<PAGE>
THE MALAYSIA FUND, INC.
- -------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Barton M. Biggs Dato Malek Merican
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS
William G. Morton, Jr.
Michael F. Klein DIRECTOR
PRESIDENT AND DIRECTOR
Stefanie V. Chang
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
Joanna M. Haigney
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 Lampur, 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
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
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, 1997
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- -------------------------------------------------------------------------------
For the year ended December 31, 1997, The Malaysia Fund, Inc. (the "Fund") had a
total return, based on net asset value per share, of -72.89% compared to -68.71%
for the U.S. dollar adjusted Kuala Lumpur Stock Exchange Index (the "Index").
For the period since the Fund's commencement of operations on May 4, 1987
through December 31, 1997, the Fund's total return, based on net asset value per
share, was -14.71% compared to -2.81% for the Index. On December 31, 1997, the
closing price of the Fund's shares on the New York Stock Exchange was $6.56,
representing a 30.2% premium to the Fund's net asset value per share.
The devaluation of the Thai baht on July 2, 1997 sparked off a wave of
contagion currency devaluations in the region which led to a major breakdown
in economic fundamentals and investor confidence that left many regional
markets in shambles at the end of the year. The Malaysian market as
represented by the Index in dollar terms fell by 68.8% in 1997. The ringgit
depreciated 35.0% over the same period. The downturn in the market was
initially precipitated by a change in Bank Negara's position at the end of
March to tighten monetary conditions in the country by reducing bank lending
to unproductive industries such as property and share financing. The market's
slump was further exacerbated by Prime Minister Mahathir's move to restrict
the sale of Index stocks in August. The ensuing exodus of foreign investors
as a result of this action created massive panic selling on both the stock
and currency markets. This continued despite a reversal in Mahathir's policy.
Notwithstanding efforts by the Malaysian government to gain investor
confidence, the market succumbed to further selling pressure on fears of
possible imposition of capital controls following Mahathir's sharp criticism
of currency speculators.
In the midst of the downward spiral in investor confidence and share prices,
only multi-national companies with financially strong majority shareholders
and balance sheets that were not directly tied to the local currency, and
companies whose businesses are not generally adversely affected by the
currency devaluation (for example, palm oil, tobacco and liquor related
companies) managed to emerge relatively unscathed during this tumultuous
period.
After slightly more than a decade of above 8% GDP growth, Malaysia has begun
to show signs of economic fatigue as regional economies deteriorate under the
weight of massive currency devaluations, high interest rates and rising
corporate bankruptcies. GDP for Malaysia slowed from 8% in the first quarter
of 1997 to under 7% in the fourth quarter. GDP growth is projected to descend
to 3% in 1998. The only sector which is expected to show sustained vigor is
the export sector of which the manufacturing industry is a major contributor.
After staying at around the 3% level for the past five years, inflation, as
measured by the CPI, is expected to rise sharply to possibly 6% in 1998
following the sharp decline in the ringgit. Price increases, however, are
expected to be mitigated by product substitution, sluggish domestic demand
and price control for certain items.
The Fund's performance was impinged by the sharp decline in the price of
certain of its portfolio securities, namely the non-Index construction,
manufacturing and insurance stocks, caused by the heavy selling pressure of
such stocks when the government imposed restrictions on the sale of Index
component stocks. The inability of the Fund to overweigh key component stocks
such as securities of Petronas, Tenaga and Telkom, due to diversification
limits, further hampered its efforts to recover from poor performance.
Although the Fund is permitted to temporarily increase its cash position
above 20% during periods of market volatility, it remains the policy of the
Fund, consistent with the Fund's long-term investment objectives of providing
investors with exposure to a diversified portfolio of Malaysian securities,
to remain invested in Malaysian equity securities, even during periods of
market volatility and market downturns.
The Fund will continue to adopt a defensive posture by investing in stocks of
companies with high quality management, strong cash flow and resilient income
stream. The Fund, however, will remain vigilant for signs of a market bottom
but current economic trends do not reflect an immediate reversal in the
market downtrend.
Finally, this is to inform you that effective January 1, 1998, Joseph Tern, a
Principal of Morgan Stanley Asset Management Inc. (MSAM) has assumed primary
responsibility for the day-to-day management of the Fund's assets. Mr. Tern
joined MSAM's Singapore office in 1992 as a portfolio manager specializing in
the Singapore, Malaysia and Indonesia markets. Prior to joining MSAM, Mr.
Tern spent over four years at UOB Asset Management where he managed unit
trusts and institutional accounts. Mr. Tern is a Chartered Financial Analyst
and holds a Bachelors degree in Accountancy (honors) from the National
University of Singapore.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
/s/ Joseph Tern
Joseph Tern
PORTFOLIO MANAGER
January 1998
2
<PAGE>
The Malaysia Fund, Inc.
Investment Summary as of December 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
TOTAL RETURN (%)
HISTORICAL --------------------------------------------------------------
INFORMATION MARKET VALUE (1) NET ASSET VALUE (2) INDEX (3)
------------------- -------------------- -------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
---------- ------- ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
ONE YEAR -61.09% -61.09% -72.89% -72.89% -68.71% -68.71%
FIVE YEAR -28.81+ -6.57+ -45.43+ -11.41+ -37.61 -9.00
TEN YEAR 102.54+ 7.31+ 25.43+ 2.32+ 46.19 3.87
SINCE INCEPTION* 11.05+ 0.99+ -14.71+ -1.48+ -2.81 -0.27
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- -----------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
[CHART]
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31:
1987* 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- ------- ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share $ 7.42 $ 8.98 $ 13.77 $ 12.41 $ 13.55 $ 16.28 $ 27.32 $ 18.57 $ 18.58 $ 19.29 $ 5.04
Market Value Per Share $ 5.88 $ 7.50 $ 18.75 $ 11.38 $ 11.75 $ 16.25 $ 28.00 $ 17.38 $ 17.00 $ 17.50 $ 6.56
Premium/(Discount) -20.8% -16.5% 36.2% -8.3% -13.3% -0.2% 2.5% -6.4% -8.5% -9.3% 30.2%
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 $ 2.82 $ 0.51
Fund Total Return (2) -32.20% 23.32% 54.57% -8.35% 9.80% 20.15% 98.28%+ -18.87% 4.33% 19.93% -72.89%
Index Total Return (3) -33.54% 25.73% 57.91% -10.02% 9.13% 20.19% 92.60% -19.66% 3.05% 25.12% -68.71%
</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, including dividends.
* The Fund commenced operations on May 4, 1987.
+ This return does not include the effect of the rights issued in connection
with the Rights Offering.
3
<PAGE>
The Malaysia Fund, Inc.
Portfolio Summary as of December 31, 1997
- -----------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
[CHART]
<TABLE>
<S> <C>
Equity Securities 89.8%
Short-Term Investments 10.2%
</TABLE>
- -----------------------------------------------------------------------------
SECTORS (UNAUDITED)
[CHART]
<TABLE>
<S> <C>
Other 23.4%
Utilities - Electrical & Gas 8.2%
Telecommunications 5.3%
Multi-Industry 9.6%
Beverages & Tobacco 15.3%
Broadcasting & Publishing 6.4%
Electrical & Electronics 3.3%
Energy Sources 5.7%
Food & Household Products 3.2%
Leisure & Tourism 12.2%
Miscellaneous Materials & Commodities 7.4%
</TABLE>
- -----------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
[CHART]
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. Genting Bhd 7.8%
2. Tenaga Nasional Bhd 6.3
3. Berjaya Sport Toto Bhd 5.7
4. Rothmans of Pall Mall Bhd 5.4
5. Telekom Malaysia Bhd 5.3
6. New Straights Times Press Bhd 3.9
7. Carlsberg Brewery Malaysia Bhd 3.9
8. Golden Hope Plantations Bhd 3.7
9. Petronas Gas Bhd 3.7
10. Sime Darby Bhd 3.5
-----
49.2%
-----
-----
</TABLE>
* Excludes short-term investments.
4
<PAGE>
FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- ---------------------------------------------------------------------------
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
<S> <C> <C>
MALAYSIAN COMMON STOCKS (90.1%)
(Unless otherwise noted)
- ---------------------------------------------------------------------------
BANKING (3.0%)
Malayan Banking Bhd 450,100 U.S.$ 1,307
Southern Bank Bhd (Foreign) 250,000 161
-----------
1,468
-----------
- ---------------------------------------------------------------------------
BEVERAGES & TOBACCO (15.3%)
Carlsberg Brewery Malaysia Bhd 597,000 1,919
Guinness Anchor Bhd 1,050,000 1,296
R.J. Reynolds Bhd 1,004,000 1,639
Rothmans of Pall Mall Bhd 339,000 2,636
----------
7,490
----------
- ---------------------------------------------------------------------------
BROADCASTING & PUBLISHING (6.3%)
Nanyang Press Bhd 350,000 317
New Straights Times Press Bhd 1,563,000 1,937
Star Publications 743,000 848
----------
3,102
----------
- ---------------------------------------------------------------------------
CONSUMER PRODUCTS-MISCELLANEOUS (2.1%)
Amway (Malaysia) Holdings Bhd 609,000 1,010
----------
- ---------------------------------------------------------------------------
ELECTRICAL & ELECTRONICS (3.3%)
Lityan Holdings Bhd 625,000 1,607
----------
- ---------------------------------------------------------------------------
ENERGY SOURCES (5.6%)
Dialog Group Bhd 559,000 963
Petronas Gas Bhd 793,000 1,804
----------
2,767
----------
- ---------------------------------------------------------------------------
FOOD & HOUSEHOLD PRODUCTS (3.2%)
Kentucky Fried Chicken Holdings Bhd 967,000 1,566
(a)Kentucky Fried Chicken Holdings Bhd
(Warrants), expiring 2/7/01 135,000 14
----------
1,580
----------
- ---------------------------------------------------------------------------
FOREST PRODUCTS & PAPER (1.9%)
Jaya Tiasa Holdings Bhd 500,000 919
----------
- ---------------------------------------------------------------------------
INSURANCE (1.7%)
Malaysian Assurance Alliance Bhd 424,000 486
Malaysian National Reinsurance Bhd 320,000 329
----------
815
----------
- ---------------------------------------------------------------------------
LEISURE & TOURISM (12.2%)
Berjaya Group Bhd 4,410,000 896
Genting Bhd 1,536,000 3,850
Magnum Corp. Bhd 500,000 301
Tanjong plc 540,000 895
----------
5,942
----------
- ---------------------------------------------------------------------------
MACHINERY & ENGINEERING (0.5%)
United Engineers Bhd 317,000 264
----------
METALS - NON-FERROUS (2.7%)
MNI Holdings Bhd 980,000 1,336
----------
- ---------------------------------------------------------------------------
MISCELLANEOUS MATERIALS & COMMODITIES (7.4%)
AIC Corp. Bhd 75,000 136
Golden Hope Plantations Bhd 1,588,000 1,837
Hap Seng Consolidated Bhd 600,000 741
IOI Corporation Bhd 2,850,000 923
----------
3,637
----------
- ---------------------------------------------------------------------------
MULTI-INDUSTRY (9.5%)
Berjaya Sport Toto Bhd 1,100,000 2,814
Killinghall Bhd 260,000 149
Sime Darby Bhd 1,776,400 1,708
----------
4,671
----------
- ---------------------------------------------------------------------------
TELECOMMUNICATIONS (5.3%)
Telekom Malaysia Bhd 875,000 2,587
----------
- ---------------------------------------------------------------------------
TRANSPORTATION - SHIPPING (2.0%)
Diperdana Corporation Bhd 109,000 58
Halim Mazmin Bhd 245,000 189
Malaysian International Shipping
Bhd (Foreign) 500,000 733
---------
980
---------
- ---------------------------------------------------------------------------
UTILITIES - ELECTRICAL & GAS (8.1%)
Malakoff Bhd 425,000 885
Tenaga Nasional Bhd 1,450,000 3,094
---------
3,979
---------
- ---------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost U.S.$87,766)
44,154
---------
- ---------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (9.8%)
- ---------------------------------------------------------------------------
REPURCHASE AGREEMENT (9.8%)
Chase Securities, Inc., 5.95%,
dated 12/31/97, due 1/2/98, to be
repurchased at U.S.$4,805,
collateralized by U.S.$4,855,
United States Treasury Notes,
5.625%, due 2/15/06, valued at
U.S.$4,905 (Cost U.S.$4,803) U.S.$ 4,803 4,803
---------
- ----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------------
<S> <C> <C>
FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN (0.4%)
Malaysian Ringgit
(Cost U.S.$214) MYR 835 U.S.$ 215
--------------
- ----------------------------------------------------------------------------
TOTAL INVESTMENTS (100.3%)
(Cost U.S.$92,783) 49,172
--------------
- ----------------------------------------------------------------------------
OTHER ASSETS (0.9%)
Cash U.S.$ 1
Dividends Receivable 226
Receivable for Investments Sold 217
Interest Receivable 1
Other Assets 13 458
----------- --------------
- ----------------------------------------------------------------------------
LIABILITIES (-1.2%)
Payable For:
Investments Purchased (386)
Professional Fees (48)
U.S. Investment Advisory Fees (44)
Shareholder Reporting Expenses (41)
Director's Fees and Expenses (20)
Custodian Fees (17)
Malaysian Investment Advisory Fees (14)
Administrative Fees (10)
Other Liabilities (2) (582)
------------ --------------
- ------------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 9,732,966, issued and
outstanding U.S.$0.01 par value
shares (20,000,000 shares authorized) U.S.$ 49,048
--------------
- ------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 5.04
--------------
- ------------------------------------------------------------------------------
AT DECEMBER 31, 1997, NET ASSETS CONSISTED OF:
Common Stock U.S.$ 97
Capital Surplus 121,159
Accumulated Net Investment Loss (89)
Distributions in Excess of Net Realized Gain (28,492)
Unrealized Depreciation on Investments and
Foreign Currency Translations (43,627)
--------------
- ------------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$ 49,048
--------------
--------------
- ------------------------------------------------------------------------------
</TABLE>
(a) - Non-income producing
December 31, 1997 exchange rate - Malaysian Ringgit (MYR) 3.890 = U.S. $1.00.
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
STATEMENT OF OPERATIONS (000)
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends................................................ U.S.$ 2,427
Interest................................................. 257
Less: Foreign Taxes Withheld............................. (694)
- --------------------------------------------------------------------------------
Total Income............................................ 1,990
- --------------------------------------------------------------------------------
EXPENSES
U.S. Investment Advisory Fees............................ 949
Malaysian Investment Advisory Fees....................... 229
Administrative Fees...................................... 212
Custodian Fees........................................... 166
Shareholder Reporting Expenses........................... 112
Professional Fees........................................ 65
Directors' Fees and Expenses............................. 27
Transfer Agent Fees...................................... 14
Other Expenses........................................... 29
- --------------------------------------------------------------------------------
Total Expenses.......................................... 1,803
- --------------------------------------------------------------------------------
Net Investment Income.................................. 187
- --------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold............................... 28,492)
Foreign Currency Transactions............................ (234)
- --------------------------------------------------------------------------------
Net Realized Loss...................................... (28,726)
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Depreciation on Investments............................ (105,230)
Depreciation on Foreign Currency Translations.......... (15)
- --------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation..... (105,245)
- --------------------------------------------------------------------------------
Total Net Realized Loss and Change in Unrealized............ (133,971)
- --------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS U.S.$ (133,784)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income (Loss). . . . . . . . . . . . . . . . U.S.$ 187 U.S.$ (378)
Net Realized Gain (Loss). . . . . . . . . . . . . . . . . . (28,726) 33,877
Change in Unrealized Appreciation/Depreciation. . . . . . . (105,245) 822
- --------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations. . . . . . . . . . . . . . . . . . . . . (133,784) 34,321
- --------------------------------------------------------------------------------------------------------------
Distributions:
Net Realized Gain . . . . . . . . . . . . . . . . . . . . . -- (27,444)
In Excess of Net Realized Gain. . . . . . . . . . . . . . . (4,930) --
- --------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . (4,930) (27,444)
- --------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Reinvestment of Distributions (10,818 shares) . . . . . . . -- 211
- --------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . . . . . . . . (138,714) 7,088
Net Assets:
Beginning of Period . . . . . . . . . . . . . . . . . . . . . 187,762 180,674
- --------------------------------------------------------------------------------------------------------------
End of Period (including accumulated net investment
loss of U.S.$89 and U.S.$41, respectively) . . . . . . . . . U.S.$ 49,048 U.S.$ 187,762
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS: 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . U.S.$ 19.29 U.S.$ 18.58 U.S.$ 18.57 U.S.$ 27.32 U.S.$ 16.28
- -----------------------------------------------------------------------------------------------------------------------------
Offering Costs . . . . . . . . . . . . . . . . . . - - - - (0.07)
- -----------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) . . . . . . . . . . . 0.02 (0.04) (0.03) 0.01 0.03
Net Realized and Unrealized Gain (Loss) on
Investments . . . . . . . . . . . . . . . . . . (13.76) 3.57 0.88 (5.15) 14.37
- -----------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations . . . . . . (13.74) 3.53 0.85 (5.14) 14.40
- -----------------------------------------------------------------------------------------------------------------------------
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. . . . . . . . (0.51) - (0.10) (0.29) (0.17)
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions. . . . . . . . . . . . . (0.51) (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 PERIOD . . . . . . . . . U.S.$ 5.04 U.S.$ 19.29 U.S.$ 18.58 U.S.$ 18.57 U.S.$ 27.32
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD . . . . . U.S.$ 6.56 U.S.$ 17.50 U.S.$ 17.00 U.S.$ 17.38 U.S.$ 28.00
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value . . . . . . . . . . . . . . . . . (61.09)% 18.92% 2.03% (25.94)% 103.00%+
Net Asset Value (1). . . . . . . . . . . . . . (72.89)% 19.93% 4.33% (18.87)% 98.28%+
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS) . . . . . U.S.$ 49,048 U.S.$187,762 U.S.$ 180,674 U.S.$ 180,587 U.S.$265,377
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets . . . . 1.35% 1.29% 1.44% 1.19% 1.60%
Ratio of Net Investment Income (Loss) to
Average Net Assets. . . . . . . . . . . . . . 0.14% (0.18)% (0.14)% 0.05% 0.14%
Portfolio Turnover Rate. . . . . . . . . . . . . 107% 50% 33% 23% 43%
Average Commission Rate (2): . . . . . . . . . .
Per Share. . . . . . . . . . . . . . . . . . . U.S.$ 0.0140 U.S.$ 0.0186 N/A N/A N/A
As a Percentage of Trade Amount . . . . . . . 0.60% 0.63% N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ This return does not include the effect of rights issued in connection with
the Rights Offering.
(1) Total investment return based on net asset value per share reflects
the effects of changes in net asset value on the performance of the Fund
during each period, and assumes dividends and distributions, if any, were
reinvested. 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.
(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.
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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 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 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 ap-
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<PAGE>
preciation (depreciation) investments and foreign currency translations in
the Statement of Net Assets. The change in net unrealized currency gains
(losses) for the period is reflected in the Statements of Operations.
The Fund intends to use derivatives more actively than it has in the past. The
Fund intends to engage in transactions in futures contracts on foreign
currencies, stock indices, as well as in options, swaps and structured notes.
Consistent with the Fund's investment objectives and policies, the Fund intends
to use derivatives for non-hedging as well as hedging purposes.
Following is a description of derivative instruments and their associated risks
that the Fund intends to utilize:
5. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into
forward 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 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. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: The Fund
may make forward commitments to purchase or sell securities. Payment and
delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not to exceed 120 days)
after the date of the transaction. Additionally, the Fund may purchase
securities on a when-issued or delayed delivery basis. Securities purchased
on a when-issued or delayed delivery basis are purchased for delivery
beyond the normal settlement date at a stated price and yield, and no
income accrues to the Fund on such securities prior to delivery. When the
Fund enters into a purchase transaction on a when-issued or delayed
delivery basis, it either establishes a segregated account in which it
maintains liquid assets in an amount at least equal in value to the Fund's
commitments to purchase such securities or denotes such securities on the
custody statement for its regular custody account. Purchasing securities on
a forward commitment or when-issued or delayed-delivery basis may involve a
risk that the market price at the time of delivery may be lower than the
agreed upon purchase price, in which case there could be an unrealized loss
at the time of delivery.
7. SWAP AGREEMENTS: The Fund may enter into swap agreements to exchange the
return generated by one security, instrument or basket of instruments for
the return generated by another security, instrument or basket of
instruments. The following summarizes swaps which may be entered into by
the Fund:
INTEREST RATE SWAPS: Interest rate swaps involve the exchange of
commitments to pay and receive interest based on a notional principal
amount. Net periodic interest payments to be received or paid are accrued
daily and are recorded in the Statement of Operations as an adjustment to
interest income. Interest rate swaps are marked-to-market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized appreciation or depreciation in the Statement of Operations.
TOTAL RETURN SWAPS: Total return swaps involve commitments to pay interest
in exchange for a market-linked return based on a notional amount. To the
extent the total return of the security, instrument or basket of
instruments underlying the transaction exceeds or falls short of the
offsetting interest obligation, the Fund will receive a payment from or
make a payment to the counterparty, respectively. Total return swaps are
marked-to-market daily based upon quotations from market makers and the
change, if any, is recorded as unrealized gains or losses in the Statement
of Operations. Periodic payments received or made at the end of each
measurement period, but prior to termination, are recorded as realized
gains or losses in the Statement of Operations.
Realized gains or losses on maturity or termination of interest rate and
total return swaps are presented in the Statement of Operations. Because
there is no organized market for these swap agreements, the value reported
in the Statement of Net Assets may differ from that which would be realized
in the event the Fund terminated its position in the agreement. Risks may
arise upon entering into these agreements from the potential inability of
the counterparties to meet the terms of the agreements and are generally
limited to the amount of net interest payments to be received and/or
favorable movements in the value of the underlying security, instrument or
basket of instruments, if any, at the date of default.
8. 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
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<PAGE>
restructuring involves the deposit with or purchase by an entity of
specified instruments and the issuance by that entity of one or more
classes of securities ("Structured Securities") backed by, or representing
interests in, the underlying instruments. Structured Securities, invested
in by the Fund, generally will have credit risk equivalent to that of the
underlying instruments. Structured Securities are typically sold in private
placement transactions with no active trading market. Investments in
structured securities may be more volatile than their underlying
instruments, however, any loss is limited to the amount of the original
investment.
9. OVER-THE-COUNTER TRADING: Derivative instruments that may be purchased or
sold by the Fund are expected to regularly consist of instruments not
traded on an exchange. The risk of nonperformance by the obligor on such an
instrument may be greater, and the ease with which the Fund can dispose of
or enter into closing transactions with respect to such an instrument may
be less, than in the case of an exchange-traded instrument. In addition,
significant disparities may exist between bid and asked prices for
derivative instruments that are not traded on an exchange. Derivative
instruments not traded on exchanges are also not subject to the same type
of government regulation as exchange traded instruments, and many of the
protections afforded to participants in a regulated environment may not be
available in connection with such transactions.
10. 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.
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, 1997, the Fund incurred international
custodian fees of $153,000 of which $16,000 was payable to the International
Custodian at December 31, 1997.
F. During the year ended December 31, 1997, the Fund made purchases and sales
totaling $135,503,000 and $147,117,000, 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, 1997, the U.S. Federal income tax cost basis of securities was
$96,327,000 and, accordingly, net unrealized depreci-
11
<PAGE>
ation for U.S. Federal income tax purposes was $47,370,000, of which $665,000
related to appreciated securities and $48,035,000 related to depreciated
securities. At December 31, 1997, the Fund had a capital loss carryforward
for U.S. Federal income tax purposes of approximately $9,368,000 available to
offset future capital gains which will expire on December 31, 2005. For the
year ended December 31, 1997, the Fund expects to defer to January 1, 1998
for U.S. Federal income tax purposes, post-October currency losses of
$441,000 and post-October capital losses of $15,365,000.
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, 1997, totaled $9,000 and are included in Payable for Directors' Fees and
Expenses on the Statement of Net Assets.
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION (UNAUDITED):
For the year ended December 31, 1997, the Fund designates $4,684,000 as
long-term capital gain at the 28% tax bracket. The Fund also expects to pass
through to shareholders foreign tax credits of approximately $695,000. In
addition, for the year ended December 31, 1997, gross income derived from
sources within foreign countries amounted to $2,476,000.
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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, 1997, 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, 1997 by correspondence with the
custodians and brokers and the application of alternative auditing procedures
where confirmations from brokers were 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 18, 1998
13
<PAGE>
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 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.
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:
The Malaysia Fund, Inc.
Boston Equiserve
Dividend Reinvestment and Cash Purchase Plan
P.O. Box 1681
Boston, MA 02105
1-800-730-6001
14
