<PAGE>
THE MORGAN STANLEY HIGH YIELD FUND, INC.
- --------------------------------------------------
OFFICERS AND DIRECTORS
Barton M. Biggs John A. Levin
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS William G. Morton, Jr.
Frederick B. Whittemore DIRECTOR
VICE-CHAIRMAN OF THE BOARD 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
TREASURER
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.
----------
ANNUAL REPORT
DECEMBER 31, 1996
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------
For the year ended December 31, 1996, the Morgan Stanley High Yield Fund, Inc.
(the "Fund") had a total return, based on net asset value per share, of 17.52%
compared to 12.40% for the CS First Boston High Yield Index (the "Index"). For
the period since the Fund's commencement of operations on November 30, 1993
through December 31, 1996, the Fund's total return, based on net asset value per
share, is 39.98% compared with 32.30% for the Index. On December 31, 1996, the
closing price of the Fund's shares on the New York Stock Exchange was $14 5/8
representing a 1.3% premium to the Fund's net asset value per share.
The High Yield market performed well in 1996 far outpacing high quality bonds
for the year. This performance occurred in the face of ten-year Treasury yields
rising nearly eighty-five basis points over the course of the year. This infers
that the spread to Treasuries narrowed about one hundred basis points. The
strong performance in the high yield market can be traced to the sound economy
as was reflected in the outstanding performance of the stock market in 1996.
Several factors helped the Fund outperform the Index for the year. The
communications sector performed very well for the Fund. The entire sector
responded favorably when MFS and Worldcom announced they would merge. We were
favorably positioned when this announcement was made and continued to add to our
positions subsequent to the announcement. This sector also performed well
because the securities in it tend to have bullish characteristics. Many of the
securities in the sector are zero coupon or deferred pay bonds. Thus, in a
rallying high yield market, they tend to outperform.
The cable television sector had a mixed year, performing poorly in the first
half of the year and well in the second half. We added to our positions at wide
spreads and reaped the benefits as spreads narrowed in the second half. Our
exposure to emerging markets debt also continued to add to performance.
As spreads narrowed over the year, we continually upgraded the quality of the
Fund's portfolio. We believe this will protect the Fund if either the economy
weakens or spreads widen generally. We still believe this is the prudent
position to take in the current market environment.
Sincerely,
[SIGNATURE]
Warren J. Olsen
PRESIDENT AND DIRECTOR
[SIGNATURE]
Robert Angevine
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
MORGAN STANLEY GROUP INC., THE DIRECT PARENT COMPANY OF THE FUND'S INVESTMENT
ADVISER, MORGAN STANLEY ASSET MANAGEMENT INC., RECENTLY ANNOUNCED ITS INTENTION
TO MERGE WITH DEAN WITTER, DISCOVER & CO. TO FORM MORGAN STANLEY, DEAN WITTER,
DISCOVER & CO. IT CURRENTLY IS ANTICIPATED THAT THE TRANSACTION WILL CLOSE IN
MID-1997. THEREAFTER, MORGAN STANLEY ASSET MANAGEMENT INC. WILL BE A SUBSIDIARY
OF MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
2
<PAGE>
The Morgan Stanley High Yield Fund, Inc.
Investment Summary as of December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 25.92% 25.92% 17.52% 17.52% 12.40% 12.40%
SINCE INCEPTION* 41.67 11.94 39.98 11.51 32.30 9.49
</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>
1993* 1994 1995 1996
Net Asset Value Per Share $14.10 $11.96 $13.63 $14.45
Market Value Per Share $14.75 $11.38 $12.88 $14.63
Premium/(Discount) 4.6% -4.8% -5.5% 1.3%
Income Dividends - $1.37 $1.27 $1.42
Fund Total Return (2) 0.00% -5.53% 26.07% 17.52%
Index Total Return (1)(3) 1.26% -0.98% 17.39% 12.40%
</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 December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Portfolio Investment
Diversification
Debt Securities 95.3%
Equity Securities 4.7%
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Broadcast - Radio & Television 16.5%
Asset-Backed Securities 5.1%
Food Service & Lodging 2.7%
Foreign Government Bonds 10.8%
Gaming & Lodging 2.8%
Multi-Industry 16.6%
Packaging & Container 5.2%
Retail - General 3.9%
Telecommunications 15.3%
Utilities 3.0%
Other 18.1%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
----------
<C> <S> <C>
1. Republic of Argentina Bonds 4.3%
2. Cablevision Systems Corp. 3.3
3. Gaylord Container Corp. 3.1
4. Viacom, Inc. 3.1
5. Comcast Corp. 3.0
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
----------
<C> <S> <C>
6. Time Warner, Inc. 2.8%
7. Nextel Communications 2.7
8. MFS Communications 2.6
9. Brooks Fiber Properties 2.5
10. Republic of Colombia Bonds 2.4
---
29.8%
---
---
</TABLE>
4
<PAGE>
FINANCIAL STATEMENTS
- ---------
STATEMENT OF NET ASSETS
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- ---------
DECEMBER 31, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
CORPORATE BONDS AND NOTES (77.6%)
- ---------------------------------------------------------
AEROSPACE & DEFENSE (2.1%)
Jet Equipment Trust 'D-95'
#11.44%, 11/1/14 $ 1,100 $ 1,305
#'C1' 11.79%, 6/15/13 1,500 1,785
--------------
3,090
--------------
BANKING (2.2%)
+++Bank United Corp., 8.05%, 5/15/98 1,585 1,597
First Nationwide
9.125%, 2/15/03 865 877
#10.625%, 10/1/03 685 736
--------------
3,210
--------------
BROADCAST -- RADIO & TELEVISION (16.5%)
Cablevision Systems Corp.
9.25%, 11/1/05 1,350 1,328
9.875%, 5/15/06 3,550 3,639
Comcast Cellular
'A' Zero Coupon, 3/5/00 200 144
'B' Zero Coupon, 3/5/00 2,170 1,562
Comcast Corp.
9.375%, 5/15/05 2,700 2,801
9.125%, 10/15/06 655 670
++9.50%, 1/15/08 1,000 1,035
++Lenfest Communications
8.375%, 11/1/05 2,855 2,729
*Marcus Cable Co.
0.00%, 12/15/05 4,640 3,318
Rogers Cablesystems 'B'
10.00%, 3/15/05 2,800 2,982
++Viacom, Inc.
8.00%, 7/7/06 4,795 4,627
--------------
24,835
--------------
COMPUTERS (2.1%)
Advanced Micro Devices, Inc.
11.00%, 8/1/03 2,070 2,241
Digital Equipment Corp.
8.625%, 11/1/12 960 931
--------------
3,172
--------------
DIVERSIFIED (0.1%)
KMart Corp.
8.375%, 7/1/22 185 153
--------------
ENERGY (0.9%)
++Nuevo Energy Co.
9.50%, 4/15/06 1,310 1,379
--------------
ENTERTAINMENT & LEISURE (0.6%)
Station Casinos, Inc.
9.625%, 6/1/03 870 861
--------------
ENVIRONMENTAL CONTROLS (2.0%)
*Norcal Waste Systems Inc.
13.00%, 11/15/05 2,725 3,025
--------------
</TABLE>
- ---------------------------------------------------------
- ------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
FINANCIAL SERVICES (0.5%)
Homeside, Inc.
11.25%, 5/15/03 $ 670 $ 747
--------------
FOOD SERVICE & LODGING (2.7%)
Courtyard By Marriott 'B'
10.75%, 2/1/08 2,020 2,136
++Host Marriott Travel
9.50%, 5/15/05 1,835 1,913
--------------
4,049
--------------
GAMING & LODGING (2.8%)
Boyd Gaming Corp.
9.25%, 10/1/03 1,655 1,618
Grand Casinos
10.125%, 12/1/03 2,320 2,329
Louisiana Casino Cruise
11.50%, 12/1/98 318 321
--------------
4,268
--------------
HEALTH CARE SUPPLIES & SERVICES (0.5%)
Quest Diagnostic Inc.
10.75%, 12/15/06 650 682
--------------
INSURANCE (0.3%)
++Home Holdings, Inc.
8.625%, 12/15/03 2,060 453
--------------
MULTI-INDUSTRY (16.6%)
*Brooks Fiber Properties
0.00%, 3/1/06 4,595 3,062
0.00%, 11/1/06 1,145 729
#Cole National Group
9.875%, 12/31/06 1,975 2,024
*Echostar Satellite Broadcast
0.00%, 3/15/04 4,275 3,222
Flores & Rucks
9.75%, 10/1/06 1,435 1,510
#ISP Holdings, Inc.
9.00%, 10/15/03 1,765 1,787
Ivaco Inc.
11.50%, 9/15/05 650 648
#International Home Foods
10.375%, 11/1/06 640 662
#Maxxam Group Holdings
12.00%, 8/1/03 930 945
*MFS Communications
0.00%, 1/15/06 5,320 3,884
#Parker Drilling Corp.
9.75%, 11/15/06 1,085 1,130
SD Warren Co. 'B'
12.00%, 12/15/04 1,675 1,801
TLC Beatrice International Holdings
11.50%, 10/1/05 1,645 1,742
</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 (CONTINUED)
#Tevecap SA
12.625%, 11/26/04 $ 1,250 $ 1,278
#US Can Corp.
10.125%, 10/15/06 535 563
--------------
24,987
--------------
PACKAGING & CONTAINER (5.2%)
Gaylord Container Corp.
11.50%, 5/15/01 3,580 3,813
12.75%, 5/15/05 795 876
Owen-Illinois, Inc.
11.00%, 12/1/03 2,000 2,225
#Stone Container Corp.
11.50%, 8/15/06 920 949
--------------
7,863
--------------
REAL ESTATE (1.4%)
HMC Acquisition Properties
9.00%, 12/15/07 2,050 2,050
--------------
RETAIL -- GENERAL (3.9%)
Revlon Worldwide Corp.,
Zero Coupon, 3/15/98 3,420 2,950
++Southland Corp.
5.00%, 12/15/03 3,550 2,929
--------------
5,879
--------------
TELECOMMUNICATIONS (14.2%)
*Dial Call Communications
0%, 4/15/04 2,500 1,772
#Globo Communicacoes Part
10.50%, 12/20/06 1,230 1,235
IXC Communications, Inc.
12.50%, 10/1/05 1,250 1,375
#Net Sat Servicos Ltd. 'A'
12.75%, 8/5/04 1,650 1,722
*Nextel Communications
0.00%, 8/15/04 5,980 4,066
*#Occidente Y Caribe
0.00%, 3/15/04 3,175 1,865
Paging Network
10.125%, 8/1/07 400 404
#10.00%, 10/15/08 1,675 1,690
Philippine Long Distance Telephone
9.25%, 6/30/06 1,025 1,110
Rogers Communications
9.125%, 1/15/06 800 790
++TCI Communications, Inc.
7.875%, 2/15/26 1,750 1,569
*Teleport Communications
0.00%, 7/1/07 2,355 1,622
*Telewest plc
0.00%, 10/1/07 3,175 2,203
--------------
21,423
--------------
UTILITIES (3.0%)
Cleveland Electric
9.50%, 5/15/05 1,000 1,071
8.375%, 12/1/11 440 431
8.375%, 8/1/12 1,050 1,029
Midland Cogeneration Ventures 'C-94'
10.33%, 7/23/02 1,169 1,243
Midland Funding II 'A'
11.75%, 7/23/05 650 718
--------------
4,492
--------------
- ---------------------------------------------------------
- ------------
TOTAL CORPORATE BONDS AND NOTES
(Cost $112,579) 116,618
--------------
</TABLE>
- ---------------------------------------------------------
- ------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
ASSET-BACKED SECURITIES (5.1%)
- ---------------------------------------------------------
#Aircraft Lease Portfolio
Securitization Ltd., 1996-1PID
12.75%, 6/15/06 $ 1,774 $ 1,840
DR Securitized Lease Trust 1993-K1 A1
6.66%, 8/15/10 1,450 1,207
DR Securitized Lease Trust 1994-K1 A
7.60%, 8/15/07 3,746 3,447
FMAC 96 B Cl C Sub
7.929%, 11/1/18 1,350 1,143
- ---------------------------------------------------------
- ------------
TOTAL ASSET-BACKED SECURITIES
(Cost $7,235) 7,637
--------------
- ---------------------------------------------------------
- ------------
COLLATERALIZED MORTGAGE OBLIGATIONS (1.8%)
- ---------------------------------------------------------
#GE Capital Mortgage Services 1995-12
7.911%, 8/25/25 651 538
GMACC IO Ser 1996-C1 CL X2 REMIC
1.967%, 3/15/21 7,200 678
PNC Mortgage Services Corp. 1995-2 B4
7.50%, 9/25/25 722 602
Prudential Home Mortgage Securities
1996-A B1
#7.963%, 4/15/25 1,250 849
- ---------------------------------------------------------
- ------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $2,601) 2,667
--------------
- ---------------------------------------------------------
- ------------
FOREIGN GOVERNMENT BONDS (10.8%)
- ---------------------------------------------------------
ARGENTINA (4.3%)
Republic of Argentina Pre 4 Bocon
Zero Coupon, 9/1/02 1,475 1,579
+++Republic of Argentina 'L'
6.625%, 3/31/05 1,470 1,277
Republic of Argentina 'L' Par Bond
5.25%, 3/31/23 5,680 3,591
--------------
6,447
--------------
BRAZIL (0.9%)
+++Federative Republic of Brazil 'L'
4.50%, 4/15/09 1,905 1,372
--------------
COLOMBIA (2.4%)
Republic of Colombia
8.70%, 2/15/16 3,605 3,598
--------------
MEXICO (2.3%)
United Mexican States Discount Bond
(Rights Attached)
6.25%, 12/31/19 4,750 3,485
--------------
VENEZUELA (0.9%)
+++Republic of Venezuela Front Loaded
Interest Rate Reduction Bond 'A'
6.50%, 3/31/07 1,500 1,341
--------------
- ---------------------------------------------------------
- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
TOTAL FOREIGN GOVERNMENT BONDS
(Cost $14,516) $ 16,243
--------------
- ---------------------------------------------------------
- ------------
<CAPTION>
SHARES
<S> <C> <C>
- ---------------------------------------------------------
- ------------
PREFERRED STOCK (4.7%)
- ---------------------------------------------------------
ENTERTAINMENT & LEISURE (2.8%)
Time Warner, Inc. 'M' 10.25% 3,913 4,246
--------------
HEALTH CARE SUPPLIES & SERVICES (0.8%)
+Fresenius Medical Care AG 9.00% 1,225 1,246
--------------
TELECOMMUNICATIONS (1.1%)
TCI Communications, Inc. 5.00%
(Convertible) 16,985 1,567
--------------
- ---------------------------------------------------------
- ------------
TOTAL PREFERRED STOCKS
(Cost $6,678) 7,059
--------------
- ---------------------------------------------------------
- ------------
<CAPTION>
NO. OF
WARRANTS
<S> <C> <C>
- ---------------------------------------------------------
- ------------
WARRANTS (0.0%)
- ---------------------------------------------------------
AEROSPACE & DEFENSE (0.0%)
#+Sabreliner Corp., expiring 4/15/03 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 12,700 --
--------------
- ---------------------------------------------------------
- ------------
TOTAL WARRANTS
(Cost $40) 8
--------------
- ---------------------------------------------------------
- ------------
TOTAL INVESTMENTS (100.0%)
(Cost $143,649) 150,232
--------------
</TABLE>
- ---------------------------------------------------------
- ------------
<TABLE>
<CAPTION>
AMOUNT AMOUNT
(000) (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
OTHER ASSETS
Cash $ 73
Interest Receivable 2,310
Dividends Receivable 100
Deferred Organization Costs 23
Other Assets 8 $ 2,514
---------- --------------
- ---------------------------------------------------------
- ------------
LIABILITIES
Payable for:
Reverse Repurchase Agreement (25,106)
Dividends Declared (1,098)
Investment Advisory Fees (74)
Shareholder Reporting Expenses (50)
Professional Fees (41)
Directors' Fees and Expenses (23)
Administrative Fees (15)
Custodian Fees (7)
Other Liabilities (2) (26,416)
---------- --------------
- ---------------------------------------------------------
- ------------
NET ASSETS
Applicable to 8,742,668 issued and outstanding
$0.01 par value shares (100,000,000 shares
authorized) $ 126,330
--------------
--------------
- ---------------------------------------------------------
- ------------
NET ASSET VALUE PER SHARE $ 14.45
--------------
--------------
- ---------------------------------------------------------
- ------------
AT DECEMBER 31, 1996, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------
Common Stock U.S.$ 87
Capital Surplus 122,605
Distributions in Excess of Net
Investment Income (7)
Accumulated Net Realized Loss (2,938)
Unrealized Appreciation on Investments 6,583
- ---------------------------------------------------------
- ------------
TOTAL NET ASSETS U.S.$ 126,330
--------------
--------------
- ---------------------------------------------------------
- ------------
</TABLE>
+ -- Non-income producing
+++ -- Variable/floating rate security--rate disclosed is as of December 31,
1996.
++ -- Denotes all or a portion of securities subject to repurchase under
Reverse Repurchase Agreements as of December 31, 1996 -- See Note A 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 December 31, 1996. Maturity disclosed is the ultimate maturity.
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
STATEMENT OF OPERATIONS (000)
<S> <C>
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest Income......................................................................... $ 14,484
Dividend Income......................................................................... 279
- ---------------------------------------------------------------------------------------------------------------
Total Income.......................................................................... 14,763
- ---------------------------------------------------------------------------------------------------------------
EXPENSES
Interest Expense........................................................................ 1,609
Investment Advisory Fees................................................................ 842
Administrative Fees..................................................................... 176
Shareholder Reporting Expenses.......................................................... 76
Professional Fees....................................................................... 73
Directors' Fees and Expenses............................................................ 33
Custodian Fees.......................................................................... 29
Transfer Agent Fees..................................................................... 28
Amortization of Organization Costs...................................................... 12
Other Expenses.......................................................................... 81
- ---------------------------------------------------------------------------------------------------------------
Total Expenses........................................................................ 2,959
- ---------------------------------------------------------------------------------------------------------------
Net Investment Income............................................................... 11,804
- ---------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN
Investment Securities Sold.............................................................. 3,064
- ---------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Appreciation on Investments............................................................. 4,689
- ---------------------------------------------------------------------------------------------------------------
Total Net Realized Gain and Change in Unrealized Appreciation/Depreciation.................. 7,753
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................... $ 19,557
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1996 1995
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
<S> <C> <C>
- --------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income............................................... $ 11,804 $ 11,734
Net Realized Gain (Loss)............................................ 3,064 (2,827)
Change in Unrealized Appreciation/Depreciation...................... 4,689 16,772
- --------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations................ 19,557 25,679
- --------------------------------------------------------------------------------------------
Distributions:
Net Investment Income............................................... (12,391) (11,112)
In Excess of Net Investment Income.................................. (7) --
- --------------------------------------------------------------------------------------------
Total Distributions............................................... (12,398) (11,112)
- --------------------------------------------------------------------------------------------
Capital Share Transactions:
Reinvestment of Distributions (22,124 shares and 2,998 shares,
respectively)...................................................... 308 36
- --------------------------------------------------------------------------------------------
Total Increase...................................................... 7,467 14,603
Net Assets:
Beginning of Year................................................... 118,863 104,260
- --------------------------------------------------------------------------------------------
End of Year (including undistributed net investment income
(distributions in excess of) of $(7) and $573, respectively)....... $126,330 $118,863
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
STATEMENT OF CASH FLOWS (000)
<S> <C>
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING AND OPERATING ACTIVITIES:
Proceeds from Sales of Investments...................................................... $ 188,872
Purchases of Investments................................................................ (188,867)
Investment Income....................................................................... 12,171
Interest Expense Paid................................................................... (1,288)
Operating Expenses Paid................................................................. (1,160)
- ---------------------------------------------------------------------------------------------------------------
Net Cash Provided by Investing and Operating Activities................................. 9,728
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under Reverse Repurchase Agreements.......................................... 2,934
Distributions Paid (net of reinvestments of $308)....................................... (12,337)
- ---------------------------------------------------------------------------------------------------------------
Net Cash Used for Financing Activities.................................................. (9,403)
- ---------------------------------------------------------------------------------------------------------------
Net Increase in Cash.................................................................... 325
BANK OVERDRAFT AT BEGINNING OF YEAR......................................................... (252)
- ---------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR......................................................................... $ 73
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INVESTMENT INCOME TO NET CASH PROVIDED BY INVESTING AND OPERATING
ACTIVITIES
- ---------------------------------------------------------------------------------------------------------------
Net Investment Income................................................................... $ 11,804
Proceeds from Sales of Investments...................................................... 188,872
Purchases of Investments................................................................ (188,867)
Net Decrease in Receivables Related to Operations....................................... 449
Net Increase in Payables Related to Operations.......................................... 499
Amortization of Organization Costs...................................................... 12
Accretion/Amortization of Discounts and Premiums........................................ (3,041)
- ---------------------------------------------------------------------------------------------------------------
Net Cash Provided by Investing and Operating Activities................................. $ 9,728
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 30,
YEAR ENDED DECEMBER 31, 1993* TO
---------------------------- DECEMBER 31,
SELECTED PER SHARE DATA AND RATIOS 1996 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......................................... 1.35 1.34 1.32 0.04
Net Realized and Unrealized Gain (Loss) on Investments........ 0.89 1.60 (2.08) 0.01
- -----------------------------------------------------------------------------------------------------------
Total from Investment Operations.......................... 2.24 2.94 (0.76) 0.05
- -----------------------------------------------------------------------------------------------------------
Distributions
Net Investment Income..................................... (1.42) (1.27) (1.36) --
In Excess of Net Investment Income........................ -- -- (0.01) --
- -----------------------------------------------------------------------------------------------------------
Total Distributions....................................... (1.42) (1.27) (1.37) --
- -----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................................ $ 14.45 $ 13.63 $ 11.96 $ 14.10
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD......................... $ 14.63 $ 12.88 $ 11.38 $ 14.75
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value.............................................. 25.92% 25.21% (14.11)% 4.61%
Net Asset Value (1)....................................... 17.52% 26.07% (5.53)% 0.00%
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS)......................... $126,330 $118,863 $104,260 $ 122,781
- -----------------------------------------------------------------------------------------------------------
Ratio of Expenses Before Interest Expense to Average Net
Assets....................................................... 1.12% 1.11% 1.12% 1.46%**
Ratio of Expenses After Interest Expense to Average Net
Assets....................................................... 2.46% 2.79% 2.78% 1.46%**
Ratio of Net Investment Income to Average Net Assets.......... 9.82% 10.29% 10.18% 3.76%**
Portfolio Turnover Rate....................................... 136% 84% 32% 0%
- -----------------------------------------------------------------------------------------------------------
*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.
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- ----------
The Morgan Stanley High Yield Fund, Inc. (the "Fund") was incorporated 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 debt
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. Certain securities may be valued on the basis of
bid prices provided by one principal market maker. 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 receives cash from the sale of securities and
agrees to repurchase the securities at a mutually agreed upon date and
price. Reverse repurchase agreements involve market risk that the 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. The Fund is also subject to credit risk equal to
the amount by which the value of securities subject to repurchase exceeds
the Fund's liability under the reverse repurchase agreement. Securities
subject to repurchase under reverse repurchase agreements are designated as
such in the Statement of Net Assets.
At December 31, 1996, the Fund had reverse repurchase agreements outstanding
as follows:
<TABLE>
<CAPTION>
MATURITY IN
30 TO 90
DAYS
------------
<S> <C>
Value of securities subject to
repurchase............................. $33,396,000
------------
Maturity Amount........................ $25,249,000
------------
Interest Rate.......................... 6.69%
</TABLE>
The average weekly balance of reverse repurchase agreements outstanding
during the year ended December 31, 1996 was approximately $23,955,000 at a
weighted average interest rate of 6.58%.
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 and non-deductible
expenses.
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 year ended December 31, 1996, the Fund did not
incur any fees to the International Custodian.
E. During the year ended December 31, 1996, the Fund made purchases and sales
totaling, approximately $188,867,000 and $188,872,000, 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, 1996, the Federal income tax cost basis of
securities was $143,700,000 and accordingly, net unrealized appreciation for
Federal income tax purposes was $6,531,000 of which $8,011,000 related to
appreciated securities and $1,480,000 related to depreciated securities. During
the year ended December 31, 1996, the Fund utilized capital loss carryforwards
for U.S. Federal income tax purposes of approximately $3,079,000. At December
31, 1996, the Fund had a capital loss carryforward for U.S. Federal income tax
purposes of approximately $2,887,000 available to offset future capital gains
which will expire on December 31, 2003.
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, 1996, approximately 95% 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 December 31, 1996 totaled
approximately $12,000 and are included in Payable for Directors' Fees and
Expenses on the Statement of Net Assets.
I. During December 1996, the Board declared a monthly distribution of $0.13 per
share, derived from net investment income payable on January 9, 1997, to
shareholders of record on December 31, 1996.
- --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED)
For the year ended December 31, 1996, the percentage of dividends, as
reported on Form 1099-DIV, that qualify for the 70% dividend received deduction
for corporate shareholders was 2%.
12
<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, 1996, 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 three 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, 1996 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 10, 1997
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
