<PAGE>
THE MORGAN STANLEY HIGH YIELD FUND, INC.
- --------------------------------------------------
DIRECTORS AND OFFICERS
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS James W. Grisham
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND DIRECTOR Michael F. Klein
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 Belinda A. Brady
ASSISTANT TREASURER
- --------------------------------------------------
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
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank
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.
----------
FIRST QUARTER REPORT
MARCH 31, 1997
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------
For the three month period ended March 31, 1997, the Morgan Stanley High Yield
Fund, Inc. (the "Fund") had a total return, based on net asset value per share,
of 0.80% compared to 1.47% for the CS First Boston High Yield Index (the
"Index"). For the one year ended March 31, 1997, the Fund had a total return,
based on net asset value per share, of 15.72% compared to 11.64% for the Index.
For the period since the Fund's commencement of operations on November 30, 1993
through March 31, 1997, the Fund's total return based on net asset value per
share, was 41.09% compared to 34.25% for the Index. On March 31, 1997, the
closing price of the Fund's shares on the New York Stock Exchange was $14.25,
equal to the Fund's net asset value per share.
The U.S. high yield bond market performed well in the first quarter of 1997,
with a return that compared favorably with other U.S. asset classes. The quarter
was divided with an extremely strong performance in January and February
followed by a correction in March associated with the impact of the Federal
Reserve's decision to raise interest rates.
Securities which performed particularly well included KMart, which continued to
post favorable results. Our holding in Echostar, a satellite television service,
performed strongly on the news that a division of News Corporation planned to
purchase 50% of the company. The only notable underperforming position was
Paging Network, Inc. While PageNet is the leader in the U.S. paging industry, it
has recently suffered from investor skepticism regarding the success of its new
enhanced voice-messaging service.
In terms of sector exposure, we added to our telecommunications and our emerging
market debt positions on weakness late in the quarter. In contrast, we reduced
our cable television exposure in the first quarter. We had added to our cable
holdings in 1996 when the sector underperformed the broader high-yield market,
and then were able to take profits as prices rebounded early in the first
quarter.
Our overall portfolio structure continues to feature average credit quality
somewhat higher than market benchmarks. Our duration and interest rate
sensitivity is moderately longer than that of market benchmarks. We believe the
value in the U.S. bond market as well as the opportunities we see in the high
yield sector continue to make this an appropriate position.
Sincerely,
[SIGNATURE]
Warren J. Olsen
PRESIDENT AND DIRECTOR
[SIGNATURE]
Robert Angevine
PORTFOLIO MANAGER
April 1997
2
<PAGE>
The Morgan Stanley High Yield Fund, Inc.
Investment Summary as of March 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION
TOTAL RETURN (%)
------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (3)
---------------------- ---------------------- ----------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
<S> <C> <C> <C> <C> <C> <C>
---------------------- ---------------------- ----------------------
FISCAL YEAR TO DATE -0.41% -- 0.80% -- 1.47% --
ONE YEAR 18.86 18.86% 15.72 15.72% 11.64 11.64%
SINCE INCEPTION* 41.09 10.88 41.09 10.88 34.25 9.24
</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:
<S> <C> <C> <C> <C> <C>
Total Return
1993* 1994 1995 1996 Three Months Ended March 31, 1997
Net Asset Value Per Share $14.10 $11.96 $13.63 $14.45 $14.25
Market Value Per Share $14.75 $11.38 $12.88 $14.63 $14.25
Premium/(Discount) 4.6% -4.8% -5.5% 1.3% 0.0%
Income Dividends - $1.37 $1.27 $1.42 $0.32
Fund Total Return (2) 0.00% -5.53% 26.07% 17.52% 0.80%
Index Total Return (3) 1.26% -0.98% 17.39% 12.40% 1.47%
The Morgan Stanley High Yield Fund, Inc. (2)
CS First Boston High Yield Index (3)
</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.
3
<PAGE>
The Morgan Stanley High Yield Fund, Inc.
Investment Summary as of March 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Debt Securities 91.7%
Equity Securities 6.0%
Short-Term Investment 2.3%
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Asset-Backed Securities 5.0%
Broadcast - Radio & Television 10.5%
Entertainment & Leisure 3.4%
Financial Services 4.2%
Food Service & Lodging 3.1%
Foreign Government Bonds 14.5%
Gaming & Lodging 2.9%
Multi-Industry 10.1%
Packaging & Container 4.4%
Telecommunications 18.3%
Other 23.6%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
-----------
<C> <S> <C>
1. Republic of Argentina Bonds 4.3%
2. Time Warner, Inc. 3.4
3. Gaylord Container Corp. 3.1
4. DR Securitized Lease Trust 3.0
5. Nextel Communications 2.5
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
-----------
<C> <S> <C>
6. United Mexican States Discount Bond 2.4%
7. Brooks Fiber Properties 2.4
8. Viacom, Inc. 2.4
9. Republic of Colombia Bonds 2.3
10. Tele-Communications, Inc. 2.1
---
27.9%
---
---
</TABLE>
* Excludes short-term investments.
4
<PAGE>
INVESTMENTS (UNAUDITED)
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- ---------
MARCH 31, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
CORPORATE BONDS AND NOTES (68.9%)
- ---------------------------------------------------------
AEROSPACE & DEFENSE (2.1%)
Jet Equipment Trust
'C1' 11.79%, 6/15/13 $ 1,500 $ 1,778
'D-95' 11.44%, 11/1/14 1,100 1,297
--------------
3,075
--------------
BANKING (2.3%)
+Bank United Corp.
8.05%, 5/15/98 1,585 1,613
First Nationwide
9.125%, 2/15/03 1,150 1,173
10.625%, 10/1/03 685 733
--------------
3,519
--------------
BROADCAST -- RADIO & TELEVISION (10.5%)
Cablevision Systems Corp.
9.875%, 5/15/06 2,650 2,623
Comcast Cellular
'A' Zero Coupon, 3/5/00 200 147
'B' Zero Coupon, 3/5/00 2,170 1,595
Comcast Corp.
9.375%, 5/15/05 1,500 1,536
9.50%, 1/15/08 1,000 1,023
Marcus Cable Co.
0.00%, 12/15/05 2,240 1,546
Rogers Cablesystems 'B'
10.00%, 3/15/05 2,210 2,332
TV Azteca 'B'
10.50%, 2/15/07 1,440 1,418
Viacom, Inc.
8.00%, 7/7/06 3,805 3,577
--------------
15,797
--------------
COMPUTERS (1.6%)
Advanced Micro Devices, Inc.
11.00%, 8/1/03 1,820 2,002
Digital Equipment Corp.
8.625%, 11/1/12 310 303
--------------
2,305
--------------
DIVERSIFIED (1.8%)
KMart Corp.
7.75%, 10/1/12 725 630
8.375% 7/1/22 185 163
RJR Nabisco Inc.
8.75%, 4/15/04 1,950 1,946
--------------
2,739
--------------
ENERGY (1.7%)
Nuevo Energy Co.
9.50%, 4/15/06 1,310 1,346
Vintage Petroleum
8.625%, 2/1/09 1,330 1,267
--------------
2,613
--------------
</TABLE>
- ---------------------------------------------------------
- ------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
ENVIRONMENTAL CONTROLS (2.0%)
Norcal Waste Systems Inc.
13.00%, 11/15/05 $ 2,725 $ 3,025
--------------
FINANCIAL SERVICES (3.1%)
Amresco Inc. '97-A'
10.00%, 3/15/04 1,370 1,356
Borg-Warner Security Corp.
9.625%, 3/15/07 1,505 1,484
Homeside, Inc.
11.25%, 5/15/03 434 488
Riggs Capital Trust II
8.875%, 3/15/27 1,305 1,303
--------------
4,631
--------------
FOOD SERVICE & LODGING (3.1%)
Courtyard By Marriott 'B'
10.75%, 2/1/08 2,020 2,106
Host Marriott Travel
9.50%, 5/15/05 1,835 1,865
Sun International Hotels
9.00%, 3/15/07 725 696
--------------
4,667
--------------
FOREST PRODUCTS & PAPER (0.9%)
Asia Pulp & Paper Co.
12.00%, 2/15/04 1,350 1,306
--------------
GAMING & LODGING (2.9%)
Boyd Gaming Corp.
9.25%, 10/1/03 1,655 1,564
Grand Casinos
10.125%, 12/1/03 2,495 2,479
Louisiana Casino Cruise
11.50%, 12/1/98 318 322
--------------
4,365
--------------
HEALTH CARE SUPPLIES & SERVICES (0.7%)
Tenet Healthcare Corp.
8.625%, 1/15/07 1,040 1,026
--------------
INSURANCE (1.0%)
Anthem Insurance
9.00%, 4/1/27 1,550 1,528
--------------
MULTI-INDUSTRY (10.1%)
Brooks Fiber Properties
0.00%, 3/1/06 4,595 2,906
0.00% 11/1/06 1,145 690
CA FM Lease Trust
8.50%, 7/15/17 1,250 1,261
Echostar Satellite Broadcast
0.00%, 3/15/04 3,345 2,663
</TABLE>
- ---------------------------------------------------------
- ------------
5
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
MULTI-INDUSTRY (CONTINUED)
ISP Holdings, Inc.
9.00%, 10/15/03 $ 2,765 $ 2,789
Multicanal S.A.
10.50%, 2/1/07 1,180 1,192
SD Warren Co. 'B'
12.00%, 12/15/04 1,675 1,859
TLC Beatrice International Holdings
11.50%, 10/1/05 1,645 1,768
--------------
15,128
--------------
PACKAGING & CONTAINER (4.4%)
Gaylord Container Corp.
11.50%, 5/15/01 3,580 3,768
12.75%, 5/15/05 795 874
Owen-Illinois, Inc.
11.00%, 12/1/03 1,000 1,105
Stone Container Corp.
11.50%, 8/15/06 920 906
--------------
6,653
--------------
REAL ESTATE (1.4%)
HMC Acquisition Properties
9.00%, 12/15/07 2,050 2,071
--------------
RETAIL -- GENERAL (1.6%)
Southland Corp.
5.00%, 12/15/03 3,000 2,460
--------------
TELECOMMUNICATIONS (15.3%)
Dial Call Communications
0.00%, 4/15/04 2,500 1,869
Globo Par Com
10.50%, 12/20/06 1,230 1,247
IXC Communications, Inc.
12.50%, 10/1/05 1,250 1,388
Net Sat Servicos Ltd. 'A'
12.75%, 8/5/04 1,650 1,718
Nextel Communications
0.00%, 8/15/04 5,435 3,750
Occidente y Caribe
0.00%, 3/15/04 2,275 1,387
Paging Network, Inc.
10.125%, 8/1/07 400 373
10.00%, 10/15/08 1,675 1,545
Qwest Communications International
10.875%, 4/1/07 1,310 1,302
Rogers Communications
9.125%, 1/15/06 800 792
TCI Satellite Entertainment
0.00%, 2/15/07 4,200 1,932
Tele-Communications, Inc.
9.25%, 1/15/23 3,300 3,171
Teleport Communications
0.00%, 7/1/07 3,855 2,612
--------------
23,086
--------------
</TABLE>
- ---------------------------------------------------------
- ------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
UTILITIES (2.4%)
Cleveland Electric
8.375%, 12/1/11 $ 440 $ 428
8.375%, 8/1/12 1,050 1,024
Midland Cogeneration Ventures 'C-94'
10.33%, 7/23/02 1,393 1,480
Midland Funding II 'A'
11.75%, 7/23/05 650 718
--------------
3,650
--------------
- ---------------------------------------------------------
- ------------
TOTAL CORPORATE BONDS AND NOTES
(Cost $102,056) 103,644
--------------
- ---------------------------------------------------------
- ------------
ASSET-BACKED SECURITIES (5.0%)
- ---------------------------------------------------------
Aircraft Lease Portfolio
Securitization Ltd., 1996-I PID
12.75%, 6/15/06 1,774 1,867
DR Securitized Lease Trust
1993-K1 A1
6.66%, 8/15/10 1,418 1,216
1994-K1 A
7.60%, 8/15/07 3,634 3,352
FMAC, 96 B CI C Sub
7.929%, 11/1/18 1,350 1,121
--------------
- ---------------------------------------------------------
- ------------
TOTAL ASSET-BACKED SECURITIES
(Cost $7,128) 7,556
--------------
- ---------------------------------------------------------
- ------------
COLLATERALIZED MORTGAGE OBLIGATIONS (1.8%)
- ---------------------------------------------------------
GE Capital Mortgage Services 1995-12
7.911%, 8/25/25 650 573
GMAC IO Ser 1996-C1 CL X2 REMIC
1.926%, 3/15/21 7,193 638
PNC Mortgage Services Corp,
1995-2 B4
7.50%, 9/25/25 721 613
Prudential Home Mortgage Securities
1996-A B1
7.963%, 4/15/25 1,250 879
--------------
- ---------------------------------------------------------
- ------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $2,599) 2,703
--------------
- ---------------------------------------------------------
- ------------
FOREIGN GOVERNMENT BONDS (14.5%)
- ---------------------------------------------------------
ARGENTINA (4.3%)
+ Republic of Argentina 'L'
6.813%, 3/31/05 1,455 1,302
Republic of Argentina 'L' Par Bond
5.25%, 3/31/23 5,680 3,554
Republic of Argentina Pre 4
Bocon Zero Coupon, 9/1/02 1,475 1,636
--------------
6,492
--------------
</TABLE>
- ---------------------------------------------------------
- ------------
6
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
BRAZIL (1.4%)
Federative Republic of Brazil 'L'
4.50%, 4/15/09 $ 2,785 $ 2,134
--------------
COLOMBIA (2.3%)
Republic of Colombia
8.70%, 2/15/16 3,605 3,510
--------------
MEXICO (2.4%)
United Mexican States Discount Bond
(Rights Attached)
6.25%, 12/31/19 5,175 3,648
--------------
PANAMA (1.0%)
Republic of Panama
7.875%, 2/13/02 1,600 1,550
--------------
RUSSIA (1.1%)
Russia Past Due Interest Bond
6.75%, 6/30/17 2,300 1,556
--------------
VENEZUELA (2.0%)
Republic of Venezuela Front Loaded
Interest Reduction Bond 'A' (Rights
Attached)
6.75%, 3/31/20 4,100 2,937
--------------
- ---------------------------------------------------------
- ------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL FOREIGN GOVERNMENT BONDS
(Cost $20,949) 21,827
--------------
- ---------------------------------------------------------
- ------------
<CAPTION>
NO. OF
UNITS
<S> <C> <C>
- ---------------------------------------------------------
- ------------
UNITS (1.5%)
- --------------------------------------------------------------------
TELECOMMUNICATIONS (1.5%)
Globalstar L.P. (Sr. Note + 1 Warrant)
11.375%, 2/15/04 (Cost $2,252) 2,250,000 2,199
--------------
- ---------------------------------------------------------
- ------------
<CAPTION>
SHARES
<S> <C> <C>
- ---------------------------------------------------------
- ------------
PREFERRED STOCKS (6.0%)
- ---------------------------------------------------------
ENTERTAINMENT & LEISURE (3.4%)
Time Warner, Inc. 'M' 10.25% 4,828 5,214
--------------
FINANCIAL SERVICES (1.1%)
Sinclair Capital
11.625% 16,200 1,612
--------------
TELECOMMUNICATIONS (1.5%)
TCI Communications, Inc. 5.00%
(Convertible) 24,985 2,280
--------------
- ---------------------------------------------------------
- ------------
TOTAL PREFERRED STOCKS
(Cost $8,819) 9,106
--------------
</TABLE>
- ---------------------------------------------------------
- ------------
<TABLE>
<CAPTION>
NO. OF VALUE
WARRANTS (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
WARRANTS (0.0%)
- ---------------------------------------------------------
AEROSPACE & DEFENSE (0.0%)
Sabreliner Corp., expiring 4/15/98 2,000 $ 1
--------------
GAMING & LODGING (0.0%)
Louisiana Casino Cruises, expiring
12/1/98 1,108 7
--------------
TELECOMMUNICATIONS (0.0%)
Nextel Communications, expiring
4/25/99 2,500 --@
Occidente y Caribe, expiring 3/15/04 9,100 --@
--------------
--@
--------------
- ---------------------------------------------------------
- ------------
TOTAL WARRANTS
(Cost $40) 8
--------------
- ---------------------------------------------------------
- ------------
<CAPTION>
FACE
AMOUNT
(000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
SHORT-TERM INVESTMENT (2.3%)
- --------------------------------------------------------------------
REPURCHASE AGREEMENT
Chase Securities, Inc., 6.00%, dated
3/31/97, due 4/1/97, to be
repurchased at $3,469,
collateralized by United States
Treasury Bonds, 10.75%, due 8/15/05,
valued at $3,542.
(Cost $3,468) $ 3,468 3,468
--------------
- ---------------------------------------------------------
- ------------
TOTAL INVESTMENTS (100.0%)
(Cost $147,311) 150,511
--------------
- ---------------------------------------------------------
- ------------
OTHER ASSETS AND LIABILITIES
Other Assets 8,880
Liabilities (34,640) (25,760)
---------- --------------
- ---------------------------------------------------------
- ------------
NET ASSETS
Applicable to 8,752,368 issued and outstanding
$0.01 par value shares (100,000,000 shares
authorized) $ 124,751
--------------
--------------
- ---------------------------------------------------------
- ------------
NET ASSET VALUE PER SHARE $ 14.25
--------------
--------------
- ---------------------------------------------------------
- ------------
</TABLE>
+ -- Variable/floating rate security--rate disclosed is as of March 31,
1997.
@ -- Value is less than $500.
IO -- Interest Only
REMIC -- Real Estate Mortgage Investment Conduit
7
