<PAGE>
- -------------------------------------------------------------------------------
THE
MORGAN STANLEY
HIGH YIELD
FUND, INC.
- -------------------------------------------------------------------------------
SEMI-ANNUAL REPORT
JUNE 30, 1998
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
THE MORGAN STANLEY HIGH YIELD FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Barton M. Biggs
CHAIRMAN OF THE BOARD
OF DIRECTORS
Michael F. Klein
PRESIDENT AND DIRECTOR
Peter J. Chase
DIRECTOR
John W. Croghan
DIRECTOR
David B. Gill
DIRECTOR
Graham E. Jones
DIRECTOR
John A. Levin
DIRECTOR
William G. Morton, Jr.
DIRECTOR
Stefanie V. Chang
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Valerie Y. Lewis
SECRETARY
Joanna M. Haigney
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
3 Chase MetroTech Center
Brooklyn, New York 11245
- -------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 278-4353
- -------------------------------------------------------------------------------
LEGAL COUNSEL
Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
- -------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers 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.
<PAGE>
LETTER TO SHAREHOLDERS
- ---------
For the six months ended June 30, 1998, The Morgan Stanley High Yield Fund,
Inc. (the "Fund") had a total return, based on net asset value per share, of
5.05% compared to 4.31% for the CS First Boston High Yield Index (the
"Index"). For the one year ended June 30, 1998, and for the period since the
Fund's commencement of operations on November 30, 1993 through June 30, 1998,
the Fund's total return, based on net asset value per share, was 13.92% and
74.22%, respectively, compared to 10.98% and 55.44%, respectively, for the
Index. On June 30, 1998, the closing price of the Fund's shares on the New
York Stock Exchange was $15.75, representing a 3.3% premium to the Fund's net
asset value per share.
U.S. high-yield bonds significantly underperformed high quality bonds in the
second quarter as interest rates fell. The high-yield market has been
negatively impacted by the renewed turmoil in Asia, the developing crisis in
Russia and concern that corporate profits in the U.S. may begin to face some
pressure. Even though the emerging markets represent a small portion of the
high-yield index, the weakness in these markets has caused spreads in the
high-yield market to widen in sympathy as investors are requiring a higher
risk premium for lower rated bonds. In addition, there continued to be a
substantial supply of new issues in the period, particularly in the
communications sector, which the market had difficulty absorbing.
The Fund underperformed the Index for the second quarter primarily due to our
emphasis on non-U.S and emerging market issues relative to the benchmark
along with the overweighting in the communications sector.
While these positions caused underperformance in the second quarter, we
continue to be overweight in communications and non-U.S. issues where we see
significant relative value. We added to communications holdings in the
second quarter, where increased new supply presented a number of attractive
opportunities. These holdings are well diversified by business strategies,
including competitive local exchange carriers, wireless, and long distance.
New investments in the sector included Level 3 Communications, a domestic
long-haul fiber network provider, and Global Crossings, which builds undersea
fiber optic cable systems. Outside the U.S., holdings are focused on selected
Asian corporates (with Korea being the largest exposure) and Latin American
bonds, especially corporate issues in Argentina, Brazil and Mexico. While
these non-U.S. markets have been weak, they currently offer very high dollar
denominated yields that we believe offer significant value relative to what
is available in other sectors.
Recent purchases in the healthcare and retail sectors as a result of bottom
up security selection have resulted in an overweighting in these sectors as
well. We purchased Tenet Healthcare, a stable, higher quality name and Oxford
Health, an HMO provider that we believe is successfully working through its
recent problems. Additions to the retail sector include Corporate Express,
HMV Media Group and Musicland. We continue to avoid U.S. cyclicals and are
underweighted in the media and entertainment, energy and metals sectors.
We have maintained an average credit quality higher than that of the Index,
and have balanced the opportunities in low-rated bonds with positions in
higher quality issues. Additionally, the interest rate sensitivity of the
Fund is similar to that of the benchmark. While the market environment has
become more challenging recently, we see excellent bottom-up investment
opportunities in securities with attractive yields relative to high quality
bonds.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
/s/ Robert Angevine
Robert Angevine
PORTFOLIO MANAGER
July 1998
2
<PAGE>
The Morgan Stanley High Yield Fund, Inc.
Investment Summary as of June 30, 1998 (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 2.60% -- 5.05% -- 4.31% --
One Year 18.10 18.10% 13.92 13.92% 10.98 10.98%
Since Inception* 79.93 13.67 74.22 12.88 55.44 10.11
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- -------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
[GRAPH]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
ENDED
JUNE 30,
1993* 1994 1995 1996 1997 1998
----- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share. . . . . $ 14.10 $ 11.96 $ 13.63 $ 14.45 $ 15.19 $ 15.25
Market Value Per Share . . . . . . $ 14.75 $ 11.38 $ 12.88 $ 14.63 $ 16.06 $ 15.75
Premium/(Discount) . . . . . . . . 4.6% -4.8% -5.5% 1.3% 5.7% 3.3%
Income Dividends . . . . . . . . . -- $ 1.37 $ 1.27 $ 1.42 $ 1.36 $ 0.66
Capital Gains Distributions. . . . -- -- -- -- $0.48 $ 0.04
Fund Total Return (2). . . . . . . 0.00% -5.53% 26.07% 17.52% 18.48% 5.05%
Index Total Return (1)(3). . . . . 1.26% -0.98% 17.39% 12.40% 12.65% 4.31%
</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.
Portfolio Summary as of June 30, 1998 (Unaudited)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<CAPTION>
<S> <C>
Debt Instruments (88.8%)
Short-Term Investments (6.2%)
Equity Securities (5.0%)
</TABLE>
- -------------------------------------------------------------------------------
SECTORS
[CHART]
<TABLE>
<CAPTION>
<S> <C>
Asset Backed Securities (5.7%)
Broadcast -- Radio & Television (11.8%)
Collateralized Mortgage Obligations (3.2%)
Financial Services (4.6%)
Gaming & Lodging (3.0%)
Health Care Supplies & Services (5.9%)
Metals (5.2%)
Multi-Industry (6.8%)
Retail -- General (3.3%)
Telecommunications (19.8%)
Other (30.7%)
</TABLE>
- -------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
-----------
<S> <C>
1. DR Securitized Lease Trust 3.8%
2. Nextel Communications, Inc. 3.4
3. Rogers Communications, Inc. 3.1
4. Tenet Healthcare Corp. 3.0
5. Comcast Cellular Holdings 'B' 2.8
6. Snyder Oil Corp. 2.6
7. Columbia /HCA Healthcare 2.5
8. Time Warner, Inc. Series 'M' 10.25% 2.4
9. Jet Equipment Trust 2.3
10. CSC Holdings, Inc. 2.3
----
28.2%
----
----
</TABLE>
* Excludes short-term investments.
4
<PAGE>
FINANCIAL STATEMENTS
- ---------
STATEMENT OF NET ASSETS (UNAUDITED)
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- ---------
JUNE 30, 1998
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS AND NOTES (77.9%)
- -------------------------------------------------------------------------------
AEROSPACE & DEFENSE (2.3%)
Jet Equipment Trust 144A
'C1' 11.79%, 6/15/13 $1,500 $2,044
'D-95' 11.44%, 11/1/14 1,100 1,488
---------
3,532
---------
- -------------------------------------------------------------------------------
BANKING (0.5%)
Western Financial Bank
8.875%, 8/1/07 885 830
--------
- -------------------------------------------------------------------------------
BROADCAST -- RADIO & TELEVISION (11.8%)
Comcast Cellular Holdings 'B'
9.50%, 5/1/07 4,130 4,306
CSC Holdings, Inc.
(d) 9.875%, 5/15/06 2,650 2,912
7.875%, 12/15/07 575 605
Lenfest Communications, Inc.
(d) 8.375%, 11/1/05 1,660 1,764
7.625%, 2/15/08 144A 800 820
RBS Participacoes 144A
11.00%, 4/1/07 (Brazil) 850 769
Rogers Cablesystems
10.125%, 9/1/12 650 708
Rogers Cablesystems 'B'
10.00%, 3/15/05 2,210 2,456
Sinclair Broadcast Group
9.00%, 7/15/07 1,370 1,411
(d)TV Azteca 'B'
10.50%, 2/15/07 (Mexico) 2,470 2,482
---------
18,233
---------
- -------------------------------------------------------------------------------
BUILDING MATERIALS & COMPONENTS (1.6%)
(d)American Standard Cos., Inc.
7.375%, 2/1/08 2,560 2,514
---------
- -------------------------------------------------------------------------------
BUSINESS SERVICES (2.0%)
(d)Outdoor Systems, Inc.
8.875%, 6/15/07 2,955 3,081
---------
- -------------------------------------------------------------------------------
COAL, GAS & OIL (2.6%)
(d)Snyder Oil Corp.
8.75%, 6/15/07 4,050 4,091
---------
- -------------------------------------------------------------------------------
COMPUTERS (1.0%)
Advanced Micro Devices, Inc.
11.00%, 8/1/03 1,450 1,533
---------
- -------------------------------------------------------------------------------
CONSTRUCTION & HOUSING (0.3%)
Cathay International Ltd. 144A
13.00%, 4/15/08 525 446
---------
- -------------------------------------------------------------------------------
ELECTRONIC COMPONENTS & INSTRUMENTS (0.1%)
AST Research, Inc.
7.45%, 10/1/02 $175 $144
---------
- -------------------------------------------------------------------------------
ENERGY (1.6%)
Quezon Power Ltd.
8.86%, 6/15/17 (Philippines) 2,900 2,447
---------
- -------------------------------------------------------------------------------
ENTERTAINMENT & LEISURE (1.1%)
American Mobile Satellite Corp.
12.25%, 4/1/08 1,725 1,622
---------
- -------------------------------------------------------------------------------
ENVIRONMENTAL CONTROLS (1.2%)
(c)Norcal Waste Systems, Inc.
13.50%, 11/15/05 1,600 1,840
---------
- -------------------------------------------------------------------------------
FINANCIAL SERVICES (3.5%)
Geberit International
10.125%, 4/15/07 DEM 1,700 1,075
Indah Kiat Finance
(d) 10.00%, 7/1/07 (Indonesia) $1,530 1,087
10.00%, 7/1/07 144A (Indonesia) 420 298
Navistar Financial Corp. 'B'
9.00%, 6/1/02 300 314
(c)PTC International Finance B.V.
0.00%, 7/1/07 2,470 1,698
(c,d)SB Treasury Co. LLC 144A
9.40%, 12/29/49 1,010 1,006
---------
5,478
---------
- -------------------------------------------------------------------------------
FOOD SERVICE & LODGING (0.2%)
Smithfield Foods, Inc. 144A
7.625%, 2/15/08 325 324
---------
- -------------------------------------------------------------------------------
FOREST PRODUCTS & PAPER (0.4%)
APP Fin II Mauritius Ltd.
12.00%, 2/15/04 (Indonesia) 865 606
---------
- -------------------------------------------------------------------------------
GAMING & LODGING (3.0%)
(d)Grand Casinos
10.125%, 12/1/03 1,495 1,614
Louisiana Casino Cruise
11.50%, 12/1/98 318 320
(d)Station Casinos, Inc.
10.125%, 3/15/06 2,485 2,771
---------
4,705
---------
- -------------------------------------------------------------------------------
HEALTH CARE SUPPLIES & SERVICES (5.9%)
Columbia/HCA Healthcare
6.91%, 6/15/05 2,350 2,271
7.00%, 7/1/07 1,705 1,635
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE SUPPLIES & SERVICES (CONTINUED)
Sirona Dental Systems 144A
9.125%, 7/15/08 DEM 1,110 $ 620
Tenet Healthcare Corp.
(d) 8.625%, 1/15/07 $3,555 3,666
8.125%, 12/1/08 144A 1,000 1,006
---------
9,198
---------
- -------------------------------------------------------------------------------
METALS (5.2%)
Grupo Minero Mexico 'A'
8.25%, 4/1/08 (Mexico) 1,040 992
Hylsa 144A
9.25%, 9/15/07 1,900 1,791
Impress Metal Packaging 144A
9.875%, 5/29/07 (Netherlands) DEM 3,150 1,851
Murrin Murrin Holdings Property Ltd. 144A
9.375%, 8/31/07 $2,785 2,747
NSM Steel Ltd.
12.25%, 2/1/08 825 726
---------
8,107
---------
- -------------------------------------------------------------------------------
MULTI-INDUSTRY (6.8%)
CA FM Lease Trust 144A
8.50%, 7/15/17 1,447 1,519
CEX Holdings, Inc. 144A
9.625%, 6/1/08 690 697
ISP Holdings, Inc. 'B'
9.00%, 10/15/03 1,425 1,485
Multicanal
(d) 10.50%, 2/1/07 1,705 1,706
10.50%, 4/15/18 144A 725 692
Reliance Industries Ltd. 144A
9.375%, 6/24/26 445 427
Revlon, Inc.
8.125%, 2/1/06 765 764
Samsonite Corp. 144A
10.75%, 6/15/08 800 795
(d)SD Warren Co. 'B'
12.00%, 12/15/04 2,235 2,475
---------
10,560
---------
- -------------------------------------------------------------------------------
REAL ESTATE (2.3%)
CB Richard Ellis Services
8.875%, 6/1/06 1,295 1,285
HMC Acquisition Properties
9.00%, 12/15/07 2,050 2,260
---------
3,545
---------
- -------------------------------------------------------------------------------
RETAIL -- GENERAL (3.3%)
Musicland Group, Inc. 'B'
9.875%, 3/15/08 $1,600 $1,592
Southland Corp.
5.00%, 12/15/03 4,000 3,475
---------
5,067
---------
- -------------------------------------------------------------------------------
TELECOMMUNICATIONS (18.4%)
(c)Dial Call Communications 'B'
0.00%, 12/15/05 1,000 990
Espirit Telecom Group 'DM'
11.50%, 12/15/07
(United Kingdom) DEM 1,300 750
Flag Ltd. 144A
8.25%, 1/30/08 $ 800 808
Globalstar LP
11.375%, 2/15/04 1,000 974
Globopar 144A
10.625%, 12/5/08 650 587
(c)Intermedia
Communications, Inc. 'B'
0.00%, 7/15/07 2,700 1,971
Iridium LLC/Capital Corp. 'A'
13.00%, 7/15/05 840 899
IXC Communications, Inc. 144A
9.00%, 4/15/08 895 897
(c)Nextel Communications, Inc.
0.00%, 8/15/04 2,075 2,013
0.00%, 9/15/07 4,770 3,196
(c)NEXTLINK Communications 144A
0.00%, 4/15/08 2,500 1,531
(c)Occidente y Caribe
0.00%, 3/15/04 (Colombia) 3,125 2,719
(d)Philippine Long Distance Telephone
9.25%, 6/30/06 1,725 1,703
Qwest Communications International
(c) 0.00%, 2/1/08 144A 1,000 720
(d) 10.875%, 4/1/07 775 893
(c)RCN Corp.
0.00%, 10/15/07 2,385 1,538
Rogers Communications, Inc.
(d) 9.125%, 1/15/06 800 811
8.875%, 7/15/07 750 755
RSL Communications, Ltd.
12.25%, 11/15/06 88 99
(c) 0.00%, 3/15/08 DEM 2,700 891
(d) 9.125%, 3/1/08 144A $1,165 1,130
Satelites Mexicanos 144A
10.125%, 11/1/04 (Mexico) 565 545
(c,d)TCI Satellite Entertainment, Inc.
0.00%, 2/15/07 2,260 1,525
(c)Viatel, Inc. 144A
0.00%, 4/15/08 980 590
---------
28,535
---------
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION (0.4%)
Hermes Europe Railtel B.V.
11.50%, 8/15/07 $ 480 $ 542
---------
- -------------------------------------------------------------------------------
UTILITIES (2.4%)
AES Corp.
8.50%, 11/1/07 1,430 1,448
(d)Korea Electric Power Corp.
7.75%, 4/1/13 1,810 1,333
Niagara Mohawk Power 'G'
7.75%, 10/1/08 433 444
(c)Niagara Mohawk Power 'H'
0.00%, 7/1/10 745 512
---------
3,737
---------
- -------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost $118,859) 120,717
---------
- -------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (5.7%)
- -------------------------------------------------------------------------------
Aircraft Lease Portfolio Securitization
Ltd. 1996-1 P1D 12.75%, 6/15/06 1,770 1,770
DR Securitized Lease Trust
1994-K1 A1 7.60%, 8/15/07 3,397 3,357
1993-K1 A1 6.66%, 8/15/10 2,111 1,974
1994-K2 A2 9.35%, 8/15/19 500 530
First Home Mortgage Acceptance Corp.,
1996-B, Class C 144A 7.929%, 11/1/18 1,312 1,186
---------
- -------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost $8,038) 8,817
---------
- -------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE
OBLIGATIONS (3.2%)
- -------------------------------------------------------------------------------
DLJ Mortgage Acceptance Corp.
1997-CF2 S 144A
0.357%, 10/15/30 32,925 855
GMAC IO 1996-C1 CL X2 REMIC
1.899%, 3/15/21 6,589 523
Long Beach Auto 1997-1, 'B' 144A
14.22%, 10/26/03 2,286 2,283
OHA Auto Grantor Trust 1997-1, 'B'
144A 11.00%, 9/15/03 1,288 1,269
---------
- -------------------------------------------------------------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $5,099) 4,930
---------
- -------------------------------------------------------------------------------
FOREIGN GOVERNMENT BONDS (2.0%)
- -------------------------------------------------------------------------------
ARGENTINA (1.1%)
(b)Republic of Argentina
6.625%, 3/31/05 361 319
- -------------------------------------------------------------------------------
(c)Republic of Argentina Pre 4 Bocon PIK
0.00%, 9/1/02 $1,100 $1,346
---------
1,665
---------
- -------------------------------------------------------------------------------
INDONESIA (0.9%)
(d)Pindo Deli Finance (Mauritius) 144A
10.75%, 10/1/07 1,955 1,369
---------
- -------------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT BONDS
(Cost $3,390) 3,034
---------
- -------------------------------------------------------------------------------
SHARES
- -------------------------------------------------------------------------------
PREFERRED STOCKS (4.8%)
- -------------------------------------------------------------------------------
DIVERSIFIED (2.5%)
Time Warner, Inc. Series 'M' 10.25% 3,452 3,841
---------
- -------------------------------------------------------------------------------
FINANCIAL SERVICES (1.1%)
Sinclair Capital 11.625% 15,290 1,697
---------
- -------------------------------------------------------------------------------
TELECOMMUNICATIONS (1.2%)
(a)IXC Communications, Inc. 'B' PIK 12.50% 1,643 1,910
---------
- -------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost $6,624) 7,448
---------
- -------------------------------------------------------------------------------
NO. OF
WARRANTS
- -------------------------------------------------------------------------------
WARRANTS (0.2%)
- -------------------------------------------------------------------------------
GAMING & LODGING (0.0%)
(a)Louisiana Casino Cruises, expiring 12/1/98 1,108 -- @
---------
- -------------------------------------------------------------------------------
TELECOMMUNICATIONS (0.2%)
(a)Globalstar Telecom 144A, expiring 2/15/04 1,000 123
(a)Iridium World Communications, Inc. 144A,
expiring 7/15/05 840 172
(a)Nextel Communications, expiring 4/25/99 2,500 -- @
(a)Occidente y Caribe 144A, expiring 3/15/04 (Colombia) 12,500 -- @
---------
295
---------
- -------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost $0) 295
---------
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (6.2%)
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Chase Securities, Inc. 5.40%, dated
6/30/98, due 7/1/98, to be repurchased
at $9,673, collateralized by $8,580,
United States Treasury Bonds, 6.625%,
due 2/15/27, valued at $9,899
(Cost $9,672) $ 9,672 $ 9,672
---------
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(Cost $151,682) 154,913
---------
- -------------------------------------------------------------------------------
OTHER ASSETS
Interest Receivable 3,012
Receivable for Investments Sold 965
Net Unrealized Gain on Foreign
Currency Exchange Contracts 34
Deferred Organization Costs 5
Other Assets 18 4,034
--------- ---------
- -------------------------------------------------------------------------------
LIABILITIES
Payable For:
Reverse Repurchase Agreements (22,575)
Dividends and
Distributions Declared (1,352)
Investments Purchased (615)
Bank Overdraft (107)
Investment Advisory Fees (78)
Custodian Fees (69)
Directors' Fees and Expenses (49)
Shareholder Reporting Expenses (33)
Professional Fees (31)
Administrative Fees (16)
Other Liabilities (42) (24,967)
---------- ---------
- -------------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 8,785,806, issued and
outstanding $0.01 par value shares
(100,000,000 shares authorized) $133,980
---------
---------
- -------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $ 15.25
---------
---------
- -------------------------------------------------------------------------------
VALUE
(000)
- -------------------------------------------------------------------------------
AT JUNE 30, 1998, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------
Common Stock $ 88
Capital Surplus 123,265
Undistributed Net Investment Income 183
Accumulated Net Realized Gain 7,182
Unrealized Appreciation on Investments
and Foreign Currency Translations 3,262
- -------------------------------------------------------------------------------
TOTAL NET ASSETS $133,980
---------
---------
- -------------------------------------------------------------------------------
</TABLE>
(a)-- Non-income producing
(b)-- Variable/floating rate security -- rate disclosed is as of June
30, 1998.
(c)-- Step Bond -- coupon rate increases in increments to maturity.
Rate disclosed is as of June 30, 1998. Maturity date disclosed is the
ultimate maturity.
(d)-- Denotes all or a portion of securities subject to repurchase under
Reverse Repurchase Agreements as of June 30, 1998 -- see note A-4 to
financial statements.
144A -- Certain conditions for public sale may exist.
PIK -- Payment-in-Kind. Income may be paid in additional securities or cash
at the discretion of the issuer.
June 30, 1998 exchange rate --
German Mark (DEM) 1.804 = U.S.$1.00
- -------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1998,
the Fund is obligated to deliver foreign currency in exchange for U.S. dollars
as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN UNREALIZED
TO EXCHANGE GAIN
DELIVER VALUE SETTLEMENT FOR VALUE (LOSS)
(000) (000) DATE (000) (000) (000)
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DEM 3,100 $1,725 08/31/98 $1,748 $1,748 $23
1,210 674 09/18/98 676 676 2
2,255 1,257 09/22/98 1,263 1,263 6
1,795 1,000 09/22/98 1,006 1,006 6
1,110 619 10/06/98 616 616 (3)
------ ------ ----
$5,275 $5,309 $34
------ ------ ----
------ ------ ----
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1998
(UNAUDITED)
STATEMENT OF OPERATIONS (000)
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,052
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . 267
- --------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . 7,319
- --------------------------------------------------------------------------------
EXPENSES
Interest Expense. . . . . . . . . . . . . . . . . . . . . . . 782
Investment Advisory Fees. . . . . . . . . . . . . . . . . . . 473
Administrative Fees . . . . . . . . . . . . . . . . . . . . . 90
Custodian Fees. . . . . . . . . . . . . . . . . . . . . . . . 62
Professional Fees . . . . . . . . . . . . . . . . . . . . . . 33
Shareholder Reporting Expenses. . . . . . . . . . . . . . . . 31
Directors' Fees and Expenses. . . . . . . . . . . . . . . . . 18
Transfer Agent Fees . . . . . . . . . . . . . . . . . . . . . 13
Amortization of Organization Costs. . . . . . . . . . . . . . 6
Other Expenses. . . . . . . . . . . . . . . . . . . . . . . . 31
- --------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . 1,539
- --------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . 5,780
- --------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold. . . . . . . . . . . . . . . . . . 6,549
Foreign Currency Transactions . . . . . . . . . . . . . . . . 315
- --------------------------------------------------------------------------------
Net Realized Gain . . . . . . . . . . . . . . . . . . . . . 6,864
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Depreciation on Investments . . . . . . . . . . . . . . . . . (5,810)
Depreciation on Foreign Currency Translations . . . . . . . . (111)
- --------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation . . . . . . (5,921)
- --------------------------------------------------------------------------------
Net Realized Gain and Change in Unrealized Appreciation/
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . 943
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS. . . . . $ 6,723
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- --------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income. . . . . . . . . . . . . . $ 5,780 $ 11,927
Net Realized Gain. . . . . . . . . . . . . . . . 6,864 7,981
Change in Unrealized Appreciation/Depreciation . (5,921) 2,600
- --------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 6,723 22,508
- --------------------------------------------------------------------------------------
Distributions:
Net Investment Income. . . . . . . . . . . . . . (5,796) (11,879)
Net Realized Gain. . . . . . . . . . . . . . . . (385) (4,182)
- --------------------------------------------------------------------------------------
Total Distributions. . . . . . . . . . . . . . . (6,181) (16,061)
- --------------------------------------------------------------------------------------
Capital Share Transactions:
Reinvestment of Distributions (25,098 and 18,040
shares, respectively) . . . . . . . . . . . . 388 273
- --------------------------------------------------------------------------------------
TOTAL INCREASE . . . . . . . . . . . . . . . . . 930 6,720
Net Assets:
Beginning of Period. . . . . . . . . . . . . . . 133,050 126,330
- --------------------------------------------------------------------------------------
End of Period (including undistributed net
investment income of $183 and $199, respectively) $133,980 $133,050
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1998
(UNAUDITED)
STATEMENT OF CASH FLOWS (000)
- --------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM INVESTING AND OPERATING ACTIVITIES:
Proceeds from Sales of Investments. . . . . . . . . . . . . . $ 92,166
Purchases of Investments. . . . . . . . . . . . . . . . . . . (66,644)
Net Increase in Short-Term Investments. . . . . . . . . . . . (4,953)
Investment Income . . . . . . . . . . . . . . . . . . . . . . 6,074
Interest Expense Paid . . . . . . . . . . . . . . . . . . . . (1,211)
Operating Expenses Paid . . . . . . . . . . . . . . . . . . . (671)
- --------------------------------------------------------------------------------
Net Cash Provided by Investing and Operating Activities 24,761
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Paid for Reverse Repurchase Agreements . . . . . . . . . (14,815)
Cash Distributions Paid (net of reinvestment of U.S.$388) . . (10,129)
- --------------------------------------------------------------------------------
Net Cash used for Financing Activities. . . . . . . . . . . . (24,944)
- --------------------------------------------------------------------------------
Net Decrease in Cash. . . . . . . . . . . . . . . . . . . . . (183)
CASH AT BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . . 76
- --------------------------------------------------------------------------------
BANK OVERDRAFT AT END OF PERIOD. . . . . . . . . . . . . . . . . $ (107)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RECONCILIATION OF NET INVESTMENT INCOME TO NET CASH
PROVIDED BY INVESTING AND OPERATING ACTIVITIES:
- --------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . $ 5,780
Proceeds from Sales of Investments. . . . . . . . . . . . . . 92,166
Purchases of Investments. . . . . . . . . . . . . . . . . . . (66,644)
Net Increase in Short-Term Investments. . . . . . . . . . . . (4,953)
Net Increase in Receivables Related to Operations (6)
Net Increase in Payables Related to Operations. . . . . . . . (343)
Amortization of Organization Costs. . . . . . . . . . . . . . 5
Accretion/Amortization of Discounts and Premiums. . . . . . . (1,244)
- --------------------------------------------------------------------------------
Net Cash Provided by Investing and Operating Activities $ 24,761
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS NOVEMBER 30,
ENDED YEAR ENDED DECEMBER 31, 1993* TO
SELECTED PER SHARE DATA AND JUNE 30, 1998 ------------------------------------------ DECEMBER 31,
RATIOS: (UNAUDITED) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . $ 15.19 $ 14.45 $ 13.63 $ 11.96 $ 14.10 $ 14.10
- ------------------------------------------------------------------------------------------------------------------------
Offering Costs . . . . . . . . . . . . . . -- -- -- -- (0.01) (0.05)
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . 0.66 1.37 1.35 1.34 1.32 0.04
Net Realized and Unrealized Gain (Loss) on
Investments . . . . . . . . . . . . . . . 0.10 1.21 0.89 1.60 (2.08) 0.01
- ------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations . . . 0.76 2.58 2.24 2.94 (0.76) 0.05
- ------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income . . . . . . . . . . (0.66) (1.36) (1.42) (1.27) (1.36) --
In Excess of Net Investment Income . . . -- -- -- -- (0.01) --
Net Realized Gain . . . . . . . . . . . . (0.04) (0.48) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . (0.70) (1.84) (1.42) (1.27) (1.37) --
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . $ 15.25 $ 15.19 $ 14.45 $ 13.63 $ 11.96 $ 14.10
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD . . $ 15.75 $ 16.06 $ 14.63 $ 12.88 $ 11.38 $ 14.75
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value . . . . . . . . . . . . . . 2.60% 23.79% 25.92% 25.21% (14.11)% 4.61%
Net Asset Value (1) . . . . . . . . . . . 5.05% 18.48% 17.52% 26.07% (5.53)% 0.00%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS) . . $133,980 $133,050 $126,330 $118,863 $104,260 $122,781
- ------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses Excluding Interest
Expense to Average Net Assets . . . . . . 1.12%** 1.06% 1.12% 1.11% 1.12% 1.46%**
Ratio of Total Expenses to Average Net
Assets . . . . . . . . . . . . . . . . . 2.28%** 2.76% 2.46% 2.79% 2.78% 1.46%**
Ratio of Net Investment Income to Average
Net Assets . . . . . . . . . . . . . . . 8.58%** 8.98% 9.82% 10.29% 10.18% 3.76%**
Portfolio Turnover Rate . . . . . . . . . 44% 94% 136% 84% 32% 0%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
(1) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund
during each period, and assumes dividends and distributions, if any, were
reinvested. This percentage is not an indication of the performance of a
shareholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value
per share of the Fund.
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
- ---------
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 under procedures approved 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, 1998, the Fund had reverse repurchase agreements outstanding as
follows:
<TABLE>
<CAPTION>
MATURITY IN
LESS THAN
365 DAYS
------------
<S> <C>
Value of Securities Subject to
Repurchase . . . . . . . . . . . . . . . . $ 27,795,000
Liability Under Reverse
Repurchase Agreement . . . . . . . . . . . $ 22,575,000
Weighted Average Interest Rate . . . . . . . 6.375%
</TABLE>
The average weekly balance of reverse repurchase agreements outstanding
during the six months ended June 30, 1998 was approximately $24,261,000 at
a weighted average interest rate of 6.60%.
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
ex-
12
<PAGE>
change 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.
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.
The Fund intends to use derivatives more actively than it has in the past. The
Fund intends to engage in transactions in futures contracts on foreign
currencies, stock indices, as well as in options, swaps and structured notes.
Consistent with the Fund's investment objectives and policies, the Fund intends
to use derivatives for non-hedging as well as hedging purposes.
Following is a description of derivative instruments and their associated risks
that the Fund intends to utilize:
6. FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into foreign
currency exchange contracts generally to attempt to protect securities and
related receivables and payables against changes in future foreign exchange
rates and, in certain situations, to gain exposure to a foreign currency. 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
either 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 or denotes such assets on the Fund's Custody account as
segregated. 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. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: The Fund
may make forward commitments to purchase or sell securities. Payment and
delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not to exceed 120 days)
after the date of the transaction. Additionally, 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 either 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 or denotes such securities on the
custody statement for its regular custody account. Purchasing securities on
a forward commitment or 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.
9. SWAP AGREEMENTS: The Fund may enter into swap agreements to exchange the
return generated by one security, instrument or basket of instruments for
the return generated by another security, instrument or basket of
instruments. The following summarizes swaps which may be entered into by
the Fund:
INTEREST RATE SWAPS: Interest rate swaps involve the exchange of
commitments to pay and receive interest based on a notional principal
amount. Net periodic interest payments to be received or paid are accrued
daily and are recorded in the Statement of Operations as an adjustment to
interest income. Interest rate swaps are marked-to-market daily based upon
quotations from market makers and the change, if any, is
13
<PAGE>
recorded as unrealized appreciation or depreciation in the Statement of
Operations.
TOTAL RETURN SWAPS: Total return swaps involve commitments to pay interest
in exchange for a market-linked return based on a notional amount. To the
extent the total return of the security, instrument or basket of
instruments underlying the transaction exceeds or falls short of the
offsetting interest obligation, the Fund will receive a payment from or
make a payment to the counterparty, respectively. Total return swaps are
marked-to-market daily based upon quotations from market makers and the
change, if any, is recorded as unrealized gains or losses in the Statement
of Operations. Periodic payments received or made at the end of each
measurement period, but prior to termination, are recorded as realized
gains or losses in the Statement of Operations.
Realized gains or losses on maturity or termination of interest rate and
total return swaps are presented in the Statement of Operations. Because
there is no organized market for these swap agreements, the value reported
in the Statement of Net Assets may differ from that which would be realized
in the event the Fund terminated its position in the agreement. Risks may
arise upon entering into these agreements from the potential inability of
the counterparties to meet the terms of the agreements and are generally
limited to the amount of net interest payments to be received and/or
favorable movements in the value of the underlying security, instrument or
basket of instruments, if any, at the date of default.
10. STRUCTURED SECURITIES: The Fund may invest in interests in entities
organized and operated solely for the purpose of restructuring the
investment characteristics of sovereign debt obligations. This type of
restructuring involves the deposit with or purchase by an entity of
specified instruments and the issuance by that entity of one or more
classes of securities ("Structured Securities") backed by, or representing
interests in, the underlying instruments. Structured Securities generally
will expose the Fund to credit risks of the underlying instruments as well
as of the issuer of the structured security. Structured Securities are
typically sold in private placement transactions with no active trading
market. Investments in structured securities may be more volatile than
their underlying instruments, however, any loss is limited to the amount of
the original investment.
11. OVER-THE-COUNTER TRADING: Derivative instruments that may be purchased or
sold by the Fund are expected to regularly consist of instruments not
traded on an exchange. The risk of nonperformance by the obligor on such an
instrument may be greater, and the ease with which the Fund can dispose of
or enter into closing transactions with respect to such an instrument may
be less, than in the case of an exchange-traded instrument. In addition,
significant disparities may exist between bid and asked prices for
derivative instruments that are not traded on an exchange. Derivative
instruments not traded on exchanges are also not subject to the same type
of government regulation as exchange traded instruments, and many of the
protections afforded to participants in a regulated environment may not be
available in connection with such transactions.
12. 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 0.70% of the Fund's
average weekly net assets.
C. The Chase Manhattan Bank, through its corporate 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 0.08% 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
14
<PAGE>
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. During the six months ended June 30, 1998, the Fund made purchases and
sales totaling, approximately $67,256,000 and $91,477,000, 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, 1998, the Federal income tax cost basis of
securities was $151,682,000 and, accordingly, net unrealized appreciation for
Federal income tax purposes was $3,231,000 of which $6,206,000 related to
appreciated securities and $2,975,000 related to depreciated securities.
E. 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.
F. At June 30, 1998, a substantial portion 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. These investments are often traded by one market maker who may also
be utilized by the Fund to provide pricing information used to value such
securities. The amounts which will be realized upon disposition of the
securities may differ from the value reflected on the statement of net assets
and the differences could be material.
G. 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,
1998 totaled approximately $40,000 and are included in Payable for Directors'
Fees and Expenses on the Statement of Net Assets.
H. During June 1998, the Board declared distributions of $0.11 and $0.04 per
share, derived from net investment income and net realized gains, respectively,
payable on July 15, 1998, to shareholders of record on June 30, 1998. Also in
June, the Board of Directors amended your Fund's by-laws to require advance
notice of any proposals to be made at stockholders' meetings. For annual
meetings the notice must be given to the Fund's secretary at least 60 days
before the anniversary date of the previous year's annual meeting. This year's
annual meeting of stockholders was held on June 24. This provision was adopted
to permit the Fund's stockholders and Directors to consider every stockholder
proposal on an informed basis and in an organized fashion, taking into account
the interests of all affected constituencies.
I. Supplemental Proxy Information
The Annual Meeting of the Stockholders of The Morgan Stanley High Yield Fund,
Inc. was held on June 24, 1998. The following is a summary of each proposal
presented and the total number of shares voted:
<TABLE>
<CAPTION>
VOTES IN VOTES AUTHORITY VOTES
PROPOSAL: FAVOR OF AGAINST WITHHELD ABSTAINED
- --------- --------- ------- --------- ---------
<S> <C> <C> <C> <C>
1. To elect the following Directors: Michael F. Klein . . . . . . . 8,005,752 -- 35,284 --
Barton M. Biggs. . . . . . . . 8,012,122 -- 28,915 --
John A. Levin. . . . . . . . . 8,010,422 -- 30,615 --
William G. Morton, Jr. . . . . 8,010,122 -- 30,915 --
2. To ratify the selection of PricewaterhouseCoopers
LLP as independent accountants of the Fund. . . . . . . . . . . . 7,994,515 20,583 -- 25,939
</TABLE>
15
<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, annually, 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
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