herein. Government Income will prepare the notice of meeting, form of proxy and proxy statement (collectively, ‘‘Proxy Materials’’) to be used in connection with such meeting; provided that Government Securities will furnish Government Income with its currently effective prospectus for inclusion in the Proxy Materials and with such other information relating to Government Securities as is reasonably necessary for the preparation of the Proxy Materials.
4.4 Government Income will assist Government Securities in obtaining such information as Government Securities reasonably requests concerning the beneficial ownership of Government Income shares.
4.5 Subject to the provisions of this Agreement, Government Securities and Government Income will each take, or cause to be taken, all action, and do or cause to be done, all things reasonably necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement.
4.6 Government Income shall furnish or cause to be furnished to Government Securities within 30 days after the Closing Date a statement of Government Income’s assets and liabilities as of the Closing Date, which statement shall be certified by Government Income’s Treasurer and shall be in accordance with generally accepted accounting principles consistently applied. As promptly as practicable, but in any case within 60 days after the Closing Date, Government Income shall furnish Government Securities, in such form as is reasonably satisfactory to Government Securities, a statement certified by Government Income’s Treasurer of Government Income’s earnings and profits for federal income tax purposes that will be carried over to Government Securities pursuant to Section 381 of the Code.
4.7 As soon after the Closing Date as is reasonably practicable, Government Income (a) shall prepare and file all federal and other tax returns and reports of Government Income required by law to be filed with respect to all periods ending on or before the Closing Date but not theretofore filed and (b) shall pay all federal and other taxes shown as due thereon and/or all federal and other taxes that were unpaid as of the Closing Date, including without limitation, all taxes for which the provision for payment was made as of the Closing Date (as represented in paragraph 5.2(k)).
4.8 Government Securities agrees to use all reasonable efforts to obtain the approvals and authorizations required by the 1933 Act and the 1940 Act and to make such filings required by the state Blue Sky and securities laws as it may deem appropriate in order to continue its operations after the Closing Date.
5.1 Government Securities represents and warrants to Government Income as follows:
(a) Government Securities is a validly existing Massachusetts business trust with full power to carry on its business as presently conducted;
(b) Government Securities is a duly registered, open-end, management investment company, and its registration with the Commission as an investment company under the 1940 Act and the registration of its shares under the 1933 Act are in full force and effect;
(c) All of the issued and outstanding shares of Government Securities have been offered and sold in compliance in all material respects with applicable registration requirements of the 1933 Act and state securities laws. Shares of Government Securities are registered in all jurisdictions in which they are required to be registered under state securities laws and other laws, and said registrations, including any periodic reports or supplemental filings, are complete and current, all fees required to be paid have been paid, and Government Securities is not subject to any stop order and is fully qualified to sell its shares in each state in which its shares have been registered;
(d) The current Prospectus and Statement of Additional Information of Government Securities conform in all material respects to the applicable requirements of the 1933 Act and the 1940 Act and the regulations thereunder and do not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading;
(e) Government Securities is not in, and the execution, delivery and performance of this Agreement will not result in a, material violation of any provision of Government Securities’ Declaration of Trust or By-Laws or of any agreement, indenture, instrument, contract, lease or other undertaking to which Government Securities is a party or by which it is bound;
(f) No litigation or administrative proceeding or investigation of or before any court or governmental body is presently pending or, to its knowledge, threatened against Government Securities or any of its properties or assets which, if adversely determined, would materially and adversely affect its financial condition or the conduct of its business; and Government Securities knows of no facts that might form the basis for the institution of such proceedings and is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body which materially and adversely affects, or is reasonably likely to materially and adversely affect, its business or its ability to consummate the transactions herein contemplated;
(g) The Statement of Assets and Liabilities, Statement of Operations, Statement of Changes in Net Assets and Financial Highlights for the fiscal year ended December 31, 2005, of Government Securities audited by [ ], Government Securities’ independent registered public accounting firm (copies of which will be furnished to Government Income), fairly present, in all material respects, Government Securities’ financial condition as of such date in accordance with generally accepted accounting principles, and its results of such operations, changes in its net assets and financial highlights for such period, and as of such date there will be no known liabilities of Government Securities (contingent or otherwise) not disclosed therein that would be required in accordance with generally accepted accounting principles to be disclosed therein;
(h) All issued and outstanding Class D Government Securities Shares are, and at the Closing Date will be, duly and validly issued and outstanding, fully paid and nonassessable with no personal liability attaching to the ownership thereof, except as set forth under the caption ‘‘Capital Stock and Other Securities’’ in Government Securities’ current Statement of Additional Information [incorporated by reference] in the Statement of Additional Information that forms a part of this Registration Statement. Government Securities does not have outstanding any options, warrants or other rights to subscribe for or purchase any of its shares;
(i) he execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of Government Securities, and this Agreement constitutes a valid and binding obligation of Government Securities enforceable in accordance with its terms, subject as to enforcement, to bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors’ rights and to general equity principles. No other consents, authorizations or approvals are necessary in connection with Government Securities’ performance of this Agreement;
(j) Class D Government Securities Shares to be issued and delivered to Government Income, for the account of the Government Income Shareholders, pursuant to the terms of this Agreement will at the Closing Date have been duly authorized and, when so issued and delivered, will be duly and validly issued Class D Government Securities Shares, and will be fully paid and non-assessable with no personal liability attaching to the ownership thereof, except as set forth under the caption ‘‘Capital Stock and Other
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Securities’’ in Government Securities’ current Statement of Additional Information [incorporated by reference] in the Statement of Additional Information to this Registration Statement;
(k) All material federal and other tax returns and reports of Government Securities required by law to be filed on or before the Closing Date have been filed and are correct, and all federal and other taxes shown as due or required to be shown as due on said returns and reports have been paid or provision has been made for the payment thereof, and to the best of Government Securities’ knowledge, no such return is currently under audit and no assessment has been asserted with respect to any such return;
(l) For each taxable year since its inception, Government Securities has met the requirements of Subchapter M of the Code for qualification and treatment as a ‘‘regulated investment company’’ and neither the execution or delivery of nor the performance of its obligations under this Agreement will adversely affect, and no other events are reasonably likely to occur which will adversely affect the ability of Government Securities to continue to meet the requirements of Subchapter M of the Code;
(m) Since [ ], there has been no change by Government Securities in accounting methods, principles or practices, including those required by generally accepted accounting principles;
(n) The information furnished or to be furnished by Government Securities for use in registration statements, proxy materials and other documents which may be necessary in connection with the transactions contemplated hereby shall be accurate and complete in all material respects and shall comply in all material respects with federal securities and other laws and regulations applicable thereto; and
(o) The Proxy Materials to be included in the Registration Statement (only insofar as they relate to Government Securities) will, on the effective date of the Registration Statement and on the Closing Date, not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which such statements were made, not materially misleading.
5.2 Government Income represents and warrants to Government Securities as follows:
(a) Government Income is a validly existing Massachusetts business trust with full power to carry on its business as presently conducted;
(b) Government Income is a duly registered, closed-end, management investment company, and its registration with the Commission as an investment company under the 1940 Act and the registration of its shares under the 1933 Act are in full force and effect;
(c) All of the issued and outstanding shares of beneficial interest of Government Income have been offered and sold in compliance in all material respects with applicable requirements of the 1933 Act and state securities laws. Shares of Government Income are registered in all jurisdictions in which they are required to be registered and said registrations, including any periodic reports or supplemental filings, are complete and current, all fees required to be paid have been paid, and Government Income is not subject to any stop order and is fully qualified to sell its shares in each state in which its shares have been registered;
(d) Government Income is not in, and the execution, delivery and performance of this Agreement will not result in a, material violation of any provision of Government Income’s Declaration of Trust or By-Laws or of any agreement, indenture, instrument, contract, lease or other undertaking to which Government Income is a party or by which it is bound;
(e) No litigation or administrative proceeding or investigation of or before any court or governmental body is presently pending or, to its knowledge, threatened against Government Income or
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any of its properties or assets which, if adversely determined, would materially and adversely affect its financial condition or the conduct of its business; and Government Income knows of no facts that might form the basis for the institution of such proceedings and is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body which materially and adversely affects, or is reasonably likely to materially and adversely affect, its business or its ability to consummate the transactions herein contemplated;
(f) The Statement of Assets and Liabilities, Statement of Operations, Statement of Changes in Net Assets and Financial Highlights of Government Income for the fiscal year ended September 30, 2006, audited by [ ], Government Income’s independent registered public accounting firm (copies of which have been or will be furnished to Government Securities) fairly present, in all material respects, Government Income’s financial condition as of such date, and its results of operations, changes in its net assets and financial highlights for such period in accordance with generally accepted accounting principles, and as of such date there were no known liabilities of Government Income (contingent or otherwise) not disclosed therein that would be required in accordance with generally accepted accounting principles to be disclosed therein;
(g) Government Income has no material contracts or other commitments (other than this Agreement) that will be terminated with liability to it prior to the Closing Date;
(h) All issued and outstanding shares of Government Income are, and at the Closing Date will be, duly and validly issued and outstanding, fully paid and nonassessable with no personal liability attaching to the ownership thereof, except as set forth under the caption ‘‘Description of Shares’’ in Government Income’s Prospectus [incorporated by reference] in the Statement of Additional Information to this Registration Statement. Government Income does not have outstanding any options, warrants or other rights to subscribe for or purchase any of its shares, nor is there outstanding any security convertible to any of its shares. All such shares will, at the time of Closing, be held by the persons and in the amounts set forth in the list of shareholders submitted to Government Securities pursuant to paragraph 3.4;
(i) The execution, delivery and performance of this Agreement will have been duly authorized prior to the Closing Date by all necessary action on the part of Government Income, and subject to the approval of Government Income’s shareholders, this Agreement constitutes a valid and binding obligation of Government Income, enforceable in accordance with its terms, subject as to enforcement to bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors’ rights and to general equity principles. No other consents, authorizations or approvals are necessary in connection with Government Income’s performance of this Agreement;
(j) All material federal and other tax returns and reports of Government Income required by law to be filed on or before the Closing Date shall have been filed and are correct and all federal and other taxes shown as due or required to be shown as due on said returns and reports have been paid or provision has been made for the payment thereof, and to the best of Government Income’s knowledge, no such return is currently under audit and no assessment has been asserted with respect to any such return;
(k) For each taxable year since its inception, Government Income has met all the requirements of Subchapter M of the Code for qualification and treatment as a ‘‘regulated investment company’’ and neither the execution or delivery of nor the performance of its obligations under this Agreement will adversely affect, and no other events are reasonably likely to occur which will adversely affect the ability of Government Income to continue to meet the requirements of Subchapter M of the Code;
(l) At the Closing Date, Government Income will have good and valid title to the Government Income Assets, subject to no liens (other than the obligation, if any, to pay the purchase price of portfolio
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securities purchased by Government Income which have not settled prior to the Closing Date), security interests or other encumbrances, and full right, power and authority to assign, deliver and otherwise transfer such assets hereunder, and upon delivery and payment for such assets, Government Securities will acquire good and marketable title thereto, subject to no restrictions on the full transfer thereof, including any restrictions as might arise under the 1933 Act;
(m) On the effective date of the Registration Statement, at the time of the meeting of Government Income’s shareholders and on the Closing Date, the Proxy Materials (exclusive of the currently effective Government Securities Prospectus contained therein) will (i) comply in all material respects with the provisions of the 1933 Act, the Securities Exchange Act of 1934, as amended (the ‘‘1934 Act’’), and the 1940 Act and the regulations thereunder and (ii) not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. Any other information furnished by Government Income for use in the Registration Statement or in any other manner that may be necessary in connection with the transactions contemplated hereby shall be accurate and complete and shall comply in all material respects with applicable federal securities and other laws and regulations thereunder;
(n) Government Income will, on or prior to the Valuation Date, declare one or more dividends or other distributions to shareholders that, together with all previous dividends and other distributions to shareholders, shall have the effect of distributing to the shareholders substantially all of its investment company taxable income and net capital gain, if any, through the Valuation Date (computed without regard to any deduction for dividends paid);
(o) Government Income has maintained or has caused to be maintained on its behalf all books and accounts as required of a registered investment company in compliance with the requirements of Section 31 of the 1940 Act and the rules thereunder; and
(p) Government Income is not acquiring Class D Government Securities Shares to be issued hereunder for the purpose of making any distribution thereof other than in accordance with the terms of this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF GOVERNMENT INCOME
The obligations of Government Income to consummate the transactions provided for herein shall be subject, at its election, to the performance by Government Securities of all the obligations to be performed by it hereunder on or before the Closing Date and, in addition thereto, the following conditions:
6.1 All representations and warranties of Government Securities contained in this Agreement shall be true and correct in all material respects as of the date hereof and, except as they may be affected by the transactions contemplated by this Agreement, as of the Closing Date with the same force and effect as if made on and as of the Closing Date;
6.2 Government Securities shall have delivered to Government Income a certificate of its President and Treasurer, in a form reasonably satisfactory to Government Income and dated as of the Closing Date, to the effect that the representations and warranties of Government Securities made in this Agreement are true and correct at and as of the Closing Date, except as they may be affected by the transactions contemplated by this Agreement, and as to such other matters as Government Income shall reasonably request;
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6.3 Government Income shall have received a favorable opinion from Clifford Chance US LLP, counsel to Government Securities, dated as of the Closing Date, to the effect that:
(a) Government Securities is a validly existing Massachusetts business trust, and has the power to own all of its properties and assets and to carry on its business as presently conducted (Massachusetts counsel may be relied upon in delivering such opinion); (b) Government Securities is a duly registered, open-end, management investment company, and its registration with the Commission as an investment company under the 1940 Act is in full force and effect; (c) this Agreement has been duly authorized, executed and delivered by Government Securities and, assuming that the Registration Statement complies with the 1933 Act, the 1934 Act and the 1940 Act and regulations thereunder and assuming due authorization, execution and delivery of this Agreement by Government Income, is a valid and binding obligation of Government Securities enforceable against Government Securities in accordance with its terms, subject as to enforcement, to bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors’ rights and to general equity principles; (d) Class D Government Securities Shares to be issued to Government Income Shareholders as provided by this Agreement are duly authorized and upon such delivery will be validly issued, fully paid and non-assessable (except as set forth under the caption ‘‘Capital Stock and Other Securities’’ in Government Securities’ current Statement of Additional Information), and no shareholder of Government Securities has any preemptive rights to subscription or purchase in respect thereof (Massachusetts counsel may be relied upon in delivering such opinion); (e) the execution and delivery of this Agreement did not, and the consummation of the transactions contemplated hereby will not, violate Government Securities’ Declaration of Trust or By-Laws; and (f) to the knowledge of such counsel, no consent, approval, authorization or order of any court or governmental authority of the United States or any state is required for the consummation by Government Securities of the transactions contemplated herein, except such as have been obtained under the 1933 Act, the 1934 Act and the 1940 Act and such as may be required under state securities laws; and
6.4 As of the Closing Date, there shall have been no material change in the investment objective, policies and restrictions nor any increase in the investment advisory fees from those described in Government Securities’ Prospectus dated April 28, 2006 and Statement of Additional Information dated April 28, 2006.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF GOVERNMENT SECURITIES
The obligations of Government Securities to complete the transactions provided for herein shall be subject, at its election, to the performance by Government Income of all the obligations to be performed by it hereunder on or before the Closing Date and, in addition thereto, the following conditions:
7.1 All representations and warranties of Government Income contained in this Agreement shall be true and correct in all material respects as of the date hereof and, except as they may be affected by the transactions contemplated by this Agreement, as of the Closing Date with the same force and effect as if made on and as of the Closing Date;
7.2 Government Income shall have delivered to Government Securities at the Closing a certificate of its President and its Treasurer, in form and substance satisfactory to Government Securities and dated as of the Closing Date, to the effect that the representations and warranties of Government Income made in this Agreement are true and correct at and as of the Closing Date, except as they may be affected by the transactions contemplated by this Agreement, and as to such other matters as Government Securities shall reasonably request;
7.3 Government Income shall have delivered to Government Securities a statement of the Government Income Assets and its liabilities, together with a list of Government Income’s portfolio
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securities and other assets showing the respective adjusted bases and holding periods thereof for income tax purposes, as of the Closing Date, certified by the Treasurer of Government Income;
7.4 Government Securities shall have received at the Closing a favorable opinion from Clifford Chance US LLP, counsel to Government Income, dated as of the Closing Date to the effect that:
(a) Government Income is a validly existing Massachusetts business trust and has the power to own all of its properties and assets and to carry on its business as presently conducted (Massachusetts counsel may be relied upon in delivering such opinion); (b) Government Income is a duly registered, closed-end, management investment company under the 1940 Act, and its registration with the Commission as an investment company under the 1940 Act is in full force and effect; (c) this Agreement has been duly authorized, executed and delivered by Government Income and, assuming that the Registration Statement complies with the 1933 Act, the 1934 Act and the 1940 Act and the regulations thereunder and assuming due authorization, execution and delivery of this Agreement by Government Securities, is a valid and binding obligation of Government Income enforceable against Government Income in accordance with its terms, subject as to enforcement, to bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors’ rights and to general equity principles; (d) the execution and delivery of this Agreement did not, and the consummation of the transactions contemplated hereby will not, violate Government Income’s Declaration of Trust or By-Laws; and (e) to the knowledge of such counsel, no consent, approval, authorization or order of any court or governmental authority of the United States or any state is required for the consummation by Government Income of the transactions contemplated herein, except such as have been obtained under the 1933 Act, the 1934 Act and the 1940 Act and such as may be required under state securities laws; and
7.5 On the Closing Date, the Government Income Assets shall include no assets that Government Securities, by reason of limitations of Government Securities’ Declaration of Trust or otherwise, may not properly acquire.
 | |
| 8. | FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF GOVERNMENT SECURITIES AND GOVERNMENT INCOME |
The obligations of Government Income and Government Securities hereunder are each subject to the further conditions that on or before the Closing Date:
8.1 This Agreement and the transactions contemplated herein shall have been approved by the requisite vote of the holders of the outstanding shares of Government Income in accordance with the provisions of Government Income’s Declaration of Trust, and certified copies of the resolutions evidencing such approval shall have been delivered to Government Securities;
8.2 On the Closing Date, no action, suit or other proceeding shall be pending before any court or governmental agency in which it is sought to restrain or prohibit, or obtain damages or other relief in connection with, this Agreement or the transactions contemplated herein;
8.3 All consents of other parties and all other consents, orders and permits of federal, state and local regulatory authorities (including those of the Commission and of state Blue Sky and securities authorities, including ‘‘no-action’’ positions of and exemptive orders from such federal and state authorities) deemed necessary by Government Securities or Government Income to permit consummation, in all material respects, of the transactions contemplated herein shall have been obtained, except where failure to obtain any such consent, order or permit would not involve risk of a material adverse effect on the assets or properties of Government Securities or Government Income;
8.4 The Registration Statement shall have become effective under the 1933 Act, no stop orders suspending the effectiveness thereof shall have been issued and, to the best knowledge of the parties
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hereto, no investigation or proceeding for that purpose shall have been instituted or be pending, threatened or contemplated under the 1933 Act;
8.5 Government Income shall have declared and paid a dividend or dividends and/or other distribution or distributions that, together with all previous such dividends or distributions, shall have the effect of distributing to the Government Income Shareholders substantially all of Government Income’s investment company taxable income (computed without regard to any deduction for dividends paid) and substantially all of its net capital gain (after reduction for any capital loss carry-forward and computed without regard to any deduction for dividends paid) for all taxable years ending on or before the Closing Date; and
8.6 The parties shall have received the opinion of the law firm of Clifford Chance US LLP (based on such representations as such law firm shall reasonably request), addressed to Government Securities and Government Income, which opinion shall not be a ‘‘covered opinion’’ within the meaning of Internal Revenue Service Circular 230 and may be relied upon by the shareholders of Government Income (but solely to the extent consistent with such opinion not being a ‘‘covered opinion’’), substantially to the effect that, for federal income tax purposes:
(a) The transfer of Government Income’s assets in exchange for Class D Government Securities Shares and the assumption by Government Securities of certain stated liabilities of Government Income followed by the distribution by Government Income of Class D Government Securities Shares to the Government Income Shareholders in exchange for their Government Income shares pursuant to and in accordance with the terms of the Reorganization Agreement will constitute a ‘‘reorganization’’ within the meaning of Section 368(a)(1)(C) of the Code, and Government Income and Government Securities will each be a ‘‘party to a reorganization’’ within the meaning of Section 368(b) of the Code;
(b) No gain or loss will be recognized by Government Securities upon the receipt of the assets of Government Income solely in exchange for Class D Government Securities Shares and the assumption by Government Securities of the stated liabilities of Government Income;
(c) No gain or loss will be recognized by Government Income upon the transfer of the assets of Government Income to Government Securities in exchange for Class D Government Securities Shares and the assumption by Government Securities of the stated liabilities or upon the distribution of Class D Government Securities Shares to the Government Income Shareholders in exchange for their Government Income shares;
(d) No gain or loss will be recognized by the Government Income Shareholders upon the exchange of the Government Income shares for Class D Government Securities Shares;
(e) The aggregate tax basis for Class D Government Securities Shares received by each Government Income Shareholder pursuant to the Reorganization will be the same as the aggregate tax basis of the Government Income shares held by each such Government Income Shareholder immediately prior to the Reorganization;
(f) The holding period of Class D Government Securities Shares to be received by each Government Income Shareholder will include the period during which the Government Income shares surrendered in exchange therefor were held (provided such Government Income shares were held as capital assets on the date of the Reorganization);
(g) The tax basis of the assets of Government Income acquired by Government Securities will be the same as the tax basis of such assets to Government Income immediately prior to the Reorganization; and
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(h) The holding period of the assets of Government Income in the hands of Government Securities will include the period during which those assets were held by Government Income.
Notwithstanding anything herein to the contrary, neither Government Securities nor Government Income may waive the conditions set forth in this paragraph 8.7.
9. FEES AND EXPENSES
9.1 (a) Government Securities shall bear its expenses incurred in connection with the entering into, and carrying out of, the provisions of this Agreement, including legal, accounting, Commission registration fees and Blue Sky expenses. Government Income shall bear its expenses incurred in connection with the entering into and carrying out of the provisions of this Agreement, including legal and accounting fees, printing, filing and proxy solicitation expenses and portfolio transfer taxes (if any) incurred in connection with the consummation of the transactions contemplated herein.
(b) In the event the transactions contemplated herein are not consummated by reason of Government Income being either unwilling or unable to go forward (other than by reason of the nonfulfillment or failure of any condition to Government Income’s obligations specified in this Agreement), Government Income’s only obligation hereunder shall be to reimburse Government Securities for all reasonable out-of-pocket fees and expenses incurred by Government Securities in connection with those transactions.
(c) In the event the transactions contemplated herein are not consummated by reason of Government Securities being either unwilling or unable to go forward (other than by reason of the nonfulfillment or failure of any condition to Government Securities’ obligations specified in this Agreement), Government Securities’ only obligation hereunder shall be to reimburse Government Income for all reasonable out-of-pocket fees and expenses incurred by Government Income in connection with those transactions.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 This Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties and covenants contained in this Agreement or in any document delivered pursuant hereto or in connection herewith shall survive the consummation of the transactions contemplated herein, except that the representations, warranties and covenants of Government Income hereunder shall not survive the dissolution and complete liquidation of Government Income in accordance with Section 1.9.
11. TERMINATION
11.1 This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing:
(a) by the mutual written consent of Government Income and Government Securities;
(b) by either Government Securities or Government Income by notice to the other, without liability to the terminating party on account of such termination (providing the terminating party is not otherwise in material default or breach of this Agreement), if the Closing shall not have occurred on or before [ ], 2007; or
(c) by either Government Securities or Government Income, in writing without liability to the terminating party on account of such termination (provided the terminating party is not otherwise in
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material default or breach of this Agreement), if (i) the other party shall fail to perform in any material respect its agreements contained herein required to be performed on or prior to the Closing Date, (ii) the other party materially breaches any of its representations, warranties or covenants contained herein, (iii) the Government Income shareholders fail to approve this Agreement at any meeting called for such purpose at which a quorum was present or (iv) any other condition herein expressed to be precedent to the obligations of the terminating party has not been met and it reasonably appears that it will not or cannot be met.
11.2 (a) Termination of this Agreement pursuant to paragraphs 11.1(a) or (b) shall terminate all obligations of the parties hereunder and there shall be no liability for damages on the part of Government Securities or Government Income, or the trustees or officers of Government Securities or Government Income, to any other party or its trustees or officers.
(b) Termination of this Agreement pursuant to paragraph 11.1(c) shall terminate all obligations of the parties hereunder and there shall be no liability for damages on the part of Government Securities or Government Income, or the trustees or officers of Government Securities or Government Income, except that any party in breach of this Agreement shall, upon demand, reimburse the non-breaching party for all reasonable out-of-pocket fees and expenses incurred in connection with the transactions contemplated by this Agreement, including legal, accounting and filing fees.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as may be mutually agreed upon in writing by the parties.
13. MISCELLANEOUS
13.1 The article and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each of which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts.
13.4 This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns, but no assignment or transfer hereof or of any rights or obligations hereunder shall be made by any party without the written consent of the other party. Nothing herein expressed or implied is intended or shall be construed to confer upon or give any person, firm or corporation, other than the parties hereto and their respective successors and assigns, any rights or remedies under or by reason of this Agreement.
13.5 The obligations and liabilities of Government Securities hereunder are solely those of Government Securities. It is expressly agreed that no shareholder, nominee, trustee, officer, agent, or employee of Government Securities shall be personally liable hereunder. The execution and delivery of this Agreement have been authorized by the trustees of Government Securities and signed by authorized officers of Government Securities acting as such, and neither such authorization by such trustees nor such execution and delivery by such officers shall be deemed to have been made by any of them individually or to impose any liability on any of them personally.
13.6 The obligations and liabilities of Government Income hereunder are solely those of Government Income. It is expressly agreed that no shareholder, nominee, trustee, officer, agent or employee of
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Government Income shall be personally liable hereunder. The execution and delivery of this Agreement have been authorized by the trustees of Government Income and signed by authorized officers of Government Income acting as such, and neither such authorization by such trustees nor such execution and delivery by such officers shall be deemed to have been made by any of them individually or to impose any liability on any of them personally.
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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by a duly authorized officer.
| | | | | | |
| | | | MORGAN STANLEY GOVERNMENT INCOME TRUST |
| | | | By: | | | |
| | | | | | | Name: Ronald E. Robison
Title: President and Principal Executive Officer |
| | | | MORGAN STANLEY U.S. GOVERNMENT SECURITIES TRUST |
| | | | By: | | | |
| | | | | | | Name: Lou Anne McInnis
Title: Assistant Secretary |
|
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MORGAN STANLEY US. GOVERNMENT SECURITIES TRUST
PART B
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information relates to the shares of Morgan Stanley U.S. Government Securities Trust (‘‘Government Securities’’) to be issued pursuant to an Agreement and Plan of Reorganization, dated [ ], 2006, between Government Securities and Morgan Stanley Government Income Trust (‘‘Government Income’’) in connection with the acquisition by Government Securities of substantially all of the assets and the assumption of substantially all of the liabilities of Government Income. This Statement of Additional Information does not constitute a prospectus. This Statement of Additional Information does not include all information that a shareholder should consider before voting on the proposals contained in the Proxy Statement and Prospectus, and, therefore, should be read in conjunction with the related Proxy Statement and Prospectus, dated [December 22], 2006. A copy of the Proxy Statement and Prospectus may be obtained without charge by mailing a written request to Morgan Stanley U.S. Government Securities Trust, c/o Morgan Stanley Trust, Harborside Financial Center, Plaza Two, Jersey City, NJ 07311 or by calling (800) 869-NEWS (TOLL-FREE). Please retain this document for future reference.
The date of this Statement of Additional Information is [December 22], 2006.
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TABLE OF CONTENTS
| | | | | | |
| | | | PAGE |
| INTRODUCTION | | | | | B-3 | |
| ADDITIONAL INFORMATION ABOUT GOVERNMENT SECURITIES | | | | | B-3 | |
| ADDITIONAL INFORMATION ABOUT GOVERNMENT INCOME | | | | | B-4 | |
| FINANCIAL STATEMENTS | | | | | B-18 | |
|
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INTRODUCTION
This Statement of Additional Information is intended to supplement the information provided in the Proxy Statement and Prospectus dated [December 22], 2006 (the ‘‘Proxy Statement and Prospectus’’). The Proxy Statement and Prospectus has been sent to Government Income's shareholders in connection with the solicitation of proxies by the Board of Trustees of Government Income to be voted at the Special Meeting of Shareholders of Government Income to be held on March 6, 2007. This Statement of Additional Information [incorporated by reference] the Statement of Additional Information of Government Securities dated April 28, 2006, as supplemented, the Annual Report of Government Securities for the fiscal year ended December 31, 2005, the Semi-Annual Report for Government Securities for the period ended June 30, 2006 and the Annual Report of Government Income for the fiscal year ended September 30, 2006.
ADDITIONAL INFORMATION ABOUT GOVERNMENT SECURITIES
Fund History
For additional information about Government Securities’ history, see ‘‘Fund History’’ in Government Securities’ Statement of Additional Information.
Investment Objective, Policies and Risks
For additional information about Government Securities’ investment objective, policies and risks, see ‘‘Description of the Fund and Its Investments and Risks’’ in Government Securities’ Statement of Additional Information.
Portfolio Holdings
For additional information about Government Securities’ policies and procedures with respect to the disclosure of Government Securities’ portfolio securities to any person, see ‘‘Description of the Fund and Its Investments and Risks — Disclosure of Portfolio Holdings’’ in Government Securities’ Statement of Additional Information.
Management
For additional information about the Board of Trustees, officers and management personnel of Government Securities, see ‘‘Management of the Fund’’ and ‘‘Investment Advisory and Other Services’’ in Government Securities’ Statement of Additional Information.
Investment Advisory and Other Services
For additional information about Government Securities’ investment adviser, Government Securities’ independent registered public accounting firm and other services provided to Government Securities, see ‘‘Investment Advisory and Other Services’’ in Government Securities’ Statement of Additional Information.
Codes of Ethics
For additional information about the Codes of Ethics adopted by Government Securities, Government Securities’ investment adviser and Government Securities’ distributor, see ‘‘Investment Advisory and Other Services — Codes of Ethics’’ in Government Securities’ Statement of Additional Information.
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Proxy Voting Policies
For additional information about the voting of proxies held by Government Securities, see ‘‘Investment Advisory and Other Services — Proxy Voting Policy and Proxy Voting Record’’ in Government Securities’ Statement of Additional Information.
Portfolio Managers
For additional information about the portfolio managers primarily responsible for the day-to-day management of Government Securities, their compensation structure and their holdings in Government Securities, see ‘‘Investment Advisory and Other Services — Fund Management’’ in Government Securities’ Statement of Additional Information.
Portfolio Transactions and Brokerage
For additional information about brokerage allocation practices, see ‘‘Brokerage Allocation and Other Practices’’ in Government Securities’ Statement of Additional Information.
Description of Fund Shares
For additional information about the voting rights and other characteristics of the shares of Government Securities, see ‘‘Capital Stock and Other Securities’’ in Government Securities’ Statement of Additional Information.
Purchase, Redemption and Pricing of Shares
For additional information about the purchase and redemption of Government Securities’ shares and the determination of net asset value, see ‘‘Purchase, Redemption and Pricing of Shares’’ in Government Securities’ Statement of Additional Information.
Dividends, Distributions and Tax Status
For additional information about Government Securities’ policies regarding dividends and distributions and tax matters affecting Government Securities and its shareholders, see ‘‘Taxation of the Fund and Shareholders’’ in Government Securities’ Statement of Additional Information.
Distribution of Shares
For additional information about Government Securities’ distributor and the distribution agreement between Government Securities and its distributor, see ‘‘Investment Advisory and Other Services’’ and ‘‘Underwriters’’ in Government Securities’ Statement of Additional Information.
Performance Data
For additional information about Government Securities’ performance, see ‘‘Performance Data’’ in Government Securities’ Statement of Additional Information.
ADDITIONAL INFORMATION ABOUT GOVERNMENT INCOME
Fund History
Government Income was organized on November 20, 1987 pursuant to a Declaration of Trust in the State of Massachusetts.
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Investment Objectives and Policies
The investment objective of Government Income is to earn as high a level of current income as is consistent with prudent investment and, as a secondary objective, capital appreciation. Government Income will seek to achieve its objective by investing at least 80% of its net assets in U.S. Government securities. This objective is a fundamental policy of Government Income and may not be changed without the approval of its shareholders. There is no assurance that this objective will be achieved.
The U.S. Government securities in which Government Income may invest include:
(1) U.S. Treasury bills (maturities of one year or less), U.S. Treasury notes (maturities of one to ten years) and U.S. Treasury bonds (generally maturities of greater than ten years), all of which are direct obligations of the U.S. Government and, as such, are backed by the ‘‘full faith and credit’’ of the United States.
(2) Securities issued by agencies and instrumentalities of the U.S. Government which are backed by the full faith and credit of the United States. Among the agencies and instrumentalities issuing such obligations are the Federal Housing Administration, the Government National Mortgage Association, the Department of Housing and Urban Development, the Export-Import Bank, the Farmers Home Administration, the General Services Administration, the Maritime Administration and the Small Business Administration. The maturities of such obligations range from three months to thirty years.
(3) Securities issued by agencies and instrumentalities which are not backed by the full faith and credit of the United States, but whose issuing agency or instumentality has the right to borrow, to meet its obligations, from an existing line of credit with the U.S. Treasury. Among the agencies and instrumentalities issuing such obligations are the Tennessee Valley Authority, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the U.S. Postal Service.
(4) Securities issued by agencies and instrumentalities which are not backed by the full faith and credit of the United States, but which are backed by the credit of the issuing agency or instrumentality. Among the agencies and instrumentalities issuing such obligations are the Federal Farm Credit System and the Federal Home Loan Banks.
Investment Restrictions
The investment restrictions listed below are among the restrictions that have been adopted by Government Income as fundamental policies. Under the Investment Company Act of 1940, as amended (the ‘‘Investment Company Act’’), a fundamental policy may not be changed without the vote of a majority of the outstanding voting securities of Government Income, as defined in the Investment Company Act. Such a majority is defined as the lessor of (a) 67% of the shares present at a meeting of shareholders, if the holders of more than 50% of the outstanding shares of Government Income are present or represented by proxy, or (b) more than 50% of the outstanding shares of Government Income.
Government Income may not:
1. Invest more than 5% of the value of its total assets in the securities of any one issuer (other than obligations issued, or guaranteed by, U.S. Government, its agencies or instrumentalities).
2. Purchase more than 10% of all outstanding voting securities or any class of securities of any one issuer.
3. Invest more than 5% of the value of its total assets in securities of issuers having a record, together with predecessors, of less than three years of continuous operation. This restriction shall not apply to any obligation of the U.S. Government, its agencies or instrumentalities.
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4. Invest 25% or more of the value of its total assets in securities of issuers in any one industry. This restriction does not apply to obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities.
5. Invest for the purpose of exercising control or management of any other issuer.
6. Invest in securities of any issuer if, to the knowledge of Government Income, any officer or trustee of Government Income or of the Investment Adviser owns more than 1/2 of 1% of the outstanding securities of such issuer, and such officers and trustees who own more than 1/2 of 1% own in the aggregate more than 5% of the outstanding securities of such issuer.
7. Borrow money, except that Government Income may borrow from a bank for temporary or emergency purposes, for the repurchase of it shares or for investment purposes provided that immediately after such borrowing the amount borrowed does not exceed 25% of Government Income's total assets, within the limits set forth in the Investment Company Act.
8. Enter into reverse repurchase agreements in an amount exceeding 10% of Government Income's total assets. The use of reverse repurchase agreements is subject to the limitations set forth in Restriction 7.
9. Make loans of money or securities except: (a) by the purchase of publicly distributed debt obligations in which Government Income may invest consistent with its investment objectives and policies; (b) by Investment in repurchase or reverse repurchase agreements; or (c) by lending its portfolio securities.
10. Issue senior securities as defined in the Investment Company Act, except insofar as Government Income may be deemed to have issued a senior security by reason of: (a) entering into any reverse repurchase agreement; (b) borrowing money; or (c) purchasing any securities on a when-issued, delayed delivery or forward commitment basis.
11. Pledge its assets or assign or otherwise encumber them except to secure permitted borrowings effected within the limitations set forth in Restriction 8.
12. Sell securities short or maintain a short position.
13. Purchase securities on margin (but Government Income may obtain short-term loans as are necessary for the clearance of transactions).
14. Purchase or sell real estate or interests therein, although Government Income may purchase securities of issuers which engage in real estate operations and securities secured by real estate or interests therein.
15. Purchase oil, gas or other mineral leases, rights or royalty contracts, or exploration or development programs, except that Government Income may invest in the securities of companies which operate, invest in, or sponsor such programs.
16. Purchase securities of other investment companies, except in connection with a merger, consolidation, reorganization or acquisition of assets.
17. Purchase or sell commodities or commodities contracts.
18. Engage in the underwriting of securities, except insofar as Government Income may be deemed an underwriter under the Securities Act of 1933 in disposing of a portfolio security.
As regards the foregoing investment restrictions, if a percentage restriction is adhered to at the time of investment, a later increase or decrease in percentage resulting from a change in values of portfolio securities or amount of total or net assets will not be considered a violation of any of the foregoing restrictions.
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Portfolio Holdings
For additional information about Government Income's policies and procedures with respect to the disclosure of Government Income's portfolio securities to any person, see ‘‘For More Information About Portfolio Holdings’’ in Government Income's Annual Report for its fiscal year ended September 30, 2006.
Management
For each Trustee, the dollar range of equity securities beneficially owned by the Trustee in Government Income and in the Family of Investment Companies (Family of Investment Companies includes all of the registered investment companies advised by Morgan Stanley Investment Advisors Inc. (the ‘‘Investment Adviser’’), Morgan Stanley Investment Management Inc. and Morgan Stanley AIP GP LP) for the calendar year ended December 31, 2005, is shown on the following chart.
| | | | | | |
| Name of Trustee | | | Dollar Range of Equity
Securities in Government
Income
(As of December 31, 2005) | | | Aggregate Dollar Range
of Equity Securities in All
Registered Investment
Companies Overseen by
Trustee in Family of
Investment Companies
(As of December 31, 2005) |
| Independent | | | | | | |
| Frank L. Bowman(1) | | | [ ] | | | None |
| Michael Bozic | | | [ ] | | | Over $100,000 |
| Kathleen A. Dennis(1) | | | [ ] | | | None |
| Edwin J. Garn | | | [ ] | | | Over $100,000 |
| Wayne E. Hedien | | | [ ] | | | Over $100,000 |
| Dr. Manuel H. Johnson | | | [ ] | | | Over $100,000 |
| Joseph J. Kearns(2) | | | [ ] | | | Over $100,000 |
| Michael F. Klein(1) | | | [ ] | | | Over $100,000 |
| Michael E. Nugent | | | [ ] | | | Over $100,000 |
| W. Allen Reed(1) | | | [ ] | | | $10,001-$50,0000 |
| Fergus Reid(2) | | | [ ] | | | Over $100,000 |
| Interested | | | | | | |
| James F. Higgins | | | [ ] | | | Over $100,000 |
|
| |
| (1) | Ms. Dennis and Messrs. Bowman, Klein and Reed did not serve as Trustees of Government Income during the calendar year ended December 31, 2005. |
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| (2) | Includes the total amount of compensation deferred by the Trustee at his election pursuant to a deferred compensation plan. Such deferred compensation is placed in a deferral account and deemed to be invested in one or more of certain of the funds advised by the Investment Adviser (the ‘‘Retail Funds’’) and certain of the funds advised by Morgan Stanley Investment Management Inc. and Morgan Stanley AIP GP LP (the ‘‘Institutional Funds’’) (or portfolio thereof) that are offered as investment options under the plan. As of December 31, 2005, the value (including interest) of the deferral accounts for Messrs. Kearns and Reid was $786,542 and $766,622, respectively, pursuant to the deferred compensation plan. |
[As to the Trustees and their immediate family members, no person owned beneficially or of record securities in an investment adviser or principal underwriter of Government Income, or a person (other
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than a registered investment company) directly or indirectly controlling, controlled by or under common control with an investment adviser or principal underwriter of Government Income.]
The Board of Government Income has four Committees: (1) Audit Committee, (2) Governance Committee, (3) Valuation, Insurance and Compliance Committee and (4) Investment Committee. The Investment Committee has three Sub-Committees focusing on Government Income's primary areas of investment, as detailed below. Five of the Independent Trustees serve as members of the Audit Committee, four Independent Trustees serve as members of the Governance Committee, three Trustees, including two Independent Trustees, serve as members of the Valuation, Insurance and Compliance Committee and all of the Trustees serve as members of the Investment Committee.
The Independent Trustees are charged with recommending to the full Board approval of management, advisory and administration contracts and distribution and underwriting agreements, continually reviewing fund performance, checking on the pricing of portfolio securities, brokerage commissions, transfer agent costs and performance and trading among funds in the same complex; and approving fidelity bond and related insurance coverage and allocations, as well as other matters that arise from time to time.
The Board of Trustees of Government Income has a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). The Audit Committee is charged with recommending to the full Board of Trustees the engagement or discharge of Government Income's independent registered public accounting firm; directing investigations into matters within the scope of the independent registered public accounting firm's duties, including the power to retain outside specialists; reviewing with the independent registered public accounting firm the audit plan and results of the auditing engagement; approving professional services provided by the independent registered public accounting firm and other accounting firms prior to the performance of the services; reviewing the independence of the independent registered public accounting firm; considering the range of audit and non-audit fees; reviewing the adequacy of Government Income's system of internal controls; and preparing and submitting Audit Committee meeting minutes to the full Board of Trustees. Government Income has adopted a formal, written Audit Committee Charter. During Government Income's fiscal year ended September 30, 2006, the Audit Committee held meetings.
The members of Government Income's Audit Committee are currently Frank L. Bowman, Wayne E. Hedien, Joseph J. Kearns, Michael E. Nugent and W. Allen Reed. None of the members of Government Income's Audit Committees is an ‘‘interested person,’’ as defined under the Investment Company Act, of Government Income. Each Independent Trustee is also ‘‘independent’’ from Government Income as defined under the listing standards of the New York Stock Exchange. The Chairperson of the Audit Committee is Joseph J. Kearns.
The Board of Trustees of Government Income also has a Governance Committee. The Governance Committee identifies individuals qualified to serve as Independent Trustees on Government Income's Board and on committees of such Board and recommends such qualified individuals for nomination by Government Income's Independent Trustees as candidates for election as Independent Trustees, advises Government Income's Board with respect to Board composition, procedures and committees, develops and recommends to Government Income's Board a set of corporate governance principles applicable to Government Income, monitors and makes recommendations on corporate governance matters and policies and procedures of Government Income's Board of Trustees and any committees of the Board and oversees periodic evaluations of Government Income's Board and its committees. The members of Government Income's Governance Committee are currently Kathleen A. Dennis, Edwin J. Garn, Michael F. Klein and Fergus Reid, each of whom is an Independent Trustee. The Chairperson of the Governance
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Committee is Fergus Reid. During Government Income's fiscal year ended September 30, 2006, the Governance Committee held ___ meetings.
Government Income does not have a separate nominating committee. While Government Income's Governance Committee recommends qualified candidates for nominations as Independent Trustees, the Board of Trustees of Government Income believes that the task of nominating prospective Independent Trustees is important enough to require the participation of all current Independent Trustees, rather than a separate committee consisting of only certain Independent Trustees. Accordingly, each current Independent Trustee (Frank L. Bowman, Michael Bozic, Kathleen A. Dennis, Edwin J. Garn, Wayne E. Hedien, Dr. Manuel H. Johnson, Joseph J. Kearns, Michael F. Klein, Michael E. Nugent, W. Allen Reed and Fergus Reid) participates in the election and nomination of candidates for election as Independent Trustees for Government Income. Persons recommended by Government Income's Governance Committee as candidates for nomination as Independent Trustees shall possess such knowledge, experience, skills, expertise and diversity so as to enhance the Board's ability to manage and direct the affairs and business of Government Income, including, when applicable, to enhance the ability of committees of the Board to fulfill their duties and/or to satisfy any independence requirements imposed by law, regulation or any listing requirements of the New York Stock Exchange. While the Independent Trustees of Government Income expect to be able to continue to identify from their own resources an ample number of qualified candidates for Government Income's Board as they deem appropriate, they will consider nominations from stockholders to the Board. Nominations from shareholders should be in writing and sent to the Independent Trustees as described below under the caption ‘‘—Shareholder Communications.’’
The Board has formed a Valuation, Insurance and Compliance Committee to oversee the compliance function, review the valuation process and address insurance coverage for Government Income and the Board. The Valuation, Insurance and Compliance Committee currently consists of Messrs. Bozic, Johnson and Higgins. Messrs. Bozic and Johnson are Independent Trustees. Mr. Bozic is the Chairperson of the Valuation, Insurance and Compliance Committee. The Valuation, Insurance and Compliance Committee was formed in October 2006.
The Investment Committee oversees the portfolio investment process for and reviews the performance of Government Income. The Investment Committee also recommends to the Board to approve or renew Government Income's Investment Advisory and Administration Agreements. The members of the Investment Committee are Manuel H. Johnson, Frank L. Bowman, Michael Bozic, Kathleen A. Dennis, Edwin Garn, Wayne Hedien, James Higgins, Joseph Kearns, Michael Klein, Michael Nugent, Fergus Reid and W. Allen Reed. Manuel H. Johnson is the Chairperson of the Investment Committee.
The Investment Committee has three Sub-Committees, each with its own Chairperson. The Sub-Committees and their members are as follows:
(1) Equity – W. Allen Reed (Chairperson), Michael E. Nugent and Frank L. Bowman;
(2) Fixed-Income – Michael F. Klein (Chairperson), Fergus Reid, Michael Bozic and Edwin J. Garn; and
(3) Closed-End, Money Market and Alternatives – Kathleen A. Dennis (Chairperson), James F. Higgins, Joseph J. Kearns and Wayne E. Hedien.
The Investment Committee and the Sub-Committees of the Investment Committee were formed in October 2006.
There were meetings of the Board of Trustees of Government Income held during the fiscal year ended September 30, 2006. The Independent Trustees of Government Income also met times during that time, in addition to the meetings of the full Board.
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For additional information about the Board of Trustees, officers and management personnel of Government Income, see ‘‘Trustee and Officer Information’’ in Government Income's Annual Report for its fiscal year ended September 30, 2006.
Compensation of Trustees and Officers
Each Independent Trustee receives an annual fee of $180,000 for serving the Retail Funds and the Institutional Funds. Prior to October 1, 2005, each Independent Trustee received an annual retainer fee of $168,000 for serving the Retail Funds and the Institutional Funds. In addition, each Independent Trustee received $2,000 for attending each of the four quarterly board meetings and two performance meetings that occur each year, so that an Independent Trustee who attended all six meetings received total compensation of $180,000 for serving the funds. Prior to October 1, 2006, the Chairperson of the Audit Committee received an additional annual retainer fee of $60,000. Other Committee Chairpersons and the Deputy Chairperson of the Audit Committee received an additional annual retainer fee of $30,000. Effective October 1, 2006, the Chairperson of the Audit Committee receives an additional annual retainer fee of $75,000 and the Investment Committee Chairperson receives an additional annual retainer fee of $60,000. Other Committee Chairpersons receive an additional annual retainer fee of $30,000 and the Investment Sub-Committee Chairpersons receive an additional annual retainer fee of $15,000. The aggregate compensation paid to each Independent Trustee is paid by the Retail Funds and the Institutional Funds, and is allocated on a pro rata basis among each of the operational funds/portfolios of the Retail Funds and the Institutional Funds based on the relative net assets of each of the funds/portfolios. As of July 1, 2006, Mr. Fiumefreddo resigned as Chairman of the Boards of the Retail Funds and the Institutional Funds and was succeeded by Mr. Nugent. Prior to July 1, 2006, Mr. Fiumefreddo received an annual fee for his services as Chairman of the Boards of the Retail Funds and the Institutional Funds and for administrative services provided to each Board. As of July 1, 2006, Mr. Nugent receives an annual fee of $360,000 for his services as Chairman.
Government Income also reimburses the Independent Trustees for travel and other out-of-pocket expenses incurred by them in connection with attending such meetings. Trustees of Government Income who are employed by the Investment Adviser or an affiliated company receive no compensation or expense reimbursement from Government Income for their services as a Trustee.
Effective April 1, 2004, Government Income began a Deferred Compensation Plan (the ‘‘DC Plan’’), which allows each Independent Trustees to defer payment of all, or a portion, of the fees he or she receives for serving on the Board of Trustees throughout the year. Each eligible Trustee generally may elect to have the deferred amounts credited with a return equal to the total return on one or more of the Retail Funds or Institutional Funds (or portfolios thereof) that are offered as investment options under the Plan. At the Trustee’s election, distributions are either in one lump sum payment, or in the form of equal annual installments over a period of five years. The rights of an eligible Trustee and the beneficiaries to the amounts held under the DC Plan are unsecured and such amounts are subject to the claims of the creditors of Government Income.
Prior to April 1, 2004, Government Income maintained a similar Deferred Compensation Plan (the ‘‘Prior DC Plan’’), which also allowed each Independent Trustee to defer payment of all, or a portion, of the fees he or she received for serving on the Board of Trustees throughout the year. The DC Plan amends and supersedes the Prior DC Plan and all amounts payable under the Prior DC Plan are now subject to the terms of the Plan (except for amounts paid during the calendar year 2004 which remain subject to the terms of the Prior DC Plan).
The following table shows aggregate compensation payable to each of Government Income's Trustees from Government Income for the fiscal year ended September 30, 2006 and the aggregate
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compensation payable to each of Government Income's Trustees by the Fund Complex (which includes all of the Retail Funds and Institutional Funds) for the calendar year ended December 31, 2005. Ms. Dennis and Messrs. Bowman, Klein and Reed did not serve as Trustees of Government Income during Government Income's most recent fiscal year end and therefore did not receive any compensation from Government Income during the period. During the relevant period Government Income's had three Committees: the Audit Committee, Governance Committee and Insurance Committee. The structure and membership of the Committees have changed since December 31, 2005. Therefore, Committees referenced in the footnotes to the Compensation Table in this section may no longer exist, and/or the Trustees may no longer serve on the Committees noted in the footnotes to the table.
| | | | | | | | | | | | | | | | | | |
| | | | Aggregate Compensation
From Government Income | | | Number of Portfolios
in the Fund Complex
From Which the
Trustee Received
Compensation(6) | | | Total Compensation
From the Fund
Complex Payable to
Trustee(6) |
| Name of Independent Trustee | | | | | | | | | | | | | | | | | | |
| Michael Bozic(1)(2)(3) | | | | $ | 424 | | | | | | [ ] | | | | | $ | 180,000 | |
| Edwin J. Garn(1)(3) | | | | | 391 | | | | | | [ ] | | | | | $ | 180,000 | |
| Wayne E. Hedien(1)(2) | | | | | 391 | | | | | | [ ] | | | | | $ | 180,000 | |
| Manuel H. Johnson(1) | | | | | 521 | | | | | | [ ] | | | | | $ | 240,000 | |
| Joseph J. Kearns(1)(4) | | | | | 481 | | | | | | [ ] | | | | | $ | 217,000 | |
| Michael E. Nugent(1)(2)(5) | | | | | 622 | | | | | | [ ] | | | | | $ | 210,000 | |
| Fergus Reid(1)(3) | | | | | 456 | | | | | | [ ] | | | | | $ | 215,000 | |
| Name of Interested Trustee | | | | | | | | | | | | | | | | | | |
| James F. Higgins | | | | | — | | | | | | [ ] | | | | | $ | 0 | |
|
| |
| (1) | Member of the Audit Committee. Dr. Johnson was the Chairman of the Audit Committee and Mr. Kearns was the Deputy Chairman of the Audit Committee during the relevant period. |
| |
| (2) | Member of the Insurance Committee. Mr. Bozic was the Chairman of the Insurance Committee. Prior to July 1, 2006, Mr. Nugent was the Chairman of the Insurance Committee during the relevant period. |
| |
| (3) | Member of the Governance Committee. Mr. Reid was the Chairman of the Governance Committee during the relevant period. |
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| (4) | Includes amounts deferred at the election of the Trustee under the DC Plan. |
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| (5) | As of July 1, 2006, Charles A. Fiumefreddo resigned as Chairman of the Boards of the Retail Funds and the Institutional Funds and was succeeded by Mr. Nugent. As a result, Mr. Nugent receives the annual fee for his services as Chairman of the Board of the Retail Funds and the Institutional Funds from that date. |
| |
| (6) | Because the funds in the Fund Complex have different fiscal year ends, the amounts shown in these columns are presented on a calendar year basis. |
[As of December 31, 2005, the Trustees and officers of Government Income as a group owned beneficially and of record less than 1% of Government Income’s outstanding shares.]
Portfolio Turnover
The significant changes in turnover rates for Government Income for 2004 and 2005 were a result of [ ].
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Investment Advisory and Other Services
Government Income has retained the Investment Adviser to provide investment advisory services. The Investment Adviser is a wholly-owned subsidiary of Morgan Stanley, a preeminent global financial services firm that maintains leading market positions in each of its three primary businesses: securities, asset management and credit services. Morgan Stanley is a full service securities firm engaged in securities trading and brokerage activities, as well as providing investment banking, research and analysis, financing and financial advisory services. The Investment Adviser's address is 1221 Avenue of the Americas, New York, NY 10020. For the fiscal years ended September 30, 2006, 2005 and 2004, Government Income paid the Investment Adviser $[ ], $[ ] and $[ ], respectively, in advisory fees.
For additional information about Government Income's investment adviser, independent registered public accounting firm and other services provided to Government Income, see ‘‘Investment Advisory Agreement Approval’’ and ‘‘Report of Independent Registered Public Accounting Firm’’ in Government Income's Annual Report for its fiscal year ended September 30, 2006.
Custodian, Dividend Disbursing and Transfer Agent
The Bank of New York, 100 Church Street, New York, NY 10286, is Government Income's custodian and has custody-of all securities and cash of Government Income. The custodian, among other things, attends to the collection of principal and income and payment for collection of proceeds of securities bought and sold by Government Income. Any of Government Income's cash balances with the Custodian in excess of $100,000 are unprotected by federal deposit insurance. Such balances may, at times, be substantial.
Morgan Stanley Trust, Harborside Financial Center, Plaza Two, Jersey City, NJ 07311, an affiliate of the Investment Adviser and the Administrator, is the dividend disbursing and transfer agent of Government Income. Morgan Stanley Trust charges Government Income an annual per shareholder account fee and is reimbursed for its out-of-pocket expenses.
Codes of Ethics
Government Income’s Board of Trustees approved a Code of Ethics under Rule 17j-1 of the 1940 Act that covers the Fund. The Investment Adviser is subject to a Codes of Ethics under Rule 17j-1. Each Code of Ethics establishes policies and procedures for personal investing by employees and restricts certain transactions. Employees subject to the Code of Ethics may invest in securities for their personal investment accounts, including securities that may be purchased or held by the Fund.
The Codes of Ethics may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information about the SEC’s Public Reference Room may be obtained by calling the SEC at (202) 551-8090. The Codes of Ethics also may be available on the Edgar Database on the SEC’s website, http://www.sec.gov, or be obtained, after paying a duplicating fee, by electronic request to publicinfo@sec.gov, or by writing to: SEC’s Public Reference Section, 100 F Street, NE, Washington, D.C. 20549. This reference to the website does not incorporate the contents of the website into this Prospectus.
Proxy Voting Policies
The Board of Trustees believes that the voting of proxies on securities to be held by Government Income is an important element of the overall investment process. As such, the Trustees have delegated the responsibility to vote such proxies to Morgan Stanley Investment Management and its advisory affiliates (‘‘MSIM’’). The following is a summary of MSIM's Proxy Voting Policy (‘‘Proxy Policy’’).
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MSIM will use its best efforts to vote proxies on securities held in Government Income as part of its authority to manage, acquire and dispose of Fund assets. In this regard, the Investment Adviser has formed a Proxy Review Committee (‘‘Committee’’) comprised of senior investment professionals that is responsible for creating and implementing the Proxy Policy. The Committee will meet monthly but may meet more frequently as conditions warrant. The Proxy Policy provides that MSIM will vote proxies in the best interests of clients consistent with the objective of maximizing long-term investment returns. The Proxy Policy provides that MSIM will generally vote proxies in accordance with pre-determined guidelines contained in the Proxy Policy. MSIM may vote in a manner that is not consistent with the pre-determined guidelines, provided that the vote is approved by the Committee.
The Proxy Policy provides that, unless otherwise determined by the Committee, votes will be cast in the manner described below:
| |
| – | Generally, routine proposals will be voted in support of management. |
| |
| – | With regard to the election of trustees, where no conflict exists and where no specific governance deficiency has been noted, votes will be cast in support of management's nominees. |
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| – | MSIM will vote in accordance with management's recommendation with respect to certain non-routine proposals (i.e., reasonable capitalization changes, stock repurchase programs, stock splits, certain compensation-related matters, certain anti-takeover measures, etc.). |
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| – | MSIM will vote against certain non-routine proposals (i.e., unreasonable capitalization changes, establishment of cumulative voting rights for the election of trustees, requiring supermajority stockholder votes to amend by-laws, indemnification of auditors, etc.) (notwithstanding management support). |
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| – | MSIM will vote in its discretion with respect to certain non-routine proposals (i.e., mergers, acquisitions, take-overs, spin-offs, etc.) which may have a substantive financial or best interest impact on an issuer. |
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| – | MSIM will vote for certain proposals it believes call for reasonable charter provisions or corporate governance practices (i.e., requiring auditors to attend annual stockholder meetings, requiring that members of compensation, nominating and audit committees be independent, reducing or eliminating supermajority voting requirements, etc.). |
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| – | MSIM will vote against certain proposals it believes call for unreasonable charter provisions or corporate governance practices (i.e., proposals to declassify boards, proposals to require a company to prepare reports that are costly to provide or that would require duplicative efforts or expenditure that are of a non-business nature or would provide no pertinent information from the perspective of institutional stockholders, etc.). |
| |
| – | Certain other proposals (i.e., proposals requiring trustees to own large amounts of company stock to be eligible for election, proposals requiring diversity of board membership relating to broad based social, religious or ethnic groups, etc.) generally are evaluated by the Committee based on the nature of the proposal and the likely impact on stockholders. |
While the proxy voting process is well-established in the United States and other developed markets with a number of tools and services available to assist an investment manager, voting proxies of non-U.S. companies located in certain jurisdictions, particularly emerging markets, may involve a number of problems that may restrict or prevent MSIM's ability to vote such proxies. As a result, non-U.S. proxies will be voted on a best efforts basis only, after weighing the costs and benefits to Government Income of voting such proxies.
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Conflicts of Interest. If the Committee determines that an issue raises a potential material conflict of interest, or gives rise to the appearance of a potential material conflict of interest, the Committee will request a special committee to review, and recommend a course of action with respect to, the conflict in question.
Third Parties. To assist in its responsibility for voting proxies, MSIM may retain third-party services as experts in the proxy voting and corporate governance area. These proxy research providers are referred to herein as ‘‘Research Providers.’’ The services provided to MSIM by the Research Providers include in-depth research, global issuer analysis, and voting recommendations. While MSIM may review and utilize recommendations made by the Research Providers in making proxy voting decisions, it is in no way obligated to follow such recommendations. In addition to research, Institutional Shareholder Services provides vote execution, reporting, and recordkeeping. The Committee carefully monitors and supervises the services provided by the Research Providers.
Further Information. A copy of the Proxy Policy, as well as Government Income's most recent proxy voting record to be filed with the Securities and Exchange Commission, will be available without charge on our web site at www.morganstanley.com. Government Income's proxy voting record will also be available without charge on the Securities and Exchange Commission's web site at www.sec.gov.
For additional information about the voting of proxies held by Government Income, see ‘‘Proxy Voting Policy and Procedures and Proxy Voting Record’’ in Government Income's Annual Report for its fiscal year ended September 30, 2006.
Portfolio Managers
Other Accounts Managed by the Portfolio Managers. As of September 30, 2006, Mr. Richard managed [ ] mutual funds with a total of $[ ] in assets; [ ] pooled investment vehicles other than mutual funds with a total of $[ ] in assets; and [ ] other accounts with a total of $[ ] in assets. Mr. Singh managed [ ] mutual funds with a total of $[ ] in assets; [ ] pooled investment vehicles other than mutual funds with a total of $[ ] in assets; and [ ] other accounts with a total of $[ ] in assets. Mr. Luo managed [ ] mutual funds with a total of $[ ] in assets; [ ] pooled investment vehicles other than mutual funds with a total of $[ ] in assets; and [ ] other accounts with a total of $[ ] in assets.
Because the portfolio managers may manage assets for other investment companies, pooled investment vehicles and/or other accounts (including institutional clients, pension plans and certain high net worth individuals), there may be an incentive to favor one client over another resulting in conflicts of interest. For instance, the Investment Adviser may receive fees from certain accounts that are higher than the fee it receives from Government Income, or it may receive a performance-based fee on certain accounts. In those instances, the portfolio managers may have an incentive to favor the higher and/or performance-based fee accounts over Government Income. The Investment Adviser has adopted trade allocation and other policies and procedures that it believes are reasonably designed to address these and other conflicts of interest.
Portfolio Manager Compensation Structure. The portfolio managers receive a combination of base compensation and discretionary compensation, comprising a cash bonus and several deferred compensation programs described below. The methodology used to determine portfolio manager compensation is applied across all accounts managed by the portfolio managers.
Base Salary Compensation. Generally, the portfolio managers receive base salary compensation based on the level of his or her position with the Investment Adviser.
B-14
Discretionary Compensation. In addition to base compensation, the portfolio managers may receive discretionary compensation. Discretionary compensation can include:
| | |
| • | Morgan Stanley’s Equity Incentive Compensation Program (EICP) Awards — a mandatory program that defers a portion of discretionary year-end compensation into restricted stock units or other awards based on Morgan Stanley common stock that are subject to vesting and other conditions; |
| | |
| • | Investment Management Deferred Compensation Plan (IMDCP) Awards — a mandatory program that defers a portion of discretionary year-end compensation and notionally invests it in designated funds advised by the Investment Adviser or its affiliates. The award is subject to vesting and other conditions. A portfolio manager must notionally invest a minimum of 25% to a maximum of 75% of the IMDCP deferral into a combination of the designated funds he or she manages that are included in the IMDCP fund menu, which may or may not include the Fund; |
| | |
| • | Voluntary Deferred Compensation Plans — voluntary programs that permit certain employees to elect to defer a portion of their discretionary year-end compensation and directly or notionally invest the deferred amount: (1) across a range of designated investment funds, including funds advised by the Investment Adviser or its affiliates; and/or (2) in Morgan Stanley stock units. |
Several factors determine discretionary compensation, which can vary by portfolio management team and circumstances. In order of relative importance, these factors include:
| | |
| • | Investment performance. A portfolio manager’s compensation is linked to the pre-tax investment performance of the funds/accounts managed by the portfolio manager. Investment performance is calculated for the one-, three- and five-year periods measured against a fund’s/account’s primary benchmark (as set forth in the fund’s prospectus), indices and/or peer groups where applicable. Generally, the greatest weight is placed on the three- and five-year periods; |
| | |
| • | Revenues generated by the investment companies, pooled investment vehicles and other accounts managed by the portfolio manager; |
| | |
| • | Contribution to the business objectives of the Investment Adviser; |
| | |
| • | The dollar amount of assets managed by the portfolio manager; |
| | |
| • | Market compensation survey research by independent third parties; |
| | |
| • | Other qualitative factors, such as contributions to client objectives; and |
| | |
| • | Performance of Morgan Stanley and Morgan Stanley Investment Management, and the overall performance of the investment teams of which each portfolio manager is a member. |
Securities Ownership of Portfolio Managers. As of [ ], 2006, Messrs. Richard, Singh and Luo beneficially owned securities in Government Income in the amount of [ ], [ ] and [ ], respectively.
Description of Fund Shares
Government Income’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest of $0.01 par value.
Pursuant to the Declaration of Trust, Government Income will hold annual meetings of shareholders. Shareholders are entitled to one vote for each share held and to vote in the election of Trustees and on
B-15
other matters submitted to meetings of shareholders. No material amendment may be made to Government Income’s Declaration of Trust without the affirmative vote of a majority (or greater) of its shares. Under certain circumstances, the Trustees may be removed by action of the Trustees. The shareholders also have the right under certain circumstances to remove the Trustees. Shares have no pre-emptive or conversion rights. Shares when issued are fully paid and non-assessable. Government Income’s Declaration of Trust permits the Trustees to divide or combine the shares into a greater or lesser number of shares without thereby changing the proportionate beneficial interests in Government Income. Each share represents an equal proportionate interest in Government Income with each other share.
Government Income is an entity of the type commonly known as a ‘‘Massachusetts business trust.’’ Under Massachusetts law, shareholders of such a trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of Government Income and provides for indemnification and reimbursement of expenses of Government Income’s property for any shareholder held personally liable for the obligations of Government Income. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which Government Income itself would be unable to meet its obligations.
The Declaration of Trust further provides that obligations of Government Income are not binding upon the Trustees individually, but only upon the property of Government Income and that the Trustees will not be liable for errors of judgment or mistakes of fact or law, but nothing in the Declaration of Trust protects a Trustee against any liability to which he would otherwise be subject by reason of willful malfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office.
Purchase and Pricing of Shares
For additional information about the purchase of Government Income’s shares and the discussion of net asset value, see Government Income’s Annual Report for the fiscal year ended September 30, 2006.
Brokerage Allocation and Other Practices
Subject to the general supervision of the Trustees of Government Income, the Investment Adviser is responsible for the investment decisions and the placing of the orders for portfolio transactions for Government Income. Government Income's portfolio transactions will occur primarily with issuers, underwriters or major dealers in U.S. Government securities acting as principals. Such transactions are normally on a net basis and do not involve payment of brokerage commissions. The cost of securities purchased from an underwriter usually includes a commission paid by the issuer to the underwriters; transactions with dealers normally reflect the spread between bid and asked prices.
For the fiscal year ended September 30, 2004, 2005 and 2006, Government Income paid a total of $[ ]. $[ ] and $[ ], respectively, in brokerage commissions.
The policy of Government Income, regarding purchases and sales of securities for its portfolio, is that primary consideration will be given to obtaining the most favorable prices and efficient execution of transactions. In seeking to implement Government Income’s policies, the Investment Adviser effects transactions with those brokers and dealers who the Investment Adviser believes provide the most favorable prices and who are capable of providing efficient executions. If the Investment Adviser believes such price and execution are obtainable from more than one broker or dealer, it may give consideration to placing portfolio transactions with those brokers and dealers who also furnish research and other services to Government Income or the Investment Adviser.
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Pursuant to an order of the Securities and Exchange Commission, Government Income may effect principal transactions in certain money market instruments with Morgan Stanley DW Inc. (‘‘Morgan Stanley DW’’). The Fund will limit its transactions with Morgan Stanley DW to U.S. Government securities. The transactions will be effected with Morgan Stanley only when the price available from Morgan Stanley DW is better than that available from other dealers.
During the fiscal years ended September 30, 2004, 2005 and 2006, Government Income [did not] effect any principal transactions with Morgan Stanley DW.
Brokerage transactions in securities listed on exchanges or admitted to unlisted trading privileges may be effected through Morgan Stanley DW, Morgan Stanley & Co. and other affiliated brokers and dealers. In order for an affiliated broker or dealer to effect any portfolio transactions on an exchange for Government Income, the commissions, fees or other remuneration received by the affiliated broker or dealer must be reasonable and fair compared to the commissions, fees or other remuneration paid to other brokers in connection with comparable transactions involving similar securities being purchased or sold on an exchange during a comparable period of time. This standard would allow the affiliated broker or dealer to receive no more than the remuneration which would be expected to be received by an unaffiliated broker in a commensurate arm's-length transaction. Furthermore, the Trustees, including the Independent Trustees, have adopted procedures which are reasonably designed to provide that any commissions, fees or other remuneration paid to an affiliated broker or dealer are consistent with the foregoing standard.
Government Income does not reduce the management fee it pays to the Investment Adviser by any amount of the brokerage commissions it may pay to an affiliated broker or dealer. During the fiscal years ended September 30, 2004, 2005 and 2006, Government Income did not effect any securities transactions through an affiliated broker or dealer.
Dividends, Distributions and Tax Status
It is Government Income’s policy, which may be changed by the Board of Trustees, to pay monthly dividends to shareholders from net investment income of Government Income. Government Income intends to distribute all of its net investment income on an annual basis. Government Income will distribute all of its net realized long-term and short-term capital gains, if any, at least once per year but it may make such distributions on a more frequent basis to comply with the distribution requirements of the Code.
All registered holders of shares of Government Income (other than brokers and nominees of banks or other financial institutions) are automatically included in Government Income’s automatic Dividend Reinvestment Plan (the ‘‘Plan’’), unless they elect to the contrary at the time they purchase shares of Government Income. All distributions under the Plan are automatically reinvested in shares of Government Income in full and fractional shares. Shareholders who elect not to participate in the Plan will receive all distributions in cash paid by check mailed directly to shareholders of record.
For additional information about the tax status of Government Income, see Government Income’s Annual Report for the fiscal year ended September 30, 2006.
Performance Data
For additional information about Government Income's performance, see ‘‘Financial Statements’’ in Government Income's Annual Report for its fiscal year ended September 30, 2006.
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FINANCIAL STATEMENTS
Government Securities’ most recent audited financial statements are set forth in Government Securities’ Annual Report for the fiscal year ended December 31, 2005. A copy of the Annual Report accompanies, and [is incorporated by reference] in, this Statement of Additional Information. Government Income's most recent audited financial statements are set forth in Government Income's Annual Report for its fiscal year ended September 30, 2006, which [is incorporated by reference] in this Statement of Additional Information.
Shown below are Financial Statements for both Government Income and Government Securities and Pro Forma Financial Statements for the Combined Fund at September 30, 2006, as though the reorganization occurred as of that date. The first table presents Portfolio of Investments (unaudited) for both Government Income and Government Securities and pro forma figures for the Combined Fund. The second table presents Statements of Assets and Liabilities (unaudited) for both Government Income and Government Securities and pro forma figures for the Combined Fund. The third table presents Statements of Operations (unaudited) for both Government Income and Government Securities and pro forma figures for the Combined Fund. The tables are followed by the Notes to the Pro Forma Financial Statements (unaudited).
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MORGAN STANLEY U.S. GOVERNMENT SECURITIES TRUST
PRO FORMA PORTFOLIO OF INVESTMENTS AS OF SEPTEMBER 30, 2006
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Morgan Stanley
U.S. Government Securities Trust | | | Morgan Stanley
Government Income Trust | | | Combined Fund |
| | | | Coupon
Rate | | | Principal
Amount in
Thousands | | | Value | | | Principal
Amount in
Thousands | | | Value | | | Principal
Amount in
Thousands | | | Value |
| U.S. Government Obligations (46.1%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury Bonds (22.2%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 02/15/29 | | | | | 5.25 | | | | | | — | | | | | | — | | | | | $ | 5,000 | | | | | $ | 5,288,675 | | | | | $ | 5,000 | | | | | $ | 5,288,675 | |
| 08/15/29 | | | | | 6.125 | | | | | $ | 19,500 | | | | | $ | 22,993,250 | | | | | | — | | | | | | — | | | | | | 19,500 | | | | | | 22,993,250 | |
| 08/15/27 | | | | | 6.375 | | | | | | 99,000 | | | | | | 118,877,418 | | | | | | 500 | | | | | | 600,391 | | | | | | 99,500 | | | | | | 119,477,809 | |
| 02/15/27 | | | | | 6.625 | | | | | | 153,000 | | | | | | 188,190,153 | | | | | | — | | | | | | — | | | | | | 153,000 | | | | | | 188,190,153 | |
| 02/15/25 | | | | | 7.625 | | | | | | 84,000 | | | | | | 112,225,344 | | | | | | 6,300 | | | | | | 8,416,901 | | | | | | 90,300 | | | | | | 120,642,245 | |
| 08/15/21 | | | | | 8.125 | | | | | | — | | | | | | — | | | | | | 27,200 | | | | | | 36,656,270 | | | | | | 27,200 | | | | | | 36,656,270 | |
| 02/15/20 | | | | | 8.50 | | | | | | — | | | | | | — | | | | | | 7,840 | | | | | | 10,686,289 | | | | | | 7,840 | | | | | | 10,686,289 | |
| 08/15/20 | | | | | 8.75 | | | | | | 65,725 | | | | | | 91,742,898 | | | | | | 7,240 | | | | | | 10,106,026 | | | | | | 72,965 | | | | | | 101,848,924 | |
| 02/15/15 | | | | | 11.25 | | | | | | 4,750 | | | | | | 6,910,138 | | | | | | — | | | | | | — | | | | | | 4,750 | | | | | | 6,910,138 | |
| | | | | | | | | | | | | | | | | | 540,939,201 | | | | | | | | | | | | 71,754,552 | | | | | | | | | | | | 612,693,753 | |
| U.S. Treasury Notes (23.9%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 05/15/07 | | | | | 3.125 | | | | | | — | | | | | | — | | | | | | 15,000 | | | | | | 14,833,605 | | | | | | 15,000 | | | | | | 14,833,605 | |
| 11/15/06 | | | | | 3.50 | | | | | | 300,000 | | | | | | 299,578,200 | | | | | | 3,500 | | | | | | 3,495,079 | | | | | | 303,500 | | | | | | 303,073,279 | |
| 02/15/13 | | | | | 3.875 | | | | | | 277,210 | | | | | | 266,349,189 | | | | | | 7,980 | | | | | | 7,667,352 | | | | | | 285,190 | | | | | | 274,016,541 | |
| 05/15/14 | | | | | 4.75 | | | | | | 55,000 | | | | | | 55,483,450 | | | | | | 8,000 | | | | | | 8,070,320 | | | | | | 63,000 | | | | | | 63,553,770 | |
| 06/30/11 | | | | | 5.125 | | | | | | — | | | | | | — | | | | | | 4,000 | | | | | | 4,089,532 | | | | | | 4,000 | | | | | | 4,089,532 | |
| | | | | | | | | | | | | | | | | | 621,410,839 | | | | | | | | | | | | 38,155,888 | | | | | | | | | | | | 659,566,727 | |
| Total U.S. Government Obligations (Cost $1,153,387,350, $105,797,044 and $1,259,184,394, respectively) | | | | | | | | | | | | | | | | | 1,162,350,040 | | | | | | | | | | | | 109,910,440 | | | | | | | | | | | | 1,272,260,480 | |
| U.S. Government Agencies – Mortgage – Backed Securities (19.8%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal Home Loan Mortgage Corp. (0.5%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| * | | | | | 4.50 | | | | | | — | | | | | | — | | | | | | 3,500 | | | | | | 3,271,406 | | | | | | 3,500 | | | | | | 3,271,406 | |
| * | | | | | 5.50 | | | | | | — | | | | | | — | | | | | | 1,700 | | | | | | 1,698,938 | | | | | | 1,700 | | | | | | 1,698,938 | |
| 05/01/21 – 09/01/21 | | | | | 5.50 | | | | | | — | | | | | | — | | | | | | 6,050 | | | | | | 6,048,305 | | | | | | 6,050 | | | | | | 6,048,305 | |
| 07/01/28 – 02/01/33 | | | | | 6.50 | | | | | | — | | | | | | — | | | | | | 566 | | | | | | 578,597 | | | | | | 566 | | | | | | 578,597 | |
| 10/01/26 – 05/01/33 | | | | | 7.50 | | | | | | — | | | | | | — | | | | | | 1,905 | | | | | | 1,973,797 | | | | | | 1,905 | | | | | | 1,973,797 | |
| 11/01/23 – 02/01/31 | | | | | 8.00 | | | | | | — | | | | | | — | | | | | | 273 | | | | | | 287,149 | | | | | | 273 | | | | | | 287,149 | |
| 01/01/19 – 02/01/19 | | | | | 9.50 | | | | | | — | | | | | | — | | | | | | 429 | | | | | | 464,610 | | | | | | 429 | | | | | | 464,610 | |
| 10/01/09 – 08/01/20 | | | | | 10.00 | | | | | | — | | | | | | — | | | | | | 558 | | | | | | 614,310 | | | | | | 558 | | | | | | 614,310 | |
| 08/01/14 – 05/01/19 | | | | | 10.50 | | | | | | — | | | | | | — | | | | | | 303 | | | | | | 336,466 | | | | | | 303 | | | | | | 336,466 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 15,273,578 | | | | | | | | | | | | 15,273,578 | |
|
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Morgan Stanley
U.S. Government Securities Trust | | | Morgan Stanley
Government Income Trust | | | Combined Fund |
| | | | Coupon
Rate | | | Principal
Amount in
Thousands | | | Value | | | Principal
Amount in
Thousands | | | Value | | | Principal
Amount in
Thousands | | | Value |
| Federal Home Loan Mortgage Corp. ARM (0.1%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 07/01/34 | | | | | 3.518 | | | | | | — | | | | | | — | | | | | | 599 | | | | | | 588,432 | | | | | | 599 | | | | | | 588,432 | |
| 08/01/34 | | | | | 4.161 | | | | | | — | | | | | | — | | | | | | 1,212 | | | | | | 1,205,608 | | | | | | 1,212 | | | | | | 1,205,608 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,794,040 | | | | | | | | | | | | 1,794,040 | |
| Federal National Mortgage Assoc. (1.3%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 01/01/08 | | | | | 3.92 | | | | | | — | | | | | | — | | | | | | 1,800 | | | | | | 1,776,821 | | | | | | 1,800 | | | | | | 1,776,821 | |
| 06/01/29 – 02/01/33 | | | | | 6.50 | | | | | | — | | | | | | — | | | | | | 3,377 | | | | | | 3,453,652 | | | | | | 3,377 | | | | | | 3,453,652 | |
| 10/01/13 – 10/01/35 | | | | | 7.00 | | | | | | — | | | | | | — | | | | | | 10,412 | | | | | | 10,720,578 | | | | | | 10,412 | | | | | | 10,720,578 | |
| * | | | | | 7.00 | | | | | | — | | | | | | — | | | | | | 12,300 | | | | | | 12,633,063 | | | | | | 12,300 | | | | | | 12,633,063 | |
| 01/01/22 – 09/01/35 | | | | | 7.50 | | | | | | — | | | | | | — | | | | | | 3,668 | | | | | | 3,802,870 | | | | | | 3,668 | | | | | | 3,802,870 | |
| 12/01/21 – 02/01/32 | | | | | 8.00 | | | | | | — | | | | | | — | | | | | | 2,255 | | | | | | 2,384,092 | | | | | | 2,255 | | | | | | 2,384,092 | |
| 07/01/24 – 06/01/25 | | | | | 8.50 | | | | | | — | | | | | | — | | | | | | 319 | | | | | | 342,938 | | | | | | 319 | | | | | | 342,938 | |
| 09/01/16 – 04/01/21 | | | | | 9.00 | | | | | | — | | | | | | — | | | | | | 31 | | | | | | 32,965 | | | | | | 31 | | | | | | 32,965 | |
| 09/01/19 – 01/01/21 | | | | | 9.50 | | | | | | — | | | | | | — | | | | | | 85 | | | | | | 92,764 | | | | | | 85 | | | | | | 92,764 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 35,239,743 | | | | | | | | | | | | 35,239,743 | |
| Federal National Mortgage Assoc. ARM (1.9%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 07/01/34 | | | | | 3.604 | | | | | | — | | | | | | — | | | | | | 636 | | | | | | 635,516 | | | | | | 636 | | | | | | 635,516 | |
| 09/01/34 | | | | | 4.12 | | | | | | — | | | | | | — | | | | | | 764 | | | | | | 757,176 | | | | | | 764 | | | | | | 757,176 | |
| 10/01/34 | | | | | 4.126 | | | | | | — | | | | | | — | | | | | | 795 | | | | | | 801,352 | | | | | | 795 | | | | | | 801,352 | |
| 02/01/34 | | | | | 4.323 | | | | | | — | | | | | | — | | | | | | 2,351 | | | | | | 2,334,314 | | | | | | 2,351 | | | | | | 2,334,314 | |
| 10/01/34 | | | | | 4.378 | | | | | | — | | | | | | — | | | | | | 648 | | | | | | 646,595 | | | | | | 648 | | | | | | 646,595 | |
| 08/01/36 | | | | | 4.541 | | | | | | — | | | | | | — | | | | | | 1,495 | | | | | | 1,538,459 | | | | | | 1,495 | | | | | | 1,538,459 | |
| 01/01/35 | | | | | 4.732 | | | | | | — | | | | | | — | | | | | | 8,335 | | | | | | 8,502,436 | | | | | | 8,335 | | | | | | 8,502,436 | |
| 07/01/33 | | | | | 5.834 | | | | | | — | | | | | | — | | | | | | 971 | | | | | | 985,069 | | | | | | 971 | | | | | | 985,069 | |
| 01/01/36 | | | | | 6.417 | | | | | | — | | | | | | — | | | | | | 5,804 | | | | | | 6,002,548 | | | | | | 5,804 | | | | | | 6,002,548 | |
| 01/01/36 – 03/01/36 | | | | | 6.42 | | | | | | — | | | | | | — | | | | | | 8,681 | | | | | | 8,978,124 | | | | | | 8,681 | | | | | | 8,978,124 | |
| 03/01/36 | | | | | 6.479 | | | | | | — | | | | | | — | | | | | | 3,213 | | | | | | 3,323,110 | | | | | | 3,213 | | | | | | 3,323,110 | |
| 07/01/36 | | | | | 6.731 | | | | | | — | | | | | | — | | | | | | 2,967 | | | | | | 3,051,302 | | | | | | 2,967 | | | | | | 3,051,302 | |
| 05/01/36 | | | | | 6.905 | | | | | | — | | | | | | — | | | | | | 3,013 | | | | | | 3,118,862 | | | | | | 3,013 | | | | | | 3,118,862 | |
| 04/01/36 | | | | | 6.921 | | | | | | — | | | | | | — | | | | | | 5,834 | | | | | | 6,076,506 | | | | | | 5,834 | | | | | | 6,076,506 | |
| 04/01/36 | | | | | 6.939 | | | | | | — | | | | | | — | | | | | | 3,796 | | | | | | 3,928,640 | | | | | | 3,796 | | | | | | 3,928,640 | |
| 03/01/36 | | | | | 7.256 | | | | | | — | | | | | | — | | | | | | 2,036 | | | | | | 2,107,695 | | | | | | 2,036 | | | | | | 2,107,695 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 52,787,704 | | | | | | | | | | | | 52,787,704 | |
| Government National Mortgage Assoc. I (13.2%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 08/20/34 | | | | | 5.25 | | | | | | 3,962 | | | | | | 3,982,198 | | | | | | — | | | | | | — | | | | | | 3,962 | | | | | | 3,982,198 | |
| 08/20/34 | | | | | 5.50 | | | | | | 1,559 | | | | | | 1,576,081 | | | | | | — | | | | | | — | | | | | | 1,559 | | | | | | 1,576,081 | |
| 02/15/28 – 09/20/34 | | | | | 6.00 | | | | | | 25,932 | | | | | | 26,283,956 | | | | | | — | | | | | | — | | | | | | 25,932 | | | | | | 26,283,956 | |
| 03/15/26 – 03/15/29 | | | | | 6.00 | | | | | | — | | | | | | — | | | | | | 1,415 | | | | | | 1,437,000 | | | | | | 1,415 | | | | | | 1,437,000 | |
| * | | | | | 6.50 | | | | | | 91,900 | | | | | | 94,254,938 | | | | | | — | | | | | | — | | | | | | 91,900 | | | | | | 94,254,938 | |
| 03/15/14 – 07/15/31 | | | | | 6.50 | | | | | | 31,570 | | | | | | 32,350,252 | | | | | | — | | | | | | — | | | | | | 31,570 | | | | | | 32,350,252 | |
| 04/15/17 – 03/15/27 | | | | | 7.00 | | | | | | 78,152 | | | | | | 80,739,678 | | | | | | — | | | | | | — | | | | | | 78,152 | | | | | | 80,739,678 | |
|
B-20
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Morgan Stanley
U.S. Government Securities Trust | | | Morgan Stanley
Government Income Trust | | | Combined Fund |
| | | | Coupon
Rate | | | Principal
Amount in
Thousands | | | Value | | | Principal
Amount in
Thousands | | | Value | | | Principal
Amount in
Thousands | | | Value |
| 06/15/28 – 08/15/29 | | | | | 6.50 | | | | | | — | | | | | | — | | | | | | 596 | | | | | | 613,143 | | | | | | 596 | | | | | | 613,143 | |
| 03/15/07 – 08/15/34 | | | | | 7.50 | | | | | | 61,480 | | | | | | 64,006,590 | | | | | | — | | | | | | — | | | | | | 61,480 | | | | | | 64,006,590 | |
| 12/15/22 – 10/15/29 | | | | | 7.50 | | | | | | — | | | | | | — | | | | | | 523 | | | | | | 544,531 | | | | | | 523 | | | | | | 544,531 | |
| 06/15/16 – 01/15/30 | | | | | 8.00 | | | | | | — | | | | | | — | | | | | | 742 | | | | | | 783,071 | | | | | | 742 | | | | | | 783,071 | |
| 10/15/16 – 09/15/31 | | | | | 8.00 | | | | | | 8,625 | | | | | | 9,143,432 | | | | | | — | | | | | | — | | | | | | 8,625 | | | | | | 9,143,432 | |
| 05/15/16 – 11/15/24 | | | | | 8.50 | | | | | | 15,536 | | | | | | 16,679,796 | | | | | | — | | | | | | — | | | | | | 15,536 | | | | | | 16,679,796 | |
| 04/15/21 – 11/15/24 | | | | | 8.50 | | | | | | — | | | | | | — | | | | | | 1,272 | | | | | | 1,374,590 | | | | | | 1,272 | | | | | | 1,374,590 | |
| 10/15/08 – 08/15/21 | | | | | 9.00 | | | | | | 11,661 | | | | | | 12,507,217 | | | | | | — | | | | | | — | | | | | | 11,661 | | | | | | 12,507,217 | |
| 06/15/17 – 02/15/25 | | | | | 9.00 | | | | | | — | | | | | | — | | | | | | 415 | | | | | | 448,569 | | | | | | 415 | | | | | | 448,569 | |
| 10/15/09 – 12/15/20 | | | | | 9.50 | | | | | | 7,208 | | | | | | 7,840,777 | | | | | | — | | | | | | — | | | | | | 7,208 | | | | | | 7,840,777 | |
| 12/15/19 – 08/15/20 | | | | | 9.50 | | | | | | — | | | | | | — | | | | | | 42 | | | | | | 45,419 | | | | | | 42 | | | | | | 45,419 | |
| 11/15/09 – 11/15/20 | | | | | 10.00 | | | | | | 9,627 | | | | | | 10,689,710 | | | | | | — | | | | | | — | | | | | | 9,627 | | | | | | 10,689,710 | |
| 06/15/10 – 06/15/15 | | | | | 12.50 | | | | | | 47 | | | | | | 52,141 | | | | | | — | | | | | | — | | | | | | 47 | | | | | | 52,141 | |
| | | | | | | | | | | | | | | | | | 360,106,766 | | | | | | | | | | | | 5,246,323 | | | | | | | | | | | | 365,353,089 | |
| Government National Mortgage Assoc. II (1.6%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 11/20/33 – 04/20/36 | | | | | 4.00 | | | | | | 37,059 | | | | | | 36,476,571 | | | | | | — | | | | | | — | | | | | | 37,059 | | | | | | 36,476,571 | |
| 04/20/36 | | | | | 4.50 | | | | | | 318 | | | | | | 316,429 | | | | | | — | | | | | | — | | | | | | 318 | | | | | | 316,429 | |
| 02/20/32 | | | | | 5.00 | | | | | | 208 | | | | | | 208,832 | | | | | | — | | | | | | — | | | | | | 208 | | | | | | 208,832 | |
| 06/20/32 | | | | | 5.375 | | | | | | 546 | | | | | | 548,069 | | | | | | — | | | | | | — | | | | | | 546 | | | | | | 548,069 | |
| 01/20/24 – 02/20/24 | | | | | 6.50 | | | | | | 2,662 | | | | | | 2,727,607 | | | | | | — | | | | | | — | | | | | | 2,662 | | | | | | 2,727,607 | |
| 03/20/26 – 05/20/29 | | | | | 6.50 | | | | | | — | | | | | | — | | | | | | 717 | | | | | | 735,634 | | | | | | 717 | | | | | | 735,634 | |
| 03/20/26 – 07/20/29 | | | | | 7.00 | | | | | | 2,025 | | | | | | 2,084,706 | | | | | | — | | | | | | — | | | | | | 2,025 | | | | | | 2,084,706 | |
| 11/20/29 | | | | | 7.50 | | | | | | — | | | | | | — | | | | | | 49 | | | | | | 50,189 | | | | | | 49 | | | | | | 50,189 | |
| | | | | | | | | | | | | | | | | | 42,362,214 | | | | | | | | | | | | 785,823 | | | | | | | | | | | | 43,148,037 | |
| Government National Mortgage Assoc. GPM I (1.2%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 05/20/34 | | | | | 3.75 | | | | | | 33,478 | | | | | | 32,770,641 | | | | | | — | | | | | | — | | | | | | 33,478 | | | | | | 32,770,641 | |
| 09/15/13 – 07/15/15 | | | | | 12.25 | | | | | | 504 | | | | | | 557,020 | | | | | | — | | | | | | — | | | | | | 504 | | | | | | 557,020 | |
| | | | | | | | | | | | | | | | | | 33,327,661 | | | | | | | | | | | | — | | | | | | | | | | | | 33,327,661 | |
Total U.S. Government Agencies – Mortgage-Backed Securities
(Cost $428,102,846, $110,433,114 and $538,535,960, respectively) | | | | | | | | | | | | | | | | | 435,796,641 | | | | | | | | | | | | 111,127,211 | | | | | | | | | | | | 546,923,852 | |
| U.S. Government Agencies - Bonds & Notes (10.3%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal Home Loan Bank (0.3%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 04/15/09 | | | | | 3.00 | | | | | | — | | | | | | — | | | | | | 10,400 | | | | | | 9,945,114 | | | | | | 10,400 | | | | | | 9,945,114 | |
| Federal Home Loan Mortgage Corp. (0.3%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 09/15/09 | | | | | 6.625 | | | | | | — | | | | | | — | | | | | | 7,550 | | | | | | 7,898,485 | | | | | | 7,550 | | | | | | 7,898,485 | |
|
B-21
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Morgan Stanley
U.S. Government Securities Trust | | | Morgan Stanley
Government Income Trust | | | Combined Fund |
| | | | Coupon
Rate | | | Principal
Amount in
Thousands | | | Value | | | Principal
Amount in
Thousands | | | Value | | | Principal
Amount in
Thousands | | | Value |
| Federal National Mortgage Assoc. (0.1%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 06/15/10 | | | | | 7.125 | | | | | | — | | | | | | — | | | | | | 1,350 | | | | | | 1,451,638 | | | | | | 1,350 | | | | | | 1,451,638 | |
| 01/15/10 | | | | | 7.25 | | | | | | — | | | | | | — | | | | | | 1,550 | | | | | | 1,660,177 | | | | | | 1,550 | | | | | | 1,660,177 | |
| | | | | | | | | | | | | | | | | | — | | | | | | | | | | | | 3,111,815 | | | | | | | | | | | | 3,111,815 | |
| Housing Urban Development Ser 99 - A (1.3%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 08/01/10 | | | | | 6.06 | | | | | | 18,800 | | | | | | 19,054,420 | | | | | | — | | | | | | — | | | | | | 18,800 | | | | | | 19,054,420 | |
| 08/01/11 | | | | | 6.16 | | | | | | 15,290 | | | | | | 15,543,585 | | | | | | — | | | | | | — | | | | | | 15,290 | | | | | | 15,543,585 | |
| | | | | | | | | | | | | | | | | | 34,598,005 | | | | | | | | | | | | — | | | | | | | | | | | | 34,598,005 | |
| Resolution Funding Corp. Zero Coupon Strips (8.2%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 10/15/08 | | | | | 0.00 | | | | | | 74,000 | | | | | | 67,352,358 | | | | | | — | | | | | | — | | | | | | 74,000 | | | | | | 67,352,358 | |
| 01/15/12 | | | | | 0.00 | | | | | | 138,134 | | | | | | 109,158,045 | | | | | | — | | | | | | — | | | | | | 138,134 | | | | | | 109,158,045 | |
| 04/15/12 | | | | | 0.00 | | | | | | 61,607 | | | | | | 48,034,424 | | | | | | — | | | | | | — | | | | | | 61,607 | | | | | | 48,034,424 | |
| | | | | | | | | | | | | | | | | | 224,544,827 | | | | | | | | | | | | — | | | | | | | | | | | | 224,544,827 | |
| Tennessee Valley Authority (0.1%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 05/01/30 | | | | | 7.125 | | | | | | — | | | | | | — | | | | | | 2,235 | | | | | | 2,836,743 | | | | | | 2,235 | | | | | | 2,836,743 | |
| Total U.S. Government Agencies – Bonds & Notes (Cost $254,375,217, $23,998,852 and $278,374,069, respectively) | | | | | | | | | | | | | | | | | 259,142,832 | | | | | | | | | | | | 23,792,157 | | | | | | | | | | | | 282,934,989 | |
| Foreign Government Obligations (1.1%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Egypt Government 09/15/15 | | | | | 4.45 | | | | | | 29,130 | | | | | | 28,158,078 | | | | | | — | | | | | | — | | | | | | 29,130 | | | | | | 28,158,078 | |
| Mexican Fixed Rate Bond (Series M20) (Mexico) 12/05/24 | | | | | 10.00 | | | | | | — | | | | | | — | | | | | | MXN 8,300 | | | | | | 861,532 | | | | | | MXN 8,300 | | | | | | 861,532 | |
| Total Foreign Government Obligations (Cost $28,581,657, $758,453 and $29,340,110, respectively) | | | | | | | | | | | | | | | | | 28,158,078 | | | | | | | | | | | | 861,532 | | | | | | | | | | | | 29,019,610 | |
| U.S. Government Agencies – Collaterized Mortgage Obligations (4.9%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal Home Loan Mortgage Corp. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2778 FV 03/15/34 | | | 5.93‡ | | | | | — | | | | | | — | | | | | $ | 1,299 | | | | | | 1,304,553 | | | | | $ | 1,299 | | | | | | 1,304,553 | |
| Whole Loan 2005 - S001 2A2 09/25/45 | | | 5.48‡ | | | | | — | | | | | | — | | | | | | 1,800 | | | | | | 1,807,153 | | | | | | 1,800 | | | | | | 1,807,153 | |
| Federal National Mortgage Assoc. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2002 – 77 FH 12/18/32 | | | 5.73‡ | | | | | — | | | | | | — | | | | | | 1,802 | | | | | | 1,819,387 | | | | | | 1,802 | | | | | | 1,819,387 | |
| 2006 – 5 2A1 11/25/28 | | | 5.38‡ | | | | | — | | | | | | — | | | | | | 3,738 | | | | | | 3,742,229 | | | | | | 3,738 | | | | | | 3,742,229 | |
| 2006 – 28 1A1 03/25/36 | | | 5.44‡ | | | | | — | | | | | | — | | | | | | 2,905 | | | | | | 2,904,558 | | | | | | 2,905 | | | | | | 2,904,558 | |
| 2006 – 28 1P IO 03/25/36 | | | 0.901‡ | | | | | — | | | | | | — | | | | | | 33,865 | | | | | | 873,078 | | | | | | 33,865 | | | | | | 873,078 | |
| Grantor Trust 2004 – T5 A11 05/28/35 | | | 5.59‡ | | | | | — | | | | | | — | | | | | | 1,340 | | | | | | 1,343,697 | | | | | | 1,340 | | | | | | 1,343,697 | |
|
B-22
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Morgan Stanley
U.S. Government Securities Trust | | | Morgan Stanley
Government Income Trust | | | Combined Fund |
| | | | Coupon
Rate | | | Principal
Amount in
Thousands | | | Value | | | Principal
Amount in
Thousands | | | Value | | | Principal
Amount in
Thousands | | | Value |
| Grantor Trust 2004 – T5 A13 05/28/35 | | | 5.60‡ | | | | | — | | | | | | — | | | | | | 302 | | | | | | 302,455 | | | | | | 302 | | | | | | 302,455 | |
| Whole Loan 2005 – W2 A1 05/25/35 | | | 5.53‡ | | | | | — | | | | | | — | | | | | | 1,852 | | | | | | 1,859,357 | | | | | | 1,852 | | | | | | 1,859,357 | |
| Government National Mortgage Assoc. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2003 – 100 AB 02/20/26 | | | | | 5.00 | | | | | | 36,009 | | | | | | 35,855,433 | | | | | | — | | | | | | — | | | | | | 36,009 | | | | | | 35,855,433 | |
| 2003 – 10 MX (PAC) 06/20/28 | | | | | 5.00 | | | | | | 1,426 | | | | | | 1,422,698 | | | | | | — | | | | | | — | | | | | | 1,426 | | | | | | 1,422,698 | |
| 2006 – 24 PA (PAC) 10/20/35 | | | | | 5.50 | | | | | | 48,652 | | | | | | 48,858,040 | | | | | | — | | | | | | — | | | | | | 48,652 | | | | | | 48,858,040 | |
| 2005 – 37 (IO) 11/16/32 | | | | | 5.50 | | | | | | 7,195 | | | | | | 987,851 | | | | | | — | | | | | | — | | | | | | 7,195 | | | | | | 987,851 | |
| 1999 – 44 FP (PAC) 06/16/27 | | | | | 5.73 | | | | | | 1,691 | | | | | | 1,695,767 | | | | | | — | | | | | | — | | | | | | 1,691 | | | | | | 1,695,767 | |
| 2002 – 55 PD (PAC) 09/20/31 | | | | | 6.00 | | | | | | 5,009 | | | | | | 5,047,451 | | | | | | — | | | | | | — | | | | | | 5,009 | | | | | | 5,047,451 | |
| 2002 – 23 PE (PAC) 04/16/32 | | | | | 6.50 | | | | | | 24,430 | | | | | | 25,463,667 | | | | | | — | | | | | | — | | | | | | 24,430 | | | | | | 25,463,667 | |
| Total U.S. Government Agenices – Collaterized Mortgage Obligations (Cost $119,294,254, $15,937,227 and $135,231,481, respectively) | | | | | | | | | | | | | | | | | 119,330,907 | | | | | | | | | | | | 15,956,467 | | | | | | | | | | | | 135,287,374 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Number of
Contracts | | | | | | Number of
Contracts | | | |
| Put Option Purchased (0.0%) | | | | | | | | | | | | | | | | | | | | | | | | |
| 90 day Euro $ | | | | | | | | | | | | | | | | | | | | | | | | |
| June/2007 @ $94.25 (Cost $0, $63,800 and $63,800, respectively) | | | | | 187 | | | | | | 15,428 | | | | | | 187 | | | | | | 15,428 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Morgan Stanley
U.S. Government Securities Trust | | | Morgan Stanley
Government Income Trust | | | Combined Fund |
| | | | Coupon
Rate | | | Principal
Amount in
Thousands | | | Value | | | Principal
Amount in
Thousands | | | Value | | | Principal
Amount in
Thousands | | | Value |
| Short-Term Investments (a) (21.5%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Government Obligations (19.2%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal Home Loan Banks (11.6%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 10/20/06 | | | | | 5.135 | | | | | | 15,000 | | | | | | 14,957,208 | | | | | | — | | | | | | — | | | | | | 15,000 | | | | | | 14,957,208 | |
| 10/04/06 – 11/01/06 | | | | | 5.145 | | | | | | 207,000 | | | | | | 206,517,513 | | | | | | — | | | | | | — | | | | | | 207,000 | | | | | | 206,517,513 | |
| 10/11/06 | | | | | 5.15 | | | | | | 35,000 | | | | | | 34,944,924 | | | | | | — | | | | | | — | | | | | | 35,000 | | | | | | 34,944,924 | |
| 10/13/06 | | | | | 5.155 | | | | | | 65,000 | | | | | | 64,879,001 | | | | | | — | | | | | | — | | | | | | 65,000 | | | | | | 64,879,001 | |
| | | | | | | | | | | | | | | | | | 321,298,646 | | | | | | | | | | | | — | | | | | | | | | | | | 321,298,646 | |
|
B-23
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Morgan Stanley
U.S. Government Securities Trust | | | Morgan Stanley
Government Income Trust | | | Combined Fund |
| | | | Coupon
Rate | | | Principal
Amount in
Thousands | | | Value | | | Principal
Amount in
Thousands | | | Value | | | Principal
Amount in
Thousands | | | Value |
| Federal Home Loan Mortgage Assoc. (2.9%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 10/03/06 – 10/10/06 | | | | | 5.14 | | | | | | 24,850 | | | | | | 24,834,808 | | | | | | — | | | | | | — | | | | | | 24,850 | | | | | | 24,834,808 | |
| 10/03/06 | | | | | 5.15 | | | | | | 20,200 | | | | | | 20,191,331 | | | | | | — | | | | | | — | | | | | | 20,200 | | | | | | 20,191,331 | |
| 10/03/06 – 10/10/06 | | | | | 5.16 | | | | | | 34,350 | | | | | | 34,301,116 | | | | | | — | | | | | | — | | | | | | 34,350 | | | | | | 34,301,116 | |
| | | | | | | | | | | | | | | | | | 79,327,255 | | | | | | | | | | | | — | | | | | | | | | | | | 79,327,255 | |
| Federal National Mortgage Assoc. (1.8%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 10/02/06 | | | | | 5.13 | | | | | | 50,000 | | | | | | 49,985,750 | | | | | | — | | | | | | — | | | | | | 50,000 | | | | | | 49,985,750 | |
| U.S. Treasury Bills (2.9) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 12/21/06 | | | | | 4.808 | | | | | | 70,630 | | | | | | 69,875,436 | | | | | | — | | | | | | — | | | | | | 70,630 | | | | | | 69,875,436 | |
| 01/11/07 † | | | | | 5.09 | | | | | | 9,100 | | | | | | 8,970,050 | | | | | $ | 800 | | | | | | 788,576 | | | | | | 9,900 | | | | | | 9,758,626 | |
| | | | | | | | | | | | | | | | | | 78,845,486 | | | | | | | | | | | | 788,576 | | | | | | | | | | | | 79,634,062 | |
| Total U.S. Government Agencies & Obligations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Cost $529,510,943, $788,463 and 530,299,406, respectively) | | | | | | | | | | | | | | | | | 529,457,137 | | | | | | | | | | | | 788,576 | | | | | | | | | | | | 530,245,713 | |
| Repurchase Agreement (2.3%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Joint repurchase agreement account due 10/02/06 (dated 09/29/06; proceeds $62,759,837) (b) (Cost $0, $62,732,000 and $62,732,000, respectively) | | | | | 5.325 | | | | | | — | | | | | | — | | | | | | 62,732 | | | | | | 62,732,000 | | | | | | 62,732 | | | | | | 62,732,000 | |
| Total Short-Term Investments (Cost $529,510,943, $63,520,463 and $593,031,406, respectively) | | | | | | | | | | | | | | | | | 529,457,137 | | | | | | | | | | | | 63,520,576 | | | | | | | | | | | | 592,977,713 | |
| Total Investments (Cost $2,513,252,267, $320,508,953 and $2,833,761,220, respectively) (c) (d) | | | | | 103.7 | | | | | | | | | | | | 2,534,235,635 | | | | | | | | | | | | 325,183,811 | | | | | | | | | | | | 2,859,419,446 | |
|
| |
| ARM | Adjustable Rate Mortgage. |
| |
| GPM | Graduated Payment Mortgage. |
| |
| IO | Interest-only security. |
| |
| MXN | Mexican New Peso. |
| |
| PAC | Planned Amortization Class. |
| |
| * | Securities purchased on a forward commitment basis with an approximate principal amount and no definite maturitydate; the actual principal amount and maturity date will be determined upon settlement. |
| |
| † | A portion of these securities have been physically segregated in connection with open futures contracts in the amounts equal to $1,326,750 and $54,935, respectively.. |
| |
| ‡ | Floating rate security, rate shown is the rate in effect at September 30, 2006. |
| |
| (a) | Purchased on a discount basis. The interest rate shown has been adjusted to reflect a money market equivalent yield. |
| |
| (b) | Collateralized by federal agency and U.S. Treasury obligations. |
| |
| (c) | Securities have been designated as collateral in an amount equal to $1,288,429,329 and $120,448,269, respectively, in connection with securities purchased on a forward commitment basis and open futures contracts. |
| |
| (d) | The aggregate cost for federal income tax purposes approximates the aggregate cost for book purposes: |
B-24
| | | | | | | | | | | | | | | | | | |
| | | | Gross
Unrealized
Appreciation | | | Gross
Unrealized
(Depreciation) | | | Net
Unrealized
Appreciation/
(Depreciation) |
| Morgan Stanley U.S. Government Securities Trust | | | | $ | 41,312,738 | | | | | | ($20,329,370 | | | | | $ | 20,983,368 | |
| Morgan Stanley Government Income Trust | | | | | 1,158,947 | | | | | | (1,872,424 | | | | | | (713,477 | |
| Combined Fund | | | | $ | 42,471,685 | | | | | | ($22,201,794 | | | | | $ | 20,269,891 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Morgan Stanley
US Government Securities Trust | | | Morgan Stanley
Government Income Trust | | | Combined Fund |
DESCRIPTION/
DELIVERY MONTH AND YEAR | | | LONG/
SHORT | | | NUMBER
OF
CONTRACTS | | | UNDER-
LYING
FACE
AMOUNT
AT
VALUE | | | UNREALIZED
APPRECI-
ATION/
(DEPRECI-
ATION) | | | NUMBER
OF
CONTRACTS | | | UNDER-
LYING
FACE
AMOUNT
AT
VALUE | | | UNREALIZED
APPRECI-
ATION/
(DEPRECI-
ATION) | | | NET
UNREALIZED
APPRECI-
ATION/
(DEPRECI-
ATION) |
U.S. Treasury Bonds 20 Year, December
2006 | | | | | Short | | | | | | 1,277 | | | | | | (143,542,781 | | | | | | (1,883,706 | | | | | | — | | | | | | — | | | | | | — | | | | | $ | (1,883,706 | |
U.S. Treasury Notes 5 Year, December
2006 | | | | | Short | | | | | | 2,624 | | | | | | (276,873,013 | | | | | | (1,704,416 | | | | | | — | | | | | | — | | | | | | — | | | | | | (1,704,416 | |
U.S. Treasury Notes 2 Year, December
2006 | | | | | Short | | | | | | 2,075 | | | | | | (424,337,500 | | | | | | (1,250,247 | | | | | | 299 | | | | | $ | (61,145,500 | | | | | $ | (179,197 | | | | | | (1,429,444 | |
U.S. Treasury Notes 10 Year, December
2006 | | | | | Short | | | | | | — | | | | | | — | | | | | | — | | | | | | 54 | | | | | | (5,835,375 | | | | | | (42,180 | | | | | | (42,180 | |
U.S. Treasury Notes 10 Year, December
2006 | | | | | Long | | | | | | 3,330 | | | | | | 359,848,125 | | | | | | 4,316,571 | | | | | | — | | | | | | — | | | | | | — | | | | | | 4,316,571 | |
U.S. Treasury Notes 5 Year, December
2006 | | | | | Long | | | | | | — | | | | | | — | | | | | | — | | | | | | 252 | | | | | | 26,589,939 | | | | | | 182,061 | | | | | | 182,061 | |
U.S. Treasury Bonds 20 Year, December
2006 | | | | | Long | | | | | | — | | | | | | — | | | | | | — | | | | | | 88 | | | | | | 9,891,750 | | | | | | 157,508 | | | | | | 157,508 | |
| | | | | | | | | | | | | | | | | | | | | | | $ | (521,798 | | | | | | | | | | | | | | | | | $ | 118,192 | | | | | $ | (403,606 | |
|
B-25
Morgan Stanley U.S. Government Securities Trust
Pro-Forma Financial Statements
Statement of Assets and Liabilities
September 30, 2006 (unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Morgan Stanley
U.S. Government
Securities Trust | | | Morgan Stanley
Government
Income Trust | | | Pro-Forma
Adjustments | | | Combined Fund |
| Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Investments in securities, at value (cost $2,513,252,267, $320,508,953 and $2,833,761,220 respectively) | | | | $ | 2,534,235,635 | | | | | $ | 325,183,811 | | | | | | — | | | | | $ | 2,859,419,446 | |
| Cash | | | | | 46,612 | | | | | | — | | | | | | — | | | | | | 46,612 | |
| Receivable for: | | | | | | | | | | | | | | | | | | | | | | | | |
| Investments sold | | | | | — | | | | | | 2,212,800 | | | | | | — | | | | | | 2,212,800 | |
| Interest | | | | | 13,295,097 | | | | | | 1,921,218 | | | | | | — | | | | | | 15,216,315 | |
| Principal paydowns | | | | | — | | | | | | 123,893 | | | | | | — | | | | | | 123,893 | |
| Shares of beneficial interest sold | | | | | 585,294 | | | | | | — | | | | | | — | | | | | | 585,294 | |
| Variation margin | | | | | — | | | | | | 3,330 | | | | | | — | | | | | | 3,330 | |
| Receivable from affiliate | | | | | 359,949 | | | | | | — | | | | | | | | | | | | 359,949 | |
| Prepaid expenses and other assets | | | | | 205,989 | | | | | | 19,370 | | | | | | — | | | | | | 225,359 | |
| Total Assets | | | | | 2,548,728,576 | | | | | | 329,464,422 | | | | | | — | | | | | | 2,878,192,998 | |
| Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Payable for: | | | | | | | | | | | | | | | | | | | | | | | | |
| Investments purchased | | | | | 94,302,324 | | | | | | 19,812,922 | | | | | | — | | | | | | 114,115,246 | |
| Shares of beneficial interest redeemed/repurchased | | | | | 4,250,257 | | | | | | 91,819 | | | | | | — | | | | | | 4,342,076 | |
| Distribution fee | | | | | 740,192 | | | | | | — | | | | | | — | | | | | | 740,192 | |
| Dividends and distributions to shareholders | | | | | 579,161 | | | | | | — | | | | | | — | | | | | | 579,161 | |
| Investment advisory fee | | | | | 790,104 | | | | | | 158,308 | | | | | | — | | | | | | 948,412 | |
| Administration fee | | | | | 161,771 | | | | | | 24,355 | | | | | | — | | | | | | 186,126 | |
| Transfer agent fee | | | | | 224,197 | | | | | | 8,305 | | | | | | — | | | | | | 232,502 | |
| Variation margin | | | | | 50,912 | | | | | | — | | | | | | — | | | | | | 50,912 | |
| Accrued expenses and other payables | | | | | 285,131 | | | | | | 167,795 | | | | | | 331764 | | | | | | 784,690 | |
| Total Liabilities | | | | | 101,384,049 | | | | | | 20,263,504 | | | | | | 331,764 | | | | | | 121,979,317 | |
| Net Assets | | | | $ | 2,447,344,527 | | | | | $ | 309,200,918 | | | | | | ($331,764 | | | | | $ | 2,756,213,681 | |
| Composition of Net Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Paid-in-capital | | | | $ | 2,539,044,832 | | | | | $ | 315,651,104 | | | | | | — | | | | | $ | 2,854,695,936 | |
| Net unrealized appreciation | | | | | 20,461,570 | | | | | | 4,793,005 | | | | | | — | | | | | | 25,254,575 | |
| Dividends in excess of net investment income | | | | | (25,765,297 | | | | | | (1,949,171 | | | | | | ($331,764 | | | | | | (28,046,232 | |
| Accumulated net realized loss | | | | | (86,396,578 | | | | | | (9,294,020 | | | | | | — | | | | | | (95,690,598 | |
| Net Assets | | | | $ | 2,447,344,527 | | | | | $ | 309,200,918 | | | | | | ($331,764 | | | | | $ | 2,756,213,681 | |
| Class A Shares: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Assets | | | | $ | 1,540,677,489 | | | | | | | | | | | | | | | | | $ | 1,540,677,489 | |
| Shares Outstanding (unlimited authorized, $.01 par value) | | | | | 171,345,552 | | | | | | | | | | | | | | | | | | 171,345,552 | |
| Net Asset Value Per Share | | | | $ | 8.99 | | | | | | | | | | | | | | | | | $ | 8.99 | |
Maximum Offering Price Per Share,
(net asset value plus 4.44% of net asset value) | | | | $ | 9.39 | | | | | | | | | | | | | | | | | $ | 9.39 | |
|
B-26
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Morgan Stanley
U.S. Government
Securities Trust | | | Morgan Stanley
Government
Income Trust | | | Pro-Forma
Adjustments | | | Combined Fund |
| Class B Shares: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Assets | | | | $ | 624,186,712 | | | | | | | | | | | | | | | | | $ | 624,186,712 | |
| Shares Outstanding (unlimited authorized, $.01 par value) | | | | | 69,347,483 | | | | | | | | | | | | | | | | | | 69,347,483 | |
| Net Asset Value Per Share | | | | $ | 9.00 | | | | | | | | | | | | | | | | | $ | 9.00 | |
| Class C Shares: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Assets | | | | $ | 55,928,185 | | | | | | | | | | | | | | | | | $ | 55,928,185 | |
| Shares Outstanding (unlimited authorized, $.01 par value) | | | | | 6,166,837 | | | | | | | | | | | | | | | | | | 6,166,837 | |
| Net Asset Value Per Share | | | | $ | 9.07 | | | | | | | | | | | | | | | | | $ | 9.07 | |
| Class D Shares: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Assets | | | | $ | 226,552,141 | | | | | $ | 309,200,918 | | | | | | ($331,764 | | | | | $ | 535,421,295 | |
| Shares Outstanding (unlimited authorized, $.01 par value) | | | | | 25,181,540 | | | | | | 31,880,656 | | | | | | 2,475,002 | | | | | | 59,537,198 | |
| Net Asset Value Per Share | | | | $ | 9.00 | | | | | $ | 9.70 | | | | | | | | | | | $ | 8.99 | |
| Market Value | | | | | | | | | | $ | 8.89 | | | | | | | | | | | | | |
|
| |
| (1) | Represents a non-recurring cost in connection with the reorganization which will be borne by Morgan Stanley Government Income Trust. |
| |
| (2) | Represents the difference between total additional shares to be issued (see Note 2) and current Morgan Stanley Government Income Trust shares outstanding. |
See Notes to Pro Forma Financial Statements
B-27
Morgan Stanley U.S. Government Securities Trust
Pro-Forma Financial Statements
Statement of Operations
For the Twelve Months Ended September 30, 2006 (unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Morgan Stanley
U.S. Government
Securities Trust | | | Morgan Stanley
Government
Income Trust | | | Pro-Forma
Adjustments | | | Combined Fund |
| Net Investment Income: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest Income | | | | $ | 105,165,067 | | | | | $ | 14,435,464 | | | | | | — | | | | | $ | 119,600,531 | |
| Expenses | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment advisory fee | | | | | 10,253,840 | | | | | | 1,624,520 | | | | | | ($627,554 | | | | | | 11,250,806 | |
| Distribution fee (Class A shares) | | | | | 4,215,451 | | | | | | -0- | | | | | | — | | | | | | 4,215,451 | |
| Distribution fee (Class B shares) | | | | | 35,012 | | | | | | -0- | | | | | | — | | | | | | 35,012 | |
| Distribution fee (Class C shares) | | | | | 478,399 | | | | | | -0- | | | | | | — | | | | | | 478,399 | |
| Transfer agent fees and expenses | | | | | 3,011,763 | | | | | | 63,644 | | | | | | — | | | | | | 3,075,407 | |
| Administration fee | | | | | 2,126,519 | | | | | | 249,926 | | | | | | — | | | | | | 2,376,445 | |
| Shareholder reports and notices | | | | | 270,640 | | | | | | 51,823 | | | | | | (20,729 | | | | | | 301,734 | |
| Professional fees | | | | | 81,863 | | | | | | 76,812 | | | | | | (76,812 | | | | | | 81,863 | |
| Registration fees | | | | | 109,335 | | | | | | 125 | | | | | | (50 | | | | | | 109,410 | |
| Custodian fees | | | | | 535,958 | | | | | | 86,187 | | | | | | — | | | | | | 622,145 | |
| Trustees' fees and expenses | | | | | 43,425 | | | | | | 11,539 | | | | | | — | | | | | | 54,964 | |
| Other | | | | | 360,565 | | | | | | 64,772 | | | | | | (610 | | | | | | 424,727 | |
| Total Expenses | | | | | 21,522,770 | | | | | | 2,229,348 | | | | | | (725,755 | | | | | | 23,026,363 | |
| Less: expense offset | | | | | (9,445 | | | | | | (293 | | | | | | — | | | | | | (9,738 | |
| Net Expenses | | | | | 21,513,325 | | | | | | 2,229,055 | | | | | | (725,755 | | | | | | 23,016,625 | |
| Net Investment Income | | | | | 83,651,742 | | | | | | 12,206,409 | | | | | | 725,755 | | | | | | 96,583,906 | |
| Net Realized and Unrealized Gain (Loss): | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Realized Gain (Loss) on: | | | | | | | | | | | | | | | | | | | | | | | | |
| Investments | | | | | 9,007,644 | | | | | | (1,391,971 | | | | | | — | | | | | | 7,615,673 | |
| Futures contracts | | | | | 22,104,077 | | | | | | 1,819,839 | | | | | | — | | | | | | 23,923,916 | |
| Options contracts | | | | | — | | | | | | 11,378 | | | | | | — | | | | | | 11,378 | |
| Net Realized Gain (Loss) | | | | | 31,111,721 | | | | | | 439,246 | | | | | | — | | | | | | 31,550,967 | |
| Net Change in Unrealized Appreciation/Depreciation on: | | | | | | | | | | | | | | | | | | | | | | | | |
| Investments | | | | | (36,202,618 | | | | | | (2,087,672 | | | | | | — | | | | | | (38,290,290 | |
| Futures contracts | | | | | (8,978,370 | | | | | | (473,913 | | | | | | — | | | | | | (9,452,283 | |
| Options contracts | | | | | — | | | | | | (48,372 | | | | | | — | | | | | | (48,372 | |
| Translation of other assets denominated in foreign currencies | | | | | — | | | | | | (45 | | | | | | — | | | | | | (45 | |
| Net Depreciation | | | | | (45,180,988 | | | | | | (2,610,002 | | | | | | — | | | | | | (47,790,990 | |
| Net Gain (Loss) | | | | | (14,069,267 | | | | | | (2,170,756 | | | | | | — | | | | | | (16,240,023 | |
| Net Increase | | | | $ | 69,582,475 | | | | | $ | 10,035,653 | | | | | $ | 725,755 | | | | | $ | 80,343,883 | |
|
| |
| (1) | Reflects adjustment to investment management fees based on Morgan Stanely U.S. Government Securities Trust fee schedule. |
| |
| (2) | Reflects elimination of duplicate services or fees. |
See Notes to Pro Forma Financial Statements
B-28
Morgan Stanley U.S. Government Securities Trust
Notes to Pro Forma Financial Statements
(unaudited)
1. Basis of Combination — The Pro Forma Statement of Assets and Liabilities, including the Portfolio of Investments, at September 30, 2006 and the related Statement of Operations (‘‘Pro Forma Statements’’) for the twelve months ended September 30, 2006, reflect the accounts of Morgan Stanley U.S. Government Securities (‘‘Government Securities’’) and Morgan Stanley Government Income Trust (‘‘Government Income’’).
The Pro Forma Statements give effect to the proposed transfer of all assets and liabilities of Government Income in exchange for shares in Government Securities. The Pro Forma Statements should be read in conjunction with the historical financial statements of each Fund included in its Statement of Additional Information.
2. Shares of Beneficial Interest — The pro forma net asset value per share assumes the issuance of additional shares of Government Securities which would have been issued on September 30, 2006 in connection with the proposed reorganization. Shareholders of Government Income would become shareholders of Government Securities receiving Class D shares of Government Securities equal to the value of their holdings in Government Income. The amount of additional shares assumed to be issued was calculated based on the September 30, 2006 net assets of Government Income and the net asset value per share of Government Securities Class D as follows:
| | | | | | |
| Government Income pre-merger shares | | | | | 31,880,656 | |
| Government Income net assets | | | | $ | 309,200,918 | |
| Net asset value per share – Government Securities Class D | | | | $ | 9.00 | |
| Government Securities Class D merger shares issued | | | | | 34,355,658 | |
| Difference between total additional shares to be issued and pre-merger Government Income shares outstanding | | | | | 2,475,002 | |
|
3. Pro Forma Operations — The Pro Forma Statement of Operations assumes similar rates of gross investment income for the investments of each Fund. Accordingly, the combined gross investment income is equal to the sum of each Fund's gross investment income. Certain expenses have been adjusted to reflect the expected expenses of the combined entity. The pro-forma investment management fees and plan of distribution fees of the combined Fund are based on the fee schedule in effect for Government Securities at the combined level of average net assets for the twelve months ended September 30, 2006. The Pro Forma Statement of Operations does not include the effect of any realized gains or losses, or transaction fees incurred in connection with the realignment of the portfolio.
B-29
MORGAN STANLEY U.S GOVERNMENT SECURITIES TRUST
PART C
OTHER INFORMATION
| |
| Item 15. | Indemnification |
The response to this item is incorporated herein by reference to Exhibits 1 and 2 under Item 16 below and by reference to Item 25 of Post-Effective Amendment No. 27 to the Registrant's Registration Statement on Form N-1A, dated April 28, 2006, which was filed electronically pursuant to Regulation S-T on April 27, 2006 as an amendment to Registrant's Registration Statement on Form N-1A (File Nos. 811-3870 and 2-86966).
| |
| Item 16. | Exhibits |
| |
| (1) | Declaration of Trust of the Registrant, dated September 29, 1983, is incorporated by reference to Exhibit 1(a) of Post-Effective Amendment No. 13 to the Registration Statement on Form N-1A, filed on February 23, 1996; Instrument Establishing and Designating Additional Classes, is incorporated by reference to Exhibit 1 of Post-Effective Amendment No. 15 to the Registration Statement on Form N-1A, filed on May 29, 1997; Amendment to the Declaration of Trust of the Registrant, dated February 29, 1984, is incorporated by reference to Exhibit 1(b) of Post-Effective Amendment No. 13 to the Registration Statement on Form N-1A, filed on February 23, 1996; Amendment to the Declaration of Trust of the Registrant, dated April 16, 1984, is incorporated by reference to Exhibit 1(c) of Post-Effective Amendment No. 13 to the Registration Statement on Form N-1A, filed on February 23, 1996; Amendment to the Declaration of Trust of the Registrant, dated June 22, 1998, is incorporated by reference to Exhibit 1 of Post-Effective Amendment No. 17 to the Registration Statement on Form N-1A, filed on February 26, 1999; Amendment to the Declaration of Trust of the Registrant, dated June 18, 2001, is incorporated herein by reference to Exhibit 1(f) of Post-Effective Amendment No. 21 to the Registration Statement on Form N-1A, filed on February 27, 2002. |
| |
| (2) | Amended and Restated By-Laws of the Registrant, dated April 24, 2003, is incorporated herein by reference to Exhibit (b) of Post-Effective Amendment No. 22 to the Registration Statement on Form N-1A, filed on April 30, 2003. |
| |
| (3) | Not Applicable. |
| |
| (4) | Copy of Agreement and Plan of Reorganization (filed herewith as Exhibit A to the Proxy Statement and Prospectus). |
| |
| (5) | Not Applicable. |
| |
| (6) | Amended and Restated Investment Advisory Agreement between the Registrant and Morgan Stanley Investment Advisors Inc., dated November 1, 2004, is incorporated by reference to Exhibit (d)(1) of Post-Effective Amendment No. 3 to the Registration Statement on Form N-1A of Morgan Stanley Small-Mid Special Value Fund, filed on June 24, 2005. |
| | |
| (7) | (a) | Amended Distribution Agreement between Registrant and Morgan Stanley Distributors Inc., dated June 22, 1998, is incorporated by reference to Exhibit 5(a) of Post-Effective Amendment No. 17 to the Registration Statement on Form N-1A, filed on February 26, 1999. |
| | |
| (b) | Selected Dealers Agreement between Morgan Stanley Distributors Inc. and Morgan Stanley DW Inc. is incorporated herein by reference to Exhibit (e)(2) of Post-Effective Amendment No. 4 to the Registration Statement on Form N-1A of Morgan Stanley Fundamental Value Fund, filed on January 25, 2006. |
C-1
| |
| (8) | Amended and Restated Retirement Plan is incorporated herein by reference to Exhibit 6 of Post-Effective Amendment No. 18 to the Registration Statement on Form N-1A, filed on April 29, 1999. |
| | |
| (9) | (a) | Custody Agreement between The Bank of New York and the Registrant, dated September 20, 1991, is incorporated herein by reference to Exhibit 8 of Post-Effective Amendment No. 13 to the Registration Statement on Form N-1A, filed on February 23, 1996; Amendment to the Custody Agreement between The Bank of New York and the Registrant, dated April 17, 1996, is incorporated herein by reference to Exhibit 8 of Post-Effective Amendment No. 14 to the Registration Statement on Form N-1A, filed on March 27, 1997; Amendment to the Custody Agreement of the Registrant, dated June 15, 2001, is incorporated herein by reference to Exhibit 7(c) of Post-Effective Amendment No. 21 to the Registration Statement on Form N-1A, filed on February 27, 2002. |
| | |
| (b) | Foreign Custody Manager Agreement between the Bank of New York and the Registrant, dated June 15, 2001, is incorporated by reference to Exhibit 7(d) of Post-Effective Amendment No. 21 to the Registration Statement on Form N-1A, filed on February 27, 2002. |
| | |
| (10) | (a) | Amended and Restated Plan of Distribution pursuant to Rule 12b-1 between the Registrant and Morgan Stanley Distributors, Inc., dated May 1, 2004, is incorporated herein by reference to Exhibit (m) of Post-Effective Amendment No. 24 to the Registration Statement on Form N-1A, filed on February 17, 2005. |
| | |
| (b) | Amended Multi-Class Plan pursuant to Rule 18f-3, dated October 28, 2004, is incorporated herein by reference to Exhibit (n) of Post-Effective Amendment No. 24 to the Registration Statement on Form N-1A, filed on February 17, 2005. |
| | |
| (11) | (a) | Opinion and consent of Clifford Chance US LLP, to be filed by amendment. |
| | |
| | (b) | Opinion and consent of Dechert LLP, to be filed by amendment. |
| |
| (12) | Opinion and consent of Clifford Chance US LLP regarding tax matters, to be filed by amendment. |
| | |
| (13) | (a) | Amended and Restated Transfer Agency and Service Agreement between the Registrant and Morgan Stanley Trust, dated November 1, 2004, is incorporated herein by reference to Exhibit (h)(1) of Post-Effective Amendment No. 24 to the Registration Statement on Form N-1A, filed on February 17, 2005. |
| | |
| (b) | Administration Agreement, dated November 1, 2004, between the Registrant and Morgan Stanley Services Company Inc., is incorporated herein by reference to Exhibit (h)(2) of Post-Effective Amendment No. 24 to the Registration Statement on Form N-1A, filed on February 17, 2005. |
| |
| (14) | Consent of Independent Registered Public Accounting Firm, to be filed by amendment. |
| |
| (15) | Not Applicable. |
| |
| (16) | Powers of Attorney of Trustees, dated October 31, 2006, is filed herewith. |
| |
| (17) | Form of Proxy, filed herewith. |
| |
| ITEM 17. | UNDERTAKINGS |
1. The undersigned Registrant agrees that prior to any public reoffering of the securities registered through the use of the prospectus which is a part of this registration statement on Form N-14 by any
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person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933, the reoffering prospectus will contain the information called for by the applicable registration form for reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form.
2. The undersigned Registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as a part of an amendment to this registration statement on Form N-14 and will not be used until the amendment is effective, and that, in determining any liability under the Securities Act of 1933, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them.
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SIGNATURES
As required by the Securities Act of 1933, this registration statement has been signed on behalf of the registrant, in the City of New York and State of New York, on this 15th day of November, 2006.
| MORGAN STANLEY U.S. GOVERNMENT SECURITIES TRUST |
| By: /s/ Ronald E. Robison
Ronald E. Robison
President and Principal Executive Officer |
As required by the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated
| | | | | | |
| Signature | | | Title | | | Date |
| (1) Principal Executive Officer | | | | | | |
By: /s/ Ronald E. Robison
Ronald E. Robison | | | President and Principal
Executive Officer | | | November 15, 2006 |
| (2) Principal Financial Officer | | | | | | |
By: /s/ Francis J. Smith
Francis J. Smith | | | Chief Financial Officer | | | November 15, 2006 |
| (3) Majority of the Trustees | | | | | | |
| James F. Higgins | | | | | | |
By: /s/ Barry Fink
Barry Fink
Attorney-in-Fact | | | | | | November 15, 2006 |
Frank L. Bowman Joseph J. Kearns
| | | | | | |
| Michael Bozic Michael F. Klein | | | | | | |
| Kathleen A. Dennis Michael E. Nugent | | | | | | |
| (Chairman) | | | | | | |
| Edwin J. Garn W. Allen Reed | | | | | | |
| Wayne E. HedienFergus Reid | | | | | | |
| Manuel H. Johnson | | | | | | |
By: /s/ Carl Frischling
Carl Frischling
Attorney-in-Fact | | | | | | November 15, 2006 |
|
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EXHIBIT INDEX
| | | | | |
| (16 | | | | Powers of Attorney of Trustees, dated October 31, 2006. |
| (17 | | | | Form of Proxy |
|
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