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) ....................... *
(d) ....................... *
(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 II, Additional Information
About Morgan Stanley High Income Advantage Trust II
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 II
(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 II's Annual Report for the
fiscal year ended July 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 II
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 II
Notice is hereby given of a Special Meeting of the Shareholders of Morgan
Stanley High Income Advantage Trust II ("HIAT II"), 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 II and Morgan
Stanley High Yield Securities Inc. ("High Yield"), pursuant to which
substantially all of the assets of HIAT II would be combined with those of
High Yield and shareholders of HIAT II 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 II (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 II 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
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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.
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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 II
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 II ("HIAT II"), 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 II, 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
II 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
II. The terms and conditions of this transaction are more fully described in
this Proxy Statement and Prospectus and in the Reorganization Agreement between
HIAT II and High Yield, attached hereto as Exhibit A. The address of HIAT II 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 II 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 II's Annual Report for its fiscal year
ended July 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
-----
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 II and High Yield ................................................... 6
PRINCIPAL RISK FACTORS ................................................................... 8
THE REORGANIZATION ....................................................................... 10
The Board's Consideration .............................................................. 10
The Reorganization Agreement ........................................................... 11
Tax Aspects of the Reorganization ...................................................... 13
Tax Consequences of the Reorganization to HIAT II and High Yield........................ 14
Description of Shares of High Yield and HIAT II and the Organization of the Two Funds .. 14
Capitalization Table (unaudited) ....................................................... 16
Appraisal Rights ....................................................................... 16
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS ........................... 16
Investment Objectives and Policies ..................................................... 16
Investment Restrictions ................................................................ 18
ADDITIONAL MATTERS REGARDING HIAT II ..................................................... 19
History of Public Trading of HIAT II's Shares .......................................... 20
Investment Manager ..................................................................... 20
Portfolio Management ................................................................... 21
Expenses Borne by HIAT II .............................................................. 21
ADDITIONAL INFORMATION ABOUT HIAT II AND HIGH YIELD ...................................... 21
General ................................................................................ 21
Financial Information .................................................................. 22
Management ............................................................................. 22
Description of Securities and Shareholder Inquiries .................................... 22
Custodian and Transfer Agent and Dividend Paying Agent ................................. 22
Dividends, Distributions and Taxes ..................................................... 22
Purchases and Redemptions .............................................................. 22
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE .............................................. 23
FINANCIAL STATEMENTS AND EXPERTS ......................................................... 23
LEGAL MATTERS ............................................................................ 23
AVAILABLE INFORMATION .................................................................... 23
OTHER BUSINESS ........................................................................... 24
Exhibit A - Agreement and Plan of Reorganization, dated July 25, 2002, by and between
HIAT II and High Yield
Exhibit B - Prospectus of High Yield dated
MORGAN STANLEY HIGH INCOME ADVANTAGE TRUST II
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 II ("HIAT II"), a closed-end
diversified management investment company, in connection with the solicitation
by the Board of Trustees of HIAT II (the "Board") of proxies to be used at the
Special Meeting of Shareholders of HIAT II 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 II shareholders ("Shareholders") will consider and
vote upon an Agreement and Plan of Reorganization, dated July 25, 2002 (the
"Reorganization Agreement"), between HIAT II and Morgan Stanley High Yield
Securities Inc. ("High Yield") pursuant to which substantially all of the
assets of HIAT II 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 II 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 II contained herein has been supplied by
HIAT II 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 II issued and outstanding. There are no HIAT II
shares held by HIAT II. 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.
1
[No persons were known to own of record or beneficially 5% or more of the
outstanding shares of HIAT II as of the Record Date although from time to time,
the number of shares held in "street name" accounts of various securities
dealers for the benefit of their clients or in centralized securities
depositories may exceed 5% of the total outstanding shares of HIAT II. As of
the Record Date, the trustees and officers of HIAT II, as a group, owned less
than 1% of the outstanding shares of HIAT II.]
[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 II 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 II 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.
2
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 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 II 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 II. HIAT II 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 II, 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 II may retain D.F. King as proxy solicitor, at a cost to HIAT II 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 II.
VOTE REQUIRED
Approval of the Reorganization Agreement by the Shareholders requires the
vote of a majority of the outstanding shares of HIAT II which means an
affirmative vote of the lesser of (1) a majority of the outstanding shares of
HIAT II, or (2) 67% or more of the shares of HIAT II represented at the Meeting
if more than 50% of the outstanding shares of HIAT II are present or
represented by proxy. If the Reorganization Agreement is not approved by
Shareholders, HIAT II 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 II, 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 II received by High Yield. On or after the closing date of the
Reorganization, currently anticipated to be December , 2002, (the "Closing
Date"), HIAT II will distribute the High Yield Shares received by HIAT II to
Shareholders as of the Valuation Date (as defined below under "The
Reorganization Agreement") in complete liquidation of HIAT II and HIAT II 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 II transferred
to High Yield. Accordingly, as a result of the Reorganization, each Shareholder
of HIAT II will become a holder of Class D shares of High Yield. Shareholders
holding their shares of HIAT II 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 II ("INDEPENDENT TRUSTEES"), AS THAT TERM IS DEFINED IN THE
1940 ACT, HAS CONCLUDED THAT THE REORGANIZATION IS IN THE BEST INTERESTS OF
HIAT II AND ITS SHAREHOLDERS AND RECOMMENDS APPROVAL OF THE REORGANIZATION
AGREEMENT.
FEE TABLE
HIAT II 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 II 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 II
for its fiscal year ended July 31, 2002 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
HIGH YIELD COMBINED HIGH
HIAT II (CLASS D) YIELD (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 II 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 FORMA
HIGH YIELD COMBINED HIGH
HIAT II (CLASS D) YIELD (CLASS D)
--------- ------------ ----------------
MANAGEMENT FEES ...............................
DISTRIBUTION AND SERVICE (12b-1) FEES .........
OTHER EXPENSES ................................
TOTAL ANNUAL FUND OPERATING EXPENSES ..........
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 II 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 II ............................................. $ $ $ $
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
5
a more complete description of these costs and expenses, see "Comparison of
HIAT II and High Yield -- Investment Management and Administration Fees, Other
Significant Fees, and Purchases, Exchanges and Redemptions" below.
TAX CONSEQUENCES OF THE REORGANIZATION
As a condition to the Reorganization, HIAT II 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 II or the shareholders of HIAT
II 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 II shareholders. In particular, the Reorganization would
afford HIAT II shareholders the opportunity for a continued interest in a fund
which has investment objectives similar to that of HIAT II, and which is
substantially larger and has a significantly lower expense ratio than HIAT II.
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 II AND HIGH YIELD
INVESTMENT OBJECTIVES AND POLICIES. HIAT II and High Yield have similar
investment objectives. As their primary investment objective, HIAT II and High
Yield seek to earn a high level of current income. As their secondary
investment objective, HIAT II and High Yield seek capital appreciation but only
when consistent with their primary investment objective. The respective
investment objectives of HIAT II 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 II 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 II 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 II's investment manager, MS Advisors, provides administrative
services and manages HIAT II'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 II in a
manner consistent with its objective and policies. As compensation for advisory
services provided to HIAT II, HIAT II pays MS Advisors monthly compensation
calculated weekly by applying the following annual rates to HIAT II's weekly
net assets: 0.75% of the portion of the average weekly net assets not exceeding
$250 million; 0.60% of the portion of the average weekly net assets exceeding
$250 million and not exceeding $500 million; 0.50% of the portion
6
of the average weekly net 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 II 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 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 II 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 II 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 II, 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 II
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.
7
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.
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 II 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 II are only
purchased and sold on the NYSE.
DIVIDENDS. Both High Yield and HIAT II declare and pay dividends from net
investment income monthly. Both High Yield and HIAT II 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 II are automatically included in HIAT II'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 II at the then current market price of such shares. For more information
on HIAT II'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 II on the NYSE as well as HIAT II'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 II 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
8
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 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 II 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 II 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.
9
The foregoing discussion is a summary of the principal risk factors of
HIAT II 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 II Shareholders approve the Reorganization
Agreement. In reaching this decision, the Board made an extensive inquiry into
a number of factors, particularly the comparative expense ratios of HIAT II and
the Class D shares of High Yield, and the effect on Shareholders of
"open-ending" HIAT II 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 II 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 II and High Yield in connection with the
Reorganization.
In recommending the Reorganization to Shareholders, the Board of HIAT II
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 II (1.14% for its fiscal
year end July 31, 2001; for its fiscal year end July 31, 2002). 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 II'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 II (0.39% of average daily net
assets) for its fiscal year end July 31, 2001 ( for its fiscal year end
July 31, 2002). 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 II.
2. HIAT II, 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 II is
trading at a discount on the date of the Reorganization, the Reorganization at
net asset value would benefit the Shareholders of HIAT II by immediately
eliminating any such discount.
3. Shareholders of HIAT II would have a continued participation in a
portfolio of lower-rated and unrated fixed-income securities.
10
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 II, being a closed-end fund, does not offer any exchange
privileges.
5. 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 II or its Shareholders for Federal income tax purposes as a
result of transactions included in the Reorganization.
6. The Board recognized that if at the time of the Reorganization, HIAT
II is trading at a premium to its net asset value, HIAT II 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 II History of Public Trading of HIAT II'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.
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 II'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 II will transfer all
of its assets, including portfolio securities, cash (other than cash amounts
retained by HIAT II 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 II, including all expenses, costs, charges and
reserves, as reflected on an unaudited statement of assets and liabilities of
HIAT II prepared by the Treasurer of HIAT II, 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 II would be de-registered as an investment company under the 1940 Act;
(iv) HIAT II would be dissolved as a Massachusetts business trust; and (v) the
outstanding shares of HIAT II would be canceled.
11
The number of High Yield Shares to be delivered to HIAT II will be
determined by dividing the aggregate net asset value of the shares of HIAT II
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 II and High Yield may agree (the "Valuation Date"). As
an illustration, assume that on the Valuation Date, the shares of HIAT II had
an aggregate net asset value (not including any Cash Reserve of HIAT II) 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 - $10). These
10,000 Class D shares of High Yield would be distributed to the former
shareholders of HIAT II. 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 II 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 II
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, Harborside Financial Center,
Jersey City, New Jersey 07311. Shareholders of HIAT II 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 II 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 II,
which expenses are expected to approximate $ . HIAT II 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 II, 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 II 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 II that received High Yield
Shares. HIAT II 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 II.
12
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 II (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 II 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 II's shares, which is
currently expected to occur on the next business day after the Meeting
(assuming Shareholders of HIAT II approve the Reorganization Agreement at the
Meeting), Shareholders will continue to be able to sell their shares of HIAT II
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 II 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 II 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 II's investment company taxable income for all periods
since the inception of HIAT II through and including the Valuation Date
(computed without regard to any dividends paid deduction), and all of HIAT II's
net capital gain, if any, realized in such periods (after reduction for any
capital loss carryforward).
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 II 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 II 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 II acquired in the Reorganization except for
dispositions made in the ordinary course of business):
1. The transfer of HIAT II's assets in exchange for the High Yield Shares
and the assumption by High Yield of certain stated liabilities of HIAT II
followed by the distribution by HIAT II of the High Yield Shares to
Shareholders in exchange for their HIAT II 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 II 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 II solely in exchange for the High Yield Shares and the
assumption by High Yield of the stated liabilities of HIAT II;
3. No gain or loss will be recognized by HIAT II upon the transfer of the
assets of HIAT II 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 II shares;
13
4. No gain or loss will be recognized by Shareholders upon the exchange
of the shares of HIAT II 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 II 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 II
surrendered in exchange therefor were held (provided such shares in HIAT II
were held as capital assets on the date of the Reorganization);
7. The tax basis of the assets of HIAT II acquired by High Yield will be
the same as the tax basis of such assets of HIAT II immediately prior to the
Reorganization; and
8. The holding period of the assets of HIAT II in the hands of High Yield
will include the period during which those assets were held by HIAT II.
The advice of Counsel is not binding on the Internal Revenue Service or
the courts and neither HIAT II 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 II 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 II. The
effect of any such limitations will depend on the existence and amount of HIAT
II'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 $1.7 million of HIAT
II'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 II 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 II (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 II 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
14
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 II, whose shares are listed on the NYSE,
does hold annual meetings as required by the rules of the NYSE.
HIAT II 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 II. However, the Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of HIAT II,
requires that notice of such HIAT II obligations include such disclaimer, and
provides for indemnification out of the HIAT II's property for any shareholder
held personally liable for the obligations of HIAT II. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which HIAT II 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 II 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 II, 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 II (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 II 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 II with or into any other
corporation;
(ii) issuance of any securities of HIAT II to any person or entity for
cash;
(iii) sale, lease or exchange of all or any substantial part of the
assets of HIAT II, 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 II, in exchange for securities of
HIAT II, of any assets of any entity or person (except assets having
an aggregate fair market value of less than $1,000,000)
15
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 II. 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 II
as of July 31, 2002 and on a pro forma combined basis as if the Reorganization
had occurred on that date:
NET ASSET
SHARES VALUE
NET ASSETS OUTSTANDING PER SHARE
-------------- ---------------- ----------
HIAT II ....................................... $ 34,240,034 35,211,007 $ 0.97
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) .................................... $120,881,159 76,166,128 $ 1.59
Total Combined Fund (pro forma) (High Yield)
(Class A -- D) ............................... $566,200,668
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 II and High Yield have similar investment objectives. Both HIAT II
and High Yield, as a primary investment objective, seek to earn a high level
current income. As a secondary investment objective, HIAT II and High Yield
seek capital appreciation but only to the extent consistent with their primary
objective.
16
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.
HIAT II 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 II 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 II 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 II 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 II may be changed without shareholder approval.
Both High Yield and HIAT II 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 II may not invest in repurchase
agreements that do not mature within seven days, if any such investments amount
to more than 10% of HIAT II'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 II),
(vi) lend their portfolio securities (up to 25% in the case of High Yield and
up to 10% in the case of HIAT II), 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.
17
INVESTMENT RESTRICTIONS
The investment restrictions adopted by HIAT II and High Yield as
fundamental policies are substantially similar. HIAT II'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 II 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
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 II's portfolio; however, HIAT II 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 II'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.
18
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.
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 II
This section sets forth additional information about HIAT II which is not
contained elsewhere in this Proxy Statement and Prospectus.
19
HISTORY OF PUBLIC TRADING OF HIAT II'S SHARES
Shares of HIAT II trade on the New York Stock Exchange under the symbol
"YLT". The following table shows the history of public trading of the shares of
beneficial interest of HIAT II 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)
- -------------------------- ------------ ----------- ------------ ----------- ----------- -------------
July 31, 2002 ............ $ 1.14 $ 1.11 2.70% $ 0.91 $ 0.97 (4.12)%
April 30, 2002 ........... $ 1.25 $ 1.14 9.65% $ 1.09 $ 1.11 (1.80%)
January 31, 2002 ......... $ 1.59 $ 1.18 34.75% $ 1.32 $ 1.15 14.78%
October 31, 2001 ......... $ 1.68 $ 1.44 16.67% $ 1.20 $ 1.29 (6.98%)
July 31, 2001 ............ $ 2.140 $ 1.65 29.70% $ 1.620 $ 1.52 6.58%
April 30, 2001 ........... $ 3.250 $ 2.15 51.16% $ 2.000 $ 1.68 19.05%
January 31, 2001 ......... $ 3.250 $ 2.14 51.87% $ 2.375 $ 2.15 10.47%
October 31, 2000 ......... $ 4.188 $ 3.00 39.58% $ 3.125 $ 2.71 15.31%
On , 2002, the shares traded at a market price of $ with a net
asset value of $ .
INVESTMENT MANAGER
HIAT II'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 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 II.
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.
20
PORTFOLIO MANAGEMENT
HIAT II'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 II's Investment Manager, Gordon W. Loery, an
Executive Director of HIAT II's Investment Manager, and Deanna L. Loughnane, an
Executive Director of HIAT II's Investment Manager.
EXPENSES BORNE BY HIAT II
Under the Investment Management Agreement, HIAT II 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 II 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
II; brokers' commissions chargeable to HIAT II 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 II; all costs
and expenses in connection with registration and maintenance of registration of
HIAT II 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 II'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 II, and
independent accountants in connection with any matter relating to HIAT II (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 II's shares on
any stock exchange; postage; insurance premiums on property or personnel
(including officers and Trustees) of HIAT II 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 II's operations unless otherwise explicitly
provided in the Investment Management Agreement.
ADDITIONAL INFORMATION ABOUT HIAT II AND HIGH YIELD
GENERAL
HIAT II was organized as a "Massachusetts business trust" under the laws of
the Commonwealth of Massachusetts on July 7, 1988 and commenced operations as a
closed-end registered investment company on September 30, 1988. 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 II 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.
21
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 II, see HIAT II's Annual Report for its fiscal
year ended July 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 II, see
"Additional Matters Regarding HIAT II" above.
DESCRIPTION OF SECURITIES AND SHAREHOLDER INQUIRIES
For a description of the nature and most significant attributes of shares
of HIAT II and High Yield, and information regarding shareholder inquiries, see
the discussion herein under "The Reorganization -- Description of Shares of
High Yield and HIAT II" 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 II'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 II and High Yield.
DIVIDENDS, DISTRIBUTIONS AND TAXES
For a discussion of High Yield's and HIAT II'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 II'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.
22
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 preceding 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 II, see HIAT II's Annual Report for its fiscal year
ended July 31, 2002.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of High Yield, for the year ended _________, 2002,
and the financial statements of HIAT II for the year ended July 31, 2002 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 II 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 II's Annual Report for its fiscal year ended July 31, 2002. The foregoing
documents may be obtained without charge by calling (800) 869-NEWS (toll-free).
HIAT II 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 II 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 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 II are listed on the NYSE and,
in accordance with the requirements of the NYSE, HIAT II 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.
23
OTHER BUSINESS
Management of HIAT II 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
24
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 II, a Massachusetts business trust ("HIAT II").
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 II in
exchange for the assumption by High Yield of all stated liabilities of HIAT II
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 II in
liquidation of HIAT II 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 II
1.1 Subject to the terms and conditions herein set forth and on the basis
of the representations and warranties contained herein, HIAT II agrees to
assign, deliver and otherwise transfer the HIAT II Assets (as defined in
paragraph 1.2) to High Yield and High Yield agrees in exchange therefor to
assume all of HIAT II stated liabilities on the Closing Date as set forth in
paragraph 1.3(a) and to deliver to HIAT II 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 II 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 II, and any deferred or prepaid expenses shown as an
asset on HIAT II's books on the Valuation Date.
(b) On or prior to the Valuation Date, HIAT II will provide High Yield
with a list of all of HIAT II 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 II 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 II 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
II holds any investments that High Yield is not permitted to hold, HIAT II will
dispose of such securities on or prior to the Valuation Date. In addition, if
it is determined that the portfolios of HIAT II and High Yield, when
aggregated, would contain investments exceeding certain percentage limitations
imposed upon High Yield with respect to such investments, HIAT II 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 II 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 II prepared by the Treasurer of HIAT II, 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 II may establish a cash reserve, which
shall not exceed 5% of HIAT II's net assets as of the close of business on the
Valuation Date ("Cash Reserve") to be retained by HIAT II 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 II 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 II 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 II
will distribute High Yield Shares received by HIAT II pursuant to paragraph 1.1
pro rata to its shareholders of record determined as of the close of business on
the Valuation Date ("HIAT II Shareholders"). Each HIAT II Shareholder will
receive Class D shares of High Yield. Such distribution will be accomplished by
an instruction, signed by the Secretary of HIAT II, to transfer High Yield
Shares then credited to HIAT II's account on the books of High Yield to open
accounts on the books of High Yield in the names of the HIAT II Shareholders and
representing the respective pro rata number of High Yield Shares due such HIAT
II Shareholders. All issued and outstanding shares of HIAT II simultaneously
will be canceled on HIAT II's books; however, share certificates representing
interests in HIAT II 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 II 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 II'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 II is and shall remain the
responsibility of HIAT II up to and including the date on which HIAT II is
dissolved pursuant to paragraph 1.9.
1.9 Within one year after the Closing Date, HIAT II shall pay or make
provision for the payment of all its liabilities and taxes, and distribute to
the shareholders of HIAT II 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 II, 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 II for federal income tax purposes, or (ii)
be subject to a waiver under
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Section 368(a)(2)(G)(ii) of the complete distribution requirement of Section
368(a)(2)(G)(i) of the Code. HIAT II 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).
1.10 Copies of all books and records maintained on behalf of HIAT II 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 II is
subject under the 1940 Act.
2. VALUATION
2.1 The value of the HIAT II 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 II
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 II'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 II 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
II 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 II 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 II 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 II 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
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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."
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 II, accurate
appraisal of the value of the net assets of High Yield or the HIAT II 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 II 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 II Shareholders and the number and
percentage ownership of outstanding HIAT II shares owned by each such HIAT II
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 II
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 II or provide evidence satisfactory to
HIAT II that such High Yield Shares have been credited to HIAT II'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 II
4.1 Except as otherwise expressly provided herein with respect to
HIAT II, High Yield and HIAT II 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 II will provide High Yield with the Proxy
Materials as described in paragraph 4.3 below, for inclusion in the
Registration Statement. HIAT II will further provide High Yield with such other
information and documents relating to HIAT II as are reasonably necessary for
the preparation of the Registration Statement.
4.3 HIAT II 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 II 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 II 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 II will assist High Yield in obtaining such information as High
Yield reasonably requests concerning the beneficial ownership of HIAT II
shares.
4.5 Subject to the provisions of this Agreement, High Yield and HIAT II
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.
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4.6 HIAT II shall furnish or cause to be furnished to High Yield within
30 days after the Closing Date a statement of HIAT II's assets and liabilities
as of the Closing Date, which statement shall be certified by HIAT II's
Treasurer and shall be in accordance with generally accepted accounting
principles consistently applied. As promptly as practicable, but in any case
within 60 days after the Closing Date, HIAT II shall furnish High Yield, in such
form as is reasonably satisfactory to High Yield, a statement certified by HIAT
II's Treasurer of earnings and profits of HIAT II 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 II
(a) shall prepare and file all Federal and other tax returns and reports of
HIAT II 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 II 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
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conduct of its business; and High Yield 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 for
the year ended _________, 2002, of High Yield audited by Deloitte & Touche
LLP (copies of which have been furnished to HIAT II), 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 II, for
the account of the HIAT II 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
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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
(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 II represents and warrants to High Yield as follows:
(a) HIAT II is a series of a validly existing Massachusetts
business trust with full power to carry on its business as presently
conducted;
(b) HIAT II 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 II 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 II 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 II 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 II 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 II is not, and the execution, delivery and performance of
this Agreement will not result, in a material violation of any provision of
HIAT II's Declaration of Trust or By-Laws or of any agreement, indenture,
instrument, contract, lease or other undertaking to which HIAT II 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 II 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 II 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 II for the year ended July 31, 2002, audited by Deloitte & Touche LLP
(copies of which have been or will be furnished to High Yield) fairly
present, in all material respects, HIAT II'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 II (contingent or otherwise) not disclosed therein that would be
required in accordance with generally accepted accounting principles to be
disclosed therein;
(h) HIAT II has no material contracts or other commitments (other
than this Agreement) that will be terminated with liability to it prior to
the Closing Date;
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(i) All issued and outstanding shares of HIAT II 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 "The Reorganization --
Description of Shares of High Yield and HIAT II and the Organization of the
Two Funds" in this Proxy Statement and Prospectus. HIAT II 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 II, and subject to the approval of HIAT II's
shareholders, this Agreement constitutes a valid and binding obligation of
HIAT II, 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 II's performance of this Agreement;
(k) All material Federal and other tax returns and reports of HIAT
II 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
II'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 II, 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 II to continue to meet the
requirements of Subchapter M of the Code;
(m) At the Closing Date, HIAT II will have good and valid title to
the HIAT II Assets, subject to no liens (other than the obligation, if any,
to pay the purchase price of portfolio securities purchased by HIAT II
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 II'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 II 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 II 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 II 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 II 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 II
The obligations of HIAT II 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 II, a certificate of its
President and Treasurer, in a form reasonably satisfactory to HIAT II 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 II shall reasonably
request;
6.3 HIAT II 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 II, 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 II 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 II 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 II 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 II 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 II 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 II shall have delivered to High Yield a statement of the HIAT II
Assets and its liabilities, together with a list of HIAT II'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 II;
7.4 HIAT II shall have delivered to High Yield within three business days
after the Closing (a) a letter from Deloitte & Touche dated as of the Closing
Date stating that such firm has performed a limited review of the Federal and
state income tax returns of HIAT II for each of the last three 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 II 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 July 31, 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 July 31, 2002 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 II 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 II, dated as of the Closing Date
to the effect that:
(a) HIAT II 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 II 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 II 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 II
enforceable against HIAT II 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
A-10
general equity principles; (d) the execution and delivery of this Agreement
did not, and the consummation of the transactions contemplated hereby will
not, violate HIAT II'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 II 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 II 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 II
The obligations of HIAT II 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 II in accordance with the provisions of HIAT II'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 II 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 II;
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 II 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
II Shareholders all of HIAT II'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 II, which opinion may be
relied upon by the shareholders of HIAT II, substantially to the effect that,
for Federal income tax purposes:
(a) The transfer of HIAT II's assets in exchange for High Yield
Shares and the assumption by High Yield of certain stated liabilities of
HIAT II followed by the distribution by HIAT II of High Yield Shares to the
HIAT II Shareholders in exchange for their HIAT II shares pursuant to and
in accordance with the
A-11
terms of the Reorganization Agreement will constitute a "reorganization"
within the meaning of Section 368(a)(1)(C) of the Code, and HIAT II 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 II solely in exchange for High Yield Shares
and the assumption by High Yield of the stated liabilities of HIAT II;
(c) No gain or loss will be recognized by HIAT II upon the transfer
of the assets of HIAT II 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 II Shareholders in exchange
for their HIAT II shares;
(d) No gain or loss will be recognized by the HIAT II Shareholders
upon the exchange of the HIAT II shares for High Yield Shares;
(e) The aggregate tax basis for High Yield Shares received by each
HIAT II Shareholder pursuant to the reorganization will be the same as the
aggregate tax basis of the HIAT II Shares held by each such HIAT II
Shareholder immediately prior to the Reorganization;
(f) The holding period of High Yield Shares to be received by each
HIAT II Shareholder will include the period during which the HIAT II Shares
surrendered in exchange therefor were held (provided such HIAT II Shares
were held as capital assets on the date of the Reorganization);
(g) The tax basis of the assets of HIAT II acquired by High Yield
will be the same as the tax basis of such assets to HIAT II immediately
prior to the Reorganization; and
(h) The holding period of the assets of HIAT II in the hands of
High Yield will include the period during which those assets were held by
HIAT II.
Notwithstanding anything herein to the contrary, neither High Yield nor
HIAT II 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 II 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 II 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 II being either unwilling or unable to go forward (other than
by reason of the nonfulfillment or failure of any condition to HIAT II's
obligations specified in this Agreement), HIAT II'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 II for all reasonable out-of-pocket fees
and expenses incurred by HIAT II 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 II
hereunder shall not survive the dissolution and complete liquidation of HIAT II
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 II and High Yield;
(b) by either High Yield or HIAT II 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 II 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 II 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 II, or the
trustees or officers of High Yield or HIAT II, 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 II, or the trustees or
officers of High Yield or HIAT II, 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 II hereunder are solely those
of HIAT II. It is expressly agreed that no shareholder, nominee, trustee,
officer, agent, or employee of HIAT II shall be personally liable hereunder.
The execution and delivery of this Agreement have been authorized by the
trustees of HIAT II and signed by authorized officers of HIAT II 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 II
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
Annual Report of
High Income Advantage Trust II
Dated July 31, 2002
To be Filed by Amendment
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 II ("HIAT II") in connection
with the acquisition by High Yield of substantially all of the assets, subject
to stated liabilities, of HIAT II. 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 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 II shareholders in connection with the solicitation of proxies by
the Board of Trustees of HIAT II to be voted at the Special Meeting of
shareholders of HIAT II 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.
B-3
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 II's
most recent audited financial statements are set forth in HIAT II's Annual
Report for the fiscal year ended July 31, 2002. A copy of the Annual Report
accompanys, and is incorporated by reference in, the Proxy Statement and
Prospectus.
B-4
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
C-1
(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.*
(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
C-2
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.
C-3
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
C-4
MORGAN STANLEY HIGH YIELD SECURITIES INC.
EXHIBIT INDEX
16 Powers of Attorney
17 Proxy Card