<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-02932
Morgan Stanley High Yield Securities Inc.
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: August 31, 2004
Date of reporting period: August 31, 2004
Item 1 - Report to Shareholders
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Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley High
Yield Securities Inc. performed during the annual period. We will provide an
overview of the market conditions, and discuss some of the factors that affected
performance during the reporting period. In addition, this report includes the
Fund's financial statements and a list of Fund investments.
This material must be preceded or accompanied by a prospectus for the fund being
offered. Market forecasts provided in this report may not necessarily come to
pass. There is no assurance that the Fund will achieve its investment objective.
The Fund is subject to market risk, which is the possibility that market values
of securities owned by the Fund will decline and, therefore, the value of the
Fund's shares may be less than what you paid for them. Accordingly, you can lose
money investing in this Fund.
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FUND REPORT
FOR THE YEAR ENDED AUGUST 31, 2004
TOTAL RETURN FOR THE 12-MONTH PERIOD ENDED AUGUST 31, 2004
<Table>
<Caption>
LEHMAN LIPPER HIGH
BROTHERS CURRENT
U.S. CORP. YIELD BOND
HIGH YIELD FUNDS
CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2)
15.40% 14.15% 14.65% 14.93% 13.98% 12.76%
</Table>
THE PERFORMANCE OF THE FUND'S FOUR SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE FUND'S TOTAL RETURN FIGURES ASSUME THE REINVESTMENT OF
ALL DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY APPLICABLE SALES
CHARGES. SUCH COSTS WOULD LOWER PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS. SEE PERFORMANCE SUMMARY FOR STANDARDIZED PERFORMANCE
INFORMATION.
MARKET CONDITIONS
The U.S. high-yield securities market performed strongly for the 12 months ended
August 31, 2004. The rally that began in October 2002 endured early in the
period as a beneficial economic environment persisted, corporate earnings
continued to be positive and the default rate declined. During the 12 months of
this reporting period many companies moved to refinance old high-yield debt and
bank debt in order to lock in a lower interest rate. Because the resulting flood
of supply was more than matched by surging demand for high-yield debt by
yield-hungry investors, the high-yield market rallied sharply through the end of
2003.
After January the rally faltered and performance wavered between slightly
positive and negative. Although earnings remained strong and defaults continued
to decline, outflows from mutual funds were detrimental to the market's
performance, as money managers were forced to sell to meet the outflows. In
April investors became increasingly concerned that the Federal Reserve's Open
Market Committee would soon move to raise interest rates, adding volatility to
the financial markets. This volatility began to settle in the summer months when
the Federal Reserve demonstrated that it would take a measured approach to
raising interest rates. Supply and demand also came into a more favorable
balance when the new-issue calendar generally slowed and funds saw some new
inflows.
Performance by sector varied somewhat over the 12-month period. Lower-quality
sectors such as utilities and telecommunications performed most strongly in the
early half of the period, based on investors' increased appetite for risk.
Utility bonds performed well for the period in that they made a recovery from
losses in the preceding period and were boosted by better fundamentals. The
aerospace sector underperformed considerably, as the airline industry was
particularly hurt by defaults and generally poor fundamentals.
PERFORMANCE ANALYSIS
Morgan Stanley High Yield Securities Inc. outperformed both the Lehman Brothers
U.S. Corporate High Yield Index and the Lipper High Current Yield Bond Funds
Index for the 12 months ended August 31, 2004. An underweighted position in the
aerospace sector relative to the Lehman Brothers U.S. Corporate High Yield Index
was a strong positive driver of overall performance, as the Fund did not own any
airline companies during this period. Security selection in the housing sector
also proved positive, as a number of building products companies provided gains.
Among them, Nortek and Associated Materials were added when they were relatively
inexpensive and performed well over the period as a result of strong
fundamentals.
Despite the Fund's outperformance for the 12 months under review, several
positions had a negative effect on the Fund. Security selection in the cable and
chemicals
2
<Page>
sectors served as a detractor when the Fund was hurt by a few holdings such as
the satellite cable provider Pegasus Communications, which suffered after they
lost on most fronts in their lawsuit against Direct TV and Direct TV terminated
the resale agreement; we sold off the company's bonds later in the period.
Within the chemicals sector, Rhodia and Avecia both suffered from disappointing
earnings and deteriorating fundamentals that similarly hurt the Fund.
TOP FIVE INDUSTRIES
<Table>
Electric Utilities 6.6%
Chemicals: Specialty 5.2
Cable/Satellite TV 4.4
Oil & Gas Pipelines 3.9
Wireless Telecommunications 3.7
</Table>
LONG-TERM CREDIT ANALYSIS
<Table>
A/A+ 3.6%
Baa/BBB+ 0.3
Ba/BB- 19.2
B/B 52.3
Caa/CCC 22.3
NR/NR 2.3
</Table>
DATA AS OF AUGUST 31, 2004. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR TOP
FIVE INDUSTRIES ARE AS A PERCENTAGE OF NET ASSETS AND ALL PERCENTAGES FOR
LONG-TERM CREDIT ANALYSIS ARE AS A PERCENTAGE OF TOTAL LONG-TERM INVESTMENTS.
PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A
RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A
FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE
ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL
ADVISORY SERVICES.
INVESTMENT STRATEGY
THE FUND WILL NORMALLY INVEST AT LEAST 80 PERCENT OF ITS ASSETS IN FIXED-INCOME
SECURITIES (INCLUDING ZERO-COUPON SECURITIES) RATED BELOW Baa BY MOODY'S
INVESTORS SERVICE ("MOODY'S") OR BELOW BBB BY STANDARD & POOR'S CORPORATION
("S&P") OR IN NONRATED SECURITIES CONSIDERED BY THE FUND'S INVESTMENT MANAGER TO
BE APPROPRIATE INVESTMENTS FOR THE FUND. SUCH SECURITIES MAY ALSO INCLUDE "RULE
144A" SECURITIES, WHICH ARE SUBJECT TO RESALE RESTRICTIONS.
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE
SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON
FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO
DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS, AND MAKES THESE
REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, www.morganstanley.com. EACH MORGAN
STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC
FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES
NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS,
NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY,
HOWEVER, OBTAIN THE FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS
FILINGS) BY ACCESSING THE SEC'S WEB SITE, http://www.sec.gov. YOU MAY ALSO
REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC.
INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED
BY CALLING THE SEC AT (800)SEC-0330. YOU CAN
3
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ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY
ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (publicinfo@sec.gov) OR BY
WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102. YOU
MAY OBTAIN COPIES OF A FUND'S FISCAL QUARTER FILINGS BY CONTACTING MORGAN
STANLEY CLIENT RELATIONS AT (800)869-NEWS.
PROXY VOTING POLICIES AND PROCEDURES
A DESCRIPTION OF (1) THE FUND'S POLICIES AND PROCEDURES WITH RESPECT TO THE
VOTING OF PROXIES RELATING TO THE FUND'S PORTFOLIO SECURITIES AND (2) HOW THE
FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT
12-MONTH PERIOD ENDED AUGUST 31, 2004, IS AVAILABLE WITHOUT CHARGE, UPON
REQUEST, BY CALLING (800)869-NEWS OR BY VISITING THE MUTUAL FUND CENTER ON OUR
WEBSITE AT www.morganstanley.com. THIS INFORMATION IS ALSO AVAILABLE ON THE
SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT http://www.sec.gov.
ANNUAL HOUSEHOLDING NOTICE
TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE
MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN
SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY
MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS.
YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME
UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE
DOCUMENTS BY CALLING (800)350-6414, 8:00 A.M. TO 8:00 P.M. ET. ONCE OUR CUSTOMER
SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING INDIVIDUAL
COPIES FOR EACH ACCOUNT WITHIN 30 DAYS.
4
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(This page has been left blank intentionally.)
5
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PERFORMANCE SUMMARY
[CHART]
PERFORMANCE OF A $10,000 INVESTMENT--CLASS A AND D
<Table>
<Caption>
CLASS A@ CLASS D@ LEHMAN(1) LIPPER(2)
August 31, 1994 $ 9,575 $ 10,000 $ 10,000 $ 10,000
August 31, 1995 $ 10,695 $ 11,198 $ 11,385 $ 11,154
August 31, 1996 $ 11,850 $ 12,437 $ 12,484 $ 12,339
August 31, 1997 $ 13,596 $ 14,304 $ 14,379 $ 14,259
August 31, 1998 $ 13,650 $ 14,394 $ 14,815 $ 14,449
August 31, 1999 $ 13,851 $ 14,635 $ 15,423 $ 15,235
August 31, 2000 $ 12,621 $ 13,363 $ 15,597 $ 15,333
August 31, 2001 $ 7,945 $ 8,425 $ 15,632 $ 14,179
August 31, 2002 $ 6,221 $ 6,618 $ 14,436 $ 12,936
August 31, 2003 $ 7,457 $ 7,995 $ 18,025 $ 15,754
August 31, 2004 $ 8,606 $ 9,189 $ 20,544 $ 17,765
</Table>
6
<Page>
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED AUGUST 31, 2004
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++
(SINCE 09/26/79) (SINCE 07/28/97) (SINCE 07/28/97) (SINCE 09/26/79)
SYMBOL HYLAX HYLBX HYLCX HYLDX
1 YEAR 15.40%(3) 14.15%(3) 14.65%(3) 14.93%(3)
10.50(4) 9.15(4) 13.65(4) --
5 YEARS (9.08)(3) (9.60)(3) (9.64)(3) (8.89)(3)
(9.86)(4) (9.80)(4) (9.64)(4) --
10 YEARS (1.06)(3) -- -- (0.84)(3)
(1.49)(4) -- -- --
SINCE INCEPTION 4.96(3) (6.70)(3) (6.73)(3) 5.21(3)
4.78(4) (6.70)(4) (6.73)(4) --
</Table>
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
morganstanley.com OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS AND
PRINCIPAL VALUE WILL FLUCTUATE AND FUND SHARES, WHEN REDEEMED, MAY BE WORTH MORE
OR LESS THAN THEIR ORIGINAL COST. THE GRAPH AND TABLE DO NOT REFLECT THE
DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE
REDEMPTION OF FUND SHARES. PERFORMANCE FOR CLASS A, CLASS B, CLASS C, AND CLASS
D SHARES WILL VARY DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES.
PRIOR TO JULY 28, 1997 THE FUND OFFERED ONLY ONE CLASS OF SHARES. BECAUSE THE
DISTRIBUTION ARRANGEMENT FOR CLASS A MOST CLOSELY RESEMBELED THE DISTRIBUTION
ARRANGEMENT APPLICABLE PRIOR TO THE IMPLEMENTATION OF MULTIPLE CLASSES (I.E.,
CLASS A IS SOLD WITH A FRONT-END SALES CHARGE), HISTORICAL PERFORMANCE
INFORMATION HAS BEEN RESTATED TO REFLECT THE ACTUAL MAXIMUM SALES CHARGE
APPLICABLE TO CLASS A (I.E., 4.25%) AS COMPARED TO THE 5.50% SALES CHARGE IN
EFFECT PRIOR TO JULY 28, 1997. IN ADDITION, CLASS A SHARES ARE NOW SUBJECT TO AN
ONGOING 12B-1 FEE WHICH IS REFLECTED IN THE RESTATED PERFORMANCE FOR THAT CLASS.
BECAUSE ALL SHARES OF THE FUND HELD PRIOR TO JULY 28, 1997 WERE DESIGNATED CLASS
D SHARES, THE FUND'S HISTORICAL PERFORMANCE HAS BEEN RESTATED TO REFLECT THE
ABSENCE OF ANY SALES CHARGE.
* THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 4.25%.
** THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B IS 5.0%.
THE CDSC DECLINES TO 0% AFTER SIX YEARS.
+ THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS C IS 1% FOR SHARES
REDEEMED WITHIN ONE YEAR OF PURCHASE.
++ CLASS D HAS NO SALES CHARGE.
(1) THE LEHMAN BROTHERS U.S. CORPORATE HIGH YIELD INDEX TRACKS THE PERFORMANCE
OF ALL BELOW INVESTMENT-GRADE SECURITIES WHICH HAVE AT LEAST $100 MILLION
IN OUTSTANDING ISSUANCE, A MATURITY GREATER THAN ONE YEAR, AND ARE ISSUED
IN FIXED-RATE U.S. DOLLAR DENOMINATIONS. INDEXES ARE UNMANAGED AND THEIR
RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER
PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
(2) THE LIPPER HIGH CURRENT YIELD BOND FUNDS INDEX IS AN EQUALLY WEIGHTED
PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN
THE LIPPER HIGH CURRENT YIELD BOND FUNDS CLASSIFICATION. THE INDEX, WHICH
IS ADJUSTED FOR CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS
UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY
30 FUNDS REPRESENTED IN THIS INDEX.
(3) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT
THE DEDUCTION OF ANY SALES CHARGES.
(4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF
THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR
COMPLETE DETAILS ON FEES AND SALES CHARGES.
@@ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON AUGUST 31, 2004
7
<Page>
EXPENSE EXAMPLE
As a shareholder of the Fund, you incur ongoing costs, including management
fees; distribution and service (12b-1) fees; and other Fund expenses. This
example is intended to help you understand your ongoing costs (in dollars) of
investing in the Fund and to compare these costs with the ongoing costs of
investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period 03/01/04 - 08/31/04.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing cost of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only. Therefore, the second line of the table is useful in
comparing ongoing costs, and will not help you determine the relative total cost
of owning different funds that have transactional costs, such as sales charges
(loads), and redemption fees, or exchange fees.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
03/01/04 -
03/01/04 08/31/04 08/31/04
------------- ------------- ---------------
CLASS A
Actual (4.17% return) $ 1,000.00 $ 1,041.70 $ 4.93
Hypothetical (5% return before expenses) $ 1,000.00 $ 1,020.31 $ 4.88
CLASS B
Actual (3.86% return) $ 1,000.00 $ 1,038.60 $ 8.40
Hypothetical (5% return before expenses) $ 1,000.00 $ 1,016.89 $ 8.31
CLASS C
Actual (3.79% return) $ 1,000.00 $ 1,037.90 $ 8.91
Hypothetical (5% return before expenses) $ 1,000.00 $ 1,016.39 $ 8.82
CLASS D
Actual (3.66% return) $ 1,000.00 $ 1,036.60 $ 4.56
Hypothetical (5% return before expenses) $ 1,000.00 $ 1,020.66 $ 4.52
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.96%,
1.64%, 1.74% AND 0.89% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT
VALUE OVER THE PERIOD, MULTIPLIED BY 184/366 (TO REFLECT THE ONE-HALF
YEAR PERIOD).
8
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MORGAN STANLEY HIGH YIELD SECURITIES INC.
PORTFOLIO OF INVESTMENTS - AUGUST 31, 2004
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (92.0%)
ADVERTISING/MARKETING SERVICES (0.8%)
$ 3,017 Interep National Radio Sales, Inc. (Series B) 10.00% 07/01/08 $ 2,372,116
2,205 Vertis Inc. - 144A* 13.50 12/07/09 2,240,831
----------------
4,612,947
----------------
AEROSPACE & DEFENSE (0.3%)
1,881 Dunlop Standards Aerospace Holdings
PLC - 144A* (United Kingdom) 11.875 05/15/09 2,003,265
----------------
ALTERNATIVE POWER GENERATION (1.5%)
4,670 Calpine Corp. - 144A* 8.50 07/15/10 3,689,300
5,399 Ormat Funding Corp. - 144A* 8.25 12/30/20 5,155,926
----------------
8,845,226
----------------
APPAREL/FOOTWEAR (0.3%)
1,650 Oxford Industries Inc. - 144A* 8.875 06/01/11 1,773,750
----------------
AUTO PARTS: O.E.M. (0.8%)
4,160 TRW Automotive, Inc. 9.375 02/15/13 4,815,200
----------------
AUTOMOTIVE AFTERMARKET (0.6%)
3,010 Tenneco Automotive, Inc. (Series B) 11.625 10/15/09 3,228,225
----------------
BROADCASTING (0.5%)
1,285 Granite Broadcasting Corp. 9.75 12/01/10 1,217,537
1,296 Salem Communications Holdings Corp. (Series B) 9.00 07/01/11 1,419,120
----------------
2,636,657
----------------
BUILDING PRODUCTS (3.3%)
8,350 Associated Materials Inc. - 144A* 11.25++ 03/01/14 5,949,375
1,705 Brand Services Inc. 12.00 10/15/12 1,952,225
865 Interface Inc. 7.30 04/01/08 860,675
4,460 Interface Inc. 9.50 02/01/14 4,593,800
4,050 THL Buildco Inc. (Nortek) Inc. - 144A* 8.50 09/01/14 4,242,375
1,455 WII Components, Inc. - 144A* 10.00 02/15/12 1,447,725
----------------
19,046,175
----------------
CABLE/SATELLITE TV (4.4%)
1,002 Avalon Cable LLC 11.875 12/01/08 1,062,156
1,780 Charter Communications Holdings LLC 10.75 10/01/09 1,504,100
4,465 Charter Communications Holdings/Charter Capital 11.75++ 05/15/11 2,857,600
1,340 Charter Communications Holdings/Charter Capital 13.50++ 01/15/11 984,900
1,085 Directv Holdings/Finance 8.375 03/15/13 1,239,612
5,280 Kabel Deutscheland - 144A* (Germany) 10.625 07/01/14 5,438,400
3,055 Knology, Inc. - 144A* (c) 12.00+ 11/30/09 2,910,280
1,700 Panamsat Corp. - 144A* 9.00 08/15/14 1,780,750
1,780 Renaissance Media Group LLC 10.00 04/15/08 1,842,300
7,980 Telenet Group Holdings NV - 144A* (Belgium) 11.50++ 06/15/14 5,526,150
----------------
25,146,248
----------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
9
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------------
CASINO/GAMING (2.5%)
$ 27,175 Aladdin Gaming Holdings/Capital Corp. LLC
(Series B) (b) 13.50% 03/01/10 $ 0
3,120 Isle of Capri Casinos 7.00 03/01/14 3,104,400
3,550 MGM Mirage Inc. 6.00 10/01/09 3,621,000
1,800 MGM Mirage Inc. - 144A* 5.875 02/27/14 1,705,500
27,634 Resort At Summerlin LP/Ras Co. (Series B) (a) (b) 13.00 12/15/07 0
3,195 Station Casinos, Inc. 6.00 04/01/12 3,218,962
2,470 Venetian Casino/LV Sands 11.00 06/15/10 2,825,062
----------------
14,474,924
----------------
CHEMICALS: MAJOR DIVERSIFIED (2.1%)
4,230 Equistar Chemical Funding 10.125 09/01/08 4,727,025
1,575 Huntsman Advanced Materials Corp. - 144A* 11.00 07/15/10 1,803,375
5,480 Huntsman ICI Chemicals 10.125 07/01/09 5,671,800
----------------
12,202,200
----------------
CHEMICALS: SPECIALTY (5.5%)
1,880 Avecia Group PLC (United Kingdom) 11.00 07/01/09 1,513,400
1,785 FMC Corp. 10.25 11/01/09 2,086,219
1,755 Innophos Inc. - 144A* 8.875 08/15/14 1,833,975
945 ISP Chemco 10.25 07/01/11 1,056,037
4,065 ISP Holdings Inc. (Series B) 10.625 12/15/09 4,491,825
1,135 Koppers Industry Inc. 9.875 10/15/13 1,254,175
775 Millennium America, Inc. 7.00 11/15/06 800,187
4,185 Millennium America, Inc. 9.25 06/15/08 4,582,575
1,140 Nalco Co. - 144A* 7.75 11/15/11 1,219,800
4,235 Nalco Co. - 144A* 8.875 11/15/13 4,589,681
3,855 Rhodia SA (France) 8.875 06/01/11 3,276,750
2,715 Rockwood Specialties, Inc. 10.625 05/15/11 2,972,925
1,700 Westlake Chemical Corp. 8.75 07/15/11 1,899,750
----------------
31,577,299
----------------
COAL (0.2%)
930 Foundation PA Coal Co. - 144A* 7.25 08/01/14 983,475
----------------
CONSUMER SUNDRIES (0.3%)
1,985 Amscan Holdings, Inc. - 144A* 8.75 05/01/14 1,987,481
----------------
CONSUMER/BUSINESS SERVICES (1.4%)
3,450 Buhrmann US, Inc. - 144A* 8.25 07/01/14 3,475,875
3,245 Muzak LLC/Muzak Finance Corp. 9.875 03/15/09 2,336,400
2,245 Muzak LLC/Muzak Finance Corp. 10.00 02/15/09 2,009,275
----------------
7,821,550
----------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
10
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------------
CONTAINERS/PACKAGING (2.7%)
$ 2,850 Graphic Packaging International Corp. 9.50% 08/15/13 $ 3,206,250
1,900 Norampac, Inc. (Canada) 6.75 06/01/13 1,971,250
850 Owens-Brockway Glass Containers Corp. 8.75 11/15/12 947,750
1,765 Owens-Illinois Inc. 7.35 05/15/08 1,826,775
3,005 Owens-Illinois Inc. 7.50 05/15/10 3,080,125
3,020 Pliant Corp. (Issued 04/10/02) 13.00 06/01/10 2,793,500
1,530 Pliant Corp. (Issued 08/29/00) 13.00 06/01/10 1,415,250
----------------
15,240,900
----------------
DRUGSTORE CHAINS (1.2%)
1,005 Jean Coutu Group PJC Inc. - 144A* (Canada) 7.625 08/01/12 1,040,175
2,490 Jean Coutu Group PJC Inc. - 144A* (Canada) 8.50 08/01/14 2,521,125
2,235 Rite Aid Corp. 7.125 01/15/07 2,290,875
810 Rite Aid Corp. 8.125 05/01/10 854,550
----------------
6,706,725
----------------
ELECTRIC UTILITIES (5.5%)
1,330 AES Corp. (The) 7.75 03/01/14 1,346,625
377 AES Corp. (The) 8.875 02/15/11 414,700
537 AES Corp. (The) 9.375 09/15/10 600,097
3,020 AES Corp. (The) - 144A* 9.00 05/15/15 3,374,850
2,405 Allegheny Energy, Inc. 7.75 08/01/05 2,510,219
460 CMS Energy Corp. 7.50 01/15/09 483,000
3,010 CMS Energy Corp. 8.50 04/15/11 3,280,900
1,040 IPALCO Enterprises, Inc. 8.625*** 11/14/11 1,159,600
3,160 Monongahela Power Co. 5.00 10/01/06 3,256,756
3,235 MSW Energy Holdings/Finance 7.375 09/01/10 3,380,575
695 MSW Energy Holdings/Finance 8.50 09/01/10 761,025
1,940 Nevada Power Co. 8.25 06/01/11 2,124,300
3,130 Nevada Power Co. 9.00 08/15/13 3,521,250
1,810 PG&E Corp. 6.875 07/15/08 1,972,900
3,320 PSEG Energy Holdings Inc. 8.625 02/15/08 3,652,000
----------------
31,838,797
----------------
ELECTRICAL PRODUCTS (0.5%)
2,525 Rayovac Corp. 8.50 10/01/13 2,714,375
----------------
ELECTRONIC DISTRIBUTORS (0.4%)
2,245 BRL Universal Equipment Corp. 8.875 02/15/08 2,407,762
----------------
ELECTRONIC EQUIPMENT/INSTRUMENTS (0.8%)
4,070 Xerox Corp. 7.125 06/15/10 4,334,550
----------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
11
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------------
ENVIRONMENTAL SERVICES (0.7%)
$ 1,515 Allied Waste North America, Inc. 6.50% 11/15/10 $ 1,522,575
2,310 Allied Waste North America, Inc. 9.25 09/01/12 2,604,525
----------------
4,127,100
----------------
FINANCE/RENTAL/LEASING (1.1%)
3,105 United Rentals NA, Inc. 6.50 02/15/12 2,965,275
3,410 United Rentals NA, Inc. 7.75 11/15/13 3,188,350
----------------
6,153,625
----------------
FOOD RETAIL (1.2%)
4,540 Delhaize America, Inc. 8.125 04/15/11 5,187,522
1,504 Kroger Co. - 144A* 8.50 07/15/17 1,709,050
----------------
6,896,572
----------------
FOOD: MEAT/FISH/DAIRY (2.9%)
2,735 Michael Foods Inc. (Series B) 8.00 11/15/13 2,878,587
1,770 Pilgrim's Pride Corp. 9.25 11/15/13 1,938,150
4,370 Pilgrim's Pride Corp. 9.625 09/15/11 4,905,325
5,780 Smithfield Foods Inc. 7.625 02/15/08 6,170,150
415 Smithfield Foods Inc. - 144A* 7.00 08/01/11 431,600
410 Smithfield Foods Inc. (Series B) 8.00 10/15/09 447,925
----------------
16,771,737
----------------
FOREST PRODUCTS (0.7%)
1,115 Tembec Industries Inc. (Canada) 7.75 03/15/12 1,131,725
2,600 Tembec Industries Inc. (Canada) 8.50 02/01/11 2,749,500
----------------
3,881,225
----------------
GAS DISTRIBUTORS (1.5%)
4,080 Dynegy Holdings, Inc. 6.875 04/01/11 3,814,800
3,390 Dynegy Holdings, Inc. - 144A* 9.875 07/15/10 3,796,800
730 Northwest Pipeline Corp. 8.125 03/01/10 825,813
----------------
8,437,413
----------------
HOME BUILDING (1.0%)
2,100 Tech Olympic USA, Inc. 10.375 07/01/12 2,294,250
1,645 Tech Olympic USA, Inc. (Issued 11/27/02) 9.00 07/01/10 1,751,925
1,850 Tech Olympic USA, Inc. (Issued 02/03/03) 9.00 07/01/10 1,970,250
----------------
6,016,425
----------------
HOME FURNISHINGS (0.2%)
1,235 Tempur-Pedic Inc. 10.25 08/15/10 1,395,550
----------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------------
HOME IMPROVEMENT CHAINS (0.3%)
$ 1,485 Buildings Materials Corp. - 144A* 7.75% 08/01/14 $ 1,455,300
----------------
HOSPITAL/NURSING MANAGEMENT (1.4%)
625 HCA, Inc. 7.19 11/15/15 675,664
1,145 HCA, Inc. 7.58 09/15/25 1,189,832
1,740 Medcath Holdings Corp. - 144A* 9.875 07/15/12 1,827,000
920 Tenet Healthcare Corp. 6.50 06/01/12 818,800
2,400 Tenet Healthcare Corp. 7.375 02/01/13 2,232,000
1,150 Tenet Healthcare Corp. - 144A* 9.875 07/01/14 1,204,625
----------------
7,947,921
----------------
HOTELS/RESORTS/CRUISELINES (1.3%)
2,980 Hilton Hotels Corp. 7.625 12/01/12 3,419,550
930 Hilton Hotels Corp. 7.95 04/15/07 1,029,975
530 Starwood Hotels & Resorts Worldwide, Inc. 7.375 05/01/07 569,750
2,290 Starwood Hotels & Resorts Worldwide, Inc. 7.875 05/01/12 2,576,250
----------------
7,595,525
----------------
HOUSEHOLD/PERSONAL CARE (0.1%)
610 Prestige Brands, Inc. - 144A* 9.25 04/15/12 610,000
----------------
INDUSTRIAL MACHINERY (0.2%)
1,111 Flowserve Corp. 12.25 08/15/10 1,266,540
----------------
INDUSTRIAL SPECIALTIES (2.2%)
4,010 Johnsondiversy, Inc. 9.625 05/15/12 4,511,250
1,440 Tekni-Plex Inc. - 144A* 8.75 11/15/13 1,389,600
3,371 Tekni-Plex Inc. (Series B) 12.75 06/15/10 3,269,870
3,070 UCAR Finance, Inc. 10.25 02/15/12 3,499,800
----------------
12,670,520
----------------
INTERNET SOFTWARE/SERVICES (0.3%)
6,546 Exodus Communications, Inc. (a) (b) 11.625 07/15/10 0
1,745 Global Cash Access - 144A* 8.75 03/15/12 1,845,337
----------------
1,845,337
----------------
INVESTMENT BANKS/BROKERS (0.8%)
4,535 Refco Finance Holdings - 144A* 9.00 08/01/12 4,716,400
----------------
INVESTMENT MANAGERS (0.7%)
3,695 JSG Funding PLC (Ireland) 9.625 10/01/12 4,175,350
----------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------------
MEDICAL DISTRIBUTORS (1.1%)
$ 220 AmerisourceBergen Corp. 7.25% 11/15/12 $ 236,500
5,260 AmerisourceBergen Corp. 8.125 09/01/08 5,799,150
----------------
6,035,650
----------------
MEDICAL SPECIALTIES (0.8%)
1,300 Fisher Scientific International, Inc. 8.00 09/01/13 1,449,500
1,675 Fisher Scientific International, Inc. 8.125 05/01/12 1,867,625
715 Fisher Scientific International, Inc. - 144A* 6.75 08/15/14 741,813
665 National Nephrology Assoc. Inc. - 144A* 9.00 11/01/11 772,231
----------------
4,831,169
----------------
MEDICAL/NURSING SERVICES (1.6%)
5,140 Fresenius Medical Care Capital Trust 7.875 06/15/11 5,628,300
795 Fresenius Medical Care Capital Trust II (Units)++ 7.875 02/01/08 850,650
2,715 Team Health, Inc. - 144A* 9.00 04/01/12 2,660,700
----------------
9,139,650
----------------
METAL FABRICATIONS (1.1%)
1,680 General Cable Corp. 9.50 11/15/10 1,864,800
4,010 Trimas Corp. 9.875 06/15/12 4,270,650
----------------
6,135,450
----------------
MISCELLANEOUS COMMERCIAL SERVICES (1.8%)
1,955 Advanstar Communications, Inc. 9.22*** 08/15/08 2,031,016
2,225 Advanstar Communications, Inc. 10.75 08/15/10 2,464,188
495 Advanstar Communications, Inc. (Series B) 12.00 02/15/11 528,413
2,471 Iron Mountain Inc. 7.75 01/15/15 2,582,195
2,800 Iron Mountain Inc. 8.625 04/01/13 3,038,000
----------------
10,643,812
----------------
MISCELLANEOUS MANUFACTURING (0.6%)
3,315 Amsted Industries Inc. - 144A* 10.25 10/15/11 3,596,775
----------------
MOVIES/ENTERTAINMENT (1.6%)
4,850 Alliance Atlantic Communications, Inc. (Canada) 13.00 12/15/09 5,310,750
1,210 Cinemark, Inc. 9.75++ 03/15/14 839,438
2,050 Marquee Inc. - 144A* 5.97*** 08/15/10 2,101,250
630 Marquee Inc. - 144A* 8.625 08/15/12 661,500
----------------
8,912,938
----------------
OIL & GAS PIPELINES (3.9%)
5,525 El Paso Production Holdings 7.75 06/01/13 5,455,938
715 GulfTerra Energy Partners, L.P. 8.50 06/01/10 839,231
2,863 GulfTerra Energy Partners, L.P. 10.625 12/01/12 3,621,695
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------------
$ 2,525 Pacific EnergyPartner/Finance - 144A* 7.125% 06/15/14 $ 2,682,813
1,435 Southern Natural Gas 8.875 03/15/10 1,621,550
1,315 Transcontinental Gas Pipe Line Corp. (Series B) 8.875 07/15/12 1,601,013
5,930 Williams Companies, Inc. (The) 7.875 09/01/21 6,456,288
----------------
22,278,528
----------------
OIL & GAS PRODUCTION (3.2%)
4,210 Chesapeake Energy Corp. 7.50 09/15/13 4,546,800
3,710 Hilcorp Energy/Finance - 144A* 10.50 09/01/10 4,127,375
1,400 Magnum Hunter Resources, Inc. 9.60 03/15/12 1,585,500
1,830 Plains E & P Corp. - 144A* 7.125 06/15/14 1,948,950
5,830 Vintage Petroleum, Inc. 7.875 05/15/11 6,121,500
----------------
18,330,125
----------------
OIL REFINING/MARKETING (1.3%)
1,750 CITGO Petroleum Corp. 11.375 02/01/11 2,051,875
3,000 Husky Oil Ltd. 8.90 08/15/28 3,505,041
1,815 Tesoro Petroleum Corp. 9.625 04/01/12 2,087,250
----------------
7,644,166
----------------
OILFIELD SERVICES/EQUIPMENT (1.6%)
3,345 CHC Helicopter Corp. (Canada) 7.375 05/01/14 3,399,356
625 Hanover Compress Co. 8.625 12/15/10 668,750
575 Hanover Compress Co. 9.00 06/01/14 619,563
2,760 Hanover Equipment Trust 2001 A (Series A) 8.50 09/01/08 2,960,100
1,655 Hanover Equipment Trust 2001 B (Series B) 8.75 09/01/11 1,795,675
----------------
9,443,444
----------------
OTHER METALS/MINERALS (0.0%)
3,750 Murrin Holdings Property Ltd. (Australia) (b) 9.375 08/31/07 375
----------------
OTHER TRANSPORTATION (0.9%)
4,305 Laidlaw International Inc. 10.75 06/15/11 4,929,225
----------------
PHARMACEUTICALS: MAJOR (0.6%)
1,370 VWR International - 144A* (Germany) 6.875 04/15/12 1,407,675
1,795 VWR International - 144A* (Germany) 8.00 04/15/14 1,862,313
----------------
3,269,988
----------------
PHARMACEUTICALS: OTHER (0.3%)
1,810 Leiner Health Products Inc. - 144A* 11.00 06/01/12 1,900,500
----------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
15
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------------
PUBLISHING: BOOKS/MAGAZINES (3.3%)
$ 1,756 Dex Media East/Finance 12.125% 11/15/12 $ 2,173,050
5,225 Dex Media Inc. - 144A* 9.00++ 11/15/13 3,853,438
2,741 Dex Media West/Finance 9.875 08/15/13 3,165,855
3,895 Houghton Mifflin Co. 9.875 02/01/13 4,084,881
755 Houghton Mifflin Co. 11.50++ 10/15/13 450,169
1,097 PEI Holdings, Inc. 11.00 03/15/10 1,278,005
4,050 PRIMEDIA, Inc. 8.875 05/15/11 3,989,250
----------------
18,994,648
----------------
PUBLISHING: NEWSPAPERS (1.1%)
5,771 Hollinger Participation Trust - 144A* (Canada) 12.125+ 11/15/10 6,535,354
----------------
PULP & PAPER (1.5%)
3,500 Abitibi-Consolidated Inc. (Canada) 6.00 06/20/13 3,228,750
4,350 Georgia-Pacific Corp. 8.875 02/01/10 5,122,125
----------------
8,350,875
----------------
REAL ESTATE DEVELOPMENT (1.4%)
5,535 CB Richard Ellis Services, Inc. 11.25 06/15/11 6,392,925
1,705 LNR Property Corp. 7.625 07/15/13 1,815,825
----------------
8,208,750
----------------
REAL ESTATE INVESTMENT TRUSTS (0.4%)
1,965 HMH Properties, Inc. (Series B) 7.875 08/01/08 2,033,775
----------------
SPECIALTY STORES (2.3%)
3,600 Autonation, Inc. 9.00 08/01/08 4,131,000
2,315 General Nutrition Center - 144A* 8.50 12/01/10 2,326,575
2,975 Petro Stopping Centers LP/Petro Financial Corp. 9.00 02/15/12 3,108,875
3,515 Sonic Automotive, Inc. 8.625 08/15/13 3,708,325
----------------
13,274,775
----------------
SPECIALTY TELECOMMUNICATIONS (2.3%)
3,400 American Tower Corp. 9.375 02/01/09 3,646,500
2,375 American Tower Corp. - 144A* 7.50 05/01/12 2,410,625
3,250 Qwest Communications International - 144A* 5.211*** 02/15/09 3,038,750
2,590 Qwest Services Corp. - 144A* 13.50 12/15/07 2,946,125
400 U.S. West Communications Corp. 5.625 11/15/08 392,000
585 U.S. West Communications Corp. 6.625 09/15/05 600,356
----------------
13,034,356
----------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
16
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------------
STEEL (0.3%)
$ 1,356 United States Steel Corp. 9.75% 05/15/10 $ 1,532,280
----------------
TELECOMMUNICATION EQUIPMENT (0.4%)
2,170 Nortel Networks Ltd. (Canada) 6.125 02/15/06 2,213,400
----------------
TELECOMMUNICATIONS (0.6%)
4,740 Primus Telecommunication Group, Inc. 8.00 01/15/14 3,649,800
28,549 Rhythms Netconnections, Inc. (a) (b) 12.75 04/15/09 0
4,309 Rhythms Netconnections, Inc. (a) (b) 14.00 02/15/10 0
13,439 Rhythms Netconnections, Inc. (Series B) (a) (b) 13.50 05/15/08 0
----------------
3,649,800
----------------
TRUCKS/CONSTRUCTION/FARM MACHINERY (1.6%)
4,535 Manitowoc Inc. (The) 10.50 08/01/12 5,192,575
3,370 NMHG Holding Co. 10.00 05/15/09 3,723,850
----------------
8,916,425
----------------
WHOLESALE DISTRIBUTORS (0.5%)
3,070 Nebraska Book Company, Inc. 8.625 03/15/12 3,070,000
----------------
WIRELESS TELECOMMUNICATIONS (3.7%)
4,700 Centennial Communications Corp. - 144A* 8.125 02/01/14 4,382,750
3,845 Metropcs, Inc. 10.75 10/01/11 4,114,150
1,920 Rural Cellular Corp - 144A* 6.02*** 03/15/10 1,958,400
2,125 SBA Communications Corp. 9.75++ 12/15/11 1,668,125
4,755 SBA Communications Corp. 10.25 02/01/09 5,028,413
1,175 Ubiquitel Operating Co. 14.00++ 04/15/10 1,210,250
2,760 US Unwire Inc. 10.00 06/15/12 2,842,800
----------------
21,204,888
----------------
Total Corporate Bonds
(COST $604,645,471) 528,471,392
----------------
Convertible Bonds (0.5%)
HOTELS/RESORTS/CRUISELINES (0.0%)
1,643 Premier Cruises Ltd. - 144A* (a) (b) 10.00+ 08/15/05 0
----------------
TELECOMMUNICATION EQUIPMENT (0.5%)
3,115 Nortel Networks Corp. (Canada) 4.25 09/01/08 3,017,656
----------------
Total Convertible Bonds
(COST $5,353,040) 3,017,656
----------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
17
<Page>
<Table>
<Caption>
NUMBEROF
SHARES VALUE
- -------------------------------------------------------------------------------------
COMMON STOCKS (d) (0.4%)
AEROSPACE & DEFENSE (0.1%)
75,021 Orbital Sciences Corp. (c) $ 800,474
------------
APPAREL/FOOTWEAR RETAIL (0.0%)
5,421,101 County Seat Stores Corp. (c) 0
------------
CASINO/GAMING (0.0%)
212,312 Fitzgerald Gaming Corp.** 0
------------
FOOD: SPECIALTY/CANDY (0.0%)
13,317 SFAC New Holdings Inc. (c) 0
2,447 SFAC New Holdings Inc. (c) 0
1,069,725 Specialty Foods Acquisition Corp. - 144A* 0
------------
0
------------
HOTELS/RESORTS/CRUISELINES (0.0%)
981,277 Premier Holdings Inc. (c) 0
------------
MEDICAL/NURSING SERVICES (0.0%)
1,754,896 Raintree Healthcare Corp. (c) 0
------------
RESTAURANTS (0.3%)
111,558 American Restaurant Group Holdings, Inc. (c) 0
13,107 American Restaurant Group Holdings, Inc. (c) 0
64,807 American Restaurant Group Holdings, Inc. - 144A* 0
787,160 Catalina Restaurant Group (c) (Note 4) 1,574,320
------------
1,574,320
------------
SPECIALTY TELECOMMUNICATIONS (0.0%)
34,159 Birch Telecom Inc. (c) 0
1,448,200 PFB Telecom NV (Series B) (c) 0
1 XO Communications, Inc. (c) 3
------------
3
------------
TELECOMMUNICATIONS (0.0%)
49,597 Viatel Holdings Bermuda Ltd. (c) 34,718
------------
TEXTILES (0.0%)
2,389,334 U.S. Leather, Inc. (c) 0
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
18
<Page>
<Table>
<Caption>
NUMBEROF
SHARES VALUE
- -------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATIONS (0.0%)
5,199 Arch Wireless, Inc. (Class A) (c) $ 158,570
315,021 Vast Solutions, Inc. (Class B1) (c) 0
315,021 Vast Solutions, Inc. (Class B2) (c) 0
315,021 Vast Solutions, Inc. (Class B3) (c) 0
------------
158,570
------------
Total Common Stocks
(COST $296,750,122) 2,568,085
------------
Non-Convertible Preferred Stocks (2.1%)
BROADCASTING (0.8%)
540 Paxson Communications Corp.+ 4,499,080
------------
ELECTRIC UTILITIES (1.1%)
5,338 TNP Enterprises, Inc. (Series D)+ 6,392,255
------------
RESTAURANTS (0.2%)
1,337 Catalina Restaurant Group (Units)@@ 1,203,300
------------
Total Non-Convertible Preferred Stocks
(COST $12,094,253) 12,094,635
------------
<Caption>
NUMBER OF EXPIRATION
WARRANTS DATE
- --------- ----------
WARRANTS (d) (0.0%)
CASINO/GAMING (0.0%)
319,500 Aladdin Gaming Enterprises, Inc. - 144A* 03/01/10 0
23,000 Resort At Summerlin LP - 144A* 12/15/07 0
--------
0
--------
ELECTRIC UTILITIES (0.0%)
1,850 TNP Enterprises, Inc. - 144A* 04/01/11 55,962
--------
RESTAURANTS (0.0%)
4,500 American Restaurant Group Holdings, Inc. - 144A* 08/15/08 0
334,250 Catalina Restaurant Group (c) 07/10/12 0
--------
0
--------
Total Warrants
(COST $58,970) 55,962
--------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
19
<Page>
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------------
Short-Term Investments (3.3%)
Repurchase Agreements
$ 18,099 Joint repurchase agreement account
(dated 08/31/04; proceeds $18,099,789) (e) 1.57% 09/01/04 $ 18,099,000
685 The Bank of New York (dated 08/31/04; proceeds
$685,367) (f) 1.313 09/01/04 685,342
----------------
Total Short-Term Investments
(COST $18,784,342) 18,784,342
----------------
Total Investments
(COST $937,686,198) (g) 98.3% 564,992,072
Other Assets in Excess of Liabilities 1.7 9,662,850
---------- ----------------
Net Assets 100.0% $ 574,654,922
========== ================
</Table>
- ----------
* RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS.
** RESALE IS RESTRICTED, ACQUIRED 12/22/98 AT A COST BASIS OF $957,527.
*** FLOATING RATE SECURITY. RATE SHOWN IS THE RATE IN EFFECT AT AUGUST 31,
2004.
+ PAYMENT-IN-KIND SECURITY.
++ CURRENTLY A ZERO COUPON BOND AND IS SCHEDULED TO PAY INTEREST AT THE RATE
SHOWN AT A FUTURE SPECIFIED DATE.
@@ CONSISTS OF ONE OR MORE CLASS OF SECURITIES TRADED TOGETHER AS A UNIT;
PREFERRED STOCKS WITH ATTACHED WARRANTS.
(a) ISSUER IN BANKRUPTCY.
(b) NON-INCOME PRODUCING SECURITY; BOND IN DEFAULT.
(c) ACQUIRED THROUGH EXCHANGE OFFER.
(d) NON-INCOME PRODUCING SECURITIES.
(e) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(f) COLLATERALIZED BY FEDERAL NATIONAL MORTGAGE ASSOCIATION 3.862% DUE
05/01/33 VALUED AT $699,049.
(g) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $935,009,300. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $33,804,329 AND THE AGGREGATE
GROSS UNREALIZED DEPRECIATION IS $403,821,557, RESULTING IN NET
UNREALIZED DEPRECIATION OF $370,017,228.
SEE NOTES TO FINANCIAL STATEMENTS
20
<Page>
MORGAN STANLEY HIGH YIELD SECURITIES INC.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2004
<Table>
ASSETS:
Investments in securities of unaffiliated
issuers, at value (cost $934,537,558) $ 563,417,752
Investments in affiliates, at value
(cost $3,148,640) 1,574,320
Cash 74,039
Receivable for:
Interest 10,187,134
Investments sold 1,776,315
Capital stock sold 139,216
Prepaid expenses and other assets 68,497
-----------------
TOTAL ASSETS 577,237,273
-----------------
LIABILITIES:
Payable for:
Capital stock redeemed 784,916
Investments purchased 706,336
Distribution fee 270,198
Investment management fee 246,588
Accrued expenses and other payables 574,313
-----------------
TOTAL LIABILITIES 2,582,351
-----------------
NET ASSETS $ 574,654,922
=================
COMPOSITION OF NET ASSETS:
Paid-in-capital $ 2,938,761,533
Net unrealized depreciation (372,694,126)
Accumulated undistributed net
investment income 3,374,549
Accumulated net realized loss (1,994,787,034)
-----------------
NET ASSETS $ 574,654,922
=================
CLASS A SHARES:
Net Assets $ 21,595,296
Shares Outstanding (500,000,000
authorized, $.01 par value) 11,990,213
NET ASSET VALUE PER SHARE $ 1.80
=================
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 4.44% of net asset value) $ 1.88
=================
CLASS B SHARES:
Net Assets $ 360,513,139
Shares Outstanding (500,000,000
authorized, $.01 par value) 201,340,944
NET ASSET VALUE PER SHARE $ 1.79
=================
CLASS C SHARES:
Net Assets $ 37,907,023
Shares Outstanding (500,000,000
authorized, $.01 par value) 21,117,055
NET ASSET VALUE PER SHARE $ 1.80
=================
CLASS D SHARES:
Net Assets $ 154,639,464
Shares Outstanding (500,000,000
authorized, $.01 par value) 85,854,360
NET ASSET VALUE PER SHARE $ 1.80
=================
</Table>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 2004
<Table>
NET INVESTMENT INCOME:
INCOME
Interest $ 63,972,912
Dividends 1,902,304
-----------------
TOTAL INCOME 65,875,216
-----------------
EXPENSES
Investment management fee 3,163,709
Distribution fee (Class A shares) 54,817
Distribution fee (Class B shares) 3,092,805
Distribution fee (Class C shares) 375,510
Transfer agent fees and expenses 1,490,050
Professional fees 318,134
Taxes 294,900
Shareholder reports and notices 147,046
Registration fees 69,776
Custodian fees 41,116
Directors' fees and expenses 24,295
Other 38,187
-----------------
TOTAL EXPENSES 9,110,345
-----------------
NET INVESTMENT INCOME 56,764,871
-----------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss from unaffiliated issuers (199,498,302)
Realized gain from affiliates 1,897,844
-----------------
NET REALIZED LOSS (197,600,458)
-----------------
Net change in unrealized depreciation 231,685,708
-----------------
NET GAIN 34,085,250
-----------------
NET INCREASE $ 90,850,121
=================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
21
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2004 AUGUST 31, 2003
--------------- ---------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 56,764,871 $ 69,794,597
Net realized loss (197,600,458) (927,632,141)
Net change in unrealized depreciation 231,685,708 966,925,307
--------------- ---------------
NET INCREASE 90,850,121 109,087,763
--------------- ---------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A shares (2,072,654) (3,157,603)
Class B shares (25,815,474) (38,559,338)
Class C shares (2,708,149) (3,797,508)
Class D shares (11,764,739) (14,815,212)
--------------- ---------------
TOTAL DIVIDENDS (42,361,016) (60,329,661)
--------------- ---------------
Net increase (decrease) from capital stock transactions (154,957,959) 116,673,515
--------------- ---------------
NET INCREASE (DECREASE) (106,468,854) 165,431,617
NET ASSETS:
Beginning of period 681,123,776 515,692,159
--------------- ---------------
END OF PERIOD
(Including accumulated undistributed net investment income
of $3,374,549 and $162,662, respectively) $ 574,654,922 $ 681,123,776
=============== ===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
22
<Page>
MORGAN STANLEY HIGH YIELD SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2004
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley High Yield Securities Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, (the "Act") as a diversified,
open-end management investment company. The Fund's investment objective is to
earn a high level of current income. The Fund was incorporated in Maryland on
June 14, 1979 and commenced operations on September 26, 1979. On July 28, 1997,
the Fund converted to a multiple class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity portfolio security listed or traded
on the New York Stock Exchange ("NYSE") or American Stock Exchange or other
exchange is valued at its latest sale price prior to the time when assets are
valued; if there were no sales that day, the security is valued at the mean
between the last reported bid and asked price; (2) an equity portfolio security
listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price;
if there were no sales that day, the security is valued at the mean between the
last reported bid and asked price; (3) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the mean
between the last reported bid and asked price. In cases where a security is
traded on more than one exchange, the security is valued on the exchange
designated as the primary market; (4) for equity securities traded on foreign
exchanges, the last reported sale price or the latest bid price may be used if
there were no sales on a particular day; (5) when market quotations are not
readily available or Morgan Stanley Investment Advisors Inc. (the "Investment
Manager") determines that the latest sale price, the bid price or the mean
between the last reported bid and asked price do not reflect a security's market
value, portfolio securities are valued at their fair value as determined in good
faith under procedures established by and under the general supervision of the
Fund's Directors. Occasionally, developments affecting the closing prices of
securities and other assets may occur between the times at which valuations of
such securities are determined (that is, close of the foreign market on which
the securities trade) and the close of business on the NYSE. If developments
occur during such periods that are expected to materially affect the value of
such securities, such valuations may be adjusted to reflect the estimated fair
value of such securities as of the close of the NYSE, as determined in good
faith by the Fund's Directors or by the Investment Manager using a pricing
service and/or procedures approved by the Directors of the Fund; (6) certain
portfolio securities may be valued by an outside pricing service
23
<Page>
approved by the Fund's Directors; and (7) short-term debt securities having a
maturity date of more than sixty days at time of purchase are valued on a
mark-to-market basis until sixty days prior to maturity and thereafter at
amortized cost based on their value on the 61st day. Short-term debt securities
having a maturity date of sixty days or less at the time of purchase are valued
at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily except where collection
is not expected.
C. REPURCHASE AGREEMENTS -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment Manager, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements and are collateralized by
cash, U.S. Treasury or federal agency obligations. The Fund may also invest
directly with institutions in repurchase agreements. The Fund's custodian
receives the collateral, which is marked-to-market daily to determine that the
value of the collateral does not decrease below the repurchase price plus
accrued interest.
D. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
E. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
G. USE OF ESTIMATES -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, calculated daily and payable monthly, by applying the
following annual rates to the net assets of the Fund determined as of the close
of each business day: 0.50% to the portion of daily net
24
<Page>
assets not exceeding $500 million; 0.425% to the portion of daily net assets
exceeding $500 million but not exceeding $750 million; 0.375% to the portion of
daily net assets exceeding $750 million but not exceeding $1 billion; 0.35% to
the portion of daily net assets exceeding $1 billion but not exceeding $2
billion; 0.325% to the portion of daily net assets exceeding $2 billion but not
exceeding $3 billion; and 0.30% to the portion of daily net assets exceeding $3
billion.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. The Fund has adopted a
Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan
provides that the Fund will pay the Distributor a fee which is accrued daily and
paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the
average daily net assets of Class A; (ii) Class B -- up to 0.75% of the average
daily net assets of Class B; and (iii) Class C -- up to 0.85% of the average
daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Directors will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled
$58,499,934 at August 31, 2004.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.85% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Financial Advisors or other selected
broker-dealer representatives may be reimbursed in the subsequent calendar year.
For the year ended August 31, 2004, the distribution fee was accrued for Class A
shares and Class C shares at the annual rate of 0.18% and 0.85%, respectively.
The Distributor has informed the Fund that for the year ended August 31, 2004,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B shares and Class C shares of $30,579 $1,016,185
and $24,619 respectively and received $82,414 in front-end sales charges from
sales of the Fund's Class A shares. The respective shareholders pay such charges
which are not an expense of the Fund.
25
<Page>
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended August 31, 2004, aggregated
$320,528,930 and $461,872,582 respectively.
Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is
the Fund's transfer agent. At August 31, 2004, the Fund had transfer agent fees
and expenses payable of approximately $31,000.
The Fund has an unfunded noncontributory defined benefit pension plan covering
certain independent Directors of the Fund who will have served as independent
Directors for at least five years at the time of retirement. Benefits under this
plan are based on factors which include years of service and compensation.
Aggregate pension costs for the year ended August 31, 2004 included in
Director's fees and expenses in the Statement of Operations amounted to $16,312.
At August 31, 2004, the Fund had an accrued pension liability of $131,880 which
is included in accrued expenses in the Statement of Assets and Liabilities.
Effective April 1, 2004, the Fund began an unfunded Deferred Compensation Plan
(the "Compensation Plan") which allows each independent Director to defer
payment of all, or a portion, of the fees he receives for serving on the Board
of Directors. Each eligible Director generally may elect to have the deferred
amounts credited with a return equal to the total return on one or more of the
Morgan Stanley funds that are offered as investment options under the
Compensation Plan. Appreciation/depreciation and distributions received from
these investments are recorded with an offsetting increase/decrease in the
deferred compensation obligation and do not affect the net asset value of the
Fund.
An affiliated company is a company in which the Fund has ownership of at least
5% of the voting securities. Transactions with such companies during the year
ended August 31, 2004 were as follows:
<Table>
<Caption>
REALIZED
ISSUER PURCHASES SALES GAIN INCOME VALUE
- ------ ------------ ------------ ------------ ------------ ------------
Anacomp Inc. -- Class A -- $ 5,490,715 $ 365,928 -- --
Catalina Restaurant Group -- -- -- -- $ 1,574,320
Globix Corp. -- 1,634,872 1,531,916 -- --
------------ ------------ ------------ ------------ ------------
Total -- $ 7,125,587 $ 1,897,844 -- $ 1,574,320
============ ============ ============ ============ ============
</Table>
5. FUND ACQUISITIONS -- MORGAN STANLEY HIGH INCOME ADVANTAGE TRUSTS
On December 16, 2002, the Fund acquired all the net assets of Morgan Stanley
High Income Advantage Trust ("HIAT"), Morgan Stanley High Income Advantage Trust
II ("HIAT II") and Morgan Stanley High Income Advantage Trust III ("HIAT III")
based on the respective valuations as of the close of business on December 13,
2002, pursuant to three reorganization plans approved by the shareholders
26
<Page>
of HIAT, HIAT II, and HIAT III on December 10, 2002. The acquisition was
accomplished by a tax-free exchange of 16,043,676 Class D shares of the Fund at
a net asset value of $1.53 per share for 29,935,152 shares of HIAT; 21,167,160
Class D shares of the Fund at a net asset value of $1.53 per share for
35,201,907 shares of HIAT II; and 8,521,386 Class D shares of the Fund at a net
asset value of $1.53 per share for 12,782,079 shares of HIAT III. The net
assets of the Fund and HIAT, HIAT II, and HIAT III immediately before the
acquisition were $504,383,912, $24,638,052, $32,445,236, and $12,976,663,
respectively, including unrealized appreciation of $78,827,004, $102,180,638,
and $38,615,052 for HIAT, HIAT II, and HIAT III, respectively. Immediately after
the acquisition, the combined net assets of the Fund amounted to $574,443,863.
6. CAPITAL STOCK
Transactions in capital stock were as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2004 AUGUST 31, 2003
---------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------- --------------- --------------- ---------------
CLASS A SHARES
Sold 13,165,136 $ 23,468,524 39,836,992 $ 64,688,820
Reinvestment of dividends 551,791 979,557 1,022,505 1,601,355
Redeemed (24,480,351) (43,554,741) (33,475,330) (54,476,121)
--------------- --------------- --------------- ---------------
Net increase (decrease) -- Class A (10,763,424) (19,106,660) 7,384,167 11,814,054
--------------- --------------- --------------- ---------------
CLASS B SHARES
Sold 23,754,798 41,770,580 77,421,752 122,904,213
Reinvestment of dividends 6,066,686 10,706,332 9,626,091 15,003,266
Redeemed (81,860,251) (144,576,386) (73,660,925) (116,540,305)
--------------- --------------- --------------- ---------------
Net increase (decrease) -- Class B (52,038,767) (92,099,474) 13,386,918 21,367,174
--------------- --------------- --------------- ---------------
CLASS C SHARES
Sold 4,446,414 7,876,921 12,695,388 20,107,539
Reinvestment of dividends 718,053 1,269,771 1,158,259 1,809,569
Redeemed (11,044,600) (19,548,258) (8,770,002) (13,966,548)
--------------- --------------- --------------- ---------------
Net increase (decrease) -- Class C (5,880,133) (10,401,566) 5,083,645 7,950,560
--------------- --------------- --------------- ---------------
CLASS D SHARES
Sold 5,564,553 9,841,550 32,279,099 51,598,560
Reinvestment of dividends 3,657,711 6,488,162 4,850,711 7,624,480
Shares issued in connection with the acquisition
of the Morgan Stanley High Income
Advantage Trusts (See Note 5) -- -- 45,732,222 70,059,951
Redeemed (28,019,698) (49,679,971) (33,881,962) (53,741,264)
--------------- --------------- --------------- ---------------
Net increase (decrease) -- Class D (18,797,434) (33,350,259) 48,980,070 75,541,727
--------------- --------------- --------------- ---------------
Net increase (decrease) in Fund (87,479,758) $ (154,957,959) 74,834,800 $ 116,673,515
=============== =============== =============== ===============
</Table>
27
<Page>
7. FEDERAL INCOME TAX STATUS
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
The tax character of distributions paid was as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 2004 AUGUST 31, 2003
----------------- ---------------
Ordinary income $ 42,361,016 $ 60,329,661
================= ===============
</Table>
As of August 31, 2004, the tax-basis components of accumulated losses were as
follows:
<Table>
Undistributed ordinary income $ 1,679,290
Undistributed long-term gains --
-----------------
Net accumulated earnings 1,679,290
Capital loss carryforward* (1,808,879,576)
Post-October losses (185,719,271)
Temporary differences (1,169,826)
Net unrealized depreciation (370,017,228)
-----------------
Total accumulated losses $ (2,364,106,611)
=================
</Table>
*As of August 31, 2004, the Fund had a net capital loss carryforward of
$1,808,879,576 of which $39,319,363 will expire on August 31, 2005, $12,603,314
will expire on August 31, 2006, $24,919,181 will expire on August 31, 2007,
$69,856,779 will expire on August 31, 2008, $89,299,249 will expire on August
31, 2009, $245,944,739 will expire on August 31, 2010, $568,502,378 will expire
on August 31, 2011 and $758,434,573 will expire on August 31, 2012 to offset
future capital gains to the extent provided by regulations.
As part of the Fund's acquisition of the assets of HIAT, HIAT II and HIAT III
(the "HIATs"), the Fund obtained a net capital loss carryforward of $231,274,856
from the HIATs. Utilization of this carryforward is subject to limitations
imposed by the Internal Revenue Code and Treasury Regulations, reducing the
total carryforward available.
As of August 31, 2004, the Fund had temporary book/tax differences primarily
attributable to post-October losses (capital losses incurred after October 31
within the taxable year which are deemed to arise on the first business day of
the Fund's next taxable year), interest on bonds in default and book
28
<Page>
amortization of discounts on debt securities and permanent book/tax differences
primarily attributable to tax adjustments on debt securities sold by the Fund
and expired capital loss carryforwards. To reflect reclassifications arising
from the permanent differences, paid-in-capital was charged $21,804,303,
accumulated undistributed net investment income was charged $11,191,968 and
accumulated net realized loss was credited $32,996,271.
8. LEGAL MATTERS
The Investment Manager, certain affiliates of the Investment Manager, certain
officers of such affiliates and certain investment companies advised by the
Investment Manager or its affiliates, including the Fund, are named as
defendants in a number of similar class action complaints which were recently
consolidated. This consolidated action also names as defendants certain
individual Trustees and Directors of the Morgan Stanley funds. The consolidated
amended complaint generally alleges that defendants, including the Fund,
violated their statutory disclosure obligations and fiduciary duties by failing
properly to disclose (i) that the Investment Manager and certain affiliates of
the Investment Manager allegedly offered economic incentives to brokers and
others to recommend the funds advised by the Investment Manager or its
affiliates to investors rather than funds managed by other companies, and (ii)
that the funds advised by the Investment Manager or its affiliates, including
the Fund, allegedly paid excessive commissions to brokers in return for their
efforts to recommend these funds to investors. The complaint seeks, among other
things, unspecified compensatory damages, rescissionary damages, fees and costs.
The defendants have moved to dismiss the action and otherwise vigorously to
defend it. While the Fund believes that it has meritorious defenses, the
ultimate outcome of this matter is not presently determinable at this early
stage of the litigation, and no provision has been made in the Fund's financial
statements for the effect, if any, of this matter.
29
<Page>
MORGAN STANLEY HIGH YIELD SECURITIES INC.
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of capital stock outstanding
throughout each period:
<Table>
<Caption>
FOR THE YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
CLASS A SHARES:
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 1.67 $ 1.55 $ 2.32 $ 4.35 $ 5.51
------------ ------------ ------------ ------------ ------------
Income (loss) from investment operations:
Net investment income++ 0.16 0.19 0.26 0.47 0.69
Net realized and unrealized gain (loss) 0.09 0.10 (0.73) (1.99) (1.13)
------------ ------------ ------------ ------------ ------------
Total income (loss) from investment
operations 0.25 0.29 (0.47) (1.52) (0.44)
------------ ------------ ------------ ------------ ------------
Less dividends and distributions from:
Net investment income (0.12) (0.17) (0.27) (0.51) (0.72)
Paid-in-capital - - (0.03) - -
------------ ------------ ------------ ------------ ------------
Total dividends and distributions (0.12) (0.17) (0.30) (0.51) (0.72)
------------ ------------ ------------ ------------ ------------
Net asset value, end of period $ 1.80 $ 1.67 $ 1.55 $ 2.32 $ 4.35
============ ============ ============ ============ ============
TOTAL RETURN+ 15.40% 19.88% (21.70)% (37.05)% (8.88)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.03% 1.06% 0.99% 0.77% 0.70%
Net investment income 8.98% 11.96% 13.76% 15.17% 13.62%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 21,595 $ 38,072 $ 23,879 $ 36,762 $ 57,273
Portfolio turnover rate 51% 66% 39% 49% 20%
</Table>
- ----------
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE
NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
30
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
CLASS B SHARES:
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 1.67 $ 1.55 $ 2.32 $ 4.34 $ 5.50
------------ ------------ ------------ ------------ ------------
Income (loss) from investment operations:
Net investment income++ 0.15 0.18 0.25 0.46 0.66
Net realized and unrealized gain (loss) 0.08 0.10 (0.73) (1.99) (1.13)
------------ ------------ ------------ ------------ ------------
Total income (loss) from investment
operations 0.23 0.28 (0.48) (1.53) (0.47)
------------ ------------ ------------ ------------ ------------
Less dividends and distributions from:
Net investment income (0.11) (0.16) (0.26) (0.49) (0.69)
Paid-in-capital - - (0.03) - -
------------ ------------ ------------ ------------ ------------
Total dividends and distributions (0.11) (0.16) (0.29) (0.49) (0.69)
------------ ------------ ------------ ------------ ------------
Net asset value, end of period $ 1.79 $ 1.67 $ 1.55 $ 2.32 $ 4.34
============ ============ ============ ============ ============
TOTAL RETURN+ 14.15% 19.27% (22.00)% (37.27)% (9.39)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.60% 1.61% 1.56% 1.37% 1.25%
Net investment income 8.41% 11.41% 13.19% 14.57% 13.07%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 360,513 $ 422,468 $ 371,399 $ 664,706 $ 1,381,008
Portfolio turnover rate 51% 66% 39% 49% 20%
</Table>
- ----------
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE
NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
31
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
CLASS C SHARES:
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 1.67 $ 1.55 $ 2.32 $ 4.34 $ 5.51
------------ ------------ ------------ ------------ ------------
Income (loss) from investment operations:
Net investment income++ 0.15 0.18 0.25 0.45 0.66
Net realized and unrealized gain (loss) 0.09 0.10 (0.73) (1.98) (1.14)
------------ ------------ ------------ ------------ ------------
Total income (loss) from investment
operations 0.24 0.28 (0.48) (1.53) (0.48)
------------ ------------ ------------ ------------ ------------
Less dividends and distributions from:
Net investment income (0.11) (0.16) (0.26) (0.49) (0.69)
Paid-in-capital - - (0.03) - -
------------ ------------ ------------ ------------ ------------
Total dividends and distributions (0.11) (0.16) (0.29) (0.49) (0.69)
------------ ------------ ------------ ------------ ------------
Net asset value, end of period $ 1.80 $ 1.67 $ 1.55 $ 2.32 $ 4.34
============ ============ ============ ============ ============
TOTAL RETURN+ 14.65% 19.14% (22.11)% (37.24)% (9.66)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.70% 1.71% 1.66% 1.47% 1.35%
Net investment income 8.31% 11.31% 13.09% 14.47% 12.97%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 37,907 $ 45,114 $ 33,978 $ 49,818 $ 86,951
Portfolio turnover rate 51% 66% 39% 49% 20%
</Table>
- ----------
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE
NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
32
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
CLASS D SHARES:
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 1.68 $ 1.55 $ 2.32 $ 4.35 $ 5.51
------------ ------------ ------------ ------------ ------------
Income (loss) from investment operations:
Net investment income++ 0.16 0.19 0.26 0.48 0.70
Net realized and unrealized gain (loss) 0.08 0.11 (0.73) (1.99) (1.13)
------------ ------------ ------------ ------------ ------------
Total income (loss) from investment
operations 0.24 0.30 (0.47) (1.51) (0.43)
------------ ------------ ------------ ------------ ------------
Less dividends and distributions from:
Net investment income (0.12) (0.17) (0.27) (0.52) (0.73)
Paid-in-capital - - (0.03) - -
------------ ------------ ------------ ------------ ------------
Total dividends and distributions (0.12) (0.17) (0.30) (0.52) (0.73)
------------ ------------ ------------ ------------ ------------
Net asset value, end of period $ 1.80 $ 1.68 $ 1.55 $ 2.32 $ 4.35
============ ============ ============ ============ ============
TOTAL RETURN+ 14.93% 20.82% (21.45)% (36.95)% (8.69)%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 0.85% 0.86% 0.81% 0.62% 0.50%
Net investment income 9.16% 12.16% 13.94% 15.32% 13.82%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 154,639 $ 175,471 $ 86,436 $ 137,319 $ 246,941
Portfolio turnover rate 51% 66% 39% 49% 20%
</Table>
- ----------
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE
PERIOD.
(1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
33
<Page>
MORGAN STANLEY HIGH YIELD SECURITIES INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND BOARD OF
DIRECTORS OF MORGAN STANLEY HIGH YIELD SECURITIES INC.:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley High Yield Securities Inc. (the "Fund"), including the portfolio of
investments, as of August 31, 2004, and the related statements of operations for
the year then ended and changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of August 31, 2004, by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley High Yield Securities Inc. as of August 31, 2004, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche LLP
NEW YORK, NEW YORK
OCTOBER 19, 2004
34
<Page>
MORGAN STANLEY HIGH YIELD SECURITIES INC.
DIRECTOR AND OFFICER INFORMATION
INDEPENDENT DIRECTORS:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT DIRECTOR REGISTRANT TIME SERVED* PAST 5 YEARS** BY DIRECTOR*** HELD BY DIRECTOR
- ------------------------------------ ----------- ------------- ------------------------------ -------------- --------------------
Michael Bozic (63) Director Since Private Investor; Director or 208 Director of Weirton
c/o Kramer Levin Naftalis & April 1994 Trustee of the Retail Funds Steel Corporation.
Frankel LLP (since April 1994) and the
Counsel to the Independent Directors Institutional Funds (since
919 Third Avenue July 2003); formerly Vice
New York, NY Chairman of Kmart Corporation
(December 1998-October 2000),
Chairman and Chief Executive
Officer of Levitz Furniture
Corporation (November 1995-
November 1998) and President
and Chief Executive Officer of
Hills Department Stores (May
1991-July 1995); formerly
variously Chairman, Chief
Executive Officer, President
and Chief Operating Officer
(1987-1991) of the Sears
Merchandise Group of Sears,
Roebuck & Co.
Edwin J. Garn (71) Director Since Managing Director of Summit 208 Director of Franklin
c/o Summit Ventures LLC January 1993 Ventures LLC; Director or Covey (time
1 Utah Center Trustee of the Retail Funds management systems),
201 S. Main Street (since January 1993) and the BMW Bank of North
Salt Lake City, UT Institutional Funds (since America, Inc.
July 2003); member of the Utah (industrial loan
Regional Advisory Board of corporation), United
Pacific Corp.; formerly United Space Alliance
States Senator (R-Utah) (joint venture
(1974-1992) and Chairman, between Lockheed
Senate Banking Committee Martin and the
(1980-1986), Mayor of Salt Boeing Company) and
Lake City, Utah (1971-1974), Nuskin Asia Pacific
Astronaut, Space Shuttle (multilevel
Discovery (April 12-19, 1985), marketing); member
and Vice Chairman, Huntsman of the board of
Corporation (chemical various civic and
company). charitable
organizations.
Wayne E. Hedien (70) Director Since Retired; Director or Trustee 208 Director of The PMI
c/o Kramer Levin Naftalis & September of the Retail Funds (since Group Inc. (private
Frankel LLP 1997 September 1997) and the mortgage insurance);
Counsel to the Independent Directors Institutional Funds (since Trustee and Vice
919 Third Avenue July 2003); formerly Chairman of The
New York, NY associated with the Allstate Field Museum of
Companies (1966-1994), most Natural History;
recently as Chairman of The director of various
Allstate Corporation (March other business and
1993-December 1994) and charitable
Chairman and Chief Executive organizations.
Officer of its whollyowned
subsidiary, Allstate Insurance
Company (July 1989-December
1994).
</Table>
35
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT DIRECTOR REGISTRANT TIME SERVED* PAST 5 YEARS** BY DIRECTOR*** HELD BY DIRECTOR
- ------------------------------------ ----------- ------------- ------------------------------ -------------- --------------------
Dr. Manuel H. Johnson (55) Director Since Senior Partner, Johnson Smick 208 Director of NVR,
c/o Johnson Smick International, July 1991 International, Inc., a Inc. (home
Inc. consulting firm; Chairman of construction);
2099 Pennsylvania Avenue, N.W. the Audit Committee and Chairman and Trustee
Suite 950 Director or Trustee of the of the Financial
Washington, D.C. Retail Funds (since July 1991) Accounting
and the Institutional Funds Foundation
(since July 2003); Co-Chairman (oversight
and a founder of the Group of organization of the
Seven Council (G7C), an Financial Accounting
international economic Standards Board);
commission; formerly Vice Director of RBS
Chairman of the Board of Greenwich Capital
Governors of the Federal Holdings (financial
Reserve System and Assistant holding company).
Secretary of the U.S.
Treasury.
Joseph J. Kearns (62) Director Since President, Kearns & Associates 209 Director of Electro
PMB754 July 2003 LLC (investment consulting); Rent Corporation
23852 Pacific Coast Highway Deputy Chairman of the Audit (equipment leasing),
Malibu, CA Committee and Director or The Ford Family
Trustee of the Retail Funds Foundation, and the
(since July 2003) and the UCLA Foundation.
Institutional Funds (since
August 1994); previously
Chairman of the Audit
Committee of the Institutional
Funds (October 2001-July
2003); formerly CFO of the J.
Paul Getty Trust.
Michael E. Nugent (68) Director Since General Partner of Triumph 208 Director of various
c/o Triumph Capital, L.P. July 1991 Capital, L.P., a private business
445 Park Avenue investment partnership; organizations.
New York, NY Chairman of the Insurance
Committee and Director or
Trustee of the Retail Funds
(since July 1991) and the
Institutional Funds (since
July 2001); formerly Vice
President, Bankers Trust
Company and BT Capital
Corporation (1984-1988).
Fergus Reid (72) Director Since Chairman of Lumelite Plastics 209 Trustee and Director
c/o Lumelite Plastics Corporation July 2003 Corporation; Chairman of the of certain
85 Charles Colman Blvd. Governance Committee and investment companies
Pawling, NY Director or Trustee of the in the JPMorgan
Retail Funds (since July 2003) Funds complex
and the Institutional Funds managed by J.P.
(since June 1992). Morgan Investment
Management Inc.
</Table>
36
<Page>
Interested Directors:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS
INTERESTED DIRECTOR REGISTRANT TIME SERVED* PAST 5 YEARS** BY DIRECTOR*** HELD BY DIRECTOR
- ------------------------------------ ----------- ------------- ------------------------------ -------------- --------------------
Charles A. Fiumefreddo (71) Chairman of Since Chairman and Director or 208 None
c/o Morgan Stanley Trust the Board July 1991 Trustee of the Retail Funds
Harborside Financial Center, and (since July 1991) and the
Plaza Two, Director Institutional Funds (since
Jersey City, NJ July 2003); formerly Chief
Executive Officer of the
Retail Funds (until September
2002).
James F. Higgins (56) Director Since Director or Trustee of the 208 Director of AXA
c/o Morgan Stanley Trust June 2000 Retail Funds (since June 2000) Financial, Inc. and
Harborside Financial Center, and the Institutional Funds The Equitable Life
Plaza Two, (since July 2003); Senior Assurance Society of
Jersey City, NJ Advisor of Morgan Stanley the United States
(since August 2000); Director (financial
of the Distributor and Dean services).
Witter Realty Inc.; previously
President and Chief Operating
Officer of the Private Client
Group of Morgan Stanley (May
1999-August 2000), and
President and Chief Operating
Officer of Individual
Securities of Morgan Stanley
(February 1997-May 1999).
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE DIRECTOR BEGAN SERVING THE FUNDS ADVISED BY
MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT MANAGER") (THE
"RETAIL FUNDS").
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICES AS
DIRECTOR/TRUSTEE FOR THE RETAIL FUNDS AND THE FUNDS ADVISED BY MORGAN
STANLEY INVESTMENT MANAGEMENT INC. AND MORGAN STANLEY AIP GP LP (THE
"INSTITUTIONAL FUNDS") REFLECT THE EARLIEST DATE THE DIRECTOR/TRUSTEE BEGAN
SERVING THE RETAIL OR INSTITUTIONAL FUNDS AS APPLICABLE.
*** THE FUND COMPLEX INCLUDES ALL OPEN-END AND CLOSED-END FUNDS (INCLUDING ALL
OF THEIR PORTFOLIOS) ADVISED BY THE INVESTMENT MANAGER AND ANY FUNDS THAT
HAVE AN INVESTMENT ADVISOR THAT IS AN AFFILIATED PERSON OF THE INVESTMENT
MANAGER (INCLUDING BUT NOT LIMITED TO MORGAN STANLEY INVESTMENT MANAGEMENT
INC.).
37
<Page>
OFFICERS:
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ------------------------------------ ------------------- --------------------- -----------------------------------------------
Mitchell M. Merin (51) President Since May 1999 President and Chief Operating Officer of Morgan
1221 Avenue of the Americas Stanley Investment Management Inc.; President,
New York, NY Director and Chief Executive Officer of the
Investment Manager and Morgan Stanley Services;
Chairman and Director of the Distributor;
Chairman and Director of the Transfer Agent;
Director of various Morgan Stanley
subsidiaries; President of the Institutional
Funds (since July 2003) and President of the
Retail Funds (since May 1999); Trustee (since
July 2003) and President (since December 2002)
of the Van Kampen Closed-End Funds; Trustee
(since May 1999) and President (since October
2002) of the Van Kampen Open-End Funds.
Barry Fink (49) Vice President Since General Counsel (since May 2000) and Managing
1221 Avenue of the Americas February 1997 Director (since December 2000) of Morgan
New York, NY Stanley Investment Management; Managing
Director (since December 2000), Secretary
(since February 1997) and Director (since July
1998) of the Investment Manager and Morgan
Stanley Services; Vice President of the Retail
Funds; Assistant Secretary of Morgan Stanley
DW; Vice President of the Institutional Funds
(since July 2003); Managing Director, Secretary
and Director of the Distributor; previously
Secretary (February 1997-July 2003) and
General Counsel (February 1997-April 2004) of
the Retail Funds; Vice President and Assistant
General Counsel of the Investment Manager and
Morgan Stanley Services (February 1997-December
2001).
Ronald E. Robison (65) Executive Vice Since Principal Executive Officer-Office of the Funds
1221 Avenue of the Americas President and April 2003 (since November 2003); Managing Director of
New York, NY Principal Executive Morgan Stanley & Co. Incorporated, Managing
Officer Director of Morgan Stanley; Managing Director,
Chief Administrative Officer and Director of
the Investment Manager and Morgan Stanley
Services; Chief Executive Officer and Director
of the Transfer Agent; Managing Director and
Director of the Distributor; Executive Vice
President and Principal Executive Officer of
the Institutional Funds (since July 2003) and
the Retail Funds (since April 2003); Director
of Morgan Stanley SICAV (since May 2004);
previously President and Director of the Retail
Funds (March 2001-July 2003) and Chief Global
Operations Officer and Managing Director of
Morgan Stanley Investment Management Inc.
Joseph J. McAlinden (61) Vice President Since July 1995 Managing Director and Chief Investment Officer
1221 Avenue of the Americas of the Investment Manager and Morgan Stanley
New York, NY Investment Management Inc., Director of the
Transfer Agent, Chief Investment Officer of the
Van Kampen Funds; Vice President of the
Institutional Funds (since July 2003) and the
Retail Funds (since July 1995).
Amy R. Doberman (42) Vice President Since July 2004 Managing Director and General Counsel, U.S.
1221 Avenue of the Americas Investment Management; Managing Director of
New York, NY Morgan Stanley Investment Management Inc. and
the Investment Manager, Vice President of the
Institutional and Retail Funds (since July
2004); previously, Managing Director and
General Counsel - Americas, UBS Global Asset
Management (July 2000 - July 2004) and General
Counsel, Aeltus Investment Management, Inc.
(January 1997 - July 2000).
Stefanie V. Chang (37) Vice President Since July 2003 Executive Director of Morgan Stanley & Co.
1221 Avenue of the Americas Incorporated, Morgan Stanley Investment
New York, NY Management Inc., and the Investment Manager;
Vice President of the Institutional Funds
(since December 1997) and the Retail Funds
(since July 2003); formerly practiced law with
the New York law firm of Rogers & Wells (now
Clifford Chance US LLP).
</Table>
38
<Page>
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ------------------------------------ ------------------- --------------------- -----------------------------------------------
Francis J. Smith (39) Treasurer and Treasurer since Executive Director of the Investment Manager
c/o Morgan Stanley Trust Chief Financial July 2003 and and Morgan Stanley Services (since December
Harborside Financial Center, Officer Chief Financial 2001); previously, Vice President of the
Plaza Two, Officer since Retail Funds (September 2002-July 2003), and
Jersey City, NJ September 2002 Vice President of the Investment Manager and
Morgan Stanley Services (August 2000-November
2001) and Senior Manager at
PricewaterhouseCoopers LLP (January
1998-August 2000).
Thomas F. Caloia (58) Vice President Since July 2003 Executive Director (since December 2002) and
c/o Morgan Stanley Trust Assistant Treasurer of the Investment Manager,
Harborside Financial Center, the Distributor and Morgan Stanley Services;
Plaza Two, previously Treasurer of the Retail Funds
Jersey City, NJ (April 1989-July 2003); formerly First Vice
President of the Investment Manager, the
Distributor and Morgan Stanley Services.
Mary E. Mullin (37) Secretary Since July 2003 Executive Director of Morgan Stanley & Co.
1221 Avenue of the Americas Incorporated, Morgan Stanley Investment
New York, NY Management Inc. and the Investment Manager;
Secretary of the Institutional Funds (since
June 1999) and the Retail Funds (since July
2003); formerly practiced law with the New
York law firms of McDermott, Will & Emery and
Skadden, Arps, Slate, Meagher & Flom LLP.
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL FUNDS. EACH
OFFICER SERVES AN INDEFINITE TERM, UNTIL HIS OR HER SUCCESSOR IS ELECTED.
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICE AS AN OFFICER
FOR THE RETAIL AND INSTITUTIONAL FUNDS REFLECT THE EARLIEST DATE THE
OFFICER BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS AS APPLICABLE.
39
<Page>
DIRECTORS
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Fergus Reid
OFFICERS
Charles A. Fiumefreddo
CHAIRMAN OF THE BOARD
Mitchell M. Merin
PRESIDENT
Ronald E. Robison
EXECUTIVE VICE PRESIDENT and PRINCIPAL EXECUTIVE OFFICER
Barry Fink
VICE PRESIDENT
Joseph J. McAlinden
VICE PRESIDENT
Amy R. Doberman
VICE PRESIDENT
Stefanie V. Chang
VICE PRESIDENT
Francis J. Smith
TREASURER and CHIEF FINANCIAL OFFICER
Thomas F. Caloia
VICE PRESIDENT
Mary E. Mullin
SECRETARY
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT MANAGER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
This report is submitted for the general information of the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its directors. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Distributors Inc., member NASD.
(C) 2004 Morgan Stanley
[MORGAN STANLEY LOGO]
37915RPT-RA04-00639P-Y08/04
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY
HIGH YIELD SECURITIES
ANNUAL REPORT
AUGUST 31, 2004
[MORGAN STANLEY LOGO]
<Page>
Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies
to its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the Fund or a third
party.
(b) No information need be disclosed pursuant to this paragraph.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Fund's Board of Directors has determined that it has two "audit committee
financial experts" serving on its audit committee, each of whom are
"independent" Directors: Dr. Manuel H. Johnson and Joseph J. Kearns. Under
applicable securities laws, a person who is determined to be an audit committee
financial expert will not be deemed an "expert" for any purpose, including
without limitation for the purposes of Section 11 of the Securities Act of 1933,
as a result of being designated or identified as an audit committee financial
expert. The designation or identification of a person as an audit committee
financial expert does not impose on such person any duties, obligations, or
liabilities that are greater than the duties, obligations, and liabilities
imposed on such person as a member of the audit committee and Board of Directors
in the absence of such designation or identification.
<Page>
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2004
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 44,630 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 452(2) $ 5,067,400(2)
TAX FEES $ 5,313(3) $ 545,053(4)
ALL OTHER FEES $ - $ -
TOTAL NON-AUDIT FEES $ 5,765 $ 5,612,453
TOTAL $ 50,395 $ 5,612,453
</Table>
2003
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 42,230 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 9,684(2) $ 1,086,576(2)
TAX FEES $ 5,375(3) $ 252,500(4)
ALL OTHER FEES $ - $ -(5)
TOTAL NON-AUDIT FEES $ 15,059 $ 1,339,076
TOTAL $ 57,289 $ 1,339,076
</Table>
N/A- Not applicable, as not required by Item 4.
(1) Covered Entities include the Adviser (excluding sub-advisors) and any
entity controlling, controlled by or under common control with the
Adviser that provides ongoing services to the Registrant.
(2) Audit-Related Fees represent assurance and related services provided
that are reasonably related to the performance of the audit of the
financial statements of the Covered Entities' and funds advised by the
Adviser or its affiliates, specifically data verification and
agreed-upon procedures related to asset securitizations and
agreed-upon procedures engagements.
(3) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the preparation and review of the
Registrant's tax returns.
(4) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the review of Covered Entities'
tax returns.
(5) All other fees represent project management for future business
applications and improving business and operational processes.
2
<Page>
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED JULY 31, 2003(1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.
The SEC has issued rules specifying the types of services that an
independent auditor may not provide to its audit client, as well as the audit
committee's administration of the engagement of the independent auditor. The
SEC's rules establish two different approaches to pre-approving services, which
the SEC considers to be equally valid. Proposed services either: may be
pre-approved without consideration of specific case-by-case services by the
Audit Committee ("GENERAL PRE-APPROVAL"); or require the specific pre-approval
of the Audit Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit
Committee believes that the combination of these two approaches in this Policy
will result in an effective and efficient procedure to pre-approve services
performed by the Independent Auditors. As set forth in this Policy, unless a
type of service has received general pre-approval, it will require specific
pre-approval by the Audit Committee (or by any member of the Audit Committee to
which pre-approval authority has been delegated) if it is to be provided by the
Independent Auditors. Any proposed services exceeding pre-approved cost levels
or budgeted amounts will also require specific pre-approval by the Audit
Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and
All Other services that have the general pre-approval of the Audit Committee.
The term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers and provides a different period and states
otherwise. The Audit Committee will annually review and pre-approve the services
that may be provided by the Independent Auditors without obtaining specific
pre-approval from the Audit Committee. The Audit Committee will add to or
subtract from the list of general pre-approved services from time to time, based
on subsequent determinations.
- ----------
(1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and
Procedures (the "POLICY"), adopted as of the date above, supercedes and
replaces all prior versions that may have been adopted from time to time.
<Page>
The purpose of this Policy is to set forth the policy and procedures by
which the Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committee's responsibilities to pre-approve services
performed by the Independent Auditors to management.
The Fund's Independent Auditors have reviewed this Policy and believes that
implementation of the Policy will not adversely affect the Independent Auditors'
independence.
2. DELEGATION
As provided in the Act and the SEC's rules, the Audit Committee may
delegate either type of pre-approval authority to one or more of its members.
The member to whom such authority is delegated must report, for informational
purposes only, any pre-approval decisions to the Audit Committee at its next
scheduled meeting.
3. AUDIT SERVICES
The annual Audit services engagement terms and fees are subject to the
specific pre-approval of the Audit Committee. Audit services include the annual
financial statement audit and other procedures required to be performed by the
Independent Auditors to be able to form an opinion on the Fund's financial
statements. These other procedures include information systems and procedural
reviews and testing performed in order to understand and place reliance on the
systems of internal control, and consultations relating to the audit. The Audit
Committee will approve, if necessary, any changes in terms, conditions and fees
resulting from changes in audit scope, Fund structure or other items.
In addition to the annual Audit services engagement approved by the Audit
Committee, the Audit Committee may grant general pre-approval to other Audit
services, which are those services that only the Independent Auditors reasonably
can provide. Other Audit services may include statutory audits and services
associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4,
etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings.
The Audit Committee has pre-approved the Audit services in Appendix B.1.
All other Audit services not listed in Appendix B.1 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
4. AUDIT-RELATED SERVICES
<Page>
Audit-related services are assurance and related services that are
reasonably related to the performance of the audit or review of the Fund's
financial statements and, to the extent they are Covered Services, the Covered
Entities or that are traditionally performed by the Independent Auditors.
Because the Audit Committee believes that the provision of Audit-related
services does not impair the independence of the auditor and is consistent with
the SEC's rules on auditor independence, the Audit Committee may grant general
pre-approval to Audit-related services. Audit-related services include, among
others, accounting consultations related to accounting, financial reporting or
disclosure matters not classified as "Audit services"; assistance with
understanding and implementing new accounting and financial reporting guidance
from rulemaking authorities; agreed-upon or expanded audit procedures related to
accounting and/or billing records required to respond to or comply with
financial, accounting or regulatory reporting matters; and assistance with
internal control reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in Appendix
B.2. All other Audit-related services not listed in Appendix B.2 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide Tax
services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing
the auditor's independence, and the SEC has stated that the Independent Auditors
may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved
the Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
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The Audit Committee has pre-approved the All Other services in Appendix
B.4. Permissible All Other services not listed in Appendix B.4 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be provided
by the Independent Auditors will be established annually by the Audit Committee.
Any proposed services exceeding these levels or amounts will require specific
pre-approval by the Audit Committee. The Audit Committee is mindful of the
overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.
8. PROCEDURES
All requests or applications for services to be provided by the Independent
Auditors that do not require specific approval by the Audit Committee will be
submitted to the Fund's Chief Financial Officer and must include a detailed
description of the services to be rendered. The Fund's Chief Financial Officer
will determine whether such services are included within the list of services
that have received the general pre-approval of the Audit Committee. The Audit
Committee will be informed on a timely basis of any such services rendered by
the Independent Auditors. Requests or applications to provide services that
require specific approval by the Audit Committee will be submitted to the Audit
Committee by both the Independent Auditors and the Fund's Chief Financial
Officer, and must include a joint statement as to whether, in their view, the
request or application is consistent with the SEC's rules on auditor
independence.
The Audit Committee has designated the Fund's Chief Financial Officer to
monitor the performance of all services provided by the Independent Auditors and
to determine whether such services are in compliance with this Policy. The
Fund's Chief Financial Officer will report to the Audit Committee on a periodic
basis on the results of its monitoring. Both the Fund's Chief Financial Officer
and management will immediately report to the chairman of the Audit Committee
any breach of this Policy that comes to the attention of the Fund's Chief
Financial Officer or any member of management.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an annual
basis to meet its responsibility to oversee the work of the Independent Auditors
and to assure the auditor's independence from the Fund, such as reviewing a
formal written statement from the Independent Auditors delineating all
relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No.
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1, and discussing with the Independent Auditors its methods and procedures for
ensuring independence.
10. COVERED ENTITIES
Covered Entities include the Fund's investment adviser(s) and any entity
controlling, controlled by or under common control with the Fund's investment
adviser(s) that provides ongoing services to the Fund(s). Beginning with
non-audit service contracts entered into on or after May 6, 2003, the Fund's
audit committee must pre-approve non-audit services provided not only to the
Fund but also to the Covered Entities if the engagements relate directly to the
operations and financial reporting of the Fund. This list of Covered Entities
would include:
MORGAN STANLEY RETAIL FUNDS
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management
Morgan Stanley Investments LP
Van Kampen Asset Management Inc.
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
MORGAN STANLEY INSTITUTIONAL FUNDS
Morgan Stanley Investment Management Inc.
Morgan Stanley Investments LP
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after May
6, 2003, the audit committee also is required to pre-approve services to Covered
Entities to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Registrant. 100% of such
services were pre-approved by the audit committee pursuant to the Audit
Committee's pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Directors has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and
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Covered Entities is compatible with maintaining the auditors' independence in
performing audit services.
Item 5. Audit Committee of Listed Registrants.
Applicable only for reports covering periods ending on or after the earlier of
(i) the first annual shareholder meeting after January 15, 2004 or (ii) October
31, 2004.
Item 6. Schedule of Investments
Refer to Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Applicable only to annual reports filed by closed-end funds.
Item 8. Closed-End Fund Repurchases
Applicable to reports filed by closed-end funds.
Item 9. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 10 - Controls and Procedures
(a) The Fund's principal executive officer and principal financial officer
have concluded that the Fund's disclosure controls and procedures are
sufficient to ensure that information required to be disclosed by the Fund
in this Form N-CSR was recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms, based upon such officers' evaluation of these controls and procedures as
of a date within 90 days of the filing date of the report.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Fund's internal
controls or in other factors that could significantly affect the Fund's
internal controls subsequent to the date of their evaluation.
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(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 11 Exhibits
(a) The Code of Ethics for Principal Executive and Senior Financial Officers is
attached hereto.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley High Yield Securities Inc.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
October 20, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
October 20, 2004
/s/ Francis Smith
Francis Smith
Principal Financial Officer
October 20, 2004