-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P8CPYfE0PHAOGuvSxsfaD1Sa97VZFEDslIcGYdI6DXRETT8BH4RbSR09AT2LRm+s FYvNtr2nSk44rkZ8mpGQnA== 0000950136-02-000244.txt : 20020414 0000950136-02-000244.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950136-02-000244 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 20020129 EFFECTIVENESS DATE: 20020129 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY CAPITAL OPPORTUNITIES TRUST CENTRAL INDEX KEY: 0001002427 STATE OF INCORPORATION: MA FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-63685 FILM NUMBER: 02520502 BUSINESS ADDRESS: STREET 1: TWO WORLD TRADE CENTER 70TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10048 BUSINESS PHONE: 212-392-1600 MAIL ADDRESS: STREET 1: TWO WORLD TRADE CENTER 70TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10048 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY DEAN WITTER MID-CAP EQUITY TRUST DATE OF NAME CHANGE: 19990628 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY MID CAP EQUITY TRUST DATE OF NAME CHANGE: 20010618 FORMER COMPANY: FORMER CONFORMED NAME: TCW DW MID CAP EQUITY TRUST DATE OF NAME CHANGE: 19951018 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY CAPITAL OPPORTUNITIES TRUST CENTRAL INDEX KEY: 0001002427 STATE OF INCORPORATION: MA FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-07377 FILM NUMBER: 02520503 BUSINESS ADDRESS: STREET 1: TWO WORLD TRADE CENTER 70TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10048 BUSINESS PHONE: 212-392-1600 MAIL ADDRESS: STREET 1: TWO WORLD TRADE CENTER 70TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10048 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY DEAN WITTER MID-CAP EQUITY TRUST DATE OF NAME CHANGE: 19990628 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY MID CAP EQUITY TRUST DATE OF NAME CHANGE: 20010618 FORMER COMPANY: FORMER CONFORMED NAME: TCW DW MID CAP EQUITY TRUST DATE OF NAME CHANGE: 19951018 485BPOS 1 file001.txt POST-EFFECTIVE AMENDMENT ================================================================================ AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 29, 2002 REGISTRATION NOS.: 33-63685 811-7377 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] PRE-EFFECTIVE AMENDMENT NO. [ ] POST-EFFECTIVE AMENDMENT NO. 11 [X] AND/OR REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ] AMENDMENT NO. 12 [X] MORGAN STANLEY CAPITAL OPPORTUNITIES TRUST (A MASSACHUSETTS BUSINESS TRUST) FORMERLY MORGAN STANLEY MID-CAP EQUITY TRUST (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) C/O MORGAN STANLEY TRUST HARBORSIDE FINANCIAL CENTER, PLAZA TWO, JERSEY CITY, NEW JERSEY 07311 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 869-6397 BARRY FINK, ESQ. 1221 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10020 (NAME AND ADDRESS OF AGENT FOR SERVICE) COPY TO: STUART M. STRAUSS, ESQ. MAYER, BROWN & PLATT 1675 BROADWAY NEW YORK, NEW YORK 10019 APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after this Post-Effective Amendment becomes effective. IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX) immediately upon filing pursuant to paragraph (b) ---- X on January 29, 2002 pursuant to paragraph (b) ---- 60 days after filing pursuant to paragraph (a) ---- on (date) pursuant to paragraph (a) of rule 485. ---- AMENDING THE PROSPECTUS AND UPDATING FINANCIAL STATEMENTS ================================================================================ [MORGAN STANLEY LOGO] Morgan Stanley Capital Opportunities Trust A mutual fund that seeks long-term capital appreciation Prospectus | January 29, 2002 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. - ---- ---- Contents The Fund INVESTMENT OBJECTIVE ..............................1 PRINCIPAL INVESTMENT STRATEGIES ...................1 PRINCIPAL RISKS ...................................2 PAST PERFORMANCE ..................................3 FEES AND EXPENSES .................................4 ADDITIONAL INVESTMENT STRATEGY INFORMATION ........5 ADDITIONAL RISK INFORMATION .......................6 FUND MANAGEMENT ...................................7 Shareholder Information PRICING FUND SHARES ...............................8 HOW TO BUY SHARES .................................8 HOW TO EXCHANGE SHARES ...........................10 HOW TO SELL SHARES ...............................12 DISTRIBUTIONS ....................................13 TAX CONSEQUENCES .................................14 SHARE CLASS ARRANGEMENTS .........................15 Financial Highlights ................................................. 23 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 [GRAPHIC OMITTED] INVESTMENT OBJECTIVE - ---------------------------- Morgan Stanley Capital Opportunities Trust (formerly named Morgan Stanley Mid-Cap Equity Trust) seeks long-term capital appreciation. [GRAPHIC OMITTED] PRINCIPAL INVESTMENT STRATEGIES - --------------------------------------- (sidebar) CAPITAL APPRECIATION An investment objective having the goal of selecting securities with the potential to rise in price rather than pay out income. (end sidebar) The Fund will normally invest at least 65% of its assets in a portfolio of common stocks and convertible securities of medium-sized companies with market capitalizations, at the time of purchase, within the capitalization range of the companies comprising the Standard & Poor's MidCap 400 Index, which capitalization range is approximately between $225 million and $10.5 billion as of December 31, 2001. The Fund's "Sub-Advisor," TCW Investment Management Company, invests the Fund's assets in companies that it believes exhibit above-average earnings growth prospects and attractive stock market valuations. In buying and selling securities for the Fund's portfolio, the Sub-Advisor uses its proprietary research in pursuing a "bottom-up" investment philosophy, which emphasizes individual company selection. Quantitative and qualitative standards also will be used to screen more than one thousand companies to provide a list of potential investment securities. The Sub-Advisor then subjects the list of securities to a fundamental analysis which generally looks for at least some of the following factors: o a demonstrated record of consistent earnings growth or the potential to grow earnings; o an ability to earn an attractive return on equity; o a price/earnings ratio which is less than the Sub-Advisor's internally estimated three-year earnings growth rate; o a large and growing market share; o a strong balance sheet; and o significant ownership by management and a strong management team. 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. A convertible security is a bond, preferred stock or other security that may be converted into a prescribed amount of common stock at a particular time and price. In addition, the Fund's investments may include equity securities of small or large companies, foreign securities and investment grade fixed-income securities. 1 In pursuing the Fund's investment objective, the Sub-Advisor has considerable leeway in deciding which investments it buys, holds or sells on a day-to-day basis -- and which trading strategies it uses. For example, the Sub-Advisor in its discretion may determine to use some permitted trading strategies while not using others. [GRAPHIC OMITTED] PRINCIPAL RISKS - ---------------------- 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 of medium-sized companies. 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. Investing in securities of medium-sized companies may involve greater risk than is customarily associated with investing in more established companies. Often, medium-sized companies and the industries in which they are focused are still evolving, and they are more sensitive to changing market conditions than larger companies in more established industries. Their securities may be more volatile and have returns that vary, sometimes significantly, from the overall stock market. 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 the Sub-Advisor 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 equity securities of small or large companies, foreign securities and its fixed-income investments. 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. 2 [GRAPHIC OMITTED] PAST PERFORMANCE - ------------------------- The bar chart and table below provide some indication of the risks of investing in the Fund. The Fund's past performance 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 B shares has varied from year to year for the past 5 calendar years. (end sidebar) ANNUAL TOTAL RETURNS -- CALENDAR YEARS 10.97% 62.71% 124.60% -35.73% -39.37% 1997 '98 '99 2000 '01 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 62.22% (quarter ended December 31, 1999) and the lowest return for a calendar quarter was -40.43% (quarter ended September 30, 2001). (sidebar) AVERAGE ANNUAL TOTAL RETURNS This table compares the Fund's average annual total returns with those of a broad measure of market performance 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. (end sidebar)
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) - -------------------------------------------------------------------------------- LIFE OF FUND PAST 1 YEAR PAST 5 YEARS (SINCE 2/27/96) - -------------------------------------------------------------------------------- Class A(1) -42.03% -- -- - -------------------------------------------------------------------------------- Class B -42.40% 9.30% 8.74% - -------------------------------------------------------------------------------- Class C(1) -39.97% -- -- - -------------------------------------------------------------------------------- Class D(1) -38.75% -- -- - -------------------------------------------------------------------------------- S&P MidCap 400 Index(2) -0.58% 16.12% 16.05% - --------------------------------------------------------------------------------
(1) Classes A, C and D commenced operations on July 28, 1997. (2) The Standard and Poor's MidCap 400 Index (S&P MidCap 400) is a market-value weighted index, the performance of which is based on the performance of 400 domestic stocks chosen for market size, liquidity and industry group representation. The Index does not include any expenses, fees or charges. The Index is unmanaged and should not be considered an investment. 3 [GRAPHIC OMITTED] FEES AND EXPENSES - -------------------------- 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. See the "Share Class Arrangements" section for further fee and expense information. (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 and are based on expenses paid for the fiscal year ended November 30, 2001. (end sidebar)
CLASS A CLASS B CLASS C CLASS D - ----------------------------------------------------------------------------------------------------- SHAREHOLDER FEES - ----------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------- Management fee 0.74% 0.74% 0.74% 0.74% - ----------------------------------------------------------------------------------------------------- Distribution and service (12b-1) fees 0.11% 1.00% 1.00% None - ----------------------------------------------------------------------------------------------------- Other expenses 0.28% 0.28% 0.28% 0.28% - ----------------------------------------------------------------------------------------------------- Total annual Fund operating expenses 1.13% 2.02% 2.02% 1.02% - -----------------------------------------------------------------------------------------------------
(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 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. 4 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 $705 $934 $1,288 $2,348 $205 $634 $1,088 $2,348 - ---------- ---- ---- ------ ------ ---- ---- ------ ------ Class C $305 $634 $1,088 $2,348 $205 $634 $1,088 $2,348 - ---------- ---- ---- ------ ------ ---- ---- ------ ------ Class D $104 $325 $ 563 $1,248 $104 $325 $ 563 $1,248 - ---------- ---- ---- ------ ------ ---- ---- ------ ------
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. [GRAPHIC OMITTED] ADDITIONAL INVESTMENT STRATEGY INFORMATION - ---------------------------------------------------- This section provides additional information relating to the Fund's principal investment strategies. Other Investments. The Fund also may invest up to 35% of its net assets in equity securities of small or large companies and investment grade fixed-income securities. It also may invest up to 25% of its net assets in foreign equity securities (including depositary receipts). 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 when the Sub-Advisor 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 will generally 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. 5 [GRAPHIC OMITTED] ADDITIONAL RISK INFORMATION - ----------------------------------- This section provides additional information relating to the principal risks of investing in the Fund. Small Companies. As with the Fund's investments in medium-sized companies, its investments in the securities of small companies may involve greater risk than is customarily associated with investing in more established companies. Small companies in particular often have limited product lines, financial resources and less experienced management. As a consequence, their securities may be more volatile and have returns that vary, sometimes significantly, from the overall stock market. Fixed-Income 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 price of most fixed-income securities goes down. When the general level of interest rates goes down, the price of most fixed-income securities goes up. 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 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 (including depositary receipts) 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. 6 [GRAPHIC OMITTED] FUND MANAGEMENT - ------------------------- The Fund has retained the Investment Manager -- Morgan Stanley Investment Advisors Inc. -- to provide administrative services, manage its business affairs and supervise the investment of its assets. The Investment Manager has, in turn, contracted with the Sub-Advisor -- TCW Investment Management Company -- to invest the Fund's assets, including the placing of orders for the purchase and sale of portfolio securities. The Investment Manager is a wholly-owned subsidiary of Morgan Stanley Dean Witter & Co., a preeminent global financial services firm that maintains leading market positions in each of its three primary businesses: securities, asset management and credit services. Its address is 1221 Avenue of the Americas, New York, NY 10020. (sidebar) MORGAN STANLEY INVESTMENT ADVISORS INC. The Investment Manager is widely recognized as a leader in the mutual fund industry and together with Morgan Stanley Services Company Inc., its wholly-owned subsidiary, had approximately $135 billion in assets under management as of December 31, 2001. (end sidebar) As of November 30, 2001, the Sub-Advisor, together with its affiliated companies, managed approximately $79.5 billion, primarily for institutional investors. The Sub-Advisor's main business office is located at 865 South Figueroa Street, Suite 1800, Los Angeles, California 90017. The Sub-Advisor is a wholly-owned subsidiary of the TCW Group, Inc. ("TCW Group"), whose direct and indirect subsidiaries provide a variety of trust, investment management and investment advisory services. Societe Generale Asset Management, S.A., a wholly-owned subsidiary of Societe Generale, S.A., owns a majority interest in TCW Group. Douglas S. Foreman, Chief Investment Officer of U.S. Equities and Group Managing Director of the Sub-Advisor, is the primary portfolio manager of the Fund. He is assisted by Christopher J. Ainley, Managing Director of the Sub-Advisor. Mr. Foreman and Mr. Ainley have been portfolio managers with affiliated companies of the TCW Group for over five years. The Fund pays the Investment Manager a monthly management fee as full compensation for the services and facilities furnished to the Fund, and for Fund expenses assumed by the Investment Manager. The fee is based on the Fund's average daily net assets. For the fiscal year ended November 30, 2001, the Fund accrued total compensation to the Investment Manager amounting to 0.74% of the Fund's average daily net assets. The Investment Manager pays the Sub-Advisor monthly compensation equal to 40% of this fee. 7 Shareholder Information [GRAPHIC OMITTED] PRICING FUND SHARES - --------------------------- 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 Manager and/or Sub-Advisor 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 these cases, the Fund's net asset value will reflect certain portfolio securities' fair value rather than their market price. 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 sixty 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. [GRAPHIC OMITTED] HOW TO BUY SHARES - -------------------------- 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. You may also purchase shares directly by calling the Fund's transfer agent and requesting an application. (sidebar) CONTACTING A FINANCIAL ADVISOR If you are new to the Morgan Stanley Family of Funds and would like to contact a 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) 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 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. 8 When you buy Fund shares, the shares are purchased at the next share price calculated (less 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. We reserve the right to reject any order for the purchase of Fund shares. (sidebar) EASYINVEST(SM) 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 AMOUNTS - -------------------------------------------------------------------------------- MINIMUM INVESTMENT ----------------------- INVESTMENT OPTIONS INITIAL ADDITIONAL - -------------------------------------------------------------------------------- Regular Account $ 1,000 $ 100 - -------------------------------------------------------------------------------- Individual Retirement Account $ 1,000 $ 100 - -------------------------------------------------------------------------------- Coverdell Education Savings Account $ 500 $ 100 - -------------------------------------------------------------------------------- EasyInvest(SM) (Automatically from your checking or savings account or Money Market Fund) $ 100* $ 100* - --------------------------------------------------------------------------------
* Provided your schedule of investments totals $1,000 in twelve months. There is no minimum investment amount if you purchase Fund shares through: (1) the Investment Manager's mutual fund asset allocation plan, (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 and (ii) certain other investment programs that do not charge an asset-based fee, or (4) employer-sponsored employee benefit plan accounts. 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 Capital Opportunities Trust. o Mail the letter and check to Morgan Stanley Trust at P.O. Box 1040, Jersey City, NJ 07303. 9 [GRAPHIC OMITTED] HOW TO EXCHANGE SHARES - -------------------------------- 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, North American Government Income Trust or Short-Term U.S. Treasury Trust, without the imposition of an exchange fee. In addition, Class A shares of the Fund may be exchanged for shares of an FSC Fund (funds subject to a front-end sales charge). See the inside back cover of this Prospectus for each Morgan Stanley Fund's designation as a Multi-Class Fund, No-Load Fund, Money Market Fund or FSC 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 thirty days. There is no waiting period for exchanges of shares acquired by exchange or dividend reinvestment. 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 Fund's transfer agent -- Morgan Stanley Trust -- 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 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 are accepted. 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. The check writing privilege is not available for Money Market Fund shares you acquire in an exchange. 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 Fund's 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 10 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 exchanges and/or purchase or sale transactions involving the Fund or other Morgan Stanley Funds may result in the Fund limiting or prohibiting, at its discretion, additional purchases and/or exchanges. Determinations in this regard may be made based on the frequency or dollar amount of previous exchanges or purchase or sale transactions. You will be notified in advance of limitations on your exchange privileges. CDSC Calculations on Exchanges. See the "Share Class Arrangements" section of this Prospectus for a further 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. 11 [GRAPHIC OMITTED] HOW TO SELL SHARES - --------------------------- 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. --------------------------------------------------------------------------------------------------- [GRAPHIC OMITTED] 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: [GRAPHIC OMITTED] 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 Family of Funds has a total market value of at Withdrawal Plan least $10,000, you may elect to withdraw amounts of $25 or more, or in any whole percentage [GRAPHIC OMITTED] 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. - ------------------ ---------------------------------------------------------------------------------------------------
12 Payment for Sold Shares. After we receive your complete instruction 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, however, 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. 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 sixty 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 EasyInvestSM, 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 sixty 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. [GRAPHIC OMITTED] DISTRIBUTIONS - -------------------- 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 are passed along as "capital gain 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) 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 because distribution fees that Class B and Class C pay are higher. Normally, income dividends are 13 distributed to shareholders semi-annually. 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 Financial Advisor 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 Fund's transfer agent, Morgan Stanley Trust, at least five business days prior to the record date of the distributions. [GRAPHIC OMITTED] TAX CONSEQUENCES - ------------------------- 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. 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. 14 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 (approximately 30% currently) on taxable distributions and redemption proceeds. Any withheld amount would be sent to the IRS as an advance tax payment. [GRAPHIC OMITTED] SHARE CLASS ARRANGEMENTS - ---------------------------------- 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:
MAXIMUM CLASS SALES CHARGE ANNUAL 12B-1 FEE - ------------------------------------------------------------------------------------------------------------ A Maximum 5.25% initial sales charge reduced for purchase of $25,000 or more; shares sold without an initial sales charge are generally subject to a 1.0% CDSC during the first year 0.25% - ------------------------------------------------------------------------------------------------------------ B Maximum 5.0% CDSC during the first year decreasing to 0% after six years 1.00% - ------------------------------------------------------------------------------------------------------------ C 1.0% CDSC during the first year 1.00% - ------------------------------------------------------------------------------------------------------------ D None None - ------------------------------------------------------------------------------------------------------------
CLASS A SHARES Class A shares are sold at net asset value plus an initial sales charge of up to 5.25%. 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 contingent deferred sales charge, or 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. Class A shares are also subject to a distribution (12b-1) fee of up to 0.25% of the average daily net assets of the Class. This fee is lower than the distribution fee paid by Class B or Class C. The Fund will not accept a purchase order for Class A shares that qualifies for investment in Class D. 15 The offering price of Class A shares includes a sales charge (expressed as a percentage of the 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 0 - ------------------------------------------------------------------------------------
The reduced sales charge schedule is applicable to purchases of Class A shares in a single transaction by: o A single account (including an individual, trust or fiduciary account). o Family member accounts (limited to husband, wife and children under the age of 21). o Pension, profit sharing or other employee benefit plans of companies and their affiliates. o Tax-exempt organizations. o Groups organized for a purpose other than to buy mutual fund shares. Combined Purchase Privilege. You also 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 and shares of FSC Funds. Right of Accumulation. You also may benefit from a reduction of 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 funds you currently own which were 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, amounts to $25,000 or more. Also, if you have a cumulative net asset value of all your Class A and Class D shares 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. You must notify your Morgan Stanley Financial Advisor or other authorized financial representative (or Morgan Stanley Trust if you purchase directly through the Fund), at the time a purchase order is placed, that the purchase qualifies for the reduced sales charge under the Right of Accumulation. Similar notification must be made in writing when an order is placed by mail. The reduced sales charge will not 16 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. Letter of Intent. The 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 or shares of FSC Funds within a thirteen month period. The initial purchase under a Letter of Intent must be at least 5% of the stated investment goal. To determine the applicable sales charge reduction, you may also include: (1) the cost of shares of other Morgan Stanley Multi-Class 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 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 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 thirteen 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. 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 Morgan Stanley Trust 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 (i) Morgan Stanley Trust serves as trustee, (ii) Morgan Stanley's Retirement Plan Services serves as recordkeeper under a written Recordkeeping Services Agreement or (iii) an entity independent from Morgan Stanley serves as recordkeeper under an alliance or similar agreement with Morgan Stanley's Retirement Plan Services (together, "Morgan Stanley Eligible Plans"), provided that, in the case of (i) and (ii) above, any such plan has at least 200 eligible employees. 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. 17 o A client of a Morgan Stanley Financial Advisor who joined us from another investment firm within six months prior to the date of purchase of Fund shares, and you used the proceeds from the sale of shares of a proprietary mutual fund of that Financial Advisor's previous firm that imposed either a front-end or deferred sales charge to purchase Class A shares, provided that: (1) you sold the shares not more than 60 days prior to the purchase of Fund shares, and (2) the sale proceeds were maintained in the interim in cash or a Money Market Fund. 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 Dean Witter & Co. 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)
CDSC AS A PERCENTAGE YEAR SINCE PURCHASE PAYMENT MADE 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. The Fund will generally not accept a purchase order for Class B shares in the amount of $100,000 or more. 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 name (not a trust) or in the names of you and your spouse as joint tenants with right of survivorship; or (ii) held in a qualified corporate or self-employed retirement plan, IRA or 403(b) Custodial Account, provided in either case that the sale is requested within one year of your death or initial determination of disability. 18 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 59 1/2); (ii) distributions from an IRA or 403(b) Custodial Account following attainment of age 59 1/2; 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 held for you as a participant in a Morgan Stanley Eligible Plan. 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 if you simultaneously invest the proceeds in the Investment Manager's mutual fund asset allocation program, pursuant to which investors pay an asset-based fee. Any shares you acquire in connection with the Investment Manager'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 Financial Advisor or call (800) 869-NEWS. Distribution Fee. Class B shares are subject to an annual distribution (12b-1) fee of 1.0% 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. This fee is higher than the annual distribution fee paid by Class A. Conversion Feature. After ten (10) years, Class B shares will convert automatically to Class A shares of the Fund with no initial sales charge. The ten 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 ten 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. (Class B shares held before May 1, 1997, however, will convert to Class A shares in May 2007.) 19 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. Currently, the Class B share conversion is not a taxable event; the conversion feature may be cancelled if it is deemed a taxable event in the future by the Internal Revenue Service. If you exchange your Class B shares for shares of a Money Market Fund, a No-Load Fund, North American Government Income Trust or Short-Term 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 distribution (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. The Fund will not accept a purchase order for Class C shares in the amount of $1 million or more. Distribution Fee. Class C shares are subject to an annual distribution (12b-1) fee of up to 1.0% of the average daily net assets of that Class. This fee is higher than the annual distribution fee paid by Class A. 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 (12b-1) fees applicable to Class C shares for an indefinite period. 20 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 Manager'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 Dean Witter & Co. or any of its subsidiaries for the benefit of certain employees of Morgan Stanley Dean Witter & Co. and its subsidiaries. o Certain unit investment trusts sponsored by Morgan Stanley DW. 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. A purchase order meeting the requirements for investment in Class D will only be accepted for 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 that have been approved by the Fund's distributor (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 and shares of FSC Funds you currently own, along with shares of Morgan Stanley Funds you currently own that you acquired in exchange for those shares. 21 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 distribution of Class A, Class B and Class C shares (Class D shares are offered without any distribution 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 in these Classes and may cost you more than paying other types of sales charges. 22 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, independent auditors, whose report, along with the Fund's financial statements, is included in the annual report, which is available upon request.
Class A Shares++ - -------------------------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED NOVEMBER 30 ---------------------------------------------------------------------- 2001 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- SELECTED PER SHARE DATA: Net asset value, beginning of period $26.86 $ 33.83 $ 15.60 $ 10.88 - -------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment loss (0.20) (0.33) (0.34) (0.18) - -------------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) (10.69) (5.76) 18.57 4.90 - -------------------------------------------------------------------------------------------------------------------------- Total income (loss) from investment operations (10.89) (6.09) 18.23 4.72 - -------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM: - -------------------------------------------------------------------------------------------------------------------------- Net realized gain -- (0.77) -- -- - -------------------------------------------------------------------------------------------------------------------------- Paid-in-capital -- (0.11) -- -- - -------------------------------------------------------------------------------------------------------------------------- Total distributions -- (0.88) -- -- - -------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $15.97 $ 26.86 $ 33.83(4) $ 15.60 - -------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN+ (40.54)% (18.72)% 116.89 % 43.38 % - -------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: - -------------------------------------------------------------------------------------------------------------------------- Expenses 1.13 %(3) 1.11 %(3) 1.23 %(3) 1.55 %(3) - -------------------------------------------------------------------------------------------------------------------------- Net investment loss (1.02)%(3) (0.82)%(3) (0.93)%(3) (1.40)%(3) - -------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA: - -------------------------------------------------------------------------------------------------------------------------- Net assets, end of period, in thousands $21,509 $48,068 $19,934 $1,107 - -------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate 25 % 17 % 51 % 52 % - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FOR THE PERIOD JULY 28, 1997* THROUGH NOVEMBER 30, 1997 - -------------------------------------------------------------------------------- SELECTED PER SHARE DATA: - -------------------------------------------------------------------------------- Net asset value, beginning of period $10.85 - -------------------------------------------------------------------------------- INCOME (LOSS) FROM INVESTMENT OPERATIONS: - -------------------------------------------------------------------------------- Net investment loss (0.06) - -------------------------------------------------------------------------------- Net realized and unrealized gain (loss) 0.09 - -------------------------------------------------------------------------------- Total income (loss) from investment operations 0.03 - -------------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM: - -------------------------------------------------------------------------------- Net realized gain -- - -------------------------------------------------------------------------------- Paid-in-capital -- - -------------------------------------------------------------------------------- Total distributions -- - -------------------------------------------------------------------------------- Net asset value, end of period $10.88 - -------------------------------------------------------------------------------- TOTAL RETURN+ 0.28 %(1) - -------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: - -------------------------------------------------------------------------------- Expenses 1.55 %(2) - -------------------------------------------------------------------------------- Net investment loss (1.46)%(2) - -------------------------------------------------------------------------------- SUPPLEMENTAL DATA: - -------------------------------------------------------------------------------- Net assets, end of period, in thousands $ 58 - -------------------------------------------------------------------------------- Portfolio turnover rate 49 % - --------------------------------------------------------------------------------
* The date shares were first issued. ++ 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) Not annualized. (2) Annualized. (3) Reflects overall Fund ratios for investment income and non-class specific expenses. (4) Includes the effect of a capital gain distribution of $0.004. 23
Class B Shares++ - ---------------------------------------------------------------------------------------- FOR THE YEAR ENDED NOVEMBER 30 -------------------------------- 2001 2000 - ---------------------------------------------------------------------------------------- SELECTED PER SHARE DATA: - ---------------------------------------------------------------------------------------- Net asset value, beginning of period $ 26.35 $ 33.36 - ---------------------------------------------------------------------------------------- INCOME (LOSS) FROM INVESTMENT OPERATIONS: - ---------------------------------------------------------------------------------------- Net investment loss (0.37) (0.51) - ---------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) (10.45) (5.62) - ---------------------------------------------------------------------------------------- Total income (loss) from investment operations (10.82) (6.13) - ---------------------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM: - ---------------------------------------------------------------------------------------- Net realized gain -- (0.77) - ---------------------------------------------------------------------------------------- Paid-in-capital -- (0.11) - ---------------------------------------------------------------------------------------- Total distributions -- (0.88) - ---------------------------------------------------------------------------------------- Net asset value, end of period $ 15.53 $ 26.35 - ---------------------------------------------------------------------------------------- TOTAL RETURN+ (41.06)% (19.12)% - ---------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: - ---------------------------------------------------------------------------------------- Expenses 2.02 %(1) 1.58 %(1) - ---------------------------------------------------------------------------------------- Net investment loss (1.91)%(1) (1.29)%(1) - ---------------------------------------------------------------------------------------- SUPPLEMENTAL DATA: - ---------------------------------------------------------------------------------------- Net assets, end of period, in thousands $705,388 $1,413,820 - ---------------------------------------------------------------------------------------- Portfolio turnover rate 25 % 17 % - ---------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED NOVEMBER 30 ------------------------------------------------- 1999 1998 1997* - ----------------------------------------------------------------------------------------------------- SELECTED PER SHARE DATA: - ----------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 15.46 $ 10.85 $ 10.92 - ----------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM INVESTMENT OPERATIONS: - ----------------------------------------------------------------------------------------------------- Net investment loss (0.42) (0.26) (0.22) - ----------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) 18.32 4.87 0.15 - ----------------------------------------------------------------------------------------------------- Total income (loss) from investment operations 17.90 4.61 (0.07) - ----------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM: - ----------------------------------------------------------------------------------------------------- Net realized gain -- -- -- - ----------------------------------------------------------------------------------------------------- Paid-in-capital -- -- -- - ----------------------------------------------------------------------------------------------------- Total distributions -- -- -- - ----------------------------------------------------------------------------------------------------- Net asset value, end of period $ 33.36(2) $ 15.46 $ 10.85 - ----------------------------------------------------------------------------------------------------- TOTAL RETURN+ 115.82 % 42.49 % (0.64)% - ----------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: - ----------------------------------------------------------------------------------------------------- Expenses 1.74 %(1) 2.20 %(1) 2.29 % - ----------------------------------------------------------------------------------------------------- Net investment loss (1.44)%(1) (2.05)%(1) (2.16)% - ----------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA: - ----------------------------------------------------------------------------------------------------- Net assets, end of period, in thousands $1,315,930 $212,043 $174,412 - ----------------------------------------------------------------------------------------------------- Portfolio turnover rate 51 % 52 % 49 % - 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* Prior to July 28, 1997, the Fund issued one class of shares. All shares of the Fund held prior to that date have been designated Class B shares. ++ 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. (2) Includes the effect of a capital gain distribution of $0.004. 24
Class C Shares++ - --------------------------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED NOVEMBER 30 ---------------------------------------------------------------------- 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- SELECTED PER SHARE DATA: - --------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $26.19 $ 33.24 $ 15.45 $ 10.85 - --------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM INVESTMENT OPERATIONS: - --------------------------------------------------------------------------------------------------------------------------- Net investment loss (0.37) (0.62) (0.52) (0.28) - --------------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) (10.39) (5.55) 18.31 4.88 - --------------------------------------------------------------------------------------------------------------------------- Total income (loss) from investment operations (10.76) (6.17) 17.79 4.60 - --------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM: - --------------------------------------------------------------------------------------------------------------------------- Net realized gain -- (0.77) -- -- - --------------------------------------------------------------------------------------------------------------------------- Paid-in-capital -- (0.11) -- -- - --------------------------------------------------------------------------------------------------------------------------- Total distributions -- (0.88) -- -- - --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $15.43 $ 26.19 $ 33.24(4) $15.45 - --------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN+ (41.08)% (19.31)% 115.18 % 42.27 % - --------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: - --------------------------------------------------------------------------------------------------------------------------- Expenses 2.02 %(3) 1.86 %(3) 1.99 %(3) 2.30 %(3) - --------------------------------------------------------------------------------------------------------------------------- Net investment loss (1.91)%(3) (1.56)%(3) (1.69)%(3) (2.15)%(3) - --------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA: - --------------------------------------------------------------------------------------------------------------------------- Net assets, end of period, in thousands $32,016 $61,822 $34,898 $ 712 - --------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate 25 % 17 % 51 % 52 % - --------------------------------------------------------------------------------------------------------------------------- FOR THE PERIOD JULY 28, 1997* THROUGH NOVEMBER 30, 1997 - -------------------------------------------------------------------------------- SELECTED PER SHARE DATA: - -------------------------------------------------------------------------------- Net asset value, beginning of period $10.85 - -------------------------------------------------------------------------------- INCOME (LOSS) FROM INVESTMENT OPERATIONS: - -------------------------------------------------------------------------------- Net investment loss (0.08) - -------------------------------------------------------------------------------- Net realized and unrealized gain (loss) 0.08 - -------------------------------------------------------------------------------- Total income (loss) from investment operations -- - -------------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM: - -------------------------------------------------------------------------------- Net realized gain -- - -------------------------------------------------------------------------------- Paid-in-capital -- - -------------------------------------------------------------------------------- Total distributions -- - -------------------------------------------------------------------------------- Net asset value, end of period $10.85 - -------------------------------------------------------------------------------- TOTAL RETURN+ 0.09 %(1) - -------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: - -------------------------------------------------------------------------------- Expenses 2.32 %(2) - -------------------------------------------------------------------------------- Net investment loss (2.22)%(2) - -------------------------------------------------------------------------------- SUPPLEMENTAL DATA: - -------------------------------------------------------------------------------- Net assets, end of period, in thousands $ 83 - -------------------------------------------------------------------------------- Portfolio turnover rate 49 % - --------------------------------------------------------------------------------
* The date shares were first issued. ++ 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) Not annualized. (2) Annualized. (3) Reflects overall Fund ratios for investment income and non-class specific expenses. (4) Includes the effect of a capital gain distribution of $0.004. 25
Class D Shares++ - ---------------------------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED NOVEMBER 30 ------------------------------------------------------------------------ 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- SELECTED PER SHARE DATA: - ---------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $27.04 $ 33.97 $ 15.66 $ 10.89 - ---------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM INVESTMENT OPERATIONS: - ---------------------------------------------------------------------------------------------------------------------------- Net investment loss (0.18) (0.24) (0.21) (0.15) - ---------------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) (10.76) (5.81) 18.52 4.92 - ---------------------------------------------------------------------------------------------------------------------------- Total income (loss) from investment operations (10.94) (6.05) 18.31 4.77 - ---------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM: - ---------------------------------------------------------------------------------------------------------------------------- Net realized gain -- (0.77) -- -- - ---------------------------------------------------------------------------------------------------------------------------- Paid-in-capital -- (0.11) -- -- - ---------------------------------------------------------------------------------------------------------------------------- Total distributions -- (0.88) -- -- - ---------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $16.10 $ 27.04 $ 33.97(4) $ 15.66 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN+ (40.46)% (18.52)% 116.96 % 43.80 % - ---------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: - ---------------------------------------------------------------------------------------------------------------------------- Expenses 1.02 %(3) 0.86 %(3) 0.99 %(3) 1.30 %(3) - ---------------------------------------------------------------------------------------------------------------------------- Net investment loss (0.91)%(3) (0.57)%(3) (0.69)%(3) (1.15)%(3) - ---------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA: - ---------------------------------------------------------------------------------------------------------------------------- Net assets, end of period, in thousands $94,203 $23,815 $4,384 $ 15 - ---------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate 25% 17 % 51 % 52 % - ---------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FOR THE PERIOD JULY 28, 1997* THROUGH NOVEMBER 30, 1997 - -------------------------------------------------------------------------------- SELECTED PER SHARE DATA: - -------------------------------------------------------------------------------- Net asset value, beginning of period $10.85 - -------------------------------------------------------------------------------- INCOME (LOSS) FROM INVESTMENT OPERATIONS: - -------------------------------------------------------------------------------- Net investment loss (0.05) - -------------------------------------------------------------------------------- Net realized and unrealized gain (loss) 0.09 - -------------------------------------------------------------------------------- Total income (loss) from investment operations 0.04 - -------------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM: - -------------------------------------------------------------------------------- Net realized gain -- - -------------------------------------------------------------------------------- Paid-in-capital -- - -------------------------------------------------------------------------------- Total distributions -- - -------------------------------------------------------------------------------- Net asset value, end of period $10.89 - -------------------------------------------------------------------------------- TOTAL RETURN+ 0.37 %(1) - -------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: - -------------------------------------------------------------------------------- Expenses 1.30 %(2) - -------------------------------------------------------------------------------- Net investment loss (1.19)%(2) - -------------------------------------------------------------------------------- SUPPLEMENTAL DATA: - -------------------------------------------------------------------------------- Net assets, end of period, in thousands $ 10 - -------------------------------------------------------------------------------- Portfolio turnover rate 49 % - --------------------------------------------------------------------------------
* The date shares were first issued. ++ 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) Not annualized. (2) Annualized. (3) Reflects overall Fund ratios for investment income and non-class specific expenses. (4) Includes the effect of a capital gain distribution of $0.004. 26 Notes - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - 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-------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 28 Morgan Stanley Funds - -------------------------------------------------------------------------------- o GLOBAL/INTERNATIONAL FUNDS Competitive Edge Fund - "Best Ideas" Portfolio European Growth Fund Fund of Funds - International Portfolio Global Dividend Growth Securities Global Utilities Fund International Fund International Smallcap Fund International Value Equity Fund Japan Fund Latin American Growth Fund Pacific Growth Fund o GROWTH FUNDS 21st Century Trend Fund Aggressive Equity Fund All Star Growth Fund American Opportunities Fund Capital Growth Securities Capital Opportunities Trust Developing Growth Securities Trust Financial Services Trust Growth Fund Health Sciences Trust Information Fund KLD Social Index Fund Market Leader Trust Mid-cap Value Fund Nasdaq-100 Index Fund Natural Resource Development Securities New Discoveries Fund Next Generation Trust Small Cap Growth Fund Special Value Fund Tax-managed Growth Fund Technology Fund o GROWTH + INCOME FUNDS Balanced Growth Fund Balanced Income Fund Convertible Securities Trust Dividend Growth Securities Equity Fund Fund of Funds - Domestic Portfolio Income Builder Fund Real Estate Fund S&p 500 Index Fund S&p 500 Select Fund Strategist Fund Total Market Index Fund Total Return Trust Utilities Fund Value Fund Value-Added Market Series/ Equity Portfolio o INCOME FUNDS Diversified Income Trust Federal Securities Trust High Yield Securities Intermediate Income Securities Limited Duration Fund(NL) Liquid Asset Fund (MM) North American Government Income Trust Short-term U.s. Treasury Trust U.S. Government Money Market Trust (MM) U.S. Government Securities Trust o TAX-FREE INCOME FUNDS California Tax-free Daily Income Trust (MM) California Tax-free Income Fund Hawaii Municipal Trust (FSC) Limited Term Municipal Trust (NL) Multi-state Municipal Series Trust (FSC) New York Municipal Money Market Trust (MM) New York Tax-free Income Fund Tax-exempt Securities Trust Tax-free Daily Income Trust (MM) - -------------------------------------------------------------------------------- There may be funds created 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, except for North American Government Income Trust and Short-Term U.S. Treasury Trust, is a Multi-Class Fund. A Multi-Class Fund is a mutual fund offering multiple Classes of shares. The other types of funds are: NL -- No-Load (Mutual) Fund; MM -- Money Market Fund; FSC -- A mutual fund sold with a front-end sales charge and a distribution (12b-1) fee. STATEMENT OF ADDITIONAL INFORMATION MORGAN STANLEY CAPITAL OPPORTUNITIES January 29, 2002 TRUST - -------------------------------------------------------------------------------- This Statement of Additional Information is not a prospectus. The Prospectus dated January 29, 2002 for Morgan Stanley Capital Opportunities Trust may be obtained without charge from the Fund at its address or telephone numb7er listed below or from Morgan Stanley DW Inc. at any of its branch offices. Morgan Stanley Capital Opportunities Trust c/o Morgan Stanley Trust Harborside Financial Center, Plaza Two, Jersey City, NJ 07311 (800) 869-NEWS TABLE OF CONTENTS - -------------------------------------------------------------------------------- I. Fund History ....................................................... 4 II. Description of the Fund and Its Investments and Risks .............. 4 A. Classification .................................................. 4 B. Investment Strategies and Risks ................................. 4 C. Fund Policies/Investment Restrictions ........................... 9 III. Management of the Fund ............................................. 10 A. Board of Trustees ............................................... 10 B. Management Information .......................................... 10 C. Compensation .................................................... 15 IV. Control Persons and Principal Holders of Securities ................ 16 V. Management, Investment Advice and Other Services ................... 17 A. Investment Manager and Sub-Advisor .............................. 17 B. Principal Underwriter ........................................... 18 C. Services Provided by the Investment Manager and the Sub-Advisor . 18 D. Dealer Reallowances ............................................. 19 E. Rule 12b-1 Plan ................................................. 20 F. Other Service Providers ......................................... 24 G. Codes of Ethics ................................................. 24 VI. Brokerage Allocation and Other Practices ........................... 24 A. Brokerage Transactions .......................................... 24 B. Commissions ..................................................... 24 C. Brokerage Selection ............................................. 25 D. Directed Brokerage .............................................. 26 E. Regular Broker-Dealers .......................................... 26 VII. Capital Stock and Other Securities ................................. 26 VIII. Purchase, Redemption and Pricing of Shares ......................... 27 A. Purchase/Redemption of Shares ................................... 27 B. Offering Price .................................................. 28 IX. Taxation of the Fund and Shareholders .............................. 28 X. Underwriters ....................................................... 30 XI. Calculation of Performance Data .................................... 30 XII. Financial Statements ............................................... 32
2 GLOSSARY OF SELECTED DEFINED TERMS The terms defined in this glossary are frequently used in this Statement of Additional Information (other terms used occasionally are defined in the text of the document). "Custodian " - The Bank of New York. "Distributor " - Morgan Stanley Distributors Inc., a wholly-owned broker-dealer subsidiary of Morgan Stanley. "Financial Advisors " - Morgan Stanley authorized financial services representatives. "Fund " - Morgan Stanley Capital Opportunities Trust, a registered open-end investment company. "Independent Trustees " - Trustees who are not "interested persons" (as defined by the Investment Company Act) of the Fund. "Investment Manager " - Morgan Stanley Investment Advisors Inc., a wholly-owned investment advisor subsidiary of Morgan Stanley. "Morgan Stanley " - Morgan Stanley Dean Witter & Co., a preeminent global financial services firm. "Morgan Stanley & Co." - Morgan Stanley & Co. Incorporated, a wholly-owned broker-dealer subsidiary of Morgan Stanley. "Morgan Stanley DW " - Morgan Stanley DW Inc., a wholly-owned broker-dealer subsidiary of Morgan Stanley. "Morgan Stanley Funds " - (i) Registered investment companies for which the Investment Manager serves as the investment advisor and that hold themselves out to investors as related companies for investment and investor services; and (ii) the TCW/DW Term Trusts. "Morgan Stanley Services Company " - Morgan Stanley Services Company Inc., a wholly-owned fund services subsidiary of the Investment Manager. "Sub-Advisor " - TCW Investment Management Company, a wholly-owned subsidiary of TCW. "TCW " - The TCW Group, Inc., a preeminent investment management and investment advisory services firm. "Transfer Agent " - Morgan Stanley Trust, a wholly-owned transfer agent subsidiary of Morgan Stanley. "Trustees " - The Board of Trustees of the Fund. 3 I. FUND HISTORY - -------------------------------------------------------------------------------- The Fund was organized under the laws of the Commonwealth of Massachusetts on October 17, 1995 as a Massachusetts business trust under the name "TCW/DW Mid-Cap Equity Trust." On February 25, 1999 the Fund's Trustees adopted an Amendment to the Fund's Declaration of Trust changing the name of the Fund to Morgan Stanley Dean Witter Mid-Cap Equity Trust, effective June 28, 1999. Effective June 18, 2001, the Fund's name was changed to Morgan Stanley Mid-Cap Equity Trust. Effective January 29, 2002, the Fund's name was changed to Morgan Stanley Capital Opportunities Trust. II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS - -------------------------------------------------------------------------------- A. CLASSIFICATION The Fund is an open-end, diversified management investment company whose investment objective is to seek long-term capital appreciation. B. Investment Strategies and Risks The following discussion of the Fund's investment strategies and risks should be read with the sections of the Fund's Prospectus titled "Principal Investment Strategies," "Principal Risks," "Additional Investment Strategy Information" and "Additional Risk Information." CONVERTIBLE SECURITIES. The Fund may invest in fixed-income securities which are convertible into common stock of the issuer. Convertible securities rank senior to common stocks in a corporation's capital structure and, therefore, entail less risk than the corporation's common stock. The value of a convertible security is a function of its "investment value" (its value as if it did not have a conversion privilege), and its "conversion value" (the security's worth if it were to be exchanged for the underlying security, at market value, pursuant to its conversion privilege). To the extent that a convertible security's investment value is greater than its conversion value, its price will be primarily a reflection of such investment value and its price will be likely to increase when interest rates fall and decrease when interest rates rise, as with a fixed-income security (the credit standing of the issuer and other factors may also have an effect on the convertible security's value). If the conversion value exceeds the investment value, the price of the convertible security will rise above its investment value and, in addition, will sell at some premium over its conversion value. (This premium represents the price investors are willing to pay for the privilege of purchasing a fixed-income security with a possibility of capital appreciation due to the conversion privilege.) At such times the price of the convertible security will tend to fluctuate directly with the price of the underlying equity security. Convertible securities may be purchased by the Fund at varying price levels above their investment values and/or their conversion values in keeping with the Fund's objective. The Fund may also invest up to 5% of its assets in convertible securities and other fixed income securities rated below investment grade. Securities below investment grade are the equivalent of high yield, high risk bonds (commonly known as "junk bonds"). However, the Fund will not invest in convertible and other fixed-income securities that are rated lower than B by S&P or Moody's or, if not rated, determined to be of comparable quality by the Sub-Advisor. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund may enter into forward foreign currency exchange contracts ("forward contracts") to "lock in" the price of a security in U.S. dollars or some other foreign currency which the Fund is holding in its portfolio. By entering into a forward contract for the purchase or sale, for a fixed amount of dollars or other currency, of the amount of foreign currency involved in the underlying security transactions, the Fund may be able to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar or other currency which is being used for the security purchase and the foreign currency in which the security is denominated during the period between the date on which the security is purchased or sold and the date on which payment is made or received. A forward contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed 4 upon by the parties, at a price set at the time of the contract. These contracts are traded in the interbank market conducted directly between currency traders (usually large, commercial and investment banks) and their customers. Forward contracts only will be entered into with United States banks and their foreign branches, insurance companies and other dealers or foreign banks whose assets total $1 billion or more. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades. When required by law, the Fund will cause its custodian bank to earmark cash, U.S. government securities or other appropriate liquid portfolio securities in an amount equal to the value of the Fund's total assets committed to the consummation of forward contracts entered into under the circumstances set forth above. If the value of the securities so earmarked declines, additional cash or securities will be placed in the account on a daily basis so that the value of such securities will equal the amount of the Fund's commitments with respect to such contracts. Although the Fund values its assets daily in terms of U.S. dollars, it does not intent to convert the holdings of foreign currencies into U.S. dollars on a daily basis. It will, however, do so from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the spread between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at one rate, while offering a lesser rate of exchange should the Fund desire to resell that currency to the dealer. The Fund may be limited in its ability to enter into hedging transactions involving forward contracts by the Internal Revenue Code requirements relating to qualification as a regulated investment company. Forward currency contracts may limit gains on portfolio securities that could otherwise be realized had they not been utilized and could result in losses. MONEY MARKET SECURITIES. The Fund may invest in various money market securities for cash management purposes or when assuming a temporary defensive position, which among others may include commercial paper, bank acceptances, bank obligations, corporate debt securities, certificates of deposit, U.S. government securities and obligations of savings institutions and repurchase agreements. Such securities are limited to: U.S. Government Securities. Obligations issued or guaranteed as to principal and interest by the United States or its agencies (such as the Export-Import Bank of the United States, Federal Housing Administration and Government National Mortgage Association) or its instrumentalities (such as the Federal Home Loan Bank), including Treasury bills, notes and bonds; Bank Obligations. Obligations (including certificates of deposit and bankers' acceptances) of banks subject to regulation by the U.S. Government and having total assets of $1 billion or more, and instruments secured by such obligations, not including obligations of foreign branches of domestic banks except to the extent below; Eurodollar Certificates of Deposit. Eurodollar certificates of deposit issued by foreign branches of domestic banks having total assets of $1 billion or more; Obligations of Savings Institutions. Certificates of deposit of savings banks and savings and loan associations, having total assets of $1 billion or more; Fully Insured Certificates of Deposit. Certificates of deposit of banks and savings institutions having total assets of less than $1 billion, if the principal amount of the obligation is federally insured by the Bank Insurance Fund or the Savings Association Insurance Fund (each of which is administered by the FDIC), limited to $100,000 principal amount per certificate and to 10% or less of the Fund's total assets in all such obligations and in all illiquid assets, in the aggregate; 5 Commercial Paper. Commercial paper rated within the two highest grades by Standard & Poor's Corporation ("S&P") or by Moody's Investor's Service, Inc. ("Moody's") or, if not rated, issued by a company having an outstanding debt issue rated at least AA by S&P or Aa by Moody's; and Repurchase Agreements. The Fund may invest in repurchase agreements. When cash may be available for only a few days, it may be invested by the Fund in repurchase agreements until such time as it may otherwise be invested or used for payments of obligations of the Fund. These agreements, which may be viewed as a type of secured lending by the Fund, typically involve the acquisition, by the Fund, of debt securities from a selling financial institution such as a bank, savings and loan association or broker-dealer. The agreement provides that the Fund will sell back to the institution, and that the institution will repurchase, the underlying security serving as collateral at a specified price and at a fixed time in the future, usually not more than seven days from the date of purchase. The collateral will be marked-to-market daily to determine that the value of the collateral, as specified in the agreement, does not decrease below the purchase price plus accrued interest. If such decrease occurs, additional collateral will be requested and, when received, added to the account to maintain full collateralization. The Fund will accrue interest from the institution until the time when the repurchase is to occur. Although this date is deemed by the Fund to be the maturity date of a repurchase agreement, the maturities of securities subject to repurchase agreements are not subject to any limits. While repurchase agreements involve certain risks not associated with direct investments in debt securities, the Fund follows procedures approved by the Trustees designed to minimize such risks. These procedures include effecting repurchase transactions only with large, well-capitalized and well-established financial institutions whose financial condition will be continually monitored by the Investment Manager and/or Sub-Advisor. In addition, as described above, the value of the collateral underlying the repurchase agreement will be at least equal to the repurchase price, including any accrued interest earned on the repurchase agreement. In the event of a default or bankruptcy by a selling financial institution, the Fund will seek to liquidate such collateral. However, the exercising of the Fund's right to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Fund could suffer a loss. It is the current policy of the Fund not to invest in repurchase agreements that do not mature within seven days if any such investment, together with any other illiquid assets held by the Fund, amounts to more than 15% of its net assets. ZERO COUPON SECURITIES. A portion of the fixed-income securities purchased by the Fund may be zero coupon securities. Such securities are purchased at a discount from their face amount, giving the purchaser the right to receive their full value at maturity. The interest earned on such securities is, implicitly, automatically compounded and paid out at maturity. While such compounding at a constant rate eliminates the risk of receiving lower yields upon reinvestment of interest if prevailing interest rates decline, the owner of a zero coupon security will be unable to participate in higher yields upon reinvestment of interest received on interest-paying securities if prevailing interest rates rise. A zero coupon security pays no interest to its holder during its life. Therefore, to the extent the Fund invests in zero coupon securities, it will not receive current cash available for distribution to shareholders. In addition, zero coupon securities are subject to substantially greater price fluctuations during periods of changing prevailing interest rates than are comparable securities which pay interest on a current basis. Current federal tax law requires that a holder (such as the Fund) of a zero coupon security accrue a portion of the discount at which the security was purchased as income each year even though the Fund receives no interest payments in cash on the security during the year. INVESTMENT IN REAL ESTATE INVESTMENT TRUSTS. The Fund may invest in real estate investment trusts, which pool investors' funds for investments primarily in commercial real estate properties. Investment in real estate investment trusts may be the most practical available means for the Fund to invest in the real estate industry (the Fund is prohibited from investing in real estate directly). As a shareholder in a real estate investment trust, the Fund would bear its ratable share of the real estate investment trust's expenses, including its advisory and administration fees. At the same time the Fund 6 would continue to pay its own management fees, investment advisory fees and other expenses, as a result of which the Fund and its shareholders in effect will be absorbing duplicate levels of fees with respect to investments in real estate investment trusts. LENDING PORTFOLIO SECURITIES. The Fund may lend its portfolio securities to brokers, dealers and other financial institutions, provided that the loans are callable at any time by the Fund, and are at all times secured by cash or cash equivalents, which are maintained in a segregated account pursuant to applicable regulations and that are equal to at least 100% of the market value, determined daily, of the loaned securities. The advantage of these loans is that the Fund continues to receive the income on the loaned securities while at the same time earning interest on the cash amounts deposited as collateral, which will be invested in short-term obligations. The Fund will not lend more than 25% of the value of its total assets. As with any extensions of credit, there are risks of delay in recovery and, in some cases, even loss of rights in the collateral should the borrower of the securities fail financially. However, these loans of portfolio securities will only be made to firms deemed by the Fund's management to be creditworthy and when the income which can be earned from such loans justifies the attendant risks. Upon termination of the loan, the borrower is required to return the securities to the Fund. Any gain or loss in the market price during the loan period would inure to the Fund. When voting or consent rights which accompany loaned securities pass to the borrower, the Fund will follow the policy of calling the loaned securities, to be delivered within one day after notice, to permit the exercise of the rights if the matters involved would have a material effect on the Fund's investment in the loaned securities. The Fund will pay reasonable finder's, administrative and custodial fees in connection with a loan of its securities. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. The Fund may purchase securities on a when-issued or delayed delivery basis or may purchase or sell securities on a forward commitment basis. When these transactions are negotiated, the price is fixed at the time of the commitment, but delivery and payment can take place a month or more after the date of commitment. While the Fund will only purchase securities on a when-issued, delayed delivery or forward commitment basis with the intention of acquiring the securities, the Fund may sell the securities before the settlement date, if it is deemed advisable. The securities so purchased or sold are subject to market fluctuation and no interest or dividends accrue to the purchaser prior to the settlement date. At the time the Fund makes the commitment to purchase or sell securities on a when-issued, delayed delivery or forward commitment basis, it will record the transaction and thereafter reflect the value, each day, of such security purchased, or if a sale, the proceeds to be received, in determining its net asset value. At the time of delivery of the securities, their value may be more or less than the purchase or sale price. An increase in the percentage of the Fund's assets committed to the purchase of securities on a when-issued, delayed delivery or forward commitment basis may increase the volatility of its net asset value. The Fund will also establish a segregated account on the Fund's books in which it will continually maintain cash or cash equivalents or other liquid portfolio securities equal in value to commitments to purchase securities on a when-issued, delayed delivery or forward commitment basis. WHEN, AS AND IF ISSUED SECURITIES. The Fund may purchase securities on a "when, as and if issued" basis under which the issuance of the security depends upon the occurrence of a subsequent event, such as approval of a merger, corporate reorganization or debt restructuring. The commitment for the purchase of any such security will not be recognized in the portfolio of the Fund until the Investment Manager and/or Sub-Advisor determines that issuance of the security is probable. At that time, the Fund will record the transaction and, in determining its net asset value, will reflect the value of the security daily. At that time, the Fund will also establish a segregated account on the Fund's books in which it will maintain cash or cash equivalents or other liquid portfolio securities equal in value to recognized commitments for such securities. An increase in the percentage of the Fund's assets committed to the purchase of securities on a "when, as and if issued" basis may increase the volatility of its net asset value. The Fund may also sell securities on a "when, as and if issued" basis provided that the issuance of the security will result automatically from the exchange or conversion of a security owned by the Fund at the time of sale. 7 PRIVATE PLACEMENTS AND RESTRICTED SECURITIES. The Fund may invest up to 15% of its net assets in securities which are subject to restrictions on resale because they have not been registered under the Securities Act of 1933 (the "Securities Act"), or which are otherwise not readily marketable. (Securities eligible for resale pursuant to Rule 144A under the Securities Act, and determined to be liquid pursuant to the procedures discussed in the following paragraph, are not subject to the foregoing restriction.) These securities are generally referred to as "private placements" or "restricted securities." Limitations on the resale of these securities may have an adverse effect on their marketability, and may prevent the Fund from disposing of them promptly at reasonable prices. The Fund may have to bear the expense of registering the securities for resale and the risk of substantial delays in effecting the registration. Rule 144A permits the Fund to sell restricted securities to qualified institutional buyers without limitation. The Investment Manager and/or Sub-Advisor, pursuant to procedures adopted by the Trustees, will make a determination as to the liquidity of each restricted security purchased by the Fund. If a restricted security is determined to be "liquid," the security will not be included within the category "illiquid securities," which may not exceed 15% of the Fund's net assets. However, investing in Rule 144A securities could have the effect of increasing the level of Fund illiquidity to the extent the Fund, at a particular point in time, may be unable to find qualified institutional buyers interested in purchasing such securities. WARRANTS AND SUBSCRIPTION RIGHTS. The Fund may acquire warrants and subscription rights attached to other securities. The Fund may invest up to 5% of the value of its net assets in warrants, including not more than 2% in warrants not listed on either the New York or American Stock Exchange. A warrant is, in effect, an option to purchase equity securities at a specific price, generally valid for a specific period of time, and has no voting rights, pays no dividends and has no rights with respect to the corporation issuing it. A subscription right is a privilege granted to existing shareholders of a corporation to subscribe to shares of a new issue of common stock before it is offered to the public. A subscription right normally has a life of two to four weeks and a subscription price lower than the current market value of the common stock. The Fund may invest up to 5% of the value of its net assets in rights. HIGH YIELD, HIGH RISK SECURITIES. Because of the ability of the Fund to invest in certain high yield, high risk convertible and other fixed-income securities (commonly known as "junk bonds"), the Investment Manager and/or Sub-Advisor must take into account the special nature of such securities and certain special considerations in assessing the risks associated with such investments. Although the growth of the high yield securities market in the 1980s had paralleled a long economic expansion, since that time many issuers have been affected by adverse economic and market conditions. It should be recognized that an economic downturn or increase in interest rates is likely to have a negative effect on the high yield bond market and on the value of the high yield securities held by the Fund, as well as on the ability of the securities' issuers to repay principal and interest on their borrowings. The prices of high yield securities have been found to be less sensitive to changes in prevailing interest rates than higher-rated investments but more sensitive to adverse economic changes or individual corporate developments. During an economic downturn or substantial period of rising interest rates, highly leveraged issuers may experience financial stress which would adversely affect their ability to service their principal and interest payment obligations, to meet their projected business goals or to obtain additional financing. If the issuer of a fixed-income security owned by the Fund defaults, the Fund may incur additional expenses to seek recovery. In addition, periods of economic uncertainty and change can be expected to result in an increased volatility of market prices of high yield securities and a corresponding volatility in the net asset value of a share of the Fund. The secondary market for high yield securities may be less liquid than the markets for higher quality securities and, as such, may have an adverse effect on the market prices of certain securities. The limited liquidity of the market may also adversely affect the ability of the Trustees to arrive at a fair value for certain high yield securities at certain times and could make it difficult for the Fund to sell certain securities. In addition, new laws and potential new laws may have an adverse effect upon the value of high yield securities and a corresponding negative impact upon the net asset value of a share of the Fund. 8 C. FUND POLICIES/INVESTMENT RESTRICTIONS The investment objective, policies and restrictions listed below have been adopted by the Fund as fundamental policies. Under the Investment Company Act of 1940, as amended (the "Investment Company Act"), a fundamental policy may not be changed without the vote of a majority of the outstanding voting securities of the Fund. The Investment Company Act defines a majority as the lesser of (a) 67% or more of the shares present at a meeting of shareholders, if the holders of 50% of the outstanding shares of the Fund are present or represented by proxy; or (b) more than 50% of the outstanding shares of the Fund. For purposes of the following restrictions: (i) all percentage limitations apply immediately after a purchase or initial investment; and (ii) any subsequent change in any applicable percentage resulting from market fluctuations or other changes in total or net assets does not require elimination of any security from the portfolio. The Fund will: 1. Seek long-term capital appreciation. The Fund may not: 1. As to 75% of its assets, invest more than 5% of the value of its total assets in the securities of any one issuer (other than obligations issued, or guaranteed by, the United States Government, its agencies or instrumentalities). 2. As to 75% of its assets, purchase more than 10% of all outstanding voting securities or any class of securities of any one issuer. 3. Invest 25% or more of the value of its total assets in securities of issuers in any one industry. This restriction does not apply to obligations issued or guaranteed by the United States Government, its agencies or instrumentalities or to cash equivalents. 4. Invest more than 5% of the value of its total assets in securities of issuers having a record, together with predecessors, of less than 3 years of continuous operation. This restriction does not apply to any obligation of the United States Government, its agencies or instrumentalities. 5. Purchase securities of other investment companies, except in connection with a merger, consolidation, reorganization or acquisition of assets. 6. Purchase or sell real estate or interests therein (including limited partnership interests), although the Fund may purchase securities of issuers which engage in real estate operations and securities secured by real estate or interests therein. 7. Purchase oil, gas or other mineral leases, rights or royalty contracts, or exploration or development programs, except that the Fund may invest in the securities of companies which operate, invest in, or sponsor these programs. 8. Purchase or sell commodities or commodities contracts. 9. Borrow money, except that the Fund may borrow from a bank for temporary or emergency purposes, in amounts not exceeding 5% of its total assets (not including the amount borrowed). 10. Pledge its assets or assign or otherwise encumber them except to secure permitted borrowings. 11. Issue senior securities as defined in the Investment Company Act, except insofar as the Fund may be deemed to have issued a senior security by reason of: (a) entering into any repurchase agreement; (b) purchasing any securities on a when-issued or delayed delivery basis; (c) borrowing money; or (d) lending portfolio securities. 9 12. Make loans of money or securities, except: (a) by the purchase of portfolio securities; (b) by investment in repurchase agreements; or (c) by lending its portfolio securities. 13. Make short sales of securities. 14. Purchase securities on margin, except for short-term loans as are necessary for the clearance of portfolio securities. 15. Engage in the underwriting of securities, except insofar as the Fund may be deemed an underwriter under the Securities Act in disposing of a portfolio security. 16. Invest for the purpose of exercising control or management of any other issuer. 17. Purchase warrants if, as a result, the Fund would then have either more than 5% of its net assets invested in warrants or more than 2% of its net assets invested in warrants not listed on the New York or American Stock Exchange. 18. Invest in options or futures contracts. If a percentage restriction is adhered to at the time of investment, a later increase or decrease in percentage resulting from a change in values of portfolio securities or amount of total or net assets will not be considered a violation of any of the foregoing restrictions. III. MANAGEMENT OF THE FUND - -------------------------------------------------------------------------------- A. BOARD OF TRUSTEES The Board of Trustees of the Fund oversees the management of the Fund but does not itself manage the Fund. The Trustees review various services provided by or under the direction of the Investment Manager to ensure that the Fund's general investment policies and programs are properly carried out. The Trustees also conduct their review to ensure that administrative services are provided to the Fund in a satisfactory manner. Under state law, the duties of the Trustees are generally characterized as a duty of loyalty and a duty of care. The duty of loyalty requires a Trustee to exercise his or her powers in the interest of the Fund and not the Trustee's own interest or the interest of another person or organization. A Trustee satisfies his or her duty of care by acting in good faith with the care of an ordinarily prudent person and in a manner the Trustee reasonably believes to be in the best interest of the Fund and its shareholders. B. MANAGEMENT INFORMATION TRUSTEES AND OFFICERS. The Board of the Fund consists of nine (9) Trustees. These same individuals also serve as directors or trustees for all of the Morgan Stanley Funds. Six Trustees (67% of the total number) have no affiliation or business connection with the Investment Manager or any of its affiliated persons and do not own any stock or other securities issued by the Investment Manager's parent company, Morgan Stanley. These are the "non-interested" or "independent" Trustees. The other three Trustees (the "management Trustees") are affiliated with the Investment Manager. The independent Trustees of the Fund, their term of office and length of time served, their principal business occupations during the past five years, the number of funds in the Fund Complex (defined below) overseen by each independent Trustee and other directorships, if any, held by the Trustee, are shown below. The Fund Complex includes all funds advised by Morgan Stanley Investment Advisors Inc. and any funds that have an investment advisor that is an affiliated person of Morgan Stanley Investment Advisors Inc. (including but not limited to, Morgan Stanley Investment Management Inc., Morgan Stanley Investments LP and Van Kampen Asset Management Inc.). 10
NUMBER OF FUNDS IN FUND POSITION(S) LENGTH OF PRINCIPAL OCCUPATION(S) COMPLEX NAME, AGE AND ADDRESS OF HELD WITH TIME DURING OVERSEEN OTHER DIRECTORSHIPS HELD INDEPENDENT TRUSTEE REGISTRANT SERVED* PAST 5 YEARS BY TRUSTEE BY TRUSTEE - -------------------------- ------------ ------------ -------------------------- ------------ -------------------------- Michael Bozic (60) Trustee Trustee Retired; Director or 99 Director of Weirton Steel c/o Mayer, Brown & Platt since Trustee of the Morgan Corporation. Counsel to the Independent April 1994 Stanley Funds and the Trustees TCW/DW Term Trusts; 1675 Broadway formerly Vice Chairman of New York, NY 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 (69) Trustee Trustee Director or Trustee of the 99 Director of Franklin Covey c/o Summit Ventures LLC since Morgan Stanley Funds and (time management systems), 1 Utah Center January 1993 the TCW/DW Term Trusts; BMW Bank of North America, 201 S. Main Street formerly United States Inc. (industrial loan Salt Lake City, UT Senator corporation), United Space (R-Utah)(1974-1992) and Alliance (joint venture Chairman, Senate Banking between Lockheed Martin Committee (1980-1986); and the Boeing Company) formerly Mayor of Salt and Nuskin Asia Pacific Lake City, Utah (multilevel marketing); (1971-1974); formerly member of the board of Astronaut, Space Shuttle various civic and Discovery (April 12-19, charitable organizations. 1985); Vice Chairman, Huntsman Corporation (chemical company); member of the Utah Regional Advisory Board of Pacific Corp. Wayne E. Hedien (67) Trustee Trustee Retired; Director or 99 Director of The PMI Group c/o Mayer, Brown & Platt since Trustee of the Morgan Inc. (private mortgage Counsel to the Independent September Stanley Funds and the insurance); Trustee and Trustees 1997 TCW/DW Term Trusts; Vice Chairman of The Field 1675 Broadway formerly associated with Museum of Natural History; New York, NY the Allstate Companies director of various other (1966-1994), most recently business and charitable as 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). Dr. Manuel H. Johnson (52) Trustee Trustee Chairman of the Audit 99 Director of NVR, Inc. c/o Johnson Smick since Committee and Director or (home construction); International, Inc. July 1991 Trustee of the Morgan Chairman and Trustee of 1133 Connecticut Avenue, Stanley Funds and the the Financial Accounting N.W. TCW/DW Term Trusts; Senior Foundation (oversight Washington, D.C. Partner, Johnson Smick organization of the International, Inc., a Financial Accounting consulting firm; Standards Board). 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. Michael E. Nugent (65) Trustee Trustee Chairman of the Insurance 115 Director of various c/o Triumph Capital, L.P. since Committee and Director or business organizations. 237 Park Avenue July 1991 Trustee of the Morgan New York, NY Stanley Funds and the TCW/DW Term Trusts; director/trustee of various investment companies managed by Morgan Stanley Investment Management Inc. and Morgan Stanley Investments LP (since July 2001); General Partner, Triumph Capital, L.P., a private investment partnership; formerly Vice President, Bankers Trust Company and BT Capital Corporation (1984-1988). John L. Schroeder (71) Trustee Trustee Retired; Chairman of the 99 Director of Citizens c/o Mayer, Brown & Platt since Derivatives Committee and Communications Company Counsel to the Independent April 1994 Director or Trustee of the (telecommunications Trustees Morgan Stanley Funds and company). 1675 Broadway the TCW/DW Term Trusts; New York, NY formerly Executive Vice President and Chief Investment Officer of the Home Insurance Company (August 1991-September 1995).
- ------------ * This is the date the Trustee began serving the Morgan Stanley family of funds. 11 The management Trustees and executive officers of the Fund, their term of office and length of time served, their principal business occupations during the past five years, the number of funds in the Fund Complex overseen by each management Trustee and the other directorships, if any, held by the Trustee, are shown below.
NUMBER OF FUNDS IN FUND POSITION(S) LENGTH OF PRINCIPAL OCCUPATION(S) COMPLEX NAME, AGE AND ADDRESS OF HELD WITH TIME DURING OVERSEEN OTHER DIRECTORSHIPS HELD MANAGEMENT TRUSTEE REGISTRANT SERVED* PAST 5 YEARS BY TRUSTEE BY TRUSTEE - ---------------------------- ------------- ------------- ------------------------ ------------ ------------------------ Charles A. Fiumefreddo (68) Chairman, Trustee since Chairman, Director or 99 None c/o Morgan Stanley Trust Director or July 1991 Trustee and Chief Harborside Financial Center, Trustee and Executive Officer of the Plaza Two, Chief Morgan Stanley Funds and Jersey City, NJ Executive the TCW/DW Term Trusts; Officer formerly Chairman, Chief Executive Officer and Director of the Investment Manager, the Distributor and Morgan Stanley Services, Executive Vice President and Director of Morgan Stanley DW, Chairman and Director of the Transfer Agent and Director and/or officer of various Morgan Stanley subsidiaries (until June 1998). James F. Higgins (53) Trustee Trustee since Director or Trustee of 99 None c/o Morgan Stanley Trust June 2000 the Morgan Stanley Funds Harborside Financial Center, and the TCW/DW Term Plaza Two, Trusts (since June Jersey City, NJ 2000); Chairman of the Individual Investor Group of Morgan Stanley (since August 2000); Director of the Transfer Agent, Distributor and Dean Witter Realty Inc.; previously President and Chief Operating Officer of the Private Client Group of Morgan Stanley (May 1999-August 2000), President and Chief Operating Officer of Individual Securities of Morgan Stanley (February 1997-May 1999). Philip J. Purcell (58) Trustee Trustee since Director or Trustee of 99 Director of American 1585 Broadway April 1994 the Morgan Stanley Funds Airlines, Inc. and its New York, NY and the TCW/DW Term parent company, AMR Trusts; Chairman of the Corporation. Board of Directors and Chief Executive Officer of Morgan Stanley and Morgan Stanley DW; Director of the Distributor; Chairman of the Board of Directors and Chief Executive Officer of Novus Credit Services Inc.; Director and/or officer of various Morgan Stanley subsidiaries. - ------------
* This is the date the Trustee began serving the Morgan Stanley family of funds. 12
POSITION(S) NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF EXECUTIVE OFFICER REGISTRANT TIME SERVED PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS - -------------------------------- ------------------- ----------------------- -------------------------------------------- Mitchell M. Merin (48) President President since May President and Chief Operating Officer of 1221 Avenue of the Americas 1999 Morgan Stanley Investment Management (since New York, NY December 1998); President, Director (since April 1997) and Chief Executive Officer (since June 1998) of the Investment Manager and Morgan Stanley Services; Chairman, Chief Executive Officer and Director of the Distributor (since June 1998); Chairman and Chief Executive Officer (since June 1998) and Director (since January 1998) of the Transfer Agent; Director of various Morgan Stanley subsidiaries; President of the Morgan Stanley Funds and TCW/DW Term Trusts (since May 1999); Trustee of various Van Kampen investment companies (since December 1999); previously Chief Strategic Officer of the Investment Manager and Morgan Stanley Services and Executive Vice President of the Distributor (April 1997-June 1998), Vice President of the Morgan Stanley Funds (May 1997-April 1999), and Executive Vice President of Morgan Stanley. Barry Fink (46) Vice President, Vice President, General Counsel (since May 2000) and c/o Morgan Stanley Trust Secretary and Secretary and General Managing Director (since December 2000) of Harborside Financial Center, General Counsel Counsel since February Morgan Stanley Investment Management; Plaza Two, 1997 Managing Director (since December 2000), and Jersey City, NJ Secretary and General Counsel (since February 1997) and Director (since July 1998) of the Investment Manager and Morgan Stanley Services; Assistant Secretary of Morgan Stanley DW; Vice President, Secretary and General Counsel of the Morgan Stanley Funds and TCW/DW Term Trusts (since February 1997); Vice President and Secretary of the Distributor; previously, Senior Vice President, Assistant Secretary and Assistant General Counsel of the Investment Manager and Morgan Stanley Services. Thomas F. Caloia (55) Treasurer Over 5 years First Vice President and Assistant Treasurer c/o Morgan Stanley Trust of the Investment Manager, the Distributor Harborside Financial Center, and Morgan Stanley Services; Treasurer of Plaza Two, the Morgan Stanley Funds. Jersey City, NJ Douglas S. Foreman (44) Vice President Since the Fund's Chief Investment Officer of U.S. Equities 865 South Figueroa Street inception (1996) and Group Managing Director of the Los Angeles, CA Sub-Advisor, Trust Company of the West and TCW Asset Management Company. Christopher J. Ainley (43) Vice President Since the Fund's Managing Director of the Sub-Advisor, Trust 865 South Figueroa Street Inception (1996) Company of the West and TCW Asset Management Los Angeles, CA Company.
For each Trustee, the dollar range of equity securities beneficially owned by the Trustee is shown below.
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN ALL REGISTERED INVESTMENT COMPANIES OVERSEEN DOLLAR RANGE OF EQUITY SECURITIES IN THE FUND BY TRUSTEE IN FAMILY OF INVESTMENT COMPANIES NAME OF TRUSTEE (AS OF DECEMBER 31, 2001) (AS OF DECEMBER 31, 2001) - -------------------------- ------------------------------------------------ ------------------------------------------------- Michael Bozic $10,001 - $50,000 over $100,000 Edwin J. Garn $10,001 - $50,000 over $100,000 Wayne E. Hedien none over $100,000 Dr. Manuel H. Johnson none over $100,000 Michael E. Nugent $50,001 - $100,000 over $100,000 John L. Schroeder none over $100,000 Charles A. Fiumefreddo $10,001 - $50,000 over $100,000 James F. Higgins none over $100,000 Philip J. Purcell over $100,000 over $100,000
As to each independent Trustee and his immediate family members, no person owned beneficially or of record securities in an investment advisor or principal underwriter of the Fund, or a person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with an investment advisor or principal underwriter of the Fund. Ronald E. Robison, Managing Director, Chief Administrative Officer and Director of the Investment Manager and Morgan Stanley Services and Chief Executive Officer and Director of the Transfer Agent, Robert S. Giambrone, Executive Director of the Investment Manager, Morgan Stanley Services, the Distributor and the Transfer Agent and Director of the Transfer Agent, and Joseph J. McAlinden, Managing Director and Chief Investment Officer of the Investment Manager and Director of the Transfer Agent, are Vice Presidents of the Fund. 13 In addition, A. Thomas Smith III, Managing Director and General Counsel of the Investment Manager and Morgan Stanley Services, is a Vice President and Assistant Secretary of the Fund, and Todd Lebo, Lou Anne D. McInnis, Carsten Otto and Ruth Rossi, Executive Directors and Assistant General Counsels of the Investment Manager and Morgan Stanley Services, Marilyn K. Cranney, First Vice President and Assistant General Counsel of the Investment Manager and Morgan Stanley Services, and Natasha Kassian and George Silfen, Vice Presidents and Assistant General Counsels of the Investment Manager and Morgan Stanley Services, are Assistant Secretaries of the Fund. INDEPENDENT DIRECTORS/TRUSTEES AND THE COMMITTEES. Law and regulation establish both general guidelines and specific duties for the independent directors/trustees. The Morgan Stanley Funds seek as independent directors/trustees individuals of distinction and experience in business and finance, government service or academia; these are people whose advice and counsel are in demand by others and for whom there is often competition. To accept a position on the funds' boards, such individuals may reject other attractive assignments because the funds make substantial demands on their time. All of the independent directors/trustees serve as members of the Audit Committee. In addition, three of the directors/trustees, including two independent director/trustees, serve as members of the Derivatives Committee and the Insurance Committee. The independent directors/trustees are charged with recommending to the full board approval of management, advisory and administration contracts, Rule 12b-1 plans and distribution and underwriting agreements; continually reviewing Fund performance; checking on the pricing of portfolio securities, brokerage commissions, transfer agent costs and performance, and trading among funds in the same complex; and approving fidelity bond and related insurance coverage and allocations, as well as other matters that arise from time to time. The independent directors/trustees are required to select and nominate individuals to fill any independent director/trustee vacancy on the board of any fund that has a Rule 12b-1 plan of distribution. Most of the Morgan Stanley Funds have a Rule 12b-1 plan. The Audit Committee is charged with recommending to the full board the engagement or discharge of the Fund's independent auditors; directing investigations into matters within the scope of the independent auditors' duties, including the power to retain outside specialists; reviewing with the independent auditors the audit plan and results of the auditing engagement; approving professional services provided by the independent auditors and other accounting firms prior to the performance of the services; reviewing the independence of the independent auditors; considering the range of audit and non-audit fees; reviewing the adequacy of the Fund's system of internal controls; and preparing and submitting Committee meeting minutes to the full board. The board of each fund has a Derivatives Committee to approve parameters for and monitor the activities of the Fund with respect to derivative investments, if any, made by the Fund. Finally, the board of each fund has formed an Insurance Committee to review and monitor the insurance coverage maintained by the Fund. ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT DIRECTORS/TRUSTEES FOR ALL MORGAN STANLEY FUNDS. The independent directors/trustees and the Funds' management believe that having the same independent directors/trustees for each of the Morgan Stanley Funds avoids the duplication of effort that would arise from having different groups of individuals serving as independent directors/ trustees for each of the funds or even of sub-groups of funds. They believe that having the same individuals serve as independent directors/trustees of all the funds tends to increase their knowledge and expertise regarding matters which affect the Fund complex generally and enhances their ability to negotiate on behalf of each fund with the Fund's service providers. This arrangement also precludes the possibility of separate groups of independent directors/trustees arriving at conflicting decisions regarding operations and management of the funds and avoids the cost and confusion that would likely ensue. Finally, having the same independent directors/trustees serve on all fund boards enhances the ability of each fund to obtain, at modest cost to each separate fund, the services of independent directors/ trustees, of the caliber, experience and business acumen of the individuals who serve as independent directors/trustees of the Morgan Stanley Funds. 14 TRUSTEE AND OFFICER INDEMNIFICATION. The Fund's Declaration of Trust provides that no Trustee, officer, employee or agent of the Fund is liable to the Fund or to a shareholder, nor is any Trustee, officer, employee or agent liable to any third persons in connection with the affairs of the Fund, except as such liability may arise from his/her or its own bad faith, willful misfeasance, gross negligence or reckless disregard of his/her or its duties. It also provides that all third persons shall look solely to the Fund property for satisfaction of claims arising in connection with the affairs of the Fund. With the exceptions stated, the Declaration of Trust provides that a Trustee, officer, employee or agent is entitled to be indemnified against all liability in connection with the affairs of the Fund. C. COMPENSATION The Fund pays each Independent Trustee an annual fee of $800 plus a per meeting fee of $50 for meetings of the Board of Trustees, the Independent Trustees or Committees of the Board of Trustees attended by the Trustee (the Fund pays the Chairman of the Audit Committee an additional annual fee of $750, and the Chairmen of the Derivatives and Insurance Committees additional annual fees of $500). If a Board meeting and a meeting of the Independent Trustees or a Committee meeting, or a meeting of the Independent Trustees and/or more than one Committee meeting, take place on a single day, the Trustees are paid a single meeting fee by the Fund. The Fund also reimburses such Trustees for travel and other out-of-pocket expenses incurred by them in connection with attending such meetings. Trustees and officers of the Fund who are or have been employed by the Investment Manager or an affiliated company receive no compensation or expense reimbursement from the Fund for their services as Trustee. The following table illustrates the compensation that the Fund paid to its Independent Trustees for the fiscal year ended November 30, 2001. FUND COMPENSATION
AGGREGATE COMPENSATION NAME OF INDEPENDENT TRUSTEE FROM THE FUND - ------------------------------- -------------- Michael Bozic ................. $1,650 Edwin J. Garn ................. 1,650 Wayne E. Hedien ............... 1,650 Dr. Manuel H. Johnson ......... 2,400 Michael E. Nugent ............. 2,150 John L. Schroeder ............. 2,150
The following table illustrates the compensation paid to the Fund's Independent Trustees for the calendar year ended December 31, 2001 for services to the 99 Morgan Stanley Funds that were in operation at December 31, 2001. None of the Fund's Independent Trustees received compensation from any other funds in the Fund Complex, except for Mr. Nugent who received compensation for service as Director/Trustee to 16 other funds in the Fund Complex. Cash Compensation from Morgan Stanley Funds
TOTAL CASH COMPENSATION FOR SERVICES TO 99 MORGAN STANLEY FUNDS AND OTHER FUNDS IN NAME OF INDEPENDENT TRUSTEE THE FUND COMPLEX - ------------------------------- ------------------------ Michael Bozic ................. $153,550 Edwin J. Garn ................. 153,550 Wayne E. Hedien ............... 153,450 Dr. Manuel H. Johnson ......... 224,800 Michael E. Nugent ............. 201,050 John L. Schroeder ............. 201,050
As of the date of this Statement of Additional Information, 52 of the Morgan Stanley Funds, not including the Fund, have adopted a retirement program under which an independent director/trustee who retires after serving for at least five years (or such lesser period as may be determined by the Board) as an independent director/trustee of any Morgan Stanley Fund that has adopted the retirement program (each such Fund referred to as an "Adopting Fund" and each such trustee referred to as an "Eligible Trustee") is entitled to retirement payments upon reaching the eligible retirement age (normally, after attaining age 72). Annual payments are based upon length of service. 15 Currently, upon retirement, each Eligible Trustee is entitled to receive from the Adopting Fund, commencing as of his or her retirement date and continuing for the remainder of his or her life, an annual retirement benefit (the "Regular Benefit") equal to 30.22% of his or her Eligible Compensation plus 0.5036667% of such Eligible Compensation for each full month of service as an independent director/trustee of any Adopting Fund in excess of five years up to a maximum of 60.44% after ten years of service. The foregoing percentages may be changed by the Board(1). "Eligible Compensation" is one-fifth of the total compensation earned by such Eligible Trustee for service to the Adopting Fund in the five year period prior to the date of the Eligible Trustee's retirement. Benefits under the retirement program are accrued as expenses on the books of the Adopting Funds. Such benefits are not secured or funded by the Adopting Funds. The following table illustrates the retirement benefits accrued to the Fund's Independent Trustees by the 52 Morgan Stanley Funds (not including the Fund) for the year ended December 31, 2001, and the estimated retirement benefits for the Independent Trustees, to commence upon their retirement, from the 52 Morgan Stanley Funds as of December 31, 2001. For the calendar year ended December 31, 2001, no retirement benefits accrued to the Independent Trustees from any other funds in the Fund Complex. RETIREMENT BENEFITS FROM ALL MORGAN STANLEY FUNDS
FOR ALL ADOPTING FUNDS --------------------------------- ESTIMATED CREDITED YEARS ESTIMATED RETIREMENT BENEFITS ESTIMATED ANNUAL OF SERVICE AT PERCENTAGE OF ACCRUED AS EXPENSES BENEFITS UPON RETIREMENT NAME OF RETIREMENT ELIGIBLE BY ALL FROM ALL INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION ADOPTING FUNDS ADOPTING FUNDS(2) - -------------------------- --------------- --------------- --------------------- ------------------------- Michael Bozic ............ 10 60.44% $21,395 $48,443 Edwin J. Garn ............ 10 60.44 33,443 49,121 Wayne E. Hedien .......... 9 51.37 44,952 41,437 Dr. Manuel H. Johnson..... 10 60.44 22,022 72,014 Michael E. Nugent ........ 10 60.44 38,472 64,157 John L. Schroeder ........ 8 50.37 68,342 50,640
- ---------- (1) An Eligible Trustee may elect alternative payments of his or her retirement benefits based upon the combined life expectancy of the Eligible Trustee and his or her spouse on the date of such Eligible Trustee's retirement. In addition, the Eligible Trustee may elect that the surviving spouse's periodic payment of benefits will be equal to a lower percentage of the periodic amount when both spouses were alive. The amount estimated to be payable under this method, through the remainder of the later of the lives of the Eligible Trustee and spouse, will be the actuarial equivalent of the Regular Benefit. (2) Based on current levels of compensation. Amount of annual benefits also varies depending on the Trustee's elections described in Footnote (1) above. IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES - -------------------------------------------------------------------------------- The following owned 5% or more of the outstanding Class A shares of the Fund as of January 9, 2002: State Street Bank and Trust Co., FBO ADP/Morgan Stanley Alliance, 105 Rosemont Ave., Westwood, MA 02090-2318 - 20.969%. As of the date of this Statement of Additional Information, the aggregate number of shares of beneficial interest of the Fund owned by the Fund's officers and Trustees as a group was less than 1% of the Fund's shares of beneficial interest outstanding. V. MANAGEMENT, INVESTMENT ADVICE AND OTHER SERVICES - -------------------------------------------------------------------------------- A. INVESTMENT MANAGER AND SUB-ADVISOR The Investment Manager to the Fund is Morgan Stanley Investment Advisors Inc., a Delaware corporation, whose address is 1221 Avenue of the Americas, New York, NY 10020. The Investment Manager is a wholly-owned subsidiary of Morgan Stanley, a Delaware corporation. Morgan Stanley is a 16 preeminent global financial services firm that maintains leading market positions in each of its three primary businesses: securities, asset management and credit services. The Sub-Advisor is TCW Investment Management Company, a wholly-owned subsidiary of TCW, whose direct and indirect subsidiaries provide a variety of trust, investment management and investment advisory services. The Sub-Advisor is headquartered at 865 South Figueroa Street, Suite 1800, Los Angeles, CA 90017. The Sub-Advisor was retained to provide sub-advisory services to the Fund effective June 28, 1999. Societe Generale, S.A., whose address is 29, Boulevard Haussmann, 75009 Paris, France, owns a majority interest in TCW. Pursuant to an Investment Management Agreement (the "Management Agreement") with the Investment Manager, the Fund has retained the Investment Manager to provide administrative services, manage its business affairs and supervise the investment of the Fund's assets. The Fund pays the Investment Manager monthly compensation calculated daily 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 daily net assets not exceeding $500 million; 0.725% to the portion of daily net assets exceeding $500 million but not exceeding $2 billion; 0.70% to the portion of daily net assets exceeding $2 billion but not exceeding $3 billion and; 0.675% of the portion of daily net assets exceeding $3 billion. The management fee is allocated among the Classes pro rata based on the net assets of the Fund attributable to each Class. The Investment Manager has retained its wholly-owned subsidiary, Morgan Stanley Services, to perform administrative services for the Fund. Under a Sub-Advisory Agreement (the "Sub-Advisory Agreement") between the Sub-Advisor and the Investment Manager, the Sub-Advisor provides the Fund with investment advice and portfolio management relating to the Fund's investments in securities, subject to the overall supervision of the Investment Manager. The Investment Manager pays the Sub-Advisor monthly compensation equal to 40% of the Investment Manager's fee. Prior to June 28, 1999, the Fund was managed by Morgan Stanley Services, pursuant to a management agreement between the Fund and Morgan Stanley Services and was advised by TCW Investment Management Company pursuant to an advisory agreement between the Fund and TCW Investment Management Company. As part of an overall consolidation of the TCW/DW Family of Funds and the Morgan Stanley Family of Funds, the Fund's Board of Trustees recommended on February 25, 1999, and shareholders of the Fund approved on June 8, 1999, the Investment Management Agreement between the Fund and the Investment Manager. The Board also recommended and shareholders also approved the Sub-Advisory Agreement between the Investment Manager and TCW Investment Management Company. The fee rate under the Management Agreement with the Investment Manager with respect to the portion of the Fund's average daily net assets not exceeding $500 million is 0.25% lower and with respect to the portion of the Fund's average daily net assets exceeding $500 million is 0.275% lower than the total aggregate fee rate that was in effect under the previous management agreement and advisory agreement combined. For the period December 1, 1998 through June 27, 1999, Morgan Stanley Services accrued total compensation under the former management agreement in the amount of $1,034,415. For the same period, TCW Investment Management Company accrued total compensation in its former capacity of advisor to the Fund in the amount of $689,610. For the fiscal period June 28, 1999 through November 30, 1999 and the fiscal years ended November 30, 2000 and November 30, 2001, the Investment Manager accrued total compensation under the new Investment Management Agreement in the amounts of $3,257,327, $15,261,401, and $8,189,231, respectively, of which $1,302,930, $6,104,560, and $3,275,692, respectively, were paid to the sub-advisor. In approving the Management Agreement and Sub-Advisory Agreement, the Board of Trustees, including the Independent Trustees, considered the nature, quality and scope of the services provided by the Investment Manager and the Sub-Advisor, the performance, fees and expenses of the Fund compared to other similar investment companies, the Investment Manager's expenses in providing the services, the profitability of the Investment Manager and its affiliated companies and other benefits they derive from their relationship with the Fund and the extent to which economies of scale are shared with the Fund. The Independent Trustees met with and reviewed reports from third parties about the foregoing 17 factors and changes, if any, in such items since the preceding year's deliberations. The Independent Trustees noted their confidence in the capability and integrity of the senior management and staff of the Investment Manager and the financial strength of the Investment Manager and its affiliated companies. The Independent Trustees weighed the foregoing factors in light of the advice given to them by their legal counsel as to the law applicable to the review of investment advisory contracts. Based upon its review, the Board of Trustees, including all of the Independent Trustees, determined, in the exercise of its business judgment, that approval of the Management Agreement and the Sub-Advisory Agreement was in the best interests of the Fund and its shareholders. B. PRINCIPAL UNDERWRITER The Fund's principal underwriter is the Distributor (which has the same address as the Investment Manager). In this capacity, the Fund's shares are distributed by the Distributor. The Distributor has entered into a Selected Dealer Agreement with Morgan Stanley DW, which through its own sales organization sells shares of the Fund. In addition, the Distributor may enter into similar agreements with other selected broker-dealers. The Distributor, a Delaware corporation, is a wholly-owned subsidiary of Morgan Stanley. The Distributor bears all expenses it may incur in providing services under the Distribution Agreement. These expenses include the payment of commissions for sales of the Fund's shares and incentive compensation to Financial Advisors, the costs of educational and/or business-related trips and educational and/or promotional and business-related expenses. The Distributor also pays certain expenses in connection with the distribution of the Fund's shares, including the costs of preparing, printing and distributing advertising or promotional materials, and the costs of printing and distributing prospectuses and supplements thereto used in connection with the offering and sale of the Fund's shares. The Fund bears the costs of initial typesetting, printing and distribution of prospectuses and supplements thereto to shareholders. The Fund also bears the costs of registering the Fund and its shares under federal and state securities laws and pays filing fees in accordance with state securities laws. The Fund and the Distributor have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. Under the Distribution Agreement, the Distributor uses its best efforts in rendering services to the Fund, but in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations, the Distributor is not liable to the Fund or any of its shareholders for any error of judgment or mistake of law or for any act or omission or for any losses sustained by the Fund or its shareholders. C. SERVICES PROVIDED BY THE INVESTMENT MANAGER AND THE SUB-ADVISOR The Investment Manager manages the Fund's business affairs and supervises the investment of the Fund's assets. The Sub-Advisor manages the investment of the Fund's assets, including the placing of orders for the purchase and sale of portfolio securities. The Sub-Advisor obtains and evaluates the information and advice relating to the economy, securities markets, and specific securities as it considers necessary or useful to continuously oversee the management of the assets of the Fund in a manner consistent with its investment objective. Under the terms of the Management Agreement, in addition to managing the Fund's affairs, the Investment Manager also maintains certain of the Fund's books and records and furnishes, at its own expense, the office space, facilities, equipment, clerical help, bookkeeping and certain legal services as the Fund may reasonably require in the conduct of its business, including the preparation of prospectuses, proxy statements and reports required to be filed with federal and state securities commissions (except insofar as the participation or assistance of independent auditors and attorneys is, in the opinion of the Investment Manager, necessary or desirable). The Investment Manager also bears the cost of telephone service, heat, light, power and other utilities provided to the Fund. Expenses not expressly assumed by the Investment Manager or the Sub-Advisor under the Management Agreement and the Sub-Advisory Agreement or by the Distributor, will be paid by the Fund. 18 These expenses will be allocated among the four Classes of shares pro rata based on the net assets of the Fund attributable to each Class, except as described below. Such expenses include, but are not limited to: expenses of the Plan of Distribution pursuant to Rule 12b-1; charges and expenses of any registrar, custodian, stock transfer and dividend disbursing agent; brokerage commissions; taxes; engraving and printing share certificates; registration costs of the Fund and its shares under federal and state securities laws; the cost and expense of printing, including typesetting, and distributing prospectuses of the Fund and supplements thereto to the Fund's shareholders; all expenses of shareholders' and Trustees' meetings and of preparing, printing and mailing of proxy statements and reports to shareholders; fees and travel expenses of Trustees or members of any advisory board or committee who are not employees of the Investment Manager or any corporate affiliate of the Investment Manager or the Sub-Advisor; all expenses incident to any dividend, withdrawal or redemption options; charges and expenses of any outside service used for pricing of the Fund's shares; fees and expenses of legal counsel, including counsel to the Trustees who are not interested persons of the Fund or of the Investment Manager or the Sub-Advisor (not including compensation or expenses of attorneys who are employees of the Investment Manager or the Sub-Advisor); fees and expenses of the Fund's independent auditors; membership dues of industry associations; interest on Fund borrowings; postage; insurance premiums on property or personnel (including officers and Trustees) of the Fund which inure to its benefit; extraordinary expenses (including, but not limited to, legal claims and liabilities and litigation costs and any indemnification relating thereto); and all other costs of the Fund's operation. The 12b-1 fees relating to a particular Class will be allocated directly to that Class. In addition, other expenses associated with a particular Class (except advisory or custodial fees) may be allocated directly to that Class, provided that such expenses are reasonably identified as specifically attributable to that Class and the direct allocation to that Class is approved by the Trustees. The Management Agreement provides that in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations thereunder, the Investment Manager is not liable to the Fund or any of its investors for any act or omission by the Investment Manager or for any losses sustained by the Fund or its investors. The Management Agreement will remain in effect from year to year, provided continuance of the Management Agreement is approved at least annually by the vote of the holders of a majority, as defined in the Investment Company Act, of the outstanding shares of the Fund, or by the Trustees; provided that in either event such continuance is approved annually by the vote of a majority of the Trustees, including a majority of the Independent Trustees. D. DEALER REALLOWANCES Upon notice to selected broker-dealers, the Distributor may reallow up to the full applicable front-end sales charge during periods specified in such notice. During periods when 90% or more of the sales charge is reallowed, such selected broker-dealers may be deemed to be underwriters as that term is defined in the Securities Act. E. RULE 12B-1 PLAN The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the Investment Company Act (the "Plan") pursuant to which each Class, other than Class D, pays the Distributor compensation accrued daily and payable monthly at the following maximum annual rates: 0.25% and 1.0% of the average daily net assets of Class A and Class C, respectively, and, with respect to Class B, 1.0% of the lesser of: (a) the average daily aggregate gross sales of the Fund's 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 Fund's Class B shares redeemed since the Fund's inception upon which a contingent deferred sales charge has been imposed or upon which such charge has been waived; or (b) the average daily net assets of Class B shares. The Distributor also receives the proceeds of front-end sales charges ("FSCs") and of contingent deferred sales charges ("CDSCs") imposed on certain redemptions of shares, which are separate and 19 apart from payments made pursuant to the Plan. The Distributor has informed the Fund that it and/or Morgan Stanley DW received the proceeds of CDSCs and FSCs, for the last three fiscal years ended November 30, in approximate amounts as provided in the table below (the Distributor did not retain any of these amounts).
2001 2000 1999 --------------------------- --------------------------- ------------------------- Class A .......... FSCs:(1) $ 49,223 FSCs:(1) $ 441,556 FSCs:(1) $154,526 CDSCs: $ 1,180 CDSCs: $ 3,460 CDSCs: $ 3,082 Class B .......... CDSCs: $2,004,434 CDSCs: $1,787,186 CDSCs: $693,550 Class C .......... CDSCs: $ 24,968 CDSCs: $ 64,855 CDSCs: $ 10,375
- ---------- (1) FSCs apply to Class A only. The Distributor has informed the Fund that the entire fee payable by Class A and a portion of the fees payable by each of Class B and Class C each year pursuant to the Plan equal to 0.25% of such Class' average daily net assets are currently each characterized as a "service fee" under the Rules of the National Association of Securities Dealers, Inc. (of which the Distributor is a member). The "service fee" is a payment made for personal service and/or the maintenance of shareholder accounts. The remaining portion of the Plan fees payable by a Class, if any, is characterized as an "asset-based sales charge" as such is defined by the Rules of the Association. Under the Plan and as required by Rule 12b-1, the Trustees receive and review promptly after the end of each calendar quarter a written report provided by the Distributor of the amounts expended under the Plan and the purpose for which such expenditures were made. Class B shares of the Fund accrued amounts payable to the Distributor under the Plan, during the fiscal year ended November 30, 2001, of $9,853,904. This amount is equal to 1.00% of the average daily net sales of Class B for the fiscal year and was calculated pursuant to clause (b) of the compensation formula under the Plan. For the fiscal year ended November 30, 2001, Class A and Class C shares of the Fund accrued payments under the Plan amounting to $30,734 and $443,325, respectively, which amounts are equal to 0.11% and 1.00% of the average daily net assets of Class A and Class C, respectively, for the fiscal year. The Plan was adopted in order to permit the implementation of the Fund's method of distribution. Under this distribution method the Fund offers four Classes, each with a different distribution arrangement. With respect to Class A shares, Morgan Stanley DW compensates its Financial Advisors by paying them, from proceeds of the FSC, commissions for the sale of Class A shares, currently a gross sales credit of up to 5.0% of the amount sold (except as provided in the following sentence) and an annual residual commission, currently a residual of up to 0.25% of the current value of the respective accounts for which they are the Financial Advisors or dealers of record in all cases. On orders of $1 million or more (for which no sales charge was paid) or net asset value purchases by employer-sponsored employee benefit plans, whether or not qualified under the Internal Revenue Code, for which (i) the Transfer Agent serves as Trustee, (ii) Morgan Stanley's Retirement Plan Services serves as recordkeeper pursuant to a written Recordkeeping Services Agreement or (iii) an entity independent from Morgan Stanley serves as recordkeeper under an alliance or similar agreement with Morgan Stanley's Retirement Plan Services ("Morgan Stanley Eligible Plans"), the Investment Manager compensates Financial Advisors by paying them, from its own funds, a gross sales credit of 1.0% of the amount sold. With respect to Class B shares, Morgan Stanley DW compensates its Financial Advisors by paying them, from its own funds, commissions for the sale of Class B shares, currently a gross sales credit of up to 5.0% of the amount sold (except as provided in the following sentence) and an annual residual commission, currently a residual of up to 0.25% of the current value (not including reinvested dividends or distributions) of the amount sold in all cases. In the case of Class B shares purchased on or after July 28, 1997 by Morgan Stanley Eligible Plans, Morgan Stanley DW compensates its Financial Advisors by paying them, from its own funds, a gross sales credit of 3.0% of the amount sold. With respect to Class C shares, Morgan Stanley DW compensates its Financial Advisors by paying them, from its own funds, commissions for the sale of Class C shares, currently a gross sales credit of 20 up to 1.0% of the amount sold and an annual residual commission, currently up to 1.0% of the current value of the respective accounts for which they are the Financial Advisors of record. With respect to Class D shares other than shares held by participants in Investment Manager's mutual fund asset allocation program and in the Morgan Stanley Choice Program, the Investment Manager compensates Morgan Stanley DW's Financial Advisors by paying them, from its own funds, commissions for the sale of Class D shares, currently a gross sales credit of up to 1.0% of the amount sold. There is a chargeback of 100% of the amount paid if the Class D shares are redeemed in the first year and a chargeback of 50% of the amount paid if the Class D shares are redeemed in the second year after purchase. The Manager also compensates Morgan Stanley DW's Financial Advisors by paying them, from its own funds, an annual residual commission, currently up to 0.10% of the current value of the respective accounts for which they are the Financial Advisors of record (not including accounts of participants in the Investment Manager's mutual fund asset allocation program and the Morgan Stanley Choice Program). The gross sales credit is a charge which reflects commissions paid by Morgan Stanley DW to its Financial Advisors and Morgan Stanley DW's Fund-associated distribution-related expenses, including sales compensation, and overhead and other branch office distribution-related expenses including (a) the expenses of operating Morgan Stanley DW's branch offices in connection with the sale of Fund shares, including lease costs, the salaries and employee benefits of operations and sales support personnel, utility costs, communications costs and the costs of stationery and supplies; (b) the costs of client sales seminars; (c) travel expenses of mutual fund sales coordinators to promote the sale of Fund shares; and (d) other expenses relating to branch promotion of Fund sales. The Investment Manager pays a retention fee to Financial Advisors at an annual rate of 0.05% of the value of shares of the Fund held for at least one year. Shares purchased through the reinvestment of dividends will be eligible for a retention fee, provided that such dividends were earned on shares otherwise eligible for a retention fee payment. Shares owned in variable annuities, closed-end fund shares and shares held in 401(k) plans where the Transfer Agent or Morgan Stanley's Retirement Plan Services is either recordkeeper or trustee are not eligible for a retention fee. The retention fees are paid by the Investment Manager from its own assets, which may include profits from investment management fees payable under the Management Agreement, as well as from borrowed funds. The distribution fee that the Distributor receives from the Fund under the Plan, in effect, offsets distribution expenses incurred under the Plan on behalf of the Fund and, in the case of Class B shares, opportunity costs, such as the gross sales credit and an assumed interest charge thereon ("carrying charge"). These expenses may include the cost of Fund-related educational and/or business-related trips or payment of Fund-related educational and/or promotional expenses of Financial Advisors. For example, the Distributor has implemented a compensation program available only to Financial Advisors meeting specified criteria under which certain marketing and/or promotional expenses of those Financial Advisors are paid by the Distributor out of compensation it receives under the Plan. In the Distributor's reporting of the distribution expenses to the Fund, in the case of Class B shares, such assumed interest (computed at the "broker's call rate") has been calculated on the gross credit as it is reduced by amounts received by the Distributor under the Plan and any contingent deferred sales charges received by the Distributor upon redemption of shares of the Fund. No other interest charge is included as a distribution expense in the Distributor's calculation of its distribution costs for this purpose. The broker's call rate is the interest rate charged to securities brokers on loans secured by exchange-listed securities. The Fund is authorized to reimburse expenses incurred or to be incurred in promoting the distribution of the Fund's Class A and Class C shares and in servicing shareholder accounts. Reimbursement will be made through payments at the end of each month. The amount of each monthly payment may in no event exceed an amount equal to a payment at the annual rate of 0.25%, in the case of Class A, and 1.0%, in the case of Class C, of the average net assets of the respective Class during the month. No interest or other financing charges, if any, incurred on any distribution expenses on behalf of Class A and Class C will be reimbursable under the Plan. With respect to Class A, in the case of all 21 expenses other than expenses representing the service fee, and, with respect to Class C, in the case of all expenses other than expenses representing a gross sales credit or a residual to Financial Advisors and other authorized financial representatives, such amounts shall be determined at the beginning of each calendar quarter by the Trustees, including, a majority of the Independent Trustees. Expenses representing the service fee (for Class A) or a gross sales credit or a residual to Financial Advisors and other authorized financial representatives (for Class C) may be reimbursed without prior determination. In the event that the Distributor proposes that monies shall be reimbursed for other than such expenses, then in making quarterly determinations of the amounts that may be reimbursed by the Fund, the Distributor will provide and the Trustees will review a quarterly budget of projected distribution expenses to be incurred on behalf of the Fund, together with a report explaining the purposes and anticipated benefits of incurring such expenses. The Trustees will determine which particular expenses, and the portions thereof, that may be borne by the Fund, and in making such a determination shall consider the scope of the Distributor's commitment to promoting the distribution of the Fund's Class A and Class C shares. Each Class paid 100% of the amounts accrued under the Plan with respect to that Class for the fiscal year ended November 30, 2001 to the Distributor. The Distributor and Morgan Stanley DW estimate that they have spent, pursuant to the Plan, $105,475,108 on behalf of Class B since the inception of the Plan. It is estimated that this amount was spent in approximately the following ways: (i) 11.22% ($11,830,781)-advertising and promotional expenses; (ii) 0.32% ($339,787)-printing and mailing of prospectuses for distribution to other than current shareholders; and (iii) 88.46% ($93,304,540)-other expenses, including the gross sales credit and the carrying charge, of which 6.74% ($6,290,475) represents carrying charges, 23.66% ($22,076,744) represents commission credits to Morgan Stanley DW's branch offices and other selected broker-dealers for payments of commissions to Financial Advisors and other authorized financial representatives, and 33.49% ($31,248,724) represents overhead and other branch office distribution-related expenses and 36.11% ($33,688,597) represents excess distribution expenses of Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities, the net assets of which were combined with those of the Fund on July 24, 2000 pursuant to an Agreement and Plan of Reorganization. The amounts accrued by Class A and a portion of the amounts accrued by Class C under the Plan during the fiscal year ended November 30, 2001 were service fees. The remainder of the amount accrued by Class C were for expenses which relate to compensation of sales personnel and associated overhead expenses. In the case of Class B shares, at any given time, the expenses of distributing shares of the Fund may be more or less than the total of (i) the payments made by the Fund pursuant to the Plan; and (ii) the proceeds of CDSCs paid by investors upon redemption of shares. For example, if $1 million in expenses in distributing Class B shares of the Fund had been incurred and $750,000 had been received as described in (i) and (ii) above, the excess expense would amount to $250,000. The Distributor has advised the Fund that in the case of Class B shares the excess distribution expenses, including the carrying charge designed to approximate the opportunity costs incurred by Morgan Stanley DW which arise from it having advanced monies without having received the amount of any sales charges imposed at the time of sale of the Fund's Class B shares, totaled $65,627,373 as of November 30, 2001 (the end of the Fund's fiscal year), which was equal to 9.26% of the net assets of Class B on such date. Because there is no requirement under the Plan that the Distributor be reimbursed for all distribution expenses with respect to Class B shares or any requirement that the Plan be continued from year to year, this excess amount does not constitute a liability of the Fund. 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 CDSCs 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. Any cumulative expenses incurred, but not yet recovered through distribution fees or CDSCs, may or may not be recovered through future distribution fees or CDSCs. In the case of Class A 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 22 representing a gross sales commission credited to Morgan Stanley Financial Advisors and other authorized financial representatives at the time of sale may be reimbursed in the subsequent calendar year. The Distributor has advised the Fund that there were no such expenses that may be reimbursed in the subsequent year in the case of Class A or Class C at December 31, 2001 (end of the calendar year). No interest or other financing charges will be incurred on any Class A or Class C distribution expenses incurred by the Distributor under the Plan or on any unreimbursed expenses due to the Distributor pursuant to the Plan. No interested person of the Fund nor any Independent Trustee has any direct financial interest in the operation of the Plan except to the extent that the Distributor, the Investment Manager, Morgan Stanley DW, Morgan Stanley Services or certain of their employees may be deemed to have such an interest as a result of benefits derived from the successful operation of the Plan or as a result of receiving a portion of the amounts expended thereunder by the Fund. On an annual basis, the Trustees, including a majority of the Independent Trustees, consider whether the Plan should be continued. Prior to approving the last continuation of the Plan, the Trustees requested and received from the Distributor and reviewed all the information which they deemed necessary to arrive at an informed determination. In making their determination to continue the Plan, the Trustees considered: (1) the Fund's experience under the Plan and whether such experience indicates that the Plan is operating as anticipated; (2) the benefits the Fund had obtained, was obtaining and would be likely to obtain under the Plan, including that: (a) the Plan is essential in order to give Fund investors a choice of alternatives for payment of distribution and service charges and to enable the Fund to continue to grow and avoid a pattern of net redemptions which, in turn, are essential for effective investment management; and (b) without the compensation to individual brokers and the reimbursement of distribution and account maintenance expenses of Morgan Stanley DW's branch offices made possible by the 12b-1 fees, Morgan Stanley DW could not establish and maintain an effective system for distribution, servicing of Fund shareholders and maintenance of shareholder accounts; and (3) what services had been provided and were continuing to be provided under the Plan to the Fund and its shareholders. Based upon their review, the Trustees, including each of the Independent Trustees, determined that continuation of the Plan would be in the best interest of the Fund and would have a reasonable likelihood of continuing to benefit the Fund and its shareholders. In the Trustees' quarterly review of the Plan, they will consider its continued appropriateness and the level of compensation provided therein. The Plan may not be amended to increase materially the amount to be spent for the services described therein without approval by the shareholders of the affected Class or Classes of the Fund, and all material amendments to the Plan must also be approved by the Trustees in the manner described above. The Plan may be terminated at any time, without payment of any penalty, by vote of a majority of the Independent Trustees or by a vote of a majority of the outstanding voting securities of the Fund (as defined in the Investment Company Act) on not more than thirty days' written notice to any other party to the Plan. So long as the Plan is in effect, the election and nomination of Independent Trustees shall be committed to the discretion of the Independent Trustees. F. OTHER SERVICE PROVIDERS (1) TRANSFER AGENT/DIVIDEND-PAYING AGENT Morgan Stanley Trust is the Transfer Agent for the Fund's shares and the Dividend Disbursing Agent for payment of dividends and distributions on Fund shares and Agent for shareholders under various investment plans. The principal business address of the Transfer Agent is Harborside Financial Center, Plaza Two, 2nd Floor, Jersey City, NJ 07311. (2) CUSTODIAN AND INDEPENDENT AUDITORS The Bank of New York, 100 Church Street, New York, NY 10007, is the Custodian of the Fund's assets. Any of the Fund's cash balances with the Custodian in excess of $100,000 are unprotected by federal deposit insurance. These balances may, at times, be substantial. 23 Deloitte & Touche LLP, Two World Financial Center, New York, NY 10281, serves as the independent auditors of the Fund. The independent auditors are responsible for auditing the annual financial statements of the Fund. (3) AFFILIATED PERSONS The Transfer Agent is an affiliate of the Investment Manager and the Distributor. As Transfer Agent and Dividend Disbursing Agent, the Transfer Agent's responsibilities include maintaining shareholder accounts, disbursing cash dividends and reinvesting dividends, processing account registration changes, handling purchase and redemption transactions, mailing prospectuses and reports, mailing and tabulating proxies, processing share certificate transactions, and maintaining shareholder records and lists. For these services, the Transfer Agent receives a per shareholder account fee from the Fund and is reimbursed for its out-of-pocket expenses in connection with such services. G. CODES OF ETHICS - -------------------------------------------------------------------------------- The Fund, the Investment Manager, the Sub-Advisor and the Distributor have each adopted a Code of Ethics pursuant to Rule 17j-1 under the Investment Company Act. The Codes of Ethics are designed to detect and prevent improper personal trading. The Codes of Ethics permit personnel subject to the Codes to invest in securities, including securities that may be purchased, sold or held by the Fund, subject to a number of restrictions and controls including prohibitions against purchases of securities in an Initial Public Offering and a preclearance requirement with respect to personal securities transactions. VI. BROKERAGE ALLOCATION AND OTHER PRACTICES - -------------------------------------------------------------------------------- A. BROKERAGE TRANSACTIONS Subject to the general supervision of the Trustees, the Investment Manager and/or Sub-Advisor are responsible for decisions to buy and sell securities for the Fund, the selection of brokers and dealers to effect the transactions, and the negotiation of brokerage commissions, if any. Purchases and sales of securities on a stock exchange are effected through brokers who charge a commission for their services. In the over-the-counter market, securities are generally traded on a "net" basis with dealers acting as principal for their own accounts without a stated commission, although the price of the security usually includes a profit to the dealer. The Fund also expects that securities will be purchased at times in underwritten offerings where the price includes a fixed amount of compensation, generally referred to as the underwriter's concession or discount. On occasion, the Fund may also purchase certain money market instruments directly from an issuer, in which case no commissions or discounts are paid. For the fiscal years ended November 30, 1999, 2000 and 2001, the Fund paid a total of $336,574, $255,195 and $329,000, respectively, in brokerage commissions. B. COMMISSIONS Pursuant to an order of the SEC, the Fund may effect principal transactions in certain money market instruments with Morgan Stanley DW. The Fund will limit its transactions with Morgan Stanley DW to U.S. government and government agency securities, bank money instruments (i.e., certificates of deposit and bankers' acceptances) and commercial paper. The transactions will be effected with Morgan Stanley DW only when the price available from Morgan Stanley DW is better than that available from other dealers. During the fiscal years ended November 30, 1999, 2000 and 2001, the Fund did not effect any principal transactions with Morgan Stanley DW. Brokerage transactions in securities listed on exchanges or admitted to unlisted trading privileges may be effected through Morgan Stanley DW, Morgan Stanley & Co. and other affiliated brokers and dealers. In order for an affiliated broker or dealer to effect any portfolio transactions on an exchange for the Fund, the commissions, fees or other remuneration received by the affiliated broker or dealer must be reasonable and fair compared to the commissions, fees or other remuneration paid to other brokers in connection with comparable transactions involving similar securities being purchased or sold on an exchange during a comparable period of time. This standard would allow the affiliated broker or dealer 24 to receive no more than the remuneration which would be expected to be received by an unaffiliated broker in a commensurate arm's-length transaction. Furthermore, the Trustees, including the Independent Trustees, have adopted procedures which are reasonably designed to provide that any commissions, fees or other remuneration paid to an affiliated broker or dealer are consistent with the foregoing standard. The Fund does not reduce the management fee it pays to the Investment Manager by any amount of the brokerage commissions it may pay to an affiliated broker or dealer. During the fiscal years ended November 30, 1999, 2000 and 2001, the Fund did not pay any brokerage commissions to Morgan Stanley DW. During the fiscal years ended November 30, 1999, 2000 and 2001, the Fund paid a total of $9,005, $13,000 and $27,340, respectively, in brokerage commissions to Morgan Stanley & Co. During the fiscal year ended November 30, 2001, the brokerage commissions paid to Morgan Stanley & Co. represented approximately 8.31% of the total brokerage commissions paid by the Fund during the year and were paid on account of transactions having an aggregate dollar value equal to approximately 9.34% of the aggregate dollar value of all portfolio transactions of the Fund during the year for which commissions were paid. C. BROKERAGE SELECTION The policy of the Fund regarding purchases and sales of securities for its portfolio is that primary consideration will be given to obtaining the most favorable prices and efficient executions of transactions. Consistent with this policy, when securities transactions are effected on a stock exchange, the Fund's policy is to pay commissions which are considered fair and reasonable without necessarily determining that the lowest possible commissions are paid in all circumstances. The Fund believes that a requirement always to seek the lowest possible commission cost could impede effective portfolio management and preclude the Fund and the Investment Manager and/or the Sub-Advisor from obtaining a high quality of brokerage and research services. In seeking to determine the reasonableness of brokerage commissions paid in any transaction, the Investment Manager and/or the Sub-Advisor relies upon its experience and knowledge regarding commissions generally charged by various brokers and on its judgment in evaluating the brokerage and research services received from the broker effecting the transaction. These determinations are necessarily subjective and imprecise, as in most cases an exact dollar value for those services is not ascertainable. The Fund anticipates that certain of its transactions involving foreign securities will be effected on foreign securities exchanges. Fixed commissions on such transactions are generally higher than negotiated commissions on domestic transactions. There is also generally less government supervision and regulation of foreign securities exchanges and brokers than in the United States. In seeking to implement the Fund's policies, the Investment Manager and/or the Sub-Advisor effect transactions with those brokers and dealers who they believe provide the most favorable prices and are capable of providing efficient executions. If the Investment Manager and/or the Sub-Advisor believes the prices and executions are obtainable from more than one broker or dealer, it may give consideration to placing portfolio transactions with those brokers and dealers who also furnish research and other services to the Fund or the Investment Manager and/or the Sub-Advisor. The services may include, but are not limited to, any one or more of the following: information as to the availability of securities for purchase or sale; statistical or factual information or opinions pertaining to investment; wire services; and appraisals or evaluations of portfolio securities. The information and services received by the Investment Manager and/or the Sub-Advisor from brokers and dealers may be utilized by them and any of their asset management affiliates in the management of accounts of some of their other clients and may not in all cases benefit the Fund directly. The Investment Manager, the Sub-Advisor and certain of their affiliates currently serve as investment advisors to a number of clients, including other investment companies, and may in the future act as investment manager or advisor to others. It is the practice of the Investment Manager, the Sub-Advisor and their affiliates to cause purchase and sale transactions (including transactions in certain initial and secondary public offerings) to be allocated among clients whose assets they manage (including the Fund) in such manner they deem equitable. In making such allocations among the Fund 25 and other client accounts, various factors may be considered, including the respective investment objectives, the relative size of portfolio holdings of the same or comparable securities, the availability of cash for investment, the size of investment commitments generally held and the opinions of the persons responsible for managing the portfolios of the Fund and other client accounts. The Investment Manager, the Sub-Advisor and their affiliates may operate one or more order placement facilities and each facility will implement order allocation in accordance with the procedures described above. From time to time, each facility may transact in a security at the same time as other facilities are trading in that security. D. DIRECTED BROKERAGE During the fiscal year ended November 30, 2001, the Fund paid $231,922 in brokerage commissions in connection with transactions in the aggregate amount of $104,506,771 to brokers because of research services provided. E. REGULAR BROKER-DEALERS During the fiscal year ended November 30, 2001, the Fund did not purchase securities issued by brokers or dealers that were among the ten brokers or the ten dealers that executed transactions for or with the Fund in the largest dollar amounts during the year. VII. CAPITAL STOCK AND OTHER SECURITIES - -------------------------------------------------------------------------------- The shareholders of the Fund are entitled to a full vote for each full share of beneficial interest held. The Fund is authorized to issue an unlimited number of shares of beneficial interest. All shares of beneficial interest of the Fund are of $0.01 par value and are equal as to earnings, assets and voting privileges except that each Class will have exclusive voting privileges with respect to matters relating to distribution expenses borne solely by such Class or any other matter in which the interests of one Class differ from the interests of any other Class. In addition, Class B shareholders will have the right to vote on any proposed material increase in Class A's expenses, if such proposal is submitted separately to Class A shareholders. Also, Class A, Class B and Class C bear expenses related to the distribution of their respective shares. The Fund's Declaration of Trust permits the Trustees to authorize the creation of additional series of shares (the proceeds of which would be invested in separate, independently managed portfolios) and additional Classes of shares within any series. The Trustees have not presently authorized any such additional series or Classes of shares other than as set forth in the Prospectus. The Fund is not required to hold annual meetings of shareholders and in ordinary circumstances the Fund does not intend to hold such meetings. The Trustees may call special meetings of shareholders for action by shareholder vote as may be required by the Investment Company Act or the Declaration of Trust. Under certain circumstances the Trustees may be removed by action of the Trustees. In addition, under certain circumstances the shareholders may call a meeting to remove Trustees and the Fund is required to provide assistance in communicating with shareholders about such a meeting. The voting rights of shareholders are not cumulative, so that holders of more than 50 percent of the shares voting can, if they choose, elect all Trustees being selected, while the holders of the remaining shares would be unable to elect any Trustees. Under Massachusetts law, shareholders of a business trust may, under certain limited circumstances, be held personally liable as partners for the obligations of the Fund. However, the Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of the Fund, requires that notice of such Fund obligations include such disclaimer, and provides for indemnification out of the Fund's property for any shareholder held personally liable for the obligations of the Fund. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Fund itself would be unable to meet its obligations. Given the above limitations on shareholder personal liability, and the nature of the Fund's assets and operations, the possibility of the Fund being unable to meet its obligations is remote and thus, in the opinion of Massachusetts counsel to the Fund, the risk to Fund shareholders of personal liability is remote. 26 All of the Trustees, except for James F. Higgins, have been elected by the shareholders of the Fund, most recently at a Special Meeting of Shareholders held on June 8, 1999. The Trustees themselves have the power to alter the number and the terms of office of the Trustees (as provided for in the Declaration of Trust), and they may at any time lengthen or shorten their own terms or make their terms of unlimited duration and appoint their own successors, provided that always at least a majority of the Trustees has been elected by the shareholders of the Fund. VIII. PURCHASE, REDEMPTION AND PRICING OF SHARES - -------------------------------------------------------------------------------- A. PURCHASE/REDEMPTION OF SHARES Information concerning how Fund shares are offered to the public (and how they are redeemed and exchanged) is provided in the Fund's Prospectus. TRANSFER AGENT AS AGENT. With respect to the redemption or repurchase of Fund shares, the application of proceeds to the purchase of new shares in the Fund or any other Morgan Stanley Fund and the general administration of the exchange privilege, the Transfer Agent acts as agent for the Distributor and for the shareholder's authorized broker-dealer, if any, in the performance of such functions. With respect to exchanges, redemptions or repurchases, the Transfer Agent is liable for its own negligence and not for the default or negligence of its correspondents or for losses in transit. The Fund is not liable for any default or negligence of the Transfer Agent, the Distributor or any authorized broker-dealer. The Distributor and any authorized broker-dealer have appointed the Transfer Agent to act as their agent in connection with the application of proceeds of any redemption of Fund shares to the purchase of shares of any other continuously offered Morgan Stanley Fund and the general administration of the exchange privilege. No commission or discounts will be paid to the Distributor or any authorized broker-dealer for any transaction pursuant to the exchange privilege. TRANSFERS OF SHARES. In the event a shareholder requests a transfer of Fund shares to a new registration, the shares will be transferred without sales charge at the time of transfer. With regard to the status of shares which are either subject to the CDSC or free of such charge (and with regard to the length of time shares subject to the charge have been held), any transfer involving less than all of the shares in an account will be made on a pro rata basis (that is, by transferring shares in the same proportion that the transferred shares bear to the total shares in the account immediately prior to the transfer). The transferred shares will continue to be subject to any applicable CDSC as if they had not been so transferred. OUTSIDE BROKERAGE ACCOUNTS. If a shareholder wishes to maintain his or her fund account through a brokerage company other than Morgan Stanley DW, he or she may do so only if the Distributor has entered into a selected dealer agreement with that brokerage company. Accounts maintained through a brokerage company other than Morgan Stanley DW may be subject to certain restrictions on subsequent purchases and exchanges. Please contact your brokerage company or the Transfer Agent for more information. B. OFFERING PRICE The Fund's Class B, Class C and Class D shares are offered at net asset value per share and the Class A shares are offered at net asset value per share plus any applicable FSC which is distributed among the Fund's Distributor, Morgan Stanley DW and other authorized dealers as described in Section "V. Management, Investment Advice and Other Services-E. Rule 12b-1 Plan." The price of Fund shares, called "net asset value," is based on the value of the Fund's portfolio securities. Net asset value per share of each Class is calculated by dividing the value of the portion of the Fund's securities and other assets attributable to that Class, less the liabilities attributable to that Class, by the number of shares of that Class outstanding. The assets of each Class of shares are invested in a single portfolio. The net asset value of each Class, however, will differ because the Classes have different ongoing fees. 27 In the calculation of the Fund's net asset value: (1) an equity portfolio security listed or traded on the New York or American Stock Exchange, Nasdaq, 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 latest bid 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 pursuant to procedures adopted by the Trustees); and (2) all other portfolio securities for which over-the-counter market quotations are readily available are valued at the latest bid price. When market quotations are not readily available, including circumstances under which it is determined by the Investment Manager or the Sub-Advisor that sale or bid prices are not reflective of 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. For valuation purposes, quotations of foreign portfolio securities, other assets and liabilities and forward contracts stated in foreign currency are translated into U.S. dollar equivalents at the prevailing market rates prior to the close of the New York Stock Exchange. Short-term debt securities with remaining maturities of sixty days or less at the time of purchase are valued at amortized cost, unless the Trustees determine such does not reflect the securities' market value, in which case these securities will be valued at their fair value as determined by the Trustees. Certain of the Fund's portfolio securities may be valued by an outside pricing service approved by the Fund's Trustees. The pricing service may utilize a matrix system incorporating security quality, maturity and coupon as the evaluation model parameters, and/or research evaluations by its staff, including review of broker-dealer market price quotations in determining what it believes is the fair valuation of the portfolio securities valued by such pricing service. Generally, trading in foreign securities, as well as corporate bonds, U.S. government securities and money market instruments, is substantially completed each day at various times prior to the close of the New York Stock Exchange. The values of such securities used in computing the net asset value of the Fund's shares are determined as of such times. Foreign currency exchange rates are also generally determined prior to the close of the New York Stock Exchange. Occasionally, events which may affect the values of such securities and such exchange rates may occur between the times at which they are determined and the close of the New York Stock Exchange and will therefore not be reflected in the computation of the Fund's net asset value. If events that may affect the value of such securities occur during such period, then these securities may be valued at their fair value as determined in good faith under procedures established by and under the supervision of the Trustees. IX. TAXATION OF THE FUND AND SHAREHOLDERS - -------------------------------------------------------------------------------- The Fund generally will make two basic types of distributions: ordinary dividends and long-term capital gain distributions. These two types of distributions are reported differently on a shareholder's income tax return and they are also subject to different rates of tax. The tax treatment of the investment activities of the Fund will affect the amount, timing and character of the distributions made by the Fund. Tax issues relating to the Fund are not generally a consideration for shareholders such as tax exempt entities and tax-advantaged retirement vehicles such as an IRA or 401(k) plan. Shareholders are urged to consult their own tax professionals regarding specific questions as to federal, state or local taxes. INVESTMENT COMPANY TAXATION. The Fund intends to remain qualified as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. As such, the Fund will not be subject to federal income tax on its net investment income and capital gains, if any, to the extent that it distributes such income and capital gains to its shareholders. The Fund generally intends to distribute sufficient income and gains so that the Fund will not pay corporate income tax on its earnings. The Fund also generally intends to distribute to its shareholders in each calendar year a sufficient amount of ordinary income and capital gains to avoid the imposition of a 4% excise tax. However, the Fund may instead determine to retain all or part of any net long-term capital gains in any year for reinvestment. In such event, the Fund will pay federal income tax (and possibly excise tax) on such retained gains. Gains or losses on sales of securities by the Fund will be long-term capital gains or losses if the securities have a tax holding period of more than one year at the time of such sale. Gains or losses on 28 the sale of securities with a tax holding period of one year or less will be short-term capital gains or losses. Special tax rules may change the normal treatment of gains and losses recognized by the Fund when the Fund invests in forward foreign currency exchange contracts and non-U.S. corporations classified as "passive foreign investment companies." Those special tax rules can, among other things, affect the treatment of capital gain or loss as long-term or short-term and may result in ordinary income or loss rather than capital gain or loss. The application of these special rules would therefore also affect the character of distributions made by the Fund. Under certain tax rules, the Fund may be required to accrue a portion of any discount at which certain securities are purchased as income each year even though the Fund receives no payments in cash on the security during the year. To the extent that the Fund invests in such securities, it would be required to pay out such income as an income distribution in each year in order to avoid taxation at the Fund level. Such distributions will be made from the available cash of the Fund or by liquidation of portfolio securities if necessary. If a distribution of cash necessitates the liquidation of portfolio securities, the Investment Manager and/or Sub-Advisor will select which securities to sell. The Fund may realize a gain or loss from such sales. In the event the Fund realizes net capital gains from such transactions, its shareholders may receive a larger capital gain distribution, if any, than they would in the absence of such transactions. TAXATION OF DIVIDENDS AND DISTRIBUTIONS. Shareholders normally will have to pay federal income taxes, and any state and/or local income taxes, on the dividends and other distributions they receive from the Fund. Such dividends and distributions, to the extent that they are derived from net investment income or short-term capital gains, are taxable to the shareholder as ordinary income regardless of whether the shareholder receives such payments in additional shares or in cash. Distributions of net long-term capital gains, if any, are taxable to shareholders as long-term capital gains regardless of how long a shareholder has held the Fund's shares and regardless of whether the distribution is received in additional shares or in cash. Under current law, the maximum tax rate on long-term capital gains realized by non-corporate shareholders generally is 20%. A special lower tax rate of 18% on long-term capital gains is available to non-corporate shareholders to the extent the distributions of long-term capital gains are derived from securities which the Fund purchased after December 31, 2000, and held for more than five years. Shareholders are generally taxed on any ordinary dividend or capital gain distributions from the Fund in the year they are actually distributed. However, if any such dividends or distributions are declared in October, November or December and paid in January then such amounts will be treated for tax purposes as received by the shareholders on December 31, to shareholders of record of such month. Subject to certain exceptions, a corporate shareholder may be eligible for a 70% dividends received deduction to the extent that the Fund earns and distributes qualifying dividends from its investments. Distributions of net capital gains by the Fund will not be eligible for the dividends received deduction. Shareholders who are not citizens or residents of the United States and certain foreign entities may be subject to withholding of United States tax on distributions made by the Fund of investment income and short term capital gains. After the end of each calendar year, shareholders will be sent full information on their dividends and capital gain distributions for tax purposes, including the portion taxable as ordinary income, the portion taxable as long-term capital gains, and the amount of any dividends eligible for the federal dividends received deduction for corporations. PURCHASES AND REDEMPTIONS AND EXCHANGES OF FUND SHARES. Any dividend or capital gains distribution received by a shareholder from any investment company will have the effect of reducing the net asset value of the shareholder's stock in that company by the exact amount of the dividend or capital gains distribution. Furthermore, such dividends and capital gains distributions are subject to federal income taxes. If the net asset value of the shares should be reduced below a shareholder's cost as a result of the payment of dividends or the distribution of realized long-term capital gains, such payment 29 or distribution would be in part a return of the shareholder's investment but nonetheless would be taxable to the shareholder. Therefore, an investor should consider the tax implications of purchasing Fund shares immediately prior to a distribution record date. In general, a sale of shares results in capital gain or loss, and for individual shareholders, is taxable at a federal rate dependent upon the length of time the shares were held. A redemption of a shareholder's Fund shares is normally treated as a sale for tax purposes. Fund shares held for a period of one year or less at the time of such sale or redemption will, for tax purposes, generally result in short-term capital gains or losses and those held for more than one year will generally result in long-term capital gains or losses. Under current law, the maximum tax rate on long-term capital gains generally is 20%. A special lower tax rate of 18% on long-term capital gains is available for non-corporate shareholders who purchased shares after December 31, 2000, and held such shares for more than five years. This special lower tax rate of 18% for five-year property does not apply to non-corporate shareholders holding Fund shares which were purchased on or prior to December 31, 2000, unless such shareholders make an election to treat the Fund shares as being sold and reacquired on January 1, 2001. A shareholder making such election may realize capital gains. Any loss realized by shareholders upon a sale or redemption of shares within six months of the date of their purchase will be treated as a long-term capital loss to the extent of any distributions of net long-term capital gains with respect to such shares during the six-month period. Gain or loss on the sale or redemption of shares in the Fund is measured by the difference between the amount received and the tax basis of the shares. Shareholders should keep records of investments made (including shares acquired through reinvestment of dividends and distributions) so they can compute the tax basis of their shares. Under certain circumstances a shareholder may compute and use an average cost basis in determining the gain or loss on the sale or redemption of shares. Exchanges of Fund shares for shares of any other continuously offered Morgan Stanley Fund are also subject to similar tax treatment. Such an exchange is treated for tax purposes as a sale of the original shares in the first fund, followed by the purchase of shares in the second fund. If a shareholder realizes a loss on the redemption or exchange of a fund's shares and reinvests in that fund's shares within 30 days before or after the redemption or exchange, the transactions may be subject to the "wash sale" rules, resulting in a postponement of the recognition of such loss for tax purposes. X. UNDERWRITERS - -------------------------------------------------------------------------------- The Fund's shares are offered to the public on a continuous basis. The Distributor, as the principal underwriter of the shares, has certain obligations under the Distribution Agreement concerning the distribution of the shares. These obligations and the compensation the Distributor receives are described above in the sections titled "Principal Underwriter" and "Rule 12b-1 Plan". XI. CALCULATION OF PERFORMANCE DATA - -------------------------------------------------------------------------------- From time to time, the Fund may quote its "total return" in advertisements and sales literature. These figures are computed separately for Class A, Class B, Class C and Class D shares. The Fund's "average annual total return" represents an annualization of the Fund's total return over a particular period and is computed by finding the annual percentage rate which will result in the ending redeemable value of a hypothetical $1,000 investment made at the beginning of a one, five or ten year period, or for the period from the date of commencement of operations, if shorter than any of the foregoing. The ending redeemable value is reduced by any contingent deferred sales charge ("CDSC") at the end of the one, five, ten year or other period. For the purpose of this calculation, it is assumed that all dividends and distributions are reinvested. The formula for computing the average annual total return involves a percentage obtained by dividing the ending redeemable value by the amount of the initial investment (which in the case of Class A shares is reduced by the Class A initial sales charge), taking a root of the quotient (where the root is equivalent to the number of years in the period) and subtracting 1 from the result. Based on this calculation, the average annual total returns for Class B for the one and five year period ended November 30, 2001 and for the period February 27, 1996 (inception of the Fund) through 30 November 30, 2001 were -44.01%, 7.51% and 8.28%, respectively. The average annual total returns of Class A for the one year period ended November 30, 2001 and for the period July 28, 1997 (inception of the Class) through November 30, 2001 were -43.67% and 8.55%, respectively. The average annual total returns of Class C for the one year period ended November 30, 2001 and for the period July 28, 1997 (inception of the Class) through November 30, 2001 were -41.67% and 9.05%, respectively. The average annual total returns of Class D for the one year period ended November 30, 2001 and for the period July 28, 1997 (inception of the Class) through November 30, 2001 were -40.46% and 10.11%, respectively. In addition, the Fund may advertise its total return for each Class over different periods of time by means of aggregate, average, year-by-year or other types of total return figures. These calculations may or may not reflect the imposition of the maximum front-end sales charge for Class A or the deduction of the CDSC for each of Class B and Class C which, if reflected, would reduce the performance quoted. For example, the average annual total return of the Fund may be calculated in the manner described above, but without deduction for any applicable sales charge. Based on this calculation, the average annual total returns of Class B for the one and five year period ended November 30, 2001 and for the period February 27, 1996 through November 30, 2001 were - -41.06%, 7.81% and 8.39%, respectively. The average annual total returns of Class A for the fiscal year ended November 30, 2001 and for the period July 28, 1997 through November 30, 2001 were -40.54% and 9.90%, respectively. The average annual total returns of Class C for the fiscal year ended November 30, 2001 and for the period July 28, 1997 through November 30, 2001 were -41.08% and 9.05%, respectively. The average annual total returns of Class D for the fiscal year ended November 30, 2001 and for the period July 28, 1997 through November 30, 2001 were -40.46% and 10.11%, respectively. In addition, the Fund may compute its aggregate total return for each Class for specified periods by determining the aggregate percentage rate which will result in the ending value of a hypothetical $1,000 investment made at the beginning of the period. For the purpose of this calculation, it is assumed that all dividends and distributions are reinvested. The formula for computing aggregate total return involves a percentage obtained by dividing the ending value (without reduction for any sales charge) by the initial $1,000 investment and subtracting 1 from the result. Based on this calculation, the total returns for Class B for the one and five year period ended November 30, 2001 and for the period February 27, 1996 through November 30, 2001 were -41.06%, 45.66% and 59.06%, respectively. The total returns of Class A for the fiscal year ended November 30, 2001 and for the period July 28, 1997 through November 30, 2001 were -40.54% and 50.70%, respectively. The total returns of Class C for the fiscal year ended November 30, 2001 and for the period July 28, 1997 through November 30, 2001 were -41.08% and 45.66%, respectively. The total returns of Class D for the fiscal year ended November 30, 2001 and for the period July 28, 1997 through November 30, 2001 were -40.46% and 51.91%, respectively. The Fund may also advertise the growth of hypothetical investments of $10,000, $50,000 and $100,000 in each Class of shares of the Fund by adding 1 to the Fund's aggregate total return to date (expressed as a decimal and without taking into account the effect of any applicable CDSC) and multiplying by $9,475, $48,000 and $97,000 in the case of Class A (investments of $10,000, $50,000 and $100,000 adjusted for the initial sales charge) or by $10,000, $50,000 and $100,000 in the case of each of Class B, Class C and Class D, as the case may be. Investments of $10,000, $50,000 and $100,000 in each Class at inception of the Class would have grown to the following amounts at November 30, 2001:
INVESTMENT AT INCEPTION OF: INCEPTION ----------------------------------- CLASS DATE $10,000 $50,000 $100,000 - ----------------- ---------- --------- --------- ----------- Class A ......... 07/28/97 $14,279 $72,336 $146,179 Class B ......... 02/27/96 15,906 79,530 159,060 Class C ......... 07/28/97 14,566 72,830 145,660 Class D ......... 07/28/97 15,191 75,955 151,910
The after-tax returns of the Fund may also be advertised or otherwise reported. This is generally calculated in a manner similar to the computation of average annual total returns discussed above, except that the calculation also reflects the effect of taxes on returns. 31 The Fund from time to time may also advertise its performance relative to certain performance rankings and indexes compiled by recognized organizations. XII. FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Experts. The financial statements of the Fund for the fiscal year ended November 30, 2001 included in this Statement of Additional Information and incorporated by reference in the Prospectus have been so included and incorporated in reliance on the report of Deloitte & Touche LLP, independent auditors, given on the authority of said firm as experts in auditing and accounting. * * * * * This Statement of Additional Information and the Prospectus do not contain all of the information set forth in the Registration Statement the Fund has filed with the SEC. The complete Registration Statement may be obtained from the SEC. 32 Morgan Stanley Capital Opportunities Trust PORTFOLIO OF INVESTMENTS o NOVEMBER 30, 2001
NUMBER OF SHARES VALUE - -------------------- ------------- Common Stocks (99.1%) Advertising/Marketing Services (1.0%) 223,700 Lamar Advertising Co.* ............ $ 8,288,085 ------------ Biotechnology (12.5%) 932,300 Abgenix, Inc.* .................... 33,562,800 276,900 Genentech, Inc.* .................. 15,907,905 274,000 Gilead Sciences, Inc.* ............ 19,785,540 759,000 Human Genome Sciences, Inc.*. 32,265,090 227,650 Vertex Pharmaceuticals, Inc.*...... 5,759,545 ------------ 107,280,880 ------------ Broadcasting (9.2%) 198,437 Clear Channel Communications, Inc.* ............. 9,272,961 470,100 Cox Radio, Inc. (Class A)* ........ 10,943,928 248,000 Granite Broadcasting Corp.*........ 394,320 401,000 Hispanic Broadcasting Corp.*....... 8,761,850 675,500 Univision Communications, Inc. (Class A)* ................... 24,054,555 849,800 Westwood One, Inc.* ............... 24,865,148 ------------ 78,292,762 ------------ Cable/Satellite TV (7.5%) 188,800 Cablevision Systems Corp. (Class A)* ........................ 7,937,152 358,000 Cablevision Systems Corp. - Rainbow Media Group* .............. 7,428,500 1,186,600 EchoStar Communications Corp. (Class A)* .................. 31,409,302 1,274,100 Liberty Satellite & Technology, Inc.* ............................. 1,426,992 1,041,800 Mediacom Communications Corp.* ............................ 16,085,392 ------------ 64,287,338 ------------ Computer Communications (2.2%) 771,300 Juniper Networks, Inc.* ........... 18,958,554 ------------ Computer Peripherals (1.4%) 750,300 Network Appliance, Inc.* .......... 11,599,638 ------------ Data Processing Services (3.0%) 511,546 CheckFree Corp.* .................. 8,650,243 481,587 Paychex, Inc. ..................... 16,860,361 ------------ 25,510,604 ------------
NUMBER OF SHARES VALUE - -------------------- ------------- Electronic Equipment/ Instruments (2.3%) 715,600 Gemstar-TV Guide International, Inc.* .............. $ 19,843,588 ------------ Electronic Production Equipment (0.8%) 173,660 Novellus Systems, Inc.* ........... 6,611,236 ------------ Financial Publishing/ Services (1.7%) 227,700 SEI Investments Co. ............... 9,221,850 177,000 SunGard Data Systems Inc.*......... 4,966,620 ------------ 14,188,470 ------------ Information Technology Services (0.3%) 485,000 Sapient Corp.* .................... 3,045,800 ------------ Internet Software/Services (13.8%) 1,292,600 Liberate Technologies, Inc.* ...... 11,827,290 422,950 Openwave Systems Inc.* ............ 4,631,303 834,200 Overture Services, Inc.* .......... 21,313,810 1,482,100 Siebel Systems, Inc.* ............. 33,124,935 881,500 VeriSign, Inc.* ................... 32,932,840 901,330 Yahoo! Inc.* ...................... 14,033,708 ------------ 117,863,886 ------------ Investment Banks/Brokers (0.1%) 52,100 Instinet Group, Inc.* ............. 455,875 ------------ Investment Managers (1.6%) 437,600 Price (T.) Rowe Group Inc. ........ 13,871,920 ------------ Medical Distributors (3.7%) 315,000 Andrx Group* ...................... 23,253,300 119,500 Cardinal Health, Inc. ............. 8,164,240 ------------ 31,417,540 ------------ Other Consumer Services (7.4%) 727,100 eBay, Inc.* ....................... 49,493,697 220,600 Expedia, Inc. (Class A)* .......... 7,901,892 123,900 Hotel Reservations Network, Inc. (Class A)* ................... 4,289,418 30,340 Weight Watchers International Inc.* ............................. 1,036,414 ------------ 62,721,421 ------------
See Notes to Financial Statements 33 Morgan Stanley Capital Opportunities Trust PORTFOLIO OF INVESTMENTS o NOVEMBER 30, 2001 continued
NUMBER OF SHARES VALUE - -------------------- ------------- Packaged Software (1.0%) 458,900 Rational Software Corp.* ............. $ 8,719,100 ----------- Personnel Services (0.7%) 232,200 Robert Half International, Inc.*...... 6,257,790 ----------- Pharmaceuticals: Other (1.7%) 298,100 Sepracor, Inc.* ...................... 14,875,190 ----------- Property - Casualty Insurers (0.4%) 79,800 Cincinnati Financial Corp. ........... 3,079,482 ----------- Semiconductors (14.9%) 555,200 Altera Corp.* ........................ 12,636,352 964,400 Applied Micro Circuits Corp.*......... 13,144,772 267,200 Elantec Semiconductor, Inc.*.......... 9,087,472 899,600 Maxim Integrated Products, Inc.* ................................ 49,307,076 1,191,100 Xilinx, Inc.* ........................ 43,010,621 ----------- 127,186,293 ----------- Specialty Stores (4.9%) 1,296,300 Bed Bath & Beyond Inc.* .............. 42,090,861 ----------- Telecommunication Equipment (7.0%) 346,100 ONI Systems Corp.* ................... 2,464,232 714,600 QUALCOMM Inc.* ....................... 41,961,312 571,800 Research In Motion Ltd. (Canada)* ............................ 12,459,522 530,900 Sonus Networks, Inc.* ................ 2,558,938 ----------- 59,444,004 ----------- Total Common Stocks (Cost $836,279,440)................... 845,890,317 -----------
PRINCIPAL AMOUNT IN THOUSANDS VALUE - ----------- --------------- Short-Term Investment (0.9%) Repurchase Agreement $ 7,458 The Bank of New York 1.938% due 12/03/01 (dated 11/30/01; proceeds $7,459,311)(a) (Cost $7,458,107).......... $ 7,458,107 ------------ Total Investments (Cost $843,737,547) (b)......... 100.0% 853,348,424 Liabilities in Excess of Other Assets ......................... 0.0 (232,785) ----------- Net Assets ..................... 100.0% $853,115,639 ============
- --------------------------- * Non-income producing security. (a) Collateralized by $7,682,594 U.S. Treasury Bill 2.325% due 04/04/02 valued at $7,635,807. (b) The aggregate cost for federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross unrealized appreciation is $239,321,438 and the aggregate gross unrealized depreciation is $229,710,561, resulting in net unrealized appreciation of $9,610,877. See Notes to Financial Statements 34 Morgan Stanley Capital Opportunities Trust FINANCIAL STATEMENTS Statement of Assets and Liabilities November 30, 2001
Assets: Investments in securities, at value (cost $843,737,547)............................ $ 853,348,424 Receivable for: Shares of beneficial interest sold ......... 1,734,587 Prepaid expenses and other assets ............... 190,314 -------------- Total Assets ................................. 855,273,325 -------------- Liabilities: Payable for: Shares of beneficial interest repurchased ............................. 938,057 Distribution fee ........................... 586,624 Investment management fee .................. 496,085 Accrued expenses and other payables ............. 136,920 -------------- Total Liabilities ............................ 2,157,686 -------------- Net Assets ................................... $ 853,115,639 ============== Composition of Net Assets: Paid-in-capital ................................. $1,436,138,244 Net unrealized appreciation ..................... 9,610,877 Accumulated net realized loss ................... (592,633,482) -------------- Net Assets ................................... $ 853,115,639 ============== Class A Shares: Net Assets ...................................... $ 21,508,773 Shares Outstanding (unlimited authorized, $.01 par value)................................ 1,346,593 Net Asset Value Per Share .................... $ 15.97 ============== Maximum Offering Price Per Share, (net asset value plus 5.54% of net asset value) ............................ $ 16.85 ============== Class B Shares: Net Assets ...................................... $ 705,387,538 Shares Outstanding (unlimited authorized, $.01 par value)................................ 45,415,180 Net Asset Value Per Share .................... $ 15.53 ============== Class C Shares: Net Assets ...................................... $ 32,016,438 Shares Outstanding (unlimited authorized, $.01 par value)................................ 2,074,364 Net Asset Value Per Share .................... $ 15.43 ============== Class D Shares: Net Assets ...................................... $ 94,202,890 Shares Outstanding (unlimited authorized, $.01 par value)................................ 5,851,805 Net Asset Value Per Share .................... $ 16.10 ==============
Statement of Operations For the year ended November 30, 2001
Net Investment Loss: Dividends ..................................... $ 791,691 Interest ...................................... 453,145 ------------- Total Income ............................... 1,244,836 ------------- Expenses Distribution fee (Class A shares) ............. 30,734 Distribution fee (Class B shares) ............. 9,853,904 Distribution fee (Class C shares) ............. 443,325 Investment management fee ..................... 8,189,231 Transfer agent fees and expenses .............. 2,797,692 Shareholder reports and notices ............... 176,417 Registration fees ............................. 78,012 Custodian fees ................................ 64,594 Professional fees ............................. 20,047 Trustees' fees and expenses ................... 12,872 Organizational expenses ....................... 4,290 Other ......................................... 21,692 ------------- Total Expenses ............................. 21,692,810 ------------- Net Investment Loss ........................ (20,447,974) ------------- Net Realized and Unrealized Loss: Net realized loss ............................. (443,947,604) Net change in unrealized appreciation ......... (170,366,801) ------------- Net Loss ................................... (614,314,405) ------------- Net Decrease .................................. $(634,762,379) =============
See Notes to Financial Statements 35 Morgan Stanley Capital Opportunities Trust FINANCIAL STATEMENTS continued Statement of Changes in Net Assets
FOR THE YEAR FOR THE YEAR ENDED ENDED NOVEMBER 30, 2001 NOVEMBER 30, 2000 ------------------- ------------------ Increase (Decrease) In Net Assets Operations: Net investment loss ....................................................... $ (20,447,974) $ (26,893,537) Net realized loss ......................................................... (443,947,604) (76,382,296) Net change in unrealized appreciation ..................................... (170,366,801) (423,602,251) -------------- -------------- Net Decrease ............................................................ (634,762,379) (526,878,084) -------------- -------------- Distributions to Shareholders from Net Realized Gain: Class A shares .......................................................... - (479,160) Class B shares .......................................................... - (31,128,120) Class C shares .......................................................... - (862,510) Class D shares .......................................................... - (119,850) Paid-in-capital Class A shares .......................................................... - (70,251) Class B shares .......................................................... - (4,563,787) Class C shares .......................................................... - (126,455) Class D shares .......................................................... - (17,572) -------------- -------------- Total Distributions ..................................................... - (37,367,705) -------------- -------------- Net increase (decrease) from transactions in shares of beneficial interest (59,647,651) 736,625,790 -------------- -------------- Net Increase (Decrease) ................................................. (694,410,030) 172,380,001 Net Assets: Beginning of period ....................................................... 1,547,525,669 1,375,145,668 -------------- -------------- End of Period ............................................................. $ 853,115,639 $1,547,525,669 ============== ==============
See Notes to Financial Statements 36 Morgan Stanley Capital Opportunities Trust NOTES TO FINANCIAL STATEMENTS o NOVEMBER 30, 2001 1. Organization and Accounting Policies Morgan Stanley Capital Opportunities Trust (the "Fund"), formerly Morgan Stanley Mid-Cap Equity Trust (the Fund changed its name effective January 29, 2002), 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 seek long-term capital appreciation. The Fund seeks to achieve its objective by investing primarily in equity securities, including common stocks and securities convertible into common stock, issued by medium-sized companies. The Fund was organized as a Massachusetts business trust on October 17, 1995 and commenced operations on February 27, 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 one year, 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. 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. The following is a summary of significant accounting policies: A. Valuation of Investments - (1) an equity security listed or traded on the New York or American Stock Exchange, NASDAQ, or other exchange is valued at its latest sale price on that exchange prior to the time when assets are valued; if there were no sales that day, the security is valued at the latest bid price (in cases where securities are traded on more than one exchange, the securities are valued on the exchange designated as the primary market pursuant to procedures adopted by the Trustees); (2) all other portfolio securities for which over-the-counter market quotations are readily available are valued at the latest available bid price prior to the time of valuation; (3) when market quotations are not readily available, including circumstances under which it is determined by Morgan Stanley Investment Advisors Inc. (the "Investment Manager"), formerly Morgan Stanley Dean Witter Advisors Inc. or TCW Investment Management Company (the "Sub-Advisor") that sale or bid prices are not reflective of 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 Trustees (valuation of debt securities for which market quotations are not readily available may be based upon current market prices of securities which are comparable in coupon, rating and maturity or an appropriate matrix utilizing similar factors); and 37 Morgan Stanley Capital Opportunities Trust NOTES TO FINANCIAL STATEMENTS O NOVEMBER 30, 2001 continued (4) 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 except for certain dividends from foreign securities which are recorded as soon as the Fund is informed after the ex-dividend date. Discounts are accreted over the life of the respective securities. Interest income is accrued daily. C. 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. D. Federal Income Tax Status - 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 its shareholders on the ex-dividend date. 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. F. Organizational Expenses - The Investment Manager paid the organizational expenses of the Fund in the amount of approximately $165,000 and was reimbursed for the full amount thereof. Such expenses were deferred and fully amortized as of February 27, 2001. 2. Investment Management and Sub-Advisory Agreements Pursuant to an Investment Management Agreement, the Fund pays the Investment Manager a management fee, accrued daily and payable monthly, by applying the annual rate of 0.75% to the 38 Morgan Stanley Capital Opportunities Trust NOTES TO FINANCIAL STATEMENTS O NOVEMBER 30, 2001 continued portion of daily net assets not exceeding $500 million; 0.725% to the portion of daily net assets exceeding $500 million but not exceeding $2 billion; 0.70% to the portion of daily net assets exceeding $2.0 billion, but not exceeding $3.0 billion; and 0.675% to the portion of daily net assets in excess of $3.0 billion. Under a Sub-Advisory Agreement between the Investment Manager and the Sub-Advisor, the Sub-Advisor provides the Fund with investment advice and portfolio management relating to the Fund's investment in securities, subject to the overall supervision of the Investment Manager. As compensation for its services provided pursuant to the Sub-Advisory Agreement, the Investment Manager pays the Sub-Advisor compensation equal to 40% of its monthly compensation. 3. Plan of Distribution Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Manager. 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 - 1.0% of the lesser of: (a) the average daily aggregate gross sales of the Class B shares since 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, including carrying charges, totaled approximately $65,627,000 at November 30, 2001. 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 November 30, 2001, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.11% and 1.0%, respectively. 39 Morgan Stanley Capital Opportunities Trust NOTES TO FINANCIAL STATEMENTS O NOVEMBER 30, 2001 continued The Distributor has informed the Fund that for the year ended November 30, 2001, it received contingent deferred sales charges from certain redemptions of the Fund's Class A shares, Class B shares and Class C shares of approximately $1,200, $2,004,000 and $25,000, respectively and received approximately $49,200 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 November 30, 2001 aggregated $269,647,472 and $320,189,393, respectively. For the year ended November 30, 2001, the Fund incurred brokerage commission of $27,340 with Morgan Stanley & Co., Inc., an affiliate of the Investment Manager and Distributor, for portfolio transactions executed on behalf of the Fund. Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is the Fund's transfer agent. At November 30, 2001, the Fund had transfer agent fees and expenses payable of approximately $40,400. 5. Federal Income Tax Status At November 30, 2001, the Fund had a net capital loss carryover of approximately $545,651,000, to offset future capital gains to the extent provided by regulations, available through November 30 of the following years:
AMOUNT IN THOUSANDS - ---------------------------------------------------------------- 2005 2006 2007 2008 2009 - ------------ ---------- --------- ---------- ----------- $ 36,450 $21,173 $6,907 $68,058 $413,063 ========= ======= ====== ======= ========
Due to the Fund's acquisition of Morgan Stanley Dean Witter Mid-Cap Dividend Growth Fund, utilization of this carryover is subject to limitations imposed by the Internal Revenue Code and Treasury Regulations, significantly reducing the total carryover available. Capital losses incurred after October 31 ("post-October" losses) within the taxable year are deemed to arise on the first business day of the Fund's next taxable year. The Fund incurred and will elect to defer net capital losses of approximately $45,324,000 during fiscal 2001. As of November 30, 2001, the Fund had temporary book/tax differences attributable to post- October losses and capital loss deferrals on wash sales and permanent book/tax differences primarily attributable to a net operating loss. To reflect reclassifications arising from the permanent differences, paid-in-capital was charged $20,544,043, accumulated net investment loss was credited $20,447,974 and accumulated net realized loss was credited $96,069. 40 Morgan Stanley Capital Opportunities Trust NOTES TO FINANCIAL STATEMENTS O NOVEMBER 30, 2001 continued 6. Shares of Beneficial Interest Transactions in shares of beneficial interest were as follows:
FOR THE YEAR FOR THE YEAR ENDED ENDED NOVEMBER 30, 2001 NOVEMBER 30, 2000 -------------------------------- --------------------------------- SHARES AMOUNT SHARES AMOUNT --------------- ---------------- ---------------- ---------------- CLASS A SHARES Sold ................................................ 874,213 $ 15,550,342 1,552,593 $ 63,483,042 Reinvestment of distributions ....................... - - 13,380 499,329 Acquisition of Morgan Stanley Dean Witter Mid-Cap Dividend Growth Fund ............................... - - 80,352 3,505,333 Repurchased ......................................... (1,317,074) (28,744,746) (446,127) (17,937,057) ---------- -------------- --------- -------------- Net increase (decrease) - Class A ................... (442,861) (13,194,404) 1,200,198 49,550,647 ---------- -------------- --------- -------------- CLASS B SHARES Sold ................................................ 9,199,135 189,556,953 21,311,168 876,690,885 Reinvestment of distributions ....................... - - 904,628 33,272,193 Acquisition of Morgan Stanley Dean Witter Mid-Cap Dividend Growth Fund ............................... - - 2,744,256 117,697,454 Repurchased ......................................... (17,436,729) (328,643,850) (10,753,031) (426,074,102) ----------- -------------- ----------- -------------- Net increase (decrease) - Class B ................... (8,237,594) (139,086,897) 14,207,021 601,586,430 ----------- -------------- ----------- -------------- CLASS C SHARES Sold ................................................ 666,937 14,317,266 1,737,151 70,678,077 Reinvestment of distributions ....................... - - 26,230 961,084 Acquisition of Morgan Stanley Dean Witter Mid-Cap Dividend Growth Fund ............................... - - 153,141 6,528,903 Repurchased ......................................... (953,488) (18,284,908) (605,428) (23,684,150) ----------- -------------- ----------- -------------- Net increase (decrease) - Class C ................... (286,551) (3,967,642) 1,311,094 54,483,914 ----------- -------------- ----------- -------------- CLASS D SHARES Sold ................................................ 6,098,619 116,872,095 1,057,630 44,032,063 Reinvestment of distributions ....................... - - 3,245 121,636 Acquisition of Morgan Stanley Dean Witter Mid-Cap Dividend Growth Fund ............................... - - 17,321 759,795 Repurchased ......................................... (1,127,585) (20,270,803) (326,506) (13,908,695) ----------- -------------- ----------- -------------- Net increase - Class D .............................. 4,971,034 96,601,292 751,690 31,004,799 ----------- -------------- ----------- -------------- Net increase (decrease) in Fund ..................... (3,995,972) $ (59,647,651) 17,470,003 $ 736,625,790 =========== ============== =========== ==============
41 Morgan Stanley Capital Opportunities Trust NOTES TO FINANCIAL STATEMENTS O NOVEMBER 30, 2001 continued 7. Acquisition of Morgan Stanley Dean Witter Mid-Cap Dividend Growth Fund On July 24, 2000, the Fund acquired all the net assets of the Morgan Stanley Dean Witter Mid-Cap Dividend Growth Fund ("Mid-Cap Dividend") based on the respective valuations as of the close of business on July 21, 2000 pursuant to a plan of reorganization approved by the shareholders of Mid-Cap Dividend on June 22, 2000. The acquisition was accomplished by a tax-free exchange of 80,352 Class A shares of the Fund at a net asset value of $43.61 per share for 507,112 shares of Mid-Cap Dividend; 2,744,256 Class B shares of the Fund at a net asset value of $42.87 per share for 16,927,521 Class B shares of Mid-Cap Dividend; 153,141 Class C shares of the Fund at a net asset value of $42.62 per share for 941,829 Class C shares of Mid-Cap Dividend; and 17,321 Class D shares of the Fund at a net asset value of $43.85 per share for 110,235 Class D shares of Mid-Cap Dividend. The net assets of the Fund and Mid-Cap Dividend immediately before the acquisition were $2,307,088,101 and $128,491,484, respectively, including unrealized depreciation of $8,021,606 for Mid-Cap Dividend. Immediately after the acquisition, the combined net assets of the Fund amounted to $2,435,579,585. 42 Morgan Stanley Capital Opportunities Trust FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE YEAR ENDED NOVEMBER 30 --------------------------------------- 2001 2000 ------------------- ------------------- Class A Shares++ Selected Per Share Data: Net asset value, beginning of period ................. $ 26.86 $ 33.83 -------- -------- Income (loss) from investment operations: Net investment loss ................................. (0.20) (0.33) Net realized and unrealized gain (loss) ............. (10.69) (5.76) -------- -------- Total income (loss) from investment operations ....... (10.89) (6.09) -------- -------- Less distributions from: Net realized gain ................................... - (0.77) Paid-in-capital ..................................... - (0.11) -------- -------- Total distributions .................................. - (0.88) -------- -------- Net asset value, end of period ....................... $ 15.97 $ 26.86 ======== ======== Total Return+ ........................................ (40.54)% (18.72)% Ratios to Average Net Assets: Expenses ............................................. 1.13 %(3) 1.11 %(3) Net investment loss .................................. (1.02)%(3) (0.82)%(3) Supplemental Data: Net assets, end of period, in thousands .............. $21,509 $48,068 Portfolio turnover rate .............................. 25 % 17 % FOR THE PERIOD FOR THE YEAR ENDED NOVEMBER 30 JULY 28, 1997* ------------------------------------- THROUGH 1999 1998 NOVEMBER 30, 1997 ------------------ ------------------ ------------------ Class A Shares++ Selected Per Share Data: Net asset value, beginning of period ................. $ 15.60 $10.88 $ 10.85 -------- ------- ------- Income (loss) from investment operations: Net investment loss ................................. (0.34) (0.18) (0.06) Net realized and unrealized gain (loss) ............. 18.57 4.90 0.09 -------- ------- ------- Total income (loss) from investment operations ....... 18.23 4.72 0.03 -------- ------- ------- Less distributions from: Net realized gain ................................... - - - Paid-in-capital ..................................... - - - -------- ------- ------- Total distributions .................................. - - - -------- ------- ------- Net asset value, end of period ....................... $ 33.83(4) $15.60 $ 10.88 ========== ======= ======= Total Return+ ........................................ 116.89 % 43.38 % 0.28 %(1) Ratios to Average Net Assets: Expenses ............................................. 1.23 %(3) 1.55 %(3) 1.55 %(2) Net investment loss .................................. (0.93)%(3) (1.40)%(3) (1.46)%(2) Supplemental Data: Net assets, end of period, in thousands .............. $19,934 $1,107 $ 58 Portfolio turnover rate .............................. 51 % 52 % 49 %
- ----------- * The date shares were first issued. ++ 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) Not annualized. (2) Annualized. (3) Reflects overall Fund ratios for investment income and non-class specific expenses. (4) Includes the effect of a capital gain distribution of $0.004. See Notes to Financial Statements 43 Morgan Stanley Capital Opportunities Trust FINANCIAL HIGHLIGHTS continued
FOR THE YEAR ENDED NOVEMBER 30 ----------------------------------------- 2001 2000 ------------------- --------------------- Class B Shares++ Selected Per Share Data: Net asset value, beginning of period .............. $ 26.35 $ 33.36 ---------- ------------- Income (loss) from investment operations: Net investment loss .............................. (0.37) (0.51) Net realized and unrealized gain (loss) .......... (10.45) (5.62) ---------- ------------- Total income (loss) from investment operations (10.82) (6.13) ---------- ------------- Less distributions from: Net realized gain ................................ - (0.77) Paid-in-capital .................................. - (0.11) ---------- ------------- Total distributions ............................... - (0.88) ---------- ------------- Net asset value, end of period .................... $ 15.53 $ 26.35 ========== ============= Total Return+ ..................................... (41.06)% (19.12)% Ratios to Average Net Assets: Expenses .......................................... 2.02 %(1) 1.58 %(1) Net investment loss ............................... (1.91)%(1) (1.29)%(1) Supplemental Data: Net assets, end of period, in thousands ........... $705,388 $1,413,820 Portfolio turnover rate ........................... 25 % 17 % FOR THE YEAR ENDED NOVEMBER 30 -------------------------------------------------------- 1999 1998 1997* --------------------- ------------------ --------------- Class B Shares++ Selected Per Share Data: Net asset value, beginning of period .............. $ 15.46 $ 10.85 $ 10.92 ----------- - ---------- ---------- Income (loss) from investment operations: Net investment loss .............................. (0.42) (0.26) (0.22) Net realized and unrealized gain (loss) .......... 18.32 4.87 0.15 ------------ ---------- ---------- Total income (loss) from investment operations 17.90 4.61 (0.07) ------------ ---------- ---------- Less distributions from: Net realized gain ................................ - - - Paid-in-capital .................................. - - - ------------ ---------- ---------- Total distributions ............................... - - - ------------ ---------- ---------- Net asset value, end of period .................... $ 33.36(2) $ 15.46 $ 10.85 ============ ========== ========== Total Return+ ..................................... 115.82 % 42.49 % (0.64)% Ratios to Average Net Assets: Expenses .......................................... 1.74 %(1) 2.20 %(1) 2.29 % Net investment loss ............................... (1.44)%(1) (2.05)%(1) (2.16)% Supplemental Data: Net assets, end of period, in thousands ........... $1,315,930 $212,043 $174,412 Portfolio turnover rate ........................... 51 % 52 % 49 %
- ----------- * Prior to July 28, 1997, the Fund issued one class of shares. All shares of the Fund held prior to that date have been designated Class B shares. ++ 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. (2) Includes the effect of a capital gain distribution of $0.004. See Notes to Financial Statements 44 Morgan Stanley Capital Opportunities Trust FINANCIAL HIGHLIGHTS continued
FOR THE YEAR ENDED NOVEMBER 30 --------------------------------------- 2001 2000 ------------------- ------------------- Class C Shares++ Selected Per Share Data: Net asset value, beginning of period ................... $ 26.19 $ 33.24 -------- -------- Income (loss) from investment operations: Net investment loss ................................... (0.37) (0.62) Net realized and unrealized gain (loss) ............... (10.39) (5.55) -------- -------- Total income (loss) from investment operations ......... (10.76) (6.17) -------- -------- Less distributions from: Net realized gain ..................................... - (0.77) Paid-in-capital ....................................... - (0.11) -------- -------- Total distributions .................................... - (0.88) -------- -------- Net asset value, end of period ......................... $ 15.43 $ 26.19 ======== ======== Total Return+ .......................................... (41.08)% (19.31)% Ratios to Average Net Assets: Expenses ............................................... 2.02 %(3) 1.86 %(3) Net investment loss .................................... (1.91)%(3) (1.56)%(3) Supplemental Data: Net assets, end of period, in thousands ................ $32,016 $61,822 Portfolio turnover rate ................................ 25 % 17 % FOR THE FOR THE YEAR ENDED NOVEMBER 30 JULY 28, ------------------------------------- THROUGH 1999 1998 NOVEMBER 30, 1997 ------------------ ------------------ ------------------ Class C Shares++ Selected Per Share Data: Net asset value, beginning of period ................... $ 15.45 $10.85 $10.85 -------- ------- ------- Income (loss) from investment operations: Net investment loss ................................... (0.52) (0.28) (0.08) Net realized and unrealized gain (loss) ............... 18.31 4.88 0.08 -------- ------- ------- Total income (loss) from investment operations ......... 17.79 4.60 - -------- ------- ------- Less distributions from: Net realized gain ..................................... - - - Paid-in-capital ....................................... - - - -------- ------- ------- Total distributions .................................... - - - -------- ------- ------- Net asset value, end of period ......................... $ 33.24(4) $15.45 $10.85 ========== ======= ======= Total Return+ .......................................... 115.18 % 42.27 % 0.09 %(1) Ratios to Average Net Assets: Expenses ............................................... 1.99 %(3) 2.30 %(3) 2.32 %(2) Net investment loss .................................... (1.69)%(3) (2.15)%(3) (2.22)%(2) Supplemental Data: Net assets, end of period, in thousands ................ $34,898 $ 712 $ 83 Portfolio turnover rate ................................ 51 % 52 % 49 %
- ----------- * The date shares were first issued. ++ 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) Not annualized. (2) Annualized. (3) Reflects overall Fund ratios for investment income and non-class specific expenses. (4) Includes the effect of a capital gain distribution of $0.004. See Notes to Financial Statements 45 Morgan Stanley Capital Opportunities Trust FINANCIAL HIGHLIGHTS continued
FOR THE YEAR ENDED NOVEMBER 30 --------------------------------------- 2001 2000 ------------------- ------------------- Class D Shares++ Selected Per Share Data: Net asset value, beginning of period .................. $ 27.04 $ 33.97 -------- -------- Income (loss) from investment operations: Net investment loss .................................. (0.18) (0.24) Net realized and unrealized gain (loss) .............. (10.76) (5.81) -------- -------- Total income (loss) from investment operations ........ (10.94) (6.05) -------- -------- Less distributions from: Net realized gain .................................... - (0.77) Paid-in-capital ...................................... - (0.11) -------- -------- Total distributions ................................... - (0.88) -------- -------- Net asset value, end of period ........................ $ 16.10 $ 27.04 ======== ======== Total Return+ ......................................... (40.46)% (18.52)% Ratios to Average Net Assets: Expenses .............................................. 1.02 %(3) 0.86 %(3) Net investment loss ................................... (0.91)%(3) (0.57)%(3) Supplemental Data: Net assets, end of period, in thousands ............... $94,203 $23,815 Portfolio turnover rate ............................... 25% 17 % FOR THE PERIOD FOR THE YEAR ENDED NOVEMBER 30 JULY 28, 1997* ------------------------------------- THROUGH 1999 1998 NOVEMBER 30, 1997 ------------------ ------------------ ------------------ Class D Shares++ Selected Per Share Data: Net asset value, beginning of period .................. $15.66 $10.89 $10.85 ------- ------- ------- Income (loss) from investment operations: Net investment loss .................................. (0.21) (0.15) (0.05) Net realized and unrealized gain (loss) .............. 18.52 4.92 0.09 ------- ------- ------- Total income (loss) from investment operations ........ 18.31 4.77 0.04 ------- ------- ------- Less distributions from: Net realized gain .................................... - - - Paid-in-capital ...................................... - - - ------- ------- ------- Total distributions ................................... - - - ------- ------- ------- Net asset value, end of period ........................ $33.97(4) $15.66 $10.89 ========= ======= ======= Total Return+ ......................................... 116.96 % 43.80 % 0.37 %(1) Ratios to Average Net Assets: Expenses .............................................. 0.99 %(3) 1.30 %(3) 1.30 %(2) Net investment loss ................................... (0.69)%(3) (1.15)%(3) (1.19)%(2) Supplemental Data: Net assets, end of period, in thousands ............... $4,384 $ 15 $ 10 Portfolio turnover rate ............................... 51 % 52 % 49 %
- ----------- * The date shares were first issued. ++ 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) Not annualized. (2) Annualized. (3) Reflects overall Fund ratios for investment income and non-class specific expenses. (4) Includes the effect of a capital gain distribution of $0.004. See Notes to Financial Statements 46 Morgan Stanley Capital Opportunities Trust INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Trustees of Morgan Stanley Capital Opportunities Trust: We have audited the accompanying statement of assets and liabilities of Morgan Stanley Capital Opportunities Trust (the "Fund"), formerly Morgan Stanley Dean Witter Mid-Cap Equity Trust, including the portfolio of investments, as of November 30, 2001, 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 periods presented. 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 auditing standards generally accepted in the United States of America. 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of November 30, 2001, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Morgan Stanley Capital Opportunities Trust as of November 30, 2001, 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 periods presented, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP New York, New York January 29, 2002 47 Morgan Stanley Capital Opportunities Trust TRUSTEE AND OFFICER INFORMATION INDEPENDENT TRUSTEES:
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF PRINCIPAL COMPLEX NAME, AGE AND ADDRESS OF HELD WITH TIME OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS INDEPENDENT TRUSTEE REGISTRANT SERVED* PAST 5 YEARS BY TRUSTEE** HELD BY TRUSTEE - ----------------------------------- ---------- -------------- ---------------------------------- ---------------------- Michael Bozic (60) Trustee Trustee since Retired; Director or 99 Director of Weirton c/o Mayer, Brown & Platt April 1994 Trustee of the Morgan Steel Corporation. Counsel to the Independent Stanley Funds and the Trustees TCW/DW Term Trusts; 1675 Broadway formerly Vice Chairman New York, NY 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 (69) Trustee Trustee since Director or Trustee of 99 Director of Franklin c/o Summit Ventures LLC January 1993 the Morgan Stanley Covey (time management 1 Utah Center Funds and the TCW/DW systems), BMW Bank of 201 S. Main Street Term Trusts; formerly North America, Inc. Salt Lake City, UT United States Senator (industrial loan (R-Utah)(1974-1992) corporation), United and Chairman, Senate Space Alliance (joint Banking Committee venture between (1980-1986); formerly Lockheed Martin and Mayor of Salt Lake the Boeing Company) City, Utah and Nuskin Asia (1971-1974); formerly Pacific (multilevel Astronaut, Space marketing); member of Shuttle Discovery the board of various (April 12-19, 1985); civic and charitable Vice Chairman, organizations. Huntsman Corporation (chemical company); member of the Utah Regional Advisory Board of Pacific Corp. Wayne E. Hedien (67) Trustee Trustee since Retired; Director or 99 Director of The PMI c/o Mayer, Brown & Platt September 1997 Trustee of the Morgan Group Inc. (private Counsel to the Independent Stanley Funds and the mortgage insurance); Trustees TCW/DW Term Trusts; Trustee and Vice 1675 Broadway formerly associated Chairman of The Field New York, NY with the Allstate Museum of Natural Companies (1966-1994), History; director of most recently as various other business Chairman of The and charitable Allstate Corporation organizations. (March 1993-December 1994) and Chairman and Chief Executive Officer of its wholly-owned subsidiary, Allstate Insurance Company (July 1989-December 1994). 48 Morgan Stanley Capital Opportunities Trust TRUSTEE AND OFFICER INFORMATION continued NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF PRINCIPAL COMPLEX NAME, AGE AND ADDRESS OF HELD WITH TIME OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS INDEPENDENT TRUSTEE REGISTRANT SERVED* PAST 5 YEARS BY TRUSTEE** HELD BY TRUSTEE - ------------------------------------- ---------- ------------- ---------------------- ------------ ---------------------- Dr. Manuel H. Johnson (52) Trustee Trustee since Chairman of the Audit 99 Director of NVR, Inc. c/o Johnson Smick International, July 1991 Committee and Director (home construction); Inc. or Trustee of the Chairman and Trustee 1133 Connecticut Avenue, N.W. Morgan Stanley Funds of the Financial Washington, D.C. and the TCW/DW Term Accounting Foundation Trusts; Senior (oversight Partner, Johnson Smick organization of the International, Inc., a Financial Accounting consulting firm; Standards Board). 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. Michael E. Nugent (65) Trustee Trustee since Chairman of the 115 Director of various c/o Triumph Capital, L.P. July 1991 Insurance Committee business 237 Park Avenue and Director or organizations. New York, NY Trustee of the Morgan Stanley Funds and the TCW/DW Term Trusts; director/ trustee of various investment companies managed by Morgan Stanley Investment Management Inc. and Morgan Stanley Investments LP (since July 2001); General Partner, Triumph Capital, L.P., a private investment partnership; formerly Vice President, Bankers Trust Company and BT Capital Corporation (1984-1988). John L. Schroeder (71) Trustee Trustee since Retired; Chairman of 99 Director of Citizens c/o Mayer, Brown & Platt April 1994 the Derivatives Communications Company Counsel to the Independent Trustees Committee and Director (telecommunications 1675 Broadway or Trustee of the company). New York, NY Morgan Stanley Funds and the TCW/DW Term Trusts; formerly Executive Vice President and Chief Investment Officer of the Home Insurance Company (August 1991-September 1995). 49 Morgan Stanley Capital Opportunities Trust TRUSTEE AND OFFICER INFORMATION continued INTERESTED TRUSTEES: NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF PRINCIPAL COMPLEX NAME, AGE AND ADDRESS OF HELD WITH TIME OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS INDEPENDENT TRUSTEE REGISTRANT SERVED* PAST 5 YEARS BY TRUSTEE** HELD BY TRUSTEE - ---------------------------- --------------------- ------------- ---------------------- ------------ ---------------------- Charles A. Fiumefreddo (68) Chairman, Director or Trustee since Chairman, Director or 99 None c/o Morgan Stanley Trust Trustee and Chief July 1991 Trustee and Chief Harborside Financial Executive Officer Executive Officer of Center, the Morgan Stanley Plaza Two, Funds and the TCW/DW Jersey City, NJ Term Trusts; formerly Chairman, Chief Executive Officer and Director of the Investment Manager, the Distributor and Morgan Stanley Services, Executive Vice President and Director of Morgan Stanley DW, Chairman and Director of the Transfer Agent, and Director and/or officer of various Morgan Stanley subsidiaries (until June 1998). James F. Higgins (53) Trustee Trustee since Chairman of the 99 None c/o Morgan Stanley Trust June 2000 Individual Investor Harborside Financial Group of Morgan Center, Stanley (since August Plaza Two, 2000); Director of the Jersey City, NJ Transfer Agent, the Distributor and Dean Witter Realty Inc.; Director or Trustee of the Morgan Stanley Funds and the TCW/DW Term Trusts (since June 2000); previously President and Chief Operating Officer of the Private Client Group of Morgan Stanley (May 1999-August 2000), President and Chief Operating Officer of Individual Securities of Morgan Stanley (February 1997-May 1999). Philip J. Purcell (58) Trustee Trustee since Director or Trustee of 99 Director of American 1585 Broadway April 1994 the Morgan Stanley Airlines, Inc. and its New York, NY Funds and the TCW/DW parent company, AMR Term Trusts; Chairman Corporation. of the Board of Directors and Chief Executive Officer of Morgan Stanley and Morgan Stanley DW; Director of the Distributor; Chairman of the Board of Directors and Chief Executive Officer of Novus Credit Services Inc.; Director and/or officer of various Morgan Stanley subsidiaries.
* Each Trustee serves an indefinite term, until his or her successor is elected. ** The Fund Complex includes all funds advised by Morgan Stanley Investment Advisors Inc. and any funds that have an investment advisor that is an affiliated person of Morgan Stanley Investment Advisors Inc. (including but not limited to, Morgan Stanley Investment Management Inc., Morgan Stanley Investments LP and Van Kampen Asset Management Inc.). 50 Morgan Stanley Capital Opportunities Trust TRUSTEE AND OFFICER INFORMATION continued OFFICERS:
TERM OF OFFICE AND POSITION(S) LENGTH OF NAME, AGE AND ADDRESS OF HELD WITH TIME EXECUTIVE OFFICER REGISTRANT SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS - ---------------------------- --------------- ---------------- -------------------------------------------- Mitchell M. Merin (48) President President since President and Chief Operating Officer of 1221 Avenue of the Americas May 1999 Morgan Stanley Investment Management (since New York, NY December 1998); President, Director (since April 1997) and Chief Executive Officer (since June 1998) of the Investment Manager and Morgan Stanley Services; Chairman, Chief Executive Officer and Director of the Distributor (since June 1998); Chairman and Chief Executive Officer (since June 1998) and Director (since January 1998) of the Transfer Agent; Director of various Morgan Stanley subsidiaries; President of the Morgan Stanley Funds and TCW/DW Term Trusts (since May 1999); Trustee of various Van Kampen investment companies (since December 1999); previously Chief Strategic Officer of the Investment Manager and Morgan Stanley Services and Executive Vice President of the Distributor (April 1997-June 1998), Vice President of the Morgan Stanley Funds (May 1997-April 1999), and Executive Vice President of Morgan Stanley. Barry Fink (46) Vice President, Vice President, General Counsel (since May 2000) and c/o Morgan Stanley Trust Secretary and Secretary and Managing Director (since December 2000) of Harborside Financial General Counsel General Counsel Morgan Stanley Investment Management; Center, since February Managing Director (since December 2000), and Plaza Two 1997 Secretary and General Counsel (since Jersey City, NJ February 1997) and Director (since July 1998) of the Investment Manager and Morgan Stanley Services; Assistant Secretary of Morgan Stanley DW; Vice President, Secretary and General Counsel of the Morgan Stanley Funds and TCW/DW Term Trusts (since February 1997); Vice President and Secretary of the Distributor; previously, Senior Vice President, Assistant Secretary and Assistant General Counsel of the Investment Manager and Morgan Stanley Services. Thomas F. Caloia (55) Treasurer Over 5 years First Vice President and Assistant Treasurer c/o Morgan Stanley Trust of the Investment Manager, the Distributor Harborside Financial and Morgan Stanley Services; Treasurer of Center, the Morgan Stanley Funds. Plaza Two Jersey City, NJ Douglas S. Foreman (44) Vice President Since the Fund's Chief Investment Officer of U.S. Equities 865 South Figueroa Street inception (1996) and Group Managing Director of the Los Angeles, CA Sub-Advisor, Trust Company of the West and TCW Asset Management Company. Christopher J. Ainley (43) Vice President Since the Fund's Managing Director of the Sub-Advisor, Trust 865 South Figueroa Street Inception (1996) Company of the West and TCW Asset Management Los Angeles, CA Company.
* Each Officer serves an indefinite term, until his or her successor is elected. 51 [MORGAN STANLEY LOGO] 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 You also may obtain information about the Fund by calling your Morgan Stanley Financial Advisor or by visiting our Internet site at: www.morganstanley.com/funds Information about the Fund (including the Statement of Additional Information) can be viewed and copied at the Securities and Exchange Commission's 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: CPOAX - ---------------------------- Class B: CPOBX - ---------------------------- Class C: CPOCX - ---------------------------- Class D: CPODX - ---------------------------- (THE FUND'S INVESTMENT COMPANY ACT FILE NO. IS 811-7377) Morgan Stanley Capital Opportunities Trust A mutual fund that seeks long-term capital appreciation Prospectus | January 29, 2002 MORGAN STANLEY CAPITAL OPPORTUNITIES TRUST PART C OTHER INFORMATION Item 23. Exhibits 1 (a). Form of Declaration of Trust of the Registrant, dated October 16, 1995, is incorporated by reference to Exhibit 1 of the Initial Registration Statement on Form N-1A, filed on October 25, 1995. 1 (b). Instrument Establishing and Designating Additional Classes is incorporated by reference to Exhibit 1 of Post-Effective Amendment No. 3 to the Registration Statement on Form N-1A, filed on July 15, 1997. 1 (c). Form of Amendment dated June 25, 1999 to the Declaration of Trust of the Registrant, is incorporated by reference to Exhibit 1(c) of Post-Effective Amendment No. 8 to the Registration Statement filed on Form N-1A on June 24, 1999. 1 (d). Amendment to the Declaration of Trust of the Registrant, dated June 18, 2001, filed herein. 1 (e). Amendment to the Declaration of Trust of the Registrant, dated January 29, 2002, filed herein. 2. Amended and Restated By-Laws of the Registrant, dated May 1, 1999, is incorporated by reference to Exhibit 2 of Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A, filed on April 23, 1999. 3. Not Applicable. 4 (a). Form of Investment Management Agreement between the Registrant and Morgan Stanley Investment Advisors Inc., dated June 28, 1999, is incorporated by reference to Exhibit 4(a) of Post-Effective Amendment No. 8 to the Registration Statement on Form N-1A on June 24, 1999. 4 (b). Form of Sub-Advisory Agreement between Morgan Stanley Investment Advisors Inc. and TCW Investment Management Company, dated June 28, 1999, is incorporated by reference to Exhibit 4(b) of Post-Effective Amendment No. 8 to the Registration Statement on Form N-1A, filed on June 24, 1999. 4 (c). Form of Sub-Advisory Agreement between Morgan Stanley Investment Advisors Inc. and TCW Investment Management Company dated July 16, 2001, filed herein. 5 (a). Amended Distribution Agreement between the Registrant and Morgan Stanley Distributors Inc., dated June 22, 1998, is incorporated by reference to Exhibit 5(a) of Post-Effective Amendment No. 8 to the Registration Statement on Form N-1A, filed on June 24, 1999. 5 (b). Selected Dealers Agreement between Morgan Stanley Distributors Inc. and Morgan Stanley DW Inc. is incorporated by reference to Exhibit 6(c) of Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A, filed on December 6, 1995. 6. Not Applicable. 7 (a). Custody Agreement is incorporated by reference to Exhibit 8(a) of Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A, filed on December 6, 1995. 7 (b). Amendment dated April 17, 1996 to the Custody Agreement between The Bank of New York and the Registrant is incorporated by reference to Exhibit 8 of Post-Effective Amendment No. 1 to the Registration Statement on Form N-1A, filed on July 1, 1996. 7 (c). Amendment dated June 15, 2001 to the Custody Agreement of the Registrant, filed herein. 7 (d). Foreign Custody Manager Agreement between the Bank of New York and the Registrant, dated June 15, 2001, filed herein. 8 (a). Amended and Restated Transfer Agency and Service Agreement between the Registrant and Morgan Stanley Trust, dated September 1, 2000, is incorporated by reference to Exhibit 8(a) of Post-Effective Amendment No. 10 to the Registration Statement on Form N-1A on January 31, 2001. 8 (b). Amended Services Agreement between Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc., dated June 22, 1998, is incorporated by reference to Exhibit 8(b) of Post-Effective Amendment No. 8 to the Registration Statement filed on Form N-1A on June 24, 1999. 9 (a). Opinion of Sheldon Curtis, Esq., dated December 6, 1995, is incorporated by reference to Exhibit No. 10(a) of Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A, filed on December 6, 1995. 9 (b). Opinion of Lane Altman & Owens LLP, Massachusetts Counsel, dated December 6, 1995, is incorporated by reference to Exhibit 10(b) of Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A, filed on December 6, 1995. 10. Consent of Independent Auditors, filed herein. 11. Not Applicable. 12. Not Applicable. 13. Form of Amended and Restated Plan of Distribution pursuant to Rule 12b-1 between the Registrant and Morgan Stanley Distributors Inc., dated June 28, 1999, is incorporated by reference to Exhibit 13 of Post-Effective Amendment No. 8 to the Registration Statement filed on Form N-1A, filed on June 24, 1999. 14. Amended Multi-Class Plan pursuant to Rule 18f-3, dated March 12, 2001, filed herein. 15. Not Applicable. 16 (a). Code of Ethics of Morgan Stanley Investment Advisors Inc., Morgan Stanley Services Company Inc. and Morgan Stanley Distributors Inc. as well as other Morgan Stanley affiliated entities is incorporated by reference to Exhibit 16(a) of Post-Effective Amendment No. 10 to the Registration Statement on Form N-1A on January 31, 2001. 16 (b). Code of Ethics of the Morgan Stanley Funds, is incorporated by reference to Exhibit 16(b) of Post-Effective Amendment No. 10 to the Registration Statement on Form N-1A on January 31, 2001. 16 (c). Code of Ethics of the TCW Group, is incorporated by reference to Exhibit 16(c) of Post-Effective Amendment No. 10 to the Registration Statement on Form N-1A on January 31, 2001. Other Powers of Attorney of Trustees are incorporated by reference to Exhibit (Other) of Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A, filed on December 6, 1995; Post-Effective Amendment No. 4 to the Registration Statement on Form N-1A, filed on January 30, 1998; Post-Effective Amendment No. 8 to the Registration Statement filed on Form N-1A on June 24, 1999 and Post-Effective Amendment No. 10 to the Registration Statement on Form N-1A on January 31, 2001. ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND. None ITEM 25. INDEMNIFICATION. Pursuant to Section 5.3 of the Registrant's Declaration of Trust and under Section 4.8 of the Registrant's By-Laws, the indemnification of the Registrant's trustees, officers, employees and agents is permitted if it is determined that they acted under the belief that their actions were in or not opposed to the best interest of the Registrant, and, with respect to any criminal proceeding, they had reasonable cause to believe their conduct was not unlawful. In addition, indemnification is permitted only if it is determined that the actions in question did not render them liable by reason of willful misfeasance, bad faith or gross negligence in the performance of their duties or by reason of reckless disregard of their obligations and duties to the Registrant. Trustees, officers, employees and agents will be indemnified for the expense of litigation if it is determined that they are entitled to indemnification against any liability established in such litigation. The Registrant may also advance money for these expenses provided that they give their undertakings to repay the Registrant unless their conduct is later determined to permit indemnification. Pursuant to Section 5.2 of the Registrant's Declaration of Trust and paragraph 8 of the Registrant's Investment Management Agreement, neither the Investment Manager nor any trustee, officer, employee or agent of the Registrant shall be liable for any action or failure to act, except in the case of bad faith, willful misfeasance, gross negligence or reckless disregard of duties to the Registrant. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer, or controlling person of the Registrant in connection with the successful defense of any action, suit or proceeding) is asserted against the Registrant by such trustee, officer or controlling person in connection with the shares being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act, and will be governed by the final adjudication of such issue. The Registrant hereby undertakes that it will apply the indemnification provision of its by-laws in a manner consistent with Release 11330 of the Securities and Exchange Commission under the Investment Company Act of 1940, so long as the interpretation of Sections 17(h) and 17(i) of such Act remains in effect. The Registrant, in conjunction with the Investment Manager, the Registrant's Trustees, and other registered investment management companies managed by the Investment Manager, maintains insurance on behalf of any person who is or was a Trustee, officer, employee, or agent of the Registrant, or who is or was serving at the request of the Registrant as a trustee, director, officer, employee or agent of another trust or corporation, against any liability asserted against him and incurred by him or arising out of his position. However, in no event will Registrant maintain insurance to indemnify any such person for any act for which the Registrant itself is not permitted to indemnify him. ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR See "Fund Management" in the Prospectus regarding the business of the investment advisor. The following information is given regarding officers of Morgan Stanley Investment Advisors Inc. ("Morgan Stanley Advisors"). Morgan Stanley Investment Advisors is a wholly-owned subsidiary of Morgan Stanley & Co. THE PRINCIPAL ADDRESSES ARE AS FOLLOWS: MORGAN STANLEY FUNDS MORGAN STANLEY SERVICES COMPANY INC. ("MORGAN STANLEY SERVICES") c/o Morgan Stanley Trust, Harborside Financial Center, Plaza Two, Jersey City, New Jersey 07311 MORGAN STANLEY DISTRIBUTORS INC. ("MORGAN STANLEY DISTRIBUTORS") MORGAN STANLEY DW INC. ("MORGAN STANLEY DW") MORGAN STANLEY INVESTMENT ADVISORS INC. MORGAN STANLEY INVESTMENT MANAGEMENT MORGAN STANLEY INVESTMENT MANAGEMENT INC. MORGAN STANLEY INVESTMENT GROUP INC. ("MORGAN STANLEY INVESTMENT GROUP") THE UNIVERSAL INSTITUTIONAL FUNDS, INC. ("UNIVERSAL INSTITUTIONAL FUNDS") 1221 Avenue of the Americas New York, New York 10020. MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT LTD. MORGAN STANLEY & CO. INTERNATIONAL LIMITED ("MORGAN STANLEY & CO. INTERNATIONAL") 25 Cabot Square, London, England. MORGAN STANLEY INVESTMENTS LP MORGAN STANLEY INSTITUTIONAL FUND TRUST MORGAN STANLEY DISTRIBUTION, INC. One Tower Bridge, West Conshohocken, PA 19428. VAN KAMPEN INVESTMENT ASSET MANAGEMENT INC. ("VAN KAMPEN") 1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, IL 60181 MORGAN STANLEY TRUST ("MORGAN STANLEY TRUST") Harborside Financial Center, Plaza Two, Jersey City, New Jersey 07311.
NAME AND POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION OR EMPLOYMENT, MORGAN STANLEY INVESTMENT ADVISORS INCLUDING NAME, PRINCIPAL ADDRESS AND NATURE OF CONNECTION - ---------------------------------- ---------------------------------------------------------- Mitchell M. Merin President and Chief Operating Officer of Morgan Stanley President, Chief Executive Officer Investment Management; Chairman, Chief Executive Officer and and Director Director of Morgan Stanley Distributors and Morgan Stanley Trust; President, Chief Executive Officer and Director of Morgan Stanley Services; President of the Morgan Stanley Funds; Executive Vice President and Director of Morgan Stanley DW; Director of Morgan Stanley Investment Management Inc.; Member of the Executive Committee of Morgan Stanley Investments LP; Director of various Morgan Stanley subsidiaries; Trustee of various Van Kampen investment companies. Barry Fink Managing Director and General Counsel of Morgan Stanley Managing Director, Investment Management; Managing Director, Secretary, Secretary and Director General Counsel and Director of Morgan Stanley Services; Vice President and Secretary of Morgan Stanley Distributors; Vice President, Secretary and General Counsel of the Morgan Stanley Funds.
NAME AND POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION OR EMPLOYMENT, MORGAN STANLEY INVESTMENT ADVISORS INCLUDING NAME, PRINCIPAL ADDRESS AND NATURE OF CONNECTION - ---------------------------------- ---------------------------------------------------------- A. Thomas Smith III Managing Director and General Counsel of Morgan Stanley Managing Director and Services; Vice President and Assistant Secretary of the General Counsel Morgan Stanley Funds. Joseph J. McAlinden Chief Investment Officer and Managing Director of Morgan Managing Director and Stanley Investment Management Inc.; Chief Investment Officer Chief Investment Officer and Managing Director of Morgan Stanley Investments LP; Director of Morgan Stanley Trust. Barton M. Biggs Chairman, Senior Advisor, Managing Director and Director Managing Director of Morgan Stanley Investment Management Inc. and Managing And Senior Advisor Director of Morgan Stanley Investments LP. Thomas L. Bennett Managing Director and Director of Morgan Stanley Investment Managing Director Management Inc.; Director of the Universal Institutional Funds; Managing Director and Executive Committee member of Morgan Stanley Investments LP; Chairman of Morgan Stanley Institutional Fund Trust; Director of Morgan Stanley Distribution, Inc. Ronald E. Robison Managing Director, Chief Administrative Officer and Managing Director, and Director of Morgan Stanley Services and Chief Executive Chief Administrative Officer and Officer and Director of Morgan Stanley Trust. Director Dominic P. Caldecott Managing Director of Morgan Stanley Investment Management Managing Director Inc., Morgan Stanley Investments LP and Morgan Stanley Dean Witter Investment Management Ltd.; Vice President and Investment Manager of Morgan Stanley & Co. International. Rajesh K. Gupta Managing Director and Chief Administrative Officer- Managing Director and Investments of Morgan Stanley Investment Management Inc. Chief Administrative Officer- and Morgan Stanley Investments LP. Investments Robert S. Giambrone Executive Director of Morgan Stanley Services, Morgan Executive Director Stanley Distributors and Morgan Stanley Trust; Director of Morgan Stanley Trust. John B. Kemp, III President of Morgan Stanley Distributors. Executive Director
ITEM 27. PRINCIPAL UNDERWRITERS (a) Morgan Stanley Distributors Inc., a Delaware corporation, is the principal underwriter of the Registrant. Morgan Stanley Distributors is also the principal underwriter of the following investment companies: (1) Active Assets California Tax-Free Trust (2) Active Assets Government Securities Trust (3) Active Assets Institutional Money Trust (4) Active Assets Money Trust (5) Active Assets Premier Money Trust (6) Active Assets Tax-Free Trust (7) Morgan Stanley 21st Century Trend Fund (8) Morgan Stanley Aggressive Equity Fund (9) Morgan Stanley All Star Growth Fund (10) Morgan Stanley American Opportunities Fund (11) Morgan Stanley Balanced Growth Fund (12) Morgan Stanley Balanced Income Fund (13) Morgan Stanley California Tax-Free Daily Income Trust (14) Morgan Stanley California Tax-Free Income Fund (15) Morgan Stanley Capital Growth Securities (16) Morgan Stanley Capital Opportunities Trust (17) Morgan Stanley Competitive Edge Fund, "Best Ideas Portfolio" (18) Morgan Stanley Convertible Securities Trust (19) Morgan Stanley Developing Growth Securities Trust (20) Morgan Stanley Diversified Income Trust (21) Morgan Stanley Dividend Growth Securities Inc. (22) Morgan Stanley Equity Fund (23) Morgan Stanley European Growth Fund Inc. (24) Morgan Stanley Federal Securities Trust (25) Morgan Stanley Financial Services Trust (26) Morgan Stanley Fund of Funds (27) Morgan Stanley Global Dividend Growth Securities (28) Morgan Stanley Global Utilities Fund (29) Morgan Stanley Growth Fund (30) Morgan Stanley Hawaii Municipal Trust (31) Morgan Stanley Health Sciences Trust (32) Morgan Stanley High Yield Securities Inc. (33) Morgan Stanley Income Builder Fund (34) Morgan Stanley Information Fund (35) Morgan Stanley Intermediate Income Securities (36) Morgan Stanley International Fund (37) Morgan Stanley International SmallCap Fund (38) Morgan Stanley International Value Equity Fund (39) Morgan Stanley Japan Fund (40) Morgan Stanley KLD Social Index Fund (41) Morgan Stanley Latin American Growth Fund (42) Morgan Stanley Limited Duration Fund (43) Morgan Stanley Limited Term Municipal Trust (44) Morgan Stanley Liquid Asset Fund Inc. (45) Morgan Stanley Market Leader Trust (46) Morgan Stanley Mid-Cap Value Fund (47) Morgan Stanley Multi-State Municipal Series Trust (48) Morgan Stanley Nasdaq-100 Index Fund (49) Morgan Stanley Natural Resource Development Securities Inc. (50) Morgan Stanley New Discoveries Fund (51) Morgan Stanley New York Municipal Money Market Trust (52) Morgan Stanley New York Tax-Free Income Fund (53) Morgan Stanley Next Generation Trust (54) Morgan Stanley North American Government Income Trust (55) Morgan Stanley Pacific Growth Fund Inc. (56) Morgan Stanley Prime Income Trust (57) Morgan Stanley Real Estate Fund (58) Morgan Stanley S&P 500 Index Fund (59) Morgan Stanley S&P 500 Select Fund (60) Morgan Stanley Short-Term U.S. Treasury Trust (61) Morgan Stanley Small Cap Growth Fund (62) Morgan Stanley Special Value Fund (63) Morgan Stanley Strategist Fund (64) Morgan Stanley Tax-Exempt Securities Trust (65) Morgan Stanley Tax-Free Daily Income Trust (66) Morgan Stanley Tax-Managed Growth Fund (67) Morgan Stanley Technology Fund (68) Morgan Stanley Total Market Index Fund (69) Morgan Stanley Total Return Trust (70) Morgan Stanley U.S. Government Money Market Trust (71) Morgan Stanley U.S. Government Securities Trust (72) Morgan Stanley Utilities Fund (73) Morgan Stanley Value-Added Market Series (74) Morgan Stanley Value Fund (75) Morgan Stanley Variable Investment Series (b) The following information is given regarding directors and officers of Morgan Stanley Distributors not listed in Item 26 above. The principal address of Morgan Stanley Distributors is 1221 Avenue of the Americas, New York, New York 10020. Other than Messrs. Higgins and Purcell, who are Trustees of the Registrant, none of the following persons has any position or office with the Registrant. NAME POSITIONS AND OFFICE WITH MORGAN STANLEY DISTRIBUTORS - ---- ----------------------------------------------------- James F. Higgins Director Philip J. Purcell Director John Schaeffer Director Charles Vadala Senior Vice President and Financial Principal. ITEM 28. LOCATION OF ACCOUNTS AND RECORDS All accounts, books and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder are maintained by the Investment Manager at its offices, except records relating to holders of shares issued by the Registrant, which are maintained by the Registrant's Transfer Agent, at its place of business as shown in the prospectus. ITEM 29. MANAGEMENT SERVICES Registrant is not a party to any such management-related service contract. ITEM 30. UNDERTAKINGS Registrant hereby undertakes to furnish each person to whom a prospectus is delivered with a copy of the Registrant's latest annual report to shareholders, upon request and without charge. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-Effective Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York and State of New York on the 29th day of January, 2002. MORGAN STANLEY CAPITAL OPPORTUNITIES TRUST By /s/Barry Fink -------------------------------------- Barry Fink Vice President and Secretary Pursuant to the requirements of the Securities Act of 1933, this Post - -Effective Amendment No.11 has been signed below by the following persons in the capacities and on the dates indicated.
Signatures Title Date ---------- ----- ---- (1) Principal Executive Officer Chief Executive Officer, Trustee and Chairman By /s/ Charles A. Fiumefreddo 1/29/02 ---------------------------------- Charles A. Fiumefreddo (2) Principal Financial Officer Treasurer and Principal Accounting Officer By /s/ Thomas F. Caloia 1/29/02 ---------------------------------- Thomas F. Caloia (3) Majority of the Trustees Charles A. Fiumefreddo (Chairman) Philip J. Purcell James F. Higgins By /s/ Barry Fink 1/29/02 ---------------------------------- Barry Fink Attorney-in-Fact Michael Bozic Manuel H. Johnson Edwin J. Garn Michael E. Nugent Wayne E. Hedien John L. Schroeder By /s/ David M. Butowsky 1/29/02 ------------------------------- David M. Butowsky Attorney-in-Fact
MORGAN STANLEY CAPITAL OPPORTUNITIES TRUST EXHIBIT INDEX 1 (d). Amendment to the Declaration of Trust of the Registrant, dated June 18, 2001 1 (e). Amendment to the Declaration of Trust of the Registrant, dated January 29, 2002 4 (c). Form of Sub-Advisory Agreement between Morgan Stanley Investment Advisors Inc. and TCW Investment Management Company dated July 16, 2001. 7 (c). Amendment dated June 15, 2001 to the Custody Agreement of the Registrant 7 (d). Foreign Custody Manager Agreement between the Bank of New York and the Registrant, dated June 15, 2001 10. Consent of Independent Auditors 14. Amended Multi-Class Plan pursuant to Rule 18f-3, dated March 12, 2001 EX-99.B1(D) 3 file002.txt AMENDMENT TO THE DECLARATION OF TRUST Exhibit 1(d) CERTIFICATE The undersigned hereby certifies that he is the Secretary of Morgan Stanley Dean Witter Mid-Cap Equity Trust (the "Trust"), an unincorporated business trust organized under the laws of the Commonwealth of Massachusetts, that annexed hereto is an Amendment to the Declaration of Trust of the Trust adopted by the Trustees of the Trust on April 26, 2001 as provided in Section 9.3 of the said Declaration, said Amendment to take effect on June 18, 2001, and I do hereby further certify that such amendment has not been amended and is on the date hereof in full force and effect. Dated this 18th day of June, 2001. /s/ Barry Fink ----------------------------- Barry Fink Secretary AMENDMENT Dated: June 18, 2001 To be Effective: June 18, 2001 TO MORGAN STANLEY DEAN WITTER MID-CAP EQUITY TRUST DECLARATION OF TRUST DATED OCTOBER 16, 1995 Amendment dated June 18, 2001 to the Declaration of Trust (the "Declaration") of Morgan Stanley Dean Witter Mid-Cap Equity Trust (the "Trust") dated October 16, 1995 WHEREAS, the Trust was established by the Declaration on the date hereinabove set forth under the laws of the Commonwealth of Massachusetts; and WHEREAS, the Trustees of the Trust have deemed it advisable to change the name of the Trust to "Morgan Stanley Mid-Cap Equity Trust," such change to be effective on June 18, 2001; NOW, THEREFORE: 1. Section 1.1 of Article I of the Declaration is hereby amended so that that Section shall read in its entirety as follows: "Section 1.1. Name. The name of the Trust created hereby is the Morgan Stanley Mid-Cap Equity Trust and so far as may be practicable the Trustees shall conduct the Trust's activities, execute all documents and sue or be sued under that name, which name (and the word "Trust" whenever herein used) shall refer to the Trustees as Trustees, and not as individuals, or personally, and shall not refer to the officers, agents, employees or Shareholders of the Trust. Should the Trustees determine that the use of such name is not advisable, they may use such other name for the Trust as they deem proper and the Trust may hold its property and conduct its activities under such other name." 2. Subsection (p) of Section 1.2 of Article I of the Declaration is hereby amended so that that subsection shall read in its entirety as follows: "Section 1.2. Definitions... "(p) "Trust" means the Morgan Stanley Mid-Cap Equity Trust." 3. Section 11.7 of Article XI of the Declaration is hereby amended so that that section shall read as follows: "Section 11.7. Use of the name "Morgan Stanley." Morgan Stanley Dean Witter & Co. ("MSDW") has consented to the use by the Trust of the identifying name "Morgan Stanley," which is a property right of MSDW. The Trust will only use the name "Morgan Stanley" as a component of its name and for no other purpose, and will not purport to grant to any third party the right to use the name "Morgan Stanley" for any purpose. MSDW, or any corporate affiliate of MSDW, may use or grant to others the right to use the name "Morgan Stanley," or any combination or abbreviation thereof, as all or a portion of a corporate or business name or for any commercial purpose, including a grant of such right to any other investment company. At the request of MSDW or any corporate affiliate of MSDW, the Trust will take such action as may be required to provide its consent to the use of the name "Morgan Stanley," or any combination or abbreviation thereof, by MSDW or any corporate affiliate of MSDW, or by any person to whom MSDW or a corporate affiliate of MSDW shall have granted the right to such use. Upon the termination of any investment advisory agreement into which a corporate affiliate of MSDW and the Trust may enter, the Trust shall, upon request of MSDW or any corporate affiliate of MSDW, cease to use the name "Morgan Stanley" as a component of its name, and shall not use the name, or any combination or abbreviation thereof, as part of its name or for any other commercial purpose, and shall cause its officers, Trustees and Shareholders to take any and all actions which MSDW or any corporate affiliate of MSDW may request to effect the foregoing and to reconvey to MSDW any and all rights to such name." 4. The Trustees of the Trust hereby reaffirm the Declaration, as amended, in all respects. 5. This Amendment may be executed in more than one counterpart, each of which shall be deemed an original, but all of which together shall constitute one and the same document. IN WITNESS WHEREOF, the undersigned, the Trustees of the Trust, have executed this instrument this 18th day of June, 2001. /s/ Michael Bozic /s/ Charles A. Fiumefreddo - -------------------------------------- ------------------------------------ Michael Bozic, as Trustee Charles A. Fiumefreddo, as Trustee and not individually and not individually c/o Mayer, Brown & Platt Two World Trade Center Counsel to the Independent Trustees New York, NY 10048 1675 Broadway New York, NY 10019 /s/ Edwin J. Garn /s/ Wayne E. Hedien - -------------------------------------- ------------------------------------ Edwin J. Garn, as Trustee Wayne E. Hedien, as Trustee and not individually and not individually c/o Summit Ventures LLC c/o Mayer, Brown & Platt 1 Utah Center Counsel to the Independent Trustees 201 S. Main Street 1675 Broadway Salt Lake City, UT 84111 New York, NY 10019 /s/ James F. Higgins /s/ Manuel H. Johnson - -------------------------------------- ------------------------------------ James F. Higgins, as Trustee Manuel H. Johnson, as Trustee and not individually and not individually Two World Trade Center c/o Johnson Smick Inernational Inc. New York, NY 10048 1133 Connecticut Avenue, NW Washington, D.C. 20036 /s/ Michael E. Nugent /s/ Philip J. Purcell - -------------------------------------- ------------------------------------ Michael E. Nugent, as Trustee Philip J. Purcell, as Trustee and not individually and not individually c/o Triumph Capital, L.P. 1585 Broadway 237 Park Avenue New York, NY 10036 New York, NY 10017 /s/ John L Schroeder - -------------------- John L. Schroeder, as Trustee and not individually c/o Mayer, Brown & Platt Counsel to the Independent Trustees 1675 Broadway New York, NY 10019 STATE OF NEW YORK ) )ss.: COUNTY OF NEW YORK ) On this 18th day of June, 2001, MICHAEL BOZIC, CHARLES A. FIUMEFREDDO, EDWIN J. GARN, JAMES F. HIGGINS, WAYNE E. HEDIEN, MANUEL H. JOHNSON, MICHAEL E. NUGENT, PHILIP J. PURCELL and JOHN L. SCHROEDER, known to me to be the individuals described in and who executed the foregoing instrument, personally appeared before me and they severally acknowledged the foregoing instrument to be their free act and deed. /s/ Rosemarie Costagliola -------------------------------- Notary Public Rosemarie Costagliola NOTARY PUBLIC, State of New York No. 01CO6016161 Qualified in New York County Commission Expires November 9, 2002 EX-99.B1(E) 4 file003.txt AMENDMENT TO THE DECLARATION OF TRUST Exhibit 1(e) CERTIFICATE The undersigned hereby certifies that he is the Secretary of Morgan Stanley Mid-Cap Equity Trust (the "Trust"), an unincorporated business trust organized under the laws of the Commonwealth of Massachusetts, that annexed hereto is an Amendment to the Declaration of Trust of the Trust adopted by the Trustees of the Trust on October 31, 2001 as provided in Section 9.3 of the said Declaration, said Amendment to take effect on January 29, 2002, and I do hereby further certify that such amendment has not been amended and is on the date hereof in full force and effect. Dated this 29th day of January, 2002. /s/ Barry Fink --------------------------------- Barry Fink Secretary AMENDMENT Dated: January 29, 2002 To be Effective: January 29, 2002 TO MORGAN STANLEY MID-CAP EQUITY TRUST DECLARATION OF TRUST DATED OCTOBER 16, 1995 Amendment dated January 29, 2002 to the Declaration of Trust (the "Declaration") of Morgan Stanley Mid-Cap Equity Trust (the "Trust") dated October 16, 1995 WHEREAS, the Trust was established by the Declaration on the date hereinabove set forth under the laws of the Commonwealth of Massachusetts; and WHEREAS, the Trustees of the Trust have deemed it advisable to change the name of the Trust to "Morgan Stanley Capital Opportunities Trust," such change to be effective on January 29, 2002; NOW, THEREFORE: 1. Section 1.1 of Article I of the Declaration is hereby amended so that that Section shall read in its entirety as follows: "Section 1.1. Name. The name of the Trust created hereby is the Morgan Stanley Capital Opportunities Trust and so far as may be practicable the Trustees shall conduct the Trust's activities, execute all documents and sue or be sued under that name, which name (and the word "Trust" whenever herein used) shall refer to the Trustees as Trustees, and not as individuals, or personally, and shall not refer to the officers, agents, employees or Shareholders of the Trust. Should the Trustees determine that the use of such name is not advisable, they may use such other name for the Trust as they deem proper and the Trust may hold its property and conduct its activities under such other name." 2. Subsection (p) of Section 1.2 of Article I of the Declaration is hereby amended so that that subsection shall read in its entirety as follows: "Section 1.2. Definitions... "(p) "Trust" means the Morgan Stanley Capital Opportunities Trust." 3. The Trustees of the Trust hereby reaffirm the Declaration, as amended, in all respects. 4. This Amendment may be executed in more than one counterpart, each of which shall be deemed an original, but all of which together shall constitute one and the same document. IN WITNESS WHEREOF, the undersigned, the Trustees of the Trust, have executed this instrument this 29th day of January, 2002.
/s/ Michael Bozic /s/ Charles A. Fiumefreddo - -------------------------------------- ------------------------------------ Michael Bozic, as Trustee Charles A. Fiumefreddo, as Trustee and not individually and not individually c/o Mayer, Brown & Platt c/o Morgan Stanley Dean Witter Trust FSB Counsel to the Independent Trustees Harborside Financial Center, Plaza Two 1675 Broadway Jersey City, NJ 07311 New York, NY 10019 /s/ Edwin J. Garn /s/ Wayne E. Hedien - -------------------------------------- ------------------------------------ Edwin J. Garn, as Trustee Wayne E. Hedien, as Trustee and not individually and not individually c/o Summit Ventures LLC c/o Mayer, Brown & Platt 1 Utah Center Counsel to the Independent Trustees 201 S. Main Street 1675 Broadway Salt Lake City, UT 84111 New York, NY 10019 /s/ James F. Higgins /s/ Manuel H. Johnson - ---------------------------------------- ------------------------------------ James F. Higgins, as Trustee Manuel H. Johnson, as Trustee and not individually and not individually c/o Morgan Stanley Dean Witter Trust FSB c/o Johnson Smick Inernational Inc. Harborside Financial Center, Plaza Two 1133 Connecticut Avenue, NW Jersey City, NJ 07311 Washington, D.C. 20036 /s/ Michael E. Nugent /s/ Philip J. Purcell - -------------------------------------- ------------------------------------ Michael E. Nugent, as Trustee Philip J. Purcell, as Trustee and not individually and not individually c/o Triumph Capital, L.P. 1585 Broadway 237 Park Avenue New York, NY 10036 New York, NY 10017 /s/ John L Schroeder - -------------------- John L. Schroeder, as Trustee and not individually c/o Mayer, Brown & Platt Counsel to the Independent Trustees 1675 Broadway New York, NY 10019
STATE OF NEW YORK ) )ss.: COUNTY OF NEW YORK ) On this 29th day of January, 2002, MICHAEL BOZIC, CHARLES A. FIUMEFREDDO, EDWIN J. GARN, JAMES F. HIGGINS, WAYNE E. HEDIEN, MANUEL H. JOHNSON, MICHAEL E. NUGENT, PHILIP J. PURCELL and JOHN L. SCHROEDER, known to me to be the individuals described in and who executed the foregoing instrument, personally appeared before me and they severally acknowledged the foregoing instrument to be their free act and deed. /s/ Rosemarie Costagliola ---------------------------------- Notary Public Rosemarie Costagliola NOTARY PUBLIC, State of New York No. 01CO6016161 Qualified in New York County Commission Expires November 9, 2002 EX-99.B4 5 file004.txt SUB-ADVISORY AGREEMENT SUB-ADVISORY AGREEMENT AGREEMENT made as of the 6th day of July, 2001 by and between Morgan Stanley Investment Advisors Inc., a Delaware corporation (herein referred to as the "Investment Manager"), and TCW Investment Management Company, a California Corporation, (herein referred to as the "Sub-Advisor"). WHEREAS, Morgan Stanley Mid-Cap Equity Trust (herein referred to as the "Fund") is engaged in business as an open-end management investment company and is registered as such under the Investment Company Act of 1940, as amended (the "Act"); and WHEREAS, the Investment Manager has entered into an Investment Management Agreement with the Fund (the "Investment Management Agreement") wherein the Investment Manager has agreed to provide investment management services to the Fund; and WHEREAS, the Sub-Advisor is registered as an investment advisor under the Investment Advisers Act of 1940, and engages in the business of acting as an investment advisor; and WHEREAS, the Investment Manager desires to retain the services of the Sub-Advisor to render investment advisory services for the Fund in the manner and on the terms and conditions hereinafter set forth; and WHEREAS, the Sub-Advisor desires to be retained by the Investment Manager to perform services on said terms and conditions: NOW, THEREFORE, in consideration of the mutual covenants and agreements of the parties hereto as herein set forth, the parties covenant and agree as follows: 1. Subject to the supervision of the Fund, its officers and Trustees, and the Investment Manager, and in accordance with the investment objectives, policies and restrictions set forth in the then-current Registration Statement relating to the Fund, and such investment objectives, policies and restrictions from time to time prescribed by the Trustees of the Fund and communicated by the Investment Manager to the Sub-Advisor, the Sub-Advisor agrees to provide the Fund with investment advisory services with respect to the Fund's investments to obtain and evaluate such information and advice relating to the economy, securities markets and securities as it deems necessary or useful to discharge its duties hereunder; to continuously manage the assets of the Fund in a manner consistent with the investment objective and policies of the Fund; to make decisions as to foreign currency matters and make determinations as to forward foreign exchange contracts and options and futures contracts in foreign currencies; shall determine the securities to be purchased, sold or otherwise disposed of by the Fund and the timing of such purchases, sales and dispositions; to take such further action, including the placing of purchase and sale orders on behalf of the Fund, as it shall deem necessary or appropriate; to furnish to or place at the disposal of the Fund and the Investment Manager such of the information, evaluations, analyses and opinions formulated or obtained by it in the discharge of its duties as the Fund and the Investment Manager may, from time to time, reasonably request. The Investment Manager and the Sub-Advisor shall each make its officers and employees available to the other from time to time at reasonable times to review investment policies of the Fund and to consult with each other. 2. The Sub-Advisor shall, at its own expense, maintain such staff and employ or retain such personnel and consult with such other persons as it shall from time to time determine to be necessary or useful to the performance of its obligations under this Agreement. Without limiting the generality of the foregoing, the staff and personnel of the Sub-Advisor shall be deemed to include persons employed or otherwise retained by the Sub-Advisor to furnish statistical and other factual data, advice regarding economic factors and trends, information with respect to technical and scientific developments, and such other information, advice and assistance as the Investment Manager may desire. The Sub-Advisor shall maintain whatever records as may be required to be maintained by it under the Act. All such records so maintained shall be made available to the Fund, upon the request of the Investment Manager or the Fund. 3. The Fund will, from time to time, furnish or otherwise make available to the Sub-Advisor such financial reports, proxy statements and other information relating to the business and affairs of the Fund 1 C60682-MIDCAPSUBA as the Sub-Advisor may reasonably require in order to discharge its duties and obligations hereunder or to comply with any applicable law and regulations and the investment objectives, policies and restrictions from time to time prescribed by the Trustees of the Fund. 4. The Sub-Advisor shall bear the cost of rendering the investment advisory services to be performed by it under this Agreement, and shall, at its own expense, pay the compensation of the officers and employees, if any, of the Fund, employed by the Sub-Advisor, and such clerical help and bookkeeping services as the Sub-Advisor shall reasonably require in performing its duties hereunder. 5. The Fund assumes and shall pay or cause to be paid all other expenses of the Fund, including, without limitation: any fees paid to the Investment Manager; fees pursuant to any plan of distribution that the Fund may adopt; the charges and expenses of any registrar, any custodian, sub-custodian or depository appointed by the Fund for the safekeeping of its cash, portfolio securities and other property, and any stock transfer or dividend agent or agents appointed by the Fund; brokers' commissions chargeable to the Fund in connection with portfolio securities transactions to which the Fund is a party; all taxes, including securities issuance and transfer taxes, and fees payable by the Fund to federal, state or other governmental agencies or pursuant to any foreign laws; the cost and expense of engraving or printing certificates representing shares of the Fund; all costs and expenses in connection with the registration and maintenance of registration of the Fund and its shares with the Securities and Exchange Commission and various states and other jurisdictions or pursuant to any foreign laws (including filing fees and legal fees and disbursements of counsel); the cost and expense of printing (including typesetting) and distributing prospectuses of the Fund and supplements thereto to the Fund's shareholders; all expenses of shareholders' and Trustees' meetings and of preparing, printing and mailing proxy statements and reports to shareholders; fees and travel expenses of Trustees or members of any advisory board or committee who are not employees of the Investment Manager or Sub-Advisor; all expenses incident to the payment of any dividend, distribution, withdrawal or redemption whether in shares or in cash; charges and expenses of any outside service used for pricing of the Fund's shares; charges and expenses of legal counsel, including counsel to the Trustees of the Fund who are not interested persons (as defined in the Act) of the Fund, the Investment Manager or the Sub-Advisor, and of independent auditors, in connection with any matter relating to the Fund; membership dues of industry associations; interest payable on Fund borrowings; postage; insurance premiums on property or personnel (including officers and Trustees) of the Fund which inure to its benefit; extraordinary expenses (including but not limited to legal claims and liabilities and litigation costs and any indemnification related thereto); and all other charges and costs of the Fund's operation unless otherwise explicitly provided herein. 6. For the services to be rendered, the facilities furnished, and the expenses assumed by the Sub-Advisor, the Investment Manager shall pay to the Sub-Advisor monthly compensation equal to 40% of its monthly compensation receivable pursuant to the Investment Management Agreement. Any subsequent change in the Investment Management Agreement which has the effect of raising or lowering the compensation of the Investment Manager will have the concomitant effect of raising or lowering the fee payable to the Sub-Advisor under this Agreement. In addition, if the Investment Manager has undertaken in the Fund's Registration Statement as filed under the Act (the "Registration Statement") or elsewhere to waive all or part of its fee under the Investment Management Agreement, the Sub-Advisor's fee payable under this Agreement will be proportionately waived in whole or in part. The calculation of the fee payable to the Sub-Advisor pursuant to this Agreement will be made, each month, at the time designated for the monthly calculation of the fee payable to the Investment Manager pursuant to the Investment Management Agreement. If this Agreement becomes effective subsequent to the first day of a month or shall terminate before the last day of a month, compensation for the part of the month this Agreement is in effect shall be prorated in a manner consistent with the calculation of the fee as set forth above. Subject to the provisions of paragraph 7 hereof, payment of the Sub-Advisor's compensation for the preceding month shall be made as promptly as possible after completion of the computations contemplated by paragraph 7 hereof. 7. In the event the operating expenses of the Fund, including amounts payable to the Investment Manager pursuant to the Investment Management Agreement, for any fiscal year ending on a date on which this Agreement is in effect, exceed the expense limitations applicable to the Fund imposed by state 2 securities laws or regulations thereunder, as such limitations may be raised or lowered from time to time, the Sub-Advisor shall reduce its advisory fee to the extent of 40% of such excess and, if required, pursuant to any such laws or regulations, will reimburse the Investment Manager for annual operating expenses in the amount of 40% of such excess of any expense limitation that may be applicable, it being understood that the Investment Manager has agreed to effect a reduction and reimbursement of 100% of such excess in accordance with the terms of the Investment Management Agreement; provided, however, there shall be excluded from such expenses the amount of any interest, taxes, brokerage commissions, distribution fees and extraordinary expenses (including but not limited to legal claims and liabilities and litigation costs and any indemnification related thereto) paid or payable by the Fund. Such reduction, if any, shall be computed and accrued daily, shall be settled on a monthly basis, and shall be based upon the expense limitation applicable to the Fund as at the end of the last business day of the month. Should two or more such expense limitations be applicable as at the end of the last business day of the month, that expense limitation which results in the largest reduction in the Investment Manager's fee or the largest expense reimbursement shall be applicable. For purposes of this provision, should any applicable expense limitation be based upon the gross income of the Fund, such gross income shall include, but not be limited to, interest on debt securities in the Fund's portfolio accrued to and including the last day of the Fund's fiscal year, and dividends declared on equity securities in the Fund's portfolio, the record dates for which fall on or prior to the last day of such fiscal year, but shall not include gains from the sale of securities. 8. The Sub-Advisor will use its best efforts in the performance of investment activities on behalf of the Fund, but in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations hereunder, the Sub-Advisor shall not be liable to the Investment Manager or the Fund or any of its investors for any error of judgment or mistake of law or for any act or omission by the Sub-Advisor or for any losses sustained by the Fund or its investors. 9. It is understood that any of the shareholders, Trustees, officers and employees of the Fund may be a shareholder, director, officer or employee of, or be otherwise interested in, the Sub-Advisor, and in any person controlled by or under common control with the Sub-Advisor, and that the Sub-Advisor and any person controlled by or under common control with the Sub-Advisor may have an interest in the Fund. It is also understood that the Sub-Advisor and any affiliated persons thereof or any persons controlled by or under common control with the Sub-Advisor have and may have advisory, management service or other contracts with other organizations and persons, and may have other interests and businesses, and further may purchase, sell or trade any securities or commodities for their own accounts or for the account of others for whom they may be acting. 10. This Agreement shall remain in effect until April 30, 2002 and from year to year thereafter provided such continuance is approved at least annually by the vote of holders of a majority, as defined in the Act, of the outstanding voting securities of the Fund or by the Trustees of the Fund; provided, that in either event such continuance is also approved annually by the vote of a majority of the Trustees of the Fund who are not parties to this Agreement or "interested persons" (as defined in the Act) of any such party, which vote must be cast in person at a meeting called for the purpose of voting on such approval; provided, however, that (a) the Fund may, at any time and without the payment of any penalty, terminate this Agreement upon thirty days' written notice to the Investment Manager and the Sub-Advisor, either by majority vote of the Trustees of the Fund or by the vote of a majority of the outstanding voting securities of the Fund; (b) this Agreement shall immediately terminate in the event of its assignment (within the meaning of the Act) unless such automatic termination shall be prevented by an exemptive order of the Securities and Exchange Commission; (c) this Agreement shall immediately terminate in the event of the termination of the Investment Management Agreement; (d) the Investment Manager may terminate this Agreement without payment of penalty on thirty days' written notice to the Fund and the Sub-Advisor and; (e) the Sub-Advisor may terminate this Agreement without the payment of penalty on thirty days' written notice to the Fund and the Investment Manager. Any notice under this Agreement shall be given in writing, addressed and delivered, or mailed post-paid, to the other party at the principal office of such party. 11. This Agreement may be amended by the parties without the vote or consent of the shareholders of the Fund to supply any omission, to cure, correct or supplement any ambiguous, defective or 3 inconsistent provision hereof, or if they deem it necessary to conform this Agreement to the requirements of applicable federal laws or regulations, but neither the Fund, the Investment Manager nor the Sub-Advisor shall be liable for failing to do so. 12. This Agreement shall be construed in accordance with the law of the State of New York and the applicable provisions of the Act. To the extent the applicable law of the State of New York, or any of the provisions herein, conflict with the applicable provisions of the Act, the latter shall control. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement on the day and year first above written in New York, New York. MORGAN STANLEY INVESTMENT ADVISORS INC. By: ------------------------------------- Attest: --------------------------------- TCW INVESTMENT MANAGEMENT COMPANY By: ------------------------------------- Attest: --------------------------------- Accepted and agreed to as of the day and year first above written: MORGAN STANLEY MID-CAP EQUITY TRUST By: ------------------------------------- Attest: --------------------------------- 4 EX-99.B7(C) 6 file005.txt AMENDMENT TO CUSTODY AGREEMENT AMENDMENT AMENDMENT made as of June 15, 2001 to that certain Custody Agreement dated as of ______ between The Bank of New York ("Custodian") and each Morgan Stanley Dean Witter Fund having a Custody Agreement with Custodian and listed on Exhibit A hereto (each a "Fund" and each such Custody Agreement hereinafter referred to as the "Custody Agreement"). W I T N E S S E T H: WHEREAS, Rule 17f-7 under the Investment Company Act of 1940, as amended (the "Rule"), was adopted on June 12, 2000 by the Securities and Exchange Commission; WHEREAS, the Fund and Custodian desire to amend the Custody Agreement to conform to the Rule; NOW, THEREFORE, the Fund and Custodian hereby agree as follows: A. The following new Article is hereby added to the Custody Agreement: FOREIGN DEPOSITORIES 1. As used in this Article, the term "Foreign Depository" shall mean each Eligible Securities Depository as defined in Rule 17f-7 under the Investment Company Act of 1940, as amended (the "Rule"), identified by Custodian to the Fund from time to time, and their respective nominees. 2. With respect to each Foreign Depository, Custodian shall exercise reasonable care, prudence, and diligence such as a person having responsibilities for the safekeeping of the Fund's assets would exercise (i) to provide the Fund or its investment adviser with an analysis of the custody risks associated with maintaining assets with the Foreign Depository, and (ii) to monitor such custody risks on a continuing basis and promptly notify the Fund of any material change in such risks. The Fund acknowledges and agrees that such analysis and monitoring shall not include any evaluation of Country Risks. As used herein the term "Country Risks" shall mean with respect to any Foreign Depository: (a) the financial infrastructure of the country in which it is organized, but not of any Foreign Depository to the extent covered by an analysis described in clause (i) of this Section, (b) such country's prevailing custody and settlement practices, (c) nationalization, expropriation or other governmental actions, (d) such country's regulation of the banking or securities industry, (e) currency controls, restrictions, devaluations or fluctuations, and (f) market conditions which affect the orderly execution of securities transactions or affect the value of securities. 3. In the event that Custodian believes that a depository institution has ceased to be an Eligible Securities Depository, Custodian shall promptly notify the Fund and shall act in accordance with instructions of the Fund with respect to the disposition of any assets of the Fund held by such depository institution. 4. Custodian shall exercise reasonable care, prudence and diligence in performing the requirements set forth in paragraphs 1, 2 and 3 above. B. The Fund hereby represents and warrants that before authorizing the placement of assets with a particular Foreign Depository, the Fund or the investment adviser has determined, based in party on the Fund's review of the risks analysis provided to the Fund by Custodian as described in Section 2 of the new Article, that the custody arrangements of such Foreign Depository provide reasonable safeguards against the custody risks associated with maintaining assets with such Foreign Depository within the meaning of Rule 17f-7 under the Investment Company Act of 1940. C. This Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original, but such counterparts, shall, together, constitute only one amendment. IN WITNESS WHEREOF, the Fund and Custodian have caused this Amendment to be executed by their respective officers, thereunto duly authorized, as of the day and year first above written. EACH MORGAN STANLEY DEAN WITTER FUND LISTED ON EXHIBIT A HERETO By: /s/ Barry Fink ------------------------------- Barry Fink Title: Vice President THE BANK OF NEW YORK By: /s/ Edward G. McGann ------------------------------- Edward G. McGann Title: Vice President 2 EXHIBIT A 1. Active Assets California Tax-Free Trust 2. Active Asset Government Securities Trust 3. Active Assets Institutional Money Trust 4. Active Assets Money Trust 5. Active Assets Premier Money Trust 6. Active Assets Tax-Free Trust 7. Morgan Stanley 21st Century Trend Fund 8. Morgan Stanley Aggressive Equity Fund 9. Morgan Stanley All Star Growth Fund 10. Morgan Stanley American Opportunities Fund 11. Morgan Stanley Balanced Growth Fund 12. Morgan Stanley Balanced Income Fund 13. Morgan Stanley Dean Witter California Insured Municipal Income Trust 14. Morgan Stanley Dean Witter California Quality Municipal Securities 15. Morgan Stanley California Tax-Free Daily Income Trust 16. Morgan Stanley California Tax-Free Income Fund 17. Morgan Stanley Capital Growth Securities 18. Morgan Stanley Competitive Edge Fund 19. Morgan Stanley Convertible Securities Trust 20. Morgan Stanley Developing Growth Securities Trust 21. Morgan Stanley Diversified Income Trust 22. Morgan Stanley Dividend Growth Securities Inc. 23. Morgan Stanley Equity Fund 24. Morgan Stanley Federal Securities Trust 25. Morgan Stanley Financial Services Trust 26. Morgan Stanley Fund of Funds: Domestic Portfolio International Portfolio 27. Morgan Stanley Global Utilities Fund 28. Morgan Stanley Dean Witter Government Income Trust 29. Morgan Stanley Growth Fund 30. Morgan Stanley Hawaii Municipal Trust 31. Morgan Stanley Health Sciences Trust 32. Morgan Stanley Dean Witter High Income Advantage Trust 33. Morgan Stanley Dean Witter High Income Advantage Trust II 34. Morgan Stanley Dean Witter High Income Advantage Trust III 35. Morgan Stanley High Yield Securities Inc. 36. Morgan Stanley Income Builder Fund 37. Morgan Stanley Income Securities Inc. 38. Morgan Stanley Dean Witter Insured California Municipal Securities 39. Morgan Stanley Dean Witter Insured Municipal Bond Trust 40. Morgan Stanley Dean Witter Insured Municipal Income Trust 41. Morgan Stanley Dean Witter Insured Municipal Securities 42. Morgan Stanley Dean Witter Insured Municipal Trust 43. Morgan Stanley Intermediate Income Securities Inc. 44. Morgan Stanley KLD Social Index Fund 45. Morgan Stanley Limited Term Municipal Trust 46. Morgan Stanley Liquid Asset Fund Inc. 47. Morgan Stanley Market Leader Trust 48. Morgan Stanley Mid-Cap Equity Trust 49. Morgan Stanley Mid-Cap Value Fund 50. Morgan Stanley Multi-State Municipal Series Trust: The Arizona Series The Florida Series The New Jersey Series The Pennsylvania Series 51. Morgan Stanley Dean Witter Municipal Income Opportunities Trust 52. Morgan Stanley Dean Witter Municipal Income Opportunities Trust II 53. Morgan Stanley Dean Witter Municipal Income Opportunities Trust III 54. Morgan Stanley Dean Witter Municipal Premium Income Trust 55. Morgan Stanley NASDAQ-100 Index Fund 56. Morgan Stanley Natural Resource Development Securities Inc. 57. Morgan Stanley New Discoveries Fund 58. Morgan Stanley New York Municipal Money Market Trust 59. Morgan Stanley Dean Witter New York Quality Municipal Securities 60. Morgan Stanley New York Tax-Free Income Fund 61. Morgan Stanley Next Generation Trust 62. Morgan Stanley North American Government Income Trust 63. Morgan Stanley Prime Income Trust 64. Morgan Stanley Dean Witter Quality Municipal Income Trust 65. Morgan Stanley Dean Witter Quality Municipal Investment Trust 66. Morgan Stanley Dean Witter Quality Municipal Securities 67. Morgan Stanley Real Estate Fund 68. Morgan Stanley S&P 500 Index Fund 69. Morgan Stanley S&P 500 Select Fund 70. Morgan Stanley Select Dimensions Investment Series: The American Opportunities Portfolio The Balanced Growth Portfolio The Developing Growth Portfolio The Diversified Income Portfolio The Dividend Growth Portfolio The Global Equity Portfolio The Growth Portfolio The Mid-Cap Equity Portfolio The Money Market Portfolio The North American Government Portfolio The Utilities Portfolio The Value-Added Portfolio 71. Morgan Stanley Select Municipal Reinvestment Fund 72. Morgan Stanley Short-Term Bond Fund 73. Morgan Stanley Short-Term U.S. Treasury Trust 74. Morgan Stanley Small Cap Growth Fund 75. Morgan Stanley Special Value Fund 76. Morgan Stanley Strategist Fund 77. Morgan Stanley Tax-Exempt Securities Trust 78. Morgan Stanley Tax-Free Daily Income Trust 79. Morgan Stanley Tax-Managed Growth Fund 80. Morgan Stanley Technology Fund 81. Morgan Stanley Total Market Index Fund 82. Morgan Stanley Total Return Bond Fund 83. Morgan Stanley Total Return Trust 84. Morgan Stanley U.S. Government Money Market Trust 85. Morgan Stanley U.S. Government Securities Trust 86. Morgan Stanley Utilities Fund 87. Morgan Stanley Value Fund 88. Morgan Stanley Value-Added Market Series 89. Morgan Stanley Variable Investment Series: The Aggressive Equity Portfolio The Capital Growth Portfolio The Competitive Edge Portfolio The Dividend Growth Portfolio The Equity Portfolio The High Yield Portfolio The Income Builder Portfolio The Money Market Portfolio The Quality Income Plus Portfolio The S&P 500 Index Portfolio The Short-Term Bond Portfolio The Strategist Portfolio The Utilities Portfolio 90. TCW/DW Term Trust 2002 91. TCW/DW Term Trust 2003 EX-99.B7(D) 7 file006.txt FOREIGN CUSTODY MANAGER AGREEMENT FOREIGN CUSTODY MANAGER AGREEMENT AGREEMENT made as of June 15, 2001, between The Bank of New York ("BNY") and each Morgan Stanley Dean Witter Fund having a Custody Agreement with BNY and listed on Exhibit A hereto (each a "Fund"). W I T N E S S E T H: WHEREAS, the Fund desires to appoint BNY as a Foreign Custody Manager on the terms and conditions contained herein; WHEREAS, BNY desires to serve as a Foreign Custody Manager and perform the duties set forth herein on the terms and conditions contained herein; NOW THEREFORE, in consideration of the mutual promises hereinafter contained in this Agreement, the Fund and BNY hereby agree as follows: ARTICLE I. DEFINITIONS Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the following meanings: 1. "BOARD" shall mean the board of directors or board of trustees, as the case may be, of the Fund. 2. "ELIGIBLE FOREIGN CUSTODIAN" shall have the meaning provided in the Rule. 3. "FOREIGN ASSETS" shall have the meaning provided in the Rule. 4. "MONITORING SYSTEM" shall mean a system established by BNY to fulfill the Responsibilities specified in clauses 1(d) and 1(e) of Article III of this Agreement, which system shall comply with paragraph (c)(3) of the Rule. 5. "RESPONSIBILITIES" shall mean the responsibilities delegated to BNY as a Foreign Custody Manager with respect to each Specified Country and each Eligible Foreign Custodian selected by BNY, as such responsibilities are more fully described in Article III of this Agreement. 6. "RULE" shall mean Rule 17f-5 under the Investment Company Act of 1940, as amended on June 12, 2000. 7. "SPECIFIED COUNTRY" shall mean each country listed on Schedule I attached hereto, as amended from time to time by BNY, and each country, other than the United States, constituting the primary market for a security with respect to which the Fund has given settlement instructions to The Bank of New York as custodian (the "Custodian") under its Custody Agreement with the Fund. ARTICLE II. BNY AS A FOREIGN CUSTODY MANAGER 1. The Fund on behalf of its Board hereby delegates to BNY with respect to each Specified Country the Responsibilities. 2. BNY accepts the Board's delegation of Responsibilities with respect to each Specified Country and agrees in performing the Responsibilities as a Foreign Custody Manager to exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of the Fund's Foreign Assets would exercise. 3. BNY shall provide to the Board and to the Fund's investment adviser at such times as the Board deems reasonable and appropriate based on the circumstances of the Fund's foreign custody arrangements written reports notifying the Board and the Fund's investment adviser of the placement of assets of the Fund with a particular Eligible Foreign Custodian within a Specified Country and of any material change in the arrangements (including the contract governing such arrangements) with respect to assets of the Fund with any such Eligible Foreign Custodian. ARTICLE III. RESPONSIBILITIES 1. Subject to the provisions of this Agreement, BNY shall with respect to each Specified Country select an Eligible Foreign Custodian. In connection therewith, BNY shall: (a) determine that Foreign Assets of the Fund held by such Eligible Foreign Custodian will be subject to reasonable care, based on the standards applicable to custodians in the relevant market in which such Eligible Foreign Custodian operates, after considering all factors relevant to the safekeeping of such assets, including, without limitation, those contained in paragraph (c)(1) of the Rule; (b) determine that the Fund's foreign custody arrangements with each Eligible Foreign Custodian are governed by a written contract with the Custodian which will provide reasonable care for the Fund's assets based on the standards specified in paragraph (c)(1) of the Rule; (c) determine that each contract with an Eligible Foreign Custodian shall include the provisions specified in paragraph (c)(2)(i)(A) through (F) of the Rule or, alternatively, in lieu of any or all of such (c)(2)(i)(A) through (F) provisions, such other provisions as BNY determines will provide, in their entirety, the same or a greater level of care and protection for Foreign Assets of the Fund as such specified provisions in their entirety; (d) monitor pursuant to the Monitoring System the appropriateness of maintaining Foreign Assets of the Fund with a particular Eligible Foreign Custodian pursuant to paragraph (c)(1) of the Rule and the performance of the contract governing such arrangement; and (e) advise the Fund and its investment adviser whenever BNY determines under the Monitoring System that an arrangement (including, any material change in the contract governing such arrangement) described in preceding clause (d) no longer meets the requirements of the Rule, or that an Eligible Foreign Custodian would no longer treat assets of the Fund it holds with reasonable care based on the standards applicable to custodians in the relevant market. In the event BNY shall have made either determination described in the preceding sentence, BNY shall promptly select another Eligible Foreign Custodian in the Specified Country and shall arrange for transfer of the Fund's assets to that custodian as soon as practicable; it being understood, however, that in the event BNY shall have determined that no other Eligible Foreign Custodian in the Specified Country would afford reasonable care based on the applicable standards in the relevant marketplace, BNY shall promptly so advise the Fund and shall act in accordance with the instructions of the Fund with respect to the disposition of any Fund assets held by that custodian. 2. For purposes of clause (d) of preceding Section 1 of this Article, BNY's determination of appropriateness shall not include, nor be deemed to include, any evaluation of Country Risks associated with investment in a particular country. For purposes hereof, "Country Risks" shall mean systemic risks of holding assets in a particular country including but not limited to (a) an Eligible Foreign Custodian's use of any depositories that act as or operate a system or a transnational system for the central handling of securities or any equivalent book-entries; (b) such country's, but not any selected Eligible Foreign Custodian's, financial infrastructure; (c) such country's prevailing custody and settlement practices; (d) nationalization, expropriation or other governmental actions; (e) regulation of the banking or securities industry; (f) currency controls, restrictions, devaluations or fluctuations; and (g) market conditions which affect the orderly execution of securities transactions or affect the value of securities. ARTICLE IV. REPRESENTATIONS 1. The Fund hereby represents that: (a) this Agreement has been duly authorized, executed and delivered by the Fund, constitutes a valid and legally binding obligation of the Fund enforceable in accordance with its terms, and no statute, regulation, rule, order, judgment or contract binding on the Fund prohibits the Fund's execution or performance of this Agreement; and (b) this Agreement has been approved and ratified by the Board at a meeting duly called and at which a quorum was at all times present. 2. BNY hereby represents that: (a) BNY is duly organized and existing under the laws of the State of New York, with full power to carry on its businesses as now conducted, and to enter into this Agreement and to perform its obligations hereunder; (b) BNY is a U.S. Bank as defined in Section (a)(7) of the Rule; (c) this Agreement has been duly authorized, executed and delivered by BNY, constitutes a valid and legally binding obligation of BNY enforceable in accordance with its terms, and no statute, 2 regulation, rule, order, judgment or contract binding on BNY prohibits BNY's execution or performance of this Agreement; and (d) BNY has established the Monitoring System. ARTICLE V. CONCERNING BNY 1. BNY shall not be liable for any costs, expenses, damages, liabilities or claims, including attorneys' and accountants' fees, sustained or incurred by, or asserted against, the Fund except to the extent the same arises out of the failure of BNY to exercise the care, prudence and diligence required by Section 2 of Article II hereof. In no event shall BNY be liable to the Fund, the Board, or any third party for special, indirect or consequential damages, or for lost profits or loss of business, arising in connection with this Agreement. 2. The Fund shall indemnify BNY and hold it harmless from and against any and all costs, expenses, damages, liabilities or claims, including reasonable attorneys' and accountants' fees, sustained or incurred by, or asserted against, BNY by reason or as a result of any action or inaction, or arising out of BNY's performance hereunder, provided that the Fund shall not indemnify BNY to the extent any such costs, expenses, damages, liabilities or claims arises out of BNY's failure to exercise the reasonable care, prudence and diligence required by Section 2 of Article II hereof. 3. For its services hereunder, the Fund agrees to pay to BNY such compensation and out-of-pocket expenses as shall be mutually agreed. 4. BNY shall have only such duties as are expressly set forth herein. In no event shall BNY be liable for any Country Risks associated with investments in a particular country. ARTICLE VI. MISCELLANEOUS 1. This Agreement constitutes the entire agreement between the Fund and BNY as a foreign custody manager, and no provision in the Custody Agreement between the Fund and the Custodian shall be construed so as to affect the duties and obligations of BNY hereunder or conflict with the terms of this Agreement, nor shall any provision in this Agreement affect the duties or obligations of the Custodian under the Custody Agreement. 2. Any notice or other instrument in writing, authorized or required by this Agreement to be given to BNY, shall be sufficiently given if received by it at its offices at 100 Church Street, 10th Floor, New York, New York 10286, or at such other place as BNY may from time to time designate in writing. 3. Any notice or other instrument in writing, authorized or required by this Agreement to be given to the Fund shall be sufficiently given if received by it at or at such other place as the Fund may from time to time designate in writing. 4. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions shall not in any way be affected thereby. This Agreement may not be amended or modified in any manner except by a written agreement executed by both parties. This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided however, that this Agreement shall not be assignable by either party without the written consent of the other. 5. This Agreement shall be construed in accordance with the substantive laws of the State of New York, without regard to conflicts of laws principles thereof. The Fund and BNY hereby consent to the exclusive jurisdiction of a state or federal court situated in New York City, New York in connection with any dispute arising hereunder. The Fund hereby irrevocably waives, to the fullest extent permitted by applicable law, any objection which it may now or hereafter have to the laying of venue of any such proceeding brought in such a court and any claim that such proceeding brought in such a court has been brought in an inconvenient forum. The Fund and BNY each hereby irrevocably waives any and all rights to trial by jury in any legal proceeding arising out of or relating to this Agreement. 3 6. The parties hereto agree that in performing hereunder, BNY is acting solely on behalf of the Fund and no contractual or service relationship shall be deemed to be established hereby between BNY and any other person by reason of this Agreement. 7. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but such counterparts shall, together, constitute only one instrument. 8. This Agreement shall terminate simultaneously with the termination of the Custody Agreement between the Fund and the Custodian, and may otherwise be terminated by either party giving to the other party a notice in writing specifying the date of such termination, which shall be not less than ninety (90) days after the date of such notice. IN WITNESS WHEREOF, the Fund and BNY have caused this Agreement to be executed by their respective officers, thereunto duly authorized, as of the date first above written. EACH MORGAN STANLEY DEAN WITTER FUND LISTED ON EXHIBIT A HERETO By: /s/ Barry Fink ------------------------------- Barry Fink Title: Vice President THE BANK OF NEW YORK By: /s/ Edward G. McGann ------------------------------- Edward G. McGann Title: Vice President 4 SCHEDULE 1 SPECIFIED COUNTRIES
COUNTRY/ COUNTRY/ MARKET SUBCUSTODIAN(S) MARKET SUBCUSTODIAN(S) ARGENTINA Banco Rio de la Plata LITHUANIA Vilniaus Bankas AUSTRALIA National Australia Bank Ltd. LUXEMBOURG Banque et Caisse d'Epargne de l'Etat AUSTRIA Bank Austria AG MALAYSIA HongKong Bank Malaysia Berhad BAHRAIN HSBC Bank Middle East MALI Societe Generale de Banques en Cote d'Ivoire BANGLADESH Standard Chartered Bank MALTA HSBC Bank Malta p.l.c BELGIUM Banque Bruxelles Lambert MAURITIUS HSBC BENIN Societe Generale de Banques en Cote MEXICO Banco Nacional de Mexico d'Ivoire BERMUDA Bank of Bermuda Limited MOROCCO Banque Commerciale du Maroc BOLIVIA Citibank, N.A. NAMIBIA Stanbic Bank Namibia Limited BOTSWANA Barclays Bank of Botswana Ltd. NETHERLANDS Fortis Bank (Nederland) N.V. BRAZIL BankBoston, N.A. NEW ZEALAND National Australia Bank Ltd. (National Nominees Ltd.) BULGARIA ING Bank NIGER Societe Generale de Banques en Cote d'Ivoire BURKINA FASO Societe Generale de Banques en Cote NIGERIA Stanbic Merchant Bank Nigeria Limited d'Ivoire CANADA Royal Bank of Canada NORWAY Den norske Bank ASA CHILE BankBoston, N.A. OMAN HSBC Bank Middle East CHINA Standard Chartered Bank PAKISTAN Standard Chartered Bank COLOMBIA Cititrust Colombia S.A. PALESTINIAN HSBC Bank Middle East AUTONOMOUS AREA COSTA RICA Banco BCT PANAMA BankBoston, N.A. CROATIA Privredna Banka Zagreb d.d. PERU Citibank, N.A. CYPRUS Bank of Cyprus PHILIPPINES HSBC CZECH REPUBLIC Ceskoslovenska Obchodni Banka A.S. POLAND Bank Handlowy W Warszawie S.A. DENMARK Den Danske Bank PORTUGAL Banco Comercial Portugues EASDAQ Banque Bruxelles Lambert QATAR HSBC Bank Middle East ECUADOR Citibank, N.A. ROMANIA ING Bank EGYPT Citibank, N.A. RUSSIA Vneshtorgbank (Min Fin Bonds only)/ Credit Suisse First Boston AO ESTONIA Hansabank Limited SENEGAL Societe Generale de Banques en Cote d'Ivoire EUROMARKET Clearstream SINGAPORE United Overseas Bank Limited/ The Development Bank of Singapore Ltd. EUROMARKET Euroclear SLOVAK REPUBLIC Ceskoslovenska Obchodni Banka, a.s. FINLAND Merita Bank plc SLOVENIA Bank Austria Creditanstalt d.d. Ljubljana FRANCE BNP Paribas / Credit Agricole Indosuez SOUTH AFRICA Societe Generale, Johannesburg / The Standard Bank of South Africa Limited GERMANY Dresdner Bank AG SOUTH KOREA Standard Chartered Bank GHANA Barclays Bank of Ghana Ltd. SPAIN Banco Bilbao Vizcaya Argentaria S.A. (BBVA) / Banco Santander Central Hispano (BSCH) GREECE BNP Paribas SRI LANKA Standard Chartered Bank GUINEA BISSAU Societe Generale de Banques en Cote SWAZILAND Standard Bank Swaziland Limited d'Ivoire HONG KONG HSBC SWEDEN Skandinaviska Enskilda Banken HUNGARY Citibank Budapest Rt. SWITZERLAND Credit Suisse First Boston ICELAND Landsbanki Islands TAIWAN HSBC INDIA HSBC / Deutsche Bank AG THAILAND Standard Chartered Bank/ Bangkok Bank Public Company Limited INDONESIA HSBC TOGO Societe Generale de Banques en Cote d'Ivoire IRELAND Allied Irish Banks, plc TRINIDAD & TOBAGO Republic Bank Limited ISRAEL Bank Leumi LE -Israel B.M. TUNISIA Banque Internationale Arabe de Tunisie ITALY Banca Commerciale Italiana / BNP Paribas TURKEY Osmanli Bankasi A.S. (Ottoman Bank) IVORY COAST Societe Generale -Abidjan UNITED ARAB HSBC Bank Middle East, Dubai EMIRATES JAMAICA CIBC Trust & Merchant Bank Jamaica Ltd. UKRAINE ING Bank JAPAN The Bank of Tokyo-Mitsubishi Limited/ UNITED KINGDOM The Bank of New York / The Fuji Bank, Limited The Depository & Clearing Centre (DCC) JORDAN HSBC Bank Middle East UNITED STATES The Bank of New York KAZAKHSTAN ABN/AMRO URUGUAY BankBoston, N.A. KENYA Barclays Bank of Kenya Ltd. VENEZUELA Citibank, N.A. LATVIA Hansabanka Limited ZAMBIA Barclays Bank of Zambia Ltd. LEBANON HSBC Bank Middle East ZIMBABWE Barclays Bank of Zimbabwe Ltd.
EXHIBIT A 1. Active Assets California Tax-Free Trust 2. Active Asset Government Securities Trust 3. Active Assets Institutional Money Trust 4. Active Assets Money Trust 5. Active Assets Premier Money Trust 6. Active Assets Tax-Free Trust 7. Morgan Stanley 21st Century Trend Fund 8. Morgan Stanley Aggressive Equity Fund 9. Morgan Stanley All Star Growth Fund 10. Morgan Stanley American Opportunities Fund 11. Morgan Stanley Balanced Growth Fund 12. Morgan Stanley Balanced Income Fund 13. Morgan Stanley Dean Witter California Insured Municipal Income Trust 14. Morgan Stanley Dean Witter California Quality Municipal Securities 15. Morgan Stanley California Tax-Free Daily Income Trust 16. Morgan Stanley California Tax-Free Income Fund 17. Morgan Stanley Capital Growth Securities 18. Morgan Stanley Competitive Edge Fund 19. Morgan Stanley Convertible Securities Trust 20. Morgan Stanley Developing Growth Securities Trust 21. Morgan Stanley Diversified Income Trust 22. Morgan Stanley Dividend Growth Securities Inc. 23. Morgan Stanley Equity Fund 24. Morgan Stanley Federal Securities Trust 25. Morgan Stanley Financial Services Trust 26. Morgan Stanley Fund of Funds: Domestic Portfolio International Portfolio 27. Morgan Stanley Global Utilities Fund 28. Morgan Stanley Dean Witter Government Income Trust 29. Morgan Stanley Growth Fund 30. Morgan Stanley Hawaii Municipal Trust 31. Morgan Stanley Health Sciences Trust 32. Morgan Stanley Dean Witter High Income Advantage Trust 33. Morgan Stanley Dean Witter High Income Advantage Trust II 34. Morgan Stanley Dean Witter High Income Advantage Trust III 35. Morgan Stanley High Yield Securities Inc. 36. Morgan Stanley Income Builder Fund 37. Morgan Stanley Income Securities Inc. 38. Morgan Stanley Dean Witter Insured California Municipal Securities 39. Morgan Stanley Dean Witter Insured Municipal Bond Trust 40. Morgan Stanley Dean Witter Insured Municipal Income Trust 41. Morgan Stanley Dean Witter Insured Municipal Securities 42. Morgan Stanley Dean Witter Insured Municipal Trust 43. Morgan Stanley Intermediate Income Securities Inc. 44. Morgan Stanley KLD Social Index Fund 45. Morgan Stanley Limited Term Municipal Trust 46. Morgan Stanley Liquid Asset Fund Inc. 47. Morgan Stanley Market Leader Trust 48. Morgan Stanley Mid-Cap Equity Trust 49. Morgan Stanley Mid-Cap Value Fund 50. Morgan Stanley Multi-State Municipal Series Trust: The Arizona Series The Florida Series The New Jersey Series The Pennsylvania Series 51. Morgan Stanley Dean Witter Municipal Income Opportunities Trust 52. Morgan Stanley Dean Witter Municipal Income Opportunities Trust II 53. Morgan Stanley Dean Witter Municipal Income Opportunities Trust III 54. Morgan Stanley Dean Witter Municipal Premium Income Trust 55. Morgan Stanley NASDAQ-100 Index Fund 56. Morgan Stanley Natural Resource Development Securities Inc. 57. Morgan Stanley New Discoveries Fund 58. Morgan Stanley New York Municipal Money Market Trust 59. Morgan Stanley Dean Witter New York Quality Municipal Securities 60. Morgan Stanley New York Tax-Free Income Fund 61. Morgan Stanley Next Generation Trust 62. Morgan Stanley North American Government Income Trust 63. Morgan Stanley Prime Income Trust 64. Morgan Stanley Dean Witter Quality Municipal Income Trust 65. Morgan Stanley Dean Witter Quality Municipal Investment Trust 66. Morgan Stanley Dean Witter Quality Municipal Securities 67. Morgan Stanley Real Estate Fund 68. Morgan Stanley S&P 500 Index Fund 69. Morgan Stanley S&P 500 Select Fund 70. Morgan Stanley Select Dimensions Investment Series: The American Opportunities Portfolio The Balanced Growth Portfolio The Developing Growth Portfolio The Diversified Income Portfolio The Dividend Growth Portfolio The Global Equity Portfolio The Growth Portfolio The Mid-Cap Equity Portfolio The Money Market Portfolio The North American Government Portfolio The Utilities Portfolio The Value-Added Portfolio 71. Morgan Stanley Select Municipal Reinvestment Fund 72. Morgan Stanley Short-Term Bond Fund 73. Morgan Stanley Short-Term U.S. Treasury Trust 74. Morgan Stanley Small Cap Growth Fund 75. Morgan Stanley Special Value Fund 76. Morgan Stanley Strategist Fund 77. Morgan Stanley Tax-Exempt Securities Trust 78. Morgan Stanley Tax-Free Daily Income Trust 79. Morgan Stanley Tax-Managed Growth Fund 80. Morgan Stanley Technology Fund 81. Morgan Stanley Total Market Index Fund 82. Morgan Stanley Total Return Bond Fund 83. Morgan Stanley Total Return Trust 84. Morgan Stanley U.S. Government Money Market Trust 85. Morgan Stanley U.S. Government Securities Trust 86. Morgan Stanley Utilities Fund 87. Morgan Stanley Value Fund 88. Morgan Stanley Value-Added Market Series 89. Morgan Stanley Variable Investment Series: The Aggressive Equity Portfolio The Capital Growth Portfolio The Competitive Edge Portfolio The Dividend Growth Portfolio The Equity Portfolio The High Yield Portfolio The Income Builder Portfolio The Money Market Portfolio The Quality Income Plus Portfolio The S&P 500 Index Portfolio The Short-Term Bond Portfolio The Strategist Portfolio The Utilities Portfolio 90. TCW/DW Term Trust 2002 91. TCW/DW Term Trust 2003 EX-99.B10 8 file007.txt CONSENT OF INDEPENDENT AUDITORS CONSENT OF INDEPENDENT AUDITORS We consent to the use in this Post-Effective Amendment No. 11 to Registration Statement No. 33-63685 of Morgan Stanley Capital Opportunities Trust, formerly Morgan Stanley Dean Witter Mid-Cap Equity Trust, on Form N-1A of our report dated January 8, 2002, incorporated by reference in the Prospectus and appearing in the Statement of Additional Information, and to the references to us under the captions "Financial Highlights" in the Prospectus and "Custodian and Independent Auditors" and "Experts" in the Statement of Additional Information, both of which are part of such Registration Statement. Deloitte & Touche LLP New York, New York January 29, 2002 EX-99.B14 9 file008.txt AMENDED MULTI CLASS PLAN MORGAN STANLEY DEAN WITTER FUNDS MULTIPLE CLASS PLAN PURSUANT TO RULE 18F-3 INTRODUCTION This plan (the "Plan") is adopted pursuant to Rule 18f-3(d) of the Investment Company Act of 1940, as amended (the "1940 Act"), effective as of July 28, 1997, and amended as of June 22, 1998, August 15, 2000, December 1, 2000 and March 12, 2001. The Plan relates to shares of the open-end investment companies to which Morgan Stanley Dean Witter Advisors Inc. acts as investment manager, that are listed on Schedule A, as may be amended from time to time (each, a "Fund" and collectively, the "Funds"). The Funds are distributed pursuant to a system (the "Multiple Class System") in which each class of shares (each, a "Class" and collectively, the "Classes") of a Fund represents a pro rata interest in the same portfolio of investments of the Fund and differs only to the extent outlined below. I. DISTRIBUTION ARRANGEMENTS One or more Classes of shares of the Funds are offered for purchase by investors with the sales load structures described below. In addition, pursuant to Rule 12b-1 under the 1940 Act, the Funds have each adopted a Plan of Distribution (the "12b-1 Plan") under which shares of certain Classes are subject to the service and/or distribution fees ("12b-1 fees") described below. 1. Class A Shares Class A shares are offered with a front-end sales load ("FESL"). The schedule of sales charges applicable to a Fund and the circumstances under which the sales charges are subject to reduction are set forth in each Fund's current prospectus. As stated in each Fund's current prospectus, Class A shares may be purchased at net asset value (without a FESL): (i) in the case of certain large purchases of such shares; and (ii) by certain limited categories of investors, in each case, under the circumstances and conditions set forth in each Fund's current prospectus. Class A shares purchased at net asset value may be subject to a contingent deferred sales charge ("CDSC") on redemptions made within one year of purchase. Further information relating to the CDSC, including the manner in which it is calculated, is set forth in paragraph 6 below. Class A shares are also subject to payments under each Fund's 12b-1 Plan to reimburse Morgan Stanley Dean Witter Distributors Inc. ("MSDW Distributors"), Dean Witter Reynolds Inc. ("DWR"), its affiliates and other broker-dealers for distribution expenses incurred by them specifically on behalf of the Class, assessed at an annual rate of up to 0.25% of average daily net assets. The entire amount of the 12b-1 fee represents a service fee within the meaning of National Association of Securities Dealers, Inc. ("NASD") guidelines. 2. Class B Shares Class B shares are offered without a FESL, but will in most cases be subject to a six-year declining CDSC which is calculated in the manner set forth in paragraph 6 below. The schedule of CDSC charges applicable to each Fund is set forth in each Fund's current prospectus. With the exception of certain of the Funds which have a different formula described below (Morgan Stanley Dean Witter American Opportunities Fund, Morgan Stanley Dean Witter Natural Resource Development Securities Inc., Morgan Stanley Dean Witter Strategist Fund and Morgan Stanley Dean Witter Dividend Growth 1 Securities Inc.) (1), Class B shares are also subject to a fee under each Fund's respective 12b-1 Plan, assessed at the annual rate of up to 1.0% of either: (a) the lesser of (i) the average daily aggregate gross sales of the Fund's 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 Fund's Class B shares redeemed since the Fund's inception upon which a CDSC has been imposed or waived, or (ii) the average daily net assets of Class B; or (b) the average daily net assets of Class B. A portion of the 12b-1 fee equal to up to 0.25% of the Fund's average daily net assets is characterized as a service fee within the meaning of the NASD guidelines and the remaining portion of the 12b-1 fee, if any, is characterized as an asset-based sales charge. Also, Class B shares have a conversion feature ("Conversion Feature") under which such shares convert to Class A shares after a certain holding period. Details of the Conversion Feature are set forth in Section IV below. 3. Class C Shares Class C shares are offered without imposition of a FESL, but will in most cases be subject to a CDSC of 1.0% on redemptions made within one year after purchase. Further information relating to the CDSC is set forth in paragraph 6 below. In addition, Class C shares, under each Fund's 12b-1 Plan, are subject to 12b-1 payments to reimburse MSDW Distributors, DWR, its affiliates and other broker-dealers for distribution expenses incurred by them specifically on behalf of the Class, assessed at the annual rate of up to 1.0% of the average daily net assets of the Class. A portion of the 12b-1 fee equal to up to 0.25% of the Fund's average daily net assets is characterized as a service fee within the meaning of NASD guidelines. Unlike Class B shares, Class C shares do not have the Conversion Feature. 4. Class D Shares Class D shares are offered without imposition of a FESL, CDSC or a 12b-1 fee for purchases of Fund shares by (i) investors meeting an initial minimum investment requirement and (ii) certain other limited categories of investors, in each case, as may be approved by the Boards of Directors/Trustees of the Funds and as disclosed in each Fund's current prospectus. Class D shares may not be offered for purchases of Fund shares made through certain investment programs approved by MSDW Distributors. 5. Additional Classes of Shares The Boards of Directors/Trustees of the Funds have the authority to create additional Classes, or change existing Classes, from time to time, in accordance with Rule 18f-3 under the 1940 Act. - ------------ (1)The payments under the 12b-1 Plan for each of Morgan Stanley Dean Witter American Opportunities Fund, Morgan Stanley Dean Witter Natural Resource Development Securities Inc. and Morgan Stanley Dean Witter Dividend Growth Securities Inc. are assessed at the annual rate of 1.0% of the lesser of: (a) the average daily aggregate gross sales of the Fund's Class B shares since the inception of the Fund's Plan (not including reinvestment of dividends or capital gains distributions), less the average daily aggregate net asset value of the Fund's Class B shares redeemed since the Plan's inception upon which a CDSC has been imposed or waived, or (b) the average daily net assets of Class B attributable to shares issued, net of related shares redeemed, since inception of the Plan. The payments under the 12b-1 Plan for the Morgan Stanley Dean Witter Strategist Fund are assessed at the annual rate of: (i) 1% of the lesser of (a) the average daily aggregate gross sales of the Fund's Class B shares since the effectiveness of the first amendment of the Plan on November 8, 1989 (not including reinvestment of dividends or capital gains distributions), less the average daily aggregate net asset value of the Fund's Class B shares redeemed since the effectiveness of the first amended Plan, upon which a CDSC has been imposed or waived, or (b) the average daily net assets of Class B attributable to shares issued, net of related shares redeemed, since the effectiveness of the first amended Plan; plus (ii) 0.25% of the average daily net assets of Class B attributable to shares issued, net of related shares redeemed, prior to effectiveness of the first amended Plan. 2 6. Calculation of the CDSC Any applicable CDSC is calculated based upon the lesser of net asset value of the shares at the time of purchase or at the time of redemption. The CDSC does not apply to amounts representing an increase in share value due to capital appreciation and shares acquired through the reinvestment of dividends or capital gains distributions. The CDSC schedule applicable to a Fund and the circumstances in which the CDSC is subject to waiver are set forth in each Fund's prospectus. II. EXPENSE ALLOCATIONS Expenses incurred by a Fund are allocated among the various Classes of shares pro rata based on the net assets of the Fund attributable to each Class, except that 12b-1 fees relating to a particular Class are allocated directly to that Class. In addition, other expenses associated with a particular Class (except advisory or custodial fees), may be allocated directly to that Class, provided that such expenses are reasonably identified as specifically attributable to that Class and the direct allocation to that Class is approved by the Fund's Board of Directors/Trustees. III. CLASS DESIGNATION All shares of the Funds held prior to July 28, 1997 (other than the shares held by certain employee benefit plans established by DWR, shares of Funds offered with a FESL, and shares of Morgan Stanley Dean Witter Balanced Growth Fund and Morgan Stanley Dean Witter Balanced Income Fund) have been designated Class B shares. Shares held prior to July 28, 1997 by such employee benefit plans have been designated Class D shares. Shares held prior to July 28, 1997 of Funds offered with a FESL have been designated Class D shares. In addition, shares of Morgan Stanley Dean Witter American Opportunities Fund purchased prior to April 30, 1984, shares of Morgan Stanley Dean Witter Strategist Fund purchased prior to November 8, 1989 and shares of Morgan Stanley Dean Witter Natural Resource Development Securities Inc. and Morgan Stanley Dean Witter Dividend Growth Securities Inc. purchased prior to July 2, 1984 (with respect to such shares of each Fund, including such proportion of shares acquired through reinvestment of dividends and capital gains distributions as the total number of shares acquired prior to each of the preceding dates in this sentence bears to the total number of shares purchased and owned by the shareholder of that Fund) have been designated Class D shares. Shares of Morgan Stanley Dean Witter Balanced Growth Fund and Morgan Stanley Dean Witter Balanced Income Fund held prior to July 28, 1997 have been designated Class C shares except that shares of Morgan Stanley Dean Witter Balanced Growth Fund and Morgan Stanley Dean Witter Balanced Income Fund held prior to July 28, 1997 that were acquired in exchange for shares of an investment company offered with a CDSC have been designated Class B shares and those that were acquired in exchange for shares of an investment company offered with a FESL have been designated Class A shares. IV. CONVERSION FEATURES 1. Class B to Class A Class B shares held before May 1, 1997 will convert to Class A shares in May, 2007, except that Class B shares which were purchased before July 28, 1997 by trusts for which Morgan Stanley Dean Witter Trust FSB ("MSDW Trust") provides discretionary trustee services converted to Class A shares on August 29, 1997 (the CDSC was not applicable to such shares upon the conversion). In all other instances, Class B shares of each Fund will automatically convert to Class A shares, based on the relative net asset values of the shares of the two Classes on the conversion date, which will be approximately ten (10) years after the date of the original purchase. Conversions will be effected once a month. The 10 year period will be calculated 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 or a series of exchanges, from the last day of the month in which the original Class B shares were purchased, provided that shares originally purchased before May 1, 1997 will convert to Class A shares in May, 2007. Except as set forth below, the conversion of shares purchased on or after May 1, 1997 will take place in the month following the tenth anniversary of the purchase. There will also be converted at that time such proportion of Class B shares acquired through automatic reinvestment of dividends owned by the shareholder as the total number of his or her Class B shares converting at the time bears to the total number of outstanding Class B shares purchased and owned by 3 the shareholder. In the case of Class B shares held by an "MSDW Eligible Plan" (as such term is defined in the prospectus of each Fund), all Class B shares will convert to Class A shares on the conversion date of the first shares of a Fund purchased by that plan. In the case of Class B shares previously exchanged for shares of Morgan Stanley Dean Witter North American Government Income Trust, Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust, a "Money Market Fund" or a "No-Load Fund" (as such terms are defined in the prospectus of each Fund), the period of time the shares were held in any of such Funds (calculated from the last day of the month in which the shares of any of such Funds were acquired) is excluded from the holding period for conversion. If those shares are subsequently re-exchanged for Class B shares of a Fund, the holding period resumes on the last day of the month in which Class B shares are reacquired. Effectiveness of the Conversion Feature is subject to the continuing availability of a ruling of the Internal Revenue Service or an opinion of counsel to the effect that (i) the conversion of shares does not constitute a taxable event under the Internal Revenue Code; (ii) Class A shares received on conversion will have a basis equal to the shareholder's basis in the converted Class B shares immediately prior to the conversion; and (iii) Class A shares received on conversion will have a holding period that includes the holding period of the converted Class B shares. The Conversion Feature may be suspended if the Ruling or opinion is no longer available. In such event, Class B shares would continue to be subject to Class B fees under the applicable Fund's 12b-1 Plan. 2. Choice Program Conversions On December 8, 2000, all Class A shares held through the Morgan Stanley Dean Witter Choice Program (the "Choice Program") were automatically converted to Class D shares in the same Fund. All Class D shares held through the Choice Program will automatically be converted to Class A shares in the same Fund at such time as those Fund shares are no longer held through the Choice Program (unless the affected shareholder is otherwise eligible to purchase Class D shares). All conversions will be effected based on then current relative net asset values of the shares of the two Classes on the conversion date. Effectiveness of these conversions is subject to the continuing availability of an opinion of counsel to the effect that the conversion of shares does not constitute a taxable event under the Internal Revenue Code. V. EXCHANGE PRIVILEGES Shares of each Class may be exchanged for shares of the same Class of the other Funds and for shares of certain other investment companies without the imposition of an exchange fee as described in the prospectuses and statements of additional information of the Funds. The exchange privilege of each Fund may be terminated or revised at any time by the Fund upon such notice as may be required by applicable regulatory agencies as described in each Fund's prospectus. VI. VOTING Each Class shall have exclusive voting rights on any matter that relates solely to its 12b-1 Plan, except that Class B shareholders will have the right to vote on any proposed material increase in Class A's expenses, including payments under the Class A 12b-1 Plan, if such proposal is submitted separately to Class A shareholders. If the amount of expenses, including payments under the Class A 12b-1 Plan, is increased materially without the approval of Class B shareholders, the Fund will establish a new Class A for Class B shareholders whose shares automatically convert on the same terms as applied to Class A before the increase. In addition, each Class shall have separate voting rights on any matter submitted to shareholders in which the interests of one Class differ from the interests of any other Class. 4 MORGAN STANLEY DEAN WITTER FUNDS MULTIPLE CLASS PLAN PURSUANT TO RULE 18F-3 SCHEDULE A AT MARCH 12, 2001 1) Morgan Stanley Dean Witter 21st Century Trend Fund 2) Morgan Stanley Dean Witter Aggressive Equity Fund 3) Morgan Stanley Dean Witter All Star Growth Fund 4) Morgan Stanley Dean Witter American Opportunities Fund 5) Morgan Stanley Dean Witter Balanced Growth Fund 6) Morgan Stanley Dean Witter Balanced Income Fund 7) Morgan Stanley Dean Witter California Tax-Free Income Fund 8) Morgan Stanley Dean Witter Capital Growth Securities 9) Morgan Stanley Dean Witter Competitive Edge Fund, "Best Ideas" Portfolio 10) Morgan Stanley Dean Witter Convertible Securities Trust 11) Morgan Stanley Dean Witter Developing Growth Securities Trust 12) Morgan Stanley Dean Witter Diversified Income Trust 13) Morgan Stanley Dean Witter Dividend Growth Securities Inc. 14) Morgan Stanley Dean Witter Equity Fund 15) Morgan Stanley Dean Witter European Growth Fund Inc. 16) Morgan Stanley Dean Witter Federal Securities Trust 17) Morgan Stanley Dean Witter Financial Services Trust 18) Morgan Stanley Dean Witter Fund of Funds 19) Morgan Stanley Dean Witter Global Dividend Growth Securities 20) Morgan Stanley Dean Witter Global Utilities Fund 21) Morgan Stanley Dean Witter Growth Fund 22) Morgan Stanley Dean Witter Health Sciences Trust 23) Morgan Stanley Dean Witter High Yield Securities Inc. 24) Morgan Stanley Dean Witter Income Builder Fund 25) Morgan Stanley Dean Witter Information Fund 26) Morgan Stanley Dean Witter Intermediate Income Securities 27) Morgan Stanley Dean Witter International Fund 28) Morgan Stanley Dean Witter International SmallCap Fund 29) Morgan Stanley Dean Witter International Value Equity Fund 30) Morgan Stanley Dean Witter Japan Fund 31) Morgan Stanley Dean Witter Latin American Growth Fund 32) Morgan Stanley Dean Witter Market Leader Trust 33) Morgan Stanley Dean Witter Mid-Cap Equity Trust 34) Morgan Stanley Dean Witter Natural Resource Development Securities Inc. 35) Morgan Stanley Dean Witter New Discoveries Fund 36) Morgan Stanley Dean Witter New York Tax-Free Income Fund 37) Morgan Stanley Dean Witter Next Generation Trust 38) Morgan Stanley Dean Witter Pacific Growth Fund Inc. 39) Morgan Stanley Dean Witter Real Estate Fund 40) Morgan Stanley Dean Witter Small Cap Growth Fund 41) Morgan Stanley Dean Witter Special Value Fund 42) Morgan Stanley Dean Witter S&P 500 Index Fund 43) Morgan Stanley Dean Witter S&P 500 Select Fund 44) Morgan Stanley Dean Witter Strategist Fund 45) Morgan Stanley Dean Witter Tax-Exempt Securities Trust 46) Morgan Stanley Dean Witter Tax-Managed Growth Fund 47) Morgan Stanley Dean Witter Technology Fund 48) Morgan Stanley Dean Witter Total Market Index Fund 49) Morgan Stanley Dean Witter Total Return Trust 50) Morgan Stanley Dean Witter U.S. Government Securities Trust 51) Morgan Stanley Dean Witter Utilities Fund 52) Morgan Stanley Dean Witter Value-Added Market Series 53) Morgan Stanley Dean Witter Value Fund 54) Morgan Stanley Dean Witter World Wide Income Trust 5 -----END PRIVACY-ENHANCED MESSAGE-----