-----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, B5AWs4L61WobDorbr/IP6f6g0ypO3d3dEVTbVWqm3vPUOnHYKvYUk0cByt2lPTFD +i2SdSysMouTsI1P2If38g== 0000912057-02-016819.txt : 20020426 0000912057-02-016819.hdr.sgml : 20020426 ACCESSION NUMBER: 0000912057-02-016819 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20020426 EFFECTIVENESS DATE: 20020426 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY VARIABLE INVESTMENT SERIES CENTRAL INDEX KEY: 0000716716 IRS NUMBER: 133178476 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-82510 FILM NUMBER: 02622508 BUSINESS ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 BUSINESS PHONE: (212) 869-6397 MAIL ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 FORMER COMPANY: FORMER CONFORMED NAME: DEAN WITTER VARIABLE INVESTMENT SERIES DATE OF NAME CHANGE: 19930209 FORMER COMPANY: FORMER CONFORMED NAME: WITTER DEAN VARIABLE INVESTMENT SERIES DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY DEAN WITTER VARIABLE INVESTMENT SERIES DATE OF NAME CHANGE: 19980622 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY VARIABLE INVESTMENT SERIES CENTRAL INDEX KEY: 0000716716 IRS NUMBER: 133178476 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-03692 FILM NUMBER: 02622509 BUSINESS ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 BUSINESS PHONE: (212) 869-6397 MAIL ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 FORMER COMPANY: FORMER CONFORMED NAME: DEAN WITTER VARIABLE INVESTMENT SERIES DATE OF NAME CHANGE: 19930209 FORMER COMPANY: FORMER CONFORMED NAME: WITTER DEAN VARIABLE INVESTMENT SERIES DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY DEAN WITTER VARIABLE INVESTMENT SERIES DATE OF NAME CHANGE: 19980622 485BPOS 1 a2077034z485bpos.txt 485BPOS AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 26, 2002 REGISTRATION NOS.: 2-82510 811-3692 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/ POST-EFFECTIVE AMENDMENT NO. 33 /X/ AND/OR REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/ AMENDMENT NO. 34 /X/ ------------------------ MORGAN STANLEY VARIABLE INVESTMENT SERIES (A MASSACHUSETTS BUSINESS TRUST) FORMERLY NAMED MORGAN STANLEY DEAN WITTER VARIABLE INVESTMENT SERIES (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) C/O MORGAN STANLEY TRUST HARBORSIDE FINANCIAL CENTER, PLAZA TWO JERSEY CITY, NJ 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, ROWE & MAW 1675 BROADWAY NEW YORK, NEW YORK 10019-5820 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 May 1, 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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS - MAY 1, 2002 Morgan Stanley VARIABLE INVESTMENT SERIES CLASS X Morgan Stanley Variable Investment Series is a mutual fund comprised of 17 separate Portfolios, each with its own distinctive investment objective(s) and policies. The Portfolios are: The Money Market Portfolio The European Growth Portfolio The Limited Duration Portfolio The Pacific Growth Portfolio The Quality Income Plus Portfolio The Equity Portfolio The High Yield Portfolio The S&P 500 Index Portfolio The Utilities Portfolio The Competitive Edge "Best Ideas" Portfolio The Income Builder Portfolio The Aggressive Equity Portfolio The Dividend Growth Portfolio The Information Portfolio The Capital Growth Portfolio The Strategist Portfolio The Global Dividend Growth Portfolio
Shares of each Portfolio are sold exclusively to certain life insurance companies in connection with particular life insurance and/or annuity contracts they issue. The insurance companies invest in shares of the Portfolios in accordance with instructions received from owners of the applicable life insurance or annuity policy. This PROSPECTUS must be accompanied by a current prospectus for the variable annuity contracts issued by Northbrook Life Insurance Company, Allstate Life Insurance Company of New York or Glenbrook Life and Annuity Company or a current prospectus for the variable life insurance contracts issued by Northbrook Life Insurance Company, Glenbrook Life and Annuity Company or Paragon Life Insurance Company. 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 Eligible Investors ............................................................ 1 The Portfolios THE MONEY MARKET PORTFOLIO ................................. 2 THE LIMITED DURATION PORTFOLIO ............................. 4 THE QUALITY INCOME PLUS PORTFOLIO .......................... 7 THE HIGH YIELD PORTFOLIO ................................... 10 THE UTILITIES PORTFOLIO .................................... 12 THE INCOME BUILDER PORTFOLIO ............................... 15 THE DIVIDEND GROWTH PORTFOLIO .............................. 18 THE CAPITAL GROWTH PORTFOLIO ............................... 20 THE GLOBAL DIVIDEND GROWTH PORTFOLIO ....................... 22 THE EUROPEAN GROWTH PORTFOLIO .............................. 24 THE PACIFIC GROWTH PORTFOLIO ............................... 27 THE EQUITY PORTFOLIO ....................................... 30 THE S&P 500 INDEX PORTFOLIO ................................ 32 THE COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO ................ 34 THE AGGRESSIVE EQUITY PORTFOLIO ............................ 38 THE INFORMATION PORTFOLIO .................................. 41 THE STRATEGIST PORTFOLIO ................................... 44 Additional Investment Strategy Information ............................................................ 47 Additional Risk Information ............................................................ 48 Portfolio Management ............................................................ 53 Shareholder Information PRICING FUND SHARES ........................................ 56 DISTRIBUTIONS .............................................. 56 TAX CONSEQUENCES ........................................... 57 Financial Highlights ............................................................ 58 THIS PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT THE FUND. PLEASE READ IT CAREFULLY AND KEEP IT FOR FUTURE REFERENCE.
Eligible Investors Morgan Stanley Variable Investment Series (the "Fund") is comprised of 17 separate Portfolios (each a "Portfolio"), each with its own distinct investment objective(s) and policies. The Fund is offered exclusively to the following life insurance companies in connection with particular life insurance and/or annuity contracts they offer (the Contracts):
INSURANCE COMPANY TYPE OF POLICY ----------------------------------------------------------------------------------------- Northbrook Life Certain Flexible Premium Variable Annuity and Variable Life Insurance Company Insurance Contracts ----------------------------------------------------------------------------------------- Allstate Life Insurance Certain Flexible Premium Deferred Variable Annuity Contracts Company of New York ----------------------------------------------------------------------------------------- Glenbrook Life and Certain Flexible Premium Deferred Variable Annuity Contracts Annuity Company and Certain Flexible Premium Variable Life Insurance Contracts ----------------------------------------------------------------------------------------- Paragon Life Insurance Certain Flexible Premium Variable Life Insurance Contracts Company (issued in connection with an employer-sponsored insurance program offered only to certain employees of Morgan Stanley Dean Witter & Co., the parent of the Fund's Investment Manager) -----------------------------------------------------------------------------------------
Shares of each Portfolio are purchased by the life insurance companies at net asset value per share without a sales charge in accordance with instructions received from the owners of the applicable Contract. Class X shares of each Portfolio are generally available to holders of (i) Contracts offered by Paragon Life Insurance Company, and (ii) other Contracts offered before May 1, 2000. For more information on eligibility to invest in Class X shares, contact the insurance company offering the accompanying prospectus. All Portfolio shares issued prior to May 1, 2000 have been designated Class X shares. The Fund also offers Class Y shares of each Portfolio through a separate prospectus. Class Y shares are subject to different expenses. 1 [Sidebar] MONEY MARKET A portfolio having the goal to select securities to provide current income while seeking to maintain a stable share price of $1.00. YIELD The Portfolio's yield reflects the actual income the Portfolio pays to you expressed as a percentage of the Portfolio share price. Because the Portfolio's income from its portfolio securities will fluctuate, the income it in turn distributes to you and the Portfolio's yield will vary. [End Sidebar] The Portfolios The Money Market Portfolio [ICON] INVESTMENT OBJECTIVES - -------------------------------------------------------------------------------- The Money Market Portfolio seeks high current income, preservation of capital and liquidity. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio invests in high quality, short-term debt obligations. In selecting investments, the "Investment Manager," Morgan Stanley Investment Advisors Inc., seeks to maintain the Portfolio's share price at $1.00. A mutual fund's share price remaining stable at $1.00 means that the fund would preserve the principal value of the shareholders' investments. The Portfolio's investments include the following money market instruments: - Commercial paper. - Corporate obligations. - Debt obligations of U.S. regulated banks and instruments secured by those obligations. These investments include certificates of deposit. - Eurodollar certificates of deposit. - Certificates of deposit of savings banks and savings and loan associations. - Debt obligations issued or guaranteed as to principal and interest by the U.S. government, its agencies or its instrumentalities. - Repurchase agreements, which may be viewed as a type of secured lending by the Portfolio. The Portfolio may purchase debt obligations that have fixed, variable or floating rates of interest. The interest rates payable on variable rate or floating rate obligations may fluctuate based upon changes in market rates. The Portfolio attempts to balance its objectives of high income, capital preservation and liquidity by investing in securities of varying maturities and risks. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objectives. Principal risks of investing in the Portfolio are associated with its debt obligation investments. All debt obligations, such as bonds, 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 debt security resulting from changes in the general level of interest rates. 2 [Sidebar] ANNUAL TOTAL RETURNS This chart shows how the performance of the Portfolio's Class X shares has varied from year to year over the past 10 calendar years. AVERAGE ANNUAL TOTAL RETURNS This table shows the average annual total returns of the Portfolio's Class X shares. [End Sidebar] The Investment Manager actively manages the Portfolio's assets to reduce the risk of losing any principal investment as a result of credit or interest rate risks. The Portfolio's assets are reviewed to maintain or improve creditworthiness. In addition, federal regulations require money market funds to invest only in debt obligations of high quality and short maturities, and repurchase agreements with respect to such obligations. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. An investment in the Portfolio is not a bank deposit and is not guaranteed or insured by the FDIC or any other government agency. Although the Portfolio seeks to preserve the value of your investment at $1.00 per share, if it is unable to do so, it is possible to lose money by investing in the Portfolio. [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Money Market Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 1992 3.43% '93 2.75% '94 3.81% '95 5.66% '96 5.11% '97 5.23% '98 5.18% '99 4.80% 2000 6.00% '01 3.94%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS 0.36%. During the periods shown in the bar chart, the highest return for a calendar quarter was 1.54% (quarter ended December 31, 2000) and the lowest return for a calendar quarter was 0.59% (quarter ended December 31, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) -------------------------------------------------------------------------------------------------- PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS -------------------------------------------------------------------------------------------------- The Money Market Portfolio 3.94% 5.03% 4.59% --------------------------------------------------------------------------------------------------
3 [Sidebar] INCOME An investment objective having the goal of selecting securities to pay out income rather than rise in value. [End Sidebar] The Limited Duration Portfolio [ICON] INVESTMENT OBJECTIVE - -------------------------------------------------------------------------------- The Limited Duration Portfolio (formerly named the Short-Term Bond Portfolio) seeks to provide a high level of current income consistent with the preservation of capital. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 65% of its assets in securities issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities (including zero coupon securities), and investment grade corporate and other types of bonds including asset-backed securities. In selecting portfolio investments, the "Investment Manager," Morgan Stanley Investment Advisors Inc., considers both domestic and international economic developments, interest rate trends, the steepness of the yield curve and other factors and seeks to maintain an overall average duration for the Portfolio of less than three years. Mortgage-Backed Securities. Certain of the securities in which the Portfolio may invest are mortgage-backed securities. One type of mortgage-backed security, in which the Portfolio may invest, is a mortgage pass-through security. These securities represent a participation interest in a pool of mortgage loans originated by U.S. Governmental or private lenders such as banks. They differ from conventional debt securities, which provide for periodic payment of interest in fixed amounts and principal payments at maturity or on specified call dates. Mortgage pass-through securities provide for monthly payments that are a "pass-through" of the monthly interest and principal payments made by the individual borrowers on the pooled mortgage loans. Mortgage pass-through securities may be collateralized by mortgages with fixed rates of interest or adjustable rates. Collateralized Mortgage Obligations ("CMOs"). CMOs are debt obligations collateralized by mortgage loans or mortgage pass-through securities (collectively "Mortgage Assets"). Payments of principal and interest on the Mortgage Assets and any reinvestment income are used to make payments on the CMOs. CMOs are issued in multiple classes. Each class has a specific fixed or floating coupon rate and a stated maturity or final distribution date. The principal and interest on the Mortgage Assets may be allocated among the classes in a number of different ways. Certain classes will, as a result of the allocation, have more predictable cash flows than others. As a general matter, the more predictable the cash flow, the lower the yield relative to other Mortgage Assets. The less predictable the cash flow, the higher the yield and the greater the risk. The Portfolio may invest in any class of CMO. Asset-Backed Securities. The Portfolio may also invest in asset-backed securities. Asset-backed securities represent an interest in a pool of assets such as automobile and credit card receivables or home equity loans that have been securitized in pass through structures similar to mortgage-backed securities. These types of pass through securities provide for monthly payments that are a "pass through" of the monthly interest and principal payments made by the individual borrowers on the pooled receivables. In addition, the Portfolio may invest up to 25% of its net assets in investment grade fixed-income securities issued by foreign governments or corporations. The Portfolio's investments also may include "Rule 144A" fixed-income securities, which are subject to resale restrictions. Up to 5% of the Portfolio's net assets may be invested in fixed-income securities rated lower than investment grade, or if unrated of comparable quality as determined by the Investment Manager 4 (commonly known as "junk bonds"). The Portfolio may also invest in futures with respect to financial instruments and interest rate indexes. The Portfolio may use futures to facilitate allocation of the Portfolio's investments among asset classes, to increase or decrease the Portfolio's exposure to a bond market or to seek to protect against a decline in securities or an increase in prices of securities that may be purchased. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objective. The Portfolio's share price and yield will fluctuate with changes in the market value and/or yield of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. Principal risks of investing in the Portfolio are associated with the Portfolio's investments in fixed-income securities. These risks are credit risk and interest rate risk. Credit risk is 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. Duration is a measure of the expected life of a fixed-income security and is considered a more precise measure of interest rate security than term-to-maturity. A portfolio with a lower average duration generally should experience less price volatility in response to charges in interest rates than a portfolio with a higher average maturity. There are certain situations involving variable rate and mortgaged-backed securities where duration calculation may not properly reflect the interest rate exposure of a security. There are also particular risks associated with the Portfolio's investments in mortgage-backed securities, which include CMOs, and asset-backed securities. For example mortgage-backed securities and asset-backed securities are subject to prepayment risk and in some cases may be more volatile and less liquid than other traditional types of debt securities. There are also particular risks associated with the Portfolio's investments in futures. Positions in futures contracts may be closed out only on an exchange which provides a secondary market for such futures. However, there can be no assurance that a liquid secondary market will exist for any particular futures contract at any specific time. The inability to close out a futures contract could have an adverse impact on the Portfolio's ability to hedge effectively. Additionally, the Portfolio's use of futures involves the risk of imperfect or no correlation where the securities underlying futures contracts have different maturities than the securities that are the subject of the hedge. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. 5 [Sidebar] ANNUAL TOTAL RETURNS This chart shows how the performance of the Portfolio's Class X shares has varied from year to year over the past 2 calendar years. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class X shares with those of a broad measure of market performance over time. [End Sidebar] [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Limited Duration Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 2000 5.85% '01 6.72%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS -0.18%. During the periods shown in the bar chart, the highest return for a calendar quarter was 3.61% (quarter ended September 30, 2001) and the lowest return for a calendar quarter was 0.50% (quarter ended December 31, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) -------------------------------------------------------------------------------------------------- LIFE OF PORTFOLIO PAST 1 YEAR (SINCE 5/4/99) -------------------------------------------------------------------------------------------------- The Limited Duration Portfolio 6.72% 5.30% -------------------------------------------------------------------------------------------------- Lehman Brothers U.S. Credit Index (1-5)(1) 9.73% 7.27% --------------------------------------------------------------------------------------------------
1 THE LEHMAN BROTHERS U.S. CREDIT INDEX (1-5 YEAR) (FORMERLY LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) INVESTMENT GRADE DEBT INDEX) INCLUDES U.S. CORPORATE AND SPECIFIED FOREIGN DEBENTURES AND SECURED NOTES WITH MATURITIES OF ONE TO FIVE YEARS. THE INDEX DOES NOT INCLUDE ANY EXPENSES, FEES OR CHARGES. THE INDEX IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT.
6 [SIDEBAR] INCOME An investment objective having the goal of selecting securities to pay out income. [End Sidebar] The Quality Income Plus Portfolio [ICON] INVESTMENT OBJECTIVES - -------------------------------------------------------------------------------- The Quality Income Plus Portfolio seeks as a primary objective to provide a high level of current income by investing primarily in U.S. government securities and other fixed-income securities. As a secondary objective the Portfolio seeks capital appreciation but only when consistent with its primary objective. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in (i) U.S. government securities issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities, (ii) debt securities (including zero coupon securities and asset-backed securities) rated at the time of purchase within the four highest bond rating categories by Moody's or S&P or if not rated determined to be of comparable quality by the "Investment Manager," Morgan Stanley Investment Advisors Inc., and (iii) Yankee government bonds rated at the time of purchase within the four highest rating categories of Moody's or S&P or if not rated determined to be of comparable quality by the Investment Manager. Yankee government bonds are U.S. dollar denominated bonds issued by foreign government agencies or instrumentalities (no more than 20% of the Portfolio's assets may be invested in Yankee government bonds). The Portfolio is not limited as to the maturities of the U.S. government and other debt securities in which it may invest. In making investment decisions for the Portfolio, the Investment Manager considers both domestic and international economic developments, interest rate trends and other factors. The Investment Manager evaluates technical considerations such as the relative supply of and demand for corporate notes and U.S. Treasury and agencies issues before it decides upon an asset allocation. Similarly, the assessment of the strength of individual companies that issue corporate debt and the overall country risk of sovereign debt obligations contribute to the decision-making process. Mortgage-Backed Securities. Certain of the securities in which the Portfolio may invest are mortgage-backed securities. One type of mortgage-backed security, in which the Portfolio may invest, is a mortgage pass-through security. These securities represent a participation interest in a pool of mortgage loans originated by U.S. Governmental or private lenders such as banks. They differ from conventional debt securities, which provide for periodic payment of interest in fixed amounts and principal payments at maturity or on specified call dates. Mortgage pass-through securities provide for monthly payments that are a "pass-through" of the monthly interest and principal payments made by the individual borrowers on the pooled mortgage loans. Mortgage pass-through securities may be collateralized by mortgages with fixed rates of interest or adjustable rates. Collateralized Mortgage Obligations ("CMOs"). CMOs are debt obligations collateralized by mortgage loans or mortgage pass-through securities (collectively "Mortgage Assets"). Payments of principal and interest on the Mortgage Assets and any reinvestment income are used to make payments on the CMOs. CMOs are issued in multiple classes. Each class has a specific fixed or floating coupon rate and a stated maturity or final distribution date. The principal and interest on the Mortgage Assets may be allocated among the classes in a number of different ways. Certain classes will, as a result of the allocation, have more predictable cash flows than 7 others. As a general matter, the more predictable the cash flow, the lower the yield relative to other Mortgage Assets. The less predictable the cash flow, the higher the yield and the greater the risk. The Portfolio may invest in any class of CMO. Asset-Backed Securities. The Portfolio may also invest in asset-backed securities. Asset-backed securities represent an interest in a pool of assets such as automobile and credit card receivables or home equity loans that have been securitized in pass through structures similar to mortgage-backed securities. These types of pass through securities provide for monthly payments that are a "pass through" of the monthly interest and principal payments made by the individual borrowers on the pooled receivables. Borrowing. In seeking to increase income, the Portfolio may borrow to purchase securities. Such borrowing may not exceed 25% of the Portfolio's assets. Other Investments. The Portfolio may invest up to 15% of its net assets in Yankee corporate bonds which are rated at the time of purchase within the four highest grades as determined by Moody's or S&P or which, if not rated, are of comparable quality as determined by the Investment Manager. Yankee corporate bonds are U.S. dollar denominated debt securities issued by foreign companies. The Portfolio may also invest in futures with respect to financial instruments and interest rate indexes. The Portfolio may use futures to facilitate allocation of the Portfolio's investments among asset classes, to increase or decrease the Portfolio's exposure to a bond market or to seek to protect against a decline in securities or an increase in prices of securities that may be purchased. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objectives. The Portfolio's share price and yield will fluctuate with changes in the market value and/or yield of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of investing in the Portfolio is associated with the Portfolio's investments in fixed-income securities. These risks are credit risk and interest rate risk. Credit risk is 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. There are also particular risks associated with the Portfolio's investments in mortgage-backed securities, which include CMOs, and asset-backed securities. For example mortgage-backed securities and asset-backed securities are subject to prepayment risk and in some cases may be more volatile and less liquid than other traditional types of debt securities. There are also particular risks associated with the Portfolio's investments in futures. Positions in futures contracts may be closed out only on an exchange which provides a secondary market for such futures. However, there can be no assurance that a liquid secondary market will exist for any particular futures contract at any specific time. The inability to close out a futures contract could have an adverse impact on the Portfolio's ability to hedge effectively. Additionally, the Portfolio's use of futures involves the risk of imperfect or no correlation where the securities underlying futures contracts have different maturities than the securities that are the subject of the hedge. 8 [Sidebar] ANNUAL TOTAL RETURNS This chart shows how the performance of the Portfolio's Class X shares has varied from year to year over the past 10 calendar years. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class X shares with those of a broad measure of market performance over time. [End Sidebar] The Portfolio may borrow money to purchase securities. To the extent that the Portfolio engages in such practice it may be leveraged. Leveraging generally exaggerates the effect on net asset value of any increase or decrease in the market value of the Portfolio's investments. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Quality Income Plus Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 1992 8.26% '93 12.99% '94 -6.63% '95 24.30% '96 1.56% '97 11.09% '98 8.67% '99 -4.32% 2000 11.09% '01 9.57%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS -0.99%. During the periods shown in the bar chart, the highest return for a calendar quarter was 8.07% (quarter ended June 30, 1995) and the lowest return for a calendar quarter was -4.83% (quarter ended March 31, 1994).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) -------------------------------------------------------------------------------------------------- PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS -------------------------------------------------------------------------------------------------- The Quality Income Plus Portfolio 9.57% 7.05% 7.32% -------------------------------------------------------------------------------------------------- Lehman Brothers U.S. Aggregate Index(1) 8.44% 7.43% 7.23% --------------------------------------------------------------------------------------------------
1 THE LEHMAN BROTHERS U.S. AGGREGATE INDEX TRACKS THE PERFORMANCE OF ALL U.S. GOVERNMENT AGENCY AND TREASURY SECURITIES, INVESTMENT- GRADE CORPORATE DEBT SECURITIES, AGENCY MORTGAGE-BACKED SECURITIES, ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BASED SECURITIES. THE INDEX DOES NOT INCLUDE ANY EXPENSES, FEES OR CHARGES. THE INDEX IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT.
9 [Sidebar] INCOME An investment objective having the goal of selecting securities to pay out income. [End Sidebar] The High Yield Portfolio [ICON] INVESTMENT OBJECTIVES - -------------------------------------------------------------------------------- The High Yield Portfolio seeks as a primary objective to provide a high level of current income by investing in a diversified portfolio consisting principally of fixed-income securities, which may include both non-convertible and convertible debt securities and preferred stocks. As a secondary objective the Portfolio will seek capital appreciation, but only when consistent with its primary objective. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in fixed-income securities (including zero coupon securities) rated Baa or lower by Moody's or BBB or lower by S&P or in nonrated securities considered by the Investment Manager to be appropriate investments for the Portfolio. These securities are commonly known as "junk bonds." They may also include "Rule 144A" securities, which are subject to resale restrictions. There are no minimum quality ratings for investments. In making investment decisions the "Investment Manager," Morgan Stanley Investment Advisors Inc., considers an issuer's creditworthiness, economic developments, interest rate trends and other factors it deems relevant. In evaluating an issuer's creditworthiness the Investment Manager relies principally on its own analysis. A security's credit rating is simply one factor that may be considered by the Investment Manager in this regard. In addition to junk bonds, the Portfolio may invest in the following: - Higher rated fixed-income securities -- The Portfolio may invest in securities rated higher than Baa or BBB (or if not rated, determined to be of comparable quality) when the Investment Manager believes that such securities may produce attractive yields. - Asset-backed securities -- Asset-backed securities represent an interest in a pool of assets such as automobile and credit card receivables or home equity loans that have been securitized in pass through structures similar to mortgage-backed securities. These types of pass through securities provide for monthly payments that are a "pass through" of the monthly interest and principal payments made by the individual borrowers on the pooled receivables. - Foreign securities -- The Portfolio may invest up to 20% of its assets in securities issued by foreign governments and other foreign issuers (including American depositary receipts or other similar securities convertible into securities of foreign issuers) but not more than 10% of its assets in these securities may be denominated in foreign currencies. - Unit Offerings -- The Portfolio may purchase units which combine debt securities with equity securities and/or warrants. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objectives. The Portfolio's share price and yield will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of investing in the Portfolio is associated with its investments in junk bonds. Junk bonds are subject to greater risk of loss of income and principal than higher rated securities. The 10 [Sidebar] ANNUAL TOTAL RETURNS This chart shows how the performance of the Portfolio's Class X shares has varied from year to year over the past 10 calendar years. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class X shares with those of a broad measure of market performance over time. [End Sidebar] prices of junk bonds have been found generally to be less sensitive to changes in prevailing interest rates than higher rated securities but are more likely to be sensitive to adverse economic changes or individual corporate developments. In addition, all fixed-income securities are subject to two types of risk: credit risk and interest rate risk. The Portfolio is subject to the risks associated with foreign securities. These risks include, among other things, the possibility that the Portfolio could be adversely affected by changes in currency exchange rates. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the High Yield Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 1992 18.35% '93 24.13% '94 -2.47% '95 14.93% '96 11.98% '97 11.87% '98 -6.20% '99 -1.33% 2000 -32.22% '01 -33.75%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS -0.39%. During the periods shown in the bar chart, the highest return for a calendar quarter was 16.28% (quarter ended March 31, 1992) and the lowest return for a calendar quarter was -21.45% (quarter ended December 31, 2000).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) -------------------------------------------------------------------------------------------------- PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS -------------------------------------------------------------------------------------------------- The High Yield Portfolio -33.75% -14.20% -1.53% -------------------------------------------------------------------------------------------------- Lehman Brothers U.S. Corporate High Yield Index(1) 5.28% 3.11% 7.58% --------------------------------------------------------------------------------------------------
1 THE LEHMAN BROTHERS U.S. CORPORATE HIGH YIELD INDEX TRACKS THE PERFORMANCE OF ALL BELOW INVESTMENT-GRADE SECURITIES WHICH HAVE AT LEAST $100 MILLION IN OUTSTANDING ISSUANCE, A MATURITY GREATER THAN ONE YEAR, AND ARE ISSUED IN FIXED-RATE U.S. DOLLAR DENOMINATIONS. THE INDEX DOES NOT INCLUDE ANY EXPENSES, FEES OR CHARGES. THE INDEX IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT.
11 [Sidebar] GROWTH & INCOME An investment objective having the goal of selecting securities with the potential to rise in price and pay out income. [End Sidebar] The Utilities Portfolio [ICON] INVESTMENT OBJECTIVE - -------------------------------------------------------------------------------- The Utilities Portfolio seeks both capital appreciation and current income. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in the securities of companies engaged in the utilities industry. These companies are involved in various aspects of the industry, such as communications, and gas and electric energy, but they do not include public broadcasting companies. A company will be considered engaged in the utilities industry if it derives at least 50% of its revenues or earnings from that industry or it devotes at least 50% of its assets to activities in that industry. These may include companies involved in, among other things, telecommunications, computers and other new or emerging technologies, gas and electric energy, water distribution, the Internet and Internet related services. The companies may be traditionally regulated public utilities or fully or partially deregulated utility companies as well as unregulated utility companies. The Portfolio's "Investment Manager," Morgan Stanley Investment Advisors Inc., will shift the Portfolio's assets between different segments of the utilities industry and between common stock, other equity securities and investment grade fixed-income securities based on its view of prevailing market, economic and financial conditions. The Portfolio does not have any set policies to concentrate its assets in any particular segment of the utilities industry or any particular type of security. However, the Portfolio's policy to concentrate its assets in the utilities industry is fundamental, and may not be changed without shareholder approval. In selecting common stock and other equity securities, the Investment Manager considers earnings and dividend growth, book value, dividend discount and price/earnings relationships. In addition, the Investment Manager makes continuing assessments of management, the prevailing regulatory framework and industry trends. Computer-based equity selection models also may be used. If the Investment Manager believes favorable conditions for capital growth of equity securities are not prevalent at a particular time, it may allocate the Portfolio's assets predominantly or exclusively to debt securities with the aim of obtaining current income and thus benefitting long-term growth of capital. The Portfolio may invest in asset-backed securities. Asset-backed securities represent an interest in a pool of assets such as a pool of power generation assets or other utility assets or utility related assets, automobile and credit card receivables or home equity loans that have been securitized in pass through structures similar to mortgage-backed securities. These types of pass through securities provide for monthly payments that are a "pass through" of the monthly interest and principal payments made by the individual borrowers on the pooled investments. The Portfolio may invest up to 20% of its assets in U.S. government securities issued or guaranteed as to principal and interest by the U.S. Government or its agencies or instrumentalities and in real estate investment trusts (commonly known as "REITs"). The Portfolio may invest up to 25% of its net assets in foreign securities (including depositary receipts). This percentage limitation, however, does not apply to securities of foreign companies that are listed in the U.S. on a national securities exchange. 12 [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objective. The Portfolio's share price will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. The Portfolio invests primarily in securities of companies in the utilities industry. The Portfolio's investments in the utilities industry are impacted by a host of risks particular to that industry. Changing regulation constitutes one of the key industry-specific risks for the Portfolio. State and other regulators monitor and control utility revenues and costs, and therefore may limit utility profits and dividends paid to investors. Regulatory authorities also may restrict a company's access to new markets, thereby diminishing the company's long-term prospects. The deregulation of certain utilities companies may eliminate restrictions on profits and dividends, but may also subject these companies to greater risks of loss. Individual sectors of the utility market are subject to additional risks. These risks apply to all utility companies -- regulated, fully or partially deregulated and unregulated. For example, telecommunications companies have been affected by technological development leading to increased competition, as well as changing regulation of local and long-distance telephone service and other telecommunications businesses. Certain telecommunications companies have not benefitted from the new competitive climate. Certain utilities companies may incur unexpected increases in fuel and other operating costs. They are adversely affected when long-term interest rates rise. Long-term borrowings are used to finance most utility investment and rising interest rates lead to higher financing costs and reduced earnings. There are also the considerable costs associated with environmental compliance, nuclear waste clean-up, and safety regulation. Increasingly, regulators are calling upon electric utilities to bear these added costs, and there is a risk that these costs will not be fully recovered through an increase in revenues. Among gas companies, there has been a move to diversify into oil and gas exploration and development, making investment return more sensitive to energy prices. In the case of the water utility sector, the industry is highly fragmented, and most water supply companies find themselves in mature markets, although upgrading of fresh water and waste water systems is an expanding business. The Portfolio's investments in common stock are also subject to the risks that affect all common stocks. In particular, stock prices can fluctuate widely in response to activities specific to the issuer as well as general market economic and political conditions. The Portfolio's investment in fixed-income securities are subject to credit risk and interest rate risk. Credit risk refers to a possibility that the issuer of a security will be unable to make interest payments and/or repay the principal on its debts. Interest rate risk refers to fluctuations in the value of a fixed-income security resulting from changes in the general level of interest rates. There are also particular risks associated with the Portfolio's investments in asset-backed securities. For example, asset-backed securities are subject to prepayment risk and in some cases may be more volatile and less liquid than other traditional types of debt securities. 13 [Sidebar] ANNUAL TOTAL RETURNS This chart shows how the performance of the Portfolio's Class X shares has varied from year to year over the past 10 calendar years. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class X shares with those of a broad measure of market performance over time. [End Sidebar] The Portfolio is subject to the risks associated with foreign securities. These risks include, among other things, the possibility that the Portfolio could be adversely affected by changes in currency exchange rates. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Utilities Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 1992 12.64% '93 15.69% '94 -9.02% '95 28.65% '96 8.68% '97 27.15% '98 23.76% '99 12.71% 2000 3.03% '01 -25.75%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS -2.29%. During the periods shown in the bar chart, the highest return for a calendar quarter was 12.58% (quarter ended December 31, 1997) and the lowest return for a calendar quarter was -15.26% (quarter ended September 30, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) -------------------------------------------------------------------------------------------------- PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS -------------------------------------------------------------------------------------------------- The Utilities Portfolio -25.75% 6.30% 8.44% -------------------------------------------------------------------------------------------------- S&P 500 Index(1) -11.88% 10.70% 12.93% --------------------------------------------------------------------------------------------------
1 THE STANDARD AND POOR'S 500 INDEX (S&P 500-REGISTERED TRADEMARK- INDEX) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON 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.
14 [Sidebar] GROWTH & INCOME An investment objective having the goal of selecting securities with the potential to rise in price and pay out income. [End Sidebar] The Income Builder Portfolio [ICON] INVESTMENT OBJECTIVES - -------------------------------------------------------------------------------- The Income Builder Portfolio seeks as a primary objective reasonable income. Growth of capital is the secondary objective. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in income-producing equity and fixed-income securities, with normally at least 65% of its assets invested in income-producing equity securities, including common stock, preferred stock, convertible securities and real estate investment trusts (commonly known as "REITs"). The "Investment Manager," Morgan Stanley Investment Advisors Inc., uses a value-oriented style in the selection of securities. Investments are normally made primarily in (i) common stocks of large capitalization companies with a record of paying dividends and which in the opinion of the Investment Manager have the potential for maintaining dividends, (ii) preferred stock and (iii) securities convertible into common stocks of small and mid-cap companies -- including synthetic and enhanced convertibles. The Portfolio's investments may also include "Rule 144A" securities, which are subject to resale restrictions. The Investment Manager follows a "bottom-up" approach in the selection of convertible securities for the Portfolio. Beginning with a universe of about 500 companies, the Investment Manager narrows the focus to small and mid-cap companies and reviews the issues to determine if the convertible is trading with the underlying equity security. The yield of the underlying equity security is evaluated and company fundamentals are studied to evaluate cash flow, risk/ reward balance, valuation and the prospects for growth. The Portfolio may invest up to 25% of its assets in "enhanced" convertible securities. Enhanced convertible securities offer holders the opportunity to obtain higher current income than would be available from a traditional equity security issued by the same company, in return for reduced participation or a cap on appreciation in the underlying common stock of the issuer which the holder can realize. In addition, in many cases, enhanced convertible securities are convertible into the underlying common stock of the issuer automatically at maturity, unlike traditional convertible securities which are convertible only at the option of the security holder. The Portfolio may invest up to 10% of its assets in "synthetic" convertible securities. Unlike traditional convertible securities whose conversion values are based on the common stock of the issuer of the convertible security, "synthetic" convertible securities are preferred stocks or debt obligations of an issuer which are combined with an equity component whose conversion value is based on the value of the common stock of a different issuer or a particular benchmark (which may include a foreign issuer or basket of foreign stocks, or a company whose stock is not yet publicly traded). In many cases, "synthetic" convertible securities are not convertible prior to maturity, at which time the value of the security is paid in cash by the issuer. The Portfolio may invest up to 35% of its assets in U.S. government securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities and non-convertible fixed-income securities (including zero coupon securities). Up to 20% of the Portfolio's net assets may be invested in non-convertible fixed-income securities rated lower than investment grade by S&P or Moody's (but not below B) or, if unrated, of comparable quality as determined by the Investment Manager (commonly known as "junk bonds"). The 20% limitation is not applicable to convertible securities. 15 Up to 20% of the Portfolio's assets may be invested in common stocks that do not pay a dividend. The Portfolio may invest up to 25% of its net assets in foreign securities (including depositary receipts). This percentage limitation, however, does not apply to securities of foreign companies that are listed in the U.S. on a national securities exchange. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objectives. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of investing in the Portfolio is associated with its investment in common stocks. In particular the prices of common stocks can fluctuate widely in response to activities specific to the issuer as well as general market, economic and political conditions. The Portfolio is also subject to the risks of investing in convertible securities. These securities may carry risks associated with both common stock and fixed-income securities. In addition, because the convertible securities in which the Portfolio invests are convertible into the common stocks of small and mid-cap companies, the Portfolio is subject to the specific risks associated with investing in small and mid-cap companies. Investments in small and medium capitalization companies involve greater risk of volatility than is customarily associated with investments in more established companies as well as certain other additional risks. There are also special risks associated with the Portfolio's investments in "enhanced" and "synthetic" convertible securities. These securities may be more volatile and less liquid than traditional convertible securities. The Portfolio is subject to the risks associated with foreign securities. These risks include, among other things, the possibility that the Portfolio could be adversely affected by changes in currency exchange rates. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. 16 [Sidebar] ANNUAL TOTAL RETURNS This chart shows how the performance of the Portfolio's Class X shares has varied from year to year over the past 4 calendar years. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class X shares with those of a broad measure of market performance over time. [End Sidebar] [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Income Builder Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 1998 3.21% '99 7.06% 2000 0.17% '01 2.30%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS 3.18%. During the periods shown in the bar chart, the highest return for a calendar quarter was 10.65% (quarter ended June 30, 1999) and the lowest return for a calendar quarter was -10.46% (quarter ended September 30, 1998).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) ----------------------------------------------------------------- LIFE OF PORTFOLIO PAST 1 YEAR (SINCE 01/21/97) ----------------------------------------------------------------- The Income Builder Portfolio 2.30% 6.83% ----------------------------------------------------------------- S&P 500 Index(1) -11.88% 9.58% -----------------------------------------------------------------
1 THE STANDARD AND POOR'S 500 INDEX (S&P 500-REGISTERED TRADEMARK- INDEX) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON 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.
17 [Sidebar] GROWTH & INCOME An investment objective having the goal of selecting securities with the potential to rise in price and pay out income. [End Sidebar] The Dividend Growth Portfolio [ICON] INVESTMENT OBJECTIVES - -------------------------------------------------------------------------------- The Dividend Growth Portfolio seeks to provide reasonable current income and long-term growth of income and capital. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will invest at least 80% of its assets in common stock of companies with a record of paying dividends and the potential for increasing dividends. The "Investment Manager," Morgan Stanley Investment Advisors Inc., initially employs a quantitative screening process in an attempt to develop a number of common stocks which are undervalued and which have a record of paying dividends. The Investment Manager then applies qualitative analysis to determine which stocks it believes have the potential to increase dividends and, finally, to determine whether any of the stocks should be added to the Portfolio. The Investment Manager attempts to avoid investment in speculative securities or those with speculative characteristics. The Portfolio may invest up to 20% of its assets in convertible securities, U.S. government securities issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities, and investment grade fixed-income securities (including zero coupon securities). The Portfolio may also invest any amount of its assets in foreign securities (including depositary receipts) that are listed in the U.S. on a national securities exchange. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objectives. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of investing in the Portfolio is associated with its investments in common stock. In particular the prices of common stock may fluctuate widely in response to activities specific to the company as well as general market, economic and political conditions. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. 18 [Sidebar] ANNUAL TOTAL RETURNS This chart shows how the performance of the Portfolio's Class X shares has varied from year to year over the past 10 calendar years. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class X shares with those of a broad measure of market performance over time. [End Sidebar] [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Dividend Growth Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 1992 8.16% '93 14.34% '94 -3.27% '95 36.38% '96 23.96% '97 25.61% '98 14.28% '99 -2.39% 2000 5.30% '01 -5.20%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS 5.47%. During the periods shown in the bar chart, the highest return for a calendar quarter was 16.92% (quarter ended June 30, 1997) and the lowest return for a calendar quarter was -14.22% (quarter ended September 30, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) -------------------------------------------------------------------------------------------------- PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS -------------------------------------------------------------------------------------------------- The Dividend Growth Portfolio -5.20% 6.94% 10.96% -------------------------------------------------------------------------------------------------- S&P 500 Index(1) -11.88% 10.70% 12.93% --------------------------------------------------------------------------------------------------
1 THE STANDARD AND POOR'S 500 INDEX (S&P 500-REGISTERED TRADEMARK- INDEX) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON 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.
19 [Sidebar] CAPITAL GROWTH An investment objective having the goal of selecting securities with the potential to rise in price rather than pay out income. [End Sidebar] The Capital Growth Portfolio [ICON] INVESTMENT OBJECTIVE - -------------------------------------------------------------------------------- The Capital Growth Portfolio seeks long term capital growth. On April 25, 2002, the Fund's Board of Trustees approved the adoption of a Plan of Liquidation (the "Plan") for the Portfolio pursuant to which the assets of the Portfolio would be liquidated and the proceeds, net of expenses, would be distributed to shareholders. Implementation of the Plan is subject to the approval of shareholders of the Portfolio. A Special Meeting of Shareholders of the Portfolio will be held on or about August 20, 2002 for the purpose of voting on the proposed Plan. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 65% of its assets in common stocks. The "Investment Manager," Morgan Stanley Investment Advisors Inc., utilizes a two-stage computerized screening process designed to find companies that demonstrate a history of consistent growth in earnings and revenues over the past several years, and have solid future earnings growth characteristics and attractive valuations. Dividend income is not a consideration in this stock selection process. Companies meeting these requirements are potential candidates for investment by the Portfolio. The Investment Manager may modify the screening process and/or may utilize additional or different screening processes in connection with the Portfolio's investments. The Portfolio may invest up to 35% of its assets in U.S. government securities issued or guaranteed as to principal and interest by the U.S. Government or its agencies or instrumentalities, investment grade fixed-income securities (including zero coupon securities), convertible securities, unit offerings involving a combination of a debt security and a convertible security and/or warrant and real estate investment trusts (commonly known as "REITs"). The Portfolio may invest up to 25% of its net assets in foreign securities (including depositary receipts). This percentage limitation, however, does not apply to securities of foreign companies that are listed in the U.S. on a national securities exchange. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objective. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of investment in the Portfolio is associated with the Portfolio's investments in common stock. In particular the prices of common stocks may fluctuate widely in response to activities specific to the company as well as general market, economic and political conditions. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. 20 [Sidebar] ANNUAL TOTAL RETURNS This chart shows how the performance of the Portfolio's Class X shares has varied from year to year over the past 10 calendar years. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class X shares with those of a broad measure of market performance over time. [End Sidebar] [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Capital Growth Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 1992 1.64% '93 -6.99% '94 -1.28% '95 32.92% '96 11.55% '97 24.54% '98 19.63% '99 33.29% 2000 1.28% '01 -26.31%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS 0.51%. During the periods shown in the bar chart, the highest return for a calendar quarter was 27.65% (quarter ended December 31, 1999) and the lowest return for a calendar quarter was -16.39% (quarter ended September 30, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) -------------------------------------------------------------------------------------------------- PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS -------------------------------------------------------------------------------------------------- The Capital Growth Portfolio -26.31% 8.19% 7.45% -------------------------------------------------------------------------------------------------- S&P 500 Index(1) -11.88% 10.70% 12.93% --------------------------------------------------------------------------------------------------
1 THE STANDARD AND POOR'S 500 INDEX (S&P 500-REGISTERED TRADEMARK- INDEX) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON 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.
21 [Sidebar] GROWTH & INCOME An investment objective having the goal of selecting securities with the potential to rise in price and pay out income. [End Sidebar] The Global Dividend Growth Portfolio [ICON] INVESTMENT OBJECTIVE - -------------------------------------------------------------------------------- The Global Dividend Growth Portfolio seeks to provide reasonable current income and long term growth of income and capital. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in dividend paying equity securities issued by issuers located in various countries around the world. The "Investment Manager," Morgan Stanley Investment Advisors Inc., seeks investments primarily in common stock of companies with a record of paying dividends and potential for increasing dividends. The Portfolio invests in at least three separate countries. The percentage of assets invested in particular geographic sectors will shift from time to time in accordance with the judgement of the Investment Manager. Up to 20% of the Portfolio's assets may be invested as follows: - Convertible securities, U.S. government securities issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities, fixed-income securities issued by foreign governments and international organizations and investment grade debt securities (including zero coupon securities). - Forward currency contracts, which involve the purchase or sale of a specific amount of foreign currency at a specified price with delivery at a specified future date. The Portfolio may use these contracts to hedge against adverse price movements in its portfolio securities and the currencies in which they are denominated. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objective. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of Investment in the Portfolio is associated with the Portfolio's investments in common stocks. In particular, the price of common stocks may fluctuate widely in response to activities specific to the company as well as general market, economic and political conditions. Another principal risk relates to the Portfolio's investments in foreign securities. In particular, foreign security investments may be adversely affected by changes in currency exchange rates. In addition, investments in foreign securities may be adversely affected by among other things political, social and economic developments abroad. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. 22 [Sidebar] ANNUAL TOTAL RETURNS This chart shows how the performance of the Portfolio's Class X shares has varied from year to year over the past 7 calendar years. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class X shares with those of a broad measure of market performance over time. [End Sidebar] [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Global Dividend Growth Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 1995 22.04% '96 17.59% '97 12.04% '98 12.53% '99 14.65% 2000 -2.50% '01 -6.25%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS 3.40%. During the periods shown in the bar chart, the highest return for a calendar quarter was 17.14% (quarter ended December 31, 1998) and the lowest return for a calendar quarter was -12.43% (quarter ended September 30, 1998).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) -------------------------------------------------------------------------------------------------- LIFE OF PORTFOLIO PAST 1 YEAR PAST 5 YEARS (SINCE 02/23/94) -------------------------------------------------------------------------------------------------- The Global Dividend Growth Portfolio -6.25% 5.73% 8.53% -------------------------------------------------------------------------------------------------- MSCI World Index(1) -16.82% 5.37% 7.70% --------------------------------------------------------------------------------------------------
1 THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD INDEX MEASURES PERFORMANCE FROM A DIVERSE RANGE OF GLOBAL STOCK MARKETS INCLUDING SECURITIES REPRESENTATIVE OF THE MARKET STRUCTURE OF 22 DEVELOPED MARKET COUNTRIES IN NORTH AMERICA, EUROPE AND THE ASIA/ PACIFIC REGION. THE PERFORMANCE OF THE INDEX IS LISTED IN U.S. DOLLARS AND ASSUMES REINVESTMENT OF NET DIVIDENDS. "NET DIVIDENDS" REFLECTS A REDUCTION IN DIVIDENDS AFTER TAKING INTO ACCOUNT WITHHOLDING OF TAXES BY CERTAIN FOREIGN COUNTRIES REPRESENTED IN THE INDEX. THE INDEX DOES NOT INCLUDE ANY EXPENSES, FEES OR CHARGES. THE INDEX IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT.
23 [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 European Growth Portfolio [ICON] INVESTMENT OBJECTIVE - -------------------------------------------------------------------------------- The European Growth Portfolio seeks to maximize the capital appreciation of its investments. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in securities issued by issuers located in European countries. A company is considered located in Europe if (i) it is organized under the laws of a European country and has a principal office in a European country; (ii) it derives at least 50% of its total revenue from business in Europe; or (iii) the company's equity securities are traded principally on a stock exchange in Europe. The principal countries in which the Portfolio invests are France, the United Kingdom, Germany, the Netherlands, Spain, Sweden, Switzerland and Italy. The Portfolio invests in at least three separate countries. The Portfolio generally invests principally in equity securities (which may include depositary receipts or convertible securities) but may also invest without limitation in fixed-income securities issued or guaranteed by European governments when the "Investment Manager," Morgan Stanley Investment Advisors Inc., or the "Sub-Advisor," Morgan Stanley Investment Management Inc., determine such investments to be appropriate. The Investment Manager and the Sub-Advisor generally invest Portfolio assets in companies they believe have a high rate of earnings growth potential. They also select securities, which in their view, possess, both on an absolute basis and as compared with other securities around the world, attractive price/earnings, price/cash flow and price/revenue ratios. The Portfolio may invest up to 20% of its assets as follows: - Equity securities issued by non-European issuers, and government and convertible securities issued by non-European governmental or private issuers. - Forward currency contracts, which involve the purchase or sale of a specific amount of foreign currency at the current price with delivery at a specified future date. The Portfolio may use these contracts to hedge against adverse price movements in its portfolio securities and securities it intends to purchase and the currencies in which they are denominated. The Portfolio may also use forward currency contracts to modify the Portfolio's exposure to various currency markets. The Portfolio may invest up to 5% of its net assets in put and call options with respect to foreign currencies. The Portfolio may also purchase and sell stock index futures contracts and options thereon. Stock index futures and options thereon may be used to facilitate trading, to increase the Portfolio's market exposure or to seek to protect against an increase in the prices of securities that may be purchased. The Portfolio may invest in warrants and acquire warrants attached to other securities. 24 [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objective. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk factor associated with investment in the Portfolio relates to the Portfolio's investments in Europe. In particular, adverse political, social or economic developments in Europe, or in a particular European country, could cause a substantial decline in the value of the Portfolio. The Portfolio's investments in common stock are also subject to the risks that affect all common stocks. In particular, stock prices can fluctuate widely in response to activities specific to the issuer as well as general market economic and political conditions. The conversion to a single European currency by many European countries could potentially adversely affect the value and/or increase the volatility of the Portfolio's investments. In addition, the Portfolio is subject to the risks associated with foreign securities generally. These risks include, among other things, the possibility that the Portfolio could be adversely affected by changes in currency exchange rates. In addition, the Portfolio's investments in fixed-income securities are subject to two types of risk: credit risk and interest rate risk. The Portfolio is also subject to the risks of investing in convertible securities. These securities may carry risks associated with both common and fixed-income securities. The performance of the Portfolio also will depend on whether the Sub-Advisor is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. 25 [Sidebar] ANNUAL TOTAL RETURNS This chart shows how the performance of the Portfolio's Class X shares has varied from year to year over the past 10 calendar years. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class X shares with those of a broad measure of market performance over time. [End Sidebar] [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the European Growth Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 1992 3.99% '93 40.88% '94 8.36% '95 25.89% '96 29.99% '97 16.07% '98 23.96% '99 29.11% 2000 -4.92% '01 -17.76%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS -0.60%. During the periods shown in the bar chart, the highest return for a calendar quarter was 25.18% (quarter ended December 31, 1999) and the lowest return for a calendar quarter was -15.72% (quarter ended September 30, 1998).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) -------------------------------------------------------------------------------------------------- PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS -------------------------------------------------------------------------------------------------- The European Growth Portfolio -17.76% 7.75% 14.20% -------------------------------------------------------------------------------------------------- MSCI World Index(1) -16.82% 5.37% 8.06% -------------------------------------------------------------------------------------------------- MSCI Europe Index(2) -15.54% 13.71% 14.20% --------------------------------------------------------------------------------------------------
1 THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD INDEX MEASURES PERFORMANCE FROM A DIVERSE RANGE OF GLOBAL STOCK MARKETS INCLUDING SECURITIES REPRESENTATIVE OF THE MARKET STRUCTURE OF 22 DEVELOPED MARKET COUNTRIES IN NORTH AMERICA, EUROPE AND THE ASIA/PACIFIC REGION. THE PERFORMANCE OF THE INDEX IS LISTED IN U.S. DOLLARS AND ASSUMES REINVESTMENT OF NET DIVIDENDS. "NET DIVIDENDS" REFLECTS A REDUCTION IN DIVIDENDS AFTER TAKING INTO ACCOUNT WITHHOLDING OF TAXES BY CERTAIN FOREIGN COUNTRIES REPRESENTED IN THE INDEX. THE INDEX DOES NOT INCLUDE ANY EXPENSES, FEES OR CHARGES. THE INDEX IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. 2 THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EUROPE INDEX MEASURES PERFORMANCE FROM A DIVERSE RANGE OF GLOBAL STOCK MARKETS WITHIN AUSTRIA, BELGIUM, DENMARK, FINLAND, FRANCE, GERMANY, ITALY, THE NETHERLANDS, NORWAY, SPAIN, SWEDEN, SWITZERLAND, IRELAND, PORTUGAL AND THE UNITED KINGDOM. THE PERFORMANCE OF THE INDEX IS LISTED IN U.S. DOLLARS AND ASSUMES REINVESTMENT OF NET DIVIDENDS. "NET DIVIDENDS" REFLECTS A REDUCTION IN DIVIDENDS AFTER TAKING INTO ACCOUNT WITHHOLDING OF TAXES BY CERTAIN FOREIGN COUNTRIES REPRESENTED IN THE INDEX. THE INDEX DOES NOT INCLUDE ANY EXPENSES, FEES OR CHARGES. THE INDEX IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT.
26 [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 Pacific Growth Portfolio [ICON] INVESTMENT OBJECTIVE - -------------------------------------------------------------------------------- The Pacific Growth Portfolio seeks to maximize the capital appreciation of its investments. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in common stocks (including depositary receipts) and other securities of companies which are (i) organized under the laws of and have a principal place of business in Asia, Australia or New Zealand or (ii) derives at least 50% of their total revenues from business in such areas. The principal Asian countries include: Japan, Malaysia, Singapore, Hong Kong, Thailand, the Philippines, India, Indonesia, Taiwan and South Korea. The Portfolio's assets are invested in at least three countries. The Portfolio may invest more than 25% of its assets in Japan, Hong Kong, South Korea and Taiwan. Thus, the investment performance of the Portfolio may be subject to the social, political and economic events occurring in these countries to a greater extent than other countries. The "Investment Manager," Morgan Stanley Investment Advisors Inc., and the "Sub-Advisor," Morgan Stanley Investment Management Inc., generally invest Portfolio assets in companies they believe have a high rate of earnings growth potential. They also select securities, which in their view, possess, both on an absolute basis and as compared with other securities around the world, attractive price/earnings, price/cash flow and price/revenue ratios. The Portfolio generally invests principally in equity securities but may also invest without limitation in fixed-income obligations issued or guaranteed by an Asian country or Australia or New Zealand when the Investment Manager or the Sub-Advisor determine such investments to be appropriate. The Portfolio may invest up to 20% of its assets as follows: - Equity, fixed-income or convertible securities (including zero coupon securities) of companies located anywhere in the world, including the United States. - Forward currency contracts, which involve the purchase or sale of a specific amount of foreign currency at the current price with a delivery at a specified future date. The Portfolio may use these contracts to hedge against adverse price movements in its portfolio securities and securities it intends to purchase and the currencies in which they are denominated. The Portfolio may invest up to 5% of its net assets in put and call options with respect to foreign currencies. The Portfolio may invest up to 10% of its net assets in securities issued by other investment companies. The Investment Manager and/or Sub-Advisor may view these investments as necessary or advisable to participate in certain foreign markets where foreigners are prohibited from investing directly in the securities of individual companies without regulatory approval. The Portfolio may invest in warrants and acquire warrants attached to other securities. 27 [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objective. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of investment in the Portfolio relates to the Portfolio's investments in the Pacific region. In particular, adverse political, social or economic developments in the Pacific region or in a particular Pacific country could cause a substantial decline in the value of the Portfolio. The Portfolio's investments in common stock are also subject to the risks that affect all common stocks. In particular, stock prices can fluctuate widely in response to activities specific to the issuer as well as general market economic and political conditions. In addition, the Portfolio is subject to the risks associated with foreign securities generally. These risks include among other things the possibility that the Portfolio could be adversely affected by changes in currency exchange rates. The Portfolio may invest a substantial portion of its assets in developing countries. These investments carry greater risks than those associated with investment in more developed countries. In addition, the Portfolio's investments in fixed-income securities are subject to two types of risk: credit risk and interest rate risk. The performance of the Portfolio also will depend on whether the Sub-Advisor is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. 28 [Sidebar] ANNUAL TOTAL RETURNS This chart shows how the performance of the Portfolio's Class X shares has varied from year to year over the past 7 calendar years. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class X shares with those of a broad measure of market performance over time. [End Sidebar] [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Pacific Growth Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 1995 5.74% '96 3.89% '97 -37.70% '98 -10.40% '99 66.09% 2000 -33.46% '01 -27.42%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS 1.76%. During the periods shown in the bar chart, the highest return for a calendar quarter was 25.61% (quarter ended December 31, 1998) and the lowest return for a calendar quarter was -27.57% (quarter ended December 31, 1997).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) -------------------------------------------------------------------------------------------------- LIFE OF PORTFOLIO PAST 1 YEAR PAST 5 YEARS (SINCE 02/23/94) -------------------------------------------------------------------------------------------------- The Pacific Growth Portfolio -27.42% -14.85% -9.45% -------------------------------------------------------------------------------------------------- MSCI World Index(1) -16.82% 5.37% 7.70% --------------------------------------------------------------------------------------------------
1 THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD INDEX MEASURES PERFORMANCE FROM A DIVERSE RANGE OF GLOBAL STOCK MARKETS INCLUDING SECURITIES REPRESENTATIVE OF THE MARKET STRUCTURE OF 22 DEVELOPED MARKET COUNTRIES IN NORTH AMERICA, EUROPE AND THE ASIA/ PACIFIC REGION. THE PERFORMANCE OF THE INDEX IS LISTED IN U.S. DOLLARS AND ASSUMES REINVESTMENT OF NET DIVIDENDS. "NET DIVIDENDS" REFLECTS A REDUCTION IN DIVIDENDS AFTER TAKING INTO ACCOUNT WITHHOLDING OF TAXES BY CERTAIN FOREIGN COUNTRIES REPRESENTED IN THE INDEX. THE INDEX DOES NOT INCLUDE ANY EXPENSES, FEES OR CHARGES. THE INDEX IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT.
29 [Sidebar] CAPITAL GROWTH An investment objective having the goal of selecting securities with the potential to rise in price. [End Sidebar] The Equity Portfolio [ICON] INVESTMENT OBJECTIVES - -------------------------------------------------------------------------------- The Equity Portfolio seeks as a primary objective growth of capital through investments in common stocks of companies believed by the Investment Manager to have potential for superior growth. As a secondary objective the Equity Portfolio seeks income but only when consistent with its primary objective. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in equity securities and securities convertible into equity securities. In selecting investments, the "Investment Manager," Morgan Stanley Investment Advisors Inc., may employ valuation models based on various economic and market indicators. The Investment Manager currently utilizes a process, known as sector rotation, that emphasizes industry selection over individual company selection. The Investment Manager invests in those industries that it believes will have the strongest relative earnings growth potential given the projected economic outlook. After selecting the Portfolio's target industries, the Investment Manager then selects specific companies within those industries whose prospects are deemed attractive after assessing company fundamentals and valuation screens. The Investment Manager utilizes a sector rotation process designed to respond to changing economic cycles by proactively investing in industries that the Investment Manager believes to be positioned to benefit from the current phase of the economic cycle. First, the Investment Manager attempts to identify at what stage of the business cycle the economy is in and which industries have historically outperformed the overall market during that stage of the cycle. To accomplish that task, the Investment Manager establishes an economic forecast based on its short term and long term views of the domestic and global economic cycles. As part of this process, the Investment Manager will attempt to identify secular trends, such as shifting demographics or technological developments, that could add clarity to its analysis. Also considered are competitive industry variables, such as supply and demand, pricing trends and new product cycles. The Portfolio may invest up to 20% of its assets in corporate debt securities (including zero coupon securities) rated Aa or better by Moody's or AA or better by S&P, U.S. government securities, issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities, and preferred stocks. The Portfolio may invest in securities of Canadian issuers registered under the Securities Exchange Act of 1934 or American Depositary Receipts. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objectives. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of investment in the Portfolio is associated with the Portfolio's investments in common stock. In particular the price of common stocks may fluctuate widely in response to activities specific to the company as well as general market, economic and political conditions. Stocks of small and medium capitalization companies in which the Portfolio may invest pose greater risk of volatility than is customarily associated with larger established companies as well as certain other additional risks. The Portfolio's emphasis on industries may cause its performance 30 [Sidebar] ANNUAL TOTAL RETURNS This chart shows how the performance of the Portfolio's Class X shares has varied from year to year over the past 10 calendar years. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class X shares with those of a broad measure of market performance over time. [End Sidebar] to be more sensitive to developments affecting particular industries than that of a fund which places greater emphasis on individual companies. Another principal risk relates to the Portfolio's investments in fixed-income securities. Fixed-income securities involve credit risk and interest rate risk. Credit risk relates to the possibility that an issuer could default on its obligation to pay principal and/or interest. Interest rate risk relates to the possibility that the value of securities may be adversely affected by fluctuations in interest rates. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Equity Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 1992 0.05% '93 19.72% '94 -4.91% '95 42.53% '96 12.36% '97 37.43% '98 30.45% '99 58.59% 2000 -12.35% '01 -26.87%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS -0.02%. During the periods shown in the bar chart, the highest return for a calendar quarter was 38.61% (quarter ended December 31, 1999) and the lowest return for a calendar quarter was -20.81% (quarter ended March 31, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) -------------------------------------------------------------------------------------------------- PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS -------------------------------------------------------------------------------------------------- The Equity Portfolio -26.87% 12.75% 12.76% -------------------------------------------------------------------------------------------------- S&P 500 Index(1) -11.88% 10.70% 12.93% --------------------------------------------------------------------------------------------------
1 THE STANDARD AND POOR'S 500 INDEX (S&P 500-REGISTERED TRADEMARK-) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON 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.
31 [Sidebar] TOTAL RETURN An investment objective having the goal of selecting securities with the potential to rise in price and pay out income. [End Sidebar] The S&P 500 Index Portfolio [ICON] INVESTMENT OBJECTIVE - -------------------------------------------------------------------------------- The S&P 500 Index Portfolio seeks to provide investment results that before expenses, correspond to the total return (I.E., the combination of capital changes and income) of the Standard & Poor's-Registered Trademark- 500 Composite Stock Price Index ("S&P 500 Index"). [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in common stocks included in the S&P 500 Index. The "Investment Manager," Morgan Stanley Investment Advisors Inc., "passively" manages the Portfolio's assets by investing in stocks in approximately the same proportion as they are represented in the S&P 500 Index. For example, where the common stock of a specific company represents five percent of the Index, the Investment Manager typically will invest five percent of the Portfolio's assets in that stock. The S&P 500 Index is a well-known stock market index that includes common stocks of 500 companies representing a significant portion of the market value of all common stocks publicly traded in the United States. The Portfolio may purchase and sell stock index futures to simulate investment in the S&P 500. Generally stock index futures may be employed to provide liquidity necessary to meet anticipated redemptions or for day-to-day operating purposes. The Portfolios may invest in securities referred to as SPDRs (known as "spiders") that are designed to track the S&P 500 Index. SPDRs represent an ownership interest in the SPDR Trust, which holds a portfolio of common stocks that closely tracks the price performance and dividend yield of the S&P 500 Index. SPDRs trade on the American Stock Exchange like shares of common stock. The Portfolio may invest up to 10% of its total assets in the aggregate in SPDRs. --------------------------------------- "Standard & Poor's-Registered Trademark-," "S&P-Registered Trademark-," "S&P 500-Registered Trademark-," "Standard & Poor's 500," and "500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by the S&P 500 Index Portfolio. The Portfolio is not sponsored, endorsed, sold or promoted by S&P, and S&P makes no representation regarding the advisability of investing in the Portfolio. (Please see the Statement of Additional Information which sets forth certain additional disclaimers and limitations of liabilities on behalf of S&P.) [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objective. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of investing in the Portfolio is associated with its common stock investments. In general, stock values fluctuate in response to activities specific to the issuer, as well as general market, economic and political conditions. Stock prices can fluctuate widely in response to these factors. Another risk of investing in the Portfolio arises from its operation as a "passively" managed index fund. As such, the adverse performance of a particular stock ordinarily will not result in the elimination of the stock from the Portfolio. The Portfolio will remain invested in common stocks even when stock prices are generally falling. Ordinarily, the Investment Manager will not sell the Portfolio's securities except to reflect additions or deletions of the stocks that comprise the S&P 500 Index, or as may be necessary to raise cash to pay Portfolio shareholders who sell (redeem) Portfolio shares. 32 [Sidebar] ANNUAL TOTAL RETURNS This chart shows how the performance of the Portfolio's Class X shares has varied from year to year over the past 3 calendar years. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class X shares with those of a broad measure of market performance over time. [End Sidebar] The performance of the S&P 500 Index is a hypothetical number which does not take into account brokerage commissions and other transaction costs, custody and other costs of investing which will be borne by the Portfolio and any incremental operating costs borne by the Portfolio (E.G., management fee, transfer agency and accounting costs). Accordingly, the performance of the Portfolio may not correlate directly with the performance of the S&P 500 Index. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the S&P 500 Index Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 1999 20.23% 2000 -9.38% '01 -12.23%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS 0.10%. During the periods shown in the bar chart, the highest return for a calendar quarter was 21.30% (quarter ended December 31, 1998) and the lowest return for a calendar quarter was -14.75% (quarter ended September 30, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) ------------------------------------------------------------------ LIFE OF THE PORTFOLIO PAST 1 YEAR (SINCE 5/18/98) ------------------------------------------------------------------ The S&P 500 Index Portfolio -12.23% 1.96% ------------------------------------------------------------------ S&P 500 Index(1) -11.88% 2.36% ------------------------------------------------------------------
1 THE STANDARD AND POOR'S 500 INDEX (S&P 500-REGISTERED TRADEMARK- INDEX) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON 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.
33 [Sidebar] CAPITAL GROWTH An investment objective having the goal of selecting securities with the potential to rise in price rather than pay out income. [End Sidebar] The Competitive Edge "Best Ideas" Portfolio [ICON] INVESTMENT OBJECTIVE - -------------------------------------------------------------------------------- The Competitive Edge "Best Ideas" Portfolio seeks long-term capital growth. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in common stock of companies included in the "Best Ideas" subgroup of "Global Investing: The Competitive Edge," a research compilation assembled by Morgan Stanley Equity Research -- and other securities selected by the Portfolio's "Investment Manager," Morgan Stanley Investment Advisors Inc. The Competitive Edge "Best Ideas" List. Morgan Stanley Equity Research is recognized as a world leader in global financial research and provides comprehensive research and in-depth knowledge about general markets and specific companies from around the world. It believes that companies with a sustainable competitive edge in the operations of their businesses are worth more than their weaker competitors. Through its ongoing research and analysis, Morgan Stanley Equity Research has developed and undertaken a comprehensive study which it calls "Global Investing: The Competitive Edge" which represents the list of those companies. Morgan Stanley Equity Research group's research analysts and strategists presently evaluate approximately 2,100 companies in 21 industry sectors worldwide. An initial comprehensive review was conducted in October 1996 and identified 238 of these companies as having a long-term sustainable competitive advantage in the global arena (the "Competitive Edge List"). The criteria used to select companies that have a global competitive advantage vary according to industry sector. The Competitive Edge List is currently updated periodically. From the Competitive Edge List, Morgan Stanley Equity Research then assembles a subgroup of approximately 40 companies which it considers at that time to be the most attractive investment opportunities of the companies identified as having a long-term sustainable competitive advantage in the global arena (the "Competitive Edge 'Best Ideas' List"). The Competitive Edge "Best Ideas" List is updated continuously. It is the intention of the Investment Manager that generally at least 1% and not more than 5% of the Portfolio's net assets will be invested in each company on the Competitive Edge "Best Ideas" List. The Portfolio will purchase any security which is added to the Competitive Edge "Best Ideas" List, and generally will sell a security which is eliminated from the Competitive Edge "Best Ideas" List as soon as practicable after the Competitive Edge "Best Ideas" List has been updated by Morgan Stanley Equity Research. Accordingly, securities may be purchased and sold by the Portfolio when such purchases and sales would not be made under traditional investment criteria. The Portfolio may at times purchase securities that are not included on the Competitive Edge "Best Ideas" List but are on the Competitive Edge List or, in the event that the Investment 34 Manager believes that there are no suitable securities on the Competitive Edge List, the Portfolio may purchase securities outside the list. Securities that are not on the Competitive Edge "Best Ideas" List generally will not exceed 20% of the Portfolio's assets. The Portfolio's investments may include forward currency contracts which involve the purchase or sale of a specific amount of foreign currency at a specified price with delivery at a specified future date. The Portfolio may use these contracts to hedge against adverse price movements in its portfolio securities and the currencies in which they are denominated. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objective. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of investment in the Portfolio is associated with the Portfolio's investments in common stocks. In particular the prices of common stocks may fluctuate widely in response to activities specific to the company as well as general market, economic and political conditions. The Portfolio invests principally in securities included on the Competitive Edge "Best Ideas" List which currently consists of 40 companies. As a result of the small universe of stocks in which the Portfolio invests it may be subject to greater risks than would a more diversified company. At times the Portfolio may be restricted in its ability to purchase or sell securities on the Competitive Edge "Best Ideas" List as a result of activities of affiliates of the Investment Manager. In addition, performance of the securities included in the List cannot be used to predict the performance of the Portfolio, an actively managed mutual fund. The Competitive Edge "Best Ideas" List is not compiled with any particular client or product in mind and is not, and will not be, compiled with the Portfolio in mind. When selecting the companies for the list, Morgan Stanley Equity Research does not take into account country or currency risks, and country or industry sector diversification concerns. Morgan Stanley publishes other lists of recommended securities that could be appropriate for Portfolio investors but which will not be used by the Investment Manager for choosing securities for the Portfolio. Morgan Stanley Equity Research could at any time cease publishing the Competitive Edge "Best Ideas" List. In that event the Board of Trustees will make a determination of how to proceed in the best interest of shareholders of the Portfolio consistent with the Portfolio's investment objective. The activities of affiliates of the Investment Manager, including but not limited to Morgan Stanley DW Inc. or Morgan Stanley & Co. Incorporated, may from time to time limit the Portfolio's ability to purchase or sell securities on the Competitive Edge "Best Ideas" List. In addition, the List is available to other clients of Morgan Stanley and its affiliates, including the Investment Manager, as well as the Portfolio. The list is also subject to restrictions related to Morgan Stanley's other businesses, and particular securities may or may not be on the list due to other business concerns of, or legal restrictions applicable to, Morgan Stanley. 35 [Sidebar] ANNUAL TOTAL RETURNS This chart shows how the performance of the Portfolio's Class X shares has varied from year to year over the past 3 calendar years. [End Sidebar] As a diversified financial services firm, with three primary businesses -- securities, asset management and credit services -- Morgan Stanley provides a wide range of financial services to issuers of securities and investors in securities. Morgan Stanley and others associated with it may create markets or specialize in, have positions in and affect transactions in securities of companies included on its research lists and may also perform or seek to perform investment banking services for those companies. Within the last three years Morgan Stanley may have managed or co-managed public security offerings for companies included on their research lists, and they or their employees may have a long or short position on holdings in the securities, or options on securities, or other related investments of companies included on their research lists. The Portfolio may invest a substantial portion of its assets in foreign securities. Foreign securities investments may be adversely affected by changes in currency exchange rates. In addition, investment in foreign securities may be adversely affected by, among other things, political, social and economic developments abroad. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Competitive Edge "Best Ideas" Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 1999 26.88% 2000 -17.39% '01 -23.33%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS 1.12%. During the periods shown in the bar chart, the highest return for a calendar quarter was 18.60% (quarter ended December 31, 1999) and the lowest return for a calendar quarter was -16.70% (quarter ended March 31, 2001). 36 [Sidebar] AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class X shares with those of a broad measure of market performance over time. [End Sidebar] _AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001)_____
LIFE OF PORTFOLIO PAST 1 YEAR (SINCE 05/18/98) ------------------------------------------------------------------- The Competitive Edge "Best Ideas" Portfolio -23.33% -6.35% ------------------------------------------------------------------- MSCI World Index(1) -16.82% -0.46% -------------------------------------------------------------------
1 THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD INDEX MEASURES PERFORMANCE FROM A DIVERSE RANGE OF GLOBAL STOCK MARKETS INCLUDING SECURITIES REPRESENTATIVE OF THE MARKET STRUCTURE OF 22 DEVELOPED MARKET COUNTRIES IN NORTH AMERICA, EUROPE AND THE ASIA/ PACIFIC REGION. THE PERFORMANCE OF THE INDEX IS LISTED IN U.S. DOLLARS AND ASSUMES REINVESTMENT OF NET DIVIDENDS. "NET DIVIDENDS" REFLECTS A REDUCTION IN DIVIDENDS AFTER TAKING INTO ACCOUNT WITHHOLDING OF TAXES BY CERTAIN FOREIGN COUNTRIES REPRESENTED IN THE INDEX. THE INDEX DOES NOT INCLUDE ANY FEES OR CHARGES. THE INDEX IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT.
37 [Sidebar] CAPITAL GROWTH An investment objective having the goal of selecting securities with the potential to rise in price rather than pay out income. [End Sidebar] The Aggressive Equity Portfolio [ICON] INVESTMENT OBJECTIVE - -------------------------------------------------------------------------------- The Aggressive Equity Portfolio seeks long-term capital growth. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in common stocks and other equity securities of companies that the "Investment Manager," Morgan Stanley Investment Advisors Inc., believes offer the potential for superior earnings growth. The Portfolio's other equity securities may include preferred stocks, securities convertible into common stock, rights and warrants. No more than 25% of the Portfolio's net assets may be invested in foreign equity or fixed-income securities denominated in a foreign currency and traded primarily in non-U.S. markets. The Investment Manager utilizes a process, known as sector rotation, that emphasizes industry selection over individual company selection. The Investment Manager invests in those industries that it believes will have the strongest relative earnings growth potential given the projected economic outlook. After selecting the Portfolio's target industries, the Investment Manager selects specific companies within those industries whose prospects are deemed attractive after assessing company fundamentals and valuation screens. Company selection is based on the Investment Manager's own analysis and research reports as well as analysis from the equity research departments of recognized securities firms. The Investment Manager has no general criteria as to the market capitalization or asset size of the companies selected for investment and, accordingly, the Portfolio may invest in small and medium-sized companies in addition to larger, more established companies. The Investment Manager utilizes a sector rotation process designed to respond to changing economic cycles by proactively investing in industries that the Investment Manager believes to be positioned to benefit from the current phase of the economic cycle. First, the Investment Manager attempts to identify at what stage of the business cycle the economy is in and which industries have historically outperformed the overall market during that stage of the cycle. To accomplish that task, the Investment Manager establishes an economic forecast based on its short term and long term views of the domestic and global economic cycles. As part of this process, the Investment Manager will attempt to identify secular trends, such as shifting demographics or technological developments, that could add clarity to its analysis. Also considered are competitive industry variables, such as supply and demand, pricing trends and new product cycles. The Portfolio may invest up to 20% of its assets as follows: - (a) fixed-income securities of U.S. companies, (b) fixed-income securities of foreign companies and governments and international organizations, (c) U.S. government securities, issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities, and (d) real estate investment trusts (commonly known as "REITs"). However, no more than 5% of the Portfolio's assets may be invested in debt securities rated lower than investment grade, or if unrated of comparable quality as determined by the Investment Manager (commonly known as "junk bonds"). 38 - Forward currency contracts, which involve the purchase or sale of a specific amount of foreign currency at a specified price with delivery at a specified future date. The Portfolio may use these contracts to hedge against adverse price movements in its portfolio securities and the currencies in which they are denominated. - Put and call options and futures with respect to financial instruments, stock and interest rate indexes and foreign currencies (limit of 5% of its net assets for the purchase of put and call options). Options and futures may be used to seek higher returns or to seek to protect against a decline in security or currency prices or an increase in prices of securities or currencies that may be purchased. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objective. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of investment in the Portfolio is associated with the Portfolio's investments in common stocks. In particular, the prices of common stocks may fluctuate widely in response to activities specific to the company as well as general market, economic and political conditions. The Portfolio may invest a substantial portion of its assets in securities issued by small and medium sized companies. Investment in small and medium size companies involves greater risk of volatility than is customarily associated with investment in larger established companies as well as certain other additional risks. The Portfolio is subject to the risks associated with foreign securities. These risks include, among other things, the possibility that the Portfolio could be adversely affected by changes in currency exchange rates. The Portfolio is also subject to the risks of investing in convertible securities. These securities may carry risks associated with both common stock and fixed-income securities. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. 39 [Sidebar] ANNUAL TOTAL RETURNS This chart shows how the performance of the Portfolio's Class X shares has varied from year to year over the past 2 calendar years. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class X shares with those of a broad measure of market performance over time. [End Sidebar] [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Aggressive Equity Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 2000 -1.75% '01 -28.46%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS -0.10%. During the periods shown in the bar chart, the highest return for a calendar quarter was 9.65% (quarter ended September 30, 2000) and the lowest return for a calendar quarter was -21.38% (quarter ended March 31, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) ------------------------------------------------------------------ LIFE OF PORTFOLIO PAST 1 YEAR (SINCE 05/04/99) ------------------------------------------------------------------ The Aggressive Equity Portfolio -28.46% 1.00% ------------------------------------------------------------------ S&P 500 Index(1) -11.88% -4.25% ------------------------------------------------------------------
1 THE STANDARD AND POOR'S 500 INDEX (S&P 500-REGISTERED TRADEMARK- INDEX) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON 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.
40 [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 Information Portfolio [ICON] INVESTMENT OBJECTIVE - -------------------------------------------------------------------------------- The Information Portfolio seeks long-term capital appreciation. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in common stocks and other equity securities of companies located throughout the world that are engaged in the communications and information industry. The Portfolio normally holds common stocks and other equity securities of companies located in at least three countries, one of which is the United States. It may invest up to 50% of its net assets in the securities (including depositary receipts) of foreign companies; however, it will not invest more than 25% of its net assets in any one foreign country. In addition, the Portfolio will not invest more than 10% of its assets in convertible securities. In deciding which securities to buy, hold or sell, the "Investment Manager," Morgan Stanley Investment Advisors Inc., considers business, economic and political conditions, as well as the growth potential of the securities. A company is considered to be in the communications and information industry if it derives at least 35% of its revenues or earnings from, or devotes at least 35% of its assets to: - designing, developing, manufacturing, providing or enabling the following products and services: regular telephone service; communications equipment and services; electronic components and equipment; broadcasting; computer equipment, enabling software, mobile communications and cellular radio/paging; electronic mail and other electronic data transmission services; networking and linkage of word and data processing systems; publishing and information systems; video text and teletext; and emerging technologies combining telephone, television and/or computer systems; or - the creation, packaging, distribution, and ownership of entertainment and information programming. The Portfolio may invest up to 20% of its assets in investment grade corporate fixed-income securities and U.S. government securities. The Portfolio's fixed-income investments may include zero coupon securities. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objective. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of investment in the Portfolio is associated with the Portfolio's investments in common stocks. In particular, the prices of common stocks may fluctuate widely in response to activities specific to the company as well as general market, economic and political conditions. The Portfolio concentrates its investments in the communications and information industry. Because of this concentration, the value of the Portfolio's shares may be more volatile than that of mutual funds that do not similarly concentrate their investments. The communications and information industry may be subject to greater changes in governmental policies and 41 governmental regulation than in many other industries in the United States and worldwide. Regulatory approval requirements, ownership restrictions and restrictions on rates of return and types of services that may be offered may materially affect the products and services of this industry. Additionally, the products and services of companies in this industry may be subject to faster obsolescence as a result of greater competition, advancing technological developments, and changing market and consumer preferences. As a result, the securities of companies in this industry may exhibit greater price volatility than those of companies in other industries. The Portfolio is subject to the risks associated with foreign securities. These risks include, among other things, the possibility that the Portfolio could be adversely affected by changes in currency exchange rates. The Portfolio is also subject to the risks of investing in convertible securities. These securities may carry risks associated with both common stock and fixed-income securities. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. 42 [Sidebar] ANNUAL TOTAL RETURNS This chart shows the performance of the Portfolio's Class X shares for the past calendar year. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class X shares with those of a broad measure of market performance over time. [End Sidebar] [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Information Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 2001 -42.87%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS -9.42%. During the period shown in the bar chart, the highest return for a calendar quarter was 32.42% (quarter ended December 31, 2001) and the lowest return for a calendar quarter was -38.45% (quarter ended March 31, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) ------------------------------------------------------------------ LIFE OF PORTFOLIO PAST 1 YEAR (SINCE 11/6/00) ------------------------------------------------------------------ The Information Portfolio -42.87% -42.25% ------------------------------------------------------------------ S&P 500 Index(1) -11.88% -16.38% ------------------------------------------------------------------
43 1 THE STANDARD AND POOR'S 500 INDEX (S&P 500-REGISTERED TRADEMARK- INDEX) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON 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.
44 [Sidebar] TOTAL RETURN An investment objective having the goal of selecting securities with the potential to rise in price and pay out income. [End Sidebar] The Strategist Portfolio [ICON] INVESTMENT OBJECTIVE - -------------------------------------------------------------------------------- The Strategist Portfolio seeks high total investment return through a fully managed investment policy utilizing equity, fixed-income and money market securities and the writing of covered call and put options. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The "Investment Manager," Morgan Stanley Investment Advisors Inc., will actively allocate the Portfolio's assets among the major asset categories of equity securities, fixed-income securities and money market instruments. Assets are allocated by the Investment Manager based on among other things, its assessment of economic and market trends on different sectors of the market. There is no limit as to the percentage of assets that may be allocated to any one asset class. The Investment Manager does not, however, currently intend to write covered call or put options. Within the equity sector, the Investment Manager actively allocates funds to those economic sectors it expects to benefit from major trends and to individual stocks which it considers to have superior investment potential. Within the fixed-income sector of the market, the Investment Manager seeks to maximize the return on its investments by adjusting maturities and coupon rates as well as by exploiting yield differentials among different types of investment grade bonds, including short-term and intermediate-term bonds. Within the money market sector of the market, the Investment Manager seeks to maximize returns by exploiting spreads among short-term instruments. Securities in which the Portfolio may invest include common stocks, preferred stocks, convertible securities, investment grade debt securities (including zero coupon securities), U.S. government securities, mortgage-backed securities, including CMOs, asset-backed securities, real estate investment trusts (commonly known as "REITs") and money market instruments. The Portfolio is not limited as to the maturities of the U.S. government securities and other debt securities in which it may invest. The Portfolio may invest up to 20% of its assets in securities issued by foreign governments and foreign private issuers but not more than 10% of its assets in securities denominated in a foreign currency. The Portfolio may also invest in futures with respect to financial instruments and interest rate indexes. The Portfolio may use futures to facilitate allocation of the Portfolio's investments among asset classes, to increase or decrease the Portfolio's exposure to a bond market or to seek to protect against a decline in securities or an increase in prices of securities that may be purchased. Mortgage-Backed Securities. Certain of the securities in which the Portfolio may invest are mortgage-backed securities. One type of mortgage-backed security, in which the Portfolio may invest, is a mortgage pass-through security. These securities represent a participation interest in a pool of mortgage loans originated by U.S. Governmental or private lenders such as banks. They differ from conventional debt securities, which provide for periodic payment of interest in fixed amounts and principal payments at maturity or on specified call dates. Mortgage pass-through securities provide for monthly payment that are a "pass-through" of the monthly interest and 44 principal payments made by the individual borrowers on the pooled mortgage loans. Mortgage pass-through securities may be collateralized by mortgages with fixed rates of interest or adjustable rates. Collateralized Mortgage Obligations ("CMOs"). CMOs are debt obligations collateralized by mortgage loans or mortgage pass-through securities (collectively "Mortgage Assets"). Payments of principal and interest on the Mortgage Assets and any reinvestment income are used to make payments on the CMOs. CMOs are issued in multiple classes. Each class has a specific fixed or floating coupon rate and a stated maturity or final distribution date. The principal and interest on the Mortgage Assets may be allocated among the classes in a number of different ways. Certain classes will, as a result of the allocation, have more predictable cash flows than others. As a general matter, the more predictable the cash flow, the lower the yield relative to other Mortgage Assets. The less predictable the cash flow, the higher the yield and the greater the risk. The Portfolio may invest in any class of CMO. Asset-Backed Securities. The Portfolio may also invest in asset-backed securities. Asset-backed securities represent an interest in a pool of assets such as automobile and credit card receivables or home equity loans that have been securitized in pass through structures similar to mortgage-backed securities. These types of pass through securities provide for monthly payments that are a "pass through" of the monthly interest and principal payments made by the individual borrowers on the pooled receivables. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objective. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of investment in the Portfolio is associated with the Portfolio's investments in common stocks. In particular, the prices of common stocks may fluctuate widely in response to activities specific to the company as well as general market, economic and political conditions. The Portfolio's investment in fixed-income securities are subject to credit risk and interest rate risk. Credit risk refers to a possibility that the issuer of a security will be unable to make interest payments and/or repay the principal on its debts. Interest rate risk refers to fluctuations in the value of a fixed-income security resulting from changes in the general level of interest rates. There are also particular risks associated with the Portfolio's investments in mortgage-backed securities, which include CMOs, and asset-backed securities. For example, mortgage-backed securities and asset-backed securities are subject to prepayment risk and in some cases may be more volatile and less liquid than other traditional types of debt securities. There are also particular risks associated with the Portfolio's investments in futures. Positions in futures contracts may be closed out only on an exchange which provides a secondary market for such futures. However, there can be no assurance that a liquid secondary market will exist for any particular futures contract at any specific time. The inability to close out a futures contract could have an adverse impact on the Portfolio's ability to hedge effectively. Additionally, the Portfolio's use of futures involves the risk of imperfect or no correlation where the securities underlying futures contracts have different maturities than the securities that are the subject of the hedge. 45 [Sidebar] ANNUAL TOTAL RETURNS This chart shows how the performance of the Portfolio's Class X shares has varied from year to year over the past 10 calendar years. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class X shares with those of broad measures of market performance over time. [End Sidebar] The Portfolio is also subject to the risks of investing in convertible securities. These securities may carry risks associated with both common stock and fixed-income securities. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Strategist Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 1992 7.24% '93 10.38% '94 3.94% '95 9.40% '96 15.02% '97 13.71% '98 26.55% '99 17.35% 2000 1.64% '01 -10.18%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS 1.48%. During the periods shown in the bar chart, the highest return for a calendar quarter was 17.60% (quarter ended December 31, 1998) and the lowest return for a calendar quarter was -10.21% (quarter ended March 31, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) -------------------------------------------------------------------------------------------------- PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS -------------------------------------------------------------------------------------------------- The Strategist Portfolio -10.18% 9.04% 9.09% -------------------------------------------------------------------------------------------------- S&P 500 Index(1) -11.88% 10.70% 12.93% -------------------------------------------------------------------------------------------------- Lehman Brothers U.S. Government/Credit Index(2) 8.50% 7.37% 7.27% --------------------------------------------------------------------------------------------------
1 THE STANDARD AND POOR'S 500 INDEX (S&P 500-REGISTERED TRADEMARK- INDEX) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON 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. 2 THE LEHMAN BROTHERS U.S. GOVERNMENT/CREDIT INDEX (FORMERLY LEHMAN BROTHERS GOVERNMENT/CORPORATE INDEX) TRACKS THE PERFORMANCE OF GOVERNMENT AND CORPORATE OBLIGATIONS, INCLUDING U.S. GOVERNMENT AGENCY AND TREASURY SECURITIES AND CORPORATE AND YANKEE BONDS. THE INDEX DOES NOT INCLUDE ANY EXPENSES, FEES OR CHARGES. THE INDEX IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT.
46 Additional Investment Strategy Information This section provides additional information relating to each Portfolio's principal investment strategies. Investment Discretion. In pursuing each Portfolio's investment objective, the Investment Manager 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 Investment Manager in its discretion may determine to use some permitted trading strategies while not using others. The Sub-Advisor has a similar degree of discretion. Defensive Investing. Each Portfolio (other than the Money Market Portfolio and the S&P 500 Index Portfolio) may take temporary "defensive" positions in attempting to respond to adverse market conditions. Each Portfolio may invest any amount of its assets in cash or money market instruments in a defensive posture when the Investment Manager or Sub-Advisor, as the case may be, believes it advisable to do so. Although taking a defensive posture is designed to protect the Portfolio from an anticipated market downturn, it could have the effect of reducing the benefit of an upswing in the market. When a Portfolio takes a defensive position, it may not achieve its investment objective(s). Investment Policies. The percentage limitations relating to the composition of a Portfolio apply at the time a Portfolio acquires an investment. Subsequent percentage changes that result from market fluctuations will generally not require a Portfolio to sell any Portfolio security. However, a Portfolio may be required to sell its illiquid securities holdings, if any, in response to fluctuations in the value of such holdings. A Portfolio may change its principal investment strategies without shareholder approval; however you would be notified of any changes. Portfolio Turnover. Each Portfolio (other than the S&P 500 Index Portfolio and the Competitive Edge "Best Ideas" Portfolio) may engage in active and frequent trading of its portfolio securities. The Financial Highlights Table at the end of this PROSPECTUS shows recent portfolio turnover rates for each Portfolio. A portfolio turnover rate of 200%, for example, is equivalent to the Portfolio buying and selling all of its securities two times during the course of the year. A high portfolio turnover rate (over 100%) could result in high brokerage costs. 47 Additional Risk Information This section provides additional information relating to the principal risks of investing in the Portfolios. Shares of the Portfolios are not bank deposits and are not guaranteed or insured by the FDIC or any other government agency. * * * The risks set forth below are applicable to a Portfolio only to the extent the Portfolio invests in the investment described. See "The Portfolios" for a description of the investments which each Portfolio may make. 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 prices of most fixed-income securities go down. When the general level of interest rates goes down, the prices of most fixed-income securities go up. (Zero coupon securities are typically subject to greater price fluctuations than comparable securities that pay interest.) Accordingly, a rise in the general level of interest rates may cause the price of a Portfolio's fixed-income securities to fall substantially. As merely illustrative of the relationship between fixed-income securities and interest rates, the following table shows how interest rates affect bond prices.
PRICE PER $100 OF A BOND IF INTEREST RATES: ------------------------------------- HOW INTEREST RATES AFFECT BOND PRICES INCREASE DECREASE ------------------------------------------------------ ------------- --------------- BOND MATURITY YIELD 1% 2% 1% 2% -------------------------------------------------------------------------------------------------- 1 year 2.04% $99 $98 $101 $102 -------------------------------------------------------------------------------------------------- 5 years 4.30% $96 $92 $105 $109 -------------------------------------------------------------------------------------------------- 10 years 5.05% $93 $86 $108 $117 -------------------------------------------------------------------------------------------------- 30 years 5.65% $87 $77 $115 $135 --------------------------------------------------------------------------------------------------
YIELDS ON TREASURY SECURITIES ARE AS OF DECEMBER 31, 2001. THE TABLE IS NOT REPRESENTATIVE OF PRICE CHANGES FOR MORTGAGE-BACKED SECURITIES PRINCIPALLY BECAUSE OF PREPAYMENTS, AND IT IS NOT REPRESENTATIVE OF JUNK BONDS. IN ADDITION, THE TABLE IS AN ILLUSTRATION AND DOES NOT REPRESENT EXPECTED YIELDS OR SHARE PRICE CHANGES OF ANY MORGAN STANLEY MUTUAL FUND. Maturity and Duration. Traditionally, a debt security's term-to-maturity has been used as an indicator for the sensitivity of the security's price to changes in interest rates (which is the interest rate risk or volatility of the security). However, term-to-maturity measures only the time until a debt security provides its final payment, taking no account of the pattern of the security's payments prior to maturity. Duration is a measure of the expected life of a fixed income security that was developed as a more precise measure of interest rate sensitivity than term-to-maturity. A portfolio with a lower average duration generally should experience less price volatility in response to changes in interest rates than a portfolio with a higher average duration. Duration incorporates a bond's yield, coupon interest payments, final maturity and call features into one measure. Duration is one of the fundamental tools used by the Investment Manager in the selection of fixed income securities. Duration takes the length of the time intervals between the present time and the time 48 that the interest and the principal payments are scheduled or, in the case of a callable bond, expected to be received, and weights them by the present values of the cash to be received at each future point in time. For any fixed income security with interest payments occurring prior to the payment of principal, duration is always less than maturity. There are some situations where even the standard duration calculation does not properly reflect the interest rate exposure of a security. For example, floating and variable rate securities often have final maturities of ten or more years; however; their interest rate exposure corresponds to the frequency of the coupon reset. Another example where the interest rate exposure is not properly captured by duration is the case of mortgage pass-through securities. The stated final maturity of such securities generally is thirty years, but current prepayment rates are more critical in determining the securities' interest rate exposure. In these and other similar situations, the Investment Manager will use analytical techniques that incorporate the economic life of a security into the determination of its interest rate exposure. Mortgage-Backed Securities. Mortgage-backed securities have different risk characteristics than traditional debt securities. Although generally the value of fixed-income securities increases during periods of falling interest rates and decreases during periods of rising interest rates, this is not always the case with mortgage-backed securities. This is due to the fact that principal on underlying mortgages may be prepaid at any time as well as other factors. Generally, prepayments will increase during a period of falling interest rates and decrease during a period of rising interest rates. The rate of prepayments also may be influenced by economic and other factors. Prepayment risk includes the possibility that, as interest rates fall, securities with stated interest rates may have the principal prepaid earlier than expected, requiring the Fund to invest the proceeds at generally lower interest rates. Investments in mortgage-backed securities are made based upon, among other things, expectations regarding the rate of prepayments on underlying mortgage pools. Rates of prepayment, faster or slower than expected by the Investment Manager, could reduce a Portfolio's yield, increase the volatility of the Portfolio and/or cause a decline in net asset value. Certain mortgage-backed securities in which a Portfolio may invest may be more volatile and less liquid than other traditional types of debt securities. Collateralized Mortgage Obligations ("CMOs"). The principal and interest on the Mortgage Assets comprising a CMO may be allocated among the several classes of a CMO in many ways. The general goal in allocating cash flows on Mortgage Assets to the various classes of a CMO is to create certain tranches on which the expected cash flows have a higher degree of predictability than do the underlying Mortgage Assets. As a general matter, the more predictable the cash flow is on a particular CMO tranche, the lower the anticipated yield on that tranche at the time of issue will be relative to prevailing market yields on Mortgage Assets. As part of the process of creating more predictable cash flows on certain tranches of a CMO, one or more tranches generally must be created that absorb most of the changes in the cash flows on the underlying Mortgage Assets. The yields on these tranches are generally higher than prevailing market yields on other mortgage related securities with similar average lives. Principal prepayments on the underlying Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated maturities or final scheduled distribution dates. Because of the uncertainty of the cash flows on these tranches, the market prices and yields of these tranches are more volatile and may increase or decrease in value substantially with changes in interest rates 49 and/or the rates of prepayment. Due to the possibility that prepayments (on home mortgages and other collateral) will alter the cash flow on CMOs, it is not possible to determine in advance the actual final maturity date or average life. Faster prepayment will shorten the average life and slower prepayment will lengthen it. In addition, if the collateral securing CMOs or any third party guarantees are insufficient to make payments, a Portfolio could sustain a loss. Asset-Backed Securities. Asset-backed securities have risk characteristics similar to mortgage-backed securities. Like mortgage-backed securities, they generally decrease in value as a result of interest rate increases, but may benefit less than other fixed-income securities from declining interest rates, principally because of prepayments. Also, as in the case of mortgage-backed securities, prepayments generally increase during a period of declining interest rates although other factors, such as changes in credit card use and payment patterns, may also influence prepayment rates. Asset-backed securities also involve the risk that various federal and state consumer laws and other legal and economic factors may result in the collateral backing the securities being insufficient to support payment on the securities. Junk Bonds. A Portfolio's investments in securities rated lower than investment grade or if unrated of comparable quality as determined by the Investment Manager or Sub-Advisor (commonly known as "junk bonds") pose significant risks. The prices of junk bonds are likely to be more sensitive to adverse economic changes or individual corporate developments than higher rated securities. During an economic downturn or substantial period of rising interest rates, junk bond issuers and, in particular, highly leveraged issuers may experience financial stress that would adversely affect their ability to service their principal and interest payment obligations, to meet their projected business goals or to obtain additional financing. In the event of a default, the Portfolio may incur additional expenses to seek recovery. The secondary market for junk bonds 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 Rule 144A securities could have the effect of increasing the level of Portfolio illiquidity to the extent a Portfolio may be unable to find qualified institutional buyers interested in purchasing the securities. The illiquidity of the market may also adversely affect the ability of the Fund's Trustees to arrive at a fair value for certain junk bonds at certain times and could make it difficult for the Portfolios to sell certain securities. In addition, periods of economic uncertainty and change probably would result in an increased volatility of market prices of high yield securities and a corresponding volatility in a Portfolio's net asset value. Securities Rated in the Lowest Investment Grade Category. Investments in the fixed-income securities rated in the lowest investment grade category by Moody's or S&P (Baa by Moody's or BBB by S&P) may have speculative characteristics and therefore changes in economic or other circumstances are more likely to weaken their capacity to make principal and interest payments than would be the case with investments in securities with higher credit ratings. Convertible Securities. A Portfolio's investments in convertible securities (which are securities that generally pay interest and may be converted into common stock, may carry risks associated with both fixed-income securities (discussed above) and common stock. To the extent that a convertible security's investment value is greater than its conversion value, its price will be likely to increase when interest rates fall and decrease when interest rates rise, as with a fixed- 50 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. A Portfolio that may invest in convertible securities may invest up to 5% of its net assets in convertible securities that are below investment grade quality (see "Junk Bonds" above). Foreign Securities. Foreign securities involve risks in addition to the risks associated with domestic securities. One additional risk is currency risk. While the price of Portfolio shares is quoted in U.S. dollars, a Portfolio generally converts U.S. dollars to a foreign market's local currency to purchase a security in that market. If the value of that local currency falls relative to the U.S. dollar, the U.S. dollar value of the foreign security will decrease. This is true even if the foreign security's local price remains unchanged. Foreign securities also have risks related to economic and political developments abroad, including 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 a Portfolio's trades effected in those markets and could result in losses to the Portfolio due to subsequent declines in the value of the securities subject to the trades. A depositary receipt is generally issued by a bank or financial institution and represents an ownership interest in the common stock or other equity securities of a foreign company. Depositary receipts involve substantially identical risks to those associated with direct investment in foreign securities. In addition, the underlying issuers of certain depositary receipts, particularly unsponsored or unregistered depositary receipts, are under no obligation to distribute shareholder communications to the holders of such receipts, or to pass through to them any voting rights with respect to the deposited securities. The foreign securities in which certain of the Portfolios may invest (in particular the Pacific Growth Portfolio) may be issued by companies located in developing countries. Compared to the United States and other developed countries, developing countries may have relatively unstable governments, economies based on only a few industries and securities markets that trade a small number of securities. Prices of these securities tend to be especially volatile and, in the past, securities in these countries have offered greater potential loss (as well as gain) than securities of companies located in developed countries. Small & Medium Capitalization Companies. A Portfolio's investments in smaller and medium sized companies carry more risk than investments in larger companies. While some of a Portfolio's holdings in these companies may be listed on a national securities exchange, such securities are more likely to be traded in the over-the-counter market. The low market liquidity 51 of these securities may have an adverse impact on a Portfolio's ability to sell certain securities at favorable prices and may also make it difficult for a Portfolio to obtain market quotations based on actual trades, for purposes of valuing a Portfolio's securities. Investing in lesser-known, smaller and medium capitalization companies involves greater risk of volatility of a Portfolio's net asset value than is customarily associated with larger, more established companies. Often smaller and medium capitalization companies and the industries in which they are focused are still evolving and, while this may offer better growth potential than larger, more established companies, it also may make them more sensitive to changing market conditions. Options and Futures. If a Portfolio invests in options and/or futures, its participation in these markets would subject the Portfolio to certain risks. The Investment Manager's or the Sub-Advisor's predictions of movements in the direction of the stock, bond, currency or interest rate markets may be inaccurate, and the adverse consequences to the Portfolio (e.g., a reduction in the Portfolio's net asset value or a reduction in the amount of income available for distribution) may leave the Portfolio in a worse position than if these strategies were not used. Other risks inherent in the use of options and futures include, for example, the possible imperfect correlation between the price of options and futures contracts and movements in the prices of the securities being hedged, and the possible absence of a liquid secondary market for any particular instrument. Certain options may be over-the-counter options, which are options negotiated with dealers; there is no secondary market for these investments. Forward Currency Contracts. A Portfolio's participation in forward currency contracts also involves risks. If the Investment Manager or Sub-Advisor employs a strategy that does not correlate well with the Portfolio's investments or the currencies in which the investments are denominated, currency contracts could result in a loss. The contracts also may increase the Portfolio's volatility and may involve a significant risk. Real Estate Investment Trusts ("REITs"). REITs pool investors funds for investments primarily in commercial real estate properties. Like mutual funds, REITs have expenses, including advisory and administration fees that are paid by its shareholders. As a result, you will absorb duplicate levels of fees when a Portfolio invests in REITs. The performance of any Portfolio REIT holdings ultimately depends on the types of real property in which the REITs invest and how well the property is managed. A general downturn in real estate values also can hurt REIT performance. 52 [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 March 31, 2002. [End Sidebar] Portfolio Management Morgan Stanley Investment Advisors Inc. is the Investment Manager to each Portfolio. Each Portfolio has retained the Investment Manager to provide administrative services, manage its business affairs and (except for the Pacific Growth and European Growth Portfolios) invest its 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. Each of the Pacific Growth and European Growth Portfolios has retained the Investment Manager to supervise the investment of its assets. The Investment Manager has, in turn, contracted with the Sub-Advisor -- Morgan Stanley Investment Management Inc. -- to invest each Portfolio's assets, including the placing of orders for the purchase and sale of portfolio securities. The Sub-Advisor also is a subsidiary of Morgan Stanley Dean Witter & Co. Its main business office is located at 1221 Avenue of the Americas, New York, NY 10020. Each Portfolio pays the Investment Manager a monthly management fee as full compensation for the services and facilities furnished to each Portfolio, and for Portfolio expenses assumed by the Investment Manager. The fee is based on the Portfolio's average daily net assets. For the fiscal year ended December 31, 2001, each Portfolio accrued total compensation to the Investment Manager as set forth in the following table.
MANAGEMENT FEES AS A PERCENTAGE OF AVERAGE NAME OF PORTFOLIO DAILY NET ASSETS ------------------------------------------------------------------------------------ The Money Market Portfolio 0.50% ------------------------------------------------------------------------------------ The Limited Duration Portfolio 0.45%(1) ------------------------------------------------------------------------------------ The Quality Income Plus Portfolio 0.50% ------------------------------------------------------------------------------------ The High Yield Portfolio 0.50% ------------------------------------------------------------------------------------ The Utilities Portfolio 0.65% ------------------------------------------------------------------------------------ The Income Builder Portfolio 0.75% ------------------------------------------------------------------------------------ The Dividend Growth Portfolio 0.54% ------------------------------------------------------------------------------------ The Capital Growth Portfolio 0.65% ------------------------------------------------------------------------------------ The Global Dividend Growth Portfolio 0.75% ------------------------------------------------------------------------------------ The European Growth Portfolio 0.95%(2) ------------------------------------------------------------------------------------ The Pacific Growth Portfolio 0.95%(2) ------------------------------------------------------------------------------------ The Equity Portfolio 0.49% ------------------------------------------------------------------------------------ The S&P 500 Index Portfolio 0.40%(3) ------------------------------------------------------------------------------------ The Competitive Edge "Best Ideas" Portfolio 0.65% ------------------------------------------------------------------------------------ The Aggressive Equity Portfolio 0.75% ------------------------------------------------------------------------------------ The Information Portfolio 0.75%(4) ------------------------------------------------------------------------------------ The Strategist Portfolio 0.50% ------------------------------------------------------------------------------------
1 THE MANAGEMENT FEE SHOWN IN THE TABLE IS THE CONTRACTUAL FEE THAT THE FUND HAS AGREED TO PAY RESPECTING THE LIMITED DURATION PORTFOLIO PURSUANT TO THE FUND'S MANAGEMENT AGREEMENT WITH THE INVESTMENT MANAGER. THE INVESTMENT MANAGER CAPPED ALL OPERATING EXPENSES OF THE LIMITED DURATION PORTFOLIO (EXCEPT FOR BROKERAGE FEES) AT 0.50% OF THE PORTFOLIO'S DAILY NET ASSETS FOR THE PERIOD JUNE 1, 2001 THROUGH DECEMBER 31, 2001. THE ACTUAL MANAGEMENT FEE FOR THE YEAR ENDED DECEMBER 31, 2001 WAS 0.41%. 2 40% OF THE INVESTMENT MANAGER'S COMPENSATION IS PAID TO THE SUB-ADVISOR.
53 3 THE INVESTMENT MANAGER HAS PERMANENTLY UNDERTAKEN TO CAP TOTAL EXPENSES OF THE S&P 500 INDEX PORTFOLIO (OTHER THAN BROKERAGE FEES) AT 0.50% OF AVERAGE DAILY NET ASSETS. 4 THE MANAGEMENT FEE SHOWN IN THE TABLE IS THE CONTRACTUAL FEE THAT THE FUND HAS AGREED TO PAY RESPECTING THE INFORMATION PORTFOLIO PURSUANT TO THE FUND'S MANAGEMENT AGREEMENT WITH THE INVESTMENT MANAGER. THE INVESTMENT MANAGER ASSUMED ALL OPERATING EXPENSES OF THE INFORMATION PORTFOLIO (EXCEPT FOR BROKERAGE FEES) AND WAIVED THE COMPENSATION PROVIDED IN ITS MANAGEMENT AGREEMENT IN RESPECT OF THE INFORMATION PORTFOLIO UNTIL DECEMBER 31, 2001.
The following individuals are primarily responsible for the day-to-day management of certain of the Portfolios of the Fund. Except as otherwise noted, each individual designated as a primary portfolio manager of a particular Portfolio has been a primary portfolio manager of the Portfolio for over five years or since the inception of the Portfolio (if less than five years) and has been a portfolio manager with the Investment Manager or the Sub-Advisor for over five years. Limited Duration Portfolio -- The Portfolio is managed by the Taxable Fixed-Income Group. Current members of the team include David S. Horowitz, a Vice President of the Investment Manager, and Michael M. Luo, a Portfolio Manager of the Investment Manager. Quality Income Plus Portfolio -- The Portfolio is managed by the Taxable Fixed-Income team. Current members of the team include David S. Horowitz, a Vice President of the Investment Manager, and Michael M. Luo, a Portfolio Manager of the Investment Manager. High Yield Portfolio -- The Portfolio is managed by the Taxable Fixed-Income team. Current members of the team include Stephen F. Esser, a Managing Director of the Investment Manager, Gordon W. Loery, an Executive Director of the Investment Manager, and Deanna L. Loughnane, an Executive Director of the Investment Manager. Utilities Portfolio -- Edward F. Gaylor, an Executive Director of the Investment Manager, is the Portfolio's primary portfolio manager responsible for overall asset allocation. The equity portion of the Portfolio is managed by the Utilities team. Current members of the Utilities team include Edward F. Gaylor and Ronald B. Silvestri, a Vice President of the Investment Manager. The fixed-income portion of the Portfolio is managed by the Taxable Fixed-Income team. Gary P. Herbert, a Vice President of the Investment Manager, is a current member of the team. Income Builder Portfolio -- The Portfolio is managed by the Large Cap Value Equity team and Equity Income team. The Large Cap Value Equity team currently includes Paul D. Vance, a Managing Director of the Investment Manager, and Catherine Maniscalco, a Vice President of the Investment Manager. The Equity Income team currently includes Ellen Gold, a Vice President of the Investment Manager. Dividend Growth Portfolio -- The Portfolio is managed by the Large Cap Value Equity team. Current members of the team include Paul Vance, a Managing Director of the Investment Manager, and Richard Behler, an Executive Director of the Investment Manager. Capital Growth Portfolio -- The Portfolio is managed by the Capital Growth team of the Large Cap Growth Equity Group. Current members of the team include Peter Hermann, a Vice President of the Investment Manager, and Gustave Scacco, an Assistant Vice President of the Investment Manager. Global Dividend Growth Portfolio -- The Portfolio is managed by the Large Cap Value Equity team. Current members of the team include Paul D. Vance, a Managing Director of the Investment Manager, and Richard Behler, an Executive Director of the Investment Manager. 54 European Growth Portfolio -- The Portfolio is managed by the European Growth team. Current members of the team include Jeremy Lodwick, a Managing Director of the Sub-Advisor, and Hassan Elmasry, an Executive Director of the Sub-Advisor. Pacific Growth Portfolio -- The Portfolio is managed by the Emerging Markets team and Japan team. Ashutosh Sinha, an Executive Director of the Sub-Advisor, is a current member of the Emerging Markets team. John R. Alkire, a Managing Director of the Sub-Advisor, is a current member of the Japan team. Equity Portfolio -- The Portfolio is managed by the Sector Rotation team. Current members of the team include Michelle Kaufman, a Managing Director of the Investment Manager, and Alison Williams, a Vice President of the Investment Manager. S&P 500 Index Portfolio -- The Portfolio is managed by the Core Growth team. Current members of the team include Guy G. Rutherfurd, Jr., a Managing Director of the Investment Manager, and Kevin Jung, a Vice President of the Investment Manager. Competitive Edge "Best Ideas" Portfolio -- The Portfolio is managed by the Competitive Edge-Best Ideas team of the Sector Fund Equity Group. Current members of the team include Mark Bavoso, a Managing Director of the Investment Manager, and Robert Rossetti, a Vice President of the Investment Manager. Aggressive Equity Portfolio -- The Portfolio is managed by the Sector Rotation team. Current members of the team include Anita Kolleeny, a Managing Director of the Investment Manager, Michelle Kaufman, a Managing Director of the Investment Manager, and Alison Williams, a Vice President of the Investment Manager. Information Portfolio -- The Portfolio is managed by the Information team of the Sector Fund Equity Group. Current members of the team include Armon Bar-Tur, an Executive Director of the Investment Manager, and Thomas Bergeron, a Vice President of the Investment Manager. Strategist Portfolio -- Mark Bavoso, a Managing Director of the Investment Manager, is the Portfolio's primary portfolio manager responsible for overall asset allocation. The equity portion of the Portfolio is managed by the Domestic Asset Allocation team. Mr. Bavoso is a current member of that team. The fixed-income portion of the Portfolio is managed by the Taxable Fixed-Income team. Paul F. O'Brien, an Executive Director of the Investment Manager, is a current member of the team. 55 Shareholder Information [ICON] PRICING FUND SHARES - -------------------------------------------------------------------------------- The price of shares of each Portfolio called "net asset value," is based on the value of its portfolio securities. The net asset value for each Portfolio is calculated once daily at 4:00 p.m. Eastern time on each day 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 each Portfolio's securities (other than the Money Market Portfolio) is based on the securities' market price when available. When a market price is not readily available, including circumstances under which the Investment Manager (or, if applicable, the 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 applicable Portfolio's net asset value will reflect certain portfolio securities' fair value rather than their market price. In addition, with respect to securities that are primarily listed on foreign exchanges, the value of the Portfolio's investment securities may change on days when shareholders will not be able to purchase or sell their shares. An exception to the general policy of using market prices concerns each Portfolio's 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. The Money Market Portfolio utilizes amortized cost in determining the value of its portfolio securities. The amortized cost valuation method involves valuing a debt obligation in reference to its acquisition cost rather than market forces. [ICON] DISTRIBUTIONS - -------------------------------------------------------------------------------- Each Portfolio passes substantially all of its earnings from income and capital gains along to its investors as "distributions." Each Portfolio earns income from stocks and/or interest from fixed-income investments. These amounts are passed along to the appropriate Portfolio investors as "income dividend distributions." Each Portfolio realizes capital gains whenever it sells securities for a higher price than it paid for them. These amounts may be passed along as "capital gains distributions." 56 Dividends from net investment income and capital gains distributions, if any, are declared and paid as follows:
NET REALIZED CAPITAL GAINS DIVIDENDS DISTRIBUTIONS ---------------------------------------------------------------------------------------------- MONEY MARKET PORTFOLIO Declared and paid on each day Declared and paid at least the New York Stock Exchange is once per calendar year, net open to shareholders as of the short-term gains may be paid close of business the more frequently preceding business day ---------------------------------------------------------------------------------------------- LIMITED DURATION, Declared and paid monthly Declared and paid at least QUALITY INCOME PLUS AND once per year HIGH YIELD PORTFOLIOS ---------------------------------------------------------------------------------------------- UTILITIES, INCOME BUILDER, Declared and paid quarterly Declared and paid at least DIVIDEND GROWTH, EQUITY AND once per calendar year STRATEGIST PORTFOLIOS ---------------------------------------------------------------------------------------------- CAPITAL GROWTH, Declared and paid at least Declared and paid at least EUROPEAN GROWTH, once per calendar year once per calendar year GLOBAL DIVIDEND GROWTH, PACIFIC GROWTH, S&P 500 INDEX, COMPETITIVE EDGE "BEST IDEAS," AGGRESSIVE EQUITY AND INFORMATION PORTFOLIOS ----------------------------------------------------------------------------------------------
[ICON] TAX CONSEQUENCES - -------------------------------------------------------------------------------- For information concerning the federal income tax consequences to holders of the underlying variable annuity or variable life insurance contracts, see the accompanying prospectus for the applicable contract. 57 Financial Highlights The financial highlights table is intended to help you understand the financial performance of each Portfolio's Class X and Class Y shares for the periods indicated. The returns for Class Y differ from those of Class X only to the extent that the Classes have different expenses. Class Y shares are offered in a separate Prospectus. Prior to May 1, 2000, the Fund issued one Class of shares of each Portfolio, which, as of that date, have been designated Class X shares. Certain information reflects financial results for a single Portfolio share. The total returns in the tables represent the rate an investor would have earned or lost on an investment in each Portfolio (assuming reinvestment of all dividends and distributions).
NET ASSET VALUE NET NET REALIZED TOTAL FROM BEGINNING INVESTMENT AND UNREALIZED INVESTMENT DIVIDENDS TO YEAR ENDED DECEMBER 31 OF PERIOD INCOME (LOSS) GAIN (LOSS) OPERATIONS SHAREHOLDERS - --------------------------------------------------------------------------------------------------------------------------------- MONEY MARKET CLASS X SHARES 1997 $ 1.00 $0.051 -- $0.051 $(0.051) - --------------------------------------------------------------------------------------------------------------------------------- 1998 1.00 0.051 -- 0.051 (0.051) - --------------------------------------------------------------------------------------------------------------------------------- 1999 1.00 0.047 -- 0.047 (0.047) - --------------------------------------------------------------------------------------------------------------------------------- 2000(a)* 1.00 0.058 -- 0.058 (0.058) - --------------------------------------------------------------------------------------------------------------------------------- 2001* 1.00 0.039 -- 0.039 (0.039)** - --------------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 1.00 0.033 -- 0.033 (0.033) - --------------------------------------------------------------------------------------------------------------------------------- 2001 1.00 0.036 -- 0.036 (0.036)** - --------------------------------------------------------------------------------------------------------------------------------- SHORT-TERM BOND CLASS X SHARES 1999(e) 10.00 0.27 $(0.12) 0.15 (0.27) - --------------------------------------------------------------------------------------------------------------------------------- 2000(a)* 9.88 0.51 0.05 0.56 (0.48) - --------------------------------------------------------------------------------------------------------------------------------- 2001* 9.96 0.40(8) 0.26(8) 0.66 (0.45) - --------------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 9.86 0.28 0.09 0.37 (0.28) - --------------------------------------------------------------------------------------------------------------------------------- 2001 9.95 0.35(8) 0.28(8) 0.63 (0.42) - --------------------------------------------------------------------------------------------------------------------------------- QUALITY INCOME PLUS CLASS X SHARES 1997 10.37 0.70 0.40 1.10 (0.70) - --------------------------------------------------------------------------------------------------------------------------------- 1998 10.77 0.68 0.23 0.91 (0.68) - --------------------------------------------------------------------------------------------------------------------------------- 1999 11.00 0.67 (1.14) (0.47) (0.67) - --------------------------------------------------------------------------------------------------------------------------------- 2000(a)* 9.86 0.68 0.37 1.05 (0.69) - --------------------------------------------------------------------------------------------------------------------------------- 2001* 10.22 0.61(8) 0.34(8) 0.95 (0.62) - --------------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 9.80 0.38 0.42 0.80 (0.39) - --------------------------------------------------------------------------------------------------------------------------------- 2001 10.21 0.57(8) 0.36(8) 0.93 (0.60) - ---------------------------------------------------------------------------------------------------------------------------------
58 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. Further information about the performance of the Portfolios of the Fund is contained in the annual report. See the discussion under the caption "Charges and Other Deductions" in the accompanying prospectus for either the Variable Annuity Contracts or the Variable Life Contracts issued by the applicable insurance company for a description of charges which are applicable thereto. These charges are not reflected in the financial highlights below. Inclusion of any of these charges would reduce the total return figures for all periods shown.
TOTAL NET ASSETS DISTRIBUTIONS TO DIVIDENDS AND NET ASSET VALUE END OF PERIOD YEAR ENDED DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS END OF PERIOD TOTAL RETURN+ (000'S) - --------------------------------------------------------------------------------------------------------- MONEY MARKET CLASS X SHARES 1997 -- $(0.051) $ 1.00 5.23% $335,578 - --------------------------------------------------------------------------------------------------------- 1998 -- (0.051) 1.00 5.18 442,034 - --------------------------------------------------------------------------------------------------------- 1999 -- (0.047) 1.00 4.80 435,643 - --------------------------------------------------------------------------------------------------------- 2000(a)* -- (0.058) 1.00 6.01 358,793 - --------------------------------------------------------------------------------------------------------- 2001* -- (0.039) 1.00 3.94 452,765 - --------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) -- (0.033) 1.00 3.37(1) 13,813 - --------------------------------------------------------------------------------------------------------- 2001 -- (0.036) 1.00 3.68 105,952 - --------------------------------------------------------------------------------------------------------- SHORT-TERM BOND CLASS X SHARES 1999(e) -- (0.27) 9.88 1.56(1) 3,175 - --------------------------------------------------------------------------------------------------------- 2000(a)* -- (0.48) 9.96 5.85 6,427 - --------------------------------------------------------------------------------------------------------- 2001* -- (0.45) 10.17 6.72 25,858 - --------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) -- (0.28) 9.95 3.82(1) 1,430 - --------------------------------------------------------------------------------------------------------- 2001 -- (0.42) 10.16 6.49 25,050 - --------------------------------------------------------------------------------------------------------- QUALITY INCOME PLUS CLASS X SHARES 1997 -- (0.70) 10.77 11.09 474,990 - --------------------------------------------------------------------------------------------------------- 1998 -- (0.68) 11.00 8.67 547,583 - --------------------------------------------------------------------------------------------------------- 1999 -- (0.67) 9.86 (4.32) 456,132 - --------------------------------------------------------------------------------------------------------- 2000(a)* -- (0.69) 10.22 11.09 406,508 - --------------------------------------------------------------------------------------------------------- 2001* -- (0.62) 10.55 9.57 452,757 - --------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) -- (0.39) 10.21 8.31(1) 5,176 - --------------------------------------------------------------------------------------------------------- 2001 -- (0.60) 10.54 9.33 54,115 - --------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS ---------------------------- PORTFOLIO NET INVESTMENT TURNOVER YEAR ENDED DECEMBER 31 EXPENSES INCOME RATE - ---------------------- MONEY MARKET CLASS X SHARES 1997 0.52% 5.10% N/A - ---------------------- 1998 0.52 5.04 N/A - ---------------------- 1999 0.52 4.68 N/A - ---------------------- 2000(a)* 0.52 5.83 N/A - ---------------------- 2001* 0.51 3.69 N/A - ---------------------- CLASS Y SHARES* 2000(b) 0.77(2) 5.86(2) N/A - ---------------------- 2001 0.76 3.44 N/A - ---------------------- SHORT-TERM BOND CLASS X SHARES 1999(e) 0.62(2)(5) 4.83(2)(5) 56%(1) - ---------------------- 2000(a)* 0.98 5.08 16 - ---------------------- 2001* 0.61(7)# 3.84(7)(8) 133 - ---------------------- CLASS Y SHARES* 2000(b) 1.17(2) 5.00(2) 16 - ---------------------- 2001 0.86(7)# 3.59(7)(8) 133 - ---------------------- QUALITY INCOME PLUS CLASS X SHARES 1997 0.53 6.71 171 - ---------------------- 1998 0.52 6.23 152 - ---------------------- 1999 0.52 6.45 119 - ---------------------- 2000(a)* 0.52 6.90 105 - ---------------------- 2001* 0.53 5.82(8) 150 - ---------------------- CLASS Y SHARES* 2000(b) 0.77(2) 6.53(2) 105 - ---------------------- 2001 0.78 5.57(8) 150 - ----------------------
59
NET ASSET VALUE NET NET REALIZED TOTAL FROM BEGINNING INVESTMENT AND UNREALIZED INVESTMENT DIVIDENDS TO YEAR ENDED DECEMBER 31 OF PERIOD INCOME (LOSS) GAIN (LOSS) OPERATIONS SHAREHOLDERS - --------------------------------------------------------------------------------------------------------------------------------- HIGH YIELD CLASS X SHARES 1997 $ 6.18 $0.75 $(0.06) $ 0.69 $(0.75) - --------------------------------------------------------------------------------------------------------------------------------- 1998 6.12 0.71 (1.05) (0.34) (0.71) - --------------------------------------------------------------------------------------------------------------------------------- 1999 5.07 0.68 (0.74) (0.06) (0.68) - --------------------------------------------------------------------------------------------------------------------------------- 2000(a)* 4.33 0.66 (1.90) (1.24) (0.66) - --------------------------------------------------------------------------------------------------------------------------------- 2001* 2.43 0.33(8) (1.09)(8) (0.76) (0.34) - --------------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 3.92 0.37 (1.48) (1.11) (0.38) - --------------------------------------------------------------------------------------------------------------------------------- 2001 2.43 0.32(8) (1.08)(8) (0.76) (0.34) - --------------------------------------------------------------------------------------------------------------------------------- UTILITIES CLASS X SHARES 1997 15.34 0.57 3.46 4.03 (0.57) - --------------------------------------------------------------------------------------------------------------------------------- 1998 18.59 0.57 3.68 4.25 (0.57) - --------------------------------------------------------------------------------------------------------------------------------- 1999 21.25 0.55 2.08 2.63 (0.55) - --------------------------------------------------------------------------------------------------------------------------------- 2000(a)* 22.90 0.49 0.17 0.66 (0.49) - --------------------------------------------------------------------------------------------------------------------------------- 2001* 21.69 0.39(8) (5.74)(8) (5.35) (0.41) - --------------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 22.98 0.24 0.19 0.43 (0.35) - --------------------------------------------------------------------------------------------------------------------------------- 2001 21.68 0.35(8) (5.74)(8) (5.39) (0.37) - --------------------------------------------------------------------------------------------------------------------------------- INCOME BUILDER CLASS X SHARES 1997(c) 10.00 0.44 1.76 2.20 (0.44) - --------------------------------------------------------------------------------------------------------------------------------- 1998 11.76 0.56 (0.19) 0.37 (0.56) - --------------------------------------------------------------------------------------------------------------------------------- 1999 11.46 0.58 0.21 0.79 (0.56) - --------------------------------------------------------------------------------------------------------------------------------- 2000(a)* 11.44 0.55 (0.54) 0.01 (0.56) - --------------------------------------------------------------------------------------------------------------------------------- 2001* 10.86 0.47(8) (0.22)(8) 0.25 (0.50)++ - --------------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 11.15 0.32 (0.21) 0.11 (0.39) - --------------------------------------------------------------------------------------------------------------------------------- 2001 10.85 0.42(8) (0.19)(8) 0.23 (0.48)++ - --------------------------------------------------------------------------------------------------------------------------------- DIVIDEND GROWTH CLASS X SHARES 1997 18.40 0.41 4.20 4.61 (0.41) - --------------------------------------------------------------------------------------------------------------------------------- 1998 21.60 0.41 2.58 2.99 (0.41) - --------------------------------------------------------------------------------------------------------------------------------- 1999 22.13 0.39 (0.55) (0.16) (0.39) - --------------------------------------------------------------------------------------------------------------------------------- 2000(a)* 18.32 0.31 0.02 0.33 (0.33) - --------------------------------------------------------------------------------------------------------------------------------- 2001* 14.50 0.26 (1.02) (0.76) (0.26) - --------------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 17.79 0.12 0.62 0.74 (0.22) - --------------------------------------------------------------------------------------------------------------------------------- 2001 14.49 0.22 (1.01) (0.79) (0.23) - ---------------------------------------------------------------------------------------------------------------------------------
60
TOTAL NET ASSETS DISTRIBUTIONS TO DIVIDENDS AND NET ASSET VALUE END OF PERIOD YEAR ENDED DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS END OF PERIOD TOTAL RETURN+ (000'S) - --------------------------------------------------------------------------------------------------------- HIGH YIELD CLASS X SHARES 1997 -- $(0.75) $ 6.12 11.87% $ 368,061 - --------------------------------------------------------------------------------------------------------- 1998 -- (0.71) 5.07 (6.20) 364,079 - --------------------------------------------------------------------------------------------------------- 1999 -- (0.68) 4.33 (1.33) 279,683 - --------------------------------------------------------------------------------------------------------- 2000(a)* -- (0.66) 2.43 (32.22) 128,646 - --------------------------------------------------------------------------------------------------------- 2001* -- (0.34) 1.33 (33.75) 64,470 - --------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) -- (0.38) 2.43 (30.02)(1) 1,947 - --------------------------------------------------------------------------------------------------------- 2001 -- (0.34) 1.33 (33.92) 6,163 - --------------------------------------------------------------------------------------------------------- UTILITIES CLASS X SHARES 1997 $(0.21) (0.78) 18.59 27.15 458,134 - --------------------------------------------------------------------------------------------------------- 1998 (1.02) (1.59) 21.25 23.76 560,803 - --------------------------------------------------------------------------------------------------------- 1999 (0.43) (0.98) 22.90 12.71 580,487 - --------------------------------------------------------------------------------------------------------- 2000(a)* (1.38) (1.87) 21.69 3.03 551,734 - --------------------------------------------------------------------------------------------------------- 2001* (1.20) (1.61) 14.73 (25.75) 327,749 - --------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) (1.38) (1.73) 21.68 2.07(1) 19,069 - --------------------------------------------------------------------------------------------------------- 2001 (1.20) (1.57) 14.72 (25.98) 24,550 - --------------------------------------------------------------------------------------------------------- INCOME BUILDER CLASS X SHARES 1997(c) -- (0.44) 11.76 22.38(1) 55,423 - --------------------------------------------------------------------------------------------------------- 1998 (0.11) (0.67) 11.46 3.21 87,769 - --------------------------------------------------------------------------------------------------------- 1999 (0.25)++ (0.81) 11.44 7.06 81,616 - --------------------------------------------------------------------------------------------------------- 2000(a)* (0.03)++ (0.59) 10.86 0.17 59,383 - --------------------------------------------------------------------------------------------------------- 2001* -- (0.50) 10.61 2.30 63,060 - --------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) (0.02)++ (0.41) 10.85 1.06(1) 965 - --------------------------------------------------------------------------------------------------------- 2001 -- (0.48) 10.60 2.10 7,147 - --------------------------------------------------------------------------------------------------------- DIVIDEND GROWTH CLASS X SHARES 1997 (1.00) (1.41) 21.60 25.61 1,905,906 - --------------------------------------------------------------------------------------------------------- 1998 (2.05) (2.46) 22.13 14.28 2,249,927 - --------------------------------------------------------------------------------------------------------- 1999 (3.26) (3.65) 18.32 (2.39) 2,033,814 - --------------------------------------------------------------------------------------------------------- 2000(a)* (3.82) (4.15) 14.50 5.30 1,552,724 - --------------------------------------------------------------------------------------------------------- 2001* -- (0.26) 13.48 (5.20) 1,258,863 - --------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) (3.82) (4.04) 14.49 7.65(1) 19,083 - --------------------------------------------------------------------------------------------------------- 2001 -- (0.23) 13.47 (5.42) 60,393 - --------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS ---------------------------- PORTFOLIO NET INVESTMENT TURNOVER YEAR ENDED DECEMBER 31 EXPENSES INCOME (LOSS) RATE - ---------------------- HIGH YIELD CLASS X SHARES 1997 0.53% 12.44% 95% - ---------------------- 1998 0.53 12.27 93 - ---------------------- 1999 0.53 14.05 48 - ---------------------- 2000(a)* 0.54 17.40 9 - ---------------------- 2001* 0.59 17.33(8) 81 - ---------------------- CLASS Y SHARES* 2000(b) 0.79(2) 20.95(2) 9 - ---------------------- 2001 0.84 17.08(8) 81 - ---------------------- UTILITIES CLASS X SHARES 1997 0.67 3.48 13 - ---------------------- 1998 0.67 2.89 7 - ---------------------- 1999 0.67 2.51 10 - ---------------------- 2000(a)* 0.66 2.16 13 - ---------------------- 2001* 0.67 2.19(8) 32 - ---------------------- CLASS Y SHARES* 2000(b) 0.91(2) 1.93(2) 13 - ---------------------- 2001 0.92 1.94(8) 32 - ---------------------- INCOME BUILDER CLASS X SHARES 1997(c) 0.15(2)(3) 5.73(2)(3) 41(1) - ---------------------- 1998 0.81 5.09 54 - ---------------------- 1999 0.81 4.98 43 - ---------------------- 2000(a)* 0.81 5.07 51 - ---------------------- 2001* 0.81 4.34(8) 45 - ---------------------- CLASS Y SHARES* 2000(b) 1.06(2) 5.17(2) 51 - ---------------------- 2001 1.06 3.88(8) 45 - ---------------------- DIVIDEND GROWTH CLASS X SHARES 1997 0.54 2.06 28 - ---------------------- 1998 0.53 1.85 45 - ---------------------- 1999 0.52 1.82 81 - ---------------------- 2000(a)* 0.54 2.07 34 - ---------------------- 2001* 0.55 1.86 19 - ---------------------- CLASS Y SHARES* 2000(b) 0.79(2) 1.59(2) 34 - ---------------------- 2001 0.80 1.61 19 - ----------------------
61
NET ASSET VALUE NET NET REALIZED TOTAL FROM BEGINNING INVESTMENT AND UNREALIZED INVESTMENT DIVIDENDS TO YEAR ENDED DECEMBER 31 OF PERIOD INCOME (LOSS) GAIN (LOSS) OPERATIONS SHAREHOLDERS - --------------------------------------------------------------------------------------------------------------------------------- CAPITAL GROWTH CLASS X SHARES 1997 $16.65 $ 0.01 $ 3.90 $ 3.91 $(0.08) - --------------------------------------------------------------------------------------------------------------------------------- 1998 18.29 (0.05) 3.59 3.54 -- - --------------------------------------------------------------------------------------------------------------------------------- 1999 20.36 -- 6.12 6.12 -- - --------------------------------------------------------------------------------------------------------------------------------- 2000(a)* 23.73 0.10 0.28 0.38 -- - --------------------------------------------------------------------------------------------------------------------------------- 2001* 20.06 0.03 (5.13) (5.10) (0.10) - --------------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 24.55 0.03 (0.50) (0.47) -- - --------------------------------------------------------------------------------------------------------------------------------- 2001 20.03 (0.01) (5.12) (5.13) (0.09) - --------------------------------------------------------------------------------------------------------------------------------- GLOBAL DIVIDEND GROWTH CLASS X SHARES 1997 13.13 0.22 1.37 1.59 (0.23) - --------------------------------------------------------------------------------------------------------------------------------- 1998 13.89 0.24 1.45 1.69 (0.24) - --------------------------------------------------------------------------------------------------------------------------------- 1999 13.82 0.27 1.71 1.98 (0.29) - --------------------------------------------------------------------------------------------------------------------------------- 2000(a)* 14.44 0.24 (0.64) (0.40) (0.09) - --------------------------------------------------------------------------------------------------------------------------------- 2001* 12.73 0.21 (1.00) (0.79) (0.33) - --------------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 13.96 0.08 (0.11) (0.03) -- - --------------------------------------------------------------------------------------------------------------------------------- 2001 12.71 0.15 (0.96) (0.81) (0.33) - --------------------------------------------------------------------------------------------------------------------------------- EUROPEAN GROWTH CLASS X SHARES 1997 21.56 0.21 3.19 3.40 (0.24) - --------------------------------------------------------------------------------------------------------------------------------- 1998 23.54 0.15 5.53 5.68 (0.31) - --------------------------------------------------------------------------------------------------------------------------------- 1999 27.18 0.25 6.91 7.16 (0.19) - --------------------------------------------------------------------------------------------------------------------------------- 2000(a)* 31.47 0.13 (1.43) (1.30) (0.18) - --------------------------------------------------------------------------------------------------------------------------------- 2001* 25.37 0.13 (4.47) (4.34) (0.26) - --------------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 32.26 (0.03) (2.10) (2.13) (0.18) - --------------------------------------------------------------------------------------------------------------------------------- 2001 25.33 0.05 (4.42) (4.37) (0.25) - --------------------------------------------------------------------------------------------------------------------------------- PACIFIC GROWTH CLASS X SHARES 1997 9.96 0.12 (3.82) (3.70) (0.14) - --------------------------------------------------------------------------------------------------------------------------------- 1998 6.12 0.06 (0.75) (0.69) (0.28) - --------------------------------------------------------------------------------------------------------------------------------- 1999 5.15 0.04 3.33 3.37 (0.06) - --------------------------------------------------------------------------------------------------------------------------------- 2000(a)* 8.46 -- (2.78) (2.78) (0.12) - --------------------------------------------------------------------------------------------------------------------------------- 2001* 5.56 (0.01) (1.50) (1.51) (0.07) - --------------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 7.70 (0.01) (2.01) (2.02) (0.12) - --------------------------------------------------------------------------------------------------------------------------------- 2001 5.56 (0.02) (1.49) (1.51) (0.07) - ---------------------------------------------------------------------------------------------------------------------------------
62
TOTAL NET ASSETS DISTRIBUTIONS TO DIVIDENDS AND NET ASSET VALUE END OF PERIOD YEAR ENDED DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS END OF PERIOD TOTAL RETURN+ (000'S) - --------------------------------------------------------------------------------------------------------- CAPITAL GROWTH CLASS X SHARES 1997 $(2.19) $(2.27) $18.29 24.54% $127,100 - --------------------------------------------------------------------------------------------------------- 1998 (1.47) (1.47) 20.36 19.63 138,603 - --------------------------------------------------------------------------------------------------------- 1999 (2.75) (2.75) 23.73 33.29 171,251 - --------------------------------------------------------------------------------------------------------- 2000(a)* (4.05) (4.05) 20.06 1.28 183,151 - --------------------------------------------------------------------------------------------------------- 2001* (1.20) (1.30) 13.66 (26.31) 103,764 - --------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) (4.05) (4.05) 20.03 (2.24)(1) 3,551 - --------------------------------------------------------------------------------------------------------- 2001 (1.20) (1.29) 13.61 (26.49) 6,615 - --------------------------------------------------------------------------------------------------------- GLOBAL DIVIDEND GROWTH CLASS X SHARES 1997 (0.60) (0.83) 13.89 12.04 481,613 - --------------------------------------------------------------------------------------------------------- 1998 (1.52) (1.76) 13.82 12.53 484,228 - --------------------------------------------------------------------------------------------------------- 1999 (1.07) (1.36) 14.44 14.65 506,929 - --------------------------------------------------------------------------------------------------------- 2000(a)* (1.22) (1.31) 12.73 (2.50) 373,770 - --------------------------------------------------------------------------------------------------------- 2001* (0.14) (0.47) 11.47 (6.25) 285,158 - --------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) (1.22) (1.22) 12.71 0.07(1) 2,211 - --------------------------------------------------------------------------------------------------------- 2001 (0.14) (0.47) 11.43 (6.44) 10,494 - --------------------------------------------------------------------------------------------------------- EUROPEAN GROWTH CLASS X SHARES 1997 (1.18) (1.42) 23.54 16.07 391,441 - --------------------------------------------------------------------------------------------------------- 1998 (1.73) (2.04) 27.18 23.96 510,638 - --------------------------------------------------------------------------------------------------------- 1999 (2.68) (2.87) 31.47 29.11 579,705 - --------------------------------------------------------------------------------------------------------- 2000(a)* (4.62) (4.80) 25.37 (4.92) 508,366 - --------------------------------------------------------------------------------------------------------- 2001* (4.06) (4.32) 16.71 (17.76) 316,196 - --------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) (4.62) (4.80) 25.33 (7.39)(1) 10,580 - --------------------------------------------------------------------------------------------------------- 2001 (4.06) (4.31) 16.65 (17.92) 20,858 - --------------------------------------------------------------------------------------------------------- PACIFIC GROWTH CLASS X SHARES 1997 -- (0.14) 6.12 (37.70) 68,904 - --------------------------------------------------------------------------------------------------------- 1998 -- (0.28) 5.15 (10.40) 52,842 - --------------------------------------------------------------------------------------------------------- 1999 -- (0.06) 8.46 66.09 115,927 - --------------------------------------------------------------------------------------------------------- 2000(a)* -- (0.12) 5.56 (33.46) 64,209 - --------------------------------------------------------------------------------------------------------- 2001* -- (0.07) 3.98 (27.42) 33,138 - --------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) -- (0.12) 5.56 (26.72)(1) 728 - --------------------------------------------------------------------------------------------------------- 2001 -- (0.07) 3.98 (27.26) 1,640 - --------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS ---------------------------- PORTFOLIO NET INVESTMENT TURNOVER YEAR ENDED DECEMBER 31 EXPENSES INCOME (LOSS) RATE - ---------------------- CAPITAL GROWTH CLASS X SHARES 1997 0.71% 0.01% 139% - ---------------------- 1998 0.70 (0.26) 248 - ---------------------- 1999 0.72 0.02 575 - ---------------------- 2000(a)* 0.69 0.43 349 - ---------------------- 2001* 0.70 0.20 323 - ---------------------- CLASS Y SHARES* 2000(b) 0.94(2) 0.30(2) 349 - ---------------------- 2001 0.95 (0.05) 323 - ---------------------- GLOBAL DIVIDEND GROWTH CLASS X SHARES 1997 0.84 1.61 48 - ---------------------- 1998 0.84 1.68 52 - ---------------------- 1999 0.83 1.90 43 - ---------------------- 2000(a)* 0.80 1.88 40 - ---------------------- 2001* 0.80 1.76 9 - ---------------------- CLASS Y SHARES* 2000(b) 1.05(2) 1.14(2) 40 - ---------------------- 2001 1.05 1.51 9 - ---------------------- EUROPEAN GROWTH CLASS X SHARES 1997 1.12 1.04 45 - ---------------------- 1998 1.11 0.65 56 - ---------------------- 1999 1.04 0.87 55 - ---------------------- 2000(a)* 1.00 0.46 78 - ---------------------- 2001* 1.02 0.68 82 - ---------------------- CLASS Y SHARES* 2000(b) 1.25(2) (0.18)(2) 78 - ---------------------- 2001 1.27 0.43 82 - ---------------------- PACIFIC GROWTH CLASS X SHARES 1997 1.44 1.09 58 - ---------------------- 1998 1.51 0.91 112 - ---------------------- 1999 1.42 0.85 105 - ---------------------- 2000(a)* 1.21 0.01 46 - ---------------------- 2001* 1.73 (0.28) 124 - ---------------------- CLASS Y SHARES* 2000(b) 1.46(2) (0.20)(2) 46 - ---------------------- 2001 1.98 (0.53) 124 - ----------------------
63
NET ASSET VALUE NET NET REALIZED TOTAL FROM BEGINNING INVESTMENT AND UNREALIZED INVESTMENT DIVIDENDS TO YEAR ENDED DECEMBER 31 OF PERIOD INCOME (LOSS) GAIN (LOSS) OPERATIONS SHAREHOLDERS - --------------------------------------------------------------------------------------------------------------------------------- EQUITY CLASS X SHARES 1997 $26.39 $ 0.18 $ 9.27 $ 9.45 $(0.18) - --------------------------------------------------------------------------------------------------------------------------------- 1998 33.58 0.25 9.47 9.72 (0.25) - --------------------------------------------------------------------------------------------------------------------------------- 1999 38.58 0.22 20.48 20.70 (0.22) - --------------------------------------------------------------------------------------------------------------------------------- 2000(a)* 53.88 0.30 (6.46) (6.16) (0.29) - --------------------------------------------------------------------------------------------------------------------------------- 2001* 39.68 0.15 (10.12) (9.97) (0.16) - --------------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 49.12 0.21 (1.68) (1.47) (0.24) - --------------------------------------------------------------------------------------------------------------------------------- 2001 39.66 0.06 (10.09) (10.03) (0.10) - --------------------------------------------------------------------------------------------------------------------------------- S&P 500 INDEX CLASS X SHARES 1998(d) 10.00 0.06 1.16 1.22 -- - --------------------------------------------------------------------------------------------------------------------------------- 1999 11.22 0.06 2.21 2.27 (0.03) - --------------------------------------------------------------------------------------------------------------------------------- 2000(a)* 13.43 0.12 (1.37) (1.25) (0.07) - --------------------------------------------------------------------------------------------------------------------------------- 2001* 12.05 0.10 (1.57) (1.47) (0.10) - --------------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 13.47 0.04 (1.34) (1.30) (0.07) - --------------------------------------------------------------------------------------------------------------------------------- 2001 12.04 0.08 (1.58) (1.50) (0.10) - --------------------------------------------------------------------------------------------------------------------------------- COMPETITIVE EDGE "BEST IDEAS" CLASS X SHARES 1998(d) 10.00 0.07 (0.25) (0.18) -- - --------------------------------------------------------------------------------------------------------------------------------- 1999 9.82 0.06 2.56 2.62 (0.07) - --------------------------------------------------------------------------------------------------------------------------------- 2000(a)* 12.37 0.06 (2.20) (2.14) (0.05) - --------------------------------------------------------------------------------------------------------------------------------- 2001* 10.18 0.05 (2.36) (2.31) (0.06) - --------------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 12.03 -- (1.82) (1.82) (0.05) - --------------------------------------------------------------------------------------------------------------------------------- 2001 10.16 0.02 (2.35) (2.33) (0.05) - --------------------------------------------------------------------------------------------------------------------------------- AGGRESSIVE EQUITY CLASS X SHARES 1999(e) 10.00 0.05 4.55 4.60 (0.03) - --------------------------------------------------------------------------------------------------------------------------------- 2000(a)* 14.57 0.05 (0.30) (0.25) (0.01) - --------------------------------------------------------------------------------------------------------------------------------- 2001* 14.31 0.02 (4.09) (4.07) (0.04) - --------------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 14.66 0.03 (0.39) (0.36) (0.01) - --------------------------------------------------------------------------------------------------------------------------------- 2001 14.29 (0.01) (4.08) (4.09) (0.03) - --------------------------------------------------------------------------------------------------------------------------------- INFORMATION CLASS X SHARES* 2000(f) 10.00 0.06 (0.75) (0.69) -- - --------------------------------------------------------------------------------------------------------------------------------- 2001 9.31 0.08 (4.07) (3.99) (0.01) - --------------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(f) 10.00 0.05 (0.74) (0.69) -- - --------------------------------------------------------------------------------------------------------------------------------- 2001 9.31 0.06 (4.06) (4.00) (0.01) - ---------------------------------------------------------------------------------------------------------------------------------
64
TOTAL NET ASSETS DISTRIBUTIONS TO DIVIDENDS AND NET ASSET VALUE END OF PERIOD YEAR ENDED DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS END OF PERIOD TOTAL RETURN+ (000'S) - --------------------------------------------------------------------------------------------------------- EQUITY CLASS X SHARES 1997 $(2.08) $(2.26) $33.58 37.43% $ 823,090 - --------------------------------------------------------------------------------------------------------- 1998 (4.47) (4.72) 38.58 30.45 1,138,413 - --------------------------------------------------------------------------------------------------------- 1999 (5.18) (5.40) 53.88 58.59 2,083,071 - --------------------------------------------------------------------------------------------------------- 2000(a)* (7.75) (8.04) 39.68 (12.35) 1,818,134 - --------------------------------------------------------------------------------------------------------- 2001* (6.89) (7.05) 22.66 (26.87) 1,022,335 - --------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) (7.75) (7.99) 39.66 (3.99)(1) 31,903 - --------------------------------------------------------------------------------------------------------- 2001 (6.89) (6.99) 22.64 (27.07) 61,110 - --------------------------------------------------------------------------------------------------------- S&P 500 INDEX CLASS X SHARES 1998(d) -- -- 11.22 12.20(1) 48,732 - --------------------------------------------------------------------------------------------------------- 1999 (0.03) (0.06) 13.43 20.23 185,963 - --------------------------------------------------------------------------------------------------------- 2000(a)* (0.06) (0.13) 12.05 (9.38) 210,530 - --------------------------------------------------------------------------------------------------------- 2001* -- (0.10) 10.48 (12.23) 165,465 - --------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) (0.06) (0.13) 12.04 (9.73)(1) 12,724 - --------------------------------------------------------------------------------------------------------- 2001 -- (0.10) 10.44 (12.53) 46,134 - --------------------------------------------------------------------------------------------------------- COMPETITIVE EDGE "BEST IDEAS" CLASS X SHARES 1998(d) -- -- 9.82 (1.90)(1) 36,539 - --------------------------------------------------------------------------------------------------------- 1999 -- (0.07) 12.37 26.88 62,295 - --------------------------------------------------------------------------------------------------------- 2000(a)* -- (0.05) 10.18 (17.39) 69,882 - --------------------------------------------------------------------------------------------------------- 2001* (0.64) (0.70) 7.17 (23.33) 40,084 - --------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) -- (0.05) 10.16 (15.22)(1) 4,666 - --------------------------------------------------------------------------------------------------------- 2001 (0.64) (0.69) 7.14 (23.53) 5,869 - --------------------------------------------------------------------------------------------------------- AGGRESSIVE EQUITY CLASS X SHARES 1999(e) -- (0.03) 14.57 46.08(1) 38,197 - --------------------------------------------------------------------------------------------------------- 2000(a)* -- (0.01) 14.31 (1.75) 138,657 - --------------------------------------------------------------------------------------------------------- 2001* -- (0.04) 10.20 (28.46) 69,418 - --------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) -- (0.01) 14.29 (2.48)(1) 13,392 - --------------------------------------------------------------------------------------------------------- 2001 -- (0.03) 10.17 (28.61) 18,652 - --------------------------------------------------------------------------------------------------------- INFORMATION CLASS X SHARES* 2000(f) -- -- 9.31 (6.90)(1) 2,686 - --------------------------------------------------------------------------------------------------------- 2001 -- (0.01) 5.31 (42.87) 4,434 - --------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(f) -- -- 9.31 (6.90)(1) 1,915 - --------------------------------------------------------------------------------------------------------- 2001 -- (0.01) 5.30 (42.99) 7,427 - --------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS ---------------------------- PORTFOLIO NET INVESTMENT TURNOVER YEAR ENDED DECEMBER 31 EXPENSES INCOME (LOSS) RATE - ---------------------- EQUITY CLASS X SHARES 1997 0.52% 0.61% 145% - ---------------------- 1998 0.52 0.73 257 - ---------------------- 1999 0.51 0.54 323 - ---------------------- 2000(a)* 0.50 0.62 402 - ---------------------- 2001* 0.51 0.55 329 - ---------------------- CLASS Y SHARES* 2000(b) 0.75(2) 0.85(2) 402 - ---------------------- 2001 0.76 0.30 329 - ---------------------- S&P 500 INDEX CLASS X SHARES 1998(d) -- (4) 1.85(2)(4) 2(1) - ---------------------- 1999 0.48(5) 1.03(5) 1 - ---------------------- 2000(a)* 0.45 0.88 3 - ---------------------- 2001* 0.46 0.95 4 - ---------------------- CLASS Y SHARES* 2000(b) 0.71(2) 0.60(2) 3 - ---------------------- 2001 0.71 0.70 4 - ---------------------- COMPETITIVE EDGE "BEST IDEAS" CLASS X SHARES 1998(d) -- (4) 1.74(2)(4) 31(1) - ---------------------- 1999 0.56(5) 0.72(5) 54 - ---------------------- 2000(a)* 0.71 0.50 70 - ---------------------- 2001* 0.75 0.55 47 - ---------------------- CLASS Y SHARES* 2000(b) 0.96(2) 0.06(2) 70 - ---------------------- 2001 1.00 0.30 47 - ---------------------- AGGRESSIVE EQUITY CLASS X SHARES 1999(e) 0.52(2)(5) 0.86(2)(5) 108(1) - ---------------------- 2000(a)* 0.82 0.32 414 - ---------------------- 2001* 0.84 0.21 409 - ---------------------- CLASS Y SHARES* 2000(b) 1.05(2) 0.32(2) 414 - ---------------------- 2001 1.09 (0.04) 409 - ---------------------- INFORMATION CLASS X SHARES* 2000(f) -- (6) 3.80(1)(2)(6) 1(1) - ---------------------- 2001 -- (7) 1.27(7) 170 - ---------------------- CLASS Y SHARES* 2000(f) 0.25(2)(6) 3.55(2)(6) 1(1) - ---------------------- 2001 0.25(7) 1.02(7) 170 - ----------------------
65
NET ASSET VALUE NET NET REALIZED TOTAL FROM BEGINNING INVESTMENT AND UNREALIZED INVESTMENT DIVIDENDS TO YEAR ENDED DECEMBER 31 OF PERIOD INCOME (LOSS) GAIN (LOSS) OPERATIONS SHAREHOLDERS - --------------------------------------------------------------------------------------------------------------------------------- STRATEGIST CLASS X SHARES 1997 $13.72 $0.45 $ 1.40 $ 1.85 $(0.45) - --------------------------------------------------------------------------------------------------------------------------------- 1998 14.80 0.36 3.40 3.76 (0.36) - --------------------------------------------------------------------------------------------------------------------------------- 1999 16.64 0.40 2.46 2.86 (0.40) - --------------------------------------------------------------------------------------------------------------------------------- 2000(a)* 19.10 0.50 (0.20) 0.30 (0.48) - --------------------------------------------------------------------------------------------------------------------------------- 2001* 16.66 0.38(8) (2.05)(8) (1.67) (0.39) - --------------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 19.29 0.49 (0.51) (0.02) (0.36) - --------------------------------------------------------------------------------------------------------------------------------- 2001 16.65 0.32(8) (2.03)(8) (1.71) (0.35) - ---------------------------------------------------------------------------------------------------------------------------------
(A) PRIOR TO JUNE 5, 2000, THE FUND ISSUED ONE CLASS OF SHARES. ALL SHARES OF THE FUND HELD PRIOR TO MAY 1, 2000 HAVE BEEN DESIGNATED CLASS X SHARES. (B) FOR THE PERIOD JUNE 5, 2000 (ISSUED DATE) THROUGH DECEMBER 31, 2000. COMMENCEMENT OF OPERATIONS: (C) JANUARY 21, 1997. (D) MAY 18, 1998. (E) MAY 4, 1999. (F) NOVEMBER 6, 2000. * THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. ** INCLUDES CAPITAL GAIN DISTRIBUTION OF LESS THAN $0.001. + CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. ++ DISTRIBUTION FROM PAID-IN-CAPITAL. ++ INCLUDES DISTRIBUTIONS FROM PAID-IN-CAPITAL OF $0.02. # DOES NOT REFLECT THE EFFECT OF EXPENSE OFFSET OF 0.06% (1) NOT ANNUALIZED. (2) ANNUALIZED. (3) IF THE INVESTMENT MANAGER HAD NOT ASSUMED ALL EXPENSES AND WAIVED ITS MANAGEMENT FEE FOR THE PERIOD JANUARY 21, 1997 THROUGH DECEMBER 3, 1997 FOR INCOME BUILDER, THE RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 0.99% AND 4.89%, RESPECTIVELY. (4) IF THE INVESTMENT MANAGER HAD NOT ASSUMED ALL EXPENSES AND WAIVED ITS MANAGEMENT FEE FOR THE PERIOD MAY 18, 1998 THROUGH DECEMBER 31, 1998 FOR COMPETITIVE EDGE "BEST IDEAS" AND S&P 500 INDEX, THE RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 0.92% AND 0.83%, RESPECTIVELY, FOR COMPETITIVE EDGE "BEST IDEAS" AND 0.59% AND 1.26%, RESPECTIVELY, FOR S&P 500 INDEX. (5) IF THE INVESTMENT MANAGER HAD NOT ASSUMED ALL EXPENSES AND WAIVED ITS MANAGEMENT FEE FOR THE PERIOD JANUARY 1, 1999 THROUGH APRIL 30, 1999 FOR COMPETITIVE EDGE "BEST IDEAS" AND FOR THE PERIOD MAY 4, 1999 THROUGH NOVEMBER 4, 1999 FOR SHORT-TERM BOND AND AGGRESSIVE EQUITY AND FOR THE PERIOD JANUARY 1, 1999 THROUGH JANUARY 5, 1999 FOR S&P 500 INDEX AND "CAPPED" THE EXPENSES OF S&P 500 INDEX AT 0.50% OF ITS DAILY NET ASSETS FOR THE PERIOD JANUARY 6, 1999 THROUGH DECEMBER 31, 1999, THE RATIO OF EXPENSES AND NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS WOULD HAVE BEEN 0.77% AND 0.51%, RESPECTIVELY, FOR COMPETITIVE EDGE "BEST IDEAS", 2.38% AND 3.07%, RESPECTIVELY, FOR SHORT-TERM BOND, 1.41% AND (0.02)%, RESPECTIVELY, FOR AGGRESSIVE EQUITY AND 0.48% AND 1.02%, RESPECTIVELY, FOR S&P 500 INDEX.
66
TOTAL NET ASSETS DISTRIBUTIONS TO DIVIDENDS AND NET ASSET VALUE END OF PERIOD YEAR ENDED DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS END OF PERIOD TOTAL RETURN+ (000'S) - --------------------------------------------------------------------------------------------------------- STRATEGIST CLASS X SHARES 1997 $(0.32) $(0.77) $14.80 13.71% $497,028 - --------------------------------------------------------------------------------------------------------- 1998 (1.56) (1.92) 16.64 26.55 633,934 - --------------------------------------------------------------------------------------------------------- 1999 -- (0.40) 19.10 17.35 729,701 - --------------------------------------------------------------------------------------------------------- 2000(a)* (2.26) (2.74) 16.66 1.64 701,294 - --------------------------------------------------------------------------------------------------------- 2001* (0.66) (1.05) 13.94 (10.18) 522,655 - --------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) (2.26) (2.62) 16.65 (0.02)(1) 23,375 - --------------------------------------------------------------------------------------------------------- 2001 (0.66) (1.01) 13.93 (10.40) 47,886 - --------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS ---------------------------- PORTFOLIO NET INVESTMENT TURNOVER YEAR ENDED DECEMBER 31 EXPENSES INCOME (LOSS) RATE - ---------------------- STRATEGIST CLASS X SHARES 1997 0.52% 3.09% 159% - ---------------------- 1998 0.52 2.32 84 - ---------------------- 1999 0.52 2.24 120 - ---------------------- 2000(a)* 0.52 2.68 126 - ---------------------- 2001* 0.52 2.53(8) 124 - ---------------------- CLASS Y SHARES* 2000(b) 0.77(2) 2.77(2) 126 - ---------------------- 2001 0.77 2.28(8) 124 - ----------------------
(A) PRIOR TO JUNE 5, 2000, THE FUND ISSUED ONE CLASS OF SHARES. ALL SHARES OF THE FUND HELD PRIOR TO MAY 1, 2000 HAVE BEEN DESIGNATED CLASS X SHARES. (B) FOR THE PERIOD JUNE 5, 2000 (ISSUED DATE) THROUGH DECEMBER 31, 2000. COMMENCEMENT OF OPERATIONS: (C) JANUARY 21, 1997. (D) MAY 18, 1998. (E) MAY 4, 1999. (F) NOVEMBER 6, 2000. * THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. ** INCLUDES CAPITAL GAIN DISTRIBUTION OF LESS THAN $0.001. + CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. ++ DISTRIBUTION FROM PAID-IN-CAPITAL. ++ INCLUDES DISTRIBUTIONS FROM PAID-IN-CAPITAL OF $0.02. # DOES NOT REFLECT THE EFFECT OF EXPENSE OFFSET OF 0.06% (1) NOT ANNUALIZED. (2) ANNUALIZED. (3) IF THE INVESTMENT MANAGER HAD NOT ASSUMED ALL EXPENSES AND WAIVED ITS MANAGEMENT FEE FOR THE PERIOD JANUARY 21, 1997 THROUGH DECEMBER 3, 1997 FOR INCOME BUILDER, THE RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 0.99% AND 4.89%, RESPECTIVELY. (4) IF THE INVESTMENT MANAGER HAD NOT ASSUMED ALL EXPENSES AND WAIVED ITS MANAGEMENT FEE FOR THE PERIOD MAY 18, 1998 THROUGH DECEMBER 31, 1998 FOR COMPETITIVE EDGE "BEST IDEAS" AND S&P 500 INDEX, THE RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 0.92% AND 0.83%, RESPECTIVELY, FOR COMPETITIVE EDGE "BEST IDEAS" AND 0.59% AND 1.26%, RESPECTIVELY, FOR S&P 500 INDEX. (5) IF THE INVESTMENT MANAGER HAD NOT ASSUMED ALL EXPENSES AND WAIVED ITS MANAGEMENT FEE FOR THE PERIOD JANUARY 1, 1999 THROUGH APRIL 30, 1999 FOR COMPETITIVE EDGE "BEST IDEAS" AND FOR THE PERIOD MAY 4, 1999 THROUGH NOVEMBER 4, 1999 FOR SHORT-TERM BOND AND AGGRESSIVE EQUITY AND FOR THE PERIOD JANUARY 1, 1999 THROUGH JANUARY 5, 1999 FOR S&P 500 INDEX AND "CAPPED" THE EXPENSES OF S&P 500 INDEX AT 0.50% OF ITS DAILY NET ASSETS FOR THE PERIOD JANUARY 6, 1999 THROUGH DECEMBER 31, 1999, THE RATIO OF EXPENSES AND NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS WOULD HAVE BEEN 0.77% AND 0.51%, RESPECTIVELY, FOR COMPETITIVE EDGE "BEST IDEAS", 2.38% AND 3.07%, RESPECTIVELY, FOR SHORT-TERM BOND, 1.41% AND (0.02)%, RESPECTIVELY, FOR AGGRESSIVE EQUITY AND 0.48% AND 1.02%, RESPECTIVELY, FOR S&P 500 INDEX. (6) IF THE INVESTMENT MANAGER HAD NOT ASSUMED ALL EXPENSES (EXCEPT FOR DISTRIBUTION FEES) AND WAIVED ITS MANAGEMENT FEE FOR THE PERIOD NOVEMBER 6, 2000 THROUGH DECEMBER 31, 2000 FOR INFORMATION, THE RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 1.82%, AND 1.98%, RESPECTIVELY, FOR CLASS X SHARES AND 2.07% AND 1.73%, RESPECTIVELY, FOR CLASS Y SHARES. (7) IF THE INVESTMENT MANAGER HAD NOT "CAPPED" ALL EXPENSES (EXCEPT FOR DISTRIBUTION FEES) FOR SHORT-TERM BOND, AT 0.50% OF ITS DAILY NET ASSETS FOR THE PERIOD JUNE 1, 2001 THROUGH DECEMBER 31, 2001 AND HAD NOT ASSUMED ALL EXPENSES (EXCEPT FOR DISTRIBUTION FEES) AND WAIVED ITS MANAGEMENT FEE FOR THE YEAR ENDED DECEMBER 31, 2001 FOR INFORMATION, THE RATIOS OF EXPENSES AND NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS WOULD HAVE BEEN 0.65% AND 3.80%, RESPECTIVELY, FOR SHORT-TERM BOND CLASS X SHARES AND 0.90% AND 3.55%, RESPECTIVELY, FOR SHORT-TERM BOND CLASS Y SHARES AND 1.62% AND (0.35)%, RESPECTIVELY, FOR INFORMATION CLASS X SHARES AND 1.87% AND (0.60)%, RESPECTIVELY, FOR INFORMATION CLASS Y SHARES. (8) EFFECTIVE JANUARY 1, 2001, THE FUND HAS ADOPTED THE PROVISIONS OF THE AICPA AUDIT AND ACCOUNTING GUIDE FOR INVESTMENT COMPANIES, AS REVISED, RELATED TO PREMIUMS AND DISCOUNTS ON DEBT SECURITIES. THE EFFECT OF THIS CHANGE FOR THE YEAR ENDED DECEMBER 31, 2001 FOR SHORT-TERM BOND, QUALITY INCOME PLUS, HIGH YIELD, UTILITIES, INCOME BUILDER AND STRATEGIST WAS TO DECREASE NET INVESTMENT INCOME PER SHARE AND INCREASE NET REALIZED AND UNREALIZED GAIN/LOSS PER SHARE BY $0.07, $0.01, $0.01, $0.01, $0.03 AND $0.01, RESPECTIVELY, AND TO DECREASE THE RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS BY 0.66%, 0.12%, 0.28%, 0.05%, 0.23% AND 0.06%, RESPECTIVELY. THE FINANCIAL HIGHLIGHTS DATA PRESENTED IN THIS TABLE FOR PRIOR PERIODS HAS NOT BEEN RESTATED TO REFLECT THIS CHANGE.
67 Notes --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- 68 Notes --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- 69 Morgan Stanley Variable Investment Series - -------------------------------------------------------------- - - ADDITIONAL INFORMATION ABOUT EACH PORTFOLIO'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 each Portfolio'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 information about the Portfolios, 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. - - 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 at 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. (THE FUND'S INVESTMENT COMPANY ACT FILE NO. IS 811-3692) PROSPECTUS - MAY 1, 2002 Morgan Stanley VARIABLE INVESTMENT SERIES CLASS Y Morgan Stanley Variable Investment Series is a mutual fund comprised of 17 separate Portfolios, each with its own distinctive investment objective(s) and policies. The Portfolios are: The Money Market Portfolio The European Growth Portfolio The Limited Duration Portfolio The Pacific Growth Portfolio The Quality Income Plus Portfolio The Equity Portfolio The High Yield Portfolio The S&P 500 Index Portfolio The Utilities Portfolio The Competitive Edge "Best Ideas" Portfolio The Income Builder Portfolio The Aggressive Equity Portfolio The Dividend Growth Portfolio The Information Portfolio The Capital Growth Portfolio The Strategist Portfolio The Global Dividend Growth Portfolio Shares of each Portfolio are sold exclusively to certain life insurance companies in connection with particular life insurance and/or annuity contracts they issue. The insurance companies invest in shares of the Portfolios in accordance with instructions received from owners of the applicable life insurance or annuity policy. This PROSPECTUS must be accompanied by a current prospectus for the variable annuity contracts issued by Northbrook Life Insurance Company, Allstate Life Insurance Company of New York or Glenbrook Life and Annuity Company or a current prospectus for the variable life insurance contracts issued by Northbrook Life Insurance Company or Glenbrook Life and Annuity Company. 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 Eligible Investors ............................................................ 1 The Portfolios THE MONEY MARKET PORTFOLIO ................................. 2 THE LIMITED DURATION PORTFOLIO ............................. 4 THE QUALITY INCOME PLUS PORTFOLIO .......................... 7 THE HIGH YIELD PORTFOLIO ................................... 10 THE UTILITIES PORTFOLIO .................................... 13 THE INCOME BUILDER PORTFOLIO ............................... 16 THE DIVIDEND GROWTH PORTFOLIO .............................. 19 THE CAPITAL GROWTH PORTFOLIO ............................... 21 THE GLOBAL DIVIDEND GROWTH PORTFOLIO ....................... 23 THE EUROPEAN GROWTH PORTFOLIO .............................. 25 THE PACIFIC GROWTH PORTFOLIO ............................... 28 THE EQUITY PORTFOLIO ....................................... 31 THE S&P 500 INDEX PORTFOLIO ................................ 33 THE COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO ................ 35 THE AGGRESSIVE EQUITY PORTFOLIO ............................ 38 THE INFORMATION PORTFOLIO .................................. 41 THE STRATEGIST PORTFOLIO ................................... 44 Additional Investment Strategy Information ............................................................ 47 Additional Risk Information ............................................................ 48 Portfolio Management ............................................................ 53 Shareholder Information PRICING FUND SHARES ........................................ 56 PLAN OF DISTRIBUTION ....................................... 56 DISTRIBUTIONS .............................................. 56 TAX CONSEQUENCES ........................................... 57 Financial Highlights ............................................................ 58 THIS PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT THE FUND. PLEASE READ IT CAREFULLY AND KEEP IT FOR FUTURE REFERENCE.
Eligible Investors Morgan Stanley Variable Investment Series (the "Fund") is comprised of 17 separate Portfolios (each a "Portfolio"), each with its own distinct investment objective(s) and policies. The Fund is offered exclusively to the following life insurance companies in connection with particular life insurance and/or annuity contracts they offer (the "Contracts"):
INSURANCE COMPANY TYPE OF POLICY ----------------------------------------------------------------------------- Northbrook Life Insurance Certain Flexible Premium Variable Annuity and Company Variable Life Insurance Contracts ----------------------------------------------------------------------------- Allstate Life Insurance Certain Flexible Premium Deferred Variable Company of New York Annuity Contracts ----------------------------------------------------------------------------- Glenbrook Life and Annuity Certain Flexible Premium Deferred Variable Company Annuity Contracts and Certain Flexible Premium Variable Life Insurance Contracts -----------------------------------------------------------------------------
Shares of each Portfolio are purchased by the life insurance companies at net asset value per share without a sales charge in accordance with instructions received from the owners of the applicable Contract. The Fund also offers Class X shares through a separate prospectus. Class X shares are subject to lower expenses, but are only available through certain eligible Contracts. For more information, contact the insurance company offering the accompanying prospectus. 1 [Sidebar] MONEY MARKET A portfolio having the goal to select securities to provide current income while seeking to maintain a stable share price of $1.00. YIELD The Portfolio's yield reflects the actual income the Portfolio pays to you expressed as a percentage of the Portfolio share price. Because the Portfolio's income from its portfolio securities will fluctuate, the income it in turn distributes to you and the Portfolio's yield will vary. [End Sidebar] The Portfolios The Money Market Portfolio [ICON] INVESTMENT OBJECTIVES - -------------------------------------------------------------------------------- The Money Market Portfolio seeks high current income, preservation of capital and liquidity. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio invests in high quality, short-term debt obligations. In selecting investments, the "Investment Manager," Morgan Stanley Investment Advisors Inc., seeks to maintain the Portfolio's share price at $1.00. A mutual fund's share price remaining stable at $1.00 means that the fund would preserve the principal value of the shareholders' investments. The Portfolio's investments include the following money market instruments: - Commercial paper. - Corporate obligations. - Debt obligations of U.S. regulated banks and instruments secured by those obligations. These investments include certificates of deposit. - Eurodollar certificates of deposit. - Certificates of deposit of savings banks and savings and loan associations. - Debt obligations issued or guaranteed as to principal and interest by the U.S. government, its agencies or its instrumentalities. - Repurchase agreements, which may be viewed as a type of secured lending by the Portfolio. The Portfolio may purchase debt obligations that have fixed, variable or floating rates of interest. The interest rates payable on variable rate or floating rate obligations may fluctuate based upon changes in market rates. The Portfolio attempts to balance its objectives of high income, capital preservation and liquidity by investing in securities of varying maturities and risks. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objectives. Principal risks of investing in the Portfolio are associated with its debt obligation investments. All debt obligations, such as bonds, 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 debt security resulting from changes in the general level of interest rates. The Investment Manager actively manages the Portfolio's assets to reduce the risk of losing any principal investment as a result of credit or interest rate risks. The Portfolio's assets are reviewed 2 [Sidebar] ANNUAL TOTAL RETURNS This chart shows the performance of the Portfolio's Class Y shares for the past calendar year. AVERAGE ANNUAL TOTAL RETURNS This table shows the average annual total returns of the Portfolio's Class Y shares. [End Sidebar] to maintain or improve creditworthiness. In addition, federal regulations require money market funds to invest only in debt obligations of high quality and short maturities, and repurchase agreements with respect to such obligations. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. An investment in the Portfolio is not a bank deposit and is not guaranteed or insured by the FDIC or any other government agency. Although the Portfolio seeks to preserve the value of your investment at $1.00 per share, if it is unable to do so, it is possible to lose money by investing in the Portfolio. [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Money Market Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 2001 3.68%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS 0.30%. During the period shown in the bar chart, the highest return for a calendar quarter was 1.30% (quarter ended March 31, 2001) and the lowest return for a calendar quarter was 0.53% (quarter ended December 31, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) ------------------------------------------------------------------------ LIFE OF PORTFOLIO PAST 1 YEAR (SINCE 6/5/00) ------------------------------------------------------------------------ The Money Market Portfolio 3.68% 4.51% ------------------------------------------------------------------------
3 [Sidebar] INCOME An investment objective having the goal of selecting securities to pay out income rather than rise in value. [End Sidebar] The Limited Duration Portfolio [ICON] INVESTMENT OBJECTIVE - -------------------------------------------------------------------------------- The Limited Duration Portfolio (formerly named the Short-Term Bond Portfolio) seeks to provide a high level of current income consistent with the preservation of capital. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 65% of its assets in bonds issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities (including zero coupon securities), and investment grade corporate and other types of bonds, including asset-backed securities. In selecting portfolio investments, the "Investment Manager," Morgan Stanley Investment Advisors Inc., considers both domestic and international economic developments, interest rate trends and other factors and seeks to maintain an overall weighted average maturity for the Portfolio of less than three years. Mortgage-Backed Securities. Certain of the securities in which the Portfolio may invest are mortgage-backed securities. One type of mortgage-backed security, in which the Portfolio may invest, is a mortgage pass-through security. These securities represent a participation interest in a pool of mortgage loans originated by U.S. Governmental or private lenders such as banks. They differ from conventional debt securities, which provide for periodic payment of interest in fixed amounts and principal payments at maturity or on specified call dates. Mortgage pass-through securities provide for monthly payments that are a "pass-through" of the monthly interest and principal payments made by the individual borrowers on the pooled mortgage loans. Mortgage pass-through securities may be collateralized by mortgages with fixed rates of interest or adjustable rates. Collateralized Mortgage Obligations ("CMOs"). CMOs are debt obligations collateralized by mortgage loans or mortgage pass-through securities (collectively "Mortgage Assets"). Payments of principal and interest on the Mortgage Assets and any reinvestment income are used to make payments on the CMOs. CMOs are issued in multiple classes. Each class has a specific fixed or floating coupon rate and a stated maturity or final distribution date. The principal and interest on the Mortgage Assets may be allocated among the classes in a number of different ways. Certain classes will, as a result of the allocation, have more predictable cash flows than others. As a general matter, the more predictable the cash flow, the lower the yield relative to other Mortgage Assets. The less predictable the cash flow, the higher the yield and the greater the risk. The Portfolio may invest in any class of CMO. Asset-Backed Securities. The Portfolio may also invest in asset-backed securities. Asset-backed securities represent an interest in a pool of assets such as automobile and credit card receivables or home equity loans that have been securitized in pass through structures similar to mortgage-backed securities. These types of pass through securities provide for monthly payments that are a "pass through" of the monthly interest and principal payments made by the individual borrowers on the pooled receivables. In addition, the Portfolio may invest up to 25% of its net assets in investment grade fixed-income securities issued by foreign governments or corporations. The Portfolio's investments also may include "Rule 144A" fixed-income securities, which are subject to resale restrictions. Up to 5% of the Portfolio's net assets may be invested in fixed-income securities rated lower than investment grade, or if unrated of comparable quality as determined by the Investment Manager 4 (commonly known as "junk bonds"). The Portfolio may also invest in futures with respect to financial instruments and interest rate indexes. The Portfolio may use futures to facilitate allocation of the Portfolio's investments among asset classes, to increase or decrease the Portfolio's exposure to a bond market or to seek to protect against a decline in securities or an increase in prices of securities that may be purchased. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objective. The Portfolio's share price and yield will fluctuate with changes in the market value and/or yield of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. Principal risks of investing in the Portfolio are associated with the Portfolio's investments in fixed-income securities. These risks are credit risk and interest rate risk. Credit risk is 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. Duration is a measure of the expected life of a fixed-income security and is considered a more precise measure of interest rate sensitivity than term-to-maturity. A portfolio with a lower average duration generally should experience less price volatility in response to changes in interest rates than a portfolio with a higher average maturity. There are certain situations involving variable rate and mortgaged-backed securities where duration calculation may not properly reflect the interest rate exposure of a security. There are also particular risks associated with the Portfolio's investments in mortgage-backed securities, which include CMOs, and asset-backed securities. For example, mortgage-backed securities and asset-backed securities are subject to prepayment risk and in some cases may be more volatile and less liquid than other traditional types of debt securities. There are also particular risks associated with the Portfolio's investments in futures. Positions in futures contracts may be closed out only on an exchange which provides a secondary market for such futures. However, there can be no assurance that a liquid secondary market will exist for any particular futures contract at any specific time. The inability to close out a futures contract could have an adverse impact on the Portfolio's ability to hedge effectively. Additionally, the Portfolio's use of futures involves the risk of imperfect or no correlation where the securities underlying futures contracts have different maturities than the securities that are the subject of the hedge. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. 5 [Sidebar] ANNUAL TOTAL RETURNS This chart shows the performance of the Portfolio's Class Y shares for the past calendar year. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class Y shares with those of a broad measure of market performance over time. [End Sidebar] [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Limited Duration Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 2001 6.49%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS -0.25%. During the period shown in the bar chart, the highest return for a calendar quarter was 3.66% (quarter ended September 30, 2001) and the lowest return for a calendar quarter was 0.44% (quarter ended December 31, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) -------------------------------------------------------------- LIFE OF PORTFOLIO PAST 1 YEAR (SINCE 6/5/00) -------------------------------------------------------------- The Limited Duration Portfolio 6.49% 6.60% -------------------------------------------------------------- Lehman Brothers U.S. Credit Index (1-5)(1) 9.73% 10.40% --------------------------------------------------------------
1 THE LEHMAN BROTHERS U.S. CREDIT INDEX (1-5 YEAR) (FORMERLY LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) INVESTMENT GRADE DEBT INDEX) INCLUDES U.S. CORPORATE AND SPECIFIED FOREIGN DEBENTURES AND SECURED NOTES WITH MATURITIES OF ONE TO FIVE YEARS. THE INDEX DOES NOT INCLUDE ANY EXPENSES, FEES OR CHARGES. THE INDEX IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. 6 [SIDEBAR] INCOME An investment objective having the goal of selecting securities to pay out income. [End Sidebar] The Quality Income Plus Portfolio [ICON] INVESTMENT OBJECTIVES - -------------------------------------------------------------------------------- The Quality Income Plus Portfolio seeks as a primary objective to provide a high level of current income by investing primarily in U.S. government securities and other fixed-income securities. As a secondary objective the Portfolio seeks capital appreciation but only when consistent with its primary objective. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in (i) U.S. Government securities issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities, (ii) debt securities (including zero coupon securities and asset-backed securities) rated at the time of purchase within the four highest bond rating categories by Moody's or S&P or if not rated determined to be of comparable quality by the "Investment Manager," Morgan Stanley Investment Advisors Inc., and (iii) Yankee government bonds rated at the time of purchase within the four highest rating categories of Moody's or S&P or if not rated determined to be of comparable quality by the Investment Manager. Yankee government bonds are U.S. dollar denominated bonds issued by foreign government agencies or instrumentalities (no more than 20% of the Portfolio's assets may be invested in Yankee government bonds). The Portfolio is not limited as to the maturities of the U.S. government and other debt securities in which it may invest. In making investment decisions for the Portfolio, the Investment Manager considers both domestic and international economic developments, interest rate trends and other factors. The Investment Manager evaluates technical considerations such as the relative supply of and demand for corporate notes and U.S. Treasury and agencies issues before it decides upon an asset allocation. Similarly, the assessment of the strength of individual companies that issue corporate debt and the overall country risk of sovereign debt obligations contribute to the decision-making process. Mortgage-Backed Securities. Certain of the securities in which the Portfolio may invest are mortgage-backed securities. One type of mortgage-backed security, in which the Portfolio may invest, is a mortgage pass-through security. These securities represent a participation interest in a pool of mortgage loans originated by U.S. Governmental or private lenders such as banks. They differ from conventional debt securities, which provide for periodic payment of interest in fixed amounts and principal payments at maturity or on specified call dates. Mortgage pass-through securities provide for monthly payments that are a "pass-through" of the monthly interest and principal payments made by the individual borrowers on the pooled mortgage loans. Mortgage pass-through securities may be collateralized by mortgages with fixed rates of interest or adjustable rates. Collateralized Mortgage Obligations ("CMOs"). CMOs are debt obligations collateralized by mortgage loans or mortgage pass-through securities (collectively "Mortgage Assets"). Payments of principal and interest on the Mortgage Assets and any reinvestment income are used to make payments on the CMOs. CMOs are issued in multiple classes. Each class has a specific fixed or floating coupon rate and a stated maturity or final distribution date. The principal and interest on the Mortgage Assets may be allocated among the classes in a number of different 7 ways. Certain classes will, as a result of the allocation, have more predictable cash flows than others. As a general matter, the more predictable the cash flow, the lower the yield relative to other Mortgage Assets. The less predictable the cash flow, the higher the yield and the greater the risk. The Portfolio may invest in any class of CMO. Asset-Backed Securities. The Portfolio may also invest in asset-backed securities. Asset-backed securities represent an interest in a pool of assets such as automobile and credit card receivables or home equity loans that have been securitized in pass through structures similar to mortgage-backed securities. These types of pass through securities provide for monthly payments that are a "pass through" of the monthly interest and principal payments made by the individual borrowers on the pooled receivables. Borrowing. In seeking to increase income, the Portfolio may borrow to purchase securities. Such borrowing may not exceed 25% of the Portfolio's assets. Other Investments. The Portfolio may invest up to 15% of its net assets in Yankee corporate bonds which are rated at the time of purchase within the four highest grades as determined by Moody's or S&P or which, if not rated, are of comparable quality as determined by the Investment Manager. Yankee corporate bonds are U.S. dollar denominated debt securities issued by foreign companies. The Portfolio may also invest in futures with respect to financial instruments and interest rate indexes. The Portfolio may use futures to facilitate allocation of the Portfolio's investments among asset classes, to increase or decrease the Portfolio's exposure to a bond market or to seek to protect against a decline in securities or an increase in prices of securities that may be purchased. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objectives. The Portfolio's share price and yield will fluctuate with changes in the market value and/or yield of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of investing in the Portfolio is associated with the Portfolio's investments in fixed-income securities. These risks are credit risk and interest rate risk. Credit risk is 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. There are also particular risks associated with the Portfolio's investments in mortgage-backed securities, which include CMOs, and asset-backed securities. For example mortgage-backed securities and asset-backed securities are subject to prepayment risk and in some cases may be more volatile and less liquid than other traditional types of debt securities. There are also particular risks associated with the Portfolio's investments in futures. Positions in futures contracts may be closed out only on an exchange which provides a secondary market for such futures. However, there can be no assurance that a liquid secondary market will exist for any particular futures contract at any specific time. The inability to close out a futures contract could have an adverse impact on the Portfolio's ability to hedge effectively. Additionally, the Portfolio's use of futures involves the risk of imperfect or no correlation where the securities underlying futures contracts have different maturities than the securities that are the subject of the hedge. 8 [Sidebar] ANNUAL TOTAL RETURNS This chart shows the performance of the Portfolio's Class Y shares for the past calendar year. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class Y shares with those of a broad measure of market performance over time. [End Sidebar] The Portfolio may borrow money to purchase securities. To the extent that the Portfolio engages in such practice it may be leveraged. Leveraging generally exaggerates the effect on net asset value of any increase or decrease in the market value of the Portfolio's investments. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Quality Income Plus Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 2001 9.33%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS -1.05%. During the period shown in the bar chart, the highest return for a calendar quarter was 4.02% (September 30, 2001) and the lowest return for a calendar quarter was 0.41% (quarter ended June 30, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) ------------------------------------------------------------------------ LIFE OF PORTFOLIO PAST 1 YEAR (SINCE 6/5/00) ------------------------------------------------------------------------ The Quality Income Plus Portfolio 9.33% 11.35% ------------------------------------------------------------------------ Lehman Brothers U.S. Aggregate Index(1) 8.44% 10.68% ------------------------------------------------------------------------
1 THE LEHMAN BROTHERS U.S. AGGREGATE INDEX TRACKS THE PERFORMANCE OF ALL U.S. GOVERNMENT AGENCY AND TREASURY SECURITIES, INVESTMENT- GRADE CORPORATE DEBT SECURITIES, AGENCY MORTGAGE-BACKED SECURITIES, ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BASED SECURITIES. THE INDEX DOES NOT INCLUDE ANY EXPENSES, FEES OR CHARGES. THE INDEX IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. 9 [Sidebar] INCOME An investment objective having the goal of selecting securities to pay out income. [End Sidebar] The High Yield Portfolio [ICON] INVESTMENT OBJECTIVES - -------------------------------------------------------------------------------- The High Yield Portfolio seeks as a primary objective to provide a high level of current income by investing in a diversified portfolio consisting principally of fixed-income securities, which may include both non-convertible and convertible debt securities and preferred stocks. As a secondary objective the Portfolio will seek capital appreciation, but only when consistent with its primary objective. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in fixed-income securities (including zero coupon securities) rated Baa or lower by Moody's or BBB or lower by S&P or in nonrated securities considered by the Investment Manager to be appropriate investments for the Portfolio. These securities are commonly known as "junk bonds." They may also include "Rule 144A" securities, which are subject to resale restrictions. There are no minimum quality ratings for investments. In making investment decisions the "Investment Manager," Morgan Stanley Investment Advisors Inc., considers an issuer's creditworthiness, economic developments, interest rate trends and other factors it deems relevant. In evaluating an issuer's creditworthiness the Investment Manager relies principally on its own analysis. A security's credit rating is simply one factor that may be considered by the Investment Manager in this regard. In addition to junk bonds, the Portfolio may invest in the following: - Higher rated fixed-income securities -- The Portfolio may invest in securities rated higher than Baa or BBB (or if not rated, determined to be of comparable quality) when the Investment Manager believes that such securities may produce attractive yields. - Asset-backed securities -- Asset-backed securities represent an interest in a pool of assets such as automobile and credit card receivables or home equity loans that have been securitized in pass through structures similar to mortgage-backed securities. These types of pass through securities provide for monthly payments that are a "pass through" of the monthly interest and principal payments made by the individual borrowers on the pooled receivables. - Foreign securities -- The Portfolio may invest up to 20% of its net assets in securities issued by foreign governments and other foreign issuers (including American depositary receipts or other similar securities convertible into securities of foreign issuers) but not more than 10% of its assets in these securities may be denominated in foreign currencies. - Unit Offerings -- The Portfolio may purchase units which combine debt securities with equity securities and/or warrants. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objectives. The Portfolio's share price and yield will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. 10 [Sidebar] ANNUAL TOTAL RETURNS This chart shows the performance of the Portfolio's Class Y shares for the past calendar year. [End Sidebar] A principal risk of investing in the Portfolio is associated with its investments in junk bonds. Junk bonds are subject to greater risk of loss of income and principal than higher rated securities. The prices of junk bonds have been found generally to be less sensitive to changes in prevailing interest rates than higher rated securities but are more likely to be sensitive to adverse economic changes or individual corporate developments. In addition, all fixed-income securities are subject to two types of risk: credit risk and interest rate risk. The Portfolio is subject to the risks associated with foreign securities. These risks include, among other things, the possibility that the Portfolio could be adversely affected by changes in currency exchange rates. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the High Yield Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 2001 -33.92%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS -0.45%. During the period shown in the bar chart, the highest return for a calendar quarter was -3.77% (quarter ended December 31, 2001) and the lowest return for a calendar quarter was -17.23% (quarter ended September 30, 2001). 11 [Sidebar] AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class Y shares with those of a broad measure of market performance over time. [End Sidebar]
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) ---------------------------------------------------------------------------- LIFE OF PORTFOLIO PAST 1 YEAR (SINCE 6/5/00) ---------------------------------------------------------------------------- The High Yield Portfolio -33.92% -38.78% ---------------------------------------------------------------------------- Lehman Brothers U.S. Corporate High Yield Index(1) 5.28% 1.19% ----------------------------------------------------------------------------
1 THE LEHMAN BROTHERS U.S. CORPORATE HIGH YIELD INDEX TRACKS THE PERFORMANCE OF ALL BELOW INVESTMENT-GRADE SECURITIES WHICH HAVE AT LEAST $100 MILLION IN OUTSTANDING ISSUANCE, A MATURITY GREATER THAN ONE YEAR AND ARE ISSUED IN FIXED-RATE U.S. DOLLAR DENOMINATIONS. THE INDEX DOES NOT INCLUDE ANY EXPENSES, FEES OR CHARGES. THE INDEX IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. 12 [Sidebar] GROWTH & INCOME An investment objective having the goal of selecting securities with the potential to rise in price and pay out income. [End Sidebar] The Utilities Portfolio [ICON] INVESTMENT OBJECTIVE - -------------------------------------------------------------------------------- The Utilities Portfolio seeks both capital appreciation and current income. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in the securities of companies engaged in the utilities industry. These companies are involved in various aspects of the industry, such as communications, and gas and electric energy, but they do not include public broadcasting companies. A company will be considered engaged in the utilities industry if it derives at least 50% of its revenues or earnings from that industry or it devotes at least 50% of its assets to activities in that industry. These may include companies involved in, among other things, telecommunications, computers and other new or emerging technologies, gas and electric energy, water distribution, the Internet and Internet related services. The companies may be traditionally regulated public utilities or fully or partially deregulated utility companies as well as unregulated utility companies. The Portfolio's "Investment Manager," Morgan Stanley Investment Advisors Inc., will shift the Portfolio's assets between different segments of the utilities industry and between common stock, other equity securities and investment grade fixed-income securities based on its view of prevailing market, economic and financial conditions. The Portfolio does not have any set policies to concentrate its assets in any particular segment of the utilities industry or any particular type of security. However, the Portfolio's policy to concentrate its assets in the utilities industry is fundamental, and may not be changed without shareholder approval. In selecting common stock and other equity securities, the Investment Manager considers earnings and dividend growth, book value, dividend discount and price/earnings relationships. In addition, the Investment Manager makes continuing assessments of management, the prevailing regulatory framework and industry trends. Computer-based equity selection models also may be used. If the Investment Manager believes favorable conditions for capital growth of equity securities are not prevalent at a particular time, it may allocate the Portfolio's assets predominantly or exclusively to debt securities with the aim of obtaining current income and thus benefitting long-term growth of capital. The Portfolio may invest in asset-backed securities. Asset-backed securities represent an interest in a pool of assets such as a pool of power generation assets or other utility assets or utility related assets, automobile and credit card receivables or home equity loans that have been securitized in pass through structures similar to mortgage-backed securities. These types of pass through securities provide for monthly payments that are a "pass through" of the monthly interest and principal payments made by the individual borrowers on the pooled investments. The Portfolio may invest up to 20% of its assets in U.S. government securities issued or guaranteed as to principal and interest by the U.S. Government or its agencies or instrumentalities and in real estate investment trusts (commonly known as "REITs"). The Portfolio may invest up to 25% of its net assets in foreign securities (including depositary receipts). This percentage limitation, however, does not apply to securities of foreign companies that are listed in the U.S. on a national securities exchange. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objective. The Portfolio's share price will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. 13 The Portfolio invests primarily in securities of companies in the utilities industry. The Portfolio's investments in the utilities industry are impacted by a host of risks particular to that industry. Changing regulation constitutes one of the key industry-specific risks for the Portfolio. State and other regulators monitor and control utility revenues and costs, and therefore may limit utility profits and dividends paid to investors. Regulatory authorities also may restrict a company's access to new markets, thereby diminishing the company's long-term prospects. The deregulation of certain utilities companies may eliminate restrictions on profits and dividends, but may also subject these companies to greater risks of loss. Individual sectors of the utility market are subject to additional risks. These risks apply to all utility companies -- regulated, fully or partially deregulated and unregulated. For example, telecommunications companies have been affected by technological development leading to increased competition, as well as changing regulation of local and long-distance telephone service and other telecommunications businesses. Certain telecommunications companies have not benefitted from the new competitive climate. Certain utilities companies may incur unexpected increases in fuel and other operating costs. They are adversely affected when long-term interest rates rise. Long-term borrowings are used to finance most utility investment and rising interest rates lead to higher financing costs and reduced earnings. There are also the considerable costs associated with environmental compliance, nuclear waste clean-up, and safety regulation. Increasingly, regulators are calling upon electric utilities to bear these added costs, and there is a risk that these costs will not be fully recovered through an increase in revenues. Among gas companies, there has been a move to diversify into oil and gas exploration and development, making investment return more sensitive to energy prices. In the case of the water utility sector, the industry is highly fragmented, and most water supply companies find themselves in mature markets, although upgrading of fresh water and waste water systems is an expanding business. The Portfolio's investments in common stock are also subject to the risks that affect all common stocks. In particular, stock prices can fluctuate widely in response to activities specific to the issuer as well as general market economic and political conditions. The Portfolio's investment in fixed-income securities are subject to credit risk and interest rate risk. Credit risk refers to a possibility that the issuer of a security will be unable to make interest payments and/or repay the principal on its debts. Interest rate risk refers to fluctuations in the value of a fixed-income security resulting from changes in the general level of interest rates. There are also particular risks associated with the Portfolio's investments in asset-backed securities. For example, asset-backed securities are subject to prepayment risk and in some cases may be more volatile and less liquid than other traditional types of debt securities. The Portfolio is subject to the risks associated with foreign securities. These risks include, among other things, the possibility that the Portfolio could be adversely affected by changes in currency exchange rates. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. 14 [Sidebar] ANNUAL TOTAL RETURNS This chart shows the performance of the Portfolio's Class Y shares for the past calendar year. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class Y shares with those of a broad measure of market performance over time. [End Sidebar] [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Utilities Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 2001 -25.98%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS -2.28%. During the period shown in the bar chart, the highest return for a calendar quarter was -1.89% (quarter ended December 31, 2001) and the lowest return for a calendar quarter was -15.37% (quarter ended September 30, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) ------------------------------------------------------------------ LIFE OF PORTFOLIO PAST 1 YEAR (SINCE 6/5/00) ------------------------------------------------------------------ The Utilities Portfolio -25.98% -16.34% ------------------------------------------------------------------ S&P 500 Index(1) -11.88% -13.38% ------------------------------------------------------------------
1 THE STANDARD AND POOR'S 500 INDEX (S&P 500-REGISTERED TRADEMARK- INDEX) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON 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. 15 [Sidebar] GROWTH & INCOME An investment objective having the goal of selecting securities with the potential to rise in price and pay out income. [End Sidebar] The Income Builder Portfolio [ICON] INVESTMENT OBJECTIVES - -------------------------------------------------------------------------------- The Income Builder Portfolio seeks as a primary objective reasonable income. Growth of capital is the secondary objective. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in income-producing equity and fixed-income securities, with normally at least 65% of its assets invested in income-producing equity securities, including common stock, preferred stock, convertible securities and real estate investment trusts (commonly known as "REITs"). The "Investment Manager," Morgan Stanley Investment Advisors Inc., uses a value-oriented style in the selection of securities. Investments are normally made primarily in (i) common stocks of large capitalization companies with a record of paying dividends and which in the opinion of the Investment Manager have the potential for maintaining dividends, (ii) preferred stock and (iii) securities convertible into common stocks of small and mid-cap companies -- including synthetic and enhanced convertibles. The Portfolio's investments may also include "Rule 144A" securities, which are subject to resale restrictions. The Investment Manager follows a "bottom-up" approach in the selection of convertible securities for the Portfolio. Beginning with a universe of about 500 companies, the Investment Manager narrows the focus to small and mid-cap companies and reviews the issues to determine if the convertible is trading with the underlying equity security. The yield of the underlying equity security is evaluated and company fundamentals are studied to evaluate cash flow, risk/ reward balance, valuation and the prospects for growth. The Portfolio may invest up to 25% of its assets in "enhanced" convertible securities. Enhanced convertible securities offer holders the opportunity to obtain higher current income than would be available from a traditional equity security issued by the same company, in return for reduced participation or a cap on appreciation in the underlying common stock of the issuer which the holder can realize. In addition, in many cases, enhanced convertible securities are convertible into the underlying common stock of the issuer automatically at maturity, unlike traditional convertible securities which are convertible only at the option of the security holder. The Portfolio may invest up to 10% of its assets in "synthetic" convertible securities. Unlike traditional convertible securities whose conversion values are based on the common stock of the issuer of the convertible security, "synthetic" convertible securities are preferred stocks or debt obligations of an issuer which are combined with an equity component whose conversion value is based on the value of the common stock of a different issuer or a particular benchmark (which may include a foreign issuer or basket of foreign stocks, or a company whose stock is not yet publicly traded). In many cases, "synthetic" convertible securities are not convertible prior to maturity, at which time the value of the security is paid in cash by the issuer. 16 The Portfolio may invest up to 35% of its assets in U.S. government securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities and non-convertible fixed-income securities (including zero coupon securities). Up to 20% of the Portfolio's net assets may be invested in non-convertible fixed-income securities rated lower than investment grade by S&P or Moody's (but not below B) or, if unrated, of comparable quality as determined by the Investment Manager (commonly known as "junk bonds"). The 20% limitation is not applicable to convertible securities. Up to 20% of the Portfolio's assets may be invested in common stocks that do not pay a dividend. The Portfolio may invest up to 25% of its net assets in foreign securities (including depositary receipts). This percentage limitation, however, does not apply to securities of foreign companies that are listed in the U.S. on a national securities exchange. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objectives. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of investing in the Portfolio is associated with its investment in common stocks. In particular the prices of common stocks can fluctuate widely in response to activities specific to the issuer as well as general market, economic and political conditions. The Portfolio is also subject to the risks of investing in convertible securities. These securities may carry risks associated with both common stock and fixed-income securities. In addition, because the convertible securities in which the Portfolio invests are convertible into the common stocks of small and midcap companies, the Portfolio is subject to the specific risks associated with investing in small and midcap companies. Investments in small and medium capitalization companies involve greater risk of volatility than is customarily associated with investments in more established companies as well as certain other additional risks. There are also special risks associated with the Portfolio's investments in "enhanced" and "synthetic" convertible securities. These securities may be more volatile and less liquid than traditional convertible securities. The Portfolio is subject to the risks associated with foreign securities. These risks include, among other things, the possibility that the Portfolio could be adversely affected by changes in currency exchange rates. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. 17 [Sidebar] ANNUAL TOTAL RETURNS This chart shows the performance of the Portfolio's Class Y shares for the past calendar year. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class Y shares with those of a broad measure of market performance over time. [End Sidebar] [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Income Builder Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 2001 2.10%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS 3.04%. During the period shown in the bar chart, the highest return for a calendar quarter was 5.24% (quarter ended December 31, 2001) and the lowest return for a calendar quarter was -7.43% (quarter ended September 30, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) ---------------------------------------------------------------------------- LIFE OF PORTFOLIO PAST 1 YEAR (SINCE 6/5/00) ---------------------------------------------------------------------------- The Income Builder Portfolio 2.10% 2.02% ---------------------------------------------------------------------------- S&P 500 Index(1) -11.88% -13.38% ----------------------------------------------------------------------------
1 THE STANDARD AND POOR'S 500 INDEX (S&P 500-REGISTERED TRADEMARK- INDEX) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON 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. 18 [Sidebar] GROWTH & INCOME An investment objective having the goal of selecting securities with the potential to rise in price and pay out income. [End Sidebar] The Dividend Growth Portfolio [ICON] INVESTMENT OBJECTIVES - -------------------------------------------------------------------------------- The Dividend Growth Portfolio seeks to provide reasonable current income and long term growth of income and capital. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will invest at least 80% of its assets in common stock of companies with a record of paying dividends and the potential for increasing dividends. The "Investment Manager," Morgan Stanley Investment Advisors Inc., initially employs a quantitative screening process in an attempt to develop a number of common stocks which are undervalued and which have a record of paying dividends. The Investment Manager then applies qualitative analysis to determine which stocks it believes have the potential to increase dividends and, finally, to determine whether any of the stocks should be added to the Portfolio. The Investment Manager attempts to avoid investment in speculative securities or those with speculative characteristics. The Portfolio may invest up to 20% of its assets in convertible securities, U.S. government securities issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities, and investment grade fixed-income securities (including zero coupon securities). The Portfolio may also invest any amount of its assets in foreign securities (including depository receipts) that are listed in the U.S. on a national securities exchange. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objectives. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of investing in the Portfolio is associated with its investments in common stock. In particular the prices of common stock may fluctuate widely in response to activities specific to the company as well as general market, economic and political conditions. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. 19 [Sidebar] ANNUAL TOTAL RETURNS This chart shows the performance of the Portfolio's Class Y shares for the past calendar year. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class Y shares with those of a broad measure of market performance over time. [End Sidebar] [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Dividend Growth Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 2001 -5.42%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS 5.34%. During the period shown in the bar chart, the highest return for a calendar quarter was 9.04% (quarter ended December 31, 2001) and the lowest return for a calendar quarter was -14.23% (quarter ended September 30, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) ---------------------------------------------------------------------------- LIFE OF PORTFOLIO PAST 1 YEAR (SINCE 6/5/00) ---------------------------------------------------------------------------- The Dividend Growth Portfolio -5.42% 1.15% ---------------------------------------------------------------------------- S&P 500 Index(1) -11.88% -13.38% ----------------------------------------------------------------------------
1 THE STANDARD AND POOR'S 500 INDEX (S&P 500-REGISTERED TRADEMARK- INDEX) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON 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. 20 [Sidebar] CAPITAL GROWTH An investment objective having the goal of selecting securities with the potential to rise in price rather than pay out income. [End Sidebar] The Capital Growth Portfolio [ICON] INVESTMENT OBJECTIVE - -------------------------------------------------------------------------------- The Capital Growth Portfolio seeks long term capital growth. On April 25, 2002, the Fund's Board of Trustees approved the adoption of a Plan of Liquidation (the "Plan") for the Portfolio pursuant to which the assets of the Portfolio would be liquidated and the proceeds, net of expenses, would be distributed to shareholders. Implementation of the Plan is subject to the approval of shareholders of the Portfolio. A Special Meeting of Shareholders of the Portfolio will be held on or about August 20, 2002 for the purpose of voting on the proposed Plan. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 65% of its assets in common stocks. The "Investment Manager," Morgan Stanley Investment Advisors Inc., utilizes a two-stage computerized screening process designed to find companies that demonstrate a history of consistent growth in earnings and revenues over the past several years, and have solid future earnings growth characteristics and attractive valuations. Dividend income is not a consideration in this stock selection process. Companies meeting these requirements are potential candidates for investment by the Portfolio. The Investment Manager may modify the screening process and/or may utilize additional or different screening processes in connection with the Portfolio's investments. The Portfolio may invest up to 35% of its assets in U.S. government securities issued or guaranteed as to principal and interest by the U.S. Government or its agencies or instrumentalities, investment grade fixed-income securities (including zero coupon securities), convertible securities, unit offerings involving a combination of a debt security and a convertible security and/or warrant and real estate investment trusts (commonly known as "REITs"). The Portfolio may invest up to 25% of its net assets in foreign securities (including depositary receipts). This percentage limitation, however, does not apply to securities of foreign companies that are listed in the U.S. on a national securities exchange. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objective. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of investment in the Portfolio is associated with the Portfolio's investments in common stock. In particular the prices of common stocks may fluctuate widely in response to activities specific to the company as well as general market, economic and political conditions. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. 21 [Sidebar] ANNUAL TOTAL RETURNS This chart shows the performance of the Portfolio's Class Y shares for the past calendar year. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class Y shares with those of a broad measure of market performance over time. [End Sidebar] [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Capital Growth Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 2001 -26.49%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS 0.44%. During the period shown in the bar chart, the highest return for a calendar quarter was 3.81% (quarter ended December 31, 2001) and the lowest return for a calendar quarter was -16.50% (quarter ended September 30, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) ------------------------------------------------------------------ LIFE OF PORTFOLIO PAST 1 YEAR (SINCE 6/5/00) ------------------------------------------------------------------ The Capital Growth Portfolio -26.49% -18.96% ------------------------------------------------------------------ S&P 500 Index(1) -11.88% -13.38% ------------------------------------------------------------------
1 THE STANDARD AND POOR'S 500 INDEX (S&P 500-REGISTERED TRADEMARK- INDEX) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON 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. 22 [Sidebar] GROWTH & INCOME An investment objective having the goal of selecting securities with the potental to rise in price and pay out income. [End Sidebar] The Global Dividend Growth Portfolio [ICON] INVESTMENT OBJECTIVE - -------------------------------------------------------------------------------- The Global Dividend Growth Portfolio seeks to provide reasonable current income and long term growth of income and capital. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in dividend paying equity securities issued by issuers located in various countries around the world. The "Investment Manager," Morgan Stanley Investment Advisors Inc., seeks investments primarily in common stock of companies with a record of paying dividends and potential for increasing dividends. The Portfolio invests in at least three separate countries. The percentage of assets invested in particular geographic sectors will shift from time to time in accordance with the judgement of the Investment Manager. Up to 20% of the Portfolio's assets may be invested as follows: - Convertible securities, U.S. government securities issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities, fixed-income securities issued by foreign governments and international organizations and investment grade debt securities (including zero coupon securities). - Forward currency contracts, which involve the purchase or sale of a specific amount of foreign currency at a specified price with delivery at a specified future date. The Portfolio may use these contracts to hedge against adverse price movements in its portfolio securities and the currencies in which they are denominated. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objective. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of Investment in the Portfolio is associated with the Portfolio's investments in common stocks. In particular, the price of common stocks may fluctuate widely in response to activities specific to the company as well as general market, economic and political conditions. Another principal risk relates to the Portfolio's investments in foreign securities. In particular, foreign security investments may be adversely affected by changes in currency exchange rates. In addition, investments in foreign securities may be adversely affected by among other things political, social and economic developments abroad. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. 23 [Sidebar] ANNUAL TOTAL RETURNS This chart shows the performance of the Portfolio's Class Y shares for the past calendar year. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class Y shares with those of a broad measure of market performance over time. [End Sidebar] [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Global Dividend Growth Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 2001 -6.44%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS 3.32%. During the period shown in the bar chart, the highest return for a calendar quarter was 10.54% (quarter ended December 31, 2001) and the lowest return for a calendar quarter was -12.00% (quarter ended September 30, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) ------------------------------------------------------------------ LIFE OF PORTFOLIO PAST 1 YEAR (SINCE 6/5/00) ------------------------------------------------------------------ The Global Dividend Growth Portfolio -6.44% -4.11% ------------------------------------------------------------------ MSCI World Index(1) -16.82% -17.72% ------------------------------------------------------------------
1 THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD INDEX MEASURES PERFORMANCE FROM A DIVERSE RANGE OF GLOBAL STOCK MARKETS INCLUDING SECURITIES REPRESENTATIVE OF THE MARKET STRUCTURE OF 22 DEVELOPED MARKET COUNTRIES IN NORTH AMERICA, EUROPE AND THE ASIA/PACIFIC REGION. THE PERFORMANCE OF THE INDEX IS LISTED IN U.S. DOLLARS AND ASSUMES REINVESTMENT OF NET DIVIDENDS. "NET DIVIDENDS" REFLECTS A REDUCTION IN DIVIDENDS AFTER TAKING INTO ACCOUNT WITHHOLDING OF TAXES BY CERTAIN FOREIGN COUNTRIES REPRESENTED IN THE INDEX. THE INDEX DOES NOT INCLUDE ANY EXPENSES, FEES OR CHARGES. THE INDEX IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. 24 [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 European Growth Portfolio [ICON] INVESTMENT OBJECTIVE - -------------------------------------------------------------------------------- The European Growth Portfolio seeks to maximize the capital appreciation of its investments. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in securities issued by issuers located in European countries. A company is considered located in Europe if (i) it is organized under the laws of a European country and has a principal office in a European country; (ii) it derives at least 50% of its total revenue from business in Europe; or (iii) the company's equity securities are traded principally on a stock exchange in Europe. The principal countries in which the Portfolio invests are France, the United Kingdom, Germany, the Netherlands, Spain, Sweden, Switzerland and Italy. The Portfolio invests in at least three separate countries. The Portfolio generally invests principally in equity securities (which may include depositary receipts or convertible securities) but may also invest without limitation in fixed-income securities issued or guaranteed by European governments when the "Investment Manager," Morgan Stanley Investment Advisors Inc., or the "Sub-Advisor," Morgan Stanley Investment Management Inc., determine such investments to be appropriate. The Investment Manager and the Sub-Advisor generally invest Portfolio assets in companies they believe have a high rate of earnings growth potential. They also select securities, which in their view, possess, both on an absolute basis and as compared with other securities around the world, attractive price/earnings, price/cash flow and price/revenue ratios. The Portfolio may invest up to 20% of its assets as follows: - Equity securities issued by non-European issuers, and government and convertible securities issued by non-European governmental or private issuers. - Forward currency contracts, which involve the purchase or sale of a specific amount of foreign currency at the current price with delivery at a specified future date. The Portfolio may use these contracts to hedge against adverse price movements in its portfolio securities and securities it intends to purchase and the currencies in which they are denominated. The Portfolio may also use forward currency contracts to modify the Portfolio's exposure to various currency markets. The Portfolio may invest up to 5% of its net assets in put and call options with respect to foreign currencies. The Portfolio may also purchase and sell stock index futures contracts and options thereon. Stock index futures and options thereon may be used to facilitate trading, to increase the Portfolio's market exposure or to seek to protect against an increase in the prices of securities that may be purchased. The Portfolio may invest in warrants and acquire warrants attached to other securities. 25 [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objective. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk factor associated with investment in the Portfolio relates to the Portfolio's investments in Europe. In particular, adverse political, social or economic developments in Europe, or in a particular European country, could cause a substantial decline in the value of the Portfolio. The Portfolio's investments in common stock are also subject to the risks that affect all common stocks. In particular, stock prices can fluctuate widely in response to activities specific to the issuer as well as general market economic and political conditions. The conversion to a single European currency by many European countries could potentially adversely affect the value and/or increase the volatility of the Portfolio's investments. In addition, the Portfolio is subject to the risks associated with foreign securities generally. These risks include, among other things, the possibility that the Portfolio could be adversely affected by changes in currency exchange rates. In addition, the Portfolio's investments in fixed-income securities are subject to two types of risk: credit risk and interest rate risk. The Portfolio is also subject to the risks of investing in convertible securities. These securities may carry risks associated with both common and fixed-income securities. The performance of the Portfolio also will depend on whether the Sub-Advisor is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. 26 [Sidebar] ANNUAL TOTAL RETURNS This chart shows the performance of the Portfolio's Class Y shares for the past calendar year. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class Y shares with those of a broad measure of market performance over time. [End Sidebar] [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the European Growth Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 2001 -17.92%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS -0.66%. During the period shown in the bar chart, the highest return for a calendar quarter was 9.47% (quarter ended December 31, 2001) and the lowest return for a calendar quarter was -14.92% (quarter ended March 31, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) ------------------------------------------------------------------ LIFE OF PORTFOLIO PAST 1 YEAR (SINCE 6/5/00) ------------------------------------------------------------------ The European Growth Portfolio -17.92% -16.01% ------------------------------------------------------------------ MSCI World Index(1) -16.82% -17.72% ------------------------------------------------------------------ MSCI Europe Index(2) -15.54% -15.39% ------------------------------------------------------------------
1 THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD INDEX MEASURES PERFORMANCE FROM A DIVERSE RANGE OF GLOBAL STOCK MARKETS INCLUDING SECURITIES REPRESENTATIVE OF THE MARKET STRUCTURE OF 22 DEVELOPED MARKET COUNTRIES IN NORTH AMERICA, EUROPE AND THE ASIA/ PACIFIC REGION. THE PERFORMANCE OF THE INDEX IS LISTED IN U.S. DOLLARS AND ASSUMES REINVESTMENT OF NET DIVIDENDS. "NET DIVIDENDS" REFLECTS A REDUCTION IN DIVIDENDS AFTER TAKING INTO ACCOUNT WITHHOLDING OF TAXES BY CERTAIN FOREIGN COUNTRIES REPRESENTED IN THE INDEX. THE INDEX DOES NOT INCLUDE ANY EXPENSES, FEES OR CHARGES. THE INDEX IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. 2 THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EUROPE INDEX MEASURES PERFORMANCE FROM A DIVERSE RANGE OF GLOBAL STOCK MARKETS WITHIN AUSTRIA, BELGIUM, DENMARK, FINLAND, FRANCE, GERMANY, ITALY, THE NETHERLANDS, NORWAY, SPAIN, SWEDEN, SWITZERLAND, IRELAND, PORTUGAL, AND THE UNITED KINGDOM. THE PERFORMANCE OF THE INDEX IS LISTED IN U.S. DOLLARS AND ASSUMES REINVESTMENT OF NET DIVIDENDS. "NET DIVIDENDS" REFLECTS A REDUCTION IN DIVIDENDS AFTER TAKING INTO ACCOUNT WITHHOLDING OF TAXES BY CERTAIN FOREIGN COUNTRIES REPRESENTED IN THE INDEX. THE INDEX DOES NOT INCLUDE ANY EXPENSES, FEES OR CHARGES. THE INDEX IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. 27 [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 Pacific Growth Portfolio [ICON] INVESTMENT OBJECTIVE - -------------------------------------------------------------------------------- The Pacific Growth Portfolio seeks to maximize the capital appreciation of its investments. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in common stocks (including depositary receipts) and other securities of companies which are (i) organized under the laws of and have a principal place of business in Asia, Australia or New Zealand or (ii) derives at least 50% of their total revenues from business in such areas. The principal Asian countries include: Japan, Malaysia, Singapore, Hong Kong, Thailand, the Philippines, India, Indonesia, Taiwan and South Korea. The Portfolio's assets are invested in at least three countries. The Portfolio may invest more than 25% of its assets in Japan, Hong Kong, South Korea and Taiwan. Thus, the investment performance of the Portfolio may be subject to the social, political and economic events occurring in these countries to a greater extent than other countries. The "Investment Manager," Morgan Stanley Investment Advisors Inc., and the "Sub-Advisor," Morgan Stanley Investment Management Inc., generally invest Portfolio assets in companies they believe have a high rate of earnings growth potential. They also select securities, which in their view, possess, both on an absolute basis and as compared with other securities around the world, attractive price/earnings, price/cash flow and price/revenue ratios. The Portfolio generally invests principally in equity securities but may also invest without limitation in fixed-income obligations issued or guaranteed by an Asian country or Australia or New Zealand when the Investment Manager or the Sub-Advisor determine such investments to be appropriate. The Portfolio may invest up to 20% of its assets as follows: - Equity, fixed-income or convertible securities (including zero coupon securities) of companies located anywhere in the world, including the United States. - Forward currency contracts, which involve the purchase or sale of a specific amount of foreign currency at the current price with a delivery at a specified future date. The Portfolio may use these contracts to hedge against adverse price movements in its portfolio securities and securities it intends to purchase and the currencies in which they are denominated. The Portfolio may invest up to 5% of its net assets in put and call options with respect to foreign currencies. The Portfolio may invest up to 10% of its net assets in securities issued by other investment companies. The Investment Manager and/or Sub-Advisor may view these investments as necessary or advisable to participate in certain foreign markets where foreigners are prohibited from investing directly in the securities of individual companies without regulatory approval. The Portfolio may invest in warrants and acquire warrants attached to other securities. 28 [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objective. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of investment in the Portfolio relates to the Portfolio's investments in the Pacific region. In particular, adverse political, social or economic developments in the Pacific region or in a particular Pacific country could cause a substantial decline in the value of the Portfolio. The Portfolio's investments in common stock are also subject to the risks that affect all common stocks. In particular, stock prices can fluctuate widely in response to activities specific to the issuer as well as general market economic and political conditions. In addition, the Portfolio is subject to the risks associated with foreign securities generally. These risks include among other things the possibility that the Portfolio could be adversely affected by changes in currency exchange rates. The Portfolio may invest a substantial portion of its assets in developing countries. These investments carry greater risks than those associated with investment in more developed countries. In addition, the Portfolio's investments in fixed-income securities are subject to two types of risk: credit risk and interest rate risk. The performance of the Portfolio also will depend on whether the Sub-Advisor is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. 29 [Sidebar] ANNUAL TOTAL RETURNS This chart shows the performance of the Portfolio's Class Y shares for the past calendar year. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class Y shares with those of a broad measure of market performance over time. [End Sidebar] [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Pacific Growth Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 2001 -27.26%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS 1.00%. During the period shown in the bar chart, the highest return for a calendar quarter was 5.56% (quarter ended December 31, 2001) and the lowest return for a calendar quarter was -21.58% (quarter ended September 30, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) ------------------------------------------------------------------ LIFE OF PORTFOLIO PAST 1 YEAR (SINCE 6/5/00) ------------------------------------------------------------------ The Pacific Growth Portfolio -27.26% -32.99% ------------------------------------------------------------------ MSCI World Index(1) -16.82% -17.72% ------------------------------------------------------------------
1 THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD INDEX MEASURES PERFORMANCE FROM A DIVERSE RANGE OF GLOBAL STOCK MARKETS INCLUDING SECURITIES REPRESENTATIVE OF THE MARKET STRUCTURE OF 22 DEVELOPED MARKET COUNTRIES IN NORTH AMERICA, EUROPE AND THE ASIA/PACIFIC REGION. THE PERFORMANCE OF THE INDEX IS LISTED IN U.S. DOLLARS AND ASSUMES REINVESTMENT OF NET DIVIDENDS. "NET DIVIDENDS" REFLECTS A REDUCTION IN DIVIDENDS AFTER TAKING INTO ACCOUNT WITHHOLDING OF TAXES BY CERTAIN FOREIGN COUNTRIES REPRESENTED IN THE INDEX. THE INDEX DOES NOT INCLUDE ANY EXPENSES, FEES OR CHARGES. THE INDEX IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. 30 [Sidebar] CAPITAL GROWTH An investment objective having the goal of selecting securities with the potential to rise in price. [End Sidebar] The Equity Portfolio [ICON] INVESTMENT OBJECTIVES - -------------------------------------------------------------------------------- The Equity Portfolio seeks as a primary objective growth of capital through investments in common stocks of companies believed by the Investment Manager to have potential for superior growth. As a secondary objective the Equity Portfolio seeks income but only when consistent with its primary objective. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in equity securities and securities convertible into equity securities. In selecting investments, the "Investment Manager," Morgan Stanley Investment Advisors Inc., may employ valuation models based on various economic and market indicators. The Investment Manager currently utilizes a process, known as sector rotation, that emphasizes industry selection over individual company selection. The Investment Manager invests in those industries that it believes will have the strongest relative earnings growth potential given the projected economic outlook. After selecting the Portfolio's target industries, the Investment Manager then selects specific companies within those industries whose prospects are deemed attractive after assessing company fundamentals and valuation screens. The Investment Manager utilizes a sector rotation process designed to respond to changing economic cycles by proactively investing in industries that the Investment Manager believes to be positioned to benefit from the current phase of the economic cycle. First, the Investment Manager attempts to identify at what stage of the business cycle the economy is in and which industries have historically outperformed the overall market during that stage of the cycle. To accomplish that task, the Investment Manager establishes an economic forecast based on its short term and long term views of the domestic and global economic cycles. As part of this process, the Investment Manager will attempt to identify secular trends, such as shifting demographics or technological developments, that could add clarity to its analysis. Also considered are competitive industry variables, such as supply and demand, pricing trends and new product cycles. The Portfolio may invest up to 20% of its assets in corporate debt securities (including zero coupon securities) rated Aa or better by Moody's or AA or better by S&P, U.S. government securities, issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities, and preferred stocks. The Portfolio may invest in securities of Canadian issuers registered under the Securities Exchange Act of 1934 or American Depositary Receipts. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objectives. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of investment in the Portfolio is associated with the Portfolio's investments in common stock. In particular the price of common stocks may fluctuate widely in response to activities specific to the company as well as general market, economic and political conditions. Stocks of small and medium capitalization companies in which the Portfolio may invest pose greater risk of volatility than is customarily associated with larger established companies as well as certain other additional risks. The Portfolio's emphasis on industries may cause its performance 31 [Sidebar] ANNUAL TOTAL RETURNS This chart shows the performance of the Portfolio's Class Y shares for the past calendar year. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class Y shares with those of a broad measure of market performance over time. [End Sidebar] to be more sensitive to developments affecting particular industries than that of a fund which places greater emphasis on individual companies. Another principal risk relates to the Portfolio's investments in fixed-income securities. Fixed-income securities involve credit risk and interest rate risk. Credit risk relates to the possibility that an issuer could default on its obligation to pay principal and/or interest. Interest rate risk relates to the possibility that the value of securities may be adversely affected by fluctuations in interest rates. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Equity Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 2001 -27.07%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS -0.09%. During the period shown in the bar chart, the highest return for a calendar quarter was 10.98% (quarter ended December 31, 2001) and the lowest return for a calendar quarter was -20.89% (quarter ended March 31, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) ---------------------------------------------------------------------------- LIFE OF PORTFOLIO PAST 1 YEAR (SINCE 6/5/00) ---------------------------------------------------------------------------- The Equity Portfolio -27.07% -20.29% ---------------------------------------------------------------------------- S&P 500 Index(1) -11.88% -13.38% ----------------------------------------------------------------------------
1 THE STANDARD AND POOR'S 500 INDEX (S&P 500-REGISTERED TRADEMARK- INDEX) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON STOCKS CHOSEN FOR MARKET SIZE, LIQUIDITY AND INDUSTRY GOUP REPRESENTATION. THE INDEX DOES NOT INCLUDE ANY EXPENSES, FEES OR CHARGES. THE INDEX IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. 32 [Sidebar] TOTAL RETURN An investment objective having the goal of selecting securities with the potential to rise in price and pay out income. [End Sidebar] The S&P 500 Index Portfolio [ICON] INVESTMENT OBJECTIVE - -------------------------------------------------------------------------------- The S&P 500 Index Portfolio seeks to provide investment results that before expenses, correspond to the total return (I.E., the combination of capital changes and income) of the Standard & Poor's-Registered Trademark- 500 Composite Stock Price Index ("S&P 500 Index"). [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in common stocks included in the S&P 500 Index. The "Investment Manager," Morgan Stanley Investment Advisors Inc., "passively" manages the Portfolio's assets by investing in stocks in approximately the same proportion as they are represented in the S&P 500 Index. For example, where the common stock of a specific company represents five percent of the Index, the Investment Manager typically will invest five percent of the Portfolio's assets in that stock. The S&P 500 Index is a well-known stock market index that includes common stocks of 500 companies representing a significant portion of the market value of all common stocks publicly traded in the United States. The Portfolio may purchase and sell stock index futures to simulate investment in the S&P 500. Generally stock index futures may be employed to provide liquidity necessary to meet anticipated redemptions or for day-to-day operating purposes. The Portfolios may invest in securities referred to as SPDRs (known as "spiders") that are designed to track the S&P 500 Index. SPDRs represent an ownership interest in the SPDR Trust, which holds a portfolio of common stocks that closely tracks the price performance and dividend yield of the S&P 500 Index. SPDRs trade on the American Stock Exchange like shares of common stock. The Portfolio may invest up to 10% of its total assets in the aggregate in SPDRs. --------------------------------------- "Standard & Poor's-Registered Trademark-," "S&P-Registered Trademark-," "S&P 500-Registered Trademark-," "Standard & Poor's 500," and "500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by the S&P 500 Index Portfolio. The Portfolio is not sponsored, endorsed, sold or promoted by S&P, and S&P makes no representation regarding the advisability of investing in the Portfolio. (Please see the Statement of Additional Information which sets forth certain additional disclaimers and limitations of liabilities on behalf of S&P.) [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objective. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of investing in the Portfolio is associated with its common stock investments. In general, stock values fluctuate in response to activities specific to the issuer, as well as general market, economic and political conditions. Stock prices can fluctuate widely in response to these factors. Another risk of investing in the Portfolio arises from its operation as a "passively" managed index fund. As such, the adverse performance of a particular stock ordinarily will not result in the elimination of the stock from the Portfolio. The Portfolio will remain invested in common stocks even when stock prices are generally falling. Ordinarily, the Investment Manager will not sell the Portfolio's securities except to reflect additions or deletions of the stocks that comprise the S&P 500 Index, or as may be necessary to raise cash to pay Portfolio shareholders who sell (redeem) Portfolio shares. 33 [Sidebar] ANNUAL TOTAL RETURNS This chart shows the performance of the Portfolio's Class Y shares for the past calendar year. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class Y shares with those of a broad measure of market performance over time. [End Sidebar] The performance of the S&P 500 Index is a hypothetical number which does not take into account brokerage commissions and other transaction costs, custody and other costs of investing which will be borne by the Portfolio and any incremental operating costs borne by the Portfolio (E.G., management fee, transfer agency and accounting costs). Accordingly, the performance of the Portfolio may not correlate directly with the performance of the S&P 500 Index. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the S&P 500 Index Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 2001 -12.53%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS 0.10%. During the period shown in the bar chart, the highest return for a calendar quarter was 10.48% (quarter ended December 31, 2001) and the lowest return for a calendar quarter was -14.86% (quarter ended September 30, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) --------------------------------------------------------------------------------------- LIFE OF PORTFOLIO PAST 1 YEAR (SINCE 6/5/00) --------------------------------------------------------------------------------------- The S&P 500 Index Portfolio -12.53% -13.95% --------------------------------------------------------------------------------------- S&P 500 Index(1) -11.88% -13.38% ---------------------------------------------------------------------------------------
1 THE STANDARD AND POOR'S 500 INDEX (S&P 500-REGISTERED TRADEMARK- INDEX) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON 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. 34 [Sidebar] CAPITAL GROWTH An investment objective having the goal of selecting securities with the potential to rise in price rather than pay out income. [End Sidebar] The Competitive Edge "Best Ideas" Portfolio [ICON] INVESTMENT OBJECTIVE - -------------------------------------------------------------------------------- The Competitive Edge "Best Ideas" Portfolio seeks long-term capital growth. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in common stock of companies included in the "Best Ideas" subgroup of "Global Investing: The Competitive Edge," a research compilation assembled by Morgan Stanley Equity Research -- and other securities selected by the Portfolio's "Investment Manager," Morgan Stanley Investment Advisors Inc. The Competitive Edge "Best Ideas" List. Morgan Stanley Equity Research is recognized as a world leader in global financial research and provides comprehensive research and in-depth knowledge about general markets and specific companies from around the world. It believes that companies with a sustainable competitive edge in the operations of their businesses are worth more than their weaker competitors. Through its ongoing research and analysis, Morgan Stanley Equity Research has developed and undertaken a comprehensive study which it calls "Global Investing: The Competitive Edge" which represents the list of those companies. Morgan Stanley Equity Research group's research analysts and strategists presently evaluate approximately 2,100 companies in 21 industry sectors worldwide. An initial comprehensive review was conducted in October 1996 and identified 238 of these companies as having a long-term sustainable competitive advantage in the global arena (the "Competitive Edge List"). The criteria used to select companies that have a global competitive advantage vary according to industry sector. The Competitive Edge List is currently updated periodically. From the Competitive Edge List, Morgan Stanley Equity Research then assembles a subgroup of approximately 40 companies which it considers at that time to be the most attractive investment opportunities of the companies identified as having a long-term sustainable competitive advantage in the global arena (the "Competitive Edge 'Best Ideas' List"). The Competitive Edge "Best Ideas" List is updated continuously. It is the intention of the Investment Manager that generally at least 1% and not more than 5% of the Portfolio's net assets will be invested in each company on the Competitive Edge "Best Ideas" List. The Portfolio will purchase any security which is added to the Competitive Edge "Best Ideas" List, and generally will sell a security which is eliminated from the Competitive Edge "Best Ideas" List as soon as practicable after the Competitive Edge "Best Ideas" List has been updated by Morgan Stanley Equity Research. Accordingly, securities may be purchased and sold by the Portfolio when such purchases and sales would not be made under traditional investment criteria. The Portfolio may at times purchase securities that are not included on the Competitive Edge "Best Ideas" List but are on the Competitive Edge List or, in the event that the Investment Manager believes that there are no suitable securities on the Competitive Edge List, the Portfolio may purchase securities outside the list. Securities that are not on the Competitive Edge "Best Ideas" List generally will not exceed 20% of the Portfolio's assets. The Portfolio's investments may include forward currency contracts which involve the purchase or sale of a specific amount of foreign currency at a specified price with delivery at a specified 35 future date. The Portfolio may use these contracts to hedge against adverse price movements in its portfolio securities and the currencies in which they are denominated. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objective. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of investment in the Portfolio is associated with the Portfolio's investments in common stocks. In particular the prices of common stocks may fluctuate widely in response to activities specific to the company as well as general market, economic and political conditions. The Portfolio invests principally in securities included on the Competitive Edge "Best Ideas" List which currently consists of 40 companies. As a result of the small universe of stocks in which the Portfolio invests it may be subject to greater risks than would a more diversified company. At times the Portfolio may be restricted in its ability to purchase or sell securities on the Competitive Edge "Best Ideas" List as a result of activities of affiliates of the Investment Manager. In addition, performance of the securities included in the List cannot be used to predict the performance of the Portfolio, an actively managed mutual fund. The Competitive Edge "Best Ideas" List is not compiled with any particular client or product in mind and is not, and will not be, compiled with the Portfolio in mind. When selecting the companies for the list, Morgan Stanley Equity Research does not take into account country or currency risks, and country or industry sector diversification concerns. Morgan Stanley publishes other lists of recommended securities that could be appropriate for Portfolio investors but which will not be used by the Investment Manager for choosing securities for the Portfolio. Morgan Stanley Equity Research could at any time cease publishing the Competitive Edge "Best Ideas" List. In that event the Board of Trustees will make a determination of how to proceed in the best interest of shareholders of the Portfolio consistent with the Portfolio's investment objective. The activities of affiliates of the Investment Manager, including but not limited to Morgan Stanley DW Inc. or Morgan Stanley & Co. Incorporated, may from time to time limit the Portfolio's ability to purchase or sell securities on the Competitive Edge "Best Ideas" List. In addition, the List is available to other clients of Morgan Stanley and its affiliates, including the Investment Manager, as well as the Portfolio. The list is also subject to restrictions related to Morgan Stanley's other businesses, and particular securities may or may not be on the list due to other business concerns of, or legal restrictions applicable to, Morgan Stanley. As a diversified financial services firm, with three primary businesses -- securities, asset management and credit services -- Morgan Stanley provides a wide range of financial services to issuers of securities and investors in securities. Morgan Stanley and others associated with it may create markets or specialize in, have positions in and affect transactions in securities of companies included on its research lists and may also perform or seek to perform investment banking services for those companies. Within the last three years Morgan Stanley may have managed or co-managed public security offerings for companies included on their research lists, and they or their employees may have a long or short position on holdings in the securities, or options on securities, or other related investments of companies included on their research lists. 36 [Sidebar] ANNUAL TOTAL RETURNS This chart shows the performance of the Portfolio's Class Y shares for the past calendar year. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class Y shares with those of a broad measure of market performance over time. [End Sidebar] The Portfolio may invest a substantial portion of its assets in foreign securities. Foreign securities investments may be adversely affected by changes in currency exchange rates. In addition, investment in foreign securities may be adversely affected by, among other things, political, social and economic developments abroad. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Competitive Edge "Best Ideas" Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 2001 -23.53%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS 0.98%. During the period shown in the bar chart, the highest return for a calendar quarter was 6.73% (quarter ended December 31, 2001) and the lowest return for a calendar quarter was -16.73% (quarter ended March 31, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) ---------------------------------------------------------------------------- LIFE OF PORTFOLIO PAST 1 YEAR (SINCE 6/5/00) ---------------------------------------------------------------------------- The Competitive Edge "Best Ideas" Portfolio -23.53% -24.10% ---------------------------------------------------------------------------- MSCI World Index(1) -16.82% -17.72% ----------------------------------------------------------------------------
1 THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD INDEX MEASURES PERFORMANCE FROM A DIVERSE RANGE OF GLOBAL STOCK MARKETS INCLUDING SECURITIES REPRESENTATIVE OF THE MARKET STRUCTURE OF 22 DEVELOPED MARKET COUNTRIES IN NORTH AMERICA, EUROPE AND THE ASIA/ PACIFIC REGION. THE PERFORMANCE OF THE INDEX IS LISTED IN U.S. DOLLARS AND ASSUMES REINVESTMENT OF NET DIVIDENDS. "NET DIVIDENDS" REFLECTS A REDUCTION IN DIVIDENDS AFTER TAKING INTO ACCOUNT WITHHOLDING OF TAXES BY CERTAIN FOREIGN COUNTRIES REPRESENTED IN THE INDEX. THE INDEX DOES NOT INCLUDE ANY EXPENSES, FEES OR CHARGES. THE INDEX IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. 37 [Sidebar] CAPITAL GROWTH An investment objective having the goal of selecting securities with the potential to rise in price rather than pay out income. [End Sidebar] The Aggressive Equity Portfolio [ICON] INVESTMENT OBJECTIVE - -------------------------------------------------------------------------------- The Aggressive Equity Portfolio seeks long-term capital growth. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in common stocks and other equity securities of companies that the "Investment Manager," Morgan Stanley Investment Advisors Inc., believes offer the potential for superior earnings growth. The Portfolio's other equity securities may include preferred stocks, securities convertible into common stock, rights and warrants. No more than 25% of the Portfolio's net assets may be invested in foreign equity or fixed-income securities denominated in a foreign currency and traded primarily in non-U.S. markets. The Investment Manager utilizes a process, known as sector rotation, that emphasizes industry selection over individual company selection. The Investment Manager invests in those industries that it believes will have the strongest relative earnings growth potential given the projected economic outlook. After selecting the Portfolio's target industries, the Investment Manager selects specific companies within those industries whose prospects are deemed attractive after assessing company fundamentals and valuation screens. Company selection is based on the Investment Manager's own analysis and research reports as well as analysis from the equity research departments of recognized securities firms. The Investment Manager has no general criteria as to the market capitalization or asset size of the companies selected for investment and, accordingly, the Portfolio may invest in small and medium-sized companies in addition to larger, more established companies. The Investment Manager utilizes a sector rotation process designed to respond to changing economic cycles by proactively investing in industries that the Investment Manager believes to be positioned to benefit from the current phase of the economic cycle. First, the Investment Manager attempts to identify at what stage of the business cycle the economy is in and which industries have historically outperformed the overall market during that stage of the cycle. To accomplish that task, the Investment Manager establishes an economic forecast based on its short term and long term views of the domestic and global economic cycles. As part of this process, the Investment Manager will attempt to identify secular trends, such as shifting demographics or technological developments, that could add clarity to its analysis. Also considered are competitive industry variables, such as supply and demand, pricing trends and new product cycles. The Portfolio may invest up to 20% of its assets as follows: - (a) fixed-income securities of U.S. companies, (b) fixed-income securities of foreign companies and governments and international organizations, (c) U.S. government securities, issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities, and (d) real estate investment trusts (commonly known as "REITs"). However, no more than 5% of the Portfolio's assets may be invested in debt securities rated lower than investment grade, or if unrated of comparable quality as determined by the Investment Manager (commonly known as "junk bonds"). 38 - Forward currency contracts, which involve the purchase or sale of a specific amount of foreign currency at a specified price with delivery at a specified future date. The Portfolio may use these contracts to hedge against adverse price movements in its portfolio securities and the currencies in which they are denominated. - Put and call options and futures with respect to financial instruments, stock and interest rate indexes and foreign currencies (limit of 5% of its assets for the purchase of put and call options). Options and futures may be used to seek higher returns to seek to protect against a decline in security or currency prices or an increase in prices of securities or currencies that may be purchased. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objective. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of investment in the Portfolio is associated with the Portfolio's investments in common stocks. In particular, the prices of common stocks may fluctuate widely in response to activities specific to the company as well as general market, economic and political conditions. The Portfolio may invest a substantial portion of its assets in securities issued by small and medium sized companies. Investment in small and medium size companies involves greater risk of volatility than is customarily associated with investment in larger established companies as well as certain other additional risks. The Portfolio is subject to the risks associated with foreign securities. These risks include, among other things, the possibility that the Portfolio could be adversely affected by changes in currency exchange rates. The Portfolio is also subject to the risks of investing in convertible securities. These securities may carry risks associated with both common stock and fixed-income securities. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. 39 [Sidebar] ANNUAL TOTAL RETURNS This chart shows the performance of the Portfolio's Class Y shares for the past calendar year. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class Y shares with those of a broad measure of market performance over time. [End Sidebar] [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Aggressive Equity Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 2001 -28.61%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS -0.20%. During the period shown in the bar chart, the highest return for a calendar quarter was 7.28% (quarter ended December 31, 2001) and the lowest return for a calendar quarter was -21.41% (quarter ended March 31, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) ------------------------------------------------------------------ LIFE OF PORTFOLIO PAST 1 YEAR (SINCE 6/5/00) ------------------------------------------------------------------ The Aggressive Equity Portfolio -28.61% -20.58% ------------------------------------------------------------------ S&P 500 Index(1) -11.88% -13.38% ------------------------------------------------------------------
1 THE STANDARD AND POOR'S 500 INDEX (S&P 500-REGISTERED TRADEMARK- INDEX) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON 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. 40 [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 Information Portfolio [ICON] INVESTMENT OBJECTIVE - -------------------------------------------------------------------------------- The Information Portfolio seeks long-term capital appreciation. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Portfolio will normally invest at least 80% of its assets in common stocks and investment grade convertible securities of companies located throughout the world that are engaged in the communications and information industry. The Portfolio normally holds common stocks and other equity securities of companies located in at least three countries, one of which is the United States. It may invest up to 50% of its net assets in the securities (including depositary receipts) of foreign companies; however, it will not invest more than 25% of its net assets in any one foreign country. In addition, the Portfolio will not invest more than 10% of its net assets in convertible securities. In deciding which securities to buy, hold or sell, the "Investment Manager," Morgan Stanley Investment Advisors Inc., considers business, economic and political conditions, in addition to the growth potential of the securities. A company is considered to be in the communications and information industry if it derives at least 35% of its revenues or earnings from, or devotes at least 35% of its assets to: - designing, developing, manufacturing, providing or enabling the following products and services: regular telephone service; communications equipment and services; electronic components and equipment; broadcasting; computer equipment, enabling software, mobile communications and cellular radio/paging; electronic mail and other electronic data transmission services; networking and linkage of word and data processing systems; publishing and information systems; video text and teletext; and emerging technologies combining telephone, television and/or computer systems; or - the creation, packaging, distribution, and ownership of entertainment and information programming. The Portfolio may invest up to 20% of its assets in investment grade corporate fixed-income securities and U.S. government securities. The Portfolio's fixed-income investments may include zero coupon securities. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objective. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of investment in the Portfolio is associated with the Portfolio's investments in common stocks. In particular, the prices of common stocks may fluctuate widely in response to activities specific to the company as well as general market, economic and political conditions. 41 The Portfolio concentrates its investments in the communications and information industry. Because of this concentration, the value of the Portfolio's shares may be more volatile than that of mutual funds that do not similarly concentrate their investments. The communications and information industry may be subject to greater changes in governmental policies and governmental regulation than in many other industries in the United States and worldwide. Regulatory approval requirements, ownership restrictions and restrictions on rates of return and types of services that may be offered may materially affect the products and services of this industry. Additionally, the products and services of companies in this industry may be subject to faster obsolescence as a result of greater competition, advancing technological developments, and changing market and consumer preferences. As a result, the securities of companies in this industry may exhibit greater price volatility than those of companies in other industries. The Portfolio is subject to the risks associated with foreign securities. These risks include, among other things, the possibility that the Portfolio could be adversely affected by changes in currency exchange rates. The Portfolio is also subject to the risks of investing in convertible securities. These securities may carry risks associated with both common stock and fixed-income securities. The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. 42 [Sidebar] ANNUAL TOTAL RETURNS This chart shows the performance of the Portfolio's Class Y shares for the past calendar year. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class Y shares with those of a broad measure of market performance over time. [End Sidebar] [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Information Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 2001 -42.99%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS -9.43%. During the period shown in the bar chart, the highest return for a calendar quarter was 32.50% (quarter ended December 31, 2001) and the lowest return for a calendar quarter was -38.56% (quarter ended March 31, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) ------------------------------------------------------------------ LIFE OF PORTFOLIO PAST 1 YEAR (SINCE 11/6/00) ------------------------------------------------------------------ The Information Portfolio -42.99% -42.35% ------------------------------------------------------------------ S&P 500 Index(1) -11.88% -16.38% ------------------------------------------------------------------
1 THE STANDARD AND POOR'S 500 INDEX (S&P 500-REGISTERED TRADEMARK- INDEX) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON 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. 43 [Sidebar] TOTAL RETURN An investment objective having the goal of selecting securities with the potential to rise in price and pay out income. [End Sidebar] The Strategist Portfolio [ICON] INVESTMENT OBJECTIVE - -------------------------------------------------------------------------------- The Strategist Portfolio seeks high total investment return through a fully managed investment policy utilizing equity, fixed-income and money market securities and the writing of covered call and put options. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The "Investment Manager," Morgan Stanley Investment Advisors Inc., will actively allocate the Portfolio's assets among the major asset categories of equity securities, fixed-income securities and money market instruments. Assets are allocated by the Investment Manager based on among other things, its assessment of economic and market trends on different sectors of the market. There is no limit as to the percentage of assets that may be allocated to any one asset class. The Investment Manager does not, however, currently intend to write covered call or put options. Within the equity sector, the Investment Manager actively allocates funds to those economic sectors it expects to benefit from major trends and to individual stocks which it considers to have superior investment potential. Within the fixed-income sector of the market, the Investment Manager seeks to maximize the return on its investments by adjusting maturities and coupon rates as well as by exploiting yield differentials among different types of investment grade bonds, including short-term and intermediate-term bonds. Within the money market sector of the market, the Investment Manager seeks to maximize returns by exploiting spreads among short-term instruments. Securities in which the Portfolio may invest include common stocks, preferred stocks, convertible securities, investment grade debt securities (including zero coupon securities), U.S. government securities, mortgage-backed securities, including CMOs, asset-backed securities, real estate investment trusts (commonly known as "REITs") and money market instruments. The Portfolio is not limited as to the maturities of the U.S. government securities and other debt securities in which it may invest. The Portfolio may invest up to 20% of its assets in securities issued by foreign governments and foreign private issuers but not more than 10% of its assets in securities denominated in a foreign currency. The Portfolio may also invest in futures with respect to financial instruments and interest rate indexes. The Portfolio may use futures to facilitate allocation of the Portfolio's investments among asset classes, to increase or decrease the Portfolio's exposure to a bond market or to seek to protect against a decline in securities or an increase in prices of securities that may be purchased. Mortgage-Backed Securities. Certain of the securities in which the Portfolio may invest are mortgage-backed securities. One type of mortgage-backed security, in which the Portfolio may invest is a mortgage pass through security. These securities represent a participation interest in a pool of mortgage loans originated by U.S. Governmental or private lenders such as banks. They differ from conventional debt securities, which provide for periodic payment of interest in fixed amounts and principal payments at maturity or on specified call dates. Mortgage pass-through securities provide for monthly payments that are a "pass-through" of the monthly interest and principal payments made by the individual borrowers on the pooled mortgage loans. Mortgage 44 pass-through securities may be collateralized by mortgages with fixed rates of interest or adjustable rates. Collateralized Mortgage Obligations ("CMOs"). CMOs are debt obligations collateralized by mortgage loans or mortgage pass-through securities (collectively "Mortgage Assets"). Payments of principal and interest on the Mortgage Assets and any reinvestment income are used to make payments on the CMOs. CMOs are issued in multiple classes. Each class has a specific fixed or floating coupon rate and a stated maturity or final distribution date. The principal and interest on the Mortgage Assets may be allocated among the classes in a number of different ways. Certain classes will, as a result of the allocation, have more predictable cash flows than others. As a general matter, the more predictable the cash flow, the lower the yield relative to other Mortgage Assets. The less predictable the cash flow, the higher the yield and the greater the risk. The Portfolio may invest in any class of CMO. Asset-Backed Securities. The Portfolio may also invest in asset-backed securities. Asset-backed securities represent an interest in a pool of assets such as automobile and credit card receivables or home equity loans that have been securitized in pass through structures similar to mortgage-backed securities. These types of pass through securities provide for monthly payment that are a "pass through" of the monthly interest and principal payments made by the individual borrowers on the pooled receivables. [ICON] SUMMARY OF PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Portfolio will achieve its investment objective. The Portfolio's share price and return will fluctuate with changes in the market value of its portfolio securities. When you sell Portfolio shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Portfolio. A principal risk of investment in the Portfolio is associated with the Portfolio's investments in common stocks. In particular, the prices of common stocks may fluctuate widely in response to activities specific to the company as well as general market, economic and political conditions. The Portfolio's investment in fixed-income securities are subject to credit risk and interest rate risk. Credit risk refers to a possibility that the issuer of a security will be unable to make interest payments and/or repay the principal on its debts. Interest rate risk refers to fluctuations in the value of a fixed-income security resulting from changes in the general level of interest rates. There are also particular risks associated with the Portfolio's investments in mortgage-backed securities, which include CMOs, and asset-backed securities. For example, mortgage-backed and asset-backed securities are subject to prepayment risk and in some cases may be more volatile and less liquid than other traditional types of debt securities. There are also particular risks associated with the Portfolio's investments in futures. Positions in futures contracts may be closed out only on an exchange which provides a secondary market for such futures. However, there can be no assurance that a liquid secondary market will exist for any particular futures contract at any specific time. The inability to close out a futures contract could have an adverse impact on the Portfolio's ability to hedge effectively. Additionally, the Portfolio's use of futures involves the risk of imperfect or no correlation where the securities underlying futures contracts have different maturities than the securities that are the subject of the hedge. The Portfolio is also subject to the risks of investing in convertible securities. These securities may carry risks associated with both common stock and fixed-income securities. 45 [Sidebar] ANNUAL TOTAL RETURNS This chart shows the performance of the Portfolio's Class Y shares for the past calendar year. AVERAGE ANNUAL TOTAL RETURNS This table compares the average annual total returns of the Portfolio's Class Y shares with those of broad measures of market performance over time. [End Sidebar] The performance of the Portfolio also will depend on whether the Investment Manager is successful in applying the Portfolio's investment strategies. In addition, the Portfolio is subject to other risks from its permissible investments. For information about these risks, as well as more detailed information about the risks summarized in this section, see the "Additional Risk Information" section. [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Strategist Portfolio. The Portfolio's past performance does not indicate how it will perform in the future. The returns shown do not reflect fees charged under the life insurance or annuity contracts, which would lower the performance for all periods shown. ANNUAL TOTAL RETURNS -- CALENDAR YEARS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 2001 -10.40%
YEAR-TO-DATE TOTAL RETURN AS OF MARCH 31, 2002 WAS 1.42%. During the period shown in the bar chart, the highest return for a calendar quarter was 3.83% (quarter ended June 30, 2001) and the lowest return for a calendar quarter was -10.27% (quarter ended March 31, 2001).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2001) ---------------------------------------------------------------------------- LIFE OF PORTFOLIO PAST 1 YEAR (SINCE 6/5/00) ---------------------------------------------------------------------------- The Strategist Portfolio -10.40% -6.76% ---------------------------------------------------------------------------- S&P 500 Index(1) -11.88% -13.38% ---------------------------------------------------------------------------- Lehman Brothers U.S. Government/Credit Index(2) 8.50% 10.79% ----------------------------------------------------------------------------
1 THE STANDARD AND POOR'S 500 INDEX (S&P 500-REGISTERED TRADEMARK- INDEX) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON 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. 2 THE LEHMAN BROTHERS U.S. GOVERNMENT/CREDIT INDEX TRACKS THE PERFORMANCE OF GOVERNMENT AND CORPORATE OBLIGATIONS, INCLUDING U.S. GOVERNMENT AGENCY AND TREASURY SECURITIES AND CORPORATE AND YANKEE BONDS. THE INDEX DOES NOT INCLUDE ANY EXPENSES, FEES OR CHARGES. THE INDEX IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. 46 Additional Investment Strategy Information This section provides additional information relating to each Portfolio's principal investment strategies. Investment Discretion. In pursuing each Portfolio's investment objective, the Investment Manager 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 Investment Manager in its discretion may determine to use some permitted trading strategies while not using others. The Sub-Advisor has a similar degree of discretion. Defensive Investing. Each Portfolio (other than the Money Market Portfolio and the S&P 500 Index Portfolio) may take temporary "defensive" positions in attempting to respond to adverse market conditions. Each Portfolio may invest any amount of its assets in cash or money market instruments in a defensive posture when the Investment Manager or Sub-Advisor, as the case may be, believes it advisable to do so. Although taking a defensive posture is designed to protect the Portfolio from an anticipated market downturn, it could have the effect of reducing the benefit of an upswing in the market. When a Portfolio takes a defensive position, it may not achieve its investment objective(s). Investment Policies. The percentage limitations relating to the composition of a Portfolio apply at the time a Portfolio acquires an investment. Subsequent percentage changes that result from market fluctuations will generally not require a Portfolio to sell any Portfolio security. However, a Portfolio may be required to sell its illiquid securities holdings, if any, in response to fluctuations in the value of such holdings. A Portfolio may change its principal investment strategies without shareholder approval; however you would be notified of any changes. Portfolio Turnover. Each Portfolio (other than the S&P 500 Index Portfolio and the Competitive Edge "Best Ideas" Portfolio) may engage in active and frequent trading of its portfolio securities. The Financial Highlights Table at the end of this PROSPECTUS shows recent portfolio turnover rates for each Portfolio. A portfolio turnover rate of 200%, for example, is equivalent to the Portfolio buying and selling all of its securities two times during the course of the year. A high portfolio turnover rate (over 100%) could result in high brokerage costs. 47 Additional Risk Information This section provides additional information relating to the principal risks of investing in the Portfolios. Shares of the Portfolios are not bank deposits and are not guaranteed or insured by the FDIC or any other government agency. * * * The risks set forth below are applicable to a Portfolio only to the extent the Portfolio invests in the investment described. See "The Portfolios" for a description of the investments which each Portfolio may make. 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 prices of most fixed-income securities go down. When the general level of interest rates goes down, the prices of most fixed-income securities go up. (Zero coupon securities are typically subject to greater price fluctuations than comparable securities that pay interest.) Accordingly, a rise in the general level of interest rates may cause the price of a Portfolio's fixed-income securities to fall substantially. As merely illustrative of the relationship between fixed-income securities and interest rates, the following table shows how interest rates affect bond prices. HOW INTEREST RATES AFFECT BOND PRICES
PRICE PER $100 OF A BOND IF INTEREST RATES: ---------------------------- INCREASE DECREASE ------------ -------------- BOND MATURITY YIELD 1% 2% 1% 2% -------------------------------------------------------------------- 1 year 2.04% $99 $98 $101 $102 -------------------------------------------------------------------- 5 years 4.30% $96 $92 $105 $109 -------------------------------------------------------------------- 10 years 5.05% $93 $86 $108 $117 -------------------------------------------------------------------- 30 years 5.65% $87 $77 $115 $135 --------------------------------------------------------------------
YIELDS ON TREASURY SECURITIES ARE AS OF DECEMBER 31, 2001. THE TABLE IS NOT REPRESENTATIVE OF PRICE CHANGES FOR MORTGAGE-BACKED SECURITIES PRINCIPALLY BECAUSE OF PREPAYMENTS, AND IT IS NOT REPRESENTATIVE OF JUNK BONDS. IN ADDITION, THE TABLE IS AN ILLUSTRATION AND DOES NOT REPRESENT EXPECTED YIELDS OR SHARE PRICE CHANGES OF ANY MORGAN STANLEY MUTUAL FUND. Maturity and Duration. Traditionally, a debt security's term-to-maturity has been used as an indicator for the sensitivity of the security's price to changes in interest rates (which is the interest rate risk or volatility of the security). However, term-to-maturity measures only the time until a debt security provides its final payment, taking no account of the pattern of the security's payments prior to maturity. Duration is a measure of the expected life of a fixed income security that was developed as a more precise measure of interest rate sensitivity than term-to-maturity. A portfolio with a lower average duration generally should experience less price volatility in response to changes in interest rates than a portfolio with a higher average duration. Duration incorporates a bond's yield, coupon interest payments, final maturity and call features into one measure. Duration is one of the fundamental tools used by the Investment Manager in the selection of fixed income 48 securities. Duration takes the length of the time intervals between the present time and the time that the interest and principal payments are scheduled or, in the case of a callable bond, expected to be received, and weights them by the present values of the cash to be received at each future point in time. For any fixed income security with interest payments occurring prior to the payment of principal, duration is always less than maturity. There are some situations where even the standard duration calculation does not properly reflect the interest rate exposure of a security. For example, floating and variable rate securities often have final maturities of ten or more years; however; their interest rate exposure corresponds to the frequency of the coupon reset. Another example where the interest rate exposure is not properly captured by duration is the case of mortgage pass-through securities. The stated final maturity of such securities generally is thirty years, but current prepayment rates are more critical in determining the securities' interest rate exposure. In these and other similar situations, the Investment Manager will use analytical techniques that incorporate the economic life of a security into the determination of its interest rate exposure. Mortgage-Backed Securities. Mortgage-backed securities have different risk characteristics than traditional debt securities. Although generally the value of fixed-income securities increases during periods of falling interest rates and decreases during periods of rising interest rates, this is not always the case with mortgage-backed securities. This is due to the fact that principal on underlying mortgages may be prepaid at any time as well as other factors. Generally, prepayments will increase during a period of falling interest rates and decrease during a period of rising interest rates. The rate of prepayments also may be influenced by economic and other factors. Prepayment risk includes the possibility that, as interest rates fall, securities with stated interest rates may have the principal prepaid earlier than expected, requiring the Fund to invest the proceeds at generally lower interest rates. Investments in mortgage-backed securities are made based upon, among other things, expectations regarding the rate of prepayments on underlying mortgage pools. Rates of prepayment, faster or slower than expected by the Investment Manager, could reduce a Portfolio's yield, increase the volatility of the Portfolio and/or cause a decline in net asset value. Certain mortgage-backed securities in which a Portfolio may invest may be more volatile and less liquid than other traditional types of debt securities. Collateralized Mortgage Obligations ("CMOs"). The principal and interest on the Mortgage Assets comprising a CMO may be allocated among the several classes of a CMO in many ways. The general goal in allocating cash flows on Mortgage Assets to the various classes of a CMO is to create certain tranches on which the expected cash flows have a higher degree of predictability than do the underlying Mortgage Assets. As a general matter, the more predictable the cash flow is on a particular CMO tranche, the lower the anticipated yield on that tranche at the time of issue will be relative to prevailing market yields on Mortgage Assets. As part of the process of creating more predictable cash flows on certain tranches of a CMO, one or more tranches generally must be created that absorb most of the changes in the cash flows on the underlying Mortgage Assets. The yields on these tranches are generally higher than prevailing market yields on other mortgage related securities with similar average lives. Principal prepayments on the underlying Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated maturities or final scheduled distribution dates. Because of the uncertainty of the cash flows on these tranches, the market prices and yields of these tranches are 49 more volatile and may increase or decrease in value substantially with changes in interest rates and/or the rates of prepayment. Due to the possibility that prepayments (on home mortgages and other collateral) will alter the cash flow on CMOs, it is not possible to determine in advance the actual final maturity date or average life. Faster prepayment will shorten the average life and slower prepayment will lengthen it. In addition, if the collateral securing CMOs or any third party guarantees are insufficient to make payments, a Portfolio could sustain a loss. Asset-Backed Securities. Asset-backed securities have risk characteristics similar to mortgage-backed securities. Like mortgage-backed securities, they generally decrease in value as a result of interest rate increases, but may benefit less than other fixed-income securities from declining interest rates, principally because of prepayments. Also, as in the case of mortgage-backed securities, prepayments generally increase during a period of declining interest rates although other factors, such as changes in credit card use and payment patterns, may also influence prepayment rates. Asset-backed securities also involve the risk that various federal and state consumer laws and other legal and economic factors may result in the collateral backing the securities being insufficient to support payment on the securities. Junk Bonds. A Portfolio's investments in securities rated lower than investment grade or if unrated of comparable quality as determined by the Investment Manager or Sub-Advisor (commonly known as "junk bonds") pose significant risks. The prices of junk bonds are likely to be more sensitive to adverse economic changes or individual corporate developments than higher rated securities. During an economic downturn or substantial period of rising interest rates, junk bond issuers and, in particular, highly leveraged issuers may experience financial stress that would adversely affect their ability to service their principal and interest payment obligations, to meet their projected business goals or to obtain additional financing. In the event of a default, the Portfolio may incur additional expenses to seek recovery. The secondary market for junk bonds 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 Rule 144A securities could have the effect of increasing the level of Portfolio illiquidity to the extent a Portfolio may be unable to find qualified institutional buyers interested in purchasing the securities. The illiquidity of the market may also adversely affect the ability of the Fund's Trustees to arrive at a fair value for certain junk bonds at certain times and could make it difficult for the Portfolios to sell certain securities. In addition, periods of economic uncertainty and change probably would result in an increased volatility of market prices of high yield securities and a corresponding volatility in a Portfolio's net asset value. Securities Rated in the Lowest Investment Grade Category. Investments in the fixed-income securities rated in the lowest investment grade category by Moody's or S&P (Baa by Moody's or BBB by S&P) may have speculative characteristics and therefore changes in economic or other circumstances are more likely to weaken their capacity to make principal and interest payments than would be the case with investments in securities with higher credit ratings. Convertible Securities. A Portfolio's investments in convertible securities (which are securities that generally pay interest and may be converted into common stock, may carry risks associated with both fixed-income securities (discussed above) and common stock. To the extent that a convertible security's investment value is greater than its conversion value, its price will be likely to increase when interest rates fall and decrease when interest rates rise, as with a 50 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. A Portfolio that may invest in convertible securities may invest up to 5% of its net assets in convertible securities that are below investment grade quality (see "Junk Bonds" above). Foreign Securities. Foreign securities involve risks in addition to the risks associated with domestic securities. One additional risk is currency risk. While the price of Portfolio shares is quoted in U.S. dollars, a Portfolio generally converts U.S. dollars to a foreign market's local currency to purchase a security in that market. If the value of that local currency falls relative to the U.S. dollar, the U.S. dollar value of the foreign security will decrease. This is true even if the foreign security's local price remains unchanged. Foreign securities also have risks related to economic and political developments abroad, including 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 a Portfolio's trades effected in those markets and could result in losses to the Portfolio due to subsequent declines in the value of the securities subject to the trades. A depositary receipt is generally issued by a bank or financial institution and represents an ownership interest in the common stock or other equity securities of a foreign company. Depositary receipts involve substantially identical risks to those associated with direct investment in foreign securities. In addition, the underlying issuers of certain depositary receipts, particularly unsponsored or unregistered depositary receipts, are under no obligation to the holders of such receipts, or to pass through to them any voting rights with respect to the deposited securities. The foreign securities in which certain of the Portfolios may invest (in particular the Pacific Growth Portfolio) may be issued by companies located in developing countries. Compared to the United States and other developed countries, developing countries may have relatively unstable governments, economies based on only a few industries and securities markets that trade a small number of securities. Prices of these securities tend to be especially volatile and, in the past, securities in these countries have offered greater potential loss (as well as gain) than securities of companies located in developed countries. Small & Medium Capitalization Companies. A Portfolio's investments in smaller and medium sized companies carry more risk than investments in larger companies. While some of a Portfolio's holdings in these companies may be listed on a national securities exchange, such securities are more likely to be traded in the over-the-counter market. The low market liquidity of these securities may have an adverse impact on a Portfolio's ability to sell certain securities at 51 favorable prices and may also make it difficult for a Portfolio to obtain market quotations based on actual trades, for purposes of valuing a Portfolio's securities. Investing in lesser-known, smaller and medium capitalization companies involves greater risk of volatility of a Portfolio's net asset value than is customarily associated with larger, more established companies. Often smaller and medium capitalization companies and the industries in which they are focused are still evolving and, while this may offer better growth potential than larger, more established companies, it also may make them more sensitive to changing market conditions. Options and Futures. If a Portfolio invests in options and/or futures, its participation in these markets would subject the Portfolio to certain risks. The Investment Manager's or the Sub-Advisor's predictions of movements in the direction of the stock, bond, currency or interest rate markets may be inaccurate, and the adverse consequences to the Portfolio (e.g., a reduction in the Portfolio's net asset value or a reduction in the amount of income available for distribution) may leave the Portfolio in a worse position than if these strategies were not used. Other risks inherent in the use of options and futures include, for example, the possible imperfect correlation between the price of options and futures contracts and movements in the prices of the securities being hedged, and the possible absence of a liquid secondary market for any particular instrument. Certain options may be over-the-counter options, which are options negotiated with dealers; there is no secondary market for these investments. Forward Currency Contracts. A Portfolio's participation in forward currency contracts also involves risks. If the Investment Manager or Sub-Advisor employs a strategy that does not correlate well with the Portfolio's investments or the currencies in which the investments are denominated, currency contracts could result in a loss. The contracts also may increase the Portfolio's volatility and may involve a significant risk. Real Estate Investment Trusts ("REITs"). REITs pool investors funds for investments primarily in commercial real estate properties. Like mutual funds, REITs have expenses, including advisory and administration fees that are paid by its shareholders. As a result, you will absorb duplicate levels of fees when a Portfolio invests in REITs. The performance of any Portfolio REIT holdings ultimately depends on the types of real property in which the REITs invest and how well the property is managed. A general downturn in real estate values also can hurt REIT performance. 52 [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 March 31, 2002. [End Sidebar] Portfolio Management Morgan Stanley Investment Advisors Inc. is the Investment Manager to each Portfolio. Each Portfolio has retained the Investment Manager to provide administrative services, manage its business affairs and (except for the Pacific Growth and European Growth Portfolios) invest its 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. Each of the Pacific Growth and European Growth Portfolios has retained the Investment Manager to supervise the investment of its assets. The Investment Manager has, in turn, contracted with the Sub-Advisor -- Morgan Stanley Investment Management Inc. -- to invest each Portfolio's assets, including the placing of orders for the purchase and sale of portfolio securities. The Sub-Advisor also is a subsidiary of Morgan Stanley Dean Witter & Co. Its main business office is located at 1221 Avenue of the Americas, New York, NY 10020. Each Portfolio pays the Investment Manager a monthly management fee as full compensation for the services and facilities furnished to each Portfolio, and for Portfolio expenses assumed by the Investment Manager. The fee is based on the Portfolio's average daily net assets. For the fiscal year ended December 31, 2001, each Portfolio accrued total compensation to the Investment Manager as set forth in the following table.
MANAGEMENT FEES AS A PERCENTAGE OF AVERAGE NAME OF PORTFOLIO DAILY NET ASSETS ------------------------------------------------------------------------- The Money Market Portfolio 0.50% ------------------------------------------------------------------------- The Limited Duration Portfolio 0.45%(1) ------------------------------------------------------------------------- The Quality Income Plus Portfolio 0.50% ------------------------------------------------------------------------- The High Yield Portfolio 0.50% ------------------------------------------------------------------------- The Utilities Portfolio 0.65% ------------------------------------------------------------------------- The Income Builder Portfolio 0.75% ------------------------------------------------------------------------- The Dividend Growth Portfolio 0.54% ------------------------------------------------------------------------- The Capital Growth Portfolio 0.65% ------------------------------------------------------------------------- The Global Dividend Growth Portfolio 0.75% ------------------------------------------------------------------------- The European Growth Portfolio 0.95%(2) ------------------------------------------------------------------------- The Pacific Growth Portfolio 0.95%(2) ------------------------------------------------------------------------- The Equity Portfolio 0.49% ------------------------------------------------------------------------- The S&P 500 Index Portfolio 0.40%(3) ------------------------------------------------------------------------- The Competitive Edge "Best Ideas" Portfolio 0.65% ------------------------------------------------------------------------- The Aggressive Equity Portfolio 0.75% ------------------------------------------------------------------------- The Information Portfolio 0.75%(4) ------------------------------------------------------------------------- The Strategist Portfolio 0.50% -------------------------------------------------------------------------
1 THE MANAGEMENT FEE SHOWN IN THE TABLE IS THE CONTRACTUAL FEE THAT THE FUND HAS AGREED TO PAY RESPECTING THE LIMITED DURATION PORTFOLIO PURSUANT TO THE FUND'S MANAGEMENT AGREEMENT WITH THE INVESTMENT MANAGER. THE INVESTMENT MANAGER CAPPED ALL OPERATING EXPENSES OF THE LIMITED DURATION PORTFOLIO (EXCEPT FOR BROKERAGE AND 12b-1 FEES) AT 0.50% OF THE PORTFOLIO'S DAILY NET ASSETS FOR THE PERIOD JUNE 1, 2001 THROUGH DECEMBER 31, 2001. THE ACTUAL MANAGEMENT FEE FOR THE YEAR ENDED DECEMBER 31, 2001 WAS 0.41%. 2 40% OF THE INVESTMENT MANAGER'S COMPENSATION IS PAID TO THE SUB-ADVISOR. 53 3 THE INVESTMENT MANAGER HAS PERMANENTLY UNDERTAKEN TO CAP TOTAL EXPENSES OF THE S&P 500 INDEX PORTFOLIO (OTHER THAN BROKERAGE AND 12b-1 FEES) AT 0.50% OF AVERAGE DAILY NET ASSETS. 4 THE MANAGEMENT FEE SHOWN IN THE TABLE IS THE CONTRACTUAL FEE THAT THE FUND HAS AGREED TO PAY RESPECTING THE INFORMATION PORTFOLIO PURSUANT TO THE FUND'S MANAGEMENT AGREEMENT WITH THE INVESTMENT MANAGER. THE INVESTMENT MANAGER ASSUMED ALL OPERATING EXPENSES OF THE INFORMATION PORTFOLIO (EXCEPT FOR BROKERAGE AND 12b-1 FEES) AND WAIVED THE COMPENSATION PROVIDED IN ITS MANAGEMENT AGREEMENT IN RESPECT OF THE INFORMATION PORTFOLIO UNTIL DECEMBER 31, 2001. The following individuals are primarily responsible for the day-to-day management of certain of the Portfolios of the Fund. Except as otherwise noted, each individual designated as a primary portfolio manager of a particular Portfolio has been a primary portfolio manager of the Portfolio for over five years or since the inception of the Portfolio (if less than five years) and has been a portfolio manager with the Investment Manager or the Sub-Advisor for over five years. Limited Duration Portfolio -- The Portfolio is managed by the Taxable Fixed-Income Group. Current members of the team include David S. Horowitz, a Vice President of the Investment Manager, and Michael M. Luo, a portfolio manager of the Investment Manager. Quality Income Plus Portfolio -- The Portfolio is managed by the Taxable Fixed-Income team. Current members of the team include David S. Horowitz, a Vice President of the Investment Manager, and Michael M. Luo, a portfolio manager of the Investment Manager. High Yield Portfolio -- The Portfolio is managed by the Taxable Fixed-Income team. Current members of the team include Stephen F. Esser, a Managing Director of the Investment Manager, Gordon W. Loery, an Executive Director of the Investment Manager, and Deanna L. Loughnane, an Executive Director of the Investment Manager. Utilities Portfolio -- Edward F. Gaylor, an Executive Director of the Investment Manager, is the Portfolio's primary portfolio manager responsible for overall asset allocation. The equity portion of the Portfolio is managed by the Utilities team. Current members of the Utilities team include Edward F. Gaylor and Ronald B. Silvestri, a Vice President of the Investment Manager. The fixed-income portion of the Portfolio is managed by the Taxable Fixed-Income team. Gary P. Herbert, a Vice President of the Investment Manager, is a current member of the team. Income Builder Portfolio -- The Portfolio is managed by the Large Cap Value Equity team and Equity Income team. The Large Cap Value Equity team currently includes Paul D. Vance, a Managing Director of the Investment Manager, and Catherine Maniscalco, a Vice President of the Investment Manager. The Equity Income team currently includes Ellen Gold, a Vice President of the Investment Manager. Dividend Growth Portfolio -- The Portfolio is managed by the Large Cap Value Equity team. Current members of the team include Paul Vance, a Managing Director of the Investment Manager, and Richard Behler, an Executive Director of the Investment Manager. Capital Growth Portfolio -- The Portfolio is managed by the Capital Growth team of the Large Cap Growth Equity Group. Current members of the team include Peter Hermann, a Vice President of the Investment Manager, and Gustave Scacco, an Assistant Vice President of the Investment Manager. Global Dividend Growth Portfolio -- The Portfolio is managed by the Large Cap Value Equity team. Current members of the team include Paul D. Vance, a Managing Director of the Investment Manager, and Richard Behler, an Executive Director of the Investment Manager. 54 European Growth Portfolio -- The Portfolio is managed by the European Growth team. Current members of the team include Jeremy Lodwick, a Managing Director of the Sub-Advisor, and Hassan Elmasry, an Executive Director of the Sub-Advisor. Pacific Growth Portfolio -- The Portfolio is managed by the Emerging Markets team and Japan team. Ashutosh Sinha, an Executive Director of the Sub-Advisor, is a current member of the Emerging Markets team. John R. Alkire, a Managing Director of the Sub-Advisor, is a current member of the Japan team. Equity Portfolio -- The Portfolio is managed by the Sector Rotation team. Current members of the team include Michelle Kaufman, a Managing Director of the Investment Manager, and Alison K. Williams, a Vice President of the Investment Manager. S&P 500 Index Portfolio -- The Portfolio is managed by the Core Growth team. Current members of the team include Guy G. Rutherfurd, Jr., a Managing Director of the Investment Manager, and Kevin Jung, a Vice President of the Investment Manager. Competitive Edge "Best Ideas" Portfolio -- The Portfolio is managed by the Competitive Edge-Best Ideas team of the Sector Fund Equity Group. Current members of the team include Mark Bavoso, a Managing Director of the Investment Manager, and Robert Rossetti, a Vice President of the Investment Manager. Aggressive Equity Portfolio -- The Portfolio is managed by the Sector Rotation team. Current members of the team include Anita Kolleeny, a Managing Director of the Investment Manager, Michelle Kaufman, a Managing Director of the Investment Manager, and Alison Williams, a Vice President of the Investment Manager. Information Portfolio -- The Portfolio is managed by the Information team of the Sector Fund Equity Group. Current members of the team include Armon Bar-Tur, Executive Director of the Investment Manager, and Thomas Bergeron, a Vice President of the Investment Manager. Strategist Portfolio -- Mark Bavoso, a Managing Director of the Investment Manager, is the Portfolio's primary portfolio manager responsible for overall asset allocation. The equity portion of the Portfolio is managed by the Domestic Asset Allocation team. Mr. Bavoso is a current member of that team. The fixed-income portion of the Portfolio is managed by the Taxable Fixed-Income team. Paul F. O'Brien, an Executive Director of the Investment Manager, is a current member of the team. 55 Shareholder Information [ICON] PRICING FUND SHARES - -------------------------------------------------------------------------------- The price of shares of each Portfolio called "net asset value," is based on the value of its portfolio securities. The net asset value for each Portfolio is calculated once daily at 4:00 p.m. Eastern time on each day 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 each Portfolio's securities (other than the Money Market Portfolio) is based on the securities' market price when available. When a market price is not readily available, including circumstances under which the Investment Manager (or, if applicable, the 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 applicable Portfolio's net asset value will reflect certain portfolio securities' fair value rather than their market price. In addition, with respect to securities that are primarily listed on foreign exchanges, the value of the Portfolio's investment securities may change on days when shareholders will not be able to purchase or sell their shares. An exception to the general policy of using market prices concerns each Portfolio's 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. The Money Market Portfolio utilizes amortized cost in determining the value of its portfolio securities. The amortized cost valuation method involves valuing a debt obligation in reference to its acquisition cost rather than market forces. [ICON] PLAN OF DISTRIBUTION - -------------------------------------------------------------------------------- Each Portfolio has adopted a Plan of Distribution in accordance with Rule 12b-1 under the Investment Company Act of 1940. Class Y shares of each Portfolio are subject to a distribution (12b-1) fee of 0.25% of the average daily net assets of the Class. The Plan allows Class Y shares of each Portfolio to bear distribution fees in connection with the sale and distribution of Class Y shares. It also allows each Portfolio to pay for services to Class Y shareholders. Because these fees are paid out of the assets of each Portfolio's Class Y shares on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. [ICON] DISTRIBUTIONS - -------------------------------------------------------------------------------- Each Portfolio passes substantially all of its earnings from income and capital gains along to its investors as "distributions." Each Portfolio earns income from stocks and/or interest from fixed-income investments. These amounts are passed along to the appropriate Portfolio investors as "income dividend distributions." Each Portfolio realizes capital gains whenever it sells securities for a higher price than it paid for them. These amounts may be passed along as "capital gain distributions." 56 Dividends from net investment income and capital gains distributions, if any, are declared and paid as follows:
NET REALIZED CAPITAL GAINS DIVIDENDS DISTRIBUTIONS ---------------------------------------------------------------------------------------------------------------------- MONEY MARKET PORTFOLIO Declared and paid on each day the New Declared and paid at least once per York Stock Exchange is open to calendar year, net short-term gains shareholders as of the close of may be paid more frequently business the preceding business day ---------------------------------------------------------------------------------------------------------------------- LIMITED DURATION, QUALITY INCOME PLUS Declared and paid monthly Declared and paid at least once per AND HIGH YIELD PORTFOLIOS year ---------------------------------------------------------------------------------------------------------------------- UTILITIES, INCOME BUILDER, DIVIDEND Declared and paid quarterly Declared and paid at least once per GROWTH, EQUITY AND STRATEGIST calendar year PORTFOLIOS ---------------------------------------------------------------------------------------------------------------------- CAPITAL GROWTH, EUROPEAN GROWTH, Declared and paid at least once per Declared and paid at least once per GLOBAL DIVIDEND GROWTH, PACIFIC calendar year calendar year GROWTH, S&P 500 INDEX, COMPETITIVE EDGE "BEST IDEAS," AGGRESSIVE EQUITY AND INFORMATION PORTFOLIOS ----------------------------------------------------------------------------------------------------------------------
[ICON] TAX CONSEQUENCES - -------------------------------------------------------------------------------- For information concerning the federal income tax consequences to holders of the underlying variable annuity or variable life insurance contracts, see the accompanying prospectus for the applicable contract. 57 Financial Highlights The financial highlights table is intended to help you understand the financial performance of each Portfolio's Class X and Class Y shares for the periods indicated. The returns for Class X differ from those of Class Y only to the extent that the Classes have different expenses. Class X shares are offered in a separate Prospectus. The Fund commenced offering Class Y shares of each Portfolio on June 5, 2000. Prior to that date, the Fund issued one Class of shares of each Portfolio, which, as of May 1, 2000, have been designated Class X shares. Certain information reflects financial results for a single Portfolio share. The total returns in the tables represent the rate an investor would have earned or lost on an investment in each Portfolio (assuming reinvestment of all dividends and distributions).
NET ASSET VALUE NET NET REALIZED TOTAL FROM BEGINNING INVESTMENT AND UNREALIZED INVESTMENT DIVIDENDS TO YEAR ENDED DECEMBER 31 OF PERIOD INCOME (LOSS) GAIN (LOSS) OPERATIONS SHAREHOLDERS - -------------------------------------------------------------------------------------------------------------------------- MONEY MARKET CLASS X SHARES 1997 $ 1.00 $0.051 -- $0.051 $(0.051) - -------------------------------------------------------------------------------------------------------------------------- 1998 1.00 0.051 -- 0.051 (0.051) - -------------------------------------------------------------------------------------------------------------------------- 1999 1.00 0.047 -- 0.047 (0.047) - -------------------------------------------------------------------------------------------------------------------------- 2000(a)* 1.00 0.058 -- 0.058 (0.058) - -------------------------------------------------------------------------------------------------------------------------- 2001* 1.00 0.039 -- 0.039 (0.039)** - -------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 1.00 0.033 -- 0.033 (0.033) - -------------------------------------------------------------------------------------------------------------------------- 2001 1.00 0.036 -- 0.036 (0.036)** - -------------------------------------------------------------------------------------------------------------------------- SHORT-TERM BOND CLASS X SHARES 1999(e) 10.00 0.27 $(0.12) 0.15 (0.27) - -------------------------------------------------------------------------------------------------------------------------- 2000(a)* 9.88 0.51 0.05 0.56 (0.48) - -------------------------------------------------------------------------------------------------------------------------- 2001* 9.96 0.40(8) 0.26(8) 0.66 (0.45) - -------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 9.86 0.28 0.09 0.37 (0.28) - -------------------------------------------------------------------------------------------------------------------------- 2001 9.95 0.35(8) 0.28(8) 0.63 (0.42) - -------------------------------------------------------------------------------------------------------------------------- QUALITY INCOME PLUS CLASS X SHARES 1997 10.37 0.70 0.40 1.10 (0.70) - -------------------------------------------------------------------------------------------------------------------------- 1998 10.77 0.68 0.23 0.91 (0.68) - -------------------------------------------------------------------------------------------------------------------------- 1999 11.00 0.67 (1.14) (0.47) (0.67) - -------------------------------------------------------------------------------------------------------------------------- 2000(a)* 9.86 0.68 0.37 1.05 (0.69) - -------------------------------------------------------------------------------------------------------------------------- 2001* 10.22 0.61(8) 0.34(8) 0.95 (0.62) - -------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 9.80 0.38 0.42 0.80 (0.39) - -------------------------------------------------------------------------------------------------------------------------- 2001 10.21 0.57(8) 0.36(8) 0.93 (0.60) - --------------------------------------------------------------------------------------------------------------------------
58 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. Further information about the performance of the Portfolios of the Fund is contained in the annual report. See the discussion under the caption "Charges and Other Deductions" in the accompanying prospectus for either the Variable Annuity Contracts or the Variable Life Contracts issued by the applicable insurance company for a description of charges which are applicable thereto. These charges are not reflected in the financial highlights below. Inclusion of any of these charges would reduce the total return figures for all periods shown.
TOTAL DISTRIBUTIONS TO DIVIDENDS AND NET ASSET VALUE YEAR ENDED DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS END OF PERIOD TOTAL RETURN+ - ----------------------------------------------------------------------------------------------------------------- MONEY MARKET CLASS X SHARES 1997 -- $(0.051) $ 1.00 5.23% - ----------------------------------------------------------------------------------------------------------------- 1998 -- (0.051) 1.00 5.18 - ----------------------------------------------------------------------------------------------------------------- 1999 -- (0.047) 1.00 4.80 - ----------------------------------------------------------------------------------------------------------------- 2000(a)* -- (0.058) 1.00 6.01 - ----------------------------------------------------------------------------------------------------------------- 2001* -- (0.039) 1.00 3.94 - ----------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) -- (0.033) 1.00 3.37(1) - ----------------------------------------------------------------------------------------------------------------- 2001 -- (0.036) 1.00 3.68 - ----------------------------------------------------------------------------------------------------------------- SHORT-TERM BOND CLASS X SHARES 1999(e) -- (0.27) 9.88 1.56(1) - ----------------------------------------------------------------------------------------------------------------- 2000(a)* -- (0.48) 9.96 5.85 - ----------------------------------------------------------------------------------------------------------------- 2001* -- (0.45) 10.17 6.72 - ----------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) -- (0.28) 9.95 3.82(1) - ----------------------------------------------------------------------------------------------------------------- 2001 -- (0.42) 10.16 6.49 - ----------------------------------------------------------------------------------------------------------------- QUALITY INCOME PLUS CLASS X SHARES 1997 -- (0.70) 10.77 11.09 - ----------------------------------------------------------------------------------------------------------------- 1998 -- (0.68) 11.00 8.67 - ----------------------------------------------------------------------------------------------------------------- 1999 -- (0.67) 9.86 (4.32) - ----------------------------------------------------------------------------------------------------------------- 2000(a)* -- (0.69) 10.22 11.09 - ----------------------------------------------------------------------------------------------------------------- 2001* -- (0.62) 10.55 9.57 - ----------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) -- (0.39) 10.21 8.31(1) - ----------------------------------------------------------------------------------------------------------------- 2001 -- (0.60) 10.54 9.33 - ----------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS NET ASSETS -------------------------------- PORTFOLIO END OF PERIOD NET INVESTMENT TURNOVER YEAR ENDED DECEMBER 31 (000'S) EXPENSES INCOME RATE - ------------------------ MONEY MARKET CLASS X SHARES 1997 $335,578 0.52% 5.10% N/A - ------------------------ 1998 442,034 0.52 5.04 N/A - ------------------------ 1999 435,643 0.52 4.68 N/A - ------------------------ 2000(a)* 358,793 0.52 5.83 N/A - ------------------------ 2001* 452,765 0.51 3.69 N/A - ------------------------ CLASS Y SHARES* 2000(b) 13,813 0.77(2) 5.86(2) N/A - ------------------------ 2001 105,952 0.76 3.44 N/A - ------------------------ SHORT-TERM BOND CLASS X SHARES 1999(e) 3,175 0.62(2)(5) 4.83(2)(5) 56%(1) - ------------------------ 2000(a)* 6,427 0.98 5.08 16 - ------------------------ 2001* 25,858 0.61(7)# 3.84(7)(8) 133 - ------------------------ CLASS Y SHARES* 2000(b) 1,430 1.17(2) 5.00(2) 16 - ------------------------ 2001 25,050 0.86(7)# 3.59(7)(8) 133 - ------------------------ QUALITY INCOME PLUS CLASS X SHARES 1997 474,990 0.53 6.71 171 - ------------------------ 1998 547,583 0.52 6.23 152 - ------------------------ 1999 456,132 0.52 6.45 119 - ------------------------ 2000(a)* 406,508 0.52 6.90 105 - ------------------------ 2001* 452,757 0.53 5.82(8) 150 - ------------------------ CLASS Y SHARES* 2000(b) 5,176 0.77(2) 6.53(2) 105 - ------------------------ 2001 54,115 0.78 5.57(8) 150 - ------------------------
59
NET ASSET VALUE NET NET REALIZED TOTAL FROM BEGINNING INVESTMENT AND UNREALIZED INVESTMENT DIVIDENDS TO YEAR ENDED DECEMBER 31 OF PERIOD INCOME (LOSS) GAIN (LOSS) OPERATIONS SHAREHOLDERS - -------------------------------------------------------------------------------------------------------------------------- HIGH YIELD CLASS X SHARES 1997 $ 6.18 $0.75 $(0.06) $ 0.69 $(0.75) - -------------------------------------------------------------------------------------------------------------------------- 1998 6.12 0.71 (1.05) (0.34) (0.71) - -------------------------------------------------------------------------------------------------------------------------- 1999 5.07 0.68 (0.74) (0.06) (0.68) - -------------------------------------------------------------------------------------------------------------------------- 2000(a)* 4.33 0.66 (1.90) (1.24) (0.66) - -------------------------------------------------------------------------------------------------------------------------- 2001* 2.43 0.33(8) (1.09)(8) (0.76) (0.34) - -------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 3.92 0.37 (1.48) (1.11) (0.38) - -------------------------------------------------------------------------------------------------------------------------- 2001 2.43 0.32(8) (1.08)(8) (0.76) (0.34) - -------------------------------------------------------------------------------------------------------------------------- UTILITIES CLASS X SHARES 1997 15.34 0.57 3.46 4.03 (0.57) - -------------------------------------------------------------------------------------------------------------------------- 1998 18.59 0.57 3.68 4.25 (0.57) - -------------------------------------------------------------------------------------------------------------------------- 1999 21.25 0.55 2.08 2.63 (0.55) - -------------------------------------------------------------------------------------------------------------------------- 2000(a)* 22.90 0.49 0.17 0.66 (0.49) - -------------------------------------------------------------------------------------------------------------------------- 2001* 21.69 0.39(8) (5.74)(8) (5.35) (0.41) - -------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 22.98 0.24 0.19 0.43 (0.35) - -------------------------------------------------------------------------------------------------------------------------- 2001 21.68 0.35(8) (5.74)(8) (5.39) (0.37) - -------------------------------------------------------------------------------------------------------------------------- INCOME BUILDER CLASS X SHARES 1997(c) 10.00 0.44 1.76 2.20 (0.44) - -------------------------------------------------------------------------------------------------------------------------- 1998 11.76 0.56 (0.19) 0.37 (0.56) - -------------------------------------------------------------------------------------------------------------------------- 1999 11.46 0.58 0.21 0.79 (0.56) - -------------------------------------------------------------------------------------------------------------------------- 2000(a)* 11.44 0.55 (0.54) 0.01 (0.56) - -------------------------------------------------------------------------------------------------------------------------- 2001* 10.86 0.47(8) (0.22)(8) 0.25 (0.50)++ - -------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 11.15 0.32 (0.21) 0.11 (0.39) - -------------------------------------------------------------------------------------------------------------------------- 2001 10.85 0.42(8) (0.19)(8) 0.23 (0.48)++ - -------------------------------------------------------------------------------------------------------------------------- DIVIDEND GROWTH CLASS X SHARES 1997 18.40 0.41 4.20 4.61 (0.41) - -------------------------------------------------------------------------------------------------------------------------- 1998 21.60 0.41 2.58 2.99 (0.41) - -------------------------------------------------------------------------------------------------------------------------- 1999 22.13 0.39 (0.55) (0.16) (0.39) - -------------------------------------------------------------------------------------------------------------------------- 2000(a)* 18.32 0.31 0.02 0.33 (0.33) - -------------------------------------------------------------------------------------------------------------------------- 2001* 14.50 0.26 (1.02) (0.76) (0.26) - -------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 17.79 0.12 0.62 0.74 (0.22) - -------------------------------------------------------------------------------------------------------------------------- 2001 14.49 0.22 (1.01) (0.79) (0.23) - --------------------------------------------------------------------------------------------------------------------------
60
TOTAL DISTRIBUTIONS TO DIVIDENDS AND NET ASSET VALUE YEAR ENDED DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS END OF PERIOD TOTAL RETURN+ - ----------------------------------------------------------------------------------------------------------------- HIGH YIELD CLASS X SHARES 1997 -- $(0.75) $ 6.12 11.87% - ----------------------------------------------------------------------------------------------------------------- 1998 -- (0.71) 5.07 (6.20) - ----------------------------------------------------------------------------------------------------------------- 1999 -- (0.68) 4.33 (1.33) - ----------------------------------------------------------------------------------------------------------------- 2000(a)* -- (0.66) 2.43 (32.22) - ----------------------------------------------------------------------------------------------------------------- 2001* -- (0.34) 1.33 (33.75) - ----------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) -- (0.38) 2.43 (30.02)(1) - ----------------------------------------------------------------------------------------------------------------- 2001 -- (0.34) 1.33 (33.92) - ----------------------------------------------------------------------------------------------------------------- UTILITIES CLASS X SHARES 1997 $(0.21) (0.78) 18.59 27.15 - ----------------------------------------------------------------------------------------------------------------- 1998 (1.02) (1.59) 21.25 23.76 - ----------------------------------------------------------------------------------------------------------------- 1999 (0.43) (0.98) 22.90 12.71 - ----------------------------------------------------------------------------------------------------------------- 2000(a)* (1.38) (1.87) 21.69 3.03 - ----------------------------------------------------------------------------------------------------------------- 2001* (1.20) (1.61) 14.73 (25.75) - ----------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) (1.38) (1.73) 21.68 2.07(1) - ----------------------------------------------------------------------------------------------------------------- 2001 (1.20) (1.57) 14.72 (25.98) - ----------------------------------------------------------------------------------------------------------------- INCOME BUILDER CLASS X SHARES 1997(c) -- (0.44) 11.76 22.38(1) - ----------------------------------------------------------------------------------------------------------------- 1998 (0.11) (0.67) 11.46 3.21 - ----------------------------------------------------------------------------------------------------------------- 1999 (0.25)++ (0.81) 11.44 7.06 - ----------------------------------------------------------------------------------------------------------------- 2000(a)* (0.03)++ (0.59) 10.86 0.17 - ----------------------------------------------------------------------------------------------------------------- 2001* -- (0.50) 10.61 2.30 - ----------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) (0.02)++ (0.41) 10.85 1.06(1) - ----------------------------------------------------------------------------------------------------------------- 2001 -- (0.48) 10.60 2.10 - ----------------------------------------------------------------------------------------------------------------- DIVIDEND GROWTH CLASS X SHARES 1997 (1.00) (1.41) 21.60 25.61 - ----------------------------------------------------------------------------------------------------------------- 1998 (2.05) (2.46) 22.13 14.28 - ----------------------------------------------------------------------------------------------------------------- 1999 (3.26) (3.65) 18.32 (2.39) - ----------------------------------------------------------------------------------------------------------------- 2000(a)* (3.82) (4.15) 14.50 5.30 - ----------------------------------------------------------------------------------------------------------------- 2001* -- (0.26) 13.48 (5.20) - ----------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) (3.82) (4.04) 14.49 7.65(1) - ----------------------------------------------------------------------------------------------------------------- 2001 -- (0.23) 13.47 (5.42) - ----------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS NET ASSETS -------------------------------- PORTFOLIO END OF PERIOD NET INVESTMENT TURNOVER YEAR ENDED DECEMBER 31 (000'S) EXPENSES INCOME (LOSS) RATE - ------------------------ HIGH YIELD CLASS X SHARES 1997 $ 368,061 0.53% 12.44% 95% - ------------------------ 1998 364,079 0.53 12.27 93 - ------------------------ 1999 279,683 0.53 14.05 48 - ------------------------ 2000(a)* 128,646 0.54 17.40 9 - ------------------------ 2001* 64,470 0.59 17.33(8) 81 - ------------------------ CLASS Y SHARES* 2000(b) 1,947 0.79(2) 20.95(2) 9 - ------------------------ 2001 6,163 0.84 17.08(8) 81 - ------------------------ UTILITIES CLASS X SHARES 1997 458,134 0.67 3.48 13 - ------------------------ 1998 560,803 0.67 2.89 7 - ------------------------ 1999 580,487 0.67 2.51 10 - ------------------------ 2000(a)* 551,734 0.66 2.16 13 - ------------------------ 2001* 327,749 0.67 2.19(8) 32 - ------------------------ CLASS Y SHARES* 2000(b) 19,069 0.91(2) 1.93(2) 13 - ------------------------ 2001 24,550 0.92 1.94(8) 32 - ------------------------ INCOME BUILDER CLASS X SHARES 1997(c) 55,423 0.15(2)(3) 5.73(2)(3) 41(1) - ------------------------ 1998 87,769 0.81 5.09 54 - ------------------------ 1999 81,616 0.81 4.98 43 - ------------------------ 2000(a)* 59,383 0.81 5.07 51 - ------------------------ 2001* 63,060 0.81 4.34(8) 45 - ------------------------ CLASS Y SHARES* 2000(b) 965 1.06(2) 5.17(2) 51 - ------------------------ 2001 7,147 1.06 3.88(8) 45 - ------------------------ DIVIDEND GROWTH CLASS X SHARES 1997 1,905,906 0.54 2.06 28 - ------------------------ 1998 2,249,927 0.53 1.85 45 - ------------------------ 1999 2,033,814 0.52 1.82 81 - ------------------------ 2000(a)* 1,552,724 0.54 2.07 34 - ------------------------ 2001* 1,258,863 0.55 1.86 19 - ------------------------ CLASS Y SHARES* 2000(b) 19,083 0.79(2) 1.59(2) 34 - ------------------------ 2001 60,393 0.80 1.61 19 - ------------------------
61
NET ASSET VALUE NET NET REALIZED TOTAL FROM BEGINNING INVESTMENT AND UNREALIZED INVESTMENT DIVIDENDS TO YEAR ENDED DECEMBER 31 OF PERIOD INCOME (LOSS) GAIN (LOSS) OPERATIONS SHAREHOLDERS - -------------------------------------------------------------------------------------------------------------------------- CAPITAL GROWTH CLASS X SHARES 1997 $16.65 $ 0.01 $ 3.90 $ 3.91 $(0.08) - -------------------------------------------------------------------------------------------------------------------------- 1998 18.29 (0.05) 3.59 3.54 -- - -------------------------------------------------------------------------------------------------------------------------- 1999 20.36 -- 6.12 6.12 -- - -------------------------------------------------------------------------------------------------------------------------- 2000(a)* 23.73 0.10 0.28 0.38 -- - -------------------------------------------------------------------------------------------------------------------------- 2001* 20.06 0.03 (5.13) (5.10) (0.10) - -------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 24.55 0.03 (0.50) (0.47) -- - -------------------------------------------------------------------------------------------------------------------------- 2001 20.03 (0.01) (5.12) (5.13) (0.09) - -------------------------------------------------------------------------------------------------------------------------- GLOBAL DIVIDEND GROWTH CLASS X SHARES 1997 13.13 0.22 1.37 1.59 (0.23) - -------------------------------------------------------------------------------------------------------------------------- 1998 13.89 0.24 1.45 1.69 (0.24) - -------------------------------------------------------------------------------------------------------------------------- 1999 13.82 0.27 1.71 1.98 (0.29) - -------------------------------------------------------------------------------------------------------------------------- 2000(a)* 14.44 0.24 (0.64) (0.40) (0.09) - -------------------------------------------------------------------------------------------------------------------------- 2001* 12.73 0.21 (1.00) (0.79) (0.33) - -------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 13.96 0.08 (0.11) (0.03) -- - -------------------------------------------------------------------------------------------------------------------------- 2001 12.71 0.15 (0.96) (0.81) (0.33) - -------------------------------------------------------------------------------------------------------------------------- EUROPEAN GROWTH CLASS X SHARES 1997 21.56 0.21 3.19 3.40 (0.24) - -------------------------------------------------------------------------------------------------------------------------- 1998 23.54 0.15 5.53 5.68 (0.31) - -------------------------------------------------------------------------------------------------------------------------- 1999 27.18 0.25 6.91 7.16 (0.19) - -------------------------------------------------------------------------------------------------------------------------- 2000(a)* 31.47 0.13 (1.43) (1.30) (0.18) - -------------------------------------------------------------------------------------------------------------------------- 2001* 25.37 0.13 (4.47) (4.34) (0.26) - -------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 32.26 (0.03) (2.10) (2.13) (0.18) - -------------------------------------------------------------------------------------------------------------------------- 2001 25.33 0.05 (4.42) (4.37) (0.25) - -------------------------------------------------------------------------------------------------------------------------- PACIFIC GROWTH CLASS X SHARES 1997 9.96 0.12 (3.82) (3.70) (0.14) - -------------------------------------------------------------------------------------------------------------------------- 1998 6.12 0.06 (0.75) (0.69) (0.28) - -------------------------------------------------------------------------------------------------------------------------- 1999 5.15 0.04 3.33 3.37 (0.06) - -------------------------------------------------------------------------------------------------------------------------- 2000(a)* 8.46 -- (2.78) (2.78) (0.12) - -------------------------------------------------------------------------------------------------------------------------- 2001* 5.56 (0.01) (1.50) (1.51) (0.07) - -------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 7.70 (0.01) (2.01) (2.02) (0.12) - -------------------------------------------------------------------------------------------------------------------------- 2001 5.56 (0.02) (1.49) (1.51) (0.07) - --------------------------------------------------------------------------------------------------------------------------
62
TOTAL DISTRIBUTIONS TO DIVIDENDS AND NET ASSET VALUE YEAR ENDED DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS END OF PERIOD TOTAL RETURN+ - ----------------------------------------------------------------------------------------------------------------- CAPITAL GROWTH CLASS X SHARES 1997 $(2.19) $(2.27) $18.29 24.54% - ----------------------------------------------------------------------------------------------------------------- 1998 (1.47) (1.47) 20.36 19.63 - ----------------------------------------------------------------------------------------------------------------- 1999 (2.75) (2.75) 23.73 33.29 - ----------------------------------------------------------------------------------------------------------------- 2000(a)* (4.05) (4.05) 20.06 1.28 - ----------------------------------------------------------------------------------------------------------------- 2001* (1.20) (1.30) 13.66 (26.31) - ----------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) (4.05) (4.05) 20.03 (2.24)(1) - ----------------------------------------------------------------------------------------------------------------- 2001 (1.20) (1.29) 13.61 (26.49) - ----------------------------------------------------------------------------------------------------------------- GLOBAL DIVIDEND GROWTH CLASS X SHARES 1997 (0.60) (0.83) 13.89 12.04 - ----------------------------------------------------------------------------------------------------------------- 1998 (1.52) (1.76) 13.82 12.53 - ----------------------------------------------------------------------------------------------------------------- 1999 (1.07) (1.36) 14.44 14.65 - ----------------------------------------------------------------------------------------------------------------- 2000(a)* (1.22) (1.31) 12.73 (2.50) - ----------------------------------------------------------------------------------------------------------------- 2001* (0.14) (0.47) 11.47 (6.25) - ----------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) (1.22) (1.22) 12.71 0.07(1) - ----------------------------------------------------------------------------------------------------------------- 2001 (0.14) (0.47) 11.43 (6.44) - ----------------------------------------------------------------------------------------------------------------- EUROPEAN GROWTH CLASS X SHARES 1997 (1.18) (1.42) 23.54 16.07 - ----------------------------------------------------------------------------------------------------------------- 1998 (1.73) (2.04) 27.18 23.96 - ----------------------------------------------------------------------------------------------------------------- 1999 (2.68) (2.87) 31.47 29.11 - ----------------------------------------------------------------------------------------------------------------- 2000(a)* (4.62) (4.80) 25.37 (4.92) - ----------------------------------------------------------------------------------------------------------------- 2001* (4.06) (4.32) 16.71 (17.76) - ----------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) (4.62) (4.80) 25.33 (7.39)(1) - ----------------------------------------------------------------------------------------------------------------- 2001 (4.06) (4.31) 16.65 (17.92) - ----------------------------------------------------------------------------------------------------------------- PACIFIC GROWTH CLASS X SHARES 1997 -- (0.14) 6.12 (37.70) - ----------------------------------------------------------------------------------------------------------------- 1998 -- (0.28) 5.15 (10.40) - ----------------------------------------------------------------------------------------------------------------- 1999 -- (0.06) 8.46 66.09 - ----------------------------------------------------------------------------------------------------------------- 2000(a)* -- (0.12) 5.56 (33.46) - ----------------------------------------------------------------------------------------------------------------- 2001* -- (0.07) 3.98 (27.42) - ----------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) -- (0.12) 5.56 (26.72)(1) - ----------------------------------------------------------------------------------------------------------------- 2001 -- (0.07) 3.98 (27.26) - ----------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS NET ASSETS -------------------------------- PORTFOLIO END OF PERIOD NET INVESTMENT TURNOVER YEAR ENDED DECEMBER 31 (000'S) EXPENSES INCOME (LOSS) RATE - ------------------------ CAPITAL GROWTH CLASS X SHARES 1997 $127,100 0.71% 0.01% 139% - ------------------------ 1998 138,603 0.70 (0.26) 248 - ------------------------ 1999 171,251 0.72 0.02 575 - ------------------------ 2000(a)* 183,151 0.69 0.43 349 - ------------------------ 2001* 103,764 0.70 0.20 323 - ------------------------ CLASS Y SHARES* 2000(b) 3,551 0.94(2) 0.30(2) 349 - ------------------------ 2001 6,615 0.95 (0.05) 323 - ------------------------ GLOBAL DIVIDEND GROWTH CLASS X SHARES 1997 481,613 0.84 1.61 48 - ------------------------ 1998 484,228 0.84 1.68 52 - ------------------------ 1999 506,929 0.83 1.90 43 - ------------------------ 2000(a)* 373,770 0.80 1.88 40 - ------------------------ 2001* 285,158 0.80 1.76 9 - ------------------------ CLASS Y SHARES* 2000(b) 2,211 1.05(2) 1.14(2) 40 - ------------------------ 2001 10,494 1.05 1.51 9 - ------------------------ EUROPEAN GROWTH CLASS X SHARES 1997 391,441 1.12 1.04 45 - ------------------------ 1998 510,638 1.11 0.65 56 - ------------------------ 1999 579,705 1.04 0.87 55 - ------------------------ 2000(a)* 508,366 1.00 0.46 78 - ------------------------ 2001* 316,196 1.02 0.68 82 - ------------------------ CLASS Y SHARES* 2000(b) 10,580 1.25(2) (0.18)(2) 78 - ------------------------ 2001 20,858 1.27 0.43 82 - ------------------------ PACIFIC GROWTH CLASS X SHARES 1997 68,904 1.44 1.09 58 - ------------------------ 1998 52,842 1.51 0.91 112 - ------------------------ 1999 115,927 1.42 0.85 105 - ------------------------ 2000(a)* 64,209 1.21 0.01 46 - ------------------------ 2001* 33,138 1.73 (0.28) 124 - ------------------------ CLASS Y SHARES* 2000(b) 728 1.46(2) (0.20)(2) 46 - ------------------------ 2001 1,640 1.98 (0.53) 124 - ------------------------
63
NET ASSET VALUE NET NET REALIZED TOTAL FROM BEGINNING INVESTMENT AND UNREALIZED INVESTMENT DIVIDENDS TO YEAR ENDED DECEMBER 31 OF PERIOD INCOME (LOSS) GAIN (LOSS) OPERATIONS SHAREHOLDERS - -------------------------------------------------------------------------------------------------------------------------- EQUITY CLASS X SHARES 1997 $26.39 $ 0.18 $ 9.27 $ 9.45 $(0.18) - -------------------------------------------------------------------------------------------------------------------------- 1998 33.58 0.25 9.47 9.72 (0.25) - -------------------------------------------------------------------------------------------------------------------------- 1999 38.58 0.22 20.48 20.70 (0.22) - -------------------------------------------------------------------------------------------------------------------------- 2000(a)* 53.88 0.30 (6.46) (6.16) (0.29) - -------------------------------------------------------------------------------------------------------------------------- 2001* 39.68 0.15 (10.12) (9.97) (0.16) - -------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 49.12 0.21 (1.68) (1.47) (0.24) - -------------------------------------------------------------------------------------------------------------------------- 2001 39.66 0.06 (10.09) (10.03) (0.10) - -------------------------------------------------------------------------------------------------------------------------- S&P 500 INDEX CLASS X SHARES 1998(d) 10.00 0.06 1.16 1.22 -- - -------------------------------------------------------------------------------------------------------------------------- 1999 11.22 0.06 2.21 2.27 (0.03) - -------------------------------------------------------------------------------------------------------------------------- 2000(a)* 13.43 0.12 (1.37) (1.25) (0.07) - -------------------------------------------------------------------------------------------------------------------------- 2001* 12.05 0.10 (1.57) (1.47) (0.10) - -------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 13.47 0.04 (1.34) (1.30) (0.07) - -------------------------------------------------------------------------------------------------------------------------- 2001 12.04 0.08 (1.58) (1.50) (0.10) - -------------------------------------------------------------------------------------------------------------------------- COMPETITIVE EDGE "BEST IDEAS" CLASS X SHARES 1998(d) 10.00 0.07 (0.25) (0.18) -- - -------------------------------------------------------------------------------------------------------------------------- 1999 9.82 0.06 2.56 2.62 (0.07) - -------------------------------------------------------------------------------------------------------------------------- 2000(a)* 12.37 0.06 (2.20) (2.14) (0.05) - -------------------------------------------------------------------------------------------------------------------------- 2001* 10.18 0.05 (2.36) (2.31) (0.06) - -------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 12.03 -- (1.82) (1.82) (0.05) - -------------------------------------------------------------------------------------------------------------------------- 2001 10.16 0.02 (2.35) (2.33) (0.05) - -------------------------------------------------------------------------------------------------------------------------- AGGRESSIVE EQUITY CLASS X SHARES 1999(e) 10.00 0.05 4.55 4.60 (0.03) - -------------------------------------------------------------------------------------------------------------------------- 2000(a)* 14.57 0.05 (0.30) (0.25) (0.01) - -------------------------------------------------------------------------------------------------------------------------- 2001* 14.31 0.02 (4.09) (4.07) (0.04) - -------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 14.66 0.03 (0.39) (0.36) (0.01) - -------------------------------------------------------------------------------------------------------------------------- 2001 14.29 (0.01) (4.08) (4.09) (0.03) - -------------------------------------------------------------------------------------------------------------------------- INFORMATION CLASS X SHARES* 2000(f) 10.00 0.06 (0.75) (0.69) -- - -------------------------------------------------------------------------------------------------------------------------- 2001 9.31 0.08 (4.07) (3.99) (0.01) - -------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(f) 10.00 0.05 (0.74) (0.69) -- - -------------------------------------------------------------------------------------------------------------------------- 2001 9.31 0.06 (4.06) (4.00) (0.01) - --------------------------------------------------------------------------------------------------------------------------
64
TOTAL DISTRIBUTIONS TO DIVIDENDS AND NET ASSET VALUE YEAR ENDED DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS END OF PERIOD TOTAL RETURN+ - ----------------------------------------------------------------------------------------------------------------- EQUITY CLASS X SHARES 1997 $(2.08) $(2.26) $33.58 37.43% - ----------------------------------------------------------------------------------------------------------------- 1998 (4.47) (4.72) 38.58 30.45 - ----------------------------------------------------------------------------------------------------------------- 1999 (5.18) (5.40) 53.88 58.59 - ----------------------------------------------------------------------------------------------------------------- 2000(a)* (7.75) (8.04) 39.68 (12.35) - ----------------------------------------------------------------------------------------------------------------- 2001* (6.89) (7.05) 22.66 (26.87) - ----------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) (7.75) (7.99) 39.66 (3.99)(1) - ----------------------------------------------------------------------------------------------------------------- 2001 (6.89) (6.99) 22.64 (27.07) - ----------------------------------------------------------------------------------------------------------------- S&P 500 INDEX CLASS X SHARES 1998(d) -- -- 11.22 12.20(1) - ----------------------------------------------------------------------------------------------------------------- 1999 (0.03) (0.06) 13.43 20.23 - ----------------------------------------------------------------------------------------------------------------- 2000(a)* (0.06) (0.13) 12.05 (9.38) - ----------------------------------------------------------------------------------------------------------------- 2001* -- (0.10) 10.48 (12.23) - ----------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) (0.06) (0.13) 12.04 (9.73)(1) - ----------------------------------------------------------------------------------------------------------------- 2001 -- (0.10) 10.44 (12.53) - ----------------------------------------------------------------------------------------------------------------- COMPETITIVE EDGE "BEST IDEAS" CLASS X SHARES 1998(d) -- -- 9.82 (1.90)(1) - ----------------------------------------------------------------------------------------------------------------- 1999 -- (0.07) 12.37 26.88 - ----------------------------------------------------------------------------------------------------------------- 2000(a)* -- (0.05) 10.18 (17.39) - ----------------------------------------------------------------------------------------------------------------- 2001* (0.64) (0.70) 7.17 (23.33) - ----------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) -- (0.05) 10.16 (15.22)(1) - ----------------------------------------------------------------------------------------------------------------- 2001 (0.64) (0.69) 7.14 (23.53) - ----------------------------------------------------------------------------------------------------------------- AGGRESSIVE EQUITY CLASS X SHARES 1999(e) -- (0.03) 14.57 46.08(1) - ----------------------------------------------------------------------------------------------------------------- 2000(a)* -- (0.01) 14.31 (1.75) - ----------------------------------------------------------------------------------------------------------------- 2001* -- (0.04) 10.20 (28.46) - ----------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) -- (0.01) 14.29 (2.48)(1) - ----------------------------------------------------------------------------------------------------------------- 2001 -- (0.03) 10.17 (28.61) - ----------------------------------------------------------------------------------------------------------------- INFORMATION CLASS X SHARES* 2000(f) -- -- 9.31 (6.90)(1) - ----------------------------------------------------------------------------------------------------------------- 2001 -- (0.01) 5.31 (42.87) - ----------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(f) -- -- 9.31 (6.90)(1) - ----------------------------------------------------------------------------------------------------------------- 2001 -- (0.01) 5.30 (42.99) - ----------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS NET ASSETS -------------------------------- PORTFOLIO END OF PERIOD NET INVESTMENT TURNOVER YEAR ENDED DECEMBER 31 (000'S) EXPENSES INCOME (LOSS) RATE - ------------------------ EQUITY CLASS X SHARES 1997 $ 823,090 0.52% 0.61% 145% - ------------------------ 1998 1,138,413 0.52 0.73 257 - ------------------------ 1999 2,083,071 0.51 0.54 323 - ------------------------ 2000(a)* 1,818,134 0.50 0.62 402 - ------------------------ 2001* 1,022,335 0.51 0.55 329 - ------------------------ CLASS Y SHARES* 2000(b) 31,903 0.75(2) 0.85(2) 402 - ------------------------ 2001 61,110 0.76 0.30 329 - ------------------------ S&P 500 INDEX CLASS X SHARES 1998(d) 48,732 -- (4) 1.85(2)(4) 2(1) - ------------------------ 1999 185,963 0.48(5) 1.03(5) 1 - ------------------------ 2000(a)* 210,530 0.45 0.88 3 - ------------------------ 2001* 165,465 0.46 0.95 4 - ------------------------ CLASS Y SHARES* 2000(b) 12,724 0.71(2) 0.60(2) 3 - ------------------------ 2001 46,134 0.71 0.70 4 - ------------------------ COMPETITIVE EDGE "BEST IDEAS" CLASS X SHARES 1998(d) 36,539 -- (4) 1.74(2)(4) 31(1) - ------------------------ 1999 62,295 0.56(5) 0.72(5) 54 - ------------------------ 2000(a)* 69,882 0.71 0.50 70 - ------------------------ 2001* 40,084 0.75 0.55 47 - ------------------------ CLASS Y SHARES* 2000(b) 4,666 0.96(2) 0.06(2) 70 - ------------------------ 2001 5,869 1.00 0.30 47 - ------------------------ AGGRESSIVE EQUITY CLASS X SHARES 1999(e) 38,197 0.52(2)(5) 0.86(2)(5) 108(1) - ------------------------ 2000(a)* 138,657 0.82 0.32 414 - ------------------------ 2001* 69,418 0.84 0.21 409 - ------------------------ CLASS Y SHARES* 2000(b) 13,392 1.05(2) 0.32(2) 414 - ------------------------ 2001 18,652 1.09 (0.04) 409 - ------------------------ INFORMATION CLASS X SHARES* 2000(f) 2,686 -- (6) 3.80(1)(2)(6) 1(1) - ------------------------ 2001 4,434 -- (7) 1.27(7) 170 - ------------------------ CLASS Y SHARES* 2000(f) 1,915 0.25(2)(6) 3.55(2)(6) 1(1) - ------------------------ 2001 7,427 0.25(7) 1.02(7) 170 - ------------------------
65
NET ASSET VALUE NET NET REALIZED TOTAL FROM BEGINNING INVESTMENT AND UNREALIZED INVESTMENT DIVIDENDS TO YEAR ENDED DECEMBER 31 OF PERIOD INCOME (LOSS) GAIN (LOSS) OPERATIONS SHAREHOLDERS - -------------------------------------------------------------------------------------------------------------------------- STRATEGIST CLASS X SHARES 1997 $13.72 $0.45 $ 1.40 $ 1.85 $(0.45) - -------------------------------------------------------------------------------------------------------------------------- 1998 14.80 0.36 3.40 3.76 (0.36) - -------------------------------------------------------------------------------------------------------------------------- 1999 16.64 0.40 2.46 2.86 (0.40) - -------------------------------------------------------------------------------------------------------------------------- 2000(a)* 19.10 0.50 (0.20) 0.30 (0.48) - -------------------------------------------------------------------------------------------------------------------------- 2001* 16.66 0.38(8) (2.05)(8) (1.67) (0.39) - -------------------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) 19.29 0.49 (0.51) (0.02) (0.36) - -------------------------------------------------------------------------------------------------------------------------- 2001 16.65 0.32(8) (2.03)(8) (1.71) (0.35) - --------------------------------------------------------------------------------------------------------------------------
(A) PRIOR TO JUNE 5, 2000, THE FUND ISSUED ONE CLASS OF SHARES. ALL SHARES OF THE FUND HELD PRIOR TO MAY 1, 2000 HAVE BEEN DESIGNATED CLASS X SHARES. (B) FOR THE PERIOD JUNE 5, 2000 (ISSUED DATE) THROUGH DECEMBER 31, 2000. COMMENCEMENT OF OPERATIONS: (C) JANUARY 21, 1997. (D) MAY 18, 1998. (E) MAY 4, 1999. (F) NOVEMBER 6, 2000. (*) THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. (**) INCLUDES CAPITAL GAIN DISTRIBUTION OF LESS THAN $0.001. + CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. ++ DISTRIBUTION FROM PAID-IN-CAPITAL. ++ INCLUDES DISTRIBUTIONS FROM PAID-IN-CAPITAL OF $0.02. # DOES NOT REFLECT THE EFFECT OF EXPENSE OFFSET OF 0.06% (1) NOT ANNUALIZED. (2) ANNUALIZED. (3) IF THE INVESTMENT MANAGER HAD NOT ASSUMED ALL EXPENSES AND WAIVED ITS MANAGEMENT FEE FOR THE PERIOD JANUARY 21, 1997 THROUGH DECEMBER 3, 1997 FOR INCOME BUILDER, THE RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 0.99% AND 4.89%, RESPECTIVELY. (4) IF THE INVESTMENT MANAGER HAD NOT ASSUMED ALL EXPENSES AND WAIVED ITS MANAGEMENT FEE FOR THE PERIOD MAY 18, 1998 THROUGH DECEMBER 31, 1998 FOR COMPETITIVE EDGE "BEST IDEAS" AND S&P 500 INDEX, THE RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 0.92% AND 0.83%, RESPECTIVELY, FOR COMPETITIVE EDGE "BEST IDEAS" AND 0.59% AND 1.26%, RESPECTIVELY, FOR S&P 500 INDEX. (5) IF THE INVESTMENT MANAGER HAD NOT ASSUMED ALL EXPENSES AND WAIVED ITS MANAGEMENT FEE FOR THE PERIOD JANUARY 1, 1999 THROUGH APRIL 30, 1999 FOR COMPETITIVE EDGE "BEST IDEAS" AND FOR THE PERIOD MAY 4, 1999 THROUGH NOVEMBER 4, 1999 FOR SHORT-TERM BOND AND AGGRESSIVE EQUITY AND FOR THE PERIOD JANUARY 1, 1999 THROUGH JANUARY 5, 1999 FOR S&P 500 INDEX AND "CAPPED" THE EXPENSES OF S&P 500 INDEX AT 0.50% OF ITS DAILY NET ASSETS FOR THE PERIOD JANUARY 6, 1999 THROUGH DECEMBER 31, 1999, THE RATIO OF EXPENSES AND NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS WOULD HAVE BEEN 0.77% AND 0.51%, RESPECTIVELY, FOR COMPETITIVE EDGE "BEST IDEAS", 2.38% AND 3.07%, RESPECTIVELY, FOR SHORT-TERM BOND, 1.41% AND (0.02)%, RESPECTIVELY, FOR AGGRESSIVE EQUITY AND 0.48% AND 1.02%, RESPECTIVELY, FOR S&P 500 INDEX. 66
TOTAL DISTRIBUTIONS TO DIVIDENDS AND NET ASSET VALUE YEAR ENDED DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS END OF PERIOD TOTAL RETURN+ - ----------------------------------------------------------------------------------------------------------------- STRATEGIST CLASS X SHARES 1997 $(0.32) $(0.77) $14.80 13.71% - ----------------------------------------------------------------------------------------------------------------- 1998 (1.56) (1.92) 16.64 26.55 - ----------------------------------------------------------------------------------------------------------------- 1999 -- (0.40) 19.10 17.35 - ----------------------------------------------------------------------------------------------------------------- 2000(a)* (2.26) (2.74) 16.66 1.64 - ----------------------------------------------------------------------------------------------------------------- 2001* (0.66) (1.05) 13.94 (10.18) - ----------------------------------------------------------------------------------------------------------------- CLASS Y SHARES* 2000(b) (2.26) (2.62) 16.65 (0.02)(1) - ----------------------------------------------------------------------------------------------------------------- 2001 (0.66) (1.01) 13.93 (10.40) - ----------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS NET ASSETS -------------------------------- PORTFOLIO END OF PERIOD NET INVESTMENT TURNOVER YEAR ENDED DECEMBER 31 (000'S) EXPENSES INCOME (LOSS) RATE - ------------------------ STRATEGIST CLASS X SHARES 1997 $497,028 0.52% 3.09% 159% - ------------------------ 1998 633,934 0.52 2.32 84 - ------------------------ 1999 729,701 0.52 2.24 120 - ------------------------ 2000(a)* 701,294 0.52 2.68 126 - ------------------------ 2001* 522,655 0.52 2.53(8) 124 - ------------------------ CLASS Y SHARES* 2000(b) 23,375 0.77(2) 2.77(2) 126 - ------------------------ 2001 47,886 0.77 2.28(8) 124 - ------------------------
(A) PRIOR TO JUNE 5, 2000, THE FUND ISSUED ONE CLASS OF SHARES. ALL SHARES OF THE FUND HELD PRIOR TO MAY 1, 2000 HAVE BEEN DESIGNATED CLASS X SHARES. (B) FOR THE PERIOD JUNE 5, 2000 (ISSUED DATE) THROUGH DECEMBER 31, 2000. COMMENCEMENT OF OPERATIONS: (C) JANUARY 21, 1997. (D) MAY 18, 1998. (E) MAY 4, 1999. (F) NOVEMBER 6, 2000. (*) THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. (**) INCLUDES CAPITAL GAIN DISTRIBUTION OF LESS THAN $0.001. + CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. ++ DISTRIBUTION FROM PAID-IN-CAPITAL. ++ INCLUDES DISTRIBUTIONS FROM PAID-IN-CAPITAL OF $0.02. # DOES NOT REFLECT THE EFFECT OF EXPENSE OFFSET OF 0.06% (1) NOT ANNUALIZED. (2) ANNUALIZED. (3) IF THE INVESTMENT MANAGER HAD NOT ASSUMED ALL EXPENSES AND WAIVED ITS MANAGEMENT FEE FOR THE PERIOD JANUARY 21, 1997 THROUGH DECEMBER 3, 1997 FOR INCOME BUILDER, THE RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 0.99% AND 4.89%, RESPECTIVELY. (4) IF THE INVESTMENT MANAGER HAD NOT ASSUMED ALL EXPENSES AND WAIVED ITS MANAGEMENT FEE FOR THE PERIOD MAY 18, 1998 THROUGH DECEMBER 31, 1998 FOR COMPETITIVE EDGE "BEST IDEAS" AND S&P 500 INDEX, THE RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 0.92% AND 0.83%, RESPECTIVELY, FOR COMPETITIVE EDGE "BEST IDEAS" AND 0.59% AND 1.26%, RESPECTIVELY, FOR S&P 500 INDEX. (5) IF THE INVESTMENT MANAGER HAD NOT ASSUMED ALL EXPENSES AND WAIVED ITS MANAGEMENT FEE FOR THE PERIOD JANUARY 1, 1999 THROUGH APRIL 30, 1999 FOR COMPETITIVE EDGE "BEST IDEAS" AND FOR THE PERIOD MAY 4, 1999 THROUGH NOVEMBER 4, 1999 FOR SHORT-TERM BOND AND AGGRESSIVE EQUITY AND FOR THE PERIOD JANUARY 1, 1999 THROUGH JANUARY 5, 1999 FOR S&P 500 INDEX AND "CAPPED" THE EXPENSES OF S&P 500 INDEX AT 0.50% OF ITS DAILY NET ASSETS FOR THE PERIOD JANUARY 6, 1999 THROUGH DECEMBER 31, 1999, THE RATIO OF EXPENSES AND NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS WOULD HAVE BEEN 0.77% AND 0.51%, RESPECTIVELY, FOR COMPETITIVE EDGE "BEST IDEAS", 2.38% AND 3.07%, RESPECTIVELY, FOR SHORT-TERM BOND, 1.41% AND (0.02)%, RESPECTIVELY, FOR AGGRESSIVE EQUITY AND 0.48% AND 1.02%, RESPECTIVELY, FOR S&P 500 INDEX. (6) IF THE INVESTMENT MANAGER HAD NOT ASSUMED ALL EXPENSES (EXCEPT FOR DISTRIBUTION FEES) AND WAIVED ITS MANAGEMENT FEE FOR THE PERIOD NOVEMBER 6, 2000 THROUGH DECEMBER 31, 2000 FOR INFORMATION, THE RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 1.82%, AND 1.98%, RESPECTIVELY, FOR CLASS X SHARES AND 2.07% AND 1.73%, RESPECTIVELY, FOR CLASS Y SHARES. (7) IF THE INVESTMENT MANAGER HAD NOT "CAPPED" ALL EXPENSES (EXCEPT FOR DISTRIBUTION FEES) FOR SHORT-TERM BOND, AT 0.50% OF ITS DAILY NET ASSETS FOR THE PERIOD JUNE 1, 2001 THROUGH DECEMBER 31, 2001 AND HAD NOT ASSUMED ALL EXPENSES (EXCEPT FOR DISTRIBUTION FEES) AND WAIVED ITS MANAGEMENT FEE FOR THE YEAR ENDED DECEMBER 31, 2001 FOR INFORMATION, THE RATIOS OF EXPENSES AND NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS WOULD HAVE BEEN 0.65% AND 3.80%, RESPECTIVELY, FOR SHORT-TERM BOND CLASS X SHARES AND 0.90% AND 3.55%, RESPECTIVELY, FOR SHORT-TERM BOND CLASS Y SHARES AND 1.62% AND (0.35)%, RESPECTIVELY, FOR INFORMATION CLASS X SHARES AND 1.87% AND (0.60)%, RESPECTIVELY, FOR INFORMATION CLASS Y SHARES. (8) EFFECTIVE JANUARY 1, 2001, THE FUND HAS ADOPTED THE PROVISIONS OF THE AICPA AUDIT AND ACCOUNTING GUIDE FOR INVESTMENT COMPANIES, AS REVISED, RELATED TO PREMIUMS AND DISCOUNTS ON DEBT SECURITIES. THE EFFECT OF THIS CHANGE FOR THE YEAR ENDED DECEMBER 31, 2001 FOR SHORT-TERM BOND, QUALITY INCOME PLUS, HIGH YIELD, UTILITIES, INCOME BUILDER AND STRATEGIST WAS TO DECREASE NET INVESTMENT INCOME PER SHARE AND INCREASE NET REALIZED AND UNREALIZED GAIN/LOSS PER SHARE BY $0.07, $0.01, $0.01, $0.01, $0.03 AND $0.01, RESPECTIVELY, AND TO DECREASE THE RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS BY 0.66%, 0.12%, 0.28%, 0.05%, 0.23% AND 0.06%, RESPECTIVELY. THE FINANCIAL HIGHLIGHTS DATA PRESENTED IN THIS TABLE FOR PRIOR PERIODS HAS NOT BEEN RESTATED TO REFLECT THIS CHANGE. 67 Notes --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- 68 Notes --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- 69 Morgan Stanley Variable Investment Series - -------------------------------------------------------------- - - ADDITIONAL INFORMATION ABOUT EACH PORTFOLIO'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 each Portfolio'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 Portfolios, 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. - - 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 at 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. (THE FUND'S INVESTMENT COMPANY ACT FILE NO. IS 811-3692) MORGAN STANLEY STATEMENT OF ADDITIONAL INFORMATION VARIABLE INVESTMENT SERIES MAY 1, 2002 - -------------------------------------------------------------------------------- -THE MONEY MARKET PORTFOLIO -THE LIMITED DURATION PORTFOLIO -THE QUALITY INCOME PLUS PORTFOLIO -THE HIGH YIELD PORTFOLIO -THE UTILITIES PORTFOLIO -THE INCOME BUILDER PORTFOLIO -THE DIVIDEND GROWTH PORTFOLIO -THE CAPITAL GROWTH PORTFOLIO -THE GLOBAL DIVIDEND GROWTH PORTFOLIO -THE EUROPEAN GROWTH PORTFOLIO -THE PACIFIC GROWTH PORTFOLIO -THE EQUITY PORTFOLIO -THE S&P 500 INDEX PORTFOLIO -THE COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO -THE AGGRESSIVE EQUITY PORTFOLIO -THE INFORMATION PORTFOLIO -THE STRATEGIST PORTFOLIO This STATEMENT OF ADDITIONAL INFORMATION for the Morgan Stanley Variable Investment Series (the "Fund") is not a prospectus. The Fund's Class X PROSPECTUS and the Fund's Class Y PROSPECTUS (each dated May 1, 2002) provide the basic information you should know before allocating your investment under your variable annuity contract or your variable life contract. Either PROSPECTUS may be obtained without charge from the Fund at its address or telephone number listed below or from the Fund's Distributor, Morgan Stanley Distributors Inc., or from Morgan Stanley DW Inc. at any of its branch offices. Morgan Stanley Variable Investment Series 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. Eligible Purchasers......................................... 4 C. Investment Strategies and Risks............................. 4 D. Fund Policies/Investment Restrictions....................... 18 E. Portfolio Turnover.......................................... 21 III. Management of the Fund........................................... 21 A. Board of Trustees........................................... 21 B. Management Information...................................... 22 C. Compensation................................................ 29 IV. Control Persons and Principal Holders of Securities.............. 30 V. Investment Management and Other Services......................... 31 A. Investment Manager and Sub-Advisor.......................... 31 B. Principal Underwriter....................................... 34 C. Services Provided by the Investment Manager and Sub-Advisor................................................. 34 D. Rule 12b-1 Plan............................................. 35 E. Other Service Providers..................................... 37 F. Codes of Ethics............................................. 37 VI. Brokerage Allocation and Other Practices......................... 37 A. Brokerage Transactions...................................... 37 B. Commissions................................................. 38 C. Brokerage Selection......................................... 41 D. Directed Brokerage.......................................... 42 E. Regular Broker-Dealers...................................... 42 VII. Capital Stock and Other Securities............................... 44 VIII. Purchase, Redemption and Pricing of Shares....................... 45 A. Purchase/Redemption of Shares............................... 45 B. Offering Price.............................................. 45 IX. Taxation of the Portfolios and Shareholders...................... 48 X. Underwriters..................................................... 48 XI. Calculation of Performance Data.................................. 49 XII. Financial Statements............................................. 54 Appendix--Ratings of Corporate Debt Instruments Investments...... 197
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). "CONTRACT"--Variable annuity contract and/or variable life insurance contract issued by Northbrook Life Insurance Company, Allstate Life Insurance Company of New York, Glenbrook Life and Annuity Company and Paragon Life Insurance Company. "CONTRACT OWNERS"--Owners of a Contract. "CUSTODIAN"--The Bank of New York for each Portfolio other than the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the INFORMATION PORTFOLIO. JPMorgan Chase Bank for the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the INFORMATION PORTFOLIO. "DISTRIBUTOR"--Morgan Stanley Distributors Inc., a wholly-owned broker-dealer subsidiary of Morgan Stanley. "FINANCIAL ADVISOR"--Morgan Stanley authorized financial services representatives. "FUND"--Morgan Stanley Variable Investment Series, a registered open-end series investment company currently consisting of seventeen Portfolios. "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 FUNDS"--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. "MORGAN STANLEY DW"--Morgan Stanley DW Inc., a wholly-owned broker-dealer subsidiary of Morgan Stanley. "MORGAN STANLEY SERVICES"--Morgan Stanley Services Company Inc., a wholly-owned fund services subsidiary of the Investment Manager. "PORTFOLIO(S)"--The separate investment portfolio(s) of the Fund. "SUB-ADVISOR"--Morgan Stanley Investment Management Inc., a subsidiary of Morgan Stanley (only applicable to the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO). "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 February 25, 1983 under the name Dean Witter Variable Annuity Investment Series and is a trust of the type commonly referred to as a Massachusetts Business Trust. Effective February 23, 1988, the Fund's name was changed to Dean Witter Variable Investment Series. On September 1, 1995, the name of the MANAGED ASSETS PORTFOLIO was changed to the STRATEGIST PORTFOLIO. Effective June 22, 1998, the Fund's name was changed to Morgan Stanley Dean Witter Variable Investment Series. Effective June 18, 2001, the Fund's name was changed to Morgan Stanley Variable Investment Series. Effective May 1, 2002, the name of the SHORT-TERM BOND PORTFOLIO was changed to the LIMITED DURATION PORTFOLIO. II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS - -------------------------------------------------------------------------------- A. CLASSIFICATION The Fund is an open-end, diversified management investment company. B. ELIGIBLE PURCHASERS As discussed in each of the Class X and Class Y PROSPECTUSES, shares of the Fund are sold only to particular insurance companies in connection with variable annuity and/or variable life insurance contracts they issue. It is conceivable that in the future it may become disadvantageous for both variable life insurance and variable annuity contract separate accounts to invest in the same underlying funds. Although neither the various insurance companies nor the Fund currently foresee any such disadvantage, the Trustees intend to monitor events in order to identify any material irreconcilable conflict between the interest of variable annuity contract owners and variable life insurance contract owners and to determine what action, if any, should be taken in response thereto. C. INVESTMENT STRATEGIES AND RISKS The following discussion of each Portfolio'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. Each Portfolio, other than the MONEY MARKET PORTFOLIO, the S&P 500 INDEX PORTFOLIO and the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO, may acquire through purchase fixed-income securities which are convertible into common stock ("convertible securities"). In addition, each Portfolio, other than the MONEY MARKET PORTFOLIO, may acquire convertible securities through a distribution by a security held in its portfolio. 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 to 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 a Portfolio at varying price levels above their investment values and/ or their conversion values in keeping with the Portfolio's objective. 4 FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The LIMITED DURATION PORTFOLIO, the HIGH YIELD PORTFOLIO, the UTILITIES PORTFOLIO, the INCOME BUILDER PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO, the AGGRESSIVE EQUITY PORTFOLIO, the INFORMATION PORTFOLIO and the STRATEGIST PORTFOLIO may enter into forward foreign currency exchange contracts ("forward contracts"): to facilitate settlement in an attempt to limit the effect of changes in the relationship between the U.S. dollar and the foreign currency during the period between the date on which the security is purchased or sold and the date on which payment is made or received. In addition, the LIMITED DURATION PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO, the AGGRESSIVE EQUITY PORTFOLIO and the INFORMATION PORTFOLIO may enter into forward contracts as a hedge against fluctuations in future foreign exchange rates. Each Portfolio may conduct its foreign currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through entering into forward contracts to purchase or sell foreign currencies. A forward contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are traded in the interbank market conducted directly between currency traders (usually large commercial and investment banks) and their customers. Forward contracts only will be entered into with United States banks and their foreign branches 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 the Fund's Investment Manager believes that a particular foreign currency may experience a substantial movement against the U.S. dollar, it may enter into a forward contract to purchase or sell, for a fixed amount of dollars or other currency, the amount of foreign currency approximating the value of some or all of a Portfolio's portfolio securities denominated in such foreign currency. The Portfolios will also not enter into such forward contracts or maintain a net exposure to such contracts where the consummation of the contracts would obligate the Portfolio to deliver an amount of foreign currency in excess of the value of the Portfolio's portfolio securities or other assets denominated in that currency. The LIMITED DURATION PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO and the AGGRESSIVE EQUITY PORTFOLIO also may from time to time utilize forward contracts for other purposes. For example, they may be used to hedge a foreign security held in the portfolio or a security which pays out principal tied to an exchange rate between the U.S. dollar and a foreign currency, against a decline in value of the applicable foreign currency. They also may be used to lock in the current exchange rate of the currency in which those securities anticipated to be purchased are denominated. At times, the Portfolios may enter into "cross-currency" hedging transactions involving currencies other than those in which securities are held or proposed to be purchased are denominated. A Portfolio will not enter into forward currency contracts or maintain a net exposure to these contracts where the consummation of the contracts would obligate the Portfolio to deliver an amount of foreign currency in excess of the value of the Portfolio's portfolio securities. When required by law, a Portfolio 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 Portfolio'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 earmarked on a daily basis so that the value of such securities will equal the amount of the Portfolio's commitments with respect to such contracts. Although a Portfolio values its assets daily in terms of U.S. dollars, it does not intend to convert its 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 5 which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Portfolio at one rate, while offering a lesser rate of exchange should the Portfolio desire to resell that currency to the dealer. A Portfolio 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 contracts may limit gains on portfolio securities that could otherwise be realized had they not been utilized and could result in losses. The contracts also may increase the Portfolio's volatility and may involve a significant amount of risk relative to the investment of cash. OPTION AND FUTURES TRANSACTIONS. Each of the following Portfolios may engage in transactions in listed and OTC options: the LIMITED DURATION PORTFOLIO, the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO, the AGGRESSIVE EQUITY PORTFOLIO, the INFORMATION PORTFOLIO and the STRATEGIST PORTFOLIO. Listed options are issued or guaranteed by the exchange on which they are traded or by a clearing corporation such as the Options Clearing Corporation ("OCC"). Ownership of a listed call option gives the Portfolio the right to buy from the OCC (in the U.S.) or other clearing corporation or exchange, the underlying security or currency covered by the option at the stated exercise price (the price per unit of the underlying security) by filing an exercise notice prior to the expiration date of the option. The writer (seller) of the option would then have the obligation to sell to the OCC (in the U.S.) or other clearing corporation or exchange, the underlying security or currency at that exercise price prior to the expiration date of the option, regardless of its then current market price. Ownership of a listed put option would give the Portfolio the right to sell the underlying security or currency to the OCC (in the U.S.) or other clearing corporation or exchange, at the stated exercise price. Upon notice of exercise of the put option, the writer of the put would have the obligation to purchase the underlying security or currency from the OCC (in the U.S.) or other clearing corporation or exchange, at the exercise price. COVERED CALL WRITING. Each of the above-named Portfolios is permitted to write covered call options on portfolio securities without limit. Each of the LIMITED DURATION PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO and the AGGRESSIVE EQUITY PORTFOLIO may also write covered call options on the U.S. dollar and foreign currencies in which its portfolio securities are denominated, without limit. The Portfolio will receive from the purchaser, in return for a call it has written, a "premium," I.E., the price of the option. Receipt of these premiums may better enable the Portfolio to earn a higher level of current income than it would earn from holding the underlying securities (or currencies) alone. Moreover, the premium received will offset a portion of the potential loss incurred by the Portfolio if the securities (or currencies) underlying the option decline in value. The Portfolio may be required, at any time during the option period, to deliver the underlying security (or currency) against payment of the exercise price on any calls it has written. This obligation is terminated upon the expiration of the option period or at such earlier time when the writer effects a closing purchase transaction. A closing purchase transaction is accomplished by purchasing an option of the same series as the option previously written. However, once the Portfolio has been assigned an exercise notice, the Portfolio will be unable to effect a closing purchase transaction. A call option is "covered" if the Portfolio owns the underlying security subject to the option or has an absolute and immediate right to acquire that security without additional cash consideration (or for additional consideration (in cash, Treasury bills or other liquid portfolio securities) held in a segregated account on the Portfolio's books) upon conversion or exchange of other securities held in its portfolio. A call option is also covered if the Portfolio holds a call on the same security as the call written where the exercise price of the call held is (i) equal to or less than the exercise price of the call written or (ii) greater 6 than the exercise price of the call written if the difference is maintained by the Portfolio in cash, Treasury bills or other liquid portfolio securities in a segregated account on the Portfolio's books. Options written by the Portfolio normally have expiration dates of from up to eighteen months from the date written. The exercise price of a call option may be below, equal to or above the current market value of the underlying security at the time the option is written. COVERED PUT WRITING. Each of the Portfolios that may engage in covered call writing may engage in covered put writing. A writer of a covered put option incurs an obligation to buy the security underlying the option from the purchaser of the put, at the option's exercise price at any time during the option period, at the purchaser's election. Through the writing of a put option, the Portfolio would receive income from the premium paid by purchasers. The potential gain on a covered put option is limited to the premium received on the option (less the commissions paid on the transaction). At any time during the option period, the Portfolio may be required to make payment of the exercise price against delivery of the underlying security (or currency). A put option is "covered" if the Portfolio maintains cash, Treasury bills or other liquid portfolio securities with a value equal to the exercise price in a segregated account on the Portfolio's books, or holds a put on the same security as the put written where the exercise price of the put held is equal to or greater than the exercise price of the put written. The aggregate value of the obligations underlying puts may not exceed 50% of the Portfolio's assets. The operation of and limitations on covered put options in other respects are substantially identical to those of call options. PURCHASING CALL AND PUT OPTIONS. Each of the LIMITED DURATION PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO, the AGGRESSIVE EQUITY PORTFOLIO and the INFORMATION PORTFOLIO may purchase listed and OTC call and put options in amounts equaling up to 5% of its total assets and, in the case of each of the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO and the STRATEGIST PORTFOLIO, up to 10% of its total assets. Each of the last three listed Portfolios and the INFORMATION PORTFOLIO may purchase stock index options in amounts not exceeding 5% of its total assets. The purchase of a call option would enable a Portfolio, in return for the premium paid, to lock in a purchase price for a security or currency during the term of the option. The purchase of a put option would enable a Portfolio, in return for a premium paid, to lock in a price at which it may sell a security or currency during the term of the option. OPTIONS ON FOREIGN CURRENCIES. The LIMITED DURATION PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO, and the AGGRESSIVE EQUITY PORTFOLIO may purchase and write options on foreign currencies for purposes similar to those involved with investing in forward foreign currency exchange contracts. OTC OPTIONS. OTC options are purchased from or sold (written) to dealers or financial institutions which have entered into direct agreements with a Portfolio. With OTC options, such variables as expiration date, exercise price and premium will be agreed upon between a Portfolio and the transacting dealer, without the intermediation of a third party such as the OCC. The Portfolios may engage in OTC option transactions only with member banks of the Federal Reserve Bank System or primary dealers in U.S. government securities or with affiliates of such banks or dealers. RISKS OF OPTIONS TRANSACTIONS. The successful use of options depends on the ability of the Investment Manager or, if applicable, the Sub-Advisor, to forecast correctly interest rates, currency exchange rates and/or market movements. If the market value of the portfolio securities (or the currencies in which they are denominated) upon which call options have been written increases, a Portfolio may receive a lower total return from the portion of its portfolio upon which calls have been written than it would have had such calls not been written. During the option period, the covered call writer has, in return for the premium on the option, given up the opportunity for capital appreciation above the exercise price should the market price of the underlying security (or the value of its denominated currency) increase, but has retained the risk of loss should the price of the underlying security (or the value of its denominated currency) decline. The covered put writer also retains the risk of loss should the 7 market value of the underlying security decline below the exercise price of the option less the premium received on the sale of the option. In both cases, the writer has no control over the time when it may be required to fulfill its obligation as a writer of the option. Prior to exercise or expiration, an option position can only be terminated by entering into a closing purchase or sale transaction. Once an option writer has received an exercise notice, it cannot effect a closing purchase transaction in order to terminate its obligation under the option and must deliver or receive the underlying securities at the exercise price. A Portfolio's ability to close out its position as a writer of an option is dependent upon the existence of a liquid secondary market on option exchanges. There is no assurance that such a market will exist, particularly in the case of OTC options. In the event of the bankruptcy of a broker through which a Portfolio engages in transactions in options, the Portfolio could experience delays and/or losses in liquidating open positions purchased or sold through the broker and/or incur a loss of all or part of its margin deposits with the broker. In the case of OTC options, if the transacting dealer fails to make or take delivery of the securities underlying an option it has written, in accordance with the terms of that option, due to insolvency or otherwise, the Portfolio would lose the premium paid for the option as well as any anticipated benefit of the transaction. Each of the exchanges has established limitations governing the maximum number of call or put options on the same underlying security which may be written by a single investor, whether acting alone or in concert with others (regardless of whether such options are written on the same or different exchanges or are held or written on one or more accounts or through one or more brokers). An exchange may order the liquidation of positions found to be in violation of these limits and it may impose other sanctions or restrictions. These position limits may restrict the number of listed options which the Portfolios may write. The hours of trading for options may not conform to the hours during which the underlying securities are traded. To the extent that the option markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying markets that cannot be reflected in the option markets. The markets in foreign currency options are relatively new and a Portfolio's ability to establish and close out positions on such options is subject to the maintenance of a liquid secondary market. There can be no assurance that a liquid secondary market will exist for a particular option at any specific time. The value of a foreign currency option depends upon the value of the underlying currency relative to the U.S. dollar. As a result, the price of the option position may vary with changes in the value of either or both currencies and have no relationship to the investment merits of a foreign security. Because foreign currency transactions occurring in the interbank market involve substantially larger amounts than those that may be involved in the use of foreign currency options, investors may be disadvantaged by having to deal in an odd lot market (generally consisting of transactions of less than $1 million) for the underlying foreign currencies at prices that are less favorable than for round lots. There is no systematic reporting of last sale information for foreign currencies or any regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis. Quotation information available is generally representative of very large transactions in the interbank market and thus may not reflect relatively smaller transactions (i.e., less than $1 million) where rates may be less favorable. The interbank market in foreign currencies is a global, around-the-clock market. To the extent that the U.S. options markets are closed while the markets for the underlying currencies remain open, significant price and rate movements may take place in the underlying markets that are not reflected in the options market. STOCK INDEX OPTIONS. Each of the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO, the AGGRESSIVE EQUITY PORTFOLIO, the INFORMATION PORTFOLIO and the STRATEGIST PORTFOLIO may invest in options on stock indexes. Options on stock indexes are similar to options on stock except that, rather than the right to take or make delivery of 8 stock at a specified price, an option on a stock index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the stock index upon which the option is based is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. This amount of cash is equal to such difference between the closing price of the index and the exercise price of the option expressed in dollars times a specified multiple. The writer of the option is obligated, in return for the premium received, to make delivery of this amount. RISKS OF OPTIONS ON INDEXES. Because exercises of stock index options are settled in cash, a Portfolio could not, if it wrote a call option, provide in advance for its potential settlement obligations by acquiring and holding the underlying securities. A call writer can offset some of the risk of its writing position by holding a diversified portfolio of stocks similar to those on which the underlying index is based. However, most investors cannot, as a practical matter, acquire and hold a portfolio containing exactly the same stocks as the underlying index, and, as a result, bear a risk that the value of the securities held will vary from the value of the index. Even if an index call writer could assemble a stock portfolio that exactly reproduced the composition of the underlying index, the writer still would not be fully covered from a risk standpoint because of the "timing risk" inherent in writing index options. When an index option is exercised, the amount of cash that the holder is entitled to receive is determined by the difference between the exercise price and the closing index level on the date when the option is exercised. As with other kinds of options, the writer will not learn that it had been assigned until the next business day, at the earliest. The time lag between exercise and notice of assignment poses no risk for the writer of a covered call on a specific underlying security, such as a common stock, because there the writer's obligation is to deliver the underlying security, not to pay its value as of a fixed time in the past. So long as the writer already owns the underlying security, it can satisfy its settlement obligations by simply delivering it, and the risk that its value may have declined since the exercise date is borne by the exercising holder. In contrast, even if the writer of an index call holds stocks that exactly match the composition of the underlying index, it will not be able to satisfy its assignment obligations by delivering those stocks against payment of the exercise price. Instead, it will be required to pay cash in an amount based on the closing index value on the exercise date; and by the time it learns that it has been assigned, the index may have declined, with a corresponding decrease in the value of its stock portfolio. This "timing risk" is an inherent limitation on the ability of index call writers to cover their risk exposure by holding stock positions. A holder of an index option who exercises it before the closing index value for that day is available runs the risk that the level of the underlying index may subsequently change. If a change causes the exercised option to fall out-of-the-money, the exercising holder will be required to pay the difference between the closing index value and the exercise price of the option (times the applicable multiplier) to the assigned writer. If dissemination of the current level of an underlying index is interrupted, or if trading is interrupted in stocks accounting for a substantial portion of the value of an index, the trading of options on that index will ordinarily be halted. If the trading of options on an underlying index is halted, an exchange may impose restrictions prohibiting the exercise of such options. FUTURES CONTRACTS. Each of the LIMITED DURATION PORTFOLIO, the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO, the AGGRESSIVE EQUITY PORTFOLIO, the INFORMATION PORTFOLIO and the STRATEGIST PORTFOLIO may purchase and sell interest rate and index futures contracts that are traded on U.S. commodity exchanges on such underlying securities as U.S. Treasury bonds, notes, bills and GNMA Certificates and, in the case of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO and the AGGRESSIVE EQUITY PORTFOLIO, on any foreign government fixed-income security and on various currencies, and with respect to each of the ten listed Portfolios that may engage 9 in futures transactions, on such indexes of U.S. (and, if applicable, foreign securities) as may exist or come into existence. The S&P 500 INDEX PORTFOLIO may invest in stock index futures. A futures contract purchaser incurs an obligation to take delivery of a specified amount of the obligation underlying the contract at a specified time in the future for a specified price. A seller of a futures contract incurs an obligation to deliver the specified amount of the underlying obligation at a specified time in return for an agreed upon price. The purchase of a futures contract enables a Portfolio, during the term of the contract, to lock in a price at which it may purchase a security or currency and protect against a rise in prices pending purchase of portfolio securities. The sale of a futures contract enables a Portfolio to lock in a price at which it may sell a security or currency and protect against declines in the value of portfolio securities. Although most futures contracts call for actual delivery or acceptance of securities, the contracts usually are closed out before the settlement date without the making or taking of delivery. Index futures contracts provide for the delivery of an amount of cash equal to a specified dollar amount times the difference between the index value at the open or close of the last trading day of the contract and the futures contract price. A futures contract sale is closed out by effecting a futures contract purchase for the same aggregate amount of the specific type of security (currency) and the same delivery date. If the sale price exceeds the offsetting purchase price, the seller would be paid the difference and would realize a gain. If the offsetting purchase price exceeds the sale price, the seller would pay the difference and would realize a loss. Similarly, a futures contract purchase is closed out by effecting a futures contract sale for the same aggregate amount of the specific type of security (currency) and the same delivery date. If the offsetting sale price exceeds the purchase price, the purchaser would realize a gain, whereas if the purchase price exceeds the offsetting sale price, the purchaser would realize a loss. There is no assurance that a Portfolio will be able to enter into a closing transaction. MARGIN. If a Portfolio enters into a futures contract, it is initially required to deposit an "initial margin" of cash, U.S. government securities or other liquid portfolio securities ranging from approximately 2% to 5% of the contract amount. Initial margin requirements are established by the exchanges on which futures contracts trade and may, from time to time, change. In addition, brokers may establish margin deposit requirements in excess of those required by the exchanges. Initial margin in futures transactions is different from margin in securities transactions in that initial margin does not involve the borrowing of funds by a broker's client but is, rather, a good faith deposit on the futures contract which will be returned to the Portfolio upon the proper termination of the futures contract. The margin deposits made are marked-to-market daily and the Portfolio may be required to make subsequent deposits of cash, U.S. government securities or other liquid portfolio securities, called "variation margin," which are reflective of price fluctuations in the futures contract. OPTIONS ON FUTURES CONTRACTS. Each of the LIMITED DURATION PORTFOLIO, the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO, the AGGRESSIVE EQUITY PORTFOLIO, the INFORMATION PORTFOLIO and the STRATEGIST PORTFOLIO may purchase and write call and put options on futures contracts and enter into closing transactions with respect to such options to terminate an existing position. An option on a futures contract gives the purchaser the right (in return for the premium paid), and the writer the obligation, to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the term of the option. Upon exercise of the option, the delivery of the futures position by the writer of the option to the holder of the option is accompanied by delivery of the accumulated balance in the writer's futures margin account, which represents the amount by which the market price of the futures contract at the time of exercise exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option on the futures contract. 10 The writer of an option on a futures contract is required to deposit initial and variation margin pursuant to requirements similar to those applicable to futures contracts. Premiums received from the writing of an option on a futures contract are included in initial margin deposits. LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES. A Portfolio may not enter into futures contracts or purchase related options thereon if, immediately thereafter, the amount committed to margin plus the amount paid for premiums for unexpired options on futures contracts exceeds 5% of the value of the Portfolio's total assets, after taking into account unrealized gains and unrealized losses on such contracts into which it has entered; provided, however, that in the case of an option that is in-the-money (the exercise price of the call (put) option is less (more) than the market price of the underlying security) at the time of purchase, the in-the-money amount may be excluded in calculating the 5%. However, there is no overall limitation on the percentage of a Portfolio's net assets which may be subject to a hedge position. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. The prices of securities and indexes subject to futures contracts (and thereby the futures contract prices) may correlate imperfectly with the behavior of the cash prices of the Portfolio's securities (and the currencies in which they are denominated). Also, prices of futures contracts may not move in tandem with the changes in prevailing interest rates, market movements and/or currency exchange rates against which a Portfolio seeks a hedge. A correlation may also be distorted (a) temporarily, by short-term traders' seeking to profit from the difference between a contract or security price objective and their cost of borrowed funds; (b) by investors in futures contracts electing to close out their contracts through offsetting transactions rather than meet margin deposit requirements; (c) by investors in futures contracts opting to make or take delivery of underlying securities rather than engage in closing transactions, thereby reducing liquidity of the futures market; and (d) temporarily, by speculators who view the deposit requirements in the futures markets as less onerous than margin requirements in the cash market. Due to the possibility of price distortion in the futures market and because of the possible imperfect correlation between movements in the prices of securities and movements in the prices of futures contracts, a correct forecast of interest rate, currency exchange rate and/or market movement trends by the Investment Manager (and/or if applicable, the Sub-Advisor) may still not result in a successful hedging transaction. There is no assurance that a liquid secondary market will exist for futures contracts and related options in which a Portfolio may invest. In the event a liquid market does not exist, it may not be possible to close out a futures position and, in the event of adverse price movements, the Portfolio would continue to be required to make daily cash payments of variation margin. The absence of a liquid market in futures contracts might cause the Portfolio to make or take delivery of the underlying securities (currencies) at a time when it may be disadvantageous to do so. Exchanges also limit the amount by which the price of a futures contract may move on any day. If the price moves equal the daily limit on successive days, then it may prove impossible to liquidate a futures position until the daily limit moves have ceased. In the event of adverse price movements, a Portfolio would continue to be required to make daily cash payments of variation margin on open futures positions. In these situations, if the Portfolio has insufficient cash, it may have to sell portfolio securities to meet daily variation margin requirements at a time when it may be disadvantageous to do so. In addition, the Portfolio may be required to take or make delivery of the instruments underlying interest rate futures contracts it holds at a time when it is disadvantageous to do so. The inability to close out options and futures positions could also have an adverse impact on a Portfolio's ability to effectively hedge its portfolio. Futures contracts and options thereon which are purchased or sold on foreign commodities exchanges may have greater price volatility than their U.S. counterparts. Furthermore, foreign commodities exchanges may be less regulated and under less governmental scrutiny than U.S. exchanges. Brokerage commissions, clearing costs and other transaction costs may be higher on foreign exchanges. Greater margin requirements may limit a Portfolio's ability to enter into certain commodity 11 transactions on foreign exchanges. Moreover, differences in clearance and delivery requirements on foreign exchanges may occasion delays in the settlement of a Portfolio's transactions effected on foreign exchanges. In the event of the bankruptcy of a broker through which a Portfolio engages in transactions in futures or options thereon, the Portfolio could experience delays and/or losses in liquidating open positions purchased or sold through the broker and/or incur a loss of all or part of its margin deposits with the broker. If a Portfolio maintains a short position in a futures contract or has sold a call option in a futures contract, it will cover this position by holding, in a segregated account maintained on the books of the Portfolio, cash, U.S. government securities or other liquid portfolio securities equal in value (when added to any initial or variation margin on deposit) to the market value of the securities underlying the futures contract or the exercise price of the option. Such a position may also be covered by owning the securities underlying the futures contract (in the case of a stock index futures contract a portfolio of securities substantially replicating the relevant index), or by holding a call option permitting the Portfolio to purchase the same contract at a price no higher than the price at which the short position was established. In addition, if a Portfolio holds a long position in a futures contract or has sold a put option on a futures contract, it will hold cash, U.S. government securities or other liquid portfolio securities equal to the purchase price of the contract or the exercise price of the put option (less the amount of initial or variation margin on deposit) in a segregated account maintained on the books of the Portfolio. Alternatively, the Portfolio could cover its long position by purchasing a put option on the same futures contract with an exercise price as high or higher than the price of the contract held by the Portfolio. COLLATERALIZED MORTGAGE OBLIGATIONS. The LIMITED DURATION PORTFOLIO, the QUALITY INCOME PLUS PORTFOLIO and the STRATEGIST PORTFOLIO may invest in CMOs - collateralized mortgage obligations. CMOs are debt obligations collateralized by mortgage loans or mortgage pass-through securities (collectively "Mortgage Assets"). Payments of principal and interest on the Mortgage Assets and any reinvestment income are used to make payments on the CMOs. CMOs are issued in multiple classes. Each class has a specific fixed or floating coupon rate and a stated maturity or final distribution date. The principal and interest on the Mortgage Assets may be allocated among the classes in a number of different ways. Certain classes will, as a result of the collection, have more predictable cash flows than others. As a general matter, the more predictable the cash flow, the lower the yield relative to other Mortgage Assets. The less predictable the cash flow, the higher the yield and the greater the risk. The Portfolio(s) may invest in any class of CMO. Certain mortgage-backed securities in which the Portfolio(s) may invest (E.G.,certain classes of CMOs) may increase or decrease in value substantially with changes in interest rates and/or the rates of prepayment. In addition, if the collateral securing CMOs or any third party guarantees are insufficient to make payments, the Portfolio could sustain a loss. In addition, the LIMITED DURATION PORTFOLIO may invest up to 15% of its net assets in stripped mortgage-backed securities, which are usually structured in two classes. One class entitles the holder to receive all or most of the interest but little or none of the principal of a pool of Mortgage Assets (the interest-only or "IO Class"), while the other class entitles the holder to receive all or most of the principal but little or none of the interest (the principal-only or "PO" Class). IOs tend to decrease in value substantially if interest rates decline and prepayment rates become more rapid. POs tend to decrease in value substantially if interest rates increase and the rate of repayment decreases. The LIMITED DURATION PORTFOLIO may invest up to 10% of its assets in inverse floaters. An inverse floater has a coupon rate that moves in the direction opposite to that of a designated interest rate index. Like most other fixed income securities, the value of inverse floaters will decrease as interest rates increase. They are more volatile, however, than most other fixed income securities because the coupon 12 rate on an inverse floater typically changes at a multiple of the change in the relevant index rate. Thus, any rise in the index rate (as a consequence of an increase in interest rates) causes a correspondingly greater drop in the coupon rate of an inverse floater while a drop in the index rate causes a correspondingly greater increase in the coupon of an inverse floater. Some inverse floaters may also increase or decrease substantially because of changes in the rate of prepayments. ASSET-BACKED SECURITIES. The LIMITED DURATION PORTFOLIO, the QUALITY INCOME PLUS PORTFOLIO, the HIGH YIELD PORTFOLIO and the STRATEGIST PORTFOLIO may invest in asset-backed securities. The securitization techniques used to develop mortgage-backed securities are also applied to a broad range of other assets. Various types of assets, primarily automobile and credit card receivables and home equity loans, are being securitized in pass-through structures similar to the mortgage pass-through structures. These types of securities are known as asset-backed securities. The Portfolio(s) may invest in any type of asset- backed security. Asset-backed securities have risk characteristics similar to mortgage-backed securities. Like mortgage-backed securities, they generally decrease in value as a result of interest rate increases, but may benefit less than other fixed-income securities from declining interest rates, principally because of prepayments. Also, as in the case of mortgage-backed securities, prepayments generally increase during a period of declining interest rates although other factors, such as changes in credit use and payment patterns, may also influence prepayment rates. Asset-backed securities also involve the risk that various federal and state consumer laws and other legal and economic factors may result in the collateral backing the securities being insufficient to support payment on the securities. ADDITIONAL INFORMATION CONCERNING THE LIMITED DURATION PORTFOLIO. The LIMITED DURATION PORTFOLIO'S investments in preferred stocks are limited to those rated in one of the four highest categories by a nationally recognized statistical rating organization ("NRSRO") including Moody's Investors Service, Inc., Standard & Poor's Corporation, Duff and Phelps, Inc. and Fitch IBCA, Inc. Investments in securities rated within the four highest rating categories by a NRSRO are considered "investment grade." However, such securities rated within the fourth highest rating category by a NRSRO may have speculative characteristics and, therefore, changes in economic conditions or other circumstances are more likely to weaken their capacity to make principal and interest payments than would be the case with investments in securities with higher credit ratings. ADDITIONAL INFORMATION CONCERNING THE S&P 500 INDEX PORTFOLIO. The S&P 500 INDEX PORTFOLIO is not sponsored, endorsed, sold or promoted by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no representation or warranty, express or implied, to the owners of shares of the Portfolio or any member of the public regarding the advisability of investing in securities generally or in the Portfolio particularly or the ability of the S&P 500 Index to track general stock market performance. S&P's only relationship to the S&P 500 INDEX PORTFOLIO is the licensing of certain trademarks and trade names of S&P and of the S&P 500 Index which is determined, composed and calculated by S&P without regard to the Portfolio. S&P has no obligation to take the needs of the Portfolio or the owners of shares of the Portfolio into consideration in determining, composing or calculating the S&P 500 Index. S&P is not responsible for and has not participated in the determination of the prices and amount of the Portfolio or the timing of the issuance or sale of shares of the Portfolio or in the determination or calculation of the equation by which shares of the Portfolio are to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing or trading of the Portfolio. S&P does not guarantee the accuracy or the completeness of the S&P 500 Index or any data included therein, and S&P shall have no liability for any errors, omissions or interruptions therein. S&P makes no warranty, express or implied, as to results to be obtained by the S&P 500 INDEX PORTFOLIO, owners of shares of the Portfolio, or any other person or entity from the use of the S&P 500 Index or any data included therein. S&P makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to the S&P 500 Index or any 13 data included therein. Without limiting any of the foregoing, in no event shall S&P have any liability for any special, punitive, indirect, or consequential damages (including lost profits), even if notified of the possibility of such damages. MONEY MARKET SECURITIES. In addition to the short-term fixed-income securities in which the Portfolios may otherwise invest, the Portfolios 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, obligations of savings institutions and repurchase agreements. (This section does not apply to the MONEY MARKET PORTFOLIO whose money market instruments are described in the Prospectus.) 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, time deposits 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 association, 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 a Portfolio's total assets in all such obligations and in all illiquid assets, in the aggregate; COMMERCIAL PAPER. Commercial paper rated within the two highest grades by Standard & Poor's Corporation ("S&P") or by Moody's Investors 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. Each Portfolio may invest in repurchase agreements. When cash may be available for only a few days, it may be invested by a Portfolio in repurchase agreements until such time as it may otherwise be invested or used for payments of obligations of the Portfolio. These agreements, which may be viewed as a type of secured lending by the Portfolio, typically involve the acquisition by the Portfolio of debt securities from a selling financial institution such as a bank, savings and loan association or broker-dealer. The agreement provides that the Portfolio 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 Portfolio will accrue interest from the institution until the time when the repurchase is to occur. Although this date is deemed by the Portfolio 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 Portfolio follows procedures approved by the Trustees designed to minimize such risks. These procedures include effecting repurchase transactions only with large, well-capitalized and well- 14 established financial institutions whose financial condition will be continually monitored by the Investment Manager. 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 case of the MONEY MARKET PORTFOLIO, such collateral will consist entirely of securities that are direct obligations of, or that are fully guaranteed as to principal and interest by, the United States or any agency thereof, and/or certificates of deposit, bankers' acceptances which are eligible for acceptance by a Federal Reserve Bank, and, if the seller is a bank, mortgage related securities (as such term is defined in section 3(a)(41) of the Securities Exchange Act of 1934) that at the time the repurchase agreement is entered into are rated in the highest rating category by the "Requisite NRSROs" (as defined in Rule 2a-7 under the Investment Company Act of 1940). Additionally, in the case of the MONEY MARKET PORTFOLIO, the collateral must qualify the repurchase agreement for preferential treatment under the Federal Deposit Insurance Act of the Federal Bankruptcy Code. In the event of a default or bankruptcy by a selling financial institution, the Portfolio will seek to liquidate such collateral. However, the exercising of the Portfolio'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 Portfolio could suffer a loss. It is the current policy of each Portfolio 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 Portfolio, amounts to more than 10% of its total assets in the case of each of the MONEY MARKET PORTFOLIO, the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO and 15% of its net assets in the case of each of the other Portfolios. REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. Each of the LIMITED DURATION PORTFOLIO, the QUALITY INCOME PLUS PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO and may use reverse repurchase agreements for purposes of meeting redemptions or as part of its investment strategy. The LIMITED DURATION PORTFOLIO may also use dollar rolls as part of its investment strategy. Reverse repurchase agreements involve sales by the Portfolio of assets concurrently with an agreement by the Portfolio to repurchase the same assets at a later date at a fixed price. Reverse repurchase agreements involve the risk that the market value of the securities the Portfolio is obligated to purchase under the agreement may decline below the repurchase price. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Portfolio's use of the proceeds of the agreement may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the Portfolio's obligation to repurchase the securities. Dollar rolls involve the Portfolio selling securities for delivery in the current month and simultaneously contracting to repurchase substantially similar (same type and coupon) securities on a specified future date. During the roll period, the Portfolio will forgo principal and interest paid on the securities. The Portfolio is compensated by the difference between the current sales price and the lower forward price for the future purchase (often referred to as the "drop") as well as by the interest earned on the cash proceeds of the initial sale. Reverse repurchase agreements and dollar rolls are speculative techniques involving leverage and are considered borrowings by the Portfolio. With respect to each of the QUALITY INCOME PLUS PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, reverse repurchase agreements may not exceed 10% of the Portfolio's total assets. INVESTMENT IN REAL ESTATE INVESTMENT TRUSTS. Each of the UTILITIES PORTFOLIO, the INCOME BUILDER PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EQUITY PORTFOLIO, the AGGRESSIVE EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO 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 a Portfolio 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, a Portfolio would bear its ratable share of the real 15 estate investment trust's expenses, including its advisory and administration fees. At the same time the Portfolio would continue to pay its own investment management fees and other expenses, as a result of which the Portfolio and its shareholders in effect will be absorbing duplicate levels of fees with respect to investments in real estate investment trusts. LENDING PORTFOLIO SECURITIES. Each Portfolio may lend its portfolio securities to brokers, dealers and other financial institutions, provided that the loans are callable at any time by the Portfolio, 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 Portfolio 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. A Portfolio will not lend securities with a value exceeding 10% of the Portfolio's 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 Portfolio'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 Portfolio. Any gain or loss in the market price during the loan period would inure to the Portfolio. When voting or consent rights which accompany loaned securities pass to the borrower, a Portfolio 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 Portfolio's investment in the loaned securities. The Portfolio 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. From time to time, each Portfolio other than the S&P 500 INDEX PORTFOLIO and the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO 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 a Portfolio will only purchase securities on a when-issued, delayed delivery or forward commitment basis with the intention of acquiring the securities, the Portfolio 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 a Portfolio 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 a Portfolio'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 Portfolio will also establish a segregated account on its 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. Each Portfolio other than the MONEY MARKET PORTFOLIO, the S&P 500 INDEX PORTFOLIO and the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO 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 a Portfolio until the Portfolio determines that issuance of the security is probable. At that time, the Portfolio will record the transaction and, in determining its net asset value, will reflect the value of the security daily. At that time, the Portfolio will also establish a segregated account on the Portfolio's books in which it will maintain cash or cash 16 equivalents or other liquid portfolio securities equal in value to recognized commitments for such securities. The value of a Portfolio's commitments to purchase the securities of any one issuer, together with the value of all securities of such issuer owned by the Portfolio, may not exceed 5% of the value of the Portfolio's total assets at the time the initial commitment to purchase such securities is made. An increase in the percentage of the Portfolio assets committed to the purchase of securities on a "when, as and if issued" basis may increase the volatility of its net asset value. A Portfolio 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 Portfolio at the time of sale. PRIVATE PLACEMENTS. As a fundamental policy, which may only be changed by the shareholders of the affected Portfolios, each of the QUALITY INCOME PLUS PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO may invest up to 5% of its total 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. As a non-fundamental policy, which may be changed by the Trustees, each of the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the INCOME BUILDER PORTFOLIO and the EUROPEAN GROWTH PORTFOLIO may invest up to 10% of its total assets in such restricted securities; each of the HIGH YIELD PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO and the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO may invest up to 15% of its total assets in such restricted securities; and each of the LIMITED DURATION PORTFOLIO, the AGGRESSIVE EQUITY PORTFOLIO and the INFORMATION PORTFOLIO may invest up to 15% of its net assets in such restricted securities. (With respect to these eleven Portfolios, 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.) Limitations on the resale of these securities may have an adverse effect on their marketability, and may prevent a Portfolio from disposing of them promptly at reasonable prices. A Portfolio 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 above-listed Portfolios to sell restricted securities to qualified institutional buyers without limitation. The Investment Manager, pursuant to procedures adopted by the Trustees, will make a determination as to the liquidity of each restricted security purchased by a Portfolio. If a restricted security is determined to be "liquid," the security will not be included within the category "illiquid securities," which may not exceed, as to each of the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO, 10% of the Portfolio's total assets and as to each of the other Portfolios listed above, 15% of the Portfolio's net assets, as more fully described under "Fund Policies/ Investment Restrictions" below. However, investing in Rule 144A securities could have the effect of increasing the level of Portfolio illiquidity to the extent the Portfolio, at a particular point in time, may be unable to find qualified institutional buyers interested in purchasing such securities. WARRANTS AND SUBSCRIPTION RIGHTS. The Portfolios, other than the MONEY MARKET PORTFOLIO and the QUALITY INCOME PLUS PORTFOLIO, may acquire warrants and subscription rights attached to other securities. In addition, each of the INCOME BUILDER PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the EQUITY PORTFOLIO, the INFORMATION PORTFOLIO and the STRATEGIST PORTFOLIO may invest up to 5% of its assets in warrants not attached to other securities with a limit of up to 2 % of its total assets in warrants that are not listed on the New York or American Stock Exchange. The COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO may invest in warrants which are issued as a distribution by the issuer or a security held in its portfolio. 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 17 has a life of two to four weeks and a subscription price lower than the current market value of the common stock. OTHER INVESTMENT VEHICLES. Each of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the INFORMATION PORTFOLIO may acquire shares in other investment companies, including foreign investment companies. Investment in foreign investment companies may be the sole or most practical means by which these four Portfolios may participate in certain foreign securities markets. As a shareholder in an investment company, a Portfolio would bear its ratable share of that entity's expenses, including its advisory and administration fees. At the same time the Portfolio would continue to pay its own investment management fees and other expenses, as a result of which the Portfolio and its shareholders in effect will be absorbing duplicate levels of fees with respect to investments in other investment companies. D. FUND POLICIES/INVESTMENT RESTRICTIONS The investment restrictions listed below have been adopted by the Fund as fundamental policies of the Portfolios. Under the Investment Company Act of 1940, as amended (the "Investment Company Act"), a fundamental policy of a Portfolio may not be changed without the vote of a majority of the outstanding voting securities of the Portfolio. The Investment Company Act defines a majority as the lesser of (a) 67% or more of the shares of a Portfolio present at a meeting of Fund shareholders, if the holders of 50% of the outstanding shares of the Portfolio are present or represented by proxy; or (b) more than 50% of the outstanding shares of the Portfolio. 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. INVESTMENT OBJECTIVES The investment objective of each Portfolio is a fundamental policy which may not be changed without the approval of the shareholders of that Portfolio. RESTRICTIONS APPLICABLE TO ALL PORTFOLIOS Each Portfolio may not: 1. Invest more than 5% of the value of its total assets in the securities of any one issuer (other than obligations issued or guaranteed by the United States Government, its agencies or instrumentalities), or purchase more than 10% of the voting securities, or more than 10% of any class of security, of any issuer (for this purpose all outstanding debt securities of an issuer are considered as one class and all preferred stock of an issuer are considered as one class). With regard to the LIMITED DURATION PORTFOLIO, the INCOME BUILDER PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the S&P 500 INDEX PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO, the AGGRESSIVE EQUITY PORTFOLIO and the INFORMATION PORTFOLIO, these limitations apply only as to 75% of the Portfolio's total assets. 2. Concentrate its investments in any particular industry, but if deemed appropriate for attainment of its investment objective, a Portfolio may invest up to 25% of its total assets (valued at the time of investment) in any one industry classification used by that Portfolio for investment purposes. This restriction does not apply to obligations issued or guaranteed by the United States Government or its agencies or instrumentalities, or, in the case of the MONEY MARKET PORTFOLIO, to domestic bank obligations (not including obligations issued by foreign branches of such banks). This restriction does not apply, in the case of the UTILITIES PORTFOLIO, to the utilities industry and, in the case of the INFORMATION PORTFOLIO, to the communications and information industry, in which industries these Portfolios will concentrate, respectively. 3. Except for the LIMITED DURATION PORTFOLIO, the AGGRESSIVE EQUITY PORTFOLIO and the INFORMATION PORTFOLIO, invest more than 5% of the value of its total assets in securities of issuers having a record, 18 together with predecessors, of less than three years of continuous operation. This restriction shall not apply to any obligations issued or guaranteed by the United States Government, its agencies or instrumentalities. 4. Purchase or sell commodities or commodity futures contracts, or oil, gas or mineral exploration or developmental programs, except that a Portfolio may invest in the securities of companies which operate, invest in, or sponsor such programs, and (i) the LIMITED DURATION PORTFOLIO, the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the INCOME BUILDER PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO, the AGGRESSIVE EQUITY PORTFOLIO, the INFORMATION PORTFOLIO and the STRATEGIST PORTFOLIO may purchase or sell futures contracts and related options thereon, (ii) the LIMITED DURATION PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO and the AGGRESSIVE EQUITY PORTFOLIO may purchase or sell currency futures contracts and related options thereon and the S&P 500 INDEX PORTFOLIO may purchase or sell index futures contracts. 5. Borrow money (except insofar as each of the LIMITED DURATION PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO may be deemed to have borrowed by entrance into a reverse repurchase agreement (in an amount not exceeding 10% of the Portfolio's total assets, except in the case of the LIMITED DURATION PORTFOLIO)), except from banks for temporary or emergency purposes or to meet redemption requests which might otherwise require the untimely disposition of securities, and, in the case of the Portfolios other than the QUALITY INCOME PLUS PORTFOLIO, not for investment or leveraging, provided that borrowing in the aggregate (other than, in the case of the QUALITY INCOME PLUS PORTFOLIO, for investment or leveraging) may not exceed 5% of the value of the Portfolio's total assets (including the amount borrowed) at the time of such borrowing. 6. Pledge its assets or assign or otherwise encumber them except to secure permitted borrowings. (For the purpose of this restriction, collateral arrangements with respect to the writing of options and collateral arrangements with respect to initial margin for futures are not deemed to be pledges of assets.) 7. Purchase securities on margin (but the Portfolios may obtain short-term loans as are necessary for the clearance of transactions). The deposit or payment by the LIMITED DURATION PORTFOLIO, the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the INCOME BUILDER PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the S&P 500 INDEX PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO, the AGGRESSIVE EQUITY PORTFOLIO, the INFORMATION PORTFOLIO and the STRATEGIST PORTFOLIO of initial or variation margin in connection with futures contracts or related options thereon is not considered the purchase of a security on margin. 8. In the case of each Portfolio, other than the LIMITED DURATION PORTFOLIO, the S&P 500 INDEX PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO, the AGGRESSIVE EQUITY PORTFOLIO and the INFORMATION PORTFOLIO, purchase securities of other investment companies, except in connection with a merger, consolidation, reorganization or acquisition of assets or, in the case of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, in accordance with the provisions of Section 12(d) of the Investment Company Act and any Rules promulgated thereunder. 9. Make loans of money or securities, except (a) by the purchase of debt obligations in which the Portfolio may invest consistent with its investment objectives and policies; (b) by investing in repurchase agreements; or (c) by lending its portfolio securities, not in excess of 10% of the value of a Portfolio's total assets, including maintaining collateral from the borrower equal at all times to the current market value of the securities loaned, provided that lending of portfolio securities is not deemed to be loans in the case of the LIMITED DURATION PORTFOLIO, the S&P 500 INDEX PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO, the AGGRESSIVE EQUITY PORTFOLIO and the INFORMATION PORTFOLIO. 19 10. In the case of each Portfolio, other than the LIMITED DURATION PORTFOLIO, the S&P 500 INDEX PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO, the AGGRESSIVE EQUITY PORTFOLIO and the INFORMATION PORTFOLIO, invest in securities of any issuer if, to the knowledge of the Fund, any officer or Trustee of the Fund or any officer or director of the Investment Manager owns more than 1/2 of 1% of the outstanding securities of such issuer, and such officers, Trustees and directors who own more than 1/2 of 1% own in the aggregate more than 5% of the outstanding securities of such issuer. 11. Purchase or sell real estate; however, the Portfolios may purchase marketable securities of issuers which engage in real estate operations or which invest in real estate or interests therein, including real estate investment trusts and securities which are secured by real estate or interests therein. 12. Engage in the underwriting of securities except insofar as the Portfolio may be deemed an underwriter under the Securities Act in disposing of a portfolio security. 13. Invest for the purposes of exercising control or management of another company. 14. Participate on a joint or a joint and several basis in any securities trading account. The "bunching" of orders of two or more Portfolios (or of one or more Portfolios and of other accounts under the investment management of the Investment Manager) for the sale or purchase of portfolio securities shall not be considered participating in a joint securities trading account. 15. Issue senior securities as defined in the Investment Company Act except insofar as the Portfolio may be deemed to have issued a senior security by reason of: (a) entering into any repurchase agreement (or, in the case of the QUALITY INCOME PLUS PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, a reverse repurchase agreement, or, in the case of the LIMITED DURATION PORTFOLIO, a reverse repurchase agreement or a dollar roll); (b) borrowing money in accordance with restrictions described above; (c) purchasing any security on a when-issued, delayed delivery or forward commitment basis; (d) lending portfolio securities; or (e) purchasing or selling futures contracts, forward foreign exchange contracts or options, if such investments are otherwise permitted for the Portfolio. RESTRICTIONS APPLICABLE TO RESTRICTED AND ILLIQUID SECURITIES 16. Each of the QUALITY INCOME PLUS PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO may not invest more than 5% of the value of its total assets in securities which are restricted as to disposition under the Federal securities laws or otherwise, provided that this restriction shall not apply to securities received as a result of a corporate reorganization or similar transaction affecting readily marketable securities already held by the Portfolio; however, these Portfolios will attempt to dispose in an orderly fashion of any of these securities to the extent that these, together with other illiquid securities, exceed 10% of the Portfolio's total assets. 17. Each of the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO and the EUROPEAN GROWTH PORTFOLIO may not invest more than 10% of its total assets in "illiquid securities" (securities for which market quotations are not readily available) and repurchase agreements which have a maturity of longer than seven days. In addition, no more than 15% of the EUROPEAN GROWTH PORTFOLIO'S net assets will be invested in such illiquid securities and foreign securities not traded on a recognized domestic or foreign exchange. RESTRICTIONS APPLICABLE TO THE MONEY MARKET PORTFOLIO ONLY The MONEY MARKET PORTFOLIO may not: 1. Purchase securities for which there are legal or contractual restrictions on resale (I.E., restricted securities). 2. Write, purchase or sell puts, calls, straddles, spreads or combinations thereof. 20 RESTRICTIONS APPLICABLE TO THE QUALITY INCOME PLUS PORTFOLIO ONLY The QUALITY INCOME PLUS PORTFOLIO may not acquire any common stocks except when acquired upon conversion of fixed-income securities. The QUALITY INCOME PLUS PORTFOLIO will attempt to dispose in an orderly fashion of any common stocks acquired under these circumstances. RESTRICTIONS APPLICABLE TO THE HIGH YIELD PORTFOLIO ONLY The HIGH YIELD PORTFOLIO may not: 1. Acquire any common stocks, except (a) when attached to or included in a unit with fixed-income securities; (b) when acquired upon conversion of fixed-income securities; or (c) when acquired upon exercise of warrants attached to fixed-income securities. The HIGH YIELD PORTFOLIO may retain common stocks so acquired, but not in excess of 10% of its total assets. 2. Write, purchase or sell puts, calls, straddles, spreads or combinations thereof. RESTRICTIONS APPLICABLE TO THE DIVIDEND GROWTH PORTFOLIO ONLY The DIVIDEND GROWTH PORTFOLIO may not invest more than 5% of the value of its total assets in warrants, including not more than 2% of such assets in warrants not listed on either the New York or American Stock Exchange. However, the acquisition of warrants attached to other securities is not subject to this restriction. RESTRICTIONS APPLICABLE TO THE EQUITY PORTFOLIO ONLY The EQUITY PORTFOLIO may not: 1. Invest more than 5% of the value of its total assets in warrants, including not more than 2% of such assets in warrants not listed on either the New York or American Stock Exchange. However, the acquisition of warrants attached to other securities is not subject to this restriction. 2. Purchase non-convertible corporate bonds unless rated at the time of purchase Aa or better by Moody's Investors Service ("Moody's") or AA or better by S&P, or purchase commercial paper unless issued by a U.S. corporation and rated at the time of purchase Prime-1 by Moody's or A-1 by S&P, although it may continue to hold a security if its quality rating is reduced by a rating service below those specified. 3. Write, purchase or sell puts, calls, straddles, spreads or combinations thereof. 4. Invest in securities of foreign issuers, except for (i) securities of Canadian issuers registered under the Securities Exchange Act of 1934 and (ii) American Depositary Receipts. E. PORTFOLIO TURNOVER For the fiscal years ended December 31, 2000 and 2001, the portfolio turnover rates of the LIMITED DURATION PORTFOLIO were 16% and 133%, respectively; the QUALITY INCOME PLUS PORTFOLIO were 105% and 150%, respectively; the HIGH YIELD PORTFOLIO were 9% and 81%, respectively; and the PACIFIC GROWTH PORTFOLIO were 46% and 124%, respectively. These variations resulted from the portfolio managers' responses to varying market conditions during these periods. III. MANAGEMENT OF THE FUND - -------------------------------------------------------------------------------- A. BOARD OF TRUSTEES The Trustees oversee the management of the Portfolios but do not manage each Portfolio. The Trustees review various services provided by or under the direction of the Investment Manager to ensure that each Portfolio's general investment policies and programs are properly carried out. The Trustees also conduct their review to ensure that administrative services are provided to each Portfolio 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 21 each Portfolio 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 each Portfolio 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 portfolios in the Fund Complex (defined below) overseen by each Independent Trustee (as of December 31, 2001) and other directorships, if any, held by the Trustee, are shown below. The Fund Complex includes all open- and closed-end funds (including all of their portfolios) 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.).
NUMBER OF PORTFOLIOS IN FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS HELD INDEPENDENT TRUSTEE REGISTRANT SERVED* PAST 5 YEARS BY TRUSTEE BY TRUSTEE - ------------------------ ----------- ----------- ------------------------------ ---------- ------------------------- Michael Bozic (61) Trustee Trustee Retired; Director or Trustee 129 Director of Weirton Steel c/o Mayer, Brown, Rowe & since of the Morgan Stanley Funds Corporation. Maw April 1994 and the TCW/DW Term Trusts; Counsel to the formerly Vice Chairman of Independent Kmart Corporation (December Trustees 1998-October 2000), Chairman 1675 Broadway and Chief Executive Officer of New York, NY 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 129 Director of Franklin c/o Summit Ventures LLC since Morgan Stanley Funds and the Covey (time management 1 Utah Center January TCW/DW Term Trusts; formerly systems), BMW Bank of 201 S. Main Street 1993 United States Senator (R- North America, Inc. Salt Lake City, UT Utah)(1974-1992) and Chairman, (industrial loan Senate Banking Committee corporation), United (1980-1986); formerly Mayor of Space Alliance (joint Salt Lake City, Utah venture between Lockheed (1971-1974); formerly Martin and the Boeing Astronaut, Space Shuttle Company) and Nuskin Asia Discovery (April 12-19, 1985); Pacific (multilevel Vice Chairman, Huntsman marketing); member of the Corporation (chemical board of various civic company); member of the Utah and charitable Regional Advisory Board of organizations. Pacific Corp.
- ------------------------ * This is the date the Trustee began serving the Morgan Stanley Funds. 22
NUMBER OF PORTFOLIOS IN FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS HELD INDEPENDENT TRUSTEE REGISTRANT SERVED* PAST 5 YEARS BY TRUSTEE BY TRUSTEE - ------------------------ ----------- ----------- ------------------------------ ---------- ------------------------- Wayne E. Hedien (68) Trustee Trustee Retired; Director or Trustee 129 Director of The PMI Group c/o Mayer, Brown, Rowe & since of the Morgan Stanley Funds Inc. (private mortgage Maw September and the TCW/DW Term Trusts; insurance); Trustee and Counsel to the 1997 formerly associated with the Vice Chairman of The Independent Allstate Companies Field Museum of Natural Trustees (1966-1994), most recently as History; director of 1675 Broadway Chairman of The Allstate various other business New York, NY Corporation (March and charitable 1993-December 1994) and organizations. Chairman and Chief Executive Officer of its wholly-owned subsidiary, Allstate Insurance Company (July 1989-December 1994). Dr. Manuel H. Johnson Trustee Trustee Chairman of the Audit 129 Director of NVR, Inc. (53) since Committee and Director or (home construction); c/o Johnson Smick July 1991 Trustee of the Morgan Stanley Chairman and Trustee of International, Inc. Funds and the TCW/DW Term the Financial Accounting 1133 Connecticut Avenue, Trusts; Senior Partner, Foundation (oversight N.W. Johnson Smick organization of the Washington, D.C. International, Inc., a Financial Accounting consulting firm; Co- Chairman Standards Board). 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 207 Director of various c/o Triumph Capital, since Committee and Director or business organizations. L.P. July 1991 Trustee of the Morgan Stanley 237 Park Avenue Funds and the TCW/DW Term New York, NY 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 129 Director of Citizens c/o Mayer, Brown, Rowe & since Derivatives Committee and Communications Company Maw April 1994 Director or Trustee of the (telecommunications Counsel to the Morgan Stanley Funds and the company). Independent TCW/DW Term Trusts; formerly Trustees Executive Vice President and 1675 Broadway Chief Investment Officer of New York, NY the Home Insurance Company (August 1991-September 1995).
- ---------------------------------- * This is the date the Trustee began serving the Morgan Stanley Funds. 23 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 portfolios in the Fund Complex overseen by each management Trustee and the other directorships, if any, held by the Trustee, are shown below.
NUMBER OF PORTFOLIOS IN FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS HELD MANAGEMENT TRUSTEE REGISTRANT SERVED* PAST 5 YEARS BY TRUSTEE BY TRUSTEE - ------------------------ ----------- ----------- ------------------------------ ---------- ------------------------- Charles A. Fiumefreddo Chairman, Trustee Chairman, Director or Trustee 129 None (68) Director or since and Chief Executive Officer of c/o Morgan Stanley Trust Trustee July 1991 the Morgan Stanley Funds and Harborside Financial and Chief the TCW/DW Term Trusts; Center, Executive formerly Chairman, Chief Plaza Two, Officer Executive Officer and Director Jersey City, NJ 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 (54) Trustee Trustee Director or Trustee of the 129 None c/o Morgan Stanley Trust since June Morgan Stanley Funds and the Harborside Financial 2000 TCW/DW Term Trusts (since June Center, 2000); Senior Advisor of Plaza Two, Morgan Stanley (since August Jersey City, NJ 2000); Director of the Distributor and Dean Witter Realty Inc.; previously President and Chief Operating Officer of the Private Client Group of Morgan Stanley (May 1999-August 2000), President and Chief Operating Officer of Individual Securities of Morgan Stanley (February 1997-May 1999). Philip J. Purcell (58) Trustee Trustee Director or Trustee of the 129 Director of American 1585 Broadway since April Morgan Stanley Funds and the Airlines, Inc. and its New York, NY 1994 TCW/DW Term Trusts; Chairman parent company, AMR of the Board of Directors and Corporation. 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. 24
POSITION(S) NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF TIME PRINCIPAL OCCUPATION(S) DURING EXECUTIVE OFFICER REGISTRANT SERVED PAST 5 YEARS - ------------------------------ --------------- --------------------- ------------------------------------------------------- Mitchell M. Merin (48) President President since May President and Chief Operating Officer of Morgan Stanley 1221 Avenue of the Americas 1999 Investment Management (since December 1998); President, New York, NY 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 (47) Vice President, Vice President, General Counsel (since May 2000) and Managing Director 1221 Avenue of the Americas Secretary and Secretary and General (since December 2000) of Morgan Stanley Investment New York, NY General Counsel Counsel since Management; Managing Director (since December 2000), February 1997 and 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 of the c/o Morgan Stanley Trust Investment Manager, the Distributor and Morgan Stanley Harborside Financial Center, Services; Treasurer of the Morgan Stanley Funds. Plaza Two, Jersey City, NJ Armon Bar-Tur (32) Vice President Since October 1996 Executive Director and Portfolio Manager of the 1221 Avenue of the Americas Investment Manager for over 5 years New York, New York Mark Bavoso (41) Vice President Since January 1994 Managing Director and Portfolio Manager of the 1221 Avenue of the Americas Investment Manager for over 5 years. New York, New York Richard M. Behler (48) Vice President Since May 2001 Executive Director and Portfolio Manager of the 1221 Avenue of the Americas Investment Manager and/or its investment management New York, New York affiliates for over 5 years. Thomas Bergeron (37) Vice President Since May 2001 Vice President and Portfolio Manager of the Investment 1221 Avenue of the Americas Manager; previously a Financial Analyst with Bank New York, New York Boston (1993-1997). Stephen F. Esser (37) Vice President Since January 2001 Managing Director and Portfolio Manager of the One Tower Bridge Investment Manager and/or its investment management West Conshohocken, affiliates for over 5 years. Pennsylvania Ellen Gold (37) Vice President Since May 2001 Vice President and Portfolio Manager of the Investment 1221 Avenue of the Americas Manager for over 5 years. New York, New York
25
POSITION(S) NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF TIME PRINCIPAL OCCUPATION(S) DURING EXECUTIVE OFFICER REGISTRANT SERVED PAST 5 YEARS - ------------------------------ --------------- --------------------- ------------------------------------------------------- Edward F. Gaylor (60) Vice President Since inception of Executive Director and Portfolio Manager of the 1221 Avenue of the Americas the Fund Investment Manager for over 5 years. New York, New York David S. Horowitz (28) Vice President Since February 2001 Vice President and Portfolio Manager of the Investment One Tower Bridge Manager and/or its investment management affiliates for West Conshohocken, over 5 years. Pennsylvania Peter Hermann (42) Vice President Since May 1996 Vice President and Portfolio Manager of the Investment 1221 Avenue of the Americas Manager for over 5 years. New York, New York Kevin Jung (36) Vice President Since May 1999 Vice President and Portfolio Manager of the Investment 1221 Avenue of the Americas Manager (since September 1997), previously a portfolio New York, New York manager with UBS Asset Management, Inc. Michelle Kaufman (37) Vice President Since May 1996 Managing Director and Portfolio Manager of the 1221 Avenue of the Americas Investment Manager for over 5 years. New York, New York Anita H. Kolleeny (46) Vice President Since inception of Managing Director and Portfolio Manager of the 1221 Avenue of the Americas the Fund Investment Manager for over 5 years. New York, New York Gordon W. Loery (41) Vice President Since January 2001 Executive Director and Portfolio Manager of the One Tower Bridge Investment Manager and/or its investment management West Conshohocken, affiliates over 5 years. Pennsylvania Deanna L. Loughnane (35) Vice President Since January 2001 Executive Director and Portfolio Manager of the One Tower Bridge Investment Manager and/or its investment management West Conshohocken, affiliates (since 1997); previously Vice President and Pennsylvania Corporate Bond Analyst for Putnam Investments (1993-1997). Catherine Maniscalco (38) Vice President Since August 1999 Vice President and Portfolio Manager of the Investment 1221 Avenue of the Americas Manager for over 5 years. New York, New York Jonathan R. Page (55) Vice President Since inception of Managing Director and Portfolio Manager of the 1221 Avenue of the Americas the Fund Investment Manager and/or its investment management New York, New York affiliates for over 5 years. Robert Rossetti (54) Vice President Since July 2001 Vice President and Portfolio Manager of the Investment 1221 Avenue of the Americas Manager for over 5 years. New York, New York Guy G. Rutherfurd, Jr. (62) Vice President Since May 1999 Managing Director and Portfolio Manager of the 1221 Avenue of the Americas Investment Manager for over 5 years. New York, New York
26
POSITION(S) NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF TIME PRINCIPAL OCCUPATION(S) DURING EXECUTIVE OFFICER REGISTRANT SERVED PAST 5 YEARS - ------------------------------ --------------- --------------------- ------------------------------------------------------- Gustave Scacco (40) Vice President Since December 2001 Assistant Vice President and Equity Analyst of the 1221 Avenue of the Americas Investment Manager (since 1998); previously Vice New York, New York President-Finance of Amicale Industries (1997-1998). Ronald B. Silvestri (36) Vice President Since May 2000 Vice President and Portfolio Manager of the Investment 1221 Avenue of the Americas Manager (since December 1999); previously a Senior New York, New York Research Analyst with the Investment Manager. Paul D. Vance (66) Vice President Since inception of Managing Director and Portfolio Manager of the 1221 Avenue of the Americas the Fund Investment Manager and its investment management New York, New York affiliates for over 5 years. Alison E. Williams (33) Vice President Since May 2002 Vice President and Portfolio Manager of the Investment 1221 Avenue of the Americas Manager (since February 2001); previously an equity New York, New York analyst at PaineWebber.
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 none over $100,000 Edwin J. Garn none over $100,000 Wayne E. Hedien none over $100,000 Dr. Manuel H. Johnson none over $100,000 Michael E. Nugent none over $100,000 John L. Schroeder none over $100,000 Charles A. Fiumefreddo none over $100,000 James F. Higgins none over $100,000 Philip J. Purcell none 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, JOSEPH J. MCALINDEN,Managing Director and Chief Investment Officer of the Investment Manager and Director of the Transfer Agent, and KENTON J. HINCHLIFFE, Executive Director of the Investment Manager, are Vice Presidents of the Fund. 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 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. 27 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 directors/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 Portfolio 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 Audit Committee currently consists of Messrs. Johnson, Bozic, Hedien, Garn, Nugent and Schroeder. During the Fund's fiscal year ended December 31, 2001, the Audit Committee held 11 meetings. 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 Portfolios. The Derivatives Committee currently consists of Messrs. Schroeder, Fiumefreddo and Johnson. During the Fund's fiscal year ended December 31, 2001, the Derivatives Committee held four meetings. Finally, the board of each fund has formed an Insurance Committee to review and monitor the insurance coverage maintained by the Fund. The Insurance Committee currently consists of Messrs. Nugent, Fiumefreddo and Hedien. During the Fund's fiscal year ended December 31, 2001, the Insurance Committee held one meeting. 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. 28 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 (except an Audit Committee meeting), or a meeting of the Independent Trustees and/or more than one Committee meeting (except an Audit 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 December 31, 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 97 registered Morgan Stanley Funds (consisting of 129 portfolios) 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 registered funds (consisting of 78 portfolios) in the Fund Complex. CASH COMPENSATION FROM MORGAN STANLEY FUNDS
TOTAL CASH COMPENSATION FOR SERVICES TO 97 MORGAN STANLEY FUNDS AND OTHER FUNDS IN THE FUND NAME OF INDEPENDENT TRUSTEE COMPLEX - --------------------------- ---------------- Michael Bozic............................................... $150,150 Edwin J. Garn............................................... 150,150 Wayne E. Hedien............................................. 150,100 Dr. Manuel H. Johnson....................................... 219,900 Michael E. Nugent........................................... 228,362 John L. Schroeder........................................... 196,650
29 As of the date of this STATEMENT OF ADDITIONAL INFORMATION, 52 of the Morgan Stanley Funds, 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 independent director/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. 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 Fund for the fiscal year ended December 31, 2001 and by the 52 Morgan Stanley Funds (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 Fund as of December 31, 2001 and 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 THE FUND AND ALL MORGAN STANLEY FUNDS
FOR ALL ADOPTING FUNDS RETIREMENT ----------------------------- BENEFITS ESTIMATED ANNUAL ESTIMATED ACCRUED AS BENEFITS CREDITED EXPENSES UPON RETIREMENT(2) YEARS ESTIMATED ------------------- ------------------- OF SERVICE AT PERCENTAGE OF BY ALL FROM FROM ALL RETIREMENT ELIGIBLE BY THE ADOPTING THE ADOPTING NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUND FUNDS FUND FUNDS - --------------------------- ------------- ------------- -------- -------- -------- -------- Michael Bozic................ 10 60.44% $ 405 $21,395 $ 967 $48,443 Edwin J. Garn................ 10 60.44 600 33,443 973 49,121 Wayne E. Hedien.............. 9 51.37 763 44,952 826 41,437 Dr. Manuel H. Johnson........ 10 60.44 404 22,022 1,420 72,014 Michael E. Nugent............ 10 60.44 695 38,472 1,269 64,157 John L. Schroeder............ 8 50.37 1,230 68,342 987 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 Eligible Trustee's elections described in Footnote (1) above. IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES - -------------------------------------------------------------------------------- As of the date of this STATEMENT OF ADDITIONAL INFORMATION, Northbrook Life Insurance Company, Allstate Life Insurance Company of New York and Paragon Life Insurance Company owned all of the 30 outstanding shares of each Class of each Portfolio of the Fund for allocation to their respective separate accounts ("Accounts"), none of the Fund's Trustees was a Contract Owner under the Accounts, and the aggregate number of shares of each Portfolio of the Fund allocated to Contracts owned by the Fund's officers as a group was less than one percent of each Portfolio's outstanding Class X or Class Y shares. The address of Northbrook Life Insurance Company ("Northbrook") is 3100 Sanders Road, Northbrook, IL 60062. The address of Allstate Life Insurance Company of New York ("Allstate NY") is One Allstate Drive, P.O. Box 9095, Farmingville, NY 11738. The address of Paragon Life Insurance Company ("Paragon") is 100 South Brentwood, St. Louis, MO 63105. Northbrook, Allstate New York and Paragon owned the shares of each Class of each Portfolio of the Fund in the following percentages as of April 17, 2002:
CLASS/PORTFOLIO NORTHBROOK ALLSTATE NY PARAGON TOTAL - --------------- ---------- ----------- -------- -------- Class X: The Money Market Portfolio 96.10% 3.85% 0.05% 100.00% Class Y: The Money Market Portfolio 95.25% 4.75% 0.00% 100.00% Class X: The Limited Duration Portfolio 96.15% 3.85% 0.00% 100.00% Class Y: The Limited Duration Portfolio 97.95% 2.05% 0.00% 100.00% Class X: The Quality Income Plus Portfolio 94.35% 5.63% 0.02% 100.00% Class Y: The Quality Income Plus Portfolio 96.62% 3.38% 0.00% 100.00% Class X: The High Yield Portfolio 96.92% 2.94% 0.14% 100.00% Class Y: The High Yield Portfolio 99.05% 0.95% 0.00% 100.00% Class X: The Utilities Portfolio 94.61% 5.37% 0.02% 100.00% Class Y: The Utilities Portfolio 97.75% 2.25% 0.00% 100.00% Class X: The Income Builder Portfolio 96.43% 3.57% 0.00% 100.00% Class Y: The Income Builder Portfolio 98.51% 1.49% 0.00% 100.00% Class X: The Dividend Growth Portfolio 95.63% 4.26% 0.11% 100.00% Class Y: The Dividend Growth Portfolio 97.11% 2.89% 0.00% 100.00% Class X: The Capital Growth Portfolio 93.87% 5.75% 0.38% 100.00% Class Y: The Capital Growth Portfolio 97.47% 2.53% 0.00% 100.00% Class X: The Global Dividend Growth Portfolio 94.96% 4.81% 0.23% 100.00% Class Y: The Global Dividend Growth Portfolio 98.12% 1.88% 0.00% 100.00% Class X: The European Growth Portfolio 95.00% 4.80% 0.20% 100.00% Class Y: The European Growth Portfolio 97.33% 2.67% 0.00% 100.00% Class X: The Pacific Growth Portfolio 93.40% 4.57% 2.03% 100.00% Class Y: The Pacific Growth Portfolio 96.15% 3.85% 0.00% 100.00% Class X: The Equity Portfolio 96.10% 3.79% 0.11% 100.00% Class Y: The Equity Portfolio 98.90% 1.10% 0.00% 100.00% Class X: The S&P 500 Index Portfolio 95.42% 4.58% 0.00% 100.00% Class Y: The S&P 500 Index Portfolio 98.62% 1.38% 0.00% 100.00% Class X: The Competitive Edge "Best Ideas" Portfolio 94.16% 5.38% 0.46% 100.00% Class Y: The Competitive Edge "Best Ideas" Portfolio 99.69% 0.31% 0.00% 100.00% Class X: The Aggressive Equity Portfolio 96.38% 3.62% 0.00% 100.00% Class Y: The Aggressive Equity Portfolio 99.21% 0.79% 0.00% 100.00% Class X: The Information Portfolio 98.01% 1.99% 0.00% 100.00% Class Y: The Information Portfolio 99.17% 0.83% 0.00% 100.00% Class X: The Strategist Portfolio 94.90% 5.04% 0.06% 100.00% Class Y: The Strategist Portfolio 97.56% 2.44% 0.00% 100.00%
V. INVESTMENT MANAGEMENT AND OTHER SERVICES - -------------------------------------------------------------------------------- A. INVESTMENT MANAGER AND SUB-ADVISOR The Investment Manager to each Portfolio is Morgan Stanley Investment Advisors Inc., a Delaware corporation, whose address is 1221 Avenue of the Americas, New York, NY 10020. The Investment 31 Manager is a wholly-owned subsidiary of Morgan Stanley, a Delaware corporation. Morgan Stanley is a 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 to the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO is Morgan Stanley Investment Management Inc., a subsidiary of Morgan Stanley and an affiliate of the Investment Manager, whose address is 1221 Avenue of the Americas, New York, NY 10020. The Sub-Advisor was retained to provide sub-advisory services to the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO effective December 1, 1998 and November 1, 1998, respectively. Pursuant to an Investment Management Agreement (the "Management Agreement") with the Investment Manager, the Fund has retained the Investment Manager to provide each Portfolio administrative services, manage its business affairs and, other than with respect to the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, manage its investments, including the placing of orders for the purchase and sale of portfolio securities. With respect to the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, the Investment Manager supervises these Portfolios' investments. The Fund pays the Investment Manager monthly compensation calculated daily by applying the following annual rates to the net assets of each Portfolio determined as of the close of each business day:
NAME OF PORTFOLIO INVESTMENT MANAGEMENT FEE RATES - ----------------- -------------------------------------------------------- The Money Market Portfolio 0.50% of net assets up to $500 million; 0.425% of net assets exceeding $500 million but not exceeding $750 million; and 0.375% of net assets exceeding $750 million The Limited Duration Portfolio 0.45% of net assets The Quality Income Plus Portfolio 0.50% of net assets up to $500 million and 0.45% of net assets exceeding $500 million The High Yield Portfolio 0.50% of net assets up to $500 million and 0.425% of net assets exceeding $500 million The Utilities Portfolio 0.65% of net assets up to $500 million; 0.55% of net assets exceeding $500 million but not exceeding $1 billion; and 0.525% of net assets exceeding $1 billion The Income Builder Portfolio 0.75% of net assets The Dividend Growth Portfolio 0.625% of net assets up to $500 million; 0.50% of net assets exceeding $500 million but not exceeding $1 billion; 0.475% of net assets exceeding $1 billion but not exceeding $2 billion; 0.45% of net assets exceeding $2 billion but not exceeding $3 billion; and 0.425% of net assets exceeding $3 billion The Capital Growth Portfolio 0.65% of net assets The Global Dividend Growth Portfolio 0.75% of net assets up to $1 billion and 0.725% of net assets exceeding $1 billion The European Growth Portfolio 0.95% of net assets up to $500 million and 0.90% of net assets exceeding $500 million The Pacific Growth Portfolio 0.95% of net assets
32
NAME OF PORTFOLIO INVESTMENT MANAGEMENT FEE RATES - ----------------- -------------------------------------------------------- The Equity Portfolio 0.50% of net assets up to $1 billion; 0.475% of net assets exceeding $1 billion but not exceeding $2 billion; and 0.450% of net assets exceeding $2 billion The S&P 500 Index Portfolio 0.40% of net assets The Competitive Edge "Best Ideas" 0.65% of net assets Portfolio The Aggressive Equity Portfolio 0.75% of net assets The Information Portfolio 0.75% of net assets The Strategist Portfolio 0.50% of net assets up to $1.5 billion and 0.475% of net assets exceeding $1.5 billion
With respect to each Portfolio, the management fee is allocated among the Classes pro rata based on the net assets of the Portfolio attributable to each Class. For the fiscal years ended December 31, 1999, 2000 and 2001, the Investment Manager accrued compensation under the Management Agreement as follows:
COMPENSATION ACCRUED FOR THE FISCAL YEAR ENDED DECEMBER 31, ------------------------------------------ NAME OF PORTFOLIO 1999 2000 2001 - ----------------- ------------ ------------ ------------ The Money Market Portfolio.......................... $ 2,177,536 $ 1,929,020 $ 2,487,979 The Limited Duration Portfolio...................... 2,134 24,424 115,398 The Quality Income Plus Portfolio................... 2,519,733 2,076,692 2,297,200 The High Yield Portfolio............................ 1,657,944 1,093,003 514,608 The Utilities Portfolio............................. 3,606,185 3,671,048 2,940,607 The Income Builder Portfolio........................ 632,479 497,794 502,750 The Dividend Growth Portfolio....................... 11,638,694 8,539,459 7,727,136 The Capital Growth Portfolio........................ 922,721 1,225,512 888,331 The Global Dividend Growth Portfolio................ 3,669,864 3,118,294 2,459,977 The European Growth Portfolio....................... 4,749,793 5,308,859 3,806,995 The Pacific Growth Portfolio........................ 754,955 969,734 483,401 The Equity Portfolio................................ 7,156,661 10,048,377 6,418,456 The S&P 500 Index Portfolio......................... 457,843 880,891 837,012 The Competitive Edge "Best Ideas" Portfolio......... 206,828 504,726 374,809 The Aggressive Equity Portfolio..................... 28,471 901,980 797,144 The Information Portfolio........................... N/A 3,008 64,005 The Strategist Portfolio............................ 3,399,095 3,679,250 3,124,988 ----------- ----------- ----------- Total........................................... $43,580,936 $44,472,071 $35,840,796 =========== =========== ===========
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 respecting the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, the Sub-Advisor provides these Portfolios with investment advice and portfolio management, 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, payable in respect of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO. 33 In approving the Management Agreement and (in the case of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO) the 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 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 each 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, each Portfolio's shares are distributed by the Distributor. The Distributor, a Delaware corporation, is a wholly-owned subsidiary of Morgan Stanley. 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 Portfolios or their shareholders. C. SERVICES PROVIDED BY THE INVESTMENT MANAGER AND SUB-ADVISOR Each Portfolio has retained the Investment Manager to provide administrative services, manage its business affairs and (except for the PACIFIC GROWTH PORTFOLIO and the EUROPEAN GROWTH PORTFOLIO) invest its assets, including the placing of orders for the purchase and sale of portfolio securities. Each of the PACIFIC GROWTH PORTFOLIO and the EUROPEAN GROWTH PORTFOLIO has retained the Investment Manager to supervise the investment of its assets. Under the terms of the Management Agreement, 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. The services provided by the Sub-Advisor are discussed above under "Investment Manager and Sub-Advisor." Expenses not expressly assumed by the Investment Manager under the Management Agreement, by the Sub-Advisor for the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO under the Sub-Advisory Agreement, or by the Distributor, will be paid by the Portfolios. Each Portfolio pays all expenses incurred in its operation and a portion of the Fund's general administration expenses allocated based on the asset sizes of the Portfolios. The Portfolios' direct 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, 34 transfer and dividend disbursing agent; brokerage commissions; certain taxes; registration costs of the Fund under federal and state securities laws; shareholder servicing costs, charges and expenses of any outside service used for pricing of the Portfolios' 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; interest on Portfolio borrowings; and all other expenses attributable to a particular Portfolio. The 12b-1 fees relating to Class Y will be allocated directly to Class Y. 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. Expenses which are allocated on the basis of size of the respective Portfolios include the costs and expenses of printing, including typesetting, and distributing prospectuses and statements of additional information 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 the Sub-Advisor) or any corporate affiliate of the Investment Manager (or the Sub-Advisor); state franchise taxes; Securities and Exchange Commission fees; membership dues of industry associations; postage; insurance premiums on property or personnel (including officers and Trustees) of the Fund which inure to its benefit; and all other costs of the Fund's operations properly payable by the Fund and allocable on the basis of size to the respective Portfolios. Depending on the nature of a legal claim, liability or lawsuit, litigation costs, payment of legal claims or liabilities and any indemnification relating thereto may be directly applicable to the Portfolio or allocated on the basis of the size of the respective Portfolios. The Trustees have determined that this is an appropriate method of allocation of expenses. Each of the Management Agreement and the Sub-Advisory Agreement provides that in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations thereunder, the Investment Manager and the Sub-Advisor, respectively, are not liable to the Fund or any of its investors (and, in the case of the Sub-Advisory Agreement, to the Investment Manager) for any act or omission or for any losses sustained by the Fund or its investors. Each of the Management Agreement and the Sub-Advisory Agreement will remain in effect from year to year provided continuance of the applicable 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 each affected Portfolio, 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. RULE 12b-1 PLAN The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the Investment Company Act (the "Plan"). Under the Plan, Class Y shares of each Portfolio bear a distribution fee paid to the Distributor which is accrued daily and payable monthly at the annual rate of 0.25% of the average daily net assets of the Class. The Plan provides that each Portfolio's distribution fee shall compensate the Distributor, Morgan Stanley DW and its affiliates, and other selected broker-dealers for expenses they incur in connection with the distribution of the Portfolio's Class Y shares. These expenses may include: (i) cost incurred in providing personal services to shareholders; (ii) overhead and other branch office distribution-related expenses including, but not limited to, expenses of operating the Distributor's or other broker-dealers' offices used for selling Portfolio shares (E.G., lease and utility costs, salaries and employee benefits of operations and sales support personnel, costs related to client sales seminars and telephone expenses); (iii) printing and mailing costs relating to prospectuses and reports (for new shareholders); and (iv) costs incurred in connection with advertising materials and sales literature. 35 Under the Plan, the Distributor provides the Fund, for review by the Trustees, and the Trustees review, promptly after the end of each calendar quarter, a written report regarding the distribution expenses incurred on behalf of each Portfolio during such calendar quarter, which report includes (1) an itemization of the types of expenses and the purposes therefor; (2) the amounts of such expenses; and (3) a description of the benefits derived by the Fund. For the fiscal year ended December 31, 2001, Class Y shares of the Portfolios accrued amounts payable under the Plan as follows:
COMPENSATION ACCRUED FOR NAME OF PORTFOLIO FISCAL YEAR ENDED 12/31/01 - ----------------- -------------------------- The Money Market Portfolio......................... $159,510 The Limited Duration Portfolio..................... 25,690 The Quality Income Plus Portfolio.................. 66,513 The High Yield Portfolio........................... 11,153 The Utilities Portfolio............................ 54,717 The Income Builder Portfolio....................... 9,604 The Dividend Growth Portfolio...................... 94,097 The Capital Growth Portfolio....................... 12,174 The Global Dividend Growth Portfolio............... 14,318 The European Growth Portfolio...................... 42,296 The Pacific Growth Portfolio....................... 4,796 The Equity Portfolio............................... 111,991 The S&P 500 Index Portfolio........................ 70,452 The Competitive Edge "Best Ideas" Portfolio........ 13,328 The Aggressive Equity Portfolio.................... 39,838 The Information Portfolio.......................... 11,794 The Strategist Portfolio........................... 85,536
On an annual basis, the Trustees, including a majority of the Independent Trustees, consider whether the Plan should be continued. Prior to approving 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, the Trustees considered: (1) the benefits each Portfolio would be likely to obtain under the Plan, including that 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 a competitive and effective system for distribution and servicing of Contract Owners and maintenance of their accounts; and (2) what services would be provided under the Plan to Contract Owners. Based upon their review, the Trustees, including each of the Independent Trustees, determined that approval of the Plan would be in the best interests of each Portfolio and would have a reasonable likelihood of continuing to benefit the Portfolio and Contract Owners. 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 Class Y shareholders of each affected Portfolio, and all material amendments to the Plan must also be approved by the Trustees. The Plan may be terminated as to a Portfolio 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 Portfolio (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. 36 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 Portfolios. E. OTHER SERVICE PROVIDERS (1) TRANSFER AGENT/DIVIDEND-DISBURSING AGENT The Transfer Agent is the transfer agent for each Portfolio's shares and the Dividend Disbursing Agent for payment of dividends and distributions on Portfolio shares. The principal business address of the Transfer Agent is Harborside Financial Center, Plaza Two, 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 each Portfolio's assets other than those of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO and the INFORMATION PORTFOLIO. JPMorgan Chase Bank, One Chase Plaza, New York, NY 10005, is the Custodian of the assets of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO and the INFORMATION PORTFOLIO. Any Portfolio's cash balances with the Custodian in excess of $100,000 are unprotected by federal deposit insurance. These balances may, at times, be substantial. 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, of the Sub-Advisor and of the Distributor. As Transfer Agent and Dividend Disbursing Agent, the Transfer Agent's responsibilities include maintaining shareholder accounts, reinvesting dividends, processing account registration changes, handling purchase and redemption transactions, tabulating proxies and maintaining shareholder records and lists. For these services, the Transfer Agent receives an annual fee of $500 per account from each Portfolio and is reimbursed for its out-of-pocket expenses in connection with such services. F. 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, for the PACIFIC GROWTH PORTFOLIO and the EUROPEAN GROWTH PORTFOLIO, the Sub-Advisor, are responsible for decisions to buy and sell securities for each Portfolio, 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 37 concession or discount. Options and futures transactions will usually be effected through a broker and a commission will be charged. Certain securities (e.g., certain money market instruments) are purchased directly from an issuer, in which case no commissions or discounts are paid. For the fiscal years ended December 31, 1999, 2000 and 2001, the Portfolios paid brokerage commissions as follows:
BROKERAGE BROKERAGE BROKERAGE COMMISSIONS PAID COMMISSIONS PAID COMMISSIONS PAID FOR FISCAL YEAR FOR FISCAL YEAR FOR FISCAL YEAR NAME OF PORTFOLIO ENDED 12/31/99 ENDED 12/31/00 ENDED 12/31/01 - ----------------- ---------------- ---------------- ---------------- The Money Market Portfolio................ -0- -0- -0- The Limited Duration Portfolio............ -0- -0- -0- The Quality Income Plus Portfolio......... -0- -0- -0- The High Yield Portfolio.................. $ 10,500 -0- -0- The Utilities Portfolio................... 87,152 $ 155,363 $ 391,871 The Income Builder Portfolio.............. 90,868 86,066 56,207 The Dividend Growth Portfolio............. 4,248,651 2,340,426 982,093 The Capital Growth Portfolio.............. 1,199,740 998,257 876,249 The Global Dividend Growth Portfolio...... 996,294 950,003 202,567 The European Growth Portfolio............. 1,316,726 1,534,067 926,664 The Pacific Growth Portfolio.............. 555,870 254,333 321,893 The Equity Portfolio...................... 5,790,009 8,002,523 6,179,574 The S&P 500 Index Portfolio............... 60,008 34,203 22,985 The Competitive Edge "Best Ideas" Portfolio................................ 47,170 113,519 62,179 The Aggressive Equity Portfolio........... 29,426 560,207 652,259 The Information Portfolio................. -0- 1,829 25,815 The Strategist Portfolio.................. 697,388 478,508 470,094 ----------- ----------- ----------- Total................................. $15,129,802 $15,509,304 $11,170,450 =========== =========== ===========
B. COMMISSIONS Pursuant to an order of the SEC, the Portfolios may effect principal transactions in certain money market instruments with Morgan Stanley DW. The Portfolios will limit their 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 December 31, 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 Portfolios, the commissions, fees or other remuneration received by the affiliated broker or dealer must be reasonable and fair compared to the commissions, fees or other remuneration paid to other brokers in connection with comparable transactions involving similar securities being purchased or sold on an exchange during a comparable period of time. This standard would allow the affiliated broker or dealer to receive no more than the remuneration which would be expected to be received by an unaffiliated broker in a commensurate arm's-length transaction. Furthermore, the Trustees, including the Independent Trustees, have adopted procedures which are reasonably designed to provide that any commissions, fees or other remuneration paid to an affiliated broker or dealer are consistent with the foregoing standard. 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. 38 During the fiscal years ended December 31, 1999 and 2000 the Portfolios paid brokerage commissions to Morgan Stanley DW as follows:
BROKERAGE COMMISSIONS PAID TO MORGAN STANLEY DW FOR FISCAL YEAR ENDED -------------------------- NAME OF PORTFOLIO 12/31/99 12/31/00 - ----------------- -------- -------- The Money Market Portfolio.................................. -0- -0- The Limited Duration Portfolio.............................. -0- -0- The Quality Income Plus Portfolio........................... -0- -0- The High Yield Portfolio.................................... $ 10,498 -0- The Utilities Portfolio..................................... 8,450 $ 8,430 The Income Builder Portfolio................................ 30,496 25,664 The Dividend Growth Portfolio............................... 167,890 194,380 The Capital Growth Portfolio................................ 120,251 -0- The Global Dividend Growth Portfolio........................ 30,930 44,090 The European Growth Portfolio............................... -0- -0- The Pacific Growth Portfolio................................ -0- -0- The Equity Portfolio........................................ 218,335 128,355 The S&P 500 Index Portfolio................................. -0- -0- The Competitive Edge "Best Ideas" Portfolio................. 25 -0- The Aggressive Equity Portfolio............................. 21,397 100,823 The Information Portfolio................................... -0- 1,271 The Strategist Portfolio.................................... 27,241 13,969 -------- -------- Total................................................... $635,513 $516,982 ======== ========
For the fiscal year ended December 31, 2001, the Portfolios paid brokerage commissions to Morgan Stanley DW as follows:
PERCENTAGE OF AGGREGATE DOLLAR AMOUNT OF EXECUTED TRADES BROKERAGE PERCENTAGE OF ON WHICH COMMISSIONS PAID AGGREGATE BROKERAGE BROKERAGE TO MORGAN STANLEY COMMISSIONS FOR COMMISSIONS WERE DW FOR FISCAL YEAR FISCAL YEAR ENDED PAID FOR FISCAL YEAR NAME OF PORTFOLIO ENDED 12/31/01 12/31/01 ENDED 12/31/01 - ----------------- ------------------ ------------------- -------------------- The Money Market Portfolio............... -0- -0- -0- The Limited Duration Portfolio........... -0- -0- -0- The Quality Income Plus Portfolio........ -0- -0- -0- The High Yield Portfolio................. -0- -0- -0- The Utilities Portfolio.................. $ 16,245 4.15% 8.31% The Income Builder Portfolio............. $ 18,666 33.21% 41.22% The Dividend Growth Portfolio............ $ 93,430 9.51% 15.57% The Capital Growth Portfolio............. $ 70,619 8.06% 11.26% The Global Dividend Growth Portfolio..... $ 5,378 2.65% 4.34% The European Growth Portfolio............ -0- -0- -0- The Pacific Growth Portfolio............. -0- -0- -0- The Equity Portfolio..................... $ 70,637 1.14% 1.49% The S&P 500 Index Portfolio.............. -0- -0- -0- The Competitive Edge "Best Ideas" Portfolio............................... $ 399 0.64% 1.03% The Aggressive Equity Portfolio.......... $ 11,490 1.76% 2.18% The Information Portfolio................ $ 13,994 54.21% 47.16% The Strategist Portfolio................. $ 26,114 5.55% 2.96% -------- Total................................ $326,972 ========
39 During the fiscal years ended December 31, 1999 and 2000, the Portfolios paid brokerage commissions to Morgan Stanley & Co. as follows:
BROKERAGE COMMISSIONS PAID TO MORGAN STANLEY & CO. FOR FISCAL YEAR ENDED ------------------------- NAME OF PORTFOLIO 12/31/99 12/31/00 - ----------------- -------- -------- The Money Market Portfolio.................................. -0- -0- The Limited Duration Portfolio.............................. -0- -0- The Quality Income Plus Portfolio........................... -0- -0- The High Yield Portfolio.................................... -0- -0- The Utilities Portfolio..................................... -0- $ 3,959 The Income Builder Portfolio................................ $ 2,555 2,101 The Dividend Growth Portfolio............................... 255,110 125,914 The Capital Growth Portfolio................................ 83,995 -0- The Global Dividend Growth Portfolio........................ 145,785 156,221 The European Growth Portfolio............................... -0- -0- The Pacific Growth Portfolio................................ 55,994 -0- The Equity Portfolio........................................ 637,848 765,135 The S&P 500 Index Portfolio................................. -0- 869 The Competitive Edge "Best Ideas" Portfolio................. 39,371 89,859 The Aggressive Equity Portfolio............................. 671 37,119 The Information Portfolio................................... -0- 2 The Strategist Portfolio.................................... 26,580 23,955 ---------- ---------- Total................................................... $1,247,909 $1,205,134 ========== ==========
For the fiscal year ended December 31, 2001, the Portfolios paid brokerage commissions to Morgan Stanley & Co. as follows:
PERCENTAGE OF AGGREGATE DOLLAR AMOUNT OF EXECUTED PERCENTAGE OF TRADES ON WHICH BROKERAGE COMMISSIONS AGGREGATE BROKERAGE BROKERAGE PAID TO MORGAN COMMISSIONS FOR COMMISSIONS WERE STANLEY & CO. FOR FISCAL FISCAL YEAR ENDED PAID FOR FISCAL YEAR NAME OF PORTFOLIO YEAR ENDED 12/31/01 12/31/01 ENDED 12/31/01 - ----------------- ------------------------- ------------------- -------------------- The Money Market Portfolio........ -0- -0- -0- The Limited Duration Portfolio.... -0- -0- -0- The Quality Income Plus Portfolio........................ -0- -0- -0- The High Yield Portfolio.......... -0- -0- -0- The Utilities Portfolio........... $ 26,581 6.78% 7.50% The Income Builder Portfolio...... $ 2,792 4.97% 5.52% The Dividend Growth Portfolio..... $131,486 13.39% 9.70% The Capital Growth Portfolio...... $ 43,956 5.02% 4.62% The Global Dividend Growth Portfolio........................ $ 22,298 11.01% 11.92% The European Growth Portfolio..... -0- -0- -0- The Pacific Growth Portfolio...... $ 663 0.21% 0.20% The Equity Portfolio.............. $589,325 9.54% 10.80% The S&P 500 Index Portfolio....... $ 131 0.57% 0.97% The Competitive Edge "Best Ideas" Portfolio........................ $ 49,471 79.56% 89.72% The Aggressive Equity Portfolio... $ 65,534 10.05% 10.67% The Information Portfolio......... $ 121 0.47% 0.52% The Strategist Portfolio.......... $ 37,215 7.92% 10.65% -------- Total......................... $969,573 ========
40 During the fiscal year ended December 31, 1999, the PACIFIC GROWTH PORTFOLIO paid a total of $605 in brokerage commissions to China International Capital, which broker-dealer became an affiliate of the Investment Manager during 1999. C. BROKERAGE SELECTION The policy of the Fund regarding purchases and sales of securities for the Portfolios 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 (or, if applicable, 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 (or, if applicable, 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 Portfolio 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 each Portfolio's policies, the Investment Manager (or, if applicable, the Sub-Advisor) effects transactions with those brokers and dealers who the Investment Manager (or, if applicable, the Sub-Advisor) believes provide the most favorable prices and are capable of providing efficient executions. If the Investment Manager (or, if applicable, 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 (or, if applicable, 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 (or, if applicable, 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 a Portfolio 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 advisors to others. It is the practice of the Investment Manager, the Sub-Advisor (if applicable) and their affiliates to cause purchase and sale transactions to be allocated among the Portfolios and clients whose assets they manage in such manner as they deem equitable. In making such allocations among the Portfolios 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 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. 41 D. DIRECTED BROKERAGE During the fiscal year ended December 31, 2001, the Portfolios paid brokerage commissions to brokers because of research services provided as follows:
AGGREGATE DOLLAR AMOUNT BROKERAGE COMMISSIONS OF TRANSACTIONS FOR WHICH DIRECTED IN CONNECTION WITH SUCH COMMISSIONS WERE RESEARCH SERVICES PROVIDED FOR PAID FOR FISCAL YEAR ENDED NAME OF PORTFOLIO FISCAL YEAR ENDED 12/31/01 12/31/01 - ----------------- ------------------------------ -------------------------- The Money Market Portfolio................ -0- -0- The Limited Duration Portfolio............ -0- -0- The Quality Income Plus Portfolio......... -0- -0- The High Yield Portfolio.................. -0- -0- The Utilities Portfolio................... $ 231,732 $ 109,888,083 The Income Builder Portfolio.............. $ 30,047 $ 15,354,305 The Dividend Growth Portfolio............. $ 640,208 $ 384,309,016 The Capital Growth Portfolio.............. $ 666,076 $ 427,541,674 The Global Dividend Growth Portfolio...... $ 166,610 $ 76,737,252 The European Growth Portfolio............. -0- -0- The Pacific Growth Portfolio.............. $ 19,986 $ 11,671,438 The Equity Portfolio...................... $4,973,611 $3,930,910,103 The S&P 500 Index Portfolio............... $ 170 $ 391,749 The Competitive Edge "Best Ideas" Portfolio................................ $ 11,789 $ 5,150,467 The Aggressive Equity Portfolio........... $ 526,318 $ 433,539,269 The Information Portfolio................. $ 8,150 $ 6,671,746 The Strategist Portfolio.................. $ 396,379 $ 246,760,296 ---------- -------------- Total................................. $7,671,076 $5,648,925,398 ========== ==============
E. REGULAR BROKER-DEALERS During the fiscal year ended December 31, 2001, the Portfolios purchased securities issued by the following issuers which were among the ten brokers or the ten dealers that executed transactions for or with the Fund or the Portfolio in the largest dollar amounts during the year:
NAME OF PORTFOLIO ISSUER - ----------------- -------------------------------------------------------- The Money Market Portfolio The Bank of New York, Inc., JPMorgan Chase & Co., Inc., Goldman Sachs Group Inc. and Bank of America, N.A. The Limited Duration Portfolio Goldman Sachs Group Inc., JP Morgan Securities Inc., Prudential Financial Inc. The Quality Income Plus Portfolio Goldman Sachs Group Inc., Bank of America Corp., Lehman Brothers Holdings The High Yield Portfolio None The Utilities Portfolio None The Income Builder Portfolio JP Morgan Securities Inc. The Dividend Growth Portfolio Bank of America Corp., JPMorgan Chase & Co. The Capital Growth Portfolio Bank of America Corp., Goldman Sachs Group, Inc., Lehman Brothers Holdings, Inc., Prudential Financial, Inc. The Global Dividend Growth Portfolio None The European Growth Portfolio None The Pacific Growth Portfolio None
42
NAME OF PORTFOLIO ISSUER - ----------------- -------------------------------------------------------- The Equity Portfolio Bank of America Corp., Bank of New York, Goldman Sachs Group, Inc., JPMorgan Chase & Co., Inc., Lehman Brothers Holdings, Inc., Merrill Lynch & Co., Inc., Prudential Financial, Inc. The S&P 500 Index Portfolio Bank of America Securities LLC, The Bank of New York, JP Morgan Securities Inc., Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Inc. The Competitive Edge "Best Ideas" Portfolio The Bank of New York, Inc. The Aggressive Equity Bank of America Corp., The Bank of New York, Goldman Sachs Group, Inc., Lehman Brothers Holdings, Inc., Merrill Lynch & Co., Inc., Prudential Financial Inc. The Information Portfolio None The Strategist Portfolio Goldman Sachs & Co., Bank of America Securities LLC, The Bank of New York, Lehman Brothers Inc., JP Morgan Securities Inc., Prudential Financial Inc.
At December 31, 2001, the Portfolios held securities issued by such brokers or dealers with the following market values:
MARKET VALUE NAME OF PORTFOLIO ISSUER AT 12/31/01 - ----------------- ------------------------------ ------------ The Money Market Portfolio The Bank of New York, Inc. $ 9,985,000 JPMorgan Chase & Co., Inc. $19,984,691 Goldman Sachs Group Inc. $ 5,988,410 Bank of America, N.A. $ 6,000,000 The Limited Duration Portfolio Goldman Sachs Group Inc. $ 97,393 Prudential Financial Inc $ 103,390 The Quality Income Plus Portfolio Goldman Sachs Group Inc. $ 5,786,651 Lehman Brothers Holdings $ 4,135,028 The High Yield Portfolio None $ 0 The Utilities Portfolio None $ 0 The Income Builder Portfolio JP Morgan Securities Inc. $ 836,050 The Dividend Growth Portfolio Bank of America Corp. $19,514,500 JPMorgan Chase & Co. $18,175,000 The Capital Growth Portfolio Goldman Sachs Group, Inc. $ 2,318,750 Prudential Financial, Inc. $ 311,986 The Global Dividend Growth Portfolio Bank of America Corp. $ 2,958,650 The European Growth Portfolio None $ 0 The Pacific Growth Portfolio None $ 0 The Equity Portfolio Bank of America Corp. $12,061,220 Goldman Sachs Group, Inc. $10,573,500 Lehman Brothers Holdings, Inc. $10,661,280 Merrill Lynch & Co., Inc. $ 4,424,988 Prudential Financial, Inc. $ 3,182,921 The S&P 500 Index Portfolio Bank of America Securities LLC $ 1,935,146 The Bank of New York $ 587,112 Lehman Brothers Inc. $ 311,021 Merrill Lynch, Pierce, Fenner & Smith Inc. $ 861,856
43
MARKET VALUE NAME OF PORTFOLIO ISSUER AT 12/31/01 - ----------------- ------------------------------ ------------ JP Morgan Securities Inc. $ 1,401,329 The Competitive Edge "Best Ideas" Portfolio The Bank of New York, Inc. $ 1,183,200 The Aggressive Equity Bank of America Corp. $ 1,107,920 Goldman Sachs Group, Inc. $ 556,500 Lehman Brothers Holdings, Inc. $ 622,500 Merrill Lynch & Co., Inc. $ 604,592 The Information Portfolio None $ 0 The Strategist Portfolio Merrill Lynch, Pierce, Fenner & Smith Inc. $ 5,212,000 Prudential Financial Inc. $ 895,921 Prudential Financial Inc. $ 618,901
VII. CAPITAL STOCK AND OTHER SECURITIES - -------------------------------------------------------------------------------- The shareholders of each Portfolio 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. The Fund's shares of beneficial interest are divided currently into seventeen Portfolios. All shares of beneficial interest of the Fund 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 by such Class (if any) or any other matter in which the interests of one Class differ from the interests of any other Class. The Fund's Declaration of Trust permits the Trustees to authorize the creation of additional Portfolios and additional Classes of shares within any Portfolio. The Trustees have not presently authorized any such additional series or Classes of shares other than as set forth in the Prospectus for each Class. 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 the actions 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. Shareholders have the right to vote on the election of Trustees of the Fund and on any and all matters on which by law or the provisions of the Fund's By-Laws they may be entitled to vote. To the extent required by law, Northbrook Life Insurance Company, Allstate Life Insurance Company of New York, Glenbrook Life and Annuity Company and Paragon Life Insurance Company, which are the only shareholders of the Fund, will vote the shares of the Fund held in each Account established to fund the 44 benefits under either a flexible premium deferred variable annuity Contract or a flexible premium variable life insurance Contract in accordance with instructions from the owners of such Contracts. Shareholders of all Portfolios vote for a single set of Trustees. 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 May 21, 1997. 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. On any matters affecting only one Portfolio, only the shareholders of that Portfolio are entitled to vote. On matters relating to all the Portfolios, but affecting the Portfolios differently, separate votes by Portfolio are required. Approval of an Investment Management Agreement and a change in fundamental policies would be regarded as matters requiring separate voting by each Portfolio. With respect to the submission to shareholder vote of a matter requiring separate voting by Portfolio, the matter shall have been effectively acted upon with respect to any Portfolio if a majority of the outstanding voting securities of that Portfolio votes for the approval of the matter, notwithstanding that: (1) the matter has not been approved by a majority of the outstanding voting securities of any other Portfolio; or (2) the matter has not been approved by a majority of the outstanding voting securities of the Fund. 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. VIII. PURCHASE, REDEMPTION AND PRICING OF SHARES - -------------------------------------------------------------------------------- A. PURCHASE/REDEMPTION OF SHARES Information concerning how Portfolio shares are offered (and how they are redeemed) is provided in each of the Fund's Class X and Class Y PROSPECTUSES. B. OFFERING PRICE The price of each Portfolio share, called "net asset value," is based on the value of the Portfolio's securities. Net asset value per share of each of Class X and Class Y shares is calculated by dividing the value of the portion of each Portfolio's securities and other assets attributable to each Class, respectively, less the liabilities attributable to each Class, respectively, by the number of shares of the 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. The MONEY MARKET PORTFOLIO, however, utilizes the amortized cost method in valuing its portfolio securities for purposes of determining the net asset value of its shares. The MONEY MARKET PORTFOLIO utilizes the amortized cost method in valuing its portfolio securities even though the portfolio securities may increase or decrease in market value, generally in connection with changes in interest rates. The amortized cost method of valuation involves valuing a security at its cost at the time of purchase adjusted by a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the instrument. While this method provides certainty in valuation, it may result in periods during which value, as determined by amortized cost, is higher or lower than the price the MONEY MARKET PORTFOLIO would receive if it sold the investment. During such periods, the yield to investors in the MONEY MARKET PORTFOLIO may differ somewhat from that obtained in a similar company which uses mark-to-market values for all of its portfolio securities. For example, if the use of amortized cost resulted in a lower (higher) aggregate portfolio value on a particular day, a prospective investor in the MONEY MARKET PORTFOLIO would be able to obtain a somewhat higher (lower) yield than would result from investment in such a similar company and existing investors would receive less (more) investment 45 income. The purpose of this method of calculation is to facilitate the maintenance of a constant net asset value per share of $1.00. The use of the amortized cost method to value the portfolio securities of the MONEY MARKET PORTFOLIO and the maintenance of the per share net asset value of $1.00 is permitted pursuant to Rule 2a-7 of the Act (the "Rule") and is conditioned on its compliance with various conditions contained in the Rule including: (a) the Trustees are obligated, as a particular responsibility within the overall duty of care owed to the Portfolio's shareholders, to establish procedures reasonably designed, taking into account current market conditions and the Portfolio's investment objectives, to stabilize the net asset value per share as computed for the purpose of distribution and redemption at $1.00 per share; (b) the procedures include (i) calculation, at such intervals as the Trustees determine are appropriate and as are reasonable in light of current market conditions, of the deviation, if any, between net asset value per share using amortized cost to value portfolio securities and net asset value per share based upon available market quotations with respect to such portfolio securities; (ii) periodic review by the Trustees of the amount of deviation as well as methods used to calculate it; and (iii) maintenance of written records of the procedures, and the Trustees' considerations made pursuant to them and any actions taken upon such consideration; (c) the Trustees should consider what steps should be taken, if any, in the event of a difference of more than 1/2 of 1% between the two methods of valuation; and (d) the Trustees should take such action as they deem appropriate (such as shortening the average portfolio maturity, realizing gains or losses, withholding dividends or, as provided by the Declaration of Trust, reducing the number of outstanding shares of the MONEY MARKET PORTFOLIO) to eliminate or reduce to the extent reasonably practicable material dilution or other unfair results to investors or existing shareholders which might arise from differences between the two methods of valuation. Any reduction of outstanding shares will be effected by having each shareholder proportionately contribute to the MONEY MARKET PORTFOLIO'S capital the necessary shares that represent the amount of excess upon such determination. Each Contract Owner will be deemed to have agreed to such contribution in these circumstances by allocating investment under his or her Contract to the MONEY MARKET PORTFOLIO. Generally, for purposes of the procedures adopted under the Rule, the maturity of a portfolio security is deemed to be the period remaining (calculated from the trade date or such other date on which the MONEY MARKET PORTFOLIO'S interest in the instrument is subject to market action) until the date on which in accordance with the terms of the security the principal amount must unconditionally be paid, or in the case of a security called for redemption, the date on which the redemption payment must be made. A variable rate security that is subject to a demand feature is deemed to have a maturity equal to the period remaining until the principal amount can be recovered through demand. A floating rate security that is subject to a demand feature is deemed to have a maturity equal to the period remaining until the principal amount can be recovered through demand. An "NRSRO" is a nationally recognized statistical rating organization. The term "Requisite NRSROs" means (i) any two NRSROs that have issued a rating with respect to a security or class of debt obligations of an issuer, or (ii) if only one NRSRO has issued a rating with respect to such security or issuer at the time a fund purchases or rolls over the security, that NRSRO. An Eligible Security is generally defined in the Rule to mean (i) a security with a remaining maturity of 397 calendar days or less that has received a short-term rating (or that has been issued by an issuer that has received a short-term rating with respect to a class of debt obligations, or any debt obligation within that class, that is comparable in priority and security with the security) by the Requisite NRSROs in one of the two highest short-term rating categories (within which there may be sub-categories or gradations indicating relative standing); or (ii) a security: (A) that at the time of issuance had a remaining maturity of more than 397 calendar days but that has a remaining maturity of 397 calendar days or less; and (B) whose issuer has received from the Requisite NRSROs a rating with respect to a class of debt obligations (or any debt obligations within that class) that is now comparable in priority and security with 46 the security, in one of the two highest short-term rating categories (within which there may be subcategories or gradations indicating relative standing); or (iii) an unrated security that is of comparable quality to a security meeting the requirements of (i) or (ii) above, as determined by the Trustees. The MONEY MARKET PORTFOLIO will limit its investments to securities that meet the requirements for Eligible Securities. As permitted by the Rule, the Board has delegated to the Fund's Investment Manager, subject to the Board's oversight pursuant to guidelines and procedures adopted by the Board, the authority to determine which securities present minimal credit risks and which unrated securities are comparable in quality to rated securities. Also, as required by the Rule, the MONEY MARKET PORTFOLIO will limit its investments in securities, other than Government securities, so that, at the time of purchase: (a) except as further limited in (b) below with regard to certain securities, no more than 5% of its total assets will be invested in the securities of any one issuer; and (b) with respect to Eligible Securities that have received a rating in less than the highest category by any one of the NRSROs whose ratings are used to qualify the security as an Eligible Security, or that have been determined to be of comparable quality: (i) no more than 5% in the aggregate of the Portfolio's total assets in all such securities, and (ii) no more than the greater of 1% of total assets, or $1 million, in the securities on any one issuer. The presence of a line of credit or other credit facility offered by a bank or other financial institution which guarantees the payment obligation of the issuer, in the event of a default in the payment of principal or interest of an obligation, may be taken into account in determining whether an investment is an Eligible Security, provided that the guarantee itself is an Eligible Security. The Rule further requires that the MONEY MARKET PORTFOLIO limit its investments to U.S. dollar-denominated instruments which the Trustees determine present minimal credit risks and which are Eligible Securities. The Rule also requires the Portfolio to maintain a dollar-weighted average portfolio maturity (not more than 90 days) appropriate to its objective of maintaining a stable net asset value of $1.00 per share and precludes the purchase of any instrument with a remaining maturity of more than 397 days. Should the disposition of a portfolio security result in a dollar-weighted average portfolio maturity of more than 90 days, the Portfolio will invest its available cash in such a manner as to reduce such maturity to 90 days or less a soon as is reasonably practicable. If the Trustees determine that it is no longer in the best interests of the MONEY MARKET PORTFOLIO and its shareholders to maintain a stable price of $1.00 per share or if the Trustees believe that maintaining such price no longer reflects a market-based net asset value per share, the board has the right to change from an amortized cost basis of valuation to valuation based on market quotations. The Fund will notify shareholders of the Portfolio of any such change. In the calculation of a Portfolio's net asset value (other than for the MONEY MARKET PORTFOLIO): (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 if applicable, 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. 47 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 Portfolios' securities (other than securities of the MONEY MARKET PORTFOLIO) 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. Listed options on securities are valued at the latest sale price on the exchange on which they are listed unless no sales of such options have taken place that day, in which case they will be valued at the mean between their latest bid and asked prices. Unlisted options on debt securities and all options on equity securities are valued at the mean between their latest bid and asked prices. Futures are valued at the latest price published by the commodities exchange on which they trade unless the Trustees determine such price does not reflect their market value, in which case they will be valued at their fair value as determined in good faith under procedures established by and under the supervision of the Trustees. 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 a Portfolio'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 PORTFOLIOS AND SHAREHOLDERS - -------------------------------------------------------------------------------- Each of the Portfolios is treated as a separate entity for federal tax purposes. Each of the Portfolios intends to remain qualified as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. As such, each of the Portfolios 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. Each of the Portfolios generally intends to distribute sufficient income and gains so that each of the Portfolios will not pay corporate income tax on its earnings. Section 817(h) of the Internal Revenue Code provides that the investments of a separate account underlying a variable insurance contract (or the investments of a mutual fund, the shares of which are owned by the variable separate account) must be "adequately diversified" in order for the contract to be treated as an annuity or life insurance for tax purposes. The Treasury Department has issued regulations prescribing these diversification requirements. Each Portfolio intends to comply with these requirements. Information concerning the federal income tax consequences to holders of the underlying variable annuity or variable life insurance Contracts is contained in the accompanying prospectus for the applicable Contract. X. UNDERWRITERS - -------------------------------------------------------------------------------- The Portfolios' shares are offered 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 48 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 - -------------------------------------------------------------------------------- The annualized current yield of the MONEY MARKET PORTFOLIO, as may be quoted from time to time in advertisements and other communications to shareholders and potential investors, is computed by determining, for a stated seven-day period, the net change, exclusive of capital changes and including the value of additional shares purchased with dividends and any dividends declared therefrom, in the value of a hypothetical pre-existing account have a balance of one share at the beginning of the period, subtracting a hypothetical charge which reflects deductions from shareholder accounts (such as management fees), and dividing the difference by the value of the account at the beginning of the base period to obtain the base period return, and then multiplying the base period return by (365/7). The MONEY MARKET PORTFOLIO'S annualized effective yield, as may be quoted from time to time in advertisements and other communications to shareholders and potential investors, is computed by determining (for the same stated seven-day period as for the current yield), the net change, exclusive of capital changes and including the value of additional shares purchased with dividends and any dividends declared therefrom, in the value of a hypothetical pre-existing account having a balance of one share at the beginning of the period, subtracting a hypothetical charge reflecting deductions from shareholder accounts, and dividing the difference by the value of the account at the beginning of the base period to obtain the base period return, and then compounding the based period return by adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the result. The yields quoted in any advertisement or other communication should not be considered a representation of the yields of the MONEY MARKET PORTFOLIO in the future since the yield is not fixed. Actual yields will depend not only on the type, quality and maturities of the investments held by the MONEY MARKET PORTFOLIO and changes in interest rates on such investments, but also on changes in the Portfolio's expenses during the period. Yield information may be useful in reviewing the performance of the MONEY MARKET PORTFOLIO and for providing a basis for comparison with other investment alternatives. However, unlike bank deposits or other investments which typically pay a fixed yield for a stated period of time, the Money Market Portfolio's yield fluctuates. Furthermore, the quoted yield does not reflect charges which may be imposed on the Contracts by the applicable Account and therefore is not equivalent to total return under a Contract. (For a description of such charges, see the prospectus for the Contracts which accompanies each of the Class X PROSPECTUS and the Class Y PROSPECTUS for the Fund.) The current yield of the MONEY MARKET PORTFOLIO for the seven days ending December 31, 2001 was 1.69% for Class X shares and 1.44% for Class Y shares. The seven day effective yield on December 31, 2001 was 1.71% for Class X shares and 1.45% for Class Y shares, assuming daily compounding. From time to time the Fund may quote the "yield" of each of the LIMITED DURATION PORTFOLIO, the QUALITY INCOME PLUS PORTFOLIO, the HIGH YIELD PORTFOLIO and the UTILITIES PORTFOLIO in advertising and sales literature. Yield is calculated for any 30-day period as follows: the amount of interest and/or dividend income for each security in the Portfolio is determined in accordance with regulatory requirements; the total for the entire portfolio constitutes the Portfolio's gross income for the period. Expenses accrued during the period are subtracted to arrive at "net investment income." The resulting amount is divided by the product of the net asset value per share on the last day of the period multiplied by the average number of Portfolio shares outstanding during the period that were entitled to dividends. This amount is added to 1 and raised to the sixth power. 1 is then subtracted from the result and the difference is multiplied by 2 to arrive at the annualized yield. The "yield" of a Portfolio does not reflect the deduction of any charges which may be imposed on the Contracts by the applicable Account which, if quoted, would reduce the yield quoted. For the 30-day period ended December 31, 2001, the yield of the LIMITED 49 DURATION PORTFOLIO, calculated pursuant to this formula, was 2.70% for Class X shares and 2.46% for Class Y shares, the yield of the QUALITY INCOME PLUS PORTFOLIO, calculated pursuant to this formula, was 5.50% for Class X shares and 5.25% for Class Y shares, the yield of the HIGH YIELD PORTFOLIO, calculated pursuant to this formula, was 23.25% for Class X shares and 23.05% for Class Y shares, and the yield of the UTILITIES PORTFOLIO, calculated pursuant to this formula, was 2.41% for Class X shares and 2.16% for Class Y shares. From time to time the Fund may quote the "total return" of each Portfolio in advertising and sales literature. A Portfolio's "average annual total return" represents an annualization of the Portfolio'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 the Portfolio's operations, if shorter than any of the foregoing. For the purpose of this calculation, it is assumed that all dividends and distributions are reinvested. However, average annual total return does not reflect the deduction of any charges which may be imposed on the Contracts by the applicable Account which, if quoted, would reduce the performance quoted. 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, 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. The average annual total returns of the Class X and Class Y shares of each Portfolio for the one, five and ten year periods ended December 31, 2001 (or for the period from the date of commencement of the Portfolio's operations or from the date the shares of the Class were first offered through December 31, 2001, if shorter than any of the foregoing) were as follows: CLASS X SHARES
AVERAGE ANNUAL TOTAL RETURN FOR PERIOD FROM AVERAGE ANNUAL AVERAGE ANNUAL COMMENCEMENT TOTAL RETURN FOR TOTAL RETURN FOR TOTAL RETURN FOR OF OPERATIONS DATE OF INCEPTION FISCAL YEAR ENDED FIVE YEARS ENDED TEN YEARS ENDED THROUGH NAME OF PORTFOLIO (IF APPLICABLE) DECEMBER 31, 2001 DECEMBER 31, 2001 DECEMBER 31, 2001 DECEMBER 31, 2001 - ----------------- ----------------- ------------------- ------------------- ------------------- ------------------- The Money Market Portfolio........... N/A 3.94% 5.03% 4.59% N/A The Limited Duration Portfolio........... 05/04/99 6.72% N/A N/A 5.30% The Quality Income Plus Portfolio...... N/A 9.57% 7.05% 7.32% N/A The High Yield Portfolio........... N/A -33.75% -14.20% -1.53% N/A The Utilities Portfolio........... N/A -25.75% 6.30% 8.44% N/A The Income Builder Portfolio........... 01/21/97 2.30% N/A N/A 6.83% The Dividend Growth Portfolio........... N/A -5.20% 6.94% 10.96% N/A The Capital Growth Portfolio........... N/A -26.31% 8.19% 7.45% N/A The Global Dividend Growth Portfolio.... 02/23/94 -6.25% 5.73% N/A 8.53% The European Growth Portfolio........... N/A -17.76% 7.75% 14.20 N/A The Pacific Growth Portfolio........... 02/23/94 -27.42% -14.85% N/A -9.45%
50
AVERAGE ANNUAL TOTAL RETURN FOR PERIOD FROM AVERAGE ANNUAL AVERAGE ANNUAL COMMENCEMENT TOTAL RETURN FOR TOTAL RETURN FOR TOTAL RETURN FOR OF OPERATIONS DATE OF INCEPTION FISCAL YEAR ENDED FIVE YEARS ENDED TEN YEARS ENDED THROUGH NAME OF PORTFOLIO (IF APPLICABLE) DECEMBER 31, 2001 DECEMBER 31, 2001 DECEMBER 31, 2001 DECEMBER 31, 2001 - ----------------- ----------------- ------------------- ------------------- ------------------- ------------------- The Equity Portfolio........... N/A -26.87% 12.75% 12.76% N/A The S&P 500 Index Portfolio........... 05/18/98 -12.23% N/A N/A 1.96% The Competitive Edge "Best Ideas" Portfolio........... 05/18/98 -23.33% N/A N/A -6.35% The Aggressive Equity Portfolio........... 05/04/99 -28.46% N/A N/A 1.00% The Information Portfolio........... 11/6/00 -42.87% N/A N/A -42.25% The Strategist Portfolio........... N/A -10.18% 9.04% 9.09% N/A
CLASS Y SHARES
AVERAGE ANNUAL TOTAL DATE OF INCEPTION RETURN FOR PERIOD FROM FIRST OR FIRST OFFERING TOTAL RETURN FOR FISCAL OFFERING OF CLASS Y SHARES OF SHARES OF YEAR ENDED THROUGH NAME OF PORTFOLIO THE CLASS DECEMBER 31, 2001 DECEMBER 31, 2001 - ----------------- ----------------- ----------------------- ---------------------------- The Money Market Portfolio.................. 06/05/00 3.68% 4.51% The Limited Duration Portfolio.................. 06/05/00 6.49 6.60 The Quality Income Plus Portfolio.................. 06/05/00 9.33 11.35 The High Yield Portfolio.... 06/05/00 -33.92 -38.78 The Utilities Portfolio..... 06/05/00 -25.98 -16.34 The Income Builder Portfolio.................. 06/05/00 2.10 2.02 The Dividend Growth Portfolio.................. 06/05/00 -5.42 1.15 The Capital Growth Portfolio.................. 06/05/00 -26.49 -18.96 The Global Dividend Growth Portfolio.................. 06/05/00 -6.44 -4.11 The European Growth Portfolio.................. 06/05/00 -17.92 -16.01 The Pacific Growth Portfolio.................. 06/05/00 -27.26 -32.99 The Equity Portfolio........ 06/05/00 -27.07 -20.29 The S&P 500 Index Portfolio.................. 06/05/00 -12.53 -13.95 The Competitive Edge "Best Ideas" Portfolio........... 06/05/00 -23.53 -24.10 The Aggressive Equity Portfolio.................. 06/05/00 -28.61 -20.58 The Information Portfolio... 11/06/00 -42.99 -42.35 The Strategist Portfolio.... 06/05/00 -10.40 -6.76
The Investment Manager assumed all operating expenses of each of the Class X and Class Y shares of the INFORMATION PORTFOLIO during the period November 6, 2000 through December 31, 2001. Without the waiver of fees and assumption of expenses by the Investment Manager, the total return of the Class X 51 and Class Y shares of the INFORMATION PORTFOLIO for the periods ended December 31, 2000 and 2001 would have been -43.74% and -43.01% (Class X) and - -43.63% and -42.92% (Class Y). In addition to the foregoing, the Fund may advertise the total return of the Portfolios over different periods of time by means of aggregate, average, year-by-year or other types of total return figures. Such calculations similarly do not reflect the deduction of any charges which may be imposed on the Contracts by an Account. The Fund may also compute the aggregate total returns of the Portfolios 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 the reduction for any charges imposed on the Contracts by the applicable Account) by the initial $1,000 investment and subtracting 1 from the result. Based on the foregoing calculation, the total returns of the CLASS X and CLASS Y shares of each Portfolio for the one, five and ten year periods ended December 31, 2001 (or for the period from the date of commencement of the Portfolio's operations or from the date the shares of the Class were first offered through December 31, 2001, if shorter than any of the foregoing) were as follows: CLASS X SHARES
TOTAL RETURN FOR PERIOD FROM COMMENCEMENT TOTAL RETURN FOR TOTAL RETURN FOR TOTAL RETURN FOR OF OPERATIONS DATE OF INCEPTION FISCAL YEAR ENDED FIVE YEARS ENDED TEN YEARS ENDED THROUGH NAME OF PORTFOLIO (IF APPLCABLE) DECEMBER 31, 2001 DECEMBER 31, 2001 DECEMBER 31, 2001 DECEMBER 31, 2001 - ----------------- ----------------- ------------------- ------------------- ------------------- ------------------- The Money Market Portfolio........... N/A 3.94% 27.80% 56.61% N/A The Limited Duration Portfolio........... 05/04/99 6.72% N/A N/A 14.72% The Quality Income Plus Portfolio...... N/A 9.57% 40.60% 102.72% N/A The High Yield Portfolio........... N/A -33.75% -53.51% -14.28% N/A The Utilities Portfolio........... N/A -25.75% 35.70% 124.95% N/A The Income Builder Portfolio........... 01/21/97 2.30% N/A N/A 38.59% The Dividend Growth Portfolio........... N/A -5.20% 39.85% 182.85% N/A The Capital Growth Portfolio........... N/A -26.31% 48.22% 105.08% N/A The Global Dividend Growth Portfolio.... 02/23/94 -6.25% 32.14% N/A 90.13% The European Growth Portfolio........... N/A -17.76% 45.27% 277.42 N/A The Pacific Growth Portfolio........... 02/23/94 -27.42% -55.22% N/A -54.12% The Equity Portfolio........... N/A -26.87% 82.25% 232.44% N/A The S&P 500 Index Portfolio........... 05/18/98 -12.23% N/A N/A 7.29% The Competitive Edge "Best Ideas" Portfolio........... 05/18/98 -23.33% N/A N/A -21.16% The Aggressive Equity Portfolio........... 05/04/99 -28.46% N/A N/A 2.68% The Information Portfolio........... 11/06/00 -42.87% N/A N/A -46.82% The Strategist Portfolio........... N/A -10.18% 54.17% 138.67% N/A
52 CLASS Y SHARES
TOTAL RETURN FOR PERIOD FROM DATE OF INCEPTION COMMENCEMENT OR FIRST OFFERING TOTAL RETURN FOR OF OPERATIONS OF SHARES OF FISCAL YEAR ENDED THROUGH NAME OF PORTFOLIO THE CLASS DECEMBER 31, 2001 DECEMBER 31, 2001 - ----------------- ----------------- ----------------- ----------------- The Money Market Portfolio.................. 06/05/00 3.68% 7.17% The Limited Duration Portfolio.............. 06/05/00 6.49% 10.56% The Quality Income Plus Portfolio........... 06/05/00 9.33% 18.41% The High Yield Portfolio.................... 06/05/00 -33.92% -53.76% The Utilities Portfolio..................... 06/05/00 -25.98% -24.45% The Income Builder Portfolio................ 06/05/00 2.10% 3.19% The Dividend Growth Portfolio............... 06/05/00 -5.42% 1.82% The Capital Growth Portfolio................ 06/05/00 -26.49% -28.14% The Global Dividend Growth Portfolio........ 06/05/00 -6.44% -6.38% The European Growth Portfolio............... 06/05/00 -17.92% -23.99% The Pacific Growth Portfolio................ 06/05/00 -27.26% -46.70% The Equity Portfolio........................ 06/05/00 -27.07% 29.98% The S&P 500 Index Portfolio................. 06/05/00 -12.53% -21.03% The Competitive Edge "Best Ideas" Portfolio.................................. 06/05/00 -23.53% -35.17% The Aggressive Equity Portfolio............. 06/05/00 -28.61% -30.39% The Information Portfolio................... 11/06/00 -42.99% -46.92% The Strategist Portfolio.................... 06/05/00 -10.40% -10.42%
The Fund may also advertise the growth of hypothetical investments of $10,000, $50,000 and $100,000 in shares of a Portfolio by adding 1 to the Portfolio's aggregate total return to date (expressed as a decimal) and multiplying by $10,000, $50,000 or $100,000, as the case may be. Investments of $10,000, $50,000 and $100,000 in each Class of each Portfolio of the Fund on the date shares of the Class were first offered would have grown (or declined) to the following amounts at December 31, 2001:
INVESTMENT ON DATE SHARES WERE FIRST OFFERED OF ------------------------------------- NAME OF PORTFOLIO $10,000 $50,000 $100,000 - ----------------- ---------- ---------- ----------- The Money Market Portfolio - Class X...................... $ 27,424 $137,120 $ 274,240 The Money Market Portfolio - Class Y...................... 10,717 53,585 107,170 The Limited Duration Portfolio - Class X.................. 11,472 57,360 114,720 The Limited Duration Portfolio - Class Y.................. 11,056 55,280 110,560 The Quality Income Plus Portfolio - Class X............... 31,946 159,730 319,460 The Quality Income Plus Portfolio - Class Y............... 11,841 59,205 118,410 The High Yield Portfolio - Class X........................ 16,014 80,070 160,140 The High Yield Portfolio - Class Y........................ 4,624 23,120 46,240 The Utilities Portfolio - Class X......................... 28,346 141,730 283,460 The Utilities Portfolio - Class Y......................... 7,555 37,775 75,550 The Income Builder Portfolio - Class X.................... 13,859 69,295 138,590 The Income Builder Portfolio - Class Y.................... 10,319 51,595 103,190 The Dividend Growth Portfolio - Class X................... 33,315 166,575 333,150 The Dividend Growth Portfolio - Class Y................... 10,182 50,910 101,820 The Capital Growth Portfolio - Class X.................... 26,335 131,675 263,350 The Capital Growth Portfolio - Class Y.................... 7,186 35,930 71,860 The Global Dividend Growth Portfolio - Class X............ 19,013 95,065 190,130 The Global Dividend Growth Portfolio - Class Y............ 9,362 46,810 93,620
53
INVESTMENT ON DATE SHARES WERE FIRST OFFERED OF ------------------------------------- NAME OF PORTFOLIO $10,000 $50,000 $100,000 - ----------------- ---------- ---------- ----------- The European Growth Portfolio - Class X................... $ 38,248 $191,240 $ 382,480 The European Growth Portfolio - Class Y................... 7,601 38,005 76,010 The Pacific Growth Portfolio - Class X.................... 4,588 22,940 45,880 The Pacific Growth Portfolio - Class Y.................... 5,330 26,650 53,300 The Equity Portfolio - Class X............................ 100,280 501,400 1,002,800 The Equity Portfolio - Class Y............................ 7,002 35,010 70,020 The S&P 500 Index Portfolio - Class X..................... 10,729 53,645 107,290 The S&P 500 Index Portfolio - Class Y..................... 7,897 39,485 78,970 The Competitive Edge "Best Ideas" Portfolio - Class X..... 7,884 39,420 78,840 The Competitive Edge "Best Ideas" Portfolio - Class Y..... 6,483 32,415 64,830 The Aggressive Equity Portfolio - Class X................. 10,268 51,340 102,680 The Aggressive Equity Portfolio - Class Y................. 6,961 34,805 69,610 The Information Portfolio - Class X....................... 5,318 26,590 53,180 The Information Portfolio - Class Y....................... 5,308 26,540 53,080 The Strategist Portfolio - Class X........................ 39,286 196,430 392,860 The Strategist Portfolio - Class Y........................ 8,958 44,790 89,580
The Fund from time to time may also advertise the performance of the Portfolios 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 December 31, 2001 included in this STATEMENT OF ADDITIONAL INFORMATION and incorporated by reference in each of the Class X and Class Y PROSPECTUSES 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 each of the Class X and Class Y PROSPECTUSES 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. 54 Morgan Stanley Variable Investment Series - Money Market PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001
ANNUALIZED PRINCIPAL YIELD AMOUNT IN ON DATE OF MATURITY THOUSANDS PURCHASE DATE VALUE - -------------------------------------------------------------------------------------------- Commercial Paper (56.6%) BANKING (4.1%) $10,000 Bank of New York Co., Inc..... 2.01% 01/28/02 $ 9,985,000 13,000 J.P. Morgan Chase & Co........ 1.89 - 2.01 01/17/02 - 01/30/02 12,984,691 ------------ 22,969,691 ------------ COMPUTER PROCESSING HARDWARE (1.3%) 7,000 IBM Credit Corp............... 2.10 01/02/02 6,999,592 ------------ FINANCE - AUTOMOTIVE (1.3%) 7,000 American Honda Finance Corp......................... 2.06 01/28/02 6,989,237 ------------ FINANCE - CONSUMER (10.6%) 27,500 FCAR Owner Trust.............. 1.77 - 2.34 01/09/02 - 02/15/02 27,462,229 26,500 New Center Asset Trust........ 1.78 - 1.92 01/10/02 - 03/21/02 26,447,160 5,500 Wells Fargo Financial Inc..... 2.31 03/13/02 5,475,160 ------------ 59,384,549 ------------ FINANCE - CORPORATE (3.4%) 19,000 Ciesco, L.P................... 2.01 - 2.23 01/08/02 - 02/05/02 18,973,410 ------------ FINANCIAL CONGLOMERATES (4.7%) 26,500 General Electric Capital Corp......................... 2.05 - 2.47 01/18/02 - 03/27/02 26,421,486 ------------ INSURANCE (3.4%) 19,000 American General Corp......... 1.84 - 1.92 01/14/02 - 01/30/02 18,981,348 ------------ INTEGRATED OIL (4.5%) 9,000 ChevronTexaco Corp............ 1.84 02/19/02 8,977,582 16,350 Texaco, Inc................... 1.88 - 1.94 01/03/02 - 01/09/02 16,346,068 ------------ 25,323,650 ------------ INTERNATIONAL BANKS (22.2%) 7,000 A N Z (DE) Inc................ 1.88 02/11/02 6,985,092 14,000 Abbey National North America Corp......................... 1.80 - 2.04 01/04/02 - 02/21/02 13,978,819 7,000 Barclays U.S. Funding Corp.... 2.10 01/07/02 6,997,556 6,000 CBA (Delaware) Finance Inc.... 2.39 01/07/02 5,997,630 24,500 Dresdner U.S. Finance Inc..... 1.88 - 2.30 01/11/02 - 02/07/02 24,468,606 10,000 Halifax PLC................... 1.79 01/15/02 9,993,039 11,000 KFW International Finance Inc.......................... 1.89 - 2.29 02/06/02 - 04/25/02 10,956,772 7,000 Societe Generale N.A. Inc..... 1.90 01/08/02 6,997,414 16,000 Toronto-Dominion Holdings USA Inc.......................... 2.03 - 2.04 01/02/02 - 02/22/02 15,981,843 14,869 UBS Finance (Delaware) LLC.... 1.70 - 1.81 01/02/02 - 03/28/02 14,838,129 7,000 Westpac Capital Corp.......... 1.88 02/12/02 6,984,728 ------------ 124,179,628 ------------
SEE NOTES TO FINANCIAL STATEMENTS 55 Morgan Stanley Variable Investment Series - Money Market PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
ANNUALIZED PRINCIPAL YIELD AMOUNT IN ON DATE OF MATURITY THOUSANDS PURCHASE DATE VALUE - -------------------------------------------------------------------------------------------- INVESTMENT BANKERS/BROKERS (1.1%) $ 6,000 Goldman Sachs Group Inc....... 1.83% 02/08/02 $ 5,988,410 ------------ Total Commercial Paper (COST $316,211,001)............................................... 316,211,001 ------------ U.S. Government Agencies (35.5%) 10,000 Federal Farm Credit Banks..... 1.70 01/23/02 9,989,611 28,350 Federal Home Loan Banks....... 1.77 - 2.36 01/04/02 - 04/17/02 28,242,549 69,600 Federal Home Loan Mortgage Corp......................... 1.70 - 4.16 01/03/02 - 07/19/02 69,211,288 91,314 Federal National Mortgage Assoc........................ 1.71 - 4.01 01/25/02 - 05/31/02 90,714,966 ------------ Total U.S. Government Agencies (COST $198,158,414)............................................... 198,158,414 ------------ Short-Term Bank Notes (4.5%) 6,000 Bank of America, N.A.......... 2.47 01/10/02 6,000,000 12,000 U.S. Bank N.A. Cincinnati..... 2.13 01/31/02 - 02/04/02 12,000,000 7,000 LaSalle Bank N.A.............. 2.11 02/01/02 7,000,000 ------------ Total Short-Term Bank Notes (COST $25,000,000)................................................ 25,000,000 ------------ Certificate of Deposit (1.2%) 7,000 Chase Manhattan Bank (USA), N.A. (COST $7,000,000)............ 1.75 03/15/02 7,000,000 ------------
Total Investments (COST $546,369,415) (a)...... 97.8% 546,369,415 Other Assets in Excess of Liabilities.................. 2.2 12,348,512 ----- ------------ Net Assets.................... 100.0% $558,717,927 ===== ============
- --------------------- (a) COST IS THE SAME FOR FEDERAL INCOME TAX PURPOSES. SEE NOTES TO FINANCIAL STATEMENTS 56 Morgan Stanley Variable Investment Series - Short-Term Bond PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ----------------------------------------------------------------------------------------------------------------- Corporate Bonds (26.1%) AEROSPACE & DEFENSE (1.1%) $ 160 Lockheed Martin Corp.............................. 6.50% 04/15/03 $ 165,288 275 Northrop Grumman Corp............................. 7.00 03/01/06 287,795 50 Raytheon Co....................................... 6.75 08/15/07 51,777 65 Raytheon Co....................................... 8.20 03/01/06 70,455 ----------- 575,315 ----------- AIRLINES (0.1%) 45 Southwest Airlines Co............................. 5.496 11/01/06 44,309 ----------- AUTO PARTS: O.E.M. (0.6%) 80 Delphi Auto Systems Corp.......................... 6.125 05/01/04 81,430 125 Johnson Controls Inc.............................. 5.00 11/15/06 121,675 115 TRW Inc........................................... 7.625 03/15/06 118,438 ----------- 321,543 ----------- BROADCASTING (0.3%) 140 Clear Channel Communications Corp................. 7.25 09/15/03 144,786 ----------- CABLE/SATELLITE (1.7%) 360 Comcast Cable..................................... 6.375 01/30/06 365,793 290 Cox Communications Inc............................ 7.50 08/15/04 309,433 165 TCI Communications Inc............................ 6.375 05/01/03 169,554 ----------- 844,780 ----------- DEPARTMENT STORES (0.5%) 180 Federated Department Stores Co.................... 8.50 06/15/03 190,845 40 May Department Stores Co.......................... 6.875 11/01/05 42,214 ----------- 233,059 ----------- DISCOUNT STORES (0.7%) 100 Target Corp....................................... 7.50 02/15/05 109,236 230 Wal-Mart Stores, Inc.............................. 5.45 08/01/06 235,384 ----------- 344,620 ----------- DRUGSTORE CHAINS (0.2%) 115 CVS Corp.......................................... 5.625 03/15/06 115,824 ----------- ELECTRIC UTILITIES (0.8%) 225 DTE Energy Co..................................... 6.45 06/01/06 230,932 170 Progressive Energy Inc............................ 6.75 03/01/06 176,519 ----------- 407,451 -----------
SEE NOTES TO FINANCIAL STATEMENTS 57 Morgan Stanley Variable Investment Series - Short-Term Bond PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ----------------------------------------------------------------------------------------------------------------- ENVIRONMENTAL SERVICES (0.6%) $ 60 USA Waste Services Inc............................ 7.125% 10/01/07 $ 61,271 215 WMX Technologies Inc.............................. 7.00 10/15/06 220,975 ----------- 282,246 ----------- FINANCE/RENTAL/LEASING (2.4%) 180 American General Finance Corp..................... 5.875 07/14/06 182,645 100 Associates Corp. North America.................... 6.50 07/15/02 102,213 90 CIT Group Inc..................................... 5.625 05/17/04 92,729 304 Ford Motor Credit Co.............................. 6.875 02/01/06 305,440 305 Household Finance Corp............................ 6.50 01/24/06 312,609 100 IBM Credit Corp................................... 7.00 01/28/02 100,336 110 MBNA America Bank N.A............................. 6.50 06/20/06 107,942 ----------- 1,203,914 ----------- FINANCIAL CONGLOMERATES (0.2%) 95 General Motors Acceptance Corp.................... 7.50 07/15/05 99,871 ----------- FINANCIAL PUBLISHING/SERVICES (0.1%) 60 Reed Elsevier Capital............................. 6.125 08/01/06 61,067 ----------- FOOD RETAIL (0.8%) 285 Kroger Co. (Fred Meyer Inc.)...................... 7.375 03/01/05 300,947 80 Safeway Inc....................................... 6.15 03/01/06 82,133 ----------- 383,080 ----------- FOODS: MAJOR DIVERSIFIED (0.4%) 170 Unilever Capital Corp............................. 6.75 11/01/03 179,505 ----------- FOODS: MEAT/FISH/DAIRY (0.1%) 65 Conagra Foods Inc................................. 6.00 09/15/06 66,515 ----------- GAS DISTRIBUTORS (0.7%) 165 Consolidated Natural Gas Co....................... 5.375 11/01/06 162,700 110 Nisource Finance Corp............................. 7.625 11/15/05 114,952 95 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A* (Qatar).......................................... 7.628 09/15/06 99,870 ----------- 377,522 ----------- HOME BUILDING (0.2%) 115 Centex Corp....................................... 9.75 06/15/05 127,222 ----------- HOME IMPROVEMENT CHAINS (0.7%) 330 Lowe's Companies Inc.............................. 7.50 12/15/05 353,694 ----------- HOSPITAL/NURSING MANAGEMENT (0.3%) 165 Tenet Healthcare Corp. - 144A*.................... 5.375 11/15/06 161,388 -----------
SEE NOTES TO FINANCIAL STATEMENTS 58 Morgan Stanley Variable Investment Series - Short-Term Bond PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ----------------------------------------------------------------------------------------------------------------- HOTELS/RESORTS/CRUISELINES (0.1%) $ 50 Marriott International Inc. (Series D)............ 8.125% 04/01/05 $ 53,760 ----------- INDUSTRIAL CONGLOMERATES (1.0%) 275 Honeywell International........................... 5.125 11/01/06 271,297 250 Tyco International Group S.A. (Luxembourg)........ 6.375 02/15/06 255,334 ----------- 526,631 ----------- INTEGRATED OIL (0.4%) 175 Conoco Inc........................................ 5.90 04/15/04 181,746 ----------- INVESTMENT BANKS/BROKERS (0.7%) 230 Credit Suisse FB USA Inc.......................... 5.875 08/01/06 233,971 90 Goldman Sachs Group Inc........................... 7.625 08/17/05 97,393 ----------- 331,364 ----------- LIFE/HEALTH INSURANCE (1.4%) 200 John Hancock Global Funding - 144A*............... 5.625 06/27/06 201,966 250 Metropolitan Life Insurance Co. - 144A*........... 6.30 11/01/03 260,207 165 Nationwide Mutual Insuance Co. - 144A*............ 6.50 02/15/04 171,938 100 Prudential Insurance Co - 144A*................... 6.375 07/23/06 103,390 ----------- 737,501 ----------- MAJOR BANKS (0.2%) 100 First Union Corp.................................. 8.00 11/15/02 104,338 ----------- MAJOR TELECOMMUNICATIONS (3.1%) 200 AT&T Corp. - 144A*................................ 6.50 11/15/06 203,321 205 Bell South Corp................................... 5.00 10/15/06 203,483 170 British Telecom PLC (United Kingdom).............. 7.875 12/15/05 182,105 215 Deutsche Telekom International Finance (Netherlands).................................... 7.75 06/15/05 232,810 195 Sprint Capital Corp. - 144A*...................... 6.00 01/15/07 193,611 230 Telus Corp........................................ 7.50 06/01/07 242,045 65 WorldCom, Inc..................................... 6.25 08/15/03 66,630 210 WorldCom, Inc..................................... 6.50 05/15/04 215,774 50 WorldCom, Inc..................................... 7.875 05/15/03 52,273 ----------- 1,592,052 ----------- MANAGED HEALTH CARE (0.5%) 105 Aetna Inc......................................... 7.375 03/01/06 105,279 65 United Health Group Inc........................... 7.50 11/15/05 69,179 95 WellPoint Health Network.......................... 6.375 06/15/06 96,880 ----------- 271,338 -----------
SEE NOTES TO FINANCIAL STATEMENTS 59 Morgan Stanley Variable Investment Series - Short-Term Bond PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ----------------------------------------------------------------------------------------------------------------- MEDIA CONGLOMERATES (1.0%) $ 310 AOL Time Warner................................... 6.125% 04/15/06 $ 316,643 185 Viacom Inc........................................ 6.40 01/30/06 190,875 ----------- 507,518 ----------- MOTOR VEHICLES (0.6%) 175 DaimlerChrysler North American Holdings Co........ 6.40 05/15/06 175,018 125 Ford Motor Credit Co.............................. 6.50 01/25/07 122,291 ----------- 297,309 ----------- MULTI-LINE INSURANCE (1.5%) 250 AIG SunAmerica Global Finance - 144A*............. 5.20 05/10/04 257,471 240 Hartford Financial Service Group Inc.............. 7.75 06/15/05 257,253 250 Farmer Insurance Exchange - 144A*................. 8.50 08/01/04 264,214 ----------- 778,938 ----------- OIL & GAS PIPELINES (0.3%) 145 Williams Companies, Inc........................... 6.50 08/01/06 144,620 ----------- PHARMACEUTICALS: MAJOR (0.7%) 70 American Home Products Corp....................... 6.25 03/15/06 72,482 290 Bristol-Myers Squibb.............................. 4.75 10/01/06 287,656 ----------- 360,138 ----------- RAILROADS (0.4%) 100 Norfolk Southern Corp............................. 7.875 02/15/04 107,263 85 Union Pacific Corp................................ 5.84 05/25/04 87,587 ----------- 194,850 ----------- SPECIALTY TELECOMMUNICATIONS (0.3%) 170 Qwest Capital Funding............................. 7.75 08/15/06 174,789 ----------- WIRELESS COMMUNICATIONS (1.4%) 355 AT&T Wireless Group............................... 7.35 03/01/06 375,536 70 Nextel Communications Inc......................... 9.375 11/15/09 55,300 250 Vodafone Group PLC................................ 7.625 02/15/05 269,297 ----------- 700,133 ----------- Total Corporate Bonds (COST $13,198,324)................................................................... 13,284,736 -----------
SEE NOTES TO FINANCIAL STATEMENTS 60 Morgan Stanley Variable Investment Series - Short-Term Bond PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ----------------------------------------------------------------------------------------------------------------- U.S. Government & Agency Obligations (15.9%) $ 75 Federal Home Loan Banks........................... 4.875% 01/22/02 $ 75,114 1,100 Federal National Mortgage Assoc.+................. 5.75 - 6.29 02/11/02 - 04/15/03 1,137,216 6,465 U.S. Treasury Notes+.............................. 5.75 - 7.50 01/31/02 - 05/15/05 6,849,908 ----------- Total U.S. Government & Agency Obligations (COST $7,911,704).................................................................... 8,062,238 ----------- Asset-Backed Securities (5.2%) FINANCE/RENTAL/LEASING 250 American Express Credit Account................... 6.40 04/15/05 256,971 100 Connecticut RRB Special........................... 5.36 03/30/07 103,020 175 Chase Credit Card Master Trust.................... 5.50 11/17/08 178,203 129 Daimler-Benz Vehicle Trust........................ 5.22 12/22/03 130,686 155 Daimler Chrysler Auto Trust....................... 6.82 09/06/04 160,574 120 Ford Credit Auto Owner Trust...................... 6.74 06/15/04 123,979 80 Honda Auto Receivable Owner Trust................. 6.62 07/15/04 82,461 250 Honda Auto Receivable Owner Trust................. 2.76 02/18/04 250,478 400 Household Automotive Trust........................ 3.68 04/17/06 398,635 325 MBNA Master Credit Card Trust..................... 2.015 02/15/07 325,350 150 MMCA Automobile Trust............................. 7.00 06/15/04 153,954 160 Nissan Auto Receivables Owner Trust............... 6.72 08/16/04 165,492 75 Nissan Auto Receivables Owner Trust............... 4.80 02/15/07 75,915 200 Nordstrom Private Label Credit - 144A*............ 4.82 04/15/10 194,802 55 Residential Funding Mortgage Securities........... 7.39 04/25/11 55,644 ----------- Total Asset-Backed Securities (COST $2,654,080).................................................................... 2,656,164 ----------- Foreign Government Obligation (0.3%) ELECTRIC UTILITIES 160 Hydro-Quebec (Canada) (COST $159,621).................................. 5.50 04/11/06 162,856 ----------- Mortgage-Backed Security (0.6%) 300 Federal Home Loan Mortgage Corp. Gold** (COST $302,813).................................. 6.00 301,031 ----------- Collateralized Mortgage Obligations (1.5%) 248 Federal Home Loan Mortgage Corp................... 6.50 03/15/29 254,516
SEE NOTES TO FINANCIAL STATEMENTS 61 Morgan Stanley Variable Investment Series - Short-Term Bond PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ----------------------------------------------------------------------------------------------------------------- $ 512 Federal Home Loan Mortgage Corp................... 6.60% 03/15/29 $ 524,757 1 Federal National Mortgage Assoc................... 2.08 10/25/24 813 ----------- Total Collateralized Mortgage Obligations (COST $774,397)...................................................................... 780,086 ----------- Short-Term Investments (48.7%) U.S. Government & Agency Obligations (a) (47.4%) 9,600 Federal Home Loan Banks........................... 1.74 - 2.03 01/04/01 - 03/08/02 9,587,999 7,000 Federal Home Loan Mortgage Corp................... 1.70 - 2.00 01/15/02 - 03/07/02 6,985,254 4,600 Federal National Mortgage Assoc................... 1.685 03/07/02 4,585,859 3,000 U.S. Treasury Bill................................ 1.725 03/07/02 2,990,800 ----------- Total U.S. Government & Agency Obligations (COST $24,149,768)................................................................... 24,149,912 ----------- Repurchase Agreement (1.3%) 645 The Bank of New York (dated 12/31/01; proceeds $645,167 (b) (COST $645,135).................................. 0.875 01/02/02 645,135 ----------- Total Short-Term Investments (COST $24,794,903)................................................................... 24,795,047 -----------
Total Investments (COST $49,795,842) (c)........................... 98.3% 50,042,158 Other Assets in Excess of Liabilities............. 1.7 865,587 ----- ----------- Net Assets........................................ 100.0% $50,907,745 ===== ===========
- ------------------------ * RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. ** SECURITY WAS PURCHASED ON A FORWARD COMMITMENT BASIS WITH AN APPROXIMATE PRINCIPAL AMOUNT AND NO DEFINITE MATURITY DATE; THE ACTUAL PRINCIPAL AMOUNT AND MATURITY DATE WILL BE DETERMINED UPON SETTLEMENT. + SOME OR ALL OF THESE SECURITIES HAVE BEEN SEGREGATED IN CONNECTION WITH OPEN FUTURES CONTRACTS AND/OR SECURITIES PURCHASED ON A FORWARD COMMITMENT BASIS. (A) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (B) COLLATERALIZED BY $654,456 FEDERAL HOME LOAN MORTGAGE CORP., 5.775%, DUE 06/26/06, VALUED AT $658,038. (C) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $308,862 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $62,546, RESULTING IN NET UNREALIZED APPRECIATION OF $246,316. SEE NOTES TO FINANCIAL STATEMENTS 62 Morgan Stanley Variable Investment Series - Short-Term Bond PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
FUTURES CONTRACTS OPEN AT DECEMBER 31, 2001: UNREALIZED NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE APPRECIATION/ CONTRACTS LONG/SHORT MONTH, AND YEAR AMOUNT AT VALUE (DEPRECIATION) - ------------------------------------------------------------------------------------------------- 35 Long U.S. Treasury Notes March 2002 $ 3,703,985 $(46,062) 27 Long U.S. Treasury Future March 2002 5,642,578 26,123 22 Short U.S. Treasury Notes March 2002 (2,313,094) 20,710 -------- Net unrealized appreciation................................................ $ 771 ========
SEE NOTES TO FINANCIAL STATEMENTS 63 Morgan Stanley Variable Investment Series - Quality Income Plus PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------- Corporate Bonds (65.9%) AEROSPACE & DEFENSE (1.8%) $ 2,500 Lockheed Martin Corp.......... 7.75% 05/01/26 $ 2,696,528 2,000 Northrop Grumman Corp......... 7.75 02/15/31 2,165,916 2,645 Systems 2001 Asset Trust -144A*....................... 6.664 09/15/13 2,726,512 1,640 Systems 2001 Asset Trust -144A*....................... 7.156 12/15/11 1,687,876 ------------ 9,276,832 ------------ AIR FREIGHT/COURIERS (1.0%) 4,683 Federal Express Corp.......... 7.50 01/15/18 4,849,193 ------------ AIRLINES (2.2%) 4,527 America West Airlines (Class A).................... 6.85 07/02/09 4,400,364 1,780 America West Airlines -144A*....................... 7.10 04/02/21 1,783,731 3,000 Continental Airlines, Inc..... 7.056 09/15/09 2,716,800 1,353 Continental Airlines, Inc..... 6.90 01/02/18 1,188,765 1,005 Southwest Airlines Co......... 5.496 11/01/06 989,564 ------------ 11,079,224 ------------ CABLE/SATELLITE TV (1.7%) 5,295 Comcast Cable Communications Inc.......................... 6.75 01/30/11 5,318,028 1,945 Comcast Cable Communications Inc.......................... 8.375 05/01/07 2,144,551 1,020 TCI Communications Inc........ 7.875 02/15/26 1,053,970 ------------ 8,516,549 ------------ COMPUTER PROCESSING HARDWARE (0.2%) 885 Sun Microsystems Inc.......... 7.65 08/15/09 898,325 ------------ DEPARTMENT STORES (0.5%) 1,690 May Department Stores Co., Inc..................... 5.95 11/01/08 1,695,592 630 May Department Stores Co., Inc..................... 6.70 09/15/28 602,889 ------------ 2,298,481 ------------ DISCOUNT STORES (0.5%) 2,281 Wal-Mart Stores, Inc.......... 7.49 06/21/07 2,364,904 ------------ DRUGSTORES CHAINS (0.3%) 1,725 CVS Corp...................... 5.625 03/15/06 1,737,358 ------------ ELECTRIC UTILITIES (3.4%) 2,540 American Electric Power (Series A)................... 6.125 05/15/06 2,514,394 5,000 Consolidated Edison Co. ***... 7.50 09/01/10 5,323,455 2,250 Detroit Edison Co............. 6.125 10/01/10 2,209,793 3,500 Oklahoma Gas & Electric Co.... 6.50 07/15/17 3,640,805
SEE NOTES TO FINANCIAL STATEMENTS 64 Morgan Stanley Variable Investment Series - Quality Income Plus PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------- $ 2,500 Public Service Electric & Gas Co........................... 6.75% 03/01/06 $ 2,572,410 1,000 Tampa Electric Co............. 7.75 11/01/22 952,055 ------------ 17,212,912 ------------ FINANCIAL CONGLOMERATES (6.8%) 4,585 American Express Co........... 6.875 11/01/05 4,849,715 3,785 American Express Co........... 5.50 09/12/06 3,787,952 1,235 General Motors Acceptance Corp......................... 6.875 09/15/11 1,209,755 2,920 General Motors Acceptance Corp......................... 8.00 11/01/31 2,971,932 8,200 J.P. Morgan Chase & Co. Inc.......................... 6.75 02/01/11 8,394,143 1,890 Prudential Holdings LLC -144A*....................... 7.245 12/18/23 1,935,190 5,950 Prudential Holdings LLC -144A*....................... 8.695 12/18/23 6,189,012 5,000 State Street Boston Corp. ***.......................... 5.95 09/15/03 5,212,215 ------------ 34,549,914 ------------ FINANCE/RENTAL/LEASING (2.7%) 4,400 American General Finance Corp......................... 5.875 07/14/06 4,464,662 600 Ford Motor Credit Co.......... 7.25 10/25/11 583,876 3,000 Ford Capital B.V.............. 9.50 06/01/10 3,311,625 5,000 Household Finance Corp........ 8.00 05/09/05 5,361,750 250 Household Finance Corp........ 6.75 05/15/11 248,588 215 MBNA American General Finance...................... 6.50 06/20/06 210,978 ------------ 14,181,479 ------------ FINANCIAL PUBLISHING/SERVICES (0.2%) 1,045 Reed Elsevier Capital......... 6.75 08/01/11 1,060,038 ------------ FOOD: RETAIL (0.4%) 1,715 Kroger Co..................... 7.70 06/01/29 1,840,219 ------------ GAS DISTRIBUTORS (0.3%) 540 Consolidated Natural Gas Co........................... 6.25 11/01/11 528,483 1,000 Keyspan Corp.................. 7.625 11/15/10 1,082,412 ------------ 1,610,895 ------------ HOME IMPROVEMENT CHAINS (1.5%) 5,000 Home Depot Real Estate Funding Corp. II - 144A*............. 5.95 10/15/08 4,938,380 2,325 Lowe's Companies Inc.......... 6.50 03/15/29 2,246,015 705 Lowe's Companies Inc.......... 6.875 02/15/28 705,312 ------------ 7,889,707 ------------ HOSPITAL/NURSING MANAGEMENT (0.3%) 1,540 Tenent Healthcare Corp........ 6.875 11/15/31 1,417,211 ------------ HOTELS/RESORTS/CRUISELINES (0.1%) 565 Marriott International - 144A*........................ 7.00 01/15/08 568,388 ------------
SEE NOTES TO FINANCIAL STATEMENTS 65 Morgan Stanley Variable Investment Series - Quality Income Plus PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------- INDUSTRIAL CONGLOMERATES (3.7%) $ 6,260 Honeywell International....... 6.125% 11/01/11 $ 6,194,045 4,170 Hutchison Whampoa Finance Ltd. (Hong Kong) - 144A*.......... 7.50 08/01/27 3,934,562 3,585 Tyco International Group S.A. (Luxembourg)................. 6.375 10/15/11 3,502,287 5,245 Tyco International Group S.A. (Luxembourg)................. 6.875 01/15/29 5,031,702 260 Tyco International Group S.A. (Luxembourg)................. 7.00 06/15/28 251,541 ------------ 18,914,137 ------------ INTEGRATED OIL (0.9%) 3,000 BP Amoco PLC.................. 5.90 04/15/09 3,021,495 1,000 Texaco Capital, Inc........... 9.75 03/15/20 1,350,282 ------------ 4,371,777 ------------ INVESTMENT BANKS/BROKERS (2.8%) 4,600 Credit Suisse F/B USA, Inc..................... 5.875 08/01/06 4,679,428 5,650 Goldman Sachs Group Inc....... 6.875 01/15/11 5,786,651 3,750 Lehman Brothers Holdings, Inc. ***........... 8.75 03/15/05 4,135,028 ------------ 14,601,107 ------------ LIFE/HEALTH INSURANCE (1.9%) 400 Hartford Life................. 7.375 03/01/31 412,584 4,945 John Hancock.................. 7.375 02/15/24 4,946,024 1,215 Metropolitan Life Insurance Co........................... 7.80 11/01/25 1,238,398 1,260 Nationwide Mutual Insurance - 144A*........................ 7.50 02/15/24 1,133,706 1,705 New England Mutual Life Insurance Co................. 7.875 02/15/24 1,746,863 ------------ 9,477,575 ------------ MAJOR BANKS (3.1%) 1,055 Bank One Corp................. 8.00 04/29/27 1,169,545 330 Bank One Corp................. 6.00 02/17/09 325,977 5,000 First Union National Bank ***.......................... 7.80 08/18/10 5,489,465 3,000 Mellon Bank N.A............... 7.625 09/15/07 3,320,316 5,000 Wells Fargo & Co.............. 7.55 06/21/10 5,472,940 ------------ 15,778,243 ------------ MAJOR TELECOMMUNICATIONS (7.1%) 470 AT&T Corp. - 144A*............ 7.30 11/15/11 481,479 5,750 AT&T Corp. - 144A*............ 8.00 11/15/31 6,017,761 2,845 BellSouth Telecommunications Inc.......................... 6.375 06/01/28 2,747,960 360 Deutsche Telekom International Finance Corp. (Netherlands)................ 8.25 06/15/30 399,555 1,000 GTE Corp...................... 7.90 02/01/27 1,036,979 2,155 GTE Corp...................... 6.94 04/15/28 2,137,734 3,000 Verizon Global Funding Corp. - 144A*................ 7.75% 12/01/30 3,338,973
SEE NOTES TO FINANCIAL STATEMENTS 66 Morgan Stanley Variable Investment Series - Quality Income Plus PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------- $ 2,000 Worldcom, Inc................. 8.00 % 05/15/06 $ 2,128,958 16,745 Worldcom, Inc................. 8.25 05/15/31 17,700,386 ------------ 35,989,785 ------------ MANAGED HEALTH CARE (2.3%) 1,020 Aetna, Inc.................... 7.375 03/01/06 1,022,708 1,095 Aetna, Inc.................... 7.875 03/01/11 1,078,439 4,540 Cigna Corp.................... 6.375 10/15/11 4,457,953 885 Healthnet Inc................. 8.375 04/15/11 912,431 1,565 UnitedHealth Group Inc........ 7.50 11/15/05 1,665,609 1,530 News America Holding Corp..... 8.875 04/26/23 1,654,332 960 Wellpoint Health Network...... 6.375 06/15/06 979,001 ------------ 11,770,473 ------------ MEDIA CONGLOMERATES (2.3%) 6,087 AOL Time Warner Inc........... 7.625 04/15/31 6,438,658 5,015 Viacom Inc. - 144A*........... 6.625 05/15/11 5,098,229 ------------ 11,536,887 ------------ MEDICAL SPECIALTIES (0.9%) 4,000 Becton Dickinson & Co. ***.... 8.70 01/15/25 4,502,140 ------------ MOTOR VEHICLES (2.1%) 2,100 DaimlerChrysler North American Holdings Co.................. 8.00 06/15/10 2,201,491 1,540 DaimlerChrysler North American Holdings Co.................. 8.50 01/18/31 1,643,967 235 Ford Motor Co................. 6.625 10/01/28 194,923 6,960 Ford Motor Co................. 7.45 07/16/31 6,376,668 ------------ 10,417,049 ------------ MULTI-LINE INSURANCE (3.1%) 2,255 Farmers Exchange Capital -144A*....................... 7.05 07/15/28 1,791,223 3,860 Farmers Insurance Capital -144A*....................... 8.625 05/01/24 3,695,209 4,900 Hartford Financial Services Group, Inc................... 7.90 06/15/10 5,363,310 5,000 Nationwide Financial Services, Inc................ 8.00 03/01/27 4,842,450 ------------ 15,692,192 ------------ OIL & GAS PIPELINES (0.4%) 1,885 Williams Companies, Inc....... 7.50 01/15/31 1,836,390 ------------ OIL & GAS PRODUCTION (0.4%) 2,000 Anadarko Petroleum Corp....... 7.73 09/15/96 2,078,212 ------------ PHARMACEUTICALS: MAJOR (1.6%) 1,855 American Home Products Corp......................... 6.70 03/15/11 1,922,051
SEE NOTES TO FINANCIAL STATEMENTS 67 Morgan Stanley Variable Investment Series - Quality Income Plus PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------- $ 5,000 Johnson & Johnson ***......... 8.72% 11/01/24 $ 5,691,905 360 Marion Merrell Corp........... 9.11 08/01/05 393,947 ------------ 8,007,903 ------------ PROPERTY - CASUALTY INSURERS (1.0%) 570 Florida Windstorm -144A*...... 7.125 02/25/19 584,480 5,000 Progressive Corp.............. 6.625 03/01/29 4,539,450 ------------ 5,123,930 ------------ RAILROADS (0.9%) 4,078 Burlington Northern Santa Fe Corp. ***.................... 7.97 01/01/15 4,407,127 ------------ REGIONAL BANKS (0.4%) 2,000 M&T Bank Corp................. 8.00 10/01/10 2,185,442 ------------ REAL ESTATE DEVELOPMENT (0.1%) 572 World Financial PropertyTowers (Class B) - 144A*............ 6.91 09/01/13 576,638 ------------ SERVICE TO THE HEALTH INDUSTRY (0.4%) 1,010 Anthem Insurance -144A*....... 9.125 04/01/10 1,085,363 850 Anthem Insurance -144A*....... 9.00 04/01/27 855,550 ------------ 1,940,913 ------------ SPECIALTY TELECOMMUNICATIONS (2.8%) 1,960 PCCW Capital Ltd. -144A* (Hong Kong)........................ 7.75 11/15/11 1,955,449 9,750 Qwest Capital Funding Inc..... 7.25 02/15/11 9,501,102 2,865 Qwest Capital Funding Inc..... 7.75 02/15/31 2,748,887 ------------ 14,205,438 ------------ TELECOMMUNICATIONS EQUIPMENT (0.1%) 950 Corning Inc. (Conv.).......... 0.00 11/08/15 491,625 ------------ TOBACCO (1.1%) 5,000 Philip Morris Companies, Inc. ***.......................... 7.125 10/01/04 5,336,035 ------------ TRUCKS/CONSTRUCTION/FARM MACHINERY (0.7%) 3,000 Caterpillar Inc............... 9.375 08/15/11 3,707,076 ------------ WIRELESS COMMUNICATIONS (1.9%) 4,885 AT&T Wireless Services Inc.... 8.75 03/01/31 5,536,600 3,765 Vodafone AirTouch PLC (United Kingdom)..................... 7.75 02/15/10 4,135,084 ------------ 9,671,684 ------------ Total Corporate Bonds (COST $326,546,748)........................................ 333,971,407 ------------ U.S. Government & Agency Obligations (26.0%) 4 Federal Home Loan Mortgage Corp......................... 11.50 05/01/19 5,044
SEE NOTES TO FINANCIAL STATEMENTS 68 Morgan Stanley Variable Investment Series - Quality Income Plus PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------- $ 613 Federal Home Loan Mortgage Corp. PC Gold................ 8.50% 01/01/22 - 12/01/24 $ 649,004 Federal National Mortgage Assoc. 2,800 **............................ 6.00 2,731,751 19,042 .............................. 6.50 05/01/31 19,042,029 12,500 **............................ 6.50 12,500,000 1,205 .............................. 7.50 06/01/28 - 09/01/29 1,242,578 1,200 **............................ 7.50 1,237,875 7,595 .............................. 8.00 08/01/29 - 08/01/31 7,950,866 26,450 **............................ 8.00 27,689,843 178 .............................. 9.00 06/01/21 - 02/01/25 189,172 Government National Mortgage Assoc. 7,829 .............................. 6.00 04/15/28 - 12/15/28 7,677,540 16,184 .............................. 6.50 08/15/27 - 07/15/29 16,229,352 12 .............................. 7.50 04/15/24 - 09/15/27 12,009 7,369 .............................. 8.00 10/15/24 - 11/15/29 7,705,298 987 .............................. 8.50 01/15/17 - 03/01/28 1,044,828 853 .............................. 9.00 07/15/24 - 12/15/24 906,263 77 .............................. 10.00 05/15/16 - 04/15/19 82,313 5,895 U.S. Treasury Note ***........ 6.75 05/15/05 6,409,433 3,000 ***........................... 7.00 07/15/06 3,323,907 8,800 ***........................... 7.50 02/15/05 9,749,098 15,000 U.S. Treasury Note Strips ***.......................... 0.00 02/15/19 - 08/15/19 5,249,590 ------------ Total U.S. Government & Agency Obligations (COST $130,110,398)........................................ 131,627,793 ------------ Foreign Government Obligations (3.6%) 5,000 Hydro-Quebec (Canada) ***..... 9.50 11/15/30 6,840,840 5,000 Manitoba (Province of) (Canada)..................... 7.75 07/17/16 5,904,030 5,000 Province of New Brunswick (Canada)..................... 7.625 06/29/04 5,430,405 ------------ Total Foreign Government Obligations (COST $15,896,050)......................................... 18,175,275 ------------ Asset-Backed Securities (0.7%) FINANCE/RENTAL/LEASING (0.7%) 1,800 American Express Credit Account...................... 5.53 10/15/08 1,840,033 1,650 Connecticut RRB Special....... 6.21 12/30/11 1,687,580 ------------ Total Asset-Backed Securities (COST $3,449,343).......................................... 3,527,613 ------------
SEE NOTES TO FINANCIAL STATEMENTS 69 Morgan Stanley Variable Investment Series - Quality Income Plus PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------- Short-Term Investments (a) (10.9%) U.S. Government & Agency Obligations $55,000 Federal Home Loan Mortgage Corp......................... 1.51% 01/02/02 $ 54,997,693 100 U.S. Treasury Bill ***........ 1.73 04/18/02 99,491 300 U.S. Treasury Bill ***........ 1.822 04/18/02 298,391 ------------ Total Short-Term Investments (COST $55,395,564)......................................... 55,395,575 ------------
Total Investments (COST $531,398,103) (b)...... 107.1% 542,697,663 Liabilities in Excess of Other Assets....................... (7.1) (35,825,059) ----- ------------ Net Assets.................... 100.0% $506,872,604 ===== ============
- ------------------------ * RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. ** SECURITIES PURCHASED ON A FORWARD COMMITMENT BASIS WITH AN APPROXIMATE PRINCIPAL AMOUNT AND NO DEFINITE MATURITY DATE; THE ACTUAL PRINCIPAL AMOUNT AND MATURITY DATE WILL BE DETERMINED UPON SETTLEMENT. *** SOME OR ALL OF THESE SECURITIES HAVE BEEN SEGREGATED IN CONNECTION WITH OPEN FUTURES CONTRACTS AND/OR SECURITIES PURCHASED ON A FORWARD COMMITMENT BASIS. PC PARTICIPATION CERTIFICATE. (A) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $14,580,334 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $3,280,774, RESULTING IN NET UNREALIZED APPRECIATION OF $11,299,560.
FUTURES CONTRACTS OPEN AT DECEMBER 31, 2001: NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE UNREALIZED CONTRACTS LONG/SHORT MONTH, AND YEAR AMOUNT AT VALUE APPRECIATION - ------------------------------------------------------------------------------------ 75 Long U.S. Treasury Notes, March 2002 $ 7,937,109 $ 19,622 145 Long U.S. Treasury Notes, March 2002 30,302,736 132,892 ---------- 80 Short U.S. Treasury Notes, March 2002 (8,411,250) (99,856) ---------- 391 Short U.S. Treasury Bond, March 2002 (39,698,719) 1,408,454 ---------- Total unrealized appreciation................................... $1,461,112 ==========
SEE NOTES TO FINANCIAL STATEMENTS 70 Morgan Stanley Variable Investment Series - High Yield PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE --------------------------------------------------------------------------------- Corporate Bonds (91.9%) ADVERTISING/MARKETING SERVICES (1.2%) $ 807 Interep National Radio Sales, Inc. (Series B).............. 10.00% 07/01/08 $ 524,550 6,853 Next Generation Network, Inc. (Series C)................... 14.00+ 02/01/03 351,216 ----------- 875,766 ----------- AEROSPACE & DEFENSE (1.0%) 1,300 Loral Space & Communications Ltd.......................... 9.50 01/15/06 715,000 ----------- AIRLINES (0.8%) 945 Air Canada Corp............... 10.25 03/15/11 603,619 ----------- ALTERNATIVE POWER GENERATION (0.8%) 620 Calpine Corp.................. 8.50 02/15/11 564,180 ----------- AUTO PARTS: O.E.M. (1.3%) 95 Collins & Aikman Products..... 11.50 04/15/06 92,625 305 Collins & Aikman Products - 144A*........................ 10.75 12/31/11 305,762 515 Dana Corp. - 144A*............ 9.00 08/15/11 478,837 625 Hayes Lemmerz International, Inc. (Series B) (a).......... 9.125 07/15/07 28,125 650 Hayes Lemmerz International, Inc. (Series B) (a).......... 8.25 12/15/08 29,250 ----------- 934,599 ----------- BROADCAST/MEDIA (1.2%) 1,265 Tri-State Outdoor Media Group, Inc. (b)..................... 11.00 05/15/08 887,081 ----------- BROADCASTING (2.5%) 350 Radio One Inc. (Series B)..... 8.875 07/01/11 361,375 600 Salem Communications Holdings Corp. (Series B)............. 9.00 07/01/11 620,250 365 XM Satellite Radio Holdings Inc.......................... 14.00 03/15/10 288,806 520 Young Broadcasting Inc........ 10.00 03/01/11 483,600 ----------- 1,754,031 ----------- CABLE/SATELLITE TV (11.8%) 1,060 Adelphia Communications Corp. (Series B)................... 10.50 07/15/04 1,063,975 3,750 Australis Holdings Ltd. (Australia) (a)(b)........... 15.00 11/01/02 -- 1,100 British Sky Broadcasting Group PLC (United Kingdom)......... 6.875 02/23/09 1,053,523 675 British Sky Broadcasting Group PLC (United Kingdom)......... 8.20 07/15/09 694,685 1,000 Callahan Nordhein Westfalen (Germany).................... 14.00 07/15/10 660,000 1,525 Charter Communications Holdings/Charter Capital..... 11.75++ 05/15/11 937,875 685 CSC Holdings Inc. (Series B)................... 7.625 04/01/11 685,944 625 Echostar DBS Corp. - 144A*.... 9.125 01/15/09 626,562 2,525 Knology Holdings, Inc......... 11.875++ 10/15/07 1,129,937 705 ONO Finance PLC (United Kingdom)..................... 14.00 02/15/11 556,069 95 Pegasus Communications Corp. (Series B)................... 9.625 10/15/05 85,500
SEE NOTES TO FINANCIAL STATEMENTS 71 Morgan Stanley Variable Investment Series - High Yield PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE --------------------------------------------------------------------------------- $ 980 Telewest Communications PLC (United Kingdom)............. 9.875% 02/01/10 $ 686,000 1,335 United Pan-Europe Communications NV (Series B) (Netherlands)................ 10.875 08/01/09 173,550 ----------- 8,353,620 ----------- CASINO/GAMING (2.1%) 4,485 Aladdin Gaming Holdings/Capital Corp. (Series B)................... 13.50++ 03/01/10 140,156 250 Harrah's Operating Co., Inc.......................... 8.00 02/01/11 257,528 7,210 Resorts At Summerlin (Series B) (a)(b)............ 13.00 12/15/07 -- 220 Station Casinos, Inc.......... 8.875 12/01/08 215,600 850 Station Casinos, Inc.......... 9.875 07/01/10 863,812 ----------- 1,477,096 ----------- CELLULAR TELEPHONE (2.4%) 200 Dobson/Sygnet Communications............... 12.25 12/15/08 214,000 5,500 Dolphin Telecom PLC (Series B) (United Kingdom) (a).......................... 14.00++ 05/15/09 550 5,130 McCaw International Ltd....... 13.00++ 04/15/07 256,500 925 Nextel Communications, Inc.... 9.95++ 02/15/08 635,937 675 Tritel PCS Inc................ 12.75++ 05/15/09 573,750 ----------- 1,680,737 ----------- CHEMICALS: MAJOR DIVERSIFIED (0.3%) 245 Equistar Chemical/Funding..... 10.125 09/01/08 246,225 ----------- CHEMICALS: SPECIALTY (1.7%) 230 Acetex Corp. - 144A* (Canada)..................... 10.875 08/01/09 230,000 75 ISP Chemco - 144A*............ 10.25 07/01/11 78,375 530 ISP Holdings Inc. - 144A*..... 10.625 12/15/09 530,000 175 Millennium America Inc........ 9.25 06/15/08 178,500 160 OM Group Inc. - 144A*......... 9.25 12/15/11 163,200 ----------- 1,180,075 ----------- COMMERCIAL PRINTING/FORMS (1.2%) 2,500 Premier Graphics Inc. (b)..... 11.50 12/01/05 78,125 695 Quebecor Media Inc. (Canada)..................... 11.125 07/15/11 741,912 70 Quebecor Media Inc. (Canada)..................... 13.75++ 07/15/11 42,437 ----------- 862,474 ----------- CONSUMER/BUSINESS SERVICES (4.7%) 500 Anacomp, Inc. (b)............. 10.875 04/01/04 110,000 1,800 Anacomp, Inc. (Series B) (b)............... 10.875 04/01/04 396,000 5,690 Comforce Corp. (Series B)..... 15.00+ 12/01/09 1,706,887 745 MDC Communication Corp. (Canada)..................... 10.50 12/01/06 543,850 620 Muzak LLC/Muzak Finance....... 9.875 03/15/09 545,600 ----------- 3,302,337 -----------
SEE NOTES TO FINANCIAL STATEMENTS 72 Morgan Stanley Variable Investment Series - High Yield PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE --------------------------------------------------------------------------------- CONTAINERS/PACKAGING (1.9%) $ 1,300 Owens-Illinois, Inc........... 7.80% 05/15/18 $ 1,124,500 195 Riverwood International Corp......................... 10.875 04/01/08 197,925 ----------- 1,322,425 ----------- DIVERSIFIED MANUFACTURING (1.4%) 800 Eagle-Picher Industries, Inc.......................... 9.375 03/01/08 440,000 4,525 Jordan Industries, Inc. (Series B)................... 11.75++ 04/01/09 588,250 ----------- 1,028,250 ----------- DRUGSTORE CHAINS (1.0%) 1,000 Rite Aid Corp................. 7.70 02/15/27 690,000 ----------- ELECTRIC UTILITIES (1.3%) 75 CMS Energy Corp............... 7.50 01/15/09 73,414 415 Mirant Americas General LLC... 8.30 05/01/11 383,839 410 PG&E National Energy Corp..... 10.375 05/16/11 432,304 ----------- 889,557 ----------- ELECTRONIC COMPONENTS (0.1%) 85 Flextronics International Ltd. (Singapore).................. 9.875 07/01/10 89,250 ----------- ELECTRONIC DISTRIBUTORS (1.0%) 610 BRL Universal Equipment Corp......................... 8.875 02/15/08 634,400 6,000 CHS Electronics, Inc. (a)(b).................. 9.875 04/15/05 52,500 ----------- 686,900 ----------- ELECTRONIC EQUIPMENT/INSTRUMENTS (0.4%) 820 High Voltage Engineering, Inc.......................... 10.75 08/15/04 278,800 ----------- ELECTRONICS/APPLIANCES (0.0%) 12,000 International Semi-Tech Microelectronics, Inc. (Canada) (a)(b).............. 11.50 08/15/03 7,500 ----------- ENGINEERING & CONSTRUCTION (1.1%) 525 Encompass Services Corp. - 144A*........................ 10.50 05/01/09 341,250 1,500 Metromedia Fiber Network, Inc.......................... 10.00 12/15/09 435,000 ----------- 776,250 ----------- ENVIRONMENTAL SERVICES (2.3%) 675 Allied Waste North America, Inc. (Series B).............. 10.00 08/01/09 695,250 875 Waste Management, Inc......... 7.375 08/01/10 894,700 ----------- 1,589,950 ----------- FINANCE/RENTAL/LEASING (0.2%) 175 Ford Motor Credit Co.......... 7.25 10/25/11 170,297 ----------- FINANCIAL CONGLOMERATES (0.3%) 195 Case Credit Corp.............. 6.125 02/15/03 183,823 -----------
SEE NOTES TO FINANCIAL STATEMENTS 73 Morgan Stanley Variable Investment Series - High Yield PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE --------------------------------------------------------------------------------- FOOD DISTRIBUTORS (1.1%) $ 800 Volume Services America, Inc.......................... 11.25% 03/01/09 $ 780,000 ----------- FOOD: MEAT/FISH/DAIRY (1.6%) 485 Michael Foods Inc............. 11.75 04/01/11 523,800 530 Smithfield Foods Inc.......... 7.625 02/15/08 519,400 90 Smithfield Foods Inc. - 144A*........................ 8.00 10/15/09 92,700 ----------- 1,135,900 ----------- FOREST PRODUCTS (2.5%) 505 Louisiana Pacific Corp........ 10.875 11/15/08 484,800 170 Louisiana Pacific Corp........ 8.875 08/15/10 164,799 1,050 Tembec Industries Inc. (Canada)..................... 8.50 02/01/11 1,086,750 ----------- 1,736,349 ----------- HOME BUILDING (5.1%) 765 Beazer Homes USA, Inc......... 8.625 05/15/11 789,863 1,110 Centex Corp................... 7.875 02/01/11 1,130,814 655 Schuler Homes, Inc. - 144A*... 9.375 07/15/09 677,925 40 Schuler Homes, Inc. - 144A*... 10.50 07/15/11 41,700 970 Toll Corp..................... 8.25 02/01/11 960,300 ----------- 3,600,602 ----------- HOSPITAL/NURSING MANAGEMENT (1.7%) 1,200 HCA Inc....................... 7.875 02/01/11 1,224,000 ----------- HOTELS/RESORTS/CRUISELINES (1.3%) 3,000 Epic Resorts LLC (Series B) (a)(b)............ 13.00 06/15/05 450,000 485 HMH Properties (Series B)..... 7.875 08/01/08 447,413 ----------- 897,413 ----------- INDUSTRIAL SPECIALTIES (0.8%) 700 International Wire Group, Inc.......................... 11.75 06/01/05 574,000 ----------- INTERNET SOFTWARE/SERVICES (0.9%) 1,290 Exodus Communications Inc. (a)(b).................. 11.625 07/15/10 232,200 1,270 Globix Corp................... 12.50 02/01/10 254,000 1,700 PSINet, Inc. (a)(b)........... 11.00 08/01/09 127,500 ----------- 613,700 ----------- MANAGED HEALTH CARE (1.7%) 840 Aetna, Inc.................... 7.875 03/01/11 827,296 365 Health Net, Inc............... 8.375 04/15/11 376,313 ----------- 1,203,609 ----------- MEDIA CONGLOMERATES (0.7%) 455 Nextmedia Operating, Inc. - 144A*........................ 10.75 07/01/11 469,788 -----------
SEE NOTES TO FINANCIAL STATEMENTS 74 Morgan Stanley Variable Investment Series - High Yield PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE --------------------------------------------------------------------------------- MEDICAL DISTRIBUTORS (0.2%) $ 135 Amerisource Bergen Corp. - 144A*........................ 8.125% 09/01/08 $ 138,375 ----------- MEDICAL SPECIALTIES (0.1%) 5,100 MEDIQ/PPN Life Support Services, Inc. (b)........... 11.00 06/01/08 51,000 ----------- MEDICAL/NURSING SERVICES (1.2%) 850 Fresenius Medical Capital Trust........................ 7.875 06/15/11 845,750 ----------- MOTOR VEHICLES (0.5%) 410 Ford Motor Co................. 7.45 07/16/31 375,637 ----------- MOVIES/ENTERTAINMENT (1.2%) 810 Alliance Atlantis Communications, Inc. (Canada)..................... 13.00 12/15/09 874,800 ----------- OFFICE EQUIPMENT/SUPPLIES (0.0%) 6,500 Mosler, Inc. (a)(b)........... 11.00 04/15/03 -- ----------- OIL & GAS PRODUCTION (1.8%) 1,075 Chesapeake Energy Corp........ 8.125 04/01/11 1,042,750 245 Stone Energy Corp. - 144A*.... 8.25 12/15/11 248,675 ----------- 1,291,425 ----------- OILFIELD SERVICES/EQUIPMENT (0.4%) 125 Hanover Equipment Trust - 144A*........................ 8.75 09/01/11 129,375 120 Hanover Equipment Trust - 144A*........................ 8.50 09/01/08 124,800 ----------- 254,175 ----------- OTHER CONSUMER SPECIALTIES (0.7%) 730 Samsonite Corp................ 10.75 06/15/08 509,175 ----------- OTHER METALS/MINERALS (1.1%) 355 Murrin Murrin Holdings Property Ltd. (Australia).... 9.375 08/31/07 259,150 520 Phelps Dodge Corp............. 8.75 06/01/11 509,359 ----------- 768,509 ----------- PUBLISHING: BOOKS/MAGAZINES (1.1%) 855 PRIMEDIA, Inc................. 8.875 05/15/11 769,500 ----------- PUBLISHING: NEWSPAPERS (0.7%) 200 Belo Corp..................... 8.00 11/01/08 204,269 385 Hollinger Participation - 144A* (Canada)............... 12.125+ 11/15/10 320,031 ----------- 524,300 ----------- PULP & PAPER (0.7%) 500 Norske Skog - 144A*........... 8.625 06/15/11 518,750 ----------- REAL ESTATE DEVELOPMENT (0.7%) 545 CB Richard Ellis Services Inc.......................... 11.25 06/15/11 465,975 ----------- RECREATIONAL PRODUCTS (1.0%) 675 International Game Technology................... 8.375 05/15/09 710,438 -----------
SEE NOTES TO FINANCIAL STATEMENTS 75 Morgan Stanley Variable Investment Series - High Yield PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE --------------------------------------------------------------------------------- RESTAURANTS (1.0%) $ 20,351 American Restaurant Group Holdings, Inc. - 144A* (c).................... 0.00% 12/15/05 $ 622,750 5,000 FRD Acquisition Corp. (a)(b)................. 12.50 07/15/04 62,500 ----------- 685,250 ----------- RETAIL - SPECIALTY (1.1%) 775 Pantry, Inc................... 10.25 10/15/07 761,438 ----------- SEMICONDUCTORS (0.3%) 230 Fairchild Semi Conductors..... 10.50 02/01/09 244,375 ----------- SERVICES TO THE HEALTH INDUSTRY (1.3%) 350 Anthem Insurance - 144A**..... 9.125 04/01/10 376,116 550 Omnicare, Inc. (Series B)..... 8.125 03/15/11 569,250 ----------- 945,366 ----------- SPECIALTY STORES (0.5%) 335 Autonation, Inc. - 144A*...... 9.00 08/01/08 340,863 ----------- SPECIALTY TELECOMMUNICATIONS (5.0%) 6,500 Birch Telecom Inc............. 14.00 06/15/08 1,560,000 1,800 DTI Holdings, Inc. (Series B) (a).......................... 12.50++ 03/01/08 33,750 3,000 Esprit Telecom Group PLC (United Kingdom) (b)......... 11.50 12/15/07 7,500 1,800 Esprit Telecom Group PLC (United Kingdom) (b)......... 10.875 06/15/08 4,500 16,520 Firstworld Communications, Inc.......................... 13.00++ 04/15/08 1,652 1,000 Global Crossing Holdings, Ltd. (Bermuda).................... 8.70 08/01/07 90,000 585 Global Crossing Holdings, Ltd. (Bermuda).................... 9.50 11/15/09 64,350 2,500 GT Group Telecom Inc. (Canada)..................... 13.25++ 02/01/10 325,000 305 McLeodUSA Inc................. 11.375 01/01/09 68,625 1,150 McLeodUSA, Inc................ 11.50 05/01/09 253,000 955 Pac-West Telecom Inc. (Series B)................... 13.50 02/01/09 296,050 1,950 Primus Telecommunication Group, Inc. (Series B)....... 9.875 05/15/08 331,500 1,300 Versatel Telecom International NV (Netherlands)............. 13.25 05/15/08 455,000 3,031 Viatel Inc. (a)(b)............ 11.25 04/15/08 3,789 800 Viatel Inc. (a)(b)............ 11.50 03/15/09 1,000 3,410 World Access, Inc (a)(b)(c)................ 13.25 01/15/08 34,100 1,300 Worldwide Fiber Inc. (Canada) (a)(b).............. 12.00 08/01/09 1,625 ----------- 3,531,441 ----------- TELECOMMUNICATIONS (5.1%) 5,500 e. Spire Communications, Inc. (a)(b).................. 13.75 07/15/07 715,000 1,901 Focal Communications, Corp. (Series B)................... 12.125++ 02/15/08 532,280 1,300 Hyperion Telecommunication, Inc. (Series B).............. 12.25 09/01/04 156,000 1,000 MGC Communications, Inc....... 13.00 04/01/10 152,500 800 NEXTLINK Communications, Inc.......................... 9.00 03/15/08 96,000 875 NEXTLINK Communications, Inc. (b).......................... 10.75 06/01/09 109,375 1,795 NTL Communications Corp. (Series B)................... 11.875 10/01/10 628,250
SEE NOTES TO FINANCIAL STATEMENTS 76 Morgan Stanley Variable Investment Series - High Yield PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE --------------------------------------------------------------------------------- $ 5,400 Rhythms Netconnections, Inc. (a)(b).................. 12.75% 04/15/09 $ 810,000 1,200 Startec Global Communications Corp. (a)(b)................. 12.00 05/15/08 18,000 560 Talton Holdings, Inc. (Series B)................... 11.00 06/30/07 358,400 ----------- 3,575,805 ----------- TRUCKS/CONSTRUCTION/FARM MACHINERY (1.9%) 200 Case Corp. (Series B)......... 6.25 12/01/03 186,351 1,415 J.B. Poindexter & Co., Inc.... 12.50 05/15/04 1,144,381 ----------- 1,330,732 ----------- WHOLESALE DISTRIBUTORS (0.6%) 415 Burhmann US Inc............... 12.25 11/01/09 415,000 ----------- WIRELESS COMMUNICATIONS (2.3%) 915 American Cellular Corp........ 9.50 10/15/09 887,550 930 AMSC Acquisition Co., Inc. (Series B) (b)............... 12.25 04/01/08 288,300 19,000 CellNet Data Systems, Inc. (a)(b).................. 14.00++ 10/01/07 23,750 3,000 Globalstar LP/Capital Corp. (b).................... 10.75 11/01/04 210,000 3,300 Orbcomm Global LP/Capital Corp. (Series B) (a)(b)...... 14.00 08/15/04 99,000 4,500 USA Mobile Communications Holdings, Inc. (a)(b)........ 14.00 11/01/04 90,000 3,600 WinStar Communications, Inc. (a)..................... 14.75++ 04/15/10 4,500 1,000 WinStar Communications, Inc. (a)(b).................. 12.75 04/15/10 1,250 ----------- 1,604,350 ----------- Total Corporate Bonds (COST $229,267,413)................................... 64,917,632 -----------
NUMBER OF SHARES ----------- Common Stocks (d) (0.5%) APPAREL/FOOTWEAR RETAIL (0.0%) 1,310,596 County Seat Store Corp. (c)..................... -- ------ CASINO/GAMING (0.0%) 2,000 Fitzgerald Gaming Corp.......................... -- ------ FOOD: SPECIALTY/CANDY (0.0%) 2,375 SFAC New Holdings Inc. (c)...................... -- 436 SFFB Holdings, Inc. (c)......................... -- 120,000 Specialty Foods Acquisition Corp. - 144A*....... -- ------ -- ------ HOTELS/RESORTS/CRUISELINES (0.0%) 444,351 Premier Holdings Inc. (c)....................... -- 71,890 Vagabond Inns, Inc. (Class D) (a)............... -- ------ -- ------
SEE NOTES TO FINANCIAL STATEMENTS 77 Morgan Stanley Variable Investment Series - High Yield PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE ---------------------------------------------------------------------------- MEDICAL/NURSING SERVICES (0.0%) 418,663 Raintree Healthcare Corp. (c)................... $ -- ------ MOTOR VEHICLES (0.0%) 87 Northern Holdings Industrial Corp.* (c)......... -- ------ RESTAURANTS (0.0%) 7,750 American Restaurant Group Holdings, Inc. - 144A*.......................................... -- ------ SPECIALTY TELECOMMUNICATIONS (0.1%) 33,335 Versatel Telecom International NV (ADR) (Netherlands).................................. 31,675 15,710 World Access, Inc (c)........................... 17 ------ 31,692 ------ TELECOMMUNICATION EQUIPMENT (0.0%) 196,000 FWT Inc. (c).................................... 1,960 ------ TELECOMMUNICATIONS (0.4%) 25,399 Covad Communications Group, Inc. (c)............ 72,641 374,996 Focal Communications Corp.* (c)................. 228,748 ------ 301,389 ------ TEXTILES (0.0%) 298,461 U.S. Leather, Inc. (c).......................... -- ------ WIRELESS COMMUNICATIONS (0.0%) 809,424 Arch Wireless, Inc. (c)......................... 10,927 38,444 Vast Solutions, Inc. (Class B1) (c)............. -- 38,444 Vast Solutions, Inc. (Class B2) (c)............. -- 38,444 Vast Solutions, Inc. (Class B3) (c)............. -- ------ 10,927 ------ Total Common Stocks (COST $66,781,546)............................. 345,968 ------
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE ----------- ------------- -------- Convertible Bonds (0.1%) HOTELS/RESORTS/CRUISELINES (0.0%) $ 742 Premier Cruises Ltd. (a)...... 10.00 %+ 08/15/05 -- ----------- TELECOMMUNICATION EQUIPMENT (0.1%) 220 Corning Inc................... 0.00 11/08/15 113,850 ----------- Total Convertible Bonds (COST $859,067)....................................... 113,850 -----------
SEE NOTES TO FINANCIAL STATEMENTS 78 Morgan Stanley Variable Investment Series - High Yield PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE --------------------------------------------------------------------------------- Preferred Stocks (2.2%) RESTAURANTS (0.6%) 2,395 American Restaurant Group Holdings, Inc. (Series B).... $ 416,699 ----------- TELECOMMUNICATION EQUIPMENT (1.6%) 2,244,200 FWT Inc. (Series A) (c)(d)............................. 1,122,100 ----------- Total Preferred Stocks (COST $10,452,297).................................... 1,538,799 -----------
NUMBER OF EXPIRATION WARRANTS DATE ----------- ---------- Warrants (0.1%) ADVERTISING/MARKETING SERVICES (0.0%) 12,524 Mentus Media Corp. - 144A*................. 02/01/08 -- ----------- AEROSPACE & DEFENSE (0.0%) 1,500 Sabreliner Corp. - 144A*................... 04/15/03 -- ----------- BROADCASTING (0.0%) 640 XM Satellite Radio Holdings Inc. - 144A*... 03/15/10 19,200 ----------- CABLE/SATELLITE TV (0.1%) 705 ONO Finance PLC - 144A* (United Kingdom)... 03/16/11 35,250 ----------- CASINO/GAMING (0.0%) 83,500 Aladdin Gaming Enterprises, Inc. - 144A*... 03/01/10 -- 6,000 Resorts At Summerlin - 144A*............... 12/15/07 -- ----------- -- ----------- CONSUMER/BUSINESS SERVICES (0.0%) 42,250 Comforce Corp. - 144A*..................... 12/01/09 -- ----------- HOTELS/RESORTS/CRUISELINES (0.0%) 3,000 Epic Resorts LLC - 144A*................... 06/15/05 -- ----------- INTERNET SOFTWARE/SERVICES (0.0%) 16,520 Verado Holdings Inc. - 144A*............... 04/15/08 -- ----------- OIL & GAS PRODUCTION (0.0%) 39,665 Gothic Energy Corp. - 144A*................ 05/01/05 -- ----------- RESTAURANTS (0.0%) 1,500 American Restaurant Group Holdings, Inc. - 144A*..................................... 08/15/08 -- ----------- SPECIALTY TELECOMMUNICATIONS (0.0%) 6,500 Birch Telecom Inc. - 144A*................. 06/15/08 -- 2,500 GT Group Telecom Inc. - 144A* (Canada)..... 02/01/10 12,500 ----------- 12,500 -----------
SEE NOTES TO FINANCIAL STATEMENTS 79 Morgan Stanley Variable Investment Series - High Yield PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF EXPIRATION WARRANTS DATE VALUE --------------------------------------------------------------------------------- TELECOMMUNICATIONS (0.0%) 1,200 Startec Global Communications Corp. - 144A*..................................... 05/15/08 $ -- ----------- WIRELESS COMMUNICATIONS (0.0%) 1,000 Motient Corp. - 144A*...................... 04/01/08 15 ----------- Total Warrants (COST $730,825)....................................... 66,965 -----------
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE ----------- ------------- -------- Short-Term Investment (2.5%) Repurchase Agreement $ 1,749 The Bank of New York (dated 12/31/01; proceeds $1,749,344) (e) (COST $1,749,259)............ 0.875% 01/02/02 1,749,259 -----------
Total Investments (COST $309,840,407) (f)...... 97.3% 68,732,473 Other Assets in Excess of Liabilities.................. 2.7 1,901,100 ----- ----------- Net Assets.................... 100.0% $70,633,573 ===== ===========
- --------------------- ADR AMERICAN DEPOSITORY RECEIPT. * RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. + PAYMENT-IN-KIND SECURITY. ++ CURRENTLY A ZERO COUPON BOND AND WILL PAY INTEREST AT THE RATE SHOWN AT A FUTURE SPECIFIED DATE. (A) ISSUER IN BANKRUPTCY. (B) NON-INCOME PRODUCING SECURITY; BOND IN DEFAULT. (C) ACQUIRED THROUGH EXCHANGE OFFER. (D) NON-INCOME PRODUCING SECURITIES. (E) COLLATERALIZED BY $1,774,533 FEDERAL HOME LOAN MORTGAGE CORP. 5.775% DUE 06/26/06 VALUED AT $1,784,246. (F) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $1,367,689 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $242,475,623, RESULTING IN NET UNREALIZED DEPRECIATION OF $241,107,934. SEE NOTES TO FINANCIAL STATEMENTS 80 Morgan Stanley Variable Investment Series - Utilities PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001
NUMBER OF SHARES VALUE - ------------------------------------------------------------------------- Common Stocks (82.3%) ELECTRIC UTILITIES (44.4%) 188,050 AES Corp.*.................................... $ 3,074,618 165,000 Calpine Corp.*................................ 2,770,350 225,865 Cinergy Corp.................................. 7,550,667 185,000 CMS Energy Corp............................... 4,445,550 150,000 Consolidated Edison, Inc...................... 6,054,000 307,500 DPL, Inc...................................... 7,404,600 175,000 DTE Energy Co................................. 7,339,500 262,432 Duke Energy Corp.............................. 10,303,080 230,000 Energy East Corp.............................. 4,367,700 220,000 Entergy Corp.................................. 8,604,200 100,000 FirstEnergy Corp.............................. 3,498,000 170,000 FPL Group, Inc................................ 9,588,000 145,000 General Electric Co........................... 5,811,600 231,367 Mirant Corp.*................................. 3,706,499 265,000 NRG Energy, Inc.*............................. 4,107,500 195,000 Pinnacle West Capital Corp.................... 8,160,750 150,000 PNM Resources Inc............................. 4,192,500 120,000 PPL Corp...................................... 4,182,000 175,000 Public Service Enterprise Group, Inc.......... 7,383,250 200,000 Reliant Energy, Inc........................... 5,304,000 215,000 SCANA Corp.................................... 5,983,450 200,000 Sierra Pacific Resources...................... 3,010,000 285,000 Southern Co. (The)............................ 7,224,750 221,500 TXU Corp...................................... 10,443,725 200,000 Wisconsin Energy Corp......................... 4,512,000 267,250 Xcel Energy, Inc.............................. 7,413,515 ------------ 156,435,804 ------------ ENERGY (13.2%) 145,000 Anardarko Petroleum Corp...................... 8,243,250 137,000 Dynegy, Inc. (Class A)........................ 3,493,500 220,460 El Paso Corp.................................. 9,834,721 170,000 KeySpan Corp.................................. 5,890,500 120,000 Kinder Morgan, Inc............................ 6,682,800 200,000 UtiliCorp United, Inc......................... 5,034,000 290,000 Williams Companies, Inc....................... 7,400,800 ------------ 46,579,571 ------------ TELECOMMUNICATIONS (24.7%) 161,932 ALLTEL Corp................................... 9,996,062
SEE NOTES TO FINANCIAL STATEMENTS 81 Morgan Stanley Variable Investment Series - Utilities PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ------------------------------------------------------------------------- 205,000 AOL Time Warner Inc.*......................... $ 6,580,500 128,007 AT&T Wireless Services Inc.*.................. 1,839,461 170,000 BCE, Inc. (Canada)............................ 3,876,000 258,750 CenturyTel, Inc............................... 8,487,000 158,000 Charter Communications, Inc. (Class A)*....... 2,595,940 165,000 Nextel Communications, Inc. (Class A)*........ 1,808,400 238,946 SBC Communications, Inc....................... 9,359,515 215,000 Sprint Corp. (FON Group)...................... 4,317,200 100,000 Sprint Corp. (PCS Group)*..................... 2,441,000 160,000 Telefonos de Mexico S.A. (Series L) (ADR) (Mexico)..................................... 5,603,200 110,000 Telephone & Data Systems, Inc................. 9,872,500 201,120 Verizon Communications Inc.................... 9,545,155 230,000 Vodafone Group PLC (ADR) (United Kingdom)..... 5,906,400 326,163 WorldCom, Inc. - WorldCom Group*.............. 4,592,375 ------------ 86,820,708 ------------ Total Common Stocks (COST $216,010,981).......................... 289,836,083 ------------
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE - --------- ------- -------- Corporate Bonds (5.9%) AEROSPACE & DEFENSE (0.1%) $ 400 Northrop Grumman Corporation.................. 7.00% 03/01/06 418,610 ------------ ELECTRIC UTILITIES (2.5%) 1,215 American Electric Power....... 6.125 05/15/06 1,202,752 240 Calpine Corp.................. 8.50 02/15/11 218,392 400 Consumers Energy Co........... 6.875 03/01/18 355,629 495 DTE Energy Co................. 7.05 06/01/11 510,817 1,065 Exelon Corp................... 6.75 05/01/11 1,079,389 330 Florida Power Corp............ 6.65 07/15/11 336,144 1,000 MidAmerican Funding LLC....... 6.75 03/01/11 980,996 920 Mirant Americas Generation LLC.......................... 7.625 05/01/06 838,790 800 NRG Energy, Inc............... 7.75 04/01/11 752,510 275 PG&E National Energy Corp..... 10.375 05/16/11 289,960 1,740 PSEG Energy Holdings.......... 9.125 02/10/04 1,829,027 330 South Carolina Electric & Gas Co........................... 7.50 06/15/05 353,167 ------------ 8,747,573 ------------ ENERGY (1.1%) 400 CMS Panhandle Holding Co...... 7.00 07/15/29 344,890
SEE NOTES TO FINANCIAL STATEMENTS 82 Morgan Stanley Variable Investment Series - Utilities PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------- $ 330 Conoco Inc.................... 5.90% 04/15/04 $ 342,720 280 Consolidated Natural Gas Co,.......................... 5.375 11/01/06 276,096 845 NiSource Finance Corp......... 7.875 11/15/10 874,510 410 Oxymar - 144A**............... 7.50 02/15/16 327,233 535 Petrozuata Finance, Inc. (Venezuela) - 144A**......... 8.22 04/01/17 401,250 455 RAS Laffan Liquid Natural Gas - 144A** (Qatar)......... 8.294 03/15/14 464,100 110 Transcontinental Gas Pipeline Corp. - 144A**............... 7.00 08/15/11 107,363 900 Williams Companies Inc. (Series A)................... 7.50 01/15/31 876,791 ------------ 4,014,953 ------------ ENVIRONMENTAL SERVICES (0.1%) 450 Waste Management Inc.......... 7.00 10/15/06 462,506 ------------ FINANCIAL CONGLOMERATES (0.1%) 195 General Motors Acceptance Corp......................... 7.50 07/15/05 204,998 ------------ INDUSTRIAL CONGLOMERATES (0.2%) 260 Honeywell International Inc.......................... 5.125 11/01/06 256,499 410 Tyco International Group S.A. (Luxembourg)................. 6.375 02/15/06 418,748 ------------ 675,247 ------------ TELECOMMUNICATIONS (1.8%) 450 AOL Time Warner, Inc.......... 6.125 04/15/06 459,644 375 AT&T Corp. - 144A**........... 6.50 11/15/06 381,227 510 AT&T Wireless Services, Inc................ 7.875 03/01/11 545,195 520 British Telecom PLC (United Kingdom)..................... 7.875 12/15/05 557,028 415 Comcast Cable Communications Corp......................... 6.375 01/30/06 421,678 520 Deutsche Telekom PLC (Netherlands)................ 7.75 06/15/05 563,075 520 GTE Corp...................... 7.90 02/01/27 539,229 210 PCCW Capital Ltd. - 144A** (Hong Kong).................. 7.75 11/15/11 209,512 1,150 Qwest Capital Funding......... 7.90 08/15/10 1,169,938 130 TCI Communications Corp....... 8.00 08/01/05 139,287 390 Telus Corp.................... 8.00 06/01/11 413,857 940 WorldCom, Inc................. 8.25 05/15/31 993,632 ------------ 6,393,302 ------------ Total Corporate Bonds (COST $20,988,968).............................. 20,917,189 ------------ Asset-Backed Securities (0.5%) FINANCE/RENTAL/LEASING 425 Connecticut RRB Special Purpose Trust CL&P - Series 2001.................. 6.21 12/30/11 434,680 400 Detroit Edison Securitization Funding LLC.................. 5.875 03/01/10 411,020
SEE NOTES TO FINANCIAL STATEMENTS 83 Morgan Stanley Variable Investment Series - Utilities PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------- $ 450 PECO Energy Transition Trust........................ 7.625% 03/01/10 $ 496,330 400 PSE&G Transition Funding LLC.......................... 6.61 06/15/15 414,748 ------------ Total Asset-Backed Securities (COST $1,796,933)............................... 1,756,778 ------------ U.S. Government Obligations (0.6%) 700 U.S. Treasury Bond............ 8.125 08/15/21 893,593 1,050 U.S. Treasury Bond............ 8.75 08/15/20 1,409,051 ------------ Total U.S. Government Obligations (COST $2,310,783)............................... 2,302,644 ------------ Short-Term Investment (a) (11.1%) U.S. Government Agency 39,000 Federal Home Loan Mortgage Discount Note (a) (COST $38,998,364)........... 1.51 01/02/02 38,998,364 ------------
Total Investments (COST $280,106,029) (b)...... 100.4% 353,811,058 Liabilities in Excess of Other Assets....................... (0.4) (1,512,073) ----- ------------ Net Assets.................... 100.0% $352,298,985 ===== ============
- --------------------- ADR AMERICAN DEPOSITORY RECEIPT. * NON-INCOME PRODUCING SECURITY. ** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. (a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $93,316,455 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $19,611,426, RESULTING IN NET UNREALIZED APPRECIATION OF $73,705,029. SEE NOTES TO FINANCIAL STATEMENTS 84 Morgan Stanley Variable Investment Series - Income Builder PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001
NUMBER OF SHARES VALUE - ---------------------------------------------------------------- Common Stocks (53.6%) AEROSPACE & DEFENSE (1.4%) 26,000 Boeing Co............................... $ 1,008,280 ----------- AUTO PARTS: O.E.M. (2.5%) 60,000 Delphi Automotive Systems Corp.......... 819,600 12,000 Johnson Controls, Inc................... 969,000 ----------- 1,788,600 ----------- CHEMICALS: AGRICULTURAL (0.3%) 15,940 IMC Global Inc.......................... 207,220 ----------- CHEMICALS: MAJOR DIVERSIFIED (0.6%) 12,000 Dow Chemical Co. (The).................. 405,360 ----------- DEPARTMENT STORES (1.2%) 18,000 Sears, Roebuck & Co..................... 857,520 ----------- ELECTRIC UTILITIES (3.4%) 12,000 Dominion Resources, Inc................. 721,200 15,000 FPL Group, Inc.......................... 846,000 30,000 TECO Energy, Inc........................ 787,200 ----------- 2,354,400 ----------- ELECTRICAL PRODUCTS (0.8%) 10,000 Emerson Electric Co..................... 571,000 ----------- FINANCE/RENTAL/ LEASING (1.1%) 10,000 Fannie Mae.............................. 795,000 ----------- FINANCIAL CONGLOMERATES (1.2%) 23,000 J.P. Morgan Chase & Co.................. 836,050 ----------- FOOD: MAJOR DIVERSIFIED (1.3%) 40,000 Sara Lee Corp........................... 889,200 ----------- FOOD: MEAT/FISH/DAIRY (1.2%) 35,000 ConAgra Foods Inc....................... 831,950 ----------- HOUSEHOLD/PERSONAL CARE (1.0%) 21,665 Estee Lauder Companies, Inc. (The) (Class A).............................. 694,580 ----------- NUMBER OF SHARES VALUE - ---------------------------------------------------------------- INDUSTRIAL CONGLOMERATES (3.4%) 25,000 Honeywell International, Inc............ $ 845,500 14,506 Ingersoll-Rand Co....................... 606,496 15,000 United Technologies Corp................ 969,450 ----------- 2,421,446 ----------- INDUSTRIAL SPECIALTIES (0.6%) 8,000 PPG Industries, Inc..................... 413,760 ----------- LIFE/HEALTH INSURANCE (1.2%) 18,000 Lincoln National Corp................... 874,260 ----------- MAJOR BANKS (4.7%) 15,000 Bank of America Corp.................... 944,250 26,000 FleetBoston Financial Corp.............. 949,000 35,000 KeyCorp................................. 851,900 13,125 WestPac Banking Corp. Ltd. (ADR) (Australia)............................ 531,037 ----------- 3,276,187 ----------- MAJOR TELECOMMUNICATIONS (2.4%) 40,000 Sprint Corp. (FON Group)................ 803,200 18,000 Verizon Communications Inc.............. 854,280 ----------- 1,657,480 ----------- OFFICE EQUIPMENT/ SUPPLIES (1.3%) 25,000 Pitney Bowes, Inc....................... 940,250 ----------- OIL & GAS PRODUCTION (2.3%) 22,000 Burlington Resources, Inc............... 825,880 14,000 Kerr-McGee Corp......................... 767,200 ----------- 1,593,080 ----------- OIL REFINING/MARKETING (4.7%) 20,000 Ashland, Inc............................ 921,600 30,000 Marathon Oil Corp....................... 900,000 50,000 Tesoro Petroleum Corp.*................. 655,500 17,000 Ultramar Diamond Shamrock Corp.......... 841,160 ----------- 3,318,260 -----------
SEE NOTES TO FINANCIAL STATEMENTS 85 Morgan Stanley Variable Investment Series - Income Builder PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ---------------------------------------------------------------- PHARMACEUTICALS: MAJOR (4.4%) 17,000 Bristol-Myers Squibb Co................. $ 867,000 20,000 Merck & Co., Inc........................ 1,176,000 30,000 Schering-Plough Corp.................... 1,074,300 ----------- 3,117,300 ----------- REAL ESTATE INVESTMENT TRUSTS (7.8%) 13,000 Alexandria Real Estate Equities, Inc.... 534,300 20,000 Archstone Smith Trust................... 526,000 10,000 Avalonbay Communities, Inc.............. 473,100 10,000 Boston Properties, Inc.................. 380,000 16,000 Equity Office Properties Trust.......... 481,280 10,000 Equity Residential Properties Trust..... 287,100 6,000 General Growth Properties, Inc.......... 232,800 18,000 Healthcare Realty Trust, Inc............ 504,000 15,000 Mack-Cali Realty Corp................... 465,300 20,000 Reckson Associates Realty Corp.......... 467,200 8,000 Rouse Co. (The)......................... 234,320 16,000 Simon Property Group, Inc............... 469,280 10,000 Vornado Realty Trust.................... 416,000 ----------- 5,470,680 ----------- REGIONAL BANKS (1.1%) 12,001 Fifth Third Bancorp..................... 739,022 ----------- SAVINGS BANKS (1.3%) 27,000 Washington Mutual, Inc.................. 882,900 ----------- TELECOMMUNICATION EQUIPMENT (1.2%) 35,000 Nokia Oyj (ADR) (Finland)............... 858,550 ----------- TOBACCO (1.2%) 18,000 Philip Morris Companies, Inc............ 825,300 ----------- NUMBER OF SHARES VALUE - ---------------------------------------------------------------- WIRELESS COMMUNICATIONS (0.0%) 688 Leap Wireless International, Inc.*...... $ 14,427 ----------- Total Common Stocks (COST $33,901,886)..................... 37,642,062 ----------- Convertible Preferred Stocks (10.2%) AUTO PARTS: O.E.M. (0.0%) 12,000 BTI Capital Trust $3.25 - 144A**........ 1,500 ----------- CONTAINERS/PACKAGING (2.1%) 36,000 Sealed Air Corp. (Series A) $2.00....... 1,492,200 ----------- ELECTRIC UTILITIES (2.0%) 53,000 Duke Energy Corp. $17.02 (Units)++...... 1,396,550 ----------- MAJOR BANKS (1.0%) 22,550 National Australia Bank, Ltd. $1.97 (Australia) (Units)++.................. 676,500 ----------- PULP & PAPER (1.5%) 20,000 Boise Cascade $3.75..................... 1,089,000 ----------- RAILROADS (1.5%) 22,400 Union Pacific Capital Trust $3.13....... 1,069,600 ----------- REAL ESTATE INVESTMENT TRUSTS (1.0%) 9,000 Equity Residential Properties Trust (Series E) $1.75....................... 285,750 13,000 SL Green Realty Corp. $2.00............. 413,400 ----------- 699,150 ----------- TELECOMMUNICATION EQUIPMENT (1.1%) 16,250 Motorola Inc. $3.50..................... 759,525 ----------- Total Convertible Preferred Stocks (COST $7,721,878)...................... 7,184,025 -----------
SEE NOTES TO FINANCIAL STATEMENTS 86 Morgan Stanley Variable Investment Series - Income Builder PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN THOUSANDS VALUE - ---------------------------------------------------------------- Convertible Bonds (18.6%) CABLE/SATELLITE TV (4.0%) $ 1,800 Adelphia Communications Corp. 6.00% due 02/15/06..................... $ 1,563,750 1,445 EchoStar Communications Corp. 4.875% due 01/07/07.................... 1,280,631 ----------- 2,844,381 ----------- CONTRACT DRILLING (1.4%) 2,000 Diamond Offshore Drilling Inc. 0.00% due 06/06/20..................... 1,002,500 ----------- DEPARTMENT STORES (1.6%) 1,000 Penney (J.C.) Co., Inc. - 144A** 5.00% due 10/15/08..................... 1,117,500 ----------- ELECTRONIC EQUIPMENT/ INSTRUMENTS (1.2%) 1,000 SCI Systems, Inc. 3.00% due 03/15/07..................... 823,750 ----------- ELECTRONIC PRODUCTION EQUIPMENT (1.6%) 960 Photronics Inc. 6.00% due 06/01/04..................... 1,134,000 ----------- INDUSTRIAL MACHINERY (0.3%) 200 Thermo Fibertek, Inc. - 144A** 4.50% due 07/15/04..................... 189,000 ----------- INFORMATION TECHNOLOGY SERVICES (1.5%) 1,750 Aether Systems, Inc. 6.00% due 03/22/05..................... 1,032,500 ----------- MAJOR TELECOMMUNICATIONS (3.0%) 800 Bell Atlantic Financial Service - 144A** (exchangeable into Cable & Wireless Communications common stock) 4.25% due 09/15/05..................... 796,000 PRINCIPAL AMOUNT IN THOUSANDS VALUE - ---------------------------------------------------------------- $ 1,300 Bell Atlantic Financial Service - 144A** (exchangeable into Telecom Corporation of New Zealand common stock) 5.75% due 04/01/03..................... $ 1,321,125 ----------- 2,117,125 ----------- PACKAGED SOFTWARE (1.3%) 1,125 Mercury Interactive Corp. 4.75% due 07/01/07..................... 909,844 ----------- SERVICES TO THE HEALTH INDUSTRY (1.4%) 1,000 Healthsouth Corp. 3.25% due 04/01/03..................... 948,750 ----------- TELECOMMUNICATION EQUIPMENT (1.3%) 1,100 RF Micro Systems Devices - 144A** 3.75% due 08/15/05..................... 903,375 ----------- Total Convertible Bonds (COST $13,325,428)..................... 13,022,725 ----------- Corporate Bonds (13.4%) ADVERTISING/MARKETING SERVICES (1.5%) 1,000 Lamar Media Corp. 9.625% due 12/01/06.................... 1,046,250 ----------- APPAREL/FOOTWEAR (1.7%) 1,250 Tommy Hilfiger USA Inc. 6.85% due 06/01/08..................... 1,189,845 ----------- BROADCASTING (3.0%) 2,000 Clear Channel Communications (Series B) 8.75% due 06/15/07..................... 2,080,000 ----------- FOOD DISTRIBUTORS (1.3%) 1,000 Fleming Companies, Inc. (Series B) 10.625% due 07/31/07................... 955,000 -----------
SEE NOTES TO FINANCIAL STATEMENTS 87 Morgan Stanley Variable Investment Series - Income Builder PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN THOUSANDS VALUE - ---------------------------------------------------------------- OIL & GAS PRODUCTION (1.3%) $ 900 KCS Energy, Inc. (Series B) 11.00% due 01/15/03.................... $ 895,500 ----------- OTHER METALS/MINERALS (3.6%) 2,500 Cyprus Amax Minerals Inc. 10.125% due 04/01/02................... 2,528,115 ----------- TRUCKS/CONSTRUCTION/FARM MACHINERY (1.0%) 700 Navistar International (Series B) 9.375% due 06/01/06.................... 735,000 ----------- Total Corporate Bonds (COST $9,547,541)...................... 9,429,710 ----------- Short-Term Investment (a) (5.0%) U.S. Government Agency 3,500 Federal Home Loan Mortgage Corp. 1.51% due 01/02/02 (COST $3,499,853)...................... 3,499,853 -----------
Total Investments (COST $67,996,586) (b)................. 100.8% 70,778,375 Liabilities in Excess of Other Assets... (0.8) (571,390) ------ ----------- Net Assets.............................. 100.0% $70,206,985 ====== ===========
- --------------------------------------------------- ADR AMERICAN DEPOSITORY RECEIPT. * NON-INCOME PRODUCING SECURITY. ** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. ++ CONSISTS OF ONE OR MORE CLASS OF SECURITIES TRADED TOGETHER AS A UNIT; PREFERRED STOCKS WITH ATTACHED WARRANTS. (A) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $6,237,894 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $3,456,105, RESULTING IN NET UNREALIZED APPRECIATION OF $2,781,789. SEE NOTES TO FINANCIAL STATEMENTS 88 Morgan Stanley Variable Investment Series - Dividend Growth PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001
NUMBER OF SHARES VALUE - -------------------------------------------------------------------- Common Stocks (98.7%) AEROSPACE & DEFENSE (1.6%) 780,000 Goodrich Corp........................... $ 20,763,600 -------------- ALUMINUM (2.9%) 550,000 Alcan, Inc. (Canada).................... 19,761,500 520,000 Alcoa, Inc.............................. 18,486,000 -------------- 38,247,500 -------------- APPAREL/FOOTWEAR (1.5%) 520,000 VF Corp................................. 20,285,200 -------------- AUTO PARTS: O.E.M. (4.6%) 1,505,000 Delphi Automotive Systems Corp.......... 20,558,300 248,000 Johnson Controls, Inc................... 20,026,000 515,000 TRW, Inc................................ 19,075,600 -------------- 59,659,900 -------------- BEVERAGES: NON-ALCOHOLIC (1.4%) 394,000 Coca-Cola Co............................ 18,577,100 -------------- CHEMICALS: MAJOR DIVERSIFIED (2.9%) 545,000 Dow Chemical Co......................... 18,410,100 460,000 Du Pont (E.I.) de Nemours & Co., Inc.... 19,554,600 -------------- 37,964,700 -------------- COMPUTER PROCESSING HARDWARE (2.9%) 880,000 Hewlett-Packard Co...................... 18,075,200 167,000 International Business Machines Corp.... 20,200,320 -------------- 38,275,520 -------------- DEPARTMENT STORES (1.5%) 425,000 Sears, Roebuck & Co..................... 20,247,000 -------------- DISCOUNT STORES (1.7%) 535,000 Target Corp............................. 21,961,750 -------------- ELECTRIC UTILITIES (7.4%) 330,000 Dominion Resources, Inc................. 19,833,000 415,000 Exelon Corp............................. 19,870,200 NUMBER OF SHARES VALUE - -------------------------------------------------------------------- 560,000 FirstEnergy Corp........................ $ 19,588,800 340,000 FPL Group, Inc.......................... 19,176,000 720,000 Reliant Energy, Inc..................... 19,094,400 -------------- 97,562,400 -------------- ELECTRONICS/ APPLIANCES (1.6%) 285,000 Whirlpool Corp.......................... 20,899,050 -------------- FINANCE/RENTAL/ LEASING (2.9%) 240,000 Fannie Mae.............................. 19,080,000 340,000 Household International, Inc............ 19,699,600 -------------- 38,779,600 -------------- FINANCIAL CONGLOMERATES (2.9%) 410,000 Citigroup, Inc.......................... 20,696,800 500,000 J.P. Morgan Chase & Co.................. 18,175,000 -------------- 38,871,800 -------------- FOOD DISTRIBUTORS (3.0%) 930,000 Supervalu, Inc.......................... 20,571,600 740,000 SYSCO Corp.............................. 19,402,800 -------------- 39,974,400 -------------- FOOD: MAJOR DIVERSIFIED (1.5%) 400,000 PepsiCo, Inc............................ 19,476,000 -------------- FOREST PRODUCTS (1.5%) 370,000 Weyerhaeuser Co......................... 20,009,600 -------------- HOUSEHOLD/PERSONAL CARE (4.4%) 395,000 Avon Products, Inc...................... 18,367,500 325,000 Kimberly-Clark Corp..................... 19,435,000 255,000 Procter & Gamble Co. (The).............. 20,178,150 -------------- 57,980,650 -------------- INDUSTRIAL CONGLOMERATES (7.8%) 500,000 General Electric Co..................... 20,040,000 600,000 Honeywell International, Inc............ 20,292,000
SEE NOTES TO FINANCIAL STATEMENTS 89 Morgan Stanley Variable Investment Series - Dividend Growth PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - -------------------------------------------------------------------- 172,000 Minnesota Mining & Manufacturing Co..... $ 20,332,120 358,000 Tyco International Ltd. (Bermuda)....... 21,086,200 325,000 United Technologies Corp................ 21,004,750 -------------- 102,755,070 -------------- INDUSTRIAL SPECIALTIES (1.5%) 385,000 PPG Industries, Inc..................... 19,912,200 -------------- INFORMATION TECHNOLOGY SERVICES (1.5%) 295,000 Electronic Data Systems Corp............ 20,222,250 -------------- INTEGRATED OIL (4.4%) 425,000 BP PLC (ADR) (United Kingdom)........... 19,766,750 490,000 Exxon Mobil Corp........................ 19,257,000 390,000 Royal Dutch Petroleum Co. (ADR) (Netherlands).......................... 19,117,800 -------------- 58,141,550 -------------- LIFE/HEALTH INSURANCE (4.5%) 730,000 Aegon N.V. (ARS) (Netherlands).......... 19,542,100 420,000 Jefferson-Pilot Corp.................... 19,433,400 410,000 Lincoln National Corp................... 19,913,700 -------------- 58,889,200 -------------- MAJOR BANKS (2.9%) 310,000 Bank of America Corp.................... 19,514,500 790,000 KeyCorp................................. 19,228,600 -------------- 38,743,100 -------------- MAJOR TELECOMMUNICATIONS (1.4%) 385,000 Verizon Communications, Inc............. 18,272,100 -------------- MOTOR VEHICLES (3.4%) 470,000 DaimlerChrysler AG (Germany)............ 19,584,900 NUMBER OF SHARES VALUE - -------------------------------------------------------------------- 318,100 Ford Motor Co........................... $ 5,000,532 410,000 General Motors Corp..................... 19,926,000 -------------- 44,511,432 -------------- OFFICE EQUIPMENT/ SUPPLIES (1.4%) 500,000 Pitney Bowes, Inc....................... 18,805,000 -------------- OIL & GAS PIPELINES (1.6%) 465,000 El Paso Corp............................ 20,743,650 -------------- OIL & GAS PRODUCTION (1.5%) 355,000 Kerr-McGee Corp......................... 19,454,000 -------------- OIL REFINING/ MARKETING (3.0%) 685,000 Marathon Oil Corp....................... 20,550,000 500,000 Sunoco, Inc............................. 18,670,000 -------------- 39,220,000 -------------- PHARMACEUTICALS: MAJOR (5.7%) 312,000 American Home Products Corp............. 19,144,320 365,000 Bristol-Myers Squibb Co................. 18,615,000 450,000 Pharmacia Corp.......................... 19,192,500 515,000 Schering-Plough Corp.................... 18,442,150 -------------- 75,393,970 -------------- PULP & PAPER (3.0%) 500,000 International Paper Co.................. 20,175,000 640,000 Mead Corp............................... 19,769,600 -------------- 39,944,600 -------------- RAILROADS (3.0%) 695,000 Burlington Northern Santa Fe Corp....... 19,828,350 565,000 CSX Corp................................ 19,803,250 -------------- 39,631,600 -------------- RECREATIONAL PRODUCTS (1.4%) 618,000 Eastman Kodak Co........................ 18,187,740 --------------
SEE NOTES TO FINANCIAL STATEMENTS 90 Morgan Stanley Variable Investment Series - Dividend Growth PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - -------------------------------------------------------------------- SEMICONDUCTORS (1.4%) 605,000 Intel Corp.............................. $ 19,027,250 -------------- TRUCKS/CONSTRUCTION/FARM MACHINERY (3.1%) 385,000 Caterpillar, Inc........................ 20,116,250 470,000 Deere & Co.............................. 20,520,200 -------------- 40,636,450 -------------- Total Common Stocks (COST $1,148,027,632).................. 1,302,026,932 -------------- PRINCIPAL AMOUNT IN THOUSANDS - ---------- Short-Term Investments (1.0%) U.S. Government Agency (a) (1.0%) $ 13,000 Federal Home Loan Mortgage Corp. 1.51% due 01/02/02 (COST $12,999,455)..................... 12,999,455 -------------- Repurchase Agreement (0.0%) 326 The Bank of New York 0.875% due 01/02/02 (dated 12/31/01; proceeds $325,572)(b) (COST $325,556)........................ 325,556 -------------- Total Short-Term Investments (COST $13,325,011)..................... 13,325,011
Total Investments (COST $1,161,352,643) (c).............. 99.7% 1,315,351,943 Other Assets in Excess of Liabilities... 0.3 3,904,559 ------ -------------- Net Assets.............................. 100.0% $1,319,256,502 ====== ==============
- --------------------------------------------------- ADR AMERICAN DEPOSITORY RECEIPT. ARS AMERICAN REGISTERED SHARES. (a) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (b) COLLATERALIZED BY $331,806 FEDERAL HOME LOAN MORTGAGE CORP 5.775% DUE 06/26/06 VALUED AT $332,068. (c) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $212,296,288 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $58,296,988, RESULTING IN NET UNREALIZED APPRECIATION OF $153,999,300. SEE NOTES TO FINANCIAL STATEMENTS 91 Morgan Stanley Variable Investment Series - Capital Growth PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001
NUMBER OF SHARES VALUE - ----------------------------------------------------------------- Common Stocks (92.9%) ADVERTISING/MARKETING SERVICES (0.8%) 30,000 Interpublic Group of Companies, Inc..... $ 886,200 ------------ AEROSPACE & DEFENSE (2.1%) 10,000 Lockheed Martin Corp.................... 466,700 5,000 Northrop Grumman Corp................... 504,050 55,000 Titan Corp. (The)*...................... 1,372,250 ------------ 2,343,000 ------------ AIR FREIGHT/COURIERS (1.4%) 30,000 FedEx Corp.*............................ 1,556,400 ------------ BEVERAGES: NON-ALCOHOLIC (2.4%) 10,000 Coca-Cola Co............................ 471,500 37,500 Coca-Cola Enterprises Inc............... 710,250 60,000 Pepsi Bottling Group, Inc. (The)........ 1,410,000 ------------ 2,591,750 ------------ BIOTECHNOLOGY (2.6%) 25,000 Cephalon, Inc.*......................... 1,889,625 35,000 Immunex Corp.*.......................... 969,850 ------------ 2,859,475 ------------ CATALOG/SPECIALTY DISTRIBUTION (1.2%) 27,500 Lands' End, Inc.*....................... 1,379,400 ------------ COMPUTER COMMUNICATIONS (1.2%) 75,000 Cisco Systems, Inc.*.................... 1,358,250 ------------ COMPUTER PERIPHERALS (1.4%) 16,500 Advanced Digital Information Corp.*..... 264,660 60,000 Network Appliance, Inc.*................ 1,312,200 ------------ 1,576,860 ------------ COMPUTER PROCESSING HARDWARE (3.1%) 35,000 Apple Computer, Inc.*................... 766,500 NUMBER OF SHARES VALUE - ----------------------------------------------------------------- 55,000 Dell Computer Corp.*.................... $ 1,494,900 90,000 Sun Microsystems, Inc.*................. 1,110,600 ------------ 3,372,000 ------------ CONTAINERS/ PACKAGING (1.6%) 25,000 Ball Corp............................... 1,767,500 ------------ CONTRACT DRILLING (1.6%) 90,000 Rowan Companies, Inc.*.................. 1,743,300 ------------ DATA PROCESSING SERVICES (1.6%) 16,500 Affiliated Computer Services, Inc. (Class A)*............................. 1,751,145 ------------ DEPARTMENT STORES (4.0%) 30,000 Kohl's Corp.*........................... 2,113,200 85,000 Penney (J.C.) Co., Inc.................. 2,286,500 ------------ 4,399,700 ------------ DISCOUNT STORES (2.2%) 55,000 Costco Wholesale Corp.*................. 2,440,900 ------------ ELECTRONIC COMPONENTS (0.9%) 21,000 Amphenol Corp. (Class A)*............... 1,009,050 ------------ ELECTRONICS/APPLIANCE STORES (2.1%) 90,000 Circuit City Stores, Inc. - Circuit City Group............................. 2,335,500 ------------ FINANCE/RENTAL/ LEASING (1.3%) 17,500 USA Education Inc....................... 1,470,350 ------------ FINANCIAL CONGLOMERATES (0.3%) 9,400 Prudential Financial, Inc.*............. 311,986 ------------ FINANCIAL PUBLISHING/ SERVICES (2.1%) 80,000 SunGard Data Systems Inc.*.............. 2,314,400 ------------ HOME BUILDING (0.6%) 15,000 Lennar Corp............................. 702,300 ------------
SEE NOTES TO FINANCIAL STATEMENTS 92 Morgan Stanley Variable Investment Series - Capital Growth PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ----------------------------------------------------------------- HOME FURNISHINGS (0.6%) 27,500 Leggett & Platt, Inc.................... $ 632,500 ------------ HOSPITAL/NURSING MANAGEMENT (0.3%) 5,500 Tenet Healthcare Corp.*................. 322,960 ------------ HOUSEHOLD/PERSONAL CARE (1.9%) 70,000 International Flavors & Fragrances, Inc.................................... 2,079,700 ------------ INDUSTRIAL CONGLOMERATES (1.9%) 35,000 Tyco International Ltd. (Bermuda)....... 2,061,500 ------------ INFORMATION TECHNOLOGY SERVICES (1.4%) 45,000 McAfee.com Corp.*....................... 1,525,950 ------------ INSURANCE BROKERS/ SERVICES (1.8%) 85,000 Willis Group Holdings Ltd.*............. 2,001,750 ------------ INTEGRATED OIL (0.4%) 5,000 ChevronTexaco Corp...................... 448,050 ------------ INTERNET SOFTWARE/ SERVICES (0.7%) 25,000 BEA Systems, Inc.*...................... 385,250 35,000 Earthlink, Inc.*........................ 425,950 ------------ 811,200 ------------ INVESTMENT BANKS/ BROKERS (2.1%) 25,000 Goldman Sachs Group, Inc. (The)......... 2,318,750 ------------ MAJOR BANKS (1.7%) 30,000 Bank of America Corp.................... 1,888,500 ------------ MEDICAL DISTRIBUTORS (0.7%) 10,000 Henry Schein, Inc.*..................... 370,300 10,000 McKesson HBOC, Inc...................... 374,000 ------------ 744,300 ------------ MEDICAL SPECIALTIES (5.3%) 55,000 Cytyc Corp.*............................ 1,435,500 NUMBER OF SHARES VALUE - ----------------------------------------------------------------- 30,000 Guidant Corp.*.......................... $ 1,494,000 17,500 St. Jude Medical, Inc.*................. 1,358,875 22,000 Varian Medical Systems, Inc.*........... 1,567,720 ------------ 5,856,095 ------------ MISCELLANEOUS COMMERCIAL SERVICES (0.9%) 85,000 IKON Office Solutions, Inc.............. 993,650 ------------ OIL & GAS PRODUCTION (0.7%) 30,000 Ocean Energy, Inc....................... 576,000 12,500 XTO Energy Inc.......................... 218,750 ------------ 794,750 ------------ OILFIELD SERVICES/ EQUIPMENT (1.5%) 30,000 Smith International, Inc.*.............. 1,608,600 ------------ OTHER CONSUMER SERVICES (1.0%) 25,000 Apollo Group, Inc. (Class A)*........... 1,125,250 ------------ PACKAGED SOFTWARE (5.7%) 20,000 Concord Communications, Inc.*........... 413,000 55,000 i2 Technologies, Inc.*.................. 434,500 35,000 Intuit Inc.*............................ 1,496,600 35,000 Microsoft Corp.*........................ 2,319,450 65,000 Network Associates, Inc.*............... 1,680,250 ------------ 6,343,800 ------------ PROPERTY - CASUALTY INSURERS (5.5%) 55,000 ACE, Ltd. (Bermuda)..................... 2,208,250 22,500 Everest Re Group, Ltd. (Bermuda)........ 1,590,750 25,000 XL Capital Ltd. (Class A) (Bermuda)..... 2,284,000 ------------ 6,083,000 ------------ PULP & PAPER (1.0%) 40,000 Georgia-Pacific Group................... 1,104,400 ------------ RAILROADS (1.9%) 60,000 CSX Corp................................ 2,103,000 ------------
SEE NOTES TO FINANCIAL STATEMENTS 93 Morgan Stanley Variable Investment Series - Capital Growth PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ----------------------------------------------------------------- RECREATIONAL PRODUCTS (2.5%) 15,000 International Game Technology*.......... $ 1,024,500 100,000 Mattel, Inc............................. 1,720,000 ------------ 2,744,500 ------------ REGIONAL BANKS (2.7%) 20,000 Fifth Third Bancorp..................... 1,231,600 100,000 Hibernia Corp. (Class A)................ 1,779,000 ------------ 3,010,600 ------------ RESTAURANTS (2.7%) 55,000 AFC Enterprises, Inc.*.................. 1,561,450 50,000 Wendy's International, Inc.............. 1,458,500 ------------ 3,019,950 ------------ SAVINGS BANKS (0.2%) 8,000 Charter One Financial, Inc.............. 217,200 ------------ SEMICONDUCTORS (6.4%) 35,000 Applied Micro Circuits Corp.*........... 396,200 17,500 Broadcom Corp. (Class A)*............... 717,150 105,000 Conexant Systems, Inc.*................. 1,507,800 45,000 Fairchild Semiconductor Corp. (Class A)*............................. 1,269,000 65,000 Intel Corp.............................. 2,044,250 35,000 National Semiconductor Corp.*........... 1,077,650 ------------ 7,012,050 ------------ SPECIALTY STORES (2.6%) 35,000 Michaels Stores, Inc.*.................. 1,153,250 90,000 Staples, Inc.*.......................... 1,683,000 ------------ 2,836,250 ------------ TELECOMMUNICATION EQUIPMENT (1.1%) 35,000 Polycom, Inc.*.......................... 1,204,000 ------------ NUMBER OF SHARES VALUE - ----------------------------------------------------------------- WIRELESS COMMUNICATIONS (3.2%) 70,000 Sprint Corp. (PCS Group)*............... $ 1,708,700 70,000 Vodafone Group PLC (ADR) (United Kingdom)............................... 1,797,600 ------------ 3,506,300 ------------ Total Common Stocks (COST $93,327,298)..................... 102,568,021 ------------ PRINCIPAL AMOUNT IN THOUSANDS - --------- Short-Term Investment (a) (8.0%) U.S. Government Agency $ 8,800 Federal Home Loan Mortgage Corp. 1.51% due 01/02/02 (COST $8,799,631)...................... 8,799,631 ------------
Total Investments (COST $102,126,929) (b)................ 100.9% 111,367,652 Liabilities in Excess of Other Assets... (0.9) (989,368) ------ ------------ Net Assets.............................. 100.0% $110,378,284 ====== ============
- --------------------------------------------------- ADR AMERICAN DEPOSITORY RECEIPT. * NON-INCOME PRODUCING SECURITY. (a) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $10,020,038 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $779,315, RESULTING IN NET UNREALIZED APPRECIATION OF $9,240,723. SEE NOTES TO FINANCIAL STATEMENTS 94 Morgan Stanley Variable Investment Series - Global Dividend Growth PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001
NUMBER OF SHARES VALUE - ------------------------------------------------------------------ Common Stocks and Warrants (95.7%) Australia (3.4%) CONTAINERS/PACKAGING 750,000 Amcor Ltd............................... $ 2,736,484 ------------ MAJOR BANKS 280,000 Australia & New Zealand Banking Group Ltd.................................... 2,544,621 160,000 Commonwealth Bank of Australia.......... 2,444,541 ------------ 4,989,162 ------------ OIL & GAS PRODUCTION 725,000 Santos Ltd.............................. 2,293,798 ------------ Total Australia......................... 10,019,444 ------------ Belgium (0.9%) FINANCIAL CONGLOMERATES 105,000 Fortis.................................. 2,726,210 ------------ Canada (2.6%) ALUMINUM 50,000 Alcan Inc............................... 1,794,236 ------------ FINANCIAL CONGLOMERATES 115,000 Brascan Corp. (Class A)................. 2,076,008 ------------ MAJOR BANKS 70,000 Toronto-Dominion Bank................... 1,805,601 ------------ OIL & GAS PIPELINES 70,000 Enbridge Inc............................ 1,907,572 ------------ Total Canada............................ 7,583,417 ------------ Finland (1.5%) INFORMATION TECHNOLOGY SERVICES 80,000 TietoEnator Oyj......................... 2,119,866 ------------ TELECOMMUNICATION EQUIPMENT 87,000 Nokia Oyj............................... 2,244,136 ------------ Total Finland........................... 4,364,002 ------------ NUMBER OF SHARES VALUE - ------------------------------------------------------------------ France (6.6%) AUTOMOTIVE AFTERMARKET 70,000 Compagnie Generale des Etablissements Michelin (B Shares).................... $ 2,310,030 ------------ CONSTRUCTION MATERIALS 27,000 Lafarge S.A............................. 2,522,730 ------------ CONTAINERS/PACKAGING 17,000 Compagnie de Saint-Gobain............... 2,566,552 ------------ MAJOR BANKS 29,000 BNP Paribas S.A......................... 2,595,945 42,000 Societe Generale (A Shares)............. 2,351,181 ------------ 4,947,126 ------------ MISCELLANEOUS MANUFACTURING 70,000 Compagnie Generale d'Industrie et de Participations......................... 2,338,088 60,000 Compagnie Generale d'Industrie et de Participations (Warrants due 03/31/03)*............................. 24,583 ------------ 2,362,671 ------------ MULTI-LINE INSURANCE 45,000 Assurances Generales de France.......... 2,160,393 ------------ OIL REFINING/MARKETING 18,000 TotalFinaElf S.A........................ 2,571,629 ------------ Total France............................ 19,441,131 ------------ Germany (5.8%) APPAREL/FOOTWEAR 37,050 Adidas-Salomon AG....................... 2,755,536 ------------ CHEMICALS: MAJOR DIVERSIFIED 70,000 BASF AG................................. 2,609,306 60,000 Bayer AG................................ 1,907,879 ------------ 4,517,185 ------------
SEE NOTES TO FINANCIAL STATEMENTS 95 Morgan Stanley Variable Investment Series - Global Dividend Growth PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ------------------------------------------------------------------ INDUSTRIAL CONGLOMERATES 45,000 E. ON AG................................ $ 2,340,760 115,000 MAN AG.................................. 2,437,846 40,000 Siemens AG.............................. 2,666,756 ------------ 7,445,362 ------------ MOTOR VEHICLES 60,000 DaimlerChrysler AG (Registered Shares)................................ 2,570,560 ------------ Total Germany........................... 17,288,643 ------------ Hong Kong (2.7%) ELECTRIC UTILITIES 570,000 CLP Holdings Ltd........................ 2,174,317 ------------ FINANCIAL CONGLOMERATES 150,000 HSBC Holdings PLC....................... 1,755,033 ------------ REAL ESTATE DEVELOPMENT 205,000 Cheung Kong (Holdings) Ltd.............. 2,129,119 235,000 Sun Hung Kai Properties Ltd............. 1,898,320 ------------ 4,027,439 ------------ Total Hong Kong......................... 7,956,789 ------------ Ireland (0.9%) MAJOR BANKS 230,000 Allied Irish Banks PLC.................. 2,663,193 ------------ Italy (3.0%) MAJOR BANKS 200,000 Sanpaolo IMI SpA........................ 2,146,587 550,000 Unicredito Italiano SpA................. 2,209,381 ------------ 4,355,968 ------------ MAJOR TELECOMMUNICATIONS 465,000 Telecom Italia SpA...................... 2,485,053 ------------ WIRELESS COMMUNICATIONS 550,000 Telecom Italia Mobile SpA............... 2,106,506 ------------ Total Italy............................. 8,947,527 ------------ NUMBER OF SHARES VALUE - ------------------------------------------------------------------ Japan (8.7%) BEVERAGES: ALCOHOLIC 270,000 Kirin Brewery Co., Ltd.................. $ 1,920,665 ------------ DEPARTMENT STORES 140,000 Marui Co., Ltd.......................... 1,647,434 ------------ ELECTRICAL PRODUCTS 175,000 Matsushita Electric Works, Ltd.......... 1,433,533 ------------ ELECTRONIC COMPONENTS 32,000 TDK Corp................................ 1,501,367 ------------ ELECTRONIC EQUIPMENT/ INSTRUMENTS 25,000 Kyocera Corp............................ 1,622,760 100,000 Matsushita Electric Industrial Co., Ltd.................................... 1,277,710 140,000 NEC Corp................................ 1,421,045 ------------ 4,321,515 ------------ ELECTRONICS/APPLIANCES 160,000 Sharp Corp.............................. 1,862,132 32,000 Sony Corp............................... 1,455,208 ------------ 3,317,340 ------------ FINANCE/RENTAL/LEASING 22,000 Acom Co., Ltd........................... 1,595,050 ------------ MOTOR VEHICLES 50,000 Honda Motor Co.......................... 1,985,272 60,000 Toyota Motor Corp....................... 1,512,299 ------------ 3,497,571 ------------ PHARMACEUTICALS: MAJOR 40,500 Takeda Chemical Industries, Ltd......... 1,823,299 ------------ PHARMACEUTICALS: OTHER 90,000 Taisho Pharmaceutical Co., Ltd.......... 1,407,531 ------------ RECREATIONAL PRODUCTS 11,000 Nintendo Co., Ltd....................... 1,916,566 ------------
SEE NOTES TO FINANCIAL STATEMENTS 96 Morgan Stanley Variable Investment Series - Global Dividend Growth PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ------------------------------------------------------------------ WIRELESS COMMUNICATIONS 120 NTT DoCoMo, Inc......................... $ 1,402,976 ------------ Total Japan............................. 25,784,847 ------------ Netherlands (4.2%) CHEMICALS: SPECIALTY 75,000 DSM NV.................................. 2,739,570 ------------ ELECTRONIC EQUIPMENT/ INSTRUMENTS 90,000 Koninklijke (Royal) Philips Electronics NV..................................... 2,675,841 ------------ FINANCIAL CONGLOMERATES 80,000 ING Groep NV............................ 2,040,772 ------------ FINANCIAL PUBLISHING/ SERVICES 105,000 Wolters Kluwer NV....................... 2,394,202 ------------ FOOD: MAJOR DIVERSIFIED 45,000 Unilever NV............................. 2,639,367 ------------ Total Netherlands....................... 12,489,752 ------------ Singapore (1.3%) AIRLINES 280,000 Singapore Airlines Ltd.................. 1,667,569 ------------ MAJOR BANKS 279,000 DBS Group Holdings Ltd.................. 2,084,569 ------------ Total Singapore......................... 3,752,138 ------------ Spain (2.3%) ELECTRIC UTILITIES 190,000 Iberdrola S.A........................... 2,474,186 ------------ MAJOR BANKS 275,000 Banco Santander Central Hispano, S.A.... 2,304,909 ------------ OIL REFINING/MARKETING 150,000 Repsol-YPF, S.A......................... 2,188,450 ------------ Total Spain............................. 6,967,545 ------------ NUMBER OF SHARES VALUE - ------------------------------------------------------------------ Sweden (2.6%) ELECTRONICS/APPLIANCES 145,000 Electrolux AB (Series B)................ $ 2,171,219 ------------ ENGINEERING & CONSTRUCTION 248,000 Skanska AB (B Shares)................... 1,625,413 ------------ INDUSTRIAL MACHINERY 90,000 Sandvik AB (B Shares)................... 1,933,215 ------------ REGIONAL BANKS 350,000 Nordea AB............................... 1,858,585 ------------ Total Sweden............................ 7,588,432 ------------ Switzerland (6.0%) CHEMICALS: AGRICULTURAL 2,500 Syngenta AG*............................ 129,573 ------------ FINANCIAL CONGLOMERATES 61,500 UBS AG (Registered Shares)*............. 3,105,948 ------------ FOOD: MAJOR DIVERSIFIED 15,000 Nestle S.A. (Registered Shares)......... 3,200,145 ------------ MAJOR TELECOMMUNICATIONS 11,000 Swisscom AG (Registered Shares)......... 3,049,479 ------------ OTHER CONSUMER SPECIALTIES 130,000 Compagnie Financiere Richmont AG (A Units)++............................... 2,416,983 ------------ PHARMACEUTICALS: MAJOR 82,000 Novartis AG (Registered Shares)......... 2,965,106 ------------ PROPERTY - CASUALTY INSURERS 30,000 Swiss Re (Registered Shares)............ 3,019,345 ------------ Total Switzerland....................... 17,886,579 ------------ United Kingdom (11.0%) AEROSPACE & DEFENSE 500,000 BAE Systems PLC......................... 2,252,696 ------------
SEE NOTES TO FINANCIAL STATEMENTS 97 Morgan Stanley Variable Investment Series - Global Dividend Growth PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ------------------------------------------------------------------ AIRLINES 745,000 British Airways PLC..................... $ 2,114,768 ------------ APPAREL/FOOTWEAR RETAIL 160,000 Next PLC................................ 2,084,562 ------------ BEVERAGES: ALCOHOLIC 220,000 Diageo PLC.............................. 2,513,994 ------------ CONSTRUCTION MATERIALS 320,000 Hanson PLC.............................. 2,208,006 ------------ ELECTRIC UTILITIES 225,000 PowerGen PLC............................ 2,472,870 255,000 United Utilities PLC.................... 2,284,757 ------------ 4,757,627 ------------ ELECTRONIC COMPONENTS 1,550,000 Cookson Group PLC....................... 2,154,800 ------------ HOTELS/RESORTS/CRUISELINES 250,000 Six Continents PLC...................... 2,474,690 ------------ MAJOR BANKS 95,000 Royal Bank of Scotland Group PLC........ 2,312,234 ------------ MOVIES/ENTERTAINMENT 770,000 Rank Group PLC.......................... 2,578,045 ------------ STEEL 2,450,000 Corus Group PLC*........................ 2,567,855 ------------ TOBACCO 260,000 British American Tobacco PLC............ 2,204,658 ------------ WATER UTILITIES 215,000 Severn Trent PLC........................ 2,250,294 ------------ Total United Kingdom.................... 32,474,229 ------------ United States (32.2%) AEROSPACE & DEFENSE 75,000 Boeing Co............................... 2,908,500 ------------ ALUMINUM 80,000 Alcoa, Inc.............................. 2,844,000 ------------ NUMBER OF SHARES VALUE - ------------------------------------------------------------------ CHEMICALS: MAJOR DIVERSIFIED 84,000 Dow Chemical Co. (The).................. $ 2,837,520 ------------ COMPUTER PROCESSING HARDWARE 260,000 Compaq Computer Corp.................... 2,537,600 135,000 Hewlett-Packard Co...................... 2,772,900 26,000 International Business Machines Corp.... 3,144,960 ------------ 8,455,460 ------------ DEPARTMENT STORES 68,000 Sears, Roebuck & Co..................... 3,239,520 ------------ DISCOUNT STORES 80,000 Target Corp............................. 3,284,000 ------------ ELECTRIC UTILITIES 70,706 FirstEnergy Corp........................ 2,473,296 55,000 FPL Group, Inc.......................... 3,102,000 ------------ 5,575,296 ------------ ENGINEERING & CONSTRUCTION 67,000 Fluor Corp.............................. 2,505,800 ------------ FINANCIAL CONGLOMERATES 60,006 Citigroup, Inc.......................... 3,029,103 ------------ FOOD RETAIL 90,000 Albertson's, Inc........................ 2,834,100 ------------ INDUSTRIAL CONGLOMERATES 95,000 Honeywell International, Inc............ 3,212,900 25,000 Minnesota Mining & Manufacturing Co..... 2,955,250 ------------ 6,168,150 ------------ INFORMATION TECHNOLOGY SERVICES 45,000 Electronic Data Systems Corp............ 3,084,750 ------------ INTEGRATED OIL 33,000 ChevronTexaco Corp...................... 2,957,130 ------------
SEE NOTES TO FINANCIAL STATEMENTS 98 Morgan Stanley Variable Investment Series - Global Dividend Growth PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ------------------------------------------------------------------ MAJOR BANKS 47,000 Bank of America Corp.................... $ 2,958,650 125,000 KeyCorp................................. 3,042,500 ------------ 6,001,150 ------------ MAJOR TELECOMMUNICATIONS 65,000 SBC Communications, Inc................. 2,546,050 130,000 Sprint Corp. (FON Group)................ 2,610,400 55,000 Verizon Communications Inc.............. 2,610,300 ------------ 7,766,750 ------------ MOTOR VEHICLES 40,654 Ford Motor Co........................... 639,081 ------------ OIL REFINING/MARKETING 67,000 Ashland, Inc............................ 3,087,360 105,000 Marathon Oil Corp....................... 3,150,000 ------------ 6,237,360 ------------ PACKAGED SOFTWARE 83,000 Computer Associates International, Inc.................................... 2,862,670 ------------ PHARMACEUTICALS: MAJOR 50,000 Bristol-Myers Squibb Co................. 2,550,000 45,000 Merck & Co., Inc........................ 2,646,000 ------------ 5,196,000 ------------ PULP & PAPER 75,000 International Paper Co.................. 3,026,250 ------------ RECREATIONAL PRODUCTS 84,000 Eastman Kodak Co........................ 2,472,120 ------------ SAVINGS BANKS 80,000 Washington Mutual, Inc.................. 2,616,000 ------------ SEMICONDUCTORS 90,000 Intel Corp.............................. 2,830,500 ------------ TOBACCO 60,000 Philip Morris Companies, Inc............ 2,751,000 ------------ NUMBER OF SHARES VALUE - ------------------------------------------------------------------ TRUCKS/CONSTRUCTION/FARM MACHINERY 70,000 Deere & Co.............................. $ 3,056,200 ------------ Total United States..................... 95,178,410 ------------ Total Common Stocks and Warrants (COST $278,898,563).................... 283,112,288 ------------ PRINCIPAL AMOUNT IN THOUSANDS - ---------- Short-Term Investment (a) (3.9%) U.S. Government Agency $ 11,500 Federal Home Loan Mortgage Corp. 1.51% due 01/02/02 (COST $11,499,518)..................... 11,499,518 ------------
Total Investments (COST $290,398,081) (b)................ 99.6% 294,611,806 Other Assets in Excess of Liabilities... 0.4 1,040,066 ------ ------------ Net Assets.............................. 100.0% $295,651,872 ====== ============
- --------------------------------------------------- * NON-INCOME PRODUCING SECURITY. ++ CONSISTS OF ONE OR MORE CLASS OF SECURITIES TRADED TOGETHER AS A UNIT; STOCKS WITH ATTACHED WARRANTS. (A) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $37,880,247 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $33,666,522, RESULTING IN NET UNREALIZED APPRECIATION OF $4,213,725. SEE NOTES TO FINANCIAL STATEMENTS 99 Morgan Stanley Variable Investment Series - Global Dividend Growth SUMMARY OF INVESTMENTS / / DECEMBER 31, 2001
PERCENT OF INDUSTRY VALUE NET ASSETS - ------------------------------------------------------------------ Aerospace & Defense..................... $ 5,161,196 1.7% Airlines................................ 3,782,337 1.3 Aluminum................................ 4,638,236 1.6 Apparel/Footwear........................ 2,755,536 0.9 Apparel/Footwear Retail................. 2,084,562 0.7 Automotive Aftermarket.................. 2,310,030 0.8 Beverages: Alcoholic.................... 4,434,659 1.5 Chemicals: Agricultural................. 129,573 0.0 Chemicals: Major Diversified............ 7,354,705 2.5 Chemicals: Specialty.................... 2,739,571 0.9 Computer Processing Hardware............ 8,455,460 2.9 Construction Materials.................. 4,730,736 1.6 Containers/Packaging.................... 5,303,036 1.8 Department Stores....................... 4,886,954 1.6 Discount Stores......................... 3,284,000 1.1 Electric Utilities...................... 14,981,426 5.1 Electrical Products..................... 1,433,533 0.5 Electronic Components................... 3,656,166 1.2 Electronic Equipment/ Instruments....... 6,997,356 2.4 Electronics/Appliances.................. 5,488,559 1.8 Engineering & Construction.............. 4,131,213 1.4 Finance/Rental/Leasing.................. 1,595,050 0.5 Financial Conglomerates................. 14,733,074 5.0 Financial Publishing/Services........... 2,394,202 0.8 Food Retail............................. 2,834,100 0.9 Food: Major Diversified................. 5,839,511 2.0 Hotels/Resorts/Cruiselines.............. 2,474,690 0.8 Industrial Conglomerates................ 13,613,511 4.6 Industrial Machinery.................... 1,933,215 0.7 Information Technology Services......... 5,204,616 1.8 Integrated Oil.......................... 2,957,130 1.0 Major Banks............................. 31,463,913 10.6 Major Telecommunications................ 13,301,282 4.5 Miscellaneous Manufacturing............. 2,362,671 0.8 PERCENT OF INDUSTRY VALUE NET ASSETS - ------------------------------------------------------------------ Motor Vehicles.......................... $ 6,707,212 2.3% Movies/Entertainment.................... 2,578,045 0.9 Multi-Line Insurance.................... 2,160,393 0.7 Oil & Gas Pipelines..................... 1,907,573 0.6 Oil & Gas Production.................... 2,293,798 0.8 Oil Refining/Marketing.................. 10,997,439 3.7 Other Consumer Specialties.............. 2,416,983 0.8 Packaged Software....................... 2,862,670 1.0 Pharmaceuticals: Major.................. 9,984,405 3.4 Pharmaceuticals: Other.................. 1,407,531 0.5 Property - Casualty Insurers............ 3,019,346 1.0 Pulp & Paper............................ 3,026,250 1.0 Real Estate Development................. 4,027,439 1.4 Recreational Products................... 4,388,685 1.5 Regional Banks.......................... 1,858,585 0.6 Savings Banks........................... 2,616,000 0.9 Semiconductors.......................... 2,830,500 0.9 Steel................................... 2,567,855 0.9 Telecommunication Equipment............. 2,244,136 0.8 Tobacco................................. 4,955,658 1.7 Trucks/Construction/Farm Machinery...... 3,056,200 1.0 U.S. Government Agency.................. 11,499,518 3.9 Water Utilities......................... 2,250,294 0.8 Wireless Communications................. 3,509,482 1.2 ------------ ------- $294,611,806 99.6% ============ ======= TYPE OF INVESTMENT - ------------------------------------------------------------------ Common Stocks........................... $283,087,705 95.7% Short-Term Investment................... 11,499,518 3.9 Warrants................................ 24,583 0.0 ------------ ------- $294,611,806 99.6% ============ =======
SEE NOTES TO FINANCIAL STATEMENTS 100 Morgan Stanley Variable Investment Series - European Growth PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001
NUMBER OF SHARES VALUE - ----------------------------------------------------------------- Common Stocks and Warrants (97.6%) Belgium (1.5%) FINANCIAL CONGLOMERATES 195,470 Fortis.................................. $ 5,066,459 ------------ Finland (0.9%) TELECOMMUNICATION EQUIPMENT 121,880 Nokia Oyj+.............................. 3,143,855 ------------ France (16.3%) ADVERTISING/MARKETING SERVICES 168,700 JC Decaux S.A.*......................... 1,885,777 ------------ APPAREL/FOOTWEAR 36,100 LVMH (Louis Vuitton Moet Hennessy)...... 1,469,450 ------------ FOOD RETAIL 76,600 Carrefour S.A........................... 3,984,493 ------------ HOUSEHOLD/PERSONAL CARE 47,320 L'Oreal S.A............................. 3,409,767 ------------ INFORMATION TECHNOLOGY SERVICES 106,900 Cap Gemini S.A.......................... 7,722,004 ------------ MAJOR BANKS 22,270 BNP Paribas S.A......................... 1,993,507 82,500 Credit Agricole S.A..................... 1,307,258 ------------ 3,300,765 ------------ OIL REFINING/MARKETING 52,482 TotalFinaElf S.A.+...................... 7,498,013 ------------ PHARMACEUTICALS: MAJOR 163,906 Aventis S.A.+........................... 11,642,788 38,980 Sanofi-Synthelabo S.A................... 2,909,493 ------------ 14,552,281 ------------ RESTAURANTS 39,560 Sodexho Alliance S.A.................... 1,691,685 ------------ SEMICONDUCTORS 188,360 STMicroelectronics NV................... 6,048,190 ------------ NUMBER OF SHARES VALUE - ----------------------------------------------------------------- WATER UTILITIES 98,700 Vivendi Environnement................... $ 3,293,187 98,700 Vivendi Environnement (Warrants due 03/08/06)*............................. 40,439 ------------ 3,333,626 ------------ Total France............................ 54,896,051 ------------ Germany (5.6%) MAJOR BANKS 92,990 Deutsche Bank AG (Registered Shares).... 6,568,117 ------------ MAJOR TELECOMMUNICATIONS 354,100 Deutsche Telecom AG..................... 6,118,699 ------------ MULTI-LINE INSURANCE 22,866 Muenchener Rueckver AG (Registered Shares)................................ 6,211,858 ------------ Total Germany........................... 18,898,674 ------------ Italy (8.7%) CONSUMER SUNDRIES 317,782 Luxottica Group SpA (ADR)............... 5,237,047 ------------ INTEGRATED OIL 781,490 ENI SpA................................. 9,800,710 ------------ MAJOR BANKS 2,675,100 IntesaBci SpA........................... 6,695,420 1,335,220 Unicredito Italiano SpA................. 5,363,655 ------------ 12,059,075 ------------ MAJOR TELECOMMUNICATIONS 264,160 Telecom Italia SpA...................... 2,258,758 ------------ Total Italy............................. 29,355,590 ------------ Netherlands (7.8%) APPAREL/FOOTWEAR 19,210 Gucci Group NV.......................... 1,634,894 ------------ BEVERAGES: ALCOHOLIC 46,100 Heineken NV............................. 1,748,799 ------------
SEE NOTES TO FINANCIAL STATEMENTS 101 Morgan Stanley Variable Investment Series - European Growth PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ----------------------------------------------------------------- ELECTRONIC EQUIPMENT/ INSTRUMENTS 370,363 Koninklijke (Royal) Philips Electronics NV+.................................... $ 11,011,472 ------------ FINANCIAL CONGLOMERATES 229,400 ING Groep NV............................ 5,851,913 ------------ FOOD RETAIL 143,213 Koninklijke Ahold NV.................... 4,168,655 ------------ MAJOR TELECOMMUNICATIONS 375,100 Koninklijke (Royal) Kpn NV*............. 1,907,720 ------------ Total Netherlands....................... 26,323,453 ------------ Norway (0.5%) MAJOR TELECOMMUNICATIONS 399,500 Telenor ASA............................. 1,721,041 ------------ Portugal (0.6%) MAJOR TELECOMMUNICATIONS 252,000 Portugal Telecom, S.A. (Registered Shares)................................ 1,963,994 ------------ Spain (4.0%) MAJOR TELECOMMUNICATIONS 713,352 Telefonica S.A.*........................ 9,549,801 ------------ MISCELLANEOUS COMMERCIAL SERVICES 654,000 Amadeus Global Travel Distribution S.A. (A Shares)............................. 3,774,715 ------------ Total Spain............................. 13,324,516 ------------ Sweden (3.7%) INDUSTRIAL MACHINERY 175,391 Assa Abloy AB (Series B)................ 2,533,994 ------------ MAJOR BANKS 199,600 Svenska Handelsbanken AB (A Shares)..... 2,941,051 ------------ REGIONAL BANKS 1,310,870 Nordea AB............................... 6,961,038 ------------ Total Sweden............................ 12,436,083 ------------ NUMBER OF SHARES VALUE - ----------------------------------------------------------------- Switzerland (9.8%) CHEMICALS: AGRICULTURAL 104,628 Syngenta AG*............................ $ 5,422,774 ------------ ELECTRICAL PRODUCTS 18,803 Kaba Holding AG (Registered B Shares)... 4,646,074 ------------ FINANCIAL CONGLOMERATES 70,673 UBS AG (Registered Shares)*............. 3,569,214 ------------ FOOD: MAJOR DIVERSIFIED 41,870 Nestle S.A. (Registered Shares)+........ 8,932,670 ------------ OTHER CONSUMER SPECIALTIES 123,200 Compagnie Financiere Richmont AG (A Units)++............................... 2,290,556 ------------ PERSONNEL SERVICES 60,500 Adecco S.A. (Registered Shares)......... 3,290,620 ------------ PHARMACEUTICALS: MAJOR 138,120 Novartis AG (Registered Shares)+........ 4,994,395 ------------ Total Switzerland....................... 33,146,303 ------------ United Kingdom (38.2%) ADVERTISING/MARKETING SERVICES 1,011,690 WPP Group PLC........................... 11,192,650 ------------ BEVERAGES: ALCOHOLIC 730,970 Allied Domecq PLC....................... 4,333,437 441,270 Diageo PLC.............................. 5,042,500 ------------ 9,375,937 ------------ CATALOG/SPECIALTY DISTRIBUTION 480,630 GUS PLC................................. 4,512,763 ------------ FINANCIAL CONGLOMERATES 919,600 Lloyds TSB Group PLC.................... 9,986,416 ------------ FOOD: SPECIALTY/CANDY 1,149,900 Cadbury Schweppes PLC................... 7,331,723 ------------
SEE NOTES TO FINANCIAL STATEMENTS 102 Morgan Stanley Variable Investment Series - European Growth PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ----------------------------------------------------------------- INTEGRATED OIL 780,410 BP PLC.................................. $ 6,066,469 ------------ INVESTMENT MANAGERS 377,400 Amvescap PLC............................ 5,444,368 ------------ MAJOR BANKS 261,860 Barclays PLC+........................... 8,672,064 ------------ MISCELLANEOUS COMMERCIAL SERVICES 1,662,000 Hays PLC................................ 5,032,297 1,998,100 Rentokil Initial PLC.................... 8,027,830 ------------ 13,060,127 ------------ PHARMACEUTICALS: MAJOR 88,744 AstraZeneca PLC+........................ 4,084,185 736,761 GlaxoSmithKline PLC+.................... 18,479,227 ------------ 22,563,412 ------------ PUBLISHING: BOOKS/ MAGAZINES 1,188,901 Reed International PLC.................. 9,864,894 ------------ RESTAURANTS 324,071 Compass Group PLC....................... 2,429,513 ------------ WIRELESS COMMUNICATIONS 6,982,653 Vodafone Group PLC+..................... 18,270,955 ------------ Total United Kingdom.................... 128,771,291 ------------ Total Common Stocks and Warrants (COST $299,396,442).................... 329,047,310 ------------ PRINCIPAL AMOUNT IN THOUSANDS VALUE - ----------------------------------------------------------------- Short-Term Investment (a) (2.6%) U.S. Government Agency $ 8,700 Federal Home Loan Mortgage Corp. 1.51% due 01/02/02 (COST $8,699,635)...................... $ 8,699,635 ------------
Total Investments (COST $308,096,077) (b)................ 100.2% 337,746,945 Liabilities in Excess of Other Assets... (0.2) (692,997) ------ ------------ Net Assets.............................. 100.0% $337,053,948 ====== ============
- --------------------------------------------------- ADR AMERICAN DEPOSITORY RECEIPT. * NON-INCOME PRODUCING SECURITY. + SOME OR ALL OF THESE SECURITIES ARE SEGREGATED IN CONNECTION WITH OPEN FORWARD FOREIGN CURRENCY CONTRACTS. ++ CONSISTS OF ONE OR MORE CLASS OF SECURITIES TRADED TOGETHER AS A UNIT; STOCKS WITH ATTACHED WARRANTS. (a) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $40,479,762 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $10,828,894, RESULTING IN NET UNREALIZED APPRECIATION OF $29,650,868. SEE NOTES TO FINANCIAL STATEMENTS 103 Morgan Stanley Variable Investment Series - European Growth PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT DECEMBER 31, 2001: UNREALIZED CONTRACTS IN EXCHANGE DELIVERY APPRECIATION TO DELIVER FOR DATE (DEPRECIATION) - ----------------------------------------------------------------------------------------------- SEK 6,291,140 $ 594,120 01/02/02 $ (7,816) EUR 3,158,929 SEK 30,000,000 01/04/02 56,546 EUR 13,572,854 GBP 8,500,000 01/04/02 283,220 EUR 2,094,175 SEK 20,000,000 01/04/02 48,186 EUR 1,078,272 SEK 10,000,000 01/04/02 (3,678) GBP 10,400,000 EUR 16,810,798 01/04/02 (164,848) GBP 1,200,000 EUR 1,948,052 01/04/02 (11,590) GBP 2,350,000 EUR 3,800,437 01/04/02 (35,608) SEK 117,000,000 EUR 12,185,723 01/04/02 (339,951) --------- Net unrealized depreciation.................................... $(175,539) =========
CURRENCY ABBREVIATIONS: GBP British Pound. EUR Euro. SEK Swedish Krona. SEE NOTES TO FINANCIAL STATEMENTS 104 Morgan Stanley Variable Investment Series - European Growth SUMMARY OF INVESTMENTS / / DECEMBER 31, 2001
PERCENT OF INDUSTRY VALUE NET ASSETS - ------------------------------------------------------------------ Advertising/Marketing Services.......... $ 13,078,427 3.9% Apparel/Footwear........................ 3,104,344 0.9 Beverages: Alcoholic.................... 11,124,737 3.3 Catalog/Specialty Distribution.......... 4,512,762 1.3 Chemicals: Agricultural................. 5,422,774 1.6 Consumer Sundries....................... 5,237,047 1.6 Electrical Products..................... 4,646,074 1.4 Electronic Equipment/ Instruments....... 11,011,472 3.3 Financial Conglomerates................. 24,474,003 7.2 Food Retail............................. 8,153,148 2.4 Food: Major Diversified................. 8,932,670 2.7 Food: Specialty/Candy................... 7,331,723 2.2 Household/Personal Care................. 3,409,767 1.0 Industrial Machinery.................... 2,533,994 0.8 Information Technology Services......... 7,722,004 2.3 Integrated Oil.......................... 15,867,179 4.7 Investment Managers..................... 5,444,368 1.6 Major Banks............................. 33,541,071 9.9 Major Telecommunications................ 23,520,013 7.0 Miscellaneous Commercial Services....... 16,834,842 5.0 PERCENT OF INDUSTRY VALUE NET ASSETS - ------------------------------------------------------------------ Multi-Line Insurance.................... $ 6,211,858 1.8% Oil Refining/Marketing.................. 7,498,013 2.2 Other Consumer Specialties.............. 2,290,556 0.7 Personnel Services...................... 3,290,620 1.0 Pharmaceuticals: Major.................. 42,110,088 12.5 Publishing: Books/Magazines............. 9,864,894 2.9 Regional Banks.......................... 6,961,038 2.1 Restaurants............................. 4,121,198 1.2 Semiconductors.......................... 6,048,190 1.8 Telecommunication Equipment............. 3,143,855 0.9 U.S. Government Agency.................. 8,699,635 2.6 Water Utilities......................... 3,333,626 1.0 Wireless Communications................. 18,270,955 5.4 ------------ ------- $337,746,945 100.2% ============ ======= TYPE OF INVESTMENT - ------------------------------------------------------------------ Common Stocks........................... $329,006,871 97.6% Short-Term Investment................... 8,699,635 2.6 Warrants................................ 40,439 0.0 ------------ ------- $337,746,945 100.2% ============ =======
SEE NOTES TO FINANCIAL STATEMENTS 105 Morgan Stanley Variable Investment Series - Pacific Growth PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001
NUMBER OF SHARES VALUE - ---------------------------------------------------------------- Common and Preferred Stocks (103.7%) Australia (9.4%) AIRLINES 87,500 Qantas Airways Ltd...................... $ 164,317 ----------- BEVERAGES: ALCOHOLIC 65,350 Foster's Group Ltd...................... 162,072 ----------- INFORMATION TECHNOLOGY SERVICES 14,650 Computershare Ltd....................... 39,473 ----------- MAJOR BANKS 6,700 Australia & New Zealand Banking Group Ltd.................................... 60,889 7,750 Commonwealth Bank of Australia.......... 118,407 19,300 National Australia Bank Ltd............. 313,782 31,550 Westpac Banking Corp., Ltd.............. 253,655 ----------- 746,733 ----------- MAJOR TELECOMMUNICATIONS 92,000 Telstra Corp. Ltd....................... 255,395 ----------- MARINE SHIPPING 6,481 Lang Corporation Ltd.................... 37,041 ----------- MEDIA CONGLOMERATES 50,400 News Corp., Ltd. (The).................. 401,784 ----------- MEDICAL/NURSING SERVICES 12,150 Sonic Healthcare Ltd.................... 49,601 ----------- MISCELLANEOUS COMMERCIAL SERVICES 23,727 Brambles Industries Ltd................. 125,921 ----------- OTHER METALS/MINERALS 67,796 BHP Billiton Ltd........................ 363,264 114,600 M.I.M. Holdings Ltd..................... 66,668 20,600 Rio Tinto Ltd........................... 391,116 20,500 WMC Ltd................................. 100,144 ----------- 921,192 ----------- PHARMACEUTICALS: OTHER 6,950 CSL Ltd................................. 182,614 ----------- PRECIOUS METALS 104,500 Normandy Mining Ltd..................... 96,521 ----------- NUMBER OF SHARES VALUE - ---------------------------------------------------------------- REAL ESTATE DEVELOPMENT 10,700 Lend Lease Corp., Ltd................... $ 71,256 ----------- Total Australia......................... 3,253,920 ----------- China (1.2%) ALUMINUM 459,000 Aluminum Corp. of China Ltd.*........... 80,041 ----------- INTEGRATED OIL 562,000 China Petroleum & Chemical Corp. (Class H).............................. 77,105 724,000 PetroChina Co. Ltd...................... 128,109 ----------- 205,214 ----------- MAJOR TELECOMMUNICATIONS 88,000 China Unicom Ltd.*...................... 97,038 ----------- MISCELLANEOUS COMMERCIAL SERVICES 55,000 Travelsky Technology Ltd.*.............. 42,313 ----------- Total China............................. 424,606 ----------- Hong Kong (10.4%) ADVERTISING/MARKETING SERVICES 25,000 Clear Media Ltd.*....................... 18,272 ----------- APPAREL/FOOTWEAR RETAIL 147,000 Esprit Holdings Ltd..................... 165,867 ----------- COMPUTER PROCESSING HARDWARE 116,000 Legend Holdings Ltd..................... 59,123 ----------- ELECTRIC UTILITIES 268,000 Beijing Datang Power Generation Co., Ltd.................................... 85,049 17,000 CLP Holdings Ltd........................ 64,848 ----------- 149,897 ----------- ENGINEERING & CONSTRUCTION 95,000 New World Development Co., Ltd.......... 82,831 ----------- GAS DISTRIBUTORS 130,220 Hong Kong & China Gas Co., Ltd.......... 159,456 -----------
SEE NOTES TO FINANCIAL STATEMENTS 106 Morgan Stanley Variable Investment Series - Pacific Growth PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ---------------------------------------------------------------- INDUSTRIAL CONGLOMERATES 64,900 Hutchison Whampoa Ltd................... $ 626,199 29,700 Swire Pacific Ltd. (Class A)............ 161,848 ----------- 788,047 ----------- INDUSTRIAL SPECIALTIES 97,000 China Merchants Holdings International Co., Ltd............................... 62,187 ----------- INVESTMENT BANKS/BROKERS 37,000 Hong Kong Exchanges & Clearing Ltd...... 56,219 ----------- MAJOR BANKS 11,000 Hang Seng Bank Ltd...................... 120,945 ----------- MISCELLANEOUS MANUFACTURING 114,400 Johnson Electric Holdings Ltd........... 120,282 ----------- MOTOR VEHICLES 188,500 Denway Motors Ltd....................... 58,612 ----------- OIL & GAS PRODUCTION 86,000 CNOOC Ltd............................... 81,049 ----------- REAL ESTATE DEVELOPMENT 34,000 Amoy Properties, Ltd.................... 34,876 18,000 Cheung Kong (Holdings) Ltd.............. 186,947 35,000 Henderson Land Development Co., Ltd..... 158,418 69,100 Sun Hung Kai Properties Ltd............. 558,187 9,000 Wharf (Holdings) Ltd. (The)............. 21,984 ----------- 960,412 ----------- REGIONAL BANKS 11,000 Bank of East Asia Ltd................... 23,695 ----------- SPECIALTY TELECOMMUNICATIONS 21,500 Asia Satellite Telecommunications Holdings Ltd........................... 35,149 ----------- WHOLESALE DISTRIBUTORS 31,000 Citic Pacific Ltd....................... 68,964 47,600 Li & Fung Ltd........................... 53,404 ----------- 122,368 ----------- WIRELESS COMMUNICATIONS 136,200 China Mobile Ltd.*...................... 479,381 NUMBER OF SHARES VALUE - ---------------------------------------------------------------- 71,500 SmarTone Telecommunications Holdings Ltd.*.................................. $ 85,261 ----------- 564,642 ----------- Total Hong Kong......................... 3,629,053 ----------- India (3.5%) ELECTRICAL PRODUCTS 19,200 Bharat Heavy Electricals Ltd............ 55,925 ----------- INFORMATION TECHNOLOGY SERVICES 4,700 HCL Technologies Ltd.................... 26,708 3,200 Infosys Technologies Ltd................ 270,054 2,350 Wipro Ltd............................... 78,017 ----------- 374,779 ----------- MAJOR TELECOMMUNICATIONS 20,170 Videsh Sanchar Nigam Ltd................ 86,183 ----------- MOTOR VEHICLES 17,500 Hero Honda Motors Ltd................... 90,890 ----------- MOVIES/ENTERTAINMENT 15,000 Zee Telefilms Ltd....................... 34,695 ----------- OIL REFINING/MARKETING 7,800 Bharat Petroleum Corp., Ltd............. 30,541 8,000 Hindustan Petroleum Corp., Ltd.......... 23,137 ----------- 53,678 ----------- PHARMACEUTICALS: OTHER 1,400 Cipla Ltd............................... 33,015 9,100 Dr. Reddy's Laboratories Ltd............ 174,092 4,500 Ranbaxy Laboratories Ltd................ 64,358 ----------- 271,465 ----------- REGIONAL BANKS 5,800 HDFC Bank Ltd. (ADR)*................... 84,390 ----------- SPECIALTY TELECOMMUNICATIONS 29,700 Mahanagar Telephone Nigam Ltd........... 77,926 -----------
SEE NOTES TO FINANCIAL STATEMENTS 107 Morgan Stanley Variable Investment Series - Pacific Growth PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ---------------------------------------------------------------- TOBACCO 5,000 ITC Ltd................................. $ 70,106 ----------- Total India............................. 1,200,037 ----------- Indonesia (0.0%) INVESTMENT TRUSTS/MUTUAL FUNDS 500,000 Batavia Investment Fund Ltd.*........... -- ----------- Japan (54.1%) AUTO PARTS: O.E.M. 24,000 NIFCO Inc............................... 196,781 ----------- BUILDING PRODUCTS 68,000 Sanwa Shutter Corp...................... 146,614 ----------- CHEMICALS: MAJOR DIVERSIFIED 100,000 Mitsubishi Chemical Corp................ 211,813 ----------- CHEMICALS: SPECIALTY 100,000 Daicel Chemical Industries Ltd.......... 292,287 100,000 Denki Kagaku Kogyo Kabushiki Kaisha..... 230,793 64,000 Kaneka Corp............................. 388,217 43,000 Shin-Etsu Polymer Co., Ltd.............. 118,828 ----------- 1,030,125 ----------- COMMERCIAL PRINTING/FORMS 31,000 Dai Nippon Printing Co., Ltd............ 308,305 10,000 Nissha Printing Co., Ltd................ 45,551 ----------- 353,856 ----------- COMPUTER PERIPHERALS 25,000 Mitsumi Electric Co., Ltd............... 285,264 ----------- COMPUTER PROCESSING HARDWARE 60,000 Fujitsu Ltd............................. 434,558 ----------- ELECTRIC UTILITIES 18,000 Tokyo Electric Power Co................. 381,263 ----------- ELECTRICAL PRODUCTS 40,000 Furukawa Electric Co.................... 211,357 ----------- ELECTRONIC COMPONENTS 8,000 TDK Corp................................ 375,342 ----------- NUMBER OF SHARES VALUE - ---------------------------------------------------------------- ELECTRONIC DISTRIBUTORS 17,100 Ryosan Co., Ltd......................... $ 188,240 ----------- ELECTRONIC EQUIPMENT/ INSTRUMENTS 16,000 Canon, Inc.............................. 547,829 49,000 Casio Computer Co., Ltd................. 211,297 6,100 Kyocera Corp............................ 395,954 39,000 Matsushita Electric Industrial Co., Ltd.................................... 498,307 45,000 NEC Corp................................ 456,764 30,000 Ricoh Co., Ltd.......................... 555,724 114,000 Toshiba Corp............................ 389,462 ----------- 3,055,337 ----------- ELECTRONICS/APPLIANCES 10,100 Rinnai Corp............................. 161,790 11,500 Sony Corp............................... 522,965 ----------- 684,755 ----------- ENGINEERING & CONSTRUCTION 35,000 Kyudenko Corp........................... 116,915 80,000 Obayashi Corp........................... 225,934 13,000 Sanki Engineering Co., Ltd.............. 63,164 ----------- 406,013 ----------- FINANCE/RENTAL/LEASING 25,400 Hitachi Capital Corp.................... 379,882 ----------- FOOD RETAIL 16,500 FamilyMart Co., Ltd..................... 276,211 ----------- FOOD: MEAT/FISH/DAIRY 24,000 Nippon Meat Packers, Inc................ 253,265 ----------- FOOD: SPECIALTY/CANDY 20,000 House Foods Corp........................ 163,225 ----------- HOME BUILDING 53,000 Sekisui Chemical Co., Ltd............... 138,817 40,000 Sekisui House Ltd....................... 288,491 ----------- 427,308 ----------- HOME FURNISHINGS 4,000 Sangetsu Co., Ltd....................... 54,661 ----------- INDUSTRIAL CONGLOMERATES 67,000 Hitachi Ltd............................. 488,309 ----------- INDUSTRIAL MACHINERY 63,000 Amada Co., Ltd.......................... 248,709
SEE NOTES TO FINANCIAL STATEMENTS 108 Morgan Stanley Variable Investment Series - Pacific Growth PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ---------------------------------------------------------------- 68,000 Daifuku Co., Ltd........................ $ 273,611 30,000 Daikin Industries Ltd................... 468,038 16,000 Fuji Machine Manufacturing Co., Ltd..... 207,713 105,000 Mitsubishi Heavy Industries, Ltd........ 279,001 92,000 Tsubakimoto Chain Co.................... 209,535 ----------- 1,686,607 ----------- INDUSTRIAL SPECIALTIES 24,000 Fujitec Co., Ltd........................ 76,162 26,000 Lintec Corp............................. 159,687 ----------- 235,849 ----------- MAJOR BANKS 6 Mitsubishi Tokyo Financial Group, Inc.*.................................. 40,039 ----------- MAJOR TELECOMMUNICATIONS 113 Nippon Telegraph & Telephone Corp....... 366,315 ----------- MARINE SHIPPING 19,000 Mitsubishi Logistics Corp............... 133,860 ----------- METAL FABRICATIONS 55,000 Minebea Co., Ltd........................ 294,792 ----------- MISCELLANEOUS MANUFACTURING 31,000 Kurita Water Industries Ltd............. 382,911 ----------- MOTOR VEHICLES 92,000 Nissan Motor Co., Ltd................... 485,424 38,000 Suzuki Motor Corp....................... 413,696 18,000 Toyota Motor Corp....................... 453,690 ----------- 1,352,810 ----------- PHARMACEUTICALS: MAJOR 27,000 Sankyo Co., Ltd......................... 460,181 ----------- PHARMACEUTICALS: OTHER 13,000 Ono Pharmaceutical Co., Ltd............. 388,855 18,000 Yamanouchi Pharmaceutical Co., Ltd...... 472,821 ----------- 861,676 ----------- RAILROADS 58 East Japan Railway Co................... 278,728 ----------- NUMBER OF SHARES VALUE - ---------------------------------------------------------------- REAL ESTATE DEVELOPMENT 49,000 Mitsubishi Estate Co., Ltd.............. $ 356,749 ----------- RECREATIONAL PRODUCTS 15,000 Fuji Photo Film Co., Ltd................ 532,949 4,100 Nintendo Co., Ltd....................... 714,356 33,000 Yamaha Corp............................. 243,015 ----------- 1,490,320 ----------- SEMICONDUCTORS 2,500 Rohm Co. Ltd............................ 322,844 ----------- TEXTILES 25,000 Nisshinbo Industries, Inc............... 92,241 ----------- WHOLESALE DISTRIBUTORS 10,000 Hitachi High-Technologies Corp.......... 107,729 39,000 Mitsubishi Corp......................... 251,966 27,000 Nagase & Co., Ltd....................... 111,714 ----------- 471,409 ----------- Total Japan............................. 18,831,510 ----------- Singapore (5.1%) AEROSPACE & DEFENSE 61,000 Singapore Technologies Engineering Ltd.................................... 77,612 ----------- AIRLINES 33,000 Singapore Airlines Ltd.................. 196,535 ----------- ELECTRONIC COMPONENTS 21,600 Venture Manufacturing Ltd............... 155,539 ----------- FINANCIAL CONGLOMERATES 52,000 Keppel Corp., Ltd....................... 79,957 ----------- MAJOR BANKS 38,182 DBS Group Holdings Ltd.................. 285,280 ----------- MAJOR TELECOMMUNICATIONS 66,000 Singapore Telecommunications Ltd........ 62,891 ----------- MARINE SHIPPING 166,000 Neptune Orient Lines Ltd.*.............. 87,179 99,000 Sembcorp Logistics Ltd.................. 96,481 ----------- 183,660 ----------- PUBLISHING: NEWSPAPERS 15,019 Singapore Press Holdings Ltd............ 177,268 -----------
SEE NOTES TO FINANCIAL STATEMENTS 109 Morgan Stanley Variable Investment Series - Pacific Growth PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ---------------------------------------------------------------- REAL ESTATE DEVELOPMENT 47,000 Capitaland Ltd.......................... $ 47,585 31,400 City Developments Ltd................... 102,853 ----------- 150,438 ----------- REGIONAL BANKS 33,086 Oversea - Chinese Banking Corp., Ltd.... 197,047 27,363 United Overseas Bank Ltd................ 188,148 ----------- 385,195 ----------- SEMICONDUCTORS 13,000 Chartered Semiconductor Manufacturing Ltd.*.................................. 34,488 ----------- Total Singapore......................... 1,788,863 ----------- South Korea (10.8%) ADVERTISING/MARKETING SERVICES 620 Cheil Communications, Inc............... 63,699 ----------- ELECTRIC UTILITIES 6,900 Korea Electric Power Corp............... 113,950 ----------- ELECTRONIC COMPONENTS 2,276 Samsung Electro Mechanics Co., Ltd...... 75,867 ----------- ELECTRONICS/APPLIANCES 9,070 Humax Co., Ltd.......................... 219,157 1,990 LG Electronics Inc...................... 37,559 ----------- 256,716 ----------- ENGINEERING & CONSTRUCTION 17,430 LG Construction Co., Ltd................ 187,034 ----------- FOOD: SPECIALTY/CANDY 1,880 Tong Yang Confectionery Corp............ 48,073 ----------- HOUSEHOLD/PERSONAL CARE 1,670 LG Household & Health Care Ltd.*........ 36,730 ----------- INDUSTRIAL MACHINERY 19,090 Hyundai Mobis........................... 274,582 ----------- NUMBER OF SHARES VALUE - ---------------------------------------------------------------- INVESTMENT BANKS/BROKERS 5,530 LG Investment & Securities Co.*......... $ 62,707 2,170 Samsung Securities Co., Ltd.*........... 79,022 ----------- 141,729 ----------- MAJOR BANKS 4,397 Kookmin Bank............................ 166,639 ----------- MAJOR TELECOMMUNICATIONS 4,600 Korea Telecom Corp. (ADR)............... 93,518 ----------- MOTOR VEHICLES 10,790 Hyundai Motor Co., Ltd.................. 220,891 ----------- REGIONAL BANKS 10,660 Hana Bank............................... 137,103 2,220 Kookmin Credit Card Co., Ltd............ 84,475 17,300 Shinhan Financial Group Co., Ltd.*...... 231,062 ----------- 452,640 ----------- SEMICONDUCTORS 4,197 Samsung Electronics Co., Ltd............ 891,144 1,030 Samsung Electronics Ltd. (Pref.)........ 88,969 ----------- 980,113 ----------- SPECIALTY STORES 450 Shinsegae Co., Ltd...................... 47,603 ----------- STEEL 1,080 Pohang Iron & Steel Co., Ltd............ 100,274 ----------- TOBACCO 4,625 Korea Tobacco & Ginseng Corp. (GDR)-144A**........................... 34,687 ----------- WIRELESS COMMUNICATIONS 2,270 SK Telecom Co., Ltd..................... 462,983 ----------- Total South Korea....................... 3,757,728 ----------- Taiwan (9.1%) COMPUTER COMMUNICATIONS 57,000 Accton Technology Corp.................. 146,488 5,200 Ambit Microsystems Corp................. 23,906 ----------- 170,394 -----------
SEE NOTES TO FINANCIAL STATEMENTS 110 Morgan Stanley Variable Investment Series - Pacific Growth PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ---------------------------------------------------------------- COMPUTER PERIPHERALS 47,400 Hon Hai Precison Industry Co., Ltd...... $ 216,562 ----------- COMPUTER PROCESSING HARDWARE 36,500 Asustek Computer, Inc................... 159,466 5,000 Quanta Computer Inc..................... 16,276 ----------- 175,742 ----------- ELECTRONIC EQUIPMENT/ INSTRUMENTS 88,000 Au Optronics Corp.*..................... 93,981 ----------- ELECTRONIC PRODUCTION EQUIPMENT 4,360 ASE Test Ltd.*.......................... 60,735 ----------- FINANCIAL CONGLOMERATES 113,583 Fubon Financial Holding Co., Ltd.*...... 98,599 ----------- FOOD RETAIL 42,650 President Chain Store Corp.............. 90,123 ----------- REGIONAL BANKS 167,100 Bank Sinopac*........................... 69,665 387,531 Chinatrust Commercial Bank.............. 232,386 104,000 Taipei Bank............................. 77,807 ----------- 379,858 ----------- SEMICONDUCTORS 58,000 Advanced Semiconductor Engineering Inc.*.................................. 53,826 7,400 Faraday Technology Corp................. 34,866 108,915 Siliconware Precision Industries Co.*... 96,101 21,450 SunPlus Technology Co.*................. 66,151 377,000 Taiwan Semiconductor Manufacturing Co. Ltd.*.................................. 941,962 322,450 United Microelectronics Corp.*.......... 469,587 ----------- 1,662,493 ----------- STEEL 80,460 China Steel Corp........................ 31,361 ----------- TEXTILES 148,320 Formosa Chemical & Fibre Corp........... 99,529 ----------- NUMBER OF SHARES VALUE - ---------------------------------------------------------------- WIRELESS COMMUNICATIONS 63,606 Taiwan Cellular Corp.*.................. $ 85,002 ----------- Total Taiwan............................ 3,164,379 ----------- United States (0.1%) MEDICAL SPECIALTIES 8,150 ResMed Inc.*............................ 43,461 ----------- Total Common and Preferred Stocks (COST $41,345,044)..................... 36,093,557 ----------- PRINCIPAL AMOUNT IN THOUSANDS - --------- Short-Term Investment (a) (12.7%) U.S. Government Agency $ 4,400 Federal Home Loan Mortgage Corp. 1.51% due 01/02/02 (COST $4,399,815)...................... 4,399,815 -----------
Total Investments (COST $45,744,859) (b)................. 116.4% 40,493,372 Liabilities in Excess of Other Assets... (16.4) (5,714,762) ------ ----------- Net Assets.............................. 100.0% $34,778,610 ====== ===========
- --------------------------------------------------- ADR AMERICAN DEPOSITORY RECEIPT. GDR GLOBAL DEPOSITORY RECEIPT. * NON-INCOME PRODUCING SECURITY. ** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. (A) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $52,124,705. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $2,765,576 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $14,396,909, RESULTING IN NET UNREALIZED DEPRECIATION OF $11,631,333. SEE NOTES TO FINANCIAL STATEMENTS 111 Morgan Stanley Variable Investment Series - Pacific Growth SUMMARY OF INVESTMENTS / / DECEMBER 31, 2001
PERCENT OF INDUSTRY VALUE NET ASSETS - ----------------------------------------------------------------- Advertising/Marketing Services.......... $ 81,971 0.2% Aerospace & Defense..................... 77,612 0.2 Airlines................................ 360,852 1.0 Aluminum................................ 80,041 0.2 Apparel/Footwear Retail................. 165,867 0.5 Auto Parts: O.E.M....................... 196,781 0.6 Beverages: Alcoholic.................... 162,072 0.5 Building Products....................... 146,614 0.4 Chemicals: Major Diversified............ 211,813 0.6 Chemicals: Specialty.................... 1,030,125 3.0 Commercial Printing/Forms............... 353,856 1.0 Computer Communications................. 170,394 0.5 Computer Peripherals.................... 501,826 1.4 Computer Processing Hardware............ 669,423 1.9 Electric Utilities...................... 645,110 1.9 Electrical Products..................... 267,282 0.8 Electronic Components................... 606,748 1.7 Electronic Distributors................. 188,240 0.5 Electronic Equipment/ Instruments....... 3,149,318 9.1 Electronic Production Equipment......... 60,735 0.2 Electronics/Appliances.................. 941,471 2.7 Engineering & Construction.............. 675,878 1.9 Finance/Rental/Leasing.................. 379,882 1.1 Financial Conglomerates................. 178,556 0.5 Food Retail............................. 366,334 1.1 Food: Meat/Fish/Dairy................... 253,265 0.7 Food: Specialty/Candy................... 211,298 0.6 Gas Distributors........................ 159,456 0.5 Home Building........................... 427,308 1.2 Home Furnishings........................ 54,661 0.2 Household/Personal Care................. 36,730 0.1 Industrial Conglomerates................ 1,276,356 3.7 Industrial Machinery.................... 1,961,189 5.6 Industrial Specialties.................. 298,036 0.9 Information Technology Services......... 414,252 1.2 Integrated Oil.......................... 205,214 0.6 Investment Banks/Brokers................ 197,948 0.6 Major Banks............................. 1,359,636 3.9 PERCENT OF INDUSTRY VALUE NET ASSETS - ----------------------------------------------------------------- Major Telecommunications................ $ 961,340 2.8% Marine Shipping......................... 354,561 1.0 Media Conglomerates..................... 401,784 1.2 Medical Specialties..................... 43,461 0.1 Medical/Nursing Services................ 49,601 0.1 Metal Fabrications...................... 294,792 0.8 Miscellaneous Commercial Services....... 168,234 0.5 Miscellaneous Manufacturing............. 503,193 1.4 Motor Vehicles.......................... 1,723,203 5.0 Movies/Entertainment.................... 34,695 0.1 Oil & Gas Production.................... 81,049 0.2 Oil Refining/Marketing.................. 53,678 0.2 Other Metals/Minerals................... 921,192 2.6 Pharmaceuticals: Major.................. 460,181 1.3 Pharmaceuticals: Other.................. 1,315,755 3.8 Precious Metals......................... 96,521 0.3 Publishing: Newspapers.................. 177,268 0.5 Railroads............................... 278,728 0.8 Real Estate Development................. 1,538,855 4.4 Recreational Products................... 1,490,320 4.3 Regional Banks.......................... 1,325,778 3.8 Semiconductors.......................... 2,999,938 8.6 Specialty Stores........................ 47,603 0.1 Specialty Telecommunications............ 113,075 0.3 Steel................................... 131,635 0.4 Textiles................................ 191,770 0.6 Tobacco................................. 104,793 0.3 U.S. Government Agencies & Obligations............................ 4,399,815 12.7 Wholesale Distributors.................. 593,777 1.7 Wireless Communications................. 1,112,627 3.2 ----------- ------- $40,493,372 116.4% =========== ======= TYPE OF INVESTMENT - ----------------------------------------------------------------- Common Stocks........................... $36,004,588 103.5% Preferred Stocks........................ 88,969 0.2 Short-Term Investment................... 4,399,815 12.7 ----------- ------- $40,493,372 116.4% =========== =======
SEE NOTES TO FINANCIAL STATEMENTS 112 Morgan Stanley Variable Investment Series - Equity PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001
NUMBER OF SHARES VALUE - ------------------------------------------------------------------- Common Stocks (92.5%) ADVERTISING/MARKETING SERVICES (1.1%) 433,200 DoubleClick Inc.*....................... $ 4,912,488 175,000 Lamar Advertising Co.*.................. 7,409,500 -------------- 12,321,988 -------------- AEROSPACE & DEFENSE (0.8%) 195,000 Lockheed Martin Corp.................... 9,100,650 -------------- AIR FREIGHT/ COURIERS (0.4%) 88,300 FedEx Corp.*............................ 4,581,004 -------------- AIRLINES (0.4%) 137,800 Ryanair Holdings PLC (ADR) (Ireland)*... 4,416,490 -------------- APPAREL/FOOTWEAR (1.4%) 272,900 Coach, Inc.*............................ 10,637,642 178,300 Polo Ralph Lauren Corp.*................ 4,771,308 -------------- 15,408,950 -------------- APPAREL/FOOTWEAR RETAIL (1.0%) 333,300 Hot Topic, Inc.*........................ 10,462,287 -------------- BIOTECHNOLOGY (7.5%) 55,000 Amgen Inc.*............................. 3,104,200 53,700 Aviron*................................. 2,670,501 216,000 Cephalon, Inc.*......................... 16,326,360 67,000 Genzyme Corp. (General Division)*....... 4,010,620 139,200 Gilead Sciences, Inc.*.................. 9,148,224 127,600 IDEC Pharmaceuticals Corp.*............. 8,795,468 242,700 MedImmune, Inc.*........................ 11,249,145 87,000 Myriad Genetics, Inc.*.................. 4,579,680 236,800 Neurocrine Biosciences, Inc.*........... 12,150,208 150,700 NPS Pharmaceuticals, Inc.*.............. 5,771,810 91,600 Trimeris, Inc.*......................... 4,119,252 -------------- 81,925,468 -------------- NUMBER OF SHARES VALUE - ------------------------------------------------------------------- BROADCASTING (0.8%) 315,900 USA Networks, Inc.*..................... $ 8,627,229 -------------- CABLE/SATELLITE TV (0.7%) 222,000 Comcast Corp. (Class A Special)*........ 7,992,000 -------------- COMPUTER COMMUNICATIONS (1.5%) 130,000 Brocade Communications Systems, Inc.*... 4,305,600 261,200 Cisco Systems, Inc.*.................... 4,730,332 180,300 Emulex Corp.*........................... 7,123,653 -------------- 16,159,585 -------------- COMPUTER PERIPHERALS (0.1%) 88,900 ATI Technologies Inc. (Canada)*......... 1,129,030 -------------- COMPUTER PROCESSING HARDWARE (3.6%) 467,200 Dell Computer Corp.*.................... 12,698,496 88,900 International Business Machines Corp.... 10,753,344 1,220,000 Sun Microsystems, Inc.*................. 15,054,800 -------------- 38,506,640 -------------- CONTAINERS/ PACKAGING (0.5%) 287,400 Pactiv Corp.*........................... 5,101,350 -------------- CONTRACT DRILLING (2.5%) 153,200 ENSCO International Inc................. 3,807,020 193,700 GlobalSantaFe Corp...................... 5,524,324 122,500 Nabors Industries, Inc.*................ 4,205,425 226,700 Rowan Companies, Inc.*.................. 4,391,179 257,600 Transocean Sedco Forex Inc.............. 8,712,032 -------------- 26,639,980 -------------- DATA PROCESSING SERVICES (0.5%) 80,800 Bisys Group, Inc. (The)*................ 5,170,392 --------------
SEE NOTES TO FINANCIAL STATEMENTS 113 Morgan Stanley Variable Investment Series - Equity PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ------------------------------------------------------------------- DISCOUNT STORES (2.7%) 115,400 99 Cents Only Stores*................... $ 4,396,740 97,200 Costco Wholesale Corp.*................. 4,313,736 366,100 Wal-Mart Stores, Inc.................... 21,069,055 -------------- 29,779,531 -------------- ELECTRICAL PRODUCTS (0.4%) 165,600 02Micro International Ltd. (Cayman Islands)*.............................. 3,982,680 -------------- ELECTRONIC EQUIPMENT/ INSTRUMENTS (0.4%) 107,200 Waters Corp.*........................... 4,154,000 -------------- ELECTRONIC PRODUCTION EQUIPMENT (2.0%) 41,800 Brooks Automation, Inc.*................ 1,700,006 231,500 KLA-Tencor Corp.*....................... 11,473,140 119,700 Numerical Technologies, Inc.*........... 4,213,440 138,600 Photronics, Inc.*....................... 4,345,110 -------------- 21,731,696 -------------- ELECTRONICS/APPLIANCE STORES (1.0%) 212,200 Blockbuster, Inc. (Class A)............. 5,347,440 222,000 Circuit City Stores, Inc.-Circuit City Group.................................. 5,760,900 -------------- 11,108,340 -------------- FINANCIAL CONGLOMERATES (2.8%) 439,900 Citigroup, Inc.......................... 22,206,152 95,900 Prudential Financial, Inc.*............. 3,182,921 103,900 State Street Corp....................... 5,428,775 -------------- 30,817,848 -------------- FINANCIAL PUBLISHING/ SERVICES (0.4%) 108,400 Moody's Corp............................ 4,320,824 -------------- FOOD RETAIL (0.1%) 26,600 Whole Foods Market, Inc.*............... 1,158,696 -------------- NUMBER OF SHARES VALUE - ------------------------------------------------------------------- FOOD: MAJOR DIVERSIFIED (0.4%) 92,700 PepsiCo, Inc............................ $ 4,513,563 -------------- FOOD: MEAT/FISH/ DAIRY (1.0%) 80,100 Dean Foods Co.*......................... 5,462,820 151,000 Dreyer's Grand Ice Cream, Inc........... 5,815,010 -------------- 11,277,830 -------------- FOOD: SPECIALTY/ CANDY (0.3%) 103,300 Hain Celestial Group, Inc.*............. 2,836,618 -------------- HOME BUILDING (4.2%) 78,000 Beazer Homes USA Inc.*.................. 5,707,260 119,000 Centex Corp............................. 6,793,710 185,200 D.R. Horton, Inc........................ 6,011,592 224,700 KB HOME................................. 9,010,470 94,000 Lennar Corp............................. 4,401,080 123,400 Ryland Group, Inc. (The)................ 9,032,880 97,200 Toll Brothers, Inc.*.................... 4,267,080 -------------- 45,224,072 -------------- HOME IMPROVEMENT CHAINS (0.9%) 203,800 Lowe's Companies, Inc................... 9,458,358 -------------- HOSPITAL/NURSING MANAGEMENT (0.9%) 107,400 HCA Inc................................. 4,139,196 94,000 Tenet Healthcare Corp.*................. 5,519,680 -------------- 9,658,876 -------------- HOUSEHOLD/PERSONAL CARE (0.6%) 202,800 International Flavors & Fragrances, Inc.................................... 6,025,188 -------------- INDUSTRIAL CONGLOMERATES (2.4%) 538,000 General Electric Co..................... 21,563,040 68,300 United Technologies Corp................ 4,414,229 -------------- 25,977,269 --------------
SEE NOTES TO FINANCIAL STATEMENTS 114 Morgan Stanley Variable Investment Series - Equity PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ------------------------------------------------------------------- INDUSTRIAL SPECIALTIES (0.4%) 298,800 RPM, Inc................................ $ 4,320,648 -------------- INFORMATION TECHNOLOGY SERVICES (2.6%) 204,000 Accenture Ltd. (Class A) (Bermuda)*..... 5,491,680 179,100 Manhattan Associates, Inc.*............. 5,220,765 405,500 PeopleSoft, Inc.*....................... 16,301,100 37,600 Tier Technologies, Inc. (Class B)*...... 810,656 -------------- 27,824,201 -------------- INTEGRATED OIL (0.5%) 61,200 ChevronTexaco Corp...................... 5,484,132 -------------- INTERNET SOFTWARE/ SERVICES (5.2%) 300,500 Alloy Online, Inc.*..................... 6,469,765 284,800 BEA Systems, Inc.*...................... 4,388,768 171,300 Business Objects S.A. (ADR) (France)*... 5,789,940 620,600 Earthlink, Inc.*........................ 7,552,702 459,800 F5 Networks, Inc.*...................... 9,904,092 150,200 Internet Security Systems, Inc.*........ 4,815,412 74,200 PEC Solutions, Inc.*.................... 2,790,662 840,800 Yahoo! Inc.*............................ 14,915,792 -------------- 56,627,133 -------------- INVESTMENT BANKS/ BROKERS (3.4%) 114,000 Goldman Sachs Group, Inc. (The)......... 10,573,500 84,800 Legg Mason, Inc......................... 4,238,304 159,600 Lehman Brothers Holdings, Inc........... 10,661,280 84,900 Merrill Lynch & Co., Inc................ 4,424,988 453,000 Schwab (Charles) Corp................... 7,007,910 -------------- 36,905,982 -------------- NUMBER OF SHARES VALUE - ------------------------------------------------------------------- MAJOR BANKS (1.5%) 191,600 Bank of America Corp.................... $ 12,061,220 76,400 Comerica, Inc........................... 4,377,720 -------------- 16,438,940 -------------- MANAGED HEALTH CARE (0.6%) 95,100 Trigon Healthcare, Inc.*................ 6,604,695 -------------- MEDIA CONGLOMERATES (1.2%) 398,300 AOL Time Warner Inc.*................... 12,785,430 -------------- MEDICAL DISTRIBUTORS (0.3%) 44,200 Andrx Group*............................ 3,112,122 -------------- MEDICAL SPECIALTIES (2.5%) 310,900 Boston Scientific Corp.*................ 7,498,908 165,200 Guidant Corp.*.......................... 8,226,960 43,300 Medtronic, Inc.......................... 2,217,393 28,600 St. Jude Medical, Inc.*................. 2,220,790 212,740 Zimmer Holdings, Inc.*.................. 6,497,079 -------------- 26,661,130 -------------- MISCELLANEOUS COMMERCIAL SERVICES (1.0%) 46,800 Freemarkets, Inc.*...................... 1,121,796 123,300 MAXIMUS, Inc.*.......................... 5,185,998 99,600 Sabre Holdings Corp.*................... 4,218,060 -------------- 10,525,854 -------------- MULTI-LINE INSURANCE (1.3%) 170,600 American International Group, Inc....... 13,545,640 -------------- OIL & GAS PRODUCTION (0.3%) 76,010 Apache Corp............................. 3,791,379 -------------- OILFIELD SERVICES/ EQUIPMENT (0.7%) 79,100 Smith International, Inc.*.............. 4,241,342
SEE NOTES TO FINANCIAL STATEMENTS 115 Morgan Stanley Variable Investment Series - Equity PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ------------------------------------------------------------------- 94,000 Weatherford International, Inc.*........ $ 3,502,440 -------------- 7,743,782 -------------- OTHER CONSUMER SERVICES (3.0%) 134,200 eBay, Inc.*............................. 8,977,980 49,100 Expedia, Inc. (Class A)*................ 1,993,951 220,100 Hotel Reservations Network, Inc. (Class A)*.................................... 10,124,600 159,400 Travelocity.com Inc.*................... 4,576,374 190,500 Weight Watchers International, Inc.*.... 6,442,710 -------------- 32,115,615 -------------- PACKAGED SOFTWARE (5.8%) 302,200 Informatica Corp.*...................... 4,384,922 95,700 Intuit Inc.*............................ 4,092,132 49,100 Legato Systems, Inc.*................... 636,827 184,800 Mercury Interactive Corp.*.............. 6,279,504 472,000 Microsoft Corp.*........................ 31,279,440 481,600 Network Associates, Inc.*............... 12,449,360 92,500 VERITAS Software Corp.*................. 4,145,850 -------------- 63,268,035 -------------- PERSONNEL SERVICES (0.4%) 104,600 TMP Worldwide, Inc.*.................... 4,487,340 -------------- PHARMACEUTICALS: OTHER (0.9%) 70,087 Biovail Corp. (Canada)*................. 3,942,394 52,200 Forest Laboratories, Inc.*.............. 4,277,790 33,100 Sepracor, Inc.*......................... 1,888,686 -------------- 10,108,870 -------------- PROPERTY - CASUALTY INSURERS (2.0%) 109,400 Everest Re Group, Ltd. (Bermuda)........ 7,734,580 59,900 Progressive Corp. (The)................. 8,943,070 56,000 XL Capital Ltd. (Class A) (Bermuda)..... 5,116,160 -------------- 21,793,810 -------------- NUMBER OF SHARES VALUE - ------------------------------------------------------------------- RECREATIONAL PRODUCTS (0.8%) 236,500 JAKKS Pacific, Inc.*.................... $ 4,481,675 237,200 Mattel, Inc............................. 4,079,840 -------------- 8,561,515 -------------- REGIONAL BANKS (1.9%) 210,700 Compass Bancshares, Inc................. 5,962,810 149,700 Fifth Third Bancorp..................... 9,218,526 139,300 First Tennessee National Corp........... 5,051,018 -------------- 20,232,354 -------------- RESTAURANTS (2.4%) 93,100 CBRL Group, Inc......................... 2,740,864 86,300 CEC Entertainment, Inc.*................ 3,744,557 279,600 Darden Restaurants, Inc................. 9,897,840 173,500 Outback Steakhouse, Inc.*............... 5,942,375 110,500 Wendy's International, Inc.............. 3,223,285 -------------- 25,548,921 -------------- SEMICONDUCTORS (2.8%) 71,500 Genesis Microchip, Inc.*................ 4,727,580 326,300 Intel Corp.............................. 10,262,135 139,800 Intersil Holding Corp. (Class A)*....... 4,508,550 97,800 Microchip Technology Inc.*.............. 3,788,772 109,900 NVIDIA Corp.*........................... 7,352,310 -------------- 30,639,347 -------------- SERVICES TO THE HEALTH INDUSTRY (1.3%) 125,300 Laboratory Corp. of America Holdings*... 10,130,505 62,700 Quest Diagnostics Inc.*................. 4,496,217 -------------- 14,626,722 -------------- SPECIALTY INSURANCE (0.4%) 73,500 MBIA, Inc............................... 3,941,805 -------------- SPECIALTY STORES (2.0%) 95,700 AutoZone, Inc.*......................... 6,871,260 111,100 Bed Bath & Beyond Inc.*................. 3,766,290
SEE NOTES TO FINANCIAL STATEMENTS 116 Morgan Stanley Variable Investment Series - Equity PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ------------------------------------------------------------------- 273,500 Sonic Automotive, Inc.*................. $ 6,410,840 101,600 Williams-Sonoma, Inc.*.................. 4,358,640 -------------- 21,407,030 -------------- TELECOMMUNICATION EQUIPMENT (1.7%) 218,400 Microtune, Inc.*........................ 5,123,664 284,400 Polycom, Inc.*.......................... 9,783,360 73,500 QUALCOMM Inc.*.......................... 3,711,750 -------------- 18,618,774 -------------- TRUCKING (0.4%) 188,900 Hunt (J.B.) Tansport Services, Inc.*.... 4,382,480 -------------- TRUCKS/CONSTRUCTION/FARM MACHINERY (0.5%) 124,800 Deere & Co.............................. 5,448,768 -------------- WIRELESS COMMUNICATIONS (1.4%) 606,900 Sprint Corp. (PCS Group)*............... 14,814,429 -------------- Total Common Stocks (COST $913,302,710).................... 1,001,935,315 -------------- PRINCIPAL AMOUNT IN THOUSANDS - --------- Short-Term Investments (10.0%) U.S. Government Agency (a) (9.8%) $107,000 Federal Home Loan Mortgage Corp. 1.51% due 01/02/02 (COST $106,995,512).................... 106,995,512 -------------- PRINCIPAL AMOUNT IN THOUSANDS VALUE - ------------------------------------------------------------------- Repurchase Agreement (0.2%) $ 1,813 The Bank of New York 0.875% due 01/02/02 (dated 12/31/01; proceeds $1,813,214) (b) (COST $1,813,126)...................... $ 1,813,126 -------------- Total Short-Term Investments (COST $108,808,638).................... 108,808,638 --------------
Total Investments (COST $1,022,111,348) (c).............. 102.5% 1,110,743,953 Liabilities in Excess of Other Assets... (2.5) (27,299,486) ------ -------------- Net Assets.............................. 100.0% $1,083,444,467 ====== ==============
- --------------------------------------------------- ADR AMERICAN DEPOSITORY RECEIPT. * NON-INCOME PRODUCING SECURITY. (a) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (b) COLLATERALIZED BY $1,849,389 FEDERAL HOME LOAN MORTGAGE CORP. 5.775% DUE 06/26/06 VALUED AT $1,847,930. (c) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $102,190,130 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $13,557,525, RESULTING IN NET UNREALIZED APPRECIATION OF $88,632,605. SEE NOTES TO FINANCIAL STATEMENTS 117 Morgan Stanley Variable Investment Series - S&P 500 Index PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001
NUMBER OF SHARES VALUE - ----------------------------------------------------------------- Common Stocks (96.6%) ADVERTISING/MARKETING SERVICES (0.3%) 7,379 Interpublic Group of Companies, Inc..... $ 217,976 3,631 Omnicom Group, Inc...................... 324,430 ------------ 542,406 ------------ AEROSPACE & DEFENSE (0.9%) 16,364 Boeing Co............................... 634,596 3,943 General Dynamics Corp................... 314,021 1,992 Goodrich Corp........................... 53,027 8,607 Lockheed Martin Corp.................... 401,689 2,158 Northrop Grumman Corp................... 217,548 7,638 Raytheon Co............................. 248,006 3,588 Rockwell Collins, Inc................... 69,966 ------------ 1,938,853 ------------ AGRICULTURAL COMMODITIES/ MILLING (0.1%) 12,921 Archer-Daniels-Midland Co............... 185,416 ------------ AIR FREIGHT/COURIERS (0.1%) 5,825 FedEx Corp.*............................ 302,201 ------------ AIRLINES (0.2%) 3,018 AMR Corp................................ 66,909 2,408 Delta Air Lines, Inc.................... 70,458 14,954 Southwest Airlines Co................... 276,350 1,331 US Airways Group, Inc.*................. 8,439 ------------ 422,156 ------------ ALTERNATIVE POWER GENERATION (0.0%) 5,966 Calpine Corp.*.......................... 100,169 ------------ ALUMINUM (0.4%) 6,270 Alcan Inc. (Canada)..................... 225,281 16,595 Alcoa, Inc.............................. 589,952 ------------ 815,233 ------------ APPAREL/FOOTWEAR (0.3%) 3,316 Cintas Corp............................. 160,461 2,451 Jones Apparel Group, Inc.*.............. 81,300 1,028 Liz Claiborne, Inc...................... 51,143 NUMBER OF SHARES VALUE - ----------------------------------------------------------------- 5,249 Nike, Inc. (Class B).................... $ 295,204 1,151 Reebok International Inc. (United Kingdom)*.............................. 30,501 2,168 VF Corp................................. 84,574 ------------ 703,183 ------------ APPAREL/FOOTWEAR RETAIL (0.3%) 16,851 Gap, Inc. (The)......................... 234,903 8,374 Limited, Inc. (The)..................... 123,265 2,626 Nordstrom, Inc.......................... 53,124 5,329 TJX Companies, Inc. (The)............... 212,414 ------------ 623,706 ------------ AUTO PARTS: O.E.M. (0.3%) 2,902 Dana Corp............................... 40,280 10,947 Delphi Automotive Systems Corp.......... 149,536 1,354 Eaton Corp.............................. 100,751 1,705 Johnson Controls, Inc................... 137,679 2,468 TRW Inc................................. 91,415 2,547 Visteon Corp............................ 38,307 ------------ 557,968 ------------ AUTOMOTIVE AFTERMARKET (0.0%) 1,418 Cooper Tire & Rubber Co................. 22,631 3,188 Goodyear Tire & Rubber Co. (The)........ 75,906 ------------ 98,537 ------------ BEVERAGES: ALCOHOLIC (0.4%) 17,278 Anheuser-Busch Companies, Inc........... 781,138 1,334 Brown-Forman Corp. (Class B)............ 83,508 706 Coors (Adolph) Co. (Class B)............ 37,700 ------------ 902,346 ------------ BEVERAGES: NON-ALCOHOLIC (1.2%) 48,589 Coca Cola Co............................ 2,290,971 8,690 Coca-Cola Enterprises Inc............... 164,589
SEE NOTES TO FINANCIAL STATEMENTS 118 Morgan Stanley Variable Investment Series - S&P 500 Index PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ----------------------------------------------------------------- 5,547 Pepsi Bottling Group, Inc. (The)........ $ 130,354 ------------ 2,585,914 ------------ BIOTECHNOLOGY (1.0%) 20,428 Amgen Inc.*............................. 1,152,956 2,890 Biogen, Inc.*........................... 165,741 3,696 Chiron Corp.*........................... 162,033 4,146 Genzyme Corp. (General Division)*....... 248,180 10,642 Immunex Corp.*.......................... 294,890 4,182 MedImmune, Inc.*........................ 193,836 ------------ 2,217,636 ------------ BROADCASTING (0.4%) 11,677 Clear Channel Communications, Inc.*..... 594,476 4,105 Univision Communications, Inc. (Class A)*............................. 166,088 ------------ 760,564 ------------ BUILDING PRODUCTS (0.1%) 8,967 Masco Corp.............................. 219,691 ------------ CABLE/SATELLITE TV (0.3%) 18,463 Comcast Corp. (Class A Special)*........ 664,668 ------------ CASINO/GAMING (0.0%) 2,197 Harrah's Entertainment, Inc.*........... 81,311 ------------ CHEMICALS: MAJOR DIVERSIFIED (0.8%) 17,622 Dow Chemical Co. (The).................. 595,271 20,031 Du Pont (E.I.) de Nemours & Co., Inc............................... 851,518 1,507 Eastman Chemical Co..................... 58,803 2,120 Hercules Inc.*.......................... 21,200 4,306 Rohm & Haas Co.......................... 149,117 ------------ 1,675,909 ------------ NUMBER OF SHARES VALUE - ----------------------------------------------------------------- CHEMICALS: SPECIALTY (0.3%) 4,442 Air Products & Chemicals, Inc........... $ 208,374 2,536 Engelhard Corp.......................... 70,196 981 Great Lakes Chemical Corp............... 23,819 3,143 Praxair, Inc............................ 173,651 1,433 Sigma-Aldrich Corp...................... 56,475 ------------ 532,515 ------------ COMMERCIAL PRINTING/ FORMS (0.1%) 1,292 Deluxe Corp............................. 53,721 2,237 Donnelley (R.R.) & Sons Co.............. 66,417 ------------ 120,138 ------------ COMPUTER COMMUNICATIONS (1.3%) 5,606 Avaya Inc.*............................. 68,113 143,318 Cisco Systems, Inc.*.................... 2,595,489 ------------ 2,663,602 ------------ COMPUTER PERIPHERALS (0.4%) 43,290 EMC Corp.*.............................. 581,818 2,540 Lexmark International Group, Inc.*...... 149,860 6,470 Network Appliance, Inc.*................ 141,499 1,810 QLogic Corp.*........................... 80,563 ------------ 953,740 ------------ COMPUTER PROCESSING HARDWARE (3.6%) 6,855 Apple Computer, Inc.*................... 150,124 33,099 Compaq Computer Corp.................... 323,046 50,997 Dell Computer Corp.*.................... 1,386,098 6,330 Gateway, Inc.*.......................... 50,893 37,907 Hewlett-Packard Co...................... 778,610 33,659 International Business Machines Corp.... 4,071,393 1,898 NCR Corp.*.............................. 69,960 11,098 Palm, Inc.*............................. 43,060 63,338 Sun Microsystems, Inc.*................. 781,591 ------------ 7,654,775 ------------
SEE NOTES TO FINANCIAL STATEMENTS 119 Morgan Stanley Variable Investment Series - S&P 500 Index PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ----------------------------------------------------------------- CONSTRUCTION MATERIALS (0.0%) 1,979 Vulcan Materials Co..................... $ 94,873 ------------ CONSUMER SUNDRIES (0.0%) 1,241 American Greetings Corp. (Class A)...... 17,101 ------------ CONTAINERS/ PACKAGING (0.1%) 535 Ball Corp............................... 37,824 1,032 Bemis Company, Inc...................... 50,754 3,113 Pactiv Corp.*........................... 55,256 1,636 Sealed Air Corp.*....................... 66,782 964 Temple-Inland, Inc...................... 54,688 ------------ 265,304 ------------ CONTRACT DRILLING (0.2%) 2,752 Nabors Industries, Inc.*................ 94,476 2,584 Noble Drilling Corp.*................... 87,959 1,832 Rowan Companies, Inc.*.................. 35,486 6,229 Transocean Sedco Forex Inc.............. 210,665 ------------ 428,586 ------------ DATA PROCESSING SERVICES (1.0%) 12,048 Automatic Data Processing, Inc.......... 709,627 9,843 Concord EFS, Inc.*...................... 322,654 7,454 First name Corp......................... 584,766 3,657 Fiserv, Inc.*........................... 154,764 7,314 Paychex, Inc............................ 256,283 ------------ 2,028,094 ------------ DEPARTMENT STORES (0.6%) 1,636 Dillard's, Inc. (Class A)............... 26,176 3,765 Federated Department Stores, Inc.*...... 153,988 6,545 Kohl's Corp.*........................... 461,030 5,846 May Department Stores Co................ 216,185 5,155 Penney (J.C.) Co., Inc.................. 138,669 6,303 Sears, Roebuck & Co..................... 300,275 ------------ 1,296,323 ------------ NUMBER OF SHARES VALUE - ----------------------------------------------------------------- DISCOUNT STORES (3.0%) 2,224 Big Lots, Inc.*......................... $ 23,130 8,836 Costco Wholesale Corp.*................. 392,142 6,460 Dollar General Corp..................... 96,254 3,368 Family Dollar Stores, Inc............... 100,973 9,739 Kmart Corp.*............................ 53,175 17,640 Target Corp............................. 724,122 87,088 Wal-Mart Stores, Inc.................... 5,011,914 ------------ 6,401,710 ------------ DRUGSTORE CHAINS (0.4%) 7,636 CVS Corp................................ 226,026 19,931 Walgreen Co............................. 670,877 ------------ 896,903 ------------ ELECTRIC UTILITIES (2.3%) 10,415 AES Corp. (The)*........................ 170,285 2,443 Allegheny Energy, Inc................... 88,485 2,689 Ameren Corp............................. 113,745 6,296 American Electric Power Co., Inc........ 274,065 3,109 Cinergy Corp............................ 103,934 2,598 CMS Energy Corp......................... 62,430 4,147 Consolidated Edison, Inc................ 167,373 3,199 Constellation Energy Group, Inc......... 84,933 5,139 Dominion Resources, Inc................. 308,854 3,178 DTE Energy Co........................... 133,285 15,165 Duke Energy Corp........................ 595,378 6,366 Edison International*................... 96,127 4,319 Entergy Corp............................ 168,916 6,270 Exelon Corp............................. 300,208 5,815 FirstEnergy Corp........................ 203,409 3,436 FPL Group, Inc.......................... 193,790 6,655 Mirant Corp.*........................... 106,613 3,131 Niagara Mohawk Holdings Inc.*........... 55,513 7,567 PG&E Corp.*............................. 145,589 1,654 Pinnacle West Capital Corp.............. 69,220 2,862 PPL Corp................................ 99,741 4,274 Progress Energy, Inc.................... 192,458
SEE NOTES TO FINANCIAL STATEMENTS 120 Morgan Stanley Variable Investment Series - S&P 500 Index PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ----------------------------------------------------------------- 4,054 Public Service Enterprise Group, Inc............................. $ 171,038 5,826 Reliant Energy, Inc..................... 154,506 13,582 Southern Co. (The)...................... 344,304 2,727 TECO Energy, Inc........................ 71,556 5,180 TXU Corp................................ 244,237 6,751 Xcel Energy, Inc........................ 187,273 ------------ 4,907,265 ------------ ELECTRICAL PRODUCTS (0.4%) 3,821 American Power Conversion Corp.*........ 55,252 1,830 Cooper Industries, Inc.................. 63,904 8,362 Emerson Electric Co..................... 477,470 3,824 Molex Inc............................... 118,353 1,541 Power-One, Inc.*........................ 16,042 1,136 Thomas & Betts Corp..................... 24,026 ------------ 755,047 ------------ ELECTRONIC COMPONENTS (0.2%) 3,852 Jabil Circuit, Inc.*.................... 87,517 10,178 Sanmina-SCI Corp.*...................... 202,542 16,034 Solectron Corp.*........................ 180,864 ------------ 470,923 ------------ ELECTRONIC EQUIPMENT/ INSTRUMENTS (0.5%) 9,000 Agilent Technologies, Inc.*............. 256,590 25,942 JDS Uniphase Corp.*..................... 226,474 2,407 PerkinElmer, Inc........................ 84,293 3,591 Rockwell International Corp............. 64,135 4,462 Symbol Technologies, Inc................ 70,857 1,798 Tektronix, Inc.*........................ 46,352 3,474 Thermo Electron Corp.*.................. 82,890 2,555 Waters Corp.*........................... 99,006 14,068 Xerox Corp.............................. 146,589 ------------ 1,077,186 ------------ ELECTRONIC PRODUCTION EQUIPMENT (0.5%) 15,949 Applied Materials, Inc.*................ 639,555 NUMBER OF SHARES VALUE - ----------------------------------------------------------------- 3,621 KLA-Tencor Corp.*....................... $ 179,457 2,800 Novellus Systems, Inc.*................. 110,460 3,534 Teradyne, Inc.*......................... 106,515 ------------ 1,035,987 ------------ ELECTRONICS/APPLIANCE STORES (0.2%) 4,120 Best Buy Co., Inc.*..................... 306,858 4,070 Circuit City Stores, Inc.-Circuit City Group.................................. 105,616 3,502 RadioShack Corp......................... 105,410 ------------ 517,884 ------------ ELECTRONICS/ APPLIANCES (0.1%) 1,500 Maytag Corp............................. 46,545 1,308 Whirlpool Corp.......................... 95,916 ------------ 142,461 ------------ ENGINEERING & CONSTRUCTION (0.0%) 1,565 Fluor Corp.............................. 58,531 ------------ ENVIRONMENTAL SERVICES (0.2%) 3,849 Allied Waste Industries, Inc.*.......... 54,117 12,267 Waste Management, Inc................... 391,440 ------------ 445,557 ------------ FINANCE/RENTAL/ LEASING (2.0%) 4,198 Capital One Financial Corp.............. 226,482 2,388 Countrywide Credit Industries, Inc...... 97,836 19,520 Fannie Mae.............................. 1,551,840 13,581 Freddie Mac............................. 888,197 8,943 Household International, Inc............ 518,157 16,643 MBNA Corp............................... 585,834 5,553 Providian Financial Corp................ 19,713 1,185 Ryder System, Inc....................... 26,248 3,063 USA Education Inc....................... 257,353 ------------ 4,171,660 ------------
SEE NOTES TO FINANCIAL STATEMENTS 121 Morgan Stanley Variable Investment Series - S&P 500 Index PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ----------------------------------------------------------------- FINANCIAL CONGLOMERATES (3.8%) 26,070 American Express Co..................... $ 930,438 100,525 Citigroup, Inc.......................... 5,074,502 6,736 Conseco, Inc.*.......................... 30,043 5,836 Hancock (John) Financial Services , Inc.................................. 241,027 38,551 J.P. Morgan Chase & Co.................. 1,401,329 6,357 State Street Corp....................... 332,153 ------------ 8,009,492 ------------ FINANCIAL PUBLISHING/ SERVICES (0.2%) 2,831 Equifax, Inc............................ 68,369 3,777 McGraw-Hill Companies, Inc. (The)....... 230,321 3,048 Moody's Corporation..................... 121,493 ------------ 420,183 ------------ FOOD DISTRIBUTORS (0.2%) 2,605 Supervalu, Inc.......................... 57,623 13,023 SYSCO Corp.............................. 341,463 ------------ 399,086 ------------ FOOD RETAIL (0.5%) 7,934 Albertson's, Inc........................ 249,842 15,696 Kroger Co.*............................. 327,576 9,807 Safeway Inc.*........................... 409,442 2,746 Winn-Dixie Stores, Inc.................. 39,130 ------------ 1,025,990 ------------ FOOD: MAJOR DIVERSIFIED (1.8%) 8,004 Campbell Soup Co........................ 239,079 7,118 General Mills, Inc...................... 370,207 6,842 Heinz (H.J.) Co......................... 281,343 7,942 Kellogg Co.............................. 239,054 34,186 PepsiCo, Inc............................ 1,664,516 15,305 Sara Lee Corp........................... 340,230 11,168 Unilever N.V. (Netherlands)............. 643,388 ------------ 3,777,817 ------------ NUMBER OF SHARES VALUE - ----------------------------------------------------------------- FOOD: MEAT/FISH/ DAIRY (0.1%) 10,498 ConAgra Foods Inc....................... $ 249,537 ------------ FOOD: SPECIALTY/ CANDY (0.2%) 2,650 Hershey Foods Corp...................... 179,405 4,401 Wrigley (Wm.) Jr. Co.................... 226,079 ------------ 405,484 ------------ FOREST PRODUCTS (0.1%) 2,041 Louisiana-Pacific Corp.................. 17,226 4,225 Weyerhaeuser Co......................... 228,488 ------------ 245,714 ------------ GAS DISTRIBUTORS (0.3%) 6,857 Dynegy, Inc. (Class A).................. 174,853 2,718 KeySpan Corp............................ 94,179 2,181 Kinder Morgan, Inc...................... 121,460 875 Nicor Inc............................... 36,435 4,041 NiSource Inc............................ 93,185 692 Peoples Energy Corp..................... 26,248 4,048 Sempra Energy........................... 99,378 ------------ 645,738 ------------ HOME BUILDING (0.1%) 1,187 Centex Corp............................. 67,766 983 KB HOME................................. 39,418 1,151 Pulte Homes, Inc........................ 51,415 ------------ 158,599 ------------ HOME FURNISHINGS (0.1%) 3,839 Leggett & Platt, Inc.................... 88,297 5,211 Newell Rubbermaid, Inc.................. 143,667 1,136 Tupperware Corp......................... 21,868 ------------ 253,832 ------------ HOME IMPROVEMENT CHAINS (1.4%) 45,787 Home Depot, Inc. (The).................. 2,335,595 15,130 Lowe's Companies, Inc................... 702,183 ------------ 3,037,778 ------------
SEE NOTES TO FINANCIAL STATEMENTS 122 Morgan Stanley Variable Investment Series - S&P 500 Index PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ----------------------------------------------------------------- HOSPITAL/NURSING MANAGEMENT (0.4%) 10,063 HCA Inc................................. $ 387,828 4,791 Health Management Associates, Inc. (Class A)*............................. 88,154 2,000 Manor Care, Inc.*....................... 47,420 6,360 Tenet Healthcare Corp.*................. 373,459 ------------ 896,861 ------------ HOTELS/RESORTS/ CRUISELINES (0.3%) 11,453 Carnival Corp........................... 321,600 7,216 Hilton Hotels Corp...................... 78,799 4,709 Marriott International, Inc. (Class A).............................. 191,421 3,864 Starwood Hotels & Resorts Worldwide, Inc......................... 115,340 ------------ 707,160 ------------ HOUSEHOLD/PERSONAL CARE (2.1%) 1,108 Alberto-Culver Co. (Class B)............ 49,572 4,616 Avon Products, Inc...................... 214,644 4,544 Clorox Co............................... 179,715 10,780 Colgate-Palmolive Co.................... 622,545 20,620 Gillette Co............................. 688,708 1,853 International Flavors & Fragrances, Inc........................ 55,053 10,261 Kimberly-Clark Corp..................... 613,608 25,315 Procter & Gamble Co. (The).............. 2,003,176 ------------ 4,427,021 ------------ INDUSTRIAL CONGLOMERATES (5.9%) 193,973 General Electric Co.**.................. 7,774,438 15,889 Honeywell International, Inc............ 537,366 3,282 Ingersoll-Rand Co....................... 137,220 1,727 ITT Industries, Inc..................... 87,213 7,661 Minnesota Mining & Manufacturing Co..... 905,607 2,760 Textron, Inc............................ 114,430 NUMBER OF SHARES VALUE - ----------------------------------------------------------------- 38,983 Tyco International Ltd. (Bermuda)....... $ 2,296,099 9,155 United Technologies Corp................ 591,688 ------------ 12,444,061 ------------ INDUSTRIAL MACHINERY (0.2%) 5,953 Illinois Tool Works Inc................. 403,137 1,205 McDermott International, Inc.*.......... 14,785 2,291 Parker-Hannifin Corp.................... 105,180 ------------ 523,102 ------------ INDUSTRIAL SPECIALTIES (0.2%) 2,498 Ecolab, Inc............................. 100,544 933 Millipore Corp.......................... 56,633 3,290 PPG Industries, Inc..................... 170,159 3,018 Sherwin-Williams Co..................... 82,995 ------------ 410,331 ------------ INFORMATION TECHNOLOGY SERVICES (0.6%) 3,668 Citrix Systems, Inc.*................... 83,117 3,328 Computer Sciences Corp.*................ 163,005 9,263 Electronic Data Systems Corp............ 634,979 5,918 PeopleSoft, Inc.*....................... 237,904 2,469 Sapient Corp.*.......................... 19,061 6,235 Unisys Corp.*........................... 78,187 ------------ 1,216,253 ------------ INSURANCE BROKERS/ SERVICES (0.4%) 5,260 AON Corp................................ 186,835 5,366 Marsh & McLennan Companies, Inc......... 576,577 ------------ 763,412 ------------ INTEGRATED OIL (4.8%) 1,733 Amerada Hess Corp....................... 108,312 20,844 ChevronTexaco Corp...................... 1,867,831 12,221 Conoco Inc.............................. 345,854 133,658 Exxon Mobil Corp........................ 5,252,759 7,450 Phillips Petroleum Co................... 448,937
SEE NOTES TO FINANCIAL STATEMENTS 123 Morgan Stanley Variable Investment Series - S&P 500 Index PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ----------------------------------------------------------------- 41,501 Royal Dutch Petroleum Co. (ADR) (Netherlands).......................... $ 2,034,379 ------------ 10,058,072 ------------ INTERNET SOFTWARE/ SERVICES (0.2%) 9,034 Siebel Systems, Inc.*................... 252,771 11,130 Yahoo! Inc.*............................ 197,446 ------------ 450,217 ------------ INVESTMENT BANKS/ BROKERS (1.4%) 1,839 Bear Stearns Companies, Inc. (The)...... 107,839 4,656 Lehman Brothers Holdings, Inc........... 311,021 16,536 Merrill Lynch & Co., Inc................ 861,856 21,429 Morgan Stanley Dean Witter & Co. (Note 4)..................................... 1,198,738 26,703 Schwab (Charles) Corp................... 413,095 ------------ 2,892,549 ------------ INVESTMENT MANAGERS (0.2%) 5,096 Franklin Resources, Inc................. 179,736 2,412 Price (T.) Rowe Group, Inc.............. 83,769 4,325 Stilwell Financial, Inc................. 117,726 ------------ 381,231 ------------ LIFE/HEALTH INSURANCE (0.6%) 10,203 AFLAC, Inc.............................. 250,586 2,940 Jefferson-Pilot Corp.................... 136,034 3,702 Lincoln National Corp................... 179,806 14,161 MetLife, Inc............................ 448,620 2,426 Torchmark Corp.......................... 95,415 4,730 UnumProvident Corp...................... 125,392 ------------ 1,235,853 ------------ MAJOR BANKS (4.1%) 30,741 Bank of America Corp.................... 1,935,146 14,390 Bank of New York Co., Inc............... 587,112 22,784 Bank One Corp........................... 889,715 NUMBER OF SHARES VALUE - ----------------------------------------------------------------- 8,852 BB&T Corp............................... $ 319,646 3,480 Comerica, Inc........................... 199,404 20,419 FleetBoston Financial Corp.............. 745,293 4,908 Huntington Bancshares, Inc.............. 84,369 8,274 KeyCorp................................. 201,389 9,141 Mellon Financial Corp................... 343,884 11,841 National City Corp...................... 346,231 5,550 PNC Financial Services Group, Inc....... 311,910 6,696 SouthTrust Corp......................... 165,190 5,643 SunTrust Banks, Inc..................... 353,816 26,590 Wachovia Corp........................... 833,862 33,123 Wells Fargo & Co........................ 1,439,194 ------------ 8,756,161 ------------ MAJOR TELECOMMUNICATIONS (4.4%) 6,065 ALLTEL Corp............................. 374,392 69,130 AT&T Corp............................... 1,254,018 36,674 BellSouth Corp.......................... 1,399,113 65,682 SBC Communications, Inc................. 2,572,764 17,333 Sprint Corp. (FON Group)................ 348,047 53,038 Verizon Communications Inc.............. 2,517,183 57,629 WorldCom, Inc.- WorldCom Group*......... 811,416 ------------ 9,276,933 ------------ MANAGED HEALTH CARE (0.5%) 2,801 Aetna Inc............................... 92,405 2,826 CIGNA Corp.............................. 261,829 3,296 Humana, Inc.*........................... 38,860 6,092 UnitedHealth Group Inc.................. 431,131 1,246 Wellpoint Health Networks, Inc.*........ 145,595 ------------ 969,820 ------------ MEDIA CONGLOMERATES (2.4%) 86,493 AOL Time Warner Inc.*................... 2,776,425 39,833 Disney (Walt) Co. (The)................. 825,340
SEE NOTES TO FINANCIAL STATEMENTS 124 Morgan Stanley Variable Investment Series - S&P 500 Index PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ----------------------------------------------------------------- 34,650 Viacom, Inc. (Class B) (Non-Voting)*.... $ 1,529,797 ------------ 5,131,562 ------------ MEDICAL DISTRIBUTORS (0.4%) 2,010 Amerisource Bergen Corp................. 127,735 8,810 Cardinal Health, Inc.................... 569,655 5,588 McKesson HBOC, Inc...................... 208,991 ------------ 906,381 ------------ MEDICAL SPECIALTIES (1.6%) 4,141 Applera Corp. - Applied Biosystems Group.................................. 162,617 999 Bard (C.R.), Inc........................ 64,435 1,048 Bausch & Lomb, Inc...................... 39,468 11,535 Baxter International, Inc............... 618,622 5,052 Becton, Dickinson & Co.................. 167,474 5,268 Biomet, Inc............................. 162,781 7,881 Boston Scientific Corp.*................ 190,090 5,954 Guidant Corp.*.......................... 296,509 23,655 Medtronic, Inc.......................... 1,211,373 2,387 Pall Corp............................... 57,431 1,701 St. Jude Medical, Inc.*................. 132,083 3,842 Stryker Corp............................ 224,258 3,787 Zimmer Holdings, Inc.*.................. 115,655 ------------ 3,442,796 ------------ MISCELLANEOUS COMMERCIAL SERVICES (0.1%) 3,362 Convergys Corp.*........................ 126,041 2,608 Sabre Holdings Corp.*................... 110,449 ------------ 236,490 ------------ MISCELLANEOUS MANUFACTURING (0.2%) 1,166 Crane Co................................ 29,896 2,793 Danaher Corp............................ 168,446 3,955 Dover Corp.............................. 146,612 ------------ 344,954 ------------ MOTOR VEHICLES (0.7%) 35,383 Ford Motor Co........................... 556,221 NUMBER OF SHARES VALUE - ----------------------------------------------------------------- 10,854 General Motors Corp..................... $ 527,504 5,915 Harley-Davidson, Inc.................... 321,244 ------------ 1,404,969 ------------ MULTI-LINE INSURANCE (2.2%) 51,046 American International Group, Inc....... 4,053,052 4,790 Hartford Financial Services Group, Inc. (The).................................. 300,956 3,742 Loews Corp.............................. 207,232 2,497 Safeco Corp............................. 77,782 ------------ 4,639,022 ------------ OFFICE EQUIPMENT/ SUPPLIES (0.1%) 2,147 Avery Dennison Corp..................... 121,370 4,765 Pitney Bowes, Inc....................... 179,212 ------------ 300,582 ------------ OIL & GAS PIPELINES (0.3%) 9,971 El Paso Corp............................ 444,806 10,070 Williams Companies, Inc. (The).......... 256,986 ------------ 701,792 ------------ OIL & GAS PRODUCTION (0.6%) 4,861 Anardarko Petroleum Corp................ 276,348 2,678 Apache Corp............................. 133,604 3,923 Burlington Resources, Inc............... 147,269 2,462 Devon Energy Corp....................... 95,156 2,256 EOG Resources, Inc...................... 88,232 1,958 Kerr-McGee Corp......................... 107,298 7,300 Occidental Petroleum Corp............... 193,669 4,767 Unocal Corp............................. 171,946 ------------ 1,213,522 ------------ OIL REFINING/ MARKETING (0.1%) 1,349 Ashland, Inc............................ 62,162 6,045 Marathon Oil Corp....................... 181,350 1,536 Sunoco Inc.............................. 57,354 ------------ 300,866 ------------
SEE NOTES TO FINANCIAL STATEMENTS 125 Morgan Stanley Variable Investment Series - S&P 500 Index PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ----------------------------------------------------------------- OILFIELD SERVICES/ EQUIPMENT (0.5%) 6,563 Baker Hughes Inc........................ $ 239,353 8,389 Halliburton Co.......................... 109,896 11,249 Schlumberger Ltd........................ 618,133 ------------ 967,382 ------------ OTHER CONSUMER SERVICES (0.3%) 3,585 Block (H.&R.), Inc...................... 160,250 19,178 Cendant Corp.*.......................... 376,081 ------------ 536,331 ------------ OTHER CONSUMER SPECIALTIES (0.1%) 2,903 Fortune Brands, Inc..................... 114,930 ------------ OTHER METALS/ MINERALS (0.1%) 3,554 Inco Ltd. (Canada)*..................... 60,205 1,538 Phelps Dodge Corp....................... 49,831 ------------ 110,036 ------------ PACKAGED SOFTWARE (4.7%) 4,635 Adobe Systems, Inc...................... 143,917 1,071 Autodesk, Inc........................... 39,916 4,772 BMC Software, Inc.*..................... 78,118 11,254 Computer Associates International, Inc..................... 388,150 7,266 Compuware Corp.*........................ 85,666 4,144 Intuit Inc.*............................ 177,197 1,616 Mercury Interactive Corp.*.............. 54,912 105,233 Microsoft Corp.*........................ 6,973,791 7,077 Novell, Inc.*........................... 32,483 108,670 Oracle Corp.*........................... 1,500,733 5,130 Parametric Technology Corp.*............ 40,065 7,833 VERITAS Software Corp.*................. 351,075 ------------ 9,866,023 ------------ NUMBER OF SHARES VALUE - ----------------------------------------------------------------- PERSONNEL SERVICES (0.1%) 3,427 Robert Half International, Inc.*........ $ 91,501 2,160 TMP Worldwide, Inc.*.................... 92,664 ------------ 184,165 ------------ PHARMACEUTICALS: GENERIC DRUGS (0.0%) 2,080 Watson Pharmaceuticals, Inc.*........... 65,291 ------------ PHARMACEUTICALS: MAJOR (9.5%) 30,334 Abbott Laboratories..................... 1,691,121 25,777 American Home Products Corp............. 1,581,677 37,805 Bristol-Myers Squibb Co................. 1,928,055 59,935 Johnson & Johnson....................... 3,542,159 21,966 Lilly (Eli) & Co........................ 1,725,210 44,446 Merck & Co., Inc........................ 2,613,425 122,837 Pfizer, Inc............................. 4,895,054 25,194 Pharmacia Corp.......................... 1,074,524 28,607 Schering-Plough Corp.................... 1,024,417 ------------ 20,075,642 ------------ PHARMACEUTICALS: OTHER (0.3%) 2,563 Allergan, Inc........................... 192,353 3,477 Forest Laboratories, Inc.*.............. 284,940 4,799 King Pharmaceuticals, Inc.*............. 202,182 ------------ 679,475 ------------ PRECIOUS METALS (0.2%) 10,473 Barrick Gold Corp. (Canada)............. 167,059 2,813 Freeport-McMoRan Copper & Gold, Inc. (Class B)*............................. 37,666 3,830 Newmont Mining Corp..................... 73,191 6,416 Placer Dome Inc. (Canada)............... 69,999 ------------ 347,915 ------------ PROPERTY - CASUALTY INSURERS (0.7%) 13,932 Allstate Corp. (The) (Note 4)........... 469,508 3,318 Chubb Corp. (The)....................... 228,942
SEE NOTES TO FINANCIAL STATEMENTS 126 Morgan Stanley Variable Investment Series - S&P 500 Index PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ----------------------------------------------------------------- 3,156 Cincinnati Financial Corp............... $ 120,401 1,432 Progressive Corp. (The)................. 213,798 4,053 St. Paul Companies, Inc................. 178,210 2,592 XL Capital Ltd. (Class A) (Bermuda)..... 236,805 ------------ 1,447,664 ------------ PUBLISHING: BOOKS/ MAGAZINES (0.0%) 964 Meredith Corp........................... 34,367 ------------ PUBLISHING: NEWSPAPERS (0.4%) 1,659 Dow Jones & Co., Inc.................... 90,797 5,175 Gannett Co., Inc........................ 347,915 1,643 Knight-Ridder, Inc...................... 106,680 2,962 New York Times Co. (The) (Class A)...... 128,107 5,821 Tribune Co.............................. 217,880 ------------ 891,379 ------------ PULP & PAPER (0.4%) 1,134 Boise Cascade Corp...................... 38,567 4,490 Georgia-Pacific Group................... 123,969 9,417 International Paper Co.................. 379,976 1,940 Mead Corp............................... 59,927 1,999 Westvaco Corp........................... 56,872 2,147 Willamette Industries, Inc.............. 111,902 ------------ 771,213 ------------ RAILROADS (0.4%) 7,555 Burlington Northern Santa Fe Corp....... 215,544 4,165 CSX Corp................................ 145,983 7,533 Norfolk Southern Corp................... 138,080 4,854 Union Pacific Corp...................... 276,678 ------------ 776,285 ------------ REAL ESTATE INVESTMENT TRUSTS (0.2%) 8,096 Equity Office Properties Trust.......... 243,528 NUMBER OF SHARES VALUE - ----------------------------------------------------------------- 5,291 Equity Residential Properties Trust..... $ 151,905 ------------ 395,433 ------------ RECREATIONAL PRODUCTS (0.2%) 1,714 Brunswick Corp.......................... 37,297 5,685 Eastman Kodak Co........................ 167,310 3,375 Hasbro, Inc............................. 54,776 1,424 International Game Technology*.......... 97,259 8,434 Mattel, Inc............................. 145,065 ------------ 501,707 ------------ REGIONAL BANKS (1.1%) 7,120 AmSouth Bancorporation.................. 134,568 11,290 Fifth Third Bancorp..................... 695,238 4,340 Northern Trust Corp..................... 261,355 4,444 Regions Financial Corp.................. 133,498 5,692 Synovus Financial Corp.................. 142,585 38,119 U.S. Bancorp............................ 797,831 2,684 Union Planters Corp..................... 121,129 1,793 Zions Bancorporation.................... 94,276 ------------ 2,380,480 ------------ RESTAURANTS (0.5%) 2,277 Darden Restaurants, Inc................. 80,606 25,116 McDonald's Corp......................... 664,821 7,450 Starbucks Corp.*........................ 141,923 2,850 Tricon Global Restaurants, Inc.*........ 140,220 2,043 Wendy's International, Inc.............. 59,594 ------------ 1,087,164 ------------ SAVINGS BANKS (0.4%) 4,392 Charter One Financial, Inc.............. 119,243 3,080 Golden West Financial Corp.............. 181,258 17,114 Washington Mutual, Inc.................. 559,628 ------------ 860,129 ------------ SEMICONDUCTORS (3.6%) 6,640 Advanced Micro Devices, Inc.*........... 105,310 7,526 Altera Corp.*........................... 159,702
SEE NOTES TO FINANCIAL STATEMENTS 127 Morgan Stanley Variable Investment Series - S&P 500 Index PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ----------------------------------------------------------------- 7,069 Analog Devices, Inc.*................... $ 313,793 5,829 Applied Micro Circuits Corp.*........... 65,984 5,125 Broadcom Corp. (Class A)*............... 210,023 4,979 Conexant Systems, Inc.*................. 71,498 131,147 Intel Corp.............................. 4,124,573 6,186 Linear Technology Corp.................. 241,501 7,168 LSI Logic Corp.*........................ 113,111 6,310 Maxim Integrated Products, Inc.*........ 331,338 11,709 Micron Technology, Inc.*................ 362,979 3,437 National Semiconductor Corp.*........... 105,825 2,825 NVIDIA Corp.*........................... 188,993 3,226 PMC - Sierra, Inc.*..................... 68,585 33,846 Texas Instruments, Inc.................. 947,688 3,722 Vitesse Semiconductor Corp.*............ 46,376 6,527 Xilinx, Inc.*........................... 254,879 ------------ 7,712,158 ------------ SERVICES TO THE HEALTH INDUSTRY (0.1%) 7,665 Healthsouth Corp.*...................... 113,595 5,774 IMS Health Inc.......................... 112,651 2,337 Quintiles Transnational Corp.*.......... 37,579 ------------ 263,825 ------------ SPECIALTY INSURANCE (0.2%) 2,062 Ambac Financial Group, Inc.............. 119,307 2,900 MBIA, Inc............................... 155,527 2,094 MGIC Investment Corp.................... 129,242 ------------ 404,076 ------------ SPECIALTY STORES (0.4%) 2,099 AutoZone, Inc.*......................... 150,708 5,667 Bed Bath & Beyond Inc.*................. 192,111 5,998 Office Depot, Inc.*..................... 111,203 9,020 Staples, Inc.*.......................... 168,674 2,854 Tiffany & Co............................ 89,815 3,879 Toys 'R' Us, Inc.*...................... 80,450 ------------ 792,961 ------------ NUMBER OF SHARES VALUE - ----------------------------------------------------------------- SPECIALTY TELECOMMUNICATIONS (0.3%) 2,757 CenturyTel, Inc......................... $ 90,430 5,472 Citizens Communications Co.*............ 58,332 32,532 Qwest Communications International, Inc..................... 459,677 ------------ 608,439 ------------ STEEL (0.1%) 1,568 Allegheny Technologies Inc.............. 26,264 1,520 Nucor Corp.............................. 80,499 1,743 USX-U.S. Steel Group Inc................ 31,566 1,668 Worthington Industries, Inc............. 23,686 ------------ 162,015 ------------ TELECOMMUNICATION EQUIPMENT (1.4%) 15,426 ADC Telecommunications, Inc.*........... 70,960 1,590 Andrew Corp.*........................... 34,805 6,393 CIENA Corp.*............................ 91,484 3,624 Comverse Technology, Inc.*.............. 81,069 18,479 Corning Inc............................. 164,833 66,710 Lucent Technologies Inc................. 419,606 43,489 Motorola, Inc........................... 653,205 62,541 Nortel Networks Corp. (Canada).......... 469,058 14,936 QUALCOMM Inc.*.......................... 754,268 3,052 Scientific-Atlanta, Inc................. 73,065 8,011 Tellabs, Inc.*.......................... 120,405 ------------ 2,932,758 ------------ TOBACCO (1.0%) 42,335 Philip Morris Companies, Inc............ 1,941,060 3,232 UST, Inc................................ 113,120 ------------ 2,054,180 ------------ TOOLS/HARDWARE (0.1%) 1,559 Black & Decker Corp..................... 58,821
SEE NOTES TO FINANCIAL STATEMENTS 128 Morgan Stanley Variable Investment Series - S&P 500 Index PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ----------------------------------------------------------------- 1,131 Snap-On, Inc............................ $ 38,069 1,668 Stanley Works (The)..................... 77,679 ------------ 174,569 ------------ TRUCKS/CONSTRUCTION/FARM MACHINERY (0.3%) 6,707 Caterpillar, Inc........................ 350,441 807 Cummins Inc............................. 31,102 4,588 Deere & Co.............................. 200,312 1,160 Navistar International Corp.*........... 45,820 1,499 PACCAR, Inc............................. 98,364 ------------ 726,039 ------------ WHOLESALE DISTRIBUTORS (0.1%) 3,384 Genuine Parts Co........................ 124,193 1,828 Grainger (W.W.), Inc.................... 87,744 ------------ 211,937 ------------ WIRELESS COMMUNICATIONS (0.6%) 49,441 AT&T Wireless Services Inc.*............ 710,467 15,598 Nextel Communications, Inc. (Class A)*............................. 170,954 19,260 Sprint Corp. (PCS Group)*............... 470,137 ------------ 1,351,558 ------------ Total Common Stocks (COST $225,961,038).................... 204,482,781 ------------ PRINCIPAL AMOUNT IN THOUSANDS VALUE - ----------------------------------------------------------------- Short-Term Investment (a) (3.8%) U.S. Government Agency $ 8,000 Federal Home Loan Mortgage Corp. 1.51% due 01/02/02 (COST $7,999,664)...................... $ 7,999,664 ------------
Total Investments (COST $233,960,702) (b)................ 100.4% 212,482,445 Liabilities in Excess of Other Assets... (0.4) (883,041) ------ ------------ Net Assets.............................. 100.0% $211,599,404 ====== ============
- --------------------------------------------------- ADR AMERICAN DEPOSITORY RECEIPT. * NON-INCOME PRODUCING SECURITY. ** A PORTION OF THIS SECURITY IS SEGREGATED IN CONNECTION WITH OPEN FUTURES CONTRACTS. (a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $20,166,626 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $41,644,883, RESULTING IN NET UNREALIZED DEPRECIATION OF $21,478,257.
FUTURES CONTRACTS OPEN AT DECEMBER 31, 2001: NUMBER OF LONG/ DESCRIPTION, DELIVERY UNDERLYING FACE UNREALIZED CONTRACTS SHORT MONTH, AND YEAR AMOUNT AT VALUE APPRECIATION - ----------------------------------------------------------------------------------------------- 27 Long S&P 500 Index March/2002 $7,757,100 $81,065
SEE NOTES TO FINANCIAL STATEMENTS 129 Morgan Stanley Variable Investment Series - Competitive Edge "Best Ideas" PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001
NUMBER OF SHARES VALUE - ---------------------------------------------------------------- Common Stocks (93.5%) Finland (2.5%) PULP & PAPER 35,000 UPM-Kymmene Oyj......................... $ 1,161,250 ----------- France (8.2%) ELECTRIC UTILITIES 38,400 Suez S.A................................ 1,162,898 ----------- FOOD: MAJOR DIVERSIFIED 8,300 Groupe Danone........................... 1,012,815 ----------- MULTI-LINE INSURANCE 35,000 AXA..................................... 731,665 ----------- OIL REFINING/MARKETING 6,000 TotalFinaElf S.A........................ 857,210 ----------- Total France............................ 3,764,588 ----------- Germany (2.5%) MOTOR VEHICLES 32,000 Bayerische Motoren Werke (BMW) AG....... 1,127,270 ----------- Japan (4.8%) ELECTRONICS/APPLIANCES 26,410 Sony Corp............................... 1,201,001 ----------- MOTOR VEHICLES 25,000 Honda Motor Co.......................... 992,636 ----------- Total Japan............................. 2,193,637 ----------- Netherlands (4.3%) BEVERAGES: ALCOHOLIC 31,000 Heineken NV............................. 1,175,982 ----------- LIFE/HEALTH INSURANCE 30,000 Aegon NV................................ 812,319 ----------- Total Netherlands....................... 1,988,301 ----------- Switzerland (2.4%) PHARMACEUTICALS: MAJOR 30,000 Novartis AG (Registered Shares)......... 1,084,795 ----------- NUMBER OF SHARES VALUE - ---------------------------------------------------------------- United Kingdom (5.0%) BEVERAGES: ALCOHOLIC 105,000 Diageo PLC.............................. $ 1,199,861 ----------- INTEGRATED OIL 23,700 BP Amoco PLC (ADR)...................... 1,102,287 ----------- Total United Kingdom.................... 2,302,148 ----------- United States (63.8%) AEROSPACE & DEFENSE 13,500 General Dynamics Corp................... 1,075,140 ----------- AIR FREIGHT/COURIERS 21,500 FedEx Corp.*............................ 1,115,420 ----------- CHEMICALS: MAJOR DIVERSIFIED 31,500 Dow Chemical Co. (The).................. 1,064,070 ----------- COMPUTER COMMUNICATIONS 70,000 Cisco Systems, Inc.*.................... 1,267,700 ----------- COMPUTER PERIPHERALS 62,000 EMC Corp.*.............................. 833,280 ----------- DISCOUNT STORES 25,000 Wal-Mart Stores, Inc.................... 1,438,750 ----------- FINANCIAL CONGLOMERATES 23,000 Citigroup, Inc.......................... 1,161,040 21,000 State Street Corp....................... 1,097,250 ----------- 2,258,290 ----------- FOOD: MAJOR DIVERSIFIED 39,000 Kraft Foods Inc. (Class A).............. 1,327,170 24,500 PepsiCo, Inc............................ 1,192,905 ----------- 2,520,075 ----------- HOME IMPROVEMENT CHAINS 23,700 Home Depot, Inc. (The).................. 1,208,937 ----------- INDUSTRIAL CONGLOMERATES 30,000 General Electric Co..................... 1,202,400 10,000 Minnesota Mining & Manufacturing Co..... 1,182,100 17,000 United Technologies Corp................ 1,098,710 ----------- 3,483,210 -----------
SEE NOTES TO FINANCIAL STATEMENTS 130 Morgan Stanley Variable Investment Series - Competitive Edge "Best Ideas" PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ---------------------------------------------------------------- INTEGRATED OIL 11,000 Exxon Mobil Corp........................ $ 432,300 ----------- MAJOR BANKS 29,000 Bank of New York Co., Inc............... 1,183,200 ----------- MAJOR TELECOMMUNICATIONS 15,000 Verizon Communications Inc.............. 711,900 ----------- MEDIA CONGLOMERATES 33,300 AOL Time Warner Inc.*................... 1,068,930 ----------- MEDICAL SPECIALTIES 25,300 Medtronic, Inc.......................... 1,295,613 ----------- MULTI-LINE INSURANCE 5,500 American International Group, Inc....... 436,700 ----------- OILFIELD SERVICES/EQUIPMENT 18,000 Schlumberger Ltd........................ 989,100 ----------- PACKAGED SOFTWARE 23,700 Microsoft Corp.*........................ 1,570,599 ----------- PHARMACEUTICALS: MAJOR 14,000 Abbott Laboratories..................... 780,500 22,800 American Home Products Corp............. 1,399,008 19,000 Bristol-Myers Squibb Co................. 969,000 30,900 Schering-Plough Corp.................... 1,106,529 ----------- 4,255,037 ----------- TELECOMMUNICATION EQUIPMENT 74,000 Motorola, Inc........................... 1,111,480 ----------- Total United States..................... 29,319,731 ----------- Total Common Stocks (COST $51,550,122)..................... 42,941,720 ----------- PRINCIPAL AMOUNT IN THOUSANDS VALUE - ---------------------------------------------------------------- Short-Term Investment (a) (6.5%) U.S. Government Agency $ 3,000 Federal Home Loan Mortgage Corp. 1.51% due 01/02/02 (COST $2,999,874)...................... $ 2,999,874 -----------
Total Investments (COST $54,549,996) (b)................. 100.0% 45,941,594 Other Assets in Excess of Liabilities... 0.0 10,915 ------ ----------- Net Assets.............................. 100.0% $45,952,509 ====== ===========
- --------------------------------------------------- ADR AMERICAN DEPOSITORY RECEIPT. * NON-INCOME PRODUCING SECURITY. (a) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $1,501,708 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $10,110,110, RESULTING IN NET UNREALIZED DEPRECIATION OF $8,608,402. SEE NOTES TO FINANCIAL STATEMENTS 131 Morgan Stanley Variable Investment Series - Competitive Edge "Best Ideas" SUMMARY OF INVESTMENTS / / DECEMBER 31, 2001
PERCENT OF INDUSTRY VALUE NET ASSETS - ----------------------------------------------------------------- Aerospace & Defense..................... $ 1,075,140 2.4% Air Freight/Couriers.................... 1,115,420 2.4 Beverages: Alcoholic.................... 2,375,843 5.2 Chemicals: Major Diversified............ 1,064,070 2.3 Computer Communications................. 1,267,700 2.8 Computer Peripherals.................... 833,280 1.8 Discount Stores......................... 1,438,750 3.1 Electric Utilities...................... 1,162,898 2.5 Electronics/Appliances.................. 1,201,001 2.6 Financial Conglomerates................. 2,258,290 4.9 Food: Major Diversified................. 3,532,890 7.7 Home Improvement Chains................. 1,208,937 2.6 Industrial Conglomerates................ 3,483,210 7.6 Integrated Oil.......................... 1,534,587 3.3 Life/Health Insurance................... 812,318 1.8 Major Banks............................. 1,183,200 2.6 Major Telecommunications................ 711,900 1.6 Media Conglomerates..................... 1,068,930 2.3 Medical Specialties..................... 1,295,613 2.8 PERCENT OF INDUSTRY VALUE NET ASSETS - ----------------------------------------------------------------- Motor Vehicles.......................... $ 2,119,906 4.6% Multi-Line Insurance.................... 1,168,366 2.6 Oil Refining/Marketing.................. 857,210 1.9 Oilfield Services/Equipment............. 989,100 2.2 Packaged Software....................... 1,570,599 3.4 Pharmaceuticals: Major.................. 5,339,832 11.6 Pulp & Paper............................ 1,161,250 2.5 Telecommunication Equipment............. 1,111,480 2.4 U.S. Government Agency.................. 2,999,874 6.5 ----------- ------- $45,941,594 100.0% =========== ======= TYPE OF INVESTMENT - ----------------------------------------------------------------- Common Stocks........................... $42,941,720 93.5% Short-Term Investment................... 2,999,874 6.5 ----------- ------- $45,941,594 100.0% =========== =======
SEE NOTES TO FINANCIAL STATEMENTS 132 Morgan Stanley Variable Investment Series - Aggressive Equity PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001
NUMBER OF SHARES VALUE - ---------------------------------------------------------------- Common Stocks (96.9%) ADVERTISING/MARKETING SERVICES (0.1%) 1,000 Omnicom Group, Inc...................... $ 89,350 ----------- AEROSPACE & DEFENSE (3.0%) 4,700 Alliant Techsystems, Inc.*.............. 362,840 5,700 EDO Corp................................ 150,765 3,300 L-3 Communications Holdings, Inc.*...... 297,000 17,700 Lockheed Martin Corp.................... 826,059 1,700 Northrop Grumman Corp................... 171,377 18,200 Raytheon Co............................. 590,954 9,000 Titan Corp. (The)*...................... 224,550 ----------- 2,623,545 ----------- AIR FREIGHT/COURIERS (0.5%) 8,900 FedEx Corp.*............................ 461,732 ----------- ALUMINUM (0.3%) 7,510 Alcoa, Inc.............................. 266,980 ----------- APPAREL/FOOTWEAR (0.1%) 2,400 Nike, Inc. (Class B).................... 134,976 ----------- APPAREL/FOOTWEAR RETAIL (0.6%) 4,400 Chico's Fas, Inc.*...................... 174,680 9,300 TJX Companies, Inc. (The)............... 370,698 ----------- 545,378 ----------- BEVERAGES: ALCOHOLIC (0.7%) 13,260 Anheuser-Busch Companies, Inc........... 599,484 ----------- BEVERAGES: NON-ALCOHOLIC (0.2%) 12,400 Coca-Cola Enterprises Inc............... 234,856 ----------- BIOTECHNOLOGY (6.6%) 7,400 Amgen Inc.*............................. 417,656 3,600 Aviron*................................. 179,028 10,400 Cephalon, Inc.*......................... 786,084 7,900 Genentech, Inc.*........................ 428,575 9,700 Genzyme Corp. (General Division)*....... 580,642 6,300 Gilead Sciences, Inc.*.................. 414,036 NUMBER OF SHARES VALUE - ---------------------------------------------------------------- 16,190 IDEC Pharmaceuticals Corp.*............. $ 1,115,977 3,500 InterMune Inc.*......................... 172,410 10,700 MedImmune, Inc.*........................ 495,945 6,800 Myriad Genetics, Inc.*.................. 357,952 9,500 Neurocrine Biosciences, Inc.*........... 487,445 9,500 NPS Pharmaceuticals, Inc.*.............. 363,850 ----------- 5,799,600 ----------- BROADCASTING (1.1%) 6,300 Clear Channel Communications, Inc.*..... 320,733 4,700 Univision Communications, Inc. (Class A)*.................................... 190,162 16,800 USA Networks, Inc.*..................... 458,808 ----------- 969,703 ----------- CABLE/SATELLITE TV (1.0%) 11,000 Comcast Corp. (Class A Special)*........ 396,000 12,670 Cox Communications, Inc. (Class A)*..... 531,000 ----------- 927,000 ----------- CHEMICALS: MAJOR DIVERSIFIED (0.2%) 4,800 Dow Chemical Co. (The).................. 162,144 ----------- CHEMICALS: SPECIALTY (0.5%) 10,200 Georgia Gulf Corp....................... 188,700 13,700 Olin Corp............................... 221,118 ----------- 409,818 ----------- COMPUTER COMMUNICATIONS (2.2%) 12,800 Brocade Communications Systems, Inc.*... 423,936 54,300 Cisco Systems, Inc.*.................... 983,373 11,300 Emulex Corp.*........................... 446,463 3,300 McDATA Corp. (Class A)*................. 80,850 ----------- 1,934,622 ----------- COMPUTER PERIPHERALS (1.0%) 5,800 Advanced Digital Information Corp.*..... 93,032
SEE NOTES TO FINANCIAL STATEMENTS 133 Morgan Stanley Variable Investment Series - Aggressive Equity PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ---------------------------------------------------------------- 13,000 ATI Technologies Inc. (Canada)*......... $ 165,100 9,300 EMC Corp.*.............................. 124,992 5,600 QLogic Corp.*........................... 249,256 12,100 Storage Technology Corp.*............... 250,107 ----------- 882,487 ----------- COMPUTER PROCESSING HARDWARE (3.7%) 18,800 Compaq Computer Corp.................... 183,488 31,700 Dell Computer Corp.*.................... 861,606 14,800 International Business Machines Corp.... 1,790,208 33,700 Sun Microsystems, Inc.*................. 415,858 ----------- 3,251,160 ----------- CONTAINERS/PACKAGING (0.2%) 11,900 Pactiv Corp.*........................... 211,225 ----------- CONTRACT DRILLING (0.8%) 16,700 ENSCO International Inc................. 414,995 10,100 GlobalSantaFe Corp...................... 288,052 ----------- 703,047 ----------- DATA PROCESSING SERVICES (2.3%) 7,600 Bisys Group, Inc. (The)*................ 486,324 5,700 Concord EFS, Inc.*...................... 186,846 13,700 First Data Corp......................... 1,074,765 6,100 Fiserv, Inc.*........................... 258,152 ----------- 2,006,087 ----------- DISCOUNT STORES (3.1%) 8,200 Costco Wholesale Corp.*................. 363,916 12,800 Target Corp............................. 525,440 32,900 Wal-Mart Stores, Inc.................... 1,893,395 ----------- 2,782,751 ----------- ELECTRICAL PRODUCTS (0.2%) 8,600 02Micro International Ltd. (Cayman Islands)*.............................. 206,830 ----------- NUMBER OF SHARES VALUE - ---------------------------------------------------------------- ELECTRONIC COMPONENTS (0.1%) 6,200 Flextronics International, Ltd. (Singapore)*........................... $ 148,738 ----------- ELECTRONIC DISTRIBUTORS (0.2%) 4,400 Tech Data Corp.*........................ 190,432 ----------- ELECTRONIC PRODUCTION EQUIPMENT (0.4%) 3,000 Celestica, Inc.*........................ 121,170 2,300 KLA-Tencor Corp.*....................... 113,988 3,900 Photronics, Inc.*....................... 122,265 ----------- 357,423 ----------- ELECTRONICS/APPLIANCE STORES (1.1%) 3,500 Best Buy Co., Inc.*..................... 260,680 23,600 Circuit City Stores, Inc.-Circuit City Group.................................. 612,420 2,500 Electronics Boutique Holdings Corp...... 99,850 ----------- 972,950 ----------- ENVIRONMENTAL SERVICES (0.2%) 5,700 Waste Management, Inc................... 181,887 ----------- FINANCE/RENTAL/ LEASING (1.8%) 5,930 Fannie Mae.............................. 471,435 9,270 Freddie Mac............................. 606,258 5,800 USA Education Inc....................... 487,316 ----------- 1,565,009 ----------- FINANCIAL CONGLOMERATES (2.5%) 31,393 Citigroup, Inc.......................... 1,584,719 7,700 Prudential Financial, Inc.*............. 255,563 6,200 State Street Corp....................... 323,950 ----------- 2,164,232 ----------- FOOD RETAIL (0.2%) 4,300 Whole Foods Market, Inc.*............... 187,308 -----------
SEE NOTES TO FINANCIAL STATEMENTS 134 Morgan Stanley Variable Investment Series - Aggressive Equity PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ---------------------------------------------------------------- FOOD: MAJOR DIVERSIFIED (1.5%) 5,000 General Mills, Inc...................... $ 260,050 14,100 Kraft Foods Inc. (Class A).............. 479,823 12,200 PepsiCo, Inc............................ 594,018 ----------- 1,333,891 ----------- FOOD: MEAT/FISH/DAIRY (1.0%) 6,500 Dean Foods Co.*......................... 443,300 11,800 Dreyer's Grand Ice Cream, Inc........... 454,418 ----------- 897,718 ----------- HOME BUILDING (0.7%) 6,100 D.R. Horton, Inc........................ 198,006 5,000 KB HOME................................. 200,500 2,700 Ryland Group, Inc. (The)................ 197,640 ----------- 596,146 ----------- HOME IMPROVEMENT CHAINS (1.6%) 8,700 Home Depot, Inc. (The).................. 443,787 20,500 Lowe's Companies, Inc................... 951,405 ----------- 1,395,192 ----------- HOSPITAL/NURSING MANAGEMENT (2.0%) 12,700 HCA Inc................................. 489,458 25,400 Health Management Associates, Inc. (Class A)*............................. 467,360 13,000 Tenet Healthcare Corp.*................. 763,360 ----------- 1,720,178 ----------- HOUSEHOLD/PERSONAL CARE (1.1%) 11,400 Dial Corp. (The)........................ 195,510 10,200 International Flavors & Fragrances, Inc.................................... 303,042 5,500 Procter & Gamble Co. (The).............. 435,215 ----------- 933,767 ----------- INDUSTRIAL CONGLOMERATES (1.7%) 26,200 General Electric Co..................... 1,050,096 NUMBER OF SHARES VALUE - ---------------------------------------------------------------- 4,100 Minnesota Mining & Manufacturing Co..... $ 484,661 ----------- 1,534,757 ----------- INDUSTRIAL SPECIALTIES (0.2%) 13,200 RPM, Inc................................ 190,872 ----------- INFORMATION TECHNOLOGY SERVICES (2.2%) 13,800 Accenture Ltd. (Class A) (Bermuda)*..... 371,496 4,400 Electronic Data Systems Corp............ 301,620 6,000 Manhattan Associates, Inc.*............. 174,900 24,860 PeopleSoft, Inc.*....................... 999,372 3,100 Tier Technologies, Inc. (Class B)*...... 66,836 ----------- 1,914,224 ----------- INSURANCE BROKERS/ SERVICES (0.2%) 4,700 Gallagher (Arthur J.) & Co.............. 162,103 ----------- INTERNET RETAIL (0.1%) 7,400 Amazon.com, Inc.*....................... 80,068 ----------- INTERNET SOFTWARE/ SERVICES (1.5%) 2,100 Business Objects S.A. (ADR) (France)*... 70,980 15,300 F5 Networks, Inc.*...................... 329,562 11,900 Internet Security Systems, Inc.*........ 381,514 8,300 PEC Solutions, Inc.*.................... 312,163 10,500 Yahoo! Inc.*............................ 186,270 ----------- 1,280,489 ----------- INVESTMENT BANKS/ BROKERS (2.0%) 6,000 Goldman Sachs Group, Inc. (The)......... 556,500 9,320 Lehman Brothers Holdings, Inc........... 622,576 11,600 Merrill Lynch & Co., Inc................ 604,592 ----------- 1,783,668 -----------
SEE NOTES TO FINANCIAL STATEMENTS 135 Morgan Stanley Variable Investment Series - Aggressive Equity PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ---------------------------------------------------------------- INVESTMENT MANAGERS (0.6%) 4,000 Affiliated Managers Group, Inc.*........ $ 281,920 6,800 Federated Investors, Inc. (Class B)..... 216,784 ----------- 498,704 ----------- MAJOR BANKS (1.3%) 17,600 Bank of America Corp.................... 1,107,920 ----------- MAJOR TELECOMMUNICATIONS (0.9%) 11,300 SBC Communications, Inc................. 442,621 7,700 Verizon Communications Inc.............. 365,442 ----------- 808,063 ----------- MANAGED HEALTH CARE (0.1%) 2,600 Anthem, Inc.*........................... 128,700 ----------- MEDIA CONGLOMERATES (1.0%) 12,000 AOL Time Warner Inc.*................... 385,200 10,600 Viacom, Inc. (Class B) (Non-Voting)*.... 467,990 ----------- 853,190 ----------- MEDICAL DISTRIBUTORS (0.4%) 4,400 Andrx Group*............................ 309,804 ----------- MEDICAL SPECIALTIES (4.2%) 16,680 Baxter International, Inc............... 894,548 17,700 Boston Scientific Corp.*................ 426,924 3,600 Digene Corp.*........................... 106,200 13,200 Guidant Corp.*.......................... 657,360 12,400 Medtronic, Inc.......................... 635,004 4,900 St. Jude Medical, Inc.*................. 380,485 4,600 Therasense, Inc......................... 114,080 2,500 Varian Medical Systems, Inc.*........... 178,150 8,620 Zimmer Holdings, Inc.*.................. 263,255 ----------- 3,656,006 ----------- MISCELLANEOUS COMMERCIAL SERVICES (0.3%) 2,400 MAXIMUS, Inc.*.......................... 100,944 4,200 Sabre Holdings Corp.*................... 177,870 ----------- 278,814 ----------- NUMBER OF SHARES VALUE - ---------------------------------------------------------------- MOVIES/ENTERTAINMENT (0.5%) 17,600 Fox Entertainment Group, Inc. (Class A)*.................................... $ 466,928 ----------- MULTI-LINE INSURANCE (1.3%) 13,900 American International Group, Inc....... 1,103,660 ----------- OIL & GAS PRODUCTION (0.3%) 6,160 Apache Corp............................. 307,261 ----------- OILFIELD SERVICES/ EQUIPMENT (1.8%) 14,100 Baker Hughes Inc........................ 514,227 3,600 BJ Services Co.*........................ 116,820 5,300 Schlumberger Ltd........................ 291,235 4,900 Smith International, Inc.*.............. 262,738 9,800 Weatherford International, Inc.*........ 365,148 ----------- 1,550,168 ----------- OTHER CONSUMER SERVICES (1.3%) 9,400 Cendant Corp.*.......................... 184,334 9,100 eBay, Inc.*............................. 608,790 9,100 Weight Watchers International, Inc.*.... 307,762 ----------- 1,100,886 ----------- OTHER METALS/MINERALS (0.0%) 100 Phelps Dodge Corp....................... 3,240 ----------- PACKAGED SOFTWARE (5.3%) 11,800 Legato Systems, Inc.*................... 153,046 7,700 Mercury Interactive Corp.*.............. 261,646 39,300 Microsoft Corp.*........................ 2,604,411 39,300 Network Associates, Inc.*............... 1,015,905 5,800 Quest Software, Inc.*................... 128,238 4,000 Symantec Corp.*......................... 265,320 5,400 VERITAS Software Corp.*................. 242,028 ----------- 4,670,594 ----------- PHARMACEUTICALS: MAJOR (3.9%) 11,000 Abbott Laboratories..................... 613,250
SEE NOTES TO FINANCIAL STATEMENTS 136 Morgan Stanley Variable Investment Series - Aggressive Equity PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ---------------------------------------------------------------- 17,210 American Home Products Corp............. $ 1,056,006 37,700 Pfizer, Inc............................. 1,502,345 6,800 Pharmacia Corp.......................... 290,020 ----------- 3,461,621 ----------- PHARMACEUTICALS: OTHER (1.6%) 2,400 Allergan, Inc........................... 180,120 8,300 Biovail Corp. (Canada)*................. 466,875 5,320 Forest Laboratories, Inc.*.............. 435,974 8,600 King Pharmaceuticals, Inc.*............. 362,318 ----------- 1,445,287 ----------- PROPERTY - CASUALTY INSURERS (3.5%) 5,200 ACE, Ltd. (Bermuda)..................... 208,780 200 Berkshire Hathaway, Inc. (Class B)*..... 505,000 9,700 Everest Re Group, Ltd. (Bermuda)........ 685,790 5,000 Progressive Corp. (The)................. 746,500 2,600 RenaissanceRe Holdings Ltd. (Bermuda)... 248,040 7,800 XL Capital Ltd. (Class A) (Bermuda)..... 712,608 ----------- 3,106,718 ----------- PULP & PAPER (0.2%) 7,530 Jefferson Smurfit Group PLC (ADR) (Ireland).............................. 169,425 ----------- RAILROADS (0.5%) 8,200 CSX Corp................................ 287,410 9,600 Norfolk Southern Corp................... 175,968 ----------- 463,378 ----------- RECREATIONAL PRODUCTS (2.3%) 16,200 Activision, Inc.*....................... 421,362 14,100 Electronic Arts Inc.*................... 845,295 10,500 Hasbro, Inc............................. 170,415 NUMBER OF SHARES VALUE - ---------------------------------------------------------------- 11,900 Mattel, Inc............................. $ 204,680 7,500 THQ, Inc.*.............................. 363,525 ----------- 2,005,277 ----------- REGIONAL BANKS (1.7%) 12,300 Fifth Third Bancorp..................... 757,434 10,100 First Tennessee National Corp........... 366,226 14,200 National Commerce Financial Corp........ 359,260 ----------- 1,482,920 ----------- RESTAURANTS (2.0%) 6,600 Applebee's International, Inc........... 225,720 12,000 CBRL Group, Inc......................... 353,280 5,000 Cheesecake Factory, Inc. (The)*......... 173,850 15,300 Darden Restaurants, Inc................. 541,620 3,400 Tricon Global Restaurants, Inc.*........ 167,280 8,900 Wendy's International, Inc.............. 259,613 ----------- 1,721,363 ----------- SEMICONDUCTORS (4.9%) 4,000 ESS Technology, Inc.*................... 85,040 2,700 Genesis Microchip, Inc.*................ 178,524 1,000 Infineon Technologies AG (ADR) (Germany).............................. 20,300 44,500 Intel Corp.............................. 1,399,525 9,800 Intersil Holding Corp. (Class A)*....... 316,050 4,300 Linear Technology Corp.................. 167,872 8,900 Marvell Technology Group Ltd. (Bermuda)*............................. 318,798 4,200 Maxim Integrated Products, Inc.*........ 220,542 12,800 Microchip Technology Inc.*.............. 495,872 6,900 NVIDIA Corp.*........................... 461,610 10,100 Taiwan Semiconductor Manufacturing Co. Ltd. (ADR) (Taiwan)*................... 173,417
SEE NOTES TO FINANCIAL STATEMENTS 137 Morgan Stanley Variable Investment Series - Aggressive Equity PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ---------------------------------------------------------------- 13,200 Texas Instruments, Inc.................. $ 369,600 2,700 Zoran Corp.*............................ 88,128 ----------- 4,295,278 ----------- SERVICES TO THE HEALTH INDUSTRY (1.2%) 9,800 Laboratory Corp. of America Holdings*... 792,330 3,800 Quest Diagnostics Inc.*................. 272,498 ----------- 1,064,828 ----------- SPECIALTY STORES (1.0%) 10,600 AutoZone, Inc.*......................... 761,080 2,800 Michaels Stores, Inc.*.................. 92,260 ----------- 853,340 ----------- STEEL (0.2%) 3,600 Nucor Corp.............................. 190,656 ----------- TELECOMMUNICATION EQUIPMENT (1.5%) 16,900 Microtune, Inc.*........................ 396,474 5,400 Motorola, Inc........................... 81,108 15,500 Polycom, Inc.*.......................... 533,200 6,100 QUALCOMM Inc.*.......................... 308,050 ----------- 1,318,832 ----------- TOOLS/HARDWARE (0.2%) 3,900 Stanley Works (The)..................... 181,623 ----------- TRUCKING (0.6%) 5,100 Roadway Corp............................ 187,170 8,500 Swift Transportation Co., Inc.*......... 182,835 5,600 Werner Enterprises, Inc................. 136,080 ----------- 506,085 ----------- TRUCKS/CONSTRUCTION/FARM MACHINERY (0.7%) 10,100 Deere & Co.............................. 440,966 4,600 Navistar International Corp.*........... 181,700 ----------- 622,666 ----------- NUMBER OF SHARES VALUE - ---------------------------------------------------------------- WHOLESALE DISTRIBUTORS (0.4%) 10,500 Genuine Parts Co........................ $ 385,350 ----------- WIRELESS COMMUNICATIONS (0.5%) 17,900 Sprint Corp. (PCS Group)*............... 436,939 ----------- Total Common Stocks (COST $81,992,226)..................... 85,349,351 ----------- PRINCIPAL AMOUNT IN THOUSANDS - --------- Short-Term Investment (4.1%) Repurchase Agreement $ 3,595 The Bank of New York 0.875% due 01/02/02 (dated 12/31/01; proceeds $3,594,917) (a) (COST $3,594,742)...................... 3,594,742 -----------
Total Investments (COST $85,586,968) (b)................. 101.0% 88,944,093 Liabilities in Excess of Other Assets... (1.0) (874,807) ------ ----------- Net Assets.............................. 100.0% $88,069,286 ====== ===========
- --------------------------------------------------- ADR AMERICAN DEPOSITORY RECEIPT. * NON-INCOME PRODUCING SECURITY. (a) COLLATERALIZED BY $3,663,747 FEDERAL HOME LOAN MORTGAGE CORP. 5.775% DUE 06/26/06 VALUED AT $3,666,640. (b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $5,262,258 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $1,905,133, RESULTING IN NET UNREALIZED APPRECIATION OF $3,357,125. SEE NOTES TO FINANCIAL STATEMENTS 138 Morgan Stanley Variable Investment Series - Information PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001
NUMBER OF SHARES VALUE - ---------------------------------------------------------------- Common Stocks (90.5%) CABLE/SATELLITE TV (6.1%) 9,900 Adelphia Communications Corp. (Class A)*.................................... $ 308,682 8,700 Charter Communications, Inc. (Class A)*.................................... 142,941 4,000 Comcast Corp. (Class A Special)*........ 144,000 3,000 Cox Communications, Inc. (Class A)*..... 125,730 ----------- 721,353 ----------- COMPUTER COMMUNICATIONS (7.7%) 26,300 Cisco Systems, Inc.*.................... 476,293 3,000 Emulex Corp.*........................... 118,530 5,000 Extreme Networks, Inc.*................. 64,500 2,000 Finisar Corp.*.......................... 20,340 6,000 Foundry Networks, Inc.*................. 48,900 2,000 Juniper Networks, Inc.*................. 37,900 6,000 McDATA Corp. (Class A)*................. 147,000 100 NetScreen Technologies, Inc.*........... 2,213 ----------- 915,676 ----------- COMPUTER PERIPHERALS (3.2%) 9,900 EMC Corp.*.............................. 133,056 3,000 Network Appliance, Inc.*................ 65,610 4,000 QLogic Corp.*........................... 178,040 ----------- 376,706 ----------- COMPUTER PROCESSING HARDWARE (5.5%) 14,900 Compaq Computer Corp.................... 145,424 9,900 Dell Computer Corp.*.................... 269,082 18,900 Sun Microsystems, Inc.*................. 233,226 ----------- 647,732 ----------- DATA PROCESSING SERVICES (1.3%) 1,500 Affiliated Computer Services, Inc. (Class A)*............................. 159,195 ----------- NUMBER OF SHARES VALUE - ---------------------------------------------------------------- ELECTRONIC COMPONENTS (2.2%) 5,500 Flextronics International, Ltd. (Singapore)*........................... $ 131,945 6,450 Sanmina-SCI Corp.*...................... 128,355 ----------- 260,300 ----------- ELECTRONIC DISTRIBUTORS (1.3%) 3,000 CDW Computer Centers, Inc.*............. 161,130 ----------- ELECTRONIC EQUIPMENT/ INSTRUMENTS (0.7%) 3,000 JDS Uniphase Corp.*..................... 26,190 3,500 Symbol Technologies, Inc................ 55,580 ----------- 81,770 ----------- ELECTRONIC PRODUCTION EQUIPMENT (2.6%) 3,500 Amkor Technology, Inc.*................. 56,105 3,000 Applied Materials, Inc.*................ 120,300 3,000 ASM Lithography Holding NV (Netherlands)*......................... 51,150 2,000 Novellus Systems, Inc.*................. 78,900 ----------- 306,455 ----------- FINANCIAL PUBLISHING/ SERVICES (2.4%) 9,900 SunGard Data Systems Inc.*.............. 286,407 ----------- INFORMATION TECHNOLOGY SERVICES (3.7%) 2,500 Accenture Ltd. (Class A) (Bermuda)*..... 67,300 3,000 American Management Systems, Inc.*...... 54,240 7,000 Citrix Systems, Inc.*................... 158,620 4,000 PeopleSoft, Inc.*....................... 160,800 ----------- 440,960 ----------- INTERNET RETAIL (0.3%) 3,000 Amazon.com, Inc.*....................... 32,460 ----------- INTERNET SOFTWARE/ SERVICES (4.4%) 5,000 BEA Systems, Inc.*...................... 77,050
SEE NOTES TO FINANCIAL STATEMENTS 139 Morgan Stanley Variable Investment Series - Information PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - ---------------------------------------------------------------- 8,000 KPMG Consulting, Inc.*.................. $ 132,560 2,500 Openwave Systems Inc.*.................. 24,475 4,950 Siebel Systems, Inc.*................... 138,501 4,000 VeriSign, Inc.*......................... 152,160 ----------- 524,746 ----------- MEDIA CONGLOMERATES (1.9%) 7,000 AOL Time Warner Inc.*................... 224,700 ----------- PACKAGED SOFTWARE (12.4%) 1,500 Entrust Technologies Inc.*.............. 15,285 5,000 i2 Technologies, Inc.*.................. 39,500 3,500 Informatica Corp.*...................... 50,785 200 Magma Design Automation, Inc.*.......... 6,056 1,000 Mercury Interactive Corp.*.............. 33,980 5,000 Micromuse Inc.*......................... 75,000 9,950 Microsoft Corp.*........................ 659,387 500 Nassda Corp.*........................... 11,245 3,500 NetIQ Corp.*............................ 123,410 3,300 Network Associates, Inc.*............... 85,305 7,500 Oracle Corp.*........................... 103,575 4,000 Quest Software, Inc.*................... 88,440 3,500 SAP AG (ADR) (Germany).................. 111,755 1,500 VERITAS Software Corp.*................. 67,230 ----------- 1,470,953 ----------- SEMICONDUCTORS (26.9%) 14,900 Agere Systems, Inc. (Class A)*.......... 84,781 5,970 Altera Corp.*........................... 126,683 3,900 Analog Devices, Inc.*................... 173,121 6,000 Applied Micro Circuits Corp.*........... 67,920 3,500 Broadcom Corp. (Class A)*............... 143,430 7,500 Conexant Systems, Inc.*................. 107,700 20,900 Intel Corp.............................. 657,305 4,450 Intersil Holding Corp. (Class A)*....... 143,513 4,000 Linear Technology Corp.................. 156,160 6,000 Marvell Technology Group Ltd. (Bermuda)*............................. 214,920 NUMBER OF SHARES VALUE - ---------------------------------------------------------------- 3,000 Maxim Integrated Products, Inc.*........ $ 157,530 2,500 Microchip Technology Inc.*.............. 96,850 6,200 Micron Technology, Inc.*................ 192,200 3,000 NVIDIA Corp.*........................... 200,700 4,000 Pixelworks, Inc.*....................... 64,240 9,900 Taiwan Semiconductor Manufacturing Co. Ltd. (ADR) (Taiwan)*................... 169,983 6,200 Texas Instruments, Inc.................. 173,600 3,000 TriQuint Semiconductor, Inc.*........... 36,780 2,450 Vitesse Semiconductor Corp.*............ 30,527 5,000 Xilinx, Inc.*........................... 195,250 ----------- 3,193,193 ----------- TELECOMMUNICATION EQUIPMENT (5.5%) 2,500 CIENA Corp.*............................ 35,775 2,000 Comverse Technology, Inc.*.............. 44,740 3,500 Microtune, Inc.*........................ 82,110 12,400 Motorola, Inc........................... 186,248 2,500 Nokia Corp. (ADR) (Finland)............. 61,325 7,500 Nortel Networks Corp. (Canada)*......... 56,250 1,500 ONI Systems Corp.*...................... 9,405 3,500 QUALCOMM Inc.*.......................... 176,750 ----------- 652,603 ----------- WIRELESS COMMUNICATIONS (2.4%) 2,500 Nextel Communications, Inc. (Class A)*.................................... 27,400 9,900 Vodafone Group PLC (ADR) (United Kingdom)............................... 254,232 ----------- 281,632 ----------- Total Common Stocks (COST $11,053,157)..................... 10,737,971 -----------
SEE NOTES TO FINANCIAL STATEMENTS 140 Morgan Stanley Variable Investment Series - Information PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN THOUSANDS VALUE - ------------------------------------------------------------------ Convertible Bonds (5.6%) COMPUTER COMMUNICATIONS (1.2%) $150 Juniper Networks, Inc. 4.75% due 03/15/07............................... $ 108,375 60 Redback Networks, Inc. 5.00% due 04/01/07............................... 30,450 ----------- 138,825 ----------- ELECTRONIC PRODUCTION EQUIPMENT (0.5%) 180 Celestica, Inc. (Canada) 0.00% due 08/01/20............................... 76,275 ----------- PACKAGED SOFTWARE (1.6%) 130 i2 Technologies, Inc. 5.25% due 12/15/06............................... 95,875 115 Mercury Interactive Corp. 4.75% due 07/01/07............................... 93,006 ----------- 188,881 ----------- SEMICONDUCTORS (1.5%) 55 Analog Devices, Inc. 4.75% due 10/01/05............................... 52,044 158 Vitesse Semiconductor Corp. 4.00% due 03/15/05............................... 122,647 ----------- 174,691 ----------- TELECOMMUNICATION EQUIPMENT (0.8%) 60 Comverse Technology Inc. 1.50% due 12/01/05............................... 45,525 PRINCIPAL AMOUNT IN THOUSANDS VALUE - ------------------------------------------------------------------ $ 65 ONI Systems Corp. 5.00% due 10/15/05.... $ 43,794 ----------- 89,319 ----------- Total Convertible Bonds (COST $699,256)........................ 667,991 ----------- Short-Term Investment (a) (3.4%) U.S. Government Agency 400 Federal Home Loan Mortgage Corp. 1.51% due 01/02/02 (Cost $399,983)........... 399,983 -----------
Total Investments (COST $12,152,396) (b)................. 99.5% 11,805,945 Other Assets in Excess of Liabilities... 0.5 54,918 ------ ----------- Net Assets.............................. 100.0% $11,860,863 ====== ===========
- --------------------------------------------------- ADR AMERICAN DEPOSITORY RECEIPT. * NON-INCOME PRODUCING SECURITY. (A) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $624,593 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $971,044, RESULTING IN NET UNREALIZED DEPRECIATION OF $346,451. SEE NOTES TO FINANCIAL STATEMENTS 141 Morgan Stanley Variable Investment Series - Strategist PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001
NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------- Common Stocks (60.1%) AEROSPACE & DEFENSE (2.0%) 83,000 Lockheed Martin Corp...................................... $ 3,873,610 229,000 Raytheon Co............................................... 7,435,630 ------------- 11,309,240 ------------- AGRICULTURAL COMMODITIES/MILLING (0.4%) 150,000 Archer-Daniels-Midland Co................................. 2,152,500 ------------- APPAREL/FOOTWEAR RETAIL (0.7%) 302,825 Gap, Inc. (The)........................................... 4,221,381 ------------- AUTO PARTS: O.E.M. (0.2%) 100,000 Delphi Automotive Systems Corp............................ 1,366,000 ------------- BIOTECHNOLOGY (2.7%) 162,400 Applera Corp. - Celera Genomics Group*.................... 4,334,456 90,000 Bruker Daltonics, Inc.*................................... 1,471,500 111,300 Enzon, Inc. *............................................. 6,263,964 100,000 Human Genome Sciences, Inc.*.............................. 3,372,000 ------------- 15,441,920 ------------- CABLE/SATELLITE TV (0.4%) 68,000 Comcast Corp. (Class A Special)*.......................... 2,448,000 ------------- CHEMICALS: MAJOR DIVERSIFIED (1.2%) 200,800 Dow Chemical Co. (The).................................... 6,783,024 ------------- COMPUTER COMMUNICATIONS (1.2%) 145,000 Brocade Communications Systems, Inc.*..................... 4,802,400 100,000 Cisco Systems, Inc.*...................................... 1,811,000 ------------- 6,613,400 ------------- COMPUTER PROCESSING HARDWARE (2.0%) 230,000 Apple Computer, Inc.*..................................... 5,037,000 221,000 Compaq Computer Corp...................................... 2,156,960 352,400 Sun Microsystems, Inc.*................................... 4,348,616 ------------- 11,542,576 ------------- DISCOUNT STORES (1.3%) 169,000 Costco Wholesale Corp.*................................... 7,500,220 ------------- ELECTRIC UTILITIES (1.0%) 100,000 Dominion Resources, Inc................................... 6,010,000 ------------- ELECTRICAL PRODUCTS (0.9%) 85,000 Emerson Electric Co....................................... 4,853,500 ------------- ELECTRONICS/APPLIANCES (0.6%) 110,000 Maytag Corp............................................... 3,413,300 -------------
SEE NOTES TO FINANCIAL STATEMENTS 142 Morgan Stanley Variable Investment Series - Strategist PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------- ENVIRONMENTAL SERVICES (2.5%) 150,000 Waste Connections, Inc.*.................................. $ 4,648,500 300,000 Waste Management, Inc..................................... 9,573,000 ------------- 14,221,500 ------------- FINANCIAL CONGLOMERATES (1.3%) 173,000 Hancock (John) Financial Services , Inc................... 7,144,900 ------------- FOOD: MAJOR DIVERSIFIED (3.8%) 158,800 General Mills, Inc........................................ 8,259,188 385,000 Kellogg Co................................................ 11,588,500 50,000 Kraft Foods Inc. (Class A)................................ 1,701,500 ------------- 21,549,188 ------------- FOOD: MEAT/FISH/DAIRY (0.1%) 10,725 Dean Foods Co.*........................................... 731,445 ------------- INDUSTRIAL CONGLOMERATES (2.6%) 177,600 General Electric Co....................................... 7,118,208 20,000 SPX Corp.................................................. 2,738,000 85,000 Tyco International Ltd. (Bermuda)......................... 5,006,500 ------------- 14,862,708 ------------- INTEGRATED OIL (2.1%) 200,000 Phillips Petroleum Co..................................... 12,052,000 ------------- INVESTMENT BANKS/BROKERS (0.9%) 100,000 Merrill Lynch & Co., Inc.................................. 5,212,000 ------------- MAJOR TELECOMMUNICATIONS (1.0%) 400,000 WorldCom, Inc. - WorldCom Group*.......................... 5,632,000 ------------- MANAGED HEALTH CARE (3.2%) 220,000 Oxford Health Plans, Inc.*................................ 6,630,800 86,000 UnitedHealth Group Inc.................................... 6,086,220 49,500 Wellpoint Health Networks, Inc.*.......................... 5,784,075 ------------- 18,501,095 ------------- MEDIA CONGLOMERATES (0.8%) 135,800 AOL Time Warner Inc.*..................................... 4,359,180 ------------- MEDICAL DISTRIBUTORS (0.8%) 66,000 Andrx Group*.............................................. 4,647,060 ------------- MEDICAL SPECIALTIES (1.1%) 120,000 Baxter International, Inc................................. 6,435,600 ------------- MOTOR VEHICLES (0.6%) 200,000 Ford Motor Co............................................. 3,144,000 ------------- MULTI-LINE INSURANCE (1.5%) 105,000 American International Group, Inc......................... 8,337,000 -------------
SEE NOTES TO FINANCIAL STATEMENTS 143 Morgan Stanley Variable Investment Series - Strategist PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------- OIL & GAS PRODUCTION (1.1%) 114,000 Kerr-McGee Corp........................................... $ 6,247,200 ------------- OILFIELD SERVICES/EQUIPMENT (1.3%) 136,000 Smith International, Inc.*................................ 7,292,320 ------------- PACKAGED SOFTWARE (1.4%) 78,500 Microsoft Corp.*.......................................... 5,202,195 65,000 VERITAS Software Corp.*................................... 2,913,300 ------------- 8,115,495 ------------- PHARMACEUTICALS: MAJOR (5.7%) 90,000 American Home Products Corp............................... 5,522,400 242,874 Johnson & Johnson......................................... 14,353,853 315,200 Pfizer, Inc............................................... 12,560,720 ------------- 32,436,973 ------------- PRECIOUS METALS (2.9%) 388,100 Barrick Gold Corp. (Canada)............................... 6,190,195 258,000 Newmont Mining Corp....................................... 4,930,380 493,000 Placer Dome Inc. (Canada)................................. 5,378,630 ------------- 16,499,205 ------------- PROPERTY-CASUALTY INSURERS (2.0%) 124,000 ACE, Ltd. (Bermuda)....................................... 4,978,600 200,000 Allstate Corp. (The)...................................... 6,740,000 ------------- 11,718,600 ------------- PULP & PAPER (0.4%) 60,000 Boise Cascade Corp........................................ 2,040,600 ------------- RAILROADS (0.5%) 100,000 Burlington Northern Santa Fe Corp......................... 2,853,000 ------------- REGIONAL BANKS (0.5%) 64,000 Union Planters Corp....................................... 2,888,320 ------------- SEMICONDUCTORS (1.5%) 100,000 Intel Corp................................................ 3,145,000 173,000 Micron Technology, Inc.*.................................. 5,363,000 ------------- 8,508,000 ------------- SPECIALTY STORES (2.6%) 439,600 Bed Bath & Beyond Inc.*................................... 14,902,440 ------------- STEEL (0.8%) 50,000 Nucor Corp................................................ 2,648,000 100,000 USX-U.S. Steel Group Inc.................................. 1,811,000 ------------- 4,459,000 -------------
SEE NOTES TO FINANCIAL STATEMENTS 144 Morgan Stanley Variable Investment Series - Strategist PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------- TELECOMMUNICATION EQUIPMENT (1.6%) 400,000 Ericsson (L.M.) Telefonaktiebolaqet (Class B) (ADR) (Sweden)................................................. $ 2,088,000 98,300 Nokia Oyj (ADR) (Finland)................................. 2,411,299 130,000 RF Micro Devices, Inc.*................................... 2,499,900 150,000 Tellabs, Inc.*............................................ 2,254,500 ------------- 9,253,699 ------------- TOBACCO (0.9%) 95,000 R. J. Reynolds Tobacco Holdings, Inc...................... 5,348,500 ------------- Total Common Stocks (COST $282,812,938)...................................... 343,048,089 -------------
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE - --------- ------ -------- U.S. Government & Agency Obligations (11.2%) $ 2,726 Federal Home Loan Mortgage Corp......................... 8.00% 01/01/30 - 12/01/30 2,853,871 9,850 Federal National Mortgage Assoc.+...................... 6.00 9,622,704 4,341 .............................. 6.50 05/01/31 4,340,366 5,500 +............................. 6.50 5,500,000 1,400 +............................. 7.00 1,448,563 16,750 +............................. 7.50 17,278,672 4,189 ***........................... 7.50 01/01/30 - 01/01/31 4,321,503 4,158 ***........................... 8.00 11/01/29 - 09/01/31 4,353,440 9,400 +............................. 8.00 9,840,625 750 U.S. Treasury Bond............ 8.125 08/15/21 957,421 3,000 U.S. Treasury Note***......... 6.75 05/15/05 3,261,798 -------------- Total U.S. Government & Agency Obligations (COST $63,788,125)......................................... 63,778,963 -------------- Corporate Bonds (9.0%) AEROSPACE & DEFENSE (0.4%) 490 Lockheed Martin Corp.......... 7.75 05/01/26 528,519 130 Northrop Grumman Corp......... 7.75 02/15/31 140,785 1,000 Raytheon Co................... 6.15 11/01/08 993,328 834 Systems 2001 Asset Trust...... 6.664 09/15/13 859,444 -------------- 2,522,076 -------------- AIRLINES (0.3%) 790 AmericaWest Airlines - 144A**....................... 7.10 04/02/21 792,216 867 Continental Airlines Inc...... 6.90 01/02/18 761,927 185 Southwest Airlines Co......... 5.496 11/01/06 182,158 -------------- 1,736,301 --------------
SEE NOTES TO FINANCIAL STATEMENTS 145 Morgan Stanley Variable Investment Series - Strategist PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------- AUTO PARTS: O.E.M. (0.0%) $ 235 TRW Inc....................... 7.625% 03/15/06 $ 242,026 -------------- BROADCASTING (0.1%) 335 Clear Channel Communications, Inc.......... 7.65 09/15/10 346,042 -------------- CABLE/SATELLITE TV (0.3%) 495 Comcast Cable Communications............... 6.75 01/30/11 497,153 305 Comcast Cable Communications............... 8.375 05/01/07 336,292 770 Cox Communications, Inc....... 7.75 11/01/10 822,224 190 TCI Communications, Inc....... 7.875 02/15/26 196,328 -------------- 1,851,997 -------------- COMPUTER PROCESSING HARDWARE (0.1%) 705 Sun Microsystems Inc.......... 7.65 08/15/09 715,615 -------------- DEPARTMENT STORES (0.2%) 440 Federated Department Stores, Inc.................. 6.90 04/01/29 410,985 455 May Department Stores Co., Inc..................... 5.95 11/01/08 456,506 -------------- 867,491 -------------- DRUGSTORE CHAINS (0.1%) 455 CVS Corp...................... 5.625 03/15/06 458,260 -------------- ELECTRIC UTILITIES (0.2%) 430 DTE Energy Co................. 7.05 06/01/11 443,740 750 MidAmerican Funding LLC....... 6.75 03/01/11 735,747 -------------- 1,179,487 -------------- ENVIRONMENTAL SERVICES (0.1%) 650 USA Waste Services, Inc....... 7.125 10/01/07 663,768 -------------- FINANCE/RENTAL/LEASING (0.7%) 885 American General Finance Corp......................... 5.875 07/14/06 898,006 1,510 Ford Motor Credit Corp........ 7.375 10/28/09 1,487,225 1,000 Household Finance Corp........ 7.875 03/01/07 1,074,515 265 Household Finance Corp........ 6.75 05/15/11 263,503 525 MBNA America Bank N.A......... 6.50 06/20/06 515,180 -------------- 4,238,429 -------------- FINANCIAL CONGLOMERATES (0.7%) 885 AXA Financial Inc............. 6.50 04/01/08 905,099 405 Chase Manhattan Corp.......... 6.00 02/15/09 403,393 555 General Motors Acceptance Corp......................... 6.875 09/15/11 543,655 500 General Motors Acceptance Corp......................... 8.00 11/01/31 508,892
SEE NOTES TO FINANCIAL STATEMENTS 146 Morgan Stanley Variable Investment Series - Strategist PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------- $ 875 Prudential Holdings........... 7.245% 12/18/23 $ 895,921 595 Prudential Holdings........... 8.695 12/18/23 618,901 -------------- 3,875,861 -------------- FINANCIAL PUBLISHING/SERVICES (0.0%) 105 Reed Elsevier Capital......... 6.75 08/01/11 106,511 -------------- FOOD RETAIL (0.3%) 420 Ahold Finance USA Inc......... 8.25 07/15/10 468,395 795 Kroger Co..................... 6.80 04/01/11 815,404 410 Safeway Inc................... 7.50 09/15/09 443,935 115 Safeway Inc................... 6.50 03/01/11 117,258 -------------- 1,844,992 -------------- GAS DISTRIBUTORS (0.4%) 560 CMS Panhandle Holding Co...... 7.00 07/15/29 482,845 285 Consolidated Natural Gas Co........................... 6.25 11/01/11 278,921 470 Nisource Finance Corp......... 7.875 11/15/10 486,414 155 Ras Laffan Liquid Natural Gas Co. - 144A** (Qatar)......... 7.628 09/15/06 161,695 660 Ras Laffan Liquid Natural Gas Co. - 144A** (Qatar)......... 8.294 03/15/14 673,200 -------------- 2,083,075 -------------- HOME BUILDING (0.1%) 380 Centex Corp................... 7.875 02/01/11 387,125 -------------- HOME IMPROVEMENT CHAINS (0.2%) 885 Lowe's Companies, Inc......... 8.25 06/01/10 999,523 -------------- HOSPITAL/NURSING MANAGEMENT (0.2%) 600 Manor Care, Inc............... 8.00 03/01/08 621,000 585 Tenet Holdings Corp. - 144A**....................... 6.875 11/15/31 538,356 -------------- 1,159,356 -------------- HOTELS/RESORTS/CRUISELINES (0.2%) 210 Hyatt Equities LLC - 144A**... 9.25 05/15/05 218,596 675 Marriott International - 144A**....................... 7.00 01/15/08 679,047 -------------- 897,643 -------------- INDUSTRIAL CONGLOMERATES (0.3%) 500 Hutchison Whampoa Finance - 144A** (Hong Kong)........... 7.50 08/01/27 471,770 720 Tyco International Group S.A. (Luxembourg)................. 6.75 02/15/11 722,893 220 Tyco International Group S.A. (Luxembourg)................. 6.375 10/15/11 214,924 80 Tyco International Group S.A. (Luxembourg)................. 6.875 01/15/29 76,747 -------------- 1,486,334 -------------- INTEGRATED OIL (0.2%) 865 Conoco Inc.................... 6.95 04/15/29 879,591 --------------
SEE NOTES TO FINANCIAL STATEMENTS 147 Morgan Stanley Variable Investment Series - Strategist PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------- LIFE/HEALTH INSURANCE (0.5%) $ 550 American General Corp......... 7.50% 07/15/25 $ 599,833 550 John Hancock.................. 7.375 02/15/24 550,114 500 Metropolitan Life Insurance Co. - 144A**................. 7.80 11/01/25 509,629 470 Nationwide Mutual Insurance... 7.50 02/15/24 422,890 350 Nationwide Mutual Insurance... 8.25 12/01/31 349,244 255 New England Mutual Life Insurance Co................. 7.875 02/15/24 261,261 -------------- 2,692,971 -------------- MAJOR BANKS (0.0%) 200 BankOne Corp.................. 6.00 02/17/09 197,562 -------------- MAJOR TELECOMMUNICATIONS (0.7%) 640 AT&T Corp. - 144A**........... 8.00 11/15/31 669,803 405 BellSouth Telecommunications Inc.......................... 6.375 06/01/28 391,186 295 GTE Corp...................... 6.94 04/15/28 292,636 370 Telus Corp. (Canada).......... 8.00 06/01/11 392,634 2,000 WorldCom, Inc................. 7.375 01/15/06 2,073,006 -------------- 3,819,265 -------------- MANAGED HEALTH CARE (0.5%) 1,570 Aetna, Inc.................... 7.875 03/01/11 1,546,255 675 Cigna Corp.................... 6.375 10/15/11 662,801 440 Wellpoint Health Network Inc.......................... 6.375 06/15/06 448,709 -------------- 2,657,765 -------------- MEDIA CONGLOMERATES (0.6%) 1,000 News America Holdings, Inc................ 7.75 12/01/45 927,831 2,000 Time Warner Inc............... 9.15 02/01/23 2,404,156 -------------- 3,331,987 -------------- MOTOR VEHICLES (0.1%) 445 DaimlerChrysler North American Holdings Co.................. 8.50 01/18/31 475,042 -------------- MULTI-LINE INSURANCE (0.3%) 1,065 Farmers Exchange Capital - 144A**....................... 7.05 07/15/28 845,966 895 Hartford Financial Services Group Inc.................... 7.90 06/15/10 979,625 -------------- 1,825,591 -------------- OIL & GAS PIPELINES (0.1%) 335 Williams Companies, Inc....... 7.50 01/15/31 326,361 340 Williams Companies, Inc....... 7.75 06/15/31 341,041 -------------- 667,402 -------------- PHARMACEUTICALS: MAJOR (0.1%) 560 American Home Products Corp......................... 6.70 03/15/11 580,242 --------------
SEE NOTES TO FINANCIAL STATEMENTS 148 Morgan Stanley Variable Investment Series - Strategist PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------- PROPERTY - CASUALTY INSURERS (0.2%) $ 885 Florida Windstorm - 144A**.... 7.125% 02/25/19 $ 907,482 -------------- RAILROADS (0.3%) 1,601 Southern Pacific Transportation Co. (Series B)................... 7.28 04/30/15 1,671,946 -------------- REAL ESTATE DEVELOPMENT (0.0%) 217 World Financial Properties Tower (Class B).............. 6.91 09/01/13 218,423 -------------- REAL ESTATE INVESTMENT TRUSTS (0.1%) 525 EOP Operating L.P............. 6.763 06/15/07 534,279 240 Simon Property Group LP....... 6.375 11/15/07 234,787 -------------- 769,066 -------------- SERVICES TO THE HEALTH INDUSTRY (0.1%) 305 Anthem Insurance - 144A**..... 9.125 04/01/10 327,758 200 Anthem Insurance - 144A**..... 9.00 04/01/27 201,306 -------------- 529,064 -------------- SPECIALTY TELECOMMUNICATIONS (0.3%) 665 PCCW HKTC Capital Ltd. (Hong Kong) - 144A**............... 7.75 11/15/11 663,456 155 Qwest Capital Funding......... 7.90 08/15/10 157,687 635 Qwest Capital Funding - 144A**....................... 7.25 02/15/11 618,790 -------------- 1,439,933 -------------- WIRELESS COMMUNICATIONS (0.2%) 435 AT&T Wireless - 144A**........ 8.75 03/01/31 493,024 375 Vodafone Airtouch PLC (United Kingdom)..................... 7.75 02/15/10 411,861 225 Vodafone Group PLC (United Kingdom)..................... 6.65 05/01/08 232,757 -------------- 1,137,642 -------------- Total Corporate Bonds (COST $50,877,415)......................................... 51,462,886 -------------- Asset-Backed Securities (1.2%) FINANCE/RENTAL/LEASING 700 American Express Credit Assets....................... 5.53 10/15/08 715,568 915 Chase Credit Card Master Trust........................ 5.50 11/17/08 931,746 950 Citibank Credit Issuance Trust........................ 6.90 10/15/07 1,016,958 1,400 Detroit Edison Sec 2001-1 CL A5........................... 6.42 03/01/15 1,407,861 366 First Security Auto Owner Trust........................ 7.30 07/15/04 374,429 710 Ford Credit Auto Owner Trust........................ 6.74 06/15/04 733,540 610 MMCA Automobile Trust......... 7.00 06/15/04 626,081
SEE NOTES TO FINANCIAL STATEMENTS 149 Morgan Stanley Variable Investment Series - Strategist PORTFOLIO OF INVESTMENTS / / DECEMBER 31, 2001 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------- $ 600 PSE&G Transition Funding LLC.......................... 6.61% 06/15/15 $ 622,122 385 Toyota Auto Receivables Owner Trust........................ 6.76 08/15/04 397,997 -------------- Total Asset-Backed Securities (COST $6,714,445).......................................... 6,826,302 -------------- Short-Term Investments (37.0%) U.S. Government Agency & Obligations (a) (36.8%) 210,000 Federal Home Loan Mortgage Corp.***..................... 1.51 01/02/02 209,991,192 150 U.S. Treasury Bill............ 0.77 04/18/02 149,193 -------------- Total U.S. Government Agency & Obligations (COST $210,140,384)........................................ 210,140,385 -------------- Repurchase Agreement (0.2%) 868 The Bank of New York (dated 12/31/01; proceeds $868,424) (b) (COST $868,381).............. 0.875 01/02/02 868,381 -------------- Total Short-Term Investments (COST $211,008,765)........................................ 211,008,766 --------------
Total Investments (COST $615,201,688) (c)............................ 118.5% 676,125,006 Liabilities in Excess of Other Assets............... (18.5) (105,583,838) ----- -------------- Net Assets.......................................... 100.0% $ 570,541,168 ===== ==============
- --------------------- ADR AMERICAN DEPOSITORY RECEIPT. * NON-INCOME PRODUCING SECURITY. ** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. *** SOME OR ALL OF THESE SECURITIES HAVE BEEN SEGREGATED IN CONNECTION WITH OPEN FUTURES CONTRACTS AND/OR SECURITIES PURCHASED ON A FORWARD COMMITMENT BASIS. + SECURITIES PURCHASED ON A FORWARD COMMITMENT BASIS WITH AN APPROXIMATE PRINCIPAL AMOUNT AND NO DEFINITE MATURITY DATE; THE ACTUAL PRINCIPAL AMOUNT AND MATURITY DATE WILL BE DETERMINED UPON SETTLEMENT. (a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (b) COLLATERALIZED BY $880,928 FEDERAL HOME LOAN MORTGAGE CORP. 5.775% DUE 06/26/06, VALUED AT $885,750. (c) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $72,632,029 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $11,708,711, RESULTING IN NET UNREALIZED APPRECIATION OF $60,923,318.
FUTURES CONTRACTS OPEN AT DECEMBER 31, 2001: NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE UNREALIZED CONTRACTS LONG/SHORT MONTH, AND YEAR AMOUNT AT VALUE DEPRECIATION - ----------------------------------------------------------------------------------------------- 7 Short US Treasury Note Future 10 Year, March 2002 $(735,984) $(3,663) 6 Short US Treasury Bond 30 Year, March 2002 (609,188) (2,260) ------- Total unrealized depreciation.................................................. $(5,923) =======
SEE NOTES TO FINANCIAL STATEMENTS 150 (This page has been intentionally left blank.) 151 Morgan Stanley Variable Investment Series FINANCIAL STATEMENTS Statements of Assets and Liabilities DECEMBER 31, 2001
Money Short-Term Quality Income High Market Bond Plus Yield Utilities -------------- -------------- -------------- -------------- -------------- Assets: Investments in securities, at value*.... $ 546,369,415 $ 50,042,158 $ 542,697,663 $ 68,732,473 $ 353,811,058 Cash.................................... 5,103 -- 242,218 -- 22,639 Receivable for: Investments sold...................... -- -- 1,362,401 -- -- Shares of beneficial interest sold.... 13,600,324 879,151 3,352,107 71,338 181,378 Dividends............................. -- -- -- -- 603,792 Interest.............................. 115,256 331,541 7,428,489 2,500,065 491,734 Foreign withholding taxes reclaimed... -- -- -- -- -- Variation margin...................... -- 15,189 -- -- -- Prepaid expenses and other assets....... 812 27 3,574 1,540 12 ------------- ------------- ------------- ------------- ------------- Total Assets........................ 560,090,910 51,268,066 555,086,452 71,305,416 355,110,613 ------------- ------------- ------------- ------------- ------------- Liabilities: Payable for: Investments purchased................. -- 303,613 47,200,905 33,902 1,536,450 Shares of beneficial interest repurchased.......................... 1,069,442 10,321 378,911 68,038 1,013,652 Variation margin...................... -- -- 344,437 -- -- Distribution fee (Class Y)............ 20,945 5,019 11,041 1,276 5,019 Investment management fee............. 231,782 19,385 213,222 31,076 192,286 Payable to bank....................... -- -- -- 481,812 -- Unrealized depreciation on open forward foreign currency contracts............. -- -- -- -- -- Accrued expenses and other payables..... 50,814 21,983 65,332 55,739 64,221 ------------- ------------- ------------- ------------- ------------- Total Liabilities................... 1,372,983 360,321 48,213,848 671,843 2,811,628 ------------- ------------- ------------- ------------- ------------- Net Assets.......................... $ 558,717,927 $ 50,907,745 $ 506,872,604 $ 70,633,573 $ 352,298,985 ============= ============= ============= ============= ============= Composition of Net Assets: Paid-in-capital......................... $ 558,717,738 $ 50,488,337 $ 524,919,957 $ 392,295,580 $ 279,326,819 Accumulated undistributed net investment income (loss).......................... 189 (83,095) (475,593) 942,409 (27,612) Accumulated undistributed net realized gain (loss)............................ -- 255,416 (30,332,432) (81,496,482) (705,251) Net unrealized appreciation (depreciation)......................... -- 247,087 12,760,672 (241,107,934) 73,705,029 ------------- ------------- ------------- ------------- ------------- Net Assets.......................... $ 558,717,927 $ 50,907,745 $ 506,872,604 $ 70,633,573 $ 352,298,985 ============= ============= ============= ============= ============= *Cost............................... $ 546,369,415 $ 49,795,842 $ 531,398,103 $ 309,840,407 $ 280,106,029 ============= ============= ============= ============= ============= Class X Shares: Net Assets.............................. $ 452,765,450 $ 25,857,578 $ 452,757,239 $ 64,470,443 $ 327,749,363 Shares Outstanding (unlimited authorized shares of $.01 par value).............. 452,765,290 2,542,098 42,927,167 48,363,426 22,255,113 Net Asset Value Per Share........... $ 1.00 $ 10.17 $ 10.55 $ 1.33 $ 14.73 ============= ============= ============= ============= ============= Class Y Shares: Net Assets.............................. $ 105,952,477 $ 25,050,167 $ 54,115,365 $ 6,163,130 $ 24,549,622 Shares Outstanding (unlimited authorized shares of $.01 par value).............. 105,952,448 2,466,476 5,136,312 4,618,282 1,667,611 Net Asset Value Per Share........... $ 1.00 $ 10.16 $ 10.54 $ 1.33 $ 14.72 ============= ============= ============= ============= =============
- --------------------- ** INCLUDES FOREIGN CASH OF $194,880. SEE NOTES TO FINANCIAL STATEMENTS 152
Global Income Dividend Capital Dividend Builder Growth Growth Growth -------------- -------------- -------------- -------------- Assets: Investments in securities, at value*.... $ 70,778,375 $1,315,351,943 $ 111,367,652 $ 294,611,806 Cash.................................... 11,873 -- 92,132 177,569 Receivable for: Investments sold...................... -- 3,756,471 138,668 440,852 Shares of beneficial interest sold.... 7,813 178,920 35,239 54,135 Dividends............................. 125,297 1,521,190 34,913 372,297 Interest.............................. 397,115 -- -- -- Foreign withholding taxes reclaimed... -- 23,542 -- 484,808 Variation margin...................... -- -- -- -- Prepaid expenses and other assets....... 725 17 670 59 ------------- -------------- ------------- ------------- Total Assets........................ 71,321,198 1,320,832,083 111,669,274 296,141,526 ------------- -------------- ------------- ------------- Liabilities: Payable for: Investments purchased................. -- -- 1,090,455 -- Shares of beneficial interest repurchased.......................... 1,042,925 839,855 95,202 229,847 Variation margin...................... -- -- -- -- Distribution fee (Class Y)............ 1,458 12,344 1,352 2,140 Investment management fee............. 44,589 603,852 60,731 187,035 Payable to bank....................... -- -- -- -- Unrealized depreciation on open forward foreign currency contracts............. -- -- -- -- Accrued expenses and other payables..... 25,241 119,530 43,250 70,632 ------------- -------------- ------------- ------------- Total Liabilities................... 1,114,213 1,575,581 1,290,990 489,654 ------------- -------------- ------------- ------------- Net Assets.......................... $ 70,206,985 $1,319,256,502 $ 110,378,284 $ 295,651,872 ============= ============== ============= ============= Composition of Net Assets: Paid-in-capital......................... $ 75,894,525 $1,536,488,905 $ 129,738,368 $ 299,095,660 Accumulated undistributed net investment income (loss).......................... (6,414) 44 257,317 3,453,657 Accumulated undistributed net realized gain (loss)............................ (8,462,915) (371,231,747) (28,858,124) (11,106,890) Net unrealized appreciation (depreciation)......................... 2,781,789 153,999,300 9,240,723 4,209,445 ------------- -------------- ------------- ------------- Net Assets.......................... $ 70,206,985 $1,319,256,502 $ 110,378,284 $ 295,651,872 ============= ============== ============= ============= *Cost............................... $ 67,996,586 $1,161,352,643 $ 102,126,929 $ 290,398,081 ============= ============== ============= ============= Class X Shares: Net Assets.............................. $ 63,059,946 $1,258,863,419 $ 103,763,582 $ 285,158,086 Shares Outstanding (unlimited authorized shares of $.01 par value).............. 5,941,653 93,370,150 7,593,642 24,852,633 Net Asset Value Per Share........... $ 10.61 $ 13.48 $ 13.66 $ 11.47 ============= ============== ============= ============= Class Y Shares: Net Assets.............................. $ 7,147,039 $ 60,393,083 $ 6,614,702 $ 10,493,786 Shares Outstanding (unlimited authorized shares of $.01 par value).............. 674,418 4,484,727 485,933 917,892 Net Asset Value Per Share........... $ 10.60 $ 13.47 $ 13.61 $ 11.43 ============= ============== ============= ============= European Pacific Growth Growth Equity S&P 500 Index -------------- -------------- -------------- -------------- Assets: Investments in securities, at value*.... $ 337,746,945 $ 40,493,372 $1,110,743,953 $ 212,482,445 Cash.................................... 20,494 236,756** 3,255 36,914 Receivable for: Investments sold...................... 601,937 -- 22,227,475 36,187 Shares of beneficial interest sold.... 38,665 15,360 170,030 490,888 Dividends............................. 178,891 4,330 400,820 201,185 Interest.............................. -- -- -- -- Foreign withholding taxes reclaimed... 716,754 15,838 1,957 -- Variation margin...................... -- -- -- -- Prepaid expenses and other assets....... 883 1,861 10,470 3,283 ------------- ------------- -------------- ------------- Total Assets........................ 339,304,569 40,767,517 1,133,557,960 213,250,902 ------------- ------------- -------------- ------------- Liabilities: Payable for: Investments purchased................. -- -- 48,668,723 105,768 Shares of beneficial interest repurchased.......................... 1,695,251 5,851,125 856,312 1,335,444 Variation margin...................... -- -- -- 68,175 Distribution fee (Class Y)............ 4,757 950 12,738 9,316 Investment management fee............. 269,492 32,184 459,669 71,437 Payable to bank....................... -- -- -- -- Unrealized depreciation on open forward foreign currency contracts............. 175,539 -- -- -- Accrued expenses and other payables..... 105,582 104,648 116,051 61,358 ------------- ------------- -------------- ------------- Total Liabilities................... 2,250,621 5,988,907 50,113,493 1,651,498 ------------- ------------- -------------- ------------- Net Assets.......................... $ 337,053,948 $ 34,778,610 $1,083,444,467 $ 211,599,404 ============= ============= ============== ============= Composition of Net Assets: Paid-in-capital......................... $ 359,851,959 $ 93,696,270 $1,514,708,380 $ 239,962,593 Accumulated undistributed net investment income (loss).......................... 4,047,787 (137,590) (1,170) 1,908,500 Accumulated undistributed net realized gain (loss)............................ (56,306,919) (53,526,536) (519,895,348) (8,874,497) Net unrealized appreciation (depreciation)......................... 29,461,121 (5,253,534) 88,632,605 (21,397,192) ------------- ------------- -------------- ------------- Net Assets.......................... $ 337,053,948 $ 34,778,610 $1,083,444,467 $ 211,599,404 ============= ============= ============== ============= *Cost............................... $ 308,096,077 $ 45,744,859 $1,022,111,348 $ 233,960,702 ============= ============= ============== ============= Class X Shares: Net Assets.............................. $ 316,195,567 $ 33,138,282 $1,022,334,705 $ 165,465,381 Shares Outstanding (unlimited authorized shares of $.01 par value).............. 18,917,665 8,323,928 45,110,315 15,794,931 Net Asset Value Per Share........... $ 16.71 $ 3.98 $ 22.66 $ 10.48 ============= ============= ============== ============= Class Y Shares: Net Assets.............................. $ 20,858,381 $ 1,640,328 $ 61,109,762 $ 46,134,023 Shares Outstanding (unlimited authorized shares of $.01 par value).............. 1,252,719 412,419 2,698,838 4,420,170 Net Asset Value Per Share........... $ 16.65 $ 3.98 $ 22.64 $ 10.44 ============= ============= ============== =============
- --------------------- ** INCLUDES FOREIGN CASH OF $194,880. 153 Morgan Stanley Variable Investment Series Financial Statements CONTINUED Statements of Assets and Liabilities CONTINUED DECEMBER 31, 2001
Competitive Edge "Best Ideas" -------------- Assets: Investments in securities, at value*.... $ 45,941,594 Cash.................................... 3,985 Receivable for: Investments sold...................... -- Shares of beneficial interest sold.... 12,628 Dividends............................. 34,970 Interest.............................. -- Foreign withholding taxes reclaimed... 31,376 Prepaid expenses and other assets....... 664 Receivable from affiliate............... -- ------------- Total Assets........................ 46,025,217 ------------- Liabilities: Payable for: Investments purchased................. -- Shares of beneficial interest repurchased.......................... 20,639 Variation margin...................... -- Distribution fee (Class Y)............ 1,223 Investment management fee............. 25,472 Accrued expenses and other payables..... 25,374 ------------- Total Liabilities................... 72,708 ------------- Net Assets.......................... $ 45,952,509 ============= Composition of Net Assets: Paid-in-capital......................... $ 70,088,823 Accumulated undistributed net investment income................................. 298,261 Accumulated net realized loss........... (15,826,647) Net unrealized appreciation (depreciation)......................... (8,607,928) ------------- Net Assets.......................... $ 45,952,509 ============= *Cost............................... $ 54,549,996 ============= Class X Shares: Net Assets.............................. $ 40,083,777 Shares Outstanding (unlimited authorized shares of $.01 par value).............. 5,592,654 Net Asset Value Per Share........... $ 7.17 ============= Class Y Shares: Net Assets.............................. $ 5,868,732 Shares Outstanding (unlimited authorized shares of $.01 par value).............. 821,979 Net Asset Value Per Share........... $ 7.14 ============= Aggressive Equity Information Strategist -------------- -------------- -------------- Assets: Investments in securities, at value*.... $ 88,944,093 $ 11,805,945 $ 676,125,006 Cash.................................... -- 37,017 -- Receivable for: Investments sold...................... 356,809 -- 1,946,286 Shares of beneficial interest sold.... 70,837 8,333 327,168 Dividends............................. 46,807 1,811 418,989 Interest.............................. -- 9,240 1,272,944 Foreign withholding taxes reclaimed... -- -- -- Prepaid expenses and other assets....... 2,429 204 13,139 Receivable from affiliate............... -- 36,335 -- ------------- ------------- ------------- Total Assets........................ 89,420,975 11,898,885 680,103,532 ------------- ------------- ------------- Liabilities: Payable for: Investments purchased................. 1,156,061 -- 108,804,290 Shares of beneficial interest repurchased.......................... 90,452 4,512 421,099 Variation margin...................... -- -- 10,265 Distribution fee (Class Y)............ 3,893 1,565 9,836 Investment management fee............. 56,377 -- 241,720 Accrued expenses and other payables..... 44,906 31,945 75,154 ------------- ------------- ------------- Total Liabilities................... 1,351,689 38,022 109,562,364 ------------- ------------- ------------- Net Assets.......................... $ 88,069,286 $ 11,860,863 $ 570,541,168 ============= ============= ============= Composition of Net Assets: Paid-in-capital......................... $ 135,566,600 $ 16,690,715 $ 533,020,238 Accumulated undistributed net investment income................................. 184,187 96,546 172,160 Accumulated net realized loss........... (51,038,626) (4,579,947) (23,568,625) Net unrealized appreciation (depreciation)......................... 3,357,125 (346,451) 60,917,395 ------------- ------------- ------------- Net Assets.......................... $ 88,069,286 $ 11,860,863 $ 570,541,168 ============= ============= ============= *Cost............................... $ 85,586,968 $ 12,152,396 $ 615,201,688 ============= ============= ============= Class X Shares: Net Assets.............................. $ 69,417,702 $ 4,434,357 $ 522,655,329 Shares Outstanding (unlimited authorized shares of $.01 par value).............. 6,803,098 835,104 37,491,595 Net Asset Value Per Share........... $ 10.20 $ 5.31 $ 13.94 ============= ============= ============= Class Y Shares: Net Assets.............................. $ 18,651,584 $ 7,426,506 $ 47,885,839 Shares Outstanding (unlimited authorized shares of $.01 par value).............. 1,833,640 1,402,127 3,437,900 Net Asset Value Per Share........... $ 10.17 $ 5.30 $ 13.93 ============= ============= =============
SEE NOTES TO FINANCIAL STATEMENTS 154 Morgan Stanley Variable Investment Series FINANCIAL STATEMENTS CONTINUED Statements of Operations FOR THE YEAR ENDED DECEMBER 31, 2001
Money Short-Term Quality Income High Market Bond Plus Yield Utilities -------------- -------------- -------------- -------------- -------------- Investment Income: Income Interest.............................. $ 21,080,306 $ 1,126,465 $ 29,169,161 $ 18,440,859 $ 3,340,235 Dividends............................. -- -- -- -- 9,535,648* ------------- ------------- ------------- ------------- ------------- Total Income........................ 21,080,306 1,126,465 29,169,161 18,440,859 12,875,883 ------------- ------------- ------------- ------------- ------------- Expenses Investment management fee............. 2,487,979 115,398 2,297,200 514,608 2,940,607 Distribution fee (Class Y shares)..... 159,510 25,690 66,513 11,153 54,717 Professional fees..................... 26,629 24,240 33,610 45,831 29,619 Custodian fees........................ 27,796 22,701 43,220 9,175 23,979 Shareholder reports and notices....... 17,152 1,454 30,949 31,159 28,168 Trustees' fees and expenses........... 855 158 825 212 955 Transfer agent fees and expenses...... 500 500 500 500 500 Other................................. 2,717 3,252 7,954 7,420 5,042 ------------- ------------- ------------- ------------- ------------- Total Expenses...................... 2,723,138 193,393 2,480,771 620,058 3,083,587 Less: expense offset.................... -- (16,260) -- -- -- Less: amounts waived/reimbursed......... -- (11,844) -- -- -- ------------- ------------- ------------- ------------- ------------- Net Expenses........................ 2,723,138 165,289 2,480,771 620,058 3,083,587 ------------- ------------- ------------- ------------- ------------- Net Investment Income............... 18,357,168 961,176 26,688,390 17,820,801 9,792,296 ------------- ------------- ------------- ------------- ------------- Net Realized and Unrealized Gain (Loss): Net realized gain (loss) on: Investments........................... 5,214 302,230 8,325,417 (47,026,073) 5,575,752 Futures contracts..................... -- 7,944 465,480 -- -- ------------- ------------- ------------- ------------- ------------- Net Gain (Loss)................... 5,214 310,174 8,790,897 (47,026,073) 5,575,752 ------------- ------------- ------------- ------------- ------------- Net change in unrealized appreciation/depreciation on: Investments........................... -- 226,539 3,867,595 (11,351,187) (150,471,025) Futures contracts..................... -- 771 1,461,112 -- -- ------------- ------------- ------------- ------------- ------------- Net Appreciation (Depreciation)... -- 227,310 5,328,707 (11,351,187) (150,471,025) ------------- ------------- ------------- ------------- ------------- Net Gain (Loss)................... 5,214 537,484 14,119,604 (58,377,260) (144,895,273) ------------- ------------- ------------- ------------- ------------- Net Increase (Decrease)................. $ 18,362,382 $ 1,498,660 $ 40,807,994 $ (40,556,459) $(135,102,977) ============= ============= ============= ============= =============
- --------------------- * NET OF $46,888 FOREIGN WITHHOLDING TAX. 155 Morgan Stanley Variable Investment Series Financial Statements CONTINUED Statements of Operations CONTINUED FOR THE YEAR ENDED DECEMBER 31, 2001
Dividend Capital Global Dividend Income Builder Growth Growth Growth -------------- -------------- -------------- --------------- Investment Income: Income Interest.............................. $ 1,771,960 $ 256,841 $ 433,442 $ 404,699 Dividends............................. 1,659,952 34,486,664* 797,053* 7,992,621* ------------- ------------- ------------- ------------- Total Income........................ 3,431,912 34,743,505 1,230,495 8,397,320 ------------- ------------- ------------- ------------- Expenses Investment management fee............. 502,750 7,727,136 888,331 2,459,977 Distribution fee (Class Y shares)..... 9,604 94,097 12,174 14,318 Professional fees..................... 22,930 29,320 29,895 32,576 Custodian fees........................ 6,811 81,313 26,912 74,625 Shareholder reports and notices....... 9,479 127,351 12,667 47,996 Trustees' fees and expenses........... 536 7,271 894 2,769 Transfer agent fees and expenses...... 500 500 500 500 Other................................. 2,600 11,188 1,212 11,922 ------------- ------------- ------------- ------------- Total Expenses...................... 555,210 8,078,176 972,585 2,644,683 Less: amounts waived/reimbursed......... -- -- -- -- ------------- ------------- ------------- ------------- Net Expenses........................ 555,210 8,078,176 972,585 2,644,683 ------------- ------------- ------------- ------------- Net Investment Income (Loss)........ 2,876,702 26,665,329 257,910 5,752,637 ------------- ------------- ------------- ------------- Net Realized and Unrealized Gain (Loss): Net realized gain (loss) on: Investments........................... (6,125,756) (104,386,936) (26,223,368) (6,825,497) Futures contracts..................... -- -- -- -- Foreign exchange transactions......... -- -- -- (10,165) ------------- ------------- ------------- ------------- Net Loss.......................... (6,125,756) (104,386,936) (26,223,368) (6,835,662) ------------- ------------- ------------- ------------- Net change in unrealized appreciation/depreciation on: Investments........................... 4,344,566 (2,096,175) (20,160,783) (21,664,148) Futures contracts..................... -- -- -- -- Translation of forward foreign currency contracts, other assets and liabilities denominated in foreign currencies........................... -- -- -- (9,434) ------------- ------------- ------------- ------------- Net Appreciation (Depreciation)... 4,344,566 (2,096,175) (20,160,783) (21,673,582) ------------- ------------- ------------- ------------- Net Loss.......................... (1,781,190) (106,483,111) (46,384,151) (28,509,244) ------------- ------------- ------------- ------------- Net Increase (Decrease)................. $ 1,095,512 $ (79,817,782) $ (46,126,241) $ (22,756,607) ============= ============= ============= =============
- --------------------- * NET OF $322,464, $4,633, $714,167, $896,268, $98,088, $57,957, $11,541, $49,881, $1,677, $132, AND $16,690 FOREIGN WITHHOLDING TAX, RESPECTIVELY. ** NET OF FOREIGN TAXES OF $13,789. SEE NOTES TO FINANCIAL STATEMENTS 156
European Pacific Growth Growth Equity S&P 500 Index -------------- -------------- -------------- -------------- Investment Income: Income Interest.............................. $ 524,814 $ 97,559 $ 7,103,431 $ 316,290 Dividends............................. 6,299,392* 640,189* 6,656,391* 2,630,765* ------------- ------------- ------------- ------------- Total Income........................ 6,824,206 737,748 13,759,822 2,947,055 ------------- ------------- ------------- ------------- Expenses Investment management fee............. 3,806,995 483,401 6,418,456 837,012 Distribution fee (Class Y shares)..... 42,296 4,796 111,991 70,452 Professional fees..................... 32,593 44,676 30,065 19,225 Custodian fees........................ 177,791 310,857 66,905 63,627 Shareholder reports and notices....... 63,899 21,945 124,482 23,537 Trustees' fees and expenses........... 3,403 334 9,043 2,299 Transfer agent fees and expenses...... 500 500 500 500 Other................................. 9,485 19,263 12,045 21,804 ------------- ------------- ------------- ------------- Total Expenses...................... 4,136,962 885,772 6,773,487 1,038,456 Less: amounts waived/reimbursed......... -- -- -- -- ------------- ------------- ------------- ------------- Net Expenses........................ 4,136,962 885,772 6,773,487 1,038,456 ------------- ------------- ------------- ------------- Net Investment Income (Loss)........ 2,687,244 (148,024) 6,986,335 1,908,599 ------------- ------------- ------------- ------------- Net Realized and Unrealized Gain (Loss): Net realized gain (loss) on: Investments........................... (55,518,318) (12,696,356)** (448,383,743) (5,914,126) Futures contracts..................... -- -- -- (2,207,403) Foreign exchange transactions......... 2,089,625 (112,376) -- -- ------------- ------------- ------------- ------------- Net Loss.......................... (53,428,693) (12,808,732) (448,383,743) (8,121,529) ------------- ------------- ------------- ------------- Net change in unrealized appreciation/depreciation on: Investments........................... (36,500,577) 1,876,518 (41,792,666) (23,096,340) Futures contracts..................... -- -- -- 164,253 Translation of forward foreign currency contracts, other assets and liabilities denominated in foreign currencies........................... (847,073) 12,551 -- -- ------------- ------------- ------------- ------------- Net Appreciation (Depreciation)... (37,347,650) 1,889,069 (41,792,666) (22,932,087) ------------- ------------- ------------- ------------- Net Loss.......................... (90,776,343) (10,919,663) (490,176,409) (31,053,616) ------------- ------------- ------------- ------------- Net Increase (Decrease)................. $ (88,089,099) $ (11,067,687) $(483,190,074) $ (29,145,017) ============= ============= ============= ============= Competitive Edge Aggressive "Best Ideas" Equity Information Strategist ---------------- -------------- -------------- -------------- Investment Income: Income Interest.............................. $ 75,687 $ 449,088 $ 90,163 $ 15,481,549 Dividends............................. 671,842* 669,183* 18,177* 3,574,144* ------------- ------------- ------------- ------------- Total Income........................ 747,529 1,118,271 108,340 19,055,693 ------------- ------------- ------------- ------------- Expenses Investment management fee............. 374,809 797,144 64,005 3,124,988 Distribution fee (Class Y shares)..... 13,328 39,838 11,794 85,536 Professional fees..................... 21,351 19,337 49,656 31,983 Custodian fees........................ 18,549 55,760 22,748 39,761 Shareholder reports and notices....... 12,323 19,179 531 51,910 Trustees' fees and expenses........... 506 1,167 18 1,245 Transfer agent fees and expenses...... 500 500 500 500 Other................................. 1,900 1,157 1,014 11,695 ------------- ------------- ------------- ------------- Total Expenses...................... 443,266 934,082 150,266 3,347,618 Less: amounts waived/reimbursed......... -- -- (138,472) -- ------------- ------------- ------------- ------------- Net Expenses........................ 443,266 934,082 11,794 3,347,618 ------------- ------------- ------------- ------------- Net Investment Income (Loss)........ 304,263 184,189 96,546 15,708,075 ------------- ------------- ------------- ------------- Net Realized and Unrealized Gain (Loss): Net realized gain (loss) on: Investments........................... (15,318,479) (34,359,108) (4,563,372) (14,024,853) Futures contracts..................... -- -- -- 497,078 Foreign exchange transactions......... (4,896) -- -- -- ------------- ------------- ------------- ------------- Net Loss.......................... (15,323,375) (34,359,108) (4,563,372) (13,527,775) ------------- ------------- ------------- ------------- Net change in unrealized appreciation/depreciation on: Investments........................... (1,752,683) (8,047,510) (60,847) (75,235,258) Futures contracts..................... -- -- -- (5,923) Translation of forward foreign currency contracts, other assets and liabilities denominated in foreign currencies........................... (69) -- -- -- ------------- ------------- ------------- ------------- Net Appreciation (Depreciation)... (1,752,752) (8,047,510) (60,847) (75,241,181) ------------- ------------- ------------- ------------- Net Loss.......................... (17,076,127) (42,406,618) (4,624,219) (88,768,956) ------------- ------------- ------------- ------------- Net Increase (Decrease)................. $ (16,771,864) $ (42,222,429) $ (4,527,673) $ (73,060,881) ============= ============= ============= =============
- --------------------- * NET OF $322,464, $4,633, $714,167, $896,268, $98,088, $57,957, $11,541, $49,881, $1,677, $132, AND $16,690 FOREIGN WITHHOLDING TAX, RESPECTIVELY. ** NET OF FOREIGN TAXES OF $13,789. 157 Morgan Stanley Variable Investment Series FINANCIAL STATEMENTS CONTINUED Statements of Changes in Net Assets
Money Market Short-Term Bond ------------------------------------- ------------------------------------- For The Year For The Year For The Year For The Year Ended Ended Ended Ended December 31, 2001 December 31, 2000+ December 31, 2001 December 31, 2000+ ----------------- ------------------ ----------------- ------------------ Increase (Decrease) in Net Assets: Operations: Net investment income...................... $ 18,357,168 $ 22,560,142 $ 961,176 $ 276,431 Net realized gain (loss)................... 5,214 2,431 310,174 (1,534) Net change in unrealized appreciation/depreciation................. -- -- 227,310 48,780 ------------- ------------- ------------- ------------- Net Increase (Decrease).................. 18,362,382 22,562,573 1,498,660 323,677 ------------- ------------- ------------- ------------- Dividends and Distributions to Shareholders from: Net investment income Class X Shares............................. (16,395,899) (22,379,796) (679,053) (256,046) Class Y Shares............................. (1,961,364) (180,251) (429,836) (18,021) Net realized gain Class X Shares............................. (4,750) (2,394) -- -- Class Y Shares............................. (464) (37) -- -- Paid-in-capital Class X Shares............................. -- -- -- -- Class Y Shares............................. -- -- -- -- ------------- ------------- ------------- ------------- Total Dividends and Distributions........ (18,362,477) (22,562,478) (1,108,889) (274,067) ------------- ------------- ------------- ------------- Net increase (decrease) from transactions in shares of beneficial interest............... 186,111,839 (63,037,023) 42,661,275 4,632,500 ------------- ------------- ------------- ------------- Total Increase (Decrease)................ 186,111,744 (63,036,928) 43,051,046 4,682,110 Net Assets: Beginning of period.......................... 372,606,183 435,643,111 7,856,699 3,174,589 ------------- ------------- ------------- ------------- End of Period................................ $ 558,717,927 $ 372,606,183 $ 50,907,745 $ 7,856,699 ============= ============= ============= ============= Undistributed Net Investment Income (Loss)... $ 189 $ 284 $ (83,095) $ 2,364 ============= ============= ============= =============
- --------------------- + CLASS Y SHARES WERE ISSUED JUNE 5, 2000. SEE NOTES TO FINANCIAL STATEMENTS 158
Quality Income Plus High Yield ------------------------------------- ------------------------------------- For The Year For The Year For The Year For The Year Ended Ended Ended Ended December 31, 2001 December 31, 2000+ December 31, 2001 December 31, 2000+ ----------------- ------------------ ----------------- ------------------ Increase (Decrease) in Net Assets: Operations: Net investment income...................... $ 26,688,390 $ 28,732,096 $ 17,820,801 $ 38,051,913 Net realized gain (loss)................... 8,790,897 (10,516,981) (47,026,073) (3,132,579) Net change in unrealized appreciation/depreciation................. 5,328,707 25,002,447 (11,351,187) (102,561,779) ------------- ------------- ------------- ------------- Net Increase (Decrease).................. 40,807,994 43,217,562 (40,556,459) (67,642,445) ------------- ------------- ------------- ------------- Dividends and Distributions to Shareholders from: Net investment income Class X Shares............................. (25,847,068) (28,551,058) (17,433,199) (37,708,110) Class Y Shares............................. (1,575,298) (80,831) (877,856) (181,257) Net realized gain Class X Shares............................. -- -- -- -- Class Y Shares............................. -- -- -- -- Paid-in-capital Class X Shares............................. -- -- -- -- Class Y Shares............................. -- -- -- -- ------------- ------------- ------------- ------------- Total Dividends and Distributions........ (27,422,366) (28,631,889) (18,311,055) (37,889,367) ------------- ------------- ------------- ------------- Net increase (decrease) from transactions in shares of beneficial interest............... 81,802,351 (59,032,899) (1,091,250) (43,559,323) ------------- ------------- ------------- ------------- Total Increase (Decrease)................ 95,187,979 (44,447,226) (59,958,764) (149,091,135) Net Assets: Beginning of period.......................... 411,684,625 456,131,851 130,592,337 279,683,472 ------------- ------------- ------------- ------------- End of Period................................ $ 506,872,604 $ 411,684,625 $ 70,633,573 $ 130,592,337 ============= ============= ============= ============= Undistributed Net Investment Income (Loss)... $ (475,593) $ 170,211 $ 942,409 $ 183,893 ============= ============= ============= ============= Utilities Income Builder ------------------------------------- ------------------------------------- For The Year For The Year For The Year For The Year Ended Ended Ended Ended December 31, 2001 December 31, 2000+ December 31, 2001 December 31, 2000+ ----------------- ------------------ ----------------- ------------------ Increase (Decrease) in Net Assets: Operations: Net investment income...................... $ 9,792,296 $ 12,506,131 $ 2,876,702 $ 3,364,951 Net realized gain (loss)................... 5,575,752 22,995,021 (6,125,756) (1,439,206) Net change in unrealized appreciation/depreciation................. (150,471,025) (17,897,321) 4,344,566 (2,608,659) ------------- ------------- ------------- ------------- Net Increase (Decrease).................. (135,102,977) 17,603,831 1,095,512 (682,914) ------------- ------------- ------------- ------------- Dividends and Distributions to Shareholders from: Net investment income Class X Shares............................. (9,551,429) (12,359,196) (2,768,953) (3,258,344) Class Y Shares............................. (474,333) (137,756) (185,469) (16,825) Net realized gain Class X Shares............................. (27,668,154) (33,661,404) -- -- Class Y Shares............................. (1,423,813) (57,888) -- -- Paid-in-capital Class X Shares............................. -- -- (107,996) (188,897) Class Y Shares............................. -- -- (7,234) (975) ------------- ------------- ------------- ------------- Total Dividends and Distributions........ (39,117,729) (46,216,244) (3,069,652) (3,465,041) ------------- ------------- ------------- ------------- Net increase (decrease) from transactions in shares of beneficial interest............... (44,283,875) 18,929,027 11,833,945 (17,121,201) ------------- ------------- ------------- ------------- Total Increase (Decrease)................ (218,504,581) (9,683,386) 9,859,805 (21,269,156) Net Assets: Beginning of period.......................... 570,803,566 580,486,952 60,347,180 81,616,336 ------------- ------------- ------------- ------------- End of Period................................ $ 352,298,985 $ 570,803,566 $ 70,206,985 $ 60,347,180 ============= ============= ============= ============= Undistributed Net Investment Income (Loss)... $ (27,612) $ 9,160 $ (6,414) $ 29,137 ============= ============= ============= =============
- --------------------- + CLASS Y SHARES WERE ISSUED JUNE 5, 2000. 159 Morgan Stanley Variable Investment Series Financial Statements CONTINUED Statements of Changes in Net Assets CONTINUED
Dividend Growth Capital Growth ------------------------------------- ------------------------------------- For The Year For The Year For The Year For The Year Ended Ended Ended Ended December 31, 2001 December 31, 2000+ December 31, 2001 December 31, 2000+ ----------------- ------------------ ----------------- ------------------ Increase (Decrease) in Net Assets: Operations: Net investment income (loss)............... $ 26,665,329 $ 33,434,804 $ 257,910 $ 801,077 Net realized gain (loss)................... (104,386,936) (247,633,286) (26,223,368) 8,578,573 Net change in unrealized appreciation/depreciation................. (2,096,175) 255,968,189 (20,160,783) (7,754,345) -------------- -------------- ------------- ------------- Net Increase (Decrease).................. (79,817,782) 41,769,707 (46,126,241) 1,625,305 -------------- -------------- ------------- ------------- Dividends and Distributions to Shareholders from: Net investment income Class X Shares............................. (25,946,577) (33,410,710) (773,047) (16,143) Class Y Shares............................. (709,013) (116,132) (27,695) (51) Net realized gain Class X Shares............................. -- (355,389,540) (9,671,004) (31,601,359) Class Y Shares............................. -- (366,002) (378,927) (99,741) -------------- -------------- ------------- ------------- Total Dividends and Distributions........ (26,655,590) (389,282,384) (10,850,673) (31,717,294) -------------- -------------- ------------- ------------- Net increase (decrease) from transactions in shares of beneficial interest............... (146,076,979) (114,494,397) (19,347,265) 45,543,036 -------------- -------------- ------------- ------------- Total Increase (Decrease)................ (252,550,351) (462,007,074) (76,324,179) 15,451,047 Net Assets: Beginning of period.......................... 1,571,806,853 2,033,813,927 186,702,463 171,251,416 -------------- -------------- ------------- ------------- End of Period................................ $1,319,256,502 $1,571,806,853 $ 110,378,284 $ 186,702,463 ============== ============== ============= ============= Undistributed Net Investment Income (Loss)... $ 44 $ (9,695) $ 257,317 $ 800,627 ============== ============== ============= =============
- --------------------- + CLASS Y SHARES WERE ISSUED JUNE 5, 2000. SEE NOTES TO FINANCIAL STATEMENTS 160
Global Dividend Growth European Growth ------------------------------------- ------------------------------------- For The Year For The Year For The Year For The Year Ended Ended Ended Ended December 31, 2001 December 31, 2000+ December 31, 2001 December 31, 2000+ ----------------- ------------------ ----------------- ------------------ Increase (Decrease) in Net Assets: Operations: Net investment income...................... $ 5,752,637 $ 7,867,441 $ 2,687,244 $ 2,594,600 Net realized gain (loss)................... (6,835,662) 7,688,701 (53,428,693) 76,598,627 Net change in unrealized appreciation/depreciation................. (21,673,582) (33,765,802) (37,347,650) (105,877,322) ------------- ------------- ------------- ------------- Net Increase (Decrease).................. (22,756,607) (18,209,660) (88,089,099) (26,684,095) ------------- ------------- ------------- ------------- Dividends and Distributions to Shareholders from: Net investment income Class X Shares............................. (8,890,511) (2,796,221) (4,595,028) (3,290,821) Class Y Shares............................. (157,422) -- (189,010) (8,172) Net realized gain Class X Shares............................. (3,829,787) (38,145,152) (72,684,527) (84,881,334) Class Y Shares............................. (68,473) (20,655) (3,122,453) (210,787) ------------- ------------- ------------- ------------- Total Dividends and Distributions........ (12,946,193) (40,962,028) (80,591,018) (88,391,114) ------------- ------------- ------------- ------------- Net increase (decrease) from transactions in shares of beneficial interest............... (44,625,980) (71,777,150) (13,211,066) 54,315,573 ------------- ------------- ------------- ------------- Total Increase (Decrease)................ (80,328,780) (130,948,838) (181,891,183) (60,759,636) Net Assets: Beginning of period.......................... 375,980,652 506,929,490 518,945,131 579,704,767 ------------- ------------- ------------- ------------- End of Period................................ $ 295,651,872 $ 375,980,652 $ 337,053,948 $ 518,945,131 ============= ============= ============= ============= Undistributed Net Investment Income (Loss)... $ 3,453,657 $ 6,759,117 $ 4,047,787 $ 4,054,954 ============= ============= ============= ============= Pacific Growth Equity ------------------------------------- ------------------------------------- For The Year For The Year For The Year For The Year Ended Ended Ended Ended December 31, 2001 December 31, 2000+ December 31, 2001 December 31, 2000+ ----------------- ------------------ ----------------- ------------------ Increase (Decrease) in Net Assets: Operations: Net investment income...................... $ (148,024) $ 18,108 $ 6,986,335 $ 12,933,151 Net realized gain (loss)................... (12,808,732) 4,924,305 (448,383,743) 241,612,765 Net change in unrealized appreciation/depreciation................. 1,889,069 (37,297,247) (41,792,666) (526,098,393) ------------- ------------- -------------- -------------- Net Increase (Decrease).................. (11,067,687) (32,354,834) (483,190,074) (271,552,477) ------------- ------------- -------------- -------------- Dividends and Distributions to Shareholders from: Net investment income Class X Shares............................. (889,116) (1,544,980) (6,874,464) (12,785,786) Class Y Shares............................. (45,120) (892) (142,001) (118,384) Net realized gain Class X Shares............................. -- -- (279,989,635) (309,799,810) Class Y Shares............................. -- -- (10,606,414) (519,733) ------------- ------------- -------------- -------------- Total Dividends and Distributions........ (934,236) (1,545,872) (297,612,514) (323,223,713) ------------- ------------- -------------- -------------- Net increase (decrease) from transactions in shares of beneficial interest............... (18,157,070) (17,089,075) 14,210,309 361,741,551 ------------- ------------- -------------- -------------- Total Increase (Decrease)................ (30,158,993) (50,989,781) (766,592,279) (233,034,639) Net Assets: Beginning of period.......................... 64,937,603 115,927,384 1,850,036,746 2,083,071,385 ------------- ------------- -------------- -------------- End of Period................................ $ 34,778,610 $ 64,937,603 $1,083,444,467 $1,850,036,746 ============= ============= ============== ============== Undistributed Net Investment Income (Loss)... $ (137,590) $ (45,639) $ (1,170) $ 28,983 ============= ============= ============== ==============
- --------------------- + CLASS Y SHARES WERE ISSUED JUNE 5, 2000. 161 Morgan Stanley Variable Investment Series Financial Statements CONTINUED Statements of Changes in Net Assets CONTINUED
S&P 500 Index Competitive Edge "Best Ideas" ------------------------------------- ------------------------------------- For The Year For The Year For The Year For The Year Ended Ended Ended Ended December 31, 2001 December 31, 2000+ December 31, 2001 December 31, 2000+ ----------------- ------------------ ----------------- ------------------ Increase (Decrease) in Net Assets: Operations: Net investment income...................... $ 1,908,599 $ 1,936,508 $ 304,263 $ 386,773 Net realized gain (loss)................... (8,121,529) (569,474) (15,323,375) 5,361,073 Net change in unrealized appreciation/depreciation................. (22,932,087) (23,329,057) (1,752,752) (20,691,597) ------------- ------------- ------------- ------------- Net Increase (Decrease).................. (29,145,017) (21,962,023) (16,771,864) (14,943,751) ------------- ------------- ------------- ------------- Dividends and Distributions to Shareholders from: Net investment income Class X Shares............................. (1,685,269) (1,171,429) (348,939) (314,559) Class Y Shares............................. (251,291) (8,524) (32,735) (2,328) Net realized gain Class X Shares............................. -- (1,055,974) (3,960,881) -- Class Y Shares............................. -- (7,684) (413,197) -- ------------- ------------- ------------- ------------- Total Dividends and Distributions........ (1,936,560) (2,243,611) (4,755,752) (316,887) ------------- ------------- ------------- ------------- Net increase (decrease) from transactions in shares of beneficial interest............... 19,427,233 61,496,562 (7,067,984) 27,513,945 ------------- ------------- ------------- ------------- Total Increase (Decrease)................ (11,654,344) 37,290,928 (28,595,600) 12,253,307 Net Assets: Beginning of period.......................... 223,253,748 185,962,820 74,548,109 62,294,802 ------------- ------------- ------------- ------------- End of Period................................ $ 211,599,404 $ 223,253,748 $ 45,952,509 $ 74,548,109 ============= ============= ============= ============= Undistributed Net Investment Income.......... $ 1,908,500 $ 1,936,461 $ 298,261 $ 380,569 ============= ============= ============= =============
- --------------------- + CLASS Y SHARES WERE ISSUED JUNE 5, 2000. ++ FOR THE PERIOD NOVEMBER 6, 2000 (COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER 31, 2000. SEE NOTES TO FINANCIAL STATEMENTS 162
Aggressive Equity Information ------------------------------------- -------------------------------------- For The Year For The Year For The Year For The Period Ended Ended Ended Ended December 31, 2001 December 31, 2000+ December 31, 2001 December 31, 2000++ ----------------- ------------------ ----------------- ------------------- Increase (Decrease) in Net Assets: Operations: Net investment income...................... $ 184,189 $ 390,024 $ 96,546 $ 14,872 Net realized gain (loss)................... (34,359,108) (16,497,626) (4,563,372) (16,575) Net change in unrealized appreciation/depreciation................. (8,047,510) 4,022,722 (60,847) (285,604) ------------- ------------- ------------- ------------- Net Increase (Decrease).................. (42,222,429) (12,084,880) (4,527,673) (287,307) ------------- ------------- ------------- ------------- Dividends and Distributions to Shareholders from: Net investment income Class X Shares............................. (337,431) (49,395) (7,156) -- Class Y Shares............................. (52,589) (497) (8,125) -- Net realized gain Class X Shares............................. -- -- -- -- Class Y Shares............................. -- -- -- -- ------------- ------------- ------------- ------------- Total Dividends and Distributions........ (390,020) (49,892) (15,281) -- ------------- ------------- ------------- ------------- Net increase (decrease) from transactions in shares of beneficial interest............... (21,367,646) 125,986,777 11,802,317 4,888,807 ------------- ------------- ------------- ------------- Total Increase (Decrease)................ (63,980,095) 113,852,005 7,259,363 4,601,500 Net Assets: Beginning of period.......................... 152,049,381 38,197,376 4,601,500 -- ------------- ------------- ------------- ------------- End of Period................................ $ 88,069,286 $ 152,049,381 $ 11,860,863 $ 4,601,500 ============= ============= ============= ============= Undistributed Net Investment Income (Loss)... $ 184,187 $ 390,018 $ 96,546 $ 15,281 ============= ============= ============= ============= Strategist ------------------------------------- For The Year For The Year Ended Ended December 31, 2001 December 31, 2000+ ----------------- ------------------ Increase (Decrease) in Net Assets: Operations: Net investment income...................... $ 15,708,075 $ 19,788,254 Net realized gain (loss)................... (13,527,775) 26,318,018 Net change in unrealized appreciation/depreciation................. (75,241,181) (34,158,403) ------------- ------------- Net Increase (Decrease).................. (73,060,881) 11,947,869 ------------- ------------- Dividends and Distributions to Shareholders from: Net investment income Class X Shares............................. (15,113,265) (19,395,713) Class Y Shares............................. (872,432) (245,565) Net realized gain Class X Shares............................. (25,786,206) (85,487,009) Class Y Shares............................. (1,505,344) (209,745) ------------- ------------- Total Dividends and Distributions........ (43,277,247) (105,338,032) ------------- ------------- Net increase (decrease) from transactions in shares of beneficial interest............... (37,790,181) 88,358,964 ------------- ------------- Total Increase (Decrease)................ (154,128,309) (5,031,199) Net Assets: Beginning of period.......................... 724,669,477 729,700,676 ------------- ------------- End of Period................................ $ 570,541,168 $ 724,669,477 ============= ============= Undistributed Net Investment Income (Loss)... $ 172,160 $ 149,692 ============= =============
- --------------------- + CLASS Y SHARES WERE ISSUED JUNE 5, 2000. ++ FOR THE PERIOD NOVEMBER 6, 2000 (COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER 31, 2000. 163 Morgan Stanley Variable Investment Series FINANCIAL STATEMENTS CONTINUED Statements of Changes in Net Assets CONTINUED Summary of Transactions in Shares of Beneficial Interest
Money Market Short-Term Bond ------------------------------------- ------------------------------------- For the Year For the Year For the Year For the Year Ended Ended Ended Ended December 31, 2001 December 31, 2000+ December 31, 2001 December 31, 2000+ ----------------- ------------------ ----------------- ------------------ Class X Shares SHARES Sold......................................... 1,327,878,803 934,549,163 3,131,178 733,662 Reinvestment of dividends and distributions............................... 16,400,649 22,382,190 67,272 25,864 Redeemed..................................... (1,250,307,217) (1,033,781,220) (1,301,529) (435,676) --------------- --------------- ------------- ------------- Net increase (decrease) - Class X............ 93,972,235 (76,849,867) 1,896,921 323,850 =============== =============== ============= ============= AMOUNT Sold......................................... $ 1,327,878,803 $ 934,549,163 $ 31,630,451 $ 7,265,518 Reinvestment of dividends and distributions............................... 16,400,649 22,382,190 679,053 256,046 Redeemed..................................... (1,250,307,217) (1,033,781,220) (13,110,927) (4,317,357) --------------- --------------- ------------- ------------- Net increase (decrease) - Class X............ $ 93,972,235 $ (76,849,867) $ 19,198,577 $ 3,204,207 =============== =============== ============= ============= Class Y Shares SHARES Sold......................................... 364,123,457 21,834,091 3,368,543 152,198 Reinvestment of dividends and distributions............................... 1,961,828 180,288 42,519 1,815 Redeemed..................................... (273,945,681) (8,201,535) (1,088,304) (10,295) --------------- --------------- ------------- ------------- Net increase - Class Y....................... 92,139,604 13,812,844 2,322,758 143,718 =============== =============== ============= ============= AMOUNT Sold......................................... $ 364,123,457 $ 21,834,091 $ 34,082,425 $ 1,512,471 Reinvestment of dividends and distributions............................... 1,961,828 180,288 429,836 18,021 Redeemed..................................... (273,945,681) (8,201,535) (11,049,563) (102,199) --------------- --------------- ------------- ------------- Net increase - Class Y....................... $ 92,139,604 $ 13,812,844 $ 23,462,698 $ 1,428,293 =============== =============== ============= =============
- --------------------- + CLASS Y SHARES WERE ISSUED JUNE 5, 2000. SEE NOTES TO FINANCIAL STATEMENTS 164
Quality Income Plus High Yield ------------------------------------- ------------------------------------- For the Year For the Year For the Year For the Year Ended Ended Ended Ended December 31, 2001 December 31, 2000+ December 31, 2001 December 31, 2000+ ----------------- ------------------ ----------------- ------------------ Class X Shares SHARES Sold......................................... 15,119,925 5,308,884 18,143,830 7,327,491 Reinvestment of dividends and distributions............................... 2,472,345 2,888,463 9,657,042 10,699,948 Redeemed..................................... (14,430,593) (14,707,375) (32,334,252) (29,780,742) ------------- ------------- ------------- ------------- Net increase (decrease) - Class X............ 3,161,677 (6,510,028) (4,533,380) (11,753,303) ============= ============= ============= ============= AMOUNT Sold......................................... $ 158,201,213 $ 52,461,632 $ 38,065,972 $ 26,691,531 Reinvestment of dividends and distributions............................... 25,847,068 28,551,058 17,433,199 37,708,109 Redeemed..................................... (150,702,586) (145,125,419) (63,688,048) (110,680,449) ------------- ------------- ------------- ------------- Net increase (decrease) - Class X............ $ 33,345,695 $ (64,112,729) $ (8,188,877) $ (46,280,809) ============= ============= ============= ============= Class Y Shares SHARES Sold......................................... 5,159,930 521,019 4,414,455 838,148 Reinvestment of dividends and distributions............................... 150,006 8,045 528,829 62,141 Redeemed..................................... (680,391) (22,297) (1,124,542) (100,749) ------------- ------------- ------------- ------------- Net increase - Class Y....................... 4,629,545 506,767 3,818,742 799,540 ============= ============= ============= ============= AMOUNT Sold......................................... $ 54,006,767 $ 5,222,238 $ 8,282,640 $ 2,862,807 Reinvestment of dividends and distributions............................... 1,575,298 80,830 877,856 181,257 Redeemed..................................... (7,125,409) (223,238) (2,062,869) (322,578) ------------- ------------- ------------- ------------- Net increase - Class Y....................... $ 48,456,656 $ 5,079,830 $ 7,097,627 $ 2,721,486 ============= ============= ============= ============= Utilities Income Builder ------------------------------------- ------------------------------------- For the Year For the Year For the Year For the Year Ended Ended Ended Ended December 31, 2001 December 31, 2000+ December 31, 2001 December 31, 2000+ ----------------- ------------------ ----------------- ------------------ Class X Shares SHARES Sold......................................... 2,190,761 3,339,684 2,673,254 596,272 Reinvestment of dividends and distributions............................... 2,109,497 2,132,995 268,707 318,465 Redeemed..................................... (7,487,969) (5,380,502) (2,468,891) (2,580,512) ------------- ------------- ------------- ------------- Net increase (decrease) - Class X............ (3,187,711) 92,177 473,070 (1,665,775) ============= ============= ============= ============= AMOUNT Sold......................................... $ 40,178,802 $ 75,452,968 $ 29,639,063 $ 6,501,915 Reinvestment of dividends and distributions............................... 37,219,583 46,020,620 2,876,950 3,447,241 Redeemed..................................... (135,821,222) (121,835,075) (27,104,429) (28,033,361) ------------- ------------- ------------- ------------- Net increase (decrease) - Class X............ $ (58,422,837) $ (361,487) $ 5,411,584 $ (18,084,205) ============= ============= ============= ============= Class Y Shares SHARES Sold......................................... 1,304,995 911,424 674,648 96,113 Reinvestment of dividends and distributions............................... 108,451 8,984 18,183 1,646 Redeemed..................................... (625,512) (40,731) (107,327) (8,845) ------------- ------------- ------------- ------------- Net increase - Class Y....................... 787,934 879,677 585,504 88,914 ============= ============= ============= ============= AMOUNT Sold......................................... $ 23,965,784 $ 19,996,170 $ 7,363,430 $ 1,040,551 Reinvestment of dividends and distributions............................... 1,898,146 195,644 192,703 17,800 Redeemed..................................... (11,724,968) (901,300) (1,133,772) (95,347) ------------- ------------- ------------- ------------- Net increase - Class Y....................... $ 14,138,962 $ 19,290,514 $ 6,422,361 $ 963,004 ============= ============= ============= =============
- --------------------- + CLASS Y SHARES WERE ISSUED JUNE 5, 2000. 165 Morgan Stanley Variable Investment Series Financial Statements CONTINUED Statements of Changes in Net Assets CONTINUED Summary of Transactions in Shares of Beneficial Interest CONTINUED
Dividend Growth Capital Growth ------------------------------------- ------------------------------------- For the Year For the Year For the Year For the Year Ended Ended Ended Ended December 31, 2001 December 31, 2000+ December 31, 2001 December 31, 2000+ ----------------- ------------------ ----------------- ------------------ Class X Shares SHARES Sold......................................... 8,370,592 6,915,502 1,066,597 2,339,000 Reinvestment of dividends and distributions............................... 1,918,988 29,902,455 663,536 1,544,543 Redeemed..................................... (23,994,002) (40,746,272) (3,267,914) (1,968,416) ------------- ------------- ------------- ------------- Net increase (decrease) - Class X............ (13,704,422) (3,928,315) (1,537,781) 1,915,127 ============= ============= ============= ============= AMOUNT Sold......................................... $ 118,517,749 $ 107,878,599 $ 17,791,534 $ 53,795,246 Reinvestment of dividends and distributions............................... 25,946,577 379,049,270 10,444,051 31,601,359 Redeemed..................................... (334,828,122) (619,548,550) (52,411,078) (43,563,364) ------------- ------------- ------------- ------------- Net increase (decrease) - Class X............ $(190,363,796) $(132,620,681) $ (24,175,493) $ 41,833,241 ============= ============= ============= ============= Class Y Shares SHARES Sold......................................... 3,957,756 1,340,964 365,012 186,139 Reinvestment of dividends and distributions............................... 53,019 37,255 25,900 4,877 Redeemed..................................... (843,290) (60,977) (82,314) (13,681) ------------- ------------- ------------- ------------- Net increase - Class Y....................... 3,167,485 1,317,242 308,598 177,335 ============= ============= ============= ============= AMOUNT Sold......................................... $ 55,420,396 $ 18,463,831 $ 5,653,670 $ 3,889,764 Reinvestment of dividends and distributions............................... 709,013 482,134 406,622 99,741 Redeemed..................................... (11,842,592) (819,681) (1,232,064) (279,710) ------------- ------------- ------------- ------------- Net increase - Class Y....................... $ 44,286,817 $ 18,126,284 $ 4,828,228 $ 3,709,795 ============= ============= ============= =============
- --------------------- + CLASS Y SHARES WERE ISSUED JUNE 5, 2000. SEE NOTES TO FINANCIAL STATEMENTS 166
Global Dividend Growth European Growth ------------------------------------- ------------------------------------- For the Year For the Year For the Year For the Year Ended Ended Ended Ended December 31, 2001 December 31, 2000+ December 31, 2001 December 31, 2000+ ----------------- ------------------ ----------------- ------------------ Class X Shares SHARES Sold......................................... 2,547,819 2,246,998 11,284,455 9,230,245 Reinvestment of dividends and distributions............................... 1,079,822 3,301,049 4,446,465 3,299,856 Redeemed..................................... (8,141,744) (11,288,529) (16,852,961) (10,913,565) ------------- ------------- ------------- ------------- Net increase (decrease) - Class X............ (4,514,103) (5,740,482) (1,122,041) 1,616,536 ============= ============= ============= ============= AMOUNT Sold......................................... $ 30,457,581 $ 28,967,660 $ 219,081,336 $ 272,639,151 Reinvestment of dividends and distributions............................... 12,720,298 40,941,373 77,279,555 88,172,155 Redeemed..................................... (96,536,326) (143,825,063) (325,114,133) (317,442,661) ------------- ------------- ------------- ------------- Net increase (decrease) - Class X............ $ (53,358,447) $ (73,916,030) $ (28,753,242) $ 43,368,645 ============= ============= ============= ============= Class Y Shares SHARES Sold......................................... 856,167 186,212 6,049,689 468,981 Reinvestment of dividends and distributions............................... 19,225 1,677 191,083 8,195 Redeemed..................................... (131,472) (13,917) (5,405,710) (59,519) ------------- ------------- ------------- ------------- Net increase - Class Y....................... 743,920 173,972 835,062 417,657 ============= ============= ============= ============= AMOUNT Sold......................................... $ 10,018,100 $ 2,287,280 $ 104,636,188 $ 12,215,627 Reinvestment of dividends and distributions............................... 225,895 20,655 3,311,463 218,959 Redeemed..................................... (1,511,528) (169,055) (92,405,475) (1,487,658) ------------- ------------- ------------- ------------- Net increase - Class Y....................... $ 8,732,467 $ 2,138,880 $ 15,542,176 $ 10,946,928 ============= ============= ============= ============= Pacific Growth Equity ------------------------------------- ------------------------------------- For the Year For the Year For the Year For the Year Ended Ended Ended Ended December 31, 2001 December 31, 2000+ December 31, 2001 December 31, 2000+ ----------------- ------------------ ----------------- ------------------ Class X Shares SHARES Sold......................................... 111,809,242 51,041,243 2,207,985 7,164,752 Reinvestment of dividends and distributions............................... 184,464 197,316 11,357,188 7,535,790 Redeemed..................................... (115,218,886) (53,387,675) (14,280,240) (7,537,949) ------------- ------------- ------------- ------------- Net increase (decrease) - Class X............ (3,225,180) (2,149,116) (715,067) 7,162,593 ============= ============= ============= ============= AMOUNT Sold......................................... $ 507,769,717 $ 359,491,480 $ 65,478,473 $ 363,241,322 Reinvestment of dividends and distributions............................... 889,116 1,544,980 286,864,099 319,231,351 Redeemed..................................... (527,267,864) (379,056,684) (389,764,092) (355,434,066) ------------- ------------- ------------- ------------- Net increase (decrease) - Class X............ $ (18,609,031) $ (18,020,224) $ (37,421,520) $ 327,038,607 ============= ============= ============= ============= Class Y Shares SHARES Sold......................................... 19,194,728 142,556 1,889,420 829,761 Reinvestment of dividends and distributions............................... 9,361 114 426,095 14,864 Redeemed..................................... (18,922,766) (11,574) (421,163) (40,139) ------------- ------------- ------------- ------------- Net increase - Class Y....................... 281,323 131,096 1,894,352 804,486 ============= ============= ============= ============= AMOUNT Sold......................................... $ 82,178,698 $ 1,009,590 $ 51,929,531 $ 35,773,057 Reinvestment of dividends and distributions............................... 45,120 892 10,748,415 623,947 Redeemed..................................... (81,771,857) (79,333) (11,046,117) (1,694,060) ------------- ------------- ------------- ------------- Net increase - Class Y....................... $ 451,961 $ 931,149 $ 51,631,829 $ 34,702,944 ============= ============= ============= =============
- --------------------- + CLASS Y SHARES WERE ISSUED JUNE 5, 2000. 167 Morgan Stanley Variable Investment Series Financial Statements CONTINUED Statements of Changes in Net Assets CONTINUED Summary of Transactions in Shares of Beneficial Interest CONTINUED
S&P 500 Index Competitive Edge "Best Ideas" ------------------------------------- ------------------------------------- For the Year For the Year For the Year For the Year Ended Ended Ended Ended December 31, 2001 December 31, 2000+ December 31, 2001 December 31, 2000+ ----------------- ------------------ ----------------- ------------------ Class X Shares SHARES Sold......................................... 3,535,737 6,860,524 1,888,226 3,173,771 Reinvestment of dividends and distributions............................... 151,553 168,487 544,857 26,257 Redeemed..................................... (5,358,791) (3,409,330) (3,705,547) (1,371,010) ------------- ------------- ------------- ------------- Net increase (decrease) - Class X............ (1,671,501) 3,619,681 (1,272,464) 1,829,018 ============= ============= ============= ============= AMOUNT Sold......................................... $ 38,618,659 $ 89,722,478 $ 16,869,592 $ 37,675,407 Reinvestment of dividends and distributions............................... 1,685,269 2,227,401 4,309,820 314,559 Redeemed..................................... (57,391,636) (44,290,749) (31,322,011) (15,717,456) ------------- ------------- ------------- ------------- Net increase (decrease) - Class X............ $ (17,087,708) $ 47,659,130 $ (10,142,599) $ 22,272,510 ============= ============= ============= ============= Class Y Shares SHARES Sold......................................... 4,013,501 1,162,112 453,466 508,335 Reinvestment of dividends and distributions............................... 22,639 1,226 56,519 194 Redeemed..................................... (673,217) (106,091) (147,261) (49,274) ------------- ------------- ------------- ------------- Net increase - Class Y....................... 3,362,923 1,057,247 362,724 459,255 ============= ============= ============= ============= AMOUNT Sold......................................... $ 43,449,899 $ 15,208,446 $ 3,789,065 $ 5,807,167 Reinvestment of dividends and distributions............................... 251,291 16,208 445,932 2,328 Redeemed..................................... (7,186,249) (1,387,222) (1,160,382) (568,060) ------------- ------------- ------------- ------------- Net increase - Class Y....................... $ 36,514,941 $ 13,837,432 $ 3,074,615 $ 5,241,435 ============= ============= ============= =============
- --------------------- + CLASS Y SHARES WERE ISSUED JUNE 5, 2000. ++ FOR THE PERIOD NOVEMBER 6, 2000 (COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER 31, 2000. SEE NOTES TO FINANCIAL STATEMENTS 168
Aggressive Equity Information ------------------------------------- -------------------------------------- For the Year For the Year For the Year For the Period Ended Ended Ended Ended December 31, 2001 December 31, 2000+ December 31, 2001 December 31, 2000++ ----------------- ------------------ ----------------- ------------------- Class X Shares SHARES Sold......................................... 1,397,087 9,387,514 1,948,510 302,730 Reinvestment of dividends and distributions............................... 30,020 3,288 1,168 -- Redeemed..................................... (4,314,752) (2,321,837) (1,403,159) (14,145) ------------- ------------- ------------- ------------- Net increase (decrease) - Class X............ (2,887,645) 7,068,965 546,519 288,585 ============= ============= ============= ============= AMOUNT Sold......................................... $ 16,147,379 $ 146,383,257 $ 12,940,416 $ 2,991,621 Reinvestment of dividends and distributions............................... 337,431 49,395 7,156 -- Redeemed..................................... (48,169,868) (34,737,951) (8,662,660) (128,569) ------------- ------------- ------------- ------------- Net increase (decrease) - Class X............ $ (31,685,058) $ 111,694,701 $ 4,284,912 $ 2,863,052 ============= ============= ============= ============= Class Y Shares SHARES Sold......................................... 1,302,417 1,003,354 1,447,185 210,137 Reinvestment of dividends and distributions............................... 4,687 33 1,328 -- Redeemed..................................... (410,601) (66,250) (252,179) (4,344) ------------- ------------- ------------- ------------- Net increase - Class Y....................... 896,503 937,137 1,196,334 205,793 ============= ============= ============= ============= AMOUNT Sold......................................... $ 14,654,081 $ 15,298,277 $ 8,921,999 $ 2,068,622 Reinvestment of dividends and distributions............................... 52,589 497 8,125 -- Redeemed..................................... (4,389,258) (1,006,698) (1,412,719) (42,867) ------------- ------------- ------------- ------------- Net increase - Class Y....................... $ 10,317,412 $ 14,292,076 $ 7,517,405 $ 2,025,755 ============= ============= ============= ============= Strategist ------------------------------------- For the Year For the Year Ended Ended December 31, 2001 December 31, 2000+ ----------------- ------------------ Class X Shares SHARES Sold......................................... 3,700,673 5,636,054 Reinvestment of dividends and distributions............................... 2,817,502 6,205,199 Redeemed..................................... (11,126,380) (7,949,205) ------------- ------------- Net increase (decrease) - Class X............ (4,608,205) 3,892,048 ============= ============= AMOUNT Sold......................................... $ 55,551,505 $ 102,563,826 Reinvestment of dividends and distributions............................... 40,899,471 104,882,722 Redeemed..................................... (164,253,283) (143,279,933) ------------- ------------- Net increase (decrease) - Class X............ $ (67,802,307) $ 64,166,615 ============= ============= Class Y Shares SHARES Sold......................................... 2,679,997 1,463,098 Reinvestment of dividends and distributions............................... 164,477 27,045 Redeemed..................................... (810,739) (85,978) ------------- ------------- Net increase - Class Y....................... 2,033,735 1,404,165 ============= ============= AMOUNT Sold......................................... $ 39,753,947 $ 25,207,978 Reinvestment of dividends and distributions............................... 2,377,776 455,311 Redeemed..................................... (12,119,597) (1,470,940) ------------- ------------- Net increase - Class Y....................... $ 30,012,126 $ 24,192,349 ============= =============
- --------------------- + CLASS Y SHARES WERE ISSUED JUNE 5, 2000. ++ FOR THE PERIOD NOVEMBER 6, 2000 (COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER 31, 2000. 169 Morgan Stanley Variable Investment Series NOTES TO FINANCIAL STATEMENTS / / DECEMBER 31, 2001 1. Organization and Accounting Policies Morgan Stanley Variable Investment Series (the "Fund"), formerly Morgan Stanley Dean Witter Variable Investment Series, is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-end management investment company. Investments in the Fund may be made only by (1) Northbrook Life Insurance Company to fund the benefits under variable annuity contracts and variable life insurance contracts it issues; (2) Allstate Life Insurance Company to fund the benefits under variable annuity contracts it issues; (3) Glenbrook Life and Annuity Company to fund the benefits under variable annuity contracts and variable life insurance contracts it issues; and (4) Paragon Life Insurance Company to fund the benefits under variable life insurance contracts it issues to certain employees of Morgan Stanley Dean Witter & Co., Inc. the parent company of Morgan Stanley Investment Advisors Inc. (the "Investment Manager"), formerly Morgan Stanley Dean Witter Advisors Inc. The Fund, organized on February 25, 1983 as a Massachusetts business trust, consists of seventeen Portfolios ("Portfolios") which commenced operations as follows:
COMMENCEMENT OF PORTFOLIO OPERATIONS - --------- ---------------- Money Market...................................... March 9, 1984 Short-Term Bond................................... May 4, 1999 Quality Income Plus............................... March 1, 1987 High Yield........................................ March 9, 1984 Utilities......................................... March 1, 1990 Income Builder.................................... January 21, 1997 Dividend Growth................................... March 1, 1990 Capital Growth.................................... March 1, 1991 February 23, Global Dividend Growth............................ 1994 COMMENCEMENT OF PORTFOLIO OPERATIONS - --------- ---------------- European Growth................................... March 1, 1991 February 23, Pacific Growth.................................... 1994 Equity............................................ March 9, 1984 S&P 500 Index..................................... May 18, 1998 Competitive Edge "Best Ideas"..................... May 18, 1998 Aggressive Equity................................. May 4, 1999 Information....................................... November 6, 2000 Strategist........................................ March 1, 1987
On June 5, 2000, the Fund commenced offering one additional class of shares (Class Y shares), with all Portfolio shares issued prior to May 1, 2000 designated Class X shares. The two classes are identical except that Class Y shares incur distribution expenses. Class X shares are generally available to holders of contracts offered by Paragon Life Insurance Company and other contracts offered before May 1, 2000. Class Y shares are available to holders of contracts offered by Northbrook Life Insurance Company, Allstate Life Insurance Company, and Glenbrook Life and Annuity Company offered on or after June 5, 2000. 170 Morgan Stanley Variable Investment Series Notes to Financial Statements / / December 31, 2001 CONTINUED The investment objectives of each Portfolio are as follows:
PORTFOLIO INVESTMENT OBJECTIVE Money Market Seeks high current income, preservation of capital and liquidity by investing in short- term money market instruments. Short-Term Bond Seeks to provide a high level of current income consistent with the preservation of capital, by investing primarily in bonds issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities and investment grade corporate and other types of bonds including asset-backed securities. Quality Income Plus Seeks, as its primary objective, to earn a high level of current income and, as a secondary objective, capital appreciation, but only when consistent with its primary objective, by investing primarily in U.S. Government securities and higher-rated fixed income securities. High Yield Seeks, as its primary objective, to earn a high level of current income and, as a secondary objective, capital appreciation, but only when consistent with its primary objective, by investing primarily in lower-rated fixed income securities. Utilities Seeks both capital appreciation and current income by investing in equity and fixed income securities of companies engaged in the utilities industry. Income Builder Seeks, as its primary objective, to earn reasonable income and, as a secondary objective, growth of capital by investing primarily in income-producing equity securities. Dividend Growth Seeks to provide reasonable current income and long-term growth of income and capital by investing primarily in common stocks of companies with a record of paying dividends and the potential for increasing dividends. Capital Growth Seeks long-term capital growth by investing primarily in common stocks. Global Dividend Seeks to provide reasonable current income and long-term growth of income and capital by Growth investing primarily in common stocks of companies, issued by issuers worldwide, with a record of paying dividends and the potential for increasing dividends. European Growth Seeks to maximize the capital appreciation of its investments by investing primarily in securities issued by issuers located in Europe. Pacific Growth Seeks to maximize the capital appreciation of its investments by investing primarily in securities issued by issuers located in Asia, Australia and New Zealand. Equity Seeks, as its primary objective, capital growth and, as a secondary objective, income, but only when consistent with its primary objective, by investing primarily in equity securities and securities convertible into equity securities.
171 Morgan Stanley Variable Investment Series Notes to Financial Statements / / December 31, 2001 CONTINUED
PORTFOLIO INVESTMENT OBJECTIVE S&P 500 Index Seeks to provide investment results that, before expenses, correspond to the total return of the Standards & Poor's 500 Composite Stock Price Index (the "S&P 500 Index") by investing primarily in common stocks included in the S&P 500 Index. Competitive Edge Seeks long-term capital growth by investing primarily in the common stock of U.S. and "Best Ideas" non-U.S. companies included in the "Best Ideas" list, a research compilation assembled and maintained by Morgan Stanley Equity Research. Aggressive Equity Seeks long-term capital growth by investing primarily in equity securities of companies that offer the potential for superior earnings growth. Information Seeks long-term capital appreciation by investing primarily in common stocks and investment grade convertible securities of companies throughout the world that are engaged in the communications and information industry. Strategist Seeks a high total investment return through a fully managed investment policy utilizing equity, investment grade fixed income and money market securities and writing covered options.
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 -- Money Market: securities are valued at amortized cost which approximates market value. All remaining Portfolios: (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 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; (3) futures contracts are valued at the latest price published by the commodities exchange on which they trade; (4) when market quotations are not readily available, including circumstances under which it is determined by the Investment Manager (or, in the case of European Growth and Pacific Growth, by Morgan Stanley Investment Management Inc. (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 172 Morgan Stanley Variable Investment Series Notes to Financial Statements / / December 31, 2001 CONTINUED Trustees (valuation of debt securities for which market quotations are not readily available may also be based upon current market prices of securities which are comparable in coupon, rating and maturity or an appropriate matrix utilizing similar factors); (5) certain of the Fund's portfolio securities may be valued by an outside pricing service approved by the Trustees. The pricing service may utilize a matrix system incorporating security quality, maturity and coupon as the evaluation model parameters, and/or research and evaluations by its staff, including review of broker-dealer market price quotations in determining what it believes is the fair valuation of the securities valued by such pricing service; and (6) short-term debt securities having a maturity date of more than sixty days at the 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 on foreign securities which are recorded as soon as the Fund is informed after the ex-dividend date. Interest income is accrued daily except where collection is not expected. The Fund amortizes premiums and accretes discounts over the life of the respective securities. C. Futures Contracts -- A futures contract is an agreement between two parties to buy and sell financial instruments or contracts based on financial indices at a set price on a future date. Upon entering into such a contract, the Fund is required to pledge to the broker cash, U.S. Government securities or other liquid portfolio securities equal to the minimum initial margin requirements of the applicable futures exchange. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments, known as variation margin, are recorded by the Fund as unrealized gains or losses. Upon closing of the contract, the Fund realizes a gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. D. Foreign Currency Translation -- The books and records of the Portfolios investing in foreign currency denominated transactions are translated into U.S. dollars as follows: (1) the foreign currency market value of investment securities, other assets and liabilities and forward foreign currency contracts ("forward contracts") are translated at the exchange rates prevailing at the end of the period; and (2) purchases, sales, income and expenses are translated at the exchange rates prevailing on the respective dates of such 173 Morgan Stanley Variable Investment Series Notes to Financial Statements / / December 31, 2001 CONTINUED transactions. The resultant exchange gains and losses are included in the Statements of Operations as realized and unrealized gain/loss on foreign exchange transactions. Pursuant to U.S. Federal income tax regulations, certain foreign exchange gains/losses included in realized and unrealized gain/loss are included in or are a reduction of ordinary income for federal income tax purposes. The Portfolios do not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the changes in the market prices of the securities. E. Forward Foreign Currency Contracts -- Some of the Portfolios may enter into forward contracts which are valued daily at the appropriate forward exchange rates. The resultant unrealized exchange gains and losses are included in the Statements of Operations as unrealized gain/loss on foreign exchange transactions. The Portfolios record realized gains or losses on delivery of the currency or at the time the forward contract is extinguished (compensated) by entering into a closing transaction prior to delivery. F. Federal Income Tax Status -- It is the Fund's policy to comply individually for each Portfolio 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. G. 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 financial reporting purposes but not for tax purposes are reported as dividends in excess of net investment income or distributions in excess of net realized capital gains. To the extent they exceed net investment income and net realized capital gains for tax purposes, they are reported as distributions of paid-in-capital. H. Expenses -- Direct expenses are charged to the respective Portfolio and general Fund expenses are allocated on the basis of relative net assets or equally among the Portfolios. The expense offset represents a reduction of the custodian fees for earnings on cash balances maintained by a Portfolio. 174 Morgan Stanley Variable Investment Series Notes to Financial Statements / / December 31, 2001 CONTINUED 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 following annual rates to each Portfolios' net assets determined at the close of each business day: Money Market -- 0.50% to the portion of daily net assets not exceeding $500 million; 0.425% to the portion of daily net assets exceeding $500 million but not exceeding $750 million, and 0.375% to the portion of daily net assets exceeding $750 million. Short-Term Bond -- 0.45%. Quality Income Plus -- 0.50% to the portion of daily net assets not exceeding $500 million and 0.45% to the portion of daily net assets exceeding $500 million. High Yield -- 0.50% to the portion of daily net assets not exceeding $500 million and 0.425% to the portion of daily net assets exceeding $500 million. Utilities -- 0.65% to the portion of daily net assets not exceeding $500 million; 0.55% to the portion of daily net assets exceeding $500 million but not exceeding $1 billion and 0.525% to the portion of daily net assets exceeding $1 billion. Income Builder -- 0.75%. Dividend Growth -- 0.625% to the portion of daily net assets not exceeding $500 million; 0.50% to the portion of daily net assets exceeding $500 million but not exceeding $1 billion; 0.475% to the portion of daily net assets exceeding $1 billion but not exceeding $2 billion; 0.45% to the portion of daily net assets exceeding $2 billion but not exceeding $3 billion and 0.425% to the portion of daily net assets exceeding $3 billion. Capital Growth -- 0.65%. Global Dividend Growth -- 0.75% to the portion of daily net assets not exceeding $1 billion and 0.725% to the portion of daily net assets exceeding $1 billion. European Growth -- 0.95% to the portion of daily net assets not exceeding $500 million and 0.90% to the portion of daily net assets exceeding $500 million. Pacific Growth -- 0.95%. 175 Morgan Stanley Variable Investment Series Notes to Financial Statements / / December 31, 2001 CONTINUED Equity -- 0.50% to the portion of daily net assets not exceeding $1 billion; 0.475% to the portion of daily net assets exceeding $1 billion but not exceeding $2 billion and 0.45% to the portion of daily net assets exceeding $2 billion. S&P 500 Index -- 0.40%. Competitive Edge "Best Ideas" -- 0.65%. Information -- 0.75% Aggressive Equity -- 0.75%. Strategist -- 0.50% to the portion of daily net assets not exceeding $1.5 billion and 0.475% to the portion of daily net assets exceeding $1.5 billion. Under a Sub-Advisory Agreement between the Investment Manager and the Sub-Advisor, the Sub-Advisor provides European Growth and Pacific Growth with investment advice and portfolio management relating to the Portfolios' investments 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 monthly compensation equal to 40% of its monthly compensation. The Investment Manager has agreed to assume all operating expenses (except for distribution fees) and to waive its compensation to the extent that such expenses and compensation on an annualized basis exceed 0.50% of the daily net assets of S&P 500 Index. For the period June 1, 2001 through December 31, 2001, the Investment Manager has agreed to waive its fee and reimburse all operating expenses (except for distribution fees) for Short-Term Bond to the extent they exceed 0.50% of the daily net assets. The Investment Manager has agreed to waive its fee and reimburse all operating expenses (except for distribution fees) for Information until such time the Portfolio has $50 million of net assets or December 31, 2001, whichever occurs first. At December 31, 2001, included in the Statement of Assets and Liabilities is a receivable from affiliate, which represents expense reimbursements due to the Portfolio. 3. Plan of Distribution Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Manager and Sub-Advisor. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. Under the Plan, Class Y shares of each Portfolio bear a distribution 176 Morgan Stanley Variable Investment Series Notes to Financial Statements / / December 31, 2001 CONTINUED fee which is accrued daily and paid monthly at the annual rate of 0.25% of the average daily net assets of the class. 4. Security Transactions and Transactions with Affiliates Purchases and sales/maturities of portfolio securities, excluding short-term investments (except Money Market), for the year ended December 31, 2001 are as follows:
U.S. GOVERNMENT SECURITIES OTHER ------------------------------ --------------------------------- PURCHASES SALES/MATURITIES PURCHASES SALES/MATURITIES ------------ ---------------- --------------- ---------------- Money Market.................. $598,677,811 $480,076,937 $5,736,164,732 $5,693,572,625 Short-Term Bond............... 23,890,090 19,726,421 19,680,365 3,765,863 Quality Income Plus........... 438,429,367 426,578,935 273,429,367 210,234,621 High Yield.................... -- -- 77,738,651 79,941,201 Utilities..................... 10,790,113 8,447,224 126,854,975 193,257,176 Income Builder................ -- -- 38,203,483 28,306,729 Dividend Growth............... -- -- 265,853,125 410,126,246 Capital Growth................ -- -- 409,185,091 437,681,313 Global Dividend Growth........ -- -- 28,253,274 75,099,536 European Growth............... -- -- 318,290,748 397,886,086 Pacific Growth................ -- -- 59,863,234 76,466,107 Equity........................ 84,287,781 84,798,917 3,733,146,768 3,898,156,735 S&P 500 Index................. -- -- 22,205,075 8,998,944 Competitive Edge "Best Ideas"....................... -- -- 26,147,179 38,215,550 Aggressive Equity............. -- -- 414,172,715 426,587,410 Information................... -- -- 23,532,734 12,451,318 Strategist.................... 291,941,891 303,831,715 325,384,791 315,239,495
Included in the aforementioned purchases and sales of portfolio securities of S&P 500 Index are purchases and sales of Morgan Stanley Dean Witter & Co., an affiliate of the Investment Manager, Sub-Advisor and Distributor, of $72,114 and $52,162, respectively including realized losses of $38,553 and purchases and sales of Allstate Corp., an affiliate of the Fund, of $26,886 and $21,493, respectively, including realized losses of $2,487. Included in the purchases of Equity and Aggressive Equity are purchases of Allstate Corp. of $19,806,332 and $601,055 respectively. Included in the sales of portfolio securities of Equity and Aggressive Equity are sales of Allstate Corp. of $20,385,921 and $1,394,324, respectively, including net realized gains of $579,589 and net realized losses of $190,219, respectively. Included in the payable for investments purchased at December 31, 2001 for Capital Growth is $140,694 for unsettled trades with Morgan Stanley DW Inc. ("MSDW"), an affiliate of the Investment Manager, 177 Morgan Stanley Variable Investment Series Notes to Financial Statements / / December 31, 2001 CONTINUED Sub-Advisor and Distributor. Included in the receivable for investments sold at December 31, 2001 for Equity is $771,584 for unsettled trades with MSDW. For the year ended December 31, 2001, the following Portfolios incurred brokerage commissions with MSDW for portfolio transactions executed on behalf of the Portfolio:
GLOBAL INCOME DIVIDEND CAPITAL DIVIDEND UTILITIES BUILDER GROWTH GROWTH GROWTH - --------- ------- -------- ------- -------- $16,245 $18,666 $93,430 $70,619 $8,878 ======= ======= ======= ======= ====== AGGRESSIVE EQUITY EQUITY INFORMATION STRATEGIST - --------- ---------- ----------- ---------- $70,637 $11,490 $13,994 $37,215 ======= ======= ======= =======
Included in the payable for investments purchased at December 31, 2001 for Equity and Aggressive Equity are $3,272,548 and $62,985, respectively for unsettled trades with Morgan Stanley & Co., Inc., an affiliate of the Investment Manager, Sub-Advisor and Distributor. Included in the receivable for investments sold at December 31, 2001 for Dividend Growth, Capital Growth, Global Dividend Growth and Aggressive Equity are $2,442,505, $138,668, $195,153 and $176,401, respectively, for unsettled trades with Morgan Stanley & Co., Inc. For the year ended December 31, 2001, the following Portfolios incurred brokerage commissions with Morgan Stanley & Co., for portfolio transactions executed on behalf of the Portfolio:
GLOBAL INCOME DIVIDEND CAPITAL DIVIDEND PACIFIC UTILITIES BUILDER GROWTH GROWTH GROWTH GROWTH - --------- ------- -------- ------- -------- ------- $ 26,581 $2,792 $131,486 $43,956 $24,174 $ 663 ======== ====== ======== ======= ======= ======= COMPETITIVE S&P 500 EDGE AGGRESSIVE EQUITY INDEX "BEST IDEAS" EQUITY INFORMATION STRATEGIST - --------- ------- -------------- ---------- ----------- ---------- $589,325 $ 131 $ 49,870 $65,534 $ 121 $26,114 ======== ====== ======== ======= ======= =======
Included in the payable for investments purchased at December 31, 2001 for Strategist are unsettled trades with other Morgan Stanley funds aggregating $3,118,000. Included in the receivable for investments sold at December 31, 2001 for Dividend Growth and Global Dividend Growth are unsettled trades with other Morgan Stanley funds aggregating $346,098 and $43,652, respectively. 178 Morgan Stanley Variable Investment Series Notes to Financial Statements / / December 31, 2001 CONTINUED Morgan Stanley Trust, an affiliate of the Investment Manager, Sub-Advisor and Distributor, is the Fund's transfer agent. The Fund has an unfunded noncontributory defined benefit pension plan covering all independent Trustees of the Fund who will have served as independent Trustees for at least five years at the time of retirement. Benefits under this plan are based on years of service and compensation during the last five years of service. Aggregate pension costs for the year ended December 31, 2001 included in Trustees' fees and expenses in the Statement of Operations and the accrued pension liability included in accrued expenses in the Statement of Assets and Liabilities are as follows:
AGGREGATE PENSION COSTS - ---------------------------------------------------------- GLOBAL SHORT-TERM INCOME DIVIDEND CAPITAL DIVIDEND EUROPEAN BOND BUILDER GROWTH GROWTH GROWTH GROWTH - ---------- ------- -------- ------- -------- -------- $ 158 $ 54 $4,376 $767 $2,124 $2,575 ====== ====== ====== ==== ====== ====== COMPETITIVE PACIFIC S&P 500 EDGE AGGRESSIVE GROWTH EQUITY INDEX "BEST IDEAS" EQUITY STRATEGIST - ---------- ------- -------- -------------- ---------- ---------- $ 271 $6,166 $1,901 $448 $1,047 $1,245 ====== ====== ====== ==== ====== ======
ACCRUED PENSION LIABILITY - -------------------------------------------------------------------------------- MONEY SHORT-TERM QUALITY HIGH INCOME DIVIDEND CAPITAL MARKET BOND INCOME PLUS YIELD UTILITIES BUILDER GROWTH GROWTH - ------- ---------- ----------- ------- --------- ------- -------- ------- $10,562 $ 156 $7,028 $ 3,579 $4,625 $586 $12,730 $1,260 ======= ====== ====== ======= ====== ==== ======= ====== GLOBAL COMPETITIVE DIVIDEND EUROPEAN PACIFIC S&P 500 EDGE AGGRESSIVE GROWTH GROWTH GROWTH EQUITY INDEX "BEST IDEAS" EQUITY STRATEGIST - -------- ---------- ----------- ------- --------- -------------- ---------- ---------- $ 2,884 $3,597 $ 418 $12,238 $1,929 $562 $ 1,030 $7,385 ======= ====== ====== ======= ====== ==== ======= ======
179 Morgan Stanley Variable Investment Series Notes to Financial Statements / / December 31, 2001 CONTINUED 5. Federal Income Tax Status At December 31, 2001, the following Portfolios had an approximate net capital loss carryover which may be used to offset future capital gains to the extent provided by regulations:
(AMOUNTS IN THOUSANDS) ------------------------------------------------------------------------------ AVAILABLE THROUGH DECEMBER 31, 2002 2003 2004 2005 2006 2007 2008 2009 TOTAL - ------------------------------ ------ ------ ------ ------ ------- ------- -------- -------- -------- Quality Income Plus........ $5,200 -- $2,491 -- -- $10,670 $ 10,496 -- $ 28,857 High Yield................. 3,256 $2,984 5,521 -- $ 2,735 10,786 7,524 $ 47,237 80,043 Utilities.................. -- -- -- -- -- -- -- 663 663 Income Builder............. -- -- -- -- -- 180 1,746 4,578 6,504 Dividend Growth............ -- -- -- -- -- -- 233,060 54,999 288,059 Capital Growth............. -- -- -- -- -- -- -- 27,066 27,066 Global Dividend Growth..... -- -- -- -- -- -- -- 2,761 2,761 European Growth............ -- -- -- -- -- -- -- 45,515 45,515 Pacific Growth............. -- -- -- $6,035 33,536 -- -- 7,413 46,984 Equity..................... -- -- -- 3,342 14 -- -- 491,219 494,575 S&P 500 Index.............. -- -- -- -- -- -- 175 8,081 8,256 Competitive Edge "Best Ideas".................... -- -- -- -- -- -- -- 14,642 14,642 Aggressive Equity.......... -- -- -- -- -- 68 10,199 38,363 48,630 Information................ -- -- -- -- -- -- -- 3,373 3,373 Strategist................. -- -- -- -- -- -- -- 23,575 23,575
During the year ended December 31, 2001, the following Portfolios utilized approximate net capital loss carryovers: Short-Term Bond -- $4,000; Quality Income Plus -- $7,783,000. Net capital and net foreign currency losses incurred after October 31 ("post-October losses") within the taxable year are deemed to arise on the first business day of the Portfolios' next taxable year. The following Portfolios incurred and will elect to defer post-October losses during fiscal 2001: Short-Term Bond -- $32,000; High Yield -- $1,289,000; Income Builder -- $1,783,000; Dividend Growth -- $44,790,000; Global Dividend Growth -- $3,381,000; European Growth -- $2,400,000; Pacific Growth -- $371,000; Equity -- $8,019,000; S&P 500 Index -- $45,000; Competitive Edge "Best Ideas"- $1,109,000; Information -- $224,000. 180 Morgan Stanley Variable Investment Series Notes to Financial Statements / / December 31, 2001 CONTINUED At December 31, 2001, the primary reason(s) for significant temporary/permanent book/tax differences were as follows:
TEMPORARY DIFFERENCES PERMANENT DIFFERENCES ------------------------- -------------------------- POST- LOSS FOREIGN EXPIRED OCTOBER DEFERRALS FROM CURRENCY CAPITAL LOSS LOSSES WASH SALES GAINS/LOSSES CARRYFORWARD --------- -------------- ------------ ------------ Short-Term Bond............... - - Quality Income Plus........... - High Yield.................... - - - Utilities..................... - Income Builder................ - - Dividend Growth............... - - Capital Growth................ - Global Dividend Growth........ - - - European Growth............... - - - Pacific Growth................ - - - Equity........................ - - S&P 500 Index................. - - Competitive Edge "Best Ideas"....................... - - - Aggressive Equity............. - Information................... - -
Additionally, the following Portfolios had other temporary differences: Global Dividend Growth and Pacific Growth -- income from mark-to-market of passive foreign investment companies ("PFICs"); European Growth -- income from mark-to-market of forward foreign currency contracts; Short-Term Bond, Quality Income Plus, S&P 500 Index and Strategist -- capital gain/loss from mark-to-market of futures contracts; High Yield -- interest on bonds in default. Pacific Growth had permanent differences attributable to a net operating loss and tax adjustments on PFICs sold by the Portfolio. The following Portfolios had temporary and permanent differences attributable to book amortization of premiums/ discounts on debt securities: Short-Term Bond, Quality Income Plus, High Yield, Utilities, Income Builder and Strategist. 181 Morgan Stanley Variable Investment Series Notes to Financial Statements / / December 31, 2001 CONTINUED To reflect reclassification arising from the permanent differences, the following accounts were (charged) credited:
ACCUMULATED UNDISTRIBUTED ACCUMULATED UNDISTRIBUTED NET INVESMENT INCOME (LOSS) NET REALIZED GAIN (LOSS) PAID-IN-CAPITAL --------------------------- ------------------------- --------------- Short-Term Bond.................... $ 50,297 $ (50,297) -- Quality Income Plus................ 512,741 (512,741) -- High Yield......................... (364,121) 5,099,796 $(4,735,675) Utilities.......................... 182,191 (182,191) -- Income Builder..................... 252,669 (260,364) 7,695 Capital Growth..................... (478) 478 -- Global Dividend Growth............. (10,164) 10,164 -- European Growth.................... 2,089,627 (2,089,627) -- Pacific Growth..................... 990,309 (633,437) (356,872) Competitive Edge "Best Ideas"...... (4,897) 4,897 -- Strategist......................... 170,487 (170,487) --
6. Purposes of And Risks Relating to Certain Financial Instruments All of the Portfolios (except for Money Market, Quality Income Plus, Dividend Growth, Equity and S&P 500 Index) may enter into forward contracts to facilitate settlement of foreign currency denominated foreign securities. Forward contracts involve elements of market risk in excess of the amounts reflected in the Statement of Assets and Liabilities. The Portfolios bear the risk of an unfavorable change in the foreign exchange rates underlying the forward contracts. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts. At December 31, 2001, European Growth had outstanding forward contracts. All of the Portfolios (except Money Market, High Yield, Income Builder, Dividend Growth and Equity) may invest in futures contracts. Futures contracts involve elements of market risk in excess of the amount reflected in the Statement of Assets and Liabilities. The respective Portfolio bears the risk of an unfavorable change in the value of the underlying securities. At December 31, 2001, Short-Term Bond, Quality Income Plus, Strategist and S&P 500 Index had outstanding futures contracts. At December 31, 2001, European Growth's investments in securities of issuers in the United Kingdom represented 38.2% of the Portfolio's net assets. Pacific Growth's investments in securities of issuers in Japan 182 Morgan Stanley Variable Investment Series Notes to Financial Statements / / December 31, 2001 CONTINUED represented 54.1% of the Portfolio's net assets. These investments, which involve risks and considerations not present with respect to U.S. securities, may be affected by economic or political developments in these regions. At December 31, 2001, Global Dividend Growth's, European Growth's, Pacific Growth's and Information's cash balance consisted principally of interest bearing deposits with J.P. Morgan Chase Bank, the custodian of each Portfolio. 7. Change in Accounting Policy Effective January 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, related to premiums and discounts on debt securities. The cumulative effect of this accounting change had no impact on the net assets of each respective Portfolio, but resulted in the following changes to Short-Term Bond, Quality Income Plus, High Yield, Utilities, Income Builder and Strategist: an increase or (decrease) in the cost of securities of $11,957, $(424,569), $1,612,891, $14,503, $(210,500) and $129,603, respectively; and a corresponding increase or (decrease) to undistributed net investment income based on securities held as of December 31, 2000. The effect of this change for the year ended December 31, 2001 was to decrease net investment income by $169,009, $563,776, $287,757, $191,997, $163,818 and $374,978, respectively; with a corresponding increase or (decrease) in unrealized appreciation/depreciation of $120,281, $178,280, $651,878, $42,153, $(142,101) and $204,502, respectively; and an increase or (decrease) in net realized gains/losses of $48,728, $385,496, $(364,121), $149,844, $305,919, and $170,476, respectively. The statement of changes in net assets and the financial highlights for the prior periods have not been restated to reflect this change. 183 Morgan Stanley Variable Investment Series FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
NET ASSET YEAR VALUE NET NET REALIZED TOTAL FROM DIVIDENDS ENDED BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO DECEMBER 31 OF PERIOD INCOME (LOSS) GAIN (LOSS) OPERATIONS SHAREHOLDERS - ----------- --------- ------------- -------------- ---------- ------------ MONEY MARKET CLASS X SHARES 1997.................... $ 1.00 $0.051 -- $0.051 $(0.051) 1998.................... 1.00 0.051 -- 0.051 (0.051) 1999.................... 1.00 0.047 -- 0.047 (0.047) 2000(a)*................ 1.00 0.058 -- 0.058 (0.058) 2001*................... 1.00 0.039 -- 0.039 (0.039)** CLASS Y SHARES* 2000(b)................. 1.00 0.033 -- 0.033 (0.033) 2001.................... 1.00 0.036 -- 0.036 (0.036)** SHORT-TERM BOND CLASS X SHARES 1999(e)................. 10.00 0.27 $(0.12) 0.15 (0.27) 2000(a)*................ 9.88 0.51 0.05 0.56 (0.48) 2001*................... 9.96 0.40(8) 0.26(8) 0.66 (0.45) CLASS Y SHARES* 2000(b)................. 9.86 0.28 0.09 0.37 (0.28) 2001.................... 9.95 0.35(8) 0.28(8) 0.63 (0.42) QUALITY INCOME PLUS CLASS X SHARES 1997.................... 10.37 0.70 0.40 1.10 (0.70) 1998.................... 10.77 0.68 0.23 0.91 (0.68) 1999.................... 11.00 0.67 (1.14) (0.47) (0.67) 2000(a)*................ 9.86 0.68 0.37 1.05 (0.69) 2001*................... 10.22 0.61(8) 0.34(8) 0.95 (0.62) CLASS Y SHARES* 2000(b)................. 9.80 0.38 0.42 0.80 (0.39) 2001.................... 10.21 0.57(8) 0.36(8) 0.93 (0.60)
SEE NOTES TO FINANCIAL STATEMENTS 184
TOTAL NET ASSET NET ASSETS YEAR DISTRIBUTIONS DIVIDENDS VALUE END OF ENDED TO AND END OF TOTAL PERIOD DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S) - ----------- ------------- ------------- --------- ------- ---------- MONEY MARKET CLASS X SHARES 1997.................... -- $(0.051) $ 1.00 5.23% $335,578 1998.................... -- (0.051) 1.00 5.18 442,034 1999.................... -- (0.047) 1.00 4.80 435,643 2000(a)*................ -- (0.058) 1.00 6.01 358,793 2001*................... -- (0.039) 1.00 3.94 452,765 CLASS Y SHARES* 2000(b)................. -- (0.033) 1.00 3.37(1) 13,813 2001.................... -- (0.036) 1.00 3.68 105,952 SHORT-TERM BOND CLASS X SHARES 1999(e)................. -- (0.27) 9.88 1.56(1) 3,175 2000(a)*................ -- (0.48) 9.96 5.85 6,427 2001*................... -- (0.45) 10.17 6.72 25,858 CLASS Y SHARES* 2000(b)................. -- (0.28) 9.95 3.82(1) 1,430 2001.................... -- (0.42) 10.16 6.49 25,050 QUALITY INCOME PLUS CLASS X SHARES 1997.................... -- (0.70) 10.77 11.09 474,990 1998.................... -- (0.68) 11.00 8.67 547,583 1999.................... -- (0.67) 9.86 (4.32) 456,132 2000(a)*................ -- (0.69) 10.22 11.09 406,508 2001*................... -- (0.62) 10.55 9.57 452,757 CLASS Y SHARES* 2000(b)................. -- (0.39) 10.21 8.31(1) 5,176 2001.................... -- (0.60) 10.54 9.33 54,115 RATIOS TO AVERAGE NET ASSETS -------------------------- YEAR NET PORTFOLIO ENDED INVESTMENT TURNOVER DECEMBER 31 EXPENSES INCOME RATE - ----------- -------- ---------- --------- MONEY MARKET CLASS X SHARES 1997.................... 0.52% 5.10% N/A 1998.................... 0.52 5.04 N/A 1999.................... 0.52 4.68 N/A 2000(a)*................ 0.52 5.83 N/A 2001*................... 0.51 3.69 N/A CLASS Y SHARES* 2000(b)................. 0.77(2) 5.86(2) N/A 2001.................... 0.76 3.44 N/A SHORT-TERM BOND CLASS X SHARES 1999(e)................. 0.62(2)(5) 4.83(2)(5) 56%(1) 2000(a)*................ 0.98 5.08 16 2001*................... 0.61(7)# 3.84(7)(8) 133 CLASS Y SHARES* 2000(b)................. 1.17(2) 5.00(2) 16 2001.................... 0.86(7)# 3.59(7)(8) 133 QUALITY INCOME PLUS CLASS X SHARES 1997.................... 0.53 6.71 171 1998.................... 0.52 6.23 152 1999.................... 0.52 6.45 119 2000(a)*................ 0.52 6.90 105 2001*................... 0.53 5.82(8) 150 CLASS Y SHARES* 2000(b)................. 0.77(2) 6.53(2) 105 2001.................... 0.78 5.57(8) 150
185 Morgan Stanley Variable Investment Series Financial Highlights CONTINUED
NET ASSET YEAR VALUE NET NET REALIZED TOTAL FROM DIVIDENDS ENDED BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO DECEMBER 31 OF PERIOD INCOME (LOSS) GAIN (LOSS) OPERATIONS SHAREHOLDERS - ----------- --------- ------------- -------------- ---------- ------------ HIGH YIELD CLASS X SHARES 1997.................... $ 6.18 $0.75 $(0.06) $ 0.69 $(0.75) 1998.................... 6.12 0.71 (1.05) (0.34) (0.71) 1999.................... 5.07 0.68 (0.74) (0.06) (0.68) 2000(a)*................ 4.33 0.66 (1.90) (1.24) (0.66) 2001*................... 2.43 0.33(8) (1.09)(8) (0.76) (0.34) CLASS Y SHARES* 2000(b)................. 3.92 0.37 (1.48) (1.11) (0.38) 2001.................... 2.43 0.32(8) (1.08)(8) (0.76) (0.34) UTILITIES CLASS X SHARES 1997.................... 15.34 0.57 3.46 4.03 (0.57) 1998.................... 18.59 0.57 3.68 4.25 (0.57) 1999.................... 21.25 0.55 2.08 2.63 (0.55) 2000(a)*................ 22.90 0.49 0.17 0.66 (0.49) 2001*................... 21.69 0.39(8) (5.74)(8) (5.35) (0.41) CLASS Y SHARES* 2000(b)................. 22.98 0.24 0.19 0.43 (0.35) 2001.................... 21.68 0.35(8) (5.74)(8) (5.39) (0.37) INCOME BUILDER CLASS X SHARES 1997(c)................. 10.00 0.44 1.76 2.20 (0.44) 1998.................... 11.76 0.56 (0.19) 0.37 (0.56) 1999.................... 11.46 0.58 0.21 0.79 (0.56) 2000(a)*................ 11.44 0.55 (0.54) 0.01 (0.56) 2001*................... 10.86 0.47(8) (0.22)(8) 0.25 (0.50)++ CLASS Y SHARES* 2000(b)................. 11.15 0.32 (0.21) 0.11 (0.39) 2001.................... 10.85 0.42(8) (0.19)(8) 0.23 (0.48)++
SEE NOTES TO FINANCIAL STATEMENTS 186
TOTAL NET ASSET NET ASSETS YEAR DISTRIBUTIONS DIVIDENDS VALUE END OF ENDED TO AND END OF TOTAL PERIOD DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S) - ----------- ------------- ------------- --------- ------- ---------- HIGH YIELD CLASS X SHARES 1997.................... -- $(0.75) $ 6.12 11.87% $368,061 1998.................... -- (0.71) 5.07 (6.20) 364,079 1999.................... -- (0.68) 4.33 (1.33) 279,683 2000(a)*................ -- (0.66) 2.43 (32.22) 128,646 2001*................... -- (0.34) 1.33 (33.75) 64,470 CLASS Y SHARES* 2000(b)................. -- (0.38) 2.43 (30.02)(1) 1,947 2001.................... -- (0.34) 1.33 (33.92) 6,163 UTILITIES CLASS X SHARES 1997.................... $(0.21) (0.78) 18.59 27.15 458,134 1998.................... (1.02) (1.59) 21.25 23.76 560,803 1999.................... (0.43) (0.98) 22.90 12.71 580,487 2000(a)*................ (1.38) (1.87) 21.69 3.03 551,734 2001*................... (1.20) (1.61) 14.73 (25.75) 327,749 CLASS Y SHARES* 2000(b)................. (1.38) (1.73) 21.68 2.07(1) 19,069 2001.................... (1.20) (1.57) 14.72 (25.98) 24,550 INCOME BUILDER CLASS X SHARES 1997(c)................. -- (0.44) 11.76 22.38(1) 55,423 1998.................... (0.11) (0.67) 11.46 3.21 87,769 1999.................... (0.25)=/= (0.81) 11.44 7.06 81,616 2000(a)*................ (0.03)++ (0.59) 10.86 0.17 59,383 2001*................... -- (0.50) 10.61 2.30 63,060 CLASS Y SHARES* 2000(b)................. (0.02)++ (0.41) 10.85 1.06(1) 965 2001.................... -- (0.48) 10.60 2.10 7,147 RATIOS TO AVERAGE NET ASSETS ----------------------------- YEAR NET PORTFOLIO ENDED INVESTMENT TURNOVER DECEMBER 31 EXPENSES INCOME (LOSS) RATE - ----------- -------- ------------- --------- HIGH YIELD CLASS X SHARES 1997.................... 0.53% 12.44% 95% 1998.................... 0.53 12.27 93 1999.................... 0.53 14.05 48 2000(a)*................ 0.54 17.40 9 2001*................... 0.59 17.33(8) 81 CLASS Y SHARES* 2000(b)................. 0.79(2) 20.95(2) 9 2001.................... 0.84 17.08(8) 81 UTILITIES CLASS X SHARES 1997.................... 0.67 3.48 13 1998.................... 0.67 2.89 7 1999.................... 0.67 2.51 10 2000(a)*................ 0.66 2.16 13 2001*................... 0.67 2.19(8) 32 CLASS Y SHARES* 2000(b)................. 0.91(2) 1.93(2) 13 2001.................... 0.92 1.94(8) 32 INCOME BUILDER CLASS X SHARES 1997(c)................. 0.15(2)(3) 5.73(2)(3) 41(1) 1998.................... 0.81 5.09 54 1999.................... 0.81 4.98 43 2000(a)*................ 0.81 5.07 51 2001*................... 0.81 4.34(8) 45 CLASS Y SHARES* 2000(b)................. 1.06(2) 5.17(2) 51 2001.................... 1.06 3.88(8) 45
187 Morgan Stanley Variable Investment Series Financial Highlights CONTINUED
NET ASSET YEAR VALUE NET NET REALIZED TOTAL FROM DIVIDENDS ENDED BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO DECEMBER 31 OF PERIOD INCOME (LOSS) GAIN (LOSS) OPERATIONS SHAREHOLDERS - ----------- --------- ------------- -------------- ---------- ------------ DIVIDEND GROWTH CLASS X SHARES 1997.................... $18.40 $ 0.41 $ 4.20 $ 4.61 $(0.41) 1998.................... 21.60 0.41 2.58 2.99 (0.41) 1999.................... 22.13 0.39 (0.55) (0.16) (0.39) 2000(a)*................ 18.32 0.31 0.02 0.33 (0.33) 2001*................... 14.50 0.26 (1.02) (0.76) (0.26) CLASS Y SHARES* 2000(b)................. 17.79 0.12 0.62 0.74 (0.22) 2001.................... 14.49 0.22 (1.01) (0.79) (0.23) CAPITAL GROWTH CLASS X SHARES 1997.................... 16.65 0.01 3.90 3.91 (0.08) 1998.................... 18.29 (0.05) 3.59 3.54 -- 1999.................... 20.36 -- 6.12 6.12 -- 2000(a)*................ 23.73 0.10 0.28 0.38 -- 2001*................... 20.06 0.03 (5.13) (5.10) (0.10) CLASS Y SHARES* 2000(b)................. 24.55 0.03 (0.50) (0.47) -- 2001.................... 20.03 (0.01) (5.12) (5.13) (0.09) GLOBAL DIVIDEND GROWTH CLASS X SHARES 1997.................... 13.13 0.22 1.37 1.59 (0.23) 1998.................... 13.89 0.24 1.45 1.69 (0.24) 1999.................... 13.82 0.27 1.71 1.98 (0.29) 2000(a)*................ 14.44 0.24 (0.64) (0.40) (0.09) 2001*................... 12.73 0.21 (1.00) (0.79) (0.33) CLASS Y SHARES* 2000(b)................. 13.96 0.08 (0.11) (0.03) -- 2001.................... 12.71 0.15 (0.96) (0.81) (0.33)
SEE NOTES TO FINANCIAL STATEMENTS 188
TOTAL NET ASSET NET ASSETS YEAR DISTRIBUTIONS DIVIDENDS VALUE END OF ENDED TO AND END OF TOTAL PERIOD DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S) - ----------- ------------- ------------- --------- ------- ---------- DIVIDEND GROWTH CLASS X SHARES 1997.................... $(1.00) $(1.41) $21.60 25.61% $1,905,906 1998.................... (2.05) (2.46) 22.13 14.28 2,249,927 1999.................... (3.26) (3.65) 18.32 (2.39) 2,033,814 2000(a)*................ (3.82) (4.15) 14.50 5.30 1,552,724 2001*................... -- (0.26) 13.48 (5.20) 1,258,863 CLASS Y SHARES* 2000(b)................. (3.82) (4.04) 14.49 7.65(1) 19,083 2001.................... -- (0.23) 13.47 (5.42) 60,393 CAPITAL GROWTH CLASS X SHARES 1997.................... (2.19) (2.27) 18.29 24.54 127,100 1998.................... (1.47) (1.47) 20.36 19.63 138,603 1999.................... (2.75) (2.75) 23.73 33.29 171,251 2000(a)*................ (4.05) (4.05) 20.06 1.28 183,151 2001*................... (1.20) (1.30) 13.66 (26.31) 103,764 CLASS Y SHARES* 2000(b)................. (4.05) (4.05) 20.03 (2.24)(1) 3,551 2001.................... (1.20) (1.29) 13.61 (26.49) 6,615 GLOBAL DIVIDEND GROWTH CLASS X SHARES 1997.................... (0.60) (0.83) 13.89 12.04 481,613 1998.................... (1.52) (1.76) 13.82 12.53 484,228 1999.................... (1.07) (1.36) 14.44 14.65 506,929 2000(a)*................ (1.22) (1.31) 12.73 (2.50) 373,770 2001*................... (0.14) (0.47) 11.47 (6.25) 285,158 CLASS Y SHARES* 2000(b)................. (1.22) (1.22) 12.71 0.07(1) 2,211 2001.................... (0.14) (0.47) 11.43 (6.44) 10,494 RATIOS TO AVERAGE NET ASSETS ----------------------------- YEAR NET PORTFOLIO ENDED INVESTMENT TURNOVER DECEMBER 31 EXPENSES INCOME (LOSS) RATE - ----------- -------- ------------- --------- DIVIDEND GROWTH CLASS X SHARES 1997.................... 0.54% 2.06% 28% 1998.................... 0.53 1.85 45 1999.................... 0.52 1.82 81 2000(a)*................ 0.54 2.07 34 2001*................... 0.55 1.86 19 CLASS Y SHARES* 2000(b)................. 0.79(2) 1.59(2) 34 2001.................... 0.80 1.61 19 CAPITAL GROWTH CLASS X SHARES 1997.................... 0.71 0.01 139 1998.................... 0.70 (0.26) 248 1999.................... 0.72 0.02 575 2000(a)*................ 0.69 0.43 349 2001*................... 0.70 0.20 323 CLASS Y SHARES* 2000(b)................. 0.94(2) 0.30(2) 349 2001.................... 0.95 (0.05) 323 GLOBAL DIVIDEND GROWTH CLASS X SHARES 1997.................... 0.84 1.61 48 1998.................... 0.84 1.68 52 1999.................... 0.83 1.90 43 2000(a)*................ 0.80 1.88 40 2001*................... 0.80 1.76 9 CLASS Y SHARES* 2000(b)................. 1.05(2) 1.14(2) 40 2001.................... 1.05 1.51 9
189 Morgan Stanley Variable Investment Series Financial Highlights CONTINUED
NET ASSET YEAR VALUE NET NET REALIZED TOTAL FROM DIVIDENDS ENDED BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO DECEMBER 31 OF PERIOD INCOME (LOSS) GAIN (LOSS) OPERATIONS SHAREHOLDERS - ----------- --------- ------------- -------------- ---------- ------------ EUROPEAN GROWTH CLASS X SHARES 1997.................... $21.56 $ 0.21 $ 3.19 $ 3.40 $(0.24) 1998.................... 23.54 0.15 5.53 5.68 (0.31) 1999.................... 27.18 0.25 6.91 7.16 (0.19) 2000(a)*................ 31.47 0.13 (1.43) (1.30) (0.18) 2001*................... 25.37 0.13 (4.47) (4.34) (0.26) CLASS Y SHARES* 2000(b)................. 32.26 (0.03) (2.10) (2.13) (0.18) 2001.................... 25.33 0.05 (4.42) (4.37) (0.25) PACIFIC GROWTH CLASS X SHARES 1997.................... 9.96 0.12 (3.82) (3.70) (0.14) 1998.................... 6.12 0.06 (0.75) (0.69) (0.28) 1999.................... 5.15 0.04 3.33 3.37 (0.06) 2000(a)*................ 8.46 -- (2.78) (2.78) (0.12) 2001*................... 5.56 (0.01) (1.50) (1.51) (0.07) CLASS Y SHARES* 2000(b)................. 7.70 (0.01) (2.01) (2.02) (0.12) 2001.................... 5.56 (0.02) (1.49) (1.51) (0.07) EQUITY CLASS X SHARES 1997.................... 26.39 0.18 9.27 9.45 (0.18) 1998.................... 33.58 0.25 9.47 9.72 (0.25) 1999.................... 38.58 0.22 20.48 20.70 (0.22) 2000(a)*................ 53.88 0.30 (6.46) (6.16) (0.29) 2001*................... 39.68 0.15 (10.12) (9.97) (0.16) CLASS Y SHARES* 2000(b)................. 49.12 0.21 (1.68) (1.47) (0.24) 2001.................... 39.66 0.06 (10.09) (10.03) (0.10)
SEE NOTES TO FINANCIAL STATEMENTS 190
TOTAL NET ASSET NET ASSETS YEAR DISTRIBUTIONS DIVIDENDS VALUE END OF ENDED TO AND END OF TOTAL PERIOD DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S) - ----------- ------------- ------------- --------- ------- ---------- EUROPEAN GROWTH CLASS X SHARES 1997.................... $(1.18) $(1.42) $23.54 16.07% $ 391,441 1998.................... (1.73) (2.04) 27.18 23.96 510,638 1999.................... (2.68) (2.87) 31.47 29.11 579,705 2000(a)*................ (4.62) (4.80) 25.37 (4.92) 508,366 2001*................... (4.06) (4.32) 16.71 (17.76) 316,196 CLASS Y SHARES* 2000(b)................. (4.62) (4.80) 25.33 (7.39)(1) 10,580 2001.................... (4.06) (4.31) 16.65 (17.92) 20,858 PACIFIC GROWTH CLASS X SHARES 1997.................... -- (0.14) 6.12 (37.70) 68,904 1998.................... -- (0.28) 5.15 (10.40) 52,842 1999.................... -- (0.06) 8.46 66.09 115,927 2000(a)*................ -- (0.12) 5.56 (33.46) 64,209 2001*................... -- (0.07) 3.98 (27.42) 33,138 CLASS Y SHARES* 2000(b)................. -- (0.12) 5.56 (26.72)(1) 728 2001.................... -- (0.07) 3.98 (27.26) 1,640 EQUITY CLASS X SHARES 1997.................... (2.08) (2.26) 33.58 37.43 823,090 1998.................... (4.47) (4.72) 38.58 30.45 1,138,413 1999.................... (5.18) (5.40) 53.88 58.59 2,083,071 2000(a)*................ (7.75) (8.04) 39.68 (12.35) 1,818,134 2001*................... (6.89) (7.05) 22.66 (26.87) 1,022,335 CLASS Y SHARES* 2000(b)................. (7.75) (7.99) 39.66 (3.99)(1) 31,903 2001.................... (6.89) (6.99) 22.64 (27.07) 61,110 RATIOS TO AVERAGE NET ASSETS ----------------------------- YEAR NET PORTFOLIO ENDED INVESTMENT TURNOVER DECEMBER 31 EXPENSES INCOME (LOSS) RATE - ----------- -------- ------------- --------- EUROPEAN GROWTH CLASS X SHARES 1997.................... 1.12% 1.04% 45% 1998.................... 1.11 0.65 56 1999.................... 1.04 0.87 55 2000(a)*................ 1.00 0.46 78 2001*................... 1.02 0.68 82 CLASS Y SHARES* 2000(b)................. 1.25(2) (0.18)(2) 78 2001.................... 1.27 0.43 82 PACIFIC GROWTH CLASS X SHARES 1997.................... 1.44 1.09 58 1998.................... 1.51 0.91 112 1999.................... 1.42 0.85 105 2000(a)*................ 1.21 0.01 46 2001*................... 1.73 (0.28) 124 CLASS Y SHARES* 2000(b)................. 1.46(2) (0.20)(2) 46 2001.................... 1.98 (0.53) 124 EQUITY CLASS X SHARES 1997.................... 0.52 0.61 145 1998.................... 0.52 0.73 257 1999.................... 0.51 0.54 323 2000(a)*................ 0.50 0.62 402 2001*................... 0.51 0.55 329 CLASS Y SHARES* 2000(b)................. 0.75(2) 0.85(2) 402 2001.................... 0.76 0.30 329
191 Morgan Stanley Variable Investment Series Financial Highlights CONTINUED
NET ASSET YEAR VALUE NET NET REALIZED TOTAL FROM DIVIDENDS ENDED BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO DECEMBER 31 OF PERIOD INCOME (LOSS) GAIN (LOSS) OPERATIONS SHAREHOLDERS - ----------- --------- ------------- -------------- ---------- ------------ S&P 500 INDEX CLASS X SHARES 1998(d)................. $10.00 $ 0.06 $ 1.16 $ 1.22 -- 1999.................... 11.22 0.06 2.21 2.27 $(0.03) 2000(a)*................ 13.43 0.12 (1.37) (1.25) (0.07) 2001*................... 12.05 0.10 (1.57) (1.47) (0.10) CLASS Y SHARES* 2000(b)................. 13.47 0.04 (1.34) (1.30) (0.07) 2001.................... 12.04 0.08 (1.58) (1.50) (0.10) COMPETITIVE EDGE "BEST IDEAS" CLASS X SHARES 1998(d)................. 10.00 0.07 (0.25) (0.18) -- 1999.................... 9.82 0.06 2.56 2.62 (0.07) 2000(a)*................ 12.37 0.06 (2.20) (2.14) (0.05) 2001*................... 10.18 0.05 (2.36) (2.31) (0.06) CLASS Y SHARES* 2000(b)................. 12.03 -- (1.82) (1.82) (0.05) 2001.................... 10.16 0.02 (2.35) (2.33) (0.05) AGGRESSIVE EQUITY CLASS X SHARES 1999(e)................. 10.00 0.05 4.55 4.60 (0.03) 2000(a)*................ 14.57 0.05 (0.30) (0.25) (0.01) 2001*................... 14.31 0.02 (4.09) (4.07) (0.04) CLASS Y SHARES* 2000(b)................. 14.66 0.03 (0.39) (0.36) (0.01) 2001.................... 14.29 (0.01) (4.08) (4.09) (0.03) INFORMATION CLASS X SHARES* 2000(f)................. 10.00 0.06 (0.75) (0.69) -- 2001.................... 9.31 0.08 (4.07) (3.99) (0.01) CLASS Y SHARES* 2000(f)................. 10.00 0.05 (0.74) (0.69) -- 2001.................... 9.31 0.06 (4.06) (4.00) (0.01)
SEE NOTES TO FINANCIAL STATEMENTS 192
TOTAL NET ASSET NET ASSETS YEAR DISTRIBUTIONS DIVIDENDS VALUE END OF ENDED TO AND END OF TOTAL PERIOD DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S) - ----------- ------------- ------------- --------- ------- ---------- S&P 500 INDEX CLASS X SHARES 1998(d)................. -- -- $11.22 12.20%(1) $ 48,732 1999.................... $(0.03) $(0.06) 13.43 20.23 185,963 2000(a)*................ (0.06) (0.13) 12.05 (9.38) 210,530 2001*................... -- (0.10) 10.48 (12.23) 165,465 CLASS Y SHARES* 2000(b)................. (0.06) (0.13) 12.04 (9.73)(1) 12,724 2001.................... -- (0.10) 10.44 (12.53) 46,134 COMPETITIVE EDGE "BEST IDEAS" CLASS X SHARES 1998(d)................. -- -- 9.82 (1.90)(1) 36,539 1999.................... -- (0.07) 12.37 26.88 62,295 2000(a)*................ -- (0.05) 10.18 (17.39) 69,882 2001*................... (0.64) (0.70) 7.17 (23.33) 40,084 CLASS Y SHARES* 2000(b)................. -- (0.05) 10.16 (15.22)(1) 4,666 2001.................... (0.64) (0.69) 7.14 (23.53) 5,869 AGGRESSIVE EQUITY CLASS X SHARES 1999(e)................. -- (0.03) 14.57 46.08(1) 38,197 2000(a)*................ -- (0.01) 14.31 (1.75) 138,657 2001*................... -- (0.04) 10.20 (28.46) 69,418 CLASS Y SHARES* 2000(b)................. -- (0.01) 14.29 (2.48)(1) 13,392 2001.................... -- (0.03) 10.17 (28.61) 18,652 INFORMATION CLASS X SHARES* 2000(f)................. -- -- 9.31 (6.90)(1) 2,686 2001.................... -- (0.01) 5.31 (42.87) 4,434 CLASS Y SHARES* 2000(f)................. -- -- 9.31 (6.90)(1) 1,915 2001.................... -- (0.01) 5.30 (42.99) 7,427 RATIOS TO AVERAGE NET ASSETS ----------------------------- YEAR NET PORTFOLIO ENDED INVESTMENT TURNOVER DECEMBER 31 EXPENSES INCOME (LOSS) RATE - ----------- -------- ------------- --------- S&P 500 INDEX CLASS X SHARES 1998(d)................. -- (4) 1.85%(2)(4) 2%(1) 1999.................... 0.48%(5) 1.03(5) 1 2000(a)*................ 0.45 0.88 3 2001*................... 0.46 0.95 4 CLASS Y SHARES* 2000(b)................. 0.71(2) 0.60(2) 3 2001.................... 0.71 0.70 4 COMPETITIVE EDGE "BEST I CLASS X SHARES 1998(d)................. -- (4) 1.74(2)(4) 31(1) 1999.................... 0.56(5) 0.72(5) 54 2000(a)*................ 0.71 0.50 70 2001*................... 0.75 0.55 47 CLASS Y SHARES* 2000(b)................. 0.96(2) 0.06(2) 70 2001.................... 1.00 0.30 47 AGGRESSIVE EQUITY CLASS X SHARES 1999(e)................. 0.52(2)(5) 0.86(2)(5) 108(1) 2000(a)*................ 0.82 0.32 414 2001*................... 0.84 0.21 409 CLASS Y SHARES* 2000(b)................. 1.05(2) 0.32(2) 414 2001.................... 1.09 (0.04) 409 INFORMATION CLASS X SHARES* 2000(f)................. -- (6) 3.80(1)(2)(6) 1(1) 2001.................... -- (7) 1.27(7) 170 CLASS Y SHARES* 2000(f)................. 0.25(2)(6) 3.55(2)(6) 1(1) 2001.................... 0.25(7) 1.02(7) 170
193 Morgan Stanley Variable Investment Series Financial Highlights CONTINUED
NET ASSET YEAR VALUE NET NET REALIZED TOTAL FROM DIVIDENDS ENDED BEGINNING INVESTMENT AND UNREALIZED INVESTMENT TO DECEMBER 31 OF PERIOD INCOME (LOSS) GAIN (LOSS) OPERATIONS SHAREHOLDERS - ----------- --------- ------------- -------------- ---------- ------------ STRATEGIST CLASS X SHARES 1997.................... $13.72 $0.45 $ 1.40 $ 1.85 $(0.45) 1998.................... 14.80 0.36 3.40 3.76 (0.36) 1999.................... 16.64 0.40 2.46 2.86 (0.40) 2000(a)*................ 19.10 0.50 (0.20) 0.30 (0.48) 2001*................... 16.66 0.38(8) (2.05)(8) (1.67) (0.39) CLASS Y SHARES* 2000(b)................. 19.29 0.49 (0.51) (0.02) (0.36) 2001.................... 16.65 0.32(8) (2.03)(8) (1.71) (0.35)
- ---------------------------- (a) PRIOR TO JUNE 5, 2000, THE FUND ISSUED ONE CLASS OF SHARES. ALL SHARES OF THE FUND HELD PRIOR TO MAY 1, 2000 HAVE BEEN DESIGNATED CLASS X SHARES. (b) FOR THE PERIOD JUNE 5, 2000 (ISSUED DATE) THROUGH DECEMBER 31, 2000. COMMENCEMENT OF OPERATIONS: (c) JANUARY 21, 1997. (d) MAY 18, 1998. (e) MAY 4, 1999. (f) NOVEMBER 6, 2000. * THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. ** INCLUDES CAPITAL GAIN DISTRIBUTION OF LESS THAN $0.001. + CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. ++ DISTRIBUTION FROM PAID-IN-CAPITAL. ++ INCLUDES DISTRIBUTIONS FROM PAID-IN-CAPITAL OF $0.02. # DOES NOT REFLECT THE EFFECT OF EXPENSE OFFSET OF 0.06% (1) NOT ANNUALIZED. (2) ANNUALIZED. (3) IF THE INVESTMENT MANAGER HAD NOT ASSUMED ALL EXPENSES AND WAIVED ITS MANAGEMENT FEE FOR THE PERIOD JANUARY 21, 1997 THROUGH DECEMBER 3, 1997 FOR INCOME BUILDER, THE RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 0.99% AND 4.89%, RESPECTIVELY. (4) IF THE INVESTMENT MANAGER HAD NOT ASSUMED ALL EXPENSES AND WAIVED ITS MANAGEMENT FEE FOR THE PERIOD MAY 18, 1998 THROUGH DECEMBER 31, 1998 FOR COMPETITIVE EDGE "BEST IDEAS" AND S&P 500 INDEX, THE RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 0.92% AND 0.83%, RESPECTIVELY, FOR COMPETITIVE EDGE "BEST IDEAS" AND 0.59% AND 1.26%, RESPECTIVELY, FOR S&P 500 INDEX. (5) IF THE INVESTMENT MANAGER HAD NOT ASSUMED ALL EXPENSES AND WAIVED ITS MANAGEMENT FEE FOR THE PERIOD JANUARY 1, 1999 THROUGH APRIL 30, 1999 FOR COMPETITIVE EDGE "BEST IDEAS" AND FOR THE PERIOD MAY 4, 1999 THROUGH NOVEMBER 4, 1999 FOR SHORT-TERM BOND AND AGGRESSIVE EQUITY AND FOR THE PERIOD JANUARY 1, 1999 THROUGH JANUARY 5, 1999 FOR S&P 500 INDEX AND "CAPPED" THE EXPENSES OF S&P 500 INDEX AT 0.50% OF ITS DAILY NET ASSETS FOR THE PERIOD JANUARY 6, 1999 THROUGH DECEMBER 31, 1999, THE RATIO OF EXPENSES AND NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS WOULD HAVE BEEN 0.77% AND 0.51%, RESPECTIVELY, FOR COMPETITIVE EDGE "BEST IDEAS", 2.38% AND 3.07%, RESPECTIVELY, FOR SHORT-TERM BOND, 1.41% AND (0.02)%, RESPECTIVELY, FOR AGGRESSIVE EQUITY AND 0.48% AND 1.02%, RESPECTIVELY, FOR S&P 500 INDEX. SEE NOTES TO FINANCIAL STATEMENTS 194
TOTAL NET ASSET NET ASSETS YEAR DISTRIBUTIONS DIVIDENDS VALUE END OF ENDED TO AND END OF TOTAL PERIOD DECEMBER 31 SHAREHOLDERS DISTRIBUTIONS PERIOD RETURN+ (000'S) - ----------- ------------- ------------- --------- ------- ---------- STRATEGIST CLASS X SHARES 1997.................... $(0.32) $(0.77) $14.80 13.71% $497,028 1998.................... (1.56) (1.92) 16.64 26.55 633,934 1999.................... -- (0.40) 19.10 17.35 729,701 2000(a)*................ (2.26) (2.74) 16.66 1.64 701,294 2001*................... (0.66) (1.05) 13.94 (10.18) 522,655 CLASS Y SHARES* 2000(b)................. (2.26) (2.62) 16.65 (0.02)(1) 23,375 2001.................... (0.66) (1.01) 13.93 (10.40) 47,886 RATIOS TO AVERAGE NET ASSETS ----------------------------- YEAR NET PORTFOLIO ENDED INVESTMENT TURNOVER DECEMBER 31 EXPENSES INCOME (LOSS) RATE - ----------- -------- ------------- --------- STRATEGIST CLASS X SHARES 1997.................... 0.52% 3.09% 159% 1998.................... 0.52 2.32 84 1999.................... 0.52 2.24 120 2000(a)*................ 0.52 2.68 126 2001*................... 0.52 2.53(8) 124 CLASS Y SHARES* 2000(b)................. 0.77(2) 2.77(2) 126 2001.................... 0.77 2.28(8) 124
- ---------------------------- (6) IF THE INVESTMENT MANAGER HAD NOT ASSUMED ALL EXPENSES (EXCEPT FOR DISTRIBUTION FEES) AND WAIVED ITS MANAGEMENT FEE FOR THE PERIOD NOVEMBER 6, 2000 THROUGH DECEMBER 31, 2000 FOR INFORMATION, THE RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 1.82%, AND 1.98%, RESPECTIVELY, FOR CLASS X SHARES AND 2.07% AND 1.73%, RESPECTIVELY, FOR CLASS Y SHARES. (7) IF THE INVESTMENT MANAGER HAD NOT "CAPPED" ALL EXPENSES (EXCEPT FOR DISTRIBUTION FEES) FOR SHORT-TERM BOND, AT 0.50% OF ITS DAILY NET ASSETS FOR THE PERIOD JUNE 1, 2001 THROUGH DECEMBER 31, 2001 AND HAD NOT ASSUMED ALL EXPENSES (EXCEPT FOR DISTRIBUTION FEES) AND WAIVED ITS MANAGEMENT FEE FOR THE YEAR ENDED DECEMBER 31, 2001 FOR INFORMATION, THE RATIOS OF EXPENSES AND NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS WOULD HAVE BEEN 0.65% AND 3.80%, RESPECTIVELY, FOR SHORT-TERM BOND CLASS X SHARES AND 0.90% AND 3.55%, RESPECTIVELY, FOR SHORT-TERM BOND CLASS Y SHARES AND 1.62% AND (0.35)%, RESPECTIVELY, FOR INFORMATION CLASS X SHARES AND 1.87% AND (0.60)%, RESPECTIVELY, FOR INFORMATION CLASS Y SHARES. (8) EFFECTIVE JANUARY 1, 2001, THE FUND HAS ADOPTED THE PROVISIONS OF THE AICPA AUDIT AND ACCOUNTING GUIDE FOR INVESTMENT COMPANIES, AS REVISED, RELATED TO PREMIUMS AND DISCOUNTS ON DEBT SECURITIES. THE EFFECT OF THIS CHANGE FOR THE YEAR ENDED DECEMBER 31, 2001 FOR SHORT-TERM BOND, QUALITY INCOME PLUS, HIGH YIELD, UTILITIES, INCOME BUILDER AND STRATEGIST WAS TO DECREASE NET INVESTMENT INCOME PER SHARE AND INCREASE NET REALIZED AND UNREALIZED GAIN/LOSS PER SHARE BY $0.07, $0.01, $0.01, $0.01, $0.03 AND $0.01, RESPECTIVELY, AND TO DECREASE THE RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS BY 0.66%, 0.12%, 0.28%, 0.05%, 0.23% AND 0.06%, RESPECTIVELY. THE FINANCIAL HIGHLIGHTS DATA PRESENTED IN THIS TABLE FOR PRIOR PERIODS HAS NOT BEEN RESTATED TO REFLECT THIS CHANGE. 195 Morgan Stanley Variable Investment Series INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Trustees of Morgan Stanley Variable Investment Series: We have audited the accompanying statements of assets and liabilities, including the portfolios of investments, of Morgan Stanley Variable Investment Series (the "Fund"), formerly Morgan Stanley Dean Witter Variable Investment Series, comprising Money Market Portfolio, Short-Term Bond Portfolio, Quality Income Plus Portfolio, High Yield Portfolio, Utilities Portfolio, Income Builder Portfolio, Dividend Growth Portfolio, Capital Growth Portfolio, Global Dividend Growth Portfolio, European Growth Portfolio, Pacific Growth Portfolio, Equity Portfolio, S&P 500 Index Portfolio, Competitive Edge "Best Ideas" Portfolio, Aggressive Equity Portfolio, Information Portfolio and Strategist Portfolio (the "Portfolios") as of December 31, 2001, and the related statements of operations for the year then ended and of changes in net assets for each of the periods presented, 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 December 31, 2001, by correspondence with the custodians and brokers. 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 each of the Portfolios constituting Morgan Stanley Variable Investment Series as of December 31, 2001, the results of their operations for the year then ended, the changes in their net assets for each of the periods presented, 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 FEBRUARY 15, 2002 196 APPENDIX - -------------------------------------------------------------------------------- RATINGS OF CORPORATE DEBT INSTRUMENTS INVESTMENTS MOODY'S INVESTORS SERVICE INC. ("MOODY'S") FIXED-INCOME SECURITY RATINGS Aaa Fixed-income securities which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa Fixed-income securities which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade fixed-income securities. They are rated lower than the best fixed-income securities because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A Fixed-income securities which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa Fixed-income securities which are rated Baa are considered as medium grade obligations; I.E., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such fixed-income securities lack outstanding investment characteristics and in fact have speculative characteristics as well. Fixed-income securities rated Aaa, Aa, A and Baa are considered investment grade. Ba Fixed-income securities which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate, and therefore not well safeguarded during both good and bad times in the future. Uncertainty of position characterizes bonds in this class. B Fixed-income securities which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa Fixed-income securities which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca Fixed-income securities which are rated Ca present obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C Fixed-income securities which are rated C are the lowest rated class of fixed-income securities, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
RATING REFINEMENTS: Moody's may apply numerical modifiers, 1, 2, and 3 in each generic rating classification from Aa through B in its municipal fixed-income security rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a 197 mid-range ranking; and a modifier 3 indicates that the issue ranks in the lower end of its generic rating category. COMMERCIAL PAPER RATINGS Moody's Commercial Paper ratings are opinions of the ability to repay punctually promissory obligations not having an original maturity in excess of nine months. The ratings apply to Municipal Commercial Paper as well as taxable Commercial Paper. Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers: Prime-1, Prime-2, Prime-3. Issuers rated Prime-1 have a superior capacity for repayment of short-term promissory obligations. Issuers rated Prime-2 have a strong capacity for repayment of short-term promissory obligations; and Issuers rated Prime-3 have an acceptable capacity for repayment of short-term promissory obligations. Issuers rated Not Prime do not fall within any of the Prime rating categories. STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S") FIXED-INCOME SECURITY RATINGS A Standard & Poor's fixed-income security rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. This assessment may take into consideration obligors such as guarantors, insurers, or lessees. The ratings are based on current information furnished by the issuer or obtained by Standard & Poor's from other sources it considers reliable. The ratings are based, in varying degrees, on the following considerations: (1) likelihood of default-capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation; (2) nature of and provisions of the obligation; and (3) protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights. Standard & Poor's does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended or withdrawn as a result of changes in, or unavailability of, such information, or for other reasons. AAA Fixed-income securities rated "AAA" have the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA Fixed-income securities rated "AA" have a very strong capacity to pay interest and repay principal and differs from the highest-rate issues only in small degree. A Fixed-income securities rated "A" have a strong capacity to pay interest and repay principal although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than fixed-income securities in higher-rated categories. BBB Fixed-income securities rated "BBB" are regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for fixed-income securities in this category than for fixed-income securities in higher-rated categories. Fixed-income securities rated AAA, AA, A and BBB are considered investment grade. BB Fixed-income securities rated "BB" have less near-term vulnerability to default than other speculative grade fixed-income securities. However, it faces major ongoing uncertainties or exposures to adverse business, financial or economic conditions which could lead to inadequate capacity or willingness to pay interest and repay principal.
198 B Fixed-income securities rated "B" have a greater vulnerability to default but presently have the capacity to meet interest payments and principal repayments. Adverse business, financial or economic conditions would likely impair capacity or willingness to pay interest and repay principal. CCC Fixed-income securities rated "CCC" have a current identifiable vulnerability to default, and are dependent upon favorable business, financial and economic conditions to meet timely payments of interest and repayments of principal. In the event of adverse business, financial or economic conditions, they are not likely to have the capacity to pay interest and repay principal. CC The rating "CC" is typically applied to fixed-income securities subordinated to senior debt which is assigned an actual or implied "CCC" rating. C The rating "C" is typically applied to fixed-income securities subordinated to senior debt which is assigned an actual or implied "CCC-" rating. CI The rating "CI" is reserved for fixed-income securities on which no interest is being paid. NR Indicates that no rating has been requested, that there is insufficient information on which to base a rating or that Standard & Poor's does not rate a particular type of obligation as a matter of policy. Fixed-income securities rated "BB," "B," "CCC," "CC" and "C" are regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. "BB" indicates the least degree of speculation and "C" the highest degree of speculation. While such fixed-income securities will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. Plus (+) or minus (-): The rating from "AA" to "CCC" may be modified by the addition of a plus or minus sign to show relative standing within the major ratings categories.
COMMERCIAL PAPER RATINGS Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. The commercial paper rating is not a recommendation to purchase or sell a security. The ratings are based upon current information furnished by the issuer or obtained by Standard & Poor's from other sources it considers reliable. The ratings may be changed, suspended, or withdrawn as a result of changes in or unavailability of such information. Ratings are graded into group categories, ranging from "A" for the highest quality obligations to "D" for the lowest. Ratings are applicable to both taxable and tax-exempt commercial paper. The categories are as follows: Issues assigned A ratings are regarded as having the greatest capacity for timely payment. Issues in this category are further refined with the designation 1, 2, and 3 to indicate the relative degree of safety. A-1 indicates that the degree of safety regarding timely payment is very strong. A-2 indicates capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as overwhelming as for issues designated "A-1." A-3 indicates a satisfactory capacity for timely payment. Obligations carrying this designation are, however, somewhat more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations.
199 FITCH IBCA, INC. ("FITCH") BOND RATINGS Fitch investment grade bond ratings provide a guide to investors in determining the credit risk associated with a particular security. The rating represents Fitch's assessment of the issuer's ability to meet the obligations of a specific debt issue or class of debt in a timely manner. The rating takes into consideration special features of the issue, its relationship to other obligations of the issuer, the current and prospective financial condition and operating performance of the issuer and any guarantor, as well as the economic and political environment that might affect the issuer's future financial strength and credit quality. Fitch ratings do not reflect any credit enhancement that may be provided by insurance policies or financial guarantees unless otherwise indicated. Bonds carrying the same rating are of similar but not necessarily identical credit quality since the rating categories do not fully reflect small differences in the degrees of credit risk. Fitch ratings are not recommendations to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect of any security. Fitch ratings are based on information obtained from issuers, other obligors, underwriters, their experts, and other sources Fitch believes to be reliable. Fitch does not audit or verify the truth or accuracy of such information. Ratings may be changed, suspended, or withdrawn as a result of changes in, or the unavailability of, information or for other reasons. AAA Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated "F-1+." A Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB Bonds considered to be investment grade and of satisfactory-credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Plus (+) or Plus and minus signs are used with a rating symbol to Minus (-) indicate the relative position of a credit within the rating category. Plus and minus signs, however, are not used in the"AAA" category. NR Indicates that Fitch does not rate the specific issue. Conditional A conditional rating is premised on the successful completion of a project or the occurrence of a specific event.
200 Suspended A rating is suspended when Fitch deems the amount of information available from the issuer to be inadequate for rating purposes. Withdrawn A rating will be withdrawn when an issue matures or is called or refinanced and, at Fitch's discretion, when an issuer fails to furnish proper and timely information. FitchAlert Ratings are placed on FitchAlert to notify investors of an occurrence that is likely to result in a rating change and the likely direction of such change. These are designated as "Positive," indicating a potential upgrade, "Negative," for potential downgrade, or "Evolving," where ratings may be raised or lowered. FitchAlert is relatively short-term, and should be resolved within 12 months. Ratings Outlook An outlook is used to describe the most likely direction of any rating change over the intermediate term. It is described as "Positive" or "Negative." The absence of a designation indicates a stable outlook.
SPECULATIVE GRADE BOND RATINGS: Fitch speculative grade bond ratings provide a guide to investors in determining the credit risk associated with a particular security. The ratings ("BB" to "C") represent Fitch's assessment of the likelihood of timely payment of principal and interest in accordance with the terms of obligation for bond issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an assessment of the ultimate recovery value through reorganization or liquidation. The rating takes into consideration special features of the issue, its relationship to other obligations of the issuer, the current and prospective financial condition and operating performance of the issuer and any guarantor, as well as the economic and political environment that might affect the issuer's future financial strength. Bonds that have the rating are of similar but not necessarily identical credit quality since rating categories cannot fully reflect the differences in degrees of credit risk. BB Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and finan- cial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. B Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue. CCC Bonds have certain identifiable characteristics which, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment. CC Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time. C Bonds are in imminent default in payment of interest or principal. DDD Bonds are in default on interest and/or principal payments. DD and D Such bonds are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. "DDD" represents the highest potential for recovery on these bonds, and "D" represents the lowest potential for recovery. Plus(+) or Plus and minus signs are used with a rating symbol to Minus(-) indicate the relative position of a credit within the rating category. Plus and minus signs, however, are not used in the "DDD," "DD," or "D" categories.
201 SHORT-TERM RATINGS Fitch's short-term ratings apply to debt obligations that are payable on demand or have original maturities of up to three years, including commercial paper, certificates of deposit, medium-term notes, and municipal and investment notes. The short-term rating places greater emphasis than a long-term rating on the existence of liquidity necessary to meet the issuer's obligations in a timely manner. Fitch short-term ratings are as follows: F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment. F-1 Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated "F-1+." F-2 Good Credit Quality. Issues assigned this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned "F-1+" and "F-1" ratings. F-3 Fair Credit Quality. Issues assigned this rating have characteristics suggesting that the degree of assurance for timely payment is adequate; however, near-term adverse changes could cause these securities to be rated below in investment grade. F-S Weak Credit Quality. Issues assigned this rating have characteristics suggesting a minimal degree of assurance for timely payment and are vulnerable to near-term adverse changes in financial and economic conditions. D Default. Issues assigned this rating are in actual or imminent payment default. LOC The symbol "LOC" indicates that the rating is based on a letter of credit issued by a commercial bank.
DUFF & PHELPS, INC. LONG-TERM RATINGS These ratings represent a summary opinion of the issuer's long-term fundamental quality. Rating determination is based on qualitative and quantitative factors which may vary according to the basic economic and financial characteristics of each industry and each issuer. Important considerations are vulnerability to economic cycles as well as risks related to such factors as competition, government action, regulation, technological obsolescence, demand shifts, cost structure, and management depth and expertise. The projected viability of the obligor at the trough of the cycle is a critical determination. Each rating also takes into account the legal form of the security, (E.G., first mortgage bonds, subordinated debt, preferred stock, etc.). The extent of rating dispersion among the various classes of securities is determined by several factors including relative weightings of the different security classes in the capital structure, the overall credit strength of the issuer, and the nature of covenant protection. Review of indenture restrictions is important to the analysis of a company's operating and financial constraints. The Credit Rating Committee formally reviews all ratings once per quarter (more frequently, if necessary).
RATING SCALE DEFINITION - ------------ ---------- AAA Highest credit quality. The risk factors are negligible, being only slightly more than risk-free U.S. Treasury debt.
202 AA+ High credit quality. Protection factors are strong. Risk is AA modest, but may vary slightly from time to time because of AA- economic conditions. A+ Protection factors are average but adequate. However, risk A factors are more variable and greater in periods of economic A- stress. BBB+ Below average protection factors but still considered BBB sufficient for prudent investment. Considerable variability BBB- in risk during economic cycles. BB+ Below investment grade but deemed likely to meet obligations BB when due. Present or prospective financial protection BB- factors fluctuate according to industry conditions or company fortunes. Overall quality may move up or down frequently within this category. B+ Below investment grade and possessing risk that obligations B will not be met when due. Financial protection factors will B- fluctuate widely according to economic cycles, industry conditions and/or company fortunes. Potential exists for frequent changes in the quality rating within this category or into a higher or lower quality rating grade. CCC Well below investment grade securities. May be in default or considerable uncertainty exists as to timely payment of principal, interest or preferred dividends. Protection factors are narrow and risk can be substantial with unfavorable economic/industry conditions, and/or with unfavorable company developments. DD Defaulted debt obligations. Issuer failed to meet scheduled principal and/or interest payments. DP Preferred stock with dividend arrearages.
SHORT-TERM RATINGS Duff & Phelps' short-term ratings are consistent with the rating criteria utilized by money market participants. The ratings apply to all obligations with maturities of under one year, including commercial paper, the uninsured portion of certificates of deposit, unsecured bank loans, master notes, bankers acceptances, irrevocable letters of credit, and current maturities of long-term debt. Asset-backed commercial paper is also rated according to this scale. Emphasis is placed on liquidity which is defined as not only cash from operations, but also access to alternative sources of funds, including trade credit, bank lines, and the capital markets. An important consideration is the level of an obligor's reliance on short-term funds on an ongoing basis. A. Category 1: High Grade Duff 1+ Highest certainty of timely payment. Short-term liquidity, including internal operating factors and/or access to alternative sources of funds, is outstanding, and safety is just below risk-free U.S. Treasury short-term obligations. Duff 1 Very high certainty of timely payment. Liquidity factors are excellent and supported by good fundamental protection factors. Risk factors are minor. Duff- High certainty of timely payment. Liquidity factors are strong and supported by good fundamental protection factors. Risk factors are very small. B. Category 2: Good Grade Duff 2 Good certainty of timely payment. Liquidity factors and company fundamentals are sound. Although ongoing funding needs may enlarge total financing requirements, access to capital markets is good. Risk factors are small.
203 C. Category 3: Satisfactory Grade Duff 3 Satisfactory liquidity and other protection factors qualify issue as to investment grade. Risk factors are larger and subject to more variation. Nevertheless, timely payment is expected. D. Category 4: Non-investment Grade Duff 4 Speculative investment characteristics. Liquidity is not sufficient to insure against disruption in debt service. Operating factors and market access may be subject to a high degree of variation. E. Category 5: Default Duff 5 Issuer failed to meet scheduled principal and/or interest payments.
204 MORGAN STANLEY VARIABLE INVESTMENT SERIES PART C OTHER INFORMATION ITEM 23. EXHIBITS 1(a). Declaration of Trust, dated February 24, 1983, and all amendments thereto dated June 8, 1983, May 18, 1984, December 18, 1984 and February 23, 1988, and all Instruments Establishing and Designating Additional Series of Shares dated December 15, 1986, October 26, 1989, November 15, 1990 and October 22, 1993, are incorporated by reference to Exhibit 1 of Post-Effective Amendment No. 16 to the Registration Statement on Form N-1A, filed on December 1, 1993. 1(b). Amendment to the Declaration of Trust of the Registrant dated August 24, 1995, is incorporated by reference to Exhibit 1 of Post-Effective Amendment No. 19 to the Registration Statement on Form N-1A, filed on April 19, 1996. 1(c). Instrument Establishing and Designating Additional Series of Shares dated October 15, 1996, is incorporated by reference to Exhibit 1 of Post-Effective Amendment No. 20 to the Registration Statement on Form N-1A, filed on October 17, 1996. 1(d). Instrument Establishing and Designating Additional Series of Shares dated January 29, 1998, is incorporated by reference to Exhibit 1 of Post-Effective Amendment No. 22 to the Registration Statement on Form N-1A, filed on February 10, 1998. 1(e). Amendment to the Declaration of Trust of the Registrant dated June 22, 1998, is incorporated by reference to Exhibit 1 of Post-Effective Amendment No. 24 to the Registration Statement on Form N-1A, filed on August 31, 1998. 1(f). Instrument Establishing and Designating Additional Series of Shares, dated February 8, 1999, is incorporated by reference to Exhibit 1 of Post-Effective Amendment No. 25 to the Registration Statement on Form N-1A, filed on February 10, 1999. 1(g). Form of Instrument Establishing and Designating Additional Classes of Shares, dated February 24, 2000, is incorporated by reference to Exhibit 1(g) of Post-Effective Amendment No. 28 to the Registration Statement on Form N-1A, filed on February 29, 2000. 1(h). Instrument Establishing and Designating Additional Series of Shares, dated July 26, 2000, is incorporated by reference to Exhibit 1(h) of Post-Effective Amendment No. 29 to the Registration Statement on Form N-1A, filed on August 17, 2000. 1(i). Amendment to the Declaration of Trust of the Registrant, dated June 18, 2001, is incorporated by reference to Exhibit 1(j) of Post-Effective Amendment No. 32 to the Registration Statement on Form N-1A, filed on February 26, 2002. 1(j). Amendment to the Declaration of Trust of the Registrant, dated April 19, 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. 26 to the Registration Statement on Form N-1A, filed on April 27, 1999. 3. Not Applicable. 1 4(a). Amended and Restated Investment Management Agreement dated May 1, 2000, between the Registrant and Morgan Stanley Investment Advisors Inc., is incorporated by reference to Exhibit 4(a) of Post-Effective Amendment No. 30 to the Registration Statement on Form N-1A, filed on October 31, 2000. 4(b). Form of Instrument Adding New Portfolio to Investment Management Agreement, is incorporated by reference to Exhibit 4(b) of Post-Effective Amendment No. 29 to the Registration Statement on Form N-1A, filed on August 17, 2000. 4(c). Sub-Advisory Agreement between Morgan Stanley Investment Advisors Inc. and Morgan Stanley Investment Management Inc., dated November 1, 1998, is incorporated by reference to Exhibit 5(b) of Post-Effective Amendment No. 24 to the Registration Statement on Form N-1A, filed on August 31, 1998. 5(a). Amended Distribution Agreement, dated February 24, 2000, between the Registrant and Morgan Stanley Distributors Inc., is incorporated by reference to Exhibit 5(a) of Post-Effective Amendment No. 28 to the Registration Statement on Form N-1A, filed on February 29, 2000. 5(b). Participation Agreement, dated May 31, 1997, between Northbrook Life Insurance Company, Allstate Life Insurance Company of New York, Glenbrook Life and Annuity Company and Morgan Stanley Distributors Inc., and the Registrant is incorporated by reference to Exhibit 6(b) of Post-Effective Amendment No. 22 to the Registration Statement on Form N-1A, filed on February 10, 1998. 5(c). Participation Agreement, dated May 31, 1997, between Paragon Life Insurance Company and Morgan Stanley Distributors Inc., and the Registrant is incorporated by reference to Exhibit 6(c) of Post-Effective Amendment No. 22 to the Registration Statement on Form N-1A, filed on February 10, 1998. 6. Retirement Plan for Non-Interested Trustees or Directors is incorporated by reference to Exhibit 6 of Post-Effective Amendment No. 26 to the Registration Statement on Form N-1A, filed on April 27, 1999. 7(a). Custody Agreement, dated September 20, 1991, between The Bank of New York and the Registrant is incorporated by reference to Exhibit 9(a) of the Registration Statement on Form N-14, filed on November 5, 1998. 7(b). Amendment to the Custody Agreement, dated April 17, 1996, between The Bank of New York and the Registrant is incorporated by reference to Exhibit 8 of Post-Effective Amendment No. 19 to the Registration Statement on Form N-1A, filed on April 19, 1996. 7(c). Custody Agreement between The JPMorgan Chase Bank and the Registrant is incorporated by reference to Exhibit 8 of Post-Effective Amendment No. 21 to the Registration Statement on Form N-1A, filed on April 21, 1997. 7(d). Amendment to the Custody Agreement between the Registrant and The Bank of New York, dated June 15, 2001, is incorporated by reference to Exhibit 7(d) of Post-Effective Amendment No. 32 to the Registration Statement on Form N-1A, filed on February 26, 2002. 7(e). Foreign Custody Manager Agreement between the Registrant and The Bank of New York, dated June 15, 2001, is incorporated by reference to Exhibit 7(e) of Post-Effective Amendment No. 32 to the Registration Statement on Form N-1A, filed on February 26, 2002. 2 7(f). Amendment to the Custody Agreement between the Registrant and The JPMorgan Chase Bank, dated June 15, 2001, is incorporated by reference to Exhibit 7(f) of Post-Effective Amendment No. 32 to the Registration Statement on Form N-1A, filed on February 26, 2002. 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.30 to the Registration Statement on Form N-1A, filed on October 31, 2000. 8(b). Form of Services Agreement between Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc. is incorporated by reference to Exhibit 8(b) of Post-Effective Amendment No. 30 to the Registration Statement on Form N-1A, filed on October 31, 2000. 9. Opinion of Sheldon Curtis, Esq., Registrant's Counsel, dated June 29, 1993, is incorporated by reference to Exhibit 9 of Post-Effective Amendment No. 27 to the Registration Statement on Form N-1A, filed on June 4, 1999. 10. Consent of Independent Auditors, filed herein. 11. Not Applicable. 12. Not Applicable. 13. Form of Plan of Distribution pursuant to Rule 12b-1 is incorporated by reference to Exhibit 13 of Post-Effective Amendment No. 28 to the Registration Statement on Form N-1A, filed on February 29, 2000. 14. Amended Multi-Class Plan pursuant to Rule 18f-3, is incorporated by reference to Exhibit 15 of Post-Effective Amendment No. 29 to the Registration Statement on Form N-1A, filed on August 17, 2000. 15. Not Applicable. 16(a). Codes of Ethics of Morgan Stanley Investment Advisors 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. 32 to the Registration Statement on Form N-1A, filed on February 26, 2002. 16(b). Code of Ethics of the Morgan Stanley Funds, is incorporated by reference to Exhibit 16(b) of Post-Effective Amendment No. 32 to the Registration Statement on Form N-1A, filed on February 26, 2002. Other Powers of Attorney of Trustees are incorporated by reference to Exhibit (Other) of Post-Effective Amendment No. 18, Post-Effective Amendment No. 22 and Post-Effective Amendment No. 29 to the Registration Statement on Form N-1A (filed on April 18, 1995, February 10, 1998 and August 17, 2000, respectively). 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 3 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 4 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 and Director Officer and 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. 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.
5
NAME AND POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION OR EMPLOYMENT, MORGAN STANLEY INVESTMENT ADVISORS INCLUDING NAME, PRINCIPAL ADDRESS AND NATURE OF CONNECTION - ---------------------------------- -------------------------------------------------------------- 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 6 (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 7 (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. 8 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 26th day of April, 2002. MORGAN STANLEY VARIABLE INVESTMENT SERIES 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. 33 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 04/26/02 --------------------------- Charles A. Fiumefreddo (2) Principal Financial Officer Treasurer and Principal Accounting Officer By /s/ Thomas F. Caloia 04/26/02 --------------------------- Thomas F. Caloia (3) Majority of the Trustees Charles A. Fiumefreddo (Chairman) Philip J. Purcell James F. Higgins By /s/ Barry Fink 04/26/02 --------------------------- 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 04/26/02 --------------------------- David M. Butowsky Attorney-in-Fact
MORGAN STANLEY VARIABLE INVESTMENT SERIES Exhibit Index 1(j). Amendment to the Declaration of Trust of the Registrant, dated April 19, 2002 10. Consent of Independent Auditors 1 EX-99.1(J) 3 a2077034zex-99_1j.txt EXHIBIT 99.1(J) CERTIFICATE The undersigned hereby certifies that he is the Secretary of Morgan Stanley Variable Investment Series (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 19, 2002, as provided in Section 9.3 of the said Declaration, said Amendment to take effect on May 1, 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 19th day of April, 2002. /s/ Barry Fink --------------- Barry Fink Secretary AMENDMENT Dated: April 19, 2002 To be Effective: May 1, 2002 TO MORGAN STANLEY VARIABLE INVESTMENT SERIES DECLARATION OF TRUST DATED FEBRUARY 24, 1983 Amendment dated April 19, 2002 to the Declaration of Trust (the "Declaration") of Morgan Stanley Variable Investment Series (the "Trust") dated February 24, 1983 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 Short-Term Bond Portfolio of the Trust to the "Limited Duration Portfolio," such change to be effective on May 1, 2002; NOW, THEREFORE: 1. The Declaration is hereby amended so that the Short-Term Bond Portfolio is hereby designated the "Limited Duration Portfolio." 2. The Trustees of the Trust hereby reaffirm the Declaration, as amended, in all respects. 3. 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. STATE OF NEW YORK ) )ss.: COUNTY OF NEW YORK ) On this 19th day of April, 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 IN WITNESS WHEREOF, the undersigned, the Trustees of the Trust, have executed this instrument this 19th day of April, 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 International 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
EX-99.10 4 a2077034zex-99_10.txt EXHIBIT 99.10 CONSENT OF INDEPENDENT AUDITORS We consent to the use in this Post-Effective Amendment No. 33 to Registration Statement No. 2-82510 of Morgan Stanley Variable Investment Series, formerly Morgan Stanley Dean Witter Variable Investment Series, comprising Money Market Portfolio, Limited Duration Portfolio, formerly Short-Term Bond Portfolio, Quality Income Plus Portfolio, High Yield Portfolio, Utilities Portfolio, Income Builder Portfolio, Dividend Growth Portfolio, Capital Growth Portfolio, Global Dividend Growth Portfolio, European Growth Portfolio, Pacific Growth Portfolio, Equity Portfolio, S&P 500 Index Portfolio, Competitive Edge "Best Ideas" Portfolio, Aggressive Equity Portfolio, Information Portfolio and Strategist Portfolio, on Form N-1A of our report dated February 15, 2002, incorporated by reference in the Prospectuses and appearing in the Statement of Additional Information, and to the references to us under the captions "Financial Highlights" in the Prospectuses and "Custodian and Independent Auditors" and "Experts" in the Statement of Additional Information, all of which are part of such Registration Statement. Deloitte & Touche LLP New York, New York April 19, 2002 -----END PRIVACY-ENHANCED MESSAGE-----