N-CSRS 1 y31683nvcsrs.txt FORM N-CSR 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: 811-02575 Morgan Stanley Liquid Asset Fund Inc. (Exact name of registrant as specified in charter) 1221 Avenue of the Americas, New York, New York 10020 (Address of principal executive offices) (Zip code) Ronald E. Robison 1221 Avenue of the Americas, New York, New York 10020 (Name and address of agent for service) Registrant's telephone number, including area code: 212-762-4000 Date of fiscal year end: August 31, 2007 Date of reporting period: February 28, 2007 Item 1 - Report to Shareholders Welcome, Shareholder: In this report, you'll learn about how your investment in Morgan Stanley Liquid Asset Fund 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. THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING OFFERED. MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE IS NO ASSURANCE THAT A MUTUAL FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF AN INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE INFORMATION ON INVESTMENT RISKS. FUND REPORT For the six months ended February 28, 2007 MARKET CONDITIONS During the six-month period under review, the U.S. economy showed signs of weakening. For November, the Institute for Supply Management (ISM) Manufacturing Index fell below 50 for the first time since April 2003, a level traditionally seen as an indicator of a contracting manufacturing sector. After rising briefly in December, ISM fell back below 50 for January 2007. Gross domestic product (GDP) growth was 2.2 percent in the fourth quarter of 2006, up only slightly from 2.0 percent in the previous quarter and below the 2.6 percent and 5.6 percent growth rates for the second and first quarters of 2006, respectively. Given signs of moderating economic growth, a cooling housing market and the lagged effect of monetary policy action already taken, the Federal Open Market Committee ("the Fed") left its federal funds target rate unchanged for the six-month period under review. The Fed continues to state that "some inflation risks remain" in the economy. PERFORMANCE ANALYSIS As of February 28, 2007, Morgan Stanley Liquid Asset Fund had net assets of approximately $12 billion and an average portfolio maturity of 55 days. For the six-month period ended February 28, 2007, the Fund provided a total return of 2.35 percent. For the seven-day period ended February 28, 2007, the Fund provided an effective annualized yield of 4.92 percent and a current yield of 4.80 percent, while its 30-day moving average yield for February was 4.76 percent. Past performance is no guarantee of future results. Our strategy in managing the Fund remained consistent with its long-term focus on maintaining preservation of capital and liquidity. Over the past six months, as the economic landscape has become more uncertain, we have further diversified the maturity structure of the fund by decreasing the amount of investments that mature near upcoming Fed meeting dates. As a result of purchasing these longer-dated securities, we prudently extended the weighted average maturity of the fund. 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. 2
PORTFOLIO COMPOSITION Commercial Paper 72.9% Floating Rate Notes 14.5 Certificates of Deposit 11.3 Repurchase Agreement 1.3
MATURITY SCHEDULE 1 -- 30 Days 39.6% 31 -- 60 Days 20.2 61 -- 90 Days 21.2 91 -- 120 Days 12.0 121 + Days 7.0
Data as of February 28, 2007. Subject to change daily. All percentages for portfolio composition and maturity schedule are as a percentage of total investments. These data are provided for informational purposes only and should not be deemed a recommendation to buy or sell the securities mentioned. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services. INVESTMENT STRATEGY THE FUND INVESTS IN HIGH QUALITY, SHORT-TERM DEBT OBLIGATIONS. IN SELECTING INVESTMENTS, THE FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT ADVISORS INC., SEEKS TO MAINTAIN THE FUND'S SHARE PRICE AT $1.00. THE SHARE PRICE REMAINING STABLE AT $1.00 MEANS THAT THE FUND WOULD PRESERVE THE PRINCIPAL VALUE OF YOUR INVESTMENT. AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND AND FOURTH FISCAL QUARTERS. THE SEMIANNUAL REPORTS AND THE ANNUAL REPORTS ARE FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) ON FORM N-CSRS AND FORM N-CSR, RESPECTIVELY. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, WWW.MORGANSTANLEY.COM. EACH MORGAN STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, OBTAIN THE FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING THE SEC'S WEB SITE, HTTP://WWW.SEC.GOV. YOU MAY ALSO 3 REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800) SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (PUBLICINFO@SEC.GOV) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102. HOUSEHOLDING NOTICE TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS. YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M., ET. ONCE OUR CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS. 4 EXPENSE EXAMPLE As a shareholder of the Fund, you incur ongoing costs, including advisory fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 09/01/06 - 02/28/07. ACTUAL EXPENSES The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table below provides information about hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds that have transactional costs, such as sales charges (loads), and redemption fees, or exchange fees.
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * ------------- ------------- --------------- 09/01/06 - 09/01/06 02/28/07 02/28/07 ------------- ------------- --------------- Actual (2.35% return)....................................... $1,000.00 $1,023.50 $3.61 Hypothetical (5% annual return before expenses)............. $1,000.00 $1,021.22 $3.61
------------------ * Expenses are equal to the Fund's annualized expense ratio of 0.72% multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period). 5 Morgan Stanley Liquid Asset Fund Inc. PORTFOLIO OF INVESTMENTS - FEBRUARY 28, 2007 (UNAUDITED)
ANNUALIZED PRINCIPAL YIELD AMOUNT IN ON DATE OF MATURITY THOUSANDS PURCHASE DATE VALUE --------------------------------------------------------------------------------------------------------- Commercial Paper (73.6%) Asset-Backed - Auto (3.2%) $327,251 DaimlerChrysler Revolving Auto Conduit LLC Series I.......................... 5.30 - 5.32% 03/12/07 - 05/25/07 $ 325,209,939 58,550 DaimlerChrysler Revolving Auto Conduit LLC Series II......................... 5.30 - 5.31 03/12/07 - 04/26/07 58,193,031 --------------- 383,402,970 --------------- Asset-Backed - Consumer (12.1%) 50,000 Barton Capital LLC*..................... 5.32 - 5.33 06/13/07 - 07/13/07 49,115,770 110,458 Bryant Park Funding LLC*................ 5.31 - 5.32 03/29/07 - 05/21/07 109,756,717 553,500 Gemini Securitization Corp., LLC*....... 5.31 - 5.32 03/12/07 - 05/25/07 549,753,036 98,149 Mont Blanc Capital Corp.*............... 5.31 - 5.35 03/21/07 - 05/16/07 97,519,536 75,000 Park Avenue Receivables Co., LLC*....... 5.30 03/13/07 74,868,500 358,301 Regency Markets No. 1 LLC*.............. 5.31 - 5.34 03/20/07 - 05/18/07 355,200,987 20,000 Sheffield Receivables Corp.*............ 5.32 04/24/07 19,842,500 145,462 Thames Asset Global Securitization*..... 5.30 - 5.32 03/07/07 - 03/23/07 145,087,965 45,000 Three Rivers Funding Corp.*............. 5.29 03/05/07 - 03/07/07 44,969,258 --------------- 1,446,114,269 --------------- Asset-Backed - Corporate (14.3%) 407,413 Atlantis One Funding*................... 5.31 - 5.35 03/21/07 - 06/12/07 405,285,014 125,000 CAFCO LLC*.............................. 5.31 05/04/07 - 05/24/07 123,690,667 50,000 CIESCO LLC*............................. 5.31 04/04/07 49,752,556 194,000 Eureka Securitization, Inc.*............ 5.30 - 5.32 04/25/07 - 05/31/07 191,824,900 610,000 Kaiserplatz Funding (Delaware) LLC*..... 5.31 - 5.34 03/01/07 - 05/15/07 607,907,987 42,340 Nieuw Amsterdam Receivables Corp.*...... 5.32 - 5.34 03/15/07 - 03/20/07 42,244,544 288,212 Simba Funding Corp.*.................... 5.31 - 5.34 03/12/07 - 05/16/07 286,872,513 --------------- 1,707,578,181 --------------- Asset-Backed - Diversified (0.2%) 26,984 Yorktown Capital LLC*................... 5.33 03/07/07 26,960,277 --------------- Asset-Backed - Mortgages (2.8%) 335,535 Sydney Capital Corp.*................... 5.30 - 5.36 03/22/07 - 05/17/07 332,444,468 --------------- Asset-Backed - Securities (10.8%) 160,000 Amstel Funding Corp.*................... 5.31 - 5.33 03/29/07 - 05/25/07 159,127,014 75,683 Cancara Asset Securitization LLC*....... 5.32 - 5.33 03/28/07 - 05/23/07 74,971,484 295,000 Curzon Funding LLC*..................... 5.31 - 5.34 03/19/07 - 05/01/07 293,972,677 45,000 Galaxy Funding Inc.*.................... 5.31 04/24/07 - 04/25/07 44,641,821 74,000 Galleon Capital LLC*.................... 5.32 03/01/07 74,000,000 280,000 Grampian Funding LLC*................... 5.32 - 5.35 05/15/07 - 08/03/07 274,823,346
See Notes to Financial Statements 6 Morgan Stanley Liquid Asset Fund Inc. PORTFOLIO OF INVESTMENTS - FEBRUARY 28, 2007 (UNAUDITED) continued
ANNUALIZED PRINCIPAL YIELD AMOUNT IN ON DATE OF MATURITY THOUSANDS PURCHASE DATE VALUE --------------------------------------------------------------------------------------------------------- $ 26,313 Scaldis Capital LLC*.................... 5.31 - 5.32% 05/16/07 - 06/05/07 $ 25,975,301 348,920 Solitaire Funding LLC*.................. 5.31 - 5.32 03/30/07 - 06/01/07 346,125,070 --------------- 1,293,636,713 --------------- Asset-Backed - Structured Investment Vehicles (1.5%) 40,000 Atlas Capital Funding Corp.*............ 5.34 08/07/07 39,079,567 20,000 Beta Finance*........................... 5.34 03/14/07 19,961,903 120,000 Cullinan Finance Corp.*................. 5.31 05/21/07 - 05/22/07 118,573,651 --------------- 177,615,121 --------------- Banking (6.2%) 345,000 Bank of America Corp. .................. 5.31 - 5.32 04/20/07 - 06/11/07 340,896,290 400,000 Citigroup Funding Inc. ................. 5.31 - 5.34 03/09/07 - 06/12/07 395,847,564 --------------- 736,743,854 --------------- Finance - Automotive (0.3%) 40,000 Toyota Motor Credit Corp. .............. 5.44 03/13/07 39,929,733 --------------- Finance - Consumer (0.5%) 65,000 HSBC Finance Corp. ..................... 5.31 03/16/07 - 03/19/07 64,843,400 --------------- Financial Conglomerates (0.8%) 97,000 General Electric Capital Corp. ......... 5.30 - 5.36 03/12/07 - 06/18/07 95,552,977 --------------- Insurance (4.9%) 586,100 Irish Life & Permanent plc*............. 5.31 - 5.35 03/14/07 - 08/03/07 581,954,115 --------------- International Banks (16.0%) 65,000 Abbey National North America LLC........ 5.29 03/02/07 64,990,575 30,000 Australia and New Zealand Banking Group, Ltd.*................................. 5.32 06/18/07 29,526,758 30,000 Calyon North America, Inc. ............. 5.31 03/14/07 29,943,450 399,726 DEPFA Bank plc*......................... 5.31 - 5.32 04/16/07 - 06/21/07 394,719,749 25,000 Dexia Delaware LLC ..................... 5.34 08/09/07 24,418,611 226,900 HBOS Treasury Services plc.............. 5.31 - 5.33 04/24/07 - 07/06/07 224,405,718 289,750 IXIS Commercial Paper Corp.*............ 5.31 - 5.32 04/04/07 - 05/24/07 286,665,824 200,000 Nordea North America, Inc. ............. 5.29 03/22/07 - 03/23/07 199,378,292 118,000 Rabobank USA Financial Corp. ........... 5.30 03/01/07 118,000,000 150,000 Sanpaolo IMI U.S. Financial Co. ........ 5.33 03/01/07 150,000,000 246,315 Societe Generale N.A., Inc. ............ 5.32 - 5.33 03/29/07 - 06/20/07 243,550,929 150,000 Svenska Handelsbanken Inc. ............. 5.32 03/08/07 149,847,458 --------------- 1,915,447,364 --------------- Total Commercial Paper (Cost $8,802,223,442)............................... 8,802,223,442 ---------------
See Notes to Financial Statements 7 Morgan Stanley Liquid Asset Fund Inc. PORTFOLIO OF INVESTMENTS - FEBRUARY 28, 2007 (UNAUDITED) continued
ANNUALIZED PRINCIPAL YIELD AMOUNT IN ON DATE OF MATURITY THOUSANDS PURCHASE DATE VALUE -------------------------------------------------------------------------------------------------------------- Floating Rate Notes (14.6%) Asset-Backed - Structured Investment Vehicles (7.8%) $345,000 Cullinan Finance Corp.*................. 5.32+% 03/01/07++ $ 344,969,202 585,000 Links Finance LLC*...................... 5.32 - 5.33+ 03/28/07 - 05/15/07++ 584,951,058 --------------- 929,920,260 --------------- Banking (1.2%) 62,400 Wachovia Corp. ......................... 5.43+ 05/08/07++ 62,446,336 82,035 Wells Fargo & Co. ...................... 5.42+ 03/28/07++ 82,079,806 --------------- 144,526,142 --------------- Domestic Banks (2.2%) 100,000 American Express Centurion Bank......... 5.32+ 03/19/07++ 100,013,891 136,445 U.S. Bank, N.A., Cincinnati............. 5.38 - 5.39+ 03/12/07 - 04/02/07++ 136,500,852 30,000 Wachovia Bank, N.A...................... 5.36+ 03/01/07++ 30,006,558 --------------- 266,521,301 --------------- Financial Conglomerates (0.7%) 81,680 General Electric Capital Corp. ......... 5.41+ 04/15/07++ 81,742,583 --------------- International Banks (1.4%) 75,000 Credit Suisse - NY...................... 5.33+ 05/29/07++ 75,000,000 33,085 HSBC Bank USA N.A....................... 5.44+ 03/21/07++ 33,105,875 55,000 Westpac Banking Corp. .................. 5.32+ 04/30/07++ 54,997,017 --------------- 163,102,892 --------------- Investment Banks/Brokers (1.3%) 75,000 Bear Stearns & Companies Inc., (The).... 5.38+ 03/01/07++ 75,000,000 90,000 Goldman Sachs Group, Inc. (The) ........ 5.47 - 5.49+ 03/01/07 - 04/05/07++ 90,079,339 --------------- 165,079,339 --------------- Total Floating Rate Notes (Cost $1,750,892,517)............................ 1,750,892,517 --------------- Certificates of Deposit (11.4%) Domestic Banks (0.9%) 100,000 Washington Mutual Bank, F.A............. 5.34 03/21/07 100,000,000 --------------- International Banks (10.5%) 50,000 Bank of Ireland - NY.................... 5.35 08/09/07 49,998,219 200,000 Barclays Bank plc....................... 5.32 04/10/07 - 07/09/07 200,000,000 100,000 BNP Paribas............................. 5.34 07/23/07 100,000,000 175,000 DEPFA Bank plc.......................... 5.32 - 5.35 05/31/07 - 08/16/07 175,000,000 50,000 Deutsche Bank AG........................ 5.35 08/07/07 50,000,000 32,950 Fortis Bank - NY........................ 5.32 06/21/07 32,949,604
See Notes to Financial Statements 8 Morgan Stanley Liquid Asset Fund Inc. PORTFOLIO OF INVESTMENTS - FEBRUARY 28, 2007 (UNAUDITED) continued
ANNUALIZED PRINCIPAL YIELD AMOUNT IN ON DATE OF MATURITY THOUSANDS PURCHASE DATE VALUE --------------------------------------------------------------------------------------------------------- $ 50,000 NATIXIS................................. 5.32% 08/17/07 $ 50,003,734 572,000 Norinchukin Bank........................ 5.28 - 5.35 03/06/07 - 07/10/07 571,999,167 30,252 Westpac Banking Corp. .................. 5.31 07/31/07 30,246,833 --------------- 1,260,197,557 --------------- Total Certificates of Deposit (Cost $1,360,197,557)........................ 1,360,197,557 --------------- Repurchase Agreement (1.3%) 155,000 Barclays Capital Inc. (dated 02/28/07; proceeds $155,022,949) (a) (Cost $155,000,000)......................... 5.33 03/01/07 155,000,000 ---------------
Total Investments (Cost $12,068,313,516) (b).................... 100.9% 12,068,313,516 Liabilities in Excess of Other Assets........................... (0.9) (103,244,281) ----- --------------- Net Assets...................................................... 100.0% $11,965,069,235 ===== ===============
--------------------- * Resale is restricted to qualified institutional investors. + Rate shown is the rate in effect at February 28, 2007. ++ Date of next interest rate reset. (a) Collateralized by Federal National Mortgage Assoc. 5.00% - 6.00% due 07/01/33 - 10/01/36 valued at $155,728,723 and Freddie Mac 6.00% due 07/01/36 valued at $2,371,278. (b) Cost is the same for federal income tax purposes.
See Notes to Financial Statements 9 Morgan Stanley Liquid Asset Fund Inc. FINANCIAL STATEMENTS Statement of Assets and Liabilities February 28, 2007 (unaudited) Assets: Investments in securities, at value (cost $12,068,313,516).................................... $12,068,313,516 Receivable for: Interest................................................ 22,797,114 Capital stock sold...................................... 1,112,441 Prepaid expenses and other assets........................... 168,354 --------------- Total Assets............................................ 12,092,391,425 --------------- Liabilities: Payable for: Capital stock redeemed.................................. 120,480,121 Investment advisory fee................................. 2,108,650 Transfer agent fee...................................... 1,027,376 Distribution fee........................................ 941,654 Administration fee...................................... 470,827 Payable to bank............................................. 1,306,323 Accrued expenses and other payables......................... 987,239 --------------- Total Liabilities....................................... 127,322,190 --------------- Net Assets.............................................. $11,965,069,235 =============== Composition of Net Assets: Paid-in-capital............................................. $11,964,382,532 Accumulated undistributed net investment income............. 686,703 --------------- Net Assets.............................................. $11,965,069,235 =============== Net Asset Value Per Share 11,965,049,294 shares outstanding (50,000,000,000 shares authorized of $.01 par value)............................... $1.00 ===============
See Notes to Financial Statements 10 Morgan Stanley Liquid Asset Fund Inc. FINANCIAL STATEMENTS continued Statement of Operations For the six months ended February 28, 2007 (unaudited) Net Investment Income: Interest Income............................................. $381,751,944 ------------ Expenses Transfer agent fees and expenses............................ 16,552,939 Investment advisory fee..................................... 15,586,991 Distribution fee............................................ 7,055,320 Shareholder reports and notices............................. 6,833,141 Administration fee.......................................... 3,533,079 Custodian fees.............................................. 198,934 Directors' fees and expenses................................ 113,265 Registration fees........................................... 100,836 Professional fees........................................... 51,778 Other....................................................... 519,140 ------------ Total Expenses.......................................... 50,545,423 Less: expense offset........................................ (65,117) ------------ Net Expenses............................................ 50,480,306 ------------ Net Investment Income....................................... $331,271,638 ============
See Notes to Financial Statements 11 Morgan Stanley Liquid Asset Fund Inc. FINANCIAL STATEMENTS continued Statements of Changes in Net Assets
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED FEBRUARY 28, 2007 AUGUST 31, 2006 ----------------- --------------- (unaudited) Increase (Decrease) in Net Assets: Operations: Net investment income....................................... $ 331,271,638 $ 689,940,978 Dividends to shareholders from net investment income........ (331,264,956) (689,943,341) Net decrease from capital stock transactions................ (4,920,855,983) (1,185,752,868) --------------- --------------- Net Decrease............................................ (4,920,849,301) (1,185,755,231) Net Assets: Beginning of period......................................... 16,885,918,536 18,071,673,767 --------------- --------------- End of Period (Including accumulated undistributed net investment income of $686,703 and $680,021, respectively)..................... $11,965,069,235 $16,885,918,536 =============== ===============
See Notes to Financial Statements 12 Morgan Stanley Liquid Asset Fund Inc. NOTES TO FINANCIAL STATEMENTS - FEBRUARY 28, 2007 (UNAUDITED) 1. Organization and Accounting Policies Morgan Stanley Liquid Asset Fund Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-end management investment company. The Fund's investment objectives are high current income, preservation of capital and liquidity. The Fund was incorporated in Maryland on September 3, 1974 and commenced operations on September 22, 1975. The following is a summary of significant accounting policies: A. Valuation of Investments -- Portfolio securities are valued at amortized cost, which approximates market value, in accordance with Rule 2a-7 under the Act. B. Accounting for Investments -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Discounts are accreted and premiums are amortized over the life of the respective securities. Interest income is accrued daily. C. Repurchase Agreements -- The Fund may invest directly with institutions in repurchase agreements. The Fund's custodian receives the collateral, which is marked-to-market daily to determine that the value of the collateral does not decrease below the repurchase price plus accrued interest. D. Federal Income Tax Policy -- It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Accordingly, no federal income tax provision is required. E. Dividends and Distributions to Shareholders -- The Fund records dividends and distributions to shareholders as of the close of each business day. F. Use of Estimates -- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. 2. Investment Advisory/Administration Agreements Pursuant to an Investment Advisory Agreement with Morgan Stanley Investment Advisors Inc. (the "Investment Adviser"), the Fund pays the Investment Adviser an advisory fee, accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined as of the close of each business day: 0.45% to the portion of the daily net assets not exceeding $250 million; 0.375% to the portion of the daily net assets exceeding $250 million but not 13 Morgan Stanley Liquid Asset Fund Inc. NOTES TO FINANCIAL STATEMENTS - FEBRUARY 28, 2007 (UNAUDITED) continued exceeding $750 million; 0.325% to the portion of the daily net assets exceeding $750 million but not exceeding $1.25 billion; 0.30% to the portion of the daily net assets exceeding $1.25 billion but not exceeding $1.5 billion; 0.275% to the portion of the daily net assets exceeding $1.5 billion but not exceeding $1.75 billion; 0.25% to the portion of the daily net assets exceeding $1.75 billion but not exceeding $2.25 billion; 0.225% to the portion of the daily net assets exceeding $2.25 billion but not exceeding $2.75 billion; 0.20% to the portion of the daily net assets exceeding $2.75 billion but not exceeding $15 billion; 0.199% to the portion of the daily net assets exceeding $15 billion but not exceeding $17.5 billion; 0.198% to the portion of the daily net assets exceeding $17.5 billion but not exceeding $25 billion; 0.197% to the portion of the daily net assets exceeding $25 billion but not exceeding $30 billion; and 0.196% to the portion of the daily net assets in excess of $30 billion. Pursuant to an Administration Agreement with Morgan Stanley Services Company Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund pays an administration fee, accrued daily and payable monthly, by applying the annual rate of 0.05% to the Fund's daily net assets. 3. Plan of Distribution Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Adviser and Administrator, is the distributor of the Fund's shares and in accordance with a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act, finances certain expenses in connection with the promotion of sales of Fund shares. Reimbursements for these expenses are made in monthly payments by the Fund to the Distributor, which will in no event exceed an amount equal to a payment at the annual rate of 0.15% of the Fund's average daily net assets during the month. Expenses incurred by the Distributor pursuant to the Plan in any fiscal year will not be reimbursed by the Fund through payments accrued in any subsequent fiscal year. For the six months ended February 28, 2007, the distribution fee was accrued at the annual rate of 0.10%. 4. Security Transactions and Transactions with Affiliates The cost of purchases and proceeds from sales/maturities of portfolio securities for the six months ended February 28, 2007, aggregated $38,046,713,802 and $43,404,960,164, respectively. Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and Distributor, is the Fund's transfer agent. The Fund has an unfunded noncontributory defined benefit pension plan covering certain independent Directors of the Fund who will have served as independent Directors for at least five years at the 14 Morgan Stanley Liquid Asset Fund Inc. NOTES TO FINANCIAL STATEMENTS - FEBRUARY 28, 2007 (UNAUDITED) continued 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 February 28, 2007, included in Directors' fees and expenses in the Statement of Operations amounted to $1,227. At February 28, 2007, the Fund had an accrued pension liability of $62,401 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. 5. Capital Stock Transactions in capital stock, at $1.00 per share, were as follows:
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED FEBRUARY 28, 2007 AUGUST 31, 2006 ----------------- --------------- (unaudited) Shares sold................................................. 12,403,145,898 50,899,093,960 Shares issued in reinvestment of dividends.................. 330,687,776 688,878,298 --------------- --------------- 12,733,833,674 51,587,972,258 Shares redeemed............................................. (17,654,694,069) (52,773,725,126) --------------- --------------- Net decrease................................................ (4,920,860,395) (1,185,752,868) =============== ===============
6. 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. 7. Accounting Pronouncements In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation 48, Accounting for Uncertainty in Income Taxes -- an interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position must meet before being recognized in the financial statements. FIN 48 is effective for fiscal years 15 Morgan Stanley Liquid Asset Fund Inc. NOTES TO FINANCIAL STATEMENTS - FEBRUARY 28, 2007 (UNAUDITED) continued beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. The impact to the Fund's financial statements, if any is currently being assessed. In addition, 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, establishes 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. 16 Morgan Stanley Liquid Asset Fund 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 AUGUST 31, MONTHS ENDED ---------------------------------------------------- FEBRUARY 28, 2007 2006 2005 2004 2003 2002 ----------------- -------- -------- -------- -------- -------- (unaudited) Selected Per Share Data: Net asset value, beginning of period......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ------ ------ ------ ------ ------ ------ Net income from investment operations........ 0.023 0.040 0.020 0.006 0.009 0.018 Less dividends from net investment income.... (0.023) (0.040) (0.020)+ (0.006)+ (0.009) (0.018)+ ------ ------ ------ ------ ------ ------ Net asset value, end of period............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ====== ====== ====== ====== ====== ====== Total Return................................. 2.35%(2) 4.10% 2.03% 0.58% 0.86% 1.78% Ratios to Average Net Assets: Total expenses (before expense offset)....... 0.72%(1)(3) 0.60% 0.59% 0.58% 0.56% 0.56% Net investment income........................ 4.69%(3) 3.99% 1.98% 0.57% 0.85% 1.76% Supplemental Data: Net assets, end of period, in millions....... $11,965 $16,886 $18,072 $20,475 $23,081 $23,931
--------------------- + Includes capital gain distribution of less than $0.001. (1) Does not reflect the effect of expense offset of 0.01%. (2) Not annualized. (3) Annualized.
See Notes to Financial Statements 17 Morgan Stanley Liquid Asset Fund Inc. RESULTS OF SPECIAL SHAREHOLDER MEETING (UNAUDITED) On August 1, 2006, a Special Meeting of Shareholders of the Fund was scheduled in order to vote on the proposals set forth below. The proposals failed to achieve the quorum necessary in order to hold the meeting, and therefore, the meeting was adjourned several times, most recently to November 30, 2006 to permit further solicitation of proxies. The meeting was held on November 30, 2006 and the voting results with respect to these proposals were as follows: (1) Election of Directors:
FOR WITHHELD ABSTAIN BNV* ----------------------------------------------------------- Frank L. Bowman................................... 7,629,415,695 416,380,484 16,016,628 0 Kathleen A. Dennis................................ 7,626,467,434 419,328,745 16,016,628 0 James F. Higgins.................................. 7,625,474,397 420,321,782 16,016,628 0 Joseph J. Kearns.................................. 7,627,618,009 418,178,170 16,016,628 0 Michael F. Klein.................................. 7,627,032,049 418,764,130 16,016,628 0 W. Allen Reed..................................... 7,620,510,916 425,285,263 16,016,628 0 Fergus Reid....................................... 7,614,179,402 431,616,777 16,016,628 0
The following Directors were not standing for reelection at this meeting: Michael Bozic, Dr. Manuel H. Johnson and Michael E. Nugent. (2) Elimination of certain fundamental investment restrictions:
FOR AGAINST ABSTAIN BNV* ------------------------------------------------------------------ Elimination of the fundamental policy restricting purchases of securities on margin................................... 7,253,418,327 492,654,091 303,254,798 12,485,591 Elimination of the fundamental policy prohibiting investments in oil, gas, and other types of minerals or mineral leases................................... 7,282,470,872 458,722,456 308,133,888 12,485,591 Elimination of the fundamental policy regarding investments in warrants........ 7,304,786,911 455,904,309 288,635,996 12,485,591 Elimination of the fundamental policy prohibiting or restricting the purchase of securities of issuers in which Directors or Officers have an interest... 7,295,449,509 472,490,159 281,387,548 12,485,591 Elimination of the fundamental policy prohibiting investments for purposes of exercising control....................... 7,325,536,479 441,727,046 282,063,691 12,485,591 Elimination of the fundamental policy prohibiting the purchase of common stocks and other instrument..................... 7,352,395,850 417,389,042 279,542,324 12,485,591 Elimination of the fundamental policy regarding investments in unseasoned companies................................ 7,280,307,855 479,028,850 289,990,511 12,485,591 Elimination of the fundamental policy prohibiting participation in joint securities accounts...................... 7,333,097,915 425,624,359 290,604,942 12,485,591
18 Morgan Stanley Liquid Asset Fund Inc. RESULTS OF SPECIAL SHAREHOLDER MEETING (UNAUDITED) continued (3) Modify certain fundamental investment restrictions:
FOR AGAINST ABSTAIN BNV* ------------------------------------------------------------------ Modify fundamental policy regarding diversification.......................... 7,342,911,794 422,391,115 284,024,307 12,485,591 Modify fundamental policy regarding borrowing money.......................... 7,287,428,752 483,013,231 278,885,233 12,485,591 Modify fundamental policy regarding loans.................................... 7,300,004,927 468,322,042 281,000,247 12,485,591 Modify fundamental policy regarding investment in commodities, commodity contracts and futures contracts.......... 7,290,233,136 474,859,316 284,234,764 12,485,591 Modify fundamental policy regarding issuance of senior securities............ 7,321,495,160 443,764,690 284,067,366 12,485,591
(4) Reclassify certain fundamental policies as non-fundamental policies:
FOR AGAINST ABSTAIN BNV* ------------------------------------------------------------------ Reclassification as non-fundamental the fundamental policy regarding the short sale of securities....................... 7,285,454,618 474,600,153 289,272,445 12,485,591 Reclassification as non-fundamental the fundamental policy prohibiting investments in other investment companies................................ 7,311,164,387 453,428,493 284,734,336 12,485,591 Reclassification as non-fundamental the fundamental policy prohibiting or limiting investments in illiquid or restricted securities.................... 7,285,814,435 474,111,458 289,401,323 12,485,591 Reclassification as non-fundamental the fundamental policy on the purchase or sale of puts, calls, and combinations thereof.................................. 7,286,732,673 471,661,841 290,932,702 12,485,591
--------------------- * Broker "non-votes" are shares held in street name for which the broker indicates that instructions have not been received from the beneficial owners or other persons entitled to vote and for which the broker does not have discretionary voting authority.
19 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 J. David Germany Vice President Dennis F. Shea Vice President Barry Fink Vice President Amy R. Doberman Vice President Carsten Otto Chief Compliance Officer Stefanie V. Chang Yu Vice President Francis J. Smith Treasurer and Chief Financial Officer Mary E. Mullin Secretary TRANSFER AGENT Morgan Stanley Trust Harborside Financial Center, Plaza Two Jersey City, New Jersey 07311 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP Two World Financial Center New York, New York 10281 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. 1221 Avenue of the Americas New York, New York 10020 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. This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional information contains additional information about the Fund, including its directors. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the Prospectus carefully before investing. Morgan Stanley Distributors Inc., member NASD (c) 2007 Morgan Stanley [MORGAN STANLEY LOGO] MORGAN STANLEY FUNDS Morgan Stanley Liquid Asset Fund Semiannual Report February 28, 2007 [MORGAN STANLEY LOGO] ILASAR-IU07-00467P-T02/07 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 filed by closed-end funds. Item 9. Closed-End Fund Repurchases Applicable to reports filed by closed-end funds. Item 10. Submission of Matters to a Vote of Security Holders Not applicable. Item 11. Controls and Procedures (a) The Fund's principal executive officer and principal financial officer have concluded that the Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits (a) 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. 2 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 Liquid Asset Fund Inc. /s/ Ronald E. Robison ------------------------------------- Ronald E. Robison Principal Executive Officer April 19, 2007 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 April 19, 2007 /s/ Francis Smith ---------------------------------------- Francis Smith Principal Financial Officer April 19, 2007 3