<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
Michael F. Klein VICE PRESIDENT
PRESIDENT AND DIRECTOR Harold J. Schaaff, Jr.
Peter J. Chase VICE PRESIDENT
DIRECTOR Joseph P. Stadler
John W. Croghan VICE PRESIDENT
DIRECTOR Valerie Y. Lewis
David B. Gill SECRETARY
DIRECTOR Joanna M. Haigney
Graham E. Jones TREASURER
DIRECTOR Belinda A. Brady
John A. Levin ASSISTANT TREASURER
DIRECTOR
- --------------------------------------------------
INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
- ---------------------------------------------------------
CUSTODIANS
Morgan Stanley Trust Company
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.
----------
SEMI-ANNUAL REPORT
JUNE 30, 1997
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------
For the six month period ended June 30, 1997, The Morgan Stanley High Yield
Fund, Inc. (the "Fund") had a total return, based on net asset value per share,
of 9.26% compared to 5.88% for the CS First Boston High Yield Index (the
"Index"). For the one year ended June 30, 1997, the Fund had a total return,
based on net asset value per share, of 24.11% compared to 14.66% for the Index.
For the period since the Fund's commencement of operations on November 30, 1993
through June 30, 1997, the Fund's total return based on net asset value per
share, was 52.94% compared to 40.06% for the Index. On June 30, 1997, the
closing price of the Fund's shares on the New York Stock Exchange was $15 1/16,
representing a 0.4% discount to the Fund's net asset value per share.
We have continued to emphasize the communications industry in our high yield
portfolio. We believe exceptional growth opportunities exist in the newly
deregulated local exchange sector, as well as in selected companies in the
wireless and long distance sectors. Securities which performed strongly included
Nextel Communications, Qwest Communications, and Occel, a cellular company based
in the Republic of Colombia. Microsoft's strategic investment in Comcast led to
strong gains for our holdings in the cable industry, particularly
Tele-Communications, Inc. and Cablevision Systems Corp. In the emerging markets
arena, our investments in U.S. dollar-denominated sovereign and corporate bonds
continued to outperform. We reduced both the cable and emerging market sectors
on strength in the second quarter.
Our overall portfolio structure continues to feature higher average credit
quality compared to market benchmarks. In terms of interest-rate sensitivity, we
have taken steps to reduce our exposure to no longer than that of market
benchmarks. We believe that there is fair value in the U.S. bond market, and
that historically narrow high-yield credit spreads are supported by strong
fundamentals.
Sincerely,
[SIGNATURE]
Michael F. Klein
PRESIDENT AND DIRECTOR
[SIGNATURE]
Robert Angevine
PORTFOLIO MANAGER
July 1997
2
<PAGE>
The Morgan Stanley High Yield Fund, Inc.
Investment Summary as of June 30, 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 7.54% -- 9.26% -- 5.88% --
ONE YEAR 21.51 21.51% 24.11 24.11% 14.66 14.66%
SINCE INCEPTION* 52.35 12.78 52.94 12.59 40.06 9.86
</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 Six Months Ended June 30, 1997
Net Asset Value Per Share $14.10 $11.96 $13.63 $14.45 $15.12
Market Value Per Share $14.75 $11.38 $12.88 $14.63 $15.06
Premium/(Discount) 4.6% -4.8% -5.5% 1.3% -0.4%
Income Dividends - $1.37 $1.27 $1.42 $0.64
Fund Total Return (2) 0.00% -5.53% 26.07% 17.52% 9.26%
Index Total Return (3) 1.26% -0.98% 17.39% 12.40% 5.88%
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 June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Debt Securities 84.2%
Equity Securities 5.6%
Short-Term Investments 10.2%
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Asset-Backed Securities 5.0%
Broadcast -- Radio &
Television 8.7%
Collateralized Mortgage
Obligations 2.8%
Diversified 5.3%
Energy 4.7%
Financial Services 2.7%
Foreign Government Bonds 7.9%
Gaming & Lodging 2.8%
Multi-Industry 9.3%
Telecommunications 16.2%
Utilities 2.6%
Other 32.0%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
-----------
<C> <S> <C>
1. Time Warner Inc. 3.6%
2. Republic of Argentina 3.4
3. DR Securitized Lease Trust 3.1
4. Nextel Communications 2.9
5. Brooks Fiber Properties 2.7
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
-----------
<C> <S> <C>
6. Tele-Communications, Inc. 2.7%
7. Norcal Waste Systems, Inc. 2.5
8. Gaylord Container Corp. 2.3
9. Teleport Communications 2.2
10. Marriott International 2.2
---
27.6%
---
---
</TABLE>
* Excludes short-term investments.
4
<PAGE>
FINANCIAL STATEMENTS
- ---------
STATEMENT OF NET ASSETS (UNAUDITED)
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- ---------
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
CORPORATE BONDS AND NOTES (68.5%)
- ---------------------------------------------------------
AEROSPACE & DEFENSE (2.0%)
Jet Equipment Trust
'C1' 144A 11.79%, 6/15/13 $ 1,500 $ 1,871
'D-95' 144A 11.44%, 11/1/14 1,100 1,371
--------------
3,242
--------------
AUTOMOTIVE (0.6%)
EES Coke Battery Co., Inc. 144A
9.382%, 4/15/07 950 973
--------------
BANKING (1.1%)
First Nationwide
9.125%, 1/15/03 250 259
10.625%, 10/1/03 1,375 1,509
--------------
1,768
--------------
BROADCAST -- RADIO & TELEVISION (8.7%)
(d)Cablevision Systems Corp.
9.875%, 5/15/06 2,650 2,822
Comcast Cellular Corp. 144A
9.50%, 5/1/07 940 952
Paramount Communications
8.25%, 8/1/22 2,600 2,489
Rogers Cablesystems
10.125%, 9/1/12 650 696
(d)Rogers Cablesystems 'B'
10.00%, 3/15/05 2,210 2,392
TV Azteca 'B' 144A
10.50%, 2/15/07 1,440 1,478
Viacom, Inc.
8.00%, 7/7/06 3,590 3,491
--------------
14,320
--------------
BUSINESS SERVICES (0.5%)
Outdoor Systems Inc. 144A
8.875%, 6/15/07 825 800
--------------
COAL, GAS & OIL (1.0%)
Snyder Oil Corp.
8.75%, 6/15/07 1,615 1,607
--------------
COMPUTERS (1.7%)
(d)Advanced Micro Devices, Inc.
11.00%, 8/1/03 2,270 2,531
Digital Equipment Corp.
8.625%, 11/1/12 310 309
--------------
2,840
--------------
DIVERSIFIED (1.7%)
KMart Corp.
7.75%, 10/1/12 725 665
8.375%, 7/1/22 185 169
(d)RJR Nabisco Inc.
8.75%, 4/15/04 1,935 1,973
--------------
2,807
--------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
ENERGY (4.7%)
National Power Corp.
7.875%, 12/15/06 $ 1,825 $ 1,786
(d)Nuevo Energy Co.
9.50%, 4/15/06 1,510 1,578
Quezon Power Ltd.
8.86%, 6/15/17 2,650 2,650
(c)Transamerican Energy 144A
0.00%, 6/15/02 945 679
(d)Vintage Petroleum
8.625%, 2/1/09 1,055 1,051
--------------
7,744
--------------
ENVIRONMENTAL CONTROLS (2.5%)
(f)Norcal Waste Systems Inc.
13.00%, 11/15/05 3,575 4,058
--------------
FINANCIAL SERVICES (1.7%)
(d)Amresco Inc. '97-A'
10.00%, 3/15/04 1,370 1,406
Geberit International 144A
10.125%, 4/15/07 DEM 1,700 1,065
Riggs Capital Trust II 144A
8.875%, 3/15/27 $ 305 311
--------------
2,782
--------------
FOOD SERVICE & LODGING (2.2%)
Courtyard By Marriott 'B'
10.75%, 2/1/08 1,520 1,646
(d)Host Marriott Travel
9.50%, 5/15/05 1,835 1,915
--------------
3,561
--------------
FOREST PRODUCTS & PAPER (1.0%)
(c)APP Fin II Mauritius Ltd. 144A
12.00%, 12/29/49 1,640 1,677
--------------
GAMING & LODGING (2.8%)
(d)Grand Casinos
10.125%, 12/1/03 2,495 2,607
Louisiana Casino Cruise
11.50%, 12/1/98 318 322
Station Casinos, Inc.
10.125%, 3/15/06 1,660 1,676
--------------
4,605
--------------
HEALTH CARE SUPPLIES & SERVICES (1.1%)
(d)Tenet Healthcare Corp.
8.625%, 1/15/07 1,875 1,912
--------------
INSURANCE (0.9%)
Anthem Insurance 144A
9.00%, 4/1/27 1,525 1,570
--------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
METALS (1.5%)
Altos Hornos de Mexico 144A
11.875%, 4/30/04 $ 810 $ 869
Impress Metal Packaging 144A
9.875%, 5/29/07 DEM 2,750 1,634
--------------
2,503
--------------
MULTI-INDUSTRY (9.3%)
(c,d)Brooks Fiber Properties
0.00%, 3/1/06 $ 5,395 3,675
0.00%, 11/1/06 1,095 713
CA FM Lease Trust 144A
8.50%, 7/15/17 1,491 1,529
(c)Echostar Satellite Broadcast
0.00%, 3/15/04 1,165 830
(d)ISP Holdings, Inc. 'B'
9.00%, 10/15/03 2,765 2,858
Multicanal S.A. 144A
10.50%, 2/1/07 1,205 1,295
(d)SD Warren Co. 'B'
12.00%, 12/15/04 2,235 2,503
(d)TLC Beatrice International Holdings
11.50%, 10/1/05 1,645 1,849
--------------
15,252
--------------
PACKAGING & CONTAINER (2.3%)
(d)Gaylord Container Corp.
11.50%, 5/15/01 3,580 3,766
--------------
REAL ESTATE (1.9%)
(d)HMC Acquisition Properties
9.00%, 12/15/07 2,050 2,083
Residential Reins 97A A2 144A
11.45%, 12/15/98 1,000 1,005
--------------
3,088
--------------
RETAIL -- GENERAL (1.5%)
(d)Southland Corp.
5.00%, 12/15/03 3,000 2,550
--------------
TELECOMMUNICATIONS (15.2%)
(c)Dial Call Communications
0.00%, 4/15/04 2,500 2,047
Globalstar LP 144A
11.375%, 2/15/04 1,925 1,928
(d)IXC Communications, Inc.
12.50%, 10/1/05 1,540 1,761
Net Sat Servicos Ltd. 'A'
12.75%, 8/5/04 775 845
(c,d)Nextel Communications
0.00%, 8/15/04 6,135 4,693
(c)Occidente y Caribe
0.00%, 3/15/04 3,125 2,318
Qwest Communications International
144A
10.875%, 4/1/07 1,635 1,776
(d)Rogers Communications
9.125%, 1/15/06 800 808
(c)TCI Satellite Entertainment 144A
0.00%, 2/15/07 4,050 2,410
(d)Tele-Communications, Inc.
9.25%, 1/15/23 2,650 2,759
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
TELECOMMUNICATIONS (CONTINUED)
(c,d)Teleport Communications
0.00%, 7/1/07 $ 4,980 $ 3,598
--------------
24,943
--------------
UTILITIES (2.6%)
Cleveland Electric
8.375%, 12/1/11 440 443
(d)8.375%, 8/1/12 1,050 1,059
Midland Cogeneration Ventures
'C-91' 10.33%, 7/23/02 632 677
Midland Funding Corp. I
'C-94' 10.33, 7/23/02 1,222 1,308
Midland Funding Corp. II 'A'
11.75%, 7/23/05 650 753
--------------
4,240
--------------
- ---------------------------------------------------------
- ------------
TOTAL CORPORATE BONDS AND NOTES
(Cost $107,065) 112,608
--------------
- ---------------------------------------------------------
- ------------
ASSET-BACKED SECURITIES (5.0%)
- ---------------------------------------------------------
Aircraft Lease Portfolio
Securitization Ltd., 1996-I PID
12.75%, 6/15/06 1,770 1,908
DR Securitized Lease Trust 1993-K1 A1
6.66%, 8/15/10 1,418 1,237
1994-K1 A1
7.60%, 8/15/07 3,634 3,416
1994-K2 A2
9.35%, 8/15/19 500 502
First Home Mortgage Acceptance Corp.,
96-B
C 144A
7.929%, 11/1/18 1,350 1,195
--------------
- ---------------------------------------------------------
- ------------
TOTAL ASSET-BACKED SECURITIES
(Cost $7,626) 8,258
--------------
- ---------------------------------------------------------
- ------------
COLLATERALIZED MORTGAGE OBLIGATIONS (2.8%)
- ---------------------------------------------------------
GE Capital Mortgage Services 1995-12
144A
7.911%, 8/25/25 648 585
GMAC IO 1996-C1 CL X2 REMIC
1.953%, 3/15/21 7,193 637
Long Beach Auto 1997-1 'B' 144A
14.22%, 10/26/03 1,731 1,756
PNC Mortgage Services Corp., 1995-2 B4
7.50%, 9/25/25 718 630
Prudential Home Mortgage Securities
1996-A B1 144A
7.963%, 4/15/25 1,250 1,003
--------------
- ---------------------------------------------------------
- ------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $4,354) 4,611
--------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
FOREIGN GOVERNMENT BONDS (7.9%)
- ---------------------------------------------------------
ARGENTINA (3.4%)
(b)Republic of Argentina Bearer Bond
6.75%, 3/31/05 $ 1,455 $ 1,369
(c)Republic of Argentina 'L' Par Bond
5.50%, 3/31/23 3,605 2,501
(b)Republic of Argentina Pre 4 Bocon,
5.69%, 9/1/02 1,475 1,739
--------------
5,609
--------------
BRAZIL (1.1%)
Federative Republic of Brazil 'L'
4.50%, 4/15/09 2,180 1,709
--------------
COLOMBIA (1.4%)
Republic of Colombia
8.70%, 2/15/16 2,220 2,257
--------------
MEXICO (1.0%)
United Mexican States Discount Bond
(Rights Attached)
6.25%, 12/31/19 2,125 1,643
--------------
RUSSIA (0.5%)
(e)Russia Interest Arrears Note 1,125 859
--------------
VENEZUELA (0.5%)
(b)Republic of Venezuela Front Loaded
Interest Reduction Bond 'A' (Rights
Attached) 6.75%, 3/31/20 1,125 885
--------------
- ---------------------------------------------------------
- ------------
TOTAL FOREIGN GOVERNMENT BONDS
(Cost $11,602) 12,962
--------------
- ---------------------------------------------------------
- ------------
SHARES
- ---------------------------------------------------------
- ------------
PREFERRED STOCK (5.6%)
- ---------------------------------------------------------
DIVERSIFIED (3.6%)
Time Warner, Inc. Series 'M' 10.25% 5,377 5,901
--------------
FINANCIAL SERVICES (1.0%)
Sinclair Capital 144A 11.625% 15,290 1,621
--------------
TELECOMMUNICATIONS (1.0%)
TCI Communications, Inc. 5.00%
(Convertible) 15,580 1,612
--------------
- ---------------------------------------------------------
- ------------
TOTAL PREFERRED STOCK
(Cost $8,354) 9,134
--------------
<CAPTION>
- ---------------------------------------------------------
- ------------
NO. OF
WARRANTS
<S> <C> <C>
- ---------------------------------------------------------
- ------------
WARRANTS (0.0%)
- ---------------------------------------------------------
AEROSPACE & DEFENSE (0.0%)
(a)Sabreliner Corp. 144A, expiring
4/15/03 2,000 --@
--------------
GAMING & LODGING (0.0%)
(a)Louisiana Casino Cruises, expiring
12/1/98 1,108 5
--------------
TELECOMMUNICATIONS (0.0%)
(a)Nextel Communications, expiring
4/25/99 2,500 --@
(a)Occidente y Caribe 144A, expiring
3/15/04 12,500 --@
--------------
--@
--------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
TOTAL WARRANTS
(Cost $40) $ 5
--------------
- ---------------------------------------------------------
- ------------
SHORT-TERM INVESTMENT (10.2%)
- ---------------------------------------------------------
REPURCHASE AGREEMENT
Chase Securities, Inc., 5.70%, dated
6/30/97, due 7/1/97, to be
repurchased at $16,713,
collateralized by United States
Treasury Bonds, 5.625%, due 2/15/06,
valued at $16,994.
(Cost $16,710) $ 16,710 16,710
--------------
- ---------------------------------------------------------
- ------------
TOTAL INVESTMENTS (100.0%)
(Cost $155,751) 164,288
--------------
- ---------------------------------------------------------
- ------------
OTHER ASSETS
Cash 679
Receivable for Investments Sold 8,708
Interest Receivable 2,782
Dividends Receivable 127
Net Unrealized Gain on Foreign
Currency Exchange Contracts 55
Deferred Organization Costs 17
Other Assets 169 12,537
---------- --------------
- ---------------------------------------------------------
- ------------
LIABILITIES
Payable for:
Reverse Repurchase Agreement (36,116)
Investments Purchased (7,248)
Dividends Declared (919)
Investment Advisory Fees (76)
Shareholder Reporting Expenses (52)
Professional Fees (37)
Directors' Fees and Expenses (30)
Administrative Fees (15)
Custodian Fees (12)
Other Liabilities (6) (44,511)
---------- --------------
- ---------------------------------------------------------
- ------------
NET ASSETS
Applicable to 8,752,368 issued and outstanding
$0.01 par value shares (100,000,000 shares
authorized) $ 132,314
--------------
--------------
- ---------------------------------------------------------
- ------------
NET ASSET VALUE PER SHARE $ 15.12
--------------
--------------
- ---------------------------------------------------------
- ------------
AT JUNE 30, 1997, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------
Common Stock $ 87
Capital Surplus 122,747
Undistributed Net Investment Income 624
Accumulated Net Realized Gain 264
Unrealized Appreciation on Investments
and Foreign Currency Translations 8,592
--------------
</TABLE>
- ---------------------------------------------------------
- ------------
<TABLE>
<S> <C> <C>
TOTAL NET ASSETS $ 132,314
--------------
--------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
- ---------------------------------------------------------
- ------------
(a) -- Non-income producing.
(b) -- Variable/floating rate security -- rate disclosed is as of June 30,
1997.
(c) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of June 30, 1997. Maturity date disclosed is the
ultimate maturity date.
(d) -- Denotes all or a portion of securities subject to repurchase under
Reverse Repurchase Agreements as of June 30, 1997 -- see note A-4 to
financial statements.
(e) -- When Issued Security -- see note A-7 to financial statements
@ -- Value is less than $500
144A -- Certain conditions for public sale may exist.
June 30, 1997 exchange rate -- German Mark (DEM) 1.743=U.S. $1.00
<TABLE>
<CAPTION>
- ---------------------------------------------------------
- ------------
<S> <C> <C>
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at
June 30, 1997, the Portfolio is obligated to deliver foreign
currency in exchange for U.S. dollars as indicated below:
</TABLE>
<TABLE>
<CAPTION>
CURRENCY IN NET
TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR GAIN
(000) (000) DATE (000) (000)
- ---------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C>
DEM 1,980 $1,137 7/17/97 $1,156 $19
DEM 2,785 1,605 8/28/97 1,641 36
--------- --------- -----------
$2,742 $2,797 $55
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1997
(UNAUDITED)
STATEMENT OF OPERATIONS (000)
<S> <C>
- --------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest Income............................................................. $ 7,641
Dividend Income............................................................. 248
- --------------------------------------------------------------------------------------------------
Total Income.............................................................. 7,889
- --------------------------------------------------------------------------------------------------
EXPENSES
Interest Expense............................................................ 1,003
Investment Advisory Fees.................................................... 446
Administrative Fees......................................................... 87
Shareholder Reporting Expenses.............................................. 61
Professional Fees........................................................... 35
Transfer Agent Fees......................................................... 18
Directors' Fees and Expenses................................................ 15
Custodian Fees.............................................................. 12
Amortization of Organization Costs.......................................... 6
Other Expenses.............................................................. 18
- --------------------------------------------------------------------------------------------------
Total Expenses............................................................ 1,701
- --------------------------------------------------------------------------------------------------
Net Investment Income................................................. 6,188
- --------------------------------------------------------------------------------------------------
NET REALIZED GAIN
Investment Securities Sold.................................................. 3,202
- --------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Appreciation on Investments................................................. 1,954
Appreciation on Foreign Currency Translations............................... 55
- --------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation........................ 2,009
- --------------------------------------------------------------------------------------------------
Total Net Realized Gain and Change in Unrealized Appreciation/Depreciation...... 5,211
- --------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................ $ 11,399
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1997 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1996
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income....................................................... $ 6,188 $ 11,804
Net Realized Gain........................................................... 3,202 3,064
Change in Unrealized Appreciation/Depreciation.............................. 2,009 4,689
- ----------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations........................ 11,399 19,557
- ----------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income....................................................... (5,557) (12,391)
In Excess of Net Investment Income.......................................... -- (7)
- ----------------------------------------------------------------------------------------------------------------------
Total Distributions......................................................... (5,557) (12,398)
- ----------------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Reinvestment of Distributions (9,700 shares and 22,124 shares,
respectively).............................................................. 142 308
- ----------------------------------------------------------------------------------------------------------------------
Total Increase.............................................................. 5,984 7,467
Net Assets:
Beginning of Period......................................................... 126,330 118,863
- ----------------------------------------------------------------------------------------------------------------------
End of Period (including undistributed (distributions in excess of) net
investment income of $624 and $(7), respectively).......................... $132,314 $126,330
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1997
(UNAUDITED)
STATEMENT OF CASH FLOWS (00)
<S> <C>
- --------------------------------------------------------------------
CASH FLOWS FROM INVESTING AND OPERATING
ACTIVITIES:
Proceeds from Sales of Investments............ $ 91,082
Purchases of Investments...................... (83,012)
Net Increase in Short-Term Investments........ (16,710)
Investment Income............................. 5,517
Interest Expense Paid......................... (818)
Operating Expenses Paid....................... (684)
- --------------------------------------------------------------------
Net Cash Used for Investing and Operating
Activities................................... (4,625)
- --------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under Reverse Repurchase
Agreements................................... 10,825
Distributions Paid (net of reinvestments of
$142)........................................ (5,594)
- --------------------------------------------------------------------
Net Cash Provided by Financing Activities..... 5,231
- --------------------------------------------------------------------
Net Increase in Cash.......................... 606
CASH AT BEGINNING OF PERIOD....................... 73
- --------------------------------------------------------------------
CASH AT END OF PERIOD............................. $ 679
- --------------------------------------------------------------------
- --------------------------------------------------------------------
- --------------------------------------------------------------------
RECONCILIATION OF NET INVESTMENT INCOME TO NET
CASH
USED FOR INVESTING AND OPERATING ACTIVITIES:
- --------------------------------------------------------------------
Net Investment Income......................... $ 6,188
Proceeds from Sales of Investments............ 91,082
Purchases of Investments...................... (83,012)
Net Increase in Short-Term Investments........ (16,710)
Net Increase in Receivables Related to
Operations................................... (660)
Net Increase in Payables Related to
Operations................................... 201
Amortization of Organization Costs............ 6
Accretion/Amortization of Discounts and
Premiums..................................... (1,720)
- --------------------------------------------------------------------
Net Cash Used for Investing and Operating
Activities................................... $ (4,625)
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, NOVEMBER 30, 1993*
JUNE 30, 1997 ---------------------------- TO DECEMBER 31,
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD.............. $ 14.45 $ 13.63 $ 11.96 $ 14.10 $ 14.10
- -----------------------------------------------------------------------------------------------------------------------
Offering Costs.................................... -- -- -- (0.01) (0.05)
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income............................. 0.71 1.35 1.34 1.32 0.04
Net Realized and Unrealized Gain (Loss) on
Investments...................................... 0.60 0.89 1.60 (2.08) 0.01
- -----------------------------------------------------------------------------------------------------------------------
Total from Investment Operations.............. 1.31 2.24 2.94 (0.76) 0.05
- -----------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income......................... (0.64) (1.42) (1.27) (1.36) --
In Excess of Net Investment Income............ -- -- -- (0.01) --
- -----------------------------------------------------------------------------------------------------------------------
Total Distributions........................... (0.64) (1.42) (1.27) (1.37) --
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.................... $ 15.12 $ 14.45 $ 13.63 $ 11.96 $ 14.10
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD............. $ 15.06 $ 14.63 $ 12.88 $ 11.38 $ 14.75
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value.................................. 7.54% 25.92% 25.21% (14.11)% 4.61%
Net Asset Value (1)........................... 9.26% 17.52% 26.07% (5.53)% 0.00%
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS)............. $132,314 $126,330 $118,863 $104,260 $122,781
- -----------------------------------------------------------------------------------------------------------------------
Ratio of Expenses Before Interest Expense to
Average Net Assets............................... 1.10%** 1.12% 1.11% 1.12% 1.46%**
Ratio of Expenses After Interest Expense to
Average Net Assets............................... 2.67%** 2.46% 2.79% 2.78% 1.46%**
Ratio of Net Investment Income to Average Net
Assets........................................... 9.70%** 9.82% 10.29% 10.18% 3.76%**
Portfolio Turnover Rate........................... 60% 136% 84% 32% 0%
- -----------------------------------------------------------------------------------------------------------------------
*Commencement of operations.
**Annualized.
(1)Total investment return based on net asset value per share reflects the effects of changes in net asset value on the
performance of the Fund during each period, and assumes dividends and distributions, if any, were reinvested. This
percentage is not an indication of the performance of a shareholder's investment in the Fund based on market value
due to differences between the market price of the stock and the net asset value per share of the Fund.
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997
- ------------
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 fixed income
securities may be valued on the basis of prices provided by independent
pricing services when such prices are believed to reflect the fair market
value of such securities. Short-term securities which mature in 60 days or
less are valued at amortized cost. All other securities and assets for which
market values are not readily available (including investments which are
subject to limitations as to their sale) are valued at fair value as
determined in good faith by the Board of Directors (the "Board"), although
the actual calculations may be done by others.
2. U.S. FEDERAL INCOME TAXES: It is the Fund's intention to continue to qualify
as a regulated investment company and distribute all of its taxable income.
Accordingly, no provision for U.S. Federal income taxes is required in the
financial statements.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the
underlying securities, with a market value at least equal to the amount of
the repurchase transaction, including principal and accrued interest. To the
extent that any repurchase transaction exceeds one business day, the value of
the collateral is marked-to-market on a daily basis to determine the adequacy
of the collateral. In the event of default on the obligation to repurchase,
the Fund has the right to liquidate the collateral and apply the proceeds in
satisfaction of the obligation. In the event of default or bankruptcy by the
counterparty to the agreement, realization and/or retention of the collateral
or proceeds may be subject to legal proceedings.
4. REVERSE REPURCHASE AGREEMENTS: In order to leverage the Fund, the Fund may
enter into reverse repurchase agreements with institutions that the Fund's
investment adviser has determined are creditworthy. Under a reverse
repurchase agreement, the Fund sells securities and agrees to repurchase them
at a mutually agreed upon date and price. Reverse repurchase agreements
involve the risk that the market value of the securities purchased with the
proceeds from the sale of securities received by the Fund may decline below
the price of the securities the Fund is obligated to repurchase. Securities
subject to repurchase under reverse repurchase agreements are designated as
such in the Statement of Net Assets.
At June 30, 1996, the Fund had reverse repurchase agreements outstanding as
follows:
<TABLE>
<CAPTION>
MATURITY IN
30 TO 90 DAYS
---------------
<S> <C>
Value of Securities Subject to
Repurchase........................ $ 48,851,000
Liability Under Reverse Repurchase
Agreement......................... 36,116,000
Weighted Average Interest Rate...... 6.71%
</TABLE>
The average weekly balance of reverse repurchase agreements outstanding
during the six months ended June 30, 1997 was approximately $14,862,000 at a
weighted average interest rate of 6.70%.
5. FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars at the mean of the bid and asked prices of such currencies against
U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates of
exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the period, the Fund does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from
changes in the market prices of the securities held at period end.
Similarly, the Fund does not isolate the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market
prices of securities sold during the period. Accordingly, realized and
unrealized foreign currency gains (losses) are included in the reported net
realized and unrealized gains (losses) on investment transactions and
balances.
12
<PAGE>
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of foreign
currency exchange contracts, disposition of foreign currencies, currency
gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amount of investment
income and foreign withholding taxes recorded on the Fund's books and the
U.S. dollar equivalent amounts actually received or paid. Net unrealized
currency gains (losses) from valuing foreign currency denominated assets and
liabilities at period end exchange rates are reflected as a component of
unrealized appreciation (depreciation) on investments and foreign currency
translations in the Statement of Net Assets. The change in net unrealized
currency gains (losses) for the period is reflected in the Statement of
Operations.
6. FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into foreign
currency exchange contracts to attempt to protect securities and related
receivables and payables against changes in future foreign exchange rates. A
foreign currency exchange contract is an agreement between two parties to
buy or sell currency at a set price on a future date. The market value of
the contract will fluctuate with changes in currency exchange rates. The
contract is marked-to-market daily and the change in market value is
recorded by the Fund as unrealized gain or loss. The Fund records realized
gains or losses when the contract is closed equal to the difference between
the value of the contract at the time it was opened and the value at the
time it was closed. Risk may arise upon entering into these contracts from
the potential inability of counterparties to meet the terms of their
contracts and is generally limited to the amount of unrealized gain on the
contracts, if any, at the date of default. Risks may also arise from
unanticipated movements in the value of a foreign currency relative to the
U.S. dollar.
7. WHEN-ISSUED/DELAYED DELIVERY SECURITIES: The Fund may purchase securities
on a when-issued or delayed delivery basis. Securities purchased on a
when-issued or delayed delivery basis are purchased for delivery beyond the
normal settlement date at a stated price and yield, and no income accrues to
the Fund on such securities prior to delivery. When the Fund enters into a
purchase transaction on a when-issued or delayed delivery basis, it
establishes a segregated account in which it maintains liquid assets in an
amount at least equal in value to the Fund's commitments to purchase such
securities. Purchasing securities on a when-issued or delayed delivery basis
may involve a risk that the market price at the time of delivery may be
lower than the agreed-upon purchase price, in which case there could be an
unrealized loss at the time of delivery.
8. 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 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
13
<PAGE>
Fund assets under custody plus an amount for each transaction effected,
including reimbursement for certain out-of-pocket expenses. During the six
months ended June 30, 1997, the Fund did not incur any fees to the International
Custodian.
E. During the six months ended June 30, 1997, the Fund made purchases and sales
totaling, approximately $90,260,000 and $99,816,000, respectively, of investment
securities other than long-term U.S. Government securities and short-term
investments. There were no purchases and sales of long-term U.S. Government
securities. At June 30, 1997, the Federal income tax cost basis of securities
was $155,751,000 and accordingly, net unrealized appreciation for Federal income
tax purposes was $8,537,000 of which $8,765,000 related to appreciated
securities and $228,000 related to depreciated securities. 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 June 30, 1997, approximately 71% of the Fund's total investments consist
of high yield securities rated below investment grade. Investments in high-yield
securities are accompanied by a greater degree of credit risk and the risk tends
to be more sensitive to economic conditions than higher-rated securities.
H. Each Director of the Fund who is not an officer of the Fund or an affiliated
person as defined under the Investment Company Act of 1940, as amended, may
elect to participate in the Directors' Deferred Compensation Plan (the "Plan").
Under the Plan, such Directors may elect to defer payment of a percentage of
their total fees earned as a Director of the Fund. These deferred portions are
treated, based on an election by the Director, as if they were either invested
in the Fund's shares or invested in U.S. Treasury Bills, as defined under the
Plan. The deferred fees payable, under the Plan, at June 30, 1997 totaled
approximately $21,000 and are included in Payable for Directors' Fees and
Expenses on the Statement of Net Assets.
I. During June 1997, the Board declared a monthly distribution of $0.11 per
share, derived from net investment income payable on July 15, 1997, to
shareholders of record on June 30, 1997.
J. Supplemental Proxy Information
The Annual Meeting of the Stockholders of The Morgan Stanley High Yield Fund,
Inc. was held on April 30, 1997. The following is a summary of each proposal
presented and the total number of shares voted:
<TABLE>
<CAPTION>
VOTES IN VOTES VOTES VOTES
PROPOSAL: FAVOR OF AGAINST WITHHELD ABSTAINED
------------------------------------------------------------ --------- ------- -------- ---------
<S><C> <C> <C> <C> <C>
1. To elect the following Directors: John W. Croghan 7,567,643 41,564 -- --
Graham E. Jones 7,567,243 41,964 -- --
2. To ratify the selection of Price Waterhouse LLP as 7,567,283 19,694 1 22,229
independent public accounts of the Fund.
3. To approve an Investment Advisory and Management Agreement 7,485,333 51,645 1 72,228
between the Fund and Morgan Stanley Asset Management Inc.
</TABLE>
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
