-----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, R/NppAKawCblICS2Izn9MCjpstWYAekMVyJBL2eYr0p5EfI2kcTM48L4qeBtWlGP 2Uz7uLxbiyLsE8UBbohXqQ== 0000912057-96-019583.txt : 19960906 0000912057-96-019583.hdr.sgml : 19960906 ACCESSION NUMBER: 0000912057-96-019583 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960905 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: 1940 Act SEC FILE NUMBER: 811-07694 FILM NUMBER: 96626106 BUSINESS ADDRESS: STREET 1: 1221 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 6175578742 MAIL ADDRESS: STREET 1: 1221 AVENUE OF THE AMERIAS CITY: NEW YORK STATE: NY ZIP: 10020 N-30D 1 N-30D MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. - --------------------------------------------- OFFICERS AND DIRECTORS Barton M. Biggs William G. Morton, Jr. CHAIRMAN OF THE BOARD DIRECTOR OF DIRECTORS James W. Grisham Frederick B. Whittemore VICE PRESIDENT VICE-CHAIRMAN OF THE BOARD Michael F. Klein OF DIRECTORS VICE PRESIDENT Warren J. Olsen Harold J. Schaaff, Jr. PRESIDENT AND DIRECTOR VICE PRESIDENT Peter J. Chase Joseph P. Stadler DIRECTOR VICE PRESIDENT John W. Croghan Valerie Y. Lewis DIRECTOR SECRETARY David B. Gill James R. Rooney DIRECTOR TREASURER Graham E. Jones Belinda A. Brady DIRECTOR ASSISTANT TREASURER John A. Levin 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 (International) One Pierrepont Plaza Brooklyn, New York 11201 The Chase Manhattan Bank (Domestic) 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, 1996 MORGAN STANLEY ASSET MANAGEMENT INC. INVESTMENT ADVISER LETTER TO SHAREHOLDERS - -------- For the six months ended June 30, 1996, the Morgan Stanley Emerging Markets Debt Fund, Inc. had a total return, based on net asset value per share, of 19.42% compared to 13.38% for the J.P. Morgan Emerging Markets Bond Index. For the period since the Fund's commencement of operations on July 23, 1993 through June 30, 1996, the Fund's total return, based on net asset value per share, was 52.51% compared with 39.55% for the Index. On June 28, 1996, the closing price of the Fund's shares on the New York Stock Exchange was $13.25 representing a 5.6% discount to the Fund's net asset value per share. Emerging markets debt de-coupled from the U.S. bond market during the second quarter of 1996. Improving credit stories in emerging market countries successively counteracted the negative influence of rising interest rates. The U.S. bond market was repeatedly buffeted by signs of strength in the U.S. economy during the last three months. The long end of the market tested the lows on each occasion that the non-farm payroll data was released during the quarter. Yields of 7.20% and above were attractive to aggressive fixed income investors. High real rates and the prospect that the economy would fail to retain the momentum of faster growth prompted rates to rally from their highs. We believe that the global economy is likely to witness a synchronized global pick up in aggregate demand within the next twelve months and any sign that the Federal Reserve is behind the curve in terms of managing inflation could result in a severe reaction in the bond market. Emerging market debt should continue to outperform other fixed income markets as long as credit fundamentals remain on an improving trend, with floating rate non-collateralized bonds continuing to be the preferred sector in the market. The Fund outperformed over the quarter due to its overweight positions in Russia, Venezuela and Panama and underweight position for the major Latin American countries: Argentina, Brazil and Mexico. During the quarter, Russia, Panama, Venezuela, Peru, Philippines and Ecuador outperformed the market and Argentina, Brazil and Mexico underperformed the overall market. Russian loans were the outperformers of the quarter as incumbent President Yeltsin won the second round election by a wide margin. We reduced our positions in Russian loans gradually during the last month of the quarter. The sharp post-election rally surprised even the believers. We believe the loans will trade in a tight range for some time as post-election reality sets in. Economic problems such as a wide fiscal deficit, banking sector restructurings, tight domestic liquidity conditions, a gradual uptick in inflation and Kremlin politics will keep a lid on prices. Valuations of the loans, based on the terms of the restructuring, suggest that they continue to be the cheapest assets in the emerging fixed income markets. Mexican external debt trailed the market after the run-up in prices on the back of its exchange offer to substitute collateralized Brady debt with a non- collateralized, current coupon bond with a bullet maturity of 30 years. Lingering concerns over the fragile economic recovery in the domestic non- tradeable sector and the need for an adjustment in the nominal value of the exchange rate made investors shy away from Mexican bonds. The local currency denominated treasury bills continued to be the best performing sector. We increased our allocation to Mexico towards the end of the quarter as we believed investor skepticism to have peaked. The domestic political situation continues to warrant a close watch as the investigation of various financial scandals could unearth all kinds of skeletons in the cupboards of the ruling elites. Argentina continued to underperform the market, despite signs that an economic recovery was underway. Tax receipts continued to stagnate and the fiscal targets agreed to with the IMF continue to look ambitious. High unemployment and low consumer confidence continue to prove to be a drag on the recovery. Despite abundant liquidity in the banking system, a consumption and trade led economic recovery is taking a long time to take hold. Unless a durable and sustained recovery becomes a reality in the second half, Argentina faces a difficult economic future in the months ahead. Rising U.S. interest rates and a firm dollar will prove to be a considerable headwind for the Convertibility 2 Plan to weather. We do not anticipate making any changes to our allocation to Argentina in the immediate future. Brazil came under closer scrutiny as a leading academic questioned the sustainability of the Real plan. Questions related to its burgeoning internal debt and overvalued exchange rates led some to draw parallels with Mexico's situation in 1994. We do not believe that Brazil and Mexico should be put in the same basket. Brazil's performance is far less dependent on external capital, (in fact it could be argued that a withdrawal of short term capital will probably be of benefit) and the overvaluation of its currency less significant, for any comparisons to Mexico to setoff any alarm bells at this juncture. There is no doubt that the long run sustainability of the Real plan requires a fiscal adjustment. Political wrangling should not be allowed to derail the process of stabilization. Progress towards implementing a fiscal adjustment remains one of the elements that we would be watching for to justify maintaining our allocation to Brazil. We increased our allocations towards the end of the second quarter as the administration sought to counteract market pressure related to the stagnation of its various reform proposals in the legislature by becoming more ambitious in the fields of privatization and de-regulation of the economy. Venezuela continued to make slow and steady progress towards implementing an orthodox stabilization program. We reduced our allocation to the country as its bonds moved up in price, discounting the positive news of an IMF stabilization plan. Other high yielding markets of Ecuador and Bulgaria witnessed volatility as Ecuador braced for the second round of its Presidential elections and Bulgaria coped with economic distress after swallowing the bitter pill of an IMF program. Despite a negative U.S. rate environment in the first half of 1996, emerging debt has performed well. Improvement in economic fortunes of most of the countries included in the universe has delivered handsome returns. What is underway is the dramatic re-rating of this asset class, a process that was interrupted by the Mexican crisis of 1994. Barring changes in the economic outlook of the various countries, this process has not yet been finished. If the headwind of rising interest rates becomes stronger in the second half, there may be some retracement in prices, as liquidity alone cannot sustain the run-up in prices. Sincerely [SIGNATURE] Warren J. Olsen PRESIDENT AND DIRECTOR [SIGNATURE] Paul Ghaffari PORTFOLIO MANAGER August 8, 1996 3 Morgan Stanley Emerging Markets Debt Fund, Inc. Investment Summary as of June 30, 1996 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
HISTORICAL INFORMATION (UNAUDITED) TOTAL RETURN (%) --------------------------------------------------------------------------- MARKET VALUE (1) NET ASSET VALUE (2) INDEX (1)(3) ----------------------- ----------------------- ----------------------- AVERAGE AVERAGE AVERAGE CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL ----------------------- ----------------------- ----------------------- FISCAL YEAR TO DATE 11.88% -- 19.42% -- 13.38% -- ONE YEAR 37.30+ 37.30%+ 37.56+ 37.56%+ 32.40 32.40% SINCE INCEPTION* 44.03+ 13.21+ 52.51+ 15.44+ 39.55 12.00
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: 1993* 1994 1995 SIX MONTHS ENDED 6/30/96 (UNAUDITED) Net Asset Value Per Share $ 18.96 $ 12.23 $ 12.40 $ 14.03 Market Value Per Share $ 18.13 $ 11.38 $ 12.50 $ 13.25 Premium/(Discount) -4.4% -7.0% 0.8% -5.6% Income Dividends $0.16 $1.49 $1.72 $0.72 Capital Gains Distributions - $0.41 - - Morgan Stanley Emerging Markets Debt Fund, Inc. (2) 35.96% -25.95% 26.85%+ 19.42% J. P. Morgan Emerging Markets Bond Index (1)(3)** 18.67% -18.68% 27.54% 13.38%
(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. This return does not include the effect of dilution in connection with the Rights Offering. 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 J.P. Morgan Emerging Markets Bond Index is a market weighted index composed of all Brady bonds outstanding and includes Argentina, Brazil, Bulgaria, Mexico, Nigeria, the Philippines, Poland and Venezuela. * The Fund commenced operations on July 23, 1993. ** Unaudited. + Adjusted for Rights Offering.
4 Morgan Stanley Emerging Markets Debt Fund, Inc. Portfolio Summary as of June 30, 1996 (Unaudited) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PORTFOLIO INVESTMENTS DIVERSIFICATION EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC Debt Instruments 87.7% Structured Security 6.2% Short-Term Investments 4.6% Purchased Options 1.5%
- -------------------------------------------------------------------------------- COUNTRY WEIGHTINGS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC Brazil 17.6% Russia 17.5% Argentina 13.7% Mexico 12.4% Venezuela 9.5% United States 6.2% Panama 3.6% Turkey 3.5% Nigeria 3.2% South Africa 3.0% Ecuador 2.9% Peru 2.1% Algeria 1.9% Morocco 1.4% Poland 0.8% India 0.7%
- -------------------------------------------------------------------------------- TEN LARGEST HOLDINGS
PERCENT OF TOTAL INVESTMENTS --------------- 1. Republic of Russia Debt 17.5% 2. Republic of Brazil Debt 14.6 3. Republic of Argentina Debt 10.6 4. Republic of Venezuela Debt 9.5 5. Salomon Short-Term Structured Note 6.2 PERCENT OF TOTAL INVESTMENTS --------------- 6. Republic of Panama Debt 3.6% 7. Lojas Americanas S.A. Bond 3.1 8. Republic of South Africa Debt 3.0 9. Republic of Ecuador Debt 2.9 10. Empresas ICA Sociedad Controladora S.A. 2.4 --- 73.4% --- ---
5 FINANCIAL STATEMENTS - --------- PORTFOLIO OF INVESTMENTS (UNAUDITED) (Showing Percentage of Total Value of Investments) - ------------ JUNE 30, 1996
FACE AMOUNT VALUE (000) (000) - ----------------------------------------------------------------------------------- - ------------ DEBT INSTRUMENTS (87.7%) - ----------------------------------------------------------------------------------- - ---------- ALGERIA (1.9%) LOAN AGREEMENT ###pAlgeria Reprofiled Loan Agreement 'A' U.S.$ 4,918 U.S.$ 2,877 ###~pAlgeria Reprofiled Loan Agreement 'A' (Participation: Salomon Brothers) 6,696 3,917 ------------- 6,794 ------------- - ----------------------------------------------------------------------------------- - ------------- ARGENTINA (13.7%) BONDS (12.7.%) Banco de Galicia 10.875%, 12/1/97 2,000 2,083 Industrias Pescarmona S.A. 11.75%, 3/27/98 1,000 1,010 Metrogas S.A. 'B' 10.875%, 5/15/01 4,000 4,070 +++^Republic of Argentina 'L' Bond 'Euro' 6.31%, 3/31/05 42,620 33,296 +++Republic of Argentina Discount Bond 6.44%, 3/31/23 6,400 4,480 ------------- 44,939 ------------- NOTE (1.0%) Nortel Inversora 'A' 6.00%, 3/31/07 6,723 3,563 ------------- 48,502 ------------- - ----------------------------------------------------------------------------------- - ------------- BRAZIL (17.6%) BONDS +++Federative Republic of Brazil Debt Conversion 'L' Bond 6.56%, 4/15/12 12,500 8,562 Federative Republic of Brazil 'C' Bond PIK 'Euro' 8.00%, 4/15/14 39,292 24,312 #Federative Republic of Brazil 'C' Bond PIK 8.00%, 4/15/14 11,501 7,116 +++Federative Republic of Brazil Discount Bond 'Z-L' 6.50%, 4/15/24 16,500 11,725 Lojas Americanas S.A. 11.00%, 6/4/04 11,000 10,835 ------------- 62,550 ------------- - ----------------------------------------------------------------------------------- - ------------- ECUADOR (2.9%) BONDS #*Republic of Ecuador Par Bond 3.00%, 3/1/25 65 23 Republic of Ecuador Past Due Interest Bond PIK 6.06%, 2/27/15 22,434 10,222 ------------- 10,245 ------------- - ----------------------------------------------------------------------------------- - ------------- INDIA (0.7%) BOND Saurashtra Cement Co. 17.00%, 9/7/97 INR 94,000 2,520 ------------- - ----------------------------------------------------------------------------------- - ------------- FACE AMOUNT VALUE (000) (000) - ----------------------------------------------------------------------------------- - ------------ MEXICO (11.3%) BONDS Banamex Pagare Discount Bond, 4/3/97 MXP 28,045 U.S.$ 2,918 Banamex Pagare Discount Bond, 10/9/97 29,671 2,702 Empresas La Moderna 11.38%, 1/25/99 U.S.$ 6,500 6,736 Grupo Elektra S.A. de C.V. 12.75%, 5/15/01 7,000 7,061 Grupo Industrial Durango 12.00%, 7/15/01 4,500 4,528 Grupo Mexicano de DeSarrollo 8.25%, 2/17/01 1,000 520 #Empresas ICA Sociedad Controladora S.A. 11.875%, 5/30/01 8,500 8,508 Nacional Financiera 17.00%, 2/26/99 ZAR 12,000 2,700 United Mexican States 11.50%, 5/15/26 U.S.$ 5,000 4,575 ------------- 40,248 ------------- - ----------------------------------------------------------------------------------- - ------------- MOROCCO (1.4%) LOAN AGREEMENT +++###~Kingdom of Morocco Restructuring and Consolidation Agreement 'A' 1990 (Participation: J.P. Morgan) 6.4375%, 1/1/09 7,000 5,049 ------------- - ----------------------------------------------------------------------------------- - ------------- NIGERIA (3.2%) BOND (1.8%) Central Bank of Nigeria Par Bond 6.25%, 11/15/20 (Warrants Attached) 12,000 6,390 ------------- NOTE (1.4%) Central Bank of Nigeria Promissory Note 8.00%, 1/5/10 11,000 4,868 ------------- 11,258 ------------- - ----------------------------------------------------------------------------------- - ------------- PANAMA (3.6%) LOAN AGREEMENT **###pRepublic of Panama Loans 13,183 12,986 ------------- - ----------------------------------------------------------------------------------- - ------------- PERU (2.1%) LOAN AGREEMENT (0.4%) ++###pRepublic of Peru - Petroperu Working Capital Loan 2,000 1,240 ------------- NOTE (1.7%) ++Peru Working Capital Lines 9,699 6,183 ------------- 7,423 ------------- - ----------------------------------------------------------------------------------- - ------------- POLAND (0.8%) NOTE ##Republic of Poland, Zero Coupon, 1/8/97 3,166 2,851 ------------- - ----------------------------------------------------------------------------------- - -------------
The accompanying notes are an integral part of the financial statements. 6
FACE AMOUNT VALUE (000) (000) - ----------------------------------------------------------------------------------- - ------------ RUSSIA (16.0%) LOAN AGREEMENT (9.3%) ++###Bank for Foreign Economic Affairs DEM 93,300 U.S.$ 32,954 ------------- BONDS (6.7%) Ministry of Finance Tranche III 3.00%, 5/14/99 U.S.$ 4,500 3,229 Ministry of Finance Tranche IV, 3.00%, 5/14/03 48,215 20,612 ------------- 23,841 ------------- 56,795 ------------- - ----------------------------------------------------------------------------------- - ------------- SOUTH AFRICA (3.0%) BONDS Republic of South Africa Series 147, 11.50%, 5/30/00 ZAR 5,250 1,116 Series 150, 12.00%, 2/28/25 14,490 2,907 Series 153, 13.00%, 8/31/10 13,020 2,653 Series 162, 12.50%, 1/15/02 12,180 2,599 Series 175, 9.00%, 10/15/02 4,200 738 Series 177, 9.50%, 5/15/07 3,150 512 ------------- 10,525 ------------- - ----------------------------------------------------------------------------------- - ------------- VENEZUELA (9.5%) BONDS +++Republic of Venezuela Debt Conversion Bond 'DL' 6.63%, 12/18/07 U.S.$ 14,000 9,905 +++Republic of Venezuela Front Loaded Interest Rate Reduction Bond 'A' 6.38%, 3/31/07 32,750 23,703 ------------- 33,608 ------------- - ----------------------------------------------------------------------------------- - ------------- TOTAL DEBT INSTRUMENTS (Cost U.S.$293,117) 311,354 ------------- - ----------------------------------------------------------------------------------- - ------------- CONTRACTS - ----------------------------------------------------------------------------------- - ------------- PURCHASED OPTIONS (1.5%) - ----------------------------------------------------------------------------------- - ------------ POLAND (0.0%) +Poland Discount Bond Put, expiring 7/29/96, strike price U.S.$90.50 10,000 4 ------------- - ----------------------------------------------------------------------------------- - ------------- RUSSIA (1.5%) +Russian Vneshkonombank Bond Call, expiring 7/22/96, strike price DEM 45.125 16,500 972 +Russian Vneshkonombank Bond Call, expiring 7/22/96, strike price U.S.$41.31 50,000 4,371 ------------- 5,343 ------------- - ----------------------------------------------------------------------------------- - ------------- TOTAL PURCHASED OPTIONS (Cost U.S.$2,179) 5,347 ------------- - ----------------------------------------------------------------------------------- - ------------- FACE AMOUNT VALUE (000) (000) - ----------------------------------------------------------------------------------- - ------------- STRUCTURED SECURITY (6.2%) - ----------------------------------------------------------------------------------- - ------------ UNITED STATES (6.2%) NOTE ^Salomon Short-Term Structured Note 10.13%, 4/2/97 (Principal is composed of National Treasury Notes, issued by the National Treasury of Brazil, valued at U.S.$22,000) (Cost U.S.$22,000) U.S.$ 22,000 U.S.$ 22,055 - ----------------------------------------------------------------------------------- - ------------- SHORT-TERM INVESTMENTS (3.0%) - ----------------------------------------------------------------------------------- - ------------ MEXICO (1.1%) BILLS Mexican Cetes Zero Coupon, 7/25/96 MXP 15,839 2,042 Zero Coupon, 9/26/96 15,000 1,832 ------------- 3,874 ------------- - ----------------------------------------------------------------------------------- - ------------- TURKEY (1.9%) BILLS Turkish T-Bill Zero Coupon, 7/10/96 TRL 312,000,000 3,692 Zero Coupon, 8/7/96 278,000,000 3,132 ------------- 6,824 ------------- - ----------------------------------------------------------------------------------- - ------------- TOTAL SHORT-TERM INVESTMENTS (Cost U.S.$12,768) 10,698 ------------- - ----------------------------------------------------------------------------------- - ------------- FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (1.6%) French Franc FRF 49 9 Indian Rupee INR 5 -- Turkish Lira TRL 464,675,000 5,660 ------------- (Cost U.S.$5,690) 5,669 ------------- - ----------------------------------------------------------------------------------- - ------------- TOTAL INVESTMENTS (100.0%) (Cost U.S.$335,754) U.S.$355,123 ------------- ------------- - ----------------------------------------------------------------- - -------------
+ -- Non-income producing. ++ -- Non-income producing -- in default. +++ -- Variable/floating rate security -- rate disclosed is as of June 30, 1996. ^ -- Denotes all or a portion of securities subject to repurchase under Reverse Repurchase Agreements as of June 30, 1996 -- see note A-4 to financial statements. # -- 144A security -- certain conditions for public sale may exist. ## -- Security's redemption value is linked to the Republic of Poland Treasury Bill maturing 1/1/97 and to the value of the Polish Zloty and the Deutsche Mark at maturity. ### -- Under restructuring at June 30, 1996 -- see note A-7 to financial statements. ~ -- Participation interests were acquired through the financial institutions indicated parenthetically. * -- Step Bond -- coupon rate increases in increments to maturity. Rate dislcosed is as of June 30, 1996. Maturity date disclosed is the ultimate maturity. ** -- Security valued at fair value -- see note A-1 to financial statements. p -- Issuer is making partial interest payments. PIK -- Payment-in-Kind. Income may be paid in additional securities or cash at the discretion of the issuer.
The accompanying notes are an integral part of the financial statements. 7 - -------------------------------------------------------- - ---- JUNE 30, 1996 EXCHANGE RATES: - -------------------------------------------------------- DEM German Mark 1.520 = U.S. $1.00 FRF French Franc 5.139 = U.S. $1.00 INR Indian Rupee 35.230 = U.S. $1.00 MXP Mexican Peso 7.583 = U.S. $1.00 TRL Turkish Lira 82,100.000 = U.S. $1.00 ZAR South African Rand 4.333 = U.S. $1.00 - -------------------------------------------------------- - ---- FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: Under the terms of a forward foreign currency exchange contract open at June 30, 1996, the Fund is obligated to deliver foreign currency in exchange for U.S. dollars as indicated below:
IN NET CURRENCY EXCHANGE UNREALIZED TO DELIVER VALUE SETTLEMENT FOR LOSS (000) (000) DATE (000) (000) - ---------------- --------- ---------- --------- ------------- TRL 464,675,000 U.S.$5,660 7/1/96 U.S.$5,652 U.S.$ (8) --------- --------- ------------- --------- --------- ------------- - ----------------------------------------------------------------- - -------------
FACE AMOUNT VALUE (000) (000) - ----------------------------------------------------------------------------------- - ------------- SECURITIES SOLD SHORT - ----------------------------------------------------------------------------------- - ------------ PANAMA BONDS ++-DIAMOND-Republic of Panama Interest Reduction Bond, (Proceeds U.S.$4,730) U.S.$ 10,000 U.S.$ 5,575 ++-DIAMOND-Republic of Panama Past Due Interest Bond (Proceeds U.S.$7,240) 12,000 7,357 ------------- 12,932 ------------- - ----------------------------------------------------------------------------------- - ------------- RUSSIA LOAN AGREEMENTS ++###Bank for Foreign Economic Affairs (Proceeds U.S.$3,619) 7,500 3,647 ------------- NOTES ++-DIAMOND-Interest Arrears Note (Proceeds U.S.$6,150) 11,200 5,992 ++-DIAMOND-Principal Notes (Proceeds U.S.$2,268) 6,400 2,296 ------------- 8,288 ------------- 11,935 ------------- - ----------------------------------------------------------------------------------- - ------------- TOTAL SECURITIES SOLD SHORT (Proceeds U.S.$24,007) U.S.$ 24,867 ------------- - ----------------------------------------------------------------------------------- - -------------
- -DIAMOND- -- Securities are expected to be received in connection with the restructuring of the issuing country's Loan Agreements owned by the Fund. The accompanying notes are an integral part of the financial statements. 8
JUNE 30, 1996 (UNAUDITED) STATEMENT OF ASSETS AND LIABILITIES (000) - --------------------------------------------------------------------------------------------------------------- ASSETS: Investments, at Value (Cost U.S.$335,754)............................................... U.S.$ 355,123 Receivable for Investments Sold......................................................... 37,093 Interest Receivable..................................................................... 7,299 Deferred Organization Costs............................................................. 31 Other Assets............................................................................ 30 - --------------------------------------------------------------------------------------------------------------- Total Assets........................................................................ 399,576 - --------------------------------------------------------------------------------------------------------------- LIABILITIES: Securities Sold Short, at Value (Proceeds U.S.$24,007).................................. (24,867) Payable For: Reverse Repurchase Agreements......................................................... (51,577) Investments Purchased................................................................. (10,837) Dividends Declared.................................................................... (7,751) Bank Overdraft........................................................................ (1,436) Interest.............................................................................. (602) Investment Advisory Fees.............................................................. (240) Custodian Fees........................................................................ (74) Shareholder Reporting Expenses........................................................ (67) Professional Fees..................................................................... (53) Administrative Fees................................................................... (23) Directors' Fees and Expenses.......................................................... (22) Unrealized Loss on Forward Foreign Currency Contracts................................... (8) Other Liabilities....................................................................... (41) - --------------------------------------------------------------------------------------------------------------- Total Liabilities................................................................... (97,598) - --------------------------------------------------------------------------------------------------------------- NET ASSETS.................................................................................. U.S.$ 301,978 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- NET ASSETS CONSIST OF: Common Stock............................................................................ U.S.$ 215 Capital Surplus......................................................................... 274,351 Undistributed Net Investment Income..................................................... 2,296 Accumulated Net Realized Gain........................................................... 6,741 Unrealized Appreciation on Investments, Foreign Currency Translations and Short Sales... 18,375 - --------------------------------------------------------------------------------------------------------------- NET ASSETS Applicable to 21,531,260 issued and outstanding U.S.$0.01 par value shares (100,000,000 shares authorized)..................................................................... U.S.$ 301,978 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE................................................................... U.S.$ 14.03 - --------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 9
SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) STATEMENT OF OPERATIONS (000) - --------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME Interest................................................................................ U.S.$ 22,856 Less: Foreign Taxes Withheld............................................................ (45) - --------------------------------------------------------------------------------------------------------------- Total Income.......................................................................... 22,811 - --------------------------------------------------------------------------------------------------------------- EXPENSES Investment Advisory Fees................................................................ 1,423 Interest Expense........................................................................ 1,115 Custodian Fees.......................................................................... 254 Administrative Fees..................................................................... 139 Professional Fees....................................................................... 60 Directors' Fees and Expenses............................................................ 55 Shareholder Reporting Expenses.......................................................... 48 Transfer Agent Fees..................................................................... 10 Other Expenses.......................................................................... 84 - --------------------------------------------------------------------------------------------------------------- Total Expenses........................................................................ 3,188 - --------------------------------------------------------------------------------------------------------------- Net Investment Income............................................................... 19,623 - --------------------------------------------------------------------------------------------------------------- NET REALIZED GAIN (LOSS) Investment Securities Sold.............................................................. 26,831 Investment Securities Sold Short........................................................ (1,000) Written Option Contracts................................................................ 433 Foreign Currency Transactions........................................................... (4,900) - --------------------------------------------------------------------------------------------------------------- Net Realized Gain................................................................... 21,364 - --------------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION Appreciation on Investments and Short Sales............................................. 9,565 Depreciation on Foreign Currency Translations........................................... (21) - --------------------------------------------------------------------------------------------------------------- Change in Unrealized Appreciation/Depreciation...................................... 9,544 - --------------------------------------------------------------------------------------------------------------- Net Realized Gain and Change in Unrealized Appreciation/Depreciation........................ 30,908 - --------------------------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................... U.S.$ 50,531 - --------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1996 YEAR ENDED (UNAUDITED) DECEMBER 31, 1995 STATEMENT OF CHANGES IN NET ASSETS (000) (000) - --------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS Operations: Net Investment Income............................................... U.S.$ 19,623 U.S.$ 32,870 Net Realized Gain (Loss)............................................ 21,364 (5,001) Change in Unrealized Appreciation/Depreciation...................... 9,544 26,427 - --------------------------------------------------------------------------------------------------------------- Net Increase in Net Assets Resulting from Operations................ 50,531 54,296 - --------------------------------------------------------------------------------------------------------------- Distributions: Net Investment Income............................................... (15,502) (31,947) In Excess of Net Investment Income.................................. -- (473) - --------------------------------------------------------------------------------------------------------------- Total Distributions................................................. (15,502) (32,420) - --------------------------------------------------------------------------------------------------------------- Capital Share Transactions: Common Stock Issued Through Rights Offering (5,400,000 shares)...... -- 48,360 Offering Costs...................................................... -- (500) Reinvestment of Distributions (50,147 and 25,493 shares, respectively)...................................................... 654 277 - --------------------------------------------------------------------------------------------------------------- Net Increase in Net Assets Resulting from Capital Share Transactions....................................................... 654 48,137 - --------------------------------------------------------------------------------------------------------------- Total Increase...................................................... 35,683 70,013 Net Assets: Beginning of Period................................................. 266,295 196,282 - --------------------------------------------------------------------------------------------------------------- End of Period (including undistributed (distributions in excess of) net investment income of U.S.$2,296 and U.S.$(1,825), respectively)...................................................... U.S.$301,978 U.S.$266,295 - --------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 10
SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) STATEMENT OF CASH FLOWS (000) - --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING AND OPERATING ACTIVITIES: Proceeds from Sales of Investments...................................................... U.S.$ 583,079 Purchases of Investments................................................................ (623,052) Net Decrease in Written Options......................................................... 433 Net Increase in Short-Term Investments.................................................. (166) Net Cash Used for Foreign Currency Transactions......................................... (4,900) Investment Income....................................................................... 10,824 Interest Expense Paid................................................................... (743) Operating Expenses Paid................................................................. (1,782) - --------------------------------------------------------------------------------------------------------------- Net Cash Used for Investing and Operating Activities.................................... (36,307) - --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash Received from Reverse Repurchase Agreements........................................ 51,205 Cash Distributions Paid (net of Reinvestments of U.S. $654)............................. (17,318) - --------------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities............................................... 33,887 - --------------------------------------------------------------------------------------------------------------- Net Decrease in Cash.................................................................... (2,420) CASH AT BEGINNING OF PERIOD................................................................. 6,674 - --------------------------------------------------------------------------------------------------------------- CASH AND FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN AT END OF PERIOD........................ U.S.$ 4,254 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- RECONCILIATION OF NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS TO NET CASH USED FOR INVESTING AND OPERATING ACTIVITIES: - --------------------------------------------------------------------------------------------------------------- Net Increase in Net Assets Resulting from Operations.................................... U.S.$ 50,531 Increase in Investments................................................................. (20,604) Net Realized Gain on Investments........................................................ (21,364) Change in Unrealized Appreciation/Depreciation.......................................... (9,544) Net Increase in Receivables Pertaining to Investing and Operating Activities............ (5,515) Net Decrease in Payables Pertaining to Investing and Operating Activities............... (18,649) Interest Expense........................................................................ (743) Amortization of Deferred Organization Costs............................................. 7 (Accretion)/Amortization................................................................ (10,426) - --------------------------------------------------------------------------------------------------------------- Net Cash Used for Investing and Operating Activities.................................... U.S.$ (36,307) - --------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 11 FINANCIAL HIGHLIGHTS
PERIOD FROM SIX MONTHS JULY 23, ENDED JUNE YEARS ENDED DECEMBER 31, 1993* TO 30, 1996 ------------------------------ DECEMBER 31, SELECTED PER SHARE DATA AND RATIOS: (UNAUDITED) 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD.... 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................... 0.92 1.76 1.51 0.50 Net Realized and Unrealized Gain (Loss) on Investments......................... 1.43 1.16 (6.34) 4.56 - -------------------------------------------------------------------------------------------------------------- Total from Investment Operations.... 2.35 2.92 (4.83) 5.06 - -------------------------------------------------------------------------------------------------------------- Distributions: Net Investment Income............... (0.72) (1.69) (1.49) (0.16) In Excess of Net Investment Income............................ -- (0.03) -- -- Net Realized Gain................... -- -- (0.41) -- - -------------------------------------------------------------------------------------------------------------- Total Distributions................. (0.72) (1.72) (1.90) (0.16) - -------------------------------------------------------------------------------------------------------------- Decrease in Net Asset Value due to Capital Share Transactions............. -- (1.01) -- -- - -------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD.......... U.S.$ 14.03 U.S.$ 12.40 U.S.$ 12.23 U.S.$ 18.96 - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- PER SHARE MARKET VALUE, END OF PERIOD... U.S.$ 13.25 U.S.$ 12.50 U.S.$ 11.38 U.S.$ 18.13 - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENT RETURN: Market Value........................ 11.88% 37.48%+++ (27.97)% 29.97% Net Asset Value (1)................. 19.42% 26.85%+++ (25.95)% 35.96% - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- RATIOS, SUPPLEMENTAL DATA: - -------------------------------------------------------------------------------------------------------------- NET ASSETS, END OF PERIOD (THOUSANDS)... U.S.$301,978 U.S.$266,295 U.S.$196,282 U.S.$302,951 - -------------------------------------------------------------------------------------------------------------- Ratio of Expenses Before Interest Expense to Average Net Assets.......... 1.46%** 1.50% 1.59% 1.73%** Ratio of Expenses After Interest Expense to Average Net Assets.................. 2.25%** 1.89% 2.30% 2.79%** Ratio of Net Investment Income to Average Net Assets..................... 13.84%** 15.21% 10.79% 7.20%** Portfolio Turnover Rate................. 201% 348% 256% 72% - -------------------------------------------------------------------------------------------------------------- *Commencement of operations **Annualized +++Adjusted for 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. This return does not include the effect of dilution in connection with the Rights Offering. 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 of the Fund.
The accompanying notes are an integral part of the financial statements. 12 NOTES TO FINANCIAL STATEMENTS JUNE 30, 1996 (UNAUDITED) - ------------ 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 Portfolio of Investments. At June 30, 1996, the Fund had reverse repurchase agreements outstanding as follows:
MATURITY IN 30 TO 90 DAYS ------------ Maturity Amount........................ $51,577,000 ------------ Market Value of Assets Sold Under Agreements............................ $55,351,000 ------------ Weighted Average Interest Rate......... 5.88%
The average weekly balance of reverse repurchase agreements outstanding during the six months ended June 30, 1996 was approximately $28,365,000 at a weighted average interest rate of 6.08%. 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. 13 Although the net assets of the Fund are presented at the foreign exchange rates and market values at the close of the period, the Fund does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the fluctuations arising from changes in the market prices of the securities held at period end. Similarly, the Fund does not isolate the effect of changes in foreign exchange rates from the fluctuations arising from changes in the market prices of securities sold during the period. Accordingly, realized and unrealized foreign currency gains (losses) are included in the reported net realized and unrealized gains (losses) on investment transactions and balances. Net realized gains (losses) on foreign currency transactions represent net foreign exchange gains (losses) from sales and maturities of forward 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) in the Statement of Assets and Liabilities. The change in net unrealized currency gains (losses) for the period is reflected in the Statement of Operations. 6. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into forward foreign currency exchange contracts to attempt to protect securities and related receivables and payables against changes in future foreign exchange rates. A forward 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 14 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 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. 15 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 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, 1996, the Fund incurred international custodian fees of $146,000 of which $72,000 was payable to the International Custodian at June 30, 1996. In addition, for the six months ended June 30, 1996, the Fund has earned interest income of $15,000 and incurred interest expense of $135,000, on balances with the International Custodian. E. During the six months ended June 30, 1996, the Fund made purchases and sales totaling $592,793,000 and $576,707,000, 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, 1996, the U.S. Federal income tax cost basis of securities was $330,064,000 and accordingly, net unrealized appreciation for U.S. Federal income tax purposes was $19,390,000, of which $27,215,000 related to appreciated securities and $7,825,000 related to depreciated securities. At December 31, 1995, the Fund had a capital loss carryforward for U.S. Federal income tax purposes totaling approximately $10,865,000 available to offset future capital gains of which $4,462,000 and $6,403,000 will expire on December 31, 2002 and 2003, respectively. To the extent that capital gains are so offset, such gains will not be distributed to shareholders. For the year ended December 31, 1995, the Fund expects to defer to January 1, 1996 for U.S. Federal income tax purposes, post-October capital losses of $1,611,000 and post-October currency losses of $1,056,000. 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, 1996 totaled $10,000 and are included in Payable for Directors' Fees and Expenses on the Statement of Assets and Liabilities. 16 J. During the six months ended June 30, 1996, the Fund's written covered call option activity was as follows:
PREMIUM FACE AMOUNT RECEIVED (000) (000) ------------- ----------- Options outstanding at December 31, 1995...................... $ -- $ -- Options written during the period........................ 63,500 1,068 Options expired during the period........................ (36,000) (433) Options exercised during the period........................ (27,500) (635) ------------- ----------- Options outstanding at June 30, 1996.......................... $ -- $ -- ------------- ----------- ------------- -----------
K. During June 1996, the Board declared a quarterly distribution of $0.36 per share, derived from net investment income, payable on July 15, 1996, to shareholders of record on June 28, 1996. L. Supplemental Proxy Information The Annual Meeting of the Stockholders of the Morgan Stanley Emerging Markets Debt Fund, Inc. was held on June 5, 1996. 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 Peter J. Chase 17,939,851 -- 126,214 -- David B. Gill 17,924,399 -- 141,666 -- Warren J. Olsen 17,925,618 -- 140,447 -- 2.To ratify the selection of Price Waterhouse LLP as independent public accountants of the Fund 17,982,650 25,362 -- 58,053
- -------------------------------------------------------------------------------- SUMMARY OF QUARTERLY RESULTS OF OPERATIONS* (UNAUDITED) - --------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS) AND CHANGE NET INCREASE IN UNREALIZED (DECREASE) IN NET NET INVESTMENT APPRECIATION/ ASSETS RESULTING INVESTMENT INCOME INCOME DEPRECIATION FROM OPERATIONS ------------------- ----------------------- ----------------------- ------------------------- PER PER PER PER QUARTER ENDED AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE - -------------------- -------- -------- ---------- ---------- ---------- ---------- ----------- ----------- June 30, 1996....... $11,988 $ 0.56 $ 10,443 $ 0.49 $ 25,423 $ 1.18 $ 35,866 $ 1.67 March 31, 1996...... 10,823 0.50 9,180 0.43 5,485 0.25 14,665 0.68 -------- -------- ---------- ----- ---------- ---------- ----------- ----------- Total........... $22,811 $ 1.06 $ 19,623 $ 0.92 $ 30,908 $ 1.43 $ 50,531 $ 2.35 -------- -------- ---------- ----- ---------- ---------- ----------- ----------- -------- -------- ---------- ----- ---------- ---------- ----------- ----------- December 31, 1995... $ 8,997 $ 0.42 $ 7,734 $ 0.37 $ 11,542 $ 0.54 $ 19,276 $ 0.91 September 30, 1995............... 9,972 0.43 8,889 0.38 7,824 0.50 16,713 0.88 June 30, 1995....... 8,875 0.55 8,084 0.50 39,958 2.49 48,042 2.99 March 31, 1995...... 9,121 0.57 8,163 0.51 (37,898) (2.37) (29,735) (1.86) -------- -------- ---------- ----- ---------- ---------- ----------- ----------- Total........... $36,965 $ 1.97 $ 32,870 $ 1.76 $ 21,426 $ 1.16 $ 54,296 $ 2.92 -------- -------- ---------- ----- ---------- ---------- ----------- ----------- -------- -------- ---------- ----- ---------- ---------- ----------- ----------- December 31, 1994... $ 7,310 $ 0.46 $ 6,774 $ 0.42 $ (22,977) $ (1.42) $ (16,203) $ (1.00) September 30, 1994............... 9,164 0.57 7,707 0.48 13,501 0.85 21,208 1.33 June 30, 1994....... 5,288 0.33 3,947 0.25 (5,972) (0.38) (2,025) (0.13) March 31, 1994...... 7,568 0.47 5,756 0.36 (86,118) (5.39) (80,362) (5.03) -------- -------- ---------- ----- ---------- ---------- ----------- ----------- Total........... $29,330 $ 1.83 $ 24,184 $ 1.51 $ (101,566) $ (6.34) $ (77,382) $ (4.83) -------- -------- ---------- ----- ---------- ---------- ----------- ----------- -------- -------- ---------- ----- ---------- ---------- ----------- -----------
- -------------------------------------------------------------------------------- *Expressed in thousands of U.S. dollars except per share amounts. The Fund may purchase shares of its Common Stock in the open market at such prices and in such amounts as the Board of Directors may deem advisable. 17 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 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: Morgan Stanley Emerging Markets Debt Fund, Inc. Boston Equiserve Dividend Reinvestment Unit P.O. Box 1681 Boston, MA 02105-1681 1-800-442-2001 18 -----END PRIVACY-ENHANCED MESSAGE-----