N-CSRS 1 y55131nvcsrs.txt FORM N-CSRS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-02349 Morgan Stanley Income Securities Inc. (Exact name of registrant as specified in charter) 522 Fifth Avenue, New York, New York 10036 (Address of principal executive offices) (Zip code) Ronald E. Robison 522 Fifth Avenue, New York, New York 10036 (Name and address of agent for service) Registrant's telephone number, including area code: 212-296-6990 Date of fiscal year end: September 30, 2008 Date of reporting period: March 31, 2008 Item 1 - Report to Shareholders Welcome, Shareholder: In this report, you'll learn about how your investment in Morgan Stanley Income Securities Inc. performed during the semiannual period. We will provide an overview of the market conditions, and discuss some of the factors that affected performance during the reporting period. In addition, this report includes the Fund's financial statements and a list of Fund investments. MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE MONEY INVESTING IN THIS FUND. FUND REPORT For the six months ended March 31, 2008 MARKET CONDITIONS The six-month period under review marked an unprecedented time for fixed income markets. Residential housing prices continued to decline, many large banks and financial firms began writing down mortgage-related losses, and liquidity and credit availability became even more restricted. At the same time, the economy began to slow with gross domestic product (GDP) growth measuring just 0.6 percent in the fourth quarter of 2007. Weaker economic data released in the first quarter of 2008 fueled fears of an impending recession, causing investors to continue to seek low-risk assets in the exceedingly volatile environment that persisted throughout the period. Central banks in the U.S. and around the world added liquidity to the financial system in an attempt to ease the liquidity crisis and boost the economy. Not only did the Federal Open Market Committee (the "Fed") reduce the target federal funds rate from 4.75 percent to 2.25 percent by the end of the period, but in an unprecedented move, it granted primary brokerage firms access to its discount window and loosened its collateral requirements, extending loans of Treasury securities in exchange for lower quality, less liquid securities. Finally, in what was most decidedly the biggest headline event, the Fed arranged and supported JPMorgan Chase's purchase of Bear Stearns, which was viewed by many as necessary to avoid serious market repercussions had the firm failed. The flight to quality during the reporting period pushed U.S. Treasury prices higher and yields lower, particularly on short-dated issues, causing the yield curve to steepen. As a result, Treasuries outperformed all other sectors of the fixed income market as rising risk premiums pushed credit spreads sharply wider. Within the corporate sector, financial credits suffered the most and overall, lower rated securities underperformed higher quality issues. Although the performance of all mortgage securities continued to decline, non-agency mortgages were the hardest hit during the period. PERFORMANCE ANALYSIS For the six-month period ended March 31, 2008, the net asset value (NAV) of Morgan Stanley Income Securities Inc. (ICB) decreased from $16.95 to $16.64 per share. Based on the NAV change plus reinvestment of dividends totaling $0.46635 per share, the Fund's total NAV return was 1.23 percent. ICB's value on the New York Stock Exchange (NYSE) moved from $15.33 to $14.81 per share during the same period. Based on this change plus reinvestment of dividends, the Fund's total market return was -0.44 percent. ICB's NYSE market price was at an 11 percent discount to its NAV. During the fiscal period, the Fund purchased and retired 122,737 shares of common stock at a weighted average market discount of 9.26 percent. Past performance is no guarantee of future results. Monthly dividends for the second quarter of 2008, declared in April, were unchanged at $0.077725 per share. The dividend reflects the current level of the Fund's net investment income. Throughout most of the period, we positioned the Fund for a steepening in the yield curve by underweighting longer dated issues and overweighting intermediate dated issues. This positioning was additive to performance as rates in the intermediate portion of the curve fell more than those on the long end of the curve. 2 We have maintained a lower exposure to corporate credit for some time now, which has benefited performance as credit spreads in the sector have widened considerably, putting downward pressure on prices. While we are looking for areas to take advantage of this spread widening and add to corporate positions, we remain cautious because we believe the corporate credit market remains vulnerable to potential credit downgrades and/or further weakening of the economy. Conversely, positions in agency mortgage securities, commercial mortgage-backed securities and asset-backed securities detracted from relative performance. As a result of defaults in the subprime market, all residential and commercial mortgage-backed product spreads moved wider and market liquidity for these types of products was severely diminished. Additionally asset-backed securities, especially those backed by home equity lines of credit were negatively impacted. However, we note that the majority of the portfolio's holdings in these securities are backed by prime and near-prime borrowers with good credit scores and favorable loan-to-value ratios. The Fund's procedure for reinvesting all dividends and distributions in common shares is through purchases in the open market. This method helps support the market value of the Fund's shares. In addition, we would like to remind you that the Directors have approved a procedure whereby the Fund may, when appropriate, purchase shares in the open market or in privately negotiated transactions at a price not above market value or net asset value, whichever is lower at the time of purchase. -------------------------------------------------------------------------------- PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF FUTURE RESULTS, AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN, NET ASSET VALUE AND COMMON SHARE MARKET PRICE WILL FLUCTUATE AND FUND SHARES, WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. There is no guarantee that any sectors mentioned will continue to perform as discussed herein or that securities in such sectors will be held by the Fund in the future. 3
PORTFOLIO COMPOSITION(@) Corporate Bonds 80.5% Commercial Mortgage-Backed Securities 8.7 Short-Term Investments 6.1 Asset-Backed Securities 3.7 Collateralized Mortgage Obligations 0.5 Foreign Government Obligation 0.5
LONG-TERM CREDIT ANALYSIS AAA 16.9% AA 6.6 A 21.7 BBB 52.2 BB 2.2 B or Below 0.4
@ Does not include open long/short futures contracts with an underlying face amount of $69,160,486 with net unrealized depreciation of $1,120,166. Also does not include open swap contracts with net unrealized appreciation of $5,387,584. Data as of March 31, 2008. Subject to change daily. All percentages for portfolio composition are as a percentage of total investments and all percentages for long-term credit analysis are as a percentage of total long-term investments. These data are provided for informational purposes only and should not be deemed a recommendation to buy or sell the securities mentioned. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services. FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND AND FOURTH FISCAL QUARTERS. THE SEMIANNUAL REPORTS AND THE ANNUAL REPORTS ARE FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) ON FORM N-CSRS AND FORM N-CSR, RESPECTIVELY. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, WWW.MORGANSTANLEY.COM/MSIM. EACH MORGAN STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, OBTAIN THE FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING THE SEC'S WEB SITE, HTTP://WWW.SEC.GOV. YOU MAY ALSO REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800) SEC- 0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (PUBLICINFO@SEC.GOV) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102. IN ADDITION TO FILING A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC EACH FISCAL QUARTER, THE FUND MAKES PORTFOLIO HOLDINGS INFORMATION AVAILABLE BY PERIODICALLY PROVIDING THE INFORMATION ON ITS PUBLIC WEB SITE, WWW.MORGANSTANLEY.COM/MSIM. THE FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS ON THE PUBLIC 4 WEB SITE ON A CALENDAR-QUARTER BASIS APPROXIMATELY 31 CALENDAR DAYS AFTER THE CLOSE OF THE CALENDAR QUARTER. THE FUND ALSO PROVIDES TOP 10 HOLDINGS INFORMATION ON THE PUBLIC WEB SITE APPROXIMATELY 15 BUSINESS DAYS FOLLOWING THE END OF EACH MONTH. FOR MORE INFORMATION ABOUT WEB SITE POSTINGS, CALL 1-800-869-3863. PROXY VOTING POLICY AND PROCEDURES AND PROXY VOTING RECORD YOU MAY OBTAIN A COPY OF THE FUND'S PROXY VOTING POLICY AND PROCEDURES WITHOUT CHARGE, UPON REQUEST, BY CALLING TOLL FREE (800) 869-NEWS OR BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT WWW.MORGANSTANLEY.COM. IT IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT HTTP://WWW.SEC.GOV. YOU MAY OBTAIN INFORMATION REGARDING HOW THE FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT TWELVE-MONTH PERIOD ENDED JUNE 30 WITHOUT CHARGE BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT WWW.MORGANSTANLEY.COM. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT HTTP://WWW.SEC.GOV. 5 Morgan Stanley Income Securities Inc. PORTFOLIO OF INVESTMENTS - MARCH 31, 2008 (UNAUDITED)
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------- Corporate Bonds (80.7%) Advertising/Marketing Services (0.1%) $ 175 Interpublic Group of Companies, Inc. (The)................................. 6.25 % 11/15/14 $ 141,969 ------------ Aerospace & Defense (0.3%) 504 Systems 2001 Asset Trust - 144A* (Cayman Islands).............................. 6.664 09/15/13 503,972 ------------ Air Freight/Couriers (1.4%) 2,000 FedEx Corp. ............................ 7.25 02/15/11 2,176,224 ------------ Airlines (0.3%) 369 America West Airlines, Inc. (Series 01- 1).................................... 7.10 04/02/21 367,305 ------------ Auto Parts: O.E.M. (0.3%) 405 ArvinMeritor, Inc. ..................... 8.75 03/01/12 372,600 ------------ Beverages: Alcoholic (0.9%) 210 Anheuser-Busch Companies, Inc. ......... 5.50 01/15/18 217,433 1,100 FBG Finance Ltd. - 144A* (Australia).... 5.125 06/15/15 1,091,431 ------------ 1,308,864 ------------ Biotechnology (1.1%) 140 Amgen Inc. ............................. 5.85 06/01/17 140,135 1,540 Biogen Idec Inc. ....................... 6.875 03/01/18 1,558,632 ------------ 1,698,767 ------------ Cable/Satellite TV (4.2%) 1,355 Comcast Cable Communications, Inc. ..... 6.75 01/30/11 1,409,644 1,740 Comcast Cable Communications, Inc. ..... 7.125 06/15/13 1,850,591 2,310 Comcast Corp. .......................... 6.50 01/15/15 2,368,801 125 DIRECTV Holdings/Financing.............. 6.375 06/15/15 117,188 695 EchoStar DBS Corp. ..................... 6.375 10/01/11 668,938 45 EchoStar DBS Corp. ..................... 6.625 10/01/14 41,063 ------------ 6,456,225 ------------ Chemicals: Major Diversified (0.2%) 235 Du Pont (E.I.) De Nemours & Co., Inc. .. 5.00 01/15/13 244,954 ------------ Data Processing Services (0.5%) 720 Fiserv, Inc. ........................... 6.80 11/20/17 745,363 ------------ Department Stores (0.4%) 610 May Department Stores Co. .............. 5.95 11/01/08 611,564 ------------ Discount Stores (0.1%) 145 Target Corp. ........................... 6.50 10/15/37 140,650 ------------
See Notes to Financial Statements 6 Morgan Stanley Income Securities Inc. PORTFOLIO OF INVESTMENTS - MARCH 31, 2008 (UNAUDITED) continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------- Drugstore Chains (1.0%) $ 65 CVS Caremark Corp. ..................... 5.75 % 06/01/17 $ 66,128 495 CVS Corp. .............................. 5.75 08/15/11 518,212 948 CVS Pass-Through Trust - 144A*.......... 6.036 12/10/28 905,379 ------------ 1,489,719 ------------ Electric Utilities (13.5%) 3,085 Arizona Public Service Co. ............. 5.80 06/30/14 3,028,606 2,105 Carolina Power & Light Co. ............. 5.125 09/15/13 2,210,111 285 CenterPoint Energy Resources, Corp. .... 6.25 02/01/37 266,697 305 CenterPoint Energy Resources, Corp. (Series B)............................ 7.875 04/01/13 339,166 1,705 Consumers Energy Co. ................... 4.00 05/15/10 1,708,338 240 Consumers Energy Co. (Series H)......... 4.80 02/17/09 241,617 1,015 Detroit Edison Co. (The)................ 6.125 10/01/10 1,075,844 835 Duquesne Light Co. (Series O)........... 6.70 04/15/12 910,306 400 Enel Finance International - 144A* (Luxemburg)........................... 5.70 01/15/13 414,448 930 Entergy Gulf States, Inc. .............. 3.476+ 12/01/09 910,594 820 Entergy Gulf States, Inc. - 144A*....... 6.474+ 12/08/08 822,257 1,545 Exelon Corp. ........................... 6.75 05/01/11 1,631,395 215 Indianapolis Power & Light Co. - 144A*.. 6.30 07/01/13 234,527 250 Nevada Power Co. ....................... 8.25 06/01/11 271,161 1,565 Ohio Edison Co. ........................ 6.40 07/15/16 1,614,999 1,310 Ohio Power Company (Series K)........... 6.00 06/01/16 1,317,843 500 Pacific Gas & Electric Co. ............. 5.625 11/30/17 514,597 205 PacifiCorp.............................. 6.25 10/15/37 207,826 185 Public Service Electric & Gas Co. (Series B)............................ 5.00 01/01/13 190,149 570 Texas Eastern Transmission.............. 7.00 07/15/32 609,219 430 Union Electric Co. ..................... 6.40 06/15/17 452,689 1,800 Virginia Electric Power Co. ............ 5.95 09/15/17 1,899,041 ------------ 20,871,430 ------------ Electrical Products (0.6%) 920 Cooper Industries, Inc. ................ 5.25 11/15/12 954,445 ------------ Electronic Components (0.4%) 635 Philips Electronics..................... 5.75 03/01/18 648,223 ------------ Electronic Equipment/Instruments (0.7%) 1,085 Xerox Corp. ............................ 5.50 05/15/12 1,095,136 ------------ Electronics/Appliances (0.5%) 705 LG Electronics Inc. - 144A* (South Korea)................................ 5.00 06/17/10 698,418 ------------ Environmental Services (0.9%) 1,370 Waste Management, Inc. ................. 6.875 05/15/09 1,405,830 ------------
See Notes to Financial Statements 7 Morgan Stanley Income Securities Inc. PORTFOLIO OF INVESTMENTS - MARCH 31, 2008 (UNAUDITED) continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------- Finance/Rental/Leasing (1.8%) $ 555 Capital One Financial Corp. ............ 6.75 % 09/15/17 $ 527,355 1,315 Capmark Financial Group Inc. - 144A*.... 5.875 05/10/12 833,834 450 Capmark Financial Group Inc. - 144A*.... 6.30 05/10/17 270,215 840 CIT Group, Inc. ........................ 5.65 02/13/17 652,435 600 Countrywide Financial Corp. ............ 6.25 05/15/16 487,555 ------------ 2,771,394 ------------ Financial Conglomerates (0.6%) 510 Brookfield Asset Management Inc. (Canada).............................. 5.80 04/25/17 461,000 170 Citigroup Inc. ......................... 5.875 05/29/37 148,127 285 Prudential Financial, Inc. (Series D)... 6.625 12/01/37 282,410 ------------ 891,537 ------------ Food Retail (0.9%) 901 Delhaize America, Inc. ................. 9.00 04/15/31 1,087,275 280 Kroger Co. (The)........................ 5.00 04/15/13 281,866 ------------ 1,369,141 ------------ Food: Major Diversified (2.2%) 800 ConAgra Foods, Inc. .................... 7.00 10/01/28 812,666 670 ConAgra Foods, Inc. .................... 8.25 09/15/30 772,036 330 Kellogg Co. ............................ 5.125 12/03/12 341,593 800 Kraft Foods Inc. ....................... 6.125 02/01/18 800,956 645 Kraft Foods Inc. ....................... 6.00 02/11/13 667,540 ------------ 3,394,791 ------------ Food: Meat/Fish/Dairy (0.3%) 130 Pilgrim's Pride Corp. .................. 7.625 05/01/15 125,775 345 Smithfield Foods, Inc. (Series B)....... 8.00 10/15/09 351,900 ------------ 477,675 ------------ Gas Distributors (1.6%) 285 DCP Midstream LLC - 144A*............... 6.75 09/15/37 279,349 675 Equitable Resources Inc. ............... 6.50 04/01/18 679,676 745 NiSource Finance Corp. ................. 3.663+ 11/23/09 723,478 790 NiSource Finance Corp. ................. 7.875 11/15/10 859,281 ------------ 2,541,784 ------------ Home Building (0.1%) 240 Pulte Homes, Inc. ...................... 6.375 05/15/33 188,400 ------------ Home Improvement Chains (2.4%) 2,390 Home Depot, Inc. (The).................. 5.40 03/01/16 2,250,006 1,455 Home Depot, Inc. (The).................. 2.925+ 12/16/09 1,388,090 ------------ 3,638,096 ------------
See Notes to Financial Statements 8 Morgan Stanley Income Securities Inc. PORTFOLIO OF INVESTMENTS - MARCH 31, 2008 (UNAUDITED) continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------- Hospital/Nursing Management (0.1%) $ 245 Tenet Healthcare Corp. ................. 7.375 % 02/01/13 $ 219,888 ------------ Industrial Conglomerates (0.8%) 865 General Electric Co. ................... 5.25 12/06/17 865,430 360 Honeywell International Inc. ........... 5.30 03/01/18 369,615 ------------ 1,235,045 ------------ Insurance Brokers/Services (1.8%) 1,170 Catlin Insurance Co., Ltd. - 144A* (Bermuda)............................. 7.249+ ## 978,062 450 Farmers Exchange Capital - 144A*........ 7.05 07/15/28 414,250 1,330 Farmers Insurance Exchange - 144A*...... 8.625 05/01/24 1,407,048 ------------ 2,799,360 ------------ Integrated Oil (2.4%) 1,565 Amerada Hess Corp. ..................... 6.65 08/15/11 1,686,206 1,125 Marathon Oil Corp. ..................... 6.00 10/01/17 1,143,297 1,030 Petro-Canada (Canada)................... 5.95 05/15/35 932,969 ------------ 3,762,472 ------------ Investment Banks/Brokers (2.1%) 530 Bear Stearns Companies Inc. (The)....... 6.40 10/02/17 524,241 400 Goldman Sachs Group, Inc. (The)......... 6.15 04/01/18 400,144 390 Goldman Sachs Group, Inc. (The)......... 6.75 10/01/37 363,937 315 Lehman Brothers Holdings, Inc. ......... 5.75 01/03/17 285,040 485 Lehman Brothers Holdings, Inc. ......... 6.50 07/19/17 461,363 835 Lehman Brothers Holdings, Inc. ......... 6.875 07/17/37 726,067 555 Merrill Lynch & Co., Inc. .............. 5.70 05/02/17 528,131 ------------ 3,288,923 ------------ Major Banks (2.7%) 535 Bank of America Corp. .................. 5.75 12/01/17 554,666 445 Bank of New York Mellon Corp. (Series G).................................... 4.50 04/01/13 448,653 245 Barclays Bank Plc - 144A* (United Kingdom).............................. 6.05 12/04/17 239,397 1,805 Credit Suisse New York (CH)............. 6.00 02/15/18 1,804,009 1,115 Wachovia Capital Trust III.............. 5.80+ # 794,930 315 Wells Fargo Co. ........................ 5.625 12/11/17 322,800 ------------ 4,164,455 ------------ Major Telecommunications (9.3%) 1,465 AT&T Corp. ............................. 8.00+ 11/15/31 1,716,784 1,245 France Telecom S.A. (France)............ 8.50+ 03/01/31 1,546,773 1,525 SBC Communications, Inc. ............... 6.15+ 09/15/34 1,469,479 2,095 Sprint Capital Corp. ................... 8.75 03/15/32 1,774,232 2,695 Sprint Nextel Corp. .................... 6.00 12/01/16 2,098,661 1,690 Telecom Italia Capital SA (Luxembourg).. 4.95 09/30/14 1,540,080
See Notes to Financial Statements 9 Morgan Stanley Income Securities Inc. PORTFOLIO OF INVESTMENTS - MARCH 31, 2008 (UNAUDITED) continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------- $ 1,405 Telecom Italia Capital SA (Luxembourg).. 4.00 % 01/15/10 $ 1,378,867 1,380 Telefonica Europe BV (Netherlands)...... 8.25 09/15/30 1,616,066 840 Verizon Communications.................. 5.50 02/15/18 819,665 405 Verizon New England Inc. ............... 6.50 09/15/11 423,458 ------------ 14,384,065 ------------ Managed Health Care (0.2%) 320 Unitedhealth Group Inc. ................ 6.00 02/15/18 314,021 ------------ Media Conglomerates (4.1%) 1,110 News America Inc - 144A*................ 6.65 11/15/37 1,123,052 2,005 Time Warner, Inc. ...................... 3.30+ 11/13/09 1,920,626 2,090 Time Warner, Inc. ...................... 5.875 11/15/16 1,990,784 1,350 Viacom, Inc. ........................... 6.875 04/30/36 1,303,931 ------------ 6,338,393 ------------ Medical Specialties (0.8%) 1,330 Hospira, Inc. .......................... 5.31+ 03/30/10 1,294,138 ------------ Motor Vehicles (1.2%) 795 DaimlerChrysler North American Holdings Corp. ................................ 7.30 01/15/12 849,514 260 DaimlerChrysler North American Holdings Corp. ................................ 8.00 06/15/10 278,522 675 DaimlerChrysler North American Holdings Corp. ................................ 8.50 01/18/31 773,694 ------------ 1,901,730 ------------ Multi-Line Insurance (1.0%) 1,170 AIG SunAmerica Global Financing VI - 144A*............................ 6.30 05/10/11 1,230,383 750 Two-Rock Pass-Through - 144A* (Bermuda)............................. 4.036 ## 300,000 ------------ 1,530,383 ------------ Oil & Gas Pipelines (4.4%) 630 Colorado Interstate Gas Co. ............ 6.80 11/15/15 652,684 2,685 Enterprise Products Operating L.P. (Series B)............................ 5.60 10/15/14 2,690,059 415 Kinder Morgan Energy Partners, L.P. .... 5.85 09/15/12 425,994 1,095 Kinder Morgan Finance Co. (Canada)...... 5.70 01/05/16 1,042,988 1,010 Plains All American Pipeline LP/PAA Finance Corp. ........................ 6.70 05/15/36 977,074 480 Trans-Canada Pipelines.................. 6.20 10/15/37 464,357 470 Transcontinental Gas Pipe Line Corp. (Series B)............................ 8.875 07/15/12 536,975 ------------ 6,790,131 ------------ Oil & Gas Production (3.2%) 920 Anadarko Finance Co. (Series B) (Canada).............................. 6.75 05/01/11 983,341 385 Chesapeake Energy Corp. ................ 7.625 07/15/13 396,550 1,910 Devon Financing Corp. .................. 6.875 09/30/11 2,086,356
See Notes to Financial Statements 10 Morgan Stanley Income Securities Inc. PORTFOLIO OF INVESTMENTS - MARCH 31, 2008 (UNAUDITED) continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------- $ 1,270 EnCana Corp. ........................... 6.50 % 02/01/38 $ 1,265,204 250 Husky Oil Ltd. (Canada)................. 8.90 08/15/28 253,693 ------------ 4,985,144 ------------ Oil Refining/Marketing (0.3%) 515 Valero Energy Corp. .................... 3.50 04/01/09 511,862 ------------ Oilfield Services/Equipment (0.6%) 850 Weatherford International Inc. ......... 6.35 06/15/17 880,732 ------------ Other Metals/Minerals (0.7%) 1,030 Brascan Corp. (Canada).................. 7.125 06/15/12 1,029,182 ------------ Pharmaceuticals: Major (0.2%) 285 Wyeth................................... 5.45 04/01/17 290,784 70 Wyeth................................... 5.50 02/15/16 71,490 ------------ 362,274 ------------ Property - Casualty Insurers (1.2%) 1,400 Mantis Reef Ltd. - 144A* (Australia).... 4.692 11/14/08 1,410,585 500 Platinum Underwriters Finance Inc. (Series B)............................ 7.50 06/01/17 503,045 ------------ 1,913,630 ------------ Railroads (1.3%) 1,105 Burlington Northern Santa Fe Corp. ..... 6.125 03/15/09 1,126,587 800 Union Pacific Corp. .................... 5.45 01/31/13 824,190 ------------ 1,950,777 ------------ Real Estate Development (0.5%) 667 World Financial Properties - 144A*...... 6.91 09/01/13 637,746 149 World Financial Properties - 144A*...... 6.95 09/01/13 144,749 ------------ 782,495 ------------ Real Estate Investment Trusts (0.8%) 1,485 iStar Financial Inc. ................... 3.34 03/09/10 1,175,023 ------------ Restaurants (0.5%) 760 Tricon Global Restaurants, Inc. ........ 8.875 04/15/11 838,132 ------------ Savings Banks (2.3%) 1,975 Sovereign Bancorp, Inc. ................ 5.114+ 03/23/10 1,892,011 1,455 Washington Mutual Inc. ................. 8.25 04/01/10 1,266,403 300 Washington Mutual PFD IV - 144A*........ 9.75+ # 229,825 300 Washington Mutual Preferred Funding II.. 6.665+ # 162,225 ------------ 3,550,464 ------------ Services to the Health Industry (0.7%) 1,115 Medco Health Solutions.................. 7.125 03/15/18 1,144,500 ------------
See Notes to Financial Statements 11 Morgan Stanley Income Securities Inc. PORTFOLIO OF INVESTMENTS - MARCH 31, 2008 (UNAUDITED) continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------- Tobacco (0.2%) $ 345 Reynolds American Inc. ................. 6.50 % 07/15/10 $ 353,625 ------------ Total Corporate Bonds (Cost $127,937,780)........................ 124,705,320 ------------ Commercial Mortgage-Backed Securities (8.7%) 600 Banc of America Commercial Mortgage Inc. 2007-2 A4............................. 5.688+ 04/10/49 596,982 875 Banc of America Commercial Mortgage Inc. 2007-3 A4............................. 5.659+ 06/10/49 865,621 650 Bear Stearns Commercial Mortgage Securities Inc. 2007-PW16 A4.......................... 5.713+ 06/11/40 647,074 875 Citigroup Commercial Mortgage Trust 2007-C6 A4............................ 5.889+ 06/10/17 870,152 1,300 Commercial Mortgage Pass-Through Certificate 2007-C9 A4................ 5.816+ 12/10/49 1,302,208 975 Greenwich Capital Commercial Funding Corp. 2007-GG9 A4..................... 5.444+ 03/10/39 950,699 1,225 GS Mortgage Securities Corporation II 2007-GG10 A4.......................... 5.799+ 08/10/45 1,225,758 425 JPMorgan Chase Commercial Mortgage Securities 2007-CB18 A4.......................... 5.44+ 06/12/47 413,644 700 JPMorgan Chase Commercial Mortgage Securities 2007-CB19 A4.......................... 5.747+ 02/12/49 696,565 950 JPMorgan Chase Commercial Mortgage Securities 2007-LD11 A4.......................... 6.007+ 06/15/49 951,011 650 LB Commercial Conduit Mortgage Trust 2007-C3 A4............................ 5.933+ 07/15/44 657,087 425 LB-UBS Commercial Mortgage Trust 2007-C2 A3.................................... 5.43+ 02/15/40 413,494 675 LB-UBS Commercial Mortgage Trust 2007-C6 A4.................................... 5.858+ 07/15/40 674,547 1,000 Wachovia Bank Commercial Mortgage Trust 2007-C30 A5........................... 5.342+ 12/15/43 966,116 1,200 Wachovia Bank Commercial Mortgage Trust 2007-C32 A3........................... 5.741+ 06/15/49 1,191,542 1,000 Wachovia Bank Commercial Mortgage Trust 2007-C33 A4........................... 6.10+ 02/15/51 1,009,916 ------------ Total Commercial Mortgage-Backed Securities (Cost $13,308,585).............................................. 13,432,416 ------------ Asset-Backed Securities (3.7%) 550 Capital One Multi-Asset Execution Trust 2007-A7 A7............................ 5.75 07/15/20 525,250 555 Citibank Credit Card Issuance Trust 2007-A8 A8............................ 5.65 09/20/19 541,970 600 Discover Card Master Trust 2007-A1 A1... 5.65 03/16/20 578,929 1,350 Ford Credit Auto Owner Trust 2007-A A3A................................... 5.40 08/15/11 1,388,002 1,275 GS Auto Loan Trust 2007-1 A3............ 5.39 12/15/11 1,296,000 433 Harley-Davidson Motorcycle Trust 2004-2 A2.................................... 3.56 02/15/12 433,278 950 TXU Electric Delivery Transition Bond Co. LLC 2004-1 A2..................... 4.81 11/17/14 973,423 9 USAA Auto Owner Trust 2005-1 A3......... 3.90 07/15/09 9,242 ------------ Total Asset-Backed Securities (Cost $5,716,137).................. 5,746,094 ------------ Collateralized Mortgage Obligations (0.6%) 471 American Home Mortgage Assets 2007-5 A3.................................... 2.899+ 06/25/47 231,655 472 Countrywide Alternative Loan Trust 2005- 51 B1................................. 3.536+ 11/20/35 151,053 323 Countrywide Alternative Loan Trust 2005- 81 M1................................. 3.299+ 02/25/37 137,477 200 Countrywide Alternative Loan Trust 2006- 0A16 M4............................... 3.119+ 10/25/46 20,000 225 Harborview Mortgage Loan Trust 2006-8 B4.................................... 3.149+ 08/21/36 45,000
See Notes to Financial Statements 12 Morgan Stanley Income Securities Inc. PORTFOLIO OF INVESTMENTS - MARCH 31, 2008 (UNAUDITED) continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------- $ 400 Lehman XS Trust 2007-4N M4.............. 3.599+ % 03/25/47 $ 122,250 199 Luminent Mortgage Trust 2006-5 B1....... 2.959+ 07/25/36 85,987 425 Master Adjustable Rate Mortgages Trust 2007-3 1M1............................ 3.449+ 05/25/47 72,248 ------------ Total Collateralized Mortgage Obligations (Cost $2,136,715)...... 865,670 ------------ Foreign Government Obligation (0.5%) MXN 7,735 Mexican Fixed Rate Bonds (Series M20) (Mexico) (Cost $777,562).............. 9.50 12/18/14 808,041 ------------ Short-Term Investments (6.1%) U.S. Government Obligations (a) (1.1%) 1,650 U.S. Treasury Bills** (Cost $1,649,401)........................... 0.45 - 3.15 04/10/08 1,649,401 ------------ NUMBER OF SHARES (000) ------------ Investment Company (b) (5.0%) 7,763 Morgan Stanley Institutional Liquidity Money Market Portfolio - Institutional Class++ (Cost $7,763,030) 7,763,030 ------------ Total Short-Term Investments (Cost $9,412,431)................... 9,412,431 ------------ Total Investments (Cost $159,289,210) (c) (d)......... 100.3% 154,969,972 Liabilities in Excess of Other Assets................. (0.3) (411,710) ------- ------------ Net Assets............................................ 100.0% $154,558,262 ===== ============
---------- MXN Mexican New Peso. * Resale is restricted to qualified institutional investors. ** A portion of this security has been physically segregated in connection with open futures contracts in an amount equal to $328,720. # Securities issued with perpetual maturity. ## Foreign issued securities with perpetual maturity. + Floating rate security, rate shown is the rate in effect at March 31, 2008. ++ May include cash designated as collateral in connection with open swap contracts. (a) Purchased on a discount basis. The interest rates shown have been adjusted to reflect a money market equivalent yield. (b) See Note 3 to the financial statements regarding investments in Morgan Stanley Institutional Liquidity Money Market Portfolio - Institutional Class. (c) Securities have been designated as collateral in an amount equal to $75,854,174 in connection with open futures and swap contracts. (d) The aggregate cost for federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross unrealized appreciation is $1,810,407 and the aggregate gross unrealized depreciation is $6,129,645 resulting in net unrealized depreciation of $4,319,238.
See Notes to Financial Statements 13 Morgan Stanley Income Securities Inc. PORTFOLIO OF INVESTMENTS - MARCH 31, 2008 (UNAUDITED) continued FUTURES CONTRACTS OPEN AT MARCH 31, 2008:
UNREALIZED NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE APPRECIATION CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE (DEPRECIATION) -------------------------------------------------------------------------------------------- 125 Long U.S. Treasury Notes 5 Year, June 2008 $ 14,279,298 $ 135,977 63 Long U.S. Treasury Bonds 20 Year, June 2008 8,078,188 (88,735) 24 Long U.S. Treasury Notes 2 Year, June 2008 5,151,750 29,601 348 Short U.S. Treasury Notes 10 Year, June 2008 (41,651,250) (1,197,009) ----------- Net Unrealized Depreciation.................................. $(1,120,166) ===========
See Notes to Financial Statements 14 Morgan Stanley Income Securities Inc. PORTFOLIO OF INVESTMENTS - MARCH 31, 2008 (UNAUDITED) continued CREDIT DEFAULT SWAP CONTRACTS OPEN AT MARCH 31, 2008:
NOTIONAL UNREALIZED SWAP COUNTERPARTY & BUY/SELL AMOUNT INTEREST TERMINATION APPRECIATION REFERENCE OBLIGATION PROTECTION (000'S) RATE DATE (DEPRECIATION) --------------------------------------------------------------------------------------------------------------------- Lehman Brothers Special Financing Inc. ABX He Buy 430 0.18 July 25, 2045 $ (23,611) Credit Suisse International ABX He Buy 430 0.18 July 25, 2045 (19,314) Goldman Sachs International Trane Inc. Buy 280 0.50 March 20, 2013 2,109 UBS AG Trane Inc. Buy 855 0.50 March 20, 2013 6,439 Goldman Sachs International Trane Inc. Buy 115 0.60 March 20, 2018 857 UBS AG Trane Inc. Buy 895 0.60 March 20, 2018 6,670 Credit Suisse International Arrow Electronics, Inc. Buy 975 1.00 March 20, 2015 5,129 Lehman Brothers Special Financing Inc. Arrow Electronics, Inc. Buy 160 1.04 March 20, 2018 1,250 Credit Suisse International Arrow Electronics, Inc. Buy 235 1.11 March 20, 2013 (1,086) Lehman Brothers Special Financing Inc. Arrow Electronics, Inc. Buy 1,020 1.40 March 20, 2013 0 Goldman Sachs International Avalonbay Communities Inc. Buy 1,490 3.05 March 20, 2013 (11,449) Merrill Lynch International Carnival Corp. Buy 895 1.50 March 20, 2018 (7,528) Merrill Lynch International Carnival Corp. Buy 750 1.57 March 20, 2018 (10,261) Bank of America, N.A. Carnival Corp. Buy 905 1.57 March 20, 2018 (12,380) Goldman Sachs International Carnival Corp. Buy 70 1.60 March 20, 2018 (902) Merrill Lynch International Carnival Corp. Buy 495 1.60 March 20, 2018 (6,382) Bank of America, N.A. Centurytel, Inc. Buy 395 0.88 September 20, 2017 22,157
See Notes to Financial Statements 15 Morgan Stanley Income Securities Inc. PORTFOLIO OF INVESTMENTS - MARCH 31, 2008 (UNAUDITED) continued
NOTIONAL UNREALIZED SWAP COUNTERPARTY & BUY/SELL AMOUNT INTEREST TERMINATION APPRECIATION REFERENCE OBLIGATION PROTECTION (000'S) RATE DATE (DEPRECIATION) --------------------------------------------------------------------------------------------------------------------- Lehman Brothers Special Financing Inc. CMBX NA Buy 4,080 0.10 October 12, 2052 (243,026) Lehman Brothers Special Financing Inc. CMBX NA Buy 4,105 0.10 October 12, 2052 (265,558) Lehman Brothers Special Financing Inc. CMBX NA Buy 5,100 0.10 October 12, 2052 (343,770) Goldman Sachs International Coca-Cola Enterprises Inc. Buy 1,550 0.588 March 20, 2013 (3,142) Lehman Brothers Special Financing Inc. Coca-Cola Enterprises Inc. Buy 695 0.64 March 20, 2013 (3,091) Citibank, N.A., New York Covidien Ltd. Buy 167 0.43 March 20, 2012 20 Citibank, N.A., New York Covidien Ltd. Buy 323 0.43 March 20, 2012 38 Goldman Sachs International Chubb Corp. Buy 1,640 0.10 March 20, 2012 29,714 Goldman Sachs International Dell Inc. Buy 830 0.22 March 20, 2012 14,897 Merrill Lynch International Disney (Walt) Co. Buy 1,435 0.60 March 20, 2013 (4,935) Merrill Lynch International Disney (Walt) Co. Buy 1,520 0.77 March 20, 2013 0 Goldman Sachs International Dow Jones Index Sell 825 0.60 December 20, 2012 (7,578) Goldman Sachs International Dow Jones Index Sell 2,430 0.60 December 20, 2012 (48,346) Goldman Sachs International Dow Jones Index Sell 1,525 1.40 December 20, 2012 (32,265) Goldman Sachs International Dow Jones Index Sell 1,570 1.40 December 20, 2012 (30,415) Goldman Sachs International Dow Jones Index Sell 1,600 1.40 December 20, 2012 (35,773) Merrill Lynch International Dow Jones Index Sell 2,775 1.40 December 20, 2012 77,207 Goldman Sachs International Dow Jones Index Sell 3,430 1.40 December 20, 2012 (64,324)
See Notes to Financial Statements 16 Morgan Stanley Income Securities Inc. PORTFOLIO OF INVESTMENTS - MARCH 31, 2008 (UNAUDITED) continued
NOTIONAL UNREALIZED SWAP COUNTERPARTY & BUY/SELL AMOUNT INTEREST TERMINATION APPRECIATION REFERENCE OBLIGATION PROTECTION (000'S) RATE DATE (DEPRECIATION) --------------------------------------------------------------------------------------------------------------------- Goldman Sachs International Dow Jones Index Sell 1,605 0.80 December 20, 2017 (6,711) JPMorgan Chase N.A. New York Eaton Corp. Buy 255 0.60 March 20, 2013 2,164 Citibank, N.A., New York Eaton Corp. Buy 715 0.62 March 20, 2013 5,414 Citibank, N.A., New York Eaton Corp. Buy 575 0.72 March 20, 2013 1,728 Citibank, N.A., New York Eaton Corp. Buy 405 0.82 March 20, 2018 3,436 Merrill Lynch International Eaton Corp. Buy 560 0.92 March 20, 2018 288 Goldman Sachs International Eaton Corp. Buy 490 0.97 March 20, 2018 (1,699) Goldman Sachs International E.I. Du Pont De Nemours and Co. Buy 250 0.43 March 20, 2013 505 UBS AG Eli Lilly & Co. Buy 1,265 0.30 March 20, 2013 7,885 Goldman Sachs International Eli Lilly & Co. Buy 310 0.33 March 20, 2013 1,503 Goldman Sachs International Firstenergy Corp. Buy 1,480 1.25 March 20, 2013 (8,174) Goldman Sachs International Gap, Inc. Buy 1,000 1.19 March 20, 2012 (12,224) Lehman Brothers Special Financing Inc. Goodrich Corp. Buy 515 0.45 March 20, 2018 6,348 Lehman Brothers Special Financing Inc. Goodrich Corp. Buy 370 0.46 March 20, 2018 4,259 Goldman Sachs International Goodrich Corp. Buy 445 0.47 March 20, 2018 4,760 Bank of America, N.A. Goodrich Corp. Buy 640 0.70 March 20, 2013 (5,996) Bank of America, N.A. Goodrich Corp. Buy 440 0.82 March 20, 2018 (7,844) Goldman Sachs International Hartford Financial Services Group, Inc. Buy 1,700 0.12 December 20, 2011 74,373
See Notes to Financial Statements 17 Morgan Stanley Income Securities Inc. PORTFOLIO OF INVESTMENTS - MARCH 31, 2008 (UNAUDITED) continued
NOTIONAL UNREALIZED SWAP COUNTERPARTY & BUY/SELL AMOUNT INTEREST TERMINATION APPRECIATION REFERENCE OBLIGATION PROTECTION (000'S) RATE DATE (DEPRECIATION) --------------------------------------------------------------------------------------------------------------------- Goldman Sachs International Lehman Brothers Holdings Inc. Buy 775 4.40 March 20, 2013 (45,562) Goldman Sachs International Lehman Brothers Holdings Inc. Buy 390 4.75 March 20, 2013 (28,542) UBS AG Martin Marietta Materials, Inc. Buy 715 1.73 March 20, 2018 15,596 UBS AG Martin Marietta Materials, Inc. Buy 720 1.78 March 20, 2013 9,684 Goldman Sachs International Merrill Lynch & Co., Inc. Buy 295 3.25 March 20, 2013 (6,915) Bank of America, N.A. Merrill Lynch & Co., Inc. Buy 495 3.25 March 20, 2013 (11,603) Lehman Brothers Special Financing Inc. Metlife, Inc. Buy 840 2.15 March 20, 2013 (23,859) Deutsche Bank AG MGIC Investment Corp. Buy 275 8.15 March 20, 2013 (18,920) Goldman Sachs International Motorola, Inc. Buy 540 0.15 December 20, 2011 50,143 Goldman Sachs International Motorola, Inc. Buy 1,100 0.157 December 20, 2011 101,889 Bank of America, N.A. Nordstrom, Inc. Buy 620 1.03 March 20, 2018 14,665 Credit Suisse International Nordstrom, Inc. Buy 1,495 1.04 March 20, 2013 14,442 Credit Suisse International Nordstrom, Inc. Buy 780 1.05 March 20, 2013 7,184 JPMorgan Chase N.A. New York Nordstrom, Inc. Buy 485 1.07 March 20, 2018 9,975 JPMorgan Chase N.A. New York Nordstrom, Inc. Buy 485 1.15 March 20, 2018 6,980 Deutsche Bank AG Pactiv Corp. Buy 350 1.34 March 20, 2013 308 Credit Suisse International Pactiv Corp. Buy 1,000 1.35 March 20, 2013 432 Bank of America, N.A. Pactiv Corp. Buy 1,000 1.375 March 20, 2013 (688)
See Notes to Financial Statements 18 Morgan Stanley Income Securities Inc. PORTFOLIO OF INVESTMENTS - MARCH 31, 2008 (UNAUDITED) continued
NOTIONAL UNREALIZED SWAP COUNTERPARTY & BUY/SELL AMOUNT INTEREST TERMINATION APPRECIATION REFERENCE OBLIGATION PROTECTION (000'S) RATE DATE (DEPRECIATION) --------------------------------------------------------------------------------------------------------------------- JPMorgan Chase N.A. New York Pepsi Bottling Group, Inc. Buy 400 0.58 March 20, 2013 (1,204) JPMorgan Chase N.A. New York Pepsi Bottling Group, Inc. Buy 530 0.63 March 20, 2013 (2,814) Citibank, N.A. New York Pitney Bowes Inc. Buy 1,010 0.48 March 20, 2013 10,079 Credit Suisse International PMI Group, Inc. Buy 240 8.10 March 20, 2013 (10,351) Goldman Sachs International Prologis Buy 655 3.33 March 20, 2013 6,819 Bank of America, N.A. Sealed Air Corp. Buy 315 1.08 March 20, 2018 11,607 Goldman Sachs International Sealed Air Corp. Buy 550 1.08 March 20, 2018 20,267 Bank of America, N.A. Sealed Air Corp. Buy 420 1.12 March 20, 2018 14,204 Goldman Sachs International Sealed Air Corp. Buy 265 1.24 March 20, 2018 6,552 Goldman Sachs International Simon Property Group Buy 965 2.32 March 20, 2018 (48,750) Goldman Sachs International Simon Property Group Buy 1,210 2.37 March 20, 2018 (65,621) JPMorgan Chase N.A. New York SLM Corp. Sell 435 4.95 March 20, 2013 (50,303) Merrill Lynch International SLM Corp. Sell 435 5.00 March 20, 2013 (49,584) Bank of America, N.A. Textron Financial Corp. Buy 485 0.80 March 20, 2018 29,375 UBS AG Textron Financial Corp. Buy 420 1.00 March 20, 2013 10,551 UBS AG Textron Financial Corp. Buy 350 1.01 March 20, 2013 8,793 Goldman Sachs International Textron Financial Corp. Buy 845 1.05 March 20, 2013 19,221 UBS AG Textron Financial Corp. Buy 830 1.06 March 20, 2013 (2,442)
See Notes to Financial Statements 19 Morgan Stanley Income Securities Inc. PORTFOLIO OF INVESTMENTS - MARCH 31, 2008 (UNAUDITED) continued
NOTIONAL UNREALIZED SWAP COUNTERPARTY & BUY/SELL AMOUNT INTEREST TERMINATION APPRECIATION REFERENCE OBLIGATION PROTECTION (000'S) RATE DATE (DEPRECIATION) --------------------------------------------------------------------------------------------------------------------- Bank of America, N.A. Toll Brothers, Inc. Buy 385 2.25 March 20, 2018 3,720 Bank of America, N.A. Toll Brothers, Inc. Buy 770 2.90 March 20, 2013 5,316 Citibank, N.A., New York Tyco Electronics Ltd. Buy 167 0.43 March 20, 2012 5,089 Citibank, N.A., New York Tyco Electronics Ltd. Buy 323 0.43 March 20, 2012 9,872 Citibank, N.A., New York Tyco International Ltd. Buy 167 0.43 March 20, 2012 4,990 Citibank, N.A., New York Tyco International Ltd. Buy 323 0.43 March 20, 2012 9,681 Goldman Sachs International Union Pacific Corp. Buy 850 0.20 December 20, 2011 9,678 Deutsche Bank AG Washington Mutual Buy 800 5.00 March 20, 2013 (4,682) Goldman Sachs International Washington Mutual Buy 785 6.48 March 20, 2013 (44,811) Bank of America, N.A. Yum! Brands, Inc. Buy 70 1.18 March 20, 2013 (445) Bank of America, N.A. Yum! Brands, Inc. Buy 690 1.25 March 20, 2013 (6,576) --------- Net Unrealized Depreciation............................. $(945,194) =========
See Notes to Financial Statements 20 Morgan Stanley Income Securities Inc. PORTFOLIO OF INVESTMENTS - MARCH 31, 2008 (UNAUDITED) continued INTEREST RATE SWAP CONTRACTS OPEN AT MARCH 31, 2008:
NOTIONAL PAYMENTS PAYMENTS UNREALIZED AMOUNT RECEIVED MADE TERMINATION APPRECIATION COUNTERPARTY (000'S) BY FUND BY FUND DATE (DEPRECIATION) ---------------------------------------------------------------------------------------------------------------------------------- Deutsche Bank AG, New York $24,375 Fixed Rate 5.389% Floating Rate 3.092+% May 25, 2017 $2,645,420 Citibank N.A. New York 1,375 Fixed Rate 5.44 Floating Rate 3.085+ May 29, 2017 154,701 JPMorgan Chase N.A. New York 4,075 Fixed Rate 5.448 Floating Rate 3.085+ May 29, 2017 461,005 Citibank Capital Market 22,000 Fixed Rate 5.448 Floating Rate 3.096+ August 9, 2017 2,492,600 Bank of America, N.A. New York 10,445 Fixed Rate 5.55 Floating Rate 0.00+ February 22, 2018 205,140 Bank of America, N.A. New York 10,360 Fixed Rate 5.637 Floating Rate 0.00+ March 7, 2018 233,825 Citibank N.A. New York 4,000 Fixed Rate 5.275 Floating Rate 3.331+ October 25, 2037 407,560 JPMorgan Chase N.A. New York 1,300 Floating Rate 3.057+ Fixed Rate 4.582 December 4, 2017 (55,614) JPMorgan Chase N.A. New York 8,300 Floating Rate 2.598+ Fixed Rate 3.966 March 25, 2018 76,858 JPMorgan Chase N.A. New York 12,700 Floating Rate 2.598+ Fixed Rate 3.966 March 25, 2018 117,602 Bank of America, N.A. New York 13,330 Floating Rate 0.00+ Fixed Rate 5.957 February 22, 2023 (187,953) Bank of America, N.A. New York 13,315 Floating Rate 0.00+ Fixed Rate 6.04 March 7, 2023 (218,366) ---------- Net Unrealized Appreciation................................................... $6,332,778 ==========
---------- + Floating rate represents USD-3 Months LIBOR.
See Notes to Financial Statements 21 Morgan Stanley Income Securities Inc. FINANCIAL STATEMENTS Statement of Assets and Liabilities March 31, 2008 (unaudited) Assets: Investments in securities, at value (cost $151,526,180).......................................... $147,206,942 Investment in affiliate, at value (cost $7,763,030)............................................ 7,763,030 Unrealized appreciation on open swap contracts................. 7,490,973 Receivable for: Interest.................................................... 2,030,550 Premium paid on open swap contracts......................... 953,429 Periodic interest on open swap contracts.................... 847,198 Dividends from affiliate.................................... 17,675 Prepaid expenses and other assets.............................. 18,870 ------------ Total Assets................................................ 166,328,667 ------------ Liabilities: Unrealized depreciation on open swap contracts................. 2,103,389 Payable for: Swap contract collateral due to brokers..................... 7,777,000 Investments purchased....................................... 1,324,571 Periodic interest on open swap contracts.................... 288,408 Investment advisory fee..................................... 54,267 Capital stock repurchased................................... 51,042 Variation margin............................................ 34,134 Administration fee.......................................... 10,544 Transfer agent fee.......................................... 2,878 Accrued expenses and other payables............................ 124,172 ------------ Total Liabilities........................................... 11,770,405 ------------ Net Assets.................................................. $154,558,262 ============ Composition of Net Assets: Paid-in-capital................................................ $175,735,142 Net unrealized depreciation.................................... (51,545) Dividends in excess of net investment income................... (1,349,884) Accumulated net realized loss.................................. (19,775,451) ------------ Net Assets.................................................. $154,558,262 ============ Net Asset Value Per Share 9,286,867 shares outstanding (15,000,000 shares authorized of $.01 par value)................................................ $16.64 ======
See Notes to Financial Statements 22 Morgan Stanley Income Securities Inc. FINANCIAL STATEMENTS continued Statement of Operations For the six months ended March 31, 2008 (unaudited) Net Investment Income: Income Interest........................................................ $ 4,350,898 Dividends from affiliate........................................ 141,521 ----------- Total Income................................................. 4,492,419 ----------- Expenses Investment advisory fee......................................... 334,703 Administration fee.............................................. 63,753 Shareholder reports and notices................................. 39,028 Professional fees............................................... 29,944 Transfer agent fees and expenses................................ 26,585 Custodian fees.................................................. 17,873 Listing fees.................................................... 9,990 Directors' fees and expenses.................................... 4,306 Other........................................................... 13,278 ----------- Total Expenses............................................... 539,460 Less: rebate from Morgan Stanley affiliated cash sweep (note 3)............................................................ (3,447) ----------- Net Expenses................................................. 536,013 ----------- Net Investment Income........................................ 3,956,406 ----------- Realized and Unrealized Gain (Loss): Realized Gain (Loss) on: Investments..................................................... 556,969 Futures contracts............................................... (2,315,217) Swap contracts.................................................. 365,735 Foreign exchange transactions................................... 275 ----------- Net Realized Loss............................................ (1,392,238) ----------- Change in Unrealized Appreciation/Depreciation on: Investments..................................................... (4,431,319) Futures contracts............................................... (1,207,631) Swap contracts.................................................. 4,413,240 Translation of other assets and liabilities denominated in foreign currencies............................................ 248 ----------- Net Change in Unrealized Appreciation/Depreciation........... (1,225,462) ----------- Net Loss..................................................... (2,617,700) ----------- Net Increase.................................................... $ 1,338,706 ===========
See Notes to Financial Statements 23 Morgan Stanley Income Securities Inc. FINANCIAL STATEMENTS continued Statements of Changes in Net Assets
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED MARCH 31, 2008 SEPTEMBER 30, 2007 -------------- ------------------ (unaudited) Increase (Decrease) in Net Assets: Operations: Net investment income............................. $ 3,956,406 $ 7,900,901 Net realized loss................................. (1,392,238) (1,904,317) Net change in unrealized appreciation/depreciation....................... (1,225,462) 654,326 ------------ ------------ Net Increase................................... 1,338,706 6,650,910 ------------ ------------ Dividends to shareholders from net investment income.......................................... (4,361,048) (8,933,990) Decrease from capital stock transactions.......... (1,889,044) (5,109,765) ------------ ------------ Net Decrease................................... (6,250,092) (7,392,845) Net Assets: Beginning of period............................... 159,469,648 166,862,493 ------------ ------------ End of Period (Including dividends in excess of net investment income of $1,349,884 and $945,242, respectively).. $154,558,262 $159,469,648 ============ ============
See Notes to Financial Statements 24 Morgan Stanley Income Securities Inc. NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2008 (UNAUDITED) 1. Organization and Accounting Policies Morgan Stanley Income Securities Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended, as a diversified, closed-end management investment company. The Fund's primary investment objective is to provide as high a level of current income for distribution to shareholders as is consistent with prudent investment risk and, as a secondary objective, capital appreciation. The Fund commenced operations on April 6, 1973. The following is a summary of significant accounting policies: A. Valuation of Investments -- (1) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Directors; (2) portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price; (3) futures are valued at the latest price published by the commodities exchange on which they trade; (4) credit default/interest rate swaps are marked-to-market daily based upon quotations from market makers. (5) when market quotations are not readily available including circumstances under which Morgan Stanley Investment Advisors Inc. (the "Investment Adviser") determines that the market quotations 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 Directors; (6) investments in open-end mutual funds, including the Morgan Stanley Institutional Liquidity Funds, are valued at the net asset value as of the close of each business day; and (7) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost. B. Accounting for Investments -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Discounts are accreted and premiums are amortized over the life of the respective securities and are included in interest income. Interest income is accrued daily. 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 and losses. Upon 25 Morgan Stanley Income Securities Inc. NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2008 (UNAUDITED) continued 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. Credit Default Swaps -- A credit default swap is an agreement between two parties to exchange the credit risk of an issuer. The Fund may purchase credit protection on the referenced obligation of the credit default swap ("Buy Contract"), or provide credit protection on the referenced obligation of the credit default swap ("Sale Contract"). A buyer of a credit default swap is said to buy protection by paying periodic fees in return for a contingent payment from the seller if the issuer has a credit event such as bankruptcy or a failure to pay outstanding obligations while the swap is outstanding. A seller of a credit default swap is said to sell protection and thus collects the periodic fees and profits if the credit of the issuer remains stable or improves while the swap is outstanding. If a credit event occurs, the seller pays to the buyer an agreed upon amount, which approximates the notional amount of the swap as disclosed in the table following the Portfolio of Investments. During the term of the swap agreement, the Fund receives or pays periodic fixed payments from or to the respective counterparty calculated at the agreed upon interest rate applied to the notional amount. These periodic payments are accrued daily and recorded as realized gains or losses in the Statement of Operations. In addition, upon termination of the swap contract, gains and losses are also realized. Any upfront payment received or paid by the Fund is recorded as assets/liabilities on the Fund's books. The Fund may pay or receive cash to collateralize credit default swap contracts. This cash collateral is recorded as assets/liabilities on the Fund's books. Any cash received may be invested in Morgan Stanley Institutional Liquidity Funds. E. Interest Rate Swaps -- Interest rate swaps involve the exchange of commitments to pay and receive interest based on a notional principal amount. Net periodic interest payments to be received or paid are accrued daily and are recorded as realized gains or losses in the Statement of Operations. The Fund may pay or receive cash to collateralize interest rate swap contracts. This cash collateral is recorded as assets/liabilities on the Fund's books. Any cash received may be invested in Morgan Stanley Institutional Liquidity Funds. F. Federal Income Tax Policy -- It is the Fund's policy to comply with the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no provision for federal income taxes is required. The Fund files tax returns with the U.S. Internal Revenue Service, State of New York and City of New York. The Fund adopted the provisions of the Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48") Accounting for Uncertainty in Income Taxes on March 30, 2008. FIN 48 sets forth a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return. The implementation of FIN 48 26 Morgan Stanley Income Securities Inc. NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2008 (UNAUDITED) continued did not result in any unrecognized tax benefits in the accompanying financial statements. If applicable, the Fund recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in other expenses in the Statement of Operations. Each of the tax years in the four year period ended March 31, 2008, remains subject to examination by taxing authorities. G. Dividends and Distributions to Shareholders -- Dividends and distributions to shareholders are recorded on the ex-dividend date. H. Use of Estimates -- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. 2. Investment Advisory/Administration Agreements Pursuant to an Investment Advisory Agreement with the Investment Adviser, the Fund pays an advisory fee, accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined at the close of each business week: 0.42% to the portion of average weekly net assets not exceeding $500 million and 0.35% to the portion of average weekly net assets in excess of $500 million. Pursuant to an Administration Agreement with Morgan Stanley Services Company Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund pays an administration fee, accrued daily and payable monthly, by applying the annual rate of 0.08% to the Fund's weekly net assets. Under an agreement between the Administrator and State Street Bank and Trust Company ("State Street"), State Street provides certain administrative services to the Fund. For such services, the Administrator pays State Street a portion of the fee the Administrator receives from the Fund. 3. Security Transactions and Transactions with Affiliates The Fund invests in Morgan Stanley Institutional Liquidity Money Market Portfolio -- Institutional Class, an open-end management investment company managed by the Investment Adviser. Investment advisory fees paid by the Fund are reduced by an amount equal to the advisory and administrative service fees paid by Morgan Stanley Institutional Liquidity Money Market Portfolio -- Institutional Class with respect to assets invested by the Fund in Morgan Stanley Institutional Liquidity Money Market Portfolio -- Institutional Class. For the six months ended March 31, 2008, advisory fees paid were reduced by $3,447 relating to the Fund's investment in Morgan Stanley Institutional Liquidity Money Market Portfolio -- Institutional Class. Income distributions earned by the Fund are recorded as dividends from affiliate in the Statement of Operations and totaled $141,521 for the six months 27 Morgan Stanley Income Securities Inc. NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2008 (UNAUDITED) continued ended March 31, 2008. During the six months ended March 31, 2008, cost of purchases and sales of investments in Morgan Stanley Institutional Liquidity Money Market Portfolio -- Institutional Class aggregated $51,476,206 and $47,586,961, respectively. The cost of purchases and proceeds from sales/prepayments/maturities of portfolio securities, excluding short-term investments, for the six months ended March 31, 2008 aggregated $46,226,289 and $48,378,505, respectively. Included in the aforementioned are purchases and sales of U.S. Government securities of $12,573,246, and $30,243,470, respectively. The Fund has an unfunded noncontributory defined benefit pension plan covering certain independent Directors of the Fund who will have served as independent Directors for at least five years at the time of retirement. Benefits under this plan are based on factors which include years of service and compensation. The Directors voted to close the plan to new participants and eliminate the future benefits growth due to increases to compensation after July 31, 2003. Aggregate pension costs for the six months ended March 31, 2008, included in Directors' fees and expenses in the Statement of Operations amounted to $3,009. At March 31, 2008, the Fund had an accrued pension liability of $61,880, which is included in accrued expenses in the Statement of Assets and Liabilities. The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan") which allows each independent Director to defer payment of all, or a portion, of the fees he or she receives for serving on the Board of Directors. Each eligible Director generally may elect to have the deferred amounts credited with a return equal to the total return on one or more of the Morgan Stanley funds that are offered as investment options under the Compensation Plan. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund. 4. Capital Stock Transactions in capital stock were as follows:
CAPITAL PAID IN PAR VALUE EXCESS OF SHARES OF SHARES PAR VALUE --------- --------- ------------ Balance, September 30, 2006...................... 9,732,713 $97,325 $182,636,626 Treasury shares purchased and retired (weighted average discount 6.93%)++...................... (323,109) (3,231) (5,106,534) --------- ------- ------------ Balance, September 30, 2007...................... 9,409,604 94,094 177,530,092 Treasury shares purchased and retired (weighted average discount 9.26%)++...................... (122,737) (1,227) (1,887,817) --------- ------- ------------ Balance, March 31, 2008.......................... 9,286,867 $92,867 $175,642,275 ========= ======= ============
---------- ++ The Directors have voted to retire the shares purchased. 28 Morgan Stanley Income Securities Inc. NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2008 (UNAUDITED) continued 5. Expense Offset The expense offset represents a reduction of the fees and expenses for interest earned on cash balances maintained by the Fund with the transfer agent. 6. Dividends On April 8, 2008, the Fund declared the following dividends from net investment income:
AMOUNT RECORD PAYABLE PER SHARE DATE DATE --------- -------------- -------------- $0.077725 April 18, 2008 April 25, 2008 $0.077725 May 23, 2008 May 30, 2008 $0.077725 June 20, 2008 June 27, 2008
7. Purposes of and Risks Relating to Certain Financial Instruments To hedge against adverse interest rate and market risks, the Fund may enter into interest rate futures contracts ("future contracts"). These futures contracts involve elements of market risk in excess of the amount reflected in the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the value of underlying securities. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts. The Fund may enter into credit default swaps for hedging purposes, to add leverage to its portfolio or to gain exposure to a credit in which the Fund may otherwise invest. Credit default swaps may involve greater risks than if a Fund had invested in the issuer directly. Credit default swaps are subject to general market risk, counterparty risk and credit risk. If the Fund is a buyer and no credit event occurs, it will lose its investment. In addition, if the Fund is a seller and a credit event occurs, the value of the referenced obligation received by the Fund coupled with the periodic payments previously received may be less than the maximum payout amount it pays to the buyer, resulting in a loss to the Fund. The Fund may enter into interest rate swaps and may purchase or sell interest rate caps, floors and collars. The Fund expects to enter into these transactions primarily to manage interest rate risk, hedge portfolio positions and preserve a return or spread on a particular investment or portion of its portfolio. The Fund may also enter into these transactions to protect against any increase in the price of securities the Fund anticipates purchasing at a later date. Interest rate swap transactions are subject to market risk, risk of default by the other party to the transaction, risk of imperfect correlation and manager risk. Such risks may exceed the related amounts shown in the Statement of Assets and Liabilities. The Fund may invest in mortgage securities. These are fixed income securities that derive their value from or represent interests in a pool of mortgages or mortgage securities. An unexpectedly high rate of defaults on the mortgages held by a mortgage pool may adversely affect the value of a 29 Morgan Stanley Income Securities Inc. NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2008 (UNAUDITED) continued mortgage-backed security and could result in losses to the Fund. The risk of such defaults is generally higher in the case of mortgage pools that include sub-prime mortgages. Sub-prime mortgages refer to loans made to borrowers with weakened credit histories or with a lower capacity to make timely payments on their mortgages. 8. Federal Income Tax Status The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for tax purposes are reported as distributions of paid-in-capital. As of September 30, 2007, the Fund had a net capital loss carryforward of $14,948,457 of which $5,407,105 will expire on September 30, 2010 and $9,541,352 will expire on September 30, 2011 to offset future capital gains to the extent provided by regulations. As of September 30, 2007, the Fund had temporary book/tax differences primarily attributable to post-October losses (capital losses incurred after October 31 within the taxable year which are deemed to arise on the first business day of the Fund's next taxable year), book amortization of premiums on debt securities and mark-to-market of open futures contracts. 9. Accounting Pronouncements On March 19, 2008, Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("FAS 161"). FAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The application of FAS 161 is required for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. At this time, management is evaluating the implications of FAS 161 and its impact on the financial statements has not yet been determined. In September 2006, Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157), was issued and is effective for fiscal years beginning after November 15, 2007. SFAS 157 defines fair value, established a framework for measuring fair value and expands disclosures about fair value measurements. Management is currently evaluating the impact the adoption of SFAS 157 will have on the Fund's financial statement disclosures. 30 Morgan Stanley Income Securities Inc. FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of capital stock outstanding throughout each period:
FOR THE SIX FOR THE YEAR ENDED SEPTEMBER 30, MONTHS ENDED ---------------------------------------------------- MARCH 31, 2008 2007 2006 2005 2004 2003 -------------- -------- -------- -------- -------- -------- (unaudited) Selected Per Share Data: Net asset value, beginning of period......... $16.95 $17.14 $17.35 $17.59 $17.42 $16.13 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income(1).................. 0.42 0.82 0.83 0.87 0.95 0.97 Net realized and unrealized gain (loss)... (0.28) (0.12) (0.16) (0.18) 0.13 1.21 ------ ------ ------ ------ ----- ----- Total income from investment operations...... 0.14 0.70 0.67 0.69 1.08 2.18 ----- ----- ----- ----- ----- ----- Less dividends from net investment income.... (0.47) (0.93) (0.95) (0.98) (0.96) (0.93) ------ ------ ------ ------ ------ ------ Anti-dilutive effect of acquiring treasury shares(1)................................... 0.02 0.04 0.07 0.05 0.05 0.04 ----- ----- ----- ----- ----- ----- Net asset value, end of period............... $16.64 $16.95 $17.14 $17.35 $17.59 $17.42 ====== ====== ====== ====== ====== ====== Market value, end of period.................. $14.81 $15.33 $16.07 $15.84 $16.04 $15.87 ====== ====== ====== ====== ====== ====== Total Return(2).............................. (0.44)%(3) 1.14% 7.88% 4.92% 7.27% 10.61% Ratios to Average Net Assets: Total expenses............................... 0.67 %(4)(5) 0.69%(5)(6)0.68%(6) 0.68% 0.66% 0.67% Net investment income........................ 4.96 %(4)(5) 4.85%(5)(6)4.88%(6) 4.96% 5.43% 5.81% Supplemental Data: Net assets, end of period, in thousands...... $154,558 $159,470 $166,862 $177,341 $185,953 $190,302 Portfolio turnover rate...................... 31 %(3) 46% 59% 58% 40% 56%
---------- (1) The per share amounts were computed using an average number of shares outstanding during the period. (2) Total return is based upon the current market value on the last day of each period reported. Dividends and distributions are assumed to be reinvested at the prices obtained under the Fund's dividend reinvestment plan. Total return does not reflect brokerage commissions. (3) Not Annualized. (4) Annualized. (5) Reflects rebate of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio - Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets had an effect of less than 0.005%. (6) Before expense offset.
See Notes to Financial Statements 31 Morgan Stanley Income Securities Inc. REVISED INVESTMENT POLICY (UNAUDITED) The Directors approved changes/clarifications in the investment policies discussed below. Foreign Securities. The Fund may invest in securities of foreign issuers, including issuers located in emerging market or developing countries. Securities of such foreign issuers may be denominated in U.S. dollars or in currencies other than U.S. dollars. The Fund will limit its investments in non-U.S. dollar- denominated securities to 30% of the Fund's assets. See Notes to Financial Statements 32 Morgan Stanley Income Securities Inc. SHAREHOLDER VOTING RESULTS (UNAUDITED) On December 12, 2007, an annual meeting of the Fund's shareholders was held for the purpose of voting on the following matter, the results of which were as follows: Election of Directors by all Shareholders:
------------------------------------ FOR WITHHELD ABSTAIN Frank L. Bowman................................... 7,116,218 501,694 0 Michael Bozic..................................... 7,103,457 514,455 0 Kathleen A. Dennis................................ 7,114,263 503,649 0 James F. Higgins.................................. 7,113,794 504,118 0 Manuel H. Johnson................................. 7,113,782 504,130 0 Joseph J. Kearns.................................. 7,117,531 500,381 0 Michael F. Klein.................................. 7,113,021 504,891 0 Michael E. Nugent................................. 7,109,466 508,446 0 W. Allen Reed..................................... 7,113,082 504,830 0 Fergus Reid....................................... 7,108,404 509,508 0
See Notes to Financial Statements 33 Morgan Stanley Income Securities Inc. MORGAN STANLEY ADVISOR CLOSED END FUNDS AN IMPORTANT NOTICE CONCERNING OUR U.S. PRIVACY POLICY (UNAUDITED) We are required by federal law to provide you with a copy of our Privacy Policy annually. The following Policy applies to current and former individual investors in Morgan Stanley Advisor closed end funds. This Policy is not applicable to partnerships, corporations, trusts or other non-individual clients or account holders. Please note that we may amend this Policy at any time, and will inform you of any changes to this Policy as required by law. WE RESPECT YOUR PRIVACY We appreciate that you have provided us with your personal financial information. We strive to maintain the privacy of such information while we help you achieve your financial objectives. This Policy describes what non-public personal information we collect about you, why we collect it, and when we may share it with others. We hope this Policy will help you understand how we collect and share non-public personal information that we gather about you. Throughout this Policy, we refer to the non-public information that personally identifies you or your accounts as "personal information." 1. WHAT PERSONAL INFORMATION DO WE COLLECT ABOUT YOU? To serve you better and manage our business, it is important that we collect and maintain accurate information about you. We may obtain this information from applications and other forms you submit to us, from your dealings with us, from consumer reporting agencies, from our Web sites and from third parties and other sources. FOR EXAMPLE: - We may collect information such as your name, address, e-mail address, telephone/fax numbers, assets, income and investment objectives through applications and other forms you submit to us. - We may obtain information about account balances, your use of account(s) and the types of products and services you prefer to receive from us through your dealings and transactions with us and other sources. - We may obtain information about your creditworthiness and credit history from consumer reporting agencies. - We may collect background information from and through third-party vendors to verify representations you have made and to comply with various regulatory requirements. - If you interact with us through our public and private Web sites, we may collect information that you provide directly through online communications (such as an e-mail address). We may also collect information about your Internet service provider, your domain name, your computer's operating system and Web browser, your use of our Web sites and your product and service preferences, through the use of "cookies." See Notes to Financial Statements 34 Morgan Stanley Income Securities Inc. MORGAN STANLEY ADVISOR CLOSED END FUNDS AN IMPORTANT NOTICE CONCERNING OUR U.S. PRIVACY POLICY (UNAUDITED) continued "Cookies" recognize your computer each time you return to one of our sites, and help to improve our sites' content and personalize your experience on our sites by, for example, suggesting offerings that may interest you. Please consult the Terms of Use of these sites for more details on our use of cookies. 2. WHEN DO WE DISCLOSE PERSONAL INFORMATION WE COLLECT ABOUT YOU? To provide you with the products and services you request, to serve you better and to manage our business, we may disclose personal information we collect about you to our affiliated companies and to non-affiliated third parties as required or permitted by law. A. INFORMATION WE DISCLOSE TO OUR AFFILIATED COMPANIES. We do not disclose personal information that we collect about you to our affiliated companies except to enable them to provide services on our behalf or as otherwise required or permitted by law. B. INFORMATION WE DISCLOSE TO THIRD PARTIES. We do not disclose personal information that we collect about you to non-affiliated third parties except to enable them to provide services on our behalf, to perform joint marketing agreements with other financial institutions, or as otherwise required or permitted by law. For example, some instances where we may disclose information about you to non-affiliated third parties include: for servicing and processing transactions, to offer our own products and services, to protect against fraud, for institutional risk control, to respond to judicial process or to perform services on our behalf. When we share personal information with these companies, they are required to limit their use of personal information to the particular purpose for which it was shared and they are not allowed to share personal information with others except to fulfill that limited purpose. 3. HOW DO WE PROTECT THE SECURITY AND CONFIDENTIALITY OF PERSONAL INFORMATION WE COLLECT ABOUT YOU? We maintain physical, electronic and procedural security measures to help safeguard the personal information we collect about you. We have internal policies governing the proper handling of client information. Third parties that provide support or marketing services on our behalf may also receive personal information, and we require them to adhere to confidentiality standards with respect to such information. See Notes to Financial Statements 35 DIRECTORS Frank L. Bowman Michael Bozic Kathleen A. Dennis James F. Higgins Dr. Manuel H. Johnson Joseph J. Kearns Michael F. Klein Michael E. Nugent W. Allen Reed Fergus Reid OFFICERS Michael E. Nugent Chairperson of the Board Ronald E. Robison President and Principal Executive Officer Dennis F. Shea Vice President Amy R. Doberman Vice President Carsten Otto Chief Compliance Officer Stefanie V. Chang Yu Vice President Francis J. Smith Treasurer and Chief Financial Officer Mary E. Mullin Secretary TRANSFER AGENT Computershare Trust Company, N.A. P.O. Box 43078 Providence, RI 02940-3078 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP Two World Financial Center New York, New York 10281 LEGAL COUNSEL Clifford Chance US LLP 31 West 52nd Street New York, New York 10019 COUNSEL TO THE INDEPENDENT DIRECTORS Kramer Levin Naftalis & Frankel LLP 1177 Avenue of the Americas New York, New York 10036 INVESTMENT ADVISER Morgan Stanley Investment Advisors Inc. 522 Fifth Avenue New York, New York 10036 The financial statements included herein have been taken from the records of the Fund without examination by the independent auditors and accordingly they do not express an opinion thereon. (c) 2008 Morgan Stanley [MORGAN STANLEY LOGO] MORGAN STANLEY FUNDS Morgan Stanley Income Securities Inc. Semiannual Report March 31, 2008 ICBSAN IU08-02911P-Y03/08 Item 2. Code of Ethics. Not applicable for semiannual reports. Item 3. Audit Committee Financial Expert. Not applicable for semiannual reports. Item 4. Principal Accountant Fees and Services Not applicable for semiannual reports. Item 5. Audit Committee of Listed Registrants. Not applicable for semiannual reports. Item 6. Refer to Item 1. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable for semiannual reports. Item 8. Portfolio Managers of Closed-End Management Investment Companies Applicable only to reports covering periods ending on or after December 31, 2005. Item 9. Closed-End Fund Repurchases REGISTRANT PURCHASE OF EQUITY SECURITIES
(d) Maximum (c) Total Number (or Number of Approximate Shares (or Dollar Value) Units) of Shares (or (a) Total Purchased as Units) that Number of Part of Publicly May Yet Be Shares (or (b) Average Announced Purchased Units) Price Paid per Plans or Under the Plans Period Purchased Share (or Unit) Programs or Programs ------ ---------- --------------- ---------------- --------------- October 1, 2007- October 31, 2007 26,800 15.464 N/A N/A November 1, 2007- November 30, 2007 17,400 15.2721 N/A N/A December 1, 2007- December 31, 2007 25,580 15.2442 N/A N/A January 1, 2008- January 31, 2008 19,654 15.863 N/A N/A February 1, 2008- February 29, 2008 18,902 15.4241 N/A N/A March 1, 2008 - March 31, 2008 14,401 14.9076 N/A N/A ------- ------- --- --- Total 122,737 15.3625 N/A N/A ======= ======= === ===
Item 10. Submission of Matters to a Vote of Security Holders Not applicable. Item 11. Controls and Procedures (a) The Trust's/Fund's principal executive officer and principal financial officer have concluded that the Trust's/Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Trust/Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. 2 (b) There were no changes in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits (a) Code of Ethics - Not applicable for semiannual reports. (b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT. 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Morgan Stanley Income Securities Inc. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer May 20, 2008 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer May 20, 2008 /s/ Francis Smith Francis Smith Principal Financial Officer May 20, 2008 4