<PAGE>
THE MORGAN STANLEY HIGH YIELD FUND, INC.
- --------------------------------------------------
OFFICERS AND DIRECTORS
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS James W. Grisham
Frederick B. Whittemore VICE PRESIDENT
VICE-CHAIRMAN OF THE BOARD OF DIRECTORS Michael F. Klein
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND DIRECTOR Harold J. Schaaff, Jr.
Peter J. Chase VICE PRESIDENT
DIRECTOR Joseph P. Stadler
John W. Croghan VICE PRESIDENT
DIRECTOR Valerie Y. Lewis
David B. Gill SECRETARY
DIRECTOR James R. Rooney
Graham E. Jones TREASURER
DIRECTOR Belinda A. Brady
John A. Levin ASSISTANT TREASURER
DIRECTOR
- --------------------------------------------------
INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
- ---------------------------------------------------------
CUSTODIANS
Morgan Stanley Trust Company (International)
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank (Domestic)
770 Broadway
New York, New York 10003
- ---------------------------------------------------------
SHAREHOLDER SERVICING AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 278-4353
- ---------------------------------------------------------
LEGAL COUNSEL
Rogers & Wells
200 Park Avenue
New York, New York 10166
- ---------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
- ---------------------------------------------------------
For additional Fund information, including the Fund's net asset value per share
and information regarding the investments comprising the Fund's portfolio,
please call 1-800-221-6726.
----------
THE
MORGAN STANLEY
HIGH YIELD
FUND, INC.
----------
SEMI-ANNUAL REPORT
JUNE 30, 1996
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------
For the six months ended June 30, 1996, The Morgan Stanley High Yield Fund, Inc.
(the "Fund") had a total return, based on net asset value per share, of 3.46%
compared to 3.75% for the CS First Boston High Yield Index. For the period since
the Fund's commencement of operations on November 30, 1993 through June 30,
1996, the Fund's total return, based on net asset value per share, was 23.23%
compared with 22.13% for the Index. On June 28, 1996, the closing price of the
Fund's shares on the New York Stock Exchange was 13 5/8, representing a 1.8%
premium to the Fund's net asset value per share.
Helping the Fund in the quarter were our paper industry overweighting, specific
securities which performed particularly well (including Marvel, Revlon and Six
Flags) and our emerging markets investments. Offsetting factors included the
underperformance of our cable investments, where spreads widened in the quarter,
and specific securities which performed poorly, including Home Holding.
During the second quarter of 1996, we made incremental changes to industry
exposures. We added to our cable holdings, believing that cable television bonds
represent the best value in the higher quality sector of the high yield bond
market, and that this overweighting will benefit future performance. We also
added to diversified media companies, including Viacom and Time Warner.
A new investment in the second quarter was ALPS 96-1. This is an airline lease
securitization where the aircraft and related leases were sold in securitized
form by GPA, the lessor. We purchased a BB-rated security in this transaction
where we thought the trade-off between portfolio collateralization levels and
expected return was the most attractive.
We also continued to maintain an exposure in U.S. dollar-denominated emerging
markets bonds. Increasingly, our investments take the form of non-U.S.
companies, rather than in emerging markets sovereign debt. For these corporate
credits, a combination of sovereign risk analysis and our traditional high yield
credit work offers the potential to uncover attractive values.
The high yield market has performed extremely well year-to-date compared to high
quality bonds. Credit spreads have tightened meaningfully, with strong economic
growth and favorable trends in credit quality making for an extremely supportive
environment. Looking ahead, we are being somewhat more cautious with regard to
overall credit quality. While we expect continued favorable returns from high
yield bonds, the market may be somewhat more vulnerable to signs of economic
weakness or to an equity market correction.
Sincerely,
[SIGNATURE]
Warren J. Olsen
PRESIDENT AND DIRECTOR
[SIGNATURE]
Robert Angevine
PORTFOLIO MANAGER
July 22, 1996
2
<PAGE>
The Morgan Stanley High Yield Fund, Inc.
Investment Summary as of June 30, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION (UNAUDITED)
TOTAL RETURN (%)
------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (1)(3)
---------------------- ---------------------- ----------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
<S> <C> <C> <C> <C> <C> <C>
---------------------- ---------------------- ----------------------
FISCAL YEAR TO DATE 11.45% -- 3.46% -- 3.75% --
ONE YEAR 20.91 20.91% 12.78 12.78% 9.95 9.95%
SINCE INCEPTION* 25.39 9.15 23.23 8.42 22.13 8.04
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
A BAR CHART REFLECTING THE DATA BELOW IS REFLECTED HERE.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31: SIX MONTHS
<S> <C> <C> <C> <C>
1993* 1994 1995 Ended 6/30/96 (Unaudited)
Net Asset Value Per Share $ 14.10 $ 11.96 $ 13.63 $ 13.39
Market Value Per Share $14.75 $11.38 $12.88 $13.63
Premium/(Discount) 4.6% -4.8% -5.5% 1.8%
Income Dividends - $1.37 $1.27 $0.70
Fund Total Return (2) 0.00% -5.53% 26.07% 3.46%
Index Total Return
(1)(3)** 1.26% -0.98% 17.39% 3.75%
</TABLE>
(1)Assumes dividends and distributions, if any, were reinvested.
(2)Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. These percentages are not an indication of the performance of a
shareholder's investment in the Fund based on market value due to differences
between the market price of the stock and the net asset value per share of
the Fund.
(3)The CS First Boston High Yield Index is an unmanaged index of high yield
corporate bonds.
* The Fund commenced operations on November 30, 1993.
** Unaudited.
3
<PAGE>
The Morgan Stanley High Yield Fund, Inc.
Investment Summary as of June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Debt Securities 92.9%
Short-Term Investments 5.2%
Equity Securities 1.9%
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Broadcast -- Radio & Television 14.9%
Chemicals 5.4%
Collateralized Mortgage Obligations 5.6%
Entertainment & Leisure 3.7%
Food Service & Lodging 8.1%
Foreign Government Bonds 6.8%
Multi-Industry 8.6%
Packaging & Container 4.2%
Retail - General 3.9%
Telecommunications 6.0%
Other 32.8%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
----------
<C> <S> <C>
1. IMC Global, Inc. 4.1%
2. Lenfest Communications 3.5
3. Republic of Argentina Debt 2.8
4. DR Securitized Lease Trust 2.7
5. Republic of Brazil Debt 2.4
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
----------
<C> <S> <C>
6. Comcast Corp. 2.3%
7. Southland Corp. 2.3
8. First PV Funding 2.2
9. La Quinta Inns, Inc. 2.2
10. Jet Equipment Trust 2.1
---
26.6%
---
---
</TABLE>
4
<PAGE>
FINANCIAL STATEMENTS
- ---------
STATEMENT OF NET ASSETS (UNAUDITED)
(Showing Percentage of Total Value of Investments)
- ---------
JUNE 30, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ----------------------------------------------------------------------------------
- -------------
CORPORATE BONDS AND NOTES (78.0%)
- ----------------------------------------------------------------------------------
- -------------
AEROSPACE & DEFENSE (2.1%)
Jet Equipment Trust
11.44%, 11/1/14 $ 1,100 $ 1,207
'C1' 11.79%, 6/15/13 1,500 1,684
--------------
2,891
--------------
BROADCAST -- RADIO & TELEVISION (14.9%)
Cablevision Systems Corp.
9.875%, 5/15/06 2,050 1,973
Comcast Cellular
'A' Zero Coupon, 3/5/00 200 138
'B' Zero Coupon, 3/5/00 1,695 1,165
Comcast Corp.
9.375%, 5/15/05 900 869
++9.50%, 1/15/08 1,000 968
++Continental Cablevision, Inc.
9.50%, 8/1/13 2,085 2,262
Lenfest Communications
++8.375%, 11/1/05 4,525 4,140
10.50%, 6/15/06 660 663
*Marcus Cable Co.
0.00%, 12/15/05 4,640 2,865
Rogers Cablesystems 'B'
10.00%, 3/15/05 2,800 2,772
++Viacom, Inc.
8.00%, 7/7/06 2,950 2,699
--------------
20,514
--------------
BUSINESS SERVICES (1.9%)
ADT Operations
9.25%, 8/1/03 2,500 2,591
--------------
CHEMICALS (5.4%)
Exide Corp. (Convertible)
2.90%, 12/15/05 245 134
Harris Chemical
10.25%, 7/15/01 1,590 1,594
IMC Global, Inc.
9.25%, 10/1/00 500 513
++10.125%, 6/15/01 2,000 2,117
9.45%, 12/15/11 3,000 3,060
--------------
7,418
--------------
COMPUTERS (1.8%)
++Unisys Corp.
12.00%, 4/15/03 2,490 2,530
--------------
DIVERSIFIED (1.3%)
Valcor Inc.
9.625%, 11/1/03 2,000 1,857
--------------
ENERGY (0.9%)
++Nuevo Energy Co.
9.50%, 4/15/06 1,310 1,294
--------------
- ----------------------------------------------------------------------------------
- -------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ----------------------------------------------------------------------------------
- -------------
ENTERTAINMENT & LEISURE (1.8%)
#*Six Flags Theme Parks Inc. 'A'
0.00%, 6/15/05 $ 2,850 $ 2,426
--------------
ENVIRONMENTAL CONTROLS (1.2%)
#*Norcal Waste Systems Inc.
12.75%, 11/15/05 1,600 1,684
--------------
FINANCIAL SERVICES (2.0%)
++APP International Finance
11.75%, 10/1/05 1,960 2,024
Homeside, Inc.
11.25%, 5/15/03 670 692
--------------
2,716
--------------
FOOD (1.4%)
Big V Supermarkets, Inc. 'B'
11.00%, 2/15/04 665 621
++Smith's Food & Drug Center, Inc.
11.25%, 5/15/07 1,300 1,316
--------------
1,937
--------------
FOOD SERVICE & LODGING (8.1%)
Courtyard By Marriott 'B'
10.75%, 2/1/08 2,770 2,708
++Host Marriott Travel
9.50%, 5/15/05 2,835 2,718
La Quinta Inns, Inc.
9.25%, 5/15/03 2,920 2,986
Pilgrim's Pride Corp.
10.875%, 8/1/03 2,900 2,788
--------------
11,200
--------------
GAMING & LODGING (1.5%)
Grand Casinos
10.125%, 12/1/03 190 195
Louisiana Casino Cruise
11.50%, 12/1/98 335 285
Trump Atlantic City
11.25%, 5/1/06 1,595 1,599
--------------
2,079
--------------
INSURANCE (2.6%)
++Home Holdings, Inc.
8.625%, 12/15/03 2,445 1,589
++Reliance Group Holdings, Inc.
9.00%, 11/15/00 1,990 1,973
--------------
3,562
--------------
METALS (1.1%)
++Algoma Steel, Inc.
12.375%, 7/15/05 1,600 1,560
--------------
- ----------------------------------------------------------------------------------
- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
- -------------
MULTI-INDUSTRY (8.6%)
*Brooks Fiber Properties
0.00%, 3/1/06 $ 3,265 $ 1,730
Crown Paper
11.00%, 9/1/05 2,855 2,712
*Echostar Satellite Broadcast
0.00%, 3/15/04 2,700 1,674
*MFS Communications
0.00%, 1/15/06 3,570 2,173
RJR Nabisco
8.75%, 8/15/05 675 675
SD Warren Co. 'B'
12.000%, 12/15/04 1,575 1,666
TLC Beatrice International Holdings
11.50%, 10/1/05 1,195 1,211
--------------
11,841
--------------
PACKAGING & CONTAINER (4.2%)
Gaylord Container Corp.
11.50%, 5/15/01 670 684
12.75%, 5/15/05 610 643
G-I Holdings, Inc.
Zero Coupon, 10/1/98 1,700 1,364
Owen-Illinois, Inc.
11.00%, 12/1/03 1,625 1,747
Stone Container Corp.
10.75%, 10/1/02 1,400 1,414
--------------
5,852
--------------
PROFESSIONAL SERVICES (1.2%)
United Savings Texas
8.55%, 5/15/98 1,585 1,589
--------------
REAL ESTATE (1.9%)
#HMC Acquisition Properties
9.00%, 12/15/07 2,050 1,876
MDC Holdings, Inc. 'B'
11.125%, 12/15/03 745 717
--------------
2,593
--------------
RETAIL-GENERAL (3.9%)
Revlon Worldwide Corp.
Zero Coupon, 3/15/98 2,775 2,310
++Southland Corp.
5.00%, 12/15/03 4,000 3,120
--------------
5,430
--------------
TELECOMMUNICATIONS (5.1%)
*Dial Call Communications
0.00%, 4/15/04 2,500 1,600
*Nextel Communications
0.00%, 8/15/04 3,425 2,012
Philippine Long Distance Telephone
9.25%, 6/30/06 735 736
++TCI Communications, Inc.
7.875%, 2/15/26 1,575 1,376
*Telewest plc
0.00%, 10/1/07 2,275 1,348
--------------
7,072
--------------
TEXTILES & APPAREL (1.8%)
Collins & Aikman Products
11.50%, 4/15/06 525 534
++Westpoint Stevens, Inc.
9.375%, 12/15/05 2,000 1,945
--------------
2,479
--------------
- ----------------------------------------------------------------------------------
- -------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ----------------------------------------------------------------------------------
- -------------
UTILITIES (3.3%)
++First PV Funding Lease Obligation Bonds
10.15%, 1/15/16 $ 3,000 $ 3,037
Midland Cogeneration Ventures 'C-94'
10.33%, 7/23/02 795 836
Midland Funding II 'A'
11.75%, 7/23/05 650 681
--------------
4,554
--------------
- ----------------------------------------------------------------------------------
- -------------
TOTAL CORPORATE BONDS AND NOTES
(Cost $108,272) 107,669
--------------
- ----------------------------------------------------------------------------------
- -------------
COLLATERALIZED MORTGAGE OBLIGATIONS (5.6%)
- ----------------------------------------------------------------------------------
- -------------
Aircraft Lease Portfolio Securitization Ltd.
1996-1 P1 D
12.75%, 6/15/06 1,550 1,550
DR Securitized Lease Trust 1993-K1 A1
6.66%, 8/15/10 1,481 1,120
DR Securitized Lease Trust 1994-K1 A
7.60%, 8/15/07 3,135 2,634
GE Capital Mortgage Services 1995-12
7.911%, 8/25/25 655 495
PNC Mortgage Services Corp. 1995-2 B4
7.500%, 9/25/25 727 547
Prudential Home Mortgage Securities 1996-A B1
7.963%, 4/15/25 1,250 831
Prudential Home Mortgage Securities 1996-4 B3
6.500%, 4/25/26 724 534
- ----------------------------------------------------------------------------------
- -------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $7,815) 7,711
--------------
- ----------------------------------------------------------------------------------
- -------------
FOREIGN GOVERNMENT BONDS (6.8%)
- ----------------------------------------------------------------------------------
- -------------
ARGENTINA (2.8%)
+++Republic of Argentina 'L' Bond
6.31%, 3/31/05 1,485 1,160
*Republic of Argentina 'L' Par Bond
5.25%, 3/31/23 4,880 2,678
--------------
3,838
--------------
BRAZIL (2.3%)
*Federative Republic of Brazil 'Z-L'
5.00%, 4/15/24 5,850 3,250
--------------
MEXICO (0.9%)
United Mexican States Discount Bond
6.25%, 12/31/19 (Rights Attached) 2,000 1,280
--------------
VENEZUELA (0.8%)
+++Republic of Venezuela Front Loaded Interest Rate
Reduction Bond 'A' 6.375%, 3/31/07 1,500 1,086
--------------
- ----------------------------------------------------------------------------------
- -------------
TOTAL FOREIGN GOVERNMENT BONDS
(Cost $8,775) 9,454
--------------
- ----------------------------------------------------------------------------------
- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
NO. OF VALUE
UNITS (000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
- -------------
UNITS (2.5%)
- ----------------------------------------------------------------------------------
- -------------
METALS (1.6%)
Sheffield Steel Corp. (1st Mtg. Bond + 5 Common
Stock Warrants) 12.00%, 11/1/01 2,500 $ 2,213
--------------
TELECOMMUNICATIONS (0.9%)
*Occidente Y Caribe (Sr. Discount Note + 4
Common Stock Warrants)
0.00%, 3/15/04 2,300 1,173
--------------
- ----------------------------------------------------------------------------------
- -------------
TOTAL UNITS
(Cost $3,719) 3,386
--------------
- ----------------------------------------------------------------------------------
- -------------
<CAPTION>
NO. OF
WARRANTS
<S> <C> <C>
- ----------------------------------------------------------------------------------
- -------------
WARRANTS (0.0%)
- ----------------------------------------------------------------------------------
- -------------
AEROSPACE & DEFENSE (0.0%)
+Sabreliner Corp., expiring 4/15/03 2,000 1
--------------
FOOD SERVICE & LODGING (0.0%)
+Petro PSC Properties, expiring 6/1/97 500 16
--------------
GAMING & LODGING (0.0%)
+Louisiana Casino Cruises, expiring 12/1/98 1,108 6
--------------
TELECOMMUNICATIONS (0.0%)
+#American Telecasting, expiring 8/10/00 500 12
+Nextel Communications, expiring 4/25/99 2,500 --
--------------
12
--------------
- ----------------------------------------------------------------------------------
- -------------
TOTAL WARRANTS
(Cost $68) 35
--------------
- ----------------------------------------------------------------------------------
- -------------
<CAPTION>
SHARES
<S> <C> <C>
- ----------------------------------------------------------------------------------
- -------------
PREFERRED STOCK (1.9%)
- ----------------------------------------------------------------------------------
- -------------
ENTERTAINMENT & LEISURE (1.9%)
+Time Warner, Inc. 'K' 10.25% (Cost $2,658) 2,630 2,577
--------------
- ----------------------------------------------------------------------------------
- -------------
<CAPTION>
FACE
AMOUNT
(000)
<S> <C> <C>
- ----------------------------------------------------------------------------------
- -------------
SHORT-TERM INVESTMENT (5.2%)
- ----------------------------------------------------------------------------------
- -------------
REPURCHASE AGREEMENT (5.2%)
Chase Securities, Inc. 5.15%, dated 6/28/96 due
7/1/96, to be repurchased at $7,146,
collateralized by $7,020 United States
Treasury Notes 7.125%, due 9/30/99, valued at
$7,177 (Cost $7,143) $ 7,143 7,143
--------------
- ----------------------------------------------------------------------------------
- -------------
TOTAL INVESTMENTS (100.0%)
(Cost $138,450) 137,975
--------------
- ----------------------------------------------------------------------------------
- -------------
<CAPTION>
AMOUNT AMOUNT
` (000) (000)
<S> <C> <C>
- ----------------------------------------------------------------------------------
- -------------
OTHER ASSETS
Cash $ 722
Receivable for Investments Sold 3,138
Interest Receivable 2,548
Deferred Organization Costs 29
Other Assets 15 $ 6,452
------------- --------------
- ----------------------------------------------------------------------------------
- -------------
LIABILITIES
Payable for:
Reverse Repurchase Agreements (24,954)
Dividends Declared (1,046)
Investments Purchased (1,452)
Investment Advisory Fees (67)
Shareholder Reporting Expenses (49)
Professional Fees (35)
Directors' Fees and Expenses (15)
Administrative Fees (14)
Custodian Fees (6)
Other Liabilities (42) (27,680)
------------- --------------
- ----------------------------------------------------------------------------------
- -------------
NET ASSETS
Applicable to 8,720,544 issued and outstanding
$0.01 par value shares (100,000,000 shares
authorized) $ 116,747
---------
- ----------------------------------------------------------------------------------
- -------------
NET ASSET VALUE PER SHARE $ 13.39
---------
- ----------------------------------------------------------------------------------
- -------------
AT JUNE 30, 1996, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------
Common Stock $ 87
Capital Surplus 122,311
Undistributed Net Investment Income 206
Accumulated Net Realized Loss (5,382)
Unrealized Depreciation on Investments (475)
- ----------------------------------------------------------------------------------
- -------------
TOTAL NET ASSETS $ 116,747
---------
- ----------------------------------------------------------------------------------
- -------------
</TABLE>
+ -- Non-income producing
+++ -- Variable/floating rate security -- rate disclosed is as of June 30,
1996.
++ -- Denotes all or a portion of securities subject to repurchase under
Reverse Repurchase Agreements as of June 30, 1996 -- See Note A-4 to
financial statements.
# -- 144A Security -- certain conditions for public sale may exist
* -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of June 30, 1996. Maturity disclosed is the ultimate
maturity.
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1996
(UNAUDITED)
STATEMENT OF OPERATIONS (000)
- --------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Interest Income................................................... $ 7,174
Dividend Income................................................... 2
- --------------------------------------------------------------------------------------
Total Income.................................................... 7,176
- --------------------------------------------------------------------------------------
EXPENSES
Interest Expense.................................................. 776
Investment Advisory Fees.......................................... 415
Administrative Fees............................................... 86
Shareholder Reporting Expenses.................................... 39
Professional Fees................................................. 38
Directors' Fees and Expenses...................................... 19
Transfer Agent Fees............................................... 15
Custodian Fees.................................................... 11
Amortization of Organization Costs................................ 6
Other Expenses.................................................... 77
- --------------------------------------------------------------------------------------
Total Expenses.................................................. 1,482
- --------------------------------------------------------------------------------------
Net Investment Income....................................... 5,694
- --------------------------------------------------------------------------------------
NET REALIZED GAIN
Investment Securities Sold........................................ 619
- --------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Depreciation on Investments....................................... (2,368)
- --------------------------------------------------------------------------------------
Total Net Realized Gain and Change in Unrealized
Appreciation/Depreciation............................................ (1,749)
- --------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............. $ 3,945
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1996 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1995
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income............................................. $ 5,694 $ 11,734
Net Realized Gain (Loss).......................................... 619 (2,827)
Change in Unrealized Appreciation/Depreciation.................... (2,368) 16,772
- ----------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations.............. 3,945 25,679
- ----------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income............................................. (6,061) (11,112)
- ----------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Reinvestment of Distributions (2,998 shares)...................... -- 36
- ----------------------------------------------------------------------------------------------------------
Total Increase (Decrease)......................................... (2,116) 14,603
Net Assets:
Beginning of Period............................................... 118,863 104,260
- ----------------------------------------------------------------------------------------------------------
End of Period (including undistributed net investment income of
$206 and $573, respectively)..................................... $ 116,747 $ 118,863
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1996
(UNAUDITED)
STATEMENT OF CASH FLOWS (000)
- --------------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM INVESTING AND OPERATING ACTIVITIES:
Proceeds from Sales of Investments.................................. $ 103,251
Purchases of Investments............................................ (96,952)
Net Increase in Short-Term Investments.............................. (7,143)
Investment Income................................................... 6,364
Interest Expense Paid............................................... (748)
Operating Expenses Paid............................................. (641)
- --------------------------------------------------------------------------------------
Net Cash Provided by Investing and Operating Activities............. 4,131
- --------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Reverse Repurchase Agreements....................... 3,203
Cash Distributions Paid............................................. (6,360)
- --------------------------------------------------------------------------------------
Net Cash Used for Financing Activities.............................. (3,157)
- --------------------------------------------------------------------------------------
Net Increase in Cash................................................ 974
BANK OVERDRAFT AT BEGINNING OF PERIOD................................. (252)
- --------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 722
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
RECONCILIATION OF NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS TO NET CASH PROVIDED BY INVESTING AND OPERATING
ACTIVITIES:
- --------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting From Operations................ $ 3,945
Net Sales (Purchases) of Investments................................ 842
Net Realized Gain on Investments.................................... (619)
Change in Unrealized Appreciation/Depreciation...................... 2,368
Net Increase in Receivables Pertaining to Investing and Operating
Activities........................................................ (2,834)
Net Increase in Payables Pertaining to Investing and Operating
Activities........................................................ 1,546
Amortization of Deferred Organization Costs......................... 6
(Accretion)/Amortization............................................ (1,123)
- --------------------------------------------------------------------------------------
Net Cash Provided by Investing and Operating Activities............. $ 4,131
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED PERIOD FROM
JUNE 30, DECEMBER 31, NOVEMBER 30* TO
1996 ----------------------- DECEMBER 31,
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.................................. $ 13.63 $ 11.96 $ 14.10 $ 14.10
- --------------------------------------------------------------------------------------------------------------------------------
Offering Costs........................................................ -- -- (0.01) (0.05)
- --------------------------------------------------------------------------------------------------------------------------------
Net Investment Income................................................. 0.65 1.34 1.32 0.04
Net Realized and Unrealized Gain (Loss) on Investments................ (0.19) 1.60 (2.08) 0.01
- --------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations.................................. 0.46 2.94 (0.76) 0.05
- --------------------------------------------------------------------------------------------------------------------------------
Distributions
Net Investment Income............................................. (0.70) (1.27) (1.36) --
In Excess of Net Investment Income................................ -- -- (0.01) --
- --------------------------------------------------------------------------------------------------------------------------------
Total Distributions............................................... (0.70) (1.27) (1.37) --
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD........................................ $ 13.39 $ 13.63 $ 11.96 $ 14.10
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD................................. $ 13.63 $ 12.88 $ 11.38 $ 14.75
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value...................................................... 11.45% 25.21% (14.11)% 4.61%
Net Asset Value (1)............................................... 3.46% 26.07% (5.53)% 0.00%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS)................................. $ 116,747 $ 118,863 $ 104,260 $ 122,781
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses Before Interest Expense to Average Net Assets....... 1.19%** 1.11% 1.12% 1.46%**
Ratio of Expenses After Interest Expense to Average Net Assets........ 2.50%** 2.79% 2.78% 1.46%**
Ratio of Net Investment Income to Average Net Assets.................. 9.61%** 10.29% 10.18% 3.76%**
Portfolio Turnover Rate............................................... 73% 84% 32% 0%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
** Annualized.
(1) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. This percentage is not an indication of the performance of a
shareholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value
of the Fund.
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 (UNAUDITED)
- ----------
The Morgan Stanley High Yield Fund, Inc. (the "Fund") was incorporated in
Maryland on September 23, 1993 and is registered as a non-diversified,
closed-end management investment company under the Investment Company Act of
1940, as amended. The Fund's primary objective is to produce high current income
and as a secondary objective, to seek capital appreciation, through investments
primarily in high yield securities.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such policies
are consistently followed by the Fund in the preparation of its financial
statements. Generally accepted accounting principles may require management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results may differ from those estimates.
1. SECURITY VALUATION: In valuing the Fund's assets, all listed securities for
which market quotations are readily available are valued at the last sales
price on the valuation date, or if there was no sale on such date, at the
mean between the current bid and asked prices. Securities which are traded
over-the-counter are valued at the average of the mean of the current bid
and asked prices obtained from reputable brokers. Bonds and other fixed
income securities may be valued on the basis of prices provided by
independent pricing services when such prices are believed to reflect the
fair market value of such securities. Short-term securities which mature in
60 days or less are valued at amortized cost. All other securities and
assets for which market values are not readily available (including
investments which are subject to limitations as to their sale) are valued at
fair value as determined in good faith by the Board of Directors (the
"Board"), although the actual calculations may be done by others.
2. U.S. FEDERAL INCOME TAXES: It is the Fund's intention to continue to qualify
as a regulated investment company and distribute all of its taxable income.
Accordingly, no provision for U.S. Federal income taxes is required in the
financial statements.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the
underlying securities, with a market value at least equal to the amount of
the repurchase transaction, including principal and accrued interest. To the
extent that any repurchase transaction exceeds one business day, the value
of the collateral is marked-to-market on a daily basis to determine the
adequacy of the collateral. In the event of default on the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. In the event of default or
bankruptcy by the counterparty to the agreement, realization and/or
retention of the collateral or proceeds may be subject to legal proceedings.
4. REVERSE REPURCHASE AGREEMENTS: In order to leverage the Fund, the Fund may
enter into reverse repurchase agreements with institutions that the Fund's
investment adviser has determined are creditworthy. Under a reverse
repurchase agreement, the Fund sells securities and agrees to repurchase
them at a mutually agreed upon date and price. Reverse repurchase agreements
involve the risk that the market value of the securities purchased with the
proceeds from the sale of securities received by the Fund may decline below
the price of the securities the Fund is obligated to repurchase. Securities
subject to repurchase under reverse repurchase agreements are designated as
such in the Statement of Net Assets.
At June 30, 1996, the Fund had reverse repurchase agreements outstanding as
follows:
<TABLE>
<CAPTION>
MATURITY IN
30 TO 90 DAYS
-------------
<S> <C>
Maturity Amount.......................................... $ 24,954,000
-------------
Market Value of Assets Sold Under Agreements............. $ 29,424,000
-------------
Weighted Average Interest Rate........................... 6.53%
</TABLE>
The average weekly balance of reverse repurchase agreements outstanding
during the six months ended June 30, 1996 was approximately $23,446,000 at a
weighted average interest rate of 6.55%.
5. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Interest
income is recognized on the accrual basis except where collection is in
doubt. Discounts and premiums on investments purchased are accreted or
amortized in accordance with the effective yield method over their
respective lives. Dividend income and distributions to shareholders are
recorded on the ex-date.
The amount and character of income and capital gain distributions to be paid
are determined in accordance with Federal income tax regulations which may
differ from generally accepted accounting principles. These
11
<PAGE>
differences are primarily due to differing book and tax treatments of the
timing of the recognition of losses on securities.
Permanent book and tax basis differences relating to shareholder
distributions may result in reclassifications to undistributed net investment
income (loss), accumulated net realized gain (loss) and capital surplus.
Adjustments for permanent book-tax differences, if any, are not reflected in
ending undistributed net investment income (loss) for the purpose of
calculating net investment income (loss) per share in the financial
highlights.
B. Morgan Stanley Asset Management Inc. ("the Adviser") provides investment
advisory services to the Fund under the terms of an Investment Advisory
Agreement (the "Agreement"). Under the Agreement, the Adviser is paid a fee
computed weekly and payable monthly at an annual rate of .70% of the Fund's
average weekly net assets.
C. The Chase Manhattan Bank, through its affiliate Chase Global Funds Services
Company (the "Administrator"), provides administrative services to the Fund
under an Administration Agreement. Under the Administration Agreement, the
Administrator is paid a fee computed weekly and payable monthly at an annual
rate of .08% of the Fund's average weekly net assets, plus $65,000 per annum. In
addition, the Fund is charged certain out-of-pocket expenses by the
Administrator. The Chase Manhattan Bank acts as custodian for the Fund's assets
held in the United States under a Domestic Custody Agreement. Custodian fees are
computed and payable monthly based on assets under custody plus an amount for
each transaction effected, including reimbursement for certain out-of-pocket
expenses.
D. Morgan Stanley Trust Company (the "International Custodian"), an affiliate
of the Adviser, acts as custodian for the Fund's assets held outside the United
States in accordance with an International Custody Agreement. International
Custodian fees are payable monthly based on Fund assets under custody plus an
amount for each transaction effected, including reimbursement for certain out-
of-pocket expenses. During the six months ended June 30, 1996, the Fund did not
incur any fees to the International Custodian.
E. During the six months ended June 30, 1996, the Fund made purchases and sales
totaling $98,404,000 and $106,389,000, respectively, of investment securities
other than long-term U.S. Government securities and short term investments.
There were no purchases and sales of long-term U.S. Government securities. At
June 30, 1996, the Federal income tax cost basis of securities was $138,450,000
and accordingly, net unrealized depreciation for Federal income tax purposes was
$475,000, of which $2,131,000 related to appreciated securities and $2,606,000
related to depreciated securities. At December 31, 1995, the Fund had capital
loss carryforwards for Federal income tax purposes totaling approximately
$5,966,000 available to offset future capital gains of which $1,498,000 and
$4,468,000 will expire on December 31, 2002 and 2003, respectively. To the
extent that capital gains are offset, such gains will not be distributed to
shareholders.
F. In connection with its organization, the Fund incurred $60,000 of
organization costs. The organization costs are being amortized on a
straight-line basis over a five year period beginning November 30, 1993, the
date the Fund commenced operations.
G. At June 30, 1996, approximately 80% of the Fund's total investments consist
of high yield securities rated below investment grade. Investments in high-yield
securities are accompanied by a greater degree of credit risk and the risk tends
to be more sensitive to economic conditions than higher-rated securities.
H. Each Director of the Fund who is not an officer of the Fund or an affiliated
person as defined under the Investment Company Act of 1940, as amended, may
elect to participate in the Directors' Deferred Compensation Plan (the "Plan").
Under the Plan, such Directors may elect to defer payment of a percentage of
their total fees earned as a Director of the Fund. These deferred portions are
treated, based on an election by the Director, as if they were either invested
in the Fund's shares or invested in U.S. Treasury Bills, as defined under the
Plan. The deferred fees payable, under the Plan, at June 30, 1996 totaled $4,000
and are included in Payable for Directors' Fees and Expenses on the Statement of
Net Assets.
I. During June 1996, the Board declared a distribution of $0.12 per share,
derived from net investment income, payable on July 15, 1996, to shareholders of
record on June 28, 1996.
12
<PAGE>
J. SUPPLEMENTAL PROXY INFORMATION
The Annual Meeting of the Stockholders of The Morgan Stanley High Yield Fund,
Inc. was held on June 5, 1996. The following is a summary of each proposal
presented and the total number of shares voted:
<TABLE>
<CAPTION>
VOTES IN VOTES VOTES VOTES
PROPOSAL: FAVOR OF AGAINST WITHHELD ABSTAINED
- --------------------------------------------------------------------------------- --------- ----------- ----------- -----------
<C> <S> <C> <C> <C> <C>
1. To elect the following Directors: Peter J. Chase........................... 7,546,236 -- 47,052 --
David B. Gill................................. 7,546,636 -- 46,652 --
Warren J. Olsen............................... 7,544,636 -- 48,652 --
2. To ratify the selection of Price Waterhouse LLP as independent public
accountants of the Fund.................................................... 7,524,159 33,383 -- 35,745
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS* (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------------
NET REALIZED
GAIN (LOSS) AND NET INCREASE
CHANGE IN UNREALIZED (DECREASE) IN
NET ASSETS
INVESTMENT NET INVESTMENT APPRECIATION/ RESULTING FROM
INCOME INCOME (LOSS) DEPRECIATION OPERATIONS
------------------------ ------------------------ -------------------- ----------------------
PER PER PER PER
QUARTER ENDED AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE
----------- ----------- ----------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1996................. $ 3,559 $ 0.41 $ 2,794 $ 0.32 $ (1,609) $ (0.18) $ 1,185 $ 0.14
March 31, 1996................ 3,617 0.41 2,900 0.33 (140) (0.01) 2,760 0.32
----------- ----- ----------- ----- --------- --------- ----------- ---------
Total..................... $ 7,176 $ 0.82 $ 5,694 $ 0.65 $ (1,749) $ (0.19) $ 3,945 $ 0.46
----------- ----- ----------- ----- --------- --------- ----------- ---------
----------- ----- ----------- ----- --------- --------- ----------- ---------
December 31, 1995............. $ 4,139 $ 0.47 $ 3,348 $ 0.39 $ 1,426 $ 0.16 $ 4,864 $ 0.55
September 30, 1995............ 3,506 0.40 2,816 0.32 2,155 0.25 4,971 0.57
June 30, 1995................. 3,709 0.43 2,891 0.33 5,327 0.62 8,218 0.95
March 31, 1995................ 3,563 0.41 2,589 0.30 5,037 0.57 7,626 0.87
----------- ----- ----------- ----- --------- --------- ----------- ---------
Total..................... $ 14,917 $ 1.71 $ 11,644 $ 1.34 $ 13,945 $ 1.60 $ 25,679 $ 2.94
----------- ----- ----------- ----- --------- --------- ----------- ---------
----------- ----- ----------- ----- --------- --------- ----------- ---------
December 31, 1994............. $ 3,731 $ 0.43 $ 2,811 $ 0.33 $ (3,619) $ (0.42) $ (808) $ (0.09)
September 30, 1994............ 3,764 0.43 2,899 0.33 (2,964) (0.34) (65) (0.01)
June 30, 1994................. 3,745 0.43 3,004 0.34 (4,750) (0.54) (1,746) (0.20)
March 31, 1994................ 3,357 0.39 2,751 0.32 (6,794) (0.78) (4,043) (0.46)
----------- ----- ----------- ----- --------- --------- ----------- ---------
Total..................... $ 14,597 $ 1.68 $ 11,465 $ 1.32 $ (18,127) $ (2.08) $ (6,662) $ (0.76)
----------- ----- ----------- ----- --------- --------- ----------- ---------
----------- ----- ----------- ----- --------- --------- ----------- ---------
</TABLE>
________________________________________________________________________________
*Expressed in thousands of U.S. dollars except per share amounts.
The Fund may purchase shares of its Common Stock in the open market at such
prices and in such amounts as the Board of Directors may deem advisable.
13
<PAGE>
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
each shareholder may elect by providing written instructions to American Stock
Transfer & Trust Company (the "Plan Agent") to have all distributions
automatically reinvested in Fund Shares. Participants in the Plan have the
option of making additional voluntary cash payments to the Plan Agent, monthly,
in any amount from $100 to $3,000, for investment in Fund shares.
Dividend and capital gain distributions will be reinvested on the
reinvestment date in full and fractional shares. If the market price per share
equals or exceeds net asset value per share on the reinvestment date, the Fund
will issue shares to participants at net asset value. If net asset value is less
than 95% of the market price on the reinvestment date, shares will be issued at
95% of the market price. If net asset value exceeds the market price on the
reinvestment date, participants will receive shares valued at market price. The
Fund may purchase shares of its Common Stock in the open market in connection
with dividend reinvestment requirements at the discretion of the Board of
Directors. Should the Fund declare a dividend or capital gain distribution
payable only in cash, the Plan Agent will purchase Fund shares for participants
in the open market as agent for the participants.
The Plan Agent's fees for the reinvestment of dividends and distributions
will be paid by the Fund. However, each participant's account will be charged a
pro rata share of brokerage commissions incurred on any open market purchases
effected on such participant's behalf. A participant will also pay brokerage
commissions incurred on purchases made by voluntary cash payments. Although
shareholders in the Plan may receive no cash distributions, participation in the
Plan will not relieve participants of any income tax which may be payable on
such dividends or distributions.
In the case of shareholders, such as banks, brokers or nominees, which hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
shareholder as representing the total amount registered in the shareholder's
name and held for the account of beneficial owners who are participating in the
Plan.
Participants who wish to withdraw from the Plan should notify the Plan Agent
in writing. There is no penalty for non-participation or withdrawal from the
Plan, and shareholders who have previously withdrawn from the Plan may rejoin at
any time. Requests for additional information or any correspondence concerning
the Plan should be directed to the Plan Agent at:
The Morgan Stanley High Yield Fund, Inc.
American Stock Transfer & Trust Company
Dividend Reinvestment and Cash Purchase Plan
40 Wall Street
New York, NY 10005
1-800-278-4353
14
