UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number | 811-02932 |
|
Morgan Stanley High Yield Securities Inc. |
(Exact name of registrant as specified in charter) |
|
522 Fifth Avenue, New York, New York | | 10036 |
(Address of principal executive offices) | | (Zip code) |
|
Ronald E. Robison 522 Fifth Avenue, New York, New York 10036 |
(Name and address of agent for service) |
|
Registrant’s telephone number, including area code: | 212-296-6990 | |
|
Date of fiscal year end: | August 31, 2008 | |
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Date of reporting period: | February 29, 2008 | |
| | | | | | | |
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 semiannual period. We will provide an overview of the market conditions, and discuss some of the factors that affected performance during the reporting period. In addition, this report includes the Fund's financial statements and a list of Fund investments.
This material must be preceded or accompanied by a prospectus for the fund being offered.
Market forecasts provided in this report may not necessarily come to pass. There is no assurance that the Fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that market values of securities owned by the Fund will decline and, therefore, the value of the Fund's shares may be less than what you paid for them. Accordingly, you can lose money investing in this Fund. Please see the prospectus for more complete information on investment risks.
Fund Report
For the six months ended February 29, 2008
Total Return for the 6 Months Ended February 29, 2008 | |
Class A | | Class B | | Class C | | Class D | | Lehman Brothers U.S. Corporate High Yield-2% Issuer Cap Index1 | | Lipper High Current Yield Bond Funds Index2 | |
| 2.15 | % | | | 1.32 | % | | | 1.86 | % | | | 1.69 | % | | | -1.39 | % | | | -2.20 | % | |
The performance of the Fund's four share classes varies because each has different expenses. The Fund's total returns assume the reinvestment of all distributions but do not reflect the deduction of any applicable sales charges. Such costs would lower performance. See Performance Summary for standardized performance and benchmark information.
Market Conditions
After robust third quarter, when gross domestic product (GDP) growth measured 4.9 percent, the economy began to slow in the fourth quarter of 2007, triggering fears of an impending recession. Economic data released in the first two months of 2008, including higher jobless claims, accelerating housing price declines, weakening consumer confidence and rising consumer and corporate defaults appeared to confirm these fears. At the same time, problems related to liquidity and additional credit write downs continued to plague the markets, creating a volatile and risk-averse environment in which virtually all asset classes except Treasury bonds struggled.
Although the Federal Open Market Committee (the "Fed") made ongoing efforts to boost liquidity and the economy through a series of interest rate cuts, the reductions did little to quell investor apprehension as the market continued to price in a greater likelihood of recession, higher defaults, and ongoing liquidity problems. The result has been a persistent flight to quality and the underperformance of high yield bonds versus Treasuries. Although the high yield market did outperform equities throughout the six-month reporting period, returns remained in negative territory as spreads continued to widen, closing the period at 785 basis points over Treasuries — the widest level in four years. As would be expected in this environment, higher quality bonds consistently outperformed lower quality issues within the high yield sector and new issue supply waned considerably.
High yield industry performance varied but for the overall period, the health care, utilities, supermarkets and aerospace/defense sectors were the best performers, all of which posted positive returns. The worst performing sectors were financial, media, cable, and construction machinery. Although home construction was among the worst performing sectors for the fourth quarter of 2007, it rebounded in the first two months of 2008 to place within the top performing sectors of the high yield market.
Performance Analysis
All share classes of Morgan Stanley High Yield Securities Inc. outperformed the Lehman Brothers U.S. Corporate High Yield-2% Issuer Cap Index and the Lipper High Current Yield Bond Funds Index for the six months ended February 29, 2008, assuming no deduction of applicable sales charges.
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We continued to position the Fund defensively, a strategy we have been pursuing for some time now and which was beneficial throughout the reporting period. We did so by maintaining a higher overall credit quality within the portfolio than that of the Lehman Brothers U.S. Corporate High Yield-2% Issuer Cap Index. This positioning was the primary driver of the Fund's relative outperformance, as the lower quality segment of the market has been underperforming.
We positioned the portfolio to benefit from a steepening yield curve, which proved advantageous during the period as interest rates declined, particularly on the short end of the curve, causing the curve to steepen significantly.
With regard to sector allocations, an emphasis on health care bonds was beneficial. This was the top performing sector for the six-month period and the Fund's overweight here versus the Lehman Brothers U.S. Corporate High Yield-2% Issuer Cap Index enhanced relative performance. An underweight to the media and cable sectors throughout much of the period was also additive to performance as they were among the worst performing industries. Security selection in cable and retail also contributed to returns.
The primary detractor from the Fund's relative performance was its holdings in mortgage securities. Although the allocation to these securities was relatively small, mortgage securities are not represented in the Lehman Brothers U.S. Corporate High Yield-2% Issuer Cap Index and the portfolio's exposure here held back relative returns.
We continued to seek to maintain a balanced and well-diversified portfolio, while allowing for strategic overweights in securities and sectors that we believed possessed the most attractive risk profiles. In terms of issuer size, we focused on larger companies because of their financial flexibility, their ability to withstand less favorable financial conditions, and their superior access to capital markets. Over the course of the period, this led us to increase the Fund's exposure to the cable, telecommunications, and media sectors and decrease exposure to the manufacturing and building products/home builders sectors. As of the end of the period, the Fund's major sector overweights relative to the Lehman Brothers U.S. Corporate High Yield-2% Issuer Cap Index were in the health care, energy, chemicals, and food/tobacco sectors. The Fund's major sector underweights relative to the Index were in technology, building product/home bu ilders, manufacturing, and retail.
With the increasing prospects for a recession this year, yield spreads have widened to levels well above long-term averages. In our opinion, spreads are now much more reasonable than they were in early 2007, but are still not overly attractive. In the last two recessions, spreads widened to more than 1,000 basis points over Treasuries. While we are not certain spreads will reach this level, we do believe they are likely to widen further in the coming months. Therefore, we believe it is prudent to maintain the Fund's defensive positioning but will continue to look for attractive opportunities to add value to the portfolio.
There is no guarantee that any sectors mentioned will continue to perform as discussed herein or that securities in such sectors will be held by the Fund in the future.
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TOP FIVE INDUSTRIES | |
Casinos/Gaming | | | 6.1 | % | |
Oil & Gas Production | | | 5.1 | | |
Electric Utilities | | | 4.8 | | |
Hospital/Nursing Management | | | 4.7 | | |
Containers/Packaging | | | 4.2 | | |
LONG-TERM CREDIT ANALYSIS | |
A/A+ | | | 5.1 | % | |
Baa/BBB+ | | | 2.7 | | |
Ba/BB- | | | 21.8 | | |
B/B | | | 46.4 | | |
Caa/CCC | | | 22.3 | | |
Not rated | | | 1.7 | | |
Data as of February 29, 2008. 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. These data are provided for informational purposes only and should not be deemed a recommendation to buy or sell the securities mentioned. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services.
Investment Strategy
The Fund will normally invest at least 80 percent of its assets in fixed-income securities (including zero coupon securities) rated below Baa by Moody's Investors Service ("Moody's") or below BBB by Standard & Poor's Rating Group, a division of The McGraw-Hill Companies, Inc. ("S&P"), or in non-rated securities considered by the Fund's Investment Adviser to be appropriate investments for the Fund. Such securities may also include "Rule 144A" securities, which are subject to resale restrictions. Shareholders of the Fund will receive at least 60 days' prior notice of any changes in this policy. Securities rated below Baa or BBB are commonly known as "junk bonds." There are no minimum quality ratings for investments, and as such the Fund may invest in securities which no longer make payments of interest or principal, including defaulted securities.
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. The semiannual reports and the annual reports are filed electronically with the Securities and Exchange Commission (SEC) on Form N-CSRS and Form N-CSR, respectively. 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
4
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 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.
Proxy Voting Policy and Procedures and Proxy Voting Record
You may obtain a copy of the Fund's Proxy Voting Policy and Procedures without charge, upon request, by calling toll free (800) 869-NEWS or by visiting the Mutual Fund Center on our Web site at www.morganstanley.com. It is also available on the Securities and Exchange Commission's Web site at http://www.sec.gov.
You may obtain information regarding how the Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 without charge by visiting the Mutual Fund Center on our Web site at www.morganstanley.com. This information is also available on the Securities and Exchange Commission's Web site at http://www.sec.gov.
Householding Notice
To reduce printing and mailing costs, the Fund attempts to eliminate duplicate mailings to the same address. The Fund delivers a single copy of certain shareholder documents, including shareholder reports, prospectuses and proxy materials, to investors with the same last name who reside at the same address. Your participation in this program will continue for an unlimited period of time unless you instruct us otherwise. You can request multiple copies of these documents by calling (800) 869-NEWS, 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.
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Performance Summary
Average Annual Total Returns—Period Ended February 29, 2008 | |
Symbol | | Class A Shares* (since 09/26/79) HYLAX | | Class B Shares** (since 07/28/97) HYLBX | | Class C Shares† (since 07/28/97) HYLCX | | Class D Shares†† (since 09/26/79) HYLDX | |
1 Year
| | 1.95% (2.38) | | 3 4 | | 0.87% (3.88) | | 3 4 | | 1.34% 0.39 | | 3 4 | | 1.61% — | | 3 | |
5 Years
| | 9.22 8.27 | | 3 4 | | 8.56 8.27 | | 3 4 | | 8.43 8.43 | | 3 4 | | 9.32 — | | 3 | |
10 Years
| | (3.12) (3.54) | | 3 4 | | (3.54) (3.54) | | 3 4 | | (3.75) (3.75) | | 3 4 | | (2.97) — | | 3 | |
Since Inception
| | 5.03 4.87 | | 3 4 | | (2.91) (2.91) | | 3 4 | | (3.08) (3.08) | | 3 4 | | 5.26 — | | 3 | |
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 www.morganstanley.com/msim or speak with your Financial Advisor. Investment returns and principal value will fluctuate and fund shares, when redeemed, may be worth more or less than their original cost. The table does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Performance for Class A, Class B, Class C, and Class D shares will vary due to differences in sales charges and expenses.
Prior to July 28, 1997 the Fund offered only one class of shares. Because the distribution arrangement for Class A most closely resembled the distribution arrangement applicable prior to the implementation of multiple classes (i.e., Class A is sold with a front-end sales charge), historical performance information has been restated to reflect the actual maximum sales charge applicable to Class A (i.e., 4.25%) as compared to the 5.50% sales charge in effect prior to July 28, 1997. In addition, Class A shares are now subject to an ongoing 12b-1 fee which is reflected in the restated performance for that class.
Because all shares of the fund held prior to July 28, 1997 were designated Class D shares, the Fund's historical performance has been restated to reflect the absence of any sales charge.
* 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. Effective April 2005, Class B shares will generally convert to Class A shares approximately eight years after the end of the calendar month in which the shares were purchased. Performance for periods greater than eight years reflects this conversion.
† The maximum contingent deferred sales charge for Class C is 1.0% for shares redeemed within one year of purchase.
†† Class D has no sales charge.
(1) The Lehman Brothers U.S. Corporate High Yield - 2% Issuer Cap Index is the 2% Issuer Cap component of the Lehman Brothers U.S. Corporate High Yield Index which covers the U.S. dollar-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below. The Index excludes Emerging Markets debt. The Index is unmanaged and its 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. The Fund is in the Lipper High Current Yield Bond Funds classification as of the date of this report.
(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.
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Expense Example
As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments and redemption fees; and (2) ongoing costs, including advisory 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 09/01/07 – 02/29/08.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| | Beginning Account Value | | Ending Account Value | | Expenses Paid During Period * | |
| | 09/01/07 | | 02/29/08 | | 09/01/07 – 02/29/08 | |
Class A | |
Actual (2.15% return) | | $ | 1,000.00 | | | $ | 1,021.50 | | | $ | 8.54 | | |
Hypothetical (5% annual return before expenses) | | $ | 1,000.00 | | | $ | 1,016.41 | | | $ | 8.52 | | |
Class B | |
Actual (1.32% return) | | $ | 1,000.00 | | | $ | 1,013.20 | | | $ | 11.01 | | |
Hypothetical (5% annual return before expenses) | | $ | 1,000.00 | | | $ | 1,013.92 | | | $ | 11.02 | | |
Class C | |
Actual (1.86% return) | | $ | 1,000.00 | | | $ | 1,018.60 | | | $ | 11.54 | | |
Hypothetical (5% annual return before expenses) | | $ | 1,000.00 | | | $ | 1,013.43 | | | $ | 11.51 | | |
Class D | |
Actual (1.69% return) | | $ | 1,000.00 | | | $ | 1,016.90 | | | $ | 7.27 | | |
Hypothetical (5% annual return before expenses) | | $ | 1,000.00 | | | $ | 1,017.65 | | | $ | 7.27 | | |
* Expenses are equal to the Fund's annualized expense ratios of 1.70%, 2.20%, 2.30% and 1.45% for Class A, Class B, Class C and Class D shares, respectively, multiplied by the average account value over the period, multiplied by 182/366 (to reflect the one-half year period).
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Morgan Stanley High Yield Securities Inc.
Portfolio of Investments n February 29, 2008 (unaudited)
PRINCIPAL AMOUNT IN THOUSANDS | |
| | COUPON RATE | | MATURITY DATE | | VALUE | |
| | Corporate Bonds (91.1%) | |
| | Advertising/Marketing Services (1.7%) | |
$ | 1,750 | | | Idearc Inc. | | | 8.00 | % | | 11/15/16 | | $ | 1,041,250 | | |
| 1,025 | | | Interpublic Group of Companies, Inc. (The) | | | 6.25 | | | 11/15/14 | | | 825,125 | | |
| 1,680 | | | Valassis Communications | | | 8.25 | | | 03/01/15 | | | 1,428,000 | | |
| | | 3,294,375 | | |
| | Aluminum (1.0%) | |
| 2,085 | | | Novelis, Inc. (Canada) | | | 7.25 | | | 02/15/15 | | | 1,886,925 | | |
| | Apparel/Footwear (0.8%) | |
| 1,525 | | | Oxford Industries, Inc. | | | 8.875 | | | 06/01/11 | | | 1,471,625 | | |
| | Apparel/Footwear Retail (0.9%) | |
| 1,620 | | | Brown Shoe Co., Inc. | | | 8.75 | | | 05/01/12 | | | 1,628,100 | | |
| | Auto Parts: O.E.M. (0.8%) | |
| 1,585 | | | ArvinMeritor, Inc. | | | 8.75 | | | 03/01/12 | | | 1,450,275 | | |
| | Beverages: Alcoholic (0.5%) | |
| 910 | | | Constellation Brands, Inc. | | | 7.25 | | | 05/15/17 | | | 880,425 | | |
| | Broadcasting (0.9%) | |
| 1,120 | | | LIN Television Corp. | | | 6.50 | | | 05/15/13 | | | 1,019,200 | | |
| 850 | | | Univision Communications - 144A* (a) | | | 9.75 | | | 03/15/15 | | | 590,750 | | |
| | | 1,609,950 | | |
| | Building Products (1.6%) | |
| 1,525 | | | Interface Inc. | | | 9.50 | | | 02/01/14 | | | 1,578,375 | | |
| 1,950 | | | Nortek Inc. | | | 8.50 | | | 09/01/14 | | | 1,521,000 | | |
| | | 3,099,375 | | |
| | Cable/Satellite TV (4.0%) | |
| 2,365 | | | Cablevision Systems Corp. (Series B) | | | 9.644 | ** | | 04/01/09 | | | 2,376,825 | | |
| 893 | | | CCH I LLC/CCH I Cap Co. | | | 11.00 | | | 10/01/15 | | | 625,100 | | |
| 535 | | | CCH II/CCH II | | | 10.25 | | | 09/15/10 | | | 492,200 | | |
| 1,890 | | | EchoStar DBS Corp. | | | 6.375 | | | 10/01/11 | | | 1,866,375 | | |
| 285 | | | Intelsat Sub Holdings Co. Ltd. (Bermuda) | | | 8.25 | | | 01/15/13 | | | 286,425 | | |
| 1,555 | | | Intelsat Sub Holdings Co. Ltd. (Bermuda) | | | 8.625 | | | 01/15/15 | | | 1,562,775 | | |
| 315 | | | Virgin Media Finance plc (United Kingdom) | | | 8.75 | | | 04/15/14 | | | 270,900 | | |
| 165 | | | Virgin Media Finance plc (United Kingdom) | | | 9.125 | | | 08/15/16 | | | 139,425 | | |
| | | 7,620,025 | | |
See Notes to Financial Statements
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Morgan Stanley High Yield Securities Inc.
Portfolio of Investments n February 29, 2008 (unaudited) continued
PRINCIPAL AMOUNT IN THOUSANDS | |
| | COUPON RATE | | MATURITY DATE | | VALUE | |
| | Casino/Gaming (6.1%) | |
$ | 27,175 | | | Aladdin Gaming Holdings/Capital Corp. LLC (Series B) (b)(c)(f) | | | 13.50 | % | | 03/01/10 | | $ | 0 | | |
| 2,130 | | | Harrah's Operating Co, Inc. | | | 5.375 | | | 12/15/13 | | | 1,421,775 | | |
| 2,235 | | | Isle of Capri Casinos | | | 7.00 | | | 03/01/14 | | | 1,536,562 | | |
| 2,000 | | | Las Vegas Sands Corp. | | | 6.375 | | | 02/15/15 | | | 1,760,000 | | |
| 3,700 | | | MGM Mirage Inc. | | | 6.00 | | | 10/01/09 | | | 3,700,000 | | |
| 27,634 | | | Resort At Summerlin LP/Ras Co. (Series B) (b)(c)(f) | | | 13.00 | | | 12/15/07 | | | 0 | | |
| 2,980 | | | Station Casinos, Inc. | | | 6.00 | | | 04/01/12 | | | 2,533,000 | | |
| 265 | | | Station Casinos, Inc. | | | 6.875 | | | 03/01/16 | | | 168,275 | | |
| 495 | | | Station Casinos, Inc. | | | 7.75 | | | 08/15/16 | | | 414,563 | | |
| | | 11,534,175 | | |
| | Chemicals: Agricultural (0.7%) | |
| 1,335 | | | Terra Capital Inc. | | | 7.00 | | | 02/01/17 | | | 1,318,312 | | |
| | Chemicals: Major Diversified (0.7%) | |
| 1,445 | | | Westlake Chemical Corp. | | | 6.625 | | | 01/15/16 | | | 1,286,050 | | |
| | Chemicals: Specialty (1.9%) | |
| 710 | | | Innophos Holdings Inc. - 144A* | | | 9.50 | | | 04/15/12 | | | 681,600 | | |
| 1,070 | | | Innophos, Inc. | | | 8.875 | | | 08/15/14 | | | 1,048,600 | | |
| 1,045 | | | Koppers Holdings, Inc. | | | 9.875 | † | | 11/15/14 | | | 893,475 | | |
| 915 | | | Koppers Industry Inc. | | | 9.875 | | | 10/15/13 | | | 972,188 | | |
| | | 3,595,863 | | |
| | Coal (1.5%) | |
| 860 | | | Foundation PA Coal Co. | | | 7.25 | | | 08/01/14 | | | 855,700 | | |
| 1,980 | | | Massey Energy Co. | | | 6.875 | | | 12/15/13 | | | 1,930,500 | | |
| | | 2,786,200 | | |
| | Containers/Packaging (4.2%) | |
| 1,865 | | | Berry Plastics Holding Corp. | | | 8.875 | | | 09/15/14 | | | 1,655,187 | | |
| 565 | | | Berry Plastics Holding Corp. | | | 10.25 | | | 03/01/16 | | | 449,175 | | |
| 940 | | | Graham Packaging Company Inc. | | | 8.50 | | | 10/15/12 | | | 848,350 | | |
| 1,215 | | | Graham Packaging Company Inc. (a) | | | 9.875 | | | 10/15/14 | | | 1,041,862 | | |
| 2,000 | | | Graphic Packaging International Corp. | | | 9.50 | | | 08/15/13 | | | 1,895,000 | | |
| 1,975 | | | Owens-Illinois, Inc. | | | 7.50 | | | 05/15/10 | | | 2,029,313 | | |
| | | 7,918,887 | | |
| | Data Processing Services (1.1%) | |
| 1,965 | | | Sungard Data Systems Inc. | | | 9.125 | | | 08/15/13 | | | 1,989,562 | | |
See Notes to Financial Statements
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Morgan Stanley High Yield Securities Inc.
Portfolio of Investments n February 29, 2008 (unaudited) continued
PRINCIPAL AMOUNT IN THOUSANDS | |
| | COUPON RATE | | MATURITY DATE | | VALUE | |
| | Drugstore Chains (0.9%) | |
$ | 1,785 | | | Rite Aid Corp. | | | 8.125 | % | | 05/01/10 | | $ | 1,731,450 | | |
| | Electric Utilities (4.8%) | |
| 415 | | | AES Corp. (The) | | | 7.75 | | | 03/01/14 | | | 422,262 | | |
| 347 | | | AES Corp. (The) | | | 8.875 | | | 02/15/11 | | | 364,350 | | |
| 497 | | | AES Corp. (The) | | | 9.375 | | | 09/15/10 | | | 526,820 | | |
| 1,215 | | | Intergen - 144A* | | | 9.00 | | | 06/30/17 | | | 1,275,750 | | |
| 910 | | | IPALCO Enterprises, Inc. | | | 8.375 | | | 11/14/08 | | | 921,375 | | |
| 965 | | | IPALCO Enterprises, Inc. | | | 8.625 | | | 11/14/11 | | | 1,018,075 | | |
| 530 | | | Nevada Power Co. (Series A) | | | 8.25 | | | 06/01/11 | | | 583,637 | | |
| 1,160 | | | Reliant Energy Inc. | | | 7.875 | | | 06/15/17 | | | 1,146,950 | | |
| 1,000 | | | Texas Competitive Electric Holdings LLC - 144A* | | | 10.25 | | | 11/01/15 | | | 980,000 | | |
| 1,870 | | | Texas Competitive Electric Holdings LLC - 144A* | | | 10.25 | | | 11/01/15 | | | 1,832,600 | | |
| | | 9,071,819 | | |
| | Electrical Products (1.6%) | |
| 510 | | | Balder Electric Co. | | | 8.625 | | | 02/15/17 | | | 502,350 | | |
| 2,429 | | | Ormat Funding Corp. | | | 8.25 | | | 12/30/20 | | | 2,453,753 | | |
| | | 2,956,103 | | |
| | Environmental Services (0.8%) | |
| 1,530 | | | Allied Waste North America, Inc. | | | 6.375 | | | 04/15/11 | | | 1,507,050 | | |
| | Finance/Rental/Leasing (3.3%) | |
| 340 | | | Capmark Financial Group Inc. - 144A* | | | 5.875 | | | 05/10/12 | | | 230,481 | | |
| 140 | | | Capmark Financial Group Inc. - 144A* | | | 6.30 | | | 05/10/17 | | | 91,754 | | |
| 2,450 | | | Ford Motor Credit Co. LLC | | | 7.00 | | | 10/01/13 | | | 2,012,589 | | |
| 3,605 | | | Ford Motor Credit Co. LLC | | | 7.25 | | | 10/25/11 | | | 3,085,685 | | |
| 995 | | | Residential Capital Corp. | | | 6.375 | | | 06/30/10 | | | 572,125 | | |
| 420 | | | Residential Capital LLC | | | 6.50 | | | 04/17/13 | | | 228,900 | | |
| | | 6,221,534 | | |
| | Financial Conglomerates (1.2%) | |
| 2,780 | | | General Motors Acceptance Corp. | | | 6.875 | | | 09/15/11 | | | 2,269,948 | | |
| | Food Retail (1.8%) | |
| 1,058 | | | CA FM Lease Trust - 144A* | | | 8.50 | | | 07/15/17 | | | 1,216,944 | | |
| 652 | | | Delhaize America, Inc. | | | 9.00 | | | 04/15/31 | | | 793,920 | | |
| 925 | | | Supervalu Inc. | | | 7.50 | | | 05/15/12 | | | 954,739 | | |
| 505 | | | Supervalu Inc. | | | 7.50 | | | 11/15/14 | | | 503,738 | | |
| | | 3,469,341 | | |
See Notes to Financial Statements
10
Morgan Stanley High Yield Securities Inc.
Portfolio of Investments n February 29, 2008 (unaudited) continued
PRINCIPAL AMOUNT IN THOUSANDS | |
| | COUPON RATE | | MATURITY DATE | | VALUE | |
| | Food: Meat/Fish/Dairy (3.1%) | |
$ | 1,310 | | | Michael Foods Inc. | | | 8.00 | % | | 11/15/13 | | $ | 1,267,425 | | |
| 2,140 | | | Pilgrim's Pride Corp. | | | 7.625 | | | 05/01/15 | | | 2,054,400 | | |
| 2,545 | | | Smithfield Foods Inc. | | | 7.00 | | | 08/01/11 | | | 2,494,100 | | |
| | | 5,815,925 | | |
| | Forest Products (0.8%) | |
| 1,520 | | | Crown Americas, Inc. | | | 7.625 | | | 11/15/13 | | | 1,546,600 | | |
| | Gas Distributors (0.6%) | |
| 1,245 | | | DYNEGY Holdings Inc. | | | 7.75 | | | 06/01/19 | | | 1,164,075 | | |
| | Home Building (0.1%) | |
| 170 | | | Pulte Homes, Inc. | | | 6.375 | | | 05/15/33 | | | 132,600 | | |
| | Home Furnishings (0.7%) | |
| 1,565 | | | Jarden Corp. | | | 7.50 | | | 05/01/17 | | | 1,379,156 | | |
| | Hospital/Nursing Management (4.7%) | |
| 1,115 | | | Community Health Systems | | | 8.875 | | | 07/15/15 | | | 1,099,669 | | |
| 1,240 | | | HCA, Inc | | | 6.25 | | | 02/15/13 | | | 1,081,900 | | |
| 1,200 | | | HCA, Inc. | | | 5.75 | | | 03/15/14 | | | 999,000 | | |
| 2,305 | | | HCA, Inc. | | | 6.50 | | | 02/15/16 | | | 1,959,250 | | |
| 80 | | | HCA, Inc. | | | 8.75 | | | 09/01/10 | | | 80,800 | | |
| 210 | | | HCA, Inc. | | | 9.125 | | | 11/15/14 | | | 214,725 | | |
| 930 | | | Sun Healthcare Group Inc. | | | 9.125 | | | 04/15/15 | | | 899,775 | | |
| 2,125 | | | Tenet Healthcare Corp. | | | 7.375 | | | 02/01/13 | | | 1,854,063 | | |
| 615 | | | Tenet Healthcare Corp. | | | 9.875 | | | 07/01/14 | | | 577,331 | | |
| | | 8,766,513 | | |
| | Industrial Specialties (1.6%) | |
| 2,510 | | | Johnsondiversey, Inc. | | | 9.625 | | | 05/15/12 | | | 2,510,000 | | |
| 400 | | | UCAR Finance, Inc. | | | 10.25 | | | 02/15/12 | | | 415,000 | | |
| | | 2,925,000 | | |
| | Information Technology Services (0.4%) | |
| 960 | | | VANGENT INC. | | | 9.625 | | | 02/15/15 | | | 726,000 | | |
| | Integrated Oil (0.2%) | |
| 390 | | | Cimarex Energy Co. | | | 7.125 | | | 05/01/17 | | | 384,150 | | |
| | Major Banks (0.4%) | |
| 635 | | | Reynolds American Inc. | | | 6.50 | | | 07/15/10 | | | 663,780 | | |
| | Media Conglomerates (1.1%) | |
| 2,126 | | | Canwest Media Inc. (Canada) | | | 8.00 | | | 09/15/12 | | | 2,008,604 | | |
See Notes to Financial Statements
11
Morgan Stanley High Yield Securities Inc.
Portfolio of Investments n February 29, 2008 (unaudited) continued
PRINCIPAL AMOUNT IN THOUSANDS | |
| | COUPON RATE | | MATURITY DATE | | VALUE | |
| | Medical Specialties (1.2%) | |
$ | 2,030 | | | Fisher Scientific International, Inc. | | | 6.125 | % | | 07/01/15 | | $ | 2,050,714 | | |
| 290 | | | Invacare Corp. | | | 9.75 | | | 02/15/15 | | | 294,350 | | |
| | | 2,345,064 | | |
| | Medical/Nursing Services (3.6%) | |
| 1,370 | | | DaVita Inc. | | | 6.625 | | | 03/15/13 | | | 1,349,450 | | |
| 1,605 | | | FMC Finance III SA | | | 6.875 | | | 07/15/17 | | | 1,617,038 | | |
| 3,700 | | | Fresenius Medical Care Capital Trust | | | 7.875 | | | 06/15/11 | | | 3,848,000 | | |
| | | 6,814,488 | | |
| | Miscellaneous Commercial Services (1.2%) | |
| 200 | | | Iron Mountain Inc. | | | 7.75 | | | 01/15/15 | | | 201,500 | | |
| 1,990 | | | Iron Mountain Inc. | | | 8.625 | | | 04/01/13 | | | 2,014,875 | | |
| | | 2,216,375 | | |
| | Miscellaneous Manufacturing (0.1%) | |
| 1,470 | | | Propex Fabrics Inc. | | | 10.00 | | | 12/01/12 | | | 183,750 | | |
| | Motor Vehicles (0.4%) | |
| 995 | | | General Motors Corp. (a) | | | 8.375 | | | 07/15/33 | | | 766,150 | | |
| | Oil & Gas Pipelines (4.0%) | |
| 2,890 | | | Colorado Interstate Gas Co. | | | 6.80 | | | 11/15/15 | | | 3,057,658 | | |
| 1,370 | | | Pacific Energy Partners/Finance | | | 7.125 | | | 06/15/14 | | | 1,452,529 | | |
| 2,800 | | | Williams Companies, Inc. (The) | | | 7.875 | | | 09/01/21 | | | 3,066,000 | | |
| | | 7,576,187 | | |
| | Oil & Gas Production (5.1%) | |
| 305 | | | Chaparral Energy, Inc. | | | 8.875 | | | 02/01/17 | | | 262,300 | | |
| 1,910 | | | Chaparral Energy, Inc. | | | 8.50 | | | 12/01/15 | | | 1,633,050 | | |
| 1,955 | | | Chesapeake Energy Corp. | | | 7.50 | | | 09/15/13 | | | 2,018,538 | | |
| 2,245 | | | Hilcorp Energy/Finance - 144A* | | | 7.75 | | | 11/01/15 | | | 2,127,138 | | |
| 2,305 | | | Husky Oil Ltd. (Canada) | | | 8.90 | ** | | 08/15/28 | | | 2,346,893 | | |
| 1,140 | | | Opti Canada Inc. - 144A* (Canada) | | | 8.25 | | | 12/15/14 | | | 1,131,450 | | |
| | | 9,519,369 | | |
| | Oilfield Services/Equipment (1.1%) | |
| 965 | | | CIE Generale de Geophysique S.A. (France) | | | 7.50 | | | 05/15/15 | | | 974,650 | | |
| 1,055 | | | Helix Energy Solutions - 144A* | | | 9.50 | | | 01/15/16 | | | 1,060,275 | | |
| | | 2,034,925 | | |
| | Other Transportation (1.4%) | |
| 2,635 | | | CHC Helicopter Corp. (Canada) | | | 7.375 | | | 05/01/14 | | | 2,628,413 | | |
See Notes to Financial Statements
12
Morgan Stanley High Yield Securities Inc.
Portfolio of Investments n February 29, 2008 (unaudited) continued
PRINCIPAL AMOUNT IN THOUSANDS | |
| | COUPON RATE | | MATURITY DATE | | VALUE | |
| | Pharmaceuticals: Major (0.8%) | |
$ | 1,505 | | | Warner Chilcott Corp. | | | 8.75 | % | | 02/01/15 | | $ | 1,523,813 | | |
| | Precious Metals (0.6%) | |
| 1,040 | | | Freeport-McMoran C & G | | | 8.375 | | | 04/01/17 | | | 1,105,000 | | |
| | Publishing: Books/Magazines (0.7%) | |
| 1,536 | | | Dex Media West/Finance | | | 9.875 | | | 08/15/13 | | | 1,294,080 | | |
| | Pulp & Paper (1.1%) | |
| 1,560 | | | Georgia Pacific Corp. - 144A* | | | 7.125 | | | 01/15/17 | | | 1,458,600 | | |
| 525 | | | Glatfelter (P.H.) | | | 7.125 | | | 05/01/16 | | | 523,688 | | |
| | | 1,982,288 | | |
| | Real Estate Development (0.2%) | |
| 610 | | | Realogy Corp. (a) | | | 10.50 | | | 04/15/14 | | | 436,150 | | |
| | Real Estate Investment Trusts (1.1%) | |
| 2,200 | | | Host Marriott LP (Series O) | | | 6.375 | | | 03/15/15 | | | 2,068,000 | | |
| | Restaurants (0.6%) | |
| 105 | | | Aramark Corp. | | | 6.739 | ** | | 02/01/15 | | | 92,400 | | |
| 320 | | | Aramark Corp. | | | 8.50 | | | 02/01/15 | | | 316,800 | | |
| 750 | | | Aramark Services Inc. | | | 5.00 | | | 06/01/12 | | | 656,250 | | |
| | | 1,065,450 | | |
| | Savings Banks (0.4%) | |
| 900 | | | Washington Mutual Pfd - 144A* | | | 9.75 | | | 10/29/49 | | | 775,150 | | |
| | Semiconductors (0.7%) | |
| 1,685 | | | Freescale Semiconductor | | | 8.875 | | | 12/15/14 | | | 1,381,700 | | |
| | Services to the Health Industry (1.9%) | |
| 575 | | | LVB Acquisition Merger - 144A* | | | 10.375 | | | 10/15/17 | | | 589,375 | | |
| 1,285 | | | National Mentor Holdings Inc. | | | 11.25 | | | 07/01/14 | | | 1,329,975 | | |
| 1,720 | | | Omnicare Inc. | | | 6.75 | | | 12/15/13 | | | 1,539,400 | | |
| 125 | | | Omnicare Inc. | | | 6.875 | | | 12/15/15 | | | 109,688 | | |
| | | 3,568,438 | | |
| | Specialty Stores (1.9%) | |
| 670 | | | Asbury Automotive Group | | | 7.625 | | | 03/15/17 | | | 532,650 | | |
| 2,300 | | | Sonic Automotive, Inc. | | | 8.625 | | | 08/15/13 | | | 2,153,375 | | |
| 990 | | | Penske Auto Group, Inc. | | | 7.75 | | | 12/15/16 | | | 851,400 | | |
| | | 3,537,425 | | |
See Notes to Financial Statements
13
Morgan Stanley High Yield Securities Inc.
Portfolio of Investments n February 29, 2008 (unaudited) continued
PRINCIPAL AMOUNT IN THOUSANDS | |
| | COUPON RATE | | MATURITY DATE | | VALUE | |
| | Specialty Telecommunications (2.6%) | |
$ | 395 | | | American Tower Corp. | | | 7.125 | % | | 10/15/12 | | $ | 406,850 | | |
| 1,920 | | | American Tower Corp. | | | 7.50 | | | 05/01/12 | | | 1,982,400 | | |
| 565 | | | Citizens Communications | | | 6.25 | | | 01/15/13 | | | 522,625 | | |
| 432 | | | Intelsat Corp. | | | 9.00 | | | 08/15/14 | | | 434,160 | | |
| 633 | | | Qwest Communications International | | | 6.565 | ** | | 02/15/09 | | | 631,418 | | |
| 370 | | | Qwest Corp. | | | 5.625 | | | 11/15/08 | | | 370,000 | | |
| 525 | | | Windstream Corp. | | | 8.125 | | | 08/01/13 | | | 526,313 | | |
| | | 4,873,766 | | |
| | Telecommunications (1.6%) | |
| 1,494 | | | Axtel SA (Mexico) | | | 11.00 | | | 12/15/13 | | | 1,643,400 | | |
| 6,394 | | | Exodus Communications, Inc. (b)(c)(f) | | | 11.625 | | | 07/15/10 | | | 0 | | |
| 640 | | | Nordic Tel Company - 144A* (Denmark) | | | 8.875 | | | 05/01/16 | | | 633,600 | | |
| 28,549 | | | Rhythms Netconnections, Inc. (b)(c)(f) | | | 12.75 | | | 04/15/09 | | | 0 | | |
| 13,439 | | | Rhythms Netconnections, Inc. (Series B) (b)(c)(f) | | | 13.50 | | | 05/15/08 | | | 0 | | |
| 4,309 | | | Rhythms Netconnections, Inc. (Series B) (b)(c)(f) | | | 14.00 | | | 02/15/10 | | | 0 | | |
EUR | 530 | | | TDC AS (Denmark) | | | 6.50 | | | 04/19/12 | | | 768,810 | | |
| | | 3,045,810 | | |
| | Water Utilities (0.7%) | |
$ | 1,320 | | | Nalco Co. | | | 7.75 | | | 11/15/11 | | | 1,339,800 | | |
| | Wholesale Distributors (0.9%) | |
| 1,930 | | | RBS Global & Rexnord Corp. | | | 9.50 | | | 08/01/14 | | | 1,746,650 | | |
| | Wireless Telecommunications (0.7%) | |
| 1,320 | | | Wind Acquisition Finance SA - 144A* (Luxembourg) | | | 10.75 | | | 12/01/15 | | | 1,343,100 | | |
| | | | Total Corporate Bonds (Cost $282,916,871) | | | | | | | | | 171,281,113 | | |
| | Convertible Bond (0.4%) | |
| | Telecommunication Equipment | |
| 690 | | | Nortel Networks Corp. (Canada) (Cost $685,507) | | | 4.25 | | | 09/01/08 | | | 685,687 | | |
| | Government Obligation (0.6%) | |
MXN | 10,995 | | | Mexican Fixed Rate Bonds (Cost $1,106,306) | | | 9.50 | | | 12/18/14 | | | 1,138,819 | | |
See Notes to Financial Statements
14
Morgan Stanley High Yield Securities Inc.
Portfolio of Investments n February 29, 2008 (unaudited) continued
PRINCIPAL AMOUNT IN THOUSANDS | |
| | COUPON RATE | | MATURITY DATE | | VALUE | |
| | Collateralized Mortgage Obligations (0.6%) | |
| | Finance/Rental/Leasing | |
$ | 602 | | | American Home Mortgage Assets - 2006-4 1A3 | | | 3.445 | % | | 10/25/46 | | $ | 426,119 | | |
| 707 | | | Countrywide Alternative Loan Trust - 2006-0A21 A3 | | | 3.394 | | | 03/20/47 | | | 505,907 | | |
| 400 | | | Master Adjustable Rate Mortgage Trust - 2007-3 1M2 | | | 4.235 | | | 05/25/47 | | | 196,019 | | |
| | | | Total Collateralized Mortgage Obligations (Cost $1,450,735) | | | | | | | | | 1,128,045 | | |
| | Senior Loans (1.2%) | |
| | Financial Publishing Services (0.5%) | |
| 1,102 | | | First Data Corp. | | | 7.959 | | | 09/24/14 | | | 1,008,547 | | |
| | Medical Specialties (0.1%) | |
| 25 | | | Bausch and Lomb Inc. | | | 6.511 | | | 04/26/15 | | | 23,875 | | |
| 1,175 | | | Bausch and Lomb Inc. | | | 8.268 | | | 04/26/15 | | | 191,000 | | |
| | | 214,875 | | |
| | Oil & Gas Production (0.6%) | |
| 1,175 | | | Sandridge Energy | | | 8.625 | | | 04/01/15 | | | 1,145,625 | | |
| | | | Total Senior Loans (Cost $2,471,133) | | | | | | | | | 2,369,047 | | |
NUMBER OF SHARES | | | |
| |
| | Common Stocks (0.1%) | |
| | Casino/Gaming (e)(f) (0.0%) | |
| 212,312 | | | Fitzgeralds Gaming Corp. + | | | 0 | | |
| | Electric Utilities (0.0%) | |
| 197 | | | PNM Resources Inc. | | | 2,332 | | |
| | Food: Specialty/Candy (d)(e)(f) (0.0%) | |
| 13,317 | | | SFAC New Holdings Inc. ++ | | | 0 | | |
| 2,447 | | | SFFB Holdings Inc. | | | 0 | | |
| | | 0 | | |
| | Restaurants (d)(e)(f) (0.1%) | |
| 10,126 | | | American Restaurant Group Holdings, Inc. (Class A) | | | 81,008 | | |
| 787,160 | | | Catalina Restaurant Group (escrow) | | | 7,872 | | |
| | | 88,880 | | |
See Notes to Financial Statements
15
Morgan Stanley High Yield Securities Inc.
Portfolio of Investments n February 29, 2008 (unaudited) continued
NUMBER OF SHARES | |
| | VALUE | |
| | Specialty Telecommunications (d)(e) (0.0%) | |
| 34,159 | | | Birch Telecom Inc. +++ (f) | | $ | 341 | | |
| 1,448,200 | | | PFB Telecom NV (Series B) (f) | | | 0 | | |
| 8,510 | | | XO Holdings, Inc. | | | 14,042 | | |
| | | 14,383 | | |
| | Telecommunications (d)(e) (0.0%) | |
| 49,597 | | | Viatel Holdings Bermuda Ltd. (Bermuda) | | | 595 | | |
| | Textiles (d)(e)(f) (0.0%) | |
| 2,389,334 | | | U.S. Leather, Inc. | | | 0 | | |
| | Wireless Telecommunications (0.0%) | |
| 5,199 | | | USA Mobility, Inc. (d) | | | 54,590 | | |
| | | | Total Common Stocks (Cost $217,202,884) | | | 160,780 | | |
NUMBER OF WARRANTS | |
| |
| |
| |
| | Warrants (e) (0.0%) | |
| | Casino Gaming (f) (0.0%) | |
| 319,500 | | | Aladdin Gaming Enterprises, Inc. - 144A* | | 03/01/10 | | | 0 | | |
| | Specialty Telecommunications (d) (0.0%) | |
| 17,020 | | | XO Holdings, Inc. (Series A) | | 01/16/10 | | | 2,042 | | |
| 12,768 | | | XO Holdings, Inc. (Series B) | | 01/16/10 | | | 958 | | |
| 12,768 | | | XO Holdings, Inc. (Series C) | | 01/16/10 | | | 702 | | |
| | | 3,702 | | |
| | | | Total Warrants (Cost $15,210) | | | | | 3,702 | | |
NUMBER OF SHARES (000) | | | |
| |
| | Short-Term Investments (4.2%) | |
| | Investment Company (g) (2.8%) | |
| 5,157 | | | Morgan Stanley Institutional Liquidity Money Market Portfolio - Institutional Class*** (Cost $5,157,449) | | | 5,157,449 | | |
See Notes to Financial Statements
16
Morgan Stanley High Yield Securities Inc.
Portfolio of Investments n February 29, 2008 (unaudited) continued
PRINCIPAL AMOUNT IN THOUSANDS | |
| | EXPIRATION DATE | | VALUE VALUE | |
| | Security Purchased from Securities Lending Collateral (i) (1.1%) Repurchase Agreement | |
$ | 2,116 | | | Bear Stearns 1.87% due 03/03/08 (dated 02/29/08; proceeds $2,116,110) (Cost $2,116,000) | | | | | | $ | 2,116,000 | | |
| | U.S. Government Obligation (j) (0.3%) | |
| 560 | | | U.S. Treasury Bills (Cost 558,040) | | | | | | | 558,040 | | |
Total Short-Term Investments (Cost $7,831,489) | | | 7,831,489 | | |
Total Investments (Cost $513,680,135) (h)(k) | | | | | 98.2 | % | | | 184,598,682 | | |
Other Assets in Excess of Liabilities | | | | | 1.8 | | | | 3,468,646 | | |
Net Assets | | | | | 100.0 | % | | $ | 188,067,328 | | |
* Resale is restricted to qualified institutional investors.
** Floating rate security. Rate shown is the rate in effect at February 29, 2008.
*** Includes cash in the amount of $1,031,485 designated as collateral in connection with open swap contracts.
+ Resale is restricted, acquired (12/22/98) at a cost basis of $957,527.
++ Resale is restricted, acquired (06/10/99) at a cost basis of $133.
+++ Resale is restricted, acquired (between 06/18/98 and 05/11/99) at a cost basis of $17,257,340.
† Currently a zero coupon bond and is scheduled to pay interest at the rate shown at a future specified date.
(a) All or a portion of this security was on loan at February 29, 2008.
(b) Issuer in bankruptcy.
(c) Non-income producing security; bond in default.
(d) Acquired through exchange offer.
(e) Non-income producing securities.
(f) Securities with total market value equal to $89,221 have been valued at their fair value as determined in good faith under procedures established by and under general supervision of the Fund's Directors.
(g) See Note 4 to the financial statements regarding investments in Morgan Stanley Institutional Liquidity Money Market Portfolio-Institutional Class.
(h) Securities have been designated as collateral in the amount of 56,292,109 in connection with open forward foreign currency, futures and swap contracts.
(i) Collateralized by federal agency and U.S. Treasury obligations.
(j) This security has been physically segregated in connection with open futures contracts in the amount of $344,760.
(k) The aggregate cost for federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross unrealized appreciation is $2,046,485 and the aggregate gross unrealized depreciation is $331,127,938, resulting in net unrealized depreciation of $329,081,453.
See Notes to Financial Statements
17
Morgan Stanley High Yield Securities Inc.
Portfolio of Investments n February 29, 2008 (unaudited) continued
Futures Contracts Open at February 29, 2008:
NUMBER OF CONTRACTS | | LONG/SHORT | | DESCRIPTION, DELIVERY, MONTH AND YEAR | | UNDERLYING FACE AMOUNT AT VALUE | | UNREALIZED APPRECIATION (DEPRECIATION) | |
| 72 | | | Long | | U.S. Treasury Note 2 Year, June 2008 | | $ | 15,474,375 | | | $ | 105,482 | | |
| 13 | | | Long | | U.S. Treasury Note 5 Year, June 2008 | | | 1,485,250 | | | | 20,449 | | |
| 13 | | | Short | | U.S. Treasury Bond 20 Year, March 2008 | | | (1,555,938 | ) | | | (47,154 | ) | |
| 38 | | | Short | | U.S. Treasury Note 10 Year, March 2008 | | | (4,510,125 | ) | | | (98,075 | ) | |
| 53 | | | Short | | U.S. Treasury Bond 20 Year, June 2008 | | | (6,287,125 | ) | | | (142,242 | ) | |
| 202 | | | Short | | U.S. Treasury Note 10 Year, June 2008 | | | (23,690,813 | ) | | | (451,556 | ) | |
| | | | | | Net Unrealized Depreciation | | | | | | $ | (613,096 | ) | |
Credit Default Swap Contracts Open at February 29, 2008:
SWAP COUNTERPARTY & REFERENCE OBLIGATION | | BUY/SELL PROTECTION | | NOTIONAL AMOUNT (000'S) | | INTEREST RATE | | TERMINATION DATE | | UNREALIZED APPRECIATION (DEPRECIATION) | |
Lehman Brothers Dow Jones Index | | Sell | | $ | 6,500 | | | | 3.75 | % | | December 20, 2012 | | $ | (365,605 | ) | |
Credit Suisse Arrow Electronics, Inc. | | Buy | | | 1,160 | | | | 1.00 | | | March 20, 2015 | | | 20,541 | | |
Credit Suisse Arrow Electronics, Inc. | | Buy | | | 200 | | | | 1.04 | | | March 20, 2018 | | | 5,151 | | |
UBS Securities American Standard, Inc. | | Buy | | | 1,020 | | | | 0.50 | | | March 20, 2013 | | | (2,894 | ) | |
Goldman Sachs International American Standard, Inc. | | Buy | | | 330 | | | | 0.50 | | | March 20, 2013 | | | (936 | ) | |
UBS Securities American Standard, Inc. | | Buy | | | 1,070 | | | | 0.60 | | | March 20, 2018 | | | (6,018 | ) | |
Goldman Sachs International American Standard, Inc. | | Buy | | | 125 | | | | 0.60 | | | March 20, 2018 | | | (703 | ) | |
Goldman Sachs International Avalonbay Communities | | Buy | | | 1,785 | | | | 3.05 | | | March 20, 2013 | | | 0 | | |
Goldman Sachs International Coca-Cola Enterprise, Inc. | | Buy | | | 1,860 | | | | 0.59 | | | March 20, 2013 | | | (1,934 | ) | |
See Notes to Financial Statements
18
Morgan Stanley High Yield Securities Inc.
Portfolio of Investments n February 29, 2008 (unaudited) continued
SWAP COUNTERPARTY & REFERENCE OBLIGATION | | BUY/SELL PROTECTION | | NOTIONAL AMOUNT (000'S) | | INTEREST RATE | | TERMINATION DATE | | UNREALIZED APPRECIATION (DEPRECIATION) | |
Citigroup Global Markets Eaton Corp. | | Buy | | $ | 700 | | | | 0.72 | % | | March 20, 2013 | | $ | 1,551 | | |
Citigroup Global Markets Eaton Corp. | | Buy | | | 855 | | | | 0.62 | | | March 20, 2013 | | | 5,851 | | |
J.P. Morgan Securities Eaton Corp. | | Buy | | | 300 | | | | 0.60 | | | March 20, 2013 | | | 2,331 | | |
Citigroup Global Markets Eaton Corp. | | Buy | | | 1,420 | | | | 0.82 | | | March 20, 2018 | | | 1,366 | | |
Lehman Brothers, Inc. Goodrich (BF) Co. | | Buy | | | 430 | | | | 0.46 | | | March 20, 2018 | | | 10,644 | | |
Lehman Brothers, Inc. Goodrich (BF) Co. | | Buy | | | 600 | | | | 0.45 | | | March 20, 2018 | | | 15,335 | | |
Goldman Sachs International Goodrich (BF) Co. | | Buy | | | 510 | | | | 0.47 | | | March 20, 2018 | | | 12,215 | | |
UBS Securities Martin Marietta Materials | | Buy | | | 430 | | | | 1.78 | | | March 20, 2013 | | | (476 | ) | |
UBS Securities Martin Marietta Materials | | Buy | | | 430 | | | | 1.73 | | | March 20, 2018 | | | (1,038 | ) | |
Credit Suisse Nordstrom, Inc. | | Buy | | | 920 | | | | 1.05 | | | March 20, 2013 | | | 8,808 | | |
Credit Suisse Nordstrom, Inc. | | Buy | | | 1,775 | | | | 1.04 | | | March 20, 2013 | | | 17,801 | | |
J.P. Morgan Securities Nordstrom, Inc. | | Buy | | | 580 | | | | 1.07 | | | March 20, 2018 | | | 13,040 | | |
J.P. Morgan Securities Nordstrom, Inc. | | Buy | | | 580 | | | | 1.15 | | | March 20, 2018 | | | 9,460 | | |
J.P. Morgan Securities Nordstrom, Inc. | | Buy | | | 745 | | | | 1.03 | | | March 20, 2018 | | | 19,048 | | |
J.P. Morgan Securities Pepsi Bottling Group, Inc. | | Buy | | | 640 | | | | 0.63 | | | March 20, 2013 | | | (3,183 | ) | |
Goldman Sachs International Prologis | | Buy | | | 780 | | | | 3.33 | | | March 20, 2013 | | | 0 | | |
Goldman Sachs International Qwest Capital Funding, Inc. | | Sell | | | 515 | | | | 3.25 | | | December 20, 2012 | | | (40,800 | ) | |
J.P. Morgan Securities SLM Corp. | | Sell | | | 525 | | | | 4.95 | | | March 20, 2013 | | | (1,718 | ) | |
Merrill Lynch, Inc. SLM Corp. | | Sell | | | 525 | | | | 5.00 | | | March 20, 2013 | | | (709 | ) | |
See Notes to Financial Statements
19
Morgan Stanley High Yield Securities Inc.
Portfolio of Investments n February 29, 2008 (unaudited) continued
SWAP COUNTERPARTY & REFERENCE OBLIGATION | | BUY/SELL PROTECTION | | NOTIONAL AMOUNT (000'S) | | INTEREST RATE | | TERMINATION DATE | | UNREALIZED APPRECIATION (DEPRECIATION) | |
Goldman Sachs International Sealed Air Corp. | | Buy | | $ | 315 | | | | 1.24 | % | | March 20, 2018 | | $ | 2,684 | | |
Goldman Sachs International Sealed Air Corp. | | Buy | | | 645 | | | | 1.08 | | | March 20, 2018 | | | 13,455 | | |
Credit Suisse Nordstrom, Inc. | | Buy | | | 920 | | | | 1.05 | | | March 20, 2013 | | | 8,808 | | |
Bank of America N.A. Sealed Air Corp. | | Buy | | | 500 | | | | 1.12 | | | March 20, 2018 | | | 8,888 | | |
Bank of America N.A. Sealed Air Corp. | | Buy | | | 350 | | | | 1.08 | | | March 20, 2018 | | | 7,301 | | |
UBS Securities Textron Financial Corp. | | Buy | | | 1,500 | | | | 1.06 | | | March 20, 2013 | | | (12,161 | ) | |
Goldman Sachs International Textron Financial Corp. | | Buy | | | 1,520 | | | | 1.05 | | | March 20, 2013 | | | 61 | | |
UBS Securities Textron Financial Corp. | | Buy | | | 625 | | | | 1.01 | | | March 20, 2013 | | | 1,558 | | |
UBS Securities Textron Financial Corp. | | Buy | | | 845 | | | | 1.00 | | | March 20, 2013 | | | 2,105 | | |
Bank of America N.A. Textron Financial Corp. | | Buy | | | 875 | | | | 0.80 | | | March 20, 2018 | | | 21,311 | | |
UBS Securities Toll Brothers, Inc. | | Buy | | | 1,425 | | | | 2.90 | | | March 20, 2013 | | | 8,754 | | |
Bank of America N.A. Toll Brothers, Inc. | | Buy | | | 930 | | | | 2.90 | | | March 20, 2013 | | | (7,540 | ) | |
Bank of America N.A. Toll Brothers, Inc. | | Buy | | | 465 | | | | 2.25 | | | March 20, 2018 | | | 2,217 | | |
Net Unrealized Deppreciation | | | | | | $(234,239) | |
See Notes to Financial Statements
20
Morgan Stanley High Yield Securities Inc.
Portfolio of Investments n February 29, 2008 (unaudited) continued
Interest Rate Swap Contracts Open at February 29, 2008:
COUNTERPARTY | | NOTIONAL AMOUNT (000'S) | | PAYMENTS RECEIVED BY FUND | | PAYMENTS MADE BY FUND+ | | TERMINATION DATE | | UNREALIZED APPRECIATION (DEPRECIATION) | |
Bank of America N.A. | | $ | 12,585 | | | Fixed Rate 5.550% | | Floating Rate 0.000% | | February 22, 2018 | | $ | 120,438 | | |
Bank of America N.A. | | | 16,060 | | | Floating Rate 0.000 | | Fixed Rate 5.957 | | February 22, 2023 | | | (95,718 | ) | |
Citibank N.A. | | | 13,000 | | | Fixed Rate 5.004 | | Floating Rate 3.243 | | October 31, 2017 | | | 847,340 | | |
JPMorgan Chase Bank N.A. | | | 30,000 | | | Fixed Rate 4.902 | | Floating Rate 3.070 | | November 20, 2017 | | | 1,704,300 | | |
Net Unrealized Appreciation | | | | | | | | | | | | $ | 2,576,360 | | |
+ Floating rate represents USD-3 months LIBOR.
Forward Foreign Currency Contracts Open at February 29, 2008:
CONTRACTS TO DELIVER | | IN EXCHANGE FOR | | DELIVERY DATE | | UNREALIZED DEPRECIATION | |
EUR | 543,000 | | | $ | 799,839 | | | | 4/30/08 | | | $ | (22,804 | ) | |
Currency Abbreviations:
EUR Euro.
MXN Mexican New Peso.
See Notes to Financial Statements
21
Morgan Stanley High Yield Securities Inc.
Financial Statements
Statement of Assets and Liabilities
February 29, 2008 (unaudited)
Assets: | |
Investments in securities, at value (cost $508,522,686) (including $1,947,400 securities loaned) | | $ | 179,441,233 | | |
Investments in affiliate, at value (cost $5,157,449) | | | 5,157,449 | | |
Unrealized appreciation on open swap contracts | | | 2,883,554 | | |
Cash | | | 17,547 | | |
Receivable for: | |
Interest | | | 3,928,451 | | |
Investments sold | | | 1,193,874 | | |
Periodic interest on swap contracts | | | 703,152 | | |
Transfer agent fee | | | 42,164 | | |
Dividends from affiliate | | | 19,009 | | |
Capital stock sold | | | 8,265 | | |
Prepaid expenses and other assets | | | 40,987 | | |
Total Assets | | | 193,435,685 | | |
Liabilities: | |
Collateral on securities loaned at value | | | 2,116,000 | | |
Swap contracts collateral due to brokers | | | 1,031,485 | | |
Unrealized depreciation on open swap contracts | | | 541,433 | | |
Unrealized depreciation on open forward foreign currency contracts | | | 22,804 | | |
Payable for: | |
Variation margin | | | 411,842 | | |
Capital stock redeemed | | | 155,396 | | |
Periodic interest on swap contracts | | | 91,800 | | |
Investment advisory fee | | | 62,214 | | |
Distribution fee | | | 54,810 | | |
Administration fee | | | 11,999 | | |
Accrued expenses and other payables | | | 450,137 | | |
Premium received on swap contracts | | | 418,437 | | |
Total Liabilities | | | 5,368,357 | | |
Net Assets | | $ | 188,067,328 | | |
Composition of Net Assets: | |
Paid-in-capital | | $ | 2,494,051,317 | | |
Net unrealized depreciation | | | (327,371,753 | ) | |
Accumulated undistributed net investment income | | | 2,119,139 | | |
Accumulated net realized loss | | | (1,980,731,375 | ) | �� |
Net Assets | | $ | 188,067,328 | | |
Class A Shares: | |
Net Assets | | $ | 67,639,724 | | |
Shares Outstanding (2,000,000,000 shares authorized, $.01 par value) | | | 39,560,469 | | |
Net Asset Value Per Share | | $ | 1.71 | | |
Maximum Offering Price Per Share, (net asset value plus 4.44% of net asset value) | | $ | 1.79 | | |
Class B Shares: | |
Net Assets | | $ | 53,209,130 | | |
Shares Outstanding (2,000,000,000 shares authorized, $.01 par value) | | | 31,436,206 | | |
Net Asset Value Per Share | | $ | 1.69 | | |
Class C Shares: | |
Net Assets | | $ | 13,507,895 | | |
Shares Outstanding (2,000,000,000 shares authorized, $.01 par value) | | | 7,950,101 | | |
Net Asset Value Per Share | | $ | 1.70 | | |
Class D Shares: | |
Net Assets | | $ | 53,710,579 | | |
Shares Outstanding (2,000,000,000 shares authorized, $.01 par value) | | | 31,505,177 | | |
Net Asset Value Per Share | | $ | 1.70 | | |
See Notes to Financial Statements
22
Morgan Stanley High Yield Securities Inc.
Financial Statements continued
Statement of Operations
For the six months ended February 29, 2008 (unaudited)
Net Investment Income: Income | |
Interest | | $ | 7,843,778 | | |
Dividends from affiliate | | | 124,605 | | |
Income from securities loaned - net | | | 26,530 | | |
Dividends | | | 91 | | |
Total Income | | | 7,995,004 | | |
Expenses | |
Professional fees | | | 522,638 | | |
Investment advisory fee | | | 422,149 | | |
Transfer agent fees and expenses | | | 256,656 | | |
Distribution fee (Class A shares) | | | 86,363 | | |
Distribution fee (Class B shares) | | | 226,251 | | |
Distribution fee (Class C shares) | | | 61,094 | | |
Shareholder reports and notices | | | 102,990 | | |
Administration fee | | | 80,409 | | |
Registration fees | | | 29,639 | | |
Directors' fees and expenses | | | 8,242 | | |
Custodian fees | | | 8,110 | | |
Other | | | 31,702 | | |
Total Expenses | | | 1,836,243 | | |
Less: amounts waived/reimbursed | | | (3,222 | ) | |
Less: expense offset | | | (1,287 | ) | |
Net Expenses | | | 1,831,734 | | |
Net Investment Income | | | 6,163,270 | | |
Realized and Unrealized Gain (Loss): Realized Gain (Loss) on: | |
Investments | | | 3,383,118 | | |
Futures contracts | | | (490,158 | ) | |
Swap contract | | | 524,891 | | |
Foreign exchange transactions | | | (57,846 | ) | |
Net Realized Gain | | | 3,360,005 | | |
Change in Unrealized Appreciation/Depreciation on: | |
Investments | | | (7,138,513 | ) | |
Futures contracts | | | (613,096 | ) | |
Swap contract | | | 2,234,700 | | |
Translation of forward foreign currency contracts, other assets and liabilities denominated in foreign currencies | | | (20,187 | ) | |
Net Change in Unrealized Appreciation/Depreciation | | | (5,537,096 | ) | |
Net Loss | | | (2,177,091 | ) | |
Net Increase | | $ | 3,986,179 | | |
See Notes to Financial Statements
23
Morgan Stanley High Yield Securities Inc.
Financial Statements continued
Statements of Changes in Net Assets
| | FOR THE SIX MONTHS ENDED FEBRUARY 29, 2008 | | FOR THE YEAR ENDED AUGUST 31, 2007 | |
| | (unaudited) | | | |
Increase (Decrease) in Net Assets: Operations: | |
Net investment income | | $ | 6,163,270 | | | $ | 15,501,672 | | |
Net realized gain | | | 3,360,005 | | | | 4,906,322 | | |
Net change in unrealized appreciation/depreciation | | | (5,537,096 | ) | | | (2,692,049 | ) | |
Net Increase | | | 3,986,179 | | | | 17,715,945 | | |
Dividends to Shareholders from Net Investment Income: | |
Class A shares | | | (2,274,709 | ) | | | (4,803,404 | ) | |
Class B shares | | | (1,843,188 | ) | | | (5,631,157 | ) | |
Class C shares | | | (430,379 | ) | | | (1,057,620 | ) | |
Class D shares | | | (1,935,286 | ) | | | (4,454,336 | ) | |
Total Dividends | | | (6,483,562 | ) | | | (15,946,517 | ) | |
Net decrease from capital stock transactions | | | (23,654,742 | ) | | | (73,600,924 | ) | |
Net Decrease | | | (26,152,125 | ) | | | (71,831,496 | ) | |
Net Assets: | |
Beginning of period | | | 214,219,453 | | | | 286,050,949 | | |
End of Period (Including accumulated undistributed net investment income of $2,119,139 and $2,439,431, respectively) | | $ | 188,067,328 | | | $ | 214,219,453 | | |
See Notes to Financial Statements
24
Morgan Stanley High Yield Securities Inc.
Notes to Financial Statements n February 29, 2008 (unaudited)
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 seeks as a primary objective to earn a high level of current income. As a secondary objective, the fund seeks capital appreciation but only to the extent consistent with its primary objective. The Fund was incorporated in Maryland on June 14, 1979 and commenced operations on September 26, 1979. On July 28, 1997, the Fund converted to a multiple class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within eighteen months, 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. Effective March 31, 2008, Class D shares will be renamed Class I shares.
The Fund will assess a 2% redemption fee, on Class A shares, Class B shares, Class C shares, and Class D shares, which is paid directly to the Fund, for shares redeemed or exchanged within thirty days of purchase, subject to certain exceptions. The redemption fee is designed to protect the Fund and its remaining shareholders from the effects of short-term trading.
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 e xchanges, the last reported sale price or the latest bid price may be used if there were no sales on a particular day; (5) credit default/interest rate swaps are marked to market daily based upon quotations from market makers; (6) futures are valued at the latest price published by the commodities exchange on which they trade; (7) when market quotations are not readily available including circumstances under which Morgan Stanley Investment Advisors Inc. (the "Investment Adviser") determines that the latest sale price, the bid price or the mean between the last reported bid and asked price do not reflect a security's market value, portfolio securities are valued at their fair value as
25
Morgan Stanley High Yield Securities Inc.
Notes to Financial Statements n February 29, 2008 (unaudited) continued
determined in good faith under procedures established by and under the general supervision of the Fund's Directors. Occasionally, developments affecting the closing prices of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the foreign market on which the securities trade) and the close of business on the NYSE. If developments occur during such periods that are expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Fund's Directors or by the Investment Adviser using a pricing service and/or procedures approved by the Directors of the Fund; (8) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Directors; (9) investments in open-end mutual funds, includi ng the Morgan Stanley Institutional Liquidity Funds, are valued at the net asset value as of the close of each business day; and (10) 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 and are included in interest income. Interest income is accrued daily except where collection is not expected.
C. 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.
D. Futures Contracts — A futures contract is an agreement between two parties to buy and sell financial instruments or contracts based on financial indices at a set price on a future date. Upon entering into such a contract, the Fund is required to pledge to the broker cash, U.S. Government securities or other liquid portfolio securities equal to the minimum initial margin requirements of the applicable futures exchange. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments known as variation margin are recorded by the Fund as unrealized gains or losses. Upon closing of the contract, the Fund realizes a gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
E. Foreign Currency Translation and Forward Foreign Currency Contracts — The books and records of the Fund are maintained in U.S. dollars as follows: (1) the foreign currency market value of investment
26
Morgan Stanley High Yield Securities Inc.
Notes to Financial Statements n February 29, 2008 (unaudited) continued
securities, other assets and liabilities and forward foreign currency contracts ("forward contracts") are translated at the exchange rates prevailing at the end of the period; and (2) purchases, sales, income and expenses are translated at the exchange rates prevailing on the respective dates of such transactions. The resultant exchange gains and losses are recorded as realized and unrealized gain/loss on foreign exchange transactions. Pursuant to U.S. federal income tax regulations, certain foreign exchange gains/losses included in realized and unrealized gain/loss are included in or are a reduction of ordinary income for federal income tax purposes. The Fund does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the changes in the market prices of the securities held. Forward contracts are valued daily at the appropriate exchange rates. The resultant unreali zed exchange gains and losses are recorded as unrealized foreign currency gain or loss. The Fund records realized gains or losses on delivery of the currency or at the time the forward contract is extinguished (compensated) by entering into a closing transaction prior to delivery.
F. Credit Default Swaps — A credit default swap is an agreement between two parties to exchange the credit risk of an issuer. The Fund may purchase credit protection on the referenced obligation of the credit default swap ("Buy Contract"), or provide credit protection on the referenced obligation of the credit default swap ("Sale Contract"). A buyer of a credit default swap is said to buy protection by paying periodic fees in return for a contingent payment from the seller if the issuer has a credit event such as bankruptcy or a failure to pay outstanding obligations while the swap is outstanding. A seller of a credit default swap is said to sell protection and thus collects the periodic fees and profits if the credit of the issuer remains stable or improves while the swap is outstanding. If a credit event occurs, the seller pays to the buyer an agreed amount, which approximates the notional amount of the swap as disclosed in the table following the Portfolio of Investments. During the term of the swap agreement, the Fund receives or pays periodic fixed payments from or to the respective counterparty calculated at the agreed upon interest rate applied to the notional amount. These periodic payments are accrued daily and recorded as realized gains or losses in the Statement of Operations. In addition, upon termination of the swap contract, gains and losses are also realized. Any upfront payment received or paid by the Fund is recorded as assets/liabilities on the Fund's books. The Fund may pay or receive cash to collateralize credit default swap contracts. This cash collateral is recorded as assets/liabilities on the Fund's books. Any cash received may be invested in Morgan Stanley Institutional Liquidity Fund.
G. Interest Rate Swaps — Interest rate swaps involve the exchange of commitments to pay and receive interest based on a notional principal amount. Net periodic interest payments to be received or paid are accrued daily and are recorded as realized gains or losses in the Statement of Operations. The Fund may pay or receive cash to collateralize interest rate swap contracts. This cash collateral is recorded as assets/liabilities on the Fund's books. Any cash received may be invested in Morgan Stanley Institutional Liquidity Funds.
27
Morgan Stanley High Yield Securities Inc.
Notes to Financial Statements n February 29, 2008 (unaudited) continued
H. Security Lending — The Fund may lend securities to qualified financial institutions, such as broker-dealers, to earn additional income. Any increase or decrease in the fair value of the securities loaned that might occur and any interest earned or dividends declared on those securities during the term of the loan would remain in the Fund. The Fund receives cash or securities as collateral in an amount equal to or exceeding 100% of the current fair value of the loaned securities. The collateral is marked-to-market daily, by the securities lending agent, to ensure that a minimum of 100% collateral coverage is maintained.
Based on pre-established guidelines, the securities lending agent invests any cash collateral that is received in high-quality short-term investments. Securities lending income is generated from the earnings on the invested collateral and borrowing fees, less any rebates owed to the borrowers and compensation to the lending agent.
The value of loaned securities and related collateral outstanding at February 29, 2008 are $1,947,400 and $2,116,000, respectively. The Fund received cash collateral which was subsequently invested in a Repurchase Agreement as reported in the Portfolio of Investments. The Fund has the right under the lending agreement to recover the securities from the borrower on demand.
I. Federal Income Tax Policy — It is the Fund's policy to comply with the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no federal income tax provision is required. The Fund files tax returns with the U.S. Internal Revenue Service, New York State and New York City. The Fund adopted the provisions of the Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48") Accounting for Uncertainty in Income Taxes on February 28, 2008. FIN 48 sets forth a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return. The implementation of FIN 48 did not result in any unrecognized tax benefits in the accompanying financial statements. If applicable, the Fund recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in other expenses in the Statement of Operations. Each of the tax years in the four year period ended February 29, 2008, remains subject to examination by taxing authorities.
J. Dividends and Distributions to Shareholders — Dividends and distributions to shareholders are recorded on the ex-dividend date.
K. 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.
28
Morgan Stanley High Yield Securities Inc.
Notes to Financial Statements n February 29, 2008 (unaudited) continued
2. Investment Advisory/Administration Agreements
Pursuant to an Investment Advisory Agreement, the Fund pays the Investment Adviser an advisory fee, accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined at the close of each business day: 0.42% to the portion of the daily net assets not exceeding $500 million; 0.345% to the portion of the daily net assets exceeding $500 million but not exceeding $750 million; 0.295% to the portion of the daily net assets exceeding $750 million but not exceeding $1 billion; 0.27% to the portion of the daily net assets exceeding $1 billion but not exceeding $2 billion; 0.245% to the portion of the daily net assets exceeding $2 billion but not exceeding $3 billion; and 0.22% to the portion of the daily net assets exceeding $3 billion.
Pursuant to an Administration Agreement with Morgan Stanley Services Company Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund pays an administration fee, accrued daily and payable monthly, by applying the annual rate of 0.08% to the Fund's daily net assets.
Under an agreement between the Administrator and State Street Bank and Trust Company ("State Street"), State Street provides certain administrative services to the Fund. For such services, the Administrator pays State Street a portion of the fee the Administrator receives from the Fund.
3. Plan of Distribution
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Adviser and Administrator. 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 shares; (ii) Class B — up to 0.75% of the average daily net assets of Class B shares; and (iii) Class C — up to 0.85% of the average daily net assets of Class C shares.
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 $63,813,878 at February 29, 2008.
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
29
Morgan Stanley High Yield Securities Inc.
Notes to Financial Statements n February 29, 2008 (unaudited) continued
expenses representing a gross sales credit to Morgan Stanley Financial Advisors and other authorized financial representatives at the time of sale may be reimbursed in the subsequent calendar year. For the six months ended February 29, 2008, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.25% and 0.85%, respectively.
The Distributor has informed the Fund that for the six months ended February 29, 2008 , it received contingent deferred sales charges from certain redemptions of the Fund's Class A shares, Class B shares and Class C shares of $100, $64,626, and $388, respectively and received $3,542 in front-end sales charges from sales of the Fund's Class A shares. The respective shareholders pay such charges which are not an expense of the Fund.
4. Security Transactions and Transactions with Affiliates
The Fund invests in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class, an open-end management investment company managed by the Investment Adviser. Investment advisory fees paid by the Fund are reduced by an amount equal to the advisory and administrative service fees paid by Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class with respect to assets invested by the Fund in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class. For the six months ended February 29, 2008, advisory fees paid were reduced by $3,222 relating to the Fund's investment in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class. Income distributions earned by the Fund are recorded as dividends from affiliate in the Statement of Operations and totaled $124,605 for the six months ended February 29, 2008. During the six months ended February 29, 2008, cost of purchases and sales of investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class aggregated $39,156,735 and $38,465,760, respectively.
The cost of purchases and proceeds from sales of portfolio securities, excluding short-term investments, for the six months ended February 29, 2008, aggregated $19,020,492 and $40,783,649, respectively.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and Distributor, is the Fund's transfer agent.
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. The Directors voted to close the plan to new participants and eliminate the future benefits growth due to increases to compensation after July 31, 2003. Aggregate pension costs for the six months ended February 29, 2008, included in Directors' fees and expenses in the Statement of
30
Morgan Stanley High Yield Securities Inc.
Notes to Financial Statements n February 29, 2008 (unaudited) continued
Operations amounted to $7,491. At February 29, 2008, the Fund had an accrued pension liability of $121,906 which is included in accrued expenses in the Statement of Assets and Liabilities.
The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan") which allows each independent Director to defer payment of all, or a portion, of the fees he or she receives for serving on the Board of Directors. Each eligible Director generally may elect to have the deferred amounts credited with a return equal to the total return on one or more of the Morgan Stanley funds that are offered as investment options under the Compensation Plan. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund.
5. Purposes of and Risks Relating to Certain Financial Instruments
The Fund may enter into forward contracts for many purposes, including to facilitate settlement of foreign currency denominated portfolio transactions or to manage foreign currency exposure associated with foreign currency denominated securities.
To hedge against adverse interest rates, the Fund may purchase and sell interest rate futures contracts ("futures contracts").
Forward and futures contracts involve elements of market risk in excess of the amount reflected in the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the underlying securities or currencies. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts.
The Fund may enter into interest rate swaps and may purchase or sell interest rate caps, floors and collars. The Fund expects to enter into these transactions primarily to manage interest rate risk, hedge portfolio positions and preserve a return or spread on a particular investment or portion of its portfolio. The Fund may also enter into these transactions to protect against any increase in the price of securities the Fund anticipates purchasing at a later date. Interest rate swap transactions are subject to market risk, risk of default by the other party to the transaction, risk of imperfect correlation and manager risk. Such risks may exceed the related amounts shown in the Statement of Assets and Liabilities.
The Fund may enter into credit default swaps for hedging purposes to add leverage to its portfolio or to gain exposure to a credit in which the Fund may otherwise invest. Credit default swaps may involve greater risks than if a fund had invested in the issuer directly. Credit default swaps are subject to general market risk, counterparty risk and credit risk. If the Fund is a buyer and no credit event occurs, it will lose its investment. In addition, if the Fund is a seller and a credit event occurs, the value of the referenced obligation received by the Fund coupled with the periodic payments previously received may be less than the maximum payout amount it pays to the buyer, resulting in a loss to the Fund.
31
Morgan Stanley High Yield Securities Inc.
Notes to Financial Statements n February 29, 2008 (unaudited) continued
The Fund may invest in mortgage securities. These are fixed income securities that derive their value from or represent interests in a pool of mortgages or mortgage securities. An unexpectedly high rate of defaults on the mortgages held by a mortgage pool may adversely affect the value of a mortgage-backed security and could result in losses to a Fund. The risk of such defaults is generally higher in the case of mortgage pools that include sub-prime mortgages. Sub-prime mortgages refer to loans made to borrowers with weakened credit histories or with a lower capacity to make timely payments on their mortgages.
The Fund may lend securities to qualified financial institutions, such as broker-dealers, to earn additional income. Risks in securities lending transactions are that a borrower may not provide additional collateral when required or return the securities when due, and that the value of the short-term investments will be less than the amount of cash collateral plus any rebate that is required to be returned to the borrower.
6. Capital Stock
Transactions in capital stock were as follows:
| | FOR THE SIX MONTHS ENDED FEBRUARY 29, 2008 | | FOR THE YEAR ENDED AUGUST 31, 2007 | |
| | (unaudited) | | | |
| | SHARES | | AMOUNT | | SHARES | | AMOUNT | |
CLASS A SHARES | |
Sold | | | 643,380 | | | $ | 1,125,864 | | | | 1,134,697 | | | $ | 2,039,666 | | |
Conversion from Class B | | | 2,611,501 | | | | 4,520,014 | | | | 11,398,620 | | | | 20,162,979 | | |
Reinvestment of dividends | | | 680,980 | | | | 1,170,047 | | | | 1,165,217 | | | | 2,057,013 | | |
Redeemed | | | (5,738,366 | ) | | | (9,948,087 | ) | | | (15,733,114 | ) | | | (27,875,354 | ) | |
Net decrease — Class A | | | (1,802,505 | ) | | | (3,132,162 | ) | | | (2,034,580 | ) | | | (3,615,696 | ) | |
CLASS B SHARES | |
Sold | | | 431,730 | | | | 740,763 | | | | 870,602 | | | | 1,533,789 | | |
Conversion to Class A | | | (2,639,562 | ) | | | (4,520,014 | ) | | | (11,514,182 | ) | | | (20,162,979 | ) | |
Reinvestment of dividends | | | 542,343 | | | | 923,103 | | | | 1,283,515 | | | | 2,247,697 | | |
Redeemed | | | (6,191,333 | ) | | | (10,627,722 | ) | | | (20,890,903 | ) | | | (36,660,847 | ) | |
Net decrease — Class B | | | (7,856,822 | ) | | | (13,483,870 | ) | | | (30,250,968 | ) | | | (53,042,340 | ) | |
CLASS C SHARES | |
Sold | | | 255,471 | | | | 444,396 | | | | 120,275 | | | | 210,679 | | |
Reinvestment of dividends | | | 144,670 | | | | 247,264 | | | | 279,941 | | | | 491,601 | | |
Redeemed | | | (1,210,869 | ) | | | (2,082,834 | ) | | | (3,115,232 | ) | | | (5,486,855 | ) | |
Net decrease — Class C | | | (810,728 | ) | | | (1,391,174 | ) | | | (2,715,016 | ) | | | (4,784,575 | ) | |
CLASS D SHARES | |
Sold | | | 191,854 | | | | 333,667 | | | | 299,341 | | | | 531,628 | | |
Reinvestment of dividends | | | 744,947 | | | | 1,278,899 | | | | 1,488,251 | | | | 2,623,661 | | |
Redeemed | | | (4,195,376 | ) | | | (7,260,102 | ) | | | (8,669,315 | ) | | | (15,313,602 | ) | |
Net decrease — Class D | | | (3,258,575 | ) | | | (5,647,536 | ) | | | (6,881,723 | ) | | | (12,158,313 | ) | |
Net decrease in Fund | | | (13,728,630 | ) | | $ | (23,654,742 | ) | | | (41,882,287 | ) | | $ | (73,600,924 | ) | |
32
Morgan Stanley High Yield Securities Inc.
Notes to Financial Statements n February 29, 2008 (unaudited) continued
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.
As of August 31, 2007, the Fund had temporary book/tax differences primarily attributable to post-October losses (foreign currency losses incurred after October 31 within the taxable year which are deemed to arise on the first business day of the Fund's next taxable year), interest on bonds in default and book amortization of discounts on debt securities.
8. Expense Offset
The expense offset represents a reduction of the fees and expenses for interest earned on cash balances maintained by the Fund with the transfer agent.
9. Accounting Pronouncement
In September 2006, Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157), was issued and is effective for fiscal years beginning after November 15, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Management is currently evaluating the impact the adoption of SFAS 157 will have on the Fund's financial statement disclosures.
33
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 SIX MONTHS ENDED | | FOR THE YEAR ENDED AUGUST 31, | |
| | FEBRUARY 29, 2008 | | 2007 | | 2006 | | 2005 | | 2004 | | 2003 | |
| | (unaudited) | | | | | | | | | | | |
Class A Shares | |
Selected Per Share Data: | |
Net asset value, beginning of period | | $ | 1.73 | | | $ | 1.73 | | | $ | 1.79 | | | $ | 1.80 | | | $ | 1.67 | | | $ | 1.55 | | |
Income (loss) from investment operations: | |
Net investment income‡ | | | 0.05 | | | | 0.11 | | | | 0.12 | | | | 0.13 | | | | 0.16 | | | | 0.19 | | |
Net realized and unrealized gain (loss) | | | (0.01 | ) | | | 0.00 | | | | (0.06 | ) | | | (0.01 | ) | | | 0.09 | | | | 0.10 | | |
Total income from investment operations | | | 0.04 | | | | 0.11 | | | | 0.06 | | | | 0.12 | | | | 0.25 | | | | 0.29 | | |
Less dividends from net investment income | | | (0.06 | ) | | | (0.11 | ) | | | (0.12 | ) | | | (0.13 | ) | | | (0.12 | ) | | | (0.17 | ) | |
Net asset value, end of period | | $ | 1.71 | | | $ | 1.73 | | | $ | 1.73 | | | $ | 1.79 | | | $ | 1.80 | | | $ | 1.67 | | |
Total Return† | | | 2.15 | %(1) | | | 6.65 | % | | | 3.84 | % | | | 6.84 | % | | | 15.40 | % | | | 19.88 | % | |
Ratios to Average Net Assets(3): | |
Total expenses (before expense offset) | | | 1.70 | %(2)(4) | | | 1.59 | %(4) | | | 1.26 | %(5) | | | 1.12 | % | | | 1.03 | % | | | 1.06 | % | |
Net investment income | | | 6.25 | %(2)(4) | | | 6.25 | %(4) | | | 6.79 | %(5) | | | 7.24 | % | | | 8.98 | % | | | 11.96 | % | |
Supplemental Data: | |
Net assets, end of period, in thousands | | $ | 67,640 | | | $ | 71,664 | | | $ | 75,099 | | | $ | 77,861 | | | $ | 21,595 | | | $ | 38,072 | | |
Portfolio turnover rate | | | 10 | %(1) | | | 26 | % | | | 26 | % | | | 43 | % | | | 51 | % | | | 66 | % | |
‡ The per share amounts were computed using an average number of shares outstanding during the period.
† Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific expenses.
(4) Reflects waivers of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such waivers the expenses as a percentage of its net assets had an effect of less than 0.005%.
(5) If the Fund had borne all its expenses that were reimbursed or waived by the Investment Adviser and Administrator, the annualized expense and net investment income ratios, before expense offset, would have been as follows:
PERIOD ENDED | | EXPENSE RATIO | | NET INVESTMENT INCOME RATIO | |
August 31, 2006 | | | 1.30 | % | | | 6.75 | % | |
See Notes to Financial Statements
34
Morgan Stanley High Yield Securities Inc.
Financial Highlights continued
| | FOR THE SIX MONTHS ENDED | | FOR THE YEAR ENDED AUGUST 31, | |
| | FEBRUARY 29, 2008 | | 2007 | | 2006 | | 2005 | | 2004 | | 2003 | |
| | (unaudited) | | | | | | | | | | | |
Class B Shares | |
Selected Per Share Data: | |
Net asset value, beginning of period | | $ | 1.72 | | | $ | 1.72 | | | $ | 1.77 | | | $ | 1.79 | | | $ | 1.67 | | | $ | 1.55 | | |
Income (loss) from investment operations: | |
Net investment income‡ | | | 0.05 | | | | 0.10 | | | | 0.11 | | | | 0.12 | | | | 0.15 | | | | 0.18 | | |
Net realized and unrealized gain (loss) | | | (0.03 | ) | | | 0.01 | | | | (0.04 | ) | | | (0.02 | ) | | | 0.08 | | | | 0.10 | | |
Total income from investment operations | | | 0.02 | | | | 0.11 | | | | 0.07 | | | | 0.10 | | | | 0.23 | | | | 0.28 | | |
Less dividends from net investment income | | | (0.05 | ) | | | (0.11 | ) | | | (0.12 | ) | | | (0.12 | ) | | | (0.11 | ) | | | (0.16 | ) | |
Net asset value, end of period | | $ | 1.69 | | | $ | 1.72 | | | $ | 1.72 | | | $ | 1.77 | | | $ | 1.79 | | | $ | 1.67 | | |
Total Return† | | | 1.32 | %(1) | | | 6.78 | % | | | 3.34 | % | | | 5.68 | % | | | 14.15 | % | | | 19.27 | % | |
Ratios to Average Net Assets(3): | |
Total expenses (before expense offset) | | | 2.20 | %(2)(4) | | | 2.10 | %(4) | | | 1.77 | %(5) | | | 1.66 | % | | | 1.60 | % | | | 1.61 | % | |
Net investment income | | | 5.75 | %(2)(4) | | | 5.74 | %(4) | | | 6.28 | %(5) | | | 6.70 | % | | | 8.41 | % | | | 11.41 | % | |
Supplemental Data: | |
Net assets, end of period, in thousands | | $ | 53,209 | | | $ | 67,410 | | | $ | 119,288 | | | $ | 205,739 | | | $ | 360,513 | | | $ | 422,468 | | |
Portfolio turnover rate | | | 10 | %(1) | | | 26 | % | | | 26 | % | | | 43 | % | | | 51 | % | | | 66 | % | |
‡ The per share amounts were computed using an average number of shares outstanding during the period.
† Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific expenses.
(4) Reflects waivers of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such waivers the expenses as a percentage of its net assets had an effect of less than 0.005%.
(5) If the Fund had borne all its expenses that were reimbursed or waived by the Investment Adviser and Administrator, the annualized expense and net investment income ratios, before expense offset, would have been as follows:
PERIOD ENDED | | EXPENSE RATIO | | NET INVESTMENT INCOME RATIO | |
August 31, 2006 | | | 1.81 | % | | | 6.24 | % | |
See Notes to Financial Statements
35
Morgan Stanley High Yield Securities Inc.
Financial Highlights continued
| | FOR THE SIX MONTHS ENDED | | FOR THE YEAR ENDED AUGUST 31, | |
| | FEBRUARY 29, 2008 | | 2007 | | 2006 | | 2005 | | 2004 | | 2003 | |
| | (unaudited) | | | | | | | | | | | |
Class C Shares | |
Selected Per Share Data: | |
Net asset value, beginning of period | | $ | 1.72 | | | $ | 1.72 | | | $ | 1.78 | | | $ | 1.80 | | | $ | 1.67 | | | $ | 1.55 | | |
Income (loss) from investment operations: | |
Net investment income‡ | | | 0.05 | | | | 0.10 | | | | 0.11 | | | | 0.12 | | | | 0.15 | | | | 0.18 | | |
Net realized and unrealized gain (loss) | | | (0.02 | ) | | | 0.00 | | | | (0.06 | ) | | | (0.02 | ) | | | 0.09 | | | | 0.10 | | |
Total income from investment operations | | | 0.03 | | | | 0.10 | | | | 0.05 | | | | 0.10 | | | | 0.24 | | | | 0.28 | | |
Less dividends from net investment income | | | (0.05 | ) | | | (0.10 | ) | | | (0.11 | ) | | | (0.12 | ) | | | (0.11 | ) | | | (0.16 | ) | |
Net asset value, end of period | | $ | 1.70 | | | $ | 1.72 | | | $ | 1.72 | | | $ | 1.78 | | | $ | 1.80 | | | $ | 1.67 | | |
Total Return† | | | 1.86 | %(1) | | | 6.04 | % | | | 3.25 | % | | | 5.58 | % | | | 14.65 | % | | | 19.14 | % | |
Ratios to Average Net Assets(3): | |
Total expenses (before expense offset) | | | 2.30 | %(2)(4) | | | 2.20 | %(4) | | | 1.84 | %(5) | | | 1.74 | % | | | 1.70 | % | | | 1.71 | % | |
Net investment income | | | 5.65 | %(2)(4) | | | 5.64 | %(4) | | | 6.21 | %(5) | | | 6.62 | % | | | 8.31 | % | | | 11.31 | % | |
Supplemental Data: | |
Net assets, end of period, in thousands | | $ | 13,508 | | | $ | 15,085 | | | $ | 19,753 | | | $ | 27,378 | | | $ | 37,907 | | | $ | 45,114 | | |
Portfolio turnover rate | | | 10 | %(1) | | | 26 | % | | | 26 | % | | | 43 | % | | | 51 | % | | | 66 | % | |
‡ The per share amounts were computed using an average number of shares outstanding during the period.
† Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific expenses.
(4) Reflects waivers of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such waivers the expenses as a percentage of its net assets had an effect of less than 0.005%.
(5) If the Fund had borne all its expenses that were reimbursed or waived by the Investment Adviser and Administrator, the annualized expense and net investment income ratios, before expense offset, would have been as follows:
PERIOD ENDED | | EXPENSE RATIO | | NET INVESTMENT INCOME RATIO | |
August 31, 2006 | | | 1.88 | % | | | 6.17 | % | |
See Notes to Financial Statements
36
Morgan Stanley High Yield Securities Inc.
Financial Highlights continued
| | FOR THE SIX MONTHS ENDED | | FOR THE YEAR ENDED AUGUST 31, | |
| | FEBRUARY 29, 2008 | | 2007 | | 2006 | | 2005 | | 2004 | | 2003 | |
| | (unaudited) | | | | | | | | | | | |
Class D Shares | |
Selected Per Share Data: | |
Net asset value, beginning of period | | $ | 1.73 | | | $ | 1.73 | | | $ | 1.79 | | | $ | 1.80 | | | $ | 1.68 | | | $ | 1.55 | | |
Income (loss) from investment operations: | |
Net investment income‡ | | | 0.06 | | | | 0.11 | | | | 0.12 | | | | 0.13 | | | | 0.16 | | | | 0.19 | | |
Net realized and unrealized gain (loss) | | | (0.03 | ) | | | 0.01 | | | | (0.05 | ) | | | (0.01 | ) | | | 0.08 | | | | 0.11 | | |
Total income from investment operations | | | 0.03 | | | | 0.12 | | | | 0.07 | | | | 0.12 | | | | 0.24 | | | | 0.30 | | |
Less dividends from net investment income | | | (0.06 | ) | | | (0.12 | ) | | | (0.13 | ) | | | (0.13 | ) | | | (0.12 | ) | | | (0.17 | ) | |
Net asset value, end of period | | $ | 1.70 | | | $ | 1.73 | | | $ | 1.73 | | | $ | 1.79 | | | $ | 1.80 | | | $ | 1.68 | | |
Total Return† | | | 1.69 | %(1) | | | 6.92 | % | | | 4.11 | % | | | 7.04 | % | | | 14.93 | % | | | 20.82 | % | |
Ratios to Average Net Assets(3): | |
Total expenses (before expense offset) | | | 1.45 | %(2)(4) | | | 1.35 | %(4) | | | 1.01 | %(5) | | | 0.91 | % | | | 0.85 | % | | | 0.86 | % | |
Net investment income | | | 6.50 | %(2)(4) | | | 6.48 | %(4) | | | 7.04 | %(5) | | | 7.45 | % | | | 9.16 | % | | | 12.16 | % | |
Supplemental Data: | |
Net assets, end of period, in thousands | | $ | 53,711 | | | $ | 60,060 | | | $ | 71,911 | | | $ | 124,556 | | | $ | 154,639 | | | $ | 175,471 | | |
Portfolio turnover rate | | | 10 | %(1) | | | 26 | % | | | 26 | % | | | 43 | % | | | 51 | % | | | 66 | % | |
‡ The per share amounts were computed using an average number of shares outstanding during the period.
† Calculated based on the net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific expenses.
(4) Reflects waivers of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such waivers the expenses as a percentage of its net assets had an effect of less than 0.005%.
(5) If the Fund had borne all its expenses that were reimbursed or waived by the Investment Adviser and Administrator, the annualized expense and net investment income ratios, before expense offset, would have been as follows:
PERIOD ENDED | | EXPENSE RATIO | | NET INVESTMENT INCOME RATIO | |
August 31, 2006 | | | 1.05 | % | | | 7.00 | % | |
See Notes to Financial Statements
37
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Directors
Frank L. Bowman
Michael Bozic
Kathleen A. Dennis
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent
W. Allen Reed
Fergus Reid
Officers
Michael E. Nugent
Chairperson of the Board
Ronald E. Robison
President and Principal Executive Officer
J. David Germany
Vice President
Dennis F. Shea
Vice President
Amy R. Doberman
Vice President
Carsten Otto
Chief Compliance Officer
Stefanie V. Chang Yu
Vice President
Francis J. Smith
Treasurer and Chief Financial Officer
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
Legal Counsel
Clifford Chance US LLP
31 West 52nd Street
New York, NY 10019
Counsel to the Independent Directors
Kramer Levin Naftalis & Frankel LLP
1177 Avenue of the Americas
New York, NY 10036
Investment Adviser
Morgan Stanley Investment Advisors Inc.
522 Fifth Avenue
New York, New York 10036
The financial statements included herein have been taken from the records of the Fund without examination by the independent auditors and accordingly they do not express an opinion thereon.
This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its directors. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the Prospectus carefully before investing.
Morgan Stanley Distributors Inc., member FINRA.
© 2008 Morgan Stanley
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HYLSAN
IU08–02226P–Y02/08
MORGAN STANLEY FUNDS
Morgan Stanley
High Yield Securities Inc.
Semiannual Report
February 29, 2008
![](https://capedge.com/proxy/N-CSRS/0001104659-08-031618/j08101422_za002.jpg)
Item 2. Code of Ethics.
Not applicable for semiannual reports.
Item 3. Audit Committee Financial Expert.
Not applicable for semiannual reports.
Item 4. Principal Accountant Fees and Services
Not applicable for semiannual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable for semiannual reports.
Item 6.
Refer to Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable for semiannual reports.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports filed by closed-end funds.
Item 9. Closed-End Fund Repurchases
Applicable to reports filed by closed-end funds.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
(a) The Fund’s principal executive officer and principal financial officer have concluded that the Fund’s disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, based upon such officers’ evaluation of these controls and procedures as of a date within 90 days of the filing date of the report.
(b) There were no changes in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Item 12. Exhibits
(a) Code of Ethics – Not applicable for semiannual reports.
(b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley High Yield Securities Inc.
/s/ Ronald E. Robison | |
Ronald E. Robison | |
Principal Executive Officer | |
April 17, 2008 | |
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 | |
April 17, 2008 | |
| |
/s/ Francis Smith | |
Francis Smith | |
Principal Financial Officer | |
April 17, 2008 | |