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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-03165
Active Assets Government Securities Trust
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: June 30, 2006
Date of reporting period: June 30, 2006
Item 1 - Report to Shareholders
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Welcome, Shareholder:
In this report, you'll learn about how your investment in Active Assets
Government Securities Trust 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. AN
INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND
SEEKS TO PRESERVE THE VALUE OF AN INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE
TO LOSE MONEY BY INVESTING IN THE FUND. PLEASE SEE THE PROSPECTUS FOR MORE
COMPLETE INFORMATION ON INVESTMENT RISKS.
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FUND REPORT
FOR THE YEAR ENDED JUNE 30, 2006
MARKET CONDITIONS
During the 12-month period ended June 30, 2006, the Federal Open Market
Committee (the "Fed") continued its pattern of raising short-term rates it began
in June of 2004. Through 17 steps of 25 basis points each, including eight
during the fiscal year covered by this report, the Fed increased its target rate
for federal funds from 1.00 percent to 5.25 percent.
Short-term rates rose alongside the federal funds rate, providing increased
return opportunities for investors in money market funds.
PERFORMANCE ANALYSIS
As of June 30, 2006, Active Assets Government Securities Trust had net assets of
approximately $527 million and an average portfolio maturity of 28 days. For the
12-month period ended June 30, 2006, the Fund provided a total return of 3.60
percent. For the seven-day period ended June 30, 2006, the Fund provided an
effective annualized yield of 4.49 percent and a current yield of 4.40 percent,
while its 30-day moving average yield for June was 4.39 percent. PAST
PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
Our strategy in managing the portfolio remained consistent with the Fund's
long-term focus on preservation of capital and liquidity. We adhered to a
conservative approach in managing the portfolio, emphasizing high-quality money
market obligations. In keeping with this approach, we avoided the use of
derivatives or structured notes that might fluctuate excessively with changing
interest rates.
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.
PORTFOLIO COMPOSITION
U.S. Government Agencies -- Discount Notes 79.3%
Repurchase Agreements 14.5
U.S. Government Agencies -- Floating Rate Notes 6.2
MATURITY SCHEDULE
1 - 30 Days 64.6%
31 - 60 Days 20.4
61 - 90 Days 15.0
DATA AS OF JUNE 30, 2006. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR PORTFOLIO
COMPOSITION AND MATURITY SCHEDULE 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.
2
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INVESTMENT STRATEGY
THE FUND WILL INVEST IN HIGH QUALITY, SHORT-TERM U.S. GOVERNMENT SECURITIES. THE
FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT ADVISORS INC., SEEKS TO
MAINTAIN THE FUND'S SHARE PRICE AT $1.00. THE SHARE PRICE REMAINING STABLE AT
$1.00 MEANS THAT THE FUND WOULD PRESERVE THE PRINCIPAL VALUE OF YOUR INVESTMENT
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN THE FUND.
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. THE SEMIANNUAL REPORTS AND THE ANNUAL REPORTS ARE
FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) ON FORM
N-CSRS AND FORM N-CSR, RESPECTIVELY. 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.
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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EXPENSE EXAMPLE
As a shareholder of the Fund, you incur 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 01/01/06 - 06/30/06.
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. 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 that have transactional costs, such as sales charges
(loads), and redemption fees, or exchange fees.
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BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
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01/01/06 -
01/01/06 06/30/06 06/30/06
------------- ------------- ---------------
Actual (2.01% return) $1,000.00 $1,020.10 $3.22
Hypothetical (5% annual return before expenses) $1,000.00 $1,021.74 $3.23
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* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.64%
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY
182**/365 (TO REFLECT THE ONE-HALF YEAR PERIOD).
** ADJUSTED TO REFLECT NON-BUSINESS DAY ACCRUAL.
4
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INVESTMENT ADVISORY AGREEMENT APPROVAL
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 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 at the Investment Adviser's
expense. (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 advisory and administrative 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
On a regular basis, the Board reviews the performance of all funds in the Morgan
Stanley Fund Complex, including the Fund, compared to their peers, paying
specific attention to the underperforming funds. In addition, the Board
specifically reviewed the Fund's performance for the one-, three- and five-year
periods ended November 30, 2005, as shown in a report provided by Lipper (the
"Lipper Report"), compared to the performance of comparable funds selected by
Lipper (the "performance peer group"). The Board also discussed with the Adviser
the performance goals and the actual results achieved in managing the Fund. The
Board concluded that the Fund's performance was competitive with that of its
performance peer group.
FEES RELATIVE TO OTHER PROPRIETARY FUNDS MANAGED BY THE ADVISER WITH COMPARABLE
INVESTMENT STRATEGIES
The Board reviewed the advisory and administrative fee (together, the
"management fee") rate paid by the Fund under the Management Agreement. The
Board noted that the management fee rate was comparable to the management fee
rates charged by the Adviser to other proprietary funds it manages with
investment strategies comparable to those of the Fund.
5
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FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and total expense ratio of the Fund
as compared to the average management fee rate and average total expense ratio
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. The Board concluded that the Fund's management fee rate and
total expense ratio were competitive with those of its 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 breakpoints. The Board also
reviewed the level of the Fund's management fee and noted that the fee, as a
percentage of the Fund's net assets, would decrease as net assets increase
because the management fee includes breakpoints. The Board concluded that the
Fund's management fee would reflect economies of scale as assets increase.
PROFITABILITY OF THE ADVISER AND AFFILIATES
The Board considered information concerning the costs incurred and profits
realized by the Adviser and affiliates during the last year from their
relationship with the Fund and during the last two years from their relationship
with the Morgan Stanley Fund Complex and reviewed with the Adviser the cost
allocation methodology used to determine the profitability of the Adviser and
affiliates. Based on its review of the information it received, the Board
concluded that the profits earned by the Adviser and 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
affiliates from their relationship with the Fund and the Morgan Stanley Fund
Complex, such as "float" benefits derived from handling of checks for purchases
and sales of Fund shares, through a broker-dealer affiliate of the Adviser. 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
concluded that the float benefits were relatively small and the 12b-1 fees were
competitive with those of other broker-dealers.
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits from commissions
paid to brokers who execute securities transactions for the Fund ("soft
dollars"). The Board noted that the Fund invests only in fixed income
securities, which do not generate soft dollars.
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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 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
that it would be in the best interest of the Fund and its shareholders to
approve renewal of the Management Agreement for another year.
7
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Active Assets Government Securities Trust
PORTFOLIO OF INVESTMENTS - JUNE 30, 2006
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<Caption>
ANNUALIZED
PRINCIPAL YIELD
AMOUNT IN ON DATE OF MATURITY
THOUSANDS DESCRIPTION PURCHASE DATES VALUE
- --------------------------------------------------------------------------------------------------------------------
U.S. Government Agencies - Discount Notes (79.3%)
$309,374 Federal Home Loan Banks 4.82 - 5.33% 07/03/06 - 09/29/06 $308,137,962
45,000 Federal National Mortgage Assoc. 5.09 - 5.10 08/23/06 - 08/30/06 44,646,868
65,142 Freddie Mac 4.82 - 4.91 07/03/06 - 07/18/06 65,042,352
------------
Total U.S. Government Agencies - Discount Notes
(COST $417,827,182) 417,827,182
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Repurchase Agreements (14.5%)
6,640 Barclays Capital Inc.
(dated 06/30/06; proceeds $6,642,944) (a) 5.32 07/03/06 6,640,000
40,000 Goldman Sachs & Co.
(dated 06/21/06; proceeds $40,080,111) (b) 5.15 07/05/06 40,000,000
30,000 Goldman Sachs & Co.
(dated 06/28/06; proceeds $30,030,450) (c) 5.22 07/05/06 30,000,000
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Total Repurchase Agreements
(COST $76,640,000) 76,640,000
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U.S. Government Agencies - Floating Rate Notes (6.2%)
4,400 Federal Farm Credit Banks 5.04 - 5.05+ 07/01/06 - 07/03/06* 4,400,717
28,400 Federal Home Loan Banks 5.17 - 5.19+ 07/21/06 - 09/13/06* 28,398,684
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Total U.S. Government Agencies - Floating Rate Notes
(COST $32,799,401) 32,799,401
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Total Investments
(COST $527,266,583) (d) 100.0% 527,266,583
Liabilities in Excess of Other Assets (0.0) (198,426)
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Net Assets 100.0% $527,068,157
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+ RATES SHOWN ARE THE RATES IN EFFECT AT JUNE 30, 2006.
* DATES OF NEXT INTEREST RATE RESET.
(a) COLLATERALIZED BY FEDERAL NATIONAL MORTGAGE ASSOC. 5.50% DUE 05/01/19
VALUED AT $6,772,800.
(b) COLLATERALIZED BY FEDERAL NATIONAL MORTGAGE ASSOC. 5.00% - 6.00% DUE
06/01/21 - 09/01/35 VALUED AT $40,800,000.
(c) COLLATERALIZED BY FEDERAL NATIONAL MORTGAGE ASSOC. 5.50% - 7.00% DUE
02/01/34 - 04/01/36 VALUED AT $30,600,000.
(d) COST IS THE SAME FOR FEDERAL INCOME TAX PURPOSES.
SEE NOTES TO FINANCIAL STATEMENTS
8
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Active Assets Government Securities Trust
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
JUNE 30, 2006
Assets:
Investments in securities, at value (cost $527,266,583)
(including repurchase agreements of $76,640,000) $527,266,583
Cash 5,698
Interest receivable 152,454
Prepaid expenses and other assets 45,011
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Total Assets 527,469,746
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Liabilities:
Payable for:
Investment advisory fee 208,534
Distribution fee 47,390
Administration fee 23,695
Accrued expenses and other payables 121,970
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Total Liabilities 401,589
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Net Assets $527,068,157
============
Composition of Net Assets:
Paid-in-capital $527,023,800
Accumulated undistributed net investment income 44,357
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Net Assets $527,068,157
============
Net Asset Value Per Share
527,068,105 SHARES OUTSTANDING
(UNLIMITED SHARES AUTHORIZED OF $.01 PAR VALUE) $ 1.00
============
SEE NOTES TO FINANCIAL STATEMENTS
9
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Statement of Operations
FOR THE YEAR ENDED JUNE 30, 2006
Net Investment Income:
Interest Income $33,413,116
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Expenses
Investment advisory fee 3,418,087
Distribution fee 829,161
Administration fee 414,580
Transfer agent fees and expenses 110,306
Professional fees 69,640
Registration fees 48,307
Shareholder reports and notices 46,545
Custodian fees 42,380
Trustees' fees and expenses 18,839
Other 62,086
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Total Expenses 5,059,931
Less: expense offset (413)
-----------
Net Expenses 5,059,518
-----------
Net Investment Income 28,353,598
Net Realized Gain 1,964
-----------
Net Increase $28,355,562
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SEE NOTES TO FINANCIAL STATEMENTS
10
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Statements of Changes in Net Assets
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JUNE 30, 2006 JUNE 30, 2005
-------------- --------------
Increase (Decrease) in Net Assets:
Operations:
Net investment income $ 28,353,598 $ 17,575,524
Net realized gain 1,964 988
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Net Increase 28,355,562 17,576,512
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Dividends and Distributions to Shareholders from:
Net investment income (28,353,877) (17,576,043)
Net realized gain (1,964) (988)
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Total Dividends and Distributions (28,355,841) (17,577,031)
-------------- --------------
Net decrease from transactions in shares of beneficial interest (523,115,513) (33,016,332)
-------------- --------------
Net Decrease (523,115,792) (33,016,851)
Net Assets:
Beginning of period 1,050,183,949 1,083,200,800
-------------- --------------
End of Period
(INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME OF $44,357
AND $44,636, RESPECTIVELY) $ 527,068,157 $1,050,183,949
============== ==============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
11
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Active Assets Government Securities Trust
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2006
1. Organization and Accounting Policies
Active Assets Government Securities Trust (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 objectives are
high current income, preservation of capital and liquidity. The Fund was
organized as a Massachusetts business trust on March 30, 1981 and commenced
operations on July 7, 1981.
The following is a summary of significant accounting policies:
A. Valuation of Investments -- Portfolio securities are valued at amortized
cost, which approximates market value, in accordance with Rule 2a-7 under the
Act.
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.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily.
C. Repurchase Agreements -- The Fund may 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. 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.
E. Dividends and Distributions to Shareholders -- The Fund records dividends and
distributions to shareholders as of the close of each business day.
F. 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 with Morgan Stanley Investment
Advisors Inc. (the "Investment Adviser"), 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: 0.45% to the portion of the daily net assets not exceeding $500
million; 0.375% to the portion of the daily net assets exceeding $500 million
but not exceeding $750 million; 0.325% to the portion of the daily net assets
exceeding $750 million but not exceeding $1 billion; 0.30% to the portion of the
daily net assets exceeding $1 billion but not exceeding $1.5 billion; 0.275% to
the
12
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portion of the daily net assets exceeding $1.5 billion but not exceeding $2
billion; 0.25% to the portion of the daily net assets exceeding $2 billion but
not exceeding $2.5 billion; 0.225% to the portion of the daily net assets
exceeding $2.5 billion but not exceeding $3 billion; and 0.20% to the portion of
the daily net assets exceeding $3 billion.
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 0.05% to the Fund's daily net assets.
3. Plan of Distribution
Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the
Investment Adviser and Administrator, is the distributor of the Fund's shares
and in accordance with a Plan of Distribution (the "Plan") pursuant to Rule
12b-1 under the Act, finances certain expenses in connection with the promotion
of sales of Fund shares.
Reimbursements for these expenses are made in monthly payments by the Fund to
the Distributor, which will in no event exceed an amount equal to a payment at
the annual rate of 0.15% of the Fund's average daily net assets during the
month. Expenses incurred by the Distributor pursuant to the Plan in any fiscal
year will not be reimbursed by the Fund through payments accrued in any
subsequent fiscal year. For the year ended June 30, 2006, the distribution fee
was accrued at the annual rate of 0.10%.
4. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales/maturities of portfolio securities
for the year ended June 30, 2006, aggregated $31,759,828,505 and
$32,306,095,181, respectively.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent.
The Fund has an unfunded noncontributory defined benefit pension plan covering
certain independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on factors which include years of service and compensation. The
Trustees voted to close the plan to new participants and eliminate the future
benefits growth due to increases to compensation after July 31, 2003. Aggregate
pension costs for the year ended June 30, 2006, included in Trustees' fees and
expenses in the Statement of Operations amounted to $7,377. At June 30, 2006,
the Fund had an accrued pension liability of $62,591 which is included in
accrued expenses in the Statement of Assets and Liabilities.
13
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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. Shares of Beneficial Interest
Transactions in shares of beneficial interest, at $1.00 per share, were as
follows:
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JUNE 30, 2006 JUNE 30, 2005
-------------- --------------
Shares sold 4,679,369,252 5,910,005,493
Shares issued in reinvestment of
dividends and distributions 28,293,053 17,546,368
-------------- --------------
4,707,662,305 5,927,551,861
Shares redeemed (5,230,777,818) (5,960,568,193)
-------------- --------------
Net decrease in shares outstanding (523,115,513) (33,016,332)
============== ==============
6. Expense Offset
The expense offset represents a reduction of the transfer agent fees and
expenses for earnings on cash balances maintained by the Fund.
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 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
14
<Page>
compensatory damages, rescissionary damages, fees and costs. The defendants have
moved to dismiss the action. On March 9, 2005, Plaintiffs sought leave to
supplement their complaint to assert claims on behalf of other investors, which
motion defendants opposed. On April 14, 2006, the Court granted defendants'
motion to dismiss in its entirety. Additionally, the Court denied Plaintiff's
motion to supplement their complaint. This matter is now concluded.
8. New Accounting Pronouncement
In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation 48, Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting
for income taxes by prescribing the minimum recognition threshold a tax position
must meet before being recognized in the financial statements. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Fund will
adopt FIN 48 during 2007 and the impact to the Fund's financial statements, if
any, is currently being assessed.
15
<Page>
Active Assets Government Securities Trust
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<Table>
<Caption>
FOR THE YEAR ENDED JUNE 30,
---------------------------------------------------
2006 2005 2004 2003 2002
------- ------- ------- ------- -------
Selected Per Share Data:
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Net income from investment operations 0.035 0.016 0.005 0.009 0.020
Less dividends from net investment income (0.035)+ (0.016)+ (0.005)+ (0.009)+ (0.020)+
------- ------- ------- ------- -------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
Total Return 3.60% 1.61% 0.50% 0.95% 2.01%
Ratios to Average Net Assets:
Total expenses (before expense offset) 0.61% 0.58% 0.56% 0.55% 0.53%
Net investment income 3.42% 1.60% 0.49% 0.96% 1.96%
Supplemental Data:
Net assets, end of period, in millions $ 527 $ 1,050 $ 1,083 $ 1,229 $ 1,427
</Table>
- ----------
+ INCLUDES CAPITAL GAIN DISTRIBUTION OF LESS THAN $0.001.
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
Active Assets Government Securities Trust
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees of
Active Assets Government Securities Trust:
We have audited the accompanying statement of assets and liabilities of Active
Assets Government Securities Trust (the "Fund"), including the portfolio of
investments, as of June 30, 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 June 30, 2006, 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 Active
Assets Government Securities Trust as of June 30, 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
AUGUST 22, 2006
17
<Page>
Active Assets Government Securities Trust
TRUSTEE AND OFFICER INFORMATION
Independent Trustees:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** TRUSTEE*** HELD BY TRUSTEE
- --------------------------------------- ----------- ------------ ----------------------- ----------- ---------------------
Michael Bozic (65) Trustee Since Private Investor; 197 Director of various
c/o Kramer Levin Naftalis & Frankel LLP April 1994 Chairman of the business
Counsel to the Independent Trustees Insurance Committee organizations.
1177 Avenue of the Americas (since July 2006) and
New York, NY 10036 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.
Edwin J. Garn (73) Trustee Since Consultant; Director or 197 Director of Franklin
1031 N. Chartwell Court January 1993 Trustee of the Retail Covey (time
Salt Lake City, UT 84103 Funds (since January management systems),
1993) and the BMW Bank of North
Institutional Funds America, Inc.
(since July 2003); (industrial loan
member of the Utah corporation), Escrow
Regional Advisory Board Bank USA (industrial
of Pacific Corp. loan corporation),
(utility company); United Space
formerly Managing Alliance (joint
Director of Summit venture between
Ventures LLC Lockheed Martin and
(2000-2004) (lobbying the Boeing Company)
and consulting firm); and Nuskin Asia
United States Senator Pacific (multilevel
(R-Utah) (1974-1992) marketing); member
and Chairman, Senate of the board of
Banking Committee various civic and
(1980-1986), Mayor of charitable
Salt Lake City, Utah organizations.
(1971-1974), Astronaut,
Space Shuttle Discovery
(April 12-19, 1985),
and Vice Chairman,
Huntsman Corporation
(chemical company).
Wayne E. Hedien (72) Trustee Since Retired; Director or 197 Director of The PMI
c/o Kramer Levin Naftalis & Frankel LLP September Trustee of the Retail Group Inc. (private
Counsel to the Independent Trustees 1997 Funds (since September mortgage insurance);
1177 Avenue of the Americas 1997) and the Trustee and Vice
New York, NY 10036 Institutional Funds Chairman of The
(since July 2003); Field Museum of
formerly associated Natural History;
with the Allstate director of various
Companies (1966-1994), other business and
most recently as charitable
Chairman of The organizations.
Allstate Corporation
(March 1993-December
1994) and Chairman and
Chief Executive Officer
of its wholly-owned
subsidiary, Allstate
Insurance Company (July
1989-December 1994).
</Table>
18
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** TRUSTEE*** HELD BY TRUSTEE
- --------------------------------------- ----------- ------------ ----------------------- ----------- ---------------------
Dr. Manuel H. Johnson (57) Trustee Since Senior Partner, Johnson 197 Director of NVR,
c/o Johnson Smick Group, Inc. July 1991 Smick International, Inc. (home
888 16th Street, NW Inc., a consulting construction);
Suite 740 firm; Chairman of the Director of KFX
Washington, D.C. 20006 Audit Committee and Energy; Director of
Director or Trustee of RBS Greenwich
the Retail Funds (since Capital Holdings
July 1991) and the (financial holding
Institutional Funds company).
(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.
Joseph J. Kearns (63) Trustee Since President, Kearns & 198 Director of Electro
c/o Kearns & Associates LLC July 2003 Associates LLC Rent Corporation
PMB754 (investment (equipment leasing),
23852 Pacific Coast Highway consulting); Deputy The Ford Family
Malibu, CA 90265 Chairman of the Audit Foundation, and the
Committee and Director UCLA Foundation.
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.
Michael E. Nugent (70) Chairman Chairman of General Partner of 197 None.
c/o Triumph Capital, L.P. of the the Board Triumph Capital, L.P.,
445 Park Avenue Board (since July a private investment
New York, NY 10022 and 2006) and partnership; Chairman
Trustee Trustee of the Board of the
(since July Retail Funds and
1991) Institutional Funds
(since July 2006) and
Director or Trustee of
the Retail Funds (since
July 1991) and the
Institutional Funds
(since July 2001);
formerly Chairman of
the Insurance Committee
(July 1991-July 2006)
and Vice President,
Bankers Trust Company
and BT Capital
Corporation
(1984-1988).
Fergus Reid (73) Trustee Since Chairman of Lumelite 198 Trustee and Director
c/o Lumelite Plastics Corporation July 2003 Plastics Corporation; of certain
85 Charles Colman Blvd. Chairman of the investment companies
Pawling, NY 12564 Governance Committee in the JPMorgan
and Director or Trustee Funds complex
of the Retail Funds managed by J.P.
(since July 2003) and Morgan Investment
the Institutional Funds Management Inc.
(since June 1992).
</Table>
19
<Page>
Interested Trustees:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
INTERESTED TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** TRUSTEE*** HELD BY TRUSTEE
- --------------------------------------- ----------- ------------ ----------------------- ----------- ---------------------
Charles A. Fiumefreddo (73) Trustee Since Director or Trustee of 197 None.
c/o Morgan Stanley Trust July 1991 the Retail Funds (since
Harborside Financial Center July 1991) and the
Plaza Two Institutional Funds
Jersey City, NJ 07311 (since July 2003);
formerly Chairman of
the Retail Funds (July
1991-July 2006) and the
Institutional Funds
(July 2003-July 2006)
and Chief Executive
Officer of the Retail
Funds (until September
2002).
James F. Higgins (58) Trustee Since Director or Trustee of 197 Director of AXA
c/o Morgan Stanley Trust June 2000 the Retail Funds (since Financial, Inc. and
Harborside Financial Center June 2000) and the The Equitable Life
Plaza Two Institutional Funds Assurance Society of
Jersey City, NJ 07311 (since July 2003); the United States
Senior Advisor of (financial
Morgan Stanley (since services).
August 2000).
</Table>
- ----------
* 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.).
20
<Page>
Officers:
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXCECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- --------------------------------------- ------------- ----------------- ------------------------------------------------------
Ronald E. Robison (67) President and President (since President (since September 2005) and Principal
1221 Avenue of the Americas Principal September 2005) Executive Officer (since May 2003) of funds in the
New York, NY 10020 Executive and Principal Fund Complex; President (since September 2005) and
Officer Executive Officer Principal Executive Officer (since May 2003) of the
(since May 2003) Van Kampen Funds; Managing Director, Director and/or
Officer of the Investment Adviser and various entities
affiliated with the Investment Adviser; 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 to 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.
J. David Germany (51) Vice Since February Managing Director and (since December 2005) Chief
Morgan Stanley President 2006 Investment Officer - Global Fixed Income of Morgan
Investment Management Ltd. Stanley Investment Management; Managing Director and
25 Cabot Square Director of Morgan Stanley Investment Management Ltd.;
Canary Wharf, London Vice President (since February 2006) of the Retail and
United Kingdom E144QA Institutional Funds.
Dennis F. Shea (53) Vice Since February Managing Director and (since February 2006) Chief
1221 Avenue of the Americas President 2006 Investment Officer - Global Equity of Morgan Stanley
New York, NY 10020 Investment Management; 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) Vice Since February Managing Director and General Counsel of Morgan
1221 Avenue of the Americas President 1997 Stanley Investment Management; Managing Director of
New York, NY 10020 the Investment Adviser and various entities affiliated
with the Investment Adviser; Vice President of the
Retail Funds and (since July 2003) the Institutional
Funds. Formerly, Secretary, General Counsel and/or
Director of the Investment Adviser and various
entities affiliated with the Investment Adviser;
Secretary and General Counsel of the Retail Funds.
Amy R. Doberman (44) Vice Since July 2004 Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas President Management of Morgan Stanley Investment Management
New York, NY 10020 (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 the Investment Adviser and
various entities affiliated with the Investment
Adviser. Formerly, Managing Director and General
Counsel - Americas, UBS Global Asset Management (July
2000 to July 2004).
Carsten Otto (42) Chief Since October Managing Director and U.S. Director of Compliance for
1221 Avenue of the Americas Compliance 2004 Morgan Stanley Investment Management (since October
New York, NY 10020 Officer 2004); Managing Director and Chief Compliance Officer
of Morgan Stanley Investment Management. Formerly,
Assistant Secretary and Assistant General Counsel of
the Retail Funds.
</Table>
21
<Page>
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXCECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- --------------------------------------- ------------- ----------------- ------------------------------------------------------
Stefanie V. Chang Yu (39) Vice Since July 2003 Executive Director of the Investment Adviser and
1221 Avenue of the Americas President various entities affiliated with the Investment
New York, NY 10020 Adviser; Vice President of the Retail Funds (since
July 2002) and the Institutional Funds (since December
1997). Formerly, Secretary of various entities
affiliated with the Investment Adviser.
Francis J. Smith (40) Treasurer Treasurer (since Executive Director of the Investment Adviser and
c/o Morgan Stanley Trust and Chief July 2003) and various entities affiliated with the Investment
Harborside Financial Center Financial Chief Financial Adviser; Treasurer and Chief Financial Officer of the
Plaza Two Officer Officer (since Retail Funds (since July 2003). Formerly, Vice
Jersey City, NJ 07311 September 2002) President of the Retail Funds (September 2002 to July
2003).
Mary E. Mullin (39) Secretary Since July 2003 Executive Director of the Investment Adviser and
1221 Avenue of the Americas various entities affiliated with the Investment
New York, NY 10020 Adviser; Secretary of the Retail Funds (since July
2003) and the Institutional Funds (since June 1999).
</Table>
- ----------
* 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.
2006 FEDERAL TAX NOTICE (UNAUDITED)
Of the Fund's ordinary dividends paid during the fiscal year ended June 30,
2006, 52.50% 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.
22
<Page>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Fergus Reid
OFFICERS
Michael E. Nugent
CHAIRMAN OF THE BOARD
Ronald E. Robison
PRESIDENT AND PRINCIPAL EXECUTIVE OFFICER
J. David Germany
VICE PRESIDENT
Dennis F. Shea
VICE PRESIDENT
Barry Fink
VICE PRESIDENT
Amy R. Doberman
VICE PRESIDENT
Carsten Otto
CHIEF COMPLIANCE OFFICER
Stefanie V. Chang Yu
VICE PRESIDENT
Francis J. Smith
TREASURER AND CHIEF FINANCIAL OFFICER
Mary E. Mullin
SECRETARY
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT ADVISER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
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
(C) 2006 Morgan Stanley
[Morgan Stanley LOGO]
MORGAN STANLEY FUNDS
Active Assets
Government
Securities Trust
Annual Report
June 30, 2006
[Morgan Stanley LOGO]
AAGRPT-RA06-00693P-Y06/06
<Page>
Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies to
its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the Fund or a third
party.
(b) No information need be disclosed pursuant to this paragraph.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit 12 A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Fund's Board of Trustees has determined that it has two "audit committee
financial experts" serving on its audit committee, each of whom are
"independent" Trustees: Dr. Manuel H. Johnson and Joseph J. Kearns. Under
applicable securities laws, a person who is determined to be an audit committee
financial expert will not be deemed an "expert" for any purpose, including
without limitation for the purposes of Section 11 of the Securities Act of 1933,
as a result of being designated or identified as an audit committee financial
expert. The designation or identification of a person as an audit committee
financial expert does not impose on such person any duties, obligations, or
liabilities that are greater than the duties, obligations, and liabilities
imposed on such person as a member of the audit committee and Board of Trustees
in the absence of such designation or identification.
<Page>
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2006
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $27,920 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 531(2) $5,190,300(2)
TAX FEES $ 5,000(3) $2,044,491(4)
ALL OTHER FEES $ -- $ --
TOTAL NON-AUDIT FEES $ 5,531 $7,234,791
TOTAL $33,451 $7,234,791
2005
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $28,105 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 540(2) $3,215,745(2)
TAX FEES $ 4,977(3) $ 24,000(4)
ALL OTHER FEES $ -- $ --
TOTAL NON-AUDIT FEES $ 5,517 $3,239,745
TOTAL $33,622 $3,239,745
N/A- Not applicable, as not required by Item 4.
(1) Covered Entities include the Adviser (excluding sub-advisors) and any
entity controlling, controlled by or under common control with the Adviser
that provides ongoing services to the Registrant.
(2) Audit-Related Fees represent assurance and related services provided that
are reasonably related to the performance of the audit of the financial
statements of the Covered Entities' and funds advised by the Adviser or its
affiliates, specifically data verification and agreed-upon procedures
related to asset securitizations and agreed-upon procedures engagements.
(3) Tax Fees represent tax compliance, tax planning and tax advice services
provided in connection with the preparation and review of the Registrant's
tax returns.
(4) Tax Fees represent tax compliance, tax planning and tax advice services
provided in connection with the review of Covered Entities' tax returns.
(5) All other fees represent project management for future business
applications and improving business and operational processes.
<Page>
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
APPENDIX A
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED AND AMENDED JULY 23, 2004,(1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.
The SEC has issued rules specifying the types of services that an independent
auditor may not provide to its audit client, as well as the audit committee's
administration of the engagement of the independent auditor. The SEC's rules
establish two different approaches to pre-approving services, which the SEC
considers to be equally valid. Proposed services either: may be pre-approved
without consideration of specific case-by-case services by the Audit Committee
("GENERAL PRE-APPROVAL"); or require the specific pre-approval of the Audit
Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit Committee
believes that the combination of these two approaches in this Policy will result
in an effective and efficient procedure to pre-approve services performed by the
Independent Auditors. As set forth in this Policy, unless a type of service has
received general pre-approval, it will require specific pre-approval by the
Audit Committee (or by any member of the Audit Committee to which pre-approval
authority has been delegated) if it is to be provided by the Independent
Auditors. Any proposed services exceeding pre-approved cost levels or budgeted
amounts will also require specific pre-approval by the Audit Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and All
Other services that have the general pre-approval of the Audit Committee. The
term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers and provides a different period and states
otherwise. The Audit Committee will annually review and pre-approve the services
that may be provided by the Independent Auditors without obtaining specific
pre-approval from the Audit Committee. The Audit Committee will add to or
subtract from the list of general pre-approved services from time to time, based
on subsequent determinations.
- ----------
(1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and
Procedures (the "POLICY"), adopted as of the date above, supersedes and
replaces all prior versions that may have been adopted from time to time.
<Page>
The purpose of this Policy is to set forth the policy and procedures by which
the Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committee's responsibilities to pre-approve services
performed by the Independent Auditors to management.
The Fund's Independent Auditors have reviewed this Policy and believes that
implementation of the Policy will not adversely affect the Independent Auditors'
independence.
2. DELEGATION
As provided in the Act and the SEC's rules, the Audit Committee may delegate
either type of pre-approval authority to one or more of its members. The member
to whom such authority is delegated must report, for informational purposes
only, any pre-approval decisions to the Audit Committee at its next scheduled
meeting.
3. AUDIT SERVICES
The annual Audit services engagement terms and fees are subject to the specific
pre-approval of the Audit Committee. Audit services include the annual financial
statement audit and other procedures required to be performed by the Independent
Auditors to be able to form an opinion on the Fund's financial statements. These
other procedures include information systems and procedural reviews and testing
performed in order to understand and place reliance on the systems of internal
control, and consultations relating to the audit. The Audit Committee will
approve, if necessary, any changes in terms, conditions and fees resulting from
changes in audit scope, Fund structure or other items.
In addition to the annual Audit services engagement approved by the Audit
Committee, the Audit Committee may grant general pre-approval to other Audit
services, which are those services that only the Independent Auditors reasonably
can provide. Other Audit services may include statutory audits and services
associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4,
etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings.
The Audit Committee has pre-approved the Audit services in Appendix B.1. All
other Audit services not listed in Appendix B.1 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
4. AUDIT-RELATED SERVICES
Audit-related services are assurance and related services that are reasonably
related to the performance of the audit or review of the Fund's financial
statements and, to the extent they are Covered Services, the Covered Entities or
that are traditionally performed by the Independent Auditors. Because the Audit
Committee believes that the provision of Audit-related services does not impair
the independence of the auditor and is consistent with the SEC's rules on
auditor independence, the Audit Committee may grant general pre-approval to
Audit-related services. Audit-related services include, among others, accounting
consultations related to accounting, financial reporting or disclosure matters
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not classified as "Audit services"; assistance with understanding and
implementing new accounting and financial reporting guidance from rulemaking
authorities; agreed-upon or expanded audit procedures related to accounting
and/or billing records required to respond to or comply with financial,
accounting or regulatory reporting matters; and assistance with internal control
reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in Appendix B.2.
All other Audit-related services not listed in Appendix B.2 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide Tax
services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing
the auditor's independence, and the SEC has stated that the Independent Auditors
may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved the
Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
The Audit Committee has pre-approved the All Other services in Appendix B.4.
Permissible All Other services not listed in Appendix B.4 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be provided by
the Independent Auditors will be established annually by the Audit Committee.
Any proposed services exceeding these levels or amounts will require specific
pre-approval by the Audit Committee. The Audit Committee is mindful of the
overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.
8. PROCEDURES
All requests or applications for services to be provided by the Independent
Auditors that do not require specific approval by the Audit Committee will be
submitted to the Fund's Chief Financial Officer and must include a detailed
description of the services to be
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rendered. The Fund's Chief Financial Officer will determine whether such
services are included within the list of services that have received the general
pre-approval of the Audit Committee. The Audit Committee will be informed on a
timely basis of any such services rendered by the Independent Auditors. Requests
or applications to provide services that require specific approval by the Audit
Committee will be submitted to the Audit Committee by both the Independent
Auditors and the Fund's Chief Financial Officer, and must include a joint
statement as to whether, in their view, the request or application is consistent
with the SEC's rules on auditor independence.
The Audit Committee has designated the Fund's Chief Financial Officer to monitor
the performance of all services provided by the Independent Auditors and to
determine whether such services are in compliance with this Policy. The Fund's
Chief Financial Officer will report to the Audit Committee on a periodic basis
on the results of its monitoring. Both the Fund's Chief Financial Officer and
management will immediately report to the chairman of the Audit Committee any
breach of this Policy that comes to the attention of the Fund's Chief Financial
Officer or any member of management.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an annual
basis to meet its responsibility to oversee the work of the Independent Auditors
and to assure the auditor's independence from the Fund, such as reviewing a
formal written statement from the Independent Auditors delineating all
relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No. 1, and discussing with the Independent Auditors
its methods and procedures for ensuring independence.
10. COVERED ENTITIES
Covered Entities include the Fund's investment adviser(s) and any entity
controlling, controlled by or under common control with the Fund's investment
adviser(s) that provides ongoing services to the Fund(s). Beginning with
non-audit service contracts entered into on or after May 6, 2003, the Fund's
audit committee must pre-approve non-audit services provided not only to the
Fund but also to the Covered Entities if the engagements relate directly to the
operations and financial reporting of the Fund. This list of Covered Entities
would include:
MORGAN STANLEY RETAIL FUNDS
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Van Kampen Asset Management
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
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MORGAN STANLEY INSTITUTIONAL FUNDS
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Advisors Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after May
6, 2003, the audit committee also is required to pre-approve services to Covered
Entities to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Registrant. 100% of such
services were pre-approved by the audit committee pursuant to the Audit
Committee's pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Trustees has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and Covered Entities is compatible with maintaining the auditors'
independence in performing audit services.
Item 5. Audit Committee of Listed Registrants.
(a) The Fund has a separately-designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act whose members are:
Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manual H. Johnson, Joseph J.
Kearns, Michael Nugent and Fergus Reid.
(b) Not applicable.
Item 6. Schedule of Investments
Refer to Item 1.
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Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Applicable only to reports filed by closed-end funds.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports filed by closed-end funds.
Item 9. Closed-End Fund Repurchases
Applicable only to reports filed by closed-end funds.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the second fiscal quarter of the period covered
by this report that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting.
Item 12. Exhibits
(a) The Code of Ethics for Principal Executive and Senior Financial Officers is
attached hereto.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Active Assets Government Securities Trust
/s/ Ronald E. Robison
- -------------------------------------
Ronald E. Robison
Principal Executive Officer
August 10, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Ronald E. Robison
- -------------------------------------
Ronald E. Robison
Principal Executive Officer
August 10, 2006
/s/ Francis Smith
- -------------------------------------
Francis Smith
Principal Financial Officer
August 10, 2006