<PAGE>
THE MORGAN STANLEY HIGH YIELD FUND, INC.
- ---------------------------------------------
OFFICERS AND DIRECTORS
<TABLE>
<S> <C>
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS Frederick B. Whittemore
Warren J. Olsen DIRECTOR
PRESIDENT AND DIRECTOR James W. Grisham
Peter J. Chase VICE PRESIDENT
DIRECTOR Harold J. Schaaff, Jr.
John W. Croghan VICE PRESIDENT
DIRECTOR Joseph P. Stadler
David B. Gill VICE PRESIDENT
DIRECTOR Valerie Y. Lewis
Graham E. Jones SECRETARY
DIRECTOR James R. Rooney
John A. Levin TREASURER
DIRECTOR Joanna M. Haigney
ASSISTANT TREASURER
</TABLE>
- ---------------------------------------------
INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank, N.A.
73 Tremont Street
Boston, Massachusetts 02108
- ---------------------------------------------------------
CUSTODIANS
Morgan Stanley Trust Company (International)
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank, N.A. (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.
----------
ANNUAL REPORT
DECEMBER 31, 1995
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------
As 1995 closed, the high yield market wrapped up one of its finest years. For
the year ended December 31, 1995, the Fund's total return based on net asset
value per share was 26.07% compared with 17.39% for the First Boston High Yield
Index. The outstanding results were in concert with all the domestic markets.
Bonds rallied strongly as the ten year Treasury yields declined 225 basis points
to 5.57%. Equities reached all-time highs as the Dow industrial average climbed
over 5,000.
While market returns were excellent, there were several undercurrents that
one had to be aware of to stay ahead of the competition. While the market
rallied, spreads to Treasuries widened. More importantly, intra-market quality
spreads widened as well. Market participants were concerned that the economy was
entering an economic downturn. This view was supported by an extremely weak
retail environment. Several major retailers filed for bankruptcy during the
year. Also auto sales seemed to be softening and steel and paper prices were
reported to be declining after strong run-ups in late 1994 and early 1995.
The Fund's results were very strong for the year. Several factors
contributed to our performance. As we stated at the end of last year, we felt
the casino bonds were oversold and that the baby had been thrown out with the
bathwater in some cases. As a result, we maintained and, in some cases, added to
our exposure in the casino sector. We were handsomely rewarded as the sector was
one of the best performers in the market. Other sectors where we were
overweighted that performed well were communications, and cable television. Both
of these industries were able to improve credit quality over the year. Many of
the bonds in these industries also tend to have a long duration and thus
benefited from the decline in interest rates. Finally, these industries are not
cyclical. As investors perceived the economy was weakening in the second half of
1995, they shed cyclical holdings and put money into more stable companies. We
were also overweighted in chemicals, particularly fertilizers. The fertilizer
industry had explosive earnings in 1995 and the prospects are bright in 1996.
Several of the companies in the industry went public in 1995 so the combination
of strong earnings and a strengthened balance sheet helped the bonds perform
well.
As important as investing in winning ideas is avoiding trouble situations.
Two of the weakest industries in 1995 were retailers and restaurants. We
virtually avoided these sectors entirely. The retail sector was bombarded with
bad news nearly the entire year. In the first half of the year, major northeast
retailers Bradlees and Caldor filed for bankruptcy protection. In the second
half of the year, concerns for a weak Christmas season spooked the market. A
large discount chain hit the headlines as being on the verge of bankruptcy also.
Like the retailers, the restaurant sector seems over-stored also. Price
competition is stiff and it is difficult to attract incremental traffic. Most of
the companies in the sector are overburdened with debt and it is difficult to
see at this point how they will reduce leverage.
It is difficult to formulate a strategy for 1996. Other than retailers,
which have had a horrible history in the high yield market, it is hard to find a
clearly undervalued industry. Steel and auto-related companies have widened to
the rest of the market but it is a question of timing the market to catch a
rebound in their bond prices and earnings momentum. Treasury rates have dropped
precipitously and therefore cushion bonds have some appeal. Long-term interest
rates are near the lows achieved at the end of 1993, however the shape of the
yield curve is very different. Short-term rates are much higher than at the end
of 1993 and it does not appear that a tightening is likely in the near future.
We are also faced with the uncertainty of an election year. We expect to play it
fairly close to the vest in 1996. We will be searching for bonds that generate
good current income but do not represent undue credit risk.
Sincerely,
[SIGNATURE]
Barton M. Biggs
CHAIRMAN
[SIGNATURE]
Robert Angevine
PORTFOLIO MANAGER
February 2, 1996
2
<PAGE>
The Morgan Stanley High Yield Fund, Inc.
Investment Summary as of December 31, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION
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>
---------------------------- ---------------------------- ----------------------------
ONE YEAR 25.21% 25.21% 26.07% 26.07% 17.39% 17.39%
SINCE INCEPTION* 12.51 5.82 19.11 8.75 17.71 8.13
</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:
1993* 1994 1995
<S> <C> <C> <C>
Net Asset Value Per Share $ 14.10 $ 11.96 $ 13.63
Market Value Per Share $14.75 $11.38 $12.88
Premium/(Discount) 4.6% (4.8%) (5.5%)
Income Dividends - $1.37 $1.27
Fund Total Return (2) 0.00% (5.53%) 26.07%
Index Total Return
(1)(3)** 1.26% (0.98%) 17.39%
</TABLE>
(1)Assumes dividends and distributions, if any, were reinvested.
(2)Total investment return based on per share net asset value 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)First Boston High Yield Index
* The Fund commenced operations on November 30, 1993.
** Unaudited.
3
<PAGE>
The Morgan Stanley High Yield Fund, Inc.
Portfolio Summary as of December 31, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Debt Securities 99.8%
Other 0.2%
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Broadcast -- Radio & Television 18.2%
Chemicals 15.9%
Telecommunications 6.0%
Health Care Supplies & Services 5.6%
Food Service & Lodging 5.5%
Energy 4.8%
Business Services 4.6%
Utilities 4.5%
Financial Services 4.2%
Packaging & Container 3.8%
Other 26.9%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
---------------
<C> <S> <C>
1. Heritage Media Services, 11.00%,
10/1/02 2.8%
2. Ackerley Communications, Inc., 'A'
10.75%, 10/1/03 2.7
3. Owens-Illinois, Inc., 10.50%,
6/15/02 2.7
4. Sherritt-Gordon Ltd., 9.75%,
4/1/03 2.6
5. McGaw, Inc., 10.375%, 4/1/99 2.5
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
---------------
<C> <S> <C>
6. Southland Corp., 5.00%, 12/15/03 2.4%
7. Triton Energy Corp., 0%, 12/15/00 2.4
8. IMC Global, Inc., 9.45%, 12/15/11 2.3
9. First PV Funding Lease Obligation
Bonds 10.15%, 1/15/16 2.2
10. Imperial Credit Industries, Inc.
9.75%, 1/15/04 2.1
---
24.7%
---
---
</TABLE>
4
<PAGE>
FINANCIAL STATEMENTS
- ---------
STATEMENT OF NET ASSETS
(Showing Percentage of Total Value of Investments)
- ---------
DECEMBER 31, 1995
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
CORPORATE BONDS AND NOTES (94.8%)
- ---------------------------------------------------------
- ------------
BROADCAST -- RADIO & TELEVISION (18.0%)
++Ackerley Communications, Inc., 'A'
10.75%, 10/1/03 $ 3,500 $ 3,745
Act III Broadcasting 10.25%, 12/15/05 500 512
Cablevision Systems Corp. 10.75%,
4/1/04 1,500 1,586
++Cablevision Systems Corp. 9.875%,
2/15/13 1,000 1,065
Century Communications Corp. 9.50%,
8/15/00 1,000 1,037
++Comcast Corp. 9.50%, 1/15/08 1,000 1,045
++Continental Cablevision, Inc. 9.50%,
8/1/13 2,500 2,656
Fundy Cable Ltd. 11.00%, 11/15/05 250 261
Groupe Videotron Ltee 10.625%, 2/15/05 750 801
++Heritage Media Services 11.00%,
10/1/02 3,675 3,868
Katz Corp. 12.75%, 11/15/02 700 774
Lenfest Communications 8.375%, 11/1/05 1,500 1,506
/ /Marcus Cable Co. 0%, 12/15/05 2,800 1,904
New World Communications Group,
Holding Corp., 'B' Zero Coupon,
6/15/99 2,500 1,731
Rogers Cablesystems of America 11.00%,
12/1/15 950 1,022
Sinclair Broadcasting Group, Inc.
10.00%, 9/30/05 500 511
Viacom, Inc. 8.00%, 7/7/06 1,000 1,018
--------
25,042
--------
BUSINESS SERVICES (4.6%)
++ADT Operations 9.25%, 8/1/03 2,500 2,669
/ /PM Holdings Corp., 'B' 0%, 9/1/05 1,500 773
Rapp International Finance 13.25%,
12/15/05 1,000 982
Scotsman Group, Inc. 9.50%, 12/15/00 2,000 2,000
--------
6,424
--------
CAPITAL GOODS/CONSTRUCTION (1.4%)
GS Industries, Inc. 12.25%, 10/1/05 1,000 1,001
International Wire Group 11.75%,
6/1/05 1,000 963
--------
1,964
--------
CHEMICALS (15.9%)
#Acetex Corp. (Yankee) 9.75%, 10/1/03 1,500 1,545
++Agricultural Minerals & Chemicals,
Inc. 10.75%, 9/30/03 2,000 2,210
Arcadian Partners, L.P., 'B' 10.75%,
5/1/05 1,000 1,097
- ---------------------------------------------------------
- ------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
CHEMICALS (CONTINUED)
++Foamex L.P. 9.50%, 6/1/00 $ 3,000 $ 2,977
Freeport-McMoRan Resource L.P. 8.75%,
2/15/04 1,500 1,534
Harris Chemical North America 10.75%,
10/15/03 1,250 1,137
IMC Global, Inc. 9.25%, 10/1/00 500 526
IMC Global, Inc. 'B' 10.125%, 6/15/01 2,000 2,190
IMC Global, Inc. 9.45%, 12/15/11 3,000 3,199
Plastic Specialties & Technologies,
Inc. 11.25%, 12/1/03 2,250 2,070
Sherritt-Gordon Ltd. 9.75%, 4/1/03 3,475 3,657
--------
22,142
--------
COAL, GAS & OIL (0.6%)
Gulf Canada Resources (Yankee) 9.25%,
1/15/04 875 889
--------
DIVERSIFIED (3.0%)
Primark Corp., 8.75%, 10/15/00 2,300 2,312
++Valcor Inc., 9.625%, 11/1/03 2,000 1,855
--------
4,167
--------
ENERGY (4.8%)
Maxus Energy Corp. 11.50%, 11/15/15 1,000 1,040
OPI International 12.875%, 7/15/02 2,000 2,270
++/ / Triton Energy Corp. 0%, 12/15/00 3,500 3,316
--------
6,626
--------
ENTERTAINMENT & LEISURE (2.1%)
Kloster Cruise Ltd. 13.00%, 5/1/03 135 102
/ / Six Flags Theme Parks, Inc. 0%,
6/15/05 3,600 2,808
--------
2,910
--------
ENVIRONMENTAL CONTROLS (2.4%)
Envirosource, Inc. 9.75%, 6/15/03 2,000 1,745
#/ / Norcal Waste Systems, Inc.
12.50%, 11/15/05 1,600 1,612
--------
3,357
--------
FINANCIAL SERVICES (4.2%)
Imperial Credit Industries, Inc.
9.75%, 1/15/04 3,500 2,984
Terra Nova Holdings, 10.75%, 7/1/05 750 817
Tiphook Finance Corp. 8.00%, 3/15/00 2,263 1,573
United Meridian 10.375%, 10/15/05 500 526
--------
5,900
--------
- ---------------------------------------------------------
- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
FOOD SERVICE & LODGING (5.5%)
++Family Restaurant, Inc. 9.75%,
2/1/02 $ 2,000 $ 1,100
Grand Union 12.00%, 9/1/04 1,050 903
Host Marriot Travel 9.50%, 5/15/05 1,000 987
La Quinta Inns, Inc. 9.25%, 5/15/03 2,000 2,120
++Pilgrim's Pride Corp. 10.875%,
8/1/03 2,900 2,632
--------
7,742
--------
GAMING & LODGING (1.1%)
Casino America, Inc. 11.50%, 11/15/01 1,000 925
Grand Casinos 10.125%, 12/1/03 250 261
Louisiana Casino Cruise 11.50%,
12/1/98 369 355
--------
1,541
--------
HEALTH CARE SUPPLIES & SERVICES (5.6%)
McGaw, Inc. 10.375%, 4/1/99 3,400 3,515
++OrNda HealthCorp. 12.25%, 5/15/02 2,000 2,198
Quorum Health 8.75%, 11/1/05 1,000 1,035
Tenet Healthcare Corp. 10.125%, 3/1/05 1,000 1,108
--------
7,856
--------
INSURANCE (1.1%)
Life Partners Group, Inc. 12.75%,
7/15/02 1,400 1,516
--------
METALS (1.7%)
++Algoma Steel, Inc. 12.375%, 7/15/05 1,000 900
Kaiser Aluminum 12.75%, 2/1/03 1,000 1,100
Ucar Global Enterprises, Inc. 'B'
12.00%, 1/15/05 265 305
--------
2,305
--------
MULTI-INDUSTRY (0.2%)
#Howmet Corp. 10.00%, 12/1/03 250 260
--------
PACKAGING & CONTAINER (3.8%)
++Owens-Illinois, Inc. 10.50%, 6/15/02 3,500 3,719
Stone Container Corp. 10.75%, 10/1/02 1,000 1,033
Stone Container Corp. 11.875%, 12/1/98 500 524
--------
5,276
--------
PUBLISHING (0.9%)
Marvel III Holdings, Inc. 9.125%,
2/15/98 1,250 1,223
--------
REAL ESTATE (0.7%)
#HMC Acquisition Properties 9.00%,
12/15/07 1,000 1,010
--------
RETAIL -- GENERAL (2.4%)
Southland Corp., 5.00%, 12/15/03 4,000 3,330
--------
TELECOMMUNICATIONS (6.0%)
/ / Dial Call Communications 0%,
4/15/04 2,500 1,425
- ---------------------------------------------------------
- ------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
TELECOMMUNICATIONS (CONTINUED)
/ / Horizon Cellular Telephone Co. 0%,
10/1/00 $ 2,000 $ 1,663
/ / Nextel Communications 0%, 8/15/04 3,000 1,628
Paging Network, Inc. 10.125%, 8/1/07 1,000 1,086
Rogers Communications, Inc. 10.875%,
4/15/04 1,000 1,045
Telefonica de Argentina (Yankee)
11.875%, 11/1/04 1,500 1,571
--------
8,418
--------
TEXTILES & APPAREL (3.6%)
Polysindo Eka Perkasa (Yankee) 13.00%,
6/15/01 1,000 1,035
Synthetic Industries, Inc. 12.75%,
12/1/02 2,000 1,973
++Westpoint Stevens, Inc. 9.375%,
12/15/05 2,000 1,985
--------
4,993
--------
TRANSPORTATION (0.7%)
Stena AB (Yankee) 10.50%, 12/15/05 1,000 1,020
--------
UTILITIES (4.5%)
Beaver Valley II Funding Corp. Lease
Obligation Bonds 9.00%, 6/1/17 1,477 1,246
California Energy 9.875%, 6/30/03 1,000 1,043
Columbia Gas Systems, Inc., 'A' 6.39%,
11/28/00 141 141
Columbia Gas Systems, Inc., 'B' 6.61%,
11/28/02 136 138
Columbia Gas Systems, Inc., 'C' 6.80%,
11/28/05 136 137
Columbia Gas Systems, Inc., 'D' 7.05%,
11/28/07 136 137
Columbia Gas Systems, Inc., 'E' 7.32%,
11/28/10 136 136
Columbia Gas Systems, Inc., 'F' 7.42%,
11/28/15 136 134
Columbia Gas Systems, Inc., 'G' 7.62%,
11/28/25 136 134
First PV Funding Lease Obligation
Bonds 10.15%, 1/15/16 3,000 3,060
--------
6,306
--------
- ---------------------------------------------------------
- ------------
TOTAL CORPORATE BONDS AND NOTES
(Cost $130,421) 132,217
--------
- ---------------------------------------------------------
- ------------
FOREIGN GOVERNMENT BONDS (1.7%)
ARGENTINA (0.8%)
+++Republic of Argentina 'L', 6.8125%,
3/31/05 1,500 1,069
--------
BRAZIL (0.9%)
/ / Federative Republic of Brazil
'Z-L' Bond 4.25%, 4/15/24 2,500 1,312
--------
- ---------------------------------------------------------
- ------------
TOTAL FOREIGN GOVERNMENT BONDS
(Cost $2,018) 2,381
--------
- ---------------------------------------------------------
- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
NO. OF
UNITS VALUE
(000) (000)
- ---------------------------------------------------------
<S> <C> <C>
- ------------
UNITS (3.3%)
- ---------------------------------------------------------
- ------------
BROADCAST -- RADIO & TELEVISION (0.2%)
#/ / American Telecasting, Inc. (Note
+ 1 Warrant) 14.50%, 8/15/05 500 $ 302
--------
GAMING & LODGING (1.4%)
## Trump Taj Mahal Funding, Inc. PIK
(Bond + 1 Taj Mahal Holding Corp.
'B' Common Stock) 11.35%, 11/15/99 2,045 1,969
--------
METALS (1.7%)
Sheffield Steel Corp. (1st Mtg. Bond
+ 5 Common Stock Warrants) 12.00%,
11/1/01 2,500 2,350
--------
- ---------------------------------------------------------
- ------------
TOTAL UNITS
(Cost $4,867) 4,621
--------
- ---------------------------------------------------------
- ------------
<CAPTION>
NO. OF
WARRANTS
<S> <C> <C>
- ---------------------------------------------------------
- ------------
WARRANTS (0.0%)
- ---------------------------------------------------------
- ------------
AEROSPACE & DEFENSE (0.0%)
+Sabreliner Corp., expiring 4/15/03 2,000 10
--------
FOOD SERVICE & LODGING (0.0%)
+Petro PSC Properties, expiring 6/1/97 500 17
--------
GAMING & LODGING (0.0%)
+Louisiana Casino Cruises, expiring
12/1/98 1,108 9
--------
TELECOMMUNICATIONS (0.0%)
+Dial Page Communications, expiring
4/25/99 2,500 --
--------
- ---------------------------------------------------------
- ------------
TOTAL WARRANTS
(Cost $56) 36
--------
- ---------------------------------------------------------
- ------------
<CAPTION>
NO. OF
SHARES
<S> <C> <C>
- ---------------------------------------------------------
- ------------
PREFERRED STOCK (0.1%)
- ---------------------------------------------------------
- ------------
COAL, GAS & OIL (0.1%)
+Columbia Gas Systems, Inc., 7.89%
(Cost $94) 3,826 94
--------
- ---------------------------------------------------------
- ------------
CONVERTIBLE PREFERRED STOCK (0.1%)
- ---------------------------------------------------------
- ------------
COAL, GAS & OIL (0.1%)
+Columbia Gas Systems, Inc., 5.22%
(Cost $94) 2,343 94
--------
- ---------------------------------------------------------
- ------------
TOTAL INVESTMENTS (100.0%)
(Cost $137,550) 139,443
--------
- ---------------------------------------------------------
- ------------
<CAPTION>
AMOUNT AMOUNT
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
OTHER ASSETS
Interest Receivable $ 2,859
Deferred Organization Costs 35
Other Assets 8 $ 2,902
-------- --------
- ---------------------------------------------------------
- ------------
LIABILITIES
Payable for:
Reverse Repurchase Agreement (21,723)
Dividends Declared (1,345)
Bank Overdraft (252)
Investment Advisory Fees (71)
Professional Fees (37)
Shareholder Reporting Expenses (28)
Administrative Fees (15)
Directors' Fees and Expenses (5)
Custodian Fees (4)
Other Liabilities (2) (23,482)
-------- --------
- ---------------------------------------------------------
- ------------
NET ASSETS
Applicable to 8,720,544 issued and
outstanding $.01 par value shares
(100,000,000 shares authorized) $118,863
------------
- ---------------------------------------------------------
- ------------
NET ASSET VALUE PER SHARE $ 13.63
------------
- ---------------------------------------------------------
- ------------
AT DECEMBER 31, 1995, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------
Common Stock $ 87
Capital Surplus 122,311
Accumulated Undistributed Net
Investment Income 573
Accumulated Net Realized Loss (6,001)
Unrealized Appreciation on Investments 1,893
- ---------------------------------------------------------
- ------------
TOTAL NET ASSETS $118,863
------------
- ---------------------------------------------------------
- ------------
</TABLE>
+ -- Non-income producing.
+++ -- Variable/floating rate security -- rate disclosed
is as of December 31, 1995.
++ -- Denotes all or a portion of securities subject to
repurchase under Reverse Repurchase Agreements as
of December 31, 1995 -- see note A-4 to financial
statements.
# -- 144A security -- certain conditions for public
sale may exist.
## -- 9.375 of 11.35% represents amount paid in cash.
The remainder is payment-in-kind.
/ / -- Step Bond -- coupon rate increases in increments
to maturity. Rate disclosed is as of December 31,
1995. Maturity date disclosed is the ultimate
maturity.
PIK -- Payment-in-Kind. Income may be paid in additional
securities or cash at the discretion of the
issuer.
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
STATEMENT OF OPERATIONS (000)
<S> <C>
- ----------------------------------------------------------------------------------
INVESTMENT INCOME
Interest Income.............................................. $14,914
Dividend Income.............................................. 3
- ----------------------------------------------------------------------------------
Total Income............................................... 14,917
- ----------------------------------------------------------------------------------
EXPENSES
Interest Expense............................................. 1,917
Investment Advisory Fees..................................... 800
Administrative Fees.......................................... 170
Shareholder Reporting Expenses............................... 70
Professional Fees............................................ 54
Directors' Fees and Expenses................................. 32
Transfer Agent Fees.......................................... 28
Custodian Fees............................................... 24
Other Expenses............................................... 88
- ----------------------------------------------------------------------------------
Total Expenses............................................. 3,183
- ----------------------------------------------------------------------------------
Net Investment Income.................................. 11,734
- ----------------------------------------------------------------------------------
NET REALIZED LOSS
Investment Securities Sold................................... (2,827)
- ----------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Investments.................................................. 16,772
- ----------------------------------------------------------------------------------
Total Net Realized Loss and Change in Unrealized
Appreciation/Depreciation....................................... 13,945
- ----------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS......... $25,679
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income........................................ $11,465 $11,734
Net Realized Loss............................................ (3,174) (2,827)
Change in Unrealized Appreciation/Depreciation............... (14,953) 16,772
- ----------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations.................................................. (6,662) 25,679
- ----------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income........................................ (11,852) (11,112)
In Excess of Net Investment Income........................... (64) --
- ----------------------------------------------------------------------------------------------------
Total Distributions.......................................... (11,916) (11,112)
- ----------------------------------------------------------------------------------------------------
Capital Share Transactions:
Offering Costs............................................... (71) --
Reinvestment of Distributions (10,097 and 2,998 shares,
respectively)............................................... 128 36
- ----------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting From Capital Share
Transactions................................................ 57 36
- ----------------------------------------------------------------------------------------------------
Total Increase (Decrease).................................... (18,521) 14,603
Net Assets:
Beginning of Year............................................ 122,781 104,260
- ----------------------------------------------------------------------------------------------------
End of Year (including accumulated undistributed
(distributions in excess of) net investment income of $(49)
and $573, respectively)..................................... $104,260 $118,863
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
(000)
<S> <C>
- ----------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING AND OPERATING ACTIVITIES:
Proceeds from Sales of Investments............................. $ 120,882
Purchases of Investments....................................... (113,542)
Net Decrease in Short Term Investments......................... 7,058
Investment Income.............................................. 14,106
Interest Expense Paid.......................................... (2,035)
Operating Expenses Paid........................................ (1,253)
- ----------------------------------------------------------------------------------
Net Cash Provided by Investing and Operating Activities........ 25,216
- ----------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Decrease in Reverse Repurchase Agreements.................. (14,625)
Cash Distributions Paid (net of Reinvestments of $36).......... (10,844)
- ----------------------------------------------------------------------------------
Net Cash Used for Financing Activities......................... (25,469)
- ----------------------------------------------------------------------------------
Net Decrease in Cash........................................... (253)
CASH AT BEGINNING OF YEAR........................................ 1
- ----------------------------------------------------------------------------------
BANK OVERDRAFT AT END OF YEAR.................................... $ (252)
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
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........... $ 25,679
Net Sales (Purchases) of Investments........................... 14,398
Net Realized Loss on Investments............................... 2,827
Change in Unrealized Appreciation/Depreciation................. (16,772)
Net Decrease in Receivables Pertaining to Investing and
Operating Activities.......................................... 320
Net Decrease in Payables Pertaining to Investing and Operating
Activities.................................................... (118)
Amortization of Deferred Organization Costs.................... 12
(Accretion)/Amortization....................................... (1,130)
- ----------------------------------------------------------------------------------
Net Cash Provided by Investing and Operating Activities........ $ 25,216
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED
NOVEMBER 30, DECEMBER 31,
1993* TO --------------------
SELECTED PER SHARE DATA AND RATIOS: DECEMBER 31, 1993 1994 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD................................................ $ 14.10 $ 14.10 $ 11.96
- ------------------------------------------------------------------------------------------------------------------------------
Offering Costs...................................................................... (0.05) (0.01) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Investment Income............................................................... 0.04 1.32 1.34
Net Realized and Unrealized Gain (Loss) on Investments.............................. 0.01 (2.08) 1.60
- ------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations................................................ 0.05 (0.76) 2.94
- ------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income........................................................... -- (1.36) (1.27)
In Excess of Net Investment Income.............................................. -- (0.01) --
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions............................................................. -- (1.37) (1.27)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD...................................................... $ 14.10 $ 11.96 $ 13.63
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD............................................... $ 14.75 $ 11.38 $ 12.88
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value.................................................................... 4.61% (14.11)% 25.21%
Net Asset Value (1)............................................................. 0.00% (5.53)% 26.07%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS)............................................... $ 122,781 $ 104,260 $ 118,863
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses Before Interest Expense to Average Net Assets..................... 1.46%** 1.12% 1.11%
Ratio of Expenses After Interest Expense to Average Net Assets...................... 1.46%** 2.78% 2.79%
Ratio of Net Investment Income to Average Net Assets................................ 3.76%** 10.18% 10.29%
Portfolio Turnover Rate............................................................. 0% 32% 84%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
** Annualized
(1) Total investment return based on per share net asset value 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.
Note: Current period permanent book-tax differences, if any, are not included
in the calculation of net investment income per share.
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
- ----------
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.
Capital surplus, accumulated undistributed net investment income and
accumulated net realized loss have been adjusted for prior period permanent
book-tax differences.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the
underlying securities, the value of which exceeds the principal amount of
the repurchase transaction, including 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. To the extent that proceeds from the sale of
the underlying securities are less than the repurchase price under the
agreement, the Fund may incur a loss. In the event of default or bankruptcy
by the other party 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 December 31, 1995, the Fund had reverse repurchase agreements outstanding
as follows:
<TABLE>
<CAPTION>
MATURITY IN
30 TO 90 DAYS
-------------
<S> <C>
Maturity Amount...................... $21,723,000
-------------
Market Value of Assets Sold Under
Agreements........................... $28,327,000
-------------
Weighted Average Interest Rate....... 6.88%
</TABLE>
The average weekly balance of reverse repurchase agreements outstanding
during the year ended December 31, 1995 was approximately $26,572,000 at a
weighted average interest rate of 7.03%.
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. Income distributions and capital gain distributions
are determined in accordance with U.S. Federal income tax regulations which
may differ from generally accepted accounting principles. These differences
are principally due to the timing of the recognition of losses on
securities.
11
<PAGE>
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. Effective September 1, 1995, The Chase Manhattan Bank, N.A., through its
affiliate Chase Global Funds Services Company (the "Administrator"), (formerly
Mutual Funds Service Company, a wholly owned subsidiary of the United States
Trust Company of New York), 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. Effective September 1, 1995, The Chase Manhattan Bank, N.A. 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. Prior to September 1, 1995,
Mutual Funds Service Company and United States Trust Company of New York
provided administrative and custodian services, respectively, to the Fund under
the same terms, conditions and fees as stated above.
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 year ended December 31, 1995, the Fund did not pay
any fees to the International Custodian.
E. During the year ended December 31, 1995, the Fund made purchases and sales
totaling $113,542,000 and $120,882,000, 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
December 31, 1995, the Federal income tax cost basis of securities was
$137,586,000 and accordingly, net unrealized appreciation for Federal income tax
purposes was $1,857,000, of which $4,548,000 related to appreciated securities
and $2,691,000 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 December 31, 1995, approximately 93% 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. At December 31, 1995, none of the Directors elected to participate in the
Plan.
I. During December 1995, the Board declared a distribution of $0.15 per share,
derived from net investment income, payable on January 9, 1996, to shareholders
of record on December 29, 1995.
12
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------
MARCH 31, 1995 JUNE 30, 1995 SEPTEMBER 30, 1995 DECEMBER 31, 1995
------------------ ------------------ ------------------ ------------------
TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE
------- --------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income....................... $ 3,563 $ 0.41 $ 3,709 $ 0.43 $ 3,506 $ 0.40 $ 4,139 $ 0.47
Net Investment Income................... $ 2,589 $ 0.30 $ 2,891 $ 0.33 $ 2,816 $ 0.32 $ 3,438 $ 0.39
Net Realized Loss and Change in
Unrealized Appreciation/
Depreciation........................... $ 5,037 $ 0.57 $ 5,327 $ 0.62 $ 2,155 $ 0.25 $ 1,426 $ 0.16
Net Increase in Net Assets Resulting
from Operations........................ $ 7,626 $ 0.87 $ 8,218 $ 0.95 $ 4,971 $ 0.57 $ 4,864 $ 0.55
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------
MARCH 31, 1994 JUNE 30, 1994 SEPTEMBER 30, 1994 DECEMBER 31, 1994
------------------ ------------------ ------------------ ------------------
TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE
------- --------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income....................... $ 3,357 $ 0.39 $ 3,745 $ 0.43 $ 3,764 $ 0.43 $ 3,731 $ 0.43
Net Investment Income................... $ 2,751 $ 0.32 $ 3,004 $ 0.34 $ 2,899 $ 0.33 $ 2,811 $ 0.33
Net Realized Loss and Change in
Unrealized Depreciation................ $(6,794) $ (0.78) $(4,750) $ (0.54) $(2,964) $ (0.34) $(3,619) $ (0.42)
Net Decrease in Net Assets Resulting
from Operations........................ $(4,043) $ (0.46) $(1,746) $ (0.20) $ (65) $ (0.01) $ (808) $ (0.09)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
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>
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------
To the Shareholders and Board of Directors of
The Morgan Stanley High Yield Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations, of cash flows and of changes in net assets and the
financial highlights present fairly, in all material respects, the financial
position of The Morgan Stanley High Yield Fund, Inc. (the "Fund") at December
31, 1995, the results of its operations and its cash flows 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 two years in the period
then ended and for the period November 30, 1993 (commencement of operations)
through December 31, 1993, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1995 by correspondence with the
custodians, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 9, 1996
14
<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
15
