-----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, B6bCvsQGFJnvVVKFmsn4AIeKbGavSUarp2Oop6nJ7FkkhIrggJ7GWQdJH3ve7OJx gV47kPlVNunoVrFopOW0oQ== 0000950123-03-011806.txt : 20031028 0000950123-03-011806.hdr.sgml : 20031028 20031028150048 ACCESSION NUMBER: 0000950123-03-011806 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030830 FILED AS OF DATE: 20031028 EFFECTIVENESS DATE: 20031028 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY SPECIAL GROWTH FUND CENTRAL INDEX KEY: 0000889128 STATE OF INCORPORATION: MA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-06711 FILM NUMBER: 03960746 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 SMALL CAP GROWTH FUND DATE OF NAME CHANGE: 20010618 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY DEAN WITTER SMALL CAP GROWTH FUND DATE OF NAME CHANGE: 19990628 FORMER COMPANY: FORMER CONFORMED NAME: TCW/DW SMALL CAP GROWTH FUND DATE OF NAME CHANGE: 19920929 N-CSRS 1 y89776nvcsrs.txt FORM N-CSRS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSRS CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-06711 Morgan Stanley Special Growth Fund (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 29, 2004 Date of reporting period: August 31, 2003 Item 1 - Report to Shareholders Welcome, Shareholder: In this report, you'll learn about how your investment in Morgan Stanley Special Growth Fund 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 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, 2003 TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED AUGUST 31, 2003
CLASS A CLASS B CLASS C CLASS D 38.28% 37.70% 37.79% 38.46%
S&P LIPPER RUSSELL 2000 SMALL-CAP 600 SMALL-CAP GROWTH GROWTH INDEX(1) INDEX(2) FUNDS INDEX(3) 42.83% 33.28% 40.32%
The performance of the Fund's four share classes varies because each has different expenses. The Fund's total return figures assume the reinvestment of all distributions, but do not reflect the deduction of any applicable sales charges. Such costs would lower performance. Past performance is no guarantee of future results. See Performance Summary for standardized performance information. MARKET CONDITIONS The six-month period ended August 31, 2003, was one of sharp contrast. As the period began, crude oil and natural gas prices were surging due to Iraq- centered geopolitical tensions and unusually cold weather across the United States. Fears of a double-dip recession persisted, defying evidence of a nascent recovery in the domestic economy. Responding to these negative developments, the market declined until mid-March, when it challenged its October 2002 low. Investor sentiment subsequently improved based on expectations of a swift U.S. victory in Iraq, encouraging economic data and reports of corporate earnings that exceeded expectations. These factors triggered a strong market rally that saw the S&P 500 Index appreciate more than 25 percent from its mid-March lows. The defensive sectors and securities that had led during the bear market fell behind more cyclical sectors as investors' expectations for the economy improved. The rally in the equity markets continued through the end of the period, with August boasting the sixth consecutive month of positive returns. Good news surfaced in manufacturing, where new orders drove production increases to levels not seen since June 1999. Despite improvements on the economic front, however, businesses still seemed reluctant to make longer-term commitments such as building up inventories, hiring new workers or increasing capital expenditures. PERFORMANCE ANALYSIS The Fund's underperformance relative to the Russell 2000 Growth Index can be attributed to stock selection in several areas. In health care, holdings in pharmaceuticals, medical systems electronics and biotechnology had a negative effect. Select issues within computer software and services, electronics manufacturers, production technology equipment and electrical equipment and components also detracted from the Fund's relative performance. Stock selection within the consumer discretionary sector contributed positively to performance during the period, particularly in the areas of retail, casinos and gambling, consumer electronics, education services and commercial services. The Fund also benefited from its underweighting in financial services and stock selection in that sector, especially among financial information services, multi-line insurance and investment management companies. 2
TOP 10 HOLDINGS Corporate Executive Board Co. 2.5% Interactive Data Corp. 2.5 GTECH Holdings Corp. 2.4 Dade Behring Hldgs Inc. 2.0 Abitron Inc. 1.9 Stericycle Inc. 1.7 VistaCare Inc. 1.6 Tractor Supply Co. 1.5 Eclipsys Corp. 1.5 Gen-Probe Inc. 1.5
TOP FIVE INDUSTRIES Biotechnology 7.0% Casinos/Gaming 6.5 Health Services 5.7 Semiconductors 5.1 Specialty Stores 5.1
Subject to change daily. All percentages are as a percentage of net assets. Provided for informational purposes only and should not be deemed as a recommendation to buy 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 1. THE FUND INVESTS AT LEAST 65 PERCENT OF ITS ASSETS IN COMMON STOCKS AND SECURITIES CONVERTIBLE INTO COMMON STOCK OF SMALL COMPANIES. 2. THE SECURITIES ARE CHOSEN BY PORTFOLIO MANAGERS THROUGH A STRINGENT QUALITATIVE AND QUANTITATIVE SCREENING PROCESS. PROXY VOTING POLICIES AND PROCEDURES A DESCRIPTION OF THE FUND'S POLICIES AND PROCEDURES WITH RESPECT TO THE VOTING OF PROXIES RELATING TO THE FUND'S PORTFOLIO SECURITIES IS AVAILABLE WITHOUT CHARGE, UPON REQUEST, BY CALLING (800) 869-NEWS. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEBSITE AT HTTP://WWW.SEC.GOV. 3 PERFORMANCE SUMMARY AVERAGE ANNUAL TOTAL RETURNS -- PERIOD ENDED AUGUST 31, 2003
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES(+) CLASS D SHARES(++) 07/28/97 08/02/93 07/28/97 07/28/97 SYMBOL SMPAX SMPBX SMPCX SMPDX 1 YEAR 19.23%(4) 18.23%(4) 18.27%(4) 19.47%(4) 12.97(5) 13.23(5) 17.27(5) 5 YEARS (1.33)(4) (2.06)(4) (2.08)(4) (1.13)(4) (2.39)(5) (2.41)(5) (2.08)(5) 10 YEARS 3.51(4) 3.51(5) SINCE INCEPTION (3.17)(4) 3.56(4) (3.91)(4) (2.97)(4) (4.02)(5) 3.56(5) (3.91)(5)
Past performance is not predictive of future returns. Investment return and principal value will fluctuate. When you sell fund shares, they may be worth less than their original cost. The table does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Performance for Class A, Class B, Class C, and Class D shares will vary due to differences in sales charges and expenses. - -------------------------------------------------------------------------------- Notes on Performance (1) The Russell 2000 Growth Index measures the performance of those companies in the Russell 2000 Index with higher price-to-book ratios and higher forecasted growth values. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. (2) The S&P Small-Cap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market-value weighted index (stock price times the number of shares outstanding), with each stock's weight in the Index proportionate to its market value. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. (3) The Lipper Small-Cap Growth Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Small-Cap Growth Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. (4) Figure shown assumes reinvestment of all distributions and does not reflect the deduction of any sales charges. (5) Figure shown assumes reinvestment of all distributions and the deduction of the maximum applicable sales charge. See the Fund's current prospectus for complete details on fees and sales charges. * The maximum front-end sales charge for Class A is 5.25%. ** The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%. The CDSC declines to 0% after six years. + The maximum CDSC for Class C is 1% for shares redeemed within one year of purchase. ++ Class D has no sales charge. 4 Morgan Stanley Special Growth Fund PORTFOLIO OF INVESTMENTS - AUGUST 31, 2003 (UNAUDITED)
NUMBER OF SHARES VALUE - ------------------------------------------------------ Common Stocks (98.5%) Advertising/Marketing Services (3.1%) 99,350 Abitron Inc.*............ $ 3,673,963 16,600 R.H. Donnelley Corp.*.... 687,240 184,550 ValueClick, Inc*......... 1,707,087 ------------ 6,068,290 ------------ Aerospace & Defense (0.6%) 31,600 Moog Inc. (Class A)*..... 1,191,320 ------------ Airlines (0.8%) 27,550 JetBlue Airways Corp.*... 1,484,945 ------------ Apparel/Footwear (0.2%) 8,200 Oxford Industries, Inc. ................... 488,720 ------------ Apparel/Footwear Retail (1.7%) 72,100 Casual Male Retail Group, Inc.*................... 493,885 38,850 Christopher & Banks Corp.*.................. 1,153,845 48,425 Hot Topic, Inc.*......... 1,726,835 ------------ 3,374,565 ------------ Biotechnology (7.0%) 127,200 BioMarin Pharmaceutical, Inc.* .................. 1,202,040 28,800 Celgene Corp.*........... 1,108,512 101,100 Dendreon Corp.*.......... 642,996 65,300 Discovery Laboratories, Inc.*................... 484,526 47,300 Gen-Probe Inc.*.......... 2,991,252 33,900 Ligand Pharmaceuticals Inc. (Class B)*......... 470,871 29,500 Martek Biosciences Corp.*.................. 1,521,905 37,300 MGI Pharma, Inc.*........ 1,439,407 58,525 NPS Pharmaceuticals, Inc.*................... 1,607,096 29,700 Serologicals Corp.*...... 412,830 27,200 Techne Corp.*............ 912,288 52,150 Telik, Inc.*............. 1,000,237 ------------ 13,793,960 ------------
NUMBER OF SHARES VALUE - ------------------------------------------------------ Broadcasting (1.5%) 44,200 Citadel Broadcasting Co.*.................... $ 975,936 119,075 Radio One, Inc. (Class D)*..................... 1,958,784 ------------ 2,934,720 ------------ Casino/Gaming (6.5%) 65,900 Alliance Gaming Corp.*... 1,484,727 110,445 GTECH Holdings Corp. .... 4,680,659 29,700 Kerzner International Ltd. (Bahamas)*......... 914,760 73,300 Multimedia Games, Inc.*................... 1,985,697 106,700 Penn National Gaming, Inc.*................... 2,363,405 47,300 Station Casinos, Inc. ... 1,407,175 ------------ 12,836,423 ------------ Computer Communications (0.8%) 22,350 Emulex Corp.*............ 541,093 24,900 NETGEAR, Inc.*........... 490,281 22,000 NetScreen Technologies, Inc.*................... 526,460 ------------ 1,557,834 ------------ Computer Peripherals (0.5%) 87,600 Maxtor Corp.*............ 1,001,268 ------------ Computer Processing Hardware (0.3%) 48,700 Cray, Inc.*.............. 617,029 ------------ Data Processing Services (0.5%) 25,125 Global Payments Inc. .... 948,469 ------------ Discount Stores (0.8%) 42,225 Fred's, Inc. ............ 1,509,544 ------------ Electronic Components (2.0%) 19,200 Amphenol Corp. (Class A)*..................... 1,046,976 36,200 Innovex, Inc.*........... 478,564
See Notes to Financial Statements 5 Morgan Stanley Special Growth Fund PORTFOLIO OF INVESTMENTS - AUGUST 31, 2003 (UNAUDITED) continued
NUMBER OF SHARES VALUE - ------------------------------------------------------ 24,300 OmniVision Technologies, Inc.*................... $ 1,078,677 22,950 SanDisk Corp.*........... 1,387,557 ------------ 3,991,774 ------------ Electronic Distributors (0.3%) 70,500 Bell Microproducts Inc.*................... 506,895 ------------ Electronic Production Equipment (3.3%) 52,800 ASM International NV (Netherlands)*.......... 958,848 48,200 Brooks Automation, Inc.*................... 1,178,490 26,500 Cymer, Inc.*............. 1,212,905 62,700 Entegris Inc.*........... 922,944 33,200 Mentor Graphics Corp.*... 672,300 16,700 Ultratech, Inc.*......... 489,811 24,300 Varian Semiconductor Equipment Associates, Inc.*................... 985,851 ------------ 6,421,149 ------------ Electronics/ Appliances (1.2%) 22,825 Harman International Industries, Inc. ....... 2,274,511 ------------ Finance/Rental/ Leasing (0.7%) 31,450 Doral Financial Corp. (Puerto Rico)........... 1,291,023 ------------ Financial Publishing/ Services (2.7%) 20,900 eSPEED, Inc (Class A)*... 476,520 287,500 Interactive Data Corp.*.................. 4,812,750 ------------ 5,289,270 ------------ Food: Specialty/ Candy (0.9%) 49,430 J & J Snack Foods Corp.*.................. 1,735,487 ------------
NUMBER OF SHARES VALUE - ------------------------------------------------------ Home Building (0.8%) 85,400 Brookfield Homes Corp. .................. $ 1,558,550 ------------ Home Furnishings (0.7%) 62,300 Select Comfort Corp.*.... 1,450,967 ------------ Industrial Machinery (0.5%) 25,600 Graco Inc. .............. 1,010,944 ------------ Information Technology Services (0.6%) 22,100 Intergraph Corp.*........ 525,759 29,100 Verint Systems Inc.*..... 658,824 ------------ 1,184,583 ------------ Internet Software/ Services (2.8%) 123,700 CNET Networks, Inc.*..... 1,041,554 18,800 J2 Global Communications, Inc.*................... 1,179,136 61,800 Secure Computing Corp.*.................. 673,002 29,500 United Online, Inc.*..... 1,124,245 79,400 WebEx Communications, Inc.*................... 1,516,540 ------------ 5,534,477 ------------ Investment Managers (1.2%) 35,800 Affiliated Managers Group, Inc.*............ 2,427,240 ------------ Life/Health Insurance (0.5%) 24,800 Reinsurance Group of America, Inc. .......... 937,936 ------------ Medical Distributors (1.1%) 159,555 Neoforma, Inc.*.......... 2,072,779 ------------
See Notes to Financial Statements 6 Morgan Stanley Special Growth Fund PORTFOLIO OF INVESTMENTS - AUGUST 31, 2003 (UNAUDITED) continued
NUMBER OF SHARES VALUE - ------------------------------------------------------ Medical Specialties (4.5%) 142,440 Dade Behring Holdings, Inc.*................... $ 3,974,076 24,200 Digene Corp.*............ 919,842 17,800 Flamel Technologies (ADR) (France)*............... 507,033 28,100 INAMED Corp.*............ 2,074,904 14,700 SurModics, Inc.*......... 493,332 41,000 VISX, Inc.*.............. 820,820 ------------ 8,790,007 ------------ Medical/Nursing Services (1.4%) 57,269 Apria Healthcare Group, Inc.*................... 1,483,267 59,600 VCA Antech, Inc.*........ 1,373,184 ------------ 2,856,451 ------------ Metal Fabrications (0.5%) 35,500 Chicago Bridge & Iron Company N.V. (ADR) (Netherlands)........... 948,560 ------------ Miscellaneous Commercial Services (3.9%) 109,700 Corporate Executive Board Co. (The)*.............. 4,843,255 229,900 SkillSoft PLC (ADR) (Ireland)*.............. 1,728,848 42,200 Viad Corp. .............. 1,007,736 ------------ 7,579,839 ------------ Miscellaneous Manufacturing (0.3%) 16,200 Dionex Corp.*............ 634,716 ------------ Oil & Gas Production (2.8%) 39,700 Evergreen Resources, Inc.*................... 2,218,039 28,700 PetroKazakhstan Inc. (Class A) (Canada)*..... 472,115 197,800 Ultra Petroleum Corp. (Canada)*............... 2,870,078 ------------ 5,560,232 ------------
NUMBER OF SHARES VALUE - ------------------------------------------------------ Oilfield Services/ Equipment (0.7%) 84,800 Maverick Tube Corp.*..... $ 1,440,752 ------------ Other Consumer Services (3.3%) 72,400 Autobytel Inc.*.......... 616,124 71,300 DeVry, Inc.*............. 1,850,235 94,700 iDine Rewards Network Inc.*................... 1,642,098 28,200 ITT Educational Services, Inc.*................... 1,222,470 11,050 Strayer Education, Inc. ................... 1,055,275 ------------ 6,386,202 ------------ Packaged Software (4.9%) 51,800 Hyperion Solutions Corp.*.................. 1,708,364 102,350 Informatica Corp.*....... 909,892 74,900 Legato Systems, Inc.*.... 847,868 150,400 Micromuse Inc.*.......... 1,230,272 155,100 NetIQ Corp.*............. 2,087,646 80,400 Network Associates, Inc.*................... 1,119,168 107,100 Quest Software, Inc.*.... 1,136,331 34,100 Serena Software, Inc.*... 661,540 ------------ 9,701,081 ------------ Personnel Services (0.5%) 33,100 Monster Worldwide Inc.*................... 904,292 ------------ Pharmaceuticals: Generic Drugs (0.9%) 31,200 Taro Pharmaceuticals Industries Ltd. (Israel)*............... 1,684,488 ------------ Publishing: Newspapers (2.2%) 36,200 Media General, Inc. (Class A)............... 2,194,082 41,060 Pulitzer Inc. ........... 2,108,431 ------------ 4,302,513 ------------ Recreational Products (0.5%) 40,400 WMS Industries, Inc.*.... 967,580 ------------ Regional Banks (0.5%) 28,000 UCBH Holdings, Inc. ..... 895,720 ------------
See Notes to Financial Statements 7 Morgan Stanley Special Growth Fund PORTFOLIO OF INVESTMENTS - AUGUST 31, 2003 (UNAUDITED) continued
NUMBER OF SHARES VALUE - ------------------------------------------------------ Restaurants (2.3%) 52,500 Chicago Pizza & Browery, Inc.*................... $ 630,000 26,825 P.F. Chang's China Bistro, Inc.*........... 1,247,363 113,650 Sonic Corp.*............. 2,666,229 ------------ 4,543,592 ------------ Savings Banks (1.7%) 82,700 Provident Financial Services, Inc. ......... 1,673,021 71,700 TierOne Corp.*........... 1,595,325 ------------ 3,268,346 ------------ Semiconductors (5.1%) 37,700 Actel Corp.*............. 1,104,233 304,500 Conexant Systems, Inc.*................... 1,668,660 48,150 Integrated Circuit Systems, Inc.*.......... 1,662,138 71,096 Intersil Corp. (Class A)*..................... 2,071,026 40,750 Micrel, Inc.*............ 554,200 85,600 PMC -- Sierra, Inc.*..... 1,220,656 21,800 Power Integrations, Inc.*................... 701,524 56,900 QuickLogic Corporation*............ 512,100 84,500 Vitesse Semiconductor Corp.*.................. 577,135 ------------ 10,071,672 ------------ Services to the Health Industry (5.7%) 199,400 Eclipsys Corp.*.......... 3,000,970 42,600 Merge Technologies Inc.*................... 702,474 88,700 Specialty Laboratories, Inc.*................... 935,785 71,100 Stericycle, Inc.*........ 3,412,089 99,550 VistaCare, Inc. (Class A)...................... 3,136,124 ------------ 11,187,442 ------------ Specialty Insurance (2.1%) 8,400 Markel Corp.*............ 2,257,500 55,300 PMI Group, Inc. (The).... 1,956,514 ------------ 4,214,014 ------------
NUMBER OF SHARES VALUE - ------------------------------------------------------ Specialty Stores (5.1%) 28,300 Brookstone, Inc.*........ $ 799,475 33,875 Cost Plus, Inc.*......... 1,363,130 40,475 Dick's Sporting Goods, Inc.*................... 1,530,765 28,200 Guitar Center, Inc.*..... 945,828 34,100 PETCO Animal Supplies, Inc.*................... 1,094,610 87,500 Tractor Supply Company... 3,018,750 35,900 Tuesday Morning Corp.*... 1,242,858 ------------ 9,995,416 ------------ Specialty Telecommunications (3.5%) 148,100 American Tower Corp. (Class A)*.............. 1,685,378 179,200 Crown Castle International Corp.*.... 1,926,400 134,500 IDT Corp. (Class B)...... 2,392,755 21,700 NTL Inc.*................ 873,208 ------------ 6,877,741 ------------ Telecommunication Equipment (1.2%) 18,600 Inter-Tel, Inc. ......... 468,720 210,000 Sonus Networks, Inc.*.... 1,491,000 11,200 UTStarcom, Inc.*......... 481,152 ------------ 2,440,872 ------------ Wholesale Distributors (1.3%) 91,805 Imagistics International Inc.*................... 2,625,623 ------------ Total Common Stocks (Cost $158,110,888)...... 193,371,823 ------------
See Notes to Financial Statements 8 Morgan Stanley Special Growth Fund PORTFOLIO OF INVESTMENTS - AUGUST 31, 2003 (UNAUDITED) continued
PRINCIPAL AMOUNT IN THOUSANDS VALUE - ------------------------------------------------------ Short-Term Investment (0.5%) Repurchase Agreement $ 1,073 Joint repurchase agreement account 1.05% due 09/02/03 (dated 08/29/03; proceeds $1,073,125) (a) (Cost $1,073,000)....... $ 1,073,000 ------------
Total Investments (Cost $159,183,888) (b)..... 99.0% 194,444,823 Other Assets in Excess of Liabilities................. 1.0 1,883,022 ----- ------------ Net Assets.................. 100.0% $196,327,845 ===== ============
- --------------------- 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 $38,184,931 and the aggregate gross unrealized depreciation is $2,923,996, resulting in net unrealized appreciation of $35,260,935.
See Notes to Financial Statements 9 Morgan Stanley Special Growth Fund FINANCIAL STATEMENTS Statement of Assets and Liabilities August 31, 2003 (unaudited) Assets: Investments in securities, at value (cost $159,183,888)....................................... $194,444,823 Receivable for: Investments sold........................................ 3,344,545 Shares of beneficial interest sold...................... 1,208,515 Dividends............................................... 18,571 Prepaid expenses and other assets........................... 120,601 ------------ Total Assets............................................ 199,137,055 ------------ Liabilities: Payable for: Investments purchased................................... 2,252,053 Shares of beneficial interest redeemed.................. 175,003 Investment management fee............................... 157,313 Distribution fee........................................ 118,914 Accrued expenses and other payables......................... 105,927 ------------ Total Liabilities....................................... 2,809,210 ------------ Net Assets.............................................. $196,327,845 ============ Composition of Net Assets: Paid-in-capital............................................. $474,642,618 Net unrealized appreciation................................. 35,260,935 Net investment loss......................................... (1,926,737) Accumulated net realized loss............................... (311,648,971) ------------ Net Assets.............................................. $196,327,845 ============ Class A Shares: Net Assets.................................................. $10,596,604 Shares Outstanding (unlimited authorized, $.01 par value)... 795,248 Net Asset Value Per Share............................... $13.32 ====== Maximum Offering Price Per Share, (net asset value plus 5.54% of net asset value)....... $14.06 ====== Class B Shares: Net Assets.................................................. $138,354,312 Shares Outstanding (unlimited authorized, $.01 par value)... 10,883,560 Net Asset Value Per Share............................... $12.71 ====== Class C Shares: Net Assets.................................................. $6,849,352 Shares Outstanding (unlimited authorized, $.01 par value)... 539,755 Net Asset Value Per Share............................... $12.69 ====== Class D Shares: Net Assets.................................................. $40,527,577 Shares Outstanding (unlimited authorized, $.01 par value)... 3,002,000 Net Asset Value Per Share............................... $13.50 ======
See Notes to Financial Statements 10 Morgan Stanley Special Growth Fund FINANCIAL STATEMENTS continued Statement of Operations For the six months ended August 31, 2003 (unaudited) Net Investment Loss: Income Dividends (net of $2,240 foreign withholding tax)........... $ 139,859 Interest.................................................... 12,624 ----------- Total Income............................................ 152,483 ----------- Expenses Investment management fee................................... 871,500 Distribution fee (Class A shares)........................... 14,238 Distribution fee (Class B shares)........................... 611,570 Distribution fee (Class C shares)........................... 30,248 Transfer agent fees and expenses............................ 441,257 Shareholder reports and notices............................. 52,091 Professional fees........................................... 26,076 Custodian fees.............................................. 16,324 Trustees' fees and expenses................................. 6,148 Registration fees........................................... 6,030 Other....................................................... 3,738 ----------- Total Expenses.......................................... 2,079,220 ----------- Net Investment Loss..................................... (1,926,737) ----------- Net Realized and Unrealized Gain: Net realized gain........................................... 16,069,720 Net change in unrealized depreciation....................... 41,819,867 ----------- Net Gain................................................ 57,889,587 ----------- Net Increase................................................ $55,962,850 ===========
See Notes to Financial Statements 11 Morgan Stanley Special Growth Fund FINANCIAL STATEMENTS continued Statement of Changes in Net Assets
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED AUGUST 31, 2003 FEBRUARY 28, 2003 --------------- ----------------- (unaudited) Increase (Decrease) in Net Assets: Operations: Net investment loss......................................... $ (1,926,737) $ (5,185,607) Net realized gain (loss).................................... 16,069,720 (136,471,712) Net change in unrealized depreciation....................... 41,819,867 13,316,273 ------------ ------------- Net Increase (Decrease)................................. 55,962,850 (128,341,046) Net decrease from transactions in shares of beneficial interest.................................................. (15,721,189) (37,117,689) ------------ ------------- Net Increase (Decrease)................................. 40,241,661 (165,458,735) Net Assets: Beginning of period......................................... 156,086,184 321,544,919 ------------ ------------- End of Period (Including a net investment loss of $1,926,737 and $0, respectively)............................................... $196,327,845 $ 156,086,184 ============ =============
See Notes to Financial Statements 12 Morgan Stanley Special Growth Fund NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2003 (UNAUDITED) 1. Organization and Accounting Policies Morgan Stanley Special Growth Fund (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a non-diversified, open-end management investment company. The Fund's investment objective is capital appreciation. The Fund seeks to achieve its objective by investing primarily in common stocks and other securities convertible into common stocks of small companies with market capitalizations, at the time of purchase, within the capitalization range of securities comprising the Standard & Poor's Small-Cap 600 Index. The Fund was organized as a Massachusetts business trust on March 11, 1992 and commenced operations on August 2, 1993. 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 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 equity portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market; (4) for equity securities traded on foreign exchanges, the last reported sale price or the latest bid price may be used if there were no sales on a particular day; (5) when market quotations are not readily available or Morgan Stanley Investment Advisors Inc. (the "Investment Manager") determines that the latest sale price, the bid price or the mean between the last reported bid and asked price do not reflect a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund's Trustees; (6) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Trustees; 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 13 Morgan Stanley Special Growth Fund NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2003 (UNAUDITED) continued 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. 2. Investment Management Agreement Pursuant to an Investment Management Agreement, the Fund pays the Investment Manager a management fee, accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined as of the close of each business day: 1.0% to the portion of daily 14 Morgan Stanley Special Growth Fund NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2003 (UNAUDITED) continued net assets not exceeding $1.5 billion; and 0.95% to the portion of daily net assets in excess of $1.5 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 -- 1.0% of the lesser of: (a) the average daily aggregate gross sales of the Class B shares since the inception of the Fund (not including reinvestment of dividend or capital gain distributions) less the average daily aggregate net asset value of the Class B shares redeemed since the Fund's inception upon which a contingent deferred sales charge has been imposed or waived; or (b) the average daily net assets of Class B; and (iii) Class C -- up to 1.0% of the average daily net assets of Class C. In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the Plan is terminated, the Trustees will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled $24,315,774 at August 31, 2003. 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, 2003, 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, 2003, it received contingent deferred sales charges from certain redemptions of the Fund's Class A shares, Class B shares and Class C shares of $5, $113,520 and $2,204, respectively and received $7,659 in front- 15 Morgan Stanley Special Growth Fund NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2003 (UNAUDITED) continued 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 August 31, 2003 aggregated $170,620,382 and $190,967,809, respectively. Included in the aforementioned are purchases and sales of $243,292 and $6,524,649, respectively with other Morgan Stanley Funds including a net realized gain of $1,366,083. Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is the Fund's transfer agent. At August 31, 2003, the Fund had transfer agent fees and expenses payable of approximately $32,200. 5. Shares of Beneficial Interest Transactions in shares of beneficial interest were as follows:
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED AUGUST 31, 2003 FEBRUARY 28, 2003 ------------------------- ------------------------- (unaudited) SHARES AMOUNT SHARES AMOUNT ---------- ------------ ---------- ------------ CLASS A SHARES Sold.............................................. 468,300 $ 5,201,483 987,720 $ 12,701,010 Redeemed.......................................... (842,327) (9,627,505) (673,508) (8,843,650) ---------- ------------ ---------- ------------ Net increase (decrease) - Class A................. (374,027) (4,426,022) 314,212 3,857,360 ---------- ------------ ---------- ------------ CLASS B SHARES Sold.............................................. 638,130 7,149,330 1,309,652 17,497,072 Redeemed.......................................... (1,649,705) (17,666,249) (5,820,808) (71,451,575) ---------- ------------ ---------- ------------ Net decrease - Class B............................ (1,011,575) (10,516,919) (4,511,156) (53,954,503) ---------- ------------ ---------- ------------ CLASS C SHARES Sold.............................................. 95,507 1,088,921 166,535 2,179,439 Redeemed.......................................... (141,688) (1,556,327) (293,001) (3,519,887) ---------- ------------ ---------- ------------ Net decrease - Class C............................ (46,181) (467,406) (126,466) (1,340,448) ---------- ------------ ---------- ------------ CLASS D SHARES Sold.............................................. 504,725 5,685,551 2,091,888 29,118,203 Redeemed.......................................... (541,326) (5,996,393) (1,201,463) (14,798,301) ---------- ------------ ---------- ------------ Net increase (decrease) - Class D................. (36,601) (310,842) 890,425 14,319,902 ---------- ------------ ---------- ------------ Net decrease in Fund.............................. (1,468,384) $(15,721,189) (3,432,985) $(37,117,689) ========== ============ ========== ============
16 Morgan Stanley Special Growth Fund NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2003 (UNAUDITED) continued 6. 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 28, 2003, the Fund had a net capital loss carryforward of $325,714,632 of which $10,229,259 will expire on February 28, 2009, $156,662,968 will expire on February 28, 2010 and $158,822,405 will expire on February 28, 2011 to offset future capital gains to the extent provided by regulations. As of February 28, 2003, the Fund had temporary book/tax differences attributable to capital loss deferrals on wash sales. 17 Morgan Stanley Special Growth Fund FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE SIX FOR THE YEAR ENDED FEBRUARY 28, MONTHS ENDED ---------------------------------------------------------------- AUGUST 31, 2003 2003 2002 2001 2000* 1999 --------------- -------- -------- -------- -------- -------- (unaudited) Class A Shares Selected Per Share Data: Net asset value, beginning of period...... $ 9.64 $16.45 $24.42 $62.72 $23.13 $21.18 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment loss++................. (0.10) (0.20) (0.30) (0.40) (0.41) (0.29) Net realized and unrealized gain (loss)................................ 3.78 (6.61) (7.67) (36.19) 42.93 2.24 ------ ------ ------ ------ ------ ------ Total income (loss) from investment operations............................... 3.68 (6.81) (7.97) (36.59) 42.52 1.95 ------ ------ ------ ------ ------ ------ Less distributions from net realized gain..................................... -- -- -- (1.71) (2.93) -- ------ ------ ------ ------ ------ ------ Net asset value, end of period............ $13.32 $ 9.64 $16.45 $24.42 $62.72 $23.13 ====== ====== ====== ====== ====== ====== Total Return+............................. 38.28 %(1) (41.40)% (32.64)% (59.57)% 191.77% 9.21% Ratios to Average Net Assets(3): Expenses.................................. 1.88 %(2) 1.76% 1.59% 1.33% 1.40% 1.50% Net investment loss....................... (1.71)%(2) (1.65)% (1.40)% (0.95)% (1.13)% (1.40)% Supplemental Data: Net assets, end of period, in thousands... $10,597 $11,270 $14,064 $21,357 $36,835 $2,450 Portfolio turnover rate................... 99 %(1) 119% 25% 37% 59% 51%
- --------------------- * Year ended February 29, 2000. ++ 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 18 Morgan Stanley Special Growth Fund FINANCIAL HIGHLIGHTS continued
FOR THE SIX FOR THE YEAR ENDED FEBRUARY 28, MONTHS ENDED ----------------------------------------------------------------------- AUGUST 31, 2003 2003 2002 2001 2000* 1999 --------------- --------- --------- --------- ----------- --------- (unaudited) Class B Shares Selected Per Share Data: Net asset value, beginning of period........................... $ 9.23 $15.88 $23.76 $ 61.57 $22.84 $21.08 ------ ------ ------ ------- ------ ------ Income (loss) from investment operations: Net investment loss++......... (0.13) (0.30) (0.45) (0.69) (0.55) (0.43) Net realized and unrealized gain (loss)................... 3.61 (6.35) (7.43) (35.41) 42.21 2.19 ------ ------ ------ ------- ------ ------ Total income (loss) from investment operations............ 3.48 (6.65) (7.88) (36.10) 41.66 1.76 ------ ------ ------ ------- ------ ------ Less distributions from net realized gain.................... -- -- -- (1.71) (2.93) -- ------ ------ ------ ------- ------ ------ Net asset value, end of period.... $12.71 $ 9.23 $15.88 $ 23.76 $61.57 $22.84 ====== ====== ====== ======= ====== ====== Total Return+..................... 37.70 %(1) (41.88)% (33.16)% (59.89)% 190.41% 8.35% Ratios To Average Net Assets(3): Expenses.......................... 2.63 %(2) 2.55% 2.35% 2.03% 1.85% 2.18% Net investment loss............... (2.46)%(2) (2.44)% (2.16)% (1.65)% (1.58)% (2.08)% Supplemental Data: Net assets, end of period, in thousands........................ $138,354 $109,784 $260,504 $459,380 $1,069,967 $322,489 Portfolio turnover rate........... 99 %(1) 119% 25% 37% 59% 51%
- --------------------- * Year ended February 29, 2000. ++ 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 19 Morgan Stanley Special Growth Fund FINANCIAL HIGHLIGHTS continued
FOR THE SIX FOR THE YEAR ENDED FEBRUARY 28, MONTHS ENDED ---------------------------------------------------------------- AUGUST 31, 2003 2003 2002 2001 2000* 1999 --------------- -------- -------- -------- -------- -------- (unaudited) Class C Shares Selected Per Share Data: Net asset value, beginning of period...... $ 9.21 $15.85 $23.67 $61.40 $22.85 $21.08 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment loss++................. (0.13) (0.30) (0.41) (0.73) (0.70) (0.45) Net realized and unrealized gain (loss)................................ 3.61 (6.34) (7.41) (35.29) 42.18 2.22 ------ ------ ------ ------ ------ ------ Total income (loss) from investment operations............................... 3.48 (6.64) (7.82) (36.02) 41.48 1.77 ------ ------ ------ ------ ------ ------ Less distributions from net realized gain..................................... -- -- -- (1.71) (2.93) -- ------ ------ ------ ------ ------ ------ Net asset value, end of period............ $12.69 $ 9.21 $15.85 $23.67 $61.40 $22.85 ====== ====== ====== ====== ====== ====== Total Return+............................. 37.79 %(1) (41.78)% (33.16)% (59.93)% 189.51% 8.35% Ratios to Average Net Assets(3): Expenses.................................. 2.63 %(2) 2.55% 2.20% 2.16% 2.18% 2.26% Net investment loss....................... (2.46)%(2) (2.44)% (2.01)% (1.78)% (1.91)% (2.16)% Supplemental Data: Net assets, end of period, in thousands... $6,849 $5,398 $11,294 $19,639 $28,675 $2,662 Portfolio turnover rate................... 99 %(1) 119% 25% 37% 59% 51%
- --------------------- * Year ended February 29, 2000. ++ 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 20 Morgan Stanley Special Growth Fund FINANCIAL HIGHLIGHTS continued
FOR THE SIX FOR THE YEAR ENDED FEBRUARY 28, MONTHS ENDED ---------------------------------------------------------------- AUGUST 31, 2003 2003 2002 2001 2000* 1999 --------------- -------- -------- -------- -------- -------- (unaudited) Class D Shares Selected Per Share Data: Net asset value, beginning of period...... $ 9.75 $16.61 $24.60 $ 63.11 $23.20 $21.21 ------ ------ ------ ------- ------ ------ Income (loss) from investment operations: Net investment loss++................. (0.08) (0.18) (0.25) (0.32) (0.35) (0.24) Net realized and unrealized gain (loss)................................ 3.83 (6.68) (7.74) (36.48) 43.19 2.23 ------ ------ ------ ------- ------ ------ Total income (loss) from investment operations............................... 3.75 (6.86) (7.99) (36.80) 42.84 1.99 ------ ------ ------ ------- ------ ------ Less distributions from net realized gain..................................... -- -- -- (1.71) (2.93) -- ------ ------ ------ ------- ------ ------ Net asset value, end of period............ $13.50 $ 9.75 $16.61 $ 24.60 $63.11 $23.20 ====== ====== ====== ======= ====== ====== Total Return+............................. 38.46 %(1) (41.30)% (32.48)% (59.53)% 192.59% 9.38% Ratios to Average Net Assets(3): Expenses.................................. 1.63 %(2) 1.55% 1.35% 1.16% 1.18% 1.26% Net investment loss....................... (1.46)%(2) (1.44)% (1.16)% (0.78)% (0.91)% (1.16)% Supplemental Data: Net assets, end of period, in thousands... $40,528 $29,634 $35,683 $41,207 $21,570 $13 Portfolio turnover rate................... 99 %(1) 119% 25% 37% 59% 51%
- --------------------- * Year ended February 29, 2000. ++ 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 21 (This Page Intentionally Left Blank) (This Page Intentionally Left Blank) TRUSTEES Michael Bozic Charles A. Fiumefreddo Edwin J. Garn Wayne E. Hedien James F. Higgins Dr. Manuel H. Johnson Joseph J. Kearns Michael E. Nugent Philip J. Purcell 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 and General Counsel Joseph J. McAlinden Vice President Stefanie V. Chang Vice President Francis 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 AUDITORS Deloitte & Touche LLP Two World Financial Center New York, New York 10281 INVESTMENT MANAGER Morgan Stanley Investment Advisors Inc. 1221 Avenue of the Americas New York, New York 10020 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 shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the Prospectus carefully before investing. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. (c) 2003 Morgan Stanley [MORGAN STANLEY LOGO] MORGAN STANLEY FUNDS Morgan Stanley Special Growth Fund Semiannual Report August 31, 2003 [MORGAN STANLEY LOGO] 37892RPT-12328I03-AP-9/03 Item 2. Code of Ethics. (a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Fund or a third party. (b) No information need be disclosed pursuant to this paragraph. (c) The Fund has amended its Code of Ethics during the period covered by the shareholder report presented in Item 1 hereto (d) The Fund has granted a waiver or an implicit waiver from a provision of its Code of Ethics. (e) Not applicable. (f) (1) The Fund's Code of Ethics is attached hereto as Exhibit A. (2) Not applicable. (3) Not applicable. Item 3. Audit Committee Financial Expert. The Fund's Board of Trustees has determined that it has two "audit committee financial experts" serving on its audit committee, each of whom are "independent" Trustees: Dr. Manuel H. Johnson and Joseph J. Kearns. Under applicable securities laws, a person who is determined to be an audit committee financial expert will not be deemed an "expert" for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities that are greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and Board of Trustees in the absence of such designation or identification. Item 9 - Controls and Procedures (a) The Fund's principal executive officer and principal financial officer have concluded that the Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. There were no significant changes or corrective actions with regard to significant deficiencies or material weaknesses in the Fund's internal controls or in other factors that could significantly affect the Fund's internal controls subsequent to the date of their evaluation. (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. 2 Item 10 Exhibits (a) The Code of Ethics for Principal Executive and Senior Financial Officers is attached hereto. (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. Items 4 - 8 are not applicable 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 Special Growth Fund Ronald E. Robison Principal Executive Officer October 20, 2003 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. Ronald E. Robison Principal Executive Officer October 20, 2003 Francis Smith Principal Financial Officer October 20, 2003 3 EX-99.CODE ETH 3 y89776exv99wcodeeth.txt CODE OF ETHICS EXHIBIT 10 A CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS ADOPTED JULY 31, 2003 I. This Code of Ethics (the "Code") for the investment companies within the Morgan Stanley complex identified in Exhibit A (collectively, "Funds" and each, a "Fund") applies to each Fund's Principal Executive Officer, President, Principal Financial Officer and Treasurer (or persons performing similar functions) ("Covered Officers" each of whom are set forth in Exhibit B) for the purpose of promoting: - honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships. - full, fair, accurate, timely and understandable disclosure in reports and documents that a company files with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Fund; - compliance with applicable laws and governmental rules and regulations; - prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and - accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. Any question about the application of the Code should be referred to the General Counsel or his/her designee (who is set forth in Exhibit C). II. COVERED OFFICERS SHOULD HANDLE ETHICALLY ACTUAL AND APPARENT CONFLICTS OF INTEREST 4 OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes, or appears to interfere, with the interests of, or his service to, the Fund. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of his position with the Fund. Certain conflicts of interest arise out of the relationships between Covered Officers and the Fund and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Fund because of their status as "affiliated persons" (as defined in the Investment Company Act) of the Fund. The Fund's and its investment adviser's compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside the parameters of this Code, unless or until the General Counsel determines that any violation of such programs and procedures is also a violation of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts may arise from, or as a result of, the contractual relationship between the Fund and its investment adviser of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the Fund or for the investment adviser, or for both), be involved in establishing policies and implementing decisions that will have different effects on the Fund and its investment adviser. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Fund and the investment adviser and is consistent with the performance by the Covered Officers of their duties as officers of the Fund. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the Funds' Boards of Directors/Trustees ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Fund. Each Covered Officer must not: - use his personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Fund whereby the Covered Officer would benefit personally (directly or indirectly) to the detriment of the Fund; 5 - cause the Fund to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit of the Fund; or - use material non-public knowledge of portfolio transactions made or contemplated for, or actions proposed to be taken by, the Fund to trade personally or cause others to trade personally in contemplation of the market effect of such transactions. Each Covered Officer must, at the time of signing this Code, report to the General Counsel all affiliations or significant business relationships outside the Morgan Stanley complex and must update the report annually. Conflict of interest situations should always be approved by the General Counsel and communicated to the relevant Fund or Fund's Board. Any activity or relationship that would present such a conflict for a Covered Officer would likely also present a conflict for the Covered Officer if an immediate member of the Covered Officer's family living in the same household engages in such an activity or has such a relationship. Examples of these include: - service or significant business relationships as a director on the board of any public or private company; - accepting directly or indirectly, anything of value, including gifts and gratuities in excess of $100 per year from any person or entity with which the Fund has current or prospective business dealings, not including occasional meals or tickets for theatre or sporting events or other similar entertainment; provided it is business-related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety; - any ownership interest in, or any consulting or employment relationship with, any of the Fund's service providers, other than its investment adviser, principal underwriter, or any affiliated person thereof; and - a direct or indirect financial interest in commissions, transaction charges or spreads paid by the Fund for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. III. DISCLOSURE AND COMPLIANCE - Each Covered Officer should familiarize himself/herself with the disclosure and compliance requirements generally applicable to the Funds; - each Covered Officer must not knowingly misrepresent, or cause others to misrepresent, facts about the Fund to others, whether within or outside the 6 Fund, including to the Fund's Directors/Trustees and auditors, or to governmental regulators and self-regulatory organizations; - each Covered Officer should, to the extent appropriate within his area of responsibility, consult with other officers and employees of the Funds and their investment advisers with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds; and - it is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. IV. REPORTING AND ACCOUNTABILITY Each Covered Officer must: - upon adoption of the Code (thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Boards that he has received, read and understands the Code; - annually thereafter affirm to the Boards that he has complied with the requirements of the Code; - not retaliate against any other Covered Officer, other officer or any employee of the Funds or their affiliated persons for reports of potential violations that are made in good faith; and - notify the General Counsel promptly if he/she knows or suspects of any violation of this Code. Failure to do so is itself a violation of this Code. The General Counsel is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation. However, any waivers(1) sought by a Covered Officer must be considered by the Board of the relevant Fund or Funds. The Funds will follow these procedures in investigating and enforcing this Code: - the General Counsel will take all appropriate action to investigate any potential violations reported to him; - -------------------------- (1)Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics." 7 - if, after such investigation, the General Counsel believes that no violation has occurred, the General Counsel is not required to take any further action; - any matter that the General Counsel believes is a violation will be reported to the relevant Fund's Audit Committee; - if the directors/trustees/managing general partners who are not "interested persons" as defined by the Investment Company Act (the "Independent Directors/Trustees/Managing General Partners") of the relevant Fund concur that a violation has occurred, they will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer or other appropriate disciplinary actions; - the Independent Directors/Trustees/Managing General Partners of the relevant Fund will be responsible for granting waivers of this Code, as appropriate; and - any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules. V. OTHER POLICIES AND PROCEDURES This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Funds, the Funds' investment advisers, principal underwriters, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code unless any provision of this Code conflicts with any applicable federal or state law, in which case the requirements of such law will govern. The Funds' and their investment advisers' and principal underwriters' codes of ethics under Rule 17j-1 under the Investment Company Act and Morgan Stanley's Code of Ethics are separate requirements applying to the Covered Officers and others, and are not part of this Code. VI. AMENDMENTS Any amendments to this Code, other than amendments to Exhibits A, B or C, must be approved or ratified by a majority vote of the Board of each Fund, including a majority of Independent Directors/Trustees/Managing General Partners. VII. CONFIDENTIALITY 8 All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the Independent Directors/Trustees/Managing General Partners of the relevant Fund or Funds and their counsel, the relevant Fund or Funds and their counsel and the relevant investment adviser and its counsel. 9 VIII. INTERNAL USE The Code is intended solely for the internal use by the Funds and does not constitute an admission, by or on behalf of any Fund, as to any fact, circumstance, or legal conclusion I have read and understand the terms of the above Code. I recognize the responsibilities and obligations incurred by me as a result of my being subject to the Code. I hereby agree to abide by the above Code. __________________________ Date:_____________________ 10 EXHIBIT B INSTITUTIONAL FUNDS COVERED OFFICERS Mitchell M. Merin - President Ronald E. Robison - Executive Vice President and Principal Executive Officer James W. Garrett - Chief Financial Officer and Treasurer RETAIL FUNDS COVERED OFFICERS Mitchell M. Merin - President Ronald E. Robison - Executive Vice President and Principal Executive Officer Frank Smith - Chief Financial Officer and Treasurer 19 EXHIBIT C GENERAL COUNSEL Barry Fink 20 EX-99.CERT 4 y89776exv99wcert.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 Special Growth Fund; 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-2(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures 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) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and c) presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 21 a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; 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; and 6. The registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 20, 2003 Ronald E. Robison Principal Executive Officer 22 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 Special Growth Fund; 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-2(c) under the Investment Company Act of 1940) for the registrant and have: (i) designed such disclosure controls and procedures 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; (ii) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and (iii) presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 23 a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; 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; and 6. The registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 20, 2003 Francis Smith Principal Financial Officer 24 EX-99.906CERT 5 y89776exv99w906cert.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 Special Growth Fund In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended August 31, 2003 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, 2003 Ronald E. Robison Principal Executive Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Special Growth Fund and will be retained by Morgan Stanley Special Growth Fund and furnished to the Securities and Exchange Commission or its staff upon request. 25 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 Special Growth Fund In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended August 31, 2003 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, 2003 Francis Smith Principal Financial Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Special Growth Fund and will be retained by Morgan Stanley Special Growth Fund and furnished to the Securities and Exchange Commission or its staff upon request. 26 -----END PRIVACY-ENHANCED MESSAGE-----