-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CQqDDEtlYFRZR+zwoXpRczT7Se/xvnpzwqy1zv5J9MAimta8nOiiGEJO3orkUCor 37DPtLOruMqaoFIvchLXJg== 0000912057-97-030016.txt : 19970912 0000912057-97-030016.hdr.sgml : 19970912 ACCESSION NUMBER: 0000912057-97-030016 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970905 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY EMERGING MARKETS DEBT FUND INC CENTRAL INDEX KEY: 0000904112 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133713706 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-07694 FILM NUMBER: 97675846 BUSINESS ADDRESS: STREET 1: 1221 AVENUE OF THE AMERICAS STREET 2: 8TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 6175578742 MAIL ADDRESS: STREET 1: 1221 AVENUE OF THE AMERIAS STREET 2: 8TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10020 N-30D 1 N-30D MORGAN STANLEY EMERGING MARKETS DEBT 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 Boston Equiserve Investor Relations Department P.O. Box 644 Boston, Massachusetts 02102-0644 (617) 575-3120 - --------------------------------------------------------- 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. ------------------------ MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. --------------------- SEMI-ANNUAL REPORT JUNE 30, 1997 MORGAN STANLEY ASSET MANAGEMENT INC. INVESTMENT ADVISER LETTER TO SHAREHOLDERS - -------- For the six months ended June 30, 1997, the Morgan Stanley Emerging Markets Debt Fund, Inc. (the "Fund") had a total return, based on net asset value per share, of 19.29% compared to 10.27% for the J.P. Morgan Emerging Markets Bond Plus 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 50.82% compared to 33.04% for the Index. Prior to January 1, 1997, the Fund used the J.P. Morgan Emerging Markets Bond Index as its benchmark. For the period since the Fund's commencement of operations on July 23, 1993 through June 30, 1997, the Fund's total return, based on net asset value per share, was 103.81% compared with 67.36% for the Index. On June 30, 1997, the closing price of the Fund's shares on the New York Stock Exchange was $14 9/16, representing a 4.5% discount to the Fund's net asset value per share. For the first few weeks of the year the trend of an across the board tightening of credit spreads continued unabated. Attractive relative valuations, the stretch for incremental yield and easy global monetary conditions prompted increases in allocations to emerging market assets. Federal Reserve Governor Greenspan's comments on the state of credit markets, extended valuations and mispricing of risk stopped the music suddenly. A correction in fixed income markets started in late February and lasted for much of March. The emerging markets didn't surprise by behaving differently during this market correction. An increase in risk premiums affected all countries and all bonds. A correction, precipitated by possible Fed action and deepened by redemptions and a reduction in committed capital tends to affect the broad market. The weight of money heading for the exits drowns the fundamentals for a while. During the second quarter of 1997, the emerging debt markets recovered from their late first quarter correction buoyed by falling U.S. interest rates and a renewed investor appetite for yield. U.S. interest rates fell by 35 to 40 basis points across the yield curve. This decline in rates was prompted by signs of moderating economic growth and the lack of evidence of any inflationary pressures in the system. These factors reassured investors that the Federal Reserve would not increase interest rates anytime soon. In addition to the positive interest rate environment, a confluence of events both fundamental and technical in nature bolstered the performance of emerging markets debt. On the fundamental front, improving macro-economic outlooks and rating upgrades by major U.S. ratings agencies in Argentina, Brazil, the Philippines, Uruguay, and Venezuela provided support. While on the technical front, a continuation of the trend of Brady bond retirement and debt buybacks as well as a strong inflow of funds from non-dedicated or "crossover" investors caused spreads on emerging markets debt to tighten back to levels not seen since 1993. During the first half of the year, Bulgaria, Morocco, and Peru outperformed the universe of emerging market debt, while the Philippines, Poland, and Nigeria were the performance laggards. The Fund's overweight positions in Bulgaria and Morocco as well as underweights in Nigeria, the Philippines and Poland allowed the Fund to outperform the broad market benchmark. Bulgarian bonds were the best performing in the emerging country universe during the second quarter of 1997. The election of a reformist democratic government in April assured investors that prudent macro-economic policy measures would be enacted. The new government secured technical and financial help from the IMF and the World Bank and adopted a policy framework to facilitate the July 1 introduction of a currency board monetary system. As prices of Bulgarian Brady bonds rose, we reduced our exposure to the credit but remained overweight. We expect continued outperformance next quarter from our Bulgarian positions albeit at a more gradual pace. Morocco benefited from an economic recovery following 1995's drought. The prospect of favorable ratings also buoyed priced. We used the rally to reduce our allocation to Morocco in the spring and will consider increasing them again once valuations reach attractive levels and are consistent with our expectations for a BB rating. The other out-performing credit, Peru, reacted to the release of above consensus GDP growth numbers of over 7% for the first 6 months of the year. Our value-oriented investment style steered us away from the debt of the Philippines and Poland, which both trade at fully valued levels. Both countries suffered from their proximity to the turbulence of neighboring currency markets and both were forced to keep local interest rates high in a defensive move against possible speculative attacks on their own currencies. We will monitor both situations closely and may increase our exposure should valuations become more attractive. Deteriorating political dynamics caused us to avoid Nigerian debt which suffered from its failed involvement in the unrest in neighboring Sierra Leone. The Nigerian's inability to install the former civilian government has undermined political stability in Nigeria. Also, lack of progress on economic reforms has reduced the prospect of a new IMF agreement and consequently, debt forgiveness. Our outlook remains cautiously positive. The benign U.S. rate environment, improving economic fundamentals in the emerging countries and growing investor 2 interest in the emerging debt asset class should cause risk premiums on emerging markets debt to come down and prices to rise over the medium term. Over the short term, however, we will be watching for signs of fatigue as spreads are near historic lows and we expect some profit taking. Additionally, some emerging countries in Asia and eastern Europe are experiencing considerable local currency volatility and we will be monitoring the potential contagion effects on emerging debt. Sincerely, /s/ Michael F. Klein Michael F. Klein PRESIDENT AND DIRECTOR /s/ Paul Ghaffari Paul Ghaffari PORTFOLIO MANAGER July 1997 3 Morgan Stanley Emerging Markets Debt Fund, Inc. Investment Summary as of June 30, 1997 (Unaudited) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
HISTORICAL INFORMATION TOTAL RETURN (%) --------------------------------------------------------------------------- MARKET VALUE (1) NET ASSET VALUE (2) INDEX (3) ----------------------- ----------------------- ----------------------- AVERAGE AVERAGE AVERAGE CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL ----------------------- ----------------------- ----------------------- FISCAL YEAR TO DATE 30.37% -- 19.29% -- 10.27% -- ONE YEAR 52.50 52.50% 50.82 50.82% 33.04 33.04% SINCE INCEPTION* 119.65+ 22.63+ 103.02+ 23.54+ 87.36 17.28
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. - -------------------------------------------------------------------------------- RETURNS AND PER SHARE INFORMATION A BAR CHART REFLECTING THE DATA BELOW IS REFLECTED HERE.
YEARS ENDED DECEMBER 31: SIX MONTHS ENDED 1993* 1994 1995 1996 JUNE 30, 1997 Net Asset Value Per Share $ 18.96 $ 12.23 $ 12.40 $ 17.31 $15.25 Market Value Per Share $ 18.13 $ 11.38 $ 12.50 $ 15.13 $14.56 Premium/(Discount) -4.4% -7.0% 0.8% -12.6% -4.5% Income Dividends $0.16 $1.49 $1.72 $1.08 $0.91 Capital Gains Distributions - $0.41 - - $3.44 Fund Total Return (2) 35.96% -25.95% 26.85%+ 50.98% 19.29% Index Total Return (3) 18.67% -18.93% 26.77% 39.31% 10.27%
(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) Prior to fiscal year 1997, the Fund used the J.P. Morgan Emerging Markets Bond Index as its benchmark for performance purposes. Beginning in 1997, the Fund is now using the J.P. Morgan Emerging Markets Bond Plus Index for the purpose of performance comparisons. This index includes a broader range of debt instruments and more closely represents the investment strategy of the Fund. Because the J.P. Morgan Emerging Markets Bond Plus Index was not available prior to January 1, 1994 the performance of the J.P. Morgan Emerging Markets Bond Index is shown for the period July 23, 1993 to December 31, 1993 and for purposes of computing cumulative performance of the benchmark index, for that period. The J.P. Morgan Emerging Markets Bond Plus Index is a market weighted index composed of Brady bonds, loans and Eurobonds, as well as U.S. Dollar local market instruments of Argentina, Brazil, Bulgaria, Mexico, Morocco, Nigeria, the Philippines, Poland, Russia, Venezuela and South Africa. * The Fund commenced operations on July 23, 1993. + This return does not include the effect of the rights issued in connection with the Rights Offering.
4 Morgan Stanley Emerging Markets Debt Fund, Inc. Portfolio Summary as of June 30, 1997 (Unaudited) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PORTFOLIO INVESTMENTS DIVERSIFICATION EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC Debt Instruments 94.6% Short-Term Investments 5.4%
- -------------------------------------------------------------------------------- COUNTRY WEIGHTINGS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC Mexico 17.9% Russia 15.7% Brazil 12.8% Argentina 12.8% Venezuela 10.1% Bulgaria 5.3% Jamaica 4.7% Morocco 2.9% Ivory Coast 2.7% Peru 2.1% Other 13.0%
- -------------------------------------------------------------------------------- TEN LARGEST HOLDINGS*
PERCENT OF TOTAL INVESTMENTS ----------- 1. Ministry of Finance Tranche IV 144A 3.00%, 5/14/03 6.8% 2. Republic of Argentina 'L' Bond 6.75%, 3/31/05 6.4 3. Republic of Venezuela Debt Conversion Bond 'DL' 6.75%, 12/18/07 5.3 4. Government of Jamaica 12.00%, 7/19/99 4.7 5. Federative Republic of Brazil Debt Conversion 'L' Bond 6.94%, 4/15/12 4.3 6. Salomon Brothers Federative Republic of Brazil Credit Linked Enhanced Note 9.00%, 1/15/99 3.6 PERCENT OF TOTAL INVESTMENTS ----------- 7. Russia Principal Note Zero Coupon, 12/31/99 3.5% 8. Chase Manhattan Bank United Mexican States Stripped Discount Bond 6.375%, 9/9/97 2.9 9. Kingdom of Morocco Restructuring and Consolidation Agreement 'A' (Participation: J.P. Morgan, Lehman Bros.) 6.81%, 1/1/09 2.9 10. Chase Manhattan Bank Republic of Bulgaria Stripped Discount Note 6.56%, 8/20/97 2.8 ----- 43.2% ----- -----
* Excludes short-term investments. 5 FINANCIAL STATEMENTS - --------- STATEMENT OF NET ASSETS (UNAUDITED) (Showing Percentage of Total Value of Investments) - --------- JUNE 30, 1997
FACE AMOUNT VALUE (000) (000) - ----------------------------------------------------------------- - ------------- DEBT INSTRUMENTS (85.3%) - -------------------------------------------------- - ---------- ALGERIA (0.2%) LOAN AGREEMENT (e,i)Algeria Refinanced Loan Tranche 'A' U.S.$ 1,000 U.S.$ 877 -------------- - ----------------------------------------------------------------- - ------------- ARGENTINA (12.8%) BONDS (11.9%) (e)Acindar Industries 144A 11.75%, 11/12/98 1,500 1,564 City of Buenos Aires 144A 11.25%, 4/11/07 2,000 2,175 Industrias Pescarmona S.A. 11.75%, 3/27/98 1,000 1,039 Metrogas S.A. 'B' 10.875%, 5/15/01 4,000 4,400 Republic of Argentina 11.00%, 10/9/06 5,800 6,452 Republic of Argentina 144A 11.75%, 2/12/07 ARP 3,200 3,569 (e,j)Republic of Argentina 'L' Bond 6.75%, 3/31/05 U.S.$ 27,791 26,140 Republic of Argentina Par Bond 5.50%, 3/31/23 5,000 3,469 -------------- 48,808 -------------- NOTE (0.9%) Nortel Inversora 'A' 6.00%, 3/31/07 6,723 3,580 -------------- 52,388 -------------- - ----------------------------------------------------------------- - ------------- BRAZIL (9.2%) BONDS Federative Republic of Brazil Global Bond 10.13%, 5/15/27 8,862 8,543 (h)Federative Republic of Brazil 'C' Bond PIK Euro 8.00%, 4/15/14 7,228 5,812 (e,j)Federative Republic of Brazil Debt Conversion 'L' Bond 6.94%, 4/15/12 21,500 17,791 Tevecap 12.625%, 11/26/04 5,000 5,406 -------------- 37,552 -------------- - ----------------------------------------------------------------- - ------------- BULGARIA (2.5%) BONDS (h)Republic of Bulgaria Front Loaded Interest Reduction Bond 'A' Euro 2.25%, 7/28/12 15,600 8,912 (e)Republic of Bulgaria Past Due Interest Bond 6.56%, 7/28/11 2,050 1,482 -------------- 10,394 -------------- - ----------------------------------------------------------------- - ------------- DOMINICAN REPUBLIC (0.4%) BOND (e)Dominican Republic Past Due Interest Bond 6.44%, 8/30/09 1,750 1,518 -------------- - ----------------------------------------------------------------- - ------------- FACE AMOUNT VALUE (000) (000) - --------------------------------------------------------- - ------------ ECUADOR (1.9%) BONDS Conecel 144A 14.00%, 5/1/02 U.S.$ 3,000 U.S.$ 3,188 (e)Republic of Ecuador Discount Bond 6.44%, 2/28/25 6,700 4,790 -------------- 7,978 -------------- - ----------------------------------------------------------------- - ------------- INDIA (0.6%) BOND (d)Saurashtra Cement Co. 17.00%, 9/7/97 INR 94,000 2,614 -------------- - ----------------------------------------------------------------- - ------------- IVORY COAST (2.7%) BOND (0.2%) (b,k)Republic of Ivory Coast Front Loaded Interest Reduction Bond 144A U.S.$ 2,000 668 -------------- LOAN AGREEMENTS (2.5%) (b)Republic of Ivory Coast Syndicated Loan, Zero Coupon, 12/31/00 FRF 99,146 7,995 (b)Republic of Ivory Coast Syndicated Loan, Zero Coupon, 12/31/00 U.S.$ 5,750 2,415 -------------- 10,410 -------------- 11,078 -------------- - ----------------------------------------------------------------- - ------------- JAMAICA (4.7%) BOND (i)Government of Jamaica 12.00%, 7/19/99 19,100 19,100 -------------- - ----------------------------------------------------------------- - ------------- JORDAN (0.1%) BOND (e)Government of Jordan Interest Arrears Bond 6.75%, 12/23/05 358 342 -------------- - ----------------------------------------------------------------- - ------------- MEXICO (15.0%) BONDS Bancomext Global Bond 7.25%, 2/2/04 11,900 11,112 Bufete Industrial 144A 11.375%, 7/15/99 7,000 7,311 (j)Empresas ICA Sociedad Controladora 144A, 11.875%, 5/30/01 8,000 8,740 Empresas ICA Sociedad Controladora (Registered) 11.875%, 5/30/01 1,000 1,092 (j)Empresas La Moderna 144A 11.375%, 1/25/99 6,500 6,849 National Financiera 17.00%, 2/26/99 ZAR 12,000 2,645 (e)United Mexican States Discount Bond 6.84%, 12/31/19 U.S.$ 5,000 4,653 (e)United Mexican States Discount Bond 6.87%, 12/31/19 1,300 1,210 - ----------------------------------------------------------------- - -------------
The accompanying notes are an integral part of the financial statements. 6
FACE AMOUNT VALUE (000) (000) - --------------------------------------------------------- - ------------ MEXICO (CONTINUED) United Mexican States Global Bond 'A' 6.25%, 12/31/19 U.S.$ 2,400 U.S.$ 1,856 United Mexican States Global Bond 'B' 6.25%, 12/31/19 9,600 7,422 United Mexican States Global Bond Euro 11.50%, 5/15/26 7,400 8,458 -------------- 61,348 -------------- - ----------------------------------------------------------------- - ------------- MOROCCO (2.9%) LOAN AGREEMENT (e,g)Kingdom of Morocco Restructuring and Consolidation Agreement 'A' (Participation: J.P. Morgan, Lehman Bros.) 6.81%, 1/1/09 12,900 11,827 -------------- - ----------------------------------------------------------------- - ------------- NIGERIA (1.4%) NOTE (e)Central Bank of Nigeria Promissory Note 3.80%, 1/5/10 11,000 5,761 -------------- - ----------------------------------------------------------------- - ------------- PANAMA (1.1%) BONDS (h)Republic of Panama Interest Reduction Bond 144A 3.50%, 7/17/14 3,583 2,768 (h)Republic of Panama Interest Reduction Bond Euro 3.50%, 7/17/14 300 231 (e)Republic of Panama Past Due Interest Bond 144A, 6.56%, 7/17/16 1,724 1,516 -------------- 4,515 -------------- - ----------------------------------------------------------------- - ------------- PERU (2.1%) BONDS (h)Republic of Peru Front Loaded Interest Reduction Bond 3.25%, 3/7/17 300 179 (h)Republic of Peru Front Loaded Interest Reduction Bond 3.25%, 3/7/17 14,098 8,424 -------------- 8,603 -------------- - ----------------------------------------------------------------- - ------------- RUSSIA (15.7%) BONDS (8.0%) Ministry of Finance Tranche IV 144A 3.00%, 5/14/03 41,740 28,008 Ministry of Finance Tranche IV (Letter of Entitlement) 3.00%, 5/14/03 122 81 Ministry of Finance Tranche VI 144A 3.00%, 5/14/06 8,800 4,778 -------------- 32,867 -------------- LOAN AGREEMENTS (3.2%) (b,f,g)Bank for Foreign Economic Affairs (Participation: J.P. Morgan) 4,550 4,175 International Bank for Economic Cooperation Loan Agreement DEM 14,450 5,180 International Bank for Economic Cooperation Loan Agreement U.S.$ 5,843 3,652 -------------- 13,007 -------------- - ----------------------------------------------------------------- - ------------- FACE AMOUNT VALUE (000) (000) - --------------------------------------------------------- - ------------ NOTES (4.5%) Russia Interest Arrears Note U.S.$ 5,300 U.S.$ 4,050 Russia Principal Note Zero Coupon, 12/31/99 21,300 14,211 -------------- 18,261 -------------- 64,135 -------------- - ----------------------------------------------------------------- - ------------- SOUTH AFRICA (1.9%) BOND Republic of South Africa '150' 12.00%, 2/28/05 ZAR 40,100 7,889 -------------- - ----------------------------------------------------------------- - ------------- VENEZUELA (10.1%) BONDS (e)Republic of Venezuela Debt Conversion Bond 'DL' 6.75%, 12/18/07 U.S.$ 23,500 21,811 (e)Republic of Venezuela Discount Bonds 'A' 6.81%, 3/31/20 5,500 4,874 (e)Republic of Venezuela Discount Bonds 'B' 6.81%, 3/31/20 5,600 4,963 (e,j)Republic of Venezuela Front Loaded Interest Reduction Bond 'A', 6.75%, 3/31/07 10,238 9,525 -------------- 41,173 -------------- - ----------------------------------------------------------------- - ------------- TOTAL DEBT INSTRUMENTS (Cost U.S. $334,777) 349,092 -------------- - ----------------------------------------------------------------- - ------------- STRUCTURED INVESTMENTS (9.3%) - ----------------------------------------------------------------- - ------------- BRAZIL (3.6%) Salomon Brothers Federative Republic of Brazil Credit Linked Enhanced Note 9.00%, 1/5/99 15,000 14,856 -------------- - ----------------------------------------------------------------- - ------------- BULGARIA (2.8%) Chase Manhattan Bank Republic of Bulgaria Stripped Discount Note 6.56%, 8/20/97 20,000 11,496 -------------- - ----------------------------------------------------------------- - ------------- MEXICO (2.9%) Chase Manhattan Bank United Mexican States Stripped Discount Bond 6.375%, 9/9/97 16,550 11,991 -------------- - ----------------------------------------------------------------- - ------------- TOTAL STRUCTURED INVESTMENTS (Cost U.S. $35,322) 38,343 -------------- - ----------------------------------------------------------------- - ------------- NO. OF WARRANTS - --------------------------------------------------------- - ------------ WARRANTS (0.0%) - -------------------------------------------------- - ---------- VENEZUELA (a)Republic of Venezuela Oil, expiring 4/15/20 (Cost U.S. $0) 95 --@ - ----------------------------------------------------------------- - -------------
The accompanying notes are an integral part of the financial statements. 7
NO. OF VALUE RIGHTS (000) - --------------------------------------------------------- - ------------ RIGHTS (0.0%) - -------------------------------------------------- - ---------- MEXICO (a)United Mexican States Value Recovery Rights, expiring 6/30/03 (Cost U.S. $0) 21,692 U.S.$ --@ -------------- - ----------------------------------------------------------------- - ------------- FACE AMOUNT (000) - --------------------------------------------------------- - ------------ SHORT-TERM INVESTMENTS (4.3%) - -------------------------------------------------- - ---------- SOUTH AFRICA (0.6%) COMMERCIAL PAPER Eskom 15.54%, 8/12/97 ZAR 10,300 2,229 -------------- - ----------------------------------------------------------------- - ------------- UNITED STATES (3.7%) REPURCHASE AGREEMENT Chase Securities, Inc., 5.70%, dated 6/30/97, due 7/1/97, to be repurchased at U.S. $15,196, collateralized by U.S. Treasury Bonds, 5.625%, due 2/15/06, valued at U.S. $15,452 U.S.$ 15,194 15,194 -------------- - ----------------------------------------------------------------- - ------------- TOTAL SHORT-TERM INVESTMENTS (Cost U.S. $17,463) 17,423 -------------- - ----------------------------------------------------------------- - ------------- FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (1.1%) German Mark DEM 7,903 4,534 Indian Rupee INR 10 --@ -------------- (Cost U.S. $4,572) 4,534 -------------- - ----------------------------------------------------------------- - ------------- TOTAL INVESTMENTS (100.0%) (Cost U.S. $392,134) 409,392 -------------- - ----------------------------------------------------------------- - ------------- OTHER ASSETS Receivable for Investments Sold U.S.$ 55,697 Interest Receivable 9,169 Dividend Receivable 16 Deferred Organization Costs 16 Other Assets 39 64,937 --------------- -------------- - ----------------------------------------------------------------- - ------------- LIABILITIES Payable for: Investments Purchased (76,135) Reverse Repurchase Agreement (49,983) Dividends Declared (7,751) Bank Overdraft (6,442) Capital Gains Declared (4,321) Interest (823) Investment Advisory Fees (290) Shareholder Reporting Expenses (54) Custodian Fees (52) Professional Fees (49) Directors' Fees and Expenses (44) Administration Fees (27) Other Liabilities (6) (145,977) --------------- -------------- - ----------------------------------------------------------------- - ------------- AMOUNT (000) - --------------------------------------------------------- - ------------ NET ASSETS Applicable to 21,531,260 issued and outstanding U.S.$0.01 par value shares (100,000,000 shares authorized) U.S.$ 328,352 -------------- -------------- - ----------------------------------------------------------------- - ------------- NET ASSET VALUE PER SHARE U.S.$ 15.25 -------------- -------------- - ----------------------------------------------------------------- - ------------- AT JUNE 30, 1997, NET ASSETS CONSISTED OF: - ----------------------------------------------------------------- Common Stock U.S.$ 215 Capital Surplus 274,350 Accumulated Net Investment Loss (1,182) Accumulated Net Realized Gain 37,707 Unrealized Appreciation on Investments and Foreign Currency Translations 17,262 - ----------------------------------------------------------------- - ------------- TOTAL NET ASSETS U.S.$ 328,352 -------------- -------------- - ----------------------------------------------------------------- - -------------
(a) -- Non-income producing. (b) -- Non-income producing -- in default. (c) -- Security valued at cost -- see note A-1 to financial statements. (d) -- Security valued at fair value -- see note A-1 to financial statements. (e) -- Variable/floating rate security -- rate disclosed is as of June 30, 1997. (f) -- Under restructuring at June 30, 1997 -- see note A-7 to financial statements. (g) -- Participation interests were acquired through the financial institutions indicated parenthetically. (h) -- Step Bond -- coupon rate increases in increments to maturity. Rate dislcosed is as of June 30, 1997. Maturity date disclosed is ultimate maturity. (i) -- Issuer is making partial payments. (j) -- 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. (k) -- Security is subject to delayed delivery -- see note A-8 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, 1997 EXCHANGE RATES: - ----------------------------------------------------- ARP Argentine Peso 1.000 = U.S.$1.00 DEM German Mark 1.743 = U.S.$1.00 FRF French Franc 5.875 = U.S.$1.00 INR Indian Rupee 35.800 = U.S.$1.00 ZAR South African Rand 4.537 = U.S.$1.00
- ----------------------------------------------------------------- - ------------- The accompanying notes are an integral part of the financial statements. 8
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) STATEMENT OF OPERATIONS (000) - --------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME Dividends............................................................................... U.S.$ 16 Interest................................................................................ 18,591 Less: Foreign Taxes Withheld............................................................ (45) - --------------------------------------------------------------------------------------------------------------- Total Income.......................................................................... 18,562 - --------------------------------------------------------------------------------------------------------------- EXPENSES Investment Advisory Fees................................................................ 1,593 Interest Expense on Borrowings.......................................................... 1,697 Interest Expense on Securities Sold Short............................................... 479 Custodian Fees.......................................................................... 134 Administrative Fees..................................................................... 149 Shareholder Reporting Expenses.......................................................... 72 Professional Fees....................................................................... 53 Directors' Fees and Expenses............................................................ 23 Other Expenses.......................................................................... 40 - --------------------------------------------------------------------------------------------------------------- Total Expenses........................................................................ 4,240 - --------------------------------------------------------------------------------------------------------------- Net Investment Income............................................................. 14,322 - --------------------------------------------------------------------------------------------------------------- NET REALIZED GAIN (LOSS) Investment Securities Sold.............................................................. 40,047 Investment Securities Sold Short........................................................ (1,126) Written Option Contracts................................................................ 300 Foreign Currency Transactions........................................................... 32 - --------------------------------------------------------------------------------------------------------------- Net Realized Gain..................................................................... 39,253 - --------------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION Appreciation on Investments............................................................. (4,230) Depreciation on Foreign Currency Translations........................................... (17) - --------------------------------------------------------------------------------------------------------------- Change in Unrealized Appreciation/Depreciation........................................ (4,247) - --------------------------------------------------------------------------------------------------------------- Net Realized Gain and Change in Unrealized Appreciation/Depreciation........................ 35,006 - --------------------------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................................ U.S.$ 49,328 - --------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1997 YEAR ENDED (UNAUDITED) DECEMBER 31, 1996 STATEMENT OF CHANGES IN NET ASSETS (000) (000) - --------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS Operations: Net Investment Income............................................... U.S.$ 14,322 U.S.$ 37,767 Net Realized Gain................................................... 39,253 78,503 Change in Unrealized Appreciation/Depreciation...................... (4,247) 12,679 - --------------------------------------------------------------------------------------------------------------- Net Increase in Net Assets Resulting from Operations................ 49,328 128,949 - --------------------------------------------------------------------------------------------------------------- Distributions: Net Investment Income............................................... (19,516) (23,254) Net Realized Gain................................................... (74,104) -- - --------------------------------------------------------------------------------------------------------------- Total Distributions................................................. (93,620) (23,254) - --------------------------------------------------------------------------------------------------------------- Capital Share Transactions: Reinvestment of Distributions (50,147 shares)....................... -- 654 - --------------------------------------------------------------------------------------------------------------- Total Increase (Decrease)........................................... (44,292) 106,349 - --------------------------------------------------------------------------------------------------------------- Net Assets: Beginning of Period................................................. 372,644 266,295 - --------------------------------------------------------------------------------------------------------------- End of Period (including accumulated undistributed net investment income (loss) of U.S.$(1,182) and U.S.$4,012, respectively)........ U.S.$328,352 U.S.$372,644 - --------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 9
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) STATEMENT OF CASH FLOWS (000) - -------------------------------------------------------------------------------------------- CASH FLOW FROM INVESTING AND OPERATING ACTIVITIES: Proceeds from Sale of Investments................................... U.S.$(714,408) Purchases of Investments............................................ 829,404 Net Increase in Short-Term Investments.............................. (32,349) Net Cash used for Foreign Currency Transactions..................... (4,555) Investment Income................................................... 17,702 Interest Expense Paid............................................... (2,080) Operating Expenses Paid............................................. (1,791) - -------------------------------------------------------------------------------------------- Net Cash Provided by Investing and Operating Activities............. 91,923 - -------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash Paid for Reverse Repurchase Agreements......................... (16,974) Cash Distributions Paid............................................. (81,547) - -------------------------------------------------------------------------------------------- Net Cash Used for Financing Activities.............................. (98,521) - -------------------------------------------------------------------------------------------- Net Decrease in Cash................................................ (6,598) CASH AT BEGINNING OF PERIOD............................................. 156 - -------------------------------------------------------------------------------------------- BANK OVERDRAFT AT END OF PERIOD......................................... U.S.$ (6,442) - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- RECONCILITATION OF NET INVESTMENT INCOME TO NET CASH PROVIDED BY INVESTING AND OPERATING ACTIVITIES: - -------------------------------------------------------------------------------------------- Net Investment Income............................................... U.S.$ 14,322 Proceeds from Sale of Investments................................... (714,408) Purchases of Investments............................................ 829,404 Net Decrease in Receivables Related to Operations................... 2,604 Net Increase in Payables Related to Operations...................... 383 Net Cash used for Foreign Currency Transactions..................... (4,555) Net Increase in Short-Term Investments.............................. (32,349) Amortization of Organization Costs.................................. 7 Accretion/Amortization of Discounts and Premiums.................... (3,485) - -------------------------------------------------------------------------------------------- Net Cash Provided by Investing and Operating Activities............. U.S.$ 91,923 - -------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 10 FINANCIAL HIGHLIGHTS
PERIOD FROM SIX MONTHS JULY 23, 1993* ENDED YEAR ENDED DECEMBER 31, TO JUNE 30, 1997 --------------------------------------------------- DECEMBER 31, SELECTED PER SHARE DATA AND RATIOS: (UNAUDITED) 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD.... U.S.$ 17.31 U.S.$ 12.40 U.S.$ 12.23 U.S.$ 18.96 U.S.$ 14.10 - --------------------------------------------------------------------------------------------------------------------------------- Offering Costs.......................... -- -- (0.02) -- (0.04) - --------------------------------------------------------------------------------------------------------------------------------- Net Investment Income................... 0.67 1.75 1.76 1.51 0.50 Net Realized and Unrealized Gain (Loss) on Investments......................... 1.62 4.24 1.16 (6.34) 4.56 - --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations.... 2.29 5.99 2.92 (4.83) 5.06 - --------------------------------------------------------------------------------------------------------------------------------- Distributions: Net Investment Income............... (0.91) (1.08) (1.69) (1.49) (0.16) In Excess of Net Investment Income............................ -- -- (0.03) -- -- Net Realized Gain................... (3.44) -- -- (0.41) -- - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions................. (4.35) (1.08) (1.72) (1.90) (0.16) - --------------------------------------------------------------------------------------------------------------------------------- Decrease in Net Asset Value due to Rights Offering........................ -- -- (1.01) -- -- - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD.......... U.S.$ 15.25 U.S.$ 17.31 U.S.$ 12.40 U.S.$ 12.23 U.S.$ 18.96 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- PER SHARE MARKET VALUE, END OF PERIOD... U.S.$ 14.56 U.S.$ 15.13 U.S.$ 12.50 U.S.$ 11.38 U.S.$ 18.13 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENT RETURN: Market Value........................ 30.37% 30.86% 37.48%+++ (27.97)% 29.97% Net Asset Value (1)................. 19.29% 50.98% 26.85%+++ (25.95)% 35.96% - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- RATIOS, SUPPLEMENTAL DATA: - --------------------------------------------------------------------------------------------------------------------------------- NET ASSETS, END OF PERIOD (THOUSANDS)... U.S.$328,352 U.S.$372,644 U.S.$266,295 U.S.$196,282 U.S.$302,951 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of Expenses Before Interest Expense to Average Net Assets.......... 1.30%** 1.38% 1.50% 1.59% 1.73%** Ratio of Expenses After Interest Expense to Average Net Assets.................. 2.67%** 2.59% 1.89% 2.30% 2.79%** Ratio of Net Investment Income to Average Net Assets..................... 9.03%** 12.14% 15.21% 10.79% 7.20%** Portfolio Turnover Rate................. 198% 373% 348% 256% 72% - ---------------------------------------------------------------------------------------------------------------------------------
* Commencement of operations ** Annualized +++ This return does not include the effect of the rights issued in connection with the Rights Offering. (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. 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. The accompanying notes are an integral part of the financial statements. 11 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1997 - ------------ The Morgan Stanley Emerging Markets Debt Fund, Inc. (the "Fund"), was incorporated in Maryland on May 6, 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 investment objective is to produce high current income and as a secondary objective, to seek capital appreciation, through investments primarily in debt securities. A. The following significant accounting policies, which are in conformity with generally accepted accounting principles for investment companies, 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 sale price on the valuation date, or if there was no sale on such date, at the mean between the current bid and asked prices or the bid price if only bid quotations are available. 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. Securities may be valued by independent pricing services which use prices provided by market-makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. 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. 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. The Fund may be subject to taxes imposed by countries in which it invests. Such taxes are generally based on either income earned or repatriated. The Fund accrues such taxes when the related income is earned. 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 counter-party to the agreement, realization and/or retention of the collateral or proceeds may be subject to legal proceedings. 4. REVERSE REPURCHASE AGREEMENTS: In order to leverage the Fund, the Fund may enter into reverse repurchase agreements with institutions that the Fund's investment adviser has determined are creditworthy. Under a reverse repurchase agreement, the Fund sells securities and agrees to repurchase them at a mutually agreed upon date and price. Reverse repurchase agreements involve the risk that the market value of the securities purchased with the proceeds from the sale of securities received by the Fund may decline below the price of the securities the Fund is obligated to repurchase. Securities subject to repurchase under reverse repurchase agreements, if any, are designated as such in the Statement of Net Assets. At June 30, 1996, the Fund had reverse repurchase agreements outstanding as follows:
MATURITY IN 30 TO 90 DAYS ------------- Value of Securities Subject to Repurchase............................ $ 58,088,000 Liability Under Reverse Repurchase Agreement.................. $ 49,983,000 Weighted Average Interest Rate........ 5.625%
The average weekly balance of reverse repurchase agreements outstanding during the six months ended June 30, 1997 was approximately $25,262,000 at a weighted average interest rate of 5.65%. 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 12 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. 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. LOAN AGREEMENTS: The Fund may invest in fixed and floating rate loans ("Loans") arranged through private negotiations between an issuer of sovereign debt obligations and one or more financial institutions ("Lenders") deemed to be creditworthy by the investment adviser. The Fund's investments in Loans may be in the form of participations in Loans ("Participations") or assignments of all or a portion of Loans ("Assignments") from third parties. The Fund's investment in Participations typically results in the Fund having a contractual relationship with only the Lender and not with the borrower. The Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the Lender selling the Participation and only upon receipt by the Lender of the payments from the borrower. The Fund generally has no right to enforce compliance by the borrower with the terms of the loan agreement. As a result, the Fund may be subject to the credit risk of both the borrower and the Lender that is selling the Participation. When the Fund purchases Assignments from Lenders it acquires direct rights against the borrower on the Loan. Because Assignments are arranged through private negotiations between potential assignees and potential assignors, the rights and obligations acquired by the Fund as the purchaser of an Assignment may differ from, and be more limited than, those held by the assigning Lender. 8. 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. 9. SECURITIES SOLD SHORT: The Fund may sell securities short. A short sale is a transaction in which the Fund sells securities it may or may not own, but has borrowed, in anticipation of a decline in the market price of the securities. The Fund is obligated to replace the borrowed securities at their market price at the time of replacement. The Fund may have to pay a premium to borrow the securities as well as pay any dividends or interest payable on the securities until they are replaced. The Fund's obligation to replace the securities borrowed in connection with a short sale will generally be secured by collateral deposited with the broker that consists of cash, U.S. government securities or other liquid, high grade debt obligations. In addition, the Fund will place in a 13 segregated account with its custodian an amount of cash, U.S. government securities or other liquid high grade debt obligations equal to the difference, if any, between (1) the market value of the securities sold at the time they were sold short and (2) any cash, U.S. government securities or other liquid high grade debt obligations deposited as collateral with the broker in connection with the short sale (not including the proceeds of the short sale). Short sales by the Fund involve certain risks and special considerations. Possible losses from short sales differ from losses that could be incurred from a purchase of a security because losses from short sales may be unlimited, whereas losses from purchases cannot exceed the total amount invested. 10. WRITTEN OPTIONS: The Fund may write covered call options in an attempt to increase the Fund's total return. The Fund will receive premiums that are recorded as liabilities and subsequently adjusted to the current value of the options written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or are closed are offset against the proceeds or amount paid on the transaction to determine the net realized gain or loss. By writing a covered call option, the Fund foregoes in exchange for the premium the opportunity for capital appreciation above the exercise price should the market price of the underlying security increase. 11. SWAPS: A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The following summarizes the types of swaps that the Fund may enter into: INTEREST RATE SWAPS: Interest rate swaps involve the exchange of commitments to pay and receive interest based on a notional principal amount. The Fund utilizes interest rate swaps in an attempt to increase income while limiting the Fund's exposure to market fluctuations in interest rates. 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 recorded as an unrealized gain or loss 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 and provide the Fund with the full benefit on an investment in a security without an initial cash outlay. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate 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 an unrealized gain or loss in the Statement of Operations. Payments received or made at the end of each measurement period are recorded as realized gain or loss in the Statement of Operations. 12. 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, invested in by the Fund, generally will have credit risk equivalent to that of the underlying instruments. 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. 13. 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 and discounts and premiums on investments purchased are accreted or amortized in accordance with the effective yield method over their respective lives, except where collection is in doubt. 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 for foreign currency transactions and the timing of the recognition of losses on securities. 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 14 under the terms of an Investment Advisory and Management Agreement (the "Agreement"). Under the Agreement, the Adviser is paid a fee computed weekly and payable monthly at an annual rate of 1.00% 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 .06% of the Fund's average weekly net assets, plus $100,000 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. 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 a Custody Agreement. Custodian fees are payable monthly based on assets under custody, investment purchase and sale activity, an account maintenance fee, plus reimbursement for certain out-of-pocket expenses. Investment transaction fees vary by country and security type. For the six months ended June 30, 1997, the Fund incurred international custodian fees of $115,000 of which $51,000 was payable to the International Custodian at June 30, 1997. In addition, for the six months ended June 30, 1997, the Fund has earned interest income of $46,000 and incurred interest expense of $107,000 on balances with the International Custodian. E. During the six months ended June 30, 1997, the Fund made purchases and sales totaling approximately $751,355,000 and $854,761,000 respectively, of investment securities other than long-term U.S. Government securities, purchased options and short-term investments. There were no purchases and sales of long-term U.S. Government securities. At June 30, 1997, the U.S. Federal income tax cost basis of securities was approximately $387,562,000 and accordingly, net unrealized appreciation for U.S. Federal income tax purposes was $17,296,000, of which $19,083,000 related to appreciated securities and $1,787,000 related to depreciated securities. F. In connection with its organization, the Fund incurred $75,000 of organization costs. The organization costs are being amortized on a straight-line basis over a five-year period beginning July 23, 1993, the date the Fund commenced operations. G. The Fund issued to its shareholders of record as of the close of business on July 18, 1995 transferable Rights to subscribe for up to an aggregate of 5,400,000 shares of Common Stock of the Fund at a rate of one share of Common Stock for three Rights held at the subscription price of $9.25 per share. During August 1995, the Fund issued a total of 5,400,000 shares of Common Stock on exercise of such Rights. Rights' offering costs of $500,000 were charged directly against the proceeds of the Offering. The Fund was advised that Morgan Stanley & Co. Incorporated, an affiliate of the Adviser, received commissions of $1,590,000 and reimbursement of its expenses of $125,000 in connection with its participation in the Rights Offering. H. A portion of the Fund's net assets consist of securities located in emerging markets which are denominated in foreign currencies. Changes in currency exchange rates will affect the value of and investment income from such securities. Emerging market securities are often subject to greater price volatility, limited capitalization and liquidity, and higher rates of inflation than U.S. securities. In addition, emerging market securities may be subject to substantial governmental involvement in the economy and greater social, economic and political uncertainty. I. 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 $34,000 and are included in Payable for Directors' Fees and Expenses on the Statement of Net Assets. J. During the six months ended June 30, 1997, the Fund's written covered call option activity was as follows:
FACE PREMIUM AMOUNT (000) (000) ------------- ------------- Options outstanding at December 31, 1996...................... $ -- $ -- Options written during the year.......................... 45,400 592 Options expired during the year.......................... (31,600) (343) Options closed during the year.......................... (13,800) (249) ------------- --- Options outstanding at June 30, 1997.......................... $ -- $ -- ------------- --- ------------- ---
K. During June 1997, the Board declared quarterly distributions of $0.36 and $0.20 per share, derived from net investment income and net realized gains, respectively, payable on July 15, 1997, to shareholders of record on June 30, 1997. 15 L. Supplemental Proxy Information The Annual Meeting of the Stockholders of the Morgan Stanley Emerging Markets Debt Fund, Inc. was held on April 30, 1997. The following is a summary of each proposal presented and the total number of shares voted:
VOTES IN VOTES VOTES VOTES PROPOSAL: FAVOR OF AGAINST WITHHELD ABSTAINED - ----------------------------------------------------------------------------- --------- ----------- ----------- ----------- 1. To elect the following Directors: John W. Croghan 19,102,588 -- 158,849 -- Graham E. Jones 19,095,820 -- 165,617 -- 2.To ratify the selection of Price Waterhouse LLP as independent public accountants of the Fund. 19,098,109 57,560 -- 105,768 3.To approve an Investment Advisory and Management Agreement between the Fund and Morgan Stanley Asset Management Inc. 18,967,208 126,340 -- 167,889
16 DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"), shareholders may elect, by instructing Boston Equiserve (the "Plan Agent") in writing, 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, quarterly, in any amount from $100 to $3,000, for investment in Fund shares. Shareholders who do not participate in the Plan will receive distributions in cash. 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 the 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, non-participants in the Plan will receive cash and 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: Morgan Stanley Emerging Markets Debt Fund, Inc. Boston Equiserve Dividend Reinvestment Unit P.O. Box 1681 Boston, MA 02105-1681 1-800-442-2001 17 -----END PRIVACY-ENHANCED MESSAGE-----