-----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, Ul9QZ6dORwKNqb4Bgmvv+/b5s+Y1pLINmeR2lOVuRWzYGT8m6AJutMj5Y1iGnJvD e/2UqwaslvkoIYtAPaSkCQ== 0001047469-05-000739.txt : 20050112 0001047469-05-000739.hdr.sgml : 20050112 20050112163047 ACCESSION NUMBER: 0001047469-05-000739 CONFORMED SUBMISSION TYPE: N-CSR/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040831 FILED AS OF DATE: 20050112 DATE AS OF CHANGE: 20050112 EFFECTIVENESS DATE: 20050112 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/A SEC ACT: 1940 Act SEC FILE NUMBER: 811-02932 FILM NUMBER: 05526132 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/A 1 a2149612zn-csra.txt N-CSR/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR/A 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, 2004 Date of reporting period: August 31, 2004 Item 1 - Report to Shareholders Welcome, Shareholder: In this report, you'll learn about how your investment in Morgan Stanley High Yield Securities Inc. 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 market values of securities owned by the Fund will decline and, therefore, the value of the Fund's shares may be less than what you paid for them. Accordingly, you can lose money investing in this Fund. FUND REPORT FOR THE YEAR ENDED AUGUST 31, 2004 TOTAL RETURN FOR THE 12-MONTH PERIOD ENDED AUGUST 31, 2004
LEHMAN LIPPER HIGH BROTHERS CURRENT U.S. CORP. YIELD BOND HIGH YIELD FUNDS CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2) 15.40% 14.15% 14.65% 14.93% 13.98% 12.76%
THE PERFORMANCE OF THE FUND'S FOUR SHARE CLASSES VARIES BECAUSE EACH HAS DIFFERENT EXPENSES. THE FUND'S TOTAL RETURN FIGURES ASSUME THE REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY APPLICABLE SALES CHARGES. SUCH COSTS WOULD LOWER PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SEE PERFORMANCE SUMMARY FOR STANDARDIZED PERFORMANCE INFORMATION. MARKET CONDITIONS The U.S. high-yield securities market performed strongly for the 12 months ended August 31, 2004. The rally that began in October 2002 endured early in the period as a beneficial economic environment persisted, corporate earnings continued to be positive and the default rate declined. During the 12 months of this reporting period many companies moved to refinance old high-yield debt and bank debt in order to lock in a lower interest rate. Because the resulting flood of supply was more than matched by surging demand for high-yield debt by yield-hungry investors, the high-yield market rallied sharply through the end of 2003. After January the rally faltered and performance wavered between slightly positive and negative. Although earnings remained strong and defaults continued to decline, outflows from mutual funds were detrimental to the market's performance, as money managers were forced to sell to meet the outflows. In April investors became increasingly concerned that the Federal Reserve's Open Market Committee would soon move to raise interest rates, adding volatility to the financial markets. This volatility began to settle in the summer months when the Federal Reserve demonstrated that it would take a measured approach to raising interest rates. Supply and demand also came into a more favorable balance when the new-issue calendar generally slowed and funds saw some new inflows. Performance by sector varied somewhat over the 12-month period. Lower-quality sectors such as utilities and telecommunications performed most strongly in the early half of the period, based on investors' increased appetite for risk. Utility bonds performed well for the period in that they made a recovery from losses in the preceding period and were boosted by better fundamentals. The aerospace sector underperformed considerably, as the airline industry was particularly hurt by defaults and generally poor fundamentals. PERFORMANCE ANALYSIS Morgan Stanley High Yield Securities Inc. outperformed both the Lehman Brothers U.S. Corporate High Yield Index and the Lipper High Current Yield Bond Funds Index for the 12 months ended August 31, 2004. An underweighted position in the aerospace sector relative to the Lehman Brothers U.S. Corporate High Yield Index was a strong positive driver of overall performance, as the Fund did not own any airline companies during this period. Security selection in the housing sector also proved positive, as a number of building products companies provided gains. Among them, Nortek and Associated Materials were added when they were relatively inexpensive and performed well over the period as a result of strong fundamentals. Despite the Fund's outperformance for the 12 months under review, several positions had a negative effect on the Fund. Security selection in the cable and chemicals 2 sectors served as a detractor when the Fund was hurt by a few holdings such as the satellite cable provider Pegasus Communications, which suffered after they lost on most fronts in their lawsuit against Direct TV and Direct TV terminated the resale agreement; we sold off the company's bonds later in the period. Within the chemicals sector, Rhodia and Avecia both suffered from disappointing earnings and deteriorating fundamentals that similarly hurt the Fund. TOP FIVE INDUSTRIES Electric Utilities 6.6% Chemicals: Specialty 5.2 Cable/Satellite TV 4.4 Oil & Gas Pipelines 3.9 Wireless Telecommunications 3.7
LONG-TERM CREDIT ANALYSIS A/A+ 3.6% Baa/BBB+ 0.3 Ba/BB- 19.2 B/B 52.3 Caa/CCC 22.3 NR/NR 2.3
DATA AS OF AUGUST 31, 2004. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR TOP FIVE INDUSTRIES ARE AS A PERCENTAGE OF NET ASSETS AND ALL PERCENTAGES FOR LONG-TERM CREDIT ANALYSIS ARE AS A PERCENTAGE OF TOTAL LONG-TERM INVESTMENTS. PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL ADVISORY SERVICES. INVESTMENT STRATEGY THE FUND WILL NORMALLY INVEST AT LEAST 80 PERCENT OF ITS ASSETS IN FIXED-INCOME SECURITIES (INCLUDING ZERO-COUPON SECURITIES) RATED BELOW Baa BY MOODY'S INVESTORS SERVICE ("MOODY'S") OR BELOW BBB BY STANDARD & POOR'S CORPORATION ("S&P") OR IN NONRATED SECURITIES CONSIDERED BY THE FUND'S INVESTMENT MANAGER TO BE APPROPRIATE INVESTMENTS FOR THE FUND. SUCH SECURITIES MAY ALSO INCLUDE "RULE 144A" SECURITIES, WHICH ARE SUBJECT TO RESALE RESTRICTIONS. FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS, AND MAKES THESE REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, www.morganstanley.com. EACH MORGAN STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, OBTAIN THE FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING THE SEC'S WEB SITE, http://www.sec.gov. YOU MAY ALSO REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800)SEC-0330. YOU CAN 3 ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (publicinfo@sec.gov) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102. YOU MAY OBTAIN COPIES OF A FUND'S FISCAL QUARTER FILINGS BY CONTACTING MORGAN STANLEY CLIENT RELATIONS AT (800)869-NEWS. PROXY VOTING POLICIES AND PROCEDURES A DESCRIPTION OF (1) THE FUND'S POLICIES AND PROCEDURES WITH RESPECT TO THE VOTING OF PROXIES RELATING TO THE FUND'S PORTFOLIO SECURITIES AND (2) HOW THE FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT 12-MONTH PERIOD ENDED AUGUST 31, 2004, IS AVAILABLE WITHOUT CHARGE, UPON REQUEST, BY CALLING (800)869-NEWS OR BY VISITING THE MUTUAL FUND CENTER ON OUR WEBSITE AT www.morganstanley.com. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT http://www.sec.gov. 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 WHO RESIDE AT THE SAME ADDRESS. YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE DOCUMENTS BY CALLING (800)350-6414, 8:00 A.M. TO 8:00 P.M. ET. ONCE OUR CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS. 4 (This page has been left blank intentionally.) 5 PERFORMANCE SUMMARY [CHART] PERFORMANCE OF A $10,000 INVESTMENT--CLASS A AND D
CLASS A@ CLASS D@ LEHMAN(1) LIPPER(2) August 31, 1994 $ 9,575 $ 10,000 $ 10,000 $ 10,000 August 31, 1995 $ 10,695 $ 11,198 $ 11,385 $ 11,154 August 31, 1996 $ 11,850 $ 12,437 $ 12,484 $ 12,339 August 31, 1997 $ 13,596 $ 14,304 $ 14,379 $ 14,259 August 31, 1998 $ 13,650 $ 14,394 $ 14,815 $ 14,449 August 31, 1999 $ 13,851 $ 14,635 $ 15,423 $ 15,235 August 31, 2000 $ 12,621 $ 13,363 $ 15,597 $ 15,333 August 31, 2001 $ 7,945 $ 8,425 $ 15,632 $ 14,179 August 31, 2002 $ 6,221 $ 6,618 $ 14,436 $ 12,936 August 31, 2003 $ 7,457 $ 7,995 $ 18,025 $ 15,754 August 31, 2004 $ 8,606 $ 9,189 $ 20,544 $ 17,765
6 AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED AUGUST 31, 2004
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++ (SINCE 09/26/79) (SINCE 07/28/97) (SINCE 07/28/97) (SINCE 09/26/79) SYMBOL HYLAX HYLBX HYLCX HYLDX 1 YEAR 15.40%(3) 14.15%(3) 14.65%(3) 14.93%(3) 10.50(4) 9.15(4) 13.65(4) -- 5 YEARS (9.08)(3) (9.60)(3) (9.64)(3) (8.89)(3) (9.86)(4) (9.80)(4) (9.64)(4) -- 10 YEARS (1.06)(3) -- -- (0.84)(3) (1.49)(4) -- -- -- SINCE INCEPTION 4.96(3) (6.70)(3) (6.73)(3) 5.21(3) 4.78(4) (6.70)(4) (6.73)(4) --
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT morganstanley.com OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE AND FUND SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE 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. PRIOR TO JULY 28, 1997 THE FUND OFFERED ONLY ONE CLASS OF SHARES. BECAUSE THE DISTRIBUTION ARRANGEMENT FOR CLASS A MOST CLOSELY RESEMBELED 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. * 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. (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 REFLECT THE DEDUCTION OF ANY SALES CHARGES. (4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR COMPLETE DETAILS ON FEES AND SALES CHARGES. @@ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON AUGUST 31, 2004 7 EXPENSE EXAMPLE As a shareholder of the Fund, you incur ongoing costs, including management fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 03/01/04 - 08/31/04. ACTUAL EXPENSES The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table below provides information about hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds that have transactional costs, such as sales charges (loads), and redemption fees, or exchange fees.
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * ------------- ------------- --------------- 03/01/04 - 03/01/04 08/31/04 08/31/04 ------------- ------------- --------------- CLASS A Actual (4.17% return) $ 1,000.00 $ 1,041.70 $ 4.93 Hypothetical (5% return before expenses) $ 1,000.00 $ 1,020.31 $ 4.88 CLASS B Actual (3.86% return) $ 1,000.00 $ 1,038.60 $ 8.40 Hypothetical (5% return before expenses) $ 1,000.00 $ 1,016.89 $ 8.31 CLASS C Actual (3.79% return) $ 1,000.00 $ 1,037.90 $ 8.91 Hypothetical (5% return before expenses) $ 1,000.00 $ 1,016.39 $ 8.82 CLASS D Actual (3.66% return) $ 1,000.00 $ 1,036.60 $ 4.56 Hypothetical (5% return before expenses) $ 1,000.00 $ 1,020.66 $ 4.52
- ---------- * EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.96%, 1.64%, 1.74% AND 0.89% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 184/366 (TO REFLECT THE ONE-HALF YEAR PERIOD). 8 MORGAN STANLEY HIGH YIELD SECURITIES INC. PORTFOLIO OF INVESTMENTS - AUGUST 31, 2004
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------------- CORPORATE BONDS (92.0%) ADVERTISING/MARKETING SERVICES (0.8%) $ 3,017 Interep National Radio Sales, Inc. (Series B) 10.00% 07/01/08 $ 2,372,116 2,205 Vertis Inc. - 144A* 13.50 12/07/09 2,240,831 ---------------- 4,612,947 ---------------- AEROSPACE & DEFENSE (0.3%) 1,881 Dunlop Standards Aerospace Holdings PLC - 144A* (United Kingdom) 11.875 05/15/09 2,003,265 ---------------- ALTERNATIVE POWER GENERATION (1.5%) 4,670 Calpine Corp. - 144A* 8.50 07/15/10 3,689,300 5,399 Ormat Funding Corp. - 144A* 8.25 12/30/20 5,155,926 ---------------- 8,845,226 ---------------- APPAREL/FOOTWEAR (0.3%) 1,650 Oxford Industries Inc. - 144A* 8.875 06/01/11 1,773,750 ---------------- AUTO PARTS: O.E.M. (0.8%) 4,160 TRW Automotive, Inc. 9.375 02/15/13 4,815,200 ---------------- AUTOMOTIVE AFTERMARKET (0.6%) 3,010 Tenneco Automotive, Inc. (Series B) 11.625 10/15/09 3,228,225 ---------------- BROADCASTING (0.5%) 1,285 Granite Broadcasting Corp. 9.75 12/01/10 1,217,537 1,296 Salem Communications Holdings Corp. (Series B) 9.00 07/01/11 1,419,120 ---------------- 2,636,657 ---------------- BUILDING PRODUCTS (3.3%) 8,350 Associated Materials Inc. - 144A* 11.25++ 03/01/14 5,949,375 1,705 Brand Services Inc. 12.00 10/15/12 1,952,225 865 Interface Inc. 7.30 04/01/08 860,675 4,460 Interface Inc. 9.50 02/01/14 4,593,800 4,050 THL Buildco Inc. (Nortek) Inc. - 144A* 8.50 09/01/14 4,242,375 1,455 WII Components, Inc. - 144A* 10.00 02/15/12 1,447,725 ---------------- 19,046,175 ---------------- CABLE/SATELLITE TV (4.4%) 1,002 Avalon Cable LLC 11.875 12/01/08 1,062,156 1,780 Charter Communications Holdings LLC 10.75 10/01/09 1,504,100 4,465 Charter Communications Holdings/Charter Capital 11.75++ 05/15/11 2,857,600 1,340 Charter Communications Holdings/Charter Capital 13.50++ 01/15/11 984,900 1,085 Directv Holdings/Finance 8.375 03/15/13 1,239,612 5,280 Kabel Deutscheland - 144A* (Germany) 10.625 07/01/14 5,438,400 3,055 Knology, Inc. - 144A* (c) 12.00+ 11/30/09 2,910,280 1,700 Panamsat Corp. - 144A* 9.00 08/15/14 1,780,750 1,780 Renaissance Media Group LLC 10.00 04/15/08 1,842,300 7,980 Telenet Group Holdings NV - 144A* (Belgium) 11.50++ 06/15/14 5,526,150 ---------------- 25,146,248 ----------------
SEE NOTES TO FINANCIAL STATEMENTS 9
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------------- CASINO/GAMING (2.5%) $ 27,175 Aladdin Gaming Holdings/Capital Corp. LLC (Series B) (b) 13.50% 03/01/10 $ 0 3,120 Isle of Capri Casinos 7.00 03/01/14 3,104,400 3,550 MGM Mirage Inc. 6.00 10/01/09 3,621,000 1,800 MGM Mirage Inc. - 144A* 5.875 02/27/14 1,705,500 27,634 Resort At Summerlin LP/Ras Co. (Series B) (a) (b) 13.00 12/15/07 0 3,195 Station Casinos, Inc. 6.00 04/01/12 3,218,962 2,470 Venetian Casino/LV Sands 11.00 06/15/10 2,825,062 ---------------- 14,474,924 ---------------- CHEMICALS: MAJOR DIVERSIFIED (2.1%) 4,230 Equistar Chemical Funding 10.125 09/01/08 4,727,025 1,575 Huntsman Advanced Materials Corp. - 144A* 11.00 07/15/10 1,803,375 5,480 Huntsman ICI Chemicals 10.125 07/01/09 5,671,800 ---------------- 12,202,200 ---------------- CHEMICALS: SPECIALTY (5.5%) 1,880 Avecia Group PLC (United Kingdom) 11.00 07/01/09 1,513,400 1,785 FMC Corp. 10.25 11/01/09 2,086,219 1,755 Innophos Inc. - 144A* 8.875 08/15/14 1,833,975 945 ISP Chemco 10.25 07/01/11 1,056,037 4,065 ISP Holdings Inc. (Series B) 10.625 12/15/09 4,491,825 1,135 Koppers Industry Inc. 9.875 10/15/13 1,254,175 775 Millennium America, Inc. 7.00 11/15/06 800,187 4,185 Millennium America, Inc. 9.25 06/15/08 4,582,575 1,140 Nalco Co. - 144A* 7.75 11/15/11 1,219,800 4,235 Nalco Co. - 144A* 8.875 11/15/13 4,589,681 3,855 Rhodia SA (France) 8.875 06/01/11 3,276,750 2,715 Rockwood Specialties, Inc. 10.625 05/15/11 2,972,925 1,700 Westlake Chemical Corp. 8.75 07/15/11 1,899,750 ---------------- 31,577,299 ---------------- COAL (0.2%) 930 Foundation PA Coal Co. - 144A* 7.25 08/01/14 983,475 ---------------- CONSUMER SUNDRIES (0.3%) 1,985 Amscan Holdings, Inc. - 144A* 8.75 05/01/14 1,987,481 ---------------- CONSUMER/BUSINESS SERVICES (1.4%) 3,450 Buhrmann US, Inc. - 144A* 8.25 07/01/14 3,475,875 3,245 Muzak LLC/Muzak Finance Corp. 9.875 03/15/09 2,336,400 2,245 Muzak LLC/Muzak Finance Corp. 10.00 02/15/09 2,009,275 ---------------- 7,821,550 ----------------
SEE NOTES TO FINANCIAL STATEMENTS 10
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------------- CONTAINERS/PACKAGING (2.7%) $ 2,850 Graphic Packaging International Corp. 9.50% 08/15/13 $ 3,206,250 1,900 Norampac, Inc. (Canada) 6.75 06/01/13 1,971,250 850 Owens-Brockway Glass Containers Corp. 8.75 11/15/12 947,750 1,765 Owens-Illinois Inc. 7.35 05/15/08 1,826,775 3,005 Owens-Illinois Inc. 7.50 05/15/10 3,080,125 3,020 Pliant Corp. (Issued 04/10/02) 13.00 06/01/10 2,793,500 1,530 Pliant Corp. (Issued 08/29/00) 13.00 06/01/10 1,415,250 ---------------- 15,240,900 ---------------- DRUGSTORE CHAINS (1.2%) 1,005 Jean Coutu Group PJC Inc. - 144A* (Canada) 7.625 08/01/12 1,040,175 2,490 Jean Coutu Group PJC Inc. - 144A* (Canada) 8.50 08/01/14 2,521,125 2,235 Rite Aid Corp. 7.125 01/15/07 2,290,875 810 Rite Aid Corp. 8.125 05/01/10 854,550 ---------------- 6,706,725 ---------------- ELECTRIC UTILITIES (5.5%) 1,330 AES Corp. (The) 7.75 03/01/14 1,346,625 377 AES Corp. (The) 8.875 02/15/11 414,700 537 AES Corp. (The) 9.375 09/15/10 600,097 3,020 AES Corp. (The) - 144A* 9.00 05/15/15 3,374,850 2,405 Allegheny Energy, Inc. 7.75 08/01/05 2,510,219 460 CMS Energy Corp. 7.50 01/15/09 483,000 3,010 CMS Energy Corp. 8.50 04/15/11 3,280,900 1,040 IPALCO Enterprises, Inc. 8.625*** 11/14/11 1,159,600 3,160 Monongahela Power Co. 5.00 10/01/06 3,256,756 3,235 MSW Energy Holdings/Finance 7.375 09/01/10 3,380,575 695 MSW Energy Holdings/Finance 8.50 09/01/10 761,025 1,940 Nevada Power Co. 8.25 06/01/11 2,124,300 3,130 Nevada Power Co. 9.00 08/15/13 3,521,250 1,810 PG&E Corp. 6.875 07/15/08 1,972,900 3,320 PSEG Energy Holdings Inc. 8.625 02/15/08 3,652,000 ---------------- 31,838,797 ---------------- ELECTRICAL PRODUCTS (0.5%) 2,525 Rayovac Corp. 8.50 10/01/13 2,714,375 ---------------- ELECTRONIC DISTRIBUTORS (0.4%) 2,245 BRL Universal Equipment Corp. 8.875 02/15/08 2,407,762 ---------------- ELECTRONIC EQUIPMENT/INSTRUMENTS (0.8%) 4,070 Xerox Corp. 7.125 06/15/10 4,334,550 ----------------
SEE NOTES TO FINANCIAL STATEMENTS 11
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------------- ENVIRONMENTAL SERVICES (0.7%) $ 1,515 Allied Waste North America, Inc. 6.50% 11/15/10 $ 1,522,575 2,310 Allied Waste North America, Inc. 9.25 09/01/12 2,604,525 ---------------- 4,127,100 ---------------- FINANCE/RENTAL/LEASING (1.1%) 3,105 United Rentals NA, Inc. 6.50 02/15/12 2,965,275 3,410 United Rentals NA, Inc. 7.75 11/15/13 3,188,350 ---------------- 6,153,625 ---------------- FOOD RETAIL (1.2%) 4,540 Delhaize America, Inc. 8.125 04/15/11 5,187,522 1,504 Kroger Co. - 144A* 8.50 07/15/17 1,709,050 ---------------- 6,896,572 ---------------- FOOD: MEAT/FISH/DAIRY (2.9%) 2,735 Michael Foods Inc. (Series B) 8.00 11/15/13 2,878,587 1,770 Pilgrim's Pride Corp. 9.25 11/15/13 1,938,150 4,370 Pilgrim's Pride Corp. 9.625 09/15/11 4,905,325 5,780 Smithfield Foods Inc. 7.625 02/15/08 6,170,150 415 Smithfield Foods Inc. - 144A* 7.00 08/01/11 431,600 410 Smithfield Foods Inc. (Series B) 8.00 10/15/09 447,925 ---------------- 16,771,737 ---------------- FOREST PRODUCTS (0.7%) 1,115 Tembec Industries Inc. (Canada) 7.75 03/15/12 1,131,725 2,600 Tembec Industries Inc. (Canada) 8.50 02/01/11 2,749,500 ---------------- 3,881,225 ---------------- GAS DISTRIBUTORS (1.5%) 4,080 Dynegy Holdings, Inc. 6.875 04/01/11 3,814,800 3,390 Dynegy Holdings, Inc. - 144A* 9.875 07/15/10 3,796,800 730 Northwest Pipeline Corp. 8.125 03/01/10 825,813 ---------------- 8,437,413 ---------------- HOME BUILDING (1.0%) 2,100 Tech Olympic USA, Inc. 10.375 07/01/12 2,294,250 1,645 Tech Olympic USA, Inc. (Issued 11/27/02) 9.00 07/01/10 1,751,925 1,850 Tech Olympic USA, Inc. (Issued 02/03/03) 9.00 07/01/10 1,970,250 ---------------- 6,016,425 ---------------- HOME FURNISHINGS (0.2%) 1,235 Tempur-Pedic Inc. 10.25 08/15/10 1,395,550 ----------------
SEE NOTES TO FINANCIAL STATEMENTS 12
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------------- HOME IMPROVEMENT CHAINS (0.3%) $ 1,485 Buildings Materials Corp. - 144A* 7.75% 08/01/14 $ 1,455,300 ---------------- HOSPITAL/NURSING MANAGEMENT (1.4%) 625 HCA, Inc. 7.19 11/15/15 675,664 1,145 HCA, Inc. 7.58 09/15/25 1,189,832 1,740 Medcath Holdings Corp. - 144A* 9.875 07/15/12 1,827,000 920 Tenet Healthcare Corp. 6.50 06/01/12 818,800 2,400 Tenet Healthcare Corp. 7.375 02/01/13 2,232,000 1,150 Tenet Healthcare Corp. - 144A* 9.875 07/01/14 1,204,625 ---------------- 7,947,921 ---------------- HOTELS/RESORTS/CRUISELINES (1.3%) 2,980 Hilton Hotels Corp. 7.625 12/01/12 3,419,550 930 Hilton Hotels Corp. 7.95 04/15/07 1,029,975 530 Starwood Hotels & Resorts Worldwide, Inc. 7.375 05/01/07 569,750 2,290 Starwood Hotels & Resorts Worldwide, Inc. 7.875 05/01/12 2,576,250 ---------------- 7,595,525 ---------------- HOUSEHOLD/PERSONAL CARE (0.1%) 610 Prestige Brands, Inc. - 144A* 9.25 04/15/12 610,000 ---------------- INDUSTRIAL MACHINERY (0.2%) 1,111 Flowserve Corp. 12.25 08/15/10 1,266,540 ---------------- INDUSTRIAL SPECIALTIES (2.2%) 4,010 Johnsondiversy, Inc. 9.625 05/15/12 4,511,250 1,440 Tekni-Plex Inc. - 144A* 8.75 11/15/13 1,389,600 3,371 Tekni-Plex Inc. (Series B) 12.75 06/15/10 3,269,870 3,070 UCAR Finance, Inc. 10.25 02/15/12 3,499,800 ---------------- 12,670,520 ---------------- INTERNET SOFTWARE/SERVICES (0.3%) 6,546 Exodus Communications, Inc. (a) (b) 11.625 07/15/10 0 1,745 Global Cash Access - 144A* 8.75 03/15/12 1,845,337 ---------------- 1,845,337 ---------------- INVESTMENT BANKS/BROKERS (0.8%) 4,535 Refco Finance Holdings - 144A* 9.00 08/01/12 4,716,400 ---------------- INVESTMENT MANAGERS (0.7%) 3,695 JSG Funding PLC (Ireland) 9.625 10/01/12 4,175,350 ----------------
SEE NOTES TO FINANCIAL STATEMENTS 13
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------------- MEDICAL DISTRIBUTORS (1.1%) $ 220 AmerisourceBergen Corp. 7.25% 11/15/12 $ 236,500 5,260 AmerisourceBergen Corp. 8.125 09/01/08 5,799,150 ---------------- 6,035,650 ---------------- MEDICAL SPECIALTIES (0.8%) 1,300 Fisher Scientific International, Inc. 8.00 09/01/13 1,449,500 1,675 Fisher Scientific International, Inc. 8.125 05/01/12 1,867,625 715 Fisher Scientific International, Inc. - 144A* 6.75 08/15/14 741,813 665 National Nephrology Assoc. Inc. - 144A* 9.00 11/01/11 772,231 ---------------- 4,831,169 ---------------- MEDICAL/NURSING SERVICES (1.6%) 5,140 Fresenius Medical Care Capital Trust 7.875 06/15/11 5,628,300 795 Fresenius Medical Care Capital Trust II (Units)++ 7.875 02/01/08 850,650 2,715 Team Health, Inc. - 144A* 9.00 04/01/12 2,660,700 ---------------- 9,139,650 ---------------- METAL FABRICATIONS (1.1%) 1,680 General Cable Corp. 9.50 11/15/10 1,864,800 4,010 Trimas Corp. 9.875 06/15/12 4,270,650 ---------------- 6,135,450 ---------------- MISCELLANEOUS COMMERCIAL SERVICES (1.8%) 1,955 Advanstar Communications, Inc. 9.22*** 08/15/08 2,031,016 2,225 Advanstar Communications, Inc. 10.75 08/15/10 2,464,188 495 Advanstar Communications, Inc. (Series B) 12.00 02/15/11 528,413 2,471 Iron Mountain Inc. 7.75 01/15/15 2,582,195 2,800 Iron Mountain Inc. 8.625 04/01/13 3,038,000 ---------------- 10,643,812 ---------------- MISCELLANEOUS MANUFACTURING (0.6%) 3,315 Amsted Industries Inc. - 144A* 10.25 10/15/11 3,596,775 ---------------- MOVIES/ENTERTAINMENT (1.6%) 4,850 Alliance Atlantic Communications, Inc. (Canada) 13.00 12/15/09 5,310,750 1,210 Cinemark, Inc. 9.75++ 03/15/14 839,438 2,050 Marquee Inc. - 144A* 5.97*** 08/15/10 2,101,250 630 Marquee Inc. - 144A* 8.625 08/15/12 661,500 ---------------- 8,912,938 ---------------- OIL & GAS PIPELINES (3.9%) 5,525 El Paso Production Holdings 7.75 06/01/13 5,455,938 715 GulfTerra Energy Partners, L.P. 8.50 06/01/10 839,231 2,863 GulfTerra Energy Partners, L.P. 10.625 12/01/12 3,621,695
SEE NOTES TO FINANCIAL STATEMENTS 14
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------------- $ 2,525 Pacific EnergyPartner/Finance - 144A* 7.125% 06/15/14 $ 2,682,813 1,435 Southern Natural Gas 8.875 03/15/10 1,621,550 1,315 Transcontinental Gas Pipe Line Corp. (Series B) 8.875 07/15/12 1,601,013 5,930 Williams Companies, Inc. (The) 7.875 09/01/21 6,456,288 ---------------- 22,278,528 ---------------- OIL & GAS PRODUCTION (3.2%) 4,210 Chesapeake Energy Corp. 7.50 09/15/13 4,546,800 3,710 Hilcorp Energy/Finance - 144A* 10.50 09/01/10 4,127,375 1,400 Magnum Hunter Resources, Inc. 9.60 03/15/12 1,585,500 1,830 Plains E & P Corp. - 144A* 7.125 06/15/14 1,948,950 5,830 Vintage Petroleum, Inc. 7.875 05/15/11 6,121,500 ---------------- 18,330,125 ---------------- OIL REFINING/MARKETING (1.3%) 1,750 CITGO Petroleum Corp. 11.375 02/01/11 2,051,875 3,000 Husky Oil Ltd. 8.90 08/15/28 3,505,041 1,815 Tesoro Petroleum Corp. 9.625 04/01/12 2,087,250 ---------------- 7,644,166 ---------------- OILFIELD SERVICES/EQUIPMENT (1.6%) 3,345 CHC Helicopter Corp. (Canada) 7.375 05/01/14 3,399,356 625 Hanover Compress Co. 8.625 12/15/10 668,750 575 Hanover Compress Co. 9.00 06/01/14 619,563 2,760 Hanover Equipment Trust 2001 A (Series A) 8.50 09/01/08 2,960,100 1,655 Hanover Equipment Trust 2001 B (Series B) 8.75 09/01/11 1,795,675 ---------------- 9,443,444 ---------------- OTHER METALS/MINERALS (0.0%) 3,750 Murrin Holdings Property Ltd. (Australia) (b) 9.375 08/31/07 375 ---------------- OTHER TRANSPORTATION (0.9%) 4,305 Laidlaw International Inc. 10.75 06/15/11 4,929,225 ---------------- PHARMACEUTICALS: MAJOR (0.6%) 1,370 VWR International - 144A* (Germany) 6.875 04/15/12 1,407,675 1,795 VWR International - 144A* (Germany) 8.00 04/15/14 1,862,313 ---------------- 3,269,988 ---------------- PHARMACEUTICALS: OTHER (0.3%) 1,810 Leiner Health Products Inc. - 144A* 11.00 06/01/12 1,900,500 ----------------
SEE NOTES TO FINANCIAL STATEMENTS 15
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------------- PUBLISHING: BOOKS/MAGAZINES (3.3%) $ 1,756 Dex Media East/Finance 12.125% 11/15/12 $ 2,173,050 5,225 Dex Media Inc. - 144A* 9.00++ 11/15/13 3,853,438 2,741 Dex Media West/Finance 9.875 08/15/13 3,165,855 3,895 Houghton Mifflin Co. 9.875 02/01/13 4,084,881 755 Houghton Mifflin Co. 11.50++ 10/15/13 450,169 1,097 PEI Holdings, Inc. 11.00 03/15/10 1,278,005 4,050 PRIMEDIA, Inc. 8.875 05/15/11 3,989,250 ---------------- 18,994,648 ---------------- PUBLISHING: NEWSPAPERS (1.1%) 5,771 Hollinger Participation Trust - 144A* (Canada) 12.125+ 11/15/10 6,535,354 ---------------- PULP & PAPER (1.5%) 3,500 Abitibi-Consolidated Inc. (Canada) 6.00 06/20/13 3,228,750 4,350 Georgia-Pacific Corp. 8.875 02/01/10 5,122,125 ---------------- 8,350,875 ---------------- REAL ESTATE DEVELOPMENT (1.4%) 5,535 CB Richard Ellis Services, Inc. 11.25 06/15/11 6,392,925 1,705 LNR Property Corp. 7.625 07/15/13 1,815,825 ---------------- 8,208,750 ---------------- REAL ESTATE INVESTMENT TRUSTS (0.4%) 1,965 HMH Properties, Inc. (Series B) 7.875 08/01/08 2,033,775 ---------------- SPECIALTY STORES (2.3%) 3,600 Autonation, Inc. 9.00 08/01/08 4,131,000 2,315 General Nutrition Center - 144A* 8.50 12/01/10 2,326,575 2,975 Petro Stopping Centers LP/Petro Financial Corp. 9.00 02/15/12 3,108,875 3,515 Sonic Automotive, Inc. 8.625 08/15/13 3,708,325 ---------------- 13,274,775 ---------------- SPECIALTY TELECOMMUNICATIONS (2.3%) 3,400 American Tower Corp. 9.375 02/01/09 3,646,500 2,375 American Tower Corp. - 144A* 7.50 05/01/12 2,410,625 3,250 Qwest Communications International - 144A* 5.211*** 02/15/09 3,038,750 2,590 Qwest Services Corp. - 144A* 13.50 12/15/07 2,946,125 400 U.S. West Communications Corp. 5.625 11/15/08 392,000 585 U.S. West Communications Corp. 6.625 09/15/05 600,356 ---------------- 13,034,356 ----------------
SEE NOTES TO FINANCIAL STATEMENTS 16
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------------- STEEL (0.3%) $ 1,356 United States Steel Corp. 9.75% 05/15/10 $ 1,532,280 ---------------- TELECOMMUNICATION EQUIPMENT (0.4%) 2,170 Nortel Networks Ltd. (Canada) 6.125 02/15/06 2,213,400 ---------------- TELECOMMUNICATIONS (0.6%) 4,740 Primus Telecommunication Group, Inc. 8.00 01/15/14 3,649,800 28,549 Rhythms Netconnections, Inc. (a) (b) 12.75 04/15/09 0 4,309 Rhythms Netconnections, Inc. (a) (b) 14.00 02/15/10 0 13,439 Rhythms Netconnections, Inc. (Series B) (a) (b) 13.50 05/15/08 0 ---------------- 3,649,800 ---------------- TRUCKS/CONSTRUCTION/FARM MACHINERY (1.6%) 4,535 Manitowoc Inc. (The) 10.50 08/01/12 5,192,575 3,370 NMHG Holding Co. 10.00 05/15/09 3,723,850 ---------------- 8,916,425 ---------------- WHOLESALE DISTRIBUTORS (0.5%) 3,070 Nebraska Book Company, Inc. 8.625 03/15/12 3,070,000 ---------------- WIRELESS TELECOMMUNICATIONS (3.7%) 4,700 Centennial Communications Corp. - 144A* 8.125 02/01/14 4,382,750 3,845 Metropcs, Inc. 10.75 10/01/11 4,114,150 1,920 Rural Cellular Corp - 144A* 6.02*** 03/15/10 1,958,400 2,125 SBA Communications Corp. 9.75++ 12/15/11 1,668,125 4,755 SBA Communications Corp. 10.25 02/01/09 5,028,413 1,175 Ubiquitel Operating Co. 14.00++ 04/15/10 1,210,250 2,760 US Unwire Inc. 10.00 06/15/12 2,842,800 ---------------- 21,204,888 ---------------- Total Corporate Bonds (COST $604,645,471) 528,471,392 ---------------- Convertible Bonds (0.5%) HOTELS/RESORTS/CRUISELINES (0.0%) 1,643 Premier Cruises Ltd. - 144A* (a) (b) 10.00+ 08/15/05 0 ---------------- TELECOMMUNICATION EQUIPMENT (0.5%) 3,115 Nortel Networks Corp. (Canada) 4.25 09/01/08 3,017,656 ---------------- Total Convertible Bonds (COST $5,353,040) 3,017,656 ----------------
SEE NOTES TO FINANCIAL STATEMENTS 17
NUMBEROF SHARES VALUE - ------------------------------------------------------------------------------------- COMMON STOCKS (d) (0.4%) AEROSPACE & DEFENSE (0.1%) 75,021 Orbital Sciences Corp. (c) $ 800,474 ------------ APPAREL/FOOTWEAR RETAIL (0.0%) 5,421,101 County Seat Stores Corp. (c) 0 ------------ CASINO/GAMING (0.0%) 212,312 Fitzgerald Gaming Corp.** 0 ------------ 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 ------------ HOTELS/RESORTS/CRUISELINES (0.0%) 981,277 Premier Holdings Inc. (c) 0 ------------ MEDICAL/NURSING SERVICES (0.0%) 1,754,896 Raintree Healthcare Corp. (c) 0 ------------ RESTAURANTS (0.3%) 111,558 American Restaurant Group Holdings, Inc. (c) 0 13,107 American Restaurant Group Holdings, Inc. (c) 0 64,807 American Restaurant Group Holdings, Inc. - 144A* 0 787,160 Catalina Restaurant Group (c) (Note 4) 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 1 XO Communications, Inc. (c) 3 ------------ 3 ------------ TELECOMMUNICATIONS (0.0%) 49,597 Viatel Holdings Bermuda Ltd. (c) 34,718 ------------ TEXTILES (0.0%) 2,389,334 U.S. Leather, Inc. (c) 0 ------------
SEE NOTES TO FINANCIAL STATEMENTS 18
NUMBEROF SHARES VALUE - ------------------------------------------------------------------------------------- WIRELESS TELECOMMUNICATIONS (0.0%) 5,199 Arch Wireless, Inc. (Class A) (c) $ 158,570 315,021 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 ------------ 158,570 ------------ Total Common Stocks (COST $296,750,122) 2,568,085 ------------ Non-Convertible Preferred Stocks (2.1%) BROADCASTING (0.8%) 540 Paxson Communications Corp.+ 4,499,080 ------------ ELECTRIC UTILITIES (1.1%) 5,338 TNP Enterprises, Inc. (Series D)+ 6,392,255 ------------ RESTAURANTS (0.2%) 1,337 Catalina Restaurant Group (Units)@@ 1,203,300 ------------ Total Non-Convertible Preferred Stocks (COST $12,094,253) 12,094,635 ------------ NUMBER OF EXPIRATION WARRANTS DATE - --------- ---------- WARRANTS (d) (0.0%) 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 55,962 -------- RESTAURANTS (0.0%) 4,500 American Restaurant Group Holdings, Inc. - 144A* 08/15/08 0 334,250 Catalina Restaurant Group (c) 07/10/12 0 -------- 0 -------- Total Warrants (COST $58,970) 55,962 --------
SEE NOTES TO FINANCIAL STATEMENTS 19
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------------- Short-Term Investments (3.3%) Repurchase Agreements $ 18,099 Joint repurchase agreement account (dated 08/31/04; proceeds $18,099,789) (e) 1.57% 09/01/04 $ 18,099,000 685 The Bank of New York (dated 08/31/04; proceeds $685,367) (f) 1.313 09/01/04 685,342 ---------------- Total Short-Term Investments (COST $18,784,342) 18,784,342 ---------------- Total Investments (COST $937,686,198) (g) 98.3% 564,992,072 Other Assets in Excess of Liabilities 1.7 9,662,850 ---------- ---------------- Net Assets 100.0% $ 574,654,922 ========== ================
- ---------- * RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. ** RESALE IS RESTRICTED, ACQUIRED 12/22/98 AT A COST BASIS OF $957,527. *** FLOATING RATE SECURITY. RATE SHOWN IS THE RATE IN EFFECT AT AUGUST 31, 2004. + PAYMENT-IN-KIND SECURITY. ++ CURRENTLY A ZERO COUPON BOND AND IS SCHEDULED TO PAY INTEREST AT THE RATE SHOWN AT A FUTURE SPECIFIED DATE. @@ CONSISTS OF ONE OR MORE CLASS OF SECURITIES TRADED TOGETHER AS A UNIT; PREFERRED STOCKS WITH ATTACHED WARRANTS. (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) COLLATERALIZED BY FEDERAL NATIONAL MORTGAGE ASSOCIATION 3.862% DUE 05/01/33 VALUED AT $699,049. (g) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $935,009,300. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $33,804,329 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $403,821,557, RESULTING IN NET UNREALIZED DEPRECIATION OF $370,017,228. SEE NOTES TO FINANCIAL STATEMENTS 20 MORGAN STANLEY HIGH YIELD SECURITIES INC. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES AUGUST 31, 2004 ASSETS: Investments in securities of unaffiliated issuers, at value (cost $934,537,558) $ 563,417,752 Investments in affiliates, at value (cost $3,148,640) 1,574,320 Cash 74,039 Receivable for: Interest 10,187,134 Investments sold 1,776,315 Capital stock sold 139,216 Prepaid expenses and other assets 68,497 ----------------- TOTAL ASSETS 577,237,273 ----------------- LIABILITIES: Payable for: Capital stock redeemed 784,916 Investments purchased 706,336 Distribution fee 270,198 Investment management fee 246,588 Accrued expenses and other payables 574,313 ----------------- TOTAL LIABILITIES 2,582,351 ----------------- NET ASSETS $ 574,654,922 ================= COMPOSITION OF NET ASSETS: Paid-in-capital $ 2,938,761,533 Net unrealized depreciation (372,694,126) Accumulated undistributed net investment income 3,374,549 Accumulated net realized loss (1,994,787,034) ----------------- NET ASSETS $ 574,654,922 ================= CLASS A SHARES: Net Assets $ 21,595,296 Shares Outstanding (500,000,000 authorized, $.01 par value) 11,990,213 NET ASSET VALUE PER SHARE $ 1.80 ================= MAXIMUM OFFERING PRICE PER SHARE, (net asset value plus 4.44% of net asset value) $ 1.88 ================= CLASS B SHARES: Net Assets $ 360,513,139 Shares Outstanding (500,000,000 authorized, $.01 par value) 201,340,944 NET ASSET VALUE PER SHARE $ 1.79 ================= CLASS C SHARES: Net Assets $ 37,907,023 Shares Outstanding (500,000,000 authorized, $.01 par value) 21,117,055 NET ASSET VALUE PER SHARE $ 1.80 ================= CLASS D SHARES: Net Assets $ 154,639,464 Shares Outstanding (500,000,000 authorized, $.01 par value) 85,854,360 NET ASSET VALUE PER SHARE $ 1.80 =================
STATEMENT OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 2004 NET INVESTMENT INCOME: INCOME Interest $ 63,972,912 Dividends 1,902,304 ----------------- TOTAL INCOME 65,875,216 ----------------- EXPENSES Investment management fee 3,163,709 Distribution fee (Class A shares) 54,817 Distribution fee (Class B shares) 3,092,805 Distribution fee (Class C shares) 375,510 Transfer agent fees and expenses 1,490,050 Professional fees 318,134 Taxes 294,900 Shareholder reports and notices 147,046 Registration fees 69,776 Custodian fees 41,116 Directors' fees and expenses 24,295 Other 38,187 ----------------- TOTAL EXPENSES 9,110,345 ----------------- NET INVESTMENT INCOME 56,764,871 ----------------- NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized loss from unaffiliated issuers (199,498,302) Realized gain from affiliates 1,897,844 ----------------- NET REALIZED LOSS (197,600,458) ----------------- Net change in unrealized depreciation 231,685,708 ----------------- NET GAIN 34,085,250 ----------------- NET INCREASE $ 90,850,121 =================
SEE NOTES TO FINANCIAL STATEMENTS 21 STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR ENDED ENDED AUGUST 31, 2004 AUGUST 31, 2003 --------------- --------------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income $ 56,764,871 $ 69,794,597 Net realized loss (197,600,458) (927,632,141) Net change in unrealized depreciation 231,685,708 966,925,307 --------------- --------------- NET INCREASE 90,850,121 109,087,763 --------------- --------------- DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME: Class A shares (2,072,654) (3,157,603) Class B shares (25,815,474) (38,559,338) Class C shares (2,708,149) (3,797,508) Class D shares (11,764,739) (14,815,212) --------------- --------------- TOTAL DIVIDENDS (42,361,016) (60,329,661) --------------- --------------- Net increase (decrease) from capital stock transactions (154,957,959) 116,673,515 --------------- --------------- NET INCREASE (DECREASE) (106,468,854) 165,431,617 NET ASSETS: Beginning of period 681,123,776 515,692,159 --------------- --------------- END OF PERIOD (Including accumulated undistributed net investment income of $3,374,549 and $162,662, respectively) $ 574,654,922 $ 681,123,776 =============== ===============
SEE NOTES TO FINANCIAL STATEMENTS 22 MORGAN STANLEY HIGH YIELD SECURITIES INC. NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2004 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 investment objective is to earn a high level of current income. 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) an equity portfolio security listed or traded on the New York Stock Exchange ("NYSE") or American Stock Exchange or other exchange is valued at its latest sale price prior to the time when assets are valued; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (2) an equity portfolio security listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (3) all other portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market; (4) for equity securities traded on foreign exchanges, the last reported sale price or the latest bid price may be used if there were no sales on a particular day; (5) when market quotations are not readily available or Morgan Stanley Investment Advisors Inc. (the "Investment Manager") determines that the latest sale price, the bid price or the mean between the last reported bid and asked price do not reflect a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund's Directors. Occasionally, developments affecting the closing prices of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the foreign market on which the securities trade) and the close of business on the NYSE. If developments occur during such periods that are expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Fund's Directors or by the Investment Manager using a pricing service and/or procedures approved by the Directors of the Fund; (6) certain portfolio securities may be valued by an outside pricing service 23 approved by the Fund's Directors; and (7) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost. B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Dividend income and other distributions are recorded on the ex-dividend date. Discounts are accreted and premiums are amortized over the life of the respective securities. Interest income is accrued daily 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 24 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. 3. PLAN OF DISTRIBUTION Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the average daily net assets of Class A; (ii) Class B -- up to 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 Directors will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled $58,499,934 at August 31, 2004. In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 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, 2004, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.18% and 0.85%, respectively. The Distributor has informed the Fund that for the year ended August 31, 2004, it received contingent deferred sales charges from certain redemptions of the Fund's Class A shares, Class B shares and Class C shares of $30,579 $1,016,185 and $24,619 respectively and received $82,414 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. 25 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, 2004, aggregated $320,528,930 and $461,872,582 respectively. Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is the Fund's transfer agent. At August 31, 2004, the Fund had transfer agent fees and expenses payable of approximately $31,000. The Fund has an unfunded noncontributory defined benefit pension plan covering certain independent Directors of the Fund who will have served as independent Directors for at least five years at the time of retirement. Benefits under this plan are based on factors which include years of service and compensation. Aggregate pension costs for the year ended August 31, 2004 included in Director's fees and expenses in the Statement of Operations amounted to $16,312. At August 31, 2004, the Fund had an accrued pension liability of $131,880 which is included in accrued expenses in the Statement of Assets and Liabilities. Effective April 1, 2004, the Fund began an unfunded Deferred Compensation Plan (the "Compensation Plan") which allows each independent Director to defer payment of all, or a portion, of the fees he receives for serving on the Board of Directors. Each eligible Director generally may elect to have the deferred amounts credited with a return equal to the total return on one or more of the Morgan Stanley funds that are offered as investment options under the Compensation Plan. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund. 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, 2004 were as follows:
REALIZED ISSUER PURCHASES SALES GAIN INCOME VALUE - ------ ------------ ------------ ------------ ------------ ------------ Anacomp Inc. -- Class A -- $ 5,490,715 $ 365,928 -- -- Catalina Restaurant Group -- -- -- -- $ 1,574,320 Globix Corp. -- 1,634,872 1,531,916 -- -- ------------ ------------ ------------ ------------ ------------ Total -- $ 7,125,587 $ 1,897,844 -- $ 1,574,320 ============ ============ ============ ============ ============
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 26 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 appreciation 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. 6. CAPITAL STOCK Transactions in capital stock were as follows:
FOR THE YEAR FOR THE YEAR ENDED ENDED AUGUST 31, 2004 AUGUST 31, 2003 ---------------------------------- ---------------------------------- SHARES AMOUNT SHARES AMOUNT --------------- --------------- --------------- --------------- CLASS A SHARES Sold 13,165,136 $ 23,468,524 39,836,992 $ 64,688,820 Reinvestment of dividends 551,791 979,557 1,022,505 1,601,355 Redeemed (24,480,351) (43,554,741) (33,475,330) (54,476,121) --------------- --------------- --------------- --------------- Net increase (decrease) -- Class A (10,763,424) (19,106,660) 7,384,167 11,814,054 --------------- --------------- --------------- --------------- CLASS B SHARES Sold 23,754,798 41,770,580 77,421,752 122,904,213 Reinvestment of dividends 6,066,686 10,706,332 9,626,091 15,003,266 Redeemed (81,860,251) (144,576,386) (73,660,925) (116,540,305) --------------- --------------- --------------- --------------- Net increase (decrease) -- Class B (52,038,767) (92,099,474) 13,386,918 21,367,174 --------------- --------------- --------------- --------------- CLASS C SHARES Sold 4,446,414 7,876,921 12,695,388 20,107,539 Reinvestment of dividends 718,053 1,269,771 1,158,259 1,809,569 Redeemed (11,044,600) (19,548,258) (8,770,002) (13,966,548) --------------- --------------- --------------- --------------- Net increase (decrease) -- Class C (5,880,133) (10,401,566) 5,083,645 7,950,560 --------------- --------------- --------------- --------------- CLASS D SHARES Sold 5,564,553 9,841,550 32,279,099 51,598,560 Reinvestment of dividends 3,657,711 6,488,162 4,850,711 7,624,480 Shares issued in connection with the acquisition of the Morgan Stanley High Income Advantage Trusts (See Note 5) -- -- 45,732,222 70,059,951 Redeemed (28,019,698) (49,679,971) (33,881,962) (53,741,264) --------------- --------------- --------------- --------------- Net increase (decrease) -- Class D (18,797,434) (33,350,259) 48,980,070 75,541,727 --------------- --------------- --------------- --------------- Net increase (decrease) in Fund (87,479,758) $ (154,957,959) 74,834,800 $ 116,673,515 =============== =============== =============== ===============
27 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. The tax character of distributions paid was as follows:
FOR THE YEAR FOR THE YEAR ENDED ENDED AUGUST 31, 2004 AUGUST 31, 2003 ----------------- --------------- Ordinary income $ 42,361,016 $ 60,329,661 ================= ===============
As of August 31, 2004, the tax-basis components of accumulated losses were as follows: Undistributed ordinary income $ 1,679,290 Undistributed long-term gains -- ----------------- Net accumulated earnings 1,679,290 Capital loss carryforward* (1,808,879,576) Post-October losses (185,719,271) Temporary differences (1,169,826) Net unrealized depreciation (370,017,228) ----------------- Total accumulated losses $ (2,364,106,611) =================
*As of August 31, 2004, the Fund had a net capital loss carryforward of $1,808,879,576 of which $39,319,363 will expire on August 31, 2005, $12,603,314 will expire on August 31, 2006, $24,919,181 will expire on August 31, 2007, $69,856,779 will expire on August 31, 2008, $89,299,249 will expire on August 31, 2009, $245,944,739 will expire on August 31, 2010, $568,502,378 will expire on August 31, 2011 and $758,434,573 will expire on August 31, 2012 to offset future capital gains to the extent provided by regulations. As part of the Fund's acquisition of the assets of HIAT, HIAT II and HIAT 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, 2004, 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 28 amortization of discounts on debt securities and permanent book/tax differences primarily attributable to tax adjustments on debt securities sold by the Fund and expired capital loss carryforwards. To reflect reclassifications arising from the permanent differences, paid-in-capital was charged $21,804,303, accumulated undistributed net investment income was charged $11,191,968 and accumulated net realized loss was credited $32,996,271. 8. LEGAL MATTERS The Investment Manager, certain affiliates of the Investment Manager, certain officers of such affiliates and certain investment companies advised by the Investment Manager or its affiliates, including the Fund, are named as defendants in a number of similar class action complaints which were recently consolidated. This consolidated action also names as defendants certain individual Trustees and Directors of the Morgan Stanley funds. The consolidated amended complaint generally alleges that defendants, including the Fund, violated their statutory disclosure obligations and fiduciary duties by failing properly to disclose (i) that the Investment Manager and certain affiliates of the Investment Manager allegedly offered economic incentives to brokers and others to recommend the funds advised by the Investment Manager or its affiliates to investors rather than funds managed by other companies, and (ii) that the funds advised by the Investment Manager or its affiliates, including the Fund, allegedly paid excessive commissions to brokers in return for their efforts to recommend these funds to investors. The complaint seeks, among other things, unspecified compensatory damages, rescissionary damages, fees and costs. The defendants have moved to dismiss the action and otherwise vigorously to defend it. While the Fund believes that it has meritorious defenses, the ultimate outcome of this matter is not presently determinable at this early stage of the litigation, and no provision has been made in the Fund's financial statements for the effect, if any, of this matter. 29 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, -------------------------------------------------------------------------------- 2004 2003 2002 2001 2000 ------------ ------------ ------------ ------------ ------------ CLASS A SHARES: SELECTED PER SHARE DATA: Net asset value, beginning of period $ 1.67 $ 1.55 $ 2.32 $ 4.35 $ 5.51 ------------ ------------ ------------ ------------ ------------ Income (loss) from investment operations: Net investment income++ 0.16 0.19 0.26 0.47 0.69 Net realized and unrealized gain (loss) 0.09 0.10 (0.73) (1.99) (1.13) ------------ ------------ ------------ ------------ ------------ Total income (loss) from investment operations 0.25 0.29 (0.47) (1.52) (0.44) ------------ ------------ ------------ ------------ ------------ Less dividends and distributions from: Net investment income (0.12) (0.17) (0.27) (0.51) (0.72) Paid-in-capital - - (0.03) - - ------------ ------------ ------------ ------------ ------------ Total dividends and distributions (0.12) (0.17) (0.30) (0.51) (0.72) ------------ ------------ ------------ ------------ ------------ Net asset value, end of period $ 1.80 $ 1.67 $ 1.55 $ 2.32 $ 4.35 ============ ============ ============ ============ ============ TOTAL RETURN+ 15.40% 19.88% (21.70)% (37.05)% (8.88)% RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.03% 1.06% 0.99% 0.77% 0.70% Net investment income 8.98% 11.96% 13.76% 15.17% 13.62% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 21,595 $ 38,072 $ 23,879 $ 36,762 $ 57,273 Portfolio turnover rate 51% 66% 39% 49% 20%
- ---------- ++ 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, -------------------------------------------------------------------------------- 2004 2003 2002 2001 2000 ------------ ------------ ------------ ------------ ------------ CLASS B SHARES: SELECTED PER SHARE DATA: Net asset value, beginning of period $ 1.67 $ 1.55 $ 2.32 $ 4.34 $ 5.50 ------------ ------------ ------------ ------------ ------------ Income (loss) from investment operations: Net investment income++ 0.15 0.18 0.25 0.46 0.66 Net realized and unrealized gain (loss) 0.08 0.10 (0.73) (1.99) (1.13) ------------ ------------ ------------ ------------ ------------ Total income (loss) from investment operations 0.23 0.28 (0.48) (1.53) (0.47) ------------ ------------ ------------ ------------ ------------ Less dividends and distributions from: Net investment income (0.11) (0.16) (0.26) (0.49) (0.69) Paid-in-capital - - (0.03) - - ------------ ------------ ------------ ------------ ------------ Total dividends and distributions (0.11) (0.16) (0.29) (0.49) (0.69) ------------ ------------ ------------ ------------ ------------ Net asset value, end of period $ 1.79 $ 1.67 $ 1.55 $ 2.32 $ 4.34 ============ ============ ============ ============ ============ TOTAL RETURN+ 14.15% 19.27% (22.00)% (37.27)% (9.39)% RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.60% 1.61% 1.56% 1.37% 1.25% Net investment income 8.41% 11.41% 13.19% 14.57% 13.07% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 360,513 $ 422,468 $ 371,399 $ 664,706 $ 1,381,008 Portfolio turnover rate 51% 66% 39% 49% 20%
- ---------- ++ 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, -------------------------------------------------------------------------------- 2004 2003 2002 2001 2000 ------------ ------------ ------------ ------------ ------------ CLASS C SHARES: SELECTED PER SHARE DATA: Net asset value, beginning of period $ 1.67 $ 1.55 $ 2.32 $ 4.34 $ 5.51 ------------ ------------ ------------ ------------ ------------ Income (loss) from investment operations: Net investment income++ 0.15 0.18 0.25 0.45 0.66 Net realized and unrealized gain (loss) 0.09 0.10 (0.73) (1.98) (1.14) ------------ ------------ ------------ ------------ ------------ Total income (loss) from investment operations 0.24 0.28 (0.48) (1.53) (0.48) ------------ ------------ ------------ ------------ ------------ Less dividends and distributions from: Net investment income (0.11) (0.16) (0.26) (0.49) (0.69) Paid-in-capital - - (0.03) - - ------------ ------------ ------------ ------------ ------------ Total dividends and distributions (0.11) (0.16) (0.29) (0.49) (0.69) ------------ ------------ ------------ ------------ ------------ Net asset value, end of period $ 1.80 $ 1.67 $ 1.55 $ 2.32 $ 4.34 ============ ============ ============ ============ ============ TOTAL RETURN+ 14.65% 19.14% (22.11)% (37.24)% (9.66)% RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.70% 1.71% 1.66% 1.47% 1.35% Net investment income 8.31% 11.31% 13.09% 14.47% 12.97% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 37,907 $ 45,114 $ 33,978 $ 49,818 $ 86,951 Portfolio turnover rate 51% 66% 39% 49% 20%
- ---------- ++ 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 32
FOR THE YEAR ENDED AUGUST 31, -------------------------------------------------------------------------------- 2004 2003 2002 2001 2000 ------------ ------------ ------------ ------------ ------------ CLASS D SHARES: SELECTED PER SHARE DATA: Net asset value, beginning of period $ 1.68 $ 1.55 $ 2.32 $ 4.35 $ 5.51 ------------ ------------ ------------ ------------ ------------ Income (loss) from investment operations: Net investment income++ 0.16 0.19 0.26 0.48 0.70 Net realized and unrealized gain (loss) 0.08 0.11 (0.73) (1.99) (1.13) ------------ ------------ ------------ ------------ ------------ Total income (loss) from investment operations 0.24 0.30 (0.47) (1.51) (0.43) ------------ ------------ ------------ ------------ ------------ Less dividends and distributions from: Net investment income (0.12) (0.17) (0.27) (0.52) (0.73) Paid-in-capital - - (0.03) - - ------------ ------------ ------------ ------------ ------------ Total dividends and distributions (0.12) (0.17) (0.30) (0.52) (0.73) ------------ ------------ ------------ ------------ ------------ Net asset value, end of period $ 1.80 $ 1.68 $ 1.55 $ 2.32 $ 4.35 ============ ============ ============ ============ ============ TOTAL RETURN+ 14.93% 20.82% (21.45)% (36.95)% (8.69)% RATIOS TO AVERAGE NET ASSETS(1): Expenses 0.85% 0.86% 0.81% 0.62% 0.50% Net investment income 9.16% 12.16% 13.94% 15.32% 13.82% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 154,639 $ 175,471 $ 86,436 $ 137,319 $ 246,941 Portfolio turnover rate 51% 66% 39% 49% 20%
- ---------- ++ 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 33 MORGAN STANLEY HIGH YIELD SECURITIES INC. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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, 2004, 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2004, 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, 2004, 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 19, 2004 34 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 INDEPENDENT DIRECTOR REGISTRANT TIME SERVED* PAST 5 YEARS** BY DIRECTOR*** HELD BY DIRECTOR - ------------------------------------ ----------- ------------- ------------------------------ -------------- -------------------- Michael Bozic (63) Director Since Private Investor; Director or 208 Director of Weirton c/o Kramer Levin Naftalis & April 1994 Trustee of the Retail Funds Steel Corporation. Frankel LLP (since April 1994) and the Counsel to the Independent Directors Institutional Funds (since 919 Third Avenue 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 (71) Director Since Managing Director of Summit 208 Director of Franklin c/o Summit Ventures LLC January 1993 Ventures LLC; Director or Covey (time 1 Utah Center Trustee of the Retail Funds management systems), 201 S. Main Street (since January 1993) and the BMW Bank of North Salt Lake City, UT Institutional Funds (since America, Inc. July 2003); member of the Utah (industrial loan Regional Advisory Board of corporation), United Pacific Corp.; formerly United Space Alliance States Senator (R-Utah) (joint venture (1974-1992) and Chairman, between Lockheed Senate Banking Committee Martin and the (1980-1986), Mayor of Salt Boeing Company) and Lake City, Utah (1971-1974), Nuskin Asia Pacific Astronaut, Space Shuttle (multilevel Discovery (April 12-19, 1985), marketing); member and Vice Chairman, Huntsman of the board of Corporation (chemical various civic and company). charitable organizations. Wayne E. Hedien (70) Director Since Retired; Director or Trustee 208 Director of The PMI c/o Kramer Levin Naftalis & September of the Retail Funds (since Group Inc. (private Frankel LLP 1997 September 1997) and the mortgage insurance); Counsel to the Independent Directors Institutional Funds (since Trustee and Vice 919 Third Avenue July 2003); formerly Chairman of The New York, NY associated with the Allstate Field Museum of Companies (1966-1994), most Natural History; recently as Chairman of The director of various Allstate Corporation (March other business and 1993-December 1994) and charitable Chairman and Chief Executive organizations. Officer of its whollyowned subsidiary, Allstate Insurance Company (July 1989-December 1994).
35
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 INDEPENDENT DIRECTOR REGISTRANT TIME SERVED* PAST 5 YEARS** BY DIRECTOR*** HELD BY DIRECTOR - ------------------------------------ ----------- ------------- ------------------------------ -------------- -------------------- Dr. Manuel H. Johnson (55) Director Since Senior Partner, Johnson Smick 208 Director of NVR, c/o Johnson Smick International, July 1991 International, Inc., a Inc. (home Inc. consulting firm; Chairman of construction); 2099 Pennsylvania Avenue, N.W. the Audit Committee and Chairman and Trustee Suite 950 Director or Trustee of the of the Financial Washington, D.C. Retail Funds (since July 1991) Accounting and the Institutional Funds Foundation (since July 2003); Co-Chairman (oversight and a founder of the Group of organization of the Seven Council (G7C), an Financial Accounting international economic Standards Board); commission; formerly Vice Director of RBS Chairman of the Board of Greenwich Capital Governors of the Federal Holdings (financial Reserve System and Assistant holding company). Secretary of the U.S. Treasury. Joseph J. Kearns (62) Director Since President, Kearns & Associates 209 Director of Electro PMB754 July 2003 LLC (investment consulting); Rent Corporation 23852 Pacific Coast Highway Deputy Chairman of the Audit (equipment leasing), Malibu, CA Committee and Director or The Ford Family Trustee of the Retail Funds Foundation, and the (since July 2003) and the UCLA Foundation. Institutional Funds (since August 1994); previously Chairman of the Audit Committee of the Institutional Funds (October 2001-July 2003); formerly CFO of the J. Paul Getty Trust. Michael E. Nugent (68) Director Since General Partner of Triumph 208 Director of various c/o Triumph Capital, L.P. July 1991 Capital, L.P., a private business 445 Park Avenue investment partnership; organizations. New York, NY Chairman of the Insurance Committee and Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2001); formerly Vice President, Bankers Trust Company and BT Capital Corporation (1984-1988). Fergus Reid (72) Director Since Chairman of Lumelite Plastics 209 Trustee and Director c/o Lumelite Plastics Corporation July 2003 Corporation; Chairman of the of certain 85 Charles Colman Blvd. Governance Committee and investment companies Pawling, NY Director or Trustee of the in the JPMorgan Retail Funds (since July 2003) Funds complex and the Institutional Funds managed by J.P. (since June 1992). Morgan Investment Management Inc.
36 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 INTERESTED DIRECTOR REGISTRANT TIME SERVED* PAST 5 YEARS** BY DIRECTOR*** HELD BY DIRECTOR - ------------------------------------ ----------- ------------- ------------------------------ -------------- -------------------- Charles A. Fiumefreddo (71) Chairman of Since Chairman and Director or 208 None c/o Morgan Stanley Trust the Board July 1991 Trustee of the Retail Funds Harborside Financial Center, and (since July 1991) and the Plaza Two, Director Institutional Funds (since Jersey City, NJ July 2003); formerly Chief Executive Officer of the Retail Funds (until September 2002). James F. Higgins (56) Director Since Director or Trustee of the 208 Director of AXA c/o Morgan Stanley Trust June 2000 Retail Funds (since June 2000) Financial, Inc. and Harborside Financial Center, and the Institutional Funds The Equitable Life Plaza Two, (since July 2003); Senior Assurance Society of Jersey City, NJ Advisor of Morgan Stanley the United States (since August 2000); Director (financial of the Distributor and Dean services). 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).
- ---------- * 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. 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.). 37 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 (51) President Since May 1999 President and Chief Operating Officer of Morgan 1221 Avenue of the Americas Stanley Investment Management Inc.; President, New York, NY Director and Chief Executive Officer of the Investment Manager and Morgan Stanley Services; Chairman and Director of the Distributor; Chairman and Director of the Transfer Agent; Director of various Morgan Stanley subsidiaries; President of the Institutional Funds (since July 2003) and President of the Retail Funds (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. Barry Fink (49) Vice President Since General Counsel (since May 2000) and Managing 1221 Avenue of the Americas February 1997 Director (since December 2000) of Morgan New York, NY Stanley Investment Management; Managing Director (since December 2000), Secretary (since February 1997) and Director (since July 1998) of the Investment Manager and Morgan Stanley Services; Vice President of the Retail Funds; Assistant Secretary of Morgan Stanley DW; Vice President of the Institutional Funds (since July 2003); Managing Director, Secretary and Director of the Distributor; previously Secretary (February 1997-July 2003) and General Counsel (February 1997-April 2004) of the Retail Funds; Vice President and Assistant General Counsel of the Investment Manager and Morgan Stanley Services (February 1997-December 2001). Ronald E. Robison (65) Executive Vice Since Principal Executive Officer-Office of the Funds 1221 Avenue of the Americas President and April 2003 (since November 2003); Managing Director of New York, NY Principal Executive Morgan Stanley & Co. Incorporated, Managing Officer Director of Morgan Stanley; Managing Director, Chief Administrative Officer and Director of the Investment Manager and Morgan Stanley Services; Chief Executive Officer and Director of the Transfer Agent; Managing Director and Director of the Distributor; Executive Vice President and Principal Executive Officer of the Institutional Funds (since July 2003) and the Retail Funds (since April 2003); Director of Morgan Stanley SICAV (since May 2004); previously President and Director of the Retail Funds (March 2001-July 2003) and Chief Global Operations Officer and Managing Director of Morgan Stanley Investment Management Inc. Joseph J. McAlinden (61) Vice President Since July 1995 Managing Director and Chief Investment Officer 1221 Avenue of the Americas of the Investment Manager and Morgan Stanley New York, NY Investment Management Inc., 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). Amy R. Doberman (42) Vice President Since July 2004 Managing Director and General Counsel, U.S. 1221 Avenue of the Americas Investment Management; Managing Director of New York, NY Morgan Stanley Investment Management Inc. and the Investment Manager, Vice President of the Institutional and Retail Funds (since July 2004); previously, Managing Director and General Counsel - Americas, UBS Global Asset Management (July 2000 - July 2004) and General Counsel, Aeltus Investment Management, Inc. (January 1997 - July 2000). Stefanie V. Chang (37) Vice President Since July 2003 Executive Director of Morgan Stanley & Co. 1221 Avenue of the Americas Incorporated, Morgan Stanley Investment New York, NY Management Inc., and the Investment Manager; Vice President of the 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 US LLP).
38
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 J. Smith (39) Treasurer and Treasurer since Executive Director of the Investment Manager c/o Morgan Stanley Trust Chief Financial July 2003 and and Morgan Stanley Services (since December Harborside Financial Center, Officer Chief Financial 2001); previously, Vice President of the Plaza Two, Officer since Retail Funds (September 2002-July 2003), and Jersey City, NJ September 2002 Vice President of the Investment Manager and Morgan Stanley Services (August 2000-November 2001) and Senior Manager at PricewaterhouseCoopers LLP (January 1998-August 2000). Thomas F. Caloia (58) Vice President Since July 2003 Executive Director (since December 2002) and c/o Morgan Stanley Trust Assistant Treasurer of the Investment Manager, Harborside Financial Center, the Distributor and Morgan Stanley Services; Plaza Two, previously Treasurer of the Retail Funds Jersey City, NJ (April 1989-July 2003); formerly First Vice President of the Investment Manager, the Distributor and Morgan Stanley Services. Mary E. Mullin (37) Secretary Since July 2003 Executive Director of Morgan Stanley & Co. 1221 Avenue of the Americas Incorporated, Morgan Stanley Investment New York, NY Management Inc. and the Investment Manager; Secretary of the 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. 39 DIRECTORS Michael Bozic Charles A. Fiumefreddo Edwin J. Garn Wayne E. Hedien James F. Higgins Dr. Manuel H. Johnson Joseph J. Kearns Michael E. Nugent Fergus Reid OFFICERS Charles A. Fiumefreddo CHAIRMAN OF THE BOARD Mitchell M. Merin PRESIDENT Ronald E. Robison EXECUTIVE VICE PRESIDENT and PRINCIPAL EXECUTIVE OFFICER Barry Fink VICE PRESIDENT Joseph J. McAlinden VICE PRESIDENT Amy R. Doberman VICE PRESIDENT Stefanie V. Chang VICE PRESIDENT Francis J. Smith TREASURER and CHIEF FINANCIAL OFFICER Thomas F. Caloia VICE PRESIDENT Mary E. Mullin SECRETARY TRANSFER AGENT Morgan Stanley Trust Harborside Financial Center, Plaza Two Jersey City, New Jersey 07311 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP Two World Financial Center New York, New York 10281 INVESTMENT MANAGER Morgan Stanley Investment Advisors Inc. 1221 Avenue of the Americas New York, New York 10020 This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its directors. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the Prospectus carefully before investing. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. (C) 2004 Morgan Stanley [MORGAN STANLEY LOGO] 37915RPT-RA04-00639P-Y08/04 [GRAPHIC] MORGAN STANLEY FUNDS MORGAN STANLEY HIGH YIELD SECURITIES ANNUAL REPORT AUGUST 31, 2004 [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 to delete from the end of the following paragraph on page 2 of the Code the phrase "to the detriment of the Fund.": "Each Covered Officer must not use his personal influence or personal relationship improperly to influence investment decisions or financial reporting by the Fund whereby the Covered Officer would benefit personally (directly or indirectly)." (d) Not applicable. (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 4. Principal Accountant Fees and Services. (a)(b)(c)(d) and (g). Based on fees billed for the periods shown: 2004
REGISTRANT COVERED ENTITIES(1) AUDIT FEES $ 44,630 N/A NON-AUDIT FEES AUDIT-RELATED FEES $ 452(2) $ 5,067,400(2) TAX FEES $ 5,313(3) $ 545,053(4) ALL OTHER FEES $ -- $ -- TOTAL NON-AUDIT FEES $ 5,765 $ 5,612,453 TOTAL $ 50,395 $ 5,612,453
2003
REGISTRANT COVERED ENTITIES(1) AUDIT FEES $ 42,230 N/A NON-AUDIT FEES AUDIT-RELATED FEES $ 9,684(2) $ 1,086,576(2) TAX FEES $ 5,375(3) $ 252,500(4) ALL OTHER FEES $ -- $ --(5) TOTAL NON-AUDIT FEES $ 15,059 $ 1,339,076 TOTAL $ 57,289 $ 1,339,076
N/A- Not applicable, as not required by Item 4. (1) Covered Entities include the Adviser (excluding sub-advisors) and any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Registrant. (2) Audit-Related Fees represent assurance and related services provided that are reasonably related to the performance of the audit of the financial statements of the Covered Entities' and funds advised by the Adviser or its affiliates, specifically data verification and agreed-upon procedures related to asset securitizations and agreed-upon procedures engagements. (3) Tax Fees represent tax compliance, tax planning and tax advice services provided in connection with the preparation and review of the Registrant's tax returns. (4) Tax Fees represent tax compliance, tax planning and tax advice services provided in connection with the review of Covered Entities' tax returns. (5) All other fees represent project management for future business applications and improving business and operational processes. (e)(1) The audit committee's pre-approval policies and procedures are as follows: APPENDIX A AUDIT COMMITTEE AUDIT AND NON-AUDIT SERVICES PRE-APPROVAL POLICY AND PROCEDURES OF THE MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS AS ADOPTED AND AMENDED JULY 23, 2004,(1) 1. STATEMENT OF PRINCIPLES The Audit Committee of the Board is required to review and, in its sole discretion, pre-approve all Covered Services to be provided by the Independent Auditors to the Fund and Covered Entities in order to assure that services performed by the Independent Auditors do not impair the auditor's independence from the Fund. The SEC has issued rules specifying the types of services that an independent auditor may not provide to its audit client, as well as the audit committee's administration of the engagement of the independent auditor. The SEC's rules establish two different approaches to pre-approving services, which the SEC considers to be equally valid. Proposed services either: may be pre-approved without consideration of specific case-by-case services by the Audit Committee ("GENERAL PRE-APPROVAL"); or require the specific pre-approval of the Audit Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit Committee believes that the combination of these two approaches in this Policy will result in an effective and efficient procedure to pre-approve services performed by the Independent Auditors. As set forth in this Policy, unless a type of service has received general pre-approval, it will require specific pre-approval by the Audit Committee (or by any member of the Audit Committee to which pre-approval authority has been delegated) if it is to be provided by the Independent Auditors. Any proposed services exceeding pre-approved cost levels or budgeted amounts will also require specific pre-approval by the Audit Committee. The appendices to this Policy describe the Audit, Audit-related, Tax and All Other services that have the general pre-approval of the Audit Committee. The term of any general pre-approval is 12 months from the date of pre-approval, unless the Audit Committee considers and provides a different period and states otherwise. The Audit Committee will annually review and pre-approve the services that may be provided by the Independent Auditors without obtaining specific pre-approval from the Audit Committee. The Audit Committee will add to or subtract from the list of general pre-approved services from time to time, based on subsequent determinations. - ---------- (1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and Procedures (the "POLICY"), adopted as of the date above, supersedes and replaces all prior versions that may have been adopted from time to time. The purpose of this Policy is to set forth the policy and procedures by which the Audit Committee intends to fulfill its responsibilities. It does not delegate the Audit Committee's responsibilities to pre-approve services performed by the Independent Auditors to management. The Fund's Independent Auditors have reviewed this Policy and believes that implementation of the Policy will not adversely affect the Independent Auditors' independence. 2. DELEGATION As provided in the Act and the SEC's rules, the Audit Committee may delegate either type of pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting. 3. AUDIT SERVICES The annual Audit services engagement terms and fees are subject to the specific pre-approval of the Audit Committee. Audit services include the annual financial statement audit and other procedures required to be performed by the Independent Auditors to be able to form an opinion on the Fund's financial statements. These other procedures include information systems and procedural reviews and testing performed in order to understand and place reliance on the systems of internal control, and consultations relating to the audit. The Audit Committee will approve, if necessary, any changes in terms, conditions and fees resulting from changes in audit scope, Fund structure or other items. In addition to the annual Audit services engagement approved by the Audit Committee, the Audit Committee may grant general pre-approval to other Audit services, which are those services that only the Independent Auditors reasonably can provide. Other Audit services may include statutory audits and services associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4, etc.), periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings. The Audit Committee has pre-approved the Audit services in Appendix B.1. All other Audit services not listed in Appendix B.1 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). 4. AUDIT-RELATED SERVICES Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of the Fund's financial statements and, to the extent they are Covered Services, the Covered Entities or that are traditionally performed by the Independent Auditors. Because the Audit Committee believes that the provision of Audit-related services does not impair the independence of the auditor and is consistent with the SEC's rules on auditor independence, the Audit Committee may grant general pre-approval to Audit-related services. Audit-related services include, among others, accounting consultations related to accounting, financial reporting or disclosure matters not classified as "Audit services"; assistance with understanding and implementing new accounting and financial reporting guidance from rulemaking authorities; agreed-upon or expanded audit procedures related to accounting and/or billing records required to respond to or comply with financial, accounting or regulatory reporting matters; and assistance with internal control reporting requirements under Forms N-SAR and/or N-CSR. The Audit Committee has pre-approved the Audit-related services in Appendix B.2. All other Audit-related services not listed in Appendix B.2 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). 5. TAX SERVICES The Audit Committee believes that the Independent Auditors can provide Tax services to the Fund and, to the extent they are Covered Services, the Covered Entities, such as tax compliance, tax planning and tax advice without impairing the auditor's independence, and the SEC has stated that the Independent Auditors may provide such services. Pursuant to the preceding paragraph, the Audit Committee has pre-approved the Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). 6. ALL OTHER SERVICES The Audit Committee believes, based on the SEC's rules prohibiting the Independent Auditors from providing specific non-audit services, that other types of non-audit services are permitted. Accordingly, the Audit Committee believes it may grant general pre-approval to those permissible non-audit services classified as All Other services that it believes are routine and recurring services, would not impair the independence of the auditor and are consistent with the SEC's rules on auditor independence. The Audit Committee has pre-approved the All Other services in Appendix B.4. Permissible All Other services not listed in Appendix B.4 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). 7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS Pre-approval fee levels or budgeted amounts for all services to be provided by the Independent Auditors will be established annually by the Audit Committee. Any proposed services exceeding these levels or amounts will require specific pre-approval by the Audit Committee. The Audit Committee is mindful of the overall relationship of fees for audit and non-audit services in determining whether to pre-approve any such services. 8. PROCEDURES All requests or applications for services to be provided by the Independent Auditors that do not require specific approval by the Audit Committee will be submitted to the Fund's Chief Financial Officer and must include a detailed description of the services to be rendered. The Fund's Chief Financial Officer will determine whether such services are included within the list of services that have received the general pre-approval of the Audit Committee. The Audit Committee will be informed on a timely basis of any such services rendered by the Independent Auditors. Requests or applications to provide services that require specific approval by the Audit Committee will be submitted to the Audit Committee by both the Independent Auditors and the Fund's Chief Financial Officer, and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC's rules on auditor independence. The Audit Committee has designated the Fund's Chief Financial Officer to monitor the performance of all services provided by the Independent Auditors and to determine whether such services are in compliance with this Policy. The Fund's Chief Financial Officer will report to the Audit Committee on a periodic basis on the results of its monitoring. Both the Fund's Chief Financial Officer and management will immediately report to the chairman of the Audit Committee any breach of this Policy that comes to the attention of the Fund's Chief Financial Officer or any member of management. 9. ADDITIONAL REQUIREMENTS The Audit Committee has determined to take additional measures on an annual basis to meet its responsibility to oversee the work of the Independent Auditors and to assure the auditor's independence from the Fund, such as reviewing a formal written statement from the Independent Auditors delineating all relationships between the Independent Auditors and the Fund, consistent with Independence Standards Board No. 1, and discussing with the Independent Auditors its methods and procedures for ensuring independence. 10. COVERED ENTITIES Covered Entities include the Fund's investment adviser(s) and any entity controlling, controlled by or under common control with the Fund's investment adviser(s) that provides ongoing services to the Fund(s). Beginning with non-audit service contracts entered into on or after May 6, 2003, the Fund's audit committee must pre-approve non-audit services provided not only to the Fund but also to the Covered Entities if the engagements relate directly to the operations and financial reporting of the Fund. This list of Covered Entities would include: MORGAN STANLEY RETAIL FUNDS Morgan Stanley Investment Advisors Inc. Morgan Stanley & Co. Incorporated Morgan Stanley DW Inc. Morgan Stanley Investment Management Inc. Morgan Stanley Investment Management Limited Morgan Stanley Investment Management Private Limited Morgan Stanley Asset & Investment Trust Management Co., Limited Morgan Stanley Investment Management Company Van Kampen Asset Management Morgan Stanley Services Company, Inc. Morgan Stanley Distributors Inc. Morgan Stanley Trust FSB MORGAN STANLEY INSTITUTIONAL FUNDS Morgan Stanley Investment Management Inc. Morgan Stanley Investment Advisors Inc. Morgan Stanley Investment Management Limited Morgan Stanley Investment Management Private Limited Morgan Stanley Asset & Investment Trust Management Co., Limited Morgan Stanley Investment Management Company Morgan Stanley & Co. Incorporated Morgan Stanley Distribution, Inc. Morgan Stanley AIP GP LP Morgan Stanley Alternative Investment Partners LP (e)(2) Beginning with non-audit service contracts entered into on or after May 6, 2003, the audit committee also is required to pre-approve services to Covered Entities to the extent that the services are determined to have a direct impact on the operations or financial reporting of the Registrant. 100% of such services were pre-approved by the audit committee pursuant to the Audit Committee's pre-approval policies and procedures (attached hereto). (f) Not applicable. (g) See table above. (h) The audit committee of the Board of Directors has considered whether the provision of services other than audit services performed by the auditors to the Registrant and Covered Entities is compatible with maintaining the auditors' independence in performing audit services. Item 5. Audit Committee of Listed Registrants. (a) The Fund has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act whose members are: Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manual H. Johnson, Joseph J. Kearns, Michael Nugent and Fergus Reid. (b) Not applicable. Item 6. Schedule of Investments Refer to Item 1. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Applicable only to annual reports filed by closed-end funds. Item 8. Closed-End Fund Repurchases Applicable to reports filed by closed-end funds. Item 9. Submission of Matters to a Vote of Security Holders Not applicable. Item 10 - Controls and Procedures (a) The Fund's principal executive officer and principal financial officer have concluded that the Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 11 Exhibits (a) 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. 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. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer October 20, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer October 20, 2004 /s/ Francis Smith Francis Smith Principal Financial Officer October 20, 2004 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. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer January 3, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer January 3, 2005 /s/ Francis Smith Francis Smith Principal Financial Officer January 3, 2005 EX-99.CODEETH 2 a2149612zex-99_codeeth.txt EX 99.CODEETH Exhibit 99.code-eth EXHIBIT 11 A CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS ADOPTED SEPTEMBER 28, 2004 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); - 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(2) 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; - 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 - ---------- (2) 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." 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 3 a2149612zex-99_cert.txt EX 99.CERT Exhibit 99.Cert EXHIBIT 11 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-3(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; [b) Omitted.] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: October 20, 2004 /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer Exhibit 99.Cert EXHIBIT 11 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-3(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; [b) Omitted.] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: October 20, 2004 /s/ Francis Smith Francis Smith Principal Financial Officer Exhibit 99.Cert EXHIBIT 11 B3 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-3(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; [b) Omitted.] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: January 3, 2005 /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer Exhibit 99.Cert EXHIBIT 11 B4 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-3(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; [b) Omitted.] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: January 3, 2005 /s/ Francis Smith Francis Smith Principal Financial Officer EX-99.906CERT 4 a2149612zex-99_906cert.txt EX 99.906CERT Exhibit 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, 2004 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: October 20, 2004 /s/ Ronald E. Robison --------------------- Ronald E. Robison Principal Executive Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley 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, 2004 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: October 20, 2004 /s/ Francis Smith ----------------- Francis Smith Principal Financial Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley 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, 2004 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: January 3, 2005 /s/ Ronald E. Robison --------------------- Ronald E. Robison Principal Executive Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley 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, 2004 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: January 3, 2005 /s/ Francis Smith ----------------- Francis Smith Principal Financial Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley 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-----