<PAGE>
As filed with the Securities and Exchange Commission on
October 28, 1997
File No. 33-51294
File No. 811-7140
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
POST-EFFECTIVE AMENDMENT NO. 21 /X/
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 23 /X/
--------------
MORGAN STANLEY FUND, INC.
(Exact Name of Registrant as Specified in Charter)
One Parkview Plaza, Oakbrook Terrace, Illinois 60181
(Address of Principal Executive Office)
Registrant's Telephone Number (630) 684-6000
Ronald A. Nyberg, Esquire
Executive Vice President, General Counsel and Secretary
Van Kampen American Capital, Inc.
One Parkview Plaza, Oakbrook Terrace, Illinois 60181
(Name and Address of Agent for Service)
--------------
COPIES TO:
Wayne W. Whalen, Esq.
Thomas A. Hale, Esq.
Skadden, Arps, Slate, Meagher & Flom (Illinois)
333 West Wacker Drive
Chicago, Illinois 60606
(312) 407-0700
--------------
-------------------------------------------------------------------------
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
------------------------------------------------------------------------
TITLE OF SECURITIES BEING REGISTERED: SHARES OF BENEFICIAL INTEREST, PAR
VALUE $0.001 PER SHARE
<PAGE>
MORGAN STANLEY FUND, INC.
CROSS REFERENCE SHEET
N-1A ITEM NO. LOCATION
PART A - 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 Company;
Portfolio Transactions;
General Information
Item 5A Management's Discussion of Fund
Performance **
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
Company; Purchase of Shares;
Valuation of Shares
Item 8. Redemption or Repurchase Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings *
<PAGE>
N-1A ITEM NO. LOCATION
PART A - 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 Company;
Portfolio Transactions;
General Information
Item 5A Management's Discussion of Fund
Performance **
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
Company; Purchase of Shares;
Valuation of Shares
Item 8. Redemption or Repurchase Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings *
<PAGE>
N-1A ITEM NO. LOCATION
PART A - 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 Company;
Portfolio Transactions;
General Information
Item 5A Management's Discussion of Fund
Performance **
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
Company; Purchase of Shares;
Valuation of Shares
Item 8. Redemption or Repurchase Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings *
<PAGE>
N-1A ITEM NO. LOCATION
PART A - 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 Company;
General Information
Item 5A Management's Discussion of Fund
Performance **
Item 6. Capital Stock and Other Securities Purchase of Shares; Redemption
of Shares; Shareholder
Services; Dividends and
Distributions; Taxes; General
Information
Item 7. Purchase of Securities Being Offered Cover Page; Prospectus
Summary; Management of the
Company; Purchase of Shares;
Item 8. Redemption or Repurchase Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings *
<PAGE>
N-1A ITEM NO. LOCATION
PART A - MORGAN STANLEY GROWTH AND INCOME AND MORGAN STANLEY
EUROPEAN EQUITY FUNDS
Item 1. Cover Page Cover Page
Item 2. Synopsis Fund Expenses; Prospectus
Summary
Item 3. Condensed Financial 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 Company;
Portfolio Transactions;
General Information
Item 5A Management's Discussion of Fund
Performance **
Item 6. Capital Stock and Other Securities Purchase of Shares; Redemption
of Shares; Shareholder
Services; Dividends and
Distributions; Taxes; General
Information
Item 7. Purchase of Securities Being Offered Cover Page; Prospectus
Summary; Management of the
Company; Purchase 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.
** Information required by Item 5A will be contained in the 1997 Annual Report
to Shareholders, except for the following portfolios which were not
operational at June 30, 1997: Morgan Stanley Emerging Markets Debt, Morgan
Stanley Equity Growth, Morgan Stanley European Equity, Morgan Stanley
Global Equity, Morgan Stanley Growth and Income, Morgan Stanley Japanese
Equity, Morgan Stanley Mid Cap Growth, Morgan Stanley Tax-Free Money Market
and Morgan Stanley Value Funds.
<PAGE>
N-1A ITEM NO. LOCATION
PART B - ALL 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 Company
Item 15. Control Persons and Principal Holders
of Securities Management of the Company;
General Information
Item 16. Investment Advisory and Other Services Management of the Company;
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; 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 Company
Item 22. Calculation of Performance Data Performance Information
Item 23. Financial Statements Financial Statements
- ---------------
* Omitted since the answer is negative or the Item is not applicable.
PART C - OTHER INFORMATION
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.
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
-----------------------------------------------------------------------------
MORGAN STANLEY EMERGING MARKETS DEBT FUND
MORGAN STANLEY GLOBAL FIXED INCOME FUND
MORGAN STANLEY HIGH YIELD FUND
MORGAN STANLEY WORLDWIDE HIGH INCOME FUND
PORTFOLIOS OF THE
MORGAN STANLEY FUND, INC.
P.O. BOX 418256, KANSAS CITY, MISSOURI 64141
FOR INFORMATION CALL 1-800-282-4404
--------------
Morgan Stanley Fund, Inc. (the "Company") is an open-end management
investment company, or mutual fund, which consists of twenty-two investment
portfolios. This prospectus (the "Prospectus") describes the Class A, Class B
and Class C shares of the four portfolios listed above (each, a "Fund," and
together, the "Funds"). The Funds are designed to make available to retail
investors the expertise of Van Kampen American Capital Investment Advisory
Corp., the adviser (the "Adviser") and administrator (the "Administrator"), and
its affiliate, Morgan Stanley Asset Management Inc., the sub-adviser (the
"Sub-Adviser"), to the Funds. Shares are available through Van Kampen American
Capital Distributors, Inc. (the "Distributor") and investment dealers, banks and
financial services firms that provide distribution, administrative or
shareholder services ("Participating Dealers"). As of the date of this
Prospectus, the Morgan Stanley Emerging Markets Debt Fund is not offering
shares.
THE MORGAN STANLEY EMERGING MARKETS DEBT FUND, MORGAN STANLEY HIGH YIELD
FUND AND MORGAN STANLEY WORLDWIDE HIGH INCOME FUND NORMALLY INVEST BETWEEN 80%
AND 100% OF THEIR RESPECTIVE TOTAL ASSETS IN LOWER RATED AND UNRATED BONDS,
COMMONLY REFERRED TO AS "JUNK BONDS." BONDS OF THIS TYPE ARE SUBJECT TO GREATER
RISKS THAN THOSE INVOLVED IN HIGHER RATED BONDS, INCLUDING THE RISK OF DEFAULT.
INVESTORS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN
THESE FUNDS. SEE "ADDITIONAL INVESTMENT INFORMATION -- LOWER RATED AND UNRATED
DEBT SECURITIES."
This Prospectus is designed to set forth concisely the information about the
Funds that a prospective investor should know before investing and it should be
retained for future reference. Additional information about the Company is
contained in a "Statement of Additional Information," dated October 28, 1997,
which is incorporated herein by reference. The Company offers other portfolios
which are described in other prospectuses. The Statement of Additional
Information and the prospectuses pertaining to the other portfolios of the
Company are available upon request and without charge by writing or calling the
Company at the address and telephone number set forth above. The Statement of
Additional Information and other materials regarding the Company have been filed
with the Securities and Exchange Commission and are available at the
Commission's internet web site (http://www.sec.gov).
THE COMPANY'S SHARES ARE NOT OBLIGATIONS, DEPOSITS OR ACCOUNTS OF, OR
ENDORSED OR GUARANTEED BY, ANY BANK OR DEPOSITORY INSTITUTION, OR ANY AFFILIATES
OR CORRESPONDENTS THEREOF. THE COMPANY'S SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY. SHARES OF THE COMPANY INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE DATE OF THIS PROSPECTUS IS OCTOBER 28, 1997.
<PAGE>
PROSPECTUS SUMMARY
THE COMPANY
The Company currently consists of twenty-two portfolios which are designed
to offer investors a range of investment choices with Van Kampen American
Capital Investment Advisory Corp. (the "Adviser") providing services as adviser
and administrator and its affiliate, Morgan Stanley Asset Management Inc.
("MSAM" or the "Sub-Adviser"), providing services as sub-adviser. Van Kampen
American Capital Distributors, Inc. (the "Distributor") provides services as
distributor to the Funds. For ease of reference, the words "Morgan Stanley,"
which begin the name of each portfolio, are not used throughout this Prospectus.
The investment objective of each Fund is as follows:
- The EMERGING MARKETS DEBT FUND seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries. As of the date of this
Prospectus, the Emerging Markets Debt Fund is not offering shares.
- The GLOBAL FIXED INCOME FUND seeks to produce an attractive real rate of
return while preserving capital by investing in fixed income securities of
issuers throughout the world, including U.S. issuers.
- The HIGH YIELD FUND seeks to maximize total return by investing in a
diversified portfolio of high yield, high risk income securities that
offer a yield above that generally available on debt securities in the
four highest rating categories of the recognized rating services.
- The WORLDWIDE HIGH INCOME FUND seeks high current income consistent with
relative stability of principal and, secondarily, capital appreciation, by
investing primarily in a portfolio of high yielding, high risk fixed
income securities of issuers located throughout the world.
RISK FACTORS
The investment policies of each Fund entail certain risks and considerations
of which an investor should be aware. The Funds will invest in securities of
foreign issuers, including emerging country securities. Securities of foreign
issuers and, in particular, emerging country securities are subject to certain
risks not typically associated with domestic securities. See "Additional
Investment Information--Foreign Investment" for more information. The Emerging
Markets Debt and Worldwide High Income Funds invest in securities of issuers
located in developing countries and emerging markets, which may impose greater
liquidity risks and other risks not typically associated with investing in the
more established markets of developed countries. The Funds may also invest in
sovereign debt that is considered to be speculative in nature and involves a
high degree of risk. The Funds may invest in forward foreign currency exchange
contracts, and foreign currency exchange futures and options. Each Fund may
invest in securities that are neither listed on a stock exchange nor traded
over-the-counter, including private placement securities. Such securities may be
less liquid than publicly traded securities.
The Emerging Markets Debt, High Yield and Worldwide High Income Funds may
invest in lower rated and unrated debt securities which are considered more
speculative with regard to the payment of interest and return of principal than
higher rated debt obligations. See "Additional Investment Informatioin -- Lower
Rated and Unrated Debt Securities." The Emerging Markets Debt and Worldwide High
Income Funds may borrow
2
<PAGE>
money for leveraging, and engage in reverse repurchase agreements and short
sales. Such practices involve special risks. See "Additional Investment
Information -- Borrowing and Other Forms of Leverage", "-- Reverse Repurchase
Agreements" and "-- Short Sales."
In addition, the Funds may invest in derivatives, which include options,
futures and options on futures. The Emerging Markets Debt, Global Fixed Income
and Worldwide High Income Funds are non-diversified portfolios which may invest
a greater portion of their assets in the securities of a smaller number of
issuers and, as a result, will be subject to a greater risk resulting from such
concentration of its portfolio securities. Each Fund may invest in repurchase
agreements, lend its portfolio securities, purchase securities on a when-issued
or delayed delivery basis, and borrow money in an amount not in excess of
33 1/3% of its total assets (including the amount borrowed), less all
liabilities and indebtedness other than borrowing. Each of these investment
strategies involves specific risks which are described under "Investment
Objectives and Policies" and "Additional Investment Information" herein and
under "Investment Objectives and Policies" in the Statement of Additional
Information.
HOW TO INVEST
The Class A, Class B and Class C shares of the Funds are designed to provide
investors a choice of three ways to pay distribution costs. Class A shares of
the Funds are offered at net asset value plus a maximum initial sales charge of
4.75% which initial sales charge may be reduced on certain large purchases or
when combining purchases with the investor's aggregate investments in the
Participating Funds. Class B and Class C shares of the Funds are offered at net
asset value. Class B shares are subject to a contingent deferred sales charge
("CDSC") for redemptions within five years of purchase and are subject to higher
annual distribution-related expenses than the Class A shares. Class C shares are
subject to a CDSC for redemptions within one year of purchase and are subject to
higher annual distribution-related expenses than the Class A shares. See
"Purchase of Shares" for a discussion of reduction of waiver of sales charges,
which are available for certain investors. Share purchases may be made through
the Distributor, through Participating Dealers or by sending payments directly
to the Company. The minimum initial investment is $500 for each class of a Fund,
except that the minimum initial investment amount is reduced for certain
categories of investors. The minimum for subsequent investments is $25, except
that there is no minimum for automatic reinvestment of dividends and
distributions. See "Purchase of Shares."
HOW TO REDEEM
Shares of each Fund may be redeemed at any time at the net asset value per
share (less any applicable CDSC) of the Fund next determined after receipt of
the redemption request. The redemption price may be more or less than the
purchase price. See "Redemption of Shares."
3
<PAGE>
FUND EXPENSES
The following table illustrates all expenses and fees that a shareholder of
a Fund may incur:
<TABLE>
<CAPTION>
GLOBAL WORLDWIDE
EMERGING FIXED HIGH
MARKETS INCOME HIGH YIELD INCOME
SHAREHOLDER TRANSACTION EXPENSES DEBT FUND FUND FUND FUND
- --------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price)
Class A.................................. 4.75%(1) 4.75%(1) 4.75%(1) 4.75%(1)
Class B.................................. None None None None
Class C.................................. None None None None
Maximum Deferred Sales Load (as a percentage
of the lesser of initial purchase price or
current market value)
Class A
For Purchases up to $999,999........... None None None None
For Purchases of $1,000,000 or more.... 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2)
Class B.................................. 4.00%(3) 4.00%(3) 4.00%(3) 4.00%(3)
Class C.................................. 1.00%(4) 1.00%(4) 1.00%(4) 1.00%(4)
Maximum Sales Load Imposed on Reinvested
Dividends
Class A.................................. None None None None
Class B.................................. None None None None
Class C.................................. None None None None
Redemption Fees
Class A.................................. None None None None
Class B.................................. None None None None
Class C.................................. None None None None
Exchange Fees
Class A.................................. None None None None
Class B.................................. None None None None
Class C.................................. None None None None
</TABLE>
- ------------------
(1) Percentage shown is the maximum sales load. Certain large purchases may be
subject to a reduced sales load.
(2) Purchases of Class A shares of the Funds which, when combined with the net
asset value of the purchaser's existing investments in Class A shares of the
Participating Funds (as defined under "Purchase of Shares - Quantity
Discounts"), aggregate to $1 million or more are not subject to an initial
sales load (an "initial sales charge"). A contingent deferred sales charge
("CDSC") of 1.00% will be imposed, however, on shares from any such purchase
that are redeemed within one year following such purchase. Certain other
purchases are not subject to an initial sales charge. See "Purchase of
Shares."
(3) Percentage shown is the maximum CDSC. Purchases of Class B shares of the
Funds are subject to a maximum CDSC of 4.00% which decreases to 0.00% after
five years. See "Purchase of Shares."
(4) Purchases of Class C shares of the Funds are subject to a CDSC of 1.00% for
redemptions made within one year of purchase. See "Purchase of Shares."
4
<PAGE>
<TABLE>
<CAPTION>
GLOBAL WORLDWIDE
ANNUAL FUND OPERATING EXPENSES EMERGING FIXED HIGH
MARKETS INCOME HIGH YIELD INCOME
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS) DEBT FUND FUND FUND FUND
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investment Advisory Fee (after expense
reimbursement and/or fee waiver) (5)
Class A.................................. 1.25% 0.00% 0.00% 0.75%
Class B.................................. 1.25% 0.00% 0.00% 0.75%
Class C.................................. 1.25% 0.00% 0.00% 0.75%
12b-1 Distribution and Service Fees
Class A (6).............................. 0.25% 0.25% 0.25% 0.25%
Class B (6).............................. 1.00% 1.00% 1.00% 1.00%
Class C (6).............................. 1.00% 1.00% 1.00% 1.00%
Other Expenses (after expense reimbursement
and/or fee waiver) (5)
Class A.................................. 0.55% 1.20% 1.00% 0.52%
Class B.................................. 0.55% 1.20% 1.00% 0.52%
Class C.................................. 0.55% 1.20% 1.00% 0.52%
Total Operating Expenses (after expense
reimbursement and/or fee waiver) (5)
Class A.................................. 2.05% 1.45% 1.25% 1.52%
Class B.................................. 2.80% 2.20% 2.00% 2.27%
Class C.................................. 2.80% 2.20% 2.00% 2.27%
</TABLE>
- ------------------
(5) The Adviser has agreed to waive a portion of its advisory fees and/or to
reimburse a portion of expenses of the Funds, if necessary, if such fees
would cause the total annual operating expenses of the Funds, as a
percentage of average daily net assets, to exceed the percentages set forth
in the table above. The following table sets forth for each Fund investment
advisory fees and expected total operating expenses absent fee waivers
and/or expense reimbursements.The Adviser in its discretion may terminate
voluntary fee waivers and/or reimbursements at any time. Absent the waiver
of fees or reimbursement of expenses, the amounts in the examples below
would be greater.
<TABLE>
<CAPTION>
GLOBAL WORLDWIDE
EMERGING FIXED HIGH
MARKETS INCOME HIGH YIELD INCOME
DEBT FUND FUND FUND FUND
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investment Advisory Fees
(All Classes)........................ 1.25% 0.75% 0.75% 0.75%
Total Operating Expenses
Class A.............................. 2.05% 2.57% 2.04% 1.52%
Class B.............................. 2.80% 3.37% 2.82% 2.27%
Class C.............................. 2.80% 3.35% 2.88% 2.27%
</TABLE>
For further information on Fund expenses, see "Management of the Company."
(6) Of the 12b-1 distribution and service fees for the Class A shares, 0.25%
represents a shareholder services fee, and for the Class B shares and the
Class C shares, 0.75% represents a distribution fee and 0.25% represents a
shareholder services fee. See "Management of the Company--Distributor."
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges otherwise permitted as a fund-level expense
by the Conduct Rules of the National Association of Securities Dealers, Inc.
("NASD").
The purpose of the above table is to assist the investor in understanding
the various expenses that an investor in the Funds will bear directly or
indirectly. The expenses and fees for the Global Fixed Income, High Yield and
Worldwide High Income Funds are based on actual figures for the fiscal year
ended June 30, 1997. The expenses and fees for the Emerging Markets Debt Fund
are based on the advisory agreement, 12b-1 plan and estimates of other expenses
because the Fund has not commenced investment operations as of June 30, 1997.
5
<PAGE>
The following examples illustrate the expenses that you would pay on a
$1,000 investment, assuming a 5% annual rate of return and redemption at the end
of each time period as indicated, in (i) Class A shares of each Fund, including
the maximum 4.75% initial sales charge, (ii) Class B shares of each Fund, which
have a CDSC, but no initial sales charge and (iii) Class C shares of each Fund,
which have a CDSC, but no initial sales charge.
<TABLE>
<CAPTION>
GLOBAL WORLDWIDE
EMERGING FIXED HIGH
MARKETS INCOME HIGH YIELD INCOME
DEBT FUND FUND FUND FUND
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Class A shares
1 Year............................................. $ 67(1) $ 62(1) $ 60(1) $ 62(1)
3 Years............................................ 109 91 85 93
5 Years............................................ * 123 113 126
10 Years........................................... * 213 191 220
Class B shares
(Assuming complete redemption at end of period)
1 Year............................................. 68 62 60 63
3 Years............................................ 117 99 93 101
5 Years............................................ * 133 123 137
10 Years (2)....................................... * 234 213 242
(Assuming no redemption)
1 Year............................................. 28 22 20 23
3 Years............................................ 87 69 63 71
5 Years............................................ * 118 108 122
10 Years (2)....................................... * 234 213 242
Class C shares
(Assuming complete redemption immediately prior
to the end of period)
1 Year............................................. 38 32 30 33
3 Years............................................ 87 69 63 71
5 Years............................................ * 118 108 122
10 Years........................................... * 253 233 261
Class C shares
(Assuming no redemption)
1 Year............................................. 28 22 20 23
3 Years............................................ 87 69 63 71
5 Years............................................ * 118 108 122
10 Years........................................... * 253 233 261
</TABLE>
- ------------------
* Because the Emerging Markets Debt Fund has not commenced investment
operations as of the date of this Prospectus, the Fund has not projected
expenses beyond the three-year period shown.
(1) The example reflects Class A shares sold at the maximum 4.75% initial sales
charge. Certain large purchases may be subject to a reduced initial sales
charge. Purchases of Class A shares of the Funds which, when combined with
the net asset value of the purchaser's existing investments in Class A
shares of the Participating Funds, aggregate to $1 million or more are not
subject to an initial sales charge but a CDSC of 1.00% will be imposed on
such shares that are redeemed within one year following such purchase.
(2) The expenses shown reflect that Class B shares automatically convert to
Class A shares after eight years.
THE FOREGOING EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
6
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables provide financial highlights for the Class A, Class B
and Class C shares of the Global Fixed Income, High Yield and Worldwide High
Income Funds for each of the periods presented. The financial highlights are
part of the Company's financial statements, which appear in the Company's June
30, 1997 Annual Report to Shareholders. The financial statements are
incorporated into the Funds' Statement of Additional Information. The foregoing
Funds' financial highlights for each of the periods presented have been audited
by Price Waterhouse LLP, whose report thereon (which was unqualified) is also
incorporated into the Statement of Additional Information. Additional
performance information about the Company is contained in the Company's Annual
Report. The Annual Report and the Statement of Additional Information are
available at no cost from the Company at the address and telephone number noted
on the cover page of this Prospectus. The following information should be read
in conjunction with the financial statements and notes thereto. Financial
highlights are not presented for the Emerging Markets Debt Fund because it had
not commenced investment operations as of June 30, 1997.
7
<PAGE>
FINANCIAL HIGHLIGHTS
GLOBAL FIXED INCOME FUND
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED JANUARY 4, 1993*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994 TO JUNE 30, 1993
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 9.94 $ 10.23 $ 9.53 $ 10.55 $ 10.00
------ ------ ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.44 0.53 0.56 0.52 0.25
Net Realized and Unrealized Gain
(Loss) (0.02) (0.01) 0.50 (0.42) 0.55
------ ------ ------- ------- ------
Total From Investment Operations 0.42 0.52 1.06 0.10 0.80
------ ------ ------- ------- ------
DISTRIBUTIONS
Net Investment Income (0.35) (0.79) (0.36) (0.50) (0.25)
In Excess of Net Investment
Income (0.06) (0.02) -- (0.12) --
Net Realized Gain -- -- -- (0.47) --
In Excess of Net Realized Gain -- -- -- (0.03) --
------ ------ ------- ------- ------
Total Distributions (0.41) (0.81) (0.36) (1.12) (0.25)
------ ------ ------- ------- ------
NET ASSET VALUE, END OF PERIOD $ 9.95 $ 9.94 $ 10.23 $ 9.53 $ 10.55
------ ------ ------- ------- ------
------ ------ ------- ------- ------
TOTAL RETURN (1) 4.27% 5.20% 11.41% 0.41% 8.02%
------ ------ ------- ------- ------
------ ------ ------- ------- ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 6,407 $ 7,432 $ 11,092 $ 10,369 $ 6,633
Ratio of Expenses to Average Net
Assets 1.45% 1.45% 1.45% 1.45% 1.45%**
Ratio of Net Investment Income to
Average Net Assets 4.40% 5.02% 5.84% 4.70% 5.00%**
Portfolio Turnover Rate 170% 223% 169% 168% 55%
- -------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation
During the Period
Per Share Benefit to Net
Investment Income $ 0.12 $ 0.07 $ 0.07 $ 0.11 $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.57% 2.16% 2.22% 2.48% 2.88%**
Net Investment Income to Average
Net Assets 3.25% 4.31% 5.07% 3.67% 3.57%**
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
---------------------------------------
YEAR ENDED AUGUST 1, 1995+ TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 9.91 $ 10.24
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.41 0.64
Net Realized and Unrealized Gain
(Loss) (0.07) (0.26)
------ ------
Total From Investment Operations 0.34 0.38
------ ------
DISTRIBUTIONS
Net Investment Income (0.29) (0.69)
In Excess of Net Investment
Income (0.05) (0.02)
Net Realized Gain -- --
In Excess of Net Realized Gain -- --
------ ------
Total Distributions (0.34) (0.71)
------ ------
NET ASSET VALUE, END OF PERIOD $ 9.91 $ 9.91
------ ------
------ ------
TOTAL RETURN (1) 3.48% 3.76%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 1,716 $ 1,440
Ratio of Expenses to Average Net
Assets 2.20% 2.20%**
Ratio of Net Investment Income to
Average Net Assets 3.65% 3.38%**
Portfolio Turnover Rate 170% 223%
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation
During the Period
Per Share Benefit to Net
Investment Income $ 0.13 $ 0.12
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.37% 3.57%**
Net Investment Income to Average
Net Assets 2.45% 2.01%**
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for periods of less than one year are not annualized.
8
<PAGE>
FINANCIAL HIGHLIGHTS CONTINUED
GLOBAL FIXED INCOME FUND
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.90 $ 10.20 $ 9.54 $ 10.56
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.39 0.37 0.49 0.43
Net Realized and Unrealized Gain
(Loss) (0.05) 0.08 0.47 (0.40)
------ ------ ------ ------
Total From Investment Operations 0.34 0.45 0.96 0.03
------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.29) (0.73) (0.30) (0.44)
In Excess of Net Investment Income (0.05) (0.02) -- (0.11)
Net Realized Gain -- -- -- (0.47)
In Excess of Net Realized Gain -- -- -- (0.03)
------ ------ ------ ------
Total Distributions (0.34) (0.75) (0.30) (1.05)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 9.90 $ 9.90 $ 10.20 $ 9.54
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN (1) 3.48% 4.47% 10.24% (0.25)%
------ ------ ------ ------
------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 2,445 $ 2,844 $ 5,965 $ 5,407
Ratio of Expenses to Average Net
Assets 2.20% 2.20% 2.20% 2.20%
Ratio of Net Investment Income to
Average Net Assets 3.65% 4.35% 5.09% 3.95%
Portfolio Turnover Rate 170% 223% 169% 168%
- ----------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.12 $ 0.06 $ 0.08 $ 0.12
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.35% 2.87% 2.97% 3.29%
Net Investment Income to Average Net
Assets 2.48% 3.68% 4.32% 2.86%
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
JANUARY 4, 1993*
SELECTED PER SHARE DATA AND RATIOS TO JUNE 30, 1993
<S> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.21
Net Realized and Unrealized Gain
(Loss) 0.55
------
Total From Investment Operations 0.76
------
DISTRIBUTIONS
Net Investment Income (0.20)
In Excess of Net Investment Income --
Net Realized Gain --
In Excess of Net Realized Gain --
------
Total Distributions (0.20)
------
NET ASSET VALUE, END OF PERIOD $ 10.56
------
------
TOTAL RETURN (1) 7.61%
------
------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 6,120
Ratio of Expenses to Average Net
Assets 2.20%**
Ratio of Net Investment Income to
Average Net Assets 4.25%**
Portfolio Turnover Rate 55%
- ----------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.63%**
Net Investment Income to Average Net
Assets 2.82%**
- -------------------------------------
</TABLE>
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for periods of less than one year are not annualized.
9
<PAGE>
FINANCIAL HIGHLIGHTS CONTINUED
HIGH YIELD FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------------- --------------------------------
YEAR ENDED MAY 1, 1996* TO YEAR ENDED MAY 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.92 $ 12.00 $ 11.93 $ 12.00
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 1.07 0.13 0.98 0.12
Net Realized and Unrealized Gain (Loss) 0.99 (0.09) 0.99 (0.09)
------ ------ ------ ------
Total From Investment Operations 2.06 0.04 1.97 0.03
------ ------ ------ ------
DISTRIBUTION:
Net Investment Income (1.07) (0.12) (0.99) (0.10)
Net Realized Gain (0.05) -- (0.05) --
------ ------ ------ ------
Total Distributions (1.12) (0.12) (1.04) (0.10)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 12.86 $ 11.92 $ 12.86 $ 11.93
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN (1) 18.12% 0.29% 17.22% 0.21%
------ ------ ------ ------
------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 8,980 $ 3,907 $ 8,617 $ 3,421
Ratio of Expenses to Average Net Assets 1.25% 1.25%** 2.00% 2.00%**
Ratio of Net Investment Income to Average Net Assets 8.83% 6.85%** 7.99% 6.08%**
Portfolio Turnover Rate 104% 10% 104% 10%
- ---------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the
Period
Per Share Benefit to Net Investment Income $ 0.10 $ 0.04 $ 0.10 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.04% 3.51%** 2.82% 4.25%**
Net Investment Income to Average Net Assets 8.04% 4.59%** 7.17% 3.83%**
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS C
--------------------------------
YEAR ENDED MAY 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.93 $ 12.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.99 0.12
Net Realized and Unrealized Gain (Loss) 0.98 (0.09)
------ ------
Total From Investment Operations 1.97 0.03
------ ------
DISTRIBUTION:
Net Investment Income (0.99) (0.10)
Net Realized Gain (0.05) --
------ ------
Total Distributions (1.04) (0.10)
------ ------
NET ASSET VALUE, END OF PERIOD $ 12.86 $ 11.93
------ ------
------ ------
TOTAL RETURN (1) 17.21% 0.21%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 4,970 $ 3,316
Ratio of Expenses to Average Net Assets 2.00% 2.00%**
Ratio of Net Investment Income to Average Net Assets 8.03% 6.07%**
Portfolio Turnover Rate 104% 10%
- ---------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the
Period
Per Share Benefit to Net Investment Income $ 0.11 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.88% 4.25%**
Net Investment Income to Average Net Assets 7.15% 3.82%**
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
(1) Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for periods of less than one year are not annualized.
10
<PAGE>
FINANCIAL HIGHLIGHTS CONTINUED
WORLDWIDE HIGH INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------------------ --------------------------
APRIL 21, AUGUST 1,
YEAR ENDED YEAR ENDED YEAR ENDED 1994* YEAR ENDED 1995+
SELECTED PER SHARE DATA AND JUNE 30, JUNE 30, JUNE 30, TO JUNE 30, JUNE 30, TO JUNE 30,
RATIOS 1997 1996 1995 1994 1997 1996
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 12.47 $ 11.57 $ 12.17 $ 12.00 $ 12.44 $ 11.63
------------ ------------ ------------ ------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 1.25 1.36 1.26 0.18 1.07 1.18
Net Realized and Unrealized
Gain (Loss) 2.30 0.80 (0.52) 0.16 2.35 0.72
------------ ------------ ------------ ------ ------------ ------------
Total From Investment
Operations 3.55 2.16 0.74 0.34 3.42 1.90
------------ ------------ ------------ ------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (1.25) (1.26) (1.22) (0.17) (1.15) (1.09)
Net Realized Gain (0.51) -- (0.12) -- (0.51) --
------------ ------------ ------------ ------ ------------ ------------
Total Distributions (1.76) (1.26) (1.34) (0.17) (1.66) (1.09)
------------ ------------ ------------ ------ ------------ ------------
NET ASSET VALUE, END OF PERIOD $ 14.26 $ 12.47 $ 11.57 $ 12.17 $ 14.20 $ 12.44
------------ ------------ ------------ ------ ------------ ------------
------------ ------------ ------------ ------ ------------ ------------
TOTAL RETURN (1) 30.29% 19.61% 6.87% 2.86% 29.14% 17.07%
------------ ------------ ------------ ------ ------------ ------------
------------ ------------ ------------ ------ ------------ ------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(000's) $ 76,439 $ 41,493 $ 14,819 $ 6,857 $ 78,340 $ 26,174
Ratio of Expenses to Average
Net Assets 1.52% 1.55% 1.55% 1.55%** 2.27% 2.30%**
Ratio of Net Investment Income
to Average Net Assets 9.73% 11.95% 11.53% 8.29%** 8.86% 12.06%**
Portfolio Turnover Rate 157% 220% 178% 19% 157% 220%
- --------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Income $ -- $ 0.02 $ 0.05 $ 0.02 $ -- $ 0.02
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets -- 1.69% 1.97% 3.23%** -- 2.47%**
Net Invesment Income to
Average Net Assets -- 11.81% 11.11% 6.61%** -- 11.89%**
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS C
------------------------------------------------------
APRIL 21,
YEAR ENDED YEAR ENDED YEAR ENDED 1994*
SELECTED PER SHARE DATA AND JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
RATIOS 1997 1996 1995 1994
<S> <C> <C> <C> <C>
- ------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 12.45 $ 11.58 $ 12.16 $ 12.00
------------ ------------ ------------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 1.16 1.30 1.17 0.17
Net Realized and Unrealized
Gain (Loss) 2.26 0.77 (0.50) 0.15
------------ ------------ ------------ ------
Total From Investment
Operations 3.42 2.07 0.67 0.32
------------ ------------ ------------ ------
DISTRIBUTIONS
Net Investment Income (1.15) (1.20) (1.13) (0.16)
Net Realized Gain (0.51) -- (0.12) --
------------ ------------ ------------ ------
Total Distributions (1.66) (1.20) (1.25) (0.16)
------------ ------------ ------------ ------
NET ASSET VALUE, END OF PERIOD $ 14.21 $ 12.45 $ 11.58 $ 12.16
------------ ------------ ------------ ------
------------ ------------ ------------ ------
TOTAL RETURN (1) 29.12% 18.71% 6.20% 2.62%
------------ ------------ ------------ ------
------------ ------------ ------------ ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(000's) $ 41,709 $ 28,094 $ 11,880 $ 6,081
Ratio of Expenses to Average
Net Assets 2.27% 2.30% 2.30% 2.30%**
Ratio of Net Investment Income
to Average Net Assets 9.04% 11.40% 10.72% 7.54%**
Portfolio Turnover Rate 157% 220% 178% 19%
- ------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Income $ -- $ 0.04 $ 0.05 $ 0.06
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets -- 2.44% 2.74% 4.00%**
Net Invesment Income to
Average Net Assets -- 11.26% 10.28% 5.84%**
- ------------------------------
</TABLE>
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for periods of less than one year are not annualized.
11
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Fund is described below, together with the
policies it employs in its efforts to achieve its objective. Each Fund's
investment objective is a fundamental policy which may not be changed by the
Fund without the approval of a majority of the Fund's outstanding voting
securities. The investment policies described below are not fundamental policies
and may be changed without shareholder approval. There is no assurance that a
Fund will attain its investment objective. For more information about certain
investment practices of the Funds, see "Additional Investment Information" below
and "Investment Objectives and Policies" in the Statement of Additional
Information.
THE EMERGING MARKETS DEBT FUND
The investment objective of the Fund is to seek high total return. In
seeking to achieve this objective, the Fund will seek to invest at least 65% of
its total assets in debt securities of government and government-related issuers
located in emerging countries (including participations in loans between
governments and financial institutions) and of entities organized to restructure
outstanding debt of such issuers. In addition, the Fund may invest up to 35% of
its total assets in debt securities of corporate issuers located in or organized
under the laws of emerging countries. As used in this Prospectus, the term
"emerging country" applies to any country which, in the opinion of the
Sub-Adviser, is generally considered to be an emerging or developing country by
the international financial community, which includes the International Bank for
Reconstruction and Development (more commonly known as the World Bank) and the
International Finance Corporation. 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.
The Sub-Adviser intends to invest the Fund's assets in emerging country debt
securities that provide a high level of current income, while at the same time
holding the potential for capital appreciation if the perceived creditworthiness
of the issuer improves due to improving economic, financial, political, social
or other conditions in the country in which the issuer is located. The Fund will
focus its investments on those emerging market countries in which it believes
the economies are developing strongly and in which the markets are becoming more
sophisticated. The Fund expects that its investments in emerging country debt
securities will be made primarily in some or all of the following emerging
countries:
12
<PAGE>
Algeria
Argentina
Brazil
Bulgaria
Chile
China
Colombia
Costa Rica
Czech Republic
Democratic Republic
of Congo
Dominican Republic
Ecuador
Egypt
Greece
Hungary
India
Indonesia
Ivory Coast
Jamaica
Jordan
Malaysia
Mexico
Morocco
Nicaragua
Nigeria
Pakistan
Panama
Paraguay
Peru
Philippines
Poland
Portugal
Russia
Slovakia
South Africa
Thailand
Trinidad & Tobago
Tunisia
Turkey
Uruguay
Venezuela
In selecting emerging country debt securities for investment by the Fund,
the Sub-Adviser will apply a market risk analysis contemplating assessment of
factors such as liquidity, volatility, tax implications, interest rate
sensitivity, counterparty risks and technical market considerations. Currently,
investing in many emerging country securities is not feasible or may involve
unacceptable political risks. As opportunities to invest in debt securities in
other countries develop, the Fund expects to expand and further diversify the
emerging countries in which it invests. While the Fund generally is not
restricted in the portion of its assets which may be invested in a single
country or region, it is anticipated that, under normal conditions, the Fund's
assets will be invested in issuers in at least three countries.
Emerging country debt securities held by the Fund will take the form of
bonds, notes, bills, debentures, convertible securities, warrants, bank debt
obligations, short-term paper, mortgage and other asset-backed securities,
loans, loan participations, loan assignments and interests issued by entities
organized and operated for the purpose of restructuring the investment
characteristics of instruments issued by emerging country issuers. U.S.
Dollar-denominated emerging country debt securities held by the Fund will
generally be listed but not traded on a securities exchange, and non-U.S.
Dollar-denominated securities held by the Fund may or may not be listed or
traded on a securities exchange. The Fund will be subject to no restrictions on
the maturities of the emerging country debt securities it holds; those
maturities may range from overnight to 30 years. Investments in emerging country
debt securities entail special investment risks.
The Fund is not restricted in the portion of its assets which may be
invested in securities denominated in a particular currency and a substantial
portion of the Fund's assets may be invested in non-U.S. Dollar-denominated
securities. The portion of the Fund's assets invested in securities denominated
in currencies other than the U.S. Dollar will vary depending on market
conditions. Although the Fund is permitted to engage in a wide variety of
investment practices designed to hedge against currency exchange rate risks with
respect to its holdings of non-U.S. Dollar-denominated debt securities, the Fund
may be limited in its ability to hedge against these risks.
13
<PAGE>
Emerging country debt securities in which the Fund may invest will be
subject to high risk and will not be required to meet a minimum rating standard
and may not be rated for creditworthiness by any internationally recognized
credit rating organization. The Fund's investments are expected to be rated in
the lower and lowest rating categories of internationally recognized credit
rating organizations or are expected to be unrated securities of comparable
quality. These types of debt obligations are predominantly speculative with
respect to the capacity to pay interest and repay principal in accordance with
their terms and generally involve a greater risk of default and of volatility in
price than securities in higher rating categories. See "Additional Investment
Information -- Lower Rated and Unrated Debt Securities." The Fund's investments
in government, government-related and restructured debt instruments are subject
to special risks, including the issuer's inability or unwillingness to repay
principal and interest, requests to reschedule or restructure outstanding debt
and requests to extend additional loan amounts. The Fund may have limited
recourse in the event of default on such debt instruments.
The Fund is authorized to borrow up to 33 1/3% of its total assets
(including the amount borrowed), less all liabilities and indebtedness other
than the borrowing, for investment purposes to increase the opportunity for
greater return and for payment of dividends. Such borrowings would constitute
leverage, which is a speculative characteristic. See "Additional Investment
Information -- Borrowing and Other Forms of Leverage." The Fund may also enter
into reverse repurchase agreements.
The Fund may invest in derivatives, when-issued and delayed delivery
securities and non-publicly traded securities, including private placements and
restricted securities. The Fund may also invest in zero coupon, pay-in-kind or
deferred payment securities and in securities that may be collateralized by zero
coupon securities (such as Brady Bonds).
For temporary defensive purposes, the Fund may invest a portion or all of
its assets in money market instruments and short- and medium-term debt
securities that the Sub-Adviser believes to be of high quality or hold cash.
For further information about the foregoing and certain additional
investment practices of the Fund, see "Additional Investment Information" below.
THE GLOBAL FIXED INCOME FUND
The investment objective of the Global Fixed Income Fund is to produce an
attractive real rate of return while preserving capital by investing in fixed
income securities of issuers located throughout the world, including U.S.
issuers. The Fund will, under normal market conditions, invest at least 65% of
the value of its total assets in fixed income securities of issuers in at least
three different countries. The Fund seeks to achieve its objective by investing
in United States government securities, foreign government securities,
securities of supranational entities, Eurobonds, corporate bonds and structured
investments with fixed income characteristics, with varying maturities
denominated in various currencies. In selecting portfolio securities, the Sub-
Adviser evaluates the currency, market, and individual features of the
securities being considered for investment.
The Sub-Adviser seeks to minimize investment risk by investing in a high
quality portfolio of debt securities, the majority of which will be rated in one
of the two highest rating categories by a nationally
14
<PAGE>
recognized statistical rating organization (an "NRSRO") or, if unrated, will be
of comparable quality as determined by the Sub-Adviser under the supervision of
the Board of Directors. U.S. Government securities in which the Global Fixed
Income Fund may invest include obligations issued or guaranteed by the U.S.
Government, such as U.S. Treasury securities, as well as those backed by the
full faith and credit of the United States, such as obligations of the
Government National Mortgage Association and The Export-Import Bank. The Fund
may also invest in obligations issued or guaranteed by U.S. Government agencies
or instrumentalities where the Fund must look principally to the issuing or
guaranteeing agency for ultimate repayment. The Fund may invest in obligations
issued or guaranteed by foreign governments and their political subdivisions,
authorities, agencies or instrumentalities, and by supranational entities (such
as the World Bank, The European Economic Community, The Asian Development Bank
and the European Coal and Steel Community). Investment in foreign government
securities will be limited to those of developed nations which the Sub-Adviser
believes to pose limited credit risk. These countries currently include
Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland,
Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Spain, Sweden,
Switzerland and The United Kingdom. Corporate and supranational obligations in
which the Fund will invest will be limited to those rated "A" or better by
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Rating Group
("S&P") or IBCA Ltd., or if unrated, of comparable quality as determined by the
Sub-Adviser under the supervision of the Board of Directors.
The Sub-Adviser's approach to multi-currency, fixed-income management is
strategic and value-based and designed to produce an attractive real rate of
return. The Sub-Adviser's assessment of the bond markets and currencies is based
on an analysis of real interest rates. Current nominal yields of securities are
adjusted for inflation prevailing in each currency sector using an analysis of
past and projected inflation rates. The Fund's aim is to invest in bond markets
which offer the most attractive real returns relative to inflation.
Under normal circumstances, the Global Fixed Income Fund will have a neutral
investment position in medium-term securities (i.e., those with a remaining
maturity of between three and seven years) and will respond to changing interest
rate levels by shortening or lengthening portfolio maturity through investment
in longer- or shorter-term instruments. For example, the Fund will respond to
high levels of real interest rates through a lengthening in portfolio maturity.
Current and historical yield spreads among the three main market segments -- the
Government, Foreign and Euro markets -- guide the Sub-Adviser's selection of
markets and particular securities within those markets. The analysis of
currencies is made independent of the analysis of markets. Value in foreign
exchange is determined by relative purchasing power parity of a given currency.
The Fund seeks to invest in currencies currently undervalued based on purchasing
power parity. The Sub-Adviser analyzes current account and capital account
performance and real interest rates to adjust for shorter-term currency flows.
The Global Fixed Income Fund may invest in non-publicly traded securities,
private placements and restricted securities. The Global Fixed Income Fund will
occasionally enter into forward foreign currency exchange contracts. These are
used to hedge foreign currency exchange exposures when required.
For temporary defensive purposes, the Global Fixed Income Fund may invest a
portion or all of its assets in money market instruments and short- and
medium-term debt securities that the Sub-Adviser believes to be of high quality
or hold cash.
15
<PAGE>
For further information about the foregoing and certain additional
investment practices of the Global Fixed Income Fund, see "Additional Investment
Information" below.
THE HIGH YIELD FUND
The Fund seeks to maximize total return by investing in a diversified
portfolio of high yield, high risk income securities that offer a yield above
that generally available on debt securities in the four highest rating
categories of the NRSROs. The Fund normally invests between 80% and 100% of its
total assets in these higher yielding securities (commonly referred to as "high
yield bonds" or "junk bonds") which generally entail increased credit and market
risk. To mitigate these risks the Fund will diversify its holdings by issuer,
industry and credit quality, but investors should carefully review the section
below entitled "Additional Investment Information -- Lower Rated and Unrated
Debt Securities."
Appendix A to this Prospectus sets forth a description of the corporate bond
rating categories of Moody's and S&P. Corporate bonds rated below Baa by Moody's
or BBB by S&P are considered speculative. Securities in the lowest rating
categories may have predominantly speculative characteristics or may be in
default. Ratings of S&P and Moody's represent their opinions of the quality of
bonds and other debt securities they undertake to rate at the time of issuance.
However, ratings are not absolute standards of quality and may not reflect
changes in an issuer's creditworthiness. Accordingly, although the Sub-Adviser
will consider ratings, it will perform its own analysis and will not rely
principally on ratings. The Sub-Adviser will consider, among other things, the
price of the security, and the financial history and condition, the prospects
and the management of an issuer in selecting securities for the Fund. The Fund
may buy unrated securities that the Sub-Adviser believes are comparable to rated
securities and are consistent with the Fund's objective and policies. The
Sub-Adviser may vary the average maturity of the securities in the Fund without
limit and there is no restriction on the maturity of any individual security.
The table below provides a summary of the Fund's assets invested in rated
securities with the ratings assigned by S&P and in unrated securities determined
by the Sub-Adviser to be of comparable quality. These figures are
dollar-weighted averages of month-end portfolio holdings during the period ended
June 30, 1997, and are presented as a percentage of net assets. These
percentages are historical and are not necessarily indicative of the quality of
current or future portfolio holdings, which may vary.
<TABLE>
<CAPTION>
UNRATED
SECURITIES
OF
RATED COMPARABLE
SECURITIES QUALITY AS
AS A A
PERCENTAGE PERCENTAGE
DEBT SECURITIES RATINGS OF OF
(STANDARD & POOR'S) NET ASSETS NET ASSETS
- ------------------------------------------------------------ ---------- ----------
<S> <C> <C>
AA.......................................................... 0.21% 0.14%
BBB......................................................... 6.12% 0.17%
BB.......................................................... 46.34% 3.66%
B........................................................... 39.18% 3.97%
CCC......................................................... 0.00% 0.05%
CC.......................................................... 0.00% 0.00%
C........................................................... 0.00% 0.16%
D........................................................... 0.00% 0.00%
Not Rated................................................... 8.15% 0.00%
</TABLE>
16
<PAGE>
The High Yield Fund may acquire fixed income securities of both U.S. and
foreign issuers, including debt obligations (e.g., bonds, debentures, notes,
equipment lease certificates, equipment trust certificates, conditional sales
contracts, commercial paper and obligations issued or guaranteed by the U.S.
Government, any foreign government with which the United States maintains
relations or any of their respective political subdivisions, agencies or
instrumentalities) and preferred stock. The Fund may not invest more than 5% of
its total assets at time of acquisition in either (1) equipment lease
certificates, equipment trust certificates and conditional sales contracts or
(2) limited partnership interests. The Fund may neither invest more than 20% of
its total assets in foreign securities nor invest more than 5% of its total
assets in foreign governmental issuers in any one country. The Fund's fixed
income securities may have equity features, such as conversion rights or
warrants, and the Fund may invest up to 10% of its total assets in equity
securities other than preferred stock (common stocks, warrants and rights and
limited partnership interests). The Fund may invest up to 20% of its total
assets in fixed income securities that are investment grade (i.e., rated in one
of the top four categories by an NRSRO or determined to be of comparable
quality) and have maturities of one year or less. For temporary defensive
purposes, the Fund may invest a portion or all of its assets in money market
instruments and short- and medium-term debt securities that the Sub-Adviser
believes to be of high quality or hold cash. The Fund may invest in or own
securities of companies in various stages of financial restructuring, bankruptcy
or reorganization which are not currently paying interest or dividends. Such
securities may be rated C by Moody's or D by S&P or may be unrated but
determined to be of comparable quality by the Sub-Adviser. The total value, at
time of purchase, of the sum of all such securities will not exceed 10% of the
value of the Fund's total assets. Securities that are rated above C by Moody's
or above D by S&P (or are unrated but determined to be of comparable quality by
the Sub-Adviser) when purchased by the Fund that are later downgraded may
continue to be held by the Fund at the discretion of the Sub-Adviser.
The Fund may also invest in zero coupon, pay-in-kind or deferred payment
securities.
For further information about the foregoing and certain additional
investment practices of the Fund, see "Additional Investment Information" below.
THE WORLDWIDE HIGH INCOME FUND
The investment objective of the Worldwide High Income Fund is high current
income consistent with relative stability of principal and, secondarily, capital
appreciation, by investing primarily in a portfolio of high yielding, high risk
fixed income securities of issuers located throughout the world. The Fund seeks
to achieve its investment objective by allocating its assets among any or all of
three investment sectors: U.S. corporate lower rated and unrated debt
securities, emerging country debt securities and global fixed income securities
offering high real yields. The types of securities in each of these investment
sectors in which the Fund may invest are described below. In selecting U.S.
corporate lower rated and unrated debt securities for the Fund's portfolio, the
Sub-Adviser will consider, among other things, the price of the security, and
the financial history, condition, prospects and management of an issuer. The
Sub-Adviser intends to invest a portion of the Fund's assets in emerging country
debt securities that provide a high level of current income, while at the same
time holding the potential for capital appreciation if the perceived
creditworthiness of the issuer improves due to improving economic, financial,
political, social or other conditions in the country in which the issuer is
located. In addition, the Sub-Adviser will attempt to invest a portion of the
Fund's assets in fixed income securities of issuers in global fixed income
markets displaying high real (inflation adjusted) yields. Under normal
conditions, the Fund invests
17
<PAGE>
between 80% and 100% of its total assets in some or all of three categories of
higher yielding securities, some of which may entail increased credit and market
risk. Some or all of such higher yielding securities will be lower rated or
unrated debt securities commonly known as "junk bonds."
The Sub-Adviser's approach to multi-currency fixed-income management is
strategic and value-based and designed to produce an attractive real rate of
return. The Sub-Adviser's assessment of the bond markets and currencies is based
on an analysis of real interest rates. Current nominal yields of securities are
adjusted for inflation prevailing in each currency sector using an analysis of
past and projected inflation rates. The Fund's aim is to invest in bond markets
which offer the most attractive real returns relative to inflation.
Under normal market conditions, substantially all of the Worldwide High
Income Fund's investments may be in "junk bonds." Emerging country debt
securities in which the Fund may invest will be subject to high risk and will
not be required to meet a minimum rating standard and may not be rated for
creditworthiness by any internationally recognized credit rating organization.
The Fund's investments in U.S. corporate lower rated and unrated debt securities
and emerging country debt securities are expected to be rated in the lower and
lowest rating categories of internationally recognized credit rating
organizations or to be unrated securities of comparable quality. To mitigate the
risks associated with investments in such lower rated securities, the Fund will
diversify its holdings by market, issuer, industry and credit quality. For a
discussion of the risks associated with junk bonds, see "The High Yield Fund"
above. Investors should also carefully review the section below entitled
"Additional Investment Information -- Risk Factors Relating to Investing in
Lower Rated Debt Securities."
The table below provides a summary of the Fund's assets invested in
securities with the ratings assigned by S&P and in unrated securities determined
by the Sub-Adviser to be of comparable quality. These figures are
dollar-weighted averages of month-end portfolio holdings during the period ended
June 30, 1997, and are presented as a percentage of net assets. These
percentages are historical and are not necessarily indicative of the quality of
current or future portfolio holdings, which may vary.
<TABLE>
<CAPTION>
UNRATED
SECURITIES
OF
RATED COMPARABLE
SECURITIES QUALITY AS
AS A A
PERCENTAGE PERCENTAGE
DEBT SECURITIES RATINGS OF OF
(STANDARD & POOR'S) NET ASSETS NET ASSETS
- ------------------------------------------------------------ ---------- ----------
<S> <C> <C>
A........................................................... 3.84% %
BBB......................................................... 3.03% %
BB.......................................................... 26.91% %
B........................................................... 15.21% %
CCC......................................................... 0.00% %
CC.......................................................... 0.00% %
C........................................................... 0.00% %
D........................................................... 0.00% %
Not Rated................................................... 51.00% %
</TABLE>
For a description of S&P ratings of fixed income securities, see Appendix A
to this Prospectus.
The Worldwide High Income Fund may invest in or own securities of companies
in various stages of financial restructuring, bankruptcy or reorganization which
are not currently paying interest or dividends, provided that the total value,
at the time of purchase, of all such securities will not exceed 10% of the value
of the
18
<PAGE>
Fund's total assets. The Fund may have limited recourse in the event of default
on such debt instruments. The Fund may invest in loans, assignments of loans and
participation in loans. The Fund may also invest in depositary receipts issued
by U.S. or foreign financial institutions.
The Worldwide High Income Fund is not restricted in the portion of its
assets which may be invested in securities denominated in a particular currency
and a substantial portion of the Fund's assets may be invested in non-U.S.
Dollar-denominated securities. The portion of the Fund's assets invested in
securities denominated in currencies other than the U.S. Dollar will vary
depending on market conditions. Although the Fund is permitted to engage in a
wide variety of investment practices designed to hedge against currency exchange
rate risks with respect to its holdings of non-U.S. Dollar-denominated debt
securities, the Fund may be limited in its ability to hedge against these risks.
The Fund may also engage in derivatives transactions.
The Worldwide High Income Fund may invest in zero coupon, pay-in-kind or
deferred payment securities, and in securities that may be collateralized by
zero coupon securities (such as Brady Bonds). The Worldwide High Income Fund may
invest in non-publicly traded securities, private placements and restricted
securities.
The Worldwide High Income Fund is authorized to borrow up to 33 1/3% of its
total assets (including the amount borrowed), less all liabilities and
indebtedness other than the borrowing, for investment purposes to increase the
opportunity for greater return and for payment of dividends. Such borrowings
would constitute leverage, which is a speculative characteristic. See
"Additional Investment Information -- Borrowing and Other Forms of Leverage."
The Fund may also enter into reverse repurchase agreements.
For temporary defensive purposes, the Worldwide High Income Fund may invest
a portion or all of its assets in money market instruments and short- and
medium-term debt securities that the Sub-Adviser believes to be of high quality
or hold cash.
The Fund may acquire fixed income securities, including debt obligations and
preferred stock. These fixed income securities may have equity features, such as
conversion rights or warrants and the Fund may invest up to 10% of its total
assets in equity securities other than preferred stock. The Fund may not invest
more than 5% of its total assets at the time of acquisition in either of (1)
equipment lease certificates, equipment trust certificates and conditional sales
contracts or (2) limited partnership interests. For a discussion of fixed income
securities of U.S. issuers, see "High Yield Fund" above. A portion of the
Worldwide High Income Fund's assets will be invested in emerging country debt
securities. For a discussion of emerging country debt securities, see "Emerging
Markets Debt Fund" above. A portion of the Worldwide High Income Fund's assets
will be invested in global fixed income securities. For a discussion of global
fixed income securities, see "Global Fixed Income Fund" above.
The average time to maturity of the Worldwide High Income Fund's securities
will vary depending upon the Sub-Adviser's perception of market conditions. The
Sub-Adviser invests primarily in medium-term securities (i.e., those with a
remaining maturity of approximately five years) in a market neutral environment.
When the Sub-Adviser believes that real yields are high, the Sub-Adviser
lengthens the remaining maturities of securities held by the Fund and,
conversely, when the Sub-Adviser believes real yields are low, it shortens the
remaining maturities. Thus, the Fund is not subject to any restrictions on the
maturities of the debt securities it holds, and the Sub-Adviser may vary the
average maturity of the securities held in the Fund's portfolio without limit.
19
<PAGE>
For further information about the foregoing and certain additional
investment practices of the Fund, including investment in derivative securities,
see "Additional Investment Information" below.
ADDITIONAL INVESTMENT INFORMATION
BORROWING AND OTHER FORMS OF LEVERAGE
The Global Fixed Income and High Yield Funds may borrow up to 10% of their
total assets as a temporary measure for extraordinary or emergency purposes.
These Funds may not purchase additional securities when borrowings exceed 5% of
total assets. The Worldwide High Income Fund may enter into reverse repurchase
agreements in accordance with its investment objective and policies and 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. The
Emerging Markets Debt Fund may borrow money (i) as a temporary measure for
extraordinary or emergency purposes, and (ii) in connection with reverse
repurchase agreements, provided that (i) and (ii) in combination do not exceed
33 1/3% of the Fund's total assets (including the amount borrowed) less
liabilities (exclusive of borrowings).
Borrowings by the Emerging Markets Debt and Wideworld High Income Funds may
result in leveraging. Leveraging will magnify declines as well as increases in
the net asset value of a Fund's shares and in the yield on a Fund's investments.
Although a Fund is authorized to borrow, it will do so only when the Sub-Adviser
believes that borrowing will benefit the Fund after taking into account
considerations such as the costs of borrowing and the likely investment returns
on securities purchased with borrowed monies. Borrowing by a Fund will create
the opportunity for increased net income but, at the same time, will involve
special risk considerations. Each Fund expects that its borrowing, for other
than temporary purposes, will be made on a secured basis. The Funds' custodian
will either segregate the assets securing the borrowing for the benefit of the
lenders or arrangements will be made with a suitable sub-custodian. If assets
used to secure the borrowing decrease in value, the Funds may be required to
pledge additional collateral to the lender in the form of cash or securities to
avoid liquidation of those assets.
DEPOSITARY RECEIPTS
The Emerging Markets Debt and Worldwide High Income Funds may invest in
American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"),
European Depositary Receipts ("EDRs") and other depositary receipts, to the
extent that such depositary receipts become available. ADRs are securities,
typically issued by a U.S. financial institution (a "depositary"), that evidence
ownership interests in a security or a pool of securities issued by a foreign
issuer (the "underlying issuer") and deposited with the depositary. ADRs include
American Depositary Shares and New York Shares and may be "sponsored" or
"unsponsored." Sponsored ADRs are established jointly by a depositary and the
underlying issuer, whereas unsponsored ADRs may be established by a depositary
without participation by the underlying issuer. GDRs, EDRs and other types of
depositary receipts are typically issued by foreign depositaries, although they
may also be issued by U.S. depositaries, and evidence ownership interests in a
security or pool of securities issued by either a foreign or a U.S. corporation.
Holders of unsponsored depositary receipts generally bear all the costs
associated with establishing the unsponsored depositary receipt. The depositary
of an unsponsored depositary receipt is under no obligation to distribute
shareholder communications received from the underlying issuer or to pass
through to the holders of the unsponsored depositary receipt voting rights with
respect to the deposited securities or pool of securities.
20
<PAGE>
Depositary receipts are not necessarily denominated in the same currency as the
underlying securities to which they may be connected. Generally, depositary
receipts in registered form are designed for use in the U.S. securities market
and depositary receipts in bearer form are designed for use in securities
markets outside the United States. The Funds may invest in sponsored and
unsponsored depositary receipts. For purposes of the Funds' investment policies,
a Fund's investments in depositary receipts will be deemed to be investments in
the underlying securities.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Each Fund may enter into forward foreign currency exchange contracts
("forward contracts"). Forward contracts provide for the purchase or sale of an
amount of a specified foreign currency at a future date. Purposes for which such
contracts may be used include protecting against a decline in a foreign currency
against the U.S. Dollar between the trade date and settlement date when a Fund
purchases or sells securities, locking in the U.S. Dollar value of dividends
declared on securities held by the Fund and generally protecting the U.S. Dollar
value of securities held by the Fund against exchange rate fluctuations. While
such forward contracts may limit losses to a Fund as a result of exchange rate
fluctuations, they will also limit any exchange rate gains that might otherwise
have been realized.
FOREIGN INVESTMENT
Each Fund may invest in securities of foreign issuers. Investment in
securities of foreign issuers, especially in securities of issuers in emerging
countries, involves somewhat different investment risks from those affecting
securities of U.S. issuers. There may be limited publicly available information
with respect to foreign issuers, and foreign issuers are not generally subject
to uniform accounting, auditing, and financial and other reporting standards and
requirements comparable to those applicable to domestic companies. Therefore,
disclosure of certain material information may not be made and less information
may be available to investors investing in foreign countries than in the United
States. There may also be less government supervision and regulation of foreign
securities exchanges, brokers and listed companies than in the United States.
Many foreign securities markets have substantially less volume than U.S.
national securities exchanges, and securities of some foreign issuers are less
liquid and subject to greater price volatility than securities of comparable
domestic issuers. Brokerage commissions and other transaction costs on foreign
securities exchanges are generally higher than in the United States. Dividends
and interest paid by foreign issuers may be subject to withholding and other
foreign taxes, which may decrease the net return on foreign investments as
compared to dividends and interest paid to the Funds by domestic companies.
Additional risks include future adverse political and economic developments, the
possibility that a foreign jurisdiction might impose or change withholding taxes
on income payable with respect to foreign securities, possible seizure,
nationalization or expropriation of the foreign issuer or foreign deposits, and
the possible adoption of foreign governmental restrictions such as exchange
controls. Emerging countries may have less stable political environments than
more developed countries. Also, it may be more difficult to obtain a judgment in
a court outside the United States.
The economies of individual emerging countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, the
economies of developing countries generally are heavily dependent upon
international trade and, accordingly, have been, and may continue to be,
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and
21
<PAGE>
other protectionist measures imposed or negotiated by the countries with which
they trade. These economies also have been, and may continue to be, adversely
affected by economic conditions in the countries with which they trade.
Investments in securities of foreign issuers are generally denominated in
foreign currencies, and a Fund may temporarily hold uninvested reserves in bank
deposits in foreign currencies. Therefore, the value of a Fund's assets measured
in U.S. Dollars may be affected favorably or unfavorably by changes in currency
exchange rates and exchange control regulations. Each Fund will also incur
certain costs in connection with conversions between various currencies.
INVESTMENT COMPANY SECURITIES
Each Fund may invest in securities of another open-end or closed-end
investment company by purchase in the open market involving only customary
brokers' commission or in connection with mergers, acquisitions of assets or
consolidations and as may otherwise be permitted by the Investment Company Act
of 1940, as amended (the "1940 Act").
Some emerging countries have laws and regulations that currently preclude
direct foreign investment in the securities of their companies. However,
indirect foreign investment in the securities of companies listed and traded on
the stock exchanges in these countries is permitted by certain emerging
countries through investment funds which have been specifically authorized. The
Emerging Markets Debt Fund, Global Fixed Income Fund and Worldwide High Income
Fund may invest in these investment funds, including those advised by MSAM,
subject to applicable provisions of the 1940 Act, and other applicable laws. If
a Fund invests in such investment funds, the Fund's shareholders will bear not
only their proportionate share of the expenses of the Fund (including operating
expenses and the fees of the Adviser), but also will indirectly bear similar
expenses of the underlying investment funds.
LOANS OF PORTFOLIO SECURITIES
Each Fund may lend its securities to brokers, dealers, domestic and foreign
banks or other financial institutions for the purpose of increasing its net
investment income. These loans must be secured continuously by cash or
equivalent collateral or by a letter of credit at least equal to the market
value of the securities loaned plus accrued interest. A Fund will not enter into
securities loan transactions exceeding in the aggregate 33 1/3% of the market
value of the Fund's total assets. As with other extensions of credit, there are
risks of delay in recovery or even loss of rights in collateral should the
borrower of the portfolio securities fail financially.
LOAN PARTICIPATIONS AND ASSIGNMENTS
The Emerging Markets Debt and Worldwide High Income Funds may invest in
fixed and floating rate loans ("Loans") arranged through private negotiations
between an issuer of sovereign or corporate debt obligations and one or more
financial institutions ("Lenders"). Such Funds' 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. In the case of Participations, 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 Participations and only upon receipt by the
Lender of the payments from the borrower. In the event of the 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. A Fund will acquire Participations only if the Lender interpositioned
between the Fund and the borrower is determined by the Sub-Adviser to be
creditworthy.
22
<PAGE>
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 a Fund as the purchaser of an
Assignment may differ from, and be more limited than, those held by the
assigning Lender. Because there is no liquid market for such securities, the
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 portfolio and calculating its net asset value.
LOWER RATED AND UNRATED DEBT SECURITIES
The Emerging Markets Debt, High Yield and Worldwide High Income Funds may
invest in lower rated or unrated debt securities, commonly referred to as "junk
bonds." In addition, the emerging country debt securities in which such Funds
may invest are subject to additional risks and will not be required to meet a
minimum rating standard and may not be rated. Fixed income securities are
subject to the risk of an issuer's inability to meet principal and interest
payments on the obligations (credit risk) and may also be subject to price
volatility due to such factors as interest rate sensitivity, market perception
of the creditworthiness of the issuer and general market liquidity (market
risk). Lower rated or unrated securities are more likely to react to
developments affecting market and credit risk than are more highly rated
securities, which react primarily to movements in the general level of interest
rates. The market values of fixed income securities tend to vary inversely with
the level of interest rates. Yields and market values of lower rated and unrated
debt securities will fluctuate over time, reflecting not only changing interest
rates but the market's perception of credit quality and the outlook for economic
growth. When economic conditions appear to be deteriorating, medium to lower
rated securities may decline in value due to heightened concern over credit
quality, regardless of prevailing interest rates. Fluctuations in the value of a
Fund's investments will be reflected in the Fund's net asset value per share.
The Sub-Adviser considers both credit risk and market risk in making investment
decisions for the Funds. Investors should carefully consider the relative risks
of investing in lower rated and unrated debt securities and understand that such
securities are not generally meant for short-term investing.
Adverse economic developments may disrupt the market for U.S. corporate
lower rated and unrated debt securities and for international and emerging
country debt securities. Such disruptions may severely affect the ability of
issuers, especially highly leveraged issuers, to service their debt obligations
or to repay their obligations upon maturity. In addition, the secondary market
for lower rated and unrated debt securities, which is concentrated in relatively
few market makers, may not be as liquid as the secondary market for more highly
rated securities. As a result, the Sub-Adviser could find it more difficult to
sell these securities or may be able to sell the securities only at prices lower
than if such securities were widely traded. Prices realized upon the sale of
such lower rated or unrated securities, under these circumstances, may be less
than the prices used in calculating the Fund's net asset value.
Prices for lower rated and unrated debt securities may be affected by
legislative and regulatory developments. These laws could adversely affect a
Fund's net asset value and investment practices, the secondary market for lower
rated and unrated debt securities, the financial condition of issuers of such
securities and the
23
<PAGE>
value of outstanding lower rated and unrated debt securities. For example, U.S.
federal legislation requiring the divestiture by federally insured savings and
loan associations of their investments in lower rated and unrated debt
securities and limiting the deductibility of interest by certain corporate
issuers of lower rated and unrated debt securities adversely affected the market
in recent years.
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. In addition, there
may be limited trading markets for debt securities of issuers located in
emerging countries.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligations for redemption, a Fund may have
to replace the security with a lower yielding security, resulting in a decreased
return for investors. If a Fund experiences unexpected net redemptions, it may
be forced to sell its higher rated securities, resulting in a decline in the
overall credit quality of the Fund's investment portfolio and increasing the
exposure of the Fund to the risks of lower rated and unrated debt securities.
MONEY MARKET INSTRUMENTS
Each Fund is permitted to invest in money market instruments pending other
investment, prior to settlement of portfolio transactions, for liquidity and for
temporary defensive purposes, although the Funds intend to stay invested in
securities satisfying their primary investment objective to the extent
practical. The money market investments permitted for the Funds include
obligations of the U.S. Government, its agencies and instrumentalities,
obligations of foreign sovereignties and other debt securities, including high
grade commercial paper, repurchase agreements and bank obligations, such as
bankers' acceptances and certificates of deposit (including Eurodollar
certificates of deposit).
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED SECURITIES
Each Fund may invest in securities that are neither listed on a stock
exchange nor traded over-the-counter. Such unlisted securities may involve a
higher degree of business and financial risk that can result in substantial
losses. As a result of the absence of a public trading market for these
securities, they may be less liquid than publicly traded securities. Although
these securities may be resold in privately negotiated transactions, the prices
realized from these sales could be less than what may be considered the fair
value of such securities. Furthermore, companies whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements which might be applicable if their securities were
publicly traded. If such securities are required to be registered under the
securities laws of one or more jurisdictions before being resold, a Fund may be
required to bear the expenses of registration. No Fund may invest more than 15%
of its net assets in illiquid securities and, except as set forth below, no Fund
may invest more than 10% of its total assets in securities subject to legal or
contractual restrictions on resale. The Emerging Markets Debt Fund is not
subject to the foregoing 10% limitation. Securities that are restricted from
sale to the public without registration
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("Restricted Securities") under the Securities Act of 1933, as amended, (the
"1933 Act"), which can be offered and sold to qualified institutional buyers
under Rule 144A under the 1933 Act ("144A Securities") may be determined to be
liquid under guidelines adopted by, and subject to the supervision of, the Board
of Directors and therefore not subject to the limitation on illiquid securities.
The High Yield Fund may not invest more than 10% of its total assets in
Restricted Securities, except that it may invest up to 20% of its total assets
in 144A Securities. 144A securities may become illiquid if qualified
institutional buyers are not interested in acquiring the securities.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with brokers, dealers or
banks that meet the credit guidelines of the Company's Board of Directors. In a
repurchase agreement, a Fund buys a security from a seller that has agreed to
repurchase it at a mutually agreed upon date and price, reflecting the interest
rate effective for the term of the agreement. The term for these agreements is
usually from overnight to one week and never exceeds one year. A repurchase
agreement may be viewed as a fully collateralized loan of money by a Fund to the
seller. The Funds always receive securities as collateral with a market value at
least equal to the purchase price, including accrued interest, and this value is
maintained during the term of the agreement. If the seller defaults and the
collateral value declines, a Fund might incur a loss. If bankruptcy proceedings
are commenced with respect to the seller, the Fund's realization upon the
collateral may be delayed or limited. Repurchase agreements with durations (or
maturities) over seven days in length are considered to be illiquid securities.
REVERSE REPURCHASE AGREEMENTS
The Emerging Markets Debt and Worldwide High Income Funds may enter into
reverse repurchase agreements with brokers, dealers, banks or other financial
institutions that meet the credit guidelines of the Company's Board of
Directors. In a reverse repurchase agreement, a Fund sells a security and agrees
to repurchase it at a mutually agreed upon date and price, reflecting the
interest rate effective for the term of the agreement. It may also be viewed as
the borrowing of money by a Fund. A Fund's investment of the proceeds of a
reverse repurchase agreement is the speculative factor known as leverage. A Fund
will enter into a reverse repurchase agreement only if the interest income from
investment of the proceeds is expected to be greater than the interest expense
of the transaction and the proceeds are invested for a period no longer than the
term of the agreement. A Fund will maintain with the Custodian a separate
account with a segregated portfolio of cash or liquid assets in an amount at
least equal to its purchase obligations under these agreements (including
accrued interest). If interest rates rise during a reverse repurchase agreement,
it may adversely affect a Fund's net asset value. In the event that the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, the buyer or its trustee or receiver may receive an extension of time
to determine whether to enforce the Fund's repurchase obligation, and the Fund's
use of proceeds of the agreement may effectively be restricted pending such
decision.
SHORT SALES
The Emerging Markets Debt and Worldwide High Income Funds may from time to
time sell securities short without limitation. A short sale is a transaction in
which a Fund sells securities it owns or has the right to acquire at no added
cost (i.e., "against the box") or it does not own (but has borrowed) in
anticipation of a decline in the market price of the securities. When a Fund
makes a short sale of borrowed securities, the proceeds it receives from the
sale will be held on behalf of a broker until the Fund replaces the borrowed
securities. To deliver the securities to the buyer, a Fund will need to arrange
through a broker to borrow the securities and, in
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<PAGE>
so doing, the Fund will become obligated to replace the securities borrowed at
their market price at the time of replacement, whatever that price may be. The
Funds may have to pay a premium to borrow the securities and must pay any
dividends or interest payable on the securities until they are replaced.
Each Fund's obligation to replace the securities borrowed in connection with
a short sale will be secured by collateral deposited with the broker that
consists of cash or liquid assets. In addition, each Fund will place in a
segregated account with its Custodian an amount of cash or liquid assets equal
to the difference, if any, between (1) the market value of the securities sold,
and (2) any cash or liquid securities deposited as collateral with the broker in
connection with the short sale (not including the proceeds of the short sale).
Possible losses from short sales differ from losses that could be incurred from
a purchase of a security, because losses from short sales may be unlimited,
whereas losses from purchases can equal only the total amount invested.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Each Fund may purchase securities on a when-issued or delayed delivery
basis. In such transactions, instruments are bought with payment and delivery
taking place in the future in order to secure what is considered to be an
advantageous yield or price at the time of the transaction. The payment
obligation and the interest rates that will be received are each fixed at the
time a Fund enters into the commitment, and no interest accrues to the Fund
until settlement. Thus, it is possible that the market value at the time of
settlement could be higher or lower than the purchase price if the general level
of interest rates has changed. It is a current policy of each of the Funds,
other than the Emerging Markets Debt Fund, not to enter into when-issued
commitments or delayed delivery securities exceeding, in the aggregate, 15% of
the Fund's net assets other than the obligations created by these commitments.
ZERO COUPONS; PAY-IN-KIND; DEFERRED PAYMENT SECURITIES
The Funds may invest in zero coupon securities, which are securities that
are sold at a discount to par value and on which interest payments are not made
during the life of the security. Upon maturity, the holder is entitled to
receive the par value of the security. While interest payments are not made on
such securities, holders of such securities are deemed to have received annually
"phantom income." Because a Fund will distribute its "phantom income" to
shareholders, to the extent that shareholders elect to receive dividends in cash
rather than reinvesting such dividends in additional shares, the Fund will have
fewer assets with which to purchase income producing securities. A Fund accrues
income with respect to these securities prior to the receipt of cash payments.
Pay-in-kind securities are securities that have interest payable by delivery of
additional securities. Upon maturity, the holder is entitled to receive the
aggregate par value of the securities. Deferred payment securities are
securities that remain zero coupon securities until a predetermined date, at
which time the stated coupon rate becomes effective and interest becomes payable
at regular intervals. Zero coupon, pay-in-kind and deferred payment securities
may be subject to greater fluctuation in value and lesser liquidity in the event
of adverse market conditions than comparably rated securities paying cash
interest at regular interest payment periods.
DERIVATIVE INSTRUMENTS
The Funds are permitted to invest in various derivative instruments for both
hedging and non-hedging purposes. Derivative instruments include options,
futures and options on futures, structured investments and structured notes,
caps, floors, collars and swaps. Additionally, the Funds may invest in other
derivative instruments that are developed over time if their use would be
consistent with the objectives of the Funds. Each Fund,
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<PAGE>
other than the Emerging Markets Debt Fund (as described below), will limit its
use of the foregoing derivative instruments for non-hedging purposes to 33 1/3%
of its total assets measured by the aggregate notional amount of outstanding
derivative instruments. In addition, no Fund, other than the Emerging Markets
Debt Fund, will enter into futures contracts and options on futures contracts to
the extent that the notional value of its outstanding obligations to purchase
securities under such contracts would exceed 20% of its total assets. The
Emerging Markets Debt Fund will limit its use of the foregoing derivative
instruments to 50% of its total assets measured by the aggregate notional amount
of outstanding derivative instruments, provided that no more than 33 1/3% of its
total assets are invested, for non-hedging purposes, in derivatives other than
futures and options on futures. The Funds' investments in forward foreign
currency contracts and derivatives used for hedging purposes are not subject to
the limits described above.
The Funds may use derivatives instruments under a number of different
circumstances to further their investment objectives. The Funds may use
derivatives when doing so provides more liquidity than the direct purchase of
the securities underlying such derivatives. For example, a Fund may purchase
derivatives to quickly gain exposure to a market in response to changes in the
Fund's investment strategy, or upon the inflow of investable cash or when the
derivative provides greater liquidity than the underlying securities market. A
Fund may also use derivatives when it is restricted from directly owning the
underlying securities due to foreign investment restrictions or other reasons or
when doing so provides a price advantage over purchasing the underlying
securities directly, either because of a pricing differential between the
derivatives and securities markets or because of lower transaction costs
associated with the derivatives transaction. Derivatives may also be used by a
Fund for hedging purposes and in other circumstances when a Fund's portfolio
managers believe it advantageous to do so consistent with the Fund's investment
objective. The Funds will not, however, use derivatives in a manner that creates
leverage, except to the extent that the use of leverage is expressly permitted
by a particular Fund's investment policies, and then only in a manner consistent
with such policies.
Some of the derivative instruments in which the Funds may invest and the
risks related thereto are described in more detail below.
CAPS, FLOORS AND COLLARS
The Funds may invest in caps, floors and collars, which are instruments
analogous to options. In particular, a cap is the right to receive the excess of
a reference rate over a given rate and is analogous to a put option. A floor is
the right to receive the excess of a given rate over a reference rate and is
analogous to a call option. Finally, a collar is an instrument that combines a
cap and a floor. That is, the buyer of a collar buys a cap and writes a floor,
and the writer of a collar writes a cap and buys a floor. The risks associated
with caps, floors and collars are similar to those associated with options. In
addition, caps, floors and collars are subject to risk of default by the
counterparty because they are privately negotiated instruments.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Funds may purchase and sell futures contracts and options on futures
contracts, including but not limited to securities index futures, foreign
currency exchange futures, interest rate futures and other financial futures.
Futures contracts provide for the sale by one party and purchase by another
party of a specified amount of a specific security, instrument or basket
thereof, at a specific future date and at a specified price. An option on a
futures contract is a legal contract that gives the holder the right to buy or
sell a specified amount of futures contracts at a fixed or determinable price
upon the exercise of the option.
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The Funds may sell securities index futures contracts and/or options thereon
in anticipation of or during a market decline to attempt to offset the decrease
in market value of investments in its portfolio, or purchase securities index
futures in order to gain market exposure. Subject to applicable laws, the Funds
may engage in transactions in securities index futures contracts (and options
thereon) which are traded on a recognized securities or futures exchange, or may
purchase or sell such instruments in the over-the-counter market. There
currently are limited securities index futures and options on such futures in
many countries, particularly emerging countries. The nature of the strategies
adopted by the Sub-Adviser, and the extent to which those strategies are used,
may depend on the development of such markets.
The Funds may engage in transactions involving foreign currency exchange
futures contracts. Such contracts involve an obligation to purchase or sell a
specific currency at a specified future date and at a specified price. The Funds
may engage in such transactions to hedge their respective holdings and
commitments against changes in the level of future currency rates or to adjust
their exposure to a particular currency.
The Funds may engage in transactions in interest rate futures transactions.
Interest rate futures contracts involve an obligation to purchase or sell a
specific debt security, instrument or basket thereof at a specified future date
at a specified price. The value of the contract rises and falls inversely with
changes in interest rates. The Funds may engage in such transactions to hedge
their holdings of debt instruments against future changes in interest rates.
Financial futures are futures contracts relating to financial instruments,
such as U.S. Government securities, foreign currencies and certificates of
deposit. Such contracts involve an obligation to purchase or sell a specific
security, instrument or basket thereof at a specified future date at a specified
price. Like interest rate futures contracts, the value of financial futures
contracts rises and falls inversely with changes in interest rates. The Funds
may engage in financial futures contracts for hedging and non-hedging purposes.
Under rules adopted by the Commodity Futures Trading Commission, each Fund
may enter into futures contracts and options thereon for both hedging and
non-hedging purposes, provided that not more than 5% of such Fund's total assets
at the time of entering the transaction are required as margin and option
premiums to secure obligations under such contracts relating to non-hedging
activities.
Gains and losses on futures contracts and options thereon depend on the
Sub-Adviser's ability to predict correctly the direction of securities prices,
interest rates and other economic factors. Other risks associated with the use
of futures and options are (i) imperfect correlation between the change in
market value of investments held by a Fund and the prices of futures and options
relating to investments purchased or sold by the Fund, and (ii) possible lack of
a liquid secondary market for a futures contract and the resulting inability to
close a futures position. The risk that a Fund will be unable to close out a
futures position or options contract will be minimized by only entering into
futures contracts or options transactions for which there appears to be a liquid
exchange or secondary market. The risk of loss in trading on 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.
OPTIONS TRANSACTIONS
The Funds may seek to increase their returns or may hedge their portfolio
investments through options transactions with respect to (i) securities,
instruments, indices or baskets thereof in which such Funds may invest and (ii)
foreign currencies. Purchasing a put option gives a Fund the right to sell a
specified security, currency or
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basket of securities or currencies at the exercise price until the expiration of
the option. Purchasing a call option gives a Fund the right to purchase a
specified security, currency or basket of securities or currencies at the
exercise price until the expiration of the option.
Each Fund also may write (i.e., sell) put and call options on investments
held in its portfolio, as well as with respect to a foreign currency. A Fund
that has written an option receives a premium, which increases the Fund's return
on the underlying security or instrument in the event the option expires
unexercised or is closed out at a profit. However, by writing a call option, a
Fund will limit its opportunity to profit from an increase in the market value
of the underlying security or instrument above the exercise price of the option
for as long as the Fund's obligation as writer of the option continues. The
Funds may only write options that are "covered." A covered call option means
that so long as the Fund is obligated as the writer of the option, it will
earmark or segregate sufficient liquid assets to cover its obligations under the
option or own (i) the underlying security or instrument subject to the option,
(ii) securities or instruments convertible or exchangeable without the payment
of any consideration into the security or instrument subject to the option, or
(iii) a call option on the same underlying security with a strike price no
higher than the price at which the underlying instrument was sold pursuant to a
short option position.
By writing (or selling) a put option, a Fund incurs an obligation to buy the
security or instrument underlying the option from the purchaser of the put at
the option's exercise price at any time during the option period, at the
purchaser's election. The Funds may also write options that may be exercisable
by the purchaser only on a specific date. A Fund that has written a put option
will earmark or segregate sufficient liquid assets to cover its obligations
under the option or will own a put option on the same underlying security with
an equal or higher strike price.
The Funds may engage in transactions in options which are traded on
recognized exchanges or over-the-counter. There currently are limited options
markets in many countries, particularly emerging countries, and the nature of
the strategies adopted by the Sub-Adviser and the extent to which those
strategies are used will depend on the development of such option markets. The
primary risks associated with the use of options are (i) imperfect correlation
between the change in market value of investments held, purchased or sold by a
Fund and the prices of options relating to such investments; and (ii) possible
lack of a liquid secondary market for an option.
STRUCTURED INVESTMENTS
The Emerging Markets Debt and Worldwide High Income Funds may invest a
portion of their assets 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
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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. Structured Securities
are typically sold in private placement transactions, and there currently is no
active trading market for Structured Securities.
STRUCTURED NOTES
Structured Notes are derivatives on which the amount of principal repayment
and/or interest payments is based upon the movement of one or more factors.
These factors include, but are not limited to, currency exchange rates, interest
rates (such as the prime lending rate and LIBOR) and stock indices such as the
S&P 500 Index. In some cases, the impact of the movements of these factors may
increase or decrease through the use of multipliers or deflators. The Funds may
use structured notes to tailor their investments to the specific risks and
returns the Sub-Adviser wishes to accept while avoiding or reducing certain
other risks.
SWAPS -- SWAP CONTRACTS
Swaps and Swap Contracts are derivatives in the form of a contract or other
similar instrument in which two parties agree to exchange the returns generated
by a security, instrument, basket thereof or index for the returns generated by
another security, instrument, basket thereof or index. The payment streams are
calculated by reference to a specific security, instrument, basket thereof or
index and an agreed upon notional amount. The relevant indices include but are
not limited to, currencies, fixed interest rates, prices and 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 the Funds 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.
A Fund will usually enter into swaps on a net basis, i.e., the two return
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Fund receiving or paying, as the case may
be, only the net amount of the two returns. A Fund's obligations under a swap
agreement will be accrued daily (offset against any amounts owing to the Fund)
and any accrued, but unpaid, net amounts owed to a swap counterparty will be
covered by the maintenance of a segregated account consisting of cash or liquid
securities. A Fund will not enter into any swap agreement unless the
counterparty meets the rating requirements set forth in guidelines established
by the Company's Board of Directors.
Interest rate and total rate of return swaps do not involve the delivery of
securities, other underlying assets, or principal. Accordingly, the risk of loss
with respect to interest rate and total rate of return swaps is limited to the
net amount of payments that a Fund is contractually obligated to make. If the
other party to an interest rate or total rate of return swap defaults, a Fund's
risk of loss consists of the net amount of payments that the Fund is
contractually entitled to receive. In contrast, currency swaps may 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 may be 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, a Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swaps 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
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swap documentation. As a result, the swaps market has become relatively liquid.
Swaps that include caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid that "traditional" swaps.
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 Sub-Adviser is incorrect in its forecasts of
market values, interest rates and currency exchange rates, the investment
performance of the Funds would be less favorable than it would have been if this
investment technique were not used.
INVESTMENT LIMITATIONS
The High Yield Fund is a diversified investment company under the 1940 Act,
and is subject to the following limitations: (a) the Fund may not invest more
than 5% of its total assets in the securities of any one issuer, except
obligations of the U.S. Government, its agencies and instrumentalities, and (b)
the Fund may not own more than 10% of the outstanding voting securities of any
one issuer. The Emerging Markets Debt, Global Fixed Income and Worldwide High
Income Funds are non-diversified investment companies under the 1940 Act, which
means that each such Fund is not limited by the 1940 Act in the proportion of
its total assets that may be invested in the obligations of a single issuer.
Thus, the Emerging Markets Debt, Global Fixed Income and Worldwide High Income
Funds may invest a greater proportion of their total assets in the securities of
a smaller number of issuers and, as a result, will be subject to greater risk
resulting from such concentration of its portfolio securities. The Emerging
Markets Debt, Global Fixed Income and Worldwide High Income Funds, however,
intend to comply with the diversification requirements imposed by the Internal
Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated
investment company.
MANAGEMENT OF THE COMPANY
INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp.
(the "Adviser") is the investment adviser and administrator of the Funds. The
Adviser provides investment advice and portfolio management services pursuant to
an advisory agreement (the "Advisory Agreement") and subject to the supervision
of the Company's Board of Directors, makes the Funds' investment decisions,
arranges for the execution of portfolio transactions and generally manages the
Funds' investments. The Advisory Agreement also provides that the Adviser may
appoint sub-advisers to perform these portfolio management responsibilities. See
"Investment Sub-Adviser" below. The Adviser is entitled to receive an aggregate
advisory fee computed daily and paid monthly at the following annual rates for
each Fund:
<TABLE>
<S> <C>
Emerging Markets Debt Fund............................................ 1.25%
Global Fixed Income Fund.............................................. 0.75%
High Yield Fund....................................................... 0.75%
Worldwide High Income Fund............................................ 0.75%
</TABLE>
The Adviser reserves the right in its sole discretion from time to time to
waive all or a portion of its management fee or to reimburse the Funds for all
or a portion of other expenses.
The Adviser is a wholly-owned subsidiary of Van Kampen American Capital,
Inc. ("Van Kampen American Capital"). Van Kampen American Capital is a
diversified asset management company with more than two million retail investor
accounts, extensive capabilities for managing institutional portfolios, and more
than $60 billion
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under management or supervision. Van Kampen American Capital's more than 50
open-end and 37 closed-end funds and more than 2,500 unit investment trust are
professionally distributed by leading financial advisers nationwide. The
Distributor of the Company and the sponsor of the funds mentioned above is also
a wholly-owned subsidiary of Van Kampen American Capital. The Adviser's
principal office is located at One Parkview Plaza, Oakbrook Terrace, Illinois
60181.
Van Kampen American Capital is an indirect wholly-owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co. Morgan Stanley, Dean Witter, Discover & Co.
and various of its directly or indirectly owned subsidiaries, including Morgan
Stanley & Co. Incorporated, a registered broker-dealer and investment adviser,
and Morgan Stanley International are engaged in a wide range of financial
services. Their principal businesses include securities underwriting,
distribution and trading; merger, acquisition, restructuring and other corporate
finance advisory activities; merchant banking, stock brokerage and research
services; asset management; trading of futures, option, foreign exchange
commodities and swaps (including foreign exchange, commodities, indices and
interest rates); real estate advice, financing and investing; and global
custody, securities clearance services and securities lending; and credit
services.
INVESTMENT SUB-ADVISER. Morgan Stanley Asset Management Inc. ("MSAM," or
the "Sub-Adviser") is the investment sub-adviser of the Funds. The Sub-Adviser
provides investment advice and portfolio management services pursuant to an
investment sub-advisory agreement and, subject to the supervision of the Adviser
and the Company's Board of Directors, makes the Funds' investment decisions,
arranges for the execution of portfolio transactions and generally manages the
Funds' investments.
The Sub-Adviser is entitled to receive sub-advisory fees computed daily and
paid monthly. If the average daily net assets of a Fund during the monthly
period are less than or equal to $500 million, the Adviser shall pay MSAM
one-half of the total investment advisory fee payable to the Adviser by the Fund
(after application of any fee waivers in effect) for such monthly period. If a
Fund's average daily net assets for the monthly period are greater than $500
million, the Adviser shall pay MSAM a fee for such monthly period equal to the
greater of (a) one-half of what the total investment advisory fee payable to the
Adviser by the Fund (after application of any fee waivers in effect) for such
monthly period would have been had the Fund's average daily net assets during
such period been equal to $500 million, or (b) forty-five percent of the total
investment advisory fee payable to the Adviser by the Fund (after application of
any fee waivers in effect) for such monthly period.
MSAM, with principal offices at 1221 Avenue of the Americas, New York, NY
10020, conducts a worldwide portfolio management business. It provides a broad
range of portfolio management services to customers in the United States and
abroad. At August 31, 1997, MSAM had approximately $80.9 billion in assets under
management as an investment adviser or as a named fiduciary or fiduciary
adviser.
PORTFOLIO MANAGERS -- The following individuals have primary portfolio
management responsibility for the Funds noted below:
EMERGING MARKETS DEBT FUND -- PAUL GHAFFARI. Paul Ghaffari is a Managing
Director of Morgan Stanley & Co. Incorporated ("Morgan Stanley"). He joined the
Sub-Adviser in June 1993 as a Vice President and Portfolio Manager for the
Morgan Stanley Emerging Markets Debt Fund (a closed-end investment company).
Prior to joining the Sub-Adviser, Mr. Ghaffari was a Vice President in the Fixed
Income Division of the Emerging Markets Sales and Trading Department at Morgan
Stanley. From 1983 to 1992, he worked in LDC Sales and Trading Department and
the Mortgage-Backed Securities Department at J.P. Morgan & Co. Inc. and worked
in
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the Treasury Department at the Morgan Guaranty Trust Co. He holds a B.A. in
International Relations from Pomona College and an M.S. in Foreign Service from
Georgetown University. Mr. Ghaffari will have primary responsibility for
managing the Portfolio's assets upon the Fund's commencement of operations.
GLOBAL FIXED INCOME FUND -- J. DAVID GERMANY, MICHAEL B. KUSHMA, PAUL F.
O'BRIEN, ROBERT M. SMITH AND RICHARD B. WORLEY. J. David Germany shares primary
responsibility for managing the Fund's assets. He joined the Sub-Adviser in 1996
and has been a portfolio manager with the Adviser's affiliate, Miller Anderson &
Sherrerd, LLP ("MAS") since 1991. He assumed responsibility for the Global Fixed
Income and International Fixed Income Portfolios of the MAS-advised MAS Funds in
1993 and the MAS Funds' Multi-Asset-Class Portfolio in 1994. He holds an A.B.
degree (Valedictorian) from Princeton University and a Ph.D. in Economics from
the Massachusetts Institute of Technology. Michael B. Kushma, a Principal at
Morgan Stanley, joined the firm in 1987. He shares primary responsibility for
managing the Fund's assets. He was a member of Morgan Stanley's global fixed
income strategy group in the fixed income division from 1987-1995 where he
became the division's senior government bond strategist. He joined the
Sub-Adviser in 1995 where he took responsibility for the global fixed income
portfolios. Mr. Kushma received an A.B. in economics from Princeton University
in 1979, an M. Sc. in economics from the London School of Economics in 1981 and
an M.Phil. in economics from Columbia University in 1983. Paul F. O'Brien shares
primary responsibility for managing the Fund's assets. He joined the Sub-Adviser
and MAS in 1996. He was head of European Economics from 1993 through 1995 for JP
Morgan. He assumed responsibility for the MAS-advised MAS Funds' Global Fixed
Income and International Fixed Income Portfolios in 1996. Mr. O'Brien holds a
B.S. degree from the Massachusetts Institute of Technology and a Ph.D. in
Economics from the University of Minnesota. Robert Smith, a Principal of Morgan
Stanley, joined the Sub-Adviser in June 1994 and has had or shared primary
responsibility for managing the Fund's assets since July 1994. Prior to joining
the Sub-Adviser he spent eight years as Senior Portfolio Manager -- Fixed Income
at the State of Florida Pension Fund. Mr. Smith's responsibilities included
active total-rate-of-return management of long term portfolios and supervision
of other fixed income managers. A graduate of Florida State University with a
B.S. in Business, Mr. Smith also received an M.B.A. -- Finance from Florida
State and holds a Chartered Financial Analyst (CFA) designation. Richard B.
Worley, a Managing Director of Morgan Stanley, joined MAS in 1978. He assumed
responsibility for the MAS Funds' Fixed Income Portfolio in 1984, the MAS Funds'
Domestic Fixed Income Portfolio in 1987, the MAS Funds' Fixed Income Portfolio
II in 1990, the MAS Funds' Balanced and Special Purpose Fixed Income Portfolios
in 1992, the MAS Funds' Global Fixed Income and International Fixed Income
Portfolios in 1993 and the MAS Funds' Multi-Asset-Class Portfolio in 1994. Mr.
Worley received a B.A. in Economics from University of Tennessee and attended
the Graduate School of Economics at University of Texas.
HIGH YIELD FUND -- ROBERT ANGEVINE, THOMAS L. BENNETT AND STEPHEN F. ESSER.
Robert Angevine is a Principal of the Sub-Adviser and the portfolio manager for
high yield investments. He has shared primary management responsibility for the
Fund since it commenced operations. Mr. Angevine also manages high yield assets
for one of the largest corporate pension funds in the country. His other
experience includes international treasury operations at a major pharmaceutical
company and commercial banking. Mr. Angevine received an M.B.A. from Fairleigh
Dickinson University and a B.A. in Economics from Lafayette College. Thomas L.
Bennett shares responsibility for managing the Fund's assets. He joined the
Sub-Adviser in 1996 and has been a portfolio manager with MAS since 1984. Mr.
Bennett assumed responsibility for the MAS-advised MAS Funds' Fixed Income
Portfolio in 1984, the Domestic Fixed Income Portfolio in 1987, the High Yield
Portfolio in 1985, the Fixed Income Portfolio II in 1990, the Special Purpose
Fixed Income and Balanced Portfolios in 1992 and
33
<PAGE>
the Multi-Asset-Class Portfolio in 1994. Mr. Bennett also is the Chairman of the
MAS Funds and has a B.S. degree (Chemistry) and an M.B.A. from the University of
Cincinnati. Stephen F. Esser shares primary responsibility for managing the
Fund's assets. He joined the Sub-Adviser in 1996 and has been a portfolio
manager with MAS since 1988. He assumed responsibility for the MAS-advised MAS
Funds' High Yield Portfolio in 1989. Mr. Esser is a member of the New York
Society of Security Analysts and has a B.S. degree (Summa Cum Laude; Phi Beta
Kappa) from the University of Delaware.
WORLDWIDE HIGH INCOME FUND -- ROBERT ANGEVINE AND PAUL GHAFFARI. Information
about Messrs. Angevine and Ghaffari is included under Emerging Markets Debt Fund
and High Yield Fund, respectively, above. Messrs. Angevine and Ghaffari have
shared primary management responsibility for the Fund since it commenced
operations.
ADMINISTRATOR. The Administrator provides the Company with administrative
services pursuant to an administration agreement (the "Administration
Agreement"). The services provided under the Administration Agreement are
subject to the supervision of the officers and Board of Directors of the Company
and include day-to-day administration of matters related to the corporate
existence of the Company, maintenance of its records, preparation of reports,
supervision of the Company's arrangements with its custodian and assistance in
the preparation of the Company's registration statements under federal and state
laws. The Administration Agreement also provides that the Administrator through
its agents will provide the Company dividend disbursing and transfer agent
services. For its services under the Administration Agreement, the Company pays
the Administrator a monthly fee which on an annual basis equals 0.25% of the
average daily net assets of each Fund.
Under a sub-administration agreement between the Administrator and The Chase
Manhattan Bank ("Chase"), Chase Global Funds Services Company ("CGFSC"), a
corporate affiliate of Chase, provides certain administrative services to the
Company. The Administrator supervises and monitors such administrative services
provided by CGFSC. The services provided under the sub-administration agreement
are subject to the supervision of the Board of Directors of the Company. The
Board of Directors of the Company has approved the provision of services
described above pursuant to the sub-administration agreement as being in the
best interests of the Company. CGFSC's business address is 73 Tremont Street,
Boston, Massachusetts 02108-3913. For additional information on the
Administration Agreement, see "Management of the Company" in the Statement of
Additional Information.
DIRECTORS AND OFFICERS. Pursuant to the Company's Articles of
Incorporation, the Board of Directors decides upon matters of general policy and
reviews the actions of the Adviser, Sub-Adviser, Administrator and Distributor.
The Officers of the Company conduct and supervise its daily business operations.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the
"Distributor") serves as the distributor of the shares of the Company. Under its
distribution agreement (the "Distribution Agreement") with the Company, the
Distributor sells shares of the Company upon the terms and at the current
offering price described in this Prospectus. The Distributor is not obligated to
sell any specific number of shares of the Company.
The Company currently offers Class A shares, Class B shares and Class C
shares of the Funds. The Company may in the future offer one or more classes of
shares for Funds that may have sales charges or other distribution charges or a
combination thereof different from those of the classes currently offered.
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<PAGE>
The Board of Directors of the Company has approved and adopted the
Distribution Agreement for the Company and a Plan for each class of the Funds
pursuant to Rule 12b-1 under the 1940 Act (each a "Plan" and together, the
"Plans"). Under each Plan, the Distributor is entitled to receive from each Fund
a distribution fee, which is accrued daily and paid quarterly, at a maximum rate
of 0.75% of the Class B shares and Class C shares of each Fund, on an annualized
basis of the average daily net assets of such classes. The actual amount of such
compensation is agreed upon by the Company's Board of Directors and by the
Distributor. With respect to Class B Shares, the Distributor expects to utilize
substantially all of its fee to reimburse itself for commissions paid to
investment dealers, banks or financial services firms that provide distribution
services (each, a "Participating Dealer"). With respect to Class C Shares, the
Distributor expects to reallocate substantially all of its fee to such
Participating Dealers. 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. Class A shares, Class B shares and Class C shares are subject to a
shareholder servicing fee at an annual rate of 0.25% on an annualized basis of
the average daily net assets of such class of shares of a Fund. In addition to
such payments, the Adviser may use its advisory fees or other resources to pay
expenses associated with activities which might be construed to be financing the
sale of the Funds' shares including payments to third parties that provide
assistance in the distribution effort (in addition to selling shares and
providing shareholder services).
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.
Each Plan for a class of Company shares, under the terms of Rule 12b-1, will
remain in effect only if approved at least annually 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 ("12b-1 Directors"). Each Plan may be terminated at any time by
a vote of a majority of the 12b-1 Directors or by a vote of a majority of the
outstanding voting securities of the applicable class of the Fund. The fee set
forth above will be paid by the appropriate class to the Distributor unless and
until a Plan is terminated or not renewed. The Company intends to operate each
Plan in accordance with its terms and the NASD Conduct Rules concerning sales
charges.
PAYMENTS TO FINANCIAL INSTITUTIONS. The Adviser or its affiliates may
compensate certain financial institutions for the continued investment of their
customers' assets in the Funds pursuant to the advice of such financial
institutions. These payments will be made directly by the Adviser or its
affiliates from their assets, and will not be made from the assets of the
Company or by the assessment of a sales charge on shares. Such financial
institutions may also perform certain shareholder or recordkeeping services that
would otherwise be performed by ACCESS. The Adviser may elect to enter into a
contract to pay the financial institutions for such services.
EXPENSES. Each Fund is responsible for payment of certain other fees and
expenses (including professional fees, custodial fees and printing and mailing
costs) specified in the Administration and Distribution Agreements.
35
<PAGE>
PURCHASE OF SHARES
GENERAL
The Company offers three classes of shares to the public on a continuous
basis through the Distributor as principal underwriter, which is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. Shares are also offered
through members of the NASD who are acting as securities dealers ("dealers") and
NASD members or eligible non-NASD members who are acting as brokers or agents
for investors ("brokers"). The term "dealers" and "brokers" are sometimes
referred to herein as "Participating Dealers."
Initial investments must be at least $500 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. The $500
minimum may be waived by the Distributor for plans involving periodic
investments. Shares of the Company may be sold in foreign countries where
permissible. The Company and the Distributor reserve the right to refuse any
order for the purchase of shares. The Company also reserves the right to suspend
the sale of the Company's shares in response to conditions in the securities
markets or for other reasons.
Shares of the Company may be purchased on any business day through
Participating Dealers. Shares may also be purchased by completing the
application accompanying this Prospectus and forwarding the application, through
the Participating Dealer, to the shareholder service agent, ACCESS Investor
Services, Inc. ("ACCESS"), a wholly-owned subsidiary of Van Kampen American
Capital, Inc. When purchasing shares of the Company, investors must specify
whether the purchase is for Class A shares, Class B shares or Class C shares.
Shares are offered at the next determined net asset value per share, plus an
initial or contingent deferred sales charge depending on the class of shares
chosen by the investor, as shown in the tables herein. See "Valuation of Shares"
for a further description of net asset value computations.
Generally, the net asset values per share of the Class A shares, Class B
shares and Class C shares are expected to be substantially the same. Under
certain circumstances, however, the per share net asset values of the classes of
shares may differ from one another, reflecting the daily expense accruals of the
higher distribution fees applicable with respect to the Class B shares and Class
C shares and the differential in the dividends paid on the classes of shares.
The price paid for shares purchased is based on the next calculation of net
asset value (plus sales charges, where applicable) after an order is received by
a Participating Dealer provided such order is transmitted to the Distributor
prior to the Distributor's close of business on such day. Orders received by
Participating Dealers after the close of the New York Stock Exchange (the
"NYSE") are priced based on the net asset value calculated after the next day's
close provided they are received by the Distributor prior to the Distributor's
close of business on such day. It is the responsibility of Participating Dealers
to transmit orders received by them to the Distributor so they will be received
prior to such time.
Each class of shares represents an interest in the same portfolio of
investments, has the same rights and is identical in all respects, except that
(i) Class B shares and Class C shares bear the expenses of the deferred sales
arrangement and any expenses (including higher distribution fees) resulting from
such sales arrangement, (ii) generally, each class has exclusive voting rights
with respect to approvals of the Rule 12b-1 distribution plan to which its
distribution fee or service fee is paid, (iii) certain shares are subject to a
conversion feature, (iv) each class has different exchange privileges and (v)
each class has different shareholder service options available. The net income
attributable to Class B shares and Class C shares and the dividends payable on
Class B shares and
36
<PAGE>
Class C shares will be reduced by the amount of the higher distribution fees
associated with such class of shares. Sales personnel of Participating Dealers
distributing the Company's shares and other persons entitled to receive
compensation for selling such shares may receive differing compensation for
selling Class A shares, Class B shares or Class C shares.
In deciding which class of shares to purchase, investors should take into
consideration their investment goals, present and anticipated purchase amounts,
time horizons and temperments. Investors should consider whether, during the
anticipated life of their investment in a Fund, the accumulated distribution
fees and contingent deferred sales charges on Class B shares prior to conversion
or Class C shares would be less than the initial sales charge on Class A shares
purchased at the same time, and to what extent such differential would be offset
by the higher dividends per share on Class A shares. To assist investors in
making this determination, the table under the caption "Fund Expenses" sets
forth examples of the charges applicable to each class of shares. In this
regard, Class A shares may be more beneficial to the investor who qualifies for
reduced initial sales charges or purchases shares at net asset value, as
described herein under "Purchase of Shares--Class A Shares." For these reasons,
it is presently the policy of the Distributor not to accept any order of
$500,000 or more for Class B Shares or any order of $1 million or more for Class
C shares as it ordinarily would be more beneficial for such an investor to
purchase Class A shares.
Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase for most
accounts under $1 million, investors in Class A shares do not have all their
funds invested initially and, therefore, initially own fewer shares. Other
investors might determine that it is more advantageous to purchase either Class
B shares or Class C shares and have all their funds invested initially, although
remaining subject to a contingent deferred sales charge. Ongoing distribution
fees on Class B shares and Class C shares will be offset to the extent of the
additional funds originally invested and any return realized on those funds.
However, there can be no assurance as to the return, if any, which will be
realized on such additional funds. For investments held for ten years or more,
the relative value upon liquidation of the three classes tends to favor Class A
or Class B shares, rather than Class C shares.
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges and/or have a longer-term investment
horizon. Class B shares may be appropriate for investors who wish to avoid a
front-end sales charge, put 100% of their investment dollars to work
immediately, and/or have a longer-term investment horizon. Class C shares may be
appropriate for investors who wish to avoid a front-end sales charge, put 100%
of their investment dollars to work immediately, have a shorter-term investment
horizon and/or desire a short contingent deferred sales charge schedule.
The distribution expenses incurred by the Distributor in connection with the
sale of the shares will be reimbursed, in the case of Class A shares, from the
proceeds of the initial sales charge and, in the case of Class B shares and
Class C shares, from the proceeds of the ongoing distribution fee and any CDSC
incurred upon redemption within five years or one year, respectively, of
purchase. Investors should understand that the purpose and function of the CDSC
and ongoing distribution fee with respect to Class B shares and Class C shares
are the same as those of the initial sales charge with respect to Class A
shares. See "Distribution Plans."
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<PAGE>
The Distributor may from time to time implement programs under which a
Participating Dealer's sales force may be eligible to win nominal awards for
certain sales efforts or under which the Distributor will reallow to any
Participating Dealer that sponsors sales contests or recognition programs
conforming to criteria established by the Distributor, or participates in sales
programs sponsored by the Distributor, an amount not exceeding the total
applicable sales charges on the sales generated by the Participating Dealer at
the public offering price during such programs. Other programs provide, among
other things and subject to certain conditions, for certain favorable
distribution arrangements for shares of the Company. Also, the Distributor in
its discretion may from time to time, pursuant to objective criteria established
by the Distributor, pay fees to, and sponsor business seminars for, qualifying
authorized dealers for certain services or activities which are primarily
intended to result in sales of shares of the Company. Fees may include payment
for travel expenses, including lodging, incurred in connection with trips taken
by invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. In some instances, additional compensation or promotional incentives may
be offered to Participating Dealers that have sold or may sell significant
amounts of shares during specified periods of time. Such fees paid for such
services and activities with respect to a Fund will not exceed in the aggregate
1.25% of the average total daily net assets of the Fund on an annual basis. All
of the foregoing payments are made by the Distributor out of its own assets.
These programs will not change the price an investor will pay for shares or the
amount that a Fund will receive from such sale.
CLASS A SHARES
The public offering price of Class A shares is the next determined net asset
value plus a sales charge, as set forth herein.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
REALLOWED TO DEALERS
AS % OF AS % OF NET (AS % OF OFFERING
SIZE OF INVESTMENT OFFERING PRICE AMOUNT INVESTED PRICE)
- ------------------------------ --------------- ----------------- -----------------------
<S> <C> <C> <C>
Less than $100,000............ 4.75 4.99 4.25
$100,000 but less than
$250,000..................... 3.75 3.90 3.25
$250,000 but less than
$500,000..................... 2.75 2.83 2.25
$500,000 but less than
$1,000,000................... 2.00 2.04 1.75
$1,000,000 or more*........... * * *
</TABLE>
- --------------
* No initial sales charge is payable at the time of purchase on investments of
$1 million or more, although for such investments the Funds impose a
contingent deferred sales charge of 1.00% in the event of certain redemptions
within one year of the purchase. A commission will be paid to brokers,
dealers or financial intermediaries who initiate and are responsible for
purchases of $1 million or more as follows: 1.00% on sales to $2 million,
plus 0.80% on the next $1 million, plus 0.50% on the excess over $3 million.
See "Purchase of Shares -- Purchase of Class B Shares" and "-- Purchase of
Class C Shares" for additional information with respect to contingent
deferred sales charges.
In addition to the reallowances from the applicable public offering price
described herein, the Distributor may, from time to time, pay or allow
additional reallowances or promotional incentives, in the form of cash or other
compensation, to Participating Dealers that sell shares of the Company.
Participating Dealers which are reallowed all or substantially all of the sales
charges may be deemed to be underwriters for purposes of the 1933 Act.
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<PAGE>
The Distributor may also pay financial institutions (which may include
banks) and other industry professionals that provide services to facilitate
transactions in shares of the Company for their clients a transaction fee up to
the level of the reallowance allowable to Participating Dealers described
herein. Such financial institutions, other industry professionals and
Participating Dealers are hereinafter referred to as "Service Organizations."
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Company. State
securities laws regarding registration of banks and other financial institutions
may differ from the interpretations of federal law expressed herein and banks
and other financial institutions may be required to register as dealers pursuant
to certain state laws.
QUANTITY DISCOUNTS
Investors purchasing Class A shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
Investors or their Participating Dealers must notify the Company whenever a
quantity discount is applicable to purchases. Upon such notification, an
investor will receive the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their Participating Dealer or the
Distributor.
A person eligible for a reduced sales charge includes an individual, their
spouse and children under 21 years of age, and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust
estate or single fiduciary account, or a "company" as defined in Section 2(a)(8)
of the 1940 Act.
The phrase "Participating Funds," as used herein, refers to certain open-end
investment companies advised by the Adviser or Van Kampen American Capital Asset
Management Inc. and distributed by the Distributor as determined from time to
time by the Company's Board of Directors.
VOLUME DISCOUNTS. The size of investment shown in the preceding sales
charge table applies to the total dollar amount being invested by any person in
shares of a Fund or in any combination of shares of the Fund and shares of other
Participating Funds, although other Participating Funds may have different sales
charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds plus the current offering price of all
shares of the Participating Funds which have been previously purchased and are
still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an
investor to obtain a reduced sales charge by aggregating the investments over a
13-month period to determine the sales charge as outlined in the preceding
table. The size of investment shown in the preceding table also includes
purchases of shares of the Participating Funds over a 13-month period based on
the total amount of intended purchases plus the value of all shares of the
Participating Funds previously purchased and still owned. An investor may elect
to compute the 13-month period starting up to 90 days before the date of
execution of a Letter of Intent. Each investment made during the period receives
the reduced sales charge applicable to the total amount of the investment goal.
If the
39
<PAGE>
goal is not achieved within the period, the investor must pay the difference
between the sales charges applicable to the purchases made and the sales charges
previously paid. The initial purchase must be for an amount equal to at least 5%
of the minimum total purchased amount of the level selected. If trades not
initially made under a Letter of Intent subsequently qualify for a lower sales
charge through the 90-day back-dating provisions, an adjustment will be made at
the expiration of the Letter of Intent to give effect to the lower charge. Such
adjustments in sales charge will be used to purchase additional shares for the
shareholder at the applicable discount category. Additional information is
contained in the application form accompanying this Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A shares may be entitled to reduced initial sales
charges in connection with unit investment trust reinvestment programs and
purchases by registered representatives of selling firms or purchases by persons
affiliated with the Company or the Distributor. The Company reserves the right
to modify or terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAMS. The Company permits
unitholders of unit investment trusts to reinvest distributions from such trusts
in Class A shares of the Company at net asset value with no minimum initial or
subsequent investment requirement if the administrator of an investor's unit
investment trust program meets certain uniform criteria relating to cost savings
by the Company and the Distributor. The total sales charge for all other
investments made from unit trust distributions will be 1.00% of the offering
price (1.01% of net asset value). Of this amount, the Distributor will pay to
the Participating Dealer, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their Participating Dealer or the Distributor.
The administrator of such a unit investment trust must have an agreement
with the Distributor pursuant to which the administrator will (1) submit a
single bulk order and make payment with a single remittance for all investments
in a Fund during each distribution period by all investors who choose to invest
in the Fund through the program and (2) provide ACCESS with appropriate backup
data for each participating investor in a computerized format fully compatible
with ACCESS' processing system.
As further requirements for obtaining these special benefits, the Company
also requires that all dividends and other distributions by a Fund be reinvested
in additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Company will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Company reserves the right to
modify or terminate this program at any time.
NAV PURCHASE OPTIONS. Class A shares of a Fund may be purchased without an
initial sales charge, upon written assurance that the purchase is made for
investment purposes and that the shares will not be resold except through
redemption by the Fund by:
(1) Current or retired trustees/directors of funds advised by the Adviser or
Van Kampen American Capital Asset Management, Inc. and such persons'
families and their beneficial accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley
Group Inc. and any of its subsidiaries, employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser, and such persons' families and their beneficial accounts.
40
<PAGE>
(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and children under 21 years of age when purchasing for any
accounts they beneficially own, or, in the case of any such financial
institution, when purchasing for retirement plans for such institution's
employees.
(4) Registered investments advisers, trust companies and bank trust
departments investing on their own behalf or on behalf of their clients
provided that the aggregate amount invested in a Fund alone, or in any
combination of shares of the Fund and shares of other Participating Funds
as described herein under "Purchase of Shares -- Class A Shares -- Volume
Discounts," during the 13-month period commencing with the first investment
pursuant hereto equals at least $1 million. The Distributor may pay
Participating Dealers through which purchases are made an amount up to
0.50% of the amount invested, over a 12-month period following such
transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $3 million or more and which
invest in multiple fund families through national wirehouse alliance
programs. The Distributor may pay commissions of up to 1.00% for such
purchases.
(6) Accounts as to which a broker, dealer or financial intermediary charges an
account management fee ("wrap accounts"), provided the broker, dealer or
financial intermediary has a separate agreement with the Distributor.
(7) Trusts created under pension, profit sharing or other employee benefit
plans qualified under Section 401(a) of the Code, or custodial accounts
held by a bank created pursuant to Section 403(b) of the Code and sponsored
by non-profit organizations defined under Section 501(c)(3) of the Code and
assets held by an employer or trustee in connection with an eligible
deferred compensation plan under Section 457 of the Code. Such plans will
qualify for purchases at net asset value provided that (1) the initial
amount invested in the Participating Funds is at least $500,000 or (2) such
shares are purchased by an employer sponsored plan with more than 100
eligible employees. Section 403(b) and similar accounts for which Van
Kampen American Capital Trust Company ("VKAC Trust") serves as custodian
will not be eligible for net asset value purchases based on the aggregate
investment made by the plan or the number of eligible employees, except
under certain uniform criteria established by the Distributor from time to
time. A commission will be paid to dealers who initiate and are responsible
for such purchases within a rolling twelve month period as follows: 1.00%
on sales up to $2 million, plus 0.80% on the next $1 million, plus 0.50% on
the next $47 million, plus 0.25% on the excess over $50 million
(8) Individuals who are members of a "qualified group". For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Funds or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the
Funds and other Participating Funds, (iv) has a membership that the
authorized dealer can certify as to the group's members and (v) satisfies
other uniform criteria established by the Distributor for the purpose of
realizing economies of scale in distributing such shares. A qualified group
does not include one whose sole organizational nexus, for example, is that
its participants are credit card holders of the same institution, policy
holders of an insurance company, customers of a bank or broker-dealer,
clients of an investment advisor or other similar groups. Shares purchased
in each group's participant's account in connection with this privilege
41
<PAGE>
will be subject to a contingent deferred sales charge of one percent in the
event of redemption within one year of purchase, and a commission will be
paid to authorized dealers who initiate and are responsible for such sales
to each individual as follows: 1.00% on sales to $2 million, plus 0.80% on
the next $1 million and 0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children and grandchildren
under 21 years of age, parents and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with ACCESS by the investment
adviser, trust company or bank trust department, provided that ACCESS receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized dealer may charge a transaction
fee for placing an order to purchase shares pursuant to this provision or for
placing a redemption order with respect to such shares. Authorized dealers will
be paid a service fee as described herein under "Distribution Plans" on
purchases made as described in (3) through (8) above.
The Company may terminate, or amend the terms of, offering shares of the
Funds at net asset value to the foregoing groups at any time.
PURCHASE OF CLASS B SHARES
Class B shares of the Funds may be purchased at net asset value without an
initial sales charge. However, a CDSC will be imposed on certain Class B shares
redeemed within five years of purchase. The charge is assessed on an amount
equal to the lesser of the then-current market value of the Class B shares
redeemed or the total cost of such shares. Accordingly, the CDSC will not be
applied to dollar amounts representing an increase in the net asset values above
the initial purchase price of the shares being redeemed. In addition, no charge
is assessed on redemptions of Class B shares derived from reinvestment of
dividends or capital gains distributions.
In determining whether the CDSC is applicable to a redemption, the
calculation is made in the manner that results in the lowest possible rate.
Therefore, it is assumed that the redemption is first of any Class B shares in
the shareholder's account that represent reinvested dividends and/or
distributions, and/or of Class B shares held longer than five years after
purchase, and next of Class B shares held the longest during the initial
five-year period after purchase. The amount of the CDSC, if any, will vary
depending on the number of years from the time of purchase of Class B shares
until the redemption of such shares (the "holding period"). The following table
sets forth the rates of the CDSC.
42
<PAGE>
CONTINGENT DEFERRED SALES CHARGE
<TABLE>
<CAPTION>
SALES CHARGE AS
PERCENTAGE OF
THE
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO
PAYMENT WAS MADE CHARGE
- ------------------------------------------------------------ ----------------
<S> <C>
First....................................................... 4.00%
Second...................................................... 4.00%
Third....................................................... 3.00%
Fourth...................................................... 2.50%
Fifth....................................................... 1.50%
Thereafter.................................................. None*
</TABLE>
- --------------
* As described more fully below, Class B shares automatically convert to Class A
shares after the eighth year following purchase.
Proceeds from any CDSC are paid to the Distributor and are used by the
Distributor to defray its expenses related to providing distribution-related
services to the Company in connection with the sale of the Class B shares. The
Distributor will make payments to the Participating Dealers that handle the
purchases of such shares at a rate not in excess of 4.00% of the purchase price
of such shares at the time of purchase and expects to pay to Participating
Dealers a portion of its distribution fee under the Rule 12b-1 Plan as described
under "Management of the Company -- Distributor" above. Additionally, the
Distributor may pay additional promotional incentives, in the form of cash or
other compensation, to authorized dealers that sell Class B shares of the Funds.
The combination of the CDSC and the distribution fee facilitates the ability of
the Company to sell the Class B shares without a sales charge being deducted at
the time of purchase.
AUTOMATIC CONVERSION TO CLASS A SHARES. After the eighth year following
purchase, Class B shares will automatically convert to Class A shares and will
no longer be subject to the higher distribution fees. Such conversion will be on
the basis of the relative net asset values of the two classes, without the
imposition of any sales load, fee or other charge. Under current tax law, the c
onversion is not a taxable event to the shareholder.
PURCHASE OF CLASS C SHARES
Class C shares of the Funds may be purchased at the net asset value per
share and such shares are subject to a CDSC at the rate of 1.00% of the lesser
of the current market value of the shares redeemed or the total cost of such
shares for shares that are redeemed within one year of purchase. The Distributor
will make payments to the Participating Dealers that handle the purchases of
such shares at the rate of 1.00% of the purchase price of such shares at the
time of purchase and expects to pay to Participating Dealers most of its
distribution fee, with respect to such shares, under the Rule 12b-1 Plan for
such class of shares, as described under "Management of the Company --
Distributor" above. In determining whether a CDSC is payable, and, if so, the
amount of the fee or charge, it is assumed that shares not subject to such fee
or charge are the first redeemed.
WAIVER OF CDSC.
The CDSC will be waived on the redemption of Class B or Class C shares (i)
following the death or initial determination of disability (as defined in the
Code) of a shareholder; (ii) certain distributions from an IRA or other
retirement plan; (iii) to the extent that shares redeemed have been withdrawn
from a Systematic Withdrawal Plan, up to a maximum amount of 12% per year from a
shareholder account based on the value of the account at the time the Withdrawal
Plan is established; or (iv) effected pursuant to the right of the Company to
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<PAGE>
liquidate a shareholder's account as described herein under "Redemption of
Shares." A shareholder, or their representative, must notify the Company's
Transfer Agent prior to the time of redemption if such circumstances exist and
the shareholder is eligible for this waiver. The shareholder is responsible for
providing sufficient documentation to the Transfer Agent to verify the existence
of such circumstances. For information on the imposition and waiver of the CDSC,
contact Investor Services at 1-800-282-4404.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
No initial sales charge or CDSC will be payable on the shares of the Funds
or classes thereof purchased through the automatic reinvestment of dividends and
distributions on shares of the Funds.
REINSTATEMENT PRIVILEGE OF EACH CLASS
A shareholder who has redeemed Class A shares of a Participating Fund may
reinvest up to the full amount received at net asset value at the time of the
reinvestment in Class A shares of the Funds without payment of a sales charge. A
shareholder who has redeemed Class B shares of a Participating Fund and paid a
CDSC upon such redemption may reinvest up to the full amount received upon
redemption in Class A shares of a Fund at net asset value with no initial sales
charge. A Class C shareholder who has redeemed shares of a Participating Fund
may reinstate any portion or all of the net proceeds of such redemption in Class
C shares of a Fund with credit given for any CDSC paid upon such redemption. The
reinstatement privilege as to any specific Class A, Class B or Class C shares
must be exercised within 180 days of the redemption. The Transfer Agent must
receive from the shareholder or the shareholder's Participating Dealer both a
written request for reinstatement and a check or wire which does not exceed the
redemption proceeds. The written request must state that the reinvestment is
made pursuant to this reinstatement privilege. If a loss is realized on the
redemption of Class A shares, the reinvestment may be subject to the "wash sale"
rules if made within 30 days of the redemption, resulting in a postponement of
the recognition of such loss for federal income tax purposes. The reinstatement
privilege may be terminated or modified at any time. Reinstatement at net asset
value is also offered to participants in those eligible retirement plans held or
administered by VKAC Trust for repayment of principal (and interest) on their
borrowings on such plans. See the Statement of Additional Information for
further discussion of waiver provisions.
SHAREHOLDER SERVICES
The Company offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra costs to the investor. Below is a
description of such services. Unless otherwise described below, each of these
services may be modified or terminated by the Company at any time.
INVESTMENT ACCOUNT. Each shareholder has an investment account under which
shares are held by ACCESS. ACCESS acts as transfer agent for the Company and
performs bookkeeping, data processing and administration services related to the
maintenance of shareholder accounts. Except as described herein, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder will receive statements at least
quarterly from ACCESS showing any reinvestments of dividends and capital gains
distributions and any other activity in the account since the preceding
statement. Such shareholders also will receive separate confirmations for each
purchase or sale transaction other than
44
<PAGE>
reinvestment of dividends and capital gains distributions and systematic
purchases or redemptions. Additions to an investment account may be made at any
time by purchasing shares through authorized brokers, dealers or financial
intermediaries or by mailing a check directly to ACCESS.
SHARE CERTIFICATES. Generally, the Company will not issue share
certificates. However, upon written or telephone request to the Company, a share
certificate will be issued, representing shares (with the exception of
fractional shares) of the Company. A shareholder will be required to surrender
such certificates upon redemption or transfer thereof. In addition, if such
certificates are lost the shareholder must write to Morgan Stanley Fund, Inc.
c/o ACCESS, P.O. Box 419256, Kansas City, MO 64141-9256, requesting an
"affidavit of loss" and to obtain a Surety Bond in a form acceptable to ACCESS.
On the date the letter is received, ACCESS will calculate a fee for replacing
the lost certificate equal to no more than 2.00% of the net asset value of the
issued shares and bill the party to whom the replacement certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the applicable Fund. Such shares are acquired at net asset value (without sales
charge) on the record date of such dividend or distribution. Unless the
shareholder instructs otherwise, the reinvestment plan is automatic. This
instruction may be made by telephone by calling (800) 282-4404 or (800) 772-8889
for the hearing impaired, or in writing to ACCESS. The investor may, on the
initial application or prior to any declaration, instruct that dividends be paid
in cash and capital gains distributions be reinvested at net asset value, or
that both dividends and capital gains distributions be paid in cash. For further
information, see "Dividends and Distributions."
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Funds. Additional information is
available from the Distributor or authorized brokers, dealers or financial
intermediaries.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanied by this
Prospectus or by calling (800) 282-4404 or (800) 772-8889 for the hearing
impaired, elect to have all dividends and other distributions paid on a class of
shares of the Company invested into shares of the same class of any
Participating Fund so long as a pre-existing account for such class of shares
exists for such shareholder. Both accounts must also be of the same type, either
non-retirement or retirement. Any two non-retirement accounts can be used. If
the accounts are retirement accounts, they must both be for the same class and
of the same type of retirement plan (e.g. IRA, 403(b)(7), 401(k), Keogh) and for
the benefit of the same individual.
If the qualified pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the portfolio into which distributions would be invested. Distributions are
invested into the selected portfolio at its net asset value as of the payable
date of the distribution only if shares of such selected portfolio have been
registered for sale in the investor's state and are currently available for
sale.
RETIREMENT PLANS. Eligible investors may establish IRAs; SEP; and pension
and profit sharing plans; 401(k) plans; or Section 403(b)(7) plans in the case
of employees of public school systems and certain non-profit organizations.
Documents and forms containing detailed information regarding these plans are
available from
45
<PAGE>
the Distributor. VKAC Trust serves as custodian under the IRA, 403(b)(7) and
Keogh plans. Details regarding fees, as well as full plan administration for
profit sharing, pension and 401(k) plans are available from the Distributor.
EXCHANGE PRIVILEGE. Shares of the Funds may be exchanged for shares of the
same class of another Participating Fund, based on the net asset values of each
fund on the date of exchange, subject to certain limitations. Before effecting
an exchange, shareholders in the Company should obtain and read a current
prospectus of the Participating Funds into which the exchange is to be made.
SHAREHOLDERS MAY ONLY EXCHANGE INTO SUCH OTHER PARTICIPATING FUNDS AS ARE
LEGALLY AVAILABLE FOR SALE IN THEIR STATE AND ARE CURRENTLY AVAILABLE FOR SALE.
To be eligible for exchange, shares of a Fund generally must have been
registered in the shareholder's name for at least 30 days prior to an exchange.
Shares of a Fund registered in a shareholder's name for less than 30 days may
only be exchanged upon receipt of prior approval of the Adviser. Under normal
circumstances, it is the policy of the Adviser not to approve such requests.
Class A shares of a Participating Fund that generally impose an initial
sales charge are not subject to any sales charge upon exchange into another
Participating Fund. Class A shares of Participating Funds that do not impose an
initial sales charge will be subject to the applicable sales charge of the
Participating Fund being obtained in the exchange.
No sales charge is imposed upon the exchange of a Class B share or a Class C
share. The CDSC schedule, conversion schedule and holding period applicable to a
Class B share or a Class C share acquired through the exchange privilege is
determined by reference to the Participating Fund from which such shares
originally was purchased.
Exchange of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is not included in the tax basis of
the exchanged shares, but is carried over and included in the tax basis of the
shares acquired.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form accompanied by this Prospectus. See
"Redemption of Shares -- Telephone Transaction Procedures" for more information.
The exchange will take place at the relative net asset values of the shares next
determined after receipt of such request with adjustment for any additional
sales charge. Any shares exchanged begin earning dividends on the next business
day after the exchange is affected. If the exchanging shareholder does not have
an account in the Participating Fund whose shares are being acquired, a new
account will be established with the same registration, dividend and capital
gains options (except dividend diversification options) and broker, dealer or
financial intermediary of record as the account from which shares are exchanged,
unless otherwise specified by the shareholder. In order to establish a
systematic withdrawal plan for the new account or dividend diversification
options for the new account, an exchanging shareholder must file a specific
written request. The Company reserves the right to reject any order to acquire
its shares through exchange. In addition, the Company may restrict or terminate
the exchange privilege at any time on 60 days' notice to its shareholders of any
termination or material amendment. If an account has multiple owners, ACCESS may
rely on the instructions of any one owner.
46
<PAGE>
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $5,000 or more at the offering price next computed after receipt of
instructions may establish a quarterly, semi-annual or annual withdrawal plan.
Investors whose shares in a single account total $10,000 or more at the offering
price next computed after receipt of instructions may establish a monthly,
quarterly, semi-annual or annual withdrawal plan. This plan provides for the
orderly use of the entire account, not only the income but also the principal,
if necessary. Each withdrawal constitutes a redemption of shares on which
taxable gain or loss will be recognized. The plan holder may arrange for
monthly, quarterly, semi-annual or annual checks in any amount not less than
$25.
The CDSC on Class B and Class C shares is waived for withdrawals under the
Systematic Withdrawal Plan of a maximum 1% per month, 3% per quarter, 6%
semiannually or 12% annually, of the initial value of a shareholder's account.
Under this CDSC waiver policy, amounts withdrawn each period will be paid by
redeeming first shares not subject to a CDSC because the shares were purchased
by the reinvestment of dividends or capital gains distributions, the CDSC period
has elapsed or some other waiver of the CDSC applies. If shares subject to the
CDSC must be redeemed, shares held for the longest period of time will be
redeemed first and continuing with shares held the next longest period of time
until shares held the shortest period of time are redeemed.
Under the plan, sufficient shares of the Company are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with purchases of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. The Company reserves the right to amend or terminate the systematic
withdrawal program on 30 days' notice to its shareholders.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A shares can
use ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of ACH. In addition, the shareholder must fill out the appropriate
section of the account application. The shareholder must also include a voided
check or deposit slip from the bank account into which redemptions are to be
deposited together with the completed application. Once ACCESS has received the
application and the voided check or deposit slip, such shareholder's designated
bank account, following any redemption, will be credited with the proceeds of
such redemption. Once enrolled in the ACH plan, a shareholder may terminate
participation at any time by writing to ACCESS or by calling 1-800-282-4404. A
shareholder's bank may charge a fee for ACH transfers.
TRANSFER OF REGISTRATION. You may transfer the registration of any of your
Company shares to another person by writing to the Company c/o ACCESS, P.O. Box
418256, Kansas City, Missouri 64141-9256. As in the case of redemptions, the
written request must be received in "good order" before any transfer can be
made. Shares held in broker street name may be transferred only by contacting
your Participating Dealer.
47
<PAGE>
REDEMPTION OF SHARES
Shareholders may redeem for cash some or all of their shares without charge
by the Company (other than any applicable CDSC) at any time by sending a written
request in proper form directly to the Company c/o ACCESS, P.O. Box 419256,
Kansas City, Missouri 64141-9256, by placing the redemption request through a
Participating Dealer or by calling the Company. See "Purchase of Shares" for a
discussion of applicable CDSC levels.
WRITTEN REDEMPTION REQUESTS. In the case of redemption requests sent
directly to ACCESS, the redemption request should indicate the number of shares
or dollars to be redeemed, the class designation of such shares, the account
number and be signed exactly as the shares are registered. Signatures must
conform exactly to the account registration. If the proceeds of the redemption
would exceed $50,000, or if the proceeds are not to be paid to the record owner
at the record address, or if the record address has changed within the previous
30 days, signature(s) must be guaranteed by one of the following: a bank or
trust company; a broker-dealer; a credit union; a national securities exchange,
registered securities association or clearing agency; a savings and loan
association; or a federal savings bank. If certificates are held for the shares
being redeemed, such certificates must be endorsed for transfer or accompanied
by an endorsed stock power and sent with the redemption request. In the event
the redemption is requested by a corporation, partnership, trust, fiduciary,
executor or administrator, additional documents may be necessary. The redemption
price is the net asset value per share next determined after the request is
received by ACCESS in proper form. Payment for shares redeemed will ordinarily
be made by check mailed within seven business days after acceptance by ACCESS of
the request and any other necessary documents in proper order.
DEALER REDEMPTION REQUEST. Shareholders may redeem shares through their
securities dealer, who will submit the request to the Distributor. Orders
received from dealers must be at least $500 unless transmitted via the FUNDSERV
network. The redemption price for such shares is the net asset value next
calculated after an order is received, less any applicable CDSC, by a dealer
provided such order is transmitted to the Distributor prior to the Distributor's
close of business on such day. It is the responsibility of dealers to transmit
redemption requests received by them to the Distributor so they will be received
prior to such time. Any change in the redemption price due to failure of the
Distributor to receive a redemption request prior to such time must be settled
between the shareholder and dealer. Shareholders must submit a written
redemption request in proper form (as described above under "Written Redemption
Request") to the dealer within three business days after calling the dealer with
the redemption request. Payment for shares redeemed (less any sales charge, if
applicable) will ordinarily be made by check mailed within three business days
to the dealer.
TELEPHONE REDEMPTION REQUESTS. The Company permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application accompanying this Prospectus or call the Company at (800) 282-4404
or (800) 772-8889 for the hearing impaired to request that a copy of the
Telephone Redemption Authorization form be sent to them for completion. To
redeem shares, contact the telephone transaction line at (800) 421-5684. See
"Telephone Transaction Procedures" for more information. Telephone redemptions
may not be available if the shareholder cannot reach ACCESS by telephone,
whether because all telephone lines are busy or for any other reason; in such
case, a shareholder would have to use the Company's other redemption procedures
previously described. Requests received by ACCESS prior to 4:00 p.m., Eastern
Time, on a regular business day will be processed at
48
<PAGE>
the net asset value per share determined that day. These privileges are
available for all accounts other than retirement accounts. The telephone
redemption privilege is not available for shares represented by certificates. If
an account has multiple owners, ACCESS may rely on the instructions of any one
owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily of the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check will ordinarily be mailed
within three business days to the shareholder's address or record. Proceeds from
redemptions to be paid by wire will ordinarily be wired on the next business day
to the shareholder's bank account of record. This privilege is not available if
the address or bank account of record has been changed within 30 days prior to a
telephone redemption request. The Company reserves the right at any time to
terminate, limit or otherwise modify this telephone redemption privilege.
REDEMPTION UPON DISABILITY. The Company will waive the CDSC on redemption
following the disability of holders of Class B shares and Class C shares. An
individual will be considered disabled for this purpose of he or she meets the
definition thereof in Section 72(m)(7) of the Code, which in pertinent part
defines a person as disabled of such person "is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or to be of
long-continued and indefinite duration." While the Company does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
contingent deferred sales charge on Class B shares and Class C shares.
In cases of disability, the CDSCs on Class B shares and Class C shares will
be waived where the disabled person is either an individual shareholder or owns
the shares as a joint tenant with right of survivorship or is the beneficial
owner of a custodial or fiduciary account, and where the redemption is made
within one year of the initial determination of disability. This waiver of the
CDSC on Class B shares and Class C shares applies to a total or partial
redemption, but only to redemptions of shares held at the time of the initial
determination of disability.
GENERAL REDEMPTION INFORMATION. If the shares to be redeemed have been
recently purchased by check, ACCESS may delay mailing a redemption check or
wiring redemption proceeds until it confirms that the purchase check has
cleared, usually a period of up to 15 days. In addition, the redemption payment
may be delayed or the right of redemption suspended by the Fund pursuant to
rules of the SEC.
The Company may redeem any shareholder account with a net asset value on the
date of the notice of redemption less than the minimum investment as specified
by the Directors. At least 60 days' advance written notice of any such
involuntary redemption is required and the shareholder is given an opportunity
to purchase the required value of additional shares at the next determined net
asset value without sales charge. Any involuntary redemption may only occur if
the shareholder account is less than the minimum investment due to shareholder
redemptions.
A custodian of a retirement plan account may charge fees based on the
custodian's fee schedule. IRA redemption requests should be sent to the IRA
custodian to be fowarded to ACCESS. Where VKAC Trust serves as IRA custodian,
special IRA, 403(b)(7), or Keogh redemption forms must be obtained from and be
49
<PAGE>
forwarded to Van Kampen American Capital Trust Company, P.O. Box 944, Houston,
Texas 77001-0944. Contact the custodian for information. Reinstatement
privileges (as otherwise described under "Purchase of Shares -- Reinstatement
Privilege of Each Class" above) also extend to participants in eligible
retirement plans held or administered by VKAC Trust who repay the principal and
interest on their borrowings from such plans.
FOR SHARES THAT ARE HELD IN BROKER STREET NAME, YOU CANNOT REQUEST
REDEMPTION BY TELEPHONE OR BY MAIL; SUCH SHARES MAY BE REDEEMED ONLY BY
CONTACTING YOUR PARTICIPATING DEALER.
TELEPHONE TRANSACTION PROCEDURES. Van Kampen American Capital, Inc. and its
subsidiaries, including ACCESS (collectively, "VKAC") and the Company employ
procedures considered by them to be reasonable to confirm that instructions
communicated by telephone are genuine. Such procedures include requiring certain
personal identification information prior to acting upon telephone instructions,
tape recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed, a
shareholder agrees that neither VKAC nor the Company will be liable for
following instructions which it reasonably believes to be genuine. VKAC and the
Company may be liable for any losses due to unauthorized or fraudulent
instructions if reasonable procedures are not followed.
VALUATION OF SHARES
Net asset value is calculated separately for each class of each Fund. The
net asset value per share of each class of shares of a Fund is determined by
dividing the total fair market value of the investments and other assets
attributable to such class of shares, less all liabilities attributable to such
class of shares, by the total number of outstanding shares of such class of
shares. Net asset value per share of a Fund is determined as of the regular
close of the NYSE (currently, 4:00 p.m. Eastern Time) on each day that the NYSE
is open for business. Securities listed on a securities exchange for which
market quotations are available are valued at their closing price. If no closing
price is available, such securities will be valued at the last quoted sale price
on the day the valuation is made. Price information on listed securities is
taken from the exchange where the security is primarily traded. 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 are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices but take into account institutional size trading in similar groups of
securities and any developments related to the specific securities. Securities
not priced in this manner are valued at the most recent quoted bid price, or,
when stock exchange valuations are used, at the latest quoted sale price on the
day of valuation. If there is no such reported sale, the latest quoted bid price
will be used. Debt securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used. The "amortized cost" method of valuation does not
take into account unrealized gains or losses. This method involves valuing an
instrument at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium,
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regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in valuation, it may result
in periods during which value, as determined by amortized cost, is higher or
lower than the price each Fund would receive if it sold the instrument.
The value of other assets and securities for which no quotations are readily
available (including illiquid and unlisted foreign securities) and those
securities for which it is inappropriate to determine prices in accordance with
the above procedures are determined in good faith at fair value using methods
determined by the Board of Directors. For purposes of calculating net asset
value per share, all assets and liabilities initially expressed in foreign
currencies will be converted into U.S. Dollars at the mean of the bid price and
asked price of such currencies against the U.S. Dollar as quoted by a major
bank.
PORTFOLIO TRANSACTIONS
The Adviser and the Sub-Adviser select the brokers or dealers that will
execute the purchases and sales of investment securities for each of the Funds.
The Adviser and the Sub-Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the Funds to their clients or
who act as agents in the purchase of shares of the Funds for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Adviser and the Sub-Adviser may allocate a portion of the Company's
portfolio brokerage transactions to Morgan Stanley & Co. Incorporated ("Morgan
Stanley"), an affiliate of the Adviser and Sub-Adviser or broker affiliates of
Morgan Stanley under procedures adopted by the Board of Directors. For such
portfolio transactions, the commissions, fees or other remuneration received by
Morgan Stanley or such affiliates must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers for comparable
transactions involving similar securities being purchased or sold during a
comparable period of time.
Although the objective of each Fund is not to invest for short-term trading,
each Fund will seek to take advantage of trading opportunities as they arise to
the extent they are consistent with the Fund's objective. Accordingly,
investment securities may be sold from time to time without regard to the length
of time they have been held. The Emerging Markets Debt Fund, which has not
commenced investment operations, anticipates that its annual portfolio turnover
rate will not exceed 100% under normal circumstances. Market conditions could
result in portfolio activity at a greater or lesser rate than anticipated. For
the annual turnover rates for the other Funds, see "Financial Highlights" above.
High portfolio turnover involves correspondingly greater transaction costs which
will be borne directly by the Fund. In addition, high portfolio turnover may
result in more capital gains which would be taxable to the shareholders of the
Fund.
PERFORMANCE INFORMATION
The Company may from time to time advertise total return of the Funds. In
addition, from time to time the Company may advertise "yield" for each of the
Funds. THESE FIGURES WILL BE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an investment in a
Fund would have earned over a specified period of time (such as one, three, five
or ten years) assuming that all distributions and dividends by the Fund were
reinvested on the reinvestment dates during the period. Total return does not
take into account any federal or state income taxes consequences to shareholders
subject to tax. The "yield" of a Fund refers to the income generated by an
investment in the Fund over a one-month or 30-day period. This income is
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then "annualized." That is, the amount of income generated by the investment
during that 30-day period is assumed to be generated each 30-day period for
twelve periods, and is shown as a percentage of the investment. The Company may
also include comparative performance information in advertising or marketing the
Fund's shares. Such performance information may include data from Lipper
Analytical Services, Inc. and Morgan Stanley Capital International.
PERFORMANCE OF INVESTMENT SUB-ADVISER -- EMERGING MARKETS DEBT FUND
The Sub-Adviser manages a portfolio of Morgan Stanley Institutional Fund,
Inc. ("MSIF") which served as the model for the Emerging Markets Debt Fund. The
portfolio of MSIF (the "MSIF Portfolio") has substantially the same investment
objective, policies and strategies as the Emerging Markets Debt Fund. In
addition, the Adviser and Sub-Adviser intend the Emerging Markets Debt Fund and
the corresponding MSIF Portfolio to be managed by the same personnel and to
continue to have closely similar investment strategies, techniques and
characteristics. Past investment performance of the MSIF Portfolio, as shown in
the table below, may be relevant to your consideration of investment in the
Emerging Markets Debt Fund. The investment performance of the MSIF Portfolio is
not necessarily indicative of future performance of the Emerging Markets Debt
Fund. Also, the operating expenses of the Emerging Markets Debt Fund will be
different from, and may be higher than, the operating expenses of the MSIF
Portfolio. The investment performance of the MSIF Portfolio is provided merely
to indicate the experience of the Sub-Adviser in managing similar investment
portfolios.
The data set forth below under the heading "Return With Sales Charge" is
adjusted to reflect the Fund's projected operating expenses and (i) with respect
to the Class A shares, to take into account a maximum 4.75% initial sales charge
applicable to purchases of Class A shares of the Emerging Markets Debt Fund;
(ii) with respect to Class B shares, to take into account the applicable CDSC
that is imposed if Class B shares of the Emerging Markets Debt Fund are redeemed
within the year of their purchase indicated; and (iii) with respect to the Class
C shares, to take into account a 1.00% CDSC that is imposed if Class C shares of
the Emerging Markets Debt Fund are redeemed within one year of their purchase.
The data set forth below under the heading "Return Without Sales Charge" is
adjusted to reflect the Fund's projected operating expenses and not adjusted to
take into account such sales charges.
52
<PAGE>
TOTAL RETURN FOR THE MSIF PORTFOLIO'S CLASS A SHARES
(A SEPARATE MUTUAL FUND FROM EMERGING MARKETS DEBT FUND)
FOR THE PERIOD ENDED JUNE 30, 1997
(ADJUSTED TO REFLECT PROJECTED OPERATING EXPENSES AND, WHERE INDICATED, THE
SALES CHARGES OF THE EMERGING MARKETS DEBT FUND)
<TABLE>
<CAPTION>
RETURN WITH SINCE
SALES CHARGE 1 YEAR 3 YEAR INCEPTION (1)
- ------------------------------------------------------- --------- --------- ------------
<S> <C> <C> <C>
Class A................................................ 41.60% 31.24% 19.55%
Class B................................................ 43.91% 32.39% 20.78%
Class C................................................ 46.91% 32.96% 20.78%
RETURN WITHOUT
SALES CHARGE
- -------------------------------------------------------
Class A................................................ 48.66% 33.39% 21.27%
Class B................................................ 47.91% 32.96% 20.78%
Class C................................................ 47.91% 32.96% 20.78%
</TABLE>
- --------------
(1) Commenced operations on February 1, 1994.
The past performance of the MSIF Portfolio is no guarantee of the future
performance of the Emerging Markets Debt Fund.
DIVIDENDS AND DISTRIBUTIONS
Shareholders will automatically be credited with all dividends and
distributions in additional shares at net asset value, without payment of any
sales charge of the Funds, except that, upon written notice to the Company or by
checking off the appropriate box in the account application form, a shareholder
may elect to receive dividends and/or distributions in cash.
The Emerging Markets Debt Fund expects to distribute substantially all of
its net investment income in the form of annual dividends. Each of the Global
Fixed Income, High Yield and Worldwide High Income Funds expects to distribute
net investment income in the form of monthly dividends. Each of the Funds
expects to distribute net realized gains, if any, annually. Confirmations of the
purchase of shares of the Fund through the automatic reinvestment of income
dividends and capital gains distributions will be provided, pursuant to Rule
10b-10(b) under the Securities Exchange Act of 1934, as amended, on the next
quarterly client statement following such purchase of shares. Consequently,
confirmations of such purchases will not be provided at the time of completion
of such purchases, as might otherwise be required by Rule 10b-10.
Any undistributed net investment income and undistributed realized gains
increase a Fund's net assets for the purpose of calculating net asset value per
share. Therefore, on the "ex-dividend" or "ex-distribution" date, the net asset
value per share excludes the dividend or distribution (i.e., is reduced by the
per share amount of the dividend or distribution). Dividends and distributions
paid shortly after the purchase of shares by an investor, although in effect a
return of capital, are taxable to shareholders subject to tax.
Expenses of the Company allocated to a particular class of shares of a Fund
will be borne on a pro rata basis by each outstanding share of that class.
53
<PAGE>
TAXES
TAX STATUS OF THE FUNDS
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial
or administrative action, possibly with retroactive effect. See also the tax
sections in the Statement of Additional Information.
No attempt has been made to present a detailed explanation of the federal,
state or local income tax treatment of the Funds or their shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
Each of the Funds is generally treated as a separate entity for federal
income tax purposes, and thus the provisions of the Internal Revenue Code of
1986, as amended (the "Code") generally will be applied to each Fund separately,
rather than to the Company as a whole. Net long-term, mid-term and short-term
capital gains, net income and operating expenses therefore will be determined
separately for each Fund.
Each Fund intends to qualify for the special tax treatment afforded
"regulated investment companies" ("RICs") under Subchapter M of the Code so that
it will be relieved of federal income tax on that part of its net investment
income and net capital gain (the excess of net long-term capital gain over net
short-term capital loss less any available loss carryforward) which is
distributed to its shareholders.
TAX STATUS OF DISTRIBUTIONS AND DISPOSITIONS
Each Fund distributes substantially all of its net investment income
(including, for this purpose, net short-term capital gain), to its shareholders.
Dividends paid by a Fund from its net investment income will be taxable to the
shareholders of the Fund as ordinary income, whether received in cash or in
additional shares, if the shareholder is subject to tax. Dividends paid by a
Fund attributable to dividends received from shares of domestic corporations
generally will not qualify for the dividends-received deduction to corporations.
Distributions of net capital gains ("capital gain dividends") are taxable to
shareholders subject to tax as long-term capital gains, regardless of how long
the shareholder has held a Fund's shares. Capital gain distributions are not
eligible for the corporate dividends-received deduction. Each Fund will make
annual reports to shareholders of the federal income tax status of all
distributions. For a summary of the tax rates applicable to capital gains
(including capital gain dividends); see the discussion below regarding the
Taxpayer Relief Act of 1997.
Each Fund intends to make sufficient distributions or deemed distributions
of its ordinary income and net capital gains prior to the end of each calendar
year to qualify as an RIC under the Code and to avoid liability for federal
income and excise taxes.
Dividends and other distributions declared in October, November and December
by a Fund payable as of a record date in such month and paid at any time during
January of the following year are treated as having been paid by the Fund and
received by the shareholders on December 31 of the year declared.
The sale, exchange or redemption of shares may result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the redemption proceeds exceeds or is less than the
shareholder's adjusted basis in the redeemed, exchanged or sold shares. If
capital gain dividends
54
<PAGE>
have been made with respect to shares that are sold at a loss after being held
for six months or less, then the loss is treated as a long-term capital loss to
the extent of the capital gain dividends. Shareholders may also be subject to
state and local taxes on distributions from the Funds.
Under the Taxpayer Relief Act of 1997 (the "1997 Tax Act"), the maximum tax
rates applicable to net capital gains recognized by individuals and other
non-corporate taxpayers are (i) the same as ordinary income rates for capital
assets held for one year or less, (ii) 28% for capital assets held for more than
one year but not more than 18 months and (iii) 20% for capital assets held for
more than 18 months. The maximum long-term capital gains rate for corporations
remains at 35%. Under the 1997 Tax Act, the Treasury is authorized to issue
regulations that address the application of the new capital gains rates to sales
and exchanges by RICs and to sales and exchanges of interests in RICs, but no
such regulations have been issued as of the date hereof. It is expected that the
new tax rates for capital gains under the 1997 Tax Act described above will
apply to distributions of capital gain dividends by the Funds as well as to
sales and exchanges of shares in the Funds. With respect to capital losses
recognized on dispositions of shares held six months or less where such losses
are treated as long-term capital losses to the extent of prior capital gain
dividends received on such shares (see discussion above regarding gains or
losses recognized on the sale or exchange of shares), it is unclear how such
capital losses offset the capital gains referred to above. Shareholders should
consult their own tax advisers as to the application of the new capital gains
rates to their particular circumstances.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS AND SHAREHOLDERS SHOULD CONSULT THEIR
OWN TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT
IN THE FUNDS.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Company was organized as a Maryland corporation on August 14, 1992. The
Amended Articles of Incorporation currently permit the Company to issue 27.375
billion shares of common stock, par value $.001 per share. Pursuant to the
Company's By-Laws, the Board of Directors may increase the number of shares the
Company is authorized to issue without the approval of the shareholders of the
Company. The Board of Directors has the power to designate one or more classes
of shares of common stock and to classify and reclassify any unissued shares
with respect to such classes.
The shares of each Fund, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. Except as
described herein, the shares have no preference as to conversion, exchange,
dividends, retirement or other features and have no preemptive rights. The
shares of the Funds have non-cumulative voting rights, which means that the
holders of more than 50% of the shares voting for the election of Directors can
elect 100% of the Directors if they choose to do so. Under Maryland law, the
Company is not required to hold an annual meeting of its shareholders unless
required to do so under the 1940 Act. Any person or organization owning 25% or
more of the outstanding shares of a Fund may be presumed to "control" (as that
term is defined in the 1940 Act) such Fund. As of October 16, 1997, Lehman
Brothers Inc., FBO 835-91032-18, P.O. Box 29198, Brooklyn, NY 11202-9198, was
presumed to "control" the Global Fixed Income Fund based solely on its ownership
of more than 25% of the outstanding voting shares of such Fund. As
55
<PAGE>
of October 16, 1997, Morgan Stanley Group Inc., 1221 Avenue of the Americas, New
York, New York 10020-1001, was presumed to "control" the High Yield Fund based
solely on its ownership of more than 25% of the outstanding voting shares of
such Fund.
REPORTS TO SHAREHOLDERS
The Company will send to its shareholders annual and semi-annual reports;
the financial statements appearing in annual reports are audited by independent
accountants.
In addition, the Company or ACCESS will send to each shareholder having an
account directly with the Company a quarterly statement showing transactions in
the account, the total number of shares owned, and any dividends or
distributions paid. In addition, when a transaction occurs in a shareholder's
account, the Company or ACCESS will send the shareholder a confirmation
statement showing the same information.
CUSTODIAN
Domestic securities and cash are held by Chase, which is not an affiliate of
the Adviser, the Sub-Adviser or the Distributor. Morgan Stanley Trust Company,
Brooklyn, New York ("Morgan Stanley Trust"), 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 regulations of the
SEC for the purpose of providing custodial services for such assets. Morgan
Stanley Trust may also hold certain domestic assets for the Company. Morgan
Stanley Trust is an affiliate of the Adviser, the Sub-Adviser and the
Distributor. For more information on the custodians, see "General Information --
Custody Arrangements" in the Statement of Additional Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-9256, acts as dividend
disbursing and transfer agent for the Company.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, NY 10036,
serves as independent accountants for the Company and audits its annual
financial statements.
56
<PAGE>
APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. -- CORPORATE 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-edge." 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.
A-1
<PAGE>
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS:
AAA -- Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation and indicate an extremely strong capacity to pay principal
and interest.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only to a small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC -- Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
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.
A-2
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE DISTRIBUTOR. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER BY THE COMPANY OR THE DISTRIBUTOR TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
-----
Prospectus Summary.................................................... 2
Fund Expenses......................................................... 4
Financial Highlights.................................................. 7
Investment Objectives and Policies.................................... 12
Additional Investment Information..................................... 20
Investment Limitations................................................ 31
Management of the Company............................................. 31
Purchase of Shares.................................................... 36
Shareholder Services.................................................. 44
Redemption of Shares.................................................. 48
Valuation of Shares................................................... 50
Portfolio Transactions................................................ 51
Performance Information............................................... 51
Dividends and Distributions........................................... 53
Taxes................................................................. 54
General Information................................................... 55
Appendix A -- Description of Corporate Bond Ratings................... A-1
</TABLE>
MORGAN STANLEY
EMERGING MARKETS DEBT FUND
GLOBAL FIXED INCOME FUND
HIGH YIELD FUND
WORLDWIDE HIGH INCOME FUND
PORTFOLIOS OF
MORGAN STANLEY
FUND, INC.
---------------
PROSPECTUS
---------------
INVESTMENT ADVISER
VAN KAMPEN AMERICAN
CAPITAL INVESTMENT
ADVISORY CORP.
INVESTMENT SUB-ADVISER
MORGAN STANLEY
ASSET MANAGEMENT INC.
DISTRIBUTOR
VAN KAMPEN AMERICAN
CAPITAL DISTRIBUTORS, INC.
- ---------------------------------
- ---------------------------------
- ---------------------------------
- ---------------------------------
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
-----------------------------------------------------------------------------
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
MORGAN STANLEY VALUE FUND
PORTFOLIOS OF THE
MORGAN STANLEY FUND, INC.
P.O. BOX 418256, KANSAS CITY, MISSOURI 64141
FOR INFORMATION CALL 1-800-282-4404
------------------
Morgan Stanley Fund, Inc. (the "Company") is an open-end management
investment company, or mutual fund, which consists of twenty-two investment
portfolios. This prospectus (the "Prospectus") describes the Class A, Class B
and Class C shares of the six portfolios listed above (each a "Fund," and
together, the "Funds"). The Funds are designed to make available to retail
investors the expertise of Van Kampen American Capital Investment Advisory
Corp., the adviser (the "Adviser") and administrator (the "Administrator"), and
its affiliates, Morgan Stanley Asset Management Inc., a sub-adviser ("MSAM" or a
"Sub-Adviser"), and Miller Andersen & Sherrerd, LLP, a sub-adviser ("MAS" or a
"Sub-Adviser"), to the Funds. Shares are available through Van Kampen American
Capital Distributors, Inc. (the "Distributor") and through investment dealers,
banks and financial services firms that provide distribution, administrative or
shareholder services ("Participating Dealers"). As of the date of this
Prospectus, the Morgan Stanley Equity Growth and Morgan Stanley Mid Cap Growth
Funds are not offering shares.
This Prospectus is designed to set forth concisely the information about the
Funds that a prospective investor should know before investing and it should be
retained for future reference. Additional information about the Company is
contained in a "Statement of Additional Information," dated October 28, 1997,
which is incorporated herein by reference. The Company offers other portfolios
which are described in other prospectuses. The Statement of Additional
Information and the prospectuses pertaining to the other portfolios of the
Company are available upon request and without charge by writing or calling the
Company at the address and telephone number set forth above. The Statement of
Additional Information and other materials regarding the Company have been filed
with the Securities and Exchange Commission and are available at the
Commission's internet web site (http://www.sec.gov).
THE COMPANY'S SHARES ARE NOT OBLIGATIONS, DEPOSITS OR ACCOUNTS OF, OR
ENDORSED OR GUARANTEED BY, ANY BANK OR DEPOSITORY INSTITUTION, OR ANY OF ITS
AFFILIATES OR CORRESPONDENTS. THE COMPANY'S SHARES ARE NOT FEDERALLY INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER AGENCY. SHARES OF THE COMPANY INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS DATED OCTOBER 28, 1997.
<PAGE>
PROSPECTUS SUMMARY
THE COMPANY
The Company currently consists of twenty-two portfolios which are designed
to offer investors a range of investment choices with Van Kampen American
Capital Investment Advisory Corp. (the "Adviser") providing services as adviser
and administrator and its affiliates, Morgan Stanley Asset Management Inc.
("MSAM" or a "Sub-Adviser") and Miller Andersen & Sherrerd, LLP ("MAS" or a
"Sub-Adviser"), providing services as sub-advisers. Van Kampen American Capital
Distributors, Inc. (the "Distributor") provides services as Distributor. MAS
serves as the Sub-Adviser for the Mid Cap Growth Fund and the Value Fund. MSAM
serves as the Sub-Adviser for all of the other Funds. For ease of reference, the
words "Morgan Stanley," which begin the name of each portfolio are not used
throughout this Prospectus. The investment objective of each Fund is as follows:
- The AGGRESSIVE EQUITY FUND seeks capital appreciation by investing
primarily in a non-diversified portfolio of corporate equity and
equity-linked securities.
- The AMERICAN VALUE FUND seeks high total return by investing in
undervalued equity securities of small-to medium-sized corporations.
- The EQUITY GROWTH FUND seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of medium and large
capitalization companies. As of the date of this Prospectus, the Equity
Growth Fund is not offering shares.
- The MID CAP GROWTH FUND seeks to achieve long-term growth by investing
primarily in common stocks and other equity securities of smaller and
medium size companies which are deemed by the Sub-Adviser to offer
long-term growth potential. As of the date of this Prospectus, the Mid Cap
Growth Fund is not offering shares.
- The U.S. REAL ESTATE FUND seeks to provide above-average current income
and long-term capital appreciation by investing primarily in equity
securities of companies in the U.S. real estate industry, including real
estate investment trusts.
- The VALUE FUND seeks to achieve above-average total return over a market
cycle of three to five years, consistent with reasonable risk, by
investing primarily in a diversified portfolio of common stocks and other
equity securities which are deemed by the Sub-Adviser to be relatively
undervalued based on various measures such as price/earnings ratios and
price/book ratios.
RISK FACTORS
The investment policies of each Fund entail certain risks and considerations
of which an investor should be aware. The Funds described herein invest in
common stocks, which are subject to market risks that may cause their prices to
fluctuate over time. Changes in the value of portfolio securities will not
necessarily affect cash income derived from these securities, but will affect a
Fund's net asset value. The Funds, and in particular, the Aggressive Equity,
American Value, Mid Cap Growth and Value Funds, invest in small- to medium-sized
corporations, which are more vulnerable to financial risks and other risks than
larger corporations, and therefore may involve a higher degree of risk and price
volatility than investments in the securities of larger corporations. Each Fund
described herein may invest in securities that are neither listed on stock
exchanges nor traded over-the-counter, including private placement securities
and restricted securities. Such securities may be less liquid than publicly
traded securities. The Funds may invest in securities of foreign issuers which
are subject to certain
2
<PAGE>
risks not typically associated with domestic securities. See "Additional
Investment Information -- Foreign Investment" for more information. Some Funds
may invest in forward foreign currency exchange contracts, and may invest in
foreign currency exchange futures and options. In addition, the Funds may invest
in derivatives, which include options, futures and options on futures and swaps
and each Fund may invest in repurchase agreements, borrow money, lend its
portfolio securities, and purchase securities on a when-issued or delayed
delivery basis. Certain Funds may invest in securities which are convertible
upon various terms and conditions into equity securities, borrow for purposes of
leverage, invest in reverse repurchase agreements and engage in short selling.
Because the U.S. Real Estate Fund invests primarily in the securities of
companies principally engaged in the real estate industry, its investments may
be subject to the risks associated with the direct ownership of real estate.
Because it is expected that the U.S. Real Estate Fund will invest a substantial
portion of its assets in real estate investment trusts ("REITs"), the U.S. Real
Estate Fund may also be subject to certain risks and costs associated with the
direct investments of REITs.
Because the U.S. Real Estate Fund and Aggressive Equity Fund are
non-diversified portfolios, each of these Funds may invest a greater proportion
of its assets in the securities of a smaller number of issuers and, as a result,
will be subject to a greater risk resulting from such concentration of its
portfolio securities.
Each Fund's share price and investment return fluctuate, and a shareholder's
investment when redeemed may be worth more or less than his original cost. Each
of these investment strategies involves specific risks which are described under
"Investment Objectives and Policies" and "Additional Investment Information"
herein and under "Investment Objectives and Policies" in the Statement of
Additional Information.
HOW TO INVEST
The Class A, Class B and Class C shares of the Funds are designed to provide
investors a choice of three ways to pay distribution costs. Class A shares of
the Funds are offered at net asset value plus a maximum initial sales charge of
5.75%, which initial sales charge may be reduced on certain larger purchases or
when combining purchases with the investor's aggregate investments in the
Participating Funds. Class B and Class C shares of the Funds are offered at net
asset value. Class B shares are subject to a contingent deferred sales charge
("CDSC") for redemptions within five years of purchase and are subject to higher
annual distribution-related expenses than the Class A shares. Class C shares are
also subject to a CDSC for redemptions within one year of purchase and are
subject to higher annual distribution-related expenses than the Class A shares.
See "Purchase of Shares" for a discussion of reduction or waiver of sales
charges, which are available for certain investors. Share purchases may be made
through the Distributor, through Participating Dealers or by sending payments
directly to the Company. The minimum initial investment is $500 for each class
of a Fund, except that the minimum initial investment amount is reduced for
certain categories of investors. The minimum for subsequent investments is $25,
except that there is no minimum for automatic reinvestment of dividends and
distributions. See "Purchase of Shares."
HOW TO REDEEM
Shares of each Fund may be redeemed at any time at the net asset value per
share price (less any applicable CDSC) of the Fund next determined after receipt
of the redemption request. The redemption price may be more or less than the
purchase. See "Redemption of Shares."
3
<PAGE>
FUND EXPENSES
The following table illustrates all expenses and fees that a shareholder of
a Fund may incur:
<TABLE>
<CAPTION>
AGGRESSIVE AMERICAN EQUITY MID CAP U.S. REAL
SHAREHOLDER TRANSACTION EXPENSES EQUITY FUND VALUE FUND GROWTH FUND GROWTH FUND ESTATE FUND VALUE FUND
- -------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)
Class A..................... 5.75%(1) 5.75%(1) 5.75%(1) 5.75%(1) 5.75%(1) 5.75%(1)
Class B..................... None None None None None None
Class C..................... None None None None None None
Maximum Deferred Sales Load (as
a percentage of the lesser of
initial purchase price or
current market value)
Class A
For Purchases up to
$999,999................ None None None None None None
For Purchases of
$1,000,000 or more...... 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2)
Class B..................... 5.00%(3) 5.00%(3) 5.00%(3) 5.00%(3) 5.00%(3) 5.00%(3)
Class C..................... 1.00%(4) 1.00%(4) 1.00%(4) 1.00%(4) 1.00%(4) 1.00%(4)
Maximum Sales Load Imposed on
Reinvested Dividends
Class A..................... None None None None None None
Class B..................... None None None None None None
Class C..................... None None None None None None
Redemption Fees
Class A..................... None None None None None None
Class B..................... None None None None None None
Class C..................... None None None None None None
Exchange Fees
Class A..................... None None None None None None
Class B..................... None None None None None None
Class C..................... None None None None None None
</TABLE>
- ------------------
(1) Percentage shown is the maximum sales load. Certain large purchases may be
subject to a reduced sales load.
(2) Purchases of Class A shares of the Funds which, when combined with the net
asset value of the purchaser's existing investments in Class A shares of the
Participating Funds (as defined under "Purchase of Shares -- Quantity
Discounts"), aggregate to $1 million or more are not subject to an initial
sales load (an "initial sales charge"). A contingent deferred sales charge
("CDSC") of 1.00% will be imposed, however, on shares from any such purchase
that are redeemed within one year following such purchase. Certain other
purchases are not subject to an initial sales charge. See "Purchase of
Shares."
(3) Percentage shown is the maximum CDSC. Purchases of Class B shares of the
Funds are subject to a maximum CDSC of 5.00% which decreases in steps to
0.00% after five years. See "Purchase of Shares."
(4) Purchases of Class C shares of the Funds are subject to a CDSC of 1.00% for
redemptions made within one year of purchase. See "Purchase of Shares."
4
<PAGE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET AGGRESSIVE AMERICAN EQUITY MID CAP U.S. REAL
ASSETS) EQUITY FUND VALUE FUND GROWTH FUND GROWTH FUND ESTATE FUND VALUE FUND
----------- ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Investment Advisory Fee (after expense
reimbursement and/or fee waiver) (5)
Class A............................... 0.09% 0.59% 0.68% 0.67% 0.00% 0.74%
Class B............................... 0.09% 0.59% 0.68% 0.67% 0.00% 0.74%
Class C............................... 0.09% 0.59% 0.68% 0.67% 0.00% 0.74%
12b-1 Distribution and Service Fees
Class A (6)........................... 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Class B (6)........................... 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Class C (6)........................... 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Other Expenses (after expense
reimbursement and/or fee waiver) (5)
Class A............................... 1.23% 0.66% 0.47% 0.48% 1.30% 0.46%
Class B............................... 1.23% 0.66% 0.47% 0.48% 1.30% 0.46%
Class C............................... 1.23% 0.66% 0.47% 0.48% 1.30% 0.46%
Total Operating Expenses (after expense
reimbursement and/or fee waiver) (5)
Class A............................... 1.57% 1.50% 1.40% 1.40% 1.55% 1.45%
Class B............................... 2.32% 2.25% 2.15% 2.15% 2.30% 2.20%
Class C............................... 2.32% 2.25% 2.15% 2.15% 2.30% 2.20%
</TABLE>
- ------------------
(5) The Adviser has agreed to waive a portion of its advisory fees and/or to
reimburse a portion of expenses of the Funds listed above, if necessary, if
such fees would cause the total annual operating expenses of the Funds, as a
percentage of average daily net assets, to exceed the percentages set forth
in the table above. The following table sets forth for each Fund investment
advisory fees and expected total operating expenses absent fee waivers
and/or expense reimbursements. The Adviser in its discretion may terminate
voluntary fee waivers and/or reimbursements at any time. Absent the waiver
of fees or reimbursement of expenses, the amounts in the examples below
would be greater.
<TABLE>
<CAPTION>
AGGRESSIVE AMERICAN EQUITY MID CAP U.S. REAL
EQUITY FUND VALUE FUND GROWTH FUND GROWTH FUND ESTATE FUND VALUE FUND
----------- ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Investment Advisory Fees
(All Classes)......................... 0.90% 0.85% 0.70% 0.75% 1.00% 0.80%
Total Operating Expenses
Class A............................... 2.38% 1.76% 1.42% 1.48% 2.51% 1.51%
Class B............................... 2.88% 2.48% 2.17% 2.23% 3.39% 2.26%
Class C............................... 3.23% 2.47% 2.17% 2.23% 3.58% 2.26%
</TABLE>
For further information on Fund expenses, see "Management of the Company."
(6) Of the 12b-1 distribution and service fees for the Class A shares, 0.25%
represents a shareholder services fee, and for the Class B shares and the
Class C shares, 0.75% represents a distribution fee and 0.25% represents a
shareholder services fee. See "Management of the Company -- Distributor."
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted as a fund-level expense by the
Conduct Rules of the National Association of Securities Dealers, Inc.
("NASD").
The purpose of the above table is to assist the investor in understanding
the various expenses that an investor in any of the Funds will bear directly or
indirectly. The expenses and fees for the Aggressive Equity, American Value and
U.S. Real Estate Funds are based on actual figures for the fiscal year ended
June 30, 1997. The expenses and fees for the Equity Growth, Mid Cap Growth and
Value Funds are based on advisory agreements, 12b-1 plans and estimates of other
because such Funds had not commenced investment operations as of June 30, 1997.
5
<PAGE>
The following examples illustrate the expenses that you would pay on a
$1,000 investment, assuming a 5% annual rate of return and redemption at the end
of each time period as indicated, in (i) Class A shares of each Fund, including
the maximum 5.75% initial sales charge, (ii) Class B shares of each Fund, which
have a CDSC, but no initial sales charge and (iii) Class C shares of each Fund,
which have a CDSC, but no initial sales charge.
<TABLE>
<CAPTION>
AGGRESSIVE AMERICAN EQUITY MID CAP U.S. REAL
EQUITY FUND VALUE FUND GROWTH FUND GROWTH FUND ESTATE FUND VALUE FUND
----------- ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Class A shares
1 Year................................ $ 73(1) $ 72(1) $ 71(1) $ 71(1) $ 72(1) $ 71(1)
3 Years............................... 104 102 99 99 104 101
5 Years............................... 138 135 * * 137 *
10 Years.............................. 233 226 * * 231 *
Class B shares
(Assuming complete redemption at end of
period)
1 Year................................ 74 73 72 72 73 72
3 Years............................... 102 100 97 97 102 99
5 Years............................... 139 135 * * 138 *
10 Years (2).......................... 247 239 * * 244 *
(Assuming no redemption)
1 Year................................ 24 23 22 22 23 22
3 Years............................... 72 70 67 67 72 69
5 Years............................... 124 120 * * 123 *
10 Years (2).......................... 247 239 * * 244 *
Class C shares
(Assuming complete redemption immediately
prior to the end of period)
1 Year................................ 34 33 32 32 33 32
3 Years............................... 72 70 67 67 72 69
5 Years............................... 124 120 * * 123 *
10 Years.............................. 266 258 * * 264 *
(Assuming no redemption)
1 Year................................ 24 23 22 22 23 22
3 Years............................... 72 70 67 67 72 69
5 Years............................... 124 120 * * 123 *
10 Years.............................. 266 258 * * 264 *
</TABLE>
- ------------------
* Because the Equity Growth, Mid Cap Growth and Value Funds had not commenced
investment operations as of June 30, 1997, the Company has not projected
expenses beyond the three-year period shown.
(1) The example reflects Class A shares sold subject to the maximum 5.75%
initial sales charge. Certain large purchases may be subject to a reduced
initial sales charge. Purchases of Class A shares of the Funds which, when
combined with the net asset value of the purchaser's existing investment in
Class A shares of the Participating Funds, aggregate to $1 million or more
are not subject to an initial sales charge but a CDSC of 1.00% will be
imposed on such shares that are redeemed within one year following such
purchase.
(2) The expenses shown reflect that Class B shares automatically convert to
Class A shares after eight years.
THE FOREGOING EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
6
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables provide financial highlights for the Class A, Class B
and Class C shares of the Aggressive Equity, American Value and U.S. Real Estate
Funds for each of the periods presented. The financial highlights are part of
the Company's financial statements, which appear in the Company's June 30, 1997
Annual Report to Shareholders. The financial statements are incorporated into
the Company's Statement of Additional Information. The foregoing Funds'
financial highlights for each of the periods presented have been audited by
Price Waterhouse LLP, whose report thereon (which was unqualified) is also
incorporated into the Statement of Additional Information. Additional
performance information about the Company is contained in the Annual Report. The
Annual Report and the Statement of Additional Information are available at no
cost from the Company at the address and telephone number noted on the cover
page of this Prospectus. The following information should be read in conjunction
with the financial statements and notes thereto. Financial highlights are not
presented for the Equity Growth, Mid Cap Growth and Value Funds because they had
not commenced investment operations as of June 30, 1997.
7
<PAGE>
FINANCIAL HIGHLIGHTS
AGGRESSIVE EQUITY FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
---------------------------------- ---------------------------------- ----------------------------------
SELECTED PER SHARE DATA YEAR ENDED JANUARY 2, 1996* TO YEAR ENDED JANUARY 2, 1996* TO YEAR ENDED JANUARY 2, 1996* TO
AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 14.40 $12.00 $ 14.38 $12.00 $ 14.37 $12.00
- - -
----- ----- -----
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) 0.01 0.06 (0.02) 0.03 (0.06) 0.03
Net Realized and
Unrealized Gain 3.95 2.40 3.86 2.39 3.89 2.38
- - -
----- ----- -----
Total From Investment
Operations 3.96 2.46 3.84 2.42 3.83 2.41
- - -
----- ----- -----
DISTRIBUTION:
Net Investment Income (0.03) (0.06) (0.02) (0.04) (0.02) (0.04)
Net Realized Gain (1.35) -- (1.35) -- (1.35) --
- - -
----- ----- -----
Total Distributions (1.38) (0.06) (1.37) (0.04) (1.37) (0.04)
- - -
----- ----- -----
NET ASSET VALUE, END OF
PERIOD $ 16.98 $14.40 $ 16.85 $14.38 $ 16.83 $14.37
- - -
- - -
----- ----- -----
----- ----- -----
TOTAL RETURN (1) 28.93% 20.52% 28.01% 20.18% 28.04% 20.10%
- - -
- - -
----- ----- -----
----- ----- -----
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of
Period (000's) $22,521 $5,382 $34,382 $2,426 $ 9,410 $2,582
Ratio of Expenses to
Average Net Assets 1.57% 2.03%** 2.32% 2.67%** 2.32% 2.67%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (0.04)% 1.22%** (0.83)% 0.43%** (0.77)% 0.44%**
Portfolio Turnover Rate 241% 204% 241% 204% 241% 204%
Average Commission Rate
# $0.0536 N/ A $0.0536 N/ A $0.0536 N/ A
- -----------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary
Expense Limitation
During the Period
Per Share Benefit to
Net Investment
Income $ 0.22 $ 0.06 $ 0.02 $ 0.07 $ 0.07 $ 0.07
Ratios Before Expense
Limitation:
Expenses to Average
Net Assets 2.38% 3.26%** 2.88% 3.79%** 3.23% 3.80%**
Net Investment Income
to Average Net
Assets (0.85)% (0.01)%** (1.43)% (0.69)%** (1.67)% (0.69)%**
Ratio of Expenses to
Average Net Assets
excluding dividend
expense on securities
sold short 1.50% 1.50%** 2.25% 2.25%** 2.25% 2.25%**
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
(1) Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for periods of less than one year are not annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose the average commission rate per share it paid for trades on which
commissions were charged.
8
<PAGE>
FINANCIAL HIGHLIGHTS CONTINUED
AMERICAN VALUE FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------------------------------- ---------------------------
OCTOBER 18, AUGUST 1,
YEAR ENDED YEAR ENDED YEAR ENDED 1993* YEAR ENDED 1995+ TO
SELECTED PER SHARE DATA AND JUNE 30, JUNE 30, JUNE 30, TO JUNE 30, JUNE 30, JUNE 30,
RATIOS 1997 1996 1995 1994 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 14.63 $ 12.89 $ 11.70 $ 12.00 $ 14.63 $ 13.37
----------- ----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.20 0.27 0.27 0.17 0.09 0.15
Net Realized and Unrealized
Gain (Loss) 4.05 1.94 1.44 (0.30) 4.05 1.46
----------- ----------- ----------- ----------- ----------- -----------
Total from Investment
Operations 4.25 2.21 1.71 (0.13) 4.14 1.61
----------- ----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income (0.20) (0.27) (0.28) (0.17) (0.09) (0.15)
In Excess of Net Investment
Income (0.00)++ (0.01) -- -- (0.00)++ (0.01)
Net Realized Gain (1.09) (0.19) (0.24) -- (1.09) (0.19)
----------- ----------- ----------- ----------- ----------- -----------
Total Distributions (1.29) (0.47) (0.52) (0.17) (1.18) (0.35)
----------- ----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 17.59 $ 14.63 $ 12.89 $ 11.70 $ 17.59 $ 14.63
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
TOTAL RETURN (1) 30.68% 17.41% 15.01% (1.12)% 29.77% 12.29%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(000's) $ 34,331 $ 19,674 $ 20,675 $ 10,717 $ 15,331 $ 2,485
Ratio of Expenses to Average
Net Assets 1.50% 1.50% 1.50% 1.50%** 2.25% 2.25%**
Ratio of Net Investment Income
to Average Net Assets 1.25% 1.90% 2.29% 2.14%** 0.40% 1.18%**
Portfolio Turnover Rate 73% 41% 23% 17% 73% 41%
Average Commission Rate # $ 0.0452 N/A N/A N/A $ 0.0452 N/A
- -----------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Income $ 0.04 $ 0.04 $ 0.05 $ 0.08 $ 0.06 $ 0.04
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 1.76% 1.81% 1.96% 2.48%** 2.48% 2.61%**
Net Investment Income to
Average Net Assets 0.98% 1.59% 1.83% 1.16%** 0.14% 0.82%**
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
++ Amount is less than $0.01 per share
(1) Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for periods of less than one year are not annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose the average commission rate per share it paid for trades on which
commissions were charged.
9
<PAGE>
FINANCIAL HIGHLIGHTS CONTINUED
AMERICAN VALUE FUND
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 18, 1993*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 TO JUNE 30, 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.64 $ 12.89 $ 11.69 $ 12.00
------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.08 0.16 0.17 0.11
Net Realized and Unrealized Gain
(Loss) 4.05 1.94 1.44 (0.31)
------- ------- ------- ------
Total from Investment Operations 4.13 2.10 1.61 (0.20)
------- ------- ------- ------
DISTRIBUTIONS
Net Investment Income (0.09) (0.15) (0.17) (0.11)
In Excess of Net Investment Income (0.00)++ (0.01) -- --
Net Realized Gain (1.09) (0.19) (0.24) --
------- ------- ------- ------
Total Distributions (1.18) (0.35) (0.41) (0.11)
------- ------- ------- ------
NET ASSET VALUE, END OF PERIOD $ 17.59 $ 14.64 $ 12.89 $ 11.69
------- ------- ------- ------
------- ------- ------- ------
TOTAL RETURN (1) 29.67% 16.50% 14.13% (1.70)%
------- ------- ------- ------
------- ------- ------- ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 32,425 $ 21,193 $ 13,867 $ 7,237
Ratio of Expenses to Average Net
Assets 2.25% 2.25% 2.25% 2.25%**
Ratio of Net Investment Income to
Average Net Assets 0.49% 1.17% 1.54% 1.39%**
Portfolio Turnover Rate 73% 41% 23% 17%
Average Commission Rate # $ 0.0452 N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.04 $ 0.04 $ 0.05 $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.47% 2.58% 2.71% 3.28%**
Net Investment Income to Average
Net Assets 0.22% 0.84% 1.08% 0.36%**
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
++ Amount is less than $0.01 per share
(1) Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for periods of less than one year are not annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose the average commission rate per share it paid for trades on which
commissions were charged.
10
<PAGE>
FINANCIAL HIGHLIGHTS CONTINUED
U.S. REAL ESTATE FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------------------------- --------------------------- ---------------------------
MAY 1, MAY 1, MAY 1,
YEAR ENDED 1996* TO YEAR ENDED 1996* TO YEAR ENDED 1996* TO
SELECTED PER SHARE DATA AND JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
RATIOS 1997 1996 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 12.52 $ 12.00 $ 12.52 $ 12.00 $ 12.52 $ 12.00
----------- ----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.37 0.08 0.15 0.07 0.20 0.07
Net Realized and Unrealized
Gain 4.03 0.48 4.12 0.48 4.07 0.48
----------- ----------- ----------- ----------- ----------- -----------
Total From Investment
Operations 4.40 0.56 4.27 0.55 4.27 0.55
----------- ----------- ----------- ----------- ----------- -----------
DISTRIBUTION:
Net Investment Income (0.29) (0.04) (0.19) (0.03) (0.19) (0.03)
Net Realized Gain (0.24) -- (0.24) -- (0.24) --
----------- ----------- ----------- ----------- ----------- -----------
Total Distributions (0.53) (0.04) (0.43) (0.03) (0.43) (0.03)
----------- ----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 16.39 $ 12.52 $ 16.36 $ 12.52 $ 16.36 $ 12.52
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
TOTAL RETURN (1) 35.75% 4.63% 34.58% 4.54% 34.56% 4.54%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(000's) $ 14,827 $ 1,829 $ 7,120 $ 2,197 $ 2,369 $ 1,782
Ratio of Expenses to Average
Net Assets 1.55% 1.55%** 2.30% 2.30%** 2.30% 2.30%**
Ratio of Net Investment Income
to Average Net Assets 2.33% 4.11%** 1.49% 3.35%** 1.46% 3.39%**
Portfolio Turnover Rate 143% 0% 143% 0% 143% 0%
Average Commission Rate # $ 0.0582 N/A $ 0.0582 N/A $ 0.0582 N/A
- -----------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Income $ 0.16 $ 0.08 $ 0.11 $ 0.07 $ 0.17 $ 0.08
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 2.51% 5.58%** 3.39% 6.34%** 3.58% 6.32%**
Net Investment Income to
Average Net Assets 1.36% 0.08%** 0.39% (0.69)%** 0.16% (0.63)%**
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
(1) Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for periods of less than one year are not annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose the average commission rate per share it paid for trades on which
commissions were charged.
11
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Fund is described below, together with the
policies the Fund employs in its efforts to achieve its objective. Each Fund's
investment objective is a fundamental policy which may not be changed by the
Fund without the approval of a majority of the Fund's outstanding voting
securities. There is no assurance that a Fund will attain its objective. The
investment policies described below are not fundamental policies and may be
changed without shareholder approval. For more information about certain
investment practices of the Funds, see "Additional Investment Information" below
and "Investment Objectives and Policies" in the Statement of Additional
Information.
THE AGGRESSIVE EQUITY FUND
The Aggressive Equity Fund's investment objective is to provide capital
appreciation by investing primarily in a non-diversified portfolio of corporate
equity and equity-linked securities. With respect to this Fund, equity and
equity-linked securities include common and preferred stock, convertible
securities and rights and warrants to purchase common stocks, as well as equity
related options and futures and specialty securities, such as ELKS, LYONs and
PERCS, of U.S. and foreign issuers. Under normal circumstances, the Fund will
invest at least 65% of the value of its total assets in equity and equity-linked
securities. Equity-linked securities are derivatives, which are financial
instruments that derive their value from the value of an underlying asset,
reference rate or index. As a non-diversified portfolio, the Fund can be more
heavily weighted in fewer stocks than a diversified portfolio. See "Investment
Limitations."
The Fund's Sub-Adviser employs a flexible and eclectic investment process in
pursuit of the Aggressive Equity Fund's investment objective. In selecting
securities for the Fund, the Sub-Adviser concentrates on a universe of rapidly
growing, high quality companies and on companies in lower, but accelerating,
earnings growth situations. The Sub-Adviser's universe of potential investments
generally comprises companies with market capitalizations of $500 million or
more but smaller market capitalization securities may be purchased from time to
time. The Fund is not restricted to investments in specific market sectors. The
Sub-Adviser uses its research capabilities, analytical resources and judgment to
assess economic, industry and market trends, as well as individual company
developments, to select promising investments for the Fund. The Sub-Adviser
concentrates on companies with strong, communicative management and clearly
defined strategies for growth. In addition, the Sub-Adviser rigorously assesses
earnings results. The Sub-Adviser seeks companies that will deliver surprisingly
strong earnings growth. Valuation is of secondary importance to the Sub-Adviser
and is viewed in the context of prospects for sustainable earnings growth and
the potential for positive earnings surprises in relation to consensus
expectations. The Fund is free to invest in any equity or equity-linked security
that, in the Sub-Adviser's judgment, provides above-average potential for
capital appreciation.
In selecting investments for the Aggressive Equity Fund, the Sub-Adviser
emphasizes individual security selection. Overweighted sector positions and
issuer positions may result from the investment process. The Fund has a
long-term investment perspective; however, the Sub-Adviser may take advantage of
short-term opportunities that are consistent with the Fund's objective by
selling recently purchased securities which have increased in value.
The Aggressive Equity Fund may invest in equity and equity-linked securities
of domestic and foreign corporations. However, the Fund does not expect to
invest more than 25% of its total assets at the time of purchase in securities
of foreign companies. The Fund may invest in securities of foreign issuers
directly or in
12
<PAGE>
the form of depositary receipts. The Fund may invest in forward foreign currency
exchange contracts, and may invest in foreign currency exchange futures and
options. The Fund may from time to time and consistent with applicable legal
requirements sell securities short that it owns (i.e., "against the box") or
borrows. The Fund may, to a limited extent, invest in non-publicly traded
securities, private placements and restricted securities. The Fund may invest in
derivatives, which include options, futures and options on futures and swaps,
and the Fund may lend its portfolio securities and purchase securities on a
when-issued or delayed delivery basis.
The Aggressive Equity Fund is authorized to borrow up to 33 1/3% of its
total assets (including the amount borrowed), less all liabilities and
indebtedness other than the borrowing, for investment purposes to increase the
opportunity for greater return and for payment of dividends. Such borrowings
would constitute leverage, which is a speculative characteristic. Leveraging
will magnify declines as well as increases in the net asset value of the Fund's
shares and in the yield on the Fund's investments. Although the Fund is
authorized to borrow, it will do so only when the Sub-Adviser believes that
borrowing will benefit the Fund after taking into account considerations such as
the costs of borrowing and the likely investment returns on securities purchased
with borrowed monies. Borrowing by the Fund will create the opportunity for
increased net income but, at the same time, will involve special risk
considerations. The Aggressive Equity Fund expects that any borrowing, for other
than temporary purposes, will be made on a secured basis. The Fund's Custodian
will either segregate the assets securing the borrowing for the benefit of the
lenders or arrangements will be made with a suitable sub-custodian. If assets
used to secure the borrowing decrease in value, the Fund may be required to
pledge additional collateral to the lender in the form of cash or securities to
avoid liquidation of those assets.
For temporary defensive purposes, the Aggressive Equity Fund may invest a
portion or all of its assets in money market instruments and short- and
medium-term debt securities that the Sub-Adviser believes to be of high quality
or hold cash.
For further information about the foregoing and certain additional
investment practices of the Aggressive Equity Fund, see "Additional Investment
Information" below.
THE AMERICAN VALUE FUND
The American Value Fund's investment objective is to provide high total
return by investing in equity securities of small- to medium-sized corporations.
The Fund's Sub-Adviser seeks securities which it believes to be undervalued
relative to the stock market in general at the time of purchase. The Fund
invests primarily in corporations domiciled in the United States with equity
market capitalizations in the range of the companies represented in the Russell
2500 Small Company Index, but may invest in similar sized foreign companies.
Under normal circumstances, the Fund will invest at least 65% of the value of
its total assets in equity securities whose market capitalization is up to the
top of the range represented in the Index. The Fund may also invest in equity
securities of other corporations but will generally not invest in the 500
largest corporations in the United States. With respect to the Fund, equity
securities include common and preferred stocks, convertible securities and
rights and warrants to purchase common stock, as well as other equity interests,
such as trusts or partnership interests. Debt securities convertible into common
stocks purchased by the Fund will, at the time of purchase, be rated as
investment grade (rated in one of the four highest rating categories by a
nationally recognized statistical rating organization (an "NRSRO")) or, if
unrated, will be of comparable quality as determined by the Sub-Adviser under
the supervision of the Board of Directors. These investments may or may not
carry voting rights. The Fund may invest in non-publicly traded securities,
private placements and restricted securities. The Fund may on occasion invest in
equity securities of foreign issuers that trade on a United States exchange or
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over-the-counter either directly or in the form of depositary receipts. The Fund
may invest in forward foreign currency exchange contracts, and may invest in
foreign currency exchange futures and options. The Fund may invest in
derivatives, which include options, futures and options on futures and swaps,
and the Fund may lend its portfolio securities and purchase securities on a
when-issued or delayed delivery basis.
The Sub-Adviser invests with the philosophy that a diversified portfolio of
undervalued, small- to medium-sized companies will provide high total return in
the long run. Companies considered attractive will have the following
characteristics:
1. Stocks will most often have yields distinctly above the average of
companies with similar capitalizations.
2. The market prices of the stocks will be undervalued relative to the
normal earning power of the companies.
3. Stock prices will be low relative to the intrinsic value of the
companies' assets.
4. Stocks will be of high quality, in the Sub-Adviser's judgment, as
evaluated by the companies' balance sheets, income statements,
franchises and product competitiveness.
The thrust of this approach is to seek investments in stocks for which
investor enthusiasm is currently low, as reflected in their valuation, but which
have the financial and fundamental features which, according to the
Sub-Adviser's assessment, will allow the stocks to achieve a higher valuation.
Value is achieved and exposure is reduced for the American Value Fund when the
investment community's perceptions improve and the stocks approach what the
Sub-Adviser believes is fair valuation. The Fund will invest in equity
securities of smaller capitalized companies, which are more vulnerable to
financial and other risks than larger companies. Investment in securities of
smaller companies may involve a higher degree of risk and price volatility than
in securities of larger companies.
The Sub-Adviser takes a long-term approach by placing a strong emphasis on
its ability to identify attractive values. The Sub-Adviser does not intend to
respond to short-term market fluctuations or to acquire securities for the
purpose of short-term trading. The Sub-Adviser may take advantage of short-term
opportunities, however, that are consistent with its objective of high total
return. The Fund will maintain diversity among industries and will not invest
more than 25% of its total assets in the stocks of issuers in any one industry.
For temporary defensive purposes, the American Value Fund may invest a
portion or all of its assets in money market instruments and short- and
medium-term debt securities that the Sub-Adviser believes to be of high-quality
or hold cash.
For further information about the foregoing and certain additional
investment practices of the American Value Fund, see "Additional Investment
Information" below.
THE EQUITY GROWTH FUND
The Equity Growth Fund's investment objective is to provide long-term
capital appreciation by investing primarily in growth-oriented equity securities
of medium and large capitalization companies. Under normal circumstances, the
Fund will invest at least 65% of the value of its total assets in equity
securities. With respect to this Fund, equity securities include common and
preferred stocks, convertible securities and rights and warrants to purchase
common stocks.
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The Sub-Adviser employs a flexible and eclectic investment process in
pursuit of the Equity Growth Fund's investment objective. In selecting
securities for the Fund, the Sub-Adviser concentrates on a universe of rapidly
growing, high quality companies and lower, but accelerating, earnings growth
situations. The Sub-Adviser's universe of potential investments generally
comprises companies with market capitalizations of $500 million or more. The
Fund is not restricted to investments in specific market sectors. The
Sub-Adviser uses its research capabilities, analytical resources and judgment to
assess economic, industry and market trends, as well as individual company
developments, to select promising growth investments for the Fund. The
Sub-Adviser concentrates on companies with strong, communicative management and
clearly defined strategies for growth. In addition, the Sub-Adviser rigorously
assesses company developments, including changes in strategic direction,
management focus and current and likely future earnings results. Valuation is
important to the Sub-Adviser but is viewed in the context of prospects for
sustainable earnings growth and the potential for positive earnings surprises
vis-a-vis consensus expectations. The Fund is free to invest in any equity
security that, in the Sub-Adviser's judgment, provides above average potential
for capital appreciation.
In selecting investments for the Equity Growth Fund, the Sub-Adviser
emphasizes individual security selection. The Fund's investments will generally
be diversified by number of issues but concentrated sector positions may result
from the investment process. The Fund has a long-term investment perspective;
however, the Sub-Adviser may take advantage of short-term opportunities that are
consistent with the Fund's objective by selling recently purchased securities
which have increased in value.
The Equity Growth Fund may invest up to 25% of its total assets at the time
of purchase in securities of foreign companies. The Fund may invest in
securities of foreign issuers directly or in the form of depositary receipts.
The Fund may invest in forward foreign currency exchange contracts, and may
invest in foreign currency exchange futures and options. The Equity Growth Fund
may invest in convertible securities of domestic and, subject to the above
restrictions, foreign issuers on occasions when, due to market conditions, it is
more advantageous to purchase such securities than to purchase common stock.
Since the Fund invests in both common stocks and convertible securities, the
risks of investing in the general equity markets may be tempered to a degree by
the Fund's investments in convertible securities which are often not as volatile
as common stock. The Equity Growth Fund may invest in derivatives, when-issued
and delayed delivery securities and non-publicly traded securities, including
private placements and restricted securities. The Fund may from time to time and
consistent with applicable legal requirements sell securities short, lend
portfolio securities and engage in reverse repurchase agreements.
For temporary defensive purposes, the Equity Growth Fund may invest a
portion or all of its assets in money market instruments and short- and
medium-term debt securities that the Sub-Adviser believes to be of high quality
or hold cash.
For further information about the foregoing and certain additional
investment practices of the Fund, see "Additional Investment Information" below.
THE MID CAP GROWTH FUND
The Mid Cap Growth Fund's investment objective is to achieve long-term
growth by investing primarily in common stocks and other equity securities of
small and medium size companies which are deemed by the Fund's Sub-Adviser to
offer long-term growth potential.
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The Mid Cap Growth Fund generally will invest at least 65% of its total
assets in equity securities issued by companies offering long term growth
potential which have market capitalizations in the range of the companies
represented in the S&P Mid Cap 400 Index. With respect to this Fund, equity
securities include common and preferred stocks, convertible securities and
rights and warrants to purchase common stock, as well as depositary receipts. Up
to 5% of the Fund's assets may be invested in foreign equity securities,
excluding American Depositary Receipts ("ADRs"). The Fund may invest in forward
foreign currency exchange contracts, and may invest in foreign currency exchange
futures and options.
The Sub-Adviser manages the Mid Cap Growth Fund using a four-part process
combining quantitative, fundamental and valuation analysis with a strict sales
discipline. Stocks that pass an initial screen based on estimate revisions
undergo detailed fundamental research. The Sub-Adviser uses valuation analysis
to eliminate the most overvalued securities. The Fund sells holdings when the
Sub-Adviser's estimate revision scores fall to unacceptable levels, when its
fundamental research uncovers unfavorable trends or when the securities'
valuations exceed the level that the Sub-Adviser believes is reasonable given
their growth prospects.
The Mid Cap Growth Fund may invest in derivatives, when-issued and delayed
delivery securities and non-publicly traded securities, including private
placements and restricted securities. The Fund may from time to time and
consistent with applicable legal requirements sell securities short, lend
portfolio securities and engage in reverse repurchase agreements. For temporary
defensive purposes, the Mid Cap Growth Fund may invest a portion or all of its
assets in money market instruments and short- and medium-term debt securities
that the Sub-Adviser believes to be of high quality or hold cash.
For further information about the foregoing and certain additional
investment practices of the Fund, see "Additional Investment Information" below.
THE U.S. REAL ESTATE FUND
The investment objective of the U.S. Real Estate Fund is to provide
above-average current income and long-term capital appreciation by investing
primarily in equity securities of companies in the U.S. real estate industry,
including real estate investment trusts ("REITs"). With respect to this Fund,
equity securities include common and preferred stocks, convertible securities,
and rights and warrants to purchase common stock, as well as shares or units of
beneficial interest of REITs and limited partnership interests in master limited
partnerships.
Under normal circumstances, at least 65% of the U.S. Real Estate Fund's
total assets will be invested in income producing equity securities of U.S. and
non-U.S. companies principally engaged in the U.S. real estate industry. For
purposes of the Fund's investment policies, a company is "principally engaged"
in the real estate industry if, as determined by the Sub-Adviser, (i) it derives
at least 50% of its revenues or profits from the ownership, construction,
management, financing or sale of residential, commercial or industrial real
estate or (ii) it has at least 50% of the fair market value of its assets
invested in residential, commercial or industrial real estate. Companies in the
real estate industry may include, among others: REITs, master limited
partnerships that invest in interests in real estate, real estate operating
companies, and companies with substantial real estate holdings, such as hotel
companies, residential builders and land-rich companies. The Fund seeks to
invest in equity securities of companies that provide a dividend yield that
exceeds the composite dividend yield of securities comprising the Standard &
Poor's Composite Index of 500 Stocks (the "S&P 500").
A substantial portion of the U.S. Real Estate Fund's total assets will be
invested in securities of REITs. REITs pool investors' funds for investment
primarily in income producing real estate or real estate related loans
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or interests. Generally, REITs can be classified as Equity REITs, Mortgage REITs
or Hybrid REITs. Equity REITs invest the majority of their assets directly in
real property and derive their income primarily from rents and capital gains
from appreciation realized through property sales. Equity REITs are further
categorized according to the types of real estate securities they own, e.g.,
apartment properties, retail shopping centers, office and industrial properties,
hotels, health-care facilities, manufactured housing and mixed-property types.
Mortgage REITs invest the majority of their assets in real estate mortgages and
derive their income primarily from interest payments on the credit they have
extended. Hybrid REITs combine the characteristics of both Equity and Mortgage
REITs. The Fund will invest primarily in Equity REITs. A REIT is not taxed at
the federal level on income distributed to its shareholders or unitholders if it
complies with regulatory requirements relating to its organization, ownership,
assets and income, and with a regulatory requirement that it distribute to its
shareholders or unitholders at least 95% of its taxable income for each taxable
year. A shareholder in the Fund should realize that by investing in REITs
indirectly through the Fund, he will bear not only his proportionate share of
the expenses of the Fund, but also indirectly, the management expenses of
underlying REITs.
The U.S. Real Estate Fund will concentrate in the U.S. real estate industry
and may not invest more than 25% of its total assets in securities of companies
in any one other industry (for these purposes the U.S. Government, its agencies
and instrumentalities are not considered an industry). Under normal
circumstances, the Fund may invest up to 35% of its total assets in debt
securities issued or guaranteed by real estate companies or secured by real
estate assets and rated, at time of purchase, in one of the four highest rating
categories by an NRSRO or determined by the Sub-Adviser to be of comparable
quality at the time of purchase; high quality money market instruments; or debt
securities rated in one of the two highest ratings categories by an NRSRO,
consisting of corporate debt securities and U.S. Government securities.
Investment grade securities are securities that are rated in one of the four
highest rating categories by an NRSRO. Securities rated in the lowest category
of investment grade securities have speculative characteristics. The Fund may
also, to a limited extent, invest in non-publicly traded securities, private
placements and restricted securities.
The Fund may be subject to the risks associated with the direct ownership of
real estate because of its policy of concentrating in the securities of
companies principally engaged in the real estate industry. For example, real
estate values may fluctuate as a result of general and local economic
conditions, overbuilding and increased competition, increases in property taxes
and operating expenses, demographic trends and variations in rental income,
changes in zoning laws, casualty or condemnation losses, environmental risks,
regulatory limitations on rents, changes in neighborhood values, related party
risks, changes in the appeal of properties to tenants, changes in interest rates
and other real estate capital market influences. Generally, increases in
interest rates will increase the costs of obtaining financing, which could
directly and indirectly decrease the value of the Fund's investments.
Because the U.S. Real Estate Fund may invest a substantial portion of its
assets in REITs, the Fund may also be subject to certain risks associated with
the direct investments of REITs. REITs may be affected by changes in the value
of their underlying properties and by defaults by borrowers or tenants. Mortgage
REITs may be affected by the quality of the credit extended. Furthermore, REITs
are dependent on specialized management skills. Some REITs may have limited
diversification and may be subject to risks inherent in investments in a limited
number of properties, in a narrow geographic area, or in a single property type.
REITs depend generally on their ability to generate cash flow to make
distributions to shareholders or unitholders, and may be subject to defaults by
borrowers and to self-liquidations. In addition, the performance of a REIT may
be affected by its
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failure to qualify for tax-free pass-through of income under the Internal
Revenue Code of 1986, as amended (the "Code"), or its failure to maintain
exemption from registration under the Investment Company Act of 1940, as amended
(the "1940 Act"). Rising interest rates may cause the value of the debt
securities in which the Fund will invest to fall. Conversely, falling interest
rates may cause their value to rise. Changes in the value of portfolio
securities will not necessarily affect cash income derived from these securities
but will affect the Fund's net asset value.
For temporary defensive purposes, the Fund may invest a portion or all of
its assets in money market instruments and short- and medium-term debt
securities that the Sub-Adviser believes to be of high-quality or hold cash.
For further information about the foregoing and certain additional
investment practices of the U.S. Real Estate Fund, see "Additional Investment
Information" below.
THE VALUE FUND
The Value Fund's investment objective is to achieve above-average total
return over a market cycle of three to five years, consistent with reasonable
risk, by investing in a diversified portfolio of common stocks and other equity
securities that are deemed by the Fund's Sub-Adviser to be relatively
undervalued based on various measures such as price/earnings ratios and
price/book ratios.
The Value Fund generally will invest at least 65% of its assets in equity
securities which are deemed to be undervalued. For purposes of this Fund, equity
securities include common and preferred stocks, convertible securities, and
warrants and rights to purchase common stock, as well as depositary receipts. Up
to 5% of the Fund's assets may be invested in foreign equity securities,
excluding ADRs. The Fund may invest in forward foreign currency exchange
contracts, and may invest in foreign currency exchange futures and options. The
Fund generally will invest in equity securities of companies with equity
capitalization greater than $300 million.
The Sub-Adviser selects common stocks which are deemed to be undervalued
relative to the stock market in general as measured by the S&P 500, based on the
value measures such as price/earnings ratios and price/ book ratios, as well as
fundamental research. While capital return will be emphasized somewhat more than
income return, the Value Fund's total return will consist of both capital and
income returns. Stocks which are deemed to be undervalued in the marketplace
have, under most market conditions, higher dividend income returns than stocks
which are deemed to have long-term earnings growth potential which normally sell
at higher price/earnings ratios. However, the Sub-Adviser may select
non-dividend paying stocks for their value characteristics.
The Value Fund may invest in derivatives, when-issued and delayed delivery
securities and non-publicly traded securities, including private placements and
restricted securities. The Fund may from time to time and consistent with
applicable legal requirements sell securities short, lend portfolio securities
and engage in reverse repurchase agreements. For temporary defensive purposes,
the Value Fund may invest a portion or all of its assets in money market
instruments and medium-term debt securities that the Sub-Adviser believes to be
of high quality or hold cash.
For further information about the foregoing and certain additional
investment practices of the Fund, see "Additional Investment Information" below.
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ADDITIONAL INVESTMENT INFORMATION
BORROWING AND OTHER FORMS OF LEVERAGE
The American Value and U.S. Real Estate Funds may borrow up to 10% of their
total assets as a temporary measure for extraordinary or emergency purposes.
These Funds may not purchase additional securities when borrowings exceed 5% of
total assets. The Aggressive Equity 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. See "Investment Objectives and Policies
- -- The Aggressive Equity Fund" for further information.
The Equity Growth, Mid Cap Growth and Value Funds may borrow money (i) as a
temporary measure for extraordinary or emergency purposes, and (ii) in
connection with reverse repurchase agreements, provided that (i) and (ii) in
combination do not exceed 33 1/3% of such Fund's total assets (including the
amount borrowed) less liabilities (exclusive of borrowings). These Funds may not
purchase additional securities when borrowings exceed 5% of total assets.
CONVERTIBLE SECURITIES, WARRANTS AND EQUITY-LINKED SECURITIES
Each Fund may invest in convertible securities, preferred stock, warrants or
other securities exchangeable under certain circumstances for shares of common
stock. Warrants are instruments giving holders the right, but not the
obligation, to buy shares of a company at a given price during a specified
period.
The Aggressive Equity, Equity Growth, Mid Cap Growth and Value Funds may
invest in equity-linked securities, 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. 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. In addition, it is not possible to predict how equity-linked
securities will trade in the secondary market which is fairly developed and
liquid. The market for such securities may be shallow, however, and high volume
trades may be possible only with discounting. In addition to the foregoing
risks, the return on such securities depends on the creditworthiness of the
issuer of the securities, which may be the issuer of the underlying securities
or a third party investment banker or other lender. The creditworthiness of such
third party issuer of equity-linked securities may, and often does, exceed the
creditworthiness of the issuer of the underlying securities. The advantage of
using equity-linked securities over traditional equity and debt securities is
that the former are income producing vehicles that may provide a higher income
than the dividend income on the underlying equity securities while allowing some
participation in the capital appreciation of the underlying equity securities.
Another advantage of using equity-linked securities is that they may be used for
hedging to reduce the risk of investing in the generally more volatile
underlying equity securities.
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DEPOSITARY RECEIPTS
Depositary receipts include ADRs, Global Depositary Receipts ("GDRs"),
European Depositary Receipts ("EDRs") and other depositary receipts, to the
extent that such receipts become available. ADRs are securities, typically
issued by a U.S. financial institution (a "depositary"), that evidence ownership
interests in a security or a pool of securities issued by a foreign issuer (the
"underlying issuer") and deposited with the depositary. Each of the Funds, other
than the U.S. Real Estate Fund, may invest in ADRs and the Funds, other than the
American Value and U.S. Real Estate Funds, may invest in other depository
receipts. ADRs include American Depositary Shares and New York Shares and may be
"sponsored" or "unsponsored." Sponsored ADRs are established jointly by a
depositary and the underlying issuer, whereas unsponsored ADRs may be
established by a depositary without participation by the underlying issuer.
GDRs, EDRs and other types of depositary receipts are typically issued by
foreign depositaries, although they may also be issued by U.S. depositaries, and
evidence ownership interests in a security or pool of securities issued by
either a foreign or a U.S. corporation.
Holders of unsponsored depositary receipts generally bear all the costs
associated with establishing the unsponsored depositary receipt. The depositary
of an unsponsored depositary receipt is under no obligation to distribute
shareholder communications received from the underlying issuer or to pass
through to the holders of the unsponsored depositary receipt voting rights with
respect to the deposited securities or pool of securities. Depositary receipts
are not necessarily denominated in the same currency as the underlying
securities to which they may be connected. Generally, depositary receipts in
registered form are designed for use in the U.S. securities market and
depositary receipts in bearer form are designed for use in securities markets
outside the United States. For purposes of the Funds' investment policies,
investments in depositary receipts will be deemed to be investments in the
underlying securities.
FOREIGN BONDS
The Value and Mid Cap Growth Funds may invest in foreign bonds. Foreign
bonds are fixed income securities denominated in foreign currency and issued and
traded primarily outside the United States, including: (1) obligations issued or
guaranteed by foreign national governments, their agencies, instrumentalities,
or political subdivisions; (2) fixed income securities issued, guaranteed or
sponsored by supranational organizations established or supported by several
national governments, including the World Bank, the European Community, the
Asian Development Bank and others; and (3) non-government foreign corporate debt
securities. Investing in foreign companies involves certain special
considerations that are not typically associated with investing in U.S.
companies. See "Foreign Investment" below.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Each Fund, other than the U.S. Real Estate Fund, may enter into forward
foreign currency exchange contracts ("forward contracts"). Forward contracts
provide for the purchase or sale of an amount of a specified foreign currency at
a future date. Purposes for which such contracts may be used include protecting
against a decline in a foreign currency against the U.S. Dollar between the
trade date and settlement date when a Fund purchases or sells securities,
locking in the U.S. Dollar value of dividends declared on securities held by the
Fund and generally protecting the U.S. Dollar value of securities held by the
Fund against exchange rate fluctuations. While such forward contracts may limit
losses to a Fund as a result of exchange rate fluctuations, they will also limit
any exchange rate gains that might otherwise have been realized.
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FOREIGN INVESTMENT
Each Fund may invest in securities of foreign issuers. Investment in
securities of foreign issuers, especially in securities of issuers in emerging
countries, involves somewhat different investment risks from those affecting
securities of U.S. issuers. There may be limited publicly available information
with respect to foreign issuers, and foreign issuers are not generally subject
to uniform accounting, auditing, and financial and other reporting standards and
requirements comparable to those applicable to domestic companies. Therefore,
disclosure of certain material information may not be made and less information
may be available to investors investing in foreign countries than in the United
States. There may also be less government supervision and regulation of foreign
securities exchanges, brokers and listed companies than in the United States.
Many foreign securities markets have substantially less volume than United
States national securities exchanges, and securities of some foreign issuers are
less liquid and subject to greater price volatility than securities of
comparable domestic issuers. Brokerage commissions and other transaction costs
on foreign securities exchanges are generally higher than in the United States.
Dividends and interest paid by foreign issuers may be subject to withholding and
other foreign taxes, which may decrease the net return on foreign investments as
compared to dividends and interest paid to the Funds by domestic companies.
Additional risks include future adverse political and economic developments, the
possibility that a foreign jurisdiction might impose or change withholding taxes
on income payable with respect to foreign securities, possible seizure,
nationalization or expropriation of the foreign issuer or foreign deposits, and
the possible adoption of foreign governmental restrictions such as exchange
controls. Emerging countries may have less stable political environment than
more developed countries. Also, it may be more difficult to obtain a judgment in
a court outside the United States.
Investments in securities of foreign issuers are frequently denominated in
foreign currencies, and a Fund may temporarily hold uninvested reserves in bank
deposits in foreign currencies. Therefore, the value of a Fund's assets measured
in U.S. Dollars may be affected favorably or unfavorably by changes in currency
exchange rates and exchange control regulations. Each Fund will also incur
certain costs in connection with conversions between various currencies.
INVESTMENT COMPANY SECURITIES
Each Fund may invest in securities of another open-end or closed-end
investment company, 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 Investment
Company Act of 1940, as amended (the "1940 Act"). To the extent a Fund invests a
portion of its assets in investment company securities, those assets will be
subject to the expenses of the purchased investment company as well as to the
expenses of the Fund itself.
LOANS OF PORTFOLIO SECURITIES
Each Fund may lend its securities to brokers, dealers, domestic and foreign
banks or other financial institutions for the purpose of increasing its net
investment income. These loans must be secured continuously by cash or
equivalent collateral or by a letter of credit at least equal to the market
value of the securities loaned plus accrued interest. The Aggressive Equity,
American Value, Equity Growth and U.S Real Estate Funds will not enter into
securities loan transactions exceeding in the aggregate 33 1/3% of the market
value of the Fund's total assets. As with other extensions of credit, there are
risks of delay in recovery or even loss of rights in collateral should the
borrower of the portfolio securities fail financially.
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MONEY MARKET INSTRUMENTS
Each Fund is permitted to invest in money market instruments pending other
investment, prior to settlement of portfolio transactions, for liquidity and for
temporary defensive purposes, although the Funds intend to stay invested in
securities satisfying their primary investment objective to the extent
practical. The money market investments permitted for the Funds include
obligations of the U.S. Government, its agencies and instrumentalities,
obligations of foreign sovereignties, other debt securities, including
high-grade commercial paper, repurchase agreements and bank obligations, such as
bankers' acceptances and certificates of deposit (including Eurodollar
certificates of deposit).
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED SECURITIES
Each Fund may invest in securities that are neither listed on a stock
exchange nor traded over the counter. Such unlisted securities may involve a
higher degree of business and financial risk that can result in substantial
losses. As a result of the absence of a public trading market for these
securities, they may be less liquid than publicly traded securities. Although
these securities may be resold in privately negotiated transactions, the prices
realized from these sales could be less than those originally paid by the Fund
or less than what may be considered the fair value of such securities.
Furthermore, companies whose securities are not publicly traded may not be
subject to the disclosure and other investor protection requirements which might
be applicable if their securities were publicly traded. No Fund may invest more
than 15% of its net assets in illiquid securities. None of the Aggressive
Equity, American Value and U.S. Real Estate Funds, may invest more than 10% of
its total assets in securities subject to legal or contractual restrictions on
resale. Securities that are restricted from sale to the public without
registration ("Restricted Securities") under the Securities Act of 1933, as
amended (the "1933 Act"), which can be offered and sold to qualified
institutional buyers under Rule 144A under the 1933 Act ("144A Securities") may
be determined to be liquid under guidelines adopted by, and subject to the
supervision of, the Board of Directors and therefore not subject to the
limitation on illiquid securities. 144A Securities may become illiquid if
qualified institutional buyers are not interested in acquiring the securities.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with brokers, dealers or
banks that meet the credit guidelines of the Company's Board of Directors. In a
repurchase agreement, a Fund buys a security from a seller that has agreed to
repurchase it at a mutually agreed upon date and price, reflecting the interest
rate effective for the term of the agreement. The term of these agreements is
usually from overnight to one week and never exceeds one year. A repurchase
agreement may be viewed as a fully collateralized loan of money by the Fund to
the seller. The Fund always receives securities as collateral with a market
value at least equal to the purchase price, including accrued interest, and this
value is maintained during the term of the agreement. If the seller defaults and
the collateral value declines, a Fund might incur a loss. If bankruptcy
proceedings are commenced with respect to the seller, the Fund 's realization
upon the collateral may be delayed or limited. Repurchase agreements with
durations (or maturities) over seven days in length are considered to be
illiquid securities.
REVERSE REPURCHASE AGREEMENTS
The Equity Growth, Mid Cap Growth and Value Funds may enter into reverse
repurchase agreements with brokers, dealers, banks or other financial
institutions that meet credit guidelines set by the Fund's Board of Directors.
In a reverse repurchase agreement, a Fund sells a security and agrees to
repurchase it at a mutually agreed upon date and price, reflecting the interest
rate effective for the term of the agreement. It may also be viewed as the
borrowing of money by a Fund. A Fund's investment of the proceeds of a reverse
repurchase
22
<PAGE>
agreement is the speculative factor known as leverage. A Fund will enter into a
reverse repurchase agreement only if the interest income from investment of the
proceeds is expected to be greater than the interest expense of the transaction
and the proceeds are invested for a period no longer than the term of the
agreement. A Fund will maintain with the Custodian a separate account with a
segregated portfolio of cash or liquid assets in an amount at least equal to its
purchase obligations under these agreements (including accrued interest). If
interest rates rise during a reverse repurchase agreement, it may adversely
affect a Fund's net asset value. In the event that the buyer of securities under
a reverse repurchase agreement files for bankruptcy or becomes insolvent, the
buyer or its trustee or receiver may receive an extension of time to determine
whether to enforce the Fund's repurchase obligation, and the Fund's use of
proceeds of the agreement may effectively be restricted pending such decision.
SHORT SALES
The Aggressive Equity, Equity Growth, Mid Cap Growth and Value Funds may
from time to time sell securities short without limitation, although they do not
intend to sell securities short on a regular basis. A short sale is a
transaction in which a Fund sells securities it either owns or has the right to
acquire at no added cost (i.e., "against the box") or it does not own (but has
borrowed) in anticipation of a decline in the market price of the securities.
When a Fund makes a short sale of borrowed securities, the proceeds it receives
from the sale will be held on behalf of a broker until the Fund replaces the
borrowed securities. To deliver the securities to the buyer, a Fund will need to
arrange through a broker to borrow the securities and, in so doing, the Fund
will become obligated to replace the securities borrowed at their market price
at the time of replacement, whatever that price may be. A Fund may have to pay a
premium to borrow the securities and must pay any dividends or interest payable
on the securities until they are replaced.
A Fund's obligation to replace the securities borrowed in connection with a
short sale will be secured by collateral deposited with the broker that consists
of cash or liquid assets. In addition, the Fund will place in a segregated
account with its Custodian an amount of cash or liquid assets equal to the
difference, if any, between (1) the market value of the securities sold and (2)
any cash or liquid securities deposited as collateral with the broker in
connection with the short sale (not including the proceeds of the short sale).
Possible losses from short sales differ from losses that could be incurred from
a purchase of a security, because losses from short sales may be unlimited,
whereas losses from purchases can equal only the total amount invested.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Each Fund may purchase securities on a when-issued or delayed delivery
basis. In such transactions, instruments are bought with payment and delivery
taking place in the future in order to secure what is considered to be an
advantageous yield or price at the time of the transaction. The payment
obligation and the interest rates that will be received are each fixed at the
time a Fund enters into the commitment, and no interest accrues to the Fund
until settlement. Thus, it is possible that the market value at the time of
settlement could be higher or lower than the purchase price if the general level
of interest rates has changed. It is the current policy of the Aggressive
Equity, American Value and U.S. Real Estate Funds not to enter into when-issued
commitments or delayed delivery securities exceeding, in the aggregate, 15% of
the Fund's net assets other than obligations created by these commitments.
ZERO COUPONS; PAY-IN-KIND; DEFERRED PAYMENT SECURITIES
The Funds may invest in zero coupon securities, which are securities that
are sold at a discount to par value and on which interest payments are not made
during the life of the security. Upon maturity, the holder is entitled
23
<PAGE>
to receive the par value of the security. While interest payments are not made
on such securities, holders of such securities are deemed to have received
annually "phantom income." Because a Fund will distribute its "phantom income"
to shareholders, to the extent that shareholders elect to receive dividends in
cash rather than reinvesting such dividends in additional shares, the Fund will
have fewer assets with which to purchase income producing securities. A Fund
accrues income with respect to these securities prior to the receipt of cash
payments. Pay-in-kind securities are securities that have interest payable by
delivery of additional securities. Upon maturity, the holder is entitled to
receive the aggregate par value of the securities. Deferred payment securities
are securities that remain zero coupon securities until a predetermined date, at
which time the stated coupon rate becomes effective and interest becomes payable
at regular intervals. Zero coupon, pay-in-kind and deferred payment securities
may be subject to greater fluctuation in value and lesser liquidity in the event
of adverse market conditions than comparably rated securities paying cash
interest at regular interest payment periods.
DERIVATIVE INSTRUMENTS
The Funds are permitted to invest in various derivative instruments for both
hedging and non-hedging purposes. Derivative instruments include options,
futures and options on futures, structured notes, caps, floors, collars and
swaps. Additionally, the Funds may invest in other derivative instruments that
are developed over time if their use would be consistent with the objectives of
the Funds. Each of the Funds, other than (to the extent described below) the
Equity Growth, Mid Cap Growth and Value Funds, will limit its use of the
foregoing derivative instruments for non-hedging purposes to 33 1/3% of its
total assets measured by the aggregate notional amount of outstanding derivative
instruments. In addition, none of the Aggressive Equity, American Value and U.S.
Real Estate Funds will enter into futures contracts and options on futures
contracts to the extent that the notional value of its outstanding obligations
to purchase securities under such contracts would exceed 20% of its total
assets. The Equity Growth Fund will limit its use of derivative instruments to
50% of its total assets measured by the aggregate notional amount of outstanding
derivative instruments, provided that no more than 33 1/3% of its total assets
are invested, for non-hedging purposes, in derivatives other than futures and
options on futures. The Mid Cap Growth and Value Funds will not 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 its total
assets. The Funds' investments in forward foreign currency contracts and
derivatives used for hedging purposes are not subject to the limits described
above.
The Funds may use derivatives instruments under a number of different
circumstances to further their investment objectives. The Funds may use
derivatives when doing so provides more liquidity than the direct purchase of
the securities underlying such derivatives. For example, a Fund may purchase
derivatives to quickly gain exposure to a market in response to changes in the
Fund's investment strategy, or upon the inflow of investable cash or when the
derivative provides greater liquidity than the underlying securities market. A
Fund may also use derivatives when it is restricted from directly owning the
underlying securities due to foreign investment restrictions or other reasons or
when doing so provides a price advantage over purchasing the underlying
securities directly, either because of a pricing differential between the
derivatives and securities markets or because of lower transaction costs
associated with the derivatives transaction. Derivatives may also be used by a
Fund for hedging purposes and in other circumstances when a Fund's portfolio
managers believe it advantageous to do so consistent with the Fund's investment
objective. The Funds will not, however, use
24
<PAGE>
derivatives in a manner that creates leverage, except to the extent that the use
of leverage is expressly permitted by a particular Fund's investment policies,
and then only in a manner consistent with such policies.
Some of the derivative instruments in which the Funds may invest and the
risks related thereto are described in more detail below.
CAPS, FLOORS AND COLLARS
The Funds may invest in caps, floors and collars, which are instruments
analogous to options. In particular, a cap is the right to receive the excess of
a reference rate over a given rate and is analogous to a put option. A floor is
the right to receive the excess of a given rate over a reference rate and is
analogous to a call option. Finally, a collar is an instrument that combines a
cap and a floor. That is, the buyer of a collar buys a cap and writes a floor,
and the writer of a collar writes a cap and buys a floor. The risks associated
with caps, floors and collars are similar to those associated with options. In
addition, caps, floors and collars are subject to risk of default by the
counterparty because they are privately negotiated instruments.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Funds may purchase and sell futures contracts and options on futures
contracts, including but not limited to securities index futures, foreign
currency exchange futures, interest rate futures and other financial futures.
Futures contracts provide for the sale by one party and purchase by another
party of a specified amount of a specific security, instrument or basket
thereof, at a specific future date and at a specified price. An option on a
futures contract is a legal contract that gives the holder the right to buy or
sell a specified amount of futures contracts at a fixed or determinable price
upon the exercise of the option.
The Funds may sell securities index futures contracts and/or options thereon
in anticipation of or during a market decline to attempt to offset the decrease
in market value of investments in its portfolio, or purchase securities index
futures in order to gain market exposure. Subject to applicable laws, the Funds
may engage in transactions in securities index futures contracts (and options
thereon) which are traded on a recognized securities or futures exchange, or may
purchase or sell such instruments in the over-the-counter market. There
currently are limited securities index futures and options on such futures in
many countries, particularly emerging countries. The nature of the strategies
adopted by the Sub-Advisers and the extent to which those strategies are used,
may depend on the development of such markets.
The Funds may engage in transactions involving foreign currency exchange
futures contracts. Such contracts involve an obligation to purchase or sell a
specific currency at a specified future date and at a specified price. The Funds
may engage in such transactions to hedge their respective holdings and
commitments against changes in the level of future currency rates or to adjust
their exposure to a particular currency.
The Funds may engage in transactions in interest rate futures transactions.
Interest rate futures contracts involve an obligation to purchase or sell a
specific debt security, instrument or basket thereof at a specified future date
at a specified price. The value of the contract rises and falls inversely with
changes in interest rates. The Funds may engage in such transactions to hedge
their holdings of debt instruments against future changes in interest rates.
Financial futures are futures contracts relating to financial instruments,
such as U.S. Government securities, foreign currencies and certificates of
deposit. Such contracts involve an obligation to purchase or sell a specific
security, instrument or basket thereof at a specified future date at a specified
price. Like interest rate futures
25
<PAGE>
contracts, the value of financial futures contracts rises and falls inversely
with changes in interest rates. The Funds may engage in financial futures
contracts for hedging and non-hedging purposes.
Under rules adopted by the Commodity Futures Trading Commission, each Fund
may enter into futures contracts and options thereon for both hedging and
non-hedging purposes, provided that not more than 5% of such Fund's total assets
at the time of entering the transaction are required as margin and option
premiums to secure obligations under such contracts relating to non-hedging
activities.
Gains and losses on futures contracts and options thereon depend on the
Sub-Advisers' ability to predict correctly the direction of securities prices,
interest rates and other economic factors. Other risks associated with the use
of futures and options are (i) imperfect correlation between the change in
market value of investments held by a Fund and the prices of futures and options
relating to investments purchased or sold by the Fund, and (ii) possible lack of
a liquid secondary market for a futures contract and the resulting inability to
close a futures position. The risk that a Fund will be unable to close out a
futures position or options contract will be minimized by entering into futures
contracts or options transactions for which there appears to be a liquid
exchange or secondary market. The risk of loss in trading on 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.
OPTIONS TRANSACTIONS
The Funds may seek to increase their returns or may hedge their portfolio
investments through options transactions with respect to (i) securities,
instruments, indices or baskets thereof in which such Funds may invest and (ii)
foreign currencies. Purchasing a put option gives a Fund the right to sell a
specified security, currency or basket of securities or currencies at the
exercise price until the expiration of the option. Purchasing a call option
gives a Fund the right to purchase a specified security, currency or basket of
securities or currencies at the exercise price until the expiration of the
option.
Each Fund also may write (i.e., sell) put and call options on investments
held in its portfolio, as well as with respect to a foreign currency. A Fund
that has written an option receives a premium, which increases the Fund's return
on the underlying security or instrument in the event the option expires
unexercised or is closed out at a profit. However, by writing a call option, a
Fund will limit its opportunity to profit from an increase in the market value
of the underlying security or instrument above the exercise price of the option
for as long as the Fund's obligation as writer of the option continues. The
Funds may only write options that are "covered." A covered call option means
that so long as the Fund is obligated as the writer of the option, it will
earmark or segregate sufficient liquid assets to cover its obligations under the
option or own (i) the underlying security or instrument subject to the option,
(ii) securities or instruments convertible or exchangeable without the payment
of any consideration into the security or instrument subject to the option, or
(iii) a call option on the same underlying security with a strike price no
higher than the price at which the underlying instrument was sold pursuant to a
short option position.
By writing (or selling) a put option, a Fund incurs an obligation to buy the
security or instrument underlying the option from the purchaser of the put at
the option's exercise price at any time during the option period, at the
purchaser's election. The Funds may also write options that may be exercisable
by the purchaser only on a specific date. A Fund that has written a put option
will earmark or segregate sufficient liquid assets to cover its obligations
under the option or will own a put option on the same underlying security with
an equal or higher strike price.
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<PAGE>
The Funds may engage in transactions in options which are traded on
recognized exchanges or over-the-counter. There currently are limited options
markets in many countries, particularly emerging countries, and the nature of
the strategies adopted by the Sub-Advisers and the extent to which those
strategies are used will depend on the development of such option markets. The
primary risks associated with the use of options are (i) imperfect correlation
between the change in market value of investments held, purchased or sold by a
Fund and the prices of options relating to such investments; and (ii) possible
lack of a liquid secondary market for an option.
STRUCTURED NOTES
Structured Notes are derivatives on which the amount of principal repayment
and/or interest payments is based upon the movement of one or more factors.
These factors include, but are not limited to, currency exchange rates, interest
rates (such as the prime lending rate and LIBOR) and stock indices such as the
S&P 500 Index. In some cases, the impact of the movements of these factors may
increase or decrease through the use of multipliers or deflators. The Funds may
use structured notes to tailor their investments to the specific risks and
returns the Sub-Advisers wish to accept while avoiding or reducing certain other
risks.
SWAPS -- SWAP CONTRACTS
Swaps and Swap Contracts are derivatives in the form of a contract or other
similar instrument in which two parties agree to exchange the returns generated
by a security, instrument, basket thereof or index for the returns generated by
another security, instrument, basket thereof or index. The payment streams are
calculated by reference to a specific security, instrument, basket thereof or
index and an agreed upon notional amount. The relevant indices include but are
not limited to, currencies, fixed interest rates, prices and 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 the Funds 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.
A Fund will usually enter into swaps on a net basis, i.e., the two return
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Fund receiving or paying, as the case may
be, only the net amount of the two returns. A Fund's obligations under a swap
agreement will be accrued daily (offset against any amounts owing to the Fund)
and any accrued, but unpaid, net amounts owed to a swap counterparty will be
covered by the maintenance of a segregated account consisting of cash or liquid
securities. A Fund will not enter into any swap agreement unless the
counterparty meets the rating requirements set forth in guidelines established
by the Company's Board of Directors.
Interest rate and total rate of return swaps do not involve the delivery of
securities, other underlying assets, or principal. Accordingly, the risk of loss
with respect to interest rate and total rate of return swaps is limited to the
net amount of payments that a Fund is contractually obligated to make. If the
other party to an interest rate or total rate of return swap defaults, a Fund's
risk of loss consists of the net amount of payments that the Fund is
contractually entitled to receive. In contrast, currency swaps may 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 may be 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, a Fund may have contractual remedies pursuant to
27
<PAGE>
the agreements related to the transaction. The swaps 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 swaps market has become relatively liquid.
Swaps that include 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 "traditional" swaps.
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 Sub-Advisers are incorrect in their forecasts of
market values, interest rates and currency exchange rates, the investment
performance of the Funds would be less favorable than it would have been if this
investment technique were not used.
INVESTMENT LIMITATIONS
Each Fund, except the Aggressive Equity and U.S. Real Estate Funds, is a
diversified investment company under the 1940 Act, and, therefore, with respect
to 75% of its assets, may not (a) invest more than 5% of its total assets in the
securities of any one issuer, except obligations of the U.S. Government, its
agencies and instrumentalities, or (b) own more than 10% of the outstanding
voting securities of any one issuer. The Aggressive Equity and U.S. Real Estate
Funds are non-diversified investment companies under the 1940 Act, which means
that each such Fund is not limited by the 1940 Act in the proportion of its
total assets that may be invested in the obligations of a single issuer. Thus,
each such Fund may invest a greater proportion of its total assets in the
securities of a smaller number of issuers and, as a result, will be subject to
greater risk resulting from such concentration of its portfolio securities. Each
such Fund, however, intends to comply with the diversification requirements
imposed by the Internal Revenue Code of 1986, as amended ("the Code"), for
qualification as a regulated investment company.
Each Fund also operates under certain investment restrictions that are
deemed fundamental policies and may be changed only with the approval of the
holders of a majority of the Fund's outstanding shares. See "Investment
Limitations" in the Statement of Additional Information. In addition, each Fund
operates under certain non-fundamental investment limitations as described in
the Statement of Additional Information.
MANAGEMENT OF THE COMPANY
INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp.
(the "Adviser") is the investment adviser and administrator of the Funds. The
Adviser provides investment advice and portfolio management services pursuant to
an advisory agreement (the "Advisory Agreement") and, subject to the supervision
of the Company's Board of Directors, makes the Funds' investment decisions,
arranges for the execution of portfolio transactions and generally manages the
Funds' investments. The Advisory Agreement also provides that the Adviser may
appoint sub-advisers to perform these portfolio management responsibilities. See
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<PAGE>
"Investment Sub-Advisers" below. The Adviser is entitled to receive an aggregate
advisory fee computed daily and paid monthly at the following annual rates for
each Fund:
<TABLE>
<S> <C> <C>
Aggressive Equity Fund.................. 0.90%
American Value Fund..................... 0.85%
Equity Growth Fund...................... 0.70%
Mid Cap Growth Fund..................... 0.75%
U.S. Real Estate Fund................... 1.00%
Value Fund.............................. 0.80% First $500 million;
0.75% Next $500
million;
and 0.70% Over $1
billion
</TABLE>
The Adviser reserves the right in its sole discretion from time to time to
waive all or a portion of its management fee or to reimburse the Funds for all
or a portion of their other expenses.
The Adviser is a wholly-owned subsidiary of Van Kampen American Capital,
Inc. ("Van Kampen American Capital"). Van Kampen American Capital is a
diversified asset management company with more than two million retail investor
accounts, extensive capabilities for managing institutional portfolios, and more
than $60 billion under management or supervision. Van Kampen American Capital's
more than 50 open-end and 37 closed-end funds and more than 2,500 unit
investment trust are professionally distributed by leading financial advisers
nationwide. The Distributor of the Company and the sponsor of the funds
mentioned above is also a wholly-owned subsidiary of Van Kampen American
Capital. The Adviser's principal office is located at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181.
Van Kampen American Capital is an indirect wholly-owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co. Morgan Stanley, Dean Witter, Discover & Co.
and various of its directly or indirectly owned subsidiaries, including Morgan
Stanley & Co. Incorporated, a registered broker-dealer and investment adviser,
and Morgan Stanley International are engaged in a wide range of financial
services. Their principal businesses include securities underwriting,
distribution and trading, merger, acquisition, restructuring and other corporate
finance advisory activities; merchant banking, stock brokerage and research
services; asset management; trading of futures, options, foreign exchange,
commodities and swaps (involving foreign exchange, commodities, indices and
interest rates); real estate advice, financing and investing; and global
custody, securities clearance services and securities lending; and credit
services.
INVESTMENT SUB-ADVISERS. Morgan Stanley Asset Management Inc. ("MSAM," or a
"Sub-Adviser") is the investment sub-adviser of the Aggressive Equity, American
Value, Equity Growth and U.S. Real Estate Funds and Miller Anderson & Sherrerd,
LLP ("MAS," or a "Sub-Adviser") is the investment sub-adviser of the Mid Cap
Growth and Value Funds. The Sub-Advisers provide investment advice and portfolio
management services pursuant to investment sub-advisory agreements and, subject
to the supervision of the Adviser and the Company's Board of Directors, make the
Funds' investment decisions, arrange for the execution of portfolio transactions
and generally manage the Funds' investments.
The Sub-Advisers are entitled to receive sub-advisory fees computed daily
and paid monthly. If the average daily net assets of a Fund during the monthly
period are less than or equal to $500 million, the Adviser shall pay MSAM or
MAS, as appropriate, one-half of the total investment advisory fee payable to
the Adviser by the Fund (after application of any fee waivers in effect) for
such monthly period. If a Fund's average daily net assets for the monthly period
are greater than $500 million, the Adviser shall pay MSAM or MAS, as
appropriate, a fee for such monthly period equal to the greater of (a) one-half
of what the total investment advisory fee payable to the
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<PAGE>
Adviser by the Fund (after application of any fee waivers in effect) for such
monthly period would have been had the Fund's average daily net assets during
such period been equal to $500 million, or (b) forty-five percent of the total
investment advisory fee payable to the Adviser by the Fund (after application of
any fee waivers in effect) for such monthly period.
MSAM, with principal offices at 1221 Avenue of the Americas, New York, NY
10020, conducts a worldwide portfolio management business. It provides a broad
range of portfolio management services to customers in the United States and
abroad. At August 31, 1997, MSAM had approximately $80.9 billion in assets under
management as an investment adviser or as a named fiduciary or fiduciary
adviser. MAS is a Pennsylvania limited liability partnership founded in 1969
with its principal offices at One Tower Bridge, West Conshohocken, Pennsylvania
19428. MAS provides investment services to employee benefit plans, endowment
funds, foundations and other institutional investors and has served as an
investment adviser to several open-end investment companies since 1984. At
August 31, 1997, MAS had approximately $57.6 billion in assets under management.
PORTFOLIO MANAGERS. The following individuals have primary portfolio
management responsibility for the Funds noted below:
AGGRESSIVE EQUITY FUND -- KURT A. FEUERMAN. Kurt Feuerman is a Managing
Director of MSAM and has had primary management responsibility for the
Aggressive Equity Fund since it commenced operations. Prior to joining MSAM in
July 1993, he spent over three years in Morgan Stanley & Co. Incorporated's
("Morgan Stanley") research department where he was responsible for restaurant,
gaming and emerging growth stocks. Before joining Morgan Stanley, Mr. Feuerman
was a Managing Director at Drexel Burnham Lambert, where he had been an equity
analyst since 1984. Mr. Feuerman earned a B.A. degree from McGill University, an
M.A. from Syracuse University, and an M.B.A. from Columbia University.
AMERICAN VALUE FUND -- GARY G. SCHLARBAUM, WILLIAM B. GERLACH AND BRADLEY S.
DANIELS. Messrs. Schlarbaum, Gerlach and Daniels share primary responsibility
for managing the American Value Fund. Gary G. Schlarbaum, a Managing Director of
Morgan Stanley, joined MAS in 1987. He assumed responsibility for the MAS Funds'
Equity and Small Cap Value Portfolios in 1987, the MAS Funds' Balanced Portfolio
in 1992 and the MAS Funds' Multi-Asset-Class and Mid Cap Value Portfolios in
1994. Mr. Schlarbaum also is a Director of MAS Fund Distribution, Inc. He
previously was with First Chicago Investment Advisers and was a Professor at the
Krannert Graduate School at Purdue University. Mr. Schlarbaum holds a B.A. in
Economics from Coe College and a Ph.D. in Applied Economics from University of
Pennsylvania. Mr. Schlarbaum assumed primary responsibility for managing the
Fund's assets in January, 1997. Mr. Gerlach joined MSAM in July, 1996 and has
worked with the Adviser's affiliate, MAS for the past five years. He became a
portfolio manager of the Fund in November, 1996. Mr. Gerlach also became a
portfolio manager of the MAS Funds' Small Cap Value and Mid Cap Value Portfolios
in 1996. Previously, he was with Alphametrics Corporation and Wharton
Econometric Forecasting Associates. Mr. Gerlach holds a B.A. in Economics from
Haverford College. Bradley S. Daniels, a Vice President of Morgan Stanley,
joined MAS in 1985. He assumed responsibility for the MAS Funds' Small Cap Value
Portfolio in 1986 and the MAS Funds' Mid Cap Value Portfolio in 1994.
EQUITY GROWTH FUND -- KURT A. FEUERMAN AND MARGARET K. JOHNSON. Mr. Feuerman
and Ms. Johnson will share primary responsibility for managing the Fund's assets
upon commencement of operations. For a description of Mr. Feuerman's experience,
see "Aggressive Equity Fund" above. Margaret Johnson is a Principal of MSAM and
a Portfolio Manager in the Institutional Equity Group. She joined MSAM in 1984
and worked as an
30
<PAGE>
Analyst in the Marketing and Fiduciary Advisor areas. Ms. Johnson became an
Equity Analyst in 1986 and a Portfolio Manager in 1989. She holds a B.A. degree
from Yale College and is a Chartered Financial Analyst.
MID CAP GROWTH FUND -- ARDEN C. ARMSTRONG AND ABHI Y. KANITKAR. Ms.
Armstrong and Mr. Kanitkar will share primary responsibility for managing the
Fund's assets upon commencement of operations. Arden Armstrong, a Managing
Director of Morgan Stanley, joined MAS in 1986. She assumed responsibility for
the MAS Funds Mid Cap Growth Portfolio in 1990, the MAS Funds Growth Portfolio
in 1993 and the MAS Funds Equity Portfolio in 1994. Ms. Armstrong holds a B.A.
(Magna Cum Laude) in Economics from Brown University, an M.B.A. from the
University of Pennsylvania -- Wharton School and is a Chartered Financial
Analyst. Abhi Kanitkar, a Vice President of Morgan Stanley, joined MAS in 1994.
He served as an Investment Analyst from 1993 through 1994 for Newbold's Asset
Management and as Director & Investment Analyst from 1990 through 1993 for
Kanitkar Investment Services, Inc. He assumed responsibility for the MAS Funds
Mid Cap Growth Portfolio in 1996. Mr. Kanitkar holds a B.S. (Magna Cum Laude,
Tau Beta Pi) in Electrical Engineering from the University of Michigan and an
M.B.A. from the University of Pennsylvania -- Wharton School.
U.S. REAL ESTATE FUND -- RUSSELL PLATT AND THEODORE R. BIGMAN. Messrs. Platt
and Bigman have shared primary responsibility for managing the Fund since its
inception. Mr. Platt joined MSAM and Morgan Stanley in 1982 and currently is a
Managing Director of the Firm. He has primary responsibility for managing the
real estate securities investment business for the Sub-Adviser and serves as a
member of the Investment Committee of The Morgan Stanley Real Estate Fund
("MSREF"). Previously, Mr. Platt served as a Director of MSREF, where he was
involved in capital raising, acquisitions, oversight of investments and investor
relations. From 1991 to 1993, Mr. Platt was head of Morgan Stanley's Transaction
Development Group, which was responsible for identifying and structuring real
estate investment opportunities for the Firm and its clients worldwide. Mr.
Platt graduated from Williams College in 1982 with a B.A. in Economics and
received his M.B.A. from Harvard Business School in 1986. Mr. Bigman joined MSAM
and Morgan Stanley in 1995 and currently is a Principal of the Firm. Together
with Mr. Platt, he is responsible for MSAM's real estate securities research.
Prior to joining MSAM, he was a Director at CS First Boston, where he worked for
eight years in the Real Estate Group. Since 1992, Mr. Bigman established and
managed the REIT effort at CS First Boston including primary responsibility for
$2.5 billion of initial public offerings by real estate investment trusts. Mr.
Bigman graduated from Brandeis University with a B.A. in Economics and received
his M.B.A. from Harvard University.
VALUE FUND -- ROBERT J. MARCIN, RICHARD M. BEHLER AND NICHOLAS J. KOVICH.
Messrs. Marcin, Behler and Kovich have shared primary responsibility for
managing the Value Fund since its inception. Robert J. Marcin, a Managing
Director of Morgan Stanley, joined MAS in 1988. He assumed responsibility for
the MAS Funds' Value Portfolio in 1990 and the MAS Funds' Equity Portfolio in
1994. Mr. Marcin holds a B.A. (Cum Laude) from Dartmouth College and is a
Chartered Financial Analyst. Richard M. Behler, a Principal of Morgan Stanley,
joined MAS in 1995. He served as a Portfolio Manager from 1992 through 1995 for
Moore Capital Management. He assumed responsibility for the MAS Funds' Value
Portfolio in 1996. Mr. Behler holds a B.A. (Cum Laude) in Economics from
Villanova University and an M.A. and Ph.D. in Economics from University of Notre
Dame. Nicholas J. Kovich, a Managing Director of Morgan Stanley, joined MAS in
1988. He assumed responsibility for the MAS Funds' Equity Portfolio in 1994 and
the MAS Funds' Value Portfolio in 1997. Mr. Kovich received a B.S. in Chemical
Engineering and an M.B.A. from University of Kansas.
ADMINISTRATOR. The Administrator provides the Company with administrative
services pursuant to an administration agreement (the "Administration
Agreement"). The services provided under the Administration Agreement are
subject to the supervision of the officers and Board of Directors of the Company
and include day-
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to-day administration of matters related to the corporate existence of the
Company, maintenance of its records, preparation of reports, supervision of the
Company's arrangements with its custodian and assistance in the preparation of
the Company's registration statements under federal and state laws. The
Administration Agreement also provides that the Administrator through its agents
will provide the Company dividend disbursing and transfer agent services. For
its services under the Administration Agreement, the Company pays the
Administrator a monthly fee which on an annual basis equals 0.25% of the average
daily net assets of the Funds.
Under sub-administration agreements between the Administrator and The Chase
Manhattan Bank ("Chase"), Chase Global Funds Services Company ("CGFSC"), a
corporate affiliate of Chase, provides certain administrative services to the
Company. The Administrator supervises and monitors such administrative services
provided by CGFSC. The services provided under the sub-administration agreement
are subject to the supervision of the Board of Directors of the Company. The
Board of Directors of the Company has approved the provision of services
described above pursuant to the sub-administration agreement as being in the
best interests of the Company. CGFSC's business address is 73 Tremont Street,
Boston, Massachusetts 02108-3913. For additional information on the
Administration Agreement, see "Management of the Company" in the Statement of
Additional Information.
DIRECTORS AND OFFICERS. Pursuant to the Company's Articles of
Incorporation, the Board of Directors decides upon matters of general policy and
reviews the actions of the Adviser, Sub-Advisers, Administrator and the
Company's Distributor. The Officers of the Company conduct and supervise its
daily business operations.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the
"Distributor") serves as the distributor of the shares of the Company. Under its
distribution agreement (the "Distribution Agreement") with the Company, the
Distributor sells shares of the Company upon the terms and at the current
offering price described in this Prospectus. The Distributor is not obligated to
sell any specific number of shares of the Company.
The Company currently offers Class A shares, Class B shares and Class C
shares of the Funds. The Company may in the future offer one or more classes of
shares for each Fund that may have sales charges or other distribution charges
or a combination thereof different from those of the classes currently offered.
The Board of Directors of the Company has approved and adopted the
Distribution Agreement for the Company and a Plan for each class of the Funds
pursuant to Rule 12b-1 under the 1940 Act (each a "Plan" and together, the
"Plans"). Under each Plan, the Distributor is entitled to receive from each Fund
a distribution fee, which is accrued daily and paid quarterly, at a maximum rate
of 0.75% of the Class B shares and Class C shares of each Fund, on an annualized
basis of the average daily net assets of such classes. The actual amount of such
compensation is agreed upon by the Company's Board of Directors and by the
Distributor. With respect to Class B shares, the Distributor expects to utilize
substantially all of its fee to reimburse itself for commissions paid to
investment dealers, banks or financial services firms that provide distribution
services ("Participating Dealer"). With respect to Class C shares, the
Distributor expects to reallocate substantially all of its fee to such
Participating Dealers. 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. Class A shares, Class B shares and Class C shares are subject to a
service fee at an annual rate of 0.25% on an annualized basis of the average
daily net assets of such class of shares of a Fund. In addition to such
payments, the Adviser may use its advisory fee or other resources to pay
expenses associated with activities which might be construed to be financing the
sale of these Funds' shares including payments to third parties that provide
assistance in the distribution effort (in addition to selling shares and
providing shareholder services).
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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.
Each Plan for a class of Company shares, under the terms of Rule 12b-1, will
remain in effect only if approved at least annually 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 ("12b-1 Directors"). Each Plan may be terminated at any time by
a vote of a majority of the 12b-1 Directors or by a vote of a majority of the
outstanding voting securities of the applicable class of a Fund. The fee set
forth above will be paid by the appropriate class to the Distributor unless and
until a Plan is terminated or not renewed. The Company intends to operate each
Plan in accordance with its terms and the NASD Conduct Rules concerning sales
charges.
PAYMENTS TO FINANCIAL INSTITUTIONS. The Adviser or its affiliates may
compensate certain financial institutions for the continued investment of their
customers' assets in the Funds pursuant to the advice of such financial
institutions. These payments will be made directly by the Adviser or its
affiliates from their assets, and will not be made from the assets of the
Company or by the assessment of a sales charge on shares. Such financial
institutions may also perform certain shareholder or recordkeeping services that
would otherwise be performed by ACCESS. The Adviser may elect to enter into a
contract to pay the financial institutions for such services.
EXPENSES. Each Fund is responsible for payment of certain other fees and
expenses (including professional fees, custodial fees and printing and mailing
costs) specified in the Administration and Distribution Agreements.
PURCHASE OF SHARES
GENERAL
The Company offers three classes of shares to the public on a continuous
basis through the Distributor as principal underwriter, which is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. Shares are also offered
through members of the NASD who are acting as securities dealers ("dealers") and
NASD members or eligible non-NASD members who are acting as brokers or agents
for investors ("brokers"). The term "dealers" and "brokers" are sometimes
referred to herein as "Participating Dealers."
Initial investments must be at least $500 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. The $500
minimum may be waived by the Distributor for plans involving periodic
investments. Shares of the Company may be sold in foreign countries where
permissible. The Company and the Distributor reserve the right to refuse any
order for the purchase of shares. The Company also reserves the right to suspend
the sale of the Company's shares in response to conditions in the securities
markets or for other reasons.
Shares of the Company may be purchased on any business day through
Participating Dealers. Shares may also be purchased by completing the
application accompanying this Prospectus and forwarding the application, through
the Participating Dealer, to the shareholder service agent, ACCESS Investor
Services, Inc.
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<PAGE>
("ACCESS"), a wholly-owned subsidiary of Van Kampen American Capital, Inc. When
purchasing shares of the Company, investors must specify whether the purchase is
for Class A shares, Class B shares or Class C shares.
Shares are offered at the next determined net asset value per share, plus an
initial or contingent deferred sales charge depending on the class of shares
chosen by the investor, as shown in the tables herein. See "Valuation of Shares"
for a further description of net asset value computations.
Generally, the net asset values per share of the Class A shares, Class B
shares and Class C shares are expected to be substantially the same. Under
certain circumstances, however, the per share net asset values of the classes of
shares may differ from one another, reflecting the daily expense accruals of the
higher distribution fees applicable with respect to the Class B shares and Class
C shares and the differential in the dividends paid on the classes of shares.
The price paid for shares purchased is based on the next calculation of net
asset value (plus sales charges, where applicable) after an order is received by
a Participating Dealer provided such order is transmitted to the Distributor
prior to the Distributor's close of business on such day. Orders received by
Participating Dealers after the close of the New York Stock Exchange (the
"NYSE") are priced based on the net asset value calculated after the next day's
close provided they are received by the Distributor prior to the Distributor's
close of business on such day. It is the responsibility of Participating Dealers
to transmit orders received by them to the Distributor so they will be received
prior to such time.
Each class of shares represents an interest in the same portfolio of
investments, has the same rights and is identical in all respects, except that
(i) Class B shares and Class C shares bear the expenses of the deferred sales
arrangement and any expenses (including higher distribution fees) resulting from
such sales arrangement, (ii) generally, each class has exclusive voting rights
with respect to approvals of the Rule 12b-1 distribution plan to which its
distribution fee or service fee is paid, (iii) certain shares are subject to a
conversion feature, (iv) each class has different exchange privileges and (v)
each class has different shareholder service options available. The net income
attributable to Class B shares and Class C shares and the dividends payable on
Class B shares and Class C shares will be reduced by the amount of the higher
distribution fees associated with such class of shares. Sales personnel of
Participating Dealers distributing the Company's shares and other persons
entitled to receive compensation for selling such shares may receive differing
compensation for selling Class A shares, Class B shares or Class C shares.
In deciding which class of shares to purchase, investors should take into
consideration their investment goals, present and anticipated purchase amounts,
time horizons and temperments. Investors should consider whether, during the
anticipated life of their investment in a Fund, the accumulated distribution
fees and contingent deferred sales charges on Class B shares prior to conversion
or Class C shares would be less than the initial sales charge on Class A shares
purchased at the same time, and to what extent such differential would be offset
by the higher dividends per share on Class A shares. To assist investors in
making this determination, the table under the caption "Fund Expenses" sets
forth examples of the charges applicable to each class of shares. In this
regard, Class A shares may be more beneficial to the investor who qualifies for
reduced initial sales charges or purchases shares at net asset value, as
described herein under "Purchase of Shares -- Class A Shares." For these
reasons, it is presently the policy of the Distributor not to accept any order
of $500,000 or more for Class B shares or any order of $1 million or more for
Class C shares as it ordinarily would be more beneficial for such an investor to
purchase Class A shares.
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<PAGE>
Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase for most
accounts under $1 million, investors in Class A shares do not have all their
funds invested initially and, therefore, initially own fewer shares. Other
investors might determine that it is more advantageous to purchase either Class
B shares or Class C shares and have all their funds invested initially, although
remaining subject to a contigent deferred sales charge. Ongoing distribution
fees on Class B shares and Class C shares will be offset to the extent of the
additional funds originally invested and any return realized on those funds.
However, there can be no assurance as to the return, if any, which will be
realized on such additional funds. For investments held for ten years or more,
the relative value upon liquidation of the three classes tends to favor Class A
or Class B shares, rather than Class C shares.
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges and/or have a longer-term investment
horizon. Class B shares may be appropriate for investors who wish to avoid a
front-end sales charge, put 100% of their investment dollars to work
immediately, and/or have a longer-term investment horizon. Class C shares may be
appropriate for investors who wish to avoid a front-end sales charge, put 100%
of their investment dollars to work immediately, have a shorter-term investment
horizon and/or desire a short contigent deferred sales charge schedule.
The distribution expenses incurred by the Distributor in connection with the
sale of the shares will be reimbursed, in the case of Class A shares, from the
proceeds of the initial sales charge and, in the case of Class B shares and
Class C shares, from the proceeds of the ongoing distribution fee and any CDSC
incurred upon redemption within five years or one year, respectively, of
purchase. Investors should understand that the purpose and function of the CDSC
and ongoing distribution fee with respect to Class B shares and Class C shares
are the same as those of the initial sales charge with respect to Class A
shares. See "Distribution Plans."
The Distributor may from time to time implement programs under which a
Participating Dealer's sales force may be eligible to win nominal awards for
certain sales efforts or under which the Distributor will reallow to any
Participating Dealer that sponsors sales contests or recognition programs
conforming to criteria established by the Distributor, or participates in sales
programs sponsored by the Distributor, an amount not exceeding the total
applicable sales charges on the sales generated by the Participating Dealer at
the public offering price during such programs. Other programs provide, among
other things and subject to certain conditions, for certain favorable
distribution arrangements for shares of the Company. Also, the Distributor in
its discretion may from time to time, pursuant to objective criteria established
by the Distributor, pay fees to, and sponsor business seminars for, qualifying
authorized dealers for certain services or activities which are primarily
intended to result in sales of shares of the Company. Fees may include payment
for travel expenses, including lodging, incurred in connection with trips taken
by invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. In some instances, additional compensation or promotional incentives may
be offered to Participating Dealers that have sold or may sell significant
amount of shares during specified periods of time. Such fees paid for such
services and activities with respect to a Fund will not exceed in the aggregate
1.25% of the average total daily net assets of the Fund on an annual basis. All
of the foregoing payments are made by the Distributor out of its own assets.
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<PAGE>
These programs will not change the price an investor will pay for shares or the
amount that a Fund will receive from such sale.
CLASS A SHARES
The public offering price of Class A shares is the next determined net asset
value plus a sales charge, as set forth herein.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
REALLOWED TO
DEALERS
AS % OF AS % OF NET (AS % OF
SIZE OF INVESTMENT OFFERING PRICE AMOUNT INVESTED OFFERING PRICE)
- ------------------------------ --------------- ----------------- ----------------
<S> <C> <C> <C>
Less than $50,000............. 5.75 6.10 5.00
$50,000 but less than
$100,000..................... 4.75 4.99 4.00
$100,000 but less than
$250,000..................... 3.75 3.90 3.00
$250,000 but less than
$500,000..................... 2.75 2.83 2.25
$500,000 but less than
$1,000,000................... 2.00 2.04 1.75
$1,000,000 or more*........... * * *
</TABLE>
- --------------
* No initial sales charge is payable at the time of purchase on investments of
$1 million or more, although for such investments the Fund imposes a
contingent deferred sales charge of 1.00% in the event of certain redemptions
within one year of the purchase. A commission will be paid to brokers, dealers
or financial intermediaries who initiate and are responsible for purchases of
$1 million or more as follows: 1.00 % on sales to $2 million, plus 0.80% on
the next $1 million, plus 0.50% on the excess over $3 million. See "Purchase
of Shares -- Purchase of Class B Shares" and "-- Purchase of Class C Shares"
for additional information with respect to contingent deferred sales charges.
In addition to the reallowances from the applicable public offering price
described herein, the Distributor may, from time to time, pay or allow
additional reallowances or promotional incentives, in the form of cash or other
compensation, to Participating Dealers that sell shares of the Company.
Participating Dealers which are reallowed all or substantially all of the sales
charges may be deemed to be underwriters for purposes of the 1933 Act.
The Distributor may also pay financial institutions (which may include
banks) and other industry professionals that provide services to facilitate
transactions in shares of the Company for their clients a transaction fee up to
the level of the reallowance allowable to Participating Dealers described
herein. Such financial institutions, other industry professionals and
Participating Dealers are hereinafter referred to as "Service Organizations."
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Company. State
securities laws regarding registration of banks and other financial institutions
may differ from the interpretations of federal law expressed herein and banks
and other financial institutions may be required to register as dealers pursuant
to certain state laws.
QUANTITY DISCOUNTS
Investors purchasing Class A shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
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<PAGE>
Investors or their Participating Dealers must notify the Company whenever a
quantity discount is applicable to purchases. Upon such notification, an
investor will receive the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their Participating Dealer or the
Distributor.
A person eligible for a reduced sales charge includes an individual, their
spouse and children under 21 years of age, and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust
estate or single fiduciary account, or a "company" as defined in Section 2(a)(8)
of the 1940 Act.
The phrase "Participating Funds," as used herein, refers to certain open-end
investment companies advised by the Adviser or Van Kampen American Capital Asset
Management Inc. and distributed by the Distributor as determined from time to
time by the Company's Board of Directors.
VOLUME DISCOUNTS. The size of investment shown in the preceding sales
charge table applies to the total dollar amount being invested by any person in
shares of a Fund or in any combination of shares of the Fund and shares of other
Participating Funds, although other Participating Funds may have different sales
charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds plus the current offering price of all
shares of the Participating Funds which have been previously purchased and are
still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an
investor to obtain a reduced sales charge by aggregating the investments over a
13-month period to determine the sales charge as outlined in the preceding
table. The size of investment shown in the preceding table also includes
purchases of shares of the Participating Funds over a 13-month period based on
the total amount of intended purchases plus the value of all shares of the
Participating Funds previously purchased and still owned. An investor may elect
to compute the 13-month period starting up to 90 days before the date of
execution of a Letter of Intent. Each investment made during the period receive
the reduced sales charge applicable to the total amount of the investment goal.
If the goal is not achieved within the period, the investor must pay the
difference between the sales charges applicable to the purchases made and the
sales charges previously paid. The initial purchase must be for an amount equal
to at least 5% of the minimum total purchased amount of the level selected. If
trades not initially made under a Letter of Intent subsequently qualify for a
lower sales charge through the 90-day back-dating provisions, an adjustment will
be made at the expiration of the Letter of Intent to give effect to the lower
charge. Such adjustments in sales charge will be used to purchase additional
shares for the shareholder at the applicable discount category. Additional
information is contained in the application form accompanying this Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A shares may be entitled to reduced initial sales
charges in connection with unit investment trust reinvestment programs and
purchases by registered representatives of selling firms or purchases by persons
affiliated with the Company or the Distributor. The Company reserves the right
to modify or terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAMS. The Company permits
unitholders of unit investment trusts to reinvest distributions from such trusts
in Class A shares of the Company at net asset value with no
37
<PAGE>
minimum initial or subsequent investment requirement if the administrator of an
investor's unit investment trust program meets certain uniform criteria relating
to cost savings by the Company and the Distributor. The total sales charge for
all other investments made from unit trust distributions will be 1.00% of the
offering price (1.01% of net asset value). Of this amount, the Distributor will
pay to the Participating Dealer, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their Participating Dealer or the Distributor.
The administrator of such a unit investment trust must have an agreement
with the Distributor pursuant to which the administrator will (1) submit a
single bulk order and make payment with a single remittance for all investments
in a Fund during each distribution period by all investors who choose to invest
in the Fund through the program and (2) provide ACCESS with appropriate backup
data for each participating investor in a computerized format fully compatible
with ACCESS' processing system.
As further requirements for obtaining these special benefits, the Company
also requires that all dividends and other distributions by a Fund be reinvested
in additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Company will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Company reserves the right to
modify or terminate this program at any time.
NAV PURCHASE OPTIONS. Class A shares of a Fund may be purchased without an
initial sales charge, upon written assurance that the purchase is made for
investment purposes and that the shares will not be resold except through
redemption by the Fund, by:
(1) Current or retired trustees/directors of funds advised by the
Adviser or Van Kampen American Capital Asset Management, Inc. and such
persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of Morgan
Stanley Group Inc. and any of its subsidiaries, employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser, and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and registered representatives of
financial institutions that have a selling group agreement with the
Distributor and their spouses and children under 21 years of age when
purchasing for any accounts they beneficially own, or, in the case of any
such financial institution, when purchasing for retirement plans for such
institution's employees.
(4) Registered investments advisers, trust companies and bank trust
departments investing on their own behalf or on behalf of their clients
provided that the aggregate amount invested in a Fund alone, or in any
combination of shares of the Fund and shares of other Participating Funds as
described herein under "Purchase of Shares -- Class A Shares -- Volume
Discounts," during the 13-month period commencing with the first investment
pursuant hereto equals at least $1 million. The Distributor may pay
Participating Dealers through which purchases are made an amount up to 0.50%
of the amount invested, over a 12-month period following such transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement
plans of organizations with retirement plan assets of $3 million or more and
which invest in multiple fund families through national wirehouse alliance
programs. The Distributor may pay commissions of up to 1.00% for such
purchases.
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<PAGE>
(6) Accounts as to which a broker, dealer or financial intermediary
charges an account management fee ("wrap accounts"), provided the broker,
dealer or financial intermediary has a separate agreement with the
Distributor.
(7) Trusts created under pension, profit sharing or other employee
benefit plans qualified under Section 401(a) of the Code, or custodial
accounts held by a bank created pursuant to Section 403(b) of the Code and
sponsored by non-profit organizations defined under Section 501(c)(3) of the
Code and assets held by an employer or trustee in connection with an
eligible deferred compensation plan under Section 457 of the Code. Such
plans will qualify for purchases at net asset value provided that (1) the
initial amount invested in the Participating Funds is at least $500,000 or
(2) such shares are purchased by an employer sponsored plan with more than
100 eligible employees. Section 403(b) and similar accounts for which Van
Kampen American Capital Trust Company ("VKAC Trust") serves as custodian
will not be eligible for net asset value purchases based on the aggregate
investment made by the plan or the number of eligible employees, except
under certain uniform criteria established by the Distributor from time to
time. A commission will be paid to dealers who initiate and are responsible
for such purchases within a rolling twelve month period as follows: 1.00% on
sales up to $2 million, plus 0.80% on the next $1 million, plus 0.50% on the
next $47 million, plus 0.25% on the excess over $50 million.
(8) Individuals who are members of a "qualified group." For this
purpose, a qualified group is one which (i) has been in existence for more
than six months, (ii) has a purpose other than to acquire shares of a Fund
or similar investments, (iii) has given and continues to give its
endorsement or authorization, on behalf of the group, for purchase of shares
of a Fund and other Participating Funds, (iv) has a membership that the
authorized dealer can certify as to the group's members, and (v) satisfies
other uniform criteria established by the Distributor for the purpose of
realizing economies of scale in distributing such shares. A qualified group
does not include one whose sole organizational nexus, for example, is that
its participants are credit card holders of the same institution, policy
holders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups. Shares purchased
in each group's participant's account in connection with this privilege will
be subject to a contingent deferred sales charge of one percent in the event
of redemption within one year of purchase, and a commission will be paid to
authorized dealers who initiate and are responsible for such sales to each
individual as follows: 1.00% on sales to $2 million, plus 0.80% on the next
million and 0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children and grandchildren
under 21 years of age, parents and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with ACCESS by the investment
adviser, trust company or bank trust department, provided that ACCESS receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized dealer may charge a transaction
fee for placing an order with respect to such shares. Authorized dealers will be
paid a service fee as described herein under "Distribution Plans" on purchases
made as described in (3) through (8) above.
The Company may terminate, or amend the terms of, offering shares of the
Funds at net asset value to the foregoing groups at any time.
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<PAGE>
PURCHASE OF CLASS B SHARES
Class B shares of the Funds may be purchased at net asset value without an
initial sales charge. However, a CDSC will be imposed on certain Class B shares
redeemed within five years of purchase. The charge is assessed on an amount
equal to the lesser of the then-current market value of the Class B shares
redeemed or the total cost of such shares. Accordingly, the CDSC will not be
applied to dollar amounts representing an increase in the net asset values above
the initial purchase price of the shares being redeemed. In addition, no charge
is assessed on redemptions of Class B shares derived from reinvestment of
dividends or capital gains distributions.
In determining whether the CDSC is applicable to a redemption, the
calculation is made in the manner that results in the lowest possible rate.
Therefore, it is assumed that the redemption is first of any Class B shares in
the shareholder's account that represent reinvested dividends and/or
distributions, and/or of Class B shares held longer than five years after
purchase, and next of Class B shares held the longest during the initial
five-year period after purchase. The amount of the CDSC, if any, will vary
depending on the number of years from the time of purchase of Class B shares
until the redemption of such shares (the "holding period"). The following table
sets forth the rates of the CDSC.
CONTINGENT DEFERRED SALES CHARGE
<TABLE>
<CAPTION>
SALES CHARGE AS
PERCENTAGE OF
THE
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO
PAYMENT WAS MADE CHARGE
- ------------------------------ ----------------
<S> <C>
First......................... 5.00%
Second........................ 4.00%
Third......................... 3.00%
Fourth........................ 2.50%
Fifth......................... 1.50%
Thereafter.................... None*
</TABLE>
- --------------
* As described more fully below, Class B shares automatically convert to Class A
shares after the eighth year following purchase.
Proceeds from any CDSC are paid to the Distributor and are used by the
Distributor to defray its expenses related to providing distribution-related
services to the Company in connection with the sale of the Class B shares. The
Distributor will make payments to the Participating Dealers that handle the
purchases of such shares at a rate not in excess of 4.00% of the purchase price
of such shares at the time of purchase and expects to pay to Participating
Dealers a portion of its distribution fee under the Rule 12b-1 Plan as described
under "Management of the Company -- Distributor" above. Additionally, the
Distributor may pay additional promotional incentives in the form of cash or
other compensation to authorized dealers that sell Class B shares of the Funds.
The combination of the CDSC and the distribution fee facilitates the ability of
the Company to sell the Class B shares without a sales charge being deducted at
the time of purchase.
AUTOMATIC CONVERSION TO CLASS A SHARES. After the eighth year following
purchase, Class B shares will automatically convert to Class A shares and will
no longer be subject to the higher distribution fees. Such conversion will be on
the basis of the relative net asset values of the two classes, without the
imposition of any sales load, fee or other charge. Under current tax law, the
conversion is not a taxable event to the shareholder.
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PURCHASE OF CLASS C SHARES
Class C shares of the Funds may be purchased at the net asset value per
share and such shares are subject to a CDSC at the rate of 1.00% of the lesser
of the current market value of the shares redeemed or the total cost of such
shares for shares that are redeemed within one year of purchase. The Distributor
will make payments to the Participating Dealers that handle the purchases of
such shares at the rate of 1.00% of the purchase price of such shares at the
time of purchase and expects to pay to Participating Dealers most of its
distribution fee, with respect to such shares, under the Rule 12b-1 Plan for
such class of shares, as described under "Management of the Company --
Distributor" above. In determining whether a CDSC is payable, and, if so, the
amount of the fee or charge, it is assumed that shares not subject to such fee
or charge are the first redeemed.
WAIVER OF CDSC
The CDSC will be waived on the redemption of Class B or Class C shares (i)
following the death or initial determination of disability (as defined in the
Code) of a shareholder; (ii) certain distributions from an IRA or other
retirement plan; (iii) to the extent that shares redeemed have been withdrawn
from a Systematic Withdrawal Plan, up to a maximum amount of 12% per year from a
shareholder account based on the value of the account at the time the Withdrawal
Plan is established; or (iv) effected pursuant to the right of the Company to
liquidate a shareholder's account as described herein under "Redemption of
Shares". A shareholder, or their representative, must notify the Transfer Agent
prior to the time of redemption if such circumstances exist and the shareholder
is eligible for this waiver. The shareholder is responsible for providing
sufficient documentation to the Transfer Agent to verify the existence of such
circumstances. For information on the imposition and waiver of the CDSC, contact
Investor Services at 1-800-282-4404.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
No initial sales charge or CDSC will be payable on the shares of the Funds
or classes thereof purchased through the automatic reinvestment of dividends and
distributions on shares of the Funds.
REINSTATEMENT PRIVILEGE OF EACH CLASS
A shareholder who has redeemed Class A shares of a Participating Fund may
reinvest up to the full amount received at net asset value at the time of the
reinvestment in Class A shares of the Funds without payment of a sales charge. A
shareholder who has redeemed Class B shares of a Participating Fund and paid a
CDSC upon such redemption may reinvest up to the full amount received upon
redemption in Class A shares of a Fund at net asset value with no initial sales
charge. A Class C shareholder who has redeemed shares of a Participating Fund
may reinstate any portion or all of the net proceeds of such redemption in Class
C shares of a Fund with credit given for any CDSC paid upon such redemption. The
reinstatement privilege as to any specific Class A, Class B or Class C shares
must be exercised within 180 days of the redemption. The Transfer Agent must
receive from the shareholder or the shareholder's Participating Dealer both a
written request for reinstatement and a check or wire which does not exceed the
redemption proceeds. The written request must state that the reinvestment is
made pursuant to this reinstatement privilege. If a loss is realized on the
redemption of Class A shares, the reinvestment may be subject to the "wash sale"
rules if made within 30 days of the redemption, resulting in a postponement of
the recognition of such loss for federal income tax purposes. The reinstatement
privilege may be terminated or modified at any time. Reinstatement at net asset
value is also offered to participants in those eligible retirement plans held or
administered by VKAC Trust for repayment of principal (and interest) on their
borrowings on such plan. See the Statement of Additional Information for further
discussion of waiver provisions.
41
<PAGE>
SHAREHOLDER SERVICES
The Company offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. Unless otherwise described below, each of these
services may be modified or terminated by the Company at any time.
INVESTMENT ACCOUNT. Each shareholder has an investment account under which
shares are held by ACCESS. ACCESS acts as transfer agent for the Company and
performs bookkeeping, data processing and administration services related to the
maintenance of shareholder accounts. Except as described herein, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder will receive statements at least
quarterly from ACCESS showing any reinvestments of dividends and capital gains
distributions and any other activity in the account since the preceding
statement. Such shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gains distributions and systematic purchases or redemptions. Additions to an
investment account may be made at any time by purchasing shares through
authorized brokers, dealers or financial intermediaries or by mailing a check
directly to ACCESS.
SHARE CERTIFICATES. Generally, the Company will not issue share
certificates. However, upon written or telephone request to the Company, a share
certificate will be issued, representing shares (with the exception of
fractional shares) of the Company. A shareholder will be required to surrender
such certificates upon redemption or transfer thereof. In addition, if such
certificates are lost the shareholder must write to Morgan Stanley Fund, Inc.
c/o ACCESS, P.O. Box 418256, Kansas City, MO 64141-9256, requesting an
"affidavit of loss" and to obtain a Surety Bond in a form acceptable to ACCESS.
On the date the letter is received, ACCESS will calculate a fee for replacing
the lost certificate equal to no more than 2.00% of the net asset value of the
issued shares and bill the party to whom the replacement certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the applicable Fund. Such shares are acquired at net asset value (without sales
charge) on the record date of such dividend or distribution. Unless the
shareholder instructs otherwise, the reinvestment plan is automatic. This
instruction may be made by telephone by calling (800) 282-4404 or (800) 772-8889
for the hearing impaired, or in writing to ACCESS. The investor may, on the
initial application or prior to any declaration, instruct that dividends be paid
in cash and capital gains distributions be reinvested at net asset value, or
that both dividends and capital gains distributions be paid in cash. For further
information, see "Dividends and Distributions."
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Fund. Additional information is
available from the Distributor or authorized brokers, dealers or financial
intermediaries.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanied by this
Prospectus or by calling (800) 282-4404 or (800) 772-8889 for the hearing
impaired, elect to have all dividends and other distributions paid on a class of
shares of the Company invested in shares of the same class of any Participating
Fund, so long as a pre-existing account for such class of shares exists for such
shareholder. Both accounts must also be of the same type, either non-retirement
or retirement. Any two non-retirement accounts can be used. If the accounts are
retirement
42
<PAGE>
accounts, they must both be for the same class and of the same type of
retirement plan (e.g. IRA, 403(b)(7), 401(k), Keogh) and for the benefit of the
same individual.
If the qualified pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund into which distributions would be invested. Distributions are invested
into the selected portfolio at its net asset value as of the payable date of the
distribution only if shares of such selected portfolio have been registered for
sale in the investor's state and are currently available for sale.
RETIREMENT PLANS. Eligible investors may establish IRAs; SEP; and pension
and profit sharing plans; 401(k) plans; or Section 403(b)(7) plans in the case
of employees of public school systems and certain non-profit organizations.
Documents and forms containing detailed information regarding these plans are
available from the Distributor. VKAC Trust serves as custodian under the IRA,
403(b)(7) and Keogh plans. Details regarding fees, as well as full plan
administration for profit sharing, pension and 401(k) plans, are available from
the Distributor.
EXCHANGE PRIVILEGE. Shares of the Funds may be exchanged for shares of the
same class of another Participating Fund based on the net asset values of each
Fund on the date of exchange, subject to certain limitations. Before effecting
an exchange, shareholders in the Company should obtain and read a current
prospectus of the Participating Funds into which the exchange is to be made.
Shareholders may only exchange into such other Participating Funds as are
legally available for sale in their state and are currently available for sale.
To be eligible for exchange, shares of a Fund generally must have been
registered in the shareholder's name for at least 30 days prior to an exchange.
Shares of a Fund registered in a shareholder's name for less than 30 days may
only be exchanged upon receipt of prior approval of the Adviser. Under normal
circumstances, it is the policy of the Adviser not to approve such requests.
Class A shares of a Participating Fund that generally impose an initial
sales charge are not subject to any sales charge upon exchange into another
Participating Fund. Class A shares of Participating Fund that do not impose an
initial sales charge will be subject to the applicable sales charge of the
Participating Fund being obtained in the exchange.
No sales charge is imposed upon the exchange of a Class B share or a Class C
share. The CDSC schedule, conversion schedule and holding period applicable to a
Class B share or a Class C share acquired through the exchange privilege is
determined by reference to the Participating Fund from which such share
originally was purchased.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is not included in the tax basis of
the exchanged shares, but is carried over and included in the tax basis of the
shares acquired.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form accompanied by this Prospectus. See
"Redemption of Shares -- Telephone Transaction Procedures" for more information.
The exchange will take place at the relative net asset values of the shares next
determined after receipt of such request with adjustment for any
43
<PAGE>
additional sales charge. Any shares exchanged begin earning dividends on the
next business day after the exchange is affected. If the exchanging shareholder
does not have an account in the portfolio whose shares are being acquired, a new
account will be established with the same registration, dividend and capital
gains options (except dividend diversification options) and broker, dealer or
financial intermediary of record as the account from which shares are exchanged,
unless otherwise specified by the shareholder. In order to establish a
systematic withdrawal plan for the new account or dividend diversification
options for the new account, an exchanging shareholder must file a specific
written request. The Company reserves the right to reject any order to acquire
its shares through exchange. In addition, the Company may restrict or terminate
the exchange privilege at any time on 60 days' notice to its shareholders of any
termination or material amendment. If an account has multiple owners, ACCESS may
rely on the instructions of any one owner.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $5,000 or more at the offering price next computed after receipt of
instructions may establish a quarterly, semi-annual or annual withdrawal plan.
Investors whose shares in a single account total $10,000 or more at the offering
price next computed after receipt of instructions may establish a monthly,
quarterly, semi-annual or annual withdrawal plan. This plan provides for the
orderly use of the entire account, not only the income but also the principal,
if necessary. Each withdrawal constitutes a redemption of shares on which
taxable gain or loss will be recognized. The plan holder may arrange for
monthly, quarterly, semi-annual, or annual checks in any amount not less than
$25.
The CDSC on Class B and Class C shares is waived for withdrawals under the
Systematic Withdrawal Plan of a maximum of 1% per month, 3% per quarter, 6%
semiannually or 12% annually, of a shareholder's investment in, and any
dividends or distributions on, shares of a Fund at the time the Systematic
Withdrawal Plan commences. Under this CDSC waiver policy, amounts withdrawn each
period will be paid by redeeming first shares not subject to a CDSC because the
shares were purchased by the reinvestment of dividends or capital gains
distributions, the CDSC period has elapsed or some other waiver of the CDSC
applies. If shares subject to the CDSC must be redeemed, shares held for the
longest period of time will be redeemed first and continuing with shares held
the next longest period of time until shares held the shortest period of time
are redeemed.
Under the plan, sufficient shares of the Company are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with purchases of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. The Company reserves the right to amend or terminate the systematic
withdrawal program on 30 days' notice to its shareholders.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A shares can
use ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of ACH. In addition, the shareholder must fill out the appropriate
section of the account application. The shareholder must also include a voided
check or deposit slip from the bank account into which redemptions are to be
deposited together with the completed application. Once ACCESS has received the
application and the voided check or deposit slip, such shareholder's designated
bank account, following any redemption, will be credited with the proceeds of
such
44
<PAGE>
redemption. Once enrolled in the ACH plan, a shareholder may terminate
participation at any time by writing to ACCESS or by calling 1-800-282-4404. A
shareholder's bank may charge a fee for ACH transfers.
TRANSFER OF REGISTRATION. You may transfer the registration of any of your
Company shares to another person by writing to the Company c/o ACCESS, P.O. Box
418256, Kansas City, Missouri 64141-9256. As in the case of redemptions, the
written request must be received in "good order" before any transfer can be
made. Shares held in broker street name may be transferred only by contacting
your Participating Dealer.
REDEMPTION OF SHARES
Shareholders may redeem for cash some or all of their shares without charge
by the Company (other than any applicable CDSC) at any time by sending a written
request in proper form directly to the Company c/o ACCESS, P.O. Box 418256,
Kansas City, Missouri 64141-9256, by placing the redemption request through a
Participating Dealer or by calling the Company. See "Purchase of Shares" for a
discussion of applicable CDSC levels.
WRITTEN REDEMPTION REQUESTS. In the case of redemption requests sent
directly to ACCESS, the redemption request should indicate the number of shares
or dollars to be redeemed, the class designation of such shares, the account
number and be signed exactly as the shares are registered. Signatures must
conform exactly to the account registration. If the proceeds of the redemption
would exceed $50,000, or if the proceeds are not to be paid to the record owner
at the record address, or if the record address has changed within the previous
30 days, signature(s) must be guaranteed by one of the following: a bank or
trust company; a broker-dealer, a credit union; a national securities exchange,
registered securities association or clearing agency; a savings and loan
association; or a federal savings bank. If certificates are held for the shares
being redeemed, such certificates must be endorsed for transfer or accompanied
by an endorsed stock power and sent with the redemption request. In the event
the redemption is requested by a corporation, partnership, trust, fiduciary,
executor or administrator, additional documents may be necessary. The redemption
price is the net asset value per share next determined after the request is
received by ACCESS in proper form. Payment for shares redeemed will ordinarily
be made by check mailed within seven business days after acceptance by ACCESS of
the request and any other necessary documents in proper order.
DEALER REDEMPTION REQUESTS. Shareholders may redeem shares through their
securities dealer, who will submit the request to the Distributor. Orders
received from dealers must be at least $500 unless transmitted via the FUNDSERV
network. The redemption price for such shares is the net asset value next
calculated after an order is received (less any applicable CDSC) by a dealer
provided such order is transmitted to the Distributor prior to the Distributor's
close of business on such day. It is the responsibility of dealers to transmit
redemption requests received by them to the Distributor so they will be received
prior to such time. Any change in the redemption price due to failure of the
Distributor to receive a redemption request prior to such time must be settled
between the shareholder and dealer. Shareholders must submit a written
redemption request in proper form (as described above under "Written Redemption
Requests") to the dealer within three business days after calling the dealer
with the redemption request. Payment for shares redeemed will ordinarily be made
by check mailed within three business days to the dealer.
TELEPHONE REDEMPTION REQUESTS. The Company permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as
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described below. To establish such privilege, a shareholder must complete the
appropriate section of the application accompanying this Prospectus or call the
Company at (800) 282-4404 or (800) 772-8889 for the hearing impaired, to request
that a copy of the Telephone Redemption Authorization form be sent to them for
completion. To redeem shares, contact the telephone transaction line at (800)
421-5684. See "Telephone Transaction Procedures" for more information. Telephone
redemptions may not be available if the shareholder cannot reach ACCESS by
telephone, whether because all telephone lines are busy or for any other reason,
in such case, a shareholder would have to use the Company's other redemption
procedures previously described. Requests received by ACCESS prior to 4:00 p.m.,
Eastern Time, on a regular business day will be processed at the net asset value
per share determined that day. These privileges are available for all accounts
other than retirement accounts. The telephone redemption privilege is not
available for shares represented by certificates. If an account has multiple
owners, ACCESS may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check will ordinarily be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire will ordinarily be wired on the next business day
to the shareholder's bank account of record. This privilege is not available if
the address or bank account of record has been changed within 30 days prior to a
telephone redemption request. The Company reserves the right at any time to
terminate, limit or otherwise modify this telephone redemption privilege.
REDEMPTION UPON DISABILITY. The Company will waive the CDSC on redemptions
following the disability of holders of Class B shares and Class C shares. An
individual will be considered disabled for this purpose if he or she meets the
definition thereof in Section 72(m)(7) of the Code, which in pertinent part
defines a person as disabled if such person "is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or to be of
long-continued and indefinite duration." While the Company does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
contingent deferred sales charge on Class B shares and Class C shares.
In cases of disability, the CDSCs on Class B shares and Class C shares will
be waived where the disabled person is either an individual shareholder or owns
the shares as a joint tenant with right of survivorship or is the beneficial
owner of a custodial or fiduciary account, and where the redemption is made
within one year of the initial determination of disability. This waiver of the
CDSC on Class B shares and Class C shares applies to a total or partial
redemption, but only to redemptions of shares held at the time of the initial
determination of disability.
GENERAL REDEMPTION INFORMATION. If the shares to be redeemed have been
recently purchased by check, ACCESS may delay mailing a redemption check or
wiring redemption proceeds until it confirms that the purchase check has
cleared, usually a period of up to 15 days. In addition, the redemption payment
may be delayed or the right of redemption suspended by the Fund pursuant to
rules of the SEC.
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The Company may redeem any shareholder account with a net asset value on the
date of the notice of redemption less than the minimum investment as specified
by the Directors. At least 60 days' advance written notice of any such
involuntary redemption is required and the shareholder is given an opportunity
to purchase the required value of additional shares at the next determined net
asset value without sales charge. Any involuntary redemption may only occur if
the shareholder account is less than the minimum investment due to shareholder
redemptions.
A custodian of a retirement plan account may charge fees based on the
custodian's fee schedule. IRA redemption requests should be sent to the IRA
custodian to be forwarded to ACCESS. Where VKAC Trust serves as IRA custodian,
special IRA, 403(b)(7), or Keogh redemption forms must be obtained from and be
forwarded to Van Kampen American Capital Trust Company, P.O. Box 944, Houston,
Texas 77001-0944. Contact the custodian for information. Reinstatement
privileges (as otherwise described under "Purchase of Shares -- Reinstatement
Privilege of Each Class" above) also extend to participants in eligible
retirement plans held or administered by VKAC Trust who repay the principal and
interest on their borrowings from such plans.
FOR SHARES HELD IN BROKER STREET NAME, YOU CANNOT REQUEST REDEMPTION BY
TELEPHONE OR BY MAIL; SUCH SHARES MAY BE REDEEMED ONLY BY CONTACTING YOUR
PARTICIPATING DEALER.
TELEPHONE TRANSACTION PROCEDURES. Van Kampen American Capital, Inc. and its
subsidiaries, including ACCESS (collectively, "VKAC") and the Company employ
procedures considered by them to be reasonable to confirm that instructions
communicated by telephone are genuine. Such procedures include requiring certain
personal identification information prior to acting upon telephone instructions,
tape recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed, a
shareholder agrees that neither VKAC nor the Company will be liable for
following instructions which it reasonably believes to be genuine. VKAC and the
Company may be liable for any losses due to unauthorized or fraudulent
instructions if reasonable procedures are not followed.
VALUATION OF SHARES
Net asset value is calculated separately for each class of each Fund. The
net asset value per share of each class of shares of a Fund is determined by
dividing the total fair market value of the investments and other assets
attributable to such class of shares, less all liabilities attributable to such
class of shares, by the total number of outstanding shares of such class of
shares. Net asset value per share of a Fund is determined as of the regular
close of the NYSE (currently 4:00 p.m., Eastern Time) on each day that the NYSE
is open for business. Securities listed on a securities exchange for which
market quotations are available are valued at their closing price. If no closing
price is available, such securities will be valued at the last quoted sale price
on the day the valuation is made. Price information on listed securities is
taken from the exchange where the security is primarily traded. 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 are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such
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<PAGE>
securities. The prices provided by a pricing service are determined without
regard to bid or last sale prices but take into account institutional size
trading in similar groups of securities and any developments related to the
specific securities. Securities not priced in this manner are valued at the most
recent quoted bid price, or, when stock exchange valuations are used, at the
latest quoted sale price on the day of valuation. If there is no such reported
sale, the latest quoted bid price will be used. Debt securities purchased with
remaining maturities of 60 days or less are valued at amortized cost, if it
approximates market value. In the event that amortized cost does not approximate
market value, market prices as determined above will be used. The "amortized
cost" method of valuation does not take into account unrealized gains or losses.
This method involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price each Fund would receive if it sold the instrument.
The value of other assets and securities for which no quotations are readily
available (including illiquid and unlisted foreign securities) and those
securities for which it is inappropriate to determine prices in accordance with
the above procedures are determined in good faith at fair value using methods
determined by the Board of Directors. For purposes of calculating net asset
value per share, all assets and liabilities initially expressed in foreign
currencies will be converted into U.S. Dollars at the mean of the bid price and
asked price of such currencies against the U.S. Dollar as quoted by a major
bank.
PORTFOLIO TRANSACTIONS
The Adviser and the applicable Sub-Adviser select the brokers or dealers
that will execute the purchases and sales of investment securities for the
applicable Fund. The Adviser and the applicable Sub-Adviser may, consistent with
NASD rules, place portfolio orders with qualified broker-dealers who recommend
the applicable Fund to their clients or who act as agents in the purchase of
shares of the Fund for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Adviser and the applicable Sub-Adviser may allocate a portion of the
Company's portfolio brokerage transactions to Morgan Stanley & Co. Incorporated
("Morgan Stanley") and affiliates of the Adviser and the Sub-Advisers or broker
affiliates of Morgan Stanley under procedures adopted by the Board of Directors.
For such portfolio transactions, the commissions, fees or other remuneration
received by Morgan Stanley or such affiliates must be reasonable and fair
compared to the commissions, fees or other remuneration paid to other brokers
for comparable transactions involving similar securities being purchased or sold
during a comparable period of time.
Although the objectives of each Fund is not to invest for short-term
trading, each Fund will seek to take advantage of trading opportunities as they
arise to the extent they are consistent with the Fund's objectives. Accordingly,
investment securities may be sold from time to time without regard to the length
of time they have been held. Each Fund anticipates that its annual portfolio
turnover rate will not exceed 100% under normal circumstances but market
conditions could result in portfolio activity at a greater or lesser rate than
anticipated. High portfolio turnover involves correspondingly greater
transaction costs which will be borne directly by a Fund. In addition, high
portfolio turnover may result in more capital gains which would be taxable to
the shareholders of the Fund. See "Financial Highlights" above for the Funds'
historical portfolio turnover rates.
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PERFORMANCE INFORMATION
The Company may from time to time advertise total return of the Funds. THESE
FIGURES WILL BE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE
FUTURE PERFORMANCE. The "total return" shows what an investment in a Fund would
have earned over a specified period of time (such as one, three, five or ten
years) assuming that all distributions and dividends by the Fund were reinvested
on the reinvestment dates during the period. Total return does not take into
account any federal or state income taxes consequences to shareholders subject
to tax. The Company may also include comparative performance information in
advertising or marketing the Fund's shares. Such performance information may
include data from Lipper Analytical Services, Inc. and Morgan Stanley Capital
International.
PERFORMANCE OF INVESTMENT SUB-ADVISERS
MSAM manages portfolios of Morgan Stanley Institutional Fund, Inc. ("MSIF")
which served as models for the Aggressive Equity and Equity Growth Funds.
Similarly, the Value and Mid Cap Growth Funds were modeled after portfolios of
MAS Funds, which are currently managed by MAS. Each portfolio of MSIF (the "MSIF
Portfolios") and MAS Funds (the "MAS Portfolios") has substantially the same
investment objective, policies and strategies as its corresponding Fund. In
addition, the Adviser and the applicable Sub-Adviser intend each of the Funds to
be managed by the same personnel and to continue to have closely similar
investment strategies, techniques and characteristics as the corresponding MSIF
or MAS Portfolio. Past investment performance of the MSIF Portfolios and the MAS
Portfolios, as shown in the tables below, may be relevant to your consideration
of investment in a Fund. The investment performance of the MSIF Portfolios or
the MAS Portfolios is not necessarily indicative of future performance of the
Funds. Also, the operating expenses of the Funds will be different from, and may
be higher than, the operating expenses of the corresponding MSIF or MAS
Portfolio. The investment performance of the MSIF Portfolios and MAS Portfolios
are provided merely to indicate the experience of the respective Sub-Advisers in
managing similar investment portfolios.
The data set forth below under the heading "Return With Sales Charge" is
adjusted to reflect the Fund's projected operating expenses and (i) with respect
to the Class A shares, to take into account a maximum 5.75% initial sales charge
applicable to purchases of Class A shares of the Funds, (ii) with respect to
Class B shares, to take into account the applicable CDSC that is imposed if
Class B shares of the Funds are redeemed within the year of their purchase
indicated and (iii) with respect to the Class C shares, to take into account a
1.00% CDSC that is imposed if Class C shares of the Funds are redeemed within
one year of their purchase. The data set forth below under the heading "Return
Without Sales Charge" is adjusted to reflect the Fund's projected operating
expenses and not adjusted to take into account such sales charges.
49
<PAGE>
TOTAL RETURN FOR THE MSIF PORTFOLIO'S CLASS A SHARES
(A SEPARATE MUTUAL FUND FROM THE EQUITY GROWTH FUND)
FOR THE PERIOD ENDED JUNE 30, 1997
(ADJUSTED TO REFLECT PROJECTED OPERATING EXPENSES AND, WHERE INDICATED, THE
SALES CHARGES OF THE FUND)
<TABLE>
<CAPTION>
RETURN WITH SINCE
SALES CHARGE 1 YEAR 3 YEARS 5 YEARS INCEPTION(1)
- ------------------------------------------------------ --------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Class A............................................... 19.80% 28.99% 19.22% 16.64%
Class B............................................... 21.36% 30.54% 20.12% 17.42%
Class C............................................... 25.36% 31.12% 20.27% 17.42%
<CAPTION>
RETURN WITHOUT
SALES CHARGE
- ------------------------------------------------------
<S> <C> <C> <C> <C>
Class A............................................... 27.11% 31.56% 20.64% 17.75%
Class B............................................... 26.36% 31.12% 20.27% 17.42%
Class C............................................... 26.36% 31.12% 20.27% 17.42%
</TABLE>
- --------------
(1) Commenced Operations on April 2, 1991.
The past performance of the MSIF Portfolio is no guarantee of the future
performance of the Equity Growth Fund.
TOTAL RETURN FOR THE MAS PORTFOLIO FOR VALUE INSTITUTIONAL CLASS
(A SEPARATE MUTUAL FUND FROM THE VALUE FUND)
FOR THE PERIOD ENDED JUNE 30, 1997
(ADJUSTED TO REFLECT PROJECTED OPERATING EXPENSES AND, WHERE INDICATED, THE
SALES CHARGES OF THE FUND)
<TABLE>
<CAPTION>
RETURN WITH
SALES CHARGE 1 YEAR 5 YEARS 10 YEARS
- ------------------------------------------------------------------- --------- ----------- -----------
<S> <C> <C> <C>
Class A (of 5.75%)................................................. 27.19% 19.10% 15.18%
Class B (of 5.00%)................................................. 29.20% 20.00% 15.64%
Class C (of 1.00%)................................................. 33.20% 20.14% 15.64%
<CAPTION>
RETURN WITHOUT
SALES CHARGE
- -------------------------------------------------------------------
<S> <C> <C> <C>
Class A............................................................ 34.95% 20.52% 15.87%
Class B............................................................ 34.20% 20.14% 15.64%
Class C............................................................ 34.20% 20.14% 15.64%
</TABLE>
- --------------
The past performance of the MAS Portfolio for Value is no guarantee of the
future performance of the Value Fund.
50
<PAGE>
TOTAL RETURN FOR THE MAS PORTFOLIO FOR GROWTH INSTITUTIONAL CLASS
(A SEPARATE MUTUAL FUND FROM THE MID CAP FUND)
FOR THE PERIOD ENDED JUNE 30, 1997
(ADJUSTED TO REFLECT PROJECTED OPERATING EXPENSES AND, WHERE INDICATED, THE
SALES CHARGES OF THE FUND)
<TABLE>
<CAPTION>
RETURN WITH
SALES CHARGE 1 YEAR 5 YEARS SINCE INCEPTION(1)
- ---------------------------------------------------------- --------- ----------- -------------------
<S> <C> <C> <C>
Class A (of 5.75%)........................................ 0.66% 16.59% 14.05%
Class B (of 5.00%)........................................ 1.05% 17.42% 14.65%
Class C (of 1.00%)........................................ 5.05% 17.58% 14.65%
<CAPTION>
RETURN WITHOUT
SALES CHARGE
- ----------------------------------------------------------
<S> <C> <C> <C>
Class A................................................... 6.80% 17.98% 14.99%
Class B................................................... 6.05% 17.58% 14.65%
Class C................................................... 6.05% 17.58% 14.65%
</TABLE>
- --------------
(1) Commenced Operations on March 30, 1990.
The past performance of the MAS Portfolio for Growth is no guarantee of the
future performance of the Mid Cap Growth Fund.
DIVIDENDS AND DISTRIBUTIONS
Shareholders will automatically be credited with all dividends and
distributions in additional shares at net asset value, without payment of any
sales charge of the Funds, except that, upon written notice to the Company or by
checking off the appropriate box in the account application form, a shareholder
may elect to receive dividends and/or distributions in cash.
Each of the Equity Growth and Mid Cap Growth Funds expects to distribute
substantially all of its net investment income in the form of annual dividends
and each of the Aggressive Equity, American Value, U.S. Real Estate and Value
Funds expects to distribute substantially all of its net investment income in
the form of quarterly dividends. Each of the Funds expects to distribute net
realized gains, if any, annually. Confirmations of the purchase of shares of a
Fund through the automatic reinvestment of income dividends and capital gains
distributions will be provided, pursuant to Rule 10b-10(b) under the Securities
Exchange Act of 1934, as amended, on the next quarterly client statement
following such purchase of shares. Consequently, confirmations of such purchases
will not be provided at the time of completion of such purchases, as might
otherwise be required by Rule 10b-10.
Any undistributed net investment income and undistributed realized gains
increase a Fund's net assets for the purpose of calculating net asset value per
share. Therefore, on the "ex-dividend" or "ex-distribution" date, the net asset
value per share excludes the dividend or distribution (i.e., is reduced by the
per share amount of the dividend or distribution). Dividends and distributions
paid shortly after the purchase of shares by an investor, although in effect a
return of capital, are taxable to shareholders subject to tax.
Expenses of the Company allocated to a particular class of shares of a Fund
will be borne on a pro rata basis by each outstanding share of that class.
51
<PAGE>
TAXES
TAX STATUS OF THE FUNDS
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial
or administrative action, possibly with retroactive effect. See also the tax
sections in the Statement of Additional Information.
No attempt has been made to present a detailed explanation of the federal,
state or local income tax treatment of the Funds or their shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
Each of the Funds is generally treated as a separate entity for federal
income tax purposes, and thus the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), generally will be applied to each Fund
separately, rather than to the Company as a whole. Net long-term, mid-term and
short-term capital gains, net income and operating expenses therefore will be
determined separately for each Fund.
Each Fund intends to qualify for the special tax treatment afforded
"regulated investment companies" ("RICs") under Subchapter M of the Code so that
each will be relieved of federal income tax on that part of its net investment
income and net capital gain (the excess of net long-term capital gain over net
short-term capital loss less any available capital loss carryforward) which is
distributed to its shareholders.
TAX STATUS OF DISTRIBUTIONS AND DISPOSITIONS
Each Fund distributes substantially all of its net investment income
(including, for this purpose, net short-term capital gain), to its shareholders.
Dividends paid by a Fund from its net investment income will be taxable to the
shareholders of the Fund as ordinary income, whether received in cash or in
additional shares, if the shareholder is subject to tax. Dividends paid by a
Fund attributable to dividends received from shares of domestic corporations may
qualify for the dividends-received deduction for corporations.
Distributions of net capital gains ("capital gain dividends")are taxable to
shareholders subject to tax as long-term capital gains, regardless of how long
the shareholder has held a Fund's shares. Capital gain distributions are not
eligible for the corporate dividends-received deduction. Each Fund will make
annual reports to shareholders of the federal income tax status of all
distributions. For a summary of the tax rates applicable to capital gains
(including capital gain dividends), see the discussion below regarding the
Taxpayer Relief Act of 1997.
Each Fund intends to make sufficient distributions or deemed distributions
of its ordinary income and net capital gains prior to the end of each calendar
year to qualify as an RIC under the Code and to avoid liability for federal
income and excise taxes.
Dividends and other distributions declared in October, November and December
by a Fund payable as of a record date in such month and paid at any time during
January of the following year are treated as having been paid by the Fund and
received by the shareholders on December 31 of the year declared.
The sale, exchange or redemption of shares may result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the redemption proceeds exceeds or is less than the
shareholder's adjusted basis in the redeemed, exchanged or sold shares. If
capital gain dividends have been made with respect to shares that are sold at a
loss after being held for six months or less, then the loss
52
<PAGE>
is treated as a long-term capital loss to the extent of the capital gain
dividends. Shareholders may also be subject to state and local taxes on
distributions from the Funds.
Under the Taxpayer Relief Act of 1997 (the "1997 Tax Act"), the maximum tax
rates applicable to net capital gains recognized by individuals and other
non-corporate taxpayers are (i) the same as ordinary income rates for capital
assets held for one year or less, (ii) 28% for capital assets held for more than
one year but not more than 18 months and (iii) 20% for capital assets held for
more than 18 months. The maximum long-term capital gains rate for corporations
remains at 35%. Under the 1997 Tax Act, the Treasury is authorized to issue
regulations that address the application of the new capital gains rates to sales
and exchanges by RICs and to sales and exchanges of interests in RICs, but no
such regulations have been issued as of the date hereof. It is expected that the
new tax rates for capital gains under the 1997 Tax Act described above will
apply to distributions of capital gain dividends by the Funds as well as to
sales and exchanges of shares in the Funds. With respect to capital losses
recognized on dispositions of shares held six months or less where such losses
are treated as long-term capital losses to the extent of prior capital gain
dividends received on such shares (see discussion above regarding gains or
losses recognized on the sale or exchange of shares), it is unclear how such
capital losses offset the capital gains referred to above. Shareholders should
consult their own tax advisers as to the application of the new capital gains
rates to their particular circumstances.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS AND SHAREHOLDERS SHOULD CONSULT THEIR
OWN TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT
IN THE FUNDS.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Company was organized as a Maryland corporation on August 14, 1992. The
Amended Articles of Incorporation currently permit the Company to issue 27.375
billion shares of common stock, par value $.001 per share. Pursuant to the
Company's By-Laws, the Board of Directors may increase the number of shares the
Company is authorized to issue without the approval of the shareholders of the
Company. The Board of Directors has the power to designate one or more classes
of shares of common stock and to classify and reclassify any unissued shares
with respect to such classes.
The shares of each Fund, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. Except as
described herein, the shares have no preference as to conversion, exchange,
dividends, retirement or other features and have no preemptive rights. The
shares of the Funds have non-cumulative voting rights, which means that the
holders of more than 50% of the shares voting for the election of Directors can
elect 100% of the Directors if they choose to do so. Under Maryland law, the
Company is not required to hold an annual meeting of its shareholders unless
required to do so under the 1940 Act. Any person or organization owning 25% or
more of the outstanding shares of a Fund may be presumed to "control" (as that
term is defined in the 1940 Act) such Fund. As of October 16, 1997, no person or
organization owned 25% or more of the outstanding voting shares of any Fund.
REPORTS TO SHAREHOLDERS
The Company will send to its shareholders annual and semi-annual reports;
the financial statements appearing in annual reports are audited by independent
accountants.
53
<PAGE>
In addition, the Company or ACCESS will send to each shareholder having an
account directly with the Company a quarterly statement showing transactions in
the account, the total number of shares owned, and any dividends or
distributions paid. In addition, when a transaction occurs in a shareholder's
account, the Company or ACCESS will send the shareholder a confirmation
statement showing the same information.
CUSTODIAN
Domestic securities and cash are held by Chase, which is not an affiliate of
the Adviser, the Sub-Adviser or the Distributor. Morgan Stanley Trust Company,
Brooklyn, New York ("Morgan Stanley Trust"), 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 regulations of the
SEC for the purpose of providing custodial services for such assets. Morgan
Stanley Trust may also hold certain domestic assets for the Company. Morgan
Stanley Trust is an affiliate of the Adviser, the Sub-Adviser and the
Distributor. For more information on the custodians, see "General Information --
Custody Arrangements" in the Statement of Additional Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-9256, acts as dividend
disbursing and transfer agent for the Company.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, NY 10036,
serves as independent accountants for the Company and audits its annual
financial statements.
54
<PAGE>
APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. -- CORPORATE 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-edge." 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.
A-1
<PAGE>
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS:
AAA -- Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation and indicate an extremely strong capacity to pay principal
and interest.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only to a small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC -- Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
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.
A-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE DISTRIBUTOR. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER BY THE COMPANY OR THE DISTRIBUTOR TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 2
Fund Expenses............................................... 4
Financial Highlights........................................ 7
Investment Objectives and Policies.......................... 12
Additional Investment Information........................... 19
Investment Limitations...................................... 28
Management of the Company................................... 28
Purchase of Shares.......................................... 33
Shareholder Services........................................ 42
Redemption of Shares........................................ 45
Valuation of Shares......................................... 47
Portfolio Transactions...................................... 48
Performance Information..................................... 49
Dividends and Distributions................................. 51
Taxes....................................................... 52
General Information......................................... 53
Appendix A -- Description of Corporate Bond Ratings......... A-1
MORGAN STANLEY
AGGRESSIVE EQUITY FUND
AMERICAN VALUE FUND
EQUITY GROWTH FUND
MID CAP GROWTH FUND
U.S. REAL ESTATE FUND
VALUE FUND
PORTFOLIOS OF
MORGAN STANLEY
FUND, INC.
---------------
PROSPECTUS
---------------
INVESTMENT ADVISER
VAN KAMPEN
AMERICAN
CAPITAL INVESTMENT
ADVISORY CORP.
INVESTMENT SUB-ADVISERS
MORGAN STANLEY ASSET MANAGEMENT INC.
AND
MILLER ANDERSEN & SHERRERD, LLP
DISTRIBUTOR
VAN KAMPEN AMERICAN
CAPITAL DISTRIBUTORS, INC.
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
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
MORGAN STANLEY LATIN AMERICAN FUND
PORTFOLIOS OF THE
MORGAN STANLEY FUND, INC.
P.O. BOX 418256, KANSAS CITY, MISSOURI 64141
FOR INFORMATION CALL 1-800-282-4404
------------------
Morgan Stanley Fund, Inc. (the "Company") is an open-end management
investment company, or mutual fund, which consists of twenty-two investment
portfolios. This prospectus (the "Prospectus") describes the Class A, Class B
and Class C shares of the seven portfolios listed above (each a "Fund" and
together, the "Funds"). The Funds are designed to make available to retail
investors the expertise of Van Kampen American Capital Investment Advisory
Corp., the adviser (the "Adviser") and administrator (the "Administrator"), and
its affiliate, Morgan Stanley Asset Management Inc., the sub-adviser (the
"Sub-Adviser"), to the Funds. Shares are available through Van Kampen American
Capital Distributors, Inc. (the "Distributor") and through investment dealers,
banks and financial services firms that provide distribution, administrative or
shareholder services ("Participating Dealers"). As of the date of this
Prospectus, the Morgan Stanley Japanese Equity Fund is not offering shares.
This Prospectus is designed to set forth concisely the information about the
Funds that a prospective investor should know before investing and it should be
retained for future reference. Additional information about the Company is
contained in a "Statement of Additional Information," dated October 28, 1997,
which is incorporated herein by reference. The Company offers other portfolios
which are described in other prospectuses. The Statement of Additional
Information and the prospectuses pertaining to the other portfolios of the
Company are available upon request and without charge by writing or calling the
Company at the address and telephone number set forth above. The Statement of
Additional Information and other materials regarding the Company have been filed
with the Securities and Exchange Commission and are available at the
Commission's internet web site (http://www.sec.gov).
THE COMPANY'S SHARES ARE NOT OBLIGATIONS, DEPOSITS OR ACCOUNTS OF, OR
ENDORSED OR GUARANTEED BY, ANY BANK OR DEPOSITORY INSTITUTION, OR ANY AFFILIATES
OR CORRESPONDENTS THEREOF. THE COMPANY'S SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY. SHARES OF THE COMPANY INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS OCTOBER 28, 1997.
<PAGE>
PROSPECTUS SUMMARY
THE COMPANY
The Company currently consists of twenty-two portfolios which are designed
to offer investors a range of investment choices with Van Kampen American
Capital Investment Advisory Corp. (the "Adviser") providing services as adviser
and administrator and its affiliate, Morgan Stanley Asset Management Inc.
("MSAM" or the "Sub-Adviser"), providing services as the sub-adviser. Van Kampen
American Capital Distributors, Inc. (the "Distributor") provides services as
distributor to the Funds. For ease of reference, the words "Morgan Stanley,"
which begin the name of each portfolio, are not used throughout this Prospectus.
The investment objective of each Fund is as follows:
- The ASIAN GROWTH FUND seeks long-term capital appreciation through
investment primarily in equity securities of Asian issuers, excluding
Japan.
- The EMERGING MARKETS FUND seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
- The GLOBAL EQUITY FUND seeks long-term capital appreciation by investing
primarily in equity securities of issuers throughout the world, including
U.S. issuers.
- The GLOBAL EQUITY ALLOCATION FUND seeks long-term capital appreciation by
investing in equity securities of U.S. and non-U.S. issuers in accordance
with country weightings determined by the Sub-Adviser and with stock
selection within each country designed to replicate a broad market index.
- The INTERNATIONAL MAGNUM FUND seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers in accordance
with EAFE country weightings determined by the Sub-Adviser.
- The JAPANESE EQUITY FUND seeks long-term capital appreciation by investing
primarily in equity securities of Japanese issuers. As of the date of this
Prospectus, the Japanese Equity Fund is not offering shares.
- The LATIN AMERICAN FUND seeks long-term capital appreciation by investing
primarily in equity securities of Latin American issuers and investing in
debt securities issued or guaranteed by Latin American governments or
governmental entities.
RISK FACTORS
The investment policies of each Fund entail certain risks and considerations
of which an investor should be aware. The Funds described herein will invest in
securities of foreign issuers. Securities of foreign issuers are subject to
certain risks not typically associated with domestic securities. See "Additional
Investment Information -- Foreign Investment" for more information. The Asian
Growth, Emerging Markets, Latin American and International Magnum Funds invest
in securities of issuers located in developing or emerging market countries,
which may impose greater liquidity risks and other risks not typically
associated with investing in the more established markets of developed
countries. Investments in such emerging markets may be in small- to medium-sized
companies, which are more vulnerable to risks than larger corporations,
including a higher degree of liquidity, financial, price volatility and other
risks than investments in the securities of larger corporations. The Emerging
Markets and Latin American Funds may invest in lower rated and unrated debt
securities (including
2
<PAGE>
in the case of the Latin American Fund, sovereign debt) which are considered
speculative in nature and involve a high degree of risk. The Emerging Markets
Fund may invest in equity securities of Russian companies. The registration,
clearing and settlement of securities transactions in Russia are subject to
significant risks not normally associated with securities transactions in the
United States and other more developed markets. See "Additional Investment
Information -- Russian Securities Transactions."
The Funds may invest in forward foreign currency exchange contracts, and in
foreign currency exchange futures and options. The Emerging Markets and Latin
American Funds may engage in short selling. The Latin American Fund may borrow
money for leverage purposes. In addition, each Fund may invest in repurchase
agreements, borrow money, lend its portfolio securities, and purchase securities
on a when-issued or delayed delivery basis. Each Fund may invest in derivative
instruments including options and futures. Each Fund may invest in securities
that are neither listed on a stock exchange nor traded over-the-counter,
including private placement securities. Such securities may be less liquid than
publicly traded securities. There are also risks associated with the
non-diversified status of the Emerging Markets, International Magnum and Latin
American Funds. Each of these investment strategies involves specific risks
which are described under "Investment Objectives and Policies" and "Additional
Investment Information" herein and under "Investment Objectives and Policies" in
the Statement of Additional Information.
HOW TO INVEST
The Class A, Class B and Class C shares of the Funds are designed to provide
investors a choice of three ways to pay distribution costs. Class A shares of
the Funds are offered at net asset value plus a maximum initial sales charge of
5.75% which initial sales charge may be reduced on certain large purchases or
when combining purchases with the investor's aggregate investments in the
Participating Funds. Class B and Class C shares of the Funds are offered at net
asset value. Class B shares are subject to a contingent deferred sales charge
("CDSC") for redemptions within five years of purchase and are subject to higher
annual distribution-related expenses than the Class A shares. Class C shares are
subject to a CDSC for redemptions within one year of purchase and are subject to
higher annual distribution-related expenses than the Class A shares. See
"Purchase of Shares" for a discussion of reduction or waiver of sales charges,
which are available for certain investors. Share purchases may be made through
the Distributor, through Participating Dealers or by sending payments directly
to the Company. The minimum initial investment is $500 for each class of the
Fund, except that the minimum initial investment amount is reduced for certain
categories of investors. The minimum for subsequent investments is $25, except
that there is no minimum for automatic reinvestment of dividends and
distributions. See "Purchase of Shares."
HOW TO REDEEM
Shares of each Fund may be redeemed at any time at the net asset value per
share (less any applicable CDSC) of the Fund next determined after receipt of
the redemption request. The redemption price may be more or less than the
purchase price. See "Redemption of Shares."
3
<PAGE>
FUND EXPENSES
The following table illustrates all expenses and fees that a shareholder of
a Fund may incur:
<TABLE>
<CAPTION>
GLOBAL
ASIAN EMERGING GLOBAL EQUITY JAPANESE LATIN
GROWTH MARKETS EQUITY ALLOCATION INTERNATIONAL EQUITY AMERICAN
SHAREHOLDER TRANSACTION EXPENSES FUND FUND FUND FUND MAGNUM FUND FUND FUND
- ----------------------------------- ---------- ---------- ---------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)
Class A........................ 5.75%(1) 5.75%(1) 5.75%(1) 5.75%(1) 5.75%(1) 5.75%(1) 5.75%(1)
Class B........................ None None None None None None None
Class C........................ None None None None None None None
Maximum Deferred Sales Load (as a
percentage of the lesser of
initial purchase price or current
market value)
Class A
For Purchases up to
$999,999................... None None None None None None None
For Purchases of $1,000,000
or more.................... 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2)
Class B........................ 5.00%(3) 5.00%(3) 5.00%(3) 5.00%(3) 5.00%(3) 5.00%(3) 5.00%(3)
Class C........................ 1.00%(4) 1.00%(4) 1.00%(4) 1.00%(4) 1.00%(4) 1.00%(4) 1.00%(4)
Maximum Sales Load Imposed on
Reinvested Dividends
Class A........................ None None None None None None None
Class B........................ None None None None None None None
Class C........................ None None None None None None None
Redemption Fees
Class A........................ None None None None None None None
Class B........................ None None None None None None None
Class C........................ None None None None None None None
Exchange Fees
Class A........................ None None None None None None None
Class B........................ None None None None None None None
Class C........................ None None None None None None None
</TABLE>
- ------------------
(1) Percentage shown is the maximum sales load. Certain large purchases may be
subject to a reduced sales load.
(2) Purchases of Class A shares of the Funds which, when combined with the net
asset value of the purchaser's existing investments in Class A shares of the
Participating Funds (as defined under "Purchase of Shares -- Quantity
Discounts"), aggregate to $1 million or more are not subject to an initial
sales load (an "initial sales charge"). A contingent deferred sales charge
("CDSC") of 1.00% will be imposed, however, on shares from any such purchase
that are redeemed within one year following such purchase. Certain other
purchases are not subject to an initial sales charge. See "Purchase of
Shares."
(3) Percentage shown is the maximum CDSC. Purchases of Class B shares of the
Funds are subject to a maximum CDSC of 5.00% which decreases in steps to
0.00% after five years. See "Purchase of Shares."
(4) Purchases of Class C shares of the Funds are subject to a CDSC of 1.00% for
redemptions made within one year of purchase. See "Purchase of Shares."
4
<PAGE>
<TABLE>
<CAPTION>
GLOBAL
ANNUAL FUND OPERATING EXPENSES ASIAN EMERGING GLOBAL EQUITY INTERNATIONAL JAPANESE LATIN
(AS A PERCENTAGE OF AVERAGE GROWTH MARKETS EQUITY ALLOCATION MAGNUM EQUITY AMERICAN
DAILY NET ASSETS) FUND FUND FUND FUND FUND FUND FUND
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment Advisory Fee (after
expense reimbursement and/or
fee waiver) (5)
Class A..................... 1.00% 0.99% 1.00% 0.80% 0.00% 0.80% 0.58%
Class B..................... 1.00% 0.99% 1.00% 0.80% 0.00% 0.80% 0.58%
Class C..................... 1.00% 0.99% 1.00% 0.80% 0.00% 0.80% 0.58%
12b-1 Distribution and Service
Fees
Class A (6)................. 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Class B (6)................. 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Class C (6)................. 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Other Expenses (after expense
reimbursement and/or fee
waiver) (5)
Class A..................... 0.59% 0.91% 0.55% 0.65% 1.40% 0.65% 1.27%
Class B..................... 0.59% 0.91% 0.55% 0.65% 1.40% 0.65% 1.27%
Class C..................... 0.59% 0.91% 0.55% 0.65% 1.40% 0.65% 1.27%
Total Operating Expenses (after
expense reimbursement and/or
fee waiver) (5)
Class A..................... 1.84% 2.15% 1.80% 1.70% 1.65% 1.70% 2.10%
Class B..................... 2.59% 2.90% 2.55% 2.45% 2.40% 2.45% 2.85%
Class C..................... 2.59% 2.90% 2.55% 2.45% 2.40% 2.45% 2.85%
</TABLE>
- ------------------
(5) The Adviser has agreed to waive a portion of its advisory fees and/or to
reimburse a portion of expenses of the Funds, if necessary, if such fees
would cause the total annual operating expenses of the Funds, as a
percentage of average daily net assets, to exceed the percentages set forth
in the table above. The following table sets forth for each Fund investment
advisory fees and expected total operating expenses absent fee waivers
and/or expense reimbursements. The Adviser in its discretion may terminate
voluntary fee waivers and/or reimbursements at any time. Absent the waiver
of fees or reimbursement of expenses, the amounts in the examples below
would be greater.
<TABLE>
<CAPTION>
INVESTMENT TOTAL
ADVISORY FEES OPERATING EXPENSES
----------------- ----------------------------------------
(ALL CLASSES) CLASS A CLASS B CLASS C
----------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Asian Growth Fund.................. 1.00% 1.84% 2.59% 2.59%
Emerging Markets Fund.............. 1.25% 2.41% 3.17% 3.17%
Global Equity Fund................. 1.00% 1.80% 2.55% 2.55%
Global Equity Allocation Fund...... 1.00% 1.90% 2.65% 2.65%
International Magnum Fund.......... 0.80% 2.50% 3.34% 3.45%
Japanese Equity Fund............... 1.00% 1.90% 2.65% 2.65%
Latin American Fund................ 1.25% 2.77% 3.55% 3.56%
</TABLE>
For further information on Company expenses, see "Management of the Company."
(6) Of the 12b-1 distribution and service fees for the Class A shares, 0.25%
represents a shareholder services fee, and for the Class B shares and the
Class C shares, 0.75% represents a distribution fee and 0.25% represents a
shareholder services fee. See "Management of the Company--Distributor."
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted as a Fund-level expense by the
Conduct Rules of the National Association of Securities Dealers, Inc.
("NASD").
The purpose of the above table is to assist the investor in understanding
the various expenses that an investor in a Fund will bear directly or
indirectly. The expenses and fees for the Asian Growth, Emerging Markets, Global
Equity Allocation, International Magnum and Latin American Funds are based on
actual figures for the fiscal year ended June 30, 1997. The expenses and fees
for the Global Equity and Japanese Equity Funds are based on the advisory
agreements, the 12b-1 plans and estimates of other expenses because the Funds
had not commenced investment operations as of June 30, 1997.
5
<PAGE>
The following examples illustrate the expenses that you would pay on a
$1,000 investment, assuming a 5% annual rate of return and redemption at the end
of each time period as indicated, in (i) Class A shares of each Fund, including
the maximum 5.75% initial sales charge, (ii) Class B shares of each Fund, which
have a CDSC, but no initial sales charge and (iii) Class C shares of each Fund,
which have a CDSC, but no initial sales charge.
<TABLE>
<CAPTION>
GLOBAL
ASIAN EMERGING GLOBAL EQUITY JAPANESE LATIN
GROWTH MARKETS EQUITY ALLOCATION INTERNATIONAL EQUITY AMERICAN
SHAREHOLDER TRANSACTION EXPENSES FUND FUND FUND FUND MAGNUM FUND FUND FUND
- -------------------------------- ---------- ---------- ---------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Class A shares
1 Year...................... $ 75(1) $ 78(1) $ 75(1) $ 74(1) $ 73(1) $ 74(1) $ 78(1)
3 Years..................... 112 121 111 108 107 108 120
5 Years..................... 151 166 * 144 142 * 164
10 Years.................... 261 291 * 247 242 * 287
Class B shares
(Assuming complete redemption
at end of period)
1 Year...................... 76 79 76 75 74 75 79
3 Years..................... 111 120 109 106 105 106 118
5 Years..................... 153 168 * 146 143 * 165
10 Years (2)................ 274 304 * 260 255 * 299
(Assuming no redemption)
1 Year...................... 26 29 26 25 24 25 29
3 Years..................... 81 90 79 76 75 76 88
5 Years..................... 138 153 * 131 128 * 150
10 Years (2)................ 274 304 * 260 255 * 299
Class C shares
(Assuming complete redemption
immediately prior to the end of
period)
1 Year...................... 36 39 36 35 34 35 39
3 Years..................... 81 90 79 76 75 76 88
5 Years..................... 138 153 * 131 128 * 150
10 Years.................... 292 322 * 279 274 * 318
Class C shares
(Assuming no redemption)
1 Year...................... 27 29 26 25 24 25 29
3 Years..................... 81 90 79 76 75 76 88
5 Years..................... 138 153 * 131 128 * 150
10 Years.................... 292 322 * 279 274 * 318
</TABLE>
- ------------------
* Because the Global Equity and Japanese Equity Funds were either not
operational or had recently become operational as of the date of this
Prospectus, the Funds have not projected expenses beyond the three-year
period shown.
(1) The example reflects Class A shares sold at the maximum 5.75% initial sales
charge. Certain large purchases may be subject to a reduced initial sales
charge. Purchases of Class A shares of the Funds which, when combined with
the net asset value of the purchaser's existing investments in Class A
shares of the Participating Funds, aggregate to $1 million or more are not
subject to an initial sales charge but a CDSC of 1.00% will be imposed on
such shares that are redeemed within one year following such purchase.
(2) The expenses shown reflect that Class B shares automatically convert to
Class A shares after eight years.
THE FOREGOING EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
6
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables provide financial highlights for the Class A, Class B
and Class C shares of the Asian Growth, Emerging Markets, Global Equity
Allocation, International Magnum and Latin American Funds for each of the
periods presented. The financial highlights are part of the Company's financial
statements, which appear in the Company's June 30, 1997 Annual Report to
Shareholders. The financial statements are incorporated into the Company's
Statement of Additional Information. The foregoing Funds' financial highlights
for the periods presented have been audited by Price Waterhouse LLP, whose
report thereon (which was unqualified) is incorporated into the Statement of
Additional Information. Additional performance information about the Company is
contained in the Company's Annual Report. The Annual Report and the Statement of
Additional Information are available at no cost from the Company at the address
and telephone number noted on the cover page of this Prospectus. The following
information should be read in conjunction with the financial statements and
notes thereto. Financial highlights are not presented for the Global Equity and
Japanese Equity Funds because they had not commenced investment operations as of
June 30, 1997.
7
<PAGE>
FINANCIAL HIGHLIGHTS
ASIAN GROWTH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------------------------------------------- -----------------------
JUNE 23, AUGUST 1,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993* YEAR ENDED 1995+ TO
JUNE 30, JUNE 30, JUNE 30, JUNE 30, TO JUNE JUNE 30, JUNE 30,
SELECTED PER SHARE DATA AND RATIOS 1997 1996 1995 1994 30, 1993 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 17.15 $ 16.42 $ 15.50 $ 12.00 $ 12.00 $ 16.81 $ 16.51
---------- ---------- ---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (0.06) (0.04) -- (0.03) -- (0.16) (0.03)
Net Realized and Unrealized Gain
(Loss) (0.14) 0.77 1.43 3.53 -- (0.15) 0.33
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total From Investment Operations (0.20) 0.73 1.43 3.50 -- (0.31) 0.30
---------- ---------- ---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS
Net Realized Gain -- -- (0.49) -- -- -- --
In Excess of Net Realized Gain (0.33) -- (0.02) -- -- (0.33) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
(0.33) -- (0.51) -- -- (0.33) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $ 16.62 $ 17.15 $ 16.42 $ 15.50 $ 12.00 $ 16.17 $ 16.81
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL RETURN (1) (1.10)% 4.45% 9.50% 29.17% 0.00% (1.79)% 1.82%
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 175,440 $ 248,009 $ 178,667 $ 138,212 $ 11,770 $ 62,786 $ 52,853
Ratio of Expenses to Average Net
Assets 1.84% 1.88% 1.90% 1.90% 1.90%** 2.59% 2.61%**
Ratio of Net Investment Income
(Loss) to
Average Net Assets (0.31)% (0.16)% 0.04% (0.24)% (0.81)%** (1.04)% (0.52)%**
Portfolio Turnover Rate 74% 38% 34% 34% 0% 74% 38%
Average Commission Rate #
Per Share $ 0.0110 N/A N/A N/A N/A $ 0.0110 N/A
As a Percentage of Trade Amount 0.51% N/A N/A N/A N/A 0.51% N/A
- -----------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Loss -- -- -- $ 0.03 $ 0.01 -- --
Ratios Before Expense Limitation:
Expenses to Average Net Assets -- -- -- 2.17% 11.83%** -- --
Net Investment Income (Loss) to
Average Net Assets -- -- -- (0.51)% (10.74)%** -- --
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for a periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose the average commission rate per share it paid for trades on which
commissions were charged.
8
<PAGE>
FINANCIAL HIGHLIGHTS CONTINUED
ASIAN GROWTH FUND
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------------------
JUNE 23,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993*
JUNE 30, JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
SELECTED PER SHARE DATA AND RATIOS 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.78 $ 16.19 $ 15.40 $ 12.00 $ 12.00
----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (0.21) (0.13) (0.12) (0.10) --
Net Realized and Unrealized Gain
(Loss) (0.10) 0.72 1.42 3.50 --
----------- ----------- ----------- ----------- -----------
Total From Investment Operations (0.31) 0.59 1.30 3.40 --
----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Realized Gain -- -- (0.49) -- --
In Excess of Net Realized Gain (0.33) -- (0.02) -- --
----------- ----------- ----------- ----------- -----------
(0.33) -- (0.51) -- --
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 16.14 $ 16.78 $ 16.19 $ 15.40 $ 12.00
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
TOTAL RETURN (1) (1.79)% 3.64% 8.71% 28.33% 0.00%
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 114,460 $ 168,070 $ 139,497 $ 116,889 $ 8,491
Ratio of Expenses to Average Net
Assets 2.59% 2.63% 2.63% 2.65% 2.65%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (1.06)% (0.94)% (0.77)% (0.99)% (1.56)%**
Portfolio Turnover Rate 74% 38% 34% 34% 0%
Average Commission Rate #
Per Share $ 0.0110 N/A N/A N/A N/A
As a Percentage of Trade Amount 0.51% N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Loss -- -- -- $ 0.03 $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets -- -- -- 2.92% 12.64%**
Net Investment Income (Loss) to
Average Net Assets -- -- -- (1.26)% (11.55)%**
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for a periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose the average commission rate per share it paid for trades on which
commissions were charged.
9
<PAGE>
FINANCIAL HIGHLIGHTS CONTINUED
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------------- ----------------------------
JULY 6, AUGUST 1,
YEAR ENDED YEAR ENDED 1994* YEAR ENDED 1995+ TO
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
SELECTED PER SHARE DATA AND RATIOS 1997 1996 1995 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.06 $ 10.61 $ 12.00 $ 11.94 $ 10.91
----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.01 0.05 0.05 (0.03) 0.01
Net Realized and Unrealized Gain
(Loss) 1.57 1.44 (1.44) 1.50 1.02
----------- ----------- ----------- ----------- -----------
Total From Investment Operations 1.58 1.49 (1.39) 1.47 1.03
----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income -- (0.04) -- -- --
In Excess of Net Investment Income (0.04) -- -- (0.04) --
Net Realized Gain (0.13) -- -- (0.13) --
----------- ----------- ----------- ----------- -----------
Total Distributions (0.17) (0.04) -- (0.17) --
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 13.47 $ 12.06 $ 10.61 $ 13.24 $ 11.94
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
TOTAL RETURN (1) 13.54% 14.16% (11.58)% 12.67% 9.45%
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 119,022 $ 114,850 $ 26,091 $ 35,966 $ 10,416
Ratio of Expenses to Average Net Assets 2.21% 2.16% 2.33%** 2.96% 2.91%**
Ratio of Net Investment Income (Loss) to
Average Net Assets (0.06)% 0.93% 0.81%** (0.64)% 0.30%**
Portfolio Turnover Rate 82% 42% 32% 82% 42%
Average Commission Rate #
Per Share $ 0.0007 N/A N/A $ 0.0007 N/A
As a Percentage of Trade Amount 0.39% N/A N/A 0.39% N/A
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation
During the Period
Per Share Benefit to Net Investment
Income $ 0.03 $ 0.02 $ 0.04 $ 0.01 $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.41% 2.56% 3.10%** 3.17% 3.31%**
Net Investment Income (Loss) to
Average Net Assets (0.27)% 0.53% 0.04%** (0.87)% (0.10)%**
Ratio of Expenses to Average Net Assets
excluding country tax expense 2.15% 2.15% 2.15%** 2.90% 2.90%**
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for periods of less than one year are not annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose the average commission rate per share it paid for trades on which
commissions were charged.
10
<PAGE>
FINANCIAL HIGHLIGHTS CONTINUED
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
CLASS C
---------------------------------------------------------------
YEAR ENDED YEAR ENDED JULY 6, 1994* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.93 10.53 $ 12.00
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.08) (0.01) --
Net Realized and Unrealized Gain
(Loss) 1.55 1.41 (1.47)
------- ------- -------
Total From Investment Operations 1.47 1.40 (1.47)
------- ------- -------
DISTRIBUTIONS
Net Investment Income -- -- --
In Excess of Net Investment Income (0.01) -- --
Net Realized Gain (0.13) -- --
------- ------- -------
Total Distributions (0.14) -- --
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 13.26 $ 11.93 $ 10.53
------- ------- -------
------- ------- -------
TOTAL RETURN (1) 12.66% 13.30% (12.25)%
------- ------- -------
------- ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 57,958 $ 43,601 $ 22,245
Ratio of Expenses to Average Net
Assets 2.96% 2.91% 3.08%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.79)% (0.11)% 0.06%**
Portfolio Turnover Rate 82% 42% 32%
Average Commission Rate #
Per Share $ 0.0007 N/A N/A
As a Percentage of Trade Amount 0.39% N/A N/A
- ---------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.02 $ 0.03 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.17% 3.34% 3.90%**
Net Investment Income (Loss) to
Average Net Assets (1.00)% (0.54)% (0.76)%**
Ratio of Expenses to Average Net
Assets excluding country tax
expense 2.90% 2.90% 2.90%**
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for periods of less than one year are not annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose the average commission rate per share if paid for trades on which
commissions were charged.
11
<PAGE>
FINANCIAL HIGHLIGHTS CONTINUED
GLOBAL EQUITY ALLOCATION FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------------------------------------------- -----------------------
JANUARY 4, AUGUST 1,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993* YEAR ENDED 1995+
JUNE 30, JUNE 30, JUNE 30, JUNE 30, TO JUNE JUNE 30, TO JUNE
SELECTED PER SHARE DATA AND RATIOS 1997 1996 1995 1994 30, 1993 1997 30, 1996
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.75 $ 12.60 $ 11.99 $ 11.09 $ 10.00 $ 14.46 $ 13.01
---------- ---------- ---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.10 0.19 0.12 0.10 0.04 (0.05) 0.30
Net Realized and Unrealized Gain
(Loss) 2.76 2.82 0.67 0.90 1.05 2.73 1.98
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total From Investment Operations 2.86 3.01 0.79 1.00 1.09 2.68 2.28
---------- ---------- ---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS
Net Investment Income (0.55) (0.39) -- (0.03) -- (0.50) (0.35)
In Excess of Net Investment Income -- -- (0.05) -- -- -- --
Net Realized Gain (0.49) (0.47) (0.13) (0.07) -- (0.49) (0.48)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Distributions (1.04) (0.86) (0.18) (0.10) -- (0.99) (0.83)
---------- ---------- ---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $ 16.57 $ 14.75 $ 12.60 $ 11.99 $ 11.09 $ 16.15 $ 14.46
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL RETURN (1) 20.61% 24.62% 6.69% 9.02% 10.90% 19.64% 18.08%
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 72,704 $ 63,706 $ 42,586 $ 33,425 $ 10,434 $ 38,962 $ 14,786
Ratio of Expenses to Average Net Assets 1.70% 1.70% 1.70% 1.70% 1.70%** 2.45% 2.45%**
Ratio of Net Investment Income to
Average Net Assets 0.59% 0.71% 1.01% 0.98% 1.04%** (0.11)% 0.45%**
Portfolio Turnover Rate 45% 44% 39% 30% 14% 45% 44%
Average Commission Rate #
Per Share $0.0021 N/A N/A N/A N/A $0.0021 N/A
As a Percentage of Trade Amount 0.83% N/A N/A N/A N/A 0.83% N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation
During the Period
Per Share Benefit to Net Investment
Income $ 0.03 $ 0.10 $ 0.04 $ 0.09 $ 0.08 $ 0.09 $ 0.22
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.90% 2.06% 2.03% 2.58% 3.65%** 2.65% 2.81%**
Net Investment Income (Loss) to
Average Net Assets 0.40% 0.35% 0.68% 0.10% (0.91)%** (0.30)% 0.09%**
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return to calculated exclusive of sales charges or deferred sales
charges. Total returns for periods of less than one year are not annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose the average commission rate per share if paid for trades on which
commissions were charged.
12
<PAGE>
FINANCIAL HIGHLIGHTS CONTINUED
GLOBAL EQUITY ALLOCATION FUND
<TABLE>
<CAPTION>
CLASS C
--------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED JANUARY 4, 1993*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994 TO JUNE 3, 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.49 $ 12.43 $ 11.90 $ 11.05 $10.00
------------- ------------- ------------- ------------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.03) 0.12 0.04 0.06 0.01
Net Realized and Unrealized Gain (Loss) 2.73 2.75 0.65 0.86 1.04
------------- ------------- ------------- ------------- ------
Total From Investment Operations 2.70 2.87 0.69 0.92 1.05
------------- ------------- ------------- ------------- ------
DISTRIBUTIONS
Net Investment Income (0.46) (0.33) -- -- --
In Excess of Net Investment Income -- -- (0.03) -- --
Net Realized Gain (0.49) (0.48) (0.13) (0.07) --
------------- ------------- ------------- ------------- ------
Total Distributions (0.95) (0.81) (0.16) (0.07) --
------------- ------------- ------------- ------------- ------
NET ASSET VALUE, END OF PERIOD $ 16.24 $ 14.49 $ 12.43 $ 11.90 $11.05
------------- ------------- ------------- ------------- ------
------------- ------------- ------------- ------------- ------
TOTAL RETURN (1) 19.69% 23.65% 5.84% 8.34% 10.50%
------------- ------------- ------------- ------------- ------
------------- ------------- ------------- ------------- ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $78,199 $63,025 $40,460 $29,892 $6,995
Ratio of Expenses to Average Net Assets 2.45% 2.45% 2.45% 2.45% 2.45%**
Ratio of Net Investment Income to Average Net
Assets (0.16)% (0.04)% 0.25% 0.23% 0.29%**
Portfolio Turnover Rate 45% 44% 39% 30% 14%
Average Commission Rate #
Per Share $0.0021 N/A N/A N/A N/A
As a Percentage of Trade Amount 0.83% N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During
the Period
Per Share Benefit to Net Investment Income $ 0.03 $ 1.16 $ 0.05 $ 0.12 $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.65% 2.81% 2.78% 3.34% 4.40%**
Net Investment Income (Loss) to Average Net
Assets (0.34)% (0.40)% (0.08)% (0.66)% (1.66)%**
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for a periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose the average commission rate per share it paid for trades on which
commissions were charged.
13
<PAGE>
FINANCIAL HIGHLIGHTS CONTINUED
INTERNATIONAL MAGNUM FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
---------------- ---------------- ----------------
JULY 1, 1996* TO JULY 1, 1996* TO JULY 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1997 JUNE 30, 1997
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.00 $ 12.00 $ 12.00
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.17 0.10 0.06
Net Realized and Unrealized Gain 1.88 1.85 1.88
------- ------- -------
Total From Investment Operations 2.05 1.95 1.94
------- ------- -------
DISTRIBUTION:
Net Investment Income (0.13) (0.10) (0.10)
Net Realized Gain (0.01) (0.01) (0.01)
------- ------- -------
Total Distributions (0.14) (0.11) (0.11)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 13.91 $ 13.84 $ 13.83
------- ------- -------
------- ------- -------
TOTAL RETURN (1) 17.30% 16.40% 16.27%
------- ------- -------
------- ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $21,961 $18,215 $ 9,156
Ratio of Expenses to Average Net Assets 1.65% 2.40% 2.40%
Ratio of Net Investment Income to Average Net Assets 1.39% 0.54% 0.29%
Portfolio Turnover Rate 22% 22% 22%
Average Commission Rate #
Per Share $0.0318 $0.0318 $0.0318
As a Percentage of Trade Amount 0.33% 0.33% 0.33%
- ------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the Period
Per Share Benefit to Net Investment Income $ 0.11 $ 0.17 $ 0.21
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.50% 3.34% 3.45%
Net Investment Income (Loss) to Average Net Assets 0.52% (0.42)% (0.77)%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
(1) Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for periods of less than one year are not annualized.
14
<PAGE>
FINANCIAL HIGHLIGHTS CONTINUED
LATIN AMERICAN FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------------- ----------------------------------
YEAR ENDED YEAR ENDED JULY 6, 1994* YEAR ENDED AUGUST 1, 1995+ TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1997 JUNE 30, 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.63 $ 9.08 $ 12.00 $ 12.45 $ 9.58
------------- ------------- ------------- ------------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.02 0.10 (0.02) (0.03) 0.03
Net Realized and Unrealized Gain (Loss) 6.46 3.47 (2.70) 6.28 2.84
------------- ------------- ------------- ------------- ------
Total From Investment Operations 6.48 3.57 (2.72) 6.25 2.87
------------- ------------- ------------- ------------- ------
DISTRIBUTIONS
Net Investment Income -- (0.02) -- -- --
In Excess of Net Investment Income (0.09) -- -- (0.08) --
Net Realized Gain (1.63) -- -- (1.63) --
Return of Capital -- -- (0.20) -- --
------------- ------------- ------------- ------------- ------
Total Distributions (1.72) (0.02) (0.20) (1.71) --
------------- ------------- ------------- ------------- ------
NET ASSET VALUE, END OF PERIOD $ 17.39 $ 12.63 $ 9.08 $ 16.99 $12.45
------------- ------------- ------------- ------------- ------
------------- ------------- ------------- ------------- ------
TOTAL RETURN (1) 57.32% 39.35% (23.07)% 56.17% 29.26%
------------- ------------- ------------- ------------- ------
------------- ------------- ------------- ------------- ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 84,401 $18,701 $ 7,658 $14,314 $2,041
Ratio of Expenses to Average Net Assets 2.24% 2.11% 2.46%** 2.99% 2.87%**
Ratio of Net Investment Income (Loss) to
Average Net Assets (0.08)% 1.18% (0.44)%** (0.78)% 0.88%**
Portfolio Turnover Rate 241% 131% 107% 241% 131%
Average Commission Rate #
Per Share $ 0.0006 N/A N/A $0.0006 N/A
As a Percentage of Trade Amount 0.31% N/A N/A 0.31% N/A
- ---------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During
the Period
Per Share Benefit to Net Investment Income $ 0.10 $ 0.09 $ 0.13 $ 0.02 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.77% 3.28% 4.30%** 3.55% 3.89%**
Net Investment Income (Loss) to Average Net
Assets (0.61)% 0.01% (2.26)%** (1.34)% (0.14)%**
Ratio of Expenses to Average Net Assets
excluding country tax expense 2.10% 2.10% 2.10%** 2.85% 2.85%**
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995
(1) Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for periods of less than one year are not annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose the average commission rate per share it paid for trades on which
commissions were charged.
15
<PAGE>
FINANCIAL HIGHLIGHTS CONTINUED
LATIN AMERICAN FUND
<TABLE>
<CAPTION>
CLASS C
---------------------------------------------
YEAR ENDED YEAR ENDED JULY 6, 1994*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.43 $ 8.99 $ 12.00
------------- ------ -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (0.07) 0.04 (0.08)
Net Realized and Unrealized Gain (Loss) 6.31 3.40 (2.73)
------------- ------ -------------
Total From Investment Operations 6.24 3.44 (2.81)
------------- ------ -------------
DISTRIBUTIONS
Net Investment Income -- -- --
In Excess of Net Investment Income (0.03) -- --
Net Realized Gain (1.63) -- --
Return of Capital -- -- (0.20)
------------- ------ -------------
Total Distributions (1.66) -- (0.20)
------------- ------ -------------
NET ASSET VALUE, END OF PERIOD $ 17.01 $12.43 $ 8.99
------------- ------ -------------
------------- ------ -------------
TOTAL RETURN (1) 56.04% 38.26% (23.83)%
------------- ------ -------------
------------- ------ -------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $20,345 $6,780 $ 4,085
Ratio of Expenses to Average Net Assets 2.99% 2.86% 3.20%**
Ratio of Net Investment Income (Loss) to Average
Net Assets (0.79)% 0.42% (1.16)%**
Portfolio Turnover Rate 241% 131% 107%
Average Commission Rate #
Per Share $0.0006 N/A N/A
As a Percentage of Trade Amount 0.31% N/A N/A
- -------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the
Period
Per Share Benefit to Net Investment Income $ 0.05 $ 0.12 $ 0.12
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.56% 4.06% 5.20%**
Net Investment Income (Loss) to Average Net
Assets (1.36)% (0.78)% (3.16)%**
Ratio of Expenses to Average Net Assets excluding
country tax expense 2.85% 2.85% 2.85%**
- -------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995
(1) Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for periods of less than one year are not annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose the average commission rate per share it paid for trades on which
commissions were charged.
16
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Fund is described below, together with the
policies the Fund employs in its efforts to achieve its objective. Each Fund's
investment objective is a fundamental policy which may not be changed by the
Fund without the approval of a majority of the Fund's outstanding voting
securities. There is no assurance that a Fund will attain its objective. The
investment policies described below are not fundamental policies and may be
changed without shareholder approval. For each of the Funds, other than the
Japanese Equity and Latin American Funds, equity securities include common and
preferred stocks, convertible securities, and rights and warrants to purchase
common stocks. For more information about certain investment practices of the
Funds, see "Additional Investment Information" below and "Investment Objectives
and Policies" in the Statement of Additional Information.
THE ASIAN GROWTH FUND
The investment objective of the Asian Growth Fund is long-term capital
appreciation through investment primarily in equity securities of Asian issuers,
excluding Japan. The production of any current income is incidental to this
objective. The Fund seeks to achieve its objective by investing, under normal
market conditions, at least 65% of the value of its total assets in equity
securities which are traded on recognized stock exchanges of the countries in
Asia described below and in equity securities of companies organized under the
laws of an Asian country whose business is conducted principally in Asia. The
Fund does not intend to invest in securities which are primarily traded in
markets in Japan or in companies organized under the laws of Japan. The Fund may
also invest in sponsored or unsponsored depositary receipts, including American
Depositary Receipts ("ADRs") of Asian issuers that are traded on stock exchanges
in the United States.
The Asian Growth Fund will invest in countries having more established
markets in the Asian region. The Asian countries to be represented in the Fund
will consist of three or more of the following countries: Hong Kong (China),
Singapore, Malaysia, Thailand, the Philippines and Indonesia. The Fund may also
invest in common stocks traded on markets in mainland China, Taiwan, South
Korea, India, Pakistan, Sri Lanka and other developing markets that are open to
foreign investment. There is no requirement that the Fund, at any given time,
invest in any one particular country or in all of the countries listed above or
in any other Asian countries. Allocation of investments among the various
countries will depend on the relative attractiveness of the stocks of issuers in
the respective countries. Government regulation and restrictions in many of the
countries of interest may limit the amount, mode and extent of investment in
companies in such countries.
The Sub-Adviser's approach in selecting investments for the Asian Growth
Fund is oriented to individual stock selection and is value driven. In selecting
stocks for the Fund, the Sub-Adviser initially identifies those stocks which it
believes to be undervalued in relation to the issuer's assets, cash flow,
earnings and revenues, and then evaluates the future value of such stocks by
running the results of an in-depth study of the issuer through a dividend
discount model. The Sub-Adviser utilizes the research of a number of sources,
including its affiliate in Geneva, Switzerland, Morgan Stanley Capital
International ("MSCI"), in identifying attractive securities, and applies a
number of proprietary screening criteria to identify those securities it
believes to be undervalued. Fund holdings are regularly reviewed and subjected
to fundamental analysis to determine whether they continue to conform to the
Sub-Adviser's value criteria. Those which no longer conform are sold. In
selecting industries and particular issuers, the Sub-Adviser will evaluate costs
of labor and raw materials, access to technology, export of products and
government regulation, as well as the assets, revenues and earnings of issuers.
Although the Fund seeks to invest in larger companies, it may invest in small-
and medium-sized
17
<PAGE>
companies that, in the Sub-Adviser's view, have potential for growth. The Fund
may invest in equity securities of smaller capitalized companies, which may
involve a higher degree of risk and price volatility than investment in
securities of larger companies. The Fund's investments will include securities
of issuers located in developing countries and traded in emerging markets. These
securities pose greater liquidity risks and other risks than securities of
companies located in developed countries and traded in more established markets.
Although the Asian Growth Fund intends to invest primarily in securities
listed on stock exchanges, it may also invest in securities traded in
over-the-counter markets and, to a limited extent, in non-publicly traded
securities. Securities traded in over-the-counter markets and non-publicly
traded securities pose liquidity risks.
Under normal circumstances, at least 65% of the total assets of the Asian
Growth Fund will be invested in equity securities of issuers in Asian countries,
excluding Japan. Any remaining assets of the Fund will be kept in any
combination of debt instruments, bills and bonds of governmental entities in
Asia and the United States, in notes, debentures, and bonds of companies in Asia
and in money market instruments in the United States. Debt securities
convertible into common stocks will be investment grade (rated in one of the
four highest rating categories by an internationally recognized statistical
rating organization) or, if unrated, will be of comparable quality as determined
by the Sub-Adviser under the supervision of the Board of Directors. Pending
investment or settlement, and for liquidity purposes, the Fund may invest in
domestic, Eurodollar and foreign short-term money market instruments. For
temporary defensive purposes, the Fund may invest in money market instruments
and short- and medium-term debt securities that the Sub-Adviser believes to be
of high quality or hold cash. The Fund may enter into forward foreign currency
exchange contracts and invest in derivative instruments. Because of the lack of
hedging facilities in the currency markets of Asia, no active currency hedging
strategy is anticipated currently. Instead, each investment will be considered
on a total currency adjusted basis with the U.S. Dollar as a base currency.
For further information about the foregoing and certain additional
investment practices of the Asian Growth Fund, see "Additional Investment
Information" below.
THE EMERGING MARKETS FUND
The investment objective of the Emerging Markets Fund is to provide
long-term capital appreciation by investing primarily in equity securities of
emerging country issuers. Under normal conditions, at least 65% of the Fund's
total assets will be invested in emerging country equity securities. As used in
this Prospectus, the term "emerging markets" applies to any country which, in
the opinion of the Sub-Adviser, is generally considered to be an emerging or
developing country by the international financial community, including the
International Bank for Reconstruction and Development (more commonly known as
The World Bank) and the International Finance Corporation. There are currently
over 130 countries which, in the opinion of the Sub-Adviser, are generally
considered to be emerging or developing countries by the international financial
community, approximately 40 of which currently have stock markets. These
countries generally include every nation in the world except the United States,
Canada, Japan, Australia, New Zealand and most nations located in Western
Europe. Currently, investing in many emerging markets is not feasible or may
involve unacceptable political risks. The Fund will focus its investments on
those emerging market countries in which it believes the economics are
18
<PAGE>
developing strongly and in which the markets are becoming more sophisticated.
The Fund intends to invest primarily in some or all of the following countries:
Argentina
Botswana
Brazil
Chile
China (mainland and
Hong Kong)
Colombia
Ghana
Greece
Hungary
India
Indonesia
Israel
Jamaica
Jordan
Kenya
Malaysia
Mexico
Morocco
Nigeria
Pakistan
Peru
Philippines
Poland
Portugal
Russia
South Africa
South Korea
Sri Lanka
Taiwan
Thailand
Turkey
Venezuela
Zimbabwe
As markets in other countries develop, the Emerging Markets Fund expects to
expand and further diversify the emerging markets countries in which it invests.
An emerging markets security is one issued by a company that, in the opinion of
the Sub-Adviser, has one or more of the following characteristics: (i) its
principal securities trading market is in an emerging markets country; (ii)
alone or on a consolidated basis it derives 50% or more of its annual revenue
from either goods produced, sales made or services performed in emerging markets
countries; or (iii) it is organized under the laws of, and has a principal
office in, an emerging markets country. The Sub-Adviser will base determinations
as to eligibility on publicly available information and inquiries made to the
companies.
To the extent that the Emerging Markets Fund's assets are not invested in
emerging country equity securities, the remainder of the assets may be invested
in (i) debt securities denominated in the currency of an emerging country or
issued or guaranteed by an emerging country company or the government of an
emerging country; (ii) equity or debt securities of corporate or governmental
issuers located in industrialized countries; and (iii) short-term and
medium-term debt securities of the type described below under "Additional
Investment Information -- Temporary Investments." The Fund's assets may be
invested in debt securities when the Fund believes that, based upon factors such
as relative interest rate levels and foreign exchange rates, such debt
securities offer opportunities for long-term capital appreciation. It is likely
that many of the debt securities in which the Fund will invest will be unrated,
and whether or not rated, such securities may have speculative characteristics.
When deemed appropriate by the Sub-Adviser, the Fund may invest up to 10% of its
total assets (measured at the time of the investment) in lower quality debt
securities. Lower quality debt securities, also known as "junk bonds," are often
considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness. The market prices of
these securities may fluctuate more than those of higher quality securities and
may decline significantly in periods of general economic difficulty, which may
follow periods of rising interest rates. Securities in the lowest quality
category may present the risk of default, or may be in default.
The Emerging Markets Fund may invest indirectly in securities of emerging
country issuers through sponsored or unsponsored depositary receipts, including
ADRs. The Fund may also invest in non-publicly traded securities, private
placements and restricted securities. The Fund may enter into short sales,
forward foreign currency exchange contracts and instruments. For temporary
defensive purposes, the Fund may invest in money market instruments and short-
and medium-term debt securities that the Sub-Adviser believes to be of high
quality, or hold cash.
19
<PAGE>
For further information about the foregoing and certain additional
investment practices of the Emerging Markets Fund, including the particular
risks associated with Russian Securities, see "Additional Investment
Information" below.
THE GLOBAL EQUITY FUND
The Global Equity Fund seeks long-term capital appreciation by investing
primarily in equity securities of issuers throughout the world, including U.S.
issuers. The Fund may invest in American, global or other types of depositary
receipts. The Fund also may invest in equity-linked securities. The Sub-Adviser
expects that, under normal circumstances, at least 20% of the Fund's total
assets will be invested in the common stocks of U.S. issuers. The remainder of
the Fund will be invested in issuers located throughout the world, including
those located in emerging markets. At least 65% of the total assets of the Fund
will be invested in equity securities under normal circumstances. Securities in
emerging markets may not be as liquid as those in developed markets and pose
certain additional risks. See "The Emerging Markets Fund," above for a
discussion of emerging markets. Although the Fund intends to invest primarily in
securities listed on stock exchanges, it will also invest in securities traded
in over-the-counter markets. The Fund may invest in forward foreign currency
exchange contracts, reverse repurchase agreements, derivatives, when-issued and
delayed delivery securities and non-publicly traded securities, including
private placements and restricted securities. For temporary defensive purposes,
the Fund invests in money market instruments and short-term and medium-term debt
securities as described below under "Additional Investment Information --
Temporary Investments."
The Sub-Adviser's approach in selecting investments for the Fund is oriented
to individual stock selection, and is value driven. The Sub-Adviser initially
identifies those stocks which it believes to be undervalued in relation to the
issuer's cash flow, earnings and dividends. The Sub-Adviser utilizes the
research from a number of sources, including MSCI, in identifying attractive
securities, and applies a number of proprietary screening criteria to identify
those securities it believes to be undervalued. Fund holdings are regularly
reviewed and subjected to fundamental analysis to determine whether they
continue to conform to the Sub-Adviser's value criteria. Securities which no
longer conform to such value criteria are sold.
For further information about the foregoing and certain additional
investment practices of the Fund, see "Additional Investment Information" below.
THE GLOBAL EQUITY ALLOCATION FUND
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
Sub-Adviser and with stock selection within each country designed to replicate a
broad market index. The Fund will, under normal market conditions, invest at
least 65% of the value of its total assets in equity securities of issuers in at
least three different countries. The Sub-Adviser utilizes a "top-down" approach
in selecting investments for the Fund that emphasizes country selection and
weighting rather than individual stock selection. This approach reflects the
Sub-Adviser's philosophy for this Fund that a diversified selection of
securities representing exposure to world markets based upon the economic
outlook and current valuation levels for each country is an effective way to
maximize the return and minimize the risk associated with global investment.
The Sub-Adviser determines country allocations for the Global Equity
Allocation Fund on an ongoing basis within policy ranges dictated by each
country's market capitalization and liquidity. The Fund will invest in the
United States and other industrialized countries throughout the world that
comprise the MSCI World Index. As
20
<PAGE>
of the date of this Prospectus, countries comprising the MSCI World Index
included: Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Hong Kong (China), Ireland, Italy, Japan, Malaysia, the Netherlands,
New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, the United Kingdom
and the United States. In addition, the Fund may invest a portion of its assets
in emerging country equity securities, which are described in detail in the
discussion of the Emerging Markets Fund, above. The Sub-Adviser intends to use
the same criteria as used for the Emerging Markets Fund in selecting emerging
market securities for investment. As of the date of this Prospectus, the Fund
intends to invest in some or all of the following emerging markets: Argentina,
Indonesia, Portugal, South Africa, Brazil, Malaysia, Philippines, Thailand,
India, Mexico, South Korea and Turkey.
By analyzing a variety of macroeconomic and political factors, the
Sub-Adviser develops fundamental projections on interest rates, currencies,
corporate profits and economic growth for each country. These country
projections are then used to determine what the Sub-Adviser believes to be a
fair value for the stock market of each country. Discrepancies between actual
value and fair value, as determined by the Sub-Adviser, provide an expected
return for each stock market. The expected return is adjusted by currency return
expectations derived from the Sub-Adviser's purchasing-power parity exchange
rate model to arrive at an expected total return in U.S. Dollars. The final
country allocation decision is then reached by considering the expected total
return in light of various country specific considerations such as market size,
volatility, liquidity and country risk.
Within a particular country, investments are made through the purchase of
common stocks which, in the aggregate, replicate a broad market index, which in
most cases will be the MSCI Index for the particular country. The MSCI Indices
measure the performance of stock markets worldwide. Companies included in the
MSCI country index replicate the industry composition of the local market and
are a representative sampling of large, medium and small companies, subject to
liquidity. Non-domiciled companies traded on the local exchange and companies
with restricted float due to dominant shareholders or cross-ownership are
avoided. The Sub-Adviser may overweight or underweight an industry segment of a
particular index if it concludes this would be advantageous to the Fund. Debt
securities convertible into common stocks will be investment grade (rated in one
of the four highest rating categories by a nationally recognized statistical
rating organization (an "NRSRO")) or, if unrated, will be of comparable quality
as determined by the Adviser under the supervision of the Board of Directors.
Indexation of the Fund's stock selection reduces stock-specific risk through
diversification and minimizes transaction costs, which can be substantial in
foreign markets.
The Global Equity Allocation Fund will normally purchase common stocks
listed on a major stock exchange in the subject country. The Global Equity
Allocation Fund may invest in non-publicly traded securities, private
placements, restricted securities and derivative instruments. For temporary
defensive purposes, the Fund may invest in money market instruments and short-
and medium-term debt securities as described below under "Additional Investment
Information -- Temporary Investments."
For further information about the foregoing and certain additional
investment practices of the Fund, see "Additional Investment Information" below.
THE INTERNATIONAL MAGNUM FUND
The investment objective of the International Magnum Fund is to provide
long-term capital appreciation. The production of any current income is
incidental to this objective. The Fund seeks to achieve its objective by
investing primarily in equity securities of non-U.S. issuers in accordance with
the EAFE country (defined
21
<PAGE>
below) weightings determined by the Sub-Adviser. The equity securities in which
the Fund may invest may be denominated in any currency.
The countries in which the International Magnum Fund will invest are those
comprising the MSCI EAFE Index (the "Index"), which currently includes
Australia, Japan, New Zealand, most nations located in Western Europe and
certain developed countries in Asia, such as Hong Kong (China) and Singapore
(each an "EAFE country," and collectively the "EAFE countries"). At least 65% of
the total assets of the Fund will be invested in equity securities of issuers in
at least three different EAFE countries under normal circumstances. In addition,
the Fund may invest in a foreign country when it has been announced publicly
that it will be added to the Index.
By analyzing a variety of macroeconomic and political factors, the
Sub-Adviser develops fundamental projections on comparative interest rates,
currencies, corporate profits and economic growth among the various regions
represented in the Index. These projections will be used to establish regional
allocation strategies. Within these regional allocations, the Sub-Adviser then
selects equity securities among issuers of a region.
The Sub-Adviser's approach in selecting among equity securities within a
region comprised of EAFE countries is oriented to individual stock selection and
is value driven. The Sub-Adviser identifies those equity securities which it
believes to be undervalued in relation to the issuer's assets, cash flow,
earnings and revenues. In selecting investments, the Sub-Adviser utilizes the
research of a number of sources, including MSCI. Fund holdings are regularly
reviewed and subjected to fundamental analysis to determine whether they
continue to conform to the Sub-Adviser's investment criteria. Equity securities
which no longer conform to such investment criteria will be sold.
Although the International Magnum Fund intends to invest primarily in equity
securities listed on a stock exchange in an EAFE country, the Fund may invest in
equity securities that are traded over the counter or that are not admitted to
listing on a stock exchange or dealt in on a regulated market. As a result of
the absence of a public trading market, such securities may pose liquidity
risks. The Fund may also invest in private placements or initial public
offerings in the form of oversubscriptions. Such investments generally entail
short-term liquidity risks.
The International Magnum Fund may invest up to 10% of its total assets in
(i) investment funds with investment objectives similar to that of the Fund and
(ii) for temporary purposes, money market funds and pooled investment vehicles.
If the Fund invests in other investment funds, stockholders will bear not only
their proportionate share of the expenses of the Fund (including operating
expenses and fees of the Adviser), but also will indirectly bear similar
expenses of the underlying investment fund. The Fund may invest in forward
foreign currency contracts, derivatives, when-issued and delayed delivery
securities and non-publicly traded securities including private placements and
restricted securities.
Although the International Magnum Fund anticipates being fully invested in
equity securities of EAFE countries, the Fund may invest, under normal
circumstances for cash management purposes, up to 35% of its total assets in
certain short-term (less than twelve months to maturity) and medium-term (not
greater than five years to maturity) debt securities or hold cash. For temporary
defensive purposes, the Fund may invest in money market instruments and short
and medium-term debt securities described below under "Additional Investment
Information -- Temporary Investments."
For further information about the foregoing and certain additional
investment practices of the International Magnum Fund, see "Additional
Investment Information" below.
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THE JAPANESE EQUITY FUND
The investment objective of the Japanese Equity Fund is to provide long-term
capital appreciation. The Fund seeks to achieve this objective by investing
primarily in equity securities of Japanese issuers. With respect to the Fund,
equity securities include common and preferred stocks, convertible securities,
and rights and warrants to purchase common stocks and depositary receipts.
Under normal conditions, the Japanese Equity Fund will invest at least 80%
of its total assets in securities issued by entities that are organized under
the laws of Japan, entities for which the principal securities trading market is
in Japan, and entities not organized under the laws of Japan but deriving 50% or
more of their revenues or profits from goods produced or sold, investments made,
or services performed in Japan or which have at least 50% of their assets
situated in Japan. These securities may include debt securities (issued by the
Japanese government or by Japanese companies) when the Sub-Adviser believes that
the potential for capital appreciation from investment in debt securities equals
or exceeds that available from investment in equity securities. In making
investment decisions, the Sub-Adviser will consider, among other factors, the
size of the company, its financial condition, its marketing and technical
strengths and its competitiveness in its industry. All debt securities in which
the Fund may invest will be rated no lower than BBB by Standard & Poor's Ratings
Group ("S&P"), Baa by Moody's Investors Services, Inc. ("Moody's") or BBB by
Mikuni Inc. ("Mikuni") (a Japanese rating agency) or, if unrated, of comparable
quality as determined by the Sub-Adviser. Securities rated BBB by S&P, Baa by
Moody's or BBB by Mikuni have speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments on such securities than would
be the case with higher rated securities. The convertible securities in which
the Fund may invest include bonds, notes, debentures, preferred stocks and other
securities convertible into common stocks and may be fixed-income or zero coupon
debt securities. Prior to their conversion, convertible securities may have
characteristics similar to nonconvertible debt securities.
The Japanese Equity Fund currently intends to focus its investments in
Japanese companies that have an active market for their shares and that the
Sub-Adviser believes show a potential for better than average growth. The Fund
anticipates that most equity securities of Japanese companies in which it
invests, either directly or indirectly by means of ADRs or convertible
debentures, will be listed on securities exchanges in Japan. The Fund may also
invest in equity securities of Japanese companies that are traded in an
over-the-counter market.
The Japanese Equity Fund may also invest up to 20% of its total assets in
cash or short-term government or other short-term prime obligations or
repurchase agreements so that funds may be readily available for general
corporate purposes, including the payment of dividends, redemptions and
operating expenses, for investment in securities through exercise of rights or
otherwise. The Fund may invest in forward foreign currency contracts,
derivatives, when-issued and delayed delivery securities and non-publicly traded
securities including private placements and restricted securities. For temporary
defensive purposes, the Fund may invest in money market instruments and
medium-term debt securities as described below under "Additional Investment
Information -- Temporary Investments" below.
For further information about the foregoing and certain additional
investment practices of the Japanese Equity Fund, see "Additional Investment
Information" below.
Investors should consider the following factors inherent in investment in
Japan.
TRADE ISSUES. Because of the concentration of Japanese exports in highly
visible products such as automobiles, machine tools and semiconductors, and the
large trade surpluses ensuing therefrom, Japan is in a difficult
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phase in its relation with its trading partners, particularly the U.S., where
the trade imbalance is the greatest. Retaliatory action taken by such trading
partners could affect the ability of Japanese companies to export goods to these
countries, which could negatively impact the value of securities in the Fund.
CURRENCY FACTORS. Over a long period of years, the yen has generally
appreciated in relation to the dollar. The yen's appreciation would add to the
returns of dollars invested through the Fund in Japan. A decline in the value of
the yen would have the opposite effect, adversely affecting the value of the
Fund in dollar terms.
THE JAPANESE STOCK MARKET. Like other stock markets, the Japanese stock
market can be volatile. A decline in the market may have an adverse effect on
the availability of credit and on the value of the substantial stock holdings of
Japanese companies in particular, Japanese banks, insurance companies and other
financial institutions. A decline in the market may contribute to weakness in
Japan's economy. The common stocks of many Japanese companies continue to trade
at high price-earnings ratios. Differences in accounting methods make it
difficult to compare the earnings of Japanese companies with those of companies
in other countries, especially the United States. In general, however, reported
net income in Japan is understated relative to U.S. accounting standards. In
addition, Japanese companies have tended historically to have higher growth
rates than U.S. companies, and Japanese interest rates have generally been lower
than in the U.S., both of which factors tend to result in lower discount rates
and higher price-earnings ratios in Japan than in the United States.
THE LATIN AMERICAN FUND
The investment objective of the Latin American Fund is long-term capital
appreciation. The Fund seeks to achieve this objective by investing primarily in
equity securities (i) of companies organized in or for which the principal
securities trading market is in Latin America, (ii) denominated in a Latin
American currency issued by companies to finance operations in Latin America, or
(iii) of companies that alone or on a consolidated basis derive 50% or more of
their annual revenues from either goods produced, sales made or services
performed in Latin America (collectively, "Latin American issuers") and by
investing, from time to time, in debt securities issued or guaranteed by a Latin
American government or governmental entity ("Sovereign Debt"). With respect to
the Fund, unless otherwise indicated, Latin America consists of Argentina,
Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, the Dominican Republic,
Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay,
Peru, Uruguay and Venezuela. Income is not an investment objective or a
consideration in selecting investments.
Under normal conditions, substantially all, but not less than 80%, of the
Latin American Fund's total assets are invested in equity securities of Latin
American issuers and in Sovereign Debt. With respect to the Fund, equity
securities include common or preferred stocks (including convertible preferred
stock), bonds, notes or debentures convertible into common or preferred stock,
stock purchase warrants or rights, equity interests in trusts or partnerships or
American, global or other types of depositary receipts. Securities in which the
Latin American Fund may invest include those that are neither listed on a stock
exchange nor traded over-the-counter. As a result of the absence of a public
trading market for these securities, they may be less liquid than publicly
traded securities.
The Latin American Fund focuses its investments in listed equity securities
in Argentina, Brazil, Chile and Mexico, the most developed capital markets in
Latin America. The Fund expects, under normal market conditions, to have at
least 55% of its total assets invested in listed equity securities of issuers in
these four countries. In addition, the Fund actively invests in markets in other
Latin American countries such as Colombia, Peru and Venezuela. The Fund is not
limited in the extent to which it may invest in any Latin American country
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and intends to invest opportunistically as markets develop. The portion of the
Fund's holdings in any Latin American country will vary from time to time,
although the portion of the Fund's assets invested in Chile may tend to vary
less than the portions invested in other Latin American countries because, with
limited exceptions, capital invested in Chile currently cannot be repatriated
for one year.
The securities markets of Latin American countries are substantially
smaller, less liquid and more volatile than the major securities markets in the
United States. A high proportion of the shares of many Latin American issuers
may be held by a limited number of persons, which may limit the number of shares
available for investment by the Fund. A limited number of issuers in most, if
not all, Latin American securities markets may represent a disproportionately
large percentage of market capitalization and trading value. The limited
liquidity of Latin American securities markets may also affect the Fund's
ability to acquire or dispose of securities at the price and time it wishes to
do so. In addition, certain Latin American securities markets, including those
of Argentina, Brazil, Chile and Mexico, are susceptible to being influenced by
large investors trading significant blocks of securities or by large
dispositions of securities resulting from the failure to meet margin calls when
due.
In addition to their smaller size, lesser liquidity and greater volatility,
Latin American securities markets are less developed than U.S. securities
markets. Disclosure and regulatory standards are in many respects less stringent
than U.S. standards. Furthermore, there is a lower level of monitoring and
regulation of the markets and the activities of investors in such markets, and
enforcement of existing regulations has been extremely limited. Consequently,
the prices at which the Fund may acquire investments may be affected by other
market participants' anticipation of the Fund's investing, by trading by persons
with material non-public information and by securities transactions by brokers
in anticipation of transactions by the Fund in particular securities.
Commissions and other transaction costs on most, if not all, Latin American
securities exchanges are generally higher than in the United States, although
the Fund will endeavor to achieve the most favorable net results on its
portfolio transactions.
To the extent that the Latin American Fund's assets are not invested in
equity securities of Latin American issuers or in Sovereign Debt, the remainder
of the assets may be invested in (i) debt securities of Latin American corporate
issuers, (ii) equity or debt securities of corporate or governmental issuers
located in countries outside Latin America, and (iii) short-term and medium-term
debt securities of the type described below under "Temporary Investments." The
Fund's assets may be invested in debt securities when the Fund believes that,
based upon factors such as relative interest rate levels and foreign exchange
rates, such debt securities offer opportunities for long-term capital
appreciation. It is likely that many of the debt securities in which the Fund
will invest will be unrated. The Fund may invest up to 20% of its total assets
in securities that are determined by the Sub-Adviser to be comparable to
securities rated below investment grade by S&P or Moody's. Such lower-quality
securities are regarded as being predominantly speculative and involve
significant risks.
The Latin American Fund's holdings of lower-quality debt securities will
consist predominantly of Sovereign Debt, much of which trades at substantial
discounts from face value and which may include Sovereign Debt comparable to
securities rated as low as D by S&P or C by Moody's. The Fund may invest in
Sovereign Debt to hold and trade in appropriate circumstances, as well as to use
to participate in debt for equity conversion programs. The Fund will invest in
Sovereign Debt only when the Fund believes such investments offer opportunities
for long-term capital appreciation. Investment in Sovereign Debt involves a high
degree of risk and such securities are generally considered to be speculative in
nature.
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For temporary defensive purposes, the Latin American Fund may invest less
than 80% of its total assets in Latin American equity securities and Sovereign
Debt, in which case the Fund may invest in other equity or debt securities or
may invest in certain short-term (less than twelve months to maturity) and
medium-term (not greater than five years to maturity) debt securities or hold
cash. The Fund may enter into forward foreign currency exchange contracts and
foreign currency futures contracts, may purchase and write (sell) put and call
options on securities, foreign currency and on foreign currency futures
contracts, and may enter into stock index and interest rate futures contracts
and options thereon. There currently are limited options and futures markets for
Latin American currencies, securities and indexes, and the nature of the
strategies adopted by the Sub-Adviser and the extent to which those strategies
are used depends on the development of those markets. The Fund may also from
time to time lend securities (but not in excess of 20% of its total assets) from
its portfolio to brokers, dealers and financial institutions.
The Board of Directors has determined that, in light of the increased
presence of telecommunications companies in the Latin American markets, the
Fund's ability to achieve its investment objective would be materially adversely
affected if it were not permitted to invest more than 25% of its assets in
securities of companies in the telecommunications industries of the Latin
American countries in which the Fund invests. In accordance with the Fund's
investment restrictions and as a result of the Board's action, the Fund is
required to invest at least 25% of its total assets in securities of Latin
American issuers engaged in the telecommunications industry. The Fund will
remain so invested until the Board determines that the Fund should invest less
than 25% of its assets in that industry. Because the Fund will have a more
concentrated position in the securities of a single sector within the Latin
American securities markets, the Fund will be subject to certain risks with
respect to these portfolio securities. Market price movements affecting
telecommunications companies and their securities will have a greater impact on
the Fund's performance because of the more concentrated position in such
securities. Telecommunications may be subject to greater government regulation
than many other industries. Changes in government policies and the need to
obtain regulatory approvals may have a material effect on products and services
offered by telecommunications companies. Technological and structural
developments may adversely affect the profitability of telecommunications
companies. To better control the Fund's exposure to such risks, the Board has
limited investments in telecommunications securities to not more than 40% of the
Fund's assets.
The Latin American Fund is authorized to borrow up to 33 1/3% of its total
assets (including the amount borrowed), less all liabilities and indebtedness
other than the borrowing, for investment purposes to increase the opportunity
for greater return and for payment of dividends. Such borrowings would
constitute leverage, which is a speculative characteristic. See "Additional
Investment Information -- Borrowing and Other Forms of Leverage."
The Latin American Fund may also enter into forward foreign currency
contracts, derivatives, reverse repurchase agreements, short sales, when-issued
and delayed delivery contracts and non-publicly traded securities, including
private placements and restricted securities.
For further information about the foregoing and certain additional
investment practices of the Latin American Fund, see "Additional Investment
Information" below.
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ADDITIONAL INVESTMENT INFORMATION
BORROWING AND OTHER FORMS OF LEVERAGE
The Global Equity Allocation, Asian Growth, Emerging Markets, International
Magnum, and Japanese Equity Funds may borrow up to 10% of their total assets as
a temporary measure for extraordinary or emergency purposes. These funds may not
purchase additional securities when borrowings exceed 5% of total assets. The
Latin American Fund may enter into reverse repurchase agreements in accordance
with its investment objective and policies and borrow amounts up to 33 1/3% of
its total assets (including the amount borrowed), less all liabilities and
indebtedness other than the borrowing. The Global Equity Fund may borrow money
(i) as a temporary measure for extraordinary or emergency purposes, and (ii) in
connection with reverse repurchase agreements, provided that (i) and (ii) in
combination do not exceed 33 1/3% of the Fund's total assets (including the
amount borrowed) less liabilities (exclusive of borrowings) and, further, that
the Fund may not purchase additional securities when borrowings exceed 5% of its
total assets.
Borrowings by the Latin American Fund may result in leveraging. Leveraging
magnifies declines as well as increases in the net asset value of the Fund's
shares and in the yield on a Fund's investments. Although a Fund is authorized
to borrow, it will do so only when the Sub-Adviser believes that borrowing will
benefit the Fund after taking into account considerations such as the costs of
borrowing and the likely investment returns on securities purchased with
borrowed monies. Borrowing by the Funds may create the opportunity for increased
net income but, at the same time, would involve special risk considerations.
Each Fund expects that any borrowing, other than for temporary purposes,
will be made on a secured basis. The Funds' custodian will either segregate the
assets securing the borrowing for the benefit of the lenders or arrangements
will be made with a suitable sub-custodian. If assets used to secure the
borrowing decrease in value, the Funds may be required to pledge additional
collateral to the lender in the form of cash or securities to avoid liquidation
of those assets.
CONVERTIBLE SECURITIES, WARRANTS AND EQUITY-LINKED SECURITIES
Each Fund may invest in convertible securities, preferred stock, warrants or
other securities exchangeable under certain circumstances for shares of common
stock. Warrants are instruments giving holders the right, but not the
obligation, to buy shares of a company at a given price during a specified
period.
The Global Equity Fund may invest in equity-linked securities 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. 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. In addition, it is
not possible to predict how equity-linked securities will trade in the secondary
market which is fairly developed and liquid. The market for such securities may
be shallow, however, and high volume trades may be possible only with
discounting. In addition to the foregoing risks, the return on such securities
depends on the creditworthiness of the issuer of the securities, which may be
the issuer of the underlying securities or a third party investment banker or
other lender. The creditworthiness of such third party issuer of equity-linked
securities may, and often does, exceed the creditworthiness of the issuer of the
underlying securities. The advantage of using equity-linked securities over
traditional equity and debt securities
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is that the former are income producing vehicles that may provide a higher
income than the dividend income on the underlying equity securities while
allowing some participation in the capital appreciation of the underlying equity
securities. Another advantage of using equity-linked securities is that they may
be used for hedging to reduce the risk of investing in the generally more
volatile underlying equity securities.
DEPOSITARY RECEIPTS
The Asian Growth, Emerging Markets, Global Equity, Japanese Equity and Latin
American Funds may invest in depositary receipts, including ADRs, Global
Depositary Receipts ("GDRs"), European Depositary Receipts ("EDRs") and other
depositary receipts, to the extent that such depositary receipts become
available. ADRs are securities, typically issued by a U.S. financial institution
(a "depositary"), that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer (the "underlying issuer") and deposited
with the depositary. ADRs include American Depositary Shares and New York Shares
and may be "sponsored" or "unsponsored." Sponsored ADRs are established jointly
by a depositary and the underlying issuer, whereas unsponsored ADRs may be
established by a depositary without participation by the underlying issuer.
GDRs, EDRs and other types of depositary receipts are typically issued by
foreign depositaries, although they may also be issued by U.S. depositaries, and
evidence ownership interests in a security or pool of securities issued by
either a foreign or a U.S. corporation.
Holders of unsponsored depositary receipts generally bear all the costs
associated with establishing the unsponsored depositary receipt. The depositary
of an unsponsored depositary receipt is under no obligation to distribute
shareholder communications received from the underlying issuer or to pass
through to the holders of the unsponsored depositary receipt voting rights with
respect to the deposited securities or pool of securities. Depositary receipts
are not necessarily denominated in the same currency as the underlying
securities to which they may be connected. Generally, depositary receipts in
registered form are designed for use in the U.S. securities market and
depositary receipts in bearer form are designed for use in securities markets
outside the United States. The Funds may invest in sponsored and unsponsored
depositary receipts. For purposes of the Funds' investment policies, a Fund's
investments in depositary receipts will be deemed to be investments in the
underlying securities.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Each of the Funds may enter into forward foreign currency exchange contracts
("forward contracts"). Forward contracts provide for the purchase or sale of an
amount of a specified foreign currency at a future date. Purposes for which such
contracts may be used include protecting against a decline in a foreign currency
against the U.S. Dollar between the trade date and settlement date when a Fund
purchases or sells securities, locking in the U.S. Dollar value of dividends
declared on securities held by the Fund and generally protecting the U.S. Dollar
value of securities held by the Fund against exchange rate fluctuations. While
such forward contracts may limit losses to a Fund as a result of exchange rate
fluctuations, they will also limit any exchange rate gains that might otherwise
have been realized.
FOREIGN INVESTMENT
Each of the Funds invests in securities of foreign issuers. Investment in
securities of foreign issuers, especially in securities of issuers in emerging
countries, involves somewhat different investment risks from those affecting
securities of U.S. issuers. There may be limited publicly available information
with respect to foreign issuers, and foreign issuers are not generally subject
to uniform accounting, auditing, and financial and
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other reporting standards and requirements comparable to those applicable to
domestic companies. Therefore, disclosure of certain material information may
not be made and less information may be available to investors investing in
foreign countries than in the United States. There may also be less government
supervision and regulation of foreign securities exchanges, brokers and listed
companies than in the United States. Many foreign securities markets have
substantially less volume than U.S. national securities exchanges, and
securities of some foreign issuers are less liquid and subject to greater price
volatility than securities of comparable domestic issuers. Brokerage commissions
and other transaction costs on foreign securities exchanges are generally higher
than in the United States. Dividends and interest paid by foreign issuers may be
subject to withholding and other foreign taxes, which may decrease the net
return on foreign investments as compared to dividends and interest paid to the
Funds by domestic companies. Additional risks include future adverse political
and economic developments, the possibility that a foreign jurisdiction might
impose or change withholding taxes on income payable with respect to foreign
securities, possible seizure, nationalization or expropriation of the foreign
issuer or foreign deposits, and the possible adoption of foreign governmental
restrictions such as exchange controls. Also, it may be more difficult to obtain
a judgment in a court outside the United States. Emerging countries may have
less stable political environments than more developed countries.
Investments in securities of foreign issuers are frequently denominated in
foreign currencies, and a Fund may temporarily hold uninvested reserves in bank
deposits in foreign currencies. Therefore, the value of a Fund's assets measured
in U.S. Dollars may be affected favorably or unfavorably by changes in currency
exchange rates and exchange control regulations. Each Fund will also incur
certain costs in connection with conversions between various currencies.
INVESTMENT COMPANY SECURITIES
Each Fund may invest in securities of another open-end or closed-end
investment company by purchase in the open market involving only customary
brokers' commissions or in connection with mergers, acquisitions of assets or
consolidations and as may otherwise be permitted by the Investment Company Act
of 1940, as amended (the "1940 Act").
Some emerging market countries have laws and regulations that currently
preclude direct foreign investment in the securities of their companies.
However, indirect foreign investment in the securities of companies listed and
traded on the stock exchanges in these countries is permitted by certain
emerging market countries through investment funds which have been specifically
authorized. Certain of the Funds may invest in these investment funds, including
those advised by MSAM, as well as other investment companies, subject to
applicable provisions of the 1940 Act and other applicable laws. If a Fund
invests in such investment companies, the Fund's shareholders will bear not only
their proportionate share of the expenses of the Fund (including operating
expenses and the fees of the Adviser), but also will indirectly bear similar
expenses of the underlying investment funds.
LOANS OF PORTFOLIO SECURITIES
Each Fund may lend its portfolio securities to brokers, dealers, domestic
and foreign banks or other financial institutions for the purpose of increasing
its net investment income. These loans must be secured continuously by cash or
equivalent collateral or by a letter of credit at least equal to the market
value of the securities loaned plus accrued interest. The Funds will not enter
into securities loan transactions exceeding in the aggregate 33 1/3% of the
market value of a Fund's total assets (exceeding in the aggregate 20% of such
value
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with respect to the Latin American Fund). As with other extensions of credit,
there are risks of delay in recovery or even loss of rights in collateral should
the borrower of the portfolio securities fail financially.
LOWER RATED AND UNRATED DEBT SECURITIES
The Emerging Markets and Latin American Funds may invest in lower rated or
unrated debt securities, commonly referred to as "junk bonds." In addition, the
emerging country debt securities in which such Funds may invest are subject to
risk and will not be required to meet a minimum rating standard and may not be
rated. Fixed income securities are subject to the risk of an issuer's inability
to meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and general
market liquidity (market risk). Lower rated or unrated securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in the general level
of interest rates. The market values of fixed-income securities tend to vary
inversely with the level of interest rates. Yields and market values of lower
rated and unrated debt securities will fluctuate over time, reflecting not only
changing interest rates but the market's perception of credit quality and the
outlook for economic growth. When economic conditions appear to be
deteriorating, medium to lower rated securities may decline in value due to
heightened concern over credit quality, regardless of prevailing interest rates.
Fluctuations in the value of a Fund's investments will be reflected in the
Fund's net asset value per share. The Sub-Adviser considers both credit risk and
market risk in making investment decisions for a Fund. Investors should
carefully consider the relative risks of investing in lower rated and unrated
debt securities and understand that such securities are not generally meant for
short-term investing.
Adverse economic developments may disrupt the market for U.S. corporate
lower rated and unrated debt securities and for international and emerging
country debt securities. Such disruptions may severely affect the ability of
issuers, especially highly leveraged issuers, to service their debt obligations
or to repay their obligations upon maturity. In addition, the secondary market
for lower rated and unrated debt securities, which is concentrated in relatively
few market makers, may not be as liquid as the secondary market for more highly
rated securities. As a result, the Sub-Adviser could find it more difficult to
sell these securities or may be able to sell the securities only at prices lower
than if such securities were widely traded. In addition, there may be limited
trading markets for debt securities of issuers located in emerging countries.
Prices realized upon the sale of such lower rated or unrated securities, under
these circumstances, may be less than the prices used in calculating a Fund's
net asset value.
Prices for lower rated and unrated debt securities may be affected by
legislative and regulatory developments. These laws could adversely affect a
Fund's net asset value and investment practices, the secondary market for lower
rated and unrated debt securities, the financial condition of issuers of such
securities and the value of outstanding lower rated and unrated debt securities.
For example, U.S. federal legislation requiring the divestiture by federally
insured savings and loan associations of their investments in lower rated and
unrated debt securities and limiting the deductibility of interest by certain
corporate issuers of lower rated and unrated debt securities adversely affected
the market in recent years.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligations for redemption, a Fund may have
to replace the security with a lower yielding security, resulting in a decreased
return for investors. If a Fund experiences unexpected net redemptions, it may
be forced to sell
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its higher rated securities, resulting in a decline in the overall credit
quality of the Fund's investment portfolio and increasing the exposure of the
Fund to the risks of lower rated and unrated debt securities.
MONEY MARKET INSTRUMENTS
Each Fund is permitted to invest in money market instruments pending other
investment, prior to settlement of portfolio transactions, for liquidity and for
temporary defensive purposes, although the Funds intend to stay invested in
securities satisfying their primary investment objective to the extent
practical. The money market investments permitted for the Funds include
obligations of the U.S. Government, its agencies and instrumentalities,
obligations of foreign sovereignties and other debt securities, including
high-grade commercial paper, repurchase agreements and bank obligations, such as
bankers' acceptances and certificates of deposit (including Eurodollar
certificates of deposit).
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED SECURITIES
Each Fund, except the Japanese Equity Fund, may invest in securities that
are neither listed on a stock exchange nor traded over the counter. Such
unlisted securities may involve a higher degree of business and financial risk
that can result in substantial losses. As a result of the absence of a public
trading market for these securities, they may be less liquid than publicly
traded securities. Although these securities may be resold in privately
negotiated transactions, the prices realized from these sales could be less than
what may be considered the fair value of such securities. Furthermore, companies
whose securities are not publicly traded may not be subject to the disclosure
and other investor protection requirements which might be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, a Fund may be required to bear the expenses of registration. No Fund may
invest more than 15% of its net assets in illiquid securities and, with the
exception of the Global Equity Fund, no fund may invest more than 10% of its
total assets in securities subject to legal or contractual restrictions on
resale. Securities that are restricted from sale to the public without
registration ("Restricted Securities") under the Securities Act of 1933, as
amended (the "1933 Act"), which can be offered and sold to qualified
institutional buyers under Rule 144A under the 1933 Act ("Rule 144A Securities")
may be determined to be liquid under guidelines adopted by, and subject to the
supervision of, the Board of Directors and therefore not subject to the
limitation on illiquid securities. Rule 144A securities may become illiquid if
qualified institutional buyers are not interested in acquiring the securities.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with investment dealers or
financial institutions that meet the credit guidelines of the Company's Board of
Directors. In a repurchase agreement, a Fund buys a security from a seller that
has agreed to repurchase it at a mutually agreed upon date and price, reflecting
the interest rate effective for the term of the agreement. The term of these
agreements is usually from overnight to one week and never exceeds one year. A
repurchase agreement may be viewed as a fully collateralized loan of money by a
Fund to the seller. The Funds always receive securities as collateral with a
market value at least equal to the purchase price, including accrued interest,
and this value is maintained during the term of the agreement. If the seller
defaults and the collateral value declines, a Fund might incur a loss. If
bankruptcy proceedings are commenced with respect to the seller, the Fund's
realization upon the collateral may be delayed or limited. Repurchase agreements
with durations (or maturities) over seven days in length are considered to be
illiquid securities.
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REVERSE REPURCHASE AGREEMENTS
The Latin American and Global Equity Funds may enter into reverse repurchase
agreements with brokers, dealers, banks or other financial institutions that
meet credit guidelines of the Company's Board of Directors. In a reverse
repurchase agreement, a Fund sells a security and agrees to repurchase it at a
mutually agreed upon date and price, reflecting the interest rate effective for
the term of the agreement. It may also be viewed as the borrowing of money by
the Fund. A Fund's investment of the proceeds of a reverse repurchase agreement
is the speculative factor known as leverage. The Funds will enter into a reverse
repurchase agreement only if the interest income from investment of the proceeds
is expected to be greater than the interest expense of the transaction and the
proceeds are invested for a period no longer than the term of the agreement. The
Funds will maintain with the appropriate custodian a separate account with a
segregated portfolio of cash or liquid assets in an amount at least equal to its
purchase obligations under these agreements (including accrued interest). If
interest rates rise during a reverse repurchase agreement, it may adversely
affect a Fund's net asset value. In the event that the buyer of securities under
a reverse repurchase agreement files for bankruptcy or becomes insolvent, the
buyer or its trustee or receiver may receive an extension of time to determine
whether to enforce the Fund's repurchase obligation, and the Fund's use of
proceeds of the agreement may effectively be restricted pending such decision.
RUSSIAN SECURITIES TRANSACTIONS
The Emerging Markets Fund may invest in equity securities of Russian
companies. The registration, clearing and settlement of securities transactions
in Russia are subject to significant risks not normally associated with
securities transactions in the United States and other more developed markets.
Ownership of shares in Russian companies is evidenced by entries in a company's
share register (except where shares are held through depositories that meet the
requirements of the 1940 Act) and the issuance of extracts from the register or,
in certain limited cases, by formal share certificates. However, Russian share
registers are frequently unreliable and the Fund could possibly lose its
registration through oversight, negligence or fraud. Moreover, Russia lacks a
centralized registry to record securities transactions and registrars located
throughout Russia or the companies themselves maintain share registers.
Registrars are under no obligation to provide extracts to potential purchasers
in a timely manner or at all and are not necessarily subject to effective state
supervision. In addition, while registrars are liable under law for losses
resulting from their errors, it may be difficult for the Fund to enforce any
rights it may have against the registrar or issuer of the securities in the
event of loss of share registration. Although Russian companies with more than
1,000 shareholders are required by law to employ an independent company to
maintain share registers, in practice, such companies have not always followed
this law. Because of this lack of independence of registrars, management of a
Russian company may be able to exert considerable influence over who can
purchase and sell the company's shares by illegally instructing the registrar to
refuse to record transactions on the share register. Furthermore, these
practices may prevent the Fund from investing in the securities of certain
Russian companies deemed suitable by the Sub-Adviser and could cause a delay in
the sale of Russian securities by the Fund if the company deems a purchaser
unsuitable, which may expose the Fund to potential loss on its investment.
In light of the risks described above, the Board of Directors has approved
certain procedures concerning the Fund's investments in Russian securities.
Among these procedures is a requirement that the Fund will not invest in the
securities of a Russian company unless that issuer's registrar has entered into
a contract with the
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Fund's sub-custodian containing certain protective conditions, including, among
other things, the sub-custodian's right to conduct regular share confirmations
on behalf of the Fund. This requirement will likely have the effect of
precluding investments in certain Russian companies that the Fund would
otherwise make.
SHORT SALES
The Emerging Markets and Latin American Funds may from time to time sell
securities short without limitation, although neither of such Funds intends to
sell securities short on a regular basis. A short sale is a transaction in which
a Fund sells securities it either owns or has the right to acquire at no added
cost (i.e., "against the box") or it does not own (but has borrowed) in
anticipation of a decline in the market price of the securities. When a Fund
makes a short sale of borrowed securities, the proceeds it receives from the
sale will be held on behalf of a broker until the Fund replaces the borrowed
securities. To deliver the securities to the buyer, a Fund will need to arrange
through a broker to borrow the securities and, in so doing, the Fund will become
obligated to replace the securities borrowed at their market price at the time
of replacement, whatever that price may be. A Fund may have to pay a premium to
borrow the securities and must pay any dividends or interest payable on the
securities until they are replaced.
A Fund's obligation to replace the securities borrowed in connection with a
short sale will be secured by collateral deposited with the broker that consists
of cash or liquid assets. In addition, the Fund will place in a segregated
account with the appropriate custodian an amount of cash or liquid assets equal
to the difference, if any, between (1) the market value of the securities sold,
and (2) any cash or liquid securities deposited as collateral with the broker in
connection with the short sale (not including the proceeds of the short sale).
Possible losses from short sales differ from losses that could be incurred from
a purchase of a security, because losses from short sales may be unlimited,
whereas losses from purchases can equal only the total amount invested.
TEMPORARY INVESTMENTS
For temporary defensive purposes, when the Sub-Adviser determines that
market conditions warrant, each Fund may invest a portion or all of its assets
in money market instruments, short- and medium-term debt securities that the
Sub-Adviser believes to be of high quality, or hold cash.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Each Fund may purchase securities on a when-issued or delayed delivery
basis. In such transactions, instruments are bought with payment and delivery
taking place in the future in order to secure what is considered to be an
advantageous yield or price at the time of the transaction. The payment
obligation and the interest rates that will be received are each fixed at the
time a Fund enters into the commitment, and no interest accrues to the Fund
until settlement. Thus, it is possible that the market value at the time of
settlement could be higher or lower than the purchase price if the general level
of interest rates has changed. It is a current policy of each of the Funds,
other than the Global Equity Fund, not to enter into when-issued commitments or
delayed delivery securities exceeding, in the aggregate, 15% of a Fund's net
assets other than the obligations created by these commitments.
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ZERO COUPONS; PAY-IN-KIND; DEFERRED PAYMENT SECURITIES
The Funds may invest in zero coupon securities, which are securities that
are sold at a discount to par value and on which interest payments are not made
during the life of the security. Upon maturity, the holder is entitled to
receive the par value of the security. While interest payments are not made on
such securities, holders of such securities are deemed to have received annually
"phantom income." Because a Fund will distribute its "phantom income" to
shareholders, to the extent that shareholders elect to receive dividends in cash
rather than reinvesting such dividends in additional shares, the Fund will have
fewer assets with which to purchase income producing securities. A Fund accrues
income with respect to these securities prior to the receipt of cash payments.
Pay-in-kind securities are securities that have interest payable by delivery of
additional securities. Upon maturity, the holder is entitled to receive the
aggregate par value of the securities. Deferred payment securities are
securities that remain zero coupon securities until a predetermined date, at
which time the stated coupon rate becomes effective and interest becomes payable
at regular intervals. Zero coupon, pay-in-kind and deferred payment securities
may be subject to greater fluctuation in value and lesser liquidity in the event
of adverse market conditions than comparably rated securities paying cash
interest at regular interest payment periods.
DERIVATIVE INSTRUMENTS
The Funds are permitted to invest in various derivative instruments for both
hedging and non-hedging purposes. Derivative instruments include options,
futures and options on futures, structured notes, caps, floors, collars and
swaps. Additionally, the Funds may invest in other derivative instruments that
are developed over time if their use would be consistent with the objectives of
the Funds. Each Fund, other than the Global Equity Fund (as described below),
will limit its use of the foregoing derivative instruments for non-hedging
purposes to 33 1/3% of its total assets measured by the aggregate notional
amount of outstanding derivative instruments. In addition, no Fund, other than
the Global Equity Fund, will enter into futures contracts and options on futures
contracts to the extent that the notional value of its outstanding obligations
to purchase securities under such contracts would exceed 20% of its total
assets. The Global Equity Fund will limit its use of the foregoing derivative
instruments to 50% of its total assets measured by the aggregate notional amount
of outstanding derivative instruments, provided that no more than 33 1/3% of its
total assets are invested, for non-hedging purposes, in derivatives other than
futures and options on futures. The Funds' investments in forward foreign
currency contracts and derivatives used for hedging purposes are not subject to
the limits described above.
The Funds may use derivative instruments under a number of different
circumstances to further their investment objectives. The Funds may use
derivatives when doing so provides more liquidity than the direct purchase of
the securities underlying such derivatives. For example, a Fund may purchase
derivatives to quickly gain exposure to a market in response to changes in the
Fund's investment policy or upon the inflow of investable cash or when the
derivative provides greater liquidity than the underlying securities market. A
Fund may also use derivatives when it is restricted from directly owning the
underlying securities due to foreign investment restrictions or other reasons or
when doing so provides a price advantage over purchasing the underlying
securities directly, either because of a pricing differential between the
derivatives and securities markets or because of lower transaction costs
associated with the derivatives transaction. Derivatives may also be used by a
Fund for hedging purposes and in other circumstances when a Fund's portfolio
managers believe it advantageous to do so consistent with the Fund's investment
objective. The Funds will not, however, use
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derivatives in a manner that creates leverage, except to the extent that the use
of leverage is expressly permitted by a particular Fund's investment policies,
and then only in a manner consistent with such policies.
Some of the derivative instruments in which the Funds may invest and the
risks related thereto are described in more detail below.
CAPS, FLOORS AND COLLARS
The Funds may invest in caps, floors and collars, which are instruments
analogous to options. In particular, a cap is the right to receive the excess of
a reference rate over a given rate and is analogous to a put option. A floor is
the right to receive the excess of a given rate over a reference rate and is
analogous to a call option. Finally, a collar is an instrument that combines a
cap and a floor. That is, the buyer of a collar buys a cap and writes a floor,
and the writer of a collar writes a cap and buys a floor. The risks associated
with caps, floors and collars are similar to those associated with options. In
addition, caps, floors and collars are subject to risk of default by the
counterparty because they are privately negotiated instruments.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Funds may purchase and sell futures contracts and options on futures
contracts, including but not limited to securities index futures, foreign
currency exchange futures, interest rate futures and other financial futures.
Futures contracts provide for the sale by one party and purchase by another
party of a specified amount of a specific security, instrument or basket
thereof, at a specific future date and at a specified price. An option on a
futures contract is a legal contract that gives the holder the right to buy or
sell a specified amount of futures contracts at a fixed or determinable price
upon the exercise of the option.
The Funds may sell securities index futures contracts and/or options thereon
in anticipation of or during a market decline to attempt to offset the decrease
in market value of investments in its portfolio, or purchase securities index
futures in order to gain market exposure. Subject to applicable laws, the Funds
may engage in transactions in securities index futures contracts (and options
thereon) which are traded on a recognized securities or futures exchange, or may
purchase or sell such instruments in the over-the-counter market. There
currently are limited securities index futures and options on such futures in
many countries, particularly emerging countries. The nature of the strategies
adopted by the Sub-Adviser, and the extent to which those strategies are used,
may depend on the development of such markets.
The Funds may engage in transactions involving foreign currency exchange
futures contracts. Such contracts involve an obligation to purchase or sell a
specific currency at a specified future date and at a specified price. The Funds
may engage in such transactions to hedge their respective holdings and
commitments against changes in the level of future currency rates or to adjust
their exposure to a particular currency.
The Funds may engage in transactions in interest rate futures transactions.
Interest rate futures contracts involve an obligation to purchase or sell a
specific debt security, instrument or basket thereof at a specified future date
at a specified price. The value of the contract rises and falls inversely with
changes in interest rates. The Funds may engage in such transactions to hedge
their holdings of debt instruments against future changes in interest rates.
Financial futures are futures contracts relating to financial instruments,
such as U.S. Government securities, foreign currencies and certificates of
deposit. Such contracts involve an obligation to purchase or sell a specific
security, instrument or basket thereof at a specified future date at a specified
price. Like interest rate futures
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contracts, the value of financial futures contracts rises and falls inversely
with changes in interest rates. The Funds may engage in financial futures
contracts for hedging and non-hedging purposes.
Under rules adopted by the Commodity Futures Trading Commission, each Fund
may enter into futures contracts and options thereon for both hedging and
non-hedging purposes, provided that not more than 5% of such Fund's total assets
at the time of entering the transaction are required as margin and option
premiums to secure obligations under such contracts relating to non-hedging
activities.
Gains and losses on futures contracts and options thereon depend on the
Sub-Adviser's ability to predict correctly the direction of securities prices,
interest rates and other economic factors. Other risks associated with the use
of futures and options are (i) imperfect correlation between the change in
market value of investments held by a Fund and the prices of futures and options
relating to investments purchased or sold by the Fund, and (ii) possible lack of
a liquid secondary market for a futures contract and the resulting inability to
close a futures position. The risk that a Fund will be unable to close out a
futures position or options contract will be minimized by only entering into
futures contracts or options transactions for which there appears to be a liquid
exchange or secondary market. The risk of loss in trading on 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.
OPTIONS TRANSACTIONS
The Funds may seek to increase their returns or may hedge their portfolio
investments through options transactions with respect to (i) securities,
instruments, indices or baskets thereof in which such Funds may invest and (ii)
foreign currencies. Purchasing a put option gives a Fund the right to sell a
specified security, currency or basket of securities or currencies at the
exercise price until the expiration of the option. Purchasing a call option
gives a Fund the right to purchase a specified security, currency or basket of
securities or currencies at the exercise price until the expiration of the
option.
Each Fund also may write (i.e., sell) put and call options on investments
held in its portfolio, as well as with respect to a foreign currency. A Fund
that has written an option receives a premium, which increases the Fund's return
on the underlying security or instrument in the event the option expires
unexercised or is closed out at a profit. However, by writing a call option, a
Fund will limit its opportunity to profit from an increase in the market value
of the underlying security or instrument above the exercise price of the option
for as long as the Fund's obligation as writer of the option continues. The
Funds may only write options that are "covered." A covered call option means
that so long as the Fund is obligated as the writer of the option, it will
earmark or segregate sufficient liquid assets to cover its obligations under the
option or own (i) the underlying security or instrument subject to the option,
(ii) securities or instruments convertible or exchangeable without the payment
of any consideration into the security or instrument subject to the option, or
(iii) a call option on the same underlying security with a strike price no
higher than the price at which the underlying instrument was sold pursuant to a
short option position.
By writing (or selling) a put option, a Fund incurs an obligation to buy the
security or instrument underlying the option from the purchaser of the put at
the option's exercise price at any time during the option period, at the
purchaser's election. The Funds may also write options that may be exercisable
by the purchaser only on a specific date. A Fund that has written a put option
will earmark or segregate sufficient liquid assets to cover its obligations
under the option or will own a put option on the same underlying security with
an equal or higher strike price.
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The Funds may engage in transactions in options which are traded on
recognized exchanges or over-the-counter. There currently are limited options
markets in many countries, particularly emerging countries such as Latin
American countries, and the nature of the strategies adopted by the Sub-Adviser
and the extent to which those strategies are used will depend on the development
of such option markets. The primary risks associated with the use of options are
(i) imperfect correlation between the change in market value of investments
held, purchased or sold by a Fund and the prices of options relating to such
investments; and (ii) possible lack of a liquid secondary market for an option.
STRUCTURED NOTES
Structured Notes are derivatives on which the amount of principal repayment
and/or interest payments is based upon the movement of one or more factors.
These factors include, but are not limited to, currency exchange rates, interest
rates (such as the prime lending rate and LIBOR) and stock indices such as the
S&P 500 Index. In some cases, the impact of the movements of these factors may
increase or decrease through the use of multipliers or deflators. The Funds may
use structured notes to tailor their investments to the specific risks and
returns the Sub-Adviser wishes to accept while avoiding or reducing certain
other risks.
SWAPS -- SWAP CONTRACTS
Swaps and Swap Contracts are derivatives in the form of a contract or other
similar instrument in which two parties agree to exchange the returns generated
by a security, instrument, basket thereof or index for the returns generated by
another security, instrument, basket thereof or index. The payment streams are
calculated by reference to a specific security, instrument, basket thereof or
index and an agreed upon notional amount. The relevant indices include but are
not limited to, currencies, fixed interest rates, prices and 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 the Funds 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.
A Fund will usually enter into swaps on a net basis, i.e., the two return
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Fund receiving or paying, as the case may
be, only the net amount of the two returns. A Fund's obligations under a swap
agreement will be accrued daily (offset against any amounts owing to the Fund)
and any accrued, but unpaid, net amounts owed to a swap counterparty will be
covered by the maintenance of a segregated account consisting of cash or liquid
securities. A Fund will not enter into any swap agreement unless the
counterparty meets the rating requirements set forth in guidelines established
by the Company's Board of Directors.
Interest rate and total rate of return swaps do not involve the delivery of
securities, other underlying assets, or principal. Accordingly, the risk of loss
with respect to interest rate and total rate of return swaps is limited to the
net amount of payments that a Fund is contractually obligated to make. If the
other party to an interest rate or total rate of return swap defaults, a Fund's
risk of loss consists of the net amount of payments that the Fund is
contractually entitled to receive. In contrast, currency swaps may 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 may be subject to the risk that the other party to the swap will
default on its contractual
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delivery obligations. If there is a default by the counterparty, a Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swaps 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 swaps market has
become relatively liquid. Swaps that include 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 "traditional" swaps.
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 Sub-Adviser is incorrect in its forecasts of
market values, interest rates and currency exchange rates, the investment
performance of the Funds would be less favorable than it would have been if this
investment technique were not used.
INVESTMENT LIMITATIONS
Each Fund, except the Emerging Markets, Latin American and International
Magnum Funds, is a diversified investment company under the 1940 Act, and is
subject to the following limitations as to 75% of its total assets: (a) the Fund
may not invest more than 5% of its total assets in the securities of any one
issuer, except obligations of the U.S. Government, and its agencies and
instrumentalities, and (b) the Fund may not own more than 10% of the outstanding
voting securities of any one issuer. The Emerging Markets, Latin American and
International Magnum Funds are non-diversified investment companies under the
1940 Act, which means that each of such Funds is not limited by the 1940 Act in
the proportion of its total assets that may be invested in the obligations of a
single issuer. Thus, each of such Funds may invest a greater proportion of its
total assets in the securities of a smaller number of issuers and, as a result,
will be subject to greater risk resulting from such concentration of its
portfolio securities. Each of such Funds, however, intends to comply with the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company.
MANAGEMENT OF THE COMPANY
INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp.
(the "Adviser") is the investment adviser and administrator of the Funds. The
Adviser provides investment advice and portfolio management services pursuant to
an advisory agreement (the "Advisory Agreement") and subject to the supervision
of the Company's Board of Directors, makes the Funds' investment decisions,
arranges for the execution of portfolio transactions and generally manages the
Funds' investments. The Advisory Agreement also provides that the Adviser may
appoint sub-advisers to perform these portfolio management responsibilities. See
"Investment Sub-Adviser" below. The Adviser is entitled to receive an aggregate
advisory fee computed daily and paid monthly at the following annual rates for
each Fund:
<TABLE>
<S> <C>
Asian Growth Fund.................................................... 1.00%
Emerging Markets Fund................................................ 1.25%
Global Equity Fund................................................... 1.00%
Global Equity Allocation Fund........................................ 1.00%
International Magnum Fund............................................ 0.80%
Japanese Equity Fund................................................. 1.00%
Latin American Fund.................................................. 1.25%
</TABLE>
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The Adviser reserves the right in its sole discretion from time to time to
waive all or a portion of its management fee to reimburse the Funds for all or a
portion of other expenses.
The Adviser is a wholly-owned subsidiary of Van Kampen American Capital,
Inc. ("Van Kampen American Capital"). Van Kampen American Capital is a
diversified asset management company with more than two million retail investor
accounts, extensive capabilities for managing institutional portfolios, and more
than $60 billion under management or supervision. Van Kampen American Capital's
more than 50 open-end and 37 closed-end funds and more than 2,500 unit
investment trust are professionally distributed by leading financial advisers
nationwide. The Distributor of the Company and the sponsor of the funds
mentioned above is also a wholly-owned subsidiary of Van Kampen American
Capital. The Adviser's principal office is located at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181.
Van Kampen American Capital is an indirect wholly-owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co. Morgan Stanley, Dean Witter, Discover & Co.
and various of its directly or indirectly owned subsidiaries, including Morgan
Stanley & Co. Incorporated, a registered broker-dealer and investment adviser,
and Morgan Stanley International are engaged in a wide range of financial
services. Their principal businesses include securities underwriting,
distribution and trading; merger, acquisition, restructuring and other corporate
finance advisory activities; merchant banking, stock brokerage and research
services; asset management; trading of futures, options, foreign exchange
commodities and swaps (including foreign exchange, commodities, indices and
interest rates); real estate advice, financing and investing; and global
custody, securities clearance services and securities lending; and credit
services.
INVESTMENT SUB-ADVISER. Morgan Stanley Asset Management Inc. ("MSAM," or
the "Sub-Adviser") is the investment sub-adviser of the Funds. The Sub-Adviser
provides investment advice and portfolio management services pursuant to an
investment sub-advisory agreement and, subject to the supervision of the Adviser
and the Company's Board of Directors, makes the Funds' investment decisions,
arranges for the execution of portfolio transactions and generally manages the
Funds' investments.
The Sub-Adviser is entitled to receive sub-advisory fees computed daily and
paid monthly. If the average daily net assets of a Fund during the monthly
period are less than or equal to $500 million, the Adviser shall pay MSAM
one-half of the total investment advisory fee payable to the Adviser by the Fund
(after application of any fee waivers in effect) for such monthly period. If a
Fund's average daily net assets for the monthly period are greater than $500
million, the Adviser shall pay MSAM a fee for such monthly period equal to the
greater of (a) one-half of what the total investment advisory fee payable to the
Adviser by the Fund (after application of any fee waivers in effect) for such
monthly period would have been had the Fund's average daily net assets during
such period been equal to $500 million, or (b) forty-five percent of the total
investment advisory fee payable to the Adviser by the Fund (after application of
any fee waivers in effect) for such monthly period.
MSAM, with principal offices at 1221 Avenue of the Americas, New York, NY
10020, conducts a worldwide portfolio management business. It provides a broad
range of portfolio management services to customers in the United States and
abroad. At August 31, 1997, MSAM had approximately $80.9 billion in assets under
management as an investment adviser or as a named fiduciary or fiduciary
adviser.
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PORTFOLIO MANAGERS -- The following individuals have primary portfolio
management responsibility for the Funds noted below:
ASIAN GROWTH FUND -- EAN WAH CHIN AND SEAH KIAT SENG. Ean Wah Chin is a
Managing Director of the Sub-Adviser and Morgan Stanley & Co. Incorporated
("Morgan Stanley") and is responsible for the Sub-Adviser's regional Asia
ex-Japan operations based in Singapore. She has shared primary management
responsibility for the Fund since it commenced operations. Ms. Chin was an ASEAN
scholar educated at the University of Singapore. Seah Kiat Seng joined the
Sub-Adviser's Singapore office in 1990 as a portfolio manager/analyst
specializing in the Southeast Asian markets. He is currently a Vice President,
responsible for investments in Thailand. He has shared primary management
responsibility for the Fund since it commenced operations. Kiat Seng is a
Chartered Financial Analyst and a qualified real estate valuer who has worked
for the Singapore Ministry of Finance. He was a Colombo Plan Scholar educated in
New Zealand.
EMERGING MARKETS FUND -- MADHAV DHAR AND ROBERT C. MEYER. Madhav Dhar is a
Managing Director of the Sub-Adviser and Morgan Stanley. He joined the
Sub-Adviser in 1984. He is a member of the Sub-Adviser's executive committee,
head of the Sub-Adviser's emerging markets group and chief investment officer of
the Sub-Adviser's global emerging market equity portfolios. He holds a B.S.
(honors) from St. Stephens College, Delhi University (India), and an M.B.A. from
Carnegie - Mellon University. Mr. Dhar has been primarily responsibe for
managing the Fund's assets since it commenced operations. Robert Meyer joined
the Sub-Adviser in 1989. He is a Managing Director of the Sub-Adviser and Morgan
Stanley and co-manager of the Adviser's emerging markets group and head of the
Adviser's Latin American team. He was born in Argentina and graduated from Yale
University with a B.A. in Economics and Political Science. He received a J.D.
from Harvard Law School. In addition, he is also a Chartered Financial Analyst.
Mr. Meyer has worked with Mr. Dhar in managing the Fund's assets since its
inception.
GLOBAL EQUITY FUND -- FRANCES CAMPION. Frances Campion joined the
Sub-Adviser in January 1990 as a Global Equity Fund Manager and is now a
Principal of Morgan Stanley. Her responsibilities include day-to-day management
of the Global Equity product. Ms. Campion has ten years global investment
experience. She is a graduate of University College, Dublin.
GLOBAL EQUITY ALLOCATION FUND -- BARTON M. BIGGS, MADHAV DHAR, FRANCINE J.
BOVICH AND ANN D. THIVIERGE. Barton Biggs has been Chairman and a director of
the Sub-Adviser since 1980 and a Managing Director of Morgan Stanley since 1975.
He is also a director of Morgan Stanley Group Inc. and a director and chairman
of various registered investment companies to which the Sub-Adviser and certain
of its affiliates provide investment advisory services. Mr. Biggs holds a B.A.
from Yale University and an M.B.A. from New York University. Information about
Madhav Dhar is included under the Emerging Markets Fund above. Francine Bovich
joined the Sub-Adviser as a Principal in 1993. She is responsible for portfolio
management and communication of the Sub-Adviser's asset allocation strategy to
institutional investor clients. She holds a B.A. in Economics from Connecticut
College and an M.B.A. in Finance from New York University. Ann Thivierge is a
Principal of the Sub-Adviser. She is a member of the Sub-Adviser's asset
allocation committee, primarily representing the Total Fund Management team
since its inception in 1991. Prior to joining the Sub-Adviser in 1986, she spent
two years at Edgewood Management Company, a privately held investment management
firm. Ms. Thivierge holds a B.A. in International Relations from James Madison
College, Michigan State University, and an M.B.A. in Finance from New York
University. Mr. Biggs, Mr. Dhar, Ms. Bovich and Ms. Thivierge have had primary
responsibility for managing the Fund since it commenced operations.
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<PAGE>
INTERNATIONAL MAGNUM FUND -- FRANCINE J. BOVICH. Information about Francine
Bovich is included under the Global Equity Allocation Fund above. Ms. Bovich has
had primary responsibility for managing the Fund since it commenced operations.
JAPANESE EQUITY FUND -- DOMINIC CALDECOTT AND KUNIHIKO SUGIO. Mr. Caldecott
is responsible for research and stock selection in the Pacific Basin and will
share primary responsibility for managing the Fund's assets upon commencement of
operations. He has ten years professional experience, primarily in Tokyo, Hong
Kong and Seoul. He became a Vice President of the Sub-Adviser and Morgan Stanley
in 1987, a principal in 1989, and a Managing Director in 1991. He is responsible
for a number of Pacific Basin investment programs for clients of Morgan Stanley.
Mr. Caldecott is a graduate of New College, Oxford, England. Kunihiko Sugio
joined the Sub-Adviser in December 1993 as a Vice President and manages
dedicated Japanese equity portfolios. He will share primary responsibility for
managing the Fund's assets upon commencement of operations. He graduated from
Wakayama Kokuritsu University.
LATIN AMERICAN FUND -- ROBERT L. MEYER AND ANDY SKOV. Robert Meyer and Andy
Skov share primary responsibility for managing the Fund's assets. Information
about Robert Meyer is included under the Emerging Markets Fund above. Andy Skov
joined the Sub-Adviser in 1994 as a Portfolio Manager. Currently, he is a Vice
President of the Sub-Adviser. He graduated from the University of California at
Berkeley with a B.A. (Phi Beta Kappa) in Political Science and Economics
Development.
ADMINISTRATOR. The Administrator provides the Company with administrative
services pursuant to an administration agreement (the "Administration
Agreement"). The services provided under the Administration Agreement are
subject to the supervision of the officers and Board of Directors of the Company
and include day-to-day administration of matters related to the corporate
existence of the Company, maintenance of its records, preparation of reports,
supervision of the Company's arrangements with its custodian and assistance in
the preparation of the Company's registration statements under federal and state
laws. The Administration Agreement also provides that the Administrator through
its agents will provide the Company dividend disbursing and transfer agent
services. For its services under the Administration Agreement, the Company pays
the Administrator a monthly fee which on an annual basis equals 0.25% of the
average daily net assets of the Funds.
Under a sub-administration agreement between the Administrator and The Chase
Manhattan Bank ("Chase"), Chase Global Funds Services Company ("CGFSC"), a
corporate affiliate of Chase, provides certain administrative services to the
Company. The Administrator supervises and monitors such administrative services
provided by CGFSC. The services provided under the sub-administration agreement
are subject to the supervision of the Board of Directors of the Company. The
Board of Directors of the Company has approved the provision of services
described above pursuant to the sub-administration agreement as being in the
best interests of the Company. CGFSC's business address is 73 Tremont Street,
Boston, Massachusetts 02108-3913. For additional information on the
Administration Agreement, see "Management of the Company" in the Statement of
Additional Information.
LOCAL ADMINISTRATORS FOR THE LATIN AMERICAN FUND. The Fund has, as required
by local law, entered into administration agreements with local administrators
in Brazil, Chile, and Colombia. A local administrator provides certain services
for the Fund with respect to the Fund's investments in that country, including
services relating to foreign exchange, local taxes, remittance of income and
capital gains, and repatriation of investments. The Fund's local administrator
in Brazil, Unibanco-Uniao, a Brazilian corporation, is paid by the Company an
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<PAGE>
annual fee of 0.125% of the Fund's average weekly net assets invested in Brazil.
The Fund's local administrator in Chile, Bice Chileconsult Agente de Valores
S.A., a Chilean corporation, is paid by the Company an annual fee of 0.125% of
the Fund's average weekly net assets invested in Chile. The Fund's local
administrator in Colombia, CitiTrust S.A., a Colombian trust company, is paid by
the Company an annual fee of $1,000 plus 0.20% per transaction in Colombia.
DIRECTORS AND OFFICERS. Pursuant to the Company's Articles of
Incorporation, the Board of Directors decides upon matters of general policy and
reviews the actions of the Adviser, Sub-Adviser, Administrator and Distributor.
The Officers of the Company conduct and supervise its daily business operations.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the
"Distributor") serves as the distributor of the shares of the Company. Under its
distribution agreement (the "Distribution Agreement") with the Company, the
Distributor sells shares of the Company upon the terms and at the current
offering price described in this Prospectus. The Distributor is not obligated to
sell any specific number of shares of the Company.
The Company currently offers Class A shares, Class B shares and Class C
shares of the Funds. The Company may in the future offer one or more classes of
shares for the Funds that may have sales charges or other distribution charges
or a combination thereof different from those of the classes currently offered.
The Board of Directors of the Company has approved and adopted the
Distribution Agreement for the Company and a Plan for each class of the Funds
pursuant to Rule 12b-1 under the 1940 Act (each a "Plan" and together, the
"Plans"). Under each Plan, the Distributor is entitled to receive from each Fund
a distribution fee, which is accrued daily and paid quarterly, at a maximum rate
of 0.75% of the Class B shares and Class C shares of the Fund, on an annualized
basis of the average daily net assets of such classes. The actual amount of such
compensation is agreed upon by the Company's Board of Directors and by the
Distributor. With respect to Class B shares, the Distributor expects to utilize
substantially all of its fee to reimburse itself for commissions paid to
investment dealers, banks or financial services firms that provide distribution
services (each, a "Participating Dealer"). With respect to the Class C shares,
the Distributor expects to reallocate substantially all of its fee to such
Participating Dealers. 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. Class A shares, Class B shares and Class C shares are subject to a
service fee at an annual rate of 0.25% on an annualized basis of the average
daily net assets of such class of shares of the Funds as compensation the
Distributor for shareholder services. In addition to such payments, the Adviser
may use its advisory fees or other resources to pay expenses associated with
activities which might be construed to be financing the sale of the Fund's
shares, including payments to third parties that provide assistance in the
distribution effort (in addition to selling shares and providing shareholder
services).
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.
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<PAGE>
Each Plan for a class of Company shares, under the terms of Rule 12b-1, will
remain in effect only if approved at least annually 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 ("12b-1 Directors"). Each Plan may be terminated at any time by
a vote of a majority of the 12b-1 Directors or by a vote of a majority of the
outstanding voting securities of the applicable class of the Funds. The fee set
forth above will be paid by the appropriate class to the Distributor unless and
until a Plan is terminated or not renewed. The Company intends to operate each
Plan in accordance with its terms and the NASD Conduct Rules concerning sales
charges.
PAYMENTS TO FINANCIAL INSTITUTIONS. The Adviser or its affiliates may
compensate certain financial institutions for the continued investment of their
customers' assets in the Funds pursuant to the advice of such financial
institutions. These payments will be made directly by the Adviser or its
affiliates from their assets, and will not be made from the assets of the
Company or by the assessment of a sales charge on shares. Such financial
institutions may also perform certain shareholder or recordkeeping services that
would otherwise be performed by ACCESS. The Adviser may elect to enter into a
contract to pay the financial institutions for such services.
EXPENSES. Each Fund is responsible for payment of certain other fees and
expenses (including professional fees, custodial fees and printing and mailing
costs) specified in the Administration and Distribution Agreements.
PURCHASE OF SHARES
GENERAL
The Company offers three classes of shares to the public on a continuous
basis through the Distributor as principal underwriter, which is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. Shares are also offered
through members of the NASD who are acting as securities dealers ("dealers") and
NASD members or eligible non-NASD members who are acting as brokers or agents
for investors ("brokers"). The term "dealers" and "brokers" are sometimes
referred to herein as "Participating Dealers."
Initial investments must be at least $500 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. The $500
minimums may be waived by the Distributor for plans involving periodic
investments. Shares of the Company may be sold in foreign countries where
permissible. The Company and the Distributor reserve the right to refuse any
order for the purchase of shares. The Company also reserves the right to suspend
the sale of the Company's shares in response to conditions in the securities
markets or for other reasons.
Shares of the Company may be purchased on any business day through
Participating Dealers. Shares may also be purchased by completing the
application accompanying this Prospectus and forwarding the application, through
the Participating Dealer, to the shareholder service agent, ACCESS Investor
Services, Inc. ("ACCESS"), a wholly-owned subsidiary of Van Kampen American
Capital, Inc. When purchasing shares of the Company, investors must specify
whether the purchase is for Class A shares, Class B shares or Class C shares.
Shares are offered at the next determined net asset value per share, plus an
initial or contingent deferred sales charge depending on the class of shares
chosen by the investor, as shown in the tables herein. See "Valuation of Shares"
for a further description of net asset value computations.
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<PAGE>
Generally, the net asset values per share of the Class A shares, Class B
shares and Class C shares are expected to be substantially the same. Under
certain circumstances, however, the per share net asset values of the classes of
shares may differ from one another, reflecting the daily expense accruals of the
higher distribution fees applicable with respect to the Class B shares and Class
C shares and the differential in the dividends paid on the classes of shares.
The price paid for shares purchased is based on the next calculation of net
asset value (plus sales charges, where applicable) after an order is received by
a Participating Dealer provided such order is transmitted to the Distributor
prior to the Distributor's close of business on such day. Orders received by
Participating Dealers after the close of the New York Stock Exchange (the
"NYSE") are priced based on the net asset value calculated after the next day's
close provided they are received by the Distributor prior to the Distributor's
close of business on such day. It is the responsibility of Participating Dealers
to transmit orders received by them to the Distributor so they will be received
prior to such time.
Each class of shares represents an interest in the same portfolio of
investments, has the same rights and is identical in all respects, except that
(i) Class B shares and Class C shares bear the expenses of the deferred sales
arrangement and any expenses (including higher distribution fees) resulting from
such sales arrangement, (ii) generally, each class has exclusive voting rights
with respect to approvals of the Rule 12b-1 distribution plan to which its
distribution fee or service fee is paid, (iii) certain shares are subject to a
conversion feature, (iv) each class has different exchange privileges and (v)
each class has different shareholder service options available. The net income
attributable to Class B shares and Class C shares and the dividends payable on
Class B shares and Class C shares will be reduced by the amount of the higher
distribution fees associated with such class of shares. Sales personnel of
Participating Dealers distributing the Company's shares and other persons
entitled to receive compensation for selling such shares may receive differing
compensation for selling Class A shares, Class B shares or Class C shares.
In deciding which class of shares to purchase, investors should take into
consideration their investment goals, present and anticipated purchase amounts,
time horizons and temperments. Investors should consider whether, during the
anticipated life of their investment in a Fund, the accumulated distribution
fees and contingent deferred sales charges on Class B shares prior to conversion
or Class C shares would be less than the initial sales charge on Class A shares
purchased at the same time, and to what extent such differential would be offset
by the higher dividends per share on Class A shares. To assist investors in
making this determination, the table under the caption "Fund Expenses" sets
forth examples of the charges applicable to each class of shares. In this
regard, Class A shares may be more beneficial to the investor who qualifies for
reduced initial sales charges or purchases shares at net asset value, as
described herein under "Purchase of Shares -- Class A Shares." For these
reasons, it is presently the policy of the Distributor not to accept any order
of $500,000 or more for Class B shares or any order of $1 million or more for
Class C shares as it ordinarily would be more beneficial for such investor to
purchase Class A shares.
Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase for most
accounts under $1 million, investors in Class A shares do not have all their
funds invested initially and, therefore, initially own fewer shares. Other
investors might determine that it is more advantageous to purchase either Class
B shares or Class C shares and have all their funds invested initially, although
remaining subject to a contingent deferred sales charge. Ongoing distribution
fees on Class B shares and Class C shares will be offset to the extent of the
additional funds originally invested and any return realized on those funds.
However, there can
44
<PAGE>
be no assurance as to the return, if any, which will be realized on such
additional funds. For investments held for ten years or more, the relative value
upon liquidation of the three classes tends to favor Class A or Class B shares,
rather than Class C shares.
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges and/or have a longer-term investment
horizon. Class B shares may be appropriate for investors who wish to avoid a
front-end sales charge, put 100% of their investment dollars to work
immediately, and/or have a longer-term investment horizon. Class C shares may be
appropriate for investors who wish to avoid a front-end sales charge, put 100%
of their investment dollars to work immediately, have a shorter-term investment
horizon and/or desire a short contingent deferred sales charge schedule.
The distribution expenses incurred by the Distributor in connection with the
sale of the shares will be reimbursed, in the case of Class A shares, from the
proceeds of the initial sales charge and, in the case of Class B shares and
Class C shares, from the proceeds of the ongoing distribution fee and any CDSC
incurred upon redemption within five years or one year, respectively, of
purchase. Investors should understand that the purpose and function of the CDSC
and ongoing distribution fee with respect to Class B shares and Class C shares
are the same as those of the initial sales charge with respect to Class A
shares. See "Distribution Plans."
The Distributor may from time to time implement programs under which a
Participating Dealer's sales force may be eligible to win nominal awards for
certain sales efforts or under which the Distributor will reallow to any
Participating Dealer that sponsors sales contests or recognition programs
conforming to criteria established by the Distributor, or participates in sales
programs sponsored by the Distributor, an amount not exceeding the total
applicable sales charges on the sales generated by the Participating Dealer at
the public offering price during such programs. Other programs provide, among
other things and subject to certain conditions, for certain favorable
distribution arrangements for shares of the Company. Also, the Distributor in
its discretion may from time to time, pursuant to objective criteria established
by the Distributor, pay fees to, and sponsor business seminars for, qualifying
authorized dealers for certain services or activities which are primarily
intended to result in sales of shares of the Company. Fees may include payment
for travel expenses, including lodging, incurred in connection with trips taken
by invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. In some instances, additional compensation or promotional incentives may
be offered to Participating Dealers that have sold or may sell significant
amounts of shares during specified periods of time. Such fees paid for such
services and activities with respect to a Fund will not exceed in the aggregate
1.25% of the average total daily net assets of the Fund on an annual basis. All
of the foregoing payments are made by the Distributor out of its own assets.
These programs will not change the price an investor will pay for shares or the
amount that a Fund will receive from such sale.
CLASS A SHARES
The public offering price of Class A shares is the next determined net asset
value plus a sales charge, as set forth herein.
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<PAGE>
SALES CHARGE TABLE
<TABLE>
<CAPTION>
REALLOWED TO DEALERS
AS % OF AS % OF NET AMOUNT (AS % OF OFFERING
SIZE OF INVESTMENT OFFERING PRICE INVESTED PRICE)
- --------------------------------------------------------- --------------- ------------------- -----------------------
<S> <C> <C> <C>
Less than $50,000........................................ 5.75 6.10 5.00
$50,000 but less than $100,000........................... 4.75 4.99 4.00
$100,000 but less than $250,000.......................... 3.75 3.90 3.00
$250,000 but less than $500,000.......................... 2.75 2.83 2.25
$500,000 but less than $1,000,000........................ 2.00 2.04 1.75
$1,000,000 or more*...................................... * * *
</TABLE>
- ------------------
* No initial sales charge is payable at the time of purchase on investments of
$1 million or more, although for such investments the Fund imposes a
contingent deferred sales charge of 1.00% in the event of certain redemptions
within one year of the purchase. A commission will be paid to brokers, dealers
or financial intermediaries who initiate and are responsible for purchases of
$1 million or more as follows: 1.00 % on sales to $2 million, plus 0.80% on
the next $1 million, plus 0.50% on the excess over $3 million. See "Purchase
of Shares -- Purchase of Class B Shares" and "-- Purchase of Class C Shares"
for additional information with respect to contingent deferred sales charges.
In addition to the reallowances from the applicable public offering price
described herein, the Distributor may, from time to time, pay or allow
additional reallowances or promotional incentives, in the form of cash or other
compensation, to Participating Dealers that sell shares of the Company.
Participating Dealers which are reallowed all or substantially all of the sales
charges may be deemed to be underwriters for purposes of the 1933 Act.
The Distributor may also pay financial institutions (which may include
banks) and other industry professionals that provide services to facilitate
transactions in shares of the Company for their clients a transaction fee up to
the level of the reallowance allowable to Participating Dealers described
herein. Such financial institutions, other industry professionals and
Participating Dealers are hereinafter referred to as "Service Organizations."
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Company. State
securities laws regarding registration of banks and other financial institutions
may differ from the interpretations of federal law expressed herein and banks
and other financial institutions may be required to register as dealers pursuant
to certain state laws.
QUANTITY DISCOUNTS
Investors purchasing Class A shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
Investors or their Participating Dealers must notify the Company whenever a
quantity discount is applicable to purchases. Upon such notification, an
investor will receive the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their Participating Dealer or the
Distributor.
A person eligible for a reduced sales charge includes an individual, their
spouse and children under 21 years of age, and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in
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<PAGE>
combination, by any of the foregoing; a trustee or other fiduciary purchasing
for a single trust estate or single fiduciary account, or a "company" as defined
in Section 2(a)(8) of the 1940 Act.
The phrase "Participating Funds," as used herein, refers to certain open-end
investment companies advised by the Adviser or Van Kampen American Capital Asset
Management Inc. and distributed by the Distributor as determined from time to
time by the Company's Board of Directors.
VOLUME DISCOUNTS. The size of investment shown in the preceding sales
charge tables applies to the total dollar amount being invested by any person in
shares of a Fund or in any combination of shares of the Fund and shares of other
Participating Funds, although other Participating Funds may have different sales
charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
sales charge tables may also be determined by combining the amount being
invested in shares of the Participating Funds plus the current offering price of
all shares of the Participating Funds which have been previously purchased and
are still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an
investor to obtain a reduced sales charge by aggregating investments over a
13-month period to determine the sales charge as outlined in the preceding
table. The size of investment shown in the preceding tables also includes
purchases of shares of the Participating Funds over a 13-month period based on
the total amount of intended purchases plus the value of all shares of the
Participating Funds previously purchased and still owned. An investor may elect
to compute the 13-month period starting up to 90 days before the date of
execution of a Letter of Intent. Each investment made during the period receives
the reduced sales charge applicable to the total amount of the investment goal.
If the goal is not achieved within the period, the investor must pay the
difference between the sales charges applicable to the purchases made and the
sales charges previously paid. The initial purchase must be for an amount equal
to at least 5% of the minimum total purchased amount of the level selected. If
trades not initially made under a Letter of Intent subsequently qualify for a
lower sales charge through the 90-day back-dating provisions, an adjustment will
be made at the expiration of the Letter of Intent to give effect to the lower
charge. Such adjustments in sales charge will be used to purchase additional
shares for the shareholder at the applicable discount category. Additional
information is contained in the application form accompanying this Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A shares may be entitled to reduced initial sales
charges in connection with unit investment trust reinvestment programs and
purchases by registered representatives of selling firms or purchases by persons
affiliated with the Company or the Distributor. The Company reserves the right
to modify or terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAMS. The Company permits
unitholders of unit investment trusts to reinvest distributions from such trusts
in Class A shares of the Company at net asset value with no minimum initial or
subsequent investment requirement if the administrator of an investor's unit
investment trust program meets certain uniform criteria relating to cost savings
by the Company and the Distributor. The total sales charge for all other
investments made from unit trust distributions will be 1.00% of the offering
price (1.01% of net asset value). Of this amount, the Distributor will pay to
the Participating Dealer, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their Participating Dealer or the Distributor.
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<PAGE>
The administrator of such a unit investment trust must have an agreement
with the Distributor pursuant to which the administrator will (1) submit a
single bulk order and make payment with a single remittance for all investments
in a Fund during each distribution period by all investors who choose to invest
in the Fund through the program and (2) provide ACCESS with appropriate backup
data for each participating investor in a computerized format fully compatible
with ACCESS' processing system.
As further requirements for obtaining these special benefits, the Company
also requires that all dividends and other distributions by a Fund be reinvested
in additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Company will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Company reserves the right to
modify or terminate this program at any time.
NAV PURCHASE OPTIONS. Class A shares of a Fund may be purchased without an
initial sales charge, at net asset value, upon written assurance that the
purchase is made for investment purposes and that the shares will not be resold
except through redemption by the Fund, by:
(1) Current or retired trustees/directors of funds advised by the
Adviser or Van Kampen American Capital Asset Management, Inc. and such
persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of Morgan
Stanley Group Inc. and any of its subsidiaries, employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser, and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and registered representatives of
financial institutions that have a selling group agreement with the
Distributor and their spouses and children under 21 years of age when
purchasing for any accounts they beneficially own, or, in the case of any
such financial institution, when purchasing for retirement plans for such
institution's employees.
(4) Registered investments advisers, trust companies and bank trust
departments investing on their own behalf or on behalf of their clients
provided that the aggregate amount invested in a Fund alone, or in any
combination of shares of the Fund and shares of other Participating Funds as
described herein under "Purchase of Shares -- Class A Shares -- Volume
Discounts," during the 13-month period commencing with the first investment
pursuant hereto equals at least $1 million. The Distributor may pay
Participating Dealers through which purchases are made an amount up to 0.50%
of the amount invested, over a 12-month period following such transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement
plans of organizations with retirement plan assets of $3 million or more and
which invest in multiple fund families through national wirehouse alliance
programs. The Distributor may pay commissions of up to 1.00% for such
purchases.
(6) Accounts as to which a broker, dealer or financial intermediary
charges an account management fee ("wrap accounts"), provided the broker,
dealer or financial intermediary has a separate agreement with the
Distributor.
(7) Trusts created under pension, profit sharing or other employee
benefit plans qualified under Section 401(a) of the Code, or custodial
accounts held by a bank created pursuant to Section 403(b) of the Code and
sponsored by non-profit organizations defined under Section 501(c)(3) of the
Code and assets
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<PAGE>
held by an employer or trustee in connection with an eligible deferred
compensation plan under Section 457 of the Code. Such plans will qualify for
purchases at net asset value provided that (1) the initial amount invested
in the Participating Funds is at least $500,000 or (2) such shares are
purchased by an employer sponsored plan with more than 100 eligible
employees. Section 403(b) and similar accounts for which Van Kampen American
Capital Trust Company ("VKAC Trust") serves as custodian will not be
eligible for net asset value purchases based on the aggregate investment
made by the plan or the number of eligible employee, except under certain
uniform criteria established by the Distributor from time to time. A
commission will be paid to dealers who initiate and are responsible for such
purchases within a rolling twelve month period as follows: 1.00% on sales up
to $2 million, plus 0.80% on the next $1 million, plus 0.50% on the next $47
million, plus 0.25% on the excess over $50 million.
(8) Individuals who are members of a "qualified group." For this
purpose, a qualified group is one which (i) has been in existence for more
than six months, (ii) has a purpose other than to acquire shares of the
Funds or similar investments, (iii) has given and continues to give its
endorsement or authorization, on behalf of the group, for purchase of shares
of the Funds and other Participating Funds, (iv) has a membership that the
authorized dealer can certify as to the group's members and (v) satisfies
other uniform criteria established by the Distributor for the purpose of
realizing economies of scale in distributing such shares. A qualified group
does not include one whose sole organizational nexus, for example, is that
its participants are credit card holders of the same institution, policy
holders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups. Shares purchased
in each group's participant's account in connection with this privilege will
be subject to a contingent deferred sales charge of one percent in the event
of redemption within one year of purchase, and a commission will be paid to
authorized dealers who initiate and are responsible for such sales to each
individual as follows: 1.00% on sales to $2 million, plus 0.80% on the next
$1 million and 0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children and grandchildren
under 21 years of age, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with ACCESS by the investment
adviser, trust company or bank trust department, provided that ACCESS receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized dealer may charge a transaction
fee for placing an order to purchase shares pursuant to this provision or for
placing a redemption order with respect to such shares. Authorized dealers will
be paid a service fee as described herein under "Distribution Plans" on
purchases made as described in (3) through (8) above.
The Company may terminate, or amend the terms of, offering shares of the
Funds at net asset value to the foregoing groups at any time.
PURCHASE OF CLASS B SHARES
Class B shares of the Funds may be purchased at net asset value without an
initial sales charge. However, a CDSC will be imposed on certain Class B shares
redeemed within five years of purchase. The charge is assessed on an amount
equal to the lesser of the then-current market value of the Class B shares
redeemed or the total cost of such shares. Accordingly, the CDSC will not be
applied to dollar amounts representing an increase in the
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net asset values above the initial purchase price of the shares being redeemed.
In addition, no charge is assessed on redemptions of Class B shares derived from
reinvestment of dividends or capital gains distributions.
In determining whether the CDSC is applicable to a redemption, the
calculation is made in the manner that results in the lowest possible rate.
Therefore, it is assumed that the redemption is first of any Class B shares in
the shareholder's account that represent reinvested dividends and/or
distributions, and/or of Class B shares held longer than five years after
purchase, and next of Class B shares held the longest during the initial
five-year period after purchase. The amount of the CDSC, if any, will vary
depending on the number of years from the time of purchase of Class B shares
until the redemption of such shares (the "holding period"). The following table
sets forth the rates of the CDSC.
CONTINGENT DEFERRED SALES CHARGE
<TABLE>
<CAPTION>
SALES CHARGE AS PERCENTAGE
YEAR SINCE PURCHASE OF THE DOLLAR AMOUNT
PAYMENT WAS MADE SUBJECT TO CHARGE
- ------------------------------------------------------------------- ---------------------------
<S> <C>
First.............................................................. 5.00%
Second............................................................. 4.00%
Third.............................................................. 3.00%
Fourth............................................................. 2.50%
Fifth.............................................................. 1.50%
Thereafter......................................................... None*
</TABLE>
- ------------------
* As described more fully below, Class B shares automatically convert to Class A
shares after the eighth year following purchase.
Proceeds from any CDSC are paid to the Distributor and are used by the
Distributor to defray its expenses related to providing distribution-related
services to the Company in connection with the sale of the Class B shares. The
Distributor will make payments to the Participating Dealers that handle the
purchases of such shares at a rate not in excess of 4.00% of the purchase price
of such shares at the time of purchase and expects to pay to Participating
Dealers a portion of its distribution fee under the Rule 12b-1 Plan, as
described under "Management of the Company -- Distributor" above. Additionally,
the Distributor may pay additional promotional incentives, in the form of cash
or other compensation, to authorized dealers that sell Class B shares of the
Funds. The combination of the CDSC and the distribution fee facilitates the
ability of the Company to sell the Class B shares without a sales charge being
deducted at the time of purchase.
AUTOMATIC CONVERSION TO CLASS A SHARES. After the eighth year following
purchase, Class B shares will automatically convert to Class A shares and will
no longer be subject to the higher distribution fees. Such conversion will be on
the basis of the relative net asset values of the two classes, without the
imposition of any sales load, fee or other charge. Under current tax law, the
conversion is not a taxable event to the shareholder.
PURCHASE OF CLASS C SHARES
Class C shares of the Funds may be purchased at the net asset value per
share and such shares are subject to a CDSC at the rate of 1.00% of the lesser
of the current market value of the shares redeemed or the total cost of such
shares for shares that are redeemed within one year of purchase. The Distributor
will make payments to the Participating Dealers that handle the purchases of
such shares at the rate of 1.00% of the purchase price of such shares at the
time of purchase and expects to pay to Participating Dealers most of its
distribution fee, with
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respect to such shares, under the Rule 12b-1 Plan for such class of shares, as
described under "Management of the Company -- Distributor" above. In determining
whether a CDSC is payable, and, if so, the amount of the fee or charge, it is
assumed that shares not subject to such fee or charge are the first redeemed.
WAIVER OF CDSC
The CDSC will be waived on the redemption of Class B or Class C shares (i)
following the death or initial determination of disability (as defined in the
Code) of a shareholder; (ii) certain distributions from an IRA or other
retirement plan; (iii) to the extent that shares redeemed have been withdrawn
from a Systematic Withdrawal Plan, up to a maximum of 12% per year from a
shareholder account based on the value of the account at the time the Withdrawal
Plan is established; or (iv) effected pursuant to the right of the Company to
liquidate a shareholder's account as described herein under "Redemption of
Shares." A shareholder, or their representative, must notify the Transfer Agent
prior to the time of redemption if such circumstances exist and the shareholder
is eligible for this waiver. The shareholder is responsible for providing
sufficient documentation to the Transfer Agent to verify the existence of such
circumstances. For information on the imposition and waiver of the CDSC, contact
Investor Services at 1-800-282-4404.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
No initial sales charge or CDSC will be payable on the shares of the Funds
or classes thereof purchased through the automatic reinvestment of dividends and
distributions on shares of the Funds.
REINSTATEMENT PRIVILEGE OF EACH CLASS
A shareholder who has redeemed Class A shares of a Participating Fund may
reinvest up to the full amount received at net asset value at the time of the
reinvestment in Class A shares of the Funds without payment of a sales charge. A
shareholder who has redeemed Class B shares of a Participating Fund and paid a
CDSC upon such redemption may reinvest up to the full amount received upon
redemption in Class A shares of a Fund at net asset value with no initial sales
charge. A Class C shareholder who has redeemed shares of a Participating Fund
may reinstate any portion or all of the net proceeds of such redemption in Class
C shares of a Fund with credit given for any CDSC paid upon such redemption. The
reinstatement privilege as to any specific Class A, Class B or Class C shares
must be exercised within 180 days of the redemption. The Transfer Agent must
receive from the shareholder or the shareholder's Participating Dealer both a
written request for reinstatement and a check or wire which does not exceed the
redemption proceeds. The written request must state that the reinstatement is
made pursuant to this reinstatement privilege. If a loss is realized on the
redemption of Class A shares, the reinstatement may be subject to the "wash
sale" rules if made within 30 days of the redemption, resulting in a
postponement of the recognition of such loss for federal income tax purposes.
The reinstatement privilege may be terminated or modified at any time.
Reinstatement at net asset value is also offered to participants in those
eligible retirement plans held or administered by VKAC Trust for repayment of
principal (and interest) on their borrowings. See the Statement of Additional
Information for further discussion of waiver provisions.
SHAREHOLDER SERVICES
The Company offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. Unless otherwise described below, each of these
services may be modified or terminated by the Company at any time.
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<PAGE>
INVESTMENT ACCOUNT. Each shareholder has an investment account under which
shares are held by ACCESS. ACCESS acts as transfer agent for the Company and
performs bookkeeping, data processing and administration services related to the
maintenance of shareholder accounts. Except as described herein, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder will receive statements at least
quarterly from ACCESS showing any reinvestments of dividends and capital gains
distributions and any other activity in the account since the preceding
statement. Such shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gains distributions and systematic purchases or redemptions. Additions to an
investment account may be made at any time by purchasing shares through
authorized brokers, dealers or financial intermediaries or by mailing a check
directly to ACCESS.
SHARE CERTIFICATES. Generally, the Company will not issue share
certificates. However, upon written or telephone request to the Company, a share
certificate will be issued, representing shares (with the exception of
fractional shares) of the Company. A shareholder will be required to surrender
such certificates upon redemption or transfer thereof. In addition, if such
certificates are lost the shareholder must write to Morgan Stanley Fund, Inc.
c/o ACCESS, P.O. Box 418256, Kansas City, MO 64141-9256, requesting an
"affidavit of loss" and to obtain a Surety Bond in a form acceptable to ACCESS.
On the date the letter is received, ACCESS will calculate a fee for replacing
the lost certificate equal to no more than 2.00% of the net asset value of the
issued shares and bill the party to whom the replacement certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the applicable Fund. Such shares are acquired at net asset value (without sales
charge) on the record date of such dividend or distribution. Unless the
shareholder instructs otherwise, the reinvestment plan is automatic. This
instruction may be made by telephone by calling (800) 282-4404 or (800) 772-8889
for the hearing impaired, or in writing to ACCESS. The investor may, on the
initial application or prior to any declaration, instruct that dividends be paid
in cash and capital gains distributions be reinvested at net asset value, or
that both dividends and capital gains distributions be paid in cash. For further
information, see "Dividends and Distributions."
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Funds. Additional information is
available from the Distributor or authorized brokers, dealers or financial
intermediaries.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanied by this
Prospectus or by calling (800) 282-4404 or (800) 772-8889 for the hearing
impaired, elect to have all dividends and other distributions paid on a class of
shares of the Company invested into shares of the same class of any
Participating Fund so long as a pre-existing account for such class of shares
exists for such shareholder. Both accounts must also be of the same type, either
non-retirement or retirement. Any two non-retirement accounts can be used. If
the accounts are retirement accounts, they must both be for the same class and
of the same type of retirement plan (e.g. IRA, 403(b)(7), 401(k), Keogh) and for
the benefit of the same individual.
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<PAGE>
If the qualified pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the portfolio into which distributions would be invested. Distributions are
invested into the selected portfolio at its net asset value as of the payable
date of the distribution only if shares of such selected portfolio have been
registered for sale in the investor's state and are currently available for
sale.
RETIREMENT PLANS. Eligible investors may establish IRAs; SEP; and pension
and profit sharing plans; 401(k) plans; or Section 403(b)(7) plans in the case
of employees of public school systems and certain non-profit organizations.
Documents and forms containing detailed information regarding these plans are
available from the Distributor. VKAC Trust serves as custodian under the IRA,
403(b)(7) and Keogh plans. Details regarding fees, as well as full plan
administration for profit sharing, pension and 401(k) plans, are available from
the Distributor.
EXCHANGE PRIVILEGE. Shares of the Funds or any Participating Fund may be
exchanged with shares of the same class of another Participating Fund based on
the net asset value of each fund on the date of exchange, subject to certain
limitations. Before effecting an exchange, shareholders in the Company should
obtain and read a current prospectus of the Participating Funds into which the
exchange is to be made. SHAREHOLDERS MAY ONLY EXCHANGE INTO SUCH OTHER
PARTICIPATING FUNDS AS ARE LEGALLY AVAILABLE FOR SALE IN THEIR STATE AND ARE
CURRENTLY AVAILABLE FOR SALE.
To be eligible for exchange, shares of a Fund generally must have been
registered in the shareholder's name for at least 30 days prior to an exchange.
Shares of a Fund registered in a shareholder's name for less than 30 days may
only be exchanged upon receipt of prior approval of the Adviser. Under normal
circumstances, it is the policy of the Adviser not to approve such requests.
Class A shares of a Participating Fund that generally impose an initial
sales charge are not subject to any sales charge upon exchange into another
Participating Fund. Class A shares of Participating Funds that do not impose an
initial sales charge will be subject to the applicable sales charge of the
Participating Fund being obtained in the exchange.
No sales charge is imposed upon the exchange of a Class B share or a Class C
share. The CDSC schedule, conversion schedule and holding period applicable to a
Class B share or a Class C share acquired through the exchange privilege is
determined by reference to the Participating Fund from which such share
originally was purchased.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is not included in the tax basis of
the exchanged shares, but is carried over and included in the tax basis of the
shares acquired.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form accompanied by this Prospectus. See
"Redemption of Shares--Telephone Transaction Procedures" for more information.
The exchange will take place at the relative net asset values of the shares next
determined after receipt of such request with adjustment for any additional
sales charge. Any shares exchanged begin earning dividends on the next business
day after the exchange is affected. If the exchanging shareholder does not have
an account in the portfolio whose shares are
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<PAGE>
being acquired, a new account will be established with the same registration,
dividend and capital gains options (except dividend diversification options) and
broker, dealer or financial intermediary of record as the account from which
shares are exchanged, unless otherwise specified by the shareholder. In order to
establish a systematic withdrawal plan for the new account or dividend
diversification options for the new account, an exchanging shareholder must file
a specific written request. The Company reserves the right to reject any order
to acquire its shares through exchange. In addition, the Company may restrict or
terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment. If an account has
multiple owners, ACCESS may rely on the instructions of any one owner.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $5,000 or more at the offering prices next completed after receipt of
instructions may establish a quarterly, semi-annual or annual withdrawal plan.
Investors whose shares in a single account total $10,000 or more at the offering
prices next completed after receipt of instruction may establish a monthly,
quarterly, semi-annual, or annual withdrawal plan. This plan provides for the
orderly use of the entire account, not only the income but also the principal,
if necessary. Each withdrawal constitutes a redemption of shares on which
taxable gain or loss will be recognized. The plan holder may arrange for
monthly, quarterly, semi-annual, or annual checks in any amount not less than
$25.
The CDSC on Class B and Class C shares is waived for withdrawals under the
Systematic Withdrawal Plan of a maximum 1% per month, 3% per quarter, 6%
semiannually or 12% annually, of the initial value of a shareholder's account.
Under this CDSC waiver policy, amounts withdrawn each period will be paid by
redeeming first shares not subject to a CDSC because the shares were purchased
by the reinvestment of dividends or capital gains distributions, the CDSC period
has elapsed or some other waiver of the CDSC applies. If shares subject to a
CDSC must be redeemed, shares held for the longest period of time will be
redeemed first and continuing with shares held the next longest period of time
until shares held the shortest period of time are redeemed.
Under the plan, sufficient shares of the Company are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with purchases of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. The Company reserves the right to amend or terminate the systematic
withdrawal program on 30 days' notice to its shareholders.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A shares can
use ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of ACH. In addition, the shareholder must fill out the appropriate
section of the account application. The shareholder must also include a voided
check or deposit slip from the bank account into which redemptions are to be
deposited together with the completed application. Once ACCESS has received the
application and the voided check or deposit slip, such shareholder's designated
bank account, following any redemption, will be credited with the proceeds of
such redemption. Once enrolled in the ACH plan, a shareholder may terminate
participation at any time by writing to ACCESS or by calling 1-800-282-4404. A
shareholder's bank may charge a fee for ACH transfers.
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TRANSFER OF REGISTRATION. You may transfer the registration of any of your
Company shares to another person by writing to the Company c/o ACCESS, P.O. Box
418256, Kansas City, Missouri 64141-9256. As in the case of redemptions, the
written request must be received in "good order" before any transfer can be
made. Shares held in broker street name may be transferred only by contacting
your Participating Dealer.
REDEMPTION OF SHARES
Shareholders may redeem for cash some or all of their shares without charge
by the Company (other than, any applicable CDSC) at any time by sending a
written request in proper form directly to the Company c/o ACCESS, P.O. Box
418256, Kansas City, Missouri 64141-9256, by placing the redemption request
through a Participating Dealer or by calling the Company. See "Purchase of
Shares" for a discussion of applicable CDSC levels.
WRITTEN REDEMPTION REQUESTS. In the case of redemption requests sent
directly to ACCESS, the redemption request should indicate the number of shares
or dollars to be redeemed, the class designation of such shares, the account
number and be signed exactly as the shares are registered. Signatures must
conform exactly to the account registration. If the proceeds of the redemption
would exceed $50,000, or if the proceeds are not to be paid to the record owner
at the record address, or if the record address has changed within the previous
30 days, signature(s) must be guaranteed by one of the following: a bank or
trust company; a broker-dealer; a credit union; a national securities exchange,
registered securities association or clearing agency; a savings and loan
association; or a federal savings bank. If certificates are held for the shares
being redeemed, such certificates must be endorsed for transfer or accompanied
by an endorsed stock power and sent with the redemption request. In the event
the redemption is requested by a corporation, partnership, trust, fiduciary,
executor or administrator, additional documents may be necessary. The redemption
price is the net asset value per share next determined after the request is
received by ACCESS in proper form. Payment for shares redeemed will ordinarily
be made by check mailed within seven business days after acceptance by ACCESS of
the request and any other necessary documents in proper order.
DEALER REDEMPTION REQUESTS. Shareholders may redeem shares through their
securities dealer, who will submit the request to the Distributor. Orders
received from dealers must be at least $500 unless transmitted via the FUNDSERV
network. The redemption price for such shares is the net asset value next
calculated after an order is received, less any applicable CDSC, by a dealer
provided such order is transmitted to the Distributor prior to the Distributor's
close of business on such day. It is the responsibility of dealers to transmit
redemption requests received by them to the Distributor so they will be received
prior to such time. Any change in the redemption price due to failure of the
Distributor to receive a redemption request prior to such time must be settled
between the shareholder and dealer. Shareholders must submit a written
redemption request in proper form (as described above under "Written Redemption
Requests") to the dealer within three business days after calling the dealer
with the redemption request. Payment for shares redeemed will ordinarily be made
by check mailed within three business days to the dealer.
TELEPHONE REDEMPTION REQUESTS. The Company permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application accompanying this Prospectus or call the Company at (800) 287-4404
or (800) 772-8889 for the hearing impaired, to request that a copy of the
Telephone Redemption Authorization form be sent to them for
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<PAGE>
completion. To redeem shares, contact the telephone transaction line at (800)
421-5684. See "Telephone Transaction Procedures" for more information. Telephone
redemptions may not be available if the shareholder cannot reach ACCESS by
telephone, whether because all telephone lines are busy or for any other reason;
in such case, a shareholder would have to use the Company's other redemption
procedures previously described. Requests received by ACCESS prior to 4:00 p.m.,
Eastern Time, on a regular business day will be processed at the net asset value
per share determined that day. These privileges are available for all accounts
other than retirement accounts. The telephone redemption privilege is not
available for shares represented by certificates. If an account has multiple
owners, ACCESS may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check will ordinarily be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire will ordinarily be wired on the next business day
to the shareholder's bank account of record. This privilege is not available if
the address or bank account of record has been changed within 30 days prior to a
telephone redemption request. The Company reserves the right at any time to
terminate, limit or otherwise modify this telephone redemption privilege.
REDEMPTION UPON DISABILITY. The Company will waive the CDSC on redemptions
following the disability of holders of Class B shares and Class C shares. An
individual will be considered disabled for this purpose if he or she meets the
definition thereof in Section 72(m)(7) of the Code, which in pertinent part
defines a person as disabled if such person "is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or to be of
long-continued and indefinite duration." While the Company does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
contingent deferred sales charge on Class B shares and Class C shares.
In cases of disability, the CDSCs on Class B shares and Class C shares will
be waived where the disabled person is either an individual shareholder or owns
the shares as a joint tenant with right of survivorship or is the beneficial
owner of a custodial or fiduciary account, and where the redemption is made
within one year of the initial determination of disability. This waiver of the
CDSC on Class B shares and Class C shares applies to a total or partial
redemption, but only to redemptions of shares held at the time of the initial
determination of disability.
GENERAL REDEMPTION INFORMATION. If the shares to be redeemed have been
recently purchased by check, ACCESS may delay mailing a redemption check or
wiring redemption proceeds until it confirms that the purchase check has
cleared, usually a period of up to 15 days. In addition, the redemption payment
may be delayed or the right of redemption suspended by the Fund pursuant to
rules of the SEC.
The Company may redeem any shareholder account with a net asset value on the
date of the notice of redemption less than the minimum investment as specified
by the Directors. At least 60 days' advance written notice of any such
involuntary redemption is required and the shareholder is given an opportunity
to purchase the required value of additional shares at the next determined net
asset value without sales charge. Any
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<PAGE>
involuntary redemption may only occur if the shareholder account is less than
the minimum investment due to shareholder redemptions.
A custodian of a retirement plan account may charge fees based on the
custodian's fee schedule. IRA redemption requests should be sent to the IRA
custodian to be forwarded to ACCESS. Where VKAC Trust serves as IRA custodian,
special IRA, 403(b)(7), or Keogh redemption forms must be obtained from and be
forwarded to Van Kampen American Capital Trust Company, P.O. Box 944, Houston,
Texas 77001-0944. Contact the custodian for information. Reinstatement
privileges (as otherwise described under "Purchase of Shares-- Reinstatement
Privilege of Each Class" above) also extend to participants in eligible
retirement plans held or administered by VKAC Trust who repay the principal and
interest on their borrowings from such plans.
FOR SHARES HELD IN BROKER STREET NAME, YOU CANNOT REQUEST REDEMPTION BY
TELEPHONE OR BY MAIL; SUCH SHARES MAY BE REDEEMED ONLY BY CONTACTING YOUR
PARTICIPATING DEALER.
TELEPHONE TRANSACTION PROCEDURES. Van Kampen American Capital, Inc. and its
subsidiaries, including ACCESS (collectively, "VKAC") and the Company employ
procedures considered by them to be reasonable to confirm that instructions
communicated by telephone are genuine. Such procedures include requiring certain
personal identification information prior to acting upon telephone instructions,
tape recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed, a
shareholder agrees that neither VKAC nor the Company will be liable for
following instructions which it reasonably believes to be genuine. VKAC and the
Company may be liable for any losses due to unauthorized or fraudulent
instructions if reasonable procedures are not followed.
VALUATION OF SHARES
Net asset value is calculated separately for each class of a Fund. The net
asset value per share of each class of shares of a Fund is determined by
dividing the total fair market value of the investments and other assets
attributable to such class of shares, less all liabilities attributable to such
class of shares, by the total number of outstanding shares of such class of
shares. Net asset value per share of a Fund is determined as of the regular
close of the NYSE (currently 4:00 p.m. Eastern Time) on each day that the NYSE
is open for business. Securities listed on a securities exchange for which
market quotations are available are valued at their closing price. If no closing
price is available, such securities will be valued at the last quoted sale price
on the day the valuation is made. Price information on listed securities is
taken from the exchange where the security is primarily traded. 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 are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices but take into account institutional size trading in similar groups of
securities and any developments related to the specific securities. Securities
not priced in this manner are valued at the most recent quoted bid price, or,
when stock exchange valuations are used, at the closing price, or if that is
unavailable, the latest quoted sale price on
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the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Debt securities purchased with remaining maturities of 60
days or less are valued at amortized cost, if it approximates market value. In
the event that amortized cost does not approximate market value, market prices
as determined above will be used. The "amortized cost" method of valuation does
not take into account unrealized gains or losses. This method involves valuing
an instrument at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price each Fund would
receive if it sold the instrument.
The value of other assets and securities for which no quotations are readily
available (including illiquid and unlisted foreign securities) and those
securities for which it is inappropriate to determine prices in accordance with
the above procedures are determined in good faith at fair value using methods
determined by the Board of Directors. For purposes of calculating net asset
value per share, all assets and liabilities initially expressed in foreign
currencies will be converted into U.S. Dollars at the mean of the bid price and
asked price of such currencies against the U.S. Dollar as quoted by a major
bank.
PORTFOLIO TRANSACTIONS
The Adviser and the Sub-Adviser select the brokers or dealers that will
execute the purchases and sales of investment securities for the Funds. The
Adviser and the Sub-Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the Funds to their clients or
who act as agents in the purchase of shares of the Funds for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Adviser and the Sub-Adviser may allocate a portion of the Company's
portfolio brokerage transactions to Morgan Stanley & Co. Incorporated ("Morgan
Stanley"), an affiliate of the Adviser and the Sub-Adviser, or broker affiliates
of Morgan Stanley under procedures adopted by the Board of Directors. For such
portfolio transactions, the commissions, fees or other remuneration received by
Morgan Stanley or such affiliates must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers for comparable
transactions involving similar securities being purchased or sold during a
comparable period of time.
Although the objective of each Fund is not to invest for short-term trading,
a Fund will seek to take advantage of trading opportunities as they arise to the
extent they are consistent with the Fund's objectives. Accordingly, investment
securities may be sold from time to time without regard to the length of time
they have been held. Each Fund, other than the Latin American Fund, anticipates
that its annual portfolio turnover rate will not exceed 100% under normal
circumstances but market conditions could result in portfolio activity at a
greater or lesser rate than anticipated. High portfolio turnover involves
correspondingly greater transaction costs which will be borne directly by a
Fund. In addition, high portfolio turnover may result in more capital gains
which would be taxable to the shareholders of the particular Fund. See
"Financial Highlights" above for the Funds' historical portfolio turnover rates.
58
<PAGE>
PERFORMANCE INFORMATION
The Company may from time to time advertise total return of the Funds. THESE
FIGURES WILL BE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE
FUTURE PERFORMANCE. The "total return" shows what an investment in a Fund would
have earned over a specified period of time (such as one, three, five or ten
years) assuming that all distributions and dividends by the Fund were reinvested
on the reinvestment dates during the period. Total return does not take into
account any federal or state income taxes consequences to shareholders subject
to tax. The Company may also include comparative performance information in
advertising or marketing the Funds' shares. Such performance information may
include data from Lipper Analytical Services, Inc. and Morgan Stanley Capital
International.
PERFORMANCE OF INVESTMENT SUB-ADVISER
The Sub-Adviser manages a portfolio of Morgan Stanley Institutional Fund,
Inc. ("MSIF") which served as the model for the Global Equity Fund. The
portfolio of MSIF (the "MSIF Portfolio") has substantially the same investment
objective, policies and strategies as the Global Equity Fund. In addition, the
Adviser and Sub-Adviser intends the Global Equity Fund and the corresponding
MSIF Portfolio to be managed by the same personnel and to continue to have
closely similar investment strategies, techniques and characteristics. Past
investment performance of the MSIF Portfolio, as shown in the table below, may
be relevant to your consideration of investment in the Global Equity Fund. The
investment performance of the MSIF Portfolio is not necessarily indicative of
future performance of the Global Equity Fund. Also, the operating expenses of
the Global Equity Fund will be different from, and may be higher than, the
operating expenses of the MSIF Portfolio. The investment performance of the MSIF
Portfolio is provided merely to indicate the experience of the Sub-Adviser in
managing similar investment portfolios.
The data set forth below under the heading "Return With Sales Charge" is
adjusted to reflect the Fund's projected operating expenses and (i) with respect
to the Class A shares to take into account a maximum 5.75% initial sales charge
applicable to purchases of Class A shares of the Global Equity Fund; (ii) with
respect to Class B shares to take into account the applicable CDSC that is
imposed if Class B shares of the Global Equity Fund are redeemed within the year
of their purchase indicated; and (iii) with respect to the Class C shares to
take into account a 1.00% CDSC that is imposed if Class C shares of the Global
Equity Fund are redeemed within one year of their purchase. The data set forth
below under the heading "Return Without Sales Charge" is adjusted to reflect the
Fund's projected operating expenses and not adjusted to take into account such
sales charges.
59
<PAGE>
TOTAL RETURN FOR THE MSIF GLOBAL EQUITY PORTFOLIO'S CLASS A SHARES
(A SEPARATE MUTUAL FUND FROM THE GLOBAL EQUITY FUND)
FOR THE PERIOD ENDED JULY 31, 1997
(ADJUSTED TO REFLECT PROJECTED OPERATING EXPENSES AND, WHERE INDICATED, THE
SALES CHARGES OF THE GLOBAL EQUITY FUND)
<TABLE>
<CAPTION>
RETURN WITH SALES CHARGE 1 YEAR 3 YEARS 5 YEARS SINCE INCEPTION(1)
- ---------------------------------------------------------------- ---------- ---------- ---------- -------------------
<S> <C> <C> <C> <C>
Class A......................................................... 30.23% 17.48% 20.57% 19.73%
Class B......................................................... 32.43% 18.58% 21.52% 20.77%
Class C......................................................... 36.43% 19.29% 21.65% 20.77%
<CAPTION>
RETURN WITHOUT SALES CHARGE
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A......................................................... 38.18% 19.83% 22.01% 21.14%
Class B......................................................... 37.43% 19.29% 21.65% 20.77%
Class C......................................................... 37.43% 19.29% 21.65% 20.77%
</TABLE>
- ------------------
(1) Commenced Operations on July 15, 1992.
The past performance of the MSIF Global Equity Portfolio is no guarantee of
the future performance of the Global Equity Fund.
DIVIDENDS AND DISTRIBUTIONS
Shareholders will automatically be credited with all dividends and
distributions in additional shares at net asset value, without payment of any
sales charge of the Funds, except that, upon written notice to the Company or by
checking off the appropriate box in the account application form, a shareholder
may elect to receive dividends and/or distributions in cash.
Each Fund expects to distribute substantially all of its net investment
income in the form of annual dividends. Each Fund expects to distribute net
realized gains, if any, annually. Confirmations of the purchase of shares of a
Fund through the automatic reinvestment of income dividends and capital gains
distributions will be provided, pursuant to Rule 10b-10(b) under the Securities
Exchange Act of 1934, as amended, on the next quarterly client statement
following such purchase of shares. Consequently, confirmations of such purchases
will not be provided at the time of completion of such purchases, as might
otherwise be required by Rule 10b-10.
Any undistributed net investment income and undistributed realized gains
increase a Fund's net assets for the purpose of calculating net asset value per
share. Therefore, on the "ex-dividend" or "ex-distribution" date, the net asset
value per share excludes the dividend or distribution (i.e., is reduced by the
per share amount of the dividend or distribution). Dividends and distributions
paid shortly after the purchase of shares by an investor, although in effect a
return of capital, are taxable to shareholders subject to tax.
Expenses of the Company allocated to a particular class of shares of the
Fund will be borne on a pro rata basis by each outstanding share of that class.
60
<PAGE>
TAXES
TAX STATUS OF THE FUNDS
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial
or administrative action, possibly with retroactive effect. See also the tax
sections in the Statement of Additional Information.
No attempt has been made to present a detailed explanation of the federal,
state or local income tax treatment of the Funds or their shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
Each of the Funds is generally treated as a separate entity for federal
income tax purposes, and thus the provisions of the Internal Revenue Code of
1986, as amended (the "Code") generally will be applied to each Fund separately,
rather than to the Company as a whole. Net long-term, mid-term and short-term
capital gains, net income and operating expenses therefore will be determined
separately for each Fund.
Each Fund intends to qualify for the special tax treatment afforded
"regulated investment companies" ("RICs") under Subchapter M of the Code so that
it will be relieved of federal income tax on that part of its net investment
income and net capital gain (the excess of net long-term capital gain over net
short-term capital loss less any available capital loss carryforward) which is
distributed to its shareholders.
TAX STATUS OF DISTRIBUTIONS AND DISPOSITIONS
Each Fund distributes substantially all of its net investment income
(including, for this purpose, net short-term capital gain), to its shareholders.
Dividends paid by a Fund from its net investment income will be taxable to the
shareholders of the Fund as ordinary income, whether received in cash or in
additional shares, if the shareholder is subject to tax. Dividends paid by a
Fund attributable to dividends received from shares of domestic corporations may
qualify for the dividends-received deduction for corporations.
Distributions of net capital gains ("capital gain dividends") are taxable to
shareholders subject to tax as long-term capital gains, regardless of how long
the shareholder has held a Fund's shares. Capital gain dividends are not
eligible for the corporate dividends-received deduction. The Funds will make
annual reports to shareholders of the federal income tax status of all
distributions. For a summary of the tax rates applicable to capital gains
(including capital gain dividends), see the discussion below regarding the
Taxpayer Relief Act of 1997.
Each Fund intends to make sufficient distributions or deemed distributions
of its ordinary income and net capital gains prior to the end of each calendar
year to qualify as an RIC under the Code and to avoid liability for federal
income and excise taxes.
Dividends and other distributions declared in October, November and December
by a Fund payable as of a record date in such month and paid at any time during
January of the following year are treated as having been paid by the Fund and
received by the shareholders on December 31 of the year declared.
The sale, exchange or redemption of shares may result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the redemption proceeds exceeds or is less than the
shareholder's adjusted basis in the redeemed, exchanged or sold shares. If
capital gain dividends have been made with respect to shares that are sold at a
loss after being held for six months or less, then the loss
61
<PAGE>
is treated as a long-term capital loss to the extent of the capital gain
dividends. Shareholders may also be subject to state and local taxes on
distributions from the Funds.
Under the Taxpayer Relief Act of 1997 (the "1997 Tax Act"), the maximum tax
rates applicable to net capital gains recognized by individuals and other
non-corporate taxpayers are (i) the same as ordinary income rates for capital
assets held for one year or less, (ii) 28% for capital assets held for more than
one year but not more than 18 months and (iii) 20% for capital assets held for
more than 18 months. The maximum long-term capital gains rate for corporations
remains at 35%. Under the 1997 Tax Act, the Treasury is authorized to issue
regulations that address the application of the new capital gains rates to sales
and exchanges by RICs and to sales and exchanges of interests in RICs, but no
such regulations have been issued as of the date hereof. It is expected that the
new tax rates for capital gains under the 1997 Tax Act described above will
apply to distributions of capital gain dividends by the Funds as well as to
sales and exchanges of shares in the Funds. With respect to capital losses
recognized on dispositions of shares held six months or less where such losses
are treated as long-term capital losses to the extent of prior capital gain
dividends received on such shares (see discussion above regarding gains or
losses recognized on the sale or exchange of shares), it is unclear how such
capital losses offset the capital gains referred to above. Shareholders should
consult their own tax advisers as to the application of the new capital gains
rates to their particualr circumstances.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS AND SHAREHOLDERS SHOULD CONSULT THEIR
OWN TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT
IN THE FUNDS.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Company was organized as a Maryland corporation on August 14, 1992. The
Amended Articles of Incorporation currently permit the Company to issue 27.375
billion shares of common stock, par value $.001 per share. Pursuant to the
Company's By-Laws, the Board of Directors may increase the number of shares the
Company is authorized to issue without the approval of the shareholders of the
Company. The Board of Directors has the power to designate one or more classes
of shares of common stock and to classify and reclassify any unissued shares
with respect to such classes.
The shares of the Funds, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. Except as
described herein, the shares have no preference as to conversion, exchange,
dividends, retirement or other features and have no preemptive rights. The
shares of the Funds have non-cumulative voting rights, which means that the
holders of more than 50% of the shares voting for the election of Directors can
elect 100% of the Directors if they choose to do so. Under Maryland law, the
Company is not required to hold an annual meeting of its shareholders unless
required to do so under the 1940 Act. Any person or organization owning 25% or
more of the outstanding shares of a Fund may be presumed to "control" (as that
term is defined in the 1940 Act) such Fund. As of October 16, 1997, no person or
organization owned 25% or more of the outstanding voting shares of any of the
Funds.
REPORTS TO SHAREHOLDERS
The Company will send to its shareholders annual and semi-annual reports;
the financial statements appearing in annual reports are audited by independent
accountants.
62
<PAGE>
In addition, the Company or ACCESS will send to each shareholder having an
account directly with the Company a quarterly statement showing transactions in
the account, the total number of shares owned, and any dividends or
distributions paid. In addition, when a transaction occurs in a shareholder's
account, the Company or ACCESS will send the shareholder a confirmation
statement showing the same information.
CUSTODIAN
Domestic securities and cash are held by Chase, which is not an affiliate of
the Adviser, the Sub-Adviser or the Distributor. Morgan Stanley Trust Company,
Brooklyn, New York ("Morgan Stanley Trust"), 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 regulations of the
SEC for the purpose of providing custodial services for such assets. Morgan
Stanley Trust may also hold certain domestic assets for the Company. Morgan
Stanley Trust is an affiliate of the Adviser, the Sub-Adviser and the
Distributor. For more information on the custodians, see "General Information --
Custody Arrangements" in the Statement of Additional Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-9256, acts as dividend
disbursing and transfer agent for the Company.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, NY 10036,
serves as independent accountants for the Company and audits its annual
financial statements.
63
<PAGE>
APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. -- CORPORATE 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-edge." 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.
A-1
<PAGE>
STANDARD & POOR'S RATINGS GROUP -- CORPORATE BOND RATINGS:
AAA -- Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation and indicate an extremely strong capacity to pay principal
and interest.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only to a small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC -- Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
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.
A-2
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE DISTRIBUTOR. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER BY THE COMPANY OR THE DISTRIBUTOR TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION.
--------------------------
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary.......................................... 2
Fund Expenses............................................... 4
Financial Highlights........................................ 7
Investment Objectives and Policies.......................... 17
Additional Investment Information........................... 27
Investment Limitations...................................... 38
Management of the Company................................... 38
Purchase of Shares.......................................... 43
Shareholder Services........................................ 51
Redemption of Shares........................................ 55
Valuation of Shares......................................... 57
Portfolio Transactions...................................... 58
Performance Information..................................... 59
Dividends and Distributions................................. 60
Taxes....................................................... 61
General Information......................................... 62
Appendix A -- Description of Corporate Bond Ratings......... A-1
MORGAN STANLEY
----------------------
ASIAN GROWTH FUND
EMERGING MARKETS FUND
GLOBAL EQUITY FUND
GLOBAL EQUITY ALLOCATION FUND
INTERNATIONAL MAGNUM FUND
JAPANESE EQUITY FUND
LATIN AMERICAN FUND
PORTFOLIOS OF
MORGAN STANLEY
FUND, INC.
---------------
PROSPECTUS
---------------
INVESTMENT ADVISER
VAN KAMPEN
AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
INVESTMENT SUB-ADVISER
MORGAN STANLEY
ASSET MANAGEMENT INC.
DISTRIBUTOR
VAN KAMPEN AMERICAN
CAPITAL DISTRIBUTORS, INC.
- ------------------------------------
- ------------------------------------
- ------------------------------------
- ------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
MORGAN STANLEY MONEY MARKET FUND
MORGAN STANLEY TAX-FREE MONEY MARKET FUND
MORGAN STANLEY GOVERNMENT OBLIGATIONS MONEY MARKET FUND
PORTFOLIOS OF THE
MORGAN STANLEY FUND, INC.
P.O. BOX 418256, KANSAS CITY, MISSOURI 64141
FOR INFORMATION CALL 1-800-282-4404
------------------
Morgan Stanley Fund, Inc. (the "Company") is an open-end management
investment company, or mutual fund, which consists of twenty-two investment
portfolios. This prospectus (the "Prospectus") describes the shares of the
Morgan Stanley Money Market Fund, the Morgan Stanley Tax-Free Money Market Fund
and the Morgan Stanley Government Obligations Money Market Fund (collectively,
the "Money Market Funds" or the "Funds" and each a "Fund"). The Funds are
designed to make available to investors the expertise of Van Kampen American
Capital Investment Advisory Corp., the adviser (the "Adviser") and administrator
(the "Administrator"), and its affiliate, Morgan Stanley Asset Management Inc.,
the sub-adviser (the "Sub-Adviser"), to the Funds. Shares are available through
Van Kampen American Capital Distributors, Inc. (the "Distributor") and
investment dealers, banks and financial services firms that provide
distribution, administrative or shareholder services ("Participating Dealers").
As of the date of this Prospectus, the Morgan Stanley Tax-Free Money Market Fund
is not offering shares.
INVESTMENTS IN THE FUNDS ARE NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE IS NO ASSURANCE THAT A FUND WILL BE ABLE TO MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus is designed to set forth concisely the information about the
Funds that a prospective investor should know before investing and it should be
retained for future reference. Additional information about the Company is
contained in a "Statement of Additional Information," dated October 28, 1997,
which is incorporated herein by reference. The Company offers additional
portfolios which are described in other prospectuses. The Statement of
Additional Information and the prospectuses pertaining to the other portfolios
of the Company are available upon request and without charge by writing or
calling the Company at the address and telephone number set forth above. The
Statement of Additional Information and other materials regarding the Company
have been filed with the Securities and Exchange Commission and are available at
the Commission's internet web site (http://www.sec.gov).
THE FUNDS' SHARES ARE NOT DEPOSITS, OBLIGATIONS OR ACCOUNTS (COMPANY OR
OTHERWISE) OF, OR ENDORSED OR GUARANTEED BY, ANY BANK OR ANY OF ITS AFFILIATES
OR CORRESPONDENTS, NOR ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
INVESTMENTS IN THE COMPANY INVOLVE RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS OCTOBER 28, 1997.
<PAGE>
PROSPECTUS SUMMARY
THE COMPANY
The Company currently consists of twenty-two portfolios which are designed
to offer investors a range of investment choices with Van Kampen American
Capital Investment Advisory Corp. (the "Adviser") providing services as adviser
and administrator and its affiliate, Morgan Stanley Asset Management Inc.
("MSAM" or the "Sub-Adviser"), providing services as the sub-adviser. Van Kampen
American Capital Distributors, Inc. (the "Distributor") provides services as
Distributor. For ease of reference, the words "Morgan Stanley," which begin the
name of each portfolio, are not included in the portfolios named below. The
investment objective of each Fund is as follows:
- The MONEY MARKET FUND seeks to provide as high a level of current interest
income as is consistent with maintaining liquidity and stability of
principal.
- The TAX-FREE MONEY MARKET FUND seeks to provide as high a level of current
interest income exempt from regular federal income taxes as is consistent
with maintaining liquidity and stability of principal. As of the date of
this Prospectus, the Tax-Free Money Market Fund is not offering shares.
- The GOVERNMENT OBLIGATIONS MONEY MARKET FUND seeks to provide as high a
level of current interest income as is consistent with maintaining
liquidity and stability of principal.
RISK FACTORS
Investments in the Funds are neither insured nor guaranteed by the U.S.
Government, and there is no assurance that a Fund will be able to maintain a
stable net asset value of $1.00 per share. See "Investment Objectives and
Policies." The Money Market Fund and the Government Obligations Money Market
Fund may enter into reverse repurchase agreement transactions. See "Additional
Investment Information".
HOW TO INVEST
Shares of each of the Funds are offered at net asset value. Share purchases
may be made through the Distributor, through Participating Dealers or by sending
payments directly to the Company. The minimum initial investment is $250,000 for
each Fund, except that the minimum initial investment amount is $500 for Prime
Resource Account Holders. The minimum for subsequent investments is $25, except
that there is no minimum for automatic reinvestment of dividends and
distributions. See "Purchase of Shares."
HOW TO REDEEM
Shares of each Fund may be redeemed at any time at the net asset value per
share of the Fund next determined after receipt of the redemption request. The
redemption price may be more or less than the purchase price. If a shareholder
reduces his/her total investment in shares of a Fund to less than $250,000, the
entire investment may be subject to involuntary redemption. See "Redemption of
Shares."
2
<PAGE>
FUND EXPENSES
The following table illustrates all expenses and fees that a shareholder of
a Fund may incur:
<TABLE>
<CAPTION>
GOVERNMENT
TAX-FREE OBLIGATIONS
MONEY MONEY MONEY
MARKET MARKET MARKET
SHAREHOLDER TRANSACTION EXPENSES FUND FUND FUND
- --------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases...... None None None
Maximum Sales Load Imposed on Reinvested
Dividends................................... None None None
Maximum Deferred Sales Load.................. None None None
Redemption Fees.............................. None None None
Exchange Fees................................ None None None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory Fee (after expense
reimbursement and/or fee waiver) (1)........ 0.16% 0.14% 0.13%
12b-1 Fees (after fee waivers) (1)........... 0.50% 0.35% 0.48%
Other Expenses............................... 0.32% 0.46% 0.34%
Total Operating Expenses (after expense
reimbursement and/or fee waiver)............ 0.98% 0.95% 0.95%
</TABLE>
- ------------------------------
(1) The Adviser and the Distributor will voluntarily waive a portion of their
respective fees and/or reimburse fund expenses until such time as they
determine that the particular Fund's performance is competitive with other
comparable funds without such waivers. However, such fee waivers are
voluntary and may be terminated at any time. There can be no assurances that
any future waivers will not vary from the figures reflected in the expense
table. Absent fee waivers, investment advisory fees would be 0.45% and 12b-1
fees would be 0.50% for each Fund and total operating expenses would be
1.27% for the Money Market Fund, 1.41% for the Tax-Free Money Market Fund
and 1.27% for the Government Obligations Money Market Fund. (Investment
advisory fees are contractually reduced when average daily net assets exceed
$250 million). For more information regarding the 12b-1 fees, see
"Management of the Company -- Distributor." Long-term shareholders may pay
more than the economic equivalent of the maximum front-end sales charges
otherwise permitted as a fund-level expense by the Conduct Rules of the
National Association of Securities Dealers, Inc. (the "NASD").
The purpose of the above table is to assist the investor in understanding
the various expenses that an investor in any of the Funds will bear directly or
indirectly. The expenses and fees for the Money Market Fund and Government
Obligations Money Market Fund are based on actual figures for the fiscal year
ended June 30, 1997. The expenses and fees for the Tax-Free Money Market Fund,
which has not commenced investment operations, are based on the advisory
agreement, 12b-1 plan and estimates of other expenses assuming an average net
asset level for the first year of $50,000,000. "Other Expenses" include, among
others, Directors' fees and expenses, amortization of organizational costs,
filing fees, professional fees, and the costs for reports to shareholders.
3
<PAGE>
The following example illustrates the expenses that you would pay on a
$1,000 investment, assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period.
<TABLE>
<CAPTION>
GOVERNMENT
TAX-FREE OBLIGATIONS
MONEY MONEY MONEY
MARKET MARKET MARKET
FUND FUND FUND
---------- ---------- ----------
<S> <C> <C> <C>
1 Year...................................................... $ 10 $ 10 $ 10
3 Years..................................................... 31 30 30
5 Years..................................................... 54 * 53
10 Years.................................................... 120 * 117
</TABLE>
- ------------------------
* Because the Tax-Free Money Market Fund has not commenced investment
operations as of the date of this Prospectus, the Company has not projected
expenses beyond the three-year period shown.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN. The Adviser and Distributor in their discretion may terminate voluntary
fee waivers and/or reimbursements at any time. Absent the waiver of fees or
reimbursement of expenses, the amounts in the example above would be greater.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables provide financial highlights for the Money Market and
Government Obligations Money Market Funds. For periods prior to September 26,
1996 financial highlights are shown for the PCS Money Market Portfolio and PCS
Government Obligations Money Market Portfolio (the "Predecessor Portfolios"),
the predecessors of the Morgan Stanley Money Market Fund and Morgan Stanley
Government Obligations Money Market Fund, respectively. The financial highlights
for the shares for the fiscal year ended June 30, 1997 are part of the Company's
financial statements which appear in the Annual Report to Shareholders and the
Company's Statement of Additional Information. The Predecessor Portfolios'
financial highlights for the periods presented have been derived from financial
statements audited by Coopers & Lybrand L.L.P. All financial statements after
September 26, 1996 are audited by Price Waterhouse LLP. The Annual Report and
the Statement of Additional Information are available at no cost from the
Company at the address and telephone number noted on the cover page of this
Prospectus. The following financial highlights should be read in conjunction
with the financial statements and notes thereto. Financial highlights are not
presented for the Tax-Free Money Market Fund because it had not commenced
investment operations as of June 30, 1997.
5
<PAGE>
FINANCIAL HIGHLIGHTS
MONEY MARKET FUND
<TABLE>
<CAPTION>
LESS
NET ASSET NET REALIZED DISTRIBUTIONS LESS
VALUE, NET AND UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS
BEGINNING INVESTMENT GAIN (LOSS) ON INVESTMENT INVESTMENT FROM NET
OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME REALIZED GAINS
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
FOR THE FISCAL YEAR ENDED JUNE 30
1997 $ 1.00 0.0450 -- 0.0450 (0.0450) --
1996 $ 1.00 0.0463 (0.0006) 0.0457 (0.0463) --
1995 $ 1.00 0.0446 0.0001 0.0447 (0.0446) (0.0001)
1994 $ 1.00 0.0246 -- 0.0246 (0.0246) --
1993 $ 1.00 0.0243 0.0001 0.0244 (0.0243) (0.0001)
1992 $ 1.00 0.0402 -- 0.0402 (0.0402) --
1991 $ 1.00 0.0652 -- 0.0652 (0.0652) --
1990 (2) $ 1.00 0.0690 -- 0.0690 (0.0690) --
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NET RATIO OF NET
ASSETS AT RATIO OF INVESTMENT
NET ASSET END OF EXPENSES TO INCOME TO
TOTAL VALUE, END OF PERIOD AVERAGE NET AVERAGE NET
DISTRIBUTIONS PERIOD TOTAL RETURN (000) ASSETS(1) ASSETS(1)
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------
FOR THE FISCAL YEAR ENDED JUNE 30
1997 (0.0450) $ 1.00 4.60% $ 138,422 0.98% 4.50%
1996 (0.0463) $ 1.00 4.72% $ 170,973 0.98% 4.65%
1995 (0.0447) $ 1.00 4.55% $ 171,515 0.98% 4.45%
1994 (0.0246) $ 1.00 2.49% $ 176,599 0.98% 2.45%
1993 (0.0244) $ 1.00 2.47% $ 156,310 0.98% 2.44%
1992 (0.0402) $ 1.00 4.11% $ 190,034 0.98% 3.97%
1991 (0.0652) $ 1.00 6.72% $ 140,594 0.98% 6.40%
1990 (2) (0.0690) $ 1.00 7.12%(3) $ 76,463 0.98%(3) 7.53%(3)
- ----------------------------------------
</TABLE>
(1) Without voluntary fee waiver of advisory and distribution fees, the ratios
of expenses to average net assets for the fiscal periods ended June 30, 1990
through June 30, 1997 would have been 1.48% (annualized), 1.27%, 1.27%,
1.20%, 1.19%, 1.18%, 1.22% and 1.27%, respectively. The ratio of net
investment income to average net assets for the fiscal periods ended June
30, 1990 through June 30, 1997 would have been, 7.03% (annualized), 6.11%,
3.68%, 2.22%, 2.24%, 4.25%, 4.41% and 4.20%, respectively.
(2) Commenced operations on August 4, 1989.
(3) Annualized.
6
<PAGE>
FINANCIAL HIGHLIGHTS CONTINUED
GOVERNMENT OBLIGATIONS MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
LESS
NET ASSET NET REALIZED DISTRIBUTIONS LESS
VALUE, NET AND UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS
BEGINNING INVESTMENT GAIN (LOSS) ON INVESTMENT INVESTMENT FROM NET
OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME REALIZED GAIN
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
FOR THE FISCAL YEAR ENDED JUNE 30
1997 $ 1.00 0.0443 -- 0.0443 (0.0443) --
1996 $ 1.00 0.0464 (0.0011) 0.0453 (0.0464) (0.0001)
1995 $ 1.00 0.0448 -- 0.0448 (0.0448) --
1994 $ 1.00 0.0243 0.0011 0.0254 (0.0243) (0.0011)
1993 $ 1.00 0.0246 0.0002 0.0248 (0.0246) (0.0002)
1992 (2) $ 1.00 0.0094 -- 0.0094 (0.0094) --
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NET RATIO OF NET
ASSETS AT RATIO OF INVESTMENT
NET ASSET END OF EXPENSES TO INCOME TO
TOTAL VALUE, END OF PERIOD AVERAGE NET AVERAGE NET
DISTRIBUTIONS PERIOD TOTAL RETURN (000) ASSETS(1) ASSETS(1)
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------
FOR THE FISCAL YEAR ENDED JUNE 30
1997 (0.0443) $ 1.00 4.53% $ 94,768 0.95% 4.43%
1996 (0.0465) $ 1.00 4.72% $ 145,978 0.95% 4.68%
1995 (0.0448) $ 1.00 4.58% $ 67,505 0.95% 4.61%
1994 (0.0254) $ 1.00 2.45% $ 102,551 0.95% 2.40%
1993 (0.0248) $ 1.00 2.51% $ 101,736 0.95% 2.50%
1992 (2) (0.0094) $ 1.00 0.94%(3) $ 269,627 0.95%(4) 3.07%(4)
- ----------------------------------------
</TABLE>
(1) Without voluntary fee waiver of advisory and distribution fees, the ratios
of expenses to average net assets for the fiscal periods ended June 30, 1992
through June 30, 1997, would have been 1.29% (annualized), 1.19%, 1.22%,
1.12%, 1.24%, and 1.27%, respectively. The ratio of net investment income to
average net assets for the fiscal periods ended June 30, 1992 through June
30, 1997, would have been 2.73% (annualized), 2.26%, 2.13%, 4.44%, 4.39% and
4.10%, respectively.
(2) Commenced operations on March 12, 1992.
(3) Not annualized. Total return on an unannualized basis would have been 3.16%
for the Government Obligations Money Market Fund.
(4) Annualized.
7
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Fund is described below, together with the
policies the Fund employs in its efforts to achieve its objective. Each Fund's
investment objective is a fundamental policy which may not be changed by the
Fund without the approval of a majority of the Fund's outstanding voting
securities. The investment policies described below are not fundamental policies
and may be changed without shareholder approval. There is no assurance that a
Fund will attain its objective. For more information about certain investment
practices common to two or more of the Funds and applicable quality
requirements, see "Additional Investment Information."
THE MONEY MARKET FUND
The Money Market Fund's investment objective is to provide as high a level
of current interest income as is consistent with maintaining liquidity and
stability of principal. Obligations held by the Money Market Fund will have
remaining maturities of 397 days or less (except that portfolio securities which
are subject to repurchase agreements may bear maturities exceeding 397 days). In
pursuing its investment objective, the Money Market Fund invests in a broad
range of U.S. dollar-denominated instruments, such as government, bank and
commercial obligations, that may be available in the money markets and that
satisfy strict credit quality standards imposed by the Fund in accordance with
applicable law ("Money Market Instruments"). The following descriptions
illustrate the types of Money Market Instruments in which the Money Market Fund
invests.
BANK OBLIGATIONS. The Fund may purchase bank obligations, such as
certificates of deposit, bankers' acceptances and time deposits, including U.S.
dollar-denominated instruments issued or supported by the credit of U.S. or
foreign banks or savings institutions having total assets at the time of
purchase in excess of $1 billion. The Fund may invest substantially in U.S.
dollar-denominated obligations of foreign banks or foreign branches of U.S.
banks where the Sub-Adviser deems the instrument to present minimal credit risks
and to otherwise satisfy applicable quality standards. Such investments may
nevertheless entail risks that are different from those of investments in
domestic obligations of U.S. banks due to differences in political, regulatory
and economic systems and conditions. These risks may include future unfavorable
political and economic developments, possible withholding taxes on interest
income, seizure or nationalization of foreign deposits, currency controls,
interest limitations, or other governmental restrictions which might affect the
payment of principal or interest on the securities held in the Fund.
Additionally, these institutions may be subject to less stringent reserve
requirements and to different accounting, auditing, reporting and recordkeeping
requirements than those applicable to domestic branches of U.S. banks. The Fund
may also make interest-bearing savings deposits in commercial and savings banks
in amounts not in excess of 5% of its total assets.
COMMERCIAL PAPER. The Fund may purchase commercial paper rated (at the time
of purchase) "A-1" or "A-1+" by Standard & Poor's Ratings Group ("S&P") or
"Prime-1" by Moody's Investors Service, Inc. ("Moody's") or, when deemed
advisable by the Sub-Adviser and to the extent permitted under applicable
regulations, limited amounts of issues rated "A-2" or "Prime-2" by S&P or
Moody's, respectively that the Sub-Adviser believes to be of high quality. The
Fund may also purchase commercial paper not rated by S&P or Moody's provided
that such paper is determined by the Sub-Adviser to be of comparable quality
pursuant to guidelines approved by the Company's Board of Directors. The
applicable short-term corporate ratings are described in the Statement of
Additional Information.
8
<PAGE>
UNITED STATES GOVERNMENT OBLIGATIONS. The Money Market Fund may invest in
obligations issued or guaranteed by the United States Government, including
United States Treasury securities and other securities backed by the full faith
and credit of the United States, such as obligations of the Government National
Mortgage Association ("GNMA"), the Farmers Home Administration and the
Export-Import Bank. The Fund may also invest in obligations issued or guaranteed
by United States Government agencies or instrumentalities, such as the Federal
Farm Credit System and the Federal Home Loan Banks, where the Fund must look
principally to the issuing or guaranteeing agency for ultimate repayment. For a
more complete discussion of United States Government Obligations, see the
description of the Government Obligations Money Market Fund.
MUNICIPAL OBLIGATIONS. "Municipal Obligations" are obligations issued by or
on behalf of states, territories and possessions of the United States, the
District of Columbia and their political subdivisions, agencies,
instrumentalities and authorities. The Fund may invest without limitation in
high quality, short-term Municipal Obligations issued by state and local
governmental issuers, the interest on which may be taxable or tax-exempt for
federal income tax purposes, when deemed appropriate by the Sub-Adviser in light
of the Fund's investment objective, and provided that such obligations carry
yields that are competitive with those of other types of Money Market
Instruments of comparable quality. For a more complete discussion of Municipal
Obligations, see the description of the Tax-Free Money Market Fund. In addition,
the Fund may acquire "stand-by commitments" with respect to Municipal
Obligations held in its portfolio.
THE TAX-FREE MONEY MARKET FUND
The Tax-Free Money Market Fund's investment objective is to provide as high
a level of current interest income exempt from regular federal income taxes as
is consistent with maintaining liquidity and stability of principal. The
Tax-Free Money Market Fund invests substantially all of its assets in a
diversified portfolio of high quality, short-term Municipal Obligations, the
interest on which, in the opinion of bond counsel or counsel to the issuer, as
the case may be, is exempt from the regular federal income tax. It is a
fundamental policy of the Fund that under normal market conditions, at least 80%
of the net assets of the Tax-Free Money Market Fund will be invested in
short-term Municipal Obligations, the interest on which is exempt from regular
federal income tax and is not an item of tax preference for noncorporate
shareholders for purposes of the alternative minimum tax ("Tax-Exempt
Interest"). All portfolio investments must satisfy strict credit quality
standards imposed by the Company in accordance with applicable law.
MUNICIPAL OBLIGATIONS. The Fund invests in short-term Municipal Obligations
which are determined by the Sub-Adviser to present minimal credit risks and to
otherwise satisfy applicable quality standards pursuant to guidelines
established by the Company's Board of Directors and which at the time of
purchase are considered to be "first-tier" securities e.g., rated "AAA" or
higher by S&P or "Aaa" or higher by Moody's in the case of bonds; rated "SP-1"
by S&P or "MIG-1" by Moody's in the case of notes; rated "VMIG-1" by Moody's in
the case of variable rate demand notes; or rated "A-1" or "A-1+" by S&P or
"Prime-1" by Moody's in the case of tax-exempt commercial paper. The Fund may
also purchase securities that are not rated by S&P or Moody's at the time of
purchase provided that the securities are determined to be of comparable quality
by the Sub-Adviser pursuant to guidelines approved by the Company's Board of
Directors. The applicable Municipal Obligations ratings are described in the
Statement of Additional Information.
9
<PAGE>
The Fund may hold uninvested cash reserves pending investment, during
temporary defensive periods or if, in the opinion of the Sub-Adviser, suitable
obligations bearing Tax-Exempt Interest are unavailable. There is no percentage
limitation on the amount of assets which may be held uninvested during temporary
defensive periods. Uninvested cash reserves will not earn income.
The two principal classifications of Municipal Obligations are "general
obligation" securities and "revenue" securities. General obligation securities
are secured by the issuer's pledge of its full faith, credit and taxing power
for the payment of principal and interest. Revenue securities are payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other specific
excise tax or other specific revenue source such as the user of the facility
being financed. Revenue securities include private activity bonds which are not
payable from the unrestricted revenues of the issuer. Consequently, the credit
quality of private activity bonds is usually directly related to the credit
standing of the corporate user of the facility involved. Municipal Obligations
may also include "moral obligation" bonds, which are normally issued by special
purpose public authorities. If the issuer of moral obligation bonds is unable to
meet its debt service obligations from current revenues, it may draw on a
reserve fund, the restoration of which is a moral commitment but not a legal
obligation of the state or municipality which created the issuer. Municipal
Obligations may include variable rate demand notes, which are described below
under "Additional Investment Information."
Current federal tax law limits the types and volume of bonds qualifying for
the federal income tax exemption of interest. Such limitations may have an
effect on the ability of the Fund to purchase sufficient amounts of tax-exempt
securities. In addition, interest on certain bonds, although exempt from the
regular federal income tax, may be subject to alternative minimum tax. See the
discussion below under "Taxes" and the Statement of Additional Information.
Although the Tax-Free Money Market Fund may invest more than 25% of its net
assets in (i) Municipal Obligations whose issuers are in the same state, (ii)
Municipal Obligations the interest on which is paid solely from revenues of
similar projects and (iii) private activity bonds bearing Tax-Exempt Interest,
it does not currently intend to do so on a regular basis. To the extent the
Tax-Free Money Market Fund's assets are concentrated in Municipal Obligations
that are payable from issuers of the same state or the revenues of similar
projects, the Fund will be subject to the peculiar risks presented by the laws
and economic conditions relating to such states or projects to a greater extent
than it would be if its assets were not so concentrated.
THE GOVERNMENT OBLIGATIONS MONEY MARKET FUND
The Government Obligations Money Market Fund's investment objective is to
provide as high a level of current interest income as is consistent with
maintaining liquidity and stability of principal. It seeks to achieve such
objective by investing at least 65% of its net assets, under normal market
conditions, in short-term U.S. Treasury bills, notes and other obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
and entering into repurchase agreements relating to such obligations. Purchases
of portfolio securities must satisfy strict credit quality standards imposed by
the Fund in accordance with applicable law. The types of U.S. Government
obligations in which the Fund may invest include a variety of U.S. Treasury
obligations, which differ only in their interest rates, maturities, and time of
issuance, and obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, including mortgage-backed securities.
10
<PAGE>
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as GNMA and the Export-Import Bank of the United States, are supported by
the full faith and credit of the U.S. Treasury; others, such as those of Fannie
Mae, are supported by the right of the issuer to borrow from the Treasury;
others, such as those of the Student Loan Marketing Association, are supported
by the discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Federal Farm Credit Banks or the
Federal Home Loan Mortgage Corporation, are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government-sponsored agencies or
instrumentalities if it is not obligated to do so under law. The Fund will
invest in the obligations of such agencies or instrumentalities only when the
Sub-Adviser believes that the credit risk with respect thereto is minimal and
that applicable quality standards have been satisfied.
Securities issued or guaranteed by the U.S. Government, its agencies and
instrumentalities have historically involved little risk of loss of principal if
held to maturity. However, due to fluctuations in interest rates, the market
value of such securities may vary during the period a shareholder owns shares
representing an interest in the Fund. Certain government securities held by the
Fund may have remaining maturities exceeding 397 days if such securities provide
for adjustments in their interest rates not less frequently than annually and
the adjustments are sufficient to cause the securities to have market values,
after adjustment, which approximate their par values.
ADDITIONAL INVESTMENT INFORMATION
ILLIQUID SECURITIES AND RESTRICTED SECURITIES
Each Fund may invest up to 10% of the value of its net assets in illiquid
securities, which are securities that cannot be disposed of within seven
business days at approximately the price they are being carried on a Fund's
books. Each Fund may also purchase securities that are restricted from sale to
the public without registration ("Restricted Securities") under the Securities
Act of 1933, as amended (the "1933 Act"), including Restricted Securities that
can be offered and sold to qualified institutional buyers under Rule 144A under
the 1933 Act ("144A Securities") or commercial paper sold without restriction
pursuant to Section 4(2) of the 1933 Act ("4(2) Commercial Paper"). 144A
Securities may be determined to be liquid pursuant to procedures approved by the
Company's Board of Directors and therefore not subject to the limitation on
illiquid securities.
LOANS OF PORTFOLIO SECURITIES
Each of the Money Market and Government Obligations Money Market Funds may
lend its securities to brokers, dealers, domestic and foreign banks or other
financial institutions for the purpose of increasing its net investment income.
These loans must be secured continuously by cash or equivalent collateral or by
a letter of credit at least equal to the market value of the securities loaned
plus accrued interest. As with other extensions of credit, there are risks of
delay in recovery or even loss of rights in collateral should the borrower of
the portfolio securities fail financially. The Funds will not enter into
securities loan transactions exceeding in the aggregate 33 1/3% of the market
value of a Fund's total assets.
MORTGAGE-BACKED SECURITIES
The Money Market and Government Obligations Money Market Funds may invest in
mortgage-backed securities. Mortgage loans made by banks, savings and loan
institutions, and other lenders are often assembled
11
<PAGE>
into pools, the interests in which are issued and guaranteed by an agency or
instrumentality of the U.S. Government, though not necessarily by the U.S.
Government itself. Interests in such pools are what this Prospectus calls
"mortgage-backed securities."
One such type of mortgage-backed security in which the Funds may invest is a
GNMA Certificate. GNMA Certificates are backed as to the timely payment of
principal and interest by the full faith and credit of the U.S. Government.
Another type is a Fannie Mae Certificate. Principal and interest payments on
Fannie Mae Certificates are guaranteed only by Fannie Mae itself, not by the
full faith and credit of the U.S. Government. A third type of mortgage-backed
security in which such Funds may invest is a Federal Home Loan Mortgage
Association ("FHLMC") Participation Certificate. This type of security is
guaranteed by FHLMC as to timely payment of principal and interest but, like a
Fannie Mae security, it is not guaranteed by the full faith and credit of the
U.S. Government.
Each of the mortgage-backed securities described above is characterized by
monthly payments to the security holder, reflecting the monthly payments made by
the mortgagors of the underlying mortgage loans. The payments to the security
holders (such as a Fund), like the payments on the underlying loans, represent
both principal and interest. Although the underlying mortgage loans are for
specified periods of time, such as twenty or thirty years, the borrowers can,
and typically do, repay them sooner. Thus, the security holders frequently
receive prepayments of principal, in addition to the principal which is part of
the regular monthly payments. A borrower is more likely to prepay a mortgage
which bears a relatively high rate of interest. This means that, in times of
declining interest rates, some of a Fund's higher yielding securities might be
repaid and thereby converted to cash and the Fund will be forced to accept lower
interest rates when that cash is used to purchase additional securities. A Fund
normally will not distribute principal payments (whether regular or prepaid) to
its shareholders. Interest received by each Fund will, however, be distributed
to shareholders in the form of dividends.
REPURCHASE AGREEMENTS
The Money Market and Government Obligations Money Market Funds may enter
into repurchase agreements with brokers, dealers or banks that meet the credit
guidelines of the Company's Board of Directors. In a repurchase agreement, a
Fund buys a security from a seller that has agreed to repurchase it at a
mutually agreed upon date and price, reflecting the interest rate effective for
the term of the agreement. The term of these agreements is usually from
overnight to one week and never exceeds one year. A repurchase agreement may be
viewed as a fully collateralized loan of money by a Fund to the seller. A Fund
always receives securities as collateral with a market value at least equal to
the purchase price, including accrued interest, and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, a Fund might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Fund's realization upon the collateral
may be delayed or limited. The aggregate of certain repurchase agreements and
certain other investments is limited as set forth under "Investment
Limitations."
REVERSE REPURCHASE AGREEMENTS
The Money Market and Government Obligations Money Market Funds may enter
into reverse repurchase agreements with brokers, dealers, banks or other
financial institutions that meet the credit guidelines of the Company's Board of
Directors. In a reverse repurchase agreement, a Fund sells a security and agrees
to
12
<PAGE>
repurchase it at a mutually agreed upon date and price, reflecting the interest
rate effective for the term of the agreement. It may also be viewed as the
borrowing of money by the Fund. A Fund's investment of the proceeds of a reverse
repurchase agreement is a speculative factor known as leverage. A Fund will
enter into a reverse repurchase agreement only if the interest income from
investment of the proceeds is expected to be greater than the interest expense
of the transaction and the proceeds are invested for a period no longer than the
term of the agreement. A Fund will maintain with the Custodian a separate
account with a segregated portfolio of cash or other liquid securities in an
amount at least equal to its purchase obligations under these agreements
(including accrued interest). If interest rates rise during a reverse repurchase
agreement, it may adversely affect a Fund's ability to maintain a stable net
asset value. In the event that the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, the buyer or its
trustee or receiver may receive an extension of time to determine whether to
enforce a Fund's repurchase obligation, and the Fund's use of proceeds of the
agreement may effectively be restricted pending such decision.
STAND-BY COMMITMENTS
The Money Market and Tax-Free Money Market Funds may each acquire "stand-by
commitments" with respect to Municipal Obligations held in its portfolio. Under
a stand-by commitment, a dealer would agree to purchase at a Fund's option
specified Municipal Obligations at a specified price. The acquisition of a
stand-by commitment may increase the cost, and thereby reduce the yield, of the
Municipal Obligations to which such commitment relates. A Fund will acquire
stand-by commitments solely to facilitate portfolio liquidity and does not
intend to exercise its rights thereunder for trading purposes.
VARIABLE RATE DEMAND NOTES
The Money Market and Tax-Free Money Market Funds may purchase variable rate
demand notes, which are unsecured instruments that permit the indebtedness
thereunder to vary and provide for periodic adjustment in the interest rate.
Although the notes are not normally traded and there may be no active secondary
market in the notes, a Fund will be able (at any time or during the specified
periods not exceeding 397 days, depending upon the note involved) to demand
payment of the principal of a note. The notes are frequently not rated by credit
rating agencies, but notes not rated by S&P or Moody's purchased by a Fund will
have been determined by the Sub-Adviser to be of comparable quality at the time
of the purchase to rated instruments purchasable by the Fund. Where necessary to
ensure that a note is of sufficiently high quality, a Fund will require that the
issuer's obligation to pay the principal of the note be backed by an
unconditional bank letter or line of credit, guarantee or commitment to lend.
The absence of an active secondary market, however, could make it difficult for
a Fund to dispose of a variable rate demand note if the issuer defaulted on its
payment obligation or during the periods that the Fund is not entitled to
exercise its demand rights. A Fund could, for this or other reasons, suffer a
loss to the extent of the default. A Fund will invest in variable rate demand
notes only when the Sub-Adviser deems the investment to involve minimal credit
risk and to otherwise satisfy applicable quality standards. The Sub-Adviser also
monitors the continuing creditworthiness of issuers of such notes to determine
whether a Fund should continue to hold such notes.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Money Market Fund and Government Obligations Money Market Fund may
purchase securities on a when-issued or delayed delivery basis. In such
transactions, instruments are bought with payment and delivery
13
<PAGE>
taking place in the future in order to secure what is considered to be an
advantageous yield or price at the time of the transaction. The payment
obligation and the interest rates that will be received are each fixed at the
time a Fund enters into the commitment, and no interest accrues to the Fund
until settlement. Thus, it is possible that the market value at the time of
settlement could be higher or lower than the purchase price if the general level
of interest rates has changed. It is a current policy of each Fund not to enter
into when-issued commitments or delayed delivery securities exceeding, in the
aggregate, 25% of the Fund's net assets other than the obligations created by
these commitments.
QUALITY INFORMATION
The Funds utilize the amortized cost method of valuation in accordance with
regulations issued by the Securities and Exchange Commission ("SEC"). See
"Valuation of Shares." Accordingly, each Fund will limit its portfolio
investments to those instruments which present minimal credit risks and which
are of eligible quality, as determined by the Sub-Adviser under the supervision
of the Board of Directors and in accordance with regulations of the SEC, as such
regulations may from time to time be amended. Eligible quality for this purpose
means a security (i) rated in one of the two highest rating categories by at
least two nationally recognized statistical rating organizations ("NRSROs")
assigning a rating to the security or issuer or, if only one rating organization
assigned a rating, by that rating organization or (ii) if unrated, determined to
be of comparable quality by the Sub-Adviser under the supervision of the Board
of Directors. Each of the Government Obligations Money Market and Money Market
Funds will not invest more than 5% of its total assets in securities of issuers
having the second highest rating from any NRSRO; and these Funds will not invest
more than the greater of one percent of its total assets or $1 million in
securities issued by an issuer, having at the time of acquisition or roll over,
the second highest rating from any NRSRO. The Tax-Exempt Money Market Fund will
not invest more than 5% of its total assets in conduit securities (not subject
to unconditional demand features) of issuers having the second highest rating
from any NRSRO. Additionally, the Tax-Exempt Money Market Fund will not invest
more than the greater of one percent of its total assets or $1 million in
conduit securities (not subject to unconditional demand features) of an issuer
which, at the time of acquisition or roll over, has the second highest rating
from an NRSRO. Among the criteria adopted by the Board of Directors, a Fund will
not purchase any bank or corporate obligation unless it is rated at least Aa or
Prime-1 by Moody's or AA, A-1+ or A-1 by S&P or, if not rated by S&P or Moody's,
it is determined to be of comparable quality by the Sub-Adviser under the
supervision of the Board of Directors. Ratings, however, are not the only
criteria utilized under the procedures adopted by the Board of Directors.
These quality standards must be satisfied at the time an investment is made.
In the event that an investment held by the Fund is assigned a lower rating or
ceases to be rated, the Sub-Adviser, under the supervision of the Board of
Directors, will promptly reassess whether such security presents minimal credit
risks and whether the Fund should continue to hold the security in its
portfolio. If a portfolio security no longer presents minimal credit risks, is
in default or its rating is downgraded to below the second highest rating
category, the Fund will dispose of the security as soon as reasonably
practicable unless the Board of Directors determines that to do so is not in the
best interests of the Fund.
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INVESTMENT LIMITATIONS
Each Fund is a diversified investment company under the Investment Company
Act of 1940, as amended (the "1940 Act"), and is subject to the following
limitations: (a) as to 75% of its total assets, the Fund may not invest more
than 5% of its total assets in the securities of any one issuer, except
obligations of the U.S. Government, its agencies and instrumentalities, and (b)
the Fund may not own more than 10% of the outstanding voting securities of any
one issuer. Under regulations applicable to money market funds, however, a Fund
may invest more than 5% of its assets in any one issuer of "first tier"
securities for no more than three days.
The Money Market Funds also operate under certain investment restrictions
that are deemed fundamental policies and may be changed by a Fund only with the
approval of the holders of a majority of the Fund's outstanding shares. In
addition to other restrictions listed in the Statement of Additional
Information, a Fund may not (i) enter into repurchase agreements with more than
seven days to maturity if, as a result, more than 10% of the market value of its
net assets would be invested in these agreements and other investments for which
market quotations are not readily available or which are otherwise illiquid; or
(ii) invest more than 25% of the Fund's total assets in securities of companies
in any one industry, except that there is no limitation with respect to
investments in securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities or, for the Money Market Fund, obligations of U.S.
banks or their domestic branches.
MANAGEMENT OF THE COMPANY
INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp.
(the "Adviser") is the investment adviser and administrator of the Funds. The
Adviser provides investment advice and portfolio management services pursuant to
an advisory agreement (the "Advisory Agreement") and subject to the supervision
of the Company's Board of Directors, makes the Funds' investment decisions,
arranges for the execution of portfolio transactions and generally manages the
Funds' investments. The Advisory Agreement also provides that the Adviser may
appoint sub-advisers to perform these portfolio management responsibilities. See
"Investment Sub-Adviser" below. The Adviser is entitled to receive an aggregate
advisory fee computed daily and paid monthly at the following annual rates for
each Fund:
<TABLE>
<CAPTION>
NET ASSETS ABOVE
NET ASSETS UP TO $250 MILLION UP NET ASSETS EXCEEDING
$250 MILLION TO $500 MILLION $500 MILLION
----------------- ----------------- ---------------------
<S> <C> <C> <C>
Money Market Fund........................................ 0.45% 0.40% 0.35%
Tax-Free Money Market Fund............................... 0.45% 0.40% 0.35%
Government Obligations Money Market Fund................. 0.45% 0.40% 0.35%
</TABLE>
The Adviser reserves the right in its sole discretion from time to time to
waive all or a portion of its management fee or to reimburse the Funds for all
or a portion of other expenses.
The Adviser is a wholly-owned subsidiary of Van Kampen American Capital,
Inc. ("Van Kampen American Capital"). Van Kampen American Capital is a
diversified asset management company with more than two million retail investor
accounts, extensive capabilities for managing institutional portfolios, and more
than $60 billion under management or supervision. Van Kampen American Capital's
more than 50 open-end and 37 closed-end funds and more than 2,500 unit
investment trust are professionally distributed by leading financial advisers
15
<PAGE>
nationwide. The Distributor of the Company and the sponsor of the funds
mentioned above is also a wholly-owned subsidiary of Van Kampen American
Capital. The Adviser's principal office is located at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181.
Van Kampen American Capital is an indirect wholly-owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co. Morgan Stanley, Dean Witter, Discover & Co.
and various of its directly or indirectly owned subsidiaries, including Morgan
Stanley & Co. Incorporated, a registered broker-dealer and investment adviser,
and Morgan Stanley International are engaged in a wide range of financial
services. Their principal businesses include securities underwriting,
distribution and trading; merger, acquisition, restructuring and other corporate
finance advisory activities; merchant banking, stock brokerage and research
services; asset management; trading of futures, option, foreign exchange
commodities and swaps (including foreign exchange, commodities, indices and
interest rates); real estate advice, financing and investing; and global
custody, securities clearance services and securities lending; and credit
services.
INVESTMENT SUB-ADVISER. Morgan Stanley Asset Management Inc. ("MSAM," or
the "Sub-Adviser") is the investment sub-adviser of the Funds. The Sub-Adviser
provides investment advice and portfolio management services pursuant to an
investment sub-advisory agreement and, subject to the supervision of the Adviser
and the Company's Board of Directors, makes the Funds' investment decisions,
arranges for the execution of portfolio transactions and generally manages the
Funds' investments.
The Sub-Adviser is entitled to receive sub-advisory fees computed daily and
paid monthly. If the average daily net assets of a Fund during the monthly
period are less than or equal to $500 million, the Adviser shall pay MSAM
one-half of the total investment advisory fee payable to the Adviser by the Fund
(after application of any fee waivers in effect) for such monthly period. If a
Fund's average daily net assets for the monthly period are greater than $500
million, the Adviser shall pay MSAM a fee for such monthly period equal to the
greater of (a) one-half of what the total investment advisory fee payable to the
Adviser by the Fund (after application of any fee waivers in effect) for such
monthly period would have been had the Fund's average daily net assets during
such period been equal to $500 million, or (b) forty-five percent of the total
investment advisory fee payable to the Adviser by the Fund (after application of
any fee waivers in effect) for such monthly period.
MSAM, with principal offices at 1221 Avenue of the Americas, New York, NY
10020, conducts a worldwide portfolio management business. It provides a broad
range of portfolio management services to customers in the United States and
abroad. At August 31, 1997, MSAM had approximately $80.9 billion in assets under
management as an investment adviser or as a named fiduciary or fiduciary
adviser.
ADMINISTRATOR. The Administrator provides the Company with administrative
services pursuant to an administration agreement (the "Administration
Agreement"). The services provided under the Administration Agreement are
subject to the supervision of the officers and Board of Directors of the Company
and include day-to-day administration of matters related to the corporate
existence of the Company, maintenance of its records, preparation of reports,
supervision of the Company's arrangements with its custodian and assistance in
the preparation of the Company's registration statements under federal and state
laws. The Administration Agreement also provides that the Administrator through
its agents will provide the Company dividend disbursing and
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<PAGE>
transfer agent services. For its services under the Administration Agreement,
the Company pays the Administrator a monthly fee which on an annual basis equals
0.10% of the first $200 million of the Funds' average daily net assets, 0.075%
on the next $200 million of average daily net assets, 0.05% on the next $200
million of average daily net assets, and 0.03% on the average daily net assets
over $600 million of each Fund.
Under a sub-administration agreement between the Administrator and The Chase
Manhattan Bank ("Chase"), Chase Global Funds Services Company ("CGFSC"), a
corporate affiliate of Chase, provides certain administrative services to the
Company. The Administrator supervises and monitors such administrative services
provided by CGFSC. The services provided under the sub-administration agreement
are subject to the supervision of the Board of Directors of the Company. The
Board of Directors of the Company has approved the provision of services
described above pursuant to the sub-administration agreement as being in the
best interests of the Company. CGFSC's business address is 73 Tremont Street,
Boston, MA 02108-3913. PFPC, Inc., under an agreement with the Administrator,
will perform as sub-transfer agent and dividend disbursing agent for Prime
Resource Account Holders. ACCESS, under an agreement with the Administrator,
will perform as sub-transfer agent and dividend disbursing agent for all other
shareholders. For additional information on the Administration Agreement, see
"Management of the Company" in the Statement of Additional Information.
DIRECTORS AND OFFICERS. Pursuant to the Company's Articles of
Incorporation, the Board of Directors decides upon matters of general policy and
reviews the actions of the Company's Adviser, Sub-Adviser, Administrator and
Distributor. The Officers of the Company conduct and supervise its daily
business operations.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the
"Distributor") serves as the distributor of the shares of the Company. Under its
distribution agreement (the "Distribution Agreement") with the Company, the
Distributor sells shares of the Company upon the terms and at the current
offering price described in this Prospectus. The Distributor is not obligated to
sell any specific number of shares of the Company.
Each Fund currently offers only one class of shares. The Company may in the
future offer one or more classes of shares for each Fund that may have different
sales charges or other distribution charges or a combination thereof than the
class currently offered.
The Board of Directors of the Company has approved and adopted the
Distribution Agreement for the Company and a Plan for the Funds pursuant to Rule
12b-1 under the 1940 Act. Under the Plan, the Distributor is entitled to receive
from these Funds a distribution fee, which is accrued daily and paid monthly, of
0.50% for each of the Funds on an annualized basis of the average daily net
assets of such Fund. The Distributor expects to reallocate most of its fee to
investment dealers, banks or financial services firms that provide distribution,
administrative or shareholder services ("Participating Dealer"). The actual
amount of such compensation is agreed upon by the 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 Company shares.
The Plan obligates the Funds to accrue and pay to the Distributor the fee
agreed to under its Distribution Agreement. The Plan does 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 the Plan, even if the
Distributor's
17
<PAGE>
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 Plan, under the terms of Rule 12b-1, will remain in effect only if
approved at least annually 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 the Plan or in any agreements related thereto ("12b-1
Directors"). The Plan may be terminated at any time by a vote of a majority of
the 12b-1 Directors or by a vote of a majority of the outstanding voting
securities of the applicable class of a Fund. The fee set forth above will be
paid by the Fund to the Distributor unless and until the Plan is terminated or
not renewed. The Company intends to operate the Plan in accordance with its
terms and the NASD Rules concerning sales charges.
PAYMENTS TO FINANCIAL INSTITUTIONS. The Adviser or its affiliates may
compensate certain financial institutions for the continued investment of their
customers' assets in the Funds pursuant to the advice of such financial
institutions. These payments will be made directly by the Adviser or its
affiliates from their assets, and will not be made from the assets of the
Company or by the assessment of a sales charge on shares. Such financial
institutions may also perform certain shareholder or recordkeeping services that
would otherwise be performed by ACCESS. The Adviser may elect to enter into a
contract to pay the financial institutions for such services.
EXPENSES. The Funds are responsible for payment of certain other fees and
expenses (including professional fees, custodial fees and printing and mailing
costs) specified in the Administration and Distribution Agreements.
PURCHASE OF SHARES
GENERAL. Each Fund offers one class of shares to the public on a continuous
basis at net asset value without any sales charge through the Distributor as
principal underwriter, which is located at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181. Shares are also offered through members of the NASD who are
acting as securities dealers ("dealers") and NASD members or eligible non-NASD
members who are acting as brokers or agents for investors ("brokers"). The term
"dealers" and "brokers" are sometimes referred to herein as "Participating
Dealers." Shares are also offered through Morgan Stanley & Co. to Prime Resource
Account Holders.
The minimum initial investment is $250,000, except that the minimum initial
investment amount for Prime Resource Account Holders is $500. The minimum for
subsequent investments is $25 and there is no minimum for automatic reinvestment
of dividends and distributions. The Distributor may waive the investment
minimums in its sole discretion. The Company in its sole discretion may accept
or reject any order for purchases of shares.
PURCHASES BY PRIME RESOURCE ACCOUNT HOLDERS
GENERAL. Prime Resource Account Holders are account holders who open a
prime resource account with Morgan Stanley & Co. A prime resource account is a
cash management account offering such features as check
18
<PAGE>
writing privileges, automatic sweep of all cash balances into a Money Market
Fund and a Visa Gold credit card. Pursuant to the sweep feature, Prime Resource
Account Holders will be permitted to purchase shares of the Money Market Funds.
Prime resource accounts are available only to clients of broker-dealers who use
the Morgan Stanley & Co. as their clearing firm. Investors may purchase shares
through an account maintained by the investor with his brokerage firm (an
"Account").
All payments for initial and subsequent investments should be in U.S.
Dollars. Purchases will be effected at the net asset value next determined after
PFPC, Inc. (the "Sub-Transfer Agent"), has received a purchase order in proper
form and the Company's custodian has Federal Funds immediately available to it.
PURCHASES THROUGH A PRIME RESOURCE ACCOUNT. Share purchases may be effected
through an investor's account with his broker through procedures established in
connection with the requirements of Accounts at such broker.
In such event, beneficial ownership of shares will be recorded by the broker
and will be reflected in the account statements provided by the broker to such
investors. A broker may impose minimum investor account requirements. Although a
broker does not impose a sales charge for purchases of shares, depending on the
terms of an investor's account with his broker, the broker may charge an
investor's account fees for automatic investment and other service provided to
the Account. Information concerning Account requirements, services and charges
should be obtained from an investor's broker. This Prospectus should be read in
conjunction with any information received from a broker.
A broker may offer investors maintaining Accounts the ability to purchase
shares under an automatic purchase program (a "Purchase Program") established by
a participating broker. An investor who participates in a Purchase Program will
have their "free-credit" cash balances in their Account automatically invested
in shares of the Fund which they have designated (the "Designated Fund") under
the Purchase Program. The frequency of investments and the minimum investment
requirement will be established by the broker and the Company. In addition, the
broker may require a minimum amount of cash and/or securities to be deposited in
an Account for participants in its Purchase Program. The description of the
particular broker's Purchase Program should be read for details, and any
inquiries concerning an Account under a Purchase Program should be directed to
the broker. A participant in a Purchase Program may change the designation Fund
at any time by so instructing his broker.
If a broker makes special arrangements under which orders for shares are
received by the Sub-Transfer Agent prior to 12:00 noon (Eastern Time) on any day
that the New York Stock Exchange (the "NYSE") and Federal Reserve Banks are open
for business (a "Business Day"), and the broker guarantees that payment for such
shares will be made in Federal Funds to the Company's custodian prior to 4:00
p.m. (Eastern Time), on the same day, such purchase orders will be effective,
and shares will be purchased at the offering price in effect, as of 12:00 p.m.
(Eastern Time) on the date the purchase order is received by the Sub-Transfer
Agent. Purchase orders received after 12:00 p.m. (Eastern Time) and prior to
4:00 p.m. (Eastern Time), on any Business Day for which payment in Federal Funds
has been received by 4:00 p.m. (Eastern Time), will be effective, and shares
will be purchased at the offering price in effect, as of 4:00 p.m. (Eastern
Time) the same day.
FOR PRIME RESOURCE ACCOUNT HOLDERS, INFORMATION ON EACH MONEY MARKET FUND
CAN BE OBTAINED BY CALLING THE SUB-TRANSFER AGENT AT 1-800-533-7719.
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<PAGE>
PURCHASES BY ALL OTHER SHAREHOLDERS
GENERAL. Shares of the Company may be purchased on any business day through
Participating Dealers. Shares may also be purchased by completing the
application accompanying this Prospectus and forwarding the application, through
the Participating Dealer, to the shareholder service agent, ACCESS Investor
Services, Inc. ("ACCESS"), a wholly-owned subsidiary of Van Kampen American
Capital, Inc.
The price paid for shares purchased is based on the next calculation of net
asset value after an order is received by a Participating Dealer and transmitted
to the Distributor. If the Distributor receives a purchase order prior to 12:00
noon (Eastern Time) and receives payment in Federal Funds prior to 4:00 p.m.
(Eastern Time) on any day that the NYSE and Federal Reserve Banks are open for
business (a "Business Day"), shares will be purchased at the offering price in
effect as of 12:00 p.m. (Eastern Time) on the date the purchase order is
received by a Participating Dealer. Purchase orders received after 12:00 p.m.
(Eastern Time) and prior to 4:00 p.m. (Eastern Time), on any Business Day for
which payment in Federal Funds has been received by 4:00 p.m. (Eastern Time),
will be effective, and shares will be purchased at the offering price in effect,
as of 4:00 p.m. (Eastern Time) the same day provided such order is transmitted
to the Distributor prior to the Distributor's close of business on such day.
Orders received by Participating Dealers after the close of the NYSE are priced
based on the net asset value next calculated provided they are received by the
Distributor prior to the Distributor's close of business on such day. It is the
responsibility of Participating Dealers to transmit orders received by them to
the Distributor so they will be received prior to such time. Orders of less than
$500 are mailed by the Participating Dealer and processed at the offering price
next calculated after acceptance by ACCESS.
OTHER PURCHASE INFORMATION
Purchase of shares of the Funds by check is credited to your account at the
price next determined after receipt of Federal Funds on the day of receipt and
will begin receiving dividends the following day. If you purchase shares of a
Fund directly, you must make payment by check or Federal Funds to effect your
purchase of the shares and obtain the price for the shares as described above.
Purchasing shares of a Fund is different from placing a trade for securities at
a given price and having a certain number of days in which to make settlement or
payment for the securities.
To ensure that checks are collected by the Company, withdrawals of
investments made by check will not be forwarded until the Company's depository
bank has made fully available for withdrawal the check amount used to purchase
Company shares, which generally will be within 15 days. As a condition of this
offering, if a purchase is canceled due to nonpayment or because your check does
not clear, you will be responsible for any loss the Company and/or its agents
incur. If you are already a shareholder, the Company may redeem shares from your
account(s) to reimburse the Company and/or its agents for any loss. In addition,
you may be prohibited or restricted from making future purchases in the Company.
20
<PAGE>
SHAREHOLDER SERVICES RELATED TO PURCHASES (Shareholders Other Than Prime
Resource Account Holders)
The Company offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. Unless otherwise described below, each of these
services may be modified or terminated by the Company at any time.
INVESTMENT ACCOUNT. ACCESS performs bookkeeping, data processing and
administration services related to the maintenance of shareholder accounts. Each
shareholder has an investment account under which shares are held by ACCESS.
Except as described herein, after each share transaction in an account, the
shareholder receives a statement showing the activity in the account. Each
shareholder will receive statements at least quarterly from ACCESS showing any
reinvestments of dividends and capital gains distributions and any other
activity in the account since the preceding statement. Such shareholders also
will receive separate confirmations for each purchase or sale transaction other
than reinvestment of dividends and capital gains distributions and systematic
purchases or redemptions. Additions to an investment account may be made at any
time by purchasing shares through authorized brokers, dealers or financial
intermediaries or by mailing a check directly to ACCESS.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the applicable Fund. Such shares are acquired at net asset value on the record
date of such dividend or distribution. Unless the shareholder instructs
otherwise, the reinvestment plan is automatic. This instruction may be made by
telephone by calling (800) 282-4404 or (800) 772-8889 for the hearing impaired,
or in writing to ACCESS. The investor may, on the initial application or prior
to any declaration, instruct that dividends be paid in cash and capital gains
distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash. For further information, see
"Dividends and Distributions."
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Funds. Additional information is
available from the Distributor or authorized brokers, dealers or financial
intermediaries.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanied by this
Prospectus or by calling (800) 282-4404, or (800) 772-8889 for the hearing
impaired, elect to have all dividends and other distributions paid on shares of
the Company invested into shares of any other Participating Fund, so long as a
pre-existing account exists for such shareholder. Both accounts must also be of
the same type, either non-retirement or retirement. Any two non-retirement
accounts can be used. If the accounts are retirement accounts, they must both be
for the same type of retirement plan (e.g. IRA, 403(b)(7), 401(k), Keogh) and
for the benefit of the same individual. The phrase "Participating Funds," as
used herein, refers to certain open-end investment companies advised by the
Adviser or Van Kampen American Capital Asset Management Inc. and distributed by
the Distributor as determined from time to time by the Company's Board of
Directors.
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<PAGE>
If the qualified pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund into which distributions would be invested. Distributions are invested
into the selected fund at its net asset value as of the payable date of the
distribution only if shares of such selected fund have been registered for sale
in the investor's state and are currently available for sale.
SHARE CERTIFICATES. Generally, the Company will not issue share
certificates. However, upon written or telephone request to the Company, a share
certificate will be issued, representing shares (with the exception of
fractional shares) of the Company. A shareholder will be required to surrender
such certificates upon redemption or transfer thereof. In addition, if such
certificates are lost the shareholder must write to Morgan Stanley Fund, Inc.
c/o ACCESS, P.O. Box 418256, Kansas City, MO 64141-9256, requesting an
"affidavit of loss" and to obtain a Surety Bond in a form acceptable to ACCESS.
On the date the letter is received, ACCESS will calculate a fee for replacing
the lost certificate equal to no more than 2.00% of the net asset value of the
issued shares and bill the party to whom the replacement certificate was mailed.
SYSTEMATIC WITHDRAWAL PLAN. A shareholder, other than a Prime Resource
Account Holder, whose shares in a single account total $5,000 or more at the
offering price next computed after receipt of instructions may establish a
quarterly, semi-annual or annual withdrawal plan. A shareholder, other than a
Prime Resource Account Holder, whose shares in a single account total $10,000 or
more at the offering price next computed after receipt of instructions may
establish a monthly, quarterly, semi-annual or annual withdrawal plan. This plan
provides for the orderly use of the entire account, not only the income but also
the principal, if necessary. Each withdrawal constitutes a redemption of shares
on which taxable gain or loss will be recognized. The plan holder may arrange
for monthly, quarterly, semi-annual, or annual checks in any amount not less
than $25.
Under the plan, sufficient shares of the Company are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
The Company reserves the right to amend or terminate the systematic withdrawal
program on 30 days' notice to its shareholders.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. A shareholder, other than a
Prime Resource Account Holder, can use ACH to have redemption proceeds deposited
electronically into their bank accounts. Redemptions transferred to a bank
account via the ACH plan are available to be credited to the account on the
second business day following normal payment. In order to utilize this option,
the shareholder's bank must be a member of ACH. In addition, the shareholder
must fill out the appropriate section of the account application. The
shareholder must also include a voided check or deposit slip from the bank
account into which redemptions are to be deposited together with the completed
application. Once ACCESS has received the application and the voided check or
deposit slip, such shareholder's designated bank account, following any
redemption, will be credited with the proceeds of such redemption. Once enrolled
in the ACH plan, a shareholder may terminate participation at any time by
writing to ACCESS or by calling (800) 282-4404. A shareholder's bank may charge
a fee for ACH transfers.
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<PAGE>
FOR SHAREHOLDERS OTHER THAN PRIME RESOURCE ACCOUNT HOLDERS, INFORMATION ON
EACH MONEY MARKET FUND CAN BE OBTAINED BY CALLING THE TRANSFER AGENT AT
1-800-282-4404.
SHAREHOLDER SERVICES
TRANSFER OF REGISTRATION. You may transfer the registration of any of your
Company shares to another person by writing to the Company c/o ACCESS, P.O. Box
418256, Kansas City, Missouri 64141-9256. As in the case of redemptions, the
written request must be received in "good order" before any transfer can be
made.
RETIREMENT PLANS. Eligible investors may establish individual retirement
accounts ("IRAs"); Simplified Employee Pension ("SEP") Plans; and pension and
profit sharing plans; 401(k) plans; or Section 403(b)(7) plans in the case of
employees of public school systems and certain non-profit organizations.
Documents and forms containing detailed information regarding these plans are
available from the Distributor. Van Kampen American Capital Trust Company serves
as custodian under the IRA, 403(b)(7) and Keogh plans. Details regarding fees,
as well as full plan administration for profit sharing, pension and 401(k)
plans, are available from the Distributor.
EXCHANGE PRIVILEGE. Shares of a Fund may be exchanged with shares of
another Money Market Fund, subject to certain limitations. SHAREHOLDERS MAY ONLY
EXCHANGE INTO SUCH OTHER FUNDS AS ARE LEGALLY AVAILABLE FOR SALE IN THEIR STATE
AND ARE CURRENTLY AVAILABLE FOR SALE.
To be eligible for exchange, shares of a Fund generally must have been
registered in the shareholder's name for at least 30 days prior to an exchange.
Shares of a Fund registered in a shareholder's name for less than 30 days may
only be exchanged upon receipt of prior approval of the Adviser. Under normal
circumstances, it is the policy of the Adviser not to approve such requests.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684 or (800) 772-8889 for the hearing impaired. A shareholder automatically
has telephone exchange privileges unless otherwise designated in the application
form accompanied by this Prospectus. See "Redemption of Shares -- Telephone
Transaction Procedures" for more information. The exchange will take place at
the relative net asset values of the shares next determined after receipt of
such request. Any shares exchanged begin earning dividends on the next business
day after the exchange is affected. Exchanges of shares are sales and may result
in a gain or loss for federal income tax purposes. If the exchanging shareholder
does not have an account in the Fund whose shares are being acquired, a new
account will be established with the same registration, dividend and capital
gains options (except dividend diversification options) and broker, dealer or
financial intermediary of record as the account from which shares are exchanged,
unless otherwise specified by the shareholder. In order to establish a
systematic withdrawal plan for the new account or dividend diversification
options for the new account, an exchanging shareholder must file a specific
written request. The Company reserves the right to reject any order to acquire
its shares through exchange. In addition, the Company may restrict or terminate
the exchange privilege at any time on 60 days' notice to its shareholders of any
termination or material amendment.
23
<PAGE>
REDEMPTION OF SHARES
REDEMPTION PROCEDURES Redemption orders are effected at the net asset value
per share next determined after receipt of the order in proper form by the
Sub-Transfer Agent. Investors may redeem all or some of their shares in
accordance with one of the procedures described below.
REDEMPTIONS BY PRIME RESOURCE ACCOUNT HOLDERS
REDEMPTION OF SHARES IN A PRIME RESOURCE ACCOUNT. An investor who
beneficially owns shares may redeem such shares in their Account in accordance
with instructions and limitations pertaining to their Account by contacting
their broker. If such notice is received by the Sub-Transfer Agent by 12:00 noon
(Eastern Time) on any Business Day, the redemption will be effective as of 12:00
noon (Eastern Time) on that day. Payment of the redemption proceeds will be made
after 12:00 noon (Eastern Time) on the day the redemption is effected, provided
that PNC Bank, N.A. (the "Custodian") is open for business. If the Custodian is
not open, payment will be made on the next bank business day. If the redemption
request is received after 12:00 noon but before
4:00 p.m. (Eastern Time), the redemption will be effected as of 4:00 p.m.
(Eastern Time) on that day and payment of the redemptions proceeds will be made
after 12:00 noon (Eastern Time) on the next Business Day after the redemption is
effected, provided that the Custodian is open for business. If the Custodian is
not open, payment will be made on the next bank business day. If all shares are
redeemed, all accrued but unpaid dividends on those shares will be paid with the
redemption proceeds.
An investor's brokerage firm will also redeem each day a sufficient number
of shares of the designated Fund to cover debit balances created by transactions
in the Account or instructions for cash disbursements. Fund shares will be
redeemed on the same day that a transaction occurs that results in such a debit
balance or charge.
Each brokerage firm reserves the right to waive or modify criteria for
participation in an Account or to terminate participation in an Account for any
reason.
REDEMPTION BY CHECK. Upon request, the Company will provide any Prime
Resource Account Holder with forms of drafts ("checks") payable through the
Custodian. These checks may be made payable to the order of anyone. The minimum
amount of a check is $500. An investor wishing to use this check writing
redemption procedure should complete specimen signature cards, and then forward
such signature cards to the investor's broker or in accordance with the broker's
instructions. Upon receipt, the Sub-Transfer Agent will then arrange for the
checks to be honored by the Custodian. Investors who own shares through an
Account should contact their brokers for signature cards. Investors with joint
accounts may elect to have checks honored with a single signature. Check
redemptions will be subject to the Custodian's rules governing checks. An
investor will be able to stop payment on a check redemption. The Company or
Sub-Transfer Agent may terminate this redemption service at any time, and shall
not incur any liability for honoring checks, for effecting redemptions to pay
checks, or for returning checks which have not been accepted.
24
<PAGE>
When a check is presented to the Custodian for clearance, the Custodian, as
the investor's agent, will cause the Company to redeem a sufficient number of
full and fractional shares owned by the investor to cover the amount of the
check at the redemption price next determined after the redemption requested is
presented. Checks may not be presented for cash payment at the offices of the
Custodian.
REDEMPTION BY ALL OTHER SHAREHOLDERS
Shareholders may redeem for cash some or all of their shares without charge
by the Company at any time by sending a written request in proper form directly
to the Fund c/o ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-9256, by
placing the redemption request through Participating Dealer or by calling the
Company.
WRITTEN REDEMPTION REQUESTS. In the case of redemption requests sent
directly to ACCESS, the redemption request should indicate the number of shares
or dollars to be redeemed, the account number and be signed exactly as the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption would exceed $50,000, or if the
proceeds are not to be paid to the record owner at the record address, or if the
record address has changed within the previous 30 days, signature(s) must be
guaranteed by one of the following: a bank or trust company; a broker-dealer; a
credit union; a national securities exchange, registered securities association
or clearing agency; a savings and loan association; or a federal savings bank.
If certificates are held for the shares being redeemed, such certificates must
be endorsed for transfer or accompanied by an endorsed stock power and sent with
the redemption request. In the event the redemption is requested by a
corporation, partnership, trust, fiduciary, executor or administrator, and the
name and title of the individual(s) authorizing such redemption is not shown in
the account registration, a copy of the corporate resolution or other legal
documentation appointing the authorized signer and certified within the prior 60
days must accompany the redemption request. The redemption price is the net
asset value per share next determined after the request is received by ACCESS in
proper form. Payment for shares redeemed will ordinarily be made by check mailed
within seven business days after acceptance by ACCESS of the request and any
other necessary documents in proper order.
DEALER REDEMPTION REQUESTS. Shareholders may redeem shares through their
securities dealer, who will telephone the request to the Distributor. Orders
received from dealers must be at least $500 unless transmitted via the FUNDSERV
network. The redemption price for such shares is the net asset value next
calculated after an order is received by a dealer provided such order is
transmitted to the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
Any change in the redemption price due to failure of the Distributor to receive
a redemption request prior to such time must be settled between the shareholder
and dealer. Shareholders must submit a written redemption request in proper form
(as described above under "Written Redemption Requests") to the dealer within
three business days after calling the dealer with the redemption request.
Payment for shares redeemed will ordinarily be made by check mailed within three
business days to the dealer.
TELEPHONE REDEMPTION REQUESTS. The Company permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as
25
<PAGE>
described below. To establish such privilege, a shareholder must complete the
appropriate section of the application accompanying this Prospectus or call the
Company at (800) 282-4404, or (800) 772-8889 for the hearing impaired, to
request that a copy of the Telephone Redemption Authorization form be sent to
them for completion. To redeem shares, contact the telephone transaction line at
(800) 421-5684. See "Telephone Transaction Procedures" for more information.
Telephone redemptions may not be available if the shareholder cannot reach
ACCESS by telephone, whether because all telephone lines are busy or for any
other reason; in such case, a shareholder would have to use the Company's other
redemption procedures previously described. Requests received by ACCESS prior to
12:00 noon, Eastern Time, on a regular business day or 4:00 p.m., Eastern Time,
on a regular business day will be processed at the net asset value per share
determined at 12:00 noon, Eastern Time or 4:00 p.m., Eastern Time, respectively,
that day. These privileges are available for all accounts other than retirement
accounts. The telephone redemption privilege is not available for shares
represented by certificates. If an account has multiple owners, ACCESS may rely
on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check will ordinarily be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire will ordinarily be wired on the next business day
to the shareholder's bank account of record. This privilege is not available if
the address of record has been changed within 30 days prior to a telephone
redemption request. The Company reserves the right at any time to terminate,
limit or otherwise modify this telephone redemption privilege.
GENERAL REDEMPTION INFORMATION. If the shares to be redeemed have been
recently purchased by check, ACCESS may delay mailing a redemption check or
wiring redemption proceeds until it confirms that the purchase check has
cleared, usually a period of up to 15 days. In addition, the redemption payment
may be delayed or the right of redemption suspended by the Fund pursuant to
rules of the SEC.
The Company may redeem any shareholder account with a net asset value on the
date of the notice of redemption less than the minimum investment as specified
by the Directors. At least 60 days' advance written notice of any such
involuntary redemption is required and the shareholder is given an opportunity
to purchase the required value of additional shares at the next determined net
asset value. Any involuntary redemption may only occur if the shareholder
account is less than the minimum investment due to shareholder redemptions.
IRA redemption requests should be sent to the IRA custodian to be forwarded
to ACCESS. Where Van Kampen American Capital Trust Company serves as IRA
Custodian, special IRA, 403(b)(7), or Keogh redemption forms must be obtained
from and be forwarded to Van Kampen American Capital Trust Company, P.O. Box
944, Houston, Texas 77001-0944. Contact the Custodian for information.
FOR SHARES HELD IN BROKER STREET NAME, YOU CANNOT REQUEST REDEMPTION BY
TELEPHONE OR BY MAIL; SUCH SHARES MAY BE REDEEMED ONLY BY CONTACTING YOUR
PARTICIPATING DEALER.
26
<PAGE>
TELEPHONE TRANSACTION PROCEDURES. Van Kampen American Capital, Inc. and its
subsidiaries, including ACCESS (collectively, "VKAC") and the Company employ
procedures considered by them to be reasonable to confirm that instructions
communicated by telephone are genuine. Such procedures include requiring certain
personal identification information prior to acting upon telephone instructions,
tape recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither VKAC nor the Company will be liable for following instructions which it
reasonably believes to be genuine. VKAC and the Company may be liable for any
losses due to unauthorized or fraudulent instructions if reasonable procedures
are not followed.
VALUATION OF SHARES
The net asset value per share of each of the Funds is determined at 12:00
p.m. (Eastern Time) and 4:00 p.m. (Eastern Time) on the days on which the NYSE
and the Custodian are open. For the purpose of calculating the Fund's net asset
value per share, securities are valued by the "amortized cost" method of
valuation, which does not take into account unrealized gains or losses. This
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Fund would receive if it sold the instrument.
PERFORMANCE INFORMATION
From time to time the Funds may advertise "yield," and may advertise
"effective yield." Yield figures are based on historical performance and are not
intended to indicate future performance. The "yield" of such Funds refers to the
income generated by an investment in the Funds over a seven-day period and the
income generated over the seven-day period is then "annualized." That is, the
amount of income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned on an investment in a Fund is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. The Tax-Free Money Market Fund
may also quote its "tax-equivalent yield" from time to time. The tax-equivalent
yield shows the level of taxable yield needed to produce an after-tax equivalent
to the Fund's tax-free yield. This is done by increasing the Fund's yield
(calculated as above) by the amount necessary to reflect the payment of federal
income tax at a stated tax rate. For further information concerning these
figures, see "Performance Information" in the Statement of Additional
Information. The Fund may also use comparative performance information from time
to time in marketing Fund shares, including data from Lipper Analytical
Services, Inc. and/or Donoghue's Money Fund Report.
For information on each Fund's seven-day yield call the Transfer Agent at
1-800-282-4404.
27
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
Shareholders will automatically be credited with all dividends and
distributions in additional shares at net asset value, except that, upon written
notice to the Company or by checking off the appropriate box in the account
application form, a shareholder may elect to receive dividends and/or
distributions in cash.
For the Funds, net investment income is computed and dividends declared as
of 1:00 p.m. (Eastern Time) on each day. Such dividends are payable to Fund
shareholders of record as of 12:00 p.m. (Eastern Time) on that day, if the
Company and the Custodian are open for business. This means that shareholders
whose purchase orders become effective as of 12:00 p.m. (Eastern Time) will
begin to receive the dividend on that day and shareholders whose purchase orders
become effective as of 4:00 p.m. (Eastern Time) will begin to receive the
dividend on the following day. Dividends declared for Saturdays, Sundays and
holidays are payable to shareholders of record as of 4:00 p.m. (Eastern Time) on
the last preceding day the Company and the Custodian were open for business. Net
realized gains, if any, after reduction for any available tax loss carry forward
may be distributed annually.
It is an objective of management to maintain the price per share of each
Fund as computed for the purpose of sales and redemptions at exactly $1.00. In
the event the Directors determine that a deviation from the $1.00 per share
price may exist which may result in a material dilution or other unfair results
to investors or existing shareholders, they will take corrective action they
regard as necessary and appropriate, including the sale of instruments from the
Fund prior to maturity to realize gains or losses, shortening average portfolio
maturity, withholding dividends, making a special capital distribution, or
redemptions of shares in kind.
TAXES
TAX STATUS OF THE FUNDS
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial
or administrative action, possibly with retroactive effect. See also the tax
sections in the Statement of Additional Information.
No attempt has been made to present a detailed explanation of the federal,
state or local income tax treatment of a Fund or its shareholders. Accordingly,
shareholders are urged to consult their tax advisors regarding specific
questions as to federal, state and local income taxes.
Each Fund is treated as a separate entity for federal income tax purposes,
and thus the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), generally will be applied to each Fund separately, rather than to the
Company as a whole. Net long-term, mid-term and short-term capital gains, net
income and operating expenses therefore will be determined separately for each
Fund.
Each Fund intends to qualify for the special tax treatment afforded
"regulated investment companies" ("RICs") under Subchapter M of the Code so that
it will be relieved of federal income tax on that part of its net investment
income and net capital gain (the excess of net long-term capital gain over net
short-term capital loss) which is distributed to its shareholders.
28
<PAGE>
TAX STATUS OF DISTRIBUTIONS AND DISPOSITIONS
Each Fund distributes substantially all of its net investment income
(including, for this purpose, net short-term capital gain) to its shareholders.
Dividends paid by the Money Market Fund and Government Obligations Money Market
Fund from their respective net investment income will be taxable to the
shareholders of such Fund as ordinary income, whether received in cash or in
additional shares, if the shareholder is subject to tax. Such dividends paid by
a Fund generally will not qualify for the dividends-received deduction to
corporations.
Distributions of net capital gains ("capital gain dividends") are taxable to
shareholders subject to tax as long-term capital gains, regardless of how long
the shareholder has held the Fund's shares. Capital gain dividends are not
eligible for the corporate dividends-received deduction. Each Fund will make
annual reports to shareholders of the federal income tax status of all
distributions. For a summary of the tax rates applicable to capital gains
(including capital gain dividends), see the discussion below regarding the
Taxpayer Relief Act of 1997.
The Tax-Free Money Market Fund intends to qualify to pay "exempt interest
dividends" by satisfying the Code's requirement that at the close of each
quarter of its taxable year at least 50% of the value of its total assets
consists of securities the interest on which is exempt from federal income tax.
So long as this and certain other requirements are satisfied, the Fund's exempt
interest dividends will be exempt from regular federal income tax. Investors in
this Fund should note, however, that in certain circumstances such amounts,
while exempt from regular federal income tax, are subject to alternative minimum
tax. In addition, this Fund may not be an appropriate investment for persons who
are "substantial users" of facilities financed by industrial development or
private activity bonds. See the Statement of Additional Information for a
description of the application of the alternative minimum tax and certain other
collateral tax consequences.
Current federal income tax law limits the types and volume of bonds
qualifying for the federal income tax exemption of interest, which may affect
the ability of the Tax-Free Money Market Fund to purchase sufficient amounts of
tax-exempt securities to qualify to pay "exempt interest dividends." Investors
should note that interest on indebtedness incurred or continued by shareholders
to purchase or carry shares of the Tax-Free Money Market Fund will not be
deductible for federal income tax purposes.
The Tax-Free Money Market Fund will determine annually the percentages of
its net investment income which are exempt from the regular federal income tax
and will apply such percentages uniformly to all distributions declared from net
investment income during that year. These percentages may differ significantly
from the actual percentages for any particular day.
Shareholders may also be subject to state and local taxes on distributions
from the Funds. Shareholders are advised to consult their own tax advisers with
respect to tax consequences to them of an investment in the Company.
Dividends and other distributions declared in October, November and December
by a Fund payable as of a record date in such month and paid at any time during
January of the following year are treated as having been paid by a Fund and
received by the shareholders on December 31 of the year declared.
29
<PAGE>
The sale, exchange or redemption of shares may result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the redemption proceeds exceeds or is less than the
shareholder's adjusted basis in the redeemed, exchanged or sold shares. Any loss
recognized on a taxable disposition of shares held for six months or less will
be disallowed to the extent of any exempt interest dividends received with
respect to such shares.
Under the Taxpayer Relief Act of 1997 (the "1997 Tax Act"), the maximum tax
rates applicable to net capital gains recognized by individuals and other
non-corporate taxpayers are (i) the same as ordinary income rates for capital
assets held for one year or less, (ii) 28% for capital assets held for more than
one year but not more than 18 months and (iii) 20% for capital assets held for
more than 18 months. The maximum long-term capital gains rate for corporations
remains at 35%. Under the 1997 Tax Act, the Treasury is authorized to issue
regulations that address the application of the new capital gains rates to sales
and exchanges by RICs and to sales and exchanges of interests in RICs, but no
such regulations have been issued as of the date hereof. It is expected that the
new tax rates for capital gains under the 1997 Tax Act described above will
apply to distributions of capital gain dividends by the Funds as well as to
sales and exchanges of shares in the Funds. With respect to capital losses
recognized on dispositions of shares held six months or less where such losses
are treated as long-term capital losses to the extent of prior capital gain
dividends received on such shares (see discussion above regarding gains or
losses recognized on the sale or exchange of shares), it is unclear how such
capital losses offset the capital gains referred to above. Shareholders should
consult their own tax advisers as to the application of the new capital gains
rates to their particular circumstances.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS AND SHAREHOLDERS SHOULD CONSULT THEIR
OWN TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT
IN A FUND.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Company was organized as a Maryland corporation on August 14, 1992. The
Amended Articles of Incorporation currently permit the Company to issue 27.375
billion shares of common stock, par value $.001 per share. Pursuant to the
Company's By-Laws, the Board of Directors may increase the number of shares the
Company is authorized to issue without the approval of the shareholders of the
Company. The Board of Directors has the power to designate one or more classes
of shares of common stock and to classify and reclassify any unissued shares
with respect to such classes.
The shares of the Funds, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. The shares have
no preference as to conversion, exchange, dividends, retirement or other
features and have no preemptive rights. The shares of the Funds have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the Directors
if they choose to do so. Under Maryland law, the Company is not required to hold
an annual meeting of its shareholders unless required to do so under the 1940
Act. Any person or organization owning 25% or more of the outstanding shares of
a Fund may be presumed to "control" (as that term is defined in the 1940 Act)
such
30
<PAGE>
Fund. As of October 16, 1997, PFPC, Inc., 400 Bellevue Parkway, Wilmington, DE
19809, was presumed to "control" the Money Market Fund and Government
Obligations Money Market Fund based solely on its ownership of 25% or more of
the outstanding voting shares of such Funds.
REPORTS TO SHAREHOLDERS
The Company and/or its agents will send to shareholders of the Company
annual and semi-annual reports; the financial statements appearing in annual
reports are audited by independent accountants. Shareholder inquiries for Prime
Resource Accounts should be directed to the Sub-Transfer Agent, PFPC, Inc., P.O.
Box 8950, Delaware 19899. Shareholder inquiries for all other accounts should be
directed to the Transfer Agent, ACCESS Investor Services, Inc., P.O. Box 418256,
Kansas City, Missouri 64141-9256.
CUSTODIAN
PNC Bank, N.A. acts as custodian for each of the Money Market Funds. For
more information on the Company's custodians, see "General Information --
Custody Arrangements" in the Statement of Additional Information.
DIVIDEND DISBURSING, TRANSFER AGENT AND SUB-TRANSFER AGENT
PFPC, Inc., an indirect wholly-owned subsidiary of PNC Financial Corp., a
multi-bank holding company, serves as sub-transfer agent for Prime Resource
Account shareholders. PFPC's address is 400 Bellevue Parkway, Wilmington,
Delaware 19809. ACCESS, an affiliate of the Adviser, Sub-Adviser and
Distributor, serves as dividend disbursing and transfer agent for all other
shareholders. ACCESS's address is P.O. Box 418256, Kansas City, Missouri 64141.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, NY 10036,
serves as independent accountants for the Company and audits its annual
financial statements.
31
<PAGE>
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NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE DISTRIBUTOR. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER BY THE COMPANY OR THE DISTRIBUTOR TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................................................... 2
Fund Expenses......................................................... 3
Financial Highlights.................................................. 5
Investment Objectives and Policies.................................... 8
Additional Investment Information..................................... 11
Investment Limitations................................................ 15
Management of the Company............................................. 15
Purchase of Shares.................................................... 18
Purchases by Prime Resource Account Holders........................... 18
Purchases by All Other Shareholders................................... 20
Shareholder Services.................................................. 23
Redemption of Shares.................................................. 24
Redemptions by Prime Resource Account Holders......................... 24
Redemptions by All Other Shareholders................................. 25
Valuation of Shares................................................... 27
Performance Information............................................... 27
Dividends and Distributions........................................... 28
Taxes................................................................. 28
General Information................................................... 30
</TABLE>
MORGAN STANLEY
MONEY MARKET FUND
TAX-FREE MONEY MARKET FUND
GOVERNMENT OBLIGATIONS
MONEY MARKET FUND
PORTFOLIOS OF
MORGAN STANLEY
FUND, INC.
---------------
PROSPECTUS
---------------
INVESTMENT ADVISER
VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
INVESTMENT SUB-ADVISER
MORGAN STANLEY ASSET MANAGEMENT INC.
DISTRIBUTOR
VAN KAMPEN AMERICAN
CAPITAL DISTRIBUTORS, INC.
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<PAGE>
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P R O S P E C T U S
-------------------------------------------------------------------------
MORGAN STANLEY GROWTH AND INCOME FUND
MORGAN STANLEY EUROPEAN EQUITY FUND
PORTFOLIOS OF THE
MORGAN STANLEY FUND, INC.
P.O. BOX 418256, KANSAS CITY, MISSOURI 64141
FOR INFORMATION CALL 1-800-282-4404
------------------
Morgan Stanley Fund, Inc. (the "Company") is an open-end management
investment company, or mutual fund, which consists of twenty-two investment
portfolios. This prospectus (the "Prospectus") describes the Class A, Class B
and Class C shares of the Morgan Stanley Growth and Income Fund and the Morgan
Stanley European Equity Fund (each a "Fund" and collectively, the "Funds"). The
Funds are designed to make available to retail investors the expertise of Van
Kampen American Capital Investment Advisory Corp., the investment adviser (the
"Adviser") and administrator (the "Administrator"), and its affiliate, Morgan
Stanley Asset Management Inc., the sub-adviser (the "Sub-Adviser"), to the
Funds. Shares are available through Van Kampen American Capital Distributors,
Inc. (the "Distributor") and through investment dealers, banks and financial
services firms that provide distribution, administrative or shareholder services
("Participating Dealers"). As of June 30, 1997, the Funds have not commenced
investment operations.
This Prospectus is designed to set forth concisely the information about the
Funds that a prospective investor should know before investing and it should be
retained for future reference. Additional information about the Company is
contained in a "Statement of Additional Information," dated October 28, 1997,
which is incorporated herein by reference. The Company offers additional
portfolios which are described in other prospectuses. The Statement of
Additional Information and the prospectuses pertaining to the other portfolios
of the Companyare available upon request and without charge by writing or
calling the Company at the address and telephone number set forth above. The
Statement of Additional Information and other materials regarding the Company
have been filed with the Securities and Exchange Commission and are available at
the Commission's internet web site(http:// www.sec.gov).
THE COMPANY'S SHARES ARE NOT OBLIGATIONS, DEPOSITS OR ACCOUNTS OF, OR
ENDORSED OR GUARANTEED BY, ANY BANK OR DEPOSITORY INSTITUTION OF ITS AFFILIATES
OR CORRESPONDENTS THEREOF. THE COMPANY'S SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY. SHARES OF THE COMPANY INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS OCTOBER 28, 1997.
<PAGE>
PROSPECTUS SUMMARY
THE COMPANY
The Company currently consists of twenty-two portfolios which are designed
to offer investors a range of investment choices with Van Kampen American
Capital Investment Advisory Corp. (the "Adviser") providing services as adviser
and administrator and its affiliate, Morgan Stanley Asset Management Inc.
("MSAM" or the "Sub-Adviser"), providing services as the sub-adviser. Van Kampen
American Capital Distributors, Inc. (the "Distributor") provides services as
distributor. For ease of reference, the words "Morgan Stanley," which begin the
name of each portfolio, are not used throughout this Prospectus. The investment
objective of each Fund is as follows:
- The GROWTH AND INCOME FUND seeks capital appreciation and current income
by investing primarily in equity and equity-linked securities.
- The EUROPEAN EQUITY FUND seeks long-term capital appreciation by investing
primarily in equity securities of European issuers.
As of June 30, 1997, the Funds have not commenced investment operations.
RISK FACTORS
The investment policies of each Fund entail certain risks and considerations
of which an investor should be aware. The Growth and Income Fund may, and the
European Equity Fund will, invest in securities of foreign issuers. Securities
of foreign issuers are subject to certain risks not typically associated with
domestic securities. See "Additional Investment Information -- Foreign
Investment" for more information. The European Equity Fund invests in securities
of issuers located in developing countries and emerging markets. These
securities may impose greater liquidity risks and other risks not typically
associated with investing in more established markets. The Growth and Income
Fund may invest in lower rated and unrated debt securities which are considered
speculative with regard to the payment of interest and return of principal. In
addition, each Fund may invest in repurchase agreements, borrow money, lend its
portfolio securities, and purchase securities on a when-issued or delayed
delivery basis. The Growth and Income Fund may invest in reverse repurchase
agreements. The Funds may invest in forward foreign currency exchange contracts
and foreign currency exchange futures and options to hedge the currency risks
associated with investment in non-U.S. dollar denominated securities. The Funds
may invest in options and futures. The European Equity Fund may engage in short
selling. The Growth and Income Fund may invest in equity linked securities which
are convertible upon various terms and conditions into equity securities. Each
of these investment strategies involves specific risks which are described under
"Investment Objectives and Policies" and "Additional Investment Information"
herein and under "Investment Objectives and Policies" in the Statement of
Additional Information.
HOW TO INVEST
The Class A, Class B and Class C shares of the Funds are designed to provide
investors a choice of three ways to pay distribution costs. Class A shares of
the Funds are offered at net asset value plus a maximum initial sales charge of
5.75% which initial sales charge may be reduced on certain large purchases or
when combining purchases with the investor's aggregate investments in the
Participating Funds. Class B and Class C shares of the Funds are offered at net
asset value. Class B shares are subject to a contingent deferred sales charge
2
<PAGE>
("CDSC") for redemptions within five years of purchase and are subject to higher
annual distribution-related expenses than the Class A shares. Class C shares are
subject to a CDSC for redemptions within one year of purchase and are subject to
higher annual distribution-related expenses than the Class A shares. See
"Purchase of Shares" for a discussion of reduction or waiver of sales charges,
which are available for certain investors. Share purchases may be made through
the Distributor, through Participating Dealers or by sending payments directly
to the Company. The minimum initial investment is $500 for each class of the
Fund, except that the minimum initial investment amount is reduced for certain
categories of investors. The minimum for subsequent investments is $25, except
that there is no minimum for automatic reinvestment of dividends and
distributions. See "Purchase of Shares."
HOW TO REDEEM
Shares of each Fund may be redeemed at any time at the net asset value per
share (less any applicable CDSC) of the Fund next determined after receipt of
the redemption request. The redemption price may be more or less than the
purchase price. See "Redemption of Shares."
3
<PAGE>
FUND EXPENSES
The following table illustrates all expenses and fees that a shareholder of
a Fund may incur:
<TABLE>
<CAPTION>
GROWTH AND EUROPEAN
SHAREHOLDER TRANSACTION INCOME EQUITY
EXPENSES FUND FUND
- ------------------------------ ---------- --------
<S> <C> <C>
Maximum Sales Load Imposed on
Purchases
Class A................... 5.75%(1) 5.75%(1)
Class B................... None None
Class C................... None None
Maximum Deferred Sales Load
(as a percentage of the
lesser of initial purchase
price or current market
value)
Class A
For Purchases up to
$999,999............... None None
For Purchases of
$1,000,000 or more..... 1.00%(2) 1.00%(2)
Class B................... 5.00%(3) 5.00%(3)
Class C................... 1.00%(4) 1.00%(4)
Maximum Sales Load Imposed on
Reinvested Dividends
Class A................... None None
Class B................... None None
Class C................... None None
Redemption Fees
Class A................... None None
Class B................... None None
Class C................... None None
Exchange Fees
Class A................... None None
Class B................... None None
Class C................... None None
</TABLE>
- ------------------------------
(1) Percentage shown is the maximum sales load. Certain large purchases may be
subject to a reduced sales load.
(2) Purchases of Class A shares of the Funds which, when combined with the net
asset value of the purchaser's existing investments in Class A shares of the
Participating Funds (as defined under "Purchase of Shares -- Quantity
Discounts"), aggregate to $1 million or more are not subject to an initial
sales load (an "initial sales charge"). A contingent deferred sales charge
("CDSC") of 1.00% will be imposed, however, on shares from any such purchase
that are redeemed within one year following such purchase. Certain other
purchases are not subject to an initial sales charge. See "Purchase of
Shares."
(3) Percentage shown is the maximum CDSC. Purchases of Class B shares of the
Funds are subject to a maximum CDSC of 5.00% which decreases in steps to
0.00% after five years. See "Purchase of Shares."
(4) Purchases of Class C shares of the Funds are subject to a CDSC of 1.00% for
redemptions made within one year of purchase. See "Purchase of Shares."
4
<PAGE>
<TABLE>
<CAPTION>
GROWTH AND EUROPEAN
ANNUAL FUND OPERATING EXPENSES INCOME EQUITY
(AS A PERCENTAGE OF AVERAGE NET ASSETS) FUND FUND
- -------------------------------------------------- ---------- ----------
<S> <C> <C>
Investment Advisory Fee (after expense
reimbursement and/or fee waiver) (1)
Class A....................................... 0.75% 1.00%
Class B....................................... 0.75% 1.00%
Class C....................................... 0.75% 1.00%
12b-1 Distribution and Service Fees
Class A (2)................................... 0.25% 0.25%
Class B (2)................................... 1.00% 1.00%
Class C (2)................................... 1.00% 1.00%
Other Expenses (after expense reimbursement and/or
fee waiver) (1)
Class A....................................... 0.45% 0.45%
Class B....................................... 0.45% 0.45%
Class C....................................... 0.45% 0.45%
Total Operating Expenses (after expense
reimbursement and/or fee waiver) (1)
Class A....................................... 1.45% 1.70%
Class B....................................... 2.20% 2.45%
Class C....................................... 2.20% 2.45%
</TABLE>
- ------------------------------
(1) The Adviser has agreed to waive a portion of its advisory fees and/or to
reimburse a portion of expenses of the Funds, if necessary, if such fees
would cause the total annual operating expenses of the Funds, as a
percentage of average daily net assets, to exceed the percentages set forth
in the table above. The following sets forth, for each Fund, (i) investment
advisory fees absent advisory fee waivers and (ii) expected total operating
expenses absent fee waivers and/or expense reimbursements. The Adviser in
its discretion may terminate voluntary fee waivers and/or reimbursements at
any time. Absent the waiver of fees or reimbursement of expenses, the
amounts in the examples below would be greater.
<TABLE>
<CAPTION>
INVESTMENT TOTAL
ADVISORY FEES OPERATING EXPENSES
------------- ---------------------------------
(ALL CLASSES) CLASS A CLASS B CLASS C
------------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Growth and Income Fund............. 0.75% 1.50% 2.25% 2.25%
European Equity Fund............... 1.00% 1.90% 2.65% 2.65%
</TABLE>
For further information on Fund expenses, see "Management of the Company."
(2) Of the 12b-1 distribution and service fees for the Class A shares, 0.25%
represents a shareholder services fee, and for the Class B shares and the
Class C shares, 0.75% represents a distribution fee and 0.25% represents a
shareholder services fee. See "Management of the Company -- Distributor."
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges otherwise permitted as a fund-level expense
by the Conduct Rules of the National Association of Securities Dealers, Inc.
("NASD").
The purpose of the above table is to assist the investor in understanding
the various expenses that an investor in a Fund will bear directly or
indirectly. The expenses and fees for the Funds are based on the advisory
agreements, 12b-1 plans and estimates of other expenses because the Funds have
not commenced investment operations.
5
<PAGE>
The following examples illustrate the expenses that you would pay on a
$1,000 investment, assuming a 5% annual rate of return and redemption at the end
of each time period as indicated, in (i) Class A shares of each Fund, including
the maximum 5.75% initial sales charge, (ii) Class B shares of each Fund, which
have a CDSC, but no initial sales charge, and (iii) Class C shares of each Fund
which have a CDSC, but no initial sales charge.
<TABLE>
<CAPTION>
GROWTH AND EUROPEAN
INCOME EQUITY
FUND FUND
---------- ---------
<S> <C> <C>
Class A shares
(If it is assumed there are no redemptions, the expenses are the
same.)
1 Year........................................................... $ 71(1) $ 74(1)
3 Years.......................................................... 101 108
Class B shares
(Assuming complete redemption at end of period)
1 Year........................................................... $ 72 $ 75
3 Years.......................................................... 99 106
(Assuming no redemption)
1 Year........................................................... $ 22 $ 25
3 Years.......................................................... 69 76
Class C shares
(Assuming complete redemption immediately prior to the end of the
period)
1 Year........................................................... $ 32 $ 35
3 Years.......................................................... 69 76
Class C shares
(Assuming no redemption)
1 Year........................................................... 22 25
3 Years.......................................................... 69 76
</TABLE>
- ------------------------------
(1) The example reflects Class A shares sold at the maximum 5.75% initial sales
charge. Certain large purchases may be subject to a reduced initial sales
charge. Purchases of Class A shares of the Funds which, when combined with
the net asset value of the purchaser's existing investments in Class A
shares of the Participating Funds, aggregate to $1 million or more are not
subject to an initial sales charge but a CDSC of 1.00% will be imposed on
such shares that are redeemed within one year following such purchase.
THE FOREGOING EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Fund is described below, together with the
policies the Fund employs in its efforts to achieve its objective. Each Fund's
investment objective is a fundamental policy which may not be changed by the
Fund without the approval of a majority of the Fund's outstanding voting
securities. There is no assurance that a Fund will attain its objective. The
investment policies described below are not fundamental policies and may be
changed without shareholder approval. For more information about certain
investment practices common to the Funds and applicable quality requirements,
see "Additional Investment Information" below and "Investment Objectives and
Policies" in the Statement of Additional Information.
6
<PAGE>
THE GROWTH AND INCOME FUND
The Growth and Income Fund seeks capital appreciation and current income by
investing primarily in equity and equity-linked securities. The Fund seeks to
achieve its investment objective, consistent with reasonable investment risk, by
investing in equity securities of rapidly growing companies, or convertible
securities or other equity-linked, income-generating securities (e.g., PERCS,
ELKS, LYONs) of such companies. The Fund will also invest in slower-growth
companies with stable or accelerating earnings and/or dividend growth. The
equity securities of the foregoing companies in which the Fund will invest
consist of common stock (dividend-paying, and to the extent it is consistent
with the Fund's investment objective, nondividend-paying), preferred stock and
securities convertible into common stock, such as convertible preferred stock,
convertible bonds and warrants. The Fund will, under normal market conditions,
invest at least 65% of the value of its total assets in such equity securities.
The Fund is not subject to any limit on the size of companies in which it may
invest, but intends to be primarily invested, under normal circumstances, in
companies with equity market capitalizations of approximately $750 million and
above. The Fund is designed for investors who want an actively managed
diversified portfolio of selected equity securities that seeks to outperform the
total return of the S&P 500 Index, while providing a yield higher than the yield
of the S&P 500 Index.
The Fund does not seek to achieve its objective with any individual
portfolio security, but rather it aims to manage the portfolio as a whole in
such a way as to achieve its objective. The Fund attempts to reduce risk by
investing in many different economic sectors, industries and companies. The
Sub-Adviser may under- or over-weight selected economic sectors against the S&P
500 Index's sector weightings to seek to enhance the Fund's total return or
reduce fluctuations in market value relative to the S&P 500 Index. The Fund's
primary objective is not to invest for short-term trading, although the Fund
will seek to take advantage of trading opportunities as they arise to the extent
that they are consistent with the Fund's objectives.
Pending investment or settlement, and for liquidity purposes, the Fund may
invest in domestic, Eurodollar and foreign short-term money market instruments.
As determined by the Sub-Adviser, the Fund may for temporary defensive purposes
invest a portion or all of its assets in such securities in response to adverse
market conditions.
The Fund may invest in when-issued and delayed delivery securities. The Fund
may invest up to 34% of its total assets in securities that are rated below
investment grade by a nationally recognized statistical rating organization (an
"NRSRO") (rated below the four highest rating categories by the NRSRO) or that,
if unrated, are determined by the Sub-Adviser to be comparable to securities
rated below investment grade by an NRSRO. Such lower-quality securities are
regarded as being predominantly speculative and involve significant risks.
The Fund may, to a limited extent, invest in non-publicly traded securities,
private placements and restricted securities. The Fund may on occasion invest in
securities of foreign issuers, including equity securities of foreign issuers
that trade on a United States exchange or over-the-counter in the form of
American Depositary Receipts or common stocks.
Any remaining assets of the Fund not invested as described above may be
invested in certain securities or obligations, including derivative securities,
as set forth in "Additional Investment Information" below.
7
<PAGE>
THE EUROPEAN EQUITY FUND
The European Equity Fund seeks long-term capital appreciation by investing
primarily in equity securities of European issuers, including those located in
Germany, France, Switzerland, Belgium, Italy, Finland, Sweden, Denmark, Norway
and the United Kingdom. Investments may also be made in the equity securities of
issuers located in the smaller and emerging markets of Europe. With respect to
the Fund, equity securities include common and preferred stocks, convertible
securities, and rights and warrants to purchase common stocks. Under normal
circumstances, at least 65% of the total assets of the Fund will be invested in
equity securities of European issuers.
In recent years there have been two key issues influencing the investment
environment and economic conditions of Europe: the creation of the single market
and the emergence of Eastern European economies. Both of these factors have
helped European companies by opening up new markets for growth.
As a result of global recession, European economies and companies have
embarked on radical structural change. Governments across Europe have initiated
major privatization programs shifting a greater share of economic activity into
the more efficient private sector. Private companies have sought quotation,
following the need to compete in the capital markets, as much as in the market
place for their products and services. Those companies already quoted have begun
to appreciate the value of their being listed. To achieve a high rating on their
equity, companies need to produce transparent accounts, communicate effectively
with their shareholders and manage their businesses and assets to their
shareholders' advantage. The restructuring and rationalization of companies has
lead to lower wage structures and greater flexibility. This has enabled European
companies to match the competitive cost environment of developing economies.
Demand for equity will grow hand in hand with supply; driven by pension fund
reform, growth in life insurance and the emergence of European mutual funds. All
of these factors together will improve the quality of the markets in which
European equities are traded.
This process of evolution has begun, but has much further to go. We have
seen companies closed to foreign investment "open up" most notably in
Switzerland and Finland. In Europe's largest economy, Germany, gross domestic
product is still four times larger than its stock market, but the move towards
an equity culture is gaining momentum. Shareholders in Europe will have a
growing role in a widening range of expanding companies whose operations will
become increasingly profitable. Some of the world's most attractive and
successful companies have only recently discovered the importance of their
shareholders.
The Sub-Adviser's approach in selecting investments for the Fund is oriented
to individual stock selection and is value driven. In selecting stocks for the
Fund, the Sub-Adviser initially identifies those stocks which it believes to be
undervalued in relation to the issuer's assets, cash flow, earnings and
revenues, and then evaluates the future value of such stocks by running the
results of an in-depth study of the issuer through a dividend discount model.
The Sub-Adviser utilizes the research of a number of sources, including its
affiliate in Geneva, Morgan Stanley Capital International, in identifying
attractive securities, and applies a number of proprietary screening criteria to
identify those securities it believes to be undervalued. Fund holdings are
regularly reviewed and subjected to fundamental analysis to determine whether
they continue to conform to the Sub-Adviser's value criteria. Securities which
no longer conform to such value criteria are sold.
8
<PAGE>
While the Fund is not subject to any specific geographic diversification
requirements, it currently intends to diversify investments among countries to
reduce currency risk. Investments will be made primarily in equity securities of
companies domiciled in developed countries, but may be made in the securities of
companies in developing countries as well. Securities in emerging markets may
not be as liquid as those in developed markets and pose greater risks. Although
the Fund intends to invest primarily in securities listed on stock exchanges, it
will also invest in securities traded in over-the-counter markets. The Fund will
not, under normal circumstances, invest in the equity securities of U.S.
issuers. The Fund may for temporary defensive purposes invest a portion or all
of its assets in domestic, Eurodollar and foreign short-term money market
instruments in response to adverse market conditions.
Any remaining assets of the Investment Fund not invested as described above
may be invested in certain securities or obligations, including derivative
securities, as set forth in "Additional Investment Information" below.
ADDITIONAL INVESTMENT INFORMATION
CONVERTIBLE SECURITIES, WARRANTS AND EQUITY-LINKED SECURITIES
The Funds may invest in convertible securities, preferred stock, warrants or
other securities exchangeable under certain circumstances for shares of common
stock. Warrants are instruments giving holders the right, but not the
obligation, to buy shares of a company at a given price during a specified
period.
The Growth and Income Fund may invest in equity-linked securities, 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. In addition, it is not possible to predict how equity-linked securities
will trade in the secondary market which is fairly developed and liquid. The
market for such securities may be shallow, however, and high volume trades may
be possible only with discounting. In addition to the foregoing risks, the
return on such securities depends on the creditworthiness of the issuer of the
securities, which may be the issuer of the underlying securities or a third
party investment banker or other lender. The creditworthiness of such third
party issuer of equity-linked securities may, and often does, exceed the
creditworthiness of the issuer of the underlying securities. The advantage of
using equity-linked securities over traditional equity and debt securities is
that the former are income producing vehicles that may provide a higher income
than the dividend income on the underlying equity securities while allowing some
participation in the capital appreciation of the underlying equity securities.
Another advantage of using equity-linked securities is that they may be used for
hedging to reduce the risk of investing in the generally more volatile
underlying equity securities.
DEPOSITARY RECEIPTS
The Growth and Income Fund may on occasion invest in American Depositary
Receipts ("ADRs"). ADRs are securities, typically issued by a U.S. financial
institution (a "depositary"), that evidence ownership interests
9
<PAGE>
in a security or a pool of securities issued by a foreign issuer (the
"underlying issuer") and deposited with the depositary. ADRs include American
Depositary Shares and New York Shares and may be "sponsored" or "unsponsored."
Sponsored ADRs are established jointly by a depositary and the underlying
issuer, whereas unsponsored ADRs may be established by a depositary without
participation by the underlying issuer.
Holders of unsponsored ADRs generally bear all the costs associated with
establishing the unsponsored ADR. The depositary of an unsponsored ADR is under
no obligation to distribute shareholder communications received from the
underlying issuer or to pass through to the holders of the unsponsored ADR
voting rights with respect to the deposited securities or pool of securities.
ADRs are not necessarily denominated in the same currency as the underlying
securities to which they may be connected. Generally, ADRs in registered form
are designed for use in the U.S. securities market and ADRs in bearer form are
designed for use in securities markets outside the United States. The Fund may
invest in sponsored and unsponsored ADRs. For purposes of the Fund's investment
policies, the Fund's investments in ADRs will be deemed to be investments in the
underlying securities.
FOREIGN INVESTMENT
Each Fund may invest in securities of foreign issuers. Investment in
securities of foreign issuers, especially in securities of issuers in emerging
countries, involves somewhat different investment risks from those affecting
securities of U.S. issuers. There may be limited publicly available information
with respect to foreign issuers, and foreign issuers are not generally subject
to uniform accounting, auditing, and financial and other reporting standards and
requirements comparable to those applicable to domestic companies. Therefore,
disclosure of certain material information may not be made and less information
may be available to investors investing in foreign countries than in the United
States. There may also be less government supervision and regulation of foreign
securities exchanges, brokers and listed companies than in the United States.
Many foreign securities markets have substantially less volume than U.S.
national securities exchanges, and securities of some foreign issuers are less
liquid and subject to greater price volatility than securities of comparable
domestic issuers. Brokerage commissions and other transaction costs on foreign
securities exchanges are generally higher than in the United States. Dividends
and interest paid by foreign issuers may be subject to withholding and other
foreign taxes, which may decrease the net return on foreign investments as
compared to dividends and interest paid to the Funds by domestic companies.
Additional risks include future adverse political and economic developments, the
possibility that a foreign jurisdiction might impose or change withholding taxes
on income payable with respect to foreign securities, possible seizure,
nationalization or expropriation of the foreign issuer or foreign deposits, and
the possible adoption of foreign governmental restrictions such as exchange
controls. Emerging countries may have less stable political environments than
more developed countries. Also, it may be more difficult to obtain a judgment in
a court outside the United States.
Investments in securities of foreign issuers are frequently denominated in
foreign currencies, and a Fund may temporarily hold uninvested reserves in bank
deposits in foreign currencies. Therefore, the value of a Fund's assets measured
in U.S. Dollars may be affected favorably or unfavorably by changes in currency
exchange rates and exchange control regulations. Each Fund will also incur
certain costs in connection with conversions between various currencies.
10
<PAGE>
INVESTMENT COMPANY SECURITIES
Each Fund may invest in securities of another open-end or closed-end
investment company by purchase in the open market involving only customary
brokers' commissions or in connection with mergers, acquisitions of assets or
consolidations and as may otherwise be permitted by the Investment Company Act
of 1940, as amended (the "1940 Act").
Some emerging market countries have laws and regulations that currently
preclude direct foreign investment in the securities of their companies.
However, indirect foreign investment in the securities of companies listed and
traded on the stock exchanges in these countries is permitted by certain
emerging market countries through investment funds which have been specifically
authorized. Certain of the Funds may invest in these investment funds, including
those advised by MSAM, as well as other investment companies, subject to
applicable provisions of the 1940 Act and other applicable laws. If a Fund
invests in such investment companies, the Fund's shareholders will bear not only
their proportionate share of the expenses of the Fund (including operating
expenses and the fees of the Adviser), but also will indirectly bear similar
expenses of the underlying investment funds.
LOANS OF PORTFOLIO SECURITIES
Each Fund may lend its portfolio securities to brokers, dealers, domestic
and foreign banks or other financial institutions for the purpose of increasing
its net investment income. These loans must be secured continuously by cash or
equivalent collateral or by a letter of credit at least equal to the market
value of the securities loaned plus accrued interest. The Funds will not enter
into securities loan transactions exceeding in the aggregate 33 1/3% of the
market value of a Fund's total assets. As with other extensions of credit, there
are risks of delay in recovery or even loss of rights in collateral should the
borrower of the portfolio securities fail financially.
LOWER RATED AND UNRATED DEBT SECURITIES
The Growth and Income Fund may invest in lower rated or unrated debt
securities, commonly referred to as "junk bonds." In addition, the emerging
country debt securities in which the Fund may invest are subject to risk and
will not be required to meet a minimum rating standard and may not be rated.
Fixed income securities are subject to the risk of an issuer's inability to meet
principal and interest payments on the obligations (credit risk) and may also be
subject to price volatility due to such factors as interest rate sensitivity,
market perception of the creditworthiness of the issuer and general market
liquidity (market risk). Lower rated or unrated securities are more likely to
react to developments affecting market and credit risk than are more highly
rated securities, which react primarily to movements in the general level of
interest rates. The market values of fixed-income securities tend to vary
inversely with the level of interest rates. Yields and market values of lower
rated and unrated debt securities will fluctuate over time, reflecting not only
changing interest rates but the market's perception of credit quality and the
outlook for economic growth. When economic conditions appear to be
deteriorating, medium to lower rated securities may decline in value due to
heightened concern over credit quality, regardless of prevailing interest rates.
Fluctuations in the value of the Fund's investments will be reflected in the
Fund's net asset value per share. The Sub-Adviser considers both credit risk and
market risk in
11
<PAGE>
making investment decisions for the Fund. Investors should carefully consider
the relative risks of investing in lower rated and unrated debt securities and
understand that such securities are not generally meant for short-term
investing.
Adverse economic developments may disrupt the market for U.S. corporate
lower rated and unrated debt securities and for emerging country debt
securities. Such disruptions may severely affect the ability of issuers,
especially highly leveraged issuers, to service their debt obligations or to
repay their obligations upon maturity. In addition, the secondary market for
lower rated and unrated debt securities, which is concentrated in relatively few
market makers, may not be as liquid as the secondary market for more highly
rated securities. As a result, the Sub-Adviser could find it more difficult to
sell these securities or may be able to sell the securities only at prices lower
than if such securities were widely traded. In addition, there may be limited
trading markets for debt securities of issuers located in emerging countries.
Prices realized upon the sale of such lower rated or unrated securities, under
these circumstances, may be less than the prices used in calculating the Fund's
net asset value.
Prices for lower rated and unrated debt securities may be affected by
legislative and regulatory developments. These laws could adversely affect the
Fund's net asset value and investment practices, the secondary market for lower
rated and unrated debt securities, the financial condition of issuers of such
securities and the value of outstanding lower rated and unrated debt securities.
For example, U.S. federal legislation requiring the divestiture by federally
insured savings and loan associations of their investments in lower rated and
unrated debt securities and limiting the deductibility of interest by certain
corporate issuers of lower rated and unrated debt securities adversely affected
the market in recent years.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligations for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Fund's investment portfolio and
increasing the exposure of the Fund to the risks of lower rated and unrated debt
securities.
MONEY MARKET INSTRUMENTS
Each Fund is permitted to invest in money market instruments pending other
investment, prior to settlement of portfolio transactions, for liquidity and for
temporary defensive purposes, although the Funds intend to stay invested in
securities satisfying their primary investment objective to the extent
practical. The money market investments permitted for the Funds include
obligations of the U.S. Government, its agencies and instrumentalities,
obligations of foreign sovereignties, other debt securities, commercial paper
including bank obligations, certificates of deposit (including Eurodollar
certificates of deposit) and repurchase agreements.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED SECURITIES
Each Fund may invest in securities that are neither listed on a stock
exchange nor traded over the counter. Such unlisted securities may involve a
higher degree of business and financial risk that can result in substantial
losses. As a result of the absence of a public trading market for these
securities, they may be less liquid than publicly traded securities. Although
these securities may be resold in privately negotiated transactions, the prices
realized from these sales could be less than those originally paid by such Funds
or less than what may be considered the fair value of such securities. Further,
companies whose securities are not publicly traded may not
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<PAGE>
be subject to the disclosure and other investor protection requirements which
might be applicable if their securities were publicly traded. If such securities
are required to be registered under the securities laws of one or more
jurisdictions before being resold, the Fund may be required to bear the expenses
of registration. No Fund may invest more than 15% of its net assets in illiquid
securities, including securities for which there is no readily available
secondary market. Securities that are not registered under the Securities Act of
1933, as amended (the "1933 Act"), but that can be offered and sold to qualified
institutional buyers under Rule 144A under that Act will not be included within
the foregoing 15% restriction if the securities are determined to be liquid. The
Board of Directors has adopted guidelines and delegated to the Adviser, subject
to the supervision of the Board of Directors, the daily function of determining
and monitoring the liquidity of Rule 144A securities. Rule 144A securities may
become illiquid if qualified institutional buyers are not interested in
acquiring the securities.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with brokers, dealers, banks
or other financial institutions that meet the credit guidelines of the Company's
Board of Directors. In a repurchase agreement, a Fund buys a security from a
seller that has agreed to repurchase it at a mutually agreed upon date and
price, reflecting the interest rate effective for the term of the agreement. The
term of these agreements is usually from overnight to one week and never exceeds
one year. A repurchase agreement may be viewed as a fully collateralized loan of
money by a Fund to the seller. The Funds always receive securities as collateral
with a market value at least equal to the purchase price, including accrued
interest, and this value is maintained during the term of the agreement. If the
seller defaults and the collateral value declines, a Fund might incur a loss. If
bankruptcy proceedings are commenced with respect to the seller, the Fund's
realization upon the collateral may be delayed or limited. Repurchase agreements
with durations (or maturities) over seven days in length are considered illiquid
securities.
REVERSE REPURCHASE AGREEMENTS
The Growth and Income Fund may enter into reverse repurchase agreements with
brokers, dealers, banks or other financial institutions that meet the credit
guidelines of the Company's Board of Directors. In a reverse repurchase
agreement, the Fund sells a security and agrees to repurchase it at a mutually
agreed upon date and price, reflecting the interest rate effective for the term
of the agreement. It may also be viewed as the borrowing of money by the Fund.
The Fund's investment of the proceeds of a reverse repurchase agreement is the
speculative factor known as leverage. The Fund will enter into a reverse
repurchase agreement only if the interest income from investment of the proceeds
is expected to be greater than the interest expense of the transaction and the
proceeds are invested for a period no longer than the term of the agreement. The
Fund will maintain with the Custodian a separate account with a segregated
portfolio of cash or liquid securities in an amount at least equal to its
purchase obligations under these agreements (including accrued interest). If
interest rates rise during a reverse repurchase agreement, it may adversely
affect the Fund's ability to maintain a stable net asset value. In the event
that the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
repurchase obligation, and the Fund's use of proceeds of the agreement may
effectively be restricted pending such decision.
SHORT SALES
The European Equity Fund may from time to time sell securities short without
limitation, although it does not intend to sell securities short on a regular
basis. A short sale is a transaction in which the Fund sells securities it
either owns or has the right to acquire at no added cost (i.e.
"against-the-box") or it does not own (but has borrowed) in anticipation of a
decline in the market price of the securities. When the Fund makes a short sale
of borrowed securities, the proceeds it receives from the sale will be held on
behalf of a broker until the Fund replaces the borrowed securities. To deliver
the securities to the buyer, the Fund will need to arrange through a
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broker to borrow the securities and, in so doing, the Fund will become obligated
to replace the securities borrowed at their market price at the time of
replacement, whatever that price may be. The Fund may have to pay a premium to
borrow the securities and must pay any dividends or interest payable on the
securities until they are replaced.
The Fund's obligation to replace the securities borrowed in connection with
a short sale will be secured by collateral deposited with the broker that
consists of cash or liquid assets. In addition, the Fund will place in a
segregated account with its Custodian an amount of cash or liquid assets equal
to the difference, if any, between (1) the market value of the securities sold
at the time they were sold short and (2) any cash or liquid securities deposited
as collateral with the broker in connection with the short sale (not including
the proceeds of the short sale). Short sales by the Fund involve certain risks
and special considerations. Possible losses from short sales differ from losses
that could be incurred from a purchase of a security, because losses from short
sales may be unlimited, whereas losses from purchases can equal only the total
amount invested.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Each Fund may purchase securities on a when-issued or delayed delivery
basis. In such transactions, instruments are bought with payment and delivery
taking place in the future in order to secure what is considered to be an
advantageous yield or price at the time of the transaction. The payment
obligation and the interest rates that will be received are each fixed at the
time a Fund enters into the commitment, and no interest accrues to the Fund
until settlement. Thus, it is possible that the market value at the time of
settlement could be higher or lower than the purchase price if the general level
of interest rates has changed. It is a current policy of the Funds not to enter
into when-issued commitments or delayed delivery securities exceeding, in the
aggregate, 15% of a Fund's net assets other than the obligations created by
these commitments.
DERIVATIVE INSTRUMENTS
The Funds are permitted to invest in various derivative instruments for both
hedging and non-hedging purposes. Derivative instruments include options,
futures and options on futures, structured notes, caps, floors, collars and
swaps. Additionally, the Funds may invest in other derivative instruments that
are developed over time if their use would be consistent with the objectives of
the Funds. Each Fund will limit its use of the foregoing derivative instruments
for non-hedging purposes to 33 1/3% of its total assets measured by the
aggregate notional amount of outstanding derivative instruments. In addition,
neither Fund will enter into futures contracts and options on futures contracts
to the extent that the notional value of its outstanding obligations to purchase
securities under such contracts would exceed 20% of its total assets. The Funds'
investments in forward foreign currency contracts and derivatives used for
hedging purposes are not subject to the limits described above.
The Funds may use derivative instruments under a number of different
circumstances to further their investment objectives. The Funds may use
derivatives when doing so provides more liquidity than the direct purchase of
the securities underlying such derivatives. For example, a Fund may purchase
derivatives to quickly gain exposure to a market in response to changes in the
Fund's investment strategy, or upon the inflow of investable cash or when the
derivative provides greater liquidity than the underlying securities market. A
Fund may also use derivatives when it is restricted from directly owning the
underlying securities due to foreign investment restrictions or other reasons or
when doing so provides a price advantage over purchasing the underlying
securities directly, either because of a pricing differential between the
derivatives and securities markets or because of lower transaction costs
associated with the derivatives transaction. Derivatives may also be used by a
Fund for hedging purposes and in other circumstances when a Fund's portfolio
managers believe it advantageous to do so consistent with the Fund's investment
objective. The Funds will not, however, use derivatives in a manner that creates
leverage, except to the extent that the use of leverage is expressly permitted
by a particular Fund's investment policies, and then only in a manner consistent
with such policies.
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Some of the derivative instruments in which the Funds may invest and the
risks related thereto are described in more detail below.
CAPS, FLOORS AND COLLARS
The Funds may invest in caps, floors and collars, which are instruments
analogous to options. In particular, a cap is the right to receive the excess of
a reference rate over a given rate and is analogous to a put option. A floor is
the right to receive the excess of a given rate over a reference rate and is
analogous to a call option. Finally, a collar is an instrument that combines a
cap and a floor. That is, the buyer of a collar buys a cap and writes a floor,
and the writer of a collar writes a cap and buys a floor. The risks associated
with caps, floors and collars are similar to those associated with options. In
addition, caps, floors and collars are subject to risk of default by the
counterparty because they are privately negotiated instruments.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Funds may purchase and sell futures contracts and options on futures
contracts, including but not limited to securities index futures, foreign
currency exchange futures, interest rate futures and other financial futures.
Futures contracts provide for the sale by one party and purchase by another
party of a specified amount of a specific security, instrument or basket
thereof, at a specific future date and at a specified price. An option on a
futures contract is a legal contract that gives the holder the right to buy or
sell a specified amount of futures contracts at a fixed or determinable price
upon the exercise of the option.
The Funds may sell securities index futures contracts and/or options thereon
in anticipation of or during a market decline to attempt to offset the decrease
in market value of investments in its portfolio, or purchase securities index
futures in order to gain market exposure. Subject to applicable laws, the Funds
may engage in transactions in securities index futures contracts (and options
thereon) which are traded on a recognized securities or futures exchange, or may
purchase or sell such instruments in the over-the-counter market. There
currently are limited securities index futures and options on such futures in
many countries, particularly emerging countries. The nature of the strategies
adopted by the Sub-Adviser, and the extent to which those strategies are used,
may depend on the development of such markets.
The Funds may engage in transactions involving foreign currency exchange
futures contracts. Such contracts involve an obligation to purchase or sell a
specific currency at a specified future date and at a specified price. The Funds
may engage in such transactions to hedge their respective holdings and
commitments against changes in the level of future currency rates or to adjust
their exposure to a particular currency.
The Funds may engage in transactions in interest rate futures transactions.
Interest rate futures contracts involve an obligation to purchase or sell a
specific debt security, instrument or basket thereof at a specified future date
at a specified price. The value of the contract rises and falls inversely with
changes in interest rates. The Funds may engage in such transactions to hedge
their holdings of debt instruments against future changes in interest rates.
Financial futures are futures contracts relating to financial instruments,
such as U.S. Government securities, foreign currencies and certificates of
deposit. Such contracts involve an obligation to purchase or sell a specific
security, instrument or basket thereof at a specified future date at a specified
price. Like interest rate futures contracts, the value of financial futures
contracts rises and falls inversely with changes in interest rates. The Funds
may engage in financial futures contracts for hedging and non-hedging purposes.
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Under rules adopted by the Commodity Futures Trading Commission, each Fund
may enter into futures contracts and options thereon for both hedging and
non-hedging purposes, provided that not more than 5% of such Fund's total assets
at the time of entering the transaction are required as margin and option
premiums to secure obligations under such contracts relating to non-hedging
activities.
Gains and losses on futures contracts and options thereon depend on the
Sub-Adviser's ability to predict correctly the direction of securities prices,
interest rates and other economic factors. Other risks associated with the use
of futures and options are (i) imperfect correlation between the change in
market value of investments held by a Fund and the prices of futures and options
relating to investments purchased or sold by the Fund, and (ii) possible lack of
a liquid secondary market for a futures contract and the resulting inability to
close a futures position. The risk that a Fund will be unable to close out a
futures position or options contract will be minimized by only entering into
futures contracts or options transactions for which there appears to be a liquid
exchange or secondary market. The risk of loss in trading on 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.
OPTIONS TRANSACTIONS
The Funds may seek to increase their returns or may hedge their portfolio
investments through options transactions with respect to (i) securities,
instruments, indices or baskets thereof in which such Funds may invest and (ii)
foreign currencies. Purchasing a put option gives a Fund the right to sell a
specified security, currency or basket of securities or currencies at the
exercise price until the expiration of the option. Purchasing a call option
gives a Fund the right to purchase a specified security, currency or basket of
securities or currencies at the exercise price until the expiration of the
option.
Each Fund also may write (i.e., sell) put and call options on investments
held in its portfolio, as well as with respect to a foreign currency. A Fund
that has written an option receives a premium, which increases the Fund's return
on the underlying security or instrument in the event the option expires
unexercised or is closed out at a profit. However, by writing a call option, a
Fund will limit its opportunity to profit from an increase in the market value
of the underlying security or instrument above the exercise price of the option
for as long as the Fund's obligation as writer of the option continues. The
Funds may only write options that are "covered." A covered call option means
that so long as the Fund is obligated as the writer of the option, it will
earmark or segregate sufficient liquid assets to cover its obligations under the
option or own (i) the underlying security or instrument subject to the option,
(ii) securities or instruments convertible or exchangeable without the payment
of any consideration into the security or instrument subject to the option, or
(iii) a call option on the same underlying security with a strike price no
higher than the price at which the underlying instrument was sold pursuant to a
short option position.
By writing (or selling) a put option, a Fund incurs an obligation to buy the
security or instrument underlying the option from the purchaser of the put at
the option's exercise price at any time during the option period, at the
purchaser's election. The Funds may also write options that may be exercisable
by the purchaser only on a specific date. A Fund that has written a put option
will earmark or segregate sufficient liquid assets to cover its obligations
under the option or will own a put option on the same underlying security with
an equal or higher strike price.
The Funds may engage in transactions in options which are traded on
recognized exchanges or over-the-counter. There currently are limited options
markets in many countries, particularly emerging countries, and the nature of
the strategies adopted by the Sub-Adviser and the extent to which those
strategies are used will depend on the development of such option markets. The
primary risks associated with the use of options are (i) imperfect correlation
between the change in market value of investments held, purchased or sold by a
Fund and the prices of options relating to such investments; and (ii) possible
lack of a liquid secondary market for an option.
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STRUCTURED NOTES
Structured Notes are derivatives on which the amount of principal repayment
and/or interest payments is based upon the movement of one or more factors.
These factors include, but are not limited to, currency exchange rates, interest
rates (such as the prime lending rate and LIBOR) and stock indices such as the
S&P 500 Index. In some cases, the impact of the movements of these factors may
increase or decrease through the use of multipliers or deflators. The Funds may
use structured notes to tailor their investments to the specific risks and
returns the Sub-Adviser wishes to accept while avoiding or reducing certain
other risks.
SWAPS -- SWAP CONTRACTS
Swaps and Swap Contracts are derivatives in the form of a contract or other
similar instrument in which two parties agree to exchange the returns generated
by a security, instrument, basket thereof or index for the returns generated by
another security, instrument, basket thereof or index. The payment streams are
calculated by reference to a specific security, instrument, basket thereof or
index and an agreed upon notional amount. The relevant indices include but are
not limited to, currencies, fixed interest rates, prices and 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 the Funds 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.
A Fund will usually enter into swaps on a net basis, i.e., the two return
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Fund receiving or paying, as the case may
be, only the net amount of the two returns. A Fund's obligations under a swap
agreement will be accrued daily (offset against any amounts owing to the Fund)
and any accrued, but unpaid, net amounts owed to a swap counterparty will be
covered by the maintenance of a segregated account consisting of cash or liquid
securities. A Fund will not enter into any swap agreement unless the
counterparty meets the rating requirements set forth in guidelines established
by the Company's Board of Directors.
Interest rate and total rate of return swaps do not involve the delivery of
securities, other underlying assets, or principal. Accordingly, the risk of loss
with respect to interest rate and total rate of return swaps is limited to the
net amount of payments that a Fund is contractually obligated to make. If the
other party to an interest rate or total rate of return swap defaults, a Fund's
risk of loss consists of the net amount of payments that the Fund is
contractually entitled to receive. In contrast, currency swaps may 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 may be 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, a Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swaps 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 swaps market has become relatively liquid. Swaps that include 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
"traditional" swaps.
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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 Sub-Adviser is incorrect in its forecasts of
market values, interest rates and currency exchange rates, the investment
performance of the Funds would be less favorable than it would have been if this
investment technique were not used.
INVESTMENT LIMITATIONS
Each Fund is a diversified investment company under the 1940 Act, and is
subject to the following limitations: (a) as to 75% of its total assets, the
Fund may not invest more than 5% of its total assets in the securities of any
one issuer, except obligations of the U.S. Government, its agencies and
instrumentalities, and (b) the Fund may not own more than 10% of the outstanding
voting securities of any one issuer.
MANAGEMENT OF THE COMPANY
INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp.
(the "Adviser") is the investment adviser and administrator of the Funds. The
Adviser provides investment advice and portfolio management services pursuant to
an advisory agreement (the "Advisory Agreement") and subject to the supervision
of the Company's Board of Directors, makes the Funds' investment decisions,
arranges for the execution of portfolio transactions and generally manages the
Funds' investments. The Advisory Agreement also provides that the Adviser may
appoint sub-advisers to perform these portfolio management responsibilities. See
"Investment Sub-Adviser" below. The Adviser is entitled to receive an aggregate
advisory fee computed daily and paid monthly at the following annual rates for
each Fund:
<TABLE>
<S> <C>
Growth and Income Fund 0.75%
European Equity Fund 1.00%
</TABLE>
The Adviser reserves the right in its sole discretion from time to time to
waive all or a portion of its management fee or to reimburse the Funds for all
or a portion of other expenses.
The Adviser is a wholly-owned subsidiary of Van Kampen American Capital,
Inc. ("Van Kampen American Capital"). Van Kampen American Capital is a
diversified asset management company with more than two million retail investor
accounts, extensive capabilities for managing institutional portfolios, and more
than $60 billion under management or supervision. Van Kampen American Capital's
more than 50 open-end and 37 closed-end funds and more than 2,500 unit
investment trust are professionally distributed by leading financial advisers
nationwide. The Distributor of the Company and the sponsor of the funds
mentioned above is also a wholly-owned subsidiary of Van Kampen American
Capital. The Adviser's principal office is located at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181.
Van Kampen American Capital is an indirect wholly-owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co. Morgan Stanley, Dean Witter, Discover & Co.
and various of its directly or indirectly owned subsidiaries, including Morgan
Stanley & Co. Incorporated, a registered broker-dealer and investment adviser,
and Morgan Stanley International are engaged in a wide range of financial
services. Their principal businesses include securities underwriting,
distribution and trading; merger, acquisition, restructuring and other corporate
finance advisory activities; merchant banking, stock brokerage and research
services; asset management; trading
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of futures, option, foreign exchange commodities and swaps (including foreign
exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and global custody, securities clearance services and
securities lending; and credit services.
INVESTMENT SUB-ADVISER. Morgan Stanley Asset Management Inc. ("MSAM," or
the "Sub-Adviser") is the investment sub-adviser of the Funds. The Sub-Adviser
provides investment advice and portfolio management services pursuant to an
investment sub-advisory agreement and, subject to the supervision of the Adviser
and the Company's Board of Directors, makes the Funds' investment decisions,
arranges for the execution of portfolio transactions and generally manages the
Funds' investments.
The Sub-Adviser is entitled to receive sub-advisory fees computed daily and
paid monthly. If the average daily net assets of a Fund during the monthly
period are less than or equal to $500 million, the Adviser shall pay MSAM
one-half of the total investment advisory fee payable to the Adviser by the Fund
(after application of any fee waivers in effect) for such monthly period. If a
Fund's average daily net assets for the monthly period are greater than $500
million, the Adviser shall pay MSAM a fee for such monthly period equal to the
greater of (a) one-half of what the total investment advisory fee payable to the
Adviser by the Fund (after application of any fee waivers in effect) for such
monthly period would have been had the Fund's average daily net assets during
such period been equal to $500 million, or (b) forty-five percent of the total
investment advisory fee payable to the Adviser by the Fund (after application of
any fee waivers in effect) for such monthly period.
MSAM, with principal offices at 1221 Avenue of the Americas, New York, NY
10020, conducts a worldwide portfolio management business. It provides a broad
range of portfolio management services to customers in the United States and
abroad. At August 31, 1997, MSAM had approximately $80.9 billion in assets under
management as an investment adviser or as a named fiduciary or fiduciary
adviser.
PORTFOLIO MANAGERS -- The following individuals have primary portfolio
management responsibility for the Investment Funds noted below:
GROWTH AND INCOME FUND -- KURT A. FEUERMAN AND MARGARET KINSLEY JOHNSON.
Kurt Feuerman is a Managing Director of the Sub-Adviser. Prior to joining the
Sub-Adviser in July 1993, he spent over three years in Morgan Stanley & Co.
Incorporated's ("Morgan Stanley") Research Department where he was responsible
for restaurant, gaming and emerging growth stocks. Before joining Morgan
Stanley, Mr. Feuerman was a Managing Director at Drexel Burnham Lambert, where
he had been an equity analyst since 1984. From 1982 to 1984, Mr. Feuerman was at
the Bank of New York, following the auto and auto parts industries. Mr. Feuerman
earned a B.A. degree from McGill University, an M.A. from Syracuse University,
and an M.B.A. from Columbia University. Margaret Johnson is a Principal of the
Sub-Adviser. She joined Morgan Stanley in 1984 as a marketing analyst. She
became an equity analyst in 1986 and a portfolio manager in 1989. Prior to
joining Morgan Stanley, Ms. Johnson worked for the New York City PBS affiliate,
WNET, Channel 13. She holds a B.A. degree from Yale College and is a Chartered
Financial Analyst. Mr. Feuerman and Ms. Johnson will share primary
responsibility for managing the Fund's assets upon commencement of operations.
EUROPEAN EQUITY FUND -- ROBERT SARGENT. Mr. Sargent is a Managing Director
of the Sub-Adviser and Morgan Stanley. He joined Morgan Stanley International in
May, 1986, and transferred to the Sub-Adviser in June, 1987. As the fund manager
with primary responsibility for continental European stock selection and
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portfolio management, Mr. Sargent is closely involved with the Sub-Adviser's
fundamental research effort and company visiting program. He is a graduate of
York University, Toronto, Canada. Mr. Sargent will have primary responsibility
for managing the Fund's assets upon commencement of operations.
ADMINISTRATOR. The Administrator provides the Company with administrative
services pursuant to an administration agreement (the "Administration
Agreement"). The services provided under the Administration Agreement are
subject to the supervision of the officers and Board of Directors of the Company
and include day-to-day administration of matters related to the corporate
existence of the Company, maintenance of its records, preparation of reports,
supervision of the Company's arrangements with its custodian and assistance in
the preparation of the Company's registration statements under federal and state
laws. The Administration Agreement also provides that the Adviser through its
agents will provide the Company dividend disbursing and transfer agent services.
For its services under the Administration Agreement, the Company pays the
Adviser a monthly fee which on an annual basis equals 0.25% of the average daily
net assets of each Fund.
Under a sub-agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase Global Funds Services Company ("CGFSC"), a corporate affiliate
of Chase, provides certain administrative services to the Company. The
Administrator supervises and monitors such administrative services provided by
CGFSC. The services provided under the administration agreement are subject to
the supervision of the Board of Directors of the Company. The Board of Directors
of the Company has approved the provision of services described above pursuant
to the sub-administration agreement as being in the best interests of the
Company. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913. For additional information on the administration agreement, see
"Management of the Company" in the Statement of Additional Information.
DIRECTORS AND OFFICERS. Pursuant to the Company's Articles of
Incorporation, the Board of Directors decides upon matters of general policy and
review the actions of the Adviser, Sub-Adviser, Administrator and Distributor.
The Officers of the Company conduct and supervise its daily business operations.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the
"Distributor") serves as the distributor of the shares of the Company. Under its
distribution agreement (the "Distribution Agreement") with the Company, the
Distributor sells shares of the Company upon the terms and at the current
offering price described in this Prospectus. The Distributor is not obligated to
sell any specific number of shares of the Company.
The Company currently offers Class A shares, Class B shares and Class C
shares of the Funds. The Company may in the future offer one or more classes of
shares for the Funds that may have sales charges or other distribution charges
or a combination thereof different from those of the classes currently offered.
The Board of Directors of the Company has approved and adopted the
Distribution Agreement for the Company and a Plan for each class of the Funds
pursuant to Rule 12b-1 under the 1940 Act (each a "Plan" and together, the
"Plans"). Under each Plan, the Distributor is entitled to receive from each Fund
a distribution fee, which is accrued daily and paid quarterly, at a maximum rate
of 0.75% of the Class B shares and Class C shares of the Fund, on an annualized
basis of the average daily net assets of such classes. The actual amount of such
compensation is agreed upon by the Company's Board of Directors and by the
Distributor. With respect to Class B shares, the Distributor expects to utilize
substantially all of its fee to reimburse itself for commissions
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<PAGE>
paid to investment dealers, banks or financial services firms that provide
distribution services (each, a "Participating Dealer"). With respect to the
Class C shares, the Distributor expects to reallocate substantially all of its
fee to such Participating Dealers. 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. Class A shares, Class B shares and Class C
shares are subject to a service fee at an annual rate of 0.25% on an annualized
basis of the average daily net assets of such class of shares of the Funds as
compensation the Distributor for shareholder services. In addition to such
payments, the Adviser may use its advisory fees or other resources to pay
expenses associated with activities which might be construed to be financing the
sale of the Fund's shares, including payments to third parties that provide
assistance in the distribution effort (in addition to selling shares and
providing shareholder services).
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.
Each Plan for a class of Company shares, under the terms of Rule 12b-1, will
remain in effect only if approved at least annually 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 ("12b-1 Directors"). Each Plan may be terminated at any time by
a vote of a majority of the 12b-1 Directors or by a vote of a majority of the
outstanding voting securities of the applicable class of the Funds. The fee set
forth above will be paid by the appropriate class to the Distributor unless and
until a Plan is terminated or not renewed. The Company intends to operate each
Plan in accordance with its terms and the NASD Conduct Rules concerning sales
charges.
PAYMENTS TO FINANCIAL INSTITUTIONS. The Adviser or its affiliates may
compensate certain financial institutions for the continued investment of their
customers' assets in the Funds pursuant to the advice of such financial
institutions. These payments will be made directly by the Adviser or its
affiliates from their assets, and will not be made from the assets of the
Company or by the assessment of a sales charge on shares. Such financial
institutions may also perform certain shareholder or recordkeeping services that
would otherwise be performed by ACCESS. The Adviser may elect to enter into a
contract to pay the financial institutions for such services.
EXPENSES. Each Fund is responsible for payment of certain other fees and
expenses (including professional fees, custodial fees and printing and mailing
costs) specified in the Administration and Distribution Agreements.
PURCHASE OF SHARES
GENERAL
The Company offers three classes of shares to the public on a continuous
basis through the Distributor as principal underwriter, which is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. Shares are also
21
<PAGE>
offered through members of the NASD who are acting as securities dealers
("dealers") and NASD members or eligible non-NASD members who are acting as
brokers or agents for investors ("brokers"). The term "dealers" and "brokers"
are sometimes referred to herein as "Participating Dealers."
Initial investments must be at least $500 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. The $500
minimums may be waived by the Distributor for plans involving periodic
investments. Shares of the Company may be sold in foreign countries where
permissible. The Company and the Distributor reserve the right to refuse any
order for the purchase of shares. The Company also reserves the right to suspend
the sale of the Company's shares in response to conditions in the securities
markets or for other reasons.
Shares of the Company may be purchased on any business day through
Participating Dealers. Shares may also be purchased by completing the
application accompanying this Prospectus and forwarding the application, through
the Participating Dealer, to the shareholder service agent, ACCESS Investor
Services, Inc.
("ACCESS"), a wholly-owned subsidiary of Van Kampen American Capital, Inc. When
purchasing shares of the Company, investors must specify whether the purchase is
for Class A shares, Class B shares or Class C shares.
Shares are offered at the next determined net asset value per share, plus an
initial or contingent deferred sales charge depending on the class of shares
chosen by the investor, as shown in the tables herein. See "Valuation of Shares"
for a further description of net asset value computations.
Generally, the net asset values per share of the Class A shares, Class B
shares and Class C shares are expected to be substantially the same. Under
certain circumstances, however, the per share net asset values of the classes of
shares may differ from one another, reflecting the daily expense accruals of the
higher distribution fees applicable with respect to the Class B shares and Class
C shares and the differential in the dividends paid on the classes of shares.
The price paid for shares purchased is based on the next calculation of net
asset value (plus sales charges, where applicable) after an order is received by
a Participating Dealer provided such order is transmitted to the Distributor
prior to the Distributor's close of business on such day. Orders received by
Participating Dealers after the close of the New York Stock Exchange (the
"NYSE") are priced based on the net asset value calculated after the next day's
close provided they are received by the Distributor prior to the Distributor's
close of business on such day. It is the responsibility of Participating Dealers
to transmit orders received by them to the Distributor so they will be received
prior to such time.
Each class of shares represents an interest in the same portfolio of
investments, has the same rights and is identical in all respects, except that
(i) Class B shares and Class C shares bear the expenses of the deferred sales
arrangement and any expenses (including the higher distribution fees) resulting
from such sales arrangement, (ii) generally, each class has exclusive voting
rights with respect to approvals of the Rule 12b-1 distribution plan to which
its distribution fee or service fee is paid, (iii) Class B shares are subject to
a conversion feature, (iv) each class has different exchange privileges and (v)
each class has different shareholder service options available. The net income
attributable to Class B shares and Class C shares and the dividends payable on
Class B shares and Class C shares will be reduced by the amount of the higher
distribution fees associated with such class of shares. Sales personnel of
Participating Dealers distributing the Company's shares and other persons
entitled to receive compensation for selling such shares may receive differing
compensation for selling Class A shares, Class B shares or Class C shares.
22
<PAGE>
In deciding which class of shares to purchase, investors should take into
consideration their investment goals, present and anticipated purchase amounts,
time horizons and temperments. Investors should consider whether, during the
anticipated life of their investment in a Fund, the accumulated distribution
fees and contingent deferred sales charges on Class B shares prior to conversion
or Class C shares would be less than the initial sales charge on Class A shares
purchased at the same time, and to what extent such differential would be offset
by the higher dividends per share on Class A shares. To assist investors in
making this determination, the table under the caption "Fund Expenses" sets
forth examples of the charges applicable to each class of shares. In this
regard, Class A shares may be more beneficial to the investor who qualifies for
reduced initial sales charges or purchases shares at net asset value, as
described herein under "Purchase of Shares -- Class A Shares." For these
reasons, it is presently the policy of the Distributor not to accept any order
of $500,000 or more for Class B shares or any order of $1 million or more for
Class C shares as it ordinarily would be more beneficial for such investor to
purchase Class A shares.
Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase for most
accounts under $1 million, investors in Class A shares do not have all their
funds invested initially and, therefore, initially own fewer shares. Other
investors might determine that it is more advantageous to purchase either Class
B shares or Class C shares and have all their funds invested initially, although
remaining subject to a contingent deferred sales charge. Ongoing distribution
fees on Class B shares and Class C shares will be offset to the extent of the
additional funds originally invested and any return realized on those funds.
However, there can be no assurance as to the return, if any, which will be
realized on such additional funds. For investments held for ten years or more,
the relative value upon liquidation of the three classes tends to favor Class A
or Class B shares, rather than Class C shares.
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges and/or have a longer-term investment
horizon. Class B shares may be appropriate for investors who wish to avoid a
front-end sales charge, put 100% of their investment dollars to work
immediately, and/or have a longer-term investment horizon. Class C shares may be
appropriate for investors who wish to avoid a front-end sales charge, put 100%
of their investment dollars to work immediately, have a shorter-term investment
horizon and/or desire a short contingent deferred sales charge schedule.
The distribution expenses incurred by the Distributor in connection with the
sale of the shares will be reimbursed, in the case of Class A shares, from the
proceeds of the initial sales charge and, in the case of Class B shares and
Class C shares, from the proceeds of the ongoing distribution fee and any CDSC
incurred upon redemption within five years or one year, respectively, of
purchase. Investors should understand that the purpose and function of the CDSC
and ongoing distribution fee with respect to Class B shares and Class C shares
are the same as those of the initial sales charge with respect to Class A
shares. See "Distribution Plans."
The Distributor may from time to time implement programs under which a
Participating Dealer's sales force may be eligible to win nominal awards for
certain sales efforts or under which the Distributor will reallow to any
Participating Dealer that sponsors sales contests or recognition programs
conforming to criteria established by the Distributor, or participates in sales
programs sponsored by the Distributor, an amount not exceeding the total
applicable sales charges on the sales generated by the Participating Dealer at
the public offering price during such programs. Other programs provide, among
other things and subject to certain
23
<PAGE>
conditions, for certain favorable distribution arrangements for shares of the
Company. Also, the Distributor in its discretion may from time to time, pursuant
to objective criteria established by the Distributor, pay fees to, and sponsor
business seminars for, qualifying authorized dealers for certain services or
activities which are primarily intended to result in sales of shares of the
Company. Fees may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. In some instances
additional compensation or promotional incentives may be offered to
Participating Dealers that have sold or may sell significant amounts of shares
during specified periods of time. Such fees paid for such services and
activities with respect to a Fund will not exceed in the aggregate 1.25% of the
average total daily net assets of the Fund on an annual basis. All of the
foregoing payments are made by the Distributor out of its own assets. These
programs will not change the price an investor will pay for shares or the amount
that a Fund will receive from such sale.
CLASS A SHARES
The public offering price of Class A shares is the next determined net asset
value plus a sales charge, as set forth herein.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
REALLOWED TO DEALERS
AS % OF AS % OF NET AMOUNT (AS % OF OFFERING
SIZE OF INVESTMENT OFFERING PRICE INVESTED PRICE)
- --------------------------------------------------------- --------------- ------------------- -----------------------
<S> <C> <C> <C>
Less than $50,000........................................ 5.75 6.10 5.00
$50,000 but less than $100,000........................... 4.75 4.99 4.00
$100,000 but less than $250,000.......................... 3.75 3.90 3.00
$250,000 but less than $500,000.......................... 2.75 2.83 2.25
$500,000 but less than $1,000,000........................ 2.00 2.04 1.75
$1,000,000 or more*...................................... * * *
</TABLE>
- ------------------------------
* No initial sales charge is payable at the time of purchase on investments of
$1 million or more, although for such investments the Fund imposes a
contingent deferred sales charge of 1.00% in the event of certain redemptions
within one year of the purchase. A commission will be paid to brokers, dealers
or financial intermediaries who initiate and are responsible for purchases of
$1 million or more as follows: 1.00 % on sales to $2 million, plus 0.80% on
the next $1 million, plus 0.50% on the excess over $3 million. See "Purchase
of Shares -- Purchase of Class B Shares" and "-- Purchase of Class C Shares"
for additional information with respect to contingent deferred sales charges.
In addition to the reallowances from the applicable public offering price
described herein, the Distributor may, from time to time, pay or allow
additional reallowances or promotional incentives, in the form of cash or other
compensation, to Participating Dealers that sell shares of the Company.
Participating Dealers which are reallowed all or substantially all of the sales
charges may be deemed to be underwriters for purposes of the 1933 Act. The
Distributor may also pay financial institutions (which may include banks) and
other industry professionals that provide services to facilitate transactions in
shares of the Company for their clients a transaction fee up to the level of the
reallowance allowable to Participating Dealers described herein. Such financial
institutions, other industry professionals and Participating Dealers are
hereinafter referred to as "Service Organizations." Banks are currently
prohibited under the Glass-Steagall Act from providing certain underwriting or
distribution services. If banking firms were prohibited from acting in any
capacity or providing any of the described services, the Distributor would
consider what action, if any, would be appropriate.
24
<PAGE>
The Distributor does not believe that termination of a relationship with a
bank would result in any material adverse consequences to the Company. State
securities laws regarding registration of banks and other financial institutions
may differ from the interpretations of federal law expressed herein and banks
and other financial institutions may be required to register as dealers pursuant
to certain state laws.
QUANTITY DISCOUNTS
Investors purchasing Class A shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
Investors or their Participating Dealers must notify the Company whenever a
quantity discount is applicable to purchases. Upon such notification, an
investor will receive the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their Participating Dealer or the
Distributor.
A person eligible for a reduced sales charge includes an individual, their
spouse and children under 21 years of age, and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust
estate or single fiduciary account, or a "company" as defined in Section 2(a)(8)
of the 1940 Act.
The phrase "Participating Funds," as used herein, refers to certain open-end
investment companies advised by the Adviser or Van Kampen American Capital Asset
Management Inc. and distributed by the Distributor as determined from time to
time by the Company's Board of Directors.
VOLUME DISCOUNTS. The size of investment shown in the preceding sales
charge tables applies to the total dollar amount being invested by any person in
shares of a Fund or in any combination of shares of the Fund and shares of other
Participating Funds, although other Participating Funds may have different sales
charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
tables may also be determined by combining the amount being invested in shares
of the Participating Funds plus the current offering price of all shares of the
Participating Funds which have been previously purchased and are still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an
investor to obtain a reduced sales charge by aggregating investments over a
13-month period to determine the sales charge as outlined in the preceding
table. The size of investment shown in the preceding tables also includes
purchases of shares of the Participating Funds over a 13-month period based on
the total amount of intended purchases plus the value of all shares of the
Participating Funds previously purchased and still owned. An investor may elect
to compute the 13-month period starting up to 90 days before the date of
execution of a Letter of Intent. Each investment made during the period receives
the reduced sales charge applicable to the total amount of the investment goal.
If the goal is not achieved within the period, the investor must pay the
difference between the sales charges applicable to the purchases made and the
sales charges previously paid. The initial purchase must be for an amount equal
to at least 5% of the minimum total purchased amount of the level selected. If
trades not initially made under a Letter of Intent subsequently qualify for a
lower sales charge through the 90-day back-dating provisions, an adjustment will
be made at the expiration of the Letter of Intent to give effect to the lower
charge. Such adjustments in sales charge will be used to purchase additional
shares for the shareholder at the applicable discount category. Additional
information is contained in the application form accompanying this Prospectus.
25
<PAGE>
OTHER PURCHASE PROGRAMS
Purchasers of Class A shares may be entitled to reduced initial sales
charges in connection with unit investment trust reinvestment programs and
purchases by registered representatives of selling firms or purchases by persons
affiliated with the Company or the Distributor. The Company reserves the right
to modify or terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAMS. The Company permits
unitholders of unit investment trusts to reinvest distributions from such trusts
in Class A shares of the Company at net asset value with no minimum initial or
subsequent investment requirement if the administrator of an investor's unit
investment trust program meets certain uniform criteria relating to cost savings
by the Company and the Distributor. The total sales charge for all other
investments made from unit trust distributions will be 1.00% of the offering
price (1.01% of net asset value). Of this amount, the Distributor will pay to
the Participating Dealer, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their Participating Dealer or the Distributor.
The administrator of such a unit investment trust must have an agreement
with the Distributor pursuant to which the administrator will (1) submit a
single bulk order and make payment with a single remittance for all investments
in a Fund during each distribution period by all investors who choose to invest
in the Fund through the program and (2) provide ACCESS with appropriate backup
data for each participating investor in a computerized format fully compatible
with ACCESS' processing system.
As further requirements for obtaining these special benefits, the Company
also requires that all dividends and other distributions by a Fund be reinvested
in additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Company will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Company reserves the right to
modify or terminate this program at any time.
NAV PURCHASE OPTIONS. Class A shares of a Fund may be purchased without an
initial sales charge, upon written assurance that the purchase is made for
investment purposes and that the shares will not be resold except through
redemption by the Fund, by:
(1) Current or retired trustees/directors of funds advised by the
Adviser or Van Kampen American Capital Asset Management, Inc. and such
persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of Morgan
Stanley Group Inc. and any of its subsidiaries, employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser, and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and registered representatives of
financial institutions that have a selling group agreement with the
Distributor and their spouses and children under 21 years of age when
purchasing for any accounts they beneficially own, or, in the case of any
such financial institution, when purchasing for retirement plans for such
institution's employees.
(4) Registered investments advisers, trust companies and bank trust
departments investing on their own behalf or on behalf of their clients
provided that the aggregate amount invested in a Fund alone, or in any
combination of shares of the Fund and shares of other Participating Funds as
described herein under "Purchase of Shares -- Class A Shares -- Volume
Discounts," during the 13-month period commencing
26
<PAGE>
with the first investment pursuant hereto equals at least $1 million. The
Distributor may pay Participating Dealers through which purchases are made
an amount up to 0.50% of the amount invested, over a 12-month period
following such transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement
plans of organizations with retirement plan assets of $3 million or more and
which invest in multiple fund families through national wirehouse alliance
programs. The Distributor may pay commissions of up to 1.00% for such
purchases.
(6) Accounts as to which a broker, dealer or financial intermediary
charges an account management fee ("wrap accounts"), provided the broker,
dealer or financial intermediary has a separate agreement with the
Distributor.
(7) Trusts created under pension, profit sharing or other employee
benefit plans qualified under Section 401(a) of the Code, or custodial
accounts held by a bank created pursuant to Section 403(b) of the Code and
sponsored by non-profit organizations defined under Section 501(c)(3) of the
Code and assets held by an employer or trustee in connection with an
eligible deferred compensation plan under Section 457 of the Code. Such
plans will qualify for purchases at net asset value provided that (1) the
initial amount invested in the Participating Funds is at least $500,000 or
(2) such shares are purchased by an employer sponsored plan with more than
100 eligible employees. Section 403(b) and similar accounts for which Van
Kampen American Capital Trust Company ("VKAC Trust") serves as custodian
will not be eligible for net asset value purchases based on the aggregate
investment made by the plan or the number of eligible employee, except under
certain uniform criteria established by the Distributor from time to time. A
commission will be paid to dealers who initiate and are responsible for such
purchases within a rolling twelve month period as follows: 1.00% on sales up
to $2 million, plus 0.80% on the next $1 million, plus 0.50% on the next $47
million, plus 0.25% on the excess over $50 million.
(8) Individuals who are members of a "qualified group." For this
purpose, a qualified group is one which (i) has been in existence for more
than six months, (ii) has a purpose other than to acquire shares of the
Funds or similar investments, (iii) has given and continues to give its
endorsement or authorization, on behalf of the group, for purchase of shares
of the Funds and other Participating Funds, (iv) has a membership that the
authorized dealer can certify as to the group's members and (v) satisfies
other uniform criteria established by the Distributor for the purpose of
realizing economies of scale in distributing such shares. A qualified group
does not include one whose sole organizational nexus, for example, is that
its participants are credit card holders of the same institution, policy
holders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups. Shares purchased
in each group's participant's account in connection with this privilege will
be subject to a contingent deferred sales charge of one percent in the event
of redemption within one year of purchase, and a commission will be paid to
authorized dealers who initiate and are responsible for such sales to each
individual as follows: 1.00% on sales to $2 million, plus 0.80% on the next
million and 0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children and grandchildren
under 21 years of age, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with ACCESS by the investment
adviser, trust company or bank trust department, provided that ACCESS receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized dealer may charge a transaction
fee for placing an order to purchase
27
<PAGE>
shares pursuant to this provision or for placing a redemption order with respect
to such shares. Authorized dealers will be paid a service fee as described
herein under "Distribution Plans" on purchases made as described in (3) through
(8) above.
The Company may terminate, or amend the terms of, offering shares of the
Funds at net asset value to the foregoing groups at any time.
PURCHASE OF CLASS B SHARES
Class B shares of the Funds may be purchased at net asset value without an
initial sales charge. However, a CDSC will be imposed on certain Class B shares
redeemed within five years of purchase. The charge is assessed on an amount
equal to the lesser of the then-current market value of the Class B shares
redeemed or the total cost of such shares. Accordingly, the CDSC will not be
applied to dollar amounts representing an increase in the net asset values above
the initial purchase price of the shares being redeemed. In addition, no charge
is assessed on redemptions of Class B shares derived from reinvestment of
dividends or capital gains distributions.
In determining whether the CDSC is applicable to a redemption, the
calculation is made in the manner that results in the lowest possible rate.
Therefore, it is assumed that the redemption is first of any Class B shares in
the shareholder's account that represent reinvested dividends and/or
distributions, and/or of Class B shares held longer than five years after
purchase, and next of Class B shares held the longest during the initial
five-year period after purchase. The amount of the CDSC, if any, will vary
depending on the number of years from the time of purchase of Class B shares
until the redemption of such shares (the "holding period"). The following table
sets forth the rates of the CDSC.
CONTINGENT DEFERRED SALES CHARGE
<TABLE>
<CAPTION>
SALES CHARGE AS
PERCENTAGE OF THE
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT WAS MADE SUBJECT TO CHARGE
- ---------------------------------------------------------------------------- -------------------
<S> <C>
First....................................................................... 5.00%
Second...................................................................... 4.00%
Third....................................................................... 3.00%
Fourth...................................................................... 2.50%
Fifth....................................................................... 1.50%
Thereafter.................................................................. None*
</TABLE>
- ------------------------------
* As described more fully below, Class B shares automatically convert to Class A
shares after the eighth year following purchase.
Proceeds from any CDSC are paid to the Distributor and are used by the
Distributor to defray its expenses related to providing distribution-related
services to the Company in connection with the sale of the Class B shares. The
Distributor will make payments to the Participating Dealers that handle the
purchases of such shares at a rate not in excess of 4.00% of the purchase price
of such shares at the time of purchase and expects to pay to Participating
Dealers a portion of its distribution fee under the Rule 12b-1 Plan, as
described under "Management of the Company -- Distributor" above. Additionally,
the Distributor may pay additional promotional incentives, in the form of cash
or other compensation, to authorized dealers that sell Class B shares of the
Funds. The combination of the CDSC and the distribution fee facilitates the
ability of the Company to sell the Class B shares without a sales charge being
deducted at the time of purchase.
28
<PAGE>
AUTOMATIC CONVERSION TO CLASS A SHARES. After the eighth year following
purchase, Class B shares will automatically convert to Class A shares and will
no longer be subject to the higher distribution fees. Such conversion will be on
the basis of the relative net asset values of the two classes, without the
imposition of any sales load, fee or other charge. Under current tax law, the
conversion is not a taxable event to the shareholder.
PURCHASE OF CLASS C SHARES
Class C shares of the Funds may be purchased at the net asset value per
share and such shares are subject to a CDSC at the rate of 1.00% of the lesser
of the current market value of the shares redeemed or the total cost of such
shares for shares that are redeemed within one year of purchase. The Distributor
will make payments to the Participating Dealers that handle the purchases of
such shares at the rate of 1.00% of the purchase price of such shares at the
time of purchase and expects to pay to Participating Dealers most of its
distribution fee, with respect to such shares, under the Rule 12b-1 Plan for
such class of shares, as described under "Management of the Company --
Distributor" above. In determining whether a CDSC is payable, and, if so, the
amount of the fee or charge, it is assumed that shares not subject to such fee
or charge are the first redeemed.
WAIVER OF CDSC
The CDSC will be waived on the redemption of Class B or Class C shares (i)
following the death or initial determination of disability (as defined in the
Code) of a shareholder; (ii) certain distributions from an IRA or other
retirement plan; (iii) to the extent that shares redeemed have been withdrawn
from a Systematic Withdrawal Plan, up to a maximum of 12% per year from a
shareholder account based on the value of the account at the time the Withdrawal
Plan is established; or (iv) effected pursuant to the right of the Company to
liquidate a shareholder's account as described herein under "Redemption of
Shares." A shareholder, or their representative, must notify the Transfer Agent
prior to the time of redemption if such circumstances exist and the shareholder
is eligible for this waiver. The shareholder is responsible for providing
sufficient documentation to the Transfer Agent to verify the existence of such
circumstances. For information on the imposition and waiver of the CDSC, contact
Investor Services at 1-800-282-4404.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
No initial sales charge or CDSC will be payable on the shares of the Funds
or classes thereof purchased through the automatic reinvestment of dividends and
distributions on shares of the Funds.
REINSTATEMENT PRIVILEGE OF EACH CLASS
A shareholder who has redeemed Class A shares of a Participating Fund may
reinvest up to the full amount received at net asset value at the time of the
reinvestment in Class A shares of the Funds without payment of a sales charge. A
shareholder who has redeemed Class B shares of a Participating Fund and paid a
CDSC upon such redemption may reinvest up to the full amount received upon
redemption in Class A shares of a Fund at net asset value with no initial sales
charge. A Class C shareholder who has redeemed shares of a Participating Fund
may reinstate any portion or all of the net proceeds of such redemption in Class
C shares of a Fund with credit given for any CDSC paid upon such redemption. The
reinstatement privilege as to any specific Class A, Class B or Class C shares
must be exercised within 180 days of the redemption. The Transfer Agent must
receive from the shareholder or the shareholder's Participating Dealer both a
written request for reinstatement and a check or wire which does not exceed the
redemption proceeds. The written request must state that the reinstatement is
made pursuant to this reinstatement privilege. If a loss is realized on the
redemption of Class A shares, the reinstatement may be subject to the "wash
sale" rules if made within 30 days of the redemption, resulting in a
29
<PAGE>
postponement of the recognition of such loss for federal income tax purposes.
The reinstatement privilege may be terminated or modified at any time.
Reinstatement at net asset value is also offered to participants in those
eligible retirement plans held or administered by VKAC Trust for repayment of
principal (and interest) on their borrowings. See the Statement of Additional
Information for further discussion of waiver provisions.
SHAREHOLDER SERVICES
The Company offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. Unless otherwise described below, each of these
services may be modified or terminated by the Company at any time.
INVESTMENT ACCOUNT. Each shareholder has an investment account under which
shares are held by ACCESS. ACCESS acts as transfer agent for the Company and
performs bookkeeping, data processing and administration services related to the
maintenance of shareholder accounts. Except as described herein, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder will receive statements at least
quarterly from ACCESS showing any reinvestments of dividends and capital gains
distributions and any other activity in the account since the preceding
statement. Such shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gains distributions and systematic purchases or redemptions. Additions to an
investment account may be made at any time by purchasing shares through
authorized brokers, dealers or financial intermediaries or by mailing a check
directly to ACCESS.
SHARE CERTIFICATES. Generally, the Company will not issue share
certificates. However, upon written or telephone request to the Company, a share
certificate will be issued, representing shares (with the exception of
fractional shares) of the Company. A shareholder will be required to surrender
such certificates upon redemption or transfer thereof. In addition, if such
certificates are lost the shareholder must write to Morgan Stanley Fund, Inc.
c/o ACCESS, P.O. Box 418256, Kansas City, MO 64141-9256, requesting an
"affidavit of loss" and to obtain a Surety Bond in a form acceptable to ACCESS.
On the date the letter is received, ACCESS will calculate a fee for replacing
the lost certificate equal to no more than 2.00% of the net asset value of the
issued shares and bill the party to whom the replacement certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the applicable Fund. Such shares are acquired at net asset value (without sales
charge) on the record date of such dividend or distribution. Unless the
shareholder instructs otherwise, the reinvestment plan is automatic. This
instruction may be made by telephone by calling (800) 282-4404 or (800) 772-8889
for the hearing impaired, or in writing to ACCESS. The investor may, on the
initial application or prior to any declaration, instruct that dividends be paid
in cash and capital gains distributions be reinvested at net asset value, or
that both dividends and capital gains distributions be paid in cash. For further
information, see "Dividends and Distributions."
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Funds. Additional information is
available from the Distributor or authorized brokers, dealers or financial
intermediaries.
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DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanied by this
Prospectus or by calling (800) 282-4404 or (800) 772-8889 for the hearing
impaired, elect to have all dividends and other distributions paid on a class of
shares of the Company invested into shares of the same class of any
Participating Fund so long as a pre-existing account for such class of shares
exists for such shareholder. Both accounts must also be of the same type, either
non-retirement or retirement. Any two non-retirement accounts can be used. If
the accounts are retirement accounts, they must both be for the same class and
of the same type of retirement plan (e.g. IRA, 403(b)(7), 401(k), Keogh) and for
the benefit of the same individual.
If the qualified pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the portfolio into which distributions would be invested. Distributions are
invested into the selected portfolio at its net asset value as of the payable
date of the distribution only if shares of such selected portfolio have been
registered for sale in the investor's state and are currently available for
sale.
RETIREMENT PLANS. Eligible investors may establish IRAs; SEP; and pension
and profit sharing plans; 401(k) plans; or Section 403(b)(7) plans in the case
of employees of public school systems and certain non-profit organizations.
Documents and forms containing detailed information regarding these plans are
available from the Distributor. VKAC Trust serves as custodian under the IRA,
403(b)(7) and Keogh plans. Details regarding fees, as well as full plan
administration for profit sharing, pension and 401(k) plans, are available from
the Distributor.
EXCHANGE PRIVILEGE. Shares of the Funds or any Participating Fund may be
exchanged with shares of the same class of another Participating Fund based on
the net asset value of each fund on the date of exchange, subject to certain
limitations. Before effecting an exchange, shareholders in the Company should
obtain and read a current prospectus of the Participating Funds into which the
exchange is to be made. SHAREHOLDERS MAY ONLY EXCHANGE INTO SUCH OTHER
PARTICIPATING FUNDS AS ARE LEGALLY AVAILABLE FOR SALE IN THEIR STATE AND ARE
CURRENTLY AVAILABLE FOR SALE.
To be eligible for exchange, shares of a Fund generally must have been
registered in the shareholder's name for at least 30 days prior to an exchange.
Shares of a Fund registered in a shareholder's name for less than 30 days may
only be exchanged upon receipt of prior approval of the Adviser. Under normal
circumstances, it is the policy of the Adviser not to approve such requests.
Class A shares of a Participating Fund that generally impose an initial
sales charge are not subject to any sales charge upon exchange into another
Participating Fund. Class A shares of Participating Funds that do not impose an
initial sales charge will be subject to the applicable sales charge of the
Participating Fund being obtained in the exchange.
No sales charge is imposed upon the exchange of a Class B share or a Class C
share. The CDSC schedule, conversion schedule and holding period applicable to a
Class B share or a Class C share acquired through the exchange privilege is
determined by reference to the Participating Fund from which such share
originally was purchased.
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Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is not included in the tax basis of
the exchanged shares, but is carried over and included in the tax basis of the
shares acquired.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form accompanied by this Prospectus. See
"Redemption of Shares -- Telephone Transaction Procedures" for more information.
The exchange will take place at the relative net asset values of the shares next
determined after receipt of such request with adjustment for any additional
sales charge. Any shares exchanged begin earning dividends on the next business
day after the exchange is affected. If the exchanging shareholder does not have
an account in the portfolio whose shares are being acquired, a new account will
be established with the same registration, dividend and capital gains options
(except dividend diversification options) and broker, dealer or financial
intermediary of record as the account from which shares are exchanged, unless
otherwise specified by the shareholder. In order to establish a systematic
withdrawal plan for the new account or dividend diversification options for the
new account, an exchanging shareholder must file a specific written request. The
Company reserves the right to reject any order to acquire its shares through
exchange. In addition, the Company may restrict or terminate the exchange
privilege at any time on 60 days' notice to its shareholders of any termination
or material amendment. If an account has multiple owners, ACCESS may rely on the
instructions of any one owner.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $5,000 or more at the offering price next computed after receipt of
instructions may establish a quarterly, semi-annual or annual withdrawal plan.
Investors whose shares in a single account total $10,000 or more at the offering
price next computed after receipt of instructions may establish a monthly,
quarterly, semi-annual or annual withdrawal plan. This plan provides for the
orderly use of the entire account, not only the income but also the principal,
if necessary. Each withdrawal constitutes a redemption of shares on which
taxable gain or loss will be recognized. The plan holder may arrange for
monthly, quarterly, semi-annual, or annual checks in any amount not less than
$25.
The CDSC on Class B and Class C shares is waived for withdrawals under the
Systematic Withdrawal Plan of a maximum 1% per month, 3% per quarter, 6%
semiannually or 12% annually, of the initial value of a shareholder's account.
Under this CDSC waiver policy, amounts withdrawn each period will be paid by
redeeming first shares not subject to a CDSC because the shares were purchased
by the reinvestment of dividends or capital gains distributions, the CDSC period
has elapsed or some other waiver of the CDSC applies. If shares subject to a
CDSC must be redeemed, shares held for the longest period of time will be
redeemed first and continuing with shares held the next longest period of time
until shares held the shortest period of time are redeemed.
Under the plan, sufficient shares of the Company are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with purchases of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. The Company reserves the right to amend or terminate the systematic
withdrawal program on 30 days' notice to its shareholders.
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AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A shares can
use ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of ACH. In addition, the shareholder must fill out the appropriate
section of the account application. The shareholder must also include a voided
check or deposit slip from the bank account into which redemptions are to be
deposited together with the completed application. Once ACCESS has received the
application and the voided check or deposit slip, such shareholder's designated
bank account, following any redemption, will be credited with the proceeds of
such redemption. Once enrolled in the ACH plan, a shareholder may terminate
participation at any time by writing to ACCESS or by calling 1-800-282-4404. A
shareholder's bank may charge a fee for ACH transfers.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Company shares to another
person by writing to the Company c/o ACCESS, P.O. Box 418256, Kansas City,
Missouri 64141-9256. As in the case of redemptions, the written request must be
received in "good order" before any transfer can be made. Shares held in broker
street name may be transferred only by contacting your Participating Dealer.
REDEMPTION OF SHARES
Shareholders may redeem for cash some or all of their shares without charge
by the Company (other than, any applicable CDSC) at any time by sending a
written request in proper form directly to the Company c/o ACCESS, P.O. Box
418256, Kansas City, Missouri 64141-9256, by placing the redemption request
through a Participating Dealer or by calling the Company. See "Purchase of
Shares" for a discussion of applicable CDSC levels.
WRITTEN REDEMPTION REQUESTS. In the case of redemption requests sent
directly to ACCESS, the redemption request should indicate the number of shares
or dollars to be redeemed, the class designation of such shares, the account
number and be signed exactly as the shares are registered. Signatures must
conform exactly to the account registration. If the proceeds of the redemption
would exceed $50,000, or if the proceeds are not to be paid to the record owner
at the record address, or if the record address has changed within the previous
30 days, signature(s) must be guaranteed by one of the following: a bank or
trust company; a broker-dealer; a credit union; a national securities exchange,
registered securities association or clearing agency; a savings and loan
association; or a federal savings bank. If certificates are held for the shares
being redeemed, such certificates must be endorsed for transfer or accompanied
by an endorsed stock power and sent with the redemption request. In the event
the redemption is requested by a corporation, partnership, trust, fiduciary,
executor or administrator, additional documents may be necessary. The redemption
price is the net asset value per share next determined after the request is
received by ACCESS in proper form. Payment for shares redeemed will ordinarily
be made by check mailed within seven business days after acceptance by ACCESS of
the request and any other necessary documents in proper order.
DEALER REDEMPTION REQUESTS. Shareholders may redeem shares through their
securities dealer, who will submit the request to the Distributor. Orders
received from dealers must be at least $500 unless transmitted via the FUNDSERV
network. The redemption price for such shares is the net asset value next
calculated after an order is received, less any applicable CDSC, by a dealer
provided such order is transmitted to the Distributor prior to the Distributor's
close of business on such day. It is the responsibility of dealers to transmit
redemption
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requests received by them to the Distributor so they will be received prior to
such time. Any change in the redemption price due to failure of the Distributor
to receive a redemption request prior to such time must be settled between the
shareholder and dealer. Shareholders must submit a written redemption request in
proper form (as described above under "Written Redemption Requests") to the
dealer within three business days after calling the dealer with the redemption
request. Payment for shares redeemed will ordinarily be made by check mailed
within three business days to the dealer.
TELEPHONE REDEMPTION REQUESTS. The Company permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application accompanying this Prospectus or call the Company at (800) 287-4404
or (800) 772-8889 for the hearing impaired, to request that a copy of the
Telephone Redemption Authorization form be sent to them for completion. To
redeem shares, contact the telephone transaction line at (800) 421-5684. See
"Telephone Transaction Procedures" for more information. Telephone redemptions
may not be available if the shareholder cannot reach ACCESS by telephone,
whether because all telephone lines are busy or for any other reason; in such
case, a shareholder would have to use the Company's other redemption procedures
previously described. Requests received by ACCESS prior to 4:00 p.m., Eastern
Time, on a regular business day will be processed at the net asset value per
share determined that day. These privileges are available for all accounts other
than retirement accounts. The telephone redemption privilege is not available
for shares represented by certificates. If an account has multiple owners,
ACCESS may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check will ordinarily be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire will ordinarily be wired on the next business day
to the shareholder's bank account of record. This privilege is not available if
the address or bank account of record has been changed within 30 days prior to a
telephone redemption request. The Company reserves the right at any time to
terminate, limit or otherwise modify this telephone redemption privilege.
REDEMPTION UPON DISABILITY. The Company will waive the CDSC on redemptions
following the disability of holders of Class B shares and Class C shares. An
individual will be considered disabled for this purpose if he or she meets the
definition thereof in Section 72(m)(7) of the Code, which in pertinent part
defines a person as disabled if such person "is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or to be of
long-continued and indefinite duration." While the Company does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
contingent deferred sales charge on Class B shares and Class C shares.
In cases of disability, the CDSCs on Class B shares and Class C shares will
be waived where the disabled person is either an individual shareholder or owns
the shares as a joint tenant with right of survivorship or is the beneficial
owner of a custodial or fiduciary account, and where the redemption is made
within one year of the
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initial determination of disability. This waiver of the CDSC on Class B shares
and Class C shares applies to a total or partial redemption, but only to
redemptions of shares held at the time of the initial determination of
disability.
GENERAL REDEMPTION INFORMATION. If the shares to be redeemed have been
recently purchased by check, ACCESS may delay mailing a redemption check or
wiring redemption proceeds until it confirms that the purchase check has
cleared, usually a period of up to 15 days. In addition, the redemption payment
may be delayed or the right of redemption suspended by the Fund pursuant to
rules of the SEC.
The Company may redeem any shareholder account with a net asset value on the
date of the notice of redemption less than the minimum investment as specified
by the Directors. At least 60 days' advance written notice of any such
involuntary redemption is required and the shareholder is given an opportunity
to purchase the required value of additional shares at the next determined net
asset value without sales charge. Any involuntary redemption may only occur if
the shareholder account is less than the minimum investment due to shareholder
redemptions.
A custodian of a retirement plan account may charge fees based on the
custodian's fee schedule. IRA redemption requests should be sent to the IRA
custodian to be forwarded to ACCESS. Where VKAC Trust serves as IRA custodian,
special IRA, 403(b)(7), or Keogh redemption forms must be obtained from and be
forwarded to Van Kampen American Capital Trust Company, P.O. Box 944, Houston,
Texas 77001-0944. Contact the custodian for information. Reinstatement
privileges (as otherwise described under "Purchase of Shares -- Reinstatement
Privilege of Each Class" above) also extend to participants in eligible
retirement plans held or administered by VKAC Trust who repay the principal and
interest on their borrowings from such plans.
FOR SHARES HELD IN BROKER STREET NAME, YOU CANNOT REQUEST REDEMPTION BY
TELEPHONE OR BY MAIL; SUCH SHARES MAY BE REDEEMED ONLY BY CONTACTING YOUR
PARTICIPATING DEALER.
TELEPHONE TRANSACTION PROCEDURES
Van Kampen American Capital, Inc. and its subsidiaries, including ACCESS
(collectively, "VKAC") and the Company employ procedures considered by them to
be reasonable to confirm that instructions communicated by telephone are
genuine. Such procedures include requiring certain personal identification
information prior to acting upon telephone instructions, tape recording
telephone communications, and providing written confirmation of instructions
communicated by telephone. If reasonable procedures are employed, a shareholder
agrees that neither VKAC nor the Company will be liable for following
instructions which it reasonably believes to be genuine. VKAC and the Company
may be liable for any losses due to unauthorized or fraudulent instructions if
reasonable procedures are not followed.
VALUATION OF SHARES
Net asset value is calculated separately for each class of a Fund. The net
asset value per share of each class of shares of a Fund is determined by
dividing the total fair market value of the investments and other assets
attributable to such class of shares, less all liabilities attributable to such
class of shares, by the total number of outstanding shares of such class of
shares. Net asset value per share of a Fund is determined as of the regular
close of the NYSE (currently 4:00 p.m. Eastern Time) on each day that the NYSE
is open for business. Securities listed on a securities exchange for which
market quotations are available are valued at their closing price. If no closing
price is available, such securities will be valued at the last quoted sale price
on the day the valuation is
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made. Price information on listed securities is taken from the exchange where
the security is primarily traded. 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 are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices but take into account institutional size trading in similar groups of
securities and any developments related to the specific securities. Securities
not priced in this manner are valued at the most recent quoted bid price, or,
when stock exchange valuations are used, at the closing price, or if that is
unavailable, the latest quoted sale price on the day of valuation. If there is
no such reported sale, the latest quoted bid price will be used. Debt securities
purchased with remaining maturities of 60 days or less are valued at amortized
cost, if it approximates market value. In the event that amortized cost does not
approximate market value, market prices as determined above will be used. The
"amortized cost" method of valuation does not take into account unrealized gains
or losses. This method involves valuing an instrument at its cost and thereafter
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in valuation, it may result
in periods during which value, as determined by amortized cost, is higher or
lower than the price each Fund would receive if it sold the instrument.
The value of other assets and securities for which no quotations are readily
available (including illiquid and unlisted foreign securities) and those
securities for which it is inappropriate to determine prices in accordance with
the above procedures are determined in good faith at fair value using methods
determined by the Board of Directors. For purposes of calculating net asset
value per share, all assets and liabilities initially expressed in foreign
currencies will be converted into U.S. Dollars at the mean of the bid price and
asked price of such currencies against the U.S. Dollar as quoted by a major
bank.
PORTFOLIO TRANSACTIONS
The Adviser and the Sub-Adviser select the brokers or dealers that will
execute the purchases and sales of investment securities for the Funds. The
Adviser and the Sub-Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the Funds to their clients or
who act as agents in the purchase of shares of the Funds for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Adviser and the Sub-Adviser may allocate a portion of the Company's
portfolio brokerage transactions to Morgan Stanley & Co. Incorporated ("Morgan
Stanley"), an affiliate of the Adviser and the Sub-Adviser, or broker affiliates
of Morgan Stanley under procedures adopted by the Board of Directors. For such
portfolio transactions, the commissions, fees or other remuneration received by
Morgan Stanley or such affiliates must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers for comparable
transactions involving similar securities being purchased or sold during a
comparable period of time.
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Although the objective of each Fund is not to invest for short-term trading,
a Fund will seek to take advantage of trading opportunities as they arise to the
extent they are consistent with the Fund's objectives. Accordingly, investment
securities may be sold from time to time without regard to the length of time
they have been held. Each Fund anticipates that its annual portfolio turnover
rate will not exceed 100% under normal circumstances but market conditions could
result in portfolio activity at a greater or lesser rate than anticipated. High
portfolio turnover involves correspondingly greater transaction costs which will
be borne directly by a Fund. In addition, high portfolio turnover may result in
more capital gains which would be taxable to the shareholders of the particular
Fund.
PERFORMANCE INFORMATION
The Company may from time to time advertise total return of the Funds. THESE
FIGURES WILL BE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE
FUTURE PERFORMANCE. The "total return" shows what an investment in a Fund would
have earned over a specified period of time (such as one, three, five or ten
years) assuming that all distributions and dividends by the Fund were reinvested
on the reinvestment dates during the period. Total return does not take into
account any federal or state income taxes consequences to shareholders subject
to tax. The Company may also include comparative performance information in
advertising or marketing the Funds' shares. Such performance information may
include data from Lipper Analytical Services, Inc. and Morgan Stanley Capital
International.
DIVIDENDS AND DISTRIBUTIONS
Shareholders will automatically be credited with all dividends and
distributions in additional shares at net asset value, without payment of any
sales charge of the Funds, except that, upon written notice to the Company or by
checking off the appropriate box in the account application form, a shareholder
may elect to receive dividends and/or distributions in cash.
Each Fund expects to distribute substantially all of its net investment
income in the form of annual dividends. Each Fund expects to distribute net
realized gains, if any, annually. Confirmations of the purchase of shares of a
Fund through the automatic reinvestment of income dividends and capital gains
distributions will be provided, pursuant to Rule 10b-10(b) under the Securities
Exchange Act of 1934, as amended, on the next quarterly client statement
following such purchase of shares. Consequently, confirmations of such purchases
will not be provided at the time of completion of such purchases, as might
otherwise be required by Rule 10b-10.
Any undistributed net investment income and undistributed realized gains
increase a Fund's net assets for the purpose of calculating net asset value per
share. Therefore, on the "ex-dividend" or "ex-distribution" date, the net asset
value per share excludes the dividend or distribution (i.e., is reduced by the
per share amount of the dividend or distribution). Dividends and distributions
paid shortly after the purchase of shares by an investor, although in effect a
return of capital, are taxable to shareholders subject to tax.
Expenses of the Company allocated to a particular class of shares of the
Fund will be borne on a pro rata basis by each outstanding share of that class.
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TAXES
TAX STATUS OF THE FUNDS
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial
or administrative action, possibly with retroactive effect. See also the tax
sections in the Statement of Additional Information.
No attempt has been made to present a detailed explanation of the federal,
state or local income tax treatment of the Funds or their shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
Each of the Funds is generally treated as a separate entity for federal
income tax purposes, and thus the provisions of the Internal Revenue Code of
1986, as amended (the "Code") generally will be applied to each Fund separately,
rather than to the Company as a whole. Net long-term, mid-term and short-term
capital gains, net income and operating expenses therefore will be determined
separately for each Fund.
Each Fund intends to qualify for the special tax treatment afforded
"regulated investment companies" ("RICs") under Subchapter M of the Code so that
it will be relieved of federal income tax on that part of its net investment
income and net capital gain (the excess of net long-term capital gain over net
short-term capital loss less any available capital loss carryforward) which is
distributed to its shareholders.
TAX STATUS OF DISTRIBUTIONS AND DISPOSITIONS
Each Fund distributes substantially all of its net investment income
(including, for this purpose, net short-term capital gain), to its shareholders.
Dividends paid by a Fund from its net investment income will be taxable to the
shareholders of the Fund as ordinary income, whether received in cash or in
additional shares, if the shareholder is subject to tax. Dividends paid by a
Fund attributable to dividends received from shares of domestic corporations may
qualify for the dividends-received deduction for corporations.
Distributions of net capital gains ("capital gain dividends") are taxable to
shareholders subject to tax as long-term capital gains, regardless of how long
the shareholder has held a Fund's shares. Capital gain distributions are not
eligible for the corporate dividends-received deduction. The Funds will make
annual reports to shareholders of the federal income tax status of all
distributions. For a summary of the tax rates applicable to capital gains
(including capital gain dividends), see the discussion below regarding the
Taxpayer Relief Act of 1997.
Each Fund intends to make sufficient distributions or deemed distributions
of its ordinary income and net capital gains prior to the end of each calendar
year to qualify as an RIC under the Code and to avoid liability for federal
income and excise taxes.
Dividends and other Distributions declared in October, November and December
by a Fund payable as of a record date in such month and paid at any time during
January of the following year are treated as having been paid by the Fund and
received by the shareholders on December 31 of the year declared.
The sale, exchange or redemption of shares may result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the redemption proceeds exceeds or is
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less than the Shareholder's adjusted basis in the redeemed, exchanged or sold
shares. If capital gain distributions have been made with respect to shares that
are sold at a loss after being held for six months or less, then the loss is
treated as a long-term capital loss to the extent of the capital gain
distributions. Shareholders may also be subject to state and local taxes on
distributions from the Funds.
Under the Taxpayer Relief Act of 1997 (the "1997 Tax Act"), the maximum tax
rates applicable to net capital gains recognized by individuals and other
non-corporate taxpayers are (i) the same as ordinary income rates for capital
assets held for one year or less, (ii) 28% for capital assets held for more than
one year but not more than 18 months and (iii) 20% for capital assets held for
more than 18 months. The maximum long-term capital gains rate for corporations
remains at 35%. Under the 1997 Tax Act, the Treasury is authorized to issue
regulations that address the application of the new capital gains rates to sales
and exchanges by RICs and to sales and exchanges of interests in RICs, but no
such regulations have been issued as of the date hereof. It is expected that the
new tax rates for capital gains under the 1997 Tax Act described above will
apply to distributions of capital gain dividends by the Funds as well as to
sales and exchanges of shares in the Funds. With respect to capital losses
recognized on dispositions of shares held six months or less where such losses
are treated as long-term capital losses to the extent of prior capital gain
dividends received on such shares (see discussion above regarding gains or
losses recognized on the sale or exchange of shares), it is unclear how such
capital losses offset the capital gains referred to above. Shareholders should
consult their own tax advisers as to the application of the new capital gains
rates to their particular circumstances.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS AND SHAREHOLDERS SHOULD CONSULT THEIR
OWN TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT
IN THE FUNDS.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Company was organized as a Maryland corporation on August 14, 1992. The
Amended Articles of Incorporation currently permit the Company to issue 27.375
billion shares of common stock, par value $.001 per share. Pursuant to the
Company's By-Laws, the Board of Directors may increase the number of shares the
Company is authorized to issue without the approval of the shareholders of the
Company. The Board of Directors has the power to designate one or more classes
of shares of common stock and to classify and reclassify any unissued shares
with respect to such classes.
The shares of the Funds, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. Except as
described herein, the shares have no preference as to conversion, exchange,
dividends, retirement or other features and have no preemptive rights. The
shares of the Funds have non-cumulative voting rights, which means that the
holders of more than 50% of the shares voting for the election of Directors can
elect 100% of the Directors if they choose to do so. Under Maryland law, the
Company is not required to hold an annual meeting of its shareholders unless
required to do so under the 1940 Act. Any person or organization owning 25% or
more of the outstanding shares of a Fund may be presumed to "control" (as that
term is defined in the 1940 Act) such Fund. As of October 16, 1997, Van Kampen
American Capital Generations Variable Annuities c/o American General Life
Insurance Company, P.O. Box 1591, Houston, TX 77251-1591 was presumed to control
the Growth and Income Fund based solely on its ownership of 25% or more of the
outstanding voting shares of such Fund.
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REPORTS TO SHAREHOLDERS
The Company will send to its shareholders annual and semi-annual reports;
the financial statements appearing in annual reports are audited by independent
accountants.
In addition, the Company or ACCESS will send to each shareholder having an
account directly with the Company a quarterly statement showing transactions in
the account, the total number of shares owned, and any dividends or
distributions paid. In addition, when a transaction occurs in a shareholder's
account, the Company or ACCESS will send the shareholder a confirmation
statement showing the same information.
CUSTODIAN
Domestic securities and cash are held by Chase, which is not an affiliate of
the Adviser, the Sub-Adviser or the Distributor. Morgan Stanley Trust Company,
Brooklyn, New York ("Morgan Stanley Trust"), 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 regulations of the
SEC for the purpose of providing custodial services for such assets. Morgan
Stanley Trust may also hold certain domestic assets for the Company. Morgan
Stanley Trust is an affiliate of the Adviser, the Sub-Adviser and the
Distributor. For more information on the custodians, see "General Information --
Custody Arrangements" in the Statement of Additional Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-9256, acts as dividend
disbursing and transfer agent for the Company.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, NY 10036,
serves as independent accountants for the Company and audits its annual
financial statements.
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APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. -- CORPORATE 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-edge." 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.
A-1
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STANDARD & POOR'S RATINGS GROUP -- CORPORATE BOND RATINGS:
AAA -- Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation and indicate an extremely strong capacity to pay principal
and interest.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only to a small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC -- Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
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.
A-2
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NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE DISTRIBUTOR. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER BY THE COMPANY OR THE DISTRIBUTOR TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
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Prospectus Summary............................... 2
Fund Expenses.................................... 4
Investment Objectives and Policies............... 6
Additional Investment Information................ 9
Investment Limitations........................... 18
Management of the Company........................ 18
Purchase of Shares............................... 21
Shareholder Services............................. 30
Redemption of Shares............................. 33
Valuation of Shares.............................. 35
Portfolio Transactions........................... 36
Performance Information.......................... 37
Dividends and Distributions...................... 37
Taxes............................................ 38
General Information.............................. 39
Appendix A -- Description of Corporate Bond
Ratings......................................... A-1
</TABLE>
MORGAN STANLEY
GROWTH AND INCOME FUND
EUROPEAN EQUITY FUND
PORTFOLIOS OF THE
MORGAN STANLEY
FUND, INC.
---------------
PROSPECTUS
---------------
INVESTMENT ADVISER
VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
INVESTMENT SUB-ADVISER
MORGAN STANLEY
ASSET MANAGEMENT INC.
DISTRIBUTOR
VAN KAMPEN
AMERICAN CAPITAL
DISTRIBUTORS, INC.
- ---------------------------------
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- ---------------------------------
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<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 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
investors the expertise of (i) Van Kampen American Capital Investment Advisory
Corp. as adviser (the "Adviser") and administrator (the "Administrator") to the
Funds, (ii) Morgan Stanley Asset Management Inc. ("MSAM"), a sub-adviser (a
"Sub-Adviser") to the Funds, other than the Mid Cap Growth and Value Funds and
(iii) Miller, Anderson & Sherrerd, LLP ("MAS"), a sub-adviser (a "Sub-Adviser")
to the Mid Cap Growth and Value Funds. As of the date hereof, the Morgan Stanley
Emerging Markets Debt, Morgan Stanley Equity Growth, Morgan Stanley European
Equity, Morgan Stanley Global Equity, Morgan Stanley Growth and Income, Morgan
Stanley Japanese Equity, Morgan Stanley Mid Cap Growth and Morgan Stanley
Tax-Free Money Market Funds have not commenced a continuous offering of shares.
This Statement of Additional Information "SAI" is not a prospectus but
should be read in conjunction with the Company's prospectuses dated October 28,
1997, as amended and supplemented from time to time (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
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INVESTMENT OBJECTIVES AND POLICIES...... 2
FEDERAL INCOME TAX...................... 15
FEDERAL TAX TREATMENT OF FORWARD
CURRENCY CONTRACTS AND EXCHANGE RATE
CONTRACTS.............................. 18
TAXES AND FOREIGN SHAREHOLDERS.......... 18
PURCHASE OF SHARES...................... 19
REDEMPTION OF SHARES.................... 19
INVESTMENT LIMITATIONS.................. 21
DETERMINING MATURITIES OF CERTAIN
INSTRUMENTS............................ 25
MANAGEMENT OF THE COMPANY............... 25
MONEY MARKET FUND NET ASSET VALUE....... 36
PORTFOLIO TRANSACTIONS.................. 36
PERFORMANCE INFORMATION................. 37
GENERAL INFORMATION..................... 44
DESCRIPTION OF SECURITIES AND RATINGS... 44
FINANCIAL STATEMENTS.................... 47
</TABLE>
Date: October 28, 1997
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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 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.
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
Sub-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
Sub-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, as amended (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 Sub-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,
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<PAGE>
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.
The Funds do not intend to invest in any security in a country where the
currency is not freely convertible to U.S. Dollars, unless the Fund has obtained
the necessary governmental licensing to convert such currency or other
appropriately licensed or sanctioned contractual guarantee to protect such
investment against loss of that currency's external value, or the Fund has a
reasonable expectation at the time the investment is made that such governmental
licensing or other appropriately licensed or sanctioned guarantee would be
obtained or that the currency in which the security is quoted would be freely
convertible at the time of any proposed sale of the security by the Fund.
The governments of some countries have been engaged in programs of selling
part or all of their stakes in government owned or controlled enterprises
("privatization"). The Sub-Adviser believes that privatization may offer
investors opportunities for significant capital appreciation and intends to
invest assets of the Fund in privatization in appropriate circumstances. In
certain countries, the ability of foreign entities, such as the Fund, to
participate in privatization may be limited by local law, or the terms on which
the Fund may be permitted to participate may be less advantageous than those for
local investors. There can be no assurance that governments will continue to
sell companies currently owned or controlled by them or that any privatization
programs in which the Fund participates will be successful.
Several Latin American countries have adopted debt conversion programs,
pursuant to which investors may use sovereign debt of a country, directly or
indirectly, to make investments in local companies. The terms of the various
programs vary from country to country although each program includes significant
restrictions on the application of the proceeds received in the conversion and
on the remittance of profits on the investment and of the invested capital. The
Fund may participate in Latin American debt conversion programs. The Sub-Adviser
will evaluate opportunities to enter into debt conversion transactions as they
arise.
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.
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 not possible to predict how equity-linked securities will trade in
the secondary market or whether such market will be liquid or illiquid. The
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<PAGE>
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.
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.
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
4
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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 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
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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.
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
accept or make delivery of the currency specified in the contract or, prior to
maturity, enter into a closing purchase transaction involving the purchase or
sale of an offsetting contract. Closing purchase transactions with respect to
forward contracts are usually effected with the currency trader who is a party
to the original forward contract. A Fund will only enter into such a forward
contract if it is expected that there will be a liquid market in which to close
out such contract. There can, however, be no assurance that such a liquid market
will exist in which to close a forward contract, in which case the Fund may
suffer a loss.
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
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 Funds may sell indexed financial futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of
securities in its portfolio that might otherwise result. An index futures
contract is an agreement to
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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, Global Equity Allocation,
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 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
liquid 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. None of the Funds will enter
into futures contract transactions to the extent that, immediately thereafter,
the sum of its initial margin deposits on open contracts exceeds 5% of the
market value of its total assets. In addition, none of the Funds will enter into
futures contracts and options on futures contracts to the extent that the
notional value of its outstanding obligations to purchase securities under such
contracts would exceed 20% (50% for the Mid Cap Growth, Value, Equity Growth,
Emerging Markets Debt and Global Equity Funds) of its total assets. See also,
"Investment Limitations" for further restrictions applicable to the Funds.
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.
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The Funds will minimize the risk that they will be unable to close out a
futures contract by generally entering into futures which are traded on
recognized international or national futures exchanges and for which there
appears to be a liquid secondary market, however, the Funds may enter into
over-the-counter futures transactions to the extent permitted by applicable law.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (as well as gain) to the investor. For example, if, at the time of
purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the Funds engage
in futures strategies only for hedging purposes, the Sub-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 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.
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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 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 the rules and regulations of the Securities and
Exchange Commission ("SEC"), 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 Non-Money Market 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 Sub-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.
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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 more volatile than the market prices on the underlying
futures contract or securities. In the opinion of the Sub-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 Sub-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.
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.
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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, a 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.
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. Additional risks of
foreign investing are set forth in the appropriate Prospectuses.
ILLIQUID SECURITIES
Illiquid securities are securities that cannot be disposed of within seven
business days at approximately the price they are being carried on a Fund's
books. This 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
securities 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 securities also may make it
more difficult for a Fund to assign a value to these securities for purposes of
valuing the Fund's portfolio and calculating its net asset value.
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 1940 Act 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 Sub-Adviser. After
establishing regional allocation strategies, the Sub-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") and any countries
which have been publicly announced will be added to 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,
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The Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom.
"Far East" includes Japan, Hong Kong and Singapore/Malaysia. It was announced
publicly that Portugal will be added to the EAFE Index in December, 1997.
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
Sub-Adviser and with stock selection within each country designed to replicate a
broad market index. The Sub-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 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
the 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. See
the Prospectuses for a discussion of the risks of foreign investments. 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 Sub-Adviser believes
that the risks associated with such investment are minimal and that all
applicable quality standards have been satisfied.
PORTFOLIO TURNOVER
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. 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.
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.
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 liquid securities having a value at
all times not less than 100% of the value of the securities loaned, including
accrued interest, (b) the borrower add to such collateral whenever the price of
the securities loaned rises (i.e., the borrower "marks to the market" on a daily
basis), (c) the loan be made subject to termination by the 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 Sub-Adviser to be of
good standing and when, in the judgment of
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the Sub-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 Sub-Adviser'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.
SWAP CONTRACTS
The Non-Money Market 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
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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 Sub-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 Sub-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 Sub-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 Sub-Adviser will follow guidelines adopted by the Company's
Board of Directors.
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.
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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 tax advice or 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 has qualified and intends to continue
to qualify 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. The Short-Short Gain Test will no longer be applicable to
the Funds beginning on July 1, 1998.
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 net capital gains (i.e., the excess of net long-term
capital gains over net short-term capital losses) 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
dividends, which are distributions of net capital gains) 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.
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Each Fund will decide whether to distribute or to retain all or part of any
net capital gains 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. For a summary of
the rates applicable to capital gains (including capital gain dividends), see
"Capital Gains Rates Under the 1997 Tax Act" below. Any loss recognized 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 recognized 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 capital gain dividends 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 dividends 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.
CAPITAL GAINS RATES UNDER THE 1997 TAX ACT
Under the Taxpayer Relief Act of 1997 (the "1997 Tax Act"), the maximum tax
rates applicable to net capital gains recognized by individuals and other
non-corporate taxpayers are (i) the same as ordinary income rates for capital
assets held for one year or less, (ii) 28% for capital assets held for more than
one year but not more than 18 months and (iii) 20% for capital assets held for
more than 18 months. The maximum long-term capital gains rate for corporations
remains at 35%. Under the 1997 Tax Act, the Treasury is authorized to issue
regulations that address the application of the new capital gains rates to sales
and exchanges by RICs and to sales and exchanges of interests in RICs, but no
such regulations have been issued as of the date hereof. It is expected that the
new tax rates for capital gains under the 1997 Tax Act described above will
apply to distributions of capital gain dividends by the Funds as well as to
sales and exchanges of shares in the Funds. With respect to capital losses
recognized on dispositions of shares held six months or less where such losses
are treated as long-term capital losses to the extent of prior capital gain
dividends received on such shares (see discussion above regarding gains or
losses recognized on the sale or exchange of shares), it is unclear how such
capital losses offset the capital gains referred to above. Shareholders should
consult their own tax advisers as to the application of the new capital gains
rates to their particular circumstances.
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 of the Code and, in the case of
corporate taxpayers, 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/or 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 may be included in
the gross income of such individual depending upon the individual's "modified
adjusted gross income" (which includes exempt-interest dividends).
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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 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.
PASSIVE FOREIGN INVESTMENT COMPANIES
A Fund may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation that, in general, meets either of the
following tests: (i) at least 75% of its gross income is passive income or (ii)
an average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, a RIC that holds stock of a
PFIC will be subject to federal income tax on (i) a portion of any "excess
distribution" received on such stock or (ii) any gain from a sale or disposition
of such stock (collectively, "PFIC income"), plus interest on such amounts, even
if the RIC distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the RIC's
investment company taxable income and, accordingly, will not be taxable to it to
the extent that income is distributed to its shareholders. If a Fund invests in
a PFIC and elects to treat the PFIC as a "qualified electing fund," then in lieu
of the foregoing tax and interest obligation, the Fund would be required to
include in income each year its pro rata share of the qualified electing fund's
annual ordinary earnings and net capital gain, which most likely would have to
be distributed to satisfy the 90% distribution requirement and the distribution
requirement for avoiding income and excise taxes. In most instances it will be
very difficult to make this election due to certain requirements imposed with
respect to the election.
Under provisions of the 1997 Tax Act generally effective for taxable years
ending after 1997, a Fund that invests in PFIC stock may make an election to
annually mark-to-market certain publicly traded PFIC stock (a "PFIC
Mark-to-Market Election"). "Marking-to-market," in this context, means
recognizing as ordinary income or loss each year an amount equal to the
difference between the Fund's adjusted tax basis in such PFIC stock and its fair
market value. Losses will be allowed only to the extent of net mark-to-market
gain previously included by the Fund pursuant to the election for prior taxable
years. The Fund may be required to include in its taxable income for the first
taxable year in which it makes a PFIC Mark-to-Market Election an amount equal to
the interest charge that would otherwise accrue with respect to distributions
on, or dispositions of, the PFIC stock. This amount would not be deductible from
the Fund's taxable income. The PFIC Mark-to-Market Election applies to the
taxable year for which made and to all subsequent taxable years, unless the PFIC
stock ceases to be publicly traded or the Internal Revenue Service consents to
revocation of the election. By making the PFIC Mark-to-Market Election, the Fund
could ameliorate the adverse tax consequences arising from its ownership of PFIC
stock, but in any particular year may be required to recognize income in excess
of the distributions it receives from the PFIC and proceeds from the disposition
of PFIC stock.
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
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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 and 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.
CERTAIN INVESTMENT PRACTICES
Some of a Fund's investment practices, including those involving certain
risk management transactions and foreign currency transactions, may be subject
to special provisions of the Code that, among other things, defer the use of
certain losses of the Fund and affect the holding period of securities held by
the Fund and the character of gains or losses realized by the Fund. These
provisions may also require the Fund to recognize income or gain without
receiving cash with which to make distributions in amounts necessary to satisfy
the distribution requirements for avoiding federal income and excise taxes.
Thus, these provisions could affect the amount, timing and character of
distributions to shareholders. Each Fund engaging in such investment practices
will monitor its transactions and may make certain tax elections in order to
mitigate the effect of these rules and prevent disqualification of the Fund as a
RIC.
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. Proposed legislation would provide that amounts treated
as capital gain or loss pursuant to the foregoing sentence would be attributable
to property held for more than 18 months. See "Capital Gains Rates Under the
1997 Tax Act" above for a summary of the tax rates applicable to capital gains.
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. The Short-Short Gain test will no longer be
applicable to the Funds beginning on July 1, 1998.
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 loss.
Similarly, gains or losses on disposition of debt securities denominated in a
foreign currency attributable to fluctuations in the value of the foreign
currency between the date of acquisition of the security and the date of
disposition also are treated as ordinary gain or loss. These gains or losses
increase or decrease the amount of 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.
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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."
The purchase 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, Martin Luther King, Jr. 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 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.
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
payment wholly or partly in cash would be detrimental to the best interests of
the remaining shareholders of the Fund, 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).
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.
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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.
CONTINGENT DEFERRED SALES CHARGE -- CLASS A
For certain full service participant directed profit sharing and money
purchase plans and qualified 401(k) retirement plans and for investments in the
amount of $1,000,000 or more of Class A shares of the Non-Money Funds
("Qualified Purchaser"), the front-end sales charge will be waived and a
contingent deferred sales charge ("CDSC -- Class A") of 1.00% is imposed in the
event of certain redemptions within one year of the purchase. If a CDSC -- Class
A is imposed upon redemption, the amount of the CDSC -- Class A will be equal to
the lesser of 1.00% of the net asset value of the shares at the time of purchase
or 1.00% of the net asset value of the shares at the time of redemption.
The CDSC -- Class A will be imposed only if a Qualified Purchaser redeems an
amount which caused the value of the account to fall below the total dollar
amount of purchase payments made by the Qualified Purchaser without an initial
sales charge during the one year period prior to the redemption. The CDSC --
Class A will be waived in connection with redemptions by certain Qualified
Purchasers (e.g., in retirement plans qualified under Section 401(a) of the Code
and deferred compensation plans under Section 457 of the Code) required to
obtain funds to pay distributions to beneficiaries pursuant to the terms of the
plans. Such payments include, but are not limited to, death, disability,
retirement or separation from service. No CDSC -- Class A will be imposed on
exchanges between funds. For purposes of the CDSC -- Class A, when shares of one
fund are exchanged for shares of another fund, the purchase date for the shares
of the fund exchanged into will be assumed to be the date on which shares were
purchased in the fund from which the exchange was made. If the exchanged shares
themselves are acquired through an exchange, the purchase date is assumed to
carry over from the date of the original election to purchase shares subject to
a CDSC -- Class A rather than a front-end load sales charge. In determining
whether a CDSC -- Class A is payable, it is assumed that shares held the longest
are the first to be redeemed.
Cumulative Purchase Discounts and Letters of Intent apply to the net asset
value privilege. Also, in order to establish an amount of $1,000,000 or more, a
Qualified Purchaser may aggregate shares of the Participating Funds described in
the Prospectus.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE ("CDSC -- CLASS B
AND C")
As described in the Prospectus under "Purchase of Shares," redemptions of
Class B shares and Class C shares of the Non-Money Funds will be subject to a
CDSC. The CDSC -- Class B and C may be waived on redemptions of Class B shares
and Class C shares in the circumstances described below:
(a) Redemption Upon Disability or Death
The Non-Money Funds will waive the CDSC -- Class B and C on redemptions
following the death or disability of a Class B shareholder and Class C
shareholder. An individual will be considered disabled for this purpose if he or
she meets the definition thereof in Section 72(m)(7) of the Internal Revenue
Code of 1986, as amended (the "Code"), which in pertinent part defines a person
as disabled if such person "is unable to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment
which can be expected to result in death or to be of long-continued and
indefinite duration." While the Company does not specifically adopt the balance
of the Code's definition which pertains to furnishing the Secretary of Treasury
with such proof as he or she may require, the Distributor will require
satisfactory proof of death or disability before it determines to waive the CDSC
- -- Class B and C.
In cases of disability or death, the CDSC -- Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC -- Class B and C applies to a total or partial
redemption, but only to redemptions of shares held at the time of the death or
initial determination of disability.
(b) Redemption in Connection with Certain Distributions from Retirement
Plans
The Company will waive the CDSC -- Class B and C when a total or partial
redemption is made in connection with certain distributions from retirement
plans. The charge will be waived upon the tax-free rollover or transfer of
assets to another retirement plan invested in one or more of the Participating
Funds; in such event, as described below, the Non-Money Fund will "tack" the
period for which the original shares were held on to the holding period of the
shares acquired in the transfer or rollover for purposes of determining what, if
any, CDSC -- Class B and C is applicable in the event that such acquired shares
are redeemed following the transfer or rollover. The charge also will be waived
on any redemption which results from the return of an excess contribution
pursuant to Section 408(d)(4) or (5) of the Code, the return of excess deferral
amounts pursuant to Code Section 401(k)(8) or 402(g)(2), or from the death or
disability of the employee (see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In
addition, the charge will be waived on any minimum distribution required to be
distributed in accordance with Code Section 401(a)(9).
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The Company does not intend to waive the CDSC -- Class B and C for any
distributions from IRAs or other retirement plans not specifically described
above.
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 fundamental 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;
(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);
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(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
American Fund, Aggressive Equity Fund and U.S. Real Estate Fund, purchase more
than 10% of any class of the outstanding securities of any issuer; and
(17) except for the Global Fixed Income Fund, Emerging Markets Fund, Latin
American Fund, U.S. Real Estate Fund and Worldwide High Income 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 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;
(2) invest in oil, gas or other mineral leases; and 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, U.S.
Real Estate and Worldwide High Income 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;
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(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);
(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) 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;
(2) 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;
(3) 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;
(4) 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;
(5) 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;
(6) 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;
(7) invest for the purpose of exercising control over management of any
company;
(8) 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;
23
<PAGE>
(9) 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
(10) 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.
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");
24
<PAGE>
(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
(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.
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. Two Directors and all of the
Officers of the Company are directors, officers or employees of the Adviser or
its affiliates. The other Directors have no affiliation with the Adviser,
Distributor or administrative services providers or their affiliates. The
Directors are also Trustees of other open-end
25
<PAGE>
funds advised by the Adviser or Van Kampen American Capital Asset Management,
Inc. ("Asset Management") (except for the Exchange Fund and the Common Sense
Trust) (collectively with the Company, the "Fund Complex") and Mr. Whalen is
also Trustee of many closed-end funds that are similarly managed. Officers of
the Company are generally officers of the other funds in the Fund Complex and
some or all of the other investment companies managed, administered, advised or
distributed by the Adviser 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. Messrs.
Hegel, McDonnell, Nyberg, Wood, Sullivan, Dalmaso, Martin, Wetherell and Hill
are located at One Parkview Plaza, Oakbrook Terrace, IL 60181. The Company's
officers other than Messrs. Hegel, McDonnell, Nyberg, Wood, Sullivan, Dalmaso,
Martin, Wetherell, Hill and Stadler and Ms. Haigney are located at 2800 Post Oak
Blvd., Houston, TX 77056.
<TABLE>
<CAPTION>
NAME, ADDRESS AND
DATE OF BIRTH POSITION WITH COMPANY PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- --------------------------- --------------------------------------------------------------------------------------
<S> <C> <C>
J. Miles Branagan Director Private investor, Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc. a subsidiary
Date of Birth: 07/14/32 of Getinge Industrier AB), a company which develops,
manufactures, markets and services medical and scientific
equipment. Director/Trustee of each of the funds in the Fund
Complex.
Richard M. DeMartini* Director President and Chief Operating Officer, Individual Asset
Dean Witter Capital Management Group, a division of Morgan Stanley, Dean Witter,
Two World Trade Center Discover & Co. ("MSDWD"). Member of the MSDWD Management
New York, NY 10048 Committee. Director of the InterCapital Funds. Trustee of
Date of Birth: 10/12/52 the TCW/DW Funds. Former Chairman of the Board of the NASDAQ
Stock Market, Inc. Former Vice Chairman of the Board of the
National Association of Securities Dealers, Inc.
Director/Trustee of each of the Funds in the Fund Complex.
Linda Hutton Heagy Director Co-Managing Partner of Heidrick & Struggles, an executive
Sears Tower search firm. Prior to 1997, Partner, Paul Ray Berndtson,
233 South Wacker Drive Inc., an executive recruiting and management consulting
Suite 7000 firm. Formerly, Executive Vice President of ABN AMRO, N.A.,
Chicago, IL 60606 a Dutch bank holding company. Prior to 1992, Executive Vice
Date of Birth: 06/03/48 President of La Salle National Bank. Trustee on The
University of Chicago Hospitals Board, The International
House Board and the Women's Board of the University of
Chicago. Director/ Trustee of each of the funds in the Fund
Complex.
R. Craig Kennedy Director President and Director, German Marshall Fund of the United
11 DuPont Circle, N.W. States. Formerly, advisor to the Dennis Trading Group Inc.
Washington, D.C. 20036 Prior to 1992, President and Chief Executive Officer.
Date of Birth: 02/29/52 Director and Member of the Investment Committee of the Joyce
Foundation, a private foundation. Director/Trustee of each
of the funds in the Fund Complex.
Jack E. Nelson Director President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Investment Brokerage Services
Date of Birth: 02/13/36 Inc., a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors Protection
Corp. ("SIPC"). Director/Trustee of each of the funds in the
Fund Complex.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND
DATE OF BIRTH POSITION WITH COMPANY PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- --------------------------- --------------------------------------------------------------------------------------
<S> <C> <C>
Don G. Powell* Director Chairman, President, Chief Executive Officer and a Director
2800 Post Oak Blvd. of Van Kampen American Capital, Inc. ("VKAC"). Chairman,
Houston, TX 77056 Chief Executive Officer and a Director of the Adviser, Asset
Date of Birth: 10/19/39 Management and the Distributor. Chairman and a Director of
ACCESS Investors Services, Inc. ("ACCESS"). Director or
officer of certain other subsidiaries of VKAC. Chairman of
the Board of Governors and the Executive Committee of the
Investment Company Institute. Prior to November, 1996,
President, Chief Executive Officer and a Director of VK/AC
Holding, Inc. ("VKAC Holding"). Director/Trustee of each of
the funds in the Fund Complex advised by the Adviser and
prior to July 1996 President, Chief Executive Officer and a
Trustee/Director of funds in the Fund Complex at that time.
Jerome L. Robinson Director President, Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies and
Edgewater, NJ 07020 equipment. Director, Pacesetter Software, a software
Date of Birth: 10/10/22 programming company specializing in white collar
productivity. Director, Panasia Bank. Director/Trustee of
each of the funds in the Fund Complex.
Phillip Rooney Director Vice Chairman and Director of The Servicemaster Company, a
One Service Master Way business and consumer services company, since May 1997.
Downers Grove, IL 60515 Private investor, Director, Illinois Tool Works, Inc., a
Date of Birth: 07/08/44 manufacturing company. Director, Urban Shopping Centers
Inc., a retail mall management company; Director, Stone
Container Corp., a paper manufacturing company. Trustee,
University of Notre Dame. Formerly, President and Chief
Executive Officer, Waste Management, Inc., an environmental
services company, and prior to that, President and Chief
Operating Officer, Waste Management, Inc. Director/Trustee
of each of the funds in the Fund Complex.
Fernando Sisto Director Professor Emeritus and prior to 1995, Dean of the Graduate
155 Hickory Lane School, Stevens Institute of Technology. Director, Dynalysis
Closter, NJ 07624 of Princeton, a firm engaged in engineering research.
Date of Birth: 08/02/24 Director/ Trustee of each of the funds in the Fund Complex.
Wayne W. Whalen* Director and Chairman of Partner in the law firm of Skadden, Arps, Slate, Meagher &
333 West Wacker Drive the Board Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, open-end funds advised by Van Kampen American
Date of Birth: 08/22/39 Capital Management, Inc. and closed-end funds advised by the
Adviser. Director/Trustee of each of the funds in the Fund
Complex, open-end funds advised by Van Kampen Capital
Management, Inc. and closed-end funds advised by the
Adviser.
Dennis J. McDonnell President President and Director of VKAC. President, Chief Operating
Date of Birth: 05/20/42 Officer and a Director of the Adviser and American Capital.
Director or officer of certain other subsidiaries of VKAC.
Prior to November 1996, Executive Vice President and a
Director of VKAC Holding. President of each of the funds in
the Fund Complex. President, Chairman of the Board and
Trustee of other investment companies advised by the
Adviser, Asset Management or their affiliates.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND
DATE OF BIRTH POSITION WITH COMPANY PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- --------------------------- --------------------------------------------------------------------------------------
<S> <C> <C>
Ronald A. Nyberg Vice President and Executive Vice President, General Counsel and Secretary of
Date of Birth: 07/29/53 Secretary VKAC. Executive Vice President, General Counsel, Assistant
Secretary and a Director of the Adviser, Asset Management
and the Distributor. Executive Vice President, General
Counsel and Assistant Secretary of ACCESS. Director or
officer of certain other subsidiaries of VKAC. Director of
ICI Mutual Insurance Co., a provider of insurance to members
of the Investment Company Institute. Prior to November 1996,
Executive Vice President, General Counsel and Secretary of
VKAC Holding. Vice President and Secretary of each of the
funds in the Fund Complex and certain other investment
companies advised by the Adviser, Asset Management or their
affiliates.
Peter W. Hegel Vice President Executive Vice President of the Adviser. Director of Asset
Date of Birth: 06/25/56 Management. Officer of certain other subsidiaries of VKAC.
Vice President of each of the funds in the Fund Complex and
certain other investment companies advised by the Adviser,
Asset Management or their affiliates.
Alan T. Sachtleben Vice President Executive Vice President of the Adviser and Asset
Date of Birth: 04/20/42 Management. Director of Asset Management, Director or
officer of certain other subsidiaries of VKAC. Vice
President of each of the funds in the Fund Complex and
certain other investment companies advised by the Adviser,
Asset Management or their affiliates.
Joseph P. Stadler Vice President Vice President of Morgan Stanley Asset Management Inc.;
1221 Avenue of the Americas Officer of various investment companies managed by Morgan
New York, NY 10020 Stanley Asset Management Inc. Previously with Price
Date of Birth: 06/07/54 Waterhouse LLP (accounting).
Paul R. Wolkenberg Vice President Executive Vice President of VKAC, Asset Management and the
Date of Birth: 11/10/44 Distributor. President, Chief Executive Officer and a
Director of ACCESS. Director or officer of certain other
subsidiaries of VKAC. Vice President of each of the funds in
the Fund Complex and certain other investment companies
advised by the Adviser, Asset Management or their
affiliates.
Edward C. Wood, III Vice President and Chief Senior Vice President of the Adviser and Asset Management.
Date of Birth: 01/11/56 Financial Officer Vice President and Chief Financial Officer of each of the
funds in the Fund Complex and certain other investment
companies advised by the Adviser, Asset Management or their
affiliates.
Curtis W. Morell Vice President and Chief Senior Vice President of the Adviser and Asset Management.
Date of Birth: 08/04/46 Accounting Officer Vice President and Chief Accounting Officer of each of the
funds in the Fund Complex and certain other investment
companies advised by the Adviser, Asset Management or their
affiliates.
John L. Sullivan Treasurer First Vice President of the Adviser and Asset Management.
Date of Birth: 08/20/55 Treasurer of each of the funds in the Fund Complex and
certain other investment companies advised by the Adviser,
Asset Management or their affiliates.
Tanya M. Loden Controller Vice President of the Adviser and Asset Management.
Date of Birth: 11/19/59 Controller of each of the funds in the Fund Complex and
other investment companies advised by the Adviser, Asset
Management or the affiliates.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND
DATE OF BIRTH POSITION WITH COMPANY PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- --------------------------- --------------------------------------------------------------------------------------
<S> <C> <C>
Nicholas Dalmaso Assistant Secretary Vice President and Senior Attorney of VKAC, Vice President
Date of Birth: 03/01/65 and Assistant Secretary of the Adviser, Asset Management and
the Distributor. Officer of certain other subsidiaries of
VKAC. Assistant Secretary of each of the funds in the Fund
Complex and other investment companies advised by the
Adviser, Asset Management or the affiliates.
Huey P. Falgout, Jr. Assistant Secretary Assistant Vice President and Senior Attorney of VKAC,
Date of Birth: 11/15/63 Assistant Vice President and Assistant Secretary of the
Adviser, Asset Management, the Distributor and ACCESS.
Officer of certain other subsidiaries of VKAC, Assistant
Secretary of each of the funds in the Fund Complex and other
investment companies advised by the Adviser, Asset
Management or the affiliates.
Scott E. Martin Assistant Secretary Senior Vice President, Deputy General Counsel and Assistant
Date of Birth: 08/20/56 Secretary of VKAC, Senior Vice President, Deputy General
Counsel and Secretary of the Adviser, Asset Management, the
Distributor and ACCESS. Officer of certain other
subsidiaries of VKAC. Prior to November 1996, Senior Vice
President, Deputy General Counsel and Assistant Secretary of
VKAC Holding. Assistant Secretary of each of the funds in
the Fund Complex and other investment companies advised by
the Adviser, Asset Management or the affiliates.
Weston B. Wetherell Assistant Secretary Vice President, Associate General Counsel and Assistant
Date of Birth: 06/15/56 Secretary of VKAC, the Adviser, Asset Management and the
Distributor. Officer of certain other subsidiaries of VKAC.
Assistant Secretary of each of the funds in the Fund Complex
and other investment companies advised by the Adviser, Asset
Management or the affiliates.
Joanna Haigney Assistant Treasurer Assistant Vice President, Senior Manager of Fund
73 Tremont Street Administration and Compliance Services, Chase Global Funds
Boston, MA 02108 Services Company; Officer of various investment companies
Date of Birth: 10/10/66 managed by Morgan Stanley Asset Management Inc. Previously
with Coopers & Lybrand LLP.
Steven M. Hill Assistant Treasurer Assistant Vice President of the Adviser and Asset
Date of Birth: 10/16/64 Management. Assistant Treasurer of each of the funds in the
Fund Complex and other investment companies advised by the
Adviser, Asset Management or the affiliates.
M. Robert Sullivan Assistant Controller Assistant Vice President of the Adviser and Asset
Date of Birth: 03/30/33 Management. Assistant Controller of each of the funds in the
Fund Complex and other investment companies advised by the
Adviser, Asset Management or the affiliates.
</TABLE>
- --------------
* Such Directors are "interested persons" (within the meaning of Section
2(a)(19) of the 1940 Act). Messrs. DeMartini and Powell are interested persons
of the Adviser and the Funds because of their affiliation with the Adviser.
Mr. Whalen is an interested person of the Funds by reason of his firm acting
as legal counsel to the Funds.
Prior to the election of the current Directors on July 2, 1997, Messrs.
Barton M. Biggs, John D. Barrett, II, Gerard E. Jones, Warren J. Olsen, Andrew
McNally, IV, Samuel T. Reeves, Fergus Reid, Frederick O. Robertshaw and
Frederick B. Whittemore (the "Prior Directors") served as directors to the
Company. Until July 2, 1997, the Company was part of an open-end fund complex,
which also consisted of Morgan Stanley Institutional Fund, Inc. and Morgan
Stanley Universal Funds, Inc. (the "Prior Complex"). For the fiscal year ended
June 30, 1997, each director who was not an "interested person" of the Funds was
being paid an annual aggregate fee of $55,000 plus expenses for service as a
director of the funds in the Prior Complex and an additional annual aggregate
fee of $10,000 for service on the audit committee of the funds in the Prior
Complex. For the fiscal year ended June 30, 1997, individual trustees received
aggregate fees from the Funds and from the Prior Complex as shown in the table
below entitled "Compensation Table--Prior Directors".
As of the date of this SAI, each of the Directors is a director/trustee of
each of the 65 operating funds in the Fund Complex which includes the Funds (for
purposes of this action, the "MS Funds"), other open-end funds advised by the
Adviser (each a "VK Fund" and collectively the "VK Funds") and open-end funds
advised by Asset Management (each an "AC Fund" and
29
<PAGE>
collectively the "AC Funds"). Each director/trustee who is not an affiliated
person of VKAC, the Adviser, Asset Management, the Distributor, ACCESS or Morgan
Stanley (each a "Non-Affiliated Trustee") is compensated by an annual retainer
and meeting fees for services to the funds in the Fund Complex. Each fund in the
Fund Complex provides a deferred compensation plan to its Non-Affiliated
Trustees that allows director/trustees to defer receipt of their compensation
and earn a return on such deferred amounts based upon the return of the common
shares of the funds in the Fund Complex as more fully described below. As of the
date hereof, each VK Fund and AC Fund in the Fund Complex provides a retirement
plan to its Non-Affiliated Trustees that provides Non-Affiliated Trustees with
compensation after retirement, provided that certain eligibility requirements
are met as more fully described below. As of January 1, 1998, it is anticipated
that each Fund in the Fund Complex, except the money market series of the MS
Funds, will provide such a retirement plan to its Non-Affiliated Trustee.
The trustees recently reviewed and adopted a standardized compensation and
benefits program for each fund in the Fund Complex. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes an annual retainer in
an amount equal to $50,000 per calendar year, due in four quarterly installments
on the first business day of each quarter. Payment of the annual retainer is
allocated among the funds in the Fund Complex (except the money market series of
the MS Funds) on the basis of the relative net assets of each fund as of the
last business day of the preceding calendar quarter. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes a per meeting fee from
each fund in the Fund Complex (except the money market series of the MS Funds)
in the amount of $200 per quarterly or special meeting attended by the
Non-Affiliated Trustee, due on the date of the meeting, plus reasonable expenses
incurred by the Non-Affiliated Trustee in connection with his or her services as
a trustee, provided that no compensation will be paid in connection with certain
telephonic special meeting.
For the period until December 31, 1997, the compensation of each
Non-Affiliated Trustee from each VK Fund in the Fund Complex includes an annual
retainer in an amount equal to $2,500 per calendar year, due in four quarterly
installments on the first business day of each calendar quarter. Each
Non-Affiliated Trustee receives a per meeting fee from each VK Fund in the
amount of $125 per regular quarterly meeting attended by the Non-Affiliated
Trustee, due on the date of such meeting, plus reasonable expenses incurred by
the Non-Affiliated Trustee in connection with his or her services as a
director/trustee, provided that no compensation will be paid in connection with
certain telephonic special meetings.
For the period until December 31, 1997, the compensation of each
Non-Affiliated Trustee from the AC Funds in the Fund Complex includes an annual
retainer in an amount equal to $35,000 per calendar year, due in four quarterly
installments on the first business day of each calendar quarter. The AC Funds
pay each Non-Affiliated Trustee a per meeting fee in the amount of $2,000 per
regular quarterly meeting attended by the Non-Affiliated Trustee, due on the
date of such meeting, plus reasonable expenses incurred by the Non-Affiliated
Trustee in connection with his or her services as a director/trustee. Payment of
the annual retainer and the regular meeting fee is allocated among all of the AC
Funds (i) 50% on the basis of the relative net assets of each AC Fund to the
aggregate net assets of all the AC Funds and (ii) 50% equally to each AC Fund,
in each case as of the last business day of the preceding calendar quarter. Each
AC Fund which is the subject of a special meeting of the director/trustees
generally pays each Non-Affiliated Trustee a per meeting fee in the amount of
$125 per special meeting attended by the Non-Affiliated Trustee, due on the date
of such meeting, plus reasonable expenses incurred by the Non-Affiliated Trustee
in connection with his on her services as a director/trustee, provided that no
compensation will be paid in connection with certain telephonic special
meetings.
For the period from July 2, 1997 up to and including December 31, 1997, the
compensation of each Non-Affiliated Trustee from the MS Funds is intended to be
based generally on the compensation amounts and methodology used by such funds
prior to their joining the current Fund Complex on July 2, 1997. Each
trustee/director was elected as a director of the MS Funds on July 2, 1997.
Prior to July 2, 1997, the MS Funds were part of another fund complex (the
"Prior Complex") and the former directors of the MS Funds were paid an aggregate
fee allocated among the funds in the Prior Complex that resulted in individual
directors receiving total compensation between approximately $8,000 to $10,000
from the MS Funds during such funds' last fiscal year.
Each Non-Affiliated Trustee generally can elect to defer receipt of all or a
portion of the compensation earned by such Non-Affiliated Trustee until
retirement. Amounts deferred are retained by the fund and earn a rate of return
determined by reference to the return on the common shares of such fund or other
funds in the Fund Complex as selected by the respective Non-
Affiliated Trustee, with the same economic effect as if such Non-Affiliated
Trustee had invested in one or more funds in the Fund Complex. To the extent
permitted by the 1940 Act, the fund may invest to securities of those selected
by the Non-Affiliated Trustees in order to match the deferred compensation
obligation. The deferred compensation plan is not funded and obligations
thereunder represent general unsecured claims against the general assets of the
Company.
Each VK Fund and AC Fund in the Fund Complex has adopted a retirement plan.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
director/trustee's compensation from the fund prior to such Non-Affiliated
Trustee's retirement, has at least 10 years of service (including years of
service prior to adoption of the retirement plan) and retires at or after
attaining the age of 60, is eligible to receive a retirement benefit equal to
$2,500 per year for each of the ten years following such director/trustee's
retirement from the fund. Trustees retiring prior to the age of 60 or with fewer
than 10 years but more than 5 years of service may receive reduced retirement
benefits from the fund. The retirement plan contains a Fund Complex retirement
benefit cap of $60,000 per year.
30
<PAGE>
The following table shows aggregate compensation paid to each of the
Company's Prior Directors by the Company and the Prior Complex, respectively,
for the fiscal year from July 1, 1996 to June 30, 1997.
COMPENSATION TABLE
PRIOR DIRECTORS
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS ESTIMATED ANNUAL FROM PRIOR COMPLEX
COMPENSATION ACCRUED AS PART OF BENEFITS UPON PAID TO
NAME OF PERSON, POSITION FROM FUNDS FUND 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.......................................... $10,070 $0 $0 $73,767
Gerard E. Jones,*
Director.......................................... $10,070 $0 $0 $80,867
Warren J. Olsen,*
Director and President............................ $ 0 $0 $0 $ 0
Andrew McNally, IV,*
Director.......................................... $ 0+ $0 $0 $63,767
Samuel T. Reeves,*
Director.......................................... $ 0+ $0 $0 $63,767
Fergus Reid,*
Director.......................................... $ 0+ $0 $0 $80,867
Frederick O. Robertshaw,**
Director.......................................... $ 8,714 $0 $0 $63,767
</TABLE>
- --------------
* Elected Director as of June 28, 1995; retired as of July 2, 1997.
+ The total amount of deferred compensation for Samuel T. Reeves, Fergus Reid
and Andrew McNally, IV was $8,714, $10,070, and $8,714, respectively.
++ The Prior Complex consisted of four investment companies including the
Company.
31
<PAGE>
The following table shows aggregate compensation paid to each of the
Company's current Directors by the Company for the fiscal year from July 1, 1996
to June 30, 1997 and from the Fund Complex for the calendar year ended December
31, 1996.
COMPENSATION TABLE
CURRENT DIRECTORS
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS ESTIMATED ANNUAL FROM FUND COMPLEX
COMPENSATION ACCRUED AS PART OF BENEFITS UPON PAID TO
NAME FROM FUNDS EXPENSES RETIREMENT DIRECTOR/TRUSTEE+
- -------------------------------------------------- --------------- ------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
J. Miles Branagan*................................ $ 0** $0 $0 $104,875
Richard M. DeMartini*............................. $ 0** $0 $0 16,875
Linda Hutton Heagy*............................... $ 0** $0 $0 104,875
R. Craig Kennedy*................................. $ 0** $0 $0 104,875
Jack E. Nelson*................................... $ 0** $0 $0 97,875
Don G. Powell*.................................... $ 0** $0 $0 22,000
Jerome L. Robinson*............................... $ 0** $0 $0 101,625
Phillip Rooney*................................... $ 0** $0 $0 22,000
Dr. Fernando Sisto*............................... $ 0** $0 $0 104,875
Wayne W. Whalen*.................................. $ 0** $0 $0 104,875
</TABLE>
- --------------
* Elected Director as of July 2, 1997.
** Director received no compensation from the Funds for the fiscal year ended
June 30, 1997. See discussion preceding the table regarding anticipated
compensation for the fiscal year from July 1, 1997 to June 30, 1998.
+ The amounts in this column represent aggregate compensation from the 51 funds
in the Fund Complex as of December 31, 1996. Because funds in the Fund Complex
have different fiscal year-ends, the information for this column is presented
on a calendar year basis. The amounts for the calendar year ending December
31, 1997 will most likely be higher reflecting the addition of the Funds to
the Fund Complex. The Adviser and its affiliates also serve as investment
adviser for other investment companies; however, with the exception of Messrs.
Powell and Whalen, the director/trustees are not director/trustees of such
investment companies. Combining the Fund Complex with other investment
companies advised by the Adviser and its affiliates, Mr. Whalen received total
compensation of $243,375 during the calendar year ended December 31, 1996.
As of October 16, 1997, the Directors and officers as a group owned less
than 1% of the shares of the Funds.
INVESTMENT ADVISORY AND ADMINISTRATIVE AGREEMENTS
The Adviser is an indirect wholly-owned subsidiary of Morgan Stanley, Dean
Witter, Discover & Co. ("MSDWD"). The Adviser is a registered investment adviser
under the Investment Advisers Act of 1940, as amended, and has its offices at
One Parkview Plaza, Oakbrook Terrace, IL 60181 and 2800 Post Oak Boulevard,
Houston, TX 77056. Pursuant to the advisory agreement (the "Advisory Agreement")
between the Adviser and the Company, the Adviser provides investment services to
the Funds. Additionally, pursuant to the administration agreement (the
"Administration Agreement") between the Adviser and the Company, the Adviser
(the "Administrator") provides administrative services to the Funds. The
Advisory Agreement and Administration Agreement became effective as of July 2,
1997. The current Advisory Agreement and Administration Agreement are described
in more detail in the Company's prospectus. Prior to July 2, 1997, MSAM
(described below) was the adviser and administrator of each of the Funds except
Mid Cap Growth and Value Funds which were advised by MAS (described below). The
fees and expenses under the new Advisory Agreement and new Administration
Agreement are substantially similar to the predecessor agreements.
MSAM is an indirect wholly-owned subsidiary of MSDWD and acts as sub-adviser
pursuant to an investment sub-advisory agreement between MSAM and the Adviser to
each of the Company's Funds, other than the Mid Cap Growth and Value Funds. The
principal offices of the MSAM are located at 1221 Avenue of the Americas, New
York, NY 10020. As compensation for advisory services to the non-money Funds of
the Company for the fiscal years ended June 30, 1995, June 30, 1996 and June 30,
1997, MSAM, the prior adviser, earned fees of approximately $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) and $10,409,000 (and voluntarily waived a portion of such fees equal
to approximately $1,716,000), respectively. Further, for the fiscal years ended
June 30, 1995, June 30, 1996 and June 30, 1997, MSAM, as adviser for the PCS
Money Market Portfolio (the "Predecessor Money Market Portfolio") the
predecessor to the Money Market Fund received $611,754, $759,398 and $882,000,
respectively (net of voluntary fee waivers of $87,105, $153,797 and $579,000,
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 $897,867,
$395,312 and $542,000, respectively (net of voluntary fee waivers of $0, $45,251
and $392,000, respectively). For the fiscal years ended June 30, 1995, June 30,
1996 and June 30, 1997, the Company paid administrative fees to MSAM, the prior
administrator to the Funds, of approximately $1,500,000, $2,273,000 and
$3,187,000, respectively. For the fiscal years ended June 30, 1995 and June 30,
1996 and for the fiscal
32
<PAGE>
period from July 1, 1996 to September 26, 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 $346,829, $273,252 and $73,440,
respectively.
MAS is an indirect wholly-owned subsidiary of MSDWD with its principal
offices located at One Tower Bridge, West Conshohocken, PA 19428. Pursuant to an
investment sub-advisory agreement between MAS and the Adviser, MAS provides
sub-advisory services to each of the Mid Cap Growth and Value Funds. 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. MAS did not receive any compensation as an adviser, sub-adviser or
administrator to the Funds from the Company prior to the end of the fiscal year
ended June 30, 1997.
Under sub-administration agreements between the Administrator 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. For the fiscal years ended June 30,
1995, June 30, 1996 and June 30, 1997, the prior Administrator paid
Sub-Administration fees to Chase of approximately $2,004,678, $2,028,244 and
$2,011,782, respectively. CGFSC provides operational and administrative services
to investment companies with approximately $116 billion in assets and having
approximately 165,479 shareholder accounts as of June 30, 1997. CGFSC's business
address is 73 Tremont Street, Boston, MA 02108-3913.
DISTRIBUTION OF FUND SHARES
Prior to January 1, 1997, Morgan Stanley & Co. Incorporated ("Morgan
Stanley"), a wholly-owned subsidiary of MSDWD, served as the distributor of the
Company's shares pursuant to a Distribution Agreement with the Company and a
Plan of Distribution for each Money Market Fund and each class of each Non-Money
Fund 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 at the same meeting.
33
<PAGE>
Morgan Stanley served as distributor of the Company until December 31, 1996
and the Distributor served as the distributor for the Company from January 1,
1997 through the fiscal year ended June 30, 1997. As compensation for providing
distribution services to the Company for the fiscal year ended June 30, 1997,
the Distributor and Morgan Stanley received aggregate fees of approximately
$8,204,000 which were attributable approximately as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JUNE 30, 1997
FUND NAME (000)
- ------------------------------------------------------------------------------------------------- -------------------
<S> <C>
Global Equity Allocation Fund -- Class A......................................................... $ 160
Global Equity Allocation Fund -- Class B......................................................... 238
Global Equity Allocation Fund -- Class C......................................................... 679
Global Fixed Income Fund -- Class A.............................................................. 16
Global Fixed Income Fund -- Class B.............................................................. 16
Global Fixed Income Fund -- Class C.............................................................. 26
Asian Growth Fund -- Class A..................................................................... 509
Asian Growth Fund -- Class B..................................................................... 602
Asian Growth Fund -- Class C..................................................................... 1,424
Emerging Markets Fund -- Class A................................................................. 229
Emerging Markets Fund -- Class B................................................................. 180
Emerging Markets Fund -- Class C................................................................. 465
Latin American Fund -- Class A................................................................... 81
Latin American Fund -- Class B................................................................... 45
Latin American Fund -- Class C................................................................... 87
American Value Fund -- Class A................................................................... 58
American Value Fund -- Class B................................................................... 43
American Value Fund -- Class C................................................................... 233
Worldwide High Income Fund -- Class A............................................................ 152
Worldwide High Income Fund -- Class B............................................................ 491
Worldwide High Income Fund -- Class C............................................................ 351
Aggressive Equity Fund -- Class A................................................................ 28
Aggressive Equity Fund -- Class B................................................................ 105
Aggressive Equity Fund -- Class C................................................................ 55
High Yield Fund -- Class A....................................................................... 13
High Yield Fund -- Class B....................................................................... 57
High Yield Fund -- Class C....................................................................... 43
U.S. Real Estate Fund -- Class A................................................................. 19
U.S. Real Estate Fund -- Class B................................................................. 45
U.S. Real Estate Fund -- Class C................................................................. 22
International Magnum Fund -- Class A............................................................. 21
International Magnum Fund -- Class B............................................................. 68
International Magnum Fund -- Class C............................................................. 58
Japanese Equity Fund -- Class A(1)............................................................... N/A
Japanese Equity Fund -- Class B(1)............................................................... N/A
Japanese Equity Fund -- Class C(1)............................................................... N/A
Growth and Income Fund -- Class A(1)............................................................. N/A
Growth and Income Fund -- Class B(1)............................................................. N/A
Growth and Income Fund -- Class C(1)............................................................. N/A
European Equity Fund -- Class A(1)............................................................... N/A
European Equity Fund -- Class B(1)............................................................... N/A
European Equity Fund -- Class C(1)............................................................... N/A
Money Market Fund(2)............................................................................. 981
Tax-Free Money Market Fund(1).................................................................... N/A
Government Obligations Money Market Fund(2)...................................................... 604
Equity Growth Fund -- Class A(1)................................................................. N/A
Equity Growth Fund -- Class B(1)................................................................. N/A
Equity Growth Fund -- Class C(1)................................................................. N/A
Global Equity Fund -- Class A(1)................................................................. N/A
Global Equity Fund -- Class B(1)................................................................. N/A
Global Equity Fund -- Class C(1)................................................................. N/A
Emerging Markets Debt Fund -- Class A(1)......................................................... N/A
Emerging Markets Debt Fund -- Class B(1)......................................................... N/A
Emerging Markets Debt Fund -- Class C(1)......................................................... N/A
Mid Cap Growth Fund -- Class A(1)................................................................ N/A
Mid Cap Growth Fund -- Class B(1)................................................................ N/A
Mid Cap Growth Fund -- Class C(1)................................................................ N/A
Value Fund -- Class A(1)......................................................................... N/A
Value Fund -- Class B(1)......................................................................... N/A
Value Fund -- Class C(1)......................................................................... N/A
</TABLE>
- ------------------
(1) Not operational as of June 30, 1997.
(2) As compensation for providing distribution services to the Predecessor
Portfolios for the period from July 1, 1996 to September 26, 1996, Morgan
Stanley received fees from the Predecessor Money Market Portfolio in the
amount of $146,803 and from the Predecessor Government Obligations Money
Market Portfolio in the amount of $98,828. Such fees are included in the
amounts listed above.
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 require that all employees of the Adviser and
Sub-Advisers preclear any personal securities investment (with limited
exceptions, such as government securities). The preclearance
34
<PAGE>
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 or Sub-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 October 16, 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:
AMERICAN VALUE FUND: Charles Schwab & Co., Inc., Exclusive Benefit of its
Customers, 101 Montgomery Street, San Francisco, CA 94104-4122 owned 7.118% of
the total outstanding Class A shares of such Fund.
Merrill Lynch, Pierce, Fenner & Smith for the Sole Benefit of its Customers,
4800 Deer Lake Dr. East 3rd Floor, Jacksonville, FL 32246-6484, owned 11.140% of
the total outstanding Class B shares of such Fund.
The following each held the percentage indicated of the total outstanding
Class C shares of such Fund: Merrill Lynch, Pierce, Fenner & Smith for the Sole
Benefit of its Customers, 4800 Deer Lake Dr. East, 3rd Floor, Jacksonville, FL
32246-6484, 6.538% and Morgan Stanley Group Inc., 1221 Avenue of the Americas,
New York, NY, 10020-1001, 6.130%.
GLOBAL EQUITY ALLOCATION FUND: Scott & Stringfellow PSP, Mutual
Funds/Clearing & Custody Account, P.O. Box 1575, Richmond, VA 23213, owned
5.253% 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 34.20% 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 5.945% of the total outstanding Class A
shares of such Fund.
The following each held the percentage indicated of the total outstanding
Class B shares of such Fund: ADVEST, Inc., 90 State House Square, Hartford, CT
06103-3702, 9.934%; Piper Jaffray as Custodian FBO Mary Lou Concialdi, 222 So.
9th St., Minneapolis, MN 55402-3389, 7.312%; Anna E. Fulmer Trustee for Anna E.
Fulmer Trust, U/A/D 8/2/93, 1124 Marine Way West, West Palm Beach, FL,
33408-3630, 7.051%; and Frank Burstein, 211 Linden Dr., Elkins Park, PA
19027-1341, 5.184%.
The following each held the percentage indicated of the total outstanding
Class C shares of such Fund: Geraldine M. Nemeth, Trustee, Trust U/A Dated
12/5/87, Geraldine M. Falkiner 1987, 1482 Indian Trails Parkway, Baraboo, WI
53913, 5.593%; Thomas B. Congdon and Constance B. Congdon, Joint Tenants, 4 Pine
St., Nantucket, MA 02554-3721, 5.222% and Smith Barney, Inc., 388 Greenwich
Street, New York, NY 10613-2375, 5.064%.
EMERGING MARKETS FUND: Charles Schwab & Co., Inc., Exclusive Benefit of its
Customers, 101 Montgomery Street, San Francisco, CA 94104, owned 29.877% of the
total outstanding Class A shares of such Fund.
GROWTH AND INCOME FUND: Van Kampen American Capital Generations Variable
Annuities, c/o American General Life Insurance Company, P.O. Box 1591, Houston,
TX 77251 owned 93.182% of the total outstanding Class B shares of such Fund; Van
Kampen American Capital Distributors Inc., One Chase Manhattan Plaza, 37th
Floor, New York, NY 10005 owned 6.818% of the total outstanding Class B shares
of such Fund.
HIGH YIELD FUND: Morgan Stanley Group, Inc., 1221 Avenue of the Americas,
New York, NY 10020, owned 39.419% of the total outstanding Class A shares of
such Fund and 26.384% of the total outstanding Class C shares of such Fund.
Nancy J. Dinardo Trust, Dinardo Family Trust, DTD 09/01/88, 323 North Ave,
Bridgeport, CT 06808-6126 owned 6.816% of the total outstanding Class C shares
of such Fund.
LATIN AMERICAN FUND: Merrill Lynch, Pierce, Fenner & Smith for the Sole
Benefit of its Customers, 4800 Deer Lake Drive East, 3rd Floor, Jacksonville, FL
32246-6484, owned 10.293% of the total outstanding Class C shares of such Fund.
U.S. REAL ESTATE FUND: The following each held the percentage indicated of
the total outstanding Class C shares of such Fund: Dain Bosworth Inc., FBO
Lancaster Ventures LLC, P.O. Box 6368, Lincoln, NE 58508-0368, 11.158% and MFSC
FEBO #CL7-625647, Hironaru Okamoto, Shigeno Okamoto, 32 Beverly Rd, Great Neck,
NY, 11021-1330, 7.443%.
INTERNATIONAL MAGNUM FUND: Morgan Stanley Group, Inc., 1221 Avenue of the
Americas, New York, NY 10020, owned 10.216% of the total outstanding Class A
shares of such Fund; Wachovia Bank NA Cust, FBO East Carolina University
Endowment and Foundation, 301 N. Main Street, P.O. Box 3073, Winston Salem, NC
27150, owned 9.190% 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 94104-4122, owned 5.854% of the total outstanding
Class A shares of such Fund.
Van Kampen American Capital Trust Company, 2800 Post Oak Blvd, Houston,
Texas 77056, owned 5.406% of the total outstanding Class B shares of such Fund.
MONEY MARKET FUND: PFPC, Inc., 400 Bellevue Parkway, 2nd Floor, Wilmington,
DE 19809, owned 99.514% of the total outstanding shares of the Fund.*
GOVERNMENT OBLIGATIONS MONEY MARKET FUND: PFPC, Inc., 400 Bellevue Parkway,
2nd Floor, Wilmington, DE 19809, owned 99.979% of the total outstanding shares
of the Fund.*
35
<PAGE>
WORLDWIDE HIGH INCOME FUND: The following each held the percentage
indicated of the total outstanding Class A shares of such Fund: FTC & Co., P.O.
Box 173736, Denver, CO 80217-3738, 16.548% and Charles Schwab & Co., Inc.,
Exclusive Benefit of its Customers, 101 Montgomery Street, San Francisco, CA
94104-4122, 8.338%.
TAX-FREE MONEY MARKET FUND: N/A
JAPANESE EQUITY 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: Van Kampen American Capital Trust Company, 2800 Post Oak Blvd,
Houston, Texas 77056, owned 5.406% of the total outstanding Class C shares of
such Fund.
*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 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.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement and Investment Sub-Advisory Agreements
authorize each of the Adviser and Sub-Advisers (collectively for this discussion
only, the "Adviser") to select the brokers or dealers that will execute the
purchases and sales of investment securities for the Funds and direct the
Adviser to use its best efforts to obtain the best available price and
36
<PAGE>
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, 1995, June 30, 1996 and June 30, 1997, the Company paid brokerage
commissions of approximately $115,622, $180,458 and $464,192, respectively, to
the Morgan Stanley, an affiliated broker-dealer. For the fiscal years ended June
30, 1995, June 30, 1996 and June 30, 1997, commissions paid to Morgan Stanley
represented approximately 7%, 6% and 7.98%, respectively, of the total amount of
brokerage commissions paid in such period and which were paid on transactions
that represented 3%, 2% and 7.10%, 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, the Sub-Advisers 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>
37
<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, 1997 for the one-year period ended June
30, 1997 and for the period from the inception of each Fund through June 30,
1997 are as follows:
<TABLE>
<CAPTION>
ONE-YEAR INCEPTION
INCEPTION PERIOD ENDED THROUGH JUNE
DATE JUNE 30, 1997 30, 1997
--------- ------------- -------------
<S> <C> <C> <C>
Global Equity Allocation Fund
Class A Shares...................... 01/04/93 20.61% 15.90%
Class B Shares(1)................... 08/01/95 19.64% 19.77%
Class C Shares(1)................... 01/04/93 19.69% 15.04%
Global Fixed Income Fund
Class A Shares...................... 01/04/93 4.27% 6.48%
Class B Shares(1)................... 08/01/95 3.48% 3.78%
Class C Shares(1)................... 01/04/93 3.48% 5.64%
Asian Growth Fund
Class A Shares...................... 06/23/93 (1.10)% 9.89%
Class B Shares(1)................... 08/01/95 (1.79)% 0.00%(2)
Class C Shares(1)................... 06/23/93 (1.79)% 9.11%
American Value Fund
Class A Shares...................... 10/18/93 30.68% 16.23%
Class B Shares(1)................... 08/01/95 29.77% 21.72%
Class C Shares(1)................... 10/18/93 29.67% 15.32%
Worldwide High Income Fund
Class A Shares...................... 04/21/94 30.29% 18.35%
Class B Shares(1)................... 08/01/95 29.14% 24.02%
Class C Shares(1)................... 04/21/94 29.12% 17.39%
Emerging Markets Fund
Class A Shares...................... 07/06/94 13.54% 4.66%
Class B Shares(1)................... 08/01/95 12.67% 11.57%
Class C Shares(1)................... 07/06/94 12.66% 3.87%
Latin American Fund
Class A Shares...................... 07/06/94 57.32% 19.10%
Class B Shares(1)................... 08/01/95 56.17% 44.31%
Class C Shares(1)................... 07/06/94 56.04% 18.10%
Aggressive Equity Fund
Class A Shares...................... 01/02/96 28.93% 34.43%
Class B Shares...................... 01/02/96 28.01% 33.53%
Class C Shares...................... 01/02/96 28.04% 33.48%
U.S. Real Estate Fund
Class A Shares...................... 05/01/96 35.75% 35.17%
Class B Shares...................... 05/01/96 34.58% 33.88%
Class C Shares...................... 05/01/96 34.56% 34.05%
High Yield Fund
Class A Shares...................... 05/01/96 18.12% 15.67%
Class B Shares...................... 05/01/96 17.22% 14.83%
Class C Shares...................... 05/01/96 17.21% 14.82%
International Magnum Fund
Class A Shares...................... 07/01/96 17.30% 17.30%
Class B Shares...................... 07/01/96 16.40% 16.40%
Class C Shares...................... 07/01/96 16.27% 16.27%
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>
38
<PAGE>
<TABLE>
<CAPTION>
ONE-YEAR INCEPTION
INCEPTION PERIOD ENDED THROUGH JUNE
DATE JUNE 30, 1997 30, 1997
--------- ------------- -------------
<S> <C> <C> <C>
European 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
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
Mid Cap 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 4.60% 4.64%
Tax-Free Money Market Fund.............. N/A N/A N/A
Government Obligations Money Market
Fund................................... 03/12/92 4.53% 3.72%
</TABLE>
- ------------------
The Japanese Equity, Growth and Income, European Equity, Equity Growth, Global
Equity, Emerging Markets Debt, Mid Cap Growth, Value and Tax-Free Money Market
Funds had not commenced operations in the fiscal year ended June 30, 1997.
(1) 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.
(2) Amount is less than 0.01.
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 respective current yields for the following Funds 30-day period ended
June 30, 1997 were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
FUND NAME SHARES SHARES SHARES
- ----------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Global Fixed Income Fund 3.79% 3.23% 3.23%
Worldwide High Income Fund 7.76% 7.40% 7.40%
High Yield Fund 7.24% 6.84% 6.84%
</TABLE>
39
<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
Money Market Fund and Government Obligations Money Market Fund for the 7-day
period ended June 30, 1997 were 4.69% and 4.62% 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 Fund 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 Money Market Fund and Government Obligations Money
Market Fund for the 7-day period ended June 30, 1997 were 4.80% and 4.73%,
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 1997 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-$24,650 $0-$41,200 15% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41% 10.59% 11.76% 12.94%
$24,650-$59,750 $41,200-$99,600 28% 4.17% 5.56% 6.94% 8.33% 9.72% 11.11% 12.50% 13.89% 15.28%
$59,750-$124,650 $99,600-$151,750 31% 4.35% 5.80% 7.25% 8.70% 10.14% 11.59% 13.04% 14.49% 15.94%
$124,650-$271,050 $151,750-$271,050 36% 4.69% 6.25% 7.81% 9.38% 10.94% 12.50% 14.06% 15.63% 17.19%
$271,050 and up $271,050 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 1997 Federal Income Tax after deductions and exemptions,
not indexed for 1997 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.
(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.
40
<PAGE>
(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 Index -- 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 Index -- 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.
(w) Savings and Loan Historical Interest Rates -- as published in the United
States Savings & Loan League Fact Book.
41
<PAGE>
(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.
(jj) Russell 2500 Index -- comprised of the bottom 500 stocks in the Russell
1000 Index which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately $1.3
billion.
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
42
<PAGE>
inflation (based on the Consumer Price Index), and combinations of various
capital markets. The performance of these capital 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, 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 or its affiliates; and the
portfolio managers' goals, strategies and investment techniques.
The Funds' advertisements may discuss economic and political conditions of
the United States 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, Asia, 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 Funds 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.
From time to time marketing materials may provide a portfolio manager
update, an adviser update and discuss general economic conditions and outlooks.
The Funds' marketing materials may also show each Fund's asset class
diversification, top five sector holdings and ten largest holdings. Materials
may also mention how the Adviser believes the Fund compares relative to other
funds advised by the Adviser or distributed by the Distributor. Materials may
also discuss the Dalbar Financial Services study from 1984 to 1994 which
examined investor cash flow into and out of all types of mutual funds. The ten
year study found that investors who bought mutual fund shares and held such
shares outperformed investors who bought and sold. The Dalbar study conclusions
were consistent regardless if shareholders purchased their fund in direct or
sales force distribution channels. The study showed that investors working with
a professional representative have tended over time to earn higher returns than
those who invested directly. The Funds will also be marketed on the Internet.
43
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Company's Articles of Incorporation permit the Directors to issue 27.375
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, except as described in the Prospectuses, 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. 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. 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, Dean Witter, Discover & Co. 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
44
<PAGE>
modifiers 1, 2 and 3 in the Aa and A rating categories. The modifier 1 indicates
that the security ranks at a higher end of the rating category, modifier 2
indicates a mid-range rating and the modifier 3 indicates that the issue ranks
at the lower end of the rating category.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
EXCERPTS FROM STANDARD & POOR'S CORPORATION ("S&P") DESCRIPTION OF BOND
RATINGS:
AAA -- Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation and indicate an extremely strong capacity to pay principal
and interest.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only to a small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC -- Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
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.
45
<PAGE>
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.
46
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (92.3%)
AUSTRALIA (1.2%)
9,600 Amcor Ltd........................................ $ 64
5,200 Australian Gas Light Co., Ltd.................... 31
14,200 Australian National Industries Ltd............... 17
18,524 Boral Ltd........................................ 58
3,500 Brambles Industries Ltd.......................... 69
28,159 Broken Hill Proprietary Ltd...................... 414
8,110 Burns, Philip & Co., Ltd......................... 15
7,386 Coca-Cola Amatil Ltd............................. 96
16,181 Coles Myer Ltd................................... 84
4,800 CRA Ltd.......................................... 82
(a)10,550 Crown Ltd........................................ 17
16,300 CSR Ltd.......................................... 63
27,800 Fosters Brewing Corp............................. 52
18,051 General Property Trust........................... 36
9,255 Gio Australia Holdings Ltd....................... 29
18,537 Goodman Fielder Ltd.............................. 27
4,900 ICI Australia Ltd................................ 48
(a)3,600 Leighton Holdings Ltd............................ 18
3,926 Lend Lease Corp., Ltd............................ 83
24,389 MIM Holdings Ltd................................. 36
20,137 National Australia Bank Ltd...................... 289
4,346 Newcrest Mining Ltd.............................. 12
27,757 News Corp., Ltd.................................. 133
23,154 Normandy Mining Ltd.............................. 26
11,449 North Broken Hill Peko Ltd....................... 44
13,200 Pacific Dunlop Ltd............................... 39
14,000 Pioneer International Ltd........................ 54
3,300 Plutonic Resources Ltd........................... 10
2,900 Renison Goldfields Consolidated Ltd.............. 11
10,012 Santos Ltd....................................... 42
3,000 Smith (Howard) Ltd............................... 29
1,800 Sons of Gwalia Ltd............................... 7
9,499 Southcorp Holdings Ltd........................... 36
4,800 Tabcorp Holdings Ltd............................. 26
1,098 Westfield Trust.................................. 2
25,100 Westpac Banking Corp. Ltd........................ 151
14,690 WMC Ltd.......................................... 93
--------
2,343
--------
CANADA (4.5%)
5,800 Abitibi-Consolidated, Inc........................ 104
4,600 Agrium, Inc...................................... 53
6,800 Alcan Aluminum Ltd............................... 233
2,100 Avenor, Inc...................................... 41
8,200 Bank of Montreal................................. 320
7,500 Bank of Nova Scotia.............................. 329
13,200 Barrick Gold Corp................................ 287
20,100 BCE, Inc......................................... 559
10,300 Bombardier, Inc., 'A'............................ 233
4,300 CAE Inc.......................................... 34
1,800 Cameco Corp...................................... 68
12,900 Canadian Imperial Bank of Commerce............... 325
(a)3,700 Canadian Natural Resources Ltd................... 96
4,900 Canadian Occidental Petroleum Ltd................ 110
10,800 Canadian Pacific, Ltd............................ 307
2,900 Canadian Tire Corp., 'A'......................... 57
2,900 Cominco Ltd...................................... 77
(a)2,300 Corel Corp....................................... 15
1,900 Cott Corp........................................ 20
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
3,200 Dofasco, Inc..................................... $ 61
5,000 Domtar, Inc...................................... 44
4,900 Echo Bay Mines Ltd............................... 27
1,700 George Weston Ltd................................ 109
(a)7,700 Gulf Canada Resources, Ltd....................... 63
7,600 Imasco, Ltd...................................... 220
5,200 Imperial Oil Ltd................................. 266
5,000 Inco Ltd......................................... 149
1,800 IPL Energy, Inc.................................. 60
9,000 Laidlaw, Inc. 'B'................................ 124
2,200 Loewen Group, Inc................................ 76
4,900 MacMillan Bloedel Ltd............................ 67
2,200 Magna International, Inc., 'A'................... 132
6,000 Methanex Corp.................................... 56
2,500 Molson Companies Ltd., 'A'....................... 42
3,500 Moore Corp. Ltd.................................. 69
(a)4,900 Newbridge Networks Corp.......................... 210
7,600 Noranda, Inc..................................... 164
4,100 Norcen Energy Resources Ltd...................... 98
7,600 Northern Telecom Ltd............................. 685
17,000 Nova Corp........................................ 145
9,800 Petro............................................ 159
7,400 Placer Dome, Inc................................. 120
1,700 Potash Corp. of Saskatchewan Inc................. 128
4,200 Power Corp. of Canada............................ 103
(a)4,100 Provigo, Inc..................................... 23
4,300 Ranger Oil Ltd................................... 40
(a)4,100 Renaissance Energy Ltd........................... 114
(a)4,100 Repap Enterprises, Inc........................... 2
(a)6,000 Rogers Communication, Inc., 'B'.................. 38
9,700 Royal Bank of Canada............................. 439
(a)4,100 Talisman Energy, Inc............................. 126
3,700 Teck Corp., 'B'.................................. 75
11,100 The Seagram Co., Ltd............................. 446
18,000 Thomson Corp..................................... 415
7,500 Transcanada Pipelines, Ltd....................... 151
3,900 Westcoast Energy, Inc............................ 71
--------
8,585
--------
FRANCE (4.3%)
693 Accor S.A........................................ 104
2,750 Alcatel Alsthom.................................. 345
5,324 AXA S.A.......................................... 331
3,902 Banque Nationale de Paris RFD.................... 161
2,077 Banque Paribas................................... 144
750 BIC.............................................. 123
702 Bouygues......................................... 58
(a)482 Canal Plus....................................... 94
810 Carrefour S.A.................................... 589
1,700 Casino Guichard Perrachon........................ 84
25 Chargeurs International S.A...................... 1
500 Cie Bancaire S.A................................. 64
1,867 Cie de Saint-Gobain.............................. 272
67,520 Cie de Suez S.A.................................. 166
2,073 Cie Generale des Eaux............................ 266
5,650 Elf Aquitaine.................................... 610
750 Eridania Beghin-Say S.A.......................... 112
250 Essilor International............................ 67
1,568 Groupe Danone RFD................................ 259
1,239 Havas S.A........................................ 89
1,907 L'Air Liquide.................................... 303
</TABLE>
-----------------------
47
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FRANCE (CONT.)
<TABLE>
<C> <S> <C>
(a)1,342 L'Oreal.......................................... $ 566
2,243 Lafarge Coppee S.A............................... 140
585 Legrand S.A...................................... 103
1,905 LVMH Moet Hennessy Louis Vuitton................. 512
1,231 Lyonnaise des Eaux S.A........................... 124
3,287 Michelin (C.G.D.E.) 'B'.......................... 197
25 Pathe S.A........................................ 5
1,325 Pernod-Ricard.................................... 68
430 Pinault S.A...................................... 207
440 Promodes......................................... 171
1,155 PSA Peugeot Citroen S.A.......................... 112
6,762 Rhone-Poulenc S.A. 'A'........................... 276
60 Sagem............................................ 30
2,036 Sanofi S.A....................................... 200
2,997 Schneider S.A.................................... 160
729 Simco S.A........................................ 58
(a,d)30 Simco S.A. (New)................................. 2
65 Societe Eurafrance S.A........................... 27
1,589 Societe Generale................................. 177
125 Sodexho S.A...................................... 64
2,608 Thomson CSF S.A.................................. 67
4,705 Total S.A. 'B'................................... 476
5,590 Usinor Sacilor................................... 101
680 Worms et Compagnie............................... 40
--------
8,125
--------
GERMANY (5.1%)
900 adidas AG........................................ 101
(a)850 Agiv AG.......................................... 19
4,500 Allianz AG....................................... 962
50 AMB Aachener & Muenchener
Beteiligungs AG................................ 45
10,700 BASF AG.......................................... 395
13,600 Bayer AG......................................... 524
4,550 Bayerische Hypotheken Bank AG.................... 138
4,750 Bayerische Vereinsbank AG........................ 195
(a)1,600 Beiersdorf AG.................................... 86
(a)900 Bilfinger & Berger Bau AG........................ 38
150 Brau und Brunnen AG.............................. 12
550 CKAG Colonia Konz AG............................. 52
1,750 Continental AG................................... 44
9,200 Daimler-Benz AG.................................. 749
2,000 Degussa AG....................................... 106
9,200 Deutsche Bank AG................................. 540
38,770 Deutsche Telekom AG.............................. 953
8,050 Dresdner Bank AG................................. 282
850 Heidelberger Zement AG........................... 82
1,650 Hochtief AG...................................... 74
200 Karstadt AG...................................... 72
(a)1,150 Kloeckner-Humboldt-Deutz AG...................... 11
200 Linde AG......................................... 155
6,950 Lufthansa AG..................................... 134
250 MAN AG........................................... 78
650 Mannesmann AG.................................... 290
2,923 Merck KGAA....................................... 127
(a)1,860 METRO AG......................................... 203
153 Muenchener Rueckversicherungs (Registered)....... 434
300 Preussag AG...................................... 88
6,100 RWE AG........................................... 262
1,110 SAP AG........................................... 223
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
1,350 Schering AG...................................... $ 145
10,300 Siemens AG....................................... 617
(a)50 Starbag AG....................................... 5
750 Thyssen AG....................................... 180
9,050 VEBA AG.......................................... 511
550 Viag AG.......................................... 251
(a)128 Viag AG RFD...................................... 59
550 Volkswagen AG.................................... 417
--------
9,659
--------
HONG KONG (2.0%)
(a)10,000 Applied International Holdings Ltd............... 1
22,600 Bank of East Asia Ltd............................ 94
52,000 Cathay Pacific Airways Ltd....................... 108
37,000 Cheung Kong Holdings Ltd......................... 365
39,500 China Light & Power Co. Ltd...................... 224
28,000 Chinese Estate Holdings Ltd...................... 26
11,200 Giordano Holdings Ltd............................ 8
22,000 Hang Lung Development Corp....................... 40
31,100 Hang Seng Bank Ltd............................... 443
58,697 Hong Kong & China Gas Co......................... 117
3,200 Hong Kong Aircraft Engineering Co., Ltd.......... 12
22,500 Hong Kong Shanghai Hotels........................ 36
187,200 Hong Kong Telecomunications Ltd.................. 447
70,000 Hopewell Holdings Ltd............................ 44
61,000 Hutchison Whampoa Ltd............................ 528
17,000 Hysan Development Co............................. 50
7,000 Johnson Electric Holdings Ltd.................... 21
8,000 Miramar Hotel Investment Ltd..................... 15
30,133 New World Development Co., Ltd................... 180
26,000 Oriental Press Goup.............................. 11
7,000 Peregrine Investment Holdings.................... 14
28,000 Shangri-La Asia Ltd.............................. 34
22,961 Shun Tak Holdings Ltd............................ 14
30,000 South China Morning Post......................... 29
13,000 Stelux Holdings Ltd.............................. 3
38,000 Sun Hung Kai Properties Ltd...................... 457
25,500 Swire Pacific Ltd. 'A'........................... 230
8,000 Television Broadcasting Ltd...................... 36
37,000 Wharf Holdings Ltd............................... 160
6,000 Windsor Industrial............................... 2
4,300 Wing Lung Bank................................... 27
--------
3,776
--------
ITALY (2.8%)
25,672 Assicurazioni Generali S.p.A..................... 467
40,300 Banca Commerciale Italiana....................... 83
15,900 Banco Ambrosiano Veneto.......................... 46
5,660 Benetton Group S.p.A............................. 90
4,700 Cartiere Burgo S.p.A............................. 26
71,000 Credito Italiano S.p.A........................... 130
19,000 Edison S.p.A..................................... 95
222,000 Ente Nazionale Idrocarburi S.p.A................. 1,257
4,500 Falck............................................ 17
93,300 Fiat S.p.A....................................... 336
20,700 Fiat S.p.A. Di Risp NCS.......................... 39
(a)11,000 Impreglio S.p.A.................................. 7
24,600 Istituto Bancario San Paolo di Torina S.p.A...... 179
17,950 Istituto Mobiliare Italiano S.p.A................ 162
118,200 Istituto Nazionale delle Assicurazioni (INA)..... 180
6,800 Italcementi S.p.A................................ 42
</TABLE>
- --------------
48
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
ITALY (CONT.)
<TABLE>
<C> <S> <C>
4,650 Italcementi S.p.A. NCS........................... $ 11
19,400 Italgas.......................................... 63
6,565 La Rinascente S.p.A.............................. 36
14,000 Magneti Marelli S.p.A............................ 24
33,500 Mediaset S.p.A................................... 142
14,050 Mediobanca S.p.A................................. 85
(a)83,108 Montedison S.p.A................................. 55
(a)28,900 Montedison S.p.A. Di Risp NCS.................... 19
(a)100,750 Olivetti Group................................... 29
44,640 Parmalat Finanziaria S.p.A....................... 63
45,000 Pirelli S.p.A.................................... 111
8,301 R.A.S............................................ 66
4,100 S.A.I............................................ 32
2,300 Sasib S.p.A...................................... 8
8,500 Sirti S.p.A...................................... 49
21,000 Snia BPD S.p.A................................... 19
42,500 Telecom Italia Di Risp S.p.A..................... 84
182,800 Telecom Italia Mobile S.p.A...................... 592
45,000 Telecom Italia Mobile S.p.A...................... 80
179,200 Telecom Italia S.p.A............................. 537
--------
5,261
--------
JAPAN (16.1%)
1,580 Advantest Corp................................... 121
20,000 Ajinomoto Co., Inc............................... 215
(a)12,000 Aoki Corp........................................ 14
1,600 Aoyama Trading Co., Ltd.......................... 51
39,000 Asahi Bank Ltd................................... 332
12,000 Asahi Breweries Ltd.............................. 179
36,000 Asahi Chemical Industry Co., Ltd................. 215
34,000 Asahi Glass Co................................... 338
70,000 Bank of Tokyo-Mitsubishi......................... 1,405
12,000 Bridgestone Corp................................. 279
15,000 Canon, Inc....................................... 408
7,000 Casio Computer Co., Ltd.......................... 61
19,000 Chiba Bank Ltd................................... 113
12,000 Chugai Pharmaceutical Ltd........................ 108
14,000 Dai Nippon Printing Co., Ltd..................... 317
13,000 Daiei, Inc....................................... 83
12,000 Daikin Industries Ltd............................ 109
12,000 Daiwa House Industry............................. 147
24,000 Daiwa Securities Co., Ltd........................ 189
70 East Japan Railway Co............................ 359
8,000 Ebara Corp....................................... 120
5,100 Fanuc Co......................................... 196
42,000 Fuji Bank........................................ 631
7,000 Fuji Photo Film Ltd.............................. 282
31,000 Fujitsu Ltd...................................... 430
9,000 Furukawa Electric................................ 57
16,000 Hankyu Corp...................................... 88
12,000 Hazama-Gumi...................................... 25
60,000 Hitachi Ltd...................................... 670
16,000 Honda Motor Co................................... 482
38,000 Industrial Bank of Japan......................... 590
7,000 Ito-Yokado Co., Ltd.............................. 406
37,000 Japan Airlines Co................................ 168
30,000 Japan Energy Corp................................ 79
13,000 Joyo Bank........................................ 72
6,000 Jusco Co......................................... 203
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
24,000 Kajima Corp...................................... $ 141
15,900 Kansai Electric Power Co......................... 307
22,000 KAO Corp......................................... 305
19,000 Kawasaki Steel Corp.............................. 62
29,000 Kinki Nippon Railway............................. 177
24,000 Kirin Brewery Co., Ltd........................... 249
24,000 Komatsu Ltd...................................... 195
36,000 Kubota Corp...................................... 176
24,000 Kumagai Gumi Co. Ltd............................. 40
3,600 Kyocera Corp..................................... 286
12,000 Kyowa Hakko Kogyo................................ 90
36,000 Marubeni Corp.................................... 163
3,000 Marui Co......................................... 56
36,000 Matsushita Electric Industries Ltd............... 726
36,000 Mitsubishi Chemical Corp......................... 118
33,000 Mitsubishi Corp.................................. 412
42,000 Mitsubishi Electric Corp......................... 235
26,000 Mitsubishi Estate Co., Ltd....................... 377
65,000 Mitsubishi Heavy Industries Ltd.................. 499
24,000 Mitsubishi Materials Corp........................ 96
22,000 Mitsubishi Trust & Banking Corp.................. 348
36,000 Mitsui & Co...................................... 346
24,000 Mitsui Engineering & Shipbuilding Co., Ltd....... 52
19,000 Mitsui Fudosan Co., Ltd.......................... 262
18,000 Mitsui Trust & Banking Corp...................... 136
13,000 Mitsukoshi Ltd................................... 93
4,000 Murata Manufacturing Co., Ltd.................... 159
(a)8,000 Mycal Corp....................................... 115
21,000 NEC Corp......................................... 293
12,000 NGK Insulators Ltd............................... 132
15,000 Nippon Denko Co., Ltd............................ 359
9,000 Nippon Express Co., Ltd.......................... 72
12,000 Nippon Fire & Marine Insurance Co................ 65
12,000 Nippon Light Metal Co............................ 44
12,000 Nippon Meat Packers, Inc......................... 155
34,000 Nippon Oil Co.................................... 186
133,000 Nippon Steel Corp................................ 425
179 Nippon Telegraph & Telephone ADR................. 1,719
36,000 Nippon Yusen Kabushiki Kaisha.................... 140
45,000 Nissan Motor Co., Ltd............................ 349
70,000 NKK Corp......................................... 150
31,000 Nomura Securities Co., Ltd....................... 428
14,000 Odakyu Electric Railway Co....................... 83
24,000 OJI Paper Co., Ltd............................... 149
53,000 Osaka Gas Co..................................... 152
12,000 Penta-Ocean Construction......................... 39
4,000 Pioneer Electronic Corp.......................... 97
1,000 Rohm Co.......................................... 103
47,000 Sakura Bank Ltd.................................. 360
9,000 Sankyo Co., Ltd.................................. 302
36,000 Sanyo Electric Co., Ltd.......................... 162
3,000 Secom Co......................................... 220
2,300 Sega Enterprises Ltd............................. 76
12,000 Sekisui House Ltd................................ 121
24,000 Sharp Corp....................................... 331
3,000 Shimano, Inc..................................... 63
5,000 Shin-Etsu Chemical Co............................ 133
17,000 Shinizu Corp..................................... 102
5,000 Shiseido Co., Ltd................................ 83
16,000 Shizuoka Bank.................................... 183
</TABLE>
-----------------------
49
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
(a)24,000 Showa Denko K.K.................................. $ 63
5,500 Sony Corp........................................ 480
47,000 Sumitomo Bank.................................... 771
48,000 Sumitomo Chemical Co............................. 217
24,000 Sumitomo Corp.................................... 228
16,000 Sumitomo Electric Industries..................... 268
5,000 Sumitomo Forestry................................ 55
43,000 Sumitomo Metal Industries........................ 122
11,000 Sumitomo Metal Mining Co......................... 78
12,000 Sumitomo Osaka Cement Co., Ltd................... 38
24,000 Taisei Corp., Ltd................................ 111
7,000 Taisho Pharmaceutical Co......................... 189
15,000 Takeda Chemical Industries....................... 422
24,000 Teijin Ltd....................................... 113
16,000 Tobu Railway Co.................................. 74
8,600 Tohoku Electric Power............................ 153
36,000 Tokai Bank....................................... 371
36,000 Tokio Marine & Fire Insurance Co................. 471
22,200 Tokyo Electric Power Co.......................... 467
1,000 Tokyo Electron Ltd............................... 48
48,000 Tokyo Gas Co..................................... 133
20,000 Tokyu Corp....................................... 124
16,000 Toppan Printing Co., Ltd......................... 251
36,000 Toray Industries, Inc............................ 257
12,300 Toto Ltd......................................... 151
24,000 Toyobo Ltd....................................... 64
52,000 Toyota Motor Corp................................ 1,534
24,000 Ube Industries Ltd............................... 70
24,000 Yamaichi Securities.............................. 71
22,000 Yasuda Trust & Banking........................... 84
--------
30,517
--------
KOREA (0.7%)
4,440 Cho Hung Bank Co................................. 30
(a)3,990 Commericial Bank of Korea........................ 21
3,080 Daewoo Corp...................................... 25
9,650 Daewoo Heavy Industries.......................... 79
(a)1,330 Daewoo Securities, Co............................ 24
980 Dong-Ah Construction Industrial Co............... 19
(a)4,530 Hanil Bank....................................... 25
(a)1,366 Hyundai Engineering & Construction Co. RFD....... 35
(d)1,090 Hyundai Motor Co., Ltd........................... 36
13,650 Korea Electric Power Corp........................ 407
4,100 Korea First Bank................................. 17
(a,d)100 Korea Mobile Telecommunications Corp.
(Foreign)...................................... 75
(d)3 Korea Mobile Telecommunications Corp............. 2
2,100 L.G. Chemical Ltd................................ 29
(d)2,550 Pohang Iron & Steel Ltd.......................... 261
1,600 Samsung Corp..................................... 22
(d)670 Samsung Display Devices Co....................... 37
(d)1,900 Samsung Electronics Co........................... 213
260 Tong Yang Cement Co.............................. 5
2,009 Yukong Ltd....................................... 49
--------
1,411
--------
NETHERLANDS (1.5%)
11,500 ABN-Amro Holdings N.V............................ 214
700 Akzo Nobel N.V................................... 96
5,800 Elsevier N.V..................................... 97
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
350 Heineken N.V..................................... $ 60
7,011 ING Groep N.V.................................... 323
813 KLM Royal Dutch Airlines N.V..................... 25
1,251 Koninklijke Ahold N.V............................ 106
287 Koninklijke Hoogovens............................ 16
900 Koninklijke KNP BT............................... 20
9,213 Koninklijke PTT Nederland N.V.................... 362
200 Nedlloyd Groep N.V............................... 6
2,900 Phillips Electronics N.V......................... 208
18,800 Royal Dutch Petroleum N.V........................ 979
296 Stork N.V........................................ 12
1,400 Unilever N.V..................................... 295
640 Wolters Kluwer N.V............................... 78
--------
2,897
--------
SINGAPORE (1.8%)
(d)11,000 Amcol Holdings Ltd............................... --
35,000 City Developments Ltd............................ 343
(a)4,000 Creative Technology Ltd.......................... 69
10,000 Cycle & Carriage Ltd............................. 104
41,000 DBS Land Ltd..................................... 130
21,000 Development Bank of Singapore.................... 264
13,000 First Capital Corp............................... 34
13,200 Fraser & Neave Ltd............................... 94
25,000 Hai Sun Hup Group Ltd............................ 18
21,000 Hotel Properties Ltd............................. 36
9,000 Inchcape Bhd..................................... 32
5,000 Jurong Shipyard Ltd.............................. 22
(a)32,000 Keppel Corp...................................... 142
(a)2,750 Keppel Corp. 'A'................................. 12
5,000 Metro Holdings Ltd............................... 16
15,000 NatSteel Ltd..................................... 38
38,000 Neptune Orient Lines Ltd......................... 34
37,920 Oversea-Chinese Banking Corp..................... 392
6,000 Overseas Union Enterprise Ltd.................... 28
14,000 Parkway Holdings Ltd............................. 63
3,000 Robinson & Co. Ltd............................... 16
6,600 Shangri-La Hotel Ltd............................. 20
39,000 Singapore Airlines Ltd. (Foreign)................ 349
8,600 Singapore Press Holdings (Foreign)............... 173
32,000 Singapore Technologies Industrial Corp........... 82
270,000 Singapore Telecommunications Ltd................. 499
15,000 Straits Trading Co., Ltd......................... 33
63,000 United Industrial Corp. Ltd...................... 48
36,000 United Overseas Bank Ltd. (Foreign).............. 370
24,000 United Overseas Land Ltd......................... 32
--------
3,493
--------
SPAIN (3.0%)
340 Acerinox S.A..................................... 64
4,800 Argentaria S.A................................... 269
7,820 Autopistas Concesionaria Espanola S.A............ 106
8,000 Banco Bilbao Vizcaya (Registered)................ 650
6,100 Banco Central Hispanoamericano S.A............... 223
21,900 Banco Santander S.A.............................. 675
400 Corporacion Financiera Alba S.A.................. 51
849 Corporacion Mapfre S.A........................... 45
1,550 Dragados y Construcciones S.A.................... 32
1,300 Ebro Agricolas, Compania de Alimentacion S.A..... 25
550 Empresa Nacional de Cellulosas S.A............... 10
10,000 Empresa Nacional de Electricidad S.A............. 840
</TABLE>
- --------------
50
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SPAIN (CONT.)
<TABLE>
<C> <S> <C>
317 Energia y Indsutrias Aragonesas.................. $ 2
(a)4,700 Ercros S.A....................................... 5
400 Fomento de Construcciones y Contratas S.A........ 51
1,300 Gas Natural SDG 'E'.............................. 284
(a)200 Gines Navarro Construction Co.................... 4
35,300 Iberdrola S.A.................................... 446
625 Inmobiliaria Metropolitana Vasco Central S.A..... 23
200 Portland Vaderrivas S.A.......................... 16
11,600 Repsol S.A....................................... 491
1,591 Sociedade General de Aguas
de Barcelona S.A............................... 65
(a)44 Sociedade General de Aguas de Barcelona, S.A.
RFD............................................ 2
1,000 Tabacalera S.A. 'A'.............................. 54
34,600 Telefonica de Espana............................. 1,001
8,100 Union Electrica Fenosa S.A....................... 74
2,400 Uralita S.A...................................... 27
1,376 Vallehermoso S.A................................. 37
650 Viscofan Industria Navarra de Envolturas
Celulosicas S.A................................ 15
348 Zardoya-Otis S.A................................. 46
--------
5,633
--------
SWEDEN (1.9%)
19,000 ABB AB 'A'....................................... 267
1,300 AGA AG 'A'....................................... 18
3,000 AGA AG 'B'....................................... 40
36,266 Astra AB 'A'..................................... 675
4,450 Atlas Copco AB 'A'............................... 116
1,700 Electrolux AB 'B'................................ 123
900 Esselte AB 'A'................................... 21
(a)850 Granges AB....................................... 11
5,000 Hennes & Mauritz AB 'B'.......................... 179
100 Scancem AB....................................... 4
2,100 Securitas AB, 'B'................................ 59
2,700 Skandia Group Forsakrings AB..................... 99
12,700 Skandinaviska Enskilda Banken, 'A'............... 137
3,000 Skanska AB, 'B'.................................. 133
3,000 SKF AB 'B'....................................... 78
7,350 Stora Kopparbergs Bergslags Aktiebolag........... 119
4,600 Svenska Cellulosa AB, 'B'........................ 98
5,000 Svenska Handelsbanken 'A'........................ 160
11,300 Swedish Match AB................................. 38
22,100 Telefonaktiebolaget LM Ericsson.................. 870
3,200 Trelleborg AB, 'B'............................... 52
9,400 Volvo AB, 'B'.................................... 252
--------
3,549
--------
SWITZERLAND (2.1%)
180 Adia S.A. (Bearer)............................... 69
60 Alusuisse-Lonza Holding AG (Registered).......... 62
95 BBC Brown Boveri AG (Bearer)..................... 144
1,850 CS Holding AG (Registered)....................... 238
5 Georg Fischer AG (Bearer)........................ 7
65 Holderbank Financiere Glaris AG, 'B' (Bearer).... 61
(a)65 Merkur Holding AG (Registered)................... 14
385 Nestle S.A. (Registered)......................... 508
630 Novartis AG (Registered)......................... 1,007
16 Roche Holding AG (Bearer)........................ 220
69 Roche Holding AG-Genusshein...................... 624
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
145 Schweizerische Rueckversicherungs-Gesellschaft
(Registered)................................... $ 205
55 SMH AG (Bearer).................................. 31
20 Societe Generale de Surveillance Holding S.A.
(Bearer)....................................... 43
40 Sulzer AG (Registered)........................... 34
(a)750 Swiss Bank Corp. (Registered).................... 201
35 SwissAir AG (Registered)......................... 39
205 Union Bank of Switzerland (Bearer)............... 234
200 Union Bank of Switzerland (Registered)........... 46
465 Zuerich Versicherungs-Gesellschaft
(Registered)................................... 185
--------
3,972
--------
UNITED KINGDOM (7.3%)
18,200 Abbey National plc............................... 249
11,665 Argyll Group plc................................. 67
9,100 Arjo Wiggins Appleton plc........................ 27
6,500 Associated British Foods plc..................... 56
22,589 Barclays plc..................................... 448
14,300 Bass plc......................................... 175
40,266 B.A.T Industries plc............................. 360
57,200 BG plc........................................... 210
9,127 BICC plc......................................... 27
16,856 Blue Circle Industries plc....................... 120
9,055 BOC Group plc.................................... 157
14,300 Boots Co. plc.................................... 168
9,100 BPB Industries plc............................... 49
6,468 British Aerospace plc............................ 144
15,628 British Airways plc.............................. 178
74,927 British Petroleum Co. plc........................ 932
20,800 British Sky Broadcasting Group plc............... 152
26,000 British Steel plc................................ 65
75,400 British Telecommunications plc................... 560
54,606 BTR plc.......................................... 187
3,856 Burmah Castrol plc............................... 65
32,462 Cable & Wireless plc............................. 297
14,335 Cadbury Schweppes plc............................ 128
9,360 Caradon plc...................................... 31
(a)57,200 Centrica plc..................................... 70
11,671 Coats Viyella plc................................ 24
9,056 Commercial Union plc............................. 95
6,500 Courtaulds plc................................... 37
1,272 De La Rue plc.................................... 8
37,700 General Electric plc............................. 225
7,767 GKN plc.......................................... 133
41,600 Glaxo Wellcome plc............................... 861
9,090 Granada Group plc................................ 120
28,572 Grand Metropolitan plc........................... 275
15,600 Great Universal Stores plc....................... 158
10,369 Guardian Royal Exchange plc...................... 47
28,600 Guinness plc..................................... 280
(a)7,768 Hanson plc....................................... 39
16,900 Harrisons & Crosfield plc........................ 31
28,570 HSBC Holdings plc................................ 847
11,700 Imperial Chemical Industries plc................. 163
15,613 Ladbroke Group plc............................... 61
10,400 Land Securities plc.............................. 147
10,400 Lasmo plc........................................ 45
15,600 Legal & General Group plc........................ 106
71,500 Lloyds TSB Group plc............................. 735
</TABLE>
-----------------------
51
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED KINGDOM (CONT.)
<TABLE>
<C> <S> <C>
10,418 Lonrho plc....................................... $ 22
45,500 Marks & Spencer plc.............................. 377
7,800 MEPC plc......................................... 64
18,200 National Power plc............................... 158
9,098 North West Water plc............................. 100
10,757 Peninsular & Oriental Steam Navigation Co........ 107
19,478 Pilkington plc................................... 45
26,009 Prudential Corp. plc............................. 254
11,700 Rank Organization plc............................ 74
7,751 Redland plc...................................... 44
18,200 Reed International plc........................... 176
22,100 Reuters Holdings plc............................. 233
7,800 Rexam plc........................................ 33
3,900 RMC Group plc.................................... 63
18,212 Royal & Sun Alliance Insurance Group plc......... 135
6,454 Royal Bank of Scotland plc....................... 60
15,760 RTZ Corp. plc (Registered)....................... 275
20,772 Sainsbury (J) plc................................ 126
2,600 Schroders plc.................................... 71
12,993 Scottish Power plc............................... 84
26,000 Sears plc........................................ 29
8,051 Sedwick Group plc................................ 17
6,500 Slough Estates plc............................... 32
32,448 Smithkline Beecham plc........................... 597
6,476 Southern Electric plc............................ 48
18,185 Tarmac plc....................................... 38
10,354 Taylor Woodrow plc............................... 30
24,742 Tesco plc........................................ 153
9,144 Thames Water plc................................. 105
6,500 Thorn plc........................................ 18
6,517 Thorne EMI plc................................... 117
6,466 TI Group plc..................................... 56
9,100 Unilever plc..................................... 261
42,892 Vodafone Group plc............................... 209
11,700 Zeneca Group plc................................. 387
--------
13,957
--------
UNITED STATES (38.0%)
13,300 Abbott Laboratories.............................. 888
(a)13,000 Airtouch Communications, Inc..................... 356
5,800 Aluminum Co. of America.......................... 437
12,000 American Express Co.............................. 894
10,500 American Home Products Corp...................... 803
11,000 American International Group, Inc................ 1,643
29,500 American Telephone & Telegraph Co................ 1,034
9,300 Amoco Corp....................................... 809
(a)5,800 AMR Corp......................................... 537
(a)3,600 Applied Material, Inc............................ 255
3,100 Atlantic Richfield Co............................ 219
5,800 Automatic Data Processing, Inc................... 273
11,710 Banc One Corp.................................... 567
11,700 BankAmerica Corp................................. 755
1,900 Bankers Trust New York Corp...................... 165
10,800 Bell Atlantic Corp............................... 820
11,700 BellSouth Corp................................... 543
13,220 Boeing Co........................................ 701
14,900 Bristol-Myers Squibb Co.......................... 1,207
4,400 Campbell Soup Co................................. 220
5,800 Caterpillar, Inc................................. 623
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
12,800 Chevron Corp..................................... $ 946
9,700 Chrysler Corp.................................... 318
5,800 Chubb Corp....................................... 388
2,300 CIGNA Corp....................................... 408
(a)10,500 Cisco Systems, Inc............................... 705
9,500 Citicorp......................................... 1,145
44,300 Coca-Cola Co..................................... 2,990
13,600 Columbia HCA/Healthcare Corp..................... 535
11,700 Consolidated Edison Co. of New York, Inc......... 344
5,800 Cooper Industries, Inc........................... 289
5,800 Corning, Inc..................................... 323
4,100 CSX Corp......................................... 228
2,900 Deere & Co....................................... 159
8,600 Dow Chemical Co.................................. 749
(a)2,700 DSC Communications Corp.......................... 60
16,100 Du Pont (EI) de Nemours Co....................... 1,012
11,700 Duke Power Co.................................... 561
4,400 Dun & Bradstreet Corp............................ 116
11,700 Eastman Kodak Co................................. 898
2,200 Edison International............................. 55
9,600 Electronic Data Systems Corp..................... 394
9,048 Eli Lilly & Co................................... 989
7,800 Enron Corp....................................... 318
35,600 Exxon Corp....................................... 2,189
21,300 Federal National Mortgage Association............ 929
8,100 First Data Corp.................................. 356
5,400 Fleet Financial Group, Inc....................... 342
11,700 FPL Group, Inc................................... 539
4,500 Gannett Co., Inc................................. 444
44,300 General Electric Co.............................. 2,896
18,900 General Motors Corp.............................. 1,052
2,100 General RE Corp.................................. 382
5,800 Goodyear Tire & Rubber Co........................ 367
2,300 H&R Block, Inc................................... 74
10,850 H.J. Heinz Co.................................... 501
(a)900 Harrah's Entertainment, Inc...................... 16
17,800 Hewlett-Packard Co............................... 997
11,600 Home Depot, Inc.................................. 800
11,400 Intel Corp....................................... 1,617
11,100 International Business Machines Corp............. 1,001
8,800 International Paper Co........................... 427
6,900 J.C. Penney Co., Inc............................. 360
18,900 Johnson & Johnson................................ 1,217
(a)2,400 Kmart Corp....................................... 29
7,222 Lucent Technologies, Inc......................... 520
14,600 McDonald's Corp.................................. 705
22,100 Merck & Co., Inc................................. 2,287
(a)20,100 Microsoft Corp................................... 2,540
7,900 Minnesota Mining & Manufacturing Co.............. 806
9,000 Mobil Corp....................................... 629
3,500 Monsanto......................................... 151
5,800 Morgan (J.P.) & Co., Inc......................... 605
9,700 Motorola, Inc.................................... 737
11,700 NationsBank Corp................................. 755
4,600 Norfolk Southern Corp............................ 464
12,600 Norwest Corp..................................... 709
(a)7,200 Novell, Inc...................................... 50
2,500 Nucor Corp....................................... 141
(a)15,400 Oracle System Corp............................... 776
9,000 Pacific Gas & Electric Co........................ 218
</TABLE>
- --------------
52
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
UNITED STATES (CONT.)
11,300 Pfizer, Inc...................................... $ 1,350
12,300 Philip Morris Cos., Inc.......................... 546
3,600 PPG Industries, Inc.............................. 209
13,600 Procter & Gamble Co.............................. 1,921
11,600 Public Service Enterprise Group, Inc............. 290
7,200 Rockwell International Corp...................... 425
3,700 Salomon, Inc..................................... 206
13,243 SBC Communications, Inc.......................... 819
9,300 Schering-Plough Corp............................. 445
11,700 Sears, Roebuck & Co.............................. 629
17,600 Southern Co...................................... 385
10,600 Sprint Corp...................................... 558
5,800 Suntrust Banks, Inc.............................. 319
(a)10,300 Tele-Communications, Inc., 'A'................... 153
5,300 Texas Instruments, Inc........................... 446
11,700 Texas Utilities Co............................... 403
4,374 The Limited, Inc................................. 89
11,800 Time Warner, Inc................................. 569
(a)7,000 Toys `R' Us, Inc................................. 245
9,133 Travelers, Inc................................... 576
5,500 Union Pacific Corp............................... 388
(a)6,600 Viacom, Inc. 'B'................................. 198
33,200 Wal-Mart Stores, Inc............................. 1,123
12,609 Walt Disney Co................................... 1,012
3,400 Warner-Lambert Co................................ 422
1,500 Waste Management Inc............................. 48
1,700 Wells Fargo & Co................................. 458
15,600 Westinghouse Electric Corp....................... 361
6,000 Weyerhaeuser Co.................................. 312
9,000 WMX Technologies, Inc............................ 289
7,100 XEROX Corp....................................... 560
--------
72,061
--------
TOTAL COMMON STOCKS (COST $143,451)............................. 175,239
--------
PREFERRED STOCKS (0.2%)
AUSTRALIA (0.0%)
21,599 News Corp., Ltd.................................. 85
--------
GERMANY (0.2%)
4,150 RWE AG........................................... 145
776 SAP AG........................................... 160
--------
305
--------
ITALY (0.0%)
31,500 Fiat S.p.A....................................... 58
--------
UNITED STATES (0.0%)
(a)141 Aetna Life & Casualty 'C'........................ 13
--------
TOTAL PREFERRED STOCKS (COST $410).............................. 461
--------
INVESTMENT COMPANIES (5.1%)
UNITED STATES (5.1%)
(a,g)100,000 Morgan Stanley India Investment Fund, Inc........ 1,294
(g)70,000 Morgan Stanley Africa Investment Fund, Inc....... 1,251
(g)224,333 Morgan Stanley Asia-Pacific Fund, Inc............ 2,355
92,664 The Korea Fund, Inc.............................. 1,367
(g)95,900 The Latin American Discovery Fund, Inc........... 1,894
(g)92,853 The Thai Fund, Inc............................... 1,428
--------
TOTAL INVESTMENT COMPANIES (COST $9,653)........................ 9,589
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
<C> <S> <C>
- --------------------------------------------------------------------------
RIGHTS (0.0%)
FRANCE (0.0%)
(a,d)30 Simco S.A., expiring 7/2/97...................... $ --
--------
ITALY (0.0%)
(a)4,565 Rinascente S.p.A., expiring 7/23/97.............. 1
--------
KOREA (0.0%)
(a,d)31 Samsung Electronics Co., expiring 7/1/97......... 2
--------
SPAIN (0.0%)
(a,d)625 Immobiliaria Metropolitana Vasco Central S.A.,
expiring 7/26/97............................... --
--------
SWITZERLAND (0.0%)
(a)40 Sulzer AG (Resistered), expiring 7/17/97......... --
--------
TOTAL RIGHTS (COST $0).......................................... 3
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ------------
WARRANTS (0.0%)
FRANCE (0.0%)
(a)320 Casino Guichard Perrachon, expiring 12/31/99..... 5
(a)2,073 Compagnie Generale des Eaux, expiring 5/2/01..... 1
(a)5 Sodexho S.A., expiring 6/7/04.................... 1
--------
7
--------
HONG KONG (0.0%)
(a)2,000 Applied International Holdings Ltd., expiring
12/30/99....................................... --
(a)4,000 Hong Kong Shanghai Hotels, expiring 10/12/98..... 1
(a)1,400 Hysan Development Co., expiring 4/30/98.......... 1
(a)5,300 Oriental Press Group, expiring 10/2/98........... --
(a)1,230 Peregine Investment Holdings Ltd., expiring
5/15/98........................................ 1
(a)4,400 Stelux Holdings International Ltd., expiring
2/28/98........................................ --
--------
3
--------
ITALY (0.0%)
(a,d)578 La Rinascente S.p.A., expiring 12/31/99.......... --
(a)420 R.A.S. S.p.A. (Savings Shares), expiring
12/31/97....................................... 1
(a)880 R.A.S. S.p.A., expiring 12/31/97................. 2
--------
3
--------
SINGAPORE (0.0%)
(a)6,750 Keppel Land Ltd., expiring 12/12/00.............. 6
--------
SWITZERLAND (0.0%)
(a)45 Roche Holdings, expiring 5/5/98.................. 3
--------
TOTAL WARRANTS (COST $5)........................................ 22
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
UNITS
<C> <S> <C>
- ------------
UNITS (0.0%)
AUSTRALIA (0.0%)
(a)18,212 Westfield Trust (COST $31)....................... 37
--------
</TABLE>
-----------------------
53
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
CONVERTIBLE DEBENTURES (0.0%)
FRANCE (0.0%)
FRF 32 Casino Guichard Perrachon 4.50%, 7/12/01......... $ 16
29 Sanofi S.A. 4.00%, 1/1/00........................ 31
1 Sodexho S.A. 6.00%, 6/7/04....................... 4
--------
51
--------
ITALY (0.0%)
ITL 2,125 Mediobanca S.p.A. 6.00%, 12/31/02................ 1
--------
TOTAL CONVERTIBLE DEBENTURES (COST $38)......................... 52
--------
TOTAL FOREIGN & U.S. SECURITIES (97.6%) (COST $153,588)......... 185,403
--------
SHORT-TERM INVESTMENT (4.7%)
REPURCHASE AGREEMENT (4.7%)
UNITED STATES
$ 8,897 Chase Securities, Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $8,898,
collateralized by $9,420 U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $9,050 (COST
$8,897)........................................ 8,897
--------
TOTAL INVESTMENT IN SECURITIES (102.3%) (COST $162,485)......... 194,300
--------
FOREIGN CURRENCY (0.3%)
AUD 18 Australian Dollar................................ 14
ATS 4 Austrian Schilling............................... --
GBP 8 British Pound.................................... 13
CAD 67 Canadian Dollar.................................. 48
DEM 82 Deutsche Mark.................................... 47
FRF 540 French Franc..................................... 92
HKD 213 Hong Kong Dollar................................. 27
INR 98,939 Indonesian Rupiah................................ 41
ITL 362 Italian Lira..................................... --
JPY 8,611 Japanese Yen..................................... 75
NLG 65 Netherlands Guilder.............................. 33
SGD 12 Singapore Dollar................................. 8
KRW 18,262 South Korean Won................................. 21
SEK 329 Swedish Krona.................................... 43
CHF 46 Swiss Franc...................................... 32
--------
TOTAL FOREIGN CURRENCY (COST $498).............................. 494
--------
TOTAL INVESTMENTS (102.6%) (COST $162,983)...................... 194,794
LIABILITIES IN EXCESS OF OTHER ASSETS (-2.6%)................... (4,929)
--------
NET ASSETS (100%)............................................... $189,865
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Security valued at fair value -- see note A-1 to financial statements.
(g) -- The Fund is advised by an affiliate.
ADR -- American Depositary Receipt.
NCS -- Non Convertible Shares.
RFD -- Ranked for Dividend.
- --------------
54
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at June 30, 1997, the Fund is
obligated to deliver or is to receive foreign currency in exchange for U.S.
dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR VALUE NET UNREALIZED
(000) (000) DATE (000) (000) GAIN (LOSS) (000)
- ----------- --------- ----------- ------------- --------- -----------------
<S> <C> <C> <C> <C> <C>
$ 9 $ 9 7/1/97 ESP 1,393 $ 10 $ 1
JPY 3,492 31 7/1/97 $ 30 30 (1)
$ 1,886 1,886 7/2/97 ITL 3,174,993 1,868 (18)
$ 1,879 1,879 7/3/97 CAD 2,593 1,878 (1)
$ 2,241 2,241 7/30/97 DEM 3,861 2,220 (21)
DEM 1,931 1,110 7/30/97 $ 1,150 1,150 40
DEM 1,930 1,109 7/30/97 $ 1,150 1,150 41
$ 400 400 8/18/97 NLG 773 395 (5)
$ 890 890 8/18/97 CHF 1,238 853 (37)
$ 1,478 1,478 8/18/97 CHF 2,113 1,456 (22)
CHF 3,350 2,308 8/18/97 $ 2,358 2,358 50
NLG 2,206 1,129 8/18/97 $ 1,162 1,162 33
$ 7,077 7,077 8/25/97 JPY 803,534 7,072 (5)
JPY 803,534 7,072 8/25/97 $ 7,200 7,200 128
$ 2,193 2,193 8/29/97 DEM 3,764 2,169 (24)
DEM 3,764 2,168 8/29/97 $ 2,198 2,198 30
$ 1,770 1,770 9/15/97 FRF 10,246 1,753 (17)
FRF 21,933 3,753 9/15/97 $ 3,870 3,870 117
ESP 203,563 1,384 9/26/97 $ 1,400 1,400 16
--------- --------- -----
$ 39,887 $ 40,192 $ 305
--------- --------- -----
--------- --------- -----
</TABLE>
- ---------------
CAD -- Canadian Dollar
DEM -- Deutsche Mark
FRF -- French Franc
ITL -- Italian Lira
JPY -- Japanese Yen
NLG -- Netherlands Guilder
ESP -- Spanish Peseta
CHF -- Swiss Franc
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ----------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Consumer Goods............................................................... $ 40,454 21.3%
Finance...................................................................... 37,011 19.4
Services..................................................................... 32,912 17.3
Capital Equipment............................................................ 28,015 14.8
Energy....................................................................... 18,745 9.9
Materials.................................................................... 13,023 6.9
Investment Companies......................................................... 9,589 5.1
Multi-Industry............................................................... 4,989 2.6
Gold Mines................................................................... 665 0.3
--------- ---
$ 185,403 97.6%
--------- ---
--------- ---
</TABLE>
-----------------------
55
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL FIXED INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
FIXED INCOME SECURITIES (90.4%)
AUSTRALIAN DOLLAR (1.2%)
GOVERNMENT BOND
AUD 150 Government of Australia 9.75%, 3/15/02........... $ 128
-------
BRITISH POUND (7.2%)
GOVERNMENT BOND
GBP 400 United Kingdom 9.50%, 4/18/05.................... 760
-------
CANADIAN DOLLAR (2.7%)
GOVERNMENT BONDS
CAD 300 Government of Canada 7.50%, 3/1/01............... 232
60 Government of Canada 9.75%, 6/1/21............... 58
-------
TOTAL CANADIAN DOLLAR........................................ 290
-------
DANISH KRONE (2.4%)
GOVERNMENT BOND
DKK 1,500 Kingdom of Denmark 8.00%, 5/15/03................ 256
-------
DEUTSCHE MARK (16.5%)
CORPORATE BONDS
DEM 150 KFW International Finance, Inc. 7.50%, 1/24/00... 93
650 Landeskreditbank Baden-Wuerttemberg Financial
6.63%, 8/20/03................................. 402
-------
495
-------
GOVERNMENT BONDS
1,300 Bundesobligation 7.00%, 1/13/00.................. 803
100 Deutschland Republic 6.25%, 1/4/24............... 56
590 Treuhandanstalt 7.50%, 9/9/04.................... 383
-------
1,242
-------
TOTAL DEUTSCHE MARK.......................................... 1,737
-------
IRISH PUNT (1.1%)
GOVERNMENT BOND
IEP 70 Government of Ireland 8.00%, 8/18/06............. 116
-------
ITALIAN LIRA (5.2%)
GOVERNMENT BONDS
ITL 380,000 Buoni Poliennali Del Tes 10.50%, 7/15/00......... 250
60,000 Buoni Poliennali Del Tes 10.00%, 8/1/03.......... 41
150,000 Buoni Poliennali Del Tes 9.50%, 1/1/05........... 102
230,000 Buoni Poliennali Del Tes 9.50%, 2/1/06........... 158
-------
TOTAL ITALIAN LIRA........................................... 551
-------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
JAPANESE YEN (11.9%)
EUROBONDS
JPY 15,000 European Investment Bank 6.63%, 3/15/00.......... $ 150
30,000 European Investment Bank 3.00%, 9/20/06.......... 273
25,000 Export Import Bank of Japan 4.38%, 10/1/03....... 246
27,000 Japan Development Bank 6.50%, 9/20/01............ 282
30,000 World Bank 4.75%, 12/20/04....................... 306
-------
TOTAL JAPANESE YEN........................................... 1,257
-------
SPANISH PESETA (3.4%)
GOVERNMENT BOND
ESP 50,000 Government of Spain 8.30%, 12/15/98.............. 354
-------
SWEDISH KRONA (7.9%)
GOVERNMENT BONDS
SEK 3,100 Government of Sweden 13.00%, 6/15/01............. 506
2,600 Government of Sweden 6.00%, 2/9/05............... 329
-------
TOTAL SWEDISH KRONA.......................................... 835
-------
UNITED STATES DOLLAR (30.9%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (30.9%)
U.S. TREASURY BONDS
$ 665 8.13%, 8/15/19................................... 758
40 7.63%, 2/15/25................................... 44
-------
802
-------
U.S. TREASURY NOTES
615 5.13%, 11/30/98.................................. 608
250 6.25%, 10/31/01.................................. 249
1,538 7.25%, 5/15/04................................... 1,603
-------
2,460
-------
TOTAL UNITED STATES DOLLAR................................... 3,262
-------
TOTAL FIXED INCOME SECURITIES (COST $9,641).................... 9,546
-------
FOREIGN CURRENCY (0.0%)
DEM 4 Deutsche Mark.................................... 2
ESP 193 Spanish Peseta................................... 1
-------
TOTAL FOREIGN CURRENCY (COST $3)............................... 3
-------
TOTAL INVESTMENTS (90.4%) (COST $9,644)........................ 9,549
OTHER ASSETS IN EXCESS OF LIABILITIES (9.6%)................... 1,019
-------
NET ASSETS (100%).............................................. $10,568
-------
-------
</TABLE>
- --------------
56
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL FIXED INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at June 30, 1997, the Fund is
obligated to deliver or is to receive foreign currency in exchange for U.S.
dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR VALUE NET UNREALIZED
(000) (000) DATE (000) (000) GAIN (LOSS) (000)
- ------------- --------- ----------- ------------- --------- -----------------
<S> <C> <C> <C> <C> <C>
DEM 718 $ 412 7/11/97 $ 415 $ 415 $ 3
ITL 180,000 106 7/11/97 $ 106 106 --
JPY 36,250 317 7/11/97 $ 317 317 --
JPY 48,923 428 7/11/97 $ 425 425 (3)
$ 106 106 7/11/97 ITL 180,000 106 --
$ 210 210 7/11/97 JPY 23,981 209 (1)
$ 328 328 7/11/97 JPY 36,250 317 (11)
$ 425 425 7/11/97 DEM 718 412 (13)
DEM 550 316 7/18/97 $ 318 318 2
ITL 175,000 103 7/18/97 $ 104 104 1
$ 103 103 7/18/97 ITL 175,000 103 --
$ 319 319 7/18/97 DEM 550 316 (3)
GBP 32 53 7/25/97 $ 53 53 --
IEP 80 121 7/25/97 $ 121 121 --
SEK 4,550 589 7/25/97 $ 593 593 4
--------- --------- ---
$ 3,936 $ 3,915 $ (21)
--------- --------- ---
--------- --------- ---
</TABLE>
- ---------------
GBP -- British Pound
DEM -- Deutsche Mark
IEP -- Irish Punt
ITL -- Italian Lira
JPY -- Japanese Yen
SEK -- Swedish Krona
-----------------------
57
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
COMMON STOCKS (96.1%)
CHINA (1.1%)
2,048,000 Guangshen Railway Co., Ltd. 'H'.................. $ 899
3,105,000 Qingling Motors Co., 'H'......................... 1,603
147,000 Shenzhen Fangda Co., Ltd. 'B'.................... 213
(a)5,268,000 Zhejiang Expressway Co., Ltd. 'H'................ 1,278
--------
3,993
--------
HONG KONG (34.9%)
2,270,000 Cheung Kong Holdings Ltd......................... 22,415
432,000 China Merchants Holdings International Co.,
Ltd............................................ 1,344
3,068,000 China Resources Enterprises Ltd.................. 15,048
360,000 Dao Heng Bank Group Ltd.......................... 1,970
433,300 Hang Seng Bank Ltd............................... 6,180
1,517,000 Henderson Land Development Co., Ltd.............. 13,462
651,424 HSBC Holdings plc................................ 19,592
1,826,000 Hutchison Whampoa Ltd............................ 15,792
1,130,000 New World Development Co., Ltd................... 6,739
1,103,000 Ng Fung Hong Ltd................................. 1,651
1,831,000 Shanghai Industrial Holdings Ltd................. 11,392
613,100 Sun Hung Kai Properties Ltd...................... 7,379
--------
122,964
--------
INDONESIA (6.9%)
(a)1,271,000 Astra International (Foreign).................... 5,226
(a,d)3,226,697 Bank International Indonesia (Foreign)........... 2,786
(d)4,194,000 Bank Negara Indonesia (Foreign).................. 2,673
(d)788,000 Bimantara Citra (Foreign)........................ 1,377
(d)419,000 Gudang Garam (Foreign)........................... 1,757
(d)434,700 Hanjaya Mandala Sampoerna (Foreign).............. 1,658
(a,d)1,168,800 Indofood Sukses Makmur (Foreign)................. 2,692
(d)1,263,000 Matahari Putra Prima (Foreign)................... 2,545
(d)1,433,000 Mayora Indah (Foreign)........................... 810
(a,d)478,000 Putra Surya Multidana (Foreign).................. 762
(d)1,307,500 Telekomunikasi (Foreign)......................... 2,137
--------
24,423
--------
KOREA (7.6%)
(a)54,170 Hansol Paper Co.................................. 1,373
(d)114,420 Housing & Commercial Bank (Foreign).............. 2,136
(a)86,079 Kookmin Bank GDR................................. 1,818
(a,d)80,085 Kookmin Bank..................................... 1,477
111,720 Korea Electric Power............................. 3,334
23,980 LG Information & Communication (Foreign)......... 2,970
(d)35,362 Pohang Iron & Steel Ltd. (Foreign)............... 3,622
(d)58,419 Samsung Electronics Co. (Foreign)................ 6,540
(a,e)22,895 Samsung Electronics Co. GDR (New)................ 1,357
(d)136,257 Shinhan Bank Co., Ltd............................ 1,975
--------
26,602
--------
MALAYSIA (15.3%)
303,000 Arab Malaysian Corporation Bhd................... 1,129
3,292,000 Berjaya Group Bhd................................ 4,043
(a)255,000 Berjaya Sports Toto Bhd.......................... 1,202
1,201,000 Commerce Asset Holdings Bhd...................... 3,164
223,000 Dialog Group Bhd................................. 3,225
377,000 Edaran Otomobil Nasional Bhd..................... 3,211
665,400 Genting Bhd...................................... 3,190
880,000 IJM Corp. Bhd.................................... 1,848
521,000 Jaya Tiasa Holdings Bhd.......................... 2,622
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
850,000 Leader Universal Holdings Bhd.................... $ 1,529
(a)62,000 Lityan Bhd....................................... 755
412,500 Malayan Banking Bhd.............................. 4,331
105,000 Malaysian International Shipping (Foreign)....... 273
(a)285,000 Malaysian Pacific Industries Bhd................. 1,242
323,000 Malaysian Resources Corp. Bhd.................... 889
742,000 Multi-Purpose Holdings Bhd....................... 1,041
580,000 Rashid Hussain Bhd............................... 3,677
1,391,000 Resorts World Bhd................................ 4,189
2,696,000 Sime Darby Bhd................................... 8,972
494,000 United Engineers Bhd............................. 3,562
--------
54,094
--------
PHILIPPINES (3.9%)
4,914,296 Ayala Land, Inc. 'B'............................. 4,518
(a)15,431,000 Digital Telecommunications Philippines, Inc...... 1,492
(a)5,118,400 DMCI Holdings, Inc............................... 1,688
(a)2,775,000 Fil-Estate Land, Inc............................. 810
3,048,200 JG Summit Holding 'B'............................ 624
529,365 Manila Electric 'B'.............................. 2,609
7,107,180 SM Prime Holdings, Inc........................... 2,102
--------
13,843
--------
SINGAPORE (11.7%)
239,500 Development Bank of Singapore (Foreign).......... 3,015
574,000 Electronic Resources Ltd......................... 903
431,000 Jurong Shipyard Ltd.............................. 1,869
2,712,000 NatSteel Ltd..................................... 6,905
313,238 Oversea-Chinese Banking Corp. (Foreign).......... 3,243
(a)889,000 Pacific Century Regional Development............. 1,237
642,000 Parkway Holdings Ltd............................. 2,874
415,400 Singapore Press Holdings (Foreign)............... 8,368
2,258,000 SM Summit Holdings Ltd........................... 1,706
(a)1,015,000 Super Coffeemix Manufacturing Ltd................ 845
282,000 United Overseas Bank Ltd. (Foreign).............. 2,900
(a)1,317,600 Want Want Holdings............................... 4,374
1,087,000 Wing Tai Holdings Ltd............................ 3,132
--------
41,371
--------
TAIWAN (11.4%)
(a)1,300,000 Acer, Inc........................................ 4,676
(a)522,000 Asustek Computer, Inc............................ 6,910
(a)288,600 Cathay Life Insurance Co., Ltd................... 1,651
(a)1,005,000 China Development Corp........................... 5,188
851,850 China Steel Corp................................. 901
(a)1,888,900 Compal Electronics, Inc.......................... 7,474
2,578,000 Far Eastern Textile, Ltd......................... 4,052
1,264,400 Formosa Plastics Corp............................ 3,047
1,000,000 Great Wall Enterprises Co........................ 791
(a)701,500 Kuoyang Construction............................. 1,691
1,120,000 Siliconware Precision Industries Co.............. 3,787
--------
40,168
--------
THAILAND (3.3%)
454,300 Bangkok Bank Co., Ltd. (Foreign)................. 3,122
197,000 Big C Supercenter Co., Ltd....................... 62
302,700 Eastern Water Resources Development.............. 351
61,000 ICC International Co., PCL (Foreign)............. 191
5,800 International Cosmetics (Foreign)................ 19
27,000 Matichon Public Co., Ltd......................... 63
</TABLE>
- -----------------------
58
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
THAILAND (CONT.)
(d)219,000 Nation Multimedia Group Public Co., Ltd.
(Foreign)...................................... $ 465
(d)983,000 National Petrochemical Co., Ltd. (Foreign)....... 1,006
44,000 Quality House Co., Ltd. (Foreign)................ 16
267,000 Quality House Co., Ltd........................... 91
93,000 Robinson Department Store Co., Ltd. (Foreign).... 33
539,600 Siam Commercial Bank Co., Ltd. (Foreign)......... 2,208
(a,d)22,000 Sino Thai Engineering & Construction Co., Ltd.
(Foreign)...................................... 61
(a)42,000 Sino Thai Engineering & Construction Co., Ltd.... 117
546,000 Thai Farmer's Bank Public Co. (Foreign).......... 2,318
41,000 Thai Rung Union Car Co., Ltd..................... 148
(d)69,100 Thai Rung Union Car Co., Ltd. (Foreign).......... 249
35,000 Thai Storage Battery Co., Ltd. (Foreign)......... 35
174,900 Thai Theparos Food Product Co., Ltd. (Foreign)... 270
(d)149,000 United Communication Industry (Foreign).......... 615
--------
11,440
--------
TOTAL COMMON STOCKS (COST $303,930)................................ 338,898
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ---------------
RIGHTS (0.1%)
MALAYSIA (0.0%)
(a)239,200 Commerce Asset Holdings Bhd., expiring
7/23/97........................................ 8
(a,d)82,857 Rashid Hussain Bhd., expiring 12/31/02........... --
--------
8
--------
SINGAPORE (0.1%)
(a,d)287,000 Electronic Resources Ltd., expiring 7/21/97...... 191
--------
TOTAL RIGHTS (COST $0)............................................. 199
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ---------------
WARRANTS (0.0%)
INDONESIA (0.0%)
(a)286,818 PT Bank International Indonesia, expiring
1/17/00........................................ 112
--------
<CAPTION>
NO. OF VALUE
WARRANTS (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
MALAYSIA (0.0%)
(a,d)149,500 Commerce Asset Holdings Bhd., expiring 6/27/98... $ 23
--------
TOTAL WARRANTS (COST $0)........................................... 135
--------
TOTAL FOREIGN SECURITIES (96.2%) (COST $303,930)................... 339,232
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ---------------
SHORT-TERM INVESTMENT (4.3%)
REPURCHASE AGREEMENT
$ 15,266 Chase Securities, Inc., 5.70%, dated
6/30/97, due 7/1/97, to be repurchased at
$15,268, collateralized by $16,160 U.S.
Treasury Bonds, 5.625%, due 2/15/06, valued at
$15,527 (COST $15,266)......................... 15,266
--------
TOTAL INVESTMENTS IN SECURITIES (100.5%) (COST $319,196)........... 354,498
--------
FOREIGN CURRENCY (0.9%)
HKD 15,383 Hong Kong Dollar................................. 1,986
IDR 889,930 Indonesian Rupiah................................ 366
MYR 904 Malaysian Ringgit................................ 358
PHP 1,403 Philippine Peso.................................. 53
SGD 19 Singapore Dollar................................. 13
KRW 391,442 South Korean Won................................. 441
--------
TOTAL FOREIGN CURRENCY (COST $3,217)............................... 3,217
--------
TOTAL INVESTMENTS (101.4%) (COST $322,413)......................... 357,715
LIABILITIES IN EXCESS OF OTHER ASSETS (-1.4%)...................... (5,029)
--------
NET ASSETS (100%).................................................. $352,686
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Security valued at fair value -- see note A-1 to financial statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
GDR -- Global Depositary Receipt.
-----------------------
59
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at June 30, 1997, the Fund is
obligated to deliver or is to receive foreign currency in exchange for U.S.
dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR VALUE NET UNREALIZED
(000) (000) DATE (000) (000) GAIN (LOSS) (000)
- ------------- --------- ----------- ------------ --------- -----------------
<S> <C> <C> <C> <C> <C>
$ 1,542 $ 1,542 7/1/97 SGD 2,206 $ 1,542 $ --
$ 363 363 7/2/97 IDR 882,845 363 --
$ 91 91 7/2/97 THB 2365 91 --
THB 319,450 12,110 8/18/97 $ 12,032 12,032 (78)
--------- --------- ---
$ 14,106 $ 14,028 $ (78)
--------- --------- ---
--------- --------- ---
</TABLE>
- ---------------
IDR -- Indonesian Rupiah
SGD -- Singapore Dollar
THB -- Thai Baht
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
<TABLE>
<CAPTION>
PERCENT
OF
VALUE NET
INDUSTRY (000) ASSETS
- ---------------------------------------- -------- --------
<S> <C> <C>
Finance................................. $136,255 38.6%
Multi-Industry.......................... 52,458 14.9
Capital Equipment....................... 38,279 10.9
Consumer Goods.......................... 34,897 9.9
Services................................ 28,956 8.2
Energy.................................. 26,415 7.5
Materials............................... 21,972 6.2
-------- ---
$339,232 96.2%
-------- ---
-------- ---
</TABLE>
- -----------------------
60
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------
COMMON STOCKS (99.0%)
AEROSPACE (1.3%)
(a)3,500 Coltec Industries, Inc........................... $ 68
(a)7,400 Doncasters plc ADR............................... 171
10,300 Thiokol Corp..................................... 721
2,700 Triumph Group, Inc............................... 84
-------
1,044
-------
BANKING (9.2%)
4,800 AmSouth Bancorp.................................. 182
6,100 Astoria Financial Corp........................... 290
8,200 Comerica, Inc.................................... 558
13,600 Community First Bankshares, Inc.................. 522
14,400 First Hawaiian, Inc.............................. 491
9,200 Greenpoint Financial Corp........................ 612
4,600 MAF Bancorp, Inc................................. 193
13,200 National Commerce Bancorp........................ 290
22,800 North Fork Bancorp., Inc......................... 487
9,300 ONBANCorp, Inc................................... 474
7,919 Peoples Heritage Financial Group, Inc............ 300
14,300 Southtrust Corp.................................. 592
9,600 Summit Bancorp................................... 481
21,500 Trustmark Corp................................... 602
14,800 Union Planters Corp.............................. 768
5,700 UnionBanCal Corp................................. 410
6,500 Wilmington Trust Corp............................ 297
-------
7,549
-------
BUILDING (2.3%)
13,200 Ameron, Inc...................................... 747
10,900 Champion Enterprises, Inc........................ 164
4,300 City National Corp............................... 103
5,600 JLG Industries, Inc.............................. 76
9,300 Southdown, Inc................................... 406
(a)10,700 USG Corp......................................... 391
-------
1,887
-------
CAPITAL GOODS (2.9%)
19,100 Crane Co......................................... 799
18,600 Danka Business Systems plc....................... 760
7,900 Tecumseh Products 'A'............................ 473
(a)7,800 Tower Automotive, Inc............................ 335
-------
2,367
-------
CHEMICALS (2.7%)
26,000 Crompton & Knowles Corp.......................... 579
16,500 Dexter Corp...................................... 528
6,400 Fuller (H.B.) Co................................. 352
17,400 Quaker Chemical Corp............................. 302
12,000 Witco Corp....................................... 455
-------
2,216
-------
COMMUNICATIONS (1.0%)
(a)1,400 ADC Telecom, Inc................................. 47
(a)15,100 General Cable Corp............................... 387
(a)8,700 Hirsch International Corp. 'A'................... 194
10,600 Nextel Communications Inc. 'A'................... 201
-------
829
-------
COMPUTERS (3.9%)
(a)3,300 BMC Software, Inc................................ 183
(a)12,200 Cadence Design Systems, Inc...................... 409
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------
(a)8,500 Ceridian Corp.................................... $ 359
(a)18,600 Gateway 2000, Inc................................ 603
(a)5,400 InaCom Corp...................................... 168
(a)26,500 Overland Data, Inc............................... 143
(a)9,300 Seagate Technology, Inc.......................... 327
(a)12,400 Tech Data Corp................................... 390
(a)18,700 Western Digital Corp............................. 591
-------
3,173
-------
CONSUMER--DURABLES (6.1%)
14,100 A.O. Smith Corp. 'B'............................. 501
24,400 Arvin Industries, Inc............................ 665
5,700 Callaway Golf Co................................. 202
(a)11,100 Furniture Brands International, Inc.............. 215
26,700 Guilford Mills, Inc.............................. 556
33,000 Herman Miller, Inc............................... 1,188
13,200 Interface, Inc................................... 292
(a)13,700 Lear Corp........................................ 608
7,700 MascoTech, Inc................................... 161
19,000 Stanhome, Inc.................................... 625
-------
5,013
-------
CONSUMER--RETAIL (9.5%)
6,800 Brylane, Inc..................................... 262
23,000 CVS Corp......................................... 1,179
6,900 Dean Foods Co.................................... 279
(a)2,900 Designer Holdings Ltd............................ 30
8,800 Family Dollar Stores, Inc........................ 240
(a)4,100 Fred Meyer, Inc.................................. 212
18,600 Hughes Supply, Inc............................... 744
2,300 Jostens, Inc..................................... 62
(a)15,300 Office Depot, Inc................................ 297
22,700 Pier 1 Imports, Inc.............................. 602
5,300 Polo Ralph Lauren Corp........................... 145
13,600 Richfood Holdings, Inc........................... 354
22,200 Ross Stores, Inc................................. 726
10,300 Springs Industries, Inc. 'A'..................... 543
31,600 TJX Companies, Inc............................... 833
(a)7,600 Valassis Communications, Inc..................... 182
8,100 VF Corp.......................................... 686
(a)21,000 Zale Corp........................................ 416
-------
7,792
-------
CONSUMER--SERVICE & GROWTH (0.4%)
4,800 Hertz Corp. 'A'.................................. 173
(a)7,000 Renters Choice, Inc.............................. 139
-------
312
-------
CONSUMER--STAPLES (3.3%)
(a)11,300 Boston Chicken, Inc.............................. 158
6,700 Consolidated Cigar Holdings, Inc................. 186
24,000 DIMON, Inc....................................... 636
3,300 Interstate Bakeries Corp......................... 196
(a)16,000 Standard Commercial Corp......................... 278
19,400 Tyson Foods, Inc. 'A'............................ 371
28,600 Universal Corp................................... 908
-------
2,733
-------
ENERGY (9.5%)
5,400 Apache Corp...................................... 176
1,800 Black Hills Corp................................. 51
</TABLE>
-----------------------
61
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------
<C> <S> <C>
ENERGY (CONT.)
(a)5,200 Cooper Cameron Corp.............................. $ 243
(a)5,300 Diamond Offshore Drilling, Inc................... 414
10,500 Eastern Enterprises.............................. 364
(a)19,400 ENSCO International Inc.......................... 1,023
16,200 National Fuel Gas Co............................. 679
14,700 Nicor, Inc....................................... 527
(a)40,100 Noble Drilling Corp.............................. 905
16,300 Oneok, Inc....................................... 525
10,000 Parker & Parsley Petroleum Co.................... 354
12,000 Santa Fe International Corp...................... 408
6,300 Sun Co., Inc..................................... 195
7,500 Transocean Offshore, Inc......................... 545
(a)5,800 Tuboscope Vetco International Corp............... 115
8,900 Ultramar Diamond Shamrock Corp................... 290
9,000 Union Texas Petroleum Holdings, Inc.............. 188
(a)6,100 Varco International, Inc......................... 197
14,000 Washington Gas Light Co.......................... 352
(a)4,800 Weatherford Enterra, Inc......................... 185
-------
7,736
-------
ENTERTAINMENT (0.3%)
(a)9,300 Imax Corp........................................ 230
-------
FINANCIAL--DIVERSIFIED (9.4%)
9,500 Bear Stearns Companies, Inc...................... 325
10,500 Capital One Financial Corp....................... 396
13,125 Equity Residential Properties Trust.............. 624
25,600 Everen Capital Corp.............................. 798
3,700 Duke Realty Investment, Inc. REIT................ 150
6,900 FINOVA Group, Inc................................ 528
12,900 First Financial Corp. (Wisconsin)................ 379
20,700 Franklin Resources, Inc.......................... 1,502
11,600 GATX Corp........................................ 670
6,800 Hartford Life, Inc. 'A'.......................... 255
(a)3,100 HealthCare Financial Partners, Inc............... 63
8,000 Kilroy Realty Corp. REIT......................... 202
21,000 Nationwide Financial Services, Inc. 'A'.......... 558
5,000 Paine Webber Group, Inc.......................... 175
3,400 Post Properties, Inc............................. 138
5,100 Torchmark Corp................................... 363
17,600 United Asset Management Co....................... 498
5,250 Wellsford Real Properties Inc.................... 58
-------
7,682
-------
HEALTH CARE (8.7%)
22,500 Beckman Instruments, Inc......................... 1,086
17,500 Bergen Brunswig Corp. 'A'........................ 488
(a)7,300 Biogen, Inc...................................... 247
13,514 Block Drug Co. 'A'............................... 591
(a)8,800 Coherent, Inc.................................... 392
(a)29,200 FPA Medical Management, Inc...................... 692
(a)5,700 Health Care & Retirement Corp.................... 190
11,100 Kinetic Concepts, Inc............................ 200
(a)7,700 Marquette Medical Systems........................ 169
(a)29,200 Nellcor Puritan Bennett, Inc..................... 529
(a)2,600 RoTech Medical Corp.............................. 52
42,300 Sullivan Dental Products, Inc.................... 772
13,600 Universal Health Services, Inc................... 524
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------
(a)8,500 Vencor, Inc...................................... $ 359
(a)18,400 Wellpoint Health Networks, Inc................... 844
-------
7,135
-------
INDUSTRIAL (2.0%)
6,900 AGCO Corp........................................ 248
19,500 Barnes Group, Inc................................ 578
9,000 PACCAR, Inc...................................... 418
(a)7,800 Precision Drilling Corp.......................... 377
-------
1,621
-------
INSURANCE (1.3%)
6,700 Progressive Corp................................. 583
16,600 Reliance Group Holdings, Inc..................... 197
11,900 Western National Corp............................ 319
-------
1,099
-------
METALS (1.7%)
31,500 Birmingham Steel Corp............................ 488
10,300 Cleveland-Cliffs Iron Co......................... 420
8,800 Precision Castparts Corp......................... 525
-------
1,433
-------
PAPER & PACKAGING (2.8%)
16,500 Ball Corp........................................ 496
(a)14,200 Owens-Illinois, Inc.............................. 440
27,500 P.H. Glatfelter Co............................... 550
10,900 Potlatch Corp.................................... 493
8,700 Schweitzer-Mauduit International, Inc............ 327
-------
2,306
-------
SERVICES (11.5%)
(a)42,100 AccuStaff, Inc................................... 997
18,200 Angelica Corp.................................... 319
(a)14,700 BJ Services Co................................... 788
20,300 Bowne & Co....................................... 708
(a)25,400 CDI Corp......................................... 1,059
(a)5,300 Data Processing Resources Corp................... 124
(a)19,000 Fiserv, Inc...................................... 848
32,000 Journal Register Co.............................. 636
22,100 New England Business Services, Inc............... 582
26,800 Ogden Corp....................................... 583
13,600 McClatchy Newspapers, Inc........................ 399
3,300 New York Times Co., 'A'.......................... 163
27,000 Russ Berrie & Co., Inc........................... 592
(a)13,100 TETRA Technologies, Inc.......................... 324
(a)15,000 Tracor, Inc...................................... 377
14,300 True North Communications, Inc................... 354
(a)11,000 USA Waste Services, Inc.......................... 425
400 Washington Post Co. 'B'.......................... 159
-------
9,437
-------
TECHNOLOGY (5.6%)
8,100 Adobe Systems, Inc............................... 284
(a)10,600 Altera Corp...................................... 535
8,600 Dallas Semiconductor Corp........................ 338
(a)9,100 ESS Technology, Inc.............................. 122
(a)20,700 HMT Technology Corp.............................. 268
20,400 National Computer Systems, Inc................... 543
16,000 Park Electrochemical Corp........................ 421
21,800 Penn Engineering & Manufacturing Corp............ 428
(a)5,400 Solectron Corp................................... 378
</TABLE>
- --------------
62
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------
<C> <S> <C>
TECHNOLOGY (CONT.)
(a)17,400 Symantec Corp.................................... $ 339
7,500 Tektronix, Inc................................... 450
(a)8,600 Teradyne, Inc.................................... 338
6,200 Vishay Intertechnology, Inc...................... 179
-------
4,623
-------
TRANSPORTATION (2.5%)
20,000 Air Express International Corp................... 795
10,900 Airborne Freight Corp............................ 456
10,000 Arnold Industries, Inc........................... 170
(a)10,100 Offshore Logistics, Inc.......................... 191
(a)50,000 OMI Corp......................................... 478
-------
2,090
-------
UTILITIES (1.1%)
6,300 Public Service Co. (Colorado).................... 261
5,300 SJW Corp......................................... 278
19,600 Washington Water Power Co........................ 385
-------
924
-------
TOTAL COMMON STOCKS (COST $68,529)........................... 81,231
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------
SHORT-TERM INVESTMENT (3.0%)
REPURCHASE AGREEMENT (3.0%)
$ 2,523 Chase Securities, Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $2,523,
collateralized by $2,675 U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $2,570 (COST
$2,523)........................................ $ 2,523
-------
TOTAL INVESTMENTS (102.0%) (COST $71,052).................... 83,754
LIABILITIES IN EXCESS OF OTHER ASSETS (-2.0%)................ (1,667)
-------
NET ASSETS (100%)............................................ $82,087
-------
-------
</TABLE>
- ---------------
(a) -- Non-income producing.
ADR -- American Depositary Receipt
REIT -- Real Estate Investment Trust.
-----------------------
63
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
FIXED INCOME SECURITIES (86.7%)
CORPORATE BONDS & NOTES (32.2%)
ARGENTINA(0.8%)
$ 1,500 Impsa S.A. 11.75%, 3/27/98....................... $ 1,559
--------
BRAZIL (2.4%)
(e)4,800 Banco Do Brasil 9.375%, 6/15/07.................. 4,788
--------
CANADA (0.7%)
100 Rogers Cablesystems, 10.125%, 9/1/12............. 107
865 Rogers Cablesystems, Series B, 10.00%, 3/15/05... 936
250 Rogers Communications, Inc. 9.125%,
1/15/06........................................ 252
--------
1,295
--------
COLOMBIA (0.5%)
(n)1,225 Occidente Y Caribe 0.00%, 3/15/04................ 909
--------
ECUADOR (1.6%)
(e)3,000 Consorcio Ecuadoriano 14.00%, 5/1/02............. 3,188
--------
JAMAICA (1.1%)
2,000 Mechala Group Jamaica, Ltd. Series B, 12.75%,
12/30/99....................................... 2,115
--------
MEXICO (3.1%)
(e)2,000 Cemex S.A. 12.75%, 7/15/06....................... 2,318
(e)2,000 Empresas ICA Sociedad Controladora S.A. 11.875%,
5/30/01........................................ 2,185
(n)2,200 Grupo Televisa S.A. 0.00%, 5/15/08............... 1,526
--------
6,029
--------
UNITED STATES (22.0%)
795 Advanced Micro Devices 11.00%, 8/1/03............ 886
660 Amersco Inc., Series 97-A 10.00%,
3/15/04........................................ 677
(e)1,100 Anthem Insurance 9.00%, 4/1/27................... 1,132
(e)870 Big Flower Press 8.875%, 7/1/07.................. 855
(n)1,350 Brooks Fiber Properties 0.00%, 3/1/06............ 920
(n)720 Brooks Fiber Properties 0.00%, 11/1/06........... 469
(e)150 Brooks Fiber Properties 10.00%, 6/1/07........... 153
(e)497 CA FM Lease Trust 8.50%, 7/15/17................. 509
1,115 Cablevision Systems Corp. 9.875%,
5/15/06........................................ 1,187
630 Cleveland Electric Illuminating Co. 8.375%,
12/1/11........................................ 635
(e)850 ComcastCorp. 9.50%, 5/1/07....................... 861
640 Courtyard By Marriott, Series B, 10.75%,
2/1/08......................................... 693
(n)390 Dial Call Communications Series B, 0.00%,
12/15/05....................................... 306
670 Digital Equipment Corp. 8.625%,
11/1/12........................................ 667
419 DR Securitized Lease Trust, Series 1993-K1, Class
A1, 6.66%, 8/15/10............................. 366
1,030 DR Securitized Lease Trust, Series 1994-K1, Class
A1, 7.60%, 8/15/07............................. 968
250 DR Securitized Lease Trust, Series 1994-K1, Class
A2, 8.38%, 8/15/15............................. 232
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
$ (n)500 Echostar Satellite Broadcast 0.00%,
3/15/04........................................ $ 356
(e)300 EES Coke Battery Co., Inc. 9.382%,
4/15/07........................................ 307
370 First Nationwide Bank 9.125%, 1/15/03............ 382
(e)365 First Nationwide Bank 10.625%, 10/1/03........... 401
825 Gaylord Container Corp. 11.50%,
5/15/01........................................ 868
(e)1,280 Globalstar LP/Capital 11.375%, 2/15/04........... 1,282
1,130 Grand Casinos, Inc. 10.125%, 12/1/03............. 1,181
625 HMC Acquisition Properties 9.00%,
12/15/07....................................... 635
(e)785 Horseshoe Gaming L.L.C. 9.375%,
6/15/07........................................ 795
950 Host Marriott Travel, Series B, 9.50%, 5/15/05... 992
(e)1,230 ISP Holdings, Inc. Series B, 9.00%, 10/15/03..... 1,272
635 IXC Communications, Inc. 12.50%,
10/1/05........................................ 726
(e)300 Jet Equipment Trust, Series C-1, 11.79%,
6/15/13........................................ 375
(e)300 Jet Equipment Trust, Series 1995-D, 11.44%,
11/1/14........................................ 374
265 Kmart Corp. 7.75%, 10/1/12....................... 243
350 Kmart Funding Corp. 8.80%, 7/1/10................ 346
188 Midland Cogeneration Ventures, Series C-91,
10.33%, 7/23/02................................ 201
482 Midland Cogeneration Ventures, Series C-94,
10.33%, 7/23/02................................ 516
305 Midland Funding II, Series A, 11.75%, 7/23/05.... 353
(e)200 Navistar Financial Corp. 9.00%, 6/1/02........... 205
(n)2,550 Nextel Communications 0.00%, 8/15/04............. 1,951
(n)990 Norcal Waste Systems, Inc. 13.00%,
11/15/05....................................... 1,124
660 Nuevo Energy Co. 9.50%, 4/15/06.................. 690
(e)750 Outdoor Systems 8.875%, 6/15/07.................. 728
900 Paramount Communications 8.25%,
8/1/22......................................... 861
(e)620 Qwest Communications International 10.875%,
4/1/07......................................... 673
(e)750 Riggs Capital Trust II 8.875%, 3/15/27........... 763
850 RJR Nabisco, Inc. 8.75%, 4/15/04................. 867
800 SD Warren Co., Series B, 12.00%,
12/15/04....................................... 896
(e)550 Sinclair Broadcast Group 9.00%, 7/15/07.......... 534
710 Snyder Oil Corp. 8.75%, 6/15/07.................. 706
1,345 Southland Corp. 5.00%, 12/15/03.................. 1,143
(e)825 Station Casinos, Inc. 9.75%, 4/15/07............. 816
(e,n)1,990 TCI Satellite Entertainment 0.00%,
2/15/07........................................ 1,184
1,225 Tele-Communications Inc. 9.25%,
1/15/23........................................ 1,275
(n)1,975 Teleport Communications 0.00%, 7/1/07............ 1,427
880 Tenet Healthcare Corp. 8.625%, 1/15/07........... 897
930 TLC Beatrice International Holdings 11.50%,
10/1/05........................................ 1,045
(e,n)350 Transamerican Energy 0.00%, 6/15/02.............. 252
</TABLE>
- --------------
64
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED STATES (CONT.)
<TABLE>
<C> <S> <C>
$ 1,290 Viacom, Inc. 8.00%, 7/7/06....................... $ 1,255
900 Vintage Petroleum 8.625%, 2/1/09................. 897
--------
43,310
--------
TOTAL CORPORATE BONDS & NOTES (COST $60,490)...................... 63,193
--------
ASSET BACKED SECURITIES (0.8%)
UNITED STATES (0.8%)
(e)499 Aircraft Lease Portfolio Securitization Ltd.,
Series 1996-1, Class D, 12.75%, 6/15/06........ 538
(e)950 Long Beach Auto Trust 1997-1, Class B, 14.22%,
10/26/03....................................... 963
--------
TOTAL ASSET BACKED SECURITIES (COST $1,463)....................... 1,501
--------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.3%)
UNITED STATES (0.3%)
(e,h)1,045 DLJ Mortgage Acceptance Corp., Series 1996-CF2,
Class S, IO, 1.64%, 11/12/21................... 94
(e)550 First Home Mortgage Acceptance Corp., Series
1996-B, Class C, 7.9289%, 11/1/18.............. 487
(d,f)103 PNC Mortgage Securities Corp. Series 1995-2,
Class B4, REMIC, 7.50%, 9/25/25................ 91
--------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST $643)............. 672
--------
EUROBONDS (16.2%)
ARGENTINA (6.3%)
(e)2,500 Acindar Industria Argentina 11.75%,
11/12/98....................................... 2,606
3,500 Acindar Industria Argentina 11.25%,
2/15/04........................................ 3,725
(e)5,500 Republic of Argentina 11.75%, 2/12/07............ 6,134
--------
12,465
--------
BRAZIL (5.0%)
1,350 Comp Brazil De Projertos 12.50%,
12/22/97....................................... 1,377
(h)3,000 Federative Republic of Brazil 6.94%,
4/15/09........................................ 2,631
(n)7,284 Federative Republic of Brazil Series C, PIK
8.00%, 4/15/14................................. 5,857
--------
9,865
--------
BULGARIA (2.5%)
(h)2,250 Republic of Bulgaria Discount Bonds, 'A' 6.563%,
7/28/24........................................ 1,659
(h)4,500 Republic of Bulgaria Past Due Interest Bond
6.56%, 7/28/11................................. 3,254
--------
4,913
--------
VENEZUELA (2.4%)
(h)5,000 Republic of Venezuela Front Loaded Interest
Reduction Bond, 'A' 6.75%, 3/31/07............. 4,652
--------
TOTAL EUROBONDS (COST $28,073).................................... 31,895
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
FOREIGN GOVERNMENT & AGENCY OBLIGATIONS (25.8%)
ARGENTINA (2.0%)
$ (e)3,600 City of Buenos Aires 11.25%, 4/11/07............. $ 3,915
--------
BRAZIL (1.3%)
(h)2,000 Federative Republic of Brazil Debt Conversion 'L'
Bond, 6.938%, 4/15/12.......................... 1,655
920 Federative Republic of Brazil 10.125%, 5/15/27... 887
--------
2,542
--------
BULGARIA (2.5%)
8,500 Republic of Bulgaria Front Loaded Interest
Reduction Bond 2.25%, 7/28/12.................. 4,856
--------
CAYMAN ISLANDS (0.9%)
ZAR 8,000 National Financiera 17.00%, 2/26/99.............. 1,763
--------
ECUADOR (2.5%)
$ (h)7,000 Republic of Ecuador Past Due Interest Bond, PIK,
6.44%, 2/28/25................................. 5,005
--------
IVORY COAST (1.2%)
(e,n)6,800 Republic of Ivory Coast Front Loaded Interest
Reduction Bond 0.00%, 12/29/49................. 2,269
--------
JAMAICA (1.5%)
3,000 Government of Jamaica 12.00%, 7/19/99............ 3,000
--------
JORDAN (1.3%)
(e,h)3,000 Kingdom of Jordan 6.75%, 12/23/23................ 2,535
--------
MEXICO (2.7%)
4,800 United Mexican States 11.375%, 9/15/16........... 5,399
--------
PERU (4.3%)
(e,h)14,200 Republic of Peru Front Loaded Interest Reduction
Bond 3.25%, 3/7/17............................. 8,484
--------
RUSSIA (3.7%)
(e)6,764 Ministry of Finance Tranche IV GDR 3.00%,
5/14/03........................................ 4,539
(e)5,000 Ministry of Finance Tranche VI GDR 3.00%,
5/14/06........................................ 2,715
--------
7,254
--------
VENEZUELA (1.9%)
4,000 Republic of Venezuela Discount Bond 'L', 6.75%,
12/18/07....................................... 3,712
--------
TOTAL FOREIGN GOVERNMENT & AGENCY OBLIGATIONS
(COST $47,427).................................................. 50,734
--------
LOAN AGREEMENTS (7.9%)
ALGERIA (2.9%)
(h,r)6,500 Algeria Reprofiled Loan Agreement, 'A', 7.25%,
12/31/00....................................... 5,700
--------
GABON (2.6%)
(h)6,217 Republic of Gabon Syndicated Loan, 6.69%,
4/1/04......................................... 5,067
--------
</TABLE>
-----------------------
65
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<C> <S> <C>
IVORY COAST (1.9%)
$ 750 Republic of Ivory Coast Syndicated Loan, Zero
Coupon, 12/31/00............................... $ 315
FRF 35,644 Republic of Ivory Coast Syndicated Loan, Zero
Coupon, 12/31/00............................... 2,874
DEM 2,210 Republic of Ivory Coast Syndicated Loan, Zero
Coupon, 12/31/00............................... 532
--------
3,721
--------
JAMAICA (0.5%)
$ (h)1,000 Republic of Jamaica Syndicated Loan, 6.63%,
12/1/05........................................ 930
--------
TOTAL LOAN AGREEMENTS (COST $14,313).............................. 15,418
--------
YANKEE BONDS (3.5% )
ARGENTINA (1.6%)
1,850 Bridas Corp. 12.50%, 11/15/99.................... 2,028
1,000 Metrogas S.A., Series A, 12.00%, 8/15/00......... 1,115
--------
3,143
--------
BRAZIL (1.7%)
3,000 Tevecap S.A. 12.625%, 11/26/04................... 3,244
--------
MEXICO (0.2%)
400 Grupo Industrial Durango 12.625%,
8/1/03......................................... 450
--------
TOTAL YANKEE BONDS (COST $6,240).................................. 6,837
--------
TOTAL FIXED INCOME SECURITIES (COST $158,649)....................... 170,250
--------
</TABLE>
<TABLE>
<CAPTION>
SHARES
<C> <S> <C>
- ----------------
EQUITY SECURITIES (1.8%)
PREFERRED STOCK (1.5%)
UNITED STATES (1.5%)
(e)5,610 Sinclair Capital 11.625%......................... 595
2,084 Time Warner, Inc., 'M', PIK 10.25%............... 2,287
--------
2,882
--------
CONVERTIBLE PREFERRED STOCK (0.3%)
UNITED STATES (0.3%)
6,800 TCI Communications, Inc. 5.00%, 7/31/06.......... 704
--------
NO. OF WARRANTS
WARRANTS (0.0%)
COLOMBIA (0.0%)
(a)4,900 Occidente Y Caribe, expiring 3/15/04............. --
--------
TOTAL EQUITY SECURITIES (COST $3,372)............................... 3,586
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
STRUCTURED INVESTMENT (3.4%)
BRAZIL (3.4%)
$ (f)8,000 Salomon Bros. Federative Republic of Brazil
Credit Linked Enhanced Access Note 9.00%,
1/5/99 (COST $6,844)........................... $ 6,768
--------
TOTAL FOREIGN AND U.S. SECURITIES (91.9%) (COST $168,865)........... 180,604
--------
SHORT-TERM INVESTMENTS (7.7%)
DISCOUNT NOTES (6.1%)
BULGARIA (3.7%)
(v)12,750 Republic of Bulgaria Stripped Discount Notes,
6.5625%, 8/20/97............................... 7,329
--------
ECUADOR (1.7%)
(v)6,000 Republic of Ecuador Stripped Discount Notes,
6.4375%, 9/29/97............................... 3,311
--------
MEXICO (0.7%)
(v)1,750 United Mexican States Stripped Discount Notes,
6.375%, 9/9/97................................. 1,268
--------
TOTAL DISCOUNT NOTES.............................................. 11,908
--------
REPURCHASE AGREEMENT (1.6%)
3,146 Chase Securities, Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $3,146
collateralized by $3,330, U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $3,200.......... 3,146
--------
TOTAL SHORT-TERM INVESTMENTS (COST $13,042)......................... 15,054
--------
TOTAL INVESTMENTS (99.6%) (COST $181,907)........................... 195,658
OTHER ASSETS IN EXCESS OF LIABILITIES (0.4%)........................ 830
--------
NET ASSETS (100%)................................................... $196,488
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Security is valued at fair value -- see note A-1 to financial
statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
(f) -- Restricted as to public resale. Total value of restricted securities
at June 30, 1997 was $6,859 or 3.49% of net assets (Total cost
$6,926).
(h) -- Variable/floating rate security -- rate disclosed is as of June 30,
1997.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of June 30, 1997. Maturity date disclosed is the
ultimate maturity date.
(r) -- Issuer is making partial interest payments.
(v) -- Yield at time of purchase.
DEM -- Deutsche Mark
FRF -- French Franc
GDR -- Global Depositary Receipt
IO -- Interest Only.
PIK -- Payment-In-Kind. Income may be received in additional securities or
cash at the discretion of the issuer.
REMIC -- Real Estate Mortgage Investment Conduit
ZAR -- South African Rand
- --------------
66
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- -------------------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Foreign Government & Agency Obligations............................................... $ 82,630 42.1%
Loan Agreements....................................................................... 15,418 7.9
Materials............................................................................. 12,074 6.1
Services.............................................................................. 10,924 5.5
Telecommunications.................................................................... 10,746 5.5
Finance............................................................................... 10,522 5.3
Broadcast--Radio & Television......................................................... 8,247 4.2
Multi-Industry........................................................................ 7,065 3.6
Structured Investment................................................................. 6,768 3.4
Consumer Goods........................................................................ 5,065 2.6
Capital Equipment..................................................................... 2,310 1.2
Collateralized Mortgage Obligations & Asset Backed Securities......................... 2,173 1.1
Utilities............................................................................. 1,705 0.9
Energy................................................................................ 1,648 0.8
Technology............................................................................ 1,554 0.8
Insurance............................................................................. 1,132 0.6
Transportation........................................................................ 623 0.3
--------- ---
$ 180,604 91.9%
--------- ---
--------- ---
</TABLE>
-----------------------
67
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
COMMON STOCKS (78.8%)
ARGENTINA (6.9%)
(a)604,405 Acindar.......................................... $ 1,548
216,577 Banco del Suquia................................. 843
(a)15,557 Disco ADR........................................ 616
5,499 Quilmes ADR...................................... 56
39,015 Quilmes Industrial ADR........................... 454
269,077 Siderar 'A'...................................... 1,103
(e)10,470 Siderar ADR...................................... 340
8,585 Telecom Argentina ADR............................ 451
36,271 Telefonica de Argentina ADR...................... 1,256
50,695 YPF ADR.......................................... 1,559
--------
8,226
--------
BRAZIL (29.6%)
84,100 Brahma ADR....................................... 1,288
23,059 CEMIG ADR........................................ 1,161
(e)683 CEMIG ADR........................................ 35
(a)9,835,918 CRT 'A'.......................................... 14,800
12,910 CVRD ADR......................................... 288
8,850,000 Eletrobras....................................... 4,949
63,195 Eletrobras ADR................................... 1,763
10,020 Eletrobras 'B' ADR............................... 298
19,723,000 Ericsson Telecomunicacoes........................ 1,172
780,000 Iven............................................. 533
1,317,000 Lightpar......................................... 525
(e)10,410 Lojas Arupua ADR................................. 173
30,050 Pao de Acucar ADR................................ 689
17,568,000 Telebras......................................... 2,382
27,081 Telebras ADR..................................... 4,110
30,250 Unibanco GDR..................................... 1,123
--------
35,289
--------
CHILE (8.2%)
20,250 Andina 'B' ADR................................... 423
76,455 CCU ADR.......................................... 1,677
51,085 Chilectra ADR.................................... 1,470
14,793 Enersis ADR...................................... 526
(a)32,805 Quinenco ADR..................................... 607
139,263 Santa Isabel ADR................................. 4,492
30,360 Unimarc ADR...................................... 569
--------
9,764
--------
COLOMBIA (2.0%)
2,676,443 Banco de Colombia................................ 981
193,250 Bavaria.......................................... 1,387
--------
2,368
--------
MEXICO (27.2%)
(a)272,607 Banacci 'B'...................................... 701
(a)166,310 Banacci 'L'...................................... 388
(a)399,810 Bancomer 'B'..................................... 193
(a,e)14,306 Bancomer 'B' ADR................................. 139
(a)448,015 Banorte 'B'...................................... 467
85,398 Carso 'A1'....................................... 595
552,354 Cemex CPO........................................ 2,402
28,435 Cemex CPO ADR.................................... 247
112,980 Cemex 'B'........................................ 553
102,320 Cemex 'B' ADR.................................... 985
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
70,645 Cifra 'B'........................................ $ 132
86,907 Cifra 'B' ADR.................................... 159
111,590 Cifra 'C'........................................ 179
24,155 Coca-Cola Femsa ADR.............................. 1,247
(a)1 Desc ADR......................................... --
(e)23,400 FEMSA ADR........................................ 139
1,059,645 FEMSA 'B'........................................ 6,319
38,250 Grupo Modelo 'C'................................. 265
16,065 Hylsamex GDR..................................... 480
1,278,645 Kimberly 'A'..................................... 5,126
175,725 Maseca 'B'....................................... 192
60,750 Maseca 'B' ADR................................... 1,002
22,025 Panamco.......................................... 724
462,930 Soriana 'B'...................................... 1,164
(a)29,265 TAMSA ADR........................................ 540
96,075 Telemex ADR...................................... 4,588
(a)114,849 Televisa CPO ADR................................. 3,489
--------
32,415
--------
PERU (2.0%)
66,725 Banco Weise ADR.................................. 433
8,010 Credicorp Ltd.................................... 176
431,857 Ferreyros........................................ 497
21,140 Luz Del Sur...................................... 25
46,200 Tel Peru 'B' ADR................................. 1,210
--------
2,341
--------
VENEZUELA (2.9%)
35,632 CANTV ADR........................................ 1,537
1,139,084 Electricidad de Caracas.......................... 1,825
7,785 Mavesa ADR....................................... 79
--------
3,441
--------
TOTAL COMMON STOCKS (COST $81,747)................................. 93,844
--------
PREFERRED STOCKS (17.7%)
BRAZIL (NON-VOTING STOCKS) (17.7%)
(a,d)8,115,000 Banco Nacional................................... --
3,012,000 Brahma........................................... 2,294
77,444,200 CEMIG............................................ 3,992
3,397,000 Coteminas........................................ 1,325
3,163,771 CPFL............................................. 526
41,187 CVRD............................................. 911
(a,d)31,997 CVRD 'B' ADR..................................... --
1,572,000 Eletrobras 'B'................................... 937
56,805,300 Lojas Arapua..................................... 923
24,618,000 Lojas Renner..................................... 1,262
13,872,000 Petrobras........................................ 3,853
33,506,383 Telebras......................................... 5,082
--------
TOTAL PREFERRED STOCKS (COST $19,314).............................. 21,105
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ---------------
RIGHTS (0.0%)
BRAZIL (0.0%)
(a)121 Lojas Arapua, expiring 12/31/97 (COST $0)........ --
--------
TOTAL FOREIGN SECURITIES (96.5%) (COST $101,061)................... 114,949
--------
</TABLE>
- --------------
68
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
SHORT-TERM INVESTMENT (4.0%)
REPURCHASE AGREEMENT (4.0%)
$ 4,769 Chase Securities, Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $4,770,
collateralized by $5,050 U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $4,852 (COST
$4,769)........................................ $ 4,769
--------
TOTAL INVESTMENT IN SECURITIES (100.5%) (COST $105,830)............ 119,718
--------
FOREIGN CURRENCY (0.1%)
ARP 14 Argentine Peso................................... 15
COP 37,481 Colombian Peso................................... 34
MXP 740 Mexican Peso..................................... 93
VEB 2,254 Venezuelan Bolivar............................... 5
--------
TOTAL FOREIGN CURRENCY (COST $147)................................. 147
--------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<C> <S> <C>
- -----------------------------------------------------------------------------
TOTAL INVESTMENTS (100.6%) (COST $105,977)......................... $119,865
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.6%)...................... (805)
--------
NET ASSETS (100%).................................................. $119,060
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Security valued at fair value -- see note A-1 to financial statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
ADR -- American Depositary Receipt
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
<TABLE>
<CAPTION>
PERCENT
OF
VALUE NET
INDUSTRY (000) ASSETS
- ---------------------------------------- -------- --------
<S> <C> <C>
Telecommunications...................... $ 35,415 29.7%
Energy.................................. 22,894 19.2
Consumer Goods.......................... 17,771 14.9
Materials............................... 14,522 12.2
Services................................ 12,829 10.8
Finance................................. 5,446 4.6
Capital Equipment....................... 3,075 2.6
Multi-Industry.......................... 2,997 2.5
-------- ---
$114,949 96.5%
-------- ---
-------- ---
</TABLE>
-----------------------
69
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS (82.4%)
ARGENTINA (2.4%)
(a)12,975 Nortel Inversora ADR............................. $ 352
36,212 Quilmes ADR...................................... 371
10,847 Telecom Argentina ADR............................ 569
81,130 Telefonica Argentina ADR......................... 2,809
35,145 YPF ADR.......................................... 1,081
--------
5,182
--------
BRAZIL (6.3%)
77,330 Brahma ADR....................................... 1,184
(a,e)2,140 Celesc GDS....................................... 297
(a)389,600 CRT 'A'.......................................... 586
5,020 CVRD ADR......................................... 112
5,517,000 Eletrobras....................................... 3,085
9,140 Eletrobras ADR................................... 271
35,990 Eletrobras ADR................................... 1,004
927,000 Lightpar......................................... 369
(e)14,225 Lojas Arupua ADR................................. 236
1,960 Pao de Acucar.................................... 45
(e)14,961 Pao de Acucar ADR................................ 340
9,198,000 Telebras......................................... 1,247
20,845 Telebras ADR..................................... 3,163
(a)550,397 Telesp........................................... 162
34,420 Unibanco GDR..................................... 1,278
--------
13,379
--------
CHILE (0.6%)
16,645 CCU ADR.......................................... 365
8,290 Enersis ADR...................................... 295
18,649 Santa Isabel ADR................................. 601
--------
1,261
--------
CHINA (0.3%)
412,000 Guangshen Railway Co. Ltd. 'H'................... 181
6,000 Guangshen Railway Co. Ltd. ADR................... 131
696,000 Zhenhai Refining & Chemical Co., Ltd............. 252
--------
564
--------
COLOMBIA (0.0%)
215,412 Banco de Colombia................................ 79
--------
EGYPT (1.5%)
7,916 Ameriyah Cement Co............................... 193
34,430 Commercial International Bank.................... 720
(a)24,250 Commercial International Bank GDR................ 506
9,170 Eastern Tobacco.................................. 232
(a)1,895 Egypt American Bank.............................. 75
5,775 Egyptian Finance & Industrial.................... 345
10,800 General Silo Storage............................. 281
10,475 Helwan Portland Cement........................... 222
3,200 Madinet Housing & Development.................... 226
1,950 North Cairo Flour Mills.......................... 102
7,375 Tora H. Portland Cement.......................... 187
--------
3,089
--------
HONG KONG (2.5%)
82,000 Cheung Kong Holdings Ltd......................... 810
(a)338,000 China Everbright Ltd. -- IHD Pacific Ltd......... 1,010
778,000 China Resources Beijing Land..................... 577
272,000 China Resources Enterprises Ltd.................. 1,334
50,000 Hutchison Whampoa Ltd............................ 432
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
68,000 New World Development Co., Ltd................... $ 406
130,000 Shanghai Industrial Holdings Ltd................. 809
--------
5,378
--------
HUNGARY (0.4%)
(a)3,601 BorsodChem Rt. GDR............................... 140
(a)16,416 MOL Magyar Olaj-es Gazipari Rt. GDR.............. 365
1,790 Pannonplast Rt................................... 90
(a)12,850 Tiszai Vegyi Kombinat Rt. GDR.................... 220
--------
815
--------
INDIA (9.2%)
413,150 Automotive Axles Ltd............................. 548
181,400 Bharat Heavy Electricals Ltd..................... 1,960
12,369 Century Textiles & Industries GDR................ 656
(a)75,000 Container Corp. of India Ltd..................... 1,095
50 E.I.D. Parry Ltd. GDR............................ --
(e)150,000 E.I.D. Parry Ltd. GDR............................ 375
201,600 Great Eastern Shipping GDR....................... 1,613
100,000 Gujarat Ambuja Cement GDR........................ 1,163
214,816 Gujarat Narmada Valley Fertilizers Co., Ltd.
GDR............................................ 537
504,000 Hindustan Development Corp. Ltd. GDR............. 126
24,400 Hoechst Shering Agrevo Ltd....................... 460
12,500 Housing Development Finance Corp., Ltd........... 1,426
75,000 India Cements Ltd. GDR........................... 244
13,700 Indian Rayon & Industries GDR.................... 173
(d,e)108,750 Indo Rama Synthetics Ltd. GDR.................... 544
152,000 ITC Ltd.......................................... 2,389
145,000 ITC Ltd. GDS..................................... 2,647
4,320 JCT Ltd. GDR..................................... 7
(e)160 JCT Ltd. GDR..................................... --
230,750 JK Corp. GDR..................................... 121
150,000 Mahanagar Telephone Nigam, Ltd................... 1,273
50,000 Mahindra & Mahindra Ltd. GDR..................... 744
100,000 Philips India Ltd................................ 243
21,150 Rane Madras Ltd.................................. 151
(a)27,750 Raymond Ltd. GDR................................. 120
(a)280,000 Sanghi Polyester Ltd. GDR........................ 147
317,000 SIV Industries GDR............................... 127
302,600 Tube Investments of India Ltd. GDR............... 265
60,550 United Phosphorus Ltd. GDR....................... 394
--------
19,548
--------
INDONESIA (4.7%)
(a)648,000 Astra International (Foreign).................... 2,664
(a,d)1,424,202 Bank International Indonesia (Foreign)........... 1,230
(d)1,998,000 Bank Negara Indonesia (Foreign).................. 1,273
(d)456,500 Bimantara Citra (Foreign)........................ 798
(d)248,000 Gudang Garam (Foreign)........................... 1,040
(a,d)309,000 Hanjaya Mandala Sampoerna (Foreign).............. 1,179
(d)501,203 Indah Kiat Pulp & Paper (Foreign)................ 294
(a,d)226,800 Indofood Sukses Makmur (Foreign)................. 522
(a,d)476,000 Matahari Putra Prima (Foreign)................... 959
99,000 Mayora Indah (Foreign)........................... 56
41,000 Putra Surya Multidana (Foreign).................. 65
--------
10,080
--------
ISRAEL (2.1%)
(a)112,600 Bank Hapoalim Ltd................................ 234
1 Elbit Medical Imaging Ltd........................ --
37,500 Elbit Systems Ltd................................ 448
</TABLE>
- --------------
70
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
ISRAEL (CONT.)
<TABLE>
<C> <S> <C>
680 First International Bank of Israel Ltd. '1'...... $ 98
893 First International Bank of Israel Ltd. '5'...... 688
8,600 Koor Industries Ltd.............................. 761
16,500 Koor Industries Ltd. ADR......................... 291
91,800 Osem Investment Ltd.............................. 487
467,800 Super Sol Ltd.................................... 1,501
--------
4,508
--------
KOREA (6.0%)
37,900 Cho Hung Bank Co., Ltd. GDR...................... 275
15,195 Cho Hung Bank Co., Ltd. (Foreign)................ 101
(a)19,760 Hansol Paper Co.................................. 501
(a)657 Hanwha Chemical Corp............................. 5
(a,d)47,810 Housing & Commercial Bank, Korea................. 892
(a)30,592 Hyundai Engineering & Construction Co.
(Foreign)...................................... 785
(a,d)31,292 Kookmin Bank..................................... 577
(a)37,775 Kookmin Bank GDR................................. 798
45,097 Korea Electric Power Corp........................ 1,346
25,600 Korea Exchange Bank.............................. 169
13,920 LG Information & Communication Ltd............... 1,724
11,070 Pohang Iron & Steel Co., Ltd. ADR................ 354
(d)10,026 Pohang Iron & Steel Co., Ltd..................... 1,027
(a,e)16,184 Samsung Electronics Co. GDS (New)................ 908
(d)23,691 Samsung Electronics Co. (Foreign)................ 2,652
(d)49,945 Shinhan Bank Co., Ltd. (Foreign)................. 724
--------
12,838
--------
MALAYSIA (1.1%)
214,000 Commerce Asset Holdings Bhd...................... 564
125,000 Genting Bhd...................................... 599
52,000 Rashid Hussain Bhd............................... 330
174,000 Resorts World Bhd................................ 524
45,000 United Engineers Bhd............................. 324
--------
2,341
--------
MEXICO (11.0%)
44,710 Apasco........................................... 320
(a)266,176 Banacci 'B'...................................... 685
(a)193,888 Banacci 'L'...................................... 453
600,692 Bancomer 'B'..................................... 290
(a,e)93,470 Bancomer 'B' ADR................................. 911
103,755 Carso 'A1'....................................... 723
29,110 Carso ADR........................................ 410
293,969 Cemex CPO........................................ 1,279
63,369 Cemex CPO ADR.................................... 550
64,440 Cemex 'B'........................................ 315
87,780 Cemex 'B' ADR.................................... 845
15,004 Cifra 'A'........................................ 28
122,675 Cifra 'C'........................................ 196
15,226 Desc ADR......................................... 443
851,140 FEMSA 'B'........................................ 5,076
(a)36,726 Gruma 'B'........................................ 170
(a,e)3,953 Gruma ADR........................................ 73
299,297 Kimberly 'A'..................................... 1,200
107,474 Maseca 'B'....................................... 118
125,040 Telemex 'L' ADR.................................. 5,971
(a)113,787 Televisa CPO GDR................................. 3,457
--------
23,513
--------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
PAKISTAN (3.3%)
1,042,000 Fauji Fertilizer Co., Ltd........................ $ 2,049
(a)453,400 Hub Power Co..................................... 459
(a)181,500 Karachi Electric................................. 54
(a)150,000 Nishat Mills Ltd................................. 74
96,870 Pakistan State Oil Co., Ltd...................... 780
3,492,500 Pakistan Telecommunication Co.................... 2,657
(a)1,300,850 Sui Northern Gas Pipelines....................... 1,022
--------
7,095
--------
PERU (0.5%)
39,045 Tele Peru 'B' ADR................................ 1,022
--------
POLAND (1.5%)
(a)16,340 Agros Holdings S.A. 'D'.......................... 413
(a)8,300 Bank of Handlowy W Warszawie S.A................. 88
12,500 Bank Rozwoju Eksportu S.A........................ 262
(a)6,436 Bank Slaski S.A.................................. 460
223,822 Big Bank Inicjatyw............................... 269
15,750 Debica S.A....................................... 324
1,800 E. Wedel S.A..................................... 97
77,100 Elektrim S.A..................................... 671
(a)34,700 Exbud S.A........................................ 350
94,000 Polifarb Wroclaw S.A............................. 352
--------
3,286
--------
RUSSIA (7.6%)
(a)11,618,000 Edinaya Energetiches............................. 4,205
(a)23,900 Gazprom ADR...................................... 396
(a)1,622,000 Irkutskenergo.................................... 552
(a)110,000 Lukoil Holdings Co............................... 2,159
(a)14,000 Lukoil Holdings Co. ADR.......................... 1,105
(a)1,377,000 Moscow Energy (Mosenergo)........................ 1,929
(a)354,200 Rostelekom....................................... 1,374
(a,d,f)600 Storyfirst Communications........................ 1,500
42,000 Surgutneftegaz ADR............................... 2,248
(a)6,000 Tatneft ADR...................................... 639
--------
16,107
--------
SINGAPORE (0.4%)
(a)223,200 Want Want Holdings............................... 741
--------
SOUTH AFRICA (7.1%)
43,200 Amalgamated Banks of South Africa................ 310
110,800 Barlow Ltd....................................... 1,205
33,502 Bidvest Group Ltd................................ 258
13,300 De Beers Centenary AG............................ 491
4,100 Dreifontein Consolidation Ltd.................... 28
146,500 Ellerine Holdings, Ltd........................... 1,043
106,800 First National Bank Holdings, Ltd................ 918
(a)11,058 Foodcorp Limited................................. 84
300,600 Gencor Ltd....................................... 1,385
182,400 Illovo Sugar Ltd................................. 418
98,600 Malbak Ltd....................................... 156
2,454 New Clicks Holdings Ltd.......................... 3
90,000 Persetel Holdings Ltd............................ 633
246,000 Rembrandt Group Ltd.............................. 2,624
241,700 Reunert Ltd...................................... 828
349,100 Sasol Ltd........................................ 4,578
16,258 South African Druggists Ltd...................... 136
--------
15,098
--------
</TABLE>
-----------------------
71
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<C> <S> <C>
TAIWAN (4.0%)
(a)254,000 Acer, Inc........................................ $ 914
(a)202,500 Asustek Computer, Inc............................ 2,681
(a)98,000 China Development Corp........................... 506
(a)383,500 Compal Electronics, Inc.......................... 1,517
827,000 Far Eastern Textile, Ltd......................... 1,300
153,690 Formosa Plastics Corp............................ 370
(a)203,740 Kuoyang Construction............................. 491
203,000 Siliconware Precision Industries Co.............. 686
--------
8,465
--------
THAILAND (4.8%)
32,000 Advanced Information Services Co. Ltd............ 279
125,100 Advanced Information Services Co., Ltd.
(Foreign)...................................... 893
356,500 Bangkok Bank Co., Ltd. (Foreign)................. 2,450
5,000 Banpu Public Co., Ltd (Foreign).................. 73
88,700 Central Pattana Public Co., Ltd.................. 123
127,000 Industrial Finance (Foreign)..................... 162
(a)19,000 Lanna Lignite Public Co., Ltd.................... 134
3,000 Lanna Lignite Public Co., Ltd (Foreign).......... 20
95,000 National Finance & Securities Co................. 60
183,000 National Finance & Securities Co., Ltd.
(Foreign)...................................... 115
201,700 National Petrochemical Public Co., Ltd........... 206
(d)30,700 National Petrochemical Public Co., Ltd.
(Foreign)...................................... 31
5,000 Shinawatra Computer Co. Ltd...................... 35
(d)126,440 Shinawatra Computer Co., Ltd. (Foreign).......... 874
15,550 Siam Cement Co., Ltd. (Foreign).................. 269
324,800 Siam Commercial Bank Co. Ltd. (Foreign).......... 1,329
(a)537,300 Thai Farmers Bank Public Co., Ltd (Foreign)...... 2,282
43,000 Tipco Asphalt Public Company Ltd................. 224
141,000 United Communication Industry.................... 582
(d)9,000 United Communication Industry (Foreign).......... 37
--------
10,178
--------
TURKEY (4.1%)
5,388,750 Arcelik A.S...................................... 726
5,306,500 Bossa Ticaret ve Sanayii Isletmeleri A.S......... 120
1,545,750 Ege Biracilik Ve Malt Sanayii.................... 359
5,670,000 Erciyas Biracilik Ve Malt Sanayii................ 678
12,391,000 Eregli Demir Ve Celik Fabrikalari A.S............ 2,065
1,333,000 Guney Biraculik Ve Malt Sana..................... 75
(a)53,109,383 Turkiye Garanti Bankasi.......................... 2,002
(a)4,075,000 Vestel Elektronik Sanayii ve Ticaret A.S......... 228
(a)105,904,330 Yapi Ve Kredi Bankasi A.S........................ 2,424
--------
8,677
--------
VENEZUELA (0.2%)
75,000 C.A. La Electricidad de Caracas.................. 120
9,195 CANTV ADR........................................ 397
--------
517
--------
ZIMBABWE (0.8%)
550,450 Delta Corp....................................... 845
339,900 Meikles Africa Ltd............................... 836
--------
1,681
--------
TOTAL COMMON STOCKS (COST $160,489)..................................
175,442
--------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
PREFERRED STOCKS (11.0%)
BRAZIL (NON-VOTING STOCKS) (10.5%)
41,968,584 Banco Bradesco................................... $ 423
(a,d)11,156,000 Banco Nacional................................... 1
4,609,099 Brahma........................................... 3,511
65,899,110 CEMIG............................................ 3,397
31,430 CEMIG ADR........................................ 1,582
(a)3,780,500 CRT.............................................. 5,689
1,256,000 Coteminas........................................ 490
1,697,000 Eletrobras 'B'................................... 1,012
1,948,200 Itaubanco........................................ 1,091
12,437,000 Lojas Arapua S.A................................. 202
6,448,000 Lojas Renner S.A................................. 331
(a)4,660,000 Pao de Acucar.................................... 106
8,858,000 Petrobras........................................ 2,460
11,381,390 Telebras......................................... 1,726
734,661 Telesp........................................... 240
--------
22,261
--------
RUSSIA (0.5%)
(a)450,000 Rostelekom....................................... 1,125
--------
TOTAL PREFERRED STOCKS (COST $18,578)................................ 23,386
--------
INVESTMENT COMPANIES (1.4%)
UNITED STATES (1.4%)
(g)34,265 Morgan Stanley Africa Investment Fund, Inc....... 612
(a,g)186,045 Morgan Stanley India Investment Fund, Inc........ 2,407
--------
TOTAL INVESTMENT COMPANIES (COST $2,379)............................. 3,019
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- -----------------
RIGHTS (0.0%)
BRAZIL (0.0%)
(a,d)130,370 CRT.............................................. 30
--------
INDONESIA (0.0%)
(a,d)451,083 Indah Kiat Pulp & Paper, expiring 7/11/02........ 79
--------
MALAYSIA (0.0%)
(a,d)42,800 Commerce Asset Holdings Bhd., expiring 7/23/97... 3
(a,d) Rashid Hussain Bhd., expiring 12/31/02........... --
--------
TOTAL RIGHTS (COST $0)............................................... 112
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- -----------------
WARRANTS (0.1%)
INDONESIA (0.0%)
(a)126,596 Bank International Indonesia, expiring 1/17/00... 49
(a,d)80,192 Indah Kiat Pulp & Paper, expiring 7/11/02........ 14
--------
63
--------
MALAYSIA (0.0%)
(a,d)26,750 Commerce Asset Holdings Bhd., expiring 7/23/97... --
--------
</TABLE>
- --------------
72
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
NO. OF VALUE
WARRANTS (000)
- -------------------------------------------------------------------------------
<C> <S> <C>
THAILAND (0.1%)
(a)88,000 Thai Farmers Bank Public Co., Ltd, expiring
9/30/99........................................ $ 26
(a)102,487 Thai Farmers Bank Public Co., Ltd, expiring
9/15/02........................................ 45
--------
71
--------
TOTAL WARRANTS (COST $120)........................................... 134
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- -----------------
FOREIGN GOVERNMENT BONDS (0.4%)
BULGARIA (0.4%)
$ (n)750 Bulgaria Front Loaded Interest Reduction Bond,
'A' 2.25%, 7/28/24............................. 428
400 Bulgaria Discount Bonds, 'A' (Euro) 6.563%,
7/28/24........................................ 295
--------
TOTAL FOREIGN GOVERNMENT BONDS (COST $495)........................... 723
--------
CONVERTIBLE DEBENTURE (0.1%)
INDIA (0.0%)
(a)120 Tata Iron & Steel Co. 2.25%, 4/1/99.............. 112
--------
SOUTH AFRICA (0.1%)
(a)14,600 Sasol 8.50%, 12/15/2099.......................... 182
--------
TOTAL CONVERTIBLE DEBENTURES (COST $306)............................. 294
--------
TOTAL FOREIGN SECURITIES (95.4%) (COST $182,367)..................... 203,110
--------
SHORT-TERM INVESTMENT (4.7%)
REPURCHASE AGREEMENT (4.7%)
9,936 Chase Securities, Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $9,938,
collateralized by $10,520 U.S. Treasury Bonds,
5.625%, due 2/15/06, value at $10,108 (COST
$9,936)........................................ 9,936
--------
TOTAL INVESTMENT IN SECURITIES (100.1%) (COST $192,303).............. 213,046
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
FOREIGN CURRENCY (1.6%)
ARP 14 Argentine Peso................................... $ 14
BRL 745 Brazilian Real................................... 692
COP 7,025 Colombian Peso................................... 6
EGP 6 Egyptian Pound................................... 2
HKD 356 Hong Kong Dollar................................. 46
INR 60,094 Indian Rupee..................................... 1,679
IDR 147,154 Indonesian Rupiah................................ 61
MYR 27 Malaysian Ringgit................................ 11
MXP 245 Mexican Peso..................................... 31
PHP 343 Philippine Peso.................................. 13
PLZ 954 Polish Zloty..................................... 290
ZAR 4 South African Rand............................... 1
KRW 91,547 South Korean Won................................. 103
TWD 9,787 Taiwan Dollar.................................... 352
THB 4,960 Thai Baht........................................ 191
TRL 2,088,265 Turkish Lira..................................... 14
VEB 12,177 Venezuelan Bolivar............................... 25
--------
TOTAL FOREIGN CURRENCY (COST $3,537)................................. 3,531
--------
TOTAL INVESTMENTS (101.7%) (COST $195,840)........................... 216,577
LIABILITIES IN EXCESS OF OTHER ASSETS (-1.7%)........................ (3,631)
--------
NET ASSETS (100%).................................................... $212,946
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Securities valued at fair value -- see note A-1 to financial
statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
(f) -- Restricted as to public resale. Total value of restricted securities
at June 30, 1997 was $1,500 or 0.70% of net assets (Total cost
$1,500).
(g) -- The Fund is advised by an affiliate.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of June 30, 1997. Maturity date disclosed is the
ultimate maturity.
ADR -- American Depositary Receipt
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
-----------------------
73
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at June 30, 1997, the Fund is
obligated to deliver or is to receive foreign currency in exchange for U.S.
dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR VALUE NET UNREALIZED
(000) (000) DATE (000) (000) GAIN (LOSS) (000)
- ------------ --------- ----------- ------------ --------- -----------------
<S> <C> <C> <C> <C> <C>
$ 344 $ 344 7/1/97 ZAR 1,552 $ 342 $ (2)
$ 182 182 7/1/97 ZAR 823 181 (1)
$ 303 303 7/2/97 THB 7,841 303 --
THB 10,728 407 8/18/97 $ 400 400 (7)
THB 50,782 1,925 8/18/97 $ 1,900 1,900 (25)
$ 925 925 8/19/97 THB 24,929 945 20
THB 54,917 2,081 8/19/97 $ 2,040 2,040 (41)
THB 42,767 1,602 9/16/97 $ 1,613 1,613 11
THB 76,873 2,881 9/16/97 $ 2,897 2,897 16
--------- --------- -----
$ 10,650 $ 10,621 $ (29)
--------- --------- -----
--------- --------- -----
</TABLE>
- ---------------
THB -- Thai Baht
ZAR -- South African Rand
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ----------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Consumer Goods............................................................... $ 41,477 19.4%
Services..................................................................... 40,458 19.0
Finance...................................................................... 35,032 16.5
Energy....................................................................... 25,925 12.2
Multi-Industry............................................................... 20,185 9.5
Materials.................................................................... 20,033 9.4
Capital Equipment............................................................ 19,249 9.0
Foreign Government Bonds..................................................... 723 0.4
Gold Mines................................................................... 28 0.0
--------- ---
$ 203,110 95.4%
--------- ---
--------- ---
</TABLE>
- --------------
74
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
AGGRESSIVE EQUITY FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (94.9%)
CAPITAL GOODS (13.1%)
AEROSPACE & DEFENSE (13.1%)
17,500...... Boeing Co........................................ $ 929
(a)11,000... Litton Industries, Inc........................... 532
10,400...... McDonnell Douglas Corp........................... 712
21,700...... Textron, Inc..................................... 1,440
14,100...... Thiokol Corp..................................... 987
49,600...... United Technologies Corp......................... 4,117
--------
8,717
--------
CONSUMER--CYCLICAL (31.8%)
BROADCAST--RADIO & TELEVISION (1.9%)
(a)20,400... Clear Channel Communications, Inc................ 1,255
--------
FOOD SERVICE & LODGING (20.7%)
34,200...... Cracker Barrel Old Country Store, Inc............ 907
(a)212,700.. HFS, Inc......................................... 12,337
10,500...... McDonald's Corp.................................. 507
--------
13,751
--------
LEISURE RELATED (3.9%)
(a)61,500... GTECH Holdings Corp.............................. 1,983
34,700...... International Game Technology.................... 616
--------
2,599
--------
PUBLISHING (2.8%)
(a)126,100.. K-III Communications Corp........................ 1,513
6,700....... Time Warner, Inc................................. 323
--------
1,836
--------
RETAIL--GENERAL (2.5%)
24,200...... Home Depot, Inc.................................. 1,668
--------
TOTAL CONSUMER--CYCLICAL...................................... 21,109
--------
CONSUMER--STAPLES (13.0%)
BEVERAGES (3.9%)
113,700..... Coca-Cola Enterprises, Inc....................... 2,615
--------
HEALTH CARE SUPPLIES & SERVICES (2.0%)
12,900...... AETNA, Inc....................................... 1,321
--------
TOBACCO (7.1%)
106,300..... Philip Morris Cos., Inc.......................... 4,717
--------
TOTAL CONSUMER--STAPLES....................................... 8,653
--------
DIVERSIFIED (12.0%)
DIVERSIFIED (12.0%)
17,000...... Allied Signal, Inc............................... 1,428
(a)63 Berkshire Hathaway, Inc.......................... 2,974
27,000 ITT Industries, Inc.............................. 695
19,700 Loews Corp....................................... 1,972
45,500 Viad Corp........................................ 876
--------
7,945
--------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
ENERGY (1.3%)
COAL, GAS, & OIL (1.3%)
(a)11,000 Diamond Offshore Drilling, Inc................... $ 859
--------
FINANCE (19.4%)
BANKING (7.0%)
15,000 BankAmerica Corp................................. 968
2,600 Chase Manhattan Corp............................. 252
10,300 Citicorp......................................... 1,242
8,133 Wells Fargo Co................................... 2,192
--------
4,654
--------
FINANCIAL SERVICES (4.4%)
14,000 American Express Co.............................. 1,043
7,700 Franklin Resources, Inc.......................... 559
10,100 Student Loan Marketing Association............... 1,283
--------
2,885
--------
INSURANCE (8.0%)
14,200 ACE Ltd.......................................... 1,049
21,700 CMAC Investment Corp............................. 1,036
(a)14,800 CNA Financial Corp............................... 1,560
13,100 MGIC Investment Corp............................. 628
7,500 Progressive Corp................................. 653
15,600 USF&G Corp....................................... 374
--------
5,300
--------
TOTAL FINANCE................................................. 12,839
--------
MATERIALS (1.0%)
CHEMICALS (1.0%)
11,000 Du Pont (EI) de Nemours Co....................... 692
--------
SERVICES (2.9%)
BUSINESS SERVICES (1.0%)
8,300 Xerox Corp....................................... 655
--------
TRANSPORTATION (1.9%)
(a)6,900 AMR Corp......................................... 638
(a)17,400 U.S. Airways Group Inc........................... 609
--------
1,247
--------
TOTAL SERVICES................................................ 1,902
--------
TECHNOLOGY (0.4%)
ELECTRONICS (0.4%)
8,600 Watkins Johnson Co............................... 264
--------
TOTAL COMMON STOCKS (COST $59,265)............................ 62,980
--------
</TABLE>
-----------------------
75
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
AGGRESSIVE EQUITY FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (7.6%)
REPURCHASE AGREEMENT (7.6%)
$ 5,014 Chase Securities, Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $5,015,
collaterallized by $5,310 U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $5,102 (COST
$5,014)........................................ $ 5,014
--------
TOTAL INVESTMENTS (102.5%) (COST $64,279)....................... 67,994
LIABILITIES IN EXCESS OF OTHER ASSETS (-2.5%)................... (1,681)
--------
NET ASSETS (100%)............................................... $ 66,313
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing.
SECURITIES SOLD SHORT (NOTE A-6)
<TABLE>
<C> <S> <C>
VALUE
SHARES (000)
- ----------- ---------
98,300 CUC International, Inc. (TOTAL PROCEEDS $2,301) $ 2,537
---------
---------
</TABLE>
- --------------
76
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------
COMMON STOCKS (86.9%)
APARTMENT (19.7%)
2,500 Amli Residential Properties Trust REIT........... $ 59
13,700 Associated Estates Realty Corp. REIT............. 322
21,500 Avalon Properties, Inc. REIT..................... 615
20,200 Bay Apartment Communities, Inc. REIT............. 747
1,500 Columbus Realty Trust REIT....................... 34
26,700 Essex Property Trust, Inc. REIT.................. 858
13,400 Gables Residential Trust REIT.................... 338
18,800 Merry Land & Investment Co., Inc. REIT........... 408
15,900 Oasis Residential, Inc. REIT..................... 374
18,900 Security Capital Atlantic, Inc................... 452
2,600 Summit Properties, Inc. REIT..................... 54
(a)47,451 Wellsford Properties Inc......................... 522
-------
4,783
-------
HEALTHCARE (9.7%)
6,900 Alexandria Real Estate Equities, Inc. REIT....... 151
(a)15,600 ARV Assisted Living, Inc......................... 172
7,500 Health Care Property Investors, Inc. REIT........ 264
1,600 LTC Properties, Inc.............................. 29
43,200 Nationwide Health Properties, Inc................ 950
24,000 Omega Healthcare Investors, Inc.................. 785
-------
2,351
-------
LAND (1.9%)
45,424 Atlantic Gulf Communities Corp................... 289
(a)9,700 Catellus Development Corp........................ 176
-------
465
-------
LODGING/LEISURE (12.5%)
44,500 American General Hospitality Corp................ 1,101
(a)26,100 Extended Stay of America, Inc.................... 411
(a)24,500 Host Marriott Corp............................... 437
(a)31,700 John Q. Hammons Hotels, Inc...................... 293
(a)15,400 Servico, Inc..................................... 229
13,300 Starwood Lodging Trust REIT...................... 568
-------
3,039
-------
MANUFACTURED HOMES (6.6%)
41,148 Chateau Properties, Inc. REIT.................... 1,178
18,100 Manufactured Home Communities, Inc. REIT......... 417
-------
1,595
-------
OFFICE & INDUSTRIAL (20.7%)
INDUSTRIAL (3.3%)
2,750 EastGroup Properties, Inc. REIT.................. 55
8,800 Meridian Industrial Trust REIT................... 207
25,000 Pacific Gulf Properties, Inc. REIT............... 550
-------
812
-------
OFFICE (16.1%)
20,400 Arden Realty Group, Inc.......................... 530
14,500 Beacon Properties Corp. REIT..................... 484
6,400 Boston Properties, Inc........................... 176
39,466 Brandywine Realty Trust REIT..................... 799
500 Brookfield Properties Corp....................... 6
(a)19,900 Brookfield Properties Corp. Installment
Receipts....................................... 139
15,600 CarrAmerica Realty Corp. REIT.................... 449
10,400 Cornerstone Properties, Inc. REIT................ 160
24,400 Great Lakes REIT, Inc............................ 401
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------
10,600 Koger Equity, Inc................................ $ 193
27,216 Trizec Hahn Corp................................. 582
-------
3,919
-------
OFFICE & INDUSTRIAL (1.3%)
6,400 Kilroy Realty Corp. REIT......................... 162
6,200 Prentiss Properties Trust REIT................... 159
-------
321
-------
TOTAL OFFICE & INDUSTRIAL..................................... 5,052
-------
RETAIL (14.5%)
REGIONAL MALL (9.8%)
44,100 First Union Real Estate Investments REIT......... 623
30,200 Taubman Center, Inc. REIT........................ 400
25,700 Urban Shopping Centers, Inc. REIT................ 819
32,500 Westfield America, Inc. REIT..................... 548
-------
2,390
-------
SHOPPING CENTER (4.7%)
11,300 Alexander Haagen Properties, Inc. REIT........... 184
40,500 Burnham Pacific Property Trust REIT.............. 557
6,200 Federal Realty Investment Trust REIT............. 167
2,700 IRT Property Co.................................. 32
900 Price, Inc. REIT................................. 33
200 Ramco-Gershenson Properties Trust REIT........... 4
11,900 Western Investment Real Estate Trust REIT........ 165
-------
1,142
-------
TOTAL RETAIL.................................................. 3,532
-------
SELF STORAGE (1.3%)
11,000 Shurgard Storage Centers, Inc. 'A' REIT.......... 308
-------
TOTAL COMMON STOCKS (COST $19,346)............................ 21,125
-------
PREFERRED STOCKS (1.0%)
LAND (0.3%)
(d,f)8,207 Atlantic Gulf Communities Corp................... 82
-------
RETAIL (0.7%)
SHOPPING CENTER (0.7%)
5,500 First Washington Realty Trust, Inc. 'A'.......... 168
-------
TOTAL PREFERRED STOCKS (COST $236)............................ 250
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
CONVERTIBLE BONDS (0.5%)
OFFICE (0.5%)
$ 224 Brookfield Properties Corp. 6.00%, 2/14/07
(COST $86)..................................... 125
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------
WARRANTS (0.0%)
LAND (0.0%)
(a,d)5,724 Atlantic Gulf Communities Class A, expiring
6/23/04........................................ --
(a,d)5,724 Atlantic Gulf Communities Class B, expiring
6/23/04........................................ --
(a,d)5,724 Atlantic Gulf Communities Class C, expiring
6/23/04........................................ --
-------
--
-------
TOTAL WARRANTS (COST $0)...................................... --
-------
</TABLE>
-----------------------
77
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------
SHORT-TERM INVESTMENT (2.7%)
REPURCHASE AGREEMENT (2.7%)
$ 665 Chase Securities Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $665,
collateralized by $705 U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $677
(COST $665).................................... $ 665
-------
TOTAL INVESTMENTS (91.1%) (COST $20,333)...................... 22,165
OTHER ASSETS IN EXCESS OF LIABILITIES (8.9%).................. 2,151
-------
NET ASSETS (100%)............................................. $24,316
-------
-------
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Security valued at fair value -- see note A-1 to financial statements.
(f) -- Restricted as to public resale. Total value of restricted securities
at June 30, 1997 was $82 or 0.34% of net assets. (Total cost $82)
REIT -- Real Estate Investment Trust.
- --------------
78
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
HIGH YIELD FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------
CORPORATE BONDS AND NOTES (64.2%)
AEROSPACE & DEFENSE (2.8%)
$ (e)200 Jet Equipment Trust, Series 1994-C1,
11.79%, 6/15/13.............................. $ 253
(e)300 Jet Equipment Trust, Series 1995-D,
11.44%, 11/1/14.............................. 374
-------
627
-------
BANKING (1.5%)
95 First Nationwide Holdings 9.125%, 1/15/03...... 98
225 First Nationwide Holdings 10.625%, 10/1/03..... 247
-------
345
-------
BROADCAST -- RADIO & TELEVISION (8.1%)
410 Cablevision Systems Corp. 9.875%, 5/15/06...... 437
(e)110 Comcast Cellular Corp. 9.50%, 5/1/07........... 111
(n)170 Echostar Satellite Broadcast 0.00%, 3/15/04.... 121
200 Paramount Communications 8.25%, 8/1/22......... 191
150 Rogers Cablesystems Ltd., 'B', 10.00%,
3/15/05...................................... 162
60 Rogers Communications, Inc. 9.125%, 1/15/06.... 61
(e)165 TV Azteca S.A. 10.50%, 2/15/07................. 169
600 Viacom, Inc. 8.00%, 7/7/06..................... 584
-------
1,836
-------
BUSINESS SERVICES (0.8%)
(e)205 Outdoor Systems 8.875%, 6/15/07................ 199
-------
CHEMICALS (1.4%)
315 ISP Holdings, Inc., Series B 9.00%, 10/15/03... 326
-------
COAL, GAS & OIL (1.1%)
255 Snyder Oil Corp. 8.75%, 6/15/07................ 254
-------
COMPUTERS (2.0%)
230 Advanced Micro Devices 11.00%, 8/1/03.......... 257
190 Digital Equipment Corp. 8.625%, 11/1/12........ 189
-------
446
-------
CONSUMER STAPLES (1.4%)
300 RJR Nabisco, Inc. 8.75%, 4/15/04............... 306
-------
DIVERSIFIED (1.0%)
225 Kmart Funding Corp. 8.80%, 7/1/10.............. 223
-------
ELECTRICAL EQUIPMENT (0.6%)
(e)125 EES Coke Battery Co., Inc. 9.382%, 4/15/07..... 128
-------
ENERGY (3.9%)
240 Nuevo Energy Co. 9.50%, 4/15/06................ 251
325 Quezon Power Ltd., 8.86%, 6/15/17.............. 325
(e,n)130 Transamerican Energy 0.00%, 6/15/02............ 93
220 Vintage Petroleum 8.625%, 2/1/09............... 219
-------
888
-------
ENVIRONMENTAL CONTROLS (2.7%)
103 Midland Cogeneration Ventures, Series C-91,
10.33%, 7/23/02.............................. 109
(n)450 Norcal Waste Systems, 'B', 13.00%, 11/15/05.... 511
-------
620
-------
FINANCE (2.4%)
140 Amersco Inc., Series 97-A, 10.00%, 3/15/04..... 144
150 HMC Acquisition Properties,'B', 9.00%,
12/15/07..................................... 152
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------
$ (e)75 Navistar Financial Corp. 9.00%, 6/1/02......... $ 77
(e)170 Riggs Capital Trust II 8.875%, 3/15/27......... 173
-------
546
-------
FOOD SERVICE & LODGING (1.7%)
200 Courtyard By Marriott 10.75%, 2/1/08........... 216
150 Host Marriott Travel Plaza, 'B', 9.50%,
5/15/05...................................... 157
-------
373
-------
FOREST PRODUCTS & PAPER (2.5%)
(e)215 Asia Pulp & Paper Company Ltd. 12.00%,
12/29/49..................................... 220
305 SD Warren Co.,'B', 12.00%, 12/15/04............ 341
-------
561
-------
GAMING & LODGING (3.5%)
445 Grand Casinos, Inc. 10.125%, 12/1/03........... 465
320 Station Casinos Inc. 10.125%, 3/15/06.......... 323
-------
788
-------
HEALTH CARE SUPPLIES & SERVICES (1.0%)
220 Tenet Healthcare Corp. 8.625%, 1/15/07......... 224
-------
INSURANCE (1.5%)
(e)325 Anthem Insurance 9.00%, 4/1/27................. 335
-------
MULTI--INDUSTRY (2.0%)
(e)210 Multicanal S.A. 10.50%, 2/1/07................. 226
200 TLC Beatrice International Holdings 11.50%,
10/1/05...................................... 224
-------
450
-------
PACKAGING & CONTAINER (1.2%)
250 Gaylord Container Corp. 11.50%, 5/15/01........ 263
-------
RETAIL--GENERAL (2.3%)
95 Kmart Corp. 7.75%, 10/1/12..................... 87
500 Southland Corp. 5.00%, 12/15/03................ 425
-------
512
-------
TELECOMMUNICATIONS (17.6%)
(n)495 Brooks Fiber Properties, Inc. 0.00%, 3/1/06.... 337
(n)375 Brooks Fiber Properties, Inc. 0.00%, 11/1/06... 244
(n)185 Dial Call Communications 0.00%, 12/15/05....... 145
(e)360 Globalstar LP/Capital 11.375%, 2/15/04......... 361
175 IXC Communications, Inc., 'B', 12.50%,
10/1/05...................................... 200
100 Net Sat Servicos LTDA 12.75%, 8/5/04........... 109
(n)910 Nextel Communications 0.00%, 8/15/04........... 696
(n)400 Occidente Y Caribe 0.00%, 3/15/04.............. 297
(e)190 Qwest Communications International 10.875%,
4/1/07....................................... 207
(e,n)645 TCI Satellite Entertainment 0.00%, 2/15/07..... 384
420 Tele-Communications Inc. 9.25%, 1/15/23........ 437
25 Tele-Communications Inc. 8.75%, 2/15/23........ 25
(n)745 Teleport Communications 0.00%, 7/1/07.......... 538
-------
3,980
-------
UTILITIES (1.2%)
120 Cleveland Electric Illuminating 8.375%,
12/1/11...................................... 121
125 Midland Funding II, 'A', 11.75%, 7/23/05....... 145
-------
266
-------
TOTAL CORPORATE BONDS AND NOTES (COST $13,984)................ 14,496
-------
</TABLE>
-----------------------
79
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
HIGH YIELD FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------
<C> <S> <C>
ASSET BACKED SECURITIES (6.8%)
AEROSPACE & DEFENSE (0.8%)
$ 175 Aircraft Lease Portfolio Securitization Ltd.,
Series 1996-1, Class D, 12.75%, 6/15/06...... $ 188
-------
FINANCE (6.0%)
(e)248 CA FM Lease Trust 8.50%, 7/15/17............... 254
(e,h)323 DLJ Mortgage Acceptance Corp., Series 1996-CF2,
Class S, 1.64%, 11/12/21 IO.................. 29
150 DR Securitized Lease Trust, Series 1993-K1,
Class A2, 7.43%, 8/15/18..................... 125
504 DR Securitized Lease Trust, Series 1994-K1,
Class A1, 7.60%, 8/15/07..................... 474
100 DR Securitized Lease Trust, Series 1994-K1,
Class A2, 8.375%, 8/15/15.................... 93
(e)125 First Home Mortgage Acceptance Corp., Series
1996-B, Class C, 7.929%, 11/1/18............. 111
(e)250 Long Beach Auto Trust 1997-1, Class B, 14.22%,
10/26/03..................................... 254
-------
1,340
-------
TOTAL ASSET BACKED SECURITIES (COST $1,468)................... 1,528
-------
FOREIGN GOVERNMENT BONDS (7.6%)
BONDS (7.3%)
(h)350 Brazil Front Loaded Interest Reduction Bond,
Series 15, 4.50%, 4/15/09.................... 274
(n)625 Republic of Argentina 5.50%, 3/31/23........... 434
(h)90 Republic of Argentina BOCON, Series 2, PIK,
5.375%, 9/1/02............................... 106
245 Republic of Colombia 8.70%, 2/15/16............ 249
(h)500 Republic of Venezuela, Series W-A, 6.75%,
3/31/20...................................... 394
(h)250 United Mexican States Discount Bond, 'B',
6.25%, 12/31/19.............................. 193
-------
1,650
-------
LOAN AGREEMENTS (0.3%)
(v)75 Russia Interest Arrears Note, 12/31/99......... 57
-------
TOTAL FOREIGN GOVERNMENT BONDS (COST $1,576).................. 1,707
-------
</TABLE>
<TABLE>
<CAPTION>
SHARES
<C> <S> <C>
- ------------
CONVERTIBLE PREFERRED STOCK (1.2%)
BROADCAST--RADIO & TELEVISION (1.2%)
2,540 TCI Pacific Communications 5.00%, 7/31/06 (COST
$231)........................................ 263
-------
PREFERRED STOCKS (4.7%)
ENTERTAINMENT (3.7%)
755 Time Warner, Inc., 'M', 10.25%................. 829
-------
FINANCE (1.0%)
(e)2,150 Sinclair Capital, 11.625%...................... 228
-------
TOTAL PREFERRED STOCKS (COST $997)............................ 1,057
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF VALUE
WARRANTS (000)
<C> <S> <C>
- -----------------------------------------------------------------------
WARRANTS (0.0%)
TELECOMMUNICATIONS (0.0%)
(a,d,e)1,600 Occidente Y Caribe, expiring 3/15/04 (COST
$0).......................................... $ --
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ------------
RIGHTS (0.0%)
FOREIGN GOVERNMENT (0.0%)
(a,d)2,500 Republic of Venezuela, expiring 3/31/20........ --
(a,d)500,000 United Mexican States, expiring 12/31/19....... --
-------
TOTAL RIGHTS (COST $0)........................................ --
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ------------
SHORT-TERM INVESTMENTS (14.8%)
COMMERCIAL PAPER (12.1%)
$ 500 Case Equipment Loan Trust 5.58%, 8/7/97........ 496
500 Eiger Capital Corp. 5.54%, 7/15/97............. 499
500 J.C. Penney Inc. 5.45%, 8/11/97................ 497
500 Monsanto Co. 5.60%, 7/8/97..................... 499
500 Pacific Gas & Electric 5.57%, 8/1/97........... 498
250 RR Donnelly & Sons Corp. 5.53%, 7/8/97......... 250
-------
2,739
-------
REPURCHASE AGREEMENT (2.7%)
615 Chase Securities Inc., 5.70%, dated 6/30/97,
due 7/1/97, to be repurchased at $615,
collateralized by $655 U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $629.......... 615
-------
TOTAL SHORT-TERM INVESTMENTS (COST $3,354).................... 3,354
-------
TOTAL INVESTMENTS (99.3%) (COST $21,610)...................... 22,405
OTHER ASSETS IN EXCESS OF LIABILITIES (0.7%).................. 162
-------
NET ASSETS (100%)............................................. $22,567
-------
-------
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Security valued at fair value -- see note A-1 to financial statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
(h) -- Variable/Floating rate securities -- rate disclosed is as of June 30,
1997.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of June 30, 1997. Maturity date disclosed is the
ultimate maturity date.
(v) -- When-issued security -- see note A-9 to financial statements.
IO -- Interest Only.
PIK -- Payment-In-Kind. Income may be received in additional securities or
cash at the discretion of the issuer.
- --------------
80
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------
COMMON STOCKS (90.1%)
AUSTRALIA (3.0%)
25,927 Amcor Ltd........................................ $ 172
28,800 Broken Hill Proprietary Co., Ltd................. 424
14,100 Commonwealth Bank of Australia................... 170
8,200 Lend Lease Corp. Ltd............................. 174
11,600 National Australia Bank Ltd...................... 166
35,640 News Corp., Ltd.................................. 171
35,200 WMC Ltd.......................................... 222
-------
1,499
-------
AUSTRIA (0.6%)
3,300 Boehler-Uddeholm AG.............................. 256
380 Radex-Heraklith Industriebet AG.................. 16
-------
272
-------
BELGIUM (0.5%)
5,300 G.I.B. Holdings Ltd.............................. 254
-------
DENMARK (1.3%)
6,100 BG Bank A/S...................................... 337
5,740 Unidanmark A/S 'A' (Registered).................. 323
-------
660
-------
FINLAND (1.9%)
(a)7,150 Amer-Yhtymae Oy.................................. 129
4,500 Huhtamaki Oy 'I'................................. 194
550 Kone Oy 'B'...................................... 66
39,200 Merita Ltd. 'A'.................................. 131
25,000 Rautaruukki Oy................................... 262
7,600 Valmet Oy........................................ 131
-------
913
-------
FRANCE (6.4%)
1,000 Alcatel Alsthom.................................. 125
3,100 Banque Nationale de Paris........................ 128
640 Bongrain S.A..................................... 250
2,600 Cie de Saint Gobain.............................. 379
2,900 Elf Aquitaine S.A................................ 313
1,640 Eridania Beghin-Say S.A.......................... 246
1,900 Groupe Danone RFD................................ 314
4,400 Lafarge S.A...................................... 274
5,400 Legris Industries S.A............................ 255
(a)2,500 SGS-Thomson Microelectronics N.V................. 198
3,900 Total S.A. 'B'................................... 394
14,650 Usinor Sacilor................................... 264
-------
3,140
-------
GERMANY (7.1%)
7,100 BASF AG.......................................... 262
6,600 Bayer AG......................................... 254
1,240 Buderus AG....................................... 689
15,500 Gerresheimer Glas AG............................. 260
19,300 Lufthansa AG..................................... 371
220 Mannesmann AG.................................... 98
(a)1,800 Metro AG......................................... 196
5,600 Veba AG.......................................... 316
860 Viag AG.......................................... 393
870 Volkswagen AG.................................... 660
-------
3,499
-------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------
HONG KONG (3.6%)
35,000 Cheung Kong Holdings Ltd......................... $ 345
45,000 China Resources Enterprises Ltd.................. 221
21,000 Dao Heng Bank Group Ltd.......................... 115
19,000 Henderson Land Development Co., Ltd.............. 169
10,000 Hong Kong & Shanghai Bank Holdings plc........... 301
28,000 Hutchison Whampoa Ltd............................ 242
17,000 New World Development Co., Ltd................... 101
31,000 Shanghai Industrial Holdings Ltd................. 193
9,000 Sun Hung Kai Properties Ltd...................... 108
-------
1,795
-------
ITALY (2.1%)
34,000 Editoriale L'Expresso S.p.A...................... 113
22,300 Marzotto (Gaetano) & Figli S.p.A................. 187
(a)25,300 Olivetti......................................... 7
97,000 Sogefi S.p.A..................................... 245
72,000 Stet Societa Finanziaria Telefonica S.p.A........ 250
125,000 Telecom Italia S.p.A............................. 248
-------
1,050
-------
JAPAN (28.0%)
23,000 Amada Co., Ltd................................... 203
31,000 Asahi Tec Corp................................... 151
14,000 Canon, Inc....................................... 381
10,000 Dai Nippon Printing Co., Ltd..................... 226
40,000 Daicel Chemical Industries Ltd................... 155
15,000 Daifuku Co., Ltd................................. 198
20,000 Daikin Industries Ltd............................ 182
4,190 Family Mart...................................... 206
10,000 Fuji Machine Manufacturing Co.................... 362
9,000 Fuji Photo Film Ltd.............................. 362
15,000 Fujitec Co., Ltd................................. 178
28,000 Fujitsu Ltd...................................... 389
50,000 Furukawa Electric................................ 318
10,000 Hitachi Credit Corp.............................. 194
38,000 Hitachi Ltd...................................... 424
13,000 Inabata & Co..................................... 89
36,000 Kaneka Corp...................................... 226
10,000 Kurita Water Industries.......................... 266
4,700 Kyocera Ltd...................................... 373
18,000 Kyudenko Co., Ltd................................ 152
8,000 Lintec........................................... 146
19,000 Matsushita Electric Industries Ltd............... 383
50,000 Mitsubishi Chemical Corp......................... 163
13,000 Mitsubishi Estate Co., Ltd....................... 188
47,000 Mitsubishi Heavy Industries Ltd.................. 361
14,000 Mitsumi Electric Co., Ltd........................ 334
9,000 Murata Manufacturing Co., Ltd.................... 358
30,000 NEC Corp......................................... 419
13,000 Nifco, Inc....................................... 136
4,000 Nintendo Corp., Ltd.............................. 335
1,000 Nippon Pillar Packing............................ 9
39 Nippon Telegraph & Telephone Corp................ 374
27,000 Nissan Motor Co.................................. 209
12,000 Nissha Printing.................................. 138
30,000 Obayashi Corp.................................... 201
32,000 Ricoh Co., Ltd................................... 419
7,000 Rinnai........................................... 150
5,000 Sangetsu Co., Ltd................................ 105
13,000 Sankyo Co. Ltd................................... 437
</TABLE>
-----------------------
81
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
25,000 Sanwa Shutter.................................... $ 227
15,000 Sekisui Chemical Co.............................. 152
20,000 Sekisui House Ltd................................ 202
3,000 Shimamura Co., Ltd............................... 107
5,600 Sony Corp........................................ 488
12,000 Sumitomo Marine & Fire Insurance Co.............. 98
18,000 Suzuki Motor Co., Ltd............................ 228
44,000 Taisei Corp., Ltd................................ 204
6,000 TDK Corp......................................... 440
8,500 Tokyo Electron Ltd............................... 407
56,000 Toshiba Corp..................................... 360
13,000 Toyota Motor Corp................................ 383
24,000 Tsubakimoto Chain................................ 147
8,000 Yamaha Corp...................................... 147
12,000 Yamanuchi Pharmaceutical Co...................... 323
-------
13,813
-------
MALAYSIA (1.9%)
73,000 Berjaya Group Bhd................................ 90
16,000 Berjaya Sports Toto Bhd.......................... 75
16,000 Commerce Asset Holding Bhd....................... 42
2,000 Dialog Group Bhd................................. 29
5,000 Edaran Otomobil Nasional Bhd..................... 43
6,000 Genting Bhd...................................... 29
4,000 Lityan Holdings Bhd.............................. 49
17,000 Magnum Corp. Bhd................................. 26
13,000 Malayan Banking Bhd.............................. 136
17,000 Malaysian Resources Corp. Bhd.................... 47
16,000 Rashid Hussain Bhd............................... 101
9,000 Resorts World Bhd................................ 27
40,000 Sime Darby Bhd................................... 133
14,000 United Engineers Ltd............................. 101
-------
928
-------
NETHERLANDS (4.6%)
13,600 ABN Amro Holding N.V............................. 253
2,900 Akzo Nobel N.V................................... 398
8,300 ING Groep N.V.................................... 383
4,200 KLM Royal Dutch Airlines N.V..................... 130
2,400 Koninklijke Bijenkorf Beheer..................... 168
4,700 Koninklijke Van Ommeren N.V...................... 183
12,700 N.V. Koninklijke KNP BT.......................... 289
6,500 Phillips Electronics N.V......................... 466
-------
2,270
-------
NEW ZEALAND (0.2%)
1,840 Fletcher Challenge Forest........................ 3
46,000 Fletcher Challenge Paper......................... 113
-------
116
-------
NORWAY (1.2%)
24,300 Den Norske Bank ASA.............................. 95
25,400 Saga Petroleum ASA 'B'........................... 444
(a)11,800 Storebrand ASA................................... 70
-------
609
-------
SINGAPORE (1.9%)
18,000 Datacraft Asia Ltd............................... 57
6,000 Development Bank of Singapore Ltd. (Foreign)..... 76
52,000 Electronic Resources Ltd......................... 82
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------
44,000 NatSteel Ltd..................................... $ 112
7,600 Oversea-Chinese Banking Corp., Ltd. (Foreign).... 79
(a)34,000 Pacific Century Regional Development............. 47
10,000 Parkway Holdings Ltd............................. 45
58,000 SM Summit Holdings Ltd........................... 44
5,000 Singapore Press Holdings (Foreign)............... 101
71,000 Super Coffeemix Manufacturing Ltd................ 59
8,000 United Overseas Bank Ltd. (Foreign).............. 82
(a)19,200 Want Want Holdings............................... 64
22,000 Wing Tai Holdings Ltd............................ 63
-------
911
-------
SPAIN (2.9%)
3,900 Banco Bilbao Vizcaya............................. 317
25,100 Iberdrola S.A.................................... 317
13,400 Telefonica de Espana S.A......................... 388
34,400 Uralita S.A...................................... 384
-------
1,406
-------
SWEDEN (3.3%)
5,500 Esselte AB 'B'................................... 129
12,200 Nordbanken AB.................................... 410
3,900 Pharmacia & Upjohn, Inc. Depositary Shares....... 132
6,400 S.K.F. AB 'B'.................................... 166
5,300 Skandia Forsakrings AB........................... 195
9,000 Sparbanken Sverige AB 'A'........................ 200
10,100 Spectra-Physics AB 'A'........................... 182
6,400 Svenska Handelsbanken 'A'........................ 205
-------
1,619
-------
SWITZERLAND (7.1%)
(a)65 Ascom Holding AG (Bearer)........................ 91
(a)110 Baloise Holdings Ltd............................. 262
190 Bobst AG (Bearer)................................ 323
880 Forbo Holding AG (Registered).................... 380
410 Holderbank Financiere Glaris AG, 'B' (Bearer).... 387
390 Nestle S.A. (Registered)......................... 514
163 Novartis AG (Registered)......................... 261
1,080 Oerlikon-Buehrle Holding AG (Registered)......... 127
80 Schindler Holding AG (Participating
Certificates).................................. 100
85 Schindler Holding AG (Registered)................ 109
140 Schweizerische Industrie-Gesellschaft Holding AG
(Registered)................................... 208
550 Sulzer AG (Registered)........................... 471
790 Valora Holding AG (Registered)................... 168
270 Zuerich Versicherungs-Gesellschaft Holdings
(Registered)................................... 107
-------
3,508
-------
UNITED KINGDOM (12.5%)
30,400 Associated British Foods plc..................... 262
29,061 BAT Industries plc............................... 260
19,600 Bank of Scotland................................. 126
26,500 Bass plc......................................... 324
32,500 BG plc........................................... 119
37,400 British Telecommunications plc................... 278
23,050 Burmah Castrol plc............................... 390
55,122 Christian Salvesen plc........................... 259
64,400 Courtaulds Textiles plc.......................... 329
46,000 Grand Metropolitan plc........................... 443
61,300 Imperial Tobacco Group plc....................... 394
</TABLE>
- --------------
82
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED KINGDOM (CONT.)
<TABLE>
<C> <S> <C>
38,300 John Mowlem & Co. plc............................ $ 79
66,300 Kwik Save Group plc.............................. 334
12,700 Peninsular & Oriental Steam Navigation Co........ 126
5,400 Premier Farnell plc.............................. 42
32,600 Racal Electronics plc............................ 130
31,068 Reckitt & Coleman plc............................ 464
44,097 Royal & Sun Alliance Insurance Group plc......... 326
32,700 Scottish Hydro-Electric plc...................... 226
13,600 Southern Electric plc............................ 100
52,850 Tate & Lyle plc.................................. 393
15,900 Unilever plc..................................... 455
68,600 WPP Group plc.................................... 280
-------
6,139
-------
TOTAL COMMON STOCKS (COST $40,461).............................. 44,401
-------
PREFERRED STOCKS (1.4%)
GERMANY (1.4%)
725 Dyckerhoff AG.................................... 263
3,200 Hornbach Holding AG.............................. 267
340 Suedzucker AG.................................... 182
-------
TOTAL PREFERRED STOCKS (COST $610).............................. 712
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ------------
RIGHTS (0.0%)
MALAYSIA (0.0%)
(a,d)5,600 Commerce Asset Holdings Bhd., expiring 7/23/97... --
-------
SINGAPORE (0.0%)
(a,d)26,000 Electronic Resources Ltd., expiring 7/21/97...... 17
-------
SWITZERLAND (0.0%)
(a,d)330 Sulzer Media, expiring 7/17/97................... --
-------
TOTAL RIGHTS (COST $0).......................................... 17
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ------------
WARRANTS (0.0%)
MALAYSIA (0.0%)
(a,d)3,500 Commerce Asset Holdings Bhd., expiring 7/23/97... --
(a,d)2,285 Rashid Hussain Bhd., expiring 12/31/02........... --
-------
TOTAL WARRANTS (COST $0)........................................ --
-------
TOTAL FOREIGN SECURITIES (91.5%) (COST $41,071)................. 45,130
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------
SHORT-TERM INVESTMENT (17.5%)
REPURCHASE AGREEMENT (17.5%)
$ 8,624 Chase Securities, Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $8,625,
collateralized by $9,130 U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $8,772 (COST
$8,624)........................................ $ 8,624
-------
TOTAL INVESTMENTS IN SECURITIES (109%) (COST $49,695)........... 53,754
-------
FOREIGN CURRENCY (0.3%)
ATS 19 Austrian Schilling............................... 2
BEF 727 Belgian Franc.................................... 20
FRF 564 French Franc..................................... 96
ITL 10,064 Italian Lira..................................... 6
JPY 3,355 Japanese Yen..................................... 29
MYR 3 Malaysian Ringgit................................ 1
ESP 1,299 Spanish Peseta................................... 9
-------
TOTAL FOREIGN CURRENCY (COST $164).............................. 163
-------
TOTAL INVESTMENTS (109.3%) (COST $49,859)....................... 53,917
LIABILITIES IN EXCESS OF OTHER ASSETS (-9.3%)................... (4,585)
-------
NET ASSETS (100%)............................................... $49,332
-------
-------
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Security valued at fair value -- see note A-1 to financial statements.
RFD -- Ranked for Dividend.
-----------------------
83
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at June 30, 1997, the Fund is
obligated to deliver or is to receive foreign currency in exchange for U.S.
dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR VALUE NET UNREALIZED
(000) (000) DATE (000) (000) GAIN (LOSS) (000)
- ----------- --------- ----------- ----------- --------- -----------------
<S> <C> <C> <C> <C> <C>
$ 45 $ 45 7/02/97 GBP 27 $ 45 $ --
CHF 117 80 8/18/97 $ 80 80 --
CHF 1,203 828 8/18/97 $ 846 846 18
FRF 325 56 8/18/97 $ 56 56 --
NLG 1,442 738 8/18/97 $ 758 758 20
$ 200 200 8/18/97 CHF 285 197 (3)
$ 250 250 8/18/97 NLG 484 248 (2)
JPY 364,376 3,207 8/25/97 $ 3,260 3,260 53
BEF 4,100 115 8/29/97 $ 116 116 1
DEM 1,101 634 8/29/97 $ 643 643 9
DEM 814 469 8/29/97 $ 475 475 6
$ 70 70 8/29/97 BEF 2,481 69 (1)
$ 300 300 8/29/97 DEM 515 297 (3)
FRF 4,501 770 9/15/97 $ 794 794 24
$ 200 200 9/15/97 FRF 1,158 198 (2)
--------- --------- -----
$ 7,962 $ 8,082 $ 120
--------- --------- -----
--------- --------- -----
</TABLE>
- ---------------
BEF -- Belgian Franc
GBP -- British Pound
DEM -- Deutsche Mark
FRF -- French Franc
JPY -- Japanese Yen
NLG -- Netherlands Guilder
CHF -- Swiss Franc
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ------------------------------------------------------------------------------ --------- -------------
<S> <C> <C>
Capital Equipment............................................................. $ 13,097 26.5%
Consumer Goods................................................................ 10,089 20.5
Finance....................................................................... 6,784 13.8
Materials..................................................................... 5,300 10.7
Services...................................................................... 4,739 9.6
Energy........................................................................ 2,871 5.8
Multi-Industry................................................................ 2,027 4.1
Gold Mines.................................................................... 223 0.5
--------- ---
$ 45,130 91.5%
--------- ---
--------- ---
</TABLE>
- --------------
84
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
AGENCY OBLIGATIONS (87.0%)
FEDERAL HOME LOAN BANK DISCOUNT NOTES (15.7%)
$ 5,000 5.42%, 8/14/97................................... $ 4,967
10,000 5.56%, 9/2/97.................................... 9,903
---------
14,870
---------
FEDERAL HOME LOAN MORTGAGE CORPORATION DISCOUNT NOTES
(25.2%)
10,000 5.42%, 7/21/97................................... 9,970
5,000 5.44%, 8/1/97.................................... 4,977
4,000 5.53%, 8/5/97.................................... 3,978
5,000 5.43%, 8/6/97.................................... 4,973
---------
23,898
---------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (46.1%)
DISCOUNT NOTES (40.8%)
5,000 5.53%, 7/2/97.................................... 4,999
10,000 5.52%, 7/18/97................................... 9,974
4,500 5.41%, 7/24/97................................... 4,484
5,000 5.53%, 8/11/97................................... 4,968
4,500 5.42%, 8/28/97................................... 4,461
10,000 5.59%, 10/20/97.................................. 9,828
---------
38,714
---------
DEBENTURE (5.3%)
5,000 5.69%, Series 97 AD, 11/13/97.................... 5,000
---------
TOTAL AGENCY OBLIGATIONS (COST $82,482)...................... 82,482
---------
REPURCHASE AGREEMENT (13.2%)
12,495 Goldman Sachs, 5.82%, dated 6/30/97, due 7/1/97,
to be repurchased at $12,497, collateralized by
$12,450 U.S. Treasury Bonds, 6.875%, due
8/15/25 valued at $12,830 (COST $12,495)....... 12,495
---------
TOTAL INVESTMENTS (100.2%) (COST $94,977).................... 94,977
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.2%)................ (209)
---------
NET ASSETS (100%)............................................ $ 94,768
---------
---------
</TABLE>
-----------------------
85
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
MONEY MARKET FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
AGENCY OBLIGATIONS (2.2%)
FEDERAL HOME LOAN MORTGAGE CORPORATION DISCOUNT NOTES
(2.2%)
$ 3,000 5.98%, 4/8/98 (COST $2,995)...................... $ 2,995
---------
CERTFICATES OF DEPOSIT (22.0%)
BANKS (22.0%)
5,000 ABN-AMRO Bank (NY), Yankee, 6.12%, 7/14/97....... 5,000
2,500 ANZ (Delaware), Inc. 5.88%, 10/28/97............. 2,500
5,000 Credit Suisse (First Boston) 6.25%, 4/8/98....... 5,000
5,000 Deutsche Bank AG, Yankee, 5.85%, 3/13/98......... 5,000
2,500 Natwest plc, Yankee, 5.89%, 10/2/97.............. 2,500
5,000 Rabobank Nederland, Yankee, 6.20%, 4/10/98....... 4,998
3,000 Societe Generale Bank 6.16%, 9/8/97.............. 3,000
2,500 Sun Trust Banks 5.85%, 10/22/97.................. 2,500
---------
TOTAL CERTIFICATES OF DEPOSITS (COST $30,498)................ 30,498
---------
COMMERCIAL PAPER (41.8%)
AUTOMOBILES (3.6%)
5,000 Daimler-Benz AG 5.42%, 8/4/97.................... 4,974
---------
FINANCE (31.0%)
10,000 Asset Backed Capital Finance 5.66%, 7/22/97...... 9,967
6,000 Asset Securitization Corp. 5.63%, 7/1/97......... 6,000
6,000 CIT Group Holdings, Inc. 5.54%, 7/28/97.......... 5,975
6,000 John Deere Capital Inc. 5.58%, 7/3/97............ 5,998
10,000 Norwest Financial, Inc. 5.60%, 7/1/97............ 10,000
5,000 UBS Finance (Delaware) 6.20%, 7/1/97............. 5,000
---------
42,940
---------
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
SERVICES (7.2%)
$ 10,000 Dun & Bradstreet Corp. 5.67%, 7/29/97............ $ 9,956
---------
TOTAL COMMERCIAL PAPER (COST $57,870)........................ 57,870
---------
VARIABLE RATE OBLIGATIONS (21.7%)
FEDERAL HOME LOAN MORTGAGE CORPORATION (10.8%)
(h)15,000 Federal Home Loan Mortgage 5.36%, 9/2/97......... 15,000
---------
STUDENT LOAN MARKETING ASSOCIATION (10.9%)
(h)15,000 Student Loan Marketing Association 5.42%,
10/30/97....................................... 15,002
---------
TOTAL VARIABLE RATE OBLIGATIONS (COST $30,002)............... 30,002
---------
REPURCHASE AGREEMENT (11.8%)
16,375 Goldman Sachs, 5.82%, dated 6/30/97, due 7/1/97,
to be repurchased at $16,378, collateralized by
$16,378 U.S. Treasury Bonds, 11.625%, due
11/15/04 valued at $16,815 (COST $16,375)...... 16,375
---------
TOTAL INVESTMENTS (99.5%) (COST $137,740).................... 137,740
OTHER ASSETS IN EXCESS OF LIABILITIES (0.5%)................. 682
---------
NET ASSETS (100%)............................................ $138,422
---------
---------
</TABLE>
- ---------------
(h) -- Variable or floating rate security -- rate disclosed is as of June 30,
1997.
- --------------
86
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
JUNE 30, 1997
<TABLE>
<CAPTION>
GLOBAL
EQUITY GLOBAL WORLDWIDE U.S.
ALLO- FIXED ASIAN AMERICAN HIGH LATIN EMERGING AGGRESSIVE REAL
CATION INCOME GROWTH VALUE INCOME AMERICAN MARKETS EQUITY ESTATE
FUND FUND FUND FUND FUND FUND FUND FUND FUND
(000) (000) (000) (000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments in Securities, at
Value* (Note 1) -- See
accompanying portfolios $ 194,300 $ 9,546 $354,498 $ 83,754 $195,658 $119,718 $ 213,046 $ 67,994 $22,165
Foreign Currency 494 3 3,217 -- -- 147 3,531 -- --
Cash 9 679 -- -- 127 1,438 1,164 271 258
Receivable for:
Investments Sold 10,009 132 4,268 426 368 3,757 2,785 1,932 992
Securities Sold Short -- -- -- -- -- -- -- 2,301 --
Fund Shares Sold 1,974 63 549 2,286 2,176 2,859 1,280 1,315 988
Dividends 416 -- 245 91 48 297 674 54 87
Interest 2 214 -- -- 3,968 1 21 1 3
Security Lending Income 8 -- -- -- -- -- -- -- --
Foreign Withholding Tax Reclaim 53 3 21 -- -- -- 1 -- --
Net Unrealized Gain on Foreign
Currency Exchange Contracts 305 -- -- -- -- -- -- -- --
Deferred Organizational Costs 6 6 5 5 6 7 6 37 21
Due from Broker -- -- -- -- -- -- -- 1,155 --
Receivable from Investment Adviser -- 3 -- -- -- -- -- -- --
Securities, at Value, Held as
Collateral for Securities Loaned 29,822 -- -- -- -- -- -- -- --
Other 3 -- 26 -- 64 -- -- -- --
--------- ------- -------- -------- -------- -------- --------- ---------- -------
Total Assets 237,401 10,649 362,829 86,562 202,415 128,224 222,508 75,060 24,514
--------- ------- -------- -------- -------- -------- --------- ---------- -------
LIABILITIES:
Payable for:
Investments Purchased 15,821 -- 6,159 2,881 3,750 8,067 3,812 5,303 103
Securities Sold Short, at Value
(Proceeds -- $2,301) -- -- -- -- -- -- -- 2,537 --
Fund Shares Redeemed 1,091 6 1,760 1,053 1,354 367 4,210 684 1
Bank Overdraft 9 -- 316 284 -- 298 -- -- --
Dividends Declared -- -- -- -- -- -- -- -- --
Investment Advisory Fees 337 -- 862 96 327 176 472 85 20
Administrative Fees 43 3 73 16 40 28 50 13 5
Custody Fees 75 6 179 8 57 82 265 12 17
Professional Fees 45 27 91 27 49 31 61 22 22
Distribution Fees 211 9 365 77 227 73 201 70 20
Shareholder Reporting Expenses 55 4 151 29 47 12 47 14 7
Directors' Fees and Expenses 5 1 16 2 5 1 5 -- 1
Securities Lending Expense 18 -- -- -- -- -- -- -- --
Filing and Registration Fees 4 -- -- 2 12 11 4 6 2
Deferred Country Tax -- -- 93 -- -- 18 406 -- --
Collateral on Securities Loaned 29,822 -- -- -- -- -- -- -- --
Net Unrealized Loss on Foreign
Currency Exchange Contracts -- 21 78 -- -- -- 29 -- --
Other -- 4 -- -- 59 -- -- 1 --
--------- ------- -------- -------- -------- -------- --------- ---------- -------
Total Liabilities 47,536 81 10,143 4,475 5,927 9,164 9,562 8,747 198
--------- ------- -------- -------- -------- -------- --------- ---------- -------
NET ASSETS $ 189,865 $10,568 $352,686 $ 82,087 $196,488 $119,060 $ 212,946 $ 66,313 $24,316
--------- ------- -------- -------- -------- -------- --------- ---------- -------
--------- ------- -------- -------- -------- -------- --------- ---------- -------
<CAPTION>
GOVERNMENT
INTER- OBLIGATIONS
HIGH NATIONAL MONEY MONEY
YIELD MAGNUM MARKET MARKET
FUND FUND FUND FUND
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- -------------------------------------
ASSETS:
Investments in Securities, at
Value* (Note 1) -- See
accompanying portfolios $22,405 $53,754 $ 94,977 $137,740
Foreign Currency -- 163 -- --
Cash -- -- -- --
Receivable for:
Investments Sold 771 94 -- --
Securities Sold Short -- -- -- --
Fund Shares Sold 149 1,197 -- --
Dividends 42 92 -- --
Interest 326 1 38 1,020
Security Lending Income -- -- -- --
Foreign Withholding Tax Reclaim -- 30 -- --
Net Unrealized Gain on Foreign
Currency Exchange Contracts -- 120 -- --
Deferred Organizational Costs 19 29 -- --
Due from Broker -- -- -- --
Receivable from Investment Adviser -- -- 4 69
Securities, at Value, Held as
Collateral for Securities Loaned -- -- -- --
Other -- -- 1 1
------- ------- ---------- --------
Total Assets 23,712 55,480 95,020 138,830
------- ------- ---------- --------
LIABILITIES:
Payable for:
Investments Purchased 709 5,356 -- --
Securities Sold Short, at Value
(Proceeds -- $2,301) -- -- -- --
Fund Shares Redeemed 176 417 -- --
Bank Overdraft 183 225 -- --
Dividends Declared -- -- 94 149
Investment Advisory Fees 12 12 -- --
Administrative Fees 5 11 9 12
Custody Fees 7 44 4 9
Professional Fees 22 25 44 56
Distribution Fees 25 45 66 114
Shareholder Reporting Expenses 4 6 26 48
Directors' Fees and Expenses -- -- 4 7
Securities Lending Expense -- -- -- --
Filing and Registration Fees 2 7 -- --
Deferred Country Tax -- -- -- --
Collateral on Securities Loaned -- -- -- --
Net Unrealized Loss on Foreign
Currency Exchange Contracts -- -- -- --
Other -- -- 5 13
------- ------- ---------- --------
Total Liabilities 1,145 6,148 252 408
------- ------- ---------- --------
NET ASSETS $22,567 $49,332 $ 94,768 $138,422
------- ------- ---------- --------
------- ------- ---------- --------
</TABLE>
-----------------------
87
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
JUNE 30, 1997 (CONT.)
<TABLE>
<CAPTION>
GLOBAL
EQUITY GLOBAL WORLDWIDE U.S.
ALLO- FIXED ASIAN AMERICAN HIGH LATIN EMERGING AGGRESSIVE REAL
CATION INCOME GROWTH VALUE INCOME AMERICAN MARKETS EQUITY ESTATE
FUND FUND FUND FUND FUND FUND FUND FUND FUND
(000) (000) (000) (000) (000) (000) (000) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSETS CONSIST OF:
Capital Stock at Par $ 12 $ 1 $ 22 $ 5 $ 14 $ 7 $ 16 $ 4 $ 2
Paid in Capital in Excess of Par 147,222 10,700 327,144 63,598 173,493 96,171 181,049 59,979 20,569
Undistributed (Distributions in
Excess of) Net Investment Income 2,666 (63) (1,153) (1) 311 (11) (659) -- 55
Accumulated (Distributions in
Excess of) Net Realized Gain
(Loss) 7,878 48 (8,456) 5,783 8,928 9,027 12,215 2,851 1,858
Unrealized Appreciation
(Depreciation) on Investments and
Foreign Currency Translations** 32,087 (118) 35,129 12,702 13,742 13,866 20,325 3,479 1,832
--------- ------- -------- -------- -------- -------- --------- ---------- -------
NET ASSETS $ 189,865 $10,568 $352,686 $ 82,087 $196,488 $119,060 $ 212,946 $ 66,313 $24,316
--------- ------- -------- -------- -------- -------- --------- ---------- -------
--------- ------- -------- -------- -------- -------- --------- ---------- -------
CLASS A SHARES:
Net Assets $ 72,704 $ 6,407 $175,440 $ 34,331 $ 76,439 $ 84,401 $ 119,022 $ 22,521 $14,827
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 4,388 644 10,554 1,951 5,362 4,855 8,838 1,326 905
Net Asset Value and Redemption
Price Per Share $ 16.57 $ 9.95 $ 16.62 $ 17.59 $ 14.26 $ 17.39 $ 13.47 $ 16.98 $ 16.39
--------- ------- -------- -------- -------- -------- --------- ---------- -------
--------- ------- -------- -------- -------- -------- --------- ---------- -------
Maximum Sales Charge 5.75% 4.75% 5.75% 5.75% 4.75% 5.75% 5.75% 5.75% 5.75%
Maximum Offering Price Per Share
(Net Asset Value Per Share X
100-maximum sales charge) $ 17.58 $ 10.45 $ 17.64 $ 18.66 $ 14.97 $ 18.45 $ 14.29 $ 18.02 $ 17.39
--------- ------- -------- -------- -------- -------- --------- ---------- -------
--------- ------- -------- -------- -------- -------- --------- ---------- -------
CLASS B SHARES:
Net Assets $ 38,962 $ 1,716 $ 62,786 $ 15,331 $ 78,340 $ 14,314 $ 35,966 $ 34,382 $ 7,120
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 2,412 173 3,884 872 5,515 842 2,716 2,041 435
Net Asset Value and Offering Price
Per Share*** $ 16.15 $ 9.91 $ 16.17 $ 17.59 $ 14.20 $ 16.99 $ 13.24 $ 16.85 $ 16.36
--------- ------- -------- -------- -------- -------- --------- ---------- -------
--------- ------- -------- -------- -------- -------- --------- ---------- -------
CLASS C SHARES:
Net Assets $ 78,199 $ 2,445 $114,460 $ 32,425 $ 41,709 $ 20,345 $ 57,958 $ 9,410 $ 2,369
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 4,814 247 7,093 1,844 2,935 1,196 4,372 559 145
Net Asset Value and Offering Price
Per Share*** $ 16.24 $ 9.90 $ 16.14 $ 17.59 $ 14.21 $ 17.01 $ 13.26 $ 16.83 $ 16.36
--------- ------- -------- -------- -------- -------- --------- ---------- -------
--------- ------- -------- -------- -------- -------- --------- ---------- -------
Investments at Cost, Including
Foreign Currency $ 162,983 $ 9,644 $322,413 $ 71,052 $181,907 $105,977 $ 195,840 $ 64,279 $20,333
--------- ------- -------- -------- -------- -------- --------- ---------- -------
--------- ------- -------- -------- -------- -------- --------- ---------- -------
<CAPTION>
GOVERNMENT
INTER- OBLIGATIONS
HIGH NATIONAL MONEY MONEY
YIELD MAGNUM MARKET MARKET
FUND FUND FUND FUND
(000) (000) (000) (000)
- -------------------------------------
<S> <C> <C> <C> <C>
NET ASSETS CONSIST OF:
Capital Stock at Par $ 18 $ 3 $ 95 $ 139
Paid in Capital in Excess of Par 21,471 44,357 94,764 138,382
Undistributed (Distributions in
Excess of) Net Investment Income 38 767 -- --
Accumulated (Distributions in
Excess of) Net Realized Gain
(Loss) 245 21 (91) (99)
Unrealized Appreciation
(Depreciation) on Investments and
Foreign Currency Translations** 795 4,184 -- --
------- ------- ---------- --------
NET ASSETS $22,567 $49,332 $ 94,768 $138,422
------- ------- ---------- --------
------- ------- ---------- --------
CLASS A SHARES:
Net Assets $ 8,980 $21,961 $ 94,768 $138,422
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 698 1,579 94,859 138,521
Net Asset Value and Redemption
Price Per Share $ 12.86 $ 13.91 $ 1.00 $ 1.00
------- ------- ---------- --------
------- ------- ---------- --------
Maximum Sales Charge 4.75% 5.75% -- --
Maximum Offering Price Per Share
(Net Asset Value Per Share X
100-maximum sales charge) $ 13.50 $ 14.76 -- --
------- ------- ---------- --------
------- ------- ---------- --------
CLASS B SHARES:
Net Assets $ 8,617 $18,215 -- --
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 670 1,317 -- --
Net Asset Value and Offering Price
Per Share*** $ 12.86 $ 13.84 -- --
------- ------- ---------- --------
------- ------- ---------- --------
CLASS C SHARES:
Net Assets $ 4,970 $ 9,156 -- --
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 386 662 -- --
Net Asset Value and Offering Price
Per Share*** $ 12.86 $ 13.83 -- --
------- ------- ---------- --------
------- ------- ---------- --------
Investments at Cost, Including
Foreign Currency $21,610 $49,859 $ 94,977 $137,740
------- ------- ---------- --------
------- ------- ---------- --------
</TABLE>
- ---------------
* Includes repurchase agreements aggregating $8,897,000, $15,266,000,
2,523,000, $3,146,000, $4,769,000, $9,936,000, $5,014,000, $665,000,
$615,000, $8,624,000, $12,495,000 and $16,375,000 for Global Equity
Allocation 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 Obligations Money Market Fund
and Money Market Fund, respectively.
** Net of accrual for country tax of U.S. $93,000 for Asian Growth Fund
and $401,000 for Emerging Markets Fund.
*** Redemption price may be subject to a contingent deferred sales charge.
- ------------------
88
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
GLOBAL GLOBAL WORLDWIDE U.S.
EQUITY FIXED ASIAN AMERICAN HIGH LATIN EMERGING AGGRESSIVE REAL
ALLOCATION INCOME GROWTH VALUE INCOME AMERICAN MARKETS EQUITY ESTATE
FUND FUND FUND FUND FUND FUND FUND FUND FUND
(000) (000) (000) (000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 3,489 $ -- $ 6,912 $ 1,309 $ 170 $ 893 $ 3,086 $ 295 $ 476
Interest 259 632 340 82 16,119 106 467 116 78
Security Lending 107 -- -- -- -- -- -- -- --
Less Foreign Taxes Withheld (254) (10) (963) -- -- -- (160) -- --
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Total Income 3,601 622 6,289 1,391 16,289 999 3,393 411 554
---------- -------- -------- -------- --------- -------- -------- ---------- --------
EXPENSES:
Investment Advisory Fees 1,557 79 4,057 432 1,086 572 1,955 245 145
Less: Fees Waived (293) (79) -- (135) -- (248) (331) (204) (145)
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Net Investment Advisory Fees 1,264 -- 4,057 297 1,086 324 1,624 41 --
Administrative Fees 473 34 1,080 139 388 151 445 76 42
Custody Fees 224 17 682 18 77 191 581 34 44
Filing and Registration Fees 5 -- 1 4 13 11 6 8 2
Directors' Fees and Expenses 8 2 21 3 7 3 9 2 2
Professional Fees 95 30 207 38 84 45 107 28 21
Shareholder Reports 92 11 262 47 77 20 76 30 4
Security Lending Fees 23 -- -- -- -- -- -- -- --
Dividend Expense for Securities
Sold Short -- -- -- -- -- -- -- 1 --
Distribution Fees
Class A 160 16 509 58 152 81 229 28 19
Class B 238 16 602 43 491 45 180 105 45
Class C 679 26 1,424 233 351 87 465 55 22
Amortization of Organizational
Costs 37 37 31 46 52 51 52 78 49
Blue Sky Fees 44 35 69 36 39 40 47 36 30
Country Tax Expense 3 -- -- -- -- 57 58 -- --
Interest Expense 1 3 64 -- 23 18 37 21 --
Other 10 3 28 5 14 6 15 3 2
Expenses Reimbursed by Adviser -- (44) -- -- -- -- -- -- (8)
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Net Expenses 3,356 186 9,037 967 2,854 1,130 3,931 546 274
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Net Investment Income (Loss) 245 436 (2,748) 424 13,435 (131) (538) (135) 280
---------- -------- -------- -------- --------- -------- -------- ---------- --------
NET REALIZED GAIN (LOSS) ON:
Investments 8,119 113 (4,389) 6,719 10,103 14,026 15,276 3,674 2,077
Foreign Currency Transactions 5,051 (2) (415) -- (741) (45) (283) -- --
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Net Realized Gain (Loss) 13,170 111 (4,804) 6,719 9,362 13,981 14,993 3,674 2,077
---------- -------- -------- -------- --------- -------- -------- ---------- --------
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments 18,089 (60) (2,600) 7,544 14,410 10,222 7,857 3,365 1,622
Foreign Currency Translations (838) (24) (19) -- 2 (22) (382) -- --
Securities Sold Short -- -- -- -- -- -- -- (160) --
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Change in Unrealized
Appreciation/ Depreciation 17,251 (84) (2,619) 7,544 14,412 10,200 7,475 3,205 1,622
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Net Realized Gain (Loss) and Change
in Unrealized
Appreciation/Depreciation 30,421 27 (7,423) 14,263 23,774 24,181 22,468 6,879 3,699
---------- -------- -------- -------- --------- -------- -------- ---------- --------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 30,666 $ 463 $(10,171) $ 14,687 $ 37,209 $ 24,050 $ 21,930 $ 6,744 $ 3,979
---------- -------- -------- -------- --------- -------- -------- ---------- --------
---------- -------- -------- -------- --------- -------- -------- ---------- --------
<CAPTION>
GOVERNMENT
HIGH INTERNATIONAL MONEY MONEY
YIELD MAGNUM MARKET MARKET
FUND FUND FUND FUND
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- -----------------------------------
INVESTMENT INCOME:
Dividends $ 54 $ 498 $ -- $ --
Interest 1,454 175 6,529 10,791
Security Lending -- -- -- --
Less Foreign Taxes Withheld -- (65) -- --
-------- ------ ---------- --------
Total Income 1,508 608 6,529 10,791
-------- ------ ---------- --------
EXPENSES:
Investment Advisory Fees 113 168 542 882
Less: Fees Waived (113) (168) (392) (579)
-------- ------ ---------- --------
Net Investment Advisory Fees -- -- 150 303
Administrative Fees 42 73 123 194
Custody Fees 17 97 25 46
Filing and Registration Fees 2 -- -- --
Directors' Fees and Expenses 2 2 1 5
Professional Fees 21 39 86 122
Shareholder Reports 1 6 23 45
Security Lending Fees -- -- -- --
Dividend Expense for Securities
Sold Short -- -- -- --
Distribution Fees
Class A 13 21 604 981
Class B 57 68 -- --
Class C 43 58 -- --
Amortization of Organizational
Costs 49 68 41 41
Blue Sky Fees 26 36 60 103
Country Tax Expense -- -- -- --
Interest Expense -- 1 -- --
Other 1 2 41 92
Expenses Reimbursed by Adviser (12) (33) -- --
-------- ------ ---------- --------
Net Expenses 262 438 1,154 1,932
-------- ------ ---------- --------
Net Investment Income (Loss) 1,246 170 5,375 8,859
-------- ------ ---------- --------
NET REALIZED GAIN (LOSS) ON:
Investments 312 33 8 13
Foreign Currency Transactions -- 737 -- --
-------- ------ ---------- --------
Net Realized Gain (Loss) 312 770 8 13
-------- ------ ---------- --------
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments 881 4,060 -- --
Foreign Currency Translations -- 124 -- --
Securities Sold Short -- -- -- --
-------- ------ ---------- --------
Change in Unrealized
Appreciation/ Depreciation 881 4,184 -- --
-------- ------ ---------- --------
Net Realized Gain (Loss) and Change
in Unrealized
Appreciation/Depreciation 1,193 4,954 8 13
-------- ------ ---------- --------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 2,439 $ 5,124 $ 5,383 $ 8,872
-------- ------ ---------- --------
-------- ------ ---------- --------
</TABLE>
-----------------------
89
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
GLOBAL EQUITY ALLOCATION FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 245 $ 364
Net Realized Gain 13,170 11,649
Change in Unrealized
Appreciation/Depreciation 17,251 9,778
------------- -------------
Net Increase in Net Assets from
Operations 30,666 21,791
------------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A (2,358) (1,295)
Class B (759) (69)
Class C (2,093) (1,106)
------------- -------------
(5,210) (2,470)
------------- -------------
Net Realized Gain:
Class A (2,101) (1,591)
Class B (751) (96)
Class C (2,262) (1,624)
------------- -------------
(5,114) (3,311)
------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (10,324) (5,781)
------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 54,525 58,409
Distributions Reinvested 9,826 5,268
Redeemed (36,345) (21,216)
------------- -------------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 28,006 42,461
------------- -------------
Total Increase in Net Assets 48,348 58,471
NET ASSETS -- Beginning of Year 141,517 83,046
------------- -------------
NET ASSETS -- End of Year (Including
undistributed net investment income
of $2,666 and $2,710, respectively) $ 189,865 $ 141,517
------------- -------------
------------- -------------
- -------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 1,091 1,702
Distributions Reinvested 293 197
Redeemed (1,314) (960)
------------- -------------
Net Increase in Class A Shares
Outstanding 70 939
------------- -------------
------------- -------------
Dollars:
Subscribed $ 16,569 $ 23,872
Distributions Reinvested 4,157 2,639
Redeemed (19,605) (13,331)
------------- -------------
Net Increase $ 1,121 $ 13,180
------------- -------------
------------- -------------
Class B:
---------------------
Shares:
Subscribed 1,444 1,017
Distributions Reinvested 106 12
Redeemed (160) (7)
------------- -------------
Net Increase in Class B Shares
Outstanding 1,390 1,022
------------- -------------
------------- -------------
Dollars:
Subscribed $ 21,138 $ 14,112
Distributions Reinvested 1,475 158
Redeemed (2,336) (100)
------------- -------------
Net Increase $ 20,277 $ 14,170
------------- -------------
------------- -------------
Class C:
---------------------
Shares:
Subscribed 1,160 1,482
Distributions Reinvested 300 186
Redeemed (995) (575)
------------- -------------
Net Increase in Class C Shares
Outstanding 465 1,093
------------- -------------
------------- -------------
Dollars:
Subscribed $ 16,818 $ 20,425
Distributions Reinvested 4,194 2,471
Redeemed (14,404) (7,785)
------------- -------------
Net Increase $ 6,608 $ 15,111
------------- -------------
------------- -------------
- -------------------------------------------------------------------
</TABLE>
- -----------
90
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 436 $ 772
Net Realized Gain 111 489
Change in Unrealized
Appreciation/Depreciation (84) (513)
------- -------------
Net Increase in Net Assets
Resulting from Operations 463 748
------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A (218) (771)
Class B (46) (21)
Class C (74) (399)
In Excess of Net Investment Income:
Class A (41) (23)
Class B (9) (1)
Class C (14) (12)
------- -------------
Net Decrease in Net Assets
Resulting from Distributions (402) (1,227)
------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 4,760 8,720
Distributions Reinvested 335 676
Redeemed (6,304) (14,258)
------- -------------
Net Decrease in Net Assets
Resulting from Capital Share
Transactions (1,209) (4,862)
------- -------------
Total Decrease in Net Assets (1,148) (5,341)
NET ASSETS -- Beginning of Year 11,716 17,057
------- -------------
NET ASSETS -- End of Year (Including
distributions in excess of net
investment income of $(63) and
$(36), respectively) $ 10,568 $ 11,716
------- -------------
------- -------------
- -----------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
--------------------
Shares:
Subscribed 256 589
Distributions Reinvested 22 50
Redeemed (382) (975)
------- -------------
Net Decrease in Class A Shares
Outstanding (104) (336)
------- -------------
------- -------------
Dollars:
Subscribed $ 2,529 $ 5,929
Distributions Reinvested 225 507
Redeemed (3,839) (9,791)
------- -------------
Net Decrease $ (1,085) $ (3,355)
------- -------------
------- -------------
Class B:
--------------------
Shares:
Subscribed 100 150
Distributions Reinvested 4 1
Redeemed (76) (6)
------- -------------
Net Increase in Class B Shares
Outstanding 28 145
------- -------------
------- -------------
Dollars:
Subscribed $ 999 $ 1,496
Distributions Reinvested 41 14
Redeemed (758) (63)
------- -------------
Net Increase $ 282 $ 1,447
------- -------------
------- -------------
Class C:
--------------------
Shares:
Subscribed 123 130
Distributions Reinvested 7 15
Redeemed (170) (443)
------- -------------
Net Decrease in Class C Shares
Outstanding (40) (298)
------- -------------
------- -------------
Dollars:
Subscribed $ 1,232 $ 1,295
Distributions Reinvested 69 155
Redeemed (1,707) (4,404)
------- -------------
Net Decrease $ (406) $ (2,954)
------- -------------
------- -------------
- -----------------------------------------------------------------------
</TABLE>
-----------------------
91
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
ASIAN GROWTH FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment (Loss) $ (2,748) $ (1,844)
Net Realized Gain (Loss) (4,804) 5,364
Change in Unrealized
Appreciation/Depreciation (2,619) 9,465
----------------- -------------
Net Increase (Decrease) in Net
Assets Resulting from Operations (10,171) 12,985
----------------- -------------
DISTRIBUTIONS:
Net Realized Gain:
Class A (33) --
Class B (10) --
Class C (24) --
In Excess of Net Realized Gain:
Class A (4,110) --
Class B (1,274) --
Class C (3,072) --
----------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (8,523) --
----------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 114,562 241,482
Distributions Reinvested 8,035 --
Redeemed (220,149) (103,699)
----------------- -------------
Net Increase (Decrease) in Net
Assets Resulting from Capital
Share Transactions (97,552) 137,783
----------------- -------------
Total Increase (Decrease) in Net
Assets (116,246) 150,768
NET ASSETS -- Beginning of Year 468,932 318,164
----------------- -------------
NET ASSETS -- End of Year (Including
net investment loss of $(1,153) and
$(160), respectively) $ 352,686 $ 468,932
----------------- -------------
----------------- -------------
- -----------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 4,724 7,522
Distributions Reinvested 243 --
Redeemed (8,877) (3,936)
----------------- -------------
Net Increase (Decrease) in Class A
Shares Outstanding (3,910) 3,586
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 77,015 $ 127,388
Distributions Reinvested 3,930 --
Redeemed (144,501) (65,894)
----------------- -------------
Net Increase (Decrease) $ (63,556) $ 61,494
----------------- -------------
Class B:
---------------------
Shares:
Subscribed 1,466 3,225
Distributions Reinvested 77 --
Redeemed (803) (81)
----------------- -------------
Net Increase in Class B Shares
Outstanding 740 3,144
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 23,406 $ 54,005
Distributions Reinvested 1,210 --
Redeemed (12,628) (1,375)
----------------- -------------
Net Increase $ 11,988 $ 52,630
----------------- -------------
----------------- -------------
Class C:
---------------------
Shares:
Subscribed 883 3,629
Distributions Reinvested 184 --
Redeemed (3,989) (2,229)
----------------- -------------
Net Increase (Decrease) in Class C
Shares Outstanding (2,922) 1,400
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 14,140 $ 60,089
Distributions Reinvested 2,895 --
Redeemed (63,019) (36,430)
----------------- -------------
Net Increase (Decrease) $ (45,984) $ 23,659
----------------- -------------
----------------- -------------
- -----------------------------------------------------------------------
</TABLE>
- -----------
92
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
AMERICAN VALUE FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 424 $ 666
Net Realized Gain 6,719 2,783
Change in Unrealized
Appreciation/Depreciation 7,544 3,203
------------- -------------
Net Increase in Net Assets
Resulting from Operations 14,687 6,652
------------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A (309) (443)
Class B (25) (17)
Class C (133) (209)
In Excess of Net Investment Income:
Class A (1) (12)
Class B -- (1)
Class C -- (10)
------------- -------------
(468) (692)
------------- -------------
Net Realized Gain:
Class A (1,555) (331)
Class B (209) (20)
Class C (1,482) (252)
------------- -------------
(3,246) (603)
------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (3,714) (1,295)
------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 38,027 18,813
Distributions Reinvested 3,292 900
Redeemed (13,557) (16,260)
------------- -------------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 27,762 3,453
------------- -------------
Total Increase in Net Assets 38,735 8,810
NET ASSETS -- Beginning of Year 43,352 34,542
------------- -------------
NET ASSETS -- End of Year (Including
distributions in excess of net
investment income of $(1) and
$(23), respectively) $ 82,087 $ 43,352
------------- -------------
------------- -------------
- -------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 1,025 515
Distributions Reinvested 119 42
Redeemed (538) (816)
------------- -------------
Net Increase (Decrease) in Class A
Shares Outstanding 606 (259)
------------- -------------
------------- -------------
Dollars:
Subscribed $ 16,463 $ 7,053
Distributions Reinvested 1,785 573
Redeemed (8,501) (11,471)
------------- -------------
Net Increase (Decrease) $ 9,747 $ (3,845)
------------- -------------
------------- -------------
Class B:
---------------------
Shares:
Subscribed 714 174
Distributions Reinvested 15 3
Redeemed (27) (7)
------------- -------------
Net Increase in Class B Shares
Outstanding 702 170
------------- -------------
------------- -------------
Dollars:
Subscribed $ 11,773 $ 2,376
Distributions Reinvested 228 36
Redeemed (420) (93)
------------- -------------
Net Increase $ 11,581 $ 2,319
------------- -------------
------------- -------------
Class C:
---------------------
Shares:
Subscribed 623 685
Distributions Reinvested 85 21
Redeemed (312) (334)
------------- -------------
Net Increase in Class C Shares
Outstanding 396 372
------------- -------------
------------- -------------
Dollars:
Subscribed $ 9,791 $ 9,384
Distributions Reinvested 1,279 291
Redeemed (4,636) (4,696)
------------- -------------
Net Increase $ 6,434 $ 4,979
------------- -------------
------------- -------------
- -------------------------------------------------------------------
</TABLE>
-----------------------
93
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
WORLDWIDE HIGH INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 13,435 $ 8,304
Net Realized Gain 9,362 4,060
Change in Unrealized Appreciation
/Depreciation 14,412 (637)
------------- -------------
Net Increase in Net Assets
Resulting from Operations 37,209 11,727
------------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A (5,678) (3,806)
Class B (4,269) (1,176)
Class C (3,020) (2,325)
------------- -------------
(12,967) (7,307)
------------- -------------
Realized Gain:
Class A (2,320) --
Class B (1,708) --
Class C (1,293) --
------------- -------------
(5,321) --
------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (18,288) (7,307)
------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 133,028 103,978
Distributions Reinvested 11,818 3,981
Redeemed (63,040) (43,317)
------------- -------------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 81,806 64,642
------------- -------------
Total Increase in Net Assets 100,727 69,062
NET ASSETS -- Beginning of Year 95,761 26,699
------------- -------------
NET ASSETS -- End of Year (Including
undistributed net investment income
of $311 and $1,157, respectively) $ 196,488 $ 95,761
------------- -------------
------------- -------------
- -------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 5,082 4,713
Distributions Reinvested 423 190
Redeemed (3,469) (2,858)
------------- -------------
Net Increase in Class A Shares
Outstanding 2,036 2,045
------------- -------------
------------- -------------
Dollars:
Subscribed $ 67,886 $ 56,635
Distributions Reinvested 5,651 2,294
Redeemed (46,537) (34,479)
------------- -------------
Net Increase $ 27,000 $ 24,450
------------- -------------
------------- -------------
Class B:
---------------------
Shares:
Subscribed 3,787 2,125
Distributions Reinvested 246 44
Redeemed (622) (65)
------------- -------------
Net Increase in Class B Shares
Outstanding 3,411 2,104
------------- -------------
------------- -------------
Dollars:
Subscribed $ 50,939 $ 25,745
Distributions Reinvested 3,287 538
Redeemed (8,415) (797)
------------- -------------
Net Increase $ 45,811 $ 25,486
------------- -------------
------------- -------------
Class C:
---------------------
Shares:
Subscribed 1,057 1,792
Distributions Reinvested 217 95
Redeemed (596) (656)
------------- -------------
Net Increase in Class C Shares
Outstanding 678 1,231
------------- -------------
------------- -------------
Dollars:
Subscribed $ 14,203 $ 21,598
Distributions Reinvested 2,880 1,149
Redeemed (8,088) (8,041)
------------- -------------
Net Increase $ 8,995 $ 14,706
------------- -------------
------------- -------------
- -------------------------------------------------------------------
</TABLE>
- -----------
94
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
LATIN AMERICAN FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (131) $ 163
Net Realized Gain 13,981 752
Change in Unrealized
Appreciation/Depreciation 10,200 5,112
----------------- -------------
Net Increase in Net Assets
Resulting from Operations 24,050 6,027
----------------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A -- (18)
In Excess of Net Investment Income:
Class A (117) --
Class B (17) --
Class C (13) --
----------------- -------------
(147) (18)
----------------- -------------
Net Realized Gain:
Class A (2,192) --
Class B (359) --
Class C (727) --
----------------- -------------
(3,278) --
----------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (3,425) (18)
----------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 114,111 19,885
Distributions Reinvested 3,304 15
Redeemed (46,502) (10,130)
----------------- -------------
Net Increase in Net Assets
Resulitng from Capital Share
Transactions 70,913 9,770
----------------- -------------
Total Increase in Net Assets 91,538 15,779
NET ASSETS -- Beginning of Year 27,522 11,743
----------------- -------------
NET ASSETS -- End of Year (Including
undistributed (distribution in
excess of) net investment income of
$(11) and $132, respectively) $ 119,060 $ 27,522
----------------- -------------
----------------- -------------
- -----------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 6,162 1,373
Distributions Reinvested 187 1
Redeemed (2,975) (737)
----------------- -------------
Net Increase in Class A Shares
Outstanding 3,374 637
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 90,337 $ 14,772
Distributions Reinvested 2,243 15
Redeemed (41,558) (7,673)
----------------- -------------
Net Increase $ 51,022 $ 7,114
----------------- -------------
----------------- -------------
Class B:
---------------------
Shares:
Subscribed 752 169
Distributions Reinvested 30 --
Redeemed (104) (5)
----------------- -------------
Net Increase in Class B Shares
Outstanding 678 164
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 11,139 $ 1,858
Distributions Reinvested 353 --
Redeemed (1,385) (52)
----------------- -------------
Net Increase $ 10,107 $ 1,806
----------------- -------------
----------------- -------------
Class C:
---------------------
Shares:
Subscribed 856 316
Distributions Reinvested 60 --
Redeemed (266) (224)
----------------- -------------
Net Increase in Class C Shares
Outstanding 650 92
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 12,635 $ 3,255
Distributions Reinvested 708 --
Redeemed (3,559) (2,405)
----------------- -------------
Net Increase $ 9,784 $ 850
----------------- -------------
----------------- -------------
- -----------------------------------------------------------------------
</TABLE>
-----------------------
95
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (538) $ 465
Net Realized Gain (Loss) 14,993 (518)
Change in Unrealized
Appreciation/Depreciation 7,475 14,532
------------- -------------
Net Increase (Decrease) in Net
Assets Resulting from Operations 21,930 14,479
------------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A -- (142)
In Excess of Net Investment Income:
Class A (291) --
Class B (52) --
Class C (44) --
------------- -------------
(387) (142)
------------- -------------
Net Realized Gain:
Class A (871) --
Class B (182) --
Class C (503) --
------------- -------------
(1,556) --
------------- -------------
In Excess of Net Realized Gain:
Class A -- (3)
Class C -- (2)
------------- -------------
-- (5)
------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (1,943) (147)
------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 133,953 141,283
Distributions Reinvested 1,855 133
Redeemed (111,716) (35,217)
------------- -------------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 24,092 106,199
------------- -------------
Total Increase in Net Assets 44,079 120,531
NET ASSETS -- Beginning of Year 168,867 48,336
------------- -------------
NET ASSETS -- End of Year (Including
undistributed (distributions in
excess of) net investment income of
$(659) and $306, respectively.) $ 212,946 $ 168,867
------------- -------------
------------- -------------
- -------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 7,637 9,551
Distributions Reinvested 104 13
Redeemed (8,424) (2,502)
------------- -------------
Net Increase (Decrease) in Class A
Shares Outstanding (683) 7,062
------------- -------------
------------- -------------
Dollars:
Subscribed $ 89,680 $ 106,764
Distributions Reinvested 1,103 131
Redeemed (96,827) (27,528)
------------- -------------
Net Increase (Decrease) $ (6,044) $ 79,367
------------- -------------
------------- -------------
Class B:
---------------------
Shares:
Subscribed 2,028 883
Distributions Reinvested 20 --
Redeemed (205) (10)
------------- -------------
Net Increase in Class B Shares
Outstanding 1,843 873
------------- -------------
------------- -------------
Dollars:
Subscribed $ 23,982 $ 9,848
Distributions Reinvested 223 --
Redeemed (2,355) (116)
------------- -------------
Net Increase $ 21,850 $ 9,732
------------- -------------
------------- -------------
Class C:
---------------------
Shares:
Subscribed 1,753 2,245
Distributions Reinvested 51 --
Redeemed (1,086) (703)
------------- -------------
Net Increase in Class C Shares
Outstanding 718 1,542
------------- -------------
------------- -------------
Dollars:
Subscribed $ 20,292 $ 24,671
Distributions Reinvested 528 2
Redeemed (12,534) (7,573)
------------- -------------
Net Increase $ 8,286 $ 17,100
------------- -------------
------------- -------------
- -------------------------------------------------------------------
</TABLE>
- -----------
96
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY FUND
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 2, 1996* TO
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (135) $ 27
Net Realized Gain 3,674 943
Change in Unrealized
Appreciation/Depreciation 3,205 274
------- -------
Net Increase in Net Assets
Resulting from Operations 6,744 1,244
------- -------
DISTRIBUTIONS:
Net Investment Income:
Class A (16) (17)
Class B (5) (6)
Class C (5) (7)
------- -------
(26) (30)
------- -------
Net Realized Gain:
Class A (711) --
Class B (452) --
Class C (439) --
------- -------
(1,602) --
------- -------
Net Decrease in Net Assets
Resulting from Distributions (1,628) (30)
------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 57,588 9,793
Distributions Reinvested 1,037 10
Redeemed (7,818) (627)
------- -------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 50,807 9,176
------- -------
Total Increase in Net Assets 55,923 10,390
NET ASSETS -- Beginning of Year 10,390 --
------- -------
NET ASSETS -- End of Year $ 66,313 $ 10,390
------- -------
------- -------
- -----------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 1,309 410
Distributions Reinvested 35 1
Redeemed (392) (37)
------- -------
Net Increase in Class A Shares
Outstanding 952 374
------- -------
------- -------
Dollars:
Subscribed $ 20,966 $ 5,351
Distributions Reinvested 522 9
Redeemed (6,373) (479)
------- -------
Net Increase $ 15,115 $ 4,881
------- -------
------- -------
Class B:
---------------------
Shares:
Subscribed 1,905 170
Distributions Reinvested 18 --
Redeemed (51) (1)
------- -------
Net Increase in Class B Shares
Outstanding 1,872 169
------- -------
------- -------
Dollars:
Subscribed $ 30,344 $ 2,086
Distributions Reinvested 262 --
Redeemed (818) (11)
------- -------
Net Increase $ 29,788 $ 2,075
------- -------
------- -------
Class C:
---------------------
Shares:
Subscribed 404 190
Distributions Reinvested 17 --
Redeemed (42) (10)
------- -------
Net Increase in Class C Shares
Outstanding 379 180
------- -------
------- -------
Dollars:
Subscribed $ 6,278 $ 2,356
Distributions Reinvested 252 1
Redeemed (626) (137)
------- -------
Net Increase $ 5,904 $ 2,220
------- -------
------- -------
- -----------------------------------------------------------------------------
* Commencement of operations
</TABLE>
-----------------------
97
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
U.S. REAL ESTATE FUND
<TABLE>
<CAPTION>
YEAR ENDED MAY 1, 1996* TO
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 280 $ 32
Net Realized Gain 2,077 --
Change in Unrealized
Appreciation/Depreciation 1,622 210
------------- ------
Net Increase in Net Assets
Resulting from Operations 3,979 242
------------- ------
DISTRIBUTIONS:
Net Investment Income:
Class A (162) (5)
Class B (57) (4)
Class C (31) (4)
------------- ------
(250) (13)
------------- ------
Net Realized Gain:
Class A (100) --
Class B (71) --
Class C (48) --
------------- ------
(219) --
------------- ------
Net Decrease in Net Assets
Resulting from Distributions (469) (13)
------------- ------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 23,984 5,578
Distributions Reinvested 268 1
Redeemed (9,254) --
------------- ------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 14,998 5,579
------------- ------
Total Increase in Net Assets 18,508 5,808
NET ASSETS -- Beginning of Year 5,808 --
------------- ------
NET ASSETS -- End of Year (Including
undistributed net investment income
of $55 and $19, respectively.) $ 24,316 $ 5,808
------------- ------
------------- ------
- ---------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 1,003 146
Distributions Reinvested 13 --
Redeemed (257) --
------------- ------
Net Increase in Class A Shares
Outstanding 759 146
------------- ------
------------- ------
Dollars:
Subscribed $ 15,148 $ 1,753
Distributions Reinvested 187 1
Redeemed (3,998) --
------------- ------
Net Increase $ 11,337 $ 1,754
------------- ------
------------- ------
Class B:
---------------------
Shares:
Subscribed 441 175
Distributions Reinvested 4 --
Redeemed (185) --
------------- ------
Net Increase in Class B Shares
Outstanding 260 175
------------- ------
------------- ------
Dollars:
Subscribed $ 6,607 $ 2,116
Distributions Reinvested 54 --
Redeemed (2,916) --
------------- ------
Net Increase $ 3,745 $ 2,116
------------- ------
------------- ------
Class C:
---------------------
Shares:
Subscribed 150 142
Distributions Reinvested 2 --
Redeemed (149) --
------------- ------
Net Increase in Class C Shares
Outstanding 3 142
------------- ------
------------- ------
Dollars:
Subscribed $ 2,229 $ 1,709
Distributions Reinvested 26 --
Redeemed (2,339) --
------------- ------
Net Increase $ (84) $ 1,709
------------- ------
------------- ------
- ---------------------------------------------------------------------
* Commencement of operations
</TABLE>
- -----------
98
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
HIGH YIELD FUND
<TABLE>
<CAPTION>
YEAR ENDED MAY 1, 1996* TO
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,246 $ 110
Net Realized Gain (Loss) 312 (3)
Change in Unrealized Appreciation
/Depreciation 881 (86)
------- -------
Net Increase in Net Assets
Resulting from Operations 2,439 21
------- -------
DISTRIBUTIONS:
Net Investment Income:
Class A (434) (38)
Class B (454) (27)
Class C (338) (27)
------- -------
(1,226) (92)
------- -------
Realized Gain:
Class A (20) --
Class B (24) --
Class C (20) --
------- -------
(64) --
------- -------
Net Decrease in Net Assets
Resulting from Distributions (1,290) (92)
------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 12,562 10,709
Distributions Reinvested 237 6
Redeemed (2,025) --
------- -------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 10,774 10,715
------- -------
Total Increase in Net Assets 11,923 10,644
NET ASSETS -- Beginning of Year 10,644 --
------- -------
NET ASSETS -- End of Year (Including
undistributed net investment income
of $38 and $18, respectively.) $ 22,567 $ 10,644
------- -------
------- -------
- -------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 461 327
Distributions Reinvested 10 --
Redeemed (101) --
------- -------
Net Increase in Class A Shares
Outstanding 370 327
------- -------
------- -------
Dollars:
Subscribed $ 5,790 $ 3,930
Distributions Reinvested 131 5
Redeemed (1,282) --
------- -------
Net Increase $ 4,639 $ 3,935
------- -------
------- -------
Class B:
---------------------
Shares:
Subscribed 397 287
Distributions Reinvested 6 --
Redeemed (20) --
------- -------
Net Increase in Class B Shares
Outstanding 383 287
------- -------
------- -------
Dollars:
Subscribed $ 4,971 $ 3,443
Distributions Reinvested 72 1
Redeemed (249) --
------- -------
Net Increase $ 4,794 $ 3,444
------- -------
------- -------
Class C:
---------------------
Shares:
Subscribed 144 278
Distributions Reinvested 3 --
Redeemed (39) --
------- -------
Net Increase in Class C Shares
Outstanding 108 278
------- -------
------- -------
Dollars:
Subscribed $ 1,800 $ 3,336
Distributions Reinvested 35 --
Redeemed (494) --
------- -------
Net Increase $ 1,341 $ 3,336
------- -------
------- -------
- -------------------------------------------------------------------------
* Commencement of operations
</TABLE>
-----------------------
99
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM FUND
<TABLE>
<CAPTION>
JULY 1, 1996* TO
JUNE 30, 1997
(000)
<S> <C>
- -------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 170
Net Realized Gain 770
Change in Unrealized
Appreciation/Depreciation 4,184
-------
Net Increase in Net Assets
Resulting from Operations 5,124
-------
DISTRIBUTIONS:
Net Investment Income:
Class A (52)
Class B (45)
Class C (43)
-------
(140)
-------
Net Realized Gain:
Class A (4)
Class B (4)
Class C (4)
-------
(12)
-------
Net Decrease in Net Assets
Resulting from Distributions (152)
-------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 47,034
Distributions Reinvested 50
Redeemed (2,724)
-------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 44,360
-------
Total Increase in Net Assets 49,332
NET ASSETS -- Beginning of Period --
-------
NET ASSETS -- End of Period
(Including undistributed net
investment income of $767) $ 49,332
-------
-------
- -------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 1,722
Distributions Reinvested 1
Redeemed (144)
-------
Net Increase in Class A Shares
Outstanding 1,579
-------
-------
Dollars:
Subscribed $ 21,512
Distributions Reinvested 14
Redeemed (1,786)
-------
Net Increase $ 19,740
-------
-------
Class B:
---------------------
Shares:
Subscribed 1,321
Distributions Reinvested 2
Redeemed (6)
-------
Net Increase in Class B Shares
Outstanding 1,317
-------
-------
Dollars:
Subscribed $ 16,670
Distributions Reinvested 18
Redeemed (73)
-------
Net Increase $ 16,615
-------
-------
Class C:
---------------------
Shares:
Subscribed 728
Distributions Reinvested 1
Redeemed (67)
-------
Net Increase in Class C Shares
Outstanding 662
-------
-------
Dollars:
Subscribed $ 8,852
Distributions Reinvested 18
Redeemed (865)
-------
Net Increase $ 8,005
-------
-------
- -------------------------------------------------------
* Commencement of operations
</TABLE>
- -----------
100
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 5,375 $ 4,114
Net Realized Gain (Loss) 8 (99)
------------- -------------
Net Increase in Net Assets
Resulting from Operations 5,383 4,015
------------- -------------
DISTRIBUTIONS:
Net Investment Income (5,375) (4,114)
Net Realized Gain -- (12)
------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (5,375) (4,126)
------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 359,068 1,373,640
Distributions Reinvested 4,349 3,511
Redeemed (414,635) (1,298,567)
------------- -------------
Net Increase (Decrease) in Net
Assets Resulting from Capital
Share Transactions (51,218) 78,584
------------- -------------
Total Increase (Decrease) in Net
Assets (51,210) 78,473
NET ASSETS -- Beginning of Year 145,978 67,505
------------- -------------
NET ASSETS -- End of Year $ 94,768 $ 145,978
------------- -------------
------------- -------------
- -------------------------------------------------------------------
Capital Share Transactions:
(1) Shares:
Subscribed 359,068 1,373,640
Distributions Reinvested 4,349 3,511
Redeemed (414,635) (1,298,567)
------------- -------------
Net Increase (Decrease) in Shares
Outstanding (51,218) 78,584
------------- -------------
------------- -------------
- -------------------------------------------------------------------
</TABLE>
-----------------------
101
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>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 8,859 $ 7,849
Net Realized Gain (Loss) 13 (100)
------------- -------------
Net Increase in Net Assets
Resulting from Operations 8,872 7,749
------------- -------------
DISTRIBUTIONS:
Net Investment Income (8,859) (7,849)
------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 677,641 1,390,774
Distributions Reinvested 7,110 7,425
Redeemed (717,315) (1,398,641)
------------- -------------
Net Increase (Decrease) in Net
Assets Resulting from Capital
Share Transactions (32,564) (442)
------------- -------------
Total Increase (Decrease) in Net
Assets (32,551) (542)
NET ASSETS -- Beginning of Year 170,973 171,515
------------- -------------
NET ASSETS -- End of Year $ 138,422 $ 170,973
------------- -------------
------------- -------------
- -------------------------------------------------------------------
Capital Share Transactions:
(1) Shares:
Subscribed 677,641 1,390,774
Distributions Reinvested 7,110 7,425
Redeemed (717,315) (1,398,641)
------------- -------------
Net Increase (Decrease) in Shares
Outstanding (32,564) (442)
------------- -------------
------------- -------------
- -------------------------------------------------------------------
</TABLE>
- -----------
102
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
GLOBAL EQUITY ALLOCATION FUND
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.75 $ 12.60 $ 11.99 $ 11.09
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.10 0.19 0.12 0.10
Net Realized and Unrealized Gain
(Loss) 2.76 2.82 0.67 0.90
------- ------- ------- -------
Total From Investment Operations 2.86 3.01 0.79 1.00
------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income (0.55) (0.39) -- (0.03)
In Excess of Net Investment Income -- -- (0.05) --
Net Realized Gain (0.49) (0.47) (0.13) (0.07)
------- ------- ------- -------
Total Distributions (1.04) (0.86) (0.18) (0.10)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 16.57 $ 14.75 $ 12.60 $ 11.99
------- ------- ------- -------
------- ------- ------- -------
TOTAL RETURN (1) 20.61% 24.62% 6.69% 9.02%
------- ------- ------- -------
------- ------- ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 72,704 $ 63,706 $ 42,586 $ 33,425
Ratio of Expenses to Average Net
Assets 1.70% 1.70% 1.70% 1.70%
Ratio of Net Investment Income to
Average Net Assets 0.59% 0.71% 1.01% 0.98%
Portfolio Turnover Rate 45% 44% 39% 30%
Average Commission Rate #
Per Share $ 0.0021 N/A N/A N/A
As a Percentage of Trade Amount 0.83% N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.03 $ 0.10 $ 0.04 $ 0.09
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.90% 2.06% 2.03% 2.58%
Net Investment Income (Loss) to
Average Net Assets 0.40% 0.35% 0.68% 0.10%
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
----------------------------------------
JANUARY 4, 1993* YEAR ENDED AUGUST 1, 1995+
SELECTED PER SHARE DATA AND RATIOS TO JUNE 30, 1993 JUNE 30, 1997 TO JUNE 30, 1996
<S> <C> <C> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 14.46 $ 13.01
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.04 (0.05) 0.30
Net Realized and Unrealized Gain
(Loss) 1.05 2.73 1.98
------- ------- -------
Total From Investment Operations 1.09 2.68 2.28
------- ------- -------
DISTRIBUTIONS
Net Investment Income -- (0.50) (0.35)
In Excess of Net Investment Income -- -- --
Net Realized Gain -- (0.49) (0.48)
------- ------- -------
Total Distributions -- (0.99) (0.83)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 11.09 $ 16.15 $ 14.46
------- ------- -------
------- ------- -------
TOTAL RETURN (1) 10.90% 19.64% 18.08%
------- ------- -------
------- ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 10,434 $ 38,962 $ 14,786
Ratio of Expenses to Average Net
Assets 1.70%** 2.45% 2.45%**
Ratio of Net Investment Income to
Average Net Assets 1.04%** (0.11)% 0.45%**
Portfolio Turnover Rate 14% 45% 44%
Average Commission Rate #
Per Share N/A $ 0.0021 N/A
As a Percentage of Trade Amount N/A 0.83% N/A
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.08 $ 0.09 $ 0.22
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.65%** 2.65% 2.81%**
Net Investment Income (Loss) to
Average Net Assets (0.91)%** (0.30)% 0.09%**
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.49 $ 12.43 $ 11.90 $ 11.05
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.03) 0.12 0.04 0.06
Net Realized and Unrealized Gain
(Loss) 2.73 2.75 0.65 0.86
------- ------- ------- -------
Total From Investment Operations 2.70 2.87 0.69 0.92
------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income (0.46) (0.33) -- --
In Excess of Net Investment Income -- -- (0.03) --
Net Realized Gain (0.49) (0.48) (0.13) (0.07)
------- ------- ------- -------
Total Distributions (0.95) (0.81) (0.16) (0.07)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 16.24 $ 14.49 $ 12.43 $ 11.90
------- ------- ------- -------
------- ------- ------- -------
TOTAL RETURN (1) 19.69% 23.65% 5.84% 8.34%
------- ------- ------- -------
------- ------- ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 78,199 $ 63,025 $ 40,460 $ 29,892
Ratio of Expenses to Average Net
Assets 2.45% 2.45% 2.45% 2.45%
Ratio of Net Investment Income to
Average Net Assets (0.16)% (0.04)% 0.25% 0.23%
Portfolio Turnover Rate 45% 44% 39% 30%
Average Commission Rate #
Per Share $ 0.0021 N/A N/A N/A
As a Percentage of Trade Amount 0.83% N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.03 $ 1.16 $ 0.05 $ 0.12
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.65% 2.81% 2.78% 3.34%
Net Investment Income (Loss) to
Average Net Assets (0.34)% (0.40)% (0.08)% (0.66)%
<CAPTION>
JANUARY 4, 1993*
SELECTED PER SHARE DATA AND RATIOS TO JUNE 30, 1993
<S> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.01
Net Realized and Unrealized Gain
(Loss) 1.04
-------
Total From Investment Operations 1.05
-------
DISTRIBUTIONS
Net Investment Income --
In Excess of Net Investment Income --
Net Realized Gain --
-------
Total Distributions --
-------
NET ASSET VALUE, END OF PERIOD $ 11.05
-------
-------
TOTAL RETURN (1) 10.50%
-------
-------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 6,995
Ratio of Expenses to Average Net
Assets 2.45%**
Ratio of Net Investment Income to
Average Net Assets 0.29%**
Portfolio Turnover Rate 14%
Average Commission Rate #
Per Share N/A
As a Percentage of Trade Amount N/A
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets 4.40%**
Net Investment Income (Loss) to
Average Net Assets (1.66)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share it paid for
trades on which commissions were charged.
-----------------------
103
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME FUND
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.94 $ 10.23 $ 9.53 $ 10.55
------ ------ ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.44 0.53 0.56 0.52
Net Realized and Unrealized Gain
(Loss) (0.02) (0.01) 0.50 (0.42)
------ ------ ------- -------
Total From Investment Operations 0.42 0.52 1.06 0.10
------ ------ ------- -------
DISTRIBUTIONS
Net Investment Income (0.35) (0.79) (0.36) (0.50)
In Excess of Net Investment Income (0.06) (0.02) -- (0.12)
Net Realized Gain -- -- -- (0.47)
In Excess of Net Realized Gain -- -- -- (0.03)
------ ------ ------- -------
Total Distributions (0.41) (0.81) (0.36) (1.12)
------ ------ ------- -------
NET ASSET VALUE, END OF PERIOD $ 9.95 $ 9.94 $ 10.23 $ 9.53
------ ------ ------- -------
------ ------ ------- -------
TOTAL RETURN (1) 4.27% 5.20% 11.41% 0.41%
------ ------ ------- -------
------ ------ ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 6,407 $ 7,432 $ 11,092 $ 10,369
Ratio of Expenses to Average Net
Assets 1.45% 1.45% 1.45% 1.45%
Ratio of Net Investment Income to
Average Net Assets 4.40% 5.02% 5.84% 4.70%
Portfolio Turnover Rate 170% 223% 169% 168%
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.12 $ 0.07 $ 0.07 $ 0.11
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.57% 2.16% 2.22% 2.48%
Net Investment Income to Average
Net Assets 3.25% 4.31% 5.07% 3.67%
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
------------------------------------------
JANUARY 4, 1993* YEAR ENDED AUGUST 1, 1995+ TO
SELECTED PER SHARE DATA AND RATIOS TO JUNE 30, 1993 JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 9.91 $ 10.24
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.25 0.41 0.64
Net Realized and Unrealized Gain
(Loss) 0.55 (0.07) (0.26)
------ ------ ------
Total From Investment Operations 0.80 0.34 0.38
------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.25) (0.29) (0.69)
In Excess of Net Investment Income -- (0.05) (0.02)
Net Realized Gain -- -- --
In Excess of Net Realized Gain -- -- --
------ ------ ------
Total Distributions (0.25) (0.34) (0.71)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.55 $ 9.91 $ 9.91
------ ------ ------
------ ------ ------
TOTAL RETURN (1) 8.02% 3.48% 3.76%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 6,633 $ 1,716 $ 1,440
Ratio of Expenses to Average Net
Assets 1.45%** 2.20% 2.20%**
Ratio of Net Investment Income to
Average Net Assets 5.00%** 3.65% 3.38%**
Portfolio Turnover Rate 55% 170% 223%
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.07 $ 0.13 $ 0.12
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.88%** 3.37% 3.57%**
Net Investment Income to Average
Net Assets 3.57%** 2.45% 2.01%**
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.90 $ 10.20 $ 9.54 $ 10.56
------ ------ ------ -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.39 0.37 0.49 0.43
Net Realized and Unrealized Gain
(Loss) (0.05) 0.08 0.47 (0.40)
------ ------ ------ -------
Total From Investment Operations 0.34 0.45 0.96 0.03
------ ------ ------ -------
DISTRIBUTIONS
Net Investment Income (0.29) (0.73) (0.30) (0.44)
In Excess of Net Investment Income (0.05) (0.02) -- (0.11)
Net Realized Gain -- -- -- (0.47)
In Excess of Net Realized Gain -- -- -- (0.03)
------ ------ ------ -------
Total Distributions (0.34) (0.75) (0.30) (1.05)
------ ------ ------ -------
NET ASSET VALUE, END OF PERIOD $ 9.90 $ 9.90 $ 10.20 $ 9.54
------ ------ ------ -------
------ ------ ------ -------
TOTAL RETURN (1) 3.48% 4.47% 10.24% (0.25)%
------ ------ ------ -------
------ ------ ------ -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 2,445 $ 2,844 $ 5,965 $ 5,407
Ratio of Expenses to Average Net
Assets 2.20% 2.20% 2.20% 2.20%
Ratio of Net Investment Income to
Average Net Assets 3.65% 4.35% 5.09% 3.95%
Portfolio Turnover Rate 170% 223% 169% 168%
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.12 $ 0.06 $ 0.08 $ 0.12
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.35% 2.87% 2.97% 3.29%
Net Investment Income to Average
Net Assets 2.48% 3.68% 4.32% 2.86%
<CAPTION>
JANUARY 4, 1993*
SELECTED PER SHARE DATA AND RATIOS TO JUNE 30, 1993
<S> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.21
Net Realized and Unrealized Gain
(Loss) 0.55
------
Total From Investment Operations 0.76
------
DISTRIBUTIONS
Net Investment Income (0.20)
In Excess of Net Investment Income --
Net Realized Gain --
In Excess of Net Realized Gain --
------
Total Distributions (0.20)
------
NET ASSET VALUE, END OF PERIOD $ 10.56
------
------
TOTAL RETURN (1) 7.61%
------
------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 6,120
Ratio of Expenses to Average Net
Assets 2.20%**
Ratio of Net Investment Income to
Average Net Assets 4.25%**
Portfolio Turnover Rate 55%
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.63%**
Net Investment Income to Average
Net Assets 2.82%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
- ------------------
104
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
ASIAN GROWTH FUND
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED JUNE 23, 1993*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994 TO JUNE 30, 1993
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 17.15 $ 16.42 $ 15.50 $ 12.00 $ 12.00
------------- ------------- ------------- ------------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (0.06) (0.04) -- (0.03) --
Net Realized and Unrealized Gain
(Loss) (0.14) 0.77 1.43 3.53 --
------------- ------------- ------------- ------------- -------
Total From Investment Operations (0.20) 0.73 1.43 3.50 --
------------- ------------- ------------- ------------- -------
DISTRIBUTIONS
Net Realized Gain -- -- (0.49) -- --
In Excess of Net Realized Gain (0.33) -- (0.02) -- --
------------- ------------- ------------- ------------- -------
(0.33) -- (0.51) -- --
------------- ------------- ------------- ------------- -------
NET ASSET VALUE, END OF PERIOD $ 16.62 $ 17.15 $ 16.42 $ 15.50 $ 12.00
------------- ------------- ------------- ------------- -------
------------- ------------- ------------- ------------- -------
TOTAL RETURN (1) (1.10)% 4.45% 9.50% 29.17% 0.00%
------------- ------------- ------------- ------------- -------
------------- ------------- ------------- ------------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 175,440 $ 248,009 $ 178,667 $ 138,212 $ 11,770
Ratio of Expenses to Average Net
Assets 1.84% 1.88% 1.90% 1.90% 1.90%**
Ratio of Net Investment Income
(Loss) to Average Net Assets (0.31)% (0.16)% 0.04% (0.24)% (0.81)%**
Portfolio Turnover Rate 74% 38% 34% 34% 0%
Average Commission Rate #
Per Share $ 0.0110 N/A N/A N/A N/A
As a Percentage of Trade Amount 0.51% N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Loss -- -- -- $ 0.03 $ 0.01
Ratios Before Expense Limitation:
Expenses to Average Net Assets -- -- -- 2.17% 11.83%**
Net Investment Income (Loss) to
Average Net Assets -- -- -- (0.51)% (10.74)%**
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
---------------------------------------
YEAR ENDED AUGUST 1, 1995+ TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C>
- ----------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.81 $ 16.51
------------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (0.16) (0.03)
Net Realized and Unrealized Gain
(Loss) (0.15) 0.33
------------- -------
Total From Investment Operations (0.31) 0.30
------------- -------
DISTRIBUTIONS
Net Realized Gain -- --
In Excess of Net Realized Gain (0.33) --
------------- -------
(0.33) --
------------- -------
NET ASSET VALUE, END OF PERIOD $ 16.17 $ 16.81
------------- -------
------------- -------
TOTAL RETURN (1) (1.79)% 1.82%
------------- -------
------------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 62,786 $ 52,853
Ratio of Expenses to Average Net
Assets 2.59% 2.61%**
Ratio of Net Investment Income
(Loss) to Average Net Assets (1.04)% (0.52)%**
Portfolio Turnover Rate 74% %38
Average Commission Rate #
Per Share $ 0.0110 N/A
As a Percentage of Trade Amount 0.51% N/A
- ----------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Loss -- --
Ratios Before Expense Limitation:
Expenses to Average Net Assets -- --
Net Investment Income (Loss) to
Average Net Assets -- --
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA AND YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED JUNE 23, 1993*
RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994 TO JUNE 30, 1993
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.78 $ 16.19 $ 15.40 $ 12.00 $ 12.00
------------- ------------- ------------- ------------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Loss (0.21) (0.13) (0.12) (0.10) --
Net Realized and Unrealized
Gain (Loss) (0.10) 0.72 1.42 3.50 --
------------- ------------- ------------- ------------- ------
Total From Investment
Operations (0.31) 0.59 1.30 3.40 --
------------- ------------- ------------- ------------- ------
DISTRIBUTIONS
Net Realized Gain -- -- (0.49) -- --
In Excess of Net Realized Gain (0.33) -- (0.02) -- --
------------- ------------- ------------- ------------- ------
(0.33) -- (0.51) -- --
------------- ------------- ------------- ------------- ------
NET ASSET VALUE, END OF PERIOD $ 16.14 $ 16.78 $ 16.19 $ 15.40 $ 12.00
------------- ------------- ------------- ------------- ------
------------- ------------- ------------- ------------- ------
TOTAL RETURN (1) (1.79)% 3.64% 8.71% 28.33% 0.00%
------------- ------------- ------------- ------------- ------
------------- ------------- ------------- ------------- ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(000's) $ 114,460 $ 168,070 $ 139,497 $ 116,889 $ 8,491
Ratio of Expenses to Average Net
Assets 2.59% 2.63% 2.63% 2.65% 2.65%**
Ratio of Net Investment Income
(Loss) to Average Net Assets (1.06)% (0.94)% (0.77)% (0.99)% (1.56)%**
Portfolio Turnover Rate 74% 38% 34% 34% % 0
Average Commission Rate #
Per Share $ 0.0110 N/A N/A N/A N/A
As a Percentage of Trade
Amount 0.51% N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Loss -- -- -- $ 0.03 $ 0.02
Ratios Before Expense
Limitation:
Expenses to Average Net Assets -- -- -- 2.92% 12.64%**
Net Investment Income (Loss)
to Average Net Assets -- -- -- (1.26)% (11.55)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for a periods of less than one year are
not annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share it paid for
trades on which commissions were charged.
-----------------------
105
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
AMERICAN VALUE FUND
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 18, 1993*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 TO JUNE 30, 1994
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.63 $ 12.89 $ 11.70 $ 12.00
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.20 0.27 0.27 0.17
Net Realized and Unrealized Gain
(Loss) 4.05 1.94 1.44 (0.30)
------- ------- ------- -------
Total from Investment Operations 4.25 2.21 1.71 (0.13)
------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income (0.20) (0.27) (0.28) (0.17)
In Excess of Net Investment Income (0.00)++ (0.01) -- --
Net Realized Gain (1.09) (0.19) (0.24) --
------- ------- ------- -------
Total Distributions (1.29) (0.47) (0.52) (0.17)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 17.59 $ 14.63 $ 12.89 $ 11.70
------- ------- ------- -------
------- ------- ------- -------
TOTAL RETURN (1) 30.68% 17.41% 15.01% (1.12)%
------- ------- ------- -------
------- ------- ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 34,331 $ 19,674 $ 20,675 $ 10,717
Ratio of Expenses to Average Net
Assets 1.50% 1.50% 1.50% 1.50%**
Ratio of Net Investment Income to
Average Net Assets 1.25% 1.90% 2.29% 2.14%**
Portfolio Turnover Rate 73% 41% 23% 17%
Average Commission Rate # $ 0.0452 N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.04 $ 0.04 $ 0.05 $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.76% 1.81% 1.96% 2.48%**
Net Investment Income to Average
Net Assets 0.98% 1.59% 1.83% 1.16%**
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
------------------------------------------
YEAR ENDED AUGUST 1, 1995+ TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.63 $ 13.37
------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.09 0.15
Net Realized and Unrealized Gain
(Loss) 4.05 1.46
------- ------
Total from Investment Operations 4.14 1.61
------- ------
DISTRIBUTIONS
Net Investment Income (0.09) (0.15)
In Excess of Net Investment Income (0.00)++ (0.01)
Net Realized Gain (1.09) (0.19)
------- ------
Total Distributions (1.18) (0.35)
------- ------
NET ASSET VALUE, END OF PERIOD $ 17.59 $ 14.63
------- ------
------- ------
TOTAL RETURN (1) 29.77% 12.29%
------- ------
------- ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 15,331 $ 2,485
Ratio of Expenses to Average Net
Assets 2.25% 2.25%**
Ratio of Net Investment Income to
Average Net Assets 0.40% 1.18%**
Portfolio Turnover Rate 73% 41%
Average Commission Rate # $ 0.0452 N/A
- -----------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.06 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.48% 2.61%**
Net Investment Income to Average
Net Assets 0.14% 0.82%**
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 18, 1993*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 TO JUNE 30, 1994
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.64 $ 12.89 $ 11.69 $ 12.00
------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.08 0.16 0.17 0.11
Net Realized and Unrealized Gain
(Loss) 4.05 1.94 1.44 (0.31)
------- ------- ------- ------
Total from Investment Operations 4.13 2.10 1.61 (0.20)
------- ------- ------- ------
DISTRIBUTIONS
Net Investment Income (0.09) (0.15) (0.17) (0.11)
In Excess of Net Investment Income (0.00)++ (0.01) -- --
Net Realized Gain (1.09) (0.19) (0.24) --
------- ------- ------- ------
Total Distributions (1.18) (0.35) (0.41) (0.11)
------- ------- ------- ------
NET ASSET VALUE, END OF PERIOD $ 17.59 $ 14.64 $ 12.89 $ 11.69
------- ------- ------- ------
------- ------- ------- ------
TOTAL RETURN (1) 29.67% 16.50% 14.13% (1.70)%
------- ------- ------- ------
------- ------- ------- ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 32,425 $ 21,193 $ 13,867 $ 7,237
Ratio of Expenses to Average Net
Assets 2.25% 2.25% 2.25% 2.25%**
Ratio of Net Investment Income to
Average Net Assets 0.49% 1.17% 1.54% 1.39%**
Portfolio Turnover Rate 73% 41% 23% 17%
Average Commission Rate # $ 0.0452 N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.04 $ 0.04 $ 0.05 $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.47% 2.58% 2.71% 3.28%**
Net Investment Income to Average
Net Assets 0.22% 0.84% 1.08% 0.36%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
++ Amount is less than $0.01 per share
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share it paid for
trades on which commissions were charged.
- ------------------
106
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
WORLDWIDE HIGH INCOME FUND
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED APRIL 21, 1994*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 TO JUNE 30, 1994
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.47 $ 11.57 $ 12.17 $ 12.00
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 1.25 1.36 1.26 0.18
Net Realized and Unrealized Gain
(Loss) 2.30 0.80 (0.52) 0.16
------- ------- ------- -------
Total From Investment Operations 3.55 2.16 0.74 0.34
------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income (1.25) (1.26) (1.22) (0.17)
Net Realized Gain (0.51) -- (0.12) --
------- ------- ------- -------
Total Distributions (1.76) (1.26) (1.34) (0.17)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 14.26 $ 12.47 $ 11.57 $ 12.17
------- ------- ------- -------
------- ------- ------- -------
TOTAL RETURN (1) 30.29% 19.61% 6.87% 2.86%
------- ------- ------- -------
------- ------- ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 76,439 $ 41,493 $ 14,819 $ 6,857
Ratio of Expenses to Average Net
Assets 1.52% 1.55% 1.55% 1.55%**
Ratio of Net Investment Income to
Average Net Assets 9.73% 11.95% 11.53% 8.29%**
Portfolio Turnover Rate 157% 220% 178% 19%
- ----------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ -- $ 0.02 $ 0.05 $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets -- 1.69% 1.97% 3.23%**
Net Invesment Income to Average Net
Assets -- 11.81% 11.11% 6.61%**
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
----------------------------------------
YEAR ENDED AUGUST 1, 1995+
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 TO JUNE 30, 1996
<S> <C> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.44 $ 11.63
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 1.07 1.18
Net Realized and Unrealized Gain
(Loss) 2.35 0.72
------- -------
Total From Investment Operations 3.42 1.90
------- -------
DISTRIBUTIONS
Net Investment Income (1.15) (1.09)
Net Realized Gain (0.51) --
------- -------
Total Distributions (1.66) (1.09)
------- -------
NET ASSET VALUE, END OF PERIOD $ 14.20 $ 12.44
------- -------
------- -------
TOTAL RETURN (1) 29.14% 17.07%
------- -------
------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 78,340 $ 26,174
Ratio of Expenses to Average Net
Assets 2.27% 2.30%**
Ratio of Net Investment Income to
Average Net Assets 8.86% 12.06%**
Portfolio Turnover Rate 157% 220%
- -------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ -- $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets -- 2.47%**
Net Invesment Income to Average Net
Assets -- 11.89%**
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED APRIL 21, 1994*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 TO JUNE 30, 1994
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 12.45 $ 11.58 $ 12.16 $ 12.00
------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 1.16 1.30 1.17 0.17
Net Realized and Unrealized Gain
(Loss) 2.26 0.77 (0.50) 0.15
------- ------- ------- ------
Total From Investment Operations 3.42 2.07 0.67 0.32
------- ------- ------- ------
DISTRIBUTIONS
Net Investment Income (1.15) (1.20) (1.13) (0.16)
Net Realized Gain (0.51) -- (0.12) --
------- ------- ------- ------
Total Distributions (1.66) (1.20) (1.25) (0.16)
------- ------- ------- ------
NET ASSET VALUE, END OF PERIOD $ 14.21 $ 12.45 $ 11.58 $ 12.16
------- ------- ------- ------
------- ------- ------- ------
TOTAL RETURN (1) 29.12% 18.71% 6.20% 2.62%
------- ------- ------- ------
------- ------- ------- ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 41,709 $ 28,094 $ 11,880 $ 6,081
Ratio of Expenses to Average Net
Assets 2.27% 2.30% 2.30% 2.30%**
Ratio of Net Investment Income to
Average Net Assets 9.04% 11.40% 10.72% 7.54%**
Portfolio Turnover Rate 157% 220% 178% 19%
- ----------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ -- $ 0.04 $ 0.05 $ 0.06
Ratios Before Expense Limitation:
Expenses to Average Net Assets -- 2.44% 2.74% 4.00%**
Net Invesment Income to Average Net
Assets -- 11.26% 10.28% 5.84%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
-----------------------
107
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
LATIN AMERICAN FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------------------------------------------- ----------------
YEAR ENDED YEAR ENDED JULY 6, 1994* YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1997
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.63 $ 9.08 $ 12.00 $ 12.45
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.02 0.10 (0.02) (0.03)
Net Realized and Unrealized Gain
(Loss) 6.46 3.47 (2.70) 6.28
------- ------- ------- -------
Total From Investment Operations 6.48 3.57 (2.72) 6.25
------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income -- (0.02) -- --
In Excess of Net Investment Income (0.09) -- -- (0.08)
Net Realized Gain (1.63) -- -- (1.63)
Return of Capital -- -- (0.20) --
------- ------- ------- -------
Total Distributions (1.72) (0.02) (0.20) (1.71)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 17.39 $ 12.63 $ 9.08 $ 16.99
------- ------- ------- -------
------- ------- ------- -------
TOTAL RETURN (1) 57.32% 39.35% (23.07)% 56.17%
------- ------- ------- -------
------- ------- ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 84,401 $ 18,701 $ 7,658 $ 14,314
Ratio of Expenses to Average Net
Assets 2.24% 2.11% 2.46%** 2.99%
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.08)% 1.18% (0.44)%** (0.78)%
Portfolio Turnover Rate 241% 131% 107% 241%
Average Commission Rate #
Per Share $ 0.0006 N/A N/A $ 0.0006
As a Percentage of Trade Amount 0.31% N/A N/A 0.31%
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.10 $ 0.09 $ 0.13 $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.77% 3.28% 4.30%** 3.55%
Net Investment Income (Loss) to
Average Net Assets (0.61)% 0.01% (2.26)%** (1.34)%
Ratio of Expenses to Average Net
Assets excluding country tax
expense 2.10% 2.10% 2.10%** 2.85%
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
AUGUST 1, 1995+ TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1996
<S> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.58
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.03
Net Realized and Unrealized Gain
(Loss) 2.84
------
Total From Investment Operations 2.87
------
DISTRIBUTIONS
Net Investment Income --
In Excess of Net Investment Income --
Net Realized Gain --
Return of Capital --
------
Total Distributions --
------
NET ASSET VALUE, END OF PERIOD $ 12.45
------
------
TOTAL RETURN (1) 29.26%
------
------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 2,041
Ratio of Expenses to Average Net
Assets 2.87%**
Ratio of Net Investment Income (Loss)
to Average Net Assets 0.88%**
Portfolio Turnover Rate 131%
Average Commission Rate #
Per Share N/A
As a Percentage of Trade Amount N/A
- --------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.89%**
Net Investment Income (Loss) to
Average Net Assets (0.14)%**
Ratio of Expenses to Average Net
Assets excluding country tax
expense 2.85%**
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------------------
YEAR ENDED YEAR ENDED JULY 6, 1994*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.43 $ 8.99 $ 12.00
------- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (0.07) 0.04 (0.08)
Net Realized and Unrealized Gain
(Loss) 6.31 3.40 (2.73)
------- ------ ------
Total From Investment Operations 6.24 3.44 (2.81)
------- ------ ------
DISTRIBUTIONS
Net Investment Income -- -- --
In Excess of Net Investment Income (0.03) -- --
Net Realized Gain (1.63) -- --
Return of Capital -- -- (0.20)
------- ------ ------
Total Distributions (1.66) -- (0.20)
------- ------ ------
NET ASSET VALUE, END OF PERIOD $ 17.01 $ 12.43 $ 8.99
------- ------ ------
------- ------ ------
TOTAL RETURN (1) 56.04% 38.26% (23.83)%
------- ------ ------
------- ------ ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 20,345 $ 6,780 $ 4,085
Ratio of Expenses to Average Net
Assets 2.99% 2.86% 3.20%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.79)% 0.42% (1.16)%**
Portfolio Turnover Rate 241% 131% 107%
Average Commission Rate #
Per Share $ 0.0006 N/A N/A
As a Percentage of Trade Amount 0.31% N/A N/A
- ----------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.05 $ 0.12 $ 0.12
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.56% 4.06% 5.20%**
Net Investment Income (Loss) to
Average Net Assets (1.36)% (0.78)% (3.16)%**
Ratio of Expenses to Average Net
Assets excluding country tax
expense 2.85% 2.85% 2.85%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share it paid for
trades on which commissions were charged.
- ------------------
108
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------------------- ----------------
YEAR ENDED YEAR ENDED JULY 6, 1994* YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1997
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.06 $ 10.61 $ 12.00 $ 11.94
---------------- ------------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.01 0.05 0.05 (0.03)
Net Realized and Unrealized Gain
(Loss) 1.57 1.44 (1.44) 1.50
---------------- ------------- -------- --------
Total From Investment Operations 1.58 1.49 (1.39) 1.47
---------------- ------------- -------- --------
DISTRIBUTIONS
Net Investment Income -- (0.04) -- --
In Excess of Net Investment Income (0.04) -- -- (0.04)
Net Realized Gain (0.13) -- -- (0.13)
---------------- ------------- -------- --------
Total Distributions (0.17) (0.04) -- (0.17)
---------------- ------------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 13.47 $ 12.06 $ 10.61 $ 13.24
---------------- ------------- -------- --------
---------------- ------------- -------- --------
TOTAL RETURN (1) 13.54% 14.16% (11.58)% 12.67%
---------------- ------------- -------- --------
---------------- ------------- -------- --------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 119,022 $ 114,850 $ 26,091 $ 35,966
Ratio of Expenses to Average Net
Assets 2.21% 2.16% 2.33%** 2.96%
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.06)% 0.93% 0.81%** (0.64)%
Portfolio Turnover Rate 82% 42% 32% 82%
Average Commission Rate #
Per Share $ 0.0007 N/A N/A $ 0.0007
As a Percentage of Trade Amount 0.39% N/A N/A 0.39%
- ----------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.03 $ 0.02 $ 0.04 $ 0.01
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.41% 2.56% 3.10%** 3.17%
Net Invesment Income (Loss) to
Average Net Assets (0.27)% 0.53% 0.04%** (0.87)%
Ratio of Expenses to Average Net
Assets excluding country tax
expense 2.15% 2.15% 2.15%** 2.90%
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
AUGUST 1, 1995+ TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1996
<S> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.91
--------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.01
Net Realized and Unrealized Gain
(Loss) 1.02
--------
Total From Investment Operations 1.03
--------
DISTRIBUTIONS
Net Investment Income --
In Excess of Net Investment Income --
Net Realized Gain --
--------
Total Distributions --
--------
NET ASSET VALUE, END OF PERIOD $ 11.94
--------
--------
TOTAL RETURN (1) 9.45%
--------
--------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 10,416
Ratio of Expenses to Average Net
Assets 2.91%**
Ratio of Net Investment Income (Loss)
to Average Net Assets 0.30%**
Portfolio Turnover Rate 42%
Average Commission Rate #
Per Share N/A
As a Percentage of Trade Amount N/A
- ----------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.31%**
Net Invesment Income (Loss) to
Average Net Assets (0.10)%**
Ratio of Expenses to Average Net
Assets excluding country tax
expense 2.90%**
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------
YEAR ENDED YEAR ENDED JULY 6, 1994* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.93 $ 10.53 $ 12.00
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.08) (0.01) --
Net Realized and Unrealized Gain
(Loss) 1.55 1.41 (1.47)
-------- -------- --------
Total From Investment Operations 1.47 1.40 (1.47)
-------- -------- --------
DISTRIBUTIONS
Net Investment Income -- -- --
In Excess of Net Investment Income (0.01) -- --
Net Realized Gain (0.13) -- --
-------- -------- --------
Total Distributions (0.14) -- --
-------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 13.26 $ 11.93 $ 10.53
-------- -------- --------
-------- -------- --------
TOTAL RETURN (1) 12.66% 13.30% (12.25)%
-------- -------- --------
-------- -------- --------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 57,958 $ 43,601 $ 22,245
Ratio of Expenses to Average Net
Assets 2.96% 2.91% 3.08%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.79)% (0.11)% 0.06%**
Portfolio Turnover Rate 82% 42% 32%
Average Commission Rate #
Per Share $ 0.0007 N/A N/A
As a Percentage of Trade Amount 0.39% N/A N/A
- -------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.02 $ 0.03 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.17% 3.34% 3.90%**
Net Invesment Income (Loss) to
Average Net Assets (1.00)% (0.54)% (0.76)%**
Ratio of Expenses to Average Net
Assets excluding country tax
expense 2.90% 2.90% 2.90%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share it paid for
trades on which commissions were charged.
-----------------------
109
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------- ----------------
YEAR ENDED JANUARY 2, 1996* TO YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.40 $ 12.00 $ 14.38
------- ------ -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.01 0.06 (0.02)
Net Realized and Unrealized Gain 3.95 2.40 3.86
------- ------ -------
Total From Investment Operations 3.96 2.46 3.84
------- ------ -------
DISTRIBUTION:
Net Investment Income (0.03) (0.06) (0.02)
Net Realized Gain (1.35) -- (1.35)
------- ------ -------
Total Distributions (1.38) (0.06) (1.37)
------- ------ -------
NET ASSET VALUE, END OF PERIOD $ 16.98 $ 14.40 $ 16.85
------- ------ -------
------- ------ -------
TOTAL RETURN (1) 28.93% 20.52% 28.01%
------- ------ -------
------- ------ -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 22,521 $ 5,382 $ 34,382
Ratio of Expenses to Average Net
Assets 1.57% 2.03%** 2.32%
Ratio of Net Investment Income (Loss)
to
Average Net Assets (0.04)% 1.22%** (0.83)%
Portfolio Turnover Rate 241% 204% 241%
Average Commission Rate # $ 0.0536 N/A $ 0.0536
- ----------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.22 $ 0.06 $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.38% 3.26%** 2.88%
Net Investment Income to Average
Net Assets (0.85)% (0.01)%** (1.43)%
Ratio of Expenses to Average Net
Assets
excluding dividend expense on
securities sold short 1.50% 1.50%** 2.25%
<CAPTION>
CLASS C
-------------------------------------------
JANUARY 2, 1996* TO YEAR ENDED JANUARY 2, 1996* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.00 $ 14.37 $ 12.00
------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.03 (0.06) 0.03
Net Realized and Unrealized Gain 2.39 3.89 2.38
------ ------- ------
Total From Investment Operations 2.42 3.83 2.41
------ ------- ------
DISTRIBUTION:
Net Investment Income (0.04) (0.02) (0.04)
Net Realized Gain -- (1.35) --
------ ------- ------
Total Distributions (0.04) (1.37) (0.04)
------ ------- ------
NET ASSET VALUE, END OF PERIOD $ 14.38 $ 16.83 $ 14.37
------ ------- ------
------ ------- ------
TOTAL RETURN (1) 20.18% 28.04% 20.10%
------ ------- ------
------ ------- ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 2,426 $ 9,410 $ 2,582
Ratio of Expenses to Average Net
Assets 2.67%** 2.32% 2.67%**
Ratio of Net Investment Income (Loss)
to
Average Net Assets 0.43%** (0.77)% 0.44%**
Portfolio Turnover Rate 204% 241% 204%
Average Commission Rate # N/A $ 0.0536 N/A
- ----------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.07 $ 0.07 $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.79%** 3.23% 3.80%**
Net Investment Income to Average
Net Assets (0.69)%** (1.67)% (0.69)%**
Ratio of Expenses to Average Net
Assets
excluding dividend expense on
securities sold short 2.25%** 2.25% 2.25%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share it paid for
trades on which commissions were charged.
- ------------------
110
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
U.S. REAL ESTATE FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------------------------------- --------------------------------- -------------
YEAR ENDED MAY 1, 1996* TO YEAR ENDED MAY 1, 1996* TO YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.52 $ 12.00 $ 12.52 $ 12.00 $ 12.52
------------- ------ ------------- ------ -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.37 0.08 0.15 0.07 0.20
Net Realized and Unrealized Gain 4.03 0.48 4.12 0.48 4.07
------------- ------ ------------- ------ -------------
Total From Investment Operations 4.40 0.56 4.27 0.55 4.27
------------- ------ ------------- ------ -------------
DISTRIBUTION:
Net Investment Income (0.29) (0.04) (0.19) (0.03) (0.19)
Net Realized Gain (0.24) -- (0.24) -- (0.24)
------------- ------ ------------- ------ -------------
Total Distributions (0.53) (0.04) (0.43) (0.03) (0.43)
------------- ------ ------------- ------ -------------
NET ASSET VALUE, END OF PERIOD $ 16.39 $ 12.52 $ 16.36 $ 12.52 $ 16.36
------------- ------ ------------- ------ -------------
------------- ------ ------------- ------ -------------
TOTAL RETURN (1) 35.75% 4.63% 34.58% 4.54% 34.56%
------------- ------ ------------- ------ -------------
------------- ------ ------------- ------ -------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 14,827 $ 1,829 $ 7,120 $ 2,197 $ 2,369
Ratio of Expenses to Average Net
Assets 1.55% 1.55%** 2.30% 2.30%** 2.30%
Ratio of Net Investment Income to
Average Net Assets 2.33% 4.11%** 1.49% 3.35%** 1.46%
Portfolio Turnover Rate 143% 0% 143% 0% 143%
Average Commission Rate # $ 0.0582 N/A $ 0.0582 N/A $ 0.0582
- -----------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.16 $ 0.08 $ 0.11 $ 0.07 $ 0.17
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.51% 5.58%** 3.39% 6.34%** 3.58%
Net Investment Income to Average
Net Assets 1.36% 0.08%** 0.39% (0.69)%** 0.16%
<CAPTION>
MAY 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1996
<S> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.07
Net Realized and Unrealized Gain 0.48
------
Total From Investment Operations 0.55
------
DISTRIBUTION:
Net Investment Income (0.03)
Net Realized Gain --
------
Total Distributions (0.03)
------
NET ASSET VALUE, END OF PERIOD $ 12.52
------
------
TOTAL RETURN (1) 4.54%
------
------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 1,782
Ratio of Expenses to Average Net
Assets 2.30%**
Ratio of Net Investment Income to
Average Net Assets 3.39%**
Portfolio Turnover Rate 0%
Average Commission Rate # N/A
- --------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 6.32%**
Net Investment Income to Average
Net Assets (0.63)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share it paid for
trades on which commissions were charged.
-----------------------
111
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGH YIELD FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------- ---------------------------------------
YEAR ENDED MAY 1, 1996* TO YEAR ENDED MAY 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.92 $ 12.00 $ 11.93 $ 12.00
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 1.07 0.13 0.98 0.12
Net Realized and Unrealized Gain
(Loss) 0.99 (0.09) 0.99 (0.09)
------ ------ ------ ------
Total From Investment Operations 2.06 0.04 1.97 0.03
------ ------ ------ ------
DISTRIBUTION:
Net Investment Income (1.07) (0.12) (0.99) (0.10)
Net Realized Gain (0.05) -- (0.05) --
------ ------ ------ ------
Total Distributions (1.12) (0.12) (1.04) (0.10)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 12.86 $ 11.92 $ 12.86 $ 11.93
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN (1) 18.12% 0.29% 17.22% 0.21%
------ ------ ------ ------
------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 8,980 $ 3,907 $ 8,617 $ 3,421
Ratio of Expenses to Average Net
Assets 1.25% 1.25%** 2.00% 2.00%**
Ratio of Net Investment Income to
Average Net Assets 8.83% 6.85%** 7.99% 6.08%**
Portfolio Turnover Rate 104% 10% 104% 10%
- -----------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.10 $ 0.04 $ 0.10 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.04% 3.51%** 2.82% 4.25%**
Net Investment Income to Average
Net Assets 8.04% 4.59%** 7.17% 3.83%**
<CAPTION>
CLASS C
---------------------------------------
YEAR ENDED MAY 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.93 $ 12.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.99 0.12
Net Realized and Unrealized Gain
(Loss) 0.98 (0.09)
------ ------
Total From Investment Operations 1.97 0.03
------ ------
DISTRIBUTION:
Net Investment Income (0.99) (0.10)
Net Realized Gain (0.05) --
------ ------
Total Distributions (1.04) (0.10)
------ ------
NET ASSET VALUE, END OF PERIOD $ 12.86 $ 11.93
------ ------
------ ------
TOTAL RETURN (1) 17.21% 0.21%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 4,970 $ 3,316
Ratio of Expenses to Average Net
Assets 2.00% 2.00%**
Ratio of Net Investment Income to
Average Net Assets 8.03% 6.07%**
Portfolio Turnover Rate 104% 10%
- -----------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.11 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.88% 4.25%**
Net Investment Income to Average
Net Assets 7.15% 3.82%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
- ------------------
112
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------- ------------------- -------------------
JULY 1, 1996* TO JULY 1, 1996* TO JULY 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1997 JUNE 30, 1997
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.00 $ 12.00 $ 12.00
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.17 0.10 0.06
Net Realized and Unrealized Gain 1.88 1.85 1.88
------- ------- -------
Total From Investment Operations 2.05 1.95 1.94
------- ------- -------
DISTRIBUTION:
Net Investment Income (0.13) (0.10) (0.10)
Net Realized Gain (0.01) (0.01) (0.01)
------- ------- -------
Total Distributions (0.14) (0.11) (0.11)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 13.91 $ 13.84 $ 13.83
------- ------- -------
------- ------- -------
TOTAL RETURN (1) 17.30% 16.40% 16.27%
------- ------- -------
------- ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 21,961 $ 18,215 $ 9,156
Ratio of Expenses to Average Net
Assets 1.65% 2.40% 2.40%
Ratio of Net Investment Income to
Average Net Assets 1.39% 0.54% 0.29%
Portfolio Turnover Rate 22% 22% 22%
Average Commission Rate #
Per Share $ 0.0318 $ 0.0318 $ 0.0318
As a Percentage of Trade Amount 0.33% 0.33% 0.33%
- -------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.11 $ 0.17 $ 0.21
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.50% 3.34% 3.45%
Net Investment Income (Loss) to
Average Net Assets 0.52% (0.42)% (0.77)%
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
-----------------------
113
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------- ------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.0443 0.0464 0.0448 0.0243 0.0246
Net Realized and Unrealized Gain
(Loss) -- (0.0011) -- 0.0011 0.0002
------------- ------------- ------------- ------------- -------------
Total From Investment Operations 0.0443 0.0453 0.0448 0.0254 0.0248
------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS:
Net Investment Income (0.0443) (0.0464) (0.0448) (0.0243) (0.0246)
Net Realized Gain -- (0.0001) -- (0.0011) (0.0002)
------------- ------------- ------------- ------------- -------------
Total Distributions (0.0443) (0.0465) (0.0448) (0.0254) (0.0248)
------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
TOTAL RETURN 4.53% 4.72% 4.58% 2.45% 2.51%
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 94,768 $ 145,978 $ 67,505 $ 102,551 $ 101,736
Ratio of Expenses to Average Net
Assets 0.95% 0.95% 0.95% 0.95% 0.95%
Ratio of Net Investment Income to
Average Net Assets 4.43% 4.68% 4.61% 2.40% 2.50%
- -------------------------------------------------------------------------------------------------------------------------------
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.27% 1.24% 1.12% 1.22% 1.19%
Net Investment Income to Average
Net Assets 4.10% 4.39% 4.44% 2.13% 2.26%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------
114
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
MONEY MARKET FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 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 0.0450 0.0463 0.0446 0.0246
Net Realized and Unrealized Gain
(Loss) -- (0.0006) 0.0001 --
-------- -------- -------- --------
Total From Investment Operations 0.0450 0.0457 0.0447 0.0246
-------- -------- -------- --------
DISTRIBUTIONS:
Net Investment Income (0.0450) (0.0463) (0.0446) (0.0246)
Net Realized Gain -- -- (0.0001) --
-------- -------- -------- --------
Total Distributions (0.0450) (0.0463) (0.0447) (0.0246)
-------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
-------- -------- -------- --------
TOTAL RETURN 4.60% 4.72% 4.55% 2.49%
-------- -------- -------- --------
-------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 138,422 $ 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 4.50% 4.65% 4.45% 2.45%
- -------------------------------------------------------------------------------------------------------------------------
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.27% 1.22% 1.18% 1.19%
Net Investment Income to Average
Net Assets 4.20% 4.41% 4.25% 2.24%
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1993
<S> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00
--------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.0243
Net Realized and Unrealized Gain
(Loss) 0.0001
--------
Total From Investment Operations 0.0244
--------
DISTRIBUTIONS:
Net Investment Income (0.0243)
Net Realized Gain (0.0001)
--------
Total Distributions (0.0244)
--------
NET ASSET VALUE, END OF PERIOD $ 1.00
--------
--------
TOTAL RETURN 2.47%
--------
--------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 156,310
Ratio of Expenses to Average Net
Assets 0.98%
Ratio of Net Investment Income to
Average Net Assets 2.44%
- --------------------------------------------------------------------------
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.20%
Net Investment Income to Average
Net Assets 2.22%
- -------------------------------------------------------------------------------------------
</TABLE>
-----------------------
115
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
- --------------------------------------------------------------------------------
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 June 30, 1997, 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
Obligations 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
Obligations Money Market Fund" and "Money Market Fund," individually a
"Portfolio" and collectively as the "Portfolios").
The Fund currently offers three classes of shares, Class A, Class B and Class C
Shares (with the exception of the Government Obligations Money Market and Money
Market Funds). Class A shares are sold with a front-end sales charge of up to
5.75%. Class B shares are sold with a contingent deferred sales charge on
redemptions made within 5 years of purchase which declines annually from 5% for
redemptions made in year one, down to 1.50% in year five. 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. The Fund began offering the current Class B shares on August
1, 1995. Class B shares held prior to May 1, 1995 were renamed Class C shares.
On July 16, 1996, The Boards of Directors of the PCS Cash Fund, Inc. approved an
Agreement and Plan of Reorganization and Liquidation by and between the PCS Cash
Fund, Inc. (comprised of the PCS Government-Obligations Money Market Portfolio,
PCS Money Market Portfolio and PCS Tax-Free Money Market Portfolio) and Morgan
Stanley Fund, Inc. On September 26, 1996, all or substantially all of the PCS
Cash Fund, Inc.'s assets and liabilities were transferred to Morgan Stanley
Fund, Inc. in exchange for shares of Morgan Stanley Fund, Inc.
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 in 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. Securities owned by the Government Obligations Money Market and
Money Market Funds are stated at amortized cost, which approximates market
value. All other securities and assets for which market values are not readily
available 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 applicable, as the income and/or capital gains are
earned.
At June 30, 1997, the following Portfolios had available capital loss
carryforwards to offset future net capital gains, to the extent provided by U.S.
Federal income tax regulations, through the indicated expiration dates:
<TABLE>
<CAPTION>
EXPIRATION DATE
JUNE 30, 2004
PORTFOLIOS (000)
- ------------------------------------- -----------------------
<S> <C>
Government Obligations Money
Market............................. $ 90
Money Market......................... $ 98
</TABLE>
- -----------------------
116
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
To the extent that capital loss carryforwards are used to offset any future net
capital gains realized during the carryforward period as provided by U.S.
Federal income tax regulations, no capital gains tax liability will be incurred
by a Portfolio for gains realized and not distributed. To the extent that
capital gains are so offset, such gains will not be distributed to shareholders.
Net capital and net currency losses incurred after October 31 and within the
taxable year are deemed to arise on the first business day of the Portfolio's
next taxable year. For the period from November 1, 1996 to June 30, 1997 certain
Portfolios incurred and elected to defer until July 1, 1997, for U.S. Federal
income tax purposes, net currency and capital losses of approximately:
<TABLE>
<CAPTION>
CURRENCY
AND CAPITAL
LOSSES
PORTFOLIO (000)
- ------------------------------------- -------------------
<S> <C>
Global Fixed Income.................. $ 83
Asian Growth......................... 8,841
Latin American....................... 11
Emerging Markets..................... 223
</TABLE>
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.
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 gains and losses realized on
sales and maturities of foreign denominated debt securities is 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
investments and foreign currency translations in the Statement of Assets and
Liabilities. The change in net unrealized currency gains (losses) for the period
is reflected on the Statement of Operations.
The net assets of certain Portfolios include issuers located in emerging
markets. There will be certain considerations and risks of these investments not
typically associated with investments in the United States. Changes in currency
exchange rates will affect the value of and investment income from such
securities. The smaller size of the markets themselves, lesser liquidity and
greater volatility contribute to risks in valuation as compared with the U.S.
securities markets. Also there is often substantially less publicly available
information about these issuers. Emerging markets may be subject to a greater
degree of governmental involvement in the economy and greater economic and
political uncertainty. Accordingly the price which the Fund realizes upon the
sale of securities in such markets may not be equal to its value as presented in
the financial statements.
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. FOREIGN CURRENCY EXCHANGE CONTRACTS: Certain Portfolios may enter into
foreign currency exchange contracts to attempt to protect securities and related
receivables and payables against changes in future foreign currency exchange
------------------
117
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
rates. A 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 and the change in market value is recorded by the
Portfolio as unrealized 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. Risks may arise upon entering into these contracts from the
potential inability of counterparties 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.
6. SHORT SALES: The Aggressive Equity Fund may sell securities short. A short
sale is a transaction in which the Portfolio sells securities it may or may not
own, but has borrowed, in anticipation of a decline in the market price of the
securities. The Portfolio is obligated to purchase securities at the market
price to replace the borrowed securities at the time of replacement. The
Portfolio may have to pay a premium to borrow the securities as well as pay
dividends or interests payable on the securities until they are replaced. The
Portfolio's obligation to replace the securities borrowed in connection with a
short sale will generally be secured by collateral deposited with the broker
that consists of cash, U.S. government securities or other liquid, high grade
debt obligations. In addition, the Portfolio will place in a segregated account
with its Custodian an amount of cash, U.S. government securities or other liquid
high grade debt obligations equal to the difference, if any, between (1) the
market value of the securities sold at the time they were sold short and (2) any
cash, U.S. government securities or other liquid high grade debt obligations
deposited as collateral with the broker in connection with the short sale (not
including the proceeds of the short sale). Short sales by the Portfolio involve
certain risks and special considerations. Possible losses from short sales
differ from losses that could be incurred from the purchase of a security,
because losses from short sales may be unlimited, whereas losses from purchases
cannot exceed the total amount invested.
7. PURCHASED OPTIONS: Certain Portfolios may purchase call or put options on
their portfolio securities. A Portfolio may purchase call options to protect
against an increase in the price of a security it anticipates purchasing. A
Portfolio may purchase put options on securities which it holds to protect
against a decline in the value of the security. Risks may arise from an
imperfect correlation between the change in market value of the securities held
by the Portfolio and the prices of options relating to the securities purchased
or sold by the Portfolio and from the possible lack of a liquid secondary market
for an option. The maximum exposure to loss for any purchased option is limited
to the premium initially paid for the option.
8. SECURITY LENDING: Certain Portfolios may lend investment securities to
qualified institutional investors who borrow securities in order to complete
certain transactions. By lending its investment securities, a Portfolio 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 and any interest earned or dividends declared during the term of the loan
would accrue to the account of the Portfolio. Risks of delay in recovery of the
securities or even loss of rights in the collateral may occur should the
borrower of the securities fail financially. Risks may also arise to the extent
that the value of the collateral decreases below the value of the securities
loaned.
Portfolios that lend securities receive cash, securities issued or guaranteed by
the U.S. Government or letters of credit as collateral in an amount equal to or
exceeding 100% of the current market value of the loaned securities. Any cash
received as collateral is invested in interest bearing repurchase agreements
with approved counterparties. A portion of the interest received on the
repurchase agreements is retained by the Fund and the remainder is rebated to
the borrower of the securities. The net amount of interest earned and interest
rebated is included in the Statement of Operations as interest income. The value
of loaned securities and related collateral outstanding at June 30, 1997 is as
follows:
<TABLE>
<CAPTION>
VALUE OF LOANED VALUE OF
SECURITIES COLLATERAL
PORTFOLIO (000) (000)
- ------------------------------------- ----------------------- ----------
<S> <C> <C>
Global Equity Allocation............. $ 26,175 $ 29,822
</TABLE>
At June 30, 1997, the Fund had invested the cash collateral in a repurchase
agreement with Goldman Sachs. Such repurchase agreement was collateralized by
U.S. Treasury obligations.
Morgan Stanley Trust Company, an affiliate of the Investment Adviser,
administers the security lending program and for its services the Fund incurred
fees in the amount of $23,000 for the year ended June 30, 1997.
9. 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 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
- -----------------------
118
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
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.
10. STRUCTURED SECURITIES: The Worldwide High Income Fund may invest 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 of
specified instruments and the issuance by that entity of one or more classes of
securities ("Structured Securities") backed by, or representing interests in,
the underlying instruments. Structured Securities generally will expose the
Portfolio to credit risks equivalent to that of the underlying instruments.
Structured Securities are typically sold in private placement transactions with
no active trading market. Investments in Structured Securities may be more
volatile than their underlying instruments, however, any loss is limited to the
amount of the original investment.
11. 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 respective Portfolio's commencement of operations. Morgan Stanley Asset
Management, Inc. has agreed that in the event any of its initial shares in a
Portfolio which comprised the Fund at its 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.
12. 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 Portfolio 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.
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 the cost of those securities.
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 presenting 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, Dean Witter, Discover & Co., provides
the Fund with investment advisory services at a fee paid quarterly (monthly for
the Government Obligations Money Market and Money Market Funds) 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 B
CLASS A AND CLASS C
MAX. OPERATING MAX. OPERATING
PORTFOLIO ADVISORY FEE EXPENSE RATIO EXPENSE RATIO
- ------------------------------------- -------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Global Equity Allocation............. 1.00% 1.70% 2.45%
Global Fixed Income.................. 0.75% 1.45% 2.20%
Asian Growth......................... 1.00% 1.90% 2.65%
American Value....................... 0.85% 1.50% 2.25%
Worldwide High Income................ 0.75% 1.55% 2.30%
Latin American....................... 1.25% 2.10% 2.85%
Emerging Markets..................... 1.25% 2.15% 2.90%
Aggressive Equity.................... 0.90% 1.50% 2.25%
U.S. Real Estate..................... 1.00% 1.55% 2.30%
High Yield........................... 0.75% 1.25% 2.00%
International Magnum................. 1.00% 1.65% 2.40%
Government Obligations Money Market.. 0.45% 0.95% N/A
Money Market......................... 0.45% 0.98% N/A
</TABLE>
------------------
119
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
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.
Through December 13, 1996, the Administrative services provided by CGFSC
included transfer agency services. Effective December 14, 1996, transfer agency
services are provided to the Fund by ACCESS Investor Services, Inc., an
affiliate of MSAM.
Prior to September 26, 1996, Morgan Stanley Government Obligations Money Market
Fund and Morgan Stanley Money Market Fund, formerly referred to as PCS
Government Obligations Money Market Fund and PCS Money Market Fund, had an
Administration and Accounting Services Agreement with PFPC Inc., a wholly owned
subsidiary of the PNC Bank Corp. For administration services provided, PFPC Inc.
was entitled to receive from each Fund a fee, computed daily and payable
monthly, at an annual rate of 0.10% of the first $200 million of daily net
assets, 0.075% of the next $200 million of daily net assets, 0.05% of the next
$200 million of daily net assets and 0.03% of the daily net assets in excess of
$600 million.
Also, prior to September 26, 1996, PNC Bank Corp. served as custodian for each
of the Funds, and, PFPC Inc. served as the Fund's transfer agent.
D. DISTRIBUTOR: Through December 31, 1996 Morgan Stanley & Co. Incorporated,
then a wholly-owned subsidiary of Morgan Stanley Group, Inc. and an affiliate of
MSAM, served as the distributor of the Fund and provided all classes of each
Portfolio with distribution services pursuant to separate Distribution Plans in
accordance with Rule 12b-1 under the Investment Company Act of 1940 as amended.
Effective January 1, 1997, Van Kampen American Capital Distributors, Inc. ("the
Distributor"), a wholly owned subsidiary of Morgan Stanley, Dean Witter,
Discover & Co., serves as the Distributor of the Fund's shares. The Distributor
is entitled to receive from the Portfolios a distribution fee, which is accrued
daily and paid quarterly, of an amount of 0.25% of the Class A shares and 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 Government Obligations
Money Market and Money Market Funds pay the Distributor a fee which is accrued
daily and paid monthly, up to 0.50%, on an annualized basis, of the average
daily net assets of those Portfolios.
Prior to September 26, 1996, Morgan Stanley Government Obligations Money Market
Fund and Morgan Stanley Money Market Fund, formerly referred to as PCS
Government Obligations Money Market Fund and PCS Money Market Fund, had a
Distribution Agreement with Morgan Stanley & Co. Incorporated (the
"Distributor"), a wholly owned subsidiary of Morgan Stanley Group, Inc. Under
the Agreement the Distributor was entitled to receive from each PCS Portfolio
compensation of its distribution costs at an annual rate of up to 0.50% of daily
net assets.
The Distributor may receive a front end sales charge for purchases of Class A
shares. In addition, the Distributor may receive a contingent deferred sales
charge for certain purchases of Class B and Class C shares of each Portfolio
redeemed within one to five years following such purchase. For the year ended
June 30, 1997, the Distributor has advised the Fund that it earned initial sales
charges of $4,004,439 for Class A shares and deferred sales charges of $73,809
and $207,030 for Class B shares and Class C shares, respectively.
E. CUSTODIAN: Morgan Stanley Trust Company ("MSTC"), a wholly owned subsidiary
of Morgan Stanley, Dean Witter, Discover & Co., acts as custodian for the Fund's
assets held outside the United States in accordance with a custodian agreement.
Custodian fees are computed and payable monthly based on assets held, investment
purchase and sales activity, an account maintenance fee, plus reimbursement for
certain out-of-pocket expenses.
For the year ended June 30, 1997, the following Portfolios incurred custody fees
and had amounts payable to MSTC at June 30, 1997:
<TABLE>
<CAPTION>
MSTC CUSTODY CUSTODY FEES
FEES INCURRED PAYABLE TO MSTC
FUND (000) (000)
- ------------------------------------- -------------------- -----------------------
<S> <C> <C>
Global Equity Allocation............. $ 202 $ 19
Global Fixed Income.................. 10 1
Asian Growth......................... 649 59
Worldwide High Income................ 40 4
Latin American....................... 174 13
Emerging Markets..................... 380 31
International Magnum................. 85 7
</TABLE>
In addition, a Portfolio may earn interest income or incur interest expense
relating to cash balances with MSTC.
F. PURCHASES AND SALES: For the year ended June 30, 1997, purchases and sales of
investment securities other than long-term U.S. Government securities and
short-term investments were:
<TABLE>
<CAPTION>
PURCHASES SALES
FUND (000) (000)
- ------------------------------------- ----------------- --------
<S> <C> <C>
Global Equity Allocation............. $ 94,822 $ 68,059
Global Fixed Income.................. 15,402 15,361
Asian Growth......................... 293,880 397,476
American Value....................... 62,195 36,646
Worldwide High Income................ 278,203 210,400
Latin American....................... 175,549 111,367
Emerging Markets..................... 156,210 122,696
Aggressive Equity.................... 106,672 61,287
U.S. Real Estate..................... 31,254 18,652
High Yield........................... 22,803 14,303
International Magnum................. 44,778 3,740
</TABLE>
- -----------------------
120
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
Purchases and sales of long term U.S. Government securities during the year
ended June 30, 1997 occurred in the Global Fixed Income Fund and totaled
$3,483,000 and $2,452,000 respectively.
G. OTHER: At June 30, 1997, the net assets of certain Portfolios were
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.
Foreign denominated assets and liabilities, including Portfolio securities and
foreign currency holdings, were translated at the following exchange rates as of
June 30, 1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Argentine Peso................ 0.99984 = $1.00
Australian Dollar............. 1.32450 = $1.00
Austrian Shilling............. 12.25850 = $1.00
Belgian Franc................. 35.93000 = $1.00
Brazilian Real................ 1.07650 = $1.00
British Pound................. 0.60074 = $1.00
Canadian Dollar............... 1.38050 = $1.00
Colombian Peso................ 1,090.00000 = $1.00
Danish Krone.................. 6.63590 = $1.00
Deutsche Mark................. 1.74310 = $1.00
Egyptian Pound................ 3.39750 = $1.00
Finnish Markka................ 5.18660 = $1.00
French Franc.................. 5.87420 = $1.00
Hong Kong Dollar.............. 7.74680 = $1.00
Hungarian Forint.............. 187.21000 = $1.00
Indian Rupee.................. 35.75000 = $1.00
Indonesian Rupiah............. 2,431.00000 = $1.00
Irish Punt.................... 0.66094 = $1.00
Israeli Shekel................ 3.58440 = $1.00
Italian Lira.................. 1,699.20000 = $1.00
Japanese Yen.................. 114.54000 = $1.00
Malaysian Ringgit............. 2.52350 = $1.00
Mexican Peso.................. 7.94200 = $1.00
Netherlands Guilder........... 1.96080 = $1.00
New Zealand Dollar............ 1.47275 = $1.00
Norwegian Krona............... 7.32460 = $1.00
Pakistan Rupee................ 40.41950 = $1.00
Peruvian Sol.................. 2.65000 = $1.00
Philippine Peso............... 26.35000 = $1.00
Polish Zloty.................. 3.28500 = $1.00
Singapore Dollar.............. 1.42920 = $1.00
South Korean Won.............. 886.00000 = $1.00
South African Rand............ 4.53550 = $1.00
Spanish Peseta................ 147.20000 = $1.00
Swedish Krona................. 7.73080 = $1.00
Swiss Franc................... 1.45950 = $1.00
Taiwan Dollar................. 27.78000 = $1.00
Thai Baht..................... 25.88000 = $1.00
Turkish Lira.................. 148,450.00000 = $1.00
Venezuelan Bolivar............ 486.31000 = $1.00
</TABLE>
During the year ended June 30, 1997, the Asian Growth Fund, American Value Fund,
Latin American Fund, Emerging Markets Fund and International Magnum Fund
incurred approximately $326,000, $1,000, $41,000, $80,000 and $15,000,
respectively, as brokerage commissions with Morgan Stanley & Co. Incorporated,
an affiliated broker/ dealer.
At June 30, 1997 the Global Equity Allocation Fund and Emerging Markets Fund
owned shares of affiliated funds for which the Funds earned dividend income of
approximately $277,000 and $38,000, respectively. The Global Equity Allocation
Fund incurred losses totaling $40,000 on sales of shares in affiliated funds
during the period.
At June 30, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of each Portfolio were:
<TABLE>
<CAPTION>
NET
APPRECIATION
COST APPREC. (DEPREC.) (DEPRECIATION)
FUND (000) (000) (000) (000)
- ------------------------- -------- ------- ---------- ---------------
<S> <C> <C> <C> <C>
Global Equity
Allocation............. $162,933 $ 37,092 $ (5,725) $ 31,367
Global Fixed Income...... 9,641 80 (175) (95)
Asian Growth............. 320,218 63,343 (29,063) 34,280
American Value........... 71,159 13,694 (1,099) 12,595
Worldwide High Income.... 181,907 14,332 (581) 13,751
Latin American........... 106,111 14,672 (1,064) 13,608
Emerging Markets......... 192,835 41,940 (21,729) 20,211
Aggressive Equity........ 64,703 4,073 (782) 3,291
U.S. Real Estate......... 20,342 1,897 (74) 1,823
High Yield............... 21,617 814 (26) 788
International Magnum..... 49,695 4,657 (598) 4,059
Government Obligations
Money Market........... 94,977 -- -- --
Money Market............. 137,740 -- -- --
</TABLE>
H. SUBSEQUENT EVENTS: At a Special Meeting of Shareholders held on July 2, 1997,
the Shareholders elected a new Board of Directors and approved, effective July
2, 1997, a new investment advisory agreement with Van Kampen American Capital
Investment Advisory Corp., a wholly-owned subsidiary of Morgan Stanley, Dean
Witter, Discover & Co., and a new sub-advisory agreement with Morgan Stanley
Asset Management Inc. Also effective July 2, 1997, the responsibilities of MSAM
as administrator to the Fund were assumed by Van Kampen American Capital
Investment Advisory Corp.
The Morgan Stanley Value Fund, an additional series of the Fund, has commenced
operations effective July 7, 1997.
------------------
121
<PAGE>
MORGAN STANLEY FUNDS
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Morgan Stanley Fund, Inc.
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of each of the portfolios constituting Morgan
Stanley Fund, Inc. (the "Fund") as of June 30, 1997, and the related statements
of operations and of changes in net assets and the financial highlights for the
year then ended. We have also audited the statements of changes in net assets
and the financial highlights for the Global Equity Allocation Portfolio, Global
Fixed Income Portfolio, Asian Growth Portfolio, American Value Portfolio,
Worldwide High Income Portfolio, Latin American Portfolio, Emerging Markets
Portfolio, Aggressive Equity Portfolio, U.S. Real Estate Portfolio, High Yield
Portfolio and International Magnum Portfolio (collectively the "non-money market
portfolios") for each of the earlier periods presented. These financial
statements are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements based on our audits. The
statements of changes in net assets for the year ended June 30, 1996 and the
financial highlights for each of the four years in the period ended June 30,
1996 for the Money Market Portfolio and Government Obligations Money Market
Portfolio (formerly separate portfolios of The PCS Cash Fund, Inc.) were audited
by other independent accountants whose report dated July 31, 1996 expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities at June 30, 1997 by correspondence with the custodians and brokers
and the application of alternative auditing procedures where confirmations from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of each of the portfolios constituting Morgan
Stanley Fund, Inc. at June 30, 1997, the results of their operations, the
changes in their net assets and the financial highlights for the year then
ended, and the changes in net assets and the financial highlights of the
non-money market portfolios for each of the earlier periods presented, in
conformity with generally accepted accounting principles.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
August 11, 1997
- -----------------------
122
<PAGE>
MORGAN STANLEY FUNDS
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
SHAREHOLDER MEETING: (UNAUDITED)
Morgan Stanley Fund, Inc. shareholders voted on proposals at a special meeting
held on July 2, 1997. The description of each proposal and number of shares
voted are as follows:
<TABLE>
<CAPTION>
1. To elect the following Directors to serve the Fund effective July 2, 1997 until such time as their VOTED FOR
successors have been duly appointed. (000)
-----------
<S> <C>
J. Miles Branagan........................................................................................... 278,313
Richard M. DeMartini........................................................................................ 278,320
Linda Hutton Heagy.......................................................................................... 278,324
R. Craig Kennedy............................................................................................ 278,318
Jack E. Nelson.............................................................................................. 278,315
Don G. Powell............................................................................................... 278,303
Jerome T. Robinson.......................................................................................... 278,291
Phillip Rooney.............................................................................................. 278,310
Fernando Sisto.............................................................................................. 278,255
Wayne W. Whalen............................................................................................. 278,316
<CAPTION>
1. To elect the following Directors to serve the Fund effective July 2, 1997 until such time as their WITHHELD
successors have been duly appointed. (000)
-----------
<S> <C>
J. Miles Branagan........................................................................................... 1,129
Richard M. DeMartini........................................................................................ 1,123
Linda Hutton Heagy.......................................................................................... 1,118
R. Craig Kennedy............................................................................................ 1,125
Jack E. Nelson.............................................................................................. 1,128
Don G. Powell............................................................................................... 1,139
Jerome T. Robinson.......................................................................................... 1,152
Phillip Rooney.............................................................................................. 1,132
Fernando Sisto.............................................................................................. 1,187
Wayne W. Whalen............................................................................................. 1,127
</TABLE>
<TABLE>
<CAPTION>
2. Approval of the investment advisory agreement by and between the following and Van Kampen AFFIRMATIVE AGAINST
American Capital Investment Advisory Corp. (000) (000)
----------- -----------
<S> <C> <C>
Global Equity Allocation Fund................................................................. 7,571 37
Global Fixed Income Fund...................................................................... 838 0
Asian Growth Fund............................................................................. 16,453 157
American Value Fund........................................................................... 2,723 5
Worldwide High Income Fund.................................................................... 9,498 71
Latin American Fund........................................................................... 3,181 25
Emerging Markets Fund......................................................................... 10,520 52
Aggressive Equity Fund........................................................................ 1,707 15
U.S. Real Estate Fund......................................................................... 980 2
High Yield Fund............................................................................... 1,182 --
International Magnum Fund..................................................................... 1,733 1
Government Obligations Money Market Fund...................................................... 77,583 21
Money Market Fund............................................................................. 143,488 204
<CAPTION>
2. Approval of the investment advisory agreement by and between the following and Van Kampen ABSTAIN
American Capital Investment Advisory Corp. (000)
-----------
<S> <C>
Global Equity Allocation Fund................................................................. 128
Global Fixed Income Fund...................................................................... 20
Asian Growth Fund............................................................................. 209
American Value Fund........................................................................... 32
Worldwide High Income Fund.................................................................... 150
Latin American Fund........................................................................... 57
Emerging Markets Fund......................................................................... 160
Aggressive Equity Fund........................................................................ 26
U.S. Real Estate Fund......................................................................... 10
High Yield Fund............................................................................... 4
International Magnum Fund..................................................................... 41
Government Obligations Money Market Fund...................................................... 0
Money Market Fund............................................................................. 578
</TABLE>
<TABLE>
<CAPTION>
3. Approval of the investment sub-advisory agreement by and between Van Kampen Capital AFFIRMATIVE AGAINST
Investment Advisory Corp. and Morgan Stanley Asset Management, Inc. (000) (000)
----------- -----------
<S> <C> <C>
Global Equity Allocation Fund................................................................. 7,569 41
Global Fixed Income Fund...................................................................... 838 0
Asian Growth Fund............................................................................. 16,441 162
American Value Fund........................................................................... 2,719 5
Worldwide High Income Fund.................................................................... 9,488 72
Latin American Fund........................................................................... 3,178 27
Emerging Markets Fund......................................................................... 10,514 58
Aggressive Equity Fund........................................................................ 1,702 19
U.S. Real Estate Fund......................................................................... 981 2
High Yield Fund............................................................................... 1,182 --
International Magnum Fund..................................................................... 1,735 1
Government Obligations Money Market Fund...................................................... 77,583 21
Money Market Fund............................................................................. 143,488 204
<CAPTION>
3. Approval of the investment sub-advisory agreement by and between Van Kampen Capital ABSTAIN
Investment Advisory Corp. and Morgan Stanley Asset Management, Inc. (000)
-----------
<S> <C>
Global Equity Allocation Fund................................................................. 126
Global Fixed Income Fund...................................................................... 20
Asian Growth Fund............................................................................. 216
American Value Fund........................................................................... 36
Worldwide High Income Fund.................................................................... 159
Latin American Fund........................................................................... 58
Emerging Markets Fund......................................................................... 160
Aggressive Equity Fund........................................................................ 26
U.S. Real Estate Fund......................................................................... 8
High Yield Fund............................................................................... 4
International Magnum Fund..................................................................... 39
Government Obligations Money Market Fund...................................................... 0
Money Market Fund............................................................................. 578
</TABLE>
<TABLE>
<CAPTION>
4. To eliminate the Morgan Stanley Worldwide High Income Fund's fundamental policy regarding AFFIRMATIVE
diversification and to reclassify the Fund as "non-diversified". (000) AGAINST (000)
--------------- ---------------
<S> <C> <C>
Worldwide High Income Fund.................................................................... 6,033 204
<CAPTION>
4. To eliminate the Morgan Stanley Worldwide High Income Fund's fundamental policy regarding
diversification and to reclassify the Fund as "non-diversified". ABSTAIN (000)
---------------
<S> <C>
Worldwide High Income Fund.................................................................... 204
</TABLE>
------------------
123
<PAGE>
MORGAN STANLEY FUNDS
ADDITIONAL INFORMATION (CONT.)
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION: (UNAUDITED)
For the year ended June 30, 1997, the percentage of dividends that qualify for
the 70% dividend received deduction for corporate shareholders of the Global
Equity Allocation Fund, American Value Fund, Aggressive Equity Fund and High
Yield Fund is 15.81%, 92.51%, 7.28%, and 3.26%, respectively.
Global Equity Allocation Fund, Asian Growth Fund, American Value Fund, Latin
American Fund, Emerging Markets Fund and U.S. Real Estate Fund have designated
approximately $4,434,000, $8,522,000, $2,280,000, $1,429,000, $508,000 and
$1,000 as long-term capital gain for the fiscal year ended June 30, 1997.
Foreign taxes paid during the fiscal year ended June 30, 1997 amounting to
$254,000, $10,000, $963,000, $189,000 and $65,000 for Global Equity Allocation
Fund, Global Fixed Income Fund, Asian Growth Fund, Emerging Markets Fund and
International Magnum Fund, respectively, are expected to be passed through to
shareholders as foreign tax credits on Form 1099-DIV, which will be sent to
shareholders in late January 1998 for the year ended December 31, 1997. In
addition, for the year ended June 30, 1997, gross income derived from sources
within foreign countries amounted to $2,120,000, $489,000, $7,014,000,
$3,145,000 and $496,000 for Global Equity Allocation Fund, Global Fixed Income
Fund, Asian Growth Fund, Emerging Markets Fund and International Magnum Fund,
respectively.
For the year ended June 30, 1997, the percentage of income earned from direct
Treasury obligations was 22.94%, 25.73%, and 22.68% for the Global Fixed Income
Fund, Government Obligations Money Market Fund, and Money Market Fund,
respectively.
- -----------------------
124
<PAGE>
PART C
Morgan Stanley Fund, Inc.
Other Information*
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) FINANCIAL STATEMENTS (included in Part A)**
The Registrant's audited financial highlights for the Funds that were
operational as of June 30, 1997 are included in Part A.
(2) FINANCIAL STATEMENTS (incorporated by reference into Part B)**
The Registrant's audited financial statements for the Funds that were
operational as of June 30, 1997, including Price Waterhouse LLP's
report thereon, are incorporated by reference into Part B (Statement of
Additional Information) and are part of the Registrant's June 30, 1997
Annual Report to Shareholders. The financial statements incorporated
by reference into Part B are:
1. Portfolio of Investments
2. Statements of Assets and Liabilities
3. Statements of Operations
4. Statements of Changes in Net Assets
5. Financial Highlights
6. Notes to Financial Statements
7. Report of Independent Accountants
- ------------------------
* For ease of reference, the words "Morgan Stanley," which begin the name of
each Fund, have not been included herein.
** As of June 30, 1997, the Emerging Markets Debt, Equity Growth, European
Equity, Global Equity, Growth and Income, Japanese Equity, Mid Cap Growth,
Tax-Free Money Market and Value Funds were not yet operational.
<PAGE>
(B) EXHIBITS
1 (a) Articles of Amendment and Restatement. (1)
(b) Articles Supplementary (adding Registrant's High Yield, U.S. Real
Estate and Japanese Equity Funds) to the Amended and Restated Articles
of Incorporation.(2)
(c) Articles Supplementary (adding Registrant's Government Obligations
Money Market and Tax-Free Money Market Funds) to the Amended and
Restated Articles of Incorporation.(2)
(d) Articles Supplementary (adding Registrant's Global Equity, Emerging
Market Debt, Mid Cap Growth, Equity Growth and Value Funds) to the
Amended and Restated Articles of Incorporation.(3)
2 Amended and Restated By-Laws.(1)
3 Not applicable.
4 Form of Specimen Securities for shares of the Money Market Fund
("Money Market Specimen"). The Specimen Securities for the
remaining Funds have been omitted because they are substantially
identical to the Money Market Specimen and differ from the Money
Market Specimen only in references to the Fund and amount of
authorized shares to which the Specimen relates.(5)
5 (a) Form of Investment Advisory Agreement between Registrant and Van
Kampen American Capital Investment Advisory Corp.(5)
(b) Form of Investment Sub-Advisory Agreement between Van Kampen American
Capital Investment Advisory Corp. and Morgan Stanley Asset Management
Inc.(5)
(c) Form of Investment Sub-Advisory Agreement between Van Kampen American
Capital Investment Advisory Corp. and Miller Anderson & Sherrerd,
LLP.(5)
6 Distribution Agreement between Registrant and Van Kampen American
Capital Distributors, Inc.(3)
7 Not applicable.
8 (a) Registrant's Mutual Fund Custody Agreement with the Chase Manhattan
Bank, N.A.(4)
(b) Registrant's Global Custody Agreement with Morgan Stanley Trust
Company.(4)
(c) Registrant's Custody Agreement with PNC Bank, N.A. (with respect to
the Money Market Funds).(2)
9. (a) Administration Agreement between Registrant and Morgan Stanley Asset
Management Inc.(4) and as amended by Addendum to such Agreement. (1)
(b) Form of Assignment and Assumption Agreement (Administration Agreement)
between Van Kampen American Capital Investment Advisory Corp. and
Morgan Stanley Asset Management Inc.(5)
(c) Administration Agreement between Registrant and Miller Anderson &
Sherrerd, LLP.(3)
(d) Form of Assignment and Assumption Agreement (Administration Agreement)
between Van Kampen American Capital Investment Advisory Corp. and
Miller Anderson & Sherrerd, LLP.(5)
<PAGE>
(e) Sub-Administration Agreement between Morgan Stanley Asset Management
Inc. and The Chase Manhattan Bank.(3)
(f) Form of Assignment and Assumption Agreement (Sub-Administration
Agreement) between Van Kampen American Capital Investment Advisory
Corp. and Morgan Stanley Asset Management Inc.(5)
(g) Sub-Administration Agreement between Miller Anderson & Sherrerd, LLP
and The Chase Manhattan Bank.(3)
(h) Form of Assignment and Assumption Agreement (Sub-Administration
Agreement) between Van Kampen American Capital Investment Advisory
Corp. and Miller Anderson & Sherrerd, LLP.(5)
(i) Amended Schedule A and Amended Administration Agreement between
Registrant and Morgan Stanley Asset Management Inc. with respect to
the Asian Growth Fund and Small Cap Value Equity Fund (currently the
American Value Fund).(4)
(j) Form of Sub-Transfer Agency Agreement between Van Kampen American
Capital Investment Advisory Corp. and PFPC, Inc.(5)
(k) Sub-Transfer Agency Agreement between Morgan Stanley Asset Management
Inc. and ACCESS Investor Services, Inc.(3)
(l) Form of Assignment and Assumption Agreement (Sub-Transfer Agency
Agreement) between Van Kampen American Capital Investment Advisory
Corp. and Morgan Stanley Asset Management Inc.(5)
(m) Sub-Transfer Agency Agreement between Miller Anderson & Sherrerd, LLP
and ACCESS Investor Services, Inc.(3)
(n) Form of Assignment and Assumption Agreement (Sub-Transfer Agency
Agreement) between Van Kampen American Capital Investment Advisory
Corp. and Miller Anderson & Sherrerd, LLP.(5)
10 Opinion of Counsel.+
11 Consent of Independent Accountants.*
12 Not applicable.
13 Purchase Agreement.(4)
14 Not applicable.
15 (a) Amended and Restated Plan of Distribution Pursuant to Rule 12b-1 for
shares of the Money Market Fund ("Money Market Plan"). The following
Rule 12b-1 distribution plan has been omitted because it is
substantially identical to the Money Market Plan and differs from the
Money Market Plan only in references to the Fund to which the plan
relates: Government Obligations Money Market Fund.(3)
(b) Form of Plan of Distribution Pursuant to Rule 12b-1 for shares of the
Tax-Free Money Market Fund.(3)
(c) Form of Plan of Distribution Pursuant to Rule 12b-1 for Class A shares
(the "Class A Plan") of the Global Fixed Income Fund. 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 Fund to which the plan relates: Asian Growth, Small Cap Value
Equity (currently the American Value Fund),
<PAGE>
Worldwide High Income, Emerging Markets, Latin American, Global Equity
Allocation, High Yield, U.S. Real Estate, International Magnum and
Aggressive Equity Funds.(3)
(d) Form of Plan of Distribution Pursuant to Rule 12b-1 for Class A shares
(the "Class A Plan") of the Japanese Equity Fund. 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 Fund to which the plan relates: European Equity, Growth and
Income, Global Equity, Emerging Markets Debt, Mid Cap Growth, Equity
Growth and Value Funds.(3)
(e) 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") of the
Global Fixed Income, Asian Growth, Small Cap Value Equity (currently
the American Value Fund), Worldwide High Income, Emerging Markets,
Latin American, Global Equity Allocation, High Yield, U.S. Real Estate,
International Magnum, Aggressive Equity, Global Equity, Emerging
Markets Debt, Mid Cap Growth, Equity Growth and Value Funds.(3)
(f) 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
Japanese Equity, European Equity and Growth and Income Funds.(3)
16 Schedules of Computation of Performance Information.(4)
18 Registrant's Rule 18f-3 Multiple Class Plan.(3)
24 Powers of Attorney.(5)
27 Financial data schedules for the fiscal year ended June 30, 1997.*
- --------------------
(1) Incorporated herein by reference to Post-Effective Amendment No. 10 to
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.
(2) Incorporated herein by reference to Post-Effective Amendment No. 16 to
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.
(3) Incorporated herein by reference to Post-Effective Amendment No. 18 to
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.
(4) Incorporated herein by reference to Post-Effective Amendment No. 11 to
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.
(5) Incorporated herein by reference to Post-Effective Amendment No. 20 to
Registrant's Registration statement on Form N-1A (File Nos. 33-51294
and 811-7140), as filed with the SEC via EDGAR on August 29, 1997.
* Filed herewith.
+ To be filed by amendment.
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 October 16, 1997:
<PAGE>
Number of
Title of Class Record Holders
-------------- --------------
Global Equity Allocation Fund-Class A 4,817
Global Equity Allocation Fund-Class B 4,799
Global Equity Allocation Fund-Class C 5,377
Global Fixed Income Fund-Class A 280
Global Fixed Income Fund-Class B 90
Global Fixed Income Fund-Class C 189
Asian Growth Fund-Class A 14,382
Asian Growth Fund-Class B 6,525
Asian Growth Fund-Class C 9,240
Emerging Markets Fund-Class A 6,121
Emerging Markets Fund-Class B 5,973
Emerging Markets Fund-Class C 4,300
Latin American Fund-Class A 4,295
Latin American Fund-Class B 3,197
Latin American Fund-Class C 1,795
European Equity Fund-Class A 0
European Equity Fund-Class B 0
European Equity Fund-Class C 0
American Value Fund-Class A 5,149
American Value Fund-Class B 5,333
American Value Fund-Class C 3,021
Worldwide High Income Fund-Class A 2,621
Worldwide High Income Fund-Class B 4,813
Worldwide High Income Fund-Class C 2,386
Aggressive Equity Fund-Class A 2,505
Aggressive Equity Fund-Class B 4,924
Aggressive Equity Fund-Class C 794
Growth and Income Fund-Class A 0
Growth and Income Fund-Class B 2
Growth and Income Fund-Class C 0
High Yield Fund-Class A 120
High Yield Fund-Class B 296
High Yield Fund-Class C 103
U.S. Real Estate Fund-Class A 578
U.S. Real Estate Fund-Class B 675
U.S. Real Estate Fund-Class C 227
International Magnum Fund-Class A 2,805
International Magnum Fund-Class B 2,964
International Magnum Fund-Class C 452
Japanese Equity Fund-Class A 0
Japanese Equity Fund-Class B 0
Japanese Equity Fund-Class C 0
<PAGE>
Money Market Fund 53
Government Obligations Money Market Fund 12
Tax-Free Money Market Fund 0
Value Fund-Class A 5,737
Value Fund-Class B 4,119
Value Fund-Class C 752
Equity Growth Fund-Class A 0
Equity Growth Fund-Class B 0
Equity Growth Fund-Class C 0
Global Equity Fund-Class A 0
Global Equity Fund-Class B 0
Global Equity Fund-Class C 0
Emerging Markets Debt Fund-Class A 0
Emerging Markets Debt Fund-Class B 0
Emerging Markets Debt Fund-Class C 0
Mid Cap Growth Fund-Class A 0
Mid Cap Growth Fund-Class B 0
Mid Cap Growth Fund-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 "SEC") such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a 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 AND INVESTMENT
SUB-ADVISERS
For information regarding the business of the Adviser, reference is made to
the caption "Management of the Company -- Investment Adviser" in the Prospectus
constituting Part A of this Registration Statement and "Management of the
Company" in Part B of this Registration Statement. For information as to the
business, profession, vocation and employment of a substantial nature of
directors and officers of the Adviser, reference is made to the Adviser's
current Form ADV (SEC File No. 801-1669) filed under the Investment Advisers Act
of 1940, as amended, incorporated herein by reference.
<PAGE>
For information regarding the business of Morgan Stanley Asset Management
Inc., reference is made to the caption "Management of the Company -- Investment
Sub-Adviser" in the Prospectus constituting Part A of this Registration
Statement and "Management of the Company" in Part B of this Registration
Statement. For information as to the business, profession, vocation and
employment of a substantial nature of directors and officers of Morgan Stanley
Asset Management Inc., reference is made to the Sub-Adviser's current Form ADV
(SEC File No. 801-15757) filed under the Investment Advisers Act of 1940, as
amended, incorporated herein by reference.
For information regarding the business of Miller Anderson & Sherrerd, LLP,
reference is made to the caption "Management of the Company -- Investment
Sub-Adviser" in the Prospectus constituting Part A of this Registration
Statement and "Management of the Company" in Part B of this Registration
Statement. For information as to the business, profession, vocation and
employment of a substantial nature of directors and officers of Miller Anderson
& Sherrerd, LLP, reference is made to the Sub-Adviser's current Form ADV (SEC
File No. 801-10437) filed under the Investment Advisers Act of 1940, as amended,
incorporated herein by reference.
ITEM 29. PRINCIPAL UNDERWRITERS
Van Kampen American Capital, Inc. ("VKAC") is distributor for Morgan
Stanley Fund, Inc. The information required by this Item 29 with respect to
each Director and officer of VKAC is incorporated by reference to Schedule A of
Form BD filed by VKAC pursuant to the Securities and Exchange Act of 1934 (SEC
File No. 8-19412)
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required by Section 31(a) under the
Investment Company Act of 1940, as amended, and the rules promulgated thereunder
to be maintained (i) by Registrant will be maintained at its offices, located at
One Parkview Plaza, Oakbrook Terrace, Illinois 60181 or ACCESS Investor
Services, Inc., 7501 Tiffany Springs Parkway, Kansas City, Missouri 64153; (ii)
by the Adviser, will be maintained at its offices, located at One Parkview
Plaza, Oakbrook Terrace, Illinois 60181; and (iii) by the Distributor, the
principal underwriter, will be maintained at its offices located at One Parkview
Plaza, Oakbrook Terrace, Illinois 60181.
ITEM 31. MANAGEMENT SERVICES
Morgan Stanley Asset Management Inc. ("MSAM") and Miller Anderson &
Sherrerd, LLP ("MAS") have entered into separate Chase Sub-Administration
Agreements with The Chase Manhattan Bank ("Chase"), successor in interest to
United States Trust Company of New York (which is incorporated by reference to
Exhibit No. 9(b) to Pre-Effective Amendment No. 2 to Registrant's Registration
Statement and Exhibit 9(d) to Post-Effective Amendment No. 18 to Registrant's
Registration Statement, respectively). Pursuant to these agreements, 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;
<PAGE>
(ii) providing personnel and facilities to perform the foregoing; (iii)
accounting services, including the preparation of statement 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. MSAM and MAS have assigned the respective Chase
Sub-Administration Agreements to and they were assumed by Van Kampen American
Capital Investment Advisory Corp. as filed herewith as Exhibits 9(f) and 9(h),
respectively.
ITEM 32. UNDERTAKINGS
1. Registrant undertakes to file a post-effective amendment containing
reasonably current financial statements, which need not be certified, for the
Emerging Markets Debt, Equity Growth, European Equity, Global Equity, Growth
and Income, Japanese Equity, Mid Cap Growth, Tax-Free Money Market and Value
Funds within four to six months of their effective date or the commencement
of operations of each such 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, her 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, as
amended, and the Investment Company Act of 1940, as amended, the Registrant
certifies that it meets all of the requirements for effectiveness of this
Amendment to the Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 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 Oakbrook Terrace and State of Illinois, on October
27, 1997.
MORGAN STANLEY FUND, INC.
By: /s/ Ronald A. Nyberg
---------------------------------------------
Ronald A. Nyberg
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
SIGNATURE TITLE
- --------- -----
* /s/ Wayne W. Whalen Director (Chairman)
- -----------------------------
Wayne W. Whalen
*/s/ J. Miles Branagan Director
- -----------------------------
J. Miles Branagan
*/s/ Richard M. DeMartini Director
- -----------------------------
Richard M. DeMartini
*/s/ Linda Hutton Heagy Director
- -----------------------------
Linda Hutton Heagy
*/s/ R. Craig Kennedy Director
- -----------------------------
R. Craig Kennedy
*/s/ Jack E. Nelson Director
- -----------------------------
Jack E. Nelson
*/s/ Don G. Powell Director
- -----------------------------
Don G. Powell
*/s/ Jerome L. Robinson Director
- -----------------------------
Jerome L. Robinson
<PAGE>
*/s/ Phillip Rooney Director
- -----------------------------
Phillip Rooney
*/s/ Fernando Sisto Director
- -----------------------------
Fernando Sisto
*/s/ Edward C. Wood, III Chief Financial
- ----------------------------- Officer and
Edward C. Wood, III Vice President
*/s/ Dennis J. McDonnell Principal Executive
- ----------------------------- Officer and
Dennis J. McDonnell President
*By:/s/ Ronald A. Nyberg October 27, 1997
------------------------
Ronald A. Nyberg
Attorney-In-Fact
<PAGE>
(B) SCHEDULE OF EXHIBITS TO POST-EFFECTIVE AMENDMENT 21 TO FORM N-1A AS
SUBMITTED TO THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1997.
EX-99.11 11 Consent of Independent Accountants.
EX-99.27 27 Financial data schedules for the fiscal year
ended June 30, 1997.
<PAGE>
Exhibit 99.11
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the following with respect to this Post-Effective Amendment No.
21 to the Registration Statement (File No. 33-51294) on Form N-1A under the
Securities Act of 1933, as amended, of Morgan Stanley Fund, Inc. (consisting
of, among others, Morgan Stanley Money Market Fund and Morgan Stanley
Government Obligations Money Market Fund, successors to the PCS Money Market
and PCS Government Obligations Money Market Portfolios):
- The reference to our Firm under the heading "Financial Highlights" in
the Prospectus.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
October 23, 1997
<PAGE>
[PRICE WATERHOUSE LLP LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 21 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
August 11, 1997, relating to the financial statements and financial
highlights of Morgan Stanley Fund, Inc., which appears in such Statement of
Additional Information, and to the incorporation by reference of our report
into the Prospectuses which constitute part of this Registration Statement.
We also consent to the references to us under the headings "Financial
Highlights" and "Independent Accountants" in such Prospectuses.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
October 23, 1997
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