AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 30, 2002
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [X]
---------------------
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. [ ]
---------------------
MORGAN STANLEY
HIGH YIELD SECURITIES INC.
(Exact Name of Registrant as Specified in Charter)
(formerly named Morgan Stanley Dean Witter High Yield Securities Inc.)
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(Address of Principal Executive Offices)
---------------------
(Registrant's Telephone Number)
BARRY FINK, ESQ.
1221 Avenue of the Americas
New York, New York 10020
(Name and Address of Agent for Service)
---------------------
COPY TO:
STUART M. STRAUSS, ESQ.
Mayer, Brown, Rowe & Maw
1675 Broadway
New York, New York 10019
---------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of this Registration statement.
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
The Exhibit Index is located on page [ ].
PURSUANT TO RULE 429, THIS REGISTRATION STATEMENT RELATES TO SHARES
PREVIOUSLY REGISTERED BY THE REGISTRANT ON FORM N-1A (REGISTRATION NOS.
2-64782; 811-2932).
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FORM N-14
MORGAN STANLEY HIGH YIELD SECURITIES INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(A) UNDER THE SECURITIES ACT OF 1933
PART A OF FORM N-14 ITEM NO. PROXY STATEMENT AND PROSPECTUS HEADING
- ------------------------------ ----------------------------------------------------------
1 (a) ........................ Cross Reference Sheet
(b) ........................ Front Cover Page
(c) ........................ *
2 (a) ........................ Available Information Back Cover Page
(b) ........................ Table of Contents
3 (a) ........................ Fee Table
(b) ........................ Synopsis
(c) ........................ Principal Risk Factors
4 (a) ........................ The Reorganization
(b) ........................ The Reorganization -- Capitalization Table (Unaudited)
5 (a) ........................ Registrant's Prospectus
(b) ........................ *
(c) ........................ *
(e) ........................ Available Information
(f) ........................ Available Information
6 (a) ........................ Front Cover Page, Introduction Synopsis, Principal Risk
Factors, Comparison of Investment Objectives, Policies
and Restrictions, Additional Matters Regarding
Morgan Stanley High Income Advantage Trust, Additional
Information About Morgan Stanley High Income
Advantage Trust and Morgan Stanley High Yield Securities
Inc., Available Information
(b) ........................ Available Information
(c) ........................ *
(d) ........................ *
7 (a) ........................ Introduction -- General, Record Date; Share Information,
Expenses of Solicitation, Proxies, Vote Required
(b) ........................ *
(c) ........................ Introduction; The Reorganization -- Appraisal Rights
8 (a) ........................ The Reorganization
(b) ........................ *
9 ........................... *
PART B OF FORM N-14 ITEM NO. STATEMENT OF ADDITIONAL INFORMATION HEADING
- ------------------------------- ----------------------------------------------------------
10 (a) ....................... Cover Page
(b) ....................... *
11 .......................... Table of Contents
12 (a) ....................... Additional Information about Morgan Stanley High Yield
Securities Inc.
(b) ....................... *
(c) ....................... *
13 (a) ....................... *
(b) ....................... Additional Information about Morgan Stanley High Income
Advantage Trust
(c) ....................... *
14 .......................... Registrant's Annual Report for the fiscal year ended
August 31, 2002 and Registrant's Semi-Annual Report for
the six months ended February 28, 2002. Morgan Stanley
High Income Advantage Trust's Annual Report for the
fiscal year ended September 30, 2001 and Semi-Annual
Report for the six months ended March 31, 2002.
PART C OF FORM N-14 ITEM NO. OTHER INFORMATION HEADING
- ------------------------------- ----------------------------------------------------------
15 ........................... Indemnification
16 ........................... Exhibits
17 ........................... Undertakings
- ----------
* Not Applicable or negative answer
MORGAN STANLEY HIGH INCOME ADVANTAGE TRUST
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(800) 869-NEWS
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 10, 2002
TO THE SHAREHOLDERS OF MORGAN STANLEY HIGH INCOME ADVANTAGE TRUST
Notice is hereby given of a Special Meeting of the Shareholders of Morgan
Stanley High Income Advantage Trust ("HIAT"), to be held at 1221 Avenue of the
Americas, New York, New York 10020, at A.M., Eastern time, on December 10,
2002, and any adjournments thereof (the "Meeting"), for the following purposes:
1. To consider and vote upon an Agreement and Plan of Reorganization, dated
July 25, 2002 (the "Reorganization Agreement"), between HIAT and Morgan
Stanley High Yield Securities Inc. ("High Yield"), pursuant to which
substantially all of the assets of HIAT would be combined with those of
High Yield and shareholders of HIAT would become shareholders of High Yield
receiving Class D shares of High Yield with a value equal to the net asset
value of their holdings in HIAT (the "Reorganization"); and
2. To act upon such other matters as may properly come before the Meeting.
The Reorganization is more fully described in the accompanying Proxy
Statement and Prospectus and a copy of the Reorganization Agreement is attached
as Exhibit A thereto. Shareholders of record at the close of business on
September 9, 2002 are entitled to notice of, and to vote at, the Meeting.
Please read the Proxy Statement and Prospectus carefully before telling us,
through your proxy or in person, how you wish your shares to be voted.
Alternatively, if you are eligible to vote telephonically by touchtone
telephone or electronically on the Internet (as discussed in the enclosed Proxy
Statement) you may do so in lieu of attending the Meeting in person. THE BOARD
OF TRUSTEES OF HIAT RECOMMENDS YOU VOTE IN FAVOR OF THE REORGANIZATION. WE URGE
YOU TO SIGN, DATE AND MAIL THE ENCLOSED PROXY PROMPTLY.
By Order of the Board of Trustees,
BARRY FINK
Secretary
, 2002
YOU CAN HELP AVOID THE NECESSITY AND EXPENSE OF SENDING FOLLOW-UP LETTERS TO
ENSURE A QUORUM BY PROMPTLY RETURNING THE ENCLOSED PROXY. IF YOU ARE UNABLE
TO BE PRESENT IN PERSON, PLEASE FILL IN, SIGN AND RETURN THE ENCLOSED PROXY
IN ORDER THAT THE NECESSARY QUORUM BE REPRESENTED AT THE MEETING. THE
ENCLOSED ENVELOPE REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. AS
DISCUSSED IN THE ENCLOSED PROXY STATEMENT CERTAIN SHAREHOLDERS WILL BE ABLE
TO VOTE TELEPHONICALLY BY TOUCHTONE TELEPHONE OR ELECTRONICALLY ON THE
INTERNET BY FOLLOWING INSTRUCTIONS ON THEIR PROXY CARDS OR ON THE ENCLOSED
VOTING INFORMATION CARD.
MORGAN STANLEY HIGH YIELD SECURITIES INC.
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(800) 869-NEWS
ACQUISITION OF THE ASSETS OF
MORGAN STANLEY HIGH INCOME ADVANTAGE TRUST
BY AND IN EXCHANGE FOR CLASS D SHARES OF
MORGAN STANLEY HIGH YIELD SECURITIES INC.
This Proxy Statement and Prospectus is being furnished to shareholders of
Morgan Stanley High Income Advantage Trust ("HIAT"), in connection with an
Agreement and Plan of Reorganization, dated July 25, 2002 (the "Reorganization
Agreement"), pursuant to which substantially all the assets of HIAT, a
closed-end management investment company, will be combined with those of Morgan
Stanley High Yield Securities Inc. ("High Yield"), an open-end management
investment company, in exchange for Class D shares of High Yield (the
"Reorganization"). As a result of this transaction, shareholders of HIAT will
become shareholders of High Yield and will receive Class D shares of High Yield
with a value equal to the net asset value of their holdings in HIAT. The terms
and conditions of this transaction are more fully described in this Proxy
Statement and Prospectus and in the Reorganization Agreement between HIAT and
High Yield, attached hereto as Exhibit A. The address of HIAT is that of High
Yield set forth above. This Proxy Statement also constitutes a Prospectus of
High Yield, which is dated , 2002, filed by High Yield with the
Securities and Exchange Commission (the "Commission") as part of its
Registration Statement on Form N-14 (the "Registration Statement").
High Yield is an open-end diversified management investment company whose
primary investment objective is 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 seeks to achieve its objective
by investing at least 80% of its assets in fixed-income securities rated lower
than Baa by Moody's Investors Service or lower than BBB by Standard & Poor's
Corporation or in non-rated securities considered by the fund's investment
manager, Morgan Stanley Investment Advisors Inc., to be appropriate investments
for the fund.
This Proxy Statement and Prospectus sets forth concisely information about
High Yield that shareholders of HIAT should know before voting on the
Reorganization Agreement. A copy of the Prospectus for High Yield dated ,
is attached as Exhibit B and incorporated herein by reference. Also enclosed
and incorporated herein by reference is High Yield's Annual Report for the
fiscal year ended August 31, 2002 and the preceding Semi-Annual Report for the
six months ended February 28, 2002. A Statement of Additional Information
relating to the Reorganization, described in this Proxy Statement and
Prospectus (the "Additional Statement"), dated September , 2002, has been
filed with the Commission and is also incorporated herein by reference. Also
incorporated herein by reference is HIAT's Annual Report for its fiscal year
ended September 30, 2001 and the succeeding Semi-Annual Report for the six
months ended March 31, 2002. Such documents are available without charge by
calling (800) 869-NEWS (toll free).
Investors are advised to read and retain this Proxy Statement and Prospectus
for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROXY STATEMENT AND PROSPECTUS IS DATED SEPTEMBER , 2002.
TABLE OF CONTENTS
PROXY STATEMENT AND PROSPECTUS
PAGE
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INTRODUCTION ............................................................................ 1
General .............................................................................. 1
Record Date; Share Information ....................................................... 1
Proxies .............................................................................. 2
Expenses of Solicitation ............................................................. 3
Vote Required ........................................................................ 3
SYNOPSIS ................................................................................ 4
The Reorganization ................................................................... 4
Fee Table ............................................................................ 4
Example .............................................................................. 5
Tax Consequences of the Reorganization ............................................... 6
Reasons for the Reorganization ....................................................... 6
Comparison of HIAT and High Yield .................................................... 6
PRINCIPAL RISK FACTORS .................................................................. 8
THE REORGANIZATION ...................................................................... 9
The Board's Consideration ............................................................ 9
The Reorganization Agreement ......................................................... 11
Tax Aspects of the Reorganization .................................................... 12
Tax Consequences of the Reorganization to HIAT and High Yield......................... 13
Description of Shares of High Yield and HIAT and the Organization of the Two Funds ... 14
Capitalization Table (unaudited) ..................................................... 15
Appraisal Rights ..................................................................... 16
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS .......................... 16
Investment Objectives and Policies ................................................... 16
Investment Restrictions .............................................................. 17
ADDITIONAL MATTERS REGARDING HIAT ....................................................... 19
History of Public Trading of HIAT's Shares ........................................... 19
Investment Manager ................................................................... 19
Portfolio Management ................................................................. 20
Expenses Borne by HIAT ............................................................... 20
ADDITIONAL INFORMATION ABOUT HIAT AND HIGH YIELD ........................................ 21
General .............................................................................. 21
Financial Information ................................................................ 21
Management ........................................................................... 21
Description of Securities and Shareholder Inquiries .................................. 21
Custodian and Transfer Agent and Dividend Paying Agent ............................... 21
Dividends, Distributions and Taxes ................................................... 22
Purchases and Redemptions ............................................................ 22
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE ............................................. 22
FINANCIAL STATEMENTS AND EXPERTS ........................................................ 22
LEGAL MATTERS ........................................................................... 22
AVAILABLE INFORMATION ................................................................... 22
OTHER BUSINESS .......................................................................... 23
Exhibit A -- Agreement and Plan of Reorganization, dated July 25, 2002, by and between
HIAT and High Yield
Exhibit B -- Prospectus of High Yield dated
MORGAN STANLEY HIGH INCOME ADVANTAGE TRUST
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(800) 869-NEWS
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PROXY STATEMENT AND PROSPECTUS
--------------------
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 10, 2002
INTRODUCTION
GENERAL
This Proxy Statement and Prospectus is being furnished to the shareholders
of the Morgan Stanley High Income Advantage Trust ("HIAT"), a closed-end
diversified management investment company, in connection with the solicitation
by the Board of Trustees of HIAT (the "Board") of proxies to be used at the
Special Meeting of Shareholders of HIAT to be held at 1221 Avenue of the
Americas, New York, New York 10020 at A.M., Eastern time, on December 10,
2002, and any adjournments thereof (the "Meeting"). It is expected that the
mailing of this Proxy Statement and Prospectus will be made on or about
September , 2002.
At the Meeting, HIAT shareholders ("Shareholders") will consider and vote
upon an Agreement and Plan of Reorganization, dated July 25, 2002 (the
"Reorganization Agreement"), between HIAT and Morgan Stanley High Yield
Securities Inc. ("High Yield") pursuant to which substantially all of the
assets of HIAT will be combined with those of High Yield in exchange for Class
D shares of High Yield. As a result of this transaction, Shareholders will
become shareholders of High Yield and will receive Class D shares of High Yield
equal to the net asset value of their holdings in HIAT on the closing date of
such transaction (the "Reorganization"). The Class D shares to be issued by
High Yield pursuant to the Reorganization (the "High Yield Shares") will be
issued at net asset value and will not be subject to any sales charge. Further
information relating to High Yield is set forth herein and in High Yield's
current Prospectus, dated ("High Yield's Prospectus"), attached to this
Proxy Statement and Prospectus and incorporated herein by reference.
The information concerning HIAT contained herein has been supplied by HIAT
and the information concerning High Yield contained herein has been supplied by
High Yield.
RECORD DATE; SHARE INFORMATION
The Board has fixed the close of business on September 9, 2002 as the
record date (the "Record Date") for the determination of the Shareholders
entitled to notice of, and to vote at, the Meeting. As of the Record Date,
there were shares of HIAT issued and outstanding. There are no HIAT shares
held by HIAT. Shareholders on the Record Date are entitled to one vote per
share on each matter submitted to a vote at the Meeting. A majority of the
outstanding shares entitled to vote, represented in person or by proxy, will
constitute a quorum at the Meeting.
[No persons were known to own of record or beneficially 5% or more of the
outstanding shares of HIAT as of the Record Date although from time to time,
the number of shares held in "street name" accounts of
1
various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total outstanding shares of HIAT.
As of the Record Date, the trustees and officers of HIAT, as a group, owned
less than 1% of the outstanding shares of HIAT.]
[The following persons were known to own of record or beneficially 5% or
more of the outstanding shares of a Class of High Yield as of the Record Date:
Class A -- . Class B -- . Class C -- . Class D --
. As of the Record Date, the trustees and officers of High Yield, as a
group, owned less than 1% of the outstanding shares of High Yield.]
PROXIES
The enclosed form of proxy, if properly executed and returned, will be
voted in accordance with the choice specified thereon. The proxy will be voted
in favor of the Reorganization Agreement unless a choice is indicated to vote
against or to abstain from voting on the Reorganization Agreement. The Board
knows of no business, other than that set forth in the Notice of Special
Meeting of Shareholders, to be presented for consideration at the Meeting.
However, the proxy confers discretionary authority upon the persons named
therein to vote as they determine on other business, not currently
contemplated, which may come before the Meeting. Abstentions and, if
applicable, broker "non-votes" will not count as votes in favor of the
Reorganization Agreement, and broker "non-votes" will not be deemed to be
present at the meeting for purposes of determining whether the Reorganization
Agreement has been approved. Broker "non-votes" are shares held in street name
for which the broker indicates that instructions have not been received from
the beneficial owners or other persons entitled to vote and for which the
broker does not have discretionary voting authority. If a Shareholder executes
and returns a proxy but fails to indicate how the votes should be cast, the
proxy will be voted in favor of the Reorganization Agreement. The proxy may be
revoked at any time prior to the voting thereof by: (i) delivering written
notice of revocation to the Secretary of HIAT at 1221 Avenue of the Americas,
New York, New York 10020; (ii) attending the Meeting and voting in person; or
(iii) completing and returning a new proxy (whether by mail or, as discussed
below, by touchtone telephone or the Internet) (if returned and received in
time to be voted). Attendance at the Meeting will not in and of itself revoke a
proxy.
In the event that the necessary quorum to transact business or the vote
required to approve or reject the Reorganization Agreement is not obtained at
the Meeting, the persons named as proxies may propose one or more adjournments
of the Meeting to permit further solicitation of proxies. Any such adjournment
will require the affirmative vote of the holders of a majority of shares of
HIAT present in person or by proxy at the Meeting. The persons named as proxies
will vote in favor of such adjournment those proxies which they are entitled to
vote in favor of the Reorganization Agreement and will vote against any such
adjournment those proxies required to be voted against the Reorganization
Agreement.
Shareholders will be able to vote their shares by touchtone telephone or
by Internet by following the instructions on the proxy card or on the Voting
Information Card accompanying this Proxy Statement and Prospectus. To vote by
Internet or by telephone, Shareholders can access the website or call the
toll-free number listed on the proxy card or noted in the enclosed voting
instructions. To vote by Internet or by telephone, Shareholders will need the
"control number" that appears on the proxy card.
In certain instances, Morgan Stanley Trust ("MS Trust"), an affiliate of
Morgan Stanley Investment Advisors Inc. ("MS Advisors" or the "Investment
Manager"), Alamo Direct Mail Services Inc. ("Alamo") or
2
D.F. King & Co. Inc. ("D.F. King") may call Shareholders to ask if they would
be willing to have their votes recorded by telephone. The telephone voting
procedure is designed to authenticate Shareholders' identities, to allow
Shareholders to authorize the voting of their shares in accordance with their
instructions and to confirm that their instructions have been recorded
properly. No recommendation will be made as to how a Shareholder should vote on
the Reorganization Agreement other than to refer to the recommendation of the
Board. HIAT has been advised by counsel that these procedures are consistent
with the requirements of applicable law. Shareholders voting by telephone in
this manner will be asked for their social security number or other identifying
information and will be given an opportunity to authorize proxies to vote their
shares in accordance with their instructions. To ensure that the Shareholders'
instructions have been recorded correctly, they will receive a confirmation of
their instructions in the mail. A special toll-free number set forth in the
confirmation will be available in case the information contained in the
confirmation is incorrect. Although a Shareholder's vote may be taken by
telephone, each Shareholder will receive a copy of this Proxy Statement and
Prospectus and may vote by mail using the enclosed proxy card or by touchtone
telephone or the Internet as set forth above. The last proxy vote received in
time to be voted, whether by proxy card, touchtone telephone or Internet, will
be the last vote that is counted and will revoke all previous votes by the
Shareholder.
EXPENSES OF SOLICITATION
The expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement and Prospectus, are expected to approximate $
and will be borne by HIAT. HIAT and High Yield will bear all of their
respective other expenses associated with the Reorganization. In addition to
the solicitation of proxies by mail, proxies may be solicited by officers of
HIAT, and officers and regular employees of MS Advisors and MS Trust, Morgan
Stanley Services Company Inc. ("MS Services") and/or Morgan Stanley DW Inc.
("Morgan Stanley DW"), affiliates of MS Advisors, personally or by mail,
telephone, telegraph or otherwise, without compensation therefor. In addition,
HIAT may retain D.F. King as proxy solicitor, at a cost to HIAT of
approximately $ plus reimbursement of reasonable expenses. In addition, HIAT
will employ Alamo to make telephone calls to Shareholders to remind them to
vote. Brokerage houses, banks and other fiduciaries may be requested to forward
soliciting material to the beneficial owners of shares and to obtain
authorization for the execution of proxies. With respect to the solicitation of
a telephonic vote by D.F. King, additional expenses would include [$7.00] per
telephone vote transacted, [$3.00] per outbound telephone contact and costs
relating to obtaining Shareholders' telephone numbers, and, with respect to
Alamo, expenses would be approximately $1.00 per outbound telephone contact,
which would be borne by HIAT.
VOTE REQUIRED
Approval of the Reorganization Agreement by the Shareholders requires the
vote of a majority of the outstanding shares of HIAT which means an affirmative
vote of the lesser of (1) a majority of the outstanding shares of HIAT, or (2)
67% or more of the shares of HIAT represented at the Meeting if more than 50%
of the outstanding shares of HIAT are present or represented by proxy. If the
Reorganization Agreement is not approved by Shareholders, HIAT will continue in
existence and the Board will consider alternative actions.
3
SYNOPSIS
The following is a synopsis of certain information contained in or
incorporated by reference in this Proxy Statement and Prospectus. This synopsis
is only a summary and is qualified in its entirety by the more detailed
information contained or incorporated by reference in this Proxy Statement and
Prospectus and the Reorganization Agreement. Shareholders should carefully
review this Proxy Statement and Prospectus and Reorganization Agreement in
their entirety and, in particular, High Yield's Prospectus, which is attached
to this Proxy Statement and incorporated herein by reference.
THE REORGANIZATION
The Reorganization Agreement provides for the transfer of substantially
all the assets of HIAT, subject to stated liabilities, to High Yield in
exchange for the High Yield Shares. The aggregate net asset value of the High
Yield Shares issued in the exchange will equal the aggregate value of the net
assets of HIAT received by High Yield. On or after the closing date of the
Reorganization, currently anticipated to be December , 2002, (the "Closing
Date"), HIAT will distribute the High Yield Shares received by HIAT to
Shareholders as of the Valuation Date (as defined below under "The
Reorganization Agreement") in complete liquidation of HIAT and HIAT will
thereafter be de-registered as an investment company under the Investment
Company Act of 1940, as amended (the "1940 Act") and dissolved under
Massachusetts law. As a result of the Reorganization, each Shareholder will
receive that number of full and fractional High Yield Shares equal in value to
such Shareholder's pro rata interest in the net assets of HIAT transferred to
High Yield. Accordingly, as a result of the Reorganization, each Shareholder of
HIAT will become a holder of Class D shares of High Yield. Shareholders holding
their shares of HIAT in certificate form will be asked to surrender their
certificates in connection with the Reorganization. Shareholders who do not
surrender their certificates prior to the Closing Date will still receive their
shares of High Yield; however, such Shareholders will not be able to redeem,
transfer or exchange the High Yield Shares received until the old certificates
have been surrendered. The Board has determined that the interests of
Shareholders will not be diluted as a result of the Reorganization.
FOR THE REASONS SET FORTH BELOW UNDER "THE REORGANIZATION -- THE BOARD'S
CONSIDERATION," THE BOARD, INCLUDING THE TRUSTEES WHO ARE NOT "INTERESTED
PERSONS" OF HIAT ("INDEPENDENT TRUSTEES"), AS THAT TERM IS DEFINED IN THE 1940
ACT, HAS CONCLUDED THAT THE REORGANIZATION IS IN THE BEST INTERESTS OF HIAT AND
ITS SHAREHOLDERS AND RECOMMENDS APPROVAL OF THE REORGANIZATION AGREEMENT.
FEE TABLE
HIAT and High Yield each pay a variety of expenses for management of their
assets, distribution of their shares (High Yield) and other services, and those
expenses are reflected in the net asset value per share of each fund. Class D
shares of High Yield do not pay distribution-related fees; however, the other
three Classes offered by High Yield pay fees for the distribution of their
shares. The following table briefly describes the fees and expenses that a
shareholder of HIAT and a Class D shareholder of High Yield may pay if they buy
and hold shares of each respective fund. These expenses are deducted from each
respective fund's assets and are based on expenses paid by HIAT for its fiscal
year ended September 30, 2001 and on expenses paid by Class D shares of High
Yield for its fiscal year ended August 31, 2002. The table also sets forth pro
forma fees for the surviving combined fund (High Yield) reflecting what the fee
schedule would have been on August 31, 2002, if the Reorganization had been
consummated twelve (12) months prior to that date and assuming Class D fees and
expenses.
4
Shareholder Fees
- -------------------------------------------------------
PRO FORMA
COMBINED
HIGH YIELD HIGH YIELD
HIAT (CLASS D) (CLASS D)
--------- ------------ -----------
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON PURCHASES
(AS A PERCENTAGE OF OFFERING PRICE) .................. none(1) none none
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON REINVESTED
DIVIDENDS ............................................ none none none
MAXIMUM CONTINGENT DEFERRED SALES CHARGE (LOAD) (AS A
PERCENTAGE OF THE LESSER OF ORIGINAL PURCHASE PRICE OR
REDEMPTION PROCEEDS) ................................. none none none
REDEMPTION FEES ....................................... none(1) none none
EXCHANGE FEE .......................................... none none none
- ----------
(1) Purchases and sales of HIAT are made on the New York Stock Exchange or
otherwise through brokers and dealers and are generally subject to
brokerage commissions which vary. Customarily, such commissions may
depend upon the size of the transaction, the broker selected and other
factors.
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
- -------------------------------------------------------------------------------
PRO FORM
COMBINED
HIGH YIELD HIGH YIELD
HIAT (CLASS D) (CLASS D)
------------ -------------- -----------
MANAGEMENT FEES ............................... 0.75%
DISTRIBUTION AND SERVICE (12b-1) FEES ......... none
OTHER EXPENSES ................................ 0.57%
TOTAL ANNUAL FUND OPERATING EXPENSES .......... 1.32%
EXAMPLE
To attempt to show the effect of these expenses on an investment over
time, the hypotheticals shown below have been created. The Example assumes that
an investor invests $10,000 in either HIAT or Class D shares of High Yield or
the new combined fund (High Yield), that the investment has a 5% return each
year and that the operating expenses for each fund remain the same (as set
forth in the chart above). Although a shareholder's actual costs may be higher
or lower, the tables below show a shareholder's costs at the end of each period
based on these assumptions.
Expenses Over Time:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
HIAT ............................................. $134 $418 $723 $1,590
HIGH YIELD (CLASS D) ............................. $ $ $ $
PRO FORMA COMBINED-HIGH YIELD (CLASS D) .......... $ $ $ $
The purpose of the foregoing fee table is to assist the investor or
shareholder in understanding the various costs and expenses that an investor or
shareholder in the fund will bear directly or indirectly. For a more complete
description of these costs and expenses, see "Comparison of HIAT and High Yield
- -- Investment Management and Administration Fees, Other Significant Fees, and
Purchases, Exchanges and Redemptions" below.
5
TAX CONSEQUENCES OF THE REORGANIZATION
As a condition to the Reorganization, HIAT and High Yield, will receive an
opinion of Mayer, Brown, Rowe & Maw to the effect that the Reorganization will
constitute a tax-free reorganization for federal income tax purposes, and that
no gain or loss will be recognized by HIAT or the shareholders of HIAT for
federal income tax purposes as a result of the transactions included in the
Reorganization. For further information about the tax consequences of the
Reorganization, see "The Reorganization -- Tax Aspects of the Reorganization"
below.
REASONS FOR THE REORGANIZATION
The Board of Trustees has determined that the Reorganization is in the
best interests of HIAT shareholders. In particular, the Reorganization would
afford HIAT shareholders the opportunity for a continued interest in a fund
which has investment objectives similar to that of HIAT, and which is
substantially larger and has a significantly lower expense ratio than HIAT. The
Board of Trustees believes that other potential benefits could be realized as
well. For further information on the reasons for the Board's decision, see "The
Reorganization -- The Board's Consideration," set forth below.
COMPARISON OF HIAT AND HIGH YIELD
INVESTMENT OBJECTIVES AND POLICIES. HIAT and High Yield have similar
investment objectives. As their primary investment objective, HIAT and High
Yield seek to earn a high level of current income. As their secondary
investment objective, HIAT and High Yield seek capital appreciation but only
when consistent with their primary investment objective. The respective
investment objectives of HIAT and High Yield are fundamental and may not be
changed without respective shareholder approval.
High Yield seeks to achieve its primary investment objective by investing
at least 80% of its assets in fixed-income securities rated lower than Baa by
Moody's Investors Service ("Moody's") or lower than BBB by Standard & Poor's
Corporation ("S&P") or in non-rated securities considered by the fund's
investment manager, MS Advisors, to be appropriate investments for the fund.
Securities rated below Baa or BBB are commonly known as "junk bonds." Likewise,
HIAT seeks to achieve its primary investment objective by investing at least
80% of its assets in such lower rated and unrated securities.
Other than as set forth above, the investment policies of HIAT and High
Yield are substantially similar; the principal differences between them are
described under "Comparison of Investment Objectives, Policies and
Restrictions" below.
INVESTMENT MANAGEMENT FEES. Pursuant to an Investment Management
Agreement, HIAT's investment manager, MS Advisors, provides administrative
services and manages HIAT's assets, including placing orders for the purchase
and sale of portfolio securities. MS Advisors obtains and evaluates such
information and advice relating to the economy, securities markets and
securities as it deems necessary or useful to manage the assets of HIAT in a
manner consistent with its objective and policies. As compensation for advisory
services provided to HIAT, HIAT pays MS Advisors monthly compensation
calculated weekly by applying the following annual rates to HIAT's weekly net
assets: 0.75% of the portion of the average weekly assets not exceeding $250
million; 0.60% of the portion of the average weekly assets exceeding $250
million and not exceeding $500 million; 0.50% of the portion of the average
weekly assets exceeding $500 million and not exceeding $750 million; 0.40% of
the portion of the average weekly assets exceeding $750 million and not
exceeding $1 billion; and 0.30% of the portion of the average weekly assets
exceeding $1 billion. The services provided to HIAT under the Investment
Management Agreement are comparable to those provided by MS Advisors to High
Yield under its Investment Management Agreement with MS Advisors. Pursuant to
that agreement, High
6
Yield pays MS Advisors, monthly compensation calculated daily by applying the
following annual rates to the net assets of the fund determined as of the close
of each business day: 0.50% of the portion of the daily net assets not
exceeding $500 million; 0.425% of the portion of the daily net assets exceeding
$500 million but not exceeding $750 million; 0.375% of the portion of the daily
net assets exceeding $750 million but not exceeding $1 billion; 0.35% of the
portion of the daily net assets exceeding $1 billion but not exceeding $2
billion; and 0.325% of the portion of the daily net assets exceeding $2 billion
but not exceeding $3 billion; and 0.30% of the portion of the daily net assets
exceeding $3 billion. Each class of shares of High Yield is subject to the same
management fee rates.
HIAT is a closed-end investment company and therefore does not have a
distribution plan pursuant to Rule 12b-1 under the 1940 Act ("12b-1 Plan").
High Yield has adopted a 12b-1 Plan for the distribution of its shares,
however, there are no 12b-1 fees applicable to High Yield's Class D shares. For
information relating to the 12b-1 fees applicable to High Yield's Class A, B
and C shares, see the section entitled "Share Class Arrangements" in High
Yield's Prospectus, attached hereto.
OTHER SIGNIFICANT FEES. Both HIAT and High Yield pay additional fees in
connection with their operations, including legal, auditing, transfer agent,
trustees fees and custodial fees, registration fees in the case of High Yield
and, in the case of HIAT, listing fees for the listing of its shares on the New
York Stock Exchange ("NYSE"). See "Synopsis -- Fee Table" above for the
percentage of average net assets represented by such "Other Expenses."
PURCHASES, EXCHANGES AND REDEMPTIONS. Class D shares of High Yield are
currently offered at net asset value and such shares may be redeemed for cash
without redemption or other charge at the net asset value per share next
determined. Normally, Class D shares of High Yield are offered only to a
limited group of investors. Subsequent to the Reorganization, all HIAT shares
will be designated Class D shares of High Yield. However, additional
investments (except for reinvestment of distributions received on shares
acquired as a result of the Reorganization) in Class D shares of High Yield (or
in Class D shares of any other Morgan Stanley Fund) by Shareholders holding
such shares may only be made if those Shareholders are otherwise eligible to
purchase Class D shares. Class D shares acquired in the Reorganization may,
however, be exchanged for Class D shares of another Morgan Stanley Fund
pursuant to Class D's exchange privileges discussed below.
High Yield offers four classes of shares (Class A, Class B, Class C and
Class D) which differ principally in terms of sales charges, distribution and
service fees, and ongoing expenses. For further information relating to each of
the classes of High Yield's shares, see the section entitled "Share Class
Arrangements" in High Yield's Prospectus attached hereto.
Class D shares of High Yield that are held with a broker-dealer that has
entered into a selected dealer agreement with High Yield's distributor (or
shares held directly with High Yield's transfer agent) may be exchanged for
Class D shares of any other Morgan Stanley Fund that offers its shares in more
than one class, or any of Morgan Stanley Limited Duration U.S. Treasury Trust,
Morgan Stanley Limited Term Municipal Trust, Morgan Stanley Limited Duration
Fund and the five Morgan Stanley Funds that are money market funds (the
foregoing funds are collectively referred to as the "Exchange Funds"), without
the imposition of an exchange fee. Exchange privileges will not be available to
Shareholders who hold High Yield shares with broker-dealers that have not
entered into a selected dealer agreement with High Yield's distributor.
High Yield shareholders may redeem their High Yield shares on any business
day at the net asset value of such shares. High Yield provides telephone
exchange privileges to its shareholders. For greater details relating to
exchange privileges applicable to High Yield, see the section entitled "How to
Exchange Shares" in High Yield's Prospectus.
7
High Yield may redeem involuntarily, at net asset value, most accounts
valued at less than $100. However, High Yield offers a reinstatement privilege
whereby a shareholder who has not previously exercised such privilege whose
shares have been redeemed may, within thirty-five days after the date of
redemption, reinstate any portion or all of the proceeds thereof in shares of
the same class from which such shares were redeemed.
Unlike High Yield, HIAT is a closed-end investment company and does not
redeem its shares or engage in the continuous offering of new shares in the
same manner as an open-end investment company and does not offer to exchange
its shares for shares of other investment companies. Shares of HIAT are only
purchased and sold on the NYSE.
DIVIDENDS. Both High Yield and HIAT declare and pay dividends from net
investment income monthly. Both High Yield and HIAT generally distribute all of
their net realized short-term and long-term capital gains at least once per
year. Each, however, may determine either to distribute or to retain all or
part of any net long-term capital gains in any year for reinvestment. With
respect to High Yield, dividends and capital gains distributions are
automatically reinvested in additional shares at net asset value unless the
shareholder elects to receive cash. All persons who become registered holders
of HIAT are automatically included in HIAT's automatic dividend reinvestment
plan unless they elect to receive distributions in cash. Under that plan,
Shareholders' dividends are automatically reinvested in shares of HIAT at the
then current market price of such shares. For more information on HIAT's
dividend reinvestment plan, see Exhibit C to this Proxy Statement and
Prospectus.
PRINCIPAL RISK FACTORS
The share price or net asset value of High Yield and the market price per
share of HIAT on the NYSE as well as HIAT's net asset value will fluctuate with
changes in the market value of their respective portfolio securities. The
market value of the funds' portfolio securities will increase or decrease due
to a variety of economic, market and political factors, including changes in
prevailing interest rates, which cannot be predicted. The principal risks of an
investment in either High Yield or HIAT are the risks associated with their
respective fixed-income securities which primarily consist of high yield, high
risk securities commonly known as "junk bonds." Fixed income securities are
subject to two types of risks: credit risk and interest rate risk.
Credit risk refers to the possibility that the issuer of a security will
be unable or unwilling to make interest payments and/or repay the principal on
its debt. Interest rate risk refers to fluctuations in the value of a
fixed-income security resulting from changes in the general level of interest
rates. When the general level of interest rates goes up, the prices of most
fixed-income securities go down. When the general level of interest rates goes
down, the prices of most fixed-income securities go up.
Junk bonds are subject to greater risk of loss of income and principal
than higher rated securities. The prices of junk bonds are likely to be more
sensitive to adverse economic changes or individual corporate developments than
higher rated securities. During an economic downturn or substantial period of
rising interest rates, junk bond issuers and, in particular, highly leveraged
issuers may experience financial stress that would adversely affect their
ability to service their principal and interest payment obligations, to meet
their projected business goals or to obtain additional financing. In the event
of a default, the funds may incur additional expenses to seek recovery. The
secondary market for junk bonds may be less liquid than the markets for higher
quality securities and, as such, may have an adverse effect on the market
prices of certain securities. The Rule 144A securities could have the effect of
increasing the level of fund illiquidity to the extent the funds may be unable
to find qualified institutional buyers interested in purchasing the securities.
The illiquidity of the market may also adversely affect the ability of the
funds' Directors/Trustees to arrive at a fair value for certain junk
8
bonds at certain times and could make it difficult for the fund to sell certain
securities. In addition, periods of economic uncertainty and change probably
would result in an increased volatility of market prices of high yield
securities and a corresponding volatility in the funds' net asset value.
In addition to junk bonds, both High Yield and HIAT invest up to 20% of
their assets in investment grade fixed-income securities. Some of these
securities have speculative characteristics.
Both High Yield and HIAT may invest up to 20% of their total assets in
common stocks. In general stock values fluctuate in response to activities
specific to the company as well as general market, economic and political
conditions. These prices can fluctuate widely.
Each fund may invest up to 20% of its assets in foreign securities
including fixed income securities issued by foreign governments and other
foreign issuers (including American depositary receipts or other similar
securities convertible into securities of foreign issuers) but not more than
10% of its total assets in these securities may be denominated in foreign
currencies. The funds' investments in foreign securities involve risks that are
in addition to the risks associated with domestic securities. One additional
risk is currency risk. In particular, the price of securities could be
adversely affected by changes in the exchange rate between U.S. dollars and a
foreign market's local currency. Foreign securities (including depositary
receipts) also have risks related to economic and political developments
abroad, including any effects of foreign social, economic or political
instability. Foreign companies, in general, are not subject to the regulatory
requirements of U.S. companies and, as such, there may be less publicly
available information about these companies. Moreover, foreign accounting,
auditing and financial reporting standards generally are different from those
applicable to U.S. companies. Finally, in the event of a default of any foreign
debt obligations, it may be more difficult for the funds to obtain or enforce a
judgment against the issuers of the securities. Securities of foreign issuers
may be less liquid than comparable securities of U.S. issuers and, as such,
their price changes may be more volatile. Furthermore, foreign exchanges and
broker-dealers are generally subject to less government and exchange scrutiny
and regulation than their U.S. counterparts. In addition, differences in
clearance and settlement procedures in foreign markets may occasion delays in
settlements of the funds' trades effected in those markets.
The funds may invest in put and call options and futures on their
portfolio securities, stock indexes and U.S. and foreign currencies. The funds
may use options and futures to protect against a decline in the funds'
securities or in currency prices or an increase in prices of securities or
currencies that may be purchased, as well as to protect against interest rate
changes. If the funds invest in options and/or futures, their participation in
these markets would subject the funds' portfolios to certain risks. If the
Investment Manager's predictions of movements in the direction of the stock or
currency markets are inaccurate, the adverse consequences to the funds (e.g., a
reduction in the funds' net asset value or a reduction in the amount of income
available for distribution) may leave the funds in a worse position than if
these strategies were not used. Other risks inherent in the use of options and
futures include, for example, the possible imperfect correlation between the
price of options and futures contracts and movements in the prices of the
securities or currencies being hedged, and the possible absence of a liquid
secondary market for any particular instrument. Certain options may be
over-the-counter options which are options negotiated with dealers; there is no
secondary market for these investments.
The foregoing discussion is a summary of the principal risk factors of
HIAT and High Yield. For a more complete discussion of the risks of High Yield,
see "Principal Risks" and "Additional Risk Information" in High Yield's
Prospectus attached hereto and incorporated herein by reference.
THE REORGANIZATION
THE BOARD'S CONSIDERATION
At a meeting held on July 25, 2002, the Board, including all of the
Independent Trustees, unanimously approved the Reorganization Agreement and
determined to recommend that HIAT Shareholders approve the
9
Reorganization Agreement. In reaching this decision, the Board made an
extensive inquiry into a number of factors, particularly the comparative
expense ratios of HIAT and the Class D shares of High Yield, and the effect on
Shareholders of "open-ending" HIAT including, for example, the ability to
realize the net asset value of their shares and the potential impact of
redemptions on portfolio management. The Board also considered other factors,
including, but not limited to: comparable investment objectives, policies,
restrictions and portfolios of HIAT and High Yield; the terms and conditions of
the Reorganization which would affect the price of shares to be issued in the
Reorganization; the tax-free nature of the Reorganization; and any direct or
indirect costs to be incurred by HIAT and High Yield in connection with the
Reorganization.
In recommending the Reorganization to Shareholders, the Board of HIAT
considered the following:
1. The expense ratio for the Class D shares of High Yield (0.62% for its
fiscal year end August 31, 2001; ____________ for its fiscal year end August 31,
2002) is substantially lower than the expense ratio for HIAT (1.32% for its
fiscal year end September 30, 2001). This is partially attributable to the fact
that High Yield's investment management fee rate (0.43% of its net assets) was
appreciably lower for its fiscal year end August 31, 2001 (_____________ for its
fiscal year end August 31, 2002) than HIAT's investment management fee rate
(0.75%) paid for the twelve months ended August 31, 2001. Furthermore, the rate
of other expenses paid by Class D shareholders of High Yield (0.19% of average
daily net assets) for its fiscal year end August 31, 2001 (______________ for
its fiscal year end August 31, 2002) was lower than the rate of other expenses
paid by HIAT (0.57% of average daily net assets) for the its last fiscal year.
In addition, to the extent that the Reorganization would result in Shareholders
becoming shareholders of a combined larger fund, further economies of scale
could be achieved since various fixed expenses (e.g., auditing and legal) can be
spread over a larger number of shares. Therefore, once the Reorganization is
consummated, the expenses which would be borne by Class D shareholders of the
"combined fund" are expected to be significantly lower on a percentage basis
than the expenses per share of HIAT.
2. HIAT, has generally traded at a premium, but recently has traded at a
discount to its net asset value and is, as of the date of this Proxy Statement
and Prospectus, trading at a discount. To the extent that HIAT is trading at a
discount on the date of the Reorganization, the Reorganization at net asset
value would benefit the Shareholders of HIAT by immediately eliminating any
such discount.
3. Shareholders of HIAT would have a continued participation in a
portfolio of lower-rated and unrated fixed-income securities.
4. Shareholders would have the ability to exchange their Class D shares of
High Yield acquired as a result of the Reorganization into Class D shares of
any Morgan Stanley Multi-Class Fund without the imposition of any sales charge
or additional fees. The Board noted, however, that exchange privileges will not
be available to Shareholders who hold High Yield shares with broker-dealers
that have not entered into a selected dealer agreement with High Yield's
distributor. HIAT, being a closed-end fund, does not offer any exchange
privileges.
5. HIAT does not currently satisfy certain NYSE listing standards.
Therefore, absent the Reorganization, there is a risk that the shares could
become ineligible for trading on the NYSE.
6. The Reorganization is intended to qualify as a tax-free reorganization
for federal income tax purposes, pursuant to which no gain or loss will be
recognized by HIAT or its Shareholders for Federal income tax purposes as a
result of transactions included in the Reorganization.
7. The Board recognized that if at the time of the Reorganization, HIAT is
trading at a premium to its net asset value, HIAT shareholders would receive
High Yield shares with a value less than the amount which could have been
realized through a sale of shares in the open market. See "Additional Matters
Regarding HIAT -- History of Public Trading of HIAT's Shares" below. The Board
concluded, however, that the potential benefits of the Reorganization
outweighed the potential risk of the elimination of any premium at which the
shares trade on the date of the Reorganization.
10
The Board of Directors of High Yield, including a majority of the
Independent Directors of High Yield, also have determined that the
Reorganization is in the best interests of High Yield and its shareholders and
that the interests of existing shareholders of High Yield will not be diluted
as a result thereof. The transaction will enable High Yield to acquire
investment securities which are consistent with High Yield's investment
objective, without the costs attendant to the purchase of such securities in
the market. Also, the addition of HIAT's assets to High Yield's portfolio may
result in a further reduction in High Yield's investment management fee
resulting from the addition of more assets at a lower breakpoint rate in the
management fee schedule and may result also in the economies of scale described
above. Finally, the Board considered that even if the benefits enumerated above
are not realized, the costs to the Fund are sufficiently minor to warrant
taking the opportunity to realize those benefits.
THE REORGANIZATION AGREEMENT
The terms and conditions under which the Reorganization would be
consummated, as summarized below, are set forth in the Reorganization
Agreement. This summary is qualified in its entirety by reference to the
Reorganization Agreement, a copy of which is attached as Exhibit A to this
Proxy Statement and Prospectus.
The Reorganization Agreement provides that (i) HIAT will transfer all of
its assets, including portfolio securities, cash (other than cash amounts
retained by HIAT as a "Cash Reserve" in the amount sufficient to discharge its
liabilities not discharged prior to the Valuation Date (as defined below) and
for expenses of the dissolution), cash equivalents and receivables to High
Yield on the Closing Date in exchange for the assumption by High Yield of
stated liabilities of HIAT, including all expenses, costs, charges and
reserves, as reflected on an unaudited statement of assets and liabilities of
HIAT prepared by the Treasurer of HIAT, as of the Valuation Date (as defined
below) in accordance with generally accepted accounting principles consistently
applied from the prior audited period, and the delivery of the High Yield
Shares; (ii) such High Yield Shares would be distributed to Shareholders on the
Closing Date or as soon as practicable thereafter; (iii) HIAT would be
de-registered as an investment company under the 1940 Act; (iv) HIAT would be
dissolved as a Massachusetts business trust; and (v) the outstanding shares of
HIAT would be canceled.
The number of High Yield Shares to be delivered to HIAT will be determined
by dividing the aggregate net asset value of the shares of HIAT acquired by High
Yield by the net asset value per share of the Class D shares of High Yield;
these values will be calculated as of the close of business of the New York
Stock Exchange on the third business day following the receipt of the requisite
approval by Shareholders of the Reorganization Agreement or at such other time
as HIAT and High Yield may agree (the "Valuation Date"). As an illustration,
assume that on the Valuation Date, the shares of HIAT had an aggregate net asset
value (not including any Cash Reserve of HIAT) of $100,000. If the net asset
value per Class D share of High Yield were $10 per share at the close of
business on the Valuation Date, the number of Class D shares of High Yield to be
issued would be 10,000 ($100,000 (divided by) $10). These 10,000 Class D shares
of High Yield would be distributed to the former shareholders of HIAT. This
example is given for illustration purposes only and does not bear any
relationship to the dollar amounts or shares expected to be involved in the
Reorganization.
On the Closing Date or as soon as practicable thereafter, HIAT will
distribute pro rata to its Shareholders of record as of the close of business
on the Valuation Date, the High Yield Shares it receives. Each Shareholder will
receive Class D shares of High Yield that corresponds to the shares of HIAT
currently held by that Shareholder. High Yield will cause its transfer agent to
credit and confirm an appropriate number of High Yield Shares to each
Shareholder. Certificates for High Yield Shares will be issued only upon
written request of a Shareholder and only for whole shares, with fractional
shares credited to the name of the Shareholder on the books of High Yield.
Shareholders who wish to receive certificates representing their High Yield
Shares must, after receipt of their confirmations, make a written request to
High Yield's transfer agent Morgan Stanley Trust,
11
Harborside Financial Center, Jersey City, New Jersey 07311. Shareholders of
HIAT holding their shares in certificate form will be asked to surrender such
certificates in connection with the Reorganization. Shareholders who do not
surrender their certificates prior to the Closing Date will still receive their
shares of High Yield; however, such Shareholders will not be able to redeem,
transfer or exchange the High Yield Shares received until the old certificates
have been surrendered.
The Closing Date will be the next business day following the Valuation
Date. The consummation of the Reorganization is contingent upon the approval of
the Reorganization by the Shareholders and the receipt of the other opinions
and certificates set forth in Sections 6, 7 and 8 of the Reorganization
Agreement (attached hereto as Exhibit A) and the occurrence of the events
described in those Sections, certain of which may be waived by HIAT or High
Yield. The Reorganization Agreement may be amended in any mutually agreeable
manner. All expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement and Prospectus, will be borne, as set forth in this
Proxy Statement and Prospectus under "Expenses of Solicitation," by HIAT, which
expenses are expected to approximate $ . HIAT and High Yield will bear all of
their respective other expenses associated with the Reorganization.
The Reorganization Agreement may be terminated and the Reorganization
abandoned at any time, before or after approval by Shareholders or by mutual
consent of HIAT, and High Yield. In addition, either party may terminate the
Reorganization Agreement upon the occurrence of a material breach of the
Reorganization Agreement by the other party or if, by March 31, 2003, any
condition set forth in the Reorganization Agreement has not been fulfilled or
waived by the party entitled to its benefits.
Under the Reorganization Agreement, within one year after the Closing
Date, HIAT shall: either pay or make provision for all of its liabilities and
distribute any remaining amount of the Cash Reserve (after paying or making
provision for such liabilities and the estimated cost of making the
distribution) to former Shareholders of HIAT that received High Yield Shares.
HIAT shall be de-registered as an investment company under the 1940 Act,
dissolved under Massachusetts law promptly following the distributions of
shares of High Yield to Shareholders of record of HIAT.
The effect of the Reorganization is that Shareholders who vote their
shares in favor of the Reorganization Agreement are electing to sell their
shares of HIAT (at net asset value on the Valuation Date calculated after
subtracting any Cash Reserve) and reinvest the proceeds in High Yield Shares at
net asset value and without recognition of taxable gain or loss for Federal
income tax purposes. See "Tax Aspects of the Reorganization" below. As noted in
"Tax Aspects of the Reorganization" below, if HIAT recognizes net gain from the
sale of securities prior to the Closing Date, such gain, to the extent not
offset by capital loss carryforwards, will be distributed to Shareholders prior
to the Closing Date and will be taxable to Shareholders as capital gain.
Prior to the NYSE's suspension of trading of HIAT's shares, which is
currently expected to occur on the next business day after the Meeting
(assuming Shareholders of HIAT approve the Reorganization Agreement at the
Meeting), Shareholders will continue to be able to sell their shares of HIAT on
the NYSE at the market price of the shares on the NYSE when the sell order is
placed. Following the suspension of trading, Shareholders will no longer be
able to sell their HIAT shares on the NYSE. On or after the Closing Date,
however, Shareholders will be able to redeem their newly-issued shares of High
Yield.
TAX ASPECTS OF THE REORGANIZATION
At least one but not more than 20 business days prior to the Valuation
Date, HIAT will declare and pay a dividend or dividends which, together with
all previous such dividends, will have the effect of distributing to
Shareholders all of HIAT's investment company taxable income for all periods
since the inception of HIAT through and including the Valuation Date (computed
without regard to any dividends paid deduction), and all of HIAT's net capital
gain, if any, realized in such periods (after reduction for any capital loss
carryforward).
12
The Reorganization is intended to qualify for Federal income tax purposes
as a tax-free reorganization under Section 368(a)(1)(C) of the Internal Revenue
Code of 1986, as amended (the "Code").
As a condition to the Reorganization, HIAT and High Yield will receive an
opinion of Mayer, Brown, Rowe & Maw to the effect that, based on certain
assumptions, facts, the terms of the Reorganization Agreement and
representations set forth in the Reorganization Agreement or otherwise provided
by HIAT and High Yield (including a representation to the effect that High
Yield has no plan or intention to sell or otherwise dispose of more than fifty
percent of the assets of HIAT acquired in the Reorganization except for
dispositions made in the ordinary course of business):
1. The transfer of HIAT's assets in exchange for the High Yield Shares and
the assumption by High Yield of certain stated liabilities of HIAT followed by
the distribution by HIAT of the High Yield Shares to Shareholders in exchange
for their HIAT shares pursuant to and in accordance with the terms of the
Reorganization Agreement will constitute a "reorganization" within the meaning
of Section 368(a)(1)(C) of the Code, and HIAT and High Yield will each be a
"party to a reorganization" within the meaning of Section 368(b) of the Code;
2. No gain or loss will be recognized by High Yield upon the receipt of
the assets of HIAT solely in exchange for the High Yield Shares and the
assumption by High Yield of the stated liabilities of HIAT;
3. No gain or loss will be recognized by HIAT upon the transfer of the
assets of HIAT to High Yield in exchange for the High Yield Shares and the
assumption by High Yield of the stated liabilities or upon the distribution of
High Yield Shares to Shareholders in exchange for their HIAT shares;
4. No gain or loss will be recognized by Shareholders upon the exchange of
the shares of HIAT for the High Yield Shares;
5. The aggregate tax basis for the High Yield Shares received by each of
the Shareholders pursuant to the Reorganization will be the same as the
aggregate tax basis of the shares in HIAT held by each such Shareholder
immediately prior to the Reorganization;
6. The holding period of the High Yield Shares to be received by each
Shareholder will include the period during which the shares of HIAT surrendered
in exchange therefor were held (provided such shares in HIAT were held as
capital assets on the date of the Reorganization);
7. The tax basis of the assets of HIAT acquired by High Yield will be the
same as the tax basis of such assets of HIAT immediately prior to the
Reorganization; and
8. The holding period of the assets of HIAT in the hands of High Yield
will include the period during which those assets were held by HIAT.
The advice of Counsel is not binding on the Internal Revenue Service or
the courts and neither HIAT nor High Yield has sought or will seek a ruling
with respect to the tax treatment of the Reorganization.
SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE EFFECT, IF
ANY, OF THE PROPOSED TRANSACTION IN LIGHT OF THEIR INDIVIDUAL CIRCUMSTANCES.
BECAUSE THE FOREGOING DISCUSSION ONLY RELATES TO THE FEDERAL INCOME TAX
CONSEQUENCES OF THE PROPOSED TRANSACTION, SHAREHOLDERS SHOULD ALSO CONSULT
THEIR TAX ADVISORS AS TO STATE AND LOCAL TAX CONSEQUENCES, IF ANY, OF THE
PROPOSED TRANSACTION.
TAX CONSEQUENCES OF THE REORGANIZATION TO HIAT AND HIGH YIELD.
Under the Code, the Reorganization may result in limitations on the
utilization of the capital loss carryovers and built-in losses of HIAT. The
effect of any such limitations will depend on the existence and
13
amount of HIAT's capital loss carryovers and built-in losses at the time of the
Reorganization. A fund will have built-in losses in its assets if its tax basis
in its assets exceeds the fair market value of such assets on the date of the
Reorganization. While the actual amount of such limitation will be determined
at the time of the Reorganization, if, for example, the Reorganization had
occurred on July 19, 2002, each year only approximately $1.3 million of HIAT's
capital loss carryovers and recognized built-in capital losses would have been
able to be used to offset capital gains of the Combined Fund. The
Reorganization should not have any effect on the capital loss carryovers and
built-in losses of High Yield.
DESCRIPTION OF SHARES OF HIGH YIELD AND HIAT AND THE ORGANIZATION OF THE TWO
FUNDS
Class D shares of High Yield to be issued pursuant to the Reorganization
Agreement will, when issued, be fully paid and non-assessable by High Yield and
transferable without restrictions and will have no preemptive rights. As stated
above, Class D shares of High Yield are not subject to any sales charge on
purchase or redemption or any 12b-1 fee.
Shares of HIAT (the only existing class of which is common) are entitled
to one vote for each share held and to vote for the election of Trustees and on
other matters submitted to meetings of shareholders. Shares of HIAT have no
pre-emptive or conversion rights and the shares, when issued, are fully paid
and non-assessable.
The shareholders of High Yield are entitled to a full vote for each full
common share held. High Yield is authorized to issue an unlimited number of
common shares. All common shares of High Yield are of $0.01 par value and are
equal as to earnings, assets and voting privileges except that each Class will
have exclusive voting privileges with respect to matters relating to
distribution expenses borne solely by such Class or any other matter in which
the interests of one Class differ from the interests of any other Class. In
addition, Class B shareholders will have the right to vote on any proposed
material increase in Class A's expenses, if such proposal is submitted
separately to Class A shareholders. Also, Class A, Class B and Class C bear
expenses related to the distribution of their respective shares.
High Yield's Articles of Incorporation permits the Directors to authorize
the creation of additional series of shares (the proceeds of which would be
invested in separate, independently managed portfolios) and additional Classes
of shares within any series. The Directors have not presently authorized any
such additional series or Classes of shares other than as set forth in High
Yield's Prospectus.
High Yield is not required to hold annual meetings of shareholders and in
ordinary circumstances High Yield does not intend to hold such meetings. The
Directors may call special meetings of shareholders for action by shareholder
vote as may be required by the Investment Company Act or the Articles of
Incorporation. Under certain circumstances, the Directors may be removed by the
actions of the Directors. In addition, under certain circumstances, the
shareholders may call a meeting to remove the Directors and High Yield is
required to provide assistance in communicating with shareholders about such a
meeting. The voting rights of shareholders are not cumulative, so that holders
of more than 50 percent of the shares voting can, if they choose, elect all
Directors being selected, while the holders of the remaining shares would be
unable to elect any Directors. HIAT, whose shares are listed on the NYSE, does
hold annual meetings as required by the rules of the NYSE.
HIAT is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of a business trust may, under
certain limited circumstances, be held personally liable as partners for the
obligations of HIAT. However, the Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of HIAT, requires
that notice of such HIAT obligations include such disclaimer, and provides for
indemnification out of the HIAT's property for any shareholder held personally
liable for the obligations of HIAT. Thus, the risk of a shareholder incurring
financial loss on account of
14
shareholder liability is limited to circumstances in which HIAT itself would be
unable to meet its obligations. High Yield is a Maryland corporation.
Shareholders of a Maryland Corporation are not personally liable for the
obligations of the company.
HIAT presently has certain anti-takeover provisions in its Declaration of
Trust which could have the effect of limiting the ability of other entities or
persons to acquire control of HIAT, to cause it to engage in certain
transactions or to modify its structure. The Board of Trustees is divided into
three classes, each having a term of three years. Each year the term of one
class expires. This provision could delay for up to two years the replacement
of a majority of the Board of Trustees. In addition, the affirmative vote or
consent of the holders of 80% of the shares of HIAT (a greater vote than that
required by the 1940 Act and greater than the required vote applicable to
business corporations under state law) is required to authorize the conversion
of HIAT from a closed-end to an open-end investment company, or generally to
authorize any of the following transactions:
(i) merger or consolidation of HIAT with or into any other corporation;
(ii) issuance of any securities of HIAT to any person or entity for cash;
(iii) sale, lease or exchange of all or any substantial part of the
assets of HIAT, to any entity or person (except assets having an
aggregate fair market value of less than $1,000,000);
(iv) sale, lease or exchange to HIAT, in exchange for securities of HIAT,
of any assets of any entity or person (except assets having an
aggregate fair market value of less than $1,000,000)
if such corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of 5% or more of the outstanding shares of
HIAT. However, such 80% vote or consent will not be required with respect to
the foregoing transactions where the Board of Trustees under certain conditions
approves the transaction (as the Board has done with respect to the
Reorganization), in which case, with respect to (i) and (iii) above, a majority
shareholder vote or consent will be required, and, with respect to (ii) and
(iv) above, no shareholder vote or consent would be required. Furthermore, any
amendment to the provisions in the Declaration of Trust requiring an 80%
shareholder vote or consent for the foregoing transactions similarly requires
an 80% shareholder vote or consent.
CAPITALIZATION TABLE (UNAUDITED)
The following table sets forth the capitalization of High Yield and HIAT
as of July 31, 2002 and on a pro forma combined basis as if the Reorganization
had occurred on that date:
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NET ASSET
SHARES VALUE
NET ASSETS OUTSTANDING PER SHARE
-------------- ------------- ----------
HIAT .......................................... $ 25,880,572 29,935,152 $ 0.86
High Yield
(Class A) .................................... $ 23,153,188 14,587,759 $ 1.59
(Class B) .................................... $387,265,515 244,990,472 $ 1.58
(Class C) .................................... $ 34,900,806 22,036,996 $ 1.58
(Class D) .................................... $ 86,641,125 54,631,515 $ 1.59
Total High Yield (Class A -- D) ............... $531,960,634
Combined Fund (pro forma) (High Yield after the
Reorganization)
(Class A) .................................... $ 23,153,188 14,587,759 $ 1.59
(Class B) .................................... $387,265,515 244,990,472 $ 1.58
(Class C) .................................... $ 34,900,806 22,036,996 $ 1.58
(Class D) .................................... $112,521,697 70,908,604 $ 1.59
Total Combined Fund (pro forma) (High Yield)
(Class A -- D) ............................... $557,841,206
APPRAISAL RIGHTS
Shareholders will have no appraisal rights in connection with the
Reorganization.
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES AND POLICIES
HIAT and High Yield have similar investment objectives. Both HIAT and High
Yield, as a primary investment objective, seek to earn a high level current
income. As a secondary investment objective, HIAT and High Yield seek capital
appreciation but only to the extent consistent with their primary objective.
High Yield invests at least 80% of its assets in fixed-income securities
rated lower than Baa by Moody's or lower than BBB by S&P (commonly known as
"junk bonds") or in non-rated securities considered by MS Advisors to be
appropriate investments for the fund. These lower-rated and unrated fixed
income securities may also include "Rule 144A" securities, which are subject to
resale restrictions. 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. In deciding which securities to buy, hold or sell, MS
Advisors considers an issuer's creditworthiness, economic developments,
interest rate trends and other factors it deems relevant. In evaluating an
issuer's creditworthiness, MS Advisors relies principally on its own analysis.
A security's credit rating is simply one factor that may be considered by MS
Advisors in this regard. High Yield may invest up to 20% of its assets in
securities rated Baa or BBB or higher (or, if not rated, determined to be of
comparable quality) when MS Advisors believes that such securities may produce
attractive yields. The fund's fixed-income securities may include zero coupon
securities and payment in kind bonds. Zero coupon securities are purchased at a
discount and either (i) pay no interest, or (ii) accrue interest, but make no
payments until maturity; payment in kind bonds are purchased at the face amount
of the bond and accrue additional principal but make no payments until
maturity. High Yield may also invest in common stocks and foreign securities,
and, may acquire warrants which may or may not be attached to common stock and
may purchase units which combine debt securities with equity securities.
Additionally, High Yield may invest up to 10% of its assets in municipal
obligations that pay interest exempt from federal income tax. Other than its
investment objectives, the foregoing investment policies of High Yield may be
changed without shareholder approval.
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HIAT also invests at least 80% of its assets in the lower-rated and
unrated fixed-income securities previously described, as well as Rule 144A
securities. Fixed-income securities appropriate for HIAT and High Yield may
include both convertible and nonconvertible debt securities and preferred
stock. Under normal conditions, 20% of HIAT's total assets may be invested in
higher-rated fixed-income securities and unrated fixed-income securities of
comparable quality and HIAT also may invest up to 10% of its assets in
municipal obligations. HIAT may also purchase common stocks, foreign
securities, money market instruments and may acquire warrants and unit
offerings.
Both High Yield and HIAT may take temporary "defensive" positions that are
inconsistent with each fund's principal investment strategies in attempting to
respond to adverse market conditions. Both High Yield and HIAT may invest any
amount of their assets in cash or money market instruments in a defensive
posture when MS Advisors believes it is advisable to do so.
Other than its investment objectives, the foregoing investment policies of
HIAT may be changed without shareholder approval.
Both High Yield and HIAT may (i) engage in options and futures
transactions, (ii) purchase securities on a when-issued or delayed delivery
basis, (iii) purchase securities on a "when, as and if issued" basis, (iv)
enter into repurchase agreements, (HIAT may not invest in repurchase agreements
that do not mature within seven days, if any such investments amount to more
than 10% of HIAT's total assets), (v) invest in private placements (up to 15%
in the case of High Yield and up to 10% in the case of HIAT), (vi) lend their
portfolio securities (up to 25% in the case of High Yield and up to 10% in the
case of HIAT), and (vii) invest in public utilities.
The foregoing discussion is a summary of the principal differences and
similarities between the investment policies of the funds. For a more complete
discussion of High Yield's policies, see "Principal Investment Strategies" and
"Additional Investment Strategy Information" in High Yield's Prospectus and
"Description of the Fund and Its Investments and Risks" in High Yield's
Statement of Additional Information.
INVESTMENT RESTRICTIONS
The investment restrictions adopted by HIAT and High Yield as fundamental
policies are substantially similar. HIAT's investment restrictions and their
similarities or differences with High Yield's investment restrictions are
summarized below. A full description of High Yield's investment restrictions
can be found under the caption "Description of the Fund and Its Investments and
Risks -- Fund Policies/Investment Restrictions" in High Yield's Statement of
Additional Information. A fundamental investment restriction cannot be changed
without the vote of the majority of the outstanding voting securities of a
fund, as defined in the 1940 Act.
HIAT may not:
1. Acquire common stocks in excess of 20% of its total assets. High Yield
has a similar restriction.
2. As to 75% of its total assets, invest more than 5% of its total assets
in the securities of any one issuer, (other than obligations issued or
guaranteed by the United States Government, its agencies or instrumentalities).
High Yield has a similar restriction but as to 100% of its total assets.
3. As to 75% of its total assets, purchase more than 10% of the voting
securities, or more than 10% of any class of securities of any issuer. For
purposes of this restriction, all outstanding debt securities of an issuer are
considered as one class and all preferred stocks of an issuer are considered as
one class. High Yield has a similar restriction but as to 100% of its total
assets.
4. Invest 25% or more of its total assets in securities of issuers in any
one industry. For purposes of this restriction, gas, electric, water and
telephone utilities will each be treated as being a separate industry. This
17
restriction does not apply to obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities. High Yield has an
identical restriction.
5. Invest more than 5% of its total assets in securities of companies
having a record, together with predecessors, of less than three years of
continuous operation. This restriction shall not apply to any obligation of the
United States Government, its agencies or instrumentalities. High Yield has an
identical restriction.
6. Invest more than 10% of its total assets in securities which are
restricted as to disposition under the federal securities laws or otherwise.
This restriction shall not apply to securities received as a result of
corporate reorganization or similar transaction affecting readily marketable
securities already held in HIAT's portfolio; however, HIAT will attempt to
dispose in an orderly fashion of any securities received under these
circumstances to the extent that such securities exceed 15% of HIAT's total
assets. High Yield, as an open-end investment company, may not invest more than
15% of its assets in illiquid securities.
7. Invest in securities of any issuer if, to the knowledge of the fund,
any officer or trustee of the fund or any officer or director of the Investment
Manager owns more than 1/2 of 1% of the outstanding securities of such issuer,
and such officers, trustees and directors who own more than 1/2 of 1% own in
the aggregate more than 5% of the outstanding securities of such issuer. High
Yield has an identical restriction.
8. Purchase or sell real estate or interests therein, although it may
purchase securities of issuers which engage in real estate operations and
securities which are secured by real estate or interests therein. High Yield
has an identical restriction.
9. Purchase or sell commodities except that the fund may purchase or sell
financial futures contracts and related options. High Yield has an identical
restriction.
10. Purchase oil, gas or other mineral leases, rights or royalty
contracts, or exploration or development programs, except that the fund may
invest in securities of companies which invest in or sponsor such programs.
High Yield has an identical restriction.
11. Write, purchase or sell puts, calls, or combinations thereof, except
for options on futures contracts or options on debt securities. High Yield has
an identical restriction.
12. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets. High Yield has an identical restriction.
13. Borrow money, except that the fund may borrow from a bank for
temporary or emergency purposes or for repurchase of its shares provided that
immediately after such borrowing the amount borrowed does not exceed 33 1/3% of
the value of its total assets (including the amount borrowed) less its
liabilities (not including any borrowings but including the fair market value
at the time of computation of any other senior securities which are outstanding
at the time). High Yield may only borrow for temporary purposes and only in
amounts not exceeding 5% of the value of its total assets (not including the
amount borrowed).
14. Pledge its assets or assign or otherwise encumber them except to
secure borrowings effected within the limitations set forth in Restriction 13.
However, for the purpose of this restriction, collateral arrangements with
respect to the writing of options and collateral arrangements with respect to
initial margin for futures are not deemed to be pledges of assets. High Yield
has a substantially similar restriction.
15. Issue senior securities as defined in the 1940 Act, except insofar as
the fund may be deemed to have issued a senior security by reason of: (a)
entering into any repurchase agreement; (b) purchasing any securities on a
when-issued or delayed delivery basis; (c) purchasing or selling any financial
futures contracts; (d) borrowing money in accordance with restrictions described
above; or (e) lending portfolio securities. High Yield is similarly restricted.
18
16. Make loans of money or securities, except: (a) by the purchase of debt
obligations in which the fund may invest consistent with its investment
objective and policies; (b) by investment in repurchase agreements; or (c) by
lending its portfolio securities. High Yield has an identical restriction.
17. Make short sales of securities. High Yield has an identical
restriction.
18. Purchase securities on margin, except for such short-term loans as are
necessary for the clearance of purchases of portfolio securities. High Yield
has an identical restriction.
19. Engage in the underwriting of securities, except insofar as the fund
may be deemed an underwriter under the Securities Act of 1933 in disposing of a
portfolio security. High Yield has an identical restriction.
20. Invest for the purpose of exercising control or management of another
company. High Yield has an identical restriction.
ADDITIONAL MATTERS REGARDING HIAT
This section sets forth additional information about HIAT which is not
contained elsewhere in this Proxy Statement and Prospectus.
HISTORY OF PUBLIC TRADING OF HIAT'S SHARES
Shares of HIAT trade on the New York Stock Exchange under the symbol
"YLD". The following table shows the history of public trading of the shares of
beneficial interest of HIAT by quarter for the last two fiscal years. The table
sets forth the per share high market price and the per share low market price
on the NYSE for each completed fiscal quarter and the corresponding net asset
value for that market price as well as the discount (expressed as a percentage
of net asset value) represented by the difference between the market price and
its corresponding net asset value:
PERCENTAGE PERCENTAGE
MARKET NET ASSET PREMIUM MARKET NET ASSET PREMIUM
QUARTER ENDED PRICE-HIGH VALUE (DISCOUNT) PRICE-LOW VALUE (DISCOUNT)
- ---------------------------- ------------ ----------- ------------ ----------- ----------- -------------
September 30, 2001 ......... $ 1.500 $ 1.33 12.78% $ 1.130 $ 1.15 (1.74)%
June 30, 2001 .............. $ 2.500 $ 1.50 66.67% $ 1.440 $ 1.36 5.88%
March 31, 2001 ............. $ 3.260 $ 1.92 69.79% $ 2.350 $ 1.74 35.06%
December 31, 2001 .......... $ 1.290 $ 1.10 17.27% $ 1.170 $ 1.09 7.34%
September 30, 2000 ......... $ 3.938 $ 2.68 46.38% $ 3.500 $ 2.51 39.44%
June 30, 2000 .............. $ 3.875 $ 2.91 33.16% $ 3.375 $ 3.02 11.75%
March 31, 2000 ............. $ 3.625 $ 3.17 14.35% $ 3.375 $ 3.27 3.21%
December 31, 2000 .......... $ 3.188 $ 2.35 35.64% $ 2.375 $ 1.87 27.01%
On , 2002, the shares traded at a market price of $ with a
net asset value of $ .
INVESTMENT MANAGER
HIAT's investment manager, MS Advisors, maintains its offices at 1221
Avenue of the Americas, New York, New York 10020. MS Advisors, which was
incorporated in July, 1992 under the name Dean Witter InterCapital Inc.,
changed its name to Morgan Stanley Investment Advisors Inc. on June 18, 2001.
MS Advisors together with Morgan Stanley Services Company Inc. ("MS Services"),
its wholly-owned subsidiary, had
19
approximately $ billion in assets under management as of , 2002. MS
Advisors is a wholly-owned subsidiary of Morgan Stanley, a preeminent global
financial services firm that maintains leading market positions in each of its
three primary businesses -- securities, asset management and credit services.
Morgan Stanley has its offices at 1585 Broadway, New York, New York 10036.
The Principal Executive Officer and Directors of MS Advisors are Mitchell
M. Merin, President and Chief Executive Officer, Ronald E. Robison, Managing
Director and Chief Administrative Officer and Barry Fink, Vice President,
Secretary and General Counsel. Messrs. Merin, Robison and Fink also serve as
officers of HIAT.
MS Advisors and its wholly-owned subsidiary, MS Services, serve in various
investment management, advisory, management and administrative capacities to
investment companies and pension plans and other institutional and individual
investors.
There are various lawsuits pending against Morgan Stanley involving
material amounts which, in the opinion of its management, will be resolved with
no material effect on the consolidated financial position of the company.
PORTFOLIO MANAGEMENT
HIAT's portfolio is managed by the High Yield Corporate team of the
Taxable Fixed-Income Group. Current members of the team include Stephen F.
Esser, a Managing Director of HIAT's Investment Manager, Gordon W. Loery, an
Executive Director of HIAT's Investment Manager, and Deanna L. Loughnane, an
Executive Director of HIAT's Investment Manager.
EXPENSES BORNE BY HIAT
Under the Investment Management Agreement, HIAT is obligated to bear all
of the costs and expenses of its operation, except those specifically assumed
by the Investment Manager, including, without limitation: charges and expenses
of any registrar, custodian or depository appointed by HIAT for the safekeeping
of its cash, portfolio securities or commodities and other property, and any
stock transfer or dividend agent or agents appointed by HIAT; brokers'
commissions chargeable to HIAT in connection with portfolio securities
transactions to which the Trust is a party; all taxes, including securities or
commodities issuance and transfer taxes, and fees payable by the Trust to
Federal, state or other governmental agencies; costs and expenses of engraving
or printing of certificates representing shares of HIAT; all costs and expenses
in connection with registration and maintenance of registration of HIAT and of
its shares with the Securities and Exchange Commission and various states and
other jurisdictions (including filing fees and legal fees and disbursements of
counsel); the costs and expense of preparing, printing, including typesetting,
and distributing prospectuses for such purposes; all expenses of shareholders'
and Trustees' meetings and of preparing, printing and mailing proxy statements
and reports to shareholders; fees and travel expenses of Trustees or members of
any advisory board or committee who are not employees of HIAT's Investment
Manager or any of their corporate affiliates; all expenses incident to the
payment of any dividend or distribution program; charges and expenses of any
outside pricing services; charges and expenses of legal counsel, including
counsel to the Independent Trustees of HIAT, and independent accountants in
connection with any matter relating to HIAT (not including compensation or
expenses of attorneys employed by the Investment Manager); membership dues of
industry associations; interest payable on borrowings; fees and expenses
incident to the listing of HIAT's shares on any stock exchange; postage;
insurance premiums on property or personnel (including officers and Trustees)
of HIAT which inure to its benefit; extraordinary expenses (including, but not
limited to legal claims, liabilities, litigation costs and any indemnification
related thereto); and all other charges and costs of HIAT's operations unless
otherwise explicitly provided in the Investment Management Agreement.
20
ADDITIONAL INFORMATION ABOUT HIAT AND HIGH YIELD
GENERAL
HIAT was organized as a "Massachusetts business trust" under the laws of
the Commonwealth of Massachusetts on June 17, 1987 and commenced operations as
a closed-end registered investment company on October 29, 1987. For a
discussion of the organization and operation of High Yield, see "Fund
Management" and "Investment Objective" in High Yield's Prospectus.
The Board of Trustees of HIAT and the Board of Directors of High Yield
oversee the management of the funds but do not themselves manage the funds. The
Trustees/Directors review various services provided by or under the direction
of the Investment Manager to ensure that the funds' general investment policies
and programs are properly carried out. The Trustees/Directors also conduct
their review to ensure that administrative services are provided to the funds
in a satisfactory manner.
Under state law, the duties of the Trustees/Directors are generally
characterized as a duty of loyalty and a duty of care. The duty of loyalty
requires a Trustee/Director to exercise his or her powers in the interest of
each fund and not the Trustee's/Director's own interest or the interest of
another person or organization. A Trustee/Director satisfies his or her duty of
care by acting in good faith with the care of an ordinarily prudent person and
in a manner the Trustee/Director reasonably believes to be in the best interest
of each fund and its shareholders.
FINANCIAL INFORMATION
For certain financial information about High Yield, see "Financial
Highlights" and "Past Performance" in High Yield's Prospectus, and for certain
financial information about HIAT, see HIAT's Annual Report for its fiscal year
ended September 30, 2001 and succeeding Semi-Annual Report for the six months
ended March 31, 2002.
MANAGEMENT
For information about the respective Board of Directors, Investment
Manager, and the Distributor of High Yield, see "Fund Management" in High
Yield's Prospectus and "Investment Management and Other Services" in High
Yield's Statement of Additional Information and, with respect to HIAT, see
"Additional Matters Regarding HIAT" above.
DESCRIPTION OF SECURITIES AND SHAREHOLDER INQUIRIES
For a description of the nature and most significant attributes of shares
of HIAT and High Yield, and information regarding shareholder inquiries, see
the discussion herein under "The Reorganization -- Description of Shares of
High Yield and HIAT" and "Available Information" as well as "Capital Stock and
Other Securities" in High Yield's Statement of Additional Information.
CUSTODIAN AND TRANSFER AGENT AND DIVIDEND PAYING AGENT
Morgan Stanley Trust is the Transfer Agent for each of HIAT's and High
Yield's shares and the Dividend Disbursing Agent for payment of dividends and
distributions on their respective shares. The principal business address of the
Transfer Agent is Harborside Financial Center, Plaza Two, Jersey City, New
Jersey 07311. The Bank of New York, 100 Church Street, New York, NY 10007 is
the Custodian of the assets of both HIAT and High Yield.
21
DIVIDENDS, DISTRIBUTIONS AND TAXES
For a discussion of High Yield's and HIAT's policies with respect to
dividends, distributions and taxes, see "Distributions" and "Tax Consequences"
in High Yield's Prospectus and "Dividends and Distributions; Automatic Dividend
Reinvestment Plan" in HIAT's Prospectus.
PURCHASES AND REDEMPTIONS
For a discussion of how High Yield's shares may be purchased and redeemed,
see "How to Buy Shares," "How to Exchange Shares" and "How to Sell Shares" in
High Yield's Prospectus.
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
For a discussion of High Yield's performance, see management's letter to
shareholders in its Annual Report for its fiscal year ended August 31, 2002 and
its Semi-Annual Report for the six month period ended February 28, 2002, each
accompanying this Proxy Statement and Prospectus. For a discussion of the
performance of HIAT, see HIAT's Annual Report for its fiscal year ended
September 30, 2001 and the Semi-Annual Report for the six months ended March
31, 2002.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of High Yield, for the year ended ___________,
2002, and the financial statements of HIAT for the year ended September 30, 2001
have been audited by Deloitte & Touche LLP, independent auditors, and are
incorporated by reference and included in the Statement of Additional
Information relating to the Registration Statement on Form N-14 of which this
Proxy Statement and Prospectus forms a part. These financial statements have
been incorporated by reference in reliance upon such reports given upon the
authority of Deloitte & Touche LLP, as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of High Yield will
be passed upon by Mayer, Brown, Rowe & Maw, New York, New York. Such firm will
rely on Massachusetts counsel as to matters of Massachusetts law.
AVAILABLE INFORMATION
Additional information about HIAT and High Yield is available, as
applicable, in the following documents which are incorporated herein by
reference: (i) High Yield's Prospectus dated , attached to this Proxy
Statement and Prospectus, which Prospectus forms a part of Post-Effective
Amendment No. to High Yield's Registration Statement on Form N-1A (File Nos.
2-64782; 811-2932 (ii) High Yield's Annual Report for its fiscal year ended
August 31, 2002 and its preceding Semi-Annual Report for the six months ended
February 28, 2002, accompanying this Proxy Statement and Prospectus; and (iii)
HIAT's Annual Report for its fiscal year ended September 30, 2001 and its
succeeding Semi-Annual Report for the six months ended March 31, 2002. The
foregoing documents may be obtained without charge by calling (800) 869-NEWS
(toll-free).
HIAT and High Yield are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith, file
reports and other information with the Commission. Proxy material, reports and
other information about HIAT and High Yield which are of public record can be
inspected and copied at public reference facilities maintained by the
Commission at Room 1204, Judiciary
22
Plaza, 450 Fifth Street, NW, Washington, D.C. 20549 and certain of its regional
offices, and copies of such materials can be obtained at prescribed rates from
the Public Reference Branch, Office of Consumer Affairs and Information
Services, Securities and Exchange Commission, Washington, D.C. 20549.
The shares of beneficial interest of HIAT are listed on the NYSE and, in
accordance with the requirements of the NYSE, HIAT files proxy materials,
reports and other information with the NYSE. These materials can be inspected
at the New York Stock Exchange located at 11 Wall Street, New York, NY 10005 or
by telephoning the NYSE at (212) 656-3000.
OTHER BUSINESS
Management of HIAT knows of no business other than the matters specified
above which will be presented at the Meeting. Since matters not known at the
time of the solicitation may come before the Meeting, the proxy as solicited
confers discretionary authority with respect to such matters as properly come
before the Meeting, including any adjournment or adjournments thereof, and it
is the intention of the persons named as attorneys-in-fact in the proxy to vote
this proxy in accordance with their judgment on such matters.
By Order of the Board of Trustees
Barry Fink,
Secretary
, 2002
23
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made as of this
25th day of July, 2002, by and between MORGAN STANLEY HIGH YIELD SECURITIES
INC., a Maryland corporation ("High Yield") and MORGAN STANLEY HIGH INCOME
ADVANTAGE TRUST, a Massachusetts business trust ("HIAT").
This Agreement is intended to be and is adopted as a "plan of
reorganization" within the meaning of Treas. Reg. 1.368-2(g), for a
reorganization under Section 368(a)(1) of the Internal Revenue Code of 1986, as
amended (the "Code"). The reorganization ("Reorganization") will consist of the
transfer to High Yield of substantially all of the assets of HIAT in exchange
for the assumption by High Yield of all stated liabilities of HIAT and the
issuance by High Yield of Class D shares of beneficial interest, par value
$0.01 per share (the "High Yield Shares"), to be distributed, after the Closing
Date hereinafter referred to, to the shareholders of HIAT in liquidation of
HIAT as provided herein, all upon the terms and conditions hereinafter set
forth in this Agreement.
In consideration of the premises and of the covenants and agreements
hereinafter set forth, the parties hereto covenant and agree as follows:
1. THE REORGANIZATION AND LIQUIDATION OF HIAT
1.1 Subject to the terms and conditions herein set forth and on the basis
of the representations and warranties contained herein, HIAT agrees to assign,
deliver and otherwise transfer the HIAT Assets (as defined in paragraph 1.2) to
High Yield and High Yield agrees in exchange therefor to assume all of HIAT
stated liabilities on the Closing Date as set forth in paragraph 1.3(a) and to
deliver to HIAT the number of High Yield Shares, including fractional High
Yield Shares, determined in the manner set forth in paragraph 2.3. Such
transactions shall take place at the closing provided for in paragraph 3.1
("Closing").
1.2 (a) The "HIAT Assets" shall consist of all property, including without
limitation, all cash (other than the "Cash Reserve" (as defined in paragraph
1.3(b)), cash equivalents, securities and dividend and interest receivables
owned by HIAT, and any deferred or prepaid expenses shown as an asset on HIAT's
books on the Valuation Date.
(b) On or prior to the Valuation Date, HIAT will provide High Yield with a
list of all of HIAT assets to be assigned, delivered and otherwise transferred
to High Yield and of the stated liabilities to be assumed by High Yield
pursuant to this Agreement. HIAT reserves the right to sell any of the
securities on such list but will not, without the prior approval of High Yield,
acquire any additional securities other than securities of the type in which
High Yield is permitted to invest and in amounts agreed to in writing by High
Yield. High Yield will, within a reasonable time prior to the Valuation Date,
furnish HIAT with a statement of High Yield's investment objectives, policies
and restrictions and a list of the securities, if any, on the list referred to
in the first sentence of this paragraph that do not conform to High Yield's
investment objective, policies and restrictions. In the event that HIAT holds
any investments that High Yield is not permitted to hold, HIAT will dispose of
such securities on or prior to the Valuation Date. In addition, if it is
determined that the portfolios of HIAT and High Yield, when aggregated, would
contain investments exceeding certain percentage limitations imposed upon High
Yield with respect to such investments, HIAT if requested by High Yield will,
on or prior to the Valuation Date, dispose of and/or reinvest a sufficient
amount of such investments as may be necessary to avoid violating such
limitations as of the Closing Date (as defined in paragraph 3.1).
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1.3 (a) HIAT will endeavor to discharge all of its liabilities and
obligations on or prior to the Valuation Date. High Yield will assume all
stated liabilities, which includes, without limitation, all expenses, costs,
charges and reserves reflected on an unaudited Statement of Assets and
Liabilities of HIAT prepared by the Treasurer of HIAT, as of the Valuation Date
in accordance with generally accepted accounting principles consistently
applied from the prior audited period.
(b) On the Valuation Date, HIAT may establish a cash reserve, which shall
not exceed 5% of HIAT's net assets as of the close of business on the Valuation
Date ("Cash Reserve") to be retained by HIAT and used for the payment of its
liabilities not discharged prior to the Valuation Date and for the expenses of
dissolution.
1.4 In order for HIAT to comply with Section 852(a)(1) of the Code and to
avoid having any investment company taxable income or net capital gain (as
defined in Sections 852(b)(2) and 1222(11) of the Code, respectively) in the
short taxable year ending with its dissolution, HIAT will on or before the
Valuation Date (a) declare a dividend in an amount large enough so that it will
have declared dividends of all of its investment company taxable income and net
capital gain, if any, for such taxable year (determined without regard to any
deduction for dividends paid) and (b) distribute such dividend.
1.5 On the Closing Date or as soon as practicable thereafter, HIAT will
distribute High Yield Shares received by HIAT pursuant to paragraph 1.1 pro
rata to its shareholders of record determined as of the close of business on
the Valuation Date ("HIAT Shareholders"). Each HIAT Shareholder will receive
Class D shares of High Yield. Such distribution will be accomplished by an
instruction, signed by the Secretary of HIAT, to transfer High Yield Shares
then credited to HIAT's account on the books of High Yield to open accounts on
the books of High Yield in the names of the HIAT Shareholders and representing
the respective pro rata number of High Yield Shares due such HIAT Shareholders.
All issued and outstanding shares of HIAT simultaneously will be canceled on
HIAT's books; however, share certificates representing interests in HIAT will
represent a number of High Yield Shares after the Closing Date as determined in
accordance with paragraph 2.3. High Yield will issue certificates representing
High Yield Shares in connection with such exchange only upon the written
request of a HIAT Shareholder.
1.6 Ownership of High Yield Shares will be shown on the books of High
Yield's transfer agent. High Yield Shares will be issued in the manner
described in High Yield's current Prospectus and Statement of Additional
Information.
1.7 Any transfer taxes payable upon issuance of High Yield Shares in a
name other than the registered holder of High Yield Shares on HIAT's books as
of the close of business on the Valuation Date shall, as a condition of such
issuance and transfer, be paid by the person to whom High Yield Shares are to
be issued and transferred.
1.8 Any reporting responsibility of HIAT is and shall remain the
responsibility of HIAT up to and including the date on which HIAT is dissolved
pursuant to paragraph 1.9.
1.9 Within one year after the Closing Date, HIAT shall pay or make
provision for the payment of all its liabilities and taxes, and distribute to
the shareholders of HIAT as of the close of business on the Valuation Date any
remaining amount of the Cash Reserve (as reduced by the estimated cost of
distributing it to shareholders). If and to the extent that any trust, escrow
account, or other similar entity continues after the close of such one-year
period in connection either with making provision for payment of liabilities or
taxes or with distributions to shareholders of HIAT, such entity shall either
(i) qualify as a liquidating trust under Section 7701 of the Code (and
applicable Treasury Regulations thereunder) or other entity which does not
constitute a continuation of HIAT for federal income tax purposes, or (ii) be
subject to a waiver under Section 368(a)(2)(G)(ii) of the complete distribution
requirement of Section 368(a)(2)(G)(i) of the Code. HIAT shall be dissolved
under Massachusetts law, promptly following the making of all distributions
pursuant to paragraph 1.5 (and, in any event, within one year after the Closing
Date).
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1.10 Copies of all books and records maintained on behalf of HIAT in
connection with its obligations under the Investment Company Act of 1940, as
amended (the "1940 Act"), the Code, state blue sky laws or otherwise in
connection with this Agreement will promptly after the Closing be delivered to
officers of High Yield or their designee and High Yield or its designee shall
comply with applicable record retention requirements to which HIAT is subject
under the 1940 Act.
2. VALUATION
2.1 The value of the HIAT Assets shall be the value of such assets
computed as of 4:00 p.m. on the New York Stock Exchange on the third business
day following the receipt of the requisite approval by shareholders of HIAT of
this Agreement or at such time on such earlier or later date after such
approval as may be mutually agreed upon in writing (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in HIAT's initial registration statement on Form N-2 dated June 17, 1987
which procedures are similar to the valuation procedures in High Yield's then
current Prospectus and Statement of Additional Information.
2.2 The net asset value of a High Yield Share shall be the net asset value
per share computed on the Valuation Date, using the valuation procedures set
forth in High Yield's then current Prospectus and Statement of Additional
Information.
2.3 The number of High Yield Shares (including fractional shares, if any)
to be issued hereunder shall be determined, with respect to each class, by
dividing the aggregate net asset value of HIAT shares (determined in accordance
with paragraph 2.1) by the net asset value per share of Class D shares of High
Yield (determined in accordance with paragraph 2.2). For purposes of this
paragraph, the aggregate net asset value of the shares of HIAT shall not
include the amount of the Cash Reserve.
2.4 All computations of value shall be made by Morgan Stanley Services
Company Inc. ("MS Services") in accordance with its regular practice in pricing
High Yield. High Yield shall cause MS Services to deliver a copy of its
valuation report at the Closing.
3. CLOSING AND CLOSING DATE
3.1 The Closing shall take place on the next business day following the
Valuation Date (the "Closing Date"). The Closing shall be held as of a.m.
Eastern time on , 2002, or at such other time as the parties may agree. The
Closing shall be held at 1221 Avenue of the Americas, New York, New York, at
the principal offices of HIAT and High Yield. All acts taking place at the
Closing shall be deemed to take place simultaneously as of a.m. Eastern
time on the Closing Date unless otherwise provided.
3.2 Portfolio securities held by HIAT and represented by a certificate or
other written instrument shall be presented by it or on its behalf to The Bank
of New York (the "Custodian"), as custodian for High Yield, for examination no
later than five business days preceding the Valuation Date. Such portfolio
securities (together with any cash or other assets) shall be delivered by HIAT
to the Custodian for the account of High Yield on or before the Closing Date in
conformity with applicable custody provisions under the 1940 Act and duly
endorsed in proper form for transfer in such condition as to constitute good
delivery thereof in accordance with the custom of brokers. The portfolio
securities shall be accompanied by all necessary Federal and state stock
transfer stamps or a check for the appropriate purchase price of such stamps.
Portfolio securities and instruments deposited with a securities depository (as
defined in Rule 17f-4 under the 1940 Act) shall be delivered on or before the
Closing Date by book-entry in accordance with customary practices of such
depository and the Custodian. The cash delivered shall be in the form of a
Federal Funds wire, payable to the order of "The Bank of New York, Custodian
for Morgan Stanley High Yield Securities Inc."
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3.3 In the event that on the Valuation Date, (a) the New York Stock
Exchange shall be closed to trading or trading thereon shall be restricted or
(b) trading or the reporting of trading on such Exchange or elsewhere shall be
disrupted so that, in the judgment of both High Yield and HIAT, accurate
appraisal of the value of the net assets of High Yield or the HIAT Assets is
impracticable, the Valuation Date shall be postponed until the first business
day after the day when trading shall have been fully resumed without
restriction or disruption and reporting shall have been restored.
3.4 If requested, HIAT shall deliver to High Yield or its designee (a) at
the Closing, a list, certified by its Secretary, of the names, addresses and
taxpayer identification numbers of the HIAT Shareholders and the number and
percentage ownership of outstanding HIAT shares owned by each such HIAT
Shareholder, all as of the Valuation Date, and (b) as soon as practicable after
the Closing, all original documentation (including Internal Revenue Service
forms, certificates, certifications and correspondence) relating to the HIAT
Shareholders' taxpayer identification numbers and their liability for or
exemption from back-up withholding. High Yield shall issue and deliver to such
Secretary a confirmation evidencing delivery of High Yield Shares to be
credited on the Closing Date to HIAT or provide evidence satisfactory to HIAT
that such High Yield Shares have been credited to HIAT's account on the books
of High Yield. At the Closing, each party shall deliver to the other such bills
of sale, checks, assignments, share certificates, if any, receipts or other
documents as such other party or its counsel may reasonably request.
4. COVENANTS OF HIGH YIELD AND HIAT
4.1 Except as otherwise expressly provided herein with respect to HIAT,
High Yield and HIAT each will operate its business in the ordinary course
between the date hereof and the Closing Date, it being understood that such
ordinary course of business will include customary dividends and other
distributions.
4.2 High Yield will prepare and file with the Securities and Exchange
Commission ("Commission") a registration statement on Form N-14 under the
Securities Act of 1933, as amended ("1933 Act"), relating to High Yield Shares
("Registration Statement"). HIAT will provide High Yield with the Proxy
Materials as described in paragraph 4.3 below, for inclusion in the
Registration Statement. HIAT will further provide High Yield with such other
information and documents relating to HIAT as are reasonably necessary for the
preparation of the Registration Statement.
4.3 HIAT will call a meeting of its shareholders to consider and act upon
this Agreement and to take all other action necessary to obtain approval of the
transactions contemplated herein. HIAT will prepare the notice of meeting, form
of proxy and proxy statement (collectively, "Proxy Materials") to be used in
connection with such meeting; provided that High Yield will furnish HIAT with
its currently effective prospectus for inclusion in the Proxy Materials and
with such other information relating to High Yield as is reasonably necessary
for the preparation of the Proxy Materials.
4.4 HIAT will assist High Yield in obtaining such information as High
Yield reasonably requests concerning the beneficial ownership of HIAT shares.
4.5 Subject to the provisions of this Agreement, High Yield and HIAT will
each take, or cause to be taken, all action, and do or cause to be done, all
things reasonably necessary, proper or advisable to consummate and make
effective the transactions contemplated by this Agreement.
4.6 HIAT shall furnish or cause to be furnished to High Yield within 30
days after the Closing Date a statement of HIAT's assets and liabilities as of
the Closing Date, which statement shall be certified by HIAT's Treasurer and
shall be in accordance with generally accepted accounting principles
consistently applied. As
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promptly as practicable, but in any case within 60 days after the Closing Date,
HIAT shall furnish High Yield, in such form as is reasonably satisfactory to
High Yield, a statement certified by HIAT's Treasurer of earnings and profits
of HIAT for Federal income tax purposes that will be carried over to High Yield
pursuant to Section 381 of the Code.
4.7 As soon after the Closing Date as is reasonably practicable, HIAT (a)
shall prepare and file all Federal and other tax returns and reports of HIAT
required by law to be filed with respect to all periods ending on or before the
Closing Date but not theretofore filed and (b) shall pay all Federal and other
taxes shown as due thereon and/or all Federal and other taxes that were unpaid
as of the Closing Date, including without limitation, all taxes for which the
provision for payment was made as of the Closing Date (as represented in
paragraph 5.2(k)).
4.8 High Yield agrees to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act and the 1940 Act and to
make such filings required by the state Blue Sky and securities laws as it may
deem appropriate in order to continue its operations after the Closing Date.
5. REPRESENTATIONS AND WARRANTIES
5.1 High Yield represents and warrants to HIAT as follows:
(a) High Yield is a validly existing Maryland corporation with full power
to carry on its business as presently conducted;
(b) High Yield is a duly registered, open-end, management investment
company, and its registration with the Commission as an investment company
under the 1940 Act and the registration of its shares under the 1933 Act
are in full force and effect;
(c) All of the issued and outstanding shares of High Yield have been
offered and sold in compliance in all material respects with applicable
registration requirements of the 1933 Act and state securities laws. Shares
of High Yield are registered in all jurisdictions in which they are
required to be registered under state securities laws and other laws, and
said registrations, including any periodic reports or supplemental filings,
are complete and current, all fees required to be paid have been paid, and
High Yield is not subject to any stop order and is fully qualified to sell
its shares in each state in which its shares have been registered;
(d) The current Prospectus and Statement of Additional Information of
High Yield conform in all material respects to the applicable requirements
of the 1933 Act and the 1940 Act and the regulations thereunder and do not
include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading;
(e) High Yield is not in, and the execution, delivery and performance of
this Agreement will not result in a, material violation of any provision of
High Yield's Articles of Incorporation or By-Laws or of any agreement,
indenture, instrument, contract, lease or other undertaking to which High
Yield is a party or by which it is bound;
(f) No litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or, to its
knowledge, threatened against High Yield or any of its properties or assets
which, if adversely determined, would materially and adversely affect its
financial condition or the conduct of its business; and High Yield knows of
no facts that might form the basis for the institution of
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such proceedings and is not a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body which
materially and adversely affects, or is reasonably likely to materially and
adversely effect, its business or its ability to consummate the
transactions herein contemplated;
(g) The Statement of Assets and Liabilities, Statement of Operations,
Statement of Changes in Net Assets and Financial Highlights for the year
ended _________, 2002, of High Yield audited by Deloitte & Touche LLP
(copies of which have been furnished to HIAT), fairly present, in all
material respects, High Yield's financial condition as of such date in
accordance with generally accepted accounting principles, and its results
of such operations, changes in its net assets and financial highlights for
such period, and as of such date there were no known liabilities of High
Yield (contingent or otherwise) not disclosed therein that would be
required in accordance with generally accepted accounting principles to be
disclosed therein;
(h) All issued and outstanding High Yield Shares are, and at the Closing
Date will be, duly and validly issued and outstanding, fully paid and
nonassessable with no personal liability attaching to the ownership
thereof, except as set forth under the caption "Capital Stock and Other
Securities" in High Yield's current Statement of Additional Information
incorporated by reference in the Statement of Additional Information to the
Registration Statement. High Yield does not have outstanding any options,
warrants or other rights to subscribe for or purchase any of its shares;
(i) The execution, delivery and performance of this Agreement have been
duly authorized by all necessary action on the part of High Yield, and this
Agreement constitutes a valid and binding obligation of High Yield
enforceable in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium and other laws relating
to or affecting creditors rights and to general equity principles. No other
consents, authorizations or approvals are necessary in connection with High
Yield's performance of this Agreement;
(j) High Yield Shares to be issued and delivered to HIAT, for the account
of the HIAT Shareholders, pursuant to the terms of this Agreement will at
the Closing Date have been duly authorized and, when so issued and
delivered, will be duly and validly issued High Yield Shares, and will be
fully paid and non-assessable with no personal liability attaching to the
ownership thereof, except as set forth under the caption "Capital Stock and
Other Securities" in High Yield's current Statement of Additional
Information incorporated by reference in the Statement of Additional
Information to the Registration Statement;
(k) All material Federal and other tax returns and reports of High Yield
required by law to be filed on or before the Closing Date have been filed
and are correct, and all Federal and other taxes shown as due or required
to be shown as due on said returns and reports have been paid or provision
has been made for the payment thereof, and to the best of High Yield's
knowledge, no such return is currently under audit and no assessment has
been asserted with respect to any such return;
(l) For each taxable year since its inception, High Yield has met the
requirements of Subchapter M of the Code for qualification and treatment as
a "regulated investment company" and neither the execution or delivery of
nor the performance of its obligations under this Agreement will adversely
affect, and no other events are reasonably likely to occur which will
adversely affect the ability of High Yield to continue to meet the
requirements of Subchapter M of the Code;
(m) Since August 31, 2002 there has been no change by High Yield in
accounting methods, principles, or practices, including those required by
generally accepted accounting principles;
(n) The information furnished or to be furnished by High Yield for use in
registration statements, proxy materials and other documents which may be
necessary in connection with the transactions contemplated hereby shall be
accurate and complete in all material respects and shall comply in all
material respects with Federal securities and other laws and regulations
applicable thereto; and
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(o) The Proxy Materials to be included in the Registration Statement
(only insofar as they relate to High Yield) will, on the effective date of
the Registration Statement and on the Closing Date, not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which such statements were made, not materially
misleading.
5.2 HIAT represents and warrants to High Yield as follows:
(a) HIAT is a series of a validly existing Massachusetts business trust
with full power to carry on its business as presently conducted;
(b) HIAT is a duly registered, closed-end, management investment company,
and its registration with the Commission as an investment company under the
1940 Act is in full force and effect;
(c) All of the issued and outstanding shares of beneficial interest of
HIAT have been offered and sold in compliance in all material respects with
applicable requirements of the 1933 Act and state securities laws. Shares
of HIAT are registered in all jurisdictions in which they are required to
be registered and said registrations, including any periodic reports or
supplemental filings, are complete and current, all fees required to be
paid have been paid, and HIAT is not subject to any stop order and is fully
qualified to sell its shares in each state in which its shares have been
registered;
(d) The Registration Statement of HIAT on Form N-2 conformed in all
material respects to the applicable requirements of the 1933 Act and the
1940 Act and the regulations thereunder and did not include any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading;
(e) HIAT is not, and the execution, delivery and performance of this
Agreement will not result, in a material violation of any provision of
HIAT's Declaration of Trust or By-Laws or of any agreement, indenture,
instrument, contract, lease or other undertaking to which HIAT is a party
or by which it is bound;
(f) No litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or, to its
knowledge, threatened against HIAT or any of its properties or assets
which, if adversely determined, would materially and adversely affect its
financial condition or the conduct of its business; and HIAT knows of no
facts that might form the basis for the institution of such proceedings and
is not a party to or subject to the provisions of any order, decree or
judgment of any court or governmental body which materially and adversely
affects, or is reasonably likely to materially and adversely effect, its
business or its ability to consummate the transactions herein contemplated;
(g) The Statement of Assets and Liabilities, Statement of Operations,
Statement of Changes in Net Assets and Financial Highlights of HIAT for the
year ended September 30, 2001, audited by Deloitte & Touche LLP (copies of
which have been or will be furnished to High Yield) fairly present, in all
material respects, HIAT's financial condition as of such date, and its
results of operations, changes in its net assets and financial highlights
for such period in accordance with generally accepted accounting
principles, and as of such date there were no known liabilities of HIAT
(contingent or otherwise) not disclosed therein that would be required in
accordance with generally accepted accounting principles to be disclosed
therein;
(h) HIAT has no material contracts or other commitments (other than this
Agreement) that will be terminated with liability to it prior to the
Closing Date;
(i) All issued and outstanding shares of HIAT are, and at the Closing
Date will be, duly and validly issued and outstanding, fully paid and
nonassessable with no personal liability attaching to the ownership
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thereof, except as set forth under the caption "The Reorganization--
Description of Shares of High Yield and HIAT and the Organization of the Two
Funds" in this Proxy Statement and Prospectus. HIAT does not have outstanding
any options, warrants or other rights to subscribe for or purchase any of its
shares, nor is there outstanding any security convertible to any of its
shares. All such shares will, at the time of Closing, be held by the persons
and in the amounts set forth in the list of shareholders submitted to High
Yield pursuant to paragraph 3.4;
(j) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Closing Date by all necessary action on
the part of HIAT, and subject to the approval of HIAT's shareholders, this
Agreement constitutes a valid and binding obligation of HIAT, enforceable
in accordance with its terms, subject as to enforcement to bankruptcy,
insolvency, reorganization, moratorium and other laws relating to or
affecting creditors rights and to general equity principles. No other
consents, authorizations or approvals are necessary in connection with
HIAT's performance of this Agreement;
(k) All material Federal and other tax returns and reports of HIAT
required by law to be filed on or before the Closing Date shall have been
filed and are correct and all Federal and other taxes shown as due or
required to be shown as due on said returns and reports have been paid or
provision has been made for the payment thereof, and to the best of HIAT's
knowledge, no such return is currently under audit and no assessment has
been asserted with respect to any such return;
(l) For each taxable year since its inception, HIAT, has met all the
requirements of Subchapter M of the Code for qualification and treatment as
a "regulated investment company" and neither the execution or delivery of
nor the performance of its obligations under this Agreement will adversely
affect, and no other events are reasonably likely to occur which will
adversely affect the ability of HIAT to continue to meet the requirements
of Subchapter M of the Code;
(m) At the Closing Date, HIAT will have good and valid title to the HIAT
Assets, subject to no liens (other than the obligation, if any, to pay the
purchase price of portfolio securities purchased by HIAT which have not
settled prior to the Closing Date), security interests or other
encumbrances, and full right, power and authority to assign, deliver and
otherwise transfer such assets hereunder, and upon delivery and payment for
such assets, High Yield will acquire good and marketable title thereto,
subject to no restrictions on the full transfer thereof, including any
restrictions as might arise under the 1933 Act;
(n) On the effective date of the Registration Statement, at the time of
the meeting of HIAT's shareholders and on the Closing Date, the Proxy
Materials (exclusive of the currently effective High Yield Prospectus
contained therein) will (i) comply in all material respects with the
provisions of the 1933 Act, the Securities Exchange Act of 1934, as amended
("1934 Act") and the 1940 Act and the regulations thereunder and (ii) not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading. Any other information furnished by HIAT for use in
the Registration Statement or in any other manner that may be necessary in
connection with the transactions contemplated hereby shall be accurate and
complete and shall comply in all material respects with applicable Federal
securities and other laws and regulations thereunder;
(o) HIAT will, on or prior to the Valuation Date, declare one or more
dividends or other distributions to shareholders that, together with all
previous dividends and other distributions to shareholders, shall have the
effect of distributing to the shareholders all of its investment company
taxable income and net capital gain, if any, through the Valuation Date
(computed without regard to any deduction for dividends paid);
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(p) HIAT has maintained or has caused to be maintained on its behalf all
books and accounts as required of a registered investment company in
compliance with the requirements of Section 31 of the 1940 Act and the
Rules thereunder; and
(q) HIAT is not acquiring High Yield Shares to be issued hereunder for
the purpose of making any distribution thereof other than in accordance
with the terms of this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF HIAT
The obligations of HIAT to consummate the transactions provided for herein
shall be subject, at its election, to the performance by High Yield of all the
obligations to be performed by it hereunder on or before the Closing Date and,
in addition thereto, the following conditions:
6.1 All representations and warranties of High Yield contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date with the same force and effect as if
made on and as of the Closing Date;
6.2 High Yield shall have delivered to HIAT, a certificate of its
President and Treasurer, in a form reasonably satisfactory to HIAT and dated as
of the Closing Date, to the effect that the representations and warranties of
High Yield made in this Agreement are true and correct at and as of the Closing
Date, except as they may be affected by the transactions contemplated by this
Agreement, and as to such other matters as HIAT shall reasonably request;
6.3 HIAT shall have received a favorable opinion from Mayer, Brown, Rowe &
Maw, counsel to High Yield, dated as of the Closing Date, to the effect that:
(a) High Yield is a validly existing Maryland corporation, and has the
power to own all of its properties and assets and to carry on its business
as presently conducted (Maryland counsel may be relied upon in delivering
such opinion); (b) High Yield is a duly registered, open-end, management
investment company, and its registration with the Commission as an
investment company under the 1940 Act is in full force and effect; (c) this
Agreement has been duly authorized, executed and delivered by High Yield
and, assuming that the Registration Statement complies with the 1933 Act,
the 1934 Act and the 1940 Act and regulations thereunder and assuming due
authorization, execution and delivery of this Agreement by HIAT, is a valid
and binding obligation of High Yield enforceable against High Yield in
accordance with its terms, subject as to enforcement, to bankruptcy,
insolvency, reorganization, moratorium and other laws relating to or
affecting creditors rights and to general equity principles; (d) High Yield
Shares to be issued to HIAT Shareholders as provided by this Agreement are
duly authorized and upon such delivery will be validly issued, fully paid
and non-assessable (except as set forth under the caption "Capital Stock
and Other Securities" in High Yield's Statement of Additional Information),
and no shareholder of High Yield has any preemptive rights to subscription
or purchase in respect thereof (Maryland counsel may be relied upon in
delivering such opinion); (e) the execution and delivery of this Agreement
did not, and the consummation of the transactions contemplated hereby will
not, violate High Yield's Articles of Incorporation or By-Laws (Maryland
counsel may be relied upon in delivering such opinion); and (f) to the
knowledge of such counsel, no consent, approval, authorization or order of
any court or governmental authority of the United States or any state is
required for the consummation by High Yield of the transactions
contemplated herein, except such as have been obtained under the 1933 Act,
the 1934 Act and the 1940 Act and such as may be required under state
securities laws; and
6.4 As of the Closing Date, there shall have been no material change in
the investment objective, policies and restrictions nor any increase in the
investment management fees from those described in High Yield's Prospectus
dated and Statement of Additional Information dated .
A-9
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF HIGH YIELD
The obligations of High Yield to complete the transactions provided for
herein shall be subject, at its election, to the performance by HIAT of all the
obligations to be performed by it hereunder on or before the Closing Date and,
in addition thereto, the following conditions:
7.1 All representations and warranties of HIAT contained in this Agreement
shall be true and correct in all material respects as of the date hereof and,
except as they may be affected by the transactions contemplated by this
Agreement, as of the Closing Date with the same force and effect as if made on
and as of the Closing Date;
7.2 HIAT shall have delivered to High Yield at the Closing a certificate
of its President and its Treasurer, in form and substance satisfactory to High
Yield and dated as of the Closing Date, to the effect that the representations
and warranties of HIAT made in this Agreement are true and correct at and as of
the Closing Date, except as they may be affected by the transactions
contemplated by this Agreement, and as to such other matters as High Yield
shall reasonably request;
7.3 HIAT shall have delivered to High Yield a statement of the HIAT Assets
and its liabilities, together with a list of HIAT's portfolio securities and
other assets showing the respective adjusted bases and holding periods thereof
for income tax purposes, as of the Closing Date, certified by the Treasurer of
HIAT;
7.4 HIAT shall have delivered to High Yield within three business days
after the Closing (a) a letter from PricewaterhouseCoopers LLP with respect to
the taxable year ended September 30, 1999, and a letter from Deloitte & Touche
for the taxable years ended September 30, 2000 and 2001, each dated as of the
Closing Date stating that such respective firm has performed a limited review of
the Federal and state income tax returns of HIAT for each of the respective
taxable years and, based on such limited review, nothing came to their attention
that caused them to believe that such returns did not properly reflect, in all
material respects, the Federal and state income tax liabilities of HIAT for the
periods covered thereby; (b) a letter from Deloitte & Touche LLP dated as of the
date of the Closing Date stating that for the period from September 30, 2001 to
and including the Closing Date, Deloitte & Touche LLP has performed a limited
review (based on unaudited financial data) to ascertain the amount of applicable
Federal, state and local taxes and has determined that same either have been
paid or reserves have been established for payment of such taxes, and, based on
such limited review, nothing came to their attention that caused them to believe
that the taxes paid or reserves set aside for payment of such taxes were not
adequate in all material respects for the satisfaction of all Federal, state and
local tax liabilities for the period from September 30, 2001 to and including
the Closing Date. Each respective letter shall contain a statement that based on
such limited reviews, nothing came to their respective attention that caused
them to believe that HIAT would not qualify as a regulated investment company
for Federal income tax purposes for any such year or period;
7.5 High Yield shall have received at the Closing a favorable opinion from
Mayer, Brown, Rowe & Maw, counsel to HIAT, dated as of the Closing Date to the
effect that:
(a) HIAT is a validly existing Massachusetts business trust and has the
power to own all of its properties and assets and to carry on its business
as presently conducted (Massachusetts counsel may be relied upon in
delivering such opinion); (b) HIAT is a duly registered, closed-end,
management investment company under the 1940 Act, and its registration with
the Commission as an investment company under the 1940 Act is in full force
and effect; (c) this Agreement has been duly authorized, executed and
delivered by HIAT and, assuming that the Registration Statement complies
with the 1933 Act, the 1934 Act and the 1940 Act and the regulations
thereunder and assuming due authorization, execution and delivery of this
Agreement by High Yield, is a valid and binding obligation of HIAT
enforceable against HIAT in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors rights and to general equity
principles; (d) the
A-10
execution and delivery of this Agreement did not, and the consummation of
the transactions contemplated hereby will not, violate HIAT's Declaration
of Trust or By-Laws (Massachusetts counsel may be relied upon in delivering
such opinion); and (e) to the knowledge of such counsel, no consent,
approval, authorization or order of any court or governmental authority of
the United States or any state is required for the consummation by HIAT of
the transactions contemplated herein, except such as have been obtained
under the 1933 Act, the 1934 Act and the 1940 Act and such as may be
required under state securities laws; and
7.6 On the Closing Date, the HIAT Assets shall include no assets that High
Yield, by reason of limitations of the fund's Articles of Incorporation or
otherwise, may not properly acquire.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF HIGH YIELD AND HIAT
The obligations of HIAT and High Yield hereunder are each subject to the
further conditions that on or before the Closing Date:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
HIAT in accordance with the provisions of HIAT's Declaration of Trust, and
certified copies of the resolutions evidencing such approval shall have been
delivered to High Yield;
8.2 On the Closing Date, no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with,
this Agreement or the transactions contemplated herein;
8.3 All consents of other parties and all other consents, orders and
permits of Federal, state and local regulatory authorities (including those of
the Commission and of state Blue Sky and securities authorities, including
"no-action" positions of and exemptive orders from such Federal and state
authorities) deemed necessary by High Yield or HIAT to permit consummation, in
all material respects, of the transactions contemplated herein shall have been
obtained, except where failure to obtain any such consent, order or permit
would not involve risk of a material adverse effect on the assets or properties
of High Yield or HIAT;
8.4 The Registration Statement shall have become effective under the 1933
Act, no stop orders suspending the effectiveness thereof shall have been issued
and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act;
8.5 HIAT shall have declared and paid a dividend or dividends and/or other
distribution or distributions that, together with all previous such dividends
or distributions, shall have the effect of distributing to the HIAT
Shareholders all of HIAT's investment company taxable income (computed without
regard to any deduction for dividends paid) and all of its net capital gain
(after reduction for any capital loss carry-forward and computed without regard
to any deduction for dividends paid) for all taxable years ending on or before
the Closing Date; and
8.6 The parties shall have received the opinion of the law firm of Mayer,
Brown, Rowe & Maw (based on such representations as such law firm shall
reasonably request), addressed to High Yield and HIAT, which opinion may be
relied upon by the shareholders of HIAT, substantially to the effect that, for
Federal income tax purposes:
(a) The transfer of HIAT's assets in exchange for High Yield Shares and
the assumption by High Yield of certain stated liabilities of HIAT followed
by the distribution by HIAT of High Yield Shares to the HIAT Shareholders
in exchange for their HIAT shares pursuant to and in accordance with the
terms
A-11
of the Reorganization Agreement will constitute a "reorganization" within
the meaning of Section 368(a)(1)(C) of the Code, and HIAT and High Yield
will each be a "party to a reorganization" within the meaning of Section
368(b) of the Code;
(b) No gain or loss will be recognized by High Yield upon the receipt of
the assets of HIAT solely in exchange for High Yield Shares and the
assumption by High Yield of the stated liabilities of HIAT;
(c) No gain or loss will be recognized by HIAT upon the transfer of the
assets of HIAT to High Yield in exchange for High Yield Shares and the
assumption by High Yield of the stated liabilities or upon the distribution
of High Yield Shares to the HIAT Shareholders in exchange for their HIAT
shares;
(d) No gain or loss will be recognized by the HIAT Shareholders upon the
exchange of the HIAT shares for High Yield Shares;
(e) The aggregate tax basis for High Yield Shares received by each HIAT
Shareholder pursuant to the reorganization will be the same as the
aggregate tax basis of the HIAT Shares held by each such HIAT Shareholder
immediately prior to the Reorganization;
(f) The holding period of High Yield Shares to be received by each HIAT
Shareholder will include the period during which the HIAT Shares
surrendered in exchange therefor were held (provided such HIAT Shares were
held as capital assets on the date of the Reorganization);
(g) The tax basis of the assets of HIAT acquired by High Yield will be
the same as the tax basis of such assets to HIAT immediately prior to the
Reorganization; and
(h) The holding period of the assets of HIAT in the hands of High Yield
will include the period during which those assets were held by HIAT.
Notwithstanding anything herein to the contrary, neither High Yield nor
HIAT may waive the conditions set forth in this paragraph 8.6.
9. FEES AND EXPENSES
9.1 (a) High Yield shall bear its expenses incurred in connection with the
entering into, and carrying out of, the provisions of this Agreement, including
legal, accounting, Commission registration fees and Blue Sky expenses. HIAT
shall bear, as set forth in the Proxy Statement and Prospectus contained in the
Registration Statement, its expenses incurred in connection with the entering
into and carrying out of the provisions of this Agreement, including legal and
accounting fees, printing, filing and proxy solicitation expenses incurred in
connection with the consummation of the transactions contemplated herein. HIAT
shall bear any other expenses in connection with the provisions of this
Agreement including certain other legal and accounting fees and portfolio
transfer taxes (if any) incurred in connection with the consummation of the
transactions contemplated herein.
(b) In the event the transactions contemplated herein are not consummated
by reason of HIAT being either unwilling or unable to go forward (other than by
reason of the nonfulfillment or failure of any condition to HIAT's obligations
specified in this Agreement), HIAT's only obligation hereunder shall be to
reimburse High Yield for all reasonable out-of-pocket fees and expenses
incurred by High Yield in connection with those transactions.
(c) In the event the transactions contemplated herein are not consummated
by reason of High Yield being either unwilling or unable to go forward (other
than by reason of the nonfulfillment or failure of any condition to High
Yield's obligations specified in this Agreement), High Yield's only obligation
hereunder shall be to reimburse HIAT for all reasonable out-of-pocket fees and
expenses incurred by HIAT in connection with those transactions.
A-12
10. ENTIRE AGREEMENT, SURVIVAL OF WARRANTIES
10.1 This Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection
herewith shall survive the consummation of the transactions contemplated
herein, except that the representations, warranties and covenants of HIAT
hereunder shall not survive the dissolution and complete liquidation of HIAT in
accordance with Section 1.9.
11. TERMINATION
11.1 This Agreement may be terminated and the transactions contemplated
hereby may be abandoned at any time prior to the Closing:
(a) by the mutual written consent of HIAT and High Yield;
(b) by either High Yield or HIAT by notice to the other, without
liability to the terminating party on account of such termination
(providing the terminating party is not otherwise in material default or
breach of this Agreement) if the Closing shall not have occurred on or
before March 31, 2003; or
(c) by either High Yield or HIAT in writing without liability to the
terminating party on account of such termination (provided the terminating
party is not otherwise in material default or breach of this Agreement), if
(i) the other party shall fail to perform in any material respect its
agreements contained herein required to be performed on or prior to the
Closing Date, (ii) the other party materially breaches any of its
representations, warranties or covenants contained herein, (iii) the HIAT
shareholders fail to approve this Agreement at any meeting called for such
purpose at which a quorum was present or (iv) any other condition herein
expressed to be precedent to the obligations of the terminating party has
not been met and it reasonably appears that it will not or cannot be met.
11.2 (a) Termination of this Agreement pursuant to paragraphs 11.1 (a) or
(b) shall terminate all obligations of the parties hereunder and there shall be
no liability for damages on the part of High Yield or HIAT, or the trustees or
officers of High Yield or HIAT, to any other party or its trustees or officers.
(b) Termination of this Agreement pursuant to paragraph 11.1 (c) shall
terminate all obligations of the parties hereunder and there shall be no
liability for damages on the part of High Yield or HIAT, or the trustees or
officers of High Yield or HIAT, except that any party in breach of this
Agreement shall, upon demand, reimburse the non-breaching party for all
reasonable out-of-pocket fees and expenses incurred in connection with the
transactions contemplated by this Agreement, including legal, accounting and
filing fees.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the parties.
13. MISCELLANEOUS
13.1 The article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance with
the laws of the [Commonwealth of Massachusetts].
A-13
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
13.5 The obligations and liabilities of High Yield hereunder are solely
those of High Yield. It is expressly agreed that no shareholder, nominee,
trustee, officer, agent, or employee of High Yield shall be personally liable
hereunder. The execution and delivery of this Agreement have been authorized by
the trustees of High Yield and signed by authorized officers of High Yield
acting as such, and neither such authorization by such trustees nor such
execution and delivery by such officers shall be deemed to have been made by
any of them individually or to impose any liability on any of them personally.
13.6 The obligations and liabilities of HIAT hereunder are solely those of
HIAT. It is expressly agreed that no shareholder, nominee, trustee, officer,
agent, or employee of HIAT shall be personally liable hereunder. The execution
and delivery of this Agreement have been authorized by the trustees of HIAT and
signed by authorized officers of HIAT acting as such, and neither such
authorization by such trustees nor such execution and delivery by such officers
shall be deemed to have been made by any of them individually or to impose any
liability on any of them personally.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed by a duly authorized officer.
MORGAN STANLEY HIGH INCOME
ADVANTAGE TRUST
By:
--------------------------------------------
Name: Charles A. Fiumefreddo
Title: Chairman
MORGAN STANLEY
HIGH YIELD SECURITIES INC.
By:
--------------------------------------------
Name: Barry Fink
Title: Vice President
A-14
Prospectus of
High Yield Securities Inc.
Dated ___________, 2002
To be Filed by Amendment
Annual Report of
High Yield Securities Inc.
Dated August 31, 2002
To be Filed by Amendment
Morgan Stanley High Yield Securities Inc.
LETTER TO THE SHAREHOLDERS o FEBRUARY 28, 2002
Dear Shareholder:
The six-month period ended February 28, 2002, was a highly volatile one for the
high-yield market, especially after the terrorist attacks of September 11. These
events and the subsequent war on terrorism had a profound effect on the outlooks
for the economy and the financial markets. Despite a 50-basis-point reduction in
the federal funds rate, a flight to quality pushed high-yield security prices
sharply lower.
Within the high-yield sector, airlines, lodging and insurance, as well as
telecommunications and cable, experienced the largest sell-off in September.
Even sectors that held up relatively well, such as food, drugs, utilities and
energy, experienced price declines. Many telecommunications-related companies
also announced poor earnings and lower revenues, which pushed the whole sector
lower throughout much of the past six months. Relative performance was
particularly exaggerated for lower tier credits. The market recovered somewhat
in October and November, but then moved mostly sideways from December through
February. The market's recovery was of limited benefit to companies pushed into
default.
Credit spreads relative to U.S. Treasury securities in the high-yield market
remain at historically wide levels and came very close to reaching an all-time
peak in September. The spreads remained particularly wide within the lower-rated
portion of the market as investors continued to prefer the relatively higher
quality end of the market.
Performance and Portfolio Strategy
During the six-month period ended February 28, 2002, Morgan Stanley High Yield
Securities' Class A and D shares produced returns of -13.32 percent and -13.56
percent, respectively. The Fund underperformed the Lehman Brothers U.S.
Corporate High Yield Index, which returned -2.03 percent.* For the same period,
the Fund's Class B and C shares had total returns of -13.85 percent and -13.92
percent, respectively. The performance of the Fund's four share classes varies
because of differing expenses. Total return figures shown assume the
reinvestment of all distributions but do not reflect the deduction of any
applicable sales charges.
Over the past year, the Fund instituted several important changes to its
dividend policy. First, in May the Fund lowered its income dividend from $0.04
per share to $0.03 per share. In January 2002, the monthly income dividend was
lowered to $0.022 per share. The Fund moved from paying a fixed dividend rate to
one that fluctuates with the amount of income earned by the Fund. We believe
that adopting a fluctuating dividend policy will provide the Fund with greater
flexibility. Should the Fund experience additional defaults, the dividend amount
will be lower. Conversely, should the economy improve, defaults stabilize and
income levels increase, the Fund's dividend rate could rise.
- ----------------
* The Lehman Brothers U.S. Corporate High Yield Index tracks the performance of
all below investment-grade securities which have at least $100 million in
outstanding issuance, a maturity greater than one year, and are issued in
fixed-rate U.S. dollar denominations. The Index does not include any expenses,
fees or charges. The Index is unmanaged and should not be considered an
investment.
Morgan Stanley High Yield Securities Inc.
LETTER TO THE SHAREHOLDERS o FEBRUARY 28, 2002 CONTINUED
The Fund's position in the lower-rated portion of the market adversely affected
its relative performance. Allocations in fixed-line communications and to a
lesser extent in wireless communications were the major reasons for
disappointing performance. Fixed-line telecommunications was the weakest sector
during the past six months, down more than 30 percent. This sector's high
default rate and rating downgrades led investors to sell it as a sector, which
pushed prices lower. We have reduced the Fund's exposure to this sector over the
past year, but its higher than market weighting adversely affected overall Fund
performance.
Over the past year, the Fund's portfolio management team continued to reposition
it for the current market environment. The team initiated positions in more than
15 new companies, including Collins and Aikman, Stone Energy, Healthnet, Dana
Corp., Autonation and Equistar. The team also increased the overall credit
quality of the portfolio by buying BB-rated securities and trimming the Fund's
exposure to the telecommunications sector. The team continues to maintain
constructive positions in wireline and wireless communications, cable and media.
While many telecommunications issuers have had problems in this very challenging
environment, the team believes that investor sentiment has become excessively
negative. The team's value-oriented analysis suggests that this sector may be
poised for better performance in the months ahead.
Looking Ahead
As a result of the events of September 11, we believe that the economic
environment will be weaker in the early part of 2002 than previously
anticipated. We feel, however, that the current spread of the high-yield market
appears to be pricing in a more prolonged downturn with an extended period of
higher default rates than would be consistent with historical experience. We
consider that the monetary and fiscal policy moves that have already been
implemented are likely to bring the economy back to more normal growth levels,
which could lead to a recovery in the high-yield market. The Fund's portfolio is
positioned to participate in any potential recovery.
We appreciate your ongoing support of Morgan Stanley High Yield Securities and
look forward to continuing to serve your investment needs.
Very truly yours,
/s/ Charles A. Fiumefreddo /s/ Mitchell M. Merin
Charles A. Fiumefreddo Mitchell M. Merin
CHAIRMAN OF THE BOARD PRESIDENT
2
Morgan Stanley High Yield Securities Inc.
FUND PERFORMANCE o FEBRUARY 28, 2002
Average Annual Total Returns
- --------------------------------------------------------------------------------
Class A Shares*
- -----------------------------------------------------------------------
Period Ended 2/28/2002
- -------------------------
1 Year (32.07)%(1) (34.95)%(2)
5 Years (11.46)%(1) (12.22)%(2)
10 Years (0.42)%(1) (0.86)%(2)
Class B Shares**
- -----------------------------------------------------------------------
Period Ended 2/28/2002
- -------------------------
1 Year (32.51)%(1) (35.38)%(2)
Since Inception (7/28/1997) (14.17)%(1) (14.37)%(2)
Class C Shares+
- -----------------------------------------------------------------------
Period Ended 2/28/2002
- -------------------------
1 Year (32.60)%(1) (33.18)%(2)
Since Inception (7/28/1997) (14.27)%(1) (14.27)%(2)
Class D Shares++
- -----------------------------------------------------------------------
Period Ended 2/28/2002
- -------------------------
1 Year (32.03)%(1)
5 Years (11.35)%(1)
10 Years (0.24)%(1)
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
LESS THAN THEIR ORIGINAL COST. THE TABLE DOES NOT REFLECT THE DEDUCTION OF
TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF
FUND SHARES.
PRIOR TO JULY 28, 1997 THE FUND OFFERED ONLY ONE CLASS OF SHARES. BECAUSE THE
DISTRIBUTION ARRANGEMENT FOR CLASS A MOST CLOSELY RESEMBELED THE DISTRIBUTION
ARRANGEMENT APPLICABLE PRIOR TO THE IMPLEMENTATION OF MULTIPLE CLASSES (I.E.,
CLASS A IS SOLD WITH A FRONT-END SALES CHARGE), HISTORICAL PERFORMANCE
INFORMATION HAS BEEN RESTATED TO REFLECT THE ACTUAL MAXIMUM SALES CHARGE
APPLICABLE TO CLASS A (I.E., 4.25%) AS COMPARED TO THE 5.50% SALES CHARGE IN
EFFECT PRIOR TO JULY 28, 1997. IN ADDITION, CLASS A SHARES ARE NOW SUBJECT TO
AN ONGOING 12B-1 FEE WHICH IS REFLECTED IN THE RESTATED PERFORMANCE FOR THAT
CLASS.
BECAUSE ALL SHARES OF THE FUND HELD PRIOR TO JULY 28, 1997 WERE DESIGNATED
CLASS D SHARES, THE FUND'S HISTORICAL PERFORMANCE HAS BEEN RESTATED TO REFLECT
THE ABSENCE OF ANY SALES CHARGE.
- ---------------------
(1) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT
THE DEDUCTION OF ANY SALES CHARGES.
(2) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF
THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR
COMPLETE DETAILS ON FEES AND SALES CHARGES.
* THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 4.25%.
** THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B IS 5.0%.
THE CDSC DECLINES TO 0% AFTER SIX YEARS.
+ THE MAXIMUM CDSC FOR CLASS C SHARES IS 1.0% FOR SHARES REDEEMED WITHIN ONE
YEAR OF PURCHASE.
++ CLASS D SHARES HAVE NO SALES CHARGE.
3
Morgan Stanley High Yield Securities Inc.
PORTFOLIO OF INVESTMENTS o FEBRUARY 28, 2002 (UNAUDITED)
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------
Corporate Bonds (90.1%)
ADVERTISING/MARKETING SERVICES (0.8%)
$ 7,935 Interep National Radio Sales, Inc.
(Series B)............................. 10.00% 07/01/08 $ 5,435,475
------------
AEROSPACE & DEFENSE (1.0%)
11,195 Loral Space & Communications Ltd........ 9.50 01/15/06 6,940,900
------------
AIRLINES (0.8%)
8,100 Air Canada Corp......................... 10.25 03/15/11 5,184,000
------------
ALTERNATIVE POWER GENERATION (0.7%)
6,035 Calpine Corp............................ 8.50 02/15/11 4,346,129
------------
AUTO PARTS: O.E.M. (1.9%)
1,630 Arvinmeritor............................ 8.75 03/01/12 1,677,792
715 Collins & Aikman Products............... 11.50 04/15/06 618,475
3,160 Collins & Aikman Products - 144A*....... 10.75 12/31/11 3,025,700
6,975 Dana Corp............................... 9.00 08/15/11 6,386,868
4,760 Hayes Lammerz International, Inc.
(Series B) (a)(b)...................... 9.125 07/15/07 261,800
7,210 Hayes Lemmerz International, Inc.
(Series B) (a)(b)...................... 8.25 12/15/08 396,550
------------
12,367,185
------------
BROADCAST/MEDIA (1.5%)
5,000 Jones International Networks Ltd........ 11.75 07/01/05 2,543,750
10,000 Tri-State Outdoor Media
Group, Inc. (b)........................ 11.00 05/15/08 7,100,000
------------
9,643,750
------------
BROADCASTING (2.7%)
1,600 Corus Entertainment Inc. - 144A*
(Canada)............................... 8.75 03/01/12 1,586,976
3,000 Radio One Inc. (Series B)............... 8.875 07/01/11 3,157,500
5,600 Salem Communications Holdings Corp.
(Series B)............................. 9.00 07/01/11 5,824,000
3,400 XM Satellite Radio Holdings Inc......... 14.00 03/15/10 2,448,000
5,075 Young Broadcasting Inc.................. 10.00 03/01/11 5,100,375
------------
18,116,851
------------
CABLE/SATELLITE TV (9.7%)
5,250 Adelphia Communications Corp............ 10.875 10/01/10 5,565,000
2,700 Adelphia Communications Corp.
(Series B)............................. 10.50 07/15/04 2,781,000
2,700 Adelphia Communications Corp.
(Series B)............................. 7.75 01/15/09 2,511,000
50,687 Australis Holdings Property Ltd.
(Australia) (a)(b)..................... 15.00 11/01/02 --
5,350 British Sky Broadcasting Group PLC
(United Kingdom)....................... 6.875 02/23/09 5,124,337
5,150 British Sky Broadcasting Group PLC
(United Kingdom)....................... 8.20 07/15/09 5,301,456
9,805 Callahan Nordhein Westfalen (Germany)... 14.00 07/15/10 2,843,450
4,275 Charter Communications Holding, Inc..... 13.50++ 01/15/11 2,757,375
10,410 Charter Communications Holdings/Charter
Capital................................ 11.75++ 05/15/11 6,011,775
6,650 CSC Holdings Inc. (Series B)............ 7.625 04/01/11 6,480,372
SEE NOTES TO FINANCIAL STATEMENTS
4
Morgan Stanley High Yield Securities Inc.
PORTFOLIO OF INVESTMENTS o FEBRUARY 28, 2002 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------
$19,000 Diva Systems Corp. (Series B)........... 12.625++% 03/01/08 $ 3,040,000
5,800 Echostar DBS Corp. - 144A*.............. 9.125 01/15/09 5,879,750
16,510 Knology Holdings, Inc................... 11.875++ 10/15/07 5,943,600
6,600 Ono Finance PLC (United Kingdom)........ 13.00 05/01/09 3,564,000
915 Pegasus Communications (Series B)....... 9.75 12/01/06 667,950
8,340 Telewest Communications PLC (United
Kingdom)............................... 9.875 02/01/10 4,503,600
11,525 United Pan-Europe Communications NV
(Series B) (Netherlands) (b)........... 10.875 08/01/09 1,498,250
------------
64,472,915
------------
CASINO/GAMING (1.6%)
22,000 Aladdin Gaming Holdings/Capital Corp.
(Series B)............................. 13.50++ 03/01/10 660,000
2,400 Harrah's Operating Co., Inc............. 8.00 02/01/11 2,554,646
24,035 Resorts At Summerlin (Series B)
(a) (b)................................ 13.00 12/15/07 --
6,925 Station Casinos, Inc.................... 8.375 02/15/08 7,141,406
------------
10,356,052
------------
CELLULAR TELEPHONE (2.1%)
2,230 Dobson/Sygnet Communications............ 12.25 12/15/08 2,096,200
29,800 Dolphin Telecom PLC (Series B) (United
Kingdom) (a)........................... 14.00++ 05/15/09 2,980
25,025 Dolphin Telecom PLC (United
Kingdom) (a)........................... 11.50++ 06/01/08 2,502
1,450 Nextel Communications, Inc.............. 10.65++ 09/15/07 913,500
11,050 Nextel Partners Inc..................... 14.00++ 02/01/09 5,193,500
6,535 Tritel PCS Inc.......................... 12.75++ 05/15/09 5,685,450
------------
13,894,132
------------
CHEMICALS: MAJOR DIVERSIFIED (1.2%)
3,145 Equistar Chemical/Funding............... 10.125 09/01/08 3,145,000
5,455 Huntsman ICI Chemicals.................. 10.125 07/01/09 4,800,400
------------
7,945,400
------------
CHEMICALS: SPECIALTY (1.8%)
2,560 Acetex Corp. (Canada)................... 10.875 08/01/09 2,611,200
850 ISP Chemco - 144A*...................... 10.25 07/01/11 888,250
5,030 ISP Holdings Inc. - 144A*............... 10.625 12/15/09 5,143,175
1,725 Millennium America Inc.................. 9.25 06/15/08 1,768,125
1,625 OM Group Inc. - 144A*................... 9.25 12/15/11 1,677,812
------------
12,088,562
------------
COMMERCIAL PRINTING/FORMS (0.8%)
13,000 Premier Graphics Inc. (a)(b)............ 11.50 12/01/05 390,000
SEE NOTES TO FINANCIAL STATEMENTS
5
Morgan Stanley High Yield Securities Inc.
PORTFOLIO OF INVESTMENTS o FEBRUARY 28, 2002 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------
$ 4,265 Quebecor Media Inc. (Canada)............ 11.125% 07/15/11 $ 4,584,875
935 Quebecor Media Inc. (Canada)............ 13.75++ 07/15/11 593,725
------------
5,568,600
------------
CONSUMER/BUSINESS SERVICES (2.8%)
13,000 Comforce Operating, Inc................. 12.00 12/01/07 8,060,000
7,250 MDC Communications Corp. (Canada)....... 10.50 12/01/06 5,582,500
6,085 Muzak LLC/Muzak Finance................. 9.875 03/15/09 5,233,100
------------
18,875,600
------------
CONTAINERS/PACKAGING (1.9%)
10,000 LLS Corp. (b)........................... 11.625 08/01/09 1,000,000
10,305 Owens-Illinois, Inc..................... 7.80 05/15/18 8,656,200
2,640 Riverwood International Corp............ 10.875 04/01/08 2,739,000
------------
12,395,200
------------
DIVERSIFIED MANUFACTURING (3.1%)
9,755 Eagle-Picher Industries, Inc............ 9.375 03/01/08 6,340,750
13,000 Jordan Industries, Inc. (Series B)...... 10.375 08/01/07 7,540,000
40,563 Jordan Industries, Inc. (Series B)...... 11.75++ 04/01/09 6,895,710
------------
20,776,460
------------
DRUGSTORE CHAINS (0.5%)
2,000 Rite Aid Corp........................... 6.875 08/15/13 1,110,000
2,025 Rite Aid Corp........................... 7.70 02/15/27 1,134,000
2,000 Rite Aid Corp. - 144A*.................. 6.125 12/15/08 1,170,000
------------
3,414,000
------------
ELECTRIC UTILITIES (1.1%)
4,190 Mirant Americas General LLC............. 8.30 05/01/11 3,561,500
3,785 PG&E National Energy Corp............... 10.375 05/16/11 3,860,700
------------
7,422,200
------------
ELECTRONIC COMPONENTS (0.1%)
760 Flextronics International Ltd.
(Singapore)............................ 9.875 07/01/10 813,200
------------
ELECTRONIC DISTRIBUTORS (0.9%)
5,875 BRL Universal Equipment Corp............ 8.875 02/15/08 5,992,500
20,000 CHS Electronics, Inc. (a)(b)............ 9.875 04/15/05 175,000
------------
6,167,500
------------
ELECTRONIC EQUIPMENT/INSTRUMENTS (0.4%)
8,280 High Voltage Engineering, Inc........... 10.75 08/15/04 2,898,000
------------
ELECTRONICS/APPLIANCES (0.0%)
84,930 International Semi-Tech
Microelectronics, Inc.
(Canada) (a)(b)........................ 11.50 08/15/03 42,465
------------
SEE NOTES TO FINANCIAL STATEMENTS
6
Morgan Stanley High Yield Securities Inc.
PORTFOLIO OF INVESTMENTS o FEBRUARY 28, 2002 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------
ENGINEERING & CONSTRUCTION (0.8%)
$ 4,500 Encompass Services Corp................. 10.50% 05/01/09 $ 2,025,000
6,575 Metromedia Fiber Network, Inc........... 10.00 12/15/09 1,578,000
7,000 Metromedia Fiber Network, Inc.
(Series B)............................. 10.00 11/15/08 1,680,000
------------
5,283,000
------------
ENTERTAINMENT & LEISURE (0.1%)
10,850 AMF Bowling Worldwide Inc.
(Series B) (b)......................... 10.875 03/15/06 542,500
------------
ENVIRONMENTAL SERVICES (2.3%)
6,750 Allied Waste North America, Inc.
(Series B)............................. 10.00 08/01/09 6,868,125
8,550 Waste Management, Inc. (Series A)....... 7.375 08/01/10 8,684,021
------------
15,552,146
------------
FINANCE/RENTAL/LEASING (0.4%)
2,330 CIT Group Inc........................... 5.625 05/17/04 2,238,161
395 CIT Group Inc........................... 6.50 02/07/06 385,847
------------
2,624,008
------------
FINANCIAL CONGLOMERATES (0.3%)
2,100 Case Credit Corp........................ 6.125 02/15/03 1,893,356
------------
FOOD DISTRIBUTORS (1.3%)
8,890 Volume Services America, Inc............ 11.25 03/01/09 8,612,187
------------
FOOD: MEAT/FISH/DAIRY (1.7%)
4,755 Michael Foods Inc....................... 11.75 04/01/11 5,182,950
5,200 Smithfield Foods Inc.................... 7.625 02/15/08 5,200,000
750 Smithfield Foods Inc.................... 8.00 10/15/09 772,500
------------
11,155,450
------------
FOREST PRODUCTS (2.0%)
4,940 Louisiana Pacific Corp.................. 10.875 11/15/08 4,964,700
1,615 Louisiana Pacific Corp.................. 8.875 08/15/10 1,607,259
6,470 Tembec Industries Inc. (Canada)......... 8.50 02/01/11 6,809,675
------------
13,381,634
------------
HOME BUILDING (3.8%)
6,945 Beazer Homes USA, Inc................... 8.625 05/15/11 7,309,612
5,600 Centex Corp............................. 7.875 02/01/11 5,876,567
6,195 Schuler Homes, Inc...................... 9.375 07/15/09 6,566,700
405 Schuler Homes, Inc...................... 10.50 07/15/11 435,375
5,000 Toll Corp............................... 8.25 02/01/11 5,075,000
------------
25,263,254
------------
SEE NOTES TO FINANCIAL STATEMENTS
7
Morgan Stanley High Yield Securities Inc.
PORTFOLIO OF INVESTMENTS o FEBRUARY 28, 2002 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------
HOSPITAL/NURSING MANAGEMENT (1.0%)
$ 6,365 HCA Inc................................. 7.875% 02/01/11 $ 6,858,287
------------
HOTELS/RESORTS/CRUISELINES (1.1%)
13,000 Epic Resorts LLC (Series B) (a)(b)...... 13.00 06/15/05 1,300,000
1,455 Hilton Hotels........................... 7.95 04/15/07 1,471,772
4,800 HMH Properties (Series B)............... 7.875 08/01/08 4,656,000
------------
7,427,772
------------
INDUSTRIAL SPECIALTIES (1.9%)
4,935 Cabot Safety Corp....................... 12.50 07/15/05 5,083,050
7,163 International Wire Group, Inc........... 11.75 06/01/05 5,667,724
1,950 Ucar Finance Inc. - 144A*............... 10.25 02/15/12 2,003,625
------------
12,754,399
------------
INTERNET SOFTWARE/SERVICES (1.5%)
12,020 Exodus Communications Inc. (a)(b)....... 11.625 07/15/10 2,494,150
33,200 Globix Corp. (a)(b)..................... 12.50 02/01/10 4,814,000
11,000 PSINet, Inc. (a)(b)..................... 10.50 12/01/06 990,000
14,500 PSINet, Inc. (a)(b)..................... 11.00 08/01/09 1,305,000
------------
9,603,150
------------
MANAGED HEALTH CARE (1.7%)
7,505 Aetna, Inc.............................. 7.875 03/01/11 7,614,933
3,290 Health Net, Inc......................... 8.375 04/15/11 3,389,993
------------
11,004,926
------------
MEDIA CONGLOMERATES (0.7%)
4,260 Nextmedia Operating, Inc. - 144A*....... 10.75 07/01/11 4,536,900
------------
MEDICAL DISTRIBUTORS (0.3%)
1,935 Amerisource Bergen Corp................. 8.125 09/01/08 2,031,750
------------
MEDICAL SPECIALTIES (0.0%)
26,500 MEDIQ/PRN Life Support
Services, Inc. (b)..................... 11.00 06/01/08 265,000
------------
MEDICAL/NURSING SERVICES (0.9%)
6,315 Fresenius Medical Capital Trust......... 7.875 06/15/11 6,283,425
------------
MOVIES/ENTERTAINMENT (1.7%)
6,905 Alliance Atlantis Communications, Inc.
(Canada)............................... 13.00 12/15/09 7,664,550
3,525 Six Flags Inc. - 144A*.................. 8.875 02/01/10 3,516,188
------------
11,180,738
------------
OFFICE EQUIPMENT/SUPPLIES (0.0%)
22,000 Mosler, Inc. (a)(b)..................... 11.00 04/15/03 --
------------
SEE NOTES TO FINANCIAL STATEMENTS
8
Morgan Stanley High Yield Securities Inc.
PORTFOLIO OF INVESTMENTS o FEBRUARY 28, 2002 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------
OIL & GAS PIPELINES (0.6%)
$ 1,500 Williams Companies, Inc................. 7.75% 06/15/31 $ 1,319,067
3,260 Williams Companies, Inc. (Series A)..... 7.50 01/15/31 2,784,236
------------
4,103,303
------------
OIL & GAS PRODUCTION (1.5%)
4,260 Chesapeake Energy Corp.................. 8.125 04/01/11 4,174,800
2,375 Stone Energy Corp. - 144A*.............. 8.25 12/15/11 2,398,750
4,150 Vintage Petroleum....................... 7.875 05/15/11 3,610,500
------------
10,184,050
------------
OILFIELD SERVICES/EQUIPMENT (0.7%)
2,515 Hanover Equipment Trust - 144A*......... 8.50 09/01/08 2,540,150
1,960 Hanover Equipment Trust - 144A*......... 8.75 09/01/11 1,969,800
------------
4,509,950
------------
OTHER METALS/MINERALS (0.9%)
3,310 Murrin Murrin Holdings Property Ltd.
(Australia)............................ 9.375 08/31/07 993,000
4,940 Phelps Dodge Corp....................... 8.75 06/01/11 4,763,346
------------
5,756,346
------------
PUBLISHING: BOOKS/MAGAZINES (1.0%)
7,300 PRIMEDIA, Inc........................... 8.875 05/15/11 6,369,250
------------
PUBLISHING: NEWSPAPERS (0.8%)
1,820 Belo Corp............................... 8.00 11/01/08 1,885,329
3,815 Holliner Participation - 144A*
(Canada)............................... 12.125+ 11/15/10 3,433,500
------------
5,318,829
------------
PULP & PAPER (0.9%)
795 Long View Fibre Co. - 144A*............. 10.00 01/15/09 818,850
4,810 Norske Skog Canada Inc. (Canada) -
144A*.................................. 8.625 06/15/11 4,906,200
------------
5,725,050
------------
REAL ESTATE DEVELOPMENT (0.7%)
4,890 CB Richard Ellis Services Inc........... 11.25 06/15/11 4,596,600
------------
REAL ESTATE INVESTMENT TRUSTS (0.4%)
2,855 Istar Financial Inc..................... 8.75 08/15/08 2,871,345
------------
RECREATIONAL PRODUCTS (1.0%)
6,000 International Game Technology........... 8.375 05/15/09 6,502,500
------------
RESTAURANTS (0.7%)
141,992 American Restaurant Group
Holdings, Inc. - 144A* (c)............. 0.00 12/15/05 4,344,955
34,207 FRD Acquisition Corp.
(Series B) (a)(b)...................... 12.50 07/15/04 85,518
------------
4,430,473
------------
SEE NOTES TO FINANCIAL STATEMENTS
9
Morgan Stanley High Yield Securities Inc.
PORTFOLIO OF INVESTMENTS o FEBRUARY 28, 2002 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------
RETAIL - SPECIALTY (1.4%)
$ 9,000 Mrs. Fields Holdings Co................. 14.00++% 12/01/05 $ 4,185,000
5,525 Pantry, Inc............................. 10.25 10/15/07 5,110,625
------------
9,295,625
------------
SAVINGS BANKS (0.1%)
685 GS Escrow Corp.......................... 7.125 08/01/05 681,495
------------
SEMICONDUCTORS (0.4%)
2,210 Fairchild Semi Conductors............... 10.50 02/01/09 2,386,800
------------
SERVICES TO THE HEALTH INDUSTRY (1.4%)
3,745 Anthem Insurance - 144A**............... 9.125 04/01/10 4,102,494
5,000 Omnicare, Inc. (Series B)............... 8.125 03/15/11 5,275,000
------------
9,377,494
------------
SPECIALTY STORES (0.5%)
3,185 Autonation, Inc......................... 9.00 08/01/08 3,340,269
------------
SPECIALTY TELECOMMUNICATIONS (5.0%)
4,535 American Tower Corp..................... 9.375 02/01/09 2,993,100
11,500 Birch Telecom Inc. (b).................. 14.00 06/15/08 115,000
14,370 DTI Holdings, Inc. (Series B) (a)....... 12.50++ 03/01/08 215,550
17,085 Esprit Telecom Group PLC (United
Kingdom) (b)........................... 11.50 12/15/07 64,069
29,088 Esprit Telecom Group PLC (United
Kingdom) (b)........................... 10.875 06/15/08 109,080
47,000 Firstworld Communications, Inc.......... 13.00++ 04/15/08 3,290,000
10,000 Global Crossing Holdings,
Ltd. (a)(b)............................ 8.70 08/01/07 350,000
3,490 Global Crossing Holdings,
Ltd. (a)(b)............................ 9.50 11/15/09 69,800
23,050 GT Group Telecom Inc. (Canada).......... 13.25++ 02/01/10 1,498,250
3,350 McLeodUSA, Inc. (a)(b).................. 11.375 01/01/09 820,750
10,450 McLeodUSA, Inc. (a)(b).................. 11.50 05/01/09 2,455,750
9,365 Pac-West Telecom Inc. (Series B)........ 13.50 02/01/09 3,511,875
14,500 Primus Telecommunications
Group, Inc............................. 12.75 10/15/09 4,785,000
16,990 Primus Telecommunications Group, Inc.
(Series B)............................. 9.875 05/15/08 5,606,700
2,000 RSL Communications PLC (United
Kingdom) (a)(b)........................ 9.125 03/01/08 105,000
9,000 RSL Communications PLC (United
Kingdom) (a)(b)........................ 10.50 11/15/08 472,500
3,000 RSL Communications PLC (United
Kingdom) (a)(b)........................ 9.875 11/15/09 157,500
13,000 Tele1 Europe BV (Netherlands)........... 13.00 05/15/09 1,755,000
12,000 Versatel Telecom BV (Netherlands)
(Issued 05/27/98)...................... 13.25 05/15/08 3,720,000
3,000 Versatel Telecom BV (Netherlands)
(Issued 12/03/98)...................... 13.25 05/15/08 930,000
31,445 Viatel Inc. (a)(b)...................... 11.25 04/15/08 39,306
14,200 Viatel Inc. (Issued 03/19/99) (a)(b).... 11.50 03/15/09 17,750
29,393 Viatel Inc. (Issued 12/08/99) (a)(b).... 11.50 03/15/09 36,741
SEE NOTES TO FINANCIAL STATEMENTS
10
Morgan Stanley High Yield Securities Inc.
PORTFOLIO OF INVESTMENTS o FEBRUARY 28, 2002 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------
$32,545 World Access, Inc. (a)(b)(c)............ 13.25% 01/15/08 $ 325,450
11,500 Worldwide Fiber Inc. (Canada) (a)(b).... 12.00 08/01/09 28,750
------------
33,472,921
------------
TELECOMMUNICATION EQUIPMENT (1.2%)
10,000 SBA Communications Corp................. 12.00++ 03/01/08 4,700,000
10,500 Spectrasite Holdings, Inc............... 12.00++ 07/15/08 2,625,000
3,500 Spectrasite Holdings, Inc............... 11.25++ 04/15/09 805,000
------------
8,130,000
------------
TELECOMMUNICATIONS (5.3%)
61,075 e. Spire
Communications, Inc. (a)(b)............ 13.75 07/15/07 6,107,500
18,752 Focal Communications Corp.
(Series B)............................. 12.125++ 02/15/08 4,312,960
15,000 Hyperion Telecommunication, Inc.
(Series B)............................. 12.25 09/01/04 1,800,000
15,000 MGC Communications, Inc................. 13.00 04/01/10 975,000
1,500 NEXTLINK Communications LLC............. 12.50 04/15/06 165,000
17,500 NEXTLINK Communications, Inc............ 9.00 03/15/08 1,925,000
4,180 NEXTLINK Communications, Inc............ 10.75 11/15/08 459,800
775 NEXTLINK Communications, Inc. (b)....... 10.75 06/01/09 89,125
16,975 NTL Communications Corp. (Series B)..... 11.875 10/01/10 5,941,250
27,850 Rhythms Netconnections, Inc. (a)(b)..... 12.75 04/15/09 4,316,750
14,965 Rhythms Netconnections, Inc.
(Series B) (a)(b)...................... 13.50++ 05/15/08 1,795,800
13,850 Startec Global Communications
Corp. (a)(b)........................... 12.00 05/15/08 138,500
5,380 Talton Holdings, Inc. (Series B)........ 11.00 06/30/07 3,335,600
2,100 WorldCom, Inc........................... 7.50 05/15/11 2,023,363
1,500 WorldCom, Inc........................... 8.25 05/15/31 1,441,862
------------
34,827,510
------------
TRUCKS/CONSTRUCTION/FARM MACHINERY (2.0%)
1,930 Case Corp. (Series B)................... 6.25 12/01/03 1,737,498
13,350 J.B. Poindexter & Co., Inc.............. 12.50 05/15/04 11,330,813
------------
13,068,311
------------
WHOLESALE DISTRIBUTORS (0.6%)
4,000 Burhmann US Inc......................... 12.25 11/01/09 4,120,000
------------
WIRELESS TELECOMMUNICATIONS (2.1%)
3,675 American Cellular Corp.................. 9.50 10/15/09 2,976,750
19,485 AMSC Acquisition Co., Inc.
(Series B) (a)(b)...................... 12.25 04/01/08 7,306,875
65,300 CellNet Data Systems Inc. (a)(b)........ 14.00++ 10/01/07 81,625
19,610 Globalstar LP/Capital Corp. (b)......... 10.75 11/01/04 1,176,600
16,739 Orbcomm Global LP/Capital Corp.
(Series B) (a)(b)...................... 14.00 08/15/04 502,170
20,230 USA Mobile Communications
Holdings, Inc. (a)(b).................. 9.50 02/01/04 809,200
18,800 USA Mobile Communications
Holdings, Inc. (a)(b).................. 14.00 11/01/04 752,000
SEE NOTES TO FINANCIAL STATEMENTS
11
Morgan Stanley High Yield Securities Inc.
PORTFOLIO OF INVESTMENTS o FEBRUARY 28, 2002 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------
$33,000 WinStar Communications, Inc. (a)........ 14.75++% 04/15/10 $ 3,300
11,400 WinStar Communications, Inc. (a)(b)..... 12.75 04/15/10 1,140
------------
13,609,660
------------
Total Corporate Bonds
(COST $1,769,685,472).............................................. 598,096,239
------------
Convertible Bonds (1.3%)
ELECTRONIC COMPONENTS (0.6%)
8,830 Solectron Corp.......................... 0.00 11/20/20 4,017,650
------------
HOTELS/RESORTS/CRUISELINES (0.0%)
1,643 Premier Cruises Ltd. - 144A* (a)........ 10.00+ 8/15/05 --
------------
TELECOMMUNICATION EQUIPMENT (0.7%)
9,420 Corning Inc............................. 0.00 11/8/15 4,639,350
------------
Total Convertible Bonds
(COST $11,000,802)................................................. 8,657,000
------------
NUMBER OF
SHARES
- ---------
Common Stocks (d) (1.5%)
APPAREL/FOOTWEAR RETAIL (0.0%)
2,621,192 County Seat Stores, Inc. (c)...................................... --
------------
CASINO/GAMING (0.0%)
207,312 Fitzgerald Gaming Corp............................................ --
------------
CONSUMER/BUSINESS SERVICES (1.2%)
440,700 Anacomp, Inc. (Class A) (c)....................................... 7,712,250
------------
FOOD: SPECIALTY/CANDY (0.0%)
10,908 SFAC New Holdings Inc. (c)........................................ --
2,005 SFFB Holdings, Inc. (c)........................................... --
574,725 Specialty Foods Acquisition Corp. - 144A*......................... --
------------
--
------------
HOTELS/RESORTS/CRUISELINES (0.0%)
981,277 Premier Holdings Inc. (c)......................................... --
781,421 Vagabond Inns, Inc. (Class D)..................................... --
------------
--
------------
MEDICAL/NURSING SERVICES (0.0%)
1,151,324 Raintree Healthcare Corp. (c)..................................... --
------------
MOTOR VEHICLES (0.0%)
709 Northern Holdings Industrial Corp. (c)............................ --
------------
SEE NOTES TO FINANCIAL STATEMENTS
12
Morgan Stanley High Yield Securities Inc.
PORTFOLIO OF INVESTMENTS o FEBRUARY 28, 2002 (UNAUDITED) continued
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------------------------------
RESTAURANTS (0.0%)
38,057 American Restaurant Group Holdings, Inc. - 144A*..................... $ --
------------
SPECIALTY TELECOMMUNICATIONS (0.1%)
264,189 Song Networks Holding Aktir (ADR).................................... 84,540
486,691 Versatel Telecom International NV (ADR) (Netherlands)................ 253,079
94,263 World Access, Inc. (c)............................................... 104
------------
337,723
------------
TELECOMMUNICATION EQUIPMENT (0.0%)
196,000 FWT Inc. (Class A) (c)............................................... 1,960
------------
TELECOMMUNICATIONS (0.2%)
520,697 Covad Communications Group, Inc. (c)................................. 820,098
3,697,963 Focal Communications Corp. (c)....................................... 813,552
------------
1,633,650
------------
TEXTILES (0.0%)
1,754,730 United States Leather, Inc. (c)...................................... --
------------
WIRELESS TELECOMMUNICATIONS (0.0%)
5,777,031 Arch Wireless Inc. (c)............................................... 46,216
274,390 Vast Solutions, Inc. (Class B1) (c).................................. --
274,390 Vast Solutions, Inc. (Class B2) (c).................................. --
274,390 Vast Solutions, Inc. (Class B3) (c).................................. --
------------
46,216
------------
Total Common Stocks
(COST $337,737,145)................................................. 9,731,799
------------
Preferred Stocks (3.9%)
BROADCASTING (0.9%)
713 Paxson Communications+............................................... 6,203,361
------------
CELLULAR TELEPHONE (0.9%)
4,506 Dobson Communications Corp.+......................................... 3,694,920
6,360 Nextel Communications, Inc.+......................................... 2,257,836
------------
5,952,756
------------
ELECTRIC UTILITIES (0.6%)
3,705 TNP Enterprises Inc.+................................................ 4,038,450
------------
PUBLISHING: BOOKS/MAGAZINES (0.0%)
6,625 PRIMEDIA, Inc........................................................ 318,828
------------
RESTAURANTS (0.2%)
5,591 American Restaurant Group Holdings, Inc. (Series B)+................. 972,872
------------
SEE NOTES TO FINANCIAL STATEMENTS
13
Morgan Stanley High Yield Securities Inc.
PORTFOLIO OF INVESTMENTS o FEBRUARY 28, 2002 (UNAUDITED) continued
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------------------------------
SPECIALTY TELECOMMUNICATIONS (1.1%)
7,333 Broadwing Communications, Inc....................................... $ 3,666,500
475 Crown Castle International Corp.+................................... 213,750
3,473 Intermedia Communication (Series B)+................................ 3,369,198
180,721 XO Communications, Inc.+............................................ 1,807
------------
7,251,255
------------
TELECOMMUNICATION EQUIPMENT (0.2%)
2,244,200 FWT Inc. (Series A)+ (c)............................................ 1,122,100
------------
Total Preferred Stocks
(COST $52,960,724)................................................. 25,859,622
------------
NUMBER OF EXPIRATION
WARRANTS DATE
- --------- ----------
Warrants (0.0%)
AEROSPACE & DEFENSE (0.0%)
9,000 Sabreliner Corp. - 144A*............................... 04/15/03 --
------------
BROADCASTING (0.0%)
5,700 XM Satellite Radio Holdings Inc. - 144A*............... 03/15/10 114,000
------------
CABLE/SATELLITE TV (0.0%)
57,000 Diva Systems Corp. - 144A*............................. 03/01/08 --
6,600 Ono Finance PLC - 144A* (United Kingdom)............... 05/31/09 33,000
------------
33,000
------------
CASINO/GAMING (0.0%)
220,000 Aladdin Gaming, Inc. - 144A*........................... 03/01/10 --
20,000 Resorts At Summerlin - 144A*........................... 12/15/07 --
------------
--
------------
ELECTRIC UTILITIES (0.0%)
1,040 TNP Enterprises Inc. - 144A*........................... 04/01/11 31,200
------------
HOTELS/RESORTS/CRUISELINES (0.0%)
13,000 Epic Resorts LLC - 144A*............................... 06/15/05 --
------------
INTERNET SOFTWARE/SERVICES (0.0%)
47,000 Verado Holdings Inc. - 144A*........................... 04/15/08 --
------------
RESTAURANTS (0.0%)
3,500 American Restaurant Group Holdings, Inc. - 144A*....... 08/15/08 --
------------
RETAIL - SPECIALTY (0.0%)
9,000 Mrs. Fields Holding Inc. - 144A*....................... 12/01/05 --
------------
SEE NOTES TO FINANCIAL STATEMENTS
14
Morgan Stanley High Yield Securities Inc.
PORTFOLIO OF INVESTMENTS o FEBRUARY 28, 2002 (UNAUDITED) continued
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
- ----------------------------------------------------------------------------------------------
SPECIALTY TELECOMMUNICATIONS (0.0%)
11,500 Birch Telecom Inc. - 144A*............................. 06/15/08 $ --
23,050 GT Group Telecom Inc. - 144A* (Canada)................. 02/01/10 46,100
------------
46,100
------------
TELECOMMUNICATIONS (0.0%)
11,850 Startec Global Communications Corp. - 144A*............ 05/15/08 --
------------
WIRELESS TELECOMMUNICATIONS (0.0%)
10,000 Metricom, Inc.......................................... 02/15/10 --
18,250 Motient Corp. - 144A*.................................. 04/01/08 182
------------
182
------------
Total Warrants
(COST $5,624,493)................................................. 224,482
------------
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- --------- -------- --------
Short-Term Investments (0.4%)
Repurchase Agreements
$ 1,638 Joint repurchase agreement account
(dated 02/28/02; proceeds $1,638,086) (e)....... 1.895% 03/01/02 1,638,000
1,012 The Bank of New York (dated 02/28/02; proceeds
$1,012,059) (f)................................ 1.688 03/01/02 1,012,012
------------
Total Short-Term Investments
(COST $2,650,012).................................................. 2,650,012
------------
Total Investments
(COST $2,179,658,648) (g)................................... 97.2% 645,219,154
Other Assets in Excess of Liabilities........................ 2.8 18,541,232
----- ------------
Net Assets................................................... 100.0% $663,760,386
===== ============
- ---------------------
ADR AMERICAN DEPOSITORY RECEIPT.
* RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS.
+ PAYMENT-IN-KIND SECURITY.
++ CURRENTLY A ZERO COUPON BOND THAT IS SCHEDULED TO PAY INTEREST AT THE
RATE SHOWN AT A FUTURE SPECIFIED DATE.
(A) ISSUER IN BANKRUPTCY.
(B) NON-INCOME PRODUCING SECURITY; BOND IN DEFAULT.
(C) ACQUIRED THROUGH EXCHANGE OFFER.
(D) NON-INCOME PRODUCING SECURITIES.
(E) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(F) COLLATERALIZED BY $1,051,150 U.S. TREASURY NOTE 3.50% DUE 11/15/06 VALUED
AT $1,032,258.
(G) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE
AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED
APPRECIATION IS $13,315,466 AND THE AGGREGATE GROSS UNREALIZED
DEPRECIATION IS $1,547,754,960, RESULTING IN NET UNREALIZED DEPRECIATION
OF $1,534,439,494.
SEE NOTES TO FINANCIAL STATEMENTS
15
Morgan Stanley High Yield Securities Inc.
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
FEBRUARY 28, 2002 (UNAUDITED)
Assets:
Investments in securities, at value (cost
$2,179,658,648).................................. $ 645,219,154
Receivable for:
Interest........................................ 17,936,714
Investments sold................................ 5,671,201
Capital stock sold.............................. 392,776
Prepaid expenses and other assets................. 73,355
--------------
Total Assets.................................. 669,293,200
--------------
Liabilities:
Payable for:
Investments purchased........................... 3,534,039
Capital stock repurchased....................... 1,066,787
Distribution fee................................ 322,288
Investment management fee....................... 252,739
Accrued expenses and other payables............... 356,961
--------------
Total Liabilities............................. 5,532,814
--------------
Net Assets.................................... $ 663,760,386
==============
Composition of Net Assets:
Paid-in-capital................................... $3,010,689,166
Net unrealized depreciation....................... (1,534,439,494)
Dividends in excess of net investment income...... (17,115,158)
Accumulated net realized loss..................... (795,374,128)
--------------
Net Assets.................................... $ 663,760,386
==============
Class A Shares:
Net Assets........................................ $25,393,979
Shares Outstanding (500,000,000 AUTHORIZED, $.01
PAR VALUE)....................................... 13,754,137
Net Asset Value Per Share..................... $1.85
=====
Maximum Offering Price Per Share,
(NET ASSET VALUE PLUS 4.44% OF NET ASSET
VALUE)....................................... $1.93
=====
Class B Shares:
Net Assets........................................ $487,088,037
Shares Outstanding (500,000,000 AUTHORIZED, $.01
PAR VALUE)....................................... 264,860,033
Net Asset Value Per Share..................... $1.84
=====
Class C Shares:
Net Assets........................................ $39,051,883
Shares Outstanding (500,000,000 AUTHORIZED, $.01
PAR VALUE)....................................... 21,197,421
Net Asset Value Per Share..................... $1.84
=====
Class D Shares:
Net Assets........................................ $112,226,487
Shares Outstanding (500,000,000 AUTHORIZED, $.01
PAR VALUE)....................................... 60,832,134
Net Asset Value Per Share..................... $1.84
=====
Statement of Operations
FOR THE SIX MONTHS ENDED FEBRUARY 28, 2002 (UNAUDITED)
Net Investment Income:
Income
Interest.......................................... $ 60,445,868
Dividends......................................... 491,437
-------------
Total Income.................................. 60,937,305
-------------
Expenses
Distribution fee (Class A shares)................. 36,157
Distribution fee (Class B shares)................. 2,048,001
Distribution fee (Class C shares)................. 181,143
Investment management fee......................... 1,749,471
Transfer agent fees and expenses.................. 786,123
Shareholder reports and notices................... 130,794
Professional fees................................. 52,660
Custodian fees.................................... 50,872
Registration fees................................. 38,609
Directors' fees and expenses...................... 9,186
Other............................................. 9,111
-------------
Total Expenses................................ 5,092,127
-------------
Net Investment Income......................... 55,845,178
-------------
Net Realized and Unrealized Loss:
Net realized loss................................. (101,992,943)
Net change in unrealized depreciation............. (71,245,906)
-------------
Net Loss...................................... (173,238,849)
-------------
Net Decrease...................................... $(117,393,671)
=============
SEE NOTES TO FINANCIAL STATEMENTS
16
Morgan Stanley High Yield Securities Inc.
FINANCIAL STATEMENTS continued
Statement of Changes in Net Assets
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
FEBRUARY 28, 2002 AUGUST 31, 2001
----------------- ---------------
(UNAUDITED)
Increase (Decrease) in Net Assets:
Operations:
Net investment income................... $ 55,845,178 $ 182,819,538
Net realized loss....................... (101,992,943) (282,975,609)
Net change in unrealized depreciation... (71,245,906) (513,181,124)
------------- --------------
Net Decrease........................ (117,393,671) (613,337,195)
------------- --------------
Dividends to Shareholders from Net
Investment Income:
Class A shares.......................... (2,418,772) (7,002,632)
Class B shares.......................... (44,666,302) (150,569,611)
Class C shares.......................... (3,477,209) (10,293,101)
Class D shares.......................... (10,234,948) (29,754,002)
------------- --------------
Total Dividends..................... (60,797,231) (197,619,346)
------------- --------------
Net decrease from capital stock
transactions........................... (46,653,991) (72,611,177)
------------- --------------
Net Decrease........................ (224,844,893) (883,567,718)
Net Assets:
Beginning of period..................... 888,605,279 1,772,172,997
------------- --------------
End of Period (Including dividends in
excess of net investment income of
$17,115,158 and $17,487,233,
respectively).......................... $ 663,760,386 $ 888,605,279
============= ==============
SEE NOTES TO FINANCIAL STATEMENTS
17
Morgan Stanley High Yield Securities Inc.
NOTES TO FINANCIAL STATEMENTS o FEBRUARY 28, 2002 (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's primary investment objective
is to earn a high level of current income and, as a secondary objective, capital
appreciation, but only when consistent with its primary objective. The Fund was
incorporated in Maryland on June 14, 1979 and commenced operations on
September 26, 1979. On July 28, 1997, the Fund converted to a multiple class
share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The 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.
The following is a summary of significant accounting policies:
A. Valuation of Investments -- (1) an equity portfolio security listed or traded
on the New York or American Stock Exchange, NASDAQ, 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 latest bid price (in cases
where securities are traded on more than one exchange, the securities are valued
on the exchange designated as the primary market pursuant to procedures adopted
by the Directors); (2) all other portfolio securities for which over-the-counter
market quotations are readily available are valued at the latest available bid
price; (3) when market quotations are not readily available, including
circumstances under which it is determined by Morgan Stanley Investment Advisors
Inc. (the "Investment Manager") that sale or bid prices are not reflective of a
security's market value, portfolio securities are valued at their fair value as
determined in good faith under procedures established by and under the general
supervision of the Directors (valuation of debt securities for which market
quotations are not readily available may be based upon current market prices of
securities which are comparable in coupon, rating and maturity or an appropriate
matrix utilizing similar factors); (4) certain portfolio securities may be
valued by an outside pricing service approved by the Directors. The pricing
service may utilize a matrix system incorporating security quality, maturity and
18
Morgan Stanley High Yield Securities Inc.
NOTES TO FINANCIAL STATEMENTS o FEBRUARY 28, 2002 (UNAUDITED) continued
coupon as the evaluation model parameters, and/or research and evaluations by
its staff, including review of broker-dealer market price quotations, if
available, in determining what it believes is the fair valuation of the
portfolio securities valued by such pricing service; and (5) 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 respective life of
the securities. Interest income is accrued daily except where collection is not
expected.
C. Joint Repurchase Agreement Account -- Pursuant to an Exemptive Order issued
by the Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment Manager, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements for cash, or U.S. Treasury or
federal agency obligations.
D. Multiple Class Allocations -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
E. Federal Income Tax Status -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.
F. Dividends and Distributions to Shareholders -- The Fund records dividends and
distributions to its shareholders on the ex-dividend date. 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 financial reporting purposes but not for tax purposes
19
Morgan Stanley High Yield Securities Inc.
NOTES TO FINANCIAL STATEMENTS o FEBRUARY 28, 2002 (UNAUDITED) continued
are reported as dividends in excess of net investment income or distributions in
excess of net realized capital gains. To the extent they exceed net investment
income and net realized capital gains for tax purposes, they are reported as
distributions of paid-in-capital.
2. Investment Management Agreement
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, calculated daily and payable monthly, by applying the
following annual rates to the net assets of the Fund determined as of the close
of each business day: 0.50% to the portion of daily net assets not exceeding
$500 million; 0.425% to the portion of daily net assets exceeding $500 million
but not exceeding $750 million; 0.375% to the portion of daily net assets
exceeding $750 million but not exceeding $1 billion; 0.35% to the portion of
daily net assets exceeding $1 billion but not exceeding $2 billion; 0.325% to
the portion of daily net assets exceeding $2 billion but not exceeding
$3 billion; and 0.30% to the portion of daily net assets exceeding $3 billion.
3. Plan of Distribution
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. The Fund has adopted a
Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan
provides that the Fund pay the Distributor a fee which is accrued daily and paid
monthly at the following annual rates: (i) Class A -- up to 0.25% of the average
daily net assets of Class A; (ii) Class B -- 0.75% of the average daily net
assets of Class B; and (iii) Class C -- up to 0.85% of the average daily net
assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
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
$60,729,773 at February 28, 2002.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.85% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a
20
Morgan Stanley High Yield Securities Inc.
NOTES TO FINANCIAL STATEMENTS o FEBRUARY 28, 2002 (UNAUDITED) continued
gross sales credit to Morgan Stanley Financial Advisors or other selected
broker-dealer representatives may be reimbursed in the subsequent calendar year.
For the six months ended February 28, 2002, 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 28, 2002, it received contingent deferred sales charges from certain
redemptions of the Fund's Class A Shares, Class B shares and Class C shares of
$25,943, $850,331 and $12,717, respectively and received $1,421 in front-end
sales charges from sales of the Fund's Class A shares. The respective
shareholders pay such charges which are not an expense of the Fund.
4. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the six months ended February 28, 2002, aggregated
$130,550,663 and $191,356,513, respectively.
Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is
the Fund's transfer agent. At February 28, 2002, the Fund had transfer agent
fees and expenses payable of approximately $40,200.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Directors of the Fund who will have served as independent
Directors for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the six months ended February 28, 2002
included in Directors' fees and expenses in the Statement of Operations amounted
to $3,589. At February 28, 2002, the Fund had an accrued pension liability of
$57,558 which is included in accrued expenses in the Statement of Assets and
Liabilities.
21
Morgan Stanley High Yield Securities Inc.
NOTES TO FINANCIAL STATEMENTS o FEBRUARY 28, 2002 (UNAUDITED) continued
5. Capital Stock
Transactions in capital stock were as follows:
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
FEBRUARY 28, 2002 AUGUST 31, 2001
-------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ------------ -------------
(UNAUDITED)
CLASS A SHARES
Sold.......................... 7,162,259 $ 14,899,676 19,209,128 $ 63,780,578
Reinvestment of dividends..... 570,641 1,128,585 1,049,177 3,186,287
Redeemed...................... (9,810,062) (20,249,131) (17,600,601) (59,066,199)
----------- ------------- ------------ -------------
Net increase (decrease) --
Class A...................... (2,077,162) (4,220,870) 2,657,704 7,900,666
----------- ------------- ------------ -------------
CLASS B SHARES
Sold.......................... 21,613,070 43,035,559 87,486,847 281,384,559
Reinvestment of dividends..... 8,164,759 16,089,588 17,505,252 53,772,493
Redeemed...................... (51,830,406) (104,404,539) (136,458,377) (426,230,286)
----------- ------------- ------------ -------------
Net decrease -- Class B....... (22,052,577) (45,279,392) (31,466,278) (91,073,234)
----------- ------------- ------------ -------------
CLASS C SHARES
Sold.......................... 3,407,356 6,775,421 13,531,056 45,899,890
Reinvestment of dividends..... 827,546 1,635,525 1,676,677 5,136,460
Redeemed...................... (4,508,663) (8,947,288) (13,756,797) (45,459,076)
----------- ------------- ------------ -------------
Net increase (decrease) --
Class C...................... (273,761) (536,342) 1,450,936 5,577,274
----------- ------------- ------------ -------------
CLASS D SHARES
Sold.......................... 5,034,687 10,050,023 20,506,858 63,372,986
Reinvestment of dividends..... 3,302,846 6,529,821 5,852,214 17,880,440
Redeemed...................... (6,607,827) (13,197,231) (24,049,991) (76,269,309)
----------- ------------- ------------ -------------
Net increase -- Class D....... 1,729,706 3,382,613 2,309,081 4,984,117
----------- ------------- ------------ -------------
Net decrease in Fund.......... (22,673,794) $ (46,653,991) (25,048,557) $ (72,611,177)
=========== ============= ============ =============
6. Federal Income Tax Status
At August 31, 2001, the Fund had a net capital loss carryover of approximately
$482,783,000, which may be used to offset future capital gains to the extent
provided by regulations, which is available through August 31 in the following
years:
AMOUNT IN THOUSANDS
- -----------------------------------------------------------------------
2002 2003 2004 2005 2006 2007 2008 2009
- -------- ------- ------- ------- ------- ------- ------- -------
$166,660 $50,599 $23,296 $39,319 $12,603 $24,919 $69,857 $95,530
======== ======= ======= ======= ======= ======= ======= =======
22
Morgan Stanley High Yield Securities Inc.
NOTES TO FINANCIAL STATEMENTS o FEBRUARY 28, 2002 (UNAUDITED) continued
Capital losses incurred after October 31 ("post-October losses") within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. The Fund incurred and will elect to defer net capital losses of
approximately $199,075,000 during fiscal 2001.
At August 31, 2001, the Fund had temporary book/tax differences primarily
attributable to post-October losses, capital loss deferrals on wash sales and
interest on bonds in default.
7. Change in Accounting Policy
Effective September 1, 2001, the Fund has adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies, as revised, related to
premiums and discounts on debt securities. The cumulative effect of this
accounting change had no impact on the net assets of the Fund, but resulted in a
$5,324,128 increase in the cost of securities and a corresponding increase in
undistributed net investment income based on securities held as of August 31,
2001.
The effect of this change for the six months ended February 28, 2002 was to
increase net investment income by $952,867; increase unrealized depreciation by
$233,149; and increase net realized losses by $719,718. The statement of changes
in net assets and the financial highlights for prior periods have not been
restated to reflect this change.
23
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 PERIOD
FOR THE SIX FOR THE YEAR ENDED AUGUST 31, JULY 28, 1997*
MONTHS ENDED -------------------------------------------------------------- THROUGH
FEBRUARY 28, 2002 2001 2000 1999 1998 AUGUST 31, 1997
----------------- ----------- ----------- ----------- ----------- ---------------
(UNAUDITED)
Class A Shares++
Selected Per Share Data:
Net asset value,
beginning of period..... $ 2.32 $ 4.35 $ 5.51 $ 6.16 $ 6.82 $ 6.83
------- ------- ------- ------- ------- ------
Income (loss) from
investment operations:
Net investment
income................ 0.16 0.47 0.69 0.72 0.76 0.07
Net realized and
unrealized loss....... (0.46) (1.99) (1.13) (0.63) (0.71) (0.03)
------- ------- ------- ------- ------- ------
Total income (loss) from
investment operations... (0.30) (1.52) (0.44) 0.09 0.05 0.04
------- ------- ------- ------- ------- ------
Less dividends from net
investment income....... (0.17) (0.51) (0.72) (0.74) (0.71) (0.05)
------- ------- ------- ------- ------- ------
Net asset value, end of
period.................. $ 1.85 $ 2.32 $ 4.35 $ 5.51 $ 6.16 $ 6.82
======= ======= ======= ======= ======= ======
Total Return+............ (13.32)%(1) (37.05)% (8.88)% 1.47% 0.40% 0.65%(1)
Ratios to Average Net
Assets:
Expenses................. 1.02%(2)(3) 0.77%(3) 0.70%(3) 0.68%(3) 0.75%(3) 0.93%(2)
Net investment income.... 15.51%(2)(3)(4) 15.17%(3) 13.62%(3) 12.42%(3) 11.30%(3) 11.80%(2)
Supplemental Data:
Net assets, end of
period, in thousands.... $25,394 $36,762 $57,273 $68,667 $30,678 $1,996
Portfolio turnover
rate.................... 18%(1) 49% 20% 36% 66% 113%
- ------------------------
* THE DATE SHARES WERE FIRST ISSUED.
++ 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) EFFECTIVE SEPTEMBER 1, 2001, THE FUND HAS ADOPTED THE PROVISIONS OF THE
AICPA AUDIT AND ACCOUNTING GUIDE FOR INVESTMENT COMPANIES, AS REVISED,
RELATED TO PREMIUMS AND DISCOUNTS ON DEBT SECURITIES. THE EFFECT OF THIS
CHANGE FOR THE SIX MONTHS ENDED FEBRUARY 28, 2002 WAS TO INCREASE THE
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS BY 0.26%. THE
FINANCIAL HIGHLIGHTS DATA PRESENTED IN THIS TABLE FOR PRIOR PERIODS HAS
NOT BEEN RESTATED TO REFLECT THIS CHANGE.
SEE NOTES TO FINANCIAL STATEMENTS
24
Morgan Stanley High Yield Securities Inc.
FINANCIAL HIGHLIGHTS continued
FOR THE PERIOD
FOR THE SIX FOR THE YEAR ENDED AUGUST 31, JULY 28, 1997*
MONTHS ENDED -------------------------------------------------------------- THROUGH
FEBRUARY 28, 2002 2001 2000 1999 1998 AUGUST 31, 1997
----------------- ----------- ----------- ----------- ----------- ---------------
(UNAUDITED)
Class B Shares++
Selected Per Share Data:
Net asset value,
beginning of period..... $ 2.32 $ 4.34 $ 5.50 $ 6.15 $ 6.82 $ 6.83
-------- -------- ---------- ---------- ---------- -------
Income (loss) from
investment operations:
Net investment income.. 0.15 0.46 0.66 0.69 0.73 0.07
Net realized and
unrealized loss....... (0.47) (1.99) (1.13) (0.64) (0.72) (0.03)
-------- -------- ---------- ---------- ---------- -------
Total income (loss) from
investment operations... (0.32) (1.53) (0.47) 0.05 0.01 0.04
-------- -------- ---------- ---------- ---------- -------
Less dividends from net
investment income....... (0.16) (0.49) (0.69) (0.70) (0.68) (0.05)
-------- -------- ---------- ---------- ---------- -------
Net asset value, end of
period.................. $ 1.84 $ 2.32 $ 4.34 $ 5.50 $ 6.15 $ 6.82
======== ======== ========== ========== ========== =======
Total Return+............ (13.85)%(1) (37.27)% (9.39)% 0.92% (0.23)% 0.62%(1)
Ratios to Average Net
Assets:
Expenses................. 1.52%(2)(3) 1.37%(3) 1.25%(3) 1.24%(3) 1.25%(3) 1.42%(2)
Net investment income.... 15.01%(2)(3)(4) 14.57%(3) 13.07%(3) 11.86%(3) 10.80%(3) 11.28%(2)
Supplemental Data:
Net assets, end of
period, in thousands.... $487,088 $664,706 $1,381,008 $1,927,186 $1,761,147 $15,828
Portfolio turnover
rate.................... 18%(1) 49% 20% 36% 66% 113%
- ------------------------
* THE DATE SHARES WERE FIRST ISSUED.
++ 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) EFFECTIVE SEPTEMBER 1, 2001, THE FUND HAS ADOPTED THE PROVISIONS OF THE
AICPA AUDIT AND ACCOUNTING GUIDE FOR INVESTMENT COMPANIES, AS REVISED,
RELATED TO PREMIUMS AND DISCOUNTS ON DEBT SECURITIES. THE EFFECT OF THIS
CHANGE FOR THE SIX MONTHS ENDED FEBRUARY 28, 2002 WAS TO INCREASE THE
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS BY 0.26%. THE
FINANCIAL HIGHLIGHTS DATA PRESENTED IN THIS TABLE FOR PRIOR PERIODS HAS
NOT BEEN RESTATED TO REFLECT THIS CHANGE.
SEE NOTES TO FINANCIAL STATEMENTS
25
Morgan Stanley High Yield Securities Inc.
FINANCIAL HIGHLIGHTS continued
FOR THE PERIOD
FOR THE SIX FOR THE YEAR ENDED AUGUST 31, JULY 28, 1997*
MONTHS ENDED -------------------------------------------------------------- THROUGH
FEBRUARY 28, 2002 2001 2000 1999 1998 AUGUST 31, 1997
----------------- ----------- ----------- ----------- ----------- ---------------
(UNAUDITED)
Class C Shares++
Selected Per Share Data:
Net asset value,
beginning of period..... $ 2.32 $ 4.34 $ 5.51 $ 6.15 $ 6.82 $ 6.83
------- ------- ------- -------- ------- ------
Income (loss) from
investment operations:
Net investment
income................ 0.15 0.45 0.66 0.68 0.72 0.07
Net realized and
unrealized loss....... (0.47) (1.98) (1.14) (0.62) (0.72) (0.03)
------- ------- ------- -------- ------- ------
Total income (loss) from
investment operations... (0.32) (1.53) (0.48) 0.06 0.00 0.04
------- ------- ------- -------- ------- ------
Less dividends from net (0.05)
investment income....... (0.16) (0.49) (0.69) (0.70) (0.67) ------
------- ------- ------- -------- -------
Net asset value, end of
period.................. $ 1.84 $ 2.32 $ 4.34 $ 5.51 $ 6.15 $ 6.82
======= ======= ======= ======== ======= ======
Total Return+............ (13.92)%(1) (37.34)% (9.66)% 0.99% (0.34)% 0.62%(1)
Ratios to Average Net
Assets:
Expenses................. 1.62%(2)(3) 1.47%(3) 1.35%(3) 1.34%(3) 1.36%(3) 1.52%(2)
Net investment income.... 14.91%(2)(3)(4) 14.47%(3) 12.97%(3) 11.76%(3) 10.69%(3) 11.18%(2)
Supplemental Data:
Net assets, end of
period, in thousands.... $39,052 $49,818 $86,951 $109,142 $56,626 $5,225
Portfolio turnover
rate.................... 18%(1) 49% 20% 36% 66% 113%
- ------------------------
* THE DATE SHARES WERE FIRST ISSUED.
++ 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) EFFECTIVE SEPTEMBER 1, 2001, THE FUND HAS ADOPTED THE PROVISIONS OF THE
AICPA AUDIT AND ACCOUNTING GUIDE FOR INVESTMENT COMPANIES, AS REVISED,
RELATED TO PREMIUMS AND DISCOUNTS ON DEBT SECURITIES. THE EFFECT OF THIS
CHANGE FOR THE SIX MONTHS ENDED FEBRUARY 28, 2002 WAS TO INCREASE THE
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS BY 0.26%. THE
FINANCIAL HIGHLIGHTS DATA PRESENTED IN THIS TABLE FOR PRIOR PERIODS HAS
NOT BEEN RESTATED TO REFLECT THIS CHANGE.
SEE NOTES TO FINANCIAL STATEMENTS
26
Morgan Stanley High Yield Securities Inc.
FINANCIAL HIGHLIGHTS continued
FOR THE SIX FOR THE YEAR ENDED AUGUST 31
MONTHS ENDED -------------------------------------------------------------------------------
FEBRUARY 28, 2002++ 2001++ 2000++ 1999++ 1998++ 1997*
------------------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
Class D Shares
Selected Per Share Data:
Net asset value,
beginning of period..... $ 2.32 $ 4.35 $ 5.51 $ 6.16 $ 6.82 $ 6.71
-------- -------- -------- -------- -------- --------
Income (loss) from
investment operations:
Net investment
income................ 0.16(4) 0.48 0.70 0.74 0.78 0.79
Net realized and
unrealized gain
(loss)................ (0.47)(4) (1.99) (1.13) (0.64) (0.71) 0.15
-------- -------- -------- -------- -------- --------
Total income (loss) from
investment operations... (0.31) (1.51) (0.43) 0.10 0.07 0.94
-------- -------- -------- -------- -------- --------
Less dividends from net
investment income....... (0.17) (0.52) (0.73) (0.75) (0.73) (0.83)
-------- -------- -------- -------- -------- --------
Net asset value, end of
period.................. $ 1.84 $ 2.32 $ 4.35 $ 5.51 $ 6.16 $ 6.82
======== ======== ======== ======== ======== ========
Total Return+............ (13.56)%(1) (36.95)% (8.69)% 1.67% 0.63% 15.01%
Ratios to Average Net
Assets:
Expenses................. 0.77%(2)(3) 0.62%(3) 0.50%(3) 0.49%(3) 0.51%(3) 0.68%
Net investment income.... 15.76%(2)(3)(4) 15.32%(3) 13.82%(3) 12.61%(3) 11.54%(3) 11.78%
Supplemental Data:
Net assets, end of
period, in thousands.... $112,226 $137,319 $246,941 $333,714 $400,582 $479,020
Portfolio turnover
rate.................... 18%(1) 49% 20% 36% 66% 113%
- ------------------------
* PRIOR TO JULY 28, 1997, THE FUND ISSUED ONE CLASS OF SHARES. ALL SHARES
OF THE FUND HELD PRIOR TO THAT DATE HAVE BEEN DESIGNATED CLASS D SHARES.
++ 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) EFFECTIVE SEPTEMBER 1, 2001, THE FUND HAS ADOPTED THE PROVISIONS OF THE
AICPA AUDIT AND ACCOUNTING GUIDE FOR INVESTMENT COMPANIES, AS REVISED,
RELATED TO PREMIUMS AND DISCOUNTS ON DEBT SECURITIES. THE EFFECT OF THIS
CHANGE FOR THE SIX MONTHS ENDED FEBRUARY 28, 2002 WAS TO INCREASE THE
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS BY 0.26%. THE
FINANCIAL HIGHLIGHTS DATA PRESENTED IN THIS TABLE FOR PRIOR PERIODS HAS
NOT BEEN RESTATED TO REFLECT THIS CHANGE.
SEE NOTES TO FINANCIAL STATEMENTS
27
DIRECTORS
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Mitchell M. Merin
President
Barry Fink
Vice President, Secretary and General Counsel
Stephen F. Esser
Vice President
Gordon W. Loery
Vice President
Deanne Loughnane
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT MANAGER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
The financial statements included herein have been taken from the records of
the Fund without examination by the independent auditors and accordingly they
do not express an opinion thereon.
This report is submitted for the general information of 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 NASD. 37915RPT
[MORGAN STANLEY LOGO]
[PHOTO]
MORGAN STANLEY
HIGH YIELD SECURITIES
SEMIANNUAL REPORT
FEBRUARY 28, 2002
Morgan Stanley Dean Witter High Income Advantage Trust
LETTER TO THE SHAREHOLDERS - SEPTEMBER 30, 2001
Dear Shareholder:
During the 12-month period ended September 30, 2001, the high-yield market was
quite volatile. October and November 2000, as well as September 2001, were
particularly difficult. The market's decline was caused by a stream of negative
corporate developments in industries related to the telecommunications sector, a
declining equity market, a large new-issue calendar in the spring and a
continued high default rate. Many high-yield issuers, especially within or
dependent upon the telecommunications sector, announced poor earnings and lower
revenues, which pushed the high-yield market lower throughout most of the past
12 months.
The terrorist attacks of September 11 and subsequent events constituted an
additional shock to an already soft economy and the high-yield market. Liquidity
worsened on both the buy and sell sides as dealers resisted putting their
capital at risk. The industries that experienced the largest sell-off within the
high-yield market in September included airlines, insurance, lodging and
telecommunications-related and cable sectors. As was the case throughout the
fiscal year, lower-rated high-yield bonds tended to underperform higher-quality
issues as investors continued to shy away from that portion of the market.
Performance and Portfolio Strategy
For the 12-month period ended September 30, 2001, Morgan Stanley Dean Witter
High Income Advantage Trust produced a total return of -48.60 percent, based on
a change in net asset value (NAV) and reinvestment of distributions totaling
$0.352 per share. For the same period, the Trust's total return was -56.83
percent, based on a change in its market price on the New York Stock Exchange
(NYSE) and reinvestment of distributions.
The past three years have been one of the most difficult periods for the
high-yield market. As a result of substantial weakness in the market, we have
seen high-yield bond prices decline sharply and yields correspondingly rise over
this period. The Trust's core position in the B-rated sector was adversely
affected. Our allocations in the sectors related to fixed-line communications
and to a lesser extent in wireless communications were the major reasons for the
Trust's disappointing performance. Fixed-line telecom was the worst-performing
industry within the telecommunications sector during the past 12 months. This
industry experienced a high default rate and many ratings downgrades, which led
investors to sell the sector and pushed prices down for most telecom-related
bonds.
In our opinion, while many telecommunications-related issuers have had problems
in this very challenging environment, investor sentiment has become excessively
negative. Our value-oriented analysis suggests that this sector may be poised
for better performance in the months ahead.
Morgan Stanley Dean Witter High Income Advantage Trust
LETTER TO THE SHAREHOLDERS - SEPTEMBER 30, 2001 continued
Our new portfolio management team, which began managing the Fund in January, has
been actively repositioning the portfolio for the current market environment. We
have initiated positions in more than 30 new companies, including Allied Waste,
Chesapeake Energy, Schuler Homes, Salem Communications, Healthnet, Prime Media,
Quebecor, Nextmedia and Beazer Homes. We eliminated positions in many companies
such as Berry Plastics, Fleming, Envirodyne, J.B. Williams, Sabreliner and
Windemere. In addition, we have increased the overall credit quality of the
portfolio by buying BB-rated securities and trimming our exposure to the telecom
sector. However, we continue to maintain constructive positions in wireline
communications, cable, wireless communications and media.
Looking Ahead
As a result of the September 11 attacks, over the near term the economy is
expected to be weaker than previously anticipated. However, we believe that
prices and wide spreads in the high-yield market are currently at levels that
would be consistent with a more prolonged economic downturn and higher default
rates than is likely to occur. In our view, recent stimulative monetary and
fiscal policy initiatives may lead to more-normal economic conditions in 2002.
We believe that the high-yield market would benefit from an improvement in the
economy.
We would again like to remind shareholders that the Trustees have approved a
procedure whereby the Fund may, when appropriate, repurchase shares in the open
market or in privately negotiated transactions at a price not above market value
or net asset value, whichever is lower at the time of purchase.
We appreciate your ongoing support of Morgan Stanley Dean Witter High Income
Advantage Trust and look forward to continuing to serve your investment needs.
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO /s/ MITCHELL M. MERIN
- ----------------------------- --------------------------
Charles A. Fiumefreddo Mitchell M. Merin
Chairman of the Board President
2
Morgan Stanley Dean Witter High Income Advantage Trust
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2001 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------------
Corporate Bonds (85.9%)
Advertising/Marketing Services (0.8%)
$ 340 Interep National Radio Sales Inc. ................................ 10.00 % 07/01/08 $ 275,400
-------------
Aerospace & Defense (1.1%)
600 Loral Space & Communications Ltd. ................................ 9.50 01/15/06 366,000
-------------
Airlines (0.5%)
410 Air Canada Corp. (Canada) ........................................ 10.25 03/15/11 176,300
-------------
Alternative Power Generation (0.8%)
285 Calpine Corp. .................................................... 8.50 02/15/11 276,336
-------------
Auto Parts: O.E.M. (0.7%)
185 Dana Corp. - 144A* ............................................... 9.00 08/15/11 166,839
115 Hayes Lammerz International, Inc. (Series B) ..................... 9.125 07/15/07 17,250
425 Hayes Lemmerz International, Inc. (Series B) ..................... 8.25 12/15/08 63,750
-------------
247,839
-------------
Broadcast/Media (1.1%)
520 Tri-State Outdoor Media Group, Inc. .............................. 11.00 05/15/08 353,600
-------------
Broadcasting (2.2%)
140 Radio One, Inc. - 144A* .......................................... 8.875 07/01/11 137,900
240 Salem Communication Holdings Corp. - 144A* ....................... 9.00 07/01/11 246,600
120 XM Satellite Radio Inc. .......................................... 14.00 03/15/10 56,400
375 Young Broadcasting Inc. - 144A* .................................. 10.00 03/01/11 298,125
-------------
739,025
-------------
Cable/Satellite TV (10.1%)
625 Adelphia Communications Corp. (Series B) ......................... 10.50 07/15/04 595,312
7,000 Australis Holdings Property Ltd. (Australia) (a) (b) ............. 15.00 11/01/02 700
325 British Sky Broadcasting Group PLC (United Kingdom) .............. 6.875 02/23/09 304,395
350 British Sky Broadcasting Group PLC (United Kingdom) .............. 8.20 07/15/09 352,382
725 Callahan Nordhein Westfalen (Germany) ............................ 14.00 07/15/10 402,375
850 Charter Communications Holdings, Inc. - 144A* .................... 11.75++ 05/15/11 467,500
415 CSC Holdings, Inc. - 144A* ....................................... 7.625 04/01/11 410,569
1,000 Knology Holdings, Inc. ........................................... 11.875++ 10/15/07 330,000
See Notes to Financial Statements
3
Morgan Stanley Dean Witter High Income Advantage Trust
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2001 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------------
$ 300 ONO Finance PLC (United Kingdom) ................................. 14.00 % 02/15/11 186,000
360 Telewest Communications PLC (United Kingdom) ..................... 9.875 02/01/10 223,200
685 United Pan-Europe Communications NV (Series B) (Netherlands) ..... 10.875 08/01/09 95,900
-------------
3,368,333
-------------
Casino/Gaming (2.4%)
1,800 Aladdin Gaming Capital Corp. (Series B) .......................... 13.50++ 03/01/10 270,000
1,200 Resort At Summerlin (Series B) (a) (b) ........................... 13.00 12/15/07 12
200 Station Casinos, Inc. ............................................ 8.375 02/15/08 188,000
365 Station Casinos, Inc. ............................................ 9.875 07/01/10 330,325
-------------
788,337
-------------
Cellular Telephone (1.4%)
400 Dobson/Sygnet Communications ..................................... 12.25 12/15/08 413,000
2,900 Dolphin Telecom PLC (Series B) (United Kingdom) (a) .............. 14.00++ 05/15/09 29,000
2,700 Dolphin Telecom PLC (United Kingdom) (a) ......................... 11.50++ 06/01/08 27,000
-------------
469,000
-------------
Chemicals: Major Diversified (0.2%)
80 Equistar Chemical/Funding - 144A* ................................ 10.125 09/01/08 73,800
-------------
Chemicals: Specialty (0.8%)
100 Acetex Corp. - 144A* ............................................. 10.875 08/01/09 96,000
100 Isp Holdings Inc. (Series B) ..................................... 9.00 10/15/03 97,000
75 Millennium America, Inc. - 144A* ................................. 9.25 06/15/08 70,500
-------------
263,500
-------------
Commercial Printing/Forms (0.7%)
1,000 Premier Graphics Inc. (a) (b) .................................... 11.50 12/01/05 31,250
205 Quebecor Media, Inc. - 144A* (Canada) ............................ 11.125 07/15/11 202,950
-------------
234,200
-------------
Consumer/Business Services (4.4%)
600 Anacomp, Inc. (Series B) (a) (b) ................................. 10.875 04/01/04 108,000
700 Anacomp, Inc. (Series D) (a) (b) ................................. 10.875 04/01/04 126,000
1,328 Comforce Corp. (Series B) ........................................ 15.00+ 12/01/09 597,735
165 Comforce Operating, Inc. ......................................... 12.00 12/01/07 123,750
310 MDC Communication Corp. (Canada) ................................. 10.50 12/01/06 240,250
325 Muzak LLC ........................................................ 9.875 03/15/09 282,750
-------------
1,478,485
-------------
Containers/Packaging (1.3%)
650 Owens-Illinois, Inc. ............................................. 7.80 05/15/18 432,250
-------------
See Notes to Financial Statements
4
Morgan Stanley Dean Witter High Income Advantage Trust
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2001 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------------
Diversified Manufacturing (3.8%)
$ 610 Eagle-Picher Industries, Inc. .................................... 9.375% 03/01/08 332,450
1,850 Jordan Industries, Inc. (Series B) ............................... 11.75++ 04/01/09 925,000
-------------
1,257,450
-------------
Electric Utilities (0.6%)
40 CMS Energy Corp. ................................................. 7.50 01/15/09 37,823
165 PG&E National Energy Group - 144A* ............................... 10.375 05/16/11 177,394
-------------
215,217
-------------
Electronic Distributors (0.8%)
240 BRL Universal Equipment .......................................... 8.875 02/15/08 237,600
2,000 CHS Electronics, Inc. (a) (b) .................................... 9.875 04/15/05 40,000
-------------
277,600
-------------
Electronic Equipment/Instruments (0.7%)
650 High Voltage Engineering, Inc .................................... 10.75 08/15/04 221,000
-------------
Electronics/Appliances (0.1%)
9,000 International Semi-Tech Microelectronics, Inc. (Canada) (a) (b) .. 11.50 08/15/03 45,000
-------------
Engineering & Construction (0.6%)
215 Encompass Services Corp. - 144A* ................................. 10.50 05/01/09 146,200
575 Metromedia Fiber Network, Inc. ................................... 10.00 12/15/09 69,000
-------------
215,200
-------------
Environmental Services (3.7%)
400 Allied Waste North America, Inc. (Series B) ...................... 10.00 08/01/09 400,000
350 Allied Waste North America, Inc. - 144A* ......................... 8.875 04/01/08 357,000
200 Waste Management, Inc. ........................................... 7.375 08/01/10 209,792
250 WMX Technologies, Inc. ........................................... 7.00 10/15/06 262,304
-------------
1,229,096
-------------
Food Distributors (1.8%)
650 Volume Services America, Inc. .................................... 11.25 03/01/09 585,000
-------------
Food: Meat/Fish/Dairy (1.3%)
220 Michael Foods Inc. ............................................... 11.75 04/01/11 228,800
220 Smithfield Foods Inc. ............................................ 7.625 02/15/08 213,950
-------------
442,750
-------------
See Notes to Financial Statements
5
Morgan Stanley Dean Witter High Income Advantage Trust
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2001 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------------
Forest Products (2.1%)
$ 205 Louisiana Pacific Corp. .......................................... 10.875% 11/15/08 188,600
75 Louisiana Pacific Corp. .......................................... 8.875 08/15/10 68,182
425 Tembec Industries Inc. (Canada) .................................. 8.50 02/01/11 429,250
-------------
686,032
-------------
Home Building (4.4%)
305 Beazer Homes USA, Inc. ........................................... 8.625 05/15/11 289,750
400 Centex Corp. ..................................................... 7.875 02/01/11 404,326
270 Schuler Homes, Inc. -- 144A* ..................................... 9.375 07/15/09 255,150
130 Schuler Homes, Inc. -- 144A* ..................................... 10.50 07/15/11 123,500
435 Toll Brothers, Inc. .............................................. 8.25 02/01/11 391,500
-------------
1,464,226
-------------
Hospital/Nursing Management (3.1%)
950 HCA - The Healthcare Company ..................................... 8.75 09/01/10 1,022,438
-------------
Hotels/Resorts/Cruiselines (0.4%)
1,000 Epic Resorts LLC (Series B) (a) (b) .............................. 13.00 06/15/05 150,000
-------------
Internet Software/Services (1.0%)
445 Exodus Communications, Inc. (a) .................................. 11.625 07/15/10 48,950
1,000 Globix Corp. ..................................................... 12.50 02/01/10 180,000
500 PSINet, Inc. (a) (b) ............................................. 10.50 12/01/06 30,000
1,000 PSINet, Inc. (a) (b) ............................................. 11.00 08/01/09 60,000
-------------
318,950
-------------
Managed Health Care (2.4%)
425 Aetna, Inc. ...................................................... 7.875 03/01/11 424,952
380 Health Net, Inc. - 144A* ......................................... 8.375 04/15/11 392,137
-------------
817,089
-------------
Media Conglomerates (0.5%)
180 Nextmedia Operating, Inc. - 144A* ................................ 10.75 07/01/11 171,900
-------------
Medical Distributors (0.2%)
60 Amerisource Bergen Corp. - 144A* ................................. 8.125 09/01/08 61,950
-------------
Medical Specialties (0.1%)
1,765 Mediq/PRN Life Support Services, Inc. (a)(b) ..................... 11.00 06/01/08 17,650
-------------
See Notes to Financial Statements
6
Morgan Stanley Dean Witter High Income Advantage Trust
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2001 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------------
Medical/Nursing Services (1.0%)
$ 350 Fresenius Medical Care - 144A* ................................... 7.875% 06/15/11 346,500
-------------
Miscellaneous Commercial Services (0.1%)
45 Advanstar Communications, Inc. ................................... 12.00 02/15/11 30,600
-------------
Movies/Entertainment (0.9%)
300 Alliance Atlantis Communications, Inc. (Canada) .................. 13.00 12/15/09 303,000
-------------
Office Equipment/Supplies (0.0%)
2,400 Mosler, Inc. (a) (b) ............................................. 11.00 04/15/03 --
-------------
Oil & Gas Production (1.3%)
450 Chesapeake Energy Corp. .......................................... 8.125 04/01/11 423,000
-------------
Oilfield Services/Equipment (0.4%)
50 Hanover Equipment Trust - 144A* .................................. 8.75 09/01/11 50,000
55 Hanover Equipment Trust - 144A* .................................. 8.50 09/01/08 55,138
35 Key Energy Services, Inc. ........................................ 8.375 03/01/08 34,125
-------------
139,263
-------------
Other Consumer Specialties (1.2%)
545 Samsonite Corp. .................................................. 10.75 06/15/08 384,225
-------------
Other Metals/Minerals (0.9%)
110 Murrin Murrin Holdings Property Ltd. (Australia) ................. 9.375 08/31/07 82,500
215 Phelps Dodge Corp. ............................................... 8.75 06/01/11 220,702
-------------
303,202
-------------
Publishing: Books/Magazines (0.8%)
340 PRIMEDIA, Inc. - 144A* ........................................... 8.875 05/15/11 255,000
-------------
Pulp & Paper (0.6%)
210 Norske Skog - 144A* .............................................. 8.625 06/15/11 209,475
-------------
Real Estate Development (0.6%)
225 CB Richard Ellis Services, Inc. - 144A* .......................... 11.25 06/15/11 202,500
-------------
See Notes to Financial Statements
7
Morgan Stanley Dean Witter High Income Advantage Trust
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2001 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------------
Real Estate Investment Trusts (0.4%)
$ 125 Istar Financial Inc. ............................................. 8.75 % 08/15/08 120,804
-------------
Recreational Products (0.8%)
275 International Game Technology .................................... 8.375 05/15/09 277,063
-------------
Restaurants (1.9%)
12,252 American Restaurant Group Holdings, Inc. - 144A* (c). ............ 0.00 12/15/05 612,575
3,000 FRD Acquisition Corp. (Series B) (a) (b) ......................... 12.50 07/15/04 15,000
-------------
627,575
-------------
Retail - Specialty (1.7%)
600 Pantry, Inc. ..................................................... 10.25 10/15/07 582,000
-------------
Services to the Health Industry (1.1%)
150 Anthem Insurance - 144A* ......................................... 9.125 04/01/10 158,520
215 Omnicare, Inc. - 144A* ........................................... 8.125 03/15/11 221,988
-------------
380,508
-------------
Specialty Stores (0.3%)
125 Autonation, Inc. - 144A* ......................................... 9.00 08/01/08 120,000
-------------
Specialty Telecommunications (6.3%)
2,000 Birch Telecom Inc. ............................................... 14.00 06/15/08 500,000
600 DTI Holdings, Inc. (Series B) .................................... 12.50++ 03/01/08 84,000
1,050 Esprit Telecom Group PLC (United Kingdom) (b) .................... 11.50 12/15/07 10,500
1,000 Esprit Telecom Group PLC (United Kingdom) (b) .................... 10.875 06/15/08 10,000
3,400 Firstworld Communications, Inc. .................................. 13.00++ 04/15/08 170,000
425 Global Crossing Holdings, Ltd. (Bermuda) ......................... 8.70 08/01/07 178,500
225 Global Crossing Holdings, Ltd. (Bermuda) ......................... 9.50 11/15/09 94,500
990 GT Group Telecom Inc. (Canada) ................................... 13.25++ 02/01/10 198,000
125 McLeodUSA, Inc. .................................................. 11.375 01/01/09 36,250
500 McLeodUSA, Inc. .................................................. 11.50 05/01/09 140,000
460 Pac-West Telecom Inc. (Series B) ................................. 13.50 02/01/09 115,000
800 Primus Telecommunications Group, Inc. (Series B) ................. 9.875 05/15/08 152,000
1,800 Rhythms Netconnections, Inc. (a) (b) ............................. 12.75 04/15/09 198,000
1,400 Rhythms Netconnections, Inc. (Series B) (a) (b) .................. 14.00 02/15/10 70,000
500 Versatel Telecom International NV (Netherlands) .................. 13.25 05/15/08 115,000
See Notes to Financial Statements
8
Morgan Stanley Dean Witter High Income Advantage Trust
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2001 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------------
$1,400 Viatel, Inc. (a) (b) ............................................. 11.25 % 04/15/08 3,500
500 Viatel, Inc. (issued 03/19/99) (a) (b) ........................... 11.50 03/15/09 1,250
400 Viatel, Inc. (issued 12/08/99) (a) (b) ........................... 11.50 03/15/09 1,000
1,000 Viatel Inc. (a) .................................................. 12.50++ 04/15/08 2,500
1,415 World Access, Inc. (a) (b) (c) ................................... 13.25 01/15/08 14,150
500 Worldwide Fiber Inc. (Canada) (a) (b) ............................ 12.00 08/01/09 1,250
-------------
2,095,400
-------------
Telecommunications (5.9%)
500 Covad Communications Group, Inc. (a) ............................. 12.50 02/15/09 105,000
1,800 Covad Communications Group, Inc. (Series B) (a) .................. 13.50++ 03/15/08 216,000
500 Covad Communications Group, Inc. (Series B) (a)(b) ............... 12.00 02/15/10 80,000
2,500 e. Spire Communications, Inc. (a) (b) ............................ 13.75 07/15/07 375,000
1,150 Focal Communications, Corp. (Series B) ........................... 12.125++ 02/15/08 138,000
500 Hyperion Telecommunication, Inc. (Series B) ...................... 12.25 09/01/04 280,000
500 MGC Communications, Inc. ......................................... 13.00 04/01/10 130,000
550 NextLink Communications LLC ...................................... 12.50 04/15/06 115,500
765 NTL Communications Corp. ......................................... 11.875 10/01/10 384,413
500 Startec Global Communications Corp. .............................. 12.00 05/15/08 20,000
230 Talton Holdings, Inc. (Series B) ................................. 11.00 06/30/07 138,000
-------------
1,981,913
-------------
Trucks/Construction/Farm Machinery (1.4%)
575 J.B. Poindexter & Co., Inc. ...................................... 12.50 05/15/04 454,250
-------------
Wholesale Distributors (0.5%)
170 Burhmann US Inc. ................................................. 12.25 11/01/09 150,450
-------------
Wireless Communications (1.7%)
300 American Cellular Corp. .......................................... 9.50 10/15/09 279,000
475 AMSC Acquisition Co., Inc. (Series B) ............................ 12.25 04/01/08 90,250
8,000 CellNet Data Systems, Inc. (a) (b) ............................... 14.00++ 10/01/07 10,000
1,000 Globalstar LP/Capital Corp. (b) .................................. 11.50 06/01/05 40,000
1,200 Orbcomm Global LP/Capital Corp. (Series B) (a) (b) ............... 14.00 08/15/04 15,000
2,000 USA Mobile Communications Holdings, Inc .......................... 14.00 11/01/04 110,000
1,000 WinStar Communications, Inc. (a) (b) ............................. 12.75 04/15/10 10,000
-------------
554,250
-------------
Total Corporate Bonds (Cost $93,359,964) ................................................. 28,681,931
-------------
See Notes to Financial Statements
9
Morgan Stanley Dean Witter High Income Advantage Trust
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2001 continued
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------------------
Preferred Stocks (5.6%)
Broadcasting (0.8%)
31 Paxson Communications .................................................. $ 279,000
------------
Cellular Telephone (1.1%)
74 Dobson Communications Corp. ............................................ 68,820
602 Nextel Communications, Inc. ............................................ 307,178
------------
375,998
------------
Electric Utilities (1.0%)
305 TNP Enterprises Inc. ................................................... 318,725
------------
Publishing: Books/Magazines (0.0%)
235 PRIMEDIA, Inc (Series D) ............................................... 13,865
------------
Specialty Telecommunications (0.9%)
275 Broadwing Communications, Inc. (Series B) .............................. 255,750
7,499 XO Communications, Inc. ................................................ 33,744
------------
289,494
------------
Telecommunication Equipment (1.8%)
919,053 FWT Inc. (Series A) (c) ................................................ 597,384
------------
Total Preferred Stocks (Cost $5,098,748) ............................... 1,874,466
------------
Common Stocks (d) (0.1%)
Apparel/Footwear Retail (0.1%)
946,890 County Seat Stores, Inc. (c) ........................................... 8,522
------------
Casino/Gaming (0.0%)
2,000 Fitzgerald Gaming Corp. ................................................ 2
------------
Food: Specialty/Candy (0.0%)
835 SFAC New Holdings Inc. (c) ............................................. 209
153 SFFB Holdings, Inc. (c) ................................................ 2
180,000 Specialty Foods Acquisition Corp. - 144A* .............................. 1,800
------------
2,011
------------
Medical/Nursing Services (0.0%)
211,076 Raintree Healthcare Corp. (c) .......................................... 1,900
------------
See Notes to Financial Statements
10
Morgan Stanley Dean Witter High Income Advantage Trust
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2001 continued
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------------------
Motor Vehicles (0.0%)
113 Northern Holdings Industrial Corp. (c)* ................................ $ --
------------
Restaurants (0.0%)
9,500 American Restaurant Group Holdings, Inc. - 144A* ....................... 2,375
------------
Specialty Telecommunications (0.0%)
13,334 Versatel Telecom International NV (ADR) (Netherlands) .................. 7,467
6,284 World Access, Inc. (c) ................................................. 72
------------
7,539
------------
Telecommunication Equipment (0.0%)
80,266 FWT, Inc. (Class A) (c) ................................................ 803
------------
Textiles (0.0%)
223,846 United States Leather, Inc. (c) ........................................ 2,238
------------
Wireless Communications (0.0%)
275,769 Arch Wireless, Inc. (c) ................................................ 5,515
13,098 Vast Solutions, Inc. (Class B1) (c) .................................... 131
13,098 Vast Solutions, Inc. (Class B2) (c) .................................... 131
13,098 Vast Solutions, Inc. (Class B3) (c) .................................... 131
------------
5,908
------------
Total Common Stocks (Cost $32,619,645) ................................. 31,298
------------
NUMBER OF EXPIRATION
WARRANTS DATE
-------- ----------
Warrants (d) (0.2%)
Aerospace & Defense (0.1%)
5,000 Sabreliner Corp. - 144A* ................................... 04/15/03 50,000
------------
Broadcasting (0.0%)
250 XM Satellite Radio Holdings Inc. - 144A* .................... 03/15/10 3,750
------------
Cable/Satellite TV (0.1%)
300 Ono Finance PLC - 144A* (United Kingdom) .................... 02/15/11 12,000
------------
See Notes to Financial Statements
11
Morgan Stanley Dean Witter High Income Advantage Trust
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2001 continued
NUMBER OF EXPIRATION
SHARES DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
Casino/Gaming (0.0%)
35,000 Aladdin Gaming Enterprises, Inc. - 144A* .............................. 03/01/10 $ 350
1,000 Resort at Summerlin LP - 144A* ......................................... 12/15/07 10
-------------
360
-------------
Electric Utilities (0.0%)
285 TNP Enterprises Inc. - 144A* ........................................... 04/01/11 8,550
-------------
Hotels/Resorts/Cruiselines (0.0%)
1,000 Epic Resorts LLC - 144A* ............................................... 06/15/05 10
-------------
Internet Software/Services (0.0%)
3,400 Verado Holdings Inc. - 144A* ........................................... 04/15/08 34
-------------
Specialty Telecommunications (0.0%)
2,000 Birch Telecom Inc. - 144A* ............................................. 06/15/08 200
990 GT Group Telecom Inc. (Canada) - 144A* ................................. 02/01/10 4,950
-------------
5,150
-------------
Telecommunications (0.0%)
500 Startec Global Communications Corp. - 144A* ............................ 05/15/08 15
-------------
Wireless Communications (0.0%)
500 Motient Corp. - 144A* .................................................. 04/01/08 250
-------------
Total Warrants (Cost $238,277) ................................................... 80,119
-------------
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- ----------- ------ --------
Short-Term Investment (4.5%)
Repurchase Agreement
$1,506 Joint repurchase agreement account (dated 09/28/01;
proceeds $1,506,409) (e) (Cost $1,506,000) ........... 3.255% 10/01/01 $ 1,506,000
-------------
Total Investments (Cost $132,822,634) (f) 96.3% 32,173,814
Other Assets in Excess of Liabilities 3.7 1,234,805
---- -------------
Net Assets 100.0% $ 33,408,619
===== =============
See Notes to Financial Statements
12
Morgan Stanley Dean Witter High Income Advantage Trust
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2001 continued
- --------------
ADR American Depository Receipt.
* Resale is restricted to qualified institutional investors.
+ Payment-in-kind security.
++ Currently a zero coupon bond and will pay interest at the rate shown
at a future specified date.
(a) Issuer in bankruptcy.
(b) Non-income producing security; bond in default.
(c) Acquired through exchange offer.
(d) Non-income producing securities.
(e) Collateralized by federal agency and U.S. Treasury obligations.
(f) The aggregate cost for federal income tax purposes approximates the
aggregate cost for book purposes. The aggregate gross unrealized
appreciation is $232,033 and the aggregate gross unrealized
depreciation is $100,880,853, resulting in net unrealized depreciation
of $100,648,820.
See Notes to Financial Statements
13
Morgan Stanley Dean Witter High Income Advantage Trust
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
September 30, 2001
Assets:
Investments in securities, at value
(cost $132,822,634)............................. $ 32,173,814
Receivable for:
Interest...................................... 1,158,469
Investment sold............................... 287,471
Prepaid expenses and other assets................. 12,527
-------------
Total Assets.................................. 33,632,281
-------------
Liabilities:
Investment management fee payable................. 22,624
Payable to bank................................... 50,909
Accrued expenses and other payables............... 150,129
-------------
Total Liabilities............................. 223,662
-------------
Net Assets.................................... $ 33,408,619
-------------
Composition of Net Assets:
Paid-in-capital................................... $ 230,799,729
Net unrealized depreciation....................... (100,648,820)
Dividends in excess of net investment income...... (1,070,175)
Accumulated net realized loss..................... (95,672,115)
-------------
Net Assets.................................... $ 33,408,619
-------------
Net Assets Value Per Share,
29,997,052 shares outstanding (unlimited shares
authorized of $.01 par value)................... $ 1.11
======
See Notes to Financial Statements
14
Morgan Stanley Dean Witter High Income Advantage Trust
FINANCIAL STATEMENTS continued
Statement of Operations
For the year ended September 30, 2001
Net Investment Income:
Income
Interest................................. $ 9,255,218
Dividends................................ 12,463
-------------
Total Income......................... 9,267,681
-------------
Expenses
Investment management fee................ 382,895
Transfer agent fees and expenses......... 131,990
Professional fees........................ 44,486
Shareholder reports and notices.......... 33,229
Registration fees........................ 32,185
Trustees' fees and expenses.............. 17,976
Custodian fees........................... 14,202
Other.................................... 13,931
-------------
Total Expenses....................... 670,894
-------------
Net Investment Income................ 8,596,787
-------------
Net Realized and Unrealized Loss:
Net realized loss........................ (20,917,698)
Net change in unrealized depreciation.... (19,081,896)
-------------
Net Loss............................. (39,999,594)
-------------
Net Decrease............................. $ (31,402,807)
=============
See Notes to Financial Statements
15
Morgan Stanley Dean Witter High Income Advantage Trust
FINANCIAL STATEMENTS continued
Statement of Changes in Net Assets
FOR THE YEAR
FOR THE YEAR ENDED
ENDED SEPTEMBER 30,
SEPTEMBER 30, 2001 2000
------------------ ---------------
Increase (Decrease) in Net Assets:
Operations:
Net investment income..................................... $ 8,596,787 $ 15,338,333
Net realized loss......................................... (20,917,698) (3,163,815)
Net change in unrealized depreciation..................... (19,081,896) (25,856,377)
------------------ ---------------
Net Decrease.......................................... (31,402,807) (13,681,859)
Dividends to shareholders from net investment income...... (10,558,684) (16,200,839)
Decrease from transactions in shares of beneficial
Interest................................................ -- (64,964)
------------------ ---------------
Net Decrease.......................................... (41,961,491) (29,947,662)
Net Assets:
Beginning of period....................................... 75,370,110 105,317,772
------------------ ---------------
End of Period
(Including dividends in excess of net investment income
of $1,070,175 and undistributed net investment income of
$887,228, respectively)................................... $ 33,408,619 $ 75,370,110
================== ===============
See Notes to Financial Statements
16
Morgan Stanley Dean Witter High Income Advantage Trust
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2001
1. Organization and Accounting Policies
Morgan Stanley Dean Witter High Income Advantage Trust (the "Trust") is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company. The Trust's primary
investment objective is to earn a high level of current income and, as a
secondary objective, capital appreciation, but only when consistent with its
primary objective. The Trust was organized as a Massachusetts business trust on
June 17, 1987 and commenced operations on October 29, 1987.
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.
The following is a summary of significant accounting policies:
A. Valuation of Investments -- (1) an equity portfolio security listed or traded
on the New York or American Stock Exchange, NASDAQ, 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 latest bid price (in cases
where securities are traded on more than one exchange, the security is valued on
the exchange designated as the primary market pursuant to procedures adopted by
the Trustees); (2) all other portfolio securities for which over-the-counter
market quotations are readily available are valued at the latest available bid
price; (3) when market quotations are not readily available, including
circumstances under which it is determined by Morgan Stanley Investment Advisors
Inc. (the "Investment Manager"), formerly Morgan Stanley Dean Witter Advisors
Inc., that sale and bid prices are not reflective of a security's market value,
portfolio securities are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the
Trustees; (4) certain of the portfolio securities may be valued by an outside
pricing service approved by the Trustees. The pricing service may utilize a
matrix system incorporating security quality, maturity and coupon as the
evaluation model parameters, and/or research and evaluations by its staff,
including review of broker-dealer market price quotations, if available, in
determining what it believes is the fair valuation of the portfolio securities
valued by such pricing service; and (5) 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.
17
Morgan Stanley Dean Witter High Income Advantage Trust
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2001 continued
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.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily except where collection is not expected.
C. Joint Repurchase Agreement Account -- Pursuant to an Exemptive Order issued
by the Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment Manager, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements for cash, or U.S. Treasury or
federal agency obligations.
D. Federal Income Tax Status -- It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.
E. Dividends and Distributions to Shareholders -- The Trust records dividends
and distributions to its shareholders on the ex-dividend date. 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.
2. Investment Management Agreement
Pursuant to an Investment Management Agreement with the Investment Manager, the
Trust pays a management fee, accrued weekly and payable monthly, by applying the
following annual rates to the Trust's weekly net assets: 0.75% to the portion of
weekly net assets not exceeding $250 million; 0.60% to the portion of weekly net
assets exceeding $250 million but not exceeding $500 million; 0.50% to the
portion of weekly net assets exceeding $500 million but not exceeding $750
million; 0.40% to the portion of weekly net assets exceeding $750 million but
not exceeding $1 billion; and 0.30% to the portion of weekly net assets
exceeding $1 billion.
18
Morgan Stanley Dean Witter High Income Advantage Trust
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2001 continued
3. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended September 30, 2001 aggregated
$31,796,999 and $36,670,168, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager, is
the Trust's transfer agent. At September 30, 2001, the Trust had transfer agent
fees and expenses payable of approximately $13,000.
The Trust has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Trust who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended September 30, 2001
included in Trustees' fees and expenses in the Statement of Operations amounted
to $8,025. At September 30, 2001, the Trust had an accrued pension liability of
$58,357 which is included in accrued expenses in the Statement of Assets and
Liabilities.
4. Shares of Beneficial Interest
CAPITAL
PAID IN
PAR VALUE EXCESS OF
SHARES OF SHARES PAR VALUE
---------- ---------- ----------------
Balance, September 30, 1999.............................. 30,017,252 $ 300,172 $ 254,089,430
Treasury shares purchased and retired (weighted average
discount 2.25%)*....................................... (20,200) (202) (64,762)
Reclassification due to permanent book/tax differences... -- -- (23,411,478)
---------- ---------- ---------------
Balance, September 30, 2000.............................. 29,997,052 $ 299,970 $ 230,613,190
Reclassification due to permanent book/tax differences... -- -- (113,431)
---------- ---------- ---------------
Balance, September 30, 2001.............................. 29,997,052 $ 299,970 $ 230,499,759
========== ========== ===============
- ---------------------
* The Trustees have voted to retire the shares purchased.
5. Dividends
The Trust declared the following dividends from net investment income:
DECLARATION AMOUNT RECORD PAYABLE
DATE PER SHARE DATE DATE
----------- --------- -------- ---------
September 25, 2001 $ 0.017 October 5, 2001 October 19, 2001
October 30, 2001 $ 0.017 November 9, 2001 November 23, 2001
19
Morgan Stanley Dean Witter High Income Advantage Trust
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2001 continued
6. Federal Income Tax Status
At September 30, 2001, the Trust had a net capital loss carryover of
approximately $73,135,000, to offset future capital gains to the extent provided
by regulations, available through September 30 of the following years:
AMOUNTS IN THOUSANDS
- ---------------------------------------------------------------------------------------------------------
2002 2003 2005 2006 2007 2008 2009
- --------- --------- --------- --------- --------- --------- ---------
$15,205 $26,684 $6,214 $14,070 $3,307 $3,112 $4,543
========= ========= ========= ========= ========= ========= ==========
Capital losses incurred after October 31 ("post-October losses") within the
taxable year are deemed to arise on the first business day of the Trust's next
taxable year. The Trust incurred and will elect to defer net capital losses of
approximately $20,142,000 during fiscal 2001.
As of September 30, 2001, the Trust had temporary book/tax differences primarily
attributable to post-October losses, capital loss deferrals on wash sales and
interest on bonds in default and permanent book/tax differences primarily
attributable to an expired capital loss carryover. To reflect reclassifications
arising from the permanent differences, paid-in-capital was charged $113,431,
accumulated net realized loss was credited $108,937 and dividends in excess of
net investment income was credited $4,494.
7. Change In Accounting Policy
Effective October 1, 2001, the Fund will adopt the provisions of the AICPA Audit
and Accounting Guide for Investment Companies, as revised, related to premiums
and discounts on debt securities. The cumulative effect of this accounting
change will have no impact on the net assets of the Fund, but will result in an
adjustment to the cost of securities and a corresponding adjustment to
undistributed net investment income based on securities held as of September 30,
2001.
20
Morgan Stanley Dean Witter High Income Advantage Trust
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
FOR THE YEAR ENDED SEPTEMBER 30
------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- ----------
Selected Per Share Data:
Net asset value, beginning of period............ $ 2.51 $ 3.51 $ 4.44 $ 5.18 $ 5.22
----------- ----------- ----------- ----------- ----------
Income (loss) from investment operations:
Net investment income....................... 0.29 0.51 0.57 0.62 0.63
Net realized and unrealized loss............ (1.34) (0.97) (0.89) (0.72) --
----------- ----------- ----------- ----------- ----------
Total income (loss) from investment operations.. (1.05) (0.46) (0.32) (0.10) 0.63
----------- ----------- ----------- ----------- ----------
Dividends from net investment income............ (0.35) (0.54) (0.61) (0.64) (0.67)
----------- ----------- ----------- ----------- ----------
Net asset value, end of period.................. $ 1.11 $ 2.51 $ 3.51 $ 4.44 $ 5.18
=========== =========== =========== =========== ==========
Market value, end of period..................... $ 1.30 $ 3.50 $ 4.25 $ 5.25 $ 6.25
=========== =========== =========== =========== ==========
Total Return+................................... (56.83)% (4.71)% (8.83)% (6.52)% 16.26%
Ratios to Average Net Assets:
Expenses........................................ 1.32% 1.05% 1.00% 0.95% 0.92%
Net investment income........................... 16.89% 16.44% 14.36% 12.58% 12.43%
Supplemental Data:
Net assets, end of period, in thousands......... $ 33,409 $ 75,370 $ 105,318 $ 133,222 $ 155,540
Portfolio turnover rate......................... 66% 16% 51% 105% 124%
- --------------------
+ Total return is based upon the current market value on the last day of each
period reported. Dividends are assumed to be reinvested at the prices
obtained under the Trust's dividend reinvestment plan. Total return does
not reflect brokerage commissions.
21
Morgan Stanley Dean Witter High Income Advantage Trust
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Trustees of Morgan Stanley Dean Witter High
Income Advantage Trust:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Dean Witter High Income Advantage Trust (the "Trust"), including the
portfolio of investments, as of September 30, 2001, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of September 30, 2001, by correspondence with the custodian.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
the above present fairly, in all material respects, the financial position of
Morgan Stanley Dean Witter High Income Advantage Trust as of September 30, 2001,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in conformity
with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
New York, New York
November 12, 2001
22
Morgan Stanley Dean Witter High Income Advantage Trust
REVISED INVESTMENT POLICY/PORTFOLIO MANAGER CHANGE
On February 21, 2001, the Trustees of the Trust approved an investment policy
whereby the Trust would be permitted to invest, to a limited extent, in
asset-backed securities. Asset-backed securities represent an interest in a pool
of assets such as automobile and credit card receivables or home equity loans
which have been securitized in pass through structures similar to
mortgage-backed securities. These types of pass through securities provide for
monthly payments that are a "pass through" of the monthly interest and principal
payments made by the individual borrowers on the pooled receivables. Like
mortgage-backed securities, asset-backed securities generally decrease in value
as a result of interest rate increases, but may benefit less than other
fixed-income securities from declining interest rates, principally because of
prepayments. Also, as in the case of mortgage-backed securities, prepayments
generally increase during a period of declining interest rates although other
factors, such as changes in credit card use and payment patterns, may also
influence prepayment rates. Asset-backed securities also involve the risk that
various federal and state consumer laws and other legal and economic factors may
result in the collateral backing the securities being insufficient to support
payment on the securities.
In January 2001, Steven F. Esser, Gordon W. Loery and Deanna L. Loughnane were
named primary portfolio managers of Morgan Stanley Dean Witter High Income
Advantage Trust. Mr. Esser is a Managing Director of Morgan Stanley Investment
Advisors Inc., the Trust's Investment Manager, as well as a Managing Director of
Morgan Stanley Investments LP (formerly Miller Anderson & Sherrerd, LLP), an
affiliate of the Investment Manager. Mr. Loery is a Principal of the Investment
Manager as well as a Principal of Morgan Stanley Investments. Messrs. Esser and
Loery have been managing portfolios for Morgan Stanley Investments and its
investment advisory affiliates for over five years. Ms. Loughnane is a Principal
of the Investment Manager as well as a Principal of Morgan Stanley Investments.
Ms. Loughnane has been managing portfolios for Morgan Stanley Investments and
its investment advisory affiliates since 1997, prior to which time she was a
Vice President and Senior Corporate Bond Analyst for Putnam Investments
(1993-1997).
23
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Mitchell M. Merin
President
Barry Fink
Vice President, Secretary and General Counsel
Stephen F. Esser
Vice President
Gordon W. Loery
Vice President
Deanna L. Loughnane
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center [MORGAN STANLEY LOGO]
New York, New York 10281
INVESTMENT MANAGER
[GRAPHIC OMITTED]
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York10020
MORGAN STANLEY
DEAN WITTER
HIGH INCOME
ADVANTAGE TRUST
Annual Report
September 30, 2001
------------------------------------
Morgan Stanley High Income Advantage Trust
LETTER TO THE SHAREHOLDERS [] MARCH 31, 2002
Dear Shareholder:
During the six-month period ended March 31, 2002, the high-yield market settled
down after experiencing a spike in volatility in the weeks following the
September 11 terrorist attacks. Immediately following the attacks, market
liquidity became extremely thin and bid prices dropped sharply. This was
particularly true among the relatively weaker credits, several of which slipped
into bankruptcy. By the end of September, however, the market's liquidity had
improved and prices rose for issuers that were expected to benefit from an
anticipated economic recovery.
Despite a renewed softening in expectations for the economy in general and the
high-yield market in particular toward the end of last year, data early in 2002
were consistent with expectations for an upturn in the economy. Against this
backdrop, investors appeared to believe that the high-yield market would improve
in line with the overall economy. Consequently, investor inflows into the
high-yield market tended to be supportive. During March alone there were net
inflows of almost $3 billion into high-yield funds. On the negative side, many
telecommunications-related companies continued to announce poor earnings and
lower revenues, which pushed the sector lower throughout much of the six-month
period. In addition, issuers that were perceived to have used aggressive
accounting techniques tended to perform poorly in the post-Enron environment.
Credit spreads in the high-yield market relative to U.S. Treasury securities
remained at historically wide levels after nearly reaching their all-time peak
during September. Spreads also remained wide within the lower-rated portion of
the high-yield market as investors continued to prefer investments in the
relatively higher-quality end of the marketplace. In addition, bonds in most of
the sectors not related to telecommunications performed relatively better as
investors continued to be concerned about the future of many
telecommunications-related companies.
Performance
For the six-month period ended March 31, 2002, Morgan Stanley High Income
Advantage Trust produced a total return of -3.00 percent, based on a change in
net asset value (NAV) and reinvestment of distributions totaling $0.0905 per
share. For the same period, the Trust's total return was -12.21 percent, based
on a change in its market price on the New York Stock Exchange (NYSE) and
reinvestment of distributions.
In January, the Trust instituted an important change to its dividend policy.
First, the income dividend declared in January 2002 was lowered to $0.01125 per
share from $0.017 per share. Second, the Trust moved from paying a fixed
dividend rate to one that fluctuates with the amount of income earned by the
Trust. We believe that adopting a fluctuating dividend policy will provide the
Trust greater flexibility. Should the Trust experience additional defaults, the
dividend amount will be lower. Conversely, should the economy improve, defaults
stabilize and income levels increase, the Trust's dividend rate could rise.
Morgan Stanley High Income Advantage Trust
LETTER TO THE SHAREHOLDERS [] MARCH 31, 2002 continued
Portfolio Strategy
The Trust's position in the lower-rated portion of the market adversely affected
its relative performance. Allocations in fixed-line communications and to a
lesser extent in wireless communications were the major reasons for
disappointing performance. Fixed-line telecommunications was the weakest sector
during the past six months, down more than 30 percent. This sector's high
default rate and rating downgrades led investors to sell it as a sector, which
pushed prices lower. Although the portfolio management team reduced the Trust's
investments in these industries over the past year, the allocation to this
sector remained high relative to market weights.
Over the past six months, the Trust's portfolio management team continued to
reposition it for the current market environment. The team initiated positions
in more than 15 new companies, including Collins and Aikman, Stone Energy,
Mailwell, Dana Corp., Autonation and Equistar. The team also increased the
overall credit quality of the portfolio and trimmed the Trust's exposure to the
telecommunications sector. The team continues to maintain constructive positions
in wireline and wireless communications, cable and media.
Looking Ahead
As discussed, the high-yield market is at historically wide interest-rate spread
levels relative to U.S. Treasury securities. The Trust's portfolio management
team believes that the current spread of the high-yield market is pricing in a
more extended period of high default rates than is likely to occur. At the
macroeconomic level, the monetary and fiscal policy moves that have been
implemented are expected to bring the economy back to more normal growth levels.
If this scenario proves true, it may provide a basis for the high-yield market
to perform better during the period ahead.
We would again like to remind shareholders that the Trustees have approved a
procedure whereby the Trust may, when appropriate, repurchase shares in the open
market or in privately negotiated transactions at a price not above market value
or net asset value, whichever is lower at the time of purchase.
We appreciate your ongoing support of Morgan Stanley High Income Advantage Trust
and look forward to continuing to serve your investment needs.
Very truly yours,
/s/ Charles A. Fiumefreddo /s/ Mitchell M. Merin
Charles A. Fiumefreddo Mitchell M. Merin
Chairman of the Board President
2
Morgan Stanley High Income Advantage Trust
RESULTS OF ANNUAL MEETING
* * *
On December 18, 2001, an annual meeting of the Trust's shareholders was held for
the purpose of electing Trustees, the results of which were as follows:
(1) Election of Trustees:
Michael Bozic
For ............................................................ 23,504,913
Withheld ....................................................... 1,153,653
Charles A. Fiumefreddo
For ............................................................ 23,475,532
Withheld ....................................................... 1,183,034
James F. Higgins
For ............................................................ 23,548,151
Withheld ....................................................... 1,110,415
The following Trustees were not standing for reelection at this meeting: Edwin
J. Garn, Wayne E. Hedien, Dr. Manuel H. Johnson, Michael E. Nugent, Philip J.
Purcell and John L. Schroeder.
3
Morgan Stanley High Income Advantage Trust
PORTFOLIO OF INVESTMENTS [] MARCH 31, 2002 (unaudited)
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------- ------------- ----------- --------------
Corporate Bonds (86.0%)
Advertising/Marketing Services (0.8%)
$ 340 Interep National Radio Sales Inc. (Series B) ................. 10.00 % 07/01/08 $ 244,800
-----------
Aerospace & Defense (1.0%)
500 Loral Space & Communications Ltd. ........................... 9.50 01/15/06 310,000
-----------
Airlines (0.9%)
365 Air Canada Corp. (Canada) .................................... 10.25 03/15/11 284,700
-----------
Alternative Power Generation (0.7%)
275 Calpine Corp. ................................................ 8.50 02/15/11 219,313
-----------
Auto Parts: O.E.M. (2.4%)
65 Arvinmeritor ................................................. 8.75 03/01/12 67,150
45 Collins & Aikman Products .................................... 11.50 04/15/06 41,625
180 Collins & Aikman Products - 144A* ............................ 10.75 12/31/11 181,800
355 Dana Corp. ................................................... 9.00 08/15/11 351,450
425 Hayes Lemmerz International, Inc. (a) (b) .................... 8.25 12/15/08 25,500
115 Hayes Lemmerz International, Inc. (Series B) (a) (b) ......... 9.125 07/15/07 6,900
55 Lear Corp. ................................................... 8.11 05/15/09 56,375
-----------
730,800
-----------
Broadcast/Media (1.2%)
520 Tri-State Outdoor Media Group, Inc. (b) ...................... 11.00 05/15/08 353,600
-----------
Broadcasting (2.9%)
75 Corus Entertainment Corp. - 144A* (Canada) ................... 8.75 03/01/12 77,438
65 Entravision Communications Corp. - 144A* ..................... 8.125 03/15/09 65,650
140 Radio One, Inc. ............................................. 8.875 07/01/11 147,000
240 Salem Communications Holding Corp. .......................... 9.00 07/01/11 249,000
120 XM Satellite Radio Inc. ..................................... 14.00 03/15/10 85,200
225 Young Broadcasting Inc. ..................................... 10.00 03/01/11 234,000
-----------
858,288
-----------
Cable/Satellite TV (9.1%)
365 Adelphia Communications Corp. (Series B) ..................... 10.50 07/15/04 359,525
7,000 Australis Holdings Property Ltd. (Australia) (a) (b) ......... 15.00 11/01/02 -
100 British Sky Broadcasting Group PLC (United Kingdom) .......... 6.875 02/23/09 94,068
350 British Sky Broadcasting Group PLC (United Kingdom) .......... 8.20 07/15/09 353,547
435 Callahan Nordhein Westfalen (Germany) ........................ 14.00 07/15/10 65,250
See Notes to Financial Statements
4
Morgan Stanley High Income Advantage Trust
PORTFOLIO OF INVESTMENTS [] MARCH 31, 2002 (unaudited) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------- ----------------- ----------- --------------
$ 675 Charter Communications Holdings Corp. ........................ 11.75++% 05/15/11 $ 391,499
415 CSC Holdings Inc. ........................................... 7.625 04/01/11 401,057
275 Echostar DBS Corp. - 144A* ................................... 9.125 01/15/09 283,250
715 Knology Holdings, Inc. ...................................... 11.875++ 10/15/07 264,550
300 Ono Finance PLC (United Kingdom) ............................. 14.00 02/15/11 141,000
45 Pegasus Communications Corp. ................................. 9.75 12/01/06 30,600
435 Telewest Communications PLC (United Kingdom) ................. 9.875 02/01/10 213,150
685 United Pan Europe Communications N.V. (Netherlands) (b) ...... 10.875 08/01/09 89,050
-----------
2,686,546
-----------
Casino/Gaming (1.9%)
1,800 Aladdin Gaming Capital Corp. (Series B) ...................... 13.50++ 03/01/10 56,250
115 Harrahs Operating Co. Inc. ................................... 8.00 02/01/11 119,990
1,200 Resorts at Summerlin LP (Series B) (a) (b) ................... 13.00 12/15/07 -
365 Station Casinos, Inc. ....................................... 9.875 07/01/10 391,462
-----------
567,702
-----------
Cellular Telephone (1.2%)
100 Dobson/Sygnet Communications ................................. 12.25 12/15/08 98,000
2,900 Dolphin Telecom PLC (Series B) (United Kingdom) (a) .......... 14.00++ 05/15/09 290
2,700 Dolphin Telecom PLC (United Kingdom) (a) ..................... 11.50++ 06/01/08 270
290 Tritel PCS Inc. ............................................. 12.75++ 05/15/09 255,200
-----------
353,760
-----------
Chemicals: Major Diversified (1.4%)
135 Equistar Chemical/Funding .................................... 10.125 09/01/08 139,050
290 Huntsman ICI Chemicals LLC ................................... 10.125 07/01/09 266,800
-----------
405,850
-----------
Chemicals: Specialty (2.1%)
115 Acetex Corp. (Canada) ........................................ 10.875 08/01/09 119,600
35 ISP Chemco, Inc. ............................................. 10.25 07/01/11 37,013
250 ISP Holdings Inc. - 144A* .................................... 10.625 12/15/09 259,375
135 Lyondell Chemical Co. (Series B) ............................. 9.875 05/01/07 137,700
75 Millennium America, Inc. - ................................... 9.25 06/15/08 77,250
-----------
630,938
-----------
Commercial Printing/Forms (1.2%)
110 Mail-Well Inc. - 144A* ....................................... 9.625 03/15/12 113,300
1,000 Premier Graphics Inc. (a) (b) ................................ 11.50 12/01/05 30,000
See Notes to Financial Statements
5
Morgan Stanley High Income Advantage Trust
PORTFOLIO OF INVESTMENTS [] MARCH 31, 2002 (unaudited) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------- ----------------- ----------- --------------
$ 25 Quebecor Media, Inc. (Canada) .................................. 13.75++% 07/15/11 $ 17,250
195 Quebecor Media, Inc. (Canada) .................................. 11.125 07/15/11 211,575
-----------
372,125
-----------
Consumer/Business Services (3.0%)
1,328 Comforce Corp. (Series B) ...................................... 15.00+ 12/01/09 398,490
310 MDC Communications Corp. (Canada) .............................. 10.50 12/01/06 275,900
275 Muzak LLC/Muzak Finance ........................................ 9.875 03/15/09 231,000
-----------
905,390
-----------
Containers/Packaging (1.9%)
520 Owens-Illinois, Inc. ........................................... 7.80 05/15/18 451,100
120 Riverwood International Corp. ................................. 10.875 04/01/08 124,500
-----------
575,600
-----------
Diversified Manufacturing (2.1%)
430 Eagle-Picher Industries, Inc. ................................. 9.375 03/01/08 301,000
1,850 Jordan Industries, Inc. (Series B) ............................. 11.75++ 04/01/09 314,500
-----------
615,500
-----------
Electric Utilities (1.3%)
250 Mirant Americas General Inc. .................................. 8.30 05/01/11 231,250
165 PG&E National Energy Group ..................................... 10.375 05/16/11 170,775
-----------
402,025
-----------
Electronic Components (0.1%)
40 Flextronics International Ltd. ................................ 9.875 07/01/10 43,000
-----------
Electronic Distributors (0.9%)
240 BRL Universal Equipment ........................................ 8.875 02/15/08 247,800
2,000 CHS Electronics, Inc. (a) (b) .................................. 9.875 04/15/05 17,500
-----------
265,300
-----------
Electronic Equipment/Instruments (0.5%)
365 High Voltage Engineering, Inc. ................................ 10.75 08/15/04 135,050
-----------
Electronics/Appliances (0.0%)
9,000 International Semi-Tech Microelectronics, Inc. (Canada) (a) (b) 11.50 08/15/03 4,500
-----------
Engineering & Construction (0.3%)
105 Encompas Services Corp. ........................................ 10.50 05/01/09 57,750
575 Metromedia Fiber Network, Inc. ................................. 10.00 12/15/09 40,250
-----------
98,000
-----------
See Notes to Financial Statements
6
Morgan Stanley High Income Advantage Trust
PORTFOLIO OF INVESTMENTS [] MARCH 31, 2002 (unaudited) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------- ------------- ----------- --------------
Environmental Services (2.3%)
$ 300 Allied Waste North America Inc. (Series B) .......... 10.00 % 08/01/09 $ 303,749
150 Waste Management, Inc. ............................. 7.375 08/01/10 149,085
250 WMX Technologies, Inc. ............................. 7.00 10/15/06 250,249
-----------
703,083
-----------
Financial Conglomerates (0.7%)
85 Case Credit Corp. ................................... 6.125 02/15/03 82,463
115 Tyco Capital Corp ................................... 5.625 05/17/04 113,399
20 Tyco Capital Corp ................................... 6.50 02/07/06 20,110
-----------
215,972
-----------
Food Distributors (1.0%)
320 Volume Services America, Inc. ...................... 11.25 03/01/09 306,800
-----------
Food: Meat/Poultry/Fish (1.9%)
205 Michael Foods, Inc. ................................ 11.75 04/01/11 223,450
220 Smithfield Foods Inc. .............................. 7.625 02/15/08 217,800
130 Smithfield Foods Inc. (Series B) .................... 8.00 10/15/09 132,275
-----------
573,525
-----------
Forest Products (2.4%)
205 Louisiana Pacific Corp. ............................ 10.875 11/15/08 220,888
75 Louisiana Pacific Corp. ............................ 8.875 08/15/10 78,308
425 Tembec Industries, Inc. (Canada) .................... 8.50 02/01/11 434,562
-----------
733,758
-----------
Home Building (3.5%)
305 Beazer Homes USA, Inc. ............................. 8.625 05/15/11 317,200
240 Centex Corp. ....................................... 7.875 02/01/11 247,656
270 Schuler Homes, Inc. ................................ 9.375 07/15/09 281,475
210 Toll Brothers, Inc. ................................ 8.25 02/01/11 213,150
-----------
1,059,481
-----------
Hospital/Nursing Management (0.9%)
255 HCA - The Healthcare Company ........................ 8.75 09/01/10 278,588
-----------
Hotels/Resorts/Cruiselines (1.0%)
80 Hilton Hotels ....................................... 7.95 04/15/07 80,483
235 HMH Properties (Series B) ........................... 7.875 08/01/08 231,475
-----------
311,958
-----------
See Notes to Financial Statements
7
Morgan Stanley High Income Advantage Trust
PORTFOLIO OF INVESTMENTS [] MARCH 31, 2002 (unaudited) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------- ------------- ----------- --------------
Industrial Specialties (0.5%)
$ 65 Foamex LP/Capital - 144A* ................................ 10.75 % 04/01/09 $ 66,625
85 UCAR Finance Inc. - 144A* ................................ 10.25 02/15/12 89,250
-----------
155,875
-----------
Internet Software/Services (1.3%)
445 Exodus Communications, Inc. (a) (b) ...................... 11.625 07/15/10 91,225
1,000 Globix Corp.(a) (b) ...................................... 12.50 02/01/10 145,000
500 PSINet, Inc. (a) (b) ..................................... 10.50 12/01/06 50,000
1,000 PSINet, Inc. (a) (b) ..................................... 11.00 08/01/09 100,000
-----------
386,225
-----------
Managed Health Care (2.5%)
425 Aetna Inc. .............................................. 7.875 03/01/11 418,756
310 Healthnet, Inc. ......................................... 8.375 04/15/11 322,388
-----------
741,144
-----------
Media Conglomerates (0.7%)
195 Nextmedia Operating, Inc. - 144A* ........................ 10.75 07/01/11 209,138
-----------
Medical Distributors (0.4%)
105 AmerisourceBergen Corp. ................................. 8.125 09/01/08 109,725
-----------
Medical Specialties (0.1%)
1,765 Mediq/PRN Life Support Services, Inc. (b) ................ 11.00 06/01/08 17,650
-----------
Medical/Nursing Services (1.2%)
350 Fresenius Med Cap Trust .................................. 7.875 06/15/11 349,125
-----------
Movies/Entertainment (1.6%)
300 Alliance Atlantis Communications, Inc. (Canada) .......... 13.00 12/15/09 337,500
155 Six Flags Inc. - 144A* ................................... 8.875 02/01/10 156,938
-----------
494,438
-----------
Office Equipment/Supplies (0.0%)
2,400 Mosler, Inc. (a) (b) ..................................... 11.00 04/15/03 -
-----------
Oil & Gas Pipelines (0.7%)
75 Williams Companies, Inc. ................................ 7.75 06/15/31 69,396
145 Williams Companies, Inc. (Series A) ...................... 7.50 01/15/31 130,322
-----------
199,718
-----------
See Notes to Financial Statements
8
Morgan Stanley High Income Advantage Trust
PORTFOLIO OF INVESTMENTS [] MARCH 31, 2002 (unaudited) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------- ----------- ----------- --------------
Oil & Gas Production (2.9%)
$ 450 Chesapeake Energy Corp. ...................................... 8.125% 04/01/11 $ 451,125
40 Magnum Hunter Resources, Inc. - 144A* ........................ 9.60 03/15/12 41,900
110 Stone Energy Corp. .......................................... 8.25 12/15/11 112,475
295 Vintage Petroleum, Inc. ..................................... 7.875 05/15/11 275,825
-----------
881,325
-----------
Oilfield Services/Equipment (0.7%)
120 Hanover Equipment Trust - 144A* .............................. 8.50 09/01/08 120,600
80 Hanover Equipment Trust - 144A* .............................. 8.75 09/01/11 80,000
-----------
200,600
-----------
Other Metals/Minerals (0.8%)
155 Murrin Murrin Holdings Property Ltd. (Australia) ............. 9.375 08/31/07 29,450
215 Phelps Dodge Corp. .......................................... 8.75 06/01/11 210,567
-----------
240,017
-----------
Publishing: Books/Magazines (1.0%)
340 PRIMEDIA, Inc. .............................................. 8.875 05/15/11 309,400
-----------
Publishing: Newspapers (0.9%)
90 Belo Corp. ................................................... 8.00 11/01/08 91,559
179 Hollinger Participation - 144A* (Canada) ..................... 12.125+ 11/15/10 171,956
-----------
263,515
-----------
Pulp & Paper (0.7%)
210 Norske Skog Canada Ltd. (Canada) - 144A* ..................... 8.625 06/15/11 212,625
-----------
Real Estate Development (0.7%)
225 CB Richard Ellis Services Inc. .............................. 11.25 06/15/11 211,500
-----------
Real Estate Investment Trust (0.4%)
125 Istar Finacial Inc. ......................................... 8.75 08/15/08 128,768
-----------
Recreational Products (1.0%)
275 International Game Technology ................................ 8.375 05/15/09 286,000
-----------
Restaurants (1.3%)
12,252 American Restaurant Group Holdings, Inc. - 144A* (c) ......... 0.00 12/15/05 374,896
3,000 FRD Acquisition Corp. (Series B) (a) (b) ..................... 12.50 07/15/04 7,500
-----------
382,396
-----------
See Notes to Financial Statements
9
Morgan Stanley High Income Advantage Trust
PORTFOLIO OF INVESTMENTS [] MARCH 31, 2002 (unaudited) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------- --------------- ----------- --------------
Retail - Specialty (0.5%)
$ 165 Pantry, Inc. ............................................... 10.25 % 10/15/07 $ 150,150
-----------
Savings Banks (0.1%)
45 Golden State Holdings ...................................... 7.125 08/01/05 44,543
-----------
Semiconductors (0.3%)
85 Fairchild Semiconductors Corp. ............................. 10.50 02/01/09 93,713
-----------
Services to the Health Industry (1.3%)
150 Anthem Insurance - 144A* ................................... 9.125 04/01/10 162,529
215 Omnicare, Inc. ............................................ 8.125 03/15/11 226,287
-----------
388,816
-----------
Specialty Stores (0.5%)
145 Autonation, Inc ............................................ 9.00 08/01/08 152,250
-----------
Specialty Telecommunications (4.6%)
205 American Tower Co. ........................................ 9.375 02/01/09 151,700
2,000 Birch Telecom Inc. (b) ..................................... 14.00 06/15/08 20,000
600 DTI Holdings, Inc. (Series B) (a) .......................... 12.50++ 03/01/08 9,000
1,050 Esprit Telecom Group PLC (United Kingdom) (b) .............. 11.50 12/15/07 2,625
1,000 Esprit Telecom Group PLC (United Kingdom) (b) .............. 10.875 06/15/08 2,500
3,400 Firstworld Communications, Inc. ........................... 13.00++ 04/15/08 339,999
425 Global Crossing Holdings, Ltd. (Bermuda) (a) (b) ........... 8.70 08/01/07 13,813
225 Global Crossing Holdings, Ltd. (Bermuda) (a) (b) ........... 9.50 11/15/09 4,781
990 GT Group Telecom Inc. (Canada) ............................. 13.25++ 02/01/10 54,450
125 McLeodUSA, Inc. (a) (b) .................................... 11.375 01/01/09 31,250
500 McLeodUSA, Inc. (a) (b) .................................... 11.50 05/01/09 120,000
355 Pac-West Telecomm, Inc. (Series B) ......................... 13.50 02/01/09 136,675
800 Primus Telecommunications Group, Inc. (Series B) ........... 9.875 05/15/08 296,000
500 Versatel Telecom International N.V. (Netherlands) .......... 13.25 05/15/08 141,250
1,400 Viatel Inc. (a) ............................................ 11.25 04/15/08 7,000
1,000 Viatel Inc. (a) (b) ........................................ 12.50++ 04/15/08 5,000
500 Viatel Inc. (issued 03/19/99) (a) (b) ...................... 11.50 03/15/09 2,500
400 Viatel Inc. (issued 12/08/99) (a) (b) ...................... 11.50 03/15/09 2,000
1,415 World Access, Inc. (a) (b) (c) ............................. 13.25 01/15/08 42,450
500 Worldwide Fiber Inc. (Canada) (a) (b) ...................... 12.00 08/01/09 1,250
-----------
1,384,243
-----------
See Notes to Financial Statements
10
Morgan Stanley High Income Advantage Trust
PORTFOLIO OF INVESTMENTS [] MARCH 31, 2002 (unaudited) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------- --------------- ----------- --------------
Telecommunications (4.8%)
$ 2,500 e. Spire Communications, Inc. (a) (b) ..................... 13.75 % 07/15/07 $ 250,000
747 Focal Communications Corp. (Series B) ..................... 12.125++ 02/15/08 134,460
500 Hyperion Telecommunication, Inc. (Series B) ............... 12.25 09/01/04 73,750
500 MGC Communications, Inc. ................................. 13.00 04/01/10 45,000
550 NEXTLINK Communications LLC ............................... 12.50 04/15/06 68,750
765 NTL Communications Corp. ................................. 11.875 10/01/10 267,749
1,800 Rhythms Netconnections, Inc. (a) (b) ...................... 12.75 04/15/09 216,000
1,400 Rhythms Netconnections, Inc. (a) (b) ...................... 14.00 02/15/10 91,000
500 Startec Global Communications Corp (a) (b). ............... 12.00 05/15/08 50
230 Talton Holdings, Inc. (Series B) .......................... 11.00 06/30/07 142,600
155 Worldcom Inc. ............................................. 8.25 05/15/31 125,023
-----------
1,414,382
-----------
Trucks/Construction/Farm Machinery (1.2%)
90 Case Corp. (Series B) ..................................... 6.25 12/01/03 85,065
325 J.B. Poindexter & Co., Inc. ............................... 12.50 05/15/04 260,000
-----------
345,065
-----------
Wholesale Distributors (0.6%)
170 Burhmann US, Inc. ......................................... 12.25 11/01/09 181,900
-----------
Wireless Telecommunications (2.1%)
300 American Cellular Corp. ................................... 9.50 10/15/09 220,500
475 AMSC Aquisition Co., Inc. (Series B) (a) (b) .............. 12.25 04/01/08 187,625
8,000 CellNet Data Systems, Inc. (a) (b) ........................ 14.00++ 10/01/07 10,000
1,000 Globalstar LP/Capital Corp. (b) ........................... 11.50 06/01/05 90,000
2,000 USA Mobile Communications Holdings, Inc. (a) (b) .......... 14.00 11/01/04 125,000
1,000 WinStar Communications, Inc. (a) (b) ...................... 12.75 04/15/10 100
-----------
633,225
-----------
Total Corporate Bonds (Cost $88,760,952).............................................. 25,813,423
-----------
See Notes to Financial Statements
11
Morgan Stanley High Income Advantage Trust
PORTFOLIO OF INVESTMENTS [] MARCH 31, 2002 (unaudited) continued
NUMBER OF
SHARES VALUE
- ---------- --------------
Preferred Stocks (5.3%)
Broadcasting (1.0%)
33 Paxson Communications+ ............................ $ 305,713
-----------
Cellular Telephone (0.6%)
79 Dobson Communications Corp.+ ...................... 63,990
301 Nextel Communications, Inc. (Series D)+ ........... 122,039
-----------
186,029
-----------
Electric Utilities (1.2%)
327 TNP Enterprises, Inc.+ ............................ 331,904
-----------
Publishing: Books/Magazines (0.0%)
235 PRIMEDIA, Inc. (Series D) .......................... 11,985
-----------
Specialty Telecommunications (0.9%)
330 Broadwing Communications, Inc. (Series B) .......... 138,600
21 Crown Castle International Corp.+ ................. 13,106
160 Intermedia Communication (Series B)+ .............. 132,190
7,761 Xo Communications, Inc+ ........................... 78
-----------
283,974
-----------
Telecommunication Equipment (1.6%)
919,053 FWT, Inc. (Class A)+ (c) ........................... 459,526
-----------
Total Preferred Stocks (Cost $5,082,722) ........... 1,579,131
-----------
Common Stocks (d) (1.7%)
Aerospace & Defense (0.1%)
6,111 Orbital Sciences Corp.(c) .......................... 32,023
-----------
Apparel/Footwear Retail (0.0%)
946,890 County Seat Stores, Inc. (c) ....................... -
-----------
Casino/Gaming (0.0%)
2,000 Fitzgeralds Gaming Corp. ........................... -
-----------
Consumer/Business Services (1.1%)
16,900 Anacomp Inc. (Class A) (c) ......................... 295,750
-----------
Foods: Specialty/Candy (0.0%)
835 SFAC New Holdings Inc. (c) ......................... -
153 SFFB Holdings, Inc. (c) ............................ -
180,000 Specialty Foods Acquisition Corp. - 144A* .......... -
-----------
-
-----------
See Notes to Financial Statements
12
Morgan Stanley High Income Advantage Trust
PORTFOLIO OF INVESTMENTS [] MARCH 31, 2002 (unaudited) continued
NUMBER OF
SHARES VALUE
- ----------- --------------
Medical/Nursing Services (0.0%)
211,076 Raintree Healthcare Corp. (c) .................................. $ -
-------------
Motor Vehicles (0.0%)
113 Northern Holdings Industrial Corp. (c) ......................... -
-------------
Restaurants (0.0%)
9,500 American Restaurant Group Holdings, Inc. - 144A* ............... -
-------------
Specialty Telecommunications (0.0%)
13,334 Versatel Telecom International NV (ADR) (Netherlands) .......... 6,400
6,284 World Access, Inc. (c) ......................................... 7
-------------
6,407
-------------
Telecommunication Equipment (0.0%)
80,266 FWT, Inc. (Class A) (c) ........................................ 802
-------------
Telecommunications (0.5%)
63,349 Covad Communications Group, Inc. (c) ........................... 144,436
4,216 Focal Communications Corp. (c) ................................. 18,002
-------------
162,438
-------------
Textiles (0.0%)
223,846 United States Leather, Inc. (c) ................................ -
-------------
Wireless Telecommunications (0.0%)
275,769 Arch Wireless, Inc. (c) ........................................ 2,482
13,098 Vast Solutions, Inc. (Class B1) (c) ............................ -
13,098 Vast Solutions, Inc. (Class B2) (c) ............................ -
13,098 Vast Solutions, Inc. (Class B3) (c) ............................ -
-------------
2,482
-------------
Total Common Stocks (Cost $33,445,341) ......................... 499,902
-------------
NUMBER OF EXPIRATION
WARRANTS DATE
- ---------- ------------
Warrants (d) (0.1%)
Aerospace & Defense (0.0%)
5,000 Sabreliner Corp. - 144A* .......................... 04/15/03 -
--------
Broadcasting (0.0%)
250 XM Satellite Radio Holdings Inc. - 144A* .......... 03/15/10 6,250
--------
Cable/Satellite TV (0.0%)
300 Ono Finance PLC - 144A* (United Kingdom) .......... 02/15/11 750
--------
See Notes to Financial Statements
13
Morgan Stanley High Income Advantage Trust
PORTFOLIO OF INVESTMENTS o MARCH 31, 2002 (unaudited) continued
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
- ----------- ------------ --------------
Casino/Gaming (0.0%)
35,000 Aladdin Gaming Enterprises, Inc. - 144A* ............. 03/01/10 $ -
1,000 Resort at Summerlin LP - 144A* ....................... 12/15/07 -
-------------
-
-------------
Electric Utilities (0.1%)
285 TNP Enterprises, Inc. - 144A* ........................ 04/01/11 8,550
-------------
Internet Software/Services (0.0%)
3,400 Verado Holdings, Inc. - 144A* ........................ 04/15/08 -
-------------
Specialty Telecommunications (0.0%)
2,000 Birch Telecom Inc. - 144A* ........................... 06/15/08 -
990 GT Group Telecom Inc. (Canada) - 144A* ............... 02/01/10 1,609
-------------
1,609
-------------
Telecommunications (0.0%)
500 Startec Global Communications Corp. - 144A* .......... 05/15/08 -
-------------
Wireless Telecommunications (0.0%)
500 Motient Corp. - 144A* ................................ 04/01/08 5
-------------
Total Warrants (Cost $238,267) .................................... 17,164
-------------
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- ----------- ------------ ------------
Convertible Bonds (1.5%)
Electronic Components (0.7%)
$ 480 Solectron Corp. ............................. 0.00 % 11/20/20 222,600
-----------
Telecommunication Equipment (0.8%)
450 Corning Inc. ................................ 0.00 11/08/15 230,625
-----------
Total Convertible Bonds (Cost $474,289) ............................... 453,225
-----------
Short-Term Investment (3.5%)
Repurchase Agreement
1,062 Joint repurchase agreement account
(dated 03/28/02; proceeds
$1,062,228) (e) (Cost $1,062,000) ........... 1.936 04/01/02 1,062,000
-----------
Total Investments (Cost $129,063,571) (f)............................. 98.1% 29,424,845
Other Assets in Excess of Liabilities ................................ 1.9 582,843
----- -----------
Net Assets ........................................................... 100.0% $30,007,688
===== ===========
See Notes to Financial Statements
14
Morgan Stanley High Income Advantage Trust
PORTFOLIO OF INVESTMENTS o MARCH 31, 2002 (unaudited) continued
- ------------
ADR American Depository Receipt.
* Resale is restricted to qualified institutional investors.
+ Payment-in-kind security.
++ Currently a zero coupon bond that will pay interest at the rate shown
at a future specified date.
(a) Issuer in bankruptcy.
(b) Non-income producing security; bond in default.
(c) Acquired through exchange offer.
(d) Non-income producing securities.
(e) Collateralized by federal agency and U.S. Treasury obligations.
(f) The aggregate cost for federal income tax purposes approximates
the aggregate cost for book purposes. The aggregate gross
unrealized appreciation is $651,976, and the aggregate gross
unrealized depreciation is $100,290,702, resulting in net
unrealized depreciation of $99,638,726.
See Notes to Financial Statements
15
Morgan Stanley High Income Advantage Trust
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
March 31, 2002 (unaudited)
Assets:
Investments in securities, at value
(cost $129,063,571) ........................ $ 29,424,845
Receivable for:
Interest ................................ 739,491
Investments sold ........................ 215,629
Prepaid expenses and other assets ............ 20,101
------------
Total Assets .............................. 30,400,066
------------
Liabilities:
Payable for:
Investment management fee ............... 22,660
Investments purchased ................... 10,405
Payable to bank .............................. 205,732
Accrued expenses and other payables .......... 153,581
------------
Total Liabilities ......................... 392,378
------------
Net Assets ................................ $ 30,007,688
============
Composition of Net Assets:
Paid-in-capital .............................. $230,799,729
Net unrealized depreciation .................. (99,638,726)
Dividends in excess of net investment
income ..................................... (885,269)
Accumulated net realized loss ................ (100,268,046)
------------
Net Assets ................................ $ 30,007,688
============
Net Asset Value Per Share,
29,997,052 shares outstanding (unlimited
shares authorized of $.01 par value) ......... $ 1.00
============
Statement of Operations
For the six months ended March 31, 2002 (unaudited)
Net Investment Income:
Income
Interest ...................................... $2,892,950
Dividends ..................................... 21,800
----------
Total Income ............................... 2,914,750
----------
Expenses
Investment management fee ..................... 118,510
Transfer agent fees and expenses .............. 64,762
Registration fees ............................. 15,662
Professional fees ............................. 15,430
Shareholder reports and notices ............... 11,283
Custodian fees ................................ 6,354
Trustees' fees and expenses ................... 4,584
Other ......................................... 1,675
----------
Total Expenses ............................. 238,260
----------
Net Investment Income ...................... 2,676,490
----------
Net Realized and Unrealized Gain (Loss):
Net realized loss ............................. (4,595,931)
Net change in unrealized depreciation ......... 1,233,126
----------
Net Loss ................................... (3,362,805)
----------
Net Decrease .................................. $ (686,315)
==========
See Notes to Financial Statements
16
Morgan Stanley High Income Advantage Trust
FINANCIAL STATEMENTS continued
Statement of Changes in Net Assets
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
MARCH 31, 2002 SEPTEMBER 30, 2001
---------------- -------------------
(unaudited)
Increase (Decrease) in Net Assets:
Operations:
Net investment income ................................................. $ 2,676,490 $ 8,596,787
Net realized loss ..................................................... (4,595,931) (20,917,698)
Net change in unrealized depreciation ................................. 1,233,126 (19,081,896)
------------ -------------
Net Decrease ........................................................ (686,315) (31,402,807)
Dividends to shareholders from net investment income .................. (2,714,616) (10,558,684)
------------ -------------
Net Decrease ........................................................ (3,400,931) (41,961,491)
Net Assets:
Beginning of period ................................................... 33,408,619 75,370,110
------------ -------------
End of Period
(Including dividends in excess of net investment income of $885,269 and
$1,070,175, respectively) ............................................. $ 30,007,688 $ 33,408,619
============ =============
See Notes to Financial Statements
17
Morgan Stanley High Income Advantage Trust
NOTES TO FINANCIAL STATEMENTS o MARCH 31, 2002 (unaudited)
1. Organization and Accounting Policies
Morgan Stanley High Income Advantage Trust (the "Trust"), formerly Morgan
Stanley Dean Witter High Income Advantage Trust, is registered under the
Investment Company Act of 1940, as amended, as a diversified, closed-end
management investment company. The Trust's primary investment objective is to
earn a high level of current income and, as a secondary objective, capital
appreciation, but only when consistent with its primary objective. The Trust was
organized as a Massachusetts business trust on June 17, 1987 and commenced
operations on October 29, 1987.
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.
The following is a summary of significant accounting policies:
A. Valuation of Investments - (1) an equity portfolio security listed or traded
on the New York or American Stock Exchange, Nasdaq, 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 latest bid price (in cases
where securities are traded on more than one exchange, the security is valued on
the exchange designated as the primary market pursuant to procedures adopted by
the Trustees); (2) all other portfolio securities for which over-the-counter
market quotations are readily available are valued at the latest available bid
price; (3) when market quotations are not readily available, including
circumstances under which it is determined by Morgan Stanley Investment Advisors
Inc. (the "Investment Manager"), that sale and bid prices are not reflective of
a security's market value, portfolio securities are valued at their fair value
as determined in good faith under procedures established by and under the
general supervision of the Trustees; (4) certain of the portfolio securities may
be valued by an outside pricing service approved by the Trustees. The pricing
service may utilize a matrix system incorporating security quality, maturity and
coupon as the evaluation model parameters, and/or research and evaluations by
its staff, including review of broker-dealer market price quotations, if
available, in determining what it believes is the fair valuation of the
portfolio securities valued by such pricing service; and (5) 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
18
Morgan Stanley High Income Advantage Trust
NOTES TO FINANCIAL STATEMENTS o MARCH 31, 2002 (unaudited) continued
identified cost method. Discounts are accreted premiums are amortized over the
life of the respective securities. Interest income is accrued daily except where
collection is not expected.
C. Joint Repurchase Agreement Account - Pursuant to an Exemptive Order issued by
the Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment Manager, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements for cash, or U.S. Treasury or
federal agency obligations.
D. Federal Income Tax Status - It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.
E. Dividends and Distributions to Shareholders - The Trust records dividends and
distributions to its shareholders on the ex-dividend date. 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 financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess net
realized capital gains. To extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
2. Investment Management Agreement
Pursuant to an Investment Management Agreement with the Investment Manager, the
Trust pays a management fee, accrued weekly and payable monthly, by applying the
following annual rates to the Trust's weekly net assets: 0.75% to the portion of
weekly net assets not exceeding $250 million; 0.60% to the portion of weekly net
assets exceeding $250 million but not exceeding $500 million; 0.50% to the
portion of weekly net assets exceeding $500 million but not exceeding $750
million; 0.40% to the portion of weekly net assets exceeding $750 million but
not exceeding $1 billion; and 0.30% to the portion of weekly net assets
exceeding $1 billion.
3. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the six months ended March 31, 2002 aggregated
$7,054,037 and $7,323,700, respectively.
19
Morgan Stanley High Income Advantage Trust
NOTES TO FINANCIAL STATEMENTS o MARCH 31, 2002 (unaudited) continued
Morgan Stanley Trust, an affiliate of the Investment Manager, is the Trust's
transfer agent. At March 31, 2002, the Trust had transfer agent fees and
expenses payable of approximately $18,000.
The Trust has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Trust who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the six months ended March 31, 2002
included in Trustees' fees and expenses in the Statement of Operations amounted
to $3,744. At March 31, 2002, the Trust had an accrued pension liability of
$57,130, which is included in accrued expenses in the Statement of Assets and
Liabilities.
4. Shares of Beneficial Interest
CAPITAL
PAID IN
PAR VALUE EXCESS OF
SHARES OF SHARES PAR VALUE
------------ ----------- ---------------
Balance, September 30, 2000 ................................ 29,997,052 $299,970 $230,613,190
Reclassification due to permanent book/tax differences ..... - - (113,431)
---------- -------- ------------
Balance, September 30, 2001, and March 31, 2002 ............ 29,997,052 $299,970 $230,499,759
========== ======== ============
5. Dividends
The Trust declared the following dividends from net investment income:
DECLARATION AMOUNT RECORD PAYABLE
DATE PER SHARE DATE DATE
- ------------------ ------------- --------------- ---------------
March 26, 2002 $ 0.01125 April 5, 2002 April 19, 2002
April 23, 2002 $ 0.01125 May 3, 2002 May 17, 2002
6. Federal Income Tax Status
At September 30, 2001, the Trust had a net capital loss carryover of
approximately $73,135,000, to offset future capital gains to the extent provided
by regulations, available through September 30 of the following years:
AMOUNT IN THOUSANDS
- --------------------------------------------------------------------------
2002 2003 2005 2006 2007 2008 2009
- ------------ ---------- --------- ---------- --------- --------- ---------
$ 15,205 $26,684 $6,214 $14,070 $3,307 $3,112 $4,543
========= ======= ====== ======= ====== ====== ======
20
Morgan Stanley High Income Advantage Trust
NOTES TO FINANCIAL STATEMENTS o MARCH 31, 2002 (unaudited) continued
Capital losses incurred after October 31 ("post-October losses") within the
taxable year are deemed to arise on the first business day of the Trust's next
taxable year. The Trust incurred and will elect to defer net capital losses of
approximately $20,142,000 during fiscal 2001.
At September 30, 2001, the Trust had temporary book/tax differences primarily
attributable to post-October losses, capital loss deferrals on wash sales and
interest on bonds in default.
7. Change in Accounting Policy
Effective October 1, 2001, the Trust has adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies, as revised, related to
premiums and discounts on debt securities. The cumulative effect of this
accounting change had no impact on the net assets of the Trust, but resulted in
a $223,032 increase in the cost of securities and a corresponding increase to
undistributed net investment income based on securities held as of September 30,
2001.
The effect of this change for the six months ended March 31, 2002 was to
increase net investment income by $36,460; increase unrealized depreciation by
$31,023 and increase net realized losses by $5,437. The statement of changes in
net assets and the financial highlights for prior periods have not been restated
to reflect this change.
21
Morgan Stanley High Income Advantage Trust
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
FOR THE SIX
MONTHS ENDED
MARCH 31, 2002
---------------------
(unaudited)
Selected Per Share Data:
Net asset value, beginning of period ........ $ 1.11
---------
Income (loss) from investment operations:
Net investment income ...................... 0.09
Net realized and unrealized loss ........... (0.11)
---------
Total income (loss) from investment
operations ................................. (0.02)
---------
Dividends from net investment income ........ (0.09)
---------
Net asset value, end of period .............. $ 1.00
=========
Market value, end of period ................. $ 1.06
=========
Total Return+ .............................. (12.21)%(1)
Ratios to Average Net Assets:
Expenses .................................... 1.51 %(2)
Net investment income ....................... 16.94 %(2)(3)
Supplemental Data:
Net assets, end of period, in thousands ..... $30,008
Portfolio turnover rate ..................... 24 %(1)
FOR THE YEAR ENDED SEPTEMBER 30
------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- -------------- ---------------- ---------------- ---------------
Selected Per Share Data:
Net asset value, beginning of period ........ $ 2.51 $ 3.51 $ 4.44 $ 5.18 $ 5.22
-------- --------- ----------- ----------- ----------
Income (loss) from investment operations:
Net investment income ...................... 0.29 0.51 0.57 0.62 0.63
Net realized and unrealized loss ........... (1.34) (0.97) (0.89) (0.72) -
-------- --------- ----------- ----------- ----------
Total income (loss) from investment
operations ................................. (1.05) (0.46) (0.32) (0.10) 0.63
-------- --------- ----------- ----------- -----------
Dividends from net investment income ........ (0.35) (0.54) (0.61) (0.64) (0.67)
-------- --------- ----------- ----------- -----------
Net asset value, end of period .............. $ 1.11 $ 2.51 $ 3.51 $ 4.44 $ 5.18
======== ========= =========== =========== ===========
Market value, end of period ................. $ 1.30 $ 3.50 $ 4.25 $ 5.25 $ 6.25
======== ========= =========== =========== ===========
Total Return+ .............................. (56.83)% (4.71)% (8.83)% (6.52)% 16.26%
Ratios to Average Net Assets:
Expenses .................................... 1.32 % 1.05 % 1.00 % 0.95 % 0.92%
Net investment income ....................... 16.89 % 16.44 % 14.36 % 12.58 % 12.43%
Supplemental Data:
Net assets, end of period, in thousands ..... $33,409 $75,370 $105,318 $133,222 $155,540
Portfolio turnover rate ..................... 66 % 16 % 51 % 105 % 124%
- ------------
+ Total return is based upon the current market value on the last day of each
period reported. Dividends are assumed to be reinvested at the prices
obtained under the Trust's dividend reinvestment plan. Total return does
not reflect brokerage commissions.
(1) Not annualized.
(2) Annualized.
(3) Effective October 1, 2001, the Trust has adopted the provisions of the
AICPA Audit and Accounting Guide for Investment Companies, as revised,
related to premiums and discounts on debt securities. The effect of this
change for the six months ended March 31, 2002 was to increase the ratio of
net investment income to average net assets by 0.23%. The Financial
Highlights data presented in this table for prior periods has not been
restated to reflect this change.
See Notes to Financial Statements
22
(This page has been left blank intentionally.)
[MORGAN STANLEY LOGO]
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
[GRAPHIC OMITTED]
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Mitchell M. Merin
President
Barry Fink
Vice President, Secretary and General Counsel
Stephen F. Esser
Vice President
Gordon W. Loery
Vice President
Deanna L. Loughnane
Vice President
Thomas F. Caloia
Treasurer
MORGAN STANLEY
TRANSFER AGENT HIGH INCOME
ADVANTAGE TRUST
Morgan Stanley Trust
Harborside Financial Center -- Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT MANAGER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
The financial statements included herein
have been taken from the records of the Semiannual Report
Trust without examination by the March 31, 2002
independent auditors and accordingly
they do not express an opinion thereon.
38530
MORGAN STANLEY HIGH YIELD SECURITIES INC.
PART B
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information relates to the shares of Morgan
Stanley High Yield Securities Inc. ("High Yield") to be issued pursuant to an
Agreement and Plan of Reorganization, dated July 25, 2002, between High Yield
and Morgan Stanley High Income Advantage Trust ("HIAT") in connection with the
acquisition by High Yield of substantially all of the assets, subject to stated
liabilities, of HIAT. This Statement of Additional Information does not
constitute a prospectus. This Statement of Additional Information does not
include all information that a shareholder should consider before voting on the
proposals contained in the Proxy Statement and Prospectus, and, therefore,
should be read in conjunction with the related Proxy Statement and Prospectus,
dated , 2002. A copy of the Proxy Statement and Prospectus may be
obtained without charge by mailing a written request to High Yield Securities
Inc., 1221 Avenue of the Americas, New York, New York 10020 or by calling (800)
869-NEWS (TOLL FREE). Please retain this document for future reference.
The date of this Statement of Additional Information is , 2002.
B-1
TABLE OF CONTENTS
PAGE
----
INTRODUCTION ...................................................... B-3
ADDITIONAL INFORMATION ABOUT HIGH YIELD ........................... B-3
FINANCIAL STATEMENTS .............................................. B-4
B-2
INTRODUCTION
This Statement of Additional Information is intended to supplement the
information provided in the Proxy Statement and Prospectus dated , 2002
(the "Proxy Statement and Prospectus"). The Proxy Statement and Prospectus has
been sent to HIAT shareholders in connection with the solicitation of proxies
by the Board of Trustees of HIAT to be voted at the Special Meeting of
shareholders of HIAT to be held on December 10, 2002. This Statement of
Additional Information incorporates by reference the Statement of Additional
Information of High Yield dated , 2002.
ADDITIONAL INFORMATION ABOUT HIGH YIELD
FUND HISTORY, INVESTMENT OBJECTIVES AND POLICIES
For additional information about High Yield's history, investment
objectives and policies, see "Fund History" and "Description of the Fund and
Its Investments and Risks" in High Yield's Statement of Additional Information.
MANAGEMENT
For additional information about the Board of Directors, officers and
management personnel of High Yield, see "Management of the Fund" and
"Investment Management and Other Services" in High Yield's Statement of
Additional Information.
INVESTMENT ADVISORY AND OTHER SERVICES
For additional information about High Yield's investment manager, see
"Investment Management and Other Services" in High Yield's Statement of
Additional Information. For additional information about High Yield's
independent auditors, see "Investment Management and Other Services" in High
Yield's Statement of Additional Information. For additional information about
other services provided to High Yield, see "Investment Management and Other
Services" in High Yield's Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE
For additional information about brokerage allocation practices, see
"Brokerage Allocation and Other Practices" in High Yield's Statement of
Additional Information.
DESCRIPTION OF FUND SHARES AND PRINCIPAL HOLDERS OF FUND SHARES
For additional information about the voting rights and other
characteristics of the shares of High Yield, and the principal owners of the
shares of High Yield, see "Capital Stock and Other Securities" and "Control
Persons and Principal Holders of Securities" in High Yield's Statement of
Additional Information.
PURCHASE, REDEMPTION AND PRICING OF SHARES
For additional information about the purchase and redemption of High
Yield's shares and the determination of net asset value, see "Purchase,
Redemption and Pricing of Shares" in High Yield's Statement of Additional
Information.
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
For additional information about High Yield's policies regarding dividends
and distributions and tax matters affecting High Yield and its shareholders,
see "Taxation of the Fund and Shareholders" in High Yield's Statement of
Additional Information.
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DISTRIBUTION OF SHARES
For additional information about High Yield's distributor and the
distribution agreement between High Yield and its distributor, see "Investment
Management and Other Services" and "Underwriters" in High Yield's Statement of
Additional Information.
PERFORMANCE DATA
For additional information about High Yield's performance, see
"Calculation of Performance Data" in High Yield's Statement of Additional
Information.
FINANCIAL STATEMENTS
High Yield's most recent audited financial statements are set forth in
High Yield's Annual Report for the fiscal year ended August 31, 2002. High
Yield's most recent semi-annual financial statements (unaudited) are set forth
in High Yield's Semi-Annual Report for the six-month period ended February 28,
2002. Copies of the Annual Report and Semi-Annual Report accompany, and are
incorporated by reference in, the Proxy Statement and Prospectus. HIAT's most
recent audited financial statements are set forth in HIAT's Annual Report for
the fiscal year ended September 30, 2001. HIAT's most recent semi-annual
financial statements (unaudited) are set forth in HIAT's Semi-Annual Report for
the six-month period ended March 31, 2002. Copies of the Annual Report and
Semi-Annual Report accompany, and are incorporated by reference in, the Proxy
Statement and Prospectus.
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Statement of Additional Information of
High Yield Securities Inc.
Dated _________________, 2002
To be Filed by Amendment
MORGAN STANLEY HIGH YIELD SECURITIES INC.
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
The response to this item is incorporated herein by reference to Exhibits
1 and 2 under Item 16 below and by reference to Item 23 of Post-Effective
Amendment No. 27 to the Registrant's Registration Statement on Form N-1A, dated
October 30, 2001, which was filed electronically pursuant to Regulation S-T on
October 30, 2001 as an amendment to Registrant's Registration Statement on Form
N-1A (File Nos. 811-2932 and 2-64782).
ITEM 16. EXHIBITS
(1) Articles of Incorporation dated June 12, 1979 (incorporated herein by
reference to Exhibit 1(a) of Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A, filed on October 25, 1995); Articles
of Amendments dated March 18, 1983, December 16, 1985 and January 19, 1989
(incorporated herein by reference to Exhibits 1(b), 1(c) and 1(d),
respectively, of Post-Effective Amendment No. 19 to the Registration
Statement on Form N-1A, filed on October 25, 1995; Articles of Amendments,
dated May 23, 1997 and July 28, 1997 and Articles Supplementary dated July
28, 1997 (incorporated herein by reference to Exhibits 1(a), 1(c) and
1(b), respectively, of Post-Effective Amendment No. 21 to the Registration
Statement on Form N-1A, filed on July 3, 1997; Articles of Amendment,
dated June 22, 1998 (incorporated herein by reference to Exhibit 1 of
Post-Effective Amendment No. 23 to the Registration Statement on Form
N-1A, filed on October 29, 1998; and Articles of Amendment dated June 18,
2001 (incorporated herein by reference to Exhibit 1(d) of Post-Effective
Amendment No. 27 to the Registration Statement on Form N-1A, filed on
October 30, 2001).
(2) Amended and Restated By-Laws of Registrant dated as of May 1, 1999
(incorporated herein by reference to Exhibit 2 of Post-Effective Amendment
No. 24 to the Registration Statement on Form N-1A, filed on August 27,
1999).
(3) Not Applicable.
(4) Copy of Agreement and Plan of Reorganization (filed herewith as Exhibit A
to the Proxy Statement and Prospectus).
(5) Not Applicable.
(6) Amended Investment Management Agreement between the Registrant and Morgan
Stanley Investment Advisors Inc. dated May 31, 1997, and amended as of
April 30, 1998, (incorporated herein by reference to Exhibit 5 of
Post-Effective Amendment No. 23 to the Registration Statement on Form
N-1A filed on October 29, 1998).
(7) (a) Amended Distribution Agreement between Registrant and Morgan Stanley
Distributors Inc. (incorporated herein by reference to Exhibit 6 of
Post-Effective Amendment No. 23 to the Registration Statement on Form
N-1A, filed on October 29, 1998).
(b) Form of Selected Dealer Agreement between Morgan Stanley Distributors
Inc. and Morgan Stanley DW Inc. (incorporated herein by reference to
Exhibit 6(b) of Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A, filed on October 23, 1993).
(c) Omnibus Selected Dealer Agreement between Morgan Stanley Distributors
Inc. and National Financial Services Corporation, dated October 17,
1998 (incorporated by reference to Exhibit 5(c) of Post-Effective
Amendment No. 24 to the Registration Statement) on Form N-1A, filed on
August 27, 1999).
(8) Not Applicable
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(9) (a) Custody Agreement between the Registrant and The Bank of New York dated
September 20, 1991 (incorporated herein by reference to Exhibit 8 of
Post-Effective Amendment No. 19 to the Registration Statement on Form
N-1A, filed on October 25, 1995); Amendment dated April 17, 1996 to the
Custody Agreement between the Registrant and The Bank of New York
(incorporated to Exhibit 8 of Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A, filed on October 24, 1996;
Amendment dated June 15, 2001 to the Custody Agreement between the
Registrant and The Bank of New York (incorporated herein by reference
to Exhibit 7(c) of Post-Effective Amendment No. 27 to the Registration
Statement on Form N-1A, filed on October 30, 2001).
(b) Foreign Custody Manager Agreement between the Registrant and The Bank of
New York dated June 15, 2001 (incorporated herein by reference to
Exhibit 7(d) to Post-Effective Amendment No. 27 to the Registration
Statement on Form N-1A filed on October 30, 2001).
(c) Amended and Restated Transfer Agency and Services Agreement dated
September 1, 2000 between the Registrant and Morgan Stanley Trust
(incorporated herein by reference to Exhibit 8(a) of Post-Effective
Amendment No. 26 to the Registration Statement on Form N-1A filed on
October 30, 2000).
(10)(a) Amended and Restated Plan of Distribution pursuant to Rule 12b-1
(incorporated herein by reference to Exhibit 15 of Post-Effective
Amendment No. 21 to the Registration Statement on Form N-1A, filed on
July 3, 1997).
(10)(b) Morgan Stanley Funds Multiple Class Plan pursuant to Rule 18f-3 dated
March 12, 2001 (incorporated herein by reference to Exhibit 14 of
Post-Effective Amendment No. 27 to the Registration Statement on Form
N-1A, filed on October 30, 2001.
(11)(a) Opinion and consent of Mayer, Brown, Rowe & Maw.*
(b) Opinion and consent of Piper Rudnick LLP.*
(12) Opinion and consent of Mayer, Brown, Rowe & Maw regarding tax matters.*
(13) Form of Services Agreement between Morgan Stanley Investment Advisors Inc.
and Morgan Stanley Services Company Inc. (incorporated herein by reference
to Exhibit 9 of Post-Effective Amendment No. 23 to the Registration
Statement on Form N-1A, filed on October 29, 1998).
(14) Consent of Independent Auditors, filed herein.
(15) Not Applicable.
(16) Powers of Attorney, filed herein.
(17)(a) Registrant's Rule 24f-2 Notice pursuant to Rule 24f-2 under the
Investment Company Act of 1940, for its fiscal year ended August 31,
2001 (incorporated herein by reference to Form 24f-2 filed with the
Securities and Exchange Commission on November 6, 2001).
(b) Form of Proxy.
(c) Voting Information Card.
ITEM 17. UNDERTAKINGS
1. The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through the use of the prospectus which is a part
of this registration statement on Form N-14 by any person or
- -----------
* To be filed by amendment.
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party who is deemed to be an underwriter within the meaning of Rule 145(c) of
the Securities Act of 1933, the reoffering prospectus will contain the
information called for by the applicable registration form for reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
2. The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to this
registration statement on Form N-14 and will not be used until the amendment is
effective, and that, in determining any liability under the Securities Act of
1933, each post-effective amendment shall be deemed to be a new registration
statement for the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide offering of
them.
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SIGNATURES
As required by the Securities Act of 1933, this registration statement has
been signed on behalf of the registrant, in the City of New York and State of
New York, on the 25th day of July, 2002.
MORGAN STANLEY HIGH YIELD SECURITIES INC.
By: /s/ Barry Fink
..............................................
Barry Fink
Vice President and Secretary
As required by the Securities Act of 1933, this registration statement has
been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------------------- --------------
1. Principal Executive Officer
/s/ Charles A. Fiumefreddo Chief Executive Officer, Director and
............................ Chairman July 25, 2002
2. Principal Financial Officer
/s/ Thomas F. Caloia Treasurer and Principal
............................ Accounting Officer July 25, 2002
3. Majority of Directors
/s/ Michael Bozic Director July 25, 2002
............................
/s/ Edwin J. Garn Director July 25, 2002
............................
/s/ Wayne E. Hedien Director July 25, 2002
............................
/s/ James F. Higgins Director July 25, 2002
............................
/s/ Manuel H. Johnson Director July 25, 2002
............................
/s/ Michael E. Nugent Director July 25, 2002
............................
/s/ John L. Schroeder Director July 25, 2002
............................
/s/ Philip J. Purcell Director July 25, 2002
............................
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MORGAN STANLEY HIGH YIELD SECURITIES INC.
EXHIBIT INDEX
14 Consent of Independent Auditors
16 Powers of Attorney
17 Proxy Card