N-30D 1 file001.txt ANNUAL REPORT Morgan Stanley Insured Municipal Bond Trust LETTER TO THE SHAREHOLDERS o OCTOBER 31, 2001 Dear Shareholder: During the fiscal year ended October 31, 2001, the U.S. economy slowed and the fixed-income markets rallied. The terrorist attacks on September 11 aggravated the decline in business and consumer activity. Almost immediately after the attacks many companies announced major layoffs. The unemployment rate jumped from 4.9 percent to 5.4 percent and October reported the largest job loss in 20 years. The Federal Reserve Board responded to the attacks by lowering short-term interest rates by 50 basis points in both September and October. Subsequently, the Fed cut rates another 50 basis points in November. The November action, the tenth in 2001, reduced the federal funds rate to 2.00 percent, the lowest level since 1961. Additionally, both the House and Senate have been formulating plans to stimulate the economy. These monetary and fiscal actions appear to be laying the groundwork for an economic recovery. Within the fixed-income markets, events of the past fiscal year had the greatest impact on U.S. Treasuries which appreciated throughout the year and rallied further in a flight to quality following September 11. Yields of short maturities declined the most, steepening the yield curve. On October 31, the U.S. Treasury stunned the securities markets by announcing the cessation of the 30-year bond auction. Municipal Market Conditions Over the past 12 months, tax-free interest rates have also moved lower. The 30-year insured municipal bond index, which was 5.65 percent last October, declined to 5.04 percent by the end of October 2001. The ratio of municipal yields as a percentage of U.S. Treasury yields is routinely used as a guide to track the relationship between the two markets. A declining yield ratio indicates stronger relative performance by municipals. The ratio of 30-year insured municipal bond yields to U.S. Treasuries fell from 98 percent last October to 94 percent at the end of August. However, following September 11 and the Treasury's auction announcement, the ratio jumped to 104 percent. Long-term insured municipal yields above Treasuries is an anomaly that has occurred only during periods of significant market uncertainty. In the 10-year maturity range, the ratio also soared, from 83 percent to 95 percent between August and October. The change in the slope of the yield curve has been a major story in the fixed-income markets this year. Since the Fed started lowering short-term rates aggressively in January, the municipal yield curve between one- and 30-year maturities steepened, from 125 to 300 basis points. Lower interest rates also led to a rebound in new-issue volume. During the first 10 months of 2001, underwriting surged 36 percent, to $224 billion. Refunding issues, the most interest-rate-sensitive category, represented almost one-quarter of the total. The states with the greatest issuance: California, Florida, New York and Texas represented 35 percent of national volume. Morgan Stanley Insured Municipal Bond Trust LETTER TO THE SHAREHOLDERS o OCTOBER 31, 2001 continued 30-YEAR BOND YIELDS 1997-2001 Date AAA Ins Tsy % Relationship 12/31/96 5.60 6.63 84.46% 1/31/97 5.70 6.79 83.95% 2/28/97 5.65 6.80 83.09% 3/31/97 5.90 7.10 83.10% 4/30/97 5.75 6.94 82.85% 5/30/97 5.65 6.91 81.77% 6/30/97 5.60 6.78 82.60% 7/30/97 5.30 6.30 84.13% 8/31/97 5.50 6.61 83.21% 9/30/97 5.40 6.40 84.38% 10/31/97 5.35 6.15 86.99% 11/30/97 5.30 6.05 87.60% 12/31/97 5.15 5.92 86.99% 1/31/98 5.15 5.80 88.79% 2/28/98 5.20 5.92 87.84% 3/31/98 5.25 5.93 88.53% 4/30/98 5.35 5.95 89.92% 5/29/98 5.20 5.80 89.66% 6/30/98 5.20 5.65 92.04% 7/31/98 5.18 5.71 90.72% 8/31/98 5.03 5.27 95.45% 9/30/98 4.95 5.00 99.00% 10/31/98 5.05 5.16 97.87% 11/30/98 5.00 5.06 98.81% 12/31/98 5.05 5.10 99.02% 1/31/99 5.00 5.09 98.23% 2/28/99 5.10 5.58 91.40% 3/31/99 5.15 5.63 91.47% 4/30/99 5.20 5.66 91.87% 5/31/99 5.30 5.83 90.91% 6/30/99 5.47 5.96 91.78% 7/31/99 5.55 6.10 90.98% 8/31/99 5.75 6.06 94.88% 9/30/99 5.85 6.05 96.69% 10/31/99 6.03 6.16 97.89% 11/30/99 6.00 6.29 95.39% 12/31/99 5.97 6.48 92.13% 1/31/00 6.18 6.49 95.22% 2/29/00 6.04 6.14 98.37% 3/31/00 5.82 5.83 99.83% 4/30/00 5.91 5.96 99.16% 5/31/00 5.91 6.01 98.34% 6/30/00 5.84 5.90 98.98% 7/31/00 5.73 5.78 99.13% 8/31/00 5.62 5.67 99.12% 9/30/00 5.74 5.89 97.45% 10/31/00 5.65 5.79 97.58% 11/30/00 5.55 5.61 98.93% 12/31/00 5.27 5.46 96.52% 1/31/01 5.30 5.50 96.36% 2/28/01 5.27 5.31 99.25% 3/31/01 5.26 5.44 96.69% 4/30/01 5.45 5.79 94.13% 5/31/01 5.40 5.75 93.91% 6/30/01 5.35 5.76 92.88% 7/31/01 5.16 5.52 93.48% 8/31/01 5.07 5.37 94.41% 9/30/01 5.20 5.42 95.94% 10/31/01 5.04 4.87 103.49% 11/30/01 5.17 5.29 97.73% Source: Municipal Market Data - A Division of Thomson Financial Municipal Group and Bloomberg L.P. Performance During the 12-month period ended October 31, 2001, the net asset value (NAV) of Morgan Stanley Insured Municipal Bond Trust (IMB) increased from $14.56 to $15.70 per share. Based on this change, plus a reinvestment of tax-free dividends totaling $0.78 per share, the Trust's total NAV return was 14.08 percent. IMB's value on the New York Stock Exchange (NYSE) increased from $13.125 to $14.29 per share during this period. Based on this change plus reinvestment of tax-free dividends, IMB's total market return was 15.19 percent. As of October 31, 2001, IMB's share price was at an 8.98 percent discount to its NAV. Monthly dividends for November and December 2001 were declared in October. Beginning with the November payment, the monthly dividend was increased from $0.065 to $0.0675 per share. On October 31, 2001, the Trust's level of undistributed net investment income was $0.128 per share, versus 2 Morgan Stanley Insured Municipal Bond Trust LETTER TO THE SHAREHOLDERS o OCTOBER 31, 2001 continued $0.086 per share at the beginning of the calendar year. The new dividend level more closely reflects the Trust's current earnings, which have benefited from the lower short-term borrowing costs of Auction Rate Preferred Shares (ARPS). Portfolio Structure The Trust's net assets of $105 million were diversified among 11 long-term sectors and 48 credits. At the end of October, the portfolio's average maturity was 21 years. Average duration, a measure of sensitivity to interest-rate changes, was 7.8 years. The accompanying charts and table provide current information on the portfolio's credit enhancements, maturity distribution and sector concentration. Optional call provisions by year and their respective cost (book) yields are also shown. The Impact of Leveraging As discussed in previous shareholder reports, the total income available for distribution to common shareholders includes incremental income provided by the Trust's outstanding Auction Rate Preferred Shares. ARPS dividends reflect prevailing short-term interest rates on maturities normally ranging from one week to one year. Incremental income to common shareholders depends on two factors. The first factor is the amount of ARPS outstanding, while the second is the spread between the portfolio's cost yield and ARPS expenses (ARPS auction rate and expenses). The greater the spread and amount of ARPS outstanding, the greater the amount of incremental income available for distribution to common shareholders. The level of net investment income available for distribution to common shareholders varies with the level of short-term interest rates. ARPS leverage also increases the price volatility of common shares and has the effect of extending portfolio duration. During the 12-month period, ARPS leverage contributed approximately $0.08 per share to common share earnings. In July 2001, IMB's ARPS series was auctioned for a 12-month period at 2.80 percent compared to 4.67 percent over the previous 12-month period. The series totaled $30 million and represented 29 percent of net assets. Looking Ahead Economists calculated the negative impact of the September 11 attacks to be a full percentage point of gross domestic product. Consensus estimates for the second half of 2001 have accordingly been revised from modestly positive to negative. A decline in economic output for two successive quarters would meet the customary definition of a recession, which would be the first in a record 10 years. While there is no doubt that the terrorist attacks are having a negative impact on the economy, high-grade fixed-income securities have historically fared well during periods of stress. The Trust'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 Trust's shares. In 3 Morgan Stanley Insured Municipal Bond Trust LETTER TO THE SHAREHOLDERS o OCTOBER 31, 2001 continued addition, we would like to remind you that the Trustees have approved a procedure whereby the Trust 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. The Trust may also utilize procedures to reduce or eliminate the amount of outstanding ARPS, including their purchase in the open market or in privately negotiated transactions. During the 12-month period ended October 31, 2001, the Trust purchased and retired 133,900 shares of common stock at a weighted average market discount of 9.67 percent. We appreciate your ongoing support of Morgan Stanley Insured Municipal Bond Trust and look forward to continuing to serve your investment needs. Very truly yours, /s/ Charles A. Fiumefreddo /s/ Mitchell M. Merin Charles A. Fiumefreddo Mitchell M. Merin Chairman of the Board President 4 Morgan Stanley Insured Municipal Bond Trust LETTER TO THE SHAREHOLDERS o OCTOBER 31, 2001 continued [GRAPHIC OMITTED] LARGEST SECTORS AS OF OCTOBER 31, 2001 (% OF NET ASSETS) CATAGORY -------- WATER & SEWER .......................... 23% TRANSPORTATION ......................... 20% ELECTRIC ............................... 9% EDUCATION .............................. 7% PUBLIC FACILITIES ...................... 7% REFUNDED ............................... 7% GENERAL OBLIGATION ..................... 6% HOSPITAL ............................... 5% PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE. [GRAPHIC OMITTED] CREDIT ENHANCEMENTS AS OF OCTOBER 31, 2001 (% OF TOTAL LONG-TERM PORTFOLIO) AMBAC .................................. 24% FGIC ................................... 23% FSA .................................... 16% U.S. GOV'T BACKED ...................... 3% MBIA ................................... 34% PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE. [GRAPHIC OMITTED] DISTRIBUTION BY MATURITY (% OF LONG-TERM PORTFOLIO) WEIGHTED AVERAGE MATURITY: 21 YEARS YEARS ----- 1-5 YEARS .............................. 0.0% 5-10 YEARS ............................. 6.4% 10-20 YEARS ............................42.0% 20-30 YEARS ............................39.2% 30+ YEARS ..............................12.4% PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE. 5 Morgan Stanley Insured Municipal Bond Trust LETTER TO THE SHAREHOLDERS o OCTOBER 31, 2001 continued [GRAPHIC OMITTED] CALL AND COST (BOOK) YIELD STRUCTURE (BASED ON LONG-TERM PORTFOLIO) OCTOBER 31, 2001 BONDS CALLABLE WEIGHTED AVERAGE CALL PROTECTION: 7 YEARS CALL DATES ----- 2001 ................................... 13% 2002 ................................... 2% 2003 ................................... 0% 2004 ................................... 0% 2005 ................................... 4% 2006 ................................... 11% 2007 ................................... 2% 2008 ................................... 1% 2009 ................................... 18% 2010 ................................... 30% 2011+ .................................. 19% YEARS BOND CALLABLE COST (BOOK) YIELD* WEIGHTED AVERAGE BOOK YIELD: 5.9% YIELD DATES ----- 2001 ...................................7.0% 2002 ...................................7.0% 2003 ................................... % 2004 ................................... % 2005 ...................................6.2% 2006 ...................................6.2% 2007 ...................................5.6% 2008 ...................................5.3% 2009 ...................................5.7% 2010 ...................................5.7% 2011+ ..................................5.5% * COST OR "BOOK" YIELD IS THE ANNUAL INCOME EARNED ON A PORTFOLIO INVESTMENT BASED ON ITS ORIGINAL PURCHASE PRICE BEFORE TRUST OPERATING EXPENSES. FOR EXAMPLE, THE TRUST IS EARNING A BOOK YIELD OF 7.0% ON 13% OF THE LONG-TERM PORTFOLIO THAT IS CALLABLE IN 2001. PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE. 6 Morgan Stanley Insured Municipal Bond Trust RESULTS OF ANNUAL MEETING On October 23, 2001, an annual meeting of the Trust's shareholders was held for the purpose of voting on two separate matters, the results of which were as follows: (1) Election of Trustees by all shareholders: Michael Bozic For ................................................... 3,856,041 Withheld .............................................. 54,362 James F. Higgins For ................................................... 3,847,418 Withheld .............................................. 62,985 (2) Election of Trustee by preferred shareholders: Charles A. Fiumefreddo For ................................................... 599 Against ............................................... 1 The following Trustees were not standing for reelection at this meeting: Edwin J. Garn, Wayne E. Hedien, Dr. Manuel H. Johnson, Michael E. Nugent, Philip J. Purcell and John L. Schroeder. 7 Morgan Stanley Insured Municipal Bond Trust PORTFOLIO OF INVESTMENTS o OCTOBER 31, 2001
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE -------------------------------------------------------------------------------------------------------------------------------- Tax-Exempt Municipal Bonds (94.8%) General Obligation (6.1%) $ 2,000 North Slope Borough, Alaska, Ser 2000 B (MBIA) ........................... 0.00 % 06/30/11 $ 1,316,880 2,000 Hawaii Ser 2001 CV (FGIC) ................................................ 5.375 08/01/18 2,086,960 Illinois, 1,400 Ser 2000 (MBIA) ........................................................ 5.75 12/01/17 1,528,156 1,300 Ser 2000 (MBIA) ........................................................ 5.75 12/01/18 1,409,928 --------- ------------ 6,700 6,341,924 --------- ------------ Educational Facilities Revenue (6.9%) 3,000 Massachusetts Health & Educational Facilities Authority, Boston University, Ser K & L (MBIA) .................................... 10.765++ 10/01/31 3,097,500 2,000 New Hampshire Health & Education Facilities Authority, University of New Hampshire Ser 2001 (Ambac) ........................... 5.125 07/01/33 2,010,640 2,000 New York State Dormitory Authority, St John's University Ser 1996 (MBIA).. 5.70 07/01/26 2,100,120 --------- ------------ 7,000 7,208,260 --------- ------------ Electric Revenue (9.0%) 1,400 Alaska Industrial Development & Export Authority, Snettisham Hydroelectric 1st Ser (AMT) (Ambac) .................................... 5.00 01/01/27 1,358,938 2,680 Wyandotte County, Kansas, Kansas City Utility Ser 1998 (MBIA) ............ 4.50 09/01/28 2,480,072 4,000 Long Island Power Authority, New York, Ser 2000 A (FSA) .................. 0.00 06/01/20 1,549,200 3,000 Piedmont Municipal Power Agency, South Carolina, 1991 Refg Ser (FGIC) .... 6.50 01/01/11 3,070,110 1,000 South Carolina Public Service Authority, 1997 Refg Ser A (MBIA) .......... 5.00 01/01/29 986,760 --------- ------------ 12,080 9,445,080 --------- ------------ Hospital Revenue (5.1%) 2,000 Mesa Industrial Development Authority, Arizona, Discovery Health Ser 1999 A (MBIA) ...................................................... 5.875 01/01/16 2,201,420 2,000 University of Missouri, Health Ser 1996 A (Ambac) ........................ 5.50 11/01/16 2,109,140 1,000 University of North Carolina, Hospitals at Chapel Hill Ser 1999 (Ambac)... 5.00 02/15/24 1,002,140 --------- ------------ 5,000 5,312,700 --------- ------------
See Notes to Financial Statements 8 Morgan Stanley Insured Municipal Bond Trust PORTFOLIO OF INVESTMENTS o OCTOBER 31, 2001 continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ----------------------------------------------------------------------------------------------------------------------------- Industrial Development/Pollution Control Revenue (4.4%) $ 2,500 Jasper County, Indiana, Northern Indiana Public Service Co Collateralized Ser 1991 (MBIA) ..................................... 7.10 % 07/01/17 $ 2,559,250 1,000 Rockport, Indiana, Indiana & Michigan Power Co Ser B (Secondary FGIC). 7.60 03/01/16 1,023,980 1,000 Burlington, Kansas, Kansas Gas & Electric Co Ser 1991 (MBIA) ......... 7.00 06/01/31 1,023,730 --------- ------------ 4,500 4,606,960 --------- ------------ Mortgage Revenue - Multi-Family (4.0%) 1,000 New Jersey Housing Mortgage Finance Agency, Home Buyer Ser 2000 CC (AMT) (MBIA) ........................................... 5.875 10/01/31 1,037,510 2,955 New York State Housing Finance Agency, 1996 Ser A Refg (FSA) ......... 6.10 11/01/15 3,163,032 --------- ------------ 3,955 4,200,542 --------- ------------ Public Facilities Revenue (6.8%) 3,000 Denver, Colorado, Civic Center Office Building Ser 2000 B COPs (Ambac) ............................................................ 5.50 12/01/21 3,156,390 2,000 Broward County School Board, Florida, Ser 2001 A COPs (FSA) .......... 5.00 07/01/26 1,999,860 2,000 Miami-Dade County School Board, Florida, Ser 2001 A COPs (MBIA) ...... 5.00 05/01/31 2,000,000 --------- ------------ 7,000 7,156,250 --------- ------------ Recreational Facilities Revenue (3.3%) 1,250 College Park Business & Industrial Development Authority, Georgia, Civic Center Ser 2000 (Ambac) ...................................... 5.75 09/01/26 1,362,387 2,000 Hamilton County, Ohio, Sales Tax Ser 2000 (Ambac) .................... 5.25 12/01/32 2,034,600 --------- ------------ 3,250 3,396,987 --------- ------------ Transportation Facilities Revenue (19.8%) 2,000 Chicago, Illinois, O'Hare Int'l Airport Passenger Ser A (AMT) (Ambac) 5.375 01/01/32 2,028,480 3,000 Illinois Toll Highway Authority, Priority Refg 1998 Ser A (FSA) ...... 5.50 01/01/15 3,311,130 2,000 Wayne County, Michigan, Detroit Metropolitan Wayne County Airport Sub Lien Ser 1991 B (AMT) (MBIA) ................................... 6.75 12/01/21 2,046,000 3,000 Nevada Department of Business & Industry, Las Vegas Monorail, 1st Tier Ser 2000 (Ambac) .......................................... 5.375 01/01/40 3,058,320 2,500 New Hampshire, Turnpike 1991 Refg Ser B & C (FGIC) ................... 11.229++ 11/01/17 3,243,750 2,000 New Jersey Transportation Trust Authority, 1998 Ser A (FSA) .......... 4.50 06/15/19 1,913,040 1,000 New York State Thruway Authority, Highway & Bridge Ser 1999 B (FGIC).. 5.00 04/01/19 1,008,930
See Notes to Financial Statements 9 Morgan Stanley Insured Municipal Bond Trust PORTFOLIO OF INVESTMENTS o OCTOBER 31, 2001 continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ----------------------------------------------------------------------------------------------------------------------------- $ 2,000 Port Authority of New York & New Jersey, Cons 121 Ser (MBIA) # ............ 5.125% 10/15/30 $ 2,010,980 2,000 Southeastern Pennsylvania Transportation Authority, Ser A 1999 (FGIC) ..... 5.25 03/01/18 2,069,980 --------- ------------ 19,500 20,690,610 --------- ------------ Water & Sewer Revenue (22.8%) 2,250 Broward County, Florida, Utility Ser 1991 (FGIC) .......................... 6.00 10/01/20 2,277,855 2,000 Miami Beach, Florida, Water & Sewer Ser 2000 (Ambac) ...................... 5.75 09/01/25 2,166,540 2,000 Augusta, Georgia, Water & Sewerage Ser 2000 (FSA) ......................... 5.25 10/01/22 2,060,720 2,000 Henry County Water & Sewer Authority, Georgia, Ser 2000 (FGIC) ............ 5.625 02/01/30 2,123,280 1,000 Honolulu City & County, Hawaii, Wastewater Jr Ser 1998 (FGIC) ............. 5.25 07/01/17 1,032,960 500 Detroit, Michigan, Water Supply Ser 2001 A (FGIC) ......................... 5.75 07/01/28 540,565 2,000 St Louis, Missouri, Water Refg Ser 1998 (Ambac) ........................... 4.75 07/01/14 2,050,700 1,000 Rio Rancho, New Mexico, Water & Wastewater Refg Ser 1999 (Ambac) .......... 5.25 05/15/17 1,033,910 1,500 New York City Municipal Water Finance Authority, New York, 1999 Ser B (FSA) 5.00 06/15/29 1,484,400 2,000 Allegheny County Sanitary Authority, Pennsylvania, Sewer Ser 2000 (MBIA) .. 5.50 12/01/24 2,102,920 3,000 Charleston, South Carolina, Waterworks & Sewer Refg & Cap Impr Ser 1998 (Secondary FGIC) ............................................... 4.50 01/01/24 2,766,210 4,000 Norfolk, Virginia, Water Ser 1995 (MBIA) .................................. 5.875 11/01/20 4,254,120 --------- ------------ 23,250 23,894,180 --------- ------------ Refunded (6.6%) 1,750 Detroit, Michigan, Water Supply Ser 1999 A (FGIC) ......................... 5.75 01/01/10+ 2,000,443 1,425 Port of Portland, Oregon, Portland Int'l Airport Ser Seven B (AMT) (MBIA).. 7.10 07/01/12+ 1,763,452 3,000 Puerto Rico Infrastructure Financing Authority, 2000 Ser A (ETM) .......... 5.50 10/01/32 3,184,710 --------- ------------ 6,175 6,948,605 --------- ------------ 98,410 Total Tax-Exempt Municipal Bonds (Cost $91,735,338) .............................................. 99,202,098 --------- ------------
See Notes to Financial Statements 10 Morgan Stanley Insured Municipal Bond Trust PORTFOLIO OF INVESTMENTS o OCTOBER 31, 2001 continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------------------------------------------ Short-Term Tax-Exempt Municipal Obligations (3.5%) $ 1,800 Massachusetts Health & Educational Facilities Authority, Capital Assets Ser D (MBIA) (Demand 11/01/01) ............................ 1.95*% 01/01/35 $ 1,800,000 1,800 Bell County Health Facilities, Texas, Scott and White Memorial Hospital Ser 2000 B (MBIA) (Demand 11/01/01) ..................... 2.00* 08/15/29 1,800,000 --------- ------------ 3,600 Total Short-Term Tax-Exempt Municipal Obligations (Cost $3,600,000) ......... 3,600,000 --------- ------------ $ 102,010 Total Investments (Cost $95,335,338) (a) .................................... 98.3% 102,802,098 ========= Other Assets in Excess of Liabilities ....................................... 1.7 1,796,710 ------- ------------ Net Assets .................................................................. 100.0% $104,598,808 ======= ============
------------ AMT Alternative Minimum Tax. COPs Certificates of Participation. ETM Escrowed to maturity. + Prerefunded to call date shown. ++ Current coupon rate for residual interest bond. This rate resets periodically as the auction rate on the related short-term security changes. # Joint exemption in New York and New Jersey. * Current coupon of variable rate demand obligation. (a) The aggregate cost for federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross and net unrealized appreciation is $7,466,760. Bond Insurance: --------------- Ambac Ambac Assurance Corporation. FGIC Financial Guaranty Insurance Company. FSA Financial Security Assurance Inc. MBIA Municipal Bond Investors Assurance Corporation. Geographic Summary of Investments Based on Market Value as a Percent of Net Assets
Alaska .......... 2.6% Indiana ............ 3.4% New Jersey ........... 4.7% Puerto Rico ............... 3.0% Arizona ......... 2.1 Kansas ............. 3.4 New Mexico ........... 1.0 South Carolina ............ 6.5 Colorado ........ 3.0 Massachusetts ...... 4.7 New York ............. 10.8 Texas ..................... 1.7 Florida ......... 8.1 Michigan ........... 4.4 North Carolina ....... 1.0 Virginia .................. 4.1 Georgia ......... 5.3 Missouri ........... 4.0 Ohio ................. 1.9 Joint Exemption* .......... (1.9) Hawaii .......... 3.0 Nevada ............. 2.9 Oregon ............... 1.7 ---- Illinois ........ 7.9 New Hampshire ...... 5.0 Pennsylvania ......... 4.0 Total ..................... 98.3% ====
------------ * Joint exemption has been included in each geographic location. See Notes to Financial Statements 11 Morgan Stanley Insured Municipal Bond Trust FINANCIAL STATEMENTS Statement of Assets and Liabilities October 31, 2001 Assets: Investments in securities, at value (cost $95,335,338).............................. $102,802,098 Cash ............................................. 377,379 Interest receivable .............................. 1,594,386 Prepaid expenses ................................. 84,058 ------------ Total Assets ................................. 104,857,921 ------------ Liabilities: Payable for: Dividends to preferred shareholders .......... 70,002 Common shares of beneficial interest repurchased ................................ 56,896 Investment management fee .................... 33,038 Accrued expenses ................................. 99,177 ------------ Total Liabilities ............................ 259,113 ------------ Net Assets ................................... $104,598,808 ============ Composition of Net Assets: Preferred shares of beneficial interest (1,000,000 shares authorized of non-participating $.01 par value, 600 shares outstanding) ........................ $ 30,000,000 ------------ Common shares of beneficial interest (unlimited shares authorized of $.01 par value, 4,750,020 shares outstanding) .................. 65,867,932 Net unrealized appreciation ...................... 7,466,760 Accumulated undistributed net investment income .. 609,754 Accumulated undistributed net realized gain ...... 654,362 ------------ Net Assets Applicable to Common Shareholders.. 74,598,808 ------------ Total Net Assets ............................. $104,598,808 ============ Net Asset Value Per Common Share ($74,598,808 divided by 4,750,020 common shares outstanding) ....................... $15.70 ====== Statement of Operations For the year ended October 31, 2001 Net Investment Income: Interest Income .................................. $ 5,802,928 ------------ Expenses Investment management fee ........................ 362,378 Auction commission fees .......................... 112,503 Professional fees ................................ 69,455 Transfer agent fees and expenses ................. 29,690 Custodian fees ................................... 24,621 Trustees' fees and expenses ...................... 22,442 Registration fees ................................ 21,510 Shareholder reports and notices .................. 18,150 Auction agent fees ............................... 8,041 Other ............................................ 17,164 ------------ Total Expenses ............................... 685,954 Less: expense offset ............................. (24,618) ------------ Net Expenses ................................. 661,336 ------------ Net Investment Income ........................ 5,141,592 ------------ Net Realized and Unrealized Gain: Net realized gain ................................ 723,663 Net change in unrealized appreciation ............ 4,460,296 ------------ Net Gain ..................................... 5,183,959 ------------ Net Increase ..................................... $ 10,325,551 ============ See Notes to Financial Statements 12 Morgan Stanley Insured Municipal Bond Trust FINANCIAL STATEMENTS continued Statement of Changes in Net Assets
FOR THE YEAR FOR THE YEAR ENDED ENDED OCTOBER 31, 2001 OCTOBER 31, 2000 ---------------- ---------------- Increase (Decrease) in Net Assets: Operations: Net investment income ........................................................ $ 5,141,592 $ 5,418,124 Net realized gain ............................................................ 723,663 300,894 Net change in unrealized appreciation ........................................ 4,460,296 1,787,069 ------------ ------------ Net Increase ............................................................... 10,325,551 7,506,087 ------------ ------------ Dividends to Shareholders from Net Investment Income: Preferred .................................................................... (1,214,910) (1,237,704) Common ....................................................................... (3,757,104) (4,270,550) ------------ ------------ Total Dividends ............................................................ (4,972,014) (5,508,254) ------------ ------------ Decrease from transactions in common shares of beneficial interest ........... (1,843,603) (2,694,475) ------------ ------------ Net Increase (Decrease) .................................................... 3,509,934 (696,642) Net Assets: Beginning of period .......................................................... 101,088,874 101,785,516 ------------ ------------ End of Period (Including accumulated undistributed net investment income of $609,754 and $440,176, respectively)....................................................... $104,598,808 $101,088,874 ============ ============
See Notes to Financial Statements 13 Morgan Stanley Insured Municipal Bond Trust NOTES TO FINANCIAL STATEMENTS o OCTOBER 31, 2001 1. Organization and Accounting Policies Morgan Stanley Insured Municipal Bond Trust (the "Trust"), formerly Morgan Stanley Dean Witter Insured Municipal Bond Trust (the Trust's name changed effective December 20, 2001), is registered under the Investment Company Act of 1940, as amended, as a diversified, closed-end management investment company. The Trust's investment objective is to provide current income which is exempt from federal income tax. The Trust was organized as a Massachusetts business trust on February 27, 1990 and commenced operations on February 28, 1991. 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 - Portfolio securities are valued by an outside independent pricing service approved by the Trustees. The pricing service has informed the Trust that in valuing the portfolio securities, it uses both a computerized matrix of tax-exempt securities and evaluations by its staff, in each case based on information concerning market transactions and quotations from dealers which reflect the bid side of the market each day. The portfolio securities are thus valued by reference to a combination of transactions and quotations for the same or other securities believed to be comparable in quality, coupon, maturity, type of issue, call provisions, trading characteristics and other features deemed to be relevant. 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. The Trust amortizes premiums and accretes discounts over the life of the respective securities. Interest income is accrued daily. C. Federal Income Tax Status - It is the Trust's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable and nontaxable income to its shareholders. Accordingly, no federal income tax provision is required. D. Dividends and Distributions to Shareholders - The Trust records dividends and distributions to its shareholders on the ex-dividend date. The amount of dividends and distributions from net investment 14 Morgan Stanley Insured Municipal Bond Trust NOTES TO FINANCIAL STATEMENTS o OCTOBER 31, 2001 continued 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. 2. Investment Management Agreement Pursuant to an Investment Management Agreement with Morgan Stanley Investment Advisors Inc. (the "Investment Manager"), formerly Morgan Stanley Dean Witter Advisors Inc., the Trust pays the Investment Manager a management fee, calculated weekly and payable monthly, by applying the annual rate of 0.35% to the Trust's weekly net assets. 3. Security Transactions and Transactions with Affiliates The cost of purchases and proceeds from sales of portfolio securities, excluding short-term investments, for the year ended October 31, 2001 aggregated $15,371,049 and $18,539,737, respectively. Morgan Stanley Trust, an affiliate of the Investment Manager, is the Trust's transfer agent. At October 31, 2001, the Trust had transfer agent fees and expenses payable of approximately $1,000. The Trust has an unfunded noncontributory defined benefit pension plan covering all independent Trustees of the Trust 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 October 31, 2001 included in Trustees' fees and expenses in the Statement of Operations amounted to $10,431. At October 31, 2001, the Trust had an accrued pension liability of $50,474 which is included in accrued expenses in the Statement of Assets and Liabilities. 4. Preferred Shares of Beneficial Interest The Trust is authorized to issue up to 1,000,000 non-participating preferred shares of beneficial interest having a par value of $.01 per share, in one or more series, with rights as determined by the Trustees, without approval of the common shareholders. The Trust has issued Auction Rate Preferred Shares ("Preferred Shares") which have a liquidation value of $50,000 per share plus the redemption premium, if any, plus accumulated but unpaid dividends, whether or not declared, thereon to the date of distribution. The Trust may redeem such shares, in whole or in part, at the original purchase price of $50,000 per share plus accumulated but unpaid dividends, whether or not declared, thereon to the date of redemption. 15 Morgan Stanley Insured Municipal Bond Trust NOTES TO FINANCIAL STATEMENTS o OCTOBER 31, 2001 continued Dividends, which are cumulative, are reset through auction procedures. AMOUNT IN RESET RANGE OF SHARES* THOUSANDS* RATE* DATE DIVIDEND RATES** --------- ------------ ------------ ----------- ------------------ 600 $30,000 2.80% 07/05/02 2.80% - 4.67% ------------ * As of October 31, 2001. ** For the year ended October 31, 2001. Subsequent to October 31, 2001 and up through December 5, 2001, the Trust paid dividends at a rate of 2.80% in the aggregate amount of $140,004. The Trust is subject to certain restrictions relating to the preferred shares. Failure to comply with these restrictions could preclude the Trust from declaring any distributions to common shareholders or purchasing common shares and/or could trigger the mandatory redemption of preferred shares at liquidation value. The preferred shares, which are entitled to one vote per share, generally vote with the common shares but vote separately as a class to elect two Trustees and on any matters affecting the rights of the preferred shares. 5. Common Shares of Beneficial Interest Transactions in common shares of beneficial interest were as follows:
CAPITAL PAID IN PAR EXCESS OF SHARES VALUE PAR VALUE --------- -------- ------------ Balance, October 31, 1999 .................................................. 5,095,563 $ 50,956 $ 70,355,054 Treasury shares purchased and retired (weighted average discount 9.57%)* ... (211,643) (2,116) (2,692,359) --------- -------- ------------ Balance, October 31, 2000 .................................................. 4,883,920 48,840 67,662,695 Treasury shares purchased and retired (weighted average discount 9.67%)* ... (133,900) (1,339) (1,842,264) --------- -------- ------------ Balance, October 31, 2001 .................................................. 4,750,020 $ 47,501 $ 65,820,431 ========= ======== ============
------------ * The Trustees have voted to retire the shares purchased. 6. Federal Income Tax Status During the year ended October 31, 2001, the Trust utilized its net capital loss carryover of approximately $69,000. 16 Morgan Stanley Insured Municipal Bond Trust NOTES TO FINANCIAL STATEMENTS o OCTOBER 31, 2001 continued 7. Dividends to Common Shareholders On October 30, 2001, the Trust declared the following dividends from net investment income: AMOUNT RECORD PAYABLE PER SHARE DATE DATE --------- ---------------- ----------------- $0.0675 November 9, 2001 November 23, 2001 $0.0675 December 7, 2001 December 21, 2001 8. Expense Offset The expense offset represents a reduction of the custodian fees for earnings on cash balances maintained by the Trust. 9. Risks Relating to Certain Financial Instruments The Trust may invest a portion of its assets in residual interest bonds, which are inverse floating rate municipal obligations. The prices of these securities are subject to greater market fluctuations during periods of changing prevailing interest rates than are comparable fixed rate obligations. At October 31, 2001, the Trust held positions in residual interest bonds having a total value of $6,341,250, which represents 6.1% of the Trust's net assets. 10. Change in Accounting Policy Effective November 1, 2001, the Trust will adopt 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 will have no impact on the net assets of the Trust, but will result in an adjustment to the cost of securities and a corresponding adjustment to undistributed net investment income based on securities held as of October 31, 2001. 17 Morgan Stanley Insured Municipal Bond Trust FINANCIAL HIGHLIGHTS Selected ratios and per share data for a common share of beneficial interest outstanding throughout each period:
FOR THE YEAR ENDED OCTOBER 31* ------------------------------------------------------------------ 2001 2000 1999 1998 1997 ------ ------- ------ ------- ------ Selected Per Share Data: Net asset value, beginning of period ............... $14.56 $ 14.09 $15.64 $ 15.53 $15.35 ------ ------- ------ ------- ------ Income (loss) from investment operations: Net investment income ............................ 1.07 1.09 1.11 1.20 1.20 Net realized and unrealized gain (loss) .......... 1.06 0.43 (1.53) 0.11 0.16 ------ ------- ------ ------- ------ Total income (loss) from investment operations ..... 2.13 1.52 (0.42) 1.31 1.36 ------ ------- ------ ------- ------ Less dividends from: Net investment income ............................ (0.78) (0.86) (0.92) (0.99) (0.96) Common share equivalent of dividends paid to preferred shareholders ......................... (0.25) (0.25) (0.22) (0.21) (0.22) ------ ------- ------ ------- ------ Total dividends .................................... (1.03) (1.11) (1.14) (1.20) (1.18) ------ ------- ------ ------- ------ Anti-dilutive effect of acquiring treasury shares .. 0.04 0.06 0.01 - - ------ ------- ------ ------- ------ Net asset value, end of period ..................... $15.70 $ 14.56 $14.09 $ 15.64 $15.53 ====== ======= ====== ======= ====== Market value, end of period ........................ $14.29 $13.125 $12.50 $16.125 $16.00 ====== ======= ====== ======= ====== Total Return+ ...................................... 15.19% 12.12% (17.60)% 7.03% 20.62% Ratios to Average Net Assets of Common Shareholders: Expenses (before expense offset) ................... 0.93%(3) 0.95%(2) 0.91 %(1) 0.87%(1) 0.89%(1) Net investment income before preferred stock dividends ........................................ 7.00% 7.67% 7.36 % 7.65% 7.80% Preferred stock dividends .......................... 1.65% 1.75% 1.44 % 1.37% 1.43% Net investment income available to common shareholders ..................................... 5.35% 5.92% 5.92 % 6.28% 6.37% Supplemental Data: Net assets, end of period, in thousands ............ $104,599 $101,089 $101,786 $110,341 $109,806 Asset coverage on preferred shares at end of period ........................................... 348% 336% 338 % 367% 365% Portfolio turnover rate ............................ 16% 26% 29 % 6% 2%
------------ * The per share amounts were computed using an average number of shares outstanding during the period. + Total return is based upon the current market value on the last day of each period reported. Dividends are assumed to be reinvested at the prices obtained under the Trust's dividend reinvestment plan. Total return does not reflect brokerage commissions. (1) Does not reflect the effect of expense offset of 0.01%. (2) Does not reflect the effect of expense offset of 0.02%. (3) Does not reflect the effect of expense offset of 0.03%. See Notes to Financial Statements 18 Morgan Stanley Insured Municipal Bond Trust INDEPENDENT AUDITORS' REPORT To the Board of Trustees and Shareholders of Morgan Stanley Insured Municipal Bond Trust: We have audited the accompanying statement of assets and liabilities of Morgan Stanley Insured Municipal Bond Trust (the "Trust"), formerly Morgan Stanley Dean Witter Insured Municipal Bond Trust, including the portfolio of investments, as of October 31, 2001, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Trust'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 October 31, 2001, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Morgan Stanley Insured Municipal Bond Trust as of October 31, 2001, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP New York, New York December 20, 2001 2001 Federal Tax Notice (unaudited) For the year ended October 31, 2001, all of the Trust's dividends from net investment income received by both common and preferred shareholder classes were exempt interest dividends, excludable from gross income for Federal income tax purposes. 19 TRUSTEES Michael Bozic Charles A. Fiumefreddo Edwin J. Garn Wayne E. Hedien James F. Higgins Dr. Manuel H. Johnson Michael E. Nugent Philip J. Purcell John L. Schroeder OFFICERS Charles A. Fiumefreddo Chairman and Chief Executive Officer Mitchell M. Merin President Barry Fink Vice President, Secretary and General Counsel James F. Willison Vice President Thomas F. Caloia Treasurer TRANSFER AGENT Morgan Stanley Trust Harborside Financial Center - Plaza Two Jersey City, New Jersey 07311 INDEPENDENT AUDITORS Deloitte & Touche LLP Two World Financial Center New York, New York 10281 INVESTMENT MANAGER Morgan Stanley Investment Advisors Inc. 1221 Avenue of the Americas New York, New York 10020 MORGAN STANLEY [GRAPHIC OMITTED] MORGAN STANLEY INSURED MUNICIPAL BOND TRUST Annual Report October 31, 2001 ------------------------------