-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cgn91uuGxylT58wq5W9u2MumAhV2H0Ealfe460ettDOf7cGRWBAblQY+yh8LiSdQ +aNaw4bKq8azKifAKck76g== 0000950123-04-012718.txt : 20041029 0000950123-04-012718.hdr.sgml : 20041029 20041029160237 ACCESSION NUMBER: 0000950123-04-012718 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040831 FILED AS OF DATE: 20041029 DATE AS OF CHANGE: 20041029 EFFECTIVENESS DATE: 20041029 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY DIVIDEND GROWTH SECURITIES INC CENTRAL INDEX KEY: 0000350183 IRS NUMBER: 133054236 STATE OF INCORPORATION: MD FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-03128 FILM NUMBER: 041106504 BUSINESS ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HAROBOSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 BUSINESS PHONE: (212) 869-6397 MAIL ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY DEAN WITTER DIVIDEND GROWTH SECURITIES INC DATE OF NAME CHANGE: 19980622 FORMER COMPANY: FORMER CONFORMED NAME: WITTER DEAN DIVIDEND GROWTH SECURITIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: INTERCAPITAL DIVIDEND GROWTH SECURITIES INC DATE OF NAME CHANGE: 19830308 N-CSRS 1 y01767nvcsrs.txt MORGAN STANLEY DIVIDEND GROWTH SECURITIES 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: 811-03128 Morgan Stanley Dividend Growth Securities 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: February 28, 2005 Date of reporting period: August 31, 2004 Item 1 - Report to Shareholders Welcome, Shareholder: In this report, you'll learn about how your investment in Morgan Stanley Dividend Growth Securities Inc. performed during the semiannual period. The portfolio management team will provide an overview of the market climate, and discuss some of the factors that helped or hindered performance during the reporting period. In addition, this report includes the Fund's financial statements and a list of Fund investments, as well as other information. 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 the market values of securities owned by the fund will decline and, therefore, the value of the fund 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 August 31, 2004 TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED AUGUST 31, 2004
LIPPER LIPPER S&P LARGE-CAP LARGE-CAP 500 CORE FUNDS VALUE FUNDS CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2) INDEX(3) -1.97% -1.99% -2.35% -1.85% -2.74% -3.83% -1.86%
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 economy showed signs of strength during the first half of fiscal year 2004, albeit at a slowing rate. Investors remained cautious over the potential negative impact of rapidly rising interest rates. Fears of oil supply disruptions, as well as forecasts of a "hard landing" in China and its effect on the global economy, continued to weigh on market sentiment. Consequently, a pullback ensued in the equity markets. The Federal Reserve Board's Open Market Committee raised interest rates by 0.25 percent at its June meeting, indicating that such tightening would continue at a "measured pace." In light of an emerging soft patch in the economic data, the market moved in a downward trajectory through July and August. This, however, did not deter the Federal Reserve from its bias toward rate tightening and at its meeting in August it implemented another 0.25 percent interest-rate increase. Energy stocks were the strongest performers during the period as record high oil prices created strong earnings and cash flows. Strong oil prices had the opposite effect on the consumer discretionary sector, however, as high energy costs negatively affected consumers' budgets. Utilities, one of the more interest-rate-sensitive sectors, performed well, because of a perception that high oil prices were going to keep the Federal Reserve on hold for longer. Large index constituents raised their dividends and had strong earnings during the second quarter. Information technology stocks, led by semiconductor companies, were weak during the period. Weak demand trends led to inventory buildups and margin compression for many semiconductor companies, thus casting a bearish tone over information technology issues in general. PERFORMANCE ANALYSIS Morgan Stanley Dividend Growth Securities Inc. outperformed both the S&P 500 Index and the Lipper Large-Cap Core Funds Index but underperformed the Lipper Large-Cap Value Funds Index for the six months ended August 31, 2004. (Class D of the Fund did slightly outperform the Lipper Large-Cap Value Funds Index.) During this period the Fund focused on companies with an ability to manage through the economic deceleration that might result from rising interest rates or oil shocks. The managers made an effort to scale out of more cyclical sectors to find companies with better downside protection, through improved cash flow yield or dividend growth, than the overall market. The Fund's outperformance over these 2 six months was driven largely by its weightings in the energy and technology sectors and stock selection within the consumer discretionary sector. An overweighted position in the energy sector compared to the S&P 500 helped the Fund, as strong oil prices prevailed throughout the period. An underweighted position in technology relative to the benchmark also served as a positive driver of performance, because this sector underperformed the market as a result of deteriorating demand trends and sector overcapacity. Within the consumer discretionary sector stock selection was positive, as a low absolute level of interest rates led to healthy consumer spending trends that benefited the sector. Several of the Fund's positions served as a drag on performance for the period. An overweighting in basic materials compared to the S&P 500 hurt the Fund, as demonstrated by that sector's underperformance. Although supply and demand fundamentals within the sector held steady, an overreaction to a perceived slowdown in China hurt stock performance. Stock selection within the financials sector further hampered performance. Although valuations had been attractive in this sector, the anticipated slowdown of the fixed-income markets after interest rates rose but before merger and acquisition activity accelerated led to a weak first half. Similarly, stock selection within the health-care sector was detrimental, largely as a result of an emphasis on big pharmaceutical names. Increased competition from generic drug producers and fears of increasing regulatory pressure dampened these stocks' performance for the period. INVESTMENT STRATEGY THE FUND WILL NORMALLY INVEST AT LEAST 80 PERCENT OF ITS ASSETS IN COMMON STOCKS OF COMPANIES WITH A RECORD OF PAYING DIVIDENDS AND THE POTENTIAL FOR INCREASING DIVIDENDS. THE FUND'S "INVESTMENT MANAGER," MORGAN STANLEY INVESTMENT ADVISORS INC., INITIALLY EMPLOYS A QUANTITATIVE SCREENING PROCESS IN AN ATTEMPT TO IDENTIFY A NUMBER OF COMMON STOCKS THAT ARE UNDERVALUED AND THAT HAVE A RECORD OF PAYING DIVIDENDS. THE INVESTMENT MANAGER THEN APPLIES QUALITATIVE ANALYSIS TO DETERMINE WHICH STOCKS IT BELIEVES HAVE THE POTENTIAL TO INCREASE DIVIDENDS AND, FINALLY, TO DETERMINE WHETHER ANY OF THE STOCKS SHOULD BE ADDED TO OR SOLD FROM THE FUND'S PORTFOLIO. 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 BY FILING THE SCHEDULE ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. 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, 3
TOP 10 HOLDINGS United Technologies Corp. 3.7% 3M Co. 3.2 Microsoft Corp. 3.1 Target Corp. 3.0 Bank of America Corp. 2.9 Dow Chemical Co. (The) 2.8 Home Depot, Inc. (The) 2.7 Exxon Mobil Corp. 2.7 Pfizer, Inc. 2.7 PepsiCo, Inc. 2.7
TOP FIVE INDUSTRIES Industrial Conglomerates 9.4% Pharmaceuticals: Major 6.8 Integrated Oil 6.6 Household/Personal Care 5.3 Major Banks 5.0
Data as of August 31, 2004. Subject to change daily. All percentages for top 10 holdings and top five industries are as 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. HTTP://WWW.SEC.GOV. YOU MAY ALSO REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800) SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (PUBLICINFO@SEC.GOV) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102. YOU MAY OBTAIN COPIES OF A FUND'S FISCAL QUARTER FILINGS BY CONTACTING MORGAN STANLEY CLIENT RELATIONS AT (800) 869-NEWS. PROXY VOTING POLICIES AND PROCEDURES A DESCRIPTION OF (1) THE FUND'S POLICIES AND PROCEDURES WITH RESPECT TO THE VOTING OF PROXIES RELATING TO THE FUND'S PORTFOLIO SECURITIES AND (2) HOW THE FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT 12-MONTH PERIOD ENDED AUGUST 31 IS AVAILABLE WITHOUT CHARGE, UPON REQUEST, BY CALLING (800) 869-NEWS OR BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT WWW.MORGANSTANLEY.COM. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT HTTP://WWW.SEC.GOV. 4 PERFORMANCE SUMMARY AVERAGE ANNUAL TOTAL RETURNS -- PERIOD ENDED AUGUST 31, 2004
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES(+) CLASS D SHARES(++) (since 07/28/97) (since 03/30/81) (since 07/28/97) (since 07/28/97) SYMBOL DIVAX DIVBX DIVCX DIVDX 1 YEAR 11.21%(4) 11.09%(4) 10.38%(4) 11.48%(4) 5.37(5) 6.42(5) 9.45(5) -- 5 YEARS (0.78)(4) (1.37)(4) (1.51)(4) (0.55)(4) (1.84)(5) (1.63)(5) (1.51)(5) -- 10 YEARS -- 8.19(4) -- -- -- 8.19(5) -- -- SINCE INCEPTION 2.91(4) 11.66(4) 2.15(4) 3.15(4) 2.13(5) 11.66(5) 2.15(5) --
Performance data quoted represents past performance, which is no guarantee of future results and current performance may be lower or higher than the figures shown. For most recent 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. * 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% for shares redeemed within one year of purchase. ++ Class D has no sales charge. (1) The Standard and Poor's 500 Index (S&P 500(R)) is a broad-based index, the performance of which is based on the performance of 500 widely-held common stocks chosen for market size, liquidity and industry group representation. 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 Lipper Large-Cap Core Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Large-Cap Core 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. As of the date of this report, the Fund is in the Lipper Large-Cap Core Funds classification. (3) The Lipper Large-Cap Value Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Large-Cap Value 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. 5 EXPENSE EXAMPLE As a shareholder of the Fund, you incur ongoing costs, including management 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 03/01/04 - 08/31/04. 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 * ------------- ------------- --------------- 03/01/04 - 03/01/04 08/31/04 08/31/04 ------------- ------------- --------------- CLASS A Actual (-1.97% return)...................................... $1,000.00 $ 980.30 $4.04 Hypothetical (5% return before expenses).................... $1,000.00 $1,021.12 $4.13 CLASS B Actual (-1.99% return)...................................... $1,000.00 $ 980.10 $4.09 Hypothetical (5% return before expenses).................... $1,000.00 $1,021.07 $4.18 CLASS C Actual (-2.35% return)...................................... $1,000.00 $ 976.50 $7.77 Hypothetical (5% return before expenses).................... $1,000.00 $1,017.34 $7.93 CLASS D Actual (-1.85% return)...................................... $1,000.00 $ 981.50 $2.80 Hypothetical (5% return before expenses).................... $1,000.00 $1,022.38 $2.85
- ------------------ * Expenses are equal to the Fund's annualized expense ratio of 0.81%, 0.82%, 1.56% and 0.56% respectively, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). 6 Morgan Stanley Dividend Growth Securities Inc. PORTFOLIO OF INVESTMENTS - AUGUST 31, 2004 (UNAUDITED)
NUMBER OF SHARES VALUE - ------------------------------------------------------ Common Stocks (99.2%) Aerospace & Defense (1.0%) 194,000 General Dynamics Corp. ................ $ 18,942,160 991,200 Northrop Grumman Corp. ................ 51,195,480 -------------- 70,137,640 -------------- Aluminum (1.9%) 4,132,600 Alcoa, Inc. ........... 133,813,588 -------------- Apparel/Footwear (1.4%) 2,032,000 V.F. Corp. ............ 100,258,880 -------------- Apparel/Footwear Retail (0.1%) 341,900 Gap, Inc. (The)........ 6,407,206 -------------- Auto Parts: O.E.M. (1.8%) 2,272,800 Johnson Controls, Inc. ................. 127,958,640 -------------- Beverages: Non- Alcoholic (2.3%) 3,518,500 Coca-Cola Co. (The).... 157,312,135 -------------- Biotechnology (0.8%) 882,500 Amgen Inc.*............ 52,323,425 -------------- Chemicals: Major Diversified (2.7%) 4,445,200 Dow Chemical Co. (The)................. 190,299,012 -------------- Computer Communications (0.7%) 2,719,400 Cisco Systems, Inc.*... 51,015,944 -------------- Computer Peripherals (1.1%) 844,600 Lexmark International, Inc.*................. 74,704,870 -------------- Computer Processing Hardware (1.0%) 2,063,300 Dell Inc.*............. 71,885,372 --------------
NUMBER OF SHARES VALUE - ------------------------------------------------------ Data Processing Services (2.4%) 3,242,500 First Data Corp. ...... $ 136,995,625 1,020,800 Paychex, Inc. ......... 30,287,136 -------------- 167,282,761 -------------- Discount Stores (3.0%) 4,699,400 Target Corp. .......... 209,499,252 -------------- Drugstore Chains (1.2%) 1,998,500 CVS Corp. ............. 79,940,000 -------------- Electric Utilities (2.6%) 3,426,400 Exelon Corp. .......... 126,262,840 814,500 FPL Group, Inc. ....... 56,363,400 -------------- 182,626,240 -------------- Finance/Rental/Leasing (2.4%) 872,500 Fannie Mae............. 64,957,625 4,281,500 MBNA Corp. ............ 103,355,410 -------------- 168,313,035 -------------- Financial Conglomerates (3.5%) 3,756,700 Citigroup, Inc. ....... 174,987,086 1,706,800 J.P. Morgan Chase & Co. .................. 67,555,144 -------------- 242,542,230 -------------- Food Distributors (0.9%) 1,903,800 SYSCO Corp. ........... 61,188,132 -------------- Food: Major Diversified (2.7%) 3,675,200 PepsiCo, Inc. ......... 183,760,000 -------------- Food: Meat/Fish/Dairy (0.1%) 197,700 Dean Foods Co.*........ 7,328,739 -------------- Home Improvement Chains (2.7%) 5,094,000 Home Depot, Inc. (The)................. 186,236,640 --------------
7 See Notes to Financial Statements Morgan Stanley Dividend Growth Securities Inc. PORTFOLIO OF INVESTMENTS - AUGUST 31, 2004 (UNAUDITED) continued
NUMBER OF SHARES VALUE - ------------------------------------------------------ Household/Personal Care (5.3%) 4,127,200 Avon Products, Inc. ... $ 182,339,696 3,234,200 Procter & Gamble Co. (The)................. 181,018,174 -------------- 363,357,870 -------------- Industrial Conglomerates (9.4%) 2,646,500 3M Co. ................ 217,965,740 5,457,300 General Electric Co. .................. 178,944,867 2,704,300 United Technologies Corp. ................ 253,960,813 -------------- 650,871,420 -------------- Information Technology Services (3.3%) 1,773,900 Accenture Ltd. (Class A) (Bermuda)*......... 46,298,790 2,128,600 International Business Machines Corp. ....... 180,271,134 -------------- 226,569,924 -------------- Integrated Oil (6.6%) 3,103,800 BP PLC (ADR) (United Kingdom).............. 166,674,060 1,084,400 ChevronTexaco Corp. ... 105,729,000 4,037,900 Exxon Mobil Corp. ..... 186,147,190 -------------- 458,550,250 -------------- Internet Software/Services (0.4%) 866,200 Yahoo! Inc.*........... 24,695,362 -------------- Investment Banks/ Brokers (3.5%) 813,200 Goldman Sachs Group, Inc. (The)............ 72,903,380 779,700 Lehman Brothers Holdings Inc. ........ 57,612,033 2,213,400 Merrill Lynch & Co., Inc. ................. 113,038,338 -------------- 243,553,751 -------------- Investment Managers (0.9%) 2,203,800 Mellon Financial Corp. ................ 63,601,668 --------------
NUMBER OF SHARES VALUE - ------------------------------------------------------ Life/Health Insurance (2.1%) 3,237,300 Lincoln National Corp. ................ $ 146,649,690 -------------- Major Banks (5.0%) 4,474,400 Bank of America Corp. ................ 201,258,512 834,800 Comerica, Inc. ........ 50,213,220 1,973,300 KeyCorp................ 61,862,955 547,900 Wells Fargo & Co. ..... 32,189,125 -------------- 345,523,812 -------------- Major Telecommunications (2.2%) 3,870,700 Verizon Communications Inc. ................. 151,924,975 -------------- Managed Health Care (1.2%) 436,457 Anthem, Inc.*.......... 35,457,767 1,553,600 Caremark Rx, Inc.*..... 44,588,320 -------------- 80,046,087 -------------- Medical Specialties (1.2%) 197,300 Bard (C.R.), Inc. ..... 11,068,530 1,384,200 Medtronic, Inc. ....... 68,863,950 -------------- 79,932,480 -------------- Motor Vehicles (0.3%) 336,500 Harley-Davidson, Inc. ................. 20,533,230 -------------- Multi-Line Insurance (1.2%) 1,150,700 American International Group, Inc. .......... 81,975,868 -------------- Office Equipment/ Supplies (2.3%) 3,675,100 Pitney Bowes, Inc. .... 160,087,356 -------------- Oil & Gas Production (0.5%) 511,700 Devon Energy Corp. .... 33,163,277 -------------- Oilfield Services/ Equipment (0.8%) 1,858,000 Halliburton Co. ....... 54,197,860 --------------
8 See Notes to Financial Statements Morgan Stanley Dividend Growth Securities Inc. PORTFOLIO OF INVESTMENTS - AUGUST 31, 2004 (UNAUDITED) continued
NUMBER OF SHARES VALUE - ------------------------------------------------------ Other Consumer Services (0.6%) 450,200 eBay Inc.*............. $ 38,960,308 -------------- Packaged Software (3.8%) 338,900 Adobe Systems, Inc. ... 15,545,343 7,864,700 Microsoft Corp. ....... 214,706,310 922,000 SAP AG (ADR) (Germany)............. 33,616,120 -------------- 263,867,773 -------------- Pharmaceuticals: Major (6.8%) 2,960,900 Bristol-Myers Squibb Co. .................. 70,262,157 1,655,000 Johnson & Johnson...... 96,155,500 5,681,800 Pfizer, Inc. .......... 185,624,406 3,140,400 Wyeth.................. 114,844,428 -------------- 466,886,491 -------------- Pharmaceuticals: Other (0.9%) 2,232,400 Teva Pharmaceutical Industries Ltd. (ADR) (Israel).............. 60,832,900 -------------- Railroads (0.6%) 1,129,800 Burlington Northern Santa Fe Corp. ....... 40,446,840 -------------- Semiconductors (1.8%) 1,892,700 Intel Corp. ........... 40,295,583 1,098,400 Marvell Technology Group Ltd. (Bermuda)*............ 25,395,008 457,000 Maxim Integrated Products, Inc. ....... 19,847,510 2,041,100 Texas Instruments Inc. ................. 39,883,094 -------------- 125,421,195 -------------- Telecommunication Equipment (0.5%) 1,179,700 Nokia Corp. (ADR) (Finland)............. 14,014,836 576,000 QUALCOMM Inc. ......... 21,916,800 -------------- 35,931,636 --------------
NUMBER OF SHARES VALUE - ------------------------------------------------------ Trucks/Construction/Farm Machinery (1.7%) 1,806,400 Deere & Co. ........... $ 114,290,928 -------------- Total Common Stocks (Cost $3,372,156,486)........ 6,856,706,692 -------------- PRINCIPAL AMOUNT IN THOUSANDS - ----------- Convertible Bond (0.1%) Wireless Telecommunications (0.1%) $ 7,969 Nextel Communications, Inc. 5.25% due 01/15/10 (Cost $7,680,396)..... 7,978,961 -------------- Short-Term Investment (0.7%) Repurchase Agreement 44,444 Joint repurchase agreement account 1.57% due 09/01/04 (dated 08/31/04; proceeds $44,445,938) (a) (Cost $44,444,000).... 44,444,000 --------------
Total Investments (Cost $3,424,280,882) (b)....................... 100.0% 6,909,129,653 Other Assets in Excess of Liabilities............... 0.0 2,883,476 ----- -------------- Net Assets................ 100.0% $6,912,013,129 ===== ==============
- --------------------------------------------------- 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 $3,517,133,228 and the aggregate gross unrealized depreciation is $32,284,457, resulting in net unrealized appreciation of $3,484,848,771.
9 See Notes to Financial Statements Morgan Stanley Dividend Growth Securities Inc. SUMMARY OF INVESTMENTS - AUGUST 31, 2004 (UNAUDITED)
PERCENT OF INDUSTRY VALUE NET ASSETS - --------------------------------------------------------- Industrial Conglomerates... $ 650,871,420 9.4% Pharmaceuticals: Major..... 466,886,491 6.8 Integrated Oil............. 458,550,250 6.6 Household/Personal Care.... 363,357,870 5.3 Major Banks................ 345,523,812 5.0 Packaged Software.......... 263,867,773 3.8 Investment Banks/Brokers... 243,553,751 3.5 Financial Conglomerates.... 242,542,230 3.5 Information Technology Services.................. 226,569,924 3.3 Discount Stores............ 209,499,252 3.0 Chemicals: Major Diversified............... 190,299,012 2.7 Home Improvement Chains.... 186,236,640 2.7 Food: Major Diversified.... 183,760,000 2.7 Electric Utilities......... 182,626,240 2.6 Finance/Rental/Leasing..... 168,313,035 2.4 Data Processing Services... 167,282,761 2.4 Office Equipment/Supplies........ 160,087,356 2.3 Beverages: Non-Alcoholic... 157,312,135 2.3 Major Telecommunications... 151,924,975 2.2 Life/Health Insurance...... 146,649,690 2.1 Aluminum................... 133,813,588 1.9 Auto Parts: O.E.M.......... 127,958,640 1.8 Semiconductors............. 125,421,195 1.8 Trucks/Construction/Farm Machinery................. 114,290,928 1.7 Apparel/Footwear........... 100,258,880 1.4
PERCENT OF INDUSTRY VALUE NET ASSETS - --------------------------------------------------------- Multi-Line Insurance....... $ 81,975,868 1.2% Managed Health Care........ 80,046,087 1.2 Drugstore Chains........... 79,940,000 1.2 Medical Specialties........ 79,932,480 1.2 Computer Peripherals....... 74,704,870 1.1 Computer Processing Hardware.................. 71,885,372 1.0 Aerospace & Defense........ 70,137,640 1.0 Investment Managers........ 63,601,668 0.9 Food Distributors.......... 61,188,132 0.9 Pharmaceuticals: Other..... 60,832,900 0.9 Oilfield Services/Equipment........ 54,197,860 0.8 Biotechnology.............. 52,323,425 0.8 Computer Communications.... 51,015,944 0.7 Repurchase Agreement....... 44,444,000 0.7 Railroads.................. 40,446,840 0.6 Other Consumer Services.... 38,960,308 0.6 Telecommunication Equipment................. 35,931,636 0.5 Oil & Gas Production....... 33,163,277 0.5 Internet Software/Services......... 24,695,362 0.4 Motor Vehicles............. 20,533,230 0.3 Wireless Telecommunications........ 7,978,961 0.1 Food: Meat/Fish/Dairy...... 7,328,739 0.1 Apparel/Footwear Retail.... 6,407,206 0.1 -------------- ----- $6,909,129,653 100.0% ============== =====
10 See Notes to Financial Statements Morgan Stanley Dividend Growth Securities Inc. FINANCIAL STATEMENTS Statement of Assets and Liabilities August 31, 2004 (unaudited) Assets: Investments in securities, at value (cost $3,424,280,882)............. $6,909,129,653 Receivable for: Dividends....................... 14,362,599 Capital stock sold.............. 1,304,815 Investments sold................ 141,832 Interest........................ 56,509 Prepaid expenses and other assets... 329,843 Receivable from affiliate........... 4,398,600 -------------- Total Assets.................... 6,929,723,851 -------------- Liabilities: Payable for: Capital stock redeemed.......... 9,003,951 Distribution fee................ 5,458,853 Investment management fee....... 2,593,299 Accrued expenses and other payables.......................... 654,619 -------------- Total Liabilities............... 17,710,722 -------------- Net Assets...................... $6,912,013,129 ============== Composition of Net Assets: Paid-in-capital..................... $3,028,258,181 Net unrealized appreciation......... 3,484,848,770 Accumulated undistributed net investment income................. 24,318,084 Accumulated undistributed net realized gain..................... 374,588,094 -------------- Net Assets...................... $6,912,013,129 ============== Class A Shares: Net Assets.......................... $108,076,222 Shares Outstanding (500,000,000 authorized, $.01 par value)....... 2,910,725 Net Asset Value Per Share....... $37.13 ============== Maximum Offering Price Per Share, (net asset value plus 5.54% of net asset value).............. $39.19 ============== Class B Shares: Net Assets.......................... $6,136,857,549 Shares Outstanding (500,000,000 authorized, $.01 par value)....... 164,755,037 Net Asset Value Per Share....... $37.25 ============== Class C Shares: Net Assets.......................... $105,011,839 Shares Outstanding (500,000,000 authorized, $.01 par value)....... 2,836,171 Net Asset Value Per Share....... $37.03 ============== Class D Shares: Net Assets.......................... $562,067,519 Shares Outstanding (500,000,000 authorized, $.01 par value)....... 15,125,472 Net Asset Value Per Share....... $37.16 ==============
Statement of Operations For the six months ended August 31, 2004 (unaudited) Net Investment Income: Income Dividends (net of $88,958 foreign withholding tax)................... $ 71,165,336 Interest............................. 376,404 ------------- Total Income..................... 71,541,740 ------------- Expenses Investment management fee............ 15,769,312 Distribution fee (Class A shares).... 149,185 Distribution fee (Class B shares).... 14,628,735 Distribution fee (Class C shares).... 565,136 Transfer agent fees and expenses..... 4,232,039 Shareholder reports and notices...... 176,485 Custodian fees....................... 150,400 Registration fees.................... 60,361 Directors' fees and expenses......... 56,419 Professional fees.................... 55,891 Other................................ 115,524 ------------- Total Expenses................... 35,959,487 Less: plan of distribution fee rebate (Class B shares)................... (6,000,000) ------------- Net Investment Income............ 41,582,253 ------------- Net Realized and Unrealized Gain (Loss): Net realized gain.................... 417,185,679 Net change in unrealized appreciation....................... (611,480,181) ------------- Net Loss......................... (194,294,502) ------------- Net Decrease......................... $(152,712,249) =============
11 See Notes to Financial Statements Morgan Stanley Dividend Growth Securities Inc. FINANCIAL STATEMENTS continued Statement of Changes in Net Assets
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED AUGUST 31, 2004 FEBRUARY 29, 2004 --------------- ----------------- (unaudited) Increase (Decrease) in Net Assets: Operations: Net investment income....................................... $ 41,582,253 $ 83,186,686 Net realized gain........................................... 417,185,679 1,166,883,849 Net change in unrealized appreciation....................... (611,480,181) 1,011,336,415 -------------- -------------- Net Increase (Decrease)................................. (152,712,249) 2,261,406,950 -------------- -------------- Dividends and Distributions to Shareholders from: Net investment income Class A shares.......................................... (755,057) (1,963,643) Class B shares.......................................... (33,775,214) (74,340,471) Class C shares.......................................... (267,155) (878,589) Class D shares.......................................... (4,282,346) (8,714,782) Net realized gain Class A shares.......................................... (11,104,057) (10,500,574) Class B shares.......................................... (612,978,197) (581,521,886) Class C shares.......................................... (10,634,552) (8,873,020) Class D shares.......................................... (54,212,881) (43,854,656) -------------- -------------- Total Dividends and Distributions....................... (728,009,459) (730,647,621) -------------- -------------- Net decrease from capital stock transactions................ (79,630,122) (241,898,098) -------------- -------------- Net Increase (Decrease)................................. (960,351,830) 1,288,861,231 Net Assets: Beginning of period......................................... 7,872,364,959 6,583,503,728 -------------- -------------- End of Period (Including accumulated undistributed net investment income of $24,318,084 and $21,815,603, respectively)............... $6,912,013,129 $7,872,364,959 ============== ==============
12 See Notes to Financial Statements Morgan Stanley Dividend Growth Securities Inc. NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2004 (UNAUDITED) 1. Organization and Accounting Policies Morgan Stanley Dividend Growth Securities 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 objective is to provide reasonable current income and long-term growth of income and capital. The Fund was incorporated in Maryland on December 22, 1980 and commenced operations on March 30, 1981. 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 Directors. 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 13 Morgan Stanley Dividend Growth Securities Inc. NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2004 (UNAUDITED) continued of the close of the NYSE, as determined in good faith by the Fund's Directors or by the Investment Manager using a pricing service and/or procedures approved by the Directors of the Fund; (6) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Directors; and (7) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost. B. Accounting for Investments -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. 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. 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. F. Dividends and Distributions to Shareholders -- Dividends and distributions to shareholders are recorded on the ex-dividend date. G. 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. 14 Morgan Stanley Dividend Growth Securities Inc. NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2004 (UNAUDITED) continued 2. Investment Management Agreement Pursuant to an Investment Management Agreement with the Investment Manager, the Fund pays a management fee, accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined at the close of each business day: 0.625% to the portion of daily net assets not exceeding $250 million; 0.50% to the portion of daily net assets exceeding $250 million but not exceeding $1 billion; 0.475% to the portion of daily net assets exceeding $1 billion but not exceeding $2 billion; 0.45% to the portion of daily net assets exceeding $2 billion but not exceeding $3 billion; 0.425% to the portion of daily net assets exceeding $3 billion but not exceeding $4 billion; 0.40% to the portion of daily net assets exceeding $4 billion but not exceeding $5 billion; 0.375% to the portion of daily net assets exceeding $5 billion but not exceeding $6 billion; 0.35% to the portion of daily net assets exceeding $6 billion but not exceeding $8 billion; 0.325% to the portion of daily net assets exceeding $8 billion but not exceeding $10 billion; 0.30% to the portion of daily net assets exceeding $10 billion but not exceeding $15 billion; and 0.275% to the portion of daily net assets exceeding $15 billion. 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 -- up to 1.0% of the lesser of: (a) the average daily aggregate gross sales of the Class B shares since the inception of the Plan on July 2, 1984 (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 Plan's inception upon which a contingent deferred sales charge has been imposed or waived; or (b) the average daily net assets of Class B attributable to shares issued, net of related shares redeemed, since the Plan's inception; 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 15 Morgan Stanley Dividend Growth Securities Inc. NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2004 (UNAUDITED) continued treat such expenses. The Distributor has advised the Fund that there were no excess expenses as of August 31, 2004. For the six months ended August 31, 2004, the Distributor rebated a portion of the distribution fees paid by the Fund on Class B shares in the amount of $6,000,000. Included in the Statement of Assets and Liabilities is a receivable from affiliate which represents a distribution fee rebate due to the Fund. 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 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 August 31, 2004, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.25% and 1.0%, respectively. The Distributor has informed the Fund that for the six months ended August 31, 2004, it received contingent deferred sales charges from certain redemptions of the Fund's Class B shares and Class C shares of $2,005,654 and $7,673, respectively and received $157,230 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 the proceeds from sales of portfolio securities, excluding short-term investments, for the six months ended August 31, 2004 aggregated $1,532,305,873 and $2,215,780,989, respectively. For the six months ended August 31, 2004, the Fund incurred brokerage commissions of $740,545 with Morgan Stanley & Co., Inc., an affiliate of the Investment Manager and Distributor, for portfolio transactions executed on behalf of the Fund. The Fund has an unfunded noncontributory defined benefit pension plan covering certain independent Directors of the Fund who will have served as independent Directors for at least five years at the time of retirement. Benefits under this plan are based on factors which include years of service and compensation. Aggregate pension costs for the six months ended August 31, 2004 included in Directors' fees and expenses in the Statement of Operations amounted to $3,563. At August 31, 2004, the Fund had an accrued pension liability of $62,105 which is included in accrued expenses in the Statement of Assets and Liabilities. On December 2, 2003, the Directors voted to close the 16 Morgan Stanley Dividend Growth Securities Inc. NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2004 (UNAUDITED) continued plan to new participants and eliminate the future benefits growth due to increases to compensation after July 31, 2003. Effective April 1, 2004, the Fund began 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 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. Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is the Fund's transfer agent. At August 31, 2004, the Fund had transfer agent fees and expenses payable of approximately $339,000. 5. 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 February 29, 2004, the Fund had a net capital loss carryforward of $42,620,160 of which $37,562,781 will expire on February 28, 2010, and $5,057,379 will expire on February 28, 2011 to offset future capital gains to the extent provided by regulations. As part of the Fund's acquisition of the assets of Morgan Stanley Equity Fund ("Equity"), the Fund obtained a net capital loss carryforward of $121,087,370 from Equity. Utilization of this carryforward is subject to limitations imposed by the Internal Revenue Code and Treasury Regulations, reducing the total carryforward available. As of February 29, 2004, the Fund had temporary book/tax differences primarily attributable to capital loss deferrals on wash sales. 17 Morgan Stanley Dividend Growth Securities Inc. NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2004 (UNAUDITED) continued 6. Capital Stock Transactions in capital stock were as follows:
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED AUGUST 31, 2004 FEBRUARY 29, 2004 --------------------------- ----------------------------- (unaudited) SHARES AMOUNT SHARES AMOUNT ----------- ------------- ----------- --------------- CLASS A SHARES Sold........................................ 259,434 $ 10,217,014 651,542 $ 25,429,321 Shares issued in connection with the acquisition of Morgan Stanley Equity Fund...................................... -- -- 101,388 4,101,120 Reinvestment of dividends and distributions............................. 285,346 10,896,413 284,735 11,143,948 Redeemed.................................... (644,319) (25,230,370) (1,097,538) (43,265,319) ----------- ------------- ----------- --------------- Net decrease - Class A...................... (99,539) (4,116,943) (59,873) (2,590,930) ----------- ------------- ----------- --------------- CLASS B SHARES Sold........................................ 2,397,801 96,334,043 9,195,221 362,374,599 Shares issued in connection with the acquisition of Morgan Stanley Equity Fund...................................... -- -- 2,575,564 104,507,279 Reinvestment of dividends and distributions............................. 15,287,187 585,447,036 15,069,631 591,619,055 Redeemed.................................... (20,207,301) (800,836,806) (36,423,311) (1,429,573,259) ----------- ------------- ----------- --------------- Net decrease - Class B...................... (2,522,313) (119,055,727) (9,582,895) (371,072,326) ----------- ------------- ----------- --------------- CLASS C SHARES Sold........................................ 184,944 7,393,121 558,455 22,071,616 Shares issued in connection with the acquisition of Morgan Stanley Equity Fund...................................... -- -- 193,897 7,834,971 Reinvestment of dividends and distributions............................. 271,404 10,344,107 235,875 9,228,507 Redeemed.................................... (439,387) (17,146,994) (602,576) (23,686,489) ----------- ------------- ----------- --------------- Net increase - Class C...................... 16,961 590,234 385,651 15,448,605 ----------- ------------- ----------- --------------- CLASS D SHARES Sold........................................ 1,879,266 74,695,554 4,007,163 159,335,542 Shares issued in connection with the acquisition of Morgan Stanley Equity Fund...................................... -- -- 205,852 8,330,415 Reinvestment of dividends and distributions............................. 1,398,317 53,459,794 1,254,655 49,088,021 Redeemed.................................... (2,144,077) (85,202,434) (2,534,996) (100,437,425) ----------- ------------- ----------- --------------- Net increase - Class D...................... 1,133,506 42,952,314 2,932,674 116,316,553 ----------- ------------- ----------- --------------- Net decrease in Fund........................ (1,471,385) $ (79,630,122) (6,324,445) $ (241,898,098) =========== ============= =========== ===============
7. Fund Acquisition On December 22, 2003, the Fund acquired all the net assets of Morgan Stanley Equity Fund ("Equity") 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 Equity on December 16, 2003. 18 Morgan Stanley Dividend Growth Securities Inc. NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2004 (UNAUDITED) continued The acquisition was accomplished by a tax-free exchange of 101,388 Class A shares of the Fund at a net asset value of $40.44 per share for 533,970 Class A shares of Equity; 2,575,564 Class B shares of the Fund at a net asset value of $40.55 per share for 14,209,727 Class B shares of Equity; 193,897 Class C shares of the Fund at a net asset value of $40.39 per share for 1,059,741 Class C shares of Equity; and 205,852 Class D shares of the Fund at a net asset value of $40.45 per share for 1,068,353 Class D shares of Equity. The net assets of the Fund and Equity immediately before the acquisition were $7,684,808,181 and $124,930,805, respectively, including unrealized appreciation of $8,380,961 for Equity. Immediately after the acquisition, the combined net assets of the Fund amounted to $7,809,738,986. 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 have moved to dismiss the action and intend to otherwise vigorously 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. 19 Morgan Stanley Dividend Growth Securities Inc. FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of capital stock outstanding throughout each period:
FOR THE SIX FOR THE YEAR ENDED FEBRUARY 28, MONTHS ENDED -------------------------------------------------------------------- AUGUST 31, 2004 2004* 2003 2002 2001 2000* --------------- -------- -------- -------- -------- -------- (unaudited) Class A Shares Selected Per Share Data: Net asset value, beginning of period........................... $42.01 $ 34.01 $ 46.44 $ 52.54 $ 50.11 $ 60.22 ------ ------- ------- ------- ------- ------- Income (loss) from investment operations: Net investment income++....... 0.22 0.61 0.68 0.71 0.84 0.94 Net realized and unrealized gain (loss)................... (0.94) 11.62 (11.41) (3.51) 8.35 (7.75) ------ ------- ------- ------- ------- ------- Total income (loss) from investment operations............ (0.72) 12.23 (10.73) (2.80) 9.19 (6.81) ------ ------- ------- ------- ------- ------- Less dividends and distributions from: Net investment income......... (0.26) (0.65) (0.72) (0.70) (0.92) (0.99) Net realized gain............. (3.90) (3.58) (0.98) (2.60) (5.84) (2.31) ------ ------- ------- ------- ------- ------- Total dividends and distributions.................... (4.16) (4.23) (1.70) (3.30) (6.76) (3.30) ------ ------- ------- ------- ------- ------- Net asset value, end of period.... $37.13 $ 42.01 $ 34.01 $ 46.44 $ 52.54 $ 50.11 ====== ======= ======= ======= ======= ======= Total Return+..................... (1.97)%(1) 37.26% (23.66)% (5.35)% 19.31% (12.07)% Ratios to Average Net Assets(3):) Expenses.......................... 0.81 %(2) 0.80% 0.77% 0.73% 0.73% 0.67% Net investment income............. 1.12 %(2) 1.56% 1.69% 1.46% 1.57% 1.52% Supplemental Data: Net assets, end of period, in millions......................... $108 $126 $104 $145 $223 $215 Portfolio turnover rate........... 21 %(1) 34% 7% 0% 1% 4%
- --------------------- * Year ended February 29. ++ 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.
20 See Notes to Financial Statements Morgan Stanley Dividend Growth Securities Inc. FINANCIAL HIGHLIGHTS continued
FOR THE SIX FOR THE YEAR ENDED FEBRUARY 28, MONTHS ENDED ------------------------------------------------------------------------- AUGUST 31, 2004 2004* 2003 2002 2001 2000* --------------- ----------- ----------- --------- --------- --------- (unaudited) Class B Shares Selected Per Share Data: Net asset value, beginning of period.... $42.08 $34.04 $46.46 $52.54 $ 50.10 $60.18 ------ ------ ------ ------ -------- ------ Income (loss) from investment operations: Net investment income++............ 0.19 0.43 0.37 0.34 0.47 0.64 Net realized and unrealized gain (loss).............. (0.91) 11.64 (11.41) (3.50) 8.35 (7.73) ------ ------ ------ ------ -------- ------ Total income (loss) from investment operations............. (0.72) 12.07 (11.04) (3.16) 8.82 (7.09) ------ ------ ------ ------ -------- ------ Less dividends and distributions from: Net investment income.............. (0.21) (0.45) (0.40) (0.32) (0.54) (0.68) Net realized gain... (3.90) (3.58) (0.98) (2.60) (5.84) (2.31) ------ ------ ------ ------ -------- ------ Total dividends and distributions.......... (4.11) (4.03) (1.38) (2.92) (6.38) (2.99) ------ ------ ------ ------ -------- ------ Net asset value, end of period................. $37.25 $42.08 $34.04 $46.46 $ 52.54 $50.10 ====== ====== ====== ====== ======== ====== Total Return+........... (1.99)%(1) 36.62% (24.27)% (6.06)% 18.48% (12.49)% Ratios to Average Net Assets(3): Expenses................ 0.82 %(2)(4) 1.28%(4) 1.54% 1.49% 1.42% 1.15% Net investment income... 1.11 %(2)(4) 1.08%(4) 0.92% 0.70% 0.88% 1.04% Supplemental Data: Net assets, end of period, in millions.... $6,137 $7,040 $6,020 $9,865 $11,819 $12,869 Portfolio turnover rate................... 21 %(1) 34% 7% 0% 1% 4%
- --------------------- * Year ended February 29. ++ 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 Distributor had not rebated a portion of its fee to the Fund, the expense and net investment income ratios would have been: EXPENSE NET INVESTMENT PERIOD ENDED RATIO INCOME RATIO ----------------- ---- ---- August 31, 2004 1.00% 0.93% February 29, 2004 1.56% 0.80%
21 See Notes to Financial Statements Morgan Stanley Dividend Growth Securities Inc. FINANCIAL HIGHLIGHTS continued
FOR THE SIX FOR THE YEAR ENDED FEBRUARY 28, MONTHS ENDED --------------------------------------------------------------------- AUGUST 31, 2004 2004* 2003 2002 2001 2000* --------------- -------- --------- -------- -------- -------- (unaudited) Class C Shares Selected Per Share Data: Net asset value, beginning of period.......................... $41.89 $ 33.92 $ 46.32 $ 52.44 $ 49.96 $ 60.02 ------ ------- -------- ------- ------- ------- Income (loss) from investment operations: Net investment income++...... 0.07 0.31 0.37 0.35 0.50 0.47 Net realized and unrealized gain (loss).................. (0.93) 11.60 (11.38) (3.49) 8.32 (7.70) ------ ------- -------- ------- ------- ------- Total income (loss) from investment operations........... (0.86) 11.91 (11.01) (3.14) 8.82 (7.23) ------ ------- -------- ------- ------- ------- Less dividends and distributions from: Net investment income........ (0.10) (0.36) (0.41) (0.38) (0.50) (0.52) Net realized gain............ (3.90) (3.58) (0.98) (2.60) (5.84) (2.31) ------ ------- -------- ------- ------- ------- Total dividends and distributions................... (4.00) (3.94) (1.39) (2.98) (6.34) (2.83) ------ ------- -------- ------- ------- ------- Net asset value, end of period... $37.03 $ 41.89 $ 33.92 $ 46.32 $ 52.44 $ 49.96 ====== ======= ======== ======= ======= ======= Total Return+.................... (2.35)%(1) 36.25% (24.26)% (6.05)% 18.54% (12.73)% Ratios to Average Net Assets(3): Expenses......................... 1.56 %(2) 1.56% 1.54% 1.48% 1.37% 1.43% Net investment income............ 0.37 %(2) 0.80% 0.92% 0.71% 0.93% 0.76% Supplemental Data: Net assets, end of period, in millions........................ $105 $118 $83 $125 $139 $135 Portfolio turnover rate.......... 21 %(1) 34% 7% 0% 1% 4%
- --------------------- * Year ended February 29. ++ 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.
22 See Notes to Financial Statements Morgan Stanley Dividend Growth Securities Inc. FINANCIAL HIGHLIGHTS continued
FOR THE SIX FOR THE YEAR ENDED FEBRUARY 28, MONTHS ENDED --------------------------------------------------------------------- AUGUST 31, 2004 2004* 2003 2002 2001 2000* --------------- -------- --------- -------- -------- -------- (unaudited) Class D Shares Selected Per Share Data: Net asset value, beginning of period.......................... $42.04 $ 34.03 $ 46.47 $ 52.59 $ 50.16 $ 60.26 ------ ------- -------- ------- ------- ------- Income (loss) from investment operations: Net investment income++...... 0.28 0.70 0.77 0.83 0.97 1.09 Net realized and unrealized gain (loss).................. (0.95) 11.63 (11.41) (3.53) 8.35 (7.76) ------ ------- -------- ------- ------- ------- Total income (loss) from investment operations........... (0.67) 12.33 (10.64) (2.70) 9.32 (6.67) ------ ------- -------- ------- ------- ------- Less dividends and distributions from: Net investment income........ (0.31) (0.74) (0.82) (0.82) (1.05) (1.12) Net realized gain............ (3.90) (3.58) (0.98) (2.60) (5.84) (2.31) ------ ------- -------- ------- ------- ------- Total dividends and distributions................... (4.21) (4.32) (1.80) (3.42) (6.89) (3.43) ------ ------- -------- ------- ------- ------- Net asset value, end of period... $37.16 $ 42.04 $ 34.03 $ 46.47 $ 52.59 $ 50.16 ====== ======= ======== ======= ======= ======= Total Return+.................... (1.85)%(1) 37.58% (23.50)% (5.10)% 19.60% (11.85)% Ratios to Average Net Assets(3): Expenses......................... 0.56 %(2) 0.56% 0.54% 0.49% 0.48% 0.43% Net investment income............ 1.37 %(2) 1.80% 1.92% 1.70% 1.82% 1.76% Supplemental Data: Net assets, end of period, in millions........................ $562 $588 $376 $480 $424 $405 Portfolio turnover rate.......... 21 %(1) 34% 7% 0% 1% 4%
- --------------------- * Year ended February 29. ++ 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.
23 See Notes to Financial Statements DIRECTORS Michael Bozic Charles A. Fiumefreddo Edwin J. Garn Wayne E. Hedien James F. Higgins Dr. Manuel H. Johnson Joseph J. Kearns Michael E. Nugent Fergus Reid OFFICERS Charles A. Fiumefreddo Chairman of the Board Mitchell M. Merin President Ronald E. Robison Executive Vice President and Principal Executive Officer Barry Fink Vice President Joseph J. McAlinden Vice President Amy R. Doberman Vice President Stefanie V. Chang Vice President Francis J. Smith Treasurer and Chief Financial Officer Thomas F. Caloia Vice President 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 INVESTMENT MANAGER 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. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. (c) 2004 Morgan Stanley [MORGAN STANLEY LOGO] MORGAN STANLEY FUNDS Morgan Stanley Dividend GrowthSecurities Semiannual Report August 31, 2004 [MORGAN STANLEY LOGO] 37910RPT-RA04-00646P-Y09/04 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. Closed-End Fund Repurchases Applicable to reports filed by closed-end funds. Item 9. Submission of Matters to a Vote of Security Holders Not applicable. Item 10 - 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. (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 11 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. 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 Dividend Growth Securities Inc. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer October 20, 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 October 20, 2004 /s/ Francis Smith Francis Smith Principal Financial Officer October 20, 2004 3 EX-99.CERT 2 y01767exv99wcert.txt CERTIFICATION 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 Dividend Growth Securities Inc.; 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: October 20, 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: 1. I have reviewed this report on Form N-CSR of Morgan Stanley Dividend Growth Securities Inc.; 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): 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 6 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: October 20, 2004 /s/ Francis Smith Francis Smith Principal Financial Officer 7 EX-99.906CERT 3 y01767exv99w906cert.txt CERTIFICATION 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 Dividend Growth Securities Inc. In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended August 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: October 20, 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 Dividend Growth Securities Inc. and will be retained by Morgan Stanley Dividend Growth Securities Inc. 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 Dividend Growth Securities Inc. In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended August 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: October 20, 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 Dividend Growth Securities Inc. and will be retained by Morgan Stanley Dividend Growth Securities Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 9 -----END PRIVACY-ENHANCED MESSAGE-----