N-30D 1 a2071594zn-30d.txt N-30D 2001 ANNUAL REPORT DECEMBER 31, 2001 [MORGAN STANLEY LOGO] MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. MORGAN STANLEY INVESTMENT MANAGEMENT INC. INVESTMENT ADVISER MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. DIRECTORS AND OFFICERS Barton M. Biggs William G. Morton, Jr. CHAIRMAN OF THE DIRECTOR BOARD OF DIRECTORS Michael Nugent Ronald E. Robison DIRECTOR PRESIDENT AND DIRECTOR Fergus Reid John D. Barrett II DIRECTOR DIRECTOR Stefanie V. Chang Thomas P. Gerrity VICE PRESIDENT DIRECTOR Lorraine Truten Gerard E. Jones VICE PRESIDENT DIRECTOR James A. Gallo Joseph J. Kearns TREASURER DIRECTOR Mary E. Mullin Vincent R. Mclean SECRETARY DIRECTOR Belinda A. Brady C. Oscar Morong, Jr. ASSISTANT TREASURER DIRECTOR INVESTMENT ADVISER Morgan Stanley Investment Management Inc. 1221 Avenue of the Americas New York, New York 10020 ADMINISTRATOR JPMorgan Chase Bank 73 Tremont Street Boston, Massachusetts 02108 CUSTODIAN JPMorgan Chase Bank 3 Chase MetroTech Center Brooklyn, New York 11245 SHAREHOLDER SERVICING AGENT Boston Equiserve Investor Relations Department P.O. Box 644 Boston, Massachusetts 02102-0644 (800) 730-6001 LEGAL COUNSEL Clifford Chance Rogers & Wells LLP 200 Park Avenue New York, New York 10166 INDEPENDENT AUDITORS Ernst & Young LLP 200 Clarendon Street Boston, Massachusetts 02116 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 or visit our website at www.morganstanley.com/im. MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. OVERVIEW LETTER TO SHAREHOLDERS For the year ended December 31, 2001, the Morgan Stanley Emerging Markets Debt Fund, Inc. (the "Fund") had a total return, based on net asset value per share, of 12.50% compared to 1.36% for the J.P. Morgan Emerging Markets Bond Global Index (the "Index"). On December 31, 2001, the closing price of the Fund's shares on the New York Stock Exchange was $7.40, representing an 10.3% discount to the Fund's net asset value per share. MARKET REVIEW The headlines can often be deceiving. At first glance, the emerging markets debt (EMD) asset class had a rather disappointing year. The yield spread on the JP Morgan EMB Global Index tightened by a scant eight basis points and the Index managed to post a mere +1.36% total return for the year. Deteriorating global market conditions, increased risk aversion, crises in Argentina and Turkey, and lower commodity prices are all factors that explain the relatively muted performance of the asset class in 2001. Beneath the surface, however, lies a more interesting storyline in which most EMD issues actually had an extraordinarily favorable year. Excluding Argentina, the Index's yield spread tightened 131 basis points and the Index posted a healthy 18.9% total return. Strong global liquidity precipitated by low nominal interest rates in local markets more than offset the impact of the negative fundamentals in countries other than Argentina. Our very favorable relative performance was enhanced by our generally defensive risk posture relative to the Index early in the year, a consistent large underweight in Argentina, an overweight in Russia, and also by favorable security selection decisions within Mexico. The first half of 2001 was volatile for the EMD asset class. As with most other financial markets, the asset class was buoyed by the aggressive 100 basis-point cut in official U.S. interest rates early in the year. Then EMD took its direction from global equity markets, as growing concerns over the magnitude of the U.S. economic slowdown caused asset prices to come under pressure. In addition, investors struggled with the implications of a Turkish devaluation, heightened concerns over Argentina, and increasing political noise in both Brazil and Peru. Compounding this was a sharp slowdown in Europe and weaker commodity prices across the globe. Two opposing themes dominated EMD during the latter part of the year: the intensification of the Argentine economic and political crisis and the generalized recovery in international capital markets following the tragic events of September 11. This recovery was precipitated by a series of interest rate cuts in the U.S. and Europe, and renewed optimism regarding the likelihood of an economic rebound by 2002. The resiliency of the non-Argentina EMD universe was striking; after all, the global economic backdrop remained uncertain, commodity prices fell, and the Argentine situation deteriorated to the point where the country's economic and political foundations were shattered by late-December. Yet favorable OECD (Organization for Economic Cooperation and Development) liquidity trends, the sharp decline in most U.S. interest rates, the rebound in global equity prices, and a number of favorable country-specific considerations all supported the rest of the market during the second half of the year. MARKET OUTLOOK The year-end rally in global financial markets may be a harbinger for a recovery in the global economic cycle. An economic recovery should not only raise the demand for exports from emerging-market countries, but should also increase the risk appetite of investors and, in turn, capital flows to the EMD asset class. Both considerations are key to improvements in the creditworthiness of emerging-market borrowers in the future. Of course, the situation in Argentina requires close scrutiny in terms of any potential contagion to other EMD countries. Please be assured that our EMD team will monitor all these developments closely in the coming year and will take these factors into consideration in managing the EMD strategy in 2002. Sincerely, /s/ Ronald E. Robison Ronald E. Robison President and Director January 2002 -------------------------------------------------------------------------------- THE FUND ANNOUNCED IN FEBRUARY, 2002 THAT IT WILL BE MANAGED BY THE EMERGING MARKETS DEBT TEAM. CURRENT MEMBERS OF THE TEAM INCLUDE STEPHEN F. ESSER, MANAGING DIRECTOR, ABIGAIL L. MCKENNA, EXECUTIVE DIRECTOR AND ERIC J. BAURMEISTER, VICE PRESIDENT. 2 MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. DECEMBER 31, 2001 INVESTMENT SUMMARY Historical Information (Unaudited)
TOTAL RETURN (%) ----------------------------------------------------------------------------- MARKET VALUE(1) NET ASSET VALUE(2) INDEX(3) ----------------------------------------------------------------------------- AVERAGE AVERAGE AVERAGE CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL ---------------------------------------------------------------------------------------------------------- One Year 20.65% 20.65% 12.50% 12.50% 1.36% 1.36% Five Year 45.99 7.86 42.22 7.30 42.59 7.35 Since Inception* 145.97 11.25 174.22 12.69 136.13 10.71
Past performance is not predictive of future performance. [CHART] Returns and Per Share Information
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------------- 1993* 1994 1995 1996 1997 1998 1999 2000 2001 ------------------------------------------------------------------------------------------------------------------ Net Asset Value Per Share $18.96 $ 12.23 $12.40 $17.31 $15.21 $ 7.01 $ 8.36 $ 8.22 $8.25 ------------------------------------------------------------------------------------------------------------------ Market Value Per Share $18.13 $ 11.38 $12.50 $15.13 $15.38 $ 7.19 $ 6.81 $ 6.88 $7.40 ------------------------------------------------------------------------------------------------------------------ Premium/(Discount) -4.4% -7.0% 0.8% -12.6% 1.1% 2.6% -18.5% -16.3% -10.3% ------------------------------------------------------------------------------------------------------------------ Income Dividends $ 0.16 $ 1.49 $ 1.72 $ 1.08 $ 1.27 $ 1.41 $ 1.01 $ 1.08 $0.85 ------------------------------------------------------------------------------------------------------------------ Capital Gains Distributions -- $ 0.41 -- -- $ 3.44 $ 2.94 -- -- -- ------------------------------------------------------------------------------------------------------------------ Fund Total Return(2) 35.96% -25.95% 26.85%+ 50.98% 21.71% -33.00% 36.58% 13.50% 12.50% ------------------------------------------------------------------------------------------------------------------ Index Total Return(3) 18.67% -18.35% 26.38% 35.23% 11.95% -11.54% 24.18% 14.41% 1.36% ------------------------------------------------------------------------------------------------------------------
(1) Assumes dividends and distributions, if any, were reinvested. (2) Total investment return based on net asset value per share reflects the effects of changes in net asset value on the performance of the Fund during each period, and assumes dividends and distributions, if any, were reinvested. These percentages are not an indication of the performance of a shareholder's investment in the Fund based on market value due to differences between the market price of the stock and the net asset value per share of the Fund. (3) The J.P. Morgan Emerging Markets Bond Global Index (the "JPM EMB Global Index") tracks total returns for U.S. dollar-denominated debt instruments issued by emerging markets sovereign and quasi-sovereign entities: Brady bonds, loans, Eurobonds and local market instruments. The JPM EMB Global Index includes coverage of 27 emerging market countries. Because JPM EMB Global 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 used for purposes of computing cumulative performance of the benchmark index for that period. * 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. FOREIGN INVESTING INVOLVES CERTAIN RISKS, INCLUDING CURRENCY FLUCTUATIONS AND CONTROLS, RESTRICTIONS ON FOREIGN INVESTMENTS, LESS GOVERNMENTAL SUPERVISION AND REGULATION, LESS LIQUIDITY AND THE POTENTIAL FOR MARKET VOLATILITY AND POLITICAL INSTABILITY. 3 MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. DECEMBER 31, 2001 PORTFOLIO SUMMARY [CHART OF ALLOCATION OF TOTAL INVESTMENTS*] Debt Securities 100.0%
[CHART OF COUNTRY WEIGHTINGS*] Brazil 22.5% Mexico 21.0 Russia 16.7 Ecuador 4.1 South Korea 3.8 Argentina 2.9 Peru 2.8 Egypt 2.6 Philippines 2.6 Morocco 2.5 Other 18.5
Ten Largest Holdings
PERCENT OF TOTAL INVESTMENTS --------------------------------------------------------------------------- 1. Federative Republic of Brazil Bond PIK 'C' 8.00%, 4/15/14 (Brazil) 5.5% 2. United Mexican States Global Bond 11.375%, 9/15/16 (Mexico) 5.2 3. Russian Federation 12.75%, 6/24/28 (Russia) 5.0 4. Federative Republic of Brazil Debt Conversion Bond 'L' 3.25%, 4/15/12 (Brazil) 4.5 5. United Mexican States Discount Bond 'A' 9.875%, 2/1/10 (Mexico) 3.9 6. Russian Federation 5.00%, 3/31/30 (Russia) 3.6 7. Petroleos Mexicanos 9.375%, 12/2/08 (Mexico) 3.4 8. Federative Republic of Brazil Bond 'Z-L' 3.188%, 4/15/24 (Brazil) 3.1 9. Federative Republic of Brazil 11.00%, 8/17/40 (Brazil) 2.9 10. Arab Republic of Egypt 8.75%, 7/11/11 (Egypt) 2.6 ---- 39.7% ====
* Percent of Total Investments 4 MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. FINANCIAL STATEMENTS DECEMBER 31, 2001 STATEMENT OF NET ASSETS (SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
FACE AMOUNT VALUE (000) (000) ---------------------------------------------------------------------------------------------------------- DEBT INSTRUMENTS (100.0%) ========================================================================================================== ALGERIA (0.8%) SOVEREIGN (0.8%) Algerian Loan Agreement Tranche 1 7.188%, 3/31/10 $ 1,812 $ 1,649 ========================================================================================================== ARGENTINA (2.9%) SOVEREIGN (2.9%) Republic of Argentina 11.375%, 3/15/10 8,020(e,g) 2,025 11.75%, 4/7/09 3,540(e,g) 920 11.75%, 6/15/15 2,010(e,g) 533 Republic of Argentina Par Bond, 'L-GP' 6.00%, 3/31/23 5,470(b,e,g) 2,352 ---------------------------------------------------------------------------------------------------------- 5,830 ========================================================================================================== BRAZIL (22.5%) SOVEREIGN (22.5%) Federated Republic of Brazil 11.00%, 8/17/40 7,530 5,798 Federated Republic of Brazil Bond 8.875%, 4/15/24 6,540 4,349 12.25%, 3/6/30 2,370 2,038 Federative Republic of Brazil Bond 'C-L' 8.00%, 4/15/14 44 34 Federative Republic of Brazil Bond 'L' 3.25%, 4/15/09 3,132(a) 2,498 Federative Republic of Brazil Bond 'Z-L' 3.188%, 4/15/24 8,350(a) 6,054 Federative Republic of Brazil Bond PIK 'C' 8.00%, 4/15/14 14,137(c) 10,885 Federative Republic of Brazil Debt Conversion Bond 'L' 3.25%, 4/15/12 12,500(a,c) 8,813 Federative Republic of Brazil Global Bond 9.625%, 7/15/05 4,200 3,969 ---------------------------------------------------------------------------------------------------------- 44,438 ========================================================================================================== BULGARIA (2.2%) SOVEREIGN (2.2%) Republic of Bulgaria Discount Bond 'A' Euro 4.562%, 7/28/24 2,950(a) 2,622 Republic of Bulgaria Front- Loaded Interest Reduction Bond 'A' 4.562%, 7/28/12 1,900(a) 1,712 ---------------------------------------------------------------------------------------------------------- 4,334 ========================================================================================================== CHINA/HONG KONG (0.8%) CORPORATE (0.8%) PCCW-HKTC Capital Ltd. 7.75%, 11/15/11 1,690(d) 1,670 ========================================================================================================== COLOMBIA (2.1%) SOVEREIGN (2.1%) Republic of Colombia Notes 10.00%, 1/23/12 4,190 4,138 ========================================================================================================== CROATIA (0.7%) SOVEREIGN (0.7%) Croatia Government International Bond 4.562%, 7/31/10 1,473(a) 1,447 ========================================================================================================== DOMINICAN REPUBLIC (1.0%) SOVEREIGN (1.0%) Dominican Republic Bond 9.50%, 9/27/06 1,870(d) 1,907 ========================================================================================================== ECUADOR (4.1%) SOVEREIGN (4.1%) Republic of Ecuador 5.00%, 8/15/30 10,680(b) 5,110 12.00%, 11/15/12 4,100 3,034 ---------------------------------------------------------------------------------------------------------- 8,144 ========================================================================================================== EGYPT (2.6%) CORPORATE (2.6%) Arab Republic of Egypt 8.75%, 7/11/11 5,280(d) 5,148 ========================================================================================================== INDIA (0.0%) SOVEREIGN (0.0%) Surashtra Cement and Chemical Ltd. 19.0%, 6/26/00 INR 30,000(e,f,g) --@ ========================================================================================================== INDONESIA (0.8%) CORPORATE (0.8%) Pindo Deli Finance (Mauritius) 10.75%, 10/1/07 4,300(d,e) 645 Tjiwi Kimia Finance Mauritius Ltd. 10.00%, 8/1/04 1,280(e) 186 Tjiwi Kimia International Global Bond 13.25%, 8/1/01 3,990(e) 658 13.25%, 8/1/01 1,000(e) 145 ---------------------------------------------------------------------------------------------------------- 1,634 ========================================================================================================== IVORY COAST (0.6%) SOVEREIGN (0.6%) Republic of Ivory Coast Bond 2.00%, 3/29/18 4,550(a,e) 673 Republic of Ivory Coast Front- Loaded Interest Reduction Bond 2.00%, 3/29/18 3,183(b,e) 477 ---------------------------------------------------------------------------------------------------------- 1,150 ========================================================================================================== MALAYSIA (1.7%) SOVEREIGN (1.7%) Government of Malaysia 7.50%, 7/15/11 3,175 3,318 ========================================================================================================== The accompanying notes are an integral part of the financial statements. 5 MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. FINANCIAL STATEMENTS DECEMBER 31, 2001 STATEMENT OF NET ASSETS (CONT'D) FACE AMOUNT VALUE (000) (000) ---------------------------------------------------------------------------------------------------------- MEXICO (21.0%) CORPORATE (5.5%) Grupo Iusacell SA de CV 14.25%, 12/1/06 $ 1,100(d) $ 1,183 Petroleos Mexicanos 9.50%, 9/15/27 2,700 2,855 Petroleos Mexicanos 9.375%, 12/2/08 6,120 6,625 ---------------------------------------------------------------------------------------------------------- 10,663 ---------------------------------------------------------------------------------------------------------- SOVEREIGN (15.5%) United Mexican States Bond 0.75%, 3/12/08 4,600 5,014 8.30%, 8/15/31 3,990 3,920 11.50%, 5/15/26 2,910 3,707 United Mexican States Global Bond 11.375%, 9/15/16 8,410 10,370 United Mexican States Discount Bond 'A' 9.875%, 2/1/10 6,850 7,655 ---------------------------------------------------------------------------------------------------------- 30,666 ---------------------------------------------------------------------------------------------------------- 41,329 ========================================================================================================== MOROCCO (2.5%) SOVEREIGN (2.5%) Morocco R&C, 'A' 2.76%, 1/5/09 5,634(a) 5,000 ========================================================================================================== NIGERIA (1.0%) SOVEREIGN (1.0%) Central Bank of Nigeria Par Bond 6.25%, 11/15/20 2,000(b) 1,352 Nigeria Promissory Notes, Series RC 5.092%, 1/5/10 1,780 659 ---------------------------------------------------------------------------------------------------------- 2,011 ========================================================================================================== PANAMA (1.6%) SOVEREIGN (1.6%) Republic of Panama 9.375%, 4/1/29 1,000 1,047 9.625%, 2/8/11 2,050 2,091 ---------------------------------------------------------------------------------------------------------- 3,138 ========================================================================================================== PERU (2.8%) SOVEREIGN (2.8%) Republic of Peru Front-Loaded Interest Reduction Bond 4.00%, 3/7/17 2,970(b) 2,079 Republic of Peru, Past Due Interest Bond 4.50%, 3/7/17 4,480(b) 3,438 ---------------------------------------------------------------------------------------------------------- 5,517 ========================================================================================================== PHILIPPINES (2.6%) CORPORATE (0.2%) Bayan Telecommunications, Inc. 13.50%, 7/15/06 1,800(d,e) 315 ---------------------------------------------------------------------------------------------------------- SOVEREIGN (2.4%) Republic of Philippines 9.875%, 3/16/10 2,430 2,515 9.875%, 1/15/19 2,360 2,245 ---------------------------------------------------------------------------------------------------------- 4,760 ---------------------------------------------------------------------------------------------------------- 5,075 ========================================================================================================== POLAND (0.6%) CORPORATE (0.6%) Netia Holdings II BV, 'B' 13.125%, 6/15/09 1,400(e) 224 PTC International Finance II SA 11.25%, 12/1/09 900 900 ---------------------------------------------------------------------------------------------------------- 1,124 ========================================================================================================== QATAR (0.9%) SOVEREIGN (0.9%) State of Qatar 9.75%, 6/15/30 1,550 1,771 ========================================================================================================== RUSSIA (16.7%) SOVEREIGN (16.7%) Russian Federation 0.00%, 12/31/01 1,466(e) 948 0.00%, 12/31/01 2,013(e) 1,301 0.00%, 12/31/01 1,094 700 0.00%, 3/4/03 2,192 1,345 5.00%, 3/31/30 7,420(b) 4,304 5.00%, 3/31/30 12,174(b,d) 7,061 8.25%, 3/31/10 700 609 8.25%, 3/31/10 5,326(d) 4,633 12.75%, 6/24/28 9,000 9,788 Russian Souzzdravexport 0.00%, 12/31/01 3,642(e) 2,314 ---------------------------------------------------------------------------------------------------------- 33,003 ========================================================================================================== SOUTH KOREA (3.8%) CORPORATE (2.8%) Korea Electric Power Corp. 7.75%, 4/1/13 1,850 1,944 6.375%, 12/1/03 3,510 3,634 ---------------------------------------------------------------------------------------------------------- 5,578 ---------------------------------------------------------------------------------------------------------- SOVEREIGN (1.0%) Republic of South Korea 8.875%, 4/15/08 1,600 1,849 ---------------------------------------------------------------------------------------------------------- 7,427 ========================================================================================================== TUNISIA (0.9%) SOVEREIGN (0.9%) Central Bank of Tunisia 8.25%, 9/19/27 2,000 1,860 ========================================================================================================== The accompanying notes are an integral part of the financial statements. 6 MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. FINANCIAL STATEMENTS DECEMBER 31, 2001 STATEMENT OF NET ASSETS (CONT'D) FACE AMOUNT VALUE (000) (000) ---------------------------------------------------------------------------------------------------------- UKRAINE (1.0%) SOVEREIGN (1.0%) Ukraine Government 11.00%, 3/15/07 $ 2,040 $ 1,945 ========================================================================================================== VENEZUELA (1.8%) SOVEREIGN (1.8%) Republic of Venezuela Debt Conversion Bond 'DL' 2.875%, 12/18/07 2,571(a) 1,864 Republic of Venezuela Par Bond 6.75%, 3/31/20 2,270 1,657 ---------------------------------------------------------------------------------------------------------- 3,521 ========================================================================================================== TOTAL DEBT INSTRUMENTS (Cost $196,696) 197,528 ========================================================================================================== NO. OF RIGHTS ---------------------------------------------------------------------------------------------------------- RIGHTS (0.0%) ========================================================================================================== MEXICO (0.0%) United Mexican States Value Recovery Rights, 06/30/03 (Cost $--@) 45,419(f) 46 ========================================================================================================== NO. OF WARRANTS ---------------------------------------------------------------------------------------------------------- WARRANTS (0.0%) ========================================================================================================== COLOMBIA (0.0%) Occidente y Caribe expiring 3/15/04 69,200(d,f) 69 ---------------------------------------------------------------------------------------------------------- NIGERIA (0.0%) Central Bank of Nigeria expiring 11/15/20 1,250(f) --@ ---------------------------------------------------------------------------------------------------------- TOTAL WARRANTS (Cost $44) 69 ========================================================================================================== VALUE (000) ---------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (100.0%) (Cost $196,740) $ 197,643 ========================================================================================================== AMOUNT (000) ========================================================================================================== OTHER ASSETS Receivable for Investments Sold $ 6,570 Interest Receivable 4,372 Other 10 10,952 ========================================================================================================== LIABILITIES Payable For: Reverse Repurchase Agreements (9,993) Investments Purchased (6,208) Securities Sold Short, at Value (Proceeds $4,830) (4,906) Dividends Declared (4,850) Bank Overdraft (294) Investment Advisory Fees (158) Directors' Fees and Expenses (89) Professional Fees (38) Shareholder Reporting Expenses (31) Custodian Fees (28) Administrative Fees (24) Other Liabilities (63) (26,682) ========================================================================================================== NET ASSETS Applicable to 22,046,681, issued and outstanding $ 0.01 par value shares (100,000,000 shares authorized) $ 181,913 ========================================================================================================== NET ASSET VALUE PER SHARE $ 8.25 ========================================================================================================== AT DECEMBER 31, 2001, NET ASSETS CONSISTED OF: Common Stock $ 220 Paid-in Capital 279,105 Distributions in Excess of Net Investment Income (1,132) Accumulated Net Realized Loss (97,102) Unrealized Appreciation on Investments, Foreign Currency Translations, Futures and Securities Sold Short 822 ========================================================================================================== TOTAL NET ASSETS $ 181,913 ==========================================================================================================
The accompanying notes are an integral part of the financial statements. 7 MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. FINANCIAL STATEMENTS DECEMBER 31, 2001 STATEMENT OF NET ASSETS (CONT'D) (a) -- Variable/floating rate security - rate disclosed is as of December 31, 2001. (b) -- Step Bond - coupon rate increases in increments to maturity. Rate disclosed is as of December 31, 2001. Maturity date disclosed is ultimate maturity. (c) -- Denotes all or a portion of securities subject to repurchase under the Reverse Repurchase Agreements as of December 31, 2001. See note A-4 to financial statements (d) -- 144A Security - Certain conditions for public sale may exist. (e) -- Security is in default. (f) -- Non-income producing. (g) -- Securities valued at fair value - see note A-1 to financial statements. At December 31, 2001, the Portfolio held $5,830,000 of fair-valued securities, representing 3.2% of net assets. (h) -- The repurchase agreement is fully collateralized by U.S. government and/or agency obligations based on market prices at the date of this statement of net assets. The investment in the repurchase agreement is through participation in a joint account with affiliated funds. PIK -- Payment-in-Kind. Income may be paid in additional securities or cash at the discretion of the issuer. @ -- Amount is less than $500. INR -- Indian Rupee THB -- Thai Baht
FACE AMOUNT VALUE (000) (000) ---------------------------------------------------------------------------------------------------------- SECURITIES SOLD SHORT - DEBT INSTRUMENTS ========================================================================================================== MEXICO United Mexican States, 8.625%, 3/12/08 (Total Proceeds $4,830) 4,600 $ 4,906 ==========================================================================================================
The accompanying notes are an integral part of the financial statements. 8 MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. FINANCIAL STATEMENTS STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 (000) --------------------------------------------------------------------------------------------------------- INVESTMENT INCOME Interest (net of $203 of foreign taxes withheld) $ 20,474 Dividends 113 ========================================================================================================= TOTAL INCOME 20,587 ========================================================================================================= EXPENSES Investment Advisory Fees 1,812 Interest Expense on Borrowings 376 Administrative Fees 223 Professional Fees 112 Shareholder Reporting Expenses 97 Bank Overdraft Expense 94 Custodian Fees 55 Transfer Agent Fees 54 Directors' Fees and Expenses 15 Other Expenses 90 ========================================================================================================= TOTAL EXPENSES 2,928 ========================================================================================================= NET INVESTMENT INCOME 17,659 ========================================================================================================= NET REALIZED GAIN (LOSS) ON: Investments (net of foreign tax expense of $71) (2,994) Foreign Currency Transactions (8) Futures 545 ========================================================================================================= NET REALIZED LOSS (2,457) ========================================================================================================= CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON: Investments 4,254 Foreign Currency Translations 63 ========================================================================================================= CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION 4,317 ========================================================================================================= NET REALIZED GAIN AND CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION 1,860 ========================================================================================================= NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 19,519 =========================================================================================================
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED DECEMBER 31, 2001 DECEMBER 31, 2000 (000) (000) -------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS Operations: Net Investment Income $ 17,659 $ 27,076 Net Realized Gain (Loss) (2,457) 16,378 Change in Unrealized Appreciation/Depreciation 4,317 (22,689) ============================================================================================================== NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 19,519 20,765 ============================================================================================================== Distributions: Net Investment Income (17,608) (23,900) In Excess of Net Investment Income (1,132) -- ============================================================================================================== TOTAL DISTRIBUTIONS (18,740) (23,900) ============================================================================================================== TOTAL INCREASE (DECREASE) 779 (3,135) ============================================================================================================== Net Assets: Beginning of Period 181,134 184,269 ============================================================================================================== END OF PERIOD (INCLUDING (DISTRIBUTIONS IN EXCESS OF)/UNDISTRIBUTED NET INVESTMENT INCOME OF $(1,132) AND $181, RESPECTIVELY) $181,913 $181,134 ==============================================================================================================
The accompanying notes are an integral part of the financial statements. 9 MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. FINANCIAL STATEMENTS STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2001 (000) ---------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Proceeds from Sales and Maturities of Investments $ 424,625 Proceeds from Short Sales 4,830 Purchases of Investments (429,963) Net Realized Loss on Foreign Currency Transactions (8) Net Realized Gain on Futures 545 Net Investment Income 17,659 ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net Decrease in Receivables Related to Operations 249 Net Decrease in Payables Related to Operations (144) Accretion/Amortization of Discounts and Premiums (2,212) ---------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 15,581 ---------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash Received for Reverse Repurchase Agreements 8,517 Cash Distributions Paid (23,240) Net Cash Paid to Bank (858) ---------------------------------------------------------------------------------------------------- Net Cash Used for Financing Activities (15,581) ---------------------------------------------------------------------------------------------------- Net Decrease in Cash -- CASH AT BEGINNING OF PERIOD -- ---------------------------------------------------------------------------------------------------- CASH AT END OF PERIOD $ -- ====================================================================================================
The accompanying notes are an integral part of the financial statements. 10 MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 1998 1997 -------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.22 $ 8.36 $ 7.01 $ 15.21 $ 17.31 -------------------------------------------------------------------------------------------------- Net Investment Income 0.80 1.23 1.09 1.27 1.34 Net Realized and Unrealized Gain (Loss) on Investments 0.08 (0.29) 1.27 (5.12) 1.27 -------------------------------------------------------------------------------------------------- Total from Investment Operations 0.88 0.94 2.36 (3.85) 2.61 -------------------------------------------------------------------------------------------------- Distributions: Net Investment Income (0.80) (1.08) (1.00) (1.39) (1.27) In Excess of Net Investment Income (0.05) -- (0.01) (0.02) -- Net Realized Gain -- -- -- -- (3.44) In Excess of Net Realized Gain -- -- -- (2.94) -- -------------------------------------------------------------------------------------------------- Total Distributions (0.85) (1.08) (1.01) (4.35) (4.71) -------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 8.25 $ 8.22 $ 8.36 $ 7.01 $ 15.21 ================================================================================================== PER SHARE MARKET VALUE, END OF PERIOD $ 7.40 $ 6.88 $ 6.81 $ 7.19 $ 15.38 ================================================================================================== TOTAL INVESTMENT RETURN: Market Value 20.65% 16.49% 8.55% (32.04)% 40.81% Net Asset Value (1) 12.50% 13.50% 36.58% (33.00)% 21.71% ================================================================================================== RATIOS, SUPPLEMENTAL DATA: -------------------------------------------------------------------------------------------------- NET ASSETS, END OF PERIOD (THOUSANDS) $181,913 $181,134 $184,269 $153,084 $327,556 -------------------------------------------------------------------------------------------------- Ratio of Expenses to Average Net Assets 1.61% 2.32% 2.28% 2.75% 2.27% Ratio of Expenses Excluding Interest Expense to Average Net Assets 1.41% 1.34% 1.35% 1.47% 1.51% Ratio of Net Investment Income to Average Net Assets 9.73% 14.31% 14.53% 12.50% 8.80% Portfolio Turnover Rate 233% 272% 178% 308% 361% --------------------------------------------------------------------------------------------------
(1) Total investment return based on net asset value per share reflects the effects of changes in net asset value on the performance of the Fund during each period, and assumes dividends and distributions, if any, were reinvested. This percentage is not an indication of the performance of a shareholder's investment in the Fund based on market value due to differences between the market price of the stock and the net asset value per share of the Fund. The accompanying notes are an integral part of the financial statements. 11 MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. DECEMBER 31, 2001 NOTES TO FINANCIAL STATEMENTS 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. ACCOUNTING POLICIES: The following significant accounting policies are in conformity with generally accepted accounting principles. Such policies are consistently followed by the Fund in the preparation of its financial statements. Generally accepted accounting principles may require management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results may differ from those estimates. 1. SECURITY VALUATION: In valuing the Fund's assets, all listed securities for which market quotations are readily available are valued at the last 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 mean of the current bid and asked prices obtained from reputable brokers. Securities may be valued by independent pricing services. The prices provided by a pricing service take into account broker dealer market price quotations for institutional size trading in similar groups of securities, security quality, maturity, coupon and other security characteristics as well as any developments related to the specific securities. Short-term securities which mature in 60 days or less are valued at amortized cost. All other securities and assets for which market values are not readily available (including investments which are subject to limitations as to their sale, if any) are valued at fair value as determined in good faith under procedures approved by the Board of Directors. 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: The Fund may enter into repurchase agreements under which the Fund lends excess cash and takes possession of securities with an agreement that the counterparty will repurchase such securities. In connection with transactions in repurchase agreements, a bank as custodian for the Fund takes possession of the underlying securities (collateral), with a market value at least equal to the amount of the repurchase transaction, including principal and accrued interest. To the extent that any repurchase transaction exceeds one business day, the value of the collateral is marked-to-market on a daily basis to determine the adequacy of the collateral. In the event of default on the obligation to repurchase, the Fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. In the event of default or bankruptcy by the counterparty to the agreement, realization and/or retention of the collateral or proceeds may be subject to legal proceedings. The Fund, along with other affiliated investment companies, may utilize a joint trading account for the purpose of entering into one or more repurchase agreements. 4. REVERSE REPURCHASE AGREEMENTS: 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. Reverse repurchase agreements also involve credit risk with the counterparty to the extent that the value of securities subject to repurchase exceed the Fund's liability under the reverse repurchase agreement. Securities subject to repurchase under reverse repurchase agreements, if any, are designated as such in the Statement of Net Assets. At December 31, 2001, the Fund had reverse repurchase agreements outstanding with Lehman Brothers as follows:
MATURITY IN LESS THAN 365 DAYS -------------------------------------------------------------------- Value of Securities Subject to Repurchase $ 9,992,000 Liability Under Reverse Repurchase Agreement $ 9,993,000 Interest Rate 1.75%
The average weekly balance of reverse repurchase agreements outstanding during the year ended December 31, 2001, was approximately $9,582,000 at a weighted average interest rate of 4.26%. 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: 12 MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. DECEMBER 31, 2001 NOTES TO FINANCIAL STATEMENTS (CONT'D) - investments, other assets and liabilities - at the prevailing rates of exchange on the valuation date; - investment transactions and investment income - at the prevailing rates of exchange on the dates of such transactions. Although the net assets of the Fund are presented at the foreign exchange rates and market values at the close of the period, the Fund does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the fluctuations arising from changes in the market prices of the securities held at period end. Similarly, the Fund does not isolate the effect of changes in foreign exchange rates from the fluctuations arising from changes in the market prices of securities sold during the period. Accordingly, realized and unrealized foreign currency gains (losses) due to securities transactions 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) on foreign currency translations for the period is reflected in the Statement of Operations. Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S. dollar denominated transactions as a result of, among other factors, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability. The Fund may use derivatives to achieve its investment objectives. The Fund may engage in transactions in futures contracts on foreign currencies, stock indices, as well as in options, swaps and structured notes. Consistent with the Fund's investment objectives and policies, the Fund may use derivatives for non-hedging as well as hedging purposes. Following is a description of derivative instruments that the Fund may utilize and their associated risks: 6. FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into foreign currency exchange contracts generally to attempt to protect securities and related receivables and payables against changes in future foreign exchange rates and, in certain situations, to gain exposure to a foreign currency. A foreign currency exchange contract is an agreement between two parties to buy or sell currency at a set price on a future date. The market value of the contract will fluctuate with changes in currency exchange rates. The contract is marked-to-market daily and the change in market value is recorded by the Fund as unrealized gain or loss. The Fund records realized gains or losses when the contract is closed equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Risk may arise upon entering into these contracts from the potential inability of counter-parties 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 and any intermediaries between the Lender and the Fund. 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. 13 MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. DECEMBER 31, 2001 NOTES TO FINANCIAL STATEMENTS (CONT'D) 8. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: The Fund may make forward commitments to purchase or sell securities. Payment and delivery for securities which have been purchased or sold on a forward commitment basis can take place a month or more (not to exceed 120 days) after the date of the transaction. Additionally, the Fund may purchase securities on a when-issued or delayed delivery basis. Securities purchased on a when-issued or delayed delivery basis are purchased for delivery beyond the normal settlement date at a stated price and yield, and no income accrues to the Fund on such securities prior to delivery. When the Fund enters into a purchase transaction on a when-issued or delayed delivery basis, it either establishes a segregated account in which it maintains liquid assets in an amount at least equal in value to the Fund's commitments to purchase such securities or denotes such assets as segregated on the Fund's records. Purchasing securities on a forward commitment or when-issued or delayed delivery basis may involve a risk that the market price at the time of delivery may be lower than the agreed upon purchase price, in which case there could be an unrealized loss at the time of delivery. 9. 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 either place in a segregated account with its custodian or denote as pledged on the custody records 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 added to or 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. SWAP AGREEMENTS: 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 may utilize 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. Realized gains or losses on maturity or termination of interest rate and total return swaps are presented in the Statement of Operations. Because there is no organized market for these swap agreements, the value reported in the Statement of Net Assets may differ from that which would be realized in the 14 MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. DECEMBER 31, 2001 NOTES TO FINANCIAL STATEMENTS (CONT'D) event the Fund terminated its position in the agreement. Risks may arise upon entering into these agreements from the potential inability of the counterparties to meet the terms of the agreements and are generally limited to the amount of net interest payments to be received and/or favorable movements in the value of the underlying security, instrument or basket of instruments, if any, at the date of default. Risks also arise from potential losses from adverse market movements, and such losses could exceed the related amounts shown in the Statement of Net Assets. 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 generally will expose the Fund to credit risks of the underlying instruments as well as of the issuer of the Structured Security. Structured Securities are typically sold in private placement transactions with no active trading market. Investments in Structured Securities may be more volatile than their underlying instruments, however, any loss is limited to the amount of the original investment. 13. FUTURES: The Fund may purchase and sell futures contracts. Futures contracts provide for the sale by one party and purchase by another party of a specified amount of a specified security, index, instrument or basket of instruments. Futures contracts (secured by cash, government or other liquid securities deposited with brokers or custodians as "initial margin") are valued based upon their quoted daily settlement prices; changes in initial settlement value (represented by cash paid to or received from brokers as "variation margin") are accounted for as unrealized appreciation (depreciation). When futures contracts are closed, the difference between the opening value at the date of purchase and the value at closing is recorded as realized gains or losses in the Statement of Operations. The Fund may use futures contracts in order to manage its exposure to the stock and bond markets, to hedge against unfavorable changes in the value of securities or to remain fully invested and to reduce transaction costs. Futures contract involve market risk in excess of the amounts recognized in the Statement of Net Assets. Risks arise from the possible movements in security values underlying these instruments. The change in value of futures contracts primarily corresponds with the value of their underlying instruments, which may not correlate with the change in value of the hedged investments. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market. 14. OVER-THE-COUNTER TRADING: Securities and other derivative instruments that may be purchased or sold by the Fund may consist of instruments not traded on an exchange. The risk of nonperformance by the obligor on such an instrument may be greater, and the ease with which the Fund can dispose of or enter into closing transactions with respect to such an instrument may be less, than in the case of an exchange-traded instrument. In addition, significant disparities may exist between bid and asked prices for derivative instruments that are not traded on an exchange. Derivative instruments not traded on exchanges are also not subject to the same type of government regulation as exchange traded instruments, and many of the protections afforded to participants in a regulated environment may not be available in connection with such transactions. During the year ended December 31, 2001, the Fund's investments in derivative instruments included foreign currency exchange contracts, futures, securities sold short, structured securities and over-the-counter trading. 15. 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-dividend date. The amount and character of income and capital gain distributions to be paid by the Fund are determined in accordance with Federal income tax regulations, which may differ from generally accepted accounting principles. The book/tax differences are either considered temporary or permanent in nature. Temporary differences are attributable to differing book and tax treatments for the timing of the recognition of gains and losses on certain investment transactions and the timing of the deductibility of certain expenses. Permanent book and tax basis differences may result in reclassifications among undistributed net investment income (loss), accumulated net realized gain (loss) and paid-in capital. 15 MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. DECEMBER 31, 2001 NOTES TO FINANCIAL STATEMENTS (CONT'D) 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. ADVISER: Morgan Stanley Investment Management Inc. (formerly Morgan Stanley Dean Witter Investment 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. ADMINISTRATOR: JPMorgan Chase Bank, through its corporate affiliate J.P. Morgan Investor Services Company (the "Administrator"), provides administrative services to the Fund under an Administration Agreement. Under the Administration Agreement, the Administrator is paid a fee computed weekly and payable monthly at an annual rate of 0.06% of the Fund's average weekly net assets, plus $100,000 per annum. In addition, the Fund is charged for certain out-of-pocket expenses incurred by the Administrator on its behalf. D. CUSTODIAN: JPMorgan Chase Bank and its affiliates serve as custodian for the Fund. Custody fees are payable monthly based on assets held in custody, investment purchase and sales activity and account maintenance fees, plus reimbursement for certain out-of-pocket expenses. E. OTHER: During the year ended December 31, 2001, the Fund made purchases and sales totaling approximately $434,914,000 and $433,128,000 respectively, of investment securities other than long-term U.S. Government securities, purchased options and short-term investments. There were no purchases or sales of long-term U.S. Government securities. At December 31, 2001, the U.S. Federal income tax cost basis of securities was approximately $197,822,000 and, accordingly, net unrealized depreciation for U.S. Federal income tax purposes was $179,000, of which $10,944,000 related to appreciated securities and $11,123,000 related to depreciated securities. At December 31, 2001, the Fund had a capital loss carryforward for U.S. Federal income tax purposes of approximately $94,790,000 available to offset future capital gains, of which $78,125,000 will expire on December 31, 2006, $13,135,000 will expire on December 31, 2007 and $3,530,000 will expire on December 31, 2009. To the extent that capital gains are offset, such gains will not be distributed to the shareholders. Net capital and currency losses incurred after October 31, and within the taxable year are deemed to arise on the first business day of the Fund's next taxable year. For the year ended December 31, 2001, the Fund deferred to January 1, 2002, for U.S. Federal income tax purposes, post-October capital losses of $1,240,000. A significant portion of the Fund's net assets consist of securities of issuers located in emerging markets or which are denominated in foreign currencies. Such investments may be concentrated in a limited number of countries and regions and may vary throughout the year. Changes in currency exchange rates will affect the value of and investment income from foreign currency denominated 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. These investments may be traded by one market maker who may also be utilized by the Fund to provide pricing information used to value such securities. The amounts which will be realized upon disposition of the securities may differ from the value reflected on the Statement of Net Assets and the differences could be material. 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. At December 31, 2001, the deferred fees payable under the Plan totaled $88,000 and are included in Payable for Directors' Fees and Expenses on the Statement of Net Assets. On December 14, 2001, the Officers of the Fund, pursuant to authority granted by the Board of Directors declared a distribution of $0.22 per share, derived from net investment income, payable on January 11, 2002, to shareholders of record on December 24, 2001. 16 MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. DECEMBER 31, 2001 NOTES TO FINANCIAL STATEMENTS (CONT'D) F. SUPPLEMENTAL PROXY INFORMATION (UNAUDITED): The Annual Meeting of the Stockholders of the Fund was held on October 11, 2001. The following is a summary of the proposal presented and the total number of shares voted: PROPOSAL: 1. To elect the following Directors:
VOTES IN VOTES FAVOR OF AGAINST -------------------------------------------------------------- Joseph J. Kearns 19,414,121 295,866 Michael Nugent 19,333,701 376,286 C. Oscar Morong, Jr. 19,403,401 306,586 Vincent R. McLean 19,400,601 309,386 Thomas P. Gerrity 19,381,672 328,315
17 MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. DECEMBER 31, 2001 INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. We have audited the accompanying statement of net assets of Morgan Stanley Emerging Markets Debt Fund, Inc. (the "Fund") as of December 31, 2001, and the related statements of operations and cash flows for the year then ended, and the statement of changes in net assets and the financial highlights for each of the two years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for each of the three years in the period ended December 31, 1999 were audited by other auditors whose report, dated February 18, 2000, expressed an unqualified opinion on those financial highlights. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of December 31, 2001 by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Morgan Stanley Emerging Markets Debt Fund, Inc. at December 31, 2001, the results of its operations and its cash flows for the year then ended, and the changes in its net assets and the financial highlights for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Boston, Massachusetts February 11, 2002 18 MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. OVERVIEW DIRECTOR AND OFFICER INFORMATION (UNAUDITED)
INDEPENDENT DIRECTORS: NUMBER OF TERM OF PORTFOLIOS OFFICE AND IN FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) DURING OVERSEEN BY OTHER DIRECTORSHIPS HELD BY OF DIRECTOR REGISTRANT SERVED* PAST 5 YEARS DIRECTOR** DIRECTOR ----------------------- ----------- ---------- --------------------------------- ----------- -------------------------------- John D. Barrett II (66) Director Director Chairman and Director of Barrett 78 Director of the Ashforth 565 Fifth Avenue since Associates, Inc. (investment Company (real estate). New York, NY 10017 2000 counseling). Thomas P. Gerrity (60) Director Director Professor of Management, formerly 78 Director, ICG Commerce, Inc.; 219 Grays Lane since Dean, Wharton School of Business, Sunoco; Fannie Mae; Reliance Haverford, PA 19041 2001 University of Pennsylvania; Group Holdings, Inc., CVS formerly Director, IKON Office Corporation and Knight-Ridder, Solutions, Inc., Fiserv, Digital Inc. Equipment Corporation, Investor Force Holdings, Inc. and Union Carbide Corporation. Gerard E. Jones (65) Director Director Of Counsel, Shipman & Goodwin, 78 Director of Tractor Supply Shipman & Goodwin, LLP since LLP (law firm). Company, Tiffany Foundation, 43 Arch Street 2000 and Fairfield County Foundation. Greenwich, CT 06830 Joseph J. Kearns (59) Director Director Investment consultant; formerly 78 Director, Electro Rent 6287 Via Escondido since CFO of The J. Paul Getty Trust. Corporation and The Ford Family Malibu, CA 90265 2001 Foundation. Vincent R. McLean (70) Director Director Formerly Executive Vice 78 Director, Banner Life Insurance 702 Shackamaxon Drive since President, Chief Financial Co.; William Penn Life Insurance Westfield, NJ 07090 2001 Officer, Director and Member of Company of New York. the Executive Committee of Sperry Corporation (now part of Unisys Corporation). C. Oscar Morong, Jr.(66) Director Director Managing Director, Morong Capital 78 Trustee and Chairman of the 1385 Outlook Drive West since Management; formerly Senior Vice mutual funds in the Smith Mountainside, NJ 07092 2001 President and Investment Manager Barney/CitiFunds fund complex; for CREF, TIAA-CREF Investment Director, Ministers and Management, Inc. (investment Missionaries Benefit Board of management); formerly Director, American Baptist Churches. The Indonesia Fund (mutual fund). William G. Morton, Director Director Chairman Emeritus and former 78 Director of Radio Shack Jr.(64) since Chief Executive Officer of Boston Corporation (electronics). 100 Franklin Street 1993 Stock Exchange. Boston, MA 02110 Michael Nugent (65) Director Director General Partner, Triumph 207 Director of various business c/o Triumph Capital, L.P. since Capital, L.P. (private investment organizations; Chairman of the 237 Park Avenue 2001 partnership); formerly, Vice Insurance Committee and Director New York, NY 10017 President, Bankers Trust Company or Trustee of the retail and BT Capital Corporation. families of funds advised by Morgan Stanley Investment Advisors Inc. Fergus Reid (69) Director Director Chairman and Chief Executive 78 Trustee and Director of 85 Charles Colman Blvd. since Officer of Lumelite Plastics approximately 30 investment Pawling, NY 12564 2000 Corporation. companies in the JPMorgan Funds complex managed by JPMorgan Investment Management Inc. 19 MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. OVERVIEW DIRECTOR AND OFFICER INFORMATION (CONT'D) INTERESTED DIRECTORS: NUMBER OF TERM OF PORTFOLIOS OFFICE AND IN FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) DURING OVERSEEN BY OTHER DIRECTORSHIPS HELD BY OF DIRECTOR REGISTRANT SERVED* PAST 5 YEARS DIRECTOR** DIRECTOR ---------------------- ------------ ---------- ----------------------------------- ----------- ------------------------------ Barton M. Biggs (69) Chairman Chairman Chairman, Director and Managing 78 Member of the Yale Development 1221 Avenue of the and Director and Director of Morgan Stanley Board Americas Director Investment Management Inc. and New York, NY 10020 since Chairman and Director of Morgan 1993 Stanley Investment Management Limited; Managing Director of Morgan Stanley & Co. Incorporated; Director and Chairman of the Board of various U.S. registered companies managed by Morgan Stanley Investment Management Inc. Ronald E. Robison (63) President President Chief Global Operations Officer 78 1221 Avenue of the and Director since and Managing Director of Morgan Americas 2001 and Stanley Investment Management, New York, NY 10020 Director Inc.; Director and President of since various U.S. registered investment 2001 companies managed by Morgan Stanley Investment Management Inc.; Previously, Managing Director and Chief Operating Officer of TCW Investment Management Company.
---------- * Each Director serves an indefinite term, until his or her successor is elected. ** The Fund Complex includes all funds advised by Morgan Stanley Investment Management Inc. and any funds that have an investment advisor that is an affiliated entity of Morgan Stanley Investment Management Inc. (including, but not limited to, Morgan Stanley Investments LP, Morgan Stanley Investment Advisors Inc. and Van Kampen Asset Management Inc.). 20 MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. OVERVIEW DIRECTOR AND OFFICER INFORMATION (CONT'D)
OFFICERS: POSITION(S) TERM OF OFFICE NAME, AGE AND ADDRESS OF EXECUTIVE HELD WITH AND LENGTH OF OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS ------------------------------------ ------------ -------------- ------------------------------------------------------------ Ronald E. Robison (63) President President Chief Global Operations Officer and Managing Director of Morgan Stanley Investment Management and Director since Morgan Stanley Investment Management Inc.; Director and Inc. 2001 and President of various U.S. registered investment companies 1221 Avenue of the Americas Director since managed by Morgan Stanley Investment Management Inc.; New York, NY 10020 2001 Previously, Managing Director and Chief Operating Officer of TCW Investment Management Company. Stefanie V. Chang (35) Vice Vice President Executive Director of Morgan Stanley & Co. Incorporated and Morgan Stanley Investment Management President since 1997 Morgan Stanley Investment Management Inc.; formerly, Inc. practiced law with New York law firm of Rogers & Wells (now 1221 Avenue of the Americas Clifford Chance Rogers & Wells LLP); Vice President of New York, NY 1002 certain funds in the Fund Complex. Lorraine Truten (40) Vice Vice President Executive Director of Morgan Stanley Investment Management Morgan Stanley Investment Management President since 2001 Inc.; Head of Global Client Services, Morgan Stanley Inc. Investment Management Inc.; President, Morgan Stanley Fund 1221 Avenue of the Americas Distribution, Inc. formerly, President of Morgan Stanley New York, NY 10020 Institutional Fund Trust; Vice President of certain funds in the Fund Complex. Mary E. Mullin (34) Secretary Secretary Vice President of Morgan Stanley & Co., Inc. and Morgan Morgan Stanley Investment Management since Stanley Investment Management, Inc.; formerly, practiced Inc. 1999 law with New York firms of McDermott, Will & Emery and 1221 Avenue of the Americas Skadden, Arps, Slate, Meagher & Flom LLP; Secretary of New York, NY 10020 certain funds in the Fund Complex. James A. Gallo (37) Treasurer Treasurer Executive Director of Morgan Stanley Investment Management Morgan Stanley Investment Management since Inc.; Treasurer of certain funds in the Fund Complex; Inc. 2001 formerly, Director of Fund Accounting at PFPC, Inc. 1221 Avenue of the Americas New York, NY 10020 Belinda A. Brady (34) Assistant Assistant Fund Administration Senior Manager, J.P. Morgan Investor J.P. Morgan Investor Services Co. Treasurer Treasurer Services Co. (formerly Chase Global Funds Services 73 Tremont Street since Company); and Assistant Treasurer of all Portfolios of the Boston, MA 02108-3913 2001 Fund. Formerly Senior Auditor at Price Waterhouse LLP (now PricewaterhouseCoopers LLP).
---------- * Each Officer serves an indefinite term, until his or her successor is elected. 21 MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"), each shareholder will be deemed to have elected, unless Boston Equiserve (the "Plan Agent") is otherwise instructed by the shareholder 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, annually, in any amount from $100 to $3,000, for investment in Fund shares. Dividend and capital gain distributions will be reinvested on the reinvestment date. 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. Shareholders who do not wish to have distributions automatically reinvested 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 1-800-730-6001 22