As filed with the U.S. Securities and Exchange Commission on May 16, 2006.
Securities Act File No. 333-132395
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-14
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![]() | REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |
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![]() | Pre-Effective Amendment No. 1 |
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![]() | Post-Effective Amendment No. |
(Check appropriate box or boxes)
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MORGAN STANLEY
BALANCED GROWTH FUND
(Exact Name of Registrant as Specified in Charter)
1221 Avenue of the Americas
New York, New York 10020
(Address of Principal Executive Offices: (Number, Street, City, State, Zip Code))
(800) 869-6397
(Area Code and Telephone Number)
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Amy R. Doberman, Esq.
Morgan Stanley Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
(Name and Address of Agent for Service)
Copy to:
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Carl Frischling, Esq. Kramer Levin Naftalis & Frankel LLP 1177 Avenue of the Americas New York, New York 10036 | ![]() | Stuart M. Strauss, Esq. Clifford Chance US LLP 31 West 52nd Street New York, New York 10019 | ||||
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Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of this Registration Statement.
No filing fee is required because an indefinite number of common shares of beneficial interest of Morgan Stanley Balanced Growth Fund have previously been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940.
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The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
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MORGAN STANLEY BALANCED INCOME FUND
MORGAN STANLEY INCOME BUILDER FUND
1221 Avenue of the Americas
New York, NY 10020
(800) 869-NEWS
NOTICE OF SPECIAL MEETINGS OF SHAREHOLDERS
TO BE HELD JULY 17, 2006
To the Shareholders of Morgan Stanley Balanced Income Fund and Morgan Stanley Income Builder Fund:
Notice is hereby given of a Special Meeting of the Shareholders of each of Morgan Stanley Balanced Income Fund (‘‘Balanced Income’’) and Morgan Stanley Income Builder Fund (‘‘Income Builder’’) to be held in the Auditorium, 3rd Floor, 1221 Avenue of the Americas, New York, NY 10020, at 2:30 p.m., New York time, on July 17, 2006, and any adjournments thereof (each, a ‘‘Meeting’’), for the following purposes:
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1. | With respect to the Shareholders of Balanced Income, to consider and vote upon an Agreement and Plan of Reorganization, dated February 6, 2006 (the ‘‘Balanced Income Reorganization Agreement’’), between Balanced Income and Morgan Stanley Balanced Growth Fund (to be renamed Morgan Stanley Balanced Fund) (‘‘Balanced Growth’’), pursuant to which substantially all of the assets of Balanced Income would be combined with those of Balanced Growth and shareholders of Balanced Income would become shareholders of Balanced Growth receiving shares of Balanced Growth with a value equal to the value of their holdings in Balanced Income (the ‘‘Balanced Income Reorganization’’); |
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2. | With respect to the Shareholders of Income Builder, to consider and vote upon an Agreement and Plan of Reorganization, dated February 6, 2006 (the ‘‘Income Builder Reorganization Agreement’’), between Income Builder and Balanced Growth, pursuant to which substantially all of the assets of Income Builder would be combined with those of Balanced Growth and shareholders of Income Builder would become shareholders of Balanced Growth receiving shares of Balanced Growth with a value equal to the value of their holdings in Income Builder (the ‘‘Income Builder Reorganization’’); and |
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3. | To act upon such other matters as may properly come before the Meeting. |
Each of the Balanced Income Reorganization and the Income Builder Reorganization is herein referred to as a ‘‘Reorganization.’’ Each Reorganization is more fully described in the accompanying Proxy Statement and Prospectus and copies of the Reorganization Agreements are attached as Exhibits A-1 and A-2 thereto. Shareholders of record of each of Balanced Income and Income Builder at the close of business on April 7, 2006 are entitled to notice of, and to vote at, the Meeting. Please read the Proxy Statement and Prospectus carefully before telling us, through your Proxy or in person, how you wish your shares to be voted. Alternatively, if you are eligible to vote telephonically by touchtone telephone or electronically on the Internet (as discussed in the enclosed Proxy Statement), you may do so in lieu of
attending the Meeting in person. The Board of Trustees of each of Balanced Income and Income Builder recommends you vote in favor of the applicable Reorganization. WE URGE YOU TO SIGN, DATE AND MAIL THE ENCLOSED PROXY PROMPTLY.
![]() | By Order of the Board of Trustees, |
![]() | MARY E. MULLIN, Secretary |
May 18, 2006
You can help avoid the necessity and expense of sending follow-up letters to ensure a quorum by promptly returning the enclosed Proxy. If you are unable to be present in person, please fill in, sign and return the enclosed Proxy in order that the necessary quorum be represented at the Meeting. The enclosed envelope requires no postage if mailed in the United States. Shareholders will be able to vote telephonically by touchtone telephone or electronically on the Internet by following instructions on their proxy cards or on the enclosed Voting Information Card.
MORGAN STANLEY BALANCED GROWTH FUND
1221 Avenue of the Americas
New York, NY 10020
(800) 869-NEWS
Acquisition of the Assets of each of
Morgan Stanley Balanced Income Fund
and Morgan Stanley Income Builder Fund
By and in Exchange for Shares of
Morgan Stanley Balanced Growth Fund
This Proxy Statement and Prospectus is being furnished to shareholders of each of Morgan Stanley Balanced Income Fund (‘‘Balanced Income’’) and Morgan Stanley Income Builder Fund (‘‘Income Builder’’), in connection with:
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1. | An Agreement and Plan of Reorganization, dated February 6, 2006, between Balanced Income and Morgan Stanley Balanced Growth Fund (the ‘‘Balanced Income Reorganization Agreement’’) pursuant to which substantially all the assets of Balanced Income will be combined with those of Morgan Stanley Balanced Growth Fund (to be renamed Morgan Stanley Balanced Fund) (‘‘Balanced Growth’’) in exchange for shares of Balanced Growth (the ‘‘Balanced Income Reorganization’’). As a result of this transaction, shareholders of Balanced Income will become shareholders of Balanced Growth and will receive shares of Balanced Growth with a value equal to the value of their holdings in Balanced Income. |
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2. | An Agreement and Plan of Reorganization, dated February 6, 2006, between Income Builder and Balanced Growth (the ‘‘Income Builder Reorganization Agreement’’) pursuant to which substantially all the assets of Income Builder will be combined with those of Balanced Growth in exchange for shares of Balanced Growth (the ‘‘Income Builder Reorganization’’). As a result of this transaction, shareholders of Income Builder will become shareholders of Balanced Growth and will receive shares of Balanced Growth with a value equal to the value of their holdings in Income Builder. |
The Balanced Income Reorganization Agreement and the Income Builder Reorganization Agreement are collectively referred to herein as the ‘‘Reorganization Agreements,’’ and separately as a ‘‘Reorganization Agreement.’’ The Balanced Income Reorganization and the Income Builder Reorganization are collectively referred to herein as the ‘‘Reorganizations,’’ and separately as a ‘‘Reorganization.’’ Each of Balanced Income, Income Builder and Balanced Growth is referred to herein as a ‘‘Fund.’’
Shareholders of each of Balanced Income and Income Builder will vote separately on the Reorganization for that Fund. Each Reorganization is not dependent on the approval of the other. The terms and conditions of each transaction are more fully described in this Proxy Statement and Prospectus and in the Reorganization Agreements attached hereto as Exhibits A-1 and A-2. The address of each of Balanced Income and Income Builder is that of Balanced Growth set forth above. This Proxy Statement also constitutes a Prospectus of Balanced Growth, which is dated May 18, 2006, filed by Balanced Growth with the Securities and Exchange Commission (the ‘‘Commission’’) as part of its Registration Statement on Form N-14 (the ‘‘Registration Statement’’).
Balanced Growth is an open-end management investment company whose investment objective is to seek to provide capital growth with reasonable current income. The Fund will normally invest at least 60%
of its assets in dividend-paying common stocks and securities convertible into common stocks, and at least 25% of its assets in fixed-income securities.
This Proxy Statement and Prospectus sets forth concisely information about Balanced Growth that shareholders of each of Balanced Income and Income Builder should know before voting on the applicable Reorganization Agreement. A copy of the Prospectus for Balanced Growth, dated May 27, 2005, as supplemented, is attached as Exhibit B and is incorporated herein by reference. Also enclosed and is incorporated herein by reference is Balanced Growth's Annual Report for the fiscal year ended January 31, 2006. A Statement of Additional Information relating to the Reorganization, described in this Proxy Statement and Prospectus, dated May 18, 2006, has been filed with the Commission and is incorporated herein by reference. Also incorporated herein by reference are: (i) Balanced Income's Prospectus, dated May 27, 2005, as supplemented; (ii) Balanced Income's Annual Report for the fiscal year ended January 31, 2006, (iii) Income Builder's Prospectus, dated January 27, 2006, as supplemented; and (iv) Income Builder's Annual Report for the fiscal year ended September 30, 2005. Such documents, as well as additional information about Balanced Growth, have been filed with the Commission and are available upon request without charge by calling (800) 869-NEWS (toll-free) or by visiting the Commission's website at www.sec.gov.
Investors are advised to read and retain this Proxy Statement and Prospectus for future reference.
These Securities have not been approved or disapproved by the Securities and Exchange Commission or any State Securities Commission, nor has the Securities and Exchange Commission or any State Securities Commission passed on the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
This Proxy Statement and Prospectus is dated May 18, 2006.
TABLE OF CONTENTS
PROXY STATEMENT AND PROSPECTUS
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i
MORGAN STANLEY BALANCED INCOME FUND
MORGAN STANLEY INCOME BUILDER FUND
1221 Avenue of the Americas
New York, NY 10020
(800) 869-NEWS
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PROXY STATEMENT AND PROSPECTUS
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Special Meetings of Shareholders
to be Held July 17, 2006
INTRODUCTION
General
This Proxy Statement and Prospectus is being furnished to the shareholders of each of Morgan Stanley Balanced Income Fund ("Balanced Income") and Morgan Stanley Income Builder Fund ("Income Builder"), each an open-end, diversified management investment company, in connection with the solicitation by the Board of Trustees of each of Balanced Income and Income Builder (each, a "Board") of proxies to be used at the Special Meetings of Shareholders of Balanced Income and Income Builder to be held in the Auditorium, 3rd Floor, 1221 Avenue of the Americas, New York, NY 10020, at 2:30 p.m., New York time, on July 17, 2006, and any adjournments thereof (each, a "Meeting"). It is expected that the first mailing of this Proxy Statement and Prospectus will be made on or about May 18, 2006.
At the Meeting, shareholders of Balanced Income and Income Builder will consider and vote upon the following items, as applicable:
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1. | An Agreement and Plan of Reorganization, dated February 6, 2006, between Balanced Income and Morgan Stanley Balanced Growth Fund (the "Balanced Income Reorganization Agreement") pursuant to which substantially all the assets of Balanced Income will be combined with those of Morgan Stanley Balanced Growth Fund (to be renamed Morgan Stanley Balanced Fund) ("Balanced Growth") in exchange for shares of Balanced Growth (the "Balanced Income Reorganization"). As a result of this transaction, shareholders of Balanced Income will become shareholders of Balanced Growth and will receive shares of Balanced Growth with a value equal to the value of their holdings in Balanced Income. |
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2. | An Agreement and Plan of Reorganization, dated February 6, 2006, between Income Builder and Balanced Growth (the "Income Builder Reorganization Agreement") pursuant to which substantially all the assets of Income Builder will be combined with those of Balanced Growth in exchange for shares of Balanced Growth (the "Income Builder Reorganization"). As a result of this transaction, shareholders of Income Builder will become shareholders of Balanced Growth and will receive shares of Balanced Growth with a value equal to the value of their holdings in Income Builder. |
The Balanced Income Reorganization Agreement and the Income Builder Reorganization Agreement are collectively referred to herein as the "Reorganization Agreements," and separately as a "Reorganization Agreement." The Balanced Income Reorganization and the Income Builder Reorganization are collectively referred to herein as the "Reorganizations," and separately as a "Reorganization."
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Each of Balanced Income and Income Builder may be referred to herein as an "Acquired Fund" and Balanced Growth may be referred to herein as the "Acquiring Fund." Each of Balanced Income, Income Builder and Balanced Growth may be referred to herein as a "Fund."
Shareholders of each of the Acquired Funds (Balanced Income and Income Builder) ("Shareholders") will vote separately on the Reorganization for that Fund. Each Reorganization is not dependent on the approval of the other. Pursuant to each Reorganization, Shareholders of each Acquired Fund will receive the class of shares of Balanced Growth that corresponds to the class of shares of Balanced Income or Income Builder, as applicable, currently held by that Shareholder. Accordingly, as a result of the Reorganization, each Class A, Class B, Class C and Class D Shareholder, as applicable, will receive Class A, Class B, Class C and Class D shares of Balanced Growth, respectively. The shares to be issued by Balanced Growth pursuant to each Reorganization (the "Balanced Growth Shares") will be issued at net asset value without an initial sales charge. Further information relating to Balanced Growth is set forth herein and in Balanced Growth's current Prospectus, dated May 27, 2005, as supplemented ("Balanced Growth's Prospectus"), attached to this Proxy Statement and Prospectus as Exhibit B and incorporated herein by reference.
The information concerning Balanced Income, Income Builder and Balanced Growth contained herein has been supplied by Balanced Income, Income Builder and Balanced Growth, respectively.
As approved by Balanced Growth's Board of Trustees on February 6, 2006, the name of Morgan Stanley Balanced Growth Fund will change to Morgan Stanley Balanced Fund upon completion of a Reorganization.
Record Date; Share Information
The Board has fixed the close of business on April 7, 2006 as the record date (the "Record Date") for the determination of the Shareholders entitled to notice of, and to vote at, the Meeting. As of the Record Date, there were 12,715,406 shares of Balanced Income and 11,824,036 shares of Income Builder issued and outstanding. Shareholders on the Record Date are entitled to one vote per share and a fractional vote for a fractional share on each matter submitted to a vote at the Meeting. Shareholders of each class of each of Balanced Income and Income Builder will vote together as a single class in connection with the applicable Reorganization Agreement. A majority of the outstanding shares entitled to vote of each of Balanced Income and Income Builder represented in person or by proxy, will constitute a quorum at the applicable Meeting.
The following persons were known to own of record or beneficially 5% or more of the outstanding shares of each of the Funds as of the Record Date:
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Name and Address of Balanced Income Shareholders | ![]() | Number of Shares | ![]() | Percentage of Outstanding Shares | ||||||
Class A | ![]() | ![]() | ||||||||
STATE STREET BANK AND TRUST CO. FBO ADP/MORGAN STANLEY ALLIANCE 105 ROSEMONT AVENUE WESTWOOD, MA 02090-2318 | ![]() | 92,916.135 | ![]() | 5.02 | % | |||||
FIIOC FBO U C SURGEONS 100 MAGELLAN WAY (KW1C) COVINGTON, KY 41015-1987 | ![]() | 92,886.540 | ![]() | 5.02 | % | |||||
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Name and Address of Balanced Income Shareholders | ![]() | Number of Shares | ![]() | Percentage of Outstanding Shares | ||||||
Class B | ![]() | ![]() | ||||||||
NONE | ![]() | ![]() | ||||||||
Class C | ![]() | ![]() | ||||||||
NONE | ![]() | ![]() | ||||||||
Class D | ![]() | ![]() | ||||||||
MORGAN STANLEY DW INC. CUST FOR KAREN SPEZIALE IRA STD/ROLLOVER DTD 10/29/01 15743 VIA CALANOVA SAN DIEGO, CA 92128-4425 | ![]() | 6,949.496 | ![]() | 8.63 | % | |||||
MORGAN STANLEY DW INC. CUST FOR LYLE H MEYER JR IRA ROLLOVER DATED 1/1/84 22 ALTA WAY HOT SPRINGS VILLAGE, AR 71909 | ![]() | 4,284.706 | ![]() | 5.32 | % | |||||
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Name and Address of Income Builder Shareholders | ![]() | Number of Shares | ![]() | Percentage of Outstanding Shares | ||||||
Class A | ![]() | ![]() | ||||||||
NONE | ![]() | ![]() | ||||||||
Class B | ![]() | ![]() | ||||||||
NONE | ![]() | ![]() | ||||||||
Class C | ![]() | ![]() | ||||||||
NONE | ![]() | ![]() | ||||||||
Class D | ![]() | ![]() | ||||||||
MORGAN STANLEY DW INC. CUST FOR DAVID W HUGGARD IRA ROLLOVER DATED 06/11/02 6880 GALA ST. HIGHLAND, CA 92346-2766 | ![]() | 8,254.830 | ![]() | 10.69 | % | |||||
THOMAS J. CONE P.O. BOX 752 EUREKA, CA 95502-0752 | ![]() | 7,123.137 | ![]() | 9.22 | % | |||||
JOANNE V CULLY AND MICHAEL M. MENDEZ JTTEN 8901 WINGED FOOT DR. TALLAHASSEE, FL 32312-4010 | ![]() | 6,881.942 | ![]() | 8.91 | % | |||||
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Name and Address of Income Builder Shareholders | ![]() | Number of Shares | ![]() | Percentage of Outstanding Shares | ||||||
ROBERT A. SAULTER & SHERYON T. SAULTER JT TEN 4 REDWOOD CIRCLE SAVANNAH, GA 31419-1142 | ![]() | 6,053.006 | ![]() | 7.84 | % | |||||
ALMA LEBARON TTEE FBO TED LEBARON & ALMA LEBARON TR U/A DTD 01-25-90 10500 CYPRESS COVE DR. FORT MYERS, FL 33908-6692 | ![]() | 4,060.914 | ![]() | 5.26 | % | |||||
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Name and Address of Balanced Growth Shareholders | ![]() | Number of Shares | ![]() | Percentage of Outstanding Shares | ||||||
Class A | ![]() | ![]() | ||||||||
STATE STREET BANK AND TRUST CO. FBO ADP/MORGAN STANLEY ALLIANCE 105 ROSEMONT AVENUE WESTWOOD, MA 02090-2318 | ![]() | 150,700.509 | ![]() | 6.47 | % | |||||
Class B | ![]() | ![]() | ||||||||
NONE | ![]() | ![]() | ||||||||
Class C | ![]() | ![]() | ||||||||
NONE | ![]() | ![]() | ||||||||
Class D | ![]() | ![]() | ||||||||
BARBARA J. BARBELL TTEE F/T GERALD C. GARBELL CREDIT SHELTER TR DTD 4/25/01 3253 W. MERCER WAY MERCER ISLAND, WA 98040-2539 | ![]() | 12,470.514 | ![]() | 18.47 | % | |||||
MORGAN STANLEY DW INC. CUST FOR LAWRENCE S. ARNDT IRA ROLLOVER DATED 10/06/03 707 FIELDVIEW AVE. DUARTE, CA 91010-1502 | ![]() | 5,624.308 | ![]() | 8.33 | % | |||||
MORGAN STANLEY DW INC. CUST FOR JEANETTE BAUCHMAN IRA ROLLOVER DATED 06/18/02 1725 PLUMMER DR. ROCKWALL, TX 75087-2322 | ![]() | 3,661.844 | ![]() | 5.42 | % | |||||
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Name and Address of Balanced Growth Shareholders | ![]() | Number of Shares | ![]() | Percentage of Outstanding Shares | ||||||
ALMA LEBARON TTEE FBO TED LEBARON & ALMA LEBARON U/A DTD 01-25-90 10500 CYPRESS COVE DR. FORT MYERS, FL 33908-6692 | ![]() | 3,417.111 | ![]() | 5.06 | % | |||||
MORGAN STANLEY DW INC. CUST FOR JUDITH M SANDOVAL IRA ROLLOVER DATED 01/15/02 940 KIRKWOOD LANE LA HABRA, CA 90631-6922 | ![]() | 3,395.561 | ![]() | 5.03 | % | |||||
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As of the Record Date, the trustees and officers of Balanced Income, Income Builder and Balanced Growth, each as a group, owned less than 1% of the outstanding shares of Balanced Income, Income Builder and Balanced Growth, respectively.
Proxies
The enclosed form of Proxy for each of Balanced Income and Income Builder, if properly executed and returned, will be voted in accordance with the choice specified thereon. The Proxy will be voted in favor of the applicable Reorganization Agreement unless a choice is indicated to vote against or to abstain from voting on such Reorganization Agreement. The Board of each Acquired Fund knows of no business, other than that set forth in the Notice of Special Meetings of Shareholders, to be presented for consideration at each Meeting. However, the Proxy confers discretionary authority upon the persons named therein to vote as they determine on other business, not currently contemplated, which may come before each Meeting. Abstentions and, if applicable, broker "non-votes" will not count as votes in favor of the applicable Reorganization Agreement, and broker "non-votes" will not be deemed to be present at the applicable Meeting for purposes of determining whether the Reorganization Agreement has been approved. Broker "non-votes" are shares held in street name for which the broker indicates that instructions have not been received from the beneficial owners or other persons entitled to vote and for which the broker does not have discretionary voting authority. If a Shareholder executes and returns a Proxy but fails to indicate how the votes should be cast, the Proxy will be voted in favor of the applicable Reorganization Agreement. The Proxy may be revoked at any time prior to the voting thereof by: (i) delivering written notice of revocation to the Secretary of Balanced Income or Income Builder, as applicable, 1221 Avenue of the Americas, New York, NY 10020; (ii) attending the Meeting and voting in person; or (iii) completing and returning a new Proxy (whether by mail or, as discussed below, by touchtone telephone or the Internet) (if returned and received in time to be voted). Attendance at the Meeting will not in and of itself revoke a Proxy.
In the event that the necessary quorum to transact business or the vote required to approve or reject the Reorganization Agreement is not obtained at the applicable Meeting, the persons named as proxies may propose one or more adjournments of the Meeting to permit further solicitation of Proxies. Any such adjournment will require the affirmative vote of the holders of a majority of shares of Balanced Income or Income Builder, as applicable, present in person or by proxy at the Meeting. The persons named as proxies will vote in favor of such adjournment those proxies which they are entitled to vote in favor of the applicable Reorganization Agreement and will vote against any such adjournment those proxies required to be voted against such Reorganization Agreement. Abstentions and, if applicable, broker "non-votes" will not be counted for purposes of approving an adjournment.
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Expenses of Solicitation
All expenses of this solicitation, including the cost of preparing and mailing this Proxy Statement and Prospectus, will be borne jointly on a pro rata basis by Balanced Income, Income Builder and Balanced Growth based on each Fund's net assets, which expenses are expected to approximate $293,008. Balanced Income, Income Builder and Balanced Growth will bear all of their respective other expenses associated with the Reorganizations.
The solicitation of Proxies will be by mail, which may be supplemented by solicitation by mail, telephone or otherwise through officers of Balanced Income and Income Builder or officers and regular employees of Morgan Stanley Investment Advisors Inc. (the "Investment Adviser"), Morgan Stanley Trust (the "Transfer Agent"), Morgan Stanley Services Company Inc. and/or Morgan Stanley DW Inc. ("Morgan Stanley DW"), without special compensation therefor. As described below, Balanced Income and Income Builder will employ Computershare Fund Services ("Computershare") to make telephone calls to Shareholders to remind them to vote. In addition, Balanced Income and Income Builder may also employ Computershare as proxy solicitor if it appears that the required number of votes to achieve a quorum will not be received. In the event of a solicitation by Computershare, Balanced Income or Income Builder, as applicable, would pay the solicitor a project advisory fee not to exceed $3,000 and the expenses outlined below.
Shareholders will be able to vote their shares by touchtone telephone or by the Internet by following the instructions on the proxy card or on the Voting Information Card accompanying this Proxy Statement. To vote by Internet or by telephone, Shareholders can access the website or call the toll-free number listed on the proxy card or noted in the enclosed voting instructions.
In certain instances, the Transfer Agent or Computershare may call Shareholders to ask if they would be willing to have their votes recorded by telephone. The telephone voting procedure is designed to authenticate Shareholders' identities, to allow Shareholders to authorize the voting of their shares in accordance with their instructions and to confirm that their instructions have been recorded properly. No recommendation will be made as to how a Shareholder should vote on any proposal other than to refer to the recommendations of the Board. Balanced Income and Income Builder have been advised by counsel that these procedures are consistent with the requirements of applicable law. Shareholders voting by telephone in this manner will be asked for identifying information and will be given an opportunity to authorize proxies to vote their shares in accordance with their instructions. To ensure that the Shareholders' instructions have been recorded correctly, Shareholders will receive a confirmation of their instructions in the mail. A special toll-free number set forth in the confirmation will be available in case the information contained in the confirmation is incorrect. Although a Shareholder's vote may be taken by telephone, each Shareholder will receive a copy of this Proxy Statement and may vote by mail using the enclosed proxy card or by touchtone telephone or the Internet as set forth above. The last proxy vote received in time to be voted, whether by proxy card, touchtone telephone or Internet, will be the last vote that is counted and will revoke all previous votes by the Shareholder. With respect to recorded telephone calls by Computershare reminding Shareholders to vote, expenses would be approximately $1.00 per outbound telephone contact. With respect to the solicitation of a telephonic vote by Computershare, approximate additional expenses of $3.75 per telephone vote transacted and $2.75 per outbound or inbound telephone contact and costs relating to obtaining Shareholders' telephone numbers and providing additional materials upon Shareholder request, which would be borne by Balanced Income or Income Builder, as applicable.
6
Vote Required
Approval of each Reorganization Agreement by the Shareholders of the applicable Acquired Fund requires the affirmative vote of a majority (i.e., more than 50%) of the shares of Balanced Income or Income Builder, as applicable, represented in person or by proxy and entitled to vote at the applicable Meeting, provided a quorum is present at the Meeting. If a Reorganization Agreement is not approved by Shareholders, Balanced Income or Income Builder, as applicable, will continue in existence and the Board will consider alternative actions.
SYNOPSIS
The following is a synopsis of certain information contained in or incorporated by reference in this Proxy Statement and Prospectus. This synopsis is only a summary and is qualified in its entirety by the more detailed information contained or incorporated by reference in this Proxy Statement and Prospectus and the Reorganization Agreements. Shareholders should carefully review this Proxy Statement and Prospectus and the Reorganization Agreements in their entirety and, in particular, Balanced Growth's Prospectus, which is attached to this Proxy Statement as Exhibit B and incorporated herein by reference.
The Reorganizations
Each Reorganization Agreement provides for the transfer of substantially all the assets of the applicable Acquired Fund, each subject to stated liabilities, to Balanced Growth in exchange for the Balanced Growth Shares. The aggregate net asset value of the Balanced Growth Shares issued in the exchange will equal the aggregate value of the net assets of the applicable Acquired Fund received by Balanced Growth. On or after the closing date scheduled for each Reorganization (the "Closing Date"), the applicable Acquired Fund will distribute the Balanced Growth Shares received by such Acquired Fund to its Shareholders as of the Valuation Date (as defined below) in complete liquidation of such Acquired Fund, and the applicable Acquired Fund will thereafter be dissolved and deregistered under the Investment Company Act of 1940, as amended (the "1940 Act"). As a result of each Reorganization, each Shareholder will receive that number of full and fractional Balanced Growth Shares equal in value to such Shareholder's pro rata interest in the net assets of the applicable Acquired Fund transferred to Balanced Growth. Pursuant to each Reorganization, each Shareholder will receive the class of shares of Balanced Growth that corresponds to the class of shares of the applicable Acquired Fund currently held by that Shareholder. Accordingly, as a result of each Reorganization, each Class A, Class B, Class C and Class D Shareholder of the applicable Acquired Fund will become a holder of Class A, Class B, Class C and Class D shares of Balanced Growth, respectively. Shareholders holding their shares of an Acquired Fund in certificate form will be asked to surrender their certificates in connection with the applicable Reorganization. Shareholders who do not surrender their certificates prior to the Closing Date will still receive their shares of Balanced Growth; however, such Shareholders will not be able to redeem, transfer or exchange the Balanced Growth Shares received until the old certificates have been surrendered. The Board of each Acquired Fund has determined that the interests of Shareholders will not be diluted as a result of the applicable Reorganization. The "Valuation Date" is the third business day following the receipt of the requisite approval by Shareholders of the applicable Reorganization Agreement or at such other time as the applicable Acquired Fund and Balanced Growth may agree, on which date the number of Balanced Growth Shares to be delivered to each Acquired Fund will be determined.
At least one but not more than 20 business days prior to the Valuation Date, Balanced Income and Income Builder will each declare and pay a dividend or dividends which, together with all previous such dividends, will have the effect of distributing to Shareholders substantially all of Balanced Income's and
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Income Builder's investment company taxable income for all periods since the inception of Balanced Income or Income Builder, as applicable, through and including the Valuation Date (computed without regard to any dividends paid deduction), and substantially all of Balanced Income's and Income Builder's net capital gain, if any, realized in such periods (after reduction for any capital loss carryovers).
For the reasons set forth below under "The Reorganizations — The Boards' Considerations," the Board, including the trustees who are not "interested persons" of Balanced Income or Income Builder ("Independent Trustees"), as that term is defined in the 1940 Act, has concluded that each Reorganization is in the best interests of each of Balanced Income and Income Builder and the Shareholders and recommends approval of each Reorganization Agreement.
Past Performance
Balanced Growth. The bar chart and table below provide some indication of the risks of investing in Balanced Growth. Balanced Growth's past performance (before and after taxes) does not indicate how Balanced Growth will perform in the future. This chart shows how the performance of Balanced Growth's Class C shares has varied from year to year over the past 10 calendar years.
Annual Total Returns—Calendar Years
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/html_62673barchart1.jpg)
The bar chart reflects the performance of Class C shares; the performance of the other Classes will differ because the Classes have different ongoing fees. The performance information in the bar chart does not reflect the deduction of sales charges; if these amounts were reflected, returns would be less than shown. The year-to-date total return as of March 31, 2006 was 1.42%.
During the periods shown in the bar chart, the highest return for a calendar quarter was 12.40% (quarter ended June 30, 1997) and the lowest return for a calendar quarter was –11.69% (quarter ended September 30, 2002).
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This table compares Balanced Growth's average annual total returns with those of indices that represent broad measures of market performance, as well as an index that represents a group of similar mutual funds, over time. Balanced Growth's returns include the maximum applicable sales charge for each Class and assume you sold your shares at the end of each period (unless otherwise noted).
Average Annual Total Returns (as of December 31, 2005)
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![]() | Past 1 Year | ![]() | Past 5 Years | ![]() | Past 10 Years | ![]() | Life of Fund* | ||||||||||||||||||||||
Class A1: Return Before Taxes | ![]() | 1.96 | % | ![]() | 3.80 | % | ![]() | — | ![]() | 5.49 | % | ||||||||||||||||||
Russell 1000® Value Index2 | ![]() | 7.05 | % | ![]() | 5.28 | % | ![]() | — | ![]() | 7.77 | % | ||||||||||||||||||
Lehman Brothers U.S. Government/ Credit Index3 | ![]() | 2.37 | % | ![]() | 6.11 | % | ![]() | — | ![]() | 6.36 | % | ||||||||||||||||||
Lipper Balanced Funds Index4 | ![]() | 5.20 | % | ![]() | 3.51 | % | ![]() | — | ![]() | 5.60 | % | ||||||||||||||||||
Class B1: Return Before Taxes | ![]() | 1.76 | % | ![]() | 3.76 | % | ![]() | — | ![]() | 5.35 | % | ||||||||||||||||||
Russell 1000® Value Index2 | ![]() | 7.05 | % | ![]() | 5.28 | % | ![]() | — | ![]() | 7.77 | % | ||||||||||||||||||
Lehman Brothers U.S. Government/ Credit Index3 | ![]() | 2.37 | % | ![]() | 6.11 | % | ![]() | — | ![]() | 6.36 | % | ||||||||||||||||||
Lipper Balanced Funds Index4 | ![]() | 5.20 | % | ![]() | 3.51 | % | ![]() | — | ![]() | 5.60 | % | ||||||||||||||||||
Class C1: Return Before Taxes | ![]() | 5.79 | % | ![]() | 4.12 | % | ![]() | 7.68 | % | ![]() | — | ||||||||||||||||||
Return After Taxes on Distributions5 | ![]() | 4.97 | % | ![]() | 3.58 | % | ![]() | 6.21 | % | ![]() | — | ||||||||||||||||||
Return After Taxes on Distributions and Sale of Fund Shares | ![]() | 4.29 | % | ![]() | 3.27 | % | ![]() | 5.96 | % | ![]() | — | ||||||||||||||||||
Russell 1000® Value Index2 | ![]() | 7.05 | % | ![]() | 5.28 | % | ![]() | 10.94 | % | ![]() | — | ||||||||||||||||||
Lehman Brothers U.S. Government/ Credit Index3 | ![]() | 2.37 | % | ![]() | 6.11 | % | ![]() | 6.17 | % | ![]() | — | ||||||||||||||||||
Lipper Balanced Funds Index4 | ![]() | 5.20 | % | ![]() | 3.51 | % | ![]() | 7.57 | % | ![]() | — | ||||||||||||||||||
Class D1: Return Before Taxes | ![]() | 7.86 | % | ![]() | 5.17 | % | ![]() | — | ![]() | 6.41 | % | ||||||||||||||||||
Russell 1000® Value Index2 | ![]() | 7.05 | % | ![]() | 5.28 | % | ![]() | — | ![]() | 7.77 | % | ||||||||||||||||||
Lehman Brothers U.S. Government/ Credit Index3 | ![]() | 2.37 | % | ![]() | 6.11 | % | ![]() | — | ![]() | 6.36 | % | ||||||||||||||||||
Lipper Balanced Funds Index4 | ![]() | 5.20 | % | ![]() | 3.51 | % | ![]() | — | ![]() | 5.60 | % | ||||||||||||||||||
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* | Only shown for classes with less than a ten year history. |
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(1) | Class C commenced operations on March 28, 1995. Classes A, B and D commenced operations on July 28, 1997. |
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(2) | The Russell 1000® Value Index measures the performance of those companies in the Russell 1000® Index with lower price-to-book ratios and lower forecasted growth values. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. |
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(3) | The Lehman Brothers U.S. Government/Credit Index tracks the performance of government and corporate obligations, including U.S. government agency and U.S. Treasury securities and corporate and Yankee bonds. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. |
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(4) | The Lipper Balanced Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Balanced Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. |
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(5) | These returns do not reflect any tax consequences from a sale of your shares at the end of each period, but they do reflect any applicable sales charges on such a sale. |
Included in the table above are the after-tax returns for Balanced Growth's Class C shares. The after-tax returns for Balanced Growth's other Classes will vary from the Class C shares' returns. After-tax returns are calculated using the historical highest individual federal marginal income tax rates during the period shown and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns are not relevant to investors who hold their Balanced Growth shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns may be higher than before-tax returns due to foreign tax credits and/or an assumed benefit from capital losses that would have been realized had Balanced Growth shares been sold at the end of the relevant periods, as applicable.
Balanced Income. The bar chart and table below provide some indication of the risks of investing in Balanced Income. The Fund's past performance (before and after taxes) does not indicate how Balanced Income will perform in the future. This chart shows how the performance of Balanced Income's Class C shares has varied from year to year over the past ten calendar years.
Annnual Total Returns—Calendar Years
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/html_62673barchart2.jpg)
The bar chart reflects the performance of Class C shares; the performance of the other Classes will differ because the Classes have different ongoing fees. The performance information in the bar chart does not reflect the deduction of sales charges; if these amounts were reflected, returns would be less than shown. The year-to-date total return as of March 31, 2006 was 0.16%.
During the periods shown in the bar chart, the highest return for a calendar quarter was 8.34% (quarter ended June 30, 1997) and the lowest return for a calendar quarter was −4.38% (quarter ended September 30, 2002).
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This table compares Balanced Income's average annual total returns with those of indices that represent broad measures of market performance as well as an index that represents a group of similar mutual funds, over time. Balanced Income's returns include the maximum applicable sales charge for each Class and assume you sold your shares at the end of each period (unless otherwise noted).
Average Annual Total Returns (as of December 31, 2005)
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![]() | Past 1 Year | ![]() | Past 5 Years | ![]() | Past 10 Years | ![]() | Life of Fund* | ||||||||||||||||||||||
Class A1: Return Before Taxes | ![]() | −0.46% | ![]() | 3.87% | ![]() | — | ![]() | 5.10% | |||||||||||||||||||||
Lehman Brothers U.S. Government/Credit Index2 | ![]() | 2.37% | ![]() | 6.11% | ![]() | — | ![]() | 6.36% | |||||||||||||||||||||
Russell 1000® Value Index3 | ![]() | 7.05% | ![]() | 5.28% | ![]() | — | ![]() | 7.77% | |||||||||||||||||||||
Lipper Income Funds Index4 | ![]() | 3.61% | ![]() | 4.50% | ![]() | — | ![]() | 5.50% | |||||||||||||||||||||
Class B1: Return Before Taxes | ![]() | −0.50% | ![]() | 3.84% | ![]() | — | ![]() | 4.96% | |||||||||||||||||||||
Lehman Brothers U.S. Government/Credit Index2 | ![]() | 2.37% | ![]() | 6.11% | ![]() | — | ![]() | 6.36% | |||||||||||||||||||||
Russell 1000® Value Index3 | ![]() | 7.05% | ![]() | 5.28% | ![]() | — | ![]() | 7.77% | |||||||||||||||||||||
Lipper Income Funds Index4 | ![]() | 3.61% | ![]() | 4.50% | ![]() | — | ![]() | 5.50% | |||||||||||||||||||||
Class C1: Return Before Taxes | ![]() | 3.38% | ![]() | 4.20% | ![]() | 6.20% | ![]() | — | |||||||||||||||||||||
Return After Taxes on Distributions5 | ![]() | 1.63% | ![]() | 3.16% | ![]() | 4.65% | ![]() | — | |||||||||||||||||||||
Return After Taxes on Distributions and Sale of Fund Shares | ![]() | 3.11% | ![]() | 3.07% | ![]() | 4.50% | ![]() | — | |||||||||||||||||||||
Lehman Brothers U.S. Government/Credit Index2 | ![]() | 2.37% | ![]() | 6.11% | ![]() | 6.17% | ![]() | — | |||||||||||||||||||||
Russell 1000® Value Index3 | ![]() | 7.05% | ![]() | 5.28% | ![]() | 10.94% | ![]() | — | |||||||||||||||||||||
Lipper Income Funds Index4 | ![]() | 3.61% | ![]() | 4.50% | ![]() | 7.06% | ![]() | — | |||||||||||||||||||||
Class D1: Return Before Taxes | ![]() | 5.41% | ![]() | 5.23% | ![]() | — | ![]() | 6.01% | |||||||||||||||||||||
Lehman Brothers U.S. Government/Credit Index2 | ![]() | 2.37% | ![]() | 6.11% | ![]() | — | ![]() | 6.36% | |||||||||||||||||||||
Russell 1000® Value Index3 | ![]() | 7.05% | ![]() | 5.28% | ![]() | — | ![]() | 7.77% | |||||||||||||||||||||
Lipper Income Funds Index4 | ![]() | 3.61% | ![]() | 4.50% | ![]() | — | ![]() | 5.50% | |||||||||||||||||||||
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* | Only shown for classes with less than a ten year history. |
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(1) | Class C commenced operations on March 28, 1995. Classes A, B and D commenced operations on July 28, 1997. |
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(2) | The Lehman Brothers U.S. Government/Credit Index tracks the performance of government and corporate obligations, including U.S. government agency and Treasury securities and corporate and Yankee bonds. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. |
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(3) | The Russell 1000® Value Index measures the performance of those companies in the Russell 1000® Index with lower price-to-book ratios and lower forecasted growth values. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. |
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(4) | The Lipper Income Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Income Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. |
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(5) | These returns do not reflect any tax consequences from a sale of your shares at the end of each period but they do reflect any applicable sales charges on such a sale. |
Included in the table above are the after-tax returns for Balanced Income's Class C shares. The after-tax returns for Balanced Income's other Classes will vary from the Class C shares' returns. After-tax returns are calculated using the historical highest individual federal marginal income tax rates during the period shown and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns are not relevant to investors who hold their Balanced Income shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns may be higher than before-tax returns due to foreign tax credits and/or an assumed benefit from capital losses that would have been realized had Balanced Income shares been sold at the end of the relevant periods, as applicable.
Income Builder. The bar chart and table below provide some indication of the risks of investing in Income Builder. Income Builder's past performance (before and after taxes) does not indicate how Income Builder will perform in the future. This chart shows how the performance of Income Builder's Class B shares has varied from year to year over the past ten calendar years.
Annual Total Returns—Calendar Years
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/html_62673barchart3.jpg)
The bar chart reflects the performance of Class B shares; the performance of the other Classes will differ because the Classes have different ongoing fees. The performance information in the bar chart does not reflect the deduction of sales charges; if these amounts were reflected, returns would be less than shown. The year-to-date total return as of March 31, 2006 was 2.21%.
During the periods shown in the bar chart, the highest return for a calendar quarter was 11.82% (quarter ended June 30, 2003) and the lowest return for a calendar quarter was −12.74% (quarter ended September 30, 2002).
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This table compares Income Builder's average annual total returns with those of indices that represent a broad measure of market performance, as well as indices that represent a group of similar mutual funds, over time. Income Builder's returns include the maximum applicable sales charge for each Class and assume you sold your shares at the end of each period (unless otherwise noted).
Average Annual Total Returns (as of December 31, 2005)
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![]() | Past 1 Year | ![]() | Past 5 Years | ![]() | Life of Fund* | ||||||||||||||||||||||||
Class A1 – Return Before Taxes | ![]() | 1.32 | % | ![]() | 4.67 | % | ![]() | 4.78 | % | ||||||||||||||||||||
Russell 1000® Value Index2 | ![]() | 7.05 | % | ![]() | 5.28 | % | ![]() | 7.77 | % | ||||||||||||||||||||
Lehman Brothers U.S. Government/Credit Index3 | ![]() | 2.37 | % | ![]() | 6.11 | % | ![]() | 6.36 | % | ||||||||||||||||||||
Lipper Income Funds Index4 | ![]() | 3.61 | % | ![]() | 4.50 | % | ![]() | 5.50 | % | ||||||||||||||||||||
Lipper Equity Income Funds Index5 | ![]() | 5.80 | % | ![]() | 3.57 | % | ![]() | 5.59 | % | ||||||||||||||||||||
Class B1 – Return Before Taxes | ![]() | 1.14 | % | ![]() | 4.66 | % | ![]() | 6.74 | % | ||||||||||||||||||||
Returns After Taxes on Distributions6 | ![]() | 0.28 | % | ![]() | 3.67 | % | ![]() | 5.02 | % | ||||||||||||||||||||
Returns After Taxes on Distributions and Sale of Fund Shares | ![]() | 0.73 | % | ![]() | 3.40 | % | ![]() | 4.81 | % | ||||||||||||||||||||
Russell 1000® Value Index2 | ![]() | 7.05 | % | ![]() | 5.28 | % | ![]() | 10.82 | % | ||||||||||||||||||||
Lehman Brothers U.S. Government/Credit Index3 | ![]() | 2.37 | % | ![]() | 6.11 | % | ![]() | 6.82 | % | ||||||||||||||||||||
Lipper Income Funds Index4 | ![]() | 3.61 | % | ![]() | 4.50 | % | ![]() | 7.07 | % | ||||||||||||||||||||
Lipper Equity Income Funds Index5 | ![]() | 5.80 | % | ![]() | 3.57 | % | ![]() | 8.16 | % | ||||||||||||||||||||
Class C1 – Return Before Taxes | ![]() | 5.14 | % | ![]() | 5.00 | %�� | ![]() | 4.67 | % | ||||||||||||||||||||
Russell 1000® Value Index2 | ![]() | 7.05 | % | ![]() | 5.28 | % | ![]() | 7.77 | % | ||||||||||||||||||||
Lehman Brothers U.S. Government/Credit Index3 | ![]() | 2.37 | % | ![]() | 6.11 | % | ![]() | 6.36 | % | ||||||||||||||||||||
Lipper Income Funds Index4 | ![]() | 3.61 | % | ![]() | 4.50 | % | ![]() | 5.50 | % | ||||||||||||||||||||
Lipper Equity Income Funds Index5 | ![]() | 5.80 | % | ![]() | 3.57 | % | ![]() | 5.59 | % | ||||||||||||||||||||
Class D1 – Return Before Taxes | ![]() | 7.18 | % | ![]() | 6.06 | % | ![]() | 5.71 | % | ||||||||||||||||||||
Russell 1000® Value Index2 | ![]() | 7.05 | % | ![]() | 5.28 | % | ![]() | 7.77 | % | ||||||||||||||||||||
Lehman Brothers U.S. Government/Credit Index3 | ![]() | 2.37 | % | ![]() | 6.11 | % | ![]() | 6.36 | % | ||||||||||||||||||||
Lipper Income Funds Index4 | ![]() | 3.61 | % | ![]() | 4.50 | % | ![]() | 5.50 | % | ||||||||||||||||||||
Lipper Equity Income Funds Index5 | ![]() | 5.80 | % | ![]() | 3.57 | % | ![]() | 5.59 | % | ||||||||||||||||||||
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(1) | Classes A, C and D commenced operations on July 28, 1997. Class B commenced operations on June 26, 1996. |
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(2) | The Russell 1000® Value Index measures the performance of those companies in the Russell 1000® Index with lower price-to-book ratios and lower forecasted growth values. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. |
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(3) | The Lehman Brothers U.S. Government/Credit Index tracks the performance of government and corporate obligations, including U.S. government agency and Treasury securities and corporate and Yankee bonds. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. |
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(4) | The Lipper Income Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Income Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. The Fund is in the Lipper Income Funds classification as of September 30, 2005. |
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(5) | The Lipper Equity Income Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Equity Income Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. |
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(6) | These returns do not reflect any tax consequences from a sale of your shares at the end of each period, but they do reflect any applicable sales charges on such a sale. |
Included in the table above are the after-tax returns for Income Builder's Class B shares. The after-tax returns for Income Builder's other classes will vary from the Class B shares' returns. After-tax returns are calculated using the historical highest individual federal marginal income tax rates during the period shown and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns are not relevant to investors who hold their Income Builder shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns may be higher than before-tax returns due to foreign tax credits and/or an assumed benefit from capital losses that would have been realized had Income Builder shares been sold at the end of the relevant periods, as applicable.
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Fee Table
The following table briefly describes the fees and expenses that a shareholder of Balanced Income, Income Builder and Balanced Growth may pay if they buy and hold shares of each respective Fund. These expenses are deducted from each respective Fund's assets and are based on expenses paid by Balanced Income for its fiscal year ended January 31, 2006, by Income Builder for its fiscal year ended September 30, 2005 and by Balanced Growth for its fiscal year ended January 31, 2006. Balanced Income, Income Builder and Balanced Growth each pays expenses for management of its assets, distribution of its shares and other services, and those expenses are reflected in the net asset value per share of each Fund. The table also sets forth pro forma fees for the surviving combined fund (Balanced Growth) (the "Combined Fund") reflecting what the fee schedule would have been on January 31, 2006, if either or both Reorganizations had been consummated twelve (12) months prior to that date.
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![]() | Balanced Income | ![]() | Income Builder | ![]() | Balanced Growth | ![]() | Pro Forma Combined Fund Balanced Income Reorganization Only(6) | ![]() | Pro Forma Combined Fund Income Builder Reorganization Only(7) | ![]() | Pro Forma Combined Fund Both Reorganizations(8) | |||||||||||||||
Shareholder Fees (fees paid directly from a shareholder's investment) | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||||
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||||
Class A | ![]() | 5.25%(1) | ![]() | 5.25%(1) | ![]() | 5.25%(1) | ![]() | 5.25%(1) | ![]() | 5.25%(1) | ![]() | 5.25%(1) | ||||||||||||||
Class B | ![]() | none | ![]() | none | ![]() | none | ![]() | none | ![]() | none | ![]() | none | ||||||||||||||
Class C | ![]() | none | ![]() | none | ![]() | none | ![]() | none | ![]() | none | ![]() | none | ||||||||||||||
Class D | ![]() | none | ![]() | none | ![]() | none | ![]() | none | ![]() | none | ![]() | none | ||||||||||||||
Maximum Deferred Sales Charge (Load) (as a percentage based on the lesser of the offering price or net asset value at redemption) | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||||
Class A | ![]() | none(2) | ![]() | none(2) | ![]() | none(2) | ![]() | none(2) | ![]() | none(2) | ![]() | none(2) | ||||||||||||||
Class B | ![]() | 5.00%(3) | ![]() | 5.00%(3) | ![]() | 5.00%(3) | ![]() | 5.00%(3) | ![]() | 5.00%(3) | ![]() | 5.00%(3) | ||||||||||||||
Class C | ![]() | 1.00%(4) | ![]() | 1.00%(4) | ![]() | 1.00%(4) | ![]() | 1.00%(4) | ![]() | 1.00%(4) | ![]() | 1.00%(4) | ||||||||||||||
Class D | ![]() | none | ![]() | none | ![]() | none | ![]() | none | ![]() | none | ![]() | none | ||||||||||||||
Redemption Fee(5) | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||||
Class A | ![]() | 2.00% | ![]() | 2.00% | ![]() | 2.00% | ![]() | 2.00% | ![]() | 2.00% | ![]() | 2.00% | ||||||||||||||
Class B | ![]() | 2.00% | ![]() | 2.00% | ![]() | 2.00% | ![]() | 2.00% | ![]() | 2.00% | ![]() | 2.00% | ||||||||||||||
Class C | ![]() | 2.00% | ![]() | 2.00% | ![]() | 2.00% | ![]() | 2.00% | ![]() | 2.00% | ![]() | 2.00% | ||||||||||||||
Class D | ![]() | 2.00% | ![]() | 2.00% | ![]() | 2.00% | ![]() | 2.00% | ![]() | 2.00% | ![]() | 2.00% | ||||||||||||||
Annual Fund Operating Expenses (expenses that are deducted from Fund assets) | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||||
Advisory Fees* | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||||
Class A | ![]() | 0.52% | ![]() | 0.67% | ![]() | 0.52% | ![]() | 0.52% | ![]() | 0.52% | ![]() | 0.52% | ||||||||||||||
Class B | ![]() | 0.52% | ![]() | 0.67% | ![]() | 0.52% | ![]() | 0.52% | ![]() | 0.52% | ![]() | 0.52% | ||||||||||||||
Class C | ![]() | 0.52% | ![]() | 0.67% | ![]() | 0.52% | ![]() | 0.52% | ![]() | 0.52% | ![]() | 0.52% | ||||||||||||||
Class D | ![]() | 0.52% | ![]() | 0.67% | ![]() | 0.52% | ![]() | 0.52% | ![]() | 0.52% | ![]() | 0.52% | ||||||||||||||
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15
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![]() | Balanced Income | ![]() | Income Builder | ![]() | Balanced Growth | ![]() | Pro Forma Combined Fund Balanced Income Reorganization Only(6) | ![]() | Pro Forma Combined Fund Income Builder Reorganization Only(7) | ![]() | Pro Forma Combined Fund Both Reorganizations(8) | |||||||||||||||
Distribution and Service (12b-1) Fees | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||||
Class A | ![]() | 0.24% | ![]() | 0.25% | ![]() | 0.24% | ![]() | 0.24% | ![]() | 0.25% | ![]() | 0.24% | ||||||||||||||
Class B | ![]() | 1.00% | ![]() | 1.00% | ![]() | 1.00% | ![]() | 1.00% | ![]() | 1.00% | ![]() | 1.00% | ||||||||||||||
Class C | ![]() | 0.98% | ![]() | 0.99% | ![]() | 1.00% | ![]() | 0.99% | ![]() | 0.99% | ![]() | 0.99% | ||||||||||||||
Class D | ![]() | none | ![]() | none | ![]() | none | ![]() | none | ![]() | none | ![]() | none | ||||||||||||||
Other Expenses | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||||
Class A | ![]() | 0.39% | ![]() | 0.34% | ![]() | 0.37% | ![]() | 0.34% | ![]() | 0.31% | ![]() | 0.32% | ||||||||||||||
Class B | ![]() | 0.39% | ![]() | 0.34% | ![]() | 0.37% | ![]() | 0.34% | ![]() | 0.31% | ![]() | 0.32% | ||||||||||||||
Class C | ![]() | 0.39% | ![]() | 0.34% | ![]() | 0.37% | ![]() | 0.34% | ![]() | 0.31% | ![]() | 0.32% | ||||||||||||||
Class D | ![]() | 0.39% | ![]() | 0.34% | ![]() | 0.37% | ![]() | 0.34% | ![]() | 0.31% | ![]() | 0.32% | ||||||||||||||
Total Annual Fund Operating Expenses | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||||
Class A | ![]() | 1.15% | ![]() | 1.26% | ![]() | 1.13% | ![]() | 1.10% | ![]() | 1.08% | ![]() | 1.08% | ||||||||||||||
Class B | ![]() | 1.91% | ![]() | 2.01% | ![]() | 1.89% | ![]() | 1.86% | ![]() | 1.83% | ![]() | 1.84% | ||||||||||||||
Class C | ![]() | 1.89% | ![]() | 2.00% | ![]() | 1.89% | ![]() | 1.85% | ![]() | 1.82% | ![]() | 1.83% | ||||||||||||||
Class D | ![]() | 0.91% | ![]() | 1.01% | ![]() | 0.89% | ![]() | 0.86% | ![]() | 0.84% | ![]() | 0.84% | ||||||||||||||
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Example
To attempt to show the effect of these expenses on an investment over time, the hypotheticals shown below have been created. The example assumes that an investor invests $10,000 in either Balanced Income, Income Builder, Balanced Growth or the Combined Fund, that the investment has a 5% return each year and that the operating expenses for each Fund remain the same (as set forth in the chart above). Although a shareholder's actual costs may be higher or lower, the tables below show a shareholder's costs at the end of each period based on these assumptions depending upon whether or not a shareholder sold his shares at the end of each period.
If a Shareholder SOLD His Shares:
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
![]() | 1 year | ![]() | 3 years | ![]() | 5 years | ![]() | 10 years | |||||||||||
Balanced Income | ![]() | ![]() | ![]() | ![]() | ||||||||||||||
Class A | ![]() | $ | 636 | ![]() | $ | 871 | ![]() | $ | 1,125 | ![]() | $ | 1,849 | ||||||
Class B | ![]() | $ | 694 | ![]() | $ | 900 | ![]() | $ | 1,232 | ![]() | $ | 2,233 | ||||||
Class C | ![]() | $ | 293 | ![]() | $ | 597 | ![]() | $ | 1,026 | ![]() | $ | 2,222 | ||||||
Class D | ![]() | $ | 93 | ![]() | $ | 290 | ![]() | $ | 504 | ![]() | $ | 1,120 | ||||||
Income Builder | ![]() | ![]() | ![]() | ![]() | ||||||||||||||
Class A | ![]() | $ | 647 | ![]() | $ | 904 | ![]() | $ | 1,180 | ![]() | $ | 1,968 | ||||||
Class B | ![]() | $ | 704 | ![]() | $ | 930 | ![]() | $ | 1,283 | ![]() | $ | 2,338 | ||||||
Class C | ![]() | $ | 303 | ![]() | $ | 627 | ![]() | $ | 1,078 | ![]() | $ | 2,327 | ||||||
Class D | ![]() | $ | 103 | ![]() | $ | 322 | ![]() | $ | 558 | ![]() | $ | 1,236 | ||||||
Balanced Growth | ![]() | ![]() | ![]() | ![]() | ||||||||||||||
Class A | ![]() | $ | 634 | ![]() | $ | 865 | ![]() | $ | 1,115 | ![]() | $ | 1,827 | ||||||
Class B | ![]() | $ | 692 | ![]() | $ | 894 | ![]() | $ | 1,221 | ![]() | $ | 2,212 | ||||||
Class C | ![]() | $ | 291 | ![]() | $ | 591 | ![]() | $ | 1,016 | ![]() | $ | 2,201 | ||||||
Class D | ![]() | $ | 91 | ![]() | $ | 284 | ![]() | $ | 493 | ![]() | $ | 1,096 | ||||||
Pro Forma Combined Fund (Balanced Income Reorganization Only) | ![]() | ![]() | ![]() | ![]() | ||||||||||||||
Class A | ![]() | $ | 631 | ![]() | $ | 856 | ![]() | $ | 1,099 | ![]() | $ | 1,795 | ||||||
Class B | ![]() | $ | 689 | ![]() | $ | 885 | ![]() | $ | 1,206 | ![]() | $ | 2,180 | ||||||
Class C | ![]() | $ | 288 | ![]() | $ | 582 | ![]() | $ | 1,001 | ![]() | $ | 2,169 | ||||||
Class D | ![]() | $ | 88 | ![]() | $ | 274 | ![]() | $ | 477 | ![]() | $ | 1,061 | ||||||
Pro Forma Combined Fund (Income Builder Reorganization Only) | ![]() | ![]() | ![]() | ![]() | ||||||||||||||
Class A | ![]() | $ | 629 | ![]() | $ | 850 | ![]() | $ | 1,089 | ![]() | $ | 1,773 | ||||||
Class B | ![]() | $ | 686 | ![]() | $ | 876 | ![]() | $ | 1,190 | ![]() | $ | 2,148 | ||||||
Class C | ![]() | $ | 285 | ![]() | $ | 573 | ![]() | $ | 985 | ![]() | $ | 2,137 | ||||||
Class D | ![]() | $ | 86 | ![]() | $ | 268 | ![]() | $ | 466 | ![]() | $ | 1,037 | ||||||
Pro Forma Combined Fund (Both Reorganizations) | ![]() | ![]() | ![]() | ![]() | ||||||||||||||
Class A | ![]() | $ | 629 | ![]() | $ | 850 | ![]() | $ | 1,089 | ![]() | $ | 1,773 | ||||||
Class B | ![]() | $ | 687 | ![]() | $ | 829 | ![]() | $ | 1,795 | ![]() | $ | 2,159 | ||||||
Class C | ![]() | $ | 286 | ![]() | $ | 576 | ![]() | $ | 990 | ![]() | $ | 2,148 | ||||||
Class D | ![]() | $ | 86 | ![]() | $ | 268 | ![]() | $ | 466 | ![]() | $ | 1,037 | ||||||
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If a Shareholder HELD His Shares:
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
![]() | 1 year | ![]() | 3 years | ![]() | 5 years | ![]() | 10 years | |||||||||||
Balanced Income | ![]() | ![]() | ![]() | ![]() | ||||||||||||||
Class A | ![]() | $ | 636 | ![]() | $ | 871 | ![]() | $ | 1,125 | ![]() | $ | 1,849 | ||||||
Class B | ![]() | $ | 194 | ![]() | $ | 600 | ![]() | $ | 1,032 | ![]() | $ | 2,233 | ||||||
Class C | ![]() | $ | 193 | ![]() | $ | 597 | ![]() | $ | 1,026 | ![]() | $ | 2,222 | ||||||
Class D | ![]() | $ | 93 | ![]() | $ | 290 | ![]() | $ | 504 | ![]() | $ | 1,120 | ||||||
Income Builder | ![]() | ![]() | ![]() | ![]() | ||||||||||||||
Class A | ![]() | $ | 647 | ![]() | $ | 904 | ![]() | $ | 1,180 | ![]() | $ | 1,968 | ||||||
Class B | ![]() | $ | 204 | ![]() | $ | 630 | ![]() | $ | 1,083 | ![]() | $ | 2,338 | ||||||
Class C | ![]() | $ | 203 | ![]() | $ | 627 | ![]() | $ | 1,078 | ![]() | $ | 2,327 | ||||||
Class D | ![]() | $ | 103 | ![]() | $ | 322 | ![]() | $ | 558 | ![]() | $ | 1,236 | ||||||
Balanced Growth | ![]() | ![]() | ![]() | ![]() | ||||||||||||||
Class A | ![]() | $ | 634 | ![]() | $ | 865 | ![]() | $ | 1,115 | ![]() | $ | 1,827 | ||||||
Class B | ![]() | $ | 192 | ![]() | $ | 594 | ![]() | $ | 1,021 | ![]() | $ | 2,212 | ||||||
Class C | ![]() | $ | 191 | ![]() | $ | 591 | ![]() | $ | 1,016 | ![]() | $ | 2,201 | ||||||
Class D | ![]() | $ | 91 | ![]() | $ | 284 | ![]() | $ | 493 | ![]() | $ | 1,096 | ||||||
Pro Forma Combined (Balanced Income Reorganization Only) | ![]() | ![]() | ![]() | ![]() | ||||||||||||||
Class A | ![]() | $ | 631 | ![]() | $ | 856 | ![]() | $ | 1,099 | ![]() | $ | 1,795 | ||||||
Class B | ![]() | $ | 189 | ![]() | $ | 585 | ![]() | $ | 1,006 | ![]() | $ | 2,180 | ||||||
Class C | ![]() | $ | 188 | ![]() | $ | 582 | ![]() | $ | 1,001 | ![]() | $ | 2,169 | ||||||
Class D | ![]() | $ | 88 | ![]() | $ | 274 | ![]() | $ | 477 | ![]() | $ | 1,061 | ||||||
Pro Forma Combined (Income Builder Reorganization Only) | ![]() | ![]() | ![]() | ![]() | ||||||||||||||
Class A | ![]() | $ | 629 | ![]() | $ | 850 | ![]() | $ | 1,089 | ![]() | $ | 1,773 | ||||||
Class B | ![]() | $ | 186 | ![]() | $ | 576 | ![]() | $ | 990 | ![]() | $ | 2,148 | ||||||
Class C | ![]() | $ | 185 | ![]() | $ | 573 | ![]() | $ | 985 | ![]() | $ | 2,137 | ||||||
Class D | ![]() | $ | 86 | ![]() | $ | 268 | ![]() | $ | 466 | ![]() | $ | 1,037 | ||||||
Pro Forma Combined (Both Reorganizations) | ![]() | ![]() | ![]() | ![]() | ||||||||||||||
Class A | ![]() | $ | 629 | ![]() | $ | 850 | ![]() | $ | 1,089 | ![]() | $ | 1,773 | ||||||
Class B | ![]() | $ | 187 | ![]() | $ | 579 | ![]() | $ | 995 | ![]() | $ | 2,159 | ||||||
Class C | ![]() | $ | 186 | ![]() | $ | 576 | ![]() | $ | 990 | ![]() | $ | 2,148 | ||||||
Class D | ![]() | $ | 86 | ![]() | $ | 268 | ![]() | $ | 466 | ![]() | $ | 1,037 | ||||||
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While Class B and Class C shares do not have any front-end sales charges, their higher ongoing annual expenses (due to higher 12b-1 fees) mean that over time you could end up paying more for these shares than if you were to pay front-end sales charges for Class A shares.
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* | Expense information has been restated to reflect current fees in effect as of November 1, 2004. |
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(1) | Reduced for purchases of $25,000 and over. See "Share Class Arrangements — Class A Shares" in each Fund's Prospectus. |
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(2) | Investments that are not subject to any sales charge at the time of purchase are subject to a contingent deferred sales charge ("CDSC") of 1.00% that will be imposed if you sell your shares within 18 months after purchase, except for certain specific circumstances. See "Purchases, Exchanges and Redemptions" below and "Share Class Arrangements — Class A Shares" in each Fund's Prospectus. |
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(3) | The CDSC is scaled down to 1.00% during the sixth year, reaching zero thereafter. See "Purchases, Exchanges and Redemptions" below and "Share Class Arrangements — Class B Shares" in each Fund's Prospectus. |
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(4) | Only applicable if you sell your shares within one year of purchase. See "Purchases, Exchanges and Redemptions" below and "Share Class Arrangements — Class C Shares" in each Fund's Prospectus. |
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(5) | Payable to the Fund on shares redeemed within seven days of purchase. The redemption fee is based on the redemption proceeds. See "Shareholder Information — How to Sell Shares" in each Fund's Prospectus for more information on redemption fees. |
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(6) | Pro forma expenses are calculated based on the assets of Balanced Income and Balanced Growth as of January 31, 2006. |
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(7) | Pro forma expenses are calculated based on the assets of Income Builder and Balanced Growth as of January 31, 2006. |
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(8) | Pro forma expenses are calculated based on the assets of Balanced Income, Income Builder and Balanced Growth as of January 31, 2006. |
The purpose of the foregoing fee tables is to assist the shareholder in understanding the various costs and expenses that a shareholder in each Fund will bear directly or indirectly. For a more complete description of these costs and expenses, see "Comparison of each Acquired Fund (Balanced Income and Income Builder) and Balanced Growth — Investment Advisory and Distribution Plan Fees; Other Significant Fees; and Purchases, Exchanges and Redemptions" below.
Tax Consequences of the Reorganizations
As a condition to each Reorganization, each Acquired Fund has requested an opinion of Clifford Chance US LLP to the effect that the applicable Reorganization will constitute a tax-free reorganization for federal income tax purposes, and that no gain or loss will be recognized by such Acquired Fund and Balanced Growth or the Acquired Fund's shareholders for federal income tax purposes as a result of the transactions included in the applicable Reorganization. For further information about the tax consequences of the Reorganizations, see "The Reorganizations — Tax Aspects of the Reorganizations" below.
Comparison of each Acquired Fund (Balanced Income and Income Builder) and Balanced Growth
Investment Objectives and Policies. The investment objective and policies of each Fund are set forth below. Each of the Acquired Funds and Balanced Growth is a diversified fund. The principal differences between the investment policies of each of the Acquired Funds and Balanced Growth are more fully described under "Comparison of Investment Objectives, Policies and Restrictions" below. The investment policies of each Fund are not fundamental and may be changed by its Board.
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Balanced Income | ![]() | Income Builder | ![]() | Balanced Growth | ||||||
Investment Objective | ![]() | Investment Objectives | ![]() | Investment Objective | ||||||
•seeks to provide current income and moderate capital growth | ![]() | •seeks reasonable income as a primary objective and growth of capital as a secondary objective | ![]() | •seeks to provide capital growth with reasonable current income | ||||||
Investment Policies | ![]() | Investment Policies | ![]() | Investment Policies | ||||||
•normally invests at least 80% of its assets in income-producing securities, consisting of fixed-income securities, dividend paying common stocks and convertible securities •normally invests at least 60% of its net assets in fixed-income securities (including zero coupon securities), which are limited to investment grade corporate debt securities, Yankee dollar obligations, sovereign debt obligations, bank obligations, investment grade mortgage-backed securities (including collateralized mortgage obligations), investment grade asset-backed securities and U.S. government securities •normally invests at least 25% of its assets in dividend paying common stocks and convertible securities •may invest up to 15% of its net assets in REITs •may invest up to 20% of its net assets in foreign securities that are held directly or listed in the United States on a national securities exchange and in the form of depositary receipts | ![]() | •normally invests at least 80% of its assets in income-producing equity and fixed-income securities, with normally at least 65% of its assets invested in income-producing equity securities, including common stock, preferred stock and convertible securities •invests in common stocks (including depositary receipts) of large capitalization companies with a record of paying dividends and which have the potential for maintaining dividends, preferred stock and convertible securities •may invest up to 25% of its net assets in "exchangeable" convertible securities •may invest up to 25% of its net assets in foreign securities (including depositary receipts) (no limit on securities of foreign companies that are listed in the United States on a national securities exchange) •may invest up to 10% of its net assets in "synthetic" convertible securities •may invest up to 35% of its net assets in non-convertible fixed-income securities (including zero coupon bonds) and U.S. government securities issued or guaranteed by the U.S. government, its agencies and instrumentalities •may invest up to 15% of its net assets in REITs •may invest up to 20% of its net assets in non-convertible fixed-income securities rated lower than investment grade (but not below B) •may invest up to 20% of its net assets in common stocks that do not pay a dividend •may invest up to 15% of its net assets in REITs | ![]() | •normally invests at least 60% of its assets in dividend paying common stocks and convertible securities •normally invests at least 25% of its assets in fixed-income securities (including zero coupon securities), which are limited to investment grade corporate debt securities, Yankee dollar obligations, sovereign debt obligations, bank obligations, investment grade mortgage-backed securities (including collateralized mortgage obligations), investment grade asset-backed securities and U.S. government securities •may invest up to 25% of its net assets in "exchangeable" convertible securities •may invest up to 10% of its net assets in "synthetic" convertible securities •may invest up to 20% of its net assets in foreign securities that are held directly or listed in the United States on a national securities exchange and in the form of depositary receipts •may invest up to 15% of its net assets in REITs | ||||||
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Investment Advisory and Distribution Plan Fees. Each Acquired Fund and Balanced Growth obtain advisory services from the Investment Adviser. Each class of each Fund's shares is subject to the same advisory fee rates applicable to the respective Fund.
For each Fund's most recent fiscal year end, each Fund paid the Investment Adviser monthly compensation calculated daily by applying the following annual rates to the Fund's average daily net assets:
20
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Balanced Income (for the fiscal year ended January 31, 2006) | ![]() | 0.52% of the portion of the daily net assets not exceeding $500 million and 0.495% of the portion of the daily net assets exceeding $500 million | ||||
Income Builder (for the fiscal year ended September 30, 2005) | ![]() | For the period from November 1, 2004 to September 30, 2005: 0.67% of the portion of daily net assets of the Fund not exceeding $500 million; and 0.645% of the portion of daily net assets exceeding $500 million; and For the period from October 1, 2004 to October 31, 2004: 0.75% of the portion of daily net assets of the Fund not exceeding $500 million; and 0.725% of the portion of daily net assets exceeding $500 million | ||||
Balanced Growth (for the fiscal year ended January 31, 2006) | ![]() | 0.52% of the portion of the daily net assets not exceeding $500 million and 0.495% of the portion of the net assets exceeding $500 million | ||||
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Each Acquired Fund and Balanced Growth has adopted a distribution plan (collectively, the "Plans") pursuant to Rule 12b-1 under the 1940 Act. In the case of Class A and Class C shares, each Fund's Plan similarly provides that the Fund will reimburse Morgan Stanley Distributors Inc. (the "Distributor") and others for the expenses of certain activities and services incurred by them in connection with the distribution of the Class A and Class C shares of the Fund. Reimbursement for these expenses is made in monthly payments by each Fund to the Distributor which will in no event exceed amounts equal to payments at the annual rates of 0.25% and 1.00% of the average daily net assets of Class A and Class C shares, respectively. In the case of Class B shares, the Plans for Balanced Income and Balanced Growth provide that the Fund will reimburse the Distributor and others for their actual distribution expenses incurred on behalf of Class B Shares and for unreimbursed distribution expenses a fee, the amount of which each monthly payment may in no event exceed an amount equal to payment at the annual rate of 1.00% of the average daily net assets of Class B shares. In the case of Income Builder Class B shares, the Plan provides that the Fund will reimburse the Distributor and others for their actual distribution expenses incurred on behalf of Class B Shares and for unreimbursed distribution expenses a fee, the amount of which each monthly payment may in no event exceed an amount equal to payment at the annual rate of 1.00% of the lesser of: (a) the average daily aggregate gross sales of the Class B shares since the inception of the Fund (not including reinvestment of dividends or capital gains distributions), less the average daily aggregate net asset value of the Class B shares redeemed since a Fund's inception upon which a CDSC has been imposed or upon which such charge has been waived; or (b) the average daily net assets of Class B shares. The 12b-1 fee is paid for the services provided and the expenses borne by the Distributor and others in connection with the distribution of each Fund's Class B shares. There are no 12b-1 fees applicable to each Fund's Class D shares. For further information relating to the 12b-1 fees applicable to each class of Balanced Growth's shares, see the section entitled "Share Class Arrangements" in Balanced Growth's Prospectus attached hereto. The Distributor also receives the proceeds of any CDSC paid by the Funds' shareholders at the time of redemption. The CDSC schedules applicable to each Fund are set forth below under "Purchases, Exchanges and Redemptions."
21
Other Significant Fees. Each Acquired Fund and Balanced Growth pays additional fees in connection with its operations, including legal, auditing, transfer agent, trustees fees and custodial fees. See "Synopsis — Fee Table" above for the percentage of average net assets represented by such "Other Expenses."
Purchases, Exchanges and Redemptions. Class A shares of each Acquired Fund and Balanced Growth are sold at net asset value plus an initial sales charge of up to 5.25%. The initial sales charge is reduced for certain purchases. Investments of $1 million or more (and investment by certain other limited categories of investors) are not subject to any sales charges at the time of purchase, but are generally subject to a CDSC of 1.00% on redemptions made within 18 months after the last day of the month of purchase (except for certain specific circumstances fully described in each Fund's Prospectus).
Class B shares of each Acquired Fund and Balanced Growth are offered at net asset value with no initial sales charge, but are subject to the same CDSC schedule set forth below:
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Year Since Purchase Payment Made | ![]() | Class B Shares of Balanced Income, Income Builder and Balanced Growth | ||||
First | ![]() | 5.0% | ||||
Second | ![]() | 4.0% | ||||
Third | ![]() | 3.0% | ||||
Fourth | ![]() | 2.0% | ||||
Fifth | ![]() | 2.0% | ||||
Sixth | ![]() | 1.0% | ||||
Seventh and thereafter | ![]() | None | ||||
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Class C shares of each Acquired Fund and Balanced Growth are sold at net asset value with no initial sales charge, but are subject to a CDSC of 1.00% on redemptions made within one year after the last day of the month of purchase. The CDSC may be waived for certain redemptions (which are fully described under the section "Share Class Arrangements" in each Fund's Prospectus).
Class D shares of each Acquired Fund and Balanced Growth are available only to limited categories of investors and are sold at net asset value with no initial sales charge or CDSC.
The CDSC is paid to the Distributor. Shares of each Fund are distributed by the Distributor and offered by Morgan Stanley DW and other dealers who have entered into selected dealer agreements with the Distributor. For further information relating to the CDSC schedules applicable to each class of shares of each Fund, see the section entitled "Share Class Arrangements" in each Fund's Prospectus.
Shares of each class of each Fund may be exchanged for shares of the same class of any other continuously offered Multi-Class Fund, or for shares of a No-Load Fund, a Money Market Fund or the Limited Duration U.S. Treasury Trust (each, an "Exchange Fund"), without the imposition of an exchange fee. Front-end sales charges are not imposed on exchanges of Class A shares. See the inside back cover of the Balanced Growth Prospectus for each Morgan Stanley Fund's designation as a Multi-Class Fund, No-Load Fund or Money Market Fund. Upon consummation of each Reorganization, the foregoing exchange privileges will still be applicable to shareholders of the Combined Fund.
Balanced Growth shares distributed to Shareholders as a result of either Reorganization will not be subject to an initial sales charge.
With respect to each Fund, no CDSC is imposed at the time of any exchange, although any applicable CDSC will be imposed upon ultimate redemption. For purposes of calculating the holding period in determining any applicable CDSC upon redemption of shares received as a result of either Reorganization, any period during which the Shareholder held shares of a fund that charged a CDSC (e.g., Balanced
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Income or Income Builder) will be counted. During the period of time a shareholder of a Fund remains in an Exchange Fund, the holding period (for purposes of determining the CDSC rate) is frozen. Each Fund provides telephone exchange privileges to its shareholders. For greater details relating to exchange privileges applicable to Balanced Growth, see the section entitled "How to Exchange Shares" in Balanced Growth's Prospectus.
Shares of each Fund redeemed within seven days of purchase will be subject to a 2% redemption fee, payable to such Fund. The redemption fee is designed to protect each Fund and its remaining shareholders from the effects of short-term trading. The redemption fee is not imposed on redemptions made: (i) through systematic withdrawal/exchange plans, (ii) through pre-approved asset allocation programs, (iii) of shares received by reinvesting income dividends or capital gain distributions, (iv) through certain collective trust funds or other pooled vehicles and (v) on behalf of advisory accounts where client allocations are solely at the discretion of the Morgan Stanley Investment Management investment team. The redemption fee is based on, and deducted from, the redemption proceeds. Each time shares are redeemed or exchanged, the shares held the longest will be redeemed or exchanged first. The redemption fee may not be imposed on transactions that occur through certain omnibus accounts at financial intermediaries.
Shareholders of each Fund may redeem their shares for cash at any time at the net asset value per share next determined; however, such redemption proceeds may be reduced by the amount of any applicable CDSC. Each Fund offers a reinstatement privilege whereby a shareholder who has not previously exercised such privilege whose shares have been redeemed or repurchased may, within 35 days after the date of redemption or repurchase, reinstate any portion or all of the proceeds thereof in shares of the same class from which such shares were redeemed or repurchased and receive a pro rata credit for any CDSC paid in connection with such redemption or repurchase. Each Fund may redeem involuntarily, at net asset value, most accounts valued at less than $100.
Dividends. Each Fund declares dividends separately for each of its classes. Each Fund pays dividends from net investment income quarterly and usually distributes net capital gains, if any, in June and December (except for Income Builder, which usually distributes such capital gains in December only). Each Fund, however, may determine either to distribute or to retain all or part of any net long-term capital gains in any year for reinvestment. With respect to each Fund, dividends and capital gains distributions are automatically reinvested in additional shares of the same class of shares of the Fund at net asset value unless the shareholder elects to receive cash.
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PRINCIPAL RISK FACTORS
The share price and return of each Acquired Fund and Balanced Growth will fluctuate with changes in the market value of their respective portfolio securities. The market value of the Funds' portfolio securities will increase or decrease due to a variety of economic, market and political factors which cannot be predicted. The principal risks associated with an investment in Balanced Income, Income Builder and Balanced Growth are summarized below.
Equity Securities. Each Acquired Fund and Balanced Growth invests in common stocks and other equity securities, including securities convertible into common stocks. In general, stock and other equity security values fluctuate in response to activities specific to the company as well as general market, economic and political conditions. Stock and other equity security prices can fluctuate widely in response to these factors.
Fixed-Income Investments. The principal risks of investing in each Acquired Fund and Balanced Growth are also associated with such Fund's fixed-income investments. All fixed-income securities are subject to two types of risk: credit risk and interest rate risk. Credit risk refers to the possibility that the issuer of a security will be unable to make interest payments and/or repay the principal on its debt. Interest rate risk refers to fluctuations in the value of a fixed-income security resulting from changes in the general level of interest rates. When the general level of interest rates goes up, the prices of most fixed-income securities go down. When the general level of interest rates goes down, the prices of most fixed-income securities go up. (Zero coupon securities are typically subject to greater price fluctuations than comparable securities that pay current interest.) While each Fund invests in investment grade securities, certain of these securities have speculative characteristics. In addition, each of Balanced Income and Balanced Growth is not limited as to the maturities of the securities in which it may invest. Thus, a rise in the general level of interest rates may cause the price of the Fund's fixed-income securities to fall substantially.
Lower Rated Fixed Income Securities. Income Builder and Balanced Growth may invest in lower rated fixed-income securities. The Funds' investments in fixed-income securities rated lower than investment grade, or if unrated, of comparable quality as determined by the Investment Adviser (commonly known as ‘‘junk bonds’’) pose significant risks. The prices of junk bonds are likely to be more sensitive to adverse economic changes or individual corporate developments than higher rated securities. During an economic downturn or substantial period of rising interest rates, junk bond issuers and, in particular, highly leveraged issuers may experience financial stress that would adversely affect their ability to service their principal and interest payment obligations, to meet their projected business goals or to obtain additional financing. In the event of a default, the Funds may incur additional expenses to seek recovery. The secondary market for junk bonds may be less liquid than the market for higher quality securities and, as such, may have an adverse effect on the market prices of certain securities. Many junk bonds are issued as Rule 144A securities. Rule 144A securities could have the effect of increasing the level of Fund illiquidity to the extent the Fund may be unable to find qualified institutional buyers interested in purchasing the securities. The illiquidity of the market may also adversely affect the ability of the Funds' Trustees to arrive at a fair value for certain junk bonds at certain times and could make it difficult for the Funds to sell certain securities. In addition, periods of economic uncertainty and change probably would result in an increased volatility of market prices of high yield securities and a corresponding volatility in a Fund's net asset value.
REITs. Each Acquired Fund and Balanced Growth may also invest in REITs. REITs pool investors' funds for investments primarily in commercial real estate properties. Like mutual funds, REITs have expenses, including advisory and administration fees, that are paid by its shareholders. As a result,
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an investor would absorb duplicate levels of fees when the Funds invest in REITs. The performance of any Fund REIT holdings ultimately depends on the types of real property in which the REITs invest and how well the property is managed. A general downturn in real estate values also can hurt REIT performance. In addition, REITs are subject to certain provisions under federal tax law. The failure of a company to qualify as a REIT could have adverse consequences for the Funds, including significantly reducing return to a Fund on its investment in such company.
Foreign Securities. Each Acquired Fund and Balanced Growth may invest in foreign securities. Each Fund's investments in foreign securities involve risks that are in addition to the risks associated with domestic securities. One additional risk is currency risk. While the price of Fund shares is quoted in U.S. dollars, a Fund generally converts U.S. dollars to a foreign market's local currency to purchase a security in that market. If the value of that local currency falls relative to the U.S. dollar, the U.S. dollar value of the foreign security will decrease. This is true even if the foreign security's local price remains unchanged.
Foreign securities also have risks related to economic and political developments abroad, including expropriations, confiscatory taxation, exchange control regulation, limitations on the use or transfer of Fund assets and any effects of foreign social, economic or political instability. Foreign companies, in general, are not subject to the regulatory requirements of U.S. companies and, as such, there may be less publicly available information about these companies. Moreover, foreign accounting, auditing and financial reporting standards generally are different from those applicable to U.S. companies. Finally, in the event of a default of any foreign debt obligations, it may be more difficult for a Fund to obtain or enforce a judgment against the issuers of the securities.
Securities of foreign issuers may be less liquid than comparable securities of U.S. issuers and, as such, their price changes may be more volatile. Furthermore, foreign exchanges and broker-dealers are generally subject to less government and exchange scrutiny and regulation than their U.S. counterparts. In addition, differences in clearance and settlement procedures in foreign markets may occasion delays in settlement of a Fund's trades effected in those markets and could result in losses to the Fund due to subsequent declines in the value of the securities subject to the trades.
Depositary receipts involve many of the same risks as those associated with direct investment in foreign securities. In addition, the underlying issuers of certain depositary receipts, particularly unsponsored or unregistered depositary receipts, are under no obligation to distribute shareholder communications to the holders of such receipts, or to pass through to them any voting rights with respect to the deposited securities.
Mortgage-Backed Securities. Each of Balanced Income and Balanced Growth may invest in mortgage-backed securities. Mortgage-backed securities in which such Funds may invest have different risk characteristics than traditional debt securities. Although, generally, the value of fixed-income securities increases during periods of falling interest rates and decreases during periods of rising rates, this is not always the case with mortgage-backed securities. This is due to the fact that principal on underlying mortgages may be prepaid at any time, as well as other factors. Generally, prepayments will increase during a period of falling interest rates and decrease during a period of rising interest rates. The rate of prepayments also may be influenced by economic and other factors. Prepayment risk includes the possibility that, as interest rates fall, securities with stated interest rates may have the principal prepaid earlier than expected, requiring the Fund to invest the proceeds at generally lower interest rates. Investments in mortgage-backed securities are made based upon, among other things, expectations regarding the rate of prepayments on underlying mortgage pools. Rates of prepayment, faster or slower than expected by the Investment Adviser, could reduce the Fund's yield, increase the volatility of the Fund and/or cause a decline in net asset value. Certain mortgage-backed securities may be more volatile and less liquid than other traditional types of debt securities.
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Asset-Backed Securities. Each of Balanced Income and Balanced Growth may invest in asset-backed securities. Asset-backed securities have risk characteristics similar to mortgage-backed securities. Like mortgage-backed securities, they generally decrease in value as a result of interest rate increases, but may benefit less than other fixed-income securities from declining interest rates, principally because of prepayments. Also, as in the case of mortgage-backed securities, prepayments generally increase during a period of declining interest rates although other factors, such as changes in credit use and payment patterns, may also influence prepayment rates. Asset-backed securities also involve the risk that various federal and state consumer laws and other legal and economic factors may result in the collateral backing the securities being insufficient to support payment on the securities.
Collateralized Mortgage Obligations. Each of Balanced Income and Balanced Growth may invest in collateralized mortgage obligations (‘‘CMOs’’), which are debt obligations collateralized by mortgage loans or mortgage pass-through securities (collectively, "Mortgage Assets"). The principal and interest on the Mortgage Assets comprising a CMO may be allocated among the several classes of a CMO in many ways. The general goal in allocating cash flows on Mortgage Assets to the various classes of a CMO is to create certain tranches on which the expected cash flows have a higher degree of predictability than do the underlying Mortgage Assets. As a general matter, the more predictable the cash flow is on a particular CMO tranche, the lower the anticipated yield on that tranche at the time of issue will be relative to the prevailing market yields on the Mortgage Assets. As part of the process of creating more predictable cash flows on certain tranches of a CMO, one or more tranches generally must be created that absorb most of the changes in the cash flows on the underlying Mortgage Assets. The yields on these tranches are generally higher than prevailing market yields on other mortgage related securities with similar average lives. Principal prepayments on the underlying Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates. Because of the uncertainty of the cash flows on these tranches, the market prices and yields of these tranches are more volatile and may increase or decrease in value substantially with changes in interest rates and/or the rates of prepayment. Due to the possibility that prepayments (on home mortgages and other collateral) will alter the cash flow on CMOs, it is not possible to determine in advance the final maturity date or average life. Faster prepayment will shorten the average life and slower prepayments will lengthen it. In addition, if the collateral securing CMOs or any third party guarantees are insufficient to make payments, the Fund could sustain a loss.
Yankee Dollar Obligations. Each of Balanced Income and Balanced Growth may invest in Yankee dollar obligations. Yankee dollar obligations are subject to the same risks as domestic issues, notably credit risk, market risk and liquidity risk. To a limited extent, they are also subject to certain sovereign risks. One such risk is the possibility that a sovereign country might prevent capital, in the form of dollars, from flowing across its borders. Other risks include adverse political and economic developments; the extent and quality of government regulations of financial markets and institutions; the imposition of foreign withholding taxes; and the expropriation or nationalization of foreign issuers. Each Fund may consider Yankee dollar obligations to be domestic securities for purposes of its investment policy.
Sovereign Debt. Each of Balanced Income and Balanced Growth may invest in sovereign debt. Investments in sovereign debt are subject to the risk that a government entity may delay or refuse to pay interest or repay principal on its sovereign debt. Some of these reasons may include cash flow problems, insufficient foreign currency reserves, political considerations, the relative size of its debt position to its economy or its failure to put in place economic reforms required by the International Monetary Fund or other multilateral agencies. If a government entity defaults, it may ask for more time in which to pay or
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for further loans. There is no legal process for collecting sovereign debt that a government does not pay or bankruptcy proceeding by which all or part of sovereign debt that a government entity has not repaid may be collected.
Smaller and Medium-Sized Companies. Income Builder may invest in the securities of smaller and medium-sized companies. The Fund's investments in smaller and medium-sized companies carry more risk than investments in larger companies. While some of the Fund's holdings in these companies may be listed on a national securities exchange, such securities are more likely to be traded in the over-the-counter market. The low market liquidity of these securities may have an adverse impact on the Fund's ability to sell certain securities at favorable prices and may also make it difficult for the Fund to obtain market quotations based on actual trades for purposes of valuing the Fund's securities. Investing in lesser-known, smaller and medium capitalization companies involves greater risk of volatility of the Fund's net asset value than is customarily associated with larger, more established companies. Often smaller and medium capitalization companies and the industries in which they are focused are still evolving and, while this may offer better growth potential than larger, more established companies, it also may make them more sensitive to changing market conditions.
Convertible Securities. Each Acquired Fund and Balanced Growth may invest in convertible securities. A Fund's investments in convertible securities subject the Fund to the risks associated with both fixed-income securities and common stocks. To the extent that a convertible security's investment value is greater than its conversion value, its price will be likely to increase when interest rates fall and decrease when interest rates rise, as with a fixed-income security. If the conversion value exceeds the investment value, the price of the convertible security will tend to fluctuate directly with the price of the underlying equity security. Each of Income Builder and Balanced Growth may invest in ‘‘exchangeable’’ and ‘‘synthetic’’ convertible securities and there are special risks associated with such investments. These securities may be more volatile and less liquid than traditional convertible securities.
General. The foregoing discussion is a summary of the Funds' principal risk factors. For a more complete discussion of the risks of each Fund, see ‘‘Principal Risks’’ and ‘‘Additional Risk Information’’ in each Fund's Prospectus, each of which is incorporated herein by reference.
THE REORGANIZATIONS
The Proposals
The Board of Trustees of each Fund, including the Independent Trustees, having reviewed the financial position of each of Balanced Income and Income Builder and the prospects for achieving economies of scale through the applicable Reorganization and having determined that each Reorganization is in the best interests of Balanced Income and Income Builder, as applicable, and their Shareholders and that the interests of Shareholders will not be diluted as a result thereof, recommends approval of each Reorganization by Shareholders of Balanced Income and Income Builder, as applicable. Each Reorganization is not dependent upon the approval of the other Reorganization.
The Boards' Consideration
At a meeting held on February 6, 2006, the Board of each Fund, including the Independent Trustees, unanimously approved each Reorganization Agreement and determined to recommend that Shareholders of Balanced Income and Income Builder approve the applicable Reorganization Agreement. In reaching this decision, each Board made an extensive inquiry into a number of factors, particularly Balanced Income's and Income Builder's inability to gain assets as expected and the comparative expenses
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currently incurred in the operations of each Fund. The Boards also considered other factors, including, but not limited to, the general compatibility of the investment objectives, policies and restrictions of each of the Acquired Funds and Balanced Growth; the terms and conditions of each Reorganization which would affect the price of shares to be issued in the Reorganizations; the tax-free nature of each Reorganization; and any direct or indirect costs to be incurred by each Fund in connection with the Reorganization. The Boards considered these factors separately for each Reorganization.
In recommending each Reorganization to Shareholders, the Board of each of the Acquired Funds considered that the Reorganization would have the following benefits to Shareholders:
1. Once each Reorganization is consummated, the expenses, which would be borne by shareholders of each class of the Combined Fund, will be lower on a percentage basis than the expenses of each corresponding class of the applicable Acquired Fund. In the case of the Income Builder Reorganization, the increase in the Combined Fund's net assets immediately following the Reorganization would result in a lower management fee (as a percentage of net assets). Furthermore, to the extent that each Reorganization would result in Shareholders becoming shareholders of a combined larger fund, further economies of scale could be achieved since various fixed expenses (e.g., auditing and legal) can be spread over a larger number of shares. The assets under management of the Combined Fund are expected in the future to exceed certain advisory fee breakpoints, resulting in a fee reduction with additional assets under management. In addition, shareholders of the Combined Fund should benefit from more efficient portfolio management processes, as the portfolio management teams will be managing fewer similar investment vehicles following the Reorganizations.
2. Shareholders would have continued participation in a balanced fund product. The Board also considered that Balanced Growth and its shareholders may benefit from potential better pricing on portfolio transactions (given a larger asset base). The Board also considered that each Reorganization (and the name change of the Combined Fund) will create a clearer, more understandable product offering, which should support more effective distribution efforts following the elimination of two similar competing Morgan Stanley funds.
3. Each Reorganization has been structured in a manner intended to qualify as a tax-free reorganization for federal income tax purposes, pursuant to which no gain or loss will be recognized by the Acquired Funds (Balanced Income and Income Builder), Balanced Growth or their shareholders for federal income tax purposes as a result of transactions included in the applicable Reorganization.
The Board of Trustees of Balanced Growth, including a majority of the Independent Trustees of Balanced Growth, also has determined that each Reorganization is in the best interests of Balanced Growth and its shareholders and that the interests of existing shareholders of Balanced Growth will not be diluted as a result thereof. The transactions will result in a reduction in the total annual expense ratio of Balanced Growth and will enable Balanced Growth to acquire investment securities, which are consistent with Balanced Growth's investment objective, without the brokerage costs attendant to the purchase of such securities in the market. Finally, the Board considered that even if the benefits enumerated above are not realized, the costs to Balanced Growth are sufficiently minor to warrant taking the opportunity to realize those benefits.
The Reorganization Agreements
The terms and conditions under which each Reorganization would be consummated, as summarized below, are set forth in the applicable Reorganization Agreement. This summary is qualified in its entirety by reference to the Forms of Reorganization Agreement, copies of which are attached as Exhibit A-1 and A-2 to this Proxy Statement and Prospectus. The following discussion applies to each Reorganization and the corresponding Acquired Funds, unless otherwise noted.
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Each Reorganization Agreement provides that (i) the Acquired Fund will transfer all of its assets, including portfolio securities, cash, cash equivalents and receivables to Balanced Growth on the Closing Date in exchange for the assumption by Balanced Growth of stated liabilities of the Acquired Fund, including all expenses, costs, charges and reserves, as reflected on an unaudited statement of assets and liabilities of such Acquired Fund prepared by the Treasurer of the Acquired Fund as of the Valuation Date in accordance with generally accepted accounting principles consistently applied from the prior audited period, and the delivery of the Balanced Growth Shares; (ii) such Balanced Growth Shares would be distributed to Shareholders on the Closing Date or as soon as practicable thereafter; (iii) the Acquired Fund would be dissolved and de-registered as an investment company under the 1940 Act; and (iv) the outstanding shares of the Acquired Fund would be canceled.
The number of Balanced Growth Shares to be delivered to the Acquired Fund will be determined on the Valuation Date by dividing the aggregate net asset value of each class of shares of the Acquired Fund acquired by Balanced Growth by the net asset value per share of the corresponding class of shares of Balanced Growth. As an illustration, assume that on the Valuation Date Class B shares of the Acquired Fund had an aggregate net asset value of $100,000. If the net asset value per Class B share of Balanced Growth were $10 per share at the close of business on the Valuation Date, the number of Class B shares of Balanced Growth to be issued to the Acquired Fund would be 10,000 ($100,000 ÷ $10). These 10,000 Class B shares of Balanced Growth would be distributed to the former Class B shareholders of the Acquired Fund. This example is given for illustration purposes only and does not bear any relationship to the dollar amounts or shares expected to be involved in a Reorganization.
On the Closing Date or as soon as practicable thereafter, the Acquired Fund will distribute pro rata to its Shareholders of record as of the close of business on the Valuation Date the Balanced Growth Shares it receives. Each Shareholder will receive the class of shares of Balanced Growth that corresponds to the class of shares of the Acquired Fund currently held by that Shareholder. Accordingly, the Balanced Growth Shares will be distributed as follows: each of the Class A, Class B, Class C and Class D shares of Balanced Growth will be distributed to holders of Class A, Class B, Class C and Class D shares of the Acquired Fund, respectively. Balanced Growth will cause its transfer agent to credit and confirm an appropriate number of Balanced Growth Shares to each Shareholder. Certificates for Balanced Growth Shares will be issued only upon written request of a Shareholder and only for whole shares, with fractional shares credited to the name of the Shareholder on the books of Balanced Growth. Shareholders who wish to receive certificates representing their Balanced Growth Shares must, after receipt of their confirmations, make a written request to Balanced Growth's transfer agent, Morgan Stanley Trust, Harborside Financial Center, Plaza Two, Jersey City, New Jersey 07311. Shareholders of the Acquired Fund holding their shares in certificate form will be asked to surrender such certificates in connection with the Reorganization. Shareholders who do not surrender their certificates prior to the Closing Date will still receive their shares of Balanced Growth; however, such Shareholders will not be able to redeem, transfer or exchange the Balanced Growth Shares received until the old certificates have been surrendered.
The Closing Date will be the Valuation Date or the next business day following the Valuation Date. The consummation of the Reorganization is contingent upon its approval by the Shareholders of the Acquired Fund and the receipt of the other opinions and certificates set forth in Sections 6, 7 and 8 of the Reorganization Agreement and the occurrence of the events described in those Sections, certain of which may be waived by the Acquired Fund or Balanced Growth. The Reorganization Agreement may be amended in any mutually agreeable manner.
Shareholders of each of Balanced Income and Income Builder will vote separately on the Reorganization for that Fund. Each Reorganization is not dependent on the approval of the other.
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The Reorganization Agreement may be terminated and the Reorganization abandoned at any time, before or after approval by Shareholders, by mutual consent of the Acquired Fund and Balanced Growth. In addition, either party may terminate the Reorganization Agreement upon the occurrence of a material breach of the Reorganization Agreement by the other party or if, by January 31, 2007, any condition set forth in the Reorganization Agreement has not been fulfilled or waived by the party entitled to its benefits.
Under the Reorganization Agreement, within one year after the Closing Date, the Acquired Fund, shall either pay or make provision for all of its liabilities to former Shareholders of the Acquired Fund that received Balanced Growth Shares. The Acquired Fund shall be deregistered as an investment company and dissolved promptly following the distributions of shares of Balanced Growth to Shareholders of record of the Acquired Fund.
The effect of the Reorganization is that Shareholders who vote their shares in favor of the Reorganization Agreement are electing to sell their shares of the Acquired Fund (at net asset value on the Valuation Date) and reinvest the proceeds in Balanced Growth Shares at net asset value and without recognition of taxable gain or loss for federal income tax purposes. See ‘‘Tax Aspects of the Reorganizations’’ below. If the Acquired Fund recognizes net gain from the sale of securities prior to the Closing Date, substantially all of such gain, to the extent not offset by capital loss carryforwards, will be distributed to Shareholders on or prior to the Closing Date and will be taxable to Shareholders as capital gain.
Shareholders will continue to be able to redeem their shares of the Acquired Fund at net asset value next determined after receipt of the redemption request (subject to any applicable CDSC) until the close of business on the business day next preceding the Closing Date. Redemption requests received by the Acquired Fund thereafter will be treated as requests for redemption of shares of Balanced Growth.
Tax Aspects of the Reorganizations
Tax Consequences of each Reorganization to the Shareholders. Each Reorganization is intended to qualify for federal income tax purposes as a tax-free reorganization under Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the ‘‘Code’’). The following discussion applies to each Reorganization and the corresponding Acquired Funds, unless otherwise noted.
As a condition to each Reorganization, each Acquired Fund and Balanced Growth have requested an opinion of Clifford Chance US LLP to the effect that, based on certain assumptions, facts, the terms of the Reorganization Agreement and representations set forth in the Reorganization Agreement or otherwise provided by the applicable Acquired Fund and Balanced Growth:
1. The transfer of the assets of the Acquired Fund in exchange for the Balanced Growth Shares and the assumption by Balanced Growth of certain stated liabilities of the Acquired Fund followed by the distribution by the Acquired Fund of the Balanced Growth Shares to Shareholders in exchange for their Acquired Fund 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 the Acquired Fund and Balanced Growth will each be a ‘‘party to a reorganization’’ within the meaning of Section 368(b) of the Code;
2. No gain or loss will be recognized by Balanced Growth upon the receipt of the assets of the Acquired Fund solely in exchange for the Balanced Growth Shares and the assumption by Balanced Growth of the stated liabilities of the Acquired Fund;
3. No gain or loss will be recognized by the Acquired Fund upon the transfer of the assets of the Acquired Fund to Balanced Growth in exchange for the Balanced Growth Shares and the assumption by
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Balanced Growth of the stated liabilities or upon the distribution of Balanced Growth Shares to Shareholders in exchange for their Shares of the Acquired Fund;
4. No gain or loss will be recognized by Shareholders upon the exchange of the shares of the Acquired Fund for the Balanced Growth Shares;
5. The aggregate tax basis for the Balanced Growth Shares received by each of the Shareholders pursuant to the Reorganization will be the same as the aggregate tax basis of the shares in the Acquired Fund held by each such Shareholder immediately prior to the Reorganization;
6. The holding period of the Balanced Growth Shares to be received by each Shareholder will include the period during which the shares in the Acquired Fund surrendered in exchange therefor were held (provided such shares in the Acquired Fund were held as capital assets on the date of the Reorganization);
7. The tax basis of the assets of the Acquired Fund acquired by Balanced Growth will be the same as the tax basis of such assets of the Acquired Fund immediately prior to the applicable Reorganization; and
8. The holding period of the assets of the Acquired Fund in the hands of Balanced Growth will include the period during which those assets were held by the Acquired Fund.
The advice of counsel is not binding on the Internal Revenue Service (‘‘IRS’’) or the courts and neither the Acquired Funds nor Balanced Growth has sought a ruling with respect to the tax treatment of the applicable Reorganization. The opinion of counsel, if delivered, will be based on the Code, regulations issued by the Treasury Department under the Code, court decisions, and administrative pronouncements issued by the IRS with respect to all of the foregoing, all as in effect on the date of the opinion, and all of which may be repealed, revoked or modified thereafter, possibly on a retroactive basis.
Shareholders should consult their tax advisors regarding the effect, if any, of the proposed Reorganizations in light of their individual circumstances. Because the foregoing discussion only relates to the federal income tax consequences of the proposed Reorganizations, Shareholders should also consult their tax advisors as to state and local tax consequences, if any, of the proposed Reorganizations.
Tax Consequences of the Income Builder Reorganization. Under the Code, the Income Builder Reorganization may result in limitations on the utilization of the capital loss carryovers of Income Builder. The effect of any such limitations will depend on the existence and amount of the capital loss carryovers, built-in capital losses and built-in capital gains of Income Builder at the time of the Income Builder Reorganization. In general, a fund will have built-in capital gains if the fair market value of its assets on the date of the Reorganization exceeds its tax basis in such assets and a fund will have built-in capital losses if its tax basis in its assets exceeds the fair market value of such assets on the date of the Reorganization.
As of its last fiscal year end (September 30, 2005), Income Builder had approximately $28 million of estimated capital loss carryovers. Additionally, as of September 30, 2005, Income Builder had approximately $16 million of built-in capital gains. Under the Code, Income Builder's capital loss carryovers can be carried forward for eight years from the year in which incurred. The capital loss carryovers generally can be used in each of those eight years to offset any capital gains that are realized by the Fund in that year, but only to the extent that such gains exceed the capital losses (if any) that are realized by the Fund in that year. In addition, it is possible that the available capital loss carryovers of Income Builder may be further limited, as a result of transactions undertaken by Income Builder prior to the Reorganization. In general, to the extent that one or more transactions occurring prior to the Reorganization cause a 50% or
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greater change in the direct or indirect ownership of Income Builder during the applicable testing period, Income Builder will have a limited ability to use its capital loss carryovers in all periods following those transactions. These limitations could affect the amount of the capital loss carryovers of Income Builder that may be utilized by the Combined Fund following the Reorganization.
In general, following the Income Builder Reorganization, the Combined Fund's ability to utilize the capital loss carryovers of Income Builder will be subject to the following limitations:
1. The Combined Fund can utilize the capital loss carryovers of Income Builder to offset against capital gains from sales of assets owned by Income Builder immediately before the Reorganization, but only to the extent that (x) such sales occur within a period ending approximately five years after the Reorganization and (y) the capital gains from such sales do not exceed the built-in capital gains of Income Builder on the date of the Reorganization; and
2. In addition to being able to utilize the capital loss carryovers of Income Builder as described in paragraph 1, assuming certain continuity of business requirements are satisfied following the Reorganization, the Combined Fund also will be able to utilize a further amount of the capital loss carryovers of Income Builder to offset against other capital gains each year. This amount is determined based on certain facts as of the date of the Reorganization. If the Reorganization had occurred on September 30, 2005, then the additional amount of Income Builder's carryovers that could be utilized each year would have been approximately $7 million per year.
It is uncertain how much of the capital loss carryovers Income Builder would be able to utilize in future years if the Income Builder Reorganization did not occur. The amount of capital loss carryovers that Income Builder could utilize in future years if the Income Builder Reorganization did not occur would depend on, among other things: whether Income Builder participated in some other transaction in the future that resulted in limitations being imposed on Income Builder's utilization of capital loss carryovers; the amount of capital gains that Income Builder would be able to realize in future years before its capital loss carryovers expired; and the amount of capital losses that Income Builder would realize in future years. The Reorganization may result in the Combined Fund being unable to utilize capital loss carryovers that could have been used if the transaction did not occur, but it cannot be determined with certainty to what extent this would be the case.
Description of Shares
Balanced Growth shares to be issued pursuant to each Reorganization Agreement will, when issued, be fully paid and non-assessable by Balanced Growth and transferable without restrictions and will have no preemptive rights. Class B shares of Balanced Growth, like Class B shares of each of the Acquired Funds, have a conversion feature pursuant to which approximately eight years after the date of the original purchase of such shares, the shares will convert automatically to Class A shares, based on the relative net asset values of the two classes. For greater details regarding the conversion feature, including the method by which the eight-year period is calculated and the treatment of reinvested dividends, see ‘‘Share Class Arrangements’’ in each Fund's Prospectus.
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Capitalization Table (unaudited)
The following table sets forth the capitalization of Balanced Growth and each Acquired Fund as of January 31, 2006 and on a pro forma combined basis as if each Reorganization had occurred on that date:
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
Class A | ![]() | Net Assets* | ![]() | Shares Outstanding | ![]() | Net Asset Value Per Share* | ||||||||
Balanced Income | ![]() | $ | 22,918,403 | ![]() | 1,807,197 | ![]() | $ | 12.68 | ||||||
Income Builder | ![]() | $ | 59,402,918 | ![]() | 4,977,973 | ![]() | $ | 11.93 | ||||||
Balanced Growth | ![]() | $ | 33,216,508 | ![]() | 2,279,990 | ![]() | $ | 14.57 | ||||||
Combined Fund (pro forma).(Balanced Income Reorg only) | ![]() | $ | 56,090,662 | ![]() | 3,852,976 | ![]() | $ | 14.56 | ||||||
Combined Fund (pro forma).(Income Builder Reorg only) | ![]() | $ | 92,540,944 | ![]() | 6,357,061 | ![]() | $ | 14.56 | ||||||
Combined Fund (pro forma).(Both Reorganizations) | ![]() | $ | 115,472,015 | ![]() | 7,930,046 | ![]() | $ | 14.56 | ||||||
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Class B | ![]() | ![]() | ![]() | |||||||||||
Balanced Income | ![]() | $ | 103,937,799 | ![]() | 8,231,498 | ![]() | $ | 12.63 | ||||||
Income Builder | ![]() | $ | 64,881,942 | ![]() | 5,430,961 | ![]() | $ | 11.95 | ||||||
Balanced Growth | ![]() | $ | 84,567,622 | ![]() | 5,806,573 | ![]() | $ | 14.56 | ||||||
Combined Fund (pro forma).(Balanced Income Reorg only) | ![]() | $ | 188,353,129 | ![]() | 12,945,158 | ![]() | $ | 14.55 | ||||||
Combined Fund (pro forma).(Income Builder Reorg only) | ![]() | $ | 149,322,943 | ![]() | 10,262,750 | ![]() | $ | 14.55 | ||||||
Combined Fund (pro forma).(Both Reorganizations) | ![]() | $ | 253,243,024 | ![]() | 17,401,335 | ![]() | $ | 14.55 | ||||||
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Class C | ![]() | ![]() | ![]() | |||||||||||
Balanced Income | ![]() | $ | 40,400,509 | ![]() | 3,194,749 | ![]() | $ | 12.65 | ||||||
Income Builder | ![]() | $ | 20,636,292 | ![]() | 1,733,379 | ![]() | $ | 11.91 | ||||||
Balanced Growth | ![]() | $ | 81,339,493 | ![]() | 5,582,638 | ![]() | $ | 14.57 | ||||||
Combined Fund (pro forma).(Balanced Income Reorg only) | ![]() | $ | 121,645,316 | ![]() | 8,355,494 | ![]() | $ | 14.56 | ||||||
Combined Fund (pro forma).(Income Builder Reorg only) | ![]() | $ | 101,889,399 | ![]() | 6,998,993 | ![]() | $ | 14.56 | ||||||
Combined Fund (pro forma).(Both Reorganizations) | ![]() | $ | 142,295,192 | ![]() | 9,771,849 | ![]() | $ | 14.56 | ||||||
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Class D | ![]() | ![]() | ![]() | |||||||||||
Balanced Income | ![]() | $ | 1,282,678 | ![]() | 101,432 | ![]() | $ | 12.65 | ||||||
Income Builder | ![]() | $ | 884,150 | ![]() | 74,089 | ![]() | $ | 11.93 | ||||||
Balanced Growth | ![]() | $ | 909,105 | ![]() | 62,423 | ![]() | $ | 14.56 | ||||||
Combined Fund (pro forma).(Balanced Income Reorg only) | ![]() | $ | 2,190,002 | ![]() | 150,519 | ![]() | $ | 14.55 | ||||||
Combined Fund (pro forma).(Income Builder Reorg only) | ![]() | $ | 1,791,736 | ![]() | 123,148 | ![]() | $ | 14.55 | ||||||
Combined Fund (pro forma).(Both Reorganizations) | ![]() | $ | 3,074,180 | ![]() | 211,244 | ![]() | $ | 14.55 | ||||||
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Total Class A, B, C, D | ![]() | ![]() | ![]() | |||||||||||
Balanced Income | ![]() | $ | 168,539,389 | ![]() | 13,334,876 | ![]() | $ | 12.64 | ||||||
Income Builder | ![]() | $ | 145,805,302 | ![]() | 12,216,402 | ![]() | $ | 11.94 | ||||||
Balanced Growth | ![]() | $ | 200,032,728 | ![]() | 13,731,624 | ![]() | $ | 14.57 | ||||||
Combined Fund (pro forma).(Balanced Income Reorg only) | ![]() | $ | 368,279,109 | ![]() | 25,304,147 | ![]() | $ | 14.55 | ||||||
Combined Fund (pro forma).(Income Builder Reorg only) | ![]() | $ | 345,545,022 | ![]() | 23,741,951 | ![]() | $ | 14.55 | ||||||
Combined Fund (pro forma).(Both Reorganizations) | ![]() | $ | 514,084,411 | ![]() | 35,314,474 | ![]() | $ | 14.56 | ||||||
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* | The pro forma net assets and net asset value per share reflect the payment of reorganization expenses as follows: |
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
![]() | Class A | ![]() | Class B | ![]() | Class C | ![]() | Class D | |||||||||||
Balanced Income Reorganization Only | ![]() | ![]() | ![]() | ![]() | ||||||||||||||
Balanced Income | ![]() | $ | 19,927 | ![]() | $ | 90,370 | ![]() | $ | 35,127 | ![]() | $ | 1,115 | ||||||
Balanced Growth | ![]() | $ | 24,322 | ![]() | $ | 61,922 | ![]() | $ | 59,559 | ![]() | $ | 666 | ||||||
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Income Builder Reorganization Only | ![]() | ![]() | ![]() | ![]() | ||||||||||||||
Income Builder | ![]() | $ | 50,347 | ![]() | $ | 54,991 | ![]() | $ | 17,491 | ![]() | $ | 749 | ||||||
Balanced Growth | ![]() | $ | 28,135 | ![]() | $ | 71,630 | ![]() | $ | 68,895 | ![]() | $ | 770 | ||||||
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Both Reorganizations | ![]() | ![]() | ![]() | ![]() | ||||||||||||||
Balanced Income | ![]() | $ | 13,055 | ![]() | $ | 59,207 | ![]() | $ | 23,013 | ![]() | $ | 731 | ||||||
Income Builder | ![]() | $ | 33,838 | ![]() | $ | 36,959 | ![]() | $ | 11,755 | ![]() | $ | 504 | ||||||
Balanced Growth | ![]() | $ | 18,921 | ![]() | $ | 48,173 | ![]() | $ | 46,334 | ![]() | $ | 518 | ||||||
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Appraisal Rights
Shareholders will have no appraisal rights in connection with the Reorganizations.
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
Investment Objectives and Policies
The investment objective of Balanced Income is to seek to provide current income and moderate capital growth. The primary investment objective of Income Builder is to seek reasonable income. As a secondary objective, Income Builder seeks growth of capital. The investment objective of Balanced Growth is to seek to provide capital growth with reasonable current income.
Each of Balanced Income, Income Builder and Balanced Growth is a diversified fund.
Balanced Income
Balanced Income seeks to achieve its investment objective by normally investing at least 80% of its assets in income-producing securities, consisting of (1) fixed-income securities and (2) dividend paying common stocks and securities convertible into common stocks.
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Balanced Income will normally invest at least 60% of its net assets in fixed-income securities. The Fund's fixed-income securities (including zero coupon securities) are limited to investment grade corporate debt securities, Yankee dollar obligations, sovereign debt obligations, bank obligations, investment grade mortgage-backed securities, including CMOs, investment grade asset-backed securities and U.S. government securities. The U.S. government securities may include: (i) U.S. Treasury bills, notes and bonds, all of which are direct obligations of the U.S. Government; (ii) securities (including mortgage-backed 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 these obligations are the Government National Mortgage Association and the Federal Housing Administration; (iii) securities (including mortgage-backed 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 instrumentality has the right to borrow, to meet its obligations, from the U.S. Treasury. Among these agencies and instrumentalities are the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation; and (iv) securities issued by agencies and instrumentalities which are backed solely by the credit of the issuing agency or instrumentality. Among these agencies and instrumentalities is the Federal Home Loan Bank.
Balanced Income will normally invest at least 25% of its assets in dividend-paying common stocks and securities convertible into common stocks. The Fund invests in common stocks of companies that have a record of paying dividends and, in the Investment Adviser's opinion, have the potential for increasing dividends. Investment grade securities convertible into common stocks may also be Fund investments. These investments may include foreign securities (held directly or listed in the United States on a national securities exchange and in the form of depositary receipts). The Fund may invest in options and futures. The Fund may also invest up to 15% of its net assets in REITs.
Income Builder
Income Builder seeks to achieve its investment objective by normally investing at least 80% of its assets in income-producing equity and fixed-income securities, with normally at least 65% of its assets invested in income-producing equity securities, including common stock, preferred stock and convertible securities. The Fund may also invest up to 15% of its net assets in REITs.
The Investment Adviser utilizes a value-oriented style in the selection of securities. Investments are normally made primarily in (i) common stocks (including depositary receipts) of large capitalization companies with a record of paying dividends and which, in the opinion of the Investment Adviser, have the potential for maintaining dividends, (ii) preferred stock and (iii) securities convertible into common stocks of small-, mid- and large-cap companies, including ‘‘synthetic’’ and ‘‘exchangeable’’ convertibles. The Fund's investments can also include ‘‘Rule 144A’’ securities, which are subject to resale restrictions, and foreign securities.
The Investment Adviser follows a ‘‘bottom-up’’ approach in the selection of convertible securities for Income Builder. Beginning with a universe of about 500 companies, the Investment Adviser narrows the focus to small-, mid- and large-cap companies and reviews the issues to determine if the convertible security is trading with the underlying equity security. The yield of the underlying equity security is evaluated and company fundamentals are studied to evaluate cash flow, risk/reward balance, valuation and the prospects for growth.
Income Builder may invest up to 25% of its net assets in ‘‘exchangeable’’ convertible securities. ‘‘Exchangeable’’ convertible securities offer holders the opportunity to obtain higher current income than would be available from a traditional equity security issued by the same company, in return for reduced
35
participation or a cap on appreciation in the underlying common stock of the issuer, which the holder can realize. In addition, in many cases, ‘‘exchangeable’’ convertible securities are convertible into the underlying common stock of the issuer automatically at maturity, unlike traditional convertible securities which are convertible only at the option of the security holder.
Income Builder may invest up to 10% of its net assets in ‘‘synthetic’’ convertible securities. Unlike traditional convertible securities whose conversion values are based on the common stock of the issuer of the convertible security, ‘‘synthetic’’ convertible securities are preferred stocks or debt obligations of an issuer which are combined with an equity component whose conversion value is based on the value of the common stock of a different issuer or a particular benchmark (which may include a foreign issuer or basket of foreign stocks, or a company whose stock is not yet publicly traded). In many cases, ‘‘synthetic’’ convertible securities are not convertible prior to maturity, at which time the value of the security is paid in cash by the issuer. The Fund's convertible securities may include securities rated lower than investment grade by Standard & Poor's Rating Group, a division of The McGraw-Hill Companies, Inc. or Moody's Investors Services Inc. (but not below B) or, if unrated, of comparable quality as determined by the Investment Adviser, commonly known as ‘‘junk bonds.’’
Income Builder may invest up to 35% of its net assets in U.S. government securities issued or guaranteed by the U.S. government, its agencies and instrumentalities and non-convertible fixed-income securities (including zero coupon securities). Up to 20% of the Fund's net assets may be invested in non-convertible fixed-income securities (also commonly known as ‘‘junk bonds’’). The 20% limitation is not applicable to convertible securities.
Up to 20% of Income Builder's net assets may be invested in common stocks that do not pay a dividend. Up to 25% of the Fund's net assets may be invested in foreign securities (including depositary receipts). This limit, however, does not apply to securities of foreign companies that are listed in the United States on a national securities exchange. The Fund may also utilize forward foreign currency exchange contracts. The Fund may also invest in options and futures.
Balanced Growth
Balanced Growth seeks to achieve its investment objective by normally investing at least 60% of its assets in dividend-paying common stocks and securities convertible into common stocks and at least 25% of its assets in fixed-income securities. Within these limitations, the Investment Adviser may purchase or sell securities in any proportion it believes desirable based on its assessment of business, economic and investment conditions.
Balanced Growth invests in common stocks of companies that have a record of paying dividends and, in the Investment Adviser's opinion, have the potential for increasing dividends. The Fund's investments may also include securities convertible into common stock, including ‘‘synthetic,’’ ‘‘exchangeable’’ and ‘‘Rule 144A’’ convertible securities. The Fund's common stock investments may include foreign securities (held directly or listed in the United States on a national securities exchange and in the form of depositary receipts). The Fund may also invest up to 15% of its net assets in REITs.
Balanced Growth's investments in fixed-income securities (including zero coupon securities) are limited to investment grade corporate debt securities, Yankee dollar obligations, sovereign debt, bank obligations, investment grade mortgage-backed securities, including CMOs, investment grade asset-backed securities and U.S. government securities. The U.S. government securities may include: (i) U.S. Treasury bills, notes and bonds, all of which are direct obligations of the U.S. Government; (ii) securities (including mortgage-backed 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
36
instrumentalities issuing these obligations are the Government National Mortgage Association and the Federal Housing Administration; (iii) securities (including mortgage-backed 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 instrumentality has the right to borrow, to meet its obligations, from the U.S. Treasury. Among these agencies and instrumentalities are the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation; and (iv) securities issued by agencies and instrumentalities which are backed solely by the credit of the issuing agency or instrumentality. Among these agencies and instrumentalities is the Federal Home Loan Bank.
Balanced Growth may invest up to 25% of its net assets in ‘‘exchangeable’’ convertible securities. Exchangeable convertible securities offer holders the opportunity to obtain higher current income than would be available from a traditional equity security issued by the same company, in return for reduced participation or a cap on appreciation in the underlying common stock of the issuer, which the holder can realize. In addition, in many cases, ‘‘exchangeable’’ convertible securities are convertible into the underlying common stock of the issuer automatically at maturity, unlike traditional convertible securities which are convertible only at the option of the security holder.
Balanced Growth may invest up to 10% of its net assets in ‘‘synthetic’’ convertible securities. Unlike traditional convertible securities whose conversion values are based on the common stock of the issuer of the convertible security, ‘‘synthetic’’ convertible securities are preferred stocks or debt obligations of an issuer which are combined with an equity component whose conversion value is based on the value of the common stock of a different issuer or a particular benchmark (which may include a foreign issuer or basket of foreign stocks, or a company whose stock is not yet publicly traded). In many cases, ‘‘synthetic’’ convertible securities are not convertible prior to maturity, at which time the value of the security is paid in cash by the issuer. The Fund's convertible securities may include securities rated lower than investment grade by Standard & Poor's Rating Group, a division of The McGraw-Hill Companies, Inc. or Moody's Investors Services Inc. (but not below B) or, if unrated, of comparable quality as determined by the Investment Adviser, commonly known as ‘‘junk bonds.’’
Balanced Growth may also invest in options and futures.
All Funds
The investment policies of each Acquired Fund and Balanced Growth are not fundamental and may be changed by the Board of each Fund. The foregoing discussion is a summary of the principal differences and similarities between the investment policies of the Funds. For a more complete discussion of each Fund's policies, see ‘‘Principal Investment Strategies’’ and ‘‘Additional Investment Strategy Information’’ in each Fund's Prospectus and ‘‘Description of the Fund and Its Investments and Risks’’ in each Fund's Statement of Additional Information.
Investment Restrictions
The investment restrictions adopted by each Acquired Fund and Balanced Growth as fundamental policies are substantially similar, except Income Builder may lend its portfolio securities and neither Balanced Income nor Balanced Growth may engage in securities lending. The investment restrictions are summarized under the caption ‘‘Description of the Fund and Its Investments and Risks — Fund Policies/Investment Restrictions’’ in their respective Statements of Additional Information. A fundamental investment restriction cannot be changed without the vote of the majority of the outstanding voting securities of a Fund, as defined in the 1940 Act.
37
ADDITIONAL INFORMATION ABOUT EACH FUND
General
For a discussion of the organization and operation of each Acquired Fund and Balanced Growth, see ‘‘Fund Management,’’ ‘‘Investment Objective(s)’’ and ‘‘Principal Investment Strategies’’ in their respective Prospectuses, and ‘‘Fund History’’ in their respective Statements of Additional Information.
Financial Information
For certain financial information about each Acquired Fund and Balanced Growth, see ‘‘Financial Highlights’’ in their respective Annual Reports and ‘‘Past Performance’’ in their respective Prospectuses.
Management
For information about the Board of Trustees, Investment Adviser and the Distributor of each Acquired Fund and Balanced Growth, see ‘‘Fund Management’’ in their respective Prospectuses and ‘‘Management of the Fund’’ in their respective Statements of Additional Information.
Description of Securities and Shareholder Inquiries
For a description of the nature and most significant attributes of shares of each Acquired Fund and Balanced Growth, and information regarding shareholder inquiries, see ‘‘Capital Stock and Other Securities’’ and ‘‘Management of the Fund — Management Information — Shareholder Communications’’ in their respective Statements of Additional Information.
Dividends, Distributions and Taxes
For a discussion of each Acquired Fund's and Balanced Growth's policies with respect to dividends, distributions and taxes, see ‘‘Distributions’’ and ‘‘Tax Consequences’’ in their respective Prospectuses as well as the discussion herein under ‘‘Synopsis — Tax Consequences of the Reorganization,’’ ‘‘Synopsis — Comparison of each Acquired Fund (Balanced Income and Income Builder) and Balanced Growth — Dividends’’ and ‘‘The Reorganizations — Tax Aspects of the Reorganizations.’’
Purchases, Repurchases and Redemptions
For a discussion of how each Acquired Fund's and Balanced Growth's shares may be purchased, repurchased and redeemed, see ‘‘How to Buy Shares,’’ ‘‘How to Exchange Shares’’ and ‘‘How to Sell Shares’’ in their respective Prospectuses and the discussion herein under ‘‘Synopsis — Comparison of each Acquired Fund (Balanced Income and Income Builder) and Balanced Growth — Purchases, Exchanges and Redemptions.’’
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of (i) Balanced Income, for the fiscal year ended January 31, 2006, (ii) Income Builder, for the fiscal year ended September 30, 2005 and (iii) Balanced Growth, for the fiscal year ended January 31, 2006, that are incorporated by reference in the Statement of Additional Information relating to the Registration Statement on Form N-14 of which this Proxy Statement and Prospectus forms a part, have been audited by Deloitte & Touche LLP, each Fund's independent registered public accounting firm. The financial statements are incorporated by reference in reliance upon such reports given upon the authority of said firm as experts in accounting and auditing.
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LEGAL MATTERS
Certain legal matters concerning the issuance of shares of Balanced Growth will be passed upon by Clifford Chance US LLP, New York, New York. Such firm will rely on Dechert LLP, Massachusetts counsel to the Fund, as to matters of Massachusetts law.
AVAILABLE INFORMATION
Additional information about each Fund is available, as applicable, in the following documents which are incorporated herein by reference: (i) Balanced Growth's Prospectus dated May 27, 2005, as supplemented, attached to this Proxy Statement and Prospectus as Exhibit B, which Prospectus forms a part of Post-Effective Amendment No. 14 to Balanced Growth's Registration Statement on Form N-1A (File Nos. 33-56853; 811-7245); (ii) Balanced Growth's Annual Report for its fiscal year ended January 31, 2006, accompanying this Proxy Statement and Prospectus; (iii) Balanced Income's Prospectus dated May 27, 2005, as supplemented, which Prospectus forms a part of Post-Effective Amendment No. 14 to Balanced Income's Registration Statement on Form N-1A (File Nos. 33-56851; 811-7243); (iv) Balanced Income's Annual Report for its fiscal year ended January 31, 2006; (v) Income Builder's Prospectus dated January 27, 2006, as supplemented, which Prospectus forms a part of Post-Effective Amendment No. 13 to Income Builder's Registration Statement on Form N-1A (File Nos. 333-01995; 811-7575); and (viii) Income Builder's Annual Report for its fiscal year ended September 30, 2005. The foregoing documents may be obtained without charge by calling (800) 869-NEWS (toll-free).
Balanced Income, Income Builder and Balanced Growth each are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith, file reports and other information with the Commission. Proxy material, reports and other information about each Fund which are of public record can be viewed and copied at the Commission's Public Reference Room in Washington, D.C. Information about the Reference Room's operations may be obtained by calling the Commission at (202) 551-8090. Reports and other information about each Fund are available on the EDGAR Database on the Commission's Internet site (www.sec.gov) and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the Public Reference Section of the Commission, Washington, D.C. 20549-0102.
OTHER BUSINESS
Management of each of the Acquired Funds (Balanced Income and Income Builder) knows of no business other than the matters specified above which will be presented at the Meeting. Since matters not known at the time of the solicitation may come before the Meeting, the proxy as solicited confers discretionary authority with respect to such matters as properly come before the Meeting, including any adjournment or adjournments thereof, and it is the intention of the persons named as attorneys-in-fact in the proxy to vote this proxy in accordance with their judgment on such matters.
![]() | By Order of the Board of Trustees |
![]() | Mary E. Mullin, Secretary |
May 18, 2006
39
EXHIBIT A-1
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the ‘‘Agreement’’) is made as of this 6th day of February, 2006, by and between MORGAN STANLEY BALANCED GROWTH FUND* , a Massachusetts business trust (‘‘Balanced Growth’’), and MORGAN STANLEY BALANCED INCOME FUND, a Massachusetts business trust (‘‘Balanced Income’’).
This Agreement is intended to be and is adopted as a ‘‘plan of reorganization’’ within the meaning of Treas. Reg. 1.368-2(g), for a reorganization under Section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the ‘‘Code’’). The reorganization (the ‘‘Reorganization’’) will consist of the transfer to Balanced Growth of substantially all of the assets of Balanced Income in exchange for the assumption by Balanced Growth of all stated liabilities of Balanced Income and the issuance by Balanced Growth of shares of beneficial interest, par value $0.01 per share (the ‘‘Balanced Growth Shares’’), to be distributed, after the Closing Date hereinafter referred to, to the shareholders of Balanced Income in liquidation of Balanced Income as provided herein, all upon the terms and conditions hereinafter set forth in this Agreement.
In consideration of the premises and of the covenants and agreements hereinafter set forth, the parties hereto covenant and agree as follows:
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1. | THE REORGANIZATION AND LIQUIDATION OF BALANCED INCOME |
1.1 Subject to the terms and conditions herein set forth and on the basis of the representations and warranties contained herein, Balanced Income agrees to assign, deliver and otherwise transfer the Balanced Income Assets (as defined in paragraph 1.2) to Balanced Growth and Balanced Growth agrees in exchange therefor to assume all of Balanced Income's stated liabilities on the Closing Date as set forth in paragraph 1.3 and to deliver to Balanced Income the number of Balanced Growth Shares, including fractional Balanced Growth Shares, determined in the manner set forth in paragraph 2.3. Such transactions shall take place at the closing provided for in paragraph 3.1 (the ‘‘Closing’’).
1.2 (a) The ‘‘Balanced Income Assets’’ shall consist of all property, including without limitation, all cash, cash equivalents, securities and dividend and interest receivables owned by Balanced Income, and any deferred or prepaid expenses shown as an asset on Balanced Income's books on the Valuation Date.
(b) On or prior to the Valuation Date, Balanced Income will provide Balanced Growth with a list of all of Balanced Income's assets to be assigned, delivered and otherwise transferred to Balanced Growth and a list of the stated liabilities to be assumed by Balanced Growth pursuant to this Agreement. Balanced Income reserves the right to sell any of the securities on such list but will not, without the prior approval of Balanced Growth, acquire any additional securities other than securities of the type in which Balanced Growth is permitted to invest and in amounts agreed to in writing by Balanced Growth. Balanced Growth will, within a reasonable time prior to the Valuation Date, furnish Balanced Income with a statement of Balanced Growth's investment objective, policies and restrictions and a list of the securities, if any, on the list referred to in the first sentence of this paragraph that do not conform to Balanced Growth's investment objective, policies and restrictions. In the event that Balanced Income holds any investments that Balanced Growth is not permitted to hold, Balanced Income will dispose of such securities on or prior to the Valuation Date. In addition, if it is determined that the portfolios of
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* | To be renamed Morgan Stanley Balanced Fund upon completion of the Reorganization. |
A-1-1
Balanced Income and Balanced Growth, when aggregated, would contain investments exceeding certain percentage limitations imposed upon Balanced Growth with respect to such investments, Balanced Income if requested by Balanced Growth will, on or prior to the Valuation Date, dispose of and/or reinvest a sufficient amount of such investments as may be necessary to avoid violating such limitations as of the Closing Date (as defined in paragraph 3.1).
1.3 Balanced Income will endeavor to discharge all of its liabilities and obligations on or prior to the Valuation Date. Balanced Growth will assume all stated liabilities, which includes, without limitation, all expenses, costs, charges and reserves reflected on an unaudited Statement of Assets and Liabilities of Balanced Income prepared by the Treasurer of Balanced Income as of the Valuation Date in accordance with generally accepted accounting principles consistently applied from the prior audited period.
1.4 In order for Balanced Income to comply with Section 852(a)(1) of the Code and to avoid having any investment company taxable income or net capital gain (as defined in Sections 852(b)(2) and 1222(11) of the Code, respectively) in the short taxable year ending with its dissolution, Balanced Income will on or before the Valuation Date (a) declare a dividend in an amount large enough so that it will have declared dividends of substantially all of its investment company taxable income and net capital gain, if any, for such taxable year (determined without regard to any deduction for dividends paid) and (b) distribute such dividend.
1.5 On the Closing Date or as soon as practicable thereafter, Balanced Income will distribute Balanced Growth Shares received by Balanced Income pursuant to paragraph 1.1 pro rata to its shareholders of record determined as of the close of business on the Valuation Date (‘‘Balanced Income Shareholders’’). Each Balanced Income Shareholder will receive the class of shares of Balanced Growth that corresponds to the class of shares of Balanced Income currently held by that Balanced Income Shareholder. Accordingly, the Balanced Growth Shares will be distributed as follows: each of the Class A, Class B, Class C and Class D shares of Balanced Growth will be distributed to holders of Class A, Class B, Class C and Class D shares of Balanced Income, respectively. Such distribution will be accomplished by an instruction, signed by Balanced Income's Secretary, to transfer Balanced Growth Shares then credited to Balanced Income's account on the books of Balanced Growth to open accounts on the books of Balanced Growth in the names of the Balanced Income Shareholders and representing the respective pro rata number of Balanced Growth Shares due such Balanced Income Shareholders. All issued and outstanding shares of Balanced Income simultaneously will be canceled on Balanced Income's books; however, share certificates representing interests in Balanced Income will represent a number of Balanced Growth Shares after the Closing Date as determined in accordance with paragraph 2.3. Balanced Growth will issue certificates representing Balanced Growth Shares in connection with such exchange only upon the written request of a Balanced Income Shareholder.
1.6 Ownership of Balanced Growth Shares will be shown on the books of Balanced Growth's transfer agent. Balanced Growth Shares will be issued in the manner described in Balanced Growth's current Prospectus and Statement of Additional Information.
1.7 Any transfer taxes payable upon issuance of Balanced Growth Shares in a name other than the registered holder of Balanced Growth Shares on Balanced Income's books as of the close of business on the Valuation Date shall, as a condition of such issuance and transfer, be paid by the person to whom Balanced Growth Shares are to be issued and transferred.
1.8 Any reporting responsibility of Balanced Income is and shall remain the responsibility of Balanced Income up to and including the date on which Balanced Income is dissolved and deregistered pursuant to paragraph 1.9.
A-1-2
1.9 Within one year after the Closing Date, Balanced Income shall pay or make provision for the payment of all its liabilities and taxes. If and to the extent that any trust, escrow account, or other similar entity continues after the close of such one-year period in connection either with making provision for payment of liabilities or taxes or with distributions to shareholders of Balanced Income, such entity shall either (i) qualify as a liquidating trust under Section 7701 of the Code (and applicable Treasury Regulations thereunder) or other entity which does not constitute a continuation of Balanced Income for federal income tax purposes, or (ii) be subject to a waiver under Section 368(a)(2)(G)(ii) of the complete distribution requirement of Section 368(a)(2)(G)(i) of the Code. Balanced Income shall be dissolved as a Massachusetts business trust and deregistered as an investment company under the Investment Company Act of 1940, as amended (the ‘‘1940 Act’’), promptly following the making of all distributions pursuant to paragraph 1.5 (and, in any event, within one year after the Closing Date).
1.10 Copies of all books and records maintained on behalf of Balanced Income in connection with its obligations under the 1940 Act, the Code, state blue sky laws or otherwise in connection with this Agreement will promptly be delivered after the Closing to officers of Balanced Growth or their designee, and Balanced Growth or its designee shall comply with applicable record retention requirements to which Balanced Income is subject under the 1940 Act.
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2. | VALUATION |
2.1 The value of the Balanced Income Assets shall be the value of such assets computed as of 4:00 p.m. on the New York Stock Exchange on the third business day following the receipt of the requisite approval by shareholders of Balanced Income of this Agreement or at such time on such earlier or later date after such approval as may be mutually agreed upon in writing (such time and date being hereinafter called the ‘‘Valuation Date’’), using the valuation procedures set forth in Balanced Growth's then current Prospectus and Statement of Additional Information.
2.2 The net asset value of a Balanced Growth Share shall be the net asset value per share computed on the Valuation Date, using the valuation procedures set forth in Balanced Growth's then current Prospectus and Statement of Additional Information.
2.3 The number of Balanced Growth Shares (including fractional shares, if any) to be issued hereunder shall be determined, with respect to each class, by dividing the aggregate net asset value of each class of Balanced Income shares (determined in accordance with paragraph 2.1) by the net asset value per share of the corresponding class of shares of Balanced Growth (determined in accordance with paragraph 2.2).
2.4 All computations of value shall be made by Morgan Stanley Services Company Inc. (‘‘Morgan Stanley Services’’) in accordance with its regular practice in pricing Balanced Growth. Balanced Growth shall cause Morgan Stanley Services to deliver a copy of its valuation report at the Closing.
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3. | CLOSING AND CLOSING DATE |
3.1 The Closing shall take place on the Valuation Date or on the next business day following the Valuation Date (the ‘‘Closing Date’’). The Closing shall be held as of 9:00 a.m. New York time, or at such other time as the parties may agree. The Closing shall be held in a location mutually agreeable to the parties hereto. All acts taking place at the Closing shall be deemed to take place simultaneously as of 9:00 a.m. New York time on the Closing Date unless otherwise provided.
3.2 Portfolio securities held by Balanced Income and represented by a certificate or other written instrument shall be presented by it or on its behalf to The Bank of New York (the ‘‘Custodian’’), as custodian for Balanced Growth, for examination no later than five business days preceding the Valuation
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Date. Such portfolio securities (together with any cash or other assets) shall be delivered by Balanced Income to the Custodian for the account of Balanced Growth on or before the Closing Date in conformity with applicable custody provisions under the 1940 Act and duly endorsed in proper form for transfer in such condition as to constitute good delivery thereof in accordance with the custom of brokers. The portfolio securities shall be accompanied by all necessary federal and state stock transfer stamps or a check for the appropriate purchase price of such stamps. Portfolio securities and instruments deposited with a securities depository (as defined in Rule 17f-4 under the 1940 Act) shall be delivered on or before the Closing Date by book-entry in accordance with customary practices of such depository and the Custodian. The cash delivered shall be in the form of a Federal Funds wire, payable to the order of ‘‘The Bank of New York, Custodian for Morgan Stanley Balanced Growth Fund.’’
3.3 In the event that on the Valuation Date, (a) the New York Stock Exchange shall be closed to trading or trading thereon shall be restricted or (b) trading or the reporting of trading on such Exchange or elsewhere shall be disrupted so that, in the judgment of both Balanced Growth and Balanced Income, accurate appraisal of the value of the net assets of Balanced Growth or the Balanced Income Assets is impracticable, the Valuation Date shall be postponed until the first business day after the day when trading shall have been fully resumed without restriction or disruption and reporting shall have been restored.
3.4 If requested, Balanced Income shall deliver to Balanced Growth or its designee (a) at the Closing, a list, certified by its Secretary, of the names, addresses and taxpayer identification numbers of the Balanced Income Shareholders and the number and percentage ownership of outstanding Balanced Income shares owned by each such Balanced Income Shareholder, all as of the Valuation Date, and (b) as soon as practicable after the Closing, all original documentation (including Internal Revenue Service forms, certificates, certifications and correspondence) relating to the Balanced Income Shareholders' taxpayer identification numbers and their liability for or exemption from back-up withholding. Balanced Growth shall issue and deliver to such Secretary a confirmation evidencing delivery of Balanced Growth Shares to be credited on the Closing Date to Balanced Income or provide evidence satisfactory to Balanced Income that such Balanced Growth Shares have been credited to Balanced Income's account on the books of Balanced Growth. At the Closing, each party shall deliver to the other such bills of sale, checks, assignments, share certificates, if any, receipts or other documents as such other party or its counsel may reasonably request.
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4. | COVENANTS OF BALANCED GROWTH AND BALANCED INCOME |
4.1 Except as otherwise expressly provided herein with respect to Balanced Income, Balanced Growth and Balanced Income each will operate its business in the ordinary course between the date hereof and the Closing Date, it being understood that such ordinary course of business will include customary dividends and other distributions.
4.2 Balanced Growth will prepare and file with the Securities and Exchange Commission (‘‘Commission’’) a registration statement on Form N-14 under the Securities Act of 1933, as amended (‘‘1933 Act’’), relating to Balanced Growth Shares (‘‘Registration Statement’’). Balanced Income will provide Balanced Growth with the Proxy Materials as described in paragraph 4.3 below, for inclusion in the Registration Statement. Balanced Income will further provide Balanced Growth with such other information and documents relating to Balanced Income as are reasonably necessary for the preparation of the Registration Statement.
4.3 Balanced Income will call a meeting of its shareholders to consider and act upon this Agreement and to take all other action necessary to obtain approval of the transactions contemplated herein. Balanced Income will prepare the notice of meeting, form of proxy and proxy statement (collectively,
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‘‘Proxy Materials’’) to be used in connection with such meeting; provided that Balanced Growth will furnish Balanced Income with its currently effective prospectus for inclusion in the Proxy Materials and with such other information relating to Balanced Growth as is reasonably necessary for the preparation of the Proxy Materials.
4.4 Balanced Income will assist Balanced Growth in obtaining such information as Balanced Growth reasonably requests concerning the beneficial ownership of Balanced Income shares.
4.5 Subject to the provisions of this Agreement, Balanced Growth and Balanced 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 Balanced Income shall furnish or cause to be furnished to Balanced Growth within 30 days after the Closing Date a statement of Balanced Income's assets and liabilities as of the Closing Date, which statement shall be certified by Balanced 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, Balanced Income shall furnish Balanced Growth, in such form as is reasonably satisfactory to Balanced Growth, a statement certified by Balanced Income's Treasurer of Balanced Income's earnings and profits for federal income tax purposes that will be carried over to Balanced Growth pursuant to Section 381 of the Code.
4.7 As soon after the Closing Date as is reasonably practicable, Balanced Income (a) shall prepare and file all federal and other tax returns and reports of Balanced 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 Balanced Growth 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.
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5. | REPRESENTATIONS AND WARRANTIES |
5.1 Balanced Growth represents and warrants to Balanced Income as follows:
(a) Balanced Growth is a validly existing Massachusetts business trust with full power to carry on its business as presently conducted;
(b) Balanced Growth 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 Balanced Growth 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 Balanced Growth 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 Balanced Growth 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 Balanced Growth conform in all material respects to the applicable requirements of the 1933 Act and the 1940 Act and
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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) Balanced Growth is not in, and the execution, delivery and performance of this Agreement will not result in a, material violation of any provision of Balanced Growth's Declaration of Trust or By-Laws or of any agreement, indenture, instrument, contract, lease or other undertaking to which Balanced Growth 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 Balanced Growth 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 Balanced Growth 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 January 31, 2006, of Balanced Growth audited by Deloitte & Touche LLP, Balanced Growth's independent registered public accounting firm (copies of which will be furnished to Balanced Income), fairly present, in all material respects, Balanced Growth's 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 Balanced Growth (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 Balanced Growth 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 Balanced Growth's current Statement of Additional Information incorporated by reference in the Statement of Additional Information that forms a part of this Registration Statement. Balanced Growth does not have outstanding any options, warrants or other rights to subscribe for or purchase any of its shares;
(i) The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of Balanced Growth, and this Agreement constitutes a valid and binding obligation of Balanced Growth 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 Balanced Growth's performance of this Agreement;
(j) Balanced Growth Shares to be issued and delivered to Balanced Income, for the account of the Balanced 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 Balanced Growth 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 Securities’’ in Balanced Growth's current Statement of Additional Information incorporated by reference in the Statement of Additional Information to this Registration Statement;
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(k) All material federal and other tax returns and reports of Balanced Growth 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 Balanced Growth's 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, Balanced Growth 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 Balanced Growth to continue to meet the requirements of Subchapter M of the Code;
(m) Since January 31, 2006, there has been no change by Balanced Growth in accounting methods, principles, or practices, including those required by generally accepted accounting principles;
(n) The information furnished or to be furnished by Balanced Growth 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 Balanced Growth) 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 Balanced Income represents and warrants to Balanced Growth as follows:
(a) Balanced Income is a validly existing Massachusetts business trust with full power to carry on its business as presently conducted;
(b) Balanced Income 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 beneficial interest of Balanced 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 Balanced 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 Balanced 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) The current Prospectus and Statement of Additional Information of Balanced Income 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) Balanced Income is not in, and the execution, delivery and performance of this Agreement will not result in a, material violation of any provision of Balanced Income's Declaration of Trust or
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By-Laws or of any agreement, indenture, instrument, contract, lease or other undertaking to which Balanced Income 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 Balanced Income 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 Balanced 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;
(g) The Statement of Assets and Liabilities, Statement of Operations, Statement of Changes in Net Assets and Financial Highlights of Balanced Income for the fiscal year ended January 31, 2006, audited by Deloitte & Touche LLP, Balanced Income's independent registered public accounting firm (copies of which have been or will be furnished to Balanced Growth), fairly present, in all material respects, Balanced 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 Balanced Income (contingent or otherwise) not disclosed therein that would be required in accordance with generally accepted accounting principles to be disclosed therein;
(h) Balanced 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;
(i) All issued and outstanding shares of Balanced 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 ‘‘Capital Stock and Other Securities’’ in Balanced Income's current Statement of Additional Information incorporated by reference in the Statement of Additional Information to this Registration Statement. Balanced 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 Balanced Growth pursuant to paragraph 3.4;
(j) 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 Balanced Income, and subject to the approval of Balanced Income's shareholders, this Agreement constitutes a valid and binding obligation of Balanced 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 Balanced Income's performance of this Agreement;
(k) All material federal and other tax returns and reports of Balanced 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 Balanced Income's 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, Balanced Income has met all the requirements of Subchapter M of the Code for qualification and treatment as a ‘‘regulated investment company’’ and
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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 Balanced Income to continue to meet the requirements of Subchapter M of the Code;
(m) At the Closing Date, Balanced Income will have good and valid title to the Balanced Income Assets, subject to no liens (other than the obligation, if any, to pay the purchase price of portfolio securities purchased by Balanced 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, Balanced Growth 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;
(n) On the effective date of the Registration Statement, at the time of the meeting of Balanced Income's shareholders and on the Closing Date, the Proxy Materials (exclusive of the currently effective Balanced Growth 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 Balanced 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;
(o) Balanced 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);
(p) Balanced 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
(q) Balanced Income is not acquiring Balanced Growth Shares to be issued hereunder for the purpose of making any distribution thereof other than in accordance with the terms of this Agreement.
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6. | CONDITIONS PRECEDENT TO OBLIGATIONS OF BALANCED INCOME |
The obligations of Balanced Income to consummate the transactions provided for herein shall be subject, at its election, to the performance by Balanced Growth 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 Balanced Growth 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 Balanced Growth shall have delivered to Balanced Income a certificate of its President and Treasurer, in a form reasonably satisfactory to Balanced Income and dated as of the Closing Date, to the effect that the representations and warranties of Balanced Growth 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 Balanced Income shall reasonably request;
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6.3 Balanced Income shall have received a favorable opinion from Clifford Chance US LLP, counsel to Balanced Growth, dated as of the Closing Date, to the effect that:
(a) Balanced Growth 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) Balanced Growth 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 Balanced Growth 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 Balanced Income, is a valid and binding obligation of Balanced Growth enforceable against Balanced Growth 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) Balanced Growth Shares to be issued to Balanced 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 Balanced Growth's current Statement of Additional Information), and no shareholder of Balanced Growth 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 Balanced Growth's 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 Balanced Growth 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 or annual fees pursuant to Balanced Growth's 12b-1 plan of distribution from those described in Balanced Growth's Prospectus dated May 27, 2005, as supplemented, and Statement of Additional Information dated May 27, 2005, as supplemented.
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7. | CONDITIONS PRECEDENT TO OBLIGATIONS OF BALANCED GROWTH |
The obligations of Balanced Growth to complete the transactions provided for herein shall be subject, at its election, to the performance by Balanced 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 Balanced 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 Balanced Income shall have delivered to Balanced Growth at the Closing a certificate of its President and its Treasurer, in form and substance satisfactory to Balanced Growth and dated as of the Closing Date, to the effect that the representations and warranties of Balanced 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 Balanced Growth shall reasonably request;
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7.3 Balanced Income shall have delivered to Balanced Growth a statement of the Balanced Income Assets and its liabilities, together with a list of Balanced Income's portfolio 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 Balanced Income;
7.4 Balanced Growth shall have received at the Closing a favorable opinion from Clifford Chance US LLP, counsel to Balanced Income, dated as of the Closing Date to the effect that:
(a) Balanced 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) Balanced Income is a duly registered, open-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 Balanced 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 Balanced Growth, is a valid and binding obligation of Balanced Income enforceable against Balanced 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 Balanced 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 Balanced 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 Balanced Income Assets shall include no assets that Balanced Growth, by reason of limitations of the fund's Declaration of Trust or otherwise, may not properly acquire.
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8. | FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF BALANCED GROWTH AND BALANCED INCOME |
The obligations of Balanced Income and Balanced Growth 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 Balanced Income in accordance with the provisions of Balanced Income's Declaration of Trust, and certified copies of the resolutions evidencing such approval shall have been delivered to Balanced Growth;
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 Balanced Growth or Balanced 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 Balanced Growth or Balanced Income;
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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 hereto, no investigation or proceeding for that purpose shall have been instituted or be pending, threatened or contemplated under the 1933 Act;
8.5 Balanced 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 Balanced Income Shareholders substantially all of Balanced 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 Balanced Growth and Balanced Income, which opinion may be relied upon by the shareholders of Balanced Income, substantially to the effect that, for federal income tax purposes:
(a) The transfer of Balanced Income's assets in exchange for Balanced Growth Shares and the assumption by Balanced Growth of certain stated liabilities of Balanced Income followed by the distribution by Balanced Income of Balanced Growth Shares to the Balanced Income Shareholders in exchange for their Balanced 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 Balanced Income and Balanced Growth 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 Balanced Growth upon the receipt of the assets of Balanced Income solely in exchange for Balanced Growth Shares and the assumption by Balanced Growth of the stated liabilities of Balanced Income;
(c) No gain or loss will be recognized by Balanced Income upon the transfer of the assets of Balanced Income to Balanced Growth in exchange for Balanced Growth Shares and the assumption by Balanced Growth of the stated liabilities or upon the distribution of Balanced Growth Shares to the Balanced Income Shareholders in exchange for their Balanced Income shares;
(d) No gain or loss will be recognized by the Balanced Income Shareholders upon the exchange of the Balanced Income shares for Balanced Growth Shares;
(e) The aggregate tax basis for Balanced Growth Shares received by each Balanced Income Shareholder pursuant to the reorganization will be the same as the aggregate tax basis of the Balanced Income Shares held by each such Balanced Income Shareholder immediately prior to the Reorganization;
(f) The holding period of Balanced Growth Shares to be received by each Balanced Income Shareholder will include the period during which the Balanced Income Shares surrendered in exchange therefor were held (provided such Balanced Income Shares were held as capital assets on the date of the Reorganization);
(g) The tax basis of the assets of Balanced Income acquired by Balanced Growth will be the same as the tax basis of such assets to Balanced Income immediately prior to the Reorganization; and
(h) The holding period of the assets of Balanced Income in the hands of Balanced Growth will include the period during which those assets were held by Balanced Income.
Notwithstanding anything herein to the contrary, neither Balanced Growth nor Balanced Income may waive the conditions set forth in this paragraph 8.6.
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9. | FEES AND EXPENSES |
9.1 (a) Balanced Growth 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, and printing, filing and proxy solicitation expenses. Balanced 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.
(b) In the event the transactions contemplated herein are not consummated by reason of Balanced Income being either unwilling or unable to go forward (other than by reason of the nonfulfillment or failure of any condition to Balanced Income's obligations specified in this Agreement), Balanced Income's only obligation hereunder shall be to reimburse Balanced Growth for all reasonable out-of-pocket fees and expenses incurred by Balanced Growth in connection with those transactions.
(c) In the event the transactions contemplated herein are not consummated by reason of Balanced Growth being either unwilling or unable to go forward (other than by reason of the nonfulfillment or failure of any condition to Balanced Growth's obligations specified in this Agreement), Balanced Growth's only obligation hereunder shall be to reimburse Balanced Income for all reasonable out-of-pocket fees and expenses incurred by Balanced Income in connection with those transactions.
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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 Balanced Income hereunder shall not survive the dissolution and complete liquidation of Balanced Income in accordance with Section 1.9.
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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 Balanced Income and Balanced Growth;
(b) by either Balanced Growth or Balanced 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 January 31, 2007; or
(c) by either Balanced Growth or Balanced Income, in writing without liability to the terminating party on account of such termination (provided the terminating party is not otherwise in 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 Balanced 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 Balanced
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Growth or Balanced Income, or the trustees or officers of Balanced Growth or Balanced 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 Balanced Growth or Balanced Income, or the trustees or officers of Balanced Growth or Balanced 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.
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12. | AMENDMENTS |
This Agreement may be amended, modified or supplemented in such manner as may be mutually agreed upon in writing by the parties.
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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 Balanced Growth hereunder are solely those of Balanced Growth. It is expressly agreed that no shareholder, nominee, trustee, officer, agent, or employee of Balanced Growth shall be personally liable hereunder. The execution and delivery of this Agreement have been authorized by the trustees of Balanced Growth and signed by authorized officers of Balanced Growth 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 Balanced Income hereunder are solely those of Balanced Income. It is expressly agreed that no shareholder, nominee, trustee, officer, agent, or employee of Balanced Income shall be personally liable hereunder. The execution and delivery of this Agreement have been authorized by the trustees of Balanced Income and signed by authorized officers of Balanced 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 BALANCED INCOME FUND |
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By: | /s/ Ronald E. Robison |
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![]() | Name: | ![]() | Ronald E. Robison | |||||||
![]() | Title: | ![]() | President and Principal Executive Officer | |||||||
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![]() | MORGAN STANLEY BALANCED GROWTH FUND |
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By: | /s/ Amy R. Doberman Name: Amy R. Doberman Title: Vice President |
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EXHIBIT A-2
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the ‘‘Agreement’’) is made as of this 6th day of February, 2006, by and between MORGAN STANLEY BALANCED GROWTH FUND *, a Massachusetts business trust (‘‘Balanced Growth’’), and MORGAN STANLEY INCOME BUILDER FUND, a Massachusetts business trust (‘‘Income Builder’’).
This Agreement is intended to be and is adopted as a ‘‘plan of reorganization’’ within the meaning of Treas. Reg. 1.368-2(g), for a reorganization under Section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the ‘‘Code’’). The reorganization (the ‘‘Reorganization’’) will consist of the transfer to Balanced Growth of substantially all of the assets of Income Builder in exchange for the assumption by Balanced Growth of all stated liabilities of Income Builder and the issuance by Balanced Growth of shares of beneficial interest, par value $0.01 per share (the ‘‘Balanced Growth Shares’’), to be distributed, after the Closing Date hereinafter referred to, to the shareholders of Income Builder in liquidation of Income Builder as provided herein, all upon the terms and conditions hereinafter set forth in this Agreement.
In consideration of the premises and of the covenants and agreements hereinafter set forth, the parties hereto covenant and agree as follows:
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1. | THE REORGANIZATION AND LIQUIDATION OF INCOME BUILDER |
1.1 Subject to the terms and conditions herein set forth and on the basis of the representations and warranties contained herein, Income Builder agrees to assign, deliver and otherwise transfer the Income Builder Assets (as defined in paragraph 1.2) to Balanced Growth and Balanced Growth agrees in exchange therefor to assume all of Income Builder's stated liabilities on the Closing Date as set forth in paragraph 1.3 and to deliver to Income Builder the number of Balanced Growth Shares, including fractional Balanced Growth Shares, determined in the manner set forth in paragraph 2.3. Such transactions shall take place at the closing provided for in paragraph 3.1 (the ‘‘Closing’’).
1.2 (a) The ‘‘Income Builder Assets’’ shall consist of all property, including without limitation, all cash, cash equivalents, securities and dividend and interest receivables owned by Income Builder, and any deferred or prepaid expenses shown as an asset on Income Builder's books on the Valuation Date.
(b) On or prior to the Valuation Date, Income Builder will provide Balanced Growth with a list of all of Income Builder's assets to be assigned, delivered and otherwise transferred to Balanced Growth and a list of the stated liabilities to be assumed by Balanced Growth pursuant to this Agreement. Income Builder reserves the right to sell any of the securities on such list but will not, without the prior approval of Balanced Growth, acquire any additional securities other than securities of the type in which Balanced Growth is permitted to invest and in amounts agreed to in writing by Balanced Growth. Balanced Growth will, within a reasonable time prior to the Valuation Date, furnish Income Builder with a statement of Balanced Growth's investment objective, policies and restrictions and a list of the securities, if any, on the list referred to in the first sentence of this paragraph that do not conform to Balanced Growth's investment objective, policies and restrictions. In the event that Income Builder holds any investments that Balanced Growth is not permitted to hold, Income Builder will dispose of such securities on or prior to the Valuation Date. In addition, if it is determined that the portfolios of Income Builder and Balanced Growth, when aggregated, would contain investments exceeding certain percentage limitations imposed
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* | To be renamed Morgan Stanley Balanced Fund upon completion of the Reorganization. |
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upon Balanced Growth with respect to such investments, Income Builder if requested by Balanced Growth will, on or prior to the Valuation Date, dispose of and/or reinvest a sufficient amount of such investments as may be necessary to avoid violating such limitations as of the Closing Date (as defined in paragraph 3.1).
1.3 Income Builder will endeavor to discharge all of its liabilities and obligations on or prior to the Valuation Date. Balanced Growth will assume all stated liabilities, which includes, without limitation, all expenses, costs, charges and reserves reflected on an unaudited Statement of Assets and Liabilities of Income Builder prepared by the Treasurer of Income Builder as of the Valuation Date in accordance with generally accepted accounting principles consistently applied from the prior audited period.
1.4 In order for Income Builder to comply with Section 852(a)(1) of the Code and to avoid having any investment company taxable income or net capital gain (as defined in Sections 852(b)(2) and 1222(11) of the Code, respectively) in the short taxable year ending with its dissolution, Income Builder will on or before the Valuation Date (a) declare a dividend in an amount large enough so that it will have declared dividends of all of its investment company taxable income and net capital gain, if any, for such taxable year (determined without regard to any deduction for dividends paid) and (b) distribute such dividend.
1.5 On the Closing Date or as soon as practicable thereafter, Income Builder will distribute Balanced Growth Shares received by Income Builder pursuant to paragraph 1.1 pro rata to its shareholders of record determined as of the close of business on the Valuation Date (‘‘Income Builder Shareholders’’). Each Income Builder Shareholder will receive the class of shares of Balanced Growth that corresponds to the class of shares of Income Builder currently held by that Income Builder Shareholder. Accordingly, the Balanced Growth Shares will be distributed as follows: each of the Class A, Class B, Class C and Class D shares of Balanced Growth will be distributed to holders of Class A, Class B, Class C and Class D shares of Income Builder, respectively. Such distribution will be accomplished by an instruction, signed by Income Builder's Secretary, to transfer Balanced Growth Shares then credited to Income Builder's account on the books of Balanced Growth to open accounts on the books of Balanced Growth in the names of the Income Builder Shareholders and representing the respective pro rata number of Balanced Growth Shares due such Income Builder Shareholders. All issued and outstanding shares of Income Builder simultaneously will be canceled on Income Builder's books; however, share certificates representing interests in Income Builder will represent a number of Balanced Growth Shares after the Closing Date as determined in accordance with paragraph 2.3. Balanced Growth will issue certificates representing Balanced Growth Shares in connection with such exchange only upon the written request of an Income Builder Shareholder.
1.6 Ownership of Balanced Growth Shares will be shown on the books of Balanced Growth's transfer agent. Balanced Growth Shares will be issued in the manner described in Balanced Growth's current Prospectus and Statement of Additional Information.
1.7 Any transfer taxes payable upon issuance of Balanced Growth Shares in a name other than the registered holder of Balanced Shares on Income Builder's books as of the close of business on the Valuation Date shall, as a condition of such issuance and transfer, be paid by the person to whom Balanced Growth Shares are to be issued and transferred.
1.8 Any reporting responsibility of Income Builder is and shall remain the responsibility of Income Builder up to and including the date on which Income Builder is dissolved and deregistered pursuant to paragraph 1.9.
1.9 Within one year after the Closing Date, Income Builder shall pay or make provision for the payment of all its liabilities and taxes. If and to the extent that any trust, escrow account, or other similar
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entity continues after the close of such one-year period in connection either with making provision for payment of liabilities or taxes or with distributions to shareholders of Income Builder, such entity shall either (i) qualify as a liquidating trust under Section 7701 of the Code (and applicable Treasury Regulations thereunder) or other entity which does not constitute a continuation of Income Builder for federal income tax purposes, or (ii) be subject to a waiver under Section 368(a)(2)(G)(ii) of the complete distribution requirement of Section 368(a)(2)(G)(i) of the Code. Income Builder shall be dissolved as a Massachusetts business trust and deregistered as an investment company under the Investment Company Act of 1940, as amended (the ‘‘1940 Act’’), promptly following the making of all distributions pursuant to paragraph 1.5 (and, in any event, within one year after the Closing Date).
1.10 Copies of all books and records maintained on behalf of Income Builder in connection with its obligations under the 1940 Act, the Code, state blue sky laws or otherwise in connection with this Agreement will promptly be delivered after the Closing to officers of Balanced Growth or their designee, and Balanced Growth or its designee shall comply with applicable record retention requirements to which Income Builder is subject under the 1940 Act.
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2. | VALUATION |
2.1 The value of the Income Builder Assets shall be the value of such assets computed as of 4:00 p.m. on the New York Stock Exchange on the third business day following the receipt of the requisite approval by shareholders of Income Builder of this Agreement or at such time on such earlier or later date after such approval as may be mutually agreed upon in writing (such time and date being hereinafter called the ‘‘Valuation Date’’), using the valuation procedures set forth in Balanced Growth's then current Prospectus and Statement of Additional Information.
2.2 The net asset value of a Balanced Growth Share shall be the net asset value per share computed on the Valuation Date, using the valuation procedures set forth in Balanced Growth's then current Prospectus and Statement of Additional Information.
2.3 The number of Balanced Growth Shares (including fractional shares, if any) to be issued hereunder shall be determined, with respect to each class, by dividing the aggregate net asset value of each class of Income Builder shares (determined in accordance with paragraph 2.1) by the net asset value per share of the corresponding class of shares of Balanced Growth (determined in accordance with paragraph 2.2).
2.4 All computations of value shall be made by Morgan Stanley Services Company Inc. (‘‘Morgan Stanley Services’’) in accordance with its regular practice in pricing Balanced Growth. Balanced Growth shall cause Morgan Stanley Services to deliver a copy of its valuation report at the Closing.
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3. | CLOSING AND CLOSING DATE |
3.1 The Closing shall take place on the Valuation Date or on the next business day following the Valuation Date (the ‘‘Closing Date’’). The Closing shall be held as of 9:00 a.m. New York time, or at such other time as the parties may agree. The Closing shall be held in a location mutually agreeable to the parties hereto. All acts taking place at the Closing shall be deemed to take place simultaneously as of 9:00 a.m. New York time on the Closing Date unless otherwise provided.
3.2 Portfolio securities held by Income Builder and represented by a certificate or other written instrument shall be presented by it or on its behalf to The Bank of New York (the ‘‘Custodian’’), as custodian for Balanced Growth, for examination no later than five business days preceding the Valuation Date. Such portfolio securities (together with any cash or other assets) shall be delivered by Income Builder to the Custodian for the account of Balanced Growth on or before the Closing Date in conformity
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with applicable custody provisions under the 1940 Act and duly endorsed in proper form for transfer in such condition as to constitute good delivery thereof in accordance with the custom of brokers. The portfolio securities shall be accompanied by all necessary federal and state stock transfer stamps or a check for the appropriate purchase price of such stamps. Portfolio securities and instruments deposited with a securities depository (as defined in Rule 17f-4 under the 1940 Act) shall be delivered on or before the Closing Date by book-entry in accordance with customary practices of such depository and the Custodian. The cash delivered shall be in the form of a Federal Funds wire, payable to the order of ‘‘The Bank of New York, Custodian for Morgan Stanley Balanced Growth Fund.’’
3.3 In the event that on the Valuation Date, (a) the New York Stock Exchange shall be closed to trading or trading thereon shall be restricted or (b) trading or the reporting of trading on such Exchange or elsewhere shall be disrupted so that, in the judgment of both Balanced Growth and Income Builder, accurate appraisal of the value of the net assets of Balanced Growth or the Income Builder Assets is impracticable, the Valuation Date shall be postponed until the first business day after the day when trading shall have been fully resumed without restriction or disruption and reporting shall have been restored.
3.4 If requested, Income Builder shall deliver to Balanced Growth or its designee (a) at the Closing, a list, certified by its Secretary, of the names, addresses and taxpayer identification numbers of the Income Builder Shareholders and the number and percentage ownership of outstanding Income Builder shares owned by each such Income Builder Shareholder, all as of the Valuation Date, and (b) as soon as practicable after the Closing, all original documentation (including Internal Revenue Service forms, certificates, certifications and correspondence) relating to the Income Builder Shareholders' taxpayer identification numbers and their liability for or exemption from back-up withholding. Balanced Growth shall issue and deliver to such Secretary a confirmation evidencing delivery of Balanced Growth Shares to be credited on the Closing Date to Income Builder or provide evidence satisfactory to Income Builder that such Balanced Growth Shares have been credited to Income Builder's account on the books of Balanced Growth. At the Closing, each party shall deliver to the other such bills of sale, checks, assignments, share certificates, if any, receipts or other documents as such other party or its counsel may reasonably request.
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4. | COVENANTS OF BALANCED GROWTH AND INCOME BUILDER |
4.1 Except as otherwise expressly provided herein with respect to Income Builder, Balanced Growth and Income Builder each will operate its business in the ordinary course between the date hereof and the Closing Date, it being understood that such ordinary course of business will include customary dividends and other distributions.
4.2 Balanced Growth will prepare and file with the Securities and Exchange Commission (‘‘Commission’’) a registration statement on Form N-14 under the Securities Act of 1933, as amended (‘‘1933 Act’’), relating to Balanced Growth Shares (‘‘Registration Statement’’). Income Builder will provide Balanced Growth with the Proxy Materials as described in paragraph 4.3 below, for inclusion in the Registration Statement. Income Builder will further provide Balanced Growth with such other information and documents relating to Income Builder as are reasonably necessary for the preparation of the Registration Statement.
4.3 Income Builder will call a meeting of its shareholders to consider and act upon this Agreement and to take all other action necessary to obtain approval of the transactions contemplated herein. Income Builder 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 Balanced Growth will furnish
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Income Builder with its currently effective prospectus for inclusion in the Proxy Materials and with such other information relating to Balanced Growth as is reasonably necessary for the preparation of the Proxy Materials.
4.4 Income Builder will assist Balanced Growth in obtaining such information as Balanced Growth reasonably requests concerning the beneficial ownership of Income Builder shares.
4.5 Subject to the provisions of this Agreement, Balanced Growth and Income Builder 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 Income Builder shall furnish or cause to be furnished to Balanced Growth within 30 days after the Closing Date a statement of Income Builder's assets and liabilities as of the Closing Date, which statement shall be certified by Income Builder'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, Income Builder shall furnish Balanced Growth, in such form as is reasonably satisfactory to Balanced Growth, a statement certified by Income Builder's Treasurer of Income Builder's earnings and profits for federal income tax purposes that will be carried over to Balanced Growth pursuant to Section 381 of the Code.
4.7 As soon after the Closing Date as is reasonably practicable, Income Builder (a) shall prepare and file all federal and other tax returns and reports of Income Builder 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 Balanced Growth 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.
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5. | REPRESENTATIONS AND WARRANTIES |
5.1 Balanced Growth represents and warrants to Income Builder as follows:
(a) Balanced Growth is a validly existing Massachusetts business trust with full power to carry on its business as presently conducted;
(b) Balanced Growth 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 Balanced Growth 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 Balanced Growth 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 Balanced Growth 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 Balanced Growth 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
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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) Balanced Growth is not in, and the execution, delivery and performance of this Agreement will not result in a, material violation of any provision of Balanced Growth's Declaration of Trust or By-Laws or of any agreement, indenture, instrument, contract, lease or other undertaking to which Balanced Growth 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 Balanced Growth 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 Balanced Growth 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 January 31, 2006, of Balanced Growth audited by Deloitte & Touche LLP, Balanced Growth's independent registered public accounting firm (copies of which will be furnished to Income Builder), fairly present, in all material respects, Balanced Growth's 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 Balanced Growth (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 Balanced Growth 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 Balanced Growth's current Statement of Additional Information incorporated by reference in the Statement of Additional Information that forms a part of this Registration Statement. Balanced Growth does not have outstanding any options, warrants or other rights to subscribe for or purchase any of its shares;
(i) The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of Balanced Growth, and this Agreement constitutes a valid and binding obligation of Balanced Growth 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 Balanced Growth's performance of this Agreement;
(j) Balanced Growth Shares to be issued and delivered to Income Builder, for the account of the Income Builder 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 Balanced Growth 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 Securities’’ in Balanced Growth's 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 Balanced Growth required by law to be filed on or before the Closing Date have been filed and are correct, and all federal and other
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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 Balanced Growth's 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, Balanced Growth 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 Balanced Growth to continue to meet the requirements of Subchapter M of the Code;
(m) Since January 31, 2006, there has been no change by Balanced Growth in accounting methods, principles, or practices, including those required by generally accepted accounting principles;
(n) The information furnished or to be furnished by Balanced Growth 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 Balanced Growth) 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 Income Builder represents and warrants to Balanced Growth as follows:
(a) Income Builder is a validly existing Massachusetts business trust with full power to carry on its business as presently conducted;
(b) Income Builder 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 beneficial interest of Income Builder have been offered and sold in compliance in all material respects with applicable requirements of the 1933 Act and state securities laws. Shares of Income Builder 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 Income Builder 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 Income Builder 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) Income Builder is not in, and the execution, delivery and performance of this Agreement will not result in a, material violation of any provision of Income Builder's Declaration of Trust or By-Laws or of any agreement, indenture, instrument, contract, lease or other undertaking to which Income Builder is a party or by which it is bound;
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(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 Income Builder 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 Income Builder 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 of Income Builder for the fiscal year ended September 30, 2005, audited by Deloitte & Touche LLP, Income Builder's independent registered public accounting firm (copies of which have been or will be furnished to Balanced Growth), fairly present, in all material respects, Income Builder'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 Income Builder (contingent or otherwise) not disclosed therein that would be required in accordance with generally accepted accounting principles to be disclosed therein;
(h) Income Builder has no material contracts or other commitments (other than this Agreement) that will be terminated with liability to it prior to the Closing Date;
(i) All issued and outstanding shares of Income Builder 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 Income Builder's current Statement of Additional Information incorporated by reference in the Statement of Additional Information to this Registration Statement. Income Builder 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 Balanced Growth pursuant to paragraph 3.4;
(j) 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 Income Builder, and subject to the approval of Income Builder's shareholders, this Agreement constitutes a valid and binding obligation of Income Builder, 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 Income Builder's performance of this Agreement;
(k) All material federal and other tax returns and reports of Income Builder 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 Income Builder's 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, Income Builder 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
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adversely affect, and no other events are reasonably likely to occur which will adversely affect the ability of Income Builder to continue to meet the requirements of Subchapter M of the Code;
(m) At the Closing Date, Income Builder will have good and valid title to the Income Builder Assets, subject to no liens (other than the obligation, if any, to pay the purchase price of portfolio securities purchased by Income Builder 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, Balanced Growth 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;
(n) On the effective date of the Registration Statement, at the time of the meeting of Income Builder's shareholders and on the Closing Date, the Proxy Materials (exclusive of the currently effective Balanced Growth 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 Income Builder 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;
(o) Income Builder 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 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);
(p) Income Builder 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
(q) Income Builder is not acquiring Balanced Growth Shares to be issued hereunder for the purpose of making any distribution thereof other than in accordance with the terms of this Agreement.
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6. | CONDITIONS PRECEDENT TO OBLIGATIONS OF INCOME BUILDER |
The obligations of Income Builder to consummate the transactions provided for herein shall be subject, at its election, to the performance by Balanced Growth 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 Balanced Growth 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 Balanced Growth shall have delivered to Income Builder a certificate of its President and Treasurer, in a form reasonably satisfactory to Income Builder and dated as of the Closing Date, to the effect that the representations and warranties of Balanced Growth 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 Income Builder shall reasonably request;
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6.3 Income Builder shall have received a favorable opinion from Clifford Chance US LLP, counsel to Balanced Growth, dated as of the Closing Date, to the effect that:
(a) Balanced Growth 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) Balanced Growth 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 Balanced Growth 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 Income Builder, is a valid and binding obligation of Balanced Growth enforceable against Balanced Growth 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) Balanced Growth Shares to be issued to Income Builder 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 Balanced Growth's current Statement of Additional Information), and no shareholder of Balanced Growth 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 Balanced Growth's 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 Balanced Growth 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 or annual fees pursuant to Balanced Growth's 12b-1 plan of distribution from those described in Balanced Growth's Prospectus dated May 27, 2005, as supplemented, and Statement of Additional Information dated May 27, 2005, as supplemented.
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7. | CONDITIONS PRECEDENT TO OBLIGATIONS OF BALANCED GROWTH |
The obligations of Balanced Growth to complete the transactions provided for herein shall be subject, at its election, to the performance by Income Builder 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 Income Builder 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 Income Builder shall have delivered to Balanced Growth at the Closing a certificate of its President and its Treasurer, in form and substance satisfactory to Balanced Growth and dated as of the Closing Date, to the effect that the representations and warranties of Income Builder 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 Balanced Growth shall reasonably request;
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7.3 Income Builder shall have delivered to Balanced Growth a statement of the Income Builder Assets and its liabilities, together with a list of Income Builder's portfolio 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 Income Builder;
7.4 Balanced Growth shall have received at the Closing a favorable opinion from Clifford Chance US LLP, counsel to Income Builder, dated as of the Closing Date to the effect that:
(a) Income Builder 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) Income Builder is a duly registered, open-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 Income Builder 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 Balanced Growth, is a valid and binding obligation of Income Builder enforceable against Income Builder 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 Income Builder'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 Income Builder 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 Income Builder Assets shall include no assets that Balanced Growth, by reason of limitations of the fund's Declaration of Trust or otherwise, may not properly acquire.
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8. | FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF BALANCED GROWTH AND INCOME BUILDER |
The obligations of Income Builder and Balanced Growth 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 Income Builder in accordance with the provisions of Income Builder's Declaration of Trust, and certified copies of the resolutions evidencing such approval shall have been delivered to Balanced Growth;
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 Balanced Growth or Income Builder 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 Balanced Growth or Income Builder;
A-2-11
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 hereto, no investigation or proceeding for that purpose shall have been instituted or be pending, threatened or contemplated under the 1933 Act;
8.5 Income Builder 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 Income Builder Shareholders all of Income Builder's investment company taxable income (computed without regard to any deduction for dividends paid) and 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 Balanced Growth and Income Builder, which opinion may be relied upon by the shareholders of Income Builder, substantially to the effect that, for federal income tax purposes:
(a) The transfer of Income Builder's assets in exchange for Balanced Growth Shares and the assumption by Balanced Growth of certain stated liabilities of Income Builder followed by the distribution by Income Builder of Balanced Growth Shares to the Income Builder Shareholders in exchange for their Income Builder 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 Income Builder and Balanced Growth 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 Balanced Growth upon the receipt of the assets of Income Builder solely in exchange for Balanced Growth Shares and the assumption by Balanced Growth of the stated liabilities of Income Builder;
(c) No gain or loss will be recognized by Income Builder upon the transfer of the assets of Income Builder to Balanced Growth in exchange for Balanced Growth Shares and the assumption by Balanced Growth of the stated liabilities or upon the distribution of Balanced Growth Shares to the Income Builder Shareholders in exchange for their Income Builder shares;
(d) No gain or loss will be recognized by the Income Builder Shareholders upon the exchange of the Income Builder shares for Balanced Growth Shares;
(e) The aggregate tax basis for Balanced Growth Shares received by each Income Builder Shareholder pursuant to the reorganization will be the same as the aggregate tax basis of the Income Builder Shares held by each such Income Builder Shareholder immediately prior to the Reorganization;
(f) The holding period of Balanced Growth Shares to be received by each Income Builder Shareholder will include the period during which the Income Builder Shares surrendered in exchange therefor were held (provided such Income Builder Shares were held as capital assets on the date of the Reorganization);
(g) The tax basis of the assets of Income Builder acquired by Balanced Growth will be the same as the tax basis of such assets to Income Builder immediately prior to the Reorganization; and
(h) The holding period of the assets of Income Builder in the hands of Balanced Growth will include the period during which those assets were held by Income Builder.
Notwithstanding anything herein to the contrary, neither Balanced Growth nor Income Builder may waive the conditions set forth in this paragraph 8.6.
A-2-12
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9. | FEES AND EXPENSES |
9.1 (a) Balanced Growth 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, and printing, filing and proxy solicitation expenses. Income Builder 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.
(b) In the event the transactions contemplated herein are not consummated by reason of Income Builder being either unwilling or unable to go forward (other than by reason of the nonfulfillment or failure of any condition to Income Builder's obligations specified in this Agreement), Income Builder's only obligation hereunder shall be to reimburse Balanced Growth for all reasonable out-of-pocket fees and expenses incurred by Balanced Growth in connection with those transactions.
(c) In the event the transactions contemplated herein are not consummated by reason of Balanced Growth being either unwilling or unable to go forward (other than by reason of the nonfulfillment or failure of any condition to Balanced Growth's obligations specified in this Agreement), Balanced Growth's only obligation hereunder shall be to reimburse Income Builder for all reasonable out-of-pocket fees and expenses incurred by Income Builder in connection with those transactions.
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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 Income Builder hereunder shall not survive the dissolution and complete liquidation of Income Builder in accordance with Section 1.9.
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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 Income Builder and Balanced Growth;
(b) by either Balanced Growth or Income Builder 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 January 31, 2007; or
(c) by either Balanced Growth or Income Builder, in writing without liability to the terminating party on account of such termination (provided the terminating party is not otherwise in 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 Income Builder 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 Balanced Growth or Income Builder, or the trustees or officers of Balanced Growth or Income Builder, to any other party or its trustees or officers.
A-2-13
(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 Balanced Growth or Income Builder, or the trustees or officers of Balanced Growth or Income Builder, 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.
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12. | AMENDMENTS |
This Agreement may be amended, modified or supplemented in such manner as may be mutually agreed upon in writing by the parties.
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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 Balanced Growth hereunder are solely those of Balanced Growth. It is expressly agreed that no shareholder, nominee, trustee, officer, agent, or employee of Balanced Growth shall be personally liable hereunder. The execution and delivery of this Agreement have been authorized by the trustees of Balanced Growth and signed by authorized officers of Balanced Growth 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 Income Builder hereunder are solely those of Income Builder. It is expressly agreed that no shareholder, nominee, trustee, officer, agent, or employee of Income Builder shall be personally liable hereunder. The execution and delivery of this Agreement have been authorized by the trustees of Income Builder and signed by authorized officers of Income Builder 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.
A-2-14
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by a duly authorized officer.
![]() | MORGAN STANLEY INCOME BUILDER FUND |
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By: | /s/ Ronald E. Robison Name: Ronald E. Robison Title: President and Principal Executive Officer |
![]() | MORGAN STANLEY BALANCED GROWTH FUND |
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By: | /s/ Amy R. Doberman Name: Amy R. Doberman Title: Vice President |
A-2-15
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February 7, 2006
Supplement
EXHIBIT B
SUPPLEMENT DATED FEBRUARY 7, 2006 TO THE PROSPECTUS OF
MORGAN STANLEY BALANCED GROWTH FUND
Dated May 27, 2005
The second sentence of the section of the Fund’s Prospectus titled ‘‘Principal Investment Strategies — Common Stocks/Convertible Securities’’ is hereby deleted and replaced with the following:
The Fund’s investments may also include securities convertible into common stocks — including ‘‘synthetic,’’ ‘‘exchangeable’’ and ‘‘Rule 144A’’ convertibles.
The following paragraphs are hereby added within the section of the Fund’s Prospectus titled ‘‘Principal Investment Strategies — Common Stocks/Convertible Securities’’:
The Fund may invest up to 25% of its net assets in ‘‘exchangeable’’ convertible securities. ‘‘Exchangeable’’ convertible securities offer holders the opportunity to obtain higher current income than would be available from a traditional equity security issued by the same company, in return for reduced participation or a cap on appreciation in the underlying common stock of the issuer, which the holder can realize. In addition, in many cases, ‘‘exchangeable’’ convertible securities are convertible into the underlying common stock of the issuer automatically at maturity, unlike traditional convertible securities which are convertible only at the option of the security holder.
The Fund may invest up to 10% of its net assets in ‘‘synthetic’’ convertible securities. Unlike traditional convertible securities whose conversion values are based on the common stock of the issuer of the convertible security, ‘‘synthetic’’ convertible securities are preferred stocks or debt obligations of an issuer which are combined with an equity component whose conversion value is based on the value of the common stock of a different issuer or a particular benchmark (which may include a foreign issuer or basket of foreign stocks, or a company whose stock is not yet publicly traded). In many cases, ‘‘synthetic’’ convertible securities are not convertible prior to maturity, at which time the value of the security is paid in cash by the issuer.
The Fund’s convertible securities may include lower-rated fixed-income securities, commonly known as ‘‘junk bonds.’’
The following sentence is hereby added at the end of the third to last paragraph of the section of the Fund’s Prospectus titled ‘‘Principal Investment Strategies’’:
A convertible security is a bond, preferred stock or other security that may be converted into a prescribed amount of common stock at a prestated price.
The following sentences are hereby added at the end of the first paragraph of the section of the Fund’s Prospectus titled ‘‘Principal Risks — Convertible Securities’’:
There are also special risks associated with the Fund’s investments in ‘‘exchangeable’’ and ‘‘synthetic’’ convertible securities. These securities may be more volatile and less liquid than traditional convertible securities.
The following paragraph is hereby added within the section of the Fund’s Prospectus titled ‘‘Principal Risks’’:
Lower Rated Fixed-Income Securities (‘‘Junk Bonds’’). The Fund’s investments in fixed-income securities rated lower than investment grade, or if unrated, of comparable quality as determined by the Investment Adviser (commonly known as ‘‘junk bonds’’) pose significant risks. The prices of junk bonds are likely to be more sensitive to adverse economic changes or individual corporate developments than higher rated securities. During an economic downturn or substantial period of rising interest rates, junk bond issuers and, in particular, highly leveraged issuers may experience financial stress that would adversely affect their ability to service their principal and interest payment obligations, to meet their projected business goals or to obtain additional financing. In the event of a default, the Fund may incur additional expenses to seek recovery. The secondary market for junk bonds may be less liquid than the market for higher quality securities and, as such, may have an adverse effect on the market prices of certain securities. Many junk bonds are issued as Rule 144A securities. Rule 144A securities could have the effect of increasing the level of Fund illiquidity to the extent the Fund may be unable to find qualified institutional buyers interested in purchasing the securities. The illiquidity of the market may also adversely affect the ability of the Fund’s Trustees to arrive at a fair value for certain junk bonds at certain times and could make it difficult for the Fund to sell certain securities. In addition, periods of economic uncertainty and change probably would result in an increased volatility of market prices of high yield securities and a corresponding volatility in the Fund’s net asset value.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE.
37896SPT-02
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September 23, 2005
Supplement
SUPPLEMENT DATED SEPTEMBER 23, 2005 TO THE PROSPECTUSES OF
Morgan Stanley Aggressive Equity Fund, dated September 30, 2004
Morgan Stanley Allocator Fund, dated May 27, 2005
Morgan Stanley American Opportunities Fund, dated April 29, 2005
Morgan Stanley Balanced Growth Fund, dated May 27, 2005
Morgan Stanley Balanced Income Fund, dated May 27, 2005
Morgan Stanley Biotechnology Fund, dated July 30, 2004
Morgan Stanley California Tax-Free Income Fund, dated April 29, 2005
Morgan Stanley Capital Opportunities Trust, dated March 30, 2005
Morgan Stanley Convertible Securities Trust, dated November 30, 2004
Morgan Stanley Developing Growth Securities Trust, dated November 30, 2004
Morgan Stanley Dividend Growth Securities Inc., dated June 30, 2005
Morgan Stanley Equally-Weighted S&P 500 Fund, dated August 30, 2004
Morgan Stanley European Equity Fund Inc., dated December 30, 2004
Morgan Stanley Financial Services Trust, dated July 30, 2004
Morgan Stanley Flexible Income Trust, dated December 30, 2004
Morgan Stanley Fundamental Value Fund, dated November 30, 2004
Morgan Stanley Global Advantage Fund, dated July 30, 2004
Morgan Stanley Global Dividend Growth Securities, dated July 29, 2005
Morgan Stanley Global Utilities Fund, dated June 30, 2005
Morgan Stanley Growth Fund, dated July 29, 2005
Morgan Stanley Health Sciences Trust, dated September 30, 2004
Morgan Stanley High Yield Securities Inc., dated October 29, 2004
Morgan Stanley Income Builder Fund, dated November 30, 2004
Morgan Stanley Income Trust, dated October 29, 2004
Morgan Stanley Information Fund, dated July 29, 2005
Morgan Stanley International Fund, dated December 30, 2004
Morgan Stanley International SmallCap Fund, dated July 30, 2004
Morgan Stanley International Value Equity Fund, dated October 29, 2004
Morgan Stanley Japan Fund, dated July 30, 2004
Morgan Stanley KLD Social Index Fund, dated March 30, 2005
Morgan Stanley Mid-Cap Value Fund, dated October 29, 2004
Morgan Stanley Mortgage Securities Trust, dated December 30, 2004
Morgan Stanley Multi-Asset Class Fund – Domestic Portfolio, dated November 30, 2004
Morgan Stanley Nasdaq-100 Index Fund, dated March 30, 2005
Morgan Stanley Natural Resource Development Securities Inc., dated June 30, 2005
Morgan Stanley New York Tax-Free Income Fund, dated April 29, 2005
Morgan Stanley Pacific Growth Fund Inc., dated December 30, 2004
Morgan Stanley Real Estate Fund, dated March 30, 2005
Morgan Stanley S&P 500 Index Fund, dated October 29, 2004
Morgan Stanley Small-Mid Special Value Fund, dated August 29, 2005
Morgan Stanley Special Growth Fund, dated June 30, 2005
Morgan Stanley Special Value Fund, dated September 30, 2004
Morgan Stanley Strategist Fund, dated September 30, 2004
Morgan Stanley Tax-Exempt Securities Trust, dated April 29, 2005
Morgan Stanley Total Market Index Fund, dated October 29, 2004
Morgan Stanley Total Return Trust, dated September 30, 2004
Morgan Stanley U.S. Government Securities Trust, dated April 29, 2005
Morgan Stanley Utilities Fund, dated April 29, 2005
Morgan Stanley Value Fund, dated November 30, 2004
(Collectively, the "Funds")
Effective September 30, 2005, the Class A Shares sales charge waiver category for custodial accounts held by a bank or trust company created pursuant to Section 403(b) of the Internal Revenue Code will not be available. Accordingly, the Class A Shares sales charge waiver category related to such custodial accounts found in the section of the Fund's Prospectus titled "Share Class Arrangements – Class A Shares – Other Sales Charge Waivers" is hereby deleted.
Effective October 31, 2005, the second paragraph of the section of the Fund's Prospectus titled "Share Class Arrangements – Class B Shares" is hereby deleted and replaced with the following:
The contingent deferred sales charge is assessed on an amount equal to the lesser of the then market value of the shares or the historical cost of the shares (which is the amount actually paid for the shares at the time of original purchase) being redeemed. Accordingly, no sales charge is imposed on increases in net asset value above the initial purchase price. In determining whether a contingent deferred sales charge applies to a redemption, it is assumed that the shares being redeemed first are any shares in the shareholders Fund account that are not subject to a contingent deferred sales charge, followed by shares held the longest in the shareholder's account.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE.
79585SPT-01
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September 23, 2005
Supplement
SUPPLEMENT DATED SEPTEMBER 23, 2005 TO THE PROSPECTUSES OF
Morgan Stanley Biotechnology Fund, dated July 30, 2004
Morgan Stanley European Equity Fund Inc., dated December 30, 2004
Morgan Stanley Financial Services Trust, dated July 30, 2004
Morgan Stanley Global Advantage Fund, dated July 30, 2004
Morgan Stanley Global Dividend Growth Securities, dated July 29, 2005
Morgan Stanley Global Utilities Fund, dated June 30, 2005
Morgan Stanley Health Sciences Trust, dated September 30, 2004
Morgan Stanley High Yield Securities Inc., dated October 29, 2004
Morgan Stanley Information Fund, dated July 29, 2005
Morgan Stanley International Fund, dated December 30, 2004
Morgan Stanley International SmallCap Fund, dated July 30, 2004
Morgan Stanley International Value Equity Fund, dated October 29, 2004
Morgan Stanley Japan Fund, dated July 30, 2004
Morgan Stanley Natural Resource Development Securities Inc., dated June 30, 2005
Morgan Stanley Pacific Growth Fund Inc., dated December 30, 2004
Morgan Stanley Real Estate Fund, dated March 30, 2005
Morgan Stanley Special Growth Fund, dated June 30, 2005
Morgan Stanley Special Value Fund, dated September 30, 2004
Morgan Stanley Utilities Fund, dated April 29, 2005
("Group I Funds")
Morgan Stanley Aggressive Equity Fund, dated September 30, 2004
Morgan Stanley Allocator Fund, dated May 27, 2005
Morgan Stanley American Opportunities Fund, dated April 29, 2005
Morgan Stanley Balanced Growth Fund, dated May 27, 2005
Morgan Stanley Balanced Income Fund, dated May 27, 2005
Morgan Stanley California Tax-Free Income Fund, dated April 29, 2005
Morgan Stanley Capital Opportunities Trust, dated March 30, 2005
Morgan Stanley Convertible Securities Trust, dated November 30, 2004
Morgan Stanley Developing Growth Securities Trust, dated November 30, 2004
Morgan Stanley Dividend Growth Securities Inc., dated June 30, 2005
Morgan Stanley Equally-Weighted S&P 500 Fund, dated August 30, 2004
Morgan Stanley Flexible Income Trust, dated December 30, 2004
Morgan Stanley Fundamental Value Fund, dated November 30, 2004
Morgan Stanley Growth Fund, dated July 29, 2005
Morgan Stanley Income Builder Fund, dated November 30, 2004
Morgan Stanley Income Trust, dated October 29, 2004
Morgan Stanley KLD Social Index Fund, dated March 30, 2005
Morgan Stanley Limited Duration Fund, dated August 29, 2005
Morgan Stanley Limited Duration U.S. Treasury Trust, dated July 30, 2004
Morgan Stanley Limited Term Municipal Trust, dated July 29, 2005
Morgan Stanley Mid-Cap Value Fund, dated October 29, 2004
Morgan Stanley Mortgage Securities Trust, dated December 30, 2004
Morgan Stanley Nasdaq-100 Index Fund, dated March 30, 2005
Morgan Stanley New York Tax-Free Income Fund, dated April 29, 2005
Morgan Stanley S&P 500 Index Fund, dated October 29, 2004
Morgan Stanley Small-Mid Special Value Fund, dated August 29, 2005
Morgan Stanley Strategist Fund, dated September 30, 2004
Morgan Stanley Tax-Exempt Securities Trust, dated April 29, 2005
Morgan Stanley Total Market Index Fund, dated October 29, 2004
Morgan Stanley Total Return Trust, dated September 30, 2004
Morgan Stanley U.S. Government Securities Trust, dated April 29, 2005
Morgan Stanley Value Fund, dated November 30, 2004
("Group II Funds")
(Collectively, the "Funds")
The last paragraph of the section of the Fund's Prospectus titled "How to Sell Shares" is hereby deleted and replaced with the following:
Redemption Fee. Fund shares redeemed within 30 days (in the case of Group I Funds) or seven days (in the case of Group II Funds) of purchase will be subject to a 2% redemption fee, payable to the Fund. The redemption fee is designed to protect the Fund and its remaining shareholders from the effects of short-term trading. The redemption fee is not imposed on redemptions made: (i) through systematic withdrawal/exchange plans, (ii) through pre-approved asset allocation programs, (iii) of shares received by reinvesting income dividends or capital gain distributions, (iv) through certain collective trust funds or other pooled vehicles, (v) on behalf of advisory accounts where client allocations are solely at the discretion of the Morgan Stanley Investment Management investment team and (vi) through check-writing (with respect to Morgan Stanley Limited Duration U.S. Treasury Trust only). The redemption fee is based on, and deducted from, the redemption proceeds. Each time you redeem or exchange shares, the shares held the longest will be redeemed or exchanged first.
The redemption fee may not be imposed on transactions that occur through certain omnibus accounts at financial intermediaries. Certain financial intermediaries may apply different methodologies than those described above in assessing redemption fees, may impose their own redemption fee that may differ from the Fund's redemption fee or may impose certain trading restrictions to deter market timing and frequent trading. If you invest in the Fund through a financial intermediary, please read that firm's materials carefully to learn about any other restrictions or fees that may apply.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE.
79587SPT-01
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August 25, 2005
Supplement
SUPPLEMENT DATED AUGUST 25, 2005 TO THE PROSPECTUS OF
MORGAN STANLEY BALANCED GROWTH FUND
Dated May 27, 2005
The following sentence is hereby added within the "Principal Investment Strategies" section of the Fund's Prospectus:
The Fund may invest up to 15% of its net assets in Real Estate Investment Trusts ("REITs").
The following paragraph is hereby added within the "Principal Risks" section of the Fund's Prospectus:
Real Estate Investment Trusts ("REITs"). REITs pool investors' funds for investments primarily in commercial real estate or real estate properties. Like mutual funds, REITs have expenses, including advisory and administration fees, that are paid by their shareholders. As a result, you will absorb duplicate levels of fees when the Fund invests in REITs. The performance of any Fund REIT holdings ultimately depends on the types of real property in which the REITs invest and how well the property is managed. A general downturn in real estate values also can hurt REIT performance. In addition, REITs are subject to certain provisions under federal tax law. The failure of a company to qualify as a REIT could have adverse consequences for the Fund, including significantly reducing the return to the Fund on its investment in such company.
The third sentence in the section of the Fund's Prospectus titled "Principal Investment Strategies—Common Stocks/Convertible Securities" is hereby deleted and replaced with the following:
The Fund's common stock investments may include foreign securities (held directly or listed in the United States on a national securities exchange and in the form of depositary receipts).
The section of the Fund's Prospectus titled "Additional Investment Strategy Information—Foreign Securities" is hereby deleted and replaced with the following:
Foreign Securities. The Fund may invest up to 20% of its net assets in foreign securities. Foreign securities may include common stocks and securities convertible into common stocks (held directly or listed in the United States on a national securities exchange and in the form of depositary receipts), as well as Yankee dollar obligations and sovereign debt.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE.
37896SPT-01
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July 15, 2005
Supplement
SUPPLEMENT DATED JULY 15, 2005 TO THE PROSPECTUSES OF
Morgan Stanley Aggressive Equity Fund, dated September 30, 2004
Morgan Stanley Allocator Fund, dated May 27, 2005
Morgan Stanley American Opportunities Fund, dated April 29, 2005
Morgan Stanley Balanced Growth Fund, dated May 27, 2005
Morgan Stanley Balanced Income Fund, dated May 27, 2005
Morgan Stanley Biotechnology Fund, dated July 30, 2004
Morgan Stanley California Tax-Free Income Fund, dated April 29, 2005
Morgan Stanley Capital Opportunities Trust, dated March 30, 2005
Morgan Stanley Convertible Securities Trust, dated November 30, 2004
Morgan Stanley Developing Growth Securities Trust, dated November 30, 2004
Morgan Stanley Dividend Growth Securities Inc., dated June 30, 2005
Morgan Stanley Equally-Weighted S&P 500 Fund, dated August 30, 2004
Morgan Stanley European Equity Fund Inc., dated December 30, 2004
Morgan Stanley Financial Services Trust, dated July 30, 2004
Morgan Stanley Flexible Income Trust, dated December 30, 2004
Morgan Stanley Fund of Funds -- Domestic Portfolio, dated November 30, 2004
Morgan Stanley Fundamental Value Fund, dated November 30, 2004
Morgan Stanley Global Advantage Fund, dated July 30, 2004
Morgan Stanley Global Dividend Growth Securities, dated May 28, 2004
Morgan Stanley Global Utilities Fund, dated June 30, 2005
Morgan Stanley Growth Fund, dated May 28, 2004
Morgan Stanley Health Sciences Trust, dated September 30, 2004
Morgan Stanley High Yield Securities Inc., dated October 29, 2004
Morgan Stanley Income Builder Fund, dated November 30, 2004
Morgan Stanley Income Trust, dated October 29, 2004
Morgan Stanley Information Fund, May 28, 2004
Morgan Stanley International Fund, dated December 30, 2004
Morgan Stanley International SmallCap Fund, dated July 30, 2004
Morgan Stanley International Value Equity Fund, dated October 29, 2004
Morgan Stanley Japan Fund, dated July 30, 2004
Morgan Stanley KLD Social Index Fund, dated March 30, 2005
Morgan Stanley Mid-Cap Value Fund, dated October 29, 2004
Morgan Stanley Mortgage Securities Trust, dated December 30, 2004
Morgan Stanley Nasdaq-100 Index Fund, dated March 30, 2005
Morgan Stanley Natural Resource Development Securities Inc., dated June 30, 2005
Morgan Stanley New York Tax-Free Income Fund, dated April 29, 2005
Morgan Stanley Pacific Growth Fund Inc., dated December 30, 2004
Morgan Stanley Real Estate Fund, dated March 30, 2005
Morgan Stanley S&P 500 Index Fund, dated October 29, 2004
Morgan Stanley Small-Mid Special Value Fund, dated June 30, 2004
Morgan Stanley Special Growth Fund, dated June 30, 2005
Morgan Stanley Special Value Fund, dated September 30, 2004
Morgan Stanley Strategist Fund, dated September 30, 2004
Morgan Stanley Tax-Exempt Securities Trust, dated April 29, 2005
Morgan Stanley Total Market Index Fund, dated October 29, 2004
Morgan Stanley Total Return Trust, dated September 30, 2004
Morgan Stanley U.S. Government Securities Trust, dated April 29, 2005
Morgan Stanley Utilities Fund, dated April 29, 2005
Morgan Stanley Value Fund, dated November 30, 2004
(the "Funds")
Effective September 30, 2005, the Directors/Trustees of each Fund have approved the addition of a new Class A shares sales charge waiver category. Accordingly, the following is added as the third bullet in the section titled "Share Class Arrangements — Class A Shares — Other Sales Charge Waivers":
•
Custodial accounts held by a bank or trust company, created pursuant to Section 403(b) of the Internal Revenue Code.
This change in Class A shares purchase options is prospective only. Investors, as of September 30, 2005, will become eligible to purchase Class A shares at net asset value pursuant to this revised option and may have previously purchased Class B shares or Class C shares of the Fund. The terms of any such Class B shares or Class C shares purchased before September 30, 2005 remain unchanged such Class B shares and Class C shares remain subject to the annual operating expenses and contingent deferred sales charges ("CDSC") applicable to such shares and remain exchangeable only into corresponding Class B shares or Class C shares of other Morgan Stanley Funds pursuant to the exchange privilege. An investor election to redeem such Class B shares or Class C shares and reinvest in Class A shares would be subject to any applicable CDSC and tax consequences. Class D shares are not available to custodial accounts created pursuant to Section 403(b).
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE.
79562USPT-00
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May 31, 2005
Supplement
SUPPLEMENT DATED MAY 31, 2005 TO THE PROSPECTUSES OF
Morgan Stanley Aggressive Equity Fund, dated September 30, 2004
Morgan Stanley Allocator Fund, dated May 27, 2005
Morgan Stanley American Opportunities Fund, dated April 29, 2005
Morgan Stanley Balanced Growth Fund, dated May 27, 2005
Morgan Stanley Balanced Income Fund, dated May 27, 2005
Morgan Stanley Biotechnology Fund, dated July 30, 2004
Morgan Stanley California Tax-Free Income Fund, dated April 29, 2005
Morgan Stanley Capital Opportunities Trust, dated March 30, 2005
Morgan Stanley Convertible Securities Trust, dated November 30, 2004
Morgan Stanley Developing Growth Securities Trust, dated November 30, 2004
Morgan Stanley Dividend Growth Securities Inc., dated April 30, 2004
Morgan Stanley Equally-Weighted S&P 500 Fund, dated August 30, 2004
Morgan Stanley European Equity Fund Inc., dated December 30, 2004
Morgan Stanley Federal Securities Trust, dated December 30, 2004
Morgan Stanley Financial Services Trust, dated July 30, 2004
Morgan Stanley Flexible Income Trust, dated December 30, 2004
Morgan Stanley Fund of Funds -- Domestic Portfolio, dated November 30, 2004
Morgan Stanley Fundamental Value Fund, dated November 30, 2004
Morgan Stanley Global Advantage Fund, dated July 30, 2004
Morgan Stanley Global Dividend Growth Securities, dated May 28, 2004
Morgan Stanley Global Utilities Fund, dated April 30, 2004
Morgan Stanley Growth Fund, dated May 28, 2004
Morgan Stanley Health Sciences Trust, dated September 30, 2004
Morgan Stanley High Yield Securities Inc., dated October 29, 2004
Morgan Stanley Income Builder Fund, dated November 30, 2004
Morgan Stanley Income Trust, dated October 29, 2004
Morgan Stanley Information Fund, dated May 28, 2004
Morgan Stanley International Fund, dated December 30, 2004
Morgan Stanley International SmallCap Fund, dated July 30, 2004
Morgan Stanley International Value Equity Fund, dated October 29, 2004
Morgan Stanley Japan Fund, dated July 30, 2004
Morgan Stanley KLD Social Index Fund, dated March 30, 2005
Morgan Stanley Mid-Cap Value Fund, dated October 29, 2004
Morgan Stanley Nasdaq-100 Index Fund, dated March 30, 2005
Morgan Stanley Natural Resource Development Securities Inc., dated April 30, 2004
Morgan Stanley New York Tax-Free Income Fund, dated April 29, 2005
Morgan Stanley Pacific Growth Fund Inc., dated December 30, 2004
Morgan Stanley Real Estate Fund, dated March 30, 2005
Morgan Stanley S&P 500 Index Fund, dated October 29, 2004
Morgan Stanley Small-Mid Special Value Fund, dated June 30, 2004
Morgan Stanley Special Growth Fund, dated April 30, 2004
Morgan Stanley Special Value Fund, dated September 30, 2004
Morgan Stanley Strategist Fund, dated September 30, 2004
Morgan Stanley Tax-Exempt Securities Trust, dated April 29, 2005
Morgan Stanley Total Market Index Fund, dated October 29, 2004
Morgan Stanley Total Return Trust, dated September 30, 2004
Morgan Stanley U.S. Government Securities Trust, dated April 29, 2005
Morgan Stanley Utilities Fund, dated April 29, 2005
Morgan Stanley Value Fund, dated November 30, 2004
(the "Funds")
The paragraph of the section of the prospectus titled "Share Class Arrangements — Class A Shares — Combined Purchase Privilege" is hereby deleted and replaced with the following:
You will have the benefit of reduced sales charges by combining purchases of Class A shares of the Fund for any related account in a single transaction with purchases of any class of shares of other Morgan Stanley Multi-Class Funds for the related account or any other related account. For the purpose of this combined purchase privilege, a "related account" is:
•
A single account (including an individual account, a joint account and a trust account established solely for the benefit of the individual).
•
Family member accounts (limited to spouse and children under 21 but including trust accounts established solely for the benefit of a spouse or child under 21).
•
Individual retirement accounts (IRAs) and single participant retirement accounts (such as Keoghs).
•
UGMA/UTMA accounts.
The paragraphs of the section of the Prospectus titled "Share Class Arrangements — Class A Shares — Right of Accumulation" are hereby deleted and replaced with the following:
You may benefit from a reduced sales charge if the cumulative net asset value of Class A Shares of the Fund purchased in a single transaction, together with the net asset value of all classes of shares of Morgan Stanley Multi-Class Funds (including shares of Morgan Stanley Non-Multi-Class Funds which resulted from an exchange from Morgan Stanley Multi Class Funds) held in related accounts amounts to $25,000 or more. For the purposes of the rights of accumulation privilege, a related account is any one of the accounts listed under "Combined Purchase Privilege" above.
The following paragraph is hereby added immediately following "Share Class Arrangements — Class A Shares — Right of Accumulation."
Notification. You must notify your Morgan Stanley Financial Advisor or other authorized financial representative (or Morgan Stanley Trust if you purchase shares directly through the Fund) at the time a purchase order is placed, that the purchase qualifies for a reduced sales charge under any of the privileges discussed above. Similar notification must be made in writing when an order is placed by mail. The reduced sales charge will not be granted if: (i) notification is not furnished at the time of the order; or (ii) a review of the records of Morgan Stanley DW Inc. ("Morgan Stanley DW") or other authorized dealer of Fund shares or the Fund's transfer agent does not confirm your represented holdings.
In order to obtain a reduced sales charge under any of the privileges discussed above, it may be necessary at the time of purchase for you to inform your Morgan Stanley Financial Advisor or other authorized financial representative (or Morgan Stanley Trust if you purchase shares directly through the Fund) of the existence of other accounts in which there are holdings eligible to be aggregated to meet the sales load breakpoint and/or right of accumulation threshold. In order to verify your eligibility, you may be required to provide account statements and/or confirmations regarding shares of the Fund or other Morgan Stanley Funds held in all related accounts described above at Morgan Stanley or by other authorized dealers, as well as shares held by related parties, such as members of the same family or household, in order to and/or right of accumulation threshold determine whether you have met the sales load breakpoint and/or right of accumulation threshold. The Fund makes available, in a clear and prominent format, free of charge, on its web site, www.morganstanley.com, information regarding applicable sales loads and reduced sales charges (i.e., breakpoint discounts). The web site includes hyperlinks that facilitate access to the information.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE.
79551SPT-01
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May 31, 2005
Supplement
SUPPLEMENT DATED MAY 31, 2005 TO THE PROSPECTUSES OF
Morgan Stanley Biotechnology Fund, dated July 30, 2004
Morgan Stanley European Equity Fund Inc., dated December 30, 2004
Morgan Stanley Financial Services Trust, dated July 30, 2004
Morgan Stanley Global Advantage Fund, dated July 30, 2004
Morgan Stanley Global Dividend Growth Securities, dated May 28, 2004
Morgan Stanley Global Utilities Fund, dated April 30, 2004
Morgan Stanley Health Sciences Trust, dated September 30, 2004
Morgan Stanley High Yield Securities Inc., dated October 29, 2004
Morgan Stanley Information Fund, dated May 28, 2004
Morgan Stanley International Fund, dated December 30, 2004
Morgan Stanley International SmallCap Fund, dated July 30, 2004
Morgan Stanley International Value Equity Fund, dated October 29, 2004
Morgan Stanley Japan Fund, dated July 30, 2004
Morgan Stanley Natural Resource Development Securities Inc., dated April 30, 2004
Morgan Stanley Pacific Growth Fund Inc., dated December 30, 2004
Morgan Stanley Real Estate Fund, dated March 30, 2005
Morgan Stanley Special Growth Fund, dated April 30, 2004
Morgan Stanley Special Value Fund, dated September 30, 2004
Morgan Stanley Utilities Fund, dated April 29, 2005
("Group I Funds")
Morgan Stanley Aggressive Equity Fund, dated September 30, 2004
Morgan Stanley Allocator Fund, dated May 27, 2005
Morgan Stanley American Opportunities Fund, dated April 29, 2005
Morgan Stanley Balanced Growth Fund, dated May 27, 2005
Morgan Stanley Balanced Income Fund, dated May 27, 2005
Morgan Stanley California Tax-Free Income Fund, dated April 29, 2005
Morgan Stanley Capital Opportunities Trust, dated March 30, 2005
Morgan Stanley Convertible Securities Trust, dated November 30, 2004
Morgan Stanley Developing Growth Securities Trust, dated November 30, 2004
Morgan Stanley Dividend Growth Securities Inc., dated April 30, 2004
Morgan Stanley Equally-Weighted S&P 500 Fund, dated August 30, 2004
Morgan Stanley Federal Securities Trust, dated December 30, 2004
Morgan Stanley Flexible Income Trust, dated December 30, 2004
Morgan Stanley Fundamental Value Fund, dated November 30, 2004
Morgan Stanley Growth Fund, dated May 28, 2004
Morgan Stanley Income Builder Fund, dated November 30, 2004
Morgan Stanley Income Trust, dated October 29, 2004
Morgan Stanley KLD Social Index Fund, dated March 30, 2005
Morgan Stanley Limited Duration Fund, dated June 30, 2004
Morgan Stanley Limited Duration U.S. Treasury Trust, dated July 30, 2004
Morgan Stanley Limited Term Municipal Trust, dated May 28, 2004
Morgan Stanley Mid-Cap Value Fund, dated October 29, 2004
Morgan Stanley Nasdaq-100 Index Fund, dated March 30, 2005
Morgan Stanley New York Tax-Free Income Fund, dated April 29, 2005
Morgan Stanley S&P 500 Index Fund, dated October 29, 2004
Morgan Stanley Small-Mid Special Value Fund, dated June 30, 2004
Morgan Stanley Strategist Fund, dated September 30, 2004
Morgan Stanley Tax-Exempt Securities Trust, dated April 29, 2005
Morgan Stanley Total Market Index Fund, dated October 29, 2004
Morgan Stanley Total Return Trust, dated September 30, 2004
Morgan Stanley U.S. Government Securities Trust, dated April 29, 2005
Morgan Stanley Value Fund, dated November 30, 2004
("Group II Funds")
(Collectively, the "Funds")
Effective August 29, 2005, the Board of Directors/Trustees (the "Boards") of the Funds approved the implementation of a 2% redemption fee for Fund shares redeemed within 30 days (in the case of Group I Funds) or seven days (in the case of Group II Funds) of purchase, subject to certain exceptions discussed below. In addition, effective August 29, 2005, the Boards approved the elimination of certain trade/exchange limits currently in effect for the Funds.
With respect to all Funds (except for Morgan Stanley Limited Duration Fund, Morgan Stanley Limited Duration U.S. Treasury Trust and Morgan Stanley Limited Term Municipal Trust), the "Shareholder Fees" table in the section of the Prospectus titled "Fees and Expenses" is hereby amended with the following to reflect the redemption fee:
Shareholder Fees
![]() | ![]() | ![]() | ![]() | Class A | ![]() | ![]() | Class B | ![]() | ![]() | Class C | ![]() | ![]() | Class D | ![]() | ||||||||||||
![]() | Maximum sales charge (load) imposed on purchases (as a percentage of offering price) | ![]() | ![]() | 4.25% (for fixed income Funds) and 5.25% (for equity Funds)1 | ![]() | ![]() | ![]() | ![]() | None | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | None | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | None | ![]() | ![]() | ![]() |
![]() | Maximum deferred sales charge (load) (as a percentage based on the lesser of the offering price or net asset value at redemption) | ![]() | ![]() | None2 | ![]() | ![]() | ![]() | ![]() | 5.00 | %3 | ![]() | ![]() | ![]() | ![]() | ![]() | 1.00 | %4 | ![]() | ![]() | ![]() | ![]() | ![]() | None | ![]() | ![]() | ![]() |
![]() | Redemption fee5 | ![]() | ![]() | 2.00% | ![]() | ![]() | ![]() | ![]() | 2.00 | % | ![]() | ![]() | ![]() | ![]() | ![]() | 2.00 | % | ![]() | ![]() | ![]() | ![]() | ![]() | 2.00 | % | ![]() | ![]() |
(1)
Reduced for purchases of $25,000 and over.
(2)
Investments that are not subject to any sales charges at the time of purchase are subject to a contingent deferred sales charge ("CSDC") of 1.00% that will be imposed if you sell your shares within 18 months after purchase, except for certain specific circumstances. With respect to shares purchased prior to December 1, 2004, a CDSC of 1.00% will be imposed if you sell your shares within one year after purchase, except for certain specific circumstances.
(3)
The CDSC is scaled down to 1.00% during the sixth year, reaching zero thereafter. See "Share Class Arrangements" for a complete discussion of the CDSC.
(4)
Only applicable if you sell your shares within one year after purchase.
(5)
Payable to the Fund on shares redeemed within 30 days (in the case of Group I Funds) or seven days (in the case of Group II Funds) of purchase. See "Shareholder Information — How to Sell Shares" for more information on redemption fees.
With respect to Morgan Stanley Limited Duration Fund, Morgan Stanley Limited Duration U.S. Treasury Trust and Morgan Stanley Limited Term Municipal Trust, the following information is hereby added to the top of the table included in the section titled "Fees and Expenses":
![]() | Shareholder Fees | ![]() | |||||||
![]() | ![]() | ||||||||
![]() | Redemption Fee1 | ![]() | ![]() | ![]() | ![]() | 2.00 | % | ![]() | ![]() |
(1)
Payable to the Fund on shares redeemed within seven days of purchase. See "Shareholder Information — How to Sell Shares" for more information on redemption fees.
The second paragraph in the section of the Prospectus titled "How to Exchange Shares — Permissible Fund Exchanges" is hereby deleted and replaced with the following:
The current prospectus for each Morgan Stanley Fund describes its investment objective(s), policies and investment minimums and should be read before investment. Since exchanges are available only into continuously offered Morgan Stanley Funds, exchanges are not available into any new Morgan Stanley Fund during its initial offering period, or when shares of a particular Morgan Stanley Fund are not being offered for purchase. An exchange of Fund shares held for less than 30 days (in the case of Group I Funds) or seven days (in the case of Group II Funds) from the date of purchase will be subject to the 2% redemption fee described under the section "How to Sell Shares."
The following paragraph is hereby added as the last paragraph of the section titled "How to Sell Shares":
Redemption Fee. Fund shares redeemed within 30 days (in the case of Group I Funds) or seven days (in the case of Group II Funds) of purchase will be subject to a 2% redemption fee, payable to the Fund. The redemption fee is designed to protect the Fund and its remaining shareholders from the effects of short-term trading. The redemption fee does not apply to systematic withdrawal/exchange plans, pre-approved asset allocation programs, shares received by reinvesting income dividends or capital gain distributions, affiliated fund of funds and redemptions made through check-writing (with respect to Morgan Stanley Limited Duration U.S. Treasury Trust). The redemption fee is based on, and deducted from, the redemption proceeds. Each time you redeem or exchange shares, the shares held the longest will be redeemed or exchanged first.
With respect to trades that occur through omnibus accounts at financial intermediaries, each Fund is currently limited in its ability to monitor trading activity or enforce the redemption fee with respect to customers of such intermediaries. Certain intermediaries may not have the ability to assess a redemption fee.
Effective August 29, 2005, the limitation of a maximum of eight exchanges per calendar year will no longer be in effect. However, certain patterns of exchanges and/or purchase or sale transactions involving the Funds or other Morgan Stanley Funds may result in a Fund rejecting, limiting or prohibiting, at its sole discretion, and without prior notice, additional purchases and/or exchanges and may result in a shareholder's account being closed. Determinations in this regard may be made based on the frequency or dollar amount of previous exchanges or purchase or sale transactions. Each Fund reserves the right to reject an exchange request for any reason.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE.
79550SPT-01
[MORGAN STANLEY FUNDS GRAPHIC OMITTED] Morgan Stanley Balanced Growth Fund A mutual fund that seeks to provide capital growth with reasonable current income - -------------------------------------------------------------------------------- [MORGAN STANLEY LOGO OMITTED] - -------------------------------------------------------------------------------- The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the Prospectus contrary is a criminal offense. May 27, 2005 CONTENTS THE FUND Investment Objective.....................................................1 Principal Investment Strategies..........................................1 Principal Risks..........................................................3 Past Performance.........................................................6 Fees and Expenses........................................................8 Additional Investment Strategy Information...............................9 Additional Risk Information.............................................11 Portfolio Holdings......................................................13 Fund Management.........................................................14 SHAREHOLDER INFORMATION Pricing Fund Shares.....................................................16 How to Buy Shares.......................................................17 Limited Portability.....................................................18 How to Exchange Shares..................................................19 How to Sell Shares......................................................20 Distributions........................................................ . 23 Frequent Purchases and Redemptions of Fund Shares.......................23 Tax Consequences........................................................24 Share Class Arrangements................................................25 Additional Information..................................................33 FINANCIAL HIGHLIGHTS..........................................................34 MORGAN STANLEY FUNDS...........................................Inside Back Cover This Prospectus contains important information about the Fund. Please read it carefully and keep it for future reference. THE FUND - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE [GRAPHIC OMITTED] Morgan Stanley Balanced Growth Fund seeks to provide capital growth with reasonable current income. - -------------------------------------------------------------------------------- PRINCIPAL INVESTMENT STRATEGIES (sidebar) GROWTH & INCOME An investment objective having the goal of selecting securities with the potential to rise in price and pay out income. (end sidebar) [GRAPHIC OMITTED] The Fund will normally invest at least 60% of its assets in dividend paying common stocks and securities convertible into common stocks and at least 25% of its assets in fixed-income securities. Within these limitations, the Fund's "Investment Adviser," Morgan Stanley Investment Advisors Inc., may purchase or sell securities in any proportion it believes desirable based on its assessment of business, economic and investment conditions. The two groups of Fund investments in more detail are: COMMON STOCKS/CONVERTIBLE SECURITIES. The Fund invests in common stocks of companies that have a record of paying dividends and, in the Investment Adviser's opinion, have the potential for increasing dividends. Investment grade securities convertible into common stocks may also be Fund investments. The Fund's common stock investments may include foreign securities that are listed in the United States on a national securities exchange and depositary receipts. A depositary receipt is generally issued by a bank or financial institution and represents an ownership interest in the common stock or other equity securities of a foreign company. FIXED-INCOME SECURITIES. The Fund's fixed-income securities (including zero coupon securities) are limited to investment grade corporate debt securities, Yankee dollar obligations, sovereign debt, bank obligations, investment grade mortgage-backed securities, including collateralized mortgage obligations, investment grade asset-backed securities and U.S. government securities. The U.S. government securities may include: o U.S. Treasury bills, notes and bonds, all of which are direct obligations of the U.S. Government. o Securities (including mortgage-backed 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 these obligations are the Government National Mortgage Association and the Federal Housing Administration. o Securities (including mortgage-backed securities) issued by agencies and instrumentalities which are not backed by the full faith and credit of the United States, but whose issuing 1 agency or instrumentality has the right to borrow, to meet its obligations, from the U.S. Treasury. Among these agencies and instrumentalities are the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. o Securities issued by agencies and instrumentalities which are backed solely by the credit of the issuing agency or instrumentality. Among these agencies and instrumentalities is the Federal Home Loan Bank. One type of mortgage-backed security in which the Fund may invest is a mortgage pass-through security. These securities represent a participation interest in a pool of mortgage loans. They differ from conventional debt securities, which provide for periodic payment of interest in fixed amounts and principal payments at maturity or on specified call dates. Mortgage pass-through securities provide for monthly payments that are a "pass-through" of the monthly interest and principal payments made by the individual borrowers on the pooled mortgage loans. Mortgage pass-through securities may be collateralized by mortgages with fixed rates of interest or adjustable rates. The securitization techniques used to develop mortgage-backed securities are also applied to asset-backed securities. Asset-backed securities represent an interest in a pool of assets, such as automobile and credit card receivables or home equity loans, that have been securitized in pass-through structures similar to mortgage-backed securities. Collateralized mortgage obligations ("CMOs") are debt obligations collateralized by mortgage loans or mortgage pass-through securities (collectively "Mortgage Assets"). Payments of principal and interest on the Mortgage Assets and any reinvestment income are used to make payments on the CMOs. CMOs are issued in multiple classes. Each class has a fixed or floating rate and a stated maturity or final distribution date. The principal and interest on the Mortgage Assets may be allocated among the classes in a number of different ways. Certain classes will, as a result of the allocation, have more predictable cash flows than others. As a general matter, the more predictable the cash flow, the lower the yield relative to other Mortgage Assets. The less predictable the cash flow, the higher the yield and the greater the risk. The Fund may invest in any class of a CMO. Yankee dollar obligations are dollar-denominated obligations issued in the U.S. capital markets by foreign issuers such as corporations and banks. Sovereign debt securities are issued or guaranteed by foreign government entities. * * * Common stock is a share ownership or equity interest in a corporation. It may or may not pay dividends, as some companies reinvest all of their profits back into their businesses, while others pay out some of their profits to shareholders as dividends. Fixed-income securities are debt securities such as bonds, notes or commercial paper. The issuer of the debt security borrows money from the investor who buys the security. Most debt securities pay either fixed or adjustable rates of interest at regular intervals until they mature, at which point investors get their principal back. The Fund's fixed-income investments may include zero coupon securities which are purchased at a discount and generally accrue interest, but make no payments until maturity. The Fund may also invest in options and futures. 2 - -------------------------------------------------------------------------------- PRINCIPAL RISKS [GRAPHIC OMITTED] There is no assurance that the Fund will achieve its investment objective. The Fund's share price and return will fluctuate with changes in the market value of the Fund's portfolio securities. When you sell Fund shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Fund. COMMON STOCKS. A principal risk of investing in the Fund is associated with its common stock investments. In general, stock values fluctuate in response to activities specific to the company as well as general market, economic and political conditions. Stock prices can fluctuate widely in response to these factors. FIXED-INCOME SECURITIES. Principal risks of investing in the Fund are also associated with its fixed-income investments. All fixed-income securities are subject to two types of risk: credit risk and interest rate risk. Credit risk refers to the possibility that the issuer of a security will be unable to make interest payments and/or repay the principal on its debt. While the Fund invests in investment grade securities, certain of these securities have speculative characteristics. Interest rate risk refers to fluctuations in the value of a fixed-income security resulting from changes in the general level of interest rates. When the general level of interest rates goes up, the prices of most fixed-income securities go down. When the general level of interest rates goes down, the prices of most fixed-income securities go up. (Zero coupon securities are typically subject to greater price fluctuations than comparable securities that pay current interest.) CONVERTIBLE SECURITIES. The Fund's investments in convertible securities subject the Fund to the risks associated with both fixed-income securities and common stocks. To the extent that a convertible security's investment value is greater than its conversion value, its price will likely increase when interest rates fall and decrease when interest rates rise, as with a fixed-income security. If the conversion value exceeds the investment value, the price of the convertible security will tend to fluctuate directly with the price of the underlying equity security. The Fund is not limited as to the maturities of the securities in which it may invest. Thus, a rise in the general level of interest rates may cause the price of the Fund's fixed-income investment securities to fall substantially. MORTGAGE-BACKED SECURITIES. Mortgage-backed securities in which the Fund may invest have different risk characteristics than traditional debt securities. Although, generally, the value of fixed-income securities increases during periods of falling interest rates and decreases during periods of rising rates, this is not always the case with mortgage-backed securities. This is due to the fact that principal on underlying mortgages may be prepaid at any time, as well as other factors. Generally, prepayments will increase during a period of falling interest rates and decrease during a period of rising interest rates. The rate of prepayments also may be influenced by economic and other factors. Prepayment risk includes the possibility that, as interest rates fall, securities with stated interest rates may have the principal prepaid earlier than expected, requiring the Fund to invest the proceeds at generally lower interest rates. 3 Investments in mortgage-backed securities are made based upon, among other things, expectations regarding the rate of prepayments on underlying mortgage pools. Rates of prepayment, faster or slower than expected by the Investment Adviser, could reduce the Fund's yield, increase the volatility of the Fund and/or cause a decline in net asset value. Certain mortgage-backed securities may be more volatile and less liquid than other traditional types of debt securities. ASSET-BACKED SECURITIES. Asset-backed securities have risk characteristics similar to mortgage-backed securities. Like mortgage-backed securities, they generally decrease in value as a result of interest rate increases, but may benefit less than other fixed-income securities from declining interest rates, principally because of prepayments. Also, as in the case of mortgage-backed securities, prepayments generally increase during a period of declining interest rates although other factors, such as changes in credit use and payment patterns, may also influence prepayment rates. Asset-backed securities also involve the risk that various federal and state consumer laws and other legal and economic factors may result in the collateral backing the securities being insufficient to support payment on the securities. COLLATERALIZED MORTGAGE OBLIGATIONS. The principal and interest on the Mortgage Assets comprising a CMO may be allocated among the several classes of a CMO in many ways. The general goal in allocating cash flows on Mortgage Assets to the various classes of a CMO is to create certain tranches on which the expected cash flows have a higher degree of predictability than do the underlying Mortgage Assets. As a general matter, the more predictable the cash flow is on a particular CMO tranche, the lower the anticipated yield on that tranche at the time of issue will be relative to the prevailing market yields on the Mortgage Assets. As part of the process of creating more predictable cash flows on certain tranches of a CMO, one or more tranches generally must be created that absorb most of the changes in the cash flows on the underlying Mortgage Assets. The yields on these tranches are generally higher than prevailing market yields on other mortgage related securities with similar average lives. Principal prepayments on the underlying Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates. Because of the uncertainty of the cash flows on these tranches, the market prices and yields of these tranches are more volatile and may increase or decrease in value substantially with changes in interest rates and/or the rates of prepayment. Due to the possibility that prepayments (on home mortgages and other collateral) will alter the cash flow on CMOs, it is not possible to determine in advance the final maturity date or average life. Faster prepayment will shorten the average life and slower prepayments will lengthen it. In addition, if the collateral securing CMOs or any third party guarantees are insufficient to make payments, the Fund could sustain a loss. YANKEE DOLLAR OBLIGATIONS. Yankee dollar obligations are subject to the same risks as domestic issues, notably credit risk, market risk and liquidity risk. To a limited extent, they are also subject to certain sovereign risks. One such risk is the possibility that a sovereign country might prevent capital, in the form of dollars, from flowing across its borders. Other risks include adverse political and economic developments; the extent and quality of government regulations of financial markets and institutions; the imposition of foreign withholding taxes; and the expropriation or nationalization of foreign issuers. The Fund may consider Yankee dollar obligations to be domestic securities for purposes of its investment policy. 4 SOVEREIGN DEBT. Investments in sovereign debt are subject to the risk that a government entity may delay or refuse to pay interest or repay principal on its sovereign debt. Some of these reasons may include cash flow problems, insufficient foreign currency reserves, political considerations, the relative size of its debt position to its economy or its failure to put in place economic reforms required by the International Monetary Fund or other multilateral agencies. If a government entity defaults, it may ask for more time in which to pay or for further loans. There is no legal process for collecting sovereign debt that a government does not pay or bankruptcy proceeding by which all or part of sovereign debt that a government entity has not repaid may be collected. OTHER RISKS. The performance of the Fund also will depend on whether or not the Investment Adviser is successful in applying the Fund's investment strategies. The Fund is also subject to other risks from its permissible investments, including the risks associated with investments in options and futures, foreign securities, commercial mortgage-backed securities ("CMBS"), forward foreign currency exchange contracts, targeted return index securities ("TRAINs"), stripped mortgage-backed securities, inverse floating obligations ("inverse floaters") and swaps. For more information about these risks, see the "Additional Risk Information" section. Shares of the Fund are not bank deposits and are not guaranteed or insured by the FDIC or any other government agency. 5 - -------------------------------------------------------------------------------- PAST PERFORMANCE [GRAPHIC OMITTED] The bar chart and table below provide some indication of the risks of investing in the Fund. The Fund's past performance (before and after taxes) does not indicate how the Fund will perform in the future. (sidebar) ANNUAL TOTAL RETURNS This chart shows how the performance of the Fund's Class C shares has varied from year to year over the past nine calendar years. (end sidebar) ANNUAL TOTAL RETURNS -- CALENDAR YEARS [BARCHART OMITTED] 1996 14.41% 1997 22.79% 1998 13.67% 1999 2.10% 2000 5.03% 2001 0.46% 2002 -12.22% 2003 18.55% 2004 9.63% The bar chart reflects the performance of Class C shares; the performance of the other Classes will differ because the Classes have different ongoing fees. The performance information in the bar chart does not reflect the deduction of sales charges; if these amounts were reflected, returns would be less than shown. The year-to-date total return as of March 31, 2005 was -0.39%. During the periods shown in the bar chart, the highest return for a calendar quarter was 12.40% (quarter ended June 30, 1997) and the lowest return for a calendar quarter was -11.69% (quarter ended September 30, 2002). 6 AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2004) (sidebar) AVERAGE ANNUAL TOTAL RETURNS This table compares the Fund's average annual total returns with those of indices that represent broad measures of market performance, as well as an index that represents a group of similar mutual funds, over time. The Fund's returns include the maximum applicable sales charge for each Class and assume you sold your shares at the end of each period (unless otherwise noted). (end sidebar) - ------------------------------------------------------------------------------------------------- PAST 1 YEAR PAST 5 YEARS LIFE OF FUND - ------------------------------------------------------------------------------------------------- Class A(1): Return Before Taxes 4.68% 3.46% 5.21% - ------------------------------------------------------------------------------------------------- Russell 1000 Value Index(2) 16.49% 5.27% 7.86% - ------------------------------------------------------------------------------------------------- Lehman Brothers U.S. Government/Credit Index(3) 4.19% 8.00% 6.91% - ------------------------------------------------------------------------------------------------- Lipper Balanced Funds Index(4) 8.99% 2.95% 5.65% - ------------------------------------------------------------------------------------------------- Class B(1): Return Before Taxes 4.64% 3.43% 5.16% - ------------------------------------------------------------------------------------------------- Russell 1000 Value Index(2) 16.49% 5.27% 7.86% - ------------------------------------------------------------------------------------------------- Lehman Brothers U.S. Government/Credit Index(3) 4.19% 8.00% 6.91% - ------------------------------------------------------------------------------------------------- Lipper Balanced Funds Index(4) 8.99% 2.95% 5.65% - ------------------------------------------------------------------------------------------------- Class C(1): Return Before Taxes 8.63% 3.78% 8.98% - ------------------------------------------------------------------------------------------------- Return After Taxes on Distributions(5) 8.48% 2.94% 7.44% - ------------------------------------------------------------------------------------------------- Return After Taxes on Distributions and Sale of Fund Shares 5.79% 2.77% 7.08% - ------------------------------------------------------------------------------------------------- Russell 1000 Value Index(2) 16.49% 5.27% 13.16% - ------------------------------------------------------------------------------------------------- Lehman Brothers U.S. Government/Credit Index(3) 4.19% 8.00% 7.45% - ------------------------------------------------------------------------------------------------- Lipper Balanced Funds Index(4) 8.99% 2.95% 8.99% - ------------------------------------------------------------------------------------------------- Class D(1): Return Before Taxes 10.75% 4.83% 6.21% - ------------------------------------------------------------------------------------------------- Russell 1000 Value Index(2) 16.49% 5.27% 7.86% - ------------------------------------------------------------------------------------------------- Lehman Brothers U.S. Government/Credit Index(3) 4.19% 8.00% 6.91% - ------------------------------------------------------------------------------------------------- Lipper Balanced Funds Index(4) 8.99% 2.95% 5.65% - ------------------------------------------------------------------------------------------------- (1) Class C commenced operations on March 28, 1995. Classes A, B and D commenced operations on July 28, 1997. (2) The Russell 1000 Value Index measures the performance of those companies in the Russell 1000 Index with lower price-to-book ratios and lower forecasted growth values. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. (3) The Lehman Brothers U.S. Government/Credit Index tracks the performance of government and corporate obligations, including U.S. government agency and U.S. Treasury securities and corporate and Yankee bonds. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. (4) The Lipper Balanced Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Balanced Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. (5) These returns do not reflect any tax consequences from a sale of your shares at the end of each period, but they do reflect any applicable sales charges on such a sale. Included in the table above are the after-tax returns for the Fund's Class C shares. The after-tax returns for the Fund's other Classes will vary from the Class C shares' returns. After-tax returns are calculated using the historical highest individual federal marginal income tax rates during the period shown and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns may be higher than before-tax 7 returns due to foreign tax credits and/or an assumed benefit from capital losses that would have been realized had Fund shares been sold at the end of the relevant periods, as applicable. - -------------------------------------------------------------------------------- FEES AND EXPENSES [GRAPHIC OMITTED] The table below briefly describes the fees and expenses that you may pay if you buy and hold shares of the Fund. The Fund offers four Classes of shares: Classes A, B, C and D. Each Class has a different combination of fees, expenses and other features, which should be considered in selecting a Class of shares. The Fund does not charge account or exchange fees. However, certain shareholders may be charged an order processing fee by the broker-dealer through which shares are purchased, as described below. See the "Share Class Arrangements" section for further fee and expense information. SHAREHOLDER FEES (sidebar) SHAREHOLDER FEES These fees are paid directly from your investment. (end sidebar) - ------------------------------------------------------------------------------------------------------------- CLASS A CLASS B CLASS C CLASS D - ------------------------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 5.25%(1) None None None - ------------------------------------------------------------------------------------------------------------- Maximum deferred sales charge (load) (as a percentage based on the lesser of the offering price or net asset value at redemption) None(2) 5.00%(3) 1.00%(4) None - ------------------------------------------------------------------------------------------------------------- ANNUAL FUND OPERATING EXPENSES (sidebar) ANNUAL FUND OPERATING EXPENSES These expenses are deducted from the Fund's assets. (end sidebar) - ------------------------------------------------------------------------------------------------ CLASS A CLASS B CLASS C CLASS D - ------------------------------------------------------------------------------------------------ Advisory fee* 0.52% 0.52% 0.52% 0.52% - ------------------------------------------------------------------------------------------------ Distribution and service (12b-1) fees 0.24% 1.00% 0.98% None - ------------------------------------------------------------------------------------------------ Other expenses* 0.37% 0.37% 0.37% 0.37% - ------------------------------------------------------------------------------------------------ Total annual Fund operating expenses 1.13% 1.89% 1.87% 0.89% - ------------------------------------------------------------------------------------------------ * Expense information in the table has been restated to reflect current fees (see "Fund Management"). (1) Reduced for purchases of $25,000 and over. (2) Investments that are not subject to any sales charge at the time of purchase are subject to a contingent deferred sales charge ("CDSC") of 1.00% that will be imposed if you sell your shares within 18 months after purchase, except for certain specific circumstances. With respect to shares purchased prior to December 1, 2004, a CDSC of 1.00% will be imposed if you sell your shares within one year after purchase, except for certain specific circumstances. (3) The CDSC is scaled down to 1.00% during the sixth year, reaching zero thereafter. See "Share Class Arrangements" for a complete discussion of the CDSC. (4) Only applicable if you sell your shares within one year after purchase. 8 EXAMPLE This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund, your investment has a 5% return each year and the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, the tables below show your costs at the end of each period based on these assumptions, depending upon whether or not you sell your shares at the end of each period. - -------------------------------------------------------------------------------------------------------- IF YOU SOLD YOUR SHARES: IF YOU HELD YOUR SHARES: - -------------------------------------------------------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------------------------------------------------------------- Class A $ 634 $ 865 $ 1,115 $ 1,827 $ 634 $ 865 $ 1,115 $ 1,827 - -------------------------------------------------------------------------------------------------------- Class B $ 692 $ 894 $ 1,221 $ 2,212 $ 192 $ 594 $ 1,021 $ 2,212 - -------------------------------------------------------------------------------------------------------- Class C $ 290 $ 588 $ 1,011 $ 2,190 $ 190 $ 588 $ 1,011 $ 2,190 - -------------------------------------------------------------------------------------------------------- Class D $ 91 $ 284 $ 493 $ 1,096 $ 91 $ 284 $ 493 $ 1,096 - -------------------------------------------------------------------------------------------------------- While Class B and Class C shares do not have any front-end sales charges, their higher ongoing annual expenses (due to higher 12b-1 fees) mean that over time you could end up paying more for these shares than if you were to pay front-end sales charges for Class A shares. ORDER PROCESSING FEE. Morgan Stanley DW Inc. ("Morgan Stanley DW") charges clients an order processing fee of $5.25 (except in certain circumstances, including, but not limited to, activity in fee-based accounts, exchanges, dividend reinvestments and systematic investment and withdrawal plans) when a client buys or redeems shares of the Fund. Please consult your Morgan Stanley Financial Advisor for more information regarding this fee. - -------------------------------------------------------------------------------- ADDITIONAL INVESTMENT STRATEGY INFORMATION [GRAPHIC OMITTED] This section provides additional information relating to the Fund's investment strategies. OPTIONS AND FUTURES. The Fund may invest in futures with respect to stock indices, financial instruments and interest rate indices and may purchase and sell options on securities, securities indices and stock index futures. Futures and options may be used to facilitate trading, to increase or decrease the Fund's market exposure or to seek to protect against a decline in the value of the Fund's securities or an increase in prices of securities that may be purchased. PORTFOLIO TURNOVER. The Fund may engage in active and frequent trading of its portfolio securities. The Financial Highlights Table at the end of this Prospectus shows the Fund's portfolio turnover rates during recent fiscal years. A portfolio turnover rate of 200%, for example, is equivalent to the Fund buying and selling all of its 9 securities two times during the course of the year. A high portfolio turnover rate (over 100%) could result in high brokerage costs and an increase in taxable capital gains distributions to the Fund's shareholders. See the sections on "Distributions" and "Tax Consequences." COMMERCIAL MORTGAGE-BACKED SECURITIES. The Fund may invest in CMBS. The Fund invests in CMBS that are rated investment grade by at least one nationally-recognized statistical rating organization (e.g., Baa or better by Moody's Investor Services, Inc. or BBB or better by Standard & Poor's Ratings Group, a division of The McGraw Hill Companies, Inc.). CMBS are generally multi-class or pass-through securities backed by a mortgage loan or a pool of mortgage loans secured by commercial property, such as industrial and warehouse properties, office buildings, retail space and shopping malls, multifamily properties and cooperative apartments. The commercial mortgage loans that underlie CMBS are generally not amortizing or not fully amortizing. That is, at their maturity date, repayment of their remaining principal balance or "balloon" is due and is repaid through the attainment of an additional loan or sale of the property. An extension of a final payment on commercial mortgages will increase the average life of the CMBS, generally resulting in lower yield for discount bonds and a higher yield for premium bonds. FOREIGN SECURITIES. The Fund's investments in common stocks and securities convertible into common stocks may include foreign securities that are listed in the United States on a national securities exchange and depositary receipts. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund's investments also may include forward foreign currency exchange contracts, which involve the purchase or sale of a specific amount of foreign currency at the current price with delivery at a specified future date. The Fund may use these contracts to hedge against adverse movements in the foreign currencies in which portfolio securities are denominated. In addition, the Fund may use these instruments to modify its exposure to various currency markets. TARGETED RETURN INDEX SECURITIES ("TRAINS"). Up to 10% of the Fund's net assets may be invested in TRAINs. A TRAIN is a structured, pooled investment vehicle that permits investment in a diversified portfolio of fixed income securities without the brokerage and other expenses associated with directly holding small positions in individual securities. STRIPPED MORTGAGE-BACKED SECURITIES. The Fund may invest up to 10% of its net assets in stripped mortgage-backed securities. Stripped mortgage-backed securities are usually structured in two classes. One class entitles the holder to receive all or most of the interest but little or none of the principal of a pool of Mortgage Assets (the interest-only or "IO" Class), while the other class entitles the holder to receive all or most of the principal but little or none of the interest (the principal-only or "PO" Class). INVERSE FLOATERS. The Fund may invest up to 10% of its net assets in inverse floaters. An inverse floater has a coupon rate that moves in the direction opposite to that of a designated interest rate index. SWAPS. Swap transactions are contracts in which the Fund agrees to exchange the return or interest rate on one instrument for the return or interest rate on another instrument. The payment streams are calculated by reference to a specified index and agreed upon notional amount. A "specified index" may include currencies, interest rates, 10 fixed-income indices, securities indices, total return on interest rate indices or commodity indices. Swaps may be used to manage the maturity and duration of a fixed-income portfolio, or to gain exposure to a market without directly investing in securities traded in that market. Currency swaps generally involve an agreement to pay interest streams in one currency based on a specified index in exchange for receiving interest streams denominated in another currency. Interest rate caps, floors and collars are swaps in which one party pays a single or periodic fixed amount or premium and the other party pays periodic amounts based on the movement of a specified index. The Fund may enter into credit default swap contracts for hedging purposes, to add leverage to its portfolio or to gain exposure to a credit in which the Fund may otherwise invest. DEFENSIVE INVESTING. The Fund may take temporary "defensive" positions in attempting to respond to adverse market conditions. The Fund may invest any amount of its assets in cash or money market instruments in a defensive posture that may be inconsistent with the Fund's principal investment strategies when the Investment Adviser believes it is advisable to do so. Although taking a defensive posture is designed to protect the Fund from an anticipated market downturn, it could have the effect of reducing the benefit from any upswing in the market. When the Fund takes a defensive position, it may not achieve its investment objective. The percentage limitations relating to the composition of the Fund's portfolio apply at the time the Fund acquires an investment. Subsequent percentage changes that result from market fluctuations generally will not require the Fund to sell any portfolio security. However, the Fund may be required to sell its illiquid securities holdings, if any, in response to fluctuations in the value of such holdings. The Fund may change its principal investment strategies without shareholder approval; however, you would be notified of any changes. - -------------------------------------------------------------------------------- ADDITIONAL RISK INFORMATION [GRAPHIC OMITTED] This section provides additional information relating to the risks of investing in the Fund. OPTIONS AND FUTURES. If the Fund invests in futures on stock indices, financial instruments and interest rate indices or options on securities, securities indices and stock index futures, its participation in these markets may subject it to certain risks. The Investment Adviser's predictions of movements in the direction of the stock, bond, stock index or interest rate markets may be inaccurate, and the adverse consequences to the Fund (e.g., a reduction in the Fund's net asset value or a reduction in the amount of income available for distribution) may leave the Fund in a worse position than if these strategies were not used. Other risks inherent in the use of futures and options include, for example, the possible imperfect correlation between the price of options and futures contracts and the movements in the prices of the securities being hedged, and the possible absence of a liquid secondary market for any particular instrument. Certain options may be over-the-counter options, which are options negotiated with dealers; there is no secondary market for these investments. FOREIGN SECURITIES. The Fund's investments in foreign securities involve risks that are in addition to the risks associated with domestic securities. One additional risk is currency risk. While the price of Fund shares is quoted in U.S. dollars, the Fund generally converts U.S. dollars to a foreign market's local currency to purchase a security 11 in that market. If the value of that local currency falls relative to the U.S. dollar, the U.S. dollar value of the foreign security will decrease. This is true even if the foreign security's local price remains unchanged. Foreign securities also have risks related to economic and political developments abroad, including expropriations, confiscatory taxation, exchange control regulation, limitations on the use or transfer of Fund assets and any effects of foreign social, economic or political instability. Foreign companies, in general, are not subject to the regulatory requirements of U.S. companies and, as such, there may be less publicly available information about these companies. Moreover, foreign accounting, auditing and financial reporting standards generally are different from those applicable to U.S. companies. Finally, in the event of a default of any foreign debt obligations, it may be more difficult for the Fund to obtain or enforce a judgment against the issuers of the securities. Securities of foreign issuers may be less liquid than comparable securities of U.S. issuers and, as such, their price changes may be more volatile. Furthermore, foreign exchanges and broker-dealers are generally subject to less government and exchange scrutiny and regulation than their U.S. counterparts. In addition, differences in clearance and settlement procedures in foreign markets may occasion delays in settlement of the Fund's trades effected in those markets and could result in losses to the Fund due to subsequent declines in the value of the securities subject to the trades. Depositary receipts involve many of the same risks as those associated with direct investment in foreign securities. For example, certain depositary receipts, particularly unsponsored or unregistered depositary receipts and/or depositary receipts not traded on U.S. securities exchanges, are not subject to the reporting requirements of either U.S. regulatory entities or securities exchanges and consequently there is less available information about the issuer of the underlying securities to holders of such depositary receipts. Moreover, the depositories of such receipts are under no obligation to distribute shareholder communications received from the underlying issuer of such securities or to pass through to the holders of such receipts any voting rights with respect to the deposited securities. COMMERCIAL MORTGAGE-BACKED SECURITIES. CMBS are subject to credit risk and prepayment risk. Although prepayment risk is present, it is of a lesser degree in the CMBS market than in the residential mortgage market; commercial real estate property loans often contain provisions which substantially reduce the likelihood that such securities will be prepaid (e.g., significant prepayment penalties on loans and, in some cases, prohibition on principal payments for several years following origination). FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Use of forward foreign currency exchange contracts involves risks. If the Investment Adviser employs a strategy that does not correlate well with the Fund's investments or the currencies in which the investments are denominated, currency contracts could result in a loss. The contracts also may increase the Fund's volatility and, thus, could involve a significant risk. TRAINS. The Fund may invest in TRAINs, which are investment vehicles structured as trusts. Each trust represents an undivided investment interest in the pool of securities (generally high yield securities) underlying the trust without the brokerage and other expenses associated with holding small positions in individual securities. TRAINs are not registered under the Securities Act of 1933 or the Investment Company Act of 1940 and therefore must be held by qualified purchasers and resold to qualified institutional buyers pursuant to Rule 144A under the 12 Securities Act. Investments in certain TRAINs may have the effect of increasing the level of Fund illiquidity to the extent that the Fund, at a particular point in time, may be unable to find qualified institutional buyers interested in purchasing such securities. STRIPPED MORTGAGE-BACKED SECURITIES. Investments in each class of stripped mortgage-backed securities are extremely sensitive to changes in interest rates. IOs tend to decrease in value substantially if interest rates decline and prepayment rates become more rapid. POs tend to decrease in value substantially if interest rates increase and the rate of prepayment decreases. If the Fund invests in stripped mortgage-backed securities and interest rates move in a manner not anticipated by Fund management, it is possible that the Fund could lose all or substantially all of its investment. INVERSE FLOATERS. Investments in inverse floaters are subject to certain risks. Like most other fixed-income securities, the value of inverse floaters will decrease as interest rates increase. They are more volatile, however, than most other fixed-income securities because the coupon rate on an inverse floater typically changes at a multiple of the change in the relevant index rate. Thus, any rise in the index rate (as a consequence of an increase in interest rates) causes a correspondingly greater drop in the coupon rate of an inverse floater while a drop in the index rate causes a correspondingly greater increase in the coupon of an inverse floater. Some inverse floaters may also increase or decrease substantially because of changes in the rate of prepayments. SWAPS. Swaps do not involve the delivery of securities, other underlying assets or principal. Accordingly, the risk of loss with respect to swaps is limited to the net amount of payments that the Fund is contractually obligated to make or, in the case of the other party to a swap, the net amount of payments that the Fund is contractually entitled to receive. Currency swaps usually involve the delivery of the entire principal value of one designated currency in exchange for the other designated currency. Therefore, the entire principal value of a currency swap is subject to the risk that the other party to the swap will default on its contractual delivery obligations. If there is a default by the counterparty, the Fund may have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid. Caps, floors and collars are more recent innovations for which standardized documentation has not yet been fully developed and, accordingly, they are less liquid than swaps. The Fund's investments in credit default swap contracts involves risks. Where the Fund is the buyer of a credit default swap contract, it would be entitled to receive the par (or other agreed-upon) value of a referenced debt obligation from the counterparty to the contract only in the event of a default by a third party on the debt obligation. If no default occurs, the Fund would have paid to the counterparty a periodic stream of payments over the term of the contract and received no benefit from the contract. When the Fund is the seller of a credit default swap contract, it receives the stream of payments but is obligated to pay upon default of the referenced debt obligation. - -------------------------------------------------------------------------------- PORTFOLIO HOLDINGS [GRAPHIC OMITTED] A description of the Fund's policies and procedures with respect to the disclosure of the Fund's portfolio securities is available in the Fund's Statement of Additional Information. 13 - -------------------------------------------------------------------------------- FUND MANAGEMENT (sidebar) MORGAN STANLEY INVESTMENT ADVISORS INC. The Investment Adviser is widely recognized as a leader in the mutual fund industry and had approximately $105 billion in assets under management or administration as of April 30, 2005. (end sidebar) [GRAPHIC OMITTED] The Fund has retained the Investment Adviser -- Morgan Stanley Investment Advisors Inc. -- 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. The Fund's portfolio is managed within the Investment Adviser's Equity Income and Taxable Fixed Income teams. Current members of the Equity Income team that are jointly and primarily responsible for the day-to-day management of the Fund's portfolio include James A. Gilligan, a Managing Director of the Investment Adviser, James O. Roeder, an Executive Director of the Investment Adviser, and Sergio Marcheli, Thomas B. Bastian and Vince E. Vizachero, each a Vice President of the Investment Adviser. Current members of the Taxable Fixed Income team include W. David Armstrong and David S. Horowitz, Managing Directors of the Investment Adviser, and Stefania A. Perrucci, Vice President of the Investment Adviser. Mr. Gilligan, who is the Equity Income team's lead portfolio manager, has worked for the Investment Adviser since 1985 and has managed the Fund since 2002. Mr. Roeder has worked for the Investment Adviser since 1999 and has managed the Fund since 2002. Mr. Marcheli has worked for the Investment Adviser since 2002 and has managed the Fund since 2003. From 2002 to 2003, Mr. Marcheli worked in an investment management capacity with the Investment Adviser and prior to that, he worked in a marketing capacity for an affiliate of the Investment Adviser. Mr. Bastian has worked for the Investment Adviser since 2003 and has managed the Fund since 2003. Prior to 2003, Mr. Bastian was a portfolio manager with Eagle Asset Management. Mr. Vizachero has worked for the Investment Adviser since 2001 and has managed the Fund since 2002. Prior to 2001, he was an analyst at Fidelity Investments. Mr. Armstrong has worked for the Investment Adviser since 1998 and has managed the Fund since 2005. Mr. Horowitz has worked for the Investment Adviser since 1995 and has managed the Fund since 2005. Ms. Perrucci has worked for the Investment Adviser since 2000 and has managed the Fund since 2005. Each member is responsible for specific sectors, with the exception of Mr. Marcheli. All team members are responsible for the day-to-day management of the Fund and Mr. Gilligan is responsible for the execution of the overall strategy of the Fund. Each member of the Taxable Fixed Income team is responsible for specific sectors. W. David Armstrong is responsible for the interest rate management of the Fund. David S. Horowitz is 14 responsible for the corporate sector. Stefania A. Perrucci is responsible for the mortgage sector. Each member is responsible for the day-to-day management of the Fund. The Fund's Statement of Additional Information provides additional information about the portfolio managers' compensation structure, other accounts managed by the portfolio managers and the portfolio managers' ownership of securities in the Fund. The composition of the team may change without notice from time to time. Prior to November 1, 2004, the Fund had retained the Investment Adviser to provide administrative services and to manage the investment of the Fund's assets pursuant to an investment management agreement (the "Management Agreement") pursuant to which the Fund paid the Investment Adviser a monthly management fee as full compensation for the services and facilities furnished to the Fund, and for Fund expenses assumed by the Investment Adviser at the annual rate of: 0.60% to the portion of daily net assets not exceeding $500 million; and 0.575% of the portion of the daily net assets exceeding $500 million. For the fiscal year ended January 30, 2005, the Fund paid total compensation to the Investment Adviser amounting to 0.58% of the Fund's average daily net assets. Effective November 1, 2004, the Board of Trustees approved an amended and restated investment advisory agreement to remove the administrative services component from the Management Agreement and to reduce the investment advisory fee to the annual rate of 0.52% of the portion of daily net assets not exceeding $500 million; and 0.495% of the portion of daily net assets exceeding $500 million. The administrative services previously provided to the Fund by the Investment Adviser are being provided by Morgan Stanley Services Company Inc. ("Administrator") pursuant to a separate administration agreement entered into by the Fund with the Administrator. Such change resulted in a 0.08% reduction in the advisory fee concurrent with the implementation of a 0.08% administration fee pursuant to a new administration agreement. 15 SHAREHOLDER INFORMATION - -------------------------------------------------------------------------------- PRICING FUND SHARES [GRAPHIC OMITTED] The price of Fund shares (excluding sales charges), called "net asset value," is based on the value of the Fund's portfolio securities. While the assets of each Class are invested in a single portfolio of securities, the net asset value of each Class will differ because the Classes have different ongoing distribution fees. The net asset value per share of the Fund is determined once daily at 4:00 p.m. Eastern time on each day that the New York Stock Exchange is open (or, on days when the New York Stock Exchange closes prior to 4:00 p.m., at such earlier time). Shares will not be priced on days that the New York Stock Exchange is closed. The value of the Fund's portfolio securities is based on the securities' market price when available. When a market price is not readily available, including circumstances under which the Investment Adviser determines that a security's market price is not accurate, a portfolio security is valued at its fair value, as determined under procedures established by the Fund's Board of Trustees. In addition, with respect to securities that primarily are listed on foreign exchanges, when an event occurs after the close of such exchanges that is likely to have changed the value of the securities (for example, a percentage change in value of one or more U.S. securities indices in excess of specified thresholds), such securities will be valued at their fair value, as determined under procedures established by the Fund's Board of Trustees. Securities also may be fair valued in the event of a significant development affecting a country or region or an issuer-specific development which is likely to have changed the value of the security. In these cases, the Fund's net asset value will reflect certain portfolio securities' fair value rather than their market price. Fair value pricing involves subjective judgment and it is possible that the fair value determined for a security is materially different than the value that could be realized upon the sale of that security. With respect to securities that are primarily listed on foreign exchanges, the value of the Fund's portfolio securities may change on days when you will not be able to purchase or sell your shares. To the extent the Fund invests in open-end management companies that are registered under the Investment Company Act of 1940, as amended ("Investment Company Act") the Fund's net asset value is calculated based upon the net asset value of such fund. The prospectuses for such funds explain the circumstances under which they will use fair value pricing and its effects. An exception to the Fund's general policy of using market prices concerns its short-term debt portfolio securities. Debt securities with remaining maturities of 60 days or less at the time of purchase are valued at amortized cost. However, if the cost does not reflect the securities' market value, these securities will be valued at their fair value. 16 - -------------------------------------------------------------------------------- HOW TO BUY SHARES (side bar) CONTACTING A FINANCIAL ADVISOR If you are new to the Morgan Stanley Funds and would like to contact a Morgan Stanley Financial Advisor, call toll-free 1-866-MORGAN8 for the telephone number of the Morgan Stanley office nearest you. You may also access our office locator on our Internet site at: www.morganstanley.com/funds (end side bar) [GRAPHIC OMITTED] You may open a new account to buy Fund shares or buy additional Fund shares for an existing account by contacting your Morgan Stanley Financial Advisor or other authorized financial representative. Your Financial Advisor will assist you, step-by-step, with the procedures to invest in the Fund. The Fund's transfer agent, Morgan Stanley Trust ("Transfer Agent"), in its sole discretion, may allow you to purchase shares directly by calling and requesting an application. To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account. What this means to you: when you open an account, we will ask your name, address, date of birth and other information that will allow us to identify you. If we are unable to verify your identity, we reserve the right to restrict additional transactions and/or liquidate your account at the next calculated net asset value after your account is closed (less any applicable sales/account charges and/or tax penalties) or take any other action required by law. Because every investor has different immediate financial needs and long-term investment goals, the Fund offers investors four Classes of shares: Classes A, B, C and D. Class D shares are only offered to a limited group of investors. Each Class of shares offers a distinct structure of sales charges, distribution and service fees, and other features that are designed to address a variety of needs. Your Morgan Stanley Financial Advisor or other authorized financial representative can help you decide which Class may be most appropriate for you. When purchasing Fund shares, you must specify which Class of shares you wish to purchase. When you buy Fund shares, the shares are purchased at the next share price calculated (plus any applicable front-end sales charge for Class A shares) after we receive your purchase order. Your payment is due on the third business day after you place your purchase order. The Fund, in its sole discretion, may waive the minimum initial and additional investment amounts in certain cases. We reserve the right to reject any order for the purchase of Fund shares for any reason. ORDER PROCESSING FEE. Morgan Stanley DW charges clients an order processing fee of $5.25 (except in certain circumstances, including, but not limited to, activity in fee-based accounts, exchanges, dividend reinvestments and systematic investment and withdrawal plans) when a client buys or redeems shares of the Fund. Please consult your Morgan Stanley Financial Advisor for more information regarding this fee. 17 MINIMUM INVESTMENT AMOUNTS (sidebar) EasyInvest (R) A purchase plan that allows you to transfer money automatically from your checking or savings account or from a Money Market Fund on a semi-monthly, monthly or quarterly basis. Contact your Morgan Stanley Financial Advisor for further information about this service. (end sidebar) - -------------------------------------------------------------------------------------------------------- MINIMUM INVESTMENT - -------------------------------------------------------------------------------------------------------- INVESTMENT OPTIONS INITIAL ADDITIONAL - -------------------------------------------------------------------------------------------------------- Regular Accounts $ 1,000 $ 100 - -------------------------------------------------------------------------------------------------------- Individual Retirement Account $ 1,000 $ 100 - -------------------------------------------------------------------------------------------------------- Coverdell Education Savings Account $ 500 $ 100 - -------------------------------------------------------------------------------------------------------- EasyInvest (R) (Automatically from your checking or savings account or Money Market Fund) $ 100* $ 100* - -------------------------------------------------------------------------------------------------------- * Provided your schedule of investments totals $1,000 in 12 months. There is no minimum investment amount if you purchase Fund shares through: (1) the Investment Adviser's mutual fund asset allocation program; (2) a program, approved by the Fund's distributor, in which you pay an asset-based fee for advisory, administrative and/or brokerage services; (3) the following programs approved by the Fund's distributor: (i) qualified state tuition plans described in Section 529 of the Internal Revenue Code or (ii) certain other investment programs that do not charge an asset-based fee; (4) employer-sponsored employee benefit plan account; or (5) the reinvestment of dividends in additional Fund shares. INVESTMENT OPTIONS FOR CERTAIN INSTITUTIONAL AND OTHER INVESTORS/CLASS D SHARES. To be eligible to purchase Class D shares, you must qualify under one of the investor categories specified in the "Share Class Arrangements" section of this Prospectus. SUBSEQUENT INVESTMENTS SENT DIRECTLY TO THE FUND. In addition to buying additional Fund shares for an existing account by contacting your Morgan Stanley Financial Advisor, you may send a check directly to the Fund. To buy additional shares in this manner: o Write a "letter of instruction" to the Fund specifying the name(s) on the account, the account number, the social security or tax identification number, the Class of shares you wish to purchase and the investment amount (which would include any applicable front-end sales charge). The letter must be signed by the account owner(s). o Make out a check for the total amount payable to: Morgan Stanley Balanced Growth Fund. o Mail the letter and check to Morgan Stanley Trust at P.O. Box 1040, Jersey City, NJ 07303. - -------------------------------------------------------------------------------- LIMITED PORTABILITY [GRAPHIC OMITTED] Most Fund shareholders hold their shares with Morgan Stanley DW. Please note that your ability to transfer your Fund shares to a brokerage account at another securities dealer may be limited. Fund shares may only be transferred to accounts held at a limited number of securities dealers or financial intermediaries that have entered into agreements with the Fund's distributor. After a transfer, you may purchase additional shares of the Morgan Stanley Funds you owned before the transfer, but you may not be able to purchase shares of any other Morgan Stanley Funds or exchange shares of the Fund(s) you own for shares of other Morgan Stanley 18 Funds (as described below under "How to Exchange Shares"). If you wish to transfer Fund shares to a securities dealer or other financial intermediary that has not entered into an agreement with the Fund's distributor, you may request that the securities dealer or financial intermediary maintain the shares in an account at the Transfer Agent registered in the name of such securities dealer or financial intermediary for your benefit. You may also hold your Fund shares in your own name directly with the Transfer Agent. Other options may also be available; please check with the respective securities dealer or financial intermediary. If you choose not to hold your shares with the Transfer Agent, either directly or through a securities dealer or other financial intermediary, you must redeem your shares and pay any applicable CDSC. - -------------------------------------------------------------------------------- HOW TO EXCHANGE SHARES [GRAPHIC OMITTED] PERMISSIBLE FUND EXCHANGES. You may exchange shares of any Class of the Fund for the same Class of any other continuously offered Multi-class Fund, or for shares of a No-load Fund, a Money Market Fund or the Limited Duration U.S. Treasury Trust, without the imposition of an exchange fee. Front-end sales charges are not imposed on exchanges of Class A shares. See the inside back cover of this Prospectus for each Morgan Stanley Fund's designation as a Multi-Class Fund, No-Load Fund or Money Market Fund. If a Morgan Stanley Fund is not listed, consult the inside back cover of that fund's current prospectus for its designation. Exchanges may be made after shares of the fund acquired by purchase have been held for 30 days. There is no waiting period for exchanges of shares (i) acquired by exchange or dividend reinvestment, (ii) purchased through the automatic investment plan and (iii) purchased by wrap-free accounts that have an automatic rebalancing feature. The current prospectus for each fund describes its investment objective(s), policies and investment minimums, and should be read before investment. Since exchanges are available only into continuously offered Morgan Stanley Funds, exchanges are not available into any new Morgan Stanley Fund during its initial offering period, or when shares of a particular Morgan Stanley Fund are not being offered for purchase. EXCHANGE PROCEDURES. You can process an exchange by contacting your Morgan Stanley Financial Advisor or other authorized financial representative. Otherwise, you must forward an exchange privilege authorization form to the Transfer Agent and then write the Transfer Agent or call (800) 869-NEWS to place an exchange order. You can obtain an exchange privilege authorization form by contacting your Morgan Stanley Financial Advisor or other authorized financial representative or by calling (800) 869-NEWS. If you hold share certificates, no exchanges may be processed until we have received all applicable share certificates. An exchange to any Morgan Stanley Fund (except a Money Market Fund) is made on the basis of the next calculated net asset values of the funds involved after the exchange instructions, as described above, are received. When exchanging into a Money Market Fund, the Fund's shares are sold at their next calculated net asset value and the Money Market Fund's shares are purchased at their net asset value on the following business day. The Fund may terminate or revise the exchange privilege upon required notice or in certain cases without notice. See "Limitations on Exchanges." The check writing privilege is not available for Money Market Fund shares you acquire in an exchange. 19 TELEPHONE EXCHANGES. For your protection when calling Morgan Stanley Trust, we will employ reasonable procedures to confirm that exchange instructions communicated over the telephone are genuine. These procedures may include requiring various forms of personal identification such as name, mailing address, social security or other tax identification number. Telephone instructions also may be recorded. Telephone instructions will be accepted if received by the Transfer Agent between 9:00 a.m. and 4:00 p.m. Eastern time on any day the New York Stock Exchange is open for business. During periods of drastic economic or market changes, it is possible that the telephone exchange procedures may be difficult to implement, although this has not been the case with the Fund in the past. MARGIN ACCOUNTS. If you have pledged your Fund shares in a margin account, contact your Morgan Stanley Financial Advisor or other authorized financial representative regarding restrictions on the exchange of such shares. TAX CONSIDERATIONS OF EXCHANGES. If you exchange shares of the Fund for shares of another Morgan Stanley Fund, there are important tax considerations. For tax purposes, the exchange out of the Fund is considered a sale of Fund shares -- and the exchange into the other fund is considered a purchase. As a result, you may realize a capital gain or loss. You should review the "Tax Consequences" section and consult your own tax professional about the tax consequences of an exchange. LIMITATIONS ON EXCHANGES. Certain patterns of past exchanges and/or purchase or sale transactions involving the Fund or other Morgan Stanley Funds may result in the Fund rejecting, limiting or prohibiting, at its sole discretion, and without prior notice, additional purchases and/or exchanges and may result in a shareholder's account being closed. Determinations in this regard may be made based on the frequency or dollar amount of previous exchanges or purchase or sale transactions. Generally, all shareholders are limited to a maximum of eight exchanges per calendar year. Exchange privileges will be suspended if more than eight exchanges out of the Fund are made by a shareholder in a calendar year and further exchange requests will not be processed during that year. This limitation does not apply to the Investment Adviser's asset allocation program or employer-sponsored retirement plans. The Fund reserves the right to reject an exchange request for any reason. CDSC CALCULATIONS ON EXCHANGES. See the "Share Class Arrangements" section of this Prospectus for a discussion of how applicable contingent deferred sales charges (CDSCs) are calculated for shares of one Morgan Stanley Fund that are exchanged for shares of another. For further information regarding exchange privileges, you should contact your Morgan Stanley Financial Advisor or call (800) 869-NEWS. - -------------------------------------------------------------------------------- HOW TO SELL SHARES [GRAPHIC OMITTED] You can sell some or all of your Fund shares at any time. If you sell Class A, Class B or Class C shares, your net sale proceeds are reduced by the amount of any applicable CDSC. Your shares will be sold at the next price calculated after we receive your order to sell as described below. 20 OPTIONS PROCEDURES - ------------------------------------------------------------------------------------------------------------------ Contact Your To sell your shares, simply call your Morgan Stanley Financial Advisor or other authorized Financial Advisor financial representative. Payment will be sent to the address to which the account is registered or deposited in your brokerage account. - ------------------------------------------------------------------------------------------------------------------ By Letter You can also sell your shares by writing a "letter of instruction" that includes: o your account number; o the name of the Fund; o the dollar amount or the number of shares you wish to sell; o the Class of shares you wish to sell; and o the signature of each owner as it appears on the account. If you are requesting payment to anyone other than the registered owner(s) or that payment be sent to any address other than the address of the registered owner(s) or pre-designated bank account, you will need a signature guarantee. You can obtain a signature guarantee from an eligible guarantor acceptable to Morgan Stanley Trust. (You should contact Morgan Stanley Trust at (800) 869-NEWS for a determination as to whether a particular institution is an eligible guarantor.) A notary public cannot provide a signature guarantee. Additional documentation may be required for shares held by a corporation, partnership, trustee or executor. Mail the letter to Morgan Stanley Trust at P.O. Box 983, Jersey City, NJ 07303. If you hold share certificates, you must return the certificates, along with the letter and any required additional documentation. A check will be mailed to the name(s) and address in which the account is registered, or otherwise according to your instructions. - ------------------------------------------------------------------------------------------------------------------ Systematic If your investment in all of the Morgan Stanley Funds has a total market value of at least Withdrawal Plan $10,000, you may elect to withdraw amounts of $25 or more, or in any whole percentage of a fund's balance (provided the amount is at least $25), on a monthly, quarterly, semi-annual or annual basis, from any fund with a balance of at least $1,000. Each time you add a fund to the plan, you must meet the plan requirements. Amounts withdrawn are subject to any applicable CDSC. A CDSC may be waived under certain circumstances. See the Class B waiver categories listed in the "Share Class Arrangements" section of this Prospectus. To sign up for the systematic withdrawal plan, contact your Morgan Stanley Financial Advisor or call (800) 869-NEWS. You may terminate or suspend your plan at any time. Please remember that withdrawals from the plan are sales of shares, not Fund "distributions," and ultimately may exhaust your account balance. The Fund may terminate or revise the plan at any time. - ------------------------------------------------------------------------------------------------------------------ 21 PAYMENT FOR SOLD SHARES. After we receive your complete instructions to sell as described above, a check will be mailed to you within seven days, although we will attempt to make payment within one business day. Payment may also be sent to your brokerage account. Payment may be postponed or the right to sell your shares suspended under unusual circumstances. If you request to sell shares that were recently purchased by check, your sale will not be effected until it has been verified that the check has been honored. ORDER PROCESSING FEE. Morgan Stanley DW charges clients an order processing fee of $5.25 (except in certain circumstances, including, but not limited to, activity in fee-based accounts, exchanges, dividend reinvestments and systematic investment and withdrawal plans) when a client buys or redeems shares of the Fund. Please consult your Morgan Stanley Financial Advisor for more information regarding this fee. TAX CONSIDERATIONS. Normally, your sale of Fund shares is subject to federal and state income tax. You should review the "Tax Consequences" section of this Prospectus and consult your own tax professional about the tax consequences of a sale. REINSTATEMENT PRIVILEGE. If you sell Fund shares and have not previously exercised the reinstatement privilege, you may, within 35 days after the date of sale, invest any portion of the proceeds in the same Class of Fund shares at their net asset value and receive a pro rata credit for any CDSC paid in connection with the sale. INVOLUNTARY SALES. The Fund reserves the right, on 60 days' notice, to sell the shares of any shareholder (other than shares held in an IRA or 403(b) Custodial Account) whose shares, due to sales by the shareholder, have a value below $100, or in the case of an account opened through EasyInvest (Registered Trademark) , if after 12 months the shareholder has invested less than $1,000 in the account. However, before the Fund sells your shares in this manner, we will notify you and allow you 60 days to make an additional investment in an amount that will increase the value of your account to at least the required amount before the sale is processed. No CDSC will be imposed on any involuntary sale. MARGIN ACCOUNTS. If you have pledged your Fund shares in a margin account, contact your Morgan Stanley Financial Advisor or other authorized financial representative regarding restrictions on the sale of such shares. 22 - -------------------------------------------------------------------------------- DISTRIBUTIONS (sidebar) TARGETED DIVIDENDS(SM) You may select to have your Fund distributions automatically invested in other Classes of Fund shares or Classes of another Morgan Stanley Fund that you own. Contact your Morgan Stanley Financial Advisor for further information about this service. (end sidebar) [GRAPHIC OMITTED] The Fund passes substantially all of its earnings from income and capital gains along to its investors as "distributions." The Fund earns income from stocks and interest from fixed-income investments. These amounts are passed along to Fund shareholders as "income dividend distributions." The Fund realizes capital gains whenever it sells securities for a higher price than it paid for them. These amounts may be passed along as "capital gain distributions." The Fund declares income dividends separately for each Class. Distributions paid on Class A and Class D shares usually will be higher than for Class B and Class C shares because distribution fees that Class B and Class C shares pay are higher. Normally, income dividends are distributed to shareholders quarterly. Capital gains, if any, are usually distributed in June and December. The Fund, however, may retain and reinvest any long-term capital gains. The Fund may at times make payments from sources other than income or capital gains that represent a return of a portion of your investment. Distributions are reinvested automatically in additional shares of the same Class and automatically credited to your account, unless you request in writing that all distributions be paid in cash. If you elect the cash option, the Fund will mail a check to you no later than seven business days after the distribution is declared. However, if you purchase Fund shares through a Morgan Stanley Financial Advisor or other authorized financial representative within three business days prior to the record date for the distribution, the distribution will automatically be paid to you in cash, even if you did not request to receive all distributions in cash. No interest will accrue on uncashed checks. If you wish to change how your distributions are paid, your request should be received by the Transfer Agent at least five business days prior to the record date of the distributions. - -------------------------------------------------------------------------------- FREQUENT PURCHASES AND REDEMPTIONS OF FUND SHARES [GRAPHIC OMITTED] Frequent purchases and redemptions of Fund shares by Fund shareholders are referred to as "market-timing" or "short-term trading" and may present risks for other shareholders of the Fund, which may include, among other things, dilution in the value of Fund shares held by long-term shareholders, interference with the efficient management of the Fund's portfolio, increased brokerage and administrative costs, incurring unwanted taxable gains and forcing the Fund to hold excess levels of cash. In addition, the Fund is subject to the risk that market timers and/or short-term traders may take advantage of time zone differences between the foreign markets on which the Fund's portfolio securities trade and the time as of which the Fund's net asset value is calculated ("time-zone arbitrage"). For example, a market timer may purchase shares of the Fund based on events occurring after foreign market closing prices are established, but before the Fund's net asset value calculation, that are likely to result in higher prices in foreign markets the following day. The 23 market timer would redeem the Fund's shares the next day when the Fund's share price would reflect the increased prices in foreign markets, for a quick profit at the expense of long-term fund shareholders. The Fund's policies with respect to valuing portfolio securities are described in "Shareholders Information--Pricing Fund Shares." The Fund discourages and does not accommodate frequent purchases and redemptions of Fund shares by Fund shareholders and the Fund's Board of Trustees has adopted policies and procedures with respect to such frequent purchases and redemptions. The Fund's policies with respect to purchases, redemptions and exchanges of Fund shares are described in the "How to Buy Shares," "How to Exchange Shares" and "How to Sell Shares" sections of this Prospectus. Except as described in each of these sections, and with respect to omnibus accounts, the Fund's policies regarding frequent trading of Fund shares are applied uniformly to all shareholders. With respect to trades that occur through omnibus accounts at intermediaries, such as investment managers, broker-dealers, transfer agents and third party administrators, the Fund (i) has requested assurance that such intermediaries currently selling Fund shares have in place internal policies and procedures reasonably designed to address market timing concerns and has instructed such intermediaries to notify the Fund immediately if they are unable to comply with such policies and procedures and (ii) requires all prospective intermediaries to agree to cooperate in enforcing the Fund's policies with respect to frequent purchases, redemptions and exchanges of Fund shares. Omnibus accounts generally do not identify customers' trading activity to the Fund on an individual basis. The ability of the Fund to monitor exchanges made by the underlying shareholders in omnibus accounts, therefore, is severely limited. Consequently, the Fund must rely on the financial intermediary to monitor frequent short-term trading within the Fund by the financial intermediary's customers. There can be no assurance that the Fund will be able to eliminate all market-timing activities. - -------------------------------------------------------------------------------- TAX CONSEQUENCES [GRAPHIC OMITTED] As with any investment, you should consider how your Fund investment will be taxed. The tax information in this Prospectus is provided as general information. You should consult your own tax professional about the tax consequences of an investment in the Fund. Unless your investment in the Fund is through a tax-deferred retirement account, such as a 401(k) plan or IRA, you need to be aware of the possible tax consequences when: o The Fund makes distributions; and o You sell Fund shares, including an exchange to another Morgan Stanley Fund. TAXES ON DISTRIBUTIONS. Your distributions are normally subject to federal and state income tax when they are paid, whether you take them in cash or reinvest them in Fund shares. A distribution also may be subject to local income tax. Any income dividend distributions and any short-term capital gain distributions are taxable to you as ordinary income. Any long-term capital gain distributions are taxable as long-term capital gains, no matter how long you have owned shares in the Fund. Under current law, a portion of the ordinary income dividends you receive may be taxed at the same rate as long-term capital gains. However, even if income received in the form of ordinary income dividends is taxed at the same rates as long-term capital gains, such income will not be considered 24 long-term capital gains for other federal income tax purposes. For example, you generally will not be permitted to offset ordinary income dividends with capital losses. Short-term capital gain distributions will continue to be taxed at ordinary income rates. Every January, you will be sent a statement (IRS Form 1099-DIV) showing the taxable distributions paid to you in the previous year. The statement provides information on your dividends and capital gains for tax purposes. TAXES ON SALES. Your sale of Fund shares normally is subject to federal and state income tax and may result in a taxable gain or loss to you. A sale also may be subject to local income tax. Your exchange of Fund shares for shares of another Morgan Stanley Fund is treated for tax purposes like a sale of your original shares and a purchase of your new shares. Thus, the exchange may, like a sale, result in a taxable gain or loss to you and will give you a new tax basis for your new shares. When you open your Fund account, you should provide your social security or tax identification number on your investment application. By providing this information, you will avoid being subject to federal backup withholding tax on taxable distributions and redemption proceeds (as of the date of this Prospectus this rate is 28%). Any withheld amount would be sent to the IRS as an advance payment of your taxes due on your income. - -------------------------------------------------------------------------------- SHARE CLASS ARRANGEMENTS [GRAPHIC OMITTED] The Fund offers several Classes of shares having different distribution arrangements designed to provide you with different purchase options according to your investment needs. Your Morgan Stanley Financial Advisor or other authorized financial representative can help you decide which Class may be appropriate for you. The general public is offered three Classes: Class A shares, Class B shares and Class C shares, which differ principally in terms of sales charges and ongoing expenses. A fourth Class, Class D shares, is offered only to a limited category of investors. Shares that you acquire through reinvested distributions will not be subject to any front-end sales charge or CDSC -- contingent deferred sales charge. Sales personnel may receive different compensation for selling each Class of shares. The sales charges applicable to each Class provide for the distribution financing of shares of that Class. The chart below compares the sales charge and annual 12b-1 fee applicable to each Class: - --------------------------------------------------------------------------------------------------------------------------------- CLASS SALES CHARGE MAXIMUM ANNUAL 12B-1 FEE - --------------------------------------------------------------------------------------------------------------------------------- A Maximum 5.25% initial sales charge reduced for purchase of $25,000 or more; shares purchased without an initial sales charge are generally subject to a 1.00% CDSC if sold during the first 18 months* 0.25% - --------------------------------------------------------------------------------------------------------------------------------- B Maximum 5.00% CDSC during the first year decreasing to 0% after six years 1.00% - --------------------------------------------------------------------------------------------------------------------------------- C 1.00% CDSC during the first year 1.00% - --------------------------------------------------------------------------------------------------------------------------------- D None None - --------------------------------------------------------------------------------------------------------------------------------- * Shares purchased without an initial sales charge prior to December 1, 2004 will be subject to a 1.00% CDSC if sold during the first year. 25 Certain shareholders may be eligible for reduced sales charges (i.e., breakpoint discounts), CDSC waivers and eligibility minimums. Please see the information for each Class set forth below for specific eligibility requirements. You must notify your Morgan Stanley Financial Advisor or other authorized financial representative (or Morgan Stanley Trust if you purchase shares directly through the Fund) at the time a purchase order (or in the case of Class B or C shares, a redemption order) is placed, that the purchase (or redemption) qualifies for a reduced sales charge (i.e., breakpoint discount), CDSC waiver or eligibility minimum. Similar notification must be made in writing when an order is placed by mail. The reduced sales charge, CDSC waiver or eligibility minimum will not be granted if: (i) notification is not furnished at the time of order; or (ii) a review of the records of Morgan Stanley DW or other authorized dealer of Fund shares, or the Transfer Agent does not confirm your represented holdings. In order to obtain a reduced sales charge (i.e., breakpoint discount) or to meet an eligibility minimum, it may be necessary at the time of purchase for you to inform your Morgan Stanley Financial Advisor or other authorized financial representative (or Morgan Stanley Trust if you purchase shares directly through the Fund) of the existence of other accounts in which there are holdings eligible to be aggregated to meet the sales load breakpoints or eligibility minimums. In order to verify your eligibility, you may be required to provide account statements and/or confirmations regarding shares of the Fund or other Morgan Stanley Funds held in all related accounts described below at Morgan Stanley or by other authorized dealers, as well as shares held by related parties, such as members of the same family or household, in order to determine whether you have met a sales load breakpoint or eligibility minimum. The Fund makes available, in a clear and prominent format, free of charge, on its web site, www.morganstanley.com, information regarding applicable sales loads, reduced sales charges (i.e., breakpoint discounts), sales load waivers and eligibility minimums. The web site includes hyperlinks that facilitate access to the information. CLASS A SHARES Class A shares are sold at net asset value plus an initial sales charge of up to 5.25% of the public offering price. The initial sales charge is reduced for purchases of $25,000 or more according to the schedule below. Investments of $1 million or more are not subject to an initial sales charge, but are generally subject to a CDSC of 1.00% on sales made within 18 months after the last day of the month of purchase. With respect to shares purchased prior to December 1, 2004, investments of $1 million or more are not subject to an initial sales charge, but are generally subject to a CDSC of 1.00% on sales made within one year after the last day of the month of purchase. The CDSC will be assessed in the same manner and with the same CDSC waivers as with Class B shares. Class A shares are also subject to a 12b-1 fee of up to 0.25% of the average daily net assets of the Class. The maximum annual 12b-1 fee payable by Class A shares is lower than the maximum annual 12b-1 fee payable by Class B or Class C shares. 26 The offering price of Class A shares includes a sales charge (expressed as a percentage of the public offering price) on a single transaction as shown in the following table: (sidebar) FRONT-END SALES CHARGE OR FSC An initial sales charge you pay when purchasing Class A shares that is based on a percentage of the offering price. The percentage declines based upon the dollar value of Class A shares you purchase. We offer three ways to reduce your Class A sales charges -- the Combined Purchase Privilege, Right of Accumulation and Letter of Intent. (end sidebar) - -------------------------------------------------------------------------------- FRONT-END SALES CHARGE - -------------------------------------------------------------------------------- PERCENTAGE OF APPROXIMATE PERCENTAGE AMOUNT OF SINGLE TRANSACTION PUBLIC OFFERING PRICE OF NET AMOUNT INVESTED - -------------------------------------------------------------------------------- Less than $25,000 5.25% 5.54% - -------------------------------------------------------------------------------- $25,000 but less than $50,000 4.75% 4.99% - -------------------------------------------------------------------------------- $50,000 but less than $100,000 4.00% 4.17% - -------------------------------------------------------------------------------- $100,000 but less than $250,000 3.00% 3.09% - -------------------------------------------------------------------------------- $250,000 but less than $500,000 2.50% 2.56% - -------------------------------------------------------------------------------- $500,000 but less than $1 million 2.00% 2.04% - -------------------------------------------------------------------------------- $1 million and over 0.00% 0.00% - -------------------------------------------------------------------------------- You may benefit from a reduced sales charge schedule (i.e., breakpoint discount) for purchases of Class A shares of the Fund, by combining, in a single transaction, your purchase with purchases of Class A shares of the Fund by the following related accounts: o A single account (including an individual, trust or fiduciary account). o Family member accounts (limited to spouse, and children under the age of 21). o Pension, profit sharing or other employee benefit plans of companies and their affiliates. o Employer sponsored and individual retirement accounts (including IRA, Keogh, 401(k), 403(b), 408(k) and 457(b) Plans). o Tax-exempt organizations. o Groups organized for a purpose other than to buy mutual fund shares. COMBINED PURCHASE PRIVILEGE. You will have the benefit of reduced sales charges by combining purchases of Class A shares of the Fund in a single transaction with purchases of Class A shares of other Multi-class Funds. Shareholders also may combine such purchases made in a single transaction by family members (limited to spouse, and children under the age of 21). RIGHT OF ACCUMULATION. You may benefit from a reduced sales charges if the cumulative net asset value of Class A shares of the Fund purchased in a single transaction, together with shares of other Morgan Stanley Funds previously purchased at a price including a front-end sales charge (or Class A shares purchased at $1 million or more), and shares acquired through reinvestment of distributions, which are currently held, amounts to $25,000 or more. Also, if you have a cumulative net asset value of all your Class A and Class D shares of other Multi-Class Funds equal to at least $5 million (or $25 million for certain employee benefit plans), you are eligible to purchase Class D shares of any fund subject to the fund's minimum initial investment requirement. 27 Existing holdings of family members or other related accounts of a shareholder may not be combined for purposes of determining eligibility to purchase Class D shares. LETTER OF INTENT. The above schedule of reduced sales charges for larger purchases also will be available to you if you enter into a written "Letter of Intent." A Letter of Intent provides for the purchase of Class A shares of the Fund or other Multi-Class Funds within a 13-month period. The initial purchase under a Letter of Intent must be at least 5% of the stated investment goal. The Letter of Intent does not preclude the Fund (or any other Multi-Class Fund) from discontinuing sales of its shares. To determine the applicable sales charge reduction, you may also include: (1) the cost of shares of other Morgan Stanley Funds which were previously purchased at a price including a front-end sales charge during the 90-day period prior to the distributor receiving the Letter of Intent, and (2) the historical cost of shares of other funds you currently own acquired in exchange for shares of funds purchased during that period at a price including a front-end sales charge. You may combine purchases and exchanges by family members (limited to spouse, and children under the age of 21) during the periods referenced in (1) and (2) above. You should retain any records necessary to substantiate historical costs because the Fund, its Transfer Agent and any financial intermediaries may not maintain this information. You can obtain a Letter of Intent by contacting your Morgan Stanley Financial Advisor or other authorized financial representative, or by calling (800) 869-NEWS. If you do not achieve the stated investment goal within the 13-month period, you are required to pay the difference between the sales charges otherwise applicable and sales charges actually paid, which may be deducted from your investment. Shares acquired through reinvestment of distributions are not aggregated to achieve the stated investment goal. OTHER SALES CHARGE WAIVERS. In addition to investments of $1 million or more, your purchase of Class A shares is not subject to a front-end sales charge (or a CDSC upon sale) if your account qualifies under one of the following categories: o A trust for which a banking affiliate of the Investment Adviser provides discretionary trustee services. o Persons participating in a fee-based investment program (subject to all of its terms and conditions, including termination fees, and mandatory sale or transfer restrictions on termination) approved by the Fund's distributor pursuant to which they pay an asset-based fee for investment advisory, administrative and/or brokerage services. o Qualified state tuition plans described in Section 529 of the Internal Revenue Code and donor-advised charitable gift funds (subject to all applicable terms and conditions) and certain other investment programs that do not charge an asset-based fee and have been approved by the Fund's distributor. o Employer-sponsored employee benefit plans, whether or not qualified under the Internal Revenue Code, for an entity independent from Morgan Stanley serves as recordkeeper under an alliance or similar agreement with Morgan Stanley's Retirement Plan Solutions ("Morgan Stanley Eligible Plans"). o A Morgan Stanley Eligible Plan whose Class B shares have converted to Class A shares, regardless of the plan's asset size or number of eligible employees. o Insurance company separate accounts that have been approved by the Fund's distributor. o Current or retired Directors or Trustees of the Morgan Stanley Funds, such persons' spouses, and children under the age of 21, and trust accounts for which any of such persons is a beneficiary. 28 o Current or retired directors, officers and employees of Morgan Stanley and any of its subsidiaries, such persons' spouses, and children under the age of 21, and trust accounts for which any of such persons is a beneficiary. CLASS B SHARES Class B shares are offered at net asset value with no initial sales charge but are subject to a contingent deferred sales charge, or CDSC, as set forth in the table below. For the purpose of calculating the CDSC, shares are deemed to have been purchased on the last day of the month during which they were purchased. (sidebar) CONTINGENT DEFERRED SALES CHARGE OR CDSC A fee you pay when you sell shares of certain Morgan Stanley Funds purchased without an initial sales charge. This fee declines the longer you hold your shares as set forth in the table. (end sidebar) YEAR SINCE PURCHASE PAYMENT MADE CDSC AS A PERCENTAGE OF AMOUNT REDEEMED First 5.0% Second 4.0% Third 3.0% Fourth 2.0% Fifth 2.0% Sixth 1.0% Seventh and thereafter None Each time you place an order to sell or exchange shares, shares with no CDSC will be sold or exchanged first, then shares with the lowest CDSC will be sold or exchanged next. For any shares subject to a CDSC, the CDSC will be assessed on an amount equal to the lesser of the current market value or the cost of the shares being sold. Brokers, dealers or other financial intermediaries may impose a limit on the dollar value of a Class B share purchase order that they will accept. For example, a Morgan Stanley Financial Advisor generally will not accept purchase orders for Class B shares that in the aggregate amount to $25,000 or more over a 90-day period. You should discuss with your financial advisor which share class is most appropriate for you, based on the size of your investment, your expected time horizon for holding the shares and other factors, bearing in mind the availability of reduced sales loads on Class A share purchases of $25,000 or more and for existing shareholders who hold over $25,000 in Morgan Stanley Funds. SPECIAL CDSC CONSIDERATIONS FOR FUND SHARES HELD PRIOR TO JULY 28, 1997. If you held Fund shares prior to July 28, 1997 that were acquired in exchange for shares of Morgan Stanley Dean Witter Global Short-Term Income Fund, Dean Witter National Municipal Trust or Dean Witter High Income Securities that have been designated Class B shares, these Fund shares are subject to the other fund's lower CDSC schedule, with two exceptions. First, if you subsequently exchange these Class B shares for shares of a fund with a higher CDSC schedule, the higher CDSC schedule will apply. Second, if you exchange the Class B shares for shares of a Money Market Fund and re-exchange back into the Fund, the CDSC schedule set forth in the above table will apply. 29 CDSC WAIVERS. A CDSC, if otherwise applicable, will be waived in the case of: o Sales of shares held at the time you die or become disabled (within the definition in Section 72(m)(7) of the Internal Revenue Code which relates to the ability to engage in gainful employment), if the shares are: (i) registered either in your individual name or in the names of you and your spouse as joint tenants with right of survivorship; (ii) registered in the name of a trust of which (a) you are the settlor and that is revocable by you (i.e., a "living trust") or (b) you and your spouse are the settlors and that is revocable by you or your spouse (i.e., a "joint living trust"); or (iii) held in a qualified corporate or self-employed retirement plan, IRA or 403(b) Custodial Account; provided, in each case, that the sale is requested within one year after your death or initial determination of disability. o Sales in connection with the following retirement plan "distributions": (i) lump-sum or other distributions from a qualified corporate or self-employed retirement plan following retirement (or, in the case of a "key employee" of a "top heavy" plan, following attainment of age 591/2); (ii) distributions from an IRA or 403(b) Custodial Account following attainment of age 591/2; or (iii) a tax-free return of an excess IRA contribution (a "distribution" does not include a direct transfer of IRA, 403(b) Custodial Account or retirement plan assets to a successor custodian or trustee). o Sales of shares in connection with the Systematic Withdrawal Plan of up to 12% annually of the value of each fund from which plan sales are made. The percentage is determined on the date you establish the Systematic Withdrawal Plan and based on the next calculated share price. You may have this CDSC waiver applied in amounts up to 1% per month, 3% per quarter, 6% semi-annually or 12% annually. Shares with no CDSC will be sold first, followed by those with the lowest CDSC. As such, the waiver benefit will be reduced by the amount of your shares that are not subject to a CDSC. If you suspend your participation in the plan, you may later resume plan payments without requiring a new determination of the account value for the 12% CDSC waiver. o Sales of shares purchased prior to April 1, 2004 or acquired in exchange for shares purchased prior to April 1, 2004, if you simultaneously invest the proceeds from such sale in the Investment Adviser's mutual fund asset allocation program, pursuant to which investors pay an asset-based fee. Any shares acquired in connection with the Investment Adviser's mutual fund asset allocation program are subject to all of the terms and conditions of that program, including termination fees, and mandatory sale or transfer restrictions on termination. All waivers will be granted only following the Fund's distributor receiving confirmation of your entitlement. If you believe you are eligible for a CDSC waiver, please contact your Morgan Stanley Financial Advisor or other authorized financial representative or call (800) 869-NEWS. DISTRIBUTION FEE. Class B shares are subject to an annual distribution and shareholder services (12b-1) fee of up to 1.00% of the average daily net assets of Class B shares. The maximum annual 12b-1 fee payable by Class B shares is higher than the maximum annual 12b-1 fee payable by Class A shares. CONVERSION FEATURE. After eight years, Class B shares will convert automatically to Class A shares of the Fund with no initial sales charge. The eight year period runs from the last day of the month in which the shares were purchased or, in the case of Class B shares acquired through an exchange, from the last day of the month in which the original Class B shares were purchased; the shares will convert to Class A shares based on their relative 30 net asset values in the month following the eight year period. At the same time, an equal proportion of Class B shares acquired through automatically reinvested distributions will convert to Class A shares on the same basis. In the case of Class B shares held in a Morgan Stanley Eligible Plan, the plan is treated as a single investor and all Class B shares will convert to Class A shares on the conversion date of the Class B shares of a Morgan Stanley Fund purchased by that plan. If you exchange your Class B shares for shares of a Money Market Fund, a No-Load Fund or the Limited Duration U.S. Treasury Trust, the holding period for conversion is frozen as of the last day of the month of the exchange and resumes on the last day of the month you exchange back into Class B shares. EXCHANGING SHARES SUBJECT TO A CDSC. There are special considerations when you exchange Fund shares that are subject to a CDSC. When determining the length of time you held the shares and the corresponding CDSC rate, any period (starting at the end of the month) during which you held shares of a fund that does not charge a CDSC will not be counted. Thus, in effect the "holding period" for purposes of calculating the CDSC is frozen upon exchanging into a fund that does not charge a CDSC. For example, if you held Class B shares of the Fund for one year, exchanged to Class B of another Morgan Stanley Multi-Class Fund for another year, then sold your shares, a CDSC rate of 4% would be imposed on the shares based on a two-year holding period -- one year for each fund. However, if you had exchanged the shares of the Fund for a Money Market Fund (which does not charge a CDSC) instead of the Multi-Class Fund, then sold your shares, a CDSC rate of 5% would be imposed on the shares based on a one-year holding period. The one year in the Money Market Fund would not be counted. Nevertheless, if shares subject to a CDSC are exchanged for a fund that does not charge a CDSC, you will receive a credit when you sell the shares equal to the 12b-1 fees, if any, you paid on those shares while in that fund up to the amount of any applicable CDSC. In addition, shares that are exchanged into or from a Morgan Stanley Fund subject to a higher CDSC rate will be subject to the higher rate, even if the shares are re-exchanged into a fund with a lower CDSC rate. CLASS C SHARES Class C shares are sold at net asset value with no initial sales charge, but are subject to a CDSC of 1.0% on sales made within one year after the last day of the month of purchase. The CDSC will be assessed in the same manner and with the same CDSC waivers as with Class B shares. Brokers, dealers or other financial intermediaries may impose a limit on the dollar value of a Class C share purchase order that they will accept. For example, a Morgan Stanley Financial Advisor generally will not accept purchase orders for Class C shares that in the aggregate amount to $250,000 or more over a 90 day period. You should discuss with your financial advisor which share class is most appropriate for you based on the size of your investment, your expected time horizon for holding the shares and other factors, bearing in mind the availability of reduced sales loads on Class A share purchases of $25,000 or more and for existing shareholders who hold over $25,000 in Morgan Stanley Funds. DISTRIBUTION FEE. Class C shares are subject to an annual distribution and shareholder services (12b-1) fee of up to 1.00% of the average daily net assets of that Class. The maximum annual 12b-1 fee payable by Class C 31 shares is higher than the maximum annual 12b-1 fee payable by Class A shares. Unlike Class B shares, Class C shares have no conversion feature and, accordingly, an investor that purchases Class C shares may be subject to distribution and shareholder services (12b-1) fees applicable to Class C shares for as long as the investor owns such shares. CLASS D SHARES Class D shares are offered without any sales charge on purchases or sales and without any distribution (12b-1) fee. Class D shares are offered only to investors meeting an initial investment minimum of $5 million ($25 million for Morgan Stanley Eligible Plans) and the following investor categories: o Investors participating in the Investment Advisers' or an affiliate's mutual fund asset allocation program (subject to all of its terms and conditions, including termination fees, and mandatory sale or transfer restrictions on termination) pursuant to which they pay an asset-based fee. o Persons participating in a fee-based investment program (subject to all of its terms and conditions, including termination fees, and mandatory sale or transfer restrictions on termination) approved by the Fund's distributor pursuant to which they pay an asset-based fee for investment advisory, administrative and/or brokerage services. With respect to Class D shares held through the Morgan Stanley Choice Program, at such time as those Fund shares are no longer held through the program, the shares will be automatically converted into Class A shares (which are subject to higher expenses than Class D shares) based on the then current relative net asset values of the two Classes. o Certain investment programs that do not charge an asset-based fee and have been approved by the Fund's distributor. o Employee benefit plans maintained by Morgan Stanley or any of its subsidiaries for the benefit of certain employees of Morgan Stanley and its subsidiaries. o Certain unit investment trusts sponsored by Morgan Stanley DW or its affiliates. o Certain other open-end investment companies whose shares are distributed by the Fund's distributor. o Investors who were shareholders of the Dean Witter Retirement Series on September 11, 1998 for additional purchases for their former Dean Witter Retirement Series accounts. o The Investment Adviser and its affiliates with respect to shares held in connection with certain deferred compensation programs established for their employees. A purchase order that meets the requirements for investment in Class D shares can be made only in Class D shares. Class D shares are not offered for investments made through Section 529 plans, donor-advised charitable gift funds and insurance company separate accounts (regardless of the size of the investment). MEETING CLASS D ELIGIBILITY MINIMUMS. To meet the $5 million ($25 million for Morgan Stanley Eligible Plans) initial investment to qualify to purchase Class D shares you may combine: (1) purchases in a single 32 transaction of Class D shares of the Fund and other Morgan Stanley Multi-Class Funds; and/or (2) previous purchases of Class A and Class D shares of Multi-Class Funds you currently own, along with shares of Morgan Stanley Funds you currently own that you acquired in exchange for those shares. Shareholders cannot combine purchases made by family members or a shareholder's other related accounts in a single transaction for purposes of meeting the $5 million initial investment minimum requirement to qualify to purchase Class D shares. NO SALES CHARGES FOR REINVESTED CASH DISTRIBUTIONS If you receive a cash payment representing an income dividend or capital gain and you reinvest that amount in the applicable Class of shares by returning the check within 30 days of the payment date, the purchased shares would not be subject to an initial sales charge or CDSC. PLAN OF DISTRIBUTION (RULE 12B-1 FEES) The Fund has adopted a Plan of Distribution in accordance with Rule 12b-1 under the Investment Company Act with respect to the Class A, Class B and Class C shares. (Class D shares are offered without any 12b-1 fee.) The Plan allows the Fund to pay distribution fees for the sale and distribution of these shares. It also allows the Fund to pay for services to shareholders of Class A, Class B and Class C shares. Because these fees are paid out of the Fund's assets on an ongoing basis, over time these fees will increase the cost of your investment and reduce your return in these Classes and may cost you more than paying other types of sales charges. - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION [GRAPHIC OMITTED] The Investment Adviser and/or distributor may pay compensation (out of their own funds and not as an expense of the Fund) to certain affiliated or unaffiliated brokers, dealers or other financial intermediaries or service providers in connection with the sale or retention of Fund shares and/or shareholder servicing. Such compensation may be significant in amount and the prospect of receiving any such additional compensation may provide such affiliated or unaffiliated entities with an incentive to favor sales of shares of the Fund over other investment options. Any such payments will not change the net asset value or the price of the Fund's shares. For more information, please see the Fund's Statement of Additional Information. 33 FINANCIAL HIGHLIGHTS The financial highlights table is intended to help you understand the Fund's financial performance for the periods indicated. Certain information reflects financial results for a single Fund share throughout each period. The total returns in the table represent the rate an investor would have earned or lost on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, whose report, along with the Fund's financial statements, are incorporated by reference in the Statement of Additional Information from the Fund's annual report, which is available upon request. CLASS A SHARES - ------------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED JANUARY 31, 2005 2004 2003 2002 2001 - ------------------------------------------------------------------------------------------------------------- SELECTED PER SHARE DATA: Net asset value, beginning of period $ 12.98 $ 10.73 $ 12.82 $ 13.29 $ 13.11 --------- ------- -------- ------- ------- Income (loss) from investment operations: Net investment income[+/+] 0.21 0.18 0.25 0.33 0.37 Net realized and unrealized gain (loss) 0.79 2.30 (2.06) (0.42) 0.87 --------- ------- -------- ------- ------- Total income (loss) from investment operations 1.00 2.48 (1.81) (0.09) 1.24 --------- ------- -------- ------- ------- Less dividends and distributions from: Net investment income (0.22) (0.23) (0.28) (0.38) (0.38) Net realized gain -- -- -- -- (0.68) ---------- -------- -------- ------- ------- Total dividends and distributions (0.22) (0.23) (0.28) (0.38) (1.06) --------- ------- -------- ------- ------- Net asset value, end of period $ 13.76 $ 12.98 $ 10.73 $ 12.82 $ 13.29 - ------------------------------------------------------------------------------------------------------------- TOTAL RETURN+ 7.80% 23.37% (14.27)% (0.53)% 10.65% - ------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.13% 1.12% 1.10% 1.07% 1.03% Net investment income 1.61% 1.58% 2.14% 2.56% 2.95% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 7,017 $ 6,663 $ 5,848 $ 6,259 $ 7,440 Portfolio turnover rate 64% 117% 145% 67% 33% - ------------------------------------------------------------------------------------------------------------- [+/+] The per share amounts were computed using an average number of shares outstanding during the period. + Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. (1) Reflects overall Fund ratios for investment income and non-class specific expenses. 34 CLASS B SHARES - ------------------------------------------------------------------------------------------------------------ FOR THE YEAR ENDED JANUARY 31, 2005 2004 2003 2002 2001 - ------------------------------------------------------------------------------------------------------------ SELECTED PER SHARE DATA: Net asset value, beginning of period $ 12.97 $ 10.73 $ 12.81 $ 13.28 $ 13.09 --------- -------- -------- ------- ------- Income (loss) from investment operations: Net investment income[+/+] 0.11 0.10 0.16 0.23 0.27 Net realized and unrealized gain (loss) 0.79 2.28 (2.05) (0.42) 0.88 --------- -------- -------- ------- ------- Total income (loss) from investment operations 0.90 2.38 (1.89) (0.19) 1.15 --------- -------- -------- ------- ------- Less dividends and distributions from: Net investment income (0.12) (0.14) (0.19) (0.28) (0.28) Net realized gain -- -- -- -- (0.68) --------- -------- -------- ------- ------- Total dividends and distributions (0.12) (0.14) (0.19) (0.28) (0.96) --------- -------- -------- ------- ------- Net asset value, end of period $ 13.75 $ 12.97 $ 10.73 $ 12.81 $ 13.28 - ------------------------------------------------------------------------------------------------------------ TOTAL RETURN+ 6.99% 22.37% (14.86)% (1.32)% 9.83% - ------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.89% 1.88% 1.87% 1.83% 1.83% Net investment income 0.85% 0.82% 1.37% 1.80% 2.15% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 110,875 $114,960 $79,631 $92,009 $57,490 Portfolio turnover rate 64% 117% 145% 67% 33% - ------------------------------------------------------------------------------------------------------------ [+/+] The per share amounts were computed using an average number of shares outstanding during the period. + Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. (1) Reflects overall Fund ratios for investment income and non-class specific expenses. 35 FINANCIAL HIGHLIGHTS (CONTINUED) CLASS C SHARES - -------------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED JANUARY 31, 2005 2004 2003 2002 2001 - -------------------------------------------------------------------------------------------------------------- SELECTED PER SHARE DATA: Net asset value, beginning of period $ 12.98 $ 10.73 $ 12.81 $ 13.28 $ 13.09 --------- -------- -------- -------- -------- Income (loss) from investment operations: Net investment income[+/+] 0.11 0.10 0.16 0.23 0.27 Net realized and unrealized gain (loss) 0.79 2.29 (2.05) (0.42) 0.88 --------- -------- -------- -------- -------- Total income (loss) from investment operations 0.90 2.39 (1.89) (0.19) 1.15 --------- -------- -------- -------- -------- Less dividends and distributions from: Net investment income (0.12) (0.14) (0.19) (0.28) (0.28) Net realized gain -- -- -- -- (0.68) --------- -------- -------- -------- -------- Total dividends and distributions (0.12) (0.14) (0.19) (0.28) (0.96) --------- -------- -------- -------- -------- Net asset value, end of period $ 13.76 $ 12.98 $ 10.73 $ 12.81 $ 13.28 - -------------------------------------------------------------------------------------------------------------- TOTAL RETURN+ 6.98% 22.43% (14.88)% (1.34)% 9.86% - -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.87% 1.88% 1.87% 1.83% 1.80% Net investment income 0.87% 0.82% 1.37% 1.80% 2.18% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 81,606 $ 84,840 $75,323 $106,002 $117,927 Portfolio turnover rate 64% 117% 145% 67% 33% - -------------------------------------------------------------------------------------------------------------- [+/+] The per share amounts were computed using an average number of shares outstanding during the period. + Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. (1) Reflects overall Fund ratios for investment income and non-class specific expenses. 36 CLASS D SHARES - -------------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED JANUARY 31, 2005 2004 2003 2002 2001 - -------------------------------------------------------------------------------------------------------------- SELECTED PER SHARE DATA: Net asset value, beginning of period $ 12.97 $ 10.73 $ 12.81 $ 13.28 $ 13.10 --------- -------- -------- -------- -------- Income (loss) from investment operations: Net investment income[+/+] 0.24 0.22 0.27 0.37 0.39 Net realized and unrealized gain (loss) 0.80 2.28 (2.04) (0.43) 0.88 --------- -------- -------- -------- -------- Total income (loss) from investment operations 1.04 2.50 (1.77) (0.06) 1.27 --------- -------- -------- -------- -------- Less dividends and distributions from: Net investment income (0.25) (0.26) (0.31) (0.41) (0.41) Net realized gain -- -- -- -- (0.68) --------- -------- -------- -------- -------- Total dividends and distributions (0.25) (0.26) (0.31) (0.41) (1.09) --------- -------- -------- -------- -------- Net asset value, end of period $ 13.76 $ 12.97 $ 10.73 $ 12.81 $ 13.28 - -------------------------------------------------------------------------------------------------------------- TOTAL RETURN+ 8.14% 23.56% (13.99)% (0.32)% 10.93% - -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(1): Expenses 0.89% 0.88% 0.87% 0.83% 0.83% Net investment income 1.85% 1.82% 2.37% 2.80% 3.15% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 1,083 $ 1,151 $ 1,347 $ 1,244 $ 2,702 Portfolio turnover rate 64% 117% 145% 67% 33% - -------------------------------------------------------------------------------------------------------------- [+/+] The per share amounts were computed using an average number of shares outstanding during the period. + Calculated based on the net asset value as of the last business day of the period. (1) Reflects overall Fund ratios for investment income and non-class specific expenses. 37 NOTES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - 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-------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 40 MORGAN STANLEY FUNDS EQUITY FIXED INCOME - ----------------------------------- ---------------------------------------- -------------------------------------- BLEND/CORE INDEX TAXABLE SHORT TERM Dividend Growth Securities Equally-Weighted S&P 500 Fund Limited Duration Fund*+ Total Return Trust KLD Social Index Fund Limited Duration U.S. Treasury Trust* Fund of Funds - Domestic Portfolio Nasdaq-100 Index Fund S&P 500 Index Fund -------------------------------------- - ----------------------------------- Total Market Index Fund TAXABLE INTERMEDIATE TERM DOMESTIC HYBRID ---------------------------------------- Federal Securities Trust Allocator Fund SPECIALTY Flexible Income Trust Balanced Growth Fund High Yield Securities Balanced Income Fund Biotechnology Fund Income Trust Income Builder Fund Convertible Securities Trust U.S. Government Securities Trust Strategist Fund Financial Services Trust Global Utilities Fund -------------------------------------- - ----------------------------------- Health Sciences Trust TAX-FREE GLOBAL/INTERNATIONAL Information Fund Natural Resource Development Securities California Tax-Free Income Fund European Equity Fund Real Estate Fund Limited Term Municipal Trust*+ Global Advantage Fund Utilities Fund New York Tax-Free Income Fund Global Dividend Growth Securities Tax-Exempt Securities Trust International Fund --------------------------------------- International SmallCap Fund VALUE International Value Equity Fund MONEY MARKET* Japan Fund Fundamental Value Fund -------------------------------------- Pacific Growth Fund Mid-Cap Value Fund TAXABLE Small-Mid Special Value Fund - ----------------------------------- Special Value Fund Liquid Asset Fund GROWTH Value Fund U.S. Government Money Market Aggressive Equity Fund -------------------------------------- American Opportunities Fund TAX-FREE Capital Opportunities Trust Developing Growth Securities Trust California Tax-Free Daily Income Trust Growth Fund New York Municipal Money Market Trust Special Growth Fund Tax-Free Daily Income Trust There may be funds created or terminated after this Prospectus was published. Please consult the inside back cover of a new fund's prospectus for its designations, e.g., Multi-Class Fund or Money Market Fund. Unless otherwise noted, each listed Morgan Stanley Fund is a Multi-Class Fund. A Multi-Class Fund is a mutual fund offering multiple classes of shares. * Single-Class Fund(s) + No-Load (Mutual) Fund Additional information about the Fund's [MORGAN STANLEY FUNDS investments is available in the Fund's Annual and GRAPHIC OMITTED] Semi-Annual Reports to Shareholders. In the Fund's Annual Report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. The Fund's Statement of Additional Information also provides additional information about the Fund. The Statement of Additional Information is incorporated herein by reference (legally is part of this Prospectus). For a free copy of any of these documents, to request other information about the Fund, or to make shareholder inquiries, please call (800) 869-NEWS. Free copies of these documents are also available from our Internet site at: WWW.MORGANSTANLEY.COM/FUNDS. You also may obtain information about the Fund by MORGAN STANLEY calling your Morgan Stanley Financial Advisor or BALANCED GROWTH FUND by visiting our Internet site. 37896 05/05 Information about the Fund (including the Statement of Additional Information) can be viewed and copied at the Securities and Exchange Commission's (the "SEC") Public Reference Room in Washington, DC. Information about the Reference Room's operations may be obtained by calling the SEC at (202) 942-8090. Reports and other information about the Fund are available on the EDGAR Database on the SEC's Internet site (www.sec.gov), and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the Public Reference Section of the SEC, Washington, DC 20549-0102. ----------------------- TICKER SYMBOLS: - ------------------------------------------------- CLASS A: BGRAX CLASS B: BGRBX - --------------------- ---------------------- CLASS C: BGRCX CLASS D: BGRDX [MORGAN STANLEY LOGO OMITTED] - --------------------- ---------------------- ----------------------- CLF #37896PRO-00 (THE FUND'S INVESTMENT COMPANY ACT FILE NO. IS 811-7245) Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. (C) 2005 Morgan Stanley Prospectus May 27, 2005 [MORGAN STANLEY LOGO]
Welcome, Shareholder:
In this report, you’ll learn about how your investment in Morgan Stanley Balanced Growth Fund performed during the annual period. We will provide an overview of the market conditions, and discuss some of the factors that affected performance during the reporting period. In addition, this report includes the Fund’s financial statements and a list of Fund investments.
![]() | This material must be preceded or accompanied by a prospectus for the fund being offered. |
![]() | Market forecasts provided in this report may not necessarily come to pass. There is no assurance that a mutual fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that market values of securities owned by the Fund will decline and, therefore, the value of the Fund's shares may be less than what you paid for them. Accordingly, you can lose money investing in this Fund. Please see the prospectus for more complete information on investment risks. |
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![]() | Fund Report |
![]() | For the year ended January 31, 2006 |
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Total Return for the 12 Months Ended January 31, 2006
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Class A | ![]() | ![]() | ![]() | Class B | ![]() | ![]() | ![]() | Class C | ![]() | ![]() | ![]() | Class D | ![]() | ![]() | ![]() | Russell 1000® Value Index1 | ![]() | ![]() | ![]() | Lehman Brothers U.S. Government/ Credit Index2 | ![]() | ![]() | ![]() | Lipper Balanced Funds Index3 | ||||||||||||||
10.99% | ![]() | ![]() | ![]() | 10.12 | % | ![]() | ![]() | ![]() | 10.15 | % | ![]() | ![]() | ![]() | 11.17 | % | ![]() | ![]() | ![]() | 13.22 | % | ![]() | ![]() | ![]() | 1.48 | % | ![]() | ![]() | ![]() | 9.11 | % | ||||||||
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The performance of the Fund’s four share classes varies because each has different expenses. The Fund’s total returns assume the reinvestment of all distributions but do not reflect the deduction of any applicable sales charges. Such costs would lower performance. See Performance Summary for standardized performance and benchmark information.
Market Conditions
Despite a climate often marked by uncertainty, both stocks and bonds advanced, with stocks leading the way. Concerns about how consumers and corporate profits would fare amid rising interest rates and rising energy prices dampened investor sentiment throughout the period. Weak results at U.S. automakers intensified these worries in the first half of 2005, as did the Gulf Coast hurricanes in the second half of the year. Nonetheless, the economy proved resilient, corporate earnings continued to meet or exceed expectations, and consumer data remained stronger than expected, even rebounding after the hurricanes. As widely expected, the Federal Open Market Committee (the ‘‘Fed’’) continued to raise its federal funds rate.
Short- and intermediate-term Treasury yields rose sharply in response to stronger-than-expected economic data and the Fed’s numerous tightening moves. Although the yields of longer-term U.S. Treasuries also rose, they did so at a slower pace. As a result, the yield curve flattened over the period.
Large-cap value stocks (the mainstay of the Fund’s equity portfolio) posted solid gains overall, as measured by the Russell 1000® Value Index. Within the Index, energy and utilities were among the best performing sectors, due to high commodity prices and investors’ pursuit of yield. The financials sector also advanced with particular strength, led by stocks with capital markets exposure. Consumer discretionary was the only sector in the Index to produce a negative return for the period.
Within the government bond sector, U.S. Agency issues modestly outperformed U.S. Treasuries. Relative to other non-government sub-sectors, U.S. Treasuries performed well. Within the mortgage sector, higher-coupon, longer-dated mortgage-backed issues outperformed their lower-coupon counterparts. U.S. investment-grade corporate bonds underperformed other major bond market sectors. Returns were unevenly distributed, with a few key names driving performance within each sector of the corporate bond market. Overall, Aa-rated issues posted the highest returns while medium quality, Baa-rated issues lagged. Among the corporate sub-sectors the best performers were energy, utilities, and banking issues. The most significant industry laggards were the automotive manufacturers and parts producers.
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Performance Analysis
Morgan Stanley Balanced Growth Fund underperformed the Russell 1000 Value Index and outperformed the Lehman Brothers U.S. Government/Credit Index and the Lipper Balanced Funds Index for the 12 months ended January 31, 2006, assuming no deduction of applicable sales charges.
In the Fund’s stock portfolio, the financials, energy and health care sectors contributed the most to absolute gains. Within financials, the Fund’s emphasis on diversified financial stocks proved advantageous, as these companies benefited from strength in the capital markets. Companies with fixed income trading performed especially well. Insurance holdings were also positive contributors, due to improved pricing power within the industry. Moreover, the Fund had limited exposure to regional banks, which saw their profit margins decline as the yield curve flattened. Elsewhere in the portfolio, high commodity prices continued to support energy stocks. Notably, the Fund held refining and marketing companies, which benefited from significantly higher profit margins generated in the refining of oil. Within health care, pharmaceuticals stocks contributed strong gains. Less bad news, positive expectations for new drug launches, and favorable patent protection rulings helped buoy the beleaguered industry.
In contrast, the Fund’s telecommunication services stocks were the primary detractor from performance. Intense competition from cable and wireless companies continued to threaten traditional landline usage. Also on the downside, the Fund’s media stocks were hampered by low advertising revenues for traditional media as well as by increasing competition from Internet advertising. Lagging returns in the Fund’s consumer staples exposure also hurt results.
In addition to investing in stocks, the Fund also included an allocation to fixed income securities, totaling 29.3 percent of net assets at the close of the period. This fixed income allocation tempered the Fund’s overall pace, as bonds trailed stocks, broadly speaking.
During the period, we kept the overall interest-rate exposure of the Fund’s fixed income portfolio well below that of its Lehman benchmark. This posture was advantageous as yields rose, especially in the short-term and intermediate-term portions of the
yield curve.
Within its government bond allocation, the Fund benefited from its focus on high-coupon, slow-prepaying mortgages as these issues outperformed their lower-coupon counterparts. Compared with lower-coupon, faster pre-paying mortgages, the mortgages favored by the Fund tend to be less sensitive to rising interest rates. An underweight to U.S. Agency issues detracted slightly from relative performance, however.
The Fund’s performance relative to the Lehman benchmark was enhanced by favorable sector and security selection decisions in the corporate bond sector. Additionally, a defensive, underweighted approach toward corporate credit proved helpful as most credit spreads widened. Within the corporate bond portfolio, the Fund maintained a modest preference for selected medium-quality investment- grade credits, such as those in the paper and forest products area. Selected life insurance and asset-backed issues remained the focus of the Fund’s higher-quality investments.
3
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There is no guarantee that any sectors mentioned will continue to perform as discussed herein or that securities in such sectors will be held by the Fund in the future.
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TOP 10 HOLDINGS | ![]() | ||||||
U.S. Treasury Securities | ![]() | 12.8 | % | ||||
Fed. Natl. Mtge. Assoc. | ![]() | 3.6 | |||||
JPMorgan Chase & Co. | ![]() | 2.3 | |||||
Merrill Lynch & Co. | ![]() | 2.0 | |||||
Bayer AG (ADR) (Germany) | ![]() | 2.0 | |||||
Citigroup, Inc. | ![]() | 1.8 | |||||
Schlumberger Ltd. | ![]() | 1.7 | |||||
Roche Holdings Ltd. (ADR) (Switzerland) | ![]() | 1.7 | |||||
Time Warner, Inc. | ![]() | 1.7 | |||||
Unilever (ADR) N.V. (Netherlands) | ![]() | 1.6 | |||||
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PORTFOLIO COMPOSITION* | ![]() | ||||||
Common Stocks | ![]() | 67.4 | % | ||||
U.S. Government Agencies & Obligations | ![]() | 16.6 | |||||
Corporate Bonds | ![]() | 7.6 | |||||
Asset-Backed Securities | ![]() | 5.1 | |||||
Short-Term Investments | ![]() | 3.2 | |||||
Foreign Government Bonds | ![]() | 0.1 | |||||
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* Does not include outstanding short futures contracts with an underlying face amount of $11,620,752 with net unrealized appreciation of $1,898. |
Data as of January 31, 2006. Subject to change daily. All percentages for top 10 holdings are as a percentage of net assets and all percentages for portfolio composition are as a percentage of total investments. These data are provided for informational purposes only and should not be deemed a recommendation to buy or sell the securities mentioned. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services. |
Investment Strategy
The Fund will normally invest at least 60 percent of its assets in dividend paying common stocks and securities convertible into common stocks, at least 25 percent of its assets in fixed-income securities. Within these limitations, the Fund’s ‘‘Investment Adviser,’’ Morgan Stanley Investment Advisors Inc., may purchase or sell securities in any proportion it believes desirable based on its assessment of business, economic and investment conditions.
For More Information
About Portfolio Holdings
Each Morgan Stanley fund provides a complete schedule of portfolio holdings in its semiannual and annual reports within 60 days of the end of the fund’s second and fourth fiscal quarters by filing the schedule electronically with the Securities and Exchange Commission (SEC). The semiannual reports are filed on Form N-CSRS and the annual reports are filed on Form N-CSR. Morgan Stanley also delivers the semiannual and annual reports to fund shareholders and makes these reports available on its public Web site, www.morganstanley.com. Each Morgan Stanley fund also files a complete schedule of portfolio holdings with the SEC for the fund’s first and third fiscal quarters on Form N-Q. Morgan Stanley does not deliver the reports for the first and third fiscal quarters to shareholders, nor are the reports posted to the Morgan Stanley public Web site. You may, however, obtain the Form N-Q filings (as well as the Form N-CSR and N-CSRS filings) by accessing the SEC’s Web site, http://www.sec.gov. You may also review and copy them at the SEC’s Public Reference Room in Washington, DC. Information on the
4
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operation of the SEC’s Public Reference Room may be obtained by calling the SEC at (800) SEC-0330. You can also request copies of these materials, upon payment of a duplicating fee, by electronic request at the SEC’s e-mail address (publicinfo@sec.gov) or by writing the Public Reference section of the SEC, Washington, DC 20549-0102.
Proxy Voting Policy and Procedures and Proxy Voting Record
You may obtain a copy of the Fund’s Proxy Voting Policy and Procedures without charge, upon request, by calling toll free (800) 869-NEWS or by visiting the Mutual Fund Center on our Web site at www.morganstanley.com. It is also available on the Securities and Exchange Commission’s Web site at http://www.sec.gov.
You may obtain information regarding how the Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 without charge by visiting the Mutual Fund Center on our Web site at www.morganstanley.com. This information is also available on the Securities and Exchange Commission’s Web site at http://www.sec.gov.
Householding Notice
To reduce printing and mailing costs, the Fund attempts to eliminate duplicate mailings to the same address. The Fund delivers a single copy of certain shareholder documents, including shareholder reports, prospectuses and proxy materials, to investors with the same last name who reside at the same address. Your participation in this program will continue for an unlimited period of time unless you instruct us otherwise. You can request multiple copies of these documents by calling (800) 350-6414, 8:00 a.m. to 8:00 p.m., ET. Once our Customer Service Center has received your instructions, we will begin sending individual copies for each account within 30 days.
5
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Performance of $10,000 Investment — Class C
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Average Annual Total Returns — Period Ended January 31, 2006
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![]() | ![]() | ![]() | Class A Shares* (since 07/28/97) | ![]() | ![]() | ![]() | Class B Shares** (since 07/28/97) | ![]() | ![]() | ![]() | Class C Shares† (since 03/28/95) | ![]() | ![]() | ![]() | Class D Shares†† (since 07/28/97) | |||||||||||
Symbol | ![]() | ![]() | ![]() | BGRAX | ![]() | ![]() | ![]() | BGRBX | ![]() | ![]() | ![]() | BGRCX | ![]() | ![]() | ![]() | BGRDX | ||||||||||
1 Year | ![]() | ![]() | ![]() | 10.99 | %4 | ![]() | ![]() | ![]() | 10.12 | %4 | ![]() | ![]() | ![]() | 10.15 | %4 | ![]() | ![]() | ![]() | 11.17 | %4 | ||||||
![]() | ![]() | ![]() | 5.16 | 5 | ![]() | ![]() | ![]() | 5.12 | 5 | ![]() | ![]() | ![]() | 9.15 | 5 | ![]() | ![]() | ![]() | — | ||||||||
5 Years | ![]() | ![]() | ![]() | 4.71 | 4 | ![]() | ![]() | ![]() | 3.91 | 4 | ![]() | ![]() | ![]() | 3.91 | 4 | ![]() | ![]() | ![]() | 4.95 | 4 | ||||||
![]() | ![]() | ![]() | 3.59 | 5 | ![]() | ![]() | ![]() | 3.56 | 5 | ![]() | ![]() | ![]() | 3.91 | 5 | ![]() | ![]() | ![]() | — | ||||||||
10 Years | ![]() | ![]() | ![]() | — | ![]() | ![]() | ![]() | — | ![]() | ![]() | ![]() | 7.48 | 4 | ![]() | ![]() | ![]() | — | |||||||||
![]() | ![]() | ![]() | — | ![]() | ![]() | ![]() | — | ![]() | ![]() | ![]() | 7.48 | 5 | ![]() | ![]() | ![]() | — | ||||||||||
Since Inception | ![]() | ![]() | ![]() | 6.32 | 4 | ![]() | ![]() | ![]() | 5.50 | 4 | ![]() | ![]() | ![]() | 8.87 | 4 | ![]() | ![]() | ![]() | 6.56 | 4 | ||||||
![]() | ![]() | ![]() | 5.65 | 5 | ![]() | ![]() | ![]() | 5.50 | 5 | ![]() | ![]() | ![]() | 8.87 | 5 | ![]() | ![]() | ![]() | — | ||||||||
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![]() | Performance data quoted represents past performance, which is no guarantee of future results and current performance may be lower or higher than the figures shown. For most recent month-end performance figures, please visit www.morganstanley.com or speak with your Financial Advisor. Investment returns and principal value will fluctuate and fund shares, when redeemed, may be worth more or less than their original cost. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Performance for Class A, Class B, Class C, and Class D shares will vary due to differences in sales charges and expenses. |
![]() | * | The maximum front-end sales charge for Class A is 5.25%. |
![]() | ** | The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%. The CDSC declines to 0% after six years. |
![]() | † | The maximum contingent deferred sales charge for Class C is 1.0% for shares redeemed within one year of purchase. |
![]() | †† | Class D has no sales charge. |
![]() | (1) | The Russell 1000® Value Index measures the performance of those companies in the Russell 1000® Index with lower price-to-book ratios and lower forecasted growth values. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. |
![]() | (2) | The Lehman Brothers U.S. Government/Credit Index tracks the performance of government and corporate obligations, including U.S. government agency and Treasury securities and corporate and Yankee bonds. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. |
![]() | (3) | The Lipper Balanced Funds Index is an equally-weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Balanced Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. |
![]() | (4) | Figure shown assumes reinvestment of all distributions and does not reflect the deduction of any sales charges. |
![]() | (5) | Figure shown assumes reinvestment of all distributions and the deduction of the maximum applicable sales charge. See the Fund's current prospectus for complete details on fees and sales charges. |
![]() | ‡ | Ending value assuming a complete redemption on January 31, 2006. |
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As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments and redemption fees; and (2) ongoing costs, including advisory fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 08/01/05 – 01/31/06.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled ‘‘Expenses Paid During Period’’ to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
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![]() | Beginning Account Value | ![]() | Ending Account Value | ![]() | Expenses Paid During Period* | |||||||||
![]() | 08/01/05 | ![]() | 01/31/06 | ![]() | 08/01/05 – 01/31/06 | |||||||||
Class A | ![]() | ![]() | ![]() | |||||||||||
Actual (4.62% return) | ![]() | $ | 1,000.00 | ![]() | $ | 1,046.20 | ![]() | $ | 5.93 | |||||
Hypothetical (5% annual return before expenses) | ![]() | $ | 1,000.00 | ![]() | $ | 1,019.41 | ![]() | $ | 5.85 | |||||
Class B | ![]() | ![]() | ![]() | |||||||||||
Actual (4.15% return) | ![]() | $ | 1,000.00 | ![]() | $ | 1,041.50 | ![]() | $ | 9.88 | |||||
Hypothetical (5% annual return before expenses) | ![]() | $ | 1,000.00 | ![]() | $ | 1,015.53 | ![]() | $ | 9.75 | |||||
Class C | ![]() | ![]() | ![]() | |||||||||||
Actual (4.22% return) | ![]() | $ | 1,000.00 | ![]() | $ | 1,042.20 | ![]() | $ | 9.83 | |||||
Hypothetical (5% annual return before expenses) | ![]() | $ | 1,000.00 | ![]() | $ | 1,015.58 | ![]() | $ | 9.70 | |||||
Class D | ![]() | ![]() | ![]() | |||||||||||
Actual (4.68% return) | ![]() | $ | 1,000.00 | ![]() | $ | 1,046.80 | ![]() | $ | 4.75 | |||||
Hypothetical (5% annual return before expenses) | ![]() | $ | 1,000.00 | ![]() | $ | 1,020.57 | ![]() | $ | 4.69 | |||||
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![]() | * | Expenses are equal to the Fund's annualized expense ratio of 1.15%, 1.92%, 1.91% and 0.92% for Class A, Class B, Class C and Class D shares, respectively, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
8
Morgan Stanley Balanced Growth Fund
Portfolio of Investments January 31, 2006
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NUMBER OF SHARES | ![]() | ![]() | ![]() | ![]() | VALUE | |||||||||||||
![]() | Common Stocks (67.4%) | ![]() | ![]() | ![]() | ||||||||||||||
![]() | Aerospace & Defense (1.5%) | ![]() | ![]() | ![]() | ||||||||||||||
24,330 | ![]() | Northrop Grumman Corp. | ![]() | ![]() | ![]() | $ | 1,511,623 | |||||||||||
35,800 | ![]() | Raytheon Co. | ![]() | ![]() | ![]() | 1,466,726 | ||||||||||||
![]() | ![]() | ![]() | ![]() | 2,978,349 | ||||||||||||||
![]() | Beverages: Alcoholic (0.5%) | |||||||||||||||||
18,150 | ![]() | Diageo PLC (ADR) (United Kingdom) | ![]() | ![]() | ![]() | 1,089,363 | ||||||||||||
![]() | Beverages: Non-Alcoholic (1.0%) | |||||||||||||||||
50,100 | ![]() | Coca-Cola Co. (The) | ![]() | ![]() | ![]() | 2,073,138 | ||||||||||||
![]() | Biotechnology (0.8%) | |||||||||||||||||
36,400 | ![]() | Chiron Corp.* | ![]() | ![]() | ![]() | 1,659,840 | ||||||||||||
![]() | Broadcasting (1.3%) | |||||||||||||||||
87,680 | ![]() | Clear Channel Communications, Inc.* | ![]() | ![]() | ![]() | 2,566,394 | ||||||||||||
![]() | Chemicals: Major Diversified (2.5%) | |||||||||||||||||
94,590 | ![]() | Bayer AG (ADR) (Germany) | ![]() | ![]() | ![]() | 3,954,808 | ||||||||||||
25,060 | ![]() | Dow Chemical Co. (The) | ![]() | ![]() | ![]() | 1,060,038 | ||||||||||||
![]() | ![]() | ![]() | ![]() | 5,014,846 | ||||||||||||||
![]() | Computer Processing Hardware (0.6%) | |||||||||||||||||
40,000 | ![]() | Hewlett-Packard Co. | ![]() | ![]() | ![]() | 1,247,200 | ||||||||||||
![]() | Department Stores (0.5%) | |||||||||||||||||
23,950 | ![]() | Kohl's Corp.* | ![]() | ![]() | ![]() | 1,063,141 | ||||||||||||
![]() | Discount Stores (1.0%) | |||||||||||||||||
43,450 | ![]() | Wal-Mart Stores, Inc. | ![]() | ![]() | ![]() | 2,003,480 | ||||||||||||
![]() | Electric Utilities (2.3%) | |||||||||||||||||
38,700 | ![]() | American Electric Power Co., Inc. | ![]() | ![]() | ![]() | 1,444,284 | ||||||||||||
25,010 | ![]() | Entergy Corp. | ![]() | ![]() | ![]() | 1,738,445 | ||||||||||||
29,790 | ![]() | FirstEnergy Corp. | ![]() | ![]() | ![]() | 1,492,479 | ||||||||||||
![]() | ![]() | ![]() | ![]() | 4,675,208 | ||||||||||||||
![]() | Finance/Rental/Leasing (1.3%) | |||||||||||||||||
39,050 | ![]() | Freddie Mac | ![]() | ![]() | ![]() | 2,649,933 | ||||||||||||
![]() | Financial Conglomerates (4.8%) | |||||||||||||||||
75,120 | ![]() | Citigroup, Inc. | ![]() | ![]() | ![]() | 3,499,090 | ||||||||||||
114,154 | ![]() | JPMorgan Chase & Co. | ![]() | ![]() | ![]() | 4,537,621 | ||||||||||||
25,800 | ![]() | State Street Corp. | ![]() | ![]() | ![]() | 1,559,868 | ||||||||||||
![]() | ![]() | ![]() | ![]() | 9,596,579 | ||||||||||||||
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See Notes to Financial Statements
9
Morgan Stanley Balanced Growth Fund
Portfolio of Investments January 31, 2006 continued
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NUMBER OF SHARES | ![]() | ![]() | ![]() | ![]() | VALUE | |||||||||||||
![]() | Food: Major Diversified (1.6%) | |||||||||||||||||
46,450 | ![]() | Unilever N.V. (ADR) (NY Registered Shares) (Netherlands) | ![]() | ![]() | ![]() | $ | 3,260,790 | |||||||||||
![]() | Food: Specialty/Candy (0.7%) | |||||||||||||||||
34,100 | ![]() | Cadbury Schweppes PLC (ADR) (United Kingdom) | ![]() | ![]() | ![]() | 1,358,203 | ||||||||||||
![]() | Household/Personal Care (0.7%) | |||||||||||||||||
11,150 | ![]() | Avon Products, Inc. | ![]() | ![]() | ![]() | 315,768 | ||||||||||||
18,550 | ![]() | Procter & Gamble Co. (The) | ![]() | ![]() | ![]() | 1,098,716 | ||||||||||||
![]() | ![]() | ![]() | ![]() | 1,414,484 | ||||||||||||||
![]() | Industrial Conglomerates (3.3%) | |||||||||||||||||
96,300 | ![]() | General Electric Co. | ![]() | ![]() | ![]() | 3,153,825 | ||||||||||||
28,680 | ![]() | Ingersoll-Rand Co. Ltd. (Class A) (Bermuda) | ![]() | ![]() | ![]() | 1,126,264 | ||||||||||||
26,000 | ![]() | Siemens AG (ADR) (Germany) | ![]() | ![]() | ![]() | 2,381,600 | ||||||||||||
![]() | ![]() | ![]() | ![]() | 6,661,689 | ||||||||||||||
![]() | Insurance Brokers/Services (1.0%) | |||||||||||||||||
64,390 | ![]() | Marsh & McLennan Companies, Inc. | ![]() | ![]() | ![]() | 1,956,812 | ||||||||||||
![]() | Integrated Oil (4.0%) | |||||||||||||||||
31,220 | ![]() | BP PLC (ADR) (United Kingdom) | ![]() | ![]() | ![]() | 2,257,518 | ||||||||||||
34,520 | ![]() | ConocoPhillips | ![]() | ![]() | ![]() | 2,233,444 | ||||||||||||
14,940 | ![]() | Exxon Mobil Corp. | ![]() | ![]() | ![]() | 937,485 | ||||||||||||
36,470 | ![]() | Royal Dutch Shell PLC (ADR) (Class A) (United Kingdom) | ![]() | ![]() | ![]() | 2,483,972 | ||||||||||||
![]() | ![]() | ![]() | ![]() | 7,912,419 | ||||||||||||||
![]() | Investment Banks/Brokers (3.5%) | |||||||||||||||||
7,000 | ![]() | Goldman Sachs Group, Inc. (The) | ![]() | ![]() | ![]() | 988,750 | ||||||||||||
53,310 | ![]() | Merrill Lynch & Co., Inc. | ![]() | ![]() | ![]() | 4,001,982 | ||||||||||||
131,700 | ![]() | Schwab (Charles) Corp. (The) | ![]() | ![]() | ![]() | 1,947,843 | ||||||||||||
![]() | ![]() | ![]() | ![]() | 6,938,575 | ||||||||||||||
![]() | Life/Health Insurance (0.3%) | |||||||||||||||||
35,600 | ![]() | Aegon N.V. (NY Registered Shares) (Netherlands) | ![]() | ![]() | ![]() | 574,584 | ||||||||||||
![]() | Major Banks (2.0%) | |||||||||||||||||
53,375 | ![]() | Bank of America Corp. | ![]() | ![]() | ![]() | 2,360,776 | ||||||||||||
24,600 | ![]() | PNC Financial Services Group | ![]() | ![]() | ![]() | 1,595,556 | ||||||||||||
![]() | ![]() | ![]() | ![]() | 3,956,332 | ||||||||||||||
![]() | Major Telecommunications (3.6%) | |||||||||||||||||
61,100 | ![]() | France Telecom S.A. (ADR) (France) | ![]() | ![]() | ![]() | 1,391,858 | ||||||||||||
139,156 | ![]() | Sprint Nextel Corp. | ![]() | ![]() | ![]() | 3,185,281 | ||||||||||||
80,680 | ![]() | Verizon Communications Inc. | ![]() | ![]() | ![]() | 2,554,329 | ||||||||||||
![]() | ![]() | ![]() | ![]() | 7,131,468 | ||||||||||||||
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See Notes to Financial Statements
10
Morgan Stanley Balanced Growth Fund
Portfolio of Investments January 31, 2006 continued
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NUMBER OF SHARES | ![]() | ![]() | ![]() | ![]() | VALUE | |||||||||||||
![]() | Managed Health Care (1.0%) | |||||||||||||||||
17,300 | ![]() | CIGNA Corp. | ![]() | ![]() | ![]() | $ | 2,103,680 | |||||||||||
![]() | Media Conglomerates (3.6%) | |||||||||||||||||
25,050 | ![]() | CBS Corp. (Class B) | ![]() | ![]() | ![]() | 654,556 | ||||||||||||
84,330 | ![]() | Disney (Walt) Co. (The) | ![]() | ![]() | ![]() | 2,134,392 | ||||||||||||
189,600 | ![]() | Time Warner, Inc. | ![]() | ![]() | ![]() | 3,323,688 | ||||||||||||
25,050 | ![]() | Viacom Inc. (Class B) (Non-Voting) | ![]() | ![]() | ![]() | 1,039,074 | ||||||||||||
![]() | ![]() | ![]() | ![]() | 7,151,710 | ||||||||||||||
![]() | Medical Specialties (1.2%) | |||||||||||||||||
21,300 | ![]() | Applera Corp. – Applied Biosystems Group | ![]() | ![]() | ![]() | 603,642 | ||||||||||||
20,550 | ![]() | Bausch & Lomb, Inc. | ![]() | ![]() | ![]() | 1,388,152 | ||||||||||||
21,100 | ![]() | Boston Scientific Corp.* | ![]() | ![]() | ![]() | 461,457 | ||||||||||||
![]() | ![]() | ![]() | ![]() | 2,453,251 | ||||||||||||||
![]() | Motor Vehicles (0.6%) | |||||||||||||||||
41,890 | ![]() | Honda Motor Co., Ltd. (ADR) (Japan) | ![]() | ![]() | ![]() | 1,191,770 | ||||||||||||
![]() | Multi-Line Insurance (0.6%) | ![]() | ![]() | |||||||||||||||
15,530 | ![]() | Hartford Financial Services Group, Inc. (The) | ![]() | ![]() | ![]() | 1,277,032 | ||||||||||||
![]() | Oil Refining/Marketing (0.5%) | |||||||||||||||||
14,480 | ![]() | Valero Energy Corp. | ![]() | ![]() | ![]() | 903,986 | ||||||||||||
![]() | Oilfield Services/Equipment (1.7%) | |||||||||||||||||
26,970 | ![]() | Schlumberger Ltd. (Netherlands Antilles) | ![]() | ![]() | ![]() | 3,437,327 | ||||||||||||
![]() | Packaged Software (1.4%) | |||||||||||||||||
151,200 | ![]() | Symantec Corp.* | ![]() | ![]() | ![]() | 2,779,056 | ||||||||||||
![]() | Pharmaceuticals: Major (9.5%) | |||||||||||||||||
142,220 | ![]() | Bristol-Myers Squibb Co. | ![]() | ![]() | ![]() | 3,241,194 | ||||||||||||
24,700 | ![]() | GlaxoSmithKline PLC (ADR) (United Kingdom) | ![]() | ![]() | ![]() | 1,265,628 | ||||||||||||
39,200 | ![]() | Lilly (Eli) & Co. | ![]() | ![]() | ![]() | 2,219,504 | ||||||||||||
78,900 | ![]() | Pfizer, Inc. | ![]() | ![]() | ![]() | 2,026,152 | ||||||||||||
43,760 | ![]() | Roche Holdings Ltd. (ADR) (Switzerland) | ![]() | ![]() | ![]() | 3,459,228 | ||||||||||||
36,700 | ![]() | Sanofi-Aventis (ADR) (France) | ![]() | ![]() | ![]() | 1,688,200 | ||||||||||||
155,080 | ![]() | Schering-Plough Corp. | ![]() | ![]() | ![]() | 2,969,782 | ||||||||||||
46,390 | ![]() | Wyeth | ![]() | ![]() | ![]() | 2,145,538 | ||||||||||||
![]() | ![]() | ![]() | ![]() | 19,015,226 | ||||||||||||||
![]() | Precious Metals (1.4%) | |||||||||||||||||
44,530 | ![]() | Newmont Mining Corp. | ![]() | ![]() | ![]() | 2,751,954 | ||||||||||||
![]() |
See Notes to Financial Statements
11
Morgan Stanley Balanced Growth Fund
Portfolio of Investments January 31, 2006 continued
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
NUMBER OF SHARES | ![]() | ![]() | ![]() | ![]() | VALUE | |||||||||||||
![]() | Property – Casualty Insurers (3.1%) | |||||||||||||||||
5,200 | ![]() | ACE Ltd. (Cayman Islands) | ![]() | ![]() | ![]() | $ | 284,700 | |||||||||||
22,750 | ![]() | Chubb Corp. (The) | ![]() | ![]() | ![]() | 2,146,462 | ||||||||||||
55,278 | ![]() | St. Paul Travelers Companies, Inc. (The) | ![]() | ![]() | ![]() | 2,508,516 | ||||||||||||
17,700 | ![]() | XL Capital Ltd. (Class A) (Cayman Islands) | ![]() | ![]() | ![]() | 1,197,582 | ||||||||||||
![]() | ![]() | ![]() | ![]() | 6,137,260 | ||||||||||||||
![]() | Restaurants (0.4%) | |||||||||||||||||
19,840 | ![]() | McDonald's Corp. | ![]() | ![]() | ![]() | 694,598 | ||||||||||||
![]() | Semiconductors (1.6%) | |||||||||||||||||
74,150 | ![]() | Intel Corp. | ![]() | ![]() | ![]() | 1,577,170 | ||||||||||||
111,900 | ![]() | Micron Technology, Inc. | ![]() | ![]() | ![]() | 1,642,692 | ||||||||||||
![]() | ![]() | ![]() | ![]() | 3,219,862 | ||||||||||||||
![]() | Specialty Insurance (0.5%) | |||||||||||||||||
9,100 | ![]() | MGIC Investment Corp. | ![]() | ![]() | ![]() | 600,691 | ||||||||||||
7,900 | ![]() | PMI Group, Inc. (The) | ![]() | ![]() | ![]() | 341,517 | ||||||||||||
![]() | ![]() | ![]() | ![]() | 942,208 | ||||||||||||||
![]() | Specialty Stores (0.3%) | |||||||||||||||||
16,800 | ![]() | Office Depot, Inc.* | ![]() | ![]() | ![]() | 556,920 | ||||||||||||
![]() | Telecommunication Equipment (0.5%) | |||||||||||||||||
41,250 | ![]() | Motorola, Inc. | ![]() | ![]() | ![]() | 936,787 | ||||||||||||
![]() | Tobacco (0.7%) | |||||||||||||||||
19,340 | ![]() | Altria Group, Inc. | ![]() | ![]() | ![]() | 1,399,056 | ||||||||||||
![]() | Total Common Stocks (Cost $108,317,710) | ![]() | ![]() | ![]() | 134,734,510 | |||||||||||||
![]() |
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
PRINCIPAL AMOUNT IN THOUSANDS | ![]() | ![]() | COUPON RATE | ![]() | MATURITY DATE | ![]() | ||||||||||||
![]() | Corporate Bonds (7.6%) | ![]() | ![]() | ![]() | ||||||||||||||
![]() | Advertising/Marketing Services (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
$ | 105 | ![]() | WPP Finance (UK) Corp. (United Kingdom) | ![]() | 5.875 | % | ![]() | 06/15/14 | ![]() | 105,819 | ||||||||
![]() | Aerospace & Defense (0.2%) | ![]() | ![]() | ![]() | ||||||||||||||
105 | ![]() | Northrop Grumman Corp. | ![]() | 4.079 | ![]() | 11/16/06 | ![]() | 104,334 | ||||||||||
80 | ![]() | Raytheon Co. | ![]() | 6.15 | ![]() | 11/01/08 | ![]() | 82,206 | ||||||||||
202 | ![]() | Systems 2001 Asset Trust – 144A** (Cayman Islands) | ![]() | 6.664 | ![]() | 09/15/13 | ![]() | 215,460 | ||||||||||
![]() | ![]() | ![]() | ![]() | 402,000 | ||||||||||||||
![]() |
See Notes to Financial Statements
12
Morgan Stanley Balanced Growth Fund
Portfolio of Investments January 31, 2006 continued
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
PRINCIPAL AMOUNT IN THOUSANDS | ![]() | ![]() | COUPON RATE | ![]() | MATURITY DATE | ![]() | VALUE | |||||||||||
![]() | Air Freight/Couriers (0.0%) | ![]() | ![]() | ![]() | ||||||||||||||
$ | 95 | ![]() | Fedex Corp. | ![]() | 2.65 | % | ![]() | 04/01/07 | ![]() | $ | 92,407 | |||||||
![]() | Airlines (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
117 | ![]() | America West Airlines, Inc. (Series 01-1) | ![]() | 7.10 | ![]() | 04/02/21 | ![]() | 123,464 | ||||||||||
75 | ![]() | Southwest Airlines Co. (Series 01-1) | ![]() | 5.496 | ![]() | 11/01/06 | ![]() | 75,239 | ||||||||||
![]() | ![]() | ![]() | ![]() | 198,703 | ||||||||||||||
![]() | Apparel/Footwear Retail (0.0%) | ![]() | ![]() | ![]() | ||||||||||||||
90 | ![]() | Limited Brands, Inc. | ![]() | 6.95 | ![]() | 03/01/33 | ![]() | 89,830 | ||||||||||
![]() | Beverages: Alcoholic (0.2%) | ![]() | ![]() | ![]() | ||||||||||||||
150 | ![]() | FBG Finance Ltd. – 144A** (Australia) | ![]() | 5.125 | ![]() | 06/15/15 | ![]() | 144,597 | ||||||||||
150 | ![]() | Miller Brewing Co. – 144A** | ![]() | 4.25 | ![]() | 08/15/08 | ![]() | 146,937 | ||||||||||
![]() | ![]() | ![]() | ![]() | 291,534 | ||||||||||||||
![]() | Cable/Satellite TV (0.2%) | ![]() | ![]() | ![]() | ||||||||||||||
95 | ![]() | Comcast Cable Communications Inc. | ![]() | 6.75 | ![]() | 01/30/11 | ![]() | 100,168 | ||||||||||
20 | ![]() | Lenfest Communications Corp. | ![]() | 7.625 | ![]() | 02/15/08 | ![]() | 20,888 | ||||||||||
110 | ![]() | Cox Communications, Inc. | ![]() | 4.625 | ![]() | 01/15/10 | ![]() | 106,324 | ||||||||||
80 | ![]() | TCI Communications, Inc. | ![]() | 7.875 | ![]() | 02/15/26 | ![]() | 90,904 | ||||||||||
![]() | ![]() | ![]() | ![]() | 318,284 | ||||||||||||||
![]() | Casino/Gaming (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
220 | ![]() | Harrah's Operating Co., Inc. | ![]() | 5.625 | ![]() | 06/01/15 | ![]() | 215,456 | ||||||||||
![]() | Chemicals: Major Diversified (0.0%) | ![]() | ![]() | ![]() | ||||||||||||||
70 | ![]() | ICI Wilmington Inc. | ![]() | 4.375 | ![]() | 12/01/08 | ![]() | 68,063 | ||||||||||
![]() | Containers/Packaging (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
200 | ![]() | Sealed Air Corp. – 144A** | ![]() | 5.625 | ![]() | 07/15/13 | ![]() | 197,840 | ||||||||||
![]() | Drugstore Chains (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
275 | ![]() | CVS Corp. | ![]() | 5.625 | ![]() | 03/15/06 | ![]() | 275,165 | ||||||||||
![]() | Electric Utilities (1.0%) | ![]() | ![]() | ![]() | ||||||||||||||
150 | ![]() | Ameren Corp. | ![]() | 4.263 | ![]() | 05/15/07 | ![]() | 148,167 | ||||||||||
145 | ![]() | Arizona Public Service Co. | ![]() | 5.80 | ![]() | 06/30/14 | ![]() | 146,779 | ||||||||||
45 | ![]() | Arizona Public Service Co. | ![]() | 6.75 | ![]() | 11/15/06 | ![]() | 45,519 | ||||||||||
![]() |
See Notes to Financial Statements
13
Morgan Stanley Balanced Growth Fund
Portfolio of Investments January 31, 2006 continued
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
PRINCIPAL AMOUNT IN THOUSANDS | ![]() | ![]() | COUPON RATE | ![]() | MATURITY DATE | ![]() | VALUE | |||||||||||
$ | 150 | ![]() | Carolina Power & Light Co. | ![]() | 5.125 | % | ![]() | 09/15/13 | ![]() | $ | 148,604 | |||||||
160 | ![]() | CC Funding Trust I | ![]() | 6.90 | ![]() | 02/16/07 | ![]() | 162,719 | ||||||||||
75 | ![]() | Cincinnati Gas & Electric Co. | ![]() | 5.70 | ![]() | 09/15/12 | ![]() | 76,216 | ||||||||||
80 | ![]() | Consolidated Natural Gas Co. | ![]() | 5.00 | ![]() | 12/01/14 | ![]() | 77,259 | ||||||||||
110 | ![]() | Consolidated Natural Gas Co. (Series C) | ![]() | 6.25 | ![]() | 11/01/11 | ![]() | 115,611 | ||||||||||
85 | ![]() | Consumers Energy Co. | ![]() | 4.80 | ![]() | 02/17/09 | ![]() | 83,838 | ||||||||||
70 | ![]() | Detroit Edison Co. (The) | ![]() | 6.125 | ![]() | 10/01/10 | ![]() | 72,676 | ||||||||||
55 | ![]() | Entergy Gulf States, Inc. | ![]() | 3.60 | ![]() | 06/01/08 | ![]() | 52,899 | ||||||||||
90 | ![]() | Entergy Gulf States, Inc. | ![]() | 4.81 | † | ![]() | 12/01/09 | ![]() | 87,947 | |||||||||
80 | ![]() | Exelon Corp. | ![]() | 6.75 | ![]() | 05/01/11 | ![]() | 84,908 | ||||||||||
180 | ![]() | FPL Group Capital Inc. | ![]() | 3.25 | ![]() | 04/11/06 | ![]() | 179,460 | ||||||||||
145 | ![]() | Pacific Gas & Electric Co. | ![]() | 6.05 | ![]() | 03/01/34 | ![]() | 148,139 | ||||||||||
30 | ![]() | Panhandle Eastern Pipe Line Co. (Series B) | ![]() | 2.75 | ![]() | 03/15/07 | ![]() | 29,195 | ||||||||||
100 | ![]() | Public Service Electric & Gas Co. (Series MTNB) | ![]() | 5.00 | ![]() | 01/01/13 | ![]() | 98,369 | ||||||||||
75 | ![]() | Texas Eastern Transmission, LP | ![]() | 7.00 | ![]() | 07/15/32 | ![]() | 86,142 | ||||||||||
110 | ![]() | Wisconsin Electric Power Co. | ![]() | 3.50 | ![]() | 12/01/07 | ![]() | 107,047 | ||||||||||
![]() | ![]() | ![]() | ![]() | 1,951,494 | ||||||||||||||
![]() | Electrical Products (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
125 | ![]() | Cooper Industries Inc. | ![]() | 5.25 | ![]() | 07/01/07 | ![]() | 125,183 | ||||||||||
135 | ![]() | Cooper Industries Inc. – 144A** | ![]() | 5.25 | ![]() | 11/15/12 | ![]() | 134,768 | ||||||||||
![]() | ![]() | ![]() | ![]() | 259,951 | ||||||||||||||
![]() | Electronics/Appliances (0.0%) | ![]() | ![]() | ![]() | ||||||||||||||
80 | ![]() | LG Electronics Inc. – 144A** (South Korea) | ![]() | 5.00 | ![]() | 06/17/10 | ![]() | 78,144 | ||||||||||
![]() | Finance/Rental/Leasing (0.8%) | ![]() | ![]() | ![]() | ||||||||||||||
100 | ![]() | CIT Group, Inc. | ![]() | 2.875 | ![]() | 09/29/06 | ![]() | 98,730 | ||||||||||
100 | ![]() | CIT Group, Inc. | ![]() | 4.75 | ![]() | 08/15/08 | ![]() | 99,456 | ||||||||||
50 | ![]() | CIT Group, Inc. | ![]() | 7.375 | ![]() | 04/02/07 | ![]() | 51,311 | ||||||||||
210 | ![]() | Countrywide Home Loans, Inc. (Series MTN) | ![]() | 3.25 | ![]() | 05/21/08 | ![]() | 201,443 | ||||||||||
180 | ![]() | MBNA Corp. | ![]() | 4.721 | † | ![]() | 05/05/08 | ![]() | 181,547 | |||||||||
150 | ![]() | MBNA Corp. | ![]() | 6.125 | ![]() | 03/01/13 | ![]() | 157,895 | ||||||||||
200 | ![]() | Nationwide Building Society – 144A** (United Kingdom) | ![]() | 4.25 | ![]() | 02/01/10 | ![]() | 194,312 | ||||||||||
295 | ![]() | Residential Capital Corp. | ![]() | 6.375 | ![]() | 06/30/10 | ![]() | 302,684 | ||||||||||
105 | ![]() | SLM Corp. | ![]() | 4.00 | ![]() | 01/15/10 | ![]() | 100,795 | ||||||||||
160 | ![]() | SLM Corp. (Series MTNA) | ![]() | 5.00 | ![]() | 10/01/13 | ![]() | 156,262 | ||||||||||
![]() | ![]() | ![]() | ![]() | 1,544,435 | ||||||||||||||
![]() |
See Notes to Financial Statements
14
Morgan Stanley Balanced Growth Fund
Portfolio of Investments January 31, 2006 continued
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
PRINCIPAL AMOUNT IN THOUSANDS | ![]() | ![]() | COUPON RATE | ![]() | MATURITY DATE | ![]() | VALUE | |||||||||||
![]() | Financial Conglomerates (0.6%) | ![]() | ![]() | ![]() | ||||||||||||||
$ | 500 | ![]() | Associates Corp. of North America | ![]() | 6.25 | % | ![]() | 11/01/08 | ![]() | $ | 516,440 | |||||||
180 | ![]() | Bank One Corp. (Series MTNA) | ![]() | 6.00 | ![]() | 02/17/09 | ![]() | 183,762 | ||||||||||
170 | ![]() | Chase Manhattan Corp. | ![]() | 6.00 | ![]() | 02/15/09 | ![]() | 174,026 | ||||||||||
10 | ![]() | Chase Manhattan Corp. | ![]() | 7.00 | ![]() | 11/15/09 | ![]() | 10,648 | ||||||||||
100 | ![]() | General Electric Capital Corp. | ![]() | 4.25 | ![]() | 12/01/10 | ![]() | 96,688 | ||||||||||
215 | ![]() | General Electric Capital Corp. (Series MTNA) | ![]() | 6.75 | ![]() | 03/15/32 | ![]() | 250,506 | ||||||||||
![]() | ![]() | ![]() | ![]() | 1,232,070 | ||||||||||||||
![]() | Food Retail (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
185 | ![]() | Kroger Co. | ![]() | 7.50 | ![]() | 04/01/31 | ![]() | 207,124 | ||||||||||
![]() | Food: Major Diversified (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
60 | ![]() | Conagra Foods, Inc. | ![]() | 7.00 | ![]() | 10/01/28 | ![]() | 63,414 | ||||||||||
65 | ![]() | Conagra, Inc. | ![]() | 8.25 | ![]() | 09/15/30 | ![]() | 78,274 | ||||||||||
85 | ![]() | Heinz (H.J.) Co. – 144A** | ![]() | 6.428 | ![]() | 12/01/08 | ![]() | 87,535 | ||||||||||
![]() | ![]() | ![]() | ![]() | 229,223 | ||||||||||||||
![]() | Gas Distributors (0.2%) | ![]() | ![]() | ![]() | ||||||||||||||
90 | ![]() | NiSource Finance Corp. | ![]() | 4.95 | † | ![]() | 11/23/09 | ![]() | 90,385 | |||||||||
120 | ![]() | Ras Laffan Liquid Natural Gas Co. Ltd. – 144A** (Qatar) | ![]() | 8.294 | ![]() | 03/15/14 | ![]() | 137,865 | ||||||||||
90 | ![]() | Sempra Energy | ![]() | 4.621 | ![]() | 05/17/07 | ![]() | 89,428 | ||||||||||
![]() | ![]() | ![]() | ![]() | 317,678 | ||||||||||||||
![]() | Home Furnishings (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
95 | ![]() | Mohawk Industries Inc. | ![]() | 6.125 | ![]() | 01/15/16 | ![]() | 95,700 | ||||||||||
85 | ![]() | Mohawk Industries, Inc. (Series D) | ![]() | 7.20 | ![]() | 04/15/12 | ![]() | 90,111 | ||||||||||
![]() | ![]() | ![]() | ![]() | 185,811 | ||||||||||||||
![]() | Hotels/Resorts/Cruiselines (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
120 | ![]() | Hyatt Equities LLC – 144A** | ![]() | 6.875 | ![]() | 06/15/07 | ![]() | 122,039 | ||||||||||
![]() | Household/Personal Care (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
165 | ![]() | Clorox Co. (The) | ![]() | 4.614 | † | ![]() | 12/14/07 | ![]() | 165,387 | |||||||||
![]() | Industrial Conglomerates (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
95 | ![]() | Textron Financial Corp. | ![]() | 4.125 | ![]() | 03/03/08 | ![]() | 93,463 | ||||||||||
90 | ![]() | Textron Financial Corp. | ![]() | 5.125 | ![]() | 02/03/11 | ![]() | 89,969 | ||||||||||
![]() | ![]() | ![]() | ![]() | 183,432 | ||||||||||||||
![]() |
See Notes to Financial Statements
15
Morgan Stanley Balanced Growth Fund
Portfolio of Investments January 31, 2006 continued
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
PRINCIPAL AMOUNT IN THOUSANDS | ![]() | ![]() | COUPON RATE | ![]() | MATURITY DATE | ![]() | VALUE | |||||||||||
![]() | Insurance Brokers/Services (0.3%) | ![]() | ![]() | ![]() | ||||||||||||||
$ | 355 | ![]() | Farmers Exchange Capital – 144A** | ![]() | 7.05 | % | ![]() | 07/15/28 | ![]() | $ | 370,568 | |||||||
240 | ![]() | Marsh & McLennan Companies, Inc. | ![]() | 5.375 | ![]() | 07/15/14 | ![]() | 234,583 | ||||||||||
![]() | ![]() | ![]() | ![]() | 605,151 | ||||||||||||||
![]() | Investment Banks/Brokers (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
65 | ![]() | Goldman Sachs Group Inc. (The) | ![]() | 5.25 | ![]() | 10/15/13 | ![]() | 64,421 | ||||||||||
115 | ![]() | Goldman Sachs Group Inc. (The) | ![]() | 6.60 | ![]() | 01/15/12 | ![]() | 122,779 | ||||||||||
![]() | ![]() | ![]() | ![]() | 187,200 | ||||||||||||||
![]() | Major Banks (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
50 | ![]() | Bank of New York Co., Inc. (The) | ![]() | 5.20 | ![]() | 07/01/07 | ![]() | 50,149 | ||||||||||
65 | ![]() | HSBC Finance Corp. | ![]() | 6.75 | ![]() | 05/15/11 | ![]() | 69,445 | ||||||||||
![]() | ![]() | ![]() | ![]() | 119,594 | ||||||||||||||
![]() | Major Telecommunications (0.5%) | ![]() | ![]() | ![]() | ||||||||||||||
165 | ![]() | Deutsche Telekom International Finance Corp. NV (Netherlands) | ![]() | 8.25 | ![]() | 06/15/30 | ![]() | 206,456 | ||||||||||
155 | ![]() | France Telecom S.A. (France) | ![]() | 8.75 | ![]() | 03/01/31 | ![]() | 203,162 | ||||||||||
95 | ![]() | SBC Communications, Inc. | ![]() | 6.15 | ![]() | 09/15/34 | ![]() | 93,845 | ||||||||||
40 | ![]() | Sprint Capital Corp. | ![]() | 8.75 | ![]() | 03/15/32 | ![]() | 52,466 | ||||||||||
85 | ![]() | Telecom Italia Capital SA (Luxembourg) | ![]() | 4.00 | ![]() | 11/15/08 | ![]() | 82,336 | ||||||||||
125 | ![]() | Telecom Italia Capital SA (Luxembourg) | ![]() | 4.00 | ![]() | 01/15/10 | ![]() | 118,850 | ||||||||||
275 | ![]() | Verizon New England Inc. | ![]() | 6.50 | ![]() | 09/15/11 | ![]() | 282,914 | ||||||||||
![]() | ![]() | ![]() | ![]() | 1,040,029 | ||||||||||||||
![]() | Managed Health Care (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
100 | ![]() | WellPoint Health Networks Inc. | ![]() | 6.375 | ![]() | 06/15/06 | ![]() | 100,523 | ||||||||||
30 | ![]() | WellPoint Inc. | ![]() | 3.75 | ![]() | 12/14/07 | ![]() | 29,314 | ||||||||||
![]() | ![]() | ![]() | ![]() | 129,837 | ||||||||||||||
![]() | Media Conglomerates (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
60 | ![]() | News America Holdings, Inc. | ![]() | 7.75 | ![]() | 02/01/24 | ![]() | 66,833 | ||||||||||
20 | ![]() | News America Inc. | ![]() | 7.125 | ![]() | 04/08/28 | ![]() | 21,242 | ||||||||||
30 | ![]() | News America Inc. | ![]() | 7.28 | ![]() | 06/30/28 | ![]() | 32,355 | ||||||||||
30 | ![]() | News America Inc. – 144A** | ![]() | 6.40 | ![]() | 12/15/35 | ![]() | 29,973 | ||||||||||
![]() | ![]() | ![]() | ![]() | 150,403 | ||||||||||||||
![]() | Medical Specialties (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
155 | ![]() | Baxter Finco BV – 144A** (Netherlands) | ![]() | 4.75 | ![]() | 10/15/10 | ![]() | 152,373 | ||||||||||
![]() |
See Notes to Financial Statements
16
Morgan Stanley Balanced Growth Fund
Portfolio of Investments January 31, 2006 continued
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
PRINCIPAL AMOUNT IN THOUSANDS | ![]() | ![]() | COUPON RATE | ![]() | MATURITY DATE | ![]() | VALUE | |||||||||||
![]() | Motor Vehicles (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
$ | 105 | ![]() | DaimlerChrysler North American Holdings Co. | ![]() | 8.50 | % | ![]() | 01/18/31 | ![]() | $ | 127,684 | |||||||
![]() | Multi-Line Insurance (0.3%) | ![]() | ![]() | ![]() | ||||||||||||||
355 | ![]() | AIG Sun America Global Finance VI – 144A** | ![]() | 6.30 | ![]() | 05/10/11 | ![]() | 375,343 | ||||||||||
170 | ![]() | American General Finance Corp. (Series MTNH) | ![]() | 4.625 | ![]() | 09/01/10 | ![]() | 165,741 | ||||||||||
20 | ![]() | American General Finance Corp. (Series MTNI) | ![]() | 4.625 | ![]() | 05/15/09 | ![]() | 19,791 | ||||||||||
40 | ![]() | AXA Financial Inc. | ![]() | 6.50 | ![]() | 04/01/08 | ![]() | 41,351 | ||||||||||
50 | ![]() | Hartford Financial Services Group, Inc. (The) | ![]() | 2.375 | ![]() | 06/01/06 | ![]() | 49,599 | ||||||||||
55 | ![]() | International Lease Finance Corp. | ![]() | 3.75 | ![]() | 08/01/07 | ![]() | 53,955 | ||||||||||
![]() | ![]() | ![]() | ![]() | 705,780 | ||||||||||||||
![]() | Other Metals/Minerals (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
125 | ![]() | Brascan Corp. (Canada) | ![]() | 7.125 | ![]() | 06/15/12 | ![]() | 135,399 | ||||||||||
![]() | Property – Casualty Insurers (0.4%) | ![]() | ![]() | ![]() | ||||||||||||||
200 | ![]() | Mantis Reef Ltd. – 144A** (Australia) | ![]() | 4.692 | ![]() | 11/14/08 | ![]() | 196,177 | ||||||||||
115 | ![]() | Platinum Underwriters Finance Holdings, Ltd. | ![]() | 6.371 | ![]() | 11/16/07 | ![]() | 115,168 | ||||||||||
90 | ![]() | Platinum Underwriters Finance Holdings, Ltd. | ![]() | 7.50 | ![]() | 06/01/17 | ![]() | 92,019 | ||||||||||
155 | ![]() | St. Paul Travelers Companies, Inc. (The) | ![]() | 5.01 | ![]() | 08/16/07 | ![]() | 154,616 | ||||||||||
210 | ![]() | XLLIAC Global Funding – 144A** | ![]() | 4.80 | ![]() | 08/10/10 | ![]() | 206,698 | ||||||||||
![]() | ![]() | ![]() | ![]() | 764,678 | ||||||||||||||
![]() | Publishing: Newspapers (0.0%) | ![]() | ![]() | ![]() | ||||||||||||||
105 | ![]() | Knight Ridder, Inc. | ![]() | 5.75 | ![]() | 09/01/17 | ![]() | 90,100 | ||||||||||
![]() | Pulp & Paper (0.0%) | ![]() | ![]() | ![]() | ||||||||||||||
95 | ![]() | Sappi Papier Holding AG – 144A** (Austria) | ![]() | 6.75 | ![]() | 06/15/12 | ![]() | 89,135 | ||||||||||
![]() | Railroads (0.2%) | ![]() | ![]() | ![]() | ||||||||||||||
70 | ![]() | Burlington North Santa Fe Railway Co. | ![]() | 4.575 | ![]() | 01/15/21 | ![]() | 67,408 | ||||||||||
110 | ![]() | Burlington North Santa Fe Railway Co. | ![]() | 6.125 | ![]() | 03/15/09 | ![]() | 113,430 | ||||||||||
85 | ![]() | Norfolk Southern Corp. | ![]() | 7.35 | ![]() | 05/15/07 | ![]() | 87,518 | ||||||||||
60 | ![]() | Union Pacific Corp. | ![]() | 6.625 | ![]() | 02/01/08 | ![]() | 61,800 | ||||||||||
55 | ![]() | Union Pacific Corp. | ![]() | 6.65 | ![]() | 01/15/11 | ![]() | 58,350 | ||||||||||
40 | ![]() | Union Pacific Corp. (Series MTNE) | ![]() | 6.79 | ![]() | 11/09/07 | ![]() | 41,183 | ||||||||||
![]() | ![]() | ![]() | ![]() | 429,689 | ||||||||||||||
![]() |
See Notes to Financial Statements
17
Morgan Stanley Balanced Growth Fund
Portfolio of Investments January 31, 2006 continued
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
PRINCIPAL AMOUNT IN THOUSANDS | ![]() | ![]() | COUPON RATE | ![]() | MATURITY DATE | ![]() | VALUE | |||||||||||
![]() | Real Estate Development (0.2%) | ![]() | ![]() | ![]() | ||||||||||||||
$ | 326 | ![]() | World Financial Properties – 144A** | ![]() | 6.91 | % | ![]() | 09/01/13 | ![]() | $ | 342,131 | |||||||
![]() | Real Estate Investment Trusts (0.0%) | ![]() | ![]() | ![]() | ||||||||||||||
10 | ![]() | EOP Operating L.P. | ![]() | 4.75 | ![]() | 03/15/14 | ![]() | 9,429 | ||||||||||
80 | ![]() | EOP Operating L.P. | ![]() | 7.875 | ![]() | 07/15/31 | ![]() | 93,206 | ||||||||||
![]() | ![]() | ![]() | ![]() | 102,635 | ||||||||||||||
![]() | Regional Banks (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
240 | ![]() | Marshall & Ilsley Bank (Series BKNT) | ![]() | 3.80 | ![]() | 02/08/08 | ![]() | 235,499 | ||||||||||
![]() | Savings Banks (0.3%) | ![]() | ![]() | ![]() | ||||||||||||||
85 | ![]() | Household Finance Corp. | ![]() | 4.125 | ![]() | 12/15/08 | ![]() | 82,875 | ||||||||||
105 | ![]() | Household Finance Corp. | ![]() | 5.875 | ![]() | 02/01/09 | ![]() | 107,308 | ||||||||||
45 | ![]() | Household Finance Corp. | ![]() | 6.375 | ![]() | 10/15/11 | ![]() | 47,444 | ||||||||||
115 | ![]() | Household Finance Corp. | ![]() | 6.40 | ![]() | 06/17/08 | ![]() | 118,331 | ||||||||||
100 | ![]() | Sovereign Bank (Series CD) | ![]() | 4.00 | ![]() | 02/01/08 | ![]() | 98,170 | ||||||||||
95 | ![]() | Washington Mutual Bank | ![]() | 5.50 | ![]() | 01/15/13 | ![]() | 95,248 | ||||||||||
115 | ![]() | Washington Mutual Inc. | ![]() | 8.25 | ![]() | 04/01/10 | ![]() | 127,342 | ||||||||||
![]() | ![]() | ![]() | ![]() | 676,718 | ||||||||||||||
![]() | Trucks/Construction/Farm Machinery (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
40 | ![]() | Caterpillar Financial Services Corp. (Series MTNF) | ![]() | 3.625 | ![]() | 11/15/07 | ![]() | 39,101 | ||||||||||
185 | ![]() | Caterpillar Financial Services Corp. (Series MTNF) | ![]() | 4.44 | † | ![]() | 08/20/07 | ![]() | 185,422 | |||||||||
![]() | ![]() | ![]() | ![]() | 224,523 | ||||||||||||||
![]() | Wireless Telecommunications (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
150 | ![]() | Vodafone Group PLC (United Kingdom) | ![]() | 4.611 | † | ![]() | 12/28/07 | ![]() | 150,045 | |||||||||
![]() | Total Corporate Bonds (Cost $15,073,921) | ![]() | 15,190,492 | |||||||||||||||
![]() | Foreign Government Obligations (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
60 | ![]() | United Mexican States (Mexico) | ![]() | 8.375 | ![]() | 01/14/11 | ![]() | 68,250 | ||||||||||
20 | ![]() | United Mexican States (Mexico) (Series MTN) | ![]() | 8.30 | ![]() | 08/15/31 | ![]() | 25,250 | ||||||||||
![]() | Total Foreign Government Obligations (Cost $91,824) | ![]() | 93,500 | |||||||||||||||
![]() |
See Notes to Financial Statements
18
Morgan Stanley Balanced Growth Fund
Portfolio of Investments January 31, 2006 continued
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
PRINCIPAL AMOUNT IN THOUSANDS | ![]() | ![]() | COUPON RATE | ![]() | MATURITY DATE | ![]() | VALUE | |||||||||||
![]() | U.S Government Obligations (12.6%) | ![]() | ![]() | ![]() | ||||||||||||||
![]() | U.S. Treasury Bonds | ![]() | ![]() | ![]() | ||||||||||||||
$ | 225 | ![]() | ![]() | 6.375 | % | ![]() | 08/15/27 | ![]() | $ | 274,298 | ||||||||
4,200 | ![]() | ![]() | 7.625 | ![]() | 02/15/25 | ![]() | 5,704,125 | |||||||||||
3,705 | ![]() | ![]() | 8.125 | ![]() | 08/15/19 – | ![]() | ||||||||||||
![]() | ![]() | ![]() | 08/15/21 | ![]() | 5,044,554 | |||||||||||||
![]() | U.S. Treasury Notes | ![]() | ![]() | ![]() | ||||||||||||||
280 | ![]() | ![]() | 1.625 | ![]() | 02/28/06 | ![]() | 279,530 | |||||||||||
2,400 | ![]() | ![]() | 3.875 | ![]() | 02/15/13 | ![]() | 2,306,158 | |||||||||||
9,855 | ![]() | ![]() | 4.25 | ![]() | 08/15/13 – | ![]() | ||||||||||||
![]() | ![]() | ![]() | 11/15/13 | ![]() | 9,674,668 | |||||||||||||
120 | ![]() | ![]() | 4.625 | ![]() | 05/15/06 | ![]() | 120,066 | |||||||||||
4,655 | ![]() | U.S. Treasury Strips | ![]() | 0.00 | ![]() | 02/15/25 – | ![]() | |||||||||||
![]() | ![]() | ![]() | 02/15/27 | ![]() | 1,858,913 | |||||||||||||
![]() | Total U.S. Government Obligations (Cost $24,844,295) | ![]() | 25,262,312 | |||||||||||||||
![]() | Mortgage-Backed Securities (3.6%) | ![]() | ![]() | ![]() | ||||||||||||||
76 | ![]() | Federal Home Loan Mortgage Corp. Gold | ![]() | 7.50 | ![]() | 06/01/11 – | ![]() | |||||||||||
![]() | ![]() | ![]() | 08/01/11 | ![]() | 79,379 | |||||||||||||
![]() | Federal National Mortgage Assoc. | ![]() | ![]() | ![]() | ||||||||||||||
235 | ![]() | ![]() | 6.50 | ![]() | 07/01/32 | ![]() | 241,666 | |||||||||||
2,821 | ![]() | ![]() | 7.00 | ![]() | 03/01/12 – | ![]() | ||||||||||||
![]() | ![]() | ![]() | 10/01/35 | ![]() | 2,935,441 | |||||||||||||
632 | ![]() | ![]() | 7.50 | ![]() | 08/01/25 – | ![]() | ||||||||||||
![]() | ![]() | ![]() | 07/01/32 | ![]() | 662,842 | |||||||||||||
359 | ![]() | ![]() | 8.00 | ![]() | 05/01/24 – | ![]() | ||||||||||||
![]() | ![]() | ![]() | 02/01/32 | ![]() | 384,125 | |||||||||||||
16 | ![]() | ![]() | 9.50 | ![]() | 12/01/20 | ![]() | 17,445 | |||||||||||
![]() | Federal National Mortgage Assoc. (ARM) | ![]() | ![]() | ![]() | ||||||||||||||
1,148 | ![]() | ![]() | 1.905 | ![]() | 01/01/36 | ![]() | 1,179,725 | |||||||||||
291 | ![]() | ![]() | 4.603 | ![]() | 07/01/33 | ![]() | 291,073 | |||||||||||
1,173 | ![]() | ![]() | 5.002 | ![]() | 01/01/36 | ![]() | 1,205,786 | |||||||||||
![]() | Government National Mortgage Assoc. | ![]() | ![]() | ![]() | ||||||||||||||
93 | ![]() | ![]() | 7.50 | ![]() | 09/15/25 – | ![]() | ||||||||||||
![]() | ![]() | ![]() | 06/15/27 | ![]() | 98,492 | |||||||||||||
112 | ![]() | ![]() | 8.00 | ![]() | 04/15/26 – | ![]() | ||||||||||||
![]() | ![]() | ![]() | 08/15/26 | ![]() | 120,635 | |||||||||||||
![]() | Total Mortgage-Backed Securities (Cost $7,200,826) | ![]() | 7,216,609 | |||||||||||||||
![]() |
See Notes to Financial Statements
19
Morgan Stanley Balanced Growth Fund
Portfolio of Investments January 31, 2006 continued
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
PRINCIPAL AMOUNT IN THOUSANDS | ![]() | ![]() | COUPON RATE | ![]() | MATURITY DATE | ![]() | VALUE | |||||||||||
![]() | Asset-Backed Securities (5.1%) | ![]() | ![]() | ![]() | ||||||||||||||
![]() | Finance/Rental/Leasing | ![]() | ![]() | ![]() | ||||||||||||||
$ | 300 | ![]() | American Express Credit Account Master Trust 2002-3 A | ![]() | 4.58 | †% | ![]() | 12/15/09 | ![]() | $ | 300,591 | |||||||
600 | ![]() | American Express Credit Account Master Trust 2003-3 A | ![]() | 4.58 | † | ![]() | 11/15/10 | ![]() | 601,700 | |||||||||
350 | ![]() | Banc of America Securities Auto Trust 2005-WF1 A3 | ![]() | 3.99 | ![]() | 08/18/09 | ![]() | 345,624 | ||||||||||
175 | ![]() | Capital Auto Receivables Asset Trust 2004-2 A | ![]() | 3.35 | ![]() | 02/15/08 | ![]() | 172,906 | ||||||||||
350 | ![]() | Capital Auto Receivables Asset Trust 2005-1 A4 | ![]() | 4.05 | ![]() | 07/15/09 | ![]() | 346,062 | ||||||||||
300 | ![]() | Caterpillar Financial Asset Trust 2005-A A3 | ![]() | 3.90 | ![]() | 02/25/09 | ![]() | 296,343 | ||||||||||
335 | ![]() | Chase Credit Card Master Trust 2001-4 A | ![]() | 5.50 | ![]() | 11/17/08 | ![]() | 336,123 | ||||||||||
141 | ![]() | CIT Equipment Collateral 2004-EF1 A3 | ![]() | 3.50 | ![]() | 09/20/08 | ![]() | 138,722 | ||||||||||
225 | ![]() | CNH Equipment Trust 2005-A A3 | ![]() | 4.02 | ![]() | 04/15/09 | ![]() | 222,479 | ||||||||||
450 | ![]() | CNH Equipment Trust 2005-B A3 | ![]() | 4.27 | ![]() | 01/15/10 | ![]() | 444,968 | ||||||||||
275 | ![]() | Daimler Chrysler Auto Trust 2005-B A3 | ![]() | 4.04 | ![]() | 09/08/09 | ![]() | 271,910 | ||||||||||
225 | ![]() | Ford Credit Auto Owner Trust 2005-B A3 | ![]() | 4.17 | ![]() | 01/15/09 | ![]() | 223,216 | ||||||||||
250 | ![]() | GE Dealer Floorplan Master Note Trust 2004-1 A | ![]() | 4.54 | † | ![]() | 07/20/08 | ![]() | 250,165 | |||||||||
375 | ![]() | GE Equipment Small Ticket LLC - -2005-2A | ![]() | 4.88 | ![]() | 10/22/09 | ![]() | 374,658 | ||||||||||
150 | ![]() | Harley Davidson Motorcycle Trust 2005-3 A2 | ![]() | 4.41 | ![]() | 06/15/12 | ![]() | 148,540 | ||||||||||
400 | ![]() | Harley-Davidson Motorcycle Trust 2005-1 A2 | ![]() | 3.76 | ![]() | 12/17/12 | ![]() | 391,974 | ||||||||||
250 | ![]() | Harley-Davidson Motorcycle Trust 2005-2 A2 | ![]() | 4.07 | ![]() | 02/15/12 | ![]() | 246,000 | ||||||||||
225 | ![]() | Hertz Vehicle Financing LLC 2005-2A | ![]() | 4.93 | ![]() | 02/25/10 | ![]() | 224,578 | ||||||||||
200 | ![]() | Honda Auto Receivables Owner Trust 2005-2 A3 | ![]() | 3.93 | ![]() | 01/15/09 | ![]() | 197,672 | ||||||||||
325 | ![]() | Honda Auto Receivables Owner Trust 2005-3 A3 | ![]() | 3.87 | ![]() | 04/20/09 | ![]() | 320,272 | ||||||||||
300 | ![]() | Honda Auto Receivables Owner Trust 2005-6 A3 | ![]() | 4.85 | ![]() | 10/19/09 | ![]() | 299,923 | ||||||||||
225 | ![]() | Hyundai Auto Receivables Trust 2005-A A3 | ![]() | 3.98 | ![]() | 11/16/09 | ![]() | 221,760 | ||||||||||
150 | ![]() | MBNA Master Credit Card Trust 1999-B A | ![]() | 5.90 | ![]() | 08/15/11 | ![]() | 154,516 | ||||||||||
400 | ![]() | Merrill Auto Trust Securitization 2005-1 A3 | ![]() | 4.10 | ![]() | 08/25/09 | ![]() | 395,229 | ||||||||||
275 | ![]() | National City Auto Receivables Trust 2004-A A4 | ![]() | 2.88 | ![]() | 05/15/11 | ![]() | 265,041 | ||||||||||
400 | ![]() | Nissan Auto Receivables Owner Trust 2005-B A3 | ![]() | 3.99 | ![]() | 07/15/09 | ![]() | 395,270 | ||||||||||
75 | ![]() | TXU Electric Delivery Transition Bond Co. LLC 2004-1 A2 | ![]() | 4.81 | ![]() | 11/17/14 | ![]() | 74,045 | ||||||||||
450 | ![]() | USAA Auto Owner Trust 2004-2 A-4 | ![]() | 3.58 | ![]() | 02/15/11 | ![]() | 441,023 | ||||||||||
400 | ![]() | USAA Auto Owner Trust 2004-3 A3 | ![]() | 3.16 | ![]() | 02/17/09 | ![]() | 394,720 | ||||||||||
275 | ![]() | USAA Auto Owner Trust 2005-1 A3 | ![]() | 3.90 | ![]() | 07/15/09 | ![]() | 271,865 | ||||||||||
250 | ![]() | Volkswagen Auto Lease Trust 2005-A A3 | ![]() | 3.82 | ![]() | 05/20/08 | ![]() | 247,595 | ||||||||||
375 | ![]() | Volkswagen Auto Loan Enhanced Trust | ![]() | 4.80 | ![]() | 07/20/09 | ![]() | 374,451 | ||||||||||
150 | ![]() | Wachovia Auto Owner Trust 2004-B A3 | ![]() | 2.91 | ![]() | 04/20/09 | ![]() | 147,941 | ||||||||||
200 | ![]() | Wachovia Auto Owner Trust 2005-A A3 | ![]() | 4.06 | ![]() | 09/21/09 | ![]() | 197,758 | ||||||||||
300 | ![]() | Wachovia Auto Owner Trust 2005-B A3 | ![]() | 4.79 | ![]() | 04/20/10 | ![]() | 299,548 | ||||||||||
150 | ![]() | World Omni Auto Receivables Trust 2004-A A3 | ![]() | 3.29 | ![]() | 11/12/08 | ![]() | 148,490 | ||||||||||
![]() | Total Asset-Backed Securities (Cost $10,262,772) | ![]() | 10,183,678 | |||||||||||||||
![]() |
See Notes to Financial Statements
20
Morgan Stanley Balanced Growth Fund
Portfolio of Investments January 31, 2006 continued
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
PRINCIPAL AMOUNT IN THOUSANDS | ![]() | ![]() | COUPON RATE | ![]() | MATURITY DATE | ![]() | VALUE | |||||||||||
![]() | Collateralized Mortgage Obligations (0.3%) | ![]() | ![]() | ![]() | ||||||||||||||
$ | 412 | ![]() | Federal Home Loan Mortgage Corp. Whole Loan 2005-S001 2A2 | ![]() | 4.68 | †% | ![]() | 09/25/45 | ![]() | $ | 412,784 | |||||||
759 | ![]() | Federal National Mortgage Assoc. 2005-68 XI (IO) | ![]() | 6.00 | ![]() | 08/25/35 | ![]() | 233,042 | ||||||||||
![]() | Total Collateralized Mortgage Obligations (Cost $545,712) | ![]() | 645,826 | |||||||||||||||
![]() | Short-Term Investments (3.2%) | ![]() | ![]() | ![]() | ||||||||||||||
![]() | U.S. Government Obligation (a) (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
250 | ![]() | U.S. Treasury Bill*** (Cost $245,207) | ![]() | 4.26 | ![]() | 07/13/06 | ![]() | 245,208 | ||||||||||
![]() | Repurchase Agreement (3.1%) | ![]() | ![]() | ![]() | ||||||||||||||
6,192 | ![]() | Joint repurchase agreement account (dated 01/31/06; proceeds $6,192,765) (b) (Cost $6,192,000) | ![]() | 4.445 | ![]() | 02/01/06 | ![]() | 6,192,000 | ||||||||||
![]() | Total Short-Term Investments (Cost $6,437,207) | ![]() | 6,437,208 | |||||||||||||||
![]() | Total Investments | ![]() | ||||||||||||||||
![]() | (Cost$172,774,267)(c)(d) | ![]() | 99.9 | % | ![]() | 199,764,135 | ||||||||||||
![]() | Other Assets in Excess of Liabilities | ![]() | 0.1 | ![]() | 268,593 | |||||||||||||
![]() | Net Assets | ![]() | 100.0 | % | ![]() | $ | 200,032,728 | |||||||||||
![]() |
![]() |
![]() | ADR | American Depositary Receipt. |
![]() | ARM | Adjustable Rate Mortgage. |
![]() | IO | Interest Only security. |
![]() | * | Non-income producing security. |
![]() | ** | Resale is restricted to qualified institutional investors. |
![]() | *** | A portion of this security has been physically segregated in connection with open futures contracts in the amount of $38,850. |
![]() | † | Floating rate security; rate shown is the rate in effect at January 31, 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 $11,583,999 in connection with open futures contracts. |
![]() | (d) | The aggregate cost for federal income tax purposes is $174,480,268. |
![]() | The aggregate gross unrealized appreciation is $29,837,579 and the aggregate gross unrealized depreciation is $4,553,712, resulting in net unrealized appreciation of $25,283,867. |
See Notes to Financial Statements
21
Morgan Stanley Balanced Growth Fund
Portfolio of Investments January 31, 2006 continued
Futures Contracts Open at January 31, 2006:
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ||||||||||||||||||||
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | |
NUMBER OF CONTRACTS | ![]() | LONG/SHORT | ![]() | DESCRIPTION, DELIVERY MONTH AND YEAR | ![]() | UNDERLYING FACE AMOUNT AT VALUE | ![]() | UNREALIZED APPRECIATION/ (DEPRECIATION) | ||||||||||||
18 | ![]() | Short | ![]() | U.S. Treasury Bonds 20 Year, March 2006 | ![]() | $ | (2,031,188 | ) | ![]() | $ | (14,426 | ) | ||||||||
38 | ![]() | Short | ![]() | U.S. Treasury Notes 2 Year, March 2006 | ![]() | (7,784,063 | ) | ![]() | 16,050 | |||||||||||
12 | ![]() | Short | ![]() | U.S. Treasury Notes 5 Year, March 2006 | ![]() | (1,268,813 | ) | ![]() | 108 | |||||||||||
2 | ![]() | Short | ![]() | U.S. Treasury Notes 5 Year, June 2006 | ![]() | (211,375 | ) | ![]() | 174 | |||||||||||
3 | ![]() | Short | ![]() | U.S. Treasury Notes 10 Year, March 2006 | ![]() | (325,313 | ) | ![]() | (8 | ) | ||||||||||
![]() | ![]() | Net Unrealized Appreciation | ![]() | $ | 1,898 | |||||||||||||||
![]() | ||||||||||||||||||||
![]() |
See Notes to Financial Statements
22
Morgan Stanley Balanced Growth Fund
Financial Statements
Statement of Assets and Liabilities
January 31, 2006
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
Assets: | ||||||
Investments in securities, at value (cost $172,774,267) | ![]() | $199,764,135 | ||||
Receivable for: | ![]() | |||||
Interest | ![]() | 780,503 | ||||
Investments sold | ![]() | 638,642 | ||||
Shares of beneficial interest sold | ![]() | 216,902 | ||||
Dividends | ![]() | 119,879 | ||||
Prepaid expenses and other assets | ![]() | 38,949 | ||||
Total Assets | ![]() | 201,559,010 | ||||
Liabilities: | ![]() | |||||
Payable for: | ![]() | |||||
Investments purchased | ![]() | 1,013,958 | ||||
Shares of beneficial interest redeemed | ![]() | 180,599 | ||||
Distribution fee | ![]() | 154,034 | ||||
Investment advisory fee | ![]() | 91,642 | ||||
Administration fee | ![]() | 14,099 | ||||
Transfer agent fee | ![]() | 5,411 | ||||
Variation margin | ![]() | 802 | ||||
Accrued expenses and other payables | ![]() | 65,737 | ||||
Total Liabilities | ![]() | 1,526,282 | ||||
Net Assets | ![]() | $200,032,728 | ||||
Composition of Net Assets: | ![]() | |||||
Paid-in-capital | ![]() | $168,794,538 | ||||
Net unrealized appreciation | ![]() | 26,991,766 | ||||
Accumulated undistributed net investment income | ![]() | 77,401 | ||||
Accumulated undistributed net realized gain | ![]() | 4,169,023 | ||||
Net Assets | ![]() | $200,032,728 | ||||
Class A Shares: | ![]() | |||||
Net Assets | ![]() | $33,216,508 | ||||
Shares Outstanding (unlimited authorized, $.01 par value) | ![]() | 2,279,990 | ||||
Net Asset Value Per Share | ![]() | $14.57 | ||||
Maximum Offering Price Per Share, (net asset value plus 5.54% of net asset value) | ![]() | $15.38 | ||||
Class B Shares: | ![]() | |||||
Net Assets | ![]() | $84,567,622 | ||||
Shares Outstanding (unlimited authorized, $.01 par value) | ![]() | 5,806,573 | ||||
Net Asset Value Per Share | ![]() | 14.56 | ||||
Class C Shares: | ![]() | |||||
Net Assets | ![]() | $81,339,493 | ||||
Shares Outstanding (unlimited authorized, $.01 par value) | ![]() | 5,582,638 | ||||
Net Asset Value Per Share | ![]() | $14.57 | ||||
Class D Shares: | ![]() | |||||
Net Assets | ![]() | $909,105 | ||||
Shares Outstanding (unlimited authorized, $.01 par value) | ![]() | 62,423 | ||||
Net Asset Value Per Share | ![]() | $14.56 | ||||
![]() |
See Notes to Financial Statements
23
Morgan Stanley Balanced Growth Fund
Financial Statements continued
Statement of Operations
For the year ended January 31, 2006
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
Net Investment Income: | ||||||
Income | ||||||
Interest | ![]() | $ | 2,967,093 | |||
Dividends (net of $75,701 foreign withholding tax) | ![]() | 2,698,965 | ||||
Total Income | ![]() | 5,666,058 | ||||
Expenses | ![]() | |||||
Investment advisory fee | ![]() | 1,042,870 | ||||
Distribution fee (Class A shares) | ![]() | 57,722 | ||||
Distribution fee (Class B shares) | ![]() | 941,337 | ||||
Distribution fee (Class C shares) | ![]() | 810,976 | ||||
Transfer agent fees and expenses | ![]() | 281,186 | ||||
Administration fee | ![]() | 160,442 | ||||
Professional fees | ![]() | 78,471 | ||||
Shareholder reports and notices | ![]() | 75,481 | ||||
Registration fees | ![]() | 53,381 | ||||
Custodian fees | ![]() | 53,251 | ||||
Trustees' fees and expenses | ![]() | 2,410 | ||||
Other | ![]() | 30,022 | ||||
Total Expenses | ![]() | 3,587,549 | ||||
Net Investment Income | ![]() | 2,078,509 | ||||
Net Realized and Unrealized Gain (Loss): | ![]() | |||||
Net Realized Gain (Loss) on: | ![]() | |||||
Investments | ![]() | 19,244,255 | ||||
Futures contracts | ![]() | (486,067 | ) | |||
Net Realized Gain | ![]() | 18,758,188 | ||||
Net Change in Unrealized Appreciation/Depreciation on: | ![]() | |||||
Investments | ![]() | (2,171,088 | ) | |||
Futures contracts | ![]() | 339,805 | ||||
Net Depreciation | ![]() | (1,831,283 | ) | |||
Net Gain | ![]() | 16,926,905 | ||||
Net Increase | ![]() | $ | 19,005,414 | |||
![]() |
See Notes to Financial Statements
24
Morgan Stanley Balanced Growth Fund
Financial Statements continued
Statement of Changes in Net Assets
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
![]() | FOR THE YEAR ENDED JANUARY 31, 2006 | ![]() | FOR THE YEAR ENDED JANUARY 31, 2005 | |||||||
Increase (Decrease) in Net Assets: | ![]() | ![]() | ||||||||
Operations: | ![]() | ![]() | ||||||||
Net investment income | ![]() | $ | 2,078,509 | ![]() | $ | 1,797,333 | ||||
Net realized gain | ![]() | 18,758,188 | ![]() | 13,637,911 | ||||||
Net change in unrealized appreciation/depreciation | ![]() | (1,831,283 | ) | ![]() | (1,971,750 | ) | ||||
Net Increase | ![]() | 19,005,414 | ![]() | 13,463,494 | ||||||
Dividends and Distributions to Shareholders from: | ![]() | ![]() | ||||||||
Net investment income | ![]() | ![]() | ||||||||
Class A shares | ![]() | (452,694 | ) | ![]() | (115,267 | ) | ||||
Class B shares | ![]() | (1,020,328 | ) | ![]() | (1,026,328 | ) | ||||
Class C shares | ![]() | (914,587 | ) | ![]() | (744,083 | ) | ||||
Class D shares | ![]() | (19,399 | ) | ![]() | (19,494 | ) | ||||
Net realized gain | ![]() | ![]() | ||||||||
Class A shares | ![]() | (782,903 | ) | ![]() | — | |||||
Class B shares | ![]() | (2,185,194 | ) | ![]() | — | |||||
Class C shares | ![]() | (2,040,106 | ) | ![]() | — | |||||
Class D shares | ![]() | (22,958 | ) | ![]() | — | |||||
Total Dividends and Distributions | ![]() | (7,438,169 | ) | ![]() | (1,905,172 | ) | ||||
Net decrease from transactions in shares of beneficial interest | ![]() | (12,116,316 | ) | ![]() | (18,590,516 | ) | ||||
Net Decrease | ![]() | (549,071 | ) | ![]() | (7,032,194 | ) | ||||
Net Assets: | ![]() | ![]() | ||||||||
Beginning of period | ![]() | 200,581,799 | ![]() | 207,613,993 | ||||||
End of Period (Including accumulated undistributed net investment income of $77,401 and $131,639, respectively) | ![]() | $ | 200,032,728 | ![]() | $ | 200,581,799 | ||||
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See Notes to Financial Statements
25
Morgan Stanley Balanced Growth Fund
Notes to Financial Statements January 31, 2006
1. Organization and Accounting Policies
Morgan Stanley Balanced Growth Fund (the ‘‘Fund’’) is registered under the Investment Company Act of 1940, as amended (the ‘‘Act’’), as a diversified, open-end management investment company. The Fund's investment objective is capital growth with reasonable current income. The Fund was organized as a Massachusetts business trust on November 23, 1994 and commenced operations on March 28, 1995. On July 28, 1997, the Fund converted to a multiple class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within eighteen months, six years and one year, respectively. Class D shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses.
Effective August 29, 2005, the Board of Trustees of the Fund approved the implementation of a 2% redemption fee on Class A shares, Class B shares, Class C shares, and Class D shares, which is paid directly to the Fund, for shares redeemed within seven days of purchase. The redemption fee is designed to protect the Fund and its remaining shareholders from the effects of short-term trading.
The following is a summary of significant accounting policies:
A. Valuation of Investments — (1) an equity portfolio security listed or traded on the New York Stock Exchange (‘‘NYSE’’) or American Stock Exchange or other exchange is valued at its latest sale price prior to the time when assets are valued; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (2) an equity portfolio security listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (3) all other portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market; (4) for equity securities traded on foreign exchanges, the last reported sale price or the latest bid price may be used if there were no sales on a particular day; (5) futures are valued at the latest price published by the commodities exchange on which they trade; (6) when market quotations are not readily available or Morgan Stanley Investment Advisors Inc. (the ‘‘Investment Adviser’’) determines that the latest sale price, the bid price or the mean between the last reported bid and asked price do not reflect a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund’s Trustees. Occasionally, developments affecting the closing prices of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the foreign market on which the securities
26
Morgan Stanley Balanced Growth Fund
Notes to Financial Statements January 31, 2006 continued
trade) and the close of business on the NYSE. If developments occur during such periods that are expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Fund’s Trustees or by the Investment Adviser using a pricing service and/or procedures approved by the Trustees of the Fund; (7) certain portfolio securities may be valued by an outside pricing service approved by the Fund’s Trustees; and (8) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost.
B. Accounting for Investments — Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Dividend income and other distributions are recorded on the ex-dividend date. Discounts are accreted and premiums are amortized over the life of the respective securities. Interest income is accrued daily.
C. Repurchase Agreements — Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other affiliated entities managed by the Investment Adviser, may transfer uninvested cash balances into one or more joint repurchase agreement accounts. These balances are invested in one or more repurchase agreements and are collateralized by cash, U.S. Treasury or federal agency obligations. The Fund may also invest directly with institutions in repurchase agreements. The Fund’s custodian receives the collateral, which is marked-to-market daily to determine that the value of the collateral does not decrease below the repurchase price plus accrued interest.
D. Multiple Class Allocations — Investment income, expenses (other than distribution fees), and realized and unrealized gains and losses are allocated to each class of shares based upon the relative net asset value on the date such items are recognized. Distribution fees are charged directly to the respective class.
E. Futures Contracts — A futures contract is an agreement between two parties to buy and sell financial instruments or contracts based on financial indices at a set price on a future date. Upon entering into such a contract, the Fund is required to pledge to the broker cash, U.S. Government securities or other liquid portfolio securities equal to the minimum initial margin requirements of the applicable futures exchange. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments known as variation margin are recorded by the Fund as unrealized gains and losses. Upon closing of the contract, the Fund realizes a gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
F. Federal Income Tax Policy — It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Accordingly, no federal income tax provision is required.
27
Morgan Stanley Balanced Growth Fund
Notes to Financial Statements January 31, 2006 continued
G. Dividends and Distributions to Shareholders — Dividends and distributions to shareholders are recorded on the ex-dividend date.
H. Use of Estimates — The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates.
2. Investment Advisory/Administration Agreements
Pursuant to an Investment Advisory Agreement, the Fund pays the Investment Adviser an advisory fee, accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined as of the close of each business day: 0.52% to the portion of daily net assets not exceeding $500 million and 0.495% to the portion of daily net assets in excess of $500 million.
Pursuant to Administration Agreement with Morgan Stanley Services Company Inc. (the ‘‘Administrator’’), affiliate of the Investments Adviser, the Fund pays an administration fee, accrued daily and payable monthly, by applying the annual rate of 0.08% to the Fund’s daily net assets.
3. Plan of Distribution
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the ‘‘Distributor’’), an affiliate of the Investment Adviser and Administrator. The Fund has adopted a Plan of Distribution (the ‘‘Plan’’) pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A – up to 0.25% of the average daily net assets of Class A; (ii) Class B – up to 1.0% of the average daily net assets of Class B; and (iii) Class C – up to 1.0% of the average daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the Plan is terminated, the Trustees will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled $2,122,714 at January 31, 2006.
In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily net assets of Class A or Class C, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except that expenses representing a gross sales credit to Morgan Stanley Financial Advisors or other selected broker-dealer representatives may be reimbursed in the subsequent calendar year. For the year ended January 31, 2006, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.24% and 1.0%, respectively.
28
Morgan Stanley Balanced Growth Fund
Notes to Financial Statements January 31, 2006 continued
The Distributor has informed the Fund that for the year ended January 31, 2006, it received contingent deferred sales charges from certain redemptions of the Fund's Class A shares, Class B shares and Class C shares of $4, $196,226 and $3,971 respectively and received $54,073 in front-end sales charges from sales of the Fund's Class A shares. The respective shareholders pay such charges which are not an expense of the Fund.
4. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales, maturities, and prepayments of portfolio securities, excluding short-term investments, for the year ended January 31, 2006 aggregated $100,096,488 and $117,977,863, respectively. Included in the aforementioned are purchases and sales of U.S. Government securities in the amount of $47,623,048 and $51,522,102, respectively. The Fund had purchases and sales of $349,809 and $49,112, respectively, with other Morgan Stanley funds, including a net realized gain of $3,538.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and Distributor, is the Fund's transfer agent.
The Fund has an unfunded Deferred Compensation Plan (the ‘‘Compensation Plan’’) which allows each independent Trustee to defer payment of all, or a portion, of the fees he receives for serving on the Board of Trustees. 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 Morgan Stanley funds that are offered as investment options under the Compensation Plan. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund.
5. Purposes of and Risks Relating to Certain Financial Instruments
The Fund may purchase and sell interest rate and index futures ("futures contracts") to facilitate trading; increase or decrease Fund's market exposure, seek higher investment returns, or to protect against a decline in the value of the Fund's securities or an increase in prices of securities that may be purchased.
These futures contracts involve elements of market risk in excess of the amount reflected in the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the value of the underlying securities. Risk also may arise from the potential inability of the counterparties to meet the terms of their contracts.
29
Morgan Stanley Balanced Growth Fund
Notes to Financial Statements January 31, 2006 continued
6. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ||||
![]() | FOR THE YEAR ENDED JANUARY 31, 2006 | ![]() | FOR THE YEAR ENDED JANUARY 31, 2005 | ![]() | ||||||||||||||||||
![]() | SHARES | ![]() | AMOUNT | ![]() | SHARES | ![]() | AMOUNT | |||||||||||||||
CLASS A SHARES | ||||||||||||||||||||||
Sold | ![]() | 490,716 | ![]() | $ | 7,057,986 | ![]() | 197,090 | ![]() | $ | 2,570,407 | ||||||||||||
Conversion from Class B | ![]() | 1,649,854 | ![]() | 23,001,214 | ![]() | — | ![]() | — | ||||||||||||||
Reinvestment of dividends | ![]() | 73,309 | ![]() | 1,054,840 | ![]() | 7,165 | ![]() | 94,080 | ||||||||||||||
Redeemed | ![]() | (443,744 | ) | ![]() | (6,388,604 | ) | ![]() | (207,756 | ) | ![]() | (2,736,245 | ) | ||||||||||
Net increase (decrease) – Class A | ![]() | 1,770,135 | ![]() | 24,725,436 | ![]() | (3,501 | ) | ![]() | (71,758 | ) | ||||||||||||
CLASS B SHARES | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Sold | ![]() | 1,236,638 | ![]() | 17,572,599 | ![]() | 1,895,920 | ![]() | 24,914,311 | ||||||||||||||
Conversion to Class A | ![]() | (1,649,990 | ) | ![]() | (23,001,214 | ) | ![]() | — | ![]() | — | ||||||||||||
Reinvestment of dividends | ![]() | 193,148 | ![]() | 2,774,543 | ![]() | 64,508 | ![]() | 846,699 | ||||||||||||||
Redeemed | ![]() | (2,034,354 | ) | ![]() | (29,042,425 | ) | ![]() | (2,762,993 | ) | ![]() | (36,219,918 | ) | ||||||||||
Net decrease – Class B | ![]() | (2,254,558 | ) | ![]() | (31,696,497 | ) | ![]() | (802,565 | ) | ![]() | (10,458,908 | ) | ||||||||||
CLASS C SHARES | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Sold | ![]() | 531,681 | ![]() | 7,619,616 | ![]() | 497,642 | ![]() | 6,594,799 | ||||||||||||||
Reinvestment of dividends | ![]() | 184,017 | ![]() | 2,646,264 | ![]() | 49,799 | ![]() | 653,999 | ||||||||||||||
Redeemed | ![]() | (1,062,378 | ) | ![]() | (15,180,965 | ) | ![]() | (1,156,316 | ) | ![]() | (15,173,611 | ) | ||||||||||
Net decrease – Class C | ![]() | (346,680 | ) | ![]() | (4,915,085 | ) | ![]() | (608,875 | ) | ![]() | (7,924,813 | ) | ||||||||||
CLASS D SHARES | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Sold | ![]() | 16,327 | ![]() | 235,071 | ![]() | 31,524 | ![]() | 411,699 | ||||||||||||||
Reinvestment of dividends | ![]() | 2,786 | ![]() | 39,913 | ![]() | 1,310 | ![]() | 17,218 | ||||||||||||||
Redeemed | ![]() | (35,423 | ) | ![]() | (505,154 | ) | ![]() | (42,854 | ) | ![]() | (563,954 | ) | ||||||||||
Net decrease – Class D | ![]() | (16,310 | ) | ![]() | (230,170 | ) | ![]() | (10,020 | ) | ![]() | (135,037 | ) | ||||||||||
Net decrease in Fund | ![]() | (847,413 | ) | ![]() | $ | (12,116,316 | ) | ![]() | (1,424,961 | ) | ![]() | $ | (18,590,516 | ) | ||||||||
![]() |
7. Federal Income Tax Status
The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These ‘‘book/tax’’ differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for tax purposes are reported as distributions of paid-in-capital.
30
Morgan Stanley Balanced Growth Fund
Notes to Financial Statements January 31, 2006 continued
The tax character of distributions paid was as follows:
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
![]() | FOR THE YEAR ENDED JANUARY 31, 2006 | ![]() | FOR THE YEAR ENDED JANUARY 31, 2005 | |||||||
Ordinary income | ![]() | $ | 2,407,008 | ![]() | $ | 1,905,172 | ||||
Long-term capital gains | ![]() | 5,031,161 | ![]() | — | ||||||
Total distributions | ![]() | $ | 7,438,169 | ![]() | $ | 1,905,172 | ||||
![]() |
As of January 31, 2006, the tax-basis components of accumulated earnings were as follows:
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
Undistributed ordinary income | ![]() | $ | 984,809 | ![]() | ||||||
Undistributed long-term gains | ![]() | 4,969,803 | ||||||||
Net accumulated earnings | ![]() | 5,954,612 | ![]() | |||||||
Temporary differences | ![]() | (289 | ) | ![]() | ||||||
Net unrealized appreciation | ![]() | 25,283,867 | ||||||||
Total accumulated earnings | ![]() | $ | 31,238,190 | |||||||
![]() |
During the year ended January 31, 2006, the Fund utilized its net capital loss carryforward of $7,903,847.
As of January 31, 2006, the Fund had temporary book/tax differences primarily attributable to capital loss deferrals on wash sales and straddles, mark-to-market of open futures contracts and book amortization of premiums on debt securities and permanent book/tax differences primarily attributable to losses on paydowns and tax adjustments on debt securities sold by the Fund. To reflect reclassifications arising from the permanent differences, accumulated undistributed net realized gain was charged and accumulated undistributed net investment income was credited $274,261.
8. Legal Matters
The Investment Adviser, certain affiliates of the Investment Adviser, certain officers of such affiliates and certain investment companies advised by the Investment Adviser or its affiliates, including the Fund, are named as defendants in a consolidated class action. This consolidated action also names as defendants certain individual Trustees and Directors of the Morgan Stanley funds. The consolidated amended complaint, filed in the United States District Court Southern District of New York on April 16, 2004, generally alleges that defendants, including the Fund, violated their statutory disclosure obligations and fiduciary duties by failing properly to disclose (i) that the Investment Adviser and certain affiliates of the Investment Adviser allegedly offered economic incentives to brokers and others to recommend the funds advised by the Investment Adviser or its affiliates to investors rather than funds managed by other companies, and (ii) that the funds
31
Morgan Stanley Balanced Growth Fund
Notes to Financial Statements January 31, 2006 continued
advised by the Investment Adviser or its affiliates, including the Fund, allegedly paid excessive commissions to brokers in return for their efforts to recommend these funds to investors. The complaint seeks, among other things, unspecified compensatory damages, rescissionary damages, fees and costs. The defendants have moved to dismiss the action and intend to otherwise vigorously defend it. On March 9, 2005, Plaintiffs sought leave to supplement their complaint to assert claims on behalf of other investors. While the Fund and Adviser believe that each has meritorious defenses, the ultimate outcome of this matter is not presently determinable at this stage of the litigation, and no provision has been made in the Fund’s financial statements for the effect, if any, of this matter.
9. Subsequent Event
On February 6, 2006, the Trustees of the Fund and Morgan Stanley Balanced Income Fund (‘‘Balanced Income’’) approved an agreement and plan of reorganization (the "Balanced Income Reorganization") whereby Balanced Income would be merged into the Fund. The Balanced Income Reorganization is subject to the approval of Balanced Income shareholders at a special meeting scheduled to be held during the third quarter of 2006. If approved, the assets of the Fund would be combined with the assets of Balanced Income and shareholders of Balanced Income would become shareholders of the Fund, receiving shares of the corresponding class of the Fund equal to the value of their holdings in Balanced Income.
On February 6, 2006, the Trustees of the Fund and Morgan Stanley Income Builder Fund ("Income Builder") approved an agreement and plan of reorganization (the "Income Builder Reorganization") whereby Income Builder would be merged into the Fund. The Income Builder Reorganization is subject to the approval of Income Builder shareholders at a special meeting scheduled to be held during the third quarter of 2006. If approved, the assets of the Fund would be combined with the assets of Income Builder and shareholders of Income Builder would become shareholders of the Fund, receiving shares of the corresponding class of the Fund equal to the value of their holdings in Income Builder.
Shareholders of Balanced Income and Income Builder will vote separately on the reorganization for that fund. Each reorganization is not dependent on the approval of the other.
32
Morgan Stanley Balanced Growth Fund
Financial Highlights
Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | |
![]() | FOR THE YEAR ENDED JANUARY 31, | ![]() | |||||||||||||||||||||
![]() | 2006 | ![]() | 2005 | ![]() | 2004 | ![]() | 2003 | ![]() | 2002 | ||||||||||||||
Class A Shares | |||||||||||||||||||||||
Selected Per Share Data: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net asset value, beginning of period | ![]() | $ | 13.76 | ![]() | $ | 12.98 | ![]() | $ | 10.73 | ![]() | $ | 12.82 | ![]() | $ | 13.29 | ||||||||
Income (loss) from investment operations: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net investment income‡ | ![]() | 0.24 | ![]() | 0.21 | ![]() | 0.18 | ![]() | 0.25 | ![]() | 0.33 | |||||||||||||
Net realized and unrealized gain (loss) | ![]() | 1.21 | ![]() | 0.79 | ![]() | 2.30 | ![]() | (2.06 | ) | ![]() | (0.42 | ) | |||||||||||
Total income (loss) from investment operations | ![]() | 1.45 | ![]() | 1.00 | ![]() | 2.48 | ![]() | (1.81 | ) | ![]() | (0.09 | ) | |||||||||||
Less dividends and distributions from: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net investment income | ![]() | (0.27 | ) | ![]() | (0.22 | ) | ![]() | (0.23 | ) | ![]() | (0.28 | ) | ![]() | (0.38 | ) | ||||||||
Net realized gain | ![]() | (0.37 | ) | ![]() | — | ![]() | — | ![]() | — | ![]() | — | ||||||||||||
Total dividends and distributions | ![]() | (0.64 | ) | ![]() | (0.22 | ) | ![]() | (0.23 | ) | ![]() | (0.28 | ) | ![]() | (0.38 | ) | ||||||||
Net asset value, end of period | ![]() | $ | 14.57 | ![]() | $ | 13.76 | ![]() | $ | 12.98 | ![]() | $ | 10.73 | ![]() | $ | 12.82 | ||||||||
Total Return† | ![]() | 10.99 | % | ![]() | 7.80 | % | ![]() | 23.37 | % | ![]() | (14.27 | )% | ![]() | (0.53 | )% | ||||||||
Ratios to Average Net Assets(1): | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Expenses | ![]() | 1.13 | % | ![]() | 1.13 | % | ![]() | 1.12 | % | ![]() | 1.10 | % | ![]() | 1.07 | % | ||||||||
Net investment income | ![]() | 1.70 | % | ![]() | 1.61 | % | ![]() | 1.58 | % | ![]() | 2.14 | % | ![]() | 2.56 | % | ||||||||
Supplemental Data: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net assets, end of period, in thousands | ![]() | $33,217 | ![]() | $7,017 | ![]() | $6,663 | ![]() | $5,848 | ![]() | $6,259 | |||||||||||||
Portfolio turnover rate | ![]() | 52 | % | ![]() | 64 | % | ![]() | 117 | % | ![]() | 145 | % | ![]() | 67 | % | ||||||||
![]() |
![]() |
![]() | ‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
![]() | † | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
![]() | (1) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
See Notes to Financial Statements
33
Morgan Stanley Balanced Growth Fund
Financial Highlights continued
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![]() | FOR THE YEAR ENDED JANUARY 31, | ![]() | |||||||||||||||||||||
![]() | 2006 | ![]() | 2005 | ![]() | 2004 | ![]() | 2003 | ![]() | 2002 | ||||||||||||||
Class B Shares | |||||||||||||||||||||||
Selected Per Share Data: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net asset value, beginning of period | ![]() | $ | 13.75 | ![]() | $ | 12.97 | ![]() | $ | 10.73 | ![]() | $ | 12.81 | ![]() | $ | 13.28 | ||||||||
Income (loss) from investment operations: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net investment income‡ | ![]() | 0.14 | ![]() | 0.11 | ![]() | 0.10 | ![]() | 0.16 | ![]() | 0.23 | |||||||||||||
Net realized and unrealized gain (loss) | ![]() | 1.20 | ![]() | 0.79 | ![]() | 2.28 | ![]() | (2.05 | ) | ![]() | (0.42 | ) | |||||||||||
Total income (loss) from investment operations | ![]() | 1.34 | ![]() | 0.90 | ![]() | 2.38 | ![]() | (1.89 | ) | ![]() | (0.19 | ) | |||||||||||
Less dividends and distributions from: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net investment income | ![]() | (0.16 | ) | ![]() | (0.12 | ) | ![]() | (0.14 | ) | ![]() | (0.19 | ) | ![]() | (0.28 | ) | ||||||||
Net realized gain | ![]() | (0.37 | ) | ![]() | — | ![]() | — | ![]() | — | ![]() | — | ||||||||||||
Total dividends and distributions | ![]() | (0.53 | ) | ![]() | (0.12 | ) | ![]() | (0.14 | ) | ![]() | (0.19 | ) | ![]() | (0.28 | ) | ||||||||
Net asset value, end of period | ![]() | $ | 14.56 | ![]() | $ | 13.75 | ![]() | $ | 12.97 | ![]() | $ | 10.73 | ![]() | $ | 12.81 | ||||||||
Total Return† | ![]() | 10.12 | % | ![]() | 6.99 | % | ![]() | 22.37 | % | ![]() | (14.86 | )% | ![]() | (1.32 | )% | ||||||||
Ratios to Average Net Assets(1): | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Expenses | ![]() | 1.89 | % | ![]() | 1.89 | % | ![]() | 1.88 | % | ![]() | 1.87 | % | ![]() | 1.83 | % | ||||||||
Net investment income | ![]() | 0.94 | % | ![]() | 0.85 | % | ![]() | 0.82 | % | ![]() | 1.37 | % | ![]() | 1.80 | % | ||||||||
Supplemental Data: | ![]() | ![]() | ![]() | ![]() | |||||||||||||||||||
Net assets, end of period, in thousands | ![]() | $84,568 | ![]() | $110,875 | ![]() | $114,960 | ![]() | $79,631 | ![]() | $92,009 | |||||||||||||
Portfolio turnover rate | ![]() | 52 | % | ![]() | 64 | % | ![]() | 117 | % | ![]() | 145 | % | ![]() | 67 | % | ||||||||
![]() |
![]() |
![]() | ‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
![]() | † | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
![]() | (1) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
See Notes to Financial Statements
34
Morgan Stanley Balanced Growth Fund
Financial Highlights continued
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![]() | FOR THE YEAR ENDED JANUARY 31, | ![]() | |||||||||||||||||||||
![]() | 2006 | ![]() | 2005 | ![]() | 2004 | ![]() | 2003 | ![]() | 2002 | ||||||||||||||
Class C Shares | |||||||||||||||||||||||
Selected Per Share Data: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net asset value, beginning of period | ![]() | $ | 13.76 | ![]() | $ | 12.98 | ![]() | $ | 10.73 | ![]() | $ | 12.81 | ![]() | $ | 13.28 | ||||||||
Income (loss) from investment operations: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net investment income‡ | ![]() | 0.14 | ![]() | 0.11 | ![]() | 0.10 | ![]() | 0.16 | ![]() | 0.23 | |||||||||||||
Net realized and unrealized gain (loss) | ![]() | 1.20 | ![]() | 0.79 | ![]() | 2.29 | ![]() | (2.05 | ) | ![]() | (0.42 | ) | |||||||||||
Total income (loss) from investment operations | ![]() | 1.34 | ![]() | 0.90 | ![]() | 2.39 | ![]() | (1.89 | ) | ![]() | (0.19 | ) | |||||||||||
Less dividends and distributions from: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net investment income | ![]() | (0.16 | ) | ![]() | (0.12 | ) | ![]() | (0.14 | ) | ![]() | (0.19 | ) | ![]() | (0.28 | ) | ||||||||
Net realized gain | ![]() | (0.37 | ) | ![]() | — | ![]() | — | ![]() | — | ![]() | — | ||||||||||||
Total dividends and distributions | ![]() | (0.53 | ) | ![]() | (0.12 | ) | ![]() | (0.14 | ) | ![]() | (0.19 | ) | ![]() | (0.28 | ) | ||||||||
Net asset value, end of period | ![]() | $ | 14.57 | ![]() | $ | 13.76 | ![]() | $ | 12.98 | ![]() | $ | 10.73 | ![]() | $ | 12.81 | ||||||||
Total Return† | ![]() | 10.15 | % | ![]() | 6.98 | % | ![]() | 22.43 | % | ![]() | (14.88 | )% | ![]() | (1.34 | )% | ||||||||
Ratios to Average Net Assets(1): | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Expenses | ![]() | 1.89 | % | ![]() | 1.87 | % | ![]() | 1.88 | % | ![]() | 1.87 | % | ![]() | 1.83 | % | ||||||||
Net investment income | ![]() | 0.94 | % | ![]() | 0.87 | % | ![]() | 0.82 | % | ![]() | 1.37 | % | ![]() | 1.80 | % | ||||||||
Supplemental Data: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net assets, end of period, in thousands | ![]() | $81,339 | ![]() | $81,606 | ![]() | $84,840 | ![]() | $75,323 | ![]() | $106,002 | |||||||||||||
Portfolio turnover rate | ![]() | 52 | % | ![]() | 64 | % | ![]() | 117 | % | ![]() | 145 | % | ![]() | 67 | % | ||||||||
![]() |
![]() |
![]() | ‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
![]() | † | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
![]() | (1) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
See Notes to Financial Statements
35
Morgan Stanley Balanced Growth Fund
Financial Highlights continued
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | |
![]() | FOR THE YEAR ENDED JANUARY 31, | ![]() | |||||||||||||||||||||
![]() | 2006 | ![]() | 2005 | ![]() | 2004 | ![]() | 2003 | ![]() | 2002 | ||||||||||||||
Class D Shares | |||||||||||||||||||||||
Selected Per Share Data: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net asset value, beginning of period | ![]() | $ | 13.76 | ![]() | $ | 12.97 | ![]() | $ | 10.73 | ![]() | $ | 12.81 | ![]() | $ | 13.28 | ||||||||
Income (loss) from investment operations: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net investment income‡ | ![]() | 0.28 | ![]() | 0.24 | ![]() | 0.22 | ![]() | 0.27 | ![]() | 0.37 | |||||||||||||
Net realized and unrealized gain (loss) | ![]() | 1.19 | ![]() | 0.80 | ![]() | 2.28 | ![]() | (2.04 | ) | ![]() | (0.43 | ) | |||||||||||
Total income (loss) from investment operations | ![]() | 1.47 | ![]() | 1.04 | ![]() | 2.50 | ![]() | (1.77 | ) | ![]() | (0.06 | ) | |||||||||||
Less dividends and distributions from: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net investment income | ![]() | (0.30 | ) | ![]() | (0.25 | ) | ![]() | (0.26 | ) | ![]() | (0.31 | ) | ![]() | (0.41 | ) | ||||||||
Net realized gain | ![]() | (0.37 | ) | ![]() | — | ![]() | — | ![]() | — | ![]() | — | ||||||||||||
Total dividends and distributions | ![]() | (0.67 | ) | ![]() | (0.25 | ) | ![]() | (0.26 | ) | ![]() | (0.31 | ) | ![]() | (0.41 | ) | ||||||||
Net asset value, end of period | ![]() | $ | 14.56 | ![]() | $ | 13.76 | ![]() | $ | 12.97 | ![]() | $ | 10.73 | ![]() | $ | 12.81 | ||||||||
Total Return† | ![]() | 11.17 | % | ![]() | 8.14 | % | ![]() | 23.56 | % | ![]() | (13.99 | )% | ![]() | (0.32 | )% | ||||||||
Ratios to Average Net Assets(1): | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Expenses | ![]() | 0.89 | % | ![]() | 0.89 | % | ![]() | 0.88 | % | ![]() | 0.87 | % | ![]() | 0.83 | % | ||||||||
Net investment income | ![]() | 1.94 | % | ![]() | 1.85 | % | ![]() | 1.82 | % | ![]() | 2.37 | % | ![]() | 2.80 | % | ||||||||
Supplemental Data: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net assets, end of period, in thousands | ![]() | $ | 909 | ![]() | $ | 1,083 | ![]() | $ | 1,151 | ![]() | $ | 1,347 | ![]() | $ | 1,244 | ||||||||
Portfolio turnover rate | ![]() | 52 | % | ![]() | 64 | % | ![]() | 117 | % | ![]() | 145 | % | ![]() | 67 | % | ||||||||
![]() |
![]() |
![]() | ‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
![]() | † | Calculated based on the net asset value as of the last business day of the period. |
![]() | (1) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
See Notes to Financial Statements
36
Morgan Stanley Balanced Growth Fund
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees of
Morgan Stanley Balanced Growth Fund:
We have audited the accompanying statement of assets and liabilities of Morgan Stanley Balanced Growth Fund (the ‘‘Fund’’), including the portfolio of investments, as of January 31, 2006, and the related statements of operations for the year then ended and changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of January 31, 2006, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Morgan Stanley Balanced Growth Fund as of January 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
New York, New York
March 23, 2006
37
Morgan Stanley Balanced Growth Fund
Trustee and Officer Information
Independent Trustees:
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
Name, Age and Address of Independent Trustee | ![]() | Position(s) Held with Registrant | ![]() | Term of Office and Length of Time Served* | ![]() | Principal Occupation(s) During Past 5 Years** | ![]() | Number of Portfolios in Fund Complex Overseen by Trustee*** | ![]() | Other Directorships Held by Trustee | ||||||||||||
Michael Bozic (65) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036 | ![]() | Trustee | ![]() | Since April 1994 | ![]() | Private Investor; Director or Trustee of the Retail Funds (since April 1994) and the Institutional Funds (since July 2003); formerly Vice Chairman of Kmart Corporation (December 1998-October 2000), Chairman and Chief Executive Officer of Levitz Furniture Corporation (November 1995-November 1998) and President and Chief Executive Officer of Hills Department Stores (May 1991-July 1995); formerly variously Chairman, Chief Executive Officer, President and Chief Operating Officer (1987-1991) of the Sears Merchandise Group of Sears, Roebuck & Co. | ![]() | 197 | ![]() | Director of various business organizations. | ||||||||||||
Edwin J. Garn (73) 1031 N. Chartwell Court Salt Lake City, UT 84103 | ![]() | Trustee | ![]() | Since January 1993 | ![]() | Consultant; Director or Trustee of the Retail Funds (since January 1993) and the Institutional Funds (since July 2003); member of the Utah Regional Advisory Board of Pacific Corp. (utility company); formerly Managing Director of Summit Ventures LLC (2000-2004) (lobbying and consulting firm); United States Senator (R-Utah) (1974-1992) and Chairman, Senate Banking Committee (1980-1986), Mayor of Salt Lake City, Utah (1971-1974), Astronaut, Space Shuttle Discovery (April 12-19, 1985), and Vice Chairman, Huntsman Corporation (chemical company). | ![]() | 197 | ![]() | Director of Franklin Covey (time management systems), BMW Bank of North America, Inc. (industrial loan corporation), Escrow Bank USA (industrial loan corporation); United Space Alliance (joint venture between Lockheed Martin and the Boeing Company) and Nuskin Asia Pacific (multilevel marketing); member of the board of various civic and charitable organizations. | ||||||||||||
Wayne E. Hedien (71) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036 | ![]() | Trustee | ![]() | Since September 1997 | ![]() | Retired; Director or Trustee of the Retail Funds; (Since September 1997) and the Institutional Funds (since July 2003); formerly associated with the Allstate Companies (1966-1994), most recently as Chairman of The Allstate Corporation (March 1993-December 1994) and Chairman and Chief Executive Officer of its wholly-owned subsidiary, Allstate Insurance Company (July 1989-December 1994). | ![]() | 197 | ![]() | Director of The PMI Group Inc. (private mortgage insurance); Trustee and Vice Chairman of The Field Museum of Natural History; director of various other business and charitable organizations. | ||||||||||||
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38
Morgan Stanley Balanced Growth Fund
Trustee and Officer Information continued
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
Name, Age and Address of Independent Trustee | ![]() | Position(s) Held with Registrant | ![]() | Term of Office and Length of Time Served* | ![]() | Principal Occupation(s) During Past 5 Years** | ![]() | Number of Portfolios in Fund Complex Overseen by Trustee*** | ![]() | Other Directorships Held by Trustee | ||||||||||||
Dr. Manuel H. Johnson (56) c/o Johnson Smick Group, Inc. 888 16th Street, N.W. Suite 740 Washington, D.C. 20006 | ![]() | Trustee | ![]() | Since July 1991 | ![]() | Senior Partner, Johnson Smick International, Inc., a consulting firm; Chairman of the Audit Committee and Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2003); Co-Chairman and a founder of the Group of Seven Council (G7C), an international economic commission; formerly Vice Chairman of the Board of Governors of the Federal Reserve System and Assistant Secretary of the U.S. Treasury. | ![]() | 197 | ![]() | Director of NVR, Inc. (home construction); Director of KFX Energy; Director of RBS Greenwich Capital Holdings (financial holding company). | ||||||||||||
Joseph J. Kearns (63) c/o Kearns & Associates LLC PMB754 23852 Pacific Coast Highway Malibu, CA 90265 | ![]() | Trustee | ![]() | Since July 2003 | ![]() | President, Kearns & Associates LLC (investment consulting); Deputy Chairman of the Audit Committee and Director or Trustee of the Retail Funds (since July 2003) and the Institutional Funds (since August 1994); previously Chairman of the Audit Committee of the Institutional Funds (October 2001-July 2003); formerly CFO of the J. Paul Getty Trust. | ![]() | 198 | ![]() | Director of Electro Rent Corporation (equipment leasing), The Ford Family Foundation, and the UCLA Foundation. | ||||||||||||
Michael E. Nugent (69) c/o Triumph Capital, L.P. 445 Park Avenue New York, NY 10022 | ![]() | Trustee | ![]() | Since July 1991 | ![]() | General Partner of Triumph Capital, L.P., a private investment partnership; Chairman of the Insurance Committee and Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2001); formerly Vice President, Bankers Trust Company and BT Capital Corporation (1984-1988). | ![]() | 197 | ![]() | None. | ||||||||||||
Fergus Reid (73) c/o Lumelite Plastics Corporation 85 Charles Colman Blvd. Pawling, NY 12564 | ![]() | Trustee | ![]() | Since July 2003 | ![]() | Chairman of Lumelite Plastics Corporation; Chairman of the Governance Committee and Director or Trustee of the Retail Funds (since July 2003) and the Institutional Funds (since June 1992). | ![]() | 198 | ![]() | Trustee and Director of certain investment companies in the JPMorgan Funds complex managed by J.P. Morgan Investment Management Inc. | ||||||||||||
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39
Morgan Stanley Balanced Growth Fund
Trustee and Officer Information continued
Interested Trustees:
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
Name, Age and Address of Interested Trustee | ![]() | Position(s) Held with Registrant | ![]() | Term of Office and Length of Time Served* | ![]() | Principal Occupation(s) During Past 5 Years** | ![]() | Number of Portfolios in Fund Complex Overseen by Trustee*** | ![]() | Other Directorships Held by Trustee | ||||||||||||
Charles A. Fiumefreddo (72) c/o Morgan Stanley Trust Harborside Financial Center, Plaza Two, Jersey City, NJ 07311 | ![]() | Chairman of the Board and Trustee | ![]() | Since July 1991 | ![]() | Chairman and Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2003); formerly Chief Executive Officer of the Retail Funds (until September 2002). | ![]() | 197 | ![]() | None. | ||||||||||||
James F. Higgins (57) c/o Morgan Stanley Trust Harborside Financial Center, Plaza Two, Jersey City, NJ 07311 | ![]() | Trustee | ![]() | Since June 2000 | ![]() | Director or Trustee of the Retail Funds (since June 2000) and the Institutional Funds (since July 2003); Senior Advisor of Morgan Stanley (since August 2000); Director of Dean Witter Realty Inc. | ![]() | 197 | ![]() | Director of AXA Financial, Inc. and The Equitable Life Assurance Society of the United States (financial services). | ||||||||||||
![]() |
![]() |
![]() | * | This is the earliest date the Trustee began serving the funds advised by Morgan Stanley Investment Advisors Inc. (the "Investment Adviser") (the "Retail Funds"). |
![]() | ** | The dates referenced below indicating commencement of services as Director/Trustee for the Retail Funds and the funds advised by Morgan Stanley Investment Management Inc. and Morgan Stanley AIP GP LP (the "Institutional Funds") reflect the earliest date the Director/Trustee began serving the Retail or Institutional Funds, as applicable. |
![]() | *** | The Fund Complex includes all open-end and closed-end funds (including all of their portfolios) advised by the Investment Adviser and any funds that have an investment adviser that is an affiliated person of the Investment Adviser (including, but not limited to, Morgan Stanley Investment Management Inc.). |
40
Morgan Stanley Balanced Growth Fund
Trustee and Officer Information continued
Officers:
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
Name, Age and Address of Executive Officer | ![]() | Position(s) Held with Registrant | ![]() | Term of Office and Length of Time Served* | ![]() | Principal Occupation(s) During Past 5 Years** | ||||||||
Ronald E. Robison (67) 1221 Avenue of the Americas New York, NY 10020 | ![]() | President and Principal Executive Officer | ![]() | Since May 2003 | ![]() | President (since September 2005) and Principal Executive Officer (since May 2003) of funds in the Fund Complex; President (since September 2005) and Principal Executive Office (since May 2003) of the Van Kampen Funds; Managing Director of Morgan Stanley, Morgan Stanley Investment Management and Morgan Stanley & Co. Incorporated; Managing Director and Director of Morgan Stanley Investment Advisors Inc.; Managing Director and (since May 2002) Director, Morgan Stanley Investment Management Inc., Managing Director and (since January 2005) Director of Van Kampen Asset Management and Van Kampen Investments Inc. Director, President (since February 2006) and Chief Executive Officer (since February 2006) of Morgan Stanley Services Company Inc., Director of Moran Stanley Distributors Inc., Morgan Stanley Distribution, Inc. and Morgan Stanley Trust; Director of Morgan Stanley SICAV (since May 2004). Formerly, Executive Vice President (July 2003 to September 2005) of funds in the Fund Complex and the Van Kampen Funds; President and Director of the Institutional Funds (March 2001-July 2003), Chief Global Operating Officer of Morgan Stanley Investment Management Inc., Chief Administrative Officer of Morgan Stanley Investment Advisors Inc.; Chief Administrative Officer of Morgan Stanley Services Company Inc. (November 2003 to February 2006). | ||||||||
J. David Germany (51) 25 Cabot Square, Canary Wharf, London, United Kingdom E144QA | ![]() | Vice President | ![]() | Since February 2006 | ![]() | Managing Director and (since December 2005) Chief Investment Officer – Global Fixed Income of Morgan Stanley Investment Advisors Inc., Morgan Stanley Investment Management Inc., Van Kampen Asset Management and Van Kampen Advisors Inc. Managing Director and Director of Morgan Stanley Investment Management Ltd. Vice President (since February 2006) of the Retail and Institutional Funds. | ||||||||
Dennis F. Shea (52) 1221 Avenue of the Americas New York, NY 10020 | ![]() | Vice President | ![]() | Since February 2006 | ![]() | Managing Director and (since February 2006) Chief Investment Officer – Global Equity of Morgan Stanley Investment Advisors Inc., Morgan Stanley Investment Management Inc., Van Kampen Asset Management and Van Kampen Advisors Inc. Vice President (since February 2006) of the Retail and Institutional Funds. Formerly, Managing Director and Director of Global Equity Research at Morgan Stanley. | ||||||||
Barry Fink (51) 1221 Avenue of the Americas New York, NY 10020 | ![]() | Vice President | ![]() | Since February 1997 | ![]() | Managing Director of Morgan Stanley Investment Management, Morgan Stanley Investment Advisors Inc. and Morgan Stanley Investment Management Inc.; Vice President of the Retail Funds and (since July 2003) the Institutional Funds; Formerly, General Counsel (May 2000-February 2006) of Morgan Stanley Investment Management; Secretary (October 2003 to February 2006), General Counsel (May 2004 to February 2006) and Director (July 1998 to January 2005) of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc.; Secretary and General Counsel of Morgan Stanley Investment Management Inc. (November 2002 to February 2006); Secretary and Director of Morgan Stanley Distributors Inc.; Secretary (February 1997 to July 2003) and General Counsel (February 1997 to April 2004) of the Morgan Stanley Retail Funds; Vice President and Assistant General Counsel of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Distributors Inc. (February 1997 to December 2001). | ||||||||
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41
Morgan Stanley Balanced Growth Fund
Trustee and Officer Information continued
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Name, Age and Address of Executive Officer | ![]() | Position(s) Held with Registrant | ![]() | Term of Office and Length of Time Served* | ![]() | Principal Occupation(s) During Past 5 Years** | ||||||||
Amy R. Doberman (43) 1221 Avenue of Americas New York, NY 10020 | ![]() | Vice President | ![]() | Since July 2004 | ![]() | Managing Director and General Counsel, U.S. Investment Management (since July 2004); Vice President of the Retail Funds and the Institutional Funds (since July 2004); Vice President of the Van Kampen Funds (since August 2004); Secretary (since February 2006) and Managing Director (since July 2004) of Morgan Stanley Investment Advisors Inc., Morgan Stanley Services Company Inc., Morgan Stanley Investment Management Inc., Van Kampen Asset Management, Van Kampen Advisors Inc. and Van Kampen Investments Inc.; Secretary (since February 2006) of Morgan Stanley Distributors Inc. and Morgan Stanley Distribution, Inc. Formerly, Managing Director and General Counsel – Americas, UBS Global Asset Management (July 2000 to July 2004). | ||||||||
Carsten Otto (42) 1221 Avenue of the Americas New York, NY 10020 | ![]() | Chief Compliance Officer | ![]() | Since October 2004 | ![]() | Managing Director and U.S. Director of Compliance for Morgan Stanley Investment Management (since October 2004); Managing Director and Chief Compliance Officer (since February 2005) of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Investment Management Inc. and (since June 2004) of Van Kampen Asset Management, Van Kampen Advisors Inc. and Van Kampen Investments Inc. Formerly, Assistant Secretary and Assistant General Counsel of the Retail Funds. | ||||||||
Stefanie V. Chang (39) 1221 Avenue of the Americas New York, NY 10020 | ![]() | Vice President | ![]() | Since July 2003 | ![]() | Executive Director of Morgan Stanley & Co. Incorporated, Morgan Stanley Investment Advisors Inc., Morgan Stanley Investment Management Inc., Van Kampen Asset Management, Van Kampen Advisors Inc. and Van Kampen Investments Inc. Vice President of the Retail Funds (since July 2002) and the Institutional Funds (since December 1997). Formerly, Secretary of Van Kampen Asset Management Inc., Van Kampen Advisors Inc. and Van Kampen Investments Inc. (December 2002 to February 2006); Secretary of Morgan Stanley Distribution, Inc. (October 2005 to February 2006). | ||||||||
Francis J. Smith (40) c/o Morgan Stanley Trust Harborside Financial Center, Plaza Two, Jersey City, NJ 07311 | ![]() | Treasurer and Chief Financial Officer | ![]() | Treasurer since July 2003 and Chief Financial Officer since September 2002 | ![]() | Executive Director of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc.; Treasurer and Chief Financial Officer of the Morgan Stanley Retail Funds (since July 2003). Formerly Vice President of the Retail Funds (September 2002-July 2003). | ||||||||
Thomas F. Caloia (59) c/o Morgan Stanley Trust Harborside Financial Center, Plaza Two, Jersey City, NJ 07311 | ![]() | Vice President | ![]() | Since July 2003 | ![]() | Executive Director of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc.; Assistant Treasurer of Morgan Stanley Investment Advisors Inc., Morgan Stanley Services Company Inc. and Morgan Stanley Distributors Inc.; Vice President of the Retail Funds. Formerly, Treasurer of the Retail Funds (April 1989-July 2003). | ||||||||
Mary E. Mullin (38) 1221 Avenue of the Americas New York, NY 10020 | ![]() | Secretary | ![]() | Since July 2003 | ![]() | Executive Director of Morgan Stanley & Co. Incorporated, Morgan Stanley Investment Advisors Inc. and Morgan Stanley Investment Management Inc. Secretary of the Retail Funds (since July 2003) and the Institutional Funds (since June 1999). | ||||||||
![]() |
![]() |
![]() | * | This is the earliest date the Officer began serving the Retail Funds. Each Officer serves an indefinite term, until his or her successor is elected. |
![]() | ** | The dates referenced below indicating commencement of service as an Officer for the Retail and Institutional Funds reflect the earliest date the Officer began serving the Retail or Institutional Funds, as applicable. |
42
Morgan Stanley Balanced Growth Fund
2006 Federal Tax Notice (unaudited)
During the fiscal year ended January 31, 2006, 75.11% of the ordinary dividends paid by the Fund qualified for the dividends received deduction available to corporations. Additionally, please note that 100% of the Fund's ordinary dividends paid during the fiscal year ended January 31, 2006 qualified for the lower income tax rate available to individuals under the Jobs and Growth Tax Relief Reconciliation Act of 2003.
Also during the fiscal year ended January 31, 2006, the Fund paid to its shareholders $0.37 per share from long-term capital gains.
Of the Fund's ordinary dividends paid during the fiscal year, 23.39% was attributable to qualifying Federal obligations. Please consult your tax advisor to determine if any portion of the dividends you received is exempt from state income tax.
43
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February 7, 2006
Supplement
SUPPLEMENT DATED FEBRUARY 7, 2006 TO THE PROSPECTUS OF
MORGAN STANLEY BALANCED INCOME FUND
Dated May 27, 2005
On February 6, 2006, the Board of Trustees of the Morgan Stanley Balanced Income Fund (the "Fund") approved an Agreement and Plan of Reorganization by and between the Fund and Morgan Stanley Balanced Growth Fund ("Balanced Growth"), pursuant to which substantially all of the assets of the Fund would be combined with those of Balanced Growth and shareholders of the Fund would become shareholders of Balanced Growth, receiving shares of Balanced Growth equal to the value of their holdings in the Fund (the "Reorganization"). Each shareholder of the Fund will receive the Class of shares of Balanced Growth that corresponds to the Class of shares of the Fund currently held by that shareholder. The Reorganization is subject to the approval of shareholders of the Fund at a special meeting of shareholders to be held during the third quarter of 2006. A proxy statement formally detailing the proposal, the reasons for the Reorganization and information concerning Balanced Growth will be distributed to shareholders of the Fund during the second quarter of 2006.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE.
38400SPT-02
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September 23, 2005
Supplement
SUPPLEMENT DATED SEPTEMBER 23, 2005 TO THE PROSPECTUSES OF
Morgan Stanley Aggressive Equity Fund, dated September 30, 2004
Morgan Stanley Allocator Fund, dated May 27, 2005
Morgan Stanley American Opportunities Fund, dated April 29, 2005
Morgan Stanley Balanced Growth Fund, dated May 27, 2005
Morgan Stanley Balanced Income Fund, dated May 27, 2005
Morgan Stanley Biotechnology Fund, dated July 30, 2004
Morgan Stanley California Tax-Free Income Fund, dated April 29, 2005
Morgan Stanley Capital Opportunities Trust, dated March 30, 2005
Morgan Stanley Convertible Securities Trust, dated November 30, 2004
Morgan Stanley Developing Growth Securities Trust, dated November 30, 2004
Morgan Stanley Dividend Growth Securities Inc., dated June 30, 2005
Morgan Stanley Equally-Weighted S&P 500 Fund, dated August 30, 2004
Morgan Stanley European Equity Fund Inc., dated December 30, 2004
Morgan Stanley Financial Services Trust, dated July 30, 2004
Morgan Stanley Flexible Income Trust, dated December 30, 2004
Morgan Stanley Fundamental Value Fund, dated November 30, 2004
Morgan Stanley Global Advantage Fund, dated July 30, 2004
Morgan Stanley Global Dividend Growth Securities, dated July 29, 2005
Morgan Stanley Global Utilities Fund, dated June 30, 2005
Morgan Stanley Growth Fund, dated July 29, 2005
Morgan Stanley Health Sciences Trust, dated September 30, 2004
Morgan Stanley High Yield Securities Inc., dated October 29, 2004
Morgan Stanley Income Builder Fund, dated November 30, 2004
Morgan Stanley Income Trust, dated October 29, 2004
Morgan Stanley Information Fund, dated July 29, 2005
Morgan Stanley International Fund, dated December 30, 2004
Morgan Stanley International SmallCap Fund, dated July 30, 2004
Morgan Stanley International Value Equity Fund, dated October 29, 2004
Morgan Stanley Japan Fund, dated July 30, 2004
Morgan Stanley KLD Social Index Fund, dated March 30, 2005
Morgan Stanley Mid-Cap Value Fund, dated October 29, 2004
Morgan Stanley Mortgage Securities Trust, dated December 30, 2004
Morgan Stanley Multi-Asset Class Fund – Domestic Portfolio, dated November 30, 2004
Morgan Stanley Nasdaq-100 Index Fund, dated March 30, 2005
Morgan Stanley Natural Resource Development Securities Inc., dated June 30, 2005
Morgan Stanley New York Tax-Free Income Fund, dated April 29, 2005
Morgan Stanley Pacific Growth Fund Inc., dated December 30, 2004
Morgan Stanley Real Estate Fund, dated March 30, 2005
Morgan Stanley S&P 500 Index Fund, dated October 29, 2004
Morgan Stanley Small-Mid Special Value Fund, dated August 29, 2005
Morgan Stanley Special Growth Fund, dated June 30, 2005
Morgan Stanley Special Value Fund, dated September 30, 2004
Morgan Stanley Strategist Fund, dated September 30, 2004
Morgan Stanley Tax-Exempt Securities Trust, dated April 29, 2005
Morgan Stanley Total Market Index Fund, dated October 29, 2004
Morgan Stanley Total Return Trust, dated September 30, 2004
Morgan Stanley U.S. Government Securities Trust, dated April 29, 2005
Morgan Stanley Utilities Fund, dated April 29, 2005
Morgan Stanley Value Fund, dated November 30, 2004
(Collectively, the "Funds")
Effective September 30, 2005, the Class A Shares sales charge waiver category for custodial accounts held by a bank or trust company created pursuant to Section 403(b) of the Internal Revenue Code will not be available. Accordingly, the Class A Shares sales charge waiver category related to such custodial accounts found in the section of the Fund's Prospectus titled "Share Class Arrangements – Class A Shares – Other Sales Charge Waivers" is hereby deleted.
Effective October 31, 2005, the second paragraph of the section of the Fund's Prospectus titled "Share Class Arrangements – Class B Shares" is hereby deleted and replaced with the following:
The contingent deferred sales charge is assessed on an amount equal to the lesser of the then market value of the shares or the historical cost of the shares (which is the amount actually paid for the shares at the time of original purchase) being redeemed. Accordingly, no sales charge is imposed on increases in net asset value above the initial purchase price. In determining whether a contingent deferred sales charge applies to a redemption, it is assumed that the shares being redeemed first are any shares in the shareholders Fund account that are not subject to a contingent deferred sales charge, followed by shares held the longest in the shareholder's account.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE.
79585SPT-01
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/msbluelogo.jpg)
September 23, 2005
Supplement
SUPPLEMENT DATED SEPTEMBER 23, 2005 TO THE PROSPECTUSES OF
Morgan Stanley Biotechnology Fund, dated July 30, 2004
Morgan Stanley European Equity Fund Inc., dated December 30, 2004
Morgan Stanley Financial Services Trust, dated July 30, 2004
Morgan Stanley Global Advantage Fund, dated July 30, 2004
Morgan Stanley Global Dividend Growth Securities, dated July 29, 2005
Morgan Stanley Global Utilities Fund, dated June 30, 2005
Morgan Stanley Health Sciences Trust, dated September 30, 2004
Morgan Stanley High Yield Securities Inc., dated October 29, 2004
Morgan Stanley Information Fund, dated July 29, 2005
Morgan Stanley International Fund, dated December 30, 2004
Morgan Stanley International SmallCap Fund, dated July 30, 2004
Morgan Stanley International Value Equity Fund, dated October 29, 2004
Morgan Stanley Japan Fund, dated July 30, 2004
Morgan Stanley Natural Resource Development Securities Inc., dated June 30, 2005
Morgan Stanley Pacific Growth Fund Inc., dated December 30, 2004
Morgan Stanley Real Estate Fund, dated March 30, 2005
Morgan Stanley Special Growth Fund, dated June 30, 2005
Morgan Stanley Special Value Fund, dated September 30, 2004
Morgan Stanley Utilities Fund, dated April 29, 2005
("Group I Funds")
Morgan Stanley Aggressive Equity Fund, dated September 30, 2004
Morgan Stanley Allocator Fund, dated May 27, 2005
Morgan Stanley American Opportunities Fund, dated April 29, 2005
Morgan Stanley Balanced Growth Fund, dated May 27, 2005
Morgan Stanley Balanced Income Fund, dated May 27, 2005
Morgan Stanley California Tax-Free Income Fund, dated April 29, 2005
Morgan Stanley Capital Opportunities Trust, dated March 30, 2005
Morgan Stanley Convertible Securities Trust, dated November 30, 2004
Morgan Stanley Developing Growth Securities Trust, dated November 30, 2004
Morgan Stanley Dividend Growth Securities Inc., dated June 30, 2005
Morgan Stanley Equally-Weighted S&P 500 Fund, dated August 30, 2004
Morgan Stanley Flexible Income Trust, dated December 30, 2004
Morgan Stanley Fundamental Value Fund, dated November 30, 2004
Morgan Stanley Growth Fund, dated July 29, 2005
Morgan Stanley Income Builder Fund, dated November 30, 2004
Morgan Stanley Income Trust, dated October 29, 2004
Morgan Stanley KLD Social Index Fund, dated March 30, 2005
Morgan Stanley Limited Duration Fund, dated August 29, 2005
Morgan Stanley Limited Duration U.S. Treasury Trust, dated July 30, 2004
Morgan Stanley Limited Term Municipal Trust, dated July 29, 2005
Morgan Stanley Mid-Cap Value Fund, dated October 29, 2004
Morgan Stanley Mortgage Securities Trust, dated December 30, 2004
Morgan Stanley Nasdaq-100 Index Fund, dated March 30, 2005
Morgan Stanley New York Tax-Free Income Fund, dated April 29, 2005
Morgan Stanley S&P 500 Index Fund, dated October 29, 2004
Morgan Stanley Small-Mid Special Value Fund, dated August 29, 2005
Morgan Stanley Strategist Fund, dated September 30, 2004
Morgan Stanley Tax-Exempt Securities Trust, dated April 29, 2005
Morgan Stanley Total Market Index Fund, dated October 29, 2004
Morgan Stanley Total Return Trust, dated September 30, 2004
Morgan Stanley U.S. Government Securities Trust, dated April 29, 2005
Morgan Stanley Value Fund, dated November 30, 2004
("Group II Funds")
(Collectively, the "Funds")
The last paragraph of the section of the Fund's Prospectus titled "How to Sell Shares" is hereby deleted and replaced with the following:
Redemption Fee. Fund shares redeemed within 30 days (in the case of Group I Funds) or seven days (in the case of Group II Funds) of purchase will be subject to a 2% redemption fee, payable to the Fund. The redemption fee is designed to protect the Fund and its remaining shareholders from the effects of short-term trading. The redemption fee is not imposed on redemptions made: (i) through systematic withdrawal/exchange plans, (ii) through pre-approved asset allocation programs, (iii) of shares received by reinvesting income dividends or capital gain distributions, (iv) through certain collective trust funds or other pooled vehicles, (v) on behalf of advisory accounts where client allocations are solely at the discretion of the Morgan Stanley Investment Management investment team and (vi) through check-writing (with respect to Morgan Stanley Limited Duration U.S. Treasury Trust only). The redemption fee is based on, and deducted from, the redemption proceeds. Each time you redeem or exchange shares, the shares held the longest will be redeemed or exchanged first.
The redemption fee may not be imposed on transactions that occur through certain omnibus accounts at financial intermediaries. Certain financial intermediaries may apply different methodologies than those described above in assessing redemption fees, may impose their own redemption fee that may differ from the Fund's redemption fee or may impose certain trading restrictions to deter market timing and frequent trading. If you invest in the Fund through a financial intermediary, please read that firm's materials carefully to learn about any other restrictions or fees that may apply.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE.
79587SPT-01
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/msbluelogo.jpg)
August 25, 2005
Supplement
SUPPLEMENT DATED AUGUST 25, 2005 TO THE PROSPECTUS OF
MORGAN STANLEY BALANCED INCOME FUND
Dated May 27, 2005
The following sentence is hereby added within the "Principal Investment Strategies" section of the Fund's Prospectus:
The Fund may invest up to 15% of its net assets in Real Estate Investment Trusts ("REITs").
The following paragraph is hereby added within the "Principal Risks" section of the Fund's Prospectus:
Real Estate Investment Trusts ("REITs"). REITs pool investors' funds for investments primarily in commercial real estate or real estate properties. Like mutual funds, REITs have expenses, including advisory and administration fees, that are paid by their shareholders. As a result, you will absorb duplicate levels of fees when the Fund invests in REITs. The performance of any Fund REIT holdings ultimately depends on the types of real property in which the REITs invest and how well the property is managed. A general downturn in real estate values also can hurt REIT performance. In addition, REITs are subject to certain provisions under federal tax law. The failure of a company to qualify as a REIT could have adverse consequences for the Fund, including significantly reducing the return to the Fund on its investment in such company.
The fourth sentence in the section of the Fund's Prospectus titled "Principal Investment Strategies—Common Stocks/Convertible Securities" is hereby deleted and replaced with the following:
These investments may include foreign securities (held directly or listed in the United States on a national securities exchange and in the form of depositary receipts).
The section of the Fund's Prospectus titled "Additional Investment Strategy Information—Foreign Securities" is hereby deleted and replaced with the following:
Foreign Securities. The Fund may invest up to 20% of its net assets in foreign securities. Foreign securities include sovereign debt obligations, Yankee-dollar obligations, as well as common stocks and securities convertible into common stocks (held directly or listed in the United States on a national securities exchange and in the form of depositary receipts).
The first sentence of the section of the Fund's Prospectus entitled "Additional Risk Information—Foreign Securities" is hereby deleted and replaced with the following:
Foreign Securities. The Fund's investments in foreign securities may involve risks in addition to the risks associated with domestic securities.
The following sentence is added as the last sentence in the first paragraph of the section of the Fund's Prospectus entitled "Additional Risk Information—Foreign Securities."
In addition, in the event of default of any foreign debt obligations, it may be more difficult for the Fund to obtain or enforce a judgment against the issuers of the securities.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE.
38400SPT-01
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July 15, 2005
Supplement
SUPPLEMENT DATED JULY 15, 2005 TO THE PROSPECTUSES OF
Morgan Stanley Aggressive Equity Fund, dated September 30, 2004
Morgan Stanley Allocator Fund, dated May 27, 2005
Morgan Stanley American Opportunities Fund, dated April 29, 2005
Morgan Stanley Balanced Growth Fund, dated May 27, 2005
Morgan Stanley Balanced Income Fund, dated May 27, 2005
Morgan Stanley Biotechnology Fund, dated July 30, 2004
Morgan Stanley California Tax-Free Income Fund, dated April 29, 2005
Morgan Stanley Capital Opportunities Trust, dated March 30, 2005
Morgan Stanley Convertible Securities Trust, dated November 30, 2004
Morgan Stanley Developing Growth Securities Trust, dated November 30, 2004
Morgan Stanley Dividend Growth Securities Inc., dated June 30, 2005
Morgan Stanley Equally-Weighted S&P 500 Fund, dated August 30, 2004
Morgan Stanley European Equity Fund Inc., dated December 30, 2004
Morgan Stanley Financial Services Trust, dated July 30, 2004
Morgan Stanley Flexible Income Trust, dated December 30, 2004
Morgan Stanley Fund of Funds -- Domestic Portfolio, dated November 30, 2004
Morgan Stanley Fundamental Value Fund, dated November 30, 2004
Morgan Stanley Global Advantage Fund, dated July 30, 2004
Morgan Stanley Global Dividend Growth Securities, dated May 28, 2004
Morgan Stanley Global Utilities Fund, dated June 30, 2005
Morgan Stanley Growth Fund, dated May 28, 2004
Morgan Stanley Health Sciences Trust, dated September 30, 2004
Morgan Stanley High Yield Securities Inc., dated October 29, 2004
Morgan Stanley Income Builder Fund, dated November 30, 2004
Morgan Stanley Income Trust, dated October 29, 2004
Morgan Stanley Information Fund, May 28, 2004
Morgan Stanley International Fund, dated December 30, 2004
Morgan Stanley International SmallCap Fund, dated July 30, 2004
Morgan Stanley International Value Equity Fund, dated October 29, 2004
Morgan Stanley Japan Fund, dated July 30, 2004
Morgan Stanley KLD Social Index Fund, dated March 30, 2005
Morgan Stanley Mid-Cap Value Fund, dated October 29, 2004
Morgan Stanley Mortgage Securities Trust, dated December 30, 2004
Morgan Stanley Nasdaq-100 Index Fund, dated March 30, 2005
Morgan Stanley Natural Resource Development Securities Inc., dated June 30, 2005
Morgan Stanley New York Tax-Free Income Fund, dated April 29, 2005
Morgan Stanley Pacific Growth Fund Inc., dated December 30, 2004
Morgan Stanley Real Estate Fund, dated March 30, 2005
Morgan Stanley S&P 500 Index Fund, dated October 29, 2004
Morgan Stanley Small-Mid Special Value Fund, dated June 30, 2004
Morgan Stanley Special Growth Fund, dated June 30, 2005
Morgan Stanley Special Value Fund, dated September 30, 2004
Morgan Stanley Strategist Fund, dated September 30, 2004
Morgan Stanley Tax-Exempt Securities Trust, dated April 29, 2005
Morgan Stanley Total Market Index Fund, dated October 29, 2004
Morgan Stanley Total Return Trust, dated September 30, 2004
Morgan Stanley U.S. Government Securities Trust, dated April 29, 2005
Morgan Stanley Utilities Fund, dated April 29, 2005
Morgan Stanley Value Fund, dated November 30, 2004
(the "Funds")
Effective September 30, 2005, the Directors/Trustees of each Fund have approved the addition of a new Class A shares sales charge waiver category. Accordingly, the following is added as the third bullet in the section titled "Share Class Arrangements — Class A Shares — Other Sales Charge Waivers":
•
Custodial accounts held by a bank or trust company, created pursuant to Section 403(b) of the Internal Revenue Code.
This change in Class A shares purchase options is prospective only. Investors, as of September 30, 2005, will become eligible to purchase Class A shares at net asset value pursuant to this revised option and may have previously purchased Class B shares or Class C shares of the Fund. The terms of any such Class B shares or Class C shares purchased before September 30, 2005 remain unchanged such Class B shares and Class C shares remain subject to the annual operating expenses and contingent deferred sales charges ("CDSC") applicable to such shares and remain exchangeable only into corresponding Class B shares or Class C shares of other Morgan Stanley Funds pursuant to the exchange privilege. An investor election to redeem such Class B shares or Class C shares and reinvest in Class A shares would be subject to any applicable CDSC and tax consequences. Class D shares are not available to custodial accounts created pursuant to Section 403(b).
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE.
79562USPT-00
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/msbluelogo.jpg)
May 31, 2005
Supplement
SUPPLEMENT DATED MAY 31, 2005 TO THE PROSPECTUSES OF
Morgan Stanley Aggressive Equity Fund, dated September 30, 2004
Morgan Stanley Allocator Fund, dated May 27, 2005
Morgan Stanley American Opportunities Fund, dated April 29, 2005
Morgan Stanley Balanced Growth Fund, dated May 27, 2005
Morgan Stanley Balanced Income Fund, dated May 27, 2005
Morgan Stanley Biotechnology Fund, dated July 30, 2004
Morgan Stanley California Tax-Free Income Fund, dated April 29, 2005
Morgan Stanley Capital Opportunities Trust, dated March 30, 2005
Morgan Stanley Convertible Securities Trust, dated November 30, 2004
Morgan Stanley Developing Growth Securities Trust, dated November 30, 2004
Morgan Stanley Dividend Growth Securities Inc., dated April 30, 2004
Morgan Stanley Equally-Weighted S&P 500 Fund, dated August 30, 2004
Morgan Stanley European Equity Fund Inc., dated December 30, 2004
Morgan Stanley Federal Securities Trust, dated December 30, 2004
Morgan Stanley Financial Services Trust, dated July 30, 2004
Morgan Stanley Flexible Income Trust, dated December 30, 2004
Morgan Stanley Fund of Funds -- Domestic Portfolio, dated November 30, 2004
Morgan Stanley Fundamental Value Fund, dated November 30, 2004
Morgan Stanley Global Advantage Fund, dated July 30, 2004
Morgan Stanley Global Dividend Growth Securities, dated May 28, 2004
Morgan Stanley Global Utilities Fund, dated April 30, 2004
Morgan Stanley Growth Fund, dated May 28, 2004
Morgan Stanley Health Sciences Trust, dated September 30, 2004
Morgan Stanley High Yield Securities Inc., dated October 29, 2004
Morgan Stanley Income Builder Fund, dated November 30, 2004
Morgan Stanley Income Trust, dated October 29, 2004
Morgan Stanley Information Fund, dated May 28, 2004
Morgan Stanley International Fund, dated December 30, 2004
Morgan Stanley International SmallCap Fund, dated July 30, 2004
Morgan Stanley International Value Equity Fund, dated October 29, 2004
Morgan Stanley Japan Fund, dated July 30, 2004
Morgan Stanley KLD Social Index Fund, dated March 30, 2005
Morgan Stanley Mid-Cap Value Fund, dated October 29, 2004
Morgan Stanley Nasdaq-100 Index Fund, dated March 30, 2005
Morgan Stanley Natural Resource Development Securities Inc., dated April 30, 2004
Morgan Stanley New York Tax-Free Income Fund, dated April 29, 2005
Morgan Stanley Pacific Growth Fund Inc., dated December 30, 2004
Morgan Stanley Real Estate Fund, dated March 30, 2005
Morgan Stanley S&P 500 Index Fund, dated October 29, 2004
Morgan Stanley Small-Mid Special Value Fund, dated June 30, 2004
Morgan Stanley Special Growth Fund, dated April 30, 2004
Morgan Stanley Special Value Fund, dated September 30, 2004
Morgan Stanley Strategist Fund, dated September 30, 2004
Morgan Stanley Tax-Exempt Securities Trust, dated April 29, 2005
Morgan Stanley Total Market Index Fund, dated October 29, 2004
Morgan Stanley Total Return Trust, dated September 30, 2004
Morgan Stanley U.S. Government Securities Trust, dated April 29, 2005
Morgan Stanley Utilities Fund, dated April 29, 2005
Morgan Stanley Value Fund, dated November 30, 2004
(the "Funds")
The paragraph of the section of the prospectus titled "Share Class Arrangements — Class A Shares — Combined Purchase Privilege" is hereby deleted and replaced with the following:
You will have the benefit of reduced sales charges by combining purchases of Class A shares of the Fund for any related account in a single transaction with purchases of any class of shares of other Morgan Stanley Multi-Class Funds for the related account or any other related account. For the purpose of this combined purchase privilege, a "related account" is:
•
A single account (including an individual account, a joint account and a trust account established solely for the benefit of the individual).
•
Family member accounts (limited to spouse and children under 21 but including trust accounts established solely for the benefit of a spouse or child under 21).
•
Individual retirement accounts (IRAs) and single participant retirement accounts (such as Keoghs).
•
UGMA/UTMA accounts.
The paragraphs of the section of the Prospectus titled "Share Class Arrangements — Class A Shares — Right of Accumulation" are hereby deleted and replaced with the following:
You may benefit from a reduced sales charge if the cumulative net asset value of Class A Shares of the Fund purchased in a single transaction, together with the net asset value of all classes of shares of Morgan Stanley Multi-Class Funds (including shares of Morgan Stanley Non-Multi-Class Funds which resulted from an exchange from Morgan Stanley Multi Class Funds) held in related accounts amounts to $25,000 or more. For the purposes of the rights of accumulation privilege, a related account is any one of the accounts listed under "Combined Purchase Privilege" above.
The following paragraph is hereby added immediately following "Share Class Arrangements — Class A Shares — Right of Accumulation."
Notification. You must notify your Morgan Stanley Financial Advisor or other authorized financial representative (or Morgan Stanley Trust if you purchase shares directly through the Fund) at the time a purchase order is placed, that the purchase qualifies for a reduced sales charge under any of the privileges discussed above. Similar notification must be made in writing when an order is placed by mail. The reduced sales charge will not be granted if: (i) notification is not furnished at the time of the order; or (ii) a review of the records of Morgan Stanley DW Inc. ("Morgan Stanley DW") or other authorized dealer of Fund shares or the Fund's transfer agent does not confirm your represented holdings.
In order to obtain a reduced sales charge under any of the privileges discussed above, it may be necessary at the time of purchase for you to inform your Morgan Stanley Financial Advisor or other authorized financial representative (or Morgan Stanley Trust if you purchase shares directly through the Fund) of the existence of other accounts in which there are holdings eligible to be aggregated to meet the sales load breakpoint and/or right of accumulation threshold. In order to verify your eligibility, you may be required to provide account statements and/or confirmations regarding shares of the Fund or other Morgan Stanley Funds held in all related accounts described above at Morgan Stanley or by other authorized dealers, as well as shares held by related parties, such as members of the same family or household, in order to and/or right of accumulation threshold determine whether you have met the sales load breakpoint and/or right of accumulation threshold. The Fund makes available, in a clear and prominent format, free of charge, on its web site, www.morganstanley.com, information regarding applicable sales loads and reduced sales charges (i.e., breakpoint discounts). The web site includes hyperlinks that facilitate access to the information.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE.
79551SPT-01
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/msbluelogo.jpg)
May 31, 2005
Supplement
SUPPLEMENT DATED MAY 31, 2005 TO THE PROSPECTUSES OF
Morgan Stanley Biotechnology Fund, dated July 30, 2004
Morgan Stanley European Equity Fund Inc., dated December 30, 2004
Morgan Stanley Financial Services Trust, dated July 30, 2004
Morgan Stanley Global Advantage Fund, dated July 30, 2004
Morgan Stanley Global Dividend Growth Securities, dated May 28, 2004
Morgan Stanley Global Utilities Fund, dated April 30, 2004
Morgan Stanley Health Sciences Trust, dated September 30, 2004
Morgan Stanley High Yield Securities Inc., dated October 29, 2004
Morgan Stanley Information Fund, dated May 28, 2004
Morgan Stanley International Fund, dated December 30, 2004
Morgan Stanley International SmallCap Fund, dated July 30, 2004
Morgan Stanley International Value Equity Fund, dated October 29, 2004
Morgan Stanley Japan Fund, dated July 30, 2004
Morgan Stanley Natural Resource Development Securities Inc., dated April 30, 2004
Morgan Stanley Pacific Growth Fund Inc., dated December 30, 2004
Morgan Stanley Real Estate Fund, dated March 30, 2005
Morgan Stanley Special Growth Fund, dated April 30, 2004
Morgan Stanley Special Value Fund, dated September 30, 2004
Morgan Stanley Utilities Fund, dated April 29, 2005
("Group I Funds")
Morgan Stanley Aggressive Equity Fund, dated September 30, 2004
Morgan Stanley Allocator Fund, dated May 27, 2005
Morgan Stanley American Opportunities Fund, dated April 29, 2005
Morgan Stanley Balanced Growth Fund, dated May 27, 2005
Morgan Stanley Balanced Income Fund, dated May 27, 2005
Morgan Stanley California Tax-Free Income Fund, dated April 29, 2005
Morgan Stanley Capital Opportunities Trust, dated March 30, 2005
Morgan Stanley Convertible Securities Trust, dated November 30, 2004
Morgan Stanley Developing Growth Securities Trust, dated November 30, 2004
Morgan Stanley Dividend Growth Securities Inc., dated April 30, 2004
Morgan Stanley Equally-Weighted S&P 500 Fund, dated August 30, 2004
Morgan Stanley Federal Securities Trust, dated December 30, 2004
Morgan Stanley Flexible Income Trust, dated December 30, 2004
Morgan Stanley Fundamental Value Fund, dated November 30, 2004
Morgan Stanley Growth Fund, dated May 28, 2004
Morgan Stanley Income Builder Fund, dated November 30, 2004
Morgan Stanley Income Trust, dated October 29, 2004
Morgan Stanley KLD Social Index Fund, dated March 30, 2005
Morgan Stanley Limited Duration Fund, dated June 30, 2004
Morgan Stanley Limited Duration U.S. Treasury Trust, dated July 30, 2004
Morgan Stanley Limited Term Municipal Trust, dated May 28, 2004
Morgan Stanley Mid-Cap Value Fund, dated October 29, 2004
Morgan Stanley Nasdaq-100 Index Fund, dated March 30, 2005
Morgan Stanley New York Tax-Free Income Fund, dated April 29, 2005
Morgan Stanley S&P 500 Index Fund, dated October 29, 2004
Morgan Stanley Small-Mid Special Value Fund, dated June 30, 2004
Morgan Stanley Strategist Fund, dated September 30, 2004
Morgan Stanley Tax-Exempt Securities Trust, dated April 29, 2005
Morgan Stanley Total Market Index Fund, dated October 29, 2004
Morgan Stanley Total Return Trust, dated September 30, 2004
Morgan Stanley U.S. Government Securities Trust, dated April 29, 2005
Morgan Stanley Value Fund, dated November 30, 2004
("Group II Funds")
(Collectively, the "Funds")
Effective August 29, 2005, the Board of Directors/Trustees (the "Boards") of the Funds approved the implementation of a 2% redemption fee for Fund shares redeemed within 30 days (in the case of Group I Funds) or seven days (in the case of Group II Funds) of purchase, subject to certain exceptions discussed below. In addition, effective August 29, 2005, the Boards approved the elimination of certain trade/exchange limits currently in effect for the Funds.
With respect to all Funds (except for Morgan Stanley Limited Duration Fund, Morgan Stanley Limited Duration U.S. Treasury Trust and Morgan Stanley Limited Term Municipal Trust), the "Shareholder Fees" table in the section of the Prospectus titled "Fees and Expenses" is hereby amended with the following to reflect the redemption fee:
Shareholder Fees
![]() | ![]() | ![]() | ![]() | Class A | ![]() | ![]() | Class B | ![]() | ![]() | Class C | ![]() | ![]() | Class D | ![]() | ||||||||||||
![]() | Maximum sales charge (load) imposed on purchases (as a percentage of offering price) | ![]() | ![]() | 4.25% (for fixed income Funds) and 5.25% (for equity Funds)1 | ![]() | ![]() | ![]() | ![]() | None | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | None | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | None | ![]() | ![]() | ![]() |
![]() | Maximum deferred sales charge (load) (as a percentage based on the lesser of the offering price or net asset value at redemption) | ![]() | ![]() | None2 | ![]() | ![]() | ![]() | ![]() | 5.00 | %3 | ![]() | ![]() | ![]() | ![]() | ![]() | 1.00 | %4 | ![]() | ![]() | ![]() | ![]() | ![]() | None | ![]() | ![]() | ![]() |
![]() | Redemption fee5 | ![]() | ![]() | 2.00% | ![]() | ![]() | ![]() | ![]() | 2.00 | % | ![]() | ![]() | ![]() | ![]() | ![]() | 2.00 | % | ![]() | ![]() | ![]() | ![]() | ![]() | 2.00 | % | ![]() | ![]() |
(1)
Reduced for purchases of $25,000 and over.
(2)
Investments that are not subject to any sales charges at the time of purchase are subject to a contingent deferred sales charge ("CSDC") of 1.00% that will be imposed if you sell your shares within 18 months after purchase, except for certain specific circumstances. With respect to shares purchased prior to December 1, 2004, a CDSC of 1.00% will be imposed if you sell your shares within one year after purchase, except for certain specific circumstances.
(3)
The CDSC is scaled down to 1.00% during the sixth year, reaching zero thereafter. See "Share Class Arrangements" for a complete discussion of the CDSC.
(4)
Only applicable if you sell your shares within one year after purchase.
(5)
Payable to the Fund on shares redeemed within 30 days (in the case of Group I Funds) or seven days (in the case of Group II Funds) of purchase. See "Shareholder Information — How to Sell Shares" for more information on redemption fees.
With respect to Morgan Stanley Limited Duration Fund, Morgan Stanley Limited Duration U.S. Treasury Trust and Morgan Stanley Limited Term Municipal Trust, the following information is hereby added to the top of the table included in the section titled "Fees and Expenses":
![]() | Shareholder Fees | ![]() | |||||||
![]() | ![]() | ||||||||
![]() | Redemption Fee1 | ![]() | ![]() | ![]() | ![]() | 2.00 | % | ![]() | ![]() |
(1)
Payable to the Fund on shares redeemed within seven days of purchase. See "Shareholder Information — How to Sell Shares" for more information on redemption fees.
The second paragraph in the section of the Prospectus titled "How to Exchange Shares — Permissible Fund Exchanges" is hereby deleted and replaced with the following:
The current prospectus for each Morgan Stanley Fund describes its investment objective(s), policies and investment minimums and should be read before investment. Since exchanges are available only into continuously offered Morgan Stanley Funds, exchanges are not available into any new Morgan Stanley Fund during its initial offering period, or when shares of a particular Morgan Stanley Fund are not being offered for purchase. An exchange of Fund shares held for less than 30 days (in the case of Group I Funds) or seven days (in the case of Group II Funds) from the date of purchase will be subject to the 2% redemption fee described under the section "How to Sell Shares."
The following paragraph is hereby added as the last paragraph of the section titled "How to Sell Shares":
Redemption Fee. Fund shares redeemed within 30 days (in the case of Group I Funds) or seven days (in the case of Group II Funds) of purchase will be subject to a 2% redemption fee, payable to the Fund. The redemption fee is designed to protect the Fund and its remaining shareholders from the effects of short-term trading. The redemption fee does not apply to systematic withdrawal/exchange plans, pre-approved asset allocation programs, shares received by reinvesting income dividends or capital gain distributions, affiliated fund of funds and redemptions made through check-writing (with respect to Morgan Stanley Limited Duration U.S. Treasury Trust). The redemption fee is based on, and deducted from, the redemption proceeds. Each time you redeem or exchange shares, the shares held the longest will be redeemed or exchanged first.
With respect to trades that occur through omnibus accounts at financial intermediaries, each Fund is currently limited in its ability to monitor trading activity or enforce the redemption fee with respect to customers of such intermediaries. Certain intermediaries may not have the ability to assess a redemption fee.
Effective August 29, 2005, the limitation of a maximum of eight exchanges per calendar year will no longer be in effect. However, certain patterns of exchanges and/or purchase or sale transactions involving the Funds or other Morgan Stanley Funds may result in a Fund rejecting, limiting or prohibiting, at its sole discretion, and without prior notice, additional purchases and/or exchanges and may result in a shareholder's account being closed. Determinations in this regard may be made based on the frequency or dollar amount of previous exchanges or purchase or sale transactions. Each Fund reserves the right to reject an exchange request for any reason.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE.
79550SPT-01
[MORGAN STANLEY FUNDS GRAPHIC OMITTED] Morgan Stanley Balance Income Fund A mutual fund that seeks to provide current and moderate capital growth [MORGAN STANLEY LOGO OMITTED] The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense. Prospectus May 27, 2005 Contents THE FUND Investment Objective.................................................1 Principal Investment Strategies......................................1 Principal Risks......................................................3 Past Performance.....................................................6 Fees and Expenses....................................................8 Additional Investment Strategy Information...........................9 Additional Risk Information.........................................11 Portfolio Holdings..................................................13 Fund Management.....................................................13 SHAREHOLDER INFORMATION Pricing Fund Shares.................................................16 How to Buy Shares...................................................17 Limited Portability.................................................18 How to Exchange Shares..............................................19 How to Sell Shares..................................................20 Distributions.......................................................23 Frequent Purchases and Redemptions of Fund Shares...................23 Tax Consequences....................................................24 Share Class Arrangements............................................25 Additional Information..............................................33 FINANCIAL HIGHLIGHTS......................................................34 MORGAN STANLEY FUNDS...................................... Inside Back Cover This Prospectus contains important information about the Fund. Please read it carefully and keep it for future reference. The Fund - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE [GRAPHIC OMITTED] Morgan Stanley Balanced Income Fund seeks to provide current income and moderate capital growth. - -------------------------------------------------------------------------------- PRINCIPAL INVESTMENT STRATEGIES [GRAPHIC OMITTED] [sidebar] INCOME & GROWTH An investment objective having the goal of selecting securities that pay out income and have the potential to rise in price. [endsidebar] The Fund will normally invest at least 80% of its assets in income-producing securities, consisting of (1) fixed-income securities and (2) dividend paying common stocks and securities convertible into common stocks. Within the limitations detailed below, the Fund's "Investment Adviser," Morgan Stanley Investment Advisors Inc., may purchase or sell securities in any proportion it believes desirable based on its assessment of business, economic and investment conditions. The two groups of Fund investments in more detail are: (1) FIXED-INCOME SECURITIES. The Fund will normally invest at least 60% of its net assets in fixed-income securities. The Fund's fixed-income securities (including zero coupon securities) are limited to investment grade corporate debt securities, Yankee dollar obligations, sovereign debt obligations, bank obligations, investment grade mortgage-backed securities, including collateralized mortgage obligations, investment grade asset-backed securities and U.S. government securities. The U.S. government securities may include: o U.S. Treasury bills, notes and bonds, all of which are direct obligations of the U.S. Government. o Securities (including mortgage-backed 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 these obligations are the Government National Mortgage Association and the Federal Housing Administration. o Securities (including mortgage-backed 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 instrumentality has the right to borrow, to meet its obligations, from the U.S. Treasury. Among these agencies and instrumentalities are the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. 1 o Securities issued by agencies and instrumentalities which are backed solely by the credit of the issuing agency or instrumentality. Among these agencies and instrumentalities is the Federal Home Loan Bank. Fixed-income securities are debt securities such as bonds, notes or commercial paper. The issuer of the debt security borrows money from the investor who buys the security. Most debt securities pay either fixed or adjustable rates of interest at regular intervals until they mature, at which point investors get their principal back. The Fund's fixed-income investments may include zero coupon securities, which are purchased at a discount and generally accrue interest, but make no payments until maturity. One type of mortgage-backed security, in which the Fund may invest, is a mortgage pass-through security. These securities represent a participation interest in a pool of mortgage loans. They differ from conventional debt securities, which provide for periodic payment of interest in fixed amounts and principal payments at maturity or on specified call dates. Mortgage pass-through securities provide for monthly payments that are a "pass-through" of the monthly interest and principal payments made by the individual borrowers on the pooled mortgage loans. Mortgage pass-through securities may be collateralized by mortgages with fixed rates of interest or adjustable rates. The securitization techniques used to develop mortgage-backed securities are also applied to asset-backed securities. Asset-backed securities represent an interest in a pool of assets such as automobile and credit card receivables or home equity loans that have been securitized in pass-through structures similar to mortgage-backed securities. Collateralized mortgage obligations ("CMOs") are debt obligations collateralized by mortgage loans or mortgage pass-through securities (collectively "Mortgage Assets"). Payments of principal and interest on the Mortgage Assets and any reinvestment income are used to make payments on the CMOs. CMOs are issued in multiple classes. Each class has a fixed or floating rate and a stated maturity or final distribution date. The principal and interest on the Mortgage Assets may be allocated among the classes in a number of different ways. Certain classes will, as a result of the allocation, have more predictable cash flows than others. As a general matter, the more predictable the cash flow, the lower the yield relative to other Mortgage Assets. The less predictable the cash flow, the higher the yield and the greater the risk. The Fund may invest in any class of CMO. Yankee dollar obligations are dollar-denominated obligations issued in the U.S. capital markets by foreign issuers such as corporations and banks. Sovereign debt securities are issued or guaranteed by foreign government entities. (2) COMMON STOCKS/CONVERTIBLE SECURITIES. The Fund will normally invest at least 25% of its assets in dividend paying common stocks and securities convertible into common stocks. The Fund invests in common stocks of companies that have a record of paying dividends and, in the Investment Adviser's opinion, have the potential for increasing dividends. Investment grade securities convertible into common stocks may also be Fund investments. These investments may include foreign securities that are listed in the United States on a national securities exchange and depositary receipts. A depositary receipt is generally issued by a bank or financial institution and represents an ownership interest in the common stock or other equity securities of a foreign company. Common stock is a share ownership or equity interest in a corporation. It may or may not pay dividends, as some companies reinvest all of their profits back into their businesses, while others pay out some of their profits to shareholders as dividends. The Fund may also invest in options and futures. 2 - -------------------------------------------------------------------------------- PRINCIPAL RISKS [GRAPHIC OMITTED] There is no assurance that the Fund will achieve its investment objective. The Fund's share price and yield will fluctuate with changes in the market value and/or yield of the Fund's portfolio securities. When you sell Fund shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Fund. FIXED-INCOME SECURITIES. Principal risks of investing in the Fund are associated with its fixed-income investments. All fixed-income securities, such as bonds, bank obligations, corporate debt securities and U.S. government securities are subject to two types of risk: credit risk and interest rate risk. Credit risk refers to the possibility that the issuer of a security will be unable to make interest payments and/or repay the principal on its debt. While the Fund invests in investment grade securities, certain of these securities have speculative characteristics. Interest rate risk refers to fluctuations in the value of a fixed-income security resulting from changes in the general level of interest rates. When the general level of interest rates goes up, the prices of most fixed-income securities go down. When the general level of interest rates goes down, the prices of most fixed-income securities go up. (Zero coupon securities are typically subject to greater price fluctuations than comparable securities that pay interest.) The Fund is not limited as to the maturities of the securities in which it may invest. Thus, a rise in the general level of interest rates may cause the price of the Fund's fixed-income securities to fall substantially. MORTGAGE-BACKED SECURITIES. Mortgage-backed securities in which the Fund may invest have different risk characteristics than traditional debt securities. Although generally the value of fixed-income securities increases during periods of falling interest rates and decreases during periods of rising rates, this is not always the case with mortgage-backed securities. This is due to the fact that principal on underlying mortgages may be prepaid at any time as well as other factors. Generally, prepayments will increase during a period of falling interest rates and decrease during a period of rising interest rates. The rate of prepayments also may be influenced by economic and other factors. Prepayment risk includes the possibility that, as interest rates fall, securities with stated interest rates may have the principal prepaid earlier than expected, requiring the Fund to invest the proceeds at generally lower interest rates. Investments in mortgage-backed securities are made based upon, among other things, expectations regarding the rate of prepayments on underlying mortgage pools. Rates of prepayment, faster or slower than expected by the Investment Adviser, could reduce the Fund's yield, increase the volatility of the Fund and/or cause a decline in net asset value. Certain mortgage-backed securities may be more volatile and less liquid than other traditional types of debt securities. ASSET-BACKED SECURITIES. Asset-backed securities have risk characteristics similar to mortgage-backed securities. Like mortgage-backed securities, they generally decrease in value as a result of interest rate increases, but may benefit less than other fixed-income securities from declining interest rates, principally because of prepayments. Also, as in the case of mortgage-backed securities, prepayments generally increase during a period of declining 3 interest rates, although other factors, such as changes in credit use and payment patterns, may also influence prepayment rates. Asset-backed securities also involve the risk that various federal and state consumer laws and other legal and economic factors may result in the collateral backing the securities being insufficient to support payment on the securities. COLLATERALIZED MORTGAGE OBLIGATIONS. The principal and interest on the Mortgage Assets comprising a CMO may be allocated among the several classes of a CMO in many ways. The general goal in allocating cash flows on Mortgage Assets to the various classes of a CMO is to create certain tranches on which the expected cash flows have a higher degree of predictability than do the underlying Mortgage Assets. As a general matter, the more predictable the cash flow is on a particular CMO tranche, the lower the anticipated yield on that tranche at the time of issue will be relative to the prevailing market yields on the Mortgage Assets. As part of the process of creating more predictable cash flows on certain tranches of a CMO, one or more tranches generally must be created that absorb most of the changes in the cash flows on the underlying Mortgage Assets. The yields on these tranches are generally higher than prevailing market yields on other mortgage related securities with similar average lives. Principal prepayments on the underlying Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates. Because of the uncertainty of the cash flows on these tranches, the market prices and yields of these tranches are more volatile and may increase or decrease in value substantially with changes in interest rates and/or the rates of prepayment. Due to the possibility that prepayments (on home mortgages and other collateral) will alter the cash flow on CMOs, it is not possible to determine in advance the final maturity date or average life. Faster prepayment will shorten the average life and slower prepayments will lengthen it. In addition, if the collateral securing CMOs or any third party guarantees are insufficient to make payments, the Fund could sustain a loss. YANKEE DOLLAR OBLIGATIONS. Yankee dollar obligations are subject to the same risks as domestic issues, notably credit risk, market risk and liquidity risk. To a limited extent, they are also subject to certain sovereign risks. One such risk is the possibility that a sovereign country might prevent capital, in the form of dollars, from flowing across its borders. Other risks include adverse political and economic developments; the extent and quality of government regulations of financial markets and institutions; the imposition of foreign withholding taxes; and the expropriation or nationalization of foreign issuers. The Fund may consider Yankee dollar obligations to be domestic securities for purposes of its investment policy. SOVEREIGN DEBT. Investments in sovereign debt are subject to the risk that a government entity may delay or refuse to pay interest or repay principal on its sovereign debt. Some of these reasons may include cash flow problems, insufficient foreign currency reserves, political considerations, the relative size of its debt position to its economy or its failure to put in place economic reforms required by the International Monetary Fund or other multilateral agencies. If a government entity defaults, it may ask for more time in which to pay or for further loans. There is no legal process for collecting sovereign debts that a government does not pay or bankruptcy proceeding by which all or part of sovereign debt that a government entity has not repaid may be collected. COMMON STOCKS. A principal risk of investing in the Fund is associated with its common stock investments. In general, stock values fluctuate in response to activities specific to the company as well as general market, economic and political conditions. Stock prices can fluctuate widely in response to these factors. 4 CONVERTIBLE SECURITIES. The Fund's investments in convertible securities subject the Fund to the risks associated with both fixed-income securities and common stocks. To the extent that a convertible security's investment value is greater than its conversion value, its price will likely increase when interest rates fall and decrease when interest rates rise, as with a fixed-income security. If the conversion value exceeds the investment value, the price of the convertible security will tend to fluctuate directly with the price of the underlying equity security. OTHER RISKS. The performance of the Fund also will depend on whether or not the Investment Adviser is successful in applying the Fund's investment strategies. The Fund is also subject to other risks from its permissible investments, including the risks associated with investments in options and futures, foreign securities, commercial mortgage-backed securities ("CMBS"), forward foreign currency exchange contracts, targeted return index securities ("TRAINs"), stripped mortgage-backed securities, inverse floating obligations ("inverse floaters") and swaps. For more information about these risks, see the "Additional Risk Information" section. Shares of the Fund are not bank deposits and are not guaranteed or insured by the FDIC or any other government agency. 5 - -------------------------------------------------------------------------------- PAST PERFORMANCE [GRAPHIC OMITTED] [sidebar] ANNUAL TOTAL RETURNS This chart shows how the performance of the Fund's Class C shares has varied from year to year over the past nine calendar years. [endsidebar The bar chart and table below provide some indication of the risks of investing in the Fund. The Fund's past performance (before and after taxes) does not indicate how the Fund will perform in the future. ANNNUAL TOTAL RETURNS -- CALENDAR YEARS [GRAPHIC OMITTED] Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 - ------------------------------------------------------------------------------------------------ Percentage 8.63% 15.57% 9.38% 0.20% 7.99% 3.67% -3.13% 10.59% 6.01% The bar chart reflects the performance of Class C shares; the performance of the other Classes will differ because the Classes have different ongoing fees. The performance information in the bar chart does not reflect the deduction of sales charges; if these amounts were reflected, returns would be less than shown. The year-to-date total return as of March 31, 2005 was -0.38%. During the periods shown in the bar chart, the highest return for a calendar quarter was 8.34% (quarter ended June 30, 1997) and the lowest return for a calendar quarter was -4.38% (quarter ended September 30, 2002). 6 [sidebar] AVERAGE ANNUAL TOTAL RETURNS This table compares the Fund's average annual total returns with those of indices that represent broad measures of market performance, as well as an index that represents a group of similar mutual funds, over time. The Fund's returns include the maximum applicable sales charge for each Class and assume you sold your shares at the end of each period (unless otherwise noted). [endsidebar] AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2004) - ------------------------------------------------------------------------------------------------------------ PAST 1 YEAR PAST 5 YEARS LIFE OF FUND - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ Class A(1): Return Before Taxes 1.27% 4.60% 5.11% - ------------------------------------------------------------------------------------------------------------ Lehman Brothers U.S. Government/Credit Index(2) 4.19% 8.00% 6.91% - ------------------------------------------------------------------------------------------------------------ Russell 1000 Value Index(3) 16.49% 5.27% 7.86% - ------------------------------------------------------------------------------------------------------------ Lipper Income Funds Index(4) 7.50% 4.84% 5.76% - ------------------------------------------------------------------------------------------------------------ Class B(1): Return Before Taxes 0.99% 4.58% 5.05% - ------------------------------------------------------------------------------------------------------------ Lehman Brothers U.S. Government/Credit Index(2) 4.19% 8.00% 6.91% - ------------------------------------------------------------------------------------------------------------ Russell 1000 Value Index(3) 16.49% 5.27% 7.86% - ------------------------------------------------------------------------------------------------------------ Lipper Income Funds Index(4) 7.50% 4.84% 5.76% - ------------------------------------------------------------------------------------------------------------ Class C(1): Return Before Taxes 5.01% 4.92% 7.35% - ------------------------------------------------------------------------------------------------------------ Return After Taxes on Distributions(5) 4.34% 3.83% 5.80% - ------------------------------------------------------------------------------------------------------------ Return After Taxes on Distributions and Sale of Fund Shares 3.36% 3.57% 5.48% - ------------------------------------------------------------------------------------------------------------ Lehman Brothers U.S. Government/Credit Index(2) 4.19% 8.00% 7.45% - ------------------------------------------------------------------------------------------------------------ Russell 1000 Value Index(3) 16.49% 5.27% 13.16% - ------------------------------------------------------------------------------------------------------------ Lipper Income Funds Index(4) 7.50% 4.84% 8.60%(6) - ------------------------------------------------------------------------------------------------------------ Class D(1): Return Before Taxes 7.07% 5.94% 6.09% - ------------------------------------------------------------------------------------------------------------ Lehman Brothers U.S. Government/Credit Index(2) 4.19% 8.00% 6.91% - ------------------------------------------------------------------------------------------------------------ Russell 1000 Value Index(3) 16.49% 5.27% 7.86% - ------------------------------------------------------------------------------------------------------------ Lipper Income Funds Index(4) 7.50% 4.84% 5.76% - ------------------------------------------------------------------------------------------------------------ (1) Class C commenced operations on March 28, 1995. Classes A, B and D commenced operations on July 28, 1997. (2) The Lehman Brothers U.S. Government/Credit Index tracks the performance of government and corporate obligations, including U.S. government agency and Treasury securities and corporate and Yankee bonds. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. (3) The Russell 1000 Value Index measures the performance of those companies in the Russell 1000 Index with lower price-to-book ratios and lower forecasted growth values. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. (4) The Lipper Income Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Income Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. (5) These returns do not reflect any tax consequences from a sale of your shares at the end of each period but they do reflect any applicable sales charges on such a sale. (6) For the period March 31, 1995 through December 31, 2004. Included in the table above are the after-tax returns for the Fund's Class C shares. The after-tax returns for the Fund's other Classes will vary from the Class C shares' returns. After-tax returns are calculated using the historical highest individual federal marginal income tax rates during the period shown and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns may be higher than before-tax returns due to foreign tax credits and/or an assumed benefit from capital losses that would have been realized had Fund shares been sold at the end of the relevant periods, as applicable. 7 - -------------------------------------------------------------------------------- FEES AND EXPENSES [GRAPHIC OMITTED] [sidebar] SHAREHOLDER FEES These fees are paid directly from your investment. [endsidebar] The table below briefly describes the fees and expenses that you may pay if you buy and hold shares of the Fund. The Fund offers four Classes of shares: Classes A, B, C and D. Each Class has a different combination of fees, expenses and other features, which should be considered in selecting a Class of shares. The Fund does not charge account or exchange fees. However, certain shareholders may be charged an order processing fee by the broker-dealer through which shares are purchased, as described below. See the "Share Class Arrangements" section for further fee and expense information. SHAREHOLDER FEES CLASS A CLASS B CLASS C CLASS D Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 5.25%(1) None None None - ---------------------------------------------------------------------------------------------------------------------------- Maximum deferred sales charge (load) (as a percentage based on the lesser of the offering price or net asset value at redemption) None(2) 5.00%(3) 1.00%(4) None [sidebar] ANNUAL FUND OPERATING EXPENSES These expenses are deducted from the Fund's assets. [endsidebar] ANNUAL FUND OPERATING EXPENSES - ------------------------------------------------------------------------------------------------ CLASS A CLASS B CLASS C CLASS D - ------------------------------------------------------------------------------------------------ Advisory fee* 0.52% 0.52% 0.52% 0.52% - ------------------------------------------------------------------------------------------------ Distribution and service (12b-1) fees 0.24% 1.00% 0.93% None - ------------------------------------------------------------------------------------------------ Other expenses* 0.32% 0.32% 0.32% 0.32% - ------------------------------------------------------------------------------------------------ Total annual Fund operating expenses* 1.08% 1.84% 1.77% 0.84% - ------------------------------------------------------------------------------------------------ * Expense information in the table has been restated to reflect current fees (see "Fund Management"). (1) Reduced for purchases of $25,000 and over. (2) Investments that are not subject to any sales charges at the time of purchase are subject a contingent deferred sales charge ("CDSC") of 1.00% that will be imposed if you sell your shares within 18 months after purchase, except for certain specific circumstances. With respect to shares purchased prior to December 1, 2004, a CDSC of 1.00% will be imposed if you sell your shares within one year after purchase, except for certain specific circumstances. (3) The CDSC is scaled down to 1.00% during the sixth year, reaching zero thereafter. See "Share Class Arrangements" for a complete discussion of the CDSC. (4) Only applicable if you sell your shares within one year after purchase. 8 EXAMPLE This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund, your investment has a 5% return each year and the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, the tables below show your costs at the end of each period based on these assumptions, depending upon whether or not you sell your shares at the end of each period. IF YOU SOLD YOUR SHARES: IF YOU HELD YOUR SHARES: ---------------------------------------------- ---------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------------------------------------------------------------ ---------------------------------------------- Class A $629 $850 $1,089 $1,773 $629 $850 $1,089 $1,773 - ------------------------------------------------------------ ---------------------------------------------- Class B $687 $879 $1,195 $2,159 $187 $579 $995 $2,159 - ------------------------------------------------------------ ---------------------------------------------- Class C $280 $557 $959 $2,084 $180 $557 $959 $2,084 - ------------------------------------------------------------ ---------------------------------------------- Class D $86 $268 $466 $1,037 $86 $268 $466 $1,037 - ------------------------------------------------------------ ---------------------------------------------- While Class B and Class C shares do not have any front-end sales charges, their higher ongoing annual expenses (due to higher 12b-1 fees) mean that over time you could end up paying more for these shares than if you were to pay front-end sales charges for Class A shares. ORDER PROCESSING FEE. Morgan Stanley DW Inc. ("Morgan Stanley DW") charges clients an order processing fee of $5.25 (except in certain circumstances, including, but not limited to, activity in fee-based accounts, exchanges, dividend reinvestments and systematic investment and withdrawal plans) when a client buys or redeems shares of the Fund. Please consult your Morgan Stanley Financial Advisor for more information regarding this fee. - -------------------------------------------------------------------------------- ADDITIONAL INVESTMENT STRATEGY INFORMATION [GRAPHIC OMITTED] This section provides additional information relating to the Fund's principal investment strategies. OPTIONS AND FUTURES. The Fund may invest in futures with respect to stock indices, financial instruments and interest rate indices and may purchase and sell options on securities, securities indices and stock index futures. Futures and options may be used to facilitate trading, to increase or decrease the Fund's market exposure or to seek to protect against a decline in the value of the Fund's securities or an increase in prices of securities that may be purchased. FOREIGN SECURITIES. The Fund's investments in common stocks and securities convertible into common stocks may include foreign securities that are listed in the United States on a national securities exchange and depositary receipts. COMMERCIAL MORTGAGE-BACKED SECURITIES. The Fund may invest in CMBS. The Fund invests in CMBS that are rated investment grade by at least one nationally-recognized statistical rating organization (e.g., Baa or 9 better by Moody's Investor Services, Inc. or BBB or better by Standard & Poor's Ratings Group, a division of The McGraw Hill Companies, Inc.). CMBS are generally multi-class or pass-through securities backed by a mortgage loan or a pool of mortgage loans secured by commercial property, such as industrial and warehouse properties, office buildings, retail space and shopping malls, multifamily properties and cooperative apartments. The commercial mortgage loans that underlie CMBS are generally not amortizing or not fully amortizing. That is, at their maturity date, repayment of their remaining principal balance or "balloon" is due and is repaid through the attainment of an additional loan or sale of the property. An extension of a final payment on commercial mortgages will increase the average life of the CMBS, generally resulting in lower yield for discount bonds and a higher yield for premium bonds. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund's investments also may include forward foreign currency exchange contracts, which involve the purchase or sale of a specific amount of foreign currency at the current price with delivery at a specified future date. The Fund may use these contracts to hedge against adverse movements in the foreign currencies in which portfolio securities are denominated. In addition, the Fund may use these instruments to modify its exposure to various currency markets. TARGETED RETURN INDEX SECURITIES ("TRAINS"). Up to 10% of the Fund's net assets may be invested in TRAINs. A TRAIN is a structured, pooled investment vehicle that permits investment in a diversified portfolio of fixed income securities without the brokerage and other expenses associated with directly holding small positions in individual securities. STRIPPED MORTGAGE-BACKED SECURITIES. The Fund may invest up to 10% of its net assets in stripped mortgage-backed securities. Stripped mortgage-backed securities are usually structured in two classes. One class entitles the holder to receive all or most of the interest but little or none of the principal of a pool of Mortgage Assets (the interest-only or "IO" Class), while the other class entitles the holder to receive all or most of the principal but little or none of the interest (the principal-only or "PO" Class). INVERSE FLOATERS. The Fund may invest up to 10% of its net assets in inverse floaters. An inverse floater has a coupon rate that moves in the direction opposite to that of a designated interest rate index. SWAPS. Swap transactions are contracts in which the Fund agrees to exchange the return or interest rate on one instrument for the return or interest rate on another instrument. The payment streams are calculated by reference to a specified index and agreed upon notional amount. A "specified index" may include currencies, interest rates, fixed-income indices, securities indices, total return on interest rate indices or commodity indices. Swaps may be used to manage the maturity and duration of a fixed-income portfolio, or to gain exposure to a market without directly investing in securities traded in that market. Currency swaps generally involve an agreement to pay interest streams in one currency based on a specified index in exchange for receiving interest streams denominated in another currency. Interest rate caps, floors and collars are swaps in which one party pays a single or periodic fixed amount or premium and the other party pays periodic amounts based on the movement of a specified index. The Fund may enter into credit default swap contracts for hedging purposes, to add leverage to its portfolio or to gain exposure to a credit in which the Fund may otherwise invest. 10 DEFENSIVE INVESTING. The Fund may take temporary "defensive" positions in attempting to respond to adverse market conditions. The Fund may invest any amount of its assets in cash or money market instruments in a defensive posture that may be inconsistent with the Fund's principal investment strategies when the Investment Adviser believes it is advisable to do so. Although taking a defensive posture is designed to protect the Fund from an anticipated market downturn, it could have the effect of reducing the benefit from any upswing in the market. When the Fund takes a defensive position, it may not achieve its investment objective. PORTFOLIO TURNOVER. The Fund may engage in active and frequent trading of its portfolio securities. The Financial Highlights Table at the end of this Prospectus shows the Fund's portfolio turnover rate during the past fiscal periods. A portfolio turnover rate of 100%, for example, is equivalent to the Fund buying and selling all of its securities one time during the course of the year. A high portfolio turnover rate (over 100%) could result in high brokerage costs and an increase in taxable capital gains distributions to the Fund's shareholders. See the sections on "Distributions" and "Tax Consequences." The percentage limitations relating to the composition of the Fund's portfolio apply at the time the Fund acquires an investment. Subsequent percentage changes that result from market fluctuations generally will not require the Fund to sell any portfolio security. However, the Fund may be required to sell its illiquid securities holdings, if any, in response to fluctuations in the value of such holdings. The Fund may change its principal investment strategies without shareholder approval; however, you would be notified of any changes. - -------------------------------------------------------------------------------- ADDITIONAL RISK INFORMATION [GRAPHIC OMITTED] This section provides additional information relating to the principal risks of investing in the Fund. OPTIONS AND FUTURES. If the Fund invests in futures on stock indices, financial instruments and interest rate indices or options on securities, securities indices and stock index futures, its participation in these markets may subject it to certain risks. The Investment Adviser's predictions of movements in the direction of the stock, bond, stock index or interest rate markets may be inaccurate, and the adverse consequences to the Fund (e.g., a reduction in the Fund's net asset value or a reduction in the amount of income available for distribution) may leave the Fund in a worse position than if these strategies were not used. Other risks inherent in the use of futures and options include, for example, the possible imperfect correlation between the price of option and futures contracts and the movements in the prices of the securities being hedged, and the possible absence of a liquid secondary market for any particular instrument. Certain options may be over-the-counter options, which are options negotiated with dealers; there is no secondary market for these investments. FOREIGN SECURITIES. The Fund's investments in the common stocks of foreign corporations (including American Depositary Receipts) may involve risks in addition to the risks associated with domestic securities. Foreign securities are affected by changes in currency rates. Foreign securities also have risks related to political and economic developments abroard. Foreign companies, in general, are not subject to the regulatory requirements of 11 U.S. companies and, as such, there may be less publicly available information about these companies. Moreover, foreign accounting, auditing and financial reporting standards generally are different from those applicable to U.S. companies. Depositary receipts involve many of the same risks as those associated with direct investment in foreign securities. In addition, the underlying issuers of certain depositary receipts, particularly unsponsored or unregistered depositary receipts, are under no obligation to distribute shareholder communications to the holders of such receipts, or to pass through to them any voting rights with respect to the deposited securities. COMMERCIAL MORTGAGE-BACKED SECURITIES. CMBS are subject to credit risk and prepayment risk. Although prepayment risk is present, it is of a lesser degree in the CMBS market than in the residential mortgage market; commercial real estate property loans often contain provisions which substantially reduce the likelihood that such securities will be prepaid (e.g., significant prepayment penalties on loans and, in some cases, prohibition on principal payments for several years following origination). FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Use of forward foreign currency exchange contracts involves risks. If the Investment Adviser employs a strategy that does not correlate well with the Fund's investments or the currencies in which the investments are denominated, currency contracts could result in a loss. The contracts also may increase the Fund's volatility and, thus, could involve a significant risk. TRAINS. The Fund may invest in TRAINs, which are investment vehicles structured as trusts. Each trust represents an undivided investment interest in the pool of securities (generally high yield securities) underlying the trust without the brokerage and other expenses associated with holding small positions in individual securities. TRAINs are not registered under the Securities Act of 1933 or the Investment Company Act of 1940 and therefore must be held by qualified purchasers and resold to qualified institutional buyers pursuant to Rule 144A under the Securities Act. Investments in certain TRAINs may have the effect of increasing the level of Fund illiquidity to the extent that the Fund, at a particular point in time, may be unable to find qualified institutional buyers interested in purchasing such securities. STRIPPED MORTGAGE-BACKED SECURITIES. Investments in each class of stripped mortgage-backed securities are extremely sensitive to changes in interest rates. IOs tend to decrease in value substantially if interest rates decline and prepayment rates become more rapid. POs tend to decrease in value substantially if interest rates increase and the rate of prepayment decreases. If the Fund invests in stripped mortgage-backed securities and interest rates move in a manner not anticipated by Fund management, it is possible that the Fund could lose all or substantially all of its investment. INVERSE FLOATERS. Investments in inverse floaters are subject to certain risks. Like most other fixed-income securities, the value of inverse floaters will decrease as interest rates increase. They are more volatile, however, than most other fixed-income securities because the coupon rate on an inverse floater typically changes at a multiple of the change in the relevant index rate. Thus, any rise in the index rate (as a consequence of an increase in interest rates) causes a correspondingly greater drop in the coupon rate of an inverse floater while a drop in the index rate causes a correspondingly greater increase in the coupon of an inverse floater. Some inverse floaters may also increase or decrease substantially because of changes in the rate of prepayments. 12 SWAPS. Swaps do not involve the delivery of securities, other underlying assets or principal. Accordingly, the risk of loss with respect to swaps is limited to the net amount of payments that the Fund is contractually obligated to make or, in the case of the other party to a swap, the net amount of payments that the Fund is contractually entitled to receive. Currency swaps usually involve the delivery of the entire principal value of one designated currency in exchange for the other designated currency. Therefore, the entire principal value of a currency swap is subject to the risk that the other party to the swap will default on its contractual delivery obligations. If there is a default by the counterparty, the Fund may have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid. Caps, floors and collars are more recent innovations for which standardized documentation has not yet been fully developed and, accordingly, they are less liquid than swaps. The Fund's investments in credit default swap contracts involves risks. Where the Fund is the buyer of a credit default swap contract, it would be entitled to receive the par (or other agreed-upon) value of a referenced debt obligation from the counterparty to the contract only in the event of a default by a third party on the debt obligation. If no default occurs, the Fund would have paid to the counterparty a periodic stream of payments over the term of the contract and received no benefit from the contract. When the Fund is the seller of a credit default swap contract, it receives the stream of payments but is obligated to pay upon default of the referenced debt obligation. - -------------------------------------------------------------------------------- PORTFOLIO HOLDINGS [GRAPHIC OMITTED] [sidebar] MORGAN STANLEY INVESTMENT ADVISORS INC. The Investment Adviser is widely recognized as a leader in the mutual fund industry and had approximately $105 billion in assets under management or administration as of April 30, 2005. [endsidebar] A description of the Fund's policies and procedures with respect to the disclosure of the Fund's portfolio securities is available in the Fund's Statement of Additional Information. - -------------------------------------------------------------------------------- FUND MANAGEMENT [GRAPHIC OMITTED] The Fund has retained the Investment Adviser -- Morgan Stanley Investment Advisors Inc. -- 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. The Fund's portfolio is managed within the Investment Adviser's Equity Income and Taxable Fixed Income teams. Current members of the Equity Income team collectively responsible for the day-to-day management of the Fund's portfolio include James A. Gilligan, a Managing Director 13 of the Investment Adviser, James O. Roeder, an Executive Director of the Investment Adviser, Sergio Marcheli, Thomas B. Bastian, and Vincent E. Vizachero, each a Vice President of the Investment Adviser. Current members of the Taxable Fixed Income team include W. David Armstrong and David S. Horowitz, Managing Directors of the Investment Adviser, and Stefania A. Perrucci, Vice President of the Investment Adviser. Mr. Gilligan, who is the Equity Income team's lead portfolio manager, has worked for the Investment Adviser since 1985 and has managed the Fund since 2002. Mr. Roeder has worked for the Investment Adviser since 1999 and has managed the Fund since 2002. Mr. Marcheli has worked for the Investment Adviser since 2002 and has managed the Fund since 2003. From 2002 to 2003, Mr. Marcheli worked in an investment management capacity with the Investment Adviser and prior to that, he worked in a marketing capacity for an affiliate of the Investment Adviser. Mr. Bastian has worked for the Investment Adviser since 2003 and has managed the Fund since 2003. Prior to 2003, Mr. Bastian was a portfolio manager with Eagle Asset Management. Mr. Vizachero has worked for the Investment Adviser since 2001 and has managed the Fund since 2002. Prior to 2001, he was an analyst at Fidelity Investments. Mr. Armstrong has worked for the Investment Adviser since 1998 and has managed the Fund since 2005. Mr. Horowitz has worked for the Investment Adviser since 1995 and has managed the Fund since 2005. Ms. Perrucci has worked for the Investment Adviser since 2000 and has managed the Fund since 2005. Each member of the Equity Income team is responsible for specific sectors, with the exception of Mr. Marcheli. All team members are responsible for the day-to-day management of the Fund and Mr. Gilligan is responsible for the execution of the overall strategy of the Fund. Each member of the Taxable Fixed Income team is responsible for specific sectors. Mr. Armstrong is responsible for the interest rate management of the Fund. Mr. Horowitz is responsible for the corporate sector. Ms. Perrucci is responsible for the mortgage sector. Each member is responsible for the day-to-day management of the Fund. The Fund's Statement of Additional Information provides additional information about the portfolio managers' compensation structure, other accounts managed by the portfolio managers and the portfolio managers' ownership of securities in the Fund. The composition of the team may change without notice from time to time. Prior to November 1, 2004, the Fund had retained the Investment Adviser to provide administrative services and to manage the investment of the Fund's assets pursuant to an investment management agreement (the "Management Agreement") pursuant to which the Fund paid the Investment Adviser a monthly management fee as full compensation for the services and facilities furnished to the Fund, and for Fund expenses assumed by the Investment Adviser at the annual rate of 0.60% of the portion of the daily net assets not exceeding $500 million; and 0.575% of the portion of the daily net assets exceeding $500 million. Effective November 1, 2004, the Board of Trustees approved an amended and restated investment advisory agreement to remove the administrative services component from the Management Agreement and to reduce the investment advisory fee to the annual rate of 0.52% of the portion of the daily net assets not exceeding $500 million; and 0.495% of the portion of the daily net assets exceeding $500 million. The administrative services 14 previously provided to the Fund by the Investment Adviser are being provided by Morgan Stanley Services Company Inc. ("Administrator") pursuant to a separate administration agreement entered into by the Fund with the Administrator. Such change resulted in a 0.08% reduction in the advisory fee concurrent with the implementation of a 0.08% administration fee pursuant to the new administration agreement. For the fiscal year ended January 31, 2005, the Fund paid total compensation to the Investment Adviser amounting to 0.58% of the Fund's average daily net assets. 15 Shareholder Information - -------------------------------------------------------------------------------- PRICING FUND SHARES [GRAPHIC OMITTED] The price of Fund shares (excluding sales charges), called "net asset value," is based on the value of the Fund's portfolio securities. While the assets of each Class are invested in a single portfolio of securities, the net asset value of each Class will differ because the Classes have different ongoing distribution fees. The net asset value per share of the Fund is determined once daily at 4:00 p.m. Eastern time on each day that the New York Stock Exchange is open (or, on days when the New York Stock Exchange closes prior to 4:00 p.m., at such earlier time). Shares will not be priced on days that the New York Stock Exchange is closed. The value of the Fund's portfolio securities is based on the securities' market price when available. When a market price is not readily available, including circumstances under which the Investment Adviser determines that a security's market price is not accurate, a portfolio security is valued at its fair value, as determined under procedures established by the Fund's Board of Trustees. In addition, with respect to securities that primarily are listed on foreign exchanges, when an event occurs after the close of such exchanges that is likely to have changed the value of the securities (for example, a percentage change in value of one or more U.S. securities indices in excess of specified thresholds), such securities will be valued at their fair value, as determined under procedures established by the Fund's Board of Trustees. Securities also may be fair valued in the event of a significant development affecting a country or region or an issuer-specific development which is likely to have changed the value of the security. In these cases, the Fund's net asset value will reflect certain portfolio securities' fair value rather than their market price. Fair value pricing involves subjective judgment and it is possible that the fair value determined for a security is materially different than the value that could be realized upon the sale of that security. With respect to securities that are primarily listed on foreign exchanges, the value of the Fund's portfolio securities may change on days when you will not be able to purchase or sell your shares. An exception to the Fund's general policy of using market prices concerns its short-term debt portfolio securities. Debt securities with remaining maturities of 60 days or less at the time of purchase are valued at amortized cost. However, if the cost does not reflect the securities' market value, these securities will be valued at their fair value. 16 - -------------------------------------------------------------------------------- HOW TO BUY SHARES [GRAPHIC OMITTED] [sidebar] CONTACTING A FINANCIAL ADVISOR If you are new to the Morgan Stanley Funds and would like to contact a Morgan Stanley Financial Advisor, call toll-free 1-866-MORGAN8 for the telephone number of the Morgan Stanley office nearest you. You may also access our office locator on our Internet site at: www.morganstanley.com/funds [endsidebar] You may open a new account to buy Fund shares or buy additional Fund shares for an existing account by contacting your Morgan Stanley Financial Advisor or other authorized financial representative. Your Financial Advisor will assist you, step-by-step, with the procedures to invest in the Fund. The Fund's transfer agent, Morgan Stanley Trust ("Transfer Agent"), in its sole discretion, may allow you to purchase shares directly by calling and requesting an application. To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account. What this means to you: when you open an account, we will ask your name, address, date of birth and other information that will allow us to identify you. If we are unable to verify your identity, we reserve the right to restrict additional transactions and/or liquidate your account at the next calculated net asset value after your account is closed (less any applicable sales/account charges and/or tax penalties) or take any other action required by law. Because every investor has different immediate financial needs and long-term investment goals, the Fund offers investors four Classes of shares: Classes A, B, C and D. Class D shares are only offered to a limited group of investors. Each Class of shares offers a distinct structure of sales charges, distribution and service fees, and other features that are designed to address a variety of needs. Your Morgan Stanley Financial Advisor or other authorized financial representative can help you decide which Class may be most appropriate for you. When purchasing Fund shares, you must specify which Class of shares you wish to purchase. When you buy Fund shares, the shares are purchased at the next share price calculated (plus any applicable front-end sales charge for Class A shares) after we receive your purchase order. Your payment is due on the third business day after you place your purchase order. The Fund, in its sole discretion, may waive the minimum initial and additional investment amounts in certain cases. We reserve the right to reject any order for the purchase of Fund shares for any reason. ORDER PROCESSING FEE. Morgan Stanley DW charges clients an order processing fee of $5.25 (except in certain circumstances, including, but not limited to, activity in fee-based accounts, exchanges, dividend reinvestments and systematic investment and withdrawal plans) when a client buys or redeems shares of the Fund. Please consult your Morgan Stanley Financial Advisor for more information regarding this fee. 17 MINIMUM INVESTMENT AMOUNTS [sidebar] EasyInvest (Registered Trademark) A purchase plan that allows you to transfer money automatically from your checking or savings account or from a Money Market Fund on a semi-monthly, monthly or quarterly basis. Contact your Morgan Stanley Financial Advisor for further information about this service. [endsidebar] - ---------------------------------------------------------------------------------------------------------- MINIMUM INVESTMENT ------------------------- INVESTMENT OPTIONS INITIAL ADDITIONAL - ---------------------------------------------------------------------------------------------------------- Regular Accounts $1,000 $100 - ---------------------------------------------------------------------------------------------------------- Individual Retirement Account $1,000 $100 - ---------------------------------------------------------------------------------------------------------- Coverdell Education Savings Account $500 $100 - ---------------------------------------------------------------------------------------------------------- EasyInvest (Registered Trademark) (Automatically from your checking or savings account or Money Market Fund) $100* $100* - ---------------------------------------------------------------------------------------------------------- * Provided your schedule of investments totals $1,000 in 12 months. There is no minimum investment amount if you purchase Fund shares through: (1) the Investment Adviser's mutual fund asset allocation program; (2) a program, approved by the Fund's distributor, in which you pay an asset-based fee for advisory, administrative and/or brokerage services; (3) the following programs approved by the Fund's distributor: (i) qualified state tuition plans described in Section 529 of the Internal Revenue Code or (ii) certain other investment programs that do not charge an asset-based fee; (4) employer-sponsored employee benefit plan accounts; or (5) the reinvestment of dividends in additional Fund shares. INVESTMENT OPTIONS FOR CERTAIN INSTITUTIONAL AND OTHER INVESTORS/CLASS D SHARES. To be eligible to purchase Class D shares, you must qualify under one of the investor categories specified in the "Share Class Arrangements" section of this Prospectus. SUBSEQUENT INVESTMENTS SENT DIRECTLY TO THE FUND. In addition to buying additional Fund shares for an existing account by contacting your Morgan Stanley Financial Advisor, you may send a check directly to the Fund. To buy additional shares in this manner: o Write a "letter of instruction" to the Fund specifying the name(s) on the account, the account number, the social security or tax identification number, the Class of shares you wish to purchase and the investment amount (which would include any applicable front-end sales charge). The letter must be signed by the account owner(s). o Make out a check for the total amount payable to: Morgan Stanley Balanced Income Fund. o Mail the letter and check to Morgan Stanley Trust at P.O. Box 1040, Jersey City, NJ 07303. - -------------------------------------------------------------------------------- LIMITED PORTABILITY [GRAPHIC OMITTED] Most Fund shareholders hold their shares with Morgan Stanley DW. Please note that your ability to transfer your Fund shares to a brokerage account at another securities dealer may be limited. Fund shares may only be transferred to accounts held at a limited number of securities dealers or financial intermediaries that have entered into agreements with the Fund's distributor. After a transfer, you may purchase additional shares of the Morgan Stanley Funds you owned before the transfer, but you may not be able to purchase shares of any other Morgan Stanley Funds or exchange shares of the Fund(s) you own for shares of other Morgan Stanley 18 Funds (as described below under "How to Exchange Shares"). If you wish to transfer Fund shares to a securities dealer or other financial intermediary that has not entered into an agreement with the Fund's distributor, you may request that the securities dealer or financial intermediary maintain the shares in an account at the Transfer Agent registered in the name of such securities dealer or financial intermediary for your benefit. You may also hold your Fund shares in your own name directly with the Transfer Agent. Other options may also be available; please check with the respective securities dealer or financial intermediary. If you choose not to hold your shares with the Transfer Agent, either directly or through a securities dealer or other financial intermediary, you must redeem your shares and pay any applicable CDSC. - -------------------------------------------------------------------------------- HOW TO EXCHANGE SHARES [GRAPHIC OMITTED] PERMISSIBLE FUND EXCHANGES. You may exchange shares of any Class of the Fund for the same Class of any other continuously offered Multi-Class Fund, or for shares of a No-Load Fund, a Money Market Fund or the Limited Duration U.S. Treasury Trust, without the imposition of an exchange fee. Front-end sales charges are not imposed on exchanges of Class A shares. See the inside back cover of this Prospectus for each Morgan Stanley Fund's designation as a Multi-Class Fund, No-Load Fund or Money Market Fund. If a Morgan Stanley Fund is not listed, consult the inside back cover of that fund's current prospectus for its designation. Exchanges may be made after shares of the fund acquired by purchase have been held for 30 days. There is no waiting period for exchanges of shares (i) acquired by exchange or dividend reinvestment, (ii) purchased through the automatic investment plan and (iii) purchased by wrap-fee accounts that have an automatic rebalancing feature. The current prospectus for each fund describes its investment objective(s), policies and investment minimums, and should be read before investment. Since exchanges are available only into continuously offered Morgan Stanley Funds, exchanges are not available into any new Morgan Stanley Fund during its initial offering period, or when shares of a particular Morgan Stanley Fund are not being offered for purchase. EXCHANGE PROCEDURES. You can process an exchange by contacting your Morgan Stanley Financial Advisor or other authorized financial representative. Otherwise, you must forward an exchange privilege authorization form to the Transfer Agent and then write the Transfer Agent or call (800) 869-NEWS to place an exchange order. You can obtain an exchange privilege authorization form by contacting your Morgan Stanley Financial Advisor or other authorized financial representative, or by calling (800) 869-NEWS. If you hold share certificates, no exchanges may be processed until we have received all applicable share certificates. An exchange to any Morgan Stanley Fund (except a Money Market Fund) is made on the basis of the next calculated net asset values of the funds involved after the exchange instructions as described above, are received. When exchanging into a Money Market Fund, the Fund's shares are sold at their next calculated net asset value and the Money Market Fund's shares are purchased at their net asset value on the following business day. The Fund may terminate or revise the exchange privilege upon required notice or in certain cases without notice. See "Limitations on Exchanges." The check writing privilege is not available for Money Market Fund shares you acquire in an exchange. 19 TELEPHONE EXCHANGES. For your protection when calling Morgan Stanley Trust, we will employ reasonable procedures to confirm that exchange instructions communicated over the telephone are genuine. These procedures may include requiring various forms of personal identification such as name, mailing address, social security or other tax identification number. Telephone instructions also may be recorded. Telephone instructions will be accepted if received by the Transfer Agent between 9:00 a.m. and 4:00 p.m. Eastern time on any day the New York Stock Exchange is open for business. During periods of drastic economic or market changes, it is possible that the telephone exchange procedures may be difficult to implement, although this has not been the case with the Fund in the past. MARGIN ACCOUNTS. If you have pledged your Fund shares in a margin account, contact your Morgan Stanley Financial Advisor or other authorized financial representative regarding restrictions on the exchange of such shares. TAX CONSIDERATIONS OF EXCHANGES. If you exchange shares of the Fund for shares of another Morgan Stanley Fund, there are important tax considerations. For tax purposes, the exchange out of the Fund is considered a sale of Fund shares -- and the exchange into the other fund is considered a purchase. As a result, you may realize a capital gain or loss. You should review the "Tax Consequences" section and consult your own tax professional about the tax consequences of an exchange. LIMITATIONS ON EXCHANGES. Certain patterns of past exchanges and/or purchase or sale transactions involving the Fund or other Morgan Stanley Funds may result in the Fund rejecting, limiting or prohibiting, at its sole discretion, and without prior notice, additional purchases and/or exchanges and may result in a shareholder's account being closed. Determinations in this regard may be made based on the frequency or dollar amount of the previous exchanges or purchase or sale transactions. Generally, all shareholders are limited to a maximum of eight exchanges per calendar year. Exchange privileges will be suspended if more that eight exchanges out of the Fund are made by a shareholder in a calendar year and further exchange requests will not be processed during that year. This limitation does not apply to the Investment Adviser's asset allocation program or employer-sponsored retirement plans. The Fund reserves the right to reject an exchange request for any reason. CDSC CALCULATIONS ON EXCHANGES. See the "Share Class Arrangements" section of this Prospectus for a discussion of how applicable contingent deferred sales charges (CDSCs) are calculated for shares of one Morgan Stanley Fund that are exchanged for shares of another. For further information regarding exchange privileges, you should contact your Morgan Stanley Financial Advisor or call (800) 869-NEWS. - -------------------------------------------------------------------------------- HOW TO SELL SHARES [GRAPHIC OMITTED] You can sell some or all of your Fund shares at any time. If you sell Class A, Class B or Class C shares, your net sale proceeds are reduced by the amount of any applicable CDSC. Your shares will be sold at the next price calculated after we receive your order to sell as described below. 20 OPTIONS PROCEDURES - ------------------------------------------------------------------------------------------------------------------ Contact your To sell your shares, simply call your Morgan Stanley Financial Advisor or other authorized Financial Advisor financial representative. Payment will be sent to the address to which the account is registered or deposited in your brokerage account. - ----------------------------------------------------------------------------------------------------------------- By Letter You can also sell your shares by writing a "letter of instruction" that includes: o your account number; o the name of the Fund; o the dollar amount or the number of shares you wish to sell; o the Class of shares you wish to sell; and o the signature of each owner as it appears on the account. If you are requesting payment to anyone other than the registered owner(s) or that payment be sent to any address other than the address of the registered owner(s) or pre-designated bank account, you will need a signature guarantee. You can obtain a signature guarantee from an eligible guarantor acceptable to Morgan Stanley Trust. (You should contact Morgan Stanley Trust at (800) 869-NEWS for a determination as to whether a particular institution is an eligible guarantor.) A notary public cannot provide a signature guarantee. Additional documentation may be required for shares held by a corporation, partnership, trustee or executor. Mail the letter to Morgan Stanley Trust at P.O. Box 983, Jersey City, NJ 07303. If you hold share certificates, you must return the certificates, along with the letter and any required additional documentation. A check will be mailed to the name(s) and address in which the account is registered, or otherwise according to your instructions. - ----------------------------------------------------------------------------------------------------------------- Systematic If your investment in all of the Morgan Stanley Funds has a total market value of at least Withdrawal Plan $10,000, you may elect to withdraw amounts of $25 or more, or in any whole percentage of a fund's balance (provided the amount is at least $25), on a monthly, quarterly, semi-annual or annual basis, from any fund with a balance of at least $1,000. Each time you add a fund to the plan, you must meet the plan requirements. Amounts withdrawn are subject to any applicable CDSC. A CDSC may be waived under certain circumstances. See the Class B waiver categories listed in the "Share Class Arrangements" section of this Prospectus. To sign up for the systematic withdrawal plan, contact your Morgan Stanley Financial Advisor or call (800) 869-NEWS. You may terminate or suspend your plan at any time. Please remember that withdrawals from the plan are sales of shares, not Fund "distributions," and ultimately may exhaust your account balance. The Fund may terminate or revise the plan at any time. - ----------------------------------------------------------------------------------------------------------------- 21 PAYMENT FOR SOLD SHARES. After we receive your complete instructions to sell as described above, a check will be mailed to you within seven days, although we will attempt to make payment within one business day. Payment may also be sent to your brokerage account. Payment may be postponed or the right to sell your shares suspended under unusual circumstances. If you request to sell shares that were recently purchased by check, your sale will not be effected until it has been verified that the check has been honored. ORDER PROCESSING FEE. Morgan Stanley DW charges clients an order processing fee of $5.25 (except in certain circumstances, including, but not limited to, activity in fee-based accounts, exchanges, dividend reinvestments and systematic investment and withdrawal plans) when a client buys or redeems shares of the Fund. Please consult your Morgan Stanley Financial Advisor for more information regarding this fee. TAX CONSIDERATIONS. Normally, your sale of Fund shares is subject to federal and state income tax. You should review the "Tax Consequences" section of this Prospectus and consult your own tax professional about the tax consequences of a sale. REINSTATEMENT PRIVILEGE. If you sell Fund shares and have not previously exercised the reinstatement privilege, you may, within 35 days after the date of sale, invest any portion of the proceeds in the same Class of Fund shares at their net asset value and receive a pro rata credit for any CDSC paid in connection with the sale. INVOLUNTARY SALES. The Fund reserves the right, on 60 days' notice, to sell the shares of any shareholder (other than shares held in an IRA or 403(b) Custodial Account) whose shares, due to sales by the shareholder, have a value below $100, or in the case of an account opened through EasyInvest (Registered Trademark) , if after 12 months the shareholder has invested less than $1,000 in the account. However, before the Fund sells your shares in this manner, we will notify you and allow you 60 days to make an additional investment in an amount that will increase the value of your account to at least the required amount before the sale is processed. No CDSC will be imposed on any involuntary sale. MARGIN ACCOUNTS. If you have pledged your Fund shares in a margin account, contact your Morgan Stanley Financial Advisor or other authorized financial representative regarding restrictions on the sale of such shares. 22 - -------------------------------------------------------------------------------- DISTRIBUTIONS [GRAPHIC OMITTED] [sidebar] TARGETED DIVIDENDS(SM) You may select to have your Fund distributions automatically invested in other Classes of Fund shares or Classes of another Morgan Stanley Fund that you own. Contact your Morgan Stanley Financial Advisor for further information about this service. [endsidebar] The Fund passes substantially all of its earnings from income and capital gains along to its investors as "distributions." The Fund earns income from stocks and interest from fixed-income investments. These amounts are passed along to Fund shareholders as "income dividend distributions." The Fund realizes capital gains whenever it sells securities for a higher price than it paid for them. These amounts may be passed along as "capital gain distributions." The Fund declares income dividends separately for each Class. Distributions paid on Class A and Class D shares usually will be higher than for Class B and Class C shares because distribution fees that Class B and Class C shares pay are higher. Normally, income dividends are distributed to shareholders quarterly. Capital gains, if any, are usually distributed in June and December. The Fund, however, may retain and reinvest any long-term capital gains. The Fund may at times make payments from sources other than income or capital gains that represent a return of a portion of your investment. Distributions are reinvested automatically in additional shares of the same Class and automatically credited to your account, unless you request in writing that all distributions be paid in cash. If you elect the cash option, the Fund will mail a check to you no later than seven business days after the distribution is declared. However, if you purchase Fund shares through a Morgan Stanley Financial Advisor or other authorized financial representative within three business days prior to the record date for the distribution, the distribution will automatically be paid to you in cash, even if you did not request to receive all distributions in cash. No interest will accrue on uncashed checks. If you wish to change how your distributions are paid, your request should be received by the Transfer Agent at least five business days prior to the record date of the distributions. - -------------------------------------------------------------------------------- FREQUENT PURCHASES AND REDEMPTIONS OF FUND SHARES [GRAPHIC OMITTED] Frequent purchases and redemptions of Fund shares by Fund shareholders are referred to as "market-timing" or "short-term trading" and may present risks for other shareholders of the Fund, which may include, among other things, dilution in the value of Fund shares held by long-term shareholders, interference with the efficient management of the Fund's portfolio, increased brokerage and administrative costs, incurring unwanted taxable gains and forcing the Fund to hold excess levels of cash. In addition, the Fund is subject to the risk that market timers and/or short-term traders may take advantage of time zone differences between the foreign markets on which the Fund's portfolio securities trade and the time as of which the Fund's net asset value is calculated ("time-zone arbitrage"). For example, a market timer may purchase shares of the Fund based on events occurring after foreign market closing prices are established, but before the Fund's net asset value calculation, that are likely to result in higher prices in foreign markets the following day. The 23 market timer would redeem the Fund's shares the next day when the Fund's share price would reflect the increased prices in foreign markets, for a quick profit at the expense of long-term fund shareholders. The Fund's policies with respect to valuing portfolio securities are described in "Shareholder Information -- Pricing Fund Shares." The Fund discourages and does not accommodate frequent purchases and redemptions of Fund shares by Fund shareholders and the Fund's Board of Trustees has adopted policies and procedures with respect to such frequent purchases and redemptions. The Fund's policies with respect to purchases, redemptions and exchanges of Fund shares are described in the "How to Buy Shares," "How to Exchange Shares" and "How to Sell Shares" sections of this Prospectus. Except as described in each of these sections, and with respect to omnibus accounts, the Fund's policies regarding frequent trading of Fund shares are applied uniformly to all shareholders. With respect to trades that occur through omnibus accounts at intermediaries, such as investment advisers, broker-dealers, transfer agents and third party administrators, the Fund (i) has requested assurance that such intermediaries currently selling Fund shares have in place internal policies and procedures reasonably designed to address market timing concerns and has instructed such intermediaries to notify the Fund immediately if they are unable to comply with such policies and procedures and (ii) requires all prospective intermediaries to agree to cooperate in enforcing the Fund's policies with respect to frequent purchases, redemptions and exchanges of Fund shares. Omnibus accounts generally do not identify customers' trading activity to the Fund on an individual basis. The ability of the Fund to monitor exchanges made by the underlying shareholders in omnibus accounts, therefore, is severely limited. Consequently, the Fund must rely on the financial intermediary to monitor frequent short-term trading within the Fund by the financial intermediary's customers. There can be no assurance that the Fund will be able to eliminate all market-timing activities. - -------------------------------------------------------------------------------- TAX CONSEQUENCES [GRAPHIC OMITTED] As with any investment, you should consider how your Fund investment will be taxed. The tax information in this Prospectus is provided as general information. You should consult your own tax professional about the tax consequences of an investment in the Fund. Unless your investment in the Fund is through a tax-deferred retirement account, such as a 401(k) plan or IRA, you need to be aware of the possible tax consequences when: o The Fund makes distributions; and o You sell Fund shares, including an exchange to another Morgan Stanley Fund. TAXES ON DISTRIBUTIONS. Your distributions are normally subject to federal and state income tax when they are paid, whether you take them in cash or reinvest them in Fund shares. A distribution also may be subject to local income tax. Any income dividend distributions and any short-term capital gain distributions are taxable to you as ordinary income. Any long-term capital gain distributions are taxable to you as long-term capital gains, no matter how long you have owned shares in the Fund. Under current law, a portion of the ordinary income dividends you receive may be taxed at the same rate as long-term capital gains. However, even if income received in the form of ordinary income dividends is taxed at the same rate as long-term capital gains, such income will not be considered 24 long-term capital gains for other federal income tax purposes. For example, you generally will not be permitted to offset ordinary income dividends with capital losses. Short-term capital gain distributions will continue to be taxed at ordinary income rates. Every January, you will be sent a statement (IRS Form 1099-DIV) showing the taxable distributions paid to you in the previous year. The statement provides information on your dividends and capital gains for tax purposes. TAXES ON SALES. Your sale of Fund shares normally is subject to federal and state income tax and may result in a taxable gain or loss to you. A sale also may be subject to local income tax. Your exchange of Fund shares for shares of another Morgan Stanley Fund is treated for tax purposes like a sale of your original shares and a purchase of your new shares. Thus, the exchange may, like a sale, result in a taxable gain or loss to you and will give you a new tax basis for your new shares. When you open your Fund account, you should provide your social security or tax identification number on your investment application. By providing this information, you will avoid being subject to a federal backup withholding tax on taxable distributions and redemption proceeds (as of the date of this Prospectus this rate is 28%). Any withheld amount would be sent to the IRS as an advance payment of your taxes due on your income. - -------------------------------------------------------------------------------- SHARE CLASS ARRANGEMENTS [GRAPHIC OMITTED] The Fund offers several Classes of shares having different distribution arrangements designed to provide you with different purchase options according to your investment needs. Your Morgan Stanley Financial Advisor or other authorized financial representative can help you decide which Class may be appropriate for you. The general public is offered three Classes: Class A shares, Class B shares and Class C shares, which differ principally in terms of sales charges and ongoing expenses. A fourth Class, Class D shares, is offered only to a limited category of investors. Shares that you acquire through reinvested distributions will not be subject to any front-end sales charge or CDSC -- contingent deferred sales charge. Sales personnel may receive different compensation for selling each Class of shares. The sales charges applicable to each Class provide for the distribution financing of shares of that Class. The chart below compares the sales charge and annual 12b-1 fee applicable to each Class: - --------------------------------------------------------------------------------------------------------------------------------- CLASS SALES CHARGE MAXIMUM ANNUAL 12B-1 FEE - --------------------------------------------------------------------------------------------------------------------------------- A Maximum 5.25% initial sales charge reduced for purchase of $25,000 or more; shares purchased without an initial sales charge are generally subject to a 1.00% CDSC if sold during the first 18 months* 0.25% - --------------------------------------------------------------------------------------------------------------------------------- B Maximum 5.00% CDSC during the first year decreasing to 0% after six years 1.00% - --------------------------------------------------------------------------------------------------------------------------------- C 1.00% CDSC during the first year 1.00% - --------------------------------------------------------------------------------------------------------------------------------- D None None - --------------------------------------------------------------------------------------------------------------------------------- * Shares purchased without an initial sales charge prior to December 1, 2004 will be subject to a 1.00% CDSC if sold during the first year. 25 Certain shareholders may be eligible for reduced sales charges (i.e., breakpoint discounts), CDSC waivers and eligibility minimums. Please see the information for each Class set forth below for specific eligibility requirements. You must notify your Morgan Stanley Financial Advisor or other authorized financial representative (or Morgan Stanley Trust if you purchase shares directly through the Fund) at the time a purchase order (or in the case of Class B or C shares, a redemption order) is placed, that the purchase (or redemption) qualifies for a reduced sales charge (i.e., breakpoint discount), CDSC waiver or eligibility minimum. Similar notification must be made in writing when an order is placed by mail. The reduced sales charge, CDSC waiver or eligibility minimum will not be granted if: (i) notification is not furnished at the time of order; or (ii) a review of the records of Morgan Stanley DW or other authorized dealer of Fund shares, or the Transfer Agent does not confirm your represented holdings. In order to obtain a reduced sales charge (i.e., breakpoint discount) or to meet an eligibility minimum, it may be necessary at the time of purchase for you to inform your Morgan Stanley Financial Advisor or other authorized financial representative (or Morgan Stanley Trust if you purchase shares directly through the Fund) of the existence of other accounts in which there are holdings eligible to be aggregated to meet the sales load breakpoints or eligibility minimums. In order to verify your eligibility, you may be required to provide account statements and/or confirmations regarding shares of the Fund or other Morgan Stanley Funds held in all related accounts described below at Morgan Stanley or by other authorized dealers, as well as shares held by related parties, such as members of the same family or household, in order to determine whether you have met a sales load breakpoint or eligibility minimum. The Fund makes available, in a clear and prominent format, free of charge, on its web site, www.morganstanley.com, information regarding applicable sales loads, reduced sales charges (i.e., breakpoint discounts), sales load waivers and eligibility minimums. The web site includes hyperlinks that facilitate access to the information. CLASS A SHARES Class A shares are sold at net asset value plus an initial sales charge of up to 5.25% of the public offering price. The initial sales charge is reduced for purchases of $25,000 or more according to the schedule below. Investments of $1 million or more are not subject to an initial sales charge, but are generally subject to a CDSC of 1.00% on sales made within 18 months after the last day of the month of purchase. With respect to shares purchased prior to December 1, 2004, investments of $1 million or more are not subject to an initial sales charge, but are generally subject to a CDSC of 1.00% on sales made within one year after the last day of the month of purchase. The CDSC will be assessed in the same manner and with the same CDSC waivers as with Class B shares. Class A shares are also subject to a 12b-1 fee of up to 0.25% of the average daily net assets of the Class. The maximum annual 12b-1 fee payable by Class A shares is lower than the maximum annual 12b-1 fee payable by Class B or Class C shares. 26 The offering price of Class A shares includes a sales charge (expressed as a percentage of the public offering price) on a single transaction as shown in the following table: [sidebar] FRONT-END SALES CHARGE OR FSC An initial sales charge you pay when purchasing Class A shares that is based on a percentage of the offering price. The percentage declines based upon the dollar value of Class A shares you purchase. We offer three ways to reduce your Class A sales charges--the Combined Purchase Privilege, Right of Accumulation and Letter of Intent. [endsidebar] - --------------------------------------------------------------------------------------- FRONT-END SALES CHARGE ------------------------------------------------- PERCENTAGE OF APPROXIMATE PERCENTAGE AMOUNT OF SINGLE TRANSACTION PUBLIC OFFERING PRICE OF NET AMOUNT INVESTED - --------------------------------------------------------------------------------------- Less than $25,000 5.25% 5.54% - --------------------------------------------------------------------------------------- $25,000 but less than $50,000 4.75% 4.99% - --------------------------------------------------------------------------------------- $50,000 but less than $100,000 4.00% 4.17% - --------------------------------------------------------------------------------------- $100,000 but less than $250,000 3.00% 3.09% - --------------------------------------------------------------------------------------- $250,000 but less than $500,000 2.50% 2.56% - --------------------------------------------------------------------------------------- $500,000 but less than $1 million 2.00% 2.04% - --------------------------------------------------------------------------------------- $1 million and over 0.00% 0.00% - --------------------------------------------------------------------------------------- You may benefit from a reduced sales charge schedule (i.e., breakpoint discount) for purchases of Class A shares of the Fund, by combining, in a single transaction, your purchase with purchases of Class A shares of the Fund by the following related accounts: o A single account (including an individual, trust or fiduciary account). o Family member accounts (limited to spouse, and children under the age of 21). o Pension, profit sharing or other employee benefit plans of companies and their affiliates. o Employer sponsored and individual retirement accounts (including IRA, Keogh, 401(k), 403(b), 408(k) and 457(b) plans). o Tax-exempt organizations. o Groups organized for a purpose other than to buy mutual fund shares. COMBINED PURCHASE PRIVILEGE. You will have the benefit of reduced sales charges by combining purchases of Class A shares of the Fund in a single transaction with purchases of Class A shares of other Multi-Class Funds. Shareholders also may combine such purchases made in a single transaction by family members (limited to spouse, and children under the age of 21). RIGHT OF ACCUMULATION. You may benefit from a reduced sales charge if the cumulative net asset value of Class A shares of the Fund purchased in a single transaction, together with shares of other Morgan Stanley Funds previously purchased at a price including a front-end sales charge (or Class A shares purchased at $1 million or more), and shares acquired through reinvestment of distributions, which are currently held, amounts to $25,000 or more. Also, if you have a cumulative net asset value of all your Class A and Class D shares of other Multi-Class Funds equal to at least $5 million (or $25 million for certain employee benefit plans), you are eligible to purchase Class D shares of any fund subject to the fund's minimum initial investment requirement. 27 Existing holdings of family members or other related accounts of a shareholder may not be combined for purposes of determining eligibility to purchase Class D shares. LETTER OF INTENT. The above schedule of reduced sales charges for larger purchases also will be available to you if you enter into a written "Letter of Intent." A Letter of Intent provides for the purchase of Class A shares of the Fund or other Multi-Class Funds within a 13-month period. The initial purchase under a Letter of Intent must be at least 5% of the stated investment goal. The Letter of Intent does not preclude the Fund (or any other Multi-Class Fund) from discontinuing sales of its shares. To determine the applicable sales charge reduction, you may also include: (1) the cost of shares of other Morgan Stanley Funds which were previously purchased at a price including a front-end sales charge during the 90-day period prior to the distributor receiving the Letter of Intent, and (2) the historical cost of shares of other funds you currently own acquired in exchange for shares of funds purchased during that period at a price including a front-end sales charge. You may combine purchases and exchanges by family members (limited to spouse, and children under the age of 21) during the periods referenced in (1) and (2) above. You should retain any records necessary to substantiate historical costs because the Fund, its transfer agent and any financial intermediaries may not maintain this information. You can obtain a Letter of Intent by contacting your Morgan Stanley Financial Advisor or other authorized financial representative, or by calling (800) 869-NEWS. If you do not achieve the stated investment goal within the 13-month period, you are required to pay the difference between the sales charges otherwise applicable and sales charges actually paid, which may be deducted from your investment. Shares acquired through reinvestment of distributions are not aggregated to achieve the stated investment goal. OTHER SALES CHARGE WAIVERS. In addition to investments of $1 million or more, your purchase of Class A shares is not subject to a front-end sales charge (or a CDSC upon sale) if your account qualifies under one of the following categories: o A trust for which a banking affiliate of the Investment Adviser provides discretionary trustee services. o Persons participating in a fee-based investment program (subject to all of its terms and conditions, including termination fees, and mandatory sale or transfer restrictions on termination) approved by the Fund's distributor pursuant to which they pay an asset-based fee for investment advisory, administrative and/or brokerage services. o Qualified state tuition plans described in Section 529 of the Internal Revenue Code and donor-advised charitable gift funds (subject to all 0applicable terms and conditions) and certain other investment programs that do not charge an asset-based fee and have been approved by the Fund's distributor. o Employer-sponsored employee benefit plans, whether or not qualified under the Internal Revenue Code, for which an entity independent from Morgan Stanley serves as recordkeeper under an alliance or similar agreement with Morgan Stanley's Retirement Plan Solutions ("Morgan Stanley Eligible Plans"). o A Morgan Stanley Eligible Plan whose Class B shares have converted to Class A shares, regardless of the plan's asset size or number of eligible employees. o Insurance company separate accounts that have been approved by the Fund's distributor. o Current or retired Directors or Trustees of the Morgan Stanley Funds, such persons' spouses, and children under the age of 21, and trust accounts for which any of such persons is a beneficiary. 28 o Current or retired directors, officers and employees of Morgan Stanley and any of its subsidiaries, such persons' spouses, and children under the age of 21 and trust accounts for which any of such persons is a beneficiary. CLASS B SHARES Class B shares are offered at net asset value with no initial sales charge but are subject to a contingent deferred sales charge, or CDSC, as set forth in the table below. For the purpose of calculating the CDSC, shares are deemed to have been purchased on the last day of the month during which they were purchased. [sidebar] CONTINGENT DEFERRED SALES CHARGE OR CDSC A fee you pay when you sell shares of certain Morgan Stanley Funds purchased without an initial sales charge. This fee declines the longer you hold your shares as set forth in the table. [endsidebar] - -------------------------------------------------------------------------------- YEAR SINCE PURCHASE PAYMENT MADE CDSC AS A PERCENTAGE OF AMOUNT REDEEMED - -------------------------------------------------------------------------------- First 5.0% - -------------------------------------------------------------------------------- Second 4.0% - -------------------------------------------------------------------------------- Third 3.0% - -------------------------------------------------------------------------------- Fourth 2.0% - -------------------------------------------------------------------------------- Fifth 2.0% - -------------------------------------------------------------------------------- Sixth 1.0% - -------------------------------------------------------------------------------- Seventh and thereafter None - -------------------------------------------------------------------------------- Each time you place an order to sell or exchange shares, shares with no CDSC will be sold or exchanged first, then shares with the lowest CDSC will be sold or exchanged next. For any shares subject to a CDSC, the CDSC will be assessed on an amount equal to the lesser of the current market value or the cost of the shares being sold. Broker-dealers or other financial intermediaries may impose a limit on the dollar value of a Class B share purchase order that they will accept. For example, a Morgan Stanley Financial Advisor generally will not accept purchase orders for Class B shares that in the aggregate amount to $25,000 or more over a 90-day period. You should discuss with your financial advisor which share class is most appropriate for you, based on the size of your investment, your expected time horizon for holding the shares, and other factors, bearing in mind the availability of reduced sales loads on Class share purchases of $25,000 or more and for existing shareholders who hold over $25,000 in Morgan Stanley Funds. SPECIAL CDSC CONSIDERATIONS FOR FUND SHARES HELD PRIOR TO JULY 28, 1997. If you held Fund shares prior to July 28, 1997 that were acquired in exchange for shares of Morgan Stanley Dean Witter Global Short-Term Income Fund, Dean Witter National Municipal Trust or Dean Witter High Income Securities that have been designated Class B shares, these Fund shares are subject to the other fund's lower CDSC schedule, with two exceptions. First, if you subsequently exchange these Class B shares for shares of a fund with a higher CDSC schedule, the higher CDSC schedule will apply. Second, if you exchange the Class B shares for shares of a Morgan Stanley Money Market Fund and re-exchange back into the Fund, the CDSC schedule set forth in the above table will apply. 29 CDSC WAIVERS. A CDSC, if otherwise applicable, will be waived in the case of: o Sales of shares held at the time you die or become disabled (within the definition in Section 72(m)(7) of the Internal Revenue Code which relates to the ability to engage in gainful employment), if the shares are: (i) registered either in your individual name or in the names of you and your spouse as joint tenants with right of survivorship; (ii) registered in the name of a trust of which (a) you are the settlor and that is revocable by you (i.e., a "living trust"); or (b) you and your spouse are the settlors and that is revocable by you or your spouse (i.e., a "joint living trust"); or (iii) held in a qualified corporate or self-employed retirement plan, IRA or 403(b) Custodial Account; provided, in each case, that the sale is requested within one year after your death or initial determination of disability. o Sales in connection with the following retirement plan "distributions": (i) lump-sum or other distributions from a qualified corporate or self-employed retirement plan following retirement (or, in the case of a "key employee" of a "top heavy" plan, following attainment of age 591/2); (ii) distributions from an IRA or 403(b) Custodial Account following attainment of age 591/2; or (iii) a tax-free return of an excess IRA contribution (a distribution does not include a direct transfer of IRA, 403(b) Custodial Account or retirement plan assets to a successor custodian or trustee). o Sales of shares in connection with the Systematic Withdrawal Plan of up to 12% annually of the value of each fund from which plan sales are made. The percentage is determined on the date you establish the Systematic Withdrawal Plan and based on the next calculated share price. You may have this CDSC waiver applied in amounts up to 1% per month, 3% per quarter, 6% semi-annually or 12% annually. Shares with no CDSC will be sold first, followed by those with the lowest CDSC. As such, the waiver benefit will be reduced by the amount of your shares that are not subject to a CDSC. If you suspend your participation in the plan, you may later resume plan payments without requiring a new determination of the account value for the 12% CDSC waiver. o Sales of shares purchased prior to April 1, 2004 or acquired in exchange for shares purchased prior to April 1, 2004, if you simultaneously invest the proceeds from such sale in the Investment Adviser's mutual fund asset allocation program, pursuant to which investors pay an asset-based fee. Any shares acquired in connection with the Investment Adviser's mutual fund asset allocation program are subject to all of the terms and conditions of that program, including termination fees, and mandatory sale or transfer restrictions on termination. All waivers will be granted only following the Fund's distributor receiving confirmation of your entitlement. If you believe you are eligible for a CDSC waiver, please contact your Morgan Stanley Financial Advisor or other authorized financial representative or call (800) 869-NEWS. DISTRIBUTION FEE. Class B shares also are subject to an annual distribution and shareholder services (12b-1) fee of up to 1.00% of the average daily net asset of the Fund's Class B shares. The maximum annual 12b-1 fee payable by Class B shares is higher than the maximum annual 12b-1 fee payable by Class A shares. CONVERSION FEATURE. After eight years, Class B shares will convert automatically to Class A shares of the Fund with no initial sales charge. The eight year period runs from the last day of the month in which the shares were purchased, or in the case of Class B shares acquired through an exchange, from the last day of the month in which the original Class B shares were purchased; the shares will convert to Class A shares based on their relative 30 net asset values in the month following the eight year period. At the same time, an equal proportion of Class B shares acquired through automatically reinvested distributions will convert to Class A shares on the same basis. In the case of Class B shares held in a Morgan Stanley Eligible Plan, the plan is treated as a single investor and all Class B shares will convert to Class A shares on the conversion date of the Class B shares of a Morgan Stanley Fund purchased by that plan. If you exchange your Class B shares for shares of a Money Market Fund, a No-Load Fund or the Limited Duration U.S. Treasury Trust, the holding period for conversion is frozen as of the last day of the month of the exchange and resumes on the last day of the month you exchange back into Class B shares. EXCHANGING SHARES SUBJECT TO A CDSC. There are special considerations when you exchange Fund shares that are subject to a CDSC. When determining the length of time you held the shares and the corresponding CDSC rate, any period (starting at the end of the month) during which you held shares of a fund that does not charge a CDSC will not be counted. Thus, in effect the "holding period" for purposes of calculating the CDSC is frozen upon exchanging into a fund that does not charge a CDSC. For example, if you held Class B shares of the Fund for one year, exchanged to Class B of another Morgan Stanley Multi-Class Fund for another year, then sold your shares, a CDSC rate of 4% would be imposed on the shares based on a two-year holding period -- one year for each fund. However, if you had exchanged the shares of the Fund for a Money Market Fund (which does not charge a CDSC) instead of the Multi-Class Fund, then sold your shares, a CDSC rate of 5% would be imposed on the shares based on a one-year holding period. The one year in the Money Market fund would not be counted. Nevertheless, if shares subject to a CDSC are exchanged for a fund that does not charge a CDSC, you will receive a credit when you sell the shares equal to the 12b-1 fees, if any, you paid on those shares while in that fund up to the amount of any applicable CDSC. In addition, shares that are exchanged into or from a Morgan Stanley Fund subject to a higher CDSC rate will be subject to the higher rate, even if the shares are re-exchanged into a fund with a lower CDSC rate. CLASS C SHARES Class C shares are sold at net asset value with no initial sales charge, but are subject to a CDSC of up to 1.0% on sales made within one year after the last day of the month of purchase. The CDSC will be assessed in the same manner and with the same CDSC waivers as with Class B shares. Brokers, dealers or other financial intermediaries may impose a limit on the dollar value of a Class C share purchase order that they will accept. For example, a Morgan Stanley Financial Advisor generally will not accept purchase orders for Class C shares that in the aggregate amount to $250,000 or more over a 90 day period. You should discuss with your financial advisor which share class is most appropriate for you based on the size of your investment, your expected time horizon for holding the shares and other factors, bearing in mind the availability of reduced sales loads on Class A share purchases of $25,000 or more and for existing shareholders who hold over $25,000 in Morgan Stanley Funds. 31 DISTRIBUTION FEE. Class C shares are subject to an annual distribution and shareholder services 12b-1 fee of up to 1.00% of the average daily net assets of that Class. The maximum annual 12b-1 fee payable by Class C shares is higher than the maximum annual 12b-1 fee payable by Class A shares. Unlike Class B shares, Class C shares have no conversion feature and, accordingly, an investor that purchases Class C shares may be subject to distribution and shareholder services (12b-1) fees applicable to Class C shares for as long as the investor owns such shares. CLASS D SHARES Class D shares are offered without any sales charge on purchases or sales and without any distribution (12b-1) fee. Class D shares are offered only to investors meeting an initial investment minimum of $5 million ($25 million for Morgan Stanley Eligible Plans) and the following investor categories: o Investors participating in the Investment Adviser's or an affiliate's mutual fund asset allocation program (subject to all of its terms and conditions, including termination fees, and mandatory sale or transfer restrictions on termination) pursuant to which they pay an asset-based fee. o Persons participating in a fee-based investment program (subject to all of its terms and conditions, including termination fees, and mandatory sale or transfer restrictions on termination) approved by the Fund's distributor pursuant to which they pay an asset-based fee for investment advisory, administrative and/or brokerage services. With respect to Class D shares held through the Morgan Stanley Choice Program, at such time as those Fund shares are no longer held through the program, the shares will be automatically converted into Class A shares (which are subject to higher expenses than Class D shares) based on the then current relative net asset values of the two classes. o Certain investment programs that do not charge an asset-based fee and have been approved by the Fund's distributor. o Employee benefit plans maintained by Morgan Stanley or any of its subsidiaries for the benefit of certain employees of Morgan Stanley and its subsidiaries. o Certain unit investment trusts sponsored by Morgan Stanley DW or its affiliates. o Certain other open-end investment companies whose shares are distributed by the Fund's distributor. o Investors who were shareholders of the Dean Witter Retirement Series on September 11, 1998 for additional purchases for their former Dean Witter Retirement Series accounts. o The Investment Adviser and its affiliates with respect to shares held in connection with certain deferred compensation programs established for their employees. A purchase order that meets the requirements for investment in Class D shares can be made only in Class D shares. Class D shares are not offered for investments made through Section 529 plans, donor-advised charitable gift funds and insurance company separate accounts (regardless of the size of the investment). MEETING CLASS D ELIGIBILITY MINIMUMS. To meet the $5 million ($25 million for Morgan Stanley Eligible Plans) initial investment to qualify to purchase Class D shares you may combine: (1) purchases in a single 32 transaction of Class D shares of the Fund and other Morgan Stanley Multi-Class Funds; and/or (2) previous purchases of Class A and Class D shares of Multi-Class Funds you currently own, along with shares of Morgan Stanley Funds you currently own that you acquired in exchange for those shares. Shareholders cannot combine purchases made by family members or a shareholder's other related accounts in a single transaction for purposes of meeting the $5 million initial investment minimum requirement to qualify to purchase Class D shares. NO SALES CHARGES FOR REINVESTED CASH DISTRIBUTIONS If you receive a cash payment representing an income dividend or capital gain and you reinvest that amount in the applicable Class of shares by returning the check within 30 days of the payment date, the purchased shares would not be subject to an initial sales charge or CDSC. PLAN OF DISTRIBUTION (RULE 12B-1 FEES) The Fund has adopted a Plan of Distribution in accordance with Rule 12b-1 under the Investment Company Act of 1940 with respect to the Class A, Class B and Class C shares. (Class D shares are offered without any 12b-1 fee). The Plan allows the Fund to pay distribution fees for the sale and distribution of these shares. It also allows the Fund to pay for services to shareholders of Class A, Class B and Class C shares. Because these fees are paid out of the Fund's assets on an ongoing basis, over time these fees will increase the cost of your investment and reduce your return in these Classes and may cost you more than paying other types of sales charges. - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION The Investment Adviser and/or distributor may pay compensation (out of their own funds and not as an expense of the Fund) to certain affiliated or unaffiliated brokers, dealers or other financial intermediaries or service providers in connection with the sale or retention of Fund shares and/or shareholder servicing. Such compensation may be significant in amount and the prospect of receiving any such additional compensation may provide such affiliated or unaffiliated entities with an incentive to favor sales of shares of the Fund over other investment options. Any such payments will not change the net asset value or the price of the Fund's shares. For more information, please see the Fund's Statement of Additional Information. 33 Financial Highlights The financial highlights table is intended to help you understand the Fund's financial performance for the periods indicated. Certain information reflects financial results for a single Fund share throughout each period. The total returns in the table represent the rate an investor would have earned or lost on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, whose report, along with the Fund's financial statements, are incorporated by reference in the Statement of Additional Information from the Fund's annual report, which is available upon request. CLASS A SHARES - -------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED JANUARY 31, 2005 2004 2003 2002 2001 - -------------------------------------------------------------------------------------------------------- SELECTED PER SHARE DATA: Net asset value, beginning of period $12.66 $11.45 $12.35 $12.42 $11.80 ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment incomes[+/+] 0.30 0.26 0.33 0.43 0.47 Net realized and unrealized gain (loss) 0.39 1.28 (0.84) (0.06) 0.94 ------ ------ ------ ------ ------ Total income (loss) from investment operations 0.69 1.54 (0.51) 0.37 1.41 ------ ------ ------ ------ ------ Less dividends and distributions from: Net investment income (0.37) (0.33) (0.39) (0.44) (0.47) Net realized gain -- -- -- -- (0.32) ------ ------ ------ ------ ------ Total dividends and distributions (0.37) (0.33) (0.39) (0.44) (0.79) ------ ------ ------ ------ ------ Net asset value, end of period $12.98 $12.66 $11.45 $12.35 $12.42 - -------------------------------------------------------------------------------------------------------- TOTAL RETURN+ 5.55% 13.65% (4.19)% 3.13% 12.66% - -------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.08% 1.09% 1.08% 1.16% 1.20% Net investment income 2.39% 2.15% 2.79% 3.44% 3.97% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $8,434 $7,318 $3,125 $2,216 $2,043 Portfolio turnover rate 89% 174% 173% 99% 21% - -------------------------------------------------------------------------------------------------------- [+/+] The per share amounts were computed using an average number of shares outstanding during the period. + Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. (1) Reflects overall Fund ratios for investment income and non-class specific expenses. 34 CLASS B SHARES - ---------------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED JANUARY 31, 2005 2004 2003 2002 2001 - ---------------------------------------------------------------------------------------------------------------- SELECTED PER SHARE DATA: Net asset value, beginning of period $12.61 $11.40 $12.31 $12.39 $11.77 ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income[+/+] 0.20 0.17 0.24 0.34 0.37 Net realized and unrealized gain (loss) 0.39 1.28 (0.85) (0.07) 0.95 ------ ------ ------ ------ ------ Total income (loss) from investment operations 0.59 1.45 (0.61) 0.27 1.32 ------ ------ ------ ------ ------ Less dividends and distributions from: Net investment income (0.27) (0.24) (0.30) (0.35) (0.38) Net realized gain -- -- -- -- (0.32) ------ ------ ------ ------ ------ Total dividends and distributions (0.27) (0.24) (0.30) (0.35) (0.70) ------ ------ ------ ------ ------ Net asset value, end of period $12.93 $12.61 $11.40 $12.31 $12.39 - ---------------------------------------------------------------------------------------------------------------- TOTAL RETURN+ 4.83% 12.77 % (4.98)% 2.32% 11.82% - ---------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.84% 1.86% 1.84% 1.91% 2.00% Net investment income 1.63% 1.38% 2.03% 2.68% 3.17% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $145,072 $169,135 $135,146 $101,957 $45,803 Portfolio turnover rate 89% 174% 173% 99% 21% - ---------------------------------------------------------------------------------------------------------------- [+/+] The per share amounts were computed using an average number of shares outstanding during the period. + Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. (1) Reflects overall Fund ratios for investment income and non-class specific expenses. 35 Financial Highlights (Continued) CLASS C SHARES - ----------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED JANUARY 31, 2005 2004 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------- SELECTED PER SHARE DATA: Net asset value, beginning of period $12.63 $11.42 $12.33 $12.41 $11.78 ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income[+/+] 0.21 0.17 0.24 0.33 0.38 Net realized and unrealized gain (loss) 0.38 1.28 (0.85) (0.05) 0.95 ------ ------ ------ ------ ------ Total income (loss) from investment operations 0.59 1.45 (0.61) 0.28 1.33 ------ ------ ------ ------ ------ Less dividends and distributions from: Net investment income (0.27) (0.24) (0.30) (0.36) (0.38) Net realized gain -- -- -- -- (0.32) ------ ------ ------ ------ ------ Total dividends and distributions (0.27) (0.24) (0.30) (0.36) (0.70) ------ ------ ------ ------ ------ Net asset value, end of period $12.95 $12.63 $11.42 $12.33 $12.41 - ----------------------------------------------------------------------------------------------------------- TOTAL RETURN+ 4.84 % 12.74 % (5.00)% 2.32% 11.89% - ----------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.77% 1.85% 1.84% 1.91% 1.94% Net investment income 1.70% 1.39% 2.03% 2.68% 3.23% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $43,308 $43,092 $32,439 $33,321 $24,205 Portfolio turnover rate 89% 174% 173% 99% 21% - ----------------------------------------------------------------------------------------------------------- [+/+] The per share amounts were computed using an average number of shares outstanding during the period. + Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. (1) Reflects overall Fund ratios for investment income and non-class specific expenses. 36 CLASS D SHARES - ----------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED JANUARY 31, 2005 2004 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------- SELECTED PER SHARE DATA: Net asset value, beginning of period $12.63 $11.42 $12.33 $12.40 $11.79 ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income[+/+] 0.33 0.29 0.34 0.45 0.50 Net realized and unrealized gain (loss) 0.39 1.28 (0.83) (0.05) 0.93 ------ ------ ------ ------ ------ Total income (loss) from investment operations 0.72 1.57 (0.49) 0.40 1.43 ------ ------ ------ ------ ------ Less dividends and distributions from: Net investment income (0.40) (0.36) (0.42) (0.47) (0.50) Net realized gain -- -- -- -- (0.32) ------ ------ ------ ------ ------ Total dividends and distributions (0.40) (0.36) (0.42) (0.47) (0.82) ------ ------ ------ ------ ------ Net asset value, end of period $12.95 $12.63 $11.42 $12.33 $12.40 - ----------------------------------------------------------------------------------------------------------- TOTAL RETURN+ 5.80% 13.94% (4.04)% 3.37% 12.88% - ----------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(1): Expenses 0.84% 0.86% 0.84% 0.91% 1.00% Net investment income 2.63% 2.38% 3.03% 3.68% 4.17% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $1,895 $3,034 $1,476 $496 $107 Portfolio turnover rate 89% 174% 173% 99% 21% - ----------------------------------------------------------------------------------------------------------- [+/+] The per share amounts were computed using an average number of shares outstanding during the period. + Calculated based on the net asset value as of the last business day of the period. (1) Reflects overall Fund ratios for investment income and non-class specific expenses. 37 Notes - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - 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-------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 40 Morgan Stanley Funds EQUITY - ------------------------ BLEND/CORE Dividend Growth Securities Total Return Trust Fund of Funds - Domestic Portfolio - ------------------------ DOMESTIC HYBRID Allocator Fund Balanced Growth Fund Balanced Income Fund Income Builder Fund Strategist Fund - ------------------------ GLOBAL/INTERNATIONAL European Equity Fund Global Advantage Fund Global Dividend Growth Securities International Fund International SmallCap Fund International Value Equity Fund Japan Fund Pacific Growth Fund - ------------------------ GROWTH Aggressive Equity Fund American Opportunities Fund Capital Opportunities Trust Developing Growth Securities Trust Growth Fund Special Growth Fund - ------------------------ INDEX Equally-Weighted S&P 500 Fund KLD Social Index Fund Nasdaq-100 Index Fund S&P 500 Index Fund Total Market Index Fund - ------------------------ SPECIALTY Biotechnology Fund Convertible Securities Trust Financial Services Trust Global Utilities Fund Health Sciences Trust Information Fund Natural Resource Development Securities Real Estate Fund Utilities Fund - ------------------------ VALUE Fundamental Value Fund Mid-Cap Value Fund Small-Mid Special Value Fund Special Value Fund Value Fund FIXED INCOME - ------------------------ TAXABLE SHORT TERM Limited Duration Fund*+ Limited Duration U.S. Treasury Trust* - ------------------------ TAXABLE INTERMEDIATE TERM Federal Securities Trust Flexible Income Trust High Yield Securities Quality Income Trust U.S. Government Securities Trust - ------------------------ TAX-FREE California Tax-Free Income Fund Limited Term Municipal Trust*+ New York Tax-Free Income Fund Tax-Exempt Securities Trust MONEY MARKET* - ------------------------ TAXABLE Liquid Asset Fund U.S. Government Money Market - ------------------------ TAX-FREE California Tax-Free Daily Income Trust New York Municipal Money Market Trust Tax-Free Daily Income Trust There may be funds created or terminated after this Prospectus was published. Please consult the inside back cover of a new fund's prospectus for its designations, e.g., Multi-Class Fund or Money Market Fund. Unless otherwise noted, each listed Morgan Stanley Fund is a Multi-Class Fund. A Multi-Class Fund is a mutual fund offering multiple classes of shares. * Single-Class Fund(s) + No-Load (Mutual) Fund Additional information about the Fund's investments is available in the Fund's Annual and Semi-Annual Reports to Shareholders. In the Fund's Annual Report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. The Fund's Statement of Additional Information also provides additional information about the Fund. The Statement of Additional Information is incorporated herein by reference (legally is part of this Prospectus). For a free copy of any of these documents, to request other information about the Fund, or to make shareholder inquiries, please call (800) 869-NEWS. Free copies of these documents are also available from our Internet site at: WWW.MORGANSTANLEY.COM/FUNDS. You also may obtain information about the Fund by calling your Morgan Stanley Financial Advisor or by visiting our Internet site. Information about the Fund (including the Statement of Additional Information) can be viewed and copied at the Securities and Exchange Commission's (the "SEC") Public Reference Room in Washington, DC. Information about the Reference Room's operations may be obtained by calling the SEC at (202) 942-8090. Reports and other information about the Fund are available on the EDGAR Database on the SEC's Internet site (www.sec.gov) and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the Public Reference Section of the SEC, Washington, DC 20549-0102. TICKER SYMBOLS - ------------------ ----------------- CLASS A: BINAX CLASS B: BINBX - ------------------ ----------------- CLASS C: BINCX CLASS D: BINDX - ------------------ ----------------- (THE FUND'S INVESTMENT COMPANY ACT FILE NO. IS 811-7243) Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. (Copyright) 2005 Morgan Stanley [MORGAN STANLEY FUNDS GRAPHIC OMITTED] CLF # 38400PRO-00 [MORGAN STANLEY FUNDS LOGO OMITTED] Morgan Stanley Balanced Income Fund 38400 5/05 [MORGAN STANLEY LOGO OMITTED] Prospectus May 27, 2005
Welcome, Shareholder:
In this report, you’ll learn about how your investment in Morgan Stanley Balanced Income Fund performed during the annual period. We will provide an overview of the market conditions, and discuss some of the factors that affected performance during the reporting period. In addition, this report includes the Fund’s financial statements and a list of Fund investments.
![]() | This material must be preceded or accompanied by a prospectus for the fund being offered. |
![]() | Market forecasts provided in this report may not necessarily come to pass. There is no assurance that a mutual fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that market values of securities owned by the Fund will decline and, therefore, the value of the Fund's shares may be less than what you paid for them. Accordingly, you can lose money investing in this Fund. Please see the prospectus for more complete information on investment risks. |
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![]() | Fund Report |
![]() | For the year ended January 31, 2006 |
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Total Return for the 12 Months Ended January 31, 2006
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Class A | ![]() | ![]() | ![]() | Class B | ![]() | ![]() | ![]() | Class C | ![]() | ![]() | ![]() | Class D | ![]() | ![]() | ![]() | Lehman Brothers U.S. Government/ Credit Index1 | ![]() | ![]() | ![]() | Russell 1000® Value Index2 | ![]() | ![]() | ![]() | Lipper Income Funds Index3 | ||||||||||||||
6.05% | ![]() | ![]() | ![]() | 5.16% | ![]() | ![]() | ![]() | 5.25% | ![]() | ![]() | ![]() | 6.24% | ![]() | ![]() | ![]() | 1.48% | ![]() | ![]() | ![]() | 13.22% | ![]() | ![]() | ![]() | 6.25% | ||||||||||||||
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The performance of the Fund’s four share classes varies because each has different expenses. The Fund’s total returns assume the reinvestment of all distributions but do not reflect the deduction of any applicable sales charges. Such costs would lower performance. See Performance Summary for standardized performance and benchmark information. |
Market Conditions
Despite a climate often marked by uncertainty, both stocks and bonds advanced, with stocks leading the way. Concerns about how consumers and corporate profits would fare amid rising interest rates and rising energy prices dampened investor sentiment throughout the period. Weak results at U.S. automakers intensified these worries in the first half of 2005, as did the Gulf Coast hurricanes in the second half of the year. Nonetheless, the economy proved resilient, corporate earnings continued to meet or exceed expectations, and consumer data remained stronger than expected, even rebounding after the hurricanes. As widely expected, the Federal Open Market Committee (the ‘‘Fed’’) continued to raise its federal funds rate.
Short- and intermediate-term Treasury yields rose sharply in response to stronger-than-expected economic data and the Fed’s numerous tightening moves. Although the yields of longer-term U.S. Treasury also rose, they did so at a slower pace. As a result, the yield curve flattened over the period.
Large-cap value stocks (the mainstay of the Fund’s equity portfolio) posted solid gains overall, as measured by the Russell 1000® Value Index. Within the Index, energy and utilities were among the best performing sectors, due to high commodity prices and investors’ pursuit of yield. The financials sector also advanced with particular strength, led by stocks with capital markets exposure. Consumer discretionary was the only sector in the Index to produce a negative return for the period.
Within the government bond sector, U.S. Agency issues modestly outperformed U.S. Treasuries. Relative to other non-government sub-sectors, U.S. Treasuries performed well. Within the mortgage sector, higher-coupon, longer-dated mortgage-backed issues outperformed their lower-coupon counterparts. U.S. investment-grade corporate bonds underperformed other major bond market sectors. Returns were unevenly distributed, with a few key names driving performance within each sector of the corporate bond market. Overall, Aa-rated issues posted the highest returns while medium quality, Baa-rated issues lagged. Among the corporate sub-sectors the best performers were energy, utilities, and banking issues. The most significant industry laggards were the automotive manufacturers and parts producers.
Performance Analysis
Morgan Stanley Balanced Income Fund outperformed the Lehman Brothers U.S. Government/Credit Index and underperformed the Russell 1000 Value Index and
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the Lipper Income Funds Index for the 12 months ended January 31, 2006, assuming no deduction of applicable sales charges.
During the period, we kept the overall interest-rate exposure of the Fund’s fixed income portfolio well below that of its Lehman benchmark. This posture was advantageous as yields rose, especially in the short-term and intermediate-term portions of the yield curve.
Within its government bond allocation, the Fund benefited from its focus on high-coupon, slow-prepaying mortgages as these issues outperformed their lower-coupon counterparts. Compared with lower-coupon, faster pre-paying mortgages, the mortgages favored by the Fund tend to be less sensitive to rising interest rates. An underweight to U.S. Agency issues detracted slightly from relative performance, however.
The Fund’s performance relative to the Lehman benchmark was enhanced by favorable sector and security selection decisions in the corporate bond sector. Additionally, a defensive, underweighted approach toward corporate credit proved helpful as most credit spreads widened. Within the corporate bond portfolio, the Fund maintained a modest preference for selected medium-quality investment-grade credits, such as those in the paper and forest products area. Selected life insurance and asset-backed issues remained the focus of the Fund’s higher-quality investments.
In addition to investing in fixed income securities, the Fund also included an allocation to stocks, totaling 33.8 percent of net assets at the close of the period. This stock allocation enhanced the Fund’s overall pace, as stocks outperformed bonds, broadly speaking.
In the Fund’s stock portfolio, the financials, energy and health care sectors contributed the most to absolute gains. Within financials, the Fund’s emphasis on diversified financial stocks proved advantageous, as these companies benefited from strength in the capital markets. Companies with fixed income trading performed especially well. Insurance holdings were also positive contributors, due to improved pricing power within the industry. Moreover, the Fund had limited exposure to regional banks, which saw their profit margins decline as the yield curve flattened. Elsewhere in the portfolio, high commodity prices continued to support energy stocks. Notably, the Fund held refining and marketing companies, which benefited from significantly higher profit margins generated in the refining of oil. Within health care, pharmaceuticals stocks contributed strong gains. Less bad news, positive expectations for new drug launches, and favorable patent protection rulings helped buoy the beleaguered industry.
In contrast, the Fund’s telecommunication services stocks were the primary detractor from performance. Intense competition from cable and wireless companies continued to threaten traditional landline usage. Also on the downside, the Fund’s media stocks were hampered by low advertising revenues for traditional media as well as by increasing competition from Internet advertising. Lagging returns in the Fund’s consumer staples exposure also hurt results.
There is no guarantee that any sectors mentioned will continue to perform as discussed herein or that securities in such sectors will be held by the Fund in the future. |
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TOP 10 HOLDINGS | ![]() | |||||
U.S. Treasury Securities | ![]() | 24.9 | % | |||
Fed. Natl. Mtge. Assoc. | ![]() | 7.6 | ||||
USAA Auto Owner Trust 2004-2 | ![]() | 1.4 | ||||
American Express Credit Acct. | ![]() | 1.2 | ||||
Citigroup, Inc. | ![]() | 1.1 | ||||
JPMorgan Chase & Co. | ![]() | 1.1 | ||||
Merrill Lynch & Co. | ![]() | 1.0 | ||||
Bayer AG (ADR) (Germany) | ![]() | 1.0 | ||||
Honda Motor Auto Receivables | ![]() | 1.0 | ||||
Sprint Capital Corp. | ![]() | 0.9 | ||||
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PORTFOLIO COMPOSITION* | ![]() | |||||
Common Stocks | ![]() | 34.1 | % | |||
U.S. Government Agencies & Obligations | ![]() | 33.5 | ||||
Corp Bonds | ![]() | 18.0 | ||||
Asset-Backed Securities | ![]() | 12.1 | ||||
Short-Term Investments | ![]() | 2.2 | ||||
Foreign Government Bonds | ![]() | 0.1 | ||||
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* Does not include open long futures contracts with an underlying face amount of $422,938 and unrealized depreciation of $12 and open short futures contracts with an underlying face amount of $18,367,376 and net unrealized depreciation of $498. |
Data as of January 31, 2006. Subject to change daily. All percentages for top 10 holdings are as a percentage of net assets and all percentages for portfolio composition are as a percentage of total investments. These data are provided for informational purposes only and should not be deemed a recommendation to buy or sell the securities mentioned. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services. |
Investment Strategy
The Fund will normally invest at least 80 percent of its assets in income-producing securities, consisting of (1) fixed-income securities and (2) dividend paying common stocks and securities convertible into common stocks. Within the limitations detailed in the prospectus, the Fund’s ‘‘Investment Adviser,’’ Morgan Stanley Investment Advisors Inc., may purchase or sell securities in any proportion it believes desirable based on its assessment of business, economic and investment conditions.
For More Information
About Portfolio Holdings
Each Morgan Stanley fund provides a complete schedule of portfolio holdings in its semiannual and annual reports within 60 days of the end of the fund’s second and fourth fiscal quarters by filing the schedule electronically with the Securities and Exchange Commission (SEC). The semiannual reports are filed on Form N-CSRS and the annual reports are filed on Form N-CSR. Morgan Stanley also delivers the semiannual and annual reports to fund shareholders and makes these reports available on its public Web site, www.morganstanley.com. Each Morgan Stanley fund also files a complete schedule of portfolio holdings with the SEC for the fund’s first and third fiscal quarters on Form N-Q. Morgan Stanley does not deliver the reports for the first and third fiscal quarters to shareholders, nor are the reports posted to the Morgan Stanley public Web site. You may, however, obtain the Form N-Q filings (as well as the Form N-CSR and N-CSRS filings) by accessing the SEC’s Web site, http://www.sec.gov. You may also review and copy them at the SEC’s Public
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Reference Room in Washington, DC. Information on the operation of the SEC’s Public Reference Room may be obtained by calling the SEC at (800) SEC-0330. You can also request copies of these materials, upon payment of a duplicating fee, by electronic request at the SEC’s e-mail address (publicinfo@sec.gov) or by writing the Public Reference section of the SEC, Washington, DC 20549-0102.
Proxy Voting Policy and Procedures
and Proxy Voting Record
You may obtain a copy of the Fund’s Proxy Voting Policy and Procedures without charge, upon request, by calling toll free (800) 869-NEWS or by visiting the Mutual Fund Center on our Web site at www.morganstanley.com. It is also available on the Securities and Exchange Commission’s Web site at http://www.sec.gov.
You may obtain information regarding how the Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 without charge by visiting the Mutual Fund Center on our Web site at www.morganstanley.com. This information is also available on the Securities and Exchange Commission’s Web site at http://www.sec.gov.
Householding Notice
To reduce printing and mailing costs, the Fund attempts to eliminate duplicate mailings to the same address. The Fund delivers a single copy of certain shareholder documents, including shareholder reports, prospectuses and proxy materials, to investors with the same last name who reside at the same address. Your participation in this program will continue for an unlimited period of time unless you instruct us otherwise. You can request multiple copies of these documents by calling (800) 350-6414, 8:00 a.m. to 8:00 p.m., ET. Once our Customer Service Center has received your instructions, we will begin sending individual copies for each account within 30 days.
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Performance of $10,000 Investment — Class C
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Average Annual Total Returns — Period Ended January 31, 2006
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![]() | ![]() | ![]() | Class A Shares* (since 07/28/97) | ![]() | ![]() | ![]() | Class B Shares** (since 07/28/97) | ![]() | ![]() | ![]() | Class C Shares† (since 03/28/95) | ![]() | ![]() | ![]() | Class D Shares†† (since 07/28/97) | |||||||||||
Symbol | ![]() | ![]() | ![]() | BINAX | ![]() | ![]() | ![]() | BINBX | ![]() | ![]() | ![]() | BINCX | ![]() | ![]() | ![]() | BINDX | ||||||||||
1 Year | ![]() | ![]() | ![]() | 6.05 | %4 | ![]() | ![]() | ![]() | 5.16 | %4 | ![]() | ![]() | ![]() | 5.25 | %4 | ![]() | ![]() | ![]() | 6.24 | %4 | ||||||
![]() | ![]() | ![]() | 0.48 | 5 | ![]() | ![]() | ![]() | 0.28 | 5 | ![]() | ![]() | ![]() | 4.27 | 5 | ![]() | ![]() | ![]() | — | ||||||||
5 Years | ![]() | ![]() | ![]() | 4.68 | 4 | ![]() | ![]() | ![]() | 3.86 | 4 | ![]() | ![]() | ![]() | 3.87 | 4 | ![]() | ![]() | ![]() | 4.90 | 4 | ||||||
![]() | ![]() | ![]() | 3.56 | 5 | ![]() | ![]() | ![]() | 3.51 | 5 | ![]() | ![]() | ![]() | 3.87 | 5 | ![]() | ![]() | ![]() | — | ||||||||
10 Years | ![]() | ![]() | ![]() | — | ![]() | ![]() | ![]() | — | ![]() | ![]() | ![]() | 6.01 | 4 | ![]() | ![]() | ![]() | — | |||||||||
![]() | ![]() | ![]() | — | ![]() | ![]() | ![]() | — | ![]() | ![]() | ![]() | 6.01 | 5 | ![]() | ![]() | ![]() | — | ||||||||||
Since Inception | ![]() | ![]() | ![]() | 5.80 | 4 | ![]() | ![]() | ![]() | 4.97 | 4 | ![]() | ![]() | ![]() | 7.06 | 4 | ![]() | ![]() | ![]() | 6.02 | 4 | ||||||
![]() | ![]() | ![]() | 5.13 | 5 | ![]() | ![]() | ![]() | 4.97 | 5 | ![]() | ![]() | ![]() | 7.06 | 5 | ![]() | ![]() | ![]() | — | ||||||||
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![]() | Performance data quoted represents past performance, which is no guarantee of future results and current performance may be lower or higher than the figures shown. For most recent month-end performance figures, please visit www.morganstanley.com or speak with your Financial Advisor. Investment returns and principal value will fluctuate and fund shares, when redeemed, may be worth more or less than their original cost. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Performance for Class A, Class B, Class C, and Class D shares will vary due to differences in sales charges and expenses. |
![]() | * | The maximum front-end sales charge for Class A is 5.25%. |
![]() | ** | The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%. The CDSC declines to 0% after six years. |
![]() | † | The maximum contingent deferred sales charge for Class C is 1.0% for shares redeemed within one year of purchase. |
![]() | †† | Class D has no sales charge. |
![]() | (1) | The Lehman Brothers U.S. Government/Credit Index tracks the performance of government and corporate obligations, including U.S. government agency and Treasury securities and corporate and Yankee bonds. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. |
![]() | (2) | The Russell 1000 ® Value Index measures the performance of those companies in the Russell 1000 ® Index with lower price-to-book ratios and lower forecasted growth values. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. |
![]() | (3) | The Lipper Income Funds Index is an equally-weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Income Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. |
![]() | (4) | Figure shown assumes reinvestment of all distributions and does not reflect the deduction of any sales charges. |
![]() | (5) | Figure shown assumes reinvestment of all distributions and the deduction of the maximum applicable sales charge. See the Fund's current prospectus for complete details on fees and sales charges. |
![]() | ‡ | Ending value assuming a complete redemption on January 31, 2006. |
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![]() | Expense Example |
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As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments and redemption fees; and (2) ongoing costs, including advisory fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 08/01/05 – 01/31/06.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled ‘‘Expenses Paid During Period’’ to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
![]() | Beginning Account Value | ![]() | Ending Account Value | ![]() | Expenses Paid During Period* | |||||||||
![]() | 08/01/05 | ![]() | 01/31/06 | ![]() | 08/01/05 – 01/31/06 | |||||||||
Class A | ![]() | ![]() | ![]() | |||||||||||
Actual (2.44% return) | ![]() | $ | 1,000.00 | ![]() | $ | 1,024.40 | ![]() | $ | 5.97 | |||||
Hypothetical (5% annual return before expenses) | ![]() | $ | 1,000.00 | ![]() | $ | 1,019.31 | ![]() | $ | 5.96 | |||||
Class B | ![]() | ![]() | ![]() | |||||||||||
Actual (2.05% return) | ![]() | $ | 1,000.00 | ![]() | $ | 1,020.50 | ![]() | $ | 9.88 | |||||
Hypothetical (5% annual return before expenses) | ![]() | $ | 1,000.00 | ![]() | $ | 1,015.43 | ![]() | $ | 9.86 | |||||
Class C | ![]() | ![]() | ![]() | |||||||||||
Actual (2.05% return) | ![]() | $ | 1,000.00 | ![]() | $ | 1,020.50 | ![]() | $ | 9.68 | |||||
Hypothetical (5% annual return before expenses) | ![]() | $ | 1,000.00 | ![]() | $ | 1,015.63 | ![]() | $ | 9.65 | |||||
Class D | ![]() | ![]() | ![]() | |||||||||||
Actual (2.57% return) | ![]() | $ | 1,000.00 | ![]() | $ | 1,025.70 | ![]() | $ | 4.80 | |||||
Hypothetical (5% annual return before expenses) | ![]() | $ | 1,000.00 | ![]() | $ | 1,020.47 | ![]() | $ | 4.79 | |||||
![]() |
![]() |
![]() | * | Expenses are equal to the Fund's annualized expense ratio of 1.17%, 1.94%, 1.90% and 0.94% for Class A, Class B, Class C and Class D shares, respectively, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
8
Morgan Stanley Balanced Income Fund
Portfolio of Investments January 31, 2006
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
NUMBER OF SHARES | ![]() | ![]() | VALUE | |||||||
![]() | Common Stocks (33.8%) | ![]() | ||||||||
![]() | Aerospace & Defense (0.7%) | ![]() | ||||||||
10,090 | ![]() | Northrop Grumman Corp. | ![]() | $ | 626,892 | |||||
14,720 | ![]() | Raytheon Co. | ![]() | 603,078 | ||||||
![]() | ![]() | 1,229,970 | ||||||||
![]() | Beverages: Alcoholic (0.3%) | ![]() | ||||||||
7,590 | ![]() | Diageo PLC (ADR) (United Kingdom) | ![]() | 455,552 | ||||||
![]() | Beverages: Non-Alcoholic (0.5%) | |||||||||
21,540 | ![]() | Coca-Cola Co. (The) | ![]() | 891,325 | ||||||
![]() | Biotechnology (0.4%) | ![]() | ||||||||
14,330 | ![]() | Chiron Corp.* | ![]() | 653,448 | ||||||
![]() | Broadcasting (0.6%) | ![]() | ||||||||
37,440 | ![]() | Clear Channel Communications, Inc. | ![]() | 1,095,869 | ||||||
![]() | Chemicals: Major Diversified (1.3%) | ![]() | ||||||||
40,440 | ![]() | Bayer AG (ADR) (Germany) | ![]() | 1,690,796 | ||||||
10,760 | ![]() | Dow Chemical Co. (The) | ![]() | 455,148 | ||||||
![]() | ![]() | 2,145,944 | ||||||||
![]() | Computer Processing Hardware (0.3%) | |||||||||
17,060 | ![]() | Hewlett-Packard Co. | ![]() | 531,931 | ||||||
![]() | Department Stores (0.3%) | |||||||||
10,300 | ![]() | Kohl's Corp.* | ![]() | 457,217 | ||||||
![]() | Discount Stores (0.5%) | |||||||||
18,870 | ![]() | Wal-Mart Stores, Inc. | ![]() | 870,096 | ||||||
![]() | Electric Utilities (1.1%) | |||||||||
15,410 | ![]() | American Electric Power Co., Inc. | ![]() | 575,101 | ||||||
10,670 | ![]() | Entergy Corp. | ![]() | 741,672 | ||||||
12,060 | ![]() | FirstEnergy Corp. | ![]() | 604,206 | ||||||
![]() | ![]() | 1,920,979 | ||||||||
![]() | Finance/Rental/Leasing (0.7%) | ![]() | ||||||||
16,770 | ![]() | Freddie Mac | ![]() | 1,138,012 | ||||||
![]() | Financial Conglomerates (2.4%) | ![]() | ||||||||
32,060 | ![]() | Citigroup, Inc. | ![]() | 1,493,355 | ||||||
45,446 | ![]() | JPMorgan Chase & Co. | ![]() | 1,806,478 | ||||||
11,090 | ![]() | State Street Corp. | ![]() | 670,501 | ||||||
![]() | ![]() | 3,970,334 | ||||||||
![]() | Food: Major Diversified (0.8%) | |||||||||
19,980 | ![]() | Unilever N.V. (NY Registered Shares) (Netherlands) | ![]() | 1,402,596 | ||||||
![]() | Food: Specialty/Candy (0.4%) | |||||||||
14,870 | ![]() | Cadbury Schweppes PLC (ADR) (United Kingdom) | ![]() | 592,272 | ||||||
![]() |
See Notes to Financial Statements
9
Morgan Stanley Balanced Income Fund
Portfolio of Investments January 31, 2006 continued
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
NUMBER OF SHARES | ![]() | ![]() | VALUE | |||||||
![]() | Household/Personal Care (0.4%) | ![]() | ||||||||
4,950 | ![]() | Avon Products, Inc. | ![]() | $ | 140,184 | |||||
7,920 | ![]() | Procter & Gamble Co. (The) | ![]() | 469,102 | ||||||
![]() | ![]() | 609,286 | ||||||||
![]() | Industrial Conglomerates (1.7%) | |||||||||
40,770 | ![]() | General Electric Co. | ![]() | 1,335,217 | ||||||
12,180 | ![]() | Ingersoll-Rand Co. Ltd. (Class A) (Bermuda) | ![]() | 478,309 | ||||||
11,140 | ![]() | Siemens AG (ADR) (Germany) | ![]() | 1,020,424 | ||||||
![]() | ![]() | 2,833,950 | ||||||||
![]() | Insurance Brokers/Services (0.5%) | ![]() | ||||||||
27,400 | ![]() | Marsh & McLennan Companies, Inc. | ![]() | 832,686 | ||||||
![]() | Integrated Oil (2.0%) | |||||||||
13,120 | ![]() | BP PLC (ADR) (United Kingdom) | ![]() | 948,707 | ||||||
14,780 | ![]() | ConocoPhillips | ![]() | 956,266 | ||||||
6,240 | ![]() | Exxon Mobil Corp. | ![]() | 391,560 | ||||||
15,010 | ![]() | Royal Dutch Shell PLC (ADR) (Class A) (United Kingdom) | ![]() | 1,022,331 | ||||||
![]() | ![]() | 3,318,864 | ||||||||
![]() | Investment Banks/Brokers (1.8%) | |||||||||
3,010 | ![]() | Goldman Sachs Group, Inc. (The) | ![]() | 425,163 | ||||||
22,550 | ![]() | Merrill Lynch & Co., Inc. | ![]() | 1,692,828 | ||||||
56,980 | ![]() | Schwab (Charles) Corp. (The) | ![]() | 842,734 | ||||||
![]() | ![]() | 2,960,725 | ||||||||
![]() | Life/Health Insurance (0.1%) | ![]() | ||||||||
15,130 | ![]() | Aegon N.V. (NY Registered Shares) (Netherlands) | ![]() | 244,198 | ||||||
![]() | Major Banks (1.0%) | |||||||||
21,922 | ![]() | Bank of America Corp. | ![]() | 969,610 | ||||||
9,950 | ![]() | PNC Financial Services Group | ![]() | 645,357 | ||||||
![]() | ![]() | 1,614,967 | ||||||||
![]() | Major Telecommunications (1.8%) | |||||||||
26,770 | ![]() | France Telecom S.A. (ADR) (France) | ![]() | 609,821 | ||||||
59,522 | ![]() | Sprint Nextel Corp. | ![]() | 1,362,459 | ||||||
35,580 | ![]() | Verizon Communications Inc. | ![]() | 1,126,463 | ||||||
![]() | ![]() | 3,098,743 | ||||||||
![]() | Managed Health Care (0.5%) | |||||||||
7,340 | ![]() | CIGNA Corp. | ![]() | 892,544 | ||||||
![]() | Media Conglomerates (1.8%) | |||||||||
10,320 | ![]() | CBS Corp. (Class B) | ![]() | 269,662 | ||||||
36,040 | ![]() | Disney (Walt) Co. (The) | ![]() | 912,172 | ||||||
80,150 | ![]() | Time Warner, Inc. | ![]() | 1,405,029 | ||||||
10,320 | ![]() | Viacom Inc. (Class B) (Non-voting) | ![]() | 428,074 | ||||||
![]() | ![]() | 3,014,937 | ||||||||
![]() |
See Notes to Financial Statements
10
Morgan Stanley Balanced Income Fund
Portfolio of Investments January 31, 2006 continued
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
NUMBER OF SHARES | ![]() | ![]() | VALUE | |||||||
![]() | Medical Specialties (0.6%) | |||||||||
9,020 | ![]() | Applera Corp. – Applied Biosystems Group | ![]() | $ | 255,627 | |||||
7,880 | ![]() | Bausch & Lomb, Inc. | ![]() | 532,294 | ||||||
9,200 | ![]() | Boston Scientific Corp.* | ![]() | 201,204 | ||||||
![]() | ![]() | 989,125 | ||||||||
![]() | Motor Vehicles (0.3%) | |||||||||
17,970 | ![]() | Honda Motor Co., Ltd. (ADR) (Japan) | ![]() | 511,247 | ||||||
![]() | Multi-Line Insurance (0.3%) | |||||||||
6,610 | ![]() | Hartford Financial Services Group, Inc. (The) | ![]() | 543,540 | ||||||
![]() | Oil Refining/Marketing (0.2%) | |||||||||
5,950 | ![]() | Valero Energy Corp. | ![]() | 371,459 | ||||||
![]() | Oilfield Services/Equipment (0.9%) | |||||||||
11,410 | ![]() | Schlumberger Ltd. (Netherlands Antilles) | ![]() | 1,454,204 | ||||||
![]() | Packaged Software (0.7%) | |||||||||
64,490 | ![]() | Symantec Corp.* | ![]() | 1,185,326 | ||||||
![]() | Pharmaceuticals: Major (4.8%) | |||||||||
60,020 | ![]() | Bristol-Myers Squibb Co. | ![]() | 1,367,856 | ||||||
10,580 | ![]() | GlaxoSmithKline PLC (ADR) (United Kingdom) | ![]() | 542,119 | ||||||
16,870 | ![]() | Lilly (Eli) & Co. | ![]() | 955,179 | ||||||
33,210 | ![]() | Pfizer, Inc. | ![]() | 852,833 | ||||||
18,870 | ![]() | Roche Holdings Ltd. (ADR) (Switzerland) | ![]() | 1,491,673 | ||||||
15,670 | ![]() | Sanofi-Aventis (ADR) (France) | ![]() | 720,820 | ||||||
66,840 | ![]() | Schering-Plough Corp. | ![]() | 1,279,986 | ||||||
19,770 | ![]() | Wyeth | ![]() | 914,363 | ||||||
![]() | ![]() | 8,124,829 | ||||||||
![]() | Precious Metals (0.7%) | ![]() | ||||||||
18,200 | ![]() | Newmont Mining Corp. | ![]() | 1,124,760 | ||||||
![]() | Property – Casualty Insurers (1.5%) | ![]() | ||||||||
1,560 | ![]() | ACE Ltd. (Cayman Islands) | ![]() | 85,410 | ||||||
9,560 | ![]() | Chubb Corp. (The) | ![]() | 901,986 | ||||||
23,254 | ![]() | St. Paul Travelers Companies, Inc. (The) | ![]() | 1,055,267 | ||||||
7,540 | ![]() | XL Capital Ltd. (Class A) (Cayman Islands) | ![]() | 510,156 | ||||||
![]() | ![]() | 2,552,819 | ||||||||
![]() | Restaurants (0.2%) | ![]() | ||||||||
8,440 | ![]() | McDonald's Corp. | ![]() | 295,484 | ||||||
![]() | Semiconductors (0.8%) | ![]() | ||||||||
31,590 | ![]() | Intel Corp. | ![]() | 671,919 | ||||||
47,720 | ![]() | Micron Technology, Inc. | ![]() | 700,530 | ||||||
![]() | ![]() | 1,372,449 | ||||||||
![]() |
See Notes to Financial Statements
11
Morgan Stanley Balanced Income Fund
Portfolio of Investments January 31, 2006 continued
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
NUMBER OF SHARES | ![]() | ![]() | VALUE | |||||||
![]() | Specialty Insurance (0.2%) | ![]() | ||||||||
3,900 | ![]() | MGIC Investment Corp. | ![]() | $ | 257,439 | |||||
3,400 | ![]() | PMI Group, Inc. (The) | ![]() | 146,982 | ||||||
![]() | ![]() | 404,421 | ||||||||
![]() | Specialty Stores (0.1%) | |||||||||
7,200 | ![]() | Office Depot, Inc.* | ![]() | 238,680 | ||||||
![]() | Telecommunication Equipment (0.2%) | ![]() | ||||||||
17,600 | ![]() | Motorola, Inc. | ![]() | 399,696 | ||||||
![]() | Tobacco (0.4%) | |||||||||
8,230 | ![]() | Altria Group, Inc. | ![]() | 595,358 | ||||||
![]() | Total Common Stocks (Cost $45,395,123) | ![]() | 56,939,842 | |||||||
![]() |
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
PRINCIPAL AMOUNT IN THOUSANDS | ![]() | ![]() | COUPON RATE | ![]() | MATURITY DATE | ![]() | ||||||||||||
![]() | Corporate Bonds (17.9%) Advertising/Marketing Services (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
$ | 190 | ![]() | WPP Finance (UK) Corp. (United Kingdom) | ![]() | 5.875 | % | ![]() | 06/15/14 | ![]() | 191,482 | ||||||||
![]() | Aerospace & Defense (0.5%) | ![]() | ![]() | ![]() | ||||||||||||||
235 | ![]() | Northrop Grumman Corp. | ![]() | 4.079 | ![]() | 11/16/06 | ![]() | 233,510 | ||||||||||
150 | ![]() | Raytheon Co. | ![]() | 8.30 | ![]() | 03/01/10 | ![]() | 167,298 | ||||||||||
373 | ![]() | Systems 2001 Asset Trust – 144A** (Cayman Islands) | ![]() | 6.664 | ![]() | 09/15/13 | ![]() | 397,773 | ||||||||||
![]() | ![]() | ![]() | ![]() | 798,581 | ||||||||||||||
![]() | Air Freight/Couriers (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
225 | ![]() | Fedex Corp. | ![]() | 2.65 | ![]() | 04/01/07 | ![]() | 218,860 | ||||||||||
![]() | Airlines (0.3%) | ![]() | ![]() | ![]() | ||||||||||||||
334 | ![]() | America West Airlines, Inc. (Series 01-1) | ![]() | 7.10 | ![]() | 04/02/21 | ![]() | 352,753 | ||||||||||
195 | ![]() | Southwest Airlines Co. (Series 01-1) | ![]() | 5.496 | ![]() | 11/01/06 | ![]() | 195,621 | ||||||||||
![]() | ![]() | ![]() | ![]() | 548,374 | ||||||||||||||
![]() | Apparel/Footwear Retail (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
175 | ![]() | Limited Brands, Inc. | ![]() | 6.95 | ![]() | 03/01/33 | ![]() | 174,668 | ||||||||||
![]() | Beverages: Alcoholic (0.3%) | ![]() | ![]() | ![]() | ||||||||||||||
305 | ![]() | FBG Finance Ltd. – 144A** (Australia) | ![]() | 5.125 | ![]() | 06/15/15 | ![]() | 294,014 | ||||||||||
290 | ![]() | Miller Brewing Co. – 144A** | ![]() | 4.25 | ![]() | 08/15/08 | ![]() | 284,079 | ||||||||||
![]() | ![]() | ![]() | ![]() | 578,093 | ||||||||||||||
![]() |
See Notes to Financial Statements
12
Morgan Stanley Balanced Income Fund
Portfolio of Investments January 31, 2006 continued
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
PRINCIPAL AMOUNT IN THOUSANDS | ![]() | ![]() | COUPON RATE | ![]() | MATURITY DATE | ![]() | VALUE | |||||||||||
![]() | Cable/Satellite TV (0.3%) | ![]() | ![]() | ![]() | ||||||||||||||
$ | 135 | ![]() | Comcast Cable Communications Inc. | ![]() | 6.75 | % | ![]() | 01/30/11 | ![]() | $ | 142,345 | |||||||
40 | ![]() | Lenfest Communications Corp. | ![]() | 7.625 | ![]() | 02/15/08 | ![]() | 41,776 | ||||||||||
240 | ![]() | Cox Communications, Inc. | ![]() | 4.625 | ![]() | 01/15/10 | ![]() | 231,980 | ||||||||||
105 | ![]() | TCI Communications, Inc. | ![]() | 7.875 | ![]() | 02/15/26 | ![]() | 119,312 | ||||||||||
![]() | ![]() | ![]() | ![]() | 535,413 | ||||||||||||||
![]() | Casino/Gaming (0.2%) | ![]() | ![]() | ![]() | ||||||||||||||
360 | ![]() | Harrah's Operating Co., Inc. | ![]() | 5.625 | ![]() | 06/01/15 | ![]() | 352,564 | ||||||||||
![]() | Chemicals: Major Diversified (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
170 | ![]() | ICI Wilmington Inc. | ![]() | 4.375 | ![]() | 12/01/08 | ![]() | 165,295 | ||||||||||
![]() | Containers/Packaging (0.2%) | ![]() | ![]() | ![]() | ||||||||||||||
355 | ![]() | Sealed Air Corp. – 144A** | ![]() | 5.625 | ![]() | 07/15/13 | ![]() | 351,166 | ||||||||||
![]() | Department Stores (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
50 | ![]() | Federated Department Stores, Inc. | ![]() | 6.625 | ![]() | 09/01/08 | ![]() | 51,645 | ||||||||||
80 | ![]() | May Department Stores Co., Inc. | ![]() | 5.95 | ![]() | 11/01/08 | ![]() | 81,499 | ||||||||||
![]() | ![]() | ![]() | ![]() | 133,144 | ||||||||||||||
![]() | Drugstore Chains (0.2%) | ![]() | ![]() | ![]() | ||||||||||||||
290 | ![]() | CVS Corp. | ![]() | 5.625 | ![]() | 03/15/06 | ![]() | 290,174 | ||||||||||
![]() | Electric Utilities (2.3%) | ![]() | ![]() | ![]() | ||||||||||||||
280 | ![]() | Ameren Corp. | ![]() | 4.263 | ![]() | 05/15/07 | ![]() | 276,579 | ||||||||||
305 | ![]() | Arizona Public Service Co. | ![]() | 5.80 | ![]() | 06/30/14 | ![]() | 308,743 | ||||||||||
75 | ![]() | Arizona Public Service Co. | ![]() | 6.75 | ![]() | 11/15/06 | ![]() | 75,866 | ||||||||||
265 | ![]() | Carolina Power & Light Co. | ![]() | 5.125 | ![]() | 09/15/13 | ![]() | 262,534 | ||||||||||
305 | ![]() | CC Funding Trust I | ![]() | 6.90 | ![]() | 02/16/07 | ![]() | 310,184 | ||||||||||
145 | ![]() | Cincinnati Gas & Electric Co. | ![]() | 5.70 | ![]() | 09/15/12 | ![]() | 147,351 | ||||||||||
140 | ![]() | Consolidated Natural Gas Co. | ![]() | 5.00 | ![]() | 12/01/14 | ![]() | 135,202 | ||||||||||
230 | ![]() | Consolidated Natural Gas Co. (Series C) | ![]() | 6.25 | ![]() | 11/01/11 | ![]() | 241,733 | ||||||||||
180 | ![]() | Consumers Energy Co. | ![]() | 4.80 | ![]() | 02/17/09 | ![]() | 177,540 | ||||||||||
130 | ![]() | Detroit Edison Co. (The) | ![]() | 6.125 | ![]() | 10/01/10 | ![]() | 134,970 | ||||||||||
90 | ![]() | Entergy Gulf States, Inc. | ![]() | 3.60 | ![]() | 06/01/08 | ![]() | 86,561 | ||||||||||
195 | ![]() | Entergy Gulf States, Inc. | ![]() | 4.81 | † | ![]() | 12/01/09 | ![]() | 190,552 | |||||||||
165 | ![]() | Exelon Corp. | ![]() | 6.75 | ![]() | 05/01/11 | ![]() | 175,123 | ||||||||||
385 | ![]() | FPL Group Capital Inc. | ![]() | 3.25 | ![]() | 04/11/06 | ![]() | 383,846 | ||||||||||
270 | ![]() | Pacific Gas & Electric Co. | ![]() | 6.05 | ![]() | 03/01/34 | ![]() | 275,844 | ||||||||||
70 | ![]() | Panhandle Eastern Pipe Line Co. (Series B) | ![]() | 2.75 | ![]() | 03/15/07 | ![]() | 68,121 | ||||||||||
220 | ![]() | Public Service Electric & Gas Co. (Series MTNB) | ![]() | 5.00 | ![]() | 01/01/13 | ![]() | 216,411 | ||||||||||
155 | ![]() | Texas Eastern Transmission, LP | ![]() | 7.00 | ![]() | 07/15/32 | ![]() | 178,027 | ||||||||||
205 | ![]() | Wisconsin Electric Power Co. | ![]() | 3.50 | ![]() | 12/01/07 | ![]() | 199,497 | ||||||||||
![]() | ![]() | ![]() | ![]() | 3,844,684 | ||||||||||||||
![]() |
See Notes to Financial Statements
13
Morgan Stanley Balanced Income Fund
Portfolio of Investments January 31, 2006 continued
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
PRINCIPAL AMOUNT IN THOUSANDS | ![]() | ![]() | COUPON RATE | ![]() | MATURITY DATE | ![]() | VALUE | |||||||||||
![]() | Electrical Products (0.3%) | ![]() | ![]() | ![]() | ||||||||||||||
$ | 240 | ![]() | Cooper Industries Inc. | ![]() | 5.25 | % | ![]() | 07/01/07 | ![]() | $ | 240,350 | |||||||
245 | ![]() | Cooper Industries Inc. – 144A** | ![]() | 5.25 | ![]() | 11/15/12 | ![]() | 244,579 | ||||||||||
![]() | ![]() | ![]() | ![]() | 484,929 | ||||||||||||||
![]() | Electronics/Appliances (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
160 | ![]() | LG Electronics Inc. – 144A** (South Korea) | ![]() | 5.00 | ![]() | 06/17/10 | ![]() | 156,288 | ||||||||||
![]() | Finance/Rental/Leasing (1.7%) | ![]() | ![]() | ![]() | ||||||||||||||
240 | ![]() | CIT Group, Inc. | ![]() | 2.875 | ![]() | 09/29/06 | ![]() | 236,951 | ||||||||||
190 | ![]() | CIT Group, Inc. | ![]() | 4.75 | ![]() | 08/15/08 | ![]() | 188,967 | ||||||||||
390 | ![]() | Countrywide Home Loans, Inc. (Series MTN) | ![]() | 3.25 | ![]() | 05/21/08 | ![]() | 374,109 | ||||||||||
375 | ![]() | MBNA Corp. | ![]() | 4.721 | † | ![]() | 05/05/08 | ![]() | 378,224 | |||||||||
260 | ![]() | MBNA Corp. | ![]() | 6.125 | ![]() | 03/01/13 | ![]() | 273,684 | ||||||||||
385 | ![]() | Nationwide Building Society – 144A** (United Kingdom) | ![]() | 4.25 | ![]() | 02/01/10 | ![]() | 374,051 | ||||||||||
560 | ![]() | Residential Capital Corp. | ![]() | 6.375 | ![]() | 06/30/10 | ![]() | 574,586 | ||||||||||
200 | ![]() | SLM Corp. | ![]() | 4.00 | ![]() | 01/15/10 | ![]() | 191,990 | ||||||||||
320 | ![]() | SLM Corp. (Series MTNA) | ![]() | 5.00 | ![]() | 10/01/13 | ![]() | 312,524 | ||||||||||
![]() | ![]() | ![]() | ![]() | 2,905,086 | ||||||||||||||
![]() | Financial Conglomerates (1.4%) | ![]() | ![]() | ![]() | ||||||||||||||
500 | ![]() | Associates Corp. of North America | ![]() | 6.25 | ![]() | 11/01/08 | ![]() | 516,440 | ||||||||||
230 | ![]() | Bank One Corp. (Series MTNA) | ![]() | 6.00 | ![]() | 02/17/09 | ![]() | 234,807 | ||||||||||
370 | ![]() | Chase Manhattan Corp. | ![]() | 6.00 | ![]() | 02/15/09 | ![]() | 378,763 | ||||||||||
80 | ![]() | Chase Manhattan Corp. | ![]() | 7.00 | ![]() | 11/15/09 | ![]() | 85,180 | ||||||||||
255 | ![]() | Citigroup Inc. | ![]() | 5.75 | ![]() | 05/10/06 | ![]() | 255,663 | ||||||||||
125 | ![]() | Citigroup Inc. | ![]() | 6.00 | ![]() | 02/21/12 | ![]() | 130,822 | ||||||||||
165 | ![]() | General Electric Capital Corp. | ![]() | 4.25 | ![]() | 12/01/10 | ![]() | 159,536 | ||||||||||
450 | ![]() | General Electric Capital Corp. | ![]() | 6.75 | ![]() | 03/15/32 | ![]() | 524,315 | ||||||||||
![]() | ![]() | ![]() | ![]() | 2,285,526 | ||||||||||||||
![]() | Food Retail (0.2%) | ![]() | ![]() | ![]() | ||||||||||||||
355 | ![]() | Kroger Co. | ![]() | 7.50 | ![]() | 04/01/31 | ![]() | 397,455 | ||||||||||
![]() | Food: Major Diversified (0.3%) | ![]() | ![]() | ![]() | ||||||||||||||
100 | ![]() | ConAgra Foods, Inc. | ![]() | 7.00 | ![]() | 10/01/28 | ![]() | 105,691 | ||||||||||
130 | ![]() | Conagra, Inc. | ![]() | 8.25 | ![]() | 09/15/30 | ![]() | 156,547 | ||||||||||
155 | ![]() | Heinz (H.J.) Co. – 144A** | ![]() | 6.428 | ![]() | 12/01/08 | ![]() | 159,623 | ||||||||||
115 | ![]() | Kraft Foods Inc. | ![]() | 5.25 | ![]() | 06/01/07 | ![]() | 115,171 | ||||||||||
![]() | ![]() | ![]() | ![]() | 537,032 | ||||||||||||||
![]() | Forest Products (0.0%) | ![]() | ![]() | ![]() | ||||||||||||||
19 | ![]() | Weyerhaeuser Co. | ![]() | 6.125 | ![]() | 03/15/07 | ![]() | 19,157 | ||||||||||
![]() |
See Notes to Financial Statements
14
Morgan Stanley Balanced Income Fund
Portfolio of Investments January 31, 2006 continued
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
PRINCIPAL AMOUNT IN THOUSANDS | ![]() | ![]() | COUPON RATE | ![]() | MATURITY DATE | ![]() | VALUE | |||||||||||
![]() | Gas Distributors (0.4%) | ![]() | ![]() | ![]() | ||||||||||||||
$ | 195 | ![]() | NiSource Finance Corp. | ![]() | 4.95 | †% | ![]() | 11/23/09 | ![]() | $ | 195,834 | |||||||
295 | ![]() | Ras Laffan Liquid Natural Gas Co. Ltd. – 144A** (Qatar) | ![]() | 8.294 | ![]() | 03/15/14 | ![]() | 338,918 | ||||||||||
180 | ![]() | Sempra Energy | ![]() | 4.621 | ![]() | 05/17/07 | ![]() | 178,856 | ||||||||||
![]() | ![]() | ![]() | ![]() | 713,608 | ||||||||||||||
![]() | Home Furnishings (0.2%) | ![]() | ![]() | ![]() | ||||||||||||||
180 | ![]() | Mohawk Industries Inc. | ![]() | 6.125 | ![]() | 01/15/16 | ![]() | 181,327 | ||||||||||
155 | ![]() | Mohawk Industries, Inc. (Series D) | ![]() | 7.20 | ![]() | 04/15/12 | ![]() | 164,319 | ||||||||||
![]() | ![]() | ![]() | ![]() | 345,646 | ||||||||||||||
![]() | Hotels/Resorts/Cruiselines (0.2%) | ![]() | ![]() | ![]() | ||||||||||||||
305 | ![]() | Hyatt Equities LLC – 144A** | ![]() | 6.875 | ![]() | 06/15/07 | ![]() | 310,183 | ||||||||||
![]() | Household/Personal Care (0.2%) | ![]() | ![]() | ![]() | ||||||||||||||
350 | ![]() | Clorox Co. (The) | ![]() | 4.614 | † | ![]() | 12/14/07 | ![]() | 350,820 | |||||||||
![]() | Industrial Conglomerates (0.2%) | ![]() | ![]() | ![]() | ||||||||||||||
200 | ![]() | Textron Financial Corp. | ![]() | 4.125 | ![]() | 03/03/08 | ![]() | 196,763 | ||||||||||
130 | ![]() | Textron Financial Corp. | ![]() | 5.125 | ![]() | 02/03/11 | ![]() | 129,955 | ||||||||||
![]() | ![]() | ![]() | ![]() | 326,718 | ||||||||||||||
![]() | Insurance Brokers/Services (0.7%) | ![]() | ![]() | ![]() | ||||||||||||||
670 | ![]() | Farmers Exchange Capital – 144A** | ![]() | 7.05 | ![]() | 07/15/28 | ![]() | 699,382 | ||||||||||
480 | ![]() | Marsh & McLennan Companies, Inc. | ![]() | 5.375 | ![]() | 07/15/14 | ![]() | 469,166 | ||||||||||
![]() | ![]() | ![]() | ![]() | 1,168,548 | ||||||||||||||
![]() | Investment Banks/Brokers (0.2%) | ![]() | ![]() | ![]() | ||||||||||||||
345 | ![]() | Goldman Sachs Group Inc. (The) | ![]() | 6.60 | ![]() | 01/15/12 | ![]() | 368,336 | ||||||||||
![]() | Major Banks (0.5%) | ![]() | ![]() | ![]() | ||||||||||||||
120 | ![]() | Bank of New York Co., Inc. (The) | ![]() | 5.20 | ![]() | 07/01/07 | ![]() | 120,357 | ||||||||||
250 | ![]() | Bank of New York Co., Inc. (The) (Series BKNT) | ![]() | 3.80 | ![]() | 02/01/08 | ![]() | 244,671 | ||||||||||
225 | ![]() | HSBC Finance Corp. | ![]() | 6.75 | ![]() | 05/15/11 | ![]() | 240,386 | ||||||||||
250 | ![]() | Huntington National Bank (Series BKNT) | ![]() | 4.375 | ![]() | 01/15/10 | ![]() | 243,378 | ||||||||||
![]() | ![]() | ![]() | ![]() | 848,792 | ||||||||||||||
![]() | Major Telecommunications (1.1%) | ![]() | ![]() | ![]() | ||||||||||||||
320 | ![]() | Deutsche Telekom International Finance Corp. NV (Netherlands) | ![]() | 8.25 | ![]() | 06/15/30 | ![]() | 400,399 | ||||||||||
315 | ![]() | France Telecom S.A. (France) | ![]() | 8.75 | ![]() | 03/01/31 | ![]() | 412,878 | ||||||||||
185 | ![]() | SBC Communications, Inc. | ![]() | 6.15 | ![]() | 09/15/34 | ![]() | 182,752 | ||||||||||
70 | ![]() | Sprint Capital Corp. | ![]() | 8.75 | ![]() | 03/15/32 | ![]() | 91,815 | ||||||||||
190 | ![]() | Telecom Italia Capital SA (Luxembourg) | ![]() | 4.00 | ![]() | 11/15/08 | ![]() | 184,045 | ||||||||||
225 | ![]() | Telecom Italia Capital SA (Luxembourg) | ![]() | 4.00 | ![]() | 01/15/10 | ![]() | 213,931 | ||||||||||
300 | ![]() | Verizon New England Inc. | ![]() | 6.50 | ![]() | 09/15/11 | ![]() | 308,633 | ||||||||||
![]() | ![]() | ![]() | ![]() | 1,794,453 | ||||||||||||||
![]() |
See Notes to Financial Statements
15
Morgan Stanley Balanced Income Fund
Portfolio of Investments January 31, 2006 continued
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
PRINCIPAL AMOUNT IN THOUSANDS | ![]() | ![]() | COUPON RATE | ![]() | MATURITY DATE | ![]() | VALUE | |||||||||||
![]() | Managed Health Care (0.2%) | ![]() | ![]() | ![]() | ||||||||||||||
$ | 30 | ![]() | Anthem, Inc. | ![]() | 6.80 | % | ![]() | 08/01/12 | ![]() | $ | 32,480 | |||||||
345 | ![]() | WellPoint Health Networks Inc. | ![]() | 6.375 | ![]() | 06/15/06 | ![]() | 346,803 | ||||||||||
![]() | ![]() | ![]() | ![]() | 379,283 | ||||||||||||||
![]() | Media Conglomerates (0.2%) | ![]() | ![]() | ![]() | ||||||||||||||
90 | ![]() | News America Holdings, Inc. | ![]() | 7.75 | ![]() | 02/01/24 | ![]() | 100,249 | ||||||||||
115 | ![]() | News America Inc. | ![]() | 7.28 | ![]() | 06/30/28 | ![]() | 124,028 | ||||||||||
50 | ![]() | News America Inc. – 144A** | ![]() | 6.40 | ![]() | 12/15/35 | ![]() | 49,955 | ||||||||||
![]() | ![]() | ![]() | ![]() | 274,232 | ||||||||||||||
![]() | Medical Specialties (0.2%) | ![]() | ![]() | ![]() | ||||||||||||||
300 | ![]() | Baxter Finco BV – 144A** (Netherlands) | ![]() | 4.75 | ![]() | 10/15/10 | ![]() | 294,915 | ||||||||||
![]() | Motor Vehicles (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
145 | ![]() | DaimlerChrysler North American Holdings Co. | ![]() | 8.50 | ![]() | 01/18/31 | ![]() | 176,326 | ||||||||||
![]() | Multi-Line Insurance (0.9%) | ![]() | ![]() | ![]() | ||||||||||||||
735 | ![]() | AIG Sun America Global Finance VI – 144A** | ![]() | 6.30 | ![]() | 05/10/11 | ![]() | 777,119 | ||||||||||
190 | ![]() | American General Finance Corp. (Series MTNF) | ![]() | 5.875 | ![]() | 07/14/06 | ![]() | 190,923 | ||||||||||
130 | ![]() | American General Finance Corp. (Series MTNH) | ![]() | 4.625 | ![]() | 09/01/10 | ![]() | 126,743 | ||||||||||
85 | ![]() | AXA Financial Inc. | ![]() | 6.50 | ![]() | 04/01/08 | ![]() | 87,871 | ||||||||||
120 | ![]() | Hartford Financial Services Group, Inc. (The) | ![]() | 2.375 | ![]() | 06/01/06 | ![]() | 119,037 | ||||||||||
135 | ![]() | International Lease Finance Corp. | ![]() | 3.75 | ![]() | 08/01/07 | ![]() | 132,435 | ||||||||||
![]() | ![]() | ![]() | ![]() | 1,434,128 | ||||||||||||||
![]() | Other Metals/Minerals (0.2%) | ![]() | ![]() | ![]() | ||||||||||||||
235 | ![]() | Brascan Corp. (Canada) | ![]() | 7.125 | ![]() | 06/15/12 | ![]() | 254,551 | ||||||||||
![]() | Property – Casualty Insurers (0.9%) | ![]() | ![]() | ![]() | ||||||||||||||
460 | ![]() | Mantis Reef Ltd. – 144A** (Australia) | ![]() | 4.692 | ![]() | 11/14/08 | ![]() | 451,207 | ||||||||||
220 | ![]() | Platinum Underwriters Finance Holdings, Ltd. | ![]() | 6.371 | ![]() | 11/16/07 | ![]() | 220,322 | ||||||||||
175 | ![]() | Platinum Underwriters Finance Holdings, Ltd. | ![]() | 7.50 | ![]() | 06/01/17 | ![]() | 178,925 | ||||||||||
315 | ![]() | St. Paul Travelers Companies, Inc. (The) | ![]() | 5.01 | ![]() | 08/16/07 | ![]() | 314,220 | ||||||||||
420 | ![]() | XLLIAC Global Funding – 144A** | ![]() | 4.80 | ![]() | 08/10/10 | ![]() | 413,396 | ||||||||||
![]() | ![]() | ![]() | ![]() | 1,578,070 | ||||||||||||||
![]() | Publishing: Newspapers (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
195 | ![]() | Knight Ridder, Inc. | ![]() | 5.75 | ![]() | 09/01/17 | ![]() | 167,329 | ||||||||||
![]() | Pulp & Paper (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
195 | ![]() | Sappi Papier Holding AG – 144A** (Austria) | ![]() | 6.75 | ![]() | 06/15/12 | ![]() | 182,960 | ||||||||||
![]() | Railroads (0.5%) | ![]() | ![]() | ![]() | ||||||||||||||
153 | ![]() | Burlington North Santa Fe Railway Co. | ![]() | 4.575 | ![]() | 01/15/21 | ![]() | 146,712 | ||||||||||
190 | ![]() | Burlington North Santa Fe Railway Co. | ![]() | 6.125 | ![]() | 03/15/09 | ![]() | 195,924 | ||||||||||
175 | ![]() | Norfolk Southern Corp. | ![]() | 7.35 | ![]() | 05/15/07 | ![]() | 180,183 | ||||||||||
![]() |
See Notes to Financial Statements
16
Morgan Stanley Balanced Income Fund
Portfolio of Investments January 31, 2006 continued
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
PRINCIPAL AMOUNT IN THOUSANDS | ![]() | ![]() | COUPON RATE | ![]() | MATURITY DATE | ![]() | VALUE | |||||||||||
$ | 105 | ![]() | Union Pacific Corp. | ![]() | 3.625 | % | ![]() | 06/01/10 | ![]() | $ | 98,872 | |||||||
35 | ![]() | Union Pacific Corp. | ![]() | 6.625 | ![]() | 02/01/08 | ![]() | 36,050 | ||||||||||
100 | ![]() | Union Pacific Corp. – 144A** | ![]() | 5.214 | ![]() | 09/30/14 | ![]() | 99,299 | ||||||||||
110 | ![]() | Union Pacific Corp. (Series MTNE) | ![]() | 6.79 | ![]() | 11/09/07 | ![]() | 113,254 | ||||||||||
![]() | ![]() | ![]() | ![]() | 870,294 | ||||||||||||||
![]() | Real Estate Development (0.5%) | ![]() | ![]() | ![]() | ||||||||||||||
395 | ![]() | World Financial Properties – 144A** | ![]() | 6.91 | ![]() | 09/01/13 | ![]() | 413,976 | ||||||||||
389 | ![]() | World Financial Properties – 144A** | ![]() | 6.95 | ![]() | 09/01/13 | ![]() | 407,633 | ||||||||||
![]() | ![]() | ![]() | ![]() | 821,609 | ||||||||||||||
![]() | Real Estate Investment Trusts (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
185 | ![]() | EOP Operating L.P. | ![]() | 6.763 | ![]() | 06/15/07 | ![]() | 188,267 | ||||||||||
![]() | Regional Banks (0.3%) | ![]() | ![]() | ![]() | ||||||||||||||
465 | ![]() | Marshall & Ilsley Bank (Series BKNT) | ![]() | 3.80 | ![]() | 02/08/08 | ![]() | 456,278 | ||||||||||
![]() | Savings Banks (0.7%) | ![]() | ![]() | ![]() | ||||||||||||||
195 | ![]() | Household Finance Corp. | ![]() | 4.125 | ![]() | 12/15/08 | ![]() | 190,124 | ||||||||||
70 | ![]() | Household Finance Corp. | ![]() | 5.875 | ![]() | 02/01/09 | ![]() | 71,539 | ||||||||||
105 | ![]() | Household Finance Corp. | ![]() | 6.375 | ![]() | 10/15/11 | ![]() | 110,703 | ||||||||||
230 | ![]() | Household Finance Corp. | ![]() | 6.40 | ![]() | 06/17/08 | ![]() | 236,662 | ||||||||||
100 | ![]() | Sovereign Bank (Series CD) | ![]() | 4.00 | ![]() | 02/01/08 | ![]() | 98,170 | ||||||||||
195 | ![]() | Washington Mutual Bank | ![]() | 5.50 | ![]() | 01/15/13 | ![]() | 195,510 | ||||||||||
230 | ![]() | Washington Mutual Inc. | ![]() | 8.25 | ![]() | 04/01/10 | ![]() | 254,683 | ||||||||||
![]() | ![]() | ![]() | ![]() | 1,157,391 | ||||||||||||||
![]() | Trucks/Construction/Farm Machinery (0.2%) | ![]() | ![]() | ![]() | ||||||||||||||
70 | ![]() | Caterpillar Financial Services Corp. (Series MTNF) | ![]() | 3.625 | ![]() | 11/15/07 | ![]() | 68,427 | ||||||||||
340 | ![]() | Caterpillar Financial Services Corp. (Series MTNF) | ![]() | 4.44 | † | ![]() | 08/20/07 | ![]() | 340,776 | |||||||||
![]() | ![]() | ![]() | ![]() | 409,203 | ||||||||||||||
![]() | Wireless Telecommunications (0.2%) | ![]() | ![]() | ![]() | ||||||||||||||
285 | ![]() | Vodafone Group PLC (United Kingdom) | ![]() | 4.611 | † | ![]() | 12/28/07 | ![]() | 285,086 | |||||||||
![]() | Total Corporate Bonds (Cost $30,032,446) | ![]() | 30,124,997 | |||||||||||||||
![]() | Foreign Government Obligation (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
160 | ![]() | United Mexican States (Mexico) (Cost $182,604) | ![]() | 8.375 | ![]() | 01/14/11 | ![]() | 182,000 | ||||||||||
![]() | U.S Government Obligations (24.7%) | ![]() | ![]() | ![]() | ||||||||||||||
![]() | U.S. Treasury Bonds | ![]() | ![]() | ![]() | ||||||||||||||
5,000 | ![]() | ![]() | 7.625 | ![]() | 02/15/25 | ![]() | 6,790,625 | |||||||||||
7,100 | ![]() | ![]() | 8.125 | ![]() | 08/15/19-08/15/21 | ![]() | 9,714,038 | |||||||||||
![]() | U.S. Treasury Notes | ![]() | ![]() | ![]() | ||||||||||||||
19,565 | ![]() | ![]() | 4.25 | ![]() | 08/15/13-11/15/13 | ![]() | 19,207,050 | |||||||||||
![]() |
See Notes to Financial Statements
17
Morgan Stanley Balanced Income Fund
Portfolio of Investments January 31, 2006 continued
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
PRINCIPAL AMOUNT IN THOUSANDS | ![]() | ![]() | COUPON RATE | ![]() | MATURITY DATE | ![]() | VALUE | |||||||||||
$ | 13,695 | ![]() | U.S. Treasury Strips | ![]() | 0.00 | % | ![]() | 08/15/20-02/15/27 | ![]() | $ | 5,900,547 | |||||||
![]() | Total U.S. Government Obligations (Cost $40,422,790) | ![]() | 41,612,260 | |||||||||||||||
![]() | Mortgage-Backed Securities (7.8%) | ![]() | ![]() | ![]() | ||||||||||||||
![]() | Federal Home Loan Mortgage Corp. Gold | ![]() | ![]() | ![]() | ||||||||||||||
155 | ![]() | ![]() | 6.50 | ![]() | 01/01/31 | ![]() | 159,592 | |||||||||||
411 | ![]() | ![]() | 7.50 | ![]() | 10/01/29-06/01/32 | ![]() | 431,701 | |||||||||||
![]() | Federal National Mortgage Assoc. | ![]() | ![]() | ![]() | ||||||||||||||
761 | ![]() | ![]() | 6.50 | ![]() | 07/01/32-06/01/33 | ![]() | 781,885 | |||||||||||
5,356 | ![]() | ![]() | 7.00 | ![]() | 07/01/11-11/01/35 | ![]() | 5,568,272 | |||||||||||
493 | ![]() | ![]() | 7.50 | ![]() | 08/01/23-07/01/32 | ![]() | 517,223 | |||||||||||
536 | ![]() | ![]() | 8.00 | ![]() | 05/01/24-08/01/31 | ![]() | 572,637 | |||||||||||
![]() | Federal National Mortgage Assoc. (ARM) | ![]() | ![]() | ![]() | ||||||||||||||
2,146 | ![]() | ![]() | 4.84 | ![]() | 01/01/36 | ![]() | 2,205,574 | |||||||||||
571 | ![]() | ![]() | 4.603 | ![]() | 07/01/33 | ![]() | 570,951 | |||||||||||
2,121 | ![]() | ![]() | 5.002 | ![]() | 01/01/36 | ![]() | 2,180,677 | |||||||||||
![]() | Government National Mortgage Assoc. | ![]() | ![]() | ![]() | ||||||||||||||
101 | ![]() | ![]() | 7.50 | ![]() | 08/15/25-10/15/26 | ![]() | 106,305 | |||||||||||
64 | ![]() | ![]() | 8.00 | ![]() | 06/15/26-07/15/26 | ![]() | 68,877 | |||||||||||
![]() | Total Mortgage-Backed Securities (Cost $13,195,899) | ![]() | 13,163,694 | |||||||||||||||
![]() | Asset-Backed Securities (12.0%) | ![]() | ![]() | ![]() | ||||||||||||||
![]() | Finance/Rental/Leasing | ![]() | ![]() | ![]() | ||||||||||||||
700 | ![]() | American Express Credit Account Master Trust 2002-3 A | ![]() | 4.58 | † | ![]() | 12/15/09 | ![]() | 701,379 | |||||||||
1,275 | ![]() | American Express Credit Account Master Trust 2003-3 A | ![]() | 4.58 | † | ![]() | 11/15/10 | ![]() | 1,278,612 | |||||||||
725 | ![]() | Banc of America Securities Auto Trust 2005-WF1 A3 | ![]() | 3.99 | ![]() | 08/18/09 | ![]() | 715,935 | ||||||||||
425 | ![]() | Capital Auto Receivables Asset Trust 2004-2 A | ![]() | 3.35 | ![]() | 02/15/08 | ![]() | 419,915 | ||||||||||
725 | ![]() | Capital Auto Receivables Asset Trust 2005-1 A4 | ![]() | 4.05 | ![]() | 07/15/09 | ![]() | 716,843 | ||||||||||
650 | ![]() | Caterpillar Financial Asset Trust 2005-A A3 | ![]() | 3.90 | ![]() | 02/25/09 | ![]() | 642,077 | ||||||||||
315 | ![]() | Chase Credit Card Master Trust 2001-4 A | ![]() | 5.50 | ![]() | 11/17/08 | ![]() | 316,056 | ||||||||||
282 | ![]() | CIT Equipment Collateral 2004-EF1 A3 | ![]() | 3.50 | ![]() | 09/20/08 | ![]() | 277,444 | ||||||||||
475 | ![]() | CNH Equipment Trust 2005-A A3 | ![]() | 4.02 | ![]() | 04/15/09 | ![]() | 469,678 | ||||||||||
900 | ![]() | CNH Equipment Trust 2005-B A3 | ![]() | 4.27 | ![]() | 01/15/10 | ![]() | 889,936 | ||||||||||
575 | ![]() | Daimler Chrysler Auto Trust 2005-B A3 | ![]() | 4.04 | ![]() | 09/08/09 | ![]() | 568,539 | ||||||||||
475 | ![]() | Ford Credit Auto Owner Trust 2005B A3 | ![]() | 4.17 | ![]() | 01/15/09 | ![]() | 471,234 | ||||||||||
![]() |
See Notes to Financial Statements
18
Morgan Stanley Balanced Income Fund
Portfolio of Investments January 31, 2006 continued
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
PRINCIPAL AMOUNT IN THOUSANDS | ![]() | ![]() | COUPON RATE | ![]() | MATURITY DATE | ![]() | VALUE | |||||||||||
$ | 550 | ![]() | GE Dealer Floorplan Master Note Trust 2004-1 A | ![]() | 4.54 | †% | ![]() | 07/20/08 | ![]() | $ | 550,362 | |||||||
700 | ![]() | GE Equipment Small Ticket LLC - -2005-2A | ![]() | 4.88 | ![]() | 10/22/09 | ![]() | 699,362 | ||||||||||
900 | ![]() | Harley-Davidson Motorcycle Trust 2005-1 A2 | ![]() | 3.76 | ![]() | 12/17/12 | ![]() | 881,942 | ||||||||||
525 | ![]() | Harley-Davidson Motorcycle Trust 2005-2 A2 | ![]() | 4.07 | ![]() | 02/15/12 | ![]() | 516,600 | ||||||||||
425 | ![]() | Hertz Vehicle Financing LLC 2005-2A | ![]() | 4.93 | ![]() | 02/25/10 | ![]() | 424,203 | ||||||||||
400 | ![]() | Honda Auto Receivables Owner Trust 2005-2 A3 | ![]() | 3.93 | ![]() | 01/15/09 | ![]() | 395,344 | ||||||||||
650 | ![]() | Honda Auto Receivables Owner Trust 2005-3 A3 | ![]() | 3.87 | ![]() | 04/20/09 | ![]() | 640,543 | ||||||||||
575 | ![]() | Honda Auto Receivables Owner Trust 2005-6 A3 | ![]() | 4.85 | ![]() | 10/19/09 | ![]() | 574,853 | ||||||||||
450 | ![]() | Hyundai Auto Receivables Trust 2005-A A3 | ![]() | 3.98 | ![]() | 11/16/09 | ![]() | 443,520 | ||||||||||
140 | ![]() | MBNA Master Credit Card Trust 1999-B A | ![]() | 5.90 | ![]() | 08/15/11 | ![]() | 144,215 | ||||||||||
800 | ![]() | Merrill Auto Trust Securitization 2005-1 A3 | ![]() | 4.10 | ![]() | 08/25/09 | ![]() | 790,458 | ||||||||||
575 | ![]() | National City Auto Receivables Trust 2004-A A4 | ![]() | 2.88 | ![]() | 05/15/11 | ![]() | 554,178 | ||||||||||
825 | ![]() | Nissan Auto Receivables Owner Trust 2005-B A3 | ![]() | 3.99 | ![]() | 07/15/09 | ![]() | 815,245 | ||||||||||
175 | ![]() | TXU Electric Delivery Transition Bond Co. LLC 2004-1 A2 | ![]() | 4.81 | ![]() | 11/17/14 | ![]() | 172,771 | ||||||||||
950 | ![]() | USAA Auto Owner Trust 2004-2 A-4 | ![]() | 3.58 | ![]() | 02/15/11 | ![]() | 931,048 | ||||||||||
900 | ![]() | USAA Auto Owner Trust 2004-3 A3 | ![]() | 3.16 | ![]() | 02/17/09 | ![]() | 888,120 | ||||||||||
575 | ![]() | USAA Auto Owner Trust 2005-1 A3 | ![]() | 3.90 | ![]() | 07/15/09 | ![]() | 568,445 | ||||||||||
500 | ![]() | Volkswagen Auto Lease Trust 2005-A A3 | ![]() | 3.82 | ![]() | 05/20/08 | ![]() | 495,191 | ||||||||||
750 | ![]() | Volkswagen Auto Loan Enhanced Trust | ![]() | 4.80 | ![]() | 07/20/09 | ![]() | 748,901 | ||||||||||
325 | ![]() | Wachovia Auto Owner Trust 2004-B A3 | ![]() | 2.91 | ![]() | 04/20/09 | ![]() | 320,538 | ||||||||||
400 | ![]() | Wachovia Auto Owner Trust 2005-A A3 | ![]() | 4.06 | ![]() | 09/21/09 | ![]() | 395,516 | ||||||||||
575 | ![]() | Wachovia Auto Owner Trust 2005-B A3 | ![]() | 4.79 | ![]() | 04/20/10 | ![]() | 574,133 | ||||||||||
300 | ![]() | World Omni Auto Receivables Trust 2004-A A3 | ![]() | 3.29 | ![]() | 11/12/08 | ![]() | 296,979 | ||||||||||
![]() | Total Asset-Backed Securities (Cost $20,462,316) | ![]() | 20,290,115 | |||||||||||||||
![]() | Collateralized Mortgage Obligations (0.8%) | ![]() | ![]() | ![]() | ||||||||||||||
800 | ![]() | Federal Home Loan Mortgage Corp. Whole Loan 2005-S001 2A2 | ![]() | 4.68 | † | ![]() | 09/25/45 | ![]() | 801,286 | |||||||||
1,518 | ![]() | Federal National Mortgage Assoc. 2005-68 XI (IO) | ![]() | 6.00 | ![]() | 08/25/35 | ![]() | 466,084 | ||||||||||
![]() | Total Collateralized Mortgage Obligations (Cost $1,067,183) | ![]() | 1,267,370 | |||||||||||||||
![]() | Short-Term Investments (2.1%) | ![]() | ![]() | ![]() | ||||||||||||||
![]() | U.S. Government Obligation (a) (0.2%) | ![]() | ![]() | ![]() | ||||||||||||||
400 | ![]() | U.S. Treasury Bill*** (Cost $392,332) | ![]() | 4.26 | ![]() | 07/13/06 | ![]() | 392,332 | ||||||||||
![]() |
See Notes to Financial Statements
19
Morgan Stanley Balanced Income Fund
Portfolio of Investments January 31, 2006 continued
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
PRINCIPAL AMOUNT IN THOUSANDS | ![]() | ![]() | COUPON RATE | ![]() | MATURITY DATE | ![]() | VALUE | |||||||||||
![]() | Repurchase Agreement (1.9%) | ![]() | ![]() | ![]() | ||||||||||||||
$ | 3,265 | ![]() | Joint repurchase agreement account (dated 01/31/06; proceeds $3,265,403) (b) (Cost $3,265,000) | ![]() | 4.445 | % | ![]() | 02/01/06 | ![]() | $ | 3,265,000 | |||||||
![]() | Total Short-Term Investments (Cost $3,657,332) | ![]() | 3,657,332 | |||||||||||||||
![]() | Total Investments (Cost $154,415,693) (c) (d) | ![]() | 99.2 | % | ![]() | 167,237,610 | ||||||||||||
![]() | Other Assets in Excess of Liabilities | ![]() | 0.8 | ![]() | 1,301,779 | |||||||||||||
![]() | Net Assets | ![]() | 100.0 | % | ![]() | $ | 168,539,389 | |||||||||||
![]() |
![]() |
![]() | ADR | American Depositary Receipt. |
![]() | ARM | Adjustable Rate Mortgage. |
![]() | IO | Interest-Only security. |
![]() | * | Non-income producing security. |
![]() | ** | Resale is restricted to qualified institutional investors. |
![]() | *** | A portion of this security has been physically segregated in connection with open futures contracts in the amount of $56,520. |
![]() | † | Floating rate security; rate shown is the rate in effect at January 31, 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 $18,733,585 in connection with open futures contracts. |
![]() | (d) | The aggregate cost for federal income tax purposes is $157,819,885. The aggregate gross unrealized appreciation is $12,027,853 and the aggregate gross unrealized depreciation is $2,610,128, resulting in net unrealized appreciation of $9,417,725. |
Futures Contracts Open at January 31, 2006:
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
NUMBER OF CONTRACTS | ![]() | LONG/SHORT | ![]() | DESCRIPTION, DELIVERY MONTH AND YEAR | ![]() | UNDERLYING FACE AMOUNT AT VALUE | ![]() | UNREALIZED APPRECIATION/ (DEPRECIATION) | ||||||||||
4 | ![]() | Long | ![]() | U.S. Treasury Notes 5 Year, March 2006 | ![]() | $422,938 | ![]() | $(12) | ||||||||||
71 | ![]() | Short | ![]() | U.S. Treasury Notes 2 Year, March 2006 | ![]() | (14,543,907) | ![]() | 27,440 | ||||||||||
3 | ![]() | Short | ![]() | U.S. Treasury Notes 10 Year, March 2006 | ![]() | (325,313) | ![]() | (8) | ||||||||||
31 | ![]() | Short | ![]() | U.S. Treasury Bonds 20 Year, March 2006 | ![]() | (3,498,156) | ![]() | (27,930) | ||||||||||
![]() | ![]() | Net Unrealized Depreciation | ![]() | $(510) | ||||||||||||||
![]() |
See Notes to Financial Statements
20
Morgan Stanley Balanced Income Fund
Financial Statements
Statement of Assets and Liabilities
January 31, 2006
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
Assets: | ||||||
Investments in securities, at value (cost $154,415,693) | ![]() | $167,237,610 | ||||
Receivable for: | ![]() | |||||
Investments sold | ![]() | 1,654,647 | ||||
Interest | ![]() | 1,299,163 | ||||
Shares of beneficial interest sold | ![]() | 145,129 | ||||
Dividends | ![]() | 51,960 | ||||
Prepaid expenses and other assets | ![]() | 74,585 | ||||
Total Assets | ![]() | 170,463,094 | ||||
Liabilities: | ![]() | |||||
Payable for: | ![]() | |||||
Investments purchased | ![]() | 1,346,663 | ||||
Shares of beneficial interest redeemed | ![]() | 277,842 | ||||
Distribution fee | ![]() | 133,581 | ||||
Investment advisory fee | ![]() | 77,888 | ||||
Administration fee | ![]() | 11,983 | ||||
Variation margin | ![]() | 2,756 | ||||
Transfer agent fee | ![]() | 2,245 | ||||
Accrued expenses and other payables | ![]() | 70,747 | ||||
Total Liabilities | ![]() | 1,923,705 | ||||
Net Assets | ![]() | $168,539,389 | ||||
Composition of Net Assets: | ![]() | |||||
Paid-in-capital | ![]() | $155,047,042 | ||||
Net unrealized appreciation | ![]() | 12,821,407 | ||||
Dividends in excess of net investment income | ![]() | (81,282) | ||||
Accumulated undistributed net realized gain | ![]() | 752,222 | ||||
Net Assets | ![]() | $168,539,389 | ||||
Class A Shares: | ![]() | |||||
Net Assets | ![]() | $22,918,403 | ||||
Shares Outstanding (unlimited authorized, $.01 par value) | ![]() | 1,807,197 | ||||
Net Asset Value Per Share | ![]() | $12.68 | ||||
Maximum Offering Price Per Share, (net asset value plus 5.54% of net asset value) | ![]() | $13.38 | ||||
Class B Shares: | ![]() | |||||
Net Assets | ![]() | $103,937,799 | ||||
Shares Outstanding (unlimited authorized, $.01 par value) | ![]() | 8,231,498 | ||||
Net Asset Value Per Share | ![]() | $12.63 | ||||
Class C Shares: | ![]() | |||||
Net Assets | ![]() | $40,400,509 | ||||
Shares Outstanding (unlimited authorized, $.01 par value) | ![]() | 3,194,749 | ||||
Net Asset Value Per Share | ![]() | $12.65 | ||||
Class D Shares: | ![]() | |||||
Net Assets | ![]() | $1,282,678 | ||||
Shares Outstanding (unlimited authorized, $.01 par value) | ![]() | 101,432 | ||||
Net Asset Value Per Share | ![]() | $12.65 | ||||
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See Notes to Financial Statements
21
Morgan Stanley Balanced Income Fund
Financial Statements continued
Statement of Operations
For the year ended January 31, 2006
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
Net Investment Income: | ||||||
Income | ||||||
Interest | ![]() | $ | 5,433,194 | |||
Dividends (net of $35,470 foreign withholding tax) | ![]() | 1,250,069 | ||||
Total Income | ![]() | 6,683,263 | ||||
Expenses | ![]() | |||||
Distribution fee (Class A shares) | ![]() | 44,258 | ||||
Distribution fee (Class B shares) | ![]() | 1,208,984 | ||||
Distribution fee (Class C shares) | ![]() | 415,453 | ||||
Investment advisory fee | ![]() | 952,607 | ||||
Transfer agent fees and expenses | ![]() | 245,099 | ||||
Administration fee | ![]() | 146,555 | ||||
Professional fees | ![]() | 107,291 | ||||
Shareholder reports and notices | ![]() | 84,386 | ||||
Registration fees | ![]() | 56,439 | ||||
Custodian fees | ![]() | 50,745 | ||||
Trustees' fees and expenses | ![]() | 2,215 | ||||
Other | ![]() | 30,014 | ||||
Total Expenses | ![]() | 3,344,046 | ||||
Net Investment Income | ![]() | 3,339,217 | ||||
Net Realized and Unrealized Gain (Loss): | ![]() | |||||
Net Realized Gain (Loss) on: | ![]() | |||||
Investments | ![]() | 12,660,186 | ||||
Futures contracts | ![]() | (934,714 | ) | |||
Net Realized Gain | ![]() | 11,725,472 | ||||
Net Change in Unrealized Appreciation/Depreciation on: | ![]() | |||||
Investments | ![]() | (6,165,024 | ) | |||
Futures contracts | ![]() | 657,805 | ||||
Net Depreciation | ![]() | (5,507,219 | ) | |||
Net Gain | ![]() | 6,218,253 | ||||
Net Increase | ![]() | $ | 9,557,470 | |||
![]() |
See Notes to Financial Statements
22
Morgan Stanley Balanced Income Fund
Financial Statements continued
Statement of Changes in Net Assets
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
![]() | FOR THE YEAR ENDED JANUARY 31, 2006 | ![]() | FOR THE YEAR ENDED JANUARY 31, 2005 | |||||||
Increase (Decrease) in Net Assets: | ![]() | ![]() | ||||||||
Operations: | ![]() | ![]() | ||||||||
Net investment income | ![]() | $ | 3,339,217 | ![]() | $ | 3,543,356 | ||||
Net realized gain | ![]() | 11,725,472 | ![]() | 8,383,257 | ||||||
Net change in unrealized appreciation/depreciation | ![]() | (5,507,219 | ) | ![]() | (2,483,279 | ) | ||||
Net Increase | ![]() | 9,557,470 | ![]() | 9,443,334 | ||||||
Dividends and Distributions to Shareholders from: | ![]() | ![]() | ||||||||
Net investment income | ![]() | ![]() | ||||||||
Class A shares | ![]() | (538,035 | ) | ![]() | (238,355 | ) | ||||
Class B shares | ![]() | (2,361,571 | ) | ![]() | (3,326,493 | ) | ||||
Class C shares | ![]() | (889,437 | ) | ![]() | (935,448 | ) | ||||
Class D shares | ![]() | (41,670 | ) | ![]() | (66,324 | ) | ||||
Net realized gain | ![]() | ![]() | ||||||||
Class A shares | ![]() | (1,182,901 | ) | ![]() | — | |||||
Class B shares | ![]() | (5,804,185 | ) | ![]() | — | |||||
Class C shares | ![]() | (2,188,127 | ) | ![]() | — | |||||
Class D shares | ![]() | (64,026 | ) | ![]() | — | |||||
Total Dividends and Distributions | ![]() | (13,069,952 | ) | ![]() | (4,566,620 | ) | ||||
Net decrease from transactions in shares of beneficial interest | ![]() | (26,657,384 | ) | ![]() | (28,746,960 | ) | ||||
Net Decrease | ![]() | (30,169,866 | ) | ![]() | (23,870,246 | ) | ||||
Net Assets: | ![]() | ![]() | ||||||||
Beginning of period | ![]() | 198,709,255 | ![]() | 222,579,501 | ||||||
End of Period (Including dividends in excess of net investment income of $81,282 and $265,699, respectively) | ![]() | $ | 168,539,389 | ![]() | $ | 198,709,255 | ||||
![]() |
See Notes to Financial Statements
23
Morgan Stanley Balanced Income Fund
Notes to Financial Statements January 31, 2006
1. Organization and Accounting Policies
Morgan Stanley Balanced Income Fund (the ‘‘Fund’’) is registered under the Investment Company Act of 1940, as amended (the ‘‘Act’’), as a diversified, open-end management investment company. The Fund's investment objective is to provide current income and moderate capital growth. The Fund was organized as a Massachusetts business trust on November 23, 1994 and commenced operations on March 28, 1995. On July 28, 1997, the Fund converted to a multiple class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within eighteen months, six years and one year, respectively. Class D shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses.
Effective August 29, 2005, the Board of Trustees of the Fund approved the implementation of a 2% redemption fee on Class A shares, Class B shares, Class C shares, and Class D shares, which is paid directly to the Fund, for shares redeemed within seven days of purchase. The redemption fee is designed to protect the Fund and its remaining shareholders from the effects of short-term trading.
The following is a summary of significant accounting policies:
A. Valuation of Investments — (1) an equity portfolio security listed or traded on the New York Stock Exchange (‘‘NYSE’’) or American Stock Exchange or other exchange is valued at its latest sale price prior to the time when assets are valued; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (2) an equity portfolio security listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (3) all other portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market; (4) for equity securities traded on foreign exchanges, the last reported sale price or the latest bid price may be used if there were no sales on a particular day; (5) futures are valued at the latest price published by the commodities exchange on which they trade; (6) when market quotations are not readily available or Morgan Stanley Investment Advisors Inc. (the ‘‘Investment Adviser’’) determines that the latest sale price, the bid price or the mean between the last reported bid and asked price do not reflect a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund’s Trustees. Occasionally, developments affecting the closing prices of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the foreign market on which the securities
24
Morgan Stanley Balanced Income Fund
Notes to Financial Statements January 31, 2006 continued
trade) and the close of business on the NYSE. If developments occur during such periods that are expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Fund’s Trustees or by the Investment Adviser using a pricing service and/or procedures approved by the Trustees of the Fund; (7) certain portfolio securities may be valued by an outside pricing service approved by the Fund’s Trustees; and (8) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost.
B. Accounting for Investments — Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Dividend income and other distributions are recorded on the ex-dividend date. Discounts are accreted and premiums are amortized over the life of the respective securities. Interest income is accrued daily.
C. Repurchase Agreements — Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other affiliated entities managed by the Investment Adviser, may transfer uninvested cash balances into one or more joint repurchase agreement accounts. These balances are invested in one or more repurchase agreements and are collateralized by cash, U.S. Treasury or federal agency obligations. The Fund may also invest directly with institutions in repurchase agreements. The Fund’s custodian receives the collateral, which is marked-to-market daily to determine that the value of the collateral does not decrease below the repurchase price plus accrued interest.
D. Multiple Class Allocations — Investment income, expenses (other than distribution fees), and realized and unrealized gains and losses are allocated to each class of shares based upon the relative net asset value on the date such items are recognized. Distribution fees are charged directly to the respective class.
E. Futures Contracts — A futures contract is an agreement between two parties to buy and sell financial instruments or contracts based on financial indices at a set price on a future date. Upon entering into such a contract, the Fund is required to pledge to the broker cash, U.S. Government securities or other liquid portfolio securities equal to the minimum initial margin requirements of the applicable futures exchange. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments known as variation margin are recorded by the Fund as unrealized gains and losses. Upon closing of the contract, the Fund realizes a gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
F. Federal Income Tax Policy — It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Accordingly, no federal income tax provision is required.
25
Morgan Stanley Balanced Income Fund
Notes to Financial Statements January 31, 2006 continued
G. Dividends and Distributions to Shareholders — Dividends and distributions to shareholders are recorded on the ex-dividend date.
H. Use of Estimates — The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates.
2. Investment Advisory/ Administration Agreements
Pursuant to an Investment Advisory Agreement, the Fund pays the Investment Adviser an advisory fee, accrued daily and payable monthly, by applying the annual rate of 0.52% to the portion of the daily net assets not exceeding $500 million and 0.495% to the portion of the daily net assets in excess of $500 million.
Pursuant to an Administration Agreement with Morgan Stanley Services Company Inc. (the ‘‘Administrator’’), an affiliate of the Investment Adviser, the Fund pays an administration fee, accrued daily and payable monthly, by applying the annual rate of 0.08% to the Fund’s daily net assets.
3. Plan of Distribution
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the ‘‘Distributor’’), an affiliate of the Investment Adviser and Administrator. The Fund has adopted a Plan of Distribution (the ‘‘Plan’’) pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A − up to 0.25% of the average daily net assets of Class A; (ii) Class B − up to 1.0% of the average daily net assets of Class B; and (iii) Class C − up to 1.0% of the average daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the Plan is terminated, the Trustees will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled $6,190,918 at January 31, 2006.
In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily net assets of Class A or Class C, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except that expenses representing a gross sales credit to Morgan Stanley Financial Advisors or other selected broker-dealer representatives may be reimbursed in the subsequent calendar year. For the year ended January 31, 2006, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.24% and 0.98%, respectively.
26
Morgan Stanley Balanced Income Fund
Notes to Financial Statements January 31, 2006 continued
The Distributor has informed the Fund that for the year ended January 31, 2006, it received contingent deferred sales charges from certain redemptions of the Fund's Class B shares and Class C shares of $317,947 and $5,527, respectively and received $37,795 in front-end sales charges from sales of the Fund's Class A shares. The respective shareholders pay such charges which are not an expense of the Fund.
4. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales, maturities and prepayments of portfolio securities, excluding short-term investments, for the year ended January 31, 2006, aggregated $138,533,203 and $171,369,574, respectively. Included in the aforementioned are purchases and sales/prepayments of U.S. Government securities of $95,030,193 and $116,507,316, respectively. The Fund had purchases and sales with other Morgan Stanley funds of $154,453 and $25,051 including net realized gain of $1,961, respectively.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and Distributor, is the Fund’s transfer agent.
The Fund has an unfunded Deferred Compensation Plan (the ‘‘Compensation Plan’’) which allows each independent Trustee to defer payment of all, or a portion, of the fees he receives for serving on the Board of Trustees. 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 Morgan Stanley funds that are offered as investment options under the Compensation Plan. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund.
5. Purposes of and Risks Relating to Certain Financial Instruments
The Fund may purchase and sell interest rate and index futures ("futures contracts") to facilitate trading; increase or decrease Fund's market exposure, seek higher investment returns, or to protect against a decline in the value of the Fund's securities or an increase in prices of securities that may be purchased.
These futures contracts involve elements of market risk in excess of the amount reflected in the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the value of the underlying securities. Risk may also rise from the potential inability of counterparties to meet the terms of their contracts.
27
Morgan Stanley Balanced Income Fund
Notes to Financial Statements January 31, 2006 continued
6. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | |
![]() | FOR THE YEAR ENDED JANUARY 31, 2006 | ![]() | FOR THE YEAR ENDED JANUARY 31, 2005 | ![]() | |||||||||||||||
![]() | SHARES | ![]() | AMOUNT | ![]() | SHARES | ![]() | AMOUNT | ||||||||||||
CLASS A SHARES | |||||||||||||||||||
Sold | ![]() | 264,863 | ![]() | $ | 3,475,020 | ![]() | 317,691 | ![]() | $ | 3,989,301 | |||||||||
Conversion from Class B | ![]() | 1,302,350 | ![]() | 16,907,628 | ![]() | — | ![]() | — | |||||||||||
Reinvestment of dividends and distributions | ![]() | 105,157 | ![]() | 1,336,171 | ![]() | 13,948 | ![]() | 177,229 | |||||||||||
Redeemed | ![]() | (514,896 | ) | ![]() | (6,743,161 | ) | ![]() | (259,961 | ) | ![]() | (3,278,960 | ) | |||||||
Net increase − Class A | ![]() | 1,157,474 | ![]() | 14,975,658 | ![]() | 71,678 | ![]() | 887,570 | |||||||||||
CLASS B SHARES | ![]() | ![]() | ![]() | ![]() | |||||||||||||||
Sold | ![]() | 951,941 | ![]() | 12,432,158 | ![]() | 2,120,892 | ![]() | 26,772,710 | |||||||||||
Conversion to Class A | ![]() | (1,307,463 | ) | ![]() | (16,907,628 | ) | ![]() | — | ![]() | — | |||||||||
Reinvestment of dividends and distributions | ![]() | 483,645 | ![]() | 6,120,943 | ![]() | 185,091 | ![]() | 2,343,526 | |||||||||||
Redeemed | ![]() | (3,119,370 | ) | ![]() | (40,679,978 | ) | ![]() | (4,500,852 | ) | ![]() | (56,690,252 | ) | |||||||
Net decrease − Class B | ![]() | (2,991,247 | ) | ![]() | (39,034,505 | ) | ![]() | (2,194,869 | ) | ![]() | (27,574,016 | ) | |||||||
CLASS C SHARES | ![]() | ![]() | ![]() | ![]() | |||||||||||||||
Sold | ![]() | 323,214 | ![]() | 4,214,224 | ![]() | 491,664 | ![]() | 6,201,714 | |||||||||||
Reinvestment of dividends and distributions | ![]() | 206,479 | ![]() | 2,615,217 | ![]() | 55,409 | ![]() | 702,690 | |||||||||||
Redeemed. | ![]() | (678,101 | ) | ![]() | (8,831,850 | ) | ![]() | (617,049 | ) | ![]() | (7,782,752 | ) | |||||||
Net decrease − Class C | ![]() | (148,408 | ) | ![]() | (2,002,409 | ) | ![]() | (69,976 | ) | ![]() | (878,348 | ) | |||||||
CLASS D SHARES | ![]() | ![]() | ![]() | ![]() | |||||||||||||||
Sold | ![]() | 35,650 | ![]() | 462,004 | ![]() | 24,387 | ![]() | 310,527 | |||||||||||
Reinvestment of dividends and distributions | ![]() | 6,628 | ![]() | 84,009 | ![]() | 3,852 | ![]() | 48,712 | |||||||||||
Redeemed | ![]() | (87,220 | ) | ![]() | (1,142,141 | ) | ![]() | (122,109 | ) | ![]() | (1,541,405 | ) | |||||||
Net decrease − Class D | ![]() | (44,942 | ) | ![]() | (596,128 | ) | ![]() | (93,870 | ) | ![]() | (1,182,166 | ) | |||||||
Net decrease in Fund | ![]() | (2,027,123 | ) | ![]() | $ | (26,657,384 | ) | ![]() | (2,287,037 | ) | ![]() | $ | (28,746,960 | ) | |||||
![]() |
7. Federal Income Tax Status
The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for tax purposes are reported as distributions of paid-in-capital.
28
Morgan Stanley Balanced Income Fund
Notes to Financial Statements January 31, 2006 continued
The tax character of distributions paid was as follows:
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
![]() | FOR THE YEAR ENDED JANUARY 31, 2006 | ![]() | FOR THE YEAR ENDED JANUARY 31, 2005 | |||||||
Ordinary income | ![]() | $ | 4,389,386 | ![]() | $ | 4,566,620 | ||||
Long-term capital gains | ![]() | 8,680,566 | ![]() | — | ||||||
Total distributions | ![]() | $ | 13,069,952 | ![]() | $ | 4,566,620 | ||||
![]() |
As of January 31, 2006, the tax-basis components of accumulated earnings were as follows:
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
Undistributed ordinary income | ![]() | $ | 849,014 | ![]() | ||||||
Undistributed long-term gains | ![]() | 3,225,895 | ![]() | |||||||
Net accumulated earnings | ![]() | 4,074,909 | ||||||||
Temporary differences | ![]() | (287 | ) | |||||||
Net unrealized appreciation | ![]() | 9,417,725 | ||||||||
Total accumulated earnings | ![]() | $ | 13,492,347 | |||||||
![]() |
As of January 31, 2006, the Fund had temporary book/tax differences primarily attributable to capital loss deferrals on wash sales and straddles, mark-to-market of open futures contracts and book amortization of premiums on debt securities and permanent book/tax differences primarily attributable to losses on paydowns and tax adjustments on debt securities sold by the Fund. To reflect reclassifications arising from the permanent differences, accumulated undistributed net realized gain was charged and dividends in excess of net investment income was credited $675,913.
8. Legal Matters
The Investment Adviser, certain affiliates of the Investment Adviser, certain officers of such affiliates and certain investment companies advised by the Investment Adviser or its affiliates, including the Fund, are named as defendants in a consolidated class action. This consolidated action also names as defendants certain individual Trustees and Directors of the Morgan Stanley funds. The consolidated amended complaint, filed in the United States District Court Southern District of New York on April 16, 2004, generally alleges that defendants, including the Fund, violated their statutory disclosure obligations and fiduciary duties by failing properly to disclose (i) that the Investment Adviser and certain affiliates of the Investment Adviser allegedly offered economic incentives to brokers and others to recommend the funds advised by the Investment Adviser or its affiliates to investors rather than funds managed by other companies, and (ii) that the funds advised by the Investment Adviser or its affiliates, including the Fund, allegedly paid excessive commissions to brokers in return for their efforts to recommend these funds to investors. The complaint seeks, among other things, unspecified compensatory damages, rescissionary damages, fees and costs. The defendants have
29
Morgan Stanley Balanced Income Fund
Notes to Financial Statements January 31, 2006 continued
moved to dismiss the action and intend to otherwise vigorously defend it. On March 9, 2005, Plaintiffs sought leave to supplement their complaint to assert claims on behalf of other investors. While the Fund and Adviser believe that each has meritorious defenses, the ultimate outcome of this matter is not presently determinable at this stage of the litigation, and no provision has been made in the Fund’s financial statements for the effect, if any, of this matter.
9. Subsequent Event
On February 6, 2006, the Trustees of Morgan Stanley Balanced Growth Fund (‘‘Balanced Growth’’) and the Fund approved a plan of reorganization whereby the Fund would be merged into Balanced Growth. The plan of reorganization is subject to the consent of the Fund’s shareholders at a special meeting scheduled to be held during the third quarter of 2006. If approved, the assets of the Fund would be combined with the assets of Balanced Growth and shareholders of the Fund would become shareholders of Balanced Growth, receiving shares of the corresponding class of Balanced Growth equal to the value of their holdings in the Fund.
30
Morgan Stanley Balanced Income Fund
Financial Highlights
Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | |
![]() | FOR THE YEAR ENDED JANUARY 31, | ![]() | |||||||||||||||||||||
![]() | 2006 | ![]() | 2005 | ![]() | 2004 | ![]() | 2003 | ![]() | 2002 | ||||||||||||||
Class A Shares: | |||||||||||||||||||||||
Selected Per Share Data: | |||||||||||||||||||||||
Net asset value, beginning of period | ![]() | $ | 12.98 | ![]() | $ | 12.66 | ![]() | $ | 11.45 | ![]() | $ | 12.35 | ![]() | $ | 12.42 | ||||||||
Income (loss) from investment operations: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net investment income‡ | ![]() | 0.33 | ![]() | 0.30 | ![]() | 0.26 | ![]() | 0.33 | ![]() | 0.43 | |||||||||||||
Net realized and unrealized gain (loss) | ![]() | 0.44 | ![]() | 0.39 | ![]() | 1.28 | ![]() | (0.84 | ) | ![]() | (0.06 | ) | |||||||||||
Total income (loss) from investment operations | ![]() | 0.77 | ![]() | 0.69 | ![]() | 1.54 | ![]() | (0.51 | ) | ![]() | 0.37 | ||||||||||||
Less dividends and distributions from: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net investment income | ![]() | (0.37 | ) | ![]() | (0.37 | ) | ![]() | (0.33 | ) | ![]() | (0.39 | ) | ![]() | (0.44 | ) | ||||||||
Net realized gain | ![]() | (0.70 | ) | ![]() | — | ![]() | — | ![]() | — | ![]() | — | ||||||||||||
Total dividends and distributions | ![]() | (1.07 | ) | ![]() | (0.37 | ) | ![]() | (0.33 | ) | ![]() | (0.39 | ) | ![]() | (0.44 | ) | ||||||||
Net asset value, end of period | ![]() | $ | 12.68 | ![]() | $ | 12.98 | ![]() | $ | 12.66 | ![]() | $ | 11.45 | ![]() | $ | 12.35 | ||||||||
Total Return† | ![]() | 6.05 | % | ![]() | 5.55 | % | ![]() | 13.65 | % | ![]() | (4.19 | )% | ![]() | 3.13 | % | ||||||||
Ratios to Average Net Assets(1): | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Expenses | ![]() | 1.15 | % | ![]() | 1.08 | % | ![]() | 1.09 | % | ![]() | 1.08 | % | ![]() | 1.16 | % | ||||||||
Net investment income | ![]() | 2.49 | % | ![]() | 2.39 | % | ![]() | 2.15 | % | ![]() | 2.79 | % | ![]() | 3.44 | % | ||||||||
Supplemental Data: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net assets, end of period, in thousands | ![]() | $22,918 | ![]() | $8,434 | ![]() | $7,318 | ![]() | $3,125 | ![]() | $2,216 | |||||||||||||
Portfolio turnover rate | ![]() | 78 | % | ![]() | 89 | % | ![]() | 174 | % | ![]() | 173 | % | ![]() | 99 | % | ||||||||
![]() |
![]() |
![]() | ‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
![]() | † | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
![]() | (1) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
See Notes to Financial Statements
31
Morgan Stanley Balanced Income Fund
Financial Highlights continued
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | |
![]() | FOR THE YEAR ENDED JANUARY 31, | ![]() | |||||||||||||||||||||
![]() | 2006 | ![]() | 2005 | ![]() | 2004 | ![]() | 2003 | ![]() | 2002 | ||||||||||||||
Class B Shares: | |||||||||||||||||||||||
Selected Per Share Data: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net asset value, beginning of period. | ![]() | $ | 12.93 | ![]() | $ | 12.61 | ![]() | $ | 11.40 | ![]() | $ | 12.31 | ![]() | $ | 12.39 | ||||||||
Income (loss) from investment operations: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net investment income‡ | ![]() | 0.23 | ![]() | 0.20 | ![]() | 0.17 | ![]() | 0.24 | ![]() | 0.34 | |||||||||||||
Net realized and unrealized gain (loss) | ![]() | 0.44 | ![]() | 0.39 | ![]() | 1.28 | ![]() | (0.85 | ) | ![]() | (0.07 | ) | |||||||||||
Total income (loss) from investment operations | ![]() | 0.67 | ![]() | 0.59 | ![]() | 1.45 | ![]() | (0.61 | ) | ![]() | 0.27 | ||||||||||||
Less dividends and distributions from: | |||||||||||||||||||||||
Net investment income | ![]() | (0.27 | ) | ![]() | (0.27 | ) | ![]() | (0.24 | ) | ![]() | (0.30 | ) | ![]() | (0.35 | ) | ||||||||
Net realized gain | ![]() | (0.70 | ) | ![]() | — | ![]() | — | ![]() | — | ![]() | — | ||||||||||||
Total dividends and distributions | ![]() | (0.97 | ) | ![]() | (0.27 | ) | ![]() | (0.24 | ) | ![]() | (0.30 | ) | ![]() | (0.35 | ) | ||||||||
Net asset value, end of period | ![]() | $ | 12.63 | ![]() | $ | 12.93 | ![]() | $ | 12.61 | ![]() | $ | 11.40 | ![]() | $ | 12.31 | ||||||||
Total Return† | ![]() | 5.16 | % | ![]() | 4.83 | % | ![]() | 12.77 | % | ![]() | (4.98 | )% | ![]() | 2.32 | % | ||||||||
Ratios to Average Net Assets(1): | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Expenses | ![]() | 1.91 | % | ![]() | 1.84 | % | ![]() | 1.86 | % | ![]() | 1.84 | % | ![]() | 1.91 | % | ||||||||
Net investment income | ![]() | 1.73 | % | ![]() | 1.63 | % | ![]() | 1.38 | % | ![]() | 2.03 | % | ![]() | 2.68 | % | ||||||||
Supplemental Data: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net assets, end of period, in thousands | ![]() | $103,938 | ![]() | $145,072 | ![]() | $169,135 | ![]() | $135,146 | ![]() | $101,957 | |||||||||||||
Portfolio turnover rate | ![]() | 78 | % | ![]() | 89 | % | ![]() | 174 | % | ![]() | 173 | % | ![]() | 99 | % | ||||||||
![]() |
![]() |
![]() | ‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
![]() | † | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
![]() | (1) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
See Notes to Financial Statements
32
Morgan Stanley Balanced Income Fund
Financial Highlights continued
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | |
![]() | FOR THE YEAR ENDED JANUARY 31, | ![]() | |||||||||||||||||||||
![]() | 2006 | ![]() | 2005 | ![]() | 2004 | ![]() | 2003 | ![]() | 2002 | ||||||||||||||
Class C Shares: | |||||||||||||||||||||||
Selected Per Share Data: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net asset value, beginning of period | ![]() | $ | 12.95 | ![]() | $ | 12.63 | ![]() | $ | 11.42 | ![]() | $ | 12.33 | ![]() | $ | 12.41 | ||||||||
Income (loss) from investment operations: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net investment income‡ | ![]() | 0.23 | ![]() | 0.21 | ![]() | 0.17 | ![]() | 0.24 | ![]() | 0.33 | |||||||||||||
Net realized and unrealized gain (loss) | ![]() | 0.45 | ![]() | 0.38 | ![]() | 1.28 | ![]() | (0.85 | ) | ![]() | (0.05 | ) | |||||||||||
Total income (loss) from investment operations | ![]() | 0.68 | ![]() | 0.59 | ![]() | 1.45 | ![]() | (0.61 | ) | ![]() | 0.28 | ||||||||||||
Less dividends and distributions from: | |||||||||||||||||||||||
Net investment income | ![]() | (0.28 | ) | ![]() | (0.27 | ) | ![]() | (0.24 | ) | ![]() | (0.30 | ) | ![]() | (0.36 | ) | ||||||||
Net realized gain | ![]() | (0.70 | ) | ![]() | — | ![]() | — | ![]() | — | ![]() | — | ||||||||||||
Total dividends and distributions | ![]() | (0.98 | ) | ![]() | (0.27 | ) | ![]() | (0.24 | ) | ![]() | (0.30 | ) | ![]() | (0.36 | ) | ||||||||
Net asset value, end of period | ![]() | $ | 12.65 | ![]() | $ | 12.95 | ![]() | $ | 12.63 | ![]() | $ | 11.42 | ![]() | $ | 12.33 | ||||||||
Total Return† | ![]() | 5.25 | % | ![]() | 4.84 | % | ![]() | 12.74 | % | ![]() | (5.00 | )% | ![]() | 2.32 | % | ||||||||
Ratios to Average Net Assets(1): | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Expenses | ![]() | 1.89 | % | ![]() | 1.77 | % | ![]() | 1.85 | % | ![]() | 1.84 | % | ![]() | 1.91 | % | ||||||||
Net investment income | ![]() | 1.75 | % | ![]() | 1.70 | % | ![]() | 1.39 | % | ![]() | 2.03 | % | ![]() | 2.68 | % | ||||||||
Supplemental Data: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net assets, end of period, in thousands | ![]() | $40,401 | ![]() | $43,308 | ![]() | $43,092 | ![]() | $32,439 | ![]() | $33,321 | |||||||||||||
Portfolio turnover rate | ![]() | 78 | % | ![]() | 89 | % | ![]() | 174 | % | ![]() | 173 | % | ![]() | 99 | % | ||||||||
![]() |
![]() |
![]() | ‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
![]() | † | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
![]() | (1) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
See Notes to Financial Statements
33
Morgan Stanley Balanced Income Fund
Financial Highlights continued
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | |
![]() | FOR THE YEAR ENDED JANUARY 31, | ![]() | |||||||||||||||||||||
![]() | 2006 | ![]() | 2005 | ![]() | 2004 | ![]() | 2003 | ![]() | 2002 | ||||||||||||||
Class D Shares: | |||||||||||||||||||||||
Selected Per Share Data: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net asset value, beginning of period | ![]() | $ | 12.95 | ![]() | $ | 12.63 | ![]() | $ | 11.42 | ![]() | $ | 12.33 | ![]() | $ | 12.40 | ||||||||
Income (loss) from investment operations: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net investment income‡ | ![]() | 0.36 | ![]() | 0.33 | ![]() | 0.29 | ![]() | 0.34 | ![]() | 0.45 | |||||||||||||
Net realized and unrealized gain (loss) | ![]() | 0.44 | ![]() | 0.39 | ![]() | 1.28 | ![]() | (0.83 | ) | ![]() | (0.05 | ) | |||||||||||
Total income (loss) from investment operations | ![]() | 0.80 | ![]() | 0.72 | ![]() | 1.57 | ![]() | (0.49 | ) | ![]() | 0.40 | ||||||||||||
Less dividends and distributions from: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net investment income | ![]() | (0.40 | ) | ![]() | (0.40 | ) | ![]() | (0.36 | ) | ![]() | (0.42 | ) | ![]() | (0.47 | ) | ||||||||
Net realized gain | ![]() | (0.70 | ) | ![]() | — | ![]() | — | ![]() | — | ![]() | — | ||||||||||||
Total dividends and distributions | ![]() | (1.10 | ) | ![]() | (0.40 | ) | ![]() | (0.36 | ) | ![]() | (0.42 | ) | ![]() | (0.47 | ) | ||||||||
Net asset value, end of period | ![]() | $ | 12.65 | ![]() | $ | 12.95 | ![]() | $ | 12.63 | ![]() | $ | 11.42 | ![]() | $ | 12.33 | ||||||||
Total Return† | ![]() | 6.24 | % | ![]() | 5.80 | % | ![]() | 13.94 | % | ![]() | (4.04 | )% | ![]() | 3.37 | % | ||||||||
Ratios to Average Net Assets(1): | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Expenses | ![]() | 0.91 | % | ![]() | 0.84 | % | ![]() | 0.86 | % | ![]() | 0.84 | % | ![]() | 0.91 | % | ||||||||
Net investment income | ![]() | 2.73 | % | ![]() | 2.63 | % | ![]() | 2.38 | % | ![]() | 3.03 | % | ![]() | 3.68 | % | ||||||||
Supplemental Data: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net assets, end of period, in thousands | ![]() | $ | 1,283 | ![]() | $ | 1,895 | ![]() | $ | 3,034 | ![]() | $ | 1,476 | ![]() | $ | 496 | ||||||||
Portfolio turnover rate | ![]() | 78 | % | ![]() | 89 | % | ![]() | 174 | % | ![]() | 173 | % | ![]() | 99 | % | ||||||||
![]() |
![]() |
![]() | ‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
![]() | † | Calculated based on the net asset value as of the last business day of the period. |
![]() | (1) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
See Notes to Financial Statements
34
Morgan Stanley Balanced Income Fund
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees of
Morgan Stanley Balanced Income Fund:
We have audited the accompanying statement of assets and liabilities of Morgan Stanley Balanced Income Fund (the ‘‘Fund’’), including the portfolio of investments, as of January 31, 2006, and the related statements of operations for the year then ended and changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of January 31, 2006, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Morgan Stanley Balanced Income Fund as of January 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
New York, New York
March 23, 2006
35
Morgan Stanley Balanced Income Fund
Trustee and Officer Information
Independent Trustees:
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
Name, Age and Address of Independent Trustee | ![]() | Position(s) Held with Registrant | ![]() | Term of Office and Length of Time Served* | ![]() | Principal Occupation(s) During Past 5 Years** | ![]() | Number of Portfolios in Fund Complex Overseen by Trustee*** | ![]() | Other Directorships Held by Trustee | ||||||||||||
Michael Bozic (65) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036 | ![]() | Trustee | ![]() | Since April 1994 | ![]() | Private Investor; Director or Trustee of the Retail Funds (since April 1994) and the Institutional Funds (since July 2003); formerly Vice Chairman of Kmart Corporation (December 1998-October 2000), Chairman and Chief Executive Officer of Levitz Furniture Corporation (November 1995-November 1998) and President and Chief Executive Officer of Hills Department Stores (May 1991-July 1995); formerly variously Chairman, Chief Executive Officer, President and Chief Operating Officer (1987-1991) of the Sears Merchandise Group of Sears, Roebuck & Co. | ![]() | 197 | ![]() | Director of various business organizations. | ||||||||||||
Edwin J. Garn (73) 1031 N. Chartwell Court Salt Lake City, UT 84103 | ![]() | Trustee | ![]() | Since January 1993 | ![]() | Consultant; Director or Trustee of the Retail Funds (since January 1993) and the Institutional Funds (since July 2003); member of the Utah Regional Advisory Board of Pacific Corp. (utility company); formerly Managing Director of Summit Ventures LLC (2000-2004) (lobbying and consulting firm); United States Senator (R-Utah) (1974-1992) and Chairman, Senate Banking Committee (1980-1986), Mayor of Salt Lake City, Utah (1971-1974), Astronaut, Space Shuttle Discovery (April 12-19, 1985), and Vice Chairman, Huntsman Corporation (chemical company). | ![]() | 197 | ![]() | Director of Franklin Covey (time management systems), BMW Bank of North America, Inc. (industrial loan corporation), Escrow Bank USA (industrial loan corporation); United Space Alliance (joint venture between Lockheed Martin and the Boeing Company) and Nuskin Asia Pacific (multilevel marketing); member of the board of various civic and charitable organizations. | ||||||||||||
Wayne E. Hedien (71) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036 | ![]() | Trustee | ![]() | Since September 1997 | ![]() | Retired; Director or Trustee of the Retail Funds; (Since September 1997) and the Institutional Funds (since July 2003); formerly associated with the Allstate Companies (1966-1994), most recently as Chairman of The Allstate Corporation (March 1993-December 1994) and Chairman and Chief Executive Officer of its wholly-owned subsidiary, Allstate Insurance Company (July 1989-December 1994). | ![]() | 197 | ![]() | Director of The PMI Group Inc. (private mortgage insurance); Trustee and Vice Chairman of The Field Museum of Natural History; director of various other business and charitable organizations. | ||||||||||||
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36
Morgan Stanley Balanced Income Fund
Trustee and Officer Information continued
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Name, Age and Address of Independent Trustee | ![]() | Position(s) Held with Registrant | ![]() | Term of Office and Length of Time Served* | ![]() | Principal Occupation(s) During Past 5 Years** | ![]() | Number of Portfolios in Fund Complex Overseen by Trustee*** | ![]() | Other Directorships Held by Trustee | ||||||||||||
Dr. Manuel H. Johnson (56) c/o Johnson Smick Group, Inc. 888 16th Street, N.W. Suite 740 Washington, D.C. 20006 | ![]() | Trustee | ![]() | Since July 1991 | ![]() | Senior Partner, Johnson Smick International, Inc., a consulting firm; Chairman of the Audit Committee and Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2003); Co-Chairman and a founder of the Group of Seven Council (G7C), an international economic commission; formerly Vice Chairman of the Board of Governors of the Federal Reserve System and Assistant Secretary of the U.S. Treasury. | ![]() | 197 | ![]() | Director of NVR, Inc. (home construction); Director of KFX Energy; Director of RBS Greenwich Capital Holdings (financial holding company). | ||||||||||||
Joseph J. Kearns (63) c/o Kearns & Associates LLC PMB754 23852 Pacific Coast Highway Malibu, CA 90265 | ![]() | Trustee | ![]() | Since July 2003 | ![]() | President, Kearns & Associates LLC (investment consulting); Deputy Chairman of the Audit Committee and Director or Trustee of the Retail Funds (since July 2003) and the Institutional Funds (since August 1994); previously Chairman of the Audit Committee of the Institutional Funds (October 2001-July 2003); formerly CFO of the J. Paul Getty Trust. | ![]() | 198 | ![]() | Director of Electro Rent Corporation (equipment leasing), The Ford Family Foundation, and the UCLA Foundation. | ||||||||||||
Michael E. Nugent (69) c/o Triumph Capital, L.P. 445 Park Avenue New York, NY 10022 | ![]() | Trustee | ![]() | Since July 1991 | ![]() | General Partner of Triumph Capital, L.P., a private investment partnership; Chairman of the Insurance Committee and Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2001); formerly Vice President, Bankers Trust Company and BT Capital Corporation (1984-1988). | ![]() | 197 | ![]() | None. | ||||||||||||
Fergus Reid (73) c/o Lumelite Plastics Corporation 85 Charles Colman Blvd. Pawling, NY 12564 | ![]() | Trustee | ![]() | Since July 2003 | ![]() | Chairman of Lumelite Plastics Corporation; Chairman of the Governance Committee and Director or Trustee of the Retail Funds (since July 2003) and the Institutional Funds (since June 1992). | ![]() | 198 | ![]() | Trustee and Director of certain investment companies in the JPMorgan Funds complex managed by J.P. Morgan Investment Management Inc. | ||||||||||||
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37
Morgan Stanley Balanced Income Fund
Trustee and Officer Information continued
Interested Trustees:
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Name, Age and Address of Interested Trustee | ![]() | Position(s) Held with Registrant | ![]() | Term of Office and Length of Time Served* | ![]() | Principal Occupation(s) During Past 5 Years** | ![]() | Number of Portfolios in Fund Complex Overseen by Trustee*** | ![]() | Other Directorships Held by Trustee | ||||||||||||
Charles A. Fiumefreddo (72) c/o Morgan Stanley Trust Harborside Financial Center, Plaza Two, Jersey City, NJ 07311 | ![]() | Chairman of the Board and Trustee | ![]() | Since July 1991 | ![]() | Chairman and Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2003); formerly Chief Executive Officer of the Retail Funds (until September 2002). | ![]() | 197 | ![]() | None. | ||||||||||||
James F. Higgins (57) c/o Morgan Stanley Trust Harborside Financial Center, Plaza Two, Jersey City, NJ 07311 | ![]() | Trustee | ![]() | Since June 2000 | ![]() | Director or Trustee of the Retail Funds (since June 2000) and the Institutional Funds (since July 2003); Senior Advisor of Morgan Stanley (since August 2000); Director of Dean Witter Realty Inc. | ![]() | 197 | ![]() | Director of AXA Financial, Inc. and The Equitable Life Assurance Society of the United States (financial services). | ||||||||||||
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![]() | * | This is the earliest date the Trustee began serving the funds advised by Morgan Stanley Investment Advisors Inc. (the "Investment Adviser") (the "Retail Funds"). |
![]() | ** | The dates referenced below indicating commencement of services as Director/Trustee for the Retail Funds and the funds advised by Morgan Stanley Investment Management Inc. and Morgan Stanley AIP GP LP (the "Institutional Funds") reflect the earliest date the Director/Trustee began serving the Retail or Institutional Funds, as applicable. |
![]() | *** | The Fund Complex includes all open-end and closed-end funds (including all of their portfolios) advised by the Investment Adviser and any funds that have an investment adviser that is an affiliated person of the Investment Adviser (including, but not limited to, Morgan Stanley Investment Management Inc.). |
38
Morgan Stanley Balanced Income Fund
Trustee and Officer Information continued
Officers:
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Name, Age and Address of Executive Officer | ![]() | Position(s) Held with Registrant | ![]() | Term of Office and Length of Time Served* | ![]() | Principal Occupation(s) During Past 5 Years** | ||||||||
Ronald E. Robison (67) 1221 Avenue of the Americas New York, NY 10020 | ![]() | President and Principal Executive Officer | ![]() | Since May 2003 | ![]() | President (since September 2005) and Principal Executive Officer (since May 2003) of funds in the Fund Complex; President (since September 2005) and Principal Executive Office (since May 2003) of the Van Kampen Funds; Managing Director of Morgan Stanley, Morgan Stanley Investment Management and Morgan Stanley & Co. Incorporated; Managing Director and Director of Morgan Stanley Investment Advisors Inc.; Managing Director and (since May 2002) Director, Morgan Stanley Investment Management Inc., Managing Director and (since January 2005) Director of Van Kampen Asset Management and Van Kampen Investments Inc. Director, President (since February 2006) and Chief Executive Officer (since February 2006) of Morgan Stanley Services Company Inc., Director of Moran Stanley Distributors Inc., Morgan Stanley Distribution, Inc. and Morgan Stanley Trust; Director of Morgan Stanley SICAV (since May 2004). Formerly, Executive Vice President (July 2003 to September 2005) of funds in the Fund Complex and the Van Kampen Funds; President and Director of the Institutional Funds (March 2001-July 2003), Chief Global Operating Officer of Morgan Stanley Investment Management Inc., Chief Administrative Officer of Morgan Stanley Investment Advisors Inc.; Chief Administrative Officer of Morgan Stanley Services Company Inc. (November 2003 to February 2006). | ||||||||
J. David Germany (51) 25 Cabot Square, Canary Wharf, London, United Kingdom E144QA | ![]() | Vice President | ![]() | Since February 2006 | ![]() | Managing Director and (since December 2005) Chief Investment Officer – Global Fixed Income of Morgan Stanley Investment Advisors Inc., Morgan Stanley Investment Management Inc., Van Kampen Asset Management and Van Kampen Advisors Inc. Managing Director and Director of Morgan Stanley Investment Management Ltd. Vice President (since February 2006) of the Retail and Institutional Funds. | ||||||||
Dennis F. Shea (52) 1221 Avenue of the Americas New York, NY 10020 | ![]() | Vice President | ![]() | Since February 2006 | ![]() | Managing Director and (since February 2006) Chief Investment Officer – Global Equity of Morgan Stanley Investment Advisors Inc., Morgan Stanley Investment Management Inc., Van Kampen Asset Management and Van Kampen Advisors Inc. Vice President (since February 2006) of the Retail and Institutional Funds. Formerly, Managing Director and Director of Global Equity Research at Morgan Stanley. | ||||||||
Barry Fink (51) 1221 Avenue of the Americas New York, NY 10020 | ![]() | Vice President | ![]() | Since February 1997 | ![]() | Managing Director of Morgan Stanley Investment Management, Morgan Stanley Investment Advisors Inc. and Morgan Stanley Investment Management Inc.; Vice President of the Retail Funds and (since July 2003) the Institutional Funds; Formerly, General Counsel (May 2000-February 2006) of Morgan Stanley Investment Management; Secretary (October 2003 to February 2006), General Counsel (May 2004 to February 2006) and Director (July 1998 to January 2005) of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc.; Secretary and General Counsel of Morgan Stanley Investment Management Inc. (November 2002 to February 2006); Secretary and Director of Morgan Stanley Distributors Inc.; Secretary (February 1997 to July 2003) and General Counsel (February 1997 to April 2004) of the Morgan Stanley Retail Funds; Vice President and Assistant General Counsel of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Distributors Inc. (February 1997 to December 2001). | ||||||||
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39
Morgan Stanley Balanced Income Fund
Trustee and Officer Information continued
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Name, Age and Address of Executive Officer | ![]() | Position(s) Held with Registrant | ![]() | Term of Office and Length of Time Served* | ![]() | Principal Occupation(s) During Past 5 Years** | ||||||||
Amy R. Doberman (43) 1221 Avenue of Americas New York, NY 10020 | ![]() | Vice President | ![]() | Since July 2004 | ![]() | Managing Director and General Counsel, U.S. Investment Management (since July 2004); Vice President of the Retail Funds and the Institutional Funds (since July 2004); Vice President of the Van Kampen Funds (since August 2004); Secretary (since February 2006) and Managing Director (since July 2004) of Morgan Stanley Investment Advisors Inc., Morgan Stanley Services Company Inc., Morgan Stanley Investment Management Inc., Van Kampen Asset Management, Van Kampen Advisors Inc. and Van Kampen Investments Inc.; Secretary (since February 2006) of Morgan Stanley Distributors Inc. and Morgan Stanley Distribution, Inc. Formerly, Managing Director and General Counsel – Americas, UBS Global Asset Management (July 2000 to July 2004). | ||||||||
Carsten Otto (42) 1221 Avenue of the Americas New York, NY 10020 | ![]() | Chief Compliance Officer | ![]() | Since October 2004 | ![]() | Managing Director and U.S. Director of Compliance for Morgan Stanley Investment Management (since October 2004); Managing Director and Chief Compliance Officer (since February 2005) of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Investment Management Inc. and (since June 2004) of Van Kampen Asset Management, Van Kampen Advisors Inc. and Van Kampen Investments Inc. Formerly, Assistant Secretary and Assistant General Counsel of the Retail Funds. | ||||||||
Stefanie V. Chang (39) 1221 Avenue of the Americas New York, NY 10020 | ![]() | Vice President | ![]() | Since July 2003 | ![]() | Executive Director of Morgan Stanley & Co. Incorporated, Morgan Stanley Investment Advisors Inc., Morgan Stanley Investment Management Inc., Van Kampen Asset Management, Van Kampen Advisors Inc. and Van Kampen Investments Inc. Vice President of the Retail Funds (since July 2002) and the Institutional Funds (since December 1997). Formerly, Secretary of Van Kampen Asset Management Inc., Van Kampen Advisors Inc. and Van Kampen Investments Inc. (December 2002 to February 2006); Secretary of Morgan Stanley Distribution, Inc. (October 2005 to February 2006). | ||||||||
Francis J. Smith (40) c/o Morgan Stanley Trust Harborside Financial Center, Plaza Two, Jersey City, NJ 07311 | ![]() | Treasurer and Chief Financial Officer | ![]() | Treasurer since July 2003 and Chief Financial Officer since September 2002 | ![]() | Executive Director of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc.; Treasurer and Chief Financial Officer of the Morgan Stanley Retail Funds (since July 2003). Formerly Vice President of the Retail Funds (September 2002-July 2003). | ||||||||
Thomas F. Caloia (59) c/o Morgan Stanley Trust Harborside Financial Center, Plaza Two, Jersey City, NJ 07311 | ![]() | Vice President | ![]() | Since July 2003 | ![]() | Executive Director of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc.; Assistant Treasurer of Morgan Stanley Investment Advisors Inc., Morgan Stanley Services Company Inc. and Morgan Stanley Distributors Inc.; Vice President of the Retail Funds. Formerly, Treasurer of the Retail Funds (April 1989-July 2003). | ||||||||
Mary E. Mullin (38) 1221 Avenue of the Americas New York, NY 10020 | ![]() | Secretary | ![]() | Since July 2003 | ![]() | Executive Director of Morgan Stanley & Co. Incorporated, Morgan Stanley Investment Advisors Inc. and Morgan Stanley Investment Management Inc. Secretary of the Retail Funds (since July 2003) and the Institutional Funds (since June 1999). | ||||||||
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![]() | * | This is the earliest date the Officer began serving the Retail Funds. Each Officer serves an indefinite term, until his or her successor is elected. |
![]() | ** | The dates referenced below indicating commencement of service as an Officer for the Retail and Institutional Funds reflect the earliest date the Officer began serving the Retail or Institutional Funds, as applicable. |
40
Morgan Stanley Balanced Income Fund
2006 Federal Tax Notice (unaudited)
During the fiscal year ended January 31, 2006, 20.88% of the ordinary dividends paid by the Fund qualified for the dividends received deduction available to corporations. Additionally, please note that 26.19% of the Fund's ordinary dividends paid during the fiscal year ended January 31, 2006 qualified for the lower income tax rate available to individuals under the Jobs and Growth Tax Relief Reconciliation Act of 2003.
Also during the fiscal year ended January 31, 2006, the fund paid to its shareholders $0.66 per share from long-term capital gains.
Of the Fund's ordinary dividends paid during the fiscal year, 34.86% was attributable to qualifying Federal obligations. Please consult your tax advisor to determine if any portion of the dividends you received is exempt from state income tax.
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Trustees Michael Bozic Officers Charles A. Fiumefreddo Ronald E. Robison J. David Germany Dennis F. Shea Barry Fink Amy R. Doberman Carsten Otto Stefanie V. Chang Francis J. Smith Thomas F. Caloia Mary E. Mullin Transfer Agent Morgan Stanley Trust Independent Registered Public Accounting Firm Deloitte & Touche LLP Investment Adviser Morgan Stanley Investment Advisors Inc. This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the Prospectus carefully before investing. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. © 2006 Morgan Stanley ![]() 38400RPT-RA06-00213P-Y01/06 | ![]() | MORGAN STANLEY FUNDS |
Morgan Stanley Balanced Income Fund Annual Report January 31, 2006 | ||
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February 7, 2006
Supplement
SUPPLEMENT DATED FEBRUARY 7, 2006 TO THE PROSPECTUS OF
MORGAN STANLEY INCOME BUILDER FUND
Dated January 27, 2006
On February 6, 2006, the Board of Trustees of the Morgan Stanley Income Builder Fund (the ‘‘Fund’’) approved an Agreement and Plan of Reorganization by and between the Fund and Morgan Stanley Balanced Growth Fund (‘‘Balanced Growth’’), pursuant to which substantially all of the assets of the Fund would be combined with those of Balanced Growth and shareholders of the Fund would become shareholders of Balanced Growth, receiving shares of Balanced Growth equal to the value of their holdings in the Fund (the ‘‘Reorganization’’). Each shareholder of the Fund will receive the Class of shares of Balanced Growth that corresponds to the Class of shares of the Fund currently held by that shareholder. The Reorganization is subject to the approval of shareholders of the Fund at a special meeting of shareholders to be held during the third quarter of 2006. A proxy statement formally detailing the proposal, the reasons for the Reorganization and information concerning Balanced Growth will be distributed to shareholders of the Fund during the second quarter of 2006.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE.
38421SPT-02
[GRAPHIC OMITTED] MORGAN STANLEY FUNDS Morgan Stanley Income Builder Fund A mutual fund whose primary investment objective is to seek reasonable income. As a secondary objective, the Fund seeks growth of capital. [GRAPHIC OMITTED] MORGAN STANLEY The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense. Prospectus January 27, 2006 CONTENTS THE FUND Investment Objectives.................................................1 Principal Investment Strategies.......................................1 Principal Risks...................................................... 2 Past Performance..................................................... 5 Fees and Expenses.................................................... 8 Additional Investment Strategy Information........................... 9 Additional Risk Information......................................... 10 Portfolio Holdings...................................................10 Fund Management..................................................... 11 SHAREHOLDER INFORMATION Pricing Fund Shares................................................. 13 How to Buy Shares................................................... 14 Limited Portability..................................................15 How to Exchange Shares.............................................. 16 How to Sell Shares.................................................. 18 Distributions....................................................... 20 Frequent Purchases and Redemptions of Fund Shares....................21 Tax Consequences.................................................... 22 Share Class Arrangements............................................ 23 Additional Information.............................................. 31 FINANCIAL HIGHLIGHTS.......................................................32 MORGAN STANLEY FUNDS........................................Inside Back Cover This Prospectus contains important information about the Fund. Please read it carefully and keep it for future reference. THE FUND - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVES [GRAPHIC OMITTED] Morgan Stanley Income Builder Fund seeks reasonable income as a primary investment objective. As a secondary objective, the Fund seeks growth of capital. - -------------------------------------------------------------------------------- PRINCIPAL INVESTMENT STRATEGIES {sidebar} - ---------------- INCOME AND GROWTH An investment objective having the goal of selecting securities with the potential to pay out income and rise in price. {end sidebar} [GRAPHIC OMITTED] The Fund will normally invest at least 80% of its assets in income-producing equity and fixed-income securities, with normally at least 65% of its assets invested in income-producing equity securities, including common stock, preferred stock and convertible securities. The Fund may invest up to 15% of its net assets in real estate investment trusts (commonly known as "REITs"). The Fund's "Investment Adviser," Morgan Stanley Investment Advisors Inc., utilizes a value-oriented style in the selection of securities. Investments are normally made primarily in (i) common stocks (including depositary receipts) of large capitalization companies with a record of paying dividends and which, in the opinion of the Investment Adviser, have the potential for maintaining dividends, (ii) preferred stock and (iii) securities convertible into common stocks of small-, mid- and large-cap companies -- including "synthetic" and "exchangeable" convertibles. The Fund's investments can also include "Rule 144A" securities, which are subject to resale restrictions, and foreign securities. The Investment Adviser generally considers selling a portfolio holding when it determines that the holding no longer satisfies its investment criteria. The Investment Adviser follows a "bottom-up" approach in the selection of convertible securities for the Fund. Beginning with a universe of about 500 companies, the Investment Adviser narrows the focus to small-, mid- and large-cap companies and reviews the issues to determine if the convertible security is trading with the underlying equity security. The yield of the underlying equity security is evaluated and company fundamentals are studied to evaluate cash flow, risk/reward balance, valuation and the prospects for growth. The Fund may invest up to 25% of its net assets in "exchangeable" convertible securities. "Exchangeable" convertible securities offer holders the opportunity to obtain higher current income than would be available from a traditional equity security issued by the same company, in return for reduced participation or a cap on appreciation in the underlying common stock of the issuer, which the holder can realize. In addition, in many cases, "exchangeable" convertible 1 securities are convertible into the underlying common stock of the issuer automatically at maturity, unlike traditional convertible securities which are convertible only at the option of the security holder. The Fund may invest up to 10% of its net assets in "synthetic" convertible securities. Unlike traditional convertible securities whose conversion values are based on the common stock of the issuer of the convertible security, "synthetic" convertible securities are preferred stocks or debt obligations of an issuer which are combined with an equity component whose conversion value is based on the value of the common stock of a different issuer or a particular benchmark (which may include a foreign issuer or basket of foreign stocks, or a company whose stock is not yet publicly traded). In many cases, "synthetic" convertible securities are not convertible prior to maturity, at which time the value of the security is paid in cash by the issuer. The Fund's convertible securities may include lower-rated fixed-income securities, commonly known as "junk bonds." The Fund may invest up to 35% of its net assets in U.S. government securities issued or guaranteed by the U.S. government, its agencies and instrumentalities and non-convertible fixed-income securities (including zero coupon securities). Zero coupon securities are purchased at a discount and generally accrue interest, but make no payment until maturity. Up to 20% of the Fund's net assets may be invested in non-convertible fixed-income securities rated lower than investment grade (but not below B) by Standard & Poor's Rating Group, a division of The McGraw-Hill Companies, Inc. ("S&P"), or Moody's Investors Services Inc. ("Moody's") or, if unrated, of comparable quality as determined by the Investment Adviser (commonly known as "junk bonds"). The 20% limitation is not applicable to convertible securities. Up to 20% of the Fund's net assets may be invested in common stocks that do not pay a dividend. Up to 25% of the Fund's net assets may be invested in foreign securities (including depositary receipts). This percentage limitation, however, does not apply to securities of foreign companies that are listed in the United States on a national securities exchange. The Fund may also utilize forward foreign currency exchange contracts. The Fund may also invest in options and futures. Common stock is a share ownership or equity interest in a corporation. It may or may not pay dividends, as some companies reinvest all of their profits back into their businesses, while others pay out some of their profits to shareholders as dividends. Preferred stock pays dividends at a specified rate and has preference over common stock in the payment of dividends. A convertible security is a bond, preferred stock or other security that may be converted into a prescribed amount of common stock at a prestated price. A depositary receipt is generally issued by a bank or financial institution and represents an ownership interest in the common stock or other equity securities of a foreign company. - -------------------------------------------------------------------------------- PRINCIPAL RISKS [GRAPHIC OMITTED] There is no assurance that the Fund will achieve its investment objectives. The Fund's share price and return will fluctuate with changes in the market value of the Fund's portfolio securities. When you sell Fund shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Fund. 2 COMMON AND PREFERRED STOCK. A principal risk of investing in the Fund is associated with its investment in stocks. In general, stock values fluctuate in response to activities specific to the issuer as well as general market, economic and political conditions. Stock prices can fluctuate widely in response to these factors. FIXED-INCOME SECURITIES. Principal risks of investing in the Fund are associated with its fixed-income investments (including zero coupon securities). All fixed-income securities are subject to two types of risk: credit risk and interest rate risk. Credit risk refers to the possibility that the issuer of a security will be unable to make interest payments and/or repay the principal on its debt. Interest rate risk refers to fluctuations in the value of a fixed-income security resulting from changes in the general level of interest rates. When the general level of interest rates goes up, the prices of most fixed-income securities go down. When the general level of interest rates goes down, the prices of most fixed-income securities go up. Accordingly, a rise in the general level of interest rates may cause the price of the Fund's fixed-income securities to fall substantially. (Zero coupon securities are typically subject to greater price fluctuations than comparable securities that pay interest.) FOREIGN SECURITIES. The Fund's investment in foreign securities involve risks that are in addition to the risks associated with domestic securities. One additional risk is currency risk. While the price of Fund shares is quoted in U.S. dollars, the Fund generally converts U.S. dollars to a foreign market's local currency to purchase a security in that market. If the value of that local currency falls relative to the U.S. dollar, the U.S. dollar value of the foreign security will decrease. This is true even if the foreign security's local price remains unchanged. Foreign securities also have risks related to economic and political developments abroad, including expropriations, confiscatory taxation, exchange control regulation, limitations on the use or transfer of Fund assets and any effects of foreign social, economic or political instability. Foreign companies, in general, are not subject to the regulatory requirements of U.S. companies and, as such, there may be less publicly available information about these companies. Moreover, foreign accounting, auditing and financial reporting standards generally are different from those applicable to U.S. companies. Finally, in the event of a default of any foreign debt obligations, it may be more difficult for the Fund to obtain or enforce a judgment against the issuers of the securities. Securities of foreign issuers may be less liquid than comparable securities of U.S. issuers and, as such, their price changes may be more volatile. Furthermore, foreign exchanges and broker-dealers are generally subject to less government and exchange scrutiny and regulation than their U.S. counterparts. In addition, differences in clearance and settlement procedures in foreign markets may occasion delays in settlement of the Fund's trades effected in those markets and could result in losses to the Fund due to subsequent declines in the value of the securities subject to the trades. Depositary receipts involve many of the same risks as those associated with direct investment in foreign securities. In addition, the underlying issuers of certain depositary receipts, particularly unsponsored or unregistered depositary receipts, are under no obligation to distribute shareholder communications to the holders of such receipts, or to pass through to them any voting rights with respect to the deposited securities. CONVERTIBLE SECURITIES. The Fund is subject to the risks of investing in convertible securities. These securities may carry risks associated with both common stock and fixed-income securities. In addition, because some of the 3 convertible securities in which the Fund invests are convertible into the common stocks of small- and mid-cap companies, the Fund is subject to the specific risks associated with investing in small- and mid-cap companies. There are also special risks associated with the Fund's investments in "exchangeable" and "synthetic" convertible securities. These securities may be more volatile and less liquid than traditional convertible securities. SMALL & MEDIUM CAPITALIZATION COMPANIES. The Fund's investments in smaller and medium-sized companies carry more risk than investments in larger companies. While some of the Fund's holdings in these companies may be listed on a national securities exchange, such securities are more likely to be traded in the over-the-counter market. The low market liquidity of these securities may have an adverse impact on the Fund's ability to sell certain securities at favorable prices and may also make it difficult for the Fund to obtain market quotations based on actual trades for purposes of valuing the Fund's securities. Investing in lesser-known, smaller and medium capitalization companies involves greater risk of volatility of the Fund's net asset value than is customarily associated with larger, more established companies. Often smaller and medium capitalization companies and the industries in which they are focused are still evolving and, while this may offer better growth potential than larger, more established companies, it also may make them more sensitive to changing market conditions. LOWER RATED FIXED-INCOME SECURITIES ("JUNK BONDS"). The Fund's investments in fixed-income securities rated lower than investment grade, or if unrated, of comparable quality as determined by the Investment Adviser (commonly known as "junk bonds") pose significant risks. The prices of junk bonds are likely to be more sensitive to adverse economic changes or individual corporate developments than higher rated securities. During an economic downturn or substantial period of rising interest rates, junk bond issuers and, in particular, highly leveraged issuers may experience financial stress that would adversely affect their ability to service their principal and interest payment obligations, to meet their projected business goals or to obtain additional financing. In the event of a default, the Fund may incur additional expenses to seek recovery. The secondary market for junk bonds may be less liquid than the market for higher quality securities and, as such, may have an adverse effect on the market prices of certain securities. Many junk bonds are issued as Rule 144A securities. Rule 144A securities could have the effect of increasing the level of Fund illiquidity to the extent the Fund may be unable to find qualified institutional buyers interested in purchasing the securities. The illiquidity of the market may also adversely affect the ability of the Fund's Trustees to arrive at a fair value for certain junk bonds at certain times and could make it difficult for the Fund to sell certain securities. In addition, periods of economic uncertainty and change probably would result in an increased volatility of market prices of high yield securities and a corresponding volatility in the Fund's net asset value. REAL ESTATE INVESTMENT TRUSTS ("REITs"). REITs pool investors' funds for investments primarily in commercial real estate properties. Like mutual funds, REITs have expenses, including advisory and administration fees, that are paid by its shareholders. As a result, you will absorb duplicate levels of fees when the Fund invests in REITs. The performance of any Fund REIT holdings ultimately depends on the types of real property in which the REITs invest and how well the property is managed. A general downturn in real estate values also can hurt REIT performance. In addition, REITs are subject to certain provisions under federal tax law. The failure of a company to qualify as a REIT could have adverse consequences for the Fund, including significantly reducing return to the Fund on its investment in such company. 4 OTHER RISKS. The performance of the Fund also will depend on whether or not the Investment Adviser is successful in applying the Fund's investment strategies. The Fund is also subject to other risks from its permissible investments, including the risks associated with its investments in forward foreign currency exchange contracts and options and futures. For more information about these risks, see the "Additional Risk Information" section. Shares of the Fund are not bank deposits and are not guaranteed or insured by the FDIC or any other government agency. - -------------------------------------------------------------------------------- PAST PERFORMANCE {sidebar} - ---------------- ANNUAL TOTAL RETURNS This chart shows how the performance of the Fund's Class B shares has varied from year to year over the past nine calendar years. {end sidebar} [GRAPHIC OMITTED] The bar chart and table below provide some indication of the risks of investing in the Fund. The Fund's past performance (before and after taxes) does not indicate how the Fund will perform in the future. ANNUAL TOTAL RETURNS -- CALENDAR YEARS [GRAPHIC OMITTED] 1997 23.97% 1998 1.73% 1999 1.72% 2000 2.90% 2001 -0.49% 2002 -8.24% 2003 20.20% 2004 9.50% 2005 6.14% The bar chart reflects the performance of Class B shares; the performance of the other Classes will differ because the Classes have different ongoing fees. The performance information in the bar chart does not reflect the deduction of sales charges; if these amounts were reflected, returns would be less than shown. During the periods shown in the bar chart, the highest return for a calendar quarter was 11.82% (quarter ended June 30, 2003) and the lowest return for a calendar quarter was -12.74% (quarter ended September 30, 2002). 5 AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2005) {sidebar} - ---------------- AVERAGE ANNUAL TOTAL RETURNS This table compares the Fund's average annual total returns with those of indices that represent a broad measure of market performance, as well as indices that represent a group of similar mutual funds, over time. The Fund's returns include the maximum applicable sales charge for each Class and assume you sold your shares at the end of each period (unless otherwise noted). {end sidebar} PAST 1 YEAR PAST 5 YEARS LIFE OF FUND Class A(1) -- Return Before Taxes 1.32% 4.67% 4.78% Russell 1000(R) Value Index(2) 7.05% 5.28% 7.77% Lehman Brothers U.S. Government/Credit Index(3) 2.37% 6.11% 6.36% Lipper Income Funds Index(4) 3.61% 4.50% 5.50% Lipper Equity Income Funds Index(5) 5.80% 3.57% 5.59% Class B(1) -- Return Before Taxes 1.14% 4.66% 6.74% Returns After Taxes on Distributions(6) 0.28% 3.67% 5.02% Returns After Taxes on Distributions and Sale of Fund Shares 0.73% 3.40% 4.81% Russell 1000(R) Value Index(2) 7.05% 5.28% 10.82% Lehman Brothers U.S. Government/Credit Index(3) 2.37% 6.11% 6.82% Lipper Income Funds Index(4) 3.61% 4.50% 7.07% Lipper Equity Income Funds Index(5) 5.80% 3.57% 8.16% Class C(1) -- Return Before Taxes 5.14% 5.00% 4.67% Russell 1000(R) Value Index(2) 7.05% 5.28% 7.77% Lehman Brothers U.S. Government/Credit Index(3) 2.37% 6.11% 6.36% Lipper Income Funds Index(4) 3.61% 4.50% 5.50% Lipper Equity Income Funds Index(5) 5.80% 3.57% 5.59% Class D(1) -- Return Before Taxes 7.18% 6.06% 5.71% Russell 1000(R) Value Index(2) 7.05% 5.28% 7.77% Lehman Brothers U.S. Government/Credit Index(3) 2.37% 6.11% 6.36% Lipper Income Funds Index(4) 3.61% 4.50% 5.50% Lipper Equity Income Funds Index(5) 5.80% 3.57% 5.59% (1) Classes A, C and D commenced operations on July 28, 1997. Class B commenced operations on June 26, 1996. (2) The Russell 1000 (R) Value Index measures the performance of those companies in the Russell 1000 (R) Index with lower price-to-book ratios and lower forecasted growth values. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. (3) The Lehman Brothers U.S. Government/Credit Index tracks the performance of government and corporate obligations, including U.S. government agency and Treasury securities and corporate and Yankee bonds. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. (4) The Lipper Income Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Income Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. The Fund is in the Lipper Income Funds classification as of September 30, 2005. (5) The Lipper Equity Income Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Equity Income Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. (6) These returns do not reflect any tax consequences from a sale of your shares at the end of each period, but they do reflect any applicable sales charges on such a sale. 6 Included in the table above are the after-tax returns for the Fund's Class B shares. The after-tax returns for the Fund's other classes will vary from the Class B shares' returns. After-tax returns are calculated using the historical highest individual federal marginal income tax rates during the period shown and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns may be higher than before-tax returns due to foreign tax credits and/or an assumed benefit from capital losses that would have been realized had Fund shares been sold at the end of the relevant periods, as applicable. 7 - -------------------------------------------------------------------------------- FEES AND EXPENSES [GRAPHIC OMITTED] The table below briefly describes the fees and expenses that you may pay if you buy and hold shares of the Fund. The Fund offers four Classes of shares: Classes A, B, C and D. Each Class has a different combination of fees, expenses and other features, which should be considered in selecting a Class of shares. The Fund does not charge account or exchange fees. However, certain shareholders may be charged an order processing fee by the broker-dealer through which shares are purchased, as described below. See the "Share Class Arrangements" section for further fee and expense information. SHAREHOLDER FEES {sidebar} - ---------------- SHAREHOLDER FEES These fees are paid directly from your investment. {end sidebar} {sidebar} - ---------------- ANNUAL FUND OPERATING EXPENSES These expenses are deducted from the Fund's assets. {end sidebar} CLASS A CLASS B CLASS C CLASS D Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 5.25%(1) None None None Maximum deferred sales charge (load) (as a percentage based on the lesser of the offering price or net asset value at redemption) None(2) 5.00%(3) 1.00%(4) None Redemption fee(5) 2.00% 2.00% 2.00% 2.00% ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B CLASS C CLASS D Advisory fee* 0.67% 0.67% 0.67% 0.67% Distribution and service (12b-1) fees(6) 0.25% 1.00% 0.99% None Other expenses* 0.34% 0.34% 0.34% 0.34% Total annual Fund operating expenses* 1.26% 2.01% 2.00% 1.01% * Expense information in the table has been restated to reflect current fees (see "Fund Management"). (1) Reduced for purchases of $25,000 and over. (2) Investments that are not subject to any sales charges at the time of purchase are subject to a contingent deferred sales charge ("CDSC") of 1.00% that will be imposed if you sell your shares within 18 months after purchase, except for certain specific circumstances. (3) The CDSC is scaled down to 1.00% during the sixth year, reaching zero thereafter. See "Share Class Arrangements" for a complete discussion of the CDSC. (4) Only applicable if you sell your shares within one year after purchase. (5) Payable to the Fund on shares redeemed within seven days of purchase. The redemption fee is based on the redemption proceeds. See "Shareholder Information -- How to Sell Shares" for more information on redemption fees. (6) The Fund has adopted a Rule 12b-1 Distribution Plan pursuant to which it reimburses the distributor for distribution-related expenses (including personal services to shareholders) incurred on behalf of Class A, Class B and Class C shares in an amount each month up to an annual rate of 0.25%, 1.00% and 1.00% of the average daily net assets of Class A, Class B and Class C shares, respectively. 8 EXAMPLE This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund, your investment has a 5% return each year and the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, the tables below show your costs at the end of each period based on these assumptions, depending upon whether or not you sell your shares at the end of each period. IF YOU SOLD YOUR SHARES IF YOU HELD YOUR SHARES ---------------------------------------------- ---------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS ---------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- Class A $647 $904 $1,180 $1,968 $647 $904 $1,180 $1,968 Class B $704 $930 $1,283 $2,338 $204 $630 $1,083 $2,338 Class C $303 $627 $1,078 $2,327 $203 $627 $1,078 $2,327 Class D $103 $322 $ 558 $1,236 $103 $322 $ 558 $1,236 While Class B and Class C shares do not have any front-end sales charges, their higher ongoing annual expenses (due to higher 12b-1 fees) mean that over time you could end up paying more for these shares than if you were to pay front-end sales charges for Class A shares. ORDER PROCESSING FEE. Morgan Stanley DW Inc. ("Morgan Stanley DW") charges clients an order processing fee of $5.25 (except in certain circumstances, including, but not limited to, activity in fee-based accounts, exchanges, dividend reinvestments and systematic investment and withdrawal plans) when a client buys or redeems shares of the Fund. Please consult your Morgan Stanley Financial Advisor for more information regarding this fee. - -------------------------------------------------------------------------------- ADDITIONAL INVESTMENT STRATEGY INFORMATION [GRAPHIC OMITTED] This section provides additional information relating to the Fund's investment strategies. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund's investments also may include forward foreign currency exchange contracts, which involve the purchase or sale of a specific amount of foreign currency at the current price with delivery at a specified future date. The Fund may use these contracts to hedge against adverse movements in the foreign currencies in which portfolio securities are denominated. In addition, the Fund may use these instruments to modify its exposure to various currency markets. OPTIONS AND FUTURES. The Fund may invest in futures with respect to stock indices, financial instruments and interest rate indices and may purchase and sell options on securities, securities indices and stock index futures. Futures and options may be used to facilitate trading, to increase or decrease the Fund's market exposure or to seek to protect against a decline in the value of the Fund's securities or an increase in prices of securities that may be purchased. 9 DEFENSIVE INVESTING. The Fund may take temporary "defensive" positions in attempting to respond to adverse market conditions. The Fund may invest any amount of its assets in cash or money market instruments in a defensive posture that may be inconsistent with the Fund's principal investment strategies when the Investment Adviser believes it is advisable to do so. Although taking a defensive posture is designed to protect the Fund from an anticipated market downturn, it could have the effect of reducing the benefit from any upswing in the market. When the Fund takes a defensive position, it may not achieve its investment objectives. The percentage limitations relating to the composition of the Fund's portfolio apply at the time the Fund acquires an investment. Subsequent percentage changes that result from market fluctuations generally will not require the Fund to sell any portfolio security. However, the Fund may be required to sell its illiquid securities holdings, if any, in response to fluctuations in the value of such holdings. The Fund may change its principal investment strategies without shareholder approval; however, you would be notified of any changes. - -------------------------------------------------------------------------------- ADDITIONAL RISK INFORMATION [GRAPHIC OMITTED] This section provides additional information relating to the risks of investing in the Fund. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Use of forward foreign currency exchange contracts involves risks. If the Investment Adviser employs a strategy that does not correlate well with the Fund's investments or the currencies in which the investments are denominated, currency contracts could result in a loss. The contracts also may increase the Fund's volatility and, thus, could involve a significant risk. OPTIONS AND FUTURES. If the Fund invests in futures on stock indices, financial instruments and interest rate indices or options on securities, securities indices and stock index futures, its participation in these markets may subject it to certain risks. The Investment Adviser's predictions of movements in the direction of the stock, bond, stock index or interest rate markets may be inaccurate, and the adverse consequences to the Fund (e.g., a reduction in the Fund's net asset value or a reduction in the amount of income available for distribution) may leave the Fund in a worse position than if these strategies were not used. Other risks inherent in the use of futures and options include, for example, the possible imperfect correlation between the price of option and futures contracts and the movements in the prices of the securities being hedged, and the possible absence of a liquid secondary market for any particular instrument. Certain options may be over-the-counter options, which are options negotiated with dealers; there is no secondary market for these investments. - -------------------------------------------------------------------------------- PORTFOLIO HOLDINGS [GRAPHIC OMITTED] A description of the Fund's policies and procedures with respect to the disclosure of the Fund's portfolio securities is available in the Fund's Statement of Additional Information. 10 - -------------------------------------------------------------------------------- FUND MANAGEMENT {sidebar} - ---------------- MORGAN STANLEY INVESTMENT ADVISORS INC. The Investment Adviser is widely recognized as a leader in the mutual fund industry and had approximately $90 billion in assets under management or administration as of December 31, 2005. {end sidebar} [GRAPHIC OMITTED] The Fund has retained the Investment Adviser -- Morgan Stanley Investment Advisors Inc. -- 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. The Fund is managed by members of the Investment Adviser's Equity Income team. The team consists of portfolio managers and analysts. Current members of the team who are jointly and primarily responsible for the day-to-day management of the Fund include James A. Gilligan, a Managing Director of the Investment Adviser, Ellen Gold, James O. Roeder and Thomas B. Bastian, Executive Directors of the Investment Adviser and Sergio Marcheli and Vincent E. Vizachero, Vice Presidents of the Investment Adviser. Mr. Gilligan has been associated with the Investment Adviser in an investment management capacity since 1985 and began managing the Fund in August 2002. Ms. Gold has been associated with the Investment Adviser in an investment management capacity since 1986 and began managing the Fund in 1998. Mr. Roeder has been associated with the Investment Adviser in an investment management capacity since 1999 and began managing the Fund in August 2002. Mr. Bastian has been associated with the Investment Adviser in an investment management capacity since March 2003 and began managing the Fund in November 2003. Prior to March 2003, Mr. Bastian was a portfolio manager at Eagle Asset Management. Mr. Marcheli has been associated with the Investment Adviser in a research capacity from 1995 to 2002. Since 2002, Mr. Marcheli has been associated with the Investment Adviser in an investment management capacity and began managing the Fund in November 2003. Mr. Vizachero has been associated with the Investment Adviser in an investment management capacity since July 2001 and began managing the Fund in August 2002. Prior to July 2001, Mr. Vizachero was an analyst at Fidelity Investments. Mr. Gilligan is the lead manager of the Fund. Each member is responsible for specific sectors, except Mr. Marcheli who aids in providing research in all sectors as needed and also manages the cash position in the Fund. Mr. Gilligan is responsible for the execution of the overall strategy of the Fund. The Fund's Statement of Additional Information provides additional information about the portfolio managers' compensation structure, other accounts managed by the portfolio managers and the portfolio managers' ownership of securities in the Fund. 11 Prior to November 1, 2004, the Fund had retained the Investment Adviser to provide administrative services and to manage the investment of the Fund's assets pursuant to an investment management agreement (the "Management Agreement") pursuant to which the Fund paid the Investment Adviser a monthly management fee as full compensation for the services and facilities furnished to the Fund, and for Fund expenses assumed by the Investment Adviser at the following annual rate: 0.75% of the portion of the daily net assets not exceeding $500 million; and 0.725% of the portion of the daily net assets exceeding $500 million. Effective November 1, 2004, the Board of Trustees approved an amended and restated investment advisory agreement to remove the administrative services component from the Investment Management Agreement and to reduce the investment advisory fee to the annual rate of 0.67% of the portion of the daily net assets not exceeding $500 million; and 0.645% of the portion of the daily net assets exceeding $500 million. The administrative services previously provided to the Fund by the Investment Advisor are being provided by Morgan Stanley Services Company Inc. ("Administrator") pursuant to a separate administration agreement entered into by the Fund with the Administrator. Such change resulted in a 0.08% reduction in the advisory fee concurrent with the implementation of a 0.08% administration fee pursuant to the new administration agreement. For the fiscal year ended September 30, 2005, the Fund paid total compensation to the Investment Adviser amounting to 0.67% of the Fund's average daily net assets. Although the entities providing administration services to the Fund have changed, the Morgan Stanley personnel performing such services remain the same. Furthermore, the changes have not resulted in any increase in the amount of total combined fees paid by the Fund for investment advisory and administration services, or any decrease in the nature or quality of the investment advisory or administration services received by the Fund. A discussion regarding the basis for the Board of Trustees' approval of the investment advisory agreement is available in the Fund's annual report to shareholders for the fiscal year ended September 30, 2005. 12 SHAREHOLDER INFORMATION - -------------------------------------------------------------------------------- PRICING FUND SHARES [GRAPHIC OMITTED] The price of Fund shares (excluding sales charges), called "net asset value," is based on the value of the Fund's portfolio securities. While the assets of each Class are invested in a single portfolio of securities, the net asset value of each Class will differ because the Classes have different ongoing distribution fees. The net asset value per share of the Fund is determined once daily at 4:00 p.m. Eastern time on each day that the New York Stock Exchange is open (or, on days when the New York Stock Exchange closes prior to 4:00 p.m., at such earlier time). Shares will not be priced on days that the New York Stock Exchange is closed. The value of the Fund's portfolio securities is based on the securities' market price when available. When a market price is not readily available, including circumstances under which the Investment Adviser determines that a security's market price is not accurate, a portfolio security is valued at its fair value, as determined under procedures established by the Fund's Board of Trustees. In addition, with respect to securities that primarily are listed on foreign exchanges, when an event occurs after the close of such exchanges that is likely to have changed the value of the securities (for example, a percentage change in value of one or more U.S. securities indices in excess of specified thresholds), such securities will be valued at their fair value, as determined under procedures established by the Fund's Board of Trustees. Securities also may be fair valued in the event of a significant development affecting a country or region or an issuer-specific development which is likely to have changed the value of the security. In these cases, the Fund's net asset value will reflect certain portfolio securities' fair value rather than their market price. Fair value pricing involves subjective judgment and it is possible that the fair value determined for a security is materially different than the value that could be realized upon the sale of that security. With respect to securities that are primarily listed on foreign exchanges, the values of the Fund's portfolio securities may change on days when you will not be able to purchase or sell your shares. An exception to the Fund's general policy of using market prices concerns its short-term debt portfolio securities. Debt securities with remaining maturities of 60 days or less at the time of purchase are valued at amortized cost. However, if the cost does not reflect the securities' market value, these securities will be valued at their fair value. 13 - -------------------------------------------------------------------------------- HOW TO BUY SHARES {sidebar} - ---------------- CONTACTING A FINANCIAL ADVISOR If you are new to the Morgan Stanley Funds and would like to contact a Morgan Stanley Financial Advisor, call toll-free 1-866-MORGAN8 for the telephone number of the Morgan Stanley office nearest you. You may also access our office locator on our Internet site at: www.morganstanley.com/funds {end sidebar} [GRAPHIC OMITTED] You may open a new account to buy Fund shares or buy additional Fund shares for an existing account by contacting your Morgan Stanley Financial Advisor or other authorized financial representative. Your Financial Advisor will assist you, step-by-step, with the procedures to invest in the Fund. The Fund's transfer agent, Morgan Stanley Trust ("Transfer Agent"), in its sole discretion, may allow you to purchase shares directly by calling and requesting an application. To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account. What this means to you: when you open an account, we will ask your name, address, date of birth and other information that will allow us to identify you. If we are unable to verify your identity, we reserve the right to restrict additional transactions and/or liquidate your account at the next calculated net asset value after your account is closed (less any applicable sales/account charges and/or tax penalties) or take any other action required by law. Because every investor has different immediate financial needs and long-term investment goals, the Fund offers investors four Classes of shares: Classes A, B, C and D. Class D shares are only offered to a limited group of investors. Each Class of shares offers a distinct structure of sales charges, distribution and service fees, and other features that are designed to address a variety of needs. Your Morgan Stanley Financial Advisor or other authorized financial representative can help you decide which Class may be most appropriate for you. When purchasing Fund shares, you must specify which Class of shares you wish to purchase. When you buy Fund shares, the shares are purchased at the next share price calculated (plus any applicable front-end sales charge for Class A shares) after we receive your purchase order. Your payment is due on the third business day after you place your purchase order. The Fund, in its sole discretion, may waive the minimum initial and additional investment amounts in certain cases. We reserve the right to reject any order for the purchase of Fund shares for any reason. ORDER PROCESSING FEE. Morgan Stanley DW charges clients an order processing fee of $5.25 (except in certain circumstances, including, but not limited to, activity in fee-based accounts, exchanges, dividend reinvestments and systematic investment and withdrawal plans) when a client buys or redeems shares of the Fund. Please consult your Morgan Stanley Financial Advisor for more information regarding this fee. 14 MINIMUM INVESTMENT AMOUNTS {sidebar} - ---------------- EasyInvest (R) A purchase plan that allows you to transfer money automatically from your checking or savings account or from a Money Market Fund on a semi-monthly, monthly or quarterly basis. Contact your Morgan Stanley Financial Advisor for further information about this service. {end sidebar} MINIMUM INVESTMENT --------------------------- INVESTMENT OPTIONS INITIAL ADDITIONAL Regular Account $ 1,000 $ 100 Individual Retirement Account $ 1,000 $ 100 Coverdell Education Savings Account $ 500 $ 100 EasyInvest (R) (Automatically from your checking or savings account or Money Market Fund) $ 100* $ 100* * Provided your schedule of investments totals $1,000 in 12 months. There is no minimum investment amount if you purchase Fund shares through: (1) the Investment Adviser's mutual fund asset allocation program; (2) a program, approved by the Fund's distributor, in which you pay an asset-based fee for advisory, administrative and/or brokerage services; (3) the following programs approved by the Fund's distributor; (i) qualified state tuition plans described in Section 529 of the Internal Revenue Code or (ii) certain other investment programs that do not charge an asset-based fee; (4) employer-sponsored employee benefit plan accounts; or (5) the reinvestment of dividends in additional Fund shares. INVESTMENT OPTIONS FOR CERTAIN INSTITUTIONAL AND OTHER INVESTORS/CLASS D SHARES. To be eligible to purchase Class D shares, you must qualify under one of the investor categories specified in the "Share Class Arrangements" section of this Prospectus. SUBSEQUENT INVESTMENTS SENT DIRECTLY TO THE FUND. In addition to buying additional Fund shares for an existing account by contacting your Morgan Stanley Financial Advisor, you may send a check directly to the Fund. To buy additional shares in this manner: o Write a "letter of instruction" to the Fund specifying the name(s) on the account, the account number, the social security or tax identification number, the Class of shares you wish to purchase and the investment amount (which would include any applicable front-end sales charge). The letter must be signed by the account owner(s). o Make out a check for the total amount payable to: Morgan Stanley Income Builder Fund. o Mail the letter and check to Morgan Stanley Trust at P.O. Box 1040, Jersey City, NJ 07303. - -------------------------------------------------------------------------------- LIMITED PORTABILITY [GRAPHIC OMITTED] Most Fund shareholders hold their shares with Morgan Stanley DW. Please note that your ability to transfer your Fund shares to a brokerage account at another securities dealer may be limited. Fund shares may only be transferred to accounts held at a limited number of securities dealers or financial intermediaries that have entered into agreements with the Fund's distributor. After a transfer, you may purchase additional shares of the Morgan Stanley Funds you owned before the transfer, but you may not be able to purchase shares of any other Morgan Stanley Funds or exchange shares of the fund(s) you own for shares of other Morgan Stanley 15 Funds (as described below under "How to Exchange Shares"). If you wish to transfer Fund shares to a securities dealer or other financial intermediary that has not entered into an agreement with the Fund's distributor, you may request that the securities dealer or financial intermediary maintain the shares in an account at the Transfer Agent registered in the name of such securities dealer or financial intermediary for your benefit. You may also hold your Fund shares in your own name directly with the Transfer Agent. Other options may also be available; please check with the respective securities dealer or financial intermediary. If you choose not to hold your shares with the Transfer Agent, either directly or through a securities dealer or other financial intermediary, you must redeem your shares and pay any applicable CDSC. - -------------------------------------------------------------------------------- HOW TO EXCHANGE SHARES [GRAPHIC OMITTED] PERMISSIBLE FUND EXCHANGES. You may exchange shares of any Class of the Fund for the same Class of any other continuously offered Multi-Class Fund, or for shares of a No-Load Fund, a Money Market Fund or the Limited Duration U.S. Treasury Trust, without the imposition of an exchange fee. Front-end sales charges are not imposed on exchanges of Class A shares. See the inside back cover of this Prospectus for each Morgan Stanley Fund's designation as a Multi-Class Fund, No-Load Fund or Money Market Fund. If a Morgan Stanley Fund is not listed, consult the inside back cover of that fund's current prospectus for its designation. The current prospectus for each fund describes its investment objective(s), policies and investment minimums, and should be read before investment. Since exchanges are available only into continuously offered Morgan Stanley Funds, exchanges are not available into any new Morgan Stanley Fund during its initial offering period, or when shares of a particular Morgan Stanley Fund are not being offered for purchase. An exchange of Fund shares held for less than seven days from the date of purchase will be subject to the 2% redemption fee described under the section "How to Sell Shares." EXCHANGE PROCEDURES. You can process an exchange by contacting your Morgan Stanley Financial Advisor or other authorized financial representative. Otherwise, you must forward an exchange privilege authorization form to the Transfer Agent and then write the Transfer Agent or call toll-free (800) 869-NEWS to place an exchange order. You can obtain an exchange privilege authorization form by contacting your Morgan Stanley Financial Advisor or other authorized financial representative, or by calling toll-free (800) 869-NEWS. If you hold share certificates, no exchanges may be processed until we have received all applicable share certificates. An exchange to any Morgan Stanley Fund (except a Money Market Fund) is made on the basis of the next calculated net asset values of the funds involved after the exchange instructions, as described above, are received. When exchanging into a Money Market Fund, the Fund's shares are sold at their next calculated net asset value and the Money Market Fund's shares are purchased at their net asset value on the following business day. The Fund may terminate or revise the exchange privilege upon required notice or in certain cases without notice. See "Limitations on Exchanges." The check writing privilege is not available for Money Market Fund shares you acquire in an exchange. 16 TELEPHONE EXCHANGES. For your protection when calling Morgan Stanley Trust, we will employ reasonable procedures to confirm that exchange instructions communicated over the telephone are genuine. These procedures may include requiring various forms of personal identification such as name, mailing address, social security or other tax identification number. Telephone instructions also may be recorded. Telephone instructions will be accepted if received by the Transfer Agent between 9:00 a.m. and 4:00 p.m. Eastern time on any day the New York Stock Exchange is open for business. During periods of drastic economic or market changes, it is possible that the telephone exchange procedures may be difficult to implement, although this has not been the case with the Fund in the past. MARGIN ACCOUNTS. If you have pledged your Fund shares in a margin account, contact your Morgan Stanley Financial Advisor or other authorized financial representative regarding restrictions on the exchange of such shares. TAX CONSIDERATIONS OF EXCHANGES. If you exchange shares of the Fund for shares of another Morgan Stanley Fund, there are important tax considerations. For tax purposes, the exchange out of the Fund is considered a sale of Fund shares -- and the exchange into the other fund is considered a purchase. As a result, you may realize a capital gain or loss. You should review the "Tax Consequences" section and consult your own tax professional about the tax consequences of an exchange. LIMITATIONS ON EXCHANGES. Certain patterns of past exchanges and/or purchase or sale transactions involving the Fund or other Morgan Stanley Funds may result in the Fund rejecting, limiting or prohibiting, at its sole discretion, and without prior notice, additional purchases and/or exchanges and may result in a shareholder's account being closed. Determinations in this regard may be made based on the frequency or dollar amount of previous exchanges or purchase or sale transactions. The Fund reserves the right to reject an exchange request for any reason. CDSC CALCULATIONS ON EXCHANGES. See the "Share Class Arrangements" section of this Prospectus for a discussion of how applicable contingent deferred sales charges (CDSCs) are calculated for shares of one Morgan Stanley Fund that are exchanged for shares of another. For further information regarding exchange privileges, you should contact your Morgan Stanley Financial Advisor or call toll-free (800) 869-NEWS. 17 - -------------------------------------------------------------------------------- HOW TO SELL SHARES [GRAPHIC OMITTED] You can sell some or all of your Fund shares at any time. If you sell Class A, Class B or Class C shares, your net sale proceeds are reduced by the amount of any applicable CDSC. Your shares will be sold at the next price calculated after we receive your order to sell as described below. OPTIONS PROCEDURES - ------------------ ------------------------------------------------------------------------------------------------ Contact Your To sell your shares, simply call your Morgan Stanley Financial Advisor or other authorized Financial Advisor financial representative. Payment will be sent to the address to which the account is registered or deposited in your brokerage account. - ------------------ ------------------------------------------------------------------------------------------------ By Letter You can also sell your shares by writing a "letter of instruction" that includes: o your account number; o the name of the Fund; o the dollar amount or the number of shares you wish to sell; o the Class of shares you wish to sell; and o the signature of each owner as it appears on the account. If you are requesting payment to anyone other than the registered owner(s) or that payment be sent to any address other than the address of the registered owner(s) or pre-designated bank account, you will need a signature guarantee. You can obtain a signature guarantee from an eligible guarantor acceptable to Morgan Stanley Trust. (You should contact Morgan Stanley Trust toll-free at (800) 869-NEWS for a determination as to whether a particular institution is an eligible guarantor.) A notary public cannot provide a signature guarantee. Additional documentation may be required for shares held by a corporation, partnership, trustee or executor. Mail the letter to Morgan Stanley Trust at P.O. Box 983, Jersey City, NJ 07303. If you hold share certificates, you must return the certificates, along with the letter and any required additional documentation. A check will be mailed to the name(s) and address in which the account is registered, or otherwise according to your instructions. - ------------------ ------------------------------------------------------------------------------------------------ Systematic If your investment in all of the Morgan Stanley Funds has a total market value of at least Withdrawal Plan $10,000, you may elect to withdraw amounts of $25 or more, or in any whole percentage of a fund's balance (provided the amount is at least $25), on a monthly, quarterly, semi-annual or annual basis, from any fund with a balance of at least $1,000. Each time you add a fund to the plan, you must meet the plan requirements. Amounts withdrawn are subject to any applicable CDSC. A CDSC may be waived under certain circumstances. See the Class B waiver categories listed in the "Share Class Arrangements" section of this Prospectus. - ------------------ ------------------------------------------------------------------------------------------------ 18 OPTIONS PROCEDURES - ------------------ --------------------------------------------------------------------------------------------- Systematic To sign up for the systematic withdrawal plan, contact your Morgan Stanley Financial Advisor Withdrawal Plan or call toll-free (800) 869-NEWS. You may terminate or suspend your plan at any time. Please (continued) remember that withdrawals from the plan are sales of shares, not Fund "distributions," and ultimately may exhaust your account balance. The Fund may terminate or revise the plan at any time. - ------------------ --------------------------------------------------------------------------------------------- PAYMENT FOR SOLD SHARES. After we receive your complete instructions to sell as described above, a check will be mailed to you within seven days, although we will attempt to make payment within one business day. Payment may also be sent to your brokerage account. Payment may be postponed or the right to sell your shares suspended under unusual circumstances. If you request to sell shares that were recently purchased by check, your sale will not be effected until it has been verified that the check has been honored. ORDER PROCESSING FEE. Morgan Stanley DW charges clients an order processing fee of $5.25 (except in certain circumstances, including, but not limited to, activity in fee-based accounts, exchanges, dividend reinvestments and systematic investment and withdrawal plans) when a client buys or redeems shares of the Fund. Please consult your Morgan Stanley Financial Advisor for more information regarding this fee. TAX CONSIDERATIONS. Normally, your sale of Fund shares is subject to federal and state income tax. You should review the "Tax Consequences" section of this Prospectus and consult your own tax professional about the tax consequences of a sale. REINSTATEMENT PRIVILEGE. If you sell Fund shares and have not previously exercised the reinstatement privilege, you may, within 35 days after the date of sale, invest any portion of the proceeds in the same Class of Fund shares at their net asset value and receive a pro rata credit for any CDSC paid in connection with the sale. INVOLUNTARY SALES. The Fund reserves the right, on 60 days' notice, to sell the shares of any shareholder (other than shares held in an individual retirement account ("IRA") or 403(b) Custodial Account) whose shares, due to sales by the shareholder, have a value below $100, or in the case of an account opened through EasyInvest (R) , if after 12 months the shareholder has invested less than $1,000 in the account. However, before the Fund sells your shares in this manner, we will notify you and allow you 60 days to make an additional investment in an amount that will increase the value of your account to at least the required amount before the sale is processed. No CDSC will be imposed on any involuntary sale. MARGIN ACCOUNTS. If you have pledged your Fund shares in a margin account, contact your Morgan Stanley Financial Advisor or other authorized financial representative regarding restrictions on the sale of such shares. REDEMPTION FEE. Fund shares redeemed within seven days of purchase will be subject to a 2% redemption fee, payable to the Fund. The redemption fee is designed to protect the Fund and its remaining shareholders from the 19 effects of short-term trading. The redemption fee is not imposed on redemptions made: (i) through systematic withdrawal/exchange plans, (ii) through pre-approved asset allocation programs, (iii) of shares received by reinvesting income dividends or capital gain distributions, (iv) through certain collective trust funds or other pooled vehicles and (v) on behalf of advisory accounts where client allocations are solely at the discretion of the Morgan Stanley Investment Management investment team. The redemption fee is based on, and deducted from, the redemption proceeds. Each time you redeem or exchange shares, the shares held the longest will be redeemed or exchanged first. The redemption fee may not be imposed on transactions that occur through certain omnibus accounts at financial intermediaries. Moreover, certain financial intermediaries may apply different methodologies than those described above in assessing redemption fees, may impose their own redemption fee that may differ from the Fund's redemption fee or may impose certain trading restrictions to deter market timing and frequent trading. If you invest in the Fund through an intermediary, please read that financial intermediary's materials carefully to learn about any other restrictions or fees that may apply. - -------------------------------------------------------------------------------- DISTRIBUTIONS {sidebar} - ---------------- TARGETED DIVIDENDS(SM) You may select to have your Fund distributions automatically invested in other Classes of Fund shares or Classes of another Morgan Stanley Fund that you own. Contact your Morgan Stanley Financial Advisor for further information about this service. {end sidebar} [GRAPHIC OMITTED] The Fund passes substantially all of its earnings from income and capital gains along to its investors as "distributions." The Fund earns interest from fixed-income investments and income from stocks. These amounts are passed along to Fund shareholders as "income dividend distributions." The Fund realizes capital gains whenever it sells securities for a higher price than it paid for them. These amounts may be passed along as "capital gain distributions." The Fund declares income dividends separately for each Class. Distributions paid on Class A and Class D shares usually will be higher than for Class B and Class C shares because distribution fees that Class B and Class C shares pay are higher. Normally, income dividends are distributed to shareholders quarterly. Capital gains, if any, are usually distributed in December. The Fund, however, may retain and reinvest any long-term capital gains. The Fund may at times make payments from sources other than income or capital gains that represent a return of a portion of your investment. Distributions are reinvested automatically in additional shares of the same Class and automatically credited to your account, unless you request in writing that all distributions be paid in cash. If you elect the cash option, the Fund will mail a check to you no later than seven business days after the distribution is declared. However, if you purchase Fund shares through a Morgan Stanley Financial Advisor or other authorized financial representative within three business days prior to the record date for the distribution, the distribution will automatically be paid to you in cash, even if you did not request to receive all distributions in cash. No interest 20 will accrue on uncashed checks. If you wish to change how your distributions are paid, your request should be received by the Transfer Agent at least five business days prior to the record date of the distributions. - -------------------------------------------------------------------------------- FREQUENT PURCHASES AND REDEMPTIONS OF FUND SHARES [GRAPHIC OMITTED] Frequent purchases and redemptions of Fund shares by Fund shareholders are referred to as "market-timing" or "short-term trading" and may present risks for other shareholders of the Fund, which may include, among other things, dilution in the value of Fund shares held by long-term shareholders, interference with the efficient management of the Fund's portfolio, increased brokerage and administrative costs, incurring unwanted taxable gains and forcing the Fund to hold excess levels of cash. In addition, the Fund is subject to the risk that market timers and/or short-term traders may take advantage of time zone differences between the foreign markets on which the Fund's portfolio securities trade and the time as of which the Fund's net asset value is calculated ("time-zone arbitrage"). For example, a market timer may purchase shares of the Fund based on events occurring after foreign market closing prices are established, but before the Fund's net asset value calculation, that are likely to result in higher prices in foreign markets the following day. The market timer would redeem the Fund's shares the next day when the Fund's share price would reflect the increased prices in foreign markets, for a quick profit at the expense of long-term Fund shareholders. The Fund's policies with respect to valuing portfolio securities are described in "Shareholder Information--Pricing Fund Shares." The Fund discourages and does not accommodate frequent purchases and redemptions of Fund shares by Fund shareholders and the Fund's Board of Trustees has adopted policies and procedures with respect to such frequent purchases and redemptions. The Fund's policies with respect to purchases, redemptions and exchanges of Fund shares are described in the "How to Buy Shares," "How to Exchange Shares" and "How to Sell Shares" sections of this Prospectus. Except as described in each of these sections, and with respect to trades that occur through omnibus accounts at intermediaries, as described below, the Fund's policies regarding frequent trading of Fund shares are applied uniformly to all shareholders. With respect to trades that occur through omnibus accounts at intermediaries, such as investment managers, broker-dealers, transfer agents and third party administrators, the Fund (i) has requested assurance that such intermediaries currently selling Fund shares have in place internal policies and procedures reasonably designed to address market-timing concerns and has instructed such intermediaries to notify the Fund immediately if they are unable to comply with such policies and procedures and (ii) requires all prospective intermediaries to agree to cooperate in enforcing the Fund's policies with respect to frequent purchases, redemptions and exchanges of Fund shares. Omnibus accounts generally do not identify customers' trading activity to the Fund on an individual basis. Therefore, with respect to trades that occur through omnibus accounts at intermediaries, the Fund is currently limited in its ability to monitor trading activity or enforce the redemption fee with respect to customers of such intermediaries. The ability of the Fund to monitor exchanges made by the underlying shareholders in omnibus accounts, therefore, is severely limited. Consequently, the Fund must rely on the financial intermediary to monitor 21 frequent short-term trading within the Fund by the financial intermediary's customers. Certain intermediaries may not have the ability to assess a redemption fee. There can be no assurance that the Fund will be able to eliminate all market-timing activities. - -------------------------------------------------------------------------------- TAX CONSEQUENCES [GRAPHIC OMITTED] As with any investment, you should consider how your Fund investment will be taxed. The tax information in this Prospectus is provided as general information. You should consult your own tax professional about the tax consequences of an investment in the Fund. Unless your investment in the Fund is through a tax-deferred retirement account, such as a 401(k) plan or IRA, you need to be aware of the possible tax consequences when: o The Fund makes distributions; and o You sell Fund shares, including an exchange to another Morgan Stanley Fund. TAXES ON DISTRIBUTIONS. Your distributions are normally subject to federal and state income tax when they are paid, whether you take them in cash or reinvest them in Fund shares. A distribution also may be subject to local income tax. Any income dividend distributions and any short-term capital gain distributions are taxable to you as ordinary income. Any long-term capital gain distributions are taxable as long-term capital gains no matter how long you have owned shares in the Fund. Under current law, a portion of the ordinary income dividends you receive may be taxed at the same rate as long-term capital gains. However, even if income received in the form of ordinary income dividends is taxed at the same rates as long-term capital gains, such income will not be considered long-term capital gains for other federal income tax purposes. For example, you generally will not be permitted to offset ordinary income dividends with capital losses. Short-term capital gain distributions will continue to be taxed at ordinary income rates. Every January, you will be sent a statement (IRS Form 1099-DIV) showing the taxable distributions paid to you in the previous year. The statement provides information on your dividends and capital gains for tax purposes. TAXES ON SALES. Your sale of Fund shares normally is subject to federal and state income tax and may result in a taxable gain or loss to you. A sale also may be subject to local income tax. Your exchange of Fund shares for shares of another Morgan Stanley Fund is treated for tax purposes like a sale of your original shares and a purchase of your new shares. Thus, the exchange may, like a sale, result in a taxable gain or loss to you and will give you a new tax basis for your new shares. When you open your Fund account, you should provide your social security or tax identification number on your investment application. By providing this information, you will avoid being subject to federal backup withholding tax on taxable distributions and redemption proceeds (as of the date of this Prospectus this rate is 28%). Any withheld amount would be sent to the IRS as an advance payment of your taxes due on your income. 22 - -------------------------------------------------------------------------------- SHARE CLASS ARRANGEMENTS [GRAPHIC OMITTED] The Fund offers several Classes of shares having different distribution arrangements designed to provide you with different purchase options according to your investment needs. Your Morgan Stanley Financial Advisor or other authorized financial representative can help you decide which Class may be appropriate for you. The general public is offered three Classes: Class A shares, Class B shares and Class C shares, which differ principally in terms of sales charges and ongoing expenses. A fourth Class, Class D shares, is offered only to a limited category of investors. Shares that you acquire through reinvested distributions will not be subject to any front-end sales charge or CDSC -- contingent deferred sales charge. Sales personnel may receive different compensation for selling each Class of shares. The sales charges applicable to each Class provide for the distribution financing of shares of that Class. The chart below compares the sales charge and annual 12b-1 fee applicable to each Class: CLASS SALES CHARGE MAXIMUM ANNUAL 12B-1 FEE A Maximum 5.25% initial sales charge reduced for purchases of $25,000 or more; shares purchased without an initial sales charge are generally subject to a 1.00% CDSC if sold during the first 18 months 0.25% B Maximum 5.00% CDSC during the first year decreasing to 0% after six years 1.00% C 1.00% CDSC during the first year 1.00% D None None Certain shareholders may be eligible for reduced sales charges (i.e., breakpoint discounts), CDSC waivers and eligibility minimums. Please see the information for each Class set forth below for specific eligibility requirements. You must notify your Morgan Stanley Financial Advisor or other authorized financial representative (or Morgan Stanley Trust if you purchase shares directly through the Fund) at the time a purchase order (or in the case of Class B or Class C shares, a redemption order) is placed that the purchase (or redemption) qualifies for a reduced sales charge (i.e., breakpoint discount), CDSC waiver or eligibility minimum. Similar notification must be made in writing when an order is placed by mail. The reduced sales charge, CDSC waiver or eligibility minimum will not be granted if: (i) notification is not furnished at the time of order; or (ii) a review of the records of Morgan Stanley DW or other authorized dealer of Fund shares, or the Transfer Agent does not confirm your represented holdings. In order to obtain a reduced sales charge (i.e., breakpoint discount) or to meet an eligibility minimum, it may be necessary at the time of purchase for you to inform your Morgan Stanley Financial Advisor or other authorized financial representative (or Morgan Stanley Trust if you purchase shares directly through the Fund) of the existence of other accounts in which there are holdings eligible to be aggregated to meet the sales load breakpoints or eligibility minimums. In order to verify your eligibility, you may be required to provide account statements and/or confirmations regarding shares of the Fund or other Morgan Stanley Funds held in all related accounts described below at Morgan Stanley or by other authorized dealers, as well as shares held by related parties, such as members of the same family or household, in order to determine whether you have met a sales load breakpoint or eligibility minimums. The Fund makes available, in a clear and prominent format, free of charge, on its web site, 23 www.morganstanley.com, information regarding applicable sales loads, reduced sales charges (i.e., breakpoint discounts), sales load waivers and eligibility minimums. The web site includes hyperlinks that facilitate access to the information. CLASS A SHARES Class A shares are sold at net asset value plus an initial sales charge of up to 5.25% of the public offering price. The initial sales charge is reduced for purchases of $25,000 or more according to the schedule below. Investments of $1 million or more are not subject to an initial sales charge, but are generally subject to a CDSC of 1.00% on sales made within 18 months after the last day of the month of purchase. The CDSC will be assessed in the same manner and with the same CDSC waivers as with Class B shares. Class A shares are also subject to a distribution and shareholder services (12b-1) fee of up to 0.25% of the average daily net assets of the Class. The maximum annual 12b-1 fee payable by Class A shares is lower than the maximum annual 12b-1 fee payable by Class B or Class C shares. The offering price of Class A shares includes a sales charge (expressed as a percentage of the public offering price) on a single transaction as shown in the following table: {sidebar} - ---------------- FRONT-END SALES CHARGE OR FSC An initial sales charge you pay when purchasing Class A shares that is based on a percentage of the offering price. The percentage declines based upon the dollar value of Class A shares you purchase. We offer three ways to reduce your Class A sales charges -- the Combined Purchase Privilege, Right of Accumulation and Letter of Intent. {end sidebar} FRONT-END SALES CHARGE --------------------------------------------------- PERCENTAGE OF PUBLIC APPROXIMATE PERCENTAGE AMOUNT OF SINGLE TRANSACTION OFFERING PRICE OF NET AMOUNT INVESTED Less than $25,000 5.25% 5.54% $25,000 but less than $50,000 4.75% 4.99% $50,000 but less than $100,000 4.00% 4.17% $100,000 but less than $250,000 3.00% 3.09% $250,000 but less than $500,000 2.50% 2.56% $500,000 but less than $1 million 2.00% 2.04% $1 million and over 0.00% 0.00% You may benefit from a reduced sales charge schedule (i.e., breakpoint discount) for purchases of Class A shares of the Fund, by combining, in a single transaction, your purchase with purchases of Class A shares of the Fund by the following related accounts: o A single account (including an individual, trust or fiduciary account). o A family member account (limited to spouse, and children under the age of 21). o Pension, profit sharing or other employee benefit plans of companies and their affiliates. o Employer sponsored and individual retirement accounts (including IRAs, Keogh, 401(k), 403(b), 408(k) and 457(b) Plans). o Tax-exempt organizations. o Groups organized for a purpose other than to buy mutual fund shares. 24 COMBINED PURCHASE PRIVILEGE. You will have the benefit of reduced sales charges by combining purchases of Class A shares of the Fund for any related account in a single transaction with purchases of any class of shares of other Morgan Stanley Multi-Class Funds for the related account or any other related account. For the purpose of this combined purchase privilege, a "related account" is: o A single account (including an individual account, a joint account and a trust account established solely for the benefit of the individual). o A family member account (limited to spouse, and children under the age of 21, but including trust accounts established solely for the benefit of a spouse, or children under the age of 21). o An IRA and single participant retirement account (such as a Keogh). o An UGMA/UTMA account. RIGHT OF ACCUMULATION. You may benefit from a reduced sales charge if the cumulative net asset value of Class A Shares of the Fund purchased in a single transaction, together with the net asset value of all classes of shares of Morgan Stanley Multi-Class Funds (including shares of Morgan Stanley Non-Multi-Class Funds which resulted from an exchange from Morgan Stanley Multi-Class Funds) held in related accounts, amounts to $25,000 or more. For the purposes of the rights of accumulation privilege, a related account is any one of the accounts listed under "Combined Purchase Privilege" above. NOTIFICATION. You must notify your Morgan Stanley Financial Advisor or other authorized financial representative (or Morgan Stanley Trust if you purchase shares directly through the Fund) at the time a purchase order is placed that the purchase qualifies for a reduced sales charge under any of the privileges discussed above. Similar notification must be made in writing when an order is placed by mail. The reduced sales charge will not be granted if: (i) notification is not furnished at the time of the order; or (ii) a review of the records of Morgan Stanley DW or other authorized dealer of Fund shares or the Transfer Agent does not confirm your represented holdings. In order to obtain a reduced sales charge under any of the privileges discussed above, it may be necessary at the time of purchase for you to inform your Morgan Stanley Financial Advisor or other authorized financial representative (or Morgan Stanley Trust if you purchase shares directly through the Fund) of the existence of other accounts in which there are holdings eligible to be aggregated to meet the sales load breakpoint and/or right of accumulation threshold. In order to verify your eligibility, you may be required to provide account statements and/or confirmations regarding shares of the Fund or other Morgan Stanley Funds held in all related accounts described above at Morgan Stanley or by other authorized dealers, as well as shares held by related parties, such as members of the same family or household, in order to determine whether you have met the sales load breakpoint and/or right of accumulation threshold. The Fund makes available, in a clear and prominent format, free of charge, on its web site, www.morganstanley.com, information regarding applicable sales loads and reduced sales charges (i.e., breakpoint discounts). The web site includes hyperlinks that facilitate access to the information. LETTER OF INTENT. The above schedule of reduced sales charges for larger purchases also will be available to you if you enter into a written "Letter of Intent." A Letter of Intent provides for the purchase of Class A shares of the Fund or other Multi-Class Funds within a 13-month period. The initial purchase under a letter of intent must be at least 5% of the stated investment goal. The Letter of Intent does not preclude the Fund (or any other 25 Multi-Class Fund) from discontinuing sales of its shares. To determine the applicable sales charge reduction, you may also include: (1) the cost of shares of other Morgan Stanley Funds which were previously purchased at a price including a front-end sales charge during the 90-day period prior to the distributor receiving the Letter of Intent, and (2) the historical cost of shares of other funds you currently own acquired in exchange for shares of funds purchased during that period at a price including a front-end sales charge. You may combine purchases and exchanges by family members (limited to spouse, and children under the age of 21) during the periods referenced in (1) and (2) above. You should retain any records necessary to substantiate historical costs because the Fund, its transfer agent and any financial intermediaries may not maintain this information. You can obtain a Letter of Intent by contacting your Morgan Stanley Financial Advisor or other authorized financial representative, or by calling toll-free (800) 869-NEWS. If you do not achieve the stated investment goal within the 13-month period, you are required to pay the difference between the sales charges otherwise applicable and sales charges actually paid, which may be deducted from your investment. Shares acquired through reinvestment of distributions are not aggregated to achieve the stated investment goal. OTHER SALES CHARGE WAIVERS. In addition to investments of $1 million or more, your purchase of Class A shares is not subject to a front-end sales charge (or a CDSC upon sale) if your account qualifies under one of the following categories: o A trust for which a banking affiliate of the Investment Adviser provides discretionary trustee services. o Persons participating in a fee-based investment program (subject to all of its terms and conditions, including termination fees, and mandatory sale or transfer restrictions on termination) approved by the Fund's distributor, pursuant to which they pay an asset-based fee for investment advisory, administrative and/or brokerage services. o Qualified state tuition plans described in Section 529 of the Internal Revenue Code and donor-advised charitable gift funds (subject to all applicable terms and conditions) and certain other investment programs that do not charge an asset-based fee and have been approved by the Fund's distributor. o Employer-sponsored employee benefit plans, whether or not qualified under the Internal Revenue Code, for which an entity independent from Morgan Stanley serves as recordkeeper under an alliance or similar agreement with Morgan Stanley's Retirement Plan Solutions (together, "Morgan Stanley Eligible Plans"). o A Morgan Stanley Eligible Plan whose Class B shares have converted to Class A shares, regardless of the plan's asset size or number of eligible employees. o Insurance company separate accounts that have been approved by the Fund's distributor. o Current or retired Directors or Trustees of the Morgan Stanley Funds, such persons' spouses, and children under the age of 21, and trust accounts for which any of such persons is a beneficiary. o Current or retired directors, officers and employees of Morgan Stanley and any of its subsidiaries, such persons' spouses, and children under the age of 21, and trust accounts for which any of such persons is a beneficiary. 26 CLASS B SHARES Class B shares are offered at net asset value with no initial sales charge but are subject to a contingent deferred sales charge, or CDSC, as set forth in the table below. For the purpose of calculating the CDSC, shares are deemed to have been purchased on the last day of the month during which they were purchased. {sidebar} - ---------------- CONTINGENT DEFERRED SALES CHARGE OR CDSC A fee you pay when you sell shares of certain Morgan Stanley Funds purchased without an initial sales charge. This fee declines the longer you hold your shares as set forth in the table. {end sidebar} YEAR SINCE PURCHASE PAYMENT MADE CDSC AS A PERCENTAGE OF AMOUNT REDEEMED First 5.0% Second 4.0% Third 3.0% Fourth 2.0% Fifth 2.0% Sixth 1.0% Seventh and thereafter None The CDSC is assessed on an amount equal to the lesser of the then market value of the shares or the historical cost of the shares (which is the amount actually paid for the shares at the time of original purchase) being redeemed. Accordingly, no sales charge is imposed on increases in net asset value above the initial purchase price. In determining whether a CDSC applies to a redemption, it is assumed that the shares being redeemed first are any shares in the shareholders Fund account that are not subject to a CDSC, followed by shares held the longest in the shareholder's account. Broker-dealers or other financial intermediaries may impose a limit on the dollar value of a Class B share purchase order that they will accept. For example, a Morgan Stanley Financial Advisor generally will not accept purchase orders for Class B shares that in the aggregate amount to $25,000 or more. You should discuss with your financial advisor which share class is most appropriate for you, based on the size of your investment, your expected time horizon for holding the shares and other factors, bearing in mind the availability of reduced sales loads on Class A share purchases of $25,000 or more and for existing shareholders who hold over $25,000 in Morgan Stanley Funds. CDSC WAIVERS. A CDSC, if otherwise applicable, will be waived in the case of: o Sales of shares held at the time you die or become disabled (within the definition in Section 72(m)(7) of the Internal Revenue Code which relates to the ability to engage in gainful employment), if the shares are: (i) registered either in your individual name or in the names of you and your spouse as joint tenants with right of survivorship; (ii) registered in the name of a trust of which (a) you are the settlor and that is revocable by you (i.e., a "living trust") or (b) you and your spouse are the settlors and that is revocable by you or your spouse (i.e., a "joint living trust"); or (iii) held in a qualified corporate or self-employed retirement plan, IRA or 403(b) Custodial Account, provided in each case that the sale is requested within one year of your death or initial determination of disability. o Sales in connection with the following retirement plan "distributions": (i) lump-sum or other distributions from a qualified corporate or self-employed retirement plan following retirement 27 (or, in the case of a "key employee" of a "top heavy" plan, following attainment of age 591/2); (ii) distributions from an IRA or 403(b) Custodial Account following attainment of age 591/2; or (iii) a tax-free return of an excess IRA contribution (a "distribution" does not include a direct transfer of IRA, 403(b) Custodial Account or retirement plan assets to a successor custodian or trustee). o Sales of shares in connection with the Systematic Withdrawal Plan of up to 12% annually of the value of each fund from which plan sales are made. The percentage is determined on the date you establish the Systematic Withdrawal Plan and based on the next calculated share price. You may have this CDSC waiver applied in amounts up to 1% per month, 3% per quarter, 6% semi-annually or 12% annually. Shares with no CDSC will be sold first, followed by those with the lowest CDSC. As such, the waiver benefit will be reduced by the amount of your shares that are not subject to a CDSC. If you suspend your participation in the plan, you may later resume plan payments without requiring a new determination of the account value for the 12% CDSC waiver. o Sales of shares purchased prior to April 1, 2004 or acquired in exchange for shares purchased prior to April 1, 2004, if you simultaneously invest the proceeds from such sale in the Investment Adviser's mutual fund asset allocation program, pursuant to which investors pay an asset-based fee. Any shares acquired in connection with the Investment Adviser's mutual fund asset allocation program are subject to all of the terms and conditions of that program, including termination fees, and mandatory sale or transfer restrictions on termination. All waivers will be granted only following the Fund's distributor receiving confirmation of your entitlement. If you believe you are eligible for a CDSC waiver, please contact your Morgan Stanley Financial Advisor or other authorized financial representative or call toll-free (800) 869-NEWS. DISTRIBUTION FEE. Class B shares are also subject to an annual distribution and shareholder services (12b-1) fee of up to 1.00% of the lesser of: (a) the average daily aggregate gross purchases by all shareholders of the Fund's Class B shares since the inception of the Fund (not including reinvestments of dividends or capital gains distributions), less the average daily aggregate net asset value of the Fund's Class B shares sold by all shareholders since the Fund's inception upon which a CDSC has been imposed or waived, or (b) the average daily net assets of Class B shares. The maximum annual 12b-1 fee payable by Class B shares is higher than the maximum annual 12b-1 fee payable by Class A shares. CONVERSION FEATURE. After eight years, Class B shares will convert automatically to Class A shares of the Fund with no initial sales charge. The eight-year period runs from the last day of the month in which the shares were purchased or, in the case of Class B shares acquired through an exchange, from the last day of the month in which the original Class B shares were purchased; the shares will convert to Class A shares based on their relative net asset values in the month following the eight-year period. At the same time, an equal proportion of Class B shares acquired through automatically reinvested distributions will convert to Class A shares on the same basis. In the case of Class B shares held in a Morgan Stanley Eligible Plan, the plan is treated as a single investor and all Class B shares will convert to Class A shares on the conversion date of the Class B shares of a Morgan Stanley Fund purchased by that plan. 28 If you exchange your Class B shares for shares of a Money Market Fund, a No-Load Fund or the Limited Duration U.S. Treasury Trust, the holding period for conversion is frozen as of the last day of the month of the exchange and resumes on the last day of the month you exchange back into Class B shares. EXCHANGING SHARES SUBJECT TO A CDSC. There are special considerations when you exchange Fund shares that are subject to a CDSC. When determining the length of time you held the shares and the corresponding CDSC rate, any period (starting at the end of the month) during which you held shares of a fund that does not charge a CDSC will not be counted. Thus, in effect the "holding period" for purposes of calculating the CDSC is frozen upon exchanging into a fund that does not charge a CDSC. For example, if you held Class B shares of the Fund for one year, exchanged to Class B of another Morgan Stanley Multi-Class Fund for another year, then sold your shares, a CDSC rate of 4% would be imposed on the shares based on a two-year holding period -- one year for each fund. However, if you had exchanged the shares of the Fund for a Money Market Fund (which does not charge a CDSC) instead of the Multi-Class Fund, then sold your shares, a CDSC rate of 5% would be imposed on the shares based on a one-year holding period. The one year in the Money Market Fund would not be counted. Nevertheless, if shares subject to a CDSC are exchanged for a Fund that does not charge a CDSC, you will receive a credit when you sell the shares equal to the 12b-1 fees, if any, you paid on those shares while in that fund up to the amount of any applicable CDSC. In addition, shares that are exchanged into or from a Morgan Stanley Fund subject to a higher CDSC rate will be subject to the higher rate, even if the shares are re-exchanged into a fund with a lower CDSC rate. CLASS C SHARES Class C shares are sold at net asset value with no initial sales charge but are subject to a CDSC of 1.0% on sales made within one year after the last day of the month of purchase. The CDSC will be assessed in the same manner and with the same CDSC waivers as with Class B shares. Brokers, dealers or other financial intermediaries may impose a limit on the dollar value of a Class C share purchase order that they will accept. For example, a Morgan Stanley Financial Advisor generally will not accept purchase orders for Class C shares that in the aggregate amount to $250,000 or more. You should discuss with your financial advisor which share class is most appropriate for you based on the size of your investment, your expected time horizon for holding the shares and other factors, bearing in mind the availability of reduced sales loads on Class A share purchases of $25,000 or more and for existing shareholders who hold over $25,000 in Morgan Stanley Funds. DISTRIBUTION FEE. Class C shares are subject to an annual distribution and shareholder services (12b-1) fee of up to 1.00% of the average daily net assets of that Class. The maximum annual 12b-1 fee payable by Class C shares is higher than the maximum annual 12b-1 fee payable by Class A shares. Unlike Class B shares, Class C shares have no conversion feature and, accordingly, an investor that purchases Class C shares may be subject to distribution and shareholder services (12b-1) fees applicable to Class C shares for as long as the investor owns such shares. 29 CLASS D SHARES Class D shares are offered without any sales charge on purchases or sales and without any distribution (12b-1) fee. Class D shares are offered only to investors meeting an initial investment minimum of $5 million ($25 million for Morgan Stanley Eligible Plans) and the following investor categories: o Investors participating in the Investment Adviser's or an affiliate's mutual fund asset allocation program (subject to all of its terms and conditions, including termination fees, and mandatory sale or transfer restrictions on termination) pursuant to which they pay an asset-based fee. o Persons participating in a fee-based investment program (subject to all of its terms and conditions, including termination fees, and mandatory sale or transfer restrictions on termination) approved by the Fund's distributor pursuant to which they pay an asset-based fee for investment advisory, administrative and/or brokerage services. With respect to Class D shares held through the Morgan Stanley Choice Program, at such time as those Fund shares are no longer held through the program, the shares will be automatically converted into Class A shares (which are subject to higher expenses than Class D shares) based on the then current relative net asset values of the two Classes. o Certain investment programs that do not charge an asset-based fee and have been approved by the Fund's distributor. o Employee benefit plans maintained by Morgan Stanley or any of its subsidiaries for the benefit of certain employees of Morgan Stanley and its subsidiaries. o Certain unit investment trusts sponsored by Morgan Stanley DW or its affiliates. o Certain other open-end investment companies whose shares are distributed by the Fund's distributor. o Investors who were shareholders of the Dean Witter Retirement Series on September 11, 1998 for additional purchases for their former Dean Witter Retirement Series accounts. o The Investment Adviser and its affiliates with respect to shares held in connection with certain deferred compensation programs established for their employees. A purchase order that meets the requirements for investment in Class D shares can be made only in Class D shares. Class D shares are not offered for investments made through Section 529 plans, donor-advised charitable gift funds and insurance company separate accounts (regardless of the size of the investment). MEETING CLASS D ELIGIBILITY MINIMUMS. To meet the $5 million ($25 million for Morgan Stanley Eligible Plans) initial investment to qualify to purchase Class D shares, you may combine: (1) purchases in a single transaction of Class D shares of the Fund and other Morgan Stanley Multi-Class Funds; and/or (2) previous purchases of Class A and Class D shares of Multi-Class Funds you currently own, along with shares of Morgan Stanley Funds you currently own that you acquired in exchange for those shares. Shareholders cannot combine purchases made by family members or a shareholder's other related accounts in a single transaction for purposes of meeting the $5 million initial investment minimum requirement to qualify to purchase Class D shares. 30 NO SALES CHARGES FOR REINVESTED CASH DISTRIBUTIONS If you receive a cash payment representing an income dividend or capital gain and you reinvest that amount in the applicable Class of shares by returning the check within 30 days of the payment date, the purchased shares would not be subject to an initial sales charge or CDSC. PLAN OF DISTRIBUTION (RULE 12B-1 FEES) The Fund has adopted a Plan of Distribution in accordance with Rule 12b-1 under the Investment Company Act of 1940 with respect to the Class A, Class B and Class C shares. (Class D shares are offered without any 12b-1 fee.) The Plan allows the Fund to pay distribution fees for the sale and distribution of these shares. It also allows the Fund to pay for services to shareholders of Class A, Class B and Class C shares. Because these fees are paid out of the Fund's assets on an ongoing basis, over time these fees will increase the cost of your investment and reduce your return in these Classes and may cost you more than paying other types of sales charges. - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION [GRAPHIC OMITTED] The Investment Adviser and/or distributor may pay compensation (out of their own funds and not as an expense of the Fund) to certain affiliated or unaffiliated brokers, dealers or other financial intermediaries or service providers in connection with the sale or retention of Fund shares and/or shareholder servicing. Such compensation may be significant in amount and the prospect of receiving any such additional compensation may provide such affiliated or unaffiliated entities with an incentive to favor sales of shares of the Fund over other investment options. Any such payments will not change the net asset value or the price of the Fund's shares. For more information, please see the Fund's Statement of Additional Information. 31 FINANCIAL HIGHLIGHTS The financial highlights table is intended to help you understand the Fund's financial performance for the periods indicated. Certain information reflects financial results for a single Fund share throughout each period. The total returns in the table represent the rate an investor would have earned or lost on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, whose report, along with the Fund's financial statements, are incorporated by reference in the Statement of Additional Information from the Fund's annual report, which is available upon request. CLASS A SHARES FOR THE YEAR ENDED SEPTEMBER 30, 2005 2004 2003 2002 2001 SELECTED PER SHARE DATA: Net asset value, beginning of period $10.61 $9.76 $8.50 $9.74 $10.36 --------- ------- ------- ------- ------- Income (loss) from investment operations: Net investment income[+/+] 0.29 0.30 0.29 0.37 0.49 Net realized and unrealized gain (loss) 1.17 0.85 1.26 (1.21) (0.59) --------- ------- ------- ------- ------- Total income (loss) from investment operations 1.46 1.15 1.55 (0.84) (0.10) --------- ------- ------- ------- ------- Less dividends from net investment income (0.33) (0.30) (0.29) (0.40) (0.52) --------- ------- ------- ------- ------- Net asset value, end of period $11.74 $10.61 $9.76 $8.50 $9.74 - ------------------------------------------------ --------- ------- ------- ------- ------- TOTAL RETURN+ 13.94% 11.82% 18.42% (9.09)% (1.06)% - ------------------------------------------------ --------- ------- --------- ------- ------- RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.26% 1.26% 1.29% 1.23% 1.17% Net investment income 2.57% 2.87% 3.15% 3.67% 4.61% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $54,447 $3,562 $2,969 $1,858 $1,791 Portfolio turnover rate 33% 33% 59% 67% 29% [+/+] The per share amounts were computed using an average number of shares outstanding during the period. + Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. (1) Reflects overall Fund ratios for investment income and non-class specific expenses. 32 CLASS B SHARES FOR THE YEAR ENDED SEPTEMBER 30, 2005 2004 2003 2002 2001 SELECTED PER SHARE DATA: Net asset value, beginning of period $10.62 $9.77 $8.51 $ 9.74 $ 10.37 -------- -------- -------- -------- -------- Income (loss) from investment operations: Net investment income[+/+] 0.21 0.22 0.22 0.29 0.41 Net realized and unrealized gain (loss) 1.17 0.85 1.26 (1.20) (0.60) -------- -------- -------- -------- -------- Total income (loss) from investment operations 1.38 1.07 1.48 (0.91) (0.19) -------- -------- -------- -------- -------- Less dividends from net investment income (0.24) ( 0.22) (0.22) (0.32) (0.44) Net asset value, end of period $11.76 $10.62 $9.77 $8.51 $9.74 - ------------------------------------------------ -------- -------- -------- -------- -------- TOTAL RETURN+ 13.09% 10.94% 17.65% (9.81)% (1.83)% - ------------------------------------------------ -------- -------- ---------- -------- -------- RATIOS TO AVERAGE NET ASSETS(1): Expenses 2.01% 2.02% 2.04% 1.98% 1.95% Net investment income 1.82% 2.11% 2.40% 2.92% 3.83% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $74,844 $134,621 $144,468 $138,129 $186,994 Portfolio turnover rate 33% 33% 59% 67% 29% [+/+] The per share amounts were computed using an average number of shares outstanding during the period. + Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. (1) Reflects overall Fund ratios for investment income and non-class specific expenses. 33 FINANCIAL HIGHLIGHTS (CONTINUED) CLASS C SHARES FOR THE YEAR ENDED SEPTEMBER 30, 2005 2004 2003 2002 2001 SELECTED PER SHARE DATA: Net asset value, beginning of period $10.59 $9.75 $8.49 $9.72 $10.34 --------- ------- -------- ------- ------- Income (loss) from investment operations: Net investment income[+/+] 0.21 0.22 0.22 0.29 0.41 Net realized and unrealized gain (loss) 1.19 0.84 1.26 (1.20) (0.59) --------- ------- -------- ------- ------- Total income (loss) from investment operations 1.38 1.06 1.48 (0.91) (0.18) --------- ------- -------- ------- ------- Less dividends from net investment income (0.25) (0.22) (0.22) (0.32) (0.44) --------- ------- -------- ------- ------- Net asset value, end of period $11.72 $10.59 $9.75 $8.49 $9.72 - ------------------------------------------------ --------- ------- -------- ------- ------- TOTAL RETURN+ 13.11% 10.87% 17.57% (9.73)% (1.84)% - ------------------------------------------------ --------- ------- --------- ------- ------- RATIOS TO AVERAGE NET ASSETS(1): Expenses 2.00% 2.02% 2.04% 1.98% 1.93% Net investment income 1.83% 2.11% 2.40% 2.92% 3.85% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $20,917 $20,671 $20,028 $16,399 $20,505 Portfolio turnover rate 33% 33% 59% 67% 29% [+/+] The per share amounts were computed using an average number of shares outstanding during the period. + Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. (1) Reflects overall Fund ratios for investment income and non-class specific expenses. 34 CLASS D SHARES FOR THE YEAR ENDED SEPTEMBER 30, 2005 2004 2003 2002 2001 SELECTED PER SHARE DATA: Net asset value, beginning of period $10.61 $9.76 $8.50 $9.74 $10.36 --------- ------- ------- ------- ------- Income (loss) from investment operations: Net investment income[+/+] 0.32 0.33 0.32 0.40 0.50 Net realized and unrealized gain (loss) 1.17 0.84 1.25 (1.22) (0.57) --------- ------- ------- ------- ------- Total income (loss) from investment operations 1.49 1.17 1.57 (0.82) (0.07) --------- ------- ------- ------- ------- Less dividends from net investment income (0.36) (0.32) (0.31) (0.42) (0.55) --------- ------- ------- ------- ------- Net asset value, end of period $11.74 $10.61 $9.76 $8.50 $9.74 - ------------------------------------------------ --------- ------- ------- ------- ------- TOTAL RETURN+ 14.20% 12.08% 18.70% (8.87)% (0.80)% - ------------------------------------------------ --------- --------- ------- ------- ------- RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.01% 1.02% 1.04% 0.98% 0.95% Net investment income 2.82% 3.11% 3.40% 3.92% 4.83% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $2,103 $2,614 $2,480 $1,326 $136 Portfolio turnover rate 33% 33% 59% 67% 29% [+/+] The per share amounts were computed using an average number of shares outstanding during the period. + Calculated based on the net asset value as of the last business day of the period. (1) Reflects overall Fund ratios for investment income and non-class specific expenses. 35 Notes - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 36 MORGAN STANLEY FUNDS EQUITY - ------------------------ BLEND/CORE Dividend Growth Securities Multi-Asset Class Fund Total Return Trust - ------------------------ DOMESTIC HYBRID Allocator Fund Balanced Growth Fund Balanced Income Fund Income Builder Fund Strategist Fund - ------------------------ GLOBAL/INTERNATIONAL European Equity Fund Global Advantage Fund Global Dividend Growth Securities International Fund International SmallCap Fund International Value Equity Fund Japan Fund Pacific Growth Fund - ------------------------ GROWTH Aggressive Equity Fund American Opportunities Fund Capital Opportunities Trust Developing Growth Securities Trust Growth Fund Special Growth Fund - ------------------------ INDEX Equally-Weighted S&P 500 Fund KLD Social Index Fund Nasdaq-100 Index Fund S&P 500 Index Fund Total Market Index Fund - ------------------------ SPECIALTY Biotechnology Fund Convertible Securities Trust Financial Services Trust Global Utilities Fund Health Sciences Trust Information Fund Natural Resource Development Securities Real Estate Fund Utilities Fund - ------------------------ VALUE Fundamental Value Fund Mid-Cap Value Fund Small-Mid Special Value Fund Special Value Fund Value Fund FIXED INCOME - ------------------------ TAXABLE SHORT TERM Limited Duration Fund*+ Limited Duration U.S. Treasury Trust* - ------------------------ TAXABLE INTERMEDIATE TERM Flexible Income Trust High Yield Securities Income Trust Mortgage Securities Trust U.S. Government Securities Trust - ------------------------ TAX-FREE California Tax-Free Income Fund Limited Term Municipal Trust*+ New York Tax-Free Income Fund Tax-Exempt Securities Trust MONEY MARKET* - ------------------------ TAXABLE Liquid Asset Fund U.S. Government Money Market - ------------------------ TAX-FREE California Tax-Free Daily Income Trust New York Municipal Money Market Trust Tax-Free Daily Income Trust There may be funds created or terminated after this Prospectus was published. Please consult the inside back cover of a new fund's prospectus for its designations, e.g., Multi-Class Fund or Money Market Fund. Unless otherwise noted, each listed Morgan Stanley Fund is a Multi-Class Fund. A Multi-Class Fund is a mutual fund offering multiple classes of shares. * Single-Class Fund(s) + No-Load (Mutual) Fund Additional information about the Fund's investments is available in the Fund's Annual and Semi-Annual Reports to Shareholders. In the Fund's Annual Report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. The Fund's Statement of Additional Information also provides additional information about the Fund. The Statement of Additional Information is incorporated herein by reference (legally is part of this Prospectus). For a free copy of any of these documents, to request other information about the Fund, or to make shareholder inquiries, please call toll-free (800) 869-NEWS. Free copies of these documents are also available from our Internet site at: WWW.MORGANSTANLEY.COM/FUNDS. You also may obtain information about the Fund by calling your Morgan Stanley Financial Advisor or by visiting our Internet site. Information about the Fund (including the Statement of Additional Information) can be viewed and copied at the Securities and Exchange Commission's (the "SEC") Public Reference Room in Washington, DC. Information about the Reference Room's operations may be obtained by calling the SEC at (202) 551-8090. Reports and other information about the Fund are available on the EDGAR Database on the SEC's Internet site (www.sec.gov). Copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the Public Reference Section of the SEC, Washington, DC 20549-0102. TICKER SYMBOLS: CLASS A: INBAX CLASS B: INBBX - ------------------ ----------------- CLASS C: INBCX CLASS D: INBDX - ------------------ ----------------- (THE FUND'S INVESTMENT COMPANY ACT FILE NO. IS 811-07575) Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. CLF# 38421PRO-00 (Copyright) 2006 Morgan Stanley [GRAPHIC OMITTED] MORGAN STANLEY [GRAPHIC OMITTED] MORGAN STANLEY FUNDS Morgan Stanley Income Builder Fund 38421 01/06 [MORGAN STANLEY LOGO] Prospectus January 27, 2006
Welcome, Shareholder:
In this report, you’ll learn about how your investment in Morgan Stanley Income Builder Fund performed during the annual period. We will provide an overview of the market conditions, and discuss some of the factors that affected performance during the reporting period. In addition, this report includes the Fund’s financial statements and a list of Fund investments.
![]() | This material must be preceded or accompanied by a prospectus for the fund being offered. |
![]() | Market forecasts provided in this report may not necessarily come to pass. There is no assurance that the Fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that market values of securities owned by the Fund will decline and, therefore, the value of the Fund's shares may be less than what you paid for them. Accordingly, you can lose money investing in this Fund. Please see the prospectus for more complete information on investment risks. |
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![]() | Fund Report |
![]() | For the year ended September 30, 2005 |
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Total Return for the 12 Months Ended September 30, 2005
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Class A | ![]() | ![]() | ![]() | Class B | ![]() | ![]() | ![]() | Class C | ![]() | ![]() | ![]() | Class D | ||||||||
13.94% | ![]() | ![]() | ![]() | 13.09 | % | ![]() | ![]() | ![]() | 13.11 | % | ![]() | ![]() | ![]() | 14.20 | % | |||||
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Russell 1000® Value Index1 | ![]() | ![]() | ![]() | Lehman Brothers U.S. Government/ Credit Index2 | ![]() | ![]() | ![]() | Lipper Income Funds Index3 | ![]() | ![]() | ![]() | Lipper Equity Income Funds Index4 | ||||||||
16.69% | ![]() | ![]() | ![]() | 2.58 | % | ![]() | ![]() | ![]() | 7.80 | % | ![]() | ![]() | ![]() | 13.52 | % | |||||
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The performance of the Fund's four share classes varies because each has different expenses. The Fund's total returns assume the reinvestment of all distributions but do not reflect the deduction of any applicable sales charges. Such costs would lower performance. See Performance Summary for standardized performance and benchmark information. |
Market Conditions
During the 12-month period, the stock market performed well. Investors had many reasons to be optimistic: The economy progressed at a moderate clip, companies generally met or exceeded their earnings targets, and core inflation remained tame. Increased merger-and-acquisition activity and several high-profile initial public offerings boosted interest in stocks. Despite little relief from high prices at the gas pump, consumers, for the most part, continued to spend.
However, pockets of volatility and poorer sentiment were not uncommon. The market's most significant uncertainties continued to be the high price of crude oil and the rising interest rate environment. Energy prices skyrocketed, driven by tight supply, rising demand (especially from China and India), and geopolitical instability. Hurricanes Katrina and Rita intensified concerns about oil and natural gas production and the impact that rising prices would have on consumer spending. The Federal Open Market Committee (the Fed) continued its series of interest rate increases, disappointing some investors who believed a prolonged monetary tightening policy could potentially stifle the economy's growth.
Within the bond market, the yields of short- and intermediate-term issues rose in response to the Fed's ongoing increases, but the yields of longer-term bonds declined overall. As the yield curve (which charts the difference between the yields of short- and long-term bonds) flattened, investors favored higher yielding, lower rated securities over lower yielding, higher quality issues. Yet, even the higher yielding segments of the bond market trailed the stock market by a wide margin.
Performance Analysis
Morgan Stanley Income Builder Fund underperformed the Russell 1000® Value Index and outperformed the Lehman Brothers U.S. Government/Credit Index and the Lipper Income Funds Index, for the 12 months ended September 30, 2005, assuming no deduction of applicable sales charges. Class A and Class D shares outperformed the Lipper Equity Income Funds Index and Class B and C shares underperformed this Index for the same time period, assuming no deduction of applicable sales charges.
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All sectors represented in the stock portion of the portfolio advanced during the period. The financials sector, the Fund's largest absolute sector weight and largest underweight relative to the Russell 1000® Value Index, was the Fund's best performing group. In particular, diversified financial companies—especially those with capital markets exposure and involvement in fixed-income trading and merger-and-acquisition activity—boosted the fund's return. Interest-rate sensitivity was also an important factor in driving returns in the financials sector. For example, the Fund had limited exposure to the banking sector, which had flagging performance. As the yield curve continued to flatten (thus reducing the difference between short- and long-term rates), investors avoided banks, which profit from the spread. In contrast, insurance stocks are not as interest-rate sensitive. Here, our value-conscious discipline led us to invest with conviction in a number of strong-performing insurance stocks. Healthcare holdings were also notable. Within this sector, the Fund owned mostly pharmaceutical stocks, many of which began to turn around during the period. Positive sentiment surrounding promising new drugs in development, highly anticipated drug launches, and positive legal news helped spur a rally in pharmaceutical shares.
On an absolute basis, no sector in the Fund's stock portfolio produced a negative return. However, relative to the Russell 1000® Value Index, the Fund's return was somewhat dampened by an underweight in energy. While the Fund did maintain some exposure to the energy sector, we believed the risk/reward profiles of many energy stocks were less attractive based on our analysis of long-term company fundamentals. The consumer staples sector was also a drag on relative returns, as the Fund owned names that underperformed those in the Russell 1000® Value Index.
Convertible securities accounted for nearly one quarter of the portfolio at the end of the period. Performance in the convertible portion of the Fund was bolstered by security selection in energy issues, which benefited from high and rising commodity prices. The Fund's returns were also supported by strong performance from its consumer discretionary holdings, specifically in the hotel industry. These contributions were muted, however, by the general downdraft in the convertibles market in the second quarter of 2005.
In addition to stocks and convertible securities, the Fund invested in corporate bonds, which represented about 17 percent of the portfolio at the end of the reporting period. Although these securities provided diversification and income, the allocation tempered the Fund's pace versus the Russell benchmark during the period, as corporate bonds generally underperformed stocks.
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There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. |
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TOP 10 HOLDINGS | ![]() | |||||
Clear Channel Communications, Inc. | ![]() | 3.1 | % | |||
Starwood Hotels & Resorts Worldwide, Inc. | ![]() | 2.9 | ||||
Schering-Plough Corp. | ![]() | 2.2 | ||||
FPL Group, Inc. | ![]() | 2.2 | ||||
Disney (Walt) Co. (The) | ![]() | 2.2 | ||||
Lehman Brothers Holdings Inc. | ![]() | 2.0 | ||||
Toll Corp. | ![]() | 1.9 | ||||
Bayer AG (ADR) (Germany) | ![]() | 1.8 | ||||
Church & Dwight Co., Inc. 144A | ![]() | 1.8 | ||||
Bristol-Myers Squibb Co. | ![]() | 1.6 | ||||
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PORTFOLIO COMPOSITION | ![]() | |||||
Common Stocks | ![]() | 57.6 | % | |||
Corp Notes/Bonds | ![]() | 17.3 | ||||
Convertible Corp Notes/Bonds | ![]() | 14.5 | ||||
Convertible Preferred Stocks | ![]() | 9.0 | ||||
Short-Term Investment | ![]() | 1.6 | ||||
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Data as of September 30, 2005. Subject to change daily. All percentages for top 10 holdings are as a percentage of net assets and all percentages for portfolio composition are as a percentage of total investments. These data are provided for informational purposes only and should not be deemed a recommendation to buy or sell the securities mentioned. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services. |
Investment Strategy
The Fund will normally invest at least 80 percent of its assets in income-producing equity and fixed-income securities, with normally at least 65 percent of its assets invested in income-producing equity securities, including common stock, preferred stock, convertible securities and real estate investment trusts (commonly known as "REITs"). The Fund may invest up to 15 percent of its net assets in REITs. The Fund's "Investment Adviser," Morgan Stanley Investment Advisors Inc., utilizes a value-oriented style in the selection of securities. Investments are normally made primarily in (i) common stocks (including depositary receipts) of large capitalization companies with a record of paying dividends and which, in the opinion of the Investment Adviser, have the potential for maintaining dividends, (ii) preferred stock and (iii) securities convertible into common stocks of small-, mid and large-cap companies – including "synthetic" and "exchangeable" convertibles. The Fund's investments can also include "Rule 144A" securities, which are subject to resale restrictions, and foreign securities.
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For More Information About Portfolio Holdings
Each Morgan Stanley fund provides a complete schedule of portfolio holdings in its semiannual and annual reports within 60 days of the end of the fund's second and fourth fiscal quarters by filing the schedule electronically with the Securities and Exchange Commission (SEC). The semiannual reports are filed on Form N-CSRS and the annual reports are filed on Form N-CSR. Morgan Stanley also delivers the semiannual and annual reports to fund shareholders and makes these reports available on its public Web site, www.morganstanley.com. Each Morgan Stanley fund also files a complete schedule of portfolio holdings with the SEC for the fund's first and third fiscal quarters on Form N-Q. Morgan Stanley does not deliver the reports for the first and third fiscal quarters to shareholders, nor are the reports posted to the Morgan Stanley public Web site. You may, however, obtain the Form N-Q filings (as well as the Form N-CSR and N-CSRS filings) by accessing the SEC's Web site, http://www.sec.gov. You may also review and copy them at the SEC's Public Reference Room in Washington, DC. Information on the operation of the SEC's Public Reference Room may be obtained by calling the SEC at (800) SEC-0330. You can also request copies of these materials, upon payment of a duplicating fee, by electronic request at the SEC's e-mail address (publicinfo@sec.gov) or by writing the Public Reference section of the SEC, Washington, DC 20549-0102.
Proxy Voting Policy and Procedures and Proxy Voting Record
You may obtain a copy of the Fund's Proxy Voting Policy and Procedures without charge, upon request, by calling toll free (800) 869-NEWS or by visiting the Mutual Fund Center on our Web site at www.morganstanley.com. It is also available on the Securities and Exchange Commission's Web site at http://www.sec.gov.
You may obtain information regarding how the Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 by visiting the Mutual Fund Center on our Web site at www.morganstanley.com. This information is also available on the Securities and Exchange Commission's Web site at http://www.sec.gov.
Householding Notice
To reduce printing and mailing costs, the Fund attempts to eliminate duplicate mailings to the same address. The Fund delivers a single copy of certain shareholder documents, including shareholder reports, prospectuses and proxy materials, to investors with the same last name who reside at the same address. Your participation in this program will continue for an unlimited period of time unless you instruct us otherwise. You can request multiple copies of these documents by calling (800) 350-6414, 8:00 a.m. to 8:00 p.m., ET. Once our Customer Service Center has received your instructions, we will begin sending individual copies for each account within 30 days.
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![]() | Performance Summary |
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Performance of $10,000 Investment — Class B
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Average Annual Total Returns — Period Ended September 30, 2005
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![]() | ![]() | ![]() | Class A Shares* (since 07/28/97) | ![]() | ![]() | ![]() | Class B Shares** (since 06/26/96) | ![]() | ![]() | ![]() | Class C Shares† (since 07/28/97) | ![]() | ![]() | ![]() | Class D Shares†† (since 07/28/97) | |||||||||||
Symbol | ![]() | ![]() | ![]() | INBAX | ![]() | ![]() | ![]() | INBBX | ![]() | ![]() | ![]() | INBCX | ![]() | ![]() | ![]() | INBDX | ||||||||||
1 Year | ![]() | ![]() | ![]() | 13.94%5 | ![]() | ![]() | ![]() | 13.09%5 | ![]() | ![]() | ![]() | 13.11%5 | ![]() | ![]() | ![]() | 14.20%5 | ||||||||||
![]() | ![]() | ![]() | 7.96 6 | ![]() | ![]() | ![]() | 8.09 6 | ![]() | ![]() | ![]() | 12.11 6 | ![]() | ![]() | ![]() | — | |||||||||||
5 Years | ![]() | ![]() | ![]() | 6.30 5 | ![]() | ![]() | ![]() | 5.50 5 | ![]() | ![]() | ![]() | 5.49 5 | ![]() | ![]() | ![]() | 6.55 5 | ||||||||||
![]() | ![]() | ![]() | 5.16 6 | ![]() | ![]() | ![]() | 5.17 6 | ![]() | ![]() | ![]() | 5.49 6 | ![]() | ![]() | ![]() | — | |||||||||||
Since Inception | ![]() | ![]() | ![]() | 5.51 5 | ![]() | ![]() | ![]() | 6.85 5 | ![]() | ![]() | ![]() | 4.73 5 | ![]() | ![]() | ![]() | 5.78 5 | ||||||||||
![]() | ![]() | ![]() | 4.82 6 | ![]() | ![]() | ![]() | 6.85 6 | ![]() | ![]() | ![]() | 4.73 6 | ![]() | ![]() | ![]() | — | |||||||||||
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Performance data quoted represents past performance, which is no guarantee of future results and current performance may be lower or higher than the figures shown. For most recent month-end performance figures, please visit www.morganstanley.com or speak with your Financial Advisor. Investment returns and principal value will fluctuate and fund shares, when redeemed, may be worth more or less than their original cost. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Performance for Class A, Class B, Class C, and Class D shares will vary due to differences in sales charges and expenses.
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* | The maximum front-end sales charge for Class A is 5.25%. |
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** | The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%. The CDSC declines to 0% after six years. |
![]() | ![]() | ![]() |
† | The maximum contingent deferred sales charge for Class C is 1% for shares redeemed within one year of purchase. |
![]() | ![]() | ![]() |
†† | Class D has no sales charge. |
![]() | ![]() | ![]() |
(1) | The Russell 1000® Value Index measures the performance of those companies in the Russell 1000® Index with lower price-to-book ratios and lower forecasted growth values. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. |
![]() | ![]() | ![]() |
(2) | The Lehman Brothers U.S. Government/Credit Index tracks the performance of government and corporate obligations, including U.S. government agency and Treasury securities and corporate and Yankee bonds. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. |
![]() | ![]() | ![]() |
(3) | The Lipper Income Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Income Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. The Fund is in the Lipper Income Funds classification as of September 30, 2005. |
![]() | ![]() | ![]() |
(4) | The Lipper Equity Income Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Equity Income Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. |
![]() | ![]() | ![]() |
(5) | Figure shown assumes reinvestment of all distributions and does not reflect the deduction of any sales charges. |
![]() | ![]() | ![]() |
(6) | Figure shown assumes reinvestment of all distributions and the deduction of the maximum applicable sales charge. See the Fund's current prospectus for complete details on fees and sales charges. |
![]() | ![]() | ![]() |
‡ | Ending value assuming a complete redemption on September 30, 2005. |
7
![]() | ![]() |
![]() | ![]() |
![]() | Expense Example |
![]() | |
![]() | ![]() |
As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments and redemption fees; and (2) ongoing costs, including advisory fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 04/01/05 – 09/30/05.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled ‘‘Expenses Paid During Period’’ to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
![]() | Beginning Account Value | ![]() | Ending Account Value | ![]() | Expenses Paid During Period* | |||||||||
![]() | 04/01/05 | ![]() | 09/30/05 | ![]() | 04/01/05 – 09/30/05 | |||||||||
Class A | ![]() | ![]() | ![]() | |||||||||||
Actual (6.38% return) | ![]() | $ | 1,000.00 | ![]() | $ | 1,063.80 | ![]() | $ | 6.67 | |||||
Hypothetical (5% annual return before expenses) | ![]() | $ | 1,000.00 | ![]() | $ | 1,018.60 | ![]() | $ | 6.53 | |||||
Class B | ![]() | ![]() | ![]() | |||||||||||
Actual (6.00% return) | ![]() | $ | 1,000.00 | ![]() | $ | 1,060.00 | ![]() | $ | 10.53 | |||||
Hypothetical (5% annual return before expenses) | ![]() | $ | 1,000.00 | ![]() | $ | 1,014.84 | ![]() | $ | 10.30 | |||||
Class C | ![]() | ![]() | ![]() | |||||||||||
Actual (5.98% return) | ![]() | $ | 1,000.00 | ![]() | $ | 1,059.80 | ![]() | $ | 10.53 | |||||
Hypothetical (5% annual return before expenses) | ![]() | $ | 1,000.00 | ![]() | $ | 1,014.84 | ![]() | $ | 10.30 | |||||
Class D | ![]() | ![]() | ![]() | |||||||||||
Actual (6.50% return) | ![]() | $ | 1,000.00 | ![]() | $ | 1,065.00 | ![]() | $ | 5.38 | |||||
Hypothetical (5% annual return before expenses) | ![]() | $ | 1,000.00 | ![]() | $ | 1,019.85 | ![]() | $ | 5.27 | |||||
![]() |
![]() |
![]() | * | Expenses are equal to the Fund's annualized expense ratio of 1.29%, 2.04%, 2.04% and 1.04% for Class A, Class B, Class C and Class D shares, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). |
8
Nature, Extent and Quality of Services
The Board reviewed and considered the nature and extent of the investment advisory services provided by the Investment Adviser under the Advisory Agreement, including portfolio management, investment research and equity and fixed income securities trading. The Board also reviewed and considered the nature and extent of the non-advisory, administrative services provided by the Fund's Administrator under the Administration Agreement, including accounting, clerical, bookkeeping, compliance, business management and planning, and the provision of supplies, office space and utilities. (The Investment Adviser and the Administrator together are referred to as the "Adviser" and the Advisory and Administration Agreements together are referred to as the "Management Agreement.") The Board also compared the nature of the services provided by the Adviser with similar services provided by non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers, the senior administrative managers and other key personnel of the Adviser who provide the administrative and investment advisory services to the Fund. The Board determined that the Adviser's portfolio managers and key personnel are well qualified by education and/or training and experience to perform the services in an efficient and professional manner. The Board concluded that the nature and extent of the advisory and administrative services provided were necessary and appropriate for the conduct of the business and investment activities of the Fund. The Board also concluded that the overall quality of the advisory and administrative services was satisfactory.
Performance Relative to Comparable Funds Managed by Other Advisers
The Board reviewed the Fund's performance for the one-, three- and five-year periods ended November 30, 2004, as shown in reports provided by Lipper (the "Lipper Reports"), compared to the performance of comparable funds selected by Lipper (the "performance peer group"), and noted that the Fund's performance was lower than its performance peer group average for the one-year period but better for the three- and five-year periods. The Board concluded that the Fund's overall performance was competitive with its performance peer group.
Fees Relative to Other Funds Managed by the Adviser with Comparable Investment Strategies
The Board reviewed the advisory and administrative fees (together, the "management fee") paid by the Fund under the Management Agreement. The Board noted that the rate was comparable to the management fee rates charged by the Adviser to any other funds it manages with investment strategies comparable to those of the Fund.
Fees and Expenses Relative to Comparable Funds Managed by Other Advisers
The Board reviewed the management fee rate and the total expense ratio of the Fund. The Board noted that: (i) the Fund's management fee rate was lower than the average management fee rate for funds, selected by Lipper (the "expense peer group"), managed by other advisers with investment strategies comparable to those of the Fund, as shown in the Lipper Report for the Fund; and (ii) the Fund's total expense ratio was also lower than the average total expense ratio of the funds included in the Fund's expense peer group. The Board concluded that the Fund's management fee and total expense ratio were competitive with those of the Fund's expense peer group.
Breakpoints and Economies of Scale
The Board reviewed the structure of the Fund's management fee schedule under the Management Agreement and noted that it includes a breakpoint. The Board also reviewed the level of the Fund's management fee and noted
9
that the fee, as a percentage of the Fund's net assets, would decrease as net assets increase because the management fee includes a breakpoint. The Board concluded that the Fund's management fee would reflect economies of scale as assets increase.
Profitability of Adviser and Affiliates
The Board considered and reviewed information concerning the costs incurred and profits realized by the Adviser and its affiliates during the last two years from their relationship with the Fund and the Morgan Stanley Fund Complex and reviewed with the Controller of the Adviser the cost allocation methodology used to determine the Adviser's profitability. Based on their review of the information they received, the Board concluded that the profits earned by the Adviser and its affiliates were not excessive in light of the advisory, administrative and other services provided to the Fund.
Fall-Out Benefits
The Board considered so-called "fall-out benefits" derived by the Adviser and its affiliates from their relationship with the Fund and the Fund Complex, such as "float" benefits derived from handling of checks for purchases and redemptions of Fund shares through a broker-dealer affiliate of the Adviser and "soft dollar" benefits (discussed in the next section). The Board also considered that a broker-dealer affiliate of the Adviser receives from the Fund 12b-1 fees for distribution and shareholder services. The Board also considered that an affiliate of the Adviser, through a joint venture, receives revenue in connection with trading done on behalf of the Fund through an electronic trading system network ("ECN"). The Board concluded that the float benefits and the above-referenced ECN-related revenue were relatively small and that the 12b-1 fees were competitive with those of other broker-dealer affiliates of investment advisers of mutual funds.
Soft Dollar Benefits
The Board considered whether the Adviser realizes any benefits as a result of brokerage transactions executed through "soft dollar" arrangements. Under such arrangements, brokerage commissions paid by the Fund and/or other funds managed by the Adviser would be used to pay for research that a securities broker obtains from third parties, or to pay for both research and execution services from securities brokers who effect transactions for the Fund. The Adviser informed the Board that it does not use Fund commissions to pay for third party research. It does use commissions to pay for research which is bundled with execution services. The Board recognized that the receipt of such research from brokers may reduce the Adviser's costs but concluded that the receipt of such research strengthens the investment management resources of the Adviser, which may ultimately benefit the Fund and other funds in the Fund Complex.
Adviser Financially Sound and Financially Capable of Meeting the Fund's Needs
The Board considered whether the Adviser is financially sound and has the resources necessary to perform its obligations under the Management Agreement. The Board noted that the Adviser's operations remain profitable, although increased expenses in recent years have reduced the Adviser's profitability. The Board concluded that the Adviser has the financial resources necessary to fulfill its obligations under the Management Agreement.
Historical Relationship Between the Fund and the Adviser
The Board also reviewed and considered the historical relationship between the Fund and the Adviser, including the organizational structure of the Adviser, the policies and procedures formulated and adopted by the Adviser for
10
managing the Fund's operations and the Board's confidence in the competence and integrity of the senior managers and key personnel of the Adviser. The Board concluded that it is beneficial for the Fund to continue its relationship with the Adviser.
Other Factors and Current Trends
The Board considered the controls and procedures adopted and implemented by the Adviser and monitored by the Fund's Chief Compliance Officer and concluded that the conduct of business by the Adviser indicates a good faith effort on its part to adhere to high ethical standards in the conduct of the Fund's business.
General Conclusion
After considering and weighing all of the above factors, the Board concluded it would be in the best interest of the Fund and its shareholders to approve renewal of the Management Agreement for another year.
11
Morgan Stanley Income Builder Fund
Portfolio of Investments September 30, 2005
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | |
NUMBER OF SHARES | ![]() | ![]() | VALUE | ||||||||
![]() | Common Stocks (57.3%) | ![]() | |||||||||
![]() | Aerospace & Defense (1.2%) | ![]() | |||||||||
17,370 | ![]() | Northrop Grumman Corp. | ![]() | $ | 944,060 | ||||||
23,770 | ![]() | Raytheon Co. | ![]() | 903,735 | |||||||
![]() | ![]() | 1,847,795 | |||||||||
![]() | Beverages: Alcoholic (0.4%) | ![]() | |||||||||
11,750 | ![]() | Diageo PLC (ADR) (United Kingdom) | ![]() | 681,617 | |||||||
![]() | Beverages: Non-Alcoholic (0.9%) | ![]() | |||||||||
32,500 | ![]() | Coca-Cola Co. (The) | ![]() | 1,403,675 | |||||||
![]() | Biotechnology (0.7%) | ![]() | |||||||||
22,900 | ![]() | Chiron Corp.* | ![]() | 998,898 | |||||||
![]() | Broadcasting (1.2%) | ![]() | |||||||||
53,150 | ![]() | Clear Channel Communications, Inc. | ![]() | 1,748,103 | |||||||
![]() | Casino/Gaming (0.0%) | ![]() | |||||||||
4,685 | ![]() | Fitzgeralds Gaming Corp.† (a) * | ![]() | 0 | |||||||
![]() | Chemicals: Major Diversified (2.5%) | ![]() | |||||||||
74,680 | ![]() | Bayer AG (ADR) (Germany) | ![]() | 2,748,224 | |||||||
19,160 | ![]() | Dow Chemical Co. (The) | ![]() | 798,397 | |||||||
7,618 | ![]() | Lanxess AG (Germany)* | ![]() | 227,071 | |||||||
![]() | ![]() | 3,773,692 | |||||||||
![]() | Computer Processing Hardware (0.9%) | ![]() | |||||||||
47,200 | ![]() | Hewlett-Packard Co. | ![]() | 1,378,240 | |||||||
![]() | Department Stores (0.5%) | ![]() | |||||||||
15,550 | ![]() | Kohl's Corp.* | ![]() | 780,299 | |||||||
![]() | Discount Stores (1.1%) | ![]() | |||||||||
7,890 | ![]() | Target Corp. | ![]() | 409,728 | |||||||
28,050 | ![]() | Wal-Mart Stores, Inc. | ![]() | 1,229,151 | |||||||
![]() | ![]() | 1,638,879 | |||||||||
![]() | Electric Utilities (2.3%) | ![]() | |||||||||
24,900 | ![]() | American Electric Power Co., Inc. | ![]() | 988,530 | |||||||
13,040 | ![]() | Entergy Corp. | ![]() | 969,133 | |||||||
9,245 | ![]() | Exelon Corp. | ![]() | 494,053 | |||||||
21,460 | ![]() | FirstEnergy Corp. | ![]() | 1,118,495 | |||||||
![]() | ![]() | 3,570,211 | |||||||||
![]() |
See Notes to Financial Statements
12
Morgan Stanley Income Builder Fund
Portfolio of Investments September 30, 2005 continued
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
NUMBER OF SHARES | ![]() | ![]() | VALUE | |||||||
![]() | Finance/Rental/Leasing (1.1%) | ![]() | ||||||||
24,610 | ![]() | Freddie Mac | ![]() | $ | 1,389,481 | |||||
10,800 | ![]() | MBNA Corp. | ![]() | 266,112 | ||||||
![]() | ![]() | 1,655,593 | ||||||||
![]() | Financial Conglomerates (4.0%) | ![]() | ||||||||
45,793 | ![]() | Citigroup, Inc. | ![]() | 2,084,497 | ||||||
72,032 | ![]() | JPMorgan Chase & Co. | ![]() | 2,444,046 | ||||||
12,270 | ![]() | Prudential Financial, Inc. | ![]() | 828,961 | ||||||
16,500 | ![]() | State Street Corp. | ![]() | 807,180 | ||||||
![]() | ![]() | 6,164,684 | ||||||||
![]() | Food: Major Diversified (1.4%) | ![]() | ||||||||
30,150 | ![]() | Unilever N.V. (NY Registered Shares) (Netherlands) | ![]() | 2,154,218 | ||||||
![]() | Food: Specialty/Candy (0.6%) | ![]() | ||||||||
21,600 | ![]() | Cadbury Schweppes PLC (ADR) (United Kingdom) | ![]() | 879,768 | ||||||
![]() | Household/Personal Care (0.3%) | ![]() | ||||||||
8,350 | ![]() | Procter & Gamble Co. (The) | ![]() | 496,491 | ||||||
![]() | Industrial Conglomerates (2.6%) | ![]() | ||||||||
57,460 | ![]() | General Electric Co. | ![]() | 1,934,678 | ||||||
18,076 | ![]() | Ingersoll-Rand Co. Ltd. (Class A) (Bermuda) | ![]() | 691,045 | ||||||
16,600 | ![]() | Siemens AG (ADR) (Germany) | ![]() | 1,283,678 | ||||||
![]() | ![]() | 3,909,401 | ||||||||
![]() | Insurance Brokers/Services (0.2%) | ![]() | ||||||||
9,400 | ![]() | Marsh & McLennan Companies, Inc. | ![]() | 285,666 | ||||||
![]() | Integrated Oil (3.9%) | ![]() | ||||||||
22,590 | ![]() | BP PLC (ADR) (United Kingdom) | ![]() | 1,600,502 | ||||||
25,676 | ![]() | ConocoPhillips | ![]() | 1,795,009 | ||||||
16,530 | ![]() | Exxon Mobil Corp. | ![]() | 1,050,316 | ||||||
23,400 | ![]() | Royal Dutch Shell PLC (ADR) (Class A) (Netherlands) | ![]() | 1,535,976 | ||||||
![]() | ![]() | 5,981,803 | ||||||||
![]() | Investment Banks/Brokers (3.5%) | ![]() | ||||||||
4,550 | ![]() | Goldman Sachs Group Inc. (The) | ![]() | 553,189 | ||||||
12,450 | ![]() | Lehman Brothers Holdings Inc. | ![]() | 1,450,176 | ||||||
33,600 | ![]() | Merrill Lynch & Co., Inc. | ![]() | 2,061,360 | ||||||
83,300 | ![]() | Schwab (Charles) Corp. (The) | ![]() | 1,202,019 | ||||||
![]() | ![]() | 5,266,744 | ||||||||
![]() |
See Notes to Financial Statements
13
Morgan Stanley Income Builder Fund
Portfolio of Investments September 30, 2005 continued
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
NUMBER OF SHARES | ![]() | ![]() | VALUE | |||||||
![]() | Life/Health Insurance (0.2%) | ![]() | ||||||||
23,400 | ![]() | Aegon N.V. (ARS) (Netherlands) | ![]() | $ | 348,660 | |||||
![]() | ![]() | |||||||||
![]() | Major Banks (1.3%) | ![]() | ||||||||
27,680 | ![]() | Bank of America Corp. | ![]() | 1,165,328 | ||||||
15,290 | ![]() | PNC Financial Services Group | ![]() | 887,126 | ||||||
![]() | ![]() | 2,052,454 | ||||||||
![]() | Major Telecommunications (2.5%) | ![]() | ||||||||
28,600 | ![]() | France Telecom S.A. (ADR) (France) | ![]() | 822,250 | ||||||
65,726 | ![]() | Sprint Nextel Corp. | ![]() | 1,562,964 | ||||||
43,010 | ![]() | Verizon Communications Inc. | ![]() | 1,405,997 | ||||||
![]() | ![]() | 3,791,211 | ||||||||
![]() | Managed Health Care (1.0%) | ![]() | ||||||||
13,500 | ![]() | CIGNA Corp. | ![]() | 1,591,110 | ||||||
![]() | Media Conglomerates (3.0%) | ![]() | ||||||||
55,420 | ![]() | Disney (Walt) Co. (The) | ![]() | 1,337,285 | ||||||
124,820 | ![]() | Time Warner, Inc. | ![]() | 2,260,490 | ||||||
30,000 | ![]() | Viacom Inc. (Class B) (Non-Voting) | ![]() | 990,300 | ||||||
![]() | ![]() | 4,588,075 | ||||||||
![]() | Medical Specialties (1.0%) | ![]() | ||||||||
13,800 | ![]() | Applera Corp. – Applied Biosystems Group | ![]() | 320,712 | ||||||
13,290 | ![]() | Bausch & Lomb, Inc. | ![]() | 1,072,237 | ||||||
7,500 | ![]() | Boston Scientific Corp.* | ![]() | 175,275 | ||||||
![]() | ![]() | 1,568,224 | ||||||||
![]() | Motor Vehicles (0.6%) | ![]() | ||||||||
33,400 | ![]() | Honda Motor Co., Ltd. (ADR) (Japan) | ![]() | 948,560 | ||||||
![]() | Multi-Line Insurance (0.5%) | ![]() | ||||||||
9,290 | ![]() | Hartford Financial Services Group, Inc. (The) | ![]() | 716,909 | ||||||
![]() | Oil & Gas Pipelines (0.9%) | ![]() | ||||||||
55,000 | ![]() | Williams Companies, Inc. (The) | ![]() | 1,377,750 | ||||||
![]() | Oil Refining/Marketing (0.9%) | ![]() | ||||||||
11,650 | ![]() | Valero Energy Corp. | ![]() | 1,317,149 | ||||||
![]() | Oilfield Services/Equipment (1.2%) | ![]() | ||||||||
20,830 | ![]() | Schlumberger Ltd. (Netherlands Antilles) | ![]() | 1,757,635 | ||||||
![]() |
See Notes to Financial Statements
14
Morgan Stanley Income Builder Fund
Portfolio of Investments September 30, 2005 continued
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
NUMBER OF SHARES | ![]() | ![]() | VALUE | |||||||
![]() | Packaged Software (1.0%) | ![]() | ||||||||
64,100 | ![]() | Symantec Corp.* | ![]() | $ | 1,452,506 | |||||
![]() | Pharmaceuticals: Major (7.4%) | ![]() | ||||||||
103,890 | ![]() | Bristol-Myers Squibb Co. | ![]() | 2,499,593 | ||||||
16,200 | ![]() | GlaxoSmithKline PLC (ADR) (United Kingdom) | ![]() | 830,736 | ||||||
25,200 | ![]() | Lilly (Eli) & Co. | ![]() | 1,348,704 | ||||||
30,220 | ![]() | Roche Holdings Ltd. (ADR) (Switzerland) | ![]() | 2,089,713 | ||||||
27,060 | ![]() | Sanofi-Aventis (ADR) (France) | ![]() | 1,124,343 | ||||||
94,470 | ![]() | Schering-Plough Corp. | ![]() | 1,988,594 | ||||||
29,340 | ![]() | Wyeth | ![]() | 1,357,562 | ||||||
![]() | ![]() | 11,239,245 | ||||||||
![]() | Precious Metals (0.9%) | ![]() | ||||||||
29,000 | ![]() | Newmont Mining Corp. | ![]() | 1,367,930 | ||||||
![]() | Property – Casualty Insurers (2.0%) | ![]() | ||||||||
17,310 | ![]() | Chubb Corp. (The) | ![]() | 1,550,111 | ||||||
33,470 | ![]() | St. Paul Travelers Companies, Inc. (The) | ![]() | 1,501,799 | ||||||
![]() | ![]() | 3,051,910 | ||||||||
![]() | Restaurants (0.4%) | ![]() | ||||||||
15,840 | ![]() | McDonald's Corp. | ![]() | 530,482 | ||||||
![]() | Semiconductors (1.4%) | ![]() | ||||||||
47,250 | ![]() | Intel Corp. | ![]() | 1,164,713 | ||||||
75,300 | ![]() | Micron Technology, Inc.* | ![]() | 1,001,490 | ||||||
![]() | ![]() | 2,166,203 | ||||||||
![]() | Specialty Stores (0.1%) | ![]() | ||||||||
6,150 | ![]() | Office Depot, Inc.* | ![]() | 182,655 | ||||||
![]() | Telecommunication Equipment (0.9%) | ![]() | ||||||||
61,017 | ![]() | Motorola, Inc. | ![]() | 1,347,866 | ||||||
![]() | Tobacco (0.8%) | ![]() | ||||||||
16,940 | ![]() | Altria Group, Inc. | ![]() | 1,248,647 | ||||||
![]() | Total Common Stocks (Cost $72,670,947) | ![]() | 87,260,958 | |||||||
![]() |
See Notes to Financial Statements
15
Morgan Stanley Income Builder Fund
Portfolio of Investments September 30, 2005 continued
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
PRINCIPAL AMOUNT IN THOUSANDS | ![]() | ![]() | COUPON RATE | ![]() | MATURITY DATE | ![]() | VALUE | |||||||||||
![]() | Convertible Bonds (14.5%) | ![]() | ![]() | ![]() | ||||||||||||||
![]() | Airlines (1.5%) | ![]() | ![]() | ![]() | ||||||||||||||
$ | 2,800 | ![]() | Continental Airlines Inc. | ![]() | 4.50 | % | ![]() | 02/01/07 | ![]() | $ | 2,296,000 | |||||||
![]() | Biotechnology (1.4%) | ![]() | ![]() | ![]() | ||||||||||||||
1,800 | ![]() | Invitrogen Inc. | ![]() | 2.00 | ![]() | 08/01/23 | ![]() | 2,184,750 | ||||||||||
![]() | Cable/Satellite TV (1.3%) | ![]() | ![]() | ![]() | ||||||||||||||
2,000 | ![]() | Echostar Communications Corp. | ![]() | 5.75 | ![]() | 05/15/08 | ![]() | 1,990,000 | ||||||||||
![]() | Electric Utilities (0.6%) | ![]() | ![]() | ![]() | ||||||||||||||
297 | ![]() | PG&E Corp. | ![]() | 9.50 | ![]() | 06/30/10 | ![]() | 878,006 | ||||||||||
![]() | Electronic Components (0.6%) | ![]() | ![]() | ![]() | ||||||||||||||
1,000 | ![]() | SCI Systems, Inc. | ![]() | 3.00 | ![]() | 03/15/07 | ![]() | 967,500 | ||||||||||
![]() | Electronic Production Equipment (1.2%) | ![]() | ![]() | ![]() | ||||||||||||||
1,900 | ![]() | Veeco Instruments, Inc. | ![]() | 4.125 | ![]() | 12/21/08 | ![]() | 1,786,000 | ||||||||||
![]() | Hotels/Resorts/Cruiselines (1.5%) | ![]() | ![]() | ![]() | ||||||||||||||
2,000 | ![]() | Hilton Hotels Corp. – 144A** | ![]() | 3.375 | ![]() | 04/15/23 | ![]() | 2,292,500 | ||||||||||
![]() | Household/Personal Care (1.8%) | ![]() | ![]() | ![]() | ||||||||||||||
2,000 | ![]() | Church & Dwight Co., Inc. – 144A** | ![]() | 5.25 | ![]() | 08/15/33 | ![]() | 2,670,000 | ||||||||||
![]() | Internet Retail (0.8%) | ![]() | ![]() | ![]() | ||||||||||||||
1,214 | ![]() | Amazon.com, Inc. | ![]() | 4.75 | ![]() | 02/01/09 | ![]() | 1,192,755 | ||||||||||
![]() | Investment Banks/Brokers (0.5%) | ![]() | ![]() | ![]() | ||||||||||||||
741 | ![]() | E*Trade Financial Corp. | ![]() | 6.00 | ![]() | 02/01/07 | ![]() | 753,041 | ||||||||||
![]() | Media Conglomerates (1.3%) | ![]() | ![]() | ![]() | ||||||||||||||
1,920 | ![]() | Disney (Walt) Co. (The) | ![]() | 2.125 | ![]() | 04/15/23 | ![]() | 1,960,800 | ||||||||||
![]() | Semiconductors (1.0%) | ![]() | ![]() | ![]() | ||||||||||||||
1,550 | ![]() | Skyworks Solutions, Inc. | ![]() | 4.75 | ![]() | 11/15/07 | ![]() | 1,567,438 | ||||||||||
![]() | Telecommunication Equipment (1.0%) | ![]() | ![]() | ![]() | ||||||||||||||
1,575 | ![]() | Terayon Communication Systems, Inc. | ![]() | 5.00 | ![]() | 08/01/07 | ![]() | 1,517,906 | ||||||||||
![]() | Total Convertible Bonds (Cost $21,668,676) | ![]() | 22,056,696 | |||||||||||||||
![]() | Corporate Bonds (17.2%) | ![]() | ![]() | ![]() | ||||||||||||||
![]() | Agricultural Commodities/Milling (1.6%) | ![]() | ![]() | ![]() | ||||||||||||||
2,250 | ![]() | Corn Products International Inc. | ![]() | 8.25 | ![]() | 07/15/07 | ![]() | 2,379,521 | ||||||||||
![]() | Apparel/Footwear (1.5%) | ![]() | ![]() | ![]() | ||||||||||||||
2,250 | ![]() | Tommy Hilfiger USA Inc. | ![]() | 6.85 | ![]() | 06/01/08 | ![]() | 2,272,500 | ||||||||||
![]() | Broadcasting (2.0%) | ![]() | ![]() | ![]() | ||||||||||||||
2,800 | ![]() | Clear Channel Communications, Inc. | ![]() | 8.00 | ![]() | 11/01/08 | ![]() | 3,017,006 | ||||||||||
![]() |
See Notes to Financial Statements
16
Morgan Stanley Income Builder Fund
Portfolio of Investments September 30, 2005 continued
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
PRINCIPAL AMOUNT IN THOUSANDS | ![]() | ![]() | COUPON RATE | ![]() | MATURITY DATE | ![]() | VALUE | |||||||||||
![]() | Cable/Satellite TV (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
$ | 125 | ![]() | CSC Holdings, Inc. | ![]() | 7.625 | % | ![]() | 07/15/18 | ![]() | $ | 117,500 | |||||||
![]() | Containers/Packaging (0.2%) | ![]() | ![]() | ![]() | ||||||||||||||
225 | ![]() | Ball Corp. | ![]() | 7.75 | ![]() | 08/01/06 | ![]() | 230,062 | ||||||||||
![]() | Electric Utilities (0.3%) | ![]() | ![]() | ![]() | ||||||||||||||
100 | ![]() | CMS Energy Corp. | ![]() | 7.50 | ![]() | 01/15/09 | ![]() | 105,250 | ||||||||||
50 | ![]() | MidAmerican Energy Holdings | ![]() | 7.63 | ![]() | 10/15/07 | ![]() | 52,742 | ||||||||||
113 | ![]() | Niagara Mohawk Power (Series F) | ![]() | 7.625 | ![]() | 10/01/05 | ![]() | 113,415 | ||||||||||
175 | ![]() | Niagara Mohawk Power (Series G) | ![]() | 7.75 | ![]() | 10/01/08 | ![]() | 189,447 | ||||||||||
![]() | ![]() | ![]() | ![]() | 460,854 | ||||||||||||||
![]() | Home Building (2.0%) | ![]() | ![]() | ![]() | ||||||||||||||
75 | ![]() | D.R. Horton Inc. | ![]() | 8.00 | ![]() | 02/01/09 | ![]() | 80,803 | ||||||||||
2,800 | ![]() | Toll Corp. | ![]() | 8.25 | ![]() | 02/01/11 | ![]() | 2,943,500 | ||||||||||
![]() | ![]() | ![]() | ![]() | 3,024,303 | ||||||||||||||
![]() | Hotels/Resorts/Cruiselines (2.9%) | ![]() | ![]() | ![]() | ||||||||||||||
400 | ![]() | Starwood Hotels & Resorts Worldwide, Inc. | ![]() | 7.375 | ![]() | 11/15/15 | ![]() | 436,000 | ||||||||||
3,700 | ![]() | Starwood Hotels & Resorts Worldwide, Inc. | ![]() | 7.875 | ![]() | 05/01/12 | ![]() | 4,051,500 | ||||||||||
![]() | ![]() | ![]() | ![]() | 4,487,500 | ||||||||||||||
![]() | Managed Health Care (1.4%) | ![]() | ![]() | ![]() | ||||||||||||||
2,000 | ![]() | Magellan Health Services, Inc. (Series A) | ![]() | 9.375 | ![]() | 11/15/08 | ![]() | 2,112,500 | ||||||||||
![]() | Miscellaneous Manufacturing (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
200 | ![]() | Ametek Inc. | ![]() | 7.20 | ![]() | 07/15/08 | ![]() | 210,680 | ||||||||||
![]() | Other Consumer Specialties (0.1%) | ![]() | ![]() | ![]() | ||||||||||||||
79 | ![]() | Boyds Collection Ltd. (Series B) (a) | ![]() | 9.00 | ![]() | 05/15/08 | ![]() | 75,445 | ||||||||||
![]() | Other Metals/Minerals (1.2%) | ![]() | ![]() | ![]() | ||||||||||||||
1,800 | ![]() | USEC Inc. | ![]() | 6.625 | ![]() | 01/20/06 | ![]() | 1,800,000 | ||||||||||
![]() | Publishing: Books/Magazines (0.0%) | ![]() | ![]() | ![]() | ||||||||||||||
32 | ![]() | Primedia, Inc. | ![]() | 7.625 | ![]() | 04/01/08 | ![]() | 32,400 | ||||||||||
![]() | Publishing: Newspapers (1.3%) | ![]() | ![]() | ![]() | ||||||||||||||
2,000 | ![]() | Media General Inc. | ![]() | 6.95 | ![]() | 09/01/06 | ![]() | 2,028,208 | ||||||||||
![]() | Specialty Stores (1.0%) | ![]() | ![]() | ![]() | ||||||||||||||
1,564 | ![]() | National Vision Inc. | ![]() | 12.00 | ![]() | 03/30/09 | ![]() | 1,565,570 | ||||||||||
![]() | Trucks/Construction/Farm Machinery (1.5%) | ![]() | ![]() | ![]() | ||||||||||||||
2,300 | ![]() | Navistar International (Series B) | ![]() | 9.375 | ![]() | 06/01/06 | ![]() | 2,357,500 | ||||||||||
![]() | Total Corporate Bonds (Cost $25,593,027) | ![]() | 26,171,549 | |||||||||||||||
![]() |
See Notes to Financial Statements
17
Morgan Stanley Income Builder Fund
Portfolio of Investments September 30, 2005 continued
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
NUMBER OF SHARES | ![]() | ![]() | VALUE | |||||||
![]() | Convertible Preferred Stocks (8.9%) | ![]() | ||||||||
![]() | Electric Utilities (2.2%) | ![]() | ||||||||
47,000 | ![]() | FPL Group, Inc. $4.00 | ![]() | $ | 3,344,050 | |||||
![]() | Financial Conglomerates (1.2%) | ![]() | ||||||||
57,000 | ![]() | Citigroup Funding Inc.(Series GNW) | ![]() | 1,775,550 | ||||||
![]() | Investment Banks/Brokers (1.0%) | ![]() | ||||||||
62,000 | ![]() | Lehman Brothers Holdings Inc. (Series GIS) $1.5625 | ![]() | 1,615,720 | ||||||
![]() | Life/Health Insurance (1.3%) | ![]() | ||||||||
72,000 | ![]() | MetLife, Inc. (Series B) $1.5938 | ![]() | 2,021,040 | ||||||
![]() | Pharmaceuticals: Major (0.9%) | ![]() | ||||||||
25,500 | ![]() | Schering-Plough Corp. $3.00 | ![]() | 1,382,865 | ||||||
![]() | Property – Casualty Insurers (1.1%) | ![]() | ||||||||
70,000 | ![]() | Travelers Property Casualty Corp. $1.125 | ![]() | 1,684,200 | ||||||
![]() | Telecommunication Equipment (1.2%) | ![]() | ||||||||
1,800 | ![]() | Lucent Technologies Capital Trust I $77.50 | ![]() | 1,822,500 | ||||||
![]() | Total Convertible Preferred Stocks (Cost $12,297,475) | ![]() | 13,645,925 | |||||||
![]() |
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
PRINCIPAL AMOUNT IN THOUSANDS | ![]() | ![]() | COUPON RATE | ![]() | MATURITY DATE | |||||||||||||
![]() | Short-Term Investment (1.6%) | ![]() | ![]() | |||||||||||||||
![]() | Repurchase Agreement | ![]() | ![]() | |||||||||||||||
$ | 2,421 | ![]() | Joint repurchase agreement account (dated 09/30/05; proceeds $2,421,772) (b) (Cost $2,421,000) | ![]() | 3.825 | % | ![]() | 10/03/05 | ![]() | 2,421,000 | ||||||||
![]() | Total Investments (Cost $134,651,125) (c) | ![]() | 99.5 | % | ![]() | 151,556,128 | ||||||||||||
![]() | Other Assets in Excess of Liabilities | ![]() | 0.5 | ![]() | 755,113 | |||||||||||||
![]() | Net Assets | ![]() | 100.0 | % | ![]() | $ | 152,311,241 | |||||||||||
![]() |
![]() |
![]() | ADR | American Depositary Receipt. |
![]() | ARS | American Registered Shares. |
![]() | * | Non-income producing security. |
![]() | ** | Resale is restricted to qualified institutional investors. |
![]() | † | Resale is restricted; acquired 12/31/95 at a cost basis of $21,129. |
![]() | (a) | Securities with total market value equal to $75,445 have been valued at their fair value as determined in good faith under procedures established by and under general supervision of the Fund's Trustees. |
![]() | (b) | Collateralized by federal agency and U.S. Treasury obligations. |
![]() | (c) | The aggregate cost for federal income tax purposes is $135,655,764. The aggregate gross unrealized appreciation is $21,635,999 and the aggregate gross unrealized depreciation is $5,735,635, resulting in net unrealized appreciation of $15,900,364. |
See Notes to Financial Statements
18
Morgan Stanley Income Builder Fund
Summary of Investments September 30, 2005
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
INDUSTRY | ![]() | VALUE | ![]() | PERCENT OF NET ASSETS | ||||||
Pharmaceuticals: Major | ![]() | $ | 12,622,110 | ![]() | 8.3 | % | ||||
Electric Utilities | ![]() | 8,253,121 | ![]() | 5.4 | ||||||
Financial Conglomerates | ![]() | 7,940,234 | ![]() | 5.2 | ||||||
Investment Banks/Brokers | ![]() | 7,635,505 | ![]() | 5.0 | ||||||
Hotels/Resorts/Cruiselines | ![]() | 6,780,000 | ![]() | 4.5 | ||||||
Media Conglomerates | ![]() | 6,548,875 | ![]() | 4.3 | ||||||
Integrated Oil | ![]() | 5,981,803 | ![]() | 3.9 | ||||||
Broadcasting | ![]() | 4,765,109 | ![]() | 3.1 | ||||||
Property – Casualty Insurers | ![]() | 4,736,110 | ![]() | 3.1 | ||||||
Telecommunication Equipment | ![]() | 4,688,272 | ![]() | 3.1 | ||||||
Industrial Conglomerates | ![]() | 3,909,401 | ![]() | 2.6 | ||||||
Major Telecommunications | ![]() | 3,791,211 | ![]() | 2.5 | ||||||
Chemicals: Major Diversified | ![]() | 3,773,692 | ![]() | 2.5 | ||||||
Semiconductors | ![]() | 3,733,641 | ![]() | 2.5 | ||||||
Managed Health Care | ![]() | 3,703,610 | ![]() | 2.4 | ||||||
Biotechnology | ![]() | 3,183,648 | ![]() | 2.1 | ||||||
Household/Personal Care | ![]() | 3,166,491 | ![]() | 2.1 | ||||||
Home Building | ![]() | 3,024,303 | ![]() | 2.0 | ||||||
Repurchase Agreement | ![]() | 2,421,000 | ![]() | 1.6 | ||||||
Agricultural Commodities/Milling | ![]() | 2,379,521 | ![]() | 1.6 | ||||||
Life/Health Insurance | ![]() | 2,369,700 | ![]() | 1.6 | ||||||
Trucks/Construction/Farm Machinery | ![]() | 2,357,500 | ![]() | 1.5 | ||||||
Airlines | ![]() | 2,296,000 | ![]() | 1.5 | ||||||
Apparel/Footwear | ![]() | 2,272,500 | ![]() | 1.5 | ||||||
Food: Major Diversified | ![]() | 2,154,218 | ![]() | 1.4 | ||||||
Cable/Satellite Tv | ![]() | 2,107,500 | ![]() | 1.4 | ||||||
Major Banks | ![]() | 2,052,454 | ![]() | 1.3 | ||||||
Publishing: Newspapers | ![]() | 2,028,208 | ![]() | 1.3 | ||||||
Aerospace & Defense | ![]() | 1,847,795 | ![]() | 1.2 | ||||||
Other Metals/Minerals | ![]() | $ | 1,800,000 | ![]() | 1.2 | % | ||||
Electronic Production Equipment | ![]() | 1,786,000 | ![]() | 1.2 | ||||||
Oilfield Services/Equipment | ![]() | 1,757,635 | ![]() | 1.2 | ||||||
Specialty Stores | ![]() | 1,748,225 | ![]() | 1.1 | ||||||
Finance/Rental/Leasing | ![]() | 1,655,593 | ![]() | 1.1 | ||||||
Discount Stores | ![]() | 1,638,879 | ![]() | 1.1 | ||||||
Medical Specialties | ![]() | 1,568,224 | ![]() | 1.0 | ||||||
Packaged Software | ![]() | 1,452,506 | ![]() | 1.0 | ||||||
Beverages: Non-Alcoholic | ![]() | 1,403,675 | ![]() | 0.9 | ||||||
Computer Processing Hardware | ![]() | 1,378,240 | ![]() | 0.9 | ||||||
Oil & Gas Pipelines | ![]() | 1,377,750 | ![]() | 0.9 | ||||||
Precious Metals | ![]() | 1,367,930 | ![]() | 0.9 | ||||||
Oil Refining/Marketing | ![]() | 1,317,149 | ![]() | 0.9 | ||||||
Tobacco | ![]() | 1,248,647 | ![]() | 0.8 | ||||||
Internet Retail | ![]() | 1,192,755 | ![]() | 0.8 | ||||||
Electronic Components | ![]() | 967,500 | ![]() | 0.6 | ||||||
Motor Vehicles | ![]() | 948,560 | ![]() | 0.6 | ||||||
Food: Specialty/Candy | ![]() | 879,768 | ![]() | 0.6 | ||||||
Department Stores | ![]() | 780,299 | ![]() | 0.5 | ||||||
Multi-Line Insurance | ![]() | 716,909 | ![]() | 0.5 | ||||||
Beverages: Alcoholic | ![]() | 681,617 | ![]() | 0.4 | ||||||
Restaurants | ![]() | 530,482 | ![]() | 0.3 | ||||||
Insurance Brokers/Services | ![]() | 285,666 | ![]() | 0.2 | ||||||
Containers | ![]() | 230,062 | ![]() | 0.2 | ||||||
Miscellaneous Manufacturing | ![]() | 210,680 | ![]() | 0.1 | ||||||
Other Consumer Specialties | ![]() | 75,445 | ![]() | 0.0 | ||||||
Publishing: Books/Magazines | ![]() | 32,400 | ![]() | 0.0 | ||||||
![]() | $ | 151,556,128 | ![]() | 99.5 | % | |||||
![]() |
See Notes to Financial Statements
19
Morgan Stanley Income Builder Fund
Financial Statements
Statement of Assets and Liabilities
September 30, 2005
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
Assets: | ![]() | |||||
Investments in securities, at value (cost $134,651,125) | ![]() | $ | 151,556,128 | |||
Receivable for: | ![]() | |||||
Interest | ![]() | 876,581 | ||||
Investments sold | ![]() | 215,056 | ||||
Dividends | ![]() | 157,936 | ||||
Shares of beneficial interest sold | ![]() | 22,776 | ||||
Prepaid expenses and other assets | ![]() | 24,112 | ||||
Total Assets | ![]() | 152,852,589 | ||||
Liabilities: | ![]() | |||||
Payable for: | ![]() | |||||
Shares of beneficial interest redeemed | ![]() | 208,705 | ||||
Distribution fee | ![]() | 91,048 | ||||
Investments purchased | ![]() | 84,779 | ||||
Investment advisory fee | ![]() | 84,412 | ||||
Administration fee | ![]() | 10,079 | ||||
Transfer agent fee | ![]() | 3,432 | ||||
Accrued expenses and other payables | ![]() | 58,893 | ||||
Total Liabilities | ![]() | 541,348 | ||||
Net Assets | ![]() | $ | 152,311,241 | |||
Composition of Net Assets: | ![]() | |||||
Paid-in-capital | ![]() | $ | 162,897,141 | |||
Net unrealized appreciation | ![]() | 16,905,003 | ||||
Accumulated undistributed net investment income | ![]() | 1,171,728 | ||||
Accumulated net realized loss | ![]() | (28,662,631 | ) | |||
Net Assets | ![]() | $ | 152,311,241 | |||
Class A Shares: | ![]() | |||||
Net Assets | ![]() | $ | 54,447,139 | |||
Shares Outstanding (unlimited authorized, $.01 par value) | ![]() | 4,638,413 | ||||
Net Asset Value Per Share | ![]() | $ | 11.74 | |||
Maximum Offering Price Per Share, (net asset value plus 5.54% of net asset value) | ![]() | $ | 12.39 | |||
Class B Shares: | ![]() | |||||
Net Assets | ![]() | $ | 74,844,001 | |||
Shares Outstanding (unlimited authorized, $.01 par value) | ![]() | 6,365,215 | ||||
Net Asset Value Per Share | ![]() | $ | 11.76 | |||
Class C Shares: | ![]() | |||||
Net Assets | ![]() | $ | 20,917,055 | |||
Shares Outstanding (unlimited authorized, $.01 par value) | ![]() | 1,784,955 | ||||
Net Asset Value Per Share | ![]() | $ | 11.72 | |||
Class D Shares: | ![]() | |||||
Net Assets | ![]() | $ | 2,103,046 | |||
Shares Outstanding (unlimited authorized, $.01 par value) | ![]() | 179,181 | ||||
Net Asset Value Per Share | ![]() | $ | 11.74 | |||
![]() |
See Notes to Financial Statements
20
Morgan Stanley Income Builder Fund
Financial Statements continued
Statement of Operations
For the year ended September 30, 2005
![](https://capedge.com/proxy/N-14A/0000950136-06-003940/spacer.gif)
![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
Net Investment Income: | ![]() | |||||
Income | ![]() | |||||
Interest | ![]() | $ | 3,032,582 | |||
Dividends (net of $42,529 foreign withholding tax) | ![]() | 3,008,422 | ||||
Total Income | ![]() | 6,041,004 | ||||
Expenses | ![]() | |||||
Distribution fee (Class A shares) | ![]() | 61,694 | ||||
Distribution fee (Class B shares) | ![]() | 1,095,398 | ||||
Distribution fee (Class C shares) | ![]() | 205,295 | ||||
Investment advisory fee | ![]() | 1,066,360 | ||||
Transfer agent fees and expenses | ![]() | 172,183 | ||||
Administration fee | ![]() | 115,115 | ||||
Professional fees | ![]() | 80,831 | ||||
Shareholder reports and notices | ![]() | 65,651 | ||||
Registration fees | ![]() | 50,600 | ||||
Custodian fees | ![]() | 25,357 | ||||
Trustees' fees and expenses | ![]() | 1,919 | ||||
Other | ![]() | 18,168 | ||||
Total Expenses | ![]() | 2,958,571 | ||||
Net Investment Income | ![]() | 3,082,433 | ||||
Net Realized and Unrealized Gain: | ![]() | |||||
Net realized gain | ![]() | 12,290,886 | ||||
Net change in unrealized appreciation | ![]() | 4,258,901 | ||||
Net Gain | ![]() | 16,549,787 | ||||
Net Increase | ![]() | $ | 19,632,220 | |||
![]() |
See Notes to Financial Statements
21
Morgan Stanley Income Builder Fund
Financial Statements continued
Statement of Changes in Net Assets
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
![]() | FOR THE YEAR ENDED SEPTEMBER 30, 2005 | ![]() | FOR THE YEAR ENDED SEPTEMBER 30, 2004 | |||||||
Increase (Decrease) in Net Assets: | ![]() | ![]() | ||||||||
Operations: | ![]() | ![]() | ||||||||
Net investment income | ![]() | $ | 3,082,433 | ![]() | $ | 3,713,846 | ||||
Net realized gain | ![]() | 12,290,886 | ![]() | 9,540,822 | ||||||
Net change in unrealized appreciation | ![]() | 4,258,901 | ![]() | 4,898,385 | ||||||
Net Increase | ![]() | 19,632,220 | ![]() | 18,153,053 | ||||||
Dividends to Shareholders from Net Investment Income: | ![]() | ![]() | ||||||||
Class A shares | ![]() | (812,324 | ) | ![]() | (99,297 | ) | ||||
Class B shares | ![]() | (2,230,651 | ) | ![]() | (2,913,358 | ) | ||||
Class C shares | ![]() | (454,856 | ) | ![]() | (429,927 | ) | ||||
Class D shares | ![]() | (72,757 | ) | ![]() | (86,033 | ) | ||||
Total Dividends | ![]() | (3,570,588 | ) | ![]() | (3,528,615 | ) | ||||
Net decrease from transactions in shares of beneficial interest | ![]() | (25,218,671 | ) | ![]() | (23,101,097 | ) | ||||
Net Decrease | ![]() | (9,157,039 | ) | ![]() | (8,476,659 | ) | ||||
Net Assets: | ![]() | ![]() | ||||||||
Beginning of period | ![]() | 161,468,280 | ![]() | 169,944,939 | ||||||
End of Period (Including accumulated undistributed net investment income of $1,171,728 and $1,521,285, respectively) | ![]() | $ | 152,311,241 | ![]() | $ | 161,468,280 | ||||
![]() |
See Notes to Financial Statements
22
Morgan Stanley Income Builder Fund
Notes to Financial Statements September 30, 2005
1. Organization and Accounting Policies
Morgan Stanley Income Builder Fund (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-end management investment company. The Fund's primary investment objective is to seek reasonable income and, as a secondary objective, growth of capital. The Fund was organized as a Massachusetts business trust on March 21, 1996 and commenced operations on June 26, 1996. On July 28, 1997, the Fund converted to a multiple class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within eighteen months, six years and one year, respectively. Class D shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses.
Effective August 29, 2005, the Board of Trustees of the Fund approved the implementation of a 2% redemption fee on Class A shares, Class B shares, Class C shares, and Class D shares, which is paid directly to the Fund, for shares redeemed within seven days of purchase. The redemption fee is designed to protect the Fund and its remaining shareholders from the effects of short-term trading.
The following is a summary of significant accounting policies:
A. Valuation of Investments — (1) an equity portfolio security listed or traded on the New York Stock Exchange ("NYSE") or American Stock Exchange or other exchange is valued at its latest sale price prior to the time when assets are valued; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (2) an equity portfolio security listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (3) all other portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market; (4) for equity securities traded on foreign exchanges, the last reported sale price or the latest bid price may be used if there were no sales on a particular day; (5) when market quotations are not readily available or Morgan Stanley Investment Advisors Inc. (the "Investment Adviser"), determines that the latest sale price, the bid price or the mean between the last reported bid and asked price do not reflect a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund's Trustees. Occasionally, developments affecting the closing prices of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the foreign market on which the securities trade) and the close of business on the NYSE. If developments occur during such periods that are
23
Morgan Stanley Income Builder Fund
Notes to Financial Statements September 30, 2005 continued
expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Fund's Trustees or by the Investment Adviser using a pricing service and/or procedures approved by the Trustees of the Fund; (6) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Trustees; and (7) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost.
B. Accounting for Investments — Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Dividend income and other distributions are recorded on the ex-dividend date. Discounts are accreted and premiums are amortized over the life of the respective securities. Interest income is accrued daily.
C. Repurchase Agreements — Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other affiliated entities managed by the Investment Adviser, may transfer uninvested cash balances into one or more joint repurchase agreement accounts. These balances are invested in one or more repurchase agreements and are collateralized by cash, U.S. Treasury or federal agency obligations. The Fund may also invest directly with institutions in repurchase agreements. The Fund's custodian receives the collateral, which is marked-to-market daily to determine that the value of the collateral does not decrease below the repurchase price plus accrued interest.
D. Multiple Class Allocations — Investment income, expenses (other than distribution fees), and realized and unrealized gains and losses are allocated to each class of shares based upon the relative net asset value on the date such items are recognized. Distribution fees are charged directly to the respective class.
E. Federal Income Tax Policy — It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Accordingly, no federal income tax provision is required.
F. Dividends and Distributions to Shareholders — Dividends and distributions to shareholders are recorded on the ex-dividend date.
G. Use of Estimates — The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates.
24
Morgan Stanley Income Builder Fund
Notes to Financial Statements September 30, 2005 continued
2. Investment Advisory/Administration Agreements
Effective November 1, 2004, pursuant to an Investment Advisory Agreement with the Investment Adviser, the Fund pays an advisory fee, accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined at the close of each business day: 0.67% to the portion of the daily net assets not exceeding $500 million and 0.645% to the portion of the daily net assets in excess of $500 million.
Effective November 1, 2004, pursuant to an Administration Agreement with Morgan Stanley Services Company Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund pays an administration fee, accrued daily and payable monthly, by applying the annual rate of 0.08% to the Fund's daily net assets.
Prior to November 1, 2004, the Fund had retained the Investment Adviser to provide administrative services and to manage the investment of the Fund's assets pursuant to an investment management agreement pursuant to which the Fund paid the Investment Adviser a monthly management fee accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined as of the close of each business day: 0.75% to the portion of the daily net assets not exceeding $500 million and 0.725% to the portion of the daily net assets in excess of $500 million.
3. Plan of Distribution
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Adviser and Administrator. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A – up to 0.25% of the average daily net assets of Class A; (ii) Class B – up to 1.0% of the lesser of: (a) the average daily aggregate gross sales of the Class B shares since the inception of the Fund (not including reinvestment of dividend or capital gain distributions) less the average daily aggregate net asset value of the Class B shares redeemed since the Fund's inception upon which a contingent deferred sales charge has been imposed or waived; or (b) the average daily net assets of Class B; and (iii) Class C – up to 1.0% of the average daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the Plan is terminated, the Trustees will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled 14,506,736 at September 30, 2005.
25
Morgan Stanley Income Builder Fund
Notes to Financial Statements September 30, 2005 continued
In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily net assets of Class A or Class C, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except that expenses representing a gross sales credit to Morgan Stanley Financial Advisors or other selected broker-dealer representatives may be reimbursed in the subsequent calendar year. For the year ended September 30, 2005, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.25% and 0.99%, respectively.
The Distributor has informed the Fund that for the year ended September 30, 2005, it received contingent deferred sales charges from certain redemptions of the Fund's Class B shares and Class C shares of $123,662 and $590, respectively and received $30,992 in front-end sales charges from sales of the Fund's Class A shares. The respective shareholders pay such charges which are not an expense of the Fund.
4. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales of portfolio securities, excluding short-term investments, for the year ended September 30, 2005 aggregated $48,856,905 and $70,073,862, respectively. Included in the aforementioned transactions are purchases and sales with other Morgan Stanley funds of $6,718 and $32,822, respectively including a realized gain of $2,105.
At September 30, 2005, Morgan Stanley Multi-Asset Class Fund – Domestic portfolio, an affiliate of the Investment Adviser, Administrator and Distributor held 99,940 Class D shares of beneficial interest of the Fund.
For the year ended September 30, 2005, the Fund incurred $1,268 in brokerage commissions with Morgan Stanley & Co., Inc., an affiliate of the Investment Adviser, Administrator and Distributor, for portfolio transactions executed on behalf of the Fund.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and Distributor, is the Fund's transfer agent.
The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan") which allows each independent Trustee to defer payment of all, or a portion, of the fees he receives for serving on the Board of Trustees. 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 Morgan Stanley funds that are offered as investment options under the Compensation Plan. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund.
26
Morgan Stanley Income Builder Fund
Notes to Financial Statements September 30, 2005 continued
5. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | |
![]() | FOR THE YEAR ENDED SEPTEMBER 30, 2005 | ![]() | FOR THE YEAR ENDED SEPTEMBER 30, 2004 | ![]() | |||||||||||||||
![]() | SHARES | ![]() | AMOUNT | ![]() | SHARES | ![]() | AMOUNT | ||||||||||||
CLASS A SHARES | ![]() | ![]() | ![]() | ![]() | |||||||||||||||
Sold | ![]() | 226,386 | ![]() | $ | 2,567,956 | ![]() | 132,361 | ![]() | $ | 1,374,769 | |||||||||
Conversion from Class B | ![]() | 4,692,373 | ![]() | 52,472,756 | ![]() | — | ![]() | — | |||||||||||
Reinvestment of dividends | ![]() | 53,229 | ![]() | 610,733 | ![]() | 6,737 | ![]() | 70,738 | |||||||||||
Redeemed | ![]() | (669,333 | ) | ![]() | (7,663,761 | ) | ![]() | (107,462 | ) | ![]() | (1,137,109 | ) | |||||||
Net increase – Class A | ![]() | 4,302,655 | ![]() | 47,987,684 | ![]() | 31,636 | ![]() | 308,398 | |||||||||||
CLASS B SHARES | ![]() | ![]() | ![]() | ![]() | |||||||||||||||
Sold | ![]() | 1,039,483 | ![]() | 11,727,105 | ![]() | 1,701,694 | ![]() | 17,836,336 | |||||||||||
Conversion to Class A | ![]() | (4,691,862 | ) | ![]() | (52,472,756 | ) | ![]() | — | ![]() | — | |||||||||
Reinvestment of dividends | ![]() | 141,732 | ![]() | 1,604,047 | ![]() | 198,989 | ![]() | 2,091,173 | |||||||||||
Redeemed | ![]() | (2,800,689 | ) | ![]() | (31,446,935 | ) | ![]() | (4,009,233 | ) | ![]() | (42,142,658 | ) | |||||||
Net decrease – Class B | ![]() | (6,311,336 | ) | ![]() | (70,588,539 | ) | ![]() | (2,108,550 | ) | ![]() | (22,215,149 | ) | |||||||
CLASS C SHARES | ![]() | ![]() | ![]() | ![]() | |||||||||||||||
Sold | ![]() | 141,100 | ![]() | 1,585,730 | ![]() | 244,425 | ![]() | 2,555,937 | |||||||||||
Reinvestment of dividends | ![]() | 31,779 | ![]() | 359,753 | ![]() | 32,336 | ![]() | 339,122 | |||||||||||
Redeemed | ![]() | (339,451 | ) | ![]() | (3,812,804 | ) | ![]() | (379,869 | ) | ![]() | (3,991,035 | ) | |||||||
Net decrease – Class C | ![]() | (166,572 | ) | ![]() | (1,867,321 | ) | ![]() | (103,108 | ) | ![]() | (1,095,976 | ) | |||||||
CLASS D SHARES | ![]() | ![]() | ![]() | ![]() | |||||||||||||||
Sold | ![]() | 26,991 | ![]() | 308,347 | ![]() | 69,252 | ![]() | 716,655 | |||||||||||
Reinvestment of dividends | ![]() | 2,656 | ![]() | 30,058 | ![]() | 3,861 | ![]() | 40,500 | |||||||||||
Redeemed | ![]() | (96,835 | ) | ![]() | (1,088,900 | ) | ![]() | (80,813 | ) | ![]() | (855,525 | ) | |||||||
Net decrease – Class D | ![]() | (67,188 | ) | ![]() | (750,495 | ) | ![]() | (7,700 | ) | ![]() | (98,370 | ) | |||||||
Net decrease in Fund | ![]() | (2,242,441 | ) | ![]() | $ | (25,218,671 | ) | ![]() | (2,187,722 | ) | ![]() | $ | (23,101,097 | ) | |||||
![]() |
6. Federal Income Tax Status
The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment: temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for tax purposes are reported as distributions of paid-in-capital.
27
Morgan Stanley Income Builder Fund
Notes to Financial Statements September 30, 2005 continued
The tax character of distributions paid was as follows:
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
![]() | FOR THE YEAR ENDED SEPTEMBER 30, 2005 | ![]() | FOR THE YEAR ENDED SEPTEMBER 30, 2004 | |||||||
![]() | ![]() | |||||||||
Ordinary income | ![]() | $ | 3,570,588 | ![]() | $ | 3,528,615 | ||||
![]() |
As of September 30, 2005, the tax-basis components of accumulated losses were as follows:
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() |
Undistributed ordinary income | ![]() | $ | 1,924,980 | ![]() | ||||||
Undistributed long-term gains | ![]() | — | ||||||||
Net accumulated earnings | ![]() | 1,924,980 | ||||||||
Capital loss carryforward* | ![]() | (28,411,064 | ) | |||||||
Temporary differences | ![]() | (180 | ) | |||||||
Net unrealized appreciation | ![]() | 15,900,364 | ![]() | |||||||
Total accumulated losses | ![]() | $ | (10,585,900 | ) | ![]() | |||||
![]() |
During the year ended September 30, 2005, the Fund utilized $12,118,510 of its net capital Ioss carryforward. As of September 30, 2005, the Fund had a net capital loss carryforward of $28,411,064 of which $6,899,871 will expire on September 30, 2010 and $21,511,193 will expire on September 30, 2011 to offset future capital gains to the extent provided by regulations.
As of September 30, 2005, the Fund had temporary book/tax differences primarily attributable to capital loss deferrals on wash sales and book amortization of premiums on debt securities and permanent book/tax differences primarily attributable to tax adjustments on debt securities sold by the Fund. To reflect reclassifications arising from the permanent differences, accumulated net realized loss was charged and accumulated undistributed net investment income was credited $138,598.
7. Legal Matters
The Investment Adviser, certain affiliates of the Investment Adviser, certain officers of such affiliates and certain investment companies advised by the Investment Adviser or its affiliates, including the Fund, are named as defendants in a consolidated class action. This consolidated action also names as defendants certain individual Trustees and Directors of the Morgan Stanley funds. The consolidated amended complaint, filed in the United States District Court Southern District of New York on April 16, 2004, generally alleges that defendants, including the Fund, violated their statutory disclosure obligations and fiduciary duties by failing properly to disclose (i) that the Investment Adviser and certain affiliates of the Investment Adviser allegedly offered economic incentives to brokers and others to recommend the funds advised by the Investment
28
Morgan Stanley Income Builder Fund
Notes to Financial Statements September 30, 2005 continued
Adviser or its affiliates to investors rather than funds managed by other companies, and (ii) that the funds advised by the Investment Adviser or its affiliates, including the Fund, allegedly paid excessive commissions to brokers in return for their efforts to recommend these funds to investors. The complaint seeks, among other things, unspecified compensatory damages, rescissionary damages, fees and costs. The defendants have moved to dismiss the action and intend to otherwise vigorously defend it. On March 9, 2005, Plaintiffs sought leave to supplement their complaint to assert claims on behalf of other investors. While the Fund and Adviser believe that each has meritorious defenses, the ultimate outcome of this matter is not presently determinable at this early stage of the litigation, and no provision has been made in the Fund's financial statements for the effect, if any, of this matter.
29
Morgan Stanley Income Builder Fund
Financial Highlights
Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | |
![]() | FOR THE YEAR ENDED SEPTEMBER 30, | ![]() | |||||||||||||||||||||
![]() | 2005 | ![]() | 2004 | ![]() | 2003 | ![]() | 2002 | ![]() | 2001 | ||||||||||||||
Class A Shares | |||||||||||||||||||||||
Selected Per Share Data: | |||||||||||||||||||||||
Net asset value, beginning of period | ![]() | $ | 10.61 | ![]() | $ | 9.76 | ![]() | $ | 8.50 | ![]() | $ | 9.74 | ![]() | $ | 10.36 | ||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income‡ | ![]() | 0.29 | ![]() | 0.30 | ![]() | 0.29 | ![]() | 0.37 | ![]() | 0.49 | |||||||||||||
Net realized and unrealized gain (loss) | ![]() | 1.17 | ![]() | 0.85 | ![]() | 1.26 | ![]() | (1.21 | ) | ![]() | (0.59 | ) | |||||||||||
Total income (loss) from investment operations | ![]() | 1.46 | ![]() | 1.15 | ![]() | 1.55 | ![]() | (0.84 | ) | ![]() | (0.10 | ) | |||||||||||
Less dividends from net investment income | ![]() | (0.33 | ) | ![]() | (0.30 | ) | ![]() | (0.29 | ) | ![]() | (0.40 | ) | ![]() | (0.52 | ) | ||||||||
Net asset value, end of period | ![]() | $ | 11.74 | ![]() | $ | 10.61 | ![]() | $ | 9.76 | ![]() | $ | 8.50 | ![]() | $ | 9.74 | ||||||||
Total Return† | ![]() | 13.94 | % | ![]() | 11.82 | % | ![]() | 18.42 | % | ![]() | (9.09 | )% | ![]() | (1.06 | )% | ||||||||
Ratios to Average Net Assets(1): | |||||||||||||||||||||||
Expenses | ![]() | 1.26 | % | ![]() | 1.26 | % | ![]() | 1.29 | % | ![]() | 1.23 | % | ![]() | 1.17 | % | ||||||||
Net investment income | ![]() | 2.57 | % | ![]() | 2.87 | % | ![]() | 3.15 | % | ![]() | 3.67 | % | ![]() | 4.61 | % | ||||||||
Supplemental Data: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net assets, end of period, in thousands | ![]() | $ | 54,447 | ![]() | $ | 3,562 | ![]() | $ | 2,969 | ![]() | $ | 1,858 | ![]() | $ | 1,791 | ||||||||
Portfolio turnover rate | ![]() | 33 | % | ![]() | 33 | % | ![]() | 59 | % | ![]() | 67 | % | ![]() | 29 | % | ||||||||
![]() |
![]() |
![]() | ‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
![]() | † | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
![]() | (1) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
See Notes to Financial Statements
30
Morgan Stanley Income Builder Fund
Financial Highlights continued
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | |
![]() | FOR THE YEAR ENDED SEPTEMBER 30, | ![]() | |||||||||||||||||||||
![]() | 2005 | ![]() | 2004 | ![]() | 2003 | ![]() | 2002 | ![]() | 2001 | ||||||||||||||
Class B Shares | |||||||||||||||||||||||
Selected Per Share Data: | |||||||||||||||||||||||
Net asset value, beginning of period | ![]() | $ | 10.62 | ![]() | $ | 9.77 | ![]() | $ | 8.51 | ![]() | $ | 9.74 | ![]() | $ | 10.37 | ||||||||
Income (loss) from investment operations: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net investment income‡ | ![]() | 0.21 | ![]() | 0.22 | ![]() | 0.22 | ![]() | 0.29 | ![]() | 0.41 | |||||||||||||
Net realized and unrealized gain (loss) | ![]() | 1.17 | ![]() | 0.85 | ![]() | 1.26 | ![]() | (1.20 | ) | ![]() | (0.60 | ) | |||||||||||
Total income (loss) from investment operations | ![]() | 1.38 | ![]() | 1.07 | ![]() | 1.48 | ![]() | (0.91 | ) | ![]() | (0.19 | ) | |||||||||||
Less dividends from net investment income | ![]() | (0.24 | ) | ![]() | (0.22 | ) | ![]() | (0.22 | ) | ![]() | (0.32 | ) | ![]() | (0.44 | ) | ||||||||
Net asset value, end of period | ![]() | $ | 11.76 | ![]() | $ | 10.62 | ![]() | $ | 9.77 | ![]() | $ | 8.51 | ![]() | $ | 9.74 | ||||||||
Total Return† | ![]() | 13.09 | % | ![]() | 10.94 | % | ![]() | 17.65 | % | ![]() | (9.81 | )% | ![]() | (1.83 | )% | ||||||||
Ratios to Average Net Assets(1): | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Expenses | ![]() | 2.01 | % | ![]() | 2.02 | % | ![]() | 2.04 | % | ![]() | 1.98 | % | ![]() | 1.95 | % | ||||||||
Net investment income | ![]() | 1.82 | % | ![]() | 2.11 | % | ![]() | 2.40 | % | ![]() | 2.92 | % | ![]() | 3.83 | % | ||||||||
Supplemental Data: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net assets, end of period, in thousands | ![]() | $ | 74,844 | ![]() | $ | 134,621 | ![]() | $ | 144,468 | ![]() | $ | 138,129 | ![]() | $ | 186,994 | ||||||||
Portfolio turnover rate | ![]() | 33 | % | ![]() | 33 | % | ![]() | 59 | % | ![]() | 67 | % | ![]() | 29 | % | ||||||||
![]() |
![]() |
![]() | ‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
![]() | † | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
![]() | (1) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
See Notes to Financial Statements
31
Morgan Stanley Income Builder Fund
Financial Highlights continued
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | |
![]() | FOR THE YEAR ENDED SEPTEMBER 30, | ![]() | |||||||||||||||||||||
![]() | 2005 | ![]() | 2004 | ![]() | 2003 | ![]() | 2002 | ![]() | 2001 | ||||||||||||||
Class C Shares | |||||||||||||||||||||||
Selected Per Share Data: | |||||||||||||||||||||||
Net asset value, beginning of period | ![]() | $ | 10.59 | ![]() | $ | 9.75 | ![]() | $ | 8.49 | ![]() | $ | 9.72 | ![]() | $ | 10.34 | ||||||||
Income (loss) from investment operations: | ![]() | ||||||||||||||||||||||
Net investment income‡ | ![]() | 0.21 | ![]() | 0.22 | ![]() | 0.22 | ![]() | 0.29 | ![]() | 0.41 | |||||||||||||
Net realized and unrealized gain (loss) | ![]() | 1.19 | ![]() | 0.84 | ![]() | 1.26 | ![]() | (1.20 | ) | ![]() | (0.59 | ) | |||||||||||
Total income (loss) from investment operations | ![]() | 1.38 | ![]() | 1.06 | ![]() | 1.48 | ![]() | (0.91 | ) | ![]() | (0.18 | ) | |||||||||||
Less dividends from net investment income | ![]() | (0.25 | ) | ![]() | (0.22 | ) | ![]() | (0.22 | ) | ![]() | (0.32 | ) | ![]() | (0.44 | ) | ||||||||
Net asset value, end of period | ![]() | $ | 11.72 | ![]() | $ | 10.59 | ![]() | $ | 9.75 | ![]() | $ | 8.49 | ![]() | $ | 9.72 | ||||||||
Total Return† | ![]() | 13.11 | % | ![]() | 10.87 | % | ![]() | 17.57 | % | ![]() | (9.73 | )% | ![]() | (1.84 | )% | ||||||||
Ratios to Average Net Assets(1): | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Expenses | ![]() | 2.00 | % | ![]() | 2.02 | % | ![]() | 2.04 | % | ![]() | 1.98 | % | ![]() | 1.93 | % | ||||||||
Net investment income | ![]() | 1.83 | % | ![]() | 2.11 | % | ![]() | 2.40 | % | ![]() | 2.92 | % | ![]() | 3.85 | % | ||||||||
Supplemental Data: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net assets, end of period, in thousands | ![]() | $ | 20,917 | ![]() | $ | 20,671 | ![]() | $ | 20,028 | ![]() | $ | 16,399 | ![]() | $ | 20,505 | ||||||||
Portfolio turnover rate | ![]() | 33 | % | ![]() | 33 | % | ![]() | 59 | % | ![]() | 67 | % | ![]() | 29 | % | ||||||||
![]() |
![]() |
![]() | ‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
![]() | † | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
![]() | (1) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
See Notes to Financial Statements
32
Morgan Stanley Income Builder Fund
Financial Highlights continued
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![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | ![]() | |
![]() | FOR THE YEAR ENDED SEPTEMBER 30, | ![]() | |||||||||||||||||||||
![]() | 2005 | ![]() | 2004 | ![]() | 2003 | ![]() | 2002 | ![]() | 2001 | ||||||||||||||
Class D Shares | |||||||||||||||||||||||
Selected Per Share Data: | |||||||||||||||||||||||
Net asset value, beginning of period | ![]() | $ | 10.61 | ![]() | $ | 9.76 | ![]() | $ | 8.50 | ![]() | $ | 9.74 | ![]() | $ | 10.36 | ||||||||
Income (loss) from investment operations: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net investment income‡ | ![]() | 0.32 | ![]() | 0.33 | ![]() | 0.32 | ![]() | 0.40 | ![]() | 0.50 | |||||||||||||
Net realized and unrealized gain (loss) | ![]() | 1.17 | ![]() | 0.84 | ![]() | 1.25 | ![]() | (1.22 | ) | ![]() | (0.57 | ) | |||||||||||
Total income (loss) from investment operations | ![]() | 1.49 | ![]() | 1.17 | ![]() | 1.57 | ![]() | (0.82 | ) | ![]() | (0.07 | ) | |||||||||||
Less dividends from net investment income | ![]() | (0.36 | ) | ![]() | (0.32 | ) | ![]() | (0.31 | ) | ![]() | (0.42 | ) | ![]() | (0.55 | ) | ||||||||
Net asset value, end of period | ![]() | $ | 11.74 | ![]() | $ | 10.61 | ![]() | $ | 9.76 | ![]() | $ | 8.50 | ![]() | $ | 9.74 | ||||||||
Total Return† | ![]() | 14.20 | % | ![]() | 12.08 | % | ![]() | 18.70 | % | ![]() | (8.87 | )% | ![]() | (0.80 | )% | ||||||||
Ratios to Average Net Assets(1): | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Expenses | ![]() | 1.01 | % | ![]() | 1.02 | % | ![]() | 1.04 | % | ![]() | 0.98 | % | ![]() | 0.95 | % | ||||||||
Net investment income | ![]() | 2.82 | % | ![]() | 3.11 | % | ![]() | 3.40 | % | ![]() | 3.92 | % | ![]() | 4.83 | % | ||||||||
Supplemental Data: | ![]() | ![]() | ![]() | ![]() | ![]() | ||||||||||||||||||
Net assets, end of period, in thousands | ![]() | $ | 2,103 | ![]() | $ | 2,614 | ![]() | $ | 2,480 | ![]() | $ | 1,326 | ![]() | $ | 136 | ||||||||
Portfolio turnover rate | ![]() | 33 | % | ![]() | 33 | % | ![]() | 59 | % | ![]() | 67 | % | ![]() | 29 | % | ||||||||
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![]() | ‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
![]() | † | Calculated based on the net asset value as of the last business day of the period. |
![]() | (1) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
See Notes to Financial Statements
33
Morgan Stanley Income Builder Fund
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees of
Morgan Stanley Income Builder Fund:
We have audited the accompanying statement of assets and liabilities of Morgan Stanley Income Builder Fund (the "Fund"), including the portfolio of investments, as of September 30, 2005, and the related statements of operations for the year then ended and changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of September 30, 2005, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Morgan Stanley Income Builder Fund as of September 30, 2005, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
New York, New York
November 21, 2005
34
Morgan Stanley Income Builder Fund
Trustee and Officer Information
Independent Trustees:
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Name, Age and Address of Independent Trustee | ![]() | Position(s) Held with Registrant | ![]() | Term of Office and Length of Time Served* | ![]() | Principal Occupation(s) During Past 5 Years** | ![]() | Number of Portfolios in Fund Complex Overseen by Trustee*** | ![]() | Other Directorships Held by Trustee | ||||||||||||
Michael Bozic (64) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036 | ![]() | Trustee | ![]() | Since April 1994 | ![]() | Private Investor; Director or Trustee of the Retail Funds (since April 1994) and the Institutional Funds (since July 2003); formerly Vice Chairman of Kmart Corporation (December 1998-October 2000), Chairman and Chief Executive Officer of Levitz Furniture Corporation (November 1995-November 1998) and President and Chief Executive Officer of Hills Department Stores (May 1991-July 1995); formerly variously Chairman, Chief Executive Officer, President and Chief Operating Officer (1987-1991) of the Sears Merchandise Group of Sears, Roebuck & Co. | ![]() | 197 | ![]() | Director of various business organizations. | ||||||||||||
Edwin J. Garn (72) 1031 N. Chartwell Court Salt Lake City, UT 84103 | ![]() | Trustee | ![]() | Since January 1993 | ![]() | Consultant; Director or Trustee of the Retail Funds (since January 1993) and the Institutional Funds (since July 2003); member of the Utah Regional Advisory Board of Pacific Corp. (utility company); formerly Managing Director of Summit Ventures LLC (2000-2004) (lobbying and consulting firm); United States Senator (R-Utah) (1974-1992) and Chairman, Senate Banking Committee (1980-1986), Mayor of Salt Lake City, Utah (1971-1974), Astronaut, Space Shuttle Discovery (April 12-19, 1985), and Vice Chairman, Huntsman Corporation (chemical company). | ![]() | 197 | ![]() | Director of Franklin Covey (time management systems), BMW Bank of North America, Inc. (industrial loan corporation), Escrow Bank USA (industrial loan corporation); United Space Alliance (joint venture between Lockheed Martin and the Boeing Company) and Nuskin Asia Pacific (multilevel marketing); member of the board of various civic and charitable organizations. | ||||||||||||
Wayne E. Hedien (71) c/o Kramer Levin Naftalis & Frankel LLP Counsel to the Independent Trustees 1177 Avenue of the Americas New York, NY 10036 | ![]() | Trustee | ![]() | Since September 1997 | ![]() | Retired; Director or Trustee of the Retail Funds; (Since September 1997) and the Institutional Funds (since July 2003); formerly associated with the Allstate Companies (1966-1994), most recently as Chairman of The Allstate Corporation (March 1993-December 1994) and Chairman and Chief Executive Officer of its wholly-owned subsidiary, Allstate Insurance Company (July 1989-December 1994). | ![]() | 197 | ![]() | Director of The PMI Group Inc. (private mortgage insurance); Trustee and Vice Chairman of The Field Museum of Natural History; director of various other business and charitable organizations. | ||||||||||||
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35
Morgan Stanley Income Builder Fund
Trustee and Officer Information continued
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Name, Age and Address of Independent Trustee | ![]() | Position(s) Held with Registrant | ![]() | Term of Office and Length of Time Served* | ![]() | Principal Occupation(s) During Past 5 Years** | ![]() | Number of Portfolios in Fund Complex Overseen by Trustee*** | ![]() | Other Directorships Held by Trustee | ||||||||||||
Dr. Manuel H. Johnson (56) c/o Johnson Smick Group, Inc. 888 16th Street, N.W. Suite 740 Washington, D.C. 20006 | ![]() | Trustee | ![]() | Since July 1991 | ![]() | Senior Partner, Johnson Smick International, Inc., a consulting firm; Chairman of the Audit Committee and Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2003); Co-Chairman and a founder of the Group of Seven Council (G7C), an international economic commission; formerly Vice Chairman of the Board of Governors of the Federal Reserve System and Assistant Secretary of the U.S. Treasury. | ![]() | 197 | ![]() | Director of NVR, Inc. (home construction); Director of KFX Energy; Director of RBS Greenwich Capital Holdings (financial holding company). | ||||||||||||
Joseph J. Kearns (63) c/o Kearns & Associates LLC PMB754 23852 Pacific Coast Highway Malibu, CA 90265 | ![]() | Trustee | ![]() | Since July 2003 | ![]() | President, Kearns & Associates LLC (investment consulting); Deputy Chairman of the Audit Committee and Director or Trustee of the Retail Funds (since July 2003) and the Institutional Funds (since August 1994); previously Chairman of the Audit Committee of the Institutional Funds (October 2001-July 2003); formerly CFO of the J. Paul Getty Trust. | ![]() | 198 | ![]() | Director of Electro Rent Corporation (equipment leasing), The Ford Family Foundation, and the UCLA Foundation. | ||||||||||||
Michael E. Nugent (69) c/o Triumph Capital, L.P. 445 Park Avenue New York, NY 10022 | ![]() | Trustee | ![]() | Since July 1991 | ![]() | General Partner of Triumph Capital, L.P., a private investment partnership; Chairman of the Insurance Committee and Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2001); formerly Vice President, Bankers Trust Company and BT Capital Corporation (1984-1988). | ![]() | 197 | ![]() | None | ||||||||||||
Fergus Reid (73) c/o Lumelite Plastics Corporation 85 Charles Colman Blvd. Pawling, NY 12564 | ![]() | Trustee | ![]() | Since July 2003 | ![]() | Chairman of Lumelite Plastics Corporation; Chairman of the Governance Committee and Director or Trustee of the Retail Funds (since July 2003) and the Institutional Funds (since June 1992). | ![]() | 198 | ![]() | Trustee and Director of certain investment companies in the JPMorgan Funds complex managed by J.P. Morgan Investment Management Inc. | ||||||||||||
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36
Morgan Stanley Income Builder Fund
Trustee and Officer Information continued
Interested Trustees:
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Name, Age and Address of Interested Trustee | ![]() | Position(s) Held with Registrant | ![]() | Term of Office and Length of Time Served* | ![]() | Principal Occupation(s) During Past 5 Years** | ![]() | Number of Portfolios in Fund Complex Overseen by Trustee*** | ![]() | Other Directorships Held by Trustee | ||||||||||||
Charles A. Fiumefreddo (72) c/o Morgan Stanley Trust Harborside Financial Center, Plaza Two, Jersey City, NJ 07311 | ![]() | Chairman of the Board and Trustee | ![]() | Since July 1991 | ![]() | Chairman and Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2003); formerly Chief Executive Officer of the Retail Funds (until September 2002). | ![]() | 197 | ![]() | None | ||||||||||||
James F. Higgins (57) c/o Morgan Stanley Trust Harborside Financial Center, Plaza Two, Jersey City, NJ 07311 | ![]() | Trustee | ![]() | Since June 2000 | ![]() | Director or Trustee of the Retail Funds (since June 2000) and the Institutional Funds (since July 2003); Senior Advisor of Morgan Stanley (since August 2000); Director of the Distributor and Dean Witter Realty Inc.; previously President and Chief Operating Officer of the Private Client Group of Morgan Stanley (May 1999-August 2000), and President and Chief Operating Officer of Individual Securities of Morgan Stanley (February 1997-May 1999). | ![]() | 197 | ![]() | Director of AXA Financial, Inc. and The Equitable Life Assurance Society of the United States (financial services). | ||||||||||||
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![]() | * | This is the earliest date the Trustee began serving the funds advised by Morgan Stanley Investment Advisors Inc. (the "Investment Adviser") (the "Retail Funds"). |
![]() | ** | The dates referenced below indicating commencement of services as Director/Trustee for the Retail Funds and the funds advised by Morgan Stanley Investment Management Inc. and Morgan Stanley AIP GP LP (the "Institutional Funds") reflect the earliest date the Director/Trustee began serving the Retail or Institutional Funds, as applicable. |
![]() | *** | The Fund Complex includes all open-end and closed-end funds (including all of their portfolios) advised by the Investment Adviser and any funds that have an investment adviser that is an affiliated person of the Investment Adviser (including, but not limited to, Morgan Stanley Investment Management Inc.). |
37
Morgan Stanley Income Builder Fund
Trustee and Officer Information continued
Officers:
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Name, Age and Address of Executive Officer | ![]() | Position(s) Held with Registrant | ![]() | Term of Office and Length of Time Served* | ![]() | Principal Occupation(s) During Past 5 Years** | ||||||||
Ronald E. Robison (66) 1221 Avenue of the Americas New York, NY 10020 | ![]() | President and Principal Executive Officer | ![]() | Since May 2003 | ![]() | President (since September 2005) and Principal Executive Officer of funds in the Fund Complex (since May 2003); Managing Director of Morgan Stanley & Co. Incorporated and Morgan Stanley; Managing Director and Director of Morgan Stanley Investment Management Inc., Morgan Stanley Distribution Inc. and Morgan Stanley Distributors Inc.; Managing Director, Chief Administrative Officer and Director of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc.; Chief Executive Officer and Director of Morgan Stanley Trust; Director of Morgan Stanley SICAV (since May 2004); President (since September 2005) and Principal Executive Officer (since May 2003) of the Van Kampen Funds; previously, Executive Vice President (July 2003-September 2005) of funds in the Fund Complex and the Van Kampen Funds. He was also previously President and Director of the Institutional Funds (March 2001-July 2003), Chief Global Operations Officer of Morgan Stanley Investment Management Inc. and Chief Executive Officer and Chairman of Van Kampen Investor Services. | ||||||||
Joseph J. McAlinden (62) 1221 Avenue of the Americas New York, NY 10020 | ![]() | Vice President | ![]() | Since July 1995 | ![]() | Managing Director and Chief Investment Officer of the Investment Adviser and Morgan Stanley Investment Management Inc.; Chief Investment Officer of the Van Kampen Funds; Vice President of the Institutional Funds (since July 2003) and the Retail Funds (since July 1995). | ||||||||
Barry Fink (50) 1221 Avenue of the Americas New York, NY 10020 | ![]() | Vice President | ![]() | Since February 1997 | ![]() | General Counsel (since May 2000) and Managing Director (since December 2000) of Morgan Stanley Investment Management; Managing Director (since December 2000), Secretary (since February 1997) and Director of the Investment Adviser and the Administrator; Vice President of the Retail Funds; Assistant Secretary of Morgan Stanley DW; Vice President of the Institutional Funds (since July 2003); Managing Director, Secretary and Director of the Distributor; previously Secretary (February 1997-July 2003) and General Counsel (February 1997-April 2004) of the Retail Funds; Vice President and Assistant General Counsel of the Investment Adviser and the Administrator (February 1997-December 2001). | ||||||||
Amy R. Doberman (43) 1221 Avenue of Americas New York, NY 10020 | ![]() | Vice President | ![]() | Since July 2004 | ![]() | Managing Director and General Counsel, U.S. Investment Management; Managing Director of Morgan Stanley Investment Management Inc. and the Investment Adviser, Vice President of the Institutional and Retail Funds (since July 2004); Vice President of the Van Kampen Funds (since August 2004); previously, Managing Director and General Counsel — Americas, UBS Global Asset Management (July 2000 – July 2004) and General Counsel, Aeltus Investment Management Inc. (January 1997 – July 2000). | ||||||||
Carsten Otto (41) 1221 Avenue of the Americas New York, NY 10020 | ![]() | Chief Compliance Officer | ![]() | Since October 2004 | ![]() | Executive Director and U.S. Director of Compliance for Morgan Stanley Investment Management (since October 2004); Executive Director of the Investment Adviser and Morgan Stanley Investment Management Inc.; formerly Assistant Secretary and Assistant General Counsel of the Morgan Stanley Retail Funds. | ||||||||
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38
Morgan Stanley Income Builder Fund
Trustee and Officer Information continued
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Name, Age and Address of Executive Officer | ![]() | Position(s) Held with Registrant | ![]() | Term of Office and Length of Time Served* | ![]() | Principal Occupation(s) During Past 5 Years** | ||||||||
Stefanie V. Chang (38) 1221 Avenue of the Americas New York, NY 10020 | ![]() | Vice President | ![]() | Since July 2003 | ![]() | Executive Director of Morgan Stanley & Co. Incorporated, Morgan Stanley Investment Management Inc. and the Investment Adviser; Vice President of the Institutional Funds (since December 1997) and the Retail Funds (since July 2003); formerly practiced law with the New York law firm of Rogers & Wells (now Clifford Chance US LLP). | ||||||||
Francis J. Smith (40) c/o Morgan Stanley Trust Harborside Financial Center, Plaza Two, Jersey City, NJ 07311 | ![]() | Treasurer and Chief Financial Officer | ![]() | Treasurer since July 2003 and Chief Financial Officer since September 2002 | ![]() | Executive Director of the Investment Adviser and the Administrator (since December 2001); previously, Vice President of the Retail Funds (September 2002-July 2003); Vice President of the Investment Adviser and the Administrator (August 2000-November 2001). | ||||||||
Thomas F. Caloia (59) c/o Morgan Stanley Trust Harborside Financial Center, Plaza Two, Jersey City, NJ 07311 | ![]() | Vice President | ![]() | Since July 2003 | ![]() | Executive Director (since December 2002) and Assistant Treasurer of the Investment Adviser, the Distributor and the Administrator; previously Treasurer of the Retail Funds (April 1989-July 2003); formerly First Vice President of the Investment Adviser, the Distributor and the Administrator. | ||||||||
Mary E. Mullin (38) 1221 Avenue of the Americas New York, NY 10020 | ![]() | Secretary | ![]() | Since July 2003 | ![]() | Executive Director of Morgan Stanley & Co. Incorporated, Morgan Stanley Investment Management Inc. and the Investment Adviser; Secretary of the Institutional Funds (since June 1999) and the Retail Funds (since July 2003); formerly practiced law with the New York law firms of McDermott, Will & Emery and Skadden, Arps, Slate, Meagher & Flom LLP. | ||||||||
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![]() | * | This is the earliest date the Officer began serving the Retail Funds. Each Officer serves an indefinite term, until his or her successor is elected. |
![]() | ** | The dates referenced below indicating commencement of service as an Officer for the Retail and Institutional Funds reflect the earliest date the Officer began serving the Retail or Institutional Funds, as applicable. |
2005 Federal Tax Notice (unaudited)
During the fiscal year ended September 30, 2005, 45.38% of the ordinary dividends paid by the Fund qualified for the dividends received deduction available to corporations.
Additionally, please note that 50.54% of the Fund's ordinary dividends paid during the fiscal year ended September 30, 2005 qualified for the lower income tax rate available to individuals under the Jobs and Growth Tax Relief Reconciliation Act of 2003.
39
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Trustees Michael Bozic Officers Charles A. Fiumefreddo Ronald E. Robison Joseph J. McAlinden Barry Fink Amy R. Doberman Carsten Otto Stefanie V. Chang Francis J. Smith Thomas F. Caloia Mary E. Mullin Transfer Agent Morgan Stanley Trust Independent Registered Public Accounting Firm Deloitte & Touche LLP Investment Adviser Morgan Stanley Investment Advisors Inc. This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the Prospectus carefully before investing. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. © 2005 Morgan Stanley ![]() 38421RPT-RAO5-00940P-Y09/05 | ![]() | MORGAN STANLEY FUNDS |
Morgan Stanley Income Builder Fund Annual Report September 30, 2005 | ||
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MORGAN STANLEY BALANCED GROWTH FUND1
PART B
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the SAI’’) relates to the shares of Morgan Stanley Balanced Growth Fund (‘‘Balanced Growth’’) to be issued pursuant to (i) an Agreement and Plan of Reorganization, dated February 6, 2006, between Balanced Growth and Morgan Stanley Balanced Income Fund (‘‘Balanced Income’’) in connection with the acquisition by Balanced Growth of substantially all of the assets, subject to stated liabilities, of Balanced Income, and (ii) an Agreement and Plan of Reorganization, dated February 6, 2006, between Balanced Growth and Morgan Stanley Income Builder Fund (‘‘Income Builder’’ and, together with Balanced Income, the ‘‘Acquired Funds’’ and each an ‘‘Acquired Fund’’) in connection with the acquisition by Balanced Growth of substantially all of the assets, subject to stated liabilities, of Income Builder.
This SAI does not constitute a prospectus. This SAI 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 May 18, 2006. A copy of the Proxy Statement and Prospectus may be obtained without charge by mailing a written request to Morgan Stanley Balanced Growth Fund, c/o Morgan Stanley Trust, Harborside Financial Center, Plaza Two, Jersey City, NJ 07311 or by calling toll-free (800) 869-NEWS. Please retain this document for future reference.
The date of this SAI is May 18, 2006.
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1 | To be renamed Morgan Stanley Balanced Fund upon completion of a Reorganization. |
B-1
TABLE OF CONTENTS
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B-2
INTRODUCTION
This SAI is intended to supplement the information provided in the Proxy Statement and Prospectus dated May 18, 2006 (the ‘‘Proxy Statement and Prospectus’’). The Proxy Statement and Prospectus has been sent to the Acquired Funds’ shareholders in connection with the solicitation of proxies by the Board of Trustees of each of the Acquired Funds to be voted at the Special Meeting of Shareholders of each of the Acquired Funds to be held on July 17, 2006. This SAI incorporates by reference the Statement of Additional Information of Balanced Growth dated May 27, 2005, as supplemented, and the Statement of Additional Information of each of Balanced Income dated May 27, 2005, as supplemented, and Income Builder dated November 30, 2005, as supplemented.
ADDITIONAL INFORMATION ABOUT BALANCED GROWTH
Fund History
For additional information about Balanced Growth’s history, see ‘‘Fund History’’ in Balanced Growth’s Statement of Additional Information.
Investment Objectives and Policies
For additional information about Balanced Growth’s investment objectives and policies, see ‘‘Description of the Fund and Its Investments and Risks’’ in Balanced Growth’s Statement of Additional Information.
Portfolio Holdings
For additional information about Balanced Growth’s policies and procedures with respect to the disclosure of Balanced Growth’s portfolio securities to any person, see ‘‘Description of the Fund and Its Investments and Risks — Disclosure of Portfolio Holdings’’ in Balanced Growth’s Statement of Additional Information.
Management
For additional information about the Board of Trustees, officers and management personnel of Balanced Growth, see ‘‘Management of the Fund’’ and ‘‘Investment Advisory and Other Services’’ in Balanced Growth’s Statement of Additional Information.
Investment Advisory and Other Services
For additional information about Balanced Growth’s investment adviser, Balanced Growth’s independent registered public accounting firm and other services provided to Balanced Growth, see ‘‘Investment Advisory and Other Services’’ in Balanced Growth’s Statement of Additional Information.
Codes of Ethics
For additional information about the Codes of Ethics adopted by Balanced Growth, Balanced Growth’s investment adviser and Balanced Growth’s distributor, see ‘‘Investment Advisory and Other Services — Codes of Ethics’’ in Balanced Growth’s Statement of Additional Information.
Proxy Voting Policies
For additional information about the voting of proxies held by Balanced Growth, see ‘‘Investment Advisory and Other Services — Proxy Voting Policy and Proxy Voting Record’’ in Balanced Growth’s Statement of Additional Information.
B-3
Portfolio Managers
For additional information about the portfolio managers primarily responsible for the day-to-day management of Balanced Growth, their compensation structure and their holdings in Balanced Growth, see ‘‘Investment Advisory and Other Services — Fund Management’’ in Balanced Growth’s Statement of Additional Information.
Portfolio Transactions and Brokerage
For additional information about brokerage allocation practices, see ‘‘Brokerage Allocation and Other Practices’’ in Balanced Growth’s Statement of Additional Information.
Description of Fund Shares
For additional information about the voting rights and other characteristics of the shares of Balanced Growth, see ‘‘Capital Stock and Other Securities’’ in Balanced Growth’s Statement of Additional Information.
Purchase, Redemption and Pricing of Shares
For additional information about the purchase and redemption of Balanced Growth’s shares and the determination of net asset value, see ‘‘Purchase, Redemption and Pricing of Shares’’ in Balanced Growth’s Statement of Additional Information.
Dividends, Distributions and Tax Status
For additional information about Balanced Growth’s policies regarding dividends and distributions and tax matters affecting Balanced Growth and its shareholders, see ‘‘Taxation of the Fund and Shareholders’’ in Balanced Growth’s Statement of Additional Information.
Distribution of Shares
For additional information about Balanced Growth’s distributor and the distribution agreement between Balanced Growth and its distributor, see ‘‘Investment Advisory and Other Services’’ and ‘‘Underwriters’’ in Balanced Growth’s Statement of Additional Information.
Performance Data
For additional information about Balanced Growth’s performance, see ‘‘Performance Data’’ in Balanced Growth’s Statement of Additional Information.
ADDITIONAL INFORMATION ABOUT THE ACQUIRED FUNDS
Fund History
For additional information about each Acquired Fund’s history, see ‘‘Fund History’’ in the respective Statement of Additional Information for each Acquired Fund.
Investment Objectives and Policies
For additional information about each Acquired Fund’s investment objectives and policies, see ‘‘Description of the Fund and Its Investments and Risks’’ in the respective Statement of Additional Information for each Acquired Fund.
B-4
Portfolio Holdings
For additional information about each Acquired Fund’s policies and procedures with respect to the disclosure of each Acquired Fund’s portfolio securities to any person, see ‘‘Description of the Fund and Its Investments and Risks — Disclosure of Portfolio Holdings’’ in the respective Statement of Additional Information for each Acquired Fund.
Management
For additional information about each Acquired Fund’s Board of Trustees, officers and management personnel, see ‘‘Management of the Fund’’ and ‘‘Investment Advisory and Other Services’’ in the respective Statement of Additional Information for each Acquired Fund.
Investment Advisory and Other Services
For additional information about each Acquired Fund’s investment adviser, each Acquired Fund’s independent registered public accounting firm and other services provided to each Acquired Fund, see ‘‘Investment Advisory and Other Services’’ in the respective Statement of Additional Information for each Acquired Fund.
Codes of Ethics
For additional information about the Codes of Ethics adopted by each Acquired Fund, each Acquired Fund’s investment adviser and each Acquired Fund’s distributor, see ‘‘Investment Advisory and Other Services — Codes of Ethics’’ in the respective Statement of Additional Information for each Acquired Fund.
Proxy Voting Policies
For additional information about the voting of proxies held by each Acquired Fund, see ‘‘Investment Advisory and Other Services — Proxy Voting Policy and Proxy Voting Record’’ in the respective Statement of Additional Information for each Acquired Fund.
Portfolio Managers
For additional information about the portfolio managers primarily responsible for the day-to-day management of each Acquired Fund, their compensation structure and their holdings in each Acquired Fund, see ‘‘Investment Advisory and Other Services — Fund Management’’ in the respective Statement of Additional Information for each Acquired Fund.
Portfolio Transactions and Brokerage
For additional information about brokerage allocation practices, see ‘‘Brokerage Allocation and Other Practices’’ in the respective Statement of Additional Information for each Acquired Fund.
Description of Fund Shares
For additional information about the voting rights and other characteristics of the shares each Acquired Fund, see ‘‘Capital Stock and Other Securities’’ in the respective Statement of Additional Information for each Acquired Fund.
B-5
Purchase, Redemption and Pricing of Shares
For additional information about the purchase and redemption of each Acquired Fund’s shares and the determination of net asset value, see ‘‘Purchase, Redemption and Pricing of Shares’’ in the respective Statement of Additional Information for each Acquired Fund.
Dividends, Distributions and Tax Status
For additional information about each Acquired Fund’s policies regarding dividends and distributions and tax matters affecting each Acquired Fund and its shareholders, see ‘‘Taxation of the Fund and Shareholders’’ in the respective Statement of Additional Information for each Acquired Fund.
Distribution of Shares
For additional information about each Acquired Fund’s distributor and the distribution agreement between each Acquired Fund and its distributor, see ‘‘Investment Advisory and Other Services’’ and ‘‘Underwriters’’ in the respective Statement of Additional Information for each Acquired Fund.
Performance Data
For additional information about each Acquired Fund’s performance, see ‘‘Performance Data’’ in the respective Statement of Additional Information for each Acquired Fund.
FINANCIAL STATEMENTS
1. Balanced Growth’s most recent audited financial statements are set forth in Balanced Growth’s Annual Report for the fiscal year ended January 31, 2006. A copy of the Annual Report accompanies, and is incorporated by reference in, the Proxy Statement and Prospectus.
2. Balanced Income’s most recent audited financial statements are set forth in Balanced Income’s Annual Report for the fiscal year ended January 31, 2006. A copy of the Annual Report accompanies, and is incorporated by reference in, the Proxy Statement and Prospectus.
3. Income Builder’s most recent audited financial statements are set forth in Income Builder’s Annual Report for the fiscal year ended September 30, 2005. A copy of the Annual Report accompanies, and is incorporated by reference in, the Proxy Statement and Prospectus.
4. Shown below are Financial Statements for the Acquired Funds (Balanced Income and Income Builder) and Balanced Growth and Pro Forma Financial Statements for the Combined Fund at January 31, 2006, as though the reorganization occurred as of that date. The first table presents Portfolio of Investments (unaudited) for Balanced Income, Income Builder and Balanced Growth and pro forma figures for the Combined Fund. The second table presents Statements of Assets and Liabilities (unaudited) for Balanced Income, Income Builder and Balanced Growth and pro forma figures for the Combined Fund. The third table presents Statements of Operations (unaudited) for Balanced Income, Income Builder and Balanced Growth and pro forma figures for the Combined Fund. The tables are followed by the Notes to the Pro Forma Financial Statements (unaudited).
B-6
Morgan Stanley Balanced Growth Fund
Pro Forma Portfolio of Investments as of January 31, 2006
(unaudited)
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