<PAGE>
MORGAN STANLEY EMERGING MARKETS FUND, INC.
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS
Michael F. Klein Stefanie V. Chang
PRESIDENT AND DIRECTOR VICE PRESIDENT
Peter J. Chase Harold J. Schaaff, Jr.
DIRECTOR VICE PRESIDENT
John W. Croghan Joseph P. Stadler
DIRECTOR VICE PRESIDENT
David B. Gill Valerie Y. Lewis
DIRECTOR SECRETARY
Graham E. Jones Joanna M. Haigney
DIRECTOR TREASURER
John A. Levin Belinda A. Brady
DIRECTOR ASSISTANT TREASURER
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
- --------------------------------------------------------------------------------
CUSTODIANS
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank
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
Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
- --------------------------------------------------------------------------------
For additional Fund information, including the Fund's net asset value per share
and information regarding the investments comprising the Fund's portfolio,
please call 1-800-221-6726.
- --------------------------------------------------------------------------------
MORGAN STANLEY
EMERGING MARKETS
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 Morgan Stanley Emerging Markets
Fund, Inc. (the "Fund") had a total return, based on net asset value per
share, of -0.97% compared with -14.42% for the IFC Global Total Return
Composite Index (the "Index"). For the period from commencement of operations
on November 1, 1991 through December 31, 1997, the Fund's total return, based
on net asset value per share, was 107.86% compared with 39.73% for the Index.
On December 31, 1997, the closing price of the Fund's shares on the New York
Stock Exchange was $13.06, representing a 15.9% discount to the Fund's net
asset value per share.
The currency crisis in Asia and the contagion effect of Asian devaluations
triggered a collapse of practically every emerging market in the fourth quarter
of 1997. The selling panic which ensued across all emerging markets left Asia
down 33%, Latin America down 11% and Russia down 18%. Even India, insulated and
isolated, was off 12% during the quarter. Negatives included our overweight
positions in Russia, Indonesia, Korea and Thailand.
Country allocation drove the outperformance for the Fund, as overweights in
Russia, India, Pakistan and Turkey, combined with underweights in Asia in
general helped the relative results. We began easing into Asia in the third and
fourth quarters of 1997 as we felt that both the currency and stock markets had
dramatically overshot fair-value benchmarks. Asian markets are down 70% - 85%
from their highs and have discounted economic devastation and corporate
bankruptcies. While we do believe that the near-term economic and earnings
outlook for the Asian countries is grim, and that economic pain with its
commensurate political convulsions are ahead, (particularly in countries like
Indonesia and Korea), we believe that the worst has been discounted in the
prices of stocks and the currencies. These markets have been tremendously
oversold, and in the face of such negative sentiment, any marginally positive
news could ignite a huge rally in the region.
We have been discriminating in the selection of both markets and stocks as we
believe that the markets will bifurcate (as in Japan in the last few years). We
envision a distinction between winners and losers as the era of "Asian Value"
crony-capitalism comes to an end. We feel that Korea has the best chance of
transforming its economy and its corporate structure for the benefit of the
shareholder. World class companies such as Samsung Electronics, LG
Semiconductors and Pohang Iron and Steel are at bargain basement levels. We are
overweight Korea and concentrated in these stocks.
The closure of 56 out of 58 finance companies in Thailand last month signaled to
us the start of the corporate restructuring that is inevitable in Thailand.
After an agonizing 6 months it appears that the Thai government and the
corporate sector have seen the writing on the wall as slow, fitful, ambivalent
restructuring has begun. We are overweight Thailand since we feel that,
although positive economic and corporate news will be scarce over the next year,
the market in its discounting wisdom may have seen the worst.
Indonesia has fallen the furthest and the fastest of all Asian markets.
Although this market is currently capitalized at 10% of its value in U.S.
dollars from a year earlier, we hesitate to add to positions. While Indonesia
is very cheap, it is deservedly so. The country is poised on a razor's edge as
the fate of a country of 200 million people depends on the will of one man. The
corrupt nexus between politics and business remains intractable, and it appears
that no real progress on economic reform can be made with the current political
regime. President Suharto has made some concessions and conciliatory noises
under duress from the IMF and a phone call from President Clinton. However, a
true embracing of the IMF reform package implies a fundamental reformation of
the political system and abdication of economic largesse by the Suharto family.
Resentment for the First Family, particularly toward the Suharto children, runs
deep and may prove incendiary in the coming months. The scenario developing in
Indonesia includes sharply higher inflation, a recession, a dramatic rise in
unemployment, food shortages and an election. We maintain a neutral weight in
Indonesia as the market is dramatically oversold. Although we expect a
significant upward move from these levels, we would expect to sell into a rally,
assuming no change in underlying fundamentals.
Malaysia has earned the dubious distinction of the 'least-worst' Asian market.
Its banking system is sound, politics stable and its corporate sector is in
reasonable shape. Our hesitancy towards Malaysia has been valuation-based.
Given the recent correction, we are in the process of increasing our long
underweight position.
We are slightly underweight Latin America and expect to decrease our exposure
even further. We remain upbeat on the government and corporate leadership
witnessed during the post-Mexico devaluation crisis and the more recent Asian
crisis. In Mexico, the consumer recovery continues and in Brazil the
privatization program is moving ahead. However, the Brazilian real is perhaps
one of the more overvalued currencies in the emerging market universe, and the
high real interest rates required to support it in the aftermath of the Asian
crisis will prove burdensome both for the corporate sector and for equity market
perfor-
2
<PAGE>
mance. Mexico has performed spectacularly in the past 12 months as it has
enjoyed the unique position of having taken its devaluation "medicine" early as
well as being geographically situated to capitalize on the phenomenal strength
of the U.S. economy. As a result, though, many of the Mexican stocks we own no
longer offer compelling value, and will likely be trimmed to gain exposure to
other investments in Asia.
We continue to view India and South Africa as a source of funds for our
increased exposure in Asia. India is well underpinned by both valuations and
corporate fundamentals; however, we believe that political uncertainty and
slightly higher interest rates will cap some of the upside in the market.
In Europe, Russia has had a big correction after a stellar run. We continue to
remain sanguine about its long term prospects but have trimmed our position a
bit. Likewise, Turkey experienced tremendous returns over the last year, and
remains one of the last markets that have yet to conquer inflation. Positive
news on this front could trigger another move up. As valuations remain at
attractive levels, we are overweight the Turkish market. Cash has built up and
is slowly being redeployed as the entire asset class has been joltingly repriced
significantly below fair value.
In closing, we are happy to inform you that we have added Tim Jensen to the
Emerging Market team as a portfolio manager covering the Asian markets. Tim
will be the point person in New York coordinating investments in the Asian
markets for the global emerging market funds. He will work with our Singapore
based team. Tim has eight years of investment experience and was most recently
a partner at Ardsley. Additionally, Vinod Sethi, Managing Director in charge of
our Indian investment team, has expanded his responsibilities to include
oversight of stock selection in Asia. He will act as the CIO for the team in
Asia and will maintain his responsibility for stock selection in India. Ean Wah
Chin, Managing Director, is now Chairman of the overall investment management
business for Asia ex-Japan.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
/s/ Madhav Dhar
Madhav Dhar
PORTFOLIO MANAGER
/s/ Robert L. Meyer
Robert L. Meyer
PORTFOLIO MANAGER
January 1998
3
<PAGE>
Morgan Stanley Emerging Markets Fund, Inc.
Investment Summary as of December 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
HISTORICAL
INFORMATION
TOTAL RETURN (%)
------------------------------------------------------------------------------------
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 -5.75% -5.75% -0.97% -0.97% -14.42% -14.42%
FIVE YEAR 35.57+ 6.28+ 74.40+ 11.77+ 44.00 6.16
SINCE INCEPTION* 74.96+ 9.49+ 107.86+ 12.59+ 39.73 5.58
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- -------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
[CHART]
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31:
1991* 1992 1993 1994 1995 1996 1997
------ ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share............. $14.71 $16.74 $28.20 $20.30 $14.69 $15.69 $15.52
Market Value Per Share................ $14.25 $18.13 $31.63 $21.50 $15.50 $13.88 $13.06
Premium/(Discount).................... -3.1% 8.3% 12.2% 5.9% 5.5% -11.5% -15.9%
Income Dividends...................... $0.04 $0.01 -- -- -- $0.05 $0.01
Capital Gains Distributions........... -- $0.01 $1.49 $6.50 $1.29 $0.98 $0.01
Fund Total Return (2)................. 4.61% 13.94% 95.22%+ -5.33% -16.30%+ 13.84% -0.97%
Index Total Return (3)................ 3.25% 0.33% 67.52% -0.51% -12.34% 7.84% -14.42%
</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 IFC Global Total Return Composite Index is an unmanaged index of
common stocks of developing countries in Latin America, East and South
Asia, Europe, the Middle East and Africa, including dividends.
* The Fund commenced operations on November 1, 1991.
+ This return does not include the effect of the rights issued in connection
with the Rights Offering.
4
<PAGE>
Morgan Stanley Emerging Markets Fund, Inc.
Portfolio Summary as of December 31, 1997
- --------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Debt Securities 0.3%
Equity Securities 94.0%
Short-Term Investments 5.7%
</TABLE>
- --------------------------------------------------------------------------------
SECTORS (UNAUDITED)
[CHART]
<TABLE>
<S> <C>
Banking 11.1%
Beverages & Tobacco 7.1%
Broadcasting & Publishing 4.0%
Chemicals 4.1%
Energy Equipment & Services 5.4%
Energy Sources 6.0%
Food & Household Products 3.9%
Multi-Industry 4.8%
Other 26.8%
Telecommunications 21.5%
Utilities-Electrical & Gas 5.3%
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[CHART]
<TABLE>
<S> <C>
Brazil 15.0%
India 8.1%
Korea 3.2%
Mexico 11.4%
Other 29.7%
Pakistan 4.5%
Russia 8.5%
South Africa 5.9%
Taiwan 4.0%
Thailand 3.5%
Turkey 6.2%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. Bharat Heavy Electricals Ltd. (India) 5.5%
2. Telebras (Brazil) 4.6
3. CRT (Brazil) 3.1
4. Yapi Ve Kredi Bankasi (Turkey) 3.0
5. FEMSA 'B' (Mexico) 2.8
6. Telmex L ADR (Mexico) 2.6
7. Televisa CPO GDR (Mexico) 2.0
8. Rostelecom (Russia) 1.8
9. Pakistan Telecommunications (Pakistan) 1.8
10. Asustek Computer Inc. (Taiwan) 1.6
-----
28.8%
-----
-----
</TABLE>
* Excludes short-term investments.
5
<PAGE>
FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- ---------------------------------------------------------------------------
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (93.0%)
(Unless otherwise noted)
- ---------------------------------------------------------------------------
ARGENTINA (2.7%)
AUTOMOBILES
CIADEA 1 U.S.$ --@
---------------
ENERGY SOURCES
YPF ADR 50,302 1,719
---------------
TELECOMMUNICATIONS
Nortel ADR 28,685 731
Telecom Argentina ADR 41,722 1,492
Telefonica Argentina ADR 149,065 5,553
---------------
7,776
---------------
9,495
---------------
- ---------------------------------------------------------------------------
BRAZIL (15.0%)
BANKING
Banco Bradesco (Preferred) 138,734,363 1,367
(b)Banco Bradesco (Preferred)
(Rights) 5,931,111 12
(a,b)Banco Nacional (Preferred) 61,598,720 3
Itaubanco (Preferred) 3,557,500 1,913
(a)Unibanco (Preferred) GDR 79,575 2,561
---------------
5,856
---------------
BEVERAGES & TOBACCO
Brahma (Preferred) 7,086,209 4,762
Brahma (Preferred) ADR 27,765 394
---------------
5,156
---------------
CONSTRUCTION & HOUSING
(a)Rossi Residencial GDR 144A 33,840 165
---------------
ENERGY SOURCES
Petrobras (Preferred) 13,320,999 3,115
(a)Petrobras ADR 144A 22,595 540
---------------
3,655
---------------
MERCHANDISING
Lojas Arapua (Preferred) 30,412,000 109
Lojas Arapua (Preferred) ADR 31,540 105
Lojas Renner (Preferred) 14,237,000 447
Pao de Acucar (Preferred) 6,460,000 118
Pao de Acucar (Preferred) ADR 52,360 957
---------------
1,736
---------------
METALS -- NON-FERROUS
CVRD (Preferred) 66,900 1,346
CVRD (Preferred) ADR 42,769 842
---------------
2,188
---------------
TELECOMMUNICATIONS
(a)CRT (Preferred) 'A' 8,689,400 10,706
(a)CRT Receipts 286,847 353
Telebras 11,970,000 1,217
Telebras (Preferred) 39,944,183 4,556
Telebras (Preferred) ADR 90,646 10,555
Telesp (Preferred)
(Rights Attached) 4,185 33
---------------
27,420
---------------
- ---------------------------------------------------------------------------
TEXTILES & APPAREL
Coteminas 2,788,500 U.S.$ 1,000
(a)Coteminas ADR 144A 23,460 389
(a)Encorpar 2,980,000 2
---------------
1,391
---------------
UTILITIES -- ELECTRICAL & GAS
Cemig (Preferred) 83,151,867 3,613
Cemig (Preferred) ADR 22,525 979
Cemig (Preferred) ADR 144A 7,525 323
Light Services de Electricidad 334,349 139
Lightpar 1,086,000 326
---------------
5,380
---------------
52,947
---------------
- ---------------------------------------------------------------------------
CHILE (0.7%)
BEVERAGES & TOBACCO
CCU ADR 36,265 1,065
---------------
MERCHANDISING
Santa Isabel ADR 42,807 749
---------------
UTILITIES -- ELECTRICAL & GAS
Enersis ADR 18,305 531
---------------
2,345
---------------
- ---------------------------------------------------------------------------
CHINA (0.2%)
AUTOMOBILES
Qingling Motors Co. 'H' 562,000 276
---------------
ENERGY SOURCES
Zhenhai Refining & Chemical
Co. Ltd. 'H' 853,000 355
---------------
631
---------------
- ---------------------------------------------------------------------------
COLOMBIA (0.0%)
BANKING
Banco de Colombia 59,937 21
---------------
- ---------------------------------------------------------------------------
EGYPT (2.1%)
BANKING
Commercial International Bank 53,890 1,087
Commercial International Bank GDR 17,300 362
---------------
1,449
---------------
BEVERAGES & TOBACCO
Al-Ahram Beverages Co. GDR 9,600 266
Eastern Tobacco 47,790 1,110
---------------
1,376
---------------
- ---------------------------------------------------------------------------
BUILDING MATERIALS & COMPONENTS
Ameriyah Cement Co. 35,900 839
(a) Helwan Portland Cement 34,500 695
Torah Portland Cement Co. 37,150 851
---------------
2,385
---------------
- ---------------------------------------------------------------------------
CHEMICALS
Egyptian Finance & Industrial 14,850 895
Paints & Chemical Industries 2,000 64
Paints & Chemical Industries GDR 52,500 525
---------------
1,484
---------------
- ---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
<S> <C> <C>
EGYPT (CONTINUED)
FOOD & HOUSEHOLD PRODUCTS
North Cairo Flour Mills 7,910 U.S.$ 225
---------------
MULTI-INDUSTRY
(a)Industrial & Engineering 11,690 196
---------------
REAL ESTATE
(a)Madinet Nasr Housing & Development 7,000 453
---------------
7,568
---------------
- ---------------------------------------------------------------------------
HONG KONG (1.6%)
MULTI-INDUSTRY
China Resources Enterprise Ltd. 282,000 630
Ng Fung Hong Ltd. 825,000 868
Shanghai Industrial Holdings Ltd. 147,000 546
---------------
2,044
---------------
REAL ESTATE
Cheung Kong (Holdings) Ltd. 156,000 1,022
Sun Hung Kai Properties Ltd. 149,000 1,038
---------------
2,060
---------------
TRANSPORTATION - ROAD & RAIL
(a)Zhejiang Expressway Co. Ltd. 'H' 1,956,000 396
---------------
UTILITIES -- ELECTRICAL & GAS
China Light & Power Co. Ltd. 210,000 1,165
---------------
5,665
---------------
- ---------------------------------------------------------------------------
HUNGARY (0.8%)
BANKING
OTP Bank Rt. 11,300 429
---------------
CHEMICALS
BorsodChem Rt. GDR 5,500 198
---------------
ENERGY SOURCES
MOL Magyar Olaj-es Gazipari Rt. GDR 36,100 881
---------------
HEALTH & PERSONAL CARE
Richter Gedeon Rt. 7,400 842
Richter Gedeon Rt. GDR 3,100 325
---------------
1,167
---------------
2,675
---------------
- ---------------------------------------------------------------------------
INDIA (7.8%)
AUTOMOBILES
Apollo Tyres Ltd. 8,675 18
Hero Honda Ltd. 11,518 271
MRF Ltd. 10,000 493
Tata Engineering & Locomotive Ltd. 802 6
---------------
788
---------------
BANKING
State Bank of India Ltd. 196,100 1,216
---------------
BEVERAGES & TOBACCO ITC LTD. 58,732 927
---------------
CHEMICALS
Indian Petro Chemical Corp. Ltd. 380 1
Reliance Industries Ltd. 1,604 6
---------------
7
---------------
- ---------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES
Bharat Heavy Electricals Ltd. 2,123,700 U.S.$ 19,176
---------------
FINANCIAL SERVICES
Housing Development Finance
Corp. Ltd. 29,345 2,304
---------------
MULTI-INDUSTRY
(a,d) Morgan Stanley Growth Fund 6,881,800 1,062
---------------
RECREATION, OTHER CONSUMER GOODS
Tube Investments of India Ltd. 134,500 118
---------------
TEXTILES & APPAREL
Raymond Ltd. 274 --@
---------------
TRANSPORTATION -- ROAD & RAIL
Container Corp. of India Ltd. 196,500 2,105
---------------
27,703
---------------
- ---------------------------------------------------------------------------
INDONESIA (2.4%)
AUTOMOBILES
Astra International Inc. 5,985,180 1,550
---------------
BANKING
(b) Bank International
Indonesia (Foreign) 6,982,133 413
(a,b) Bank International Indonesia
(Foreign) (Warrants),
expiring 1/17/00 329,334 4
(b) Bank Negara Indonesia (Foreign) 3,843,500 367
---------------
784
---------------
BEVERAGES & TOBACCO
Gudang Garam 1,024,260 1,560
HM Sampoerna 565,000 426
---------------
1,986
---------------
COMMERCIAL SERVICES
Citra Marga Nusaphala Persada 312,500 34
---------------
ENERGY SOURCES
(a)Gulf Indonesia Resources Ltd. 8,900 196
---------------
FINANCIAL SERVICES
(a)Putra Surya Multidana 2,168,000 207
---------------
FOOD & HOUSEHOLD PRODUCTS
Daya Guna Samudera 94,461 72
Indofood Sukses Makmur 1,462,500 479
London Sumatra Indonesia 46,300 26
Mayora Indah 2,899,000 250
---------------
827
---------------
FOREST PRODUCTS & PAPER
Barito Pacific Timber 95,800 28
(a) Indah Kait Pulp & Paper 2,953,405 523
(a) Indah Kait Pulp & Paper
(Warrants), expiring 7/11/02 214,152 6
---------------
557
---------------
MINING
Tambang Timah 70,800 76
---------------
MULTI-INDUSTRY
Bimantara Citra 676,240 129
---------------
TELECOMMUNICATIONS
Telekomunikasi Indonesia 3,733,000 1,985
Telekomunikasi Indonesia ADR 12,000 133
---------------
2,118
---------------
8,464
---------------
- ---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
<S> <C> <C>
ISRAEL (2.8%)
BANKING
Bank Hapoalim Ltd. 726,730 U.S.$ 1,744
First International Bank
of Israel '5' 2,299 1,688
---------------
3,432
---------------
ELECTRICAL & ELECTRONICS
Elbit Systems Ltd. 66,365 876
---------------
FOOD & HOUSEHOLD PRODUCTS
Osem Investment Ltd. 29,805 144
Super Sol Ltd. 963,400 2,732
Super Sol Ltd. ADR 111,950 1,582
---------------
4,458
---------------
MULTI-INDUSTRY
Koor Industries Ltd. 10,850 1,202
---------------
9,968
---------------
KOREA (3.2%)
APPLIANCES & HOUSEHOLD DURABLES
Samsung Electronics Co. 100,147 2,269
(a) Samsung Electronics Co.
GDR - New 144A 52,636 747
---------------
3,016
---------------
BANKING
Housing & Commercial Bank, Korea 62,649 422
Housing & Commercial Bank, Korea GDR 112,164 740
---------------
1,162
---------------
FOREST PRODUCTS & PAPER
Hansol Paper Co. 57,010 251
---------------
METALS - STEEL
(b) Pohang Iron & Steel Company Ltd. 118,340 3,301
---------------
MULTI-INDUSTRY
(a) The Korea Fund, Inc. 96,100 637
---------------
TELECOMMUNICATIONS
LG Information & Communication Ltd. 88,110 2,469
(b) SK Telecom Co. Ltd. 1,770 534
---------------
3,003
---------------
11,370
---------------
- ---------------------------------------------------------------------------
MALAYSIA (2.9%)
AUTOMOBILES
Perusahaan Otomobil Nasional Bhd 96,000 94
---------------
BANKING
Commerce Asset Holding Bhd 309,000 148
(a) Commerce Asset Holding Bhd
(Warrants), expiring 3/16/02 63,500 9
RHB Capital Bhd 476,000 230
Malayan Banking Bhd 288,000 837
---------------
1,224
---------------
BEVERAGES & TOBACCO
Carlsberg Brewery Malaysia Bhd 40,000 129
R.J. Reynolds Bhd 115,000 188
Rothmans of Pall Mall Bhd 118,200 919
---------------
1,236
---------------
- ---------------------------------------------------------------------------
BROADCASTING & PUBLISHING
New Straits Times Press Bhd 58,000 U.S.$ 72
---------------
ENERGY SOURCES
Petronas Gas Bhd 354,000 805
---------------
FINANCIAL SERVICES
AMMB Holdings Bhd 131,400 86
Rashid Hussain Bhd 116,000 90
(a) Rashid Hussain Bhd (Warrants),
expiring 3/25/02 17,285 3
---------------
179
---------------
FOOD & HOUSEHOLD PRODUCTS
Nestle Bhd 86,000 398
---------------
INDUSTRIAL COMPONENTS
Malaysian Pacific Industries Bhd 36,000 87
---------------
LEISURE & TOURISM
Genting Bhd 267,400 670
Magnum Corp. Bhd 312,000 188
Resorts World Bhd 110,000 185
---------------
1,043
---------------
MACHINERY & ENGINEERING
United Engineers Bhd 400,000 333
---------------
Miscellaneous Materials
& Commodities Golden Hope
Plantations Bhd 453,000 524
IOI Corporation Bhd 232,000 75
Kuala Lumpur Kepong Bhd 281,000 603
---------------
1,202
---------------
MULTI-INDUSTRY
Berjaya Sport Toto Bhd 29,000 74
Malayan United Industries Bhd 292,000 51
Sime Darby Bhd 603,000 580
Technology Resources Industries Bhd 192,000 114
---------------
819
---------------
TELECOMMUNICATIONS
Telekom Malaysia Bhd 479,000 1,416
---------------
TRANSPORTATION - SHIPPING
Malaysian International
Shipping Bhd (Foreign) 113,000 166
---------------
UTILITIES - ELECTRICAL & GAS
Tenaga Nasional Bhd 628,000 1,340
---------------
10,414
---------------
- ---------------------------------------------------------------------------
MAURITIUS (0.5%)
BANKING
State Bank of Mauritius Ltd. 3,050,000 1,744
---------------
- ---------------------------------------------------------------------------
MEXICO (11.4%)
BANKING
(a) Banacci 'L' 545,447 1,408
(a) Bancomer 'B' ADR 144A 85,048 1,100
---------------
2,508
---------------
- ---------------------------------------------------------------------------
BEVERAGES & TOBACCO
FEMSA 'B' 1,223,925 9,840
---------------
- ---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
<S> <C> <C>
MEXICO (CONTINUED)
BROADCASTING & PUBLISHING
(a) Televisa CPO GDR 180,315 U.S.$ 6,976
(a) TV Azteca ADR 96,570 2,179
---------------
9,155
---------------
BUILDING MATERIALS & COMPONENTS
Apasco 101,703 700
(a) Cemex CPO 349,666 1,584
(a) Cemex CPO ADR 135,864 1,223
---------------
3,507
---------------
FOOD & HOUSEHOLD PRODUCTS
Kimberly Clark de Mexico 'A' 1,076,471 5,115
---------------
MERCHANDISING
Cifra 'C' 273,750 615
Cifra 'V' ADR 5,874 144
Cifra 'V' 68,360 168
---------------
927
---------------
MULTI-INDUSTRY
(a) Sidek 'A' 1,000 --@
---------------
TELECOMMUNICATIONS
Telmex 'L' ADR 164,992 9,250
---------------
40,302
- ---------------------------------------------------------------------------
PAKISTAN (4.5%)
CHEMICALS
Engro Chemicals Ltd. 240,700 624
Fauji Fertilizer Co. Ltd. 1,589,400 3,043
---------------
3,667
---------------
ENERGY SOURCES
Pakistan State Oil Co., Ltd. 388,199 3,304
---------------
TELECOMMUNICATIONS
Pakistan Telecommunications Corp. 7,595,700 5,739
Pakistan Telecommunications
Corp. GDR 7,650 528
---------------
6,267
---------------
UTILITIES - ELECTRICAL & GAS
(a) Hub Power Co. 1,530,600 1,993
(a) Karachi Electric Supply Corp. 140,200 76
(a) Sui Northern Gas Co. 771,300 471
---------------
2,540
---------------
15,778
---------------
- ---------------------------------------------------------------------------
PERU (0.6%)
TELECOMMUNICATIONS
Tel Peru 'B' ADR 90,550 2,111
---------------
- ---------------------------------------------------------------------------
PHILIPPINES (1.8%)
BANKING
Metropolitan Bank & Trust Co. 33,360 225
(a) Philippine National Bank 16,410 36
---------------
261
---------------
BEVERAGES & TOBACCO
San Miguel Corp. 'B' 716,960 876
---------------
ENERGY SOURCES
Petron Corp. 477,190 40
- ---------------------------------------------------------------------------
MULTI-INDUSTRY
Ayala Corp. 3,241,400 U.S.$ 1,260
Metro Pacific Corp. 347,640 10
---------------
1,270
---------------
REAL ESTATE
Ayala Land, Inc. 'B' 389,760 154
C&P Homes, Inc. 653,040 38
(a) Filinvest Land Inc. 531,480 21
SM Prime Holdings, Inc. 'B' 4,491,380 665
---------------
878
---------------
TELECOMMUNICATIONS
Philippine Long Distance
Telephone Co. 82,990 1,803
Philippine Long Distance
Telephone Co. ADR 6,000 135
---------------
1,938
---------------
- ---------------------------------------------------------------------------
UTILITIES - ELECTRICAL & GAS
Manila Electric Co. 'B' 386,410 1,279
---------------
6,542
- ---------------------------------------------------------------------------
POLAND (2.5%)
BANKING
Bank Rozwoju Eksportu 22,750 471
Bank Slaski 6,900 382
(a) BIG Bank Gdanski GDR 84,000 1,302
---------------
2,155
---------------
CHEMICALS
(a,c) Eastbridge 33,600 2,259
(a) Polifarb Cieszyn - Wroclaw 157,403 746
(a,b) Polifarb Cieszyn - Wroclaw (Rights) 9,805 14
---------------
3,019
---------------
CONSTRUCTION & HOUSING
(a) Exbud 16,500 154
---------------
FOOD & HOUSEHOLD PRODUCTS
(a) Agros Holding 'C' 60,880 1,261
---------------
INDUSTRIAL COMPONENTS
Debica 31,500 769
---------------
MULTI-INDUSTRY
(a) International UNP Holdings Ltd. 2,280,000 191
---------------
WHOLESALE & INTERNATIONAL TRADE
Elektrim 140,500 1,359
---------------
8,908
---------------
- ---------------------------------------------------------------------------
RUSSIA (8.5%)
BROADCASTING & PUBLISHING
(a,b) Storyfirst Communications,
Inc. 'C' (Preferred) 270 386
(a,b) Storyfirst Communications,
Inc. 'D' (Preferred) 720 1,030
(a,b) Storyfirst Communications,
Inc. 'E' (Preferred) 780 1,115
(a,b) Storyfirst Communications,
Inc. 'F' (Preferred) 139 397
(a,b) Storyfirst Communications,
Inc., First Section,
Tranche I (Convertible) 594 850
- ---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
<S> <C> <C>
RUSSIA (CONTINUED)
BROADCASTING & PUBLISHING (CONTINUED)
(a,b) Storyfirst Communications,
Inc., Second Section,
Tranche II (Convertible) 146 U.S.$ 209
---------------
(a,b) Storyfirst Communications,
Inc., Tranche IV (Convertible) 236 337
---------------
4,324
---------------
ENERGY SOURCES
AO Tatneft ADR 6,667 947
Lukoil Holdings 99,933 2,308
Lukoil Holdings (Preferred) 60,000 939
Lukoil Holdings ADR 144A 18,043 1,665
(a) Surgutneftegaz (Preferred) 116,667 1,193
---------------
7,052
---------------
FOREST PRODUCTS & PAPER
(b) Alliance Cellulose Ltd. 'B' 156,075 621
---------------
MERCHANDISING
(a) TSUM 2,828,000 919
---------------
TELECOMMUNICATIONS
(b) Global Tele-Systems Ltd. 214,285 4,286
(a) Rostelecom 1,778,500 6,314
(a,b) Russian Telecom Development Corp. 176,000 836
---------------
11,436
---------------
UTILITIES - ELECTRICAL & GAS
Irkutskenergo 3,460,000 682
Mosenergo 1,150,000 1,459
Unified Energy Systems 12,077,500 3,623
---------------
5,764
---------------
30,116
---------------
- ---------------------------------------------------------------------------
SOUTH AFRICA (5.9%)
BANKING
NBS Boland Group Ltd. 567,360 1,405
---------------
CHEMICALS
SASOL Ltd. 547,500 5,726
(a) SASOL Ltd. 8.50%
(Convertible Preferred) 3,200 32
---------------
5,758
---------------
ELECTRICAL & ELECTRONICS
Persetel Holdings Ltd. 115,892 636
---------------
FINANCIAL SERVICES
Coronation Holdings Ltd. 9,600 145
(a,b) Coronation Holdings Ltd.
'N' (Rights) 4,925 --
Coronation Holdings Ltd. 'N' - New 19,700 287
Orion Selections Holdings Ltd. 452,000 1,161
Orion Selections Ltd. 306,000 660
---------------
2,253
---------------
FOOD & HOUSEHOLD PRODUCTS
Foodcorp Ltd. 135,027 693
Illovo Sugar Ltd. 386,900 660
---------------
1,353
INSURANCE
Forbes Group Ltd. 238,200 441
---------------
- ---------------------------------------------------------------------------
MULTI-INDUSTRY
Barlow Ltd. 144,700 U.S.$ 1,228
Bidvest Group Ltd. 41,533 346
Malbak Ltd. 488,475 477
(d) Morgan Stanley Africa Investment
Fund, Inc. 141,445 1,627
(a) New Africa Investments Ltd.
(Preferred) 'N' 492,100 470
Rembrandt Group Ltd. 379,900 2,771
---------------
6,919
---------------
RETAIL - MAJOR DEPARTMENT STORES
Ellerine Holdings Ltd. 249,200 1,608
(a) Protea Furnishers Ltd. 1,029,200 512
---------------
2,120
---------------
20,885
---------------
- ---------------------------------------------------------------------------
TAIWAN (4.0%)
CONSTRUCTION & HOUSING
Cathay Construction Corp. 689,000 786
---------------
ELECTRONIC COMPONENTS & INSTRUMENTS
(a) Asustek Computer Inc. 367,000 5,816
(a) Compal Electronics 500,618 1,458
(a) Hon Hai Precision Industry 397,000 2,008
Siliconware Precision
Industries Co. 703,000 1,659
---------------
10,941
---------------
TEXTILES & APPAREL
Far East Textile 2,252,866 2,444
---------------
14,171
---------------
- ---------------------------------------------------------------------------
THAILAND (3.5%)
AUTOMOBILES
(a,b) Thai Engine Manufacturing
Public Co. Ltd. (Foreign) 63,100 106
---------------
BANKING
Bangkok Bank Ltd. (Foreign) 165,100 411
Bank of Ayudhya Public Co.
Ltd. (Foreign) 8,600 4
Siam Commercial Bank Co. Ltd.
(Foreign) 1,121,333 1,281
Thai Farmers Bank Ltd. (Foreign) 123,200 224
---------------
1,920
---------------
BROADCASTING & PUBLISHING
(b) Grammy Entertainment Public Co.
Ltd. (Foreign) 167,500 731
---------------
BUILDING MATERIALS & COMPONENTS
Siam Cement Co. Ltd. (Foreign) 23,600 186
Siam City Cement Public Co.
Ltd. (Foreign) 27,800 29
---------------
215
---------------
CHEMICALS
(b) National Petrochemical Ltd.
(Foreign) 622,000 329
(a) Thai Petrochemical Industry
Public Co. Ltd. (Foreign)(Rights) 144,100 14
---------------
343
---------------
- ---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
<S> <C> <C>
THAILAND (CONTINUED)
ELECTRICAL & ELECTRONICS
Shinawatra Computer Co.
Ltd. (Foreign) 260,900 U.S.$ 867
---------------
ELECTRONIC COMPONENTS & INSTRUMENTS
(a,b) Delta Electronics Public
Co. Ltd. (Foreign) 97,800 804
---------------
ENERGY SOURCES
(b) Lanna Lignite Co. Ltd. (Foreign) 66,400 135
PTT Exploration & Production
Public Co. Ltd. (Foreign) 255,700 2,942
---------------
3,077
---------------
FINANCIAL SERVICES
Industrial Finance Corp. (Foreign) 884,800 136
National Finance & Securities Co.
Ltd. (Foreign) (Rights Attached) 618,000 114
---------------
250
---------------
Forest Products & Paper
(a,b) Advance Agro Public Co.
Ltd. (Foreign) 156,800 131
---------------
REAL ESTATE
(b) Central Pattana Co. Ltd. (Foreign) 200,900 63
---------------
TELECOMMUNICATIONS
Advanced Information Services
Co. Ltd. (Foreign) 306,300 1,463
(b) BEC World plc (Foreign) 72,100 287
(a) TelecomAsia Corp. Ltd. (Foreign) 424,500 81
United Communications Industry
Ltd. (Foreign) 453,200 184
---------------
2,015
---------------
TRANSPORTATION - AIRLINES
(b) Thai Airways International
Public Co., Ltd. (Foreign) 440,000 475
---------------
TRANSPORTATION - ROAD & RAIL
(a,b) Bangkok Expressway Public
Co. Ltd. (Foreign) 1,869,300 1,039
---------------
UTILITIES - ELECTRICAL & GAS
(a) Electricity Generating
Public Co. Ltd. (Foreign) 111,000 207
---------------
12,243
---------------
- ---------------------------------------------------------------------------
TURKEY (6.2%)
APPLIANCES & HOUSEHOLD DURABLES
Aksa Arcelik 5,437,500 512
---------------
BANKING
Turkiye Garanti Bankasi 34,843,885 1,723
Yapi Ve Kredi Bankasi 282,201,850 10,757
---------------
12,480
---------------
BEVERAGES & TOBACCO
(a,b) Efes Sinai Yatirim 30,236,087 584
Ege Biracilik Ve Malt Sanayii 21,112,000 1,910
Erciyas Biracilik 181,000 25
---------------
2,519
---------------
ELECTRICAL & ELECTRONICS
Vestel Elektronik Sanayi Ve
Ticaret AS 13,284,000 1,090
---------------
- ---------------------------------------------------------------------------
MERCHANDISING
Migros Turk TAS
1,122,450 U.S.$ 1,016
---------------
METALS - STEEL
Eregli Demir Ve Celik
Fabrikalari TAS 29,044,000 4,484
---------------
22,101
---------------
- ---------------------------------------------------------------------------
UNITED KINGDOM (0.3%)
BANKING
HSBC Holdings plc 46,200 1,139
---------------
- ---------------------------------------------------------------------------
VENEZUELA (0.5%)
TELECOMMUNICATIONS
CANTV ADR 34,090 1,419
---------------
UTILITIES - ELECTRICAL & GAS
Electricidad de Caracas 320,329 384
---------------
1,803
---------------
- ---------------------------------------------------------------------------
ZIMBABWE (0.6%)
MERCHANDISING
Meikles Africa Ltd. 342,000 308
---------------
MULTI-INDUSTRY
Delta Corp. 911,878 620
Trans Zambezi Industries
Ltd. ADR 144A 4,000,000 1,274
---------------
1,894
---------------
2,202
---------------
- ---------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost U.S. $351,290) 329,311
---------------
- ---------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ------------------------------------------------------------------------------
DEBT INSTRUMENTS (0.3%)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
INDIA (0.3%)
Chemicals
(b) Supreme Petrochem Ltd. 2.25%, 4/22/02 INR 333 103
----------
METALS - STEEL
(b) Shri Ishar Alloy Steels Ltd.
15.00%, 4/21/01 581 216
----------
Multi-Industry
(b,e) DCM Shriram Industries Ltd. 9.90%,
2/21/02 335 430
(b) DCM Shriram Industries Ltd.
(Convertible) 7.50%, 2/21/02 330 335
----------
765
----------
- ------------------------------------------------------------------------------
TOTAL DEBT INSTRUMENTS
(Cost U.S. $1,655) 1,084
----------
- ------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (3.7%)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
UNITED STATES (3.7%)
REPURCHASE AGREEMENT
Chase Securities, Inc., 5.95%,
dated 12/31/97, due 1/2/98,
to be repurchased at U.S.$13,264,
collateralized by U.S.$13,395,
United States Treasury Notes,
5.625%, due 2/15/06, valued at
U.S.$13,533
(Cost U.S. $13,260) U.S.$ 13,260 U.S.$ 13,260
------------
- -------------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT
WITH CUSTODIAN (1.9%)
Argentine Peso ARP 6 6
Brazil Real BRL 289 259
Colombian Peso COP 52,067 40
Egyptian Pound EGP 572 168
Hong Kong Dollar HKD 134 17
Hungarian Forint HUF 67,913 333
Indian Rupee INR 113,478 2,895
Malaysian Ringgit MYR 12 3
Mexican Peso MXP 6,091 756
Pakistani Rupee PKR 28,671 652
Peruvian New Sol PSS 4 1
Polish Zloty PLZ 224 63
South African Rand ZAR 2,963 609
South Korean Won KRW 259,804 153
Taiwan Dollar TWD 3,936 121
Thai Baht THB 22,910 476
Turkish Lira TRL 22,759,503 110
Venezuelan Bolivar VEB 1,584 3
------------
(Cost U.S. $6,714) 6,665
------------
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.9%)
(Cost U.S. $372,919) 350,320
------------
- -------------------------------------------------------------------------------
OTHER ASSETS (3.5%)
Cash U.S.$ 1,938
Receivable for Investments Sold 9,399
Dividends Receivable 771
Interest Receivable 39
Foreign Withholding Tax Reclaim Receivable 23
Other Assets 37 U.S.$ 12,207
---------------- ------------
- -------------------------------------------------------------------------------
<CAPTION>
AMOUNT AMOUNT
(000) (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES (-2.4%)
Deferred Country Taxes U.S.$ (1,558)
Payable For:
Investments Purchased U.S.$ (5,975)
Investment Advisory Fees (364)
Custodian Fees (209)
Professional Fees (96)
Shareholder Reporting Expenses (71)
Director's Fees and Expenses (57)
Administrative Fees (41)
Other Liabilities (19) (6,832)
---------------- ------------
- -------------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 22,824,344, issued
and outstanding U.S.$0.01 par
value shares (100,000,000 shares
authorized) U.S.$354,137
------------
------------
- -------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 15.52
------------
------------
- -------------------------------------------------------------------------------
AT DECEMBER 31, 1997, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------
Common Stock U.S.$ 23
Capital Surplus 342,234
Undistributed Net Investment Income 576
Accumulated Net Realized Gain 35,969
Unrealized Depreciation on Investments
and Foreign Currency Translations (24,665)
- -------------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$354,137
------------
------------
- -------------------------------------------------------------------------------
</TABLE>
(a) - Non-income producing
(b) - Security valued at fair value - See note A-1 to financial
statements.
(c) - Security fair valued at cost - See note A-1 to financial
statements.
(d) - The Fund is advised by an affiliate.
(e) - Variable/floating rate security - rate disclosed is as of
December 31, 1997.
@ - Amount is less than U.S.$500.
144A - Certain conditions for public sale may exist.
ADR - American Depositary Receipt
GDR - Global Depositary Receipt
GDS - Global Depositary Shares
NOTE: Prior governmental approval for foreign investments may be
required under certain circumstances in some emerging markets,
and foreign ownership limitations may also be imposed by the
charters of individual companies in emerging markets. As a
result, an additional class of shares designated as "foreign" may
be created, and offered for investment. The "local" and
"foreign" shares' market values may vary.
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1997, the Fund is obligated to deliver or is to receive foreign currency
in exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN NET
TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN
(000) (000) DATE (000) (000) (000)
- ------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ZAR 725 U.S.$ 149 01/02/98 U.S.$ 149 U.S.$ 149 U.S.$ -
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
DECEMBER 31, 1997 EXCHANGE RATES:
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ARP Argentine Peso 1.000 = U.S.$1.00
BRL Brazilian Real 1.116 = U.S.$1.00
CLP Chilean Peso 438.500 = U.S.$1.00
COP Colombian Peso 1,296.650 = U.S.$1.00
EGP Egyptian Pound 3.403 = U.S.$1.00
GBP British Pounds 0.609 = U.S.$1.00
HKD Hong Kong Dollar 7.749 = U.S.$1.00
HUF Hungarian Forint 203.955 = U.S.$1.00
IDR Indonesian Rupiah 5,500.000 = U.S.$1.00
INR Indian Repee 39.200 = U.S.$1.00
ISS Israeli Shekel 3.537 = U.S.$1.00
KRW South Korean Won 1,695.000 = U.S.$1.00
MUR Mauritius Rupee 22.205 = U.S.$1.00
MXP Mexican Peso 8.060 = U.S.$1.00
MYR Malaysian Ringgit 3.890 = U.S.$1.00
PHP Philippines Peso 40.500 = U.S.$1.00
PKR Pakistani Rupee 44.006 = U.S.$1.00
PLZ Polish Zloty 3.525 = U.S.$1.00
PSS Peruvian New Sol 2.726 = U.S.$1.00
THB Thai Baht 48.150 = U.S.$1.00
TRL Turkish Lira 207,250.000 = U.S.$1.00
TWD Taiwan Dollar 32.625 = U.S.$1.00
VEB Venezuelan Bolivar 504.300 = U.S.$1.00
ZAR South African Rand 4.867 = U.S.$1.00
ZWD Zimbabwe Dollar 18.375 = U.S.$1.00
- --------------------------------------------------------------------------------
SUMMARY OF TOTAL INVESTMENTS BY COUNTRY -DECEMBER 31, 1997 (Unaudited)
<CAPTION>
PERCENT
VALUE OF NET
COUNTRY (000) ASSETS
- -------------------------------------------------------------------------------
<S> <C> <C>
Argentina U.S.$ 9,495 2.7%
Brazil 52,947 15.0
Chile 2,345 0.7
China 631 0.2
Colombia 21 0.0
Egypt 7,568 2.1
Hong Kong 5,665 1.6
Hungary 2,675 0.8
India0 28,787 8.1
Indonesia 8,464 2.4
Israel 9,968 2.8
Korea 11,370 3.2
Malaysia 10,414 2.9
Mauritius 1,744 0.5
Mexico 40,302 11.4
Pakistan 15,778 4.5
Peru 2,111 0.6
Philippines 6,542 1.8
Poland 8,908 2.5
Russia 30,116 8.5
South Africa 20,885 5.9
Taiwan 14,171 4.0
Thailand 12,243 3.5
Turkey 22,101 6.2
United Kingdom 1,139 0.3
United States (short-term investments) 13,260 3.7
Venezuela 1,803 0.5
Zimbabwe 2,202 0.6
Other 6,665 1.9
------------ -----
U.S.$350,320 98.9%
------------ -----
------------ -----
<CAPTION>
SUMMARY OF TOTAL INVESTMENTS BY INDUSTRY
CLASSIFICATION - DECEMBER 31, 1997 (Unaudited)
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
- -------------------------------------------------------------------------------
<S> <C> <C>
Appliances & Household Durables U.S.$ 3,528 1.0%
Automobiles 2,814 0.8
Banking 39,183 11.1
Beverages & Tobacco 24,981 7.1
Broadcasting & Publishing 14,281 4.0
Building Materials & Components 6,107 1.7
Chemicals 14,581 4.1
Commercial Services 34 0.0
Construction & Housing 1,105 0.3
Electrical & Electronics 3,469 1.1
Electronic Components & Instruments 11,745 3.3
Energy Equipment & Services 19,176 5.4
Energy Sources 21,084 6.0
Financial Services 5,194 1.5
Food & Household Products 13,638 3.9
Forest Products & Paper 1,560 0.4
Health & Personal Care 1,167 0.3
Industrial Components 855 0.2
Insurance 440 0.1
Leisure & Tourism 1,043 0.3
Machinery & Engineering 333 0.1
Merchandising 5,655 1.6
Metals - Non-Ferrous 2,188 0.6
Metals - Steel 8,001 2.3
Mining 76 0.0
Miscellaneous Materials & Commodities 1,202 0.3
Multi-Industry 17,127 4.8
Real Estate 3,454 1.0
Recreation, Other Consumer Goods 118 0.0
Retail - Major Department Stores 2,120 0.6
Telecommunications 76,170 21.5
Textiles & Apparel 3,835 1.1
Transportation - Airlines 475 0.1
Transportation - Road & Rail 3,540 1.0
Transportation - Shipping 166 0.0
Utilities - Electrical & Gas 18,591 5.3
Wholesale & International Trade 1,359 0.4
Other 19,925 5.6
------------ -----
U.S.$350,320 98.9%
------------ -----
------------ -----
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
STATEMENT OF OPERATIONS (000)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Income
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 8,325
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 441
Less: Foreign Taxes Withheld . . . . . . . . . . . . . . . . . . . . . . (443)
- -----------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,323
- -----------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . 5,235
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,365
Administrative Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . 471
Professional Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
Shareholder Reporting Expenses . . . . . . . . . . . . . . . . . . . . . 132
Country Tax Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . 59
Transfer Agent Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
- -----------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,702
- -----------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . 621
- -----------------------------------------------------------------------------------------------------------
Net Realized Gain (Loss)
Investment Securities Sold . . . . . . . . . . . . . . . . . . . . . . . 40,354
Foreign Currency Transactions. . . . . . . . . . . . . . . . . . . . . . 850
- -----------------------------------------------------------------------------------------------------------
Net Realized Gain . . . . . . . . . . . . . . . . . . . . . . . . . . 41,204
- -----------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation
Depreciation on Investments. . . . . . . . . . . . . . . . . . . . . . . (44,186)
Depreciation on Foreign Currency Translations. . . . . . . . . . . . . . (1,264)
- -----------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation . . . . . . . . . . . . (45,450)
- -----------------------------------------------------------------------------------------------------------
Total Net Realized Gain and Change in Unrealized Appreciation/Depreciation (4,246)
- -----------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting from Operations . . . . . . . . . . U.S.$ (3,625)
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
<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. . . . . . . . . . . . . . . . U.S.$ 621 U.S.$ 2,179
Net Realized Gain. . . . . . . . . . . . . . . . . . 41,204 14,808
Change in Unrealized Appreciation/Depreciation . . . (45,450) 29,076
- -----------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations (3,625) 46,063
- -----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income. . . . . . . . . . . . . . . . (220) (23)
In Excess of Net Investment Income . . . . . . . . . - (1,137)
Net Realized Gain. . . . . . . . . . . . . . . . . . (244) (19,211)
In Excess of Net Realized Gain . . . . . . . . . . . - (3,081)
- -----------------------------------------------------------------------------------------------------------
Total Distributions. . . . . . . . . . . . . . . . . (464) (23,452)
- -----------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Reinvestment of Distributions (29,974 and 134,572
shares, respectively). . . . . . . . . . . . . . . 475 2,261
- -----------------------------------------------------------------------------------------------------------
Total Increase (Decrease). . . . . . . . . . . . . . (3,614) 24,872
NET ASSETS:
Beginning of Period. . . . . . . . . . . . . . . . . 357,751 332,879
- -----------------------------------------------------------------------------------------------------------
End of Period (including undistributed (distributions
in excess of) net investment income of U.S.$576 and
U.S.$(1,137), respectively). . . . . . . . . . . . U.S.$ 354,137 U.S.$ 357,751
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The accomopanying notes are an integral part of the financial statements.
14
<PAGE>
FINANCIAL HIIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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.$ 15.69 U.S.$ 14.69 U.S.$ 20.30 U.S.$ 28.20 U.S.$ 16.74
- ------------------------------------------------------------------------------------------------------------------------------
Offering Costs. . . . . . . . . . . . . . . . - - (0.03) (0.02) (0.03)
- ------------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss). . . . . . . . . 0.03 0.10 0.06 (0.12) -
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . (0.18) 1.92 (3.14) (1.30) 13.96
- ------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations . . . . (0.15) 2.02 (3.08) (1.42) 13.96
- ------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income. . . . . . . . . . . (0.01) - - - -
In Excess of Net Investment Income . . . . - (0.05) - - -
Net Realized Gain. . . . . . . . . . . . . (0.01) (0.84) (1.29) (6.50) (1.04)
In Excess of Net Realized Gain . . . . . . - (0.14) - - (0.45)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions. . . . . . . . . . . (0.02) (1.03) (1.29) (6.50) (1.49)
- ------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Asset Value from
Capital Share Transaction . . . . . . . . . - 0.01* (1.21)+++ 0.04++ (0.98)+
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD. . . . . . . . U.S.$ 15.52 U.S.$ 15.69 U.S.$ 14.69 U.S.$ 20.30 U.S.$ 28.20
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD . . . . U.S.$ 13.06 U.S.$ 13.88 U.S.$ 15.50 U.S.$ 21.50 U.S.$ 31.63
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value . . . . . . . . . . . . . . . (5.75)% (4.59)% (16.61)%++++ (10.61)% 100.96%++++
Net Asset Value (1). . . . . . . . . . . . (0.97)% 13.84% (16.30)%++++ (5.33)% 95.22%++++
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS) . . . . U.S.$354,137 U.S.$357,751 U.S.$ 332,879 U.S.$ 321,729 U.S.$ 411,975
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets . . . 1.84% 1.87% 1.86% 1.75% 1.85%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . 0.15% 0.58% 0.30% (0.48)% (0.03)%
Portfolio Turnover Rate. . . . . . . . . . 90% 67% 61% 52% 68%
Average Commission Rate (2):
Per Share. . . . . . . . . . . . . . . . . U.S.$ 0.0016 U.S.$ 0.0006 N/A N/A N/A
As a Percentage of Trade Amount. . . . . . 0.39% 0.42% N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Increase (decrease) per share due to reinvestment of distributions.
+ Consists of $0.03 per share increase from reinvestment of
distributions and $1.01 decrease per share due to Common Stock issued
through Rights Offering during the year.
++ Consists of $0.02 per share increase from reinvestment of
distributions and $0.02 increase per share due to Common Stock
Offering during the year.
+++ Increase (decrease) per share due to Common Stock issued through
Rights Offering during the year.
++++ This return does not include the effect of the rights issued in
connection with the Rights Offering.
(1) Total investment return based on net asset value per share reflects
the effects of changes in net asset value on the performance of the
Fund during each period, and assumes dividends and distributions, if
any, were reinvested. 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.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
The Morgan Stanley Emerging Markets Fund, Inc. (the "Fund") was
incorporated on August 27, 1991 and is registered as a non-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 investments primarily in equity securities.
A. The following significant accounting policies, which are in conformity
with generally accepted accounting principles for investment companies, are
consistently followed by the Fund in the preparation of its financial
statements. Generally accepted accounting principles may require management
to make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results may differ from those
estimates.
1. SECURITY VALUATION: In valuing the Fund's assets, all listed
securities for which market quotations are readily available are
valued at the last 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. At
December 31, 1997, securities valued at $22,742,000 representing 6.4%
of net assets have been fair valued. The amounts realized upon
disposition may differ from the assigned valuations and such
differences could be material.
2. TAXES: It is the Fund's intention to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for U.S. Federal income taxes is required in
the financial statements.
The Fund may be subject to taxes imposed by countries in which it
invests. Such taxes are generally based on income and/or capital gains
earned or repatriated. Taxes are accrued and applied to net investment
income, net realized gains and net unrealized appreciation as such
income and/or gains are earned.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the
underlying securities, with a market value at least equal to the
amount of the repurchase transaction, including principal and accrued
interest. To the extent that any repurchase transaction exceeds one
business day, the value of the collateral is marked-to-market on a
daily basis to determine the adequacy of the collateral. In the event
of default on the obligation to repurchase, the Fund has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty
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. Foreign currency amounts are translated
into U.S. dollars at the mean of the bid and asked prices of such
currencies against U.S. dollars last quoted by a major bank as
follows:
- investments, other assets and liabilities at the prevailing rates
of exchange on the valuation date;
- investment transactions and investment income at the prevailing
rates of exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign
exchange rates and market values at the close of the period, the Fund
does not isolate that portion of the results of operations arising as
a result of changes in the foreign exchange rates from the
fluctuations arising from changes in the market prices of the
securities held at period end. Similarly, the Fund does not isolate
the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of securities sold during
the period. Accordingly, realized and unrealized foreign currency
gains (losses) are included in the reported net realized and
unrealized gains (losses) on investment transactions and balances.
Net realized gains (losses) on foreign currency transactions represent
net foreign exchange gains (losses) from sales and maturities of
foreign currency exchange contracts, disposition of foreign
currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference
between the amount of investment income and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent amounts
actually received or paid. Net unrealized currency gains (losses) from
valuing foreign currency denominated assets and liabilities at period
end exchange rates are reflected as a component of unrealized
appreciation (depreciation) on investments and foreign
16
<PAGE>
currency translations in the Statement of Net Assets. The change in
net unrealized currency gains (losses) for the period is reflected in
the Statement of Operations.
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 foreign currency exchange
contract is an agreement between two parties to buy or sell currency
at a set price on a future date. The market value of the contract will
fluctuate with changes in currency exchange rates. The contract is
marked-to-market daily and the change in market value is recorded by
the Fund as unrealized gain or loss. The Fund records realized gains
or losses when the contract is closed equal to the difference between
the value of the contract at the time it was opened and the value at
the time it was closed. Risk may arise upon entering into these
contracts from the potential inability of counterparties to meet the
terms of their contracts and is generally limited to the amount of
unrealized gain on the contracts, if any, at the date of default.
Risks may also arise from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar.
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
restructuring involves the deposit with or purchase
17
<PAGE>
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-date (except certain
dividends which may be recorded as soon as the Fund is informed of
such dividends) 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, gains on certain
securities of corporations designated as "passive foreign investment
companies" and the timing of the recognition of gains or losses on
securities.
Permanent book and tax basis differences relating to shareholder
distributions may result in reclassifications to undistributed net
investment income (loss), accumulated net realized gain (loss) and
capital surplus.
Adjustments for permanent book-tax differences, if any, are not
reflected in ending undistributed net investment income (loss) for the
purpose of calculating net investment income (loss) per share in the
financial highlights.
B. Morgan Stanley Asset Management Inc. (the "Adviser") provides investment
advisory services to the Fund under the terms of an Investment Advisory
Agreement (the "Agreement"). Under the Agreement, the Adviser is paid a fee
computed weekly and payable monthly at an annual rate of 1.25% of the Fund's
average weekly net assets.
C. The Chase Manhattan Bank, through its affiliate Chase Global Funds Services
Company (the "Administrator"), provides administrative services to the Fund
under an Administration Agreement. Under the Administration Agreement, the
Administrator is paid a fee computed weekly and payable monthly at an annual
rate of .08% of the Fund's average weekly net assets, plus $65,000 per annum. In
addition, the Fund is charged certain out-of-pocket expenses by the
Administrator. The Chase Manhattan Bank acts as custodian for the Fund's assets
held in the United States.
D. Morgan Stanley Trust Company (the "International Custodian"), an affiliate
of the Adviser, acts as custodian for the Fund's assets held outside the United
States in accordance with a Custody Agreement. Custodian fees are payable
monthly based on assets under custody, investment purchase and sale activity, an
account maintenance fee, plus reimbursement for certain out-of-pocket expenses.
Investment transaction fees vary by country and security type. For the year
ended December 31, 1997, the Fund incurred fees of $989,000 with the
International Custodian, of which $155,000 was payable to the International
Custodian at December 31, 1997. In addition, for the year ended December 31,
1997, the Fund has earned interest income of $10,000 and incurred interest
expense of $104,000, on balances with the International Custodian.
E. During the year ended December 31, 1997, the Fund made purchases and sales
totaling approximately $359,605,000 and $391,038,000, 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. For the year ended December 31, 1997, the Fund incurred
$125,000 as brokerage commissions to Morgan Stanley & Co. Incorporated, an
affiliate of the Adviser. At December 31, 1997, the U.S. Federal income tax cost
basis of securities was $374,644,000 and, accordingly, net unrealized
depreciation for U.S. Federal income tax purposes was $30,989,000 of which
$64,059,000 related to appreciated securities and $95,048,000 related to
depreciated securities. For the year ended December 31, 1997, the Fund intends
to elect to defer to January 1, 1998 for U.S. Federal income tax purposes,
post-October currency losses of $684,000 and post-October capital losses of
$6,086,000.
18
<PAGE>
F. A significant portion of the Fund's net assets consist of securities of
issues located in emerging markets, which are denominated in foreign currencies.
Changes in currency exchange rates will affect the value of and investment
income from such securities. Emerging market securities are often subject to
greater price volatility, limited capitalization and liquidity, and higher rates
of inflation than U.S. securities. In addition, emerging market issues may be
subject to substantial governmental involvement in the economy and greater
social, economic and political uncertainty. Accordingly, the price which the
Fund may realize upon sale of securities in such markets may not be equal to its
value as presented in the financial statements.
G. 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 $48,000 and are included in Payable for Directors' Fees and
Expenses on the Statement of Net Assets.
H. During December 1997, the Board declared a distribution of $0.11 per share,
derived from net investment income and $2.18 per share, derived from net
realized gains, payable on January 9, 1998, to shareholders of record on
December 31, 1997.
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION (UNAUDITED):
For the year ended December 31, 1997, the Fund designates $16,876,000 as
long-term capital gain at the 28% tax bracket and $11,032,000 at the 20% tax
bracket. The Fund also expects to pass through to shareholders foreign tax
credits of approximately $1,041,000. In addition, for the year ended December
31, 1997, gross income derived from sources within foreign countries amounted to
$8,367,000.
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Morgan Stanley Emerging Markets 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
Morgan Stanley Emerging Markets 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
20
<PAGE>
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
each shareholder will be deemed to have elected, unless Boston Equiserve (the
"Plan Agent") is otherwise instructed by the shareholder in writing, to have all
distributions automatically reinvested in Fund shares. Participants in the Plan
have the option of making additional voluntary cash payments to the Plan Agent,
annually, in any amount from $100 to $3,000, for investment in Fund shares.
Dividend and capital gain distributions will be reinvested on the
reinvestment date in full and fractional shares. If the market price per share
equals or exceeds net asset value per share on the reinvestment date, the Fund
will issue shares to participants at net asset value. If net asset value is less
than 95% of the market price on the reinvestment date, shares will be issued at
95% of the market price. If net asset value exceeds the market price on the
reinvestment date, participants will receive shares valued at market price. The
Fund may purchase shares of its Common Stock in the open market in connection
with dividend reinvestment requirements at the discretion of the Board of
Directors. Should the Fund declare a dividend or capital gain distribution
payable only in cash, the Plan Agent will purchase Fund shares for participants
in the open market as agent for the participants.
The Plan Agent's fees for the reinvestment of dividends and distributions
will be paid by the Fund. However, each participant's account will be charged a
pro rata share of brokerage commissions incurred on any open market purchases
effected on such participant's behalf. A participant will also pay brokerage
commissions incurred on purchases made by voluntary cash payments. Although
shareholders in the Plan may receive no cash distributions, participation in the
Plan will not relieve participants of any income tax which may be payable on
such dividends or distributions.
In the case of shareholders, such as banks, brokers or nominees, which hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
shareholder as representing the total amount registered in the shareholder's
name and held for the account of beneficial owners who are participating in the
Plan.
Shareholders who do not wish to have distributions automatically reinvested
should notify the Plan Agent in writing. There is no penalty for
non-participation or withdrawal from the Plan, and shareholders who have
previously withdrawn from the Plan may rejoin at any time. Requests for
additional information or any correspondence concerning the Plan should be
directed to the Plan Agent at:
Morgan Stanley Emerging Markets Fund, Inc.
Boston Equiserve
Dividend Reinvestment Unit
P.O. Box 1681
Boston, MA 02105-1681
1-800-730-6001
21
