-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Bs37C+XScy8jJCkmhTz/bTLtF0GqQ+GAzhLC4leFPn59MWJ6F9Mgv6PxtUqsydqr mlBX2k6cKaN7592bKqBXyg== 0000912057-02-037227.txt : 20020930 0000912057-02-037227.hdr.sgml : 20020930 20020930161511 ACCESSION NUMBER: 0000912057-02-037227 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20020930 EFFECTIVENESS DATE: 20020930 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY HIGH YIELD SECURITIES INC CENTRAL INDEX KEY: 0000311847 IRS NUMBER: 132988937 STATE OF INCORPORATION: MD FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-64782 FILM NUMBER: 02776623 BUSINESS ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 BUSINESS PHONE: (212) 869-6397 MAIL ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 FORMER COMPANY: FORMER CONFORMED NAME: WITTER DEAN HIGH YIELD SECURITIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: INTERCAPITAL HIGH YIELD SECURITIES INC DATE OF NAME CHANGE: 19830308 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY DEAN WITTER HIGH YIELD SECURITIES INC DATE OF NAME CHANGE: 19980622 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY HIGH YIELD SECURITIES INC CENTRAL INDEX KEY: 0000311847 IRS NUMBER: 132988937 STATE OF INCORPORATION: MD FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-02932 FILM NUMBER: 02776624 BUSINESS ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 BUSINESS PHONE: (212) 869-6397 MAIL ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 FORMER COMPANY: FORMER CONFORMED NAME: WITTER DEAN HIGH YIELD SECURITIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: INTERCAPITAL HIGH YIELD SECURITIES INC DATE OF NAME CHANGE: 19830308 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY DEAN WITTER HIGH YIELD SECURITIES INC DATE OF NAME CHANGE: 19980622 485BPOS 1 a2089247z485bpos.txt 485BPOS AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 2002 REGISTRATION NOS.: 2-64782 811-2932 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/ PRE-EFFECTIVE AMENDMENT NO. / / POST-EFFECTIVE AMENDMENT NO. 28 /X/ AND/OR REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/ AMENDMENT NO. 29 /X/ ------------------- MORGAN STANLEY HIGH YIELD SECURITIES INC. (A MARYLAND CORPORATION) FORMERLY NAMED MORGAN STANLEY DEAN WITTER 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 OFFICE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 869-6397 BARRY FINK, ESQ. 1221 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10020 (NAME AND ADDRESS OF AGENT FOR SERVICE) ------------------- COPY TO: STUART M. STRAUSS, ESQ. MAYER, BROWN, ROWE & MAW 1675 BROADWAY NEW YORK, NEW YORK 10019 ------------------- APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after this Post-Effective Amendment becomes effective. IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX) immediately upon filing pursuant to paragraph (b) - ------- X on September 30, 2002 pursuant to paragraph (b) - ------- 60 days after filing pursuant to paragraph (a) - ------- on (date) pursuant to paragraph (a) of rule 485. - -------
AMENDING THE PROSPECTUS AND UPDATING FINANCIAL STATEMENTS ------------------------------------------------------- ------------------------------------------------------- [MORGAN STANLEY LOGO] Morgan Stanley High Yield Securities A MUTUAL FUND WHOSE PRIMARY INVESTMENT OBJECTIVE IS TO EARN A HIGH LEVEL OF CURRENT INCOME. AS A SECONDARY OBJECTIVE, THE FUND SEEKS CAPITAL APPRECIATION BUT ONLY TO THE EXTENT CONSISTENT WITH ITS PRIMARY OBJECTIVE. [COVER PHOTO] Prospectus - September 30, 2002 THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Contents The Fund INVESTMENT OBJECTIVES............................ 1 PRINCIPAL INVESTMENT STRATEGIES.................. 1 PRINCIPAL RISKS.................................. 2 PAST PERFORMANCE................................. 3 FEES AND EXPENSES................................ 5 ADDITIONAL INVESTMENT STRATEGY INFORMATION....... 6 ADDITIONAL RISK INFORMATION...................... 7 FUND MANAGEMENT.................................. 8 Shareholder Information PRICING FUND SHARES.............................. 9 HOW TO BUY SHARES................................ 9 HOW TO EXCHANGE SHARES........................... 11 HOW TO SELL SHARES............................... 12 DISTRIBUTIONS.................................... 14 TAX CONSEQUENCES................................. 14 SHARE CLASS ARRANGEMENTS......................... 15 Financial Highlights ................................................. 22 Morgan Stanley Funds ................................................. INSIDE BACK COVER THIS PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT THE FUND. PLEASE READ IT CAREFULLY AND KEEP IT FOR FUTURE REFERENCE.
[Sidebar] INCOME An investment objective having the goal of selecting securities to pay out income rather than rise in price. [End Sidebar] The Fund [ICON] INVESTMENT OBJECTIVES - -------------------------------------------------------------------------------- Morgan Stanley High Yield Securities Inc. seeks as a primary investment objective to earn a high level of current income. As a secondary objective, the Fund seeks capital appreciation but only to the extent consistent with its primary objective. [ICON] PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- The Fund will normally invest at least 80% 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 non-rated 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. Shareholders of the Fund will receive at least 60 days prior notice of any changes in this policy. Securities rated below Baa or BBB are commonly known as "junk bonds." There are no minimum quality ratings for investments, and as such the Fund may invest in securities which no longer make payments of interest or principal. In deciding which securities to buy, hold or sell, the Investment Manager considers an issuer's creditworthiness, economic developments, interest rate trends and other factors it deems relevant. In evaluating an issuer's creditworthiness, the Investment Manager relies principally on its own analysis. A security's credit rating is simply one factor that may be considered by the Investment Manager in this regard. Fixed-income securities are debt securities such as bonds, notes or commercial paper. The issuer of the debt security borrows money from the investor who buys the security. Most debt securities pay either fixed or adjustable rates of interest at regular intervals until they mature, at which point investors get their principal back. The Fund's fixed-income investments may include zero coupon securities and payment-in-kind bonds. Zero coupon securities are purchased at a discount and either (i) pay no interest, or (ii) accrue interest, but make no payments until maturity; payment-in-kind bonds are purchased at the face amount of the bond and accrue additional principal but make no payments until maturity. The remaining 20% of the Fund's assets may be invested in securities rated Baa or BBB or higher (or, if not rated, determined to be of comparable quality when the Investment Manager believes that such securities may produce attractive yields.) The Fund may also invest in common stocks, asset-backed securities, convertible securities, warrants and foreign securities. In pursuing the Fund's investment objectives, the Investment Manager has considerable leeway in deciding which investments it buys, holds or sells on a day-to-day basis -- and which trading strategies it uses. For example, the Investment Manager in its discretion may determine to use some permitted trading strategies while not using others. 1 [ICON] PRINCIPAL RISKS - -------------------------------------------------------------------------------- There is no assurance that the Fund will achieve its investment objectives. The Fund's share price and yield will fluctuate with changes in the market value of the Fund's portfolio securities. When you sell Fund shares, they may be worth less than what you paid for them and, accordingly, you can lose money investing in this Fund. Fixed-Income Securities. Principal risks of investing in the Fund are associated with its junk bond investments. All fixed-income securities, such as junk bonds, are subject to two types of risk: credit risk and interest rate risk. Credit risk refers to the possibility that the issuer of a security will be unable to make interest payments and/or repay the principal on its debt. Interest rate risk refers to fluctuations in the value of a fixed-income security resulting from changes in the general level of interest rates. When the general level of interest rates goes up, the prices of most fixed-income securities go down. When the general level of interest rates goes down, the prices of most fixed-income securities go up. (Zero coupon securities are typically subject to greater price fluctuations than comparable securities that pay interest.) As merely illustrative of the relationship between fixed-income securities and interest rates, the following table shows how interest rates affect bond prices.
Price per $100 of a Bond if Interest Rates: ---------------------------------------------- How Interest Rates Affect Bond Prices Increase Decrease - ------------------------------------------ ---------------------- ---------------------- Bond Maturity Yield 1% 2% 1% 2% - ------------------------------------------------------------------------------------------ 1 year 2.04% $99 $98 $101 $102 - ------------------------------------------------------------------------------------------ 5 years 4.30% $96 $92 $105 $109 - ------------------------------------------------------------------------------------------ 10 years 5.05% $93 $86 $108 $117 - ------------------------------------------------------------------------------------------ 30 years 5.65% $87 $77 $115 $135 - ------------------------------------------------------------------------------------------
YIELDS ON TREASURY SECURITIES ARE AS OF DECEMBER 31, 2001. THE TABLE IS NOT REPRESENTATIVE OF PRICE CHANGES FOR JUNK BONDS. IN ADDITION, THE TABLE IS AN ILLUSTRATION AND DOES NOT REPRESENT EXPECTED YIELDS OR SHARE PRICE CHANGES OF ANY MORGAN STANLEY MUTUAL FUND. Junk Bonds. Junk bonds are subject to greater risk of loss of income and principal than higher rated securities. The prices of junk bonds are likely to be more sensitive to adverse economic changes or individual corporate developments than higher rated securities. During an economic downturn or substantial period of rising interest rates, junk bond issuers and, in particular, highly leveraged issuers may experience financial stress that would adversely affect their ability to service their principal and interest payment obligations, to meet their projected business goals or to obtain additional financing. In the event of a default, the Fund may incur additional expenses to seek recovery. The secondary market for junk bonds may be less liquid than the markets for higher quality securities and, as such, may have an adverse effect on the market prices of certain securities. The Rule 144A securities could have the effect of increasing the level of Fund illiquidity to the extent the Fund may be unable to find qualified institutional buyers interested in purchasing the securities. The illiquidity of the market may also adversely affect the ability of the Fund's Directors to arrive at a fair value for certain junk bonds at certain times and could make it difficult for the Fund to sell certain securities. In addition, periods of economic uncertainty and change probably would result in an increased volatility of market prices of high yield securities and a corresponding volatility in the Fund's net asset value. In addition to junk bonds, the Fund may also invest in certain investment grade fixed-income securities. Some of these securities have speculative characteristics. 2 [Sidebar] ANNUAL TOTAL RETURNS This chart shows how the performance of the Fund's Class D shares has varied from year to year over the past 10 calendar years. [End Sidebar] The performance of the Fund also will depend on whether or not the Investment Manager is successful in applying the Fund's investment strategies. The Fund is subject to other risks from its permissible investments including the risks associated with its investments in common stocks, asset-backed securities, warrants and foreign securities. For more information about these risks, see the "Additional Risk Information" section. Shares of the Fund are not bank deposits and are not guaranteed or insured by the FDIC or any other government agency. [ICON] PAST PERFORMANCE - -------------------------------------------------------------------------------- The bar chart and table below provide some indication of the risks of investing in the Fund. The Fund's past performance (before and after taxes) does not indicate how the Fund will perform in the future. ANNUAL TOTAL RETURNS -- Calendar Years EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 1992 24.22% '93 31.59% '94 -7.15% '95 17.13% '96 13.27% '97 12.90% '98 -2.63% '99 2.77% 2000 -30.61% '01 -26.91%
THE BAR CHART REFLECTS THE PERFORMANCE OF CLASS D SHARES; THE PERFORMANCE OF THE OTHER CLASSES WILL DIFFER BECAUSE THE CLASSES HAVE DIFFERENT ONGOING FEES. THE PERFORMANCE INFORMATION IN THE BAR CHART DOES NOT REFLECT THE DEDUCTION OF SALES CHARGES; IF THESE AMOUNTS WERE REFLECTED, RETURNS WOULD BE LESS THAN SHOWN. YEAR-TO-DATE TOTAL RETURN AS OF JUNE 30, 2002 WAS -5.14%. During the periods shown in the bar chart, the highest return for a calendar quarter was 17.06% (quarter ended March 31, 1992) and the lowest return for a calendar quarter was -19.49% (quarter ended December 31, 2000). 3 [Sidebar] AVERAGE ANNUAL TOTAL RETURNS This table compares the Fund's average annual total returns with those of a broad measure of market performance over time. The Fund's returns include the maximum applicable sales charge for each Class and assume you sold your shares at the end of each period (unless otherwise noted). [End Sidebar] AVERAGE ANNUAL TOTAL RETURNS (as of December 31, 2001) - ------------------------------------------------------------------------------
Past 1 Year Past 5 Years Past 10 Years - ----------------------------------------------------------------------------------- Class A - Returns Before Taxes(1) -30.22% -11.52% 0.76% - ----------------------------------------------------------------------------------- Class A - Returns After Taxes on Distributions(1,4) -34.65% -16.03% -4.05% - ----------------------------------------------------------------------------------- Class A - Returns After Taxes on Distributions and Sale of Fund Shares(1) -17.91% -9.64% -0.64% - ----------------------------------------------------------------------------------- Class B(2) -30.65% -- -- - ----------------------------------------------------------------------------------- Class C(2) -28.51% -- -- - ----------------------------------------------------------------------------------- Class D - Returns Before Taxes(3) -26.91% -10.54% 1.44% - ----------------------------------------------------------------------------------- Class D - Returns After Taxes on Distributions(3,4) -31.63% -15.18% -3.49% - ----------------------------------------------------------------------------------- Class D - Returns After Taxes on Distributions and Sale of Fund Shares(3) -15.88% -8.99% -0.16% - ----------------------------------------------------------------------------------- Lehman Brothers U.S. Corporate High Yield Index(5) 5.28% 3.11% 7.58% - -----------------------------------------------------------------------------------
1 PRIOR TO JULY 28, 1997 THE FUND OFFERED ONLY ONE CLASS OF SHARES. BECAUSE THE DISTRIBUTION ARRANGEMENT FOR CLASS A MOST CLOSELY RESEMBLED THE DISTRIBUTION ARRANGEMENT APPLICABLE PRIOR TO THE IMPLEMENTATION OF MULTIPLE CLASSES (I.E., CLASS A IS SOLD WITH A FRONT-END SALES CHARGE), HISTORICAL PERFORMANCE INFORMATION HAS BEEN RESTATED TO REFLECT THE ACTUAL MAXIMUM SALES CHARGE APPLICABLE TO CLASS A (I.E., 4.25%) AS COMPARED TO THE 5.50% SALES CHARGE IN EFFECT PRIOR TO JULY 28, 1997. IN ADDITION, CLASS A SHARES ARE NOW SUBJECT TO AN ONGOING 12B-1 FEE WHICH IS REFLECTED IN THE RESTATED PERFORMANCE FOR THAT CLASS. 2 CLASSES B AND C COMMENCED OPERATIONS ON JULY 28, 1997. 3 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. 4 THESE RETURNS DO NOT REFLECT ANY TAX CONSEQUENCES FROM A SALE OF YOUR SHARES AT THE END OF EACH PERIOD, BUT THEY DO REFLECT ANY APPLICABLE SALES CHARGES ON SUCH A SALE. 5 THE LEHMAN BROTHERS U.S. CORPORATE HIGH YIELD INDEX TRACKS THE PERFORMANCE OF ALL BELOW INVESTMENT-GRADE SECURITIES WHICH HAVE AT LEAST $100 MILLION IN OUTSTANDING ISSUANCE, A MATURITY GREATER THAN ONE YEAR, AND ARE ISSUED IN FIXED-RATE U.S. DOLLAR DENOMINATIONS. THE INDEX DOES NOT INCLUDE ANY EXPENSES, FEES OR CHARGES. THE INDEX IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. The above table shows after tax returns for the Fund's Class A and Class D Shares. The after tax returns for the Fund's other Classes will vary from the Class A and Class D shares' returns. After tax returns are calculated using the historical highest individual federal marginal income tax rates during the period shown and do not reflect the impact of state and local taxes. Actual after tax returns depend on an investor's tax situation and may differ from those shown, and after tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After tax returns may be higher than before tax returns due to an assumed benefit from capital losses that would have been realized had Fund shares been sold at the end of the relevant periods. 4 [Sidebar] SHAREHOLDER FEES These fees are paid directly from your investment. ANNUAL FUND OPERATING EXPENSES These expenses are deducted from the Fund's assets and are based on expenses paid for the fiscal year ended August 31, 2002. [End Sidebar] [ICON] FEES AND EXPENSES - -------------------------------------------------------------------------------- The table below briefly describes the fees and expenses that you may pay if you buy and hold shares of the Fund. The Fund offers four Classes of shares: Classes A, B, C and D. Each Class has a different combination of fees, expenses and other features, which should be considered in selecting a Class of shares. The Fund does not charge account or exchange fees. See the "Share Class Arrangements" section for further fee and expense information.
Class A Class B Class C Class D - --------------------------------------------------------------------------------------------------- SHAREHOLDER FEES - --------------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 4.25%(1) None None None - --------------------------------------------------------------------------------------------------- Maximum deferred sales charge (load) (as a percentage based on the lesser of the offering price or net asset value at redemption) None(2) 5.00%(3) 1.00%(4) None - --------------------------------------------------------------------------------------------------- ANNUAL FUND OPERATING EXPENSES - --------------------------------------------------------------------------------------------------- Management fee 0.48% 0.48% 0.48% 0.48% - --------------------------------------------------------------------------------------------------- Distribution and service (12b-1) fees 0.18% 0.75% 0.85% None - --------------------------------------------------------------------------------------------------- Other expenses 0.33% 0.33% 0.33% 0.33% - --------------------------------------------------------------------------------------------------- Total annual Fund operating expenses 0.99% 1.56% 1.66% 0.81% - ---------------------------------------------------------------------------------------------------
1 REDUCED FOR PURCHASES OF $25,000 AND OVER. 2 INVESTMENTS THAT ARE NOT SUBJECT TO ANY SALES CHARGE AT THE TIME OF PURCHASE ARE SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE ("CDSC") OF 1.00% THAT WILL BE IMPOSED IF YOU SELL YOUR SHARES WITHIN ONE YEAR AFTER PURCHASE, EXCEPT FOR CERTAIN SPECIFIC CIRCUMSTANCES. 3 THE CDSC IS SCALED DOWN TO 1.00% DURING THE SIXTH YEAR, REACHING ZERO THEREAFTER. SEE "SHARE CLASS ARRANGEMENTS" FOR A COMPLETE DISCUSSION OF THE CDSC. 4 ONLY APPLICABLE IF YOU SELL YOUR SHARES WITHIN ONE YEAR AFTER PURCHASE. Example This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund, your investment has a 5% return each year, and the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, the tables below show your costs at the end of each period based on these assumptions depending upon whether or not you sell your shares at the end of each period.
If You SOLD Your Shares: If You HELD Your Shares: - ------------------------------------------------------------------ ---------------------------------- 1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years - ------------------------------------------------------------------ ---------------------------------- Class A $522 $727 $ 949 $1,586 $522 $727 $949 $1,586 - ------------------------------------------------------------------ ---------------------------------- Class B $659 $793 $1,050 $1,856 $159 $493 $850 $1,856 - ------------------------------------------------------------------ ---------------------------------- Class C $269 $523 $ 902 $1,965 $169 $523 $902 $1,965 - ------------------------------------------------------------------ ---------------------------------- Class D $ 83 $259 $ 450 $1,002 $ 83 $259 $450 $1,002 - ------------------------------------------------------------------ ----------------------------------
5 While Class B and Class C shares do not have any front-end sales charges, their higher ongoing annual expenses (due to higher 12b-1 fees) mean that over time you could end up paying more for these shares than if you were to pay front-end sales charges for Class A shares. [ICON] ADDITIONAL INVESTMENT STRATEGY INFORMATION - -------------------------------------------------------------------------------- This section provides additional information relating to the Fund's principal investment strategies. Common Stocks. The Fund may invest up to 20% of its assets in common stocks. Asset-Backed Securities. Asset-backed securities represent an interest in a pool of assets such as automobile loans and credit card receivables or home equity loans that have been securitized in pass through structures similar to mortgage-backed securities. These types of pass through securities provide for monthly payments that are a "pass through" of the monthly interest and principal payments made by the individual borrowers on the pooled receivables. Foreign Securities. The Fund may invest up to 20% of its assets in fixed-income securities issued by foreign governments and other foreign issuers (including American depositary receipts or other similar securities convertible into securities of foreign issuers) but not more than 10% of its total assets in these securities may be denominated in foreign currencies. Warrants. The Fund may acquire warrants which may or may not be attached to common stock. Warrants are options to purchase equity securities at a specific price for a specific period of time. Unit Offerings/Convertible Securities. The Fund may purchase units which combine debt securities with equity securities and/or warrants. The Fund may invest in convertible securities which are securities that generally pay interest and may be converted into common stock. Defensive Investing. The Fund may take temporary "defensive" positions in attempting to respond to adverse market conditions. The Fund may invest any amount of its assets in cash or money market instruments in a defensive posture when the Investment Manager believes it is advisable to do so. Although taking a defensive posture is designed to protect the Fund from an anticipated market downturn, it could have the effect of reducing the benefit from any upswing in the market. When the Fund takes a defensive position, it may not achieve its investment objectives. The percentage limitations relating to the composition of the Fund's portfolio apply at the time the Fund acquires an investment. Subsequent percentage changes that result from market fluctuations will not require the Fund to sell any portfolio security. However, the Fund may be required to sell its illiquid securities holdings, if any, in response to fluctuations in the value of such holdings. The Fund may change its principal investment strategies without shareholder approval; however, you would be notified of any changes. 6 [ICON] ADDITIONAL RISK INFORMATION - -------------------------------------------------------------------------------- This section provides additional information relating to the principal risks of investing in the Fund. Common Stocks. In general, stock values fluctuate in response to activities specific to the company as well as general market, economic and political conditions. These prices can fluctuate widely. Asset-Backed Securities. Asset-backed securities have risk characteristics similar to mortgage-backed securities. Like mortgage-backed securities, they generally decrease in value as a result of interest rate increases, but may benefit less than other fixed-income securities from declining interest rates, principally because of prepayments. Also, as in the case of mortgage-backed securities, prepayments generally increase during a period of declining interest rates although other factors, such as changes in credit card use and payment patterns, may also influence prepayment rates. Asset-backed securities also involve the risk that various federal and state consumer laws and other legal and economic factors may result in the collateral backing the securities being insufficient to support payment on the securities. Foreign Securities. The Fund's investments in foreign securities involve risks that are in addition to the risks associated with domestic securities. One additional risk is currency risk. In particular, the price of securities could be adversely affected by changes in the exchange rate between U.S. dollars and a foreign market's local currency. Foreign securities also have risks related to economic and political developments abroad, including any effects of foreign social, economic or political instability. Foreign companies, in general, are not subject to the regulatory requirements of U.S. companies and, as such, there may be less publicly available information about these companies. Moreover, foreign accounting, auditing and financial reporting standards generally are different from those applicable to U.S. companies. Finally, in the event of a default of any foreign debt obligations, it may be more difficult for the Fund to obtain or enforce a judgment against the issuers of the securities. Securities of foreign issuers may be less liquid than comparable securities of U.S. issuers and, as such, their price changes may be more volatile. Furthermore, foreign exchanges and broker-dealers are generally subject to less government and exchange scrutiny and regulation than their U.S. counterparts. In addition, differences in clearance and settlement procedures in foreign markets may occasion delays in settlements of the Fund's trades effected in those markets. Depositary receipts involve substantially identical risks to those associated with direct investment in foreign securities. In addition, the underlying issuers of certain depositary receipts, particularly unsponsored or unregistered depositary receipts, are under no obligation to distribute shareholder communications to the holders of such receipts, or to pass through to them any voting rights with respect to the deposited securities. Unit Offerings/Convertible Securities. Any Fund investments in unit offerings and/or convertible securities may carry risks associated with both fixed-income and equity securities. 7 [Sidebar] MORGAN STANLEY INVESTMENT ADVISORS INC. The Investment Manager is widely recognized as a leader in the mutual fund industry and together with Morgan Stanley Services Company Inc., its wholly-owned subsidiary, had approximately $125 billion in assets under management as of August 31, 2002. [End Sidebar] [ICON] FUND MANAGEMENT - -------------------------------------------------------------------------------- The Fund has retained the Investment Manager -- Morgan Stanley Investment Advisors Inc. -- to provide administrative services, manage its business affairs and invest its assets, including the placing of orders for the purchase and sale of portfolio securities. The Investment Manager is a wholly-owned subsidiary of Morgan Stanley, a preeminent global financial services firm that maintains leading market positions in each of its three primary businesses: securities, asset management and credit services. Its address is 1221 Avenue of the Americas, New York, NY 10020. The Fund's portfolio is managed by the Taxable Fixed-Income team. Current members of the team include Stephen F. Esser, a Managing Director of the Investment Manager, Gordon W. Loery, an Executive Director of the Investment Manager, and Deanna L. Loughnane, an Executive Director of the Investment Manager. The Fund pays the Investment Manager a monthly management fee as full compensation for the services and facilities furnished to the Fund, and for Fund expenses assumed by the Investment Manager. The fee is based on the Fund's average daily net assets. For the fiscal year ended August 31, 2002 the Fund accrued total compensation to the Investment Manager amounting to 0.48% of the Fund's average daily net assets. 8 [Sidebar] CONTACTING A FINANCIAL ADVISOR If you are new to the Morgan Stanley Family of Funds and would like to contact a Financial Advisor, call toll-free 1-866-MORGAN8 for the telephone number of the Morgan Stanley office nearest you. You may also access our office locator on our Internet site at: www.morganstanley.com/funds [End Sidebar] Shareholder Information [ICON] PRICING FUND SHARES - -------------------------------------------------------------------------------- The price of Fund shares (excluding sales charges), called "net asset value," is based on the value of the Fund's portfolio securities. While the assets of each Class are invested in a single portfolio of securities, the net asset value of each Class will differ because the Classes have different ongoing distribution fees. The net asset value per share of the Fund is determined once daily at 4:00 p.m. Eastern time on each day that the New York Stock Exchange is open (or, on days when the New York Stock Exchange closes prior to 4:00 p.m., at such earlier time). Shares will not be priced on days that the New York Stock Exchange is closed. The value of the Fund's portfolio securities is based on the securities' market price when available. When a market price is not readily available, including circumstances under which the Investment Manager determines that a security's market price is not accurate, a portfolio security is valued at its fair value, as determined under procedures established by the Fund's Board of Directors. In these cases, the Fund's net asset value will reflect certain portfolio securities' fair value rather than their market price. With respect to securities that are primarily listed on foreign exchanges, the value of the Fund's portfolio securities may change on days when you will not be able to purchase or sell your shares. An exception to the Fund's general policy of using market prices concerns its short-term debt portfolio securities. Debt securities with remaining maturities of sixty days or less at the time of purchase are valued at amortized cost. However, if the cost does not reflect the securities' market value, these securities will be valued at their fair value. [ICON] HOW TO BUY SHARES - -------------------------------------------------------------------------------- You may open a new account to buy Fund shares or buy additional Fund shares for an existing account by contacting your Morgan Stanley Financial Advisor or other authorized financial representative. Your Financial Advisor will assist you, step-by-step, with the procedures to invest in the Fund. You may also purchase shares directly by calling the Fund's transfer agent and requesting an application. Because every investor has different immediate financial needs and long-term investment goals, the Fund offers investors four Classes of shares: Classes A, B, C and D. Class D shares are only offered to a limited group of investors. Each Class of shares offers a distinct structure of sales charges, distribution and service fees, and other features that are designed to address a variety of needs. Your Financial Advisor or other authorized financial representative can help you decide which Class may be most appropriate for you. When purchasing Fund shares, you must specify which Class of shares you wish to purchase. 9 [Sidebar] EASYINVEST-SM- A purchase plan that allows you to transfer money automatically from your checking or savings account or from a Money Market Fund on a semi-monthly, monthly or quarterly basis. Contact your Morgan Stanley Financial Advisor for further information about this service. [End Sidebar] When you buy Fund shares, the shares are purchased at the next share price calculated (less any applicable front-end sales charge for Class A shares) after we receive your purchase order. Your payment is due on the third business day after you place your purchase order. We reserve the right to reject any order for the purchase of Fund shares.
MINIMUM INVESTMENT AMOUNTS - ------------------------------------------------------------- Minimum Investment ------------------- Investment Options Initial Additional - ------------------------------------------------------------- Regular accounts $1,000 $100 - ------------------------------------------------------------- Individual Retirement Account $1,000 $100 - ------------------------------------------------------------- Coverdell Education Savings Account $ 500 $100 - ------------------------------------------------------------- EASYINVEST-SM- (Automatically from your checking or savings account or Money Market Fund) $ 100* $100* - -------------------------------------------------------------
* PROVIDED YOUR SCHEDULE OF INVESTMENTS TOTALS $1,000 IN TWELVE MONTHS. There is no minimum investment amount if you purchase Fund shares through: (1) the Investment Manager's mutual fund asset allocation plan, (2) a program, approved by the Fund's distributor, in which you pay an asset-based fee for advisory, administrative and/or brokerage services, (3) the following programs approved by the Fund's distributor: (i) qualified state tuition plans described in Section 529 of the Internal Revenue Code and (ii) certain other investment programs that do not charge an asset-based fee, or (4) employer-sponsored employee benefit plan accounts. Investment Options for Certain Institutional and Other Investors/Class D Shares. To be eligible to purchase Class D shares, you must qualify under one of the investor categories specified in the "Share Class Arrangements" section of this PROSPECTUS. Subsequent Investments Sent Directly to the Fund. In addition to buying additional Fund shares for an existing account by contacting your Morgan Stanley Financial Advisor, you may send a check directly to the Fund. To buy additional shares in this manner: - - Write a "letter of instruction" to the Fund specifying the name(s) on the account, the account number, the social security or tax identification number, the Class of shares you wish to purchase and the investment amount (which would include any applicable front-end sales charge). The letter must be signed by the account owner(s). - - Make out a check for the total amount payable to: Morgan Stanley High Yield Securities Inc. - - Mail the letter and check to Morgan Stanley Trust at P.O. Box 1040, Jersey City, NJ 07303. 10 [ICON] HOW TO EXCHANGE SHARES - -------------------------------------------------------------------------------- Permissible Fund Exchanges. You may exchange shares of any Class of the Fund for the same Class of any other continuously offered Multi-Class Fund, or for shares of a No-Load Fund, a Money Market Fund, North American Government Income Trust or Limited Duration U.S. Treasury Trust, without the imposition of an exchange fee. In addition, Class A shares of the Fund may be exchanged for shares of an FSC Fund (funds subject to a front-end sales charge). See the inside back cover of this PROSPECTUS for each Morgan Stanley Fund's designation as a Multi-Class Fund, No-Load Fund, Money Market Fund or an FSC Fund. If a Morgan Stanley Fund is not listed, consult the inside back cover of that fund's prospectus for its designation. Exchanges may be made after shares of the fund acquired by purchase have been held for thirty days. There is no waiting period for exchanges of shares acquired by exchange or dividend reinvestment. The current prospectus for each fund describes its investment objective(s), policies and investment minimums, and should be read before investment. Since exchanges are available only into continuously offered Morgan Stanley Funds, exchanges are not available into any new Morgan Stanley Fund during its initial offering period, or when shares of a particular Morgan Stanley Fund are not being offered for purchase. Exchange Procedures. You can process an exchange by contacting your Morgan Stanley Financial Advisor or other authorized financial representative. Otherwise, you must forward an exchange privilege authorization form to the Fund's transfer agent -- Morgan Stanley Trust -- and then write the transfer agent or call (800) 869-NEWS to place an exchange order. You can obtain an exchange privilege authorization form by contacting your Financial Advisor or other authorized financial representative or by calling (800) 869-NEWS. If you hold share certificates, no exchanges may be processed until we have received all applicable share certificates. An exchange to any Morgan Stanley Fund (except a Money Market Fund) is made on the basis of the next calculated net asset values of the funds involved after the exchange instructions are accepted. When exchanging into a Money Market Fund, the Fund's shares are sold at their next calculated net asset value and the Money Market Fund's shares are purchased at their net asset value on the following business day. The Fund may terminate or revise the exchange privilege upon required notice. The check writing privilege is not available for Money Market Fund shares you acquire in an exchange. Telephone Exchanges. For your protection when calling Morgan Stanley Trust, we will employ reasonable procedures to confirm that exchange instructions communicated over the telephone are genuine. These procedures may include requiring various forms of personal identification such as name, mailing address, social security or other tax identification number. Telephone instructions also may be recorded. Telephone instructions will be accepted if received by the Fund's transfer agent between 9:00 a.m. and 4:00 p.m. Eastern time on any day the New York Stock Exchange is open for business. During periods of drastic economic or market changes, it is possible that the telephone exchange procedures may be difficult to implement, although this has not been the case with the Fund in the past. Margin Accounts. If you have pledged your Fund shares in a margin account, contact your Morgan Stanley Financial Advisor or other authorized financial representative regarding restrictions on the exchange of such shares. 11 Tax Considerations of Exchanges. If you exchange shares of the Fund for shares of another Morgan Stanley Fund there are important tax considerations. For tax purposes, the exchange out of the Fund is considered a sale of Fund shares -- and the exchange into the other fund is considered a purchase. As a result, you may realize a capital gain or loss. You should review the "Tax Consequences" section and consult your own tax professional about the tax consequences of an exchange. Limitations on Exchanges. Certain patterns of past exchanges and/or purchase or sale transactions involving the Fund or other Morgan Stanley Funds may result in the Fund limiting or prohibiting, at its discretion, additional purchases and/or exchanges. Determinations in this regard may be made based on the frequency or dollar amount of the previous exchanges or purchase or sale transactions. You will be notified in advance of limitations on your exchange privileges. CDSC Calculations on Exchanges. See the "Share Class Arrangements" section of this PROSPECTUS for a further discussion of how applicable contingent deferred sales charges (CDSCs) are calculated for shares of one Morgan Stanley Fund that are exchanged for shares of another. For further information regarding exchange privileges, you should contact your Morgan Stanley Financial Advisor or call (800) 869-NEWS. [ICON] HOW TO SELL SHARES - -------------------------------------------------------------------------------- You can sell some or all of your Fund shares at any time. If you sell Class A, Class B or Class C shares, your net sale proceeds are reduced by the amount of any applicable CDSC. Your shares will be sold at the next price calculated after we receive your order to sell as described below.
OPTIONS PROCEDURES - -------------------------------------------------------------------------------- CONTACT YOUR To sell your shares, simply call your Morgan Stanley FINANCIAL ADVISOR Financial Advisor or other authorized financial representative. ------------------------------------------------------------ [ICON] Payment will be sent to the address to which the account is registered, or deposited in your brokerage account. - -------------------------------------------------------------------------------- BY LETTER You can also sell your shares by writing a "letter of instruction" that includes: [ICON] - your account number; - the name of the Fund; - the dollar amount or the number of shares you wish to sell; - the Class of shares you wish to sell; and - the signature of each owner as it appears on the account. - --------------------------------------------------------------------------------
12
OPTIONS PROCEDURES - -------------------------------------------------------------------------------- BY LETTER, If you are requesting payment to anyone other than the CONTINUED registered owner(s) or that payment be sent to any address other than the address of the registered owner(s) or pre-designated bank account, you will need a signature guarantee. You can obtain a signature guarantee from an eligible guarantor acceptable to Morgan Stanley Trust. (You should contact Morgan Stanley Trust at (800) 869-NEWS for a determination as to whether a particular institution is an eligible guarantor.) A notary public CANNOT provide a signature guarantee. Additional documentation may be required for shares held by a corporation, partnership, trustee or executor. ------------------------------------------------------------ Mail the letter to Morgan Stanley Trust at P.O. Box 983, Jersey City, NJ 07303. If you hold share certificates, you must return the certificates, along with the letter and any required additional documentation. ------------------------------------------------------------ A check will be mailed to the name(s) and address in which the account is registered, or otherwise according to your instructions. - -------------------------------------------------------------------------------- SYSTEMATIC If your investment in all of the Morgan Stanley Funds has a WITHDRAWAL PLAN total market value of at least $10,000, you may elect to [ICON] withdraw amounts of $25 or more, or in any whole percentage of a fund's balance (provided the amount is at least $25), on a monthly, quarterly, semi-annual or annual basis, from any fund with a balance of at least $1,000. Each time you add a fund to the plan, you must meet the plan requirements. ------------------------------------------------------------ Amounts withdrawn are subject to any applicable CDSC. A CDSC may be waived under certain circumstances. See the Class B waiver categories listed in the "Share Class Arrangements" section of this PROSPECTUS. ------------------------------------------------------------ To sign up for the Systematic Withdrawal Plan, contact your Morgan Stanley Financial Advisor or call (800) 869-NEWS. You may terminate or suspend your plan at any time. Please remember that withdrawals from the plan are sales of shares, not Fund "distributions," and ultimately may exhaust your account balance. The Fund may terminate or revise the plan at any time. - --------------------------------------------------------------------------------
Payment for Sold Shares. After we receive your complete instructions to sell as described above, a check will be mailed to you within seven days, although we will attempt to make payment within one business day. Payment may also be sent to your brokerage account. Payment may be postponed or the right to sell your shares suspended under unusual circumstances. If you request to sell shares that were recently purchased by check, your sale will not be effected until it has been verified that the check has been honored. Tax Considerations. Normally, your sale of Fund shares is subject to federal and state income tax. You should review the "Tax Consequences" section of this PROSPECTUS and consult your own tax professional about the tax consequences of a sale. Reinstatement Privilege. If you sell Fund shares and have not previously exercised the reinstatement privilege, you may, within 35 days after the date of sale, invest any portion of the proceeds in the same Class of Fund shares at their net asset value and receive a pro rata credit for any CDSC paid in connection with the sale. Involuntary Sales. The Fund reserves the right, on sixty days' notice, to sell the shares of any shareholder (other than shares held in an IRA or 403(b) Custodial Account) whose shares, due to sales by the shareholder, have a value below $100, or in the case of an account opened through EASYINVEST-SM-, if after 12 months the shareholder has invested less than $1,000 in the account. 13 [Sidebar] TARGETED DIVIDENDS-SM- You may select to have your Fund distributions automatically invested in other Classes of Fund shares or Classes of another Morgan Stanley Fund that you own. Contact your Morgan Stanley Financial Advisor for further information about this service. [End Sidebar] However, before the Fund sells your shares in this manner, we will notify you and allow you sixty days to make an additional investment in an amount that will increase the value of your account to at least the required amount before the sale is processed. No CDSC will be imposed on any involuntary sale. Margin Accounts. If you have pledged your Fund shares in a margin account, contact your Morgan Stanley Financial Advisor or other authorized financial representative regarding restrictions on the sale of such shares. [ICON] DISTRIBUTIONS - -------------------------------------------------------------------------------- The Fund passes substantially all of its earnings from income and capital gains along to its investors as "distributions." The Fund earns income from stocks and interest from fixed-income investments. These amounts are passed along to Fund shareholders as "income dividend distributions." The Fund realizes capital gains whenever it sells securities for a higher price than it paid for them. These amounts may be passed along as "capital gain distributions." The Fund declares income dividends separately for each Class. Distributions paid on Class A and Class D shares usually will be higher than for Class B and Class C because distribution fees that Class B and Class C pay are higher. Normally, income dividends are distributed to shareholders monthly. Capital gains, if any, are usually distributed in December. The Fund, however, may retain and reinvest any long-term capital gains. The Fund may at times make payments from sources other than income or capital gains that represent a return of a portion of your investment. Distributions are reinvested automatically in additional shares of the same Class and automatically credited to your account, unless you request in writing that all distributions be paid in cash. If you elect the cash option, the Fund will mail a check to you no later than seven business days after the distribution is declared. However, if you purchase Fund shares through a Financial Advisor within three business days prior to the record date for the distribution, the distribution will automatically be paid to you in cash, even if you did not request to receive all distributions in cash. No interest will accrue on uncashed checks. If you wish to change how your distributions are paid, your request should be received by the Fund's transfer agent, Morgan Stanley Trust, at least five business days prior to the record date of the distributions. [ICON] TAX CONSEQUENCES - -------------------------------------------------------------------------------- As with any investment, you should consider how your Fund investment will be taxed. The tax information in this PROSPECTUS is provided as general information. You should consult your own tax professional about the tax consequences of an investment in the Fund. Unless your investment in the Fund is through a tax-deferred retirement account, such as a 401(k) plan or IRA, you need to be aware of the possible tax consequences when: - - The Fund makes distributions; and - - You sell Fund shares, including an exchange to another Morgan Stanley Fund. 14 Taxes on Distributions. Your distributions are normally subject to federal and state income tax when they are paid, whether you take them in cash or reinvest them in Fund shares. A distribution also may be subject to local income tax. Any income dividend distributions and any short-term capital gain distributions are taxable to you as ordinary income. Any long-term capital gain distributions are taxable as long-term capital gains, no matter how long you have owned shares in the Fund. Every January, you will be sent a statement (IRS Form 1099-DIV) showing the taxable distributions paid to you in the previous year. The statement provides information on your dividends and capital gains for tax purposes. Taxes on Sales. Your sale of Fund shares normally is subject to federal and state income tax and may result in a taxable gain or loss to you. A sale also may be subject to local income tax. Your exchange of Fund shares for shares of another Morgan Stanley Fund is treated for tax purposes like a sale of your original shares and a purchase of your new shares. Thus, the exchange may, like a sale, result in a taxable gain or loss to you and will give you a new tax basis for your new shares. When you open your Fund account, you should provide your social security or tax identification number on your investment application. By providing this information, you will avoid being subject to a federal backup withholding tax (approximately 30% currently) on taxable distributions and redemption proceeds. Any withheld amount would be sent to the IRS as an advance tax payment. [ICON] SHARE CLASS ARRANGEMENTS - -------------------------------------------------------------------------------- The Fund offers several Classes of shares having different distribution arrangements designed to provide you with different purchase options according to your investment needs. Your Morgan Stanley Financial Advisor or other authorized financial representative can help you decide which Class may be appropriate for you. The general public is offered three Classes: Class A shares, Class B shares and Class C shares, which differ principally in terms of sales charges and ongoing expenses. A fourth Class, Class D shares, is offered only to a limited category of investors. Shares that you acquire through reinvested distributions will not be subject to any front-end sales charge or CDSC -- contingent deferred sales charge. Sales personnel may receive different compensation for selling each Class of shares. The sales charges applicable to each Class provide for the distribution financing of shares of that Class. The chart below compares the sales charge and annual 12b-1 fee applicable to each Class:
MAXIMUM CLASS SALES CHARGE ANNUAL 12B-1 FEE - --------------------------------------------------------------------------------------------- A Maximum 4.25% initial sales charge reduced for purchase of $25,000 or more; shares sold without an initial sales charge are generally subject to a 1.0% CDSC during the first year 0.25% - --------------------------------------------------------------------------------------------- B Maximum 5.0% CDSC during the first year decreasing to 0% after six years 0.75% - --------------------------------------------------------------------------------------------- C 1.0% CDSC during the first year 0.85% - --------------------------------------------------------------------------------------------- D None None - ---------------------------------------------------------------------------------------------
15 [Sidebar] FRONT-END SALES CHARGE OR FSC An initial sales charge you pay when purchasing Class A shares that is based on a percentage of the offering price. The percentage declines based upon the dollar value of Class A shares you purchase. We offer three ways to reduce your Class A sales charges -- the Combined Purchase Privilege, Right of Accumulation and Letter of Intent. [End Sidebar] CLASS A SHARES Class A shares are sold at net asset value plus an initial sales charge of up to 4.25%. The initial sales charge is reduced for purchases of $25,000 or more according to the schedule below. Investments of $1 million or more are not subject to an initial sales charge, but are generally subject to a contingent deferred sales charge, or CDSC, of 1.0% on sales made within one year after the last day of the month of purchase. The CDSC will be assessed in the same manner and with the same CDSC waivers as with Class B shares. Class A shares are also subject to a distribution (12b-1) fee of up to 0.25% of the average daily net assets of the Class. This fee is lower than the distribution fee paid by Class B or Class C shares. The Fund will not accept a purchase order for Class A shares that qualifies for investment in Class D shares. The offering price of Class A shares includes a sales charge (expressed as a percentage of the offering price) on a single transaction as shown in the following table:
FRONT-END SALES CHARGE --------------------------------------------- AMOUNT OF PERCENTAGE OF APPROXIMATE PERCENTAGE SINGLE TRANSACTION PUBLIC OFFERING PRICE OF NET AMOUNT INVESTED - --------------------------------------------------------------------------------------- Less than $25,000 4.25% 4.44% - --------------------------------------------------------------------------------------- $25,000 but less than $50,000 4.00% 4.17% - --------------------------------------------------------------------------------------- $50,000 but less than $100,000 3.50% 3.63% - --------------------------------------------------------------------------------------- $100,000 but less than $250,000 2.75% 2.83% - --------------------------------------------------------------------------------------- $250,000 but less than $500,000 2.25% 2.30% - --------------------------------------------------------------------------------------- $500,000 but less than $1 million 1.75% 1.78% - --------------------------------------------------------------------------------------- $1 million and over 0.00% 0.00% - ---------------------------------------------------------------------------------------
The reduced sales charge schedule is applicable to purchases of Class A shares in a single transaction by: - - A single account (including an individual, trust or fiduciary account). - - Family member accounts (limited to husband, wife and children under the age of 21). - - Pension, profit sharing or other employee benefit plans of companies and their affiliates. - - Tax-exempt organizations. - - Groups organized for a purpose other than to buy mutual fund shares. Combined Purchase Privilege. You also will have the benefit of reduced sales charges by combining purchases of Class A shares of the Fund in a single transaction with purchases of Class A shares of other Multi-Class Funds and shares of FSC Funds. Right of Accumulation. You also may benefit from a reduction of sales charges if the cumulative net asset value of Class A shares of the Fund purchased in a single transaction, together with shares of other funds you currently own which were previously purchased at a price including a front-end sales charge (or Class A shares purchased at 16 $1 million or more), and shares acquired through reinvestment of distributions, amounts to $25,000 or more. Also, if you have a cumulative net asset value of all your Class A and Class D shares equal to at least $5 million (or $25 million for certain employee benefit plans), you are eligible to purchase Class D shares of any fund subject to the fund's minimum initial investment requirement. You must notify your Morgan Stanley Financial Advisor or other authorized financial representative (or Morgan Stanley Trust if you purchase directly through the Fund), at the time a purchase order is placed, that the purchase qualifies for the reduced sales charge under the Right of Accumulation. Similar notification must be made in writing when an order is placed by mail. The reduced sales charge will not be granted if: (i) notification is not furnished at the time of the order; or (ii) a review of the records of Morgan Stanley DW Inc. ("Morgan Stanley DW") or other authorized dealer of Fund shares or the Fund's transfer agent does not confirm your represented holdings. Letter of Intent. The schedule of reduced sales charges for larger purchases also will be available to you if you enter into a written "Letter of Intent." A Letter of Intent provides for the purchase of Class A shares of the Fund or other Multi-Class Funds or shares of FSC Funds within a thirteen-month period. The initial purchase under a Letter of Intent must be at least 5% of the stated investment goal. To determine the applicable sales charge reduction, you may also include: (1) the cost of shares of other Morgan Stanley Funds which were previously purchased at a price including a front-end sales charge during the 90-day period prior to the distributor receiving the Letter of Intent, and (2) the cost of shares of other funds you currently own acquired in exchange for shares of funds purchased during that period at a price including a front-end sales charge. You can obtain a Letter of Intent by contacting your Morgan Stanley Financial Advisor or other authorized financial representative, or by calling (800) 869-NEWS. If you do not achieve the stated investment goal within the thirteen-month period, you are required to pay the difference between the sales charges otherwise applicable and sales charges actually paid, which may be deducted from your investment. Other Sales Charge Waivers. In addition to investments of $1 million or more, your purchase of Class A shares is not subject to a front-end sales charge (or a CDSC upon sale) if your account qualifies under one of the following categories: - - A trust for which Morgan Stanley Trust provides discretionary trustee services. - - Persons participating in a fee-based investment program (subject to all of its terms and conditions, including termination fees, and mandatory sale or transfer restrictions on termination) approved by the Fund's distributor pursuant to which they pay an asset-based fee for investment advisory, administrative and/or brokerage services. - - Qualified state tuition plans described in Section 529 of the Internal Revenue Code and donor-advised charitable gift funds (subject to all applicable terms and conditions) and certain other investment programs that do not charge an asset-based fee and have been approved by the Fund's distributor. - - Employer-sponsored employee benefit plans, whether or not qualified under the Internal Revenue Code, for which (i) Morgan Stanley Trust serves as trustee. (ii) Morgan Stanley's Retirement Plan Services serves as recordkeeper under a written Recordkeeping Services Agreement or (iii) an entity independent from Morgan Stanley serves as recordkeeper under an alliance or similar agreement with Morgan Stanley's Retirement Plan Services (together, "Morgan Stanley Eligible Plans"), provided that, in the case of (i) and (ii) above, any such plan has at least 200 eligible employees. 17 [Sidebar] CONTINGENT DEFERRED SALES CHARGE OR CDSC A fee you pay when you sell shares of certain Morgan Stanley Funds purchased without an initial sales charge. This fee declines the longer you hold your shares as set forth in the table. [End Sidebar] - - A Morgan Stanley Eligible Plan whose Class B shares have converted to Class A shares, regardless of the plan's asset size or number of eligible employees. - - Insurance company separate accounts that have been approved by the Fund's distributor. - - A client of a Morgan Stanley Financial Advisor who joined us from another investment firm within six months prior to the date of purchase of Fund shares, and who used the proceeds from the sale of shares of a proprietary mutual fund of that Financial Advisor's previous firm that imposed either a front-end or deferred sales charge to purchase Class A shares, provided that: (1) the client sold the shares not more than 60 days prior to the purchase of Fund shares, and (2) the sale proceeds were maintained in the interim in cash or a Money Market Fund. - - Current or retired Directors or Trustees of the Morgan Stanley Funds, such persons' spouses and children under the age of 21, and trust accounts for which any of such persons is a beneficiary. - - Current or retired directors, officers and employees of Morgan Stanley and any of its subsidiaries, such persons' spouses and children under the age of 21, and trust accounts for which any such persons is a beneficiary. CLASS B SHARES Class B shares are offered at net asset value with no initial sales charge but are subject to a contingent deferred sales charge, or CDSC, as set forth in the table below. For the purpose of calculating the CDSC, shares are deemed to have been purchased on the last day of the month during which they were purchased.
CDSC AS A PERCENTAGE YEAR SINCE PURCHASE PAYMENT MADE OF AMOUNT REDEEMED - -------------------------------------------------------------- First 5.0% - -------------------------------------------------------------- Second 4.0% - -------------------------------------------------------------- Third 3.0% - -------------------------------------------------------------- Fourth 2.0% - -------------------------------------------------------------- Fifth 2.0% - -------------------------------------------------------------- Sixth 1.0% - -------------------------------------------------------------- Seventh and thereafter None - --------------------------------------------------------------
Each time you place an order to sell or exchange shares, shares with no CDSC will be sold or exchanged first, then shares with the lowest CDSC will be sold or exchanged next. For any shares subject to a CDSC, the CDSC will be assessed on an amount equal to the lesser of the current market value or the cost of the shares being sold. The Fund will generally not accept a purchase order for Class B shares in the amount of $100,000 or more. CDSC Waivers. A CDSC, if otherwise applicable, will be waived in the case of: - - Sales of shares held at the time you die or become disabled (within the definition in Section 72(m)(7) of the Internal Revenue Code which relates to the ability to engage in gainful employment), if the shares are: (i) registered either in your name (not a trust) or in the names of you and your spouse as joint tenants with 18 right of survivorship; or (ii) held in a qualified corporate or self-employed retirement plan, IRA or 403(b) Custodial Account, provided in either case that the sale is requested within one year of your death or initial determination of disability. - - Sales in connection with the following retirement plan "distributions": (i) lump-sum or other distributions from a qualified corporate or self-employed retirement plan following retirement (or, in the case of a "key employee" of a "top heavy" plan, following attainment of age 59 1/2); (ii) distributions from an IRA or 403(b) Custodial Account following attainment of age 59 1/2; or (iii) a tax-free return of an excess IRA contribution (a "distribution" does not include a direct transfer of IRA, 403(b) Custodial Account or retirement plan assets to a successor custodian or trustee). - - Sales of shares held for you as a participant in a Morgan Stanley Eligible Plan. - - Sales of shares in connection with the Systematic Withdrawal Plan of up to 12% annually of the value of each fund from which plan sales are made. The percentage is determined on the date you establish the Systematic Withdrawal Plan and based on the next calculated share price. You may have this CDSC waiver applied in amounts up to 1% per month, 3% per quarter, 6% semi-annually or 12% annually. Shares with no CDSC will be sold first, followed by those with the lowest CDSC. As such, the waiver benefit will be reduced by the amount of your shares that are not subject to a CDSC. If you suspend your participation in the plan, you may later resume plan payments without requiring a new determination of the account value for the 12% CDSC waiver. - - Sales of shares if you simultaneously invest the proceeds in the Investment Manager's mutual fund asset allocation program, pursuant to which investors pay an asset-based fee. Any shares you acquire in connection with the Investment Manager's mutual fund asset allocation program are subject to all of the terms and conditions of that program, including termination fees, and mandatory sale or transfer restrictions on termination. All waivers will be granted only following the Fund's distributor receiving confirmation of your entitlement. If you believe you are eligible for a CDSC waiver, please contact your Financial Advisor or call (800) 869-NEWS. Distribution Fee. Class B shares are subject to an annual distribution (12b-1) fee of 0.75% of the average daily net assets of Class B. This fee is higher than the annual distribution fee paid by Class A. Conversion Feature. After ten (10) years, Class B shares will convert automatically to Class A shares of the Fund with no initial sales charge. The ten year period runs from the last day of the month in which the shares were purchased, or in the case of Class B shares acquired through an exchange, from the last day of the month in which the original Class B shares were purchased; the shares will convert to Class A shares based on their relative net asset values in the month following the ten year period. At the same time, an equal proportion of Class B shares acquired through automatically reinvested distributions will convert to Class A shares on the same basis. In the case of Class B shares held in a Morgan Stanley Eligible Plan, the plan is treated as a single investor and all Class B shares will convert to Class A shares on the conversion date of the Class B shares of a Morgan Stanley Fund purchased by that plan. Currently, the Class B share conversion is not a taxable event; the conversion feature may be cancelled if it is deemed a taxable event in the future by the Internal Revenue Service. 19 If you exchange your Class B shares for shares of a Money Market Fund, a No-Load Fund, North American Government Income Trust or Limited Duration U.S. Treasury Trust, the holding period for conversion is frozen as of the last day of the month of the exchange and resumes on the last day of the month you exchange back into Class B shares. Exchanging Shares Subject to a CDSC. There are special considerations when you exchange Fund shares that are subject to a CDSC. When determining the length of time you held the shares and the corresponding CDSC rate, any period (starting at the end of the month) during which you held shares of a fund that does NOT charge a CDSC WILL NOT BE COUNTED. Thus, in effect the "holding period" for purposes of calculating the CDSC is frozen upon exchanging into a fund that does not charge a CDSC. For example, if you held Class B shares of the Fund for one year, exchanged to Class B of another Morgan Stanley Multi-Class Fund for another year, then sold your shares, a CDSC rate of 4% would be imposed on the shares based on a two year holding period -- one year for each fund. However, if you had exchanged the shares of the Fund for a Money Market Fund (which does not charge a CDSC) instead of the Multi-Class Fund, then sold your shares, a CDSC rate of 5% would be imposed on the shares based on a one year holding period. The one year in the Money Market Fund would not be counted. Nevertheless, if shares subject to a CDSC are exchanged for a fund that does not charge a CDSC, you will receive a credit when you sell the shares equal to the distribution (12b-1) fees, if any, you paid on those shares while in that fund up to the amount of any applicable CDSC. In addition, shares that are exchanged into or from a Morgan Stanley Fund subject to a higher CDSC rate will be subject to the higher rate, even if the shares are re-exchanged into a fund with a lower CDSC rate. CLASS C SHARES Class C shares are sold at net asset value with no initial sales charge but are subject to a CDSC of 1.0% on sales made within one year after the last day of the month of purchase. The CDSC will be assessed in the same manner and with the same CDSC waivers as with Class B shares. The Fund will not accept a purchase order for Class C shares in the amount of $1 million or more. Distribution Fee. Class C shares are subject to an annual distribution (12b-1) fee of up to 0.85% of the average daily net assets of that Class. This fee is higher than the annual distribution fee paid by Class A. Unlike Class B shares, Class C shares have no conversion feature and, accordingly, an investor that purchases Class C shares may be subject to distribution (12b-1) fees applicable to Class C shares for an indefinite period. CLASS D SHARES Class D shares are offered without any sales charge on purchases or sales and without any distribution (12b-1) fee. Class D shares are offered only to investors meeting an initial investment minimum of $5 million ($25 million for Morgan Stanley Eligible Plans) and the following investor categories: - - Investors participating in the Investment Manager's mutual fund asset allocation program (subject to all of its terms and conditions, including termination fees, and mandatory sale or transfer restrictions on termination) pursuant to which they pay an asset-based fee. - - Persons participating in a fee-based investment program (subject to all of its terms and conditions, including termination fees, and mandatory sale or transfer restrictions on termination) approved by the Fund's distributor 20 pursuant to which they pay an asset-based fee for investment advisory, administrative and/or brokerage services. With respect to Class D shares held through the Morgan Stanley Choice Program, at such time as those Fund shares are no longer held through the program, the shares will be automatically converted into Class A shares (which are subject to higher expenses than Class D shares) based on the then current relative net asset values of the two Classes. - - Certain investment programs that do not charge an asset-based fee and have been approved by the Fund's distributor. - - Employee benefit plans maintained by Morgan Stanley or any of its subsidiaries for the benefit of certain employees of Morgan Stanley and its subsidiaries. - - Certain unit investment trusts sponsored by Morgan Stanley DW. - - Certain other open-end investment companies whose shares are distributed by the Fund's distributor. - - Investors who were shareholders of the Dean Witter Retirement Series on September 11, 1998 for additional purchases for their former Dean Witter Retirement Series accounts. A purchase order meeting the requirements for investment in Class D will only be accepted for Class D shares. Class D shares are not offered for investments made through Section 529 plans, donor-advised charitable gift funds and insurance company separate accounts that have been approved by the Fund's distributor (regardless of the size of the investment). Meeting Class D Eligibility Minimums. To meet the $5 million ($25 million for Morgan Stanley Eligible Plans) initial investment to qualify to purchase Class D shares you may combine: (1) purchases in a single transaction of Class D shares of the Fund and other Morgan Stanley Multi-Class Funds; and/or (2) previous purchases of Class A and Class D shares of Multi-Class Funds and shares of FSC Funds you currently own, along with shares of Morgan Stanley Funds you currently own that you acquired in exchange for those shares. NO SALES CHARGES FOR REINVESTED CASH DISTRIBUTIONS If you receive a cash payment representing an income dividend or capital gain and you reinvest that amount in the applicable Class of shares by returning the check within 30 days of the payment date, the purchased shares would not be subject to an initial sales charge or CDSC. PLAN OF DISTRIBUTION (RULE 12b-1 FEES) The Fund has adopted a Plan of Distribution in accordance with Rule 12b-1 under the Investment Company Act of 1940 with respect to the distribution of Class A, Class B and Class C shares. (Class D shares are offered without any distribution fee.) The Plan allows the Fund to pay distribution fees for the sale and distribution of these shares. It also allows the Fund to pay for services to shareholders of Class A, Class B and Class C shares. Because these fees are paid out of the Fund's assets on an ongoing basis, over time these fees will increase the cost of your investment in these Classes and may cost you more than paying other types of sales charges. 21 Financial Highlights The financial highlights table is intended to help you understand the Fund's financial performance for the periods indicated. Certain information reflects financial results for a single Fund share throughout each period. The total returns in the table represent the rate an investor would have earned or lost on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information has been audited by Deloitte & Touche LLP, independent auditors, whose report, along with the Fund's financial statements, is included in the annual report, which is available upon request. Class A Shares - --------------------------------------------------------------------------------
For the Year Ended August 31, -------------------------------------------------------------------------- 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- SELECTED PER SHARE DATA: - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 2.32 $ 4.35 $ 5.51 $ 6.16 $ 6.82 - --------------------------------------------------------------------------------------------------------------------------------- Income (loss) from investment operations: Net investment income++ 0.26(2) 0.47 0.69 0.72 0.76 Net realized and unrealized loss (0.73)(2) (1.99) (1.13) (0.63) (0.71) ------- ------- ------- ------- ------- Total income (loss) from investment operations (0.47) (1.52) (0.44) 0.09 0.05 - --------------------------------------------------------------------------------------------------------------------------------- Less dividends and distributions from: Net investment income (0.27) (0.51) (0.72) (0.74) (0.71) Paid-in-capital (0.03) -- -- -- -- ------- ------- ------- ------- ------- Total dividends and distributions (0.30) (0.51) (0.72) (0.74) (0.71) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 1.55 $ 2.32 $ 4.35 $ 5.51 $ 6.16 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN+ (21.70)% (37.05)% (8.88)% 1.47% 0.40% - --------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(1): - --------------------------------------------------------------------------------------------------------------------------------- Expenses 0.99% 0.77% 0.70% 0.68% 0.75% - --------------------------------------------------------------------------------------------------------------------------------- Net investment income 13.76%(2) 15.17% 13.62% 12.42% 11.30% - --------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA: - --------------------------------------------------------------------------------------------------------------------------------- Net assets, end of period, in thousands $23,879 $36,762 $57,273 $68,667 $30,678 - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate 39% 49% 20% 36% 66% - ---------------------------------------------------------------------------------------------------------------------------------
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. + DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. (2) EFFECTIVE SEPTEMBER 1, 2001, THE FUND HAS ADOPTED THE PROVISIONS OF THE AICPA AUDIT AND ACCOUNTING GUIDE FOR INVESTMENT COMPANIES, AS REVISED, RELATED TO PREMIUMS AND DISCOUNTS ON DEBT SECURITIES. THE EFFECT OF THIS CHANGE FOR THE YEAR ENDED AUGUST 31, 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 0.74%. THE FINANCIAL HIGHLIGHTS DATA PRESENTED IN THIS TABLE FOR PRIOR PERIODS HAS NOT BEEN RESTATED TO REFLECT THIS CHANGE. 22 Class B Shares - --------------------------------------------------------------------------------
For the Year Ended August 31, ---------------------------------------------------------------------------- 2002 2001 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------- SELECTED PER SHARE DATA: - -------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 2.32 $ 4.34 $ 5.50 $ 6.15 $ 6.82 - -------------------------------------------------------------------------------------------------------------------------------- Income (loss) from investment operations: Net investment income++ 0.25(2) 0.46 0.66 0.69 0.73 Net realized and unrealized loss (0.73)(2) (1.99) (1.13) (0.64) (0.72) -------- -------- ---------- ---------- ---------- Total income (loss) from investment operations (0.48) (1.53) (0.47) 0.05 0.01 - -------------------------------------------------------------------------------------------------------------------------------- Less dividends and distributions from: Net investment income (0.26) (0.49) (0.69) (0.70) (0.68) Paid-in-capital (0.03) -- -- -- -- -------- -------- ---------- ---------- ---------- Total dividends and distributions (0.29) (0.49) (0.69) (0.70) (0.68) - -------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 1.55 $ 2.32 $ 4.34 $ 5.50 $ 6.15 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN+ (22.00)% (37.27)% (9.39)% 0.92% (0.23)% - -------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(1): - -------------------------------------------------------------------------------------------------------------------------------- Expenses 1.56% 1.37% 1.25% 1.24% 1.25% - -------------------------------------------------------------------------------------------------------------------------------- Net investment income 13.19%(2) 14.57% 13.07% 11.86% 10.80% - -------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA: - -------------------------------------------------------------------------------------------------------------------------------- Net assets, end of period, in thousands $371,399 $664,706 $1,381,008 $1,927,186 $1,761,147 - -------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate 39% 49% 20% 36% 66% - --------------------------------------------------------------------------------------------------------------------------------
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. + DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. (2) EFFECTIVE SEPTEMBER 1, 2001, THE FUND HAS ADOPTED THE PROVISIONS OF THE AICPA AUDIT AND ACCOUNTING GUIDE FOR INVESTMENT COMPANIES, AS REVISED, RELATED TO PREMIUMS AND DISCOUNTS ON DEBT SECURITIES. THE EFFECT OF THIS CHANGE FOR THE YEAR ENDED AUGUST 31, 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 0.74%. THE FINANCIAL HIGHLIGHTS DATA PRESENTED IN THIS TABLE FOR PRIOR PERIODS HAS NOT BEEN RESTATED TO REFLECT THIS CHANGE. 23 Class C Shares - --------------------------------------------------------------------------------
For the Year Ended August 31, -------------------------------------------------------------------------- 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- SELECTED PER SHARE DATA: - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 2.32 $ 4.34 $ 5.51 $ 6.15 $ 6.82 - --------------------------------------------------------------------------------------------------------------------------------- Income (loss) from investment operations: Net investment income++ 0.25(2) 0.45 0.66 0.68 0.72 Net realized and unrealized loss (0.73)(2) (1.98) (1.14) (0.62) (0.72) ------- ------- ------- -------- ------- Total income (loss) from investment operations (0.48) (1.53) (0.48) 0.06 0.00 - --------------------------------------------------------------------------------------------------------------------------------- Less dividends and distributions from: Net investment income (0.26) (0.49) (0.69) (0.70) (0.67) Paid-in-capital (0.03) -- -- -- -- ------- ------- ------- -------- ------- Total dividends and distributions (0.29) (0.49) (0.69) (0.70) (0.67) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 1.55 $ 2.32 $ 4.34 $ 5.51 $ 6.15 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN+ (22.11)% (37.24)% (9.66)% 0.99% (0.34)% - --------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(1): - --------------------------------------------------------------------------------------------------------------------------------- Expenses 1.66% 1.47% 1.35% 1.34% 1.36% - --------------------------------------------------------------------------------------------------------------------------------- Net investment income 13.09%(2) 14.47% 12.97% 11.76% 10.69% - --------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA: - --------------------------------------------------------------------------------------------------------------------------------- Net assets, end of period, in thousands $33,978 $49,818 $86,951 $109,142 $56,626 - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate 39% 49% 20% 36% 66% - ---------------------------------------------------------------------------------------------------------------------------------
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. + DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. (2) EFFECTIVE SEPTEMBER 1, 2001, THE FUND HAS ADOPTED THE PROVISIONS OF THE AICPA AUDIT AND ACCOUNTING GUIDE FOR INVESTMENT COMPANIES, AS REVISED, RELATED TO PREMIUMS AND DISCOUNTS ON DEBT SECURITIES. THE EFFECT OF THIS CHANGE FOR THE YEAR ENDED AUGUST 31, 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 0.74%. THE FINANCIAL HIGHLIGHTS DATA PRESENTED IN THIS TABLE FOR PRIOR PERIODS HAS NOT BEEN RESTATED TO REFLECT THIS CHANGE. 24 Class D Shares - --------------------------------------------------------------------------------
For the Year Ended August 31, -------------------------------------------------------------------------- 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- SELECTED PER SHARE DATA: - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 2.32 $ 4.35 $ 5.51 $ 6.16 $ 6.82 - --------------------------------------------------------------------------------------------------------------------------------- Income (loss) from investment operations: Net investment income++ 0.26(2) 0.48 0.70 0.74 0.78 Net realized and unrealized loss (0.73)(2) (1.99) (1.13) (0.64) (0.71) ------- -------- -------- -------- -------- Total income (loss) from investment operations. (0.47) (1.51) (0.43) 0.10 0.07 - --------------------------------------------------------------------------------------------------------------------------------- Less dividends and distributions from: Net investment income (0.27) (0.52) (0.73) (0.75) (0.73) Paid-in-capital (0.03) -- -- -- -- ------- -------- -------- -------- -------- Total dividends and distributions (0.30) (0.52) (0.73) (0.75) (0.73) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 1.55 $ 2.32 $ 4.35 $ 5.51 $ 6.16 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN+ (21.45)% (36.95)% (8.69)% 1.67% 0.63% - --------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(1): - --------------------------------------------------------------------------------------------------------------------------------- Expenses 0.81% 0.62% 0.50% 0.49% 0.51% - --------------------------------------------------------------------------------------------------------------------------------- Net investment income 13.94%(2) 15.32% 13.82% 12.61% 11.54% - --------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA: - --------------------------------------------------------------------------------------------------------------------------------- Net assets, end of period, in thousands $86,436 $137,319 $246,941 $333,714 $400,582 - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate 39% 49% 20% 36% 66% - ---------------------------------------------------------------------------------------------------------------------------------
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. + CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. (2) EFFECTIVE SEPTEMBER 1, 2001, THE FUND HAS ADOPTED THE PROVISIONS OF THE AICPA AUDIT AND ACCOUNTING GUIDE FOR INVESTMENT COMPANIES, AS REVISED, RELATED TO PREMIUMS AND DISCOUNTS ON DEBT SECURITIES. THE EFFECT OF THIS CHANGE FOR THE YEAR ENDED AUGUST 31, 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 0.74%. THE FINANCIAL HIGHLIGHTS DATA PRESENTED IN THIS TABLE FOR PRIOR PERIODS HAS NOT BEEN RESTATED TO REFLECT THIS CHANGE. 25 Notes ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ 26 Notes ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ 27 Notes ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ 28 Morgan Stanley Funds - ----------------------------------------- - - GLOBAL/INTERNATIONAL FUNDS European Growth Fund Fund of Funds - International Portfolio Global Advantage Fund Global Dividend Growth Securities Global Utilities Fund International Fund International SmallCap Fund International Value Equity Fund Japan Fund Latin American Growth Fund Pacific Growth Fund - - GROWTH FUNDS 21st Century Trend Fund Aggressive Equity Fund All Star Growth Fund American Opportunities Fund Biotechnology Fund Capital Opportunities Trust Developing Growth Securities Trust Financial Services Trust Growth Fund Health Sciences Trust Information Fund KLD Social Index Fund Market Leader Trust Mid-Cap Value Fund Nasdaq-100 Index Fund Natural Resource Development Securities New Discoveries Fund Next Generation Trust Small-Mid Special Value Fund Special Growth Fund Special Value Fund Tax-Managed Growth Fund Technology Fund - - GROWTH + INCOME FUNDS Balanced Growth Fund Balanced Income Fund Convertible Securities Trust Dividend Growth Securities Equity Fund Fund of Funds - Domestic Portfolio Fundamental Value Fund Income Builder Fund Real Estate Fund S&P 500 Index Fund Strategist Fund Total Market Index Fund Total Return Trust Utilities Fund Value Fund Value-Added Market Series/ Equity Portfolio - - INCOME FUNDS Diversified Income Trust Federal Securities Trust High Yield Securities Intermediate Income Securities Limited Duration Fund (NL) Limited Duration U.S. Treasury Trust Liquid Asset Fund (MM) North American Government Income Trust U.S. Government Money Market Trust (MM) U.S. Government Securities Trust - - TAX-FREE INCOME FUNDS California Tax-Free Daily Income Trust (MM) California Tax-Free Income Fund Hawaii Municipal Trust (FSC) Limited Term Municipal Trust (NL) Multi-State Municipal Series Trust (FSC) New York Municipal Money Market Trust (MM) New York Tax-Free Income Fund Tax-Exempt Securities Trust Tax-Free Daily Income Trust (MM) - -------------------------------------------------------------------------------- THERE MAY BE FUNDS CREATED OR TERMINATED AFTER THIS PROSPECTUS WAS PUBLISHED. PLEASE CONSULT THE INSIDE BACK COVER OF A NEW FUND'S PROSPECTUS FOR ITS DESIGNATION, E.G., MULTI-CLASS FUND OR MONEY MARKET FUND. UNLESS OTHERWISE NOTED, EACH LISTED MORGAN STANLEY FUND, EXCEPT FOR NORTH AMERICAN GOVERNMENT INCOME TRUST AND LIMITED DURATION U.S. TREASURY TRUST, IS A MULTI-CLASS FUND. A MULTI-CLASS FUND IS A MUTUAL FUND OFFERING MULTIPLE CLASSES OF SHARES. THE OTHER TYPES OF FUNDS ARE: NL - NO-LOAD (MUTUAL) FUND; MM - MONEY MARKET FUND; FSC - A MUTUAL FUND SOLD WITH A FRONT-END SALES CHARGE AND A DISTRIBUTION (12b-1) FEE. [MORGAN STANLEY LOGO] Additional information about the Fund's investments is available in the Fund's ANNUAL and SEMI-ANNUAL REPORTS TO SHAREHOLDERS. In the Fund's ANNUAL REPORT, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. The Fund's STATEMENT OF ADDITIONAL INFORMATION also provides additional information about the Fund. The STATEMENT OF ADDITIONAL INFORMATION is incorporated herein by reference (legally is part of this PROSPECTUS). For a free copy of any of these documents, to request other information about the Fund, or to make shareholder inquiries, please call: (800) 869-NEWS You also may obtain information about the Fund by calling your Morgan Stanley Financial Advisor or by visiting our Internet site at: www.morganstanley.com/funds Information about the Fund (including the STATEMENT OF ADDITIONAL INFORMATION) can be viewed and copied at the Securities and Exchange Commission's Public Reference Room in Washington, DC. Information about the Reference Room's operations may be obtained by calling the SEC at (202) 942-8090. Reports and other information about the Fund are available on the EDGAR Database on the SEC's Internet site (www.sec.gov) and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the Public Reference Section of the SEC, Washington, DC 20549-0102. TICKER SYMBOLS: Class A: HYLAX Class C: HYLCX - --------------------- --------------------- Class B: HYLBX Class D: HYLDX - --------------------- ---------------------
[MORGAN STANLEY LOGO] Morgan Stanley High Yield Securities [COVER PHOTO] A MUTUAL FUND WHOSE PRIMARY INVESTMENT OBJECTIVE IS TO EARN A HIGH LEVEL OF CURRENT INCOME. AS A SECONDARY OBJECTIVE, THE FUND SEEKS CAPITAL APPRECIATION BUT ONLY TO THE EXTENT CONSISTENT WITH ITS PRIMARY OBJECTIVE. Prospectus - September 30, 2002 (THE FUND'S INVESTMENT COMPANY ACT FILE NO. IS 811-2932) STATEMENT OF ADDITIONAL INFORMATION MORGAN STANLEY SEPTEMBER 30, 2002 HIGH YIELD SECURITIES INC.
- ---------------------------------------------------------------------- This STATEMENT OF ADDITIONAL INFORMATION is not a prospectus. The PROSPECTUS (dated September 30, 2002) for Morgan Stanley High Yield Securities Inc. (the "Fund") may be obtained without charge from the Fund at its address or telephone number listed below or from Morgan Stanley DW Inc. at any of its branch offices. Morgan Stanley High Yield Securities Inc. 1221 Avenue of the Americas New York, NY 10020 (800) 869-NEWS TABLE OF CONTENTS - -------------------------------------------------------------------------------- I. Fund History................................................... 4 II. Description of the Fund and Its Investments and Risks......... 4 A. Classification.............................................. 4 B. Investment Strategies and Risks............................. 4 C. Fund Policies/Investment Restrictions....................... 10 III. Management of the Fund....................................... 12 A. Board of Directors.......................................... 12 B. Management Information...................................... 12 C. Compensation................................................ 17 IV. Control Persons and Principal Holders of Securities........... 19 V. Investment Management and Other Services....................... 19 A. Investment Manager.......................................... 19 B. Principal Underwriter....................................... 20 C. Services Provided by the Investment Manager................. 20 D. Dealer Reallowances......................................... 21 E. Rule 12b-1 Plan............................................. 22 F. Other Service Providers..................................... 26 G. Codes of Ethics............................................. 26 VI. Brokerage Allocation and Other Practices...................... 26 A. Brokerage Transactions...................................... 26 B. Commissions................................................. 26 C. Brokerage Selection......................................... 27 D. Directed Brokerage.......................................... 28 E. Regular Broker-Dealers...................................... 28 VII. Capital Stock and Other Securities........................... 28 VIII. Purchase, Redemption and Pricing of Shares.................. 28 A. Purchase/Redemption of Shares............................... 28 B. Offering Price.............................................. 29 IX. Taxation of the Fund and Shareholders......................... 30 X. Underwriters................................................... 32 XI. Calculation of Performance Data............................... 32 XII. Financial Statements......................................... 34
2 GLOSSARY OF SELECTED DEFINED TERMS - -------------------------------------------------------------------------------- The terms defined in this glossary are frequently used in this STATEMENT OF ADDITIONAL INFORMATION (other terms used occasionally are defined in the text of the document). "CUSTODIAN"--The Bank of New York. "DIRECTORS"--The Board of Directors of the Fund. "DISTRIBUTOR"--Morgan Stanley Distributors Inc., a wholly-owned broker-dealer subsidiary of Morgan Stanley. "FINANCIAL ADVISORS"--Morgan Stanley authorized financial services representatives. "FUND"--Morgan Stanley High Yield Securities Inc., a registered open-end investment company. "INDEPENDENT DIRECTORS"--Directors who are not "interested persons" (as defined by the Investment Company Act) of the Fund. "INVESTMENT MANAGER"--Morgan Stanley Investment Advisors Inc., a wholly-owned investment advisor subsidiary of Morgan Stanley. "MORGAN STANLEY & CO."--Morgan Stanley & Co. Incorporated, a wholly-owned broker-dealer subsidiary of Morgan Stanley. "MORGAN STANLEY DW"--Morgan Stanley DW Inc., a wholly-owned broker-dealer subsidiary of Morgan Stanley. "MORGAN STANLEY FUNDS"--Registered investment companies for which the Investment Manager serves as the investment advisor and that hold themselves out to investors as related companies for investment and investor services. "MORGAN STANLEY SERVICES"--Morgan Stanley Services Company Inc., a wholly-owned fund services subsidiary of the Investment Manager. "TRANSFER AGENT"--Morgan Stanley Trust, a wholly-owned transfer agent subsidiary of Morgan Stanley. 3 I. FUND HISTORY - -------------------------------------------------------------------------------- The Fund was incorporated in the state of Maryland on June 14, 1979 under the name InterCapital High Yield Securities Inc. On March 21, 1983, the Fund's name was changed to Dean Witter High Yield Securities Inc. On June 22, 1998, the name of the Fund was changed to Morgan Stanley Dean Witter High Yield Securities Inc. Effective June 18, 2001 the Fund's name was changed to Morgan Stanley High Yield Securities Inc. II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS - -------------------------------------------------------------------------------- A. CLASSIFICATION The Fund is an open-end, diversified management investment company whose investment objective is to earn a high level of current income. As a secondary objective, the Fund seeks capital appreciation but only to the extent consistent with its primary objective. B. INVESTMENT STRATEGIES AND RISKS The following discussion of the Fund's investment strategies and risks should be read with the sections of the Fund's PROSPECTUS titled "Principal Investment Strategies," "Principal Risks," "Additional Investment Strategy Information," and "Additional Risk Information." FUTURES TRANSACTIONS. The Fund may purchase and sell interest rate contracts that are traded on U.S. and foreign commodity exchanges. The Fund may sell a futures contract or a call option thereon or purchase a put option on such futures contract, if the Investment Manager anticipates interest rates to rise, as a hedge against a decrease in the value of the Fund's portfolio securities. If the Investment Manager anticipates that interest rates will decline, the Fund may purchase a futures contract or a call option thereon or sell a put option on such futures contract to protect against an increase in the price of the securities the Fund intends to purchase. These futures contracts and related options thereon will be used only as a hedge against anticipated interest rate changes. Although the terms of future contracts specify actual delivery or receipt of securities, in most instances the contracts are closed out before the settlement date without the making or taking of delivery of the securities. Closing out of a futures contract is usually effected by entering into an offsetting transaction. An offsetting transaction for a futures contract sale is effected by the Fund entering into a futures contract purchase for the same aggregate amount of the specific type of financial instrument and same delivery date. If the price in the sale exceeds the price in the offsetting purchase, the Fund is immediately paid the difference and thus realizes a gain. If the offsetting purchase price exceeds the sale price, the Fund pays the difference and realizes a loss. Similarly, the closing out of the futures contract purchase is effected by the Fund entering into a futures contract sale. If the offsetting sale price exceeds the purchase price, the Fund realizes a gain, and if the offsetting sale price is less than the purchase price, the Fund realizes a loss. MARGIN. If the Fund enters into a futures contract, it is initially required to deposit an "initial margin" of cash or U.S. government securities or other liquid portfolio securities ranging from approximately 2% to 5% of the contract amount. Initial margin requirements are established by the exchanges on which futures contracts trade and may, from time to time, change. In addition, brokers may establish margin deposit requirements in excess of those required by the exchanges. Initial margin in futures transactions is different from margin in securities transactions in that initial margin does not involve the borrowing of funds by a broker's client but is, rather, a good faith deposit on the futures contract which will be returned to the Fund upon the proper termination of the futures contract. The margin deposits made are marked to market daily and the Fund may be required to make subsequent deposits of cash or U.S. government securities or other liquid portfolio securities, called "variation margin," which are reflective of price fluctuations in the futures contract. 4 OPTIONS ON FUTURES CONTRACTS. The Fund may purchase and write call and put options on futures contracts and enter into closing transactions with respect to such options to terminate an existing position. An option on a futures contract gives the purchaser the right (in return for the premium paid), and the writer the obligation, to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the term of the option. Upon exercise of the option, the delivery of the futures position by the writer of the option to the holder of the option is accompanied by delivery of the accumulated balance in the writer's futures margin account, which represents the amount by which the market price of the futures contract at the time of exercise exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option on the futures contract. The writer of an option on a futures contract is required to deposit initial and variation margin pursuant to requirements similar to those applicable to futures contracts. Premiums received from the writing of an option on a futures contract are included in initial margin deposits. LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES. The Fund may not enter into futures contracts or purchase related options thereon if, immediately thereafter, the amount committed to margin plus the amount paid for premiums for unexpired options on futures contracts exceeds 5% of the value of the Fund's total assets, after taking into account unrealized gains and unrealized losses on such contracts it has entered into, provided, however, that in the case of an option that is in-the-money (the exercise price of the call (put) option is less (more) than the market price of the underlying security) at the time of purchase, the in-the-money amount may be excluded in calculating the 5%. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. A risk in employing futures contracts to protect against the price volatility of portfolio securities is that the prices of securities subject to futures contracts may correlate imperfectly with the behavior of the cash prices of the Fund's portfolio securities. The correlation may be distorted by the fact that the futures market is dominated by short-term traders seeking to profit from the difference between a contract or security price objective and their cost of borrowed funds. This would reduce their value for hedging purposes over a short time period. Such distortions are generally minor and would diminish as the contract approached maturity. Another risk is that the Fund's manager could be incorrect in its expectations as to the direction or extent of various interest rate movements or the time span within which the movements take place. For example, if the Fund sold futures contracts for the sale of securities in anticipation of an increase in interest rates, and then interest rates went down instead, causing bond prices to rise, the Fund would lose money on the sale. There is no assurance that a liquid secondary market will exist for futures contracts and related options in which the Fund may invest. In the event a liquid market does not exist, it may not be possible to close out a futures position and, in the event of adverse price movements, the Fund would continue to be required to make daily cash payments of variation margin. The absence of a liquid market in futures contracts might cause the Fund to make or take delivery of the underlying securities at a time when it may be disadvantageous to do so. Exchanges also limit the amount by which the price of a futures contract may move on any day. If the price moves equal the daily limit on successive days, then it may prove impossible to liquidate a futures position until the daily limit moves have ceased. In the event a liquid market does not exist, it may not be possible to close out a futures position and, in the event of adverse price movements, the Fund would continue to be required to make daily cash payments of variation margin on open futures positions. In these situations, if the Fund has insufficient cash, it may have to sell portfolio securities to meet daily variation margin requirements at a time when it may be disadvantageous to do so. In addition, the Fund may be required to take or make delivery of the instruments underlying interest rate futures contracts it holds at a time when it is disadvantageous to do so. The inability to close out options and futures positions could also have an adverse impact on the Fund's ability to effectively hedges its portfolio. 5 Futures contracts and options thereon which are purchased or sold on foreign commodities exchanges may have greater price volatility than their U.S. counterparts. Furthermore, foreign commodities exchanges may be less regulated and under less governmental scrutiny than U.S. exchanges. Brokerage commissions, clearing costs and other transaction costs may be higher on foreign exchanges. Greater margin requirements may limit the Fund's ability to enter into certain commodity transactions on foreign exchanges. Moreover, differences in clearance and delivery requirements on foreign exchanges may occasion delays in the settlement of the Fund's transactions effected on foreign exchanges. In the event of the bankruptcy of a broker through which the Fund engages in transactions in futures or options thereon, the Fund could experience delays and/or losses in liquidating open positions purchased or sold through the broker and/or incur a loss of all or part of its margin deposits with the broker. If the Fund maintains a short position in a futures contract or has sold a call option in a futures contract, it will cover this position by holding, in a segregated account maintained on the books of the Fund, cash, U.S. government securities or other liquid portfolio securities equal in value (when added to any initial or variation margin on deposit) to the market value of the securities underlying the futures contract or the exercise price of the option. Such a position may also be covered by owning the securities underlying the futures contract, or by holding a call option permitting the Fund to purchase the same contract at a price no higher than the price at which the short position was established. In addition, if the Fund holds a long position in a futures contract or has sold a put option on a futures contract, it will hold cash, U.S. government securities or other liquid portfolio securities equal to the purchase price of the contract or the exercise price of the put option (less the amount of initial or variation margin on deposit) in a segregated account maintained on the books of the Fund. Alternatively, the Fund could cover its long position by purchasing a put option on the same futures contract with an exercise price as high or higher than the price of the contract held by the Fund. OPTIONS. The Fund may purchase or sell (write) options on debt securities as a means of achieving additional return or hedging the value of the Fund's portfolio. The Fund may only buy options listed on national securities exchanges. The Fund will not purchase options if, as a result, the aggregate cost of all outstanding options exceeds 10% of the Fund's total assets. A call option is a contract that gives the holder of the option the right to buy from the writer of the call option, in return for a premium, the security underlying the option at a specified exercise price at any time during the term of the option. The writer of the call option has the obligation, upon exercise of the option, to deliver the underlying security upon payment of the exercise price during the option period. A put option is a contract that gives the holder of the option the right to sell to the writer, in return for a premium, the underlying security at a specified price during the term of the option. The writer of the put has the obligation to buy the underlying security upon exercise, at the exercise price during the option period. The Fund may only write covered call or covered put options listed on national exchanges. The Fund may not write covered options in an amount exceeding 20% of the value of the total assets of the Fund. A call option is "covered" if the Fund owns the underlying security covered by the call or has an absolute and immediate right to acquire that security or futures contract without additional cash consideration (or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other securities held in its portfolio. A call option is also covered if the Fund holds a call on the same security or futures contract as the call written, where the exercise price of the call held is (i) equal to or less than the exercise price of the call written or (ii) greater than the exercise price of the call written if the difference is maintained by the Fund in cash, Treasury bills or other liquid portfolio securities in a segregated account with its custodian. A put option is "covered" if the Fund maintains cash, Treasury bills or other liquid portfolio securities with a value equal to the exercise price in a segregated account with its custodian, or else holds a put on the same security or futures contract as the put written where the exercise price of the put held is equal to or greater than the exercise price of the put written. 6 If the Fund has written an option, it may terminate its obligation by effecting a closing purchase transaction. This is accomplished by purchasing an option of the same series as the option previously written. However, once the Fund has been assigned an exercise notice, the Fund will be unable to effect a closing purchase transaction. Similarly, if the Fund is the holder of an option, it may liquidate its position by effecting a closing sale transaction. This is accomplished by selling an option of the same fund as the option previously purchased. There can be no assurance that either a closing purchase or sale transaction on behalf of the Fund can be effected when the Fund so desires. The Fund will realize a profit from a closing transaction if the price of the transaction is less than the premium received from writing the option or is more than the premium paid to purchase the option; the Fund will realize a loss from a closing transaction if the price of the transaction is more than the premium received from writing the option or is less than the premium paid to purchase the option. Since call option prices generally reflect increases in the price of the underlying security, any loss resulting from the purchase of a call option may also be wholly or partially offset by unrealized appreciation of the underlying security. If a put option written by the Fund is exercised, the Fund may incur a loss equal to the difference between the exercise price of the option and the sum of the sale price of the underlying security plus the premiums received from the sale of the option. Other principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price and price volatility of the underlying security and the time remaining until the expiration date. An option position may be closed out only on an exchange which provides a secondary market for an option of the same series. Although the Fund will generally purchase or write only those options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange will exist for any particular option. In such event, it might not be possible to effect closing transactions in particular options, so that the Fund would have to exercise its options in order to realize any profit and would incur brokerage commission upon the exercise of call options and upon covered call option writer is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise. MONEY MARKET SECURITIES. In addition to the money market securities in which the Fund may otherwise invest, the Fund may invest in various money market securities for cash management purposes or when assuming a temporary defensive position, which among others may include commercial paper, bank acceptances, bank obligations, corporate debt securities, certificates of deposit, U.S. government securities, obligations of savings institutions and repurchase agreements. Such securities are limited to: U.S. GOVERNMENT SECURITIES. Obligations issued or guaranteed as to principal and interest by the United States or its agencies (such as the Export-Import Bank of the United States, Federal Housing Administration and Government National Mortgage Association) or its instrumentalities (such as the Federal Home Loan Bank), including Treasury bills, notes and bonds; BANK OBLIGATIONS. Obligations (including certificates of deposit, time deposits and bankers' acceptances) of banks subject to regulation by the U.S. Government and having total assets of $1 billion or more, and instruments secured by such obligations, not including obligations of foreign branches of domestic banks except to the extent below; EURODOLLAR CERTIFICATES OF DEPOSIT. Eurodollar certificates of deposit issued by foreign branches of domestic banks having total assets of $1 billion or more; OBLIGATIONS OF SAVINGS INSTITUTIONS. Certificates of deposit of savings banks and savings and loan associations, having total assets of $1 billion or more; FULLY INSURED CERTIFICATES OF DEPOSIT. Certificates of deposit of banks and savings institutions, having total assets of less than $1 billion, if the principal amount of the obligation is federally insured by 7 the Bank Insurance Fund or the Savings Association Insurance Fund (each of which is administered by the FDIC), limited to $100,000 principal amount per certificate and to 10% or less of the Fund's total assets in all such obligations and in all illiquid assets, in the aggregate; COMMERCIAL PAPER. Commercial paper rated within the two highest grades by Standard & Poor's Corporation ("S&P") or by Moody's Investors Service, Inc. ("Moody's") or, if not rated, issued by a company having an outstanding debt issue rated at least AA by S&P or Aa by Moody's; and REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements. When cash may be available for only a few days, it may be invested by the Fund in repurchase agreements until such time as it may otherwise be invested or used for payments of obligations of the Fund. These agreements, which may be viewed as a type of secured lending by the Fund, typically involve the acquisition by the Fund of debt securities from a selling financial institution such as a bank, savings and loan association or broker-dealer. The agreement provides that the Fund will sell back to the institution, and that the institution will repurchase, the underlying security serving as collateral at a specified price and at a fixed time in the future, usually not more than seven days from the date of purchase. The collateral will be marked-to-market daily to determine that the value of the collateral, as specified in the agreement, does not decrease below the purchase price plus accrued interest. If such decrease occurs, additional collateral will be requested and, when received, added to the account to maintain full collateralization. The Fund will accrue interest from the institution until the time when the repurchase is to occur. Although this date is deemed by the Fund to be the maturity date of a repurchase agreement, the maturities of securities subject to repurchase agreements are not subject to any limits. While repurchase agreements involve certain risks not associated with direct investments in debt securities, the Fund follows procedures approved by the Directors designed to minimize such risks. These procedures include effecting repurchase transactions only with large, well-capitalized and well-established financial institutions whose financial condition will be continually monitored by the Investment Manager. In addition, as described above, the value of the collateral underlying the repurchase agreement will be at least equal to the repurchase price, including any accrued interest earned on the repurchase agreement. In the event of a default or bankruptcy by a selling financial institution, the Fund will seek to liquidate such collateral. However, the exercising of the Fund's right to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Fund could suffer a loss. MUNICIPAL OBLIGATIONS. The Fund may invest up to 10% of its total assets in municipal obligations that pay interest exempt from federal income tax. Municipal obligations are securities issued by state and local governments and regional government authorities. These securities typically are "general obligation" or "revenue" bonds, notes or commercial paper. General obligation securities are secured by the issuer's faith and credit, as well as its taxing power, for payment of principal and interest. Revenue bonds, however, are generally payable from a specific revenue source. They are issued to fund a wide variety of public and private projects in sectors such as transportation, education and industrial development. Included within the revenue bonds category are participations in lease obligations and installment contracts of municipalities. PUBLIC UTILITIES. The Fund's investments in the utilities industry are impacted by risks particular to that industry. Changing regulation constitutes one of the key industry-specific risks for the Fund, especially with respect to its investments in traditionally regulated public utilities and partially regulated utility companies. State and other regulators monitor and control utility revenues and costs, and therefore may limit utility profits. Regulatory authorities also may restrict a company's access to new markets, thereby diminishing the company's long-term prospects. LENDING PORTFOLIO SECURITIES. The Fund may lend its portfolio securities to brokers, dealers and other financial institutions, provided that the loans are callable at any time by the Fund, and are at all times secured by cash or cash equivalents, which are maintained in a segregated account pursuant to applicable regulations and that are equal to at least 100% of the market value, determined daily, of the loaned securities. The advantage of these loans is that the Fund continues to receive the income on the 8 loaned securities while at the same time earning interest on the cash amounts deposited as collateral, which will be invested in short-term obligations. The Fund will not lend more than 25% of the value of its total assets. As with any extensions of credit, there are risks of delay in recovery and, in some cases, even loss of rights in the collateral should the borrower of the securities fail financially. However, these loans of portfolio securities will only be made to firms deemed by the Fund's management to be creditworthy and when the income which can be earned from such loans justifies the attendant risks. Upon termination of the loan, the borrower is required to return the securities to the Fund. Any gain or loss in the market price during the loan period would inure to the Fund. When voting or consent rights which accompany loaned securities pass to the borrower, the Fund will follow the policy of calling the loaned securities, to be delivered within one day after notice, to permit the exercise of the rights if the matters involved would have a material effect on the Fund's investment in the loaned securities. The Fund will pay reasonable finder's, administrative and custodial fees in connection with a loan of its securities. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. From time to time the Fund may purchase securities on a when-issued or delayed delivery basis or may purchase or sell securities on a forward commitment basis. When these transactions are negotiated, the price is fixed at the time of the commitment, but delivery and payment can take place a month or more after the date of commitment. While the Fund will only purchase securities on a when-issued, delayed delivery or forward commitment basis with the intention of acquiring the securities, the Fund may sell the securities before the settlement date, if it is deemed advisable. The securities so purchased or sold are subject to market fluctuation and no interest or dividends accrue to the purchaser prior to the settlement date. At the time the Fund makes the commitment to purchase or sell securities on a when-issued, delayed delivery or forward commitment basis, it will record the transaction and thereafter reflect the value, each day, of such security purchased, or if a sale, the proceeds to be received, in determining its net asset value. At the time of delivery of the securities, their value may be more or less than the purchase or sale price. An increase in the percentage of the Fund's assets committed to the purchase of securities on a when-issued, delayed delivery or forward commitment basis may increase the volatility of its net asset value. The Fund will also establish a segregated account on the Fund's books in which it will continually maintain cash or cash equivalents or other liquid portfolio securities equal in value to commitments to purchase securities on a when-issued, delayed delivery or forward commitment basis. WHEN, AS AND IF ISSUED SECURITIES. The Fund may purchase securities on a "when, as and if issued" basis under which the issuance of the security depends upon the occurrence of a subsequent event, such as approval of a merger, corporate reorganization or debt restructuring. The commitment for the purchase of any such security will not be recognized in the portfolio of the Fund until the Investment Manager determines that issuance of the security is probable. At that time, the Fund will record the transaction and, in determining its net asset value, will reflect the value of the security daily. At that time, the Fund will also establish a segregated account on the Fund's books in which it will maintain cash or cash equivalents or other liquid portfolio securities equal in value to recognized commitments for such securities. The value of the Fund's commitments to purchase the securities of any one issuer, together with the value of all securities of such issuer owned by the Fund, may not exceed 5% of the value of the Fund's total assets at the time the initial commitment to purchase such securities is made. An increase in the percentage of the Fund's assets committed to the purchase of securities on a "when, as and if issued" basis may increase the volatility of its net asset value. The Fund may also sell securities on a "when, as and if issued" basis provided that the issuance of the security will result automatically from the exchange or conversion of a security owned by the Fund at the time of sale. PRIVATE PLACEMENTS. The Fund may invest up to 15% of its net assets in securities which are subject to restrictions on resale because they have not been registered under the Securities Act of 1933 9 (the "Securities Act"), or which are otherwise not readily marketable. (Securities eligible for resale pursuant to Rule 144A under the Securities Act, and determined to be liquid pursuant to the procedures discussed in the following paragraph, are not subject to the foregoing restriction.) These securities are generally referred to as private placements or restricted securities. Limitations on the resale of these securities may have an adverse effect on their marketability, and may prevent the Fund from disposing of them promptly at reasonable prices. The Fund may have to bear the expense of registering the securities for resale and the risk of substantial delays in effecting the registration. Rule 144A permits the Fund to sell restricted securities to qualified institutional buyers without limitation. The Investment Manager, pursuant to procedures adopted by the Directors, will make a determination as to the liquidity of each restricted security purchased by the Fund. If a restricted security is determined to be "liquid," the security will not be included within the category "illiquid securities," which may not exceed 15% of the Fund's net assets. However, investing in Rule 144A securities could have the effect of increasing the level of Fund illiquidity to the extent the Fund, at a particular point in time, may be unable to find qualified institutional buyers interested in purchasing such securities. WARRANTS AND SUBSCRIPTION RIGHTS. The Fund may acquire warrants and subscription rights attached to other securities. A warrant is, in effect, an option to purchase equity securities at a specific price, generally valid for a specific period of time, and has no voting rights, pays no dividends and has no rights with respect to the corporation issuing it. A subscription right is a privilege granted to existing shareholders of a corporation to subscribe to shares of a new issue of common stock before it is offered to the public. A subscription right normally has a life of two to four weeks and a subscription price lower than the current market value of the common stock. C. FUND POLICIES/INVESTMENT RESTRICTIONS The investment objective, policies and restrictions listed below have been adopted by the Fund as fundamental policies. Under the Investment Company Act of 1940, as amended (the "Investment Company Act"), a fundamental policy may not be changed without the vote of a majority of the outstanding voting securities of the Fund. The Investment Company Act defines a majority as the lesser of (a) 67% or more of the shares present at a meeting of shareholders, if the holders of 50% of the outstanding shares of the Fund are present or represented by proxy; or (b) more than 50% of the outstanding shares of the Fund. For purposes of the following restrictions: (i) all percentage limitations apply immediately after a purchase or initial investment; and (ii) any subsequent change in any applicable percentage resulting from market fluctuations or other changes in total or net assets does not require elimination of any security from the portfolio. The Fund will: 1. As a primary objective, seek to earn a high level of current income. 2. As a secondary objective, seek capital appreciation but only to the extent consistent with its primary objective. The Fund MAY not: 1. Acquire common stocks in excess of 20% of its total assets. 2. Invest more than 5% of its total assets in the securities of any one issuer (other than obligations of, or guaranteed by, the United States government, its agencies or instrumentalities). 3. Purchase more than 10% of the voting securities, or more than 10% of any class of securities, of any issuer. For purposes of this restriction, all outstanding debt securities of an issuer are considered as one class and all preferred stocks of an issuer are considered as one class. 10 4. Invest more than 25% of its total assets in securities of issuers in any one industry. For purposes of this restriction, gas, electric, water and telephone utilities will each be treated as being a separate industry. This restriction does not apply to obligations issued or guaranteed by the United States government or its agencies or instrumentalities. 5. Invest more than 5% of its total assets in securities of companies having a record, together with predecessors, of less than three years of continuous operation. This restriction shall not apply to any obligation of the United States government, its agencies or instrumentalities. 6. Make short sales of securities. 7. Purchase securities on margin, except for such short-term loans as are necessary for the clearance of purchases of portfolio securities. 8. Pledge its assets or assign or otherwise encumber them in excess of 4.5% of its net assets (taken at market value at the time of pledging) and then only to secure permitted borrowings. For the purpose of this restriction, collateral arrangements with respect to the writing of options and collateral arrangements with respect to initial margin for futures are not deemed to be pledges of assets. 9. Engage in the underwriting of securities except insofar as the Fund may be deemed an underwriter under the Securities Act in disposing of a portfolio security. 10. Purchase or sell real estate or interests therein, although it may purchase securities of issuers which engage in real estate operations and securities which are secured by real estate or interests therein. 11. Purchase or sell commodities except that the Fund may purchase financial futures contracts and related options. 12. Make loans of money or securities, except: (a) the purchase of debt obligations; (b) investment in repurchase agreements; or (c) by lending its portfolio securities. 13. Purchase oil, gas or other mineral leases, rights or royalty contracts or exploration or development programs, except that the Fund may invest in the securities of companies which invest in or sponsor such programs. 14. Purchase securities of other investment companies, except in connection with a merger, consolidation, reorganization or acquisition of assets. 15. Invest for the purpose of exercising control or management of another company. 16. Invest in securities of any company if, to the knowledge of the Fund, any officer or director of the Fund or of the Investment Manager owns more than 1/2 of 1% of the outstanding securities of such company, and such officers and directors who own more than 1/2 of 1% own in the aggregate more than 5% of the outstanding securities of such company. 17. Write, purchase or sell puts, calls, or combinations thereof except options on futures contracts or options on debt securities. 18. Borrow money, except that the Fund may borrow for temporary purposes in amounts not exceeding 5% (taken at the lower of cost or current value) of its total assets (not including the amount borrowed). Notwithstanding any other investment policy or restriction, the Fund may seek to achieve its investment objective by investing all or substantially all of its assets in another investment company having substantially the same investment objective and policies as the Fund. 11 III. MANAGEMENT OF THE FUND - -------------------------------------------------------------------------------- A. BOARD OF DIRECTORS The Board of Directors of the Fund oversees the management of the Fund but does not itself manage the Fund. The Directors review various services provided by or under the direction of the Investment Manager to ensure that the Fund's general investment policies and programs are properly carried out. The Directors also conduct their review to ensure that administrative services are provided to the Fund in a satisfactory manner. Under state law, the duties of the Directors are generally characterized as a duty of loyalty and a duty of care. The duty of loyalty requires a Director to exercise his or her powers in the interest of the Fund and not the Director's own interest or the interest of another person or organization. A Director satisfies his or her duty of care by acting in good faith with the care of an ordinarily prudent person and in a manner the Director reasonably believes to be in the best interest of the Fund and its shareholders. B. MANAGEMENT INFORMATION DIRECTORS AND OFFICERS. The Board of the Fund consists of eight (8) Directors. These same individuals also serve as directors or trustees for all of the Morgan Stanley Funds. Five Directors have no affiliation or business connection with the Investment Manager or any of its affiliated persons and do not own any stock or other securities issued by the Investment Manager's parent company, Morgan Stanley. These are the "non-interested" or "independent" Directors. The other three Directors (the "Management Directors") are affiliated with the Investment Manager. The Independent Directors of the Fund, their term of office and length of time served, their principal business occupations during the past five years, the number of portfolios in the Fund Complex (defined below) overseen by each Independent Director (as of December 31, 2001) and other directorships, if any, held by the Director, are shown below. 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.).
NUMBER OF PORTFOLIOS IN FUND COMPLEX POSITION(S) LENGTH OF OVERSEEN NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) DURING BY INDEPENDENT DIRECTOR REGISTRANT SERVED* PAST 5 YEARS DIRECTOR - --------------------------- ----------- ----------- -------------------------------------- ----------- Michael Bozic (61) Director Director Retired; Director or Trustee of the 129 c/o Mayer, Brown, Rowe & since Morgan Stanley Funds and the TCW/DW Maw April 1994 Term Trusts; formerly Vice Chairman of Counsel to the Independent Kmart Corporation (December Directors 1998-October 2000), Chairman and Chief 1675 Broadway Executive Officer of Levitz Furniture New York, NY 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. Michael Bozic (61) Director of Weirton Steel c/o Mayer, Brown, Rowe & Corporation. Maw Counsel to the Independent Directors 1675 Broadway New York, NY
12
NUMBER OF PORTFOLIOS IN FUND COMPLEX POSITION(S) LENGTH OF OVERSEEN NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) DURING BY INDEPENDENT DIRECTOR REGISTRANT SERVED* PAST 5 YEARS DIRECTOR - --------------------------- ----------- ----------- -------------------------------------- ----------- Edwin J. Garn (69) Director Director Director or Trustee of the Morgan 129 c/o Summit Ventures LLC since Stanley Funds and the TCW/DW Term 1 Utah Center January Trusts; formerly United States Senator 201 S. Main Street 1993 (R- Utah)(1974-1992) and Chairman, Salt Lake City, UT 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) Director Director Retired; Director or Trustee of the 129 c/o Mayer, Brown, Rowe & since Morgan Stanley Funds and the TCW/DW Maw September Term Trusts; formerly associated with Counsel to the Independent 1997 the Allstate Companies (1966-1994), Directors most recently as Chairman of The 1675 Broadway Allstate Corporation (March New York, NY 1993-December 1994) and Chairman and Chief Executive Officer of its wholly-owned subsidiary, Allstate Insurance Company (July 1989-December 1994). Dr. Manuel H. Johnson (53) Director Director Chairman of the Audit Committee and 129 c/o Johnson Smick since Director or Trustee of the Morgan International, Inc. July 1991 Stanley Funds and the TCW/DW Term 1133 Connecticut Avenue, Trusts; Senior Partner, Johnson Smick N.W. International, Inc., a consulting Washington, D.C. 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) Director Director Chairman of the Insurance Committee 207 c/o Triumph Capital, L.P. since and Director or Trustee of the Morgan 237 Park Avenue July 1991 Stanley Funds and the TCW/DW Term New York, NY 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 OTHER DIRECTORSHIPS HELD INDEPENDENT DIRECTOR BY DIRECTOR - --------------------------- ------------------------- Edwin J. Garn (69) Director of Franklin c/o Summit Ventures LLC Covey (time management 1 Utah Center systems), BMW Bank of 201 S. Main Street North America, Inc. Salt Lake City, UT (industrial loan corporation), United Space 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 c/o Mayer, Brown, Rowe & Inc. (private mortgage Maw insurance); Director and Counsel to the Independent Vice Chairman of The Directors Field Museum of Natural 1675 Broadway History; director of New York, NY various other business and charitable organizations. Dr. Manuel H. Johnson (53) Director of NVR, Inc. c/o Johnson Smick (home construction); International, Inc. Chairman and Director of 1133 Connecticut Avenue, the Financial Accounting N.W. Foundation (oversight Washington, D.C. organization of the Financial Accounting Standards Board). Michael E. Nugent (66) Director of various c/o Triumph Capital, L.P. business organizations. 237 Park Avenue New York, NY
- ---------------------------------- * This is the date the Director began serving the Morgan Stanley Funds. The Directors who are affiliated with the Investment Manager or affiliates of the Investment Manager (as set forth below) and executive officers of the Fund, their term of office and length of time served, their 13 principal business occupations during the past five years, the number of portfolios in the Fund Complex overseen by each management Director and the other directorships, if any, held by the Director, are shown below.
NUMBER OF PORTFOLIOS IN FUND COMPLEX POSITION(S) LENGTH OF OVERSEEN NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) DURING BY MANAGEMENT DIRECTOR REGISTRANT SERVED* PAST 5 YEARS DIRECTOR - --------------------------- ----------- ----------- -------------------------------------- ----------- Charles A. Fiumefreddo (69) Chairman Director Chairman and Director or Trustee of 129 c/o Morgan Stanley Trust and since the Morgan Stanley Funds and the Harborside Financial Director or July 1991 TCW/DW Term Trusts; formerly Chairman, Center, Trustee Chief Executive Officer and Director Plaza Two, of the Investment Manager, the Jersey City, NJ 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 Funds and the TCW/DW Term Trusts (until September 2002). James F. Higgins (54) Director Director Director or Director of the Morgan 129 c/o Morgan Stanley Trust since June Stanley Funds and the TCW/DW Term Harborside Financial 2000 Trusts (since June 2000); Senior Center, Advisor of Morgan Stanley (since Plaza Two, August 2000); Director of the Jersey City, NJ Distributor and Dean Witter Realty Inc.; 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 (58) Director Director Director or Director of the Morgan 129 1585 Broadway since April Stanley Funds and the TCW/DW Term New York, NY 1994 Trusts; Chairman 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. NAME, AGE AND ADDRESS OF OTHER DIRECTORSHIPS HELD MANAGEMENT DIRECTOR BY DIRECTOR - --------------------------- ------------------------- 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 (58) Director of American 1585 Broadway Airlines, Inc. and its New York, NY parent company, AMR Corporation.
- ---------------------------------- * This is the date the Director began serving the Morgan Stanley Funds. 14
POSITION(S) NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF TIME PRINCIPAL OCCUPATION(S) DURING EXECUTIVE OFFICER REGISTRANT SERVED PAST 5 YEARS - ---------------------------- ---------------- --------------------- ------------------------------------------------------- Mitchell M. Merin (48) President and President since May President and Chief Operating Officer of Morgan Stanley 1221 Avenue of the Americas Chief Executive 1999 and Chief Investment Management (since December 1998); President, New York, NY Officer Executive Officer Director (since April 1997) and Chief Executive Officer since September 2002 (since June 1998) of the Investment Manager and Morgan Stanley Services; Chairman, Chief Executive Officer and 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; Director 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, Vice President, General Counsel (since May 2000) and Managing Director 1221 Avenue of the Americas Secretary and Secretary and General (since December 2000) of Morgan Stanley Investment New York, NY General Counsel Counsel since Management; Managing Director (since December 2000), February 1997 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 1989 First Vice President and Assistant Treasurer of the c/o Morgan Stanley Trust 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 1998 Managing Director, Chief Administrative Officer and 1221 Avenue of the Americas Director since February 1999) of the Investment Manager New York, NY and Morgan 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 1995 Managing Director and Chief Investment Officer of the 1221 Avenue of the Americas Investment Manager, Morgan Stanley Investment New York, NY Management Inc. and Morgan Stanley Investments LP; and Director of the Transfer Agent. Chief Investment Officer of the Van Kampen Funds. Francis Smith (37) Vice President Since September 2002 Vice President and Chief Financial Officer of the c/o Morgan Stanley Trust and Chief Morgan Stanley Funds and the TCW/DW Term Trusts (since Harborside Financial Center Financial September 2002); Executive Director of the Investment Plaza Two, Officer Manager and Morgan Stanley Services (since December Jersey City, NJ 2001). Formerly, 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).
15 In addition A. THOMAS SMITH III, Managing Director and General Counsel of the Investment Manager and Morgan Stanley Services, is a Vice President and Assistant Secretary of the Funds, and SARA BADLER, STEFANIE CHANG-YU, LOU ANNE D. MCINNIS, CARSTEN OTTO and RUTH ROSSI, Executive Directors and Assistant General Counsels of the Investment Manager and Morgan Stanley Services, MARILYN K. CRANNEY, First Vice President and Assistant General Counsel of the Investment Manager and Morgan Stanley Services, and JOANNE DOLDO, NATASHA KASSIAN AND SHELDON WINICOUR, Vice Presidents and Assistant General Counsels of the Investment Manager and Morgan Stanley Services, are Assistant Secretaries of the Funds. For each Director, the dollar range of equity securities beneficially owned by the Director is shown below.
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN ALL REGISTERED INVESTMENT COMPANIES OVERSEEN DOLLAR RANGE OF EQUITY SECURITIES IN THE FUNDS BY DIRECTOR IN FAMILY OF INVESTMENT COMPANIES NAME OF DIRECTOR (AS OF DECEMBER 31, 2001) (AS OF DECEMBER 31, 2001) - ------------------------- -------------------------------------------------- ------------------------------------------------- INDEPENDENT: Michael Bozic None over $100,000 Edwin J. Garn None over $100,000 Wayne E. Hedien None over $100,000 Dr. Manuel H. Johnson None over $100,000 Michael E. Nugent $10,001-$50,000 over $100,000 INTERESTED: Charles A. Fiumefreddo $10,001-$50,000 over $100,000 James F. Higgins None over $100,000 Philip J. Purcell None over $100,000
As to each independent Director and his immediate family members, no person owned beneficially or of record securities in an investment advisor or principal underwriter of the Fund, or a person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with an investment advisor or principal underwriter of the Fund. INDEPENDENT DIRECTORS/TRUSTEES AND THE COMMITTEES. Law and regulation establish both general guidelines and specific duties for the independent directors/trustees. The Morgan Stanley Funds seek as independent directors/trustees individuals of distinction and experience in business and finance, government service or academia; these are people whose advice and counsel are in demand by others and for whom there is often competition. To accept a position on the Funds' boards, such individuals may reject other attractive assignments because the Funds make substantial demands on their time. All of the independent directors/trustees serve as members of the Audit Committee. In addition, six of the directors/trustees, including all of the independent directors/trustees, serve as members of the Derivatives Committee and three directors/trustees including two independent directors/trustees serve as members of the Insurance Committee. The independent directors/trustees are charged with recommending to the full board approval of management, advisory and administration contracts, Rule 12b-1 plans and distribution and underwriting agreements; continually reviewing Fund performance; checking on the pricing of portfolio securities, brokerage commissions, transfer agent costs and performance, and trading among Funds in the same complex; and approving fidelity bond and related insurance coverage and allocations, as well as other matters that arise from time to time. The independent directors/trustees are required to select and nominate individuals to fill any independent director/trustee vacancy on the board of any Fund that has a Rule 12b-1 plan of distribution. Most of the Morgan Stanley Funds have a Rule 12b-1 plan. The Audit Committee is charged with recommending to the full board the engagement or discharge of the Fund's independent auditors; directing investigations into matters within the scope of the independent auditors' duties, including the power to retain outside specialists; reviewing with the independent 16 auditors the audit plan and results of the auditing engagement; approving professional services provided by the independent auditors and other accounting firms prior to the performance of the services; reviewing the independence of the independent auditors; considering the range of audit and non-audit fees; reviewing the adequacy of the Fund's system of internal controls; and preparing and submitting Committee meeting minutes to the full board. The Audit Committee currently consists of Messrs. Johnson, Bozic, Hedien, Garn and Nugent. During the Fund's fiscal year ended August 31, 2002, the Audit Committee held 10 meetings. The board of each Fund has a Derivatives Committee to approve parameters for and monitor the activities of the Fund with respect to derivative investments, if any, made by the Fund. The Derivatives Committee currently consists of Mr. Fiumefreddo and all of the Independent Directors of the Fund. During the Fund's fiscal year ended August 31, 2002, the Derivatives Committee held three meetings. Finally, the board of each Fund has formed an Insurance Committee to review and monitor the insurance coverage maintained by the Fund. The Insurance Committee currently consists of Messrs. Nugent, Fiumefreddo and Hedien. During the Fund's fiscal year ended August 31, 2002, the Insurance Committee held one meeting. ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT DIRECTORS/TRUSTEES FOR ALL MORGAN STANLEY FUNDS. The independent directors/trustees and the Funds' management believe that having the same independent directors/trustees for each of the Morgan Stanley Funds avoids the duplication of effort that would arise from having different groups of individuals serving as independent directors/ trustees for each of the Funds or even of sub-groups of Funds. They believe that having the same individuals serve as independent directors/trustees of all the Funds tends to increase their knowledge and expertise regarding matters which affect the Fund complex generally and enhances their ability to negotiate on behalf of each Fund with the Fund's service providers. This arrangement also precludes the possibility of separate groups of independent directors/trustees arriving at conflicting decisions regarding operations and management of the Funds and avoids the cost and confusion that would likely ensue. Finally, having the same independent directors/trustees serve on all Fund boards enhances the ability of each Fund to obtain, at modest cost to each separate Fund, the services of independent directors/ trustees, of the caliber, experience and business acumen of the individuals who serve as independent directors/trustees of the Morgan Stanley Funds. DIRECTOR AND OFFICER INDEMNIFICATION. The Fund's By-Laws provides that no Director, officer, employee or agent of the Fund is liable to the Fund or to a shareholder, nor is any Director, officer, employee or agent liable to any third persons in connection with the affairs of the Fund, except as such liability may arise from his/her or its own bad faith, willful misfeasance, gross negligence or reckless disregard of his/her or its duties. It also provides that all third persons shall look solely to the Fund property for satisfaction of claims arising in connection with the affairs of the Fund. With the exceptions stated, the By-Laws provides that a Director, officer, employee or agent is entitled to be indemnified against all liability in connection with the affairs of the Fund. C. COMPENSATION The Fund pays each Independent Director an annual fee of $800 plus a per meeting fee of $50 for meetings of the Board of Directors, the Independent Directors or Committees of the Board of Directors attended by the Director (the Fund pays the Chairman of the Audit Committee an additional annual fee of $750, and the Chairmen of the Derivatives and Insurance Committees additional annual fees of $500). If a Board meeting and a meeting of the Independent Directors or a Committee meeting (except an Audit Committee meeting), or a meeting of the Independent Directors and/or more than one Committee meeting (except an Audit Committee meeting), take place on a single day, the Directors are paid a single meeting fee by the Fund. The Fund also reimburses such Directors for travel and other out-of-pocket expenses incurred by them in connection with attending such meetings. Directors and officers of the Fund who are or have been employed by the Investment Manager or an affiliated company receive no compensation or expense reimbursement from the Fund for their services as Director. The Fund pays Mr. Fiumefreddo an annual fee for his service as Chairman of the Board and for administrative services provided to the Board of Directors. 17 The following table illustrates the compensation that the Fund paid to its Directors for the fiscal year ended August 31, 2002. FUND COMPENSATION
AGGREGATE COMPENSATION NAME OF DIRECTOR FROM THE FUND - ---------------- ------------- Michael Bozic............................................... $1,650 Edwin J. Garn............................................... 1,650 Wayne E. Hedien............................................. 1,650 Dr. Manuel H. Johnson....................................... 2,400 Michael E. Nugent........................................... 2,150 Charles A. Fiumefreddo...................................... 3,063
The following table illustrates the compensation paid to the Fund's Directors for the calendar year ended December 31, 2001 for services to the 97 registered Morgan Stanley Funds (consisting of 129 portfolios) that were in operation at December 31, 2001. None of the Fund's Directors received compensation from any other funds in the Fund Complex, except Mr. Nugent who received compensation for service as Director/Trustee to 16 other registered funds (consisting of 78 portfolios) in the Fund Complex. CASH COMPENSATION FROM MORGAN STANLEY FUNDS
TOTAL CASH COMPENSATION FOR SERVICES TO 97 MORGAN STANLEY FUNDS AND OTHER FUNDS IN THE NAME OF INDEPENDENT DIRECTOR FUND COMPLEX - ---------------------------- --------------- Michael Bozic............................................... $150,150 Edwin J. Garn............................................... 150,150 Wayne E. Hedien............................................. 150,100 Dr. Manuel H. Johnson....................................... 219,900 Michael E. Nugent........................................... 228,362 Charles A. Fiumefreddo...................................... 360,000
As of the date of this STATEMENT OF ADDITIONAL INFORMATION, 51 of the Morgan Stanley Funds, including the Fund, have adopted a retirement program under which an independent director/trustee who retires after serving for at least five years (or such lesser period as may be determined by the board) as an independent director/trustee of any Morgan Stanley Fund that has adopted the retirement program (each such Fund referred to as an "Adopting Fund" and each such director referred to as an "Eligible Director") is entitled to retirement payments upon reaching the eligible retirement age (normally, after attaining age 72). Annual payments are based upon length of service. Currently, upon retirement, each Eligible Director is entitled to receive from the Adopting Fund, commencing as of his or her retirement date and continuing for the remainder of his or her life, an annual retirement benefit (the "Regular Benefit") equal to 30.22% of his or her Eligible Compensation plus 0.5036667% of such Eligible Compensation for each full month of service as an independent director/ trustee of any Adopting Fund in excess of five years up to a maximum of 60.44% after ten years of service. The foregoing percentages may be changed by the board.(1) "Eligible Compensation" is one-fifth of the total compensation earned by such Eligible Director for service to the Adopting Fund in the five - ------------------------ (1) An Eligible Director may elect alternative payments of his or her retirement benefits based upon the combined life expectancy of the Eligible Director and his or her spouse on the date of such Eligible Director's retirement. In addition, the Eligible Director may elect that the surviving spouse's periodic payment of benefits will be equal to a lower percentage of the periodic amount when both spouses were alive. The amount estimated to be payable under this method, through the remainder of the later of the lives of the Eligible Director and spouse, will be the actuarial equivalent of the Regular Benefit. 18 year period prior to the date of the Eligible Director's retirement. Benefits under the retirement program are accrued as expenses on the books of the Adopting Funds. Such benefits are not secured or funded by the Adopting Funds. The following table illustrates the retirement benefits accrued to the Fund's Independent Directors by the Fund for the fiscal year ended August 31, 2002 and by the 52 Morgan Stanley Funds (including the Fund) for the calendar year ended December 31, 2001, and the estimated retirement benefits for the Independent Directors, to commence upon their retirement, from the Fund as of August 31, 2002 and from the 52 Morgan Stanley Funds as of calendar year ended December 31, 2001. For the calendar year ended December 31, 2001, no retirement benefits were accrued to the Independent Trustees from any other funds in the Fund Complex. RETIREMENT BENEFITS FROM THE FUND AND ALL MORGAN STANLEY FUNDS
FOR ALL ADOPTING FUNDS ----------------------------- ESTIMATED ANNUAL ESTIMATED RETIREMENT BENEFITS BENEFITS CREDITED ACCRUED AS EXPENSES UPON RETIREMENT(2) YEARS ESTIMATED ------------------------- ------------------------- OF SERVICE AT PERCENTAGE OF BY ALL FROM FROM ALL RETIREMENT ELIGIBLE BY THE ADOPTING THE ADOPTING NAME OF INDEPENDENT DIRECTOR (MAXIMUM 10) COMPENSATION FUND FUNDS FUND FUNDS - ---------------------------- ------------- ------------- -------- -------------- -------- -------------- Michael Bozic.............. 10 60.44% $ 360 $21,395 $ 907 $48,443 Edwin J. Garn.............. 10 60.44 520 33,443 927 49,121 Wayne E. Hedien............ 9 51.37 691 44,952 779 41,437 Dr. Manuel H. Johnson...... 10 60.44 376 22,022 1,360 72,014 Michael E. Nugent.......... 10 60.44 625 38,472 1,209 64,157
- ------------------------ (2) Based on current levels of compensation. Amount of annual benefits also varies depending on the Director's elections described in Footnote (1) on page 18. IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES - -------------------------------------------------------------------------------- The following person owned 5% or more of the outstanding shares of Class A of the Fund as of September 6, 2002: Robert M. Sullivan Jr., 1428 Longmeadow St., Longmeadow, MA 01106-2239--5.38%. As of the date of this STATEMENT OF ADDITIONAL INFORMATION, the aggregate number of shares of common stock of the Fund owned by the Fund's officers and Directors as a group was less than 1% of the Fund's shares of common stock outstanding. V. INVESTMENT MANAGEMENT AND OTHER SERVICES - -------------------------------------------------------------------------------- A. INVESTMENT MANAGER The Investment Manager to the Fund is Morgan Stanley Investment Advisors Inc., a Delaware corporation, whose address is 1221 Avenue of the Americas, New York, NY 10020. The Investment Manager is a wholly-owned subsidiary of Morgan Stanley, a Delaware corporation. Morgan Stanley is a preeminent global financial services firm that maintains leading market positions in each of its three primary businesses: securities, asset management and credit services. Pursuant to an Investment Management Agreement (the "Management Agreement") with the Investment Manager, the Fund has retained the Investment Manager to provide administrative services and manage the investment of the Fund's assets, including the placing of orders for the purchase and sale of portfolio securities. The Fund pays the Investment Manager monthly compensation calculated daily by applying the following annual rates to the net assets of the Fund determined as of the close of each business day: 0.50% to the portion of daily net assets not exceeding $500 million; 0.425% to the portion of daily net assets exceeding $500 million but not exceeding $750 million; 0.375% to the portion of daily net assets exceeding $750 million but not exceeding $1 billion; 0.35% to the portion of daily net 19 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. The management fee is allocated among the Classes pro rata based on the net assets of the Fund attributable to each Class. For the fiscal years ended August 31, 2000, 2001 and 2002, the Investment Manager accrued total compensation under the Management Agreement in the amounts of $8,439,728, $5,350,108 and $3,258,237, respectively. The Investment Manager has retained its wholly-owned subsidiary, Morgan Stanley Services, to perform administrative services for the Fund. In approving the Management Agreement, the Board of Directors, including the Independent Directors, considered the nature, quality and scope of the services provided by the Investment Manager, the performance, fees and expenses of the Fund compared to other similar investment companies, the Investment Manager's expenses in providing the services, the profitability of the Investment Manager and its affiliated companies and other benefits they derive from their relationship with the Fund and the extent to which economies of scale are shared with the Fund. The Independent Directors met with and reviewed reports from third parties about the foregoing factors and changes, if any, in such items since the preceding year's deliberations. The Independent Directors noted their confidence in the capability and integrity of the senior management and staff of the Investment Manager and the financial strength of the Investment Manager and its affiliated companies. The Independent Directors weighed the foregoing factors in light of the advice given to them by their legal counsel as to the law applicable to the review of investment advisory contracts. Based upon its review, the Board of Directors, including all of the Independent Directors, determined, in the exercise of its business judgment, that approval of the Management Agreement was in the best interests of the Fund and its shareholders. B. PRINCIPAL UNDERWRITER The Fund's principal underwriter is the Distributor (which has the same address as the Investment Manager). In this capacity, the Fund's shares are distributed by the Distributor. The Distributor has entered into a selected dealer agreement with Morgan Stanley DW, which through its own sales organization sells shares of the Fund. In addition, the Distributor may enter into similar agreements with other selected broker-dealers. The Distributor, a Delaware corporation, is a wholly-owned subsidiary of Morgan Stanley. The Distributor bears all expenses it may incur in providing services under the Distribution Agreement. These expenses include the payment of commissions for sales of the Fund's shares and incentive compensation to Financial Advisors, the cost of educational and/or business-related trips, and educational and/or promotional and business-related expenses. The Distributor also pays certain expenses in connection with the distribution of the Fund's shares, including the costs of preparing, printing and distributing advertising or promotional materials, and the costs of printing and distributing prospectuses and supplements thereto used in connection with the offering and sale of the Fund's shares. The Fund bears the costs of initial typesetting, printing and distribution of prospectuses and supplements thereto to shareholders. The Fund also bears the costs of registering the Fund and its shares under federal and state securities laws and pays filing fees in accordance with state securities laws. The Fund and the Distributor have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. Under the Distribution Agreement, the Distributor uses its best efforts in rendering services to the Fund, but in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations, the Distributor is not liable to the Fund or any of its shareholders for any error of judgment or mistake of law or for any act or omission or for any losses sustained by the Fund or its shareholders. C. SERVICES PROVIDED BY THE INVESTMENT MANAGER The Investment Manager manages the investment of the Fund's assets, including the placing of orders for the purchase and sale of portfolio securities. The Investment Manager obtains and evaluates 20 the information and advice relating to the economy, securities markets, and specific securities as it considers necessary or useful to continuously manage the assets of the Fund in a manner consistent with its investment objective. Under the terms of the Management Agreement, in addition to managing the Fund's investments, the Investment Manager maintains certain of the Fund's books and records and furnishes, at its own expense, the office space, facilities, equipment, clerical help, bookkeeping and certain legal services as the Fund may reasonably require in the conduct of its business, including the preparation of prospectuses, proxy statements and reports required to be filed with federal and state securities commissions (except insofar as the participation or assistance of independent auditors and attorneys is, in the opinion of the Investment Manager, necessary or desirable). The Investment Manager also bears the cost of telephone service, heat, light, power and other utilities provided to the Fund. Expenses not expressly assumed by the Investment Manager under the Management Agreement or by the Distributor, will be paid by the Fund. These expenses will be allocated among the four Classes of shares pro rata based on the net assets of the Fund attributable to each Class, except as described below. Such expenses include, but are not limited to: expenses of the Plan of Distribution pursuant to Rule 12b-1; charges and expenses of any registrar, custodian, stock transfer and dividend disbursing agent; brokerage commissions; taxes; engraving and printing share certificates; registration costs of the Fund and its shares under federal and state securities laws; the cost and expense of printing, including typesetting, and distributing prospectuses of the Fund and supplements thereto to the Fund's shareholders; all expenses of shareholders' and Directors' meetings and of preparing, printing and mailing of proxy statements and reports to shareholders; fees and travel expenses of Directors or members of any advisory board or committee who are not employees of the Investment Manager or any corporate affiliate of the Investment Manager; all expenses incident to any dividend, withdrawal or redemption options; charges and expenses of any outside service used for pricing of the Fund's shares; fees and expenses of legal counsel, including counsel to the Directors who are not interested persons of the Fund or of the Investment Manager (not including compensation or expenses of attorneys who are employees of the Investment Manager); fees and expenses of the Fund's independent auditors; membership dues of industry associations; interest on Fund borrowings; postage; insurance premiums on property or personnel (including officers and Directors) of the Fund which inure to its benefit; extraordinary expenses (including, but not limited to, legal claims and liabilities and litigation costs and any indemnification relating thereto); and all other costs of the Fund's operation. The 12b-1 fees relating to a particular Class will be allocated directly to that Class. In addition, other expenses associated with a particular Class (except advisory or custodial fees) may be allocated directly to that Class, provided that such expenses are reasonably identified as specifically attributable to that Class and the direct allocation to that Class is approved by the Directors. The Management Agreement provides that in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations thereunder, the Investment Manager is not liable to the Fund or any of its investors for any act or omission by the Investment Manager or for any losses sustained by the Fund or its investors. The Management Agreement will remain in effect from year to year, provided continuance of the Management Agreement is approved at least annually by the vote of the holders of a majority, as defined in the Investment Company Act, of the outstanding shares of the Fund, or by the Directors, including a majority of the Independent Directors; provided that in either event such continuance is approved annually by the vote of a majority of the Directors, including a majority of the Independent Directors. D. DEALER REALLOWANCES Upon notice to selected broker-dealers, the Distributor may reallow up to the full applicable front-end sales charge during periods specified in such notice. During periods when 90% or more of the sales charge is reallowed, such selected broker-dealers may be deemed to be underwriters as that term is defined in the Securities Act. 21 E. RULE 12b-1 PLAN The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the Investment Company Act (the "Plan") pursuant to which each Class, other than Class D, pays the Distributor compensation accrued daily and payable monthly at the following maximum annual rates: 0.25%, 0.75% and 0.85% of the average daily net assets of Class A, Class B and Class C, respectively. The Distributor also receives the proceeds of front-end sales charges ("FSCs") and of contingent deferred sales charges ("CDSCs") imposed on certain redemptions of shares, which are separate and apart from payments made pursuant to the Plan. The Distributor has informed the Fund that it and/or Morgan Stanley DW received the proceeds of CDSCs and FSCs, for the last three fiscal years ended August 31, in approximate amounts as provided in the table below (the Distributor did not retain any of these amounts).
2002 2001 2000 -------------------- -------------------- -------------------- Class A................ FSCs:(1) $ 135,390 FSCs:(1) $ 217,448 FSCs:(1) $ 187,035 CDSCs: $ 26,842 CDSCs: $ 12,759 CDSCs: $ 26,734 Class B................ CDSCs: $1,519,542 CDSCs: $3,170,758 CDSCs: $4,887,041 Class C................ CDSCs: $ 29,347 CDSCs: $ 61,850 CDSCs: $ 86,304
- ------------------------ (1) FSCs apply to Class A only. The Distributor has informed the Fund that the entire fee payable by Class A and a portion of the fees payable by each of Class B and Class C each year pursuant to the Plan equal to 0.20% of the average daily net assets of Class B and 0.25% of the average daily net assets of Class C are currently each characterized as a "service fee" under the Rules of the National Association of Securities Dealers, Inc. (of which the Distributor is a member). The "service fee" is a payment made for personal service and/or the maintenance of shareholder accounts. The remaining portion of the Plan fees payable by a Class, if any, is characterized as an "asset-based sales charge" as such is defined by the Rules of the Association. Under the Plan and as required by Rule 12b-1, the Directors receive and review promptly after the end of each calendar quarter a written report provided by the Distributor of the amounts expended under the Plan and the purpose for which such expenditures were made. During the fiscal year ended August 31, 2002, Class A, Class B and Class C shares of the Fund accrued amounts payable to the Distributor under the Plan of $48,012, $3,747,816 and $349,455, respectively, which amounts are equal to 0.18%, 0.75% and 0.85% of the average daily net assets of Class A, Class B and Class C, respectively. The Plan was adopted in order to permit the implementation of the Fund's method of distribution. Under this distribution method the Fund offers four Classes, each with a different distribution arrangement. With respect to Class A shares, Morgan Stanley DW compensates its Financial Advisors by paying them, from proceeds of the FSC, commissions for the sale of Class A shares, currently a gross sales credit of up to 4.0% of the amount sold (except as provided in the following sentence) and an annual residual commission, currently a residual of up to 0.20% of the current value of the respective accounts for which they are the Financial Advisors or dealers of record in all cases. On orders of $1 million or more (for which no sales charge was paid) or net asset value purchases by employer-sponsored employee benefit plans, whether or not qualified under the Internal Revenue Code, for which (i) the Transfer Agent serves as Trustee, (ii) Morgan Stanley's Retirement Plan Services serves as recordkeeper pursuant to a written Recordkeeping Services Agreement or (iii) an entity independent from Morgan Stanley serves as recordkeeper under an alliance or similar agreement with Morgan Stanley's Retirement Plan Services ("Morgan Stanley Eligible Plans"), the Investment Manager compensates Financial Advisors by paying them, from its own funds, a gross sales credit of 1.0% of the amount sold. With respect to Class B shares, Morgan Stanley DW compensates its Financial Advisors by paying them, from its own funds, commissions for the sale of Class B shares, currently a gross sales credit of up 22 to 4.0% of the amount sold (except as provided in the following sentence) and an annual residual commission, currently a residual of up to 0.20% of the current value (not including reinvested dividends or distributions) of the amount sold in all cases. In the case of Class B shares purchased by Morgan Stanley Eligible Plans, Morgan Stanley DW compensates its Financial Advisors by paying them, from its own funds, a gross sales credit of 3.0% of the amount sold. With respect to Class C shares, Morgan Stanley DW compensates its Financial Advisors by paying them, from its own funds, commissions for the sale of Class C shares, currently a gross sales credit of up to 1.0% of the amount sold and an annual residual commission, currently up to 0.85% of the current value of the respective accounts for which they are the Financial Advisors of record. With respect to Class D shares other than shares held by participants in the Investment Manager's mutual fund asset allocation program and in the Morgan Stanley Choice Program, the Investment Manager compensates Morgan Stanley DW's Financial Advisors by paying them, from its own funds, commissions for the sale of Class D shares, currently a gross sales credit of up to 1.0% of the amount sold. There is a chargeback of 100% of the amount paid if the Class D shares are redeemed in the first year and a chargeback of 50% of the amount paid if the Class D shares are redeemed in the second year after purchase. The Investment Manager also compensates Morgan Stanley DW's Financial Advisors by paying them, from its own funds, an annual residual commission, currently up to 0.10% of the current value of the respective accounts for which they are the Financial Advisors of record (not including accounts of participants in the Investment Manager's mutual fund asset allocation program and the Morgan Stanley Choice Program). The gross sales credit is a charge which reflects commissions paid by Morgan Stanley DW to its Financial Advisors and Morgan Stanley DW's Fund-associated distribution-related expenses, including sales compensation, and overhead and other branch office distribution-related expenses including (a) the expenses of operating Morgan Stanley DW's branch offices in connection with the sale of Fund shares, including lease costs, the salaries and employee benefits of operations and sales support personnel, utility costs, communications costs and the costs of stationery and supplies, (b) the costs of client sales seminars, (c) travel expenses of mutual fund sales coordinators to promote the sale of Fund shares and (d) other expenses relating to branch promotion of Fund sales. The Investment Manager pays a retention fee to Financial Advisors at an annual rate of 0.05% of the value of shares of the Fund held for at least one year. Shares purchased through the reinvestment of dividends will be eligible for a retention fee, provided that such dividends were earned on shares otherwise eligible for a retention fee payment. Shares owned in variable annuities, closed-end fund shares and shares held in 401(k) plans where the Transfer Agent or Morgan Stanley's Retirement Plan Services is either recordkeeper or trustee are not eligible for a retention fee. The retention fees are paid by the Investment Manager from its own assets, which may include profits from investment management fees payable under the Management Agreement, as well as from borrowed funds. The distribution fee that the Distributor receives from the Fund under the Plan, in effect, offsets distribution expenses incurred under the Plan on behalf of the Fund and, in the case of Class B shares, opportunity costs, such as the gross sales credit and an assumed interest charge thereon ("carrying charge"). These expenses may include the cost of Fund-related educational and/or business-related trips or payment of Fund-related educational and/or promotional expenses of Financial Advisors. For example, the Distributor has implemented a compensation program available only to Financial Advisors meeting specified criteria under which certain marketing and/or promotional expenses of those Financial Advisors are paid by the Distributor out of compensation it receives under the Plan. In the Distributor's reporting of the distribution expenses to the Fund, in the case of Class B shares, such assumed interest (computed at the "broker's call rate") has been calculated on the gross credit as it is reduced by amounts received by the Distributor under the Plan and any contingent deferred sales charges received 23 by the Distributor upon redemption of shares of the Fund. No other interest charge is included as a distribution expense in the Distributor's calculation of its distribution costs for this purpose. The broker's call rate is the interest rate charged to securities brokers on loans secured by exchange-listed securities. The Fund is authorized to reimburse expenses incurred or to be incurred in promoting the distribution of the Fund's Class A and Class C shares and in servicing shareholder accounts. Reimbursement will be made through payments at the end of each month. The amount of each monthly payment may in no event exceed an amount equal to a payment at the annual rate of 0.25%, in the case of Class A, and 0.85%, in the case of Class C, of the average net assets of the respective Class during the month. No interest or other financing charges, if any, incurred on any distribution expenses on behalf of Class A and Class C will be reimbursable under the Plan. With respect to Class A, in the case of all expenses other than expenses representing the service fee, and, with respect to Class C, in the case of all expenses other than expenses representing a gross sales credit or a residual to Financial Advisors and other authorized financial representatives, such amounts shall be determined at the beginning of each calendar quarter by the Directors, including, a majority of the Independent Directors. Expenses representing the service fee (for Class A) or a gross sales credit or a residual to Financial Advisors and other authorized financial representatives (for Class C) may be reimbursed without prior determination. In the event that the Distributor proposes that monies shall be reimbursed for other than such expenses, then in making quarterly determinations of the amounts that may be reimbursed by the Fund, the Distributor will provide and the Directors will review a quarterly budget of projected distribution expenses to be incurred on behalf of the Fund, together with a report explaining the purposes and anticipated benefits of incurring such expenses. The Directors will determine which particular expenses, and the portions thereof, that may be borne by the Fund, and in making such a determination shall consider the scope of the Distributor's commitment to promoting the distribution of the Fund's Class A and Class C shares. Each Class paid 100% of the amounts accrued under the Plan with respect to that Class for the fiscal year ended August 31, 2002 to the Distributor. The Distributor and Morgan Stanley DW estimate that they have spent, pursuant to the Plan, $124,910,663 on behalf of Class B since the inception of the Plan. It is estimated that this amount was spent in approximately the following ways: (i) 4.08% ($5,098,452)--advertising and promotional expenses; (ii) 0.05% ($58,266)--printing of prospectuses for distribution to other than current shareholders; and (iii) 95.87% ($119,753,945)--other expenses, including the gross sales credit and the carrying charge, of which 9.99% ($11,958,129) represents carrying charges, 24.55% ($29,394,898) represents commission credits to Morgan Stanley DW branch offices and other selected broker-dealers for payments of commissions to Financial Advisors and other authorized financial representatives, 34.74% ($41,607,270) represents overhead and other branch office distribution-related expenses, and 30.72% ($36,793,648) represents excess distribution expenses of Dean Witter High Income Securities, the net assets of which were combined with those of the Fund on November 10, 1997 pursuant to an Agreement and Plan of Reorganization. The amount accrued by Class A and a portion of the amounts accrued by Class C under the Plan during the fiscal year ended August 31, 2002 were service fees. The remainder of the amounts accrued by Class C were for expenses which relate to compensation of sales personnel and associated overhead expenses. In the case of Class B shares, at any given time, the expenses of distributing shares of the Fund may be more or less than the total of (i) the payments made by the Fund pursuant to the Plan; and (ii) the proceeds of CDSCs paid by investors upon redemption of shares. For example, if $1 million in expenses in distributing Class B shares of the Fund had been incurred and $750,000 had been received as described in (i) and (ii) above, the excess expense would amount to $250,000. The Distributor has advised the Fund that in the case of Class B shares the excess distribution expenses, including the carrying charge designed to approximate the opportunity costs incurred by Morgan Stanley DW which arise from it having advanced monies without having received the amount of any sales charges imposed at the time of sale of the Fund's Class B shares, totaled $60,068,745 as of August 31, 2002, which was equal to 16.17% of the net assets of Class B on such date. Because there is no requirement under the Plan that the Distributor be reimbursed for all distribution expenses with respect to Class B shares or any requirement that the Plan be continued from year to year, this excess amount does not constitute a 24 liability of the Fund. 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 CDSCs 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. Any cumulative expenses incurred, but not yet recovered through distribution fees or CDSCs, may or may not be recovered through future distribution fees or CDSCs. In the case of Class A 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 commission credited to Morgan Stanley Financial Advisors and other authorized financial representatives at the time of sale may be reimbursed in the subsequent calendar year. The Distributor has advised the Fund that unreimbursed expenses representing a gross sales commission credited to Morgan Stanley Financial Advisors and other authorized financial representatives at the time of sale totaled $74,429 in the case of Class C at December 31, 2001 (end of the calendar year), which was equal to 0.17% of the net assets of Class C on such date, and that there were no such expenses that may be reimbursed in the subsequent year in the case of Class A on such date. No interest or other financing charges will be incurred on any Class A or Class C distribution expenses incurred by the Distributor under the Plan or on any unreimbursed expenses due to the Distributor pursuant to the Plan. No interested person of the Fund nor any Independent Director has any direct financial interest in the operation of the Plan except to the extent that the Distributor, the Investment Manager, Morgan Stanley DW, Morgan Stanley Services or certain of their employees may be deemed to have such an interest as a result of benefits derived from the successful operation of the Plan or as a result of receiving a portion of the amounts expended thereunder by the Fund. On an annual basis, the Directors, including a majority of the Independent Directors, consider whether the Plan should be continued. Prior to approving the last continuation of the Plan, the Directors requested and received from the Distributor and reviewed all the information which they deemed necessary to arrive at an informed determination. In making their determination to continue the Plan, the Directors considered: (1) the Fund's experience under the Plan and whether such experience indicates that the Plan is operating as anticipated; (2) the benefits the Fund had obtained, was obtaining and would be likely to obtain under the Plan, including that: (a) the Plan is essential in order to give Fund investors a choice of alternatives for payment of distribution and service charges and to enable the Fund to continue to grow and avoid a pattern of net redemptions which, in turn, are essential for effective investment management; and (b) without the compensation to individual brokers and the reimbursement of distribution and account maintenance expenses of Morgan Stanley DW's branch offices made possible by the 12b-1 fees, Morgan Stanley DW could not establish and maintain an effective system for distribution, servicing of Fund shareholders and maintenance of shareholder accounts; and (3) what services had been provided and were continuing to be provided under the Plan to the Fund and its shareholders. Based upon their review, the Directors, including each of the Independent Directors, determined that continuation of the Plan would be in the best interest of the Fund and would have a reasonable likelihood of continuing to benefit the Fund and its shareholders. In the Directors' quarterly review of the Plan, they will consider its continued appropriateness and the level of compensation provided therein. The Plan may not be amended to increase materially the amount to be spent for the services described therein without approval by the shareholders of the affected Class or Classes of the Fund, and all material amendments to the Plan must also be approved by the Directors in the manner described above. The Plan may be terminated at any time, without payment of any penalty, by vote of a majority of the Independent Directors or by a vote of a majority of the outstanding voting securities of the Fund (as defined in the Investment Company Act) on not more than thirty days' written notice to any other party to the Plan. So long as the Plan is in effect, the election and nomination of Independent Directors shall be committed to the discretion of the Independent Directors. 25 F. OTHER SERVICE PROVIDERS (1) TRANSFER AGENT/DIVIDEND-PAYING AGENT Morgan Stanley Trust is the Transfer Agent for the Fund's shares and the Dividend Disbursing Agent for payment of dividends and distributions on Fund shares and Agent for shareholders under various investment plans. The principal business address of the Transfer Agent is Harborside Financial Center, Plaza Two, 2nd Floor, Jersey City, NJ 07311. (2) CUSTODIAN AND INDEPENDENT AUDITORS The Bank of New York, 100 Church Street, New York, NY 10007 is the Custodian of the Fund's assets. Any of the Fund's cash balances with the Custodian in excess of $100,000 are unprotected by federal deposit insurance. These balances may, at times, be substantial. Deloitte & Touche LLP, Two World Financial Center, New York, NY 10281, serves as the independent auditors of the Fund. The independent auditors are responsible for auditing the annual financial statements of the Fund. (3) AFFILIATED PERSONS The Transfer Agent is an affiliate of the Investment Manager and the Distributor. As Transfer Agent and Dividend Disbursing Agent, the Transfer Agent's responsibilities include maintaining shareholder accounts, disbursing cash dividends and reinvesting dividends, processing account registration changes, handling purchase and redemption transactions, mailing prospectuses and reports, mailing and tabulating proxies, processing share certificate transactions, and maintaining shareholder records and lists. For these services, the Transfer Agent receives a per shareholder account fee from the Fund and is reimbursed for its out-of-pocket expenses in connection with such services. G. CODES OF ETHICS The Fund, the Investment Manager and the Distributor have each adopted a Code of Ethics pursuant to Rule 17j-1 under the Investment Company Act. The Codes of Ethics are designed to detect and prevent improper personal trading. The Codes of Ethics permit personnel subject to the Codes to invest in securities, including securities that may be purchased, sold or held by the Fund, subject to a number of restrictions and controls including prohibitions against purchases of securities in an Initial Public Offering and a preclearance requirement with respect to personal securities transactions. VI. BROKERAGE ALLOCATION AND OTHER PRACTICES - -------------------------------------------------------------------------------- A. BROKERAGE TRANSACTIONS Subject to the general supervision of the Directors, the Investment Manager is responsible for decisions to buy and sell securities for the Fund, the selection of brokers and dealers to effect the transactions, and the negotiation of brokerage commissions, if any. Purchases and sales of securities on a stock exchange are effected through brokers who charge a commission for their services. In the over-the-counter market, securities are generally traded on a "net" basis with dealers acting as principal for their own accounts without a stated commission, although the price of the security usually includes a profit to the dealer. The Fund also expects that securities will be purchased at times in underwritten offerings where the price includes a fixed amount of compensation, generally referred to as the underwriter's concession or discount. On occasion, the Fund may also purchase certain money market instruments directly from an issuer, in which case no commissions or discounts are paid. The Fund did not pay any brokerage commissions during the fiscal years ended August 31, 2000, 2001 and 2002. B. COMMISSIONS Pursuant to an order of the SEC, the Fund may effect principal transactions in certain money market instruments with Morgan Stanley DW. The Fund will limit its transactions with Morgan Stanley DW to U.S. government and government agency securities, bank money instruments (i.e., certificates of deposit 26 and bankers' acceptances) and commercial paper. The transactions will be effected with Morgan Stanley DW only when the price available from Morgan Stanley DW is better than that available from other dealers. During the fiscal years ended August 31, 2000, 2001 and 2002, the Fund did not effect any principal transactions with Morgan Stanley DW. Brokerage transactions in securities listed on exchanges or admitted to unlisted trading privileges may be effected through Morgan Stanley DW, Morgan Stanley & Co. and other affiliated brokers and dealers. In order for an affiliated broker or dealer to effect any portfolio transactions on an exchange for the Fund, the commissions, fees or other remuneration received by the affiliated broker or dealer must be reasonable and fair compared to the commissions, fees or other remuneration paid to other brokers in connection with comparable transactions involving similar securities being purchased or sold on an exchange during a comparable period of time. This standard would allow the affiliated broker or dealer to receive no more than the remuneration which would be expected to be received by an unaffiliated broker in a commensurate arm's-length transaction. Furthermore, the Directors, including the Independent Directors, have adopted procedures which are reasonably designed to provide that any commissions, fees or other remuneration paid to an affiliated broker or dealer are consistent with the foregoing standard. The Fund does not reduce the management fee it pays to the Investment Manager by any amount of the brokerage commissions it may pay to an affiliated broker or dealer. The Fund did not pay any brokerage commissions to any affiliated brokers or dealers during the fiscal years ended August 31, 2000, 2001 and 2002. C. BROKERAGE SELECTION The policy of the Fund regarding purchases and sales of securities for its portfolio is that primary consideration will be given to obtaining the most favorable prices and efficient executions of transactions. Consistent with this policy, when securities transactions are effected on a stock exchange, the Fund's policy is to pay commissions which are considered fair and reasonable without necessarily determining that the lowest possible commissions are paid in all circumstances. The Fund believes that a requirement always to seek the lowest possible commission cost could impede effective portfolio management and preclude the Fund and the Investment Manager from obtaining a high quality of brokerage and research services. In seeking to determine the reasonableness of brokerage commissions paid in any transaction, the Investment Manager relies upon its experience and knowledge regarding commissions generally charged by various brokers and on its judgment in evaluating the brokerage and research services received from the broker effecting the transaction. These determinations are necessarily subjective and imprecise, as in most cases an exact dollar value for those services is not ascertainable. In seeking to implement the Fund's policies, the Investment Manager effects transactions with those brokers and dealers who the Investment Manager believes provide the most favorable prices and are capable of providing efficient executions. If the Investment Manager believes the prices and executions are obtainable from more than one broker or dealer, it may give consideration to placing portfolio transactions with those brokers and dealers who also furnish research and other services to the Fund or the Investment Manager. The services may include, but are not limited to, any one or more of the following: information as to the availability of securities for purchase or sale; statistical or factual information or opinions pertaining to investment; wire services; and appraisals or evaluations of portfolio securities. The information and services received by the Investment Manager from brokers and dealers may be utilized by the Investment Manager and any of its asset management affiliates in the management of accounts of some of their other clients and may not in all cases benefit the Fund directly. The Investment Manager and certain of its affiliates currently serves as investment manager to a number of clients, including other investment companies, and may in the future act as investment manager or advisor to others. It is the practice of the Investment Manager and its affiliates to cause purchase and sale transactions to be allocated among clients whose assets they manage (including the 27 Fund) in such manner they deem equitable. In making such allocations among the Fund and other client accounts, various factors may be considered, including the respective investment objectives, the relative size of portfolio holdings of the same or comparable securities, the availability of cash for investment, the size of investment commitments generally held and the opinions of the persons responsible for managing the portfolios of the Fund and other client accounts. The Investment Manager and its affiliates may operate one or more order placement facilities and each facility will implement order allocation in accordance with the procedures described above. From time to time, each facility may transact in a security at the same time as other facilities are trading in that security. D. DIRECTED BROKERAGE During the fiscal year ended August 31, 2002, the Fund did not pay any brokerage commissions to brokers because of research services provided. E. REGULAR BROKER-DEALERS During the fiscal year ended August 31, 2002, the Fund did not purchase securities issued by brokers or dealers that were among the ten brokers or the ten dealers that executed transactions for or with the Fund in the largest dollar amounts during the year. At August 31, 2002, the Fund did not own any securities issued by any of such issuers. VII. CAPITAL STOCK AND OTHER SECURITIES - -------------------------------------------------------------------------------- The Fund is authorized to issue 2 billion shares of common stock of $0.01 par value for each Class. Shares of the Fund, when issued, are fully paid, non-assessable, fully transferrable and redeemable at the option of the holder. Except for agreements entered into by the Fund in its ordinary course of business within the limitations of the Fund's fundamental investment policies (which may be modified only by shareholder vote), the Fund will not issue any securities other than common stock. All shares of common stock are equal as to earnings, assets and voting privileges except that each Class will have exclusive voting privileges with respect to matters relating to distribution expenses borne solely by such Class or any other matter in which the interests of one Class differ from the interests of any other Class. In addition, Class B shareholders will have the right to vote on any proposed material increase in Class A's expenses, if such proposal is submitted separately to Class A shareholders. Also, as discussed herein, Class A, Class B and Class C bear the expenses related to the distribution of their respective shares. The Fund is not required to hold annual meetings of shareholders and in ordinary circumstances the Fund does not intend to hold such meetings. The Directors may call special meetings of shareholders for action by shareholder vote as may be required by the Investment Company Act or the Fund's By-Laws. Under certain circumstances, the Directors may be removed by action of the Directors. In addition, under certain circumstances, the shareholders may call a meeting to remove Directors and the Fund is required to provide assistance in communicating with shareholders about such a meeting. The voting rights of shareholders are not cumulative, so that holders of more than 50 percent of the shares voting can, if they choose, elect all Directors being selected, while the holders of the remaining shares would be unable to elect any Directors. VIII. PURCHASE, REDEMPTION AND PRICING OF SHARES - -------------------------------------------------------------------------------- A. PURCHASE/REDEMPTION OF SHARES Information concerning how Fund shares are offered to the public (and how they are redeemed and exchanged) is provided in the Fund's PROSPECTUS. TRANSFER AGENT AS AGENT. With respect to the redemption or repurchase of Fund shares, the application of proceeds to the purchase of new shares in the Fund or any other Morgan Stanley Funds and the general administration of the exchange privilege, the Transfer Agent acts as agent for the 28 Distributor and for the shareholder's authorized broker-dealer, if any, in the performance of such functions. With respect to exchanges, redemptions or repurchases, the Transfer Agent is liable for its own negligence and not for the default or negligence of its correspondents or for losses in transit. The Fund is not liable for any default or negligence of the Transfer Agent, the Distributor or any authorized broker-dealer. The Distributor and any authorized broker-dealer have appointed the Transfer Agent to act as their agent in connection with the application of proceeds of any redemption of Fund shares to the purchase of shares of any other Morgan Stanley Fund and the general administration of the exchange privilege. No commission or discounts will be paid to the Distributor or any authorized broker-dealer for any transaction pursuant to the exchange privilege. TRANSFERS OF SHARES. In the event a shareholder requests a transfer of Fund shares to a new registration, the shares will be transferred without sales charge at the time of transfer. With regard to the status of shares which are either subject to the CDSC or free of such charge (and with regard to the length of time shares subject to the charge have been held), any transfer involving less than all of the shares in an account will be made on a pro rata basis (that is, by transferring shares in the same proportion that the transferred shares bear to the total shares in the account immediately prior to the transfer). The transferred shares will continue to be subject to any applicable CDSC as if they had not been so transferred. OUTSIDE BROKERAGE ACCOUNTS. If a shareholder wishes to maintain his or her fund account through a brokerage company other than Morgan Stanley DW, he or she may do so only if the Distributor has entered into a selected dealer agreement with that brokerage company. Accounts maintained through a brokerage company other than Morgan Stanley DW may be subject to certain restrictions on subsequent purchases and exchanges. Please contact your brokerage company or the Transfer Agent for more information. B. OFFERING PRICE The Fund's Class B, Class C and Class D shares are offered at net asset value per share and the Class A shares are offered at net asset value per share plus any applicable FSC which is distributed among the Fund's Distributor, Morgan Stanley DW and other authorized dealers as described in Section "V. Investment Management and Other Services -- E. Rule 12b-1 Plan." The price of Fund shares, called "net asset value," is based on the value of the Fund's portfolio securities. Net asset value per share of each Class is calculated by dividing the value of the portion of the Fund's securities and other assets attributable to that Class, less the liabilities attributable to that Class, by the number of shares of that Class outstanding. The assets of each Class of shares are invested in a single portfolio. The net asset value of each Class, however, will differ because the Classes have different ongoing fees. In the calculation of the Fund's net asset value: (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 a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market pursuant to procedures adopted by the Directors, and (2) all other portfolio securities for which over-the-counter market quotations are readily available are valued at the latest bid price. When market quotations are not readily available, including circumstances under which it is determined by the Investment Manager that sale or bid prices are not reflective of a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund's Directors. For valuation purposes, quotations of foreign portfolio securities, other assets and liabilities and forward contracts stated in foreign currency are translated into U.S. dollar equivalents at the prevailing market rates prior to the close of the New York Stock Exchange. Short-term debt securities with remaining maturities of sixty days or less at the time of purchase are valued at amortized cost, unless the Directors determine such does not reflect the securities' market value, in which case these securities will be valued at their fair value as determined by the Directors. 29 Listed options on debt securities are valued at the latest sale price on the exchange on which they are listed unless no sales of such options have taken place that day, in which case, they will be valued at the mean between their closing bid and asked prices. Unlisted options on debt securities are valued at the mean between their latest bid and asked price. Futures are valued at the latest sale price on the commodities exchange on which they trade unless the Directors determine that such price does not reflect their fair value, in which case they will be value at their fair market value as determined by the Directors. All other securities and other assets are valued at their fair value as determined in good faith under procedures established by and under the supervision of the Directors. Certain of the Fund's portfolio securities may be valued by an outside pricing service approved by the Fund's Directors. The pricing service may utilize a matrix system incorporating security quality, maturity and coupon as the evaluation model parameters, and/or research evaluations by its staff, including review of broker-dealer market price quotations in determining what it believes is the fair valuation of the portfolio securities valued by such pricing service. Listed options on debt securities are valued at the latest sale price on the exchange on which they are listed unless no sales of such options have taken place that day, in which case they well be valued at the mean between their latest bid and asked prices. Unlisted options on debt securities and all options on equity securities are valued at the mean between their latest bid and asked prices. Futures are valued at the latest price published by the commodities exchange on which they trade unless the Directors determine that such price does not reflect their market value, in which case they will be valued at their fair value as determined in good faith under procedures established by and under the supervision of the Directors. Generally, trading in foreign securities, as well as corporate bonds, U.S. government securities and money market instruments, is substantially completed each day at various times prior to the close of the New York Stock Exchange. The values of such securities used in computing the net asset value of the Fund's shares are determined as of such times. Foreign currency exchange rates are also generally determined prior to the close of the New York Stock Exchange. Occasionally, events which may affect the values of such securities and such exchange rates may occur between the times at which they are determined and the close of the New York Stock Exchange and will therefore not be reflected in the computation of the Fund's net asset value. If events that may affect the value of such securities occur during such period, then these securities may be valued at their fair value as determined in good faith under procedures established by and under the supervision of the Directors. IX. TAXATION OF THE FUND AND SHAREHOLDERS - -------------------------------------------------------------------------------- The Fund generally will make two basic types of distributions: ordinary dividends and long-term capital gain distributions. These two types of distributions are reported differently on a shareholder's income tax return and they are also subject to different rates of tax. The tax treatment of the investment activities of the Fund will affect the amount, timing and character of the distributions made by the Fund. Tax issues relating to the Fund are not generally a consideration for shareholders such as tax-exempt entities and tax-advantaged retirement vehicles such as an IRA or 401(k) plan. Shareholders are urged to consult their own tax professionals regarding specific questions as to federal, state or local taxes. INVESTMENT COMPANY TAXATION. The Fund intends to remain qualified as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. As such, the Fund will not be subject to federal income tax on its net investment income and capital gains, if any, to the extent that it distributes such income and capital gains to its shareholders. The Fund generally intends to distribute sufficient income and gains so that the Fund will not pay corporate income tax on its earnings. The Fund also generally intends to distribute to its shareholders in each calendar year a sufficient amount of ordinary income and capital gains to avoid the imposition of a 4% excise tax although it may not always do so in a particular year. However, the Fund may instead determine to retain all or part of any net long-term capital gains in any year for reinvestment. In such event, the Fund will pay federal income tax (and possibly excise tax) on such retained gains. 30 Gains or losses on sales of securities by the Fund will be long-term capital gains or losses if the securities have a tax holding period of more than one year at the time of such sale. Gains or losses on the sale of securities with a tax holding period of one year or less will be short-term capital gains or losses. Special tax rules may change the normal treatment of gains and losses recognized by the Fund when the Fund invests in forward foreign currency exchange contracts, options, futures transactions, and non-U.S. corporations classified as "passive foreign investment companies." Those special tax rules can, among other things, affect the treatment of capital gain or loss as long-term or short-term and may result in ordinary income or loss rather than capital gain or loss. The application of these special rules would therefore also affect the character of distributions made by the Fund. Under certain tax rules, the Fund may be required to accrue a portion of any discount at which certain securities are purchased as income each year even though the Fund receives no payments in cash on the security during the year. To the extent that the Fund invests in such securities, it would be required to pay out such income as an income distribution in each year in order to avoid taxation at the Fund level. Such distributions will be made from the available cash of the Fund or by liquidation of portfolio securities if necessary. If a distribution of cash necessitates the liquidation of portfolio securities, the Investment Manager will select which securities to sell. The Fund may realize a gain or loss from such sales. In the event the Fund realizes net capital gains from such transactions, its shareholders may receive a larger capital gain distribution, if any, than they would in the absence of such transactions. TAXATION OF DIVIDENDS AND DISTRIBUTIONS. Shareholders normally will have to pay federal income taxes, and any state and/or local income taxes, on the dividends and other distributions they receive from the Fund. Such dividends and distributions, to the extent that they are derived from net investment income or short-term capital gains, are taxable to the shareholder as ordinary income regardless of whether the shareholder receives such payments in additional shares or in cash. Distributions of net long-term capital gains, if any, are taxable to shareholders as long-term capital gains regardless of how long a shareholder has held the Fund's shares and regardless of whether the distribution is received in additional shares or in cash. Under current law, the maximum tax rate on long- term capital gains realized by non-corporate shareholders generally is 20%. A special lower tax rate of 18% on long-term capital is available to non-corporate shareholders to the extent the distributions of long-term capital gains are derived from securities which the Fund purchased after December 31, 2000, and held for more than five years. Shareholders are generally taxed on any ordinary dividend or capital gain distributions from the Fund in the year they are actually distributed. However, if any such dividends or distributions are declared in October, November or December and paid in January then such amounts will be treated for tax purposes as received by the shareholders on December 31, to shareholders of record of such month. Subject to certain exceptions, a corporate shareholder may be eligible for a 70% dividends received deduction to the extent that the Fund earns and distributes qualifying dividends from its investments. Distributions of net capital gains by the Fund will not be eligible for the dividends received deduction. Shareholders who are not citizens or residents of the United States and certain foreign entities may be subject to withholding of United States tax on distributions made by the Fund of investment income and short-term capital gains. After the end of each calendar year, shareholders will be sent information on their dividends and capital gain distributions for tax purposes, including the portion taxable as ordinary income, and the portion taxable as long-term capital gains, and the amount of any dividends eligible for the federal dividends received deduction for corporations. PURCHASES AND REDEMPTIONS AND EXCHANGES OF FUND SHARES. Any dividend or capital gains distribution received by a shareholder from any investment company will have the effect of reducing the net asset value of the shareholder's stock in that company by the exact amount of the dividend or capital gains distribution. Furthermore, such dividends and capital gains distributions are subject to federal 31 income taxes. If the net asset value of the shares should be reduced below a shareholder's cost as a result of the payment of dividends or the distribution of realized long-term capital gains, such payment or distribution would be in part a return of the shareholder's investment but nonetheless would be taxable to the shareholder. Therefore, an investor should consider the tax implications of purchasing Fund shares immediately prior to a distribution record date. In general, a sale of shares results in capital gain or loss, and for individual shareholders, is taxable at a federal rate dependent upon the length of time the shares were held. A redemption of a shareholder's Fund shares is normally treated as a sale for tax purposes. Fund shares held for a period of one year or less at the time of such sale or redemption will, for tax purposes, generally result in short-term capital gains or losses and those held for more than one year generally will result in long-term capital gains or losses. Under current law, the maximum tax rate on long-term capital gains realized by non- corporate shareholders generally is 20%. A special lower tax rate of 18% on long-term capital gains is available for non-corporate shareholders who purchased shares after December 31, 2000, and held such shares for more than five years. This special lower tax rate of 18% for five-year property does not apply to non-corporate shareholders holding Fund shares which were purchased on or prior to December 31, 2000, unless such shareholders make an election to treat the Fund shares as being sold and reacquired on January 1, 2001. A shareholder making such election may realize capital gains. Any loss realized by shareholders upon a sale or redemption of shares within six months of the date of their purchase will be treated as a long-term capital loss to the extent of any distributions of net long-term capital gains with respect to such shares during the six-month period. Gain or loss on the sale or redemption of shares in the Fund is measured by the difference between the amount received and the tax basis of the shares. Shareholders should keep records of investments made (including shares acquired through reinvestment of dividends and distributions) so they can compute the tax basis of their shares. Under certain circumstances a shareholder may compute and use an average cost basis in determining the gain or loss on the sale or redemption of shares. Exchanges of Fund shares for shares of another fund, including shares of other Morgan Stanley Funds, are also subject to similar tax treatment. Such an exchange is treated for tax purposes as a sale of the original shares in the first fund, followed by the purchase of shares in the second fund. If a shareholder realizes a loss on the redemption or exchange of a fund's shares and reinvests in that fund's shares within 30 days before or after the redemption or exchange, the transactions may be subject to the "wash sale" rules, resulting in a postponement of the recognition of such loss for tax purposes. X. UNDERWRITERS - -------------------------------------------------------------------------------- The Fund's shares are offered to the public on a continuous basis. The Distributor, as the principal underwriter of the shares, has certain obligations under the Distribution Agreement concerning the distribution of the shares. These obligations and the compensation the Distributor receives are described above in the sections titled "Principal Underwriter" and "Rule 12b-1 Plan." XI. CALCULATION OF PERFORMANCE DATA - -------------------------------------------------------------------------------- Prior to July 28, 1997, the Fund offered only one Class of shares subject to a maximum sales charge of 5.50% and no 12b-1 fee. Because the distribution arrangement for Class A most closely resembles 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 (i) the actual maximum sales charge applicable to Class A (i.e., 4.25%) and (ii) the ongoing 12b-1 fee applicable to Class A Shares. Furthermore, because all shares of the Fund held prior to July 28, 1997 have been designated Class D shares, the Fund's historical performance has also been restated to reflect the absence of any sales charge in the case of Class D shares. Also set forth below is the actual performance of Class B and Class C as of their last fiscal year. 32 From time to time, the Fund may quote its "yield" and/or its "total return" in advertisements and sales literature. These figures are computed separately for Class A, Class B, Class C and Class D shares. Yield is calculated for any 30-day period as follows: the amount of interest income for each security in the Fund's portfolio is determined in accordance with regulatory requirements; the total for the entire portfolio constitutes the Fund's gross income for the period. Expenses accrued during the period are subtracted to arrive at "net investment income" of each Class. The resulting amount is divided by the product of the maximum offering price per share on the last day of the period multiplied by the average number of shares of the applicable Class outstanding during the period that were entitled to dividends. This amount is added to 1 and raised to the sixth power. 1 is then subtracted from the result and the difference is multiplied by 2 to arrive at the annualized yield. The yields for the 30-day period ended August 31, 2002, calculated pursuant to this formula, were 25.68% for Class A, 26.32% for Class B, 26.26% for Class C and 27.22% for Class D. The Fund's "average annual total return" represents an annualization of the Fund's total return over a particular period and is computed by finding the annual percentage rate which will result in the ending redeemable value of a hypothetical $1,000 investment made at the beginning of a one, five or ten year period, or for the period from the date of commencement of operations, if shorter than any of the foregoing. The ending redeemable value is reduced by any contingent deferred sales charge ("CDSC") at the end of the one, five, ten year or other period. For the purpose of this calculation, it is assumed that all dividends and distributions are reinvested. The formula for computing the average annual total return involves a percentage obtained by dividing the ending redeemable value by the amount of the initial investment (which in the case of Class A shares is reduced by the Class A initial sales charge), taking a root of the quotient (where the root is equivalent to the number of years in the period) and subtracting 1 from the result. Based on this calculation, the average annual total returns of Class A for the one year, five year and ten year period ended August 31, 2002 were -25.03%, -15.21% and -2.66%, respectively. The average annual total returns for Class B for the one year and five year periods ended August 31, 2002 and for the period July 28, 1997 (inception of the Class) through August 31, 2002 were -25.34%, -15.07% and -14.63%, respectively. The average annual total returns for Class C for the one year and five year periods ended August 31, 2002 and for the period July 28, 1997 (inception of the Class) through August 31, 2002 were -22.78%, -15.00% and -14.64%, respectively. The average annual total returns for Class D for the one year, five year and ten year period ended August 31, 2002 were -21.45%, -14.29% and -2.00%, respectively. In addition, the Fund may advertise its total return for each Class over different periods of time by means of aggregate, average, year-by-year or other types of total return figures. These calculations may or may not reflect the imposition of the maximum front-end sales charge for Class A or the deduction of the CDSC for each of Class B and Class C which, if reflected, would reduce the performance quoted. For example, the average annual total return of the Fund may be calculated in the manner described above, but without deduction for any applicable sales charge. Based on the foregoing calculation, the Fund's average annual total returns for Class A for the one year, five year and ten year period ended August 31, 2002 were -21.70%, -14.48% and -2.23%, respectively. The average annual total returns for Class B for the one year, five year and life of the Class periods ended August 31, 2002 were -22.00%, -14.89% and -14.54%, respectively. The average annual total returns for Class C for the one year, five year and life of the Class periods ended August 31, 2002 were -22.11%, - -15.00% and -14.64%, respectively. Because the Class D shares are not subject to any sales charge, the Fund would only advertise average annual total returns as calculated in the previous paragraph. In addition, the Fund may compute its aggregate total return for each Class for specified periods by determining the aggregate percentage rate which will result in the ending value of a hypothetical $1,000 investment made at the beginning of the period. For the purpose of this calculation, it is assumed that all dividends and distributions are reinvested. The formula for computing aggregated total return involves a percentage obtained by dividing the ending value (without reduction for any sales charge) by the initial $1,000 investment and subtracting 1 from the result. Based on this calculation, the total returns for Class A for the one year, five year and ten year period ended August 31, 2002 were -21.70%, -54.24 % and -20.21%, respectively. The total returns for Class B for the one year, five year and life of the Class 33 periods ended August 31, 2002 were -22.00%, -55.35% and -55.08%, respectively. The total returns for Class C for the one year, five year and life of the Class periods ended August 31, 2002 were -22.11%, -55.62% and -55.35%, respectively. The total returns for Class D for the one year, five year and ten year period ended August 31, 2002 were -21.45%, -53.74% and -18.32%, respectively. The Fund may also advertise the growth of hypothetical investments of $10,000, $50,000 and $100,000 in each Class of shares of the Fund by adding 1 to the Fund's aggregate total return to date (expressed as a decimal and without taking into account the effect of any applicable CDSC) and multiplying by $9,575, $48,250 and $97,250 in the case of Class A (investments of $10,000, $50,000 and $100,000 adjusted for the initial sales charge) or by $10,000, $50,000 and $100,000 in the case of each of Class B, Class C and Class D, as the case may be. Investments of $10,000, $50,000 and $100,000 in each Class at inception of the Class would have grown (or declined) to the following amounts at August 31, 2002:
INVESTMENT AT INCEPTION OF: INCEPTION -------------------------------- CLASS DATE: $10,000 $50,000 $100,000 - ----- --------- -------- --------- --------- Class A............................... 09/26/79 $23,135 $116,583 $234,978 Class B............................... 07/28/97 4,492 22,462 44,924 Class C............................... 07/28/97 4,465 22,325 44,649 Class D............................... 09/26/79 25,540 127,699 255,398
For purposes of restating the performance of Class A, the inception date set forth in the above table is the inception date of the Fund. However, Class A did not actually commence operation until July 28, 1997. The after-tax returns of the Fund may also be advertised or otherwise reported. This is generally calculated in a manner similar to the computation of average annual total returns discussed above, except that the calculation also reflects the effect of taxes on returns. Based on these calculations, the average annual total returns (after taxes on distributions) for Class A for the one year, five year and the ten year periods ended August 31, 2002 were -29.49%, - -19.74% and -7.48%, respectively, and the average annual total returns (after taxes on distributions and redemptions) for Class A for the one year, five year and the ten year periods ended August 31, 2002 were -15.07%, -12.01% and -3.03%, respectively. The average annual total returns (after taxes on distributions) for Class D for the one year, five year and the ten year periods ended August 31, 2002 were -26.21%, -18.93% and -6.94%, respectively and the average annual total returns (after taxes on distributions and redemptions) for Class D for the one year, five year and the ten year periods ended August 31, 2002 were - -12.86%, -11.43% and -2.59%, respectively. The Fund from time to time may also advertise its performance relative to certain performance rankings and indexes compiled by recognized organizations. XII. FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- EXPERTS. The financial statements of the Fund for the fiscal year ended August 31, 2002 included in this STATEMENT OF ADDITIONAL INFORMATION and incorporated by reference in the PROSPECTUS have been so included and incorporated in reliance on the report of Deloitte & Touche LLP, independent auditors, given on the authority of said firm as experts in auditing and accounting. * * * * * This STATEMENT OF ADDITIONAL INFORMATION and the PROSPECTUS do not contain all of the information set forth in the REGISTRATION STATEMENT the Fund has filed with the SEC. The complete REGISTRATION STATEMENT may be obtained from the SEC. 34 Morgan Stanley High Yield Securities Inc. PORTFOLIO OF INVESTMENTS / / AUGUST 31, 2002
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------- Corporate Bonds (89.0%) ADVERTISING/MARKETING SERVICES (0.6%) $ 3,340 Interep National Radio Sales, Inc. (Series B)..... 10.00% 07/01/08 $ 2,989,300 ------------ AEROSPACE & DEFENSE (0.5%) 9,385 Loral Space & Communications Ltd.................. 9.50 01/15/06 2,346,250 ------------ AIRLINES (0.8%) 6,450 Air Canada Corp. (Canada)......................... 10.25 03/15/11 4,128,000 ------------ ALTERNATIVE POWER GENERATION (0.4%) 3,735 Calpine Corp...................................... 8.50 02/15/11 1,960,875 ------------ AUTO PARTS: O.E.M. (4.6%) 1,630 Arvinmeritor, Inc................................. 8.75 03/01/12 1,726,848 1,365 Collins & Aikman Products Co...................... 11.50 04/15/06 1,286,512 3,700 Collins & Aikman Products Co...................... 10.75 12/31/11 3,644,500 5,155 Dana Corp......................................... 9.00 08/15/11 4,923,025 2,300 Dura Operating Corp. (Series B)................... 8.625 04/15/12 2,334,500 3,385 Intermet Corp. - 144A*............................ 9.75 06/15/09 3,435,775 1,310 Lear Corp. (Series B)............................. 8.11 05/15/09 1,372,225 2,890 Metaldyne Corp. - 144A*........................... 11.00 06/15/12 2,535,975 2,260 Stoneridge, Inc................................... 11.50 05/01/12 2,327,800 ------------ 23,587,160 ------------ BROADCAST/MEDIA (1.4%) 10,000 Tri-State Outdoor Media Group, Inc. (b)........... 11.00 05/15/08 7,200,000 ------------ BROADCASTING (1.6%) 3,785 Salem Communications Holdings Corp................ 9.00 07/01/11 3,889,087 1,795 XM Satellite Radio Inc............................ 14.00 03/15/10 614,787 4,245 Young Broadcasting Inc............................ 10.00 03/01/11 3,884,175 ------------ 8,388,049 ------------ CABLE/SATELLITE TV (5.3%) 50,687 Australis Holdings Property Ltd. (Australia) (a) (b).............................................. 15.00 11/01/02 0 3,620 British Sky Broadcasting Group PLC (United Kingdom)......................................... 6.875 02/23/09 3,462,856 2,950 British Sky Broadcasting Group PLC (United Kingdom)......................................... 8.20 07/15/09 2,966,343 9,805 Callahan Nordrhein Westfalen (Germany) (a) (b).... 14.00 07/15/10 232,869 3,540 Charter Communications Holdings, Inc.............. 13.50++ 01/15/11 1,345,200 7,060 Charter Communications Holdings/Charter Capital... 11.75++ 05/15/11 2,647,500 19,000 Diva Systems Corp. (Series B) (a) (d)............. 12.625++ 03/01/08 2,351,250 6,145 Echostar DBS Corp. - 144A*........................ 9.125 01/15/09 5,991,375 16,510 Knology Holdings, Inc............................. 11.875++ 10/15/07 5,283,200 6,600 Ono Finance PLC (United Kingdom).................. 13.00 05/01/09 1,320,000 915 Pegasus Communications Corp. (Series B)........... 9.75 12/01/06 432,337 7,355 Telewest Communications PLC (United Kingdom)...... 9.875 02/01/10 1,103,250
SEE NOTES TO FINANCIAL STATEMENTS 35 Morgan Stanley High Yield Securities Inc. PORTFOLIO OF INVESTMENTS / / AUGUST 31, 2002 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------- $ 11,525 United Pan Europe Communications N.V. (Series B) (Netherlands) (b)................................ 10.875% 08/01/09 $ 403,375 ------------ 27,539,555 ------------ CASINO/GAMING (3.1%) 22,000 Aladdin Gaming Holdings/Capital Corp. (Series B)............................................... 13.50++ 03/01/10 440,000 2,400 Harrah's Operating Co., Inc....................... 8.00 02/01/11 2,633,362 4,850 Park Place Entertainment Corp..................... 8.875 09/15/08 5,019,750 24,035 Resort At Summerlin LP (Series B) (a) (b)......... 13.00 12/15/07 0 4,725 Station Casinos, Inc.............................. 8.375 02/15/08 4,914,000 2,970 Venetian Casino/LV Sands - 144A*.................. 11.00 06/15/10 2,981,137 ------------ 15,988,249 ------------ CELLULAR TELEPHONE (1.9%) 2,230 Dobson/Sygnet Communications Co................... 12.25 12/15/08 1,404,900 29,800 Dolphin Telecom PLC (Series B) (United Kingdom) (a) (d).......................................... 14.00++ 05/15/09 2,980 25,025 Dolphin Telecom PLC (United Kingdom) (a) (d)...... 11.50++ 06/01/08 2,502 11,050 Nextel Partners, Inc.............................. 14.00++ 02/01/09 4,751,500 4,258 Tritel PCS, Inc................................... 12.75++ 05/15/09 3,491,560 ------------ 9,653,442 ------------ CHEMICALS: MAJOR DIVERSIFIED (1.8%) 3,665 Equistar Chemical/Funding......................... 10.125 09/01/08 3,518,400 6,705 Huntsman ICI Chemicals LLC........................ 10.125 07/01/09 5,967,450 ------------ 9,485,850 ------------ CHEMICALS: SPECIALTY (2.4%) 2,560 Acetex Corp. (Canada)............................. 10.875 08/01/09 2,662,400 850 ISP Chemco, Inc. (Series B)....................... 10.25 07/01/11 850,000 4,710 ISP Holdings, Inc. (Series B)..................... 10.625 12/15/09 4,050,600 2,930 Lyondell Chemical Co. (Series B).................. 9.875 05/01/07 2,900,700 1,725 Millennium America, Inc........................... 9.25 06/15/08 1,794,000 ------------ 12,257,700 ------------ COMMERCIAL PRINTING/FORMS (1.1%) 3,935 Mail-Well I Corp. - 144A*......................... 9.625 03/15/12 2,715,150 13,000 Premier Graphics, Inc. (b)........................ 11.50 12/01/05 406,250 2,490 Quebecor Media, Inc. (Canada)..................... 11.125 07/15/11 2,079,150 935 Quebecor Media, Inc. (Canada)..................... 13.75++ 07/15/11 444,125 ------------ 5,644,675 ------------ CONSUMER/BUSINESS SERVICES (3.1%) 13,000 Comforce Operating, Inc........................... 12.00 12/01/07 7,540,000 4,249 MDC Communications Corp. (Canada)................. 10.50 12/01/06 3,526,670 6,085 Muzak LLC/Muzak Finance Corp...................... 9.875 03/15/09 5,080,975 ------------ 16,147,645 ------------
SEE NOTES TO FINANCIAL STATEMENTS 36 Morgan Stanley High Yield Securities Inc. PORTFOLIO OF INVESTMENTS / / AUGUST 31, 2002 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------- CONTAINERS/PACKAGING (1.8%) $ 10,000 LLS Corp. (b)..................................... 11.625% 08/01/09 $ 900,000 7,540 Owens-Illinois, Inc............................... 7.80 05/15/18 6,032,000 2,235 Pliant Corp....................................... 13.00 06/01/10 2,246,175 ------------ 9,178,175 ------------ DIVERSIFIED MANUFACTURING (2.3%) 9,755 Eagle-Picher Industries, Inc...................... 9.375 03/01/08 7,608,900 7,750 Jordan Industries, Inc. (Series B)................ 10.375 08/01/07 4,495,000 ------------ 12,103,900 ------------ DRUGSTORE CHAINS (0.7%) 2,000 Rite Aid Corp..................................... 6.875 08/15/13 1,160,000 2,025 Rite Aid Corp..................................... 7.70 02/15/27 1,113,750 2,000 Rite Aid Corp. - 144A*............................ 6.125 12/15/08 1,160,000 ------------ 3,433,750 ------------ ELECTRIC UTILITIES (0.7%) 3,620 PG&E National Energy Group, Inc................... 10.375 05/16/11 1,339,400 3,050 PSEG Energy Holdings - 144A*...................... 8.625 02/15/08 2,287,500 ------------ 3,626,900 ------------ ELECTRONIC COMPONENTS (0.3%) 1,585 Flextronics International Ltd. (Singapore)........ 9.875 07/01/10 1,640,475 ------------ ELECTRONIC DISTRIBUTORS (0.9%) 4,280 BRL Universal Equipment Corp...................... 8.875 02/15/08 4,333,500 20,000 CHS Electronics, Inc. (a) (b)..................... 9.875 04/15/05 175,000 ------------ 4,508,500 ------------ ELECTRONIC EQUIPMENT/INSTRUMENTS (0.6%) 8,280 High Voltage Engineering, Inc..................... 10.75 08/15/04 2,980,800 ------------ ELECTRONICS/APPLIANCES (0.0%) 84,930 International Semi-Tech Microelectronics, Inc. (Canada) (a) (b)................................. 11.50 08/15/03 8,493 ------------ ENGINEERING & CONSTRUCTION (0.1%) 2,310 Encompass Services Corp........................... 10.50 05/01/09 231,000 6,575 Metromedia Fiber Network, Inc. (a) (b)............ 10.00 12/15/09 32,875 7,000 Metromedia Fiber Network, Inc. (Series B) (a) (b).............................................. 10.00 11/15/08 35,000 ------------ 298,875 ------------ ENVIRONMENTAL SERVICES (1.7%) 6,025 Allied Waste North America, Inc. (Series B)....... 10.00 08/01/09 5,934,625 3,025 Waste Management, Inc. (Series A)................. 7.375 08/01/10 3,079,598 ------------ 9,014,223 ------------ FINANCIAL CONGLOMERATES (0.4%) 2,100 Case Credit Corp.................................. 6.125 02/15/03 2,028,417 ------------
SEE NOTES TO FINANCIAL STATEMENTS 37 Morgan Stanley High Yield Securities Inc. PORTFOLIO OF INVESTMENTS / / AUGUST 31, 2002 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------- FOOD DISTRIBUTORS (0.9%) $ 4,905 Volume Services America, Inc...................... 11.25% 03/01/09 $ 4,647,487 ------------ FOOD: MEAT/FISH/DAIRY (1.9%) 4,455 Michael Foods, Inc. (Series B).................... 11.75 04/01/11 4,878,225 5,200 Smithfield Foods, Inc............................. 7.625 02/15/08 4,810,000 ------------ 9,688,225 ------------ FOREST PRODUCTS (2.1%) 4,290 Louisiana Pacific Corp............................ 10.875 11/15/08 4,509,862 1,615 Louisiana Pacific Corp............................ 8.875 08/15/10 1,689,744 4,800 Tembec Industries, Inc. (Canada).................. 8.50 02/01/11 4,836,000 ------------ 11,035,606 ------------ GAS DISTRIBUTORS (0.2%) 3,595 Dynegy Holdings, Inc.............................. 6.875 04/01/11 1,222,300 ------------ HOME BUILDING (2.9%) 5,610 Schuler Homes, Inc................................ 9.375 07/15/09 5,652,075 405 Schuler Homes, Inc................................ 10.50 07/15/11 407,025 2,445 Tech Olympic USA, Inc. - 144A*.................... 9.00 07/01/10 2,304,412 2,305 Tech Olympic USA, Inc. - 144A*.................... 10.375 07/01/12 2,114,838 4,400 Toll Corp......................................... 8.25 02/01/11 4,356,000 ------------ 14,834,350 ------------ HOSPITAL/NURSING MANAGEMENT (0.8%) 3,600 HCA, Inc.......................................... 7.875 02/01/11 3,933,421 ------------ HOTELS/RESORTS/CRUISELINES (3.6%) 1,455 Hilton Hotels Corp................................ 7.95 04/15/07 1,482,773 4,800 HMH Properties, Inc. (Series B)................... 7.875 08/01/08 4,560,000 4,890 Horseshoe Gaming Holding Corp. (Series B)......... 8.625 05/15/09 5,073,375 3,990 Prime Hospitalty Corp. (Series B)................. 8.375 05/01/12 3,810,450 410 Starwood Hotels & Resorts Worldwide, Inc. - 144A*............................................ 7.375 05/01/07 400,775 3,480 Starwood Hotels & Resorts Worldwide, Inc. - 144A*............................................ 7.875 05/01/12 3,401,700 ------------ 18,729,073 ------------ INDUSTRIAL CONGLOMERATES (0.4%) 2,250 Tyco International Group S.A. (Luxembourg)........ 6.75 02/15/11 1,856,250 ------------ INDUSTRIAL SPECIALTIES (3.7%) 4,935 Cabot Safety Corp................................. 12.50 07/15/05 5,033,700 1,430 Foamex LP/Capital Corp. - 144A*................... 10.75 04/01/09 1,315,600 7,163 International Wire Group, Inc..................... 11.75 06/01/05 5,927,383 1,660 Johnsondiversey, Inc. - 144A*..................... 9.625 05/15/12 1,643,400 840 Tekni-Plex, Inc. (Series B)....................... 12.75 06/15/10 835,800
SEE NOTES TO FINANCIAL STATEMENTS 38 Morgan Stanley High Yield Securities Inc. PORTFOLIO OF INVESTMENTS / / AUGUST 31, 2002 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------- $ 1,125 Tekni-Plex, Inc. - 144A*.......................... 12.75% 06/15/10 $ 1,119,375 3,285 UCAR Finance, Inc................................. 10.25 02/15/12 3,301,425 ------------ 19,176,683 ------------ INTERNET SOFTWARE/SERVICES (1.8%) 12,020 Exodus Communications, Inc. (a) (b)............... 11.625 07/15/10 721,200 33,200 Globix Corp. (a) (b).............................. 12.50 02/01/10 5,976,000 11,000 PSINet, Inc. (a) (b).............................. 10.50 12/01/06 1,072,500 14,500 PSINet, Inc. (a) (b).............................. 11.00 08/01/09 1,413,750 ------------ 9,183,450 ------------ MANAGED HEALTH CARE (1.4%) 4,000 Aetna, Inc........................................ 7.875 03/01/11 4,240,784 2,690 Health Net, Inc................................... 8.375 04/15/11 3,048,687 ------------ 7,289,471 ------------ MEDIA CONGLOMERATES (1.4%) 3,280 AOL Time Warner, Inc.............................. 6.875 05/01/12 2,955,070 4,260 Nextmedia Operating, Inc.......................... 10.75 07/01/11 4,110,900 ------------ 7,065,970 ------------ MEDICAL DISTRIBUTORS (0.9%) 4,320 Amerisource Bergen Corp........................... 8.125 09/01/08 4,492,800 ------------ MEDICAL/NURSING SERVICES (0.8%) 4,865 Fresenius Medical Care Capital Trust.............. 7.875 06/15/11 4,013,625 ------------ METAL FABRICATIONS (0.5%) 2,800 Trimas Corp. - 144A*.............................. 9.875 06/15/12 2,772,000 ------------ MOVIES/ENTERTAINMENT (1.5%) 4,755 Alliance Atlantis Communications, Inc. (Canada)... 13.00 12/15/09 5,028,413 3,140 Six Flags, Inc.................................... 8.875 02/01/10 2,723,950 ------------ 7,752,363 ------------ OFFICE EQUIPMENT/SUPPLIES (0.0%) 22,000 Mosler, Inc. (a) (b).............................. 11.00 04/15/03 0 ------------ OIL & GAS PRODUCTION (2.9%) 4,260 Chesapeake Energy Corp............................ 8.125 04/01/11 4,174,800 1,820 Magnum Hunter Resources, Inc. - 144A*............. 9.60 03/15/12 1,856,400 2,375 Stone Energy Corp................................. 8.25 12/15/11 2,404,688 7,080 Vintage Petroleum, Inc............................ 7.875 05/15/11 6,584,400 ------------ 15,020,288 ------------ OIL REFINING/MARKETING (1.6%) 4,000 Husky Oil Ltd. (Canada)........................... 8.90 08/15/28 4,440,712 4,980 Tesoro Petroleum Corp. - 144A*.................... 9.625 04/01/12 3,660,300 ------------ 8,101,012 ------------
SEE NOTES TO FINANCIAL STATEMENTS 39 Morgan Stanley High Yield Securities Inc. PORTFOLIO OF INVESTMENTS / / AUGUST 31, 2002 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------- OILFIELD SERVICES/EQUIPMENT (0.9%) $ 2,515 Hanover Equipment Trust - 144A*................... 8.50% 09/01/08 $ 2,338,950 2,410 Hanover Equipment Trust - 144A*................... 8.75 09/01/11 2,217,200 ------------ 4,556,150 ------------ OTHER METALS/MINERALS (0.8%) 3,310 Murrin Murrin Holdings Property Ltd. (Australia)...................................... 9.375 08/31/07 997,138 3,100 Phelps Dodge Corp................................. 8.75 06/01/11 3,213,996 ------------ 4,211,134 ------------ PUBLISHING: BOOKS/MAGAZINES (0.7%) 4,720 PRIMEDIA, Inc..................................... 8.875 05/15/11 3,681,600 ------------ PUBLISHING: NEWSPAPERS (0.7%) 4,261 Hollinger Participation Trust (Canada) - 144A*.... 12.125+ 11/15/10 3,558,221 ------------ PULP & PAPER (0.8%) 4,310 Norske Skog Canada Ltd. (Canada).................. 8.625 06/15/11 4,223,800 ------------ REAL ESTATE DEVELOPMENT (0.8%) 4,890 CB Richard Ellis Services, Inc.................... 11.25 06/15/11 4,327,650 ------------ REAL ESTATE INVESTMENT TRUSTS (0.6%) 3,005 Istar Financial, Inc.............................. 8.75 08/15/08 3,076,594 ------------ RECREATIONAL PRODUCTS (0.9%) 4,430 International Game Technology..................... 8.375 05/15/09 4,762,250 ------------ RESTAURANTS (1.5%) 141,992 American Restaurant Group Holdings, Inc. - 144A* (c).............................................. 0.00 12/15/05 4,344,955 34,207 FRD Acquisition Corp. (Series B) (a) (b).......... 12.50 07/15/04 3,249,665 ------------ 7,594,620 ------------ RETAIL - SPECIALTY (0.1%) 9,000 Mrs. Fields Holdings Co........................... 14.00++ 12/01/05 270,000 ------------ SEMICONDUCTORS (0.5%) 2,210 Fairchild Semiconductors Corp..................... 10.50 02/01/09 2,331,550 ------------ SERVICES TO THE HEALTH INDUSTRY (2.1%) 3,045 Anthem Insurance - 144A*.......................... 9.125 04/01/10 3,521,826 3,465 Healthsouth Corp. - 144A*......................... 7.625 06/01/12 2,775,673 4,600 Omnicare, Inc. (Series B)......................... 8.125 03/15/11 4,784,000 ------------ 11,081,499 ------------ SPECIALTY STORES (0.6%) 2,975 AutoNation, Inc................................... 9.00 08/01/08 3,108,875 ------------ SPECIALTY TELECOMMUNICATIONS (3.8%) 4,535 American Tower Corp............................... 9.375 02/01/09 2,811,700 11,500 Birch Telecom, Inc. (a) (b)....................... 14.00 06/15/08 115,000 14,370 DTI Holdings, Inc. (Series B) (a) (d)............. 12.50++ 03/01/08 1,437
SEE NOTES TO FINANCIAL STATEMENTS 40 Morgan Stanley High Yield Securities Inc. PORTFOLIO OF INVESTMENTS / / AUGUST 31, 2002 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------- $ 17,085 Esprit Telecom Group PLC (United Kingdom) (b)..... 11.50% 12/15/07 $ 1,709 29,088 Esprit Telecom Group PLC (United Kingdom) (b)..... 10.875 06/15/08 2,909 47,000 Firstworld Communications, Inc. (a) (d)........... 13.00++ 04/15/08 4,582,500 10,000 Global Crossing Holdings, Ltd. (Bermuda) (a) (b).............................................. 8.70 08/01/07 112,500 3,490 Global Crossing Holdings, Ltd. (Bermuda) (a) (b).............................................. 9.50 11/15/09 39,263 23,050 GT Group Telecom, Inc. (Canada) (a) (d)........... 13.25++ 02/01/10 28,813 8,400 Primus Telecommunications Group, Inc.............. 12.75 10/15/09 4,032,000 2,000 RSL Communications PLC (United Kingdom) (a) (b)... 9.125 03/01/08 40,000 9,000 RSL Communications PLC (United Kingdom) (a) (b)... 10.50 11/15/08 180,000 3,000 RSL Communications PLC (United Kingdom) (a) (b)... 9.875 11/15/09 60,000 13,000 Tele1 Europe BV (Netherlands)..................... 13.00 05/15/09 1,430,000 12,000 Versatel Telecom BV (Netherlands) (Issued 05/27/98) (a) (b)........................ 13.25 05/15/08 3,465,000 3,000 Versatel Telecom BV (Netherlands) (Issued 12/03/98) (a) (b)........................ 13.25 05/15/08 866,250 31,445 Viatel Inc. (b)................................... 11.25 04/15/08 157,225 14,200 Viatel Inc. (Issued 03/19/99) (b)................. 11.50 03/15/09 71,000 29,393 Viatel Inc. (Issued 12/08/99) (b)................. 11.50 03/15/09 146,965 32,545 World Access, Inc. (a) (b) (c).................... 13.25 01/15/08 1,505,206 11,500 Worldwide Fiber, Inc. (Canada) (a) (b)............ 12.00 08/01/09 1,150 ------------ 19,650,627 ------------ STEEL (0.3%) 1,715 Oregon Steel Mills, Inc. - 144A*.................. 10.00 07/15/09 1,768,594 ------------ TELECOMMUNICATION EQUIPMENT (1.2%) 7,025 SBA Communications Corp........................... 12.00++ 03/01/08 3,863,750 10,500 Spectrasite Holdings, Inc......................... 12.00++ 07/15/08 1,890,000 3,500 Spectrasite Holdings, Inc......................... 11.25++ 04/15/09 595,000 ------------ 6,348,750 ------------ TELECOMMUNICATIONS (1.0%) 61,075 e. Spire Communications, Inc. (a) (b)............. 13.75 07/15/07 6,108 18,752 Focal Communications Corp. (Series B)............. 12.125++ 02/15/08 1,500,160 15,000 Hyperion Telecommunication, Inc. (Series B) (b)... 12.25 09/01/04 600,000 1,500 NEXTLINK Communications LLC (a) (b)............... 12.50 04/15/06 15,000 17,500 NEXTLINK Communications, Inc. (a) (b)............. 9.00 03/15/08 175,000 4,180 NEXTLINK Communications, Inc. (a) (b)............. 10.75 11/15/08 41,800 775 NEXTLINK Communications, Inc. (a) (b)............. 10.75 06/01/09 7,750 2,505 NTL Communications Corp. (Series B) (a) (b)....... 11.875 10/01/10 400,800 27,850 Rhythms Netconnections, Inc. (a) (b).............. 12.75 04/15/09 661,438 14,965 Rhythms Netconnections, Inc. (Series B) (a) (d)... 13.50++ 05/15/08 224,475 13,850 Startec Global Communications Corp. (a) (b)....... 12.00 05/15/08 1,385 2,100 WorldCom, Inc. (a) (b)............................ 7.50 05/15/11 288,750
SEE NOTES TO FINANCIAL STATEMENTS 41 Morgan Stanley High Yield Securities Inc. PORTFOLIO OF INVESTMENTS / / AUGUST 31, 2002 CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------- $ 1,725 WorldCom, Inc. (a) (b)............................ 6.95% 08/15/28 $ 237,188 6,100 WorldCom, Inc. (a) (b)............................ 8.25 05/15/31 838,750 ------------ 4,998,604 ------------ TRUCKS/CONSTRUCTION/FARM MACHINERY (2.3%) 1,930 Case Corp. (Series B)............................. 6.25 12/01/03 1,852,790 7,215 J.B. Poindexter & Co., Inc........................ 12.50 05/15/04 6,484,481 2,180 Manitowoc Co., Inc. (The) - 144A*................. 10.50 08/01/12 2,250,850 1,370 NMHG Holding Co. - 144A*.......................... 10.00 05/15/09 1,383,700 ------------ 11,971,821 ------------ WHOLESALE DISTRIBUTORS (1.4%) 4,000 Burhmann US, Inc.................................. 12.25 11/01/09 4,005,000 2,540 Fisher Scientific International, Inc.............. 7.125 12/15/05 2,546,350 560 Fisher Scientific International, Inc.............. 9.00 02/01/08 579,600 ------------ 7,130,950 ------------ WIRELESS TELECOMMUNICATIONS (0.6%) 3,675 American Cellular Corp............................ 9.50 10/15/09 496,125 2,919 Arch Wireless Holdings, Inc....................... 10.00 05/15/07 1,809,846 1,544 Arch Wireless Holdings, Inc....................... 12.00 05/15/09 185,280 65,300 CellNet Data Systems, Inc. (a) (d)................ 14.00++ 10/01/07 6,530 19,610 Globalstar LP/Capital Corp. (a) (b)............... 10.75 11/01/04 686,350 33,000 WinStar Communications, Inc. (a) (d).............. 14.75++ 04/15/10 3,300 11,400 WinStar Communications, Inc. (a) (b).............. 12.75 04/15/10 1,140 ------------ 3,188,571 ------------ Total Corporate Bonds (COST $1,486,695,632)....................................................... 458,795,492 ------------ Convertible Bonds (1.5%) ELECTRONIC COMPONENTS (0.7%) 8,830 Solectron Corp.................................... 0.00 11/20/20 3,841,050 ------------ HOTELS/RESORTS/CRUISELINES (0.0%) 1,643 Premier Cruises Ltd. - 144A*...................... 10.00+ 08/15/05 0 ------------ TELECOMMUNICATION EQUIPMENT (0.8%) 9,420 Corning Inc....................................... 0.00 11/08/15 4,097,700 ------------ Total Convertible Bonds (COST $11,229,282).......................................................... 7,938,750 ------------
SEE NOTES TO FINANCIAL STATEMENTS 42 Morgan Stanley High Yield Securities Inc. PORTFOLIO OF INVESTMENTS / / AUGUST 31, 2002 CONTINUED
NUMBER OF SHARES VALUE - ------------------------------------------------------------------------------ Common Stocks (d) (2.3%) AEROSPACE & DEFENSE (0.1%) 85,242 Orbital Sciences Corp. (c)........................ $ 318,807 ------------ APPAREL/FOOTWEAR RETAIL (0.0%) 2,621,192 County Seat Stores, Inc. (c)...................... 0 ------------ CASINO/GAMING (0.0%) 207,312 Fitzgerald Gaming Corp............................ 0 ------------ CONSUMER/BUSINESS SERVICES (1.5%) 440,700 Anacomp, Inc. (Class A) (c)....................... 7,712,250 ------------ ENTERTAINMENT & LEISURE (0.1%) 15,308 AMF Bowling Worldwide, Inc........................ 420,970 ------------ FOOD: SPECIALTY/CANDY (0.0%) 10,908 SFAC New Holdings, Inc. (c)....................... 0 2,005 SFFB Holdings, Inc. (c)........................... 0 574,725 Specialty Foods Acquisition Corp. - 144A*......... 0 ------------ 0 ------------ HOTELS/RESORTS/CRUISELINES (0.0%) 981,277 Premier Holdings, Inc. (c)........................ 0 781,421 Vagabond Inns, Inc. (Class D)..................... 0 ------------ 0 ------------ MEDICAL SPECIALTIES (0.1%) 48,816 MEDIQ, Inc. (c)................................... 265,071 ------------ MEDICAL/NURSING SERVICES (0.0%) 1,151,324 Raintree Healthcare Corp. (c)..................... 0 ------------ MOTOR VEHICLES (0.0%) 709 Northern Holdings Industrial Corp. (c)*........... 0 ------------ RESTAURANTS (0.0%) 38,057 American Restaurant Group Holdings, Inc. - 144A*............................................ 0 ------------ SPECIALTY TELECOMMUNICATIONS (0.1%) 2,171,896 Mpower Holding Corp. (c).......................... 325,784 264,189 Song Networks Holding AB (ADR) (Sweden)........... 15,851 40,557 Versatel Telecom International N.V. (ADR) (Netherlands).................................... 137,894 94,263 World Access, Inc. (c)............................ 141 ------------ 479,670 ------------ TELECOMMUNICATION EQUIPMENT (0.0%) 196,000 FWT, Inc. (Class A) (c)........................... 1,960 ------------
SEE NOTES TO FINANCIAL STATEMENTS 43 Morgan Stanley High Yield Securities Inc. PORTFOLIO OF INVESTMENTS / / AUGUST 31, 2002 CONTINUED
NUMBER OF SHARES VALUE - ------------------------------------------------------------------------------ TELECOMMUNICATIONS (0.1%) 520,697 Covad Communications Group, Inc. (c).............. $ 562,353 105,656 Focal Communications Corp. (c).................... 108,826 ------------ 671,179 ------------ TEXTILES (0.0%) 1,754,730 United States Leather, Inc. (c)................... 0 ------------ WIRELESS TELECOMMUNICATIONS (0.3%) 224,719 Arch Wireless, Inc. (c)........................... 143,820 1,454,105 Motient Corp. (c)................................. 1,599,516 274,390 Vast Solutions, Inc. (Class B1) (c)............... 0 274,390 Vast Solutions, Inc. (Class B2) (c)............... 0 274,390 Vast Solutions, Inc. (Class B3) (c)............... 0 ------------ 1,743,336 ------------ Total Common Stocks (COST $290,861,374).............................. 11,613,243 ------------ Preferred Stocks (3.3%) BROADCASTING (0.7%) 570 Paxson Communications Corp.+...................... 3,422,820 ------------ CELLULAR TELEPHONE (0.9%) 4,806 Dobson Communications Corp.+...................... 1,057,320 5,780 Nextel Communications, Inc. (Series D)+........... 3,583,705 ------------ 4,641,025 ------------ ELECTRIC UTILITIES (0.9%) 5,076 TNP Enterprises, Inc. (Series D)+................. 4,568,400 ------------ PUBLISHING: BOOKS/MAGAZINES (0.0%) 6,625 PRIMEDIA, Inc..................................... 238,500 ------------ RESTAURANTS (0.4%) 6,007 American Restaurant Group Holdings, Inc. (Series B)............................................... 1,045,288 1,071 FRD Acquisition Co. (Units)++..................... 1,071,000 ------------ 2,116,288 ------------ SPECIALTY TELECOMMUNICATIONS (0.2%) 7,333 Broadwing Communications, Inc. (Series B)......... 714,968 1 Crown Castle International Corp.+................. 357 1,691 Intermedia Communications, Inc. (Series B)+....... 67,624 47,064 McLeodUSA, Inc. (Series A) $0.44 (Conv.).......... 104,953 180,721 XO Communications, Inc............................ 1,807 ------------ 889,709 ------------
SEE NOTES TO FINANCIAL STATEMENTS 44 Morgan Stanley High Yield Securities Inc. PORTFOLIO OF INVESTMENTS / / AUGUST 31, 2002 CONTINUED
NUMBER OF SHARES VALUE - ------------------------------------------------------------------------------ TELECOMMUNICATION EQUIPMENT (0.2%) 2,244,200 FWT, Inc (Series A) (c)........................... $ 1,009,890 ------------ Total Preferred Stocks (COST $52,459,703)............................... 16,886,632 ------------
NUMBER OF EXPIRATION WARRANTS DATE - --------- ---------- Warrants (d) (0.1%) AEROSPACE & DEFENSE (0.0%) 9,000 Sabreliner Corp. - 144A*.......................... 04/15/03.. 0 ------------ BROADCASTING (0.0%) 5,700 XM Satellite Radio, Inc. - 144A*.................. 03/15/10.. 3,420 ------------ CABLE/SATELLITE TV (0.0%) 57,000 Diva Systems Corp. - 144A*........................ 03/01/08.. 0 6,600 Ono Finance PLC (United Kingdom) - 144A*.......... 05/31/09.. 660 ------------ 660 ------------ CASINO/GAMING (0.0%) 220,000 Aladdin Gaming Holdings LLC - 144A*............... 03/01/10.. 0 20,000 Resort At Summerlin LP - 144A*.................... 12/15/07.. 0 ------------ 0 ------------ ELECTRIC UTILITIES (0.0%) 1,040 TNP Enterprises, Inc. - 144A*..................... 04/01/11.. 26,000 ------------ ENTERTAINMENT & LEISURE (0.1%) 36,019 AMF Bowling Worldwide, Inc. (Series A)............ 03/09/09.. 216,114 35,191 AMF Bowling Worldwide, Inc. (Series B)............ 03/09/09.. 175,955 ------------ 392,069 ------------ INTERNET SOFTWARE/SERVICES (0.0%) 47,000 Verado Holdings, Inc. - 144A*..................... 04/15/08.. 0 ------------ RESTAURANTS (0.0%) 3,500 American Restaurant Group Holdings, Inc. - 144A*............................................ 08/15/08.. 0 ------------ RETAIL - SPECIALTY (0.0%) 9,000 Mrs. Fields Holding, Inc. - 144A*................. 12/01/05.. 0 ------------ SPECIALTY TELECOMMUNICATIONS (0.0%) 11,500 Birch Telecom, Inc................................ 06/15/08.. 0 23,050 GT Group Telecom, Inc. (Canada) - 144A*........... 02/01/10.. 2,305 104,289 McLeodUSA, Inc.................................... 04/16/07.. 9,386 ------------ 11,691 ------------
SEE NOTES TO FINANCIAL STATEMENTS 45 Morgan Stanley High Yield Securities Inc. PORTFOLIO OF INVESTMENTS / / AUGUST 31, 2002 CONTINUED
NUMBER OF EXPIRATION WARRANTS DATE VALUE - ----------------------------------------------------------------------------------------- TELECOMMUNICATIONS (0.0%) 11,850 Startec Global Communications Corp. - 144A*....... 05/15/08.. $ 0 ------------ WIRELESS TELECOMMUNICATIONS (0.0%) 10,000 Metricom, Inc..................................... 02/15/10.. 0 18,250 Motient Corp. - 144A*............................. 04/01/08.. 182 ------------ 182 ------------ Total Warrants (COST $6,104,595)............................................ 434,022 ------------
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE - --------- ---- ---- Short-Term Investment (0.5%) Repurchase Agreement $ 2,850 Joint repurchase agreement account (dated 08/30/02; proceeds $2,850,594) (e) (COST $2,850,000)................................. 1.875% 09/03/02 2,850,000 ---------------- Total Investments (COST $1,850,200,586) (f)........................................... 96.7% 498,518,139 Other Assets in Excess of Liabilities............................... 3.3 17,174,020 ------------------ ---------------- Net Assets.......................................................... 100.0% $ 515,692,159 ================== ================
- --------------------- 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 $7,620,178 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $1,359,302,625, RESULTING IN NET UNREALIZED DEPRECIATION OF $1,351,682,447. SEE NOTES TO FINANCIAL STATEMENTS 46 Morgan Stanley High Yield Securities Inc. FINANCIAL STATEMENTS Statement of Assets and Liabilities AUGUST 31, 2002 Assets: Investments in securities, at value (cost $1,850,200,586).................................. $ 498,518,139 Receivable for: Interest........................................ 12,441,151 Investments sold................................ 6,327,777 Capital stock sold.............................. 551,144 Prepaid expenses and other assets................. 54,789 -------------- Total Assets.................................. 517,893,000 -------------- Liabilities: Payable for: Investments purchased........................... 865,033 Capital stock redeemed.......................... 427,364 Distribution fee................................ 269,100 Investment management fee....................... 219,183 Payable to bank................................... 228,794 Accrued expenses and other payables............... 191,367 -------------- Total Liabilities............................. 2,200,841 -------------- Net Assets.................................... $ 515,692,159 ============== Composition of Net Assets: Paid-in-capital................................... 2,780,173,995 Net unrealized depreciation....................... (1,351,682,447) Dividends in excess of net investment income...... (17,405,768) Accumulated net realized loss..................... (895,393,621) -------------- Net Assets.................................... $ 515,692,159 ============== Class A Shares: Net Assets........................................ $23,879,067 Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE)....................................... 15,369,470 Net Asset Value Per Share..................... $ 1.55 ============== Maximum Offering Price Per Share, (net asset value plus 4.44% of net asset value)....................................... $ 1.62 ============== Class B Shares: Net Assets........................................ $371,398,868 Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE)....................................... 239,992,793 Net Asset Value Per Share..................... $ 1.55 ============== Class C Shares: Net Assets........................................ $33,977,953 Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE)....................................... 21,913,543 Net Asset Value Per Share..................... $ 1.55 ============== Class D Shares: Net Assets........................................ $86,436,271 Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE)....................................... 55,671,724 Net Asset Value Per Share..................... $ 1.55 ==============
SEE NOTES TO FINANCIAL STATEMENTS 47 Morgan Stanley High Yield Securities Inc. FINANCIAL STATEMENTS CONTINUED Statement of Operations FOR THE YEAR ENDED AUGUST 31, 2002 Net Investment Income: Income Interest.......................................... $ 99,363,134 Dividend.......................................... 753,719 ------------ 100,116,853 ------------ Expenses Distribution fee (Class A shares)................. 48,012 Distribution fee (Class B shares)................. 3,747,816 Distribution fee (Class C shares)................. 349,455 Investment management fee......................... 3,258,237 Transfer agent fees and expenses.................. 1,381,858 Professional fees................................. 251,733 Shareholder reports and notices................... 160,601 Registration fees................................. 97,084 Custodian fees.................................... 30,503 Directors' fees and expenses...................... 18,833 Other............................................. 321,757 ------------ Total Expenses................................ 9,665,889 ------------ Net Investment Income......................... 90,450,964 ------------ Net Realized and Unrealized Gain (Loss): Net realized loss................................. (375,136,573) Net change in unrealized depreciation............. 111,513,872 ------------ Net Loss...................................... (263,622,701) ------------ Net Decrease...................................... $(173,171,737) ============
SEE NOTES TO FINANCIAL STATEMENTS 48 Morgan Stanley High Yield Securities Inc. FINANCIAL STATEMENTS CONTINUED Statement of Changes in Net Assets
FOR THE YEAR FOR THE YEAR ENDED ENDED AUGUST 31, 2002 AUGUST 31, 2001 --------------- --------------- Increase (Decrease) in Net Assets: Operations: Net investment income................... $ 90,450,964 $ 182,819,538 Net realized loss....................... (375,136,573) (282,975,609) Net change in unrealized depreciation... 111,513,872 (513,181,124) ------------- -------------- Net Decrease........................ (173,171,737) (613,337,195) ------------- -------------- Dividends and Distributions to Shareholders from: Net Investment Income: Class A shares........................ (3,878,089) (7,002,632) Class B shares........................ (69,129,555) (150,569,611) Class C shares........................ (5,647,596) (10,293,101) Class D shares........................ (16,092,318) (29,754,002) Paid-in-Capital Class A shares........................ (425,216) -- Class B shares........................ (7,579,753) -- Class C shares........................ (619,234) -- Class D shares........................ (1,764,452) -- ------------- -------------- Total Dividends and Distributions... (105,136,213) (197,619,346) ------------- -------------- Net decrease from capital stock transactions........................... (94,605,170) (72,611,177) ------------- -------------- Net Decrease........................ (372,913,120) (883,567,718) Net Assets: Beginning of period..................... 888,605,279 1,772,172,997 ------------- -------------- End of Period (INCLUDING DIVIDENDS IN EXCESS OF NET INVESTMENT INCOME OF $17,405,768 AND $17,487,233, RESPECTIVELY)............. $ 515,692,159 $ 888,605,279 ============= ==============
SEE NOTES TO FINANCIAL STATEMENTS 49 Morgan Stanley High Yield Securities Inc. NOTES TO FINANCIAL STATEMENTS / / AUGUST 31, 2002 1. Organization and Accounting Policies Morgan Stanley High Yield Securities Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended, (the "Act") as a diversified, open-end management investment company. The Fund's primary investment objective is to earn a high level of current income and, as a secondary objective, capital appreciation, but only when consistent with its primary objective. The Fund was incorporated in Maryland on June 14, 1979 and commenced operations on September 26, 1979. On July 28, 1997, the Fund converted to a multiple class share structure. The Fund offers Class A shares, Class B shares, Class C shares and Class D shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within one year, six years and one year, respectively. Class D shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. The following is a summary of significant accounting policies: A. Valuation of Investments -- (1) an equity portfolio security listed or traded on the New York or American Stock Exchange, Nasdaq, or other exchange is valued at its latest sale price, prior to the time when assets are valued; if there were no sales that day, the security is valued at the latest bid price (in cases where securities are traded on more than one exchange, the securities are valued on the exchange designated as the primary market pursuant to procedures adopted by the Directors); (2) all other portfolio securities for which over-the-counter market quotations are readily available are valued at the latest available bid price; (3) when market quotations are not readily available, including circumstances under which it is determined by Morgan Stanley Investment Advisors Inc. (the "Investment Manager") that sale or bid prices are not reflective of a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Directors (valuation of debt securities for which market quotations are not readily available may be based upon current market prices of securities which are comparable in coupon, rating and maturity or an appropriate matrix utilizing similar factors); (4) certain portfolio securities may be valued by an outside pricing service approved by the Directors. The pricing service may utilize a matrix system incorporating security quality, maturity and 50 Morgan Stanley High Yield Securities Inc. NOTES TO FINANCIAL STATEMENTS / / AUGUST 31, 2002 CONTINUED coupon as the evaluation model parameters, and/or research and evaluations by its staff, including review of broker-dealer market price quotations, if available, in determining what it believes is the fair valuation of the portfolio securities valued by such pricing service; and (5) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost. B. Accounting for Investments -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Dividend income and other distributions are recorded on the ex-dividend date. Discounts are accreted and premiums are amortized over the respective life of the securities. Interest income is accrued daily except where collection is not expected. C. Joint Repurchase Agreement Account -- Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other affiliated entities managed by the Investment Manager, may transfer uninvested cash balances into one or more joint repurchase agreement accounts. These balances are invested in one or more repurchase agreements and are collateralized by cash, or U.S. Treasury or federal agency obligations. D. Multiple Class Allocations -- Investment income, expenses (other than distribution fees), and realized and unrealized gains and losses are allocated to each class of shares based upon the relative net asset value on the date such items are recognized. Distribution fees are charged directly to the respective class. E. Federal Income Tax Status -- It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Accordingly, no federal income tax provision is required. F. Dividends and Distributions to Shareholders -- The Fund records dividends and distributions to its shareholders on the ex-dividend date. The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for financial reporting purposes but not for tax purposes 51 Morgan Stanley High Yield Securities Inc. NOTES TO FINANCIAL STATEMENTS / / AUGUST 31, 2002 CONTINUED are reported as dividends in excess of net investment income or distributions in excess of net realized capital gains. To the extent they exceed net investment income and net realized capital gains for tax purposes, they are reported as distributions of paid-in-capital. 2. Investment Management Agreement Pursuant to an Investment Management Agreement, the Fund pays the Investment Manager a management fee, calculated daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined as of the close of each business day: 0.50% to the portion of daily net assets not exceeding $500 million; 0.425% to the portion of daily net assets exceeding $500 million but not exceeding $750 million; 0.375% to the portion of daily net assets exceeding $750 million but not exceeding $1 billion; 0.35% to the portion of daily net assets exceeding $1 billion but not exceeding $2 billion; 0.325% to the portion of daily net assets exceeding $2 billion but not exceeding $3 billion; and 0.30% to the portion of daily net assets exceeding $3 billion. 3. Plan of Distribution Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the average daily net assets of Class A; (ii) Class B -- 0.75% of the average daily net assets of Class B; and (iii) Class C -- up to 0.85% of the average daily net assets of Class C. In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the Plan is terminated, the Directors will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled $60,068,745 at August 31, 2002. In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 0.85% of the average daily net assets of Class A or Class C, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except that expenses representing a 52 Morgan Stanley High Yield Securities Inc. NOTES TO FINANCIAL STATEMENTS / / AUGUST 31, 2002 CONTINUED gross sales credit to Morgan Stanley Financial Advisors or other selected broker-dealer representatives may be reimbursed in the subsequent calendar year. For the year ended August 31, 2002, 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, 2002, it received contingent deferred sales charges from certain redemptions of the Fund's Class A Shares, Class B shares and Class C shares of $26,842, $1,519,542 and $29,347, respectively and received $135,390 in front-end sales charges from sales of the Fund's Class A shares. The respective shareholders pay such charges which are not an expense of the Fund. 4. Security Transactions and Transactions with Affiliates The cost of purchases and proceeds from sales of portfolio securities, excluding short-term investments, for the year ended August 31, 2002, aggregated $252,783,370 and $375,196,197, respectively. Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is the Fund's transfer agent. At August 31, 2002, the Fund had transfer agent fees and expenses payable of approximately $24,000. The Fund has an unfunded noncontributory defined benefit pension plan covering all independent Directors of the Fund who will have served as independent Directors for at least five years at the time of retirement. Benefits under this plan are based on years of service and compensation during the last five years of service. Aggregate pension costs for the year ended August 31, 2002 included in Directors' fees and expenses in the Statement of Operations amounted to $7,230. At August 31, 2002, the Fund had an accrued pension liability of $58,619 which is included in accrued expenses in the Statement of Assets and Liabilities. 5. Federal Income Tax Status At August 31, 2002, the Fund had a net capital loss carryover of approximately $530,730,000, which may be used to offset future capital gains to the extent provided by regulations, which is available through August 31 in the following years:
AMOUNT IN THOUSANDS - ----------------------------------------------------------------------- 2003 2004 2005 2006 2007 2008 2009 2010 - ------- ------- ------- ------- ------- ------- ------- -------- $50,599 $23,296 $39,319 $12,603 $24,919 $69,857 $89,299 $220,838 ======= ======= ======= ======= ======= ======= ======= ========
Capital losses incurred after October 31 ("post-October losses") within the taxable year are deemed to arise on the first business day of the Fund's next taxable year. The Fund incurred and will elect to defer net capital losses of approximately $363,679,000 during fiscal 2002. 53 Morgan Stanley High Yield Securities Inc. NOTES TO FINANCIAL STATEMENTS / / AUGUST 31, 2002 CONTINUED As of August 31, 2002, the Fund had temporary book/tax differences primarily attributable to post-October losses, capital loss deferrals on wash sales, book amortization of discounts on debt securities and interest and amortization of discounts on bonds in default. The Fund had permanent book/tax differences primarily attributable to an expired capital loss carryover and tax adjustments on debt securities sold by the Fund. To reflect reclassifications arising from the permanent differences, paid-in-capital was charged $172,175,337, dividends in excess of net investment income was charged $948,800 and accumulated net realized loss was credited $173,124,137. 6. Capital Stock Transactions in capital stock were as follows:
FOR THE YEAR FOR THE YEAR ENDED ENDED AUGUST 31, 2002 AUGUST 31, 2001 --------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ------------ ------------- ------------ ------------- CLASS A SHARES Sold.......................... 10,201,614 $ 20,177,481 19,209,128 $ 63,780,578 Reinvestment of dividends..... 1,119,515 2,083,474 1,049,177 3,186,287 Redeemed...................... (11,782,958) (23,700,021) (17,600,601) (59,066,199) ------------ ------------- ------------ ------------- Net increase (decrease) -- Class A...................... (461,829) (1,439,066) 2,657,704 7,900,666 ------------ ------------- ------------ ------------- CLASS B SHARES Sold.......................... 39,306,397 74,811,260 87,486,847 281,384,559 Reinvestment of dividends..... 14,993,853 27,953,825 17,505,252 53,772,493 Redeemed...................... (101,220,067) (190,557,689) (136,458,377) (426,230,286) ------------ ------------- ------------ ------------- Net decrease -- Class B....... (46,919,817) (87,792,604) (31,466,278) (91,073,234) ------------ ------------- ------------ ------------- CLASS C SHARES Sold.......................... 7,565,119 14,251,142 13,531,056 45,899,890 Reinvestment of dividends..... 1,601,530 2,981,218 1,676,677 5,136,460 Redeemed...................... (8,724,288) (16,164,050) (13,756,797) (45,459,076) ------------ ------------- ------------ ------------- Net increase -- Class C....... 442,361 1,068,310 1,450,936 5,577,274 ------------ ------------- ------------ ------------- CLASS D SHARES Sold.......................... 13,842,546 25,568,899 20,506,858 63,372,986 Reinvestment of dividends..... 6,026,961 11,290,465 5,852,214 17,880,440 Redeemed...................... (23,300,211) (43,301,174) (24,049,991) (76,269,309) ------------ ------------- ------------ ------------- Net increase (decrease) -- Class D...................... (3,430,704) (6,441,810) 2,309,081 4,984,117 ------------ ------------- ------------ ------------- Net decrease in Fund.......... (50,369,989) $ (94,605,170) (25,048,557) $ (72,611,177) ============ ============= ============ =============
54 Morgan Stanley High Yield Securities Inc. NOTES TO FINANCIAL STATEMENTS / / AUGUST 31, 2002 CONTINUED 7. Change in Accounting Policy Effective September 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, related to premiums and discounts on debt securities. The cumulative effect of this accounting change had no impact on the net assets of the Fund, but resulted in a $5,326,859 increase in the cost of securities and a corresponding increase in undistributed net investment income based on securities held as of August 31, 2001. The effect of this change for the year ended August 31, 2002 was to increase net investment income by $4,981,336; increase unrealized depreciation by $3,780,819; and increase net realized losses by $1,200,517. 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 Trustees 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") approved plans of reorganization whereby HIAT, HIAT II and HIAT III would be merged into the Fund. The plans of reorganization are subject to the consent of HIAT's, HIAT II's and HIAT III's shareholders at separate meetings to be held on December 10, 2002. If approved, the assets of HIAT, HIAT II and HIAT III would be combined with the assets of the Fund and shareholders of HIAT, HIAT II and HIAT III would become Class D shareholders of the Fund, receiving Class D shares of the Fund equal to the value of their holdings in HIAT, HIAT II and HIAT III, respectively. 55 Morgan Stanley High Yield Securities Inc. FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of capital stock outstanding throughout each period:
FOR THE YEAR ENDED AUGUST 31, --------------------------------------------------------------- 2002 2001 2000 1999 1998 ----------- ----------- ----------- ----------- ----------- Class A Shares Selected Per Share Data: Net asset value, beginning of period..... $ 2.32 $ 4.35 $ 5.51 $ 6.16 $ 6.82 ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income++.............. 0.26 (2) 0.47 0.69 0.72 0.76 Net realized and unrealized loss....... (0.73)(2) (1.99) (1.13) (0.63) (0.71) ------ ------ ------ ------ ------ Total income (loss) from investment operations... (0.47) (1.52) (0.44) 0.09 0.05 ------ ------ ------ ------ ------ Less dividends and distributions from: Net investment income................ (0.27) (0.51) (0.72) (0.74) (0.71) Paid-in-capital........ (0.03) - - - - ------ ------ ------ ------ ------ Total dividends and distributions........... (0.30) (0.51) (0.72) (0.74) (0.71) ------ ------ ------ ------ ------ Net asset value, end of period.................. $ 1.55 $ 2.32 $ 4.35 $ 5.51 $ 6.16 ====== ====== ====== ====== ====== Total Return+............ (21.70)% (37.05)% (8.88)% 1.47% 0.40% Ratios to Average Net Assets(1): Expenses................. 0.99 % 0.77 % 0.70 % 0.68% 0.75% Net investment income.... 13.76 %(2) 15.17 % 13.62 % 12.42% 11.30% Supplemental Data: Net assets, end of period, in thousands.... $23,879 $36,762 $57,273 $68,667 $30,678 Portfolio turnover rate.................... 39 % 49 % 20 % 36% 66%
- --------------------- ++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. + DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. (2) EFFECTIVE SEPTEMBER 1, 2001, THE FUND HAS ADOPTED THE PROVISIONS OF THE AICPA AUDIT AND ACCOUNTING GUIDE FOR INVESTMENT COMPANIES, AS REVISED, RELATED TO PREMIUMS AND DISCOUNTS ON DEBT SECURITIES. THE EFFECT OF THIS CHANGE FOR THE YEAR ENDED AUGUST 31, 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 0.74%. THE FINANCIAL HIGHLIGHTS DATA PRESENTED IN THIS TABLE FOR PRIOR PERIODS HAS NOT BEEN RESTATED TO REFLECT THIS CHANGE. SEE NOTES TO FINANCIAL STATEMENTS 56 Morgan Stanley High Yield Securities Inc. FINANCIAL HIGHLIGHTS CONTINUED
FOR THE YEAR ENDED AUGUST 31, ------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------- ------------- ------------- ------------- ------------- Class B Shares Selected Per Share Data: Net asset value, beginning of period..... $ 2.32 $ 4.34 $ 5.50 $ 6.15 $ 6.82 ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income++.............. 0.25 (2) 0.46 0.66 0.69 0.73 Net realized and unrealized loss....... (0.73) (2) (1.99) (1.13) (0.64) (0.72) ------ ------ ------ ------ ------ Total income (loss) from investment operations... (0.48) (1.53) (0.47) 0.05 0.01 ------ ------ ------ ------ ------ Less dividends and distributions from: Net investment income................ (0.26) (0.49) (0.69) (0.70) (0.68) Paid-in-capital........ (0.03) - - - - ------ ------ ------ ------ ------ Total dividends and distributions........... (0.29) (0.49) (0.69) (0.70) (0.68) ------ ------ ------ ------ ------ Net asset value, end of period.................. $ 1.55 $ 2.32 $ 4.34 $ 5.50 $ 6.15 ====== ====== ====== ====== ====== Total Return+............ (22.00)% (37.27)% (9.39)% 0.92% (0.23)% Ratios to Average Net Assets(1): Expenses................. 1.56 % 1.37 % 1.25 % 1.24% 1.25 % Net investment income.... 13.19 %(2) 14.57 % 13.07 % 11.86% 10.80 % Supplemental Data: Net assets, end of period, in thousands.... $371,399 $664,706 $1,381,008 $1,927,186 $1,761,147 Portfolio turnover rate.................... 39 % 49 % 20 % 36% 66 %
- --------------------- ++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. + DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. (2) EFFECTIVE SEPTEMBER 1, 2001, THE FUND HAS ADOPTED THE PROVISIONS OF THE AICPA AUDIT AND ACCOUNTING GUIDE FOR INVESTMENT COMPANIES, AS REVISED, RELATED TO PREMIUMS AND DISCOUNTS ON DEBT SECURITIES. THE EFFECT OF THIS CHANGE FOR THE YEAR ENDED AUGUST 31, 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 0.74%. THE FINANCIAL HIGHLIGHTS DATA PRESENTED IN THIS TABLE FOR PRIOR PERIODS HAS NOT BEEN RESTATED TO REFLECT THIS CHANGE. SEE NOTES TO FINANCIAL STATEMENTS 57 Morgan Stanley High Yield Securities Inc. FINANCIAL HIGHLIGHTS CONTINUED
FOR THE YEAR ENDED AUGUST 31, ---------------------------------------------------------------- 2002 2001 2000 1999 1998 ----------- ------------ ----------- ----------- ----------- Class C Shares Selected Per Share Data: Net asset value, beginning of period..... $ 2.32 $ 4.34 $ 5.51 $ 6.15 $ 6.82 ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income++.............. 0.25 (2) 0.45 0.66 0.68 0.72 Net realized and unrealized loss....... (0.73)(2) (1.98) (1.14) (0.62) (0.72) ------ ------ ------ ------ ------ Total income (loss) from investment operations... (0.48) (1.53) (0.48) 0.06 0.00 ------ ------ ------ ------ ------ Less dividends and distributions from: Net investment income................ (0.26) (0.49) (0.69) (0.70) (0.67) Paid-in-capital........ (0.03) - - - - ------ ------ ------ ------ ------ Total dividends and distributions........... (0.29) (0.49) (0.69) (0.70) (0.67) ------ ------ ------ ------ ------ Net asset value, end of period.................. $ 1.55 $ 2.32 $ 4.34 $ 5.51 $ 6.15 ====== ====== ====== ====== ====== Total Return+............ (22.11)% (37.24)% (9.66)% 0.99% (0.34)% Ratios to Average Net Assets(1): Expenses................. 1.66 % 1.47 % 1.35 % 1.34% 1.36 % Net investment income.... 13.09 %(2) 14.47 % 12.97 % 11.76% 10.69 % Supplemental Data: Net assets, end of period, in thousands.... $33,978 $49,818 $86,951 $109,142 $56,626 Portfolio turnover rate.................... 39 % 49 % 20 % 36% 66 %
- --------------------- ++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. + DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. (2) EFFECTIVE SEPTEMBER 1, 2001, THE FUND HAS ADOPTED THE PROVISIONS OF THE AICPA AUDIT AND ACCOUNTING GUIDE FOR INVESTMENT COMPANIES, AS REVISED, RELATED TO PREMIUMS AND DISCOUNTS ON DEBT SECURITIES. THE EFFECT OF THIS CHANGE FOR THE YEAR ENDED AUGUST 31, 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 0.74%. THE FINANCIAL HIGHLIGHTS DATA PRESENTED IN THIS TABLE FOR PRIOR PERIODS HAS NOT BEEN RESTATED TO REFLECT THIS CHANGE. SEE NOTES TO FINANCIAL STATEMENTS 58 Morgan Stanley High Yield Securities Inc. FINANCIAL HIGHLIGHTS CONTINUED
FOR THE YEAR ENDED AUGUST 31, ------------------------------------------------------------------ 2002 2001 2000 1999 1998 ------------ ------------ ------------ ----------- ----------- Class D Shares Selected Per Share Data: Net asset value, beginning of period..... $ 2.32 $ 4.35 $ 5.51 $ 6.16 $ 6.82 ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income++.............. 0.26 (2) 0.48 0.70 0.74 0.78 Net realized and unrealized loss....... (0.73) (2) (1.99) (1.13) (0.64) (0.71) ------ ------ ------ ------ ------ Total income (loss) from investment operations.............. (0.47) (1.51) (0.43) 0.10 0.07 ------ ------ ------ ------ ------ Less dividends and distributions from: Net investment income................ (0.27) (0.52) (0.73) (0.75) (0.73) Paid-in-capital........ (0.03) - - - - ------ ------ ------ ------ ------ Total dividends and distributions........... (0.30) (0.52) (0.73) (0.75) (0.73) ------ ------ ------ ------ ------ Net asset value, end of period.................. $ 1.55 $ 2.32 $ 4.35 $ 5.51 $ 6.16 ====== ====== ====== ====== ====== Total Return+............ (21.45)% (36.95)% (8.69)% 1.67% 0.63% Ratios to Average Net Assets(1): Expenses................. 0.81 % 0.62 % 0.50 % 0.49% 0.51% Net investment income.... 13.94 %(2) 15.32 % 13.82 % 12.61% 11.54% Supplemental Data: Net assets, end of period, in thousands.... $86,436 $137,319 $246,941 $333,714 $400,582 Portfolio turnover rate.................... 39 % 49 % 20 % 36% 66%
- --------------------- ++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. + CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. (2) EFFECTIVE SEPTEMBER 1, 2001, THE FUND HAS ADOPTED THE PROVISIONS OF THE AICPA AUDIT AND ACCOUNTING GUIDE FOR INVESTMENT COMPANIES, AS REVISED, RELATED TO PREMIUMS AND DISCOUNTS ON DEBT SECURITIES. THE EFFECT OF THIS CHANGE FOR THE YEAR ENDED AUGUST 31, 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 0.74%. THE FINANCIAL HIGHLIGHTS DATA PRESENTED IN THIS TABLE FOR PRIOR PERIODS HAS NOT BEEN RESTATED TO REFLECT THIS CHANGE. SEE NOTES TO FINANCIAL STATEMENTS 59 Morgan Stanley High Yield Securities Inc. INDEPENDENT AUDITORS' REPORT 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, 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 August 31, 2002, by correspondence with the custodian and brokers. 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, 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 SEPTEMBER 23, 2002 60 MORGAN STANLEY HIGH YIELD SECURITIES INC. PART C OTHER INFORMATION ITEM 23. EXHIBITS 1(a). Articles of Incorporation of the Registrant, dated June 12, 1979 and amendments thereto, comprised of amended Articles of Incorporation dated March 18, 1983, December 16, 1985 and January 19, 1989, are incorporated by reference to Exhibit 1 of Post-Effective Amendment No. 19 to the Registration Statement on Form N-1A, filed on October 25, 1995. 1(b). Articles of Amendment, dated May 23, 1997 and July 28, 1997, and Articles Supplementary, dated July 28, 1997, are incorporated by reference to Exhibit 1 of Post-Effective Amendment No. 21 to the Registration Statement on Form N-1A, filed on July 3, 1997. 1(c). Articles of Amendment, dated June 22, 1998 are incorporated by reference to Exhibit 1 of Post-Effective Amendment No. 23 to the Registration Statement on Form N-1A, filed on October 29, 1998. 1(d). Articles of Amendment, dated June 18, 2001, are incorporated by reference to Exhibit 1(d) of Post-Effective Amendment No. 27 to the Registration Statement on Form N-1A, filed on October 30, 2001. 2. Amended and Restated By-Laws of the Registrant, dated September 24, 2002, filed herein. 3. Not Applicable. 4. Amended Investment Management Agreement between the Registrant and Morgan Stanley Investment Advisors Inc., dated April 30, 1998, is incorporated by reference to Exhibit 5 of Post-Effective Amendment No. 23 to the Registration Statement on Form N-1A, filed on October 29, 1998. 5(a). Amended Distribution Agreement dated June 22, 1998 is incorporated by reference to Exhibit 6 of Post-Effective Amendment No. 23 to the Registration Statement on Form N-1A, filed on October 29, 1998. 5(b). Selected Dealer Agreement between Morgan Stanley Distributors Inc. and Morgan Stanley Inc. is incorporated by reference to Exhibit 6(b) of Post-Effective Amendment No. 17 to the Registration Statement on Form N-1A, filed on October 22, 1993. 5(c). Omnibus Selected Dealer Agreement between Morgan Stanley Distributors Inc. and National Financial Services Corporation, dated October 17, 1998, is incorporated by reference to Exhibit 5(c) of Post-Effective No. 24 to the Registration Statement on Form N-1A, filed on August 27, 1999. 6. Amended and Restated Retirement Plan for Non-Interested Trustees or Directors, dated May 8, 1997, is incorporated by reference to Post-Effective Amendment No. 24 to the Registration Statement on Form N-1A, filed on August 27, 1999. 7(a). Custody Agreement between The Bank of New York and the Registrant is incorporated by reference to Exhibit 8 of Post-Effective Amendment No. 19 to the Registration Statement on Form N-1A, filed on October 25, 1995. 7(b). Amendment to Custody Agreement, dated April 17, 1996, is incorporated by reference to Exhibit 8 of Post-Effective Amendment No. 20 to the Registration Statement on Form N-1A, filed on October 24, 1996. 7(c). Amendment dated June 15, 2001 to the Custody Agreement of the Registrant, is incorporated herein by reference to Exhibit 7(c) of Post-Effective Amendment No. 27 to the Registration Statement on Form N-1A, filed on October 30, 2001. 7(d). Foreign Custody Manager Agreement between the Bank of New York and the Registrant, dated June 15, 2001, is incorporated herein by reference to Exhibit 7(d) of Post-Effective Amendment No. 27 to the Registration Statement on Form N-1A, filed on October 30, 2001. 8(a). Amended and Restated Transfer Agency and Service Agreement between the Registrant and Morgan Stanley Dean Witter Trust FSB, dated September 1, 2000, is incorporated by reference to Exhibit 8(a) of Post-Effective Amendment No. 26 to the Registration Statement on Form N-1A, filed on October 30, 2000. 8(b). Amended and Restated Services Agreement, dated June 22, 1998, is incorporated by reference to Exhibit 9 of Post-Effective Amendment No. 23 to the Registration Statement on Form N-1A, filed on October 29, 1998. 9. Legal Opinion of Dennis H. Greenwald, Esq., dated August 16, 1979, is incorporated by reference to Exhibit 9 of Post-Effective Amendment No. 24 to the Registration Statement on Form N-1A, filed on August 27, 1999. 10. Consent of Independent Auditors, filed herein. 11. Not Applicable. 12. Not Applicable. 13. Amended and Restated Plan of Distribution pursuant to Rule 12b-1, dated July 28, 1997, is incorporated by reference to Exhibit 15 of Post-Effective Amendment No. 21 to the Registration Statement on Form N-1A, filed on July 3, 1997. 14. Amended Multi-Class Plan pursuant to Rule 18f-3, dated March 12, 2001, is incorporated herein by reference to Exhibit 14 of Post-Effective Amendment No. 27 to the Registration Statement on Form N-1A, filed on October 30, 2001. 15. Not Applicable. 16(a). Code of Ethics of Morgan Stanley Investment Management, filed herein. 16(b). Code of Ethics of the Morgan Stanley Funds, filed herein. Other Powers of Attorney of Directors are incorporated by reference to Exhibit (Other) of Post-Effective Amendment No. 18 to the Registration Statement on Form N-1A, filed on October 28, 1994, Post-Effective Amendment No. 22 to the Registration Statement on Form N-1A, filed on October 31, 1997 and Post-Effective Amendment No. 26 to the Registration Statement on Form N-1A, filed on October 30, 2000. ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND. None ITEM 25. INDEMNIFICATION. Reference is made to Section 3.15 of the Registrant's By-Laws and Section 2-418 of the Maryland General Corporation Law. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in connection with the successful defense of any action, suit or proceeding) is asserted against the Registrant by such director, officer or controlling person in connection with the shares being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act, and will be governed by the final adjudication of such issue. The Registrant hereby undertakes that it will apply the indemnification provision of its by-laws in a manner consistent with release 11330 of the Securities and Exchange Commission under the Investment Company Act of 1940, so long as the interpretation of Sections 17(h) and 17(i) of such Act remains in effect. Registrant, in conjunction with the Investment Manager, Registrant's Directors, and other registered investment management companies managed by the Investment Manager, maintains insurance on behalf of any person who is or was a Director, officer, employee, or agent of registrant, or who is or was serving at the request of registrant as a trustee, director, officer, employee or agent of another trust or corporation, against any liability asserted against him and incurred by him or arising out of his position. However, in no event will registrant maintain insurance to indemnify any such person for any act for which Registrant itself is not permitted to indemnify him. ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR See "Fund Management" in the Prospectus regarding the business of the investment advisor. The following information is given regarding officers of Morgan Stanley Investment Advisors Inc. ("Morgan Stanley Advisors"). Morgan Stanley Advisors is a wholly-owned subsidiary of Morgan Stanley & Co. THE PRINCIPAL ADDRESSES ARE AS FOLLOWS: MORGAN STANLEY SERVICES COMPANY INC. ("MORGAN STANLEY SERVICES") c/o Morgan Stanley Trust, Harborside Financial Center, Plaza Two, Jersey City, New Jersey 07311 MORGAN STANLEY DISTRIBUTORS INC. ("MORGAN STANLEY DISTRIBUTORS") MORGAN STANLEY DW INC. ("MORGAN STANLEY DW") MORGAN STANLEY FUNDS MORGAN STANLEY INVESTMENT ADVISORS INC. MORGAN STANLEY INVESTMENT MANAGEMENT MORGAN STANLEY INVESTMENT MANAGEMENT INC. MORGAN STANLEY INVESTMENT GROUP INC. ("MORGAN STANLEY INVESTMENT GROUP") THE UNIVERSAL INSTITUTIONAL FUNDS, INC. ("UNIVERSAL INSTITUTIONAL FUNDS") 1221 Avenue of the Americas New York, New York 10020. MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT LTD. MORGAN STANLEY & CO. INTERNATIONAL LIMITED ("MORGAN STANLEY & CO. INTERNATIONAL") 25 Cabot Square, London, England. MORGAN STANLEY INVESTMENTS LP MORGAN STANLEY INSTITUTIONAL FUND TRUST MORGAN STANLEY DISTRIBUTION, INC. One Tower Bridge, West Conshohocken, PA 19428. VAN KAMPEN INVESTMENT ASSET MANAGEMENT INC. ("VAN KAMPEN") 1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, IL 60181 MORGAN STANLEY TRUST Harborside Financial Center, Plaza Two, Jersey City, New Jersey 07311.
NAME AND POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION OR EMPLOYMENT, MORGAN STANLEY INVESTMENT ADVISORS INCLUDING NAME, PRINCIPAL ADDRESS AND NATURE OF CONNECTION - ---------------------------------- --------------------------------------------------------------- Mitchell M. Merin President and Chief Operating Officer of Morgan Stanley President, Chief Executive Officer Investment Management; Chairman, Chief Executive Officer and and Director Director of Morgan Stanley Distributors and Morgan Stanley Trust; President, Chief Executive Officer and Director of Morgan Stanley Services; President of the Morgan Stanley Funds; Executive Vice President and Director of Morgan Stanley DW; Director of Morgan Stanley Investment Management Inc.; Member of the Executive Committee of Morgan Stanley Investments LP; Director of various Morgan Stanley subsidiaries; Trustee of various Van Kampen investment companies. Barry Fink Managing Director and General Counsel of Morgan Stanley Managing Director, Investment Management; Managing Director, Secretary, General Secretary Counsel and Director of Morgan Stanley Services; Vice President and Director and Secretary of Morgan Stanley Distributors; Vice President, Secretary and General Counsel of the Morgan Stanley Funds. A. Thomas Smith III Managing Director and General Counsel of Morgan Stanley Managing Director and General Services; Vice President and Assistant Secretary of the Morgan Counsel Stanley Funds. Joseph J. McAlinden Chief Investment Officer and Managing Director of Morgan Managing Director and Stanley Investment Management Inc.; Chief Investment Officer Chief Investment Officer and Managing Director of Morgan Stanley Investments LP; Director of Morgan Stanley Trust. Barton M. Biggs Chairman, Senior Advisor, Managing Director and Director of Managing Director Morgan Stanley Investment Management Inc. and Managing Director And Senior Advisor of Morgan Stanley Investments LP. Thomas L. Bennett Managing Director and Director of Morgan Stanley Investment Managing Director Management Inc.; Director of the Universal Institutional Funds; Managing Director and Executive Committee member of Morgan Stanley Investments LP; Chairman of Morgan Stanley Institutional Fund Trust; Director of Morgan Stanley Distribution, Inc. Ronald E. Robison Managing Director, Chief Administrative Officer and Director of Managing Director, Chief Morgan Stanley Services and Chief Executive Officer and Administrative Officer and Director of Morgan Stanley Trust. Director Dominic P. Caldecott Managing Director of Morgan Stanley Investment Management Inc., Managing Director Morgan Stanley Investments LP and Morgan Stanley Dean Witter Investment Management Ltd.; Vice President and Investment Manager of Morgan Stanley & Co. International. Rajesh K. Gupta Managing Director and Chief Administrative Officer-Investments Managing Director and Chief of Morgan Stanley Investment Management Inc. and Morgan Stanley Administrative Officer- Investments LP. Investments John B. Kemp, III President of Morgan Stanley Distributors. Executive Director
ITEM 27. PRINCIPAL UNDERWRITERS (a) Morgan Stanley Distributors Inc., a Delaware corporation, is the principal underwriter of the Registrant. Morgan Stanley Distributors is also the principal underwriter of the following investment companies: (1) Active Assets California Tax-Free Trust (2) Active Assets Government Securities Trust (3) Active Assets Institutional Money Trust (4) Active Assets Money Trust (5) Active Assets Tax-Free Trust (6) Morgan Stanley 21st Century Trend Fund (7) Morgan Stanley Aggressive Equity Fund (8) Morgan Stanley All Star Growth Fund (9) Morgan Stanley American Opportunities Fund (10) Morgan Stanley Balanced Growth Fund (11) Morgan Stanley Balanced Income Fund (12) Morgan Stanley California Tax-Free Daily Income Trust (13) Morgan Stanley California Tax-Free Income Fund (14) Morgan Stanley Capital Opportunities Trust (15) Morgan Stanley Convertible Securities Trust (16) Morgan Stanley Developing Growth Securities Trust (17) Morgan Stanley Diversified Income Trust (18) Morgan Stanley Dividend Growth Securities Inc. (19) Morgan Stanley Equity Fund (20) Morgan Stanley European Growth Fund Inc. (21) Morgan Stanley Federal Securities Trust (22) Morgan Stanley Financial Services Trust (23) Morgan Stanley Fund of Funds (24) Morgan Stanley Global Advantage Fund (25) Morgan Stanley Global Dividend Growth Securities (26) Morgan Stanley Global Utilities Fund (27) Morgan Stanley Growth Fund (28) Morgan Stanley Hawaii Municipal Trust (29) Morgan Stanley Health Sciences Trust (30) Morgan Stanley High Yield Securities Inc. (31) Morgan Stanley Income Builder Fund (32) Morgan Stanley Information Fund (33) Morgan Stanley Intermediate Income Securities (34) Morgan Stanley International Fund (35) Morgan Stanley International SmallCap Fund (36) Morgan Stanley International Value Equity Fund (37) Morgan Stanley Japan Fund (38) Morgan Stanley KLD Social Index Fund (39) Morgan Stanley Latin American Growth Fund (40) Morgan Stanley Limited Duration Fund (41) Morgan Stanley Limited Duration U.S. Treasury Trust (42) Morgan Stanley Limited Term Municipal Trust (43) Morgan Stanley Liquid Asset Fund Inc. (44) Morgan Stanley Market Leader Trust (45) Morgan Stanley Mid-Cap Equity Trust (46) Morgan Stanley Mid-Cap Value Fund (47) Morgan Stanley Multi-State Municipal Series Trust (48) Morgan Stanley Nasdaq-100 Index Fund (49) Morgan Stanley Natural Resource Development Securities Inc. (50) Morgan Stanley New Discoveries Fund (51) Morgan Stanley New York Municipal Money Market Trust (52) Morgan Stanley New York Tax-Free Income Fund (53) Morgan Stanley Next Generation Trust (54) Morgan Stanley North American Government Income Trust (55) Morgan Stanley Pacific Growth Fund Inc. (56) Morgan Stanley Prime Income Trust (57) Morgan Stanley Real Estate Fund (58) Morgan Stanley S&P 500 Index Fund (59) Morgan Stanley Small-Mid Special Value Fund (60) Morgan Stanley Special Growth Fund (61) Morgan Stanley Special Value Fund (62) Morgan Stanley Strategist Fund (63) Morgan Stanley Tax-Exempt Securities Trust (64) Morgan Stanley Tax-Free Daily Income Trust (65) Morgan Stanley Tax-Managed Growth Fund (66) Morgan Stanley Technology Fund (67) Morgan Stanley Total Market Index Fund (68) Morgan Stanley Total Return Trust (69) Morgan Stanley U.S. Government Money Market Trust (70) Morgan Stanley U.S. Government Securities Trust (71) Morgan Stanley Utilities Fund (72) Morgan Stanley Value-Added Market Series (73) Morgan Stanley Value Fund (74) Morgan Stanley Variable Investment Series (b) The following information is given regarding directors and officers of Morgan Stanley Distributors not listed in Item 26 above. The principal address of Morgan Stanley Distributors is 1221 Avenue of the Americas, New York, New York 10020. Other than Messrs. Higgins and Purcell, who are Trustees of the Registrant, none of the following persons has any position or office with the Registrant.
POSITIONS AND OFFICE WITH NAME MORGAN STANLEY DISTRIBUTORS - ---- ------------------------------------------- James F. Higgins Director Philip J. Purcell Director John Schaeffer Director Charles Vadala Senior Vice President and Financial Principal.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS All accounts, books and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder are maintained by the Investment Manager at its offices, except records relating to holders of shares issued by the Registrant, which are maintained by the Registrant's Transfer Agent, at its place of business as shown in the prospectus. ITEM 29. MANAGEMENT SERVICES Registrant is not a party to any such management-related service contract. ITEM 30. UNDERTAKINGS Registrant hereby undertakes to furnish each person to whom a prospectus is delivered with a copy of the Registrant's latest annual report to shareholders, upon request and without charge. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Post- Effective Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York and State of New York on the 30th day of September, 2002. MORGAN STANLEY HIGH YIELD SECURITIES INC. By: /s/ BARRY FINK ----------------------------------------- Barry Fink VICE PRESIDENT AND SECRETARY
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 28 has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- Chief Executive Officer and President (1) Principal Executive Officer By: /s/ MITCHELL M. MERIN ------------------------------------------- 09/30/02 Mitchell M. Merin Chief Financial Officer (2) Principal Financial Officer By: /s/ FRANCIS SMITH ------------------------------------------- 09/30/02 Francis Smith (3) Majority of the Directors Charles A. Fiumefreddo (Chairman) Philip J. Purcell James F. Higgins By: /s/ BARRY FINK ------------------------------------------- Barry Fink 09/30/02 Attorney-in-Fact Michael Bozic Manuel H. Johnson Edwin J. Garn Michael E. Nugent Wayne E. Hedien By: /s/ DAVID M. BUTOWSKY ------------------------------------------- David M. Butowsky 09/30/02 Attorney-in-Fact
MORGAN STANLEY HIGH YIELD SECURITIES INC. EXHIBIT INDEX 2. -- Amended and Restated By-Laws of the Registrant dated September 24, 2002 10. -- Consent of Independent Auditors 16(a). -- Code of Ethics of Morgan Stanley Investment Management 16(b). -- Code of Ethics of the Morgan Stanley Funds
EX-99.2 3 a2089247zex-99_2.txt EXHIBIT 99.2 BY-LAWS OF MORGAN STANLEY HIGH YIELD SECURITIES INC. AMENDED AND RESTATED AS OF SEPTEMBER 24, 2002 ARTICLE I OFFICES SECTION 1.1. Principal Office. The principal office of the Corporation in the State of Maryland shall be in the City of Baltimore. SECTION 1.2. Other Offices. In addition to its principal office in the State of Maryland, the Corporation may have an office or offices in the City of New York, State of New York, and at such other places as the Board of Directors may from time to time designate or the business of the Corporation may require. ARTICLE II STOCKHOLDERS' MEETINGS SECTION 2.1. Place of Meetings. Meetings of stockholders shall be held at such place, within or without the State of Maryland, as may be designated from time to time by the Board of Directors. SECTION 2.2. Annual Meetings. An annual meeting of stockholders, when required, at which the stockholders shall elect a Board of Directors and transact such other business as may properly come before the meeting, shall be held in December of each year, the precise date in December to be fixed by the Board of Directors. Notwithstanding anything to the contrary contained herein, the Corporation shall not be required to hold an annual meeting in any year in which none of the following is required to be acted upon by stockholders under the Investment Company Act of 1940, as amended: (1) election of directors; (2) approval of an investment advisory or management agreement; (3) ratification of the selection of independent accountants; and (4) approval of a distribution plan or agreement; provided, however, that a special meeting of stockholders shall promptly be called when requested in writing by the recordholders of not less than 10% of the Corporation's shares. SECTION 2.3. Special Meetings. Special meetings of stockholders of the Corporation shall be held whenever called by the Board of Directors or the President of the Corporation. Special meetings of stockholders shall also be called by the Secretary upon the written request of the holders of shares entitled to vote not less than twenty-five percent (25%) of all the votes entitled to be cast at such meeting. Such request shall state the purpose or purposes of such meeting and the matters proposed to be acted on thereat. The Secretary shall inform such stockholders of the reasonable estimated cost of preparing and mailing such notice of the meeting, and upon payment to the Corporation of such costs, the Secretary shall give notice stating the purpose or purposes of the meeting to all entitled to a vote at such meeting. Unless requested by stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting, a special meeting need not be called to consider any matter which is substantially the same as a matter voted upon at any special meeting of stockholders held during the preceding twelve months. SECTION 2.4. Notice of Meetings. Written or printed notice of every stockholders' meeting stating the place, date and time, and in the case of a special meeting the purpose or purposes thereof, shall be given by the Secretary not less than ten (10) nor more than ninety (90) days before such meeting to each C61011 HIGHYIELDS stockholder entitled to vote at such meeting, either by mail or by presenting it to him personally, or by leaving it at his residence or usual place of business. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. SECTION 2.5. Quorum and Adjournment of Meetings. Except as otherwise provided by law, by the Charter of the Corporation, or by these By-Laws, at all meetings of stockholders the holders of a majority of the shares issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall be requisite and shall constitute a quorum for the transaction of business. In the absence of a quorum, the stockholders present or represented by proxy and entitled to vote thereat shall have power to adjourn the meeting from time to time without notice other than announcement at the meeting, until a quorum shall be present. At any adjourned meeting at which a quorum shall be present, any business may be transacted if the meeting had been held as originally called. SECTION 2.6. Voting Rights, Proxies. At each meeting of stockholders, each holder of record of stock entitled to vote thereat shall be entitled to one vote in person or by proxy for each share of stock of the Corporation and for the fractional portion of one vote for each fractional share entitled to vote so registered in his or her name on the records of the Corporation on the date fixed as the record date for the determination of stockholders entitled to vote at such meeting. Without limiting the manner in which a stockholder may authorize another person or persons to act for such stockholder as proxy pursuant hereto, the following shall constitute a valid means by which a stockholder may grant such authority: (i) A stockholder may execute a writing authorizing another person or persons to act for such stockholder as proxy. Execution may be accomplished by the stockholder or such stockholder's authorized officer, director, employee, attorney-in-fact or another agent signing such writing or causing such person's signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile or telecopy signature. No written evidence of authority of a stockholder's authorized officer, director, employee, attorney-in-fact or other agent shall be required; and (ii) A stockholder may authorize another person or persons to act for such stockholder as proxy by transmitting or authorizing the transmission of a telegram or cablegram or by other means of telephonic, electronic or computer transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that any such telegram or cablegram or other means of telephonic, electronic or computer transmission must either set forth or be submitted with information from which it can be determined that the telegram, cablegram or other transmission was authorized by the stockholder. No proxy shall be valid after eleven months from its date, unless otherwise provided in the proxy. At all meetings of stockholders, unless the voting is conducted by inspectors, all questions relating to the qualification of voters and the validity of proxies and the acceptance or rejection of votes shall be decided by the chairman of the meeting. In determining whether a telegram, cablegram or other electronic transmission is valid, the chairman or inspector, as the case may be, shall specify the information upon which he or she relied. Pursuant to a resolution of a majority of the Directors, proxies may be solicited in the name of one or more Directors or Officers of the Corporation. Proxy solicitations may be made in writing or by using telephonic or other electronic solicitation procedures that include appropriate methods of verifying the identity of the stockholder and confirming any instructions given thereby. SECTION 2.7. Vote Required. Except as otherwise provided by law, by the Charter of the Corporation, or by these By-Laws, at each meeting of stockholders at which a quorum is present, any election shall be decided by a plurality, and all other questions shall be decided by a majority of the votes cast by the stockholders present in person or represented by proxy and entitled to vote in such election or with respect to any such matter. SECTION 2.8. Action by Stockholders Without Meeting. Except as otherwise provided by law, the provisions of these By-Laws relating to notices and meetings to the contrary notwithstanding, any action 2 required or permitted to be taken at any meeting of stockholders may be taken without a meeting if a consent in writing setting forth the action shall be signed by all the stockholders entitled to vote upon the action and such consent shall be filed with the records of the Corporation. SECTION 2.9. Presence at Meetings. Presence at meetings of stockholders requires physical attendance by the stockholder or his or her proxy at the meeting site and does not encompass attendance by telephonic or other electronic means. ARTICLE III DIRECTORS SECTION 3.1. Number and Term. The Board of Directors shall consist of not less than three (3) and not more than fifteen (15) directors, the number of directors to be fixed from time to time within the above-specified limits by the affirmative vote of a majority of the whole Board of Directors. At the first annual meeting of stockholders and at each meeting thereafter, the stockholders shall elect directors to hold office until their successors are elected and qualify. Directors need not be stockholders of the Corporation. SECTION 3.2. Powers. The business of the Corporation shall be managed by the Board of Directors which may exercise all powers of the Corporation and do all lawful acts and things which are not by law or by the Charter of the Corporation, or by these By-Laws, directed or required to be exercised or done exclusively by the stockholders. SECTION 3.3. Organizational Meetings. The first meeting of each newly elected Board of Directors for the purposes of organization and the election of officers and otherwise shall be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all directors. SECTION 3.4. Regular Meetings. Regular meetings of the Board of Directors may be held at such time and place as shall be determined from time to time by the Board of Directors without further notice. SECTION 3.5. Special Meetings. Special meetings of the Board of Directors may be called at any time by the President and shall be called by such President or the Secretary upon the written request of any two (2) directors. SECTION 3.6. Notice of Special Meetings. Written notice of special meetings of the Board of Directors, stating the place, date and time thereof, shall be given not less than two (2) days before such meeting to each director, personally, by telegram, by mail, or by leaving such notice at his place of residence or usual place of business. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the director at his address as it appears on the records of the Corporation. SECTION 3.7. Telephone Meetings. Any member or members of the Board of Directors or of any committee designated by the Board, may participate in a meeting of the Board, or any such committee, as the case may be, by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means constitutes presence in person at the meeting. SECTION 3.8. Quorum, Voting and Adjournment of Meetings. At all meetings of the Board of Directors, a majority of the whole Board shall be requisite to and shall constitute a quorum for the transaction of business. If a quorum is present, the affirmative vote of a majority of the directors present shall be the act of the Board of Directors, unless the concurrence of a greater proportion is expressly required for such action by law, the Charter of the Corporation or these By-Laws. If at any meeting of the Board there be less than a quorum present, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting until a quorum shall have been obtained. SECTION 3.9. Removal. Any one or more of the directors may be removed, either with or without cause, at any time, by the affirmative vote of the stockholders holding a majority of the outstanding shares 3 entitled to vote for the election of directors. (For purposes of determining the circumstances and procedures under which such removal of directors may take place, the provisions of Section 16(c) of the Investment Company Act of 1940 shall be applicable to the same extent as if the Corporation were subject to the provisions of that Section.) The successor or successors of any director or directors so removed may be elected by the stockholders entitled to vote thereon at the same meeting to fill any resulting vacancies for the unexpired term of removed directors. Except as provided by law, pending such an election (or in the absence of such an election), the successor or successors of any director or directors so removed may be chosen by the Board of Directors. SECTION 3.10. Vacancies. Except as otherwise provided by law, any vacancy occurring in the Board of Directors and newly created directorships resulting from an increase in the authorized number of directors may be filled by the vote of a majority of the directors then in office or, if only one director shall then be in office, by such director. A director elected by the Board of Directors to fill a vacancy shall be elected to hold office until the next annual meeting of stockholders or until his successor is elected and qualifies. SECTION 3.11. Action by Directors Without Meeting. The provisions of these By-Laws covering notices and meetings to the contrary notwithstanding, and except as required by law, any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if a consent in writing setting forth the action shall be signed by all of the directors entitled to vote upon the action and such written consent is filed with the minutes of proceedings of the Board of Directors. SECTION 3.12. Expenses and Fees. Each director may be allowed expenses, if any, for attendance at each regular or special meeting of the Board of Directors and each director who is not an officer or employee of the Corporation or of its investment manager or underwriter or of any corporate affiliate of any of said persons shall receive for services rendered as a director of the Corporation such compensation as may be fixed by the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. SECTION 3.13. Execution of Instruments and Documents and Signing of Checks and Other Obligations and Transfers. All instruments, documents and other papers shall be executed in the name and on behalf of the Corporation and all checks, notes, drafts and other obligations for the payment of money by the Corporation shall be signed, and all transfer of securities standing in the name of the Corporation shall be executed, by the President, any Vice President or the Treasurer or by any one or more officers or agents of the Corporation as shall be designated for that purpose by vote of the Board of Directors; notwithstanding the above, nothing in this Section 3.13 shall be deemed to preclude the electronic authorization, by designated persons, of the Corporation's Custodian to transfer assets of the Corporation. SECTION 3.14. Contracts. Except as otherwise provided by law or by the Charter of the Corporation, no contract or transaction between the Corporation and any partnership or corporation, and no act of the Corporation, shall in any way be affected or invalidated by the fact that any officer or director of the Corporation is pecuniarily or otherwise interested therein or is a member, officer or director of such interest shall be known to the Board of Directors of the Corporation. Specifically, but without limitation of the foregoing, the Corporation may enter into one or more contracts appointing Morgan Stanley Investment Advisors Inc. investment manager of the Corporation, and may otherwise do business with Morgan Stanley Investment Advisors Inc., notwithstanding the fact that one or more of the directors of the Corporation and some or all of its officers are, have been or may become directors, officers, members, employees, or stockholders of Morgan Stanley Investment Advisors Inc.; and in the absence of fraud, the Corporation and Morgan Stanley Investment Advisors Inc. may deal freely with each other, and neither such contract appointing Morgan Stanley Investment Advisors Inc. investment manager to the Corporation nor any other contract or transaction between the Corporation and Morgan Stanley Investment Advisors Inc. shall be invalidated or in any wise affected thereby, nor shall any director or officer of the Corporation by reason thereof be liable to the Corporation or to any stockholder or creditor of the Corporation or to any other person for any loss incurred under or by reason of any such 4 contract or transaction. For purposes of this paragraph, any reference to "Morgan Stanley Investment Advisors Inc." shall be deemed to include said company and any parent, subsidiary or affiliate of said company and any successor (by merger, consolidation or otherwise) to said company or any such parent, subsidiary or affiliate. SECTION 3.15. Indemnification of Directors, Officers, Employees and Agents. (a) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation. The indemnification shall be against expenses, including attorneys' fees, judgments, fines, and amounts paid in settlement, actually and reasonably incurred by him in connection with the action, suit, or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Directors acting in their official capacity must act in good faith and in a manner reasonably believed to be in the best interest of the Corporation. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. A director may not be indemnified in respect of any proceeding charging improper personal benefit to the director, whether or not involving action in the director's official capacity, in which the director was adjudged to be liable on the basis that personal benefit was improperly received. (b) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or on behalf of the Corporation to obtain a judgment or decree in its favor by reason of the fact that he is or was a director, officer, employee, or agent of the Corporation. The indemnification shall be against expenses, including attorney's fees actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation: except that no indemnification shall be made in respect of any claim, issue, or matter as to which the person has been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation, except to the extent that the court in which the action or suit was brought, or a court of equity in the county in which the Corporation has its principal office, determines upon application that, despite the adjudication of liability, but in view of all circumstances of the case, the person is fairly and reasonably entitled to indemnity for those expenses which the court shall deem proper, provided such director or officer is not adjudged to be liable by reason of his willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. (c) To the extent that a director, officer, employee, or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsection (a) or (b) or in defense of any claim, issue or matter therein, he shall be indemnified against expenses, including attorneys' fees, actually and reasonably incurred by him in connection therewith. (d)(1) Unless a court orders otherwise, any indemnification under subsection (a) or (b) of this section may be made by the Corporation only as authorized in the specific case after a determination that indemnification of the director, officer, employee, or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsection (a) or (b). (2) The determination shall be made: (i) By the Board of Directors, by a majority vote of a quorum which consists of directors who were not parties to the action ("non-party directors"), suit or proceeding; or if a quorum of non-party directors is not obtainable by a majority vote of a committee of at least two non-party directors; or 5 (ii) If the required quorum is not obtainable; or if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion; or (iii) By the stockholders. (3) Authorization of indemnification and determination as to reasonableness of expenses shall be made in the same manner as the determination that indemnification is permissible. However, if the determination that indemnification is permissible is made by independent legal counsel, authorization of indemnification and determination as to reasonableness of expenses shall be made by a committee of non-party directors or by the non-party quorum of the Board, or if neither exists, by the full Board. (4) Notwithstanding the provisions of paragraphs (1) and (2) of this subsection (d), no person shall be entitled to indemnification for any liability, whether or not there is an adjudication of liability, arising by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of duties as described in Sections 17(h) and (i) of the Investment Company Act of 1940, as amended ("disabling conduct"). A person shall be deemed not liable by reason of disabling conduct if, either: (i) a final decision on the merits is made by a court or other body before whom the proceeding was brought that the person to be indemnified ("indemnitee") was not liable by reason of disabling conduct; or (ii) in the absence of such a decision, a reasonable determination, based upon a review of the facts, that the indemnitee was not liable by reason of disabling conduct, is made by either-- (A) a majority of a quorum of directors who are neither "interested persons" of the Corporation, as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended, nor parties to the action, suit or proceeding, or (B) an independent legal counsel in a written opinion. (e) Expenses, including attorneys' fees, incurred by a director, officer, employee or agent of the Corporation in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition thereof if: (1) authorized in the specific case by the Board of Directors; and (2) the Corporation receives an undertaking by or on behalf of the director, officer, employee or agent of the Corporation to repay the advance if it is not ultimately determined that such person is entitled to be indemnified by the Corporation; and (3) either (i) such person provides a security for his undertaking, or (ii) the Corporation is insured against losses by reason of any lawful advances, or (iii) a determination, based on a review of readily available facts, that there is reason to believe that such person ultimately will be found entitled to indemnification, is made by either-- (A) a majority of a quorum which consists of directors who are neither "interested persons" of the Corporation, as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended, nor parties to the action, suit or proceeding, or (B) an independent legal counsel in a written opinion. (f) The indemnification provided by this Section shall not be deemed exclusive of any other rights to which a person may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding the office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and inure to the benefit of the heirs, executors and administrators of such person. (g) The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Corporation, against any liability asserted against him and 6 incurred by him in any such capacity, or arising out of his status as such. However, in no event will the Corporation pay for that portion of the premium, if any, for insurance to indemnify any officer or director against liability for any act for which the Corporation itself is not permitted to indemnify him. (h) Nothing contained in this Section shall be construed to protect any director or officer of the Corporation against any liability to the Corporation or to its security holders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. (i) Any indemnification of, or advance of expenses to, a director in accordance with this Section, if arising out of a proceeding by or in the right of the Corporation, shall be reported in writing to the shareholders with the notice of the next stockholders' meeting or prior to the meeting. ARTICLE IV COMMITTEES SECTION 4.1. Executive and Other Committees. The Board of Directors, by resolution adopted by a majority of the whole Board, may designate an Executive Committee and/or other committees, each committee to consist of two (2) or more of the directors of the Corporation and may delegate to such committees, in the intervals between meetings of the Board of Directors, any or all of the powers of the Board of Directors in the management of the business and affairs of the Corporation, except the power to: declare dividends; to issue stock or to recommend to stockholders any action requiring stockholder approval. In the absence of any member of any such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint a member of the Board of Directors to act in place of such absent member. Each such committee shall keep a record of its proceedings. The Executive Committee and any other committee shall fix its own rules or procedure, but the presence of at least fifty percent (50%) of the members of the whole committee shall in each case be necessary to constitute a quorum of the committee and the affirmative vote of the majority of the members of the committee present at the meeting shall be necessary to take action. All actions of the Executive Committee shall be reported to the Board of Directors at the meeting thereof next succeeding to the taking of such action. SECTION 4.2. Advisory Committee. The Board of Directors may appoint an advisory committee which shall be composed of persons who do not serve the Corporation in any other capacity and which shall have advisory functions with respect to the investments of the Corporation, but which shall have no power to determine that any security or other investment shall be purchased, sold or otherwise disposed of by the Corporation. The number of persons constituting any such advisory committee shall be determined from time to time by the Board of Directors. The members of any such advisory committee may receive compensation for their services and may be allowed such fees and expenses for the attendance at meetings as the Board of Directors may from time to time determine to be appropriate. SECTION 4.3. Committee Action Without Meeting. The provisions of these By-Laws covering notices and meetings to the contrary notwithstanding, and except as required by law, any action required or permitted to be taken at any meeting of any Committee of the Board appointed pursuant to Section 4.1 of these By-Laws may be taken without a meeting if a consent in writing setting forth the action shall be signed by all members of the Committee entitled to vote upon the action and such written consent is filed with the records of the proceedings of the Committee. ARTICLE V OFFICERS SECTION 5.1. Executive Officers. The executive officers of the Corporation shall be a Chairman of the Board, a President, a Chief Financial Officer, one or more Vice Presidents, a Secretary and a Treasurer. The Chairman of the Board shall be selected from among the Directors but none of the other executive officers need be a member of the Board of Directors. Two or more offices, except those of 7 President and any Vice President, may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity. The executive officers of the Corporation shall be elected annually by the Board of Directors and each executive officer so elected shall hold office until his or her successor is elected and has qualified. SECTION 5.2. Other Officers and Agents. The Board of Directors may also elect one or more Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers and may elect, or may delegate to the Chairman the power to appoint, such other officers and agents as the Board of Directors shall at any time or from time to time deem advisable. SECTION 5.3. Term and Removal and Vacancies. Each officer of the Corporation shall hold office until his or her successor is elected and has qualified. Any officer or agent of the Corporation may be removed by the Board of Directors whenever, in its judgment, the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contractual rights, if any, of the person so removed. SECTION 5.4. Compensation of Officers. The compensation of officers and agents of the Corporation shall be fixed by the Board of Directors, or by the Chairman to the extent provided by the Board of Directors with respect to officers appointed by the Chairman. SECTION 5.5. Powers and Duties. All officers and agents of the Corporation, as between themselves and the Corporation, shall have such authority and perform such duties in the management of the Corporation as may be provided in or pursuant to these By-Laws or, to the extent not so provided, as may be prescribed by the Board of Directors; provided that no rights of any third party shall be affected or impaired by any such By-Law or resolution of the Board unless such third party has knowledge thereof. SECTION 5.6. The Chairman. The Chairman shall preside at all meetings of the stockholders and of the Board of Directors and shall perform such other duties as the Board of Directors may from time to time prescribe. SECTION 5.7. The President. The President shall have general and active management of the business of the Corporation. He or she shall be the chief executive officer of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. He or she shall have such other duties as may be prescribed from time to time by the Board of Directors. The President shall be authorized to delegate to one or more Vice Presidents such of his or her powers and duties at such times and in such manner as he or she may deem advisable. SECTION 5.8. The Vice Presidents. The Vice Presidents shall be of such number and shall have such titles as may be determined from time to time by the Board of Directors. The Vice President, or, if there shall be more than one, the Vice Presidents in such order as may be determined from time to time by the Board of Directors or the Chairman, shall, in the absence or disability of the President, exercise the powers and perform the duties of the President, and shall perform such other duties as the Board of Directors or the Chairman may from time to time prescribe. SECTION 5.9. The Assistant Vice Presidents. The Assistant Vice President, or, if there shall be more than one, the Assistant Vice Presidents in such order as may be determined from time to time by the Board of Directors or the Chairman, shall perform such duties and have such powers as may be assigned them from time to time by the Board of Directors or the Chairman. SECTION 5.10. The Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the stockholders and of the Board of Directors in a book to be kept for that purpose, and shall perform like duties for the standing committees when required. He or she shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties and have such powers as the Board of Directors or the Chairman may from time to time prescribe. He or she shall keep in safe custody the seal of the Corporation and affix or cause the same to be affixed to any instrument requiring it, and, when so affixed, it shall be attested by his or her signature or by the signature of an Assistant Secretary. 8 SECTION 5.11. The Assistant Secretaries. The Assistant Secretary, or, if there shall be more than one, the Assistant Secretaries in such order as may be determined from time to time by the Board of Directors or the Chairman, shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such duties and have such other powers as the Board of Directors or the Chairman may from time to time prescribe. SECTION 5.12. The Treasurer. The Treasurer shall perform such duties as the Board of Directors or the President may from time to time prescribe. SECTION 5.13. The Assistant Treasurers. The Assistant Treasurer, or, if there shall be more than one, the Assistant Treasurers in such order as may be determined from time to time by the Board of Directors or the Chairman, shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Board of Directors or the Chairman may from time to time prescribe. SECTION 5.14. The Chief Financial Officer. The Chief Financial Officer shall keep or cause to be kept full and accurate accounts of receipts and disbursements in books belonging to the Corporation, and he or she shall render to the Board of Directors and the President, whenever any of them require it, an account of his or her transactions as Chief Financial Officer and of the financial condition of the Corporation, and he or she shall perform such other duties as the Board of Directors or the President may from time to time prescribe." SECTION 5.15. Delegation of Duties. Whenever an officer is absent or disabled, or whenever for any reason the Board of Directors may deem it desirable, the Board of Directors may delegate the powers and duties of an officer or officers to any other officer or officers or to any Director or Directors. ARTICLE VI CAPITAL STOCK SECTION 6.1. Issuance of Stock. The Corporation shall not issue its shares of capital stock except as approved by the Board of Directors. SECTION 6.2. Certificates of Stock. Certificates for shares of each class of the capital stock of the Corporation shall be in such form and of such design as the Board of Directors shall approve, subject to the right of the Board of Directors to change such form and design at any time or from time to time, and shall be entered in the books of the Corporation as they are issued. Each such certificate shall bear a distinguishing number; shall exhibit the holder's name and certify the number of full shares owned by such holder; shall be signed by or in the name of the Corporation by the President, or a Vice President or an Assistant Treasurer, and countersigned by the Secretary or an Assistant Secretary or the Treasurer of the Corporation; shall be sealed with the corporate seal; and shall contain such recitals as may be required by law. Where any stock certificate is signed by a Transfer Agent or by a Registrar, the signature of such corporate officers and the corporate seal may be facsimile, printed or engraved. The Corporation may, at its option, defer the issuance of a certificate or certificates to evidence shares of capital stock owned of record by any stockholder until such time as demand therefor shall be made upon the Corporation or its Transfer Agent, but upon the making of such demand each stockholder shall be entitled to such certificate or certificates. In case any officer or officers who shall have signed, or whose facsimile signature or signatures shall appear on, any such certificate or certificates shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates shall, nevertheless, be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures shall appear therein had not ceased to be such officer or officers of the Corporation. No certificate shall be issued for any share of stock until such share is fully paid. 9 SECTION 6.3. Transfer of Stock. Transfers of shares of the capital stock of the Corporation shall be made only on the books of the Corporation by the holder thereof, or by his attorney thereunto duly authorized by a power of attorney duly executed and filed with the Corporation or a Transfer Agent of the Corporation, if any, upon written request in proper form if no share certificate has been issued, or in the event such certificate has been issued, upon presentation and surrender in proper form of said certificate. SECTION 6.4. Record Date. The Board of Directors may fix in advance a date as the record date for the purpose of determining stockholders entitled to notice of, or to vote at, any meeting of stockholders, or stockholders entitled to receive payment of any dividend or the allotment of any rights, or in order to make a determination of stockholders for any other purpose. Such date, in any case shall be not more than ninety (90) days, and in case of a meeting of stockholders not less than ten (10) days prior to the date on which particular action requiring such determination of stockholders is to be taken. In lieu of fixing a record date the Board of Directors may provide that the stock transfer books shall be closed for a stated period but not to exceed, in any case, twenty (20) days. If the stock transfer books are closed for the purpose of determining stockholders entitled to notice of a vote at a meeting of stockholders, such books shall be closed for at least ten (10) days immediately preceding such meeting. SECTION 6.5. Lost, Stolen, Destroyed and Multilated Certificates. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon satisfactory proof of such loss, theft, or destruction; and the Board of Directors may, in its discretion, require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give to the Corporation and to such Registrar, Transfer Agent and/or Transfer Clerk as may be authorized or required to countersign such new certificate or certificates, a bond in such sum and of such type as they may direct, and with such surety or sureties, as they may direct, as indemnity against any claim that may be against them or any of them on account of or in connection with the alleged loss, theft or destruction of any such certificate. SECTION 6.6. Registered Owners of Stock. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares of stock to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares of stock, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Maryland. SECTION 6.7. Fractional Denominations. Subject to any applicable provisions of law and the Charter of the Corporation, the Corporation may issue shares of its capital stock in fractional denominations, provided that the transactions in which and the terms and conditions upon which shares in fractional denominations may be issued may from time to time be limited or determined by or under the authority of the Board of Directors. ARTICLE VII SALE AND REDEMPTION OF STOCK SECTION 7.1. Sale of Stock. Upon the sale of each share of its Common Stock, except as otherwise permitted by applicable laws and regulations, the Corporation shall receive in cash or in securities not less than the current net asset value thereof, exclusive of any distributing commission or discount, and in no event less than the par value thereof. SECTION 7.2. Redemption of Stock. Subject to and in accordance with any applicable laws and regulations and any applicable provisions of the Corporation's Articles of Incorporation, the Corporation shall redeem all outstanding shares of its capital stock duly delivered or offered for redemption by any registered stockholder in a manner prescribed by or under authority of the Board of Directors. Any shares so delivered or offered for redemption shall be redeemed at a redemption price prescribed by the Board of Directors in accordance with applicable laws and regulations; provided that in no event shall such price be less than the applicable net asset value of such shares. The Corporation shall pay redemption prices in cash. 10 ARTICLE VIII DIVIDENDS AND DISTRIBUTIONS Subject to any applicable provisions of law and the Charter of the Corporation, dividends and distributions upon the Common Stock of the Corporation may be declared at such intervals as the Board of Directors may determine, in cash, in securities or other property, or in shares of stock of the Corporation, from any sources permitted by law, all as the Board of Directors shall from time to time determine. Inasmuch as the computation of net income and net profits from the sale of securities or other properties for federal income tax purposes may vary from the computation thereof on the books of the Corporation, the Board of Directors shall have power, in its discretion, to distribute as income dividends and as capital gain distributions, respectively, amounts sufficient to enable the Corporation to avoid or reduce liability for federal income taxes. ARTICLE IX BOOKS AND RECORDS SECTION 9.1. Location. The books and records of the Corporation may be kept outside the State of Maryland at such place or places as the Board of Directors may from time to time determine, except as otherwise required by law. SECTION 9.2. Stock Ledgers. The Corporation shall maintain at the office of its Transfer Agent an original stock ledger containing the names and addresses of all stockholders and the number of shares held by each stockholder. Such stock ledger may be in written form or any other form capable of being converted into written form within a reasonable time for visual inspection. SECTION 9.3. Annual Statement. The President or a Vice President or the Treasurer shall prepare or cause to be prepared annually a full and correct statement of the affairs of the Corporation, including a statement of assets and liabilities and a statement of operations for the preceding fiscal year, which shall be submitted at the annual meeting of stockholders if such meeting be held, and shall be filed within twenty (20) days thereafter at the principal office of the Corporation in the State of Maryland. ARTICLE X WAIVER OF NOTICE Whenever any notice of the time, place or purpose of any meeting of stockholders, directors, or of any committee is required to be given under the provisions of the statute or under the provisions of the Charter of the Corporation or these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to such notice and filed with the records of the meeting, whether before or after the holding thereof, or actual attendance at the meeting of Directors or committee in person, shall be deemed equivalent to the giving of such notice to such person. ARTICLE XI MISCELLANEOUS SECTION 11.1. Seal. The Board of Directors shall adopt a corporate seal, which shall be in the form of a circle, and shall have inscribed thereon the name of the Corporation, the year of its incorporation, and the words "Corporate Seal--Maryland." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. SECTION 11.2. Fiscal Year. The fiscal year of the Corporation shall end on such date as the Board of Directors may by resolution specify, and the Board of Directors may by resolution change such date for future fiscal years at any time and from time to time. SECTION 11.3. Orders for Payment of Money. All orders or instructions for the payment of money of the Corporation, and all notes or other evidences of indebtedness issued in the name of the 11 Corporation, shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate, or as may be specified in or pursuant to the agreement between the Corporation and the bank or trust company appointed as Custodian of the securities and funds of the Corporation. ARTICLE XII COMPLIANCE WITH FEDERAL REGULATIONS The Board of Directors is hereby empowered to take such action as they may deem to be necessary, desirable or appropriate so that the Corporation is or shall be in compliance with any federal or state statute, rule or regulation with which compliance by the Corporation is required. ARTICLE XIII AMENDMENTS These By-Laws may be amended, altered, or repealed at any annual or special meeting of the stockholders by the affirmative vote of the holders of a majority of the shares of capital stock of the Corporation issued and outstanding and entitled to vote, provided notice of the general purpose of the proposed amendment, alteration or repeal is given in the notice of said meeting; or, at any meeting of the Board of Directors, by a vote of a majority of the whole Board of Directors, provided, however, that any By-Law or amendment or alteration of the By-Laws adopted by the Board of Directors may be amended, altered or repealed and any By-Law repealed by the Board of Directors may be reinstated, by vote of the stockholders of the Corporation. 12 EX-99.10 4 a2089247zex-99_10.txt EXHIBIT 99.10 CONSENT OF INDEPENDENT AUDITORS We consent to the use in this Post-Effective Amendment No. 28 to Registration Statement No. 2-64782 of Morgan Stanley High Yield Securities Inc., on Form N-1A of our report dated September 23, 2002, incorporated by reference in the Prospectus and appearing in the Statement of Additional Information, and to the references to us under the captions "Financial Highlights" in the Prospectus and "Custodian and Independent Auditors" and "Experts" in the Statement of Additional Information, both of which are part of such Registration Statement. Deloitte & Touche LLP New York, New York September 25, 2002 EX-99.16A 5 a2089247zex-99_16a.txt EXHIBIT 99.16A [MORGAN STANLEY LOGO] MORGAN STANLEY INVESTMENT MANAGEMENT CODE OF ETHICS EFFECTIVE AUGUST 16, 2002 - ---------------------------- (Print Name) The investment advisors, advisors, distribution companies and related service companies listed on the attached SCHEDULE A that operate within Morgan Stanley Investment Management (each; a "Covered Company" and collectively, "Investment Management") have adopted this Code of Ethics (the "Code"). The principal objectives of the Code are (i) to provide policies and procedures consistent with applicable law and regulation, including Rule 17j-1 under the Investment Company Act of 1940, as amended (the "1940 Act"), and Section 204 A of the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and (ii) to ensure that the personal trading and other business activities of Employees of Investment Management (defined in Section III. below) are conducted in a manner consistent with applicable law and regulation and the general principles set forth in the Code. Employees of Investment Management are also subject to the "Morgan Stanley Code of Conduct -- Securities and Asset Management Businesses" (the "Code of Conduct"). The Code of Conduct can be found on the Morgan Stanley Today intranet site at http://law.corp.msdw.com:8080/ portal/cr/code_of_conduct_securities_assetmgmt_12_7_00.pdf Employees are reminded that they are also subject to other Morgan Stanley Investment Management policies, including policies on insider trading, the receipt of gifts, the handling of all internally distributed proprietary and confidential information, Morgan Stanley Investment Management Senior Loan Firewall Procedures, and service as a director of a publicly traded company. All internally distributed information is proprietary and confidential information and should not be discussed with people outside of Morgan Stanley Investment Management or shared with anybody outside of the Investment Department. I. SUMMARY OF POLICY/PROCEDURES The Code is designed to ensure that all acts, practices and courses of business engaged in by Employees are conducted in accordance with the highest possible standards and to prevent abuses or even the appearance of abuses by Employees relating to their personal trading and other business activity. The Code accomplishes this by requiring, among other things, that Employees: - Pre-clear all personal securities transactions, including transactions in Morgan Stanley securities; - Pre-clear the opening of brokerage accounts and maintain such accounts at Morgan Stanley (exceptions may be granted in unusual circumstances by the Local Compliance Group); - Report all securities transactions on a quarterly basis; - Not enter into a personal transaction in a Covered Security (defined in Section V. below) if there is an open order to purchase or sell that Covered Security for a Fund or a Managed Account (defined in Section II. below); - Not acquire any security in an initial public offering (IPO) or any other public underwriting; - Not acquire any private placements unless special permission is obtained from the Code of Ethics Review Committee (defined in Section VI. below); 02NYC7629 1 [MORGAN STANLEY LOGO] - Not serve on the board of any company without prior approval from the Code of Ethics Review Committee; - Not sell Covered Securities at a profit unless the Covered Securities have been held for at least 60 days; - Not sell Covered Securities under any circumstances unless the Covered Securities have been held for at least 30 days; - Not purchase any Covered Security sold by the Employee within the previous 30 days; - Not purchase any Covered Security sold by the Employee within the previous sixty days if the purchase price is lower than any sale price within the 60-day period; - Report all holdings on an annual basis and certify annually that they have read and understand the provisions of the Code; - Who are portfolio managers or analysts, or who report to a portfolio manager or analyst, not trade in a security if accounts they manage trade in the same security within the 7 days prior to or 7 days following the Employee's transaction. While the provisions of the Code, including exceptions to its general provisions, are more specifically described below, each Employee should note that with respect to their personal securities transactions, compliance with the Code is a matter of understanding the basic requirements set forth above and making sure that the steps the Employee takes with respect to each personal securities transaction, and their personal investment activity in general, are in accordance with these requirements. Employees with interpretative questions or any other questions are strongly urged to consult with their Local Compliance Group prior to taking the action in question. II. GENERAL PRINCIPLES A. SHAREHOLDER AND CLIENT INTERESTS COME FIRST Every Employee owes a fiduciary duty to the shareholders of registered investment companies (each; a "Fund" and collectively, the "Funds") and to the Managed Account Clients (defined as clients other than registered investment companies including unregistered investment companies, institutional clients and individuals). This means that in every decision relating to investments, every Employee must recognize the needs and interests of the Fund shareholders and the Managed Account Clients, and be certain that at all times the interests of the Fund shareholders and other Managed Account Clients are placed ahead of any personal interest. B. AVOID ACTUAL AND POTENTIAL CONFLICTS OF INTEREST The restrictions and requirements of the Code are designed to prevent behavior, which actually or potentially conflicts, or raises the appearance of actual or potential conflict, with the interests of the Fund shareholders or the Managed Account Clients. It is of the utmost importance that the Personal Securities Transactions of Employees (defined in Section IV below) be conducted in a manner consistent with both the letter and spirit of the Code, including these principles, to ensure the avoidance of any such conflict of interest, or abuse of an individual's position of trust and responsibility. III. ACCESS PERSONS "Access Persons" shall include all directors, officers, and employees of Investment Management as well as certain other persons falling within such definition under Rule 17j-1 under the 1940 Act and such other persons that may be so deemed by each Local Compliance Group from time to time, except those persons who are not officers and directors of an investment adviser under 2 [MORGAN STANLEY LOGO] Morgan Stanley Investment Management and who meet the following criteria: (i) directors and officers of Morgan Stanley Distributors, Morgan Stanley Distribution, Morgan Stanley & Co., and Van Kampen Funds Inc. (each a "Distributor" and collectively, the "Distributors") that do not devote substantially all of their working time to the activities (including distribution activities) of an investment adviser under Morgan Stanley Investment Management; (ii) directors and officers of the Distributors that do not, in connection with their regular functions and duties, participate in, obtain information with respect to, or make recommendations as to, or purchase and sell securities on behalf of a Fund or a Managed Account Client; and (iii) directors and officers of the Distributors that do not have access to information regarding the day-to-day investment activities of Investment Management shall not be deemed Access Persons. Such persons are, however, subject to the Code of Conduct. The Local Compliance Group for each Covered Company will identify all Access Persons of Investment Management and notify them of their pre-clearance and reporting obligations at the time they become an Access Person. Access Persons will be referred to as "Employees" throughout the Code. Employees with questions concerning their status as Access Persons are urged to consult with their Local Compliance Group. IV. GROUNDS FOR DISQUALIFICATION FROM EMPLOYMENT Pursuant to the terms of Section 9 of the 1940 Act, no director, officer or employee of a Covered Company may become, or continue to remain, an officer, director or employee without an exemptive order issued by the U.S. Securities and Exchange Commission if such director, officer or employee: A. within the past ten years has been convicted of any felony or misdemeanor (i) involving the purchase or sale of any security; or (ii) arising out of their conduct as an underwriter, broker, dealer, investment adviser, municipal securities dealer, government securities broker, government securities dealer, transfer agent, or entity or person required to be registered under the U.S. Commodity Exchange Act, or as an affiliated person, salesman or employee of any investment company, bank, insurance company or entity or person required to be registered under the Commodity Exchange Act; or B. is or becomes permanently or temporarily enjoined by any court from: (i) acting as an underwriter, broker, dealer, investment adviser, municipal securities dealer, government securities broker, government securities dealer, transfer agent, or entity or person required to be registered under the U.S. Commodity Exchange Act, or as an affiliated person, salesman or employee of any investment company, bank, insurance company or entity or person required to be registered under the U.S. Commodity Exchange Act; or (ii) engaging in or continuing any conduct or practice in connection with any such activity or in connection with the purchase or sale of any security. It is your obligation to immediately report any conviction or injunction falling within the foregoing provisions to the Chief Legal or Compliance Officer of Investment Management. V. PERSONAL SECURITIES TRANSACTIONS A. PROHIBITED CONDUCT No Employee shall buy or sell any "Covered Security" (defined as all securities, including any option to purchase or sell, and any security convertible into or exchangeable for such securities, with the exception of those described in sub-section C.3. below) for his/her own account or for an account in which the individual has, or as a result of the transaction acquires, any direct or indirect "beneficial ownership" (referred to herein as a "Personal Securities Transaction") unless: 1. pre-clearance of the transaction has been obtained; and 3 [MORGAN STANLEY LOGO] 2. the transaction is reported in writing to the Local Compliance Group in accordance with the requirements below. B. RESTRICTIONS AND LIMITATIONS ON PERSONAL SECURITIES TRANSACTIONS Except where otherwise indicated, the following restrictions and limitations govern investments and personal securities transactions by Employees: 1. Covered Securities (defined in sub-section A. above) purchased may not be sold until at least 30 calendar days from the purchase trade date and may not be sold at a profit until at least 60 calendar days from the purchase trade date. Covered Securities sold may not be repurchased until at least 30 calendar days from the sale trade date. In addition, Covered Securities sold may not be purchased at a lower price until at least 60 calendar days from the sale trade date. Any violation may result in disgorgement of all profits from the transactions as well as other possible sanctions. 2. No short sales are permitted. 3. No transactions in options or futures are permitted, except that listed options may be purchased, and covered calls written. No option may be purchased or written if the expiration date is less than 60 calendar days from the date of purchase. No option position may be closed at a profit less than 60 calendar days from the date it is established. 4. No Employee may acquire any security in an initial public offering (IPO) or any other public underwriting. No Employee shall purchase shares of a registered investment company that is managed by a Covered Company if such investment company is not generally available to the public, unless the vehicle is designed for Morgan Stanley employees and there is no intention of it becoming public in the future. 5a. Private placements of any kind may only be acquired with special permission from the Code of Ethics Review Committee and, if approved, will be subject to continuous monitoring by the Local Compliance Group for possible future conflict. Any Employee wishing to request approval for private placements must complete a Private Placement Approval Request Form and submit the form to the Local Compliance Group. A copy of the Private Placement Approval Request Form, which may be revised from time to time, is attached as EXHIBIT A. Where the Code of Ethics Review Committee approves any acquisition of a private placement, its decision and reasons for supporting the decision will be documented in a written report, which is to be kept for five years by the Local Compliance Group after the end of the fiscal year in which the approval was granted. 5b. Any Employee who has a personal position in an issuer through a private placement must affirmatively disclose that interest if such person is involved in consideration of any subsequent investment decision by a Fund or Managed Account regarding any security of that issuer or its affiliate. In such event, the President or Chief Investment Officer of Investment Management shall independently determine the final investment decision. Written records of any such circumstance shall be sent to the Local Compliance Group and maintained for a period of five years after the end of the fiscal year in which the approval was granted. Restrictions 6.a. and 6.b. apply only to portfolio managers and research analysts (and all persons reporting to portfolio managers and research analysts) of Investment Management. Restriction 6.c. applies only to personnel in thetrading department of each Covered Company. 6a. No purchase or sale transaction may be made in any Covered Security by any portfolio manager or research analyst (or person reporting to a portfolio manager or research 4 [MORGAN STANLEY LOGO] analyst) for a period of 7 calendar days before or after that Covered Security is bought or sold by any Fund (other than Morgan Stanley Value-Added Market Series, Morgan Stanley Select Dimensions Investment Series -- Value-Added Market Portfolio, and Morgan Stanley index funds, or Portfolios) or any Managed Account (other than index- based Managed Accounts) for which such portfolio manager or research analyst (or person reporting to a portfolio manager or research analyst) serves in that capacity. 6b. The definition of portfolio manager shall also extend to any person involved in determining the composition of the portfolios of Funds that are UITs or who have knowledge of a composition of a UIT portfolio prior to deposit. These individuals shall not buy or sell a Covered Security within 7 calendar days before or after such Covered Security is included in the initial deposit of a UIT portfolio. 6c. No purchase or sale transaction may be made in any Covered Security traded through the appropriate Covered Company's trading desk(s) (as determined by the Local Compliance Group) by any person on that trading desk at the same time that any Fund (other than Morgan Stanley Value-Added Market Series, Morgan Stanley Select Dimensions Investment Series -- Value-Added Market Portfolio, and Morgan Stanley index funds, or Portfolios) or any Managed Account (other than index-based Managed Accounts) has a pending purchase or sale order in that same Covered Security. 6d. Any transaction by persons described in sub-sections 6.a., 6.b., and 6.c. above within such enumerated period may be required to be reversed, if applicable, and any profits or, at the discretion of the Code of Ethics Review Committee, any differential between the sale price of the Personal Security Transaction and the subsequent purchase or sale price by a relevant Fund or Managed Account during the enumerated period, will be subject to disgorgement; other sanctions may also be applied. 7. No Employee shall purchase or sell any Covered Security which to their knowledge at the time of such purchase or sale: (i) IS BEING CONSIDERED for purchase or sale by a Fund or a Managed Account; or (ii) IS BEING purchased or sold by a Fund or a Managed Account. With respect to portfolio managers and research analysts (and all persons reporting to portfolio managers and research analysts) of a Covered Company, no such persons may purchase shares of a closed-end investment company over which such person exercises investment discretion. 8. If a transaction is not executed on the day pre-clearance is granted, it is required that pre-clearance be sought again on a subsequent day (i.e., open orders, such as limit orders, good until cancelled orders and stop-loss orders, must be cleared each day until the transaction is effected). 9. Employees shall not participate in investment clubs. IMPORTANT: Regardless of the limited applicability of Restrictions 6.a., 6.b., and 6.c. each Local Compliance Group monitors all transactions by Employees in all locations in order to ascertain any pattern of conduct that may evidence actual or potential conflicts with the principles and objectives of the Code, including a pattern of front-running. The Compliance Group of each Covered Company: (i) on a quarterly basis, will provide the Boards of Directors/Trustees of the Funds it manages with a written report that describes any issues that arose during the previous quarter under the Code and, if applicable, any Funds' Sub-Adviser's Code of Ethics, including but not limited to, information about material violations and sanctions imposed in response to the material violations; and (ii) on an annual basis, will certify that each Covered Company has adopted procedures reasonably necessary to prevent its Employees from violating the Code. Also, as stated 5 [MORGAN STANLEY LOGO] elsewhere in this Code, any violation of the foregoing restrictions may result in disgorgement of all profits from the transactions as well as other possible sanctions. C. PRE-CLEARANCE REQUIREMENT 1. PROCEDURES (a) FROM WHOM OBTAINED All Employees are required to obtain pre-clearance of a Personal Securities Transaction by: (i) confirming that no open orders exist in the same or related security with the appropriate trading desk(s) (as determined by the Local Compliance Group); and (ii) having the transaction approved by the Local Compliance Group. Portfolio managers and research analysts (or persons reporting to portfolio managers or research analysts) of Investment Management seeking approval for a Personal Securities Transaction must obtain an additional approval signature from a designated Senior Portfolio Manager (prior to pre-clearance from the Local Compliance Group). Trading desk personnel at any Covered Company seeking approval for a Personal Securities Transaction must obtain an additional approval signature from their immediate supervisor prior to pre-clearance from the Local Compliance Group. A copy of the Personal Securities Transaction Approval Form, which may be revised from time to time, is attached as EXHIBIT B. Each Local Compliance Group has implemented procedures reasonably designed to monitor purchases and sales effected pursuant to these pre-clearance procedures. (b) PERMITTED BROKERAGE ACCOUNTS All securities transactions must be made through a Morgan Stanley brokerage account(1). No other brokerage accounts are permitted unless special permission is obtained from the Local Compliance Group. If an Employee maintains an account(s) outside of Morgan Stanley, that Employee must transfer his/her account(s) to a Morgan Stanley brokerage account as soon as practical (generally thirty days or less). Failure to do so will be considered a significant violation of the Code. In the event permission to maintain an outside brokerage account is granted by the Local Compliance Group, it is the responsibility of the Employee to arrange for duplicate confirmations of all securities transactions and monthly brokerage statements to be sent to the Local Compliance Group. Prior to opening a Morgan Stanley brokerage account, Employees must obtain approval from their Local Compliance Group. No Employee may open a brokerage account unless a completed and signed copy of a Morgan Stanley Employee Account Request Form is submitted to the Local Compliance Group for approval. A copy of the Morgan Stanley Employee Account Request Form, which may be revised from time to time, is attached as EXHIBIT C. After account has been opened, Employees are responsible for reporting their Morgan Stanley account number to the Local Compliance Group. (c) PERSONAL SECURITIES TRANSACTION APPROVAL FORM Pre-clearance must be obtained by completing and signing the Personal Securities Transaction Approval Form, provided for that purpose, and obtaining the proper pre- - ------------------------ (1) Morgan Stanley brokerage account shall mean an account with an affiliated Morgan Stanley broker in the Employee's local jurisdiction. 6 [MORGAN STANLEY LOGO] clearance signatures. The Approval Form must also indicate, as applicable, the name of the individual's financial advisor, the branch office numbers, as well as other required information. If an Employee has more than one account under his/her control, the Employee must indicate for which account the trade is intended on the Personal Securities Transaction Approval Form. Employees are required to have duplicate copies of their trade confirms and account statements (which can be electronically transmitted) sent to the Local Compliance Group for each account the Employee has, or as a result of the transaction acquires, any direct or indirect beneficial ownership (as defined in sub-section C.4. below). (d) FILING After all required signatures are obtained, the Personal Securities Transaction Approval Form must be filed with the Local Compliance Group by noon of the day following execution of the trade for filing in the respective individual's Code of Ethics file. The Employee should retain a copy for his/her records. (The Local Compliance Group will also retain a copy of the form if a pre-clearance request is denied.) 2. FACTORS CONSIDERED IN PRE-CLEARANCE OF PERSONAL SECURITIES TRANSACTIONS In reviewing any trade for approval, the following factors, among others, will generally be considered in determining whether or not to clear a proposed transaction: (a) Whether the amount or the nature of the transaction, or the person making it, is likely to affect the price or market of security that is held by a Fund or a Managed Account Client. (b) Whether the purchase or sale transaction of the Covered Security by the Employee: (i) IS BEING CONSIDERED for purchase or sale by a Fund or a Managed Account; or (ii) IS BEING purchased or sold by a Fund or a Managed Account Client. (c) Whether the individual making the proposed purchase or sale is likely to benefit from purchases or sales being made or considered on behalf of any Fund or a Managed Account Client. (d) Whether the transaction is non-volitional on the part of the individual. (e) Whether the transaction is conducted in a manner that is consistent with the Code to avoid any potential for appearance of impropriety. In addition to the requirements set forth in the Code, the Local Compliance Group and/or, if applicable, designated Senior Portfolio Manager/immediate trading room supervisor (as appropriate), in keeping with the general principles and objectives of the Code, may refuse to grant pre-clearance of a Personal Securities Transaction in their sole discretion without being required to specify any reason for the refusal. 3. EXEMPT SECURITIES (a) The securities listed below are exempt from: (i) the restrictions of Section V., sub-sections B.1. , B.6. and B.7.; (ii) the pre-clearance requirements; and (iii) the initial, quarterly and annual reporting requirements. Accordingly, it is not necessary to obtain pre-clearance for Personal Securities Transactions in any of the following securities, nor is it necessary to 7 [MORGAN STANLEY LOGO] report such securities in the quarterly transaction reports or the initial and annual securities holdings list: (i) Direct obligations of the United States Government(2); (ii) Bank Certificates of Deposit; (iii) Bankers' Acceptances; (iv) Commercial Paper; (v) High Quality Short-Term Debt Instruments (which for these purposes are repurchase agreements and any instrument that has a maturity at issuance of less than 366 days that is rated in one of the two highest categories by a Nationally Recognized Statistical Rating Organization); and (vi) Shares of open-end investment companies (mutual funds). (Exchange Traded Funds ("ETFs") and Closed-end funds must be pre-cleared and are subject to all other reporting requirements.) (b) Transactions in redeemable Unit Investment Trusts are exempt from the restrictions contained in Section V., sub-sections B.1. , B.6. and B.7 and the pre-clearance requirement of Section V., sub-section C., but are subject to the initial, quarterly and annual reporting requirements of Section V. , sub-section D. (c) All Employees wishing to participate in an issuer's direct stock purchase plan or automatic dividend reinvestment plans must submit a memorandum to the Local Compliance Group stating the name and the amount to be invested in the plan. Any sale transactions from an automatic dividend reinvestment plan must be pre-approved. Purchases under an issuer's direct stock purchase plan or automatic dividend reinvestment plan are exempt from the restrictions contained in sub-sections B.1. , B.6. and B.7. and the pre-clearance requirement but are subject to the initial, quarterly and annual reporting requirements. (d) Holdings and transactions in MWD stock(3) are subject to the initial, quarterly and annual reporting requirements as well as the 30-day holding period restriction and the 60-day short swing profit restriction and the pre-clearance requirements described above. The restrictions imposed by Morgan Stanley on Senior Management and other persons in connection with transactions in MWD stock are in addition to this Code, and must be observed to the extent applicable. Employees are required to read the Code of Conduct for a listing of specific restrictions and limitations relating to the purchase or sale of MWD stock. (e) Employees may maintain fully discretionary accounts managed by either an internal or external registered investment adviser provided that each of the following conditions are met: (i) the investment program is offered by Morgan Stanley; (ii) the portfolio manager's strategy/ investment discipline/investment program offered/utilized is the same for both Employee and non-Employee client accounts; (iii) written permission is obtained from the Director of Compliance and the Chief Investment Officer (or their designees) prior to opening a fully discretionary account; (iv) written certification is obtained stating that there will be no communication between the portfolio manager and the Employee with regard to investment decisions prior to execution; and (v) Employee accounts will be treated no differently from - ------------------------ (2) Includes securities that carry full faith and credit of the U.S. government for the timely payment of principal and interest, such as Ginnie Maes, U.S. Savings Bonds, and U.S. Treasuries. (3) In connection with the sale of MWD stock, periodic purchases through employer sponsored equity purchase plans shall not be looked to in calculating the 30-day holding period restriction or the 60-day short swing profit restriction. 8 [MORGAN STANLEY LOGO] non-Employee accounts. The Employee must designate duplicate copies of trade confirmations and monthly statements to be sent to the Compliance Department. To the extent that an Employee directs trades for tax purposes, that Employee shall obtain pre-clearance for each transaction from his/her Local Compliance Group. 4. ACCOUNTS COVERED An Employee must obtain pre-clearance for any Personal Securities Transaction if such Employee has, or as a result of the transaction acquires, any direct or indirect beneficial ownership in the security. The term "beneficial ownership" shall be interpreted with reference to the definition contained in the provisions of Section 16 of the Securities Exchange Act of 1934. Generally, a person is regarded as having beneficial ownership of securities held in the name of: (a) the individual; or (b) a husband, wife or a minor child; or (c) a relative sharing the same house; or (d) other person if the Employee: (i) obtains benefits substantially equivalent to ownership of the securities; (ii) can obtain ownership of the securities immediately or at some future time; or (iii) can have investment discretion or otherwise can exercise control. The following circumstances constitute Beneficial Ownership by an Employee of securities held by a trust: (a) Ownership of securities as a trustee where either the Employee or members of the Employee's immediate family have a vested interest in the principal or income of the trust. (b) Estate or trust accounts in which the Employee has the power to effect investment decisions, unless a specific exemption is granted. (c) Any Employee who is a settlor of a trust is required to comply with all the provisions of the Code, unless special exemption in advance is granted by the Local Compliance Group and: (i) the Employee does not have any direct or indirect beneficial interest in the trust; (ii) the Employee does not have the direct or indirect power to effect investment decisions for the trust, and (iii) the consent of all the beneficiaries is required in order for the Employee to revoke the trust. It is the responsibility of the Employee to arrange for duplicate confirmations of all securities transactions and monthly statements to be sent to the Local Compliance Group. The final determination of beneficial ownership is a question to be determined in light of the facts of each particular case. If there are any questions as to beneficial ownership, please contact your Local Compliance Group. 5. EXEMPTION FROM PRE-CLEARANCE REQUIREMENT Pre-clearance is not required for any account where the Employee does not have direct or indirect beneficial ownership. In case of doubt as to whether an account is covered by the Code, Employees must consult with their Local Compliance Group. 9 [MORGAN STANLEY LOGO] D. REPORT OF TRANSACTIONS 1. TRANSACTIONS AND ACCOUNTS COVERED (a) All Personal Securities Transactions in Covered Securities must be reported in the next quarterly transaction report after the transaction is effected. The quarterly report shall contain the following information: (i) The date of the transaction, the title, interest rate and maturity date (if applicable), number of shares and principal amount of each security involved; (ii) The nature of the transaction (i.e., purchase, sale, or any other type of acquisition or disposition); (iii) The price at which the purchase or sale was effected; (iv) The name of the broker, dealer, or bank with, or through which, the purchase or sale was effected; and (v) The date the report was submitted to the Local Compliance Group by such person. In addition, any new brokerage account(s) opened during the quarter without approval from the Local Compliance Group as well as the date(s) the account(s) was (were) opened must be reported. The report must contain the following information: (i) The name of the broker, dealer, or bank with whom the account was established; (ii) The date the account was established; and (iii) The date the report was submitted to the Local Compliance Group. (b) An Employee need not make a quarterly transaction report if he/she: (i) maintains only a Morgan Stanley brokerage account and the report would duplicate information contained in the broker trade confirms, system generated reports or account statements received by the Local Compliance Group; and (ii) has not opened any new brokerage accounts or mutual fund accounts with brokerage facilities without obtaining approval from their Local Compliance Group during the quarter. 2. TIME OF REPORTING (a) INITIAL LISTING OF SECURITIES HOLDINGS AND BROKERAGE ACCOUNTS REPORT Each Employee must provide an Initial Listing of Securities Holdings and Brokerage Accounts Report to their Local Compliance Group disclosing: (i) all Covered Securities, including private placement securities, beneficially owned by the Employee listing the title of the security, number of shares held, and principal amount of the security; (ii) the name of the broker dealer or financial institution where the Employee maintains a personal account; and (iii) the date the report is submitted by the Employee. New Access Persons will be required to provide a listing as of the date such person becomes an Access Person of all holdings in Covered Securities and all outside brokerage accounts and mutual fund accounts with brokerage facilities. This report must be provided no later than 10 calendar days after a person becomes an Access Person. (b) QUARTERLY SECURITIES TRANSACTIONS AND NEW BROKERAGE ACCOUNT(S) REPORTS Quarterly Securities Transactions and New Brokerage Account(s) Reports must be submitted by Employees within 10 calendar days after the end of each calendar quarter. Any new brokerage account(s) opened during the quarter without their Local Compliance 10 [MORGAN STANLEY LOGO] Group's prior approval, as well as the date(s) the account(s) was (were) opened, must be reported within 10 calendar days after the end of each calendar quarter. (c) ANNUAL LISTING OF SECURITIES HOLDINGS REPORTS AND CERTIFICATION OF COMPLIANCE The Annual Listing of Securities Holdings Report and Certification of Compliance requires all Employees to provide an annual listing of holdings of: (i) all Covered Securities beneficially owned, listing the title of the security, number of shares held, and principal amount of the securityas of December 31 of the preceding year, (ii) the name of any broker dealer or financial institution where the account(s) in which Covered Securities were maintained, as of December 31 of the preceding year; and (iii) the date the report is submitted. This report must be provided no later than 30 calendar days after December 31 each year. In the case of Employees maintaining Morgan Stanley brokerage accounts for which broker trade confirms, system generated reports or account statements are already received on a quarterly basis by the Local Compliance Group, an annual certification (Certification of Compliance) that the holdings information already provided to the Local Compliance Group accurately reflects all such holdings will satisfy the aforementioned requirement. 3. FORM OF REPORTING The Initial Listing of Securities Holdings and Brokerage Accounts Report, Quarterly Securities Transactions and New Brokerage Account(s) Reports, and the Annual Listing of Securities Holdings Report and Certification of Compliance must be completed on the appropriate forms, attached as EXHIBITS D, E, AND F respectively, which would be provided by each Local Compliance Group. By not submitting a quarterly transaction report form, an Employee will be deemed to have represented that such person has: (i) executed reportable transactions only in accounts listed with the Local Compliance Group; or (ii) only traded securities exempt from the reporting requirements. Copies of the Initial Listing of Securities Holdings Report and Brokerage Accounts Report, Quarterly Securities Transactions and New Brokerage Account(s) Reports, and the Annual Listing of Securities Holdings Report and Certification of Compliance, which may be revised from time to time, are attached as EXHIBITS D, E, AND F, respectively. 4. RESPONSIBILITY TO REPORT The responsibility for reporting is imposed on each individual required to make a report. Any effort by a Covered Company to facilitate the reporting process does not change or alter that individual's responsibility. 5. LEAVE OF ABSENCE Employees on leave of absence may not be subject to the pre-clearance and reporting provisions of the Code, provided that, during their leave period, they: (i) do not participate in, obtain information with respect to, make recommendations as to, or make the purchase and sale of securities on behalf of a Fund or a Managed Account Client; and (ii) do not have access to information regarding the day-to-day investment activities of Investment Management. 6. WHERE TO FILE REPORT All reports must be filed by Employees with their Local Compliance Group. 11 [MORGAN STANLEY LOGO] 7. RESPONSIBILITY TO REVIEW Each Local Compliance Group will review all Initial Listing of Securities Holdings and Brokerage Accounts Reports, Quarterly Securities Transactions and New Brokerage Account(s) Reports, and Annual Listing of Securities Holdings Reports and Certification of Compliance, filed by Employees, as well as broker confirmations, system generated reports, and account statements. VI. REVIEW COMMITTEE A Code of Ethics Review Committee, consisting of the President/Chief Operating Officer, Chief Investment Officer, Chief Legal Officer, and the Chief Administrative Officer -- Investments of Morgan Stanley Investment Management or their designees will review and consider any proper request of an Employee for relief or exemption from any restriction, limitation or procedure contained herein consistent with the principles and objectives outlined in this Code. The Committee shall meet on an ad hoc basis, as it deems necessary, upon written request by an Employee stating the basis for the requested relief. The Committee's decision is within its sole discretion. VII. SERVICE AS A DIRECTOR No Employee may serve on the board of any company without prior approval of the Code of Ethics Review Committee. If such approval is granted, it will be subject to the implementation of information barrier procedures to isolate any such person from making investment decisions for Funds or Managed Accounts concerning the company in question. VIII. GIFTS No Employee shall accept directly or indirectly anything of value, including gifts and gratuities, in excess of $100 per year from any person or entity that does business with any Fund or Managed Account, not including occasional meals or tickets to theater or sporting events or other similar entertainment.(4) IX. SANCTIONS Upon discovering a violation of this Code, Investment Management may impose such sanctions as they deem appropriate, including a reprimand (orally or in writing), demotion, suspension or termination of employment and/or other possible sanctions. The President/Chief Operating Officer of Investment Management and the Chief Legal Officer or Compliance Officer together, are authorized to determine the choice of sanctions to be imposed in specific cases, including termination of employment. X. EMPLOYEE CERTIFICATION Employees are required to sign a copy of this Code indicating their understanding of, and their agreement to abide by the terms of this Code. In addition, Employees will be required to certify annually that: (i) they have read and understand the terms of this Code and recognize the responsibilities and obligations incurred by their being subject to this Code; and (ii) they are in compliance with the requirements of this Code, including - ------------------------ (4) For MSAITM-Tokyo, the receipt of gifts shall not be in excess of Y20,000 per year. For MSIM- Mumbai, the receipt of gifts shall not be in excess of INR 4,500. For MSIM-Singapore, the receipt of gifts shall not be in excess of SGD 170. For MSIM-Ltd, the receipt of gifts shall not be in excess of Europe L50 or equivalent. 12 [MORGAN STANLEY LOGO] but not limited to the reporting of all brokerage accounts, and the pre-clearance of all non-exempt Personal Securities Transactions in accordance with this Code. I have read and understand the terms of the above Code. I recognize the responsibilities and obligations, including but not limited to my quarterly transaction, annual listing of holdings, and initial holdings reporting obligations (as applicable), incurred by me as a result of my being subject to this Code. I hereby agree to abide by the above Code. - ------------------------------------- ------------------------------------- (Signature) (Date) - ------------------------------------- (Print name)
MORGAN STANLEY INVESTMENT MANAGEMENT CODE OF ETHICS DATED: AUGUST 16, 2002 13 [MORGAN STANLEY LOGO] SCHEDULE A MORGAN STANLEY INVESTMENT ADVISORS INC. ("ADVISORS") MORGAN STANLEY INVESTMENT MANAGEMENT INC. ("MSIM") MORGAN STANLEY INVESTMENT GROUP INC. ("MSIG") MORGAN STANLEY INVESTMENT MANAGEMENT LIMITED ("MSIM-LTD.") MORGAN STANLEY INVESTMENT MANAGEMENT COMPANY ("MSIM-SINGAPORE") MORGAN STANLEY ASSET & INVESTMENT TRUST MANAGEMENT CO., LIMITED ("MSAITM-TOKYO") MORGAN STANLEY INVESTMENT MANAGEMENT PRIVATE LIMITED ("MSIM MUMBAI") MORGAN STANLEY INVESTMENTS LP ("MSI-LP") MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP ("AIP-LP") MORGAN STANLEY AIP GP LP ("AIP GP-LP") MORGAN STANLEY SERVICES COMPANY INC. ("SERVICES") MORGAN STANLEY DISTRIBUTORS INC. ("MORGAN STANLEY DISTRIBUTORS") MORGAN STANLEY DISTRIBUTION, INC. ("MORGAN STANLEY DISTRIBUTION") MORGAN STANLEY & CO. INCORPORATED ("MORGAN STANLEY & CO.") VAN KAMPEN INVESTMENT ADVISORY CORP. ("VKIAC") VAN KAMPEN ASSET MANAGEMENT INC. ("VKAM") VAN KAMPEN ADVISORS INC. ("VK ADVISORS") VAN KAMPEN INVESTMENTS, INC. ("VK INVESTMENTS") VAN KAMPEN FUNDS INC. ("VK FUNDS") 14 EX-99.16B 6 a2089247zex-99_16b.txt EXHIBIT 99.16B MORGAN STANLEY ASSET MANAGEMENT CODE OF ETHICS FOR REGISTERED INVESTMENT COMPANIES I. INTRODUCTION This Code of Ethics (the "Code") applies to the registered investment companies (each, a "Fund" and collectively, the "Funds") advised or managed by any affiliate of Morgan Stanley (Morgan Stanley), except for any investment company (i) for which Van Kampen Asset Management, Inc. acts as Investment Adviser or Investment Manager or (ii) that is sub-advised, but not advised by, an advisory affiliate of Morgan Stanley, in compliance with Rule 17j-1 promulgated by the Securities and Exchange Commission ("SEC") under the Investment Company Act of 1940, as amended (the "1940 Act"). This Code covers all persons who are "Access Persons" of the Funds, as that term is defined in Rule 17j-1. To the extent that any such individuals are subject to compliance with the Code of Ethics of the Funds' Investment Adviser(s) or Investment Manager(s) (any such entity may be referred to as an "Investment Adviser"), and/or Sub-Adviser(s), as applicable, whose Codes have also been established pursuant to Rule 17j-1, compliance by such individuals with the provisions of the Code of the applicable Investment Adviser shall constitute compliance with this Code. The Code will only be effective for a Fund upon its adoption by that Fund's Board of Directors or Trustees pursuant to Rule 17j-1. II. PERSONAL TRANSACTIONS A. REPORTS OF TRANSACTIONS - INDEPENDENT DIRECTORS/TRUSTEES A director or trustee of a Fund who is not an "interested person" of the Fund within the meaning of section 2(a)(19) of the 1940 Act ("an Independent Director/Trustee") shall report quarterly to the Fund any personal transaction in a security if he or she knows or in the course of his/her duties as a Director/Trustee of the Fund, should have known that: the Fund has purchased or sold the same security, or the Fund's Investment Adviser considered purchasing or selling the same security, during the 15 day period immediately before or after the Director/Trustee's transaction in the same security. B. REPORTS OF TRANSACTIONS, BROKERAGE ACCOUNTS AND HOLDINGS - ACCESS PERSONS WHO ARE NOT INDEPENDENT DIRECTORS/TRUSTEES An Access Person who is not an Independent Director/Trustee of a Fund shall report all non-exempt securities transactions and new brokerage accounts on a quarterly basis. An Access Person who is not an Independent Director/Trustee of a Fund shall provide annually: (i) a listing of holdings of all securities beneficially owned as of December 31 of the preceding year, except securities exempt from reporting under Section II(D)(2) hereof, listing the title of the security, number of shares held, and principal amount of the security, (ii) the name of any broker dealer or financial institution where an account was maintained, as of December 31 of the preceding year (a current listing will also be required upon the effectiveness of this Code) and (iii) the date the Report is submitted by the Access Person. An Access Person who is not an Independent Director/Trustee of a Fund must obtain approval from the Fund before directly or indirectly acquiring beneficial ownership in any securities in an initial public offering or in a limited offering. The information must be current as of a date not more than 30 days before the report is submitted. New Access Persons who are not Independent Directors/Trustees of a Fund will be required to provide a listing of all non-exempt securities holdings, with the information set forth above, as of the date of commencement of employment as well as a listing of all outside brokerage accounts no later than ten days after that person becomes an Access Person. C. REPORTS OF TRANSACTIONS, BROKERAGE ACCOUNTS AND HOLDINGS - GENERAL Any quarterly report required under Section II(A) or (B) above must be made within ten days after the end of the calendar quarter in which the personal transaction occurred. The report may be made on the form provided by the applicable Fund's Investment Adviser or may consist of a broker statement that provides at least the same information. In the event that the Investment Adviser already maintains a record of the required information, an Access Person may satisfy this requirement by (i) confirming in writing (which may include e-mail) the accuracy and completeness of the record and disclosing the beneficial ownership of securities (if any) not listed on the account statement and (ii) recording the date of the confirmation. Copies of the Investment Advisers' forms, which may be revised at any time, are attached. The Compliance Group of a Fund's Investment Adviser will identify and advise all Access Persons of the Fund, including the Independent Directors/Trustees, subject to the reporting requirement under (A) or (B) above, of their reporting requirement. Each report required under Section II(A) or (B) above will be submitted for review by the applicable Compliance Group of the Investment Adviser. D. DEFINITIONS AND EXEMPTIONS (1) DEFINITIONS For purposes of this Code the term "personal transaction" means the purchase or sale, or other acquisition or disposition, of a security for the account of the individual making the transaction or for an account in which he or she has, or as a result of the transaction acquires, any direct or indirect beneficial ownership in a security. The term "beneficial ownership" shall be interpreted with reference to the definition contained in the provisions of Section 16 of the Securities Exchange Act of 1934, as amended. Generally, under Section 16, a person is regarded as having beneficial ownership of securities held in the name of: (a) the individual; or (b) a husband, wife or a minor child; or (c) a relative sharing the same household; or (d) other person if the Access Person: (i) obtains benefits substantially equivalent to ownership of the securities; or (ii) can obtain ownership of the securities immediately or at some future time. The term "Access Person" is defined by Rule 17j-1 under the 1940 Act as (i) any director, officer, or general partner of a fund or of a fund's investment adviser, or any employee of a fund or of a fund's investment adviser (or of any company in a Control relationship to the Fund or investment adviser) who, in connection with his or her regular functions or duties, participates in the selection of a fund's portfolio securities or who has access to information regarding a fund's future purchases or sales of portfolio securities; or (ii) any director, officer, or general partner of a principal underwriter who in the ordinary course of business, makes, participates in or obtains information regarding, the purchase or sale of securities for the fund for which the principal underwriter acts, or whose functions or duties in the ordinary course of business relate to the making of any recommendation to the fund regarding the purchase or sale of securities. (2) EXEMPTIONS No report is required for a personal transaction in any of the following securities: (i) U.S. Government Securities; (ii) Bank Certificates of Deposit; (iii) Bankers' Acceptances; (iv) Commercial Paper; (v) U.S. Government Agency Securities; (vi) High Quality Short-Term Instruments (including repurchase agreements); and (vi) Open-end registered investment companies (mutual funds). Also, no report is required with respect to (i) any account over which the access person has no influence or control. III. CODE VIOLATIONS Any officer of a Fund who discovers a violation or apparent violation of this Code by an Access Person shall bring the matter to the attention of the Chief Executive Officer or General Counsel of the Fund who shall then report the matter to the Board of Directors or the Board of Trustees, as the case may be, of the Fund. The Board shall determine whether a violation has occurred and, if it so finds, may impose such sanctions, if any, as it considers appropriate. IV. ADMINISTRATION OF CODE OF ETHICS No less frequently than annually the Board of Directors or the Board of Trustees of each of the Funds shall be provided with a written report by each of the Funds and the applicable Investment Advisers (and, if applicable, the Sub-Adviser(s)), that describes any new issues arising under the Code, including information on material violations of the Code of Ethics or procedures and sanctions imposed, and certifies that each Fund and the Investment Advisers (and, if applicable, the Sub-Adviser(s)) have adopted procedures reasonably necessary to prevent Access Persons from violating the Code of Ethics. -----END PRIVACY-ENHANCED MESSAGE-----