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: 811-03639 Morgan Stanley Developing Growth Securities Trust (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: September 30, 2004 Date of reporting period: March 31, 2004 Item 1 - Report to Shareholders
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley Developing Growth Securities Trust 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 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-month period ended March 31, 2004 | |
Total Return for the six months ended March 31, 2004
Class A | Class B | Class C | Class D | Russell MidCap Growth Index1 | Russell 2500 Growth Index2 | Lipper Mid-Cap Growth Funds Index3 | ||||||||||||||||||||||||||||||||
17.97% | 17.51 | % | 17.53 | % | 18.06 | % | 17.58 | % | 18.17 | % | 15.32 | % | ||||||||||||||||||||||||||
The performance of the Fund's four share classes varies because each has different expenses. The Fund's total return figures assume the reinvestment of all distributions but do not reflect the deduction of any applicable sales charges. Such costs would lower performance. Past performance is no guarantee of future results. See Performance Summary for standardized performance information. |
Market Conditions
The domestic equities markets returned strong results in the six-month period ended March 31, 2004. In the first month of the period, however, investor concerns about the sustainability of the U.S. economy's recovery and a new rash of conflicts with Iraqi insurgents caused a brief pause in the market's climb. Shortly thereafter, reports from a number of economic indicators eased these concerns. Manufacturing activity, traditionally a proxy for a country's economic well-being, increased in the third and fourth quarters of 2003. Additionally, U.S. gross domestic product data showed strong growth. The Federal Reserve has held interest rates at rock-bottom levels, as companies were slow to add employees and the threat of inflation remained low. These low interest rates spurred a large number of homeowners to refinance their mortgages, increasing household disposable income and thereby boosting consumer spending.
Cyclical, lower-quality companies rallied sharply throughout the six-month period. Small-cap and mid-cap companies posted strong gains in this reporting period as they outpaced their larger counterparts. Defensive sectors such as utilities, consumer staples and basic materials outpaced such market-sensitive sectors as information technology, financial services and consumer discretionary issues. Investors remain focused on job creation, inflation and the potential for rising interest rates.
Performance Analysis
The Fund performed in line with the Russell MidCap Growth Index and underperformed the Russell 2500 Growth Index, but outperformed the Lipper Mid-Cap Growth Funds Index. In managing the Fund, a bottom-up strategy is used to determine which stocks present the best opportunities, given the Fund's style and investment objectives. This approach focuses on individual companies' fundamentals with the macroeconomic environment serving as a backdrop. Sector weightings are a residual of the stock selection process.
Over this six-month period, our approach delivered both positive and negative contributors to Fund performance. On the positive side, our consumer discretionary stock picks were the largest contributor. The Fund was aided most by companies in the casino and gaming and leisure industries. The lottery system provider GTECH Holdings benefited from a search by state governments for alternative sources of revenue. GTECH has a scalable business model that enables it to add customers without creating additional cost. The
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company has continued its international expansion. Another Fund holding, Royal Caribbean, benefited from a recovery in the travel industry as well as from having a newer fleet of ships. Financial services was also a positive area contributing to performance. Further areas of strength included insurance and securities brokerage holdings. One of our best-performing issues in financials was the online trading company Ameritrade, which appreciated as retail investors gained confidence in the stock market. Several of the Fund's energy positions also rallied strongly, led by Wyoming-based Ultra Petroleum.
While many of the Fund's holdings performed well, not all lived up to our expectations. Several of our picks in the telecommunications and television and radio industries hurt performance as the telecom sector struggled under heavy competition and cable companies coped with rising programming costs and a weak advertising environment. The international television and telephone operator UnitedGlobalCom was a weak performer in that sector, as its operating margins were lower than those of its European competitors. The Fund's investment in the producer durables sector lagged, due to weakness in office furniture and business equipment, homebuilding and aerospace. One of our biggest disappointments was the integrated self-service delivery systems (ATM machines) producer Diebold, which struggled under margin pressure, an elongated receivables collection cycle for its voting machines and investor concerns about potentially disappointing future earnings.
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TOP 5 INDUSTRIES | ||||||
Casino/Gaming | 9.4 | % | ||||
Medical Specialties | 6.5 | |||||
Packaged Software | 5.2 | |||||
Broadcasting | 4.4 | |||||
Restaurants | 3.9 | |||||
TOP 10 HOLDINGS | ||||||
Royal Caribbean Cruises Ltd. | 3.1 | % | ||||
Station Casinos Inc. | 3.0 | |||||
Ultra Petroleum Corp. | 2.9 | |||||
Wynn Resorts Ltd. | 2.5 | |||||
GTECH Holdings Corp. | 2.2 | |||||
Univision Communications Inc. – Class A | 1.9 | |||||
NTL Inc. | 1.8 | |||||
Stericycle Inc. | 1.6 | |||||
Dade Behring Holdings Inc. | 1.6 | |||||
Caremark RX Inc. | 1.5 | |||||
Data as of March 31, 2004. Subject to change daily. All percentages are a percentage of net assets. 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 will normally invest at least 65% of its assets in common stocks (including depositary receipts) and other equity securities. In deciding which of these securities to buy, hold or sell, the Fund's "Investment Manager," Morgan Stanley Investment Advisors Inc., analyzes a company's potential to grow much more rapidly than the economy, using its proprietary research in pursuing a "bottom-up" investment philosophy, which emphasizes individual company selection. Quantitative and qualitative standards also will be used to screen companies to provide a list of potential investment securities. The Investment Manager then subjects the list of securities to a fundamental analysis using a variety of criteria. The Fund's other equity securities may include convertible securities and preferred stocks. The Fund will invest primarily in smaller and medium-sized companies. The Investment Manager focuses its securities selection upon a diversified group of emerging growth companies that it believes have prospects of achieving significant profit gains. The Fund may also invest in securities issued in initial public offerings ("IPOs").
Proxy Voting Policies and Procedures
A description of the Fund's policies and procedures with respect to the voting of proxies relating to the Fund's portfolio securities is available without charge, upon request, by calling (800) 869-NEWS. This information is also available on the Securities and Exchange Commission's Web site at http://www.sec.gov.
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Performance Summary | |
Average Annual Total Returns — Period Ended March 31, 2004
Class A Shares* (since 07/28/97) | Class B Shares** (since 04/29/83) | Class C Shares† (since 07/28/97) | Class D Shares†† (since 07/28/97) | |||||||||||||||||||||||
Symbol | DGRAX | DGRBX | DGRCX | DGRDX | ||||||||||||||||||||||
1 Year | 48.74% | 4 | 47.53% | 4 | 47.58% | 4 | 49.06% | 4 | ||||||||||||||||||
40.93 | 5 | 42.53 | 5 | 46.58 | 5 | — | ||||||||||||||||||||
5 Years | 3.05 | 4 | 2.24 | 4 | 2.25 | 4 | 3.26 | 4 | ||||||||||||||||||
1.94 | 5 | 1.98 | 5 | 2.25 | 5 | — | ||||||||||||||||||||
10 Years | — | 9.05 | 4 | — | — | |||||||||||||||||||||
— | 9.05 | 5 | — | — | ||||||||||||||||||||||
Since Inception | 5.08 | 4 | 7.65 | 4 | 4.29 | 4 | 5.31 | 4 | ||||||||||||||||||
4.24 | 5 | 7.65 | 5 | 4.29 | 5 | — | ||||||||||||||||||||
Past performance is no guarantee of future results and current performance may be lower or higher than the figures shown. For more up-to-date information, including month-end performance figures, please visit morganstanley.com or speak with your financial advisor. Investment returns and principal value will fluctuate and fund shares, when redeemed, may be worth more or less than their original cost. The table does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Performance for Class A, Class B, Class C, and Class D shares will vary due to differences in sales charges and expenses. |
Notes on Performance
(1) | The Russell Midcap Growth Index measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000 Growth Index. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. |
(2) | The Russell 2500 Growth Index measures the performance of those companies in the Russell 2500 Index with higher price-to-book ratios and higher forecasted growth values. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. |
(3) | The Lipper Mid-Cap Growth Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Mid-Cap Growth Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. |
(4) | Figure shown assumes reinvestment of all distributions and does not reflect the deduction of any sales charges. |
(5) | Figure shown assumes reinvestment of all distributions and the deduction of the maximum applicable sales charge. See the Fund's current prospectus for complete details on fees and sales charges. |
* | The maximum front-end sales charge for Class A is 5.25%. |
** | The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%. The CDSC declines to 0% after six years. |
† | The maximum contingent deferred sales charge for Class C is 1.0% for shares redeemed within one year of purchase. |
†† | Class D has no sales charge. |
5
Morgan Stanley Developing Growth Securities Trust
Portfolio of Investments March 31, 2004 (unaudited)
NUMBER OF SHARES | VALUE | ||||||||||
Common Stocks (99.8%) | |||||||||||
Advertising/Marketing Services (1.6%) | |||||||||||
90,900 | Getty Images, Inc.* | $ | 4,906,782 | ||||||||
108,700 | R.H. Donnelley Corp.* | 5,076,290 | |||||||||
9,983,072 | |||||||||||
Air Freight/Couriers (1.0%) | |||||||||||
155,850 | C.H. Robinson Worldwide, Inc. | 6,467,775 | |||||||||
Apparel/Footwear (1.0%) | |||||||||||
149,800 | Coach, Inc.* | 6,140,302 | |||||||||
Apparel/Footwear Retail (1.0%) | |||||||||||
138,850 | Chico's FAS, Inc.* | 6,442,640 | |||||||||
Auto Parts: O.E.M. (0.8%) | |||||||||||
114,600 | Gentex Corp. | 4,971,348 | |||||||||
Biotechnology (3.7%) | |||||||||||
115,700 | Biogen Idec Inc.* | 6,432,920 | |||||||||
72,900 | Celgene Corp.* | 3,473,685 | |||||||||
92,400 | Charles River Laboratories International, Inc.* | 3,959,340 | |||||||||
65,300 | Genzyme Corp.* | 3,071,712 | |||||||||
56,700 | Gilead Sciences, Inc.* | 3,162,159 | |||||||||
62,600 | IDEXX Laboratories, Inc.* | 3,560,062 | |||||||||
23,659,878 | |||||||||||
Broadcasting (4.4%) | |||||||||||
413,050 | Radio One, Inc. (Class D)* | 7,641,425 | |||||||||
371,225 | Univision Communications Inc. (Class A)* | 12,254,137 | |||||||||
159,150 | Westwood One, Inc.* | 4,686,967 | |||||||||
112,400 | XM Satellite Radio Holdings Inc. (Class A)* | 3,147,200 | |||||||||
27,729,729 | |||||||||||
Building Products (0.5%) | |||||||||||
28,100 | American Standard Companies, Inc.* | 3,196,375 | |||||||||
Casino/Gaming (9.4%) | |||||||||||
237,565 | GTECH Holdings Corp. | 14,049,594 | |||||||||
159,400 | International Game Technology | 7,166,624 | |||||||||
70,400 | MGM Mirage* | $ | 3,191,936 | ||||||||
434,300 | Station Casinos, Inc. | 19,183,031 | |||||||||
453,025 | Wynn Resorts, Ltd.* | 15,855,875 | |||||||||
59,447,060 | |||||||||||
Computer Communications (1.0%) | |||||||||||
142,400 | Avaya Inc.* | 2,261,312 | |||||||||
162,000 | Juniper Networks, Inc.* | 4,213,620 | |||||||||
6,474,932 | |||||||||||
Computer Peripherals (2.5%) | |||||||||||
93,600 | Lexmark International, Inc.* | 8,611,200 | |||||||||
327,800 | Network Appliance, Inc.* | 7,031,310 | |||||||||
15,642,510 | |||||||||||
Construction Materials (1.0%) | |||||||||||
119,800 | Rinker Group Ltd. (ADR) (Australia) | 6,364,974 | |||||||||
Containers/Packaging (0.5%) | |||||||||||
57,450 | Sealed Air Corp.* | 2,856,988 | |||||||||
Data Processing Services (1.3%) | |||||||||||
100,075 | Global Payments Inc. | 4,511,381 | |||||||||
147,605 | SunGard Data Systems Inc.* | 4,044,377 | |||||||||
8,555,758 | |||||||||||
Discount Stores (1.2%) | |||||||||||
256,275 | Dollar Tree Stores, Inc.* | 7,916,335 | |||||||||
Electronic Components (0.3%) | |||||||||||
54,064 | QLogic Corp.* | 1,784,653 | |||||||||
Electronic Distributors (0.5%) | |||||||||||
45,660 | CDW Corp.* | 3,087,073 | |||||||||
Electronic Production Equipment (1.7%) | |||||||||||
113,950 | KLA-Tencor Corp.* | 5,737,382 | |||||||||
188,950 | Synopsys, Inc.* | 5,471,992 | |||||||||
11,209,374 | |||||||||||
Electronics/Appliances (1.0%) | |||||||||||
79,050 | Harman International Industries, Inc. | 6,292,380 | |||||||||
Finance/Rental/Leasing (0.5%) | |||||||||||
94,650 | Doral Financial Corp. | 3,331,680 | |||||||||
See Notes to Financial Statements
6
Morgan Stanley Developing Growth Securities Trust
Portfolio of Investments March 31, 2004 (unaudited) continued
NUMBER OF SHARES | VALUE | ||||||||||
Financial Conglomerates (1.1%) | |||||||||||
166,500 | Brascan Corp. (Class A) (Canada) | $ | 6,703,290 | ||||||||
Financial Publishing/Services (1.6%) | |||||||||||
56,200 | Dun & Bradstreet Corp.* | 3,006,700 | |||||||||
236,400 | Interactive Data Corp.* | 4,203,192 | |||||||||
46,400 | Moody's Corp. | 3,285,120 | |||||||||
10,495,012 | |||||||||||
Food Retail (0.5%) | |||||||||||
40,600 | Whole Foods Market, Inc. | 3,042,970 | |||||||||
Gas Distributors (1.0%) | |||||||||||
50,400 | Kinder Morgan, Inc. | 3,176,208 | |||||||||
85,300 | Questar Corp. | 3,108,332 | |||||||||
6,284,540 | |||||||||||
Home Building (0.5%) | |||||||||||
6,825 | NVR, Inc.* | 3,139,500 | |||||||||
Home Furnishings (0.7%) | |||||||||||
55,100 | Mohawk Industries, Inc.* | 4,537,485 | |||||||||
Hospital/Nursing Management (0.5%) | |||||||||||
110,300 | Community Health Systems Inc.* | 3,069,649 | |||||||||
Hotels/Resorts/Cruiselines (3.1%) | |||||||||||
443,200 | Royal Caribbean Cruises Ltd. (Liberia) | 19,545,120 | |||||||||
Industrial Machinery (0.5%) | |||||||||||
109,500 | Graco Inc. | 3,187,545 | |||||||||
Industrial Specialties (0.5%) | |||||||||||
114,100 | Ecolab Inc. | 3,255,273 | |||||||||
Information Technology Services (0.4%) | |||||||||||
50,900 | Cognizant Technology Solutions Corp.* | 2,303,225 | |||||||||
Insurance Brokers/Services (0.9%) | |||||||||||
148,734 | ChoicePoint Inc.* | 5,656,354 | |||||||||
Integrated Oil (0.5%) | |||||||||||
117,500 | Suncor Energy, Inc. (Canada) | 3,213,625 | |||||||||
Investment Banks/Brokers (2.3%) | |||||||||||
330,000 | AmeriTrade Holding Corp. (Class A)* | $ | 5,082,000 | ||||||||
34,800 | Chicago Marcantile Exchange (The) | 3,366,552 | |||||||||
65,900 | Legg Mason, Inc. | 6,114,202 | |||||||||
14,562,754 | |||||||||||
Managed Health Care (2.0%) | |||||||||||
281,800 | Caremark Rx, Inc.* | 9,369,850 | |||||||||
84,200 | PacifiCare Health Systems, Inc.* | 3,330,110 | |||||||||
12,699,960 | |||||||||||
Medical Distributors (1.0%) | |||||||||||
94,400 | Patterson Dental Co.* | 6,476,784 | |||||||||
Medical Specialties (6.5%) | |||||||||||
152,300 | Apogent Technologies Inc.* | 4,672,564 | |||||||||
64,900 | Bard (C.R.), Inc. | 6,336,836 | |||||||||
225,600 | Dade Behring Holdings, Inc.* | 10,034,688 | |||||||||
78,100 | Kinetic Cencepts Ltd. (Bahamas)* | 3,502,785 | |||||||||
43,500 | St. Jude Medical, Inc.* | 3,136,350 | |||||||||
91,250 | Varian Medical Systems, Inc.* | 7,875,787 | |||||||||
80,100 | Zimmer Holdings, Inc.* | 5,909,778 | |||||||||
41,468,788 | |||||||||||
Medical/Nursing Services (1.7%) | |||||||||||
67,200 | DaVita, Inc.* | 3,208,800 | |||||||||
93,275 | Lincare Holdings, Inc.* | 2,930,701 | |||||||||
125,600 | VCA Antech, Inc.* | 4,475,128 | |||||||||
10,614,629 | |||||||||||
Miscellaneous Commercial Services (1.5%) | |||||||||||
65,225 | Corporate Executive Board Co. (The) | 3,065,575 | |||||||||
145,375 | Iron Mountain Inc.* | 6,488,086 | |||||||||
9,553,661 | |||||||||||
Oil & Gas Production (2.9%) | |||||||||||
614,670 | Ultra Petroleum Corp. (Canada)* | 18,446,247 | |||||||||
See Notes to Financial Statements
7
Morgan Stanley Developing Growth Securities Trust
Portfolio of Investments March 31, 2004 (unaudited) continued
NUMBER OF SHARES | VALUE | ||||||||||
Oilfield Services/Equipment (2.0%) | |||||||||||
138,300 | BJ Services Co.* | $ | 5,984,241 | ||||||||
124,600 | Smith International, Inc.* | 6,667,346 | |||||||||
12,651,587 | |||||||||||
Other Consumer Services (2.9%) | |||||||||||
108,500 | Apollo Group, Inc. (Class A)* | 9,342,935 | |||||||||
56,400 | Career Education Corp.* | 3,194,496 | |||||||||
147,900 | DeVry, Inc.* | 4,459,185 | |||||||||
49,900 | ITT Educational Services, Inc.* | 1,556,880 | |||||||||
18,553,496 | |||||||||||
Other Metals/Minerals (0.5%) | |||||||||||
36,800 | Phelps Dodge Corp.* | 3,005,088 | |||||||||
Packaged Software (5.2%) | |||||||||||
231,400 | Adobe Systems, Inc. | 9,124,102 | |||||||||
126,950 | Mercury Interactive Corp.* | 5,687,360 | |||||||||
380,700 | Red Hat, Inc.* | 8,702,802 | |||||||||
201,400 | Symantec Corp.* | 9,324,820 | |||||||||
32,839,084 | |||||||||||
Pharmaceuticals: Generic Drugs (0.7%) | |||||||||||
72,301 | Taro Pharmaceuticals Industries Ltd. (Israel)* | 4,192,735 | |||||||||
Pharmaceuticals: Other (1.8%) | |||||||||||
70,600 | Allergan, Inc. | 5,941,696 | |||||||||
110,200 | Elan Corp. PLC (ADR) (Ireland)* | 2,272,324 | |||||||||
105,000 | Shire Pharmaceuticals Group PLC (ADR) (United Kingdom)* | 3,090,150 | |||||||||
11,304,170 | |||||||||||
Precious Metals (1.9%) | |||||||||||
192,400 | Freeport-McMoRan Copper & Gold, Inc. (Class B) | 7,520,916 | |||||||||
262,800 | Placer Dome Inc. (Canada) | 4,722,516 | |||||||||
12,243,432 | |||||||||||
Property – Casualty Insurers (1.1%) | |||||||||||
12,895 | White Mountains Insurance Group, Ltd. | 6,763,428 | |||||||||
Publishing: Newspapers (0.5%) | |||||||||||
3,375 | Washington Post Co. (The) (Class B) | $ | 2,984,884 | ||||||||
Real Estate Investment Trusts (1.0%) | |||||||||||
187,900 | Plum Creek Timber Co., Inc. | 6,102,992 | |||||||||
Recreational Products (1.1%) | |||||||||||
127,517 | Electronic Arts Inc.* | 6,880,817 | |||||||||
Regional Banks (0.9%) | |||||||||||
146,100 | UCBH Holdings, Inc. | 5,849,844 | |||||||||
Restaurants (3.9%) | |||||||||||
138,900 | Cheesecake Factory, Inc. (The)* | 6,407,457 | |||||||||
65,000 | Krispy Kreme Doughnuts, Inc.* | 2,232,100 | |||||||||
127,400 | Outback Steakhouse, Inc. | 6,204,380 | |||||||||
128,000 | P.F. Chang's China Bistro, Inc.* | 6,439,680 | |||||||||
100,250 | Sonic Corp.* | 3,436,570 | |||||||||
24,720,187 | |||||||||||
Semiconductors (2.7%) | |||||||||||
276,500 | Altera Corp.* | 5,654,425 | |||||||||
85,900 | Integrated Circuit Systems, Inc.* | 2,150,077 | |||||||||
112,775 | Marvell Technology Group Ltd. (Bermuda)* | 5,080,514 | |||||||||
52,100 | National Semiconductor Corp.* | 2,314,803 | |||||||||
62,400 | Rambus Inc.* | 1,749,072 | |||||||||
16,948,891 | |||||||||||
Services to the Health Industry (2.0%) | |||||||||||
69,300 | Omnicare, Inc. | 3,072,069 | |||||||||
209,800 | Stericycle, Inc.* | 10,041,028 | |||||||||
13,113,097 | |||||||||||
Specialty Insurance (0.5%) | |||||||||||
127,100 | Assurant, Inc.* | 3,196,565 | |||||||||
Specialty Stores (0.8%) | |||||||||||
191,900 | PETSMART, Inc. | 5,231,194 | |||||||||
See Notes to Financial Statements
8
Morgan Stanley Developing Growth Securities Trust
Portfolio of Investments March 31, 2004 (unaudited) continued
NUMBER OF SHARES | VALUE | ||||||||||
Specialty Telecommunications (3.8%) | |||||||||||
733,600 | Crown Castle International Corp.* | $ | 9,265,368 | ||||||||
158,050 | IDT Corp. (Class B)* | 3,184,708 | |||||||||
193,092 | NTL, Inc.* | 11,479,319 | |||||||||
23,929,395 | |||||||||||
Telecommunication Equipment (0.9%) | |||||||||||
500,400 | Corning Inc.* | 5,594,472 | |||||||||
Wholesale Distributors (0.5%) | |||||||||||
60,300 | Fisher Scientific International, Inc.* | 3,318,912 | |||||||||
Wireless Telecommunications (0.5%) | |||||||||||
93,900 | NII Holdings, Inc. (Class B)* | 3,289,317 | |||||||||
Total Common Stock (Cost $550,478,033) | 632,524,834 | ||||||||||
PRINCIPAL AMOUNT IN THOUSANDS | ||||||||||
Short-Term Investment (0.6%) | ||||||||||
Repurchase Agreement | ||||||||||
$ | 3,874 | Joint repurchase agreement account 0.938% due 04/01/04 (dated 03/31/04; proceeds $3,874,276) (a) (Cost $3,874,175) | 3,874,175 | |||||||
Total Investments (Cost $554,352,208) (b) | 100.4 | % | 636,399,009 | |||||||
Liabilities in Excess Other Assets | (0.4 | ) | (2,678,696 | ) | ||||||
Net Assets | 100.0 | % | $ | 633,720,313 | ||||||
ADR | American Depository Receipt. |
* | Non-income producing security. |
(a) | Collateralized by federal agency and U.S. Treasury obligations. |
(b) | The aggregate cost for federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross unrealized appreciation is $91,268,147 and the aggregate gross unrealized depreciation is $9,221,346, resulting in net unrealized appreciation of $82,046,801. |
See Notes to Financial Statements
9
Morgan Stanley Developing Growth Securities Trust
Financial Statements
Statement of Assets and Liabilities
March 31, 2004 (unaudited)
Assets: | ||||||
Investments in securities, at value (cost $554,352,208) | $ | 636,399,009 | ||||
Cash | 67,254 | |||||
Receivable for: | ||||||
Investments sold | 6,009,004 | |||||
Shares of beneficial interest sold | 266,910 | |||||
Dividends | 65,960 | |||||
Prepaid expenses and other assets | 179,650 | |||||
Total Assets | 642,987,787 | |||||
Liabilities: | ||||||
Payable for: | ||||||
Investments purchased | 7,825,056 | |||||
Shares of beneficial interest redeemed | 617,702 | |||||
Distribution fee | 429,148 | |||||
Investment management fee | 281,388 | |||||
Accrued expenses and other payables | 114,180 | |||||
Total Liabilities | 9,267,474 | |||||
Net Assets | $ | 633,720,313 | ||||
Composition of Net Assets: | ||||||
Paid-in-capital | $ | 767,203,150 | ||||
Net unrealized appreciation | 82,048,234 | |||||
Accumulated net investment loss | (3,016,985 | ) | ||||
Accumulated net realized loss | (212,514,086 | ) | ||||
Net Assets | $ | 633,720,313 | ||||
Class A Shares: | ||||||
Net Assets | $ | 48,150,071 | ||||
Shares Outstanding (unlimited authorized, $.01 par value) | 2,469,388 | |||||
Net Asset Value Per Share | $ | 19.50 | ||||
Maximum Offering Price Per Share, (net asset value plus 5.54% of net asset value) | $ | 20.58 | ||||
Class B Shares: | ||||||
Net Assets | $ | 432,440,538 | ||||
Shares Outstanding (unlimited authorized, $.01 par value) | 23,698,024 | |||||
Net Asset Value Per Share | $ | 18.25 | ||||
Class C Shares: | ||||||
Net Assets | $ | 33,356,541 | ||||
Shares Outstanding (unlimited authorized, $.01 par value) | 1,822,589 | |||||
Net Asset Value Per Share | $ | 18.30 | ||||
Class D Shares: | ||||||
Net Assets | $ | 119,773,163 | ||||
Shares Outstanding (unlimited authorized, $.01 par value) | 6,028,002 | |||||
Net Asset Value Per Share | $ | 19.87 | ||||
See Notes to Financial Statements
10
Morgan Stanley Developing Growth Securities Trust
Financial Statements continued
Statement of Operations
For the six months ended March 31, 2004 (unaudited)
Net Investment Loss: | ||||||
Income | ||||||
Dividends (net of $11,019 foreign withholding tax) | $ | 1,049,523 | ||||
Interest | 28,422 | |||||
Total Income | 1,077,945 | |||||
Expenses | ||||||
Distribution fee (Class A shares) | 41,014 | |||||
Distribution fee (Class B shares) | 1,908,224 | |||||
Distribution fee (Class C shares) | 113,210 | |||||
Investment management fee | 1,388,637 | |||||
Transfer agent fees and expenses | 632,447 | |||||
Shareholder reports and notices | 41,534 | |||||
Professional fees | 30,573 | |||||
Registration fees | 23,437 | |||||
Custodian fees | 20,859 | |||||
Trustees' fees and expenses | 9,301 | |||||
Other | 6,457 | |||||
Total Expenses | 4,215,693 | |||||
Less: amounts waived | (180,000 | ) | ||||
Net Expenses | 4,035,693 | |||||
Net Investment Loss | (2,957,748 | ) | ||||
Net Realized and Unrealized Gain: | ||||||
Net realized gain | 79,010,605 | |||||
Net change in unrealized appreciation | 10,172,447 | |||||
Net Gain | 89,183,052 | |||||
Net Increase | $ | 86,225,304 | ||||
See Notes to Financial Statements
11
Morgan Stanley Developing Growth Securities Trust
Financial Statements continued
Statement of Changes in Net Assets
FOR THE SIX MONTHS ENDED MARCH 31, 2004 | FOR THE YEAR ENDED SEPTEMBER 30, 2003 | |||||||||
(unaudited) | ||||||||||
Increase (Decrease) in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment loss | $ | (2,957,748 | ) | $ | (4,498,348 | ) | ||||
Net realized gain | 79,010,605 | 22,235,164 | ||||||||
Net change in unrealized appreciation/depreciation | 10,172,447 | 86,705,321 | ||||||||
Net Increase | 86,225,304 | 104,442,137 | ||||||||
Net increase (decrease) from transactions in shares of beneficial interest | 117,663,231 | (34,415,236 | ) | |||||||
Net Increase | 203,888,535 | 70,026,901 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 429,831,778 | 359,804,877 | ||||||||
End of Period (Including accumulated net investment losses of $3,016,985 and $59,237, respectively) | $ | 633,720,313 | $ | 429,831,778 | ||||||
See Notes to Financial Statements
12
Morgan Stanley Developing Growth Securities Trust
Notes to Financial Statements March 31, 2004 (unaudited)
1. Organization and Accounting Policies
Morgan Stanley Developing Growth Securities Trust (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 objective is long-term capital growth. The Fund was organized as a Massachusetts business trust on December 28, 1982 and commenced operations on April 29, 1983. On July 28, 1997, the Fund converted to a multiple class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within one year, six years and one year, respectively. Class D shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses.
The following is a summary of significant accounting policies:
A. Valuation of Investments — (1) an equity portfolio security listed or traded on the New York Stock Exchange ("NYSE") or American Stock Exchange or other exchange is valued at its latest sale price prior to the time when assets are valued; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (2) an equity portfolio security listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (3) all other 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. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market; (4) for equity securities traded on foreign exchanges, the last reported sale price or the latest bid price may be used if there were no sales on a particular day; (5) when market quotations are not readily available or Morgan Stanley Investment Advisors Inc. (the "Investment Manager") determines that the latest sale price, the bid price or the mean between the last reported bid and asked price do not reflect a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund's Trustees. Occasionally, developments affecting the closing prices of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the foreign market on which the securities trade) and the close of business on the NYSE. If developments occur during such periods that are expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Fund's Trustees or by the Investment Manager using a pricing service and/or procedures approved by the Trustees of the Fund; (6) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Trustees; (7) short-term debt securities having a maturity date of more than sixty days at time of
13
Morgan Stanley Developing Growth Securities Trust
Notes to Financial Statements March 31, 2004 (unaudited) continued
purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost.
B. Accounting for Investments — Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Dividend income and other distributions are recorded on the ex-dividend date. Discounts are accreted and premiums are amortized over the life of the respective securities. Interest income is accrued daily.
C. Repurchase Agreements — Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other affiliated entities managed by the Investment Manager, may transfer uninvested cash balances into one or more joint repurchase agreement accounts. These balances are invested in one or more repurchase agreements and are collateralized by cash, U.S. Treasury or federal agency obligations. The Fund may also 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. Multiple Class Allocations — Investment income, expenses (other than distribution fees), and realized and unrealized gains and losses are allocated to each class of shares based upon the relative net asset value on the date such items are recognized. Distribution fees are charged directly to the respective class.
E. Foreign Currency Translation and Forward Foreign Currency Contracts — The books and records of the Fund are maintained in U.S. dollars as follows: (1) the foreign currency market value of investment securities, other assets and liabilities and forward foreign currency contracts ("forward contracts") are translated at the exchange rates prevailing at the end of the period; and (2) purchases, sales, income and expenses are translated at the exchange rates prevailing on the respective dates of such transactions. The resultant exchange gains and losses are recorded as realized and unrealized gain/loss on foreign exchange transactions. Pursuant to U.S. federal income tax regulations, certain foreign exchange gains/losses included in realized and unrealized gain/loss are included in or are a reduction of ordinary income for federal income tax purposes. The Fund does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the changes in the market prices of the securities. Forward contracts are valued daily at the appropriate exchange rates. The resultant unrealized exchange gains and losses are recorded as unrealized foreign currency gain or loss. The Fund records realized gains or losses on delivery of the currency or at the time the forward contract is extinguished (compensated) by entering into a closing transaction prior to delivery.
F. Federal Income Tax 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.
14
Morgan Stanley Developing Growth Securities Trust
Notes to Financial Statements March 31, 2004 (unaudited) continued
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 Management Agreement
Pursuant to an Investment Management Agreement, the Fund pays the Investment Manager a management fee, accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined as of the close of each business day: 0.50% to the portion of the daily net assets not exceeding $500 million and 0.475% to the portion of the daily net assets exceeding $500 million.
During the six months ended March 31, 2004, the Investment Manager waived $180,000 of its fee as part of the Fund's acquisition of Morgan Stanley Next Generation Trust ("Next Generation").
3. Plan of Distribution
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A – up to 0.25% of the average daily net assets of Class A; (ii) Class B – 1.0% of the lesser of: (a) the average daily aggregate gross sales of the Class B shares since the inception of the Fund (not including reinvestment of dividend or capital gain distributions) less the average daily aggregate net asset value of the Class B shares redeemed since the Fund's inception upon which a contingent deferred sales charge has been imposed or waived; or (b) the average daily net assets of Class B; and (iii) Class C – up to 1.0% of the average daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the Plan is terminated, the Trustees will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled $34,282,489 at March 31, 2004.
In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily net assets of Class A or Class C, respectively, will not be
15
Morgan Stanley Developing Growth Securities Trust
Notes to Financial Statements March 31, 2004 (unaudited) continued
reimbursed by the Fund through payments in any subsequent year, except that expenses representing a gross sales credit to Morgan Stanley Financial Advisors or other selected broker-dealer representatives may be reimbursed in the subsequent calendar year. For the six months ended March 31, 2004, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.21% and 1.0%, respectively.
The Distributor has informed the Fund that for the six months ended March 31, 2004, it received contingent deferred sales charges from certain redemptions of the Fund's Class A shares, Class B shares and Class C shares of $861, $209,900 and $964, respectively and received $12,710 in front-end sales charges from sales of the Fund's Class A shares. The respective shareholders pay such charges which are not an expense of the Fund.
4. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales of portfolio securities, excluding short-term investments, for the six months ended March 31, 2004 aggregated $663,900,979 and $560,298,771, respectively. Included in the aforementioned transactions are purchases and sales of $1,366,241, and $961,600, respectively for portfolio transactions with other Morgan Stanley funds, including a realized gain of $412,274.
For the six months ended March 31, 2004, the Fund incurred brokerage commissions of $9,295 with Morgan Stanley & Co., an affiliate of the Investment Manager and Distributor, for portfolio transactions executed on behalf of the Fund.
Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is the Fund's transfer agent.
The Fund has an unfunded noncontributory defined benefit pension plan covering certain independent Trustees of the Fund who will have served as independent Trustees for at least five years at the time of retirement. Benefits under this plan are based on factors which include years of service and compensation. Aggregate pension costs for the six months ended March 31, 2004 included in Trustees' fees and expenses in the Statement of Operations amounted to $5,634. At March 31, 2004, the Fund had an accrued pension liability of $59,759 which is included in accrued expenses in the Statement of Assets and Liabilities.
On December 2, 2003, the Trustees voted to close the plan to new participants, eliminate the future benefits growth due to increases to compensation after July 31, 2003 and effective April 1, 2004, establish an unfunded deferred compensation plan which allows each independent Trustee to defer payment of all or a portion of the fees he receives for serving on the Board of Trustees throughout the year.
5. Purposes of and Risks Relating to Certain Financial Instruments
To hedge against adverse interest rate, foreign currency and market risks, the Fund may purchase and sell interest rate, currency and index futures contracts ("futures contracts").
16
Morgan Stanley Developing Growth Securities Trust
Notes to Financial Statements March 31, 2004 (unaudited) continued
Futures contracts involve elements of market risk in excess of the amounts reflected in the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the value of the underlying securities or currencies. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts.
6. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
FOR THE SIX MONTHS ENDED MARCH 31, 2004 | FOR THE YEAR ENDED SEPTEMBER 30, 2003 | ||||||||||||||||||
(unaudited) | |||||||||||||||||||
SHARES | AMOUNT | SHARES | AMOUNT | ||||||||||||||||
CLASS A SHARES | |||||||||||||||||||
Sold | 488,698 | $ | 9,057,647 | 1,062,886 | $ | 15,278,789 | |||||||||||||
Acquisition of Morgan Stanley Next Generation Trust | 88,185 | 1,597,218 | — | — | |||||||||||||||
Acquisition of Morgan Stanley New Discoveries Fund | 756,529 | 13,714,813 | — | — | |||||||||||||||
Redeemed | (383,065 | ) | (7,122,070 | ) | (727,769 | ) | (10,326,598 | ) | |||||||||||
Net increase – Class A | 950,347 | 17,247,608 | 335,117 | 4,952,191 | |||||||||||||||
CLASS B SHARES | |||||||||||||||||||
Sold | 539,506 | 9,373,830 | 1,117,330 | 15,625,470 | |||||||||||||||
Acquisition of Morgan Stanley Next Generation Trust | 1,109,266 | 18,868,190 | — | — | |||||||||||||||
Acquisition of Morgan Stanley New Discoveries Fund | 5,964,678 | 101,409,720 | — | — | |||||||||||||||
Redeemed | (2,820,754 | ) | (49,279,269 | ) | (5,515,835 | ) | (72,798,466 | ) | |||||||||||
Net increase (decrease) – Class B | 4,792,696 | 80,372,471 | (4,398,505 | ) | (57,172,996 | ) | |||||||||||||
CLASS C SHARES | |||||||||||||||||||
Sold | 61,950 | 1,073,991 | 236,756 | 3,273,814 | |||||||||||||||
Acquisition of Morgan Stanley Next Generation Trust | 143,219 | 2,441,779 | — | — | |||||||||||||||
Acquisition of Morgan Stanley New Discoveries Fund | 1,416,613 | 24,158,759 | — | — | |||||||||||||||
Redeemed | (243,092 | ) | (4,330,631 | ) | (296,523 | ) | (3,974,071 | ) | |||||||||||
Net increase (decrease) – Class C | 1,378,690 | 23,343,898 | (59,767 | ) | (700,257 | ) | |||||||||||||
CLASS D SHARES | |||||||||||||||||||
Sold | 470,722 | 8,852,197 | 2,736,782 | 39,633,346 | |||||||||||||||
Acquisition of Morgan Stanley Next Generation Trust | 53,964 | 995,937 | — | — | |||||||||||||||
Acquisition of Morgan Stanley New Discoveries Fund | 196,092 | 3,621,801 | — | — | |||||||||||||||
Redeemed | (884,457 | ) | (16,770,681 | ) | (1,466,050 | ) | (21,127,520 | ) | |||||||||||
Net increase (decrease) – Class D | (163,679 | ) | (3,300,746 | ) | 1,270,732 | 18,505,826 | |||||||||||||
Net increase (decrease) in Fund | 6,958,054 | $ | 117,663,231 | (2,852,423 | ) | $ | (34,415,236 | ) | |||||||||||
17
Morgan Stanley Developing Growth Securities Trust
Notes to Financial Statements March 31, 2004 (unaudited) continued
7. 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, 2003, the Fund had a net capital loss carryforward of $290,717,522 of which $8,839,325 will expire on September 30, 2009, $213,014,457 will expire on September 30, 2010
and $68,863,740 will expire on September 30, 2011 to offset future capital gains to the extent provided by regulations.
As of September 30, 2003, the Fund had temporary book/tax differences 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) and capital loss deferrals on wash sales.
8. Legal Matters
The Investment Manager, certain affiliates of the Investment Manager, certain officers of such affiliates and certain investment companies advised by the Investment Manager or its affiliates, including the Fund, are named as defendants in a number of similar class action complaints which were recently consolidated. This consolidated action also names as defendants certain individual Trustees and Directors of the Morgan Stanley funds. The consolidated amended complaint generally alleges that defendants, including the Fund, violated their statutory disclosure obligations and fiduciary duties by failing properly to disclose (i) that the Investment Manager and certain affiliates of the Investment Manager allegedly offered economic incentives to brokers and others to recommend the funds advised by the Investment Manager or its affiliates to investors rather than funds managed by other companies, and (ii) that the funds advised by the Investment Manager or its affiliates, including the Fund, allegedly paid excessive commissions to brokers in return for their efforts to recommend these funds to investors. The complaint seeks, among other things, unspecified compensatory damages, rescissionary damages, fees and costs. The defendants intend to move to dismiss the action and otherwise vigorously to defend it. While the Fund believes that it has meritorious defenses, the ultimate outcome of this matter is not presently determinable at this early stage of the litigation, and no provision has been made in the Fund's financial statements for the effect, if any, of this matter.
9. Fund Acquisitions
On December 22, 2003, the Fund acquired all the net assets of the Morgan Stanley Next Generation ("Next Generation") based on the respective valuations as of the close of business on December 19, 2003 pursuant
18
Morgan Stanley Developing Growth Securities Trust
Notes to Financial Statements March 31, 2004 (unaudited) continued
to a Plan of Reorganization approved by the shareholders of Next Generation on December 16, 2003. The acquisition was accomplished by a tax-free exchange of 88,185 Class A shares of the Fund at a net asset value of $18.12 per share for 220,099 Class A shares of Next Generation; 1,109,266 Class B shares of the Fund at a net asset value of $17.00 per share for 2,678,625 Class B shares of Next Generation; 143,219 Class C shares of the Fund at a net asset value of $17.04 per share for 346,654 Class C shares of Next Generation; and 53,964 Class D shares of the Fund at a net asset value of $18.46 per share for 136,091 Class D shares of Next Generation. The net assets of the Fund and Next Generation immediately before the acquisition were $458,868,676 and $23,903,124, respectively, including unrealized appreciation of $4,011,878 for Next Generation. Immediately after the acquisition, the combined net assets of the Fund amounted to $482,771,800.
On December 22, 2003, the Fund acquired all the net assets of Morgan Stanley New Discoveries Fund ("New Discoveries") based on the respective valuations as of the close of business on December 19, 2003 pursuant to a Plan of Reorganization approved by the shareholders of New Discoveries on December 16, 2003. The acquisition was accomplished by a tax-free exchange of 756,529 Class A shares of the Fund at a net asset value of $18.12 per share for 2,510,678 Class A shares of New Discoveries; 5,964,678 Class B shares of the Fund at a net asset value of $17.00 per share for 19,024,300 Class B shares of New Discoveries; 1,416,613 Class C shares of the Fund at a net asset value of $17.04 per share for 4,545,968 Class C shares of New Discoveries; and 196,092 Class D shares of the Fund at a net asset value of $18.46 per share for 658,155 Class D shares of New Discoveries. The net assets of the Fund and New Discoveries immediately before the acquisition were $458,868,676 and $142,905,093, respectively, including unrealized appreciation of $20,482,207 for New Discoveries. Immediately after the acquisition, the combined net assets of the Fund amounted to $601,773,769.
19
Morgan Stanley Developing Growth Securities Trust
Financial Highlights
Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE YEAR ENDED SEPTEMBER 30, | |||||||||||||||||||||||||||
FOR THE SIX MONTHS ENDED MARCH 31, 2004 | 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||||||
(unaudited) | |||||||||||||||||||||||||||
Class A Shares | |||||||||||||||||||||||||||
Selected Per Share Data: | |||||||||||||||||||||||||||
Net asset value, beginning of period | $ | 16.53 | $ | 12.52 | $ | 15.20 | $ | 37.74 | $ | 31.44 | $ | 20.38 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment loss‡ | (0.05 | ) | (0.09 | ) | (0.11 | ) | 0.00 | (0.12 | ) | (0.07 | ) | ||||||||||||||||
Net realized and unrealized gain (loss) | 3.02 | 4.10 | (2.57 | ) | (14.40 | ) | 12.89 | 11.50 | |||||||||||||||||||
Total income (loss) from investment operations | 2.97 | 4.01 | (2.68 | ) | (14.40 | ) | 12.77 | 11.43 | |||||||||||||||||||
Less distributions from net realized gain | — | — | — | (8.14 | ) | (6.47 | ) | (0.37 | ) | ||||||||||||||||||
Net asset value, end of period | $ | 19.50 | $ | 16.53 | $ | 12.52 | $ | 15.20 | $ | 37.74 | $ | 31.44 | |||||||||||||||
Total Return† | 17.97 | %(1) | 32.03 | % | (17.63 | )% | (45.93 | )% | 40.16 | % | 56.81 | % | |||||||||||||||
Ratios to Average Net Assets(3): | |||||||||||||||||||||||||||
Expenses | 0.92 | %(2)(4) | 1.06 | % | 1.02 | % | 0.88 | % | 0.85 | % | 0.90 | % | |||||||||||||||
Net investment loss | (0.53) | % (2)(4) | (0.62 | )% | (0.68 | )% | 0.00 | % | (0.35 | )% | (0.25 | )% | |||||||||||||||
Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period, in thousands | $48,150 | $25,111 | $14,826 | $17,906 | $44,008 | $15,246 | |||||||||||||||||||||
Portfolio turnover rate | 101 | %(1) | 202 | % | 237 | % | 213 | % | 184 | % | 172 | % | |||||||||||||||
‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
† | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
(1) | Not annualized. |
(2) | Annualized. |
(3) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
(4) | If the Investment Manager had not waived part of its investment management fee, the ratios of expenses and net investment loss to average net assets would have been 0.98% and (0.59)%, respectively. |
See Notes to Financial Statements
20
Morgan Stanley Developing Growth Securities Trust
Financial Highlights continued
FOR THE YEAR ENDED SEPTEMBER 30, | |||||||||||||||||||||||||||
FOR THE SIX MONTHS ENDED MARCH 31, 2004 | 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||||||
(unaudited) | |||||||||||||||||||||||||||
Class B Shares | |||||||||||||||||||||||||||
Selected Per Share Data: | |||||||||||||||||||||||||||
Net asset value, beginning of period | $ | 15.53 | $ | 11.86 | $ | 14.51 | $ | 36.70 | $ | 30.90 | $ | 20.19 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment loss‡ | (0.12 | ) | (0.19 | ) | (0.23 | ) | (0.18 | ) | (0.44 | ) | (0.27 | ) | |||||||||||||||
Net realized and unrealized gain (loss) | 2.84 | 3.86 | (2.42 | ) | (13.87 | ) | 12.71 | 11.35 | |||||||||||||||||||
Total income (loss) from investment operations | 2.72 | 3.67 | (2.65 | ) | (14.05 | ) | 12.27 | 11.08 | |||||||||||||||||||
Less distributions from net realized gain | — | — | — | (8.14 | ) | (6.47 | ) | (0.37 | ) | ||||||||||||||||||
Net asset value, end of period | $ | 18.25 | $ | 15.53 | $ | 11.86 | $ | 14.51 | $ | 36.70 | $ | 30.90 | |||||||||||||||
Total Return† | 17.51 | %(1) | 30.94 | % | (18.26 | )% | (46.37 | )% | 39.12 | % | 55.59 | % | |||||||||||||||
Ratios to Average Net Assets(3): | |||||||||||||||||||||||||||
Expenses | 1.71 | %(2)(4) | 1.87 | % | 1.80 | % | 1.70 | % | 1.61 | % | 1.70 | % | |||||||||||||||
Net investment loss | (1.32) | % (2)(4) | (1.43 | )% | (1.46 | )% | (0.82 | )% | (1.11 | )% | (1.05 | )% | |||||||||||||||
Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period, in thousands | $432,441 | $293,619 | $276,387 | $443,652 | $1,056,116 | $770,392 | |||||||||||||||||||||
Portfolio turnover rate | 101 | %(1) | 202 | % | 237 | % | 213 | % | 184 | % | 172 | % | |||||||||||||||
‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
† | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
(1) | Not annualized. |
(2) | Annualized. |
(3) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
(4) | If the Investment Manager had not waived part of its investment management fee, the ratios of expenses and net investment loss to average net assets would have been 1.77% and (1.38)%, respectively. |
See Notes to Financial Statements
21
Morgan Stanley Developing Growth Securities Trust
Financial Highlights continued
FOR THE YEAR ENDED SEPTEMBER 30, | |||||||||||||||||||||||||||
FOR THE SIX MONTHS ENDED MARCH 31, 2004 | 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||||||
(unaudited) | |||||||||||||||||||||||||||
Class C Shares | |||||||||||||||||||||||||||
Selected Per Share Data: | |||||||||||||||||||||||||||
Net asset value, beginning of period | $ | 15.57 | $ | 11.88 | $ | 14.54 | $ | 36.76 | $ | 30.95 | $ | 20.19 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment loss‡ | (0.11 | ) | (0.19 | ) | (0.23 | ) | (0.18 | ) | (0.42 | ) | (0.25 | ) | |||||||||||||||
Net realized and unrealized gain (loss) | 2.84 | 3.88 | (2.43 | ) | (13.90 | ) | 12.70 | 11.38 | |||||||||||||||||||
Total income (loss) from investment operations | 2.73 | 3.69 | (2.66 | ) | (14.08 | ) | 12.28 | 11.13 | |||||||||||||||||||
Less distributions from net realized gain | — | — | — | (8.14 | ) | (6.47 | ) | (0.37 | ) | ||||||||||||||||||
Net asset value, end of period | $ | 18.30 | $ | 15.57 | $ | 11.88 | $ | 14.54 | $ | 36.76 | $ | 30.95 | |||||||||||||||
Total Return† | 17.53 | %(1) | 31.06 | % | (18.29 | )% | (46.37 | )% | 39.09 | % | 55.84 | % | |||||||||||||||
Ratios to Average Net Assets(3): | |||||||||||||||||||||||||||
Expenses | 1.71 | %(2)(4) | 1.82 | % | 1.80 | % | 1.70 | % | 1.61 | % | 1.58 | % | |||||||||||||||
Net investment loss | (1.32) | % (2)(4) | (1.38 | )% | (1.46 | )% | (0.82 | )% | (1.11 | )% | (0.93 | )% | |||||||||||||||
Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period, in thousands | $33,357 | $6,912 | $5,986 | $7,793 | $17,007 | $4,728 | |||||||||||||||||||||
Portfolio turnover rate | 101 | %(1) | 202 | % | 237 | % | 213 | % | 184 | % | 172 | % | |||||||||||||||
‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
† | Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. |
(1) | Not annualized. |
(2) | Annualized. |
(3) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
(4) | If the Investment Manager had not waived part of its investment management fee, the ratios of expenses and net investment loss to average net assets would have been 1.77% and (1.38)%, respectively. |
See Notes to Financial Statements
22
Morgan Stanley Developing Growth Securities Trust
Financial Highlights continued
FOR THE YEAR ENDED SEPTEMBER 30, | |||||||||||||||||||||||||||
FOR THE SIX MONTHS ENDED MARCH 31, 2004 | 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||||||
(unaudited) | |||||||||||||||||||||||||||
Class D Shares | |||||||||||||||||||||||||||
Selected Per Share Data: | |||||||||||||||||||||||||||
Net asset value, beginning of period | $ | 16.83 | $ | 12.72 | $ | 15.41 | $ | 38.07 | $ | 31.60 | $ | 20.44 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)‡ | (0.03 | ) | (0.06 | ) | (0.07 | ) | 0.03 | 0.03 | (0.01 | ) | |||||||||||||||||
Net realized and unrealized gain (loss) | 3.07 | 4.17 | (2.62 | ) | (14.55 | ) | 12.91 | 11.54 | |||||||||||||||||||
Total income (loss) from investment operations | 3.04 | 4.11 | (2.69 | ) | (14.52 | ) | 12.94 | 11.53 | |||||||||||||||||||
Less distributions form net realized gain | — | — | — | (8.14 | ) | (6.47 | ) | (0.37 | ) | ||||||||||||||||||
Net asset value, end of period | $ | 19.87 | $ | 16.83 | $ | 12.72 | $ | 15.41 | $ | 38.07 | $ | 31.60 | |||||||||||||||
Total Return† | 18.06 | %(1) | 32.31 | % | (17.46 | )% | (45.83 | )% | 40.53 | % | 57.14 | % | |||||||||||||||
Ratios to Average Net Assets(3): | |||||||||||||||||||||||||||
Expenses | 0.71 | %(2)(4) | 0.87 | % | 0.80 | % | 0.70 | % | 0.61 | % | 0.70 | % | |||||||||||||||
Net investment income (loss) | (0.32) | % (2)(4) | (0.43 | )% | (0.46 | )% | 0.18 | % | (0.11 | )% | (0.05 | )% | |||||||||||||||
Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period, in thousands | $119,773 | $104,190 | $62,606 | $57,436 | $66,696 | $6,625 | |||||||||||||||||||||
Portfolio turnover rate | 101 | %(1) | 202 | % | 237 | % | 213 | % | 184 | % | 172 | % | |||||||||||||||
‡ | The per share amounts were computed using an average number of shares outstanding during the period. |
† | Calculated based on the net asset value as of the last business day of the period. |
(1) | Not annualized. |
(2) | Annualized. |
(3) | Reflects overall Fund ratios for investment income and non-class specific expenses. |
(4) | If the Investment Manager had not waived part of its investment management fee, the ratios of expenses and net investment loss to average net assets would have been 0.77% and (0.38)%, respectively. |
See Notes to Financial Statements
23
Trustees Michael Bozic Officers Charles A. Fiumefreddo Mitchell M. Merin Ronald E. Robison Barry Fink Joseph J. McAlinden Stefanie V. Chang Francis J. Smith Thomas F. Caloia Mary E. Mullin Transfer Agent Morgan Stanley Trust Independent Auditors Deloitte & Touche LLP Investment Manager Morgan Stanley Investment Advisors Inc. 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 trustees. 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. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. © 2004 Morgan Stanley 37905RPT-RA04-00144P-Y03/04 | MORGAN STANLEY FUNDS | |
Morgan Stanley Developing Growth Securities Trust Semiannual Report March 31, 2004 | ||
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. [Reserved.] Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable for semiannual reports. Item 8. [Reserved.] Item 9 - 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. There were no significant changes or corrective actions with regard to significant deficiencies or material weaknesses in the Fund's internal controls or in other factors that could significantly affect the Fund's internal controls subsequent to the date of their evaluation. 1 (b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 10 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 Developing Growth Securities Trust /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer May 18, 2004 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 18, 2004 /s/ Francis Smith Francis Smith Principal Financial Officer May 18, 2004 3 EXHIBIT 10 B1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER CERTIFICATIONS I, Ronald E. Robison, certify that: 1. I have reviewed this report on Form N-CSR of Morgan Stanley Developing Growth Securities Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; [b) Omitted.] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 4 a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: May 18, 2004 /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer 5 EXHIBIT 10 B2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER CERTIFICATIONS I, Francis Smith, certify that: 6. I have reviewed this report on Form N-CSR of Morgan Stanley Developing Growth Securities Trust; 7. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 8. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 9. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: b) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; [b) Omitted.] e) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and f) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 10. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): c) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and 6 d) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: May 18, 2004 /s/ Francis Smith Francis Smith Principal Financial Officer 7 SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Morgan Stanley Developing Growth Securities Trust In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended March 31, 2004 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: May 18, 2004 /s/ Ronald E. Robison --------------------------- Ronald E. Robison Principal Executive Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Developing Growth Securities Trust and will be retained by Morgan Stanley Developing Growth Securities Trust and furnished to the Securities and Exchange Commission or its staff upon request. 8 SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Morgan Stanley Developing Growth Securities Trust In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended March 31, 2004 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: May 18, 2004 /s/ Francis Smith ---------------------- Francis Smith Principal Financial Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Developing Growth Securities Trust and will be retained by Morgan Stanley Developing Growth Securities Trust and furnished to the Securities and Exchange Commission or its staff upon request. 9