-----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, FyYyalTj6947PCokkM7u10K+Iq+g8faMpB8QKKLqcQxVr6+ZPRrChZEmBHHpZom7 Pov+N79fddKRZkQlzj01TQ== 0001047469-05-018854.txt : 20050705 0001047469-05-018854.hdr.sgml : 20050704 20050705161253 ACCESSION NUMBER: 0001047469-05-018854 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20050430 FILED AS OF DATE: 20050705 DATE AS OF CHANGE: 20050705 EFFECTIVENESS DATE: 20050705 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY EUROPEAN GROWTH FUND INC CENTRAL INDEX KEY: 0000860720 IRS NUMBER: 000000000 STATE OF INCORPORATION: MD FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-06044 FILM NUMBER: 05937134 BUSINESS ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE 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 EUROPEAN GROWTH FUND INC DATE OF NAME CHANGE: 19980622 FORMER COMPANY: FORMER CONFORMED NAME: WITTER DEAN EUROPEAN GROWTH FUND INC DATE OF NAME CHANGE: 19920703 N-CSRS 1 a2159457zn-csrs.txt N-CSRS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-06044 Morgan Stanley European Equity Fund Inc. (Exact name of registrant as specified in charter) 1221 Avenue of the Americas, New York, New York 10020 (Address of principal executive offices) (Zip code) Ronald E. Robison 1221 Avenue of the Americas, New York, New York 10020 (Name and address of agent for service) Registrant's telephone number, including area code: 212-762-4000 Date of fiscal year end: October 31, 2005 Date of reporting period: April 30, 2005 Item 1 - Report to Shareholders WELCOME, SHAREHOLDER: IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY EUROPEAN EQUITY FUND INC. PERFORMED DURING THE SEMIANNUAL PERIOD. WE WILL PROVIDE AN OVERVIEW OF THE MARKET CONDITIONS, AND DISCUSS SOME OF THE FACTORS THAT AFFECTED PERFORMANCE DURING THE REPORTING PERIOD. IN ADDITION, THIS REPORT INCLUDES THE FUND'S FINANCIAL STATEMENTS AND A LIST OF FUND INVESTMENTS. THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING OFFERED. MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE IS NO ASSURANCE THAT 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. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE INFORMATION ON INVESTMENT RISKS. FUND REPORT For the six months ended April 30, 2005 TOTAL RETURN FOR THE SIX MONTHS ENDED APRIL 30, 2005
MORGAN STANLEY LIPPER CAPITAL EUROPEAN INTERNATIONAL REGION (MSCI) FUNDS CLASS A CLASS B CLASS C CLASS D EUROPE INDEX(1) INDEX(2) 7.67% 7.72% 7.18% 7.78% 9.55% 10.85%
THE PERFORMANCE OF THE FUND'S FOUR SHARE CLASSES VARIES BECAUSE EACH HAS DIFFERENT EXPENSES. THE FUND'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY APPLICABLE SALES CHARGES. SUCH COSTS WOULD LOWER PERFORMANCE. SEE PERFORMANCE SUMMARY FOR STANDARDIZED PERFORMANCE AND BENCHMARK INFORMATION. BECAUSE CLASS B SHARES INCURRED LOWER EXPENSES UNDER THE 12b-1 PLAN THAN DID CLASS A SHARES FOR THE 6 MONTHS ENDED APRIL 30, 2005, THE TOTAL OPERATING EXPENSE RATIO FOR CLASS B SHARES WAS LOWER AND, AS A RESULT, THE PERFORMANCE OF CLASS B SHARES WAS HIGHER THAN THAT OF THE CLASS A SHARES. THERE CAN BE NO ASSURANCE THAT THIS WILL CONTINUE TO OCCUR IN THE FUTURE AS THE MAXIMUM FEES PAYABLE BY CLASS B SHARES UNDER THE 12b-1 PLAN ARE HIGHER THAN THOSE PAYABLE BY CLASS A SHARES. MARKET CONDITIONS Conditions in developed European equity markets were generally mixed for the six months ended April 30, 2005. Although lower oil prices contributed to the strength of many markets towards the end of 2004, the return of high oil prices and growing concerns over economic performance slowed the markets later in the period. Over the six months, data generally pointed to weakening economic conditions in Europe as industrial production, consumer confidence and retail sales faltered significantly. The export sector, which has been the driving force behind European economic growth in recent years, also underperformed expectations during the reporting period, thereby contributing to waning investor confidence. The U.K. modestly outperformed the European market for the six months, despite signs that rising interest rates had begun to slow the country's economy. U.K. retailers of discretionary goods became more pessimistic during the six months, prompting a number of analysts to scale back their earnings expectations for the sector. Meanwhile, France saw some improved economic news in the period as the country's housing market gained momentum and supported confidence among consumers. In contrast, Germany experienced a number of economic setbacks in the period. Germany continued to suffer from a particularly weak domestic economy, and Italian manufacturing and services showed signs of contraction. PERFORMANCE ANALYSIS Morgan Stanley European Equity Fund underperformed the Morgan Stanley Capital International (MSCI) Europe Index and the Lipper European Region Funds Index for the six months ended April 30, 2005, assuming no deduction of applicable sales charges. Stock selection was largely responsible for the Fund's underperformance, with holdings in the banking, media and capital goods sectors in particular detracting from gains. Within the banking sector, the Fund suffered from a lack of exposure to the larger U.K. mortgage lenders, which performed well in the first half of the period as the country appeared to come to the end of its monetary tightening cycle. A number of the Fund's banking holdings, meanwhile, lagged the overall sector. The Fund was also hurt by a lack of exposure to many of the media stocks that posted strong gains for the period. Several media stock positions hurt the Fund's relative performance due to a lack of momentum in restructuring and investors' concerns over the future margins of these companies. In the capital goods sector, the solid performance of a number of holdings was offset by the Fund's lack of emphasis in export-orientated stocks that benefited from the strength of demand from Asia and the oil industry. Although these positions led the Fund to underperform its benchmarks, other holdings were much more positive for the Fund. Stock selection in the insurance sector boosted returns due to the Fund's exposure to a number of life insurance companies, which generally benefited from the gains made by the equity market. A number of holdings in the materials sector also helped the Fund, as companies within the chemical, gas and mining industries made gains in part due to strong demand from Asia. Several food, beverage and tobacco holdings further added to the Fund's returns. They benefited from improving fundamentals as well as from their defensive characteristics during a period in which many investors became more cautious. 2 In general, the Fund's positioning became more defensive over the six months ended April 30, 2005. While decreasing exposure to consumer discretionary stocks, the Fund increased its allocation to consumer staples stocks and pharmaceutical companies over the period. By the end of the six months, the Fund was underweighted in technology, materials and industrials companies relative to the MSCI Europe Index. THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL OR BE HELD BY THE FUND IN THE FUTURE. TOP 10 HOLDINGS Novartis AG (Registered Shares) 4.0% GlaxoSmithKline PLC 3.8 Total S.A. 3.5 UBS AG (Registered Shares) 3.3 Vodafone Group PLC 3.1 BP PLC 3.1 Banco Bilbao Vizcaya Argentaria, S.A. 3.1 BNP Paribas S.A. 3.0 Royal Bank of Scotland Group PLC 2.9 Royal Dutch Petroleum Co. 2.8
TOP FIVE COUNTRIES United Kingdom 32.4% France 14.2 Netherlands 14.2 Switzerland 11.4 Germany 10.5
DATA AS OF APRIL 30, 2005. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR TOP 10 HOLDINGS AND TOP FIVE COUNTRIES ARE AS A PERCENTAGE OF NET ASSETS. THESE DATA ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL ADVISORY SERVICES. INVESTMENT STRATEGY THE FUND WILL NORMALLY INVEST AT LEAST 80 PERCENT OF ITS ASSETS IN THE SECURITIES OF ISSUERS LOCATED IN EUROPEAN COUNTRIES. A COMPANY IS CONSIDERED TO BE LOCATED IN EUROPE IF (i) IT IS ORGANIZED UNDER THE LAWS OF A EUROPEAN COUNTRY AND HAS A PRINCIPAL OFFICE IN A EUROPEAN COUNTRY; (ii) IT DERIVES AT LEAST 50 PERCENT OF ITS TOTAL REVENUES FROM BUSINESSES IN EUROPE; OR (iii) ITS EQUITY SECURITIES ARE TRADED PRINCIPALLY ON A STOCK EXCHANGE IN EUROPE. THE PRINCIPAL COUNTRIES IN WHICH THE FUND INVESTS ARE FRANCE, THE UNITED KINGDOM, GERMANY, THE NETHERLANDS, SPAIN, SWEDEN, SWITZERLAND AND ITALY. 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, 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 3 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 JUNE 30, 2004, IS AVAILABLE WITHOUT CHARGE BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT www.morganstanley.com. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT http://www.sec.gov. HOUSEHOLDING NOTICE TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS. YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M., ET. ONCE OUR CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS. 4 PERFORMANCE SUMMARY AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED APRIL 30, 2005
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++ (SINCE 07/28/97) (SINCE 06/01/90) (SINCE 07/28/97) (SINCE 07/28/97) SYMBOL EUGAX EUGBX EUGCX EUGDX 1 YEAR 11.54%(3) 11.65%(3) 10.65%(3) 11.83%(3) 5.68(4) 6.65(4) 9.65(4) 5 YEARS (2.05)(3) (2.48)(3) (2.79)(3) (1.82)(3) (3.10)(4) (2.81)(4) (2.79)(4) -- 10 YEARS -- 8.71(3) -- -- -- 8.71(4) -- -- SINCE INCEPTION 4.99(3) 8.83(3) 4.19(3) 5.38(3) 4.26(4) 8.83(4) 4.19(4) --
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 THE 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 MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EUROPE INDEX MEASURES THE PERFORMANCE FOR A DIVERSE RANGE OF GLOBAL STOCK MARKETS WITHIN AUSTRIA, BELGIUM, DENMARK, FINLAND, FRANCE, GERMANY, GREECE, IRELAND, ITALY, THE NETHERLANDS, NORWAY, PORTUGAL, SPAIN, SWEDEN, SWITZERLAND AND THE UNITED KINGDOM. THE PERFORMANCE OF THE INDEX IS LISTED IN U.S. DOLLARS AND ASSUME REINVESTMENT OF NET DIVIDENDS. "NET DIVIDENDS" REFLECTS A REDUCTION IN DIVIDENDS AFTER TAKING INTO ACCOUNT WITHHOLDING OF TAXES BY CERTAIN FOREIGN COUNTRIES REPRESENTED IN THE 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 LIPPER EUROPEAN REGION FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER EUROPEAN REGION 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. (3) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT THE DEDUCTION OF ANY SALES CHARGES. (4) 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 two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments and redemption fees; and (2) 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 11/01/04 - 04/30/05. 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 and do not reflect any transactional costs, such as sales charges (loads) and redemption fees. 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. In addition, if these transactional costs were included, your costs would have been higher.
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * ------------- ------------- --------------- 11/01/04 - 11/01/04 04/30/05 04/30/05 ------------- ------------- --------------- CLASS A Actual (7.67% return) $ 1,000.00 $ 1,076.70 $ 7.36 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,017.70 $ 7.15 CLASS B Actual (7.72% return) $ 1,000.00 $ 1,077.20 $ 6.70 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,018.35 $ 6.51 CLASS C Actual (7.18% return) $ 1,000.00 $ 1,071.80 $ 11.15 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,014.03 $ 10.84 CLASS D Actual (7.78% return) $ 1,000.00 $ 1,077.80 $ 6.13 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,018.89 $ 5.96
- ---------- * EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.43%, 1.30%, 2.17% AND 1.19% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). 6 INVESTMENT ADVISORY AGREEMENT APPROVAL NATURE, EXTENT AND QUALITY OF SERVICES The Board reviewed and considered the nature and extent of the investment advisory services provided by the Investment Adviser under the Advisory Agreement and the Sub-Advisor (an affiliated company of the Investment Adviser) under the Sub-Advisory Agreement, including portfolio management, investment research and equity and fixed income securities trading. The Board also reviewed and considered the nature and extent of the non-advisory, administrative services provided by the Fund's Administrator under the Administration Agreement, including accounting, clerical, bookkeeping, compliance, business management and planning, and the provision of supplies, office space and utilities at the Adviser's expense. (The Investment Adviser, the Sub-Advisor and the Administrator are referred to, collectively, as the "Adviser" and the Investment Advisory, the Sub-Advisory and Administration Agreements are referred to, collectively, as the "Management Agreement.") The Board also compared the nature of the services provided by the Adviser with similar services provided by non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper"). The Board reviewed and considered the qualifications of the portfolio managers, the senior administrative managers and other key personnel of the Adviser who provide the administrative and investment advisory services to the Fund. The Board determined that the Adviser's portfolio managers and key personnel are well qualified by education and/or training and experience to perform the services in an efficient and professional manner. The Board concluded that the nature and extent of the advisory and administrative services provided were necessary and appropriate for the conduct of the business and investment activities of the Fund. The Board also concluded that the overall quality of the advisory and administrative services was satisfactory. PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS The Board reviewed the Fund's performance for one-, three- and five-year periods ended November 30, 2004, as shown in reports provided by Lipper (the "Lipper Reports"), compared to the performance of comparable funds selected by Lipper (the "performance peer group"), and noted that the Fund's performance was lower than its performance peer group average for all three periods. The Board discussed with the Adviser possible steps to improve performance. The Adviser informed the Board that, in order to try to improve performance, it changed the portfolio manager, made a management strategy change and was in the process of strengthening the research resources available to the Fund through hiring of key experienced research analysts, whose names and areas of research experience were provided to the Board. The Board concluded that the action taken by the Adviser was appropriate and acceptable. FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT STRATEGIES The Board reviewed the advisory and administrative fees (together, the "management fee") paid by the Fund under the Management Agreement. The Board noted that the rate was comparable to the management fee rates charged by the Adviser to any other funds it manages with investment strategies comparable to those of the Fund. 7 FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS The Board reviewed the management fee rate and the total expense ratio of the Fund. The Board noted that: (i) the Fund's management fee rate was slightly higher than the average management fee rate for funds, selected by Lipper (the "expense peer group"), managed by other advisers with investment strategies comparable to those of the Fund, as shown in the Lipper Report for the Fund; but (ii) the Fund's total expense ratio was lower than the average total expense ratio of the funds included in the Fund's expense peer group. The Board concluded that the management fee was competitive with the management fees charged by other investment advisers considering that the Adviser's overall management of the Fund resulted in lower total expenses compared to its expense peer group average. BREAKPOINTS AND ECONOMIES OF SCALE The Board reviewed the structure of the Fund's management fee schedule under the Management Agreement and noted that it includes breakpoints. The Board also reviewed the level of the Fund's management fee and noted that the fee, as a percentage of the Fund's net assets, would decrease as net assets increase because the management fee includes breakpoints. The Board concluded that the Fund's management fee would reflect economies of scale as assets increase. PROFITABILITY OF ADVISER AND AFFILIATES The Board considered and reviewed information concerning the costs incurred and profits realized by the Adviser and its affiliates during the last two years from their relationship with the Fund and the Morgan Stanley Fund Complex and reviewed with the Controller of the Adviser the cost allocation methodology used to determine the Adviser's profitability. Based on their review of the information they received, the Board concluded that the profits earned by the Adviser and its affiliates were not excessive in light of the advisory, administrative and other services provided to the Fund. FALL-OUT BENEFITS The Board considered so-called "fall-out benefits" derived by the Adviser and its affiliates from their relationship with the Fund and the Fund Complex, such as "float" benefits derived from handling of checks for purchases and redemptions of Fund shares through a broker-dealer affiliate of the Adviser and "soft dollar" benefits (discussed in the next section). The Board also considered that a broker-dealer affiliate of the Adviser receives from the Fund 12b-1 fees for distribution and shareholder services. The Board also considered that an affiliate of the Adviser, through a joint venture, receives revenue in connection with trading done on behalf of the Fund through an electronic trading system network ("ECN"). The Board concluded that the float benefits and the above-referenced ECN-related revenue were relatively small and that the 12b-1 fees were competitive with those of other broker-dealer affiliates of investment advisers of mutual funds. 8 SOFT DOLLAR BENEFITS The Board considered whether the Adviser realizes any benefits as a result of brokerage transactions executed through "soft dollar" arrangements. Under such arrangements, brokerage commissions paid by the Fund and/or other funds managed by the Adviser would be used to pay for research that a securities broker obtains from third parties, or to pay for both research and execution services from securities brokers who effect transactions for the Fund. The Adviser informed the Board that it does not use Fund commissions to pay for third party research. It does use commissions to pay for research which is bundled with execution services. The Board recognized that the receipt of such research from brokers may reduce the Adviser's costs but concluded that the receipt of such research strengthens the investment management resources of the Adviser, which may ultimately benefit the Fund and other funds in the Fund Complex. ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE FUND'S NEEDS The Board considered whether the Adviser is financially sound and has the resources necessary to perform its obligations under the Management Agreement. The Board noted that the Adviser's operations remain profitable, although increased expenses in recent years have reduced the Adviser's profitability. The Board concluded that the Adviser has the financial resources necessary to fulfill its obligations under the Management Agreement. HISTORICAL RELATIONSHIP BETWEEN THE FUND AND THE ADVISER The Board also reviewed and considered the historical relationship between the Fund and the Adviser, including the organizational structure of the Adviser, the policies and procedures formulated and adopted by the Adviser for managing the Fund's operations and the Board's confidence in the competence and integrity of the senior managers and key personnel of the Adviser. The Board concluded that it is beneficial for the Fund to continue its relationship with the Adviser. OTHER FACTORS AND CURRENT TRENDS The Board considered the controls and procedures adopted and implemented by the Adviser and monitored by the Fund's Chief Compliance Officer and concluded that the conduct of business by the Adviser indicates a good faith effort on its part to adhere to high ethical standards in the conduct of the Fund's business. GENERAL CONCLUSION After considering and weighing all of the above factors, the Board concluded it would be in the best interest of the Fund and its shareholders to approve renewal of the Management Agreement for another year. 9 MORGAN STANLEY EUROPEAN EQUITY FUND INC. PORTFOLIO OF INVESTMENTS - APRIL 30, 2005 (UNAUDITED)
NUMBER OF SHARES VALUE - -------------------------------------------------------------------- COMMON STOCKS (98.7%) (a) AUSTRIA (0.9%) MAJOR TELECOMMUNICATIONS 320,265 Telekom Austria AG $ 6,151,324 ------------- DENMARK (2.3%) BEVERAGES: ALCOHOLIC 175,793 Carlsberg A/S (Series B) 8,622,927 ------------- PHARMACEUTICALS: MAJOR 133,894 Novo Nordisk A/S (Series B) 6,746,596 ------------- TOTAL DENMARK 15,369,523 ------------- FINLAND (1.0%) MULTI-LINE INSURANCE 500,142 Sampo Oyj (A Shares) 6,970,074 ------------- FRANCE (14.2%) BROADCASTING 188,690 M6 Metropole Television 4,868,099 ------------- ELECTRICAL PRODUCTS 152,739 Schneider Electric S.A. 10,990,518 ------------- INTEGRATED OIL 105,114 Total S.A. 23,313,457 ------------- INTERNET SOFTWARE/SERVICES 157,889 Business Objects S.A.* 4,088,751 ------------- MAJOR BANKS 310,141 BNP Paribas S.A. 20,424,316 ------------- MAJOR TELECOMMUNICATIONS 520,304 France Telecom S.A. 15,222,060 ------------- MULTI-LINE INSURANCE 386,131 Axa 9,513,358 ------------- PHARMACEUTICALS: MAJOR 77,960 Sanofi-Aventis 6,899,374 ------------- TOTAL FRANCE 95,319,933 ------------- GERMANY (10.5%) INDUSTRIAL CONGLOMERATES 182,673 Siemens AG (Registered Shares) 13,383,040 ------------- MAJOR BANKS 150,580 Deutsche Bank AG (Registered Shares) $ 12,296,340 ------------- MAJOR TELECOMMUNICATIONS 562,358 Deutsche Telekom AG (Registered Shares) 10,503,377 ------------- MEDICAL/NURSING SERVICES 86,176 Fresenius Medical Care AG 6,914,387 ------------- MOTOR VEHICLES 220,885 Bayerische Motoren Werke (BMW) AG 9,351,773 106,129 Volkswagen AG 4,416,778 ------------- 13,768,551 ------------- MULTI-LINE INSURANCE 115,538 Allianz AG (Registered Shares) 13,822,569 ------------- TOTAL GERMANY 70,688,264 ------------- ITALY (3.2%) INTEGRATED OIL 476,616 ENI SpA 11,963,213 ------------- MAJOR BANKS 1,738,165 UniCredito Italiano SpA 9,747,098 ------------- TOTAL ITALY 21,710,311 ------------- NETHERLANDS (14.2%) AIR FREIGHT/COURIERS 386,586 TNT NV 10,508,427 ------------- ELECTRONIC PRODUCTION EQUIPMENT 787,010 ASML Holding NV* 11,368,474 ------------- FINANCIAL CONGLOMERATES 467,876 ING Groep NV (Share Certificates) 12,820,979 ------------- FOOD RETAIL 408,641 Koninklijke Ahold NV* 3,099,389 ------------- FOOD: SPECIALTY/CANDY 169,452 Royal Numico NV* 7,013,435 ------------- INTEGRATED OIL 321,621 Royal Dutch Petroleum Co. 18,747,013 -------------
SEE NOTES TO FINANCIAL STATEMENTS 10
NUMBER OF SHARES VALUE - -------------------------------------------------------------------- MAJOR TELECOMMUNICATIONS 1,523,277 Koninklijke (Royal) KPN NV $ 12,706,618 ------------- PUBLISHING: BOOKS/MAGAZINES 240,600 VNU NV 6,767,997 678,909 Wolters Kluwer NV (Share Certificates) 12,078,201 ------------- 18,846,198 ------------- TOTAL NETHERLANDS 95,110,533 ------------- SPAIN (5.3%) MAJOR BANKS 1,343,335 Banco Bilbao Vizcaya Argentaria, S.A. 20,796,907 852,774 Banco Santander Central Hispano, S.A. 9,951,363 ------------- 30,748,270 ------------- TOBACCO 119,226 Altadis, S.A. 5,056,807 ------------- TOTAL SPAIN 35,805,077 ------------- SWEDEN (3.3%) INDUSTRIAL MACHINERY 259,236 Sandvik AB 10,159,701 ------------- MAJOR BANKS 502,319 ForeningsSparbanken AB 11,822,089 ------------- TOTAL SWEDEN 21,981,790 ------------- SWITZERLAND (11.4%) FINANCIAL CONGLOMERATES 278,974 UBS AG (Registered Shares) 22,340,371 ------------- FOOD: MAJOR DIVERSIFIED 43,900 Nestle S.A. (Registered Shares) 11,514,220 ------------- MAJOR BANKS 159,513 Credit Suisse Group* 6,706,578 ------------- PHARMACEUTICALS: MAJOR 549,789 Novartis AG (Registered Shares) 26,722,169 77,284 Roche Holding AG $ 9,338,459 ------------- 36,060,628 ------------- TOTAL SWITZERLAND 76,621,797 ------------- UNITED KINGDOM (32.4%) CABLE/SATELLITE TV 1,517,357 British Sky Broadcasting Group PLC 15,697,052 ------------- CHEMICALS: SPECIALTY 494,292 BOC Group PLC 9,155,244 ------------- ELECTRIC UTILITIES 1,808,815 International Power PLC* 6,298,420 ------------- FOOD RETAIL 3,679,492 Morrison (W.M.) Supermarkets PLC 13,686,067 1,200,549 Tesco PLC 7,081,841 ------------- 20,767,908 ------------- FOOD: SPECIALTY/CANDY 1,091,907 Cadbury Schweppes PLC 10,974,090 ------------- HOTELS/RESORTS/CRUISELINES 131,422 Carnival PLC 6,781,111 ------------- HOUSEHOLD/PERSONAL CARE 223,918 Reckitt Benckiser PLC 7,266,812 ------------- INTEGRATED OIL 2,054,816 BP PLC 20,920,889 708,519 Shell Transport & Trading Co. PLC 6,342,093 ------------- 27,262,982 ------------- INVESTMENT MANAGERS 1,313,305 Amvescap PLC 7,630,995 ------------- LIFE/HEALTH INSURANCE 1,392,418 Prudential PLC 12,550,874 ------------- MAJOR BANKS 655,724 Royal Bank of Scotland Group PLC 19,774,641 166,987 Standard Chartered PLC 3,009,791 ------------- 22,784,432 -------------
SEE NOTES TO FINANCIAL STATEMENTS 11
NUMBER OF SHARES VALUE - -------------------------------------------------------------------- MEDICAL SPECIALTIES 795,541 Smith & Nephew PLC $ 8,186,159 ------------- PHARMACEUTICALS: MAJOR 161,136 AstraZeneca PLC 7,062,121 1,003,026 GlaxoSmithKline PLC 25,234,674 ------------- 32,296,795 ------------- WIRELESS TELECOMMUNICATIONS 3,791,849 O2 PLC* 8,514,398 8,093,971 Vodafone Group PLC 21,116,632 ------------- 29,631,030 ------------- TOTAL UNITED KINGDOM 217,283,904 ------------- TOTAL COMMON STOCKS (COST $544,452,697) 663,012,530 ------------- PRINCIPAL AMOUNT IN THOUSANDS - --------- SHORT-TERM INVESTMENT (1.0%) REPURCHASE AGREEMENT $ 6,752 Joint repurchase agreement account 2.95% due 05/02/05 (dated 04/29/05; proceeds $6,753,660) (b) (COST $6,752,000) 6,752,000 ------------- TOTAL INVESTMENTS (COST $551,204,697) (c) 99.7% 669,764,530 OTHER ASSETS IN EXCESS OF LIABILITIES 0.3 1,841,681 ----- ------------- NET ASSETS 100.0% $ 671,606,211 ===== =============
- -------- * NON-INCOME PRODUCING SECURITY. (a) SECURITIES WITH TOTAL MARKET VALUE EQUAL TO $663,012,530 HAVE BEEN VALUED AT THEIR FAIR VALUE AS DETERMINED IN GOOD FAITH UNDER PROCEDURES ESTABLISHED BY AND UNDER THE GENERAL SUPERVISION OF THE FUND'S DIRECTORS. (b) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS. (c) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $125,727,927 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $7,168,094, RESULTING IN NET UNREALIZED APPRECIATION OF $118,559,833. SEE NOTES TO FINANCIAL STATEMENTS 12 SUMMARY OF INVESTMENTS - APRIL 30, 2005 (UNAUDITED)
PERCENT OF INDUSTRY VALUE NET ASSETS - -------------------------------------------------------------------------------- Major Banks $ 114,529,123 17.1% Pharmaceuticals: Major 82,003,393 12.2 Integrated Oil 81,286,665 12.1 Major Telecommunications 44,583,379 6.6 Financial Conglomerates 35,161,350 5.2 Multi-Line Insurance 30,306,001 4.5 Wireless Telecommunications 29,631,030 4.4 Food Retail 23,867,297 3.6 Publishing: Books/Magazines 18,846,198 2.8 Food: Specialty/Candy 17,987,525 2.7 Cable/Satellite TV 15,697,052 2.3 Motor Vehicles 13,768,551 2.1 Industrial Conglomerates 13,383,040 2.0 Life/Health Insurance 12,550,874 1.9 Food: Major Diversified 11,514,220 1.7 Electronic Production Equipment 11,368,474 1.7 Electrical Products 10,990,518 1.6 Air Freight/Couriers 10,508,427 1.6 Industrial Machinery 10,159,701 1.5 Chemicals: Specialty 9,155,244 1.4 Beverages: Alcoholic 8,622,927 1.3 Medical Specialties 8,186,159 1.2 Investment Managers 7,630,995 1.1 Household/Personal Care 7,266,812 1.1 Medical/Nursing Services 6,914,387 1.0 Hotels/Resorts/Cruiselines 6,781,111 1.0 Repurchase Agreement 6,752,000 1.0 Electric Utilities 6,298,420 0.9 Tobacco 5,056,807 0.8 Broadcasting 4,868,099 0.7 Internet Software/Services 4,088,751 0.6 --------------- ---- $ 669,764,530 99.7% =============== ====
SEE NOTES TO FINANCIAL STATEMENTS 13 MORGAN STANLEY EUROPEAN EQUITY FUND INC. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES APRIL 30, 2005 (UNAUDITED) ASSETS: Investments in securities, at value (cost $551,204,697) $ 669,764,530 Cash 390,717 Receivable for: Dividends 2,353,713 Foreign withholding taxes reclaimed 702,048 Capital stock sold 76,589 Prepaid expenses and other assets 90,822 Receivable from affiliate 421,523 ---------------- TOTAL ASSETS 673,799,942 ---------------- LIABILITIES: Payable for: Capital stock redeemed 938,746 Distribution fee 490,392 Investment advisory fee 488,512 Administration fee 45,655 Accrued expenses and other payables 230,426 ---------------- TOTAL LIABILITIES 2,193,731 ---------------- NET ASSETS $ 671,606,211 ================ COMPOSITION OF NET ASSETS: Paid-in-capital $ 725,183,588 Net unrealized appreciation 118,561,233 Accumulated undistributed net investment income 4,778,627 Accumulated net realized loss (176,917,237) ---------------- NET ASSETS $ 671,606,211 ================ CLASS A SHARES: Net Assets $ 414,421,422 Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 25,856,329 NET ASSET VALUE PER SHARE $ 16.03 ================ MAXIMUM OFFERING PRICE PER SHARE, (NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 16.92 ================ CLASS B SHARES: Net Assets $ 235,894,909 Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 15,238,667 NET ASSET VALUE PER SHARE $ 15.48 ================ CLASS C SHARES: Net Assets $ 15,614,317 Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 1,015,072 NET ASSET VALUE PER SHARE $ 15.38 ================ CLASS D SHARES: Net Assets $ 5,675,563 Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 344,092 NET ASSET VALUE PER SHARE $ 16.49 ================
SEE NOTES TO FINANCIAL STATEMENTS 14 STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED APRIL 30, 2005 (UNAUDITED) NET INVESTMENT INCOME: INCOME Dividends (net of $1,012,225 foreign withholding tax) $ 9,684,872 Interest 63,888 ---------------- TOTAL INCOME 9,748,760 ---------------- EXPENSES Investment advisory fee 3,115,500 Transfer agent fees and expenses 625,406 Distribution fee (Class A shares) 39,285 Distribution fee (Class B shares) 392,357 Distribution fee (Class C shares) 83,387 Administration fee 291,856 Custodian fees 129,723 Shareholder reports and notices 66,217 Professional fees 41,126 Registration fees 26,141 Directors' fees and expenses 8,269 Other 30,877 ---------------- TOTAL EXPENSES 4,850,144 ---------------- NET INVESTMENT INCOME 4,898,616 ---------------- NET REALIZED AND UNREALIZED GAIN (LOSS): NET REALIZED GAIN ON: Investments 67,457,581 Foreign exchange transactions 489,896 ---------------- NET REALIZED GAIN 67,947,477 ---------------- NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON: Investments (15,486,617) Translation of forward foreign currency contracts, other assets and liabilities denominated in foreign currencies (206,261) ---------------- NET DEPRECIATION (15,692,878) ---------------- NET GAIN 52,254,599 ---------------- NET INCREASE $ 57,153,215 ================
SEE NOTES TO FINANCIAL STATEMENTS 15 STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED APRIL 30, 2005 OCTOBER 31, 2004 ---------------- ---------------- (UNAUDITED) INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income $ 4,898,616 $ 7,812,438 Net realized gain 67,947,477 90,386,379 Net change in unrealized appreciation (15,692,878) 10,372,445 ---------------- ---------------- NET INCREASE 57,153,215 108,571,262 ---------------- ---------------- DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME: Class A shares (104,311) (125,548) Class B shares (6,500,714) (2,575,184) Class C shares -- (13,766) Class D shares (63,363) (445,988) ---------------- ---------------- TOTAL DIVIDENDS (6,668,388) (3,160,486) ---------------- ---------------- Net decrease from capital stock transactions (105,049,437) (234,452,558) ---------------- ---------------- NET DECREASE (54,564,610) (129,041,782) NET ASSETS: Beginning of period 726,170,821 855,212,603 ---------------- ---------------- END OF PERIOD (INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME OF $4,778,627 AND $6,548,399, RESPECTIVELY) $ 671,606,211 $ 726,170,821 ================ ================
SEE NOTES TO FINANCIAL STATEMENTS 16 MORGAN STANLEY EUROPEAN EQUITY FUND INC. NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2005 (UNAUDITED) 1. ORGANIZATION AND ACCOUNTING POLICIES Morgan Stanley European Equity Fund Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-end management investment company. The Fund's investment objective is to maximize the capital appreciation of its investments. The Fund was incorporated in Maryland on February 13, 1990 and commenced operations on June 1, 1990. 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 Adviser") or Morgan Stanley Investment Management Limited (the "Sub-Advisor"), an affiliate of the Investment Adviser, 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 of the close of the NYSE, as determined in good faith by the Fund's Directors or by the Investment Adviser using a pricing service and/or procedures approved by the Directors of the Fund; 17 (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 except for certain dividends on foreign securities which are recorded as soon as the Fund is informed after 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 Adviser, 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. 18 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. G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions to shareholders are recorded on the ex-dividend date. H. USE OF ESTIMATES -- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. 2. INVESTMENT ADVISORY/ADMINISTRATION AND SUB-ADVISORY AGREEMENTS Pursuant to an Investment Advisory Agreement, the Fund pays the Investment Adviser an advisory fee, accrued daily and payable monthly, by applying the annual rates to the net assets of the Fund determined as of the close of each business day: 0.87% to the portion of net assets not exceeding $500 million; 0.82% to the portion of daily net assets exceeding $500 million but not exceeding $2 billion; 0.77% to the portion of daily net assets exceeding $2 billion but not exceeding $3 billion; and 0.745% to the portion of daily net assets in excess of $3 billion. Pursuant to an Administration Agreement with Morgan Stanley Services Company Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund pays an administration fee, accrued daily and payable monthly, by applying the annual rate of 0.08% to the Fund's daily net assets. Under a Sub-Advisory Agreement between the Sub-Advisor and the Investment Adviser, the Sub-Advisor provides the Fund with investment advice and portfolio management relating to the Fund's investments in securities, subject to the overall supervision of the Investment Adviser. As compensation for its services provided pursuant to the Sub-Advisory Agreement, the Investment Adviser paid the Sub-Advisor compensation of $1,246,200 for the six months ended April 30, 2005. 3. PLAN OF DISTRIBUTION Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Adviser, Administrator and Sub-Advisor. 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 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 19 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 Directors will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that there were no excess expenses as of April 30, 2005. For the six months ended April 30, 2005, the distribution fee was accrued for Class B shares at the annual rate of 0.11%. At April 30, 2005, included in the Statement of Assets and Liabilities is a receivable from affiliate of $421,523, which represents payments by the Distributor. 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 April 30, 2005, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.24% and 0.98%, respectively. The Distributor has informed the Fund that for the six months ended April 30, 2005, it received contingent deferred sales charges from certain redemptions of the Fund's Class B shares and Class C shares of $210,018 and $554, respectively and received $13,100 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 April 30, 2005 aggregated $233,553,587 and $331,602,640, respectively. Included in the aforementioned transactions are purchases of $375,730 with other Morgan Stanley funds. Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator, Distributor and Sub-Advisor, is the Fund's transfer agent. 20 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 April 30, 2005 included in Directors' fees and expenses in the Statement of Operations amounted to $3,466. At April 30, 2005, the Fund had an accrued pension liability of $60,980 which is included in accrued expenses in the Statement of Assets and Liabilities. On December 2, 2003, the Directors voted to close the plan to new participants and eliminate the future benefits growth due to increases to compensation after July 31, 2003. The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan") which allows each independent Director to defer payment of all, or a portion, of the fees he receives for serving on the Board of Directors. Each eligible Director generally may elect to have the deferred amounts credited with a return equal to the total return on one or more of the Morgan Stanley funds that are offered as investment options under the Compensation Plan. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund. 5. PURPOSE OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS The Fund may enter into forward contracts to facilitate settlement of foreign currency denominated portfolio transactions or to manage foreign currency exposure associated with foreign currency denominated securities. Forward 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 foreign exchange rates underlying the forward contracts. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts. At April 30, 2005, investments in securities of issuers in the United Kingdom represented 32.4% of the Fund's net assets. These investments, as well as other non-U.S. investments, which involve risks and considerations not present with respect to U.S. securities, may be affected by economic or political developments in this region. 21 6. CAPITAL STOCK Transactions in capital stock were as follows:
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED APRIL 30, 2005 OCTOBER 31, 2004 ---------------------------------- ---------------------------------- (UNAUDITED) SHARES AMOUNT SHARES AMOUNT --------------- --------------- --------------- --------------- CLASS A SHARES Sold 108,403 $ 1,779,420 344,522 $ 5,072,788 Conversion from Class B 25,157,378 411,071,562 Reinvestment of dividends and distributions 5,562 91,381 7,674 110,742 Redeemed (433,050) (7,010,992) (583,125) (8,530,247) --------------- --------------- --------------- --------------- Net increase (decrease) -- Class A 24,838,293 405,931,371 (230,929) (3,346,717) --------------- --------------- --------------- --------------- CLASS B SHARES Sold 492,209 7,755,690 1,239,609 17,507,893 Conversion to Class A (26,066,681) (411,071,562) Reinvestment of dividends and distributions 369,059 5,853,268 166,797 2,323,489 Redeemed (6,937,831) (109,227,990) (14,834,405) (208,156,645) --------------- --------------- --------------- --------------- Net decrease -- Class B (32,143,244) (506,690,594) (13,427,999) (188,325,263) --------------- --------------- --------------- --------------- CLASS C SHARES Sold 41,623 645,286 117,097 1,647,604 Reinvestment of dividends and distributions -- -- 941 13,081 Redeemed (205,891) (3,218,984) (397,311) (5,549,360) --------------- --------------- --------------- --------------- Net decrease -- Class C (164,268) (2,573,698) (279,273) (3,888,675) --------------- --------------- --------------- --------------- CLASS D SHARES Sold 36,047 604,883 128,108 1,938,286 Reinvestment of dividends and distributions 3,455 58,396 4,805 71,313 Redeemed (141,726) (2,379,795) (2,784,964) (40,901,502) --------------- --------------- --------------- --------------- Net decrease -- Class D (102,224) (1,716,516) (2,652,051) (38,891,903) --------------- --------------- --------------- --------------- Net decrease in Fund (7,571,443) $ (105,049,437) (16,590,252) $ (234,452,558) =============== =============== =============== ===============
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. 22 As of October 31, 2004, the Fund had a net capital loss carryforward of $239,296,219 of which $81,217,815 will expire on October 31, 2009, $103,743,465 will expire on October 31, 2010 and $54,334,939 will expire on October 31, 2011 to offset future capital gains to the extent provided by regulations. As of October 31, 2004, the Fund had temporary book/tax differences primarily attributable to capital loss deferrals on wash sales and foreign tax credit pass-through. 8. LEGAL MATTERS The Investment Adviser, certain affiliates of the Investment Adviser, certain officers of such affiliates and certain investment companies advised by the Investment Adviser or its affiliates, including the Fund, are named as defendants in a consolidated class action. 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 Adviser and certain affiliates of the Investment Adviser allegedly offered economic incentives to brokers and others to recommend the funds advised by the Investment Adviser or its affiliates to investors rather than funds managed by other companies, and (ii) that the funds advised by the Investment Adviser 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. On March 10, 2005, Plaintiffs sought leave to supplement their complaint to assert claims on behalf of other investors. While the Fund and Adviser believe that each 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. 23 MORGAN STANLEY EUROPEAN EQUITY FUND INC. FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of capital stock outstanding throughout each period:
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31 MONTHS ENDED ------------------------------------------------------------ APRIL 30, 2005 2004 2003 2002 2001 2000 -------------- --------- --------- --------- --------- --------- (UNAUDITED) CLASS A SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 14.99 $ 13.30 $ 11.51 $ 13.35 $ 20.17 $ 20.70 -------------- --------- --------- --------- --------- --------- Income (loss) from investment operations: Net investment income++ 0.11 0.11 0.12 0.06 0.07 0.05 Net realized and unrealized gain (loss) 1.04 1.68 1.67 (1.67) (3.71) 2.34 -------------- --------- --------- --------- --------- --------- Total income (loss) from investment operations 1.15 1.79 1.79 (1.61) (3.64) 2.39 -------------- --------- --------- --------- --------- --------- Less dividends and distributions from: Net investment income (0.11) (0.10) - (0.23) - - Net realized gain - - - - (3.18) (2.92) -------------- --------- --------- --------- --------- --------- Total dividends and distributions (0.11) (0.10) - (0.23) (3.18) (2.92) -------------- --------- --------- --------- --------- --------- Net asset value, end of period $ 16.03 $ 14.99 $ 13.30 $ 11.51 $ 13.35 $ 20.17 ============== ========= ========= ========= ========= ========= TOTAL RETURN+ 7.67%(1) 13.51% 15.55% (12.41)% (21.07)% 10.92% RATIOS TO AVERAGE NET ASSETS(3): Expenses 1.43%(2) 1.43% 1.45% 1.38% 1.27% 1.29% Net investment income 1.24%(2) 0.79% 0.79% 0.41% 0.43% 0.23% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 414,421 $ 15,265 $ 16,612 $ 18,294 $ 22,604 $ 53,012 Portfolio turnover rate 32%(1) 89% 89% 51% 86% 71%
- ---------- ++ 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. SEE NOTES TO FINANCIAL STATEMENTS 24
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31 MONTHS ENDED ---------------------------------------------------------------- APRIL 30, 2005 2004 2003 2002 2001 2000 -------------- --------- --------- --------- --------- --------- (UNAUDITED) CLASS B SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 14.50 $ 12.79 $ 11.12 $ 12.88 $ 19.70 $ 20.41 -------------- --------- --------- --------- --------- --------- Income (loss) from investment operations: Net investment income (loss)++ 0.11 0.13 0.03 (0.05) (0.06) (0.11) Net realized and unrealized gain (loss) 1.01 1.62 1.64 (1.62) (3.58) 2.32 -------------- --------- --------- --------- --------- --------- Total income (loss) from investment operations 1.12 1.75 1.67 (1.67) (3.64) 2.21 -------------- --------- --------- --------- --------- --------- Less dividends and distributions from: Net investment income (0.14) (0.04) - (0.09) - - Net realized gain - - - - (3.18) (2.92) -------------- --------- --------- --------- --------- --------- Total dividends and distributions (0.14) (0.04) - (0.09) (3.18) (2.92) -------------- --------- --------- --------- --------- --------- Net asset value, end of period $ 15.48 $ 14.50 $ 12.79 $ 11.12 $ 12.88 $ 19.70 ============== ========= ========= ========= ========= ========= TOTAL RETURN+ 7.72%(1) 13.73% 15.02% (13.11)% (21.68)% 10.05% RATIOS TO AVERAGE NET ASSETS(3): Expenses 1.30%(2) 1.26%(4) 1.94%(4) 2.15% 2.10% 2.05% Net investment income (loss) 1.37%(2) 0.96%(4) 0.30%(4) (0.36)% (0.40)% (0.53)% SUPPLEMENTAL DATA: Net assets, end of period, in millions $ 236 $ 687 $ 778 $ 870 $ 1,335 $ 2,206 Portfolio turnover rate 32%(1) 89% 89% 51% 86% 71%
- ---------- ++ 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 FEES TO THE FUND, THE EXPENSE AND NET INVESTMENT INCOME RATIOS WOULD HAVE BEEN AS FOLLOWS:
EXPENSE NET INVESTMENT PERIOD ENDED RATIO INCOME RATIO ---------------- ------- -------------- OCTOBER 31, 2004 1.82% 0.40% OCTOBER 31, 2003 2.20% 0.04%
SEE NOTES TO FINANCIAL STATEMENTS 25
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31 MONTHS ENDED ------------------------------------------------------------ APRIL 30, 2005 2004 2003 2002 2001 2000 -------------- --------- --------- --------- --------- --------- (UNAUDITED) CLASS C SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 14.35 $ 12.74 $ 11.11 $ 12.85 $ 19.67 $ 20.38 -------------- --------- --------- --------- --------- --------- Income (loss) from investment operations: Net investment income (loss)++ 0.04 0.00 0.00 (0.04) (0.06) (0.11) Net realized and unrealized gain (loss) 0.99 1.62 1.63 (1.61) (3.58) 2.32 -------------- --------- --------- --------- --------- --------- Total income (loss) from investment operations 1.03 1.62 1.63 (1.65) (3.64) 2.21 -------------- --------- --------- --------- --------- --------- Less dividends and distributions from: Net investment income - (0.01) - (0.09) - - Net realized gain - - - - (3.18) (2.92) -------------- --------- --------- --------- --------- --------- Total dividends and distributions 0.00 (0.01) - (0.09) (3.18) (2.92) -------------- --------- --------- --------- --------- --------- Net asset value, end of period $ 15.38 $ 14.35 $ 12.74 $ 11.11 $ 12.85 $ 19.67 ============== ========= ========= ========= ========= ========= TOTAL RETURN+ 7.18%(1) 12.72% 14.67% (12.98)% (21.76)% 10.11% RATIOS TO AVERAGE NET ASSETS(3): Expenses 2.17%(2) 2.19% 2.20% 2.08% 2.10% 2.05% Net investment income (loss) 0.5%(2) 0.03% 0.04% (0.29)% (0.40)% (0.53)% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 15,614 $ 16,922 $ 18,581 $ 20,881 $ 29,075 $ 46,886 Portfolio turnover rate 32%(1) 89% 89% 51% 86% 71%
- ---------- ++ 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. SEE NOTES TO FINANCIAL STATEMENTS 26
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31 MONTHS ENDED ------------------------------------------------------------ APRIL 30, 2005 2004 2003 2002 2001 2000 -------------- --------- --------- --------- --------- --------- (UNAUDITED) CLASS D SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 15.45 $ 13.70 $ 11.83 $ 13.73 $ 20.61 $ 21.05 -------------- --------- --------- --------- --------- --------- Income (loss) from investment operations: Net investment income++ 0.12 0.20 0.13 0.09 0.10 0.12 Net realized and unrealized gain (loss) 1.07 1.69 1.74 (1.72) (3.80) 2.36 -------------- --------- --------- --------- --------- --------- Total income (loss) from investment operations 1.19 1.89 1.87 (1.63) (3.70) 2.48 -------------- --------- --------- --------- --------- --------- Less dividends and distributions from: Net investment income (0.15) (0.14) - (0.27) - - Net realized gain - - - - (3.18) (2.92) -------------- --------- --------- --------- --------- --------- Total dividends and distributions (0.15) (0.14) - (0.27) (3.18) (2.92) -------------- --------- --------- --------- --------- --------- Net asset value, end of period $ 16.49 $ 15.45 $ 13.70 $ 11.83 $ 13.73 $ 20.61 ============== ========= ========= ========= ========= ========= TOTAL RETURN+ 7.78%(1) 13.86% 15.81% (12.20)% (20.95)% 11.19% RATIOS TO AVERAGE NET ASSETS(3): Expenses 1.19%(2) 1.19% 1.20% 1.15% 1.10% 1.05% Net investment income 1.48%(2) 1.03% 1.04% 0.64% 0.60% 0.47% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 5,676 $ 6,896 $ 42,454 $ 39,716 $ 49,539 $ 54,016 Portfolio turnover rate 32%(1) 89% 89% 51% 86% 71%
- ---------- ++ 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. SEE NOTES TO FINANCIAL STATEMENTS 27 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 Joseph J. McAlinden VICE PRESIDENT Barry Fink VICE PRESIDENT Amy R. Doberman VICE PRESIDENT Carsten Otto CHIEF COMPLIANCE OFFICER 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 ADVISER Morgan Stanley Investment Advisors Inc. 1221 Avenue of the Americas New York, New York 10020 SUB-ADVISOR Morgan Stanley Investment Management Limited 25 Cabot Square, Canary Wharf London, United Kingdom E14 4QA 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) 2005 Morgan Stanley [MORGAN STANLEY LOGO] 37908RPT-RP05-00473P-YO4/05 [GRAPHIC] MORGAN STANLEY FUNDS MORGAN STANLEY EUROPEAN EQUITY FUND SEMIANNUAL REPORT APRIL 30, 2005 [MORGAN STANLEY LOGO] Item 2. Code of Ethics. Not applicable for semiannual reports. Item 3. Audit Committee Financial Expert. Not applicable for semiannual reports. Item 4. Principal Accountant Fees and Services Not applicable for semiannual reports. Item 5. Audit Committee of Listed Registrants. Not applicable for semiannual reports. Item 6. Refer to Item 1. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable for semiannual reports. Item 8. Portfolio Managers of Closed-End Management Investment Companies Applicable only to reports filed by closed-end funds. Item 9. Closed-End Fund Repurchases Applicable to reports filed by closed-end funds. Item 10. Submission of Matters to a Vote of Security Holders Not applicable. Item 11. Controls and Procedures (a) The Fund's principal executive officer and principal financial officer have concluded that the Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the 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 12. Exhibits (a) Code of Ethics - Not applicable for semiannual reports. (b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT. 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 European Equity Fund Inc. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer June 16, 2005 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 June 16, 2005 /s/ Francis Smith Francis Smith Principal Financial Officer June 16, 2005 EX-99.CERT 2 a2159457zex-99_cert.txt EX 99.CERT Exhibit 99.CERT EXHIBIT 12 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 European Equity Fund 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) and internal control over financial reporting (as defined in Rule 30a-3(d) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 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 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: June 16, 2005 /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer EXHIBIT 12 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 European Equity Fund 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) and internal control over financial reporting (as defined in Rule 30a-3(d) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 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 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: June 16, 2005 /s/ Francis Smith Francis Smith Principal Financial Officer EX-99.906CERT 3 a2159457zex-99_906cert.txt EX 99.906CERT Exhibit 99.906CERT 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 European Equity Fund Inc. In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended April 30, 2005 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: June 16, 2005 /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 European Equity Fund Inc. and will be retained by Morgan Stanley European Equity Fund Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 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 European Equity Fund Inc. In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended April 30, 2005 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: June 16, 2005 /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 European Equity Fund Inc. and will be retained by Morgan Stanley European Equity Fund Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----