N-30D 1 y64445nv30d.txt ANNUAL REPORT Morgan Stanley High Income Advantage Trust LETTER TO THE SHAREHOLDERS - SEPTEMBER 30, 2002 Dear Shareholder: The 12 months ended September 30, 2002, were extremely volatile for the high-yield market. The terrorist attacks of September 11, 2001, had a profound effect on the economy as well as the fixed-income and equity markets. A flight-to-quality mentality emerged, pushing equities and high-yield security prices sharply lower. However, the high-yield market bounced back over the next seven months. The economic recovery early in 2002 contributed to the improved tone of the market, and strong flows of some $9 billion into the high-yield asset class in January through May pushed prices higher. However, the high-yield market weakened again during the balance of this review period as the economy slowed and accounting scandals at WorldCom and other companies shocked market participants. WorldCom reported that it had misclassified nearly $3.9 billion in costs, and later announced additional improprieties. This announcement caused the market to fall significantly in late June as investor confidence eroded. The strong inflows into the high-yield asset class stopped as investors withdrew approximately $2 billion in June and July. The size of these net redemptions led to sales by mutual funds and dealers, further lowering prices. There was a short-lived rebound in the second half of August, but the high-yield market saw large outflows in September and the market turned down again to end the period. On balance, credit spreads in the high-yield market relative to U.S. Treasury securities widened to historically wide levels. Spreads especially widened within the lower-rated portion of the high-yield market as investors continued to prefer investments in the relatively higher-quality end of the marketplace. In addition, bonds in sectors related to telecommunications, cable and utilities performed poorly as investors continued to be concerned about accounting scandals and slower economic growth going forward. Performance and Portfolio Strategy For the 12-month period ended September 30, 2002, Morgan Stanley High Income Advantage Trust's net asset value (NAV) declined from $1.11 per share on September 30, 2001, to $0.83 per share on September 30, 2002. Based on this change, plus the reinvestment of distributions totaling $0.158 per share, the Trust's total return for the period was -13.53 percent. For the same period, the Trust's market price on the New York Stock Exchange declined from $1.30 per share on September 30, 2001, to $0.81 per share on September 30, 2002. Based on this change, plus the reinvestment of distributions, the Trust's total return for the period was -27.95 percent. Morgan Stanley High Income Advantage Trust LETTER TO THE SHAREHOLDERS - SEPTEMBER 30, 2002 continued The past three years have been one of the most difficult periods for the high-yield market. As a result of the substantial weakness in the market, high-yield bond prices have declined sharply and yields have risen over much of this period. The Trust's positions in the lower-rated portion of the market and in communications-related industries have been adversely affected. The last five months represented an extension of these difficulties. The Trust's allocations in the fixed-line communications, wireless communications and cable industries contributed to its disappointing performance during the review period. Fixed-line communications and cable were down by more than 30 percent, and wireless was down 25 percent over the past 12 months, underperforming the rest of the high-yield market. These industries experienced slower revenue growth, higher default rates and many rating downgrades, factors that led to lower prices for most bonds in these industries and thus adversely affecting performance. Performance was helped by the higher-quality bonds added to the portfolio over the past year, particularly those in the housing and health-care sectors, which performed better than most others in the high-yield market. Finally, an underweighting of the utilities sector helped mitigate losses when this sector came under pressure as a result of accounting concerns. Over the course of the fiscal year, the Trust's portfolio management team continued to reposition the portfolio for the current market environment. New positions were initiated in many companies, including Starwood Hotels, Collins and Aikman, AutoNation, Dana Corporation, Venetian, Intermet, Metaldyne and Foamex. The team increased the Trust's overall credit quality by buying BB-rated and BBB-rated securities and decreasing its exposure to telecommunications- related industries. At fiscal year-end the Trust was overweighted toward manufacturing, wireline communications, wireless communications and media, as well as housing. Underweighted positions included consumer products and retailing. The Trust's portfolio management team believes that consumer spending is likely to lag the growth of the overall economy. The Trust also is underweighted toward aerospace, as a result of slow demand in travel. Agreement and Plan of Reorganization On July 25, 2002, the Trust's Board of Trustees approved to an Agreement and Plan of Reorganization, pursuant to which, substantially all the assets of the Trust would be combined with the assets of Morgan Stanley High Yield Securities, effectively open-ending the Trust. Shareholders of the Trust would receive Class D shares of Morgan Stanley High Yield Securities 2 Morgan Stanley High Income Advantage Trust LETTER TO THE SHAREHOLDERS - SEPTEMBER 30, 2002 continued with a value equal to the net asset value of their respective holdings in the Trust. If shareholders of the Trust approve the Agreement and Plan of Reorganization, they would become Class D shareholders of Morgan Stanley High Yield Securities and the shares of the Trust will no longer be listed or traded on the New York Stock Exchange. The approval of the shareholders of Morgan Stanley High Yield Securities is not required. The Agreement and Plan of Reorganization will be submitted to shareholders of the Trust at a special meeting presently scheduled to take place in December 2002. A proxy statement formally detailing the Agreement and Plan of Reorganization was mailed to shareholders in early October. Morgan Stanley High Income Advantage Trust and Morgan Stanley High Yield Securities are managed by Morgan Stanley Investment Advisors Inc.'s High Yield team. Looking Ahead The high-yield market is trading at spreads very close to the historical wide levels seen more than a decade ago. These levels are indicative of a long recessionary period with continued high default rates. Although the spread widening that has occurred over the last few months makes the market look attractive, it is uncertain how long it will take to restore investor confidence. To some extent the high-yield market's returns will depend on whether the economy continues its recovery without an intervening contraction. We believe that the economy will continue on the path of recovery and that investor confidence will recover with it over the coming months. Although timing the high-yield market's turnaround is hard to predict, our long-term outlook for the asset class remains positive. We would like to remind you that the Trustees have approved a procedure whereby the Trust may, when appropriate, repurchase shares in the open market or in privately negotiated transactions at a price not above market value or net asset value, whichever is lowest at the time of purchase. 3 Morgan Stanley High Income Advantage Trust LETTER TO THE SHAREHOLDERS - SEPTEMBER 30, 2002 continued We appreciate your ongoing support of Morgan Stanley High Income Advantage Trust and look forward to continuing to serve your investment needs. Very truly yours, /s/ CHARLES A. FIUMEFREDDO /s/ MITCHELL M. MERIN Charles A. Fiumefreddo Mitchell M. Merin Chairman of the Board President and CEO
4 Morgan Stanley High Income Advantage Trust PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2002
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE --------------------------------------------------------------------------------------------------------- Corporate Bonds (87.7%) Advertising/Marketing Services (0.6%) $ 165 Interep National Radio Sales, Inc. (Series B)............. 10.00 % 07/01/08 $ 146,025 ----------- Aerospace & Defense (0.4%) 435 Loral Space & Communications Ltd. ........................ 9.50 01/15/06 108,750 ----------- Airlines (0.6%) 295 Air Canada Corp. (Canada)................................. 10.25 03/15/11 160,775 ----------- Alternative Power Generation (0.3%) 180 Calpine Corp. ............................................ 8.50 02/15/11 73,800 ----------- Auto Parts: O.E.M. (4.9%) 65 Arvinmeritor, Inc. ....................................... 8.75 03/01/12 69,908 75 Collins & Aikman Products Co. ............................ 11.50 04/15/06 68,250 180 Collins & Aikman Products Co. ............................ 10.75 12/31/11 171,900 355 Dana Corp. ............................................... 9.00 08/15/11 332,812 105 Dura Operating Corp. (Series B)........................... 8.625 04/15/12 103,950 175 Intermet Corp. ........................................... 9.75 06/15/09 166,250 75 Lear Corp. (Series B)..................................... 8.11 05/15/09 77,625 140 Metaldyne Corp. - 144A*................................... 11.00 06/15/12 120,400 110 Stoneridge, Inc. ......................................... 11.50 05/01/12 112,200 ----------- 1,223,295 ----------- Broadcast/Media (1.5%) 520 Tri-State Outdoor Media Group, Inc. (b)................... 11.00 05/15/08 375,050 ----------- Broadcasting (1.5%) 190 Salem Communications Holdings Corp. (Series B)............ 9.00 07/01/11 195,700 120 XM Satellite Radio Inc. .................................. 14.00 03/15/10 50,400 130 Young Broadcasting Inc. .................................. 10.00 03/01/11 117,000 ----------- 363,100 ----------- Cable/Satellite TV (4.9%) 7,000 Australis Holdings Property Ltd. (Australia) (a)(b)....... 15.00 11/01/02 0 295 British Sky Broadcasting Group PLC (United Kingdom)....... 8.20 07/15/09 299,424 435 Callahan Nordrhein Westfalen (Germany) (a)(b)............. 14.00 07/15/10 11,419 530 Charter Communications Holdings Corp./Charter Capital..... 11.75++ 05/15/11 185,500 295 Echostar DBS Corp. - 144A*................................ 9.125 01/15/09 277,300 715 Knology Holdings, Inc. ................................... 11.875++ 10/15/07 250,250
See Notes to Financial Statements 5 Morgan Stanley High Income Advantage Trust PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2002 continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE --------------------------------------------------------------------------------------------------------- $ 300 Ono Finance PLC (United Kingdom).......................... 14.00% 02/15/11 $ 66,000 45 Pegasus Communications Corp. (Series B)................... 9.75 12/01/06 20,250 350 Telewest Communications PLC (United Kingdom).............. 9.875 02/01/10 61,250 685 United Pan Europe Communications N.V. (Series B) (Netherlands) (b)....................................... 10.875 08/01/09 20,550 ----------- 1,191,943 ----------- Casino/Gaming (3.2%) 1,800 Aladdin Gaming Holdings/Capital Corp. (Series B).......... 13.50++ 03/01/10 36,000 115 Harrahs Operating Co., Inc. .............................. 8.00 02/01/11 132,248 215 Park Place Entertainment Corp. ........................... 8.875 09/15/08 225,750 1,200 Resort at Summerlin LP (Series B) (a)(b).................. 13.00 12/15/07 0 245 Station Casinos, Inc. .................................... 9.875 07/01/10 262,762 140 Venetian Casino/LV Sands - 144A*.......................... 11.00 06/15/10 137,200 ----------- 793,960 ----------- Cellular Telephone (0.8%) 100 Dobson/Sygnet Communications Co. ......................... 12.25 12/15/08 64,000 2,900 Dolphin Telecom PLC (Series B) (United Kingdom) (a)(d).... 14.00++ 05/15/09 0 2,700 Dolphin Telecom PLC (United Kingdom) (a)(d)............... 11.50++ 06/01/08 0 176 Tritel PCS, Inc. ......................................... 12.75++ 05/15/09 130,240 ----------- 194,240 ----------- Chemicals: Major Diversified (1.5%) 140 Equistar Chemical/Funding................................. 10.125 09/01/08 125,300 305 Huntsman ICI Chemicals LLC................................ 10.125 07/01/09 253,150 ----------- 378,450 ----------- Chemicals: Specialty (2.6%) 115 Acetex Corp. (Canada)..................................... 10.875 08/01/09 120,750 55 Avecia Group PLC (United Kingdom)......................... 11.00 07/01/09 52,800 35 ISP Chemco, Inc. (Series B)............................... 10.25 07/01/11 34,825 220 ISP Holdings, Inc. (Series B)............................. 10.625 12/15/09 198,000 85 Lyondell Chemical Co. (Series B).......................... 9.875 05/01/07 78,625 150 Millennium America, Inc. ................................. 9.25 06/15/08 151,500 ----------- 636,500 ----------- Commercial Printing/Forms (1.1%) 190 Mail-Well I Corp. - 144A*................................. 9.625 03/15/12 131,100 1,000 Premier Graphics, Inc. (b)................................ 11.50 12/01/05 31,250 125 Quebecor Media, Inc. (Canada)............................. 11.125 07/15/11 100,000 25 Quebecor Media, Inc. (Canada)............................. 13.75++ 07/15/11 11,250 ----------- 273,600 -----------
See Notes to Financial Statements 6 Morgan Stanley High Income Advantage Trust PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2002 continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE --------------------------------------------------------------------------------------------------------- Consumer/Business Services (3.2%) $ 1,528 Comforce Corp. (Series B)................................. 15.00+% 12/01/09 $ 458,263 182 MDC Communications Corp. (Canada)......................... 10.50 12/01/06 156,520 275 Muzak LLC/Muzak Finance Corp. ............................ 9.875 03/15/09 192,500 ----------- 807,283 ----------- Containers/Packaging (2.3%) 420 Owens-Illinois, Inc. ..................................... 7.80 05/15/18 327,600 105 Pliant Corp. ............................................. 13.00 06/01/10 99,750 150 Riverwood International Corp. ............................ 10.875 04/01/08 150,000 ----------- 577,350 ----------- Diversified - Manufacturing (1.3%) 430 Eagle-Picher Industries, Inc. ............................ 9.375 03/01/08 326,800 ----------- Electric Utilities (0.6%) 155 PG&E National Energy Group, Inc. ......................... 10.375 05/16/11 41,850 140 PSEG Energy Holdings - 144A*.............................. 8.625 02/15/08 109,200 ----------- 151,050 ----------- Electronic Components (0.3%) 80 Flextronics International Ltd. (Singapore)................ 9.875 07/01/10 79,600 ----------- Electronic Distributors (0.9%) 210 BRL Universal Equipment Corp. ............................ 8.875 02/15/08 214,200 2,000 CHS Electronics, Inc. (a)(b).............................. 9.875 04/15/05 17,500 ----------- 231,700 ----------- Electronic Equipment/Instruments (0.5%) 365 High Voltage Engineering, Inc. ........................... 10.75 08/15/04 120,450 ----------- Electronics/Appliances (0.0%) 9,000 International Semi-Tech Microelectronics, Inc. (Canada) (a)(b).................................................. 11.50 08/15/03 900 ----------- Engineering & Construction (0.1%) 100 Encompas Services Corp. .................................. 10.50 05/01/09 12,000 575 Metromedia Fiber Network, Inc. (a)(b)..................... 10.00 12/15/09 1,438 ----------- 13,438 -----------
See Notes to Financial Statements 7 Morgan Stanley High Income Advantage Trust PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2002 continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE --------------------------------------------------------------------------------------------------------- Environmental Services (2.2%) $ 300 Allied Waste North America, Inc. (Series B)............... 10.00% 08/01/09 $ 276,000 250 WMX Technologies, Inc. ................................... 7.00 10/15/06 261,740 ----------- 537,740 ----------- Finance/Rental/Leasing (0.5%) 140 Ford Motor Credit Co. .................................... 7.25 10/25/11 129,416 ----------- Financial Conglomerates (0.3%) 85 Case Credit Corp. ........................................ 6.125 02/15/03 83,810 ----------- Food Distributors (0.9%) 240 Volume Services America, Inc. ............................ 11.25 03/01/09 228,000 ----------- Food: Meat/Poultry/Fish (2.1%) 165 Michael Foods, Inc. (Series B)............................ 11.75 04/01/11 181,500 220 Smithfield Foods, Inc. ................................... 7.625 02/15/08 207,900 130 Smithfield Foods, Inc. (Series B)......................... 8.00 10/15/09 128,050 ----------- 517,450 ----------- Forest Products (2.2%) 205 Louisiana Pacific Corp. .................................. 10.875 11/15/08 213,200 75 Louisiana Pacific Corp. .................................. 8.875 08/15/10 80,923 245 Tembec Industries, Inc. (Canada).......................... 8.50 02/01/11 243,775 ----------- 537,898 ----------- Gas Distributors (0.2%) 170 Dynegy Holdings Inc. ..................................... 6.875 04/01/11 49,300 ----------- Home Building (2.7%) 275 Schuler Homes, Inc. ...................................... 9.375 07/15/09 273,625 115 Tech Olympic USA, Inc. - 144A*............................ 10.375 07/01/12 105,225 105 Tech Olympic USA, Inc. - 144A*............................ 9.00 07/01/10 96,075 210 Toll Corp. ............................................... 8.25 02/01/11 206,850 ----------- 681,775 ----------- Hospital/Nursing Management (1.2%) 255 HCA, Inc. ................................................ 8.75 09/01/10 291,754 -----------
See Notes to Financial Statements 8 Morgan Stanley High Income Advantage Trust PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2002 continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE --------------------------------------------------------------------------------------------------------- Hotels/Resorts/Cruiselines(3.9%) $ 80 Hilton Hotels Corp. ...................................... 7.95% 04/15/07 $ 83,282 235 HMH Properties, Inc. (Series B)........................... 7.875 08/01/08 219,725 260 Horseshoe Gaming Holding Corp. (Series B)................. 8.625 05/15/09 271,699 195 Prime Hospitality Corp. (Series B)........................ 8.375 05/01/12 185,250 40 Starwood Hotels & Resorts Worldwide, Inc. - 144A*......... 7.375 05/01/07 38,800 165 Starwood Hotels & Resorts Worldwide, Inc. - 144A*......... 7.875 05/01/12 160,463 ----------- 959,219 ----------- Industrial Conglomerates (0.4%) 110 Tyco International Group S.A. (Luxembourg)................ 6.75 02/15/11 90,750 ----------- Industrial Specialties (2.3%) 195 Foamex LP/Capital Corp. - 144A*........................... 10.75 04/01/09 175,500 120 Johnsondiversey, Inc. - 144A*............................. 9.625 05/15/12 119,700 65 Tekni-Plex, Inc. (Series B)............................... 12.75 06/15/10 63,700 50 Tekni-Plex, Inc. - 144A*.................................. 12.75 06/15/10 49,000 165 UCAR Finance, Inc. ....................................... 10.25 02/15/12 156,750 ----------- 564,650 ----------- Internet Software/Services (1.4%) 445 Exodus Communications, Inc. (a)(b)........................ 11.625 07/15/10 26,700 1,000 Globix Corp. (a)(b)....................................... 12.50 02/01/10 180,000 500 PSINet, Inc. (a)(b)....................................... 10.50 12/01/06 50,625 1,000 PSINet, Inc. (a)(b)....................................... 11.00 08/01/09 101,250 ----------- 358,575 ----------- Investment Managers (0.8%) 195 MDP Acquisitions PLC (Ireland) - 144A*.................... 9.625 10/01/12 192,563 ----------- Managed Health Care (1.9%) 290 Aetna, Inc. .............................................. 7.875 03/01/11 317,449 135 Health Net, Inc. ......................................... 8.375 04/15/11 160,035 ----------- 477,484 ----------- Media Conglomerates (1.4%) 175 AOL Time Warner, Inc. .................................... 6.875 05/01/12 159,250 195 Nextmedia Operating, Inc. ................................ 10.75 07/01/11 191,100 ----------- 350,350 ----------- Medical Distributors (0.8%) 200 AmerisourceBergen Corp. .................................. 8.125 09/01/08 209,500 -----------
See Notes to Financial Statements 9 Morgan Stanley High Income Advantage Trust PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2002 continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE --------------------------------------------------------------------------------------------------------- Medical/Nursing Services (1.0%) $ 300 Fresenius Medical Care Capital Trust...................... 7.875% 06/15/11 $ 244,500 ----------- Metals Fabrications (0.6%) 165 Trimas Corp. - 144A*...................................... 9.875 06/15/12 161,700 ----------- Movies/Entertainment (1.6%) 255 Alliance Atlantis Communications, Inc. (Canada)........... 13.00 12/15/09 270,300 155 Six Flags, Inc. .......................................... 8.875 02/01/10 127,100 ----------- 397,400 ----------- Office Equipment/Supplies (0.0%) 2,400 Mosler, Inc. (a)(b)....................................... 11.00 04/15/03 0 ----------- Oil & Gas Production (3.3%) 305 Chesapeake Energy Corp. .................................. 8.125 04/01/11 305,000 95 Magnum Hunter Resources, Inc. ............................ 9.60 03/15/12 98,800 110 Stone Energy Corp. ....................................... 8.25 12/15/11 112,750 320 Vintage Petroleum, Inc. .................................. 7.875 05/15/11 304,000 ----------- 820,550 ----------- Oil Refining/Marketing (1.3%) 185 Husky Oil Ltd. (Canada)................................... 8.90 08/15/28 209,999 225 Tesoro Petroleum Corp. - 144A*............................ 9.625 04/01/12 126,000 ----------- 335,999 ----------- Oilfield Services/Equipment (0.8%) 120 Hanover Equipment Trust - 144A*........................... 8.50 09/01/08 111,600 105 Hanover Equipment Trust - 144A*........................... 8.75 09/01/11 97,125 ----------- 208,725 ----------- Other Metals/Minerals (0.9%) 155 Murrin Murrin Holdings Property Ltd. (Australia) (b)...... 9.375 08/31/07 37,975 190 Phelps Dodge Corp. ....................................... 8.75 06/01/11 193,298 ----------- 231,273 ----------- Publishing: Books/Magazines (0.7%) 240 PRIMEDIA, Inc. ........................................... 8.875 05/15/11 180,000 ----------- Publishing: Newspapers (0.7%) 190 Hollinger Participation Trust (Canada) - 144A*............ 12.125+ 11/15/10 165,203 -----------
See Notes to Financial Statements 10 Morgan Stanley High Income Advantage Trust PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2002 continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE --------------------------------------------------------------------------------------------------------- Pulp & Paper (0.8%) $ 210 Norske Skog Canada Ltd. (Canada).......................... 8.625% 06/15/11 $ 199,500 ----------- Real Estate Development (0.8%) 225 CB Richard Ellis Services, Inc. .......................... 11.25 06/15/11 199,125 ----------- Real Estate Investment Trust (0.5%) 125 Istar Financial, Inc. .................................... 8.75 08/15/08 129,795 ----------- Recreational Products (1.2%) 275 International Game Technology............................. 8.375 05/15/09 299,063 ----------- Restaurants (2.6%) 12,252 American Restaurant Group Holdings, Inc. - 144A* (c)...... 0.00 12/15/05 374,896 3,000 FRD Acquisition Corp. (Series B) (a)(b)................... 12.50 07/15/04 273,750 ----------- 648,646 ----------- Savings Banks (0.2%) 45 Golden State Holdings, Inc. .............................. 7.125 08/01/05 49,035 ----------- Semiconductors (0.6%) 50 Fairchild Semiconductors Corp. ........................... 10.375 10/01/07 51,500 85 Fairchild Semiconductors Corp. ........................... 10.50 02/01/09 88,400 ----------- 139,900 ----------- Services to the Health Industry (1.9%) 150 Anthem Insurance - 144A*.................................. 9.125 04/01/10 182,607 90 Healthsouth Corp. - 144A*................................. 7.625 06/01/12 62,550 215 Omnicare, Inc. (Series B)................................. 8.125 03/15/11 224,137 ----------- 469,294 ----------- Specialty Stores (0.6%) 145 AutoNation, Inc. ......................................... 9.00 08/01/08 148,625 ----------- Specialty Telecommunications (3.7%) 205 American Tower Corp. ..................................... 9.375 02/01/09 120,950 2,000 Birch Telecom, Inc. (a)(b)................................ 14.00 06/15/08 200 600 DTI Holdings, Inc. (Series B) (a)(d)...................... 12.50++ 03/01/08 60 1,050 Esprit Telecom Group PLC (United Kingdom) (b)............. 11.50 12/15/07 0 1,000 Esprit Telecom Group PLC (United Kingdom) (b)............. 10.875 06/15/08 0 3,400 Firstworld Communications, Inc. (a)(d).................... 13.00++ 04/15/08 306,000
See Notes to Financial Statements 11 Morgan Stanley High Income Advantage Trust PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2002 continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE --------------------------------------------------------------------------------------------------------- $ 425 Global Crossing Holdings, Ltd. (Bermuda) (a)(b)........... 8.70% 08/01/07 $ 6,906 225 Global Crossing Holdings, Ltd. (Bermuda) (a)(b)........... 9.50 11/15/09 3,656 990 GT Group Telecom, Inc. (Canada) (a)(d).................... 13.25++ 02/01/10 99 570 Primus Telecommunications Group, Inc. (Series B).......... 9.875 05/15/08 285,000 500 Versatel Telecom International N.V. (Netherlands)......... 13.25 05/15/08 133,750 1,415 World Access, Inc. (a)(b)(c).............................. 13.25 01/15/08 63,675 500 Worldwide Fiber Inc. (Canada) (a)(b)...................... 12.00 08/01/09 50 ----------- 920,346 ----------- Steel (0.5%) 135 Oregon Steel Millls, Inc. - 144A*......................... 10.00 07/15/09 135,000 ----------- Telecommunications (0.8%) 2,500 e. Spire Communications, Inc. (a)(b)...................... 13.75 07/15/07 250 747 Focal Communications Corp. (Series B)..................... 12.125++ 02/15/08 29,880 500 Hyperion Telecommunication, Inc. (Series B) (b)........... 12.25 09/01/04 32,500 550 NEXTLINK Communications LLC (a)(b)........................ 12.50 04/15/06 2,750 1,800 Rhythms Netconnections, Inc. (a)(b)....................... 12.75 04/15/09 42,750 1,400 Rhythms Netconnections, Inc. (a)(b)....................... 14.00 02/15/10 33,250 500 Startec Global Communications Corp. (a)(b)................ 12.00 05/15/08 50 99 WorldCom, Inc. (a)(b)..................................... 6.95 08/15/28 11,880 385 WorldCom, Inc. (a)(b)..................................... 8.25 05/15/31 46,200 ----------- 199,510 ----------- Trucks/Construction/Farm Machinery (2.2%) 90 Case Corp. (Series B)..................................... 6.25 12/01/03 87,300 325 J.B. Poindexter & Co., Inc. .............................. 12.50 05/15/04 292,500 110 Manitowoc Co., Inc. (The) - 144A*......................... 10.50 08/01/12 114,950 55 NMHG Holding Co. ......................................... 10.00 05/15/09 55,550 ----------- 550,300 ----------- Wholesale Distributors (1.3%) 170 Burhmann US, Inc. ........................................ 12.25 11/01/09 170,850 115 Fisher Scientific International, Inc. .................... 7.125 12/15/05 115,288 40 Fisher Scientific International, Inc. .................... 9.00 02/01/08 41,100 ----------- 327,238 ----------- Wireless Telecommunications (0.8%) 300 American Cellular Corp. .................................. 9.50 10/15/09 39,000 147 Arch Wireless Holdings, Inc. ............................. 10.00 05/15/07 114,853 79 Arch Wireless Holdings, Inc. ............................. 12.00 05/15/09 22,120 8,000 CellNet Data Systems, Inc. (a)(d)......................... 14.00++ 10/01/07 800
See Notes to Financial Statements 12 Morgan Stanley High Income Advantage Trust PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2002 continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE --------------------------------------------------------------------------------------------------------- $ 1,000 Globalstar LP/Capital Corp. (a)(b)........................ 11.50% 06/01/05 $ 30,000 1,000 WinStar Communications, Inc. (a)(b)....................... 12.75 04/15/10 100 ----------- 206,873 ----------- Total Corporate Bonds (Cost $78,686,944)....................................... 21,855,893 ----------- NUMBER OF SHARES --------- Broadcasting (0.6%) 26 Paxson Communications Corp.+................................................... 137,815 ----------- Cellular Telephone (1.0%) 270 Dobson Communications Corp.+................................................... 70,200 276 Nextel Communications, Inc. (Series D)+........................................ 187,830 ----------- 258,030 ----------- Electric Utilities (1.0%) 286 TNP Enterprises, Inc. (Series D)+.............................................. 250,250 ----------- Publishing: Books/Magazines (0.0%) 235 PRIMEDIA, Inc. ................................................................ 8,460 ----------- Restaurants (0.4%) 94 FRD Acquisition Co. (Units)++.................................................. 94,000 ----------- Specialty Telecommunications (0.2%) 330 Broadwing Communications, Inc. (Series B)...................................... 33,000 1 Crown Castle International Corp.+.............................................. 576 81 Intermedia Communications, Inc. (Series B)+.................................... 806 2,128 McLeodUSA, Inc. (Series A) $0.44 (Conv.)....................................... 3,192 7,761 XO Communications, Inc. ....................................................... 78 ----------- 37,652 ----------- Telecommunication Equipment (1.4%) 919,053 FWT, Inc. (Class A) (c)........................................................ 367,621 ----------- Total Preferred Stocks (Cost $5,017,646)....................................... 1,153,828 -----------
See Notes to Financial Statements 13 Morgan Stanley High Income Advantage Trust PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2002 continued
NUMBER OF SHARES VALUE --------------------------------------------------------------------------------------------------------- Common Stocks (1.9%) Aerospace & Defense (0.1%) 6,111 Orbital Sciences Corp. (c)..................................................... $ 20,778 ----------- Apparel/Footwear Retail (0.0%) 946,890 County Seat Stores, Inc. (c)................................................... 0 ----------- Casino/Gaming (0.0%) 2,000 Fitzgeralds Gaming Corp. ...................................................... 0 ----------- Consumer/Business Services (1.1%) 16,900 Anacomp Inc. (Class A) (c)..................................................... 295,750 ----------- Foods: Specialty/Candy (0.0%) 835 SFAC New Holdings, Inc. (c).................................................... 0 153 SFFB Holdings, Inc. (c)........................................................ 0 180,000 Specialty Foods Acquisition Corp. - 144A*...................................... 0 ----------- 0 ----------- Medical Specialties (0.1%) 3,252 MEDIQ, Inc. (c)................................................................ 17,658 ----------- Medical/Nursing Services (0.0%) 211,076 Raintree Healthcare Corp. (c).................................................. 0 ----------- Motor Vehicles (0.0%) 113 Northern Holdings Industrial Corp. (c)*........................................ 0 ----------- Restaurants (0.0%) 9,500 American Restaurant Group Holdings, Inc. - 144A*............................... 0 ----------- Specialty Telecommunications (0.1%) 72,397 Mpower Holding Corp. (c)....................................................... 6,515 1,111 Versatel Telecom International N.V. (ADR) (Netherlands)........................ 3,611 8,230 Viatel Holding (Bermuda) Ltd. (c).............................................. 4,197 6,284 World Access, Inc. (c)......................................................... 13 ----------- 14,336 -----------
See Notes to Financial Statements 14 Morgan Stanley High Income Advantage Trust PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2002 continued
NUMBER OF SHARES VALUE --------------------------------------------------------------------------------------------------------- Telecommunication Equipment (0.0%) 80,266 FWT, Inc. (Class A) (c)........................................................ $ 803 ----------- Telecommunications (0.4%) 63,349 Covad Communications Group, Inc. (c)........................................... 93,123 4,216 Focal Communications Corp. (c)................................................. 2,108 ----------- 95,231 ----------- Textiles (0.0%) 223,846 United States Leather, Inc. (c)................................................ 0 ----------- Wireless Telecommunications (0.1%) 11,532 Arch Wireless, Inc. (c)........................................................ 6,343 35,447 Motient Corp. (c).............................................................. 30,130 13,098 Vast Solutions, Inc. (Class B1) (c)............................................ 0 13,098 Vast Solutions, Inc. (Class B2) (c)............................................ 0 13,098 Vast Solutions, Inc. (Class B3) (c)............................................ 0 ----------- 36,473 ----------- Total Common Stocks (Cost $30,895,832)......................................... 481,029 ----------- PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE --------- ------ ---------- Convertible Bonds (1.3%) Electronic Components (0.7%) $ 410 Solectron Corp. .......................................... 0.00% 11/20/20 162,462 ----------- Telecommunication Equipment (0.6%) 365 Corning Inc. ............................................. 0.00 11/08/15 159,688 ----------- Total Convertible Bonds (Cost $406,241)........................................ 322,150 ----------- NUMBER OF EXPIRATION WARRANTS DATE --------- ---------- Warrants (0.0%) Aerospace & Defense (0.0%) 5,000 Sabreliner Corp. - 144A*.......................................... 04/15/03 0 -----------
See Notes to Financial Statements 15 Morgan Stanley High Income Advantage Trust PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2002 continued
NUMBER OF EXPIRATION WARRANTS DATE VALUE --------------------------------------------------------------------------------------------------------- Broadcasting) (0.0%) 250 XM Satellite Radio, Inc. - 144A*.................................. 03/15/10 $ 500 ----------- Cable/Satellite TV (0.0%) 300 Ono Finance PLC (United Kingdom) - 144A*.......................... 05/31/09 0 ----------- Casino/Gaming (0.0%) 35,000 Aladdin Gaming Holdings LLC - 144A*............................... 03/01/10 0 1,000 Resort At Summerlin LP - 144A*.................................... 12/15/07 0 ----------- 0 ----------- Electric Utilities (0.0%) 285 TNP Enterprises, Inc. - 144A*..................................... 04/01/11 7,125 ----------- Internet Software/Services (0.0%) 3,400 Verado Holdings, Inc. - 144A*..................................... 04/15/08 0 ----------- Specialty Telecommunications (0.0%) 2,000 Birch Telecom Inc. ............................................... 06/15/08 0 990 GT Group Telecom, Inc. (Canada) - 144A*........................... 02/01/10 10 4,716 McLeodUSA, Inc. .................................................. 04/16/07 189 ----------- 199 ----------- Telecommunications (0.0%) 500 Startec Global Communications Corp. - 144A*....................... 05/15/08 0 ----------- Total Warrants (Cost $228,124)................................................. 7,824 -----------
See Notes to Financial Statements 16 Morgan Stanley High Income Advantage Trust PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 2002 continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE --------------------------------------------------------------------------------------------------------- Short-Term Investment (2.8%) Repurchase Agreement $ 689 Joint repurchase agreement account (dated 09/30/02; proceeds $689,037) (e) (Cost $689,000).................. 1.915% 10/01/02 $ 689,000 ----------- Total Investments (Cost $115,923,787) (f)................... 98.3% 24,509,724 Other Assets In Excess Of Liabilities....................... 1.7 427,724 ----- ----------- Net Assets.................................................. 100.0% $24,937,448 ===== ===========
--------------------- ADR American Depository Receipt. * Resale is restricted to qualified institutional investors. + 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) The aggregate cost for federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross unrealized appreciation is $413,747 and the aggregate gross unrealized depreciation is $91,827,810, resulting in net unrealized depreciation of $91,414,063.
See Notes to Financial Statements 17 Morgan Stanley High Income Advantage Trust FINANCIAL STATEMENTS Statement of Assets and Liabilities September 30, 2002 Assets: Investments in securities, at value (cost $115,923,787)....................................... $ 24,509,724 Receivable for: Interest................................................ 562,418 Investments sold........................................ 69,293 Prepaid expenses and other assets........................... 9,262 ------------- Total Assets............................................ 25,150,697 ------------- Liabilities: Payable for: Investments purchased................................... 31,866 Investment management fee............................... 16,208 Payable to bank............................................. 12,531 Accrued expenses and other payables......................... 152,644 ------------- Total Liabilities....................................... 213,249 ------------- Net Assets.............................................. $ 24,937,448 ============= Composition of Net Assets: Paid-in-capital............................................. $ 215,304,383 Net unrealized depreciation................................. (91,414,063) Dividends in excess of net investment income................ (978,388) Accumulated net realized loss............................... (97,974,484) ------------- Net Assets.............................................. $ 24,937,448 ============= Net Asset Value Per Share, 29,935,152 shares outstanding (unlimited shares authorized of $.01 par value)........................................ $0.83 =============
See Notes to Financial Statements 18 Morgan Stanley High Income Advantage Trust FINANCIAL STATEMENTS continued Statement of Operations For the year ended September 30, 2002 Net Investment Income: Income: Interest.................................................... $ 4,799,496 Dividends................................................... 33,287 ------------ Total Income............................................ 4,832,783 ------------ Expenses Investment management fee................................... 222,775 Transfer agent fees and expenses............................ 88,385 Professional fees........................................... 62,200 Shareholder reports and notices............................. 30,847 Registration fees........................................... 21,630 Custodian fees.............................................. 20,738 Trustees' fees and expenses................................. 17,506 Other....................................................... 7,853 ------------ Total Expenses.......................................... 471,934 ------------ Net Investment Income................................... 4,360,849 ------------ Net Realized and Unrealized Gain (Loss): Net realized loss........................................... (17,497,481) Net change in unrealized depreciation....................... 9,457,789 ------------ Net Loss................................................ (8,039,692) ------------ Net Decrease................................................ $ (3,678,843) ============
See Notes to Financial Statements 19 Morgan Stanley High Income Advantage Trust FINANCIAL STATEMENTS continued
Statement of Changes in Net Assets FOR THE YEAR FOR THE YEAR ENDED ENDED SEPTEMBER 30, 2002 SEPTEMBER 30, 2001 ------------ ------------ Increase (Decrease) in Net Assets: Operations: Net investment income....................................... $ 4,360,849 $ 8,596,787 Net realized loss........................................... (17,497,481) (20,917,698) Net change in unrealized depreciation....................... 9,457,789 (19,081,896) ------------ ------------ Net Decrease............................................ (3,678,843) (31,402,807) ------------ ------------ Dividends and Distributions to Shareholders from: Net investment income....................................... (4,501,851) (10,558,684) Paid-in-capital............................................. (236,059) -- ------------ ------------ Total Dividends and Distributions....................... (4,737,910) (10,558,684) ------------ ------------ Decrease from transactions in shares of beneficial interest.................................................. (54,418) -- ------------ ------------ Net Decrease............................................ (8,471,171) (41,961,491) Net Assets: Beginning of period......................................... 33,408,619 75,370,110 ------------ ------------ End of Period (Including dividends in excess of net investment income of $978,388 and $1,070,175, respectively)...................... $ 24,937,448 $ 33,408,619 ============ ============
See Notes to Financial Statements 20 Morgan Stanley High Income Advantage Trust NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2002 1. Organization and Accounting Policies Morgan Stanley High Income Advantage Trust (the "Trust"), formerly Morgan Stanley Dean Witter High Income Advantage Trust, is registered under the Investment Company Act of 1940, as amended, as a diversified, closed-end management investment company. The Trust's primary investment objective is to earn a high level of current income and, as a secondary objective, capital appreciation, but only when consistent with its primary objective. The Trust was organized as a Massachusetts business trust on June 17, 1987 and commenced operations on October 29, 1987. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. The following is a summary of significant accounting policies: A. Valuation of Investments -- (1) an equity portfolio security listed or traded on the New York or American Stock Exchange, Nasdaq, or other exchange is valued at its latest sale price, prior to the time when assets are valued; if there were no sales that day, the security is valued at the latest bid price (in cases where securities are traded on more than one exchange, the security is valued on the exchange designated as the primary market pursuant to procedures adopted by the Trustees); (2) all other portfolio securities for which over-the-counter market quotations are readily available are valued at the latest available bid price; (3) when market quotations are not readily available, including circumstances under which it is determined by Morgan Stanley Investment Advisors Inc. (the "Investment Manager") that sale and bid prices are not reflective of a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Trustees; (4) certain of the portfolio securities may be valued by an outside pricing service approved by the Trustees. The pricing service may utilize a matrix system incorporating security quality, maturity and coupon as the evaluation model parameters, and/or research and evaluations by its staff, including review of broker-dealer market price quotations, if available, in determining what it believes is the fair valuation of the portfolio securities valued by such pricing service; and (5) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost. 21 Morgan Stanley High Income Advantage Trust NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2002 continued B. Accounting for Investments -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Discounts are accreted premiums are amortized over the life of the respective securities. Interest income is accrued daily except where collection is not expected. C. Joint Repurchase Agreement Account -- Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other affiliated entities managed by the Investment Manager, may transfer uninvested cash balances into one or more joint repurchase agreement accounts. These balances are invested in one or more repurchase agreements and are collateralized by cash, or U.S. Treasury or federal agency obligations. D. Federal Income Tax Status -- It is the Trust's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Accordingly, no federal income tax provision is required. E. Dividends and Distributions to Shareholders -- The Trust records dividends and distributions to its shareholders on the ex-dividend date. The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for financial reporting purposes but not for tax purposes are reported as dividends in excess of net investment income or distributions in excess net realized capital gains. To extent they exceed net investment income and net realized capital gains for tax purposes, they are reported as distributions of paid-in-capital. 2. Investment Management Agreement Pursuant to an Investment Management Agreement with the Investment Manager, the Trust pays a management fee, accrued weekly and payable monthly, by applying the following annual rates to the Trust's weekly net assets: 0.75% to the portion of weekly net assets not exceeding $250 million; 0.60% to the portion of weekly net assets exceeding $250 million but not exceeding $500 million; 0.50% to the portion of weekly net assets exceeding $500 million but 22 Morgan Stanley High Income Advantage Trust NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2002 continued not exceeding $750 million; 0.40% to the portion of weekly net assets exceeding $750 million but not exceeding $1 billion; and 0.30% to the portion of weekly net assets exceeding $1 billion. 3. Security Transactions and Transactions with Affiliates The cost of purchases and proceeds from sales of portfolio securities, excluding short-term investments, for the year ended September 30, 2002 aggregated $12,901,171 and $13,579,101, respectively. Morgan Stanley Trust, an affiliate of the Investment Manager, is the Trust's transfer agent. At September 30, 2002, the Trust had transfer agent fees and expenses payable of approximately $13,000. The Trust has an unfunded noncontributory defined benefit pension plan covering all independent Trustees of the Trust who will have served as independent Trustees for at least five years at the time of retirement. Benefits under this plan are based on years of service and compensation during the last five years of service. Aggregate pension costs for the year ended September 30, 2002 included in Trustees' fees and expenses in the Statement of Operations amounted to $7,407. At September 30, 2002, the Trust had an accrued pension liability of $57,986, which is included in accrued expenses in the Statement of Assets and Liabilities. 4. Shares of Beneficial Interest
CAPITAL PAID IN PAR VALUE EXCESS OF SHARES OF SHARES PAR VALUE ---------- --------- ------------ Balance, September 30, 2000................................. 29,997,052 $299,970 $230,613,190 Reclassification due to permanent book/tax differences...... -- -- (113,431) ---------- -------- ------------ Balance, September 30, 2001................................. 29,997,052 $299,970 $230,499,759 Treasury shares purchased and retired (weighted average discount 2.78%)*.......................................... (61,900) (619) (53,799) Reclassification due to permanent book/tax differences and distribution from paid-in-capital......................... -- -- (15,440,928) ---------- -------- ------------ Balance, September 30, 2002................................. 29,935,152 $299,351 $215,005,032 ========== ======== ============
--------------------- * The Trustees have voted to retire the shares purchased. 23 Morgan Stanley High Income Advantage Trust NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2002 continued 5. Dividends The Trust declared the following dividends from net investment income:
DECLARATION AMOUNT RECORD PAYABLE DATE PER SHARE DATE DATE --------------------- --------- ---------------- ----------------- September 24, 2002 $0.01125 October 4, 2002 October 18, 2002 October 29, 2002 $0.01125 November 8, 2002 November 22, 2002
6. Federal Income Tax Status At September 30, 2002, the Trust had a net capital loss carryover of approximately $80,282,000, to offset future capital gains to the extent provided by regulations, available through September 30 of the following years:
AMOUNT IN THOUSANDS ----------------------------------------------------------------------------- 2003 2005 2006 2007 2008 2009 2010 --------------------- ------ ------- ------ ------ ------ ------- $26,684 $6,214 $14,070 $3,307 $3,112 $4,543 $22,352 ======= ====== ======= ====== ====== ====== =======
Capital losses incurred after October 31 ("post-October losses") within the taxable year are deemed to arise on the first business day of the Trust's next taxable year. The Trust incurred and will elect to defer net capital losses of approximately $17,532,000 during fiscal 2002. As of September 30, 2002, the Trust had temporary book/tax differences primarily attributable to post-October losses, book amortization of premium on debt securities and interest on bonds in default and permanent book/tax differences primarily attributable to an expired capital loss carryover. To reflect reclassifications arising from the permanent differences, paid-in-capital was charged $15,204,869, accumulated net realized loss was credited $15,195,112 and dividends in excess of net investment income was credited $9,757. 7. Change in Accounting Policy Effective October 1, 2001, the Trust has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, related to premiums and discounts on debt securities. The cumulative effect of this accounting change had no impact on the net assets of the Trust, but resulted in a $223,032 increase in the cost of securities and a corresponding increase to undistributed net investment income based on securities held as of September 30, 2001. The effect of this change for the year ended September 30, 2002 was to increase net investment income by $165,781; increase unrealized depreciation by $175,538 and decrease net realized losses 24 Morgan Stanley High Income Advantage Trust NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2002 continued by $9,757. The statement of changes in net assets and the financial highlights for prior periods have not been restated to reflect this change. 8. Merger On July 25, 2002, the Board of Trustees of the Trust and Morgan Stanley High Yield Securities Inc. ("High Yield") approved a plan of reorganization whereby the Trust would be merged into High Yield. The Plan of reorganization is subject to the consent of the Trust's shareholders at a meeting to be held on December 10, 2002. If approved, the assets of the Trust would be combined with the assets of High Yield and shareholders of the Trust would become Class D shareholders of High Yield, receiving Class D shares of High Yield equal to the value of their holdings in the Trust. 25 Morgan Stanley High Income Advantage Trust FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE YEAR ENDED SEPTEMBER 30, --------------------------------------------------------- 2002 2001 2000 1999 1998 --------- --------- --------- --------- --------- Selected Per Share Data: Net asset value, beginning of period....................... $1.11 $2.51 $3.51 $4.44 $5.18 ----- ----- ----- ----- ----- Income (loss) from investment operations: Net investment income.................................. 0.15(1) 0.29 0.51 0.57 0.62 Net realized and unrealized loss....................... (0.27)(1) (1.34) (0.97) (0.89) (0.72) ----- ----- ----- ----- ----- Total loss from investment operations...................... (0.12) (1.05) (0.46) (0.32) (0.10) ----- ----- ----- ----- ----- Less dividends and distributions from: Net investment income.................................. (0.15) (0.35) (0.54) (0.61) (0.64) Paid-in-capital........................................ (0.01) -- -- -- -- ----- ----- ----- ----- ----- Total dividends and distributions.......................... (0.16) (0.35) (0.54) (0.61) (0.64) ----- ----- ----- ----- ----- Net asset value, end of period............................. $0.83 $1.11 $2.51 $3.51 $4.44 ===== ===== ===== ===== ===== Market value, end of period................................ $0.81 $1.30 $3.50 $4.25 $5.25 ===== ===== ===== ===== ===== Total Return+.............................................. (27.95)% (56.83)% (4.71)% (8.83)% (6.52)% Ratios to Average Net Assets: Expenses................................................... 1.60% 1.32% 1.05% 1.00% 0.95% Net investment income...................................... 14.82%(1) 16.89% 16.44% 14.36% 12.58% Supplemental Data: Net assets, end of period, in thousands.................... $24,937 $33,409 $75,370 $105,318 $133,222 Portfolio turnover rate.................................... 46% 66% 16% 51% 105%
--------------------- + Total return is based upon the current market value on the last day of each period reported. Dividends are assumed to be reinvested at the prices obtained under the Trust's dividend reinvestment plan. Total return does not reflect brokerage commissions. (1) Effective October 1, 2001, the Trust has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, related to premiums and discounts on debt securities. The effect of this change for the year ended September 30, 2002 was to increase net investment income per share and increase net realized and unrealized loss per share by $0.01 and to increase the ratio of net investment income to average net assets by 0.56%. The Financial Highlights data presented in this table for prior periods has not been restated to reflect this change.
See Notes to Financial Statements 26 Morgan Stanley High Income Advantage Trust INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Trustees of Morgan Stanley High Income Advantage Trust: We have audited the accompanying statement of assets and liabilities of Morgan Stanley High Income Advantage Trust (the "Fund") formerly Morgan Stanley Dean Witter High Income Advantage Trust, including the portfolio of investments, as of September 30, 2002, 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of September 30, 2002, by correspondence with the custodian and broker. 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 Income Advantage Trust as of September 30, 2002, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP New York, New York November 11, 2002 27 Morgan Stanley High Income Advantage Trust TRUSTEE AND OFFICER INFORMATION
Independent Trustees: Number of Portfolios in Fund Position(s) Term of Office Complex Name, Age and Address of Held with and Length of Principal Occupation(s) During Past Overseen by Independent Trustee Registrant Time Served* 5 Years Trustee** ------------------------------------- ----------- -------------- ----------------------------------- ----------- Michael Bozic (61) Trustee Since April Retired; Director or Trustee of the 129 c/o Mayer, Brown, Rowe & Maw 1994 Morgan Stanley Funds and the TCW/DW Counsel to the Independent Trustees Term Trusts; formerly Vice Chairman 1675 Broadway of Kmart Corporation (December New York, NY 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 (69) Trustee Since January Director or Trustee of the Morgan 129 c/o Summit Ventures LLC 1993 Stanley Funds and the TCW/DW Term 1 Utah Center Trusts; formerly United States 201 S. Main Street Senator (R-Utah) (1974-1992) and Salt Lake City, UT Chairman, Senate Banking Committee (1980-1986); formerly Mayor of Salt Lake City, Utah (1971-1974); formerly Astronaut, Space Shuttle Discovery (April 12-19, 1985); Vice Chairman, Huntsman Corporation (chemical company); member of the Utah Regional Advisory Board of Pacific Corp. Wayne E. Hedien (68) Trustee Since Retired; Director or Trustee of the 129 c/o Mayer, Brown, Rowe & Maw September 1997 Morgan Stanley Funds and the TCW/DW Counsel to the Independent Trustees Term Trusts; formerly associated 1675 Broadway with the Allstate Companies New York, NY (1966-1994), most recently as Chairman of The Allstate Corporation (March 1993-December 1994) and Chairman and Chief Executive Officer of its wholly- owned subsidiary, Allstate Insurance Company (July 1989-December 1994). Name, Age and Address of Independent Trustee Other Directorships Held by Trustee ------------------------------------- ----------------------------------- Michael Bozic (61) Director of Weirton Steel c/o Mayer, Brown, Rowe & Maw Corporation. Counsel to the Independent Trustees 1675 Broadway New York, NY Edwin J. Garn (69) Director of Franklin Covey (time c/o Summit Ventures LLC management systems), BMW Bank of 1 Utah Center North America, Inc. (industrial 201 S. Main Street loan corporation), United Space Salt Lake City, UT Alliance (joint venture between Lockheed Martin and the Boeing Company) and Nuskin Asia Pacific (multilevel marketing); member of the board of various civic and charitable organizations. Wayne E. Hedien (68) Director of The PMI Group Inc. c/o Mayer, Brown, Rowe & Maw (private mortgage insurance); Counsel to the Independent Trustees Trustee and Vice Chairman of The 1675 Broadway Field Museum of Natural History; New York, NY director of various other business and charitable organizations.
28 Morgan Stanley High Income Advantage Trust TRUSTEE AND OFFICER INFORMATION continued
Number of Portfolios in Fund Position(s) Term of Office Complex Name, Age and Address of Held with and Length of Principal Occupation(s) During Past Overseen by Independent Trustee Registrant Time Served* 5 Years Trustee** ------------------------------------- ----------- -------------- ----------------------------------- ----------- Dr. Manuel H. Johnson (53) Trustee Since July Chairman of the Audit Committee and 129 c/o Johnson Smick International, Inc. 1991 Director or Trustee of the Morgan 1133 Connecticut Avenue, N.W. Stanley Funds and the TCW/DW Term Washington, D.C. Trusts; Senior Partner, Johnson Smick International, Inc., a consulting firm; Co-Chairman and a founder of the Group of Seven Council (G7C), an international economic commission; formerly Vice Chairman of the Board of Governors of the Federal Reserve System and Assistant Secretary of the U.S. Treasury. Michael E. Nugent (66) Trustee Since July Chairman of the Insurance Committee 207 c/o Triumph Capital, L.P. 1991 and Director or Trustee of the 237 Park Avenue Morgan Stanley Funds and the TCW/DW New York, NY Term Trusts; director/trustee of various investment companies managed by Morgan Stanley Investment Management Inc. and Morgan Stanley Investments LP (since July 2001); General Partner, Triumph Capital, L.P., a private investment partnership; formerly Vice President, Bankers Trust Company and BT Capital Corporation (1984-1988). Name, Age and Address of Independent Trustee Other Directorships Held by Trustee ------------------------------------- ----------------------------------- Dr. Manuel H. Johnson (53) Director of NVR, Inc. (home c/o Johnson Smick International, Inc. construction); Chairman and Trustee 1133 Connecticut Avenue, N.W. of the Financial Accounting Washington, D.C. Foundation (oversight organization of the Financial Accounting Standards Board). Michael E. Nugent (66) Director of various business c/o Triumph Capital, L.P. organizations. 237 Park Avenue New York, NY
29 Morgan Stanley High Income Advantage Trust TRUSTEE AND OFFICER INFORMATION continued
Interested Trustees: Number of Portfolios in Fund Position(s) Term of Office Complex Name, Age and Address of Held with and Length of Overseen by Interested Trustee Registrant Time Served* Principal Occupation(s) During Past 5 Years Trustee** ------------------------------ --------------------- -------------- ------------------------------------------- ----------- Charles A. Fiumefreddo (69) Chairman and Trustee Since July Chairman and Director or Trustee of the 129 c/o Morgan Stanley Trust 1991 Morgan Stanley Funds and the TCW/DW Term Harborside Financial Center, Trusts; formerly Chairman, Chief Executive Plaza Two, Officer and Director of the Investment Jersey City, NJ Manager, the Distributor and Morgan Stanley Services, Executive Vice President and Director of Morgan Stanley DW, Chairman and Director of the Transfer Agent, and Director and/or officer of various Morgan Stanley subsidiaries (until June 1998) and Chief Executive Officer of the Morgan Stanley Fund and the TCW/DW Trusts (until September 2002). James F. Higgins (54) Trustee Since June Senior Advisor of Morgan Stanley (since 129 c/o Morgan Stanley Trust 2000 August 2000); Director of the Distributor Harborside Financial Center, and Dean Witter Realty Inc.; Director or Plaza Two, Trustee of the Morgan Stanley Funds and the Jersey City, NJ TCW/DW Term Trusts (since June 2000); previously President and Chief Operating Officer of the Private Client Group of Morgan Stanley (May 1999-August 2000), President and Chief Operating Officer of Individual Securities of Morgan Stanley (February 1997-May 1999). Philip J. Purcell (59) Trustee Since April Director or Trustee of the Morgan Stanley 129 1585 Broadway 1994 Funds and the TCW/DW Term Trusts; Chairman New York, NY of the Board of Directors and Chief Executive Officer of Morgan Stanley and Morgan Stanley DW; Director of the Distributor; Chairman of the Board of Directors and Chief Executive Officer of Novus Credit Services Inc.; Director and/or officer of various Morgan Stanley subsidiaries. Interested Trustees: Name, Age and Address of Other Directorships Held by Interested Trustee Trustee ------------------------------ -------------------------------- Charles A. Fiumefreddo (69) None c/o Morgan Stanley Trust Harborside Financial Center, Plaza Two, Jersey City, NJ James F. Higgins (54) None c/o Morgan Stanley Trust Harborside Financial Center, Plaza Two, Jersey City, NJ Philip J. Purcell (59) Director of American Airlines, 1585 Broadway Inc. and its parent company, AMR New York, NY Corporation.
--------------------- * Each Trustee serves an indefinite term, until his or her successor is elected. ** The Fund Complex includes all open and closed-end funds (including all of their portfolios) advised by Morgan Stanley Investment Advisors Inc. and any funds that have an investment advisor that is an affiliated person of Morgan Stanley Investment Advisors Inc. (including but not limited to, Morgan Stanley Investment Management Inc., Morgan Stanley Investments LP and Van Kampen Asset Management Inc.). 30 Morgan Stanley High Income Advantage Trust TRUSTEE AND OFFICER INFORMATION continued
Officers: Term of Position(s) Office and Name, Age and Address of Held with Length of Executive Officer Registrant Time Served* Principal Occupation(s) During Past 5 Years -------------------------------- --------------- -------------- ------------------------------------------------------------ Mitchell M. Merin (49) President and President President and Chief Operating Officer of Morgan Stanley 1221 Avenue of the Americas Chief Executive since May 1999 Investment Management (since December 1998); President, New York, NY Officer and Chief Director (since April 1997) and Chief Executive Officer Executive (since June 1998) of the Investment Manager and Morgan Officer since Stanley Services; Chairman, Chief Executive Officer and September 2002 Director of the Distributor (since June 1998); Chairman (since June 1998) and Director (since January 1998) of the Transfer Agent; Director of various Morgan Stanley subsidiaries; President (since May 1999) and Chief Executive Officer (since September 2002) of the Morgan Stanley Funds and TCW/DW Term Trusts; Trustee of various Van Kampen investment companies (since December 1999); previously Chief Strategic Officer of the Investment Manager and Morgan Stanley Services and Executive Vice President of the Distributor (April 1997-June 1998), Vice President of the Morgan Stanley Funds (May 1997-April 1999), and Executive Vice President of Morgan Stanley. Barry Fink (47) Vice President, Since February General Counsel (since May 2000) and Managing Director 1221 Avenue of the Americas Secretary and 1997 (since December 2000) of Morgan Stanley Investment New York, NY General Counsel Management; Managing Director (since December 2000), and Secretary and General Counsel (since February 1997) and Director (since July 1998) of the Investment Manager and Morgan Stanley Services; Assistant Secretary of Morgan Stanley DW; Vice President, Secretary and General Counsel of the Morgan Stanley Funds and TCW/DW Term Trusts (since February 1997); Vice President and Secretary of the Distributor; previously, Senior Vice President, Assistant Secretary and Assistant General Counsel of the Investment Manager and Morgan Stanley Services. Thomas F. Caloia (56) Treasurer Since April First Vice President and Assistant Treasurer of the c/o Morgan Stanley Trust 1989 Investment Manager, the Distributor and Morgan Stanley Harborside Financial Center, Services; Treasurer of the Morgan Stanley Funds. Plaza Two Jersey City, NJ Ronald E. Robison (63) Vice President Since October Managing Director, Chief Administrative Officer and Director 1221 Avenue of the Americas 1998 (since February 1999) of the Investment Manager and Morgan New York, NY Stanley Services and Chief Executive Officer and Director of the Transfer Agent; previously Managing Director of the TCW Group Inc. Joseph J. McAlinden (59) Vice President Since July Managing Director and Chief Investment Officer of the 1221 Avenue of the Americas 1995 Investment Manager, Morgan Stanley Investment Management New York, NY Inc. and Morgan Stanley Investments LP; Director of the Transfer Agent, Chief Investment Officer of the Van Kampen Funds. Francis Smith (37) Vice President Since Vice President and Chief Financial Officer of the Morgan c/o Morgan Stanley Trust and Chief September 2002 Stanley Funds and the TCW/DW Term Trusts (since September Harborside Financial Center Financial 2002). Executive Director of the Investment Manager and Plaza Two, Officer Morgan Stanley Services (since December 2001). Formerly, Jersey City, NJ Vice President of the Investment Manager and Morgan Stanley Services (August 2000-November 2001), Senior Manager at PricewaterhouseCoopers LLP (January 1998-August 2000) and Associate-Fund Administration at BlackRock Financial Management (July 1996-December 1997).
--------------------- * Each Officer serves an indefinite term, until his or her successor is elected. 31 TRUSTEES Michael Bozic Charles A. Fiumefreddo Edwin J. Garn Wayne E. Hedien James F. Higgins Dr. Manuel H. Johnson Michael E. Nugent Philip J. Purcell OFFICERS Charles A. Fiumefreddo Chairman Mitchell M. Merin President and Chief Executive Officer Barry Fink Vice President, Secretary and General Counsel Joseph J. McAlinden Vice President Ronald E. Robison Vice President Thomas F. Caloia Treasurer Francis Smith Vice President and Chief Financial Officer TRANSFER AGENT Morgan Stanley Trust Harborside Financial Center -- Plaza Two Jersey City, New Jersey 07311 INDEPENDENT AUDITORS Deloitte & Touche LLP Two World Financial Center New York, New York 10281 INVESTMENT MANAGER Morgan Stanley Investment Advisors Inc. 1221 Avenue of the Americas New York, New York 10020 Investments and services offered through Morgan Stanley DW Inc., member SIPC. MORGAN STANLEY MORGAN STANLEY HIGH INCOME ADVANTAGE TRUST Annual Report September 30, 2002 38530RPT-8853J02-ANS-10/02