<PAGE>
THE MALAYSIA FUND, INC.
- ---------------------------------------------
OFFICERS AND DIRECTORS
Barton M. Biggs Dato Malek Merican
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS William G. Morton, Jr.
Frederick B. Whittemore DIRECTOR
VICE CHAIRMAN OF THE BOARD OF DIRECTORS James W. Grisham
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND DIRECTOR Michael F. Klein
Peter J. Chase VICE PRESIDENT
DIRECTOR Harold J. Schaaff, Jr.
John W. Croghan VICE PRESIDENT
DIRECTOR Joseph P. Stadler
David B. Gill VICE PRESIDENT
DIRECTOR Valerie Y. Lewis
Graham E. Jones SECRETARY
DIRECTOR James R. Rooney
John A. Levin TREASURER
DIRECTOR Belinda A. Brady
ASSISTANT TREASURER
- ---------------------------------------------
U.S. INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------------
MALAYSIAN INVESTMENT ADVISER
Arab-Malaysian Consultant Sdn Bhd
21st-29th Floors, Bangurian Arab-Malaysian
Jalan Raja Chulan, 5200 Kuala Lumpur, Malaysia
- --------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
- --------------------------------------------------------
CUSTODIANS
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank
770 Broadway
New York, New York 10003
- --------------------------------------------------------
SHAREHOLDER SERVICING AGENT
Boston Equiserve
Investor Relations Department
P.O. Box 644
Boston, Massachusetts 02102-0644
(617) 575-3120
- --------------------------------------------------------
LEGAL COUNSEL
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
- --------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
- --------------------------------------------------------
For additional Fund information, including the Fund's net asset value per share
and information regarding the investments comprising the Fund's portfolio,
please call 1-800-221-6726.
------------------------
THE
MALAYSIA FUND,
INC.
---------------------
ANNUAL REPORT
DECEMBER 31, 1996
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------
For the year ended December 31, 1996, The Malaysia Fund, Inc. (the "Fund") had a
total return, based on net asset value per share, of 19.93%, compared to 25.12%
for the U.S. dollar adjusted Kuala Lumpur Stock Exchange Index ("KLSE Index").
For the period since the Fund's commencement of operations on May 4, 1987
through December 31, 1996, the Fund's total return, based on net asset value per
share, was 214.58%, compared to 210.71% for the KLSE Index. On December 31,
1996, the closing price of the Fund's shares on the New York Stock Exchange was
$17.50, representing a 9.3% discount to the NAV per share.
The Malaysian market registered a credible performance in 1996 with a gain of
approximately 25%. Second bank stocks, however, gained almost 93% on a composite
basis, reflecting strong liquidity in the system. Mergers in the banking sector
also resulted in a re-rating of small to medium size banks. Major index stocks
such as Telekom and Tenaga (two of the Fund's top ten stocks) performed well
with gains of 13% and 21%, respectively, as the regulatory environment appeared
to be shifting in their favor.
After nine consecutive years of uninterrupted economic growth in excess of 8%
per annum, the Malaysian economy is beginning to show some signs of moderation
with GDP growth for 1996 estimated to be 8.2%. A slowdown in exports growth in
tandem with a more muted OECD growth rate as well as inventory adjustments in
the electronics sector helped cool an economy that seemed to be straining at the
seams. A continued stream of infrastructure projects, however, helped to shelter
the economy from a more pronounced slowdown. Malaysia's trade and account
deficits also registered significant declines on the back of a weaker Japanese
yen, which accounted for the bulk of Malaysia's imports of capital and
intermediate goods. The current accounts deficit improved to MR$10.7 billion, or
4.6% of GDP, compared with MR$18.7 billion, or 9% of GDP, a year ago. Inflation
remained subdued averaging around 3.5%. The economy, however, continued to
operate at full capacity with the unemployment rate at a low of 2.7%.
The Fund's underperformance compared to the KLSE Index was largely due to the
decline in Genting (-17.9%) and Resorts World (-15.4%), companies in which the
Fund has substantial weightings. These stocks substantially underperformed the
market as weak earnings growth rates and several unfortunate vehicle accidents
at the highlands cast a pall on their share prices. Given that the recent
expansion in these companies' casino and hotel room spaces is expected to yield
benefits in the near future, the de-rating of these two companies is expected to
be at its tail-end. The Fund was also affected by the strong performances of key
component stocks such as Telekom and Tenaga in which the Fund was underweighted.
Towards the end of the year, the Fund also raised a significant amount of cash
(14% of net assets) in preparation for its required year-end dividend payment
and, therefore, was unable to participate fully in the late year market rally.
Looking ahead to 1997, the Malaysian economy is expected to grow at an 8.0%
rate, supported by continued buoyancy in the construction sector and a recovery
in the manufacturing sector. Interest rates are expected to remain stable with
an easier bias as inflationary pressures continue to be subdued. While further
progress in improving the external deficits may be difficult to achieve over the
near-term, the magnitude of the current account deficit is expected to be at a
more manageable level of 5% of GDP for 1997.
The Malaysian market is poised for a continued rally into the first quarter of
1997, fueled by a benign interest rate outlook, improved corporate earnings
growth of 16% (compared to 13% in 1996), receding fears over current account
deficits and good liquidity conditions. The market's valuation at 19 times
prospective 1997 earnings is within the lower band of historical ranges and,
therefore, is fairly undemanding.
Having adjusted for the dividend distribution noted above, the Fund currently is
fully invested to ride on the anticipated upswing in the market as sentiment is
expected to remain bullish in the first quarter of 1997.
Sincerely,
[SIGNATURE]
Warren J. Olsen
PRESIDENT AND DIRECTOR
[SIGNATURE]
Ean Wah Chin
SENIOR PORTFOLIO MANAGER
[SIGNATURE]
Joseph Tern
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
MORGAN STANLEY GROUP INC., THE DIRECT PARENT COMPANY OF THE FUND'S INVESTMENT
ADVISER, MORGAN STANLEY ASSET MANAGEMENT INC., RECENTLY ANNOUNCED ITS INTENTION
TO MERGE WITH DEAN WITTER, DISCOVER & CO. TO FORM MORGAN STANLEY, DEAN WITTER,
DISCOVER & CO. IT CURRENTLY IS ANTICIPATED THAT THE TRANSACTION WILL CLOSE IN
MID-1997. THEREAFTER, MORGAN STANLEY ASSET MANAGEMENT INC. WILL BE A SUBSIDIARY
OF MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
2
<PAGE>
The Malaysia Fund, Inc.
Investment Summary as of December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION
TOTAL RETURN (%)
----------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (1)(3)
------------------------ ------------------------ ------------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
ONE YEAR 18.92% 18.92% 19.93% 19.93% 25.12% 25.12%
FIVE YEAR 153.02+ 20.40+ 141.85+ 19.32+ 139.98 19.13
SINCE INCEPTION* 185.39+ 11.46+ 214.58+ 12.58+ 210.71 12.44
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
A BAR CHART REFLECTING THE DATA BELOW IS REFLECTED HERE.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31:
1987* 1988 1989 1990 1991 1992 1993 1994 1995
NET ASSET VALUE PER SHARE $7.42 $8.98 $13.77 $12.41 $13.55 $16.28 $27.32 $18.57 $18.58
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Market Value Per Share $5.88 $7.50 $18.75 $11.38 $11.75 $16.25 $28.00 $17.38 $17.00
Premium/(Discount) -20.80% -16.50% 36.20% -8.30% -13.30% -0.20% 2.50% -6.40% -8.50%
Income Dividends $0.15 $0.17 $0.11 $0.21 $0.07 - $0.16 $0.02 -
Capital Gains Distributions - - - - - - $1.13 $3.59 $0.84
Fund Total Return (2) -32.20% 23.32% 54.57% -8.35% 9.80% 20.15% 98.28%+ -18.87% 4.33%
Index Total Return (1)(3) -33.54% 25.73% 57.91% -10.02% 9.13% 20.19% 92.60% -19.66% 3.05%
<CAPTION>
YEARS ENDED DECEMBER 31:
1996
NET ASSET VALUE PER SHARE $19.29
<S> <C>
Market Value Per Share $17.50
Premium/(Discount) -9.30%
Income Dividends -
Capital Gains Distributions $2.82
Fund Total Return (2) 19.93%
Index Total Return (1)(3) 25.12%
</TABLE>
(1) Assumes dividends and distributions, if any, were reinvested.
(2) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. These percentages are not an indication of the performance of a
shareholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value
per share of the Fund.
(3) The U.S. dollar adjusted Kuala Lumpur Stock Exchange (KLSE) Composite Index
is a broad based capitalization weighted index of 100 stocks listed on the
exchange.
* The Fund commenced operations on May 4, 1987.
+This return does not include the effect of dilution in connection with the
Rights Offering
3
<PAGE>
The Malaysia Fund, Inc.
Portfolio Summary as of December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Portfolio Investments
Diversification
Equity Securities 87.7%
Short-Term Investments 12.3%
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Sectors
Automobiles 5.0%
Banking 12.3%
Beverages & Tobacco 4.3%
Energy Sources 9.1%
Financial Services 7.5%
Leisure & Tourism 13.2%
Machinery & Engineering 5.5%
Multi-Industry 16.8%
Telecommunications 8.5%
Utilities - Electrical &
Gas 4.6%
Other 13.2%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
---------------
<C> <S> <C>
1. Malayan Banking Bhd 9.3%
2. Telekom Malaysia Bhd 8.5
3. Genting Bhd 7.2
4. Sime Darby Bhd 6.4
5. United Engineers 5.5
<CAPTION>
PERCENT OF
NET ASSETS
---------------
<C> <S> <C>
6. Petronas Gas Bhd 5.4%
7. Resorts World Bhd 4.7
8. Tenaga Nasional Bhd 4.6
9. Rothmans of Pall Mall Bhd 4.3
10. Renong Bhd 4.3
---
60.2%
---
---
</TABLE>
- --------------------------------------------------------------------------------
* Excludes short-term investments.
4
<PAGE>
FINANCIAL STATEMENTS
- ---------
STATEMENT OF NET ASSETS
- ---------
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<S> <C> <C>
- -----------------------------------------------------------------
- -------------
MALAYSIAN COMMON STOCKS (100.4%)
(Unless otherwise noted)
- --------------------------------------------------
- ----------
AUTOMOBILES (5.0%)
Edaran Otomobil Nasional Bhd 400,000 U.S.$ 3,999
Oriental Holdings Bhd. 417,200 2,841
Perusahaan Otomobil Nasional 400,000 2,534
--------------
9,374
--------------
- -----------------------------------------------------------------
- -------------
BANKING (12.3%)
Commerce Asset Holding Bhd 607,000 4,567
Kwong Yik Bank Bhd 300,000 1,057
Malayan Banking Bhd 1,572,100 17,430
--------------
23,054
--------------
- -----------------------------------------------------------------
- -------------
BEVERAGES & TOBACCO (4.3%)
Rothmans of Pall Mall Bhd 765,000 8,027
--------------
- -----------------------------------------------------------------
- -------------
BROADCASTING & PUBLISHING (0.5%)
Nanyang Press Bhd 250,000 911
--------------
- -----------------------------------------------------------------
- -------------
CONSTRUCTION & HOUSING (3.8%)
IJM Corp. Bhd 3,000,000 7,068
--------------
- -----------------------------------------------------------------
- -------------
ENERGY SOURCES (9.1%)
Dialog Group Bhd 484,000 6,899
Petronas Gas Bhd 2,460,000 10,228
--------------
17,127
--------------
- -----------------------------------------------------------------
- -------------
FINANCIAL SERVICES (7.5%)
+Gadek Capital Bhd 1,600,000 4,213
Hong Leong Credit Bhd 616,199 3,879
MBF Capital Bhd 2,908,000 4,721
TA Enterprise Bhd 1,000,000 1,322
--------------
14,135
--------------
- -----------------------------------------------------------------
- -------------
FOOD AND HOUSEHOLD PRODUCTS (1.5%)
Kentucky Fried Chicken Holdings Bhd 675,000 2,780
+Kentucky Fried Chicken Holdings Bhd
(Warrants), expiring 2/7/01 135,000 161
--------------
2,941
--------------
- -----------------------------------------------------------------
- -------------
INDUSTRIAL COMPONENTS (0.6%)
Leader Universal Holdings Bhd 544,000 1,142
--------------
- -----------------------------------------------------------------
- -------------
LEISURE & TOURISM (13.2%)
Genting Bhd 1,974,000 13,600
Resorts World Bhd 1,936,666 8,819
Tanjong plc 600,000 2,400
--------------
24,819
--------------
- -----------------------------------------------------------------
- -------------
MACHINERY & ENGINEERING (5.5%)
United Engineers 1,136,000 10,256
--------------
</TABLE>
- -----------------------------------------------------------------
- -------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------
- -------------
<S> <C> <C>
MISCELLANEOUS MATERIALS & COMMODITIES (2.7%)
IOI Corp. Bhd 536,000 U.S.$ 823
Kian Joo Can Factory Bhd 772,000 4,280
--------------
5,103
--------------
- -----------------------------------------------------------------
- -------------
MULTI-INDUSTRY (16.8%)
Hicom Holdings Bhd 1,550,000 4,450
+Hicom Holdings Bhd (Warrants),
expiring 12/18/00 220,000 282
Killinghall Bhd 750,000 1,069
Renong Bhd 4,500,000 7,983
Road Builder Holdings 1,000,000 5,662
Sime Darby Bhd 3,059,400 12,053
--------------
31,499
--------------
- -----------------------------------------------------------------
- -------------
REAL ESTATE (2.7%)
Selangor Properties Bhd 2,000,000 2,194
Sunway City Bhd 1,163,000 2,809
--------------
5,003
--------------
- -----------------------------------------------------------------
- -------------
TELECOMMUNICATIONS (8.5%)
Telekom Malaysia Bhd 1,798,000 16,019
--------------
- -----------------------------------------------------------------
- -------------
TRANSPORTATION -- SHIPPING (1.8%)
Malaysian International Shipping Bhd
(Foreign) 1,142,000 3,391
--------------
- -----------------------------------------------------------------
- -------------
UTILITIES -- ELECTRICAL & GAS (4.6%)
Tenaga Nasional Bhd 1,798,000 8,614
--------------
- -----------------------------------------------------------------
- -------------
TOTAL MALAYSIAN COMMON STOCKS
(Cost U.S. $126,865) 188,483
--------------
- -----------------------------------------------------------------
- -------------
<CAPTION>
FACE
AMOUNT
(000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
SHORT-TERM INVESTMENT (14.0%)
REPURCHASE AGREEMENT (14.0%)
Chase Securities, Inc. 5.95%, dated
12/31/96, due 1/2/97, to be
repurchased at U.S.$26,309,
collateralized by U.S.$25,130 United
States Treasury Bonds 7.25%, due
5/15/16, valued at U.S.$26,803 (Cost
U.S. $26,300) U.S.$ 26,300 26,300
--------------
- -----------------------------------------------------------------
- -------------
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (0.1%)
(Interest Bearing Demand Account)
Malaysian Ringgit (Cost U.S. $151) MYR 381 151
--------------
- -----------------------------------------------------------------
- -------------
TOTAL INVESTMENTS (114.5%)
(Cost U.S. $153,316) 214,934
--------------
- -----------------------------------------------------------------
- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
OTHER ASSETS (0.2%)
Dividends Receivable U.S.$ 252
Receivable for Investments Sold 76
Interest Receivable 4
Other Assets 17 U.S.$ 349
--------------- --------------
- -----------------------------------------------------------------
- -------------
LIABILITIES (-14.7%)
Payable for:
Dividends Declared (27,123)
U.S. Investment Advisory Fees (112)
Custodian Fees (83)
Shareholder Reporting Expenses (60)
Professional Fees (60)
Malaysian Investment Advisory Fees (29)
Directors' Fees and Expenses (29)
Administrative Fees (24)
Other Liabilities (1) (27,521)
--------------- --------------
- -----------------------------------------------------------------
- -------------
NET ASSETS (100%)
Applicable to 9,732,966, issued and outstanding
U.S. $0.01 par value shares (20,000,000 shares
authorized) U.S.$ 187,762
--------------
--------------
- -----------------------------------------------------------------
- -------------
NET ASSET VALUE PER SHARE U.S. $ 19.29
--------------
--------------
- -----------------------------------------------------------------
- -------------
AT DECEMBER 31, 1996, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------
Common Stock U.S.$ 97
Capital Surplus 121,159
Accumulated Net Investment Loss (41)
Accumulated Net Realized Gain 4,929
Unrealized Appreciation on Investments and Foreign
Currency Translations 61,618
- -----------------------------------------------------------------
- -------------
TOTAL NET ASSETS U.S.$ 187,762
--------------
--------------
- -----------------------------------------------------------------
- -------------
</TABLE>
+ Non-income producing.
December 31, 1996 exchange rate -- Malaysian Ringgit (MYR) 5.526 = U.S.$1.00
Note: Prior governmental approval for foreign investments may be required under
certain circumstances in some markets, and foreign ownership limitations
may also be imposed by the charters of individual companies in such
markets. As a result, an additional class of shares designated as foreign
may be created and offered for investment. The local and foreign shares'
market values may vary.
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
STATEMENT OF OPERATIONS (000)
<S> <C>
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends............................................................................... U.S.$ 2,701
Interest................................................................................ 241
Less: Foreign Taxes Withheld............................................................ (673)
- ---------------------------------------------------------------------------------------------------------------
Total Income.......................................................................... 2,269
- ---------------------------------------------------------------------------------------------------------------
EXPENSES
U.S. Investment Advisory Fees........................................................... 1,330
Custodian Fees.......................................................................... 395
Malaysian Investment Advisory Fees...................................................... 305
Administrative Fees..................................................................... 291
Professional Fees....................................................................... 101
Shareholder Reporting Expenses.......................................................... 92
Directors' Fees and Expenses............................................................ 49
Transfer Agent Fees..................................................................... 13
Other Expenses.......................................................................... 71
- ---------------------------------------------------------------------------------------------------------------
Total Expenses........................................................................ 2,647
- ---------------------------------------------------------------------------------------------------------------
Net Investment Loss............................................................... (378)
- ---------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold.............................................................. 33,948
Foreign Currency Transactions........................................................... (71)
- ---------------------------------------------------------------------------------------------------------------
Net Realized Gain................................................................. 33,877
- ---------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Appreciation on Investments............................................................. 803
Appreciation on Foreign Currency Translations........................................... 19
- ---------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation.................................... 822
- ---------------------------------------------------------------------------------------------------------------
Total Net Realized Gain and Change in Unrealized Appreciation/Depreciation.................. 34,699
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................... U.S.$ 34,321
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Loss................................................. U.S.$ (378) U.S.$ (264)
Net Realized Gain................................................... 33,877 10,663
Change in Unrealized Appreciation/Depreciation...................... 822 (2,177)
- ---------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations................ 34,321 8,222
- ---------------------------------------------------------------------------------------------------------------
Distributions:
Net Realized Gain................................................... (27,444) (7,166)
In Excess of Net Realized Gain...................................... -- (969)
- ---------------------------------------------------------------------------------------------------------------
Total Distributions................................................. (27,444) (8,135)
- ---------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Reinvestment of Distributions (10,818 Shares)....................... 211 --
- ---------------------------------------------------------------------------------------------------------------
Total Increase...................................................... 7,088 87
Net Assets:
Beginning of Year................................................... 180,674 180,587
- ---------------------------------------------------------------------------------------------------------------
End of Year (including accumulated net investment loss of U.S.$41
and U.S.$0, respectively.)......................................... U.S.$187,762 U.S.$180,674
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS: 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR................ U.S.$ 18.58 U.S.$ 18.57 U.S.$ 27.32 U.S.$ 16.28 U.S.$ 13.55
- ---------------------------------------------------------------------------------------------------------------------------------
Offering Costs.................................... -- -- -- (0.07) --
- ---------------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss)...................... (0.04) (0.03) 0.01 0.03 0.13
Net Realized and Unrealized Gain (Loss) on
Investments...................................... 3.57 0.88 (5.15) 14.37 2.60
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations.............. 3.53 0.85 (5.14) 14.40 2.73
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income......................... -- -- -- (0.13) --
In Excess of Net Investment Income............ -- -- (0.02) (0.03) --
Net Realized Gains............................ (2.82) (0.74) (3.30) (0.96) --
In Excess of Net Realized Gains............... -- (0.10) (0.29) (0.17) --
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions........................... (2.82) (0.84) (3.61) (1.29) --
- ---------------------------------------------------------------------------------------------------------------------------------
Decrease in Net Asset Value due to Shares Issued
through Rights Offering.......................... -- -- -- (2.00) --
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR...................... U.S.$ 19.29 U.S.$ 18.58 U.S.$ 18.57 U.S.$ 27.32 U.S.$ 16.28
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF YEAR............... U.S.$ 17.50 U.S.$ 17.00 U.S.$ 17.38 U.S.$ 28.00 U.S.$ 16.25
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value.................................. 18.92% 2.03% (25.94%) 103.00%* 38.30%
Net Asset Value (1)........................... 19.93% 4.33% (18.87%) 98.28%* 20.15%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (THOUSANDS)............... U.S.$187,762 U.S.$180,674 U.S.$180,587 U.S.$265,377 U.S.$118,175
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets........... 1.29% 1.44% 1.19% 1.60% 1.72%
Ratio of Net Investment Income (Loss) to Average
Net Assets....................................... (0.18%) (0.14%) 0.05% 0.14% 0.86%
Portfolio Turnover Rate........................... 50% 33% 23% 43% 38%
Average Commission Rate (2)....................... U.S.$ 0.0186 N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
*This return does not include the effect of dilution in connection with the Rights Offering.
(1)Total investment return based on net asset value per share reflects the effects of changes in net asset value on the
performance of the Fund during each period, and assumes dividends and distributions, if any, were reinvested. These
percentages are not an indication of the performance of a shareholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value of the Fund.
(2)For fiscal years beginning on or after September 1, 1995, a fund is required to disclose the average commission rate per share
it paid for portfolio trades on which commissions were charged. For the year ended December 31, 1996, the average commission
rate paid on trades on which commissions were charged was 0.63% of the trade amount.
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- ---------
The Malaysia Fund, Inc. (the "Fund") was incorporated on March 12, 1987 and
is registered as a diversified, closed-end management investment company under
the Investment Company Act of 1940, as amended. The Fund's investment objective
is long-term capital appreciation through investment primarily in equity
securities.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such policies
are consistently followed by the Fund in the preparation of its financial
statements. Generally accepted accounting principles may require management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results may differ from those estimates.
1. SECURITY VALUATION: In valuing the Fund's assets, all
listed securities for which market quotations are readily available are
valued at the last sales price on the valuation date, or if there was no
sale on such date, at the mean between the current bid and asked prices.
Securities which are traded over-the-counter are valued at the average of
the mean of current bid and asked prices obtained from reputable brokers.
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.
Prior to November 1, 1993, pursuant to a memorandum of understanding (the
"MOU") with the Malaysian Treasury, the Fund was exempt, contingent on
compliance with certain conditions, from payment of Malaysian income tax for
a period of eight years which commenced with the establishment of the Fund.
Effective November 1, 1993, the MOU was revised and as a result approximately
95% of the Fund's income was exempt from payment of Malaysian income tax of
30% through October 31, 1995. Effective November 1, 1995, all of the Fund's
dividend and interest income is subject to Malaysian income tax. Malaysian
income tax is included in foreign taxes withheld on the Statement of
Operations.
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. FOREIGN CURRENCY TRANSLATION: The books and
records of the Fund are maintained in U.S. dollars. Amounts denominated in
foreign currency are translated into U.S. dollars at the mean of the bid and
asked prices of such currencies against U.S. dollars last quoted by a major
bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates of
exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the period, the Fund does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from
changes in the market prices of the securities held at period end.
Similarly, the Fund does not isolate the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market
prices of securities sold during the period. Accordingly, realized and
unrealized foreign currency gains (losses) are included in the reported net
realized and unrealized gains (losses) on investment transactions and
balances.
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
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rates are reflected as a component of unrealized appreciation (depreciation)
in the Statement of Net Assets. The change in net unrealized currency gains
(losses) for the period is reflected in the Statement of Operations.
5. 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 U.S. dollars.
6. 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. Dividend
income is recorded on the ex-dividend date (except certain dividends which
may be recorded as soon as the Fund is informed of such dividend) net of
applicable withholding taxes where recovery of such taxes is not reasonably
assured.
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 of the timing of the recognition of gains and losses on
securities.
Permanent book and tax basis differences relating to shareholder
distributions may result in reclassifications to undistributed net
investment income (loss), accumulated net realized gain (loss) and capital
surplus.
Adjustments for permanent book-tax differences, if any, are not reflected in
ending undistributed net investment income (loss) for the purpose of
calculating net investment income (loss) per share in the financial
highlights.
B. Morgan Stanley Asset Management Inc. (the "U.S. Adviser") provides
investment advisory services to the Fund under the terms of an Investment
Advisory Agreement (the "Agreement"). Under the Agreement, the U.S. Adviser is
paid a fee computed weekly and payable monthly at an annual rate of .90% of the
Fund's first $50 million of average weekly net assets, .70% of the Fund's next
$50 million of average weekly net assets and .50% of the Fund's average weekly
net assets in excess of $100 million.
C. Arab-Malaysian Consultant Sdn Bhd (the "Malaysian Adviser") provides
investment advice, research and assistance on behalf of the Fund to Morgan
Stanley Asset Management Inc. under terms of a contract. Under the contract, the
Malaysian Adviser is paid a fee computed weekly and payable monthly at an annual
rate of .25% of the Fund's first $50 million of average weekly net assets, .15%
of the Fund's next $50 million of average weekly net assets and .10% of the
Fund's average weekly net assets in excess of $100 million.
For the year ended December 31, 1996, the Fund incurred $97,000 of brokerage
commissions to Arab Malaysian Securities, an affiliate of the Malaysian Adviser.
In addition, for the year ended December 31, 1996, the Fund incurred
approximately $2,000 of brokerage commissions with Morgan Stanley & Co.
Incorporated, an affiliate of the adviser.
D. 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 .20% of the Fund's first $50 million of average weekly net assets, .15%
of the Fund's next $50 million of average weekly net assets and .10% of the
Fund's average weekly net assets in excess of $100 million. 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.
E. 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. Custody fees are payable monthly
based on assets under custody, investment purchase and sales activity, an
account maintenance fee, plus reimbursement for certain out-of-pocket expenses.
During the year ended December 31, 1996, the Fund incurred international
custodian fees of $391,000 of which $82,000 was payable to the International
Custodian
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at December 31, 1996. In addition, for the year ended December 31, 1996, the
Fund has earned interest income of $13,000 on balances with the International
Custodian.
F. During the year ended December 31, 1996, the Fund made purchases and sales
totaling approximately $99,126,000 and $125,448,000 respectively, of investment
securities other than long-term U.S. Government securities and short term
investments. There were no purchases or sales of long-term U.S. Government
securities. At December 31, 1996, the U.S. Federal income tax cost basis of
securities was the same as that for financial reporting purposes and
accordingly, net unrealized appreciation for U.S. Federal income tax purposes
was $61,618,000, of which $65,958,000 related to appreciated securities and
$4,340,000 related to depreciated securities. For the year ended December 31,
1996, the Fund expects to defer, to January 1, 1997, for U.S. Federal income tax
purposes, post-October currency losses of $42,000.
G. A significant portion of the Fund's net assets consist of Malaysian equity
securities and foreign currency. Changes in currency exchange rates will affect
the value of and investment income from such investments. Foreign securities may
be subject to greater price volatility, lower liquidity and less diversity than
equity securities of companies based in the United States. In addition, foreign
securities may be subject to substantial governmental involvement in the economy
and greater social, economic and political uncertainty.
H. Each Director of the Fund who is not an officer of the Fund or an affiliated
person as defined under the Investment Company Act of 1940, as amended, may
elect to participate in the Directors' Deferred Compensation Plan (the "Plan").
Under the Plan, such Directors may elect to defer payment of a percentage of
their total fees earned as a Director of the Fund. These deferred portions are
treated, based on an election by the Director, as if they were either invested
in the Fund's shares or invested in U.S. Treasury Bills, as defined under the
Plan. The deferred fees payable, under the Plan, at December 31, 1996 totaled
$18,000 and are included in Payable for Directors' Fees and Expenses on the
Statement of Net Assets.
I. During December 1996, the Board declared a distribution of $2.79 per share
derived from net realized gains, payable on January 9, 1997, to shareholders of
record on December 31, 1996.
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
For the year ended December 31, 1996, the Fund designates $21,876,000 as
long-term capital gain and expects to pass through to its shareholders foreign
tax credits of approximately $673,000. In addition, for the year ended December
31, 1996, gross income derived from sources within foreign countries amounted to
$2,900,000.
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REPORT OF INDEPENDENT ACCOUNTANTS
- ---------
To the Shareholders and Board of Directors of
The Malaysia Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
The Malaysia Fund, Inc. (the "Fund") at December 31, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1996 by correspondence with the
custodians and a broker and the application of alternative auditing procedures
where the confirmation from the broker was not received, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 10, 1997
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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, semiannually, in any amount from $100 to $3,000, for
investment in Fund shares. Shareholders who do not participate in the Plan will
receive distributions in cash.
Dividend and capital gain distributions will be reinvested on the
reinvestment date in full and fractional shares. If the market price per share
equals or exceeds net asset value per share on the reinvestment date, the Fund
will issue shares to participants at net asset value. If net asset value is less
than 95% of the market price on the reinvestment date, shares will be issued at
95% of the market price. If net asset value exceeds the market price on the
reinvestment date, participants will receive shares valued at the market price.
The Fund may purchase shares of its Common Stock in the open market in
connection with dividend reinvestment requirements at the discretion of the
Board of Directors. Should the Fund declare a dividend or capital gain
distribution payable only in cash, non-participants in the Plan will receive
cash and the Plan Agent will purchase Fund shares for participants in the open
market as agent for the participants.
The Plan Agent's fees for the reinvestment of dividends and distributions
will be paid by the Fund. However, each participant's account will be charged a
pro rata share of brokerage commissions incurred on any open market purchases
effected on such participant's behalf. A participant will also pay brokerage
commissions incurred on purchases made by voluntary cash payments. Although
shareholders in the Plan may receive no cash distributions, participation in the
Plan will not relieve participants of any income tax which may be payable on
such dividends or distributions.
In the case of shareholders, such as banks, brokers or nominees, which hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
shareholder as representing the total amount registered in the shareholder's
name and held for the account of beneficial owners who are participating in the
Plan.
Participants who wish to withdraw from the Plan should notify the Plan Agent
in writing. There is no penalty for non-participation or withdrawal from the
Plan, and shareholders who have previously withdrawn from the Plan may rejoin at
any time. Requests for additional information or any correspondence concerning
the Plan should be directed to the Plan Agent at:
The Malaysia Fund, Inc.
Boston Equiserve
Dividend Reinvestment and Cash Purchase Plan
P.O. Box 1681
Boston, MA 02105
1-800-422-2001
13
