-----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, K2bfMWu/jwV+QbUt8pwDAzTlFRqcdqEiK2/SQzuhvsnEpdXWvf5kRYT2VWywGdWX whKFOuoJRyxMmHqQriK62A== 0001047469-03-034599.txt : 20031028 0001047469-03-034599.hdr.sgml : 20031028 20031028163721 ACCESSION NUMBER: 0001047469-03-034599 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030831 FILED AS OF DATE: 20031028 EFFECTIVENESS DATE: 20031028 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY HIGH YIELD SECURITIES INC CENTRAL INDEX KEY: 0000311847 IRS NUMBER: 132988937 STATE OF INCORPORATION: MD FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-02932 FILM NUMBER: 03961293 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 HIGH YIELD SECURITIES INC DATE OF NAME CHANGE: 19980622 FORMER COMPANY: FORMER CONFORMED NAME: WITTER DEAN HIGH YIELD SECURITIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: INTERCAPITAL HIGH YIELD SECURITIES INC DATE OF NAME CHANGE: 19830308 N-CSR 1 a2120672zn-csr.txt N-CSR UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-02932 Morgan Stanley High Yield Securities Inc. (Exact name of registrant as specified in charter) 1221 Avenue of the Americas, New York, New York 10020 (Address of principal executive offices) (Zip code) Ronald E. Robison 1221 Avenue of the Americas, New York, New York 10020 (Name and address of agent for service) Registrant's telephone number, including area code: 212-762-4000 Date of fiscal year end: August 31, 2003 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 HIGH YIELD SECURITIES PERFORMED DURING THE ANNUAL 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 year ended August 31, 2003 TOTAL RETURN FOR THE 12-MONTH PERIOD ENDED AUGUST 31, 2003
LEHMAN BROTHERS U.S. LIPPER HIGH CORPORATE CURRENT YIELD HIGH YIELD BOND FUNDS CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2) 19.88% 19.27% 19.14% 20.82% 24.86% 21.79%
THE PERFORMANCE OF THE FUND'S FOUR SHARE CLASSES VARIES BECAUSE EACH HAS DIFFERENT EXPENSES. THE TOTAL RETURN FIGURES SHOWN ASSUME THE REINVESTMENT OF ALL DISTRIBUTIONS, BUT DO NOT REFLECT THE DEDUCTION OF ANY APPLICABLE SALES CHARGES. IF SALES CHARGES WERE INCLUDED, RETURNS WOULD BE LOWER. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SEE PERFORMANCE SUMMARY FOR STANDARDIZED PERFORMANCE INFORMATION. MARKET CONDITIONS Market returns during the period were dominated by the high-yield rally that lasted from mid-October, 2002, through the end of June. The rally was triggered by a combination of improving fundamentals, declining default rates and record inflows into the high-yield market, and by the end of June represented the second-greatest nine-month gain in the market's history. The rallying market drew record fund inflows, which in turn propelled prices still higher. The strongest returns during the course of that period were earned by sectors and securities that were most heavily out of favor during the preceding years. Wireless communications, utilities, telecommunications and cable all soared after performing dismally earlier in 2002. These sectors benefited from a combination of improved financial results (albeit based on greatly reduced expectations) and low valuations. In a similar vein, performance patterns across credit tiers differed dramatically as the lowest-rated credits rose far higher than their higher-quality peers. While technical factors remained a potent force throughout the 12-month period, they were especially influential in the closing months. An easing of fund inflows in July coincided with a surge in issuance to produce a temporary setback in the high-yield market's upward march that lasted through the first two weeks of August, when that pattern reversed. PERFORMANCE ANALYSIS While the Fund participated in the market's rally, it underperformed the Lehman Brothers U.S. Corporate High Yield Index for the 12-month period. Much of the Fund's relative performance was driven by its lower allocation to CCC and below rated credits, which caused the Fund to miss out on the strong performance of this more aggressive segment of the market. We de-emphasized CCC rated credits out of concern for the ongoing viability of many of the companies carrying that credit rating. Our bottom-up research also led us to keep the Fund's exposure to telecommunications and utilities companies below that of the benchmark. While we selectively added companies in both sectors as attractive opportunities came to market, the Fund remained underweighted to both groups during the rally. The Fund's performance was helped by strong security selection in several key sectors. The wireless communications sector entered the period with generally low valuations for most of its component companies given the sector's poor performance for most of 2002. Our analysts identified several companies that appeared to be undervalued relative to their prospects and that went on to perform strongly on the basis of improving financial results. The Fund also enjoyed strong performance from securities in the diversified media and broadcasting sectors that entered the period with low valuations and went on to deliver solid performance. Our analysis indicated that selected companies in economically sensitive sectors such as chemicals and manufacturing were also undervalued, and we added exposure in these areas. This was a positive factor in the Fund's performance during the period. 2 TOP FIVE INDUSTRIES Cable/Satellite TV 5.3% Chemicals: Specialty 4.6 Electric Utilities 4.4 Casino/Gaming 3.3 Hotels/Resorts/Cruiselines 3.0
LONG-TERM CREDIT ANALYSIS A/A+ 2.5% Baa/BBB+ 1.1 Ba/BB- 22.8 B/B 45.7 Caa/CCC 11.0 NR/NR 6.1
DATA AS OF AUGUST 31, 2003. 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'S INVESTMENT TEAM BEGINS BY CONSIDERING CURRENT AND PROJECTED ECONOMIC TRENDS THAT MAY AFFECT THE HIGH-YIELD MARKETS. 2. THIS IS FOLLOWED BY A THOROUGH EVALUATION OF THE CREDIT QUALITY OF EACH SECURITY AS WELL AS THE FINANCIAL STRENGTH OF EACH UNDERLYING COMPANY. THIS MAY INCLUDE DIRECT COMMUNICATION WITH PRINCIPALS OF INDIVIDUAL COMPANIES, AS WELL AS OTHER HIGH-YIELD SPECIALISTS AND RECOGNIZED RATINGS AGENCIES. 3. LASTLY, THE FUND'S MANAGERS SEEK TO MAINTAIN BROAD DIVERSIFICATION ACROSS A WIDE RANGE OF COMPANIES, INDUSTRIES, COUPONS AND MATURITIES. ANNUAL 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 AND 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 AM TO 8:00 PM, ET. ONCE OUR CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS. 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 [CHART] PERFORMANCE OF A $10,000 INVESTMENT--CLASS A AND D SHARES ($ IN THOUSANDS)
CLASS A CLASS D LEHMAN(1) LIPPER(2) 8/31/1993 $ 9,575 $ 10,000 $ 10,000 $ 10,000 8/31/1994 $ 9,640 $ 10,093 $ 10,329 $ 10,259 8/31/1995 $ 10,768 $ 11,302 $ 11,760 $ 11,443 8/31/1996 $ 11,930 $ 12,553 $ 12,895 $ 12,658 8/31/1997 $ 13,688 $ 14,437 $ 14,852 $ 14,628 8/31/1998 $ 13,743 $ 14,528 $ 15,302 $ 14,824 8/31/1999 $ 13,945 $ 14,771 $ 15,930 $ 15,630 8/31/2000 $ 12,707 $ 13,488 $ 16,110 $ 15,730 8/31/2001 $ 7,999 $ 8,503 $ 16,146 $ 14,546 8/31/2002 $ 6,263 $ 6,679 $ 14,911 $ 13,271 8/31/2003 $ 7,508# $ 8,070# $ 18,618 $ 16,163
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 GRAPH AND TABLE DO 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. 4 AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED AUGUST 31, 2003
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++ 09/26/79 07/28/97 07/28/97 09/26/79 SYMBOL HYLAX HYLBX HYLCX HYLDX 1 YEAR 19.88%(3) 19.27%(3) 19.14%(3) 20.82%(3) 14.78(4) 14.27(4) 18.14(4) 5 YEARS (11.39)(3) (11.80)(3) (11.91)(3) (11.09)(3) (12.15)(4) (11.98)(4) (11.91)(4) 10 YEARS (2.40)(3) (2.12)(3) (2.83)(4) SINCE INCEPTION 4.54(3) (9.74)(3) (9.84)(3) 4.82(3) 4.36(4) (9.74)(4) (9.84)(4)
- ---------- Notes on Performance PRIOR TO JULY 28, 1997, THE FUND OFFERED ONLY ONE CLASS OF SHARES. BECAUSE THE DISTRIBUTION ARRANGEMENT FOR CLASS A MOST CLOSELY RESEMBLED THE DISTRIBUTION ARRANGEMENT APPLICABLE PRIOR TO THE IMPLEMENTATION OF MULTIPLE CLASSES (I.E., CLASS A IS SOLD WITH A FRONT-END SALES CHARGE), HISTORICAL PERFORMANCE INFORMATION HAS BEEN RESTATED TO REFLECT THE ACTUAL MAXIMUM SALES CHARGE APPLICABLE TO CLASS A (I.E., 4.25%) AS COMPARED TO THE 5.50% SALES CHARGE IN EFFECT PRIOR TO JULY 28, 1997. IN ADDITION, CLASS A SHARES ARE NOW SUBJECT TO AN ONGOING 12b-1 FEE WHICH IS REFLECTED IN THE RESTATED PERFORMANCE FOR THAT CLASS. BECAUSE ALL SHARES OF THE FUND HELD PRIOR TO JULY 28, 1997 WERE DESIGNATED CLASS D SHARES, THE FUND'S HISTORICAL PERFORMANCE HAS BEEN RESTATED TO REFLECT THE ABSENCE OF ANY SALES CHARGE. (1) THE LEHMAN BROTHERS U.S. CORPORATE HIGH YIELD INDEX TRACKS THE PERFORMANCE OF ALL BELOW INVESTMENT-GRADE SECURITIES WHICH HAVE AT LEAST $100 MILLION IN OUTSTANDING ISSUANCE, A MATURITY GREATER THAN ONE YEAR, AND ARE ISSUED IN FIXED-RATE U.S. DOLLAR DENOMINATIONS. 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 HIGH CURRENT YIELD BOND FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER HIGH CURRENT YIELD BOND 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 REFLECTTHE 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. * THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 4.25%. ** 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. # CLOSING VALUE ASSUMING A COMPLETE REDEMPTION ON AUGUST 31, 2003. 5 MORGAN STANLEY HIGH YIELD SECURITIES INC. PORTFOLIO OF INVESTMENTS - AUGUST 31, 2003
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------- CORPORATE BONDS (88.3%) ADVERTISING/MARKETING SERVICES (1.5%) $ 4,000 Advanstar Communications - 144A* 8.639% 08/15/08 $ 3,970,000 3,805 Interep National Radio Sales, Inc. (Series B) 10.00 07/01/08 3,310,350 2,330 RH Donnelley Financial Corp. - 144A* 10.875 12/15/12 2,714,450 ------------ 9,994,800 ------------ AIRLINES (0.3%) 4,640 Air Canada Corp. (Canada) (a)(b) 10.25 03/15/11 2,273,600 ------------ ALTERNATIVE POWER GENERATION (0.6%) 2,650 Calpine Corp. 8.50 02/15/11 1,974,250 1,975 Calpine Corp. - 144A* 8.50 07/15/10 1,856,500 ------------ 3,830,750 ------------ APPAREL/FOOTWEAR (0.2%) 1,650 Oxford Industries Inc. - 144A* 8.875 06/01/11 1,716,000 ------------ APPAREL/FOOTWEAR RETAIL (1.2%) 970 Gap, Inc. (The) 6.90 09/15/07 1,022,137 1,770 Gap, Inc. (The) 10.55 12/15/08 2,108,512 5,410 Payless Shoesource Inc. - 144A* 8.25 08/01/13 5,315,325 ------------ 8,445,974 ------------ AUTO PARTS: O.E.M. (2.5%) 1,670 ArvinMeritor, Inc. 8.75 03/01/12 1,728,450 2,110 Collins & Aikman Products 10.75 12/31/11 1,856,800 3,255 Intermet Corp. 9.75 06/15/09 3,092,250 4,845 Lear Corp. (Series B) 8.11 05/15/09 5,414,287 4,660 TRW Automotive, Inc. - 144A* 9.375 02/15/13 5,172,600 ------------ 17,264,387 ------------ BROADCAST/MEDIA (1.0%) 11,475 Tri-State Outdoor Media Group, Inc. (b) 11.00 05/15/08 6,942,375 ------------ BROADCASTING (1.5%) 4,815 Nextmedia Operating, Inc. 10.75 07/01/11 5,332,612 4,325 Salem Communications Holdings Corp. (Series B) 9.00 07/01/11 4,573,687 ------------ 9,906,299 ------------ BUILDING PRODUCTS (0.4%) 1,705 Brand Services Inc. 12.00 10/15/12 1,911,731 775 Nortek, Inc. 9.25 03/15/07 788,562 ------------ 2,700,293 ------------
SEE NOTES TO FINANCIAL STATEMENTS 6
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------- CABLE/SATELLITE TV (5.3%) $ 1,590 Avalon Cable LLC 11.75++% 12/01/08 $ 1,564,162 2,725 British Sky Broadcasting Group PLC (United Kingdom) 6.875 02/23/09 2,929,375 425 Charter Communications Holdings LLC 8.25 04/01/07 342,125 1,780 Charter Communications Holdings/Charter Capital 10.75 10/01/09 1,424,000 8,465 Charter Communications Holdings/Charter Capital 11.75++ 05/15/11 4,571,100 1,340 Charter Communications Holdings/Charter Capital 13.50++ 01/15/11 763,800 915 CSC Holdings Inc. 9.875 02/15/13 956,175 510 CSC Holdings Inc. 10.50 05/15/16 555,900 5,095 CSC Holdings Inc. (Series B) 8.125 07/15/09 5,260,587 5,780 Echostar DBS Corp. 9.125 01/15/09 6,401,350 875 Echostar DBS Corp. 9.375 02/01/09 930,781 5,186 Knology, Inc. - 144A* (c) 12.00+ 11/30/09 4,512,238 2,285 Lodgenet Entertainment Corp. 9.50 06/15/13 2,359,262 1,040 Pegasus Communications Corp. (Series B) 9.75 12/01/06 842,400 455 Pegagus Communications Corp. (Series B) 12.50 08/01/07 373,100 350 Pegasus Satellite Communications Inc. 12.375 08/01/06 287,000 885 Pegasus Satellite Communications Inc. 13.50++ 03/01/07 570,825 1,780 Renaissance Media Group LLC 10.00 04/15/08 1,780,000 ------------ 36,424,180 ------------ CASINO/GAMING (3.3%) 27,175 Aladdin Gaming Holdings/Capital Corp. LLC (Series B) (a)(d) 13.50 03/01/10 135,875 2,340 Harrah's Operating Co., Inc. 7.875 12/15/05 2,527,200 5,030 International Game Technology 8.375 05/15/09 5,881,041 5,455 Park Place Entertainment 8.875 09/15/08 6,000,500 27,637 Resort At Summerlin LP/Ras Co. (Series B) (a)(b) 13.00 12/15/07 0 4,600 Station Casinos, Inc. 8.375 02/15/08 4,887,500 2,470 Venetian Casino/LV Sands 11.00 06/15/10 2,809,625 ------------ 22,241,741 ------------ CELLULAR TELEPHONE (0.5%) 3,250 Dobson Communications Corp. 10.875 07/01/10 3,526,250 ------------ CHEMICALS: MAJOR DIVERSIFIED (2.1%) 4,731 Equistar Chemical 10.125 09/01/08 4,731,000 1,545 Equistar Chemical Funding - 144A* 10.625 05/01/11 1,537,275 1,575 Huntsman Advanced Materials Corp. - 144A* 11.00 07/15/10 1,661,625 7,010 Huntsman ICI Chemicals 10.125 07/01/09 6,624,450 ------------ 14,554,350 ------------
SEE NOTES TO FINANCIAL STATEMENTS 7
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------- CHEMICALS: SPECIALTY (4.6%) $ 1,875 Acetex Corp. (Canada) 10.875% 08/01/09 $ 2,043,750 2,890 Avecia Group PLC (United Kingdom) 11.00 07/01/09 2,456,500 1,785 FMC Corp. 10.25 11/01/09 2,017,050 290 Huntsman International LLC - 144A* 9.875 03/01/09 298,700 945 ISP Chemco 10.25 07/01/11 1,041,862 5,345 ISP Holdings Inc. (Series B) 10.625 12/15/09 5,572,162 1,840 Lyondell Chemical Co. 9.50 12/15/08 1,775,600 2,050 Lyondell Chemical Co. (Series B) 9.875 05/01/07 2,029,500 4,185 Millennium America, Inc. 9.25 06/15/08 4,331,475 3,990 Rhodia SA - 144A* (France) 8.875 06/01/11 4,009,950 2,715 Rockwood Specialties Corp. - 144A* 10.625 05/15/11 2,830,387 2,705 Westlake Chemical Corp. - 144A* 8.75 07/15/11 2,759,100 ------------ 31,166,036 ------------ COMMERCIAL PRINTING/FORMS (0.0%) 16,000 Premier Graphics Inc. (a)(b) 11.50 12/01/05 0 ------------ COMPUTER COMMUNICATIONS (0.7%) 4,540 Avaya, Inc. 11.125 04/01/09 5,084,800 ------------ CONSUMER/BUSINESS SERVICES (0.9%) 3,580 Muzak LLC/Muzak Finance Corp. 9.875 03/15/09 3,423,375 2,610 Muzak LLC/Muzak Finance Corp. - 144A* 10.00 02/15/09 2,753,550 ------------ 6,176,925 ------------ CONTAINERS/PACKAGING (2.3%) 2,850 Graphic Packaging International - 144A* 9.50 08/15/13 2,992,500 1,900 Norampac, Inc. - 144A* (Canada) 6.75 06/01/13 1,876,250 7,140 Owens-Brockway Glass Containers Corp. 8.75 11/15/12 7,497,000 300 Owens-Brockway Glass Containers Corp. - 144A* 7.75 05/15/11 300,000 3,100 Pliant Corp. 13.00 06/01/10 2,697,000 ------------ 15,362,750 ------------ DEPARTMENT STORES (0.7%) 495 Penney (J.C.) Co., Inc. 6.875 10/15/15 446,737 565 Penney (J.C.) Co., Inc. 7.60 04/01/07 589,012 255 Penney (J.C.) Co., Inc. 7.95 04/01/17 253,087 1,650 Penney (J.C.) Co., Inc. 8.00 03/01/10 1,711,875 1,870 Penney (J.C.) Co., Inc. 9.00 08/01/12 2,010,250 ------------ 5,010,961 ------------ DRUGSTORE CHAINS (0.3%) 2,000 Rite Aid Corp. 6.875 08/15/13 1,740,000 ------------
SEE NOTES TO FINANCIAL STATEMENTS 8
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------- ELECTRIC UTILITIES (3.7%) $ 377 AES Corp. (The) 8.875% 02/15/11 $ 350,610 537 AES Corp. (The) 9.375 09/15/10 515,520 3,615 AES Corp. (The) - 144A* 9.00 05/15/15 3,669,225 1,695 Allegheny Energy, Inc. 7.75 08/01/05 1,695,000 460 CMS Energy Corp. 7.50 01/15/09 439,875 3,010 CMS Energy Corp. 8.50 04/15/11 2,946,037 1,040 IPALCO Enterprises, Inc. 8.625 11/14/11 1,092,000 3,160 Monongahela Power Co. 5.00 10/01/06 3,108,650 695 MSW Energy Holdings/Finance - 144A* 8.50 09/01/10 708,900 3,140 Nevada Power Co. - 144A* 9.00 08/15/13 3,273,450 1,810 PG&E Corp. - 144A* 6.875 07/15/08 1,837,150 3,320 PSEG Energy Holdings Inc. 8.625 02/15/08 3,320,000 1,790 Southern California Edison Co. - 144A* 8.00 02/15/07 1,960,050 ------------ 24,916,467 ------------ ELECTRONIC DISTRIBUTORS (0.8%) 4,745 BRL Universal Equipment Corp. 8.875 02/15/08 5,029,700 26,000 CHS Electronics, Inc. (a)(b) 9.875 04/15/05 227,500 ------------ 5,257,200 ------------ ELECTRONIC EQUIPMENT/INSTRUMENTS (2.1%) 5,415 Directv Holdings/Finance - 144A* 8.375 03/15/13 5,915,887 9,315 High Voltage Engineering, Inc. (b) 10.75 08/15/04 1,863,000 2,335 Xerox Capital Europe PLC (United Kingdom) 5.875 05/15/04 2,337,919 4,075 Xerox Corp. 7.125 06/15/10 3,952,750 ------------ 14,069,556 ------------ ENGINEERING & CONSTRUCTION (0.5%) 3,240 ABB Finance Inc. 6.75 06/03/04 3,188,160 2,600 Encompass Services Corp. (a)(b) 10.50 05/01/09 0 ------------ 3,188,160 ------------ ENVIRONMENTAL SERVICES (1.2%) 6,875 Allied Waste North America, Inc. (Series B) 10.00 08/01/09 7,442,188 660 Waste Management, Inc. 7.00 10/15/06 723,525 ------------ 8,165,713 ------------ FOOD DISTRIBUTORS (0.8%) 5,590 Volume Services America, Inc. 11.25 03/01/09 5,562,050 ------------ FOOD RETAIL (0.9%) 4,640 Delhaize America, Inc. 8.125 04/15/11 4,837,200 1,241 Kroger Co. - 144A* 8.50 07/15/17 1,349,570 ------------ 6,186,770 ------------
SEE NOTES TO FINANCIAL STATEMENTS 9
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------- FOOD: MEAT/FISH/DAIRY (2.4%) $ 3,595 Michael Foods Inc. (Series B) 11.75% 04/01/11 $ 4,134,250 1,750 National Beef Packing/NB Finance - 144A* 10.50 08/01/11 1,828,750 4,140 Pilgrim's Pride Corp. 9.625 09/15/11 4,388,400 5,780 Smithfield Foods Inc. 7.625 02/15/08 5,837,800 120 Smithfield Foods Inc. (Series B) 8.00 10/15/09 126,000 ------------ 16,315,200 ------------ FOOD: SPECIALTY/CANDY (0.3%) 2,245 Merisant Co. - 144A* 9.50 07/15/13 2,357,250 ------------ FOREST PRODUCTS (1.2%) 1,250 Louisiana Pacific Corp. 8.875 08/15/10 1,434,375 1,375 Louisiana Pacific Corp. 10.875 11/15/08 1,577,813 1,115 Tembec Industries Inc. (Canada) 7.75 03/15/12 1,053,675 3,910 Tembec Industries Inc. (Canada) 8.50 02/01/11 3,851,350 ------------ 7,917,213 ------------ GAS DISTRIBUTORS (1.1%) 2,775 Dynegy Holdings, Inc. - 144A* 9.875 07/15/10 2,816,625 4,080 Dynegy Holdings, Inc. 6.875 04/01/11 3,141,600 1,435 Southern Natural Gas 8.875 03/15/10 1,513,925 ------------ 7,472,150 ------------ HOME BUILDING (2.7%) 2,975 KB HOME 7.75 02/01/10 3,034,500 1,525 Meritage Corp. 9.75 06/01/11 1,626,031 4,090 Schuler Homes, Inc. 9.375 07/15/09 4,396,750 1,310 Tech Olympic USA, Inc. 9.00 07/01/10 1,323,100 1,700 Tech Olympic USA, Inc. 9.00 07/01/10 1,717,000 2,630 Tech Olympic USA, Inc. 10.375 07/01/12 2,656,300 580 Tech Olympic USA, Inc. - 144A* 10.375 07/01/12 585,800 3,110 Toll Corp. 8.25 02/01/11 3,296,600 ------------ 18,636,081 ------------ HOME FURNISHINGS (0.4%) 2,795 Tempur-Pedic/Tempur Products - 144A* 10.25 08/15/10 2,850,900 ------------ HOSPITAL/NURSING MANAGEMENT (1.9%) 625 HCA, Inc. 7.19 11/15/15 618,918 3,600 HCA, Inc. 7.875 02/01/11 3,837,744 750 HCA, Inc. 8.75 09/01/10 833,210 1,145 HCA, Inc. 7.58 09/15/25 1,093,189 390 Manor Care, Inc. 7.50 06/15/06 415,350 1,060 Manor Care, Inc. 8.00 03/01/08 1,144,800
SEE NOTES TO FINANCIAL STATEMENTS 10
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------- $ 1,050 Manor Care, Inc. - 144A* 6.25% 05/01/13 $ 1,013,250 2,285 Tenet Healthcare Corp. 6.50 06/01/12 2,102,200 1,985 Tenet Healthcare Corp. 7.375 02/01/13 1,950,263 ------------ 13,008,924 ------------ HOTELS/RESORTS/CRUISELINES (3.0%) 2,980 Hilton Hotels Corp. 7.625 12/01/12 3,143,900 2,085 Hilton Hotels Corp. 7.95 04/15/07 2,207,494 3,715 HMH Properties, Inc. (Series B) 7.875 08/01/08 3,733,575 5,725 Horseshoe Gaming Holding Corp. (Series B) 8.625 05/15/09 6,025,563 530 Starwood Hotels & Resorts Worldwide, Inc. 7.375 05/01/07 555,175 4,385 Starwood Hotels & Resorts Worldwide, Inc. 7.875 05/01/12 4,582,325 ------------ 20,248,032 ------------ INDUSTRIAL CONGLOMERATES (0.5%) 3,200 Tyco International Group S.A. (Luxembourg) 6.75 02/15/11 3,256,000 ------------ INDUSTRIAL MACHINERY (0.2%) 1,111 Flowserve Corp. 12.25 08/15/10 1,272,095 ------------ INDUSTRIAL SPECIALTIES (2.6%) 4,065 Cabot Safety Corp. 12.50 07/15/05 4,115,813 4,535 International Wire Group, Inc. 11.75 06/01/05 2,312,850 4,010 Johnsondiversey, Inc. 9.625 05/15/12 4,240,575 3,371 Tekni-Plex Inc. (Series B) 12.75 06/15/10 3,253,015 3,670 UCAR Finance, Inc. 10.25 02/15/12 3,803,038 ------------ 17,725,291 ------------ INTERNET SOFTWARE/SERVICES (0.2%) 7,131 Exodus Communications, Inc. (a)(b) 11.625 07/15/10 427,865 1,410 Globix Corp. - 144A* 11.00+ 05/01/08 1,092,370 ------------ 1,520,235 ------------ INVESTMENT MANAGERS (0.8%) 4,960 JSG Funding PLC (Ireland) 9.625 10/01/12 5,356,800 ------------ MEDIA CONGLOMERATES (0.7%) 1,570 Vivendi Universal SA - 144A* (France) 6.25 07/15/08 1,570,000 3,155 Vivendi Universal SA - 144A* (France) 9.25 04/15/10 3,525,713 ------------ 5,095,713 ------------ MEDICAL DISTRIBUTORS (0.8%) 220 AmerisourceBergen Corp. 7.25 11/15/12 222,200 4,885 AmerisourceBergen Corp. 8.125 09/01/08 5,165,888 ------------ 5,388,088 ------------
SEE NOTES TO FINANCIAL STATEMENTS 11
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------- MEDICAL SPECIALTIES (0.2%) $ 1,405 Apogent Technologies Inc. - 144A* 6.50% 05/15/13 $ 1,383,925 ------------ MEDICAL/NURSING SERVICES (0.9%) 5,140 Fresenius Medical Care Capital Trust 7.875 06/15/11 5,345,600 795 Fresenius Medical Care Capital Trust II (Units)# 7.875 02/01/08 828,788 ------------ 6,174,388 ------------ METAL FABRICATIONS (0.6%) 4,010 Trimas Corp. 9.875 06/15/12 3,929,800 ------------ MISCELLANEOUS COMMERCIAL SERVICES (1.0%) 2,971 Iron Mountain Inc. 7.75 01/15/15 3,030,420 3,545 Iron Mountain Inc. 8.625 04/01/13 3,686,800 ------------ 6,717,220 ------------ MISCELLANEOUS MANUFACTURING (1.0%) 3,315 Amsted Industries Inc. - 144A* 10.25 10/15/11 3,397,875 3,135 Jacuzzi Brands Inc. - 144A* 9.625 07/01/10 3,260,400 ------------ 6,658,275 ------------ MOVIES/ENTERTAINMENT (0.8%) 4,850 Alliance Atlantis Communications, Inc. (Canada) 13.00 12/15/09 5,425,938 ------------ OIL & GAS PIPELINES (2.9%) 5,125 El Paso Production Holdings - 144A* 7.75 06/01/13 4,971,250 4,305 GulfTerra Energy Partners, L.P. 10.625 12/01/12 4,956,131 1,010 GulfTerra Energy Partners, L.P. - 144A* 8.50 06/01/10 1,070,600 730 Northwest Pipeline Corp. 8.125 03/01/10 759,200 1,315 Transcontinental Gas Pipe Line Corp. (Series B) 8.875 07/15/12 1,416,913 4,410 Williams Companies, Inc. (The) 7.875 09/01/21 4,057,200 2,065 Williams Companies, Inc. (The) 9.25 03/15/04 2,101,138 340 Williams Companies, Inc. (The) - (Series A) 6.75 01/15/06 333,200 ------------ 19,665,632 ------------ OIL & GAS PRODUCTION (2.2%) 4,395 Chesapeake Energy Corp. 8.125 04/01/11 4,592,775 3,800 Hillcorp Energy/Finance - 144A* 10.50 09/01/10 3,899,750 2,155 Magnum Hunter Resources, Inc. 9.60 03/15/12 2,284,300 4,030 Vintage Petroleum, Inc. 7.875 05/15/11 4,070,300 ------------ 14,847,125 ------------ OIL REFINING/MARKETING (1.5%) 1,750 CITGO Petroleum Corp. - 144A* 11.375 02/01/11 1,951,250 1,055 Frontier Escrow Corp. - 144A* 8.00 04/15/13 1,070,825
SEE NOTES TO FINANCIAL STATEMENTS 12
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------- $ 3,000 Husky Oil Ltd. 8.90% 08/15/28 $ 3,435,000 2,165 Tesoro Petroleum Corp. 9.00 07/01/08 2,121,700 1,815 Tesoro Petroleum Corp. 9.625 04/01/12 1,805,925 ------------ 10,384,700 ------------ OILFIELD SERVICES/EQUIPMENT (0.6%) 2,760 Hanover Equipment Trust 2001 A (Series A) 8.50 09/01/08 2,773,800 1,655 Hanover Equipment Trust 2001 B (Series B) 8.75 09/01/11 1,646,725 ------------ 4,420,525 ------------ OTHER METALS/MINERALS (0.0%) 3,750 Murrin Holdings Property Ltd. (Australia) (a)(b) 9.375 08/31/07 375 ------------ OTHER TRANSPORTATION (0.6%) 3,700 Laidlaw International Inc. - 144A* 10.75 06/15/11 3,885,000 ------------ PUBLISHING: BOOKS/MAGAZINES (1.3%) 1,330 Dex Media West/Finance - 144A* 9.875 08/15/13 1,482,950 980 Houghton Mifflin Co. - 144A* 9.875 02/01/13 1,068,200 1,580 PEI Holdings, Inc. - 144A* 11.00 03/15/10 1,736,025 4,050 PRIMEDIA, Inc. 8.875 05/15/11 4,242,375 ------------ 8,529,550 ------------ PUBLISHING: NEWSPAPERS (0.8%) 4,854 Hollinger Participation Trust - 144A* (Canada) 12.125+ 11/15/10 5,266,445 ------------ PULP & PAPER (2.1%) 4,305 Abitibi-Consolidated Inc. (Canada) 6.00 06/20/13 3,888,603 5,600 Georgia-Pacific Corp. - 144A* 8.875 02/01/10 5,894,000 4,350 Norske Skog Canada Ltd. (Canada) 8.625 06/15/11 4,426,125 255 Norske Skog Canada Ltd. - 144A* (Canada) 8.625 06/15/11 259,463 ------------ 14,468,191 ------------ REAL ESTATE DEVELOPMENT (1.6%) 5,535 CB Richard Ellis Services, Inc. 11.25 06/15/11 5,839,425 5,080 LNR Property Corp. - 144A* 7.625 07/15/13 5,130,800 ------------ 10,970,225 ------------ REAL ESTATE INVESTMENT TRUSTS (0.5%) 3,365 Istar Financial Inc. 8.75 08/15/08 3,695,780 ------------ SEMICONDUCTORS (0.5%) 2,800 Fairchild Semiconductors Corp. 10.50 02/01/09 3,087,000 ------------ SERVICES TO THE HEALTH INDUSTRY (0.6%) 1,560 Medco Health Solutions 7.25 08/15/13 1,614,594 2,190 Omnicare, Inc. (Series B) 8.125 03/15/11 2,321,400 ------------ 3,935,994 ------------
SEE NOTES TO FINANCIAL STATEMENTS 13
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------- SPECIALTY STORES (1.1%) $ 3,600 Autonation, Inc. 9.00% 08/01/08 $ 3,969,000 3,285 Sonic Automotive Inc. - 144A* 8.625 08/15/13 3,317,850 ------------ 7,286,850 ------------ SPECIALTY TELECOMMUNICATIONS (1.7%) 715 American Tower Corp. 9.375 02/01/09 723,938 2,565 Primus Telecommunications Group, Inc. 12.75 10/15/09 2,616,300 260 Primus Telecommunications Group, Inc. (Series B) 9.875 05/15/08 245,700 5,570 Qwest Corp. 5.625 11/15/08 5,263,650 3,040 U.S. West Communications Corp. 6.625 09/15/05 3,055,200 12,900 Worldwide Fiber, Inc. (Canada) (a)(b) 12.00 08/01/09 1,290 ------------ 11,906,078 ------------ STEEL (0.9%) 3,065 Oregon Steel Mills, Inc. 10.00 07/15/09 2,436,675 3,360 United States Steel Corp. 9.75 05/15/10 3,410,400 ------------ 5,847,075 ------------ TELECOMMUNICATION EQUIPMENT (0.7%) 4,635 SBA Communications Corp. 12.00 03/01/08 4,820,400 ------------ TELECOMMUNICATIONS (0.9%) 4,630 Cincinnati Bell Inc. - 144A* 7.25 07/15/13 4,537,400 1,470 NTL Inc. 19.00+ 01/01/10 1,440,600 28,834 Rhythms Netconnections, Inc. (a)(b) 12.75 04/15/09 0 4,351 Rhythms Netconnections, Inc. (a)(b) 14.00 02/15/10 0 13,538 Rhythms Netconnections, Inc. (Series B) (a)(d) 13.50 05/15/08 0 15,250 Startec Global Communications Corp. (a)(b) 12.00 05/15/08 1,525 ------------ 5,979,525 ------------ TRUCKS/CONSTRUCTION/FARM MACHINERY (1.7%) 5,260 J.B. Poindexter & Co., Inc. 12.50 05/15/07 4,523,600 4,535 Manitowoc Inc. (The) 10.50 08/01/12 4,988,500 2,115 NMHG Holding Co. 10.00 05/15/09 2,263,050 ------------ 11,775,150 ------------ WHOLESALE DISTRIBUTORS (1.3%) 4,485 Burhmann US, Inc. 12.25 11/01/09 4,776,525 2,330 Fisher Scientific International, Inc. 7.125 12/15/05 2,399,900 1,785 Fisher Scientific International, Inc. - 144A* 8.125 05/01/12 1,847,475 ------------ 9,023,900 ------------
SEE NOTES TO FINANCIAL STATEMENTS 14
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------- WIRELESS TELECOMMUNICATIONS (1.6%) $ 87,300 CellNet Data Systems, Inc. (a)(b) 14.00% 10/01/07 $ 0 7,085 Nextel Communications Inc. 9.375 11/15/09 7,651,800 3,310 Nextel Partners Inc. (Class A) 11.00 03/15/10 3,558,250 ------------ 11,210,050 ------------ TOTAL CORPORATE BONDS (COST $826,890,186) 601,423,475 ------------ CONVERTIBLE BONDS (0.9%) HOTELS/RESORTS/CRUISELINES (0.0%) 1,643 Premier Cruises Ltd. - 144A* (a)(d) 10.00+ 08/15/05 0 ------------ SPECIALTY TELECOMMUNICATIONS (0.9%) 6,665 American Tower Corp. 6.25 10/15/09 6,331,750 ------------ TOTAL CONVERTIBLE BONDS (COST $7,672,802) 6,331,750 ------------ NUMBER OF SHARES --------- COMMON STOCKS (D) (3.1%) AEROSPACE & DEFENSE (0.1%) 45,973 Orbital Sciences Corp. (c) 403,180 ------------ APPAREL/FOOTWEAR RETAIL (0.0%) 5,421,101 County Seat Stores Corp. (c) 0 ------------ CASINO/GAMING (0.0%) 212,312 Fitzgerald Gaming Corp.** 0 ------------ CELLULAR TELEPHONE (0.5%) 391,333 Dobson Communications Corp. (c) 3,600,264 ------------ CONSUMER/BUSINESS SERVICES (0.7%) 292,845 Anacomp, Inc. (Class A) (c) 4,539,097 ------------ ENTERTAINMENT & LEISURE (0.1%) 15,308 AMF Bowling Worldwide, Inc. 413,316 ------------ FOOD: SPECIALTY/CANDY (0.0%) 13,317 SFAC New Holdings Inc. (c) 0 2,447 SFAC New Holdings Inc. (c) 0 1,069,725 Specialty Foods Acquisition Corp. - 144A* 0 ------------ 0 ------------
SEE NOTES TO FINANCIAL STATEMENTS 15
NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------------------------------- HOTELS/RESORTS/CRUISELINES (0.0%) 981,277 Premier Holdings Inc. (c) $ 0 ------------ INTERNET SOFTWARE/SERVICES (0.4%) 825,693 Globix Corp. (c) 2,559,648 ------------ MEDICAL SPECIALTIES (0.0%) 57,963 MEDIQ, Inc. (c) 314,739 ------------ MEDICAL/NURSING SERVICES (0.0%) 1,754,896 Raintree Healthcare Corp. (c) 0 ------------ MOTOR VEHICLES (0.0%) 913 Northern Holdings Industrial Corp.* (c) 0 ------------ RESTAURANTS (0.2%) 111,549 American Restaurant Group Holdings, Inc. (c) 0 64,807 American Restaurant Group Holdings, Inc. - 144A* 0 787,160 Catalina Restaurant Group, Inc. (c) 1,574,320 ------------ 1,574,320 ------------ SPECIALTY TELECOMMUNICATIONS (0.0%) 34,159 Birch Telecom Inc. (c) 0 1,448,200 PFB Telecom NV (Series B) (c) 0 331,128 Viatel Holdings Bermuda Ltd. (c) 0 25,075 XO Communications, Inc. (c) 154,713 ------------ 154,713 ------------ TEXTILES (0.0%) 2,389,334 U.S. Leather, Inc. (c) 0 ------------ WIRELESS TELECOMMUNICATIONS (1.1%) 381,789 Arch Wireless, Inc. (Class A) (c) 3,937,340 580,766 Motient Corp. (c) 3,542,673 315,021 Vast Solutions, Inc. (Class B1) (c) 0 315,021 Vast Solutions, Inc. (Class B2) (c) 0 315,021 Vast Solutions, Inc. (Class B3) (c) 0 ------------ 7,480,013 ------------ TOTAL COMMON STOCKS (COST $384,918,125) 21,039,290 ------------ NON-CONVERTIBLE PREFERRED STOCKS (2.2%) BROADCASTING (0.7%) 523 Paxson Communications Corp.+ 4,658,260 ------------ CABLE/SATELLITE TV (0.0%) 384,629 Knology Holdings, Inc. - 144A* (c) 3,846 ------------
SEE NOTES TO FINANCIAL STATEMENTS 16
NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------------------------------- CELLULAR TELEPHONE (0.6%) 4,127 Dobson Communications Corp.+ $ 4,147,635 ------------ ELECTRIC UTILITIES (0.7%) 6,773 TNP Enterprises, Inc. (Series D)+ 4,537,910 ------------ RESTAURANTS (0.2%) 1,337 Catalina Restaurant Group, Inc. (Units)# 1,203,300 ------------ SPECIALTY TELECOMMUNICATIONS (0.0%) 5 Crown Castle International Corp. 5,738 ------------ TOTAL NON-CONVERTIBLE PREFERRED STOCKS (COST $26,896,078) 14,556,689 ------------ CONVERTIBLE PREFERRED STOCKS (0.2%) CELLULAR TELEPHONE (0.2%) 6,080 Dobson Communications Corp. $0.06 - 144A* 1,252,480 ------------ SPECIALTY TELECOMMUNICATIONS (0.0%) 53,058 McLeodUSA, Inc. (Series A) $0.44 300,308 ------------ TOTAL CONVERTIBLE PREFERRED STOCKS (COST $1,404,618) 1,552,788 ------------ NUMBER OF EXPIRATION WARRANTS DATE --------- ---------- WARRANTS (0.1%) BROADCASTING (0.0%) 6,410 XM Satellite Radio Holdings, Inc. - 144A* 03/15/10 51,280 ------------ CASINO/GAMING (0.0%) 319,500 Aladdin Gaming Enterprises, Inc. - 144A* 03/01/10 0 23,000 Resort At Summerlin LP - 144A* 12/15/07 0 ------------ 0 ------------ ELECTRIC UTILITIES (0.0%) 1,850 TNP Enterprises, Inc. - 144A* 04/01/11 18 ------------ MOVIES/ENTERTAINMENT (0.1%) 36,019 AMF Bowling Worldwide, Inc. (Series A) 03/09/09 306,162 35,191 AMF Bowling Worldwide, Inc. (Series B) 03/09/09 158,360 ------------ 464,522 ------------
SEE NOTES TO FINANCIAL STATEMENTS 17
NUMBER OF EXPIRATION WARRANTS DATE VALUE - -------------------------------------------------------------------------------------------------------------- RESTAURANTS (0.0%) 9,526 American Restaurant Group Holdings, Inc. (c) 12/15/03 $ 0 4,500 American Restaurant Group Holdings, Inc. - 144A* 08/15/08 0 334,250 Catalina Restaurant Group (c) 07/10/12 0 ------------- 0 ------------- SPECIALTY TELECOMMUNICATIONS (0.0%) 17,500 Birch Telecom Inc. 06/15/08 0 117,571 McLeodUSA, Inc. 04/16/07 43,501 526,668 Versatel Telecom International NV (Netherlands) 10/08/04 63,628 50,148 XO Communications Inc. (Class A) 01/16/10 0 37,609 XO Communications Inc. (Class B) 01/16/10 0 37,609 XO Communications Inc. (Class C) 01/16/10 0 ------------- 107,129 ------------- TELECOMMUNICATIONS (0.0%) 13,250 Startec Global Communications Corp. - 144A* 05/15/08 0 ------------- TOTAL WARRANTS (COST $2,124,966) 622,949 ------------- PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE --------- ------ -------- SHORT-TERM INVESTMENT (1.7%) REPURCHASE AGREEMENT $ 11,794 Joint repurchase agreement account (dated 08/29/03; proceeds $11,795,376) (e) (COST $11,794,000) 1.05% 09/02/03 11,794,000 ------------- TOTAL INVESTMENTS (COST $1,261,700,775) (f) 96.5% 657,320,941 OTHER ASSETS IN EXCESS OF LIABILITIES 3.5 23,802,835 -------- ------------- NET ASSETS 100.0% $ 681,123,776 ======== =============
SEE NOTES TO FINANCIAL STATEMENTS 18 - ---------- * RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. ** RESALE IS RESTRICTED; ACQUIRED (12/22/98) AT A COST BASIS OF $957,527. + PAYMENT-IN-KIND SECURITY. # CONSISTS OF ONE OR MORE CLASS OF SECURITIES TRADED TOGETHER AS A UNIT; BOND OR PREFERRED STOCK WITH ATTACHED WARRANTS. ++ CURRENTLY A ZERO COUPON BOND AND WILL PAY INTEREST AT THE RATE SHOWN AT A FUTURE SPECIFIED DATE. (a) ISSUER IN BANKRUPTCY. (b) NON-INCOME PRODUCING SECURITY; BOND IN DEFAULT. (c) ACQUIRED THROUGH EXCHANGE OFFER. (d) NON-INCOME PRODUCING SECURITIES. (e) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS. (f) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $1,258,804,227. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $35,168,716 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $636,652,002, RESULTING IN NET UNREALIZED DEPRECIATION OF $601,483,286. SEE NOTES TO FINANCIAL STATEMENTS 19 MORGAN STANLEY HIGH YIELD SECURITIES INC. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES AUGUST 31, 2003 ASSETS: Investments in securities, at value (cost $1,261,700,775) $ 657,320,941 Receivable for: Interest 12,501,914 Capital stock sold 7,450,991 Investments sold 6,102,326 Prepaid expenses and other assets 94,976 --------------- TOTAL ASSETS 683,471,148 --------------- LIABILITIES: Payable for: Investments purchased 972,923 Capital stock redeemed 428,867 Distribution fee 306,612 Investment management fee 273,149 Accrued expenses and other payables 365,821 --------------- TOTAL LIABILITIES 2,347,372 --------------- NET ASSETS $ 681,123,776 =============== COMPOSITION OF NET ASSETS: Paid-in-capital $ 3,115,523,795 Net unrealized depreciation (604,379,834) Accumulated undistributed net investment income 162,662 Accumulated net realized loss (1,830,182,847) --------------- NET ASSETS $ 681,123,776 =============== Class A Shares: Net Assets $ 38,071,507 Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 22,753,637 NET ASSET VALUE PER SHARE $ 1.67 =============== MAXIMUM OFFERING PRICE PER SHARE, (NET ASSET VALUE PLUS 4.44% OF NET ASSET VALUE) $ 1.74 =============== CLASS B SHARES: Net Assets $ 422,467,542 Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 253,379,711 NET ASSET VALUE PER SHARE $ 1.67 =============== CLASS C SHARES: Net Assets $ 45,113,502 Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 26,997,188 NET ASSET VALUE PER SHARE $ 1.67 =============== CLASS D SHARES: Net Assets $ 175,471,225 Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE) 104,651,794 NET ASSET VALUE PER SHARE $ 1.68 ===============
SEE NOTES TO FINANCIAL STATEMENTS 20 STATEMENT OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 2003 NET INVESTMENT INCOME: INCOME Interest $ 73,781,585 Dividends 4,477,876 --------------- TOTAL INCOME 78,259,461 --------------- EXPENSES Investment management fee 2,927,240 Distribution fee (Class A shares) 62,328 Distribution fee (Class B shares) 2,915,939 Distribution fee (Class C shares) 333,318 Transfer agent fees and expenses 1,469,816 Taxes 294,555 Professional fees 189,965 Shareholder reports and notices 136,836 Registration fees 72,445 Directors' fees and expenses 26,644 Custodian fees 7,233 Other 28,545 --------------- TOTAL EXPENSES 8,464,864 --------------- NET INVESTMENT INCOME 69,794,597 --------------- NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized loss (927,632,141) Net change in unrealized depreciation 966,925,307 --------------- NET GAIN 39,293,166 --------------- NET INCREASE $ 109,087,763 ===============
SEE NOTES TO FINANCIAL STATEMENTS 21 STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR ENDED ENDED AUGUST 31, 2003 AUGUST 31, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income $ 69,794,597 $ 90,450,964 Net realized loss (927,632,141) (375,136,573) Net change in unrealized depreciation 966,925,307 111,513,872 ----------------- ----------------- NET INCREASE (DECREASE) 109,087,763 (173,171,737) ----------------- ----------------- DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income Class A shares (3,157,603) (3,878,089) Class B shares (38,559,338) (69,129,555) Class C shares (3,797,508) (5,647,596) Class D shares (14,815,212) (16,092,318) Paid-in-capital Class A shares -- (425,216) Class B shares -- (7,579,753) Class C shares -- (619,234) Class D shares -- (1,764,452) ----------------- ----------------- TOTAL DIVIDENDS AND DISTRIBUTIONS (60,329,661) (105,136,213) ----------------- ----------------- Net increase (decrease) from capital stock transactions 116,673,515 (94,605,170) ----------------- ----------------- NET INCREASE (DECREASE) 165,431,617 (372,913,120) NET ASSETS: Beginning of period 515,692,159 888,605,279 ----------------- ----------------- END OF PERIOD (Including accumulated undistributed net investment income of $162,662 and dividends in excess of net investment income of $17,405,768, respectively) $ 681,123,776 $ 515,692,159 ================= =================
SEE NOTES TO FINANCIAL STATEMENTS 22 MORGAN STANLEY HIGH YIELD SECURITIES INC. NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2003 1. ORGANIZATION AND ACCOUNTING POLICIES Morgan Stanley High Yield Securities Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended, (the "Act") as a diversified, open-end management investment company. The Fund's primary investment objective is to earn a high level of current income and, as a secondary objective, capital appreciation, but only when consistent with its primary objective. The Fund was incorporated in Maryland on June 14, 1979 and commenced operations on September 26, 1979. 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) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Directors; (2) fixed income portfolio securities for which over-the-counter market quotations are readily available are valued at the latest bid price prior to the time of valuation; (3) 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; (4) 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; (5) 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; (6) 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; (7) when market quotations are not readily available or Morgan Stanley Investment Advisors Inc. (the "Investment Manager") determines that the market quotations are not reflective of 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; and (8) 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. 23 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 except where collection is not expected. 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, calculated daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined as of the close of each business day: 0.50% to the portion of daily net assets not exceeding $500 million; 0.425% to the portion of daily net assets exceeding $500 million but not exceeding $750 million; 0.375% to the portion of daily net assets exceeding $750 million but not exceeding $1 billion; 0.35% to the portion of daily net assets exceeding $1 billion but not exceeding $2 billion; 0.325% to the portion of daily net assets exceeding $2 billion but not exceeding $3 billion; and 0.30% to the portion of daily net assets exceeding $3 billion. 24 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 -- 0.75% of the average daily net assets of Class B; and (iii) Class C -- up to 0.85% 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 $60,327,882 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 0.85% 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 year ended August 31, 2003, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.20% and 0.85%, respectively. The Distributor has informed the Fund that for the year 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 $23,338, $918,343 and $21,706, respectively and received $277,628 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 year ended August 31, 2003, aggregated $386,219,201 and $369,664,877, respectively. 25 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 $20,000. The Fund has an unfunded noncontributory defined benefit pension plan covering all 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 years of service and compensation during the last five years of service. Aggregate pension costs for the year ended August 31, 2003 included in Directors' fees and expenses in the Statement of Operations amounted to $13,434. At August 31, 2003, the Fund had an accrued pension liability of $57,234 which is included in accrued expenses in the Statement of Assets and Liabilities. An affiliated company is a company in which the Fund has ownership of at least 5% of the voting securities. Transactions with such companies during the year ended August 31, 2003 were as follows:
ISSUER PURCHASES SALES REALIZED GAIN INCOME VALUE - ------ --------- ------------ ---------------- -------- ------------ Anacomp Inc. -- Class A -- $ 3,784,829 $ 321,482 -- $ 4,539,097 Catalina Restaurant Group -- -- -- -- 1,574,320 Globix Corp. -- -- -- -- 2,559,648
5. FUND ACQUISITIONS -- MORGAN STANLEY HIGH INCOME ADVANTAGE TRUSTS On December 16, 2002, the Fund acquired all the net assets of Morgan Stanley High Income Advantage Trust ("HIAT"), Morgan Stanley High Income Advantage Trust II ("HIAT II") and Morgan Stanley High Income Advantage Trust III ("HIAT III") based on the respective valuations as of the close of business on December 13, 2002, pursuant to three reorganization plans approved by the shareholders of HIAT, HIAT II, and HIAT III on December 10, 2002. The acquisition was accomplished by a tax-free exchange of 16,043,676 Class D shares of the Fund at a net asset value of $1.53 per share for 29,935,152 shares of HIAT; 21,167,160 Class D shares of the Fund at a net asset value of $1.53 per share for 35,201,907 shares of HIAT II; and 8,521,386 Class D shares of the Fund at a net asset value of $1.53 per share for 12,782,079 shares of HIAT III. The net assets of the Fund and HIAT, HIAT II, and HIAT III immediately before the acquisition were $504,383,912, $24,638,052, $32,445,236, and $12,976,663, respectively, including unrealized depreciation of $78,827,004, $102,180,638, and $38,615,052 for HIAT, HIAT II, and HIAT III, respectively. Immediately after the acquisition, the combined net assets of the Fund amounted to $574,443,863. 26 6. CAPITAL STOCK Transactions in capital stock were as follows:
FOR THE YEAR FOR THE YEAR ENDED ENDED AUGUST 31, 2003 AUGUST 31, 2002 -------------------------------- -------------------------------- SHARES AMOUNT SHARES AMOUNT -------------- -------------- -------------- -------------- CLASS A SHARES Sold 39,836,992 $ 64,688,820 10,201,614 $ 20,177,481 Reinvestment of dividends and distributions 1,022,505 1,601,355 1,119,515 2,083,474 Redeemed (33,475,330) (54,476,121) (11,782,958) (23,700,021) -------------- -------------- -------------- -------------- Net increase (decrease) -- Class A 7,384,167 11,814,054 (461,829) (1,439,066) -------------- -------------- -------------- -------------- CLASS B SHARES Sold 77,421,752 122,904,213 39,306,397 74,811,260 Reinvestment of dividends and distributions 9,626,091 15,003,266 14,993,853 27,953,825 Redeemed (73,660,925) (116,540,305) (101,220,067) (190,557,689) -------------- -------------- -------------- -------------- Net increase (decrease) -- Class B 13,386,918 21,367,174 (46,919,817) (87,792,604) -------------- -------------- -------------- -------------- CLASS C SHARES Sold 12,695,388 20,107,539 7,565,119 14,251,142 Reinvestment of dividends and distributions 1,158,259 1,809,569 1,601,530 2,981,218 Redeemed (8,770,002) (13,966,548) (8,724,288) (16,164,050) -------------- -------------- -------------- -------------- Net increase -- Class C 5,083,645 7,950,560 442,361 1,068,310 -------------- -------------- -------------- -------------- CLASS D SHARES Sold 32,279,099 51,598,560 13,842,546 25,568,899 Reinvestment of dividends and distributions 4,850,711 7,624,480 6,026,961 11,290,465 Shares issued in connection with the acquisition of the Morgan Stanley High Income Advantage Trusts (See Note 7) 45,732,222 70,059,951 -- -- Redeemed (33,881,962) (53,741,264) (23,300,211) (43,301,174) -------------- -------------- -------------- -------------- Net increase (decrease) -- Class D 48,980,070 75,541,727 (3,430,704) (6,441,810) -------------- -------------- -------------- -------------- Net increase (decrease) in Fund 74,834,800 $ 116,673,515 (50,369,989) $ (94,605,170) ============== ============== ============== ==============
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. 27 The tax character of distributions paid was as follows:
FOR THE YEAR FOR THE YEAR ENDED ENDED AUGUST 31, 2003 AUGUST 31, 2002 ---------------- ---------------- Ordinary income $ 60,329,661 $ 95,176,609 Paid-in capital -- 9,959,604 ---------------- --------------- Total distributions $ 60,329,661 $ 105,136,213 ================ ===============
As of August 31, 2003, the tax-basis components of accumulated losses were as follows: Undistributed ordinary income $ 116,367 Undistributed long-term gains -- ---------------- Net accumulated earnings 116,367 Capital loss carryforward* (1,072,223,163) Post-October losses (756,963,011) Temporary differences (3,846,926) Net unrealized depreciation (601,483,286) ---------------- Total accumulated losses $ (2,434,400,019) ================
*As of August 31, 2003, the Fund had a net capital loss carryforward of $1,072,223,163 of which $27,363,677 will expire on August 31, 2004, $42,577,150 will expire on August 31, 2005, $15,861,101 will expire on August 31, 2006, $28,176,968 will expire on August 31, 2007, $73,114,566 will expire on August 31, 2008, $92,557,036 will expire on August 31, 2009, $224,095,251 will expire on August 31, 2010 and $568,477,414 will expire on August 31, 2011 to offset future capital gains to the extent provided by regulations. As part of the Fund's acquisition of the assets of Morgan Stanley High Income Advantage Trusts I, II and III (the "HIATs"), the Fund obtained a net capital loss carryforward of $231,274,856 from the HIATs. Utilization of this carryforward is subject to limitations imposed by the Internal Revenue Code and Treasury Regulations, reducing the total carryforward available. As of August 31, 2003, the Fund had temporary book/tax differences primarily attributable to post-October losses (capital losses incurred after October 31 within the taxable year which are deemed to arise on the first business day of the Fund's next taxable year), interest on bonds in default and book amortization of discounts on debt securities and permanent book/tax differences primarily attributable to tax adjustments on debt securities sold by the Fund and capital loss carryforwards expired or written off by the Fund. To reflect reclassifications arising from the permanent differences, paid-in-capital was charged $318,746,954, accumulated undistributed net investment income was credited $10,205,488 and accumulated net realized loss was credited $308,541,466. 28 MORGAN STANLEY HIGH YIELD SECURITIES INC. FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of capital stock outstanding throughout each period:
FOR THE YEAR ENDED AUGUST 31, -------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------ ------------ ------------ ------------ ------------ CLASS A SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 1.55 $ 2.32 $ 4.35 $ 5.51 $ 6.16 ------------ ------------ ------------ ------------ ------------ Income (loss) from investment operations: Net investment income++ 0.19 0.26 0.47 0.69 0.72 Net realized and unrealized gain (loss) 0.10 (0.73) (1.99) (1.13) (0.63) ------------ ------------ ------------ ------------ ------------ Total income (loss) from investment operations 0.29 (0.47) (1.52) (0.44) 0.09 ------------ ------------ ------------ ------------ ------------ Less dividends and distributions from: Net investment income (0.17) (0.27) (0.51) (0.72) (0.74) Paid-in-capital - (0.03) - - - ------------ ------------ ------------ ------------ ------------ Total dividends and distributions (0.17) (0.30) (0.51) (0.72) (0.74) ------------ ------------ ------------ ------------ ------------ Net asset value, end of period $ 1.67 $ 1.55 $ 2.32 $ 4.35 $ 5.51 ============ ============ ============ ============ ============ TOTAL RETURN+ 19.88% (21.70)% (37.05)% (8.88)% 1.47% RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.06% 0.99% 0.77% 0.70% 0.68% Net investment income 11.96% 13.76% 15.17% 13.62% 12.42% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 38,072 $ 23,879 $ 36,762 $ 57,273 $ 68,667 Portfolio turnover rate 66% 39% 49% 20% 36%
- ---------- ++ 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) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 29
FOR THE YEAR ENDED AUGUST 31, -------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------ ------------ ------------ ------------ ------------ CLASS B SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 1.55 $ 2.32 $ 4.34 $ 5.50 $ 6.15 ------------ ------------ ------------ ------------ ------------ Income (loss) from investment operations: Net investment income++ 0.18 0.25 0.46 0.66 0.69 Net realized and unrealized gain (loss) 0.10 (0.73) (1.99) (1.13) (0.64) ------------ ------------ ------------ ------------ ------------ Total income (loss) from investment operations 0.28 (0.48) (1.53) (0.47) 0.05 ------------ ------------ ------------ ------------ ------------ Less dividends and distributions from: Net investment income (0.16) (0.26) (0.49) (0.69) (0.70) Paid-in-capital - (0.03) - - - ------------ ------------ ------------ ------------ ------------ Total dividends and distributions (0.16) (0.29) (0.49) (0.69) (0.70) ------------ ------------ ------------ ------------ ------------ Net asset value, end of period $ 1.67 $ 1.55 $ 2.32 $ 4.34 $ 5.50 ============ ============ ============ ============ ============ TOTAL RETURN+ 19.27% (22.00)% (37.27)% (9.39)% 0.92% RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.61% 1.56% 1.37% 1.25% 1.24% Net investment income 11.41% 13.19% 14.57% 13.07% 11.86% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 422,468 $ 371,399 $ 664,706 $ 1,381,008 $ 1,927,186 Portfolio turnover rate 66% 39% 49% 20% 36%
- ---------- ++ 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) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 30
FOR THE YEAR ENDED AUGUST 31, -------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------ ------------ ------------ ------------ ------------ CLASS C SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 1.55 $ 2.32 $ 4.34 $ 5.51 $ 6.15 ------------ ------------ ------------ ------------ ------------ Income (loss) from investment operations: Net investment income++ 0.18 0.25 0.45 0.66 0.68 Net realized and unrealized gain (loss) 0.10 (0.73) (1.98) (1.14) (0.62) ------------ ------------ ------------ ------------ ------------ Total income (loss) from investment operations 0.28 (0.48) (1.53) (0.48) 0.06 ------------ ------------ ------------ ------------ ------------ Less dividends and distributions from: Net investment income (0.16) (0.26) (0.49) (0.69) (0.70) Paid-in-capital - (0.03) - - - ------------ ------------ ------------ ------------ ------------ Total dividends and distributions (0.16) (0.29) (0.49) (0.69) (0.70) ------------ ------------ ------------ ------------ ------------ Net asset value, end of period $ 1.67 $ 1.55 $ 2.32 $ 4.34 $ 5.51 ============ ============ ============ ============ ============ TOTAL RETURN+ 19.14% (22.11)% (37.24)% (9.66)% 0.99% RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.71% 1.66% 1.47% 1.35% 1.34% Net investment income 11.31% 13.09% 14.47% 12.97% 11.76% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 45,114 $ 33,978 $ 49,818 $ 86,951 $ 109,142 Portfolio turnover rate 66% 39% 49% 20% 36%
- ---------- ++ 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) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 31
FOR THE YEAR ENDED AUGUST 31, -------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------ ------------ ------------ ------------ ------------ CLASS D SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 1.55 $ 2.32 $ 4.35 $ 5.51 $ 6.16 ------------ ------------ ------------ ------------ ------------ Income (loss) from investment operations: Net investment income++ 0.19 0.26 0.48 0.70 0.74 Net realized and unrealized gain (loss) 0.11 (0.73) (1.99) (1.13) (0.64) ------------ ------------ ------------ ------------ ------------ Total income (loss) from investment operations 0.30 (0.47) (1.51) (0.43) 0.10 ------------ ------------ ------------ ------------ ------------ Less dividends and distributions from: Net investment income (0.17) (0.27) (0.52) (0.73) (0.75) Paid-in-capital - (0.03) - - - ------------ ------------ ------------ ------------ ------------ Total dividends and distributions (0.17) (0.30) (0.52) (0.73) (0.75) ------------ ------------ ------------ ------------ ------------ Net asset value, end of period $ 1.68 $ 1.55 $ 2.32 $ 4.35 $ 5.51 ============ ============ ============ ============ ============ TOTAL RETURN+ 20.82% (21.45)% (36.95)% (8.69)% 1.67% RATIOS TO AVERAGE NET ASSETS(1): Expenses 0.86% 0.81% 0.62% 0.50% 0.49% Net investment income 12.16% 13.94% 15.32% 13.82% 12.61% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 175,471 $ 86,436 $ 137,319 $ 246,941 $ 333,714 Portfolio turnover rate 66% 39% 49% 20% 36%
- ---------- ++ 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) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 32 MORGAN STANLEY HIGH YIELD SECURITIES INC. INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF MORGAN STANLEY HIGH YIELD SECURITIES INC.: We have audited the accompanying statement of assets and liabilities of Morgan Stanley High Yield Securities Inc. (the "Fund"), including the portfolio of investments, as of August 31, 2003, and the related statements of operations for the year then ended and changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 2003, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Morgan Stanley High Yield Securities Inc. as of August 31, 2003, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP NEW YORK, NEW YORK OCTOBER 21, 2003 33 MORGAN STANLEY HIGH YIELD SECURITIES INC. DIRECTOR AND OFFICER INFORMATION INDEPENDENT DIRECTORS:
NUMBER OF PORTFOLIOS TERM OF IN FUND POSITION(S) OFFICE AND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS HELD BY INDEPENDENT DIRECTOR REGISTRANT TIME SERVED* PAST 5 YEARS** BY DIRECTOR*** DIRECTOR - ------------------------ ----------- ------------ ------------------------------ -------------- ------------------------------ Michael Bozic (62) Director Since Retired; Director or Trustee 216 Director of Weirton Steel c/o Mayer, Brown, April 1994 of the Retail Funds and TCW/DW Corporation. Rowe & Maw LLP Term Trust 2003 (since Counsel to the April 1994) and the Independent Directors Institutional Funds (since 1675 Broadway July 2003); formerly Vice New York, NY Chairman of Kmart Corporation (December 1998-October 2000), Chairman and Chief Executive Officer of Levitz Furniture Corporation (November 1995- November 1998) and President and Chief Executive Officer of Hills Department Stores (May 1991-July 1995); formerly variously Chairman, Chief Executive Officer, President and Chief Operating Officer (1987-1991) of the Sears Merchandise Group of Sears, Roebuck & Co. Edwin J. Garn (70) Director Since Director or Trustee of the 216 Director of Franklin Covey c/o Summit Ventures LLC January 1993 Retail Funds and TCW/DW Term (time management systems), BMW 1 Utah Center Trust 2003 (since January 1993) Bank of North America, Inc. 201 S. Main Street and the Institutional Funds (industrial loan corporation), Salt Lake City, UT (since July 2003); member of United Space Alliance (joint the Utah Regional Advisory venture between Lockheed Board of Pacific Corp.; Martin and the Boeing Company) formerly United States Senator and Nuskin Asia Pacific (R-Utah) (1974-1992) and (multilevel marketing); member Chairman, Senate Banking of the board of various civic Committee (1980-1986), Mayor and charitable organizations. of Salt Lake City, Utah (1971-1974), Astronaut, Space Shuttle Discovery (April 12-19, 1985), and Vice Chairman, Huntsman Corporation (chemical company). Wayne E. Hedien (69) Director Since Retired; Director or Trustee 216 Director of The PMI Group Inc. c/o Mayer, Brown, September of the Retail Funds and TCW/DW (private mortgage insurance); Rowe & Maw LLP 1997 Term Trust 2003; (Since Trustee and Vice Chairman of Counsel to the Independent September 1997) and the The Field Museum of Natural Directors Institutional Funds (since History; director of various 1675 Broadway July 2003); formerly associated other business and charitable New York, NY with the Allstate Companies organizations. (1966-1994), most recently as Chairman of The Allstate Corporation (March 1993- December 1994) and Chairman and Chief Executive Officer of its wholly-owned subsidiary, Allstate Insurance Company (July 1989-December 1994).
34
NUMBER OF PORTFOLIOS TERM OF IN FUND POSITION(S) OFFICE AND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS HELD BY INDEPENDENT DIRECTOR REGISTRANT TIME SERVED* PAST 5 YEARS** BY DIRECTOR*** DIRECTOR - ------------------------ ----------- ------------ ------------------------------ -------------- ------------------------------ Dr.Manuel H. Johnson (54) Director Since Chairman of the Audit 216 Director of NVR, Inc. (home c/o Johnson Smick July 1991 Committee and Director or construction); Chairman and International, Inc. Trustee of the Retail Funds Trustee of the Financial 2099 Pennsylvania and TCW/DW Term Trust 2003 Accounting Foundation Avenue, N.W. (since July 1991) and the (oversight organization of the Suite 950 Institutional Funds (since Financial Accounting Standards Washington, D.C. July 2003); Senior Partner, Board); Director of RBS Johnson Smick International, Greenwich Capital Holdings Inc., a consulting firm; (financial holding company). Co-Chairman and a founder of the Group of Seven Council (G7C), an international economic commission; formerly Vice Chairman of the Board of Governors of the Federal Reserve System and Assistant Secretary of the U.S. Treasury. Joseph J. Kearns (61) Director Since Deputy Chairman of the Audit 217 Director of Electro Rent PMB754 July 2003 Committee and Director or Corporation (equipment 23852 Pacific Coast Trustee of the Retail Funds leasing), The Ford Family Highway and TCW/DW Term Trust 2003 Foundation, and the UCLA Malibu, CA (since July 2003) and the Foundation. Institutional Funds (since August 1994); previously Chairman of the Audit Committee of the Institutional Funds (October 2001-July 2003); President, Kearns & Associates LLC (investment consulting); formerly CFO of the J. Paul Getty Trust. Michael E. Nugent (67) Director Since Chairman of the Insurance 216 Director of various business c/o Triumph Capital, July 1991 Committee and Director or organizations. L.P. Trustee of the Retail Funds 445 Park Avenue and TCW/DW Term Trust 2003 New York, NY (since July 1991) and the Institutional Funds (since July 2001); General Partner of Triumph Capital, L.P., a private investment partnership; formerly Vice President, Bankers Trust Company and BT Capital Corporation (1984-1988). Fergus Reid (71) Director Since Chairman of the Governance 217 Trustee and Director of 85 Charles Colman Blvd. July 2003 Committee and Director or certain investment companies Pawling, NY Trustee of the Retail Funds in the JPMorgan Funds and TCW/DW Term Trust 2003 complex managed by JP Morgan (since July 2003) and the Investment Management Inc. Institutional Funds (since June 1992); Chairman of Lumelite Plastics Corporation.
35 INTERESTED DIRECTORS
NUMBER OF PORTFOLIOS TERM OF IN FUND POSITION(S) OFFICE AND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS HELD BY INDEPENDENT DIRECTOR REGISTRANT TIME SERVED* PAST 5 YEARS** BY DIRECTOR*** DIRECTOR - ------------------------ ----------- ------------ ------------------------------ -------------- ------------------------------- Charles A. Chairman of Since Chairman and Director or 216 None Fiumefreddo (70) the Board July 1991 Trustee of the Retail Funds c/o Morgan Stanley Trust and and TCW/DW Term Trust 2003 Harborside Financial Director (since July 1991) and the Center, Institutional Funds (since Plaza Two, July 2003); formerly Chief Jersey City, NJ Executive Officer of the Retail Funds and the TCW/DW Term Trust 2003 (until September 2002). James F. Higgins (55) Director Since Director or Trustee of the 216 Director of AXA Financial, Inc. c/o Morgan Stanley Trust June 2000 Retail Funds and TCW/DW Term and The Equitable Life Harborside Financial Trust 2003 (since June 2000) Assurance Society of the Center, and the Institutional Funds United States (financial Plaza Two, (since July 2003); Senior services). Jersey City, NJ Advisor of Morgan Stanley (since August 2000); Director of the Distributor and Dean Witter Realty Inc.; previously President and Chief Operating Officer of the Private Client Group of Morgan Stanley (May 1999-August 2000), and President and Chief Operating Officer of Individual Securities of Morgan Stanley (February 1997-May 1999). Philip J. Purcell (59) Director Since Director or Trustee of the 216 Director of American Airlines, 1585 Broadway April 1994 Retail Funds and TCW/DW Term Inc. and its parent company, New York, NY Trust 2003 (since April 1994) AMR Corporation. and the Institutional Funds (since July 2003); Chairman of the Board of Directors and Chief Executive Officer of Morgan Stanley and Morgan Stanley DW Inc.; Director of the Distributor; Chairman of the Board of Directors and Chief Executive Officer of Novus Credit Services Inc.; Director and/or officer of various Morgan Stanley subsidiaries.
- ---------- * THIS IS THE EARLIEST DATE THE DIRECTOR BEGAN SERVING THE FUNDS ADVISED BY MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT MANAGER") (THE "RETAIL FUNDS"). ** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICES AS DIRECTOR/TRUSTEE FOR THE RETAIL FUNDS AND THE FUNDS ADVISED BY MORGAN STANLEY INVESTMENT MANAGEMENT INC., MORGAN STANLEY INVESTMENTS LP AND MORGAN STANLEY AIP GP LP (THE "INSTITUTIONAL FUNDS") REFLECT THE EARLIEST DATE THE DIRECTOR/TRUSTEE BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS AS APPLICABLE. *** THE FUND COMPLEX INCLUDES ALL OPEN-END AND CLOSED-END FUNDS (INCLUDING ALL OF THEIR PORTFOLIOS) ADVISED BY THE INVESTMENT MANAGER AND ANY FUNDS THAT HAVE AN INVESTMENT ADVISOR THAT IS AN AFFILIATED PERSON OF THE INVESTMENT MANAGER (INCLUDING BUT NOT LIMITED TO MORGAN STANLEY INVESTMENT MANAGEMENT INC. AND MORGAN STANLEY INVESTMENTS LP). 36 OFFICERS:
TERM OF POSITION(S) OFFICE AND NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S)DURING PAST 5 YEARS** - --------------------------- ---------------- -------------- ------------------------------------------------------------ Mitchell M. Merin (50) President Since May 1999 President and Chief Operating Officer of Morgan Stanley 1221 Avenue of the Americas Investment Management Inc.; President, Director and Chief New York, NY Executive Officer of the Investment Manager and Morgan Stanley Services; Chairman, Chief Executive Officer and Director of the Distributor; Chairman and Director of the Transfer Agent; Director of various Morgan Stanley subsidiaries; President Morgan Stanley Investments LP (since February 2003); President of the Institutional Funds (since July 2003) and President of the Retail Funds and TCW/DW Term Trust 2003 (since May 1999); Trustee (since July 2003) and President (since December 2002) of the Van Kampen Closed-End Funds; Trustee (since May 1999) and President (since October 2002) of the Van Kampen Open-End Funds. Ronald E. Robison (64) Executive Vice Since Chief Global Operations Officer and Managing Director of 1221 Avenue of the Americas President and April 2003 Morgan Stanley Investment Management Inc.; Managing DIrector New York, NY Principal of Morgan Stanley & Co. Incorporated; Managing DIrector of Executive Morgan Stanley; Managing Director, Chief Administrative Officer Officer and Director of the Investment Manager and Morgan Stanley Services; Chief Executive Officer and Director of the Transfer Agent; Executive Vice President and Principal Executive Officer of the Institutional Funds (since July 2003); and the TCW/DW Term Trust 2003 (since April 2003); previously President of the Institutional Funds (March 2001-July 2003) and Director of the Institutional Funds (March 2001-July 2003). Barry Fink (48) Vice President Since General Counsel (since May 2000) and Managing Director (since 1221 Avenue of the Americas and General February 1997 December 2000) of Morgan Stanley Investment Management; New York, NY Counsel Managing Director (since December 2000), Secretary (since February 1997) and Director (since July 1998) of the Investment Manager and Morgan Stanley Services; Assistant Secretary of Morgan Stanley DW; Chief Legal Officer of Morgan Stanley Investments LP (since July 2002); Vice President of the Institutional Funds (since July 2003); Vice President and Secretary of the Distributor; previously Secretary of the Retail Funds (February 1997-July 2003); previously Vice President and Assistant General Counsel of the Investment Manager and Morgan Stanley Services (February 1997-December 2001). Joseph J. McAlinden (60) Vice President Since Managing Director and Chief Investment Officer of the 1221 Avenue of the Americas July 1995 Investment Manager, Morgan Stanley Investment Management New York, NY Inc. and Morgan Stanley Investments LP; Director of the Transfer Agent, Chief Investment Officer of the Van Kampen Funds; Vice President of the Institutional Funds (since July 2003) and the Retail Funds (since July 1995). Stefanie V. Chang (36) Vice President Since Executive Director of Morgan Stanley & Co. and Morgan Stanley 1221 Avenue of the Americas July 2003 Investment Management Inc. and Vice President of the New York, NY Institutional Funds (since December 1997) and the Retail Funds (since July 2003); formerly practiced law with the New York law firm of Rogers & Wells (now Clifford Chance LLP).
37
TERM OF POSITION(S) OFFICE AND NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S)DURING PAST 5 YEARS** - --------------------------- ---------------- -------------- ------------------------------------------------------------ Francis Smith (38) Treasurer and Treasurer Executive Director of the Investment Manager and Morgan c/o Morgan Stanley Trust Chief Financial since July Stanley Services (since December 2001); previously Vice Harborside Financial Officer 2003 and Chief President of the Retail Funds (September 2002-July 2003); Center, Financial previously Vice President of the Investment Manager and Plaza Two, Officer since Morgan Stanley Services (August 2000-November 2001) and Senior Jersey City, NJ September 2002 Manager at PricewaterhouseCoopers LLP (January 1998-August 2000). Thomas F. Caloia (57) Vice President Since Executive Director (since December 2002) and Assistant c/o Morgan Stanley Trust July 2003 Treasurer of the Investment Manager, the Distributor and Harborside Financial Morgan Stanley Services; previously Treasurer of the Retail Center, Funds (April 1989-July 2003); formerly First Vice President Plaza Two, of the Investment Manager, the Distributor and Morgan Jersey City, NJ Stanley Services. Mary E. Mullin (36) Secretary Since Vice President of Morgan Stanley & Co. Incorporated and 1221 Avenue of the Americas July 2003 Morgan Stanley Investment Management Inc.; Secretary of the New York, NY Institutional Funds (since June 1999) and the Retail Funds (since July 2003); formerly practiced law with the New York law firms of McDermott, Will & Emery and Skadden, Arps, Slate, Meagher & Flom LLP.
- ---------- * THIS IS THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL FUNDS. EACH OFFICER SERVES AN INDEFINITE TERM, UNTIL HIS OR HER SUCCESSOR IS ELECTED. ** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICE AS AN OFFICER FOR THE RETAIL AND INSTITUTIONAL FUNDS REFLECT THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS AS APPLICABLE. 38 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 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 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) 2003 Morgan Stanley [MORGAN STANLEY LOGO] 37915RPT-12455J03-ANP-10/03 [GRAPHIC] MORGAN STANLEY FUNDS MORGAN STANLEY HIGH YIELD SECURITIES ANNUAL REPORT AUGUST 31, 2003 [MORGAN STANLEY LOGO] 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 Directors has determined that it has two "audit committee financial experts" serving on its audit committee, each of whom are "independent" Directors: 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 Directors 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. 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 High Yield Securities Inc. 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 EX-99.CODE 3 a2120672zex-99_code.txt EX-99.CODE 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 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; - 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 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." - 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 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. 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: -------------------- 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 EXHIBIT C GENERAL COUNSEL Barry Fink EX-99.CERT 4 a2120672zex-99_cert.txt EX-99.CERT 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 High Yield Securities Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-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): 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 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 High Yield Securities Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-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): 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 EX-99.906-CERT 5 a2120672zex-99_906cert.txt EX-99.906-CERT 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 High Yield Securities Inc. 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 High Yield Securities Inc. and will be retained by Morgan Stanley High Yield Securities 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 High Yield Securities Inc. 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 High Yield Securities Inc. and will be retained by Morgan Stanley High Yield Securities Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----