<PAGE>
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MORGAN STANLEY
EMERGING MARKETS
FUND, INC.
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ANNUAL REPORT
DECEMBER 31, 1998
MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT INC.
INVESTMENT ADVISER
MORGAN STANLEY
EMERGING MARKETS FUND, INC.
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DIRECTORS AND OFFICERS
Barton M. Biggs
CHAIRMAN OF THE BOARD
OF DIRECTORS
Michael F. Klein
PRESIDENT AND DIRECTOR
Peter J. Chase
DIRECTOR
John W. Croghan
DIRECTOR
David B. Gill
DIRECTOR
Graham E. Jones
DIRECTOR
John A. Levin
DIRECTOR
William G. Morton, Jr.
DIRECTOR
Stefanie V. Chang
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Valerie Y. Lewis
SECRETARY
Joanna M. Haigney
TREASURER
Belinda A. Brady
ASSISTANT TREASURER
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INVESTMENT ADVISER
Morgan Stanley Dean Witter Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
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ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
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CUSTODIANS
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
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SHAREHOLDER SERVICING AGENT
Boston Equiserve
Investor Relations Department
P.O. Box 644
Boston, Massachusetts 02102-0644
(800) 730-6001
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LEGAL COUNSEL
Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
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INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
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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.
<PAGE>
LETTER TO SHAREHOLDERS
- ---------
For the year ended December 31, 1998, the Morgan Stanley Emerging Markets Fund,
Inc. (the "Fund") had a total return, based on net asset value per share, of
- -19.61% compared with -21.09% for the IFC Global Total Return Composite Index
(the "IFC Index") and -25.34% for the Morgan Stanley Capital International
(MSCI) Emerging Markets Free Index (the "MSCI Index"). For the period since
commencement of operations on November 1, 1991 through December 31, 1998 the
Fund's total return, based on net asset value per share, was 67.10% compared
with 12.28% for the IFC Index and 31.25% for the MSCI Index. Beginning with
this report, the Fund's performance will be compared to both the IFC Index and
the MSCI Index. On December 31, 1998, the closing price of the Fund's shares on
the New York Stock Exchange was $8 1/8, representing an 21.3% discount to the
Fund's net asset value per share.
The financial crises of 1998 have left a legacy of lessons for the emerging
markets as well as for the broader global financial markets. Making sense of
all that took place last year is not an easy task. Nevertheless, in the
following few pages we will attempt to review the critical events that took
place in 1998 for the emerging markets, and offer some observations about what
we expect in the year ahead.
While it is true that the currency devaluations of Asia--the visible starting
point of the malaise that still reverberates in the global economy today--took
place in 1997, it was not until 1998 that the full fury of the events unleashed
by those depreciating currencies was felt. Numerous events--both at the global
and at the emerging market level--took place which shook many investors'
understanding of and faith in financial markets, and a recap of a few of the
more momentous ones might be helpful:
GLOBAL
1) The Japanese yen, following the collapse of that country's economy,
collapsed into the mid to high 140s (to the U.S. dollar) seemingly on its
way to the 160s before staging a startling and largely unexplained rally to
approximately the 115 level. As we write, the yen is now at 109.
2) Both the European and U.S. stock markets collapsed from healthy double
digit gains early in the year, dipped into negative territory by the end of
the summer, only to almost completely climb back to their earlier highs by
the end of the year.
3) The Federal Reserve Bank engineered a controversial rescue of a highly
leveraged hedge fund which, remarkably, threatened the health of the
world's financial markets.
4) No fewer than 37 central banks--in an almost unprecedented show of
coordination--executed more than 75 monetary policy easings in the latter
half of 1998 to avert a total meltdown in financial markets.
5) Commodity prices continued their lurching downward spiral as Asian demand
shortfalls further aggravated supply/demand imbalances; oil was
particularly hard hit, as OPEC continued to undergo a secular decline in
influence and the oil industry cartel slowly continued to disintegrate.
EMERGING
1) The Russian currency, economy, and debt markets collapsed as that country
unilaterally announced a de facto debt moratorium and currency devaluation,
singlehandedly triggering a worldwide credit contraction and financial
market panic.
2) Malaysia announced currency controls in a single act of defiance against
market forces that, due to its possible emulation by other governments,
cast a chill throughout emerging markets.
3) Indonesia descended into social and political chaos as riots and mayhem
engulfed that country in the aftermath of its economic crisis, leading to
an eventual departure of longstanding leader Suharto.
4) Brazil stared into the abyss of possible economic destruction in the
aftermath of the Russian meltdown, nearly averting a currency collapse with
the help of Messrs. Greenspan and Rubin.
5) Venezuela, in the throes of a steep recession exacerbated by historically
low oil prices, elected a populist, ex-military/failed coup leader as
President.
6) Broader Asian markets staged a remarkable early-year recovery, collapsed
again and touched new lows, then staged an even more powerful recovery late
in the year led by currency strengthening throughout the region.
As a whole, 1998 was a volatile year that we would prefer not to repeat.
Importantly, though, the year contained significant bright spots. The chief
positives came from the phenomenal stabilization and recovery of Asian financial
markets toward the latter part of the year, and the continued fiscal discipline
exhibited by the peripheral European markets striving to converge with western
Europe, most notably Greece.
2
<PAGE>
The Asian crisis has been written about and discussed ad infinitum. Here, we
would like simply to point out that the faith placed by Asian citizens in their
host country's financial systems and government policies has been nothing short
of astounding. This faith, together with high domestic savings rates, played a
single-handed role in allowing most battered Asian countries to simultaneously
benefit from lower interest rates and stronger currencies. Early in the year
this confluence of events would scarcely have been imaginable. Simply put, as
foreign capital fled, and most banking systems seized up (and were in many cases
taken over by the government) investors continued to both restrain their
consumption and continue depositing their savings in local currency-denominated
assets in domestic financial institutions. And, as collapsing domestic
consumption and investment triggered a dramatic decline in imports, Asian
countries were able to build up reserve levels through massive current account
surpluses. The resulting recapitalization of the economy and excess supply of
money relative to demand resulted in a historic drop in interest rates in most
of the beleaguered countries--the primary two examples are South Korea and
Thailand. This achievement has, in our view, singularly restored health to the
capital markets in Asia--much more so than forward-looking reforms or foreign
investment flows, both of which have been largely disappointing.
Equally impressive is the secular change being witnessed in eastern Europe
(Hungary, Poland, and the Czech Republic) and especially Greece. To briefly
oversimplify, the power of the Euro is exerting a tremendous pull on these
countries to get their respective fiscal houses in order; they must do so to be
accepted into the eurozone when it is their turn. In Greece's case, the
"convergence" story is immediate, and the remarkable performance of that
country's equity market last year is explained by the equally remarkable
performance of the Greek government to control spending and keep a lid on
inflation (the two most important criteria for EMU acceptance). In the eastern
European markets EMU acceptance is further away, but nevertheless those
countries' respective governments (and, equally importantly, electorates) are
already conducting both fiscal and monetary policy in strict accordance with
their goals of being accepted into the EMU as soon as possible. The relative
resilience of their equity markets last year reflects that underlying
determination.
As a final comment about positive developments witnessed in 1998, we should note
an important secular trend at the micro, or sector, level. That is, an
important positive secular development continued to take place in the technology
field, and both Taiwan and India have continued to exploit this trend (and, to
some extent, Korea). Taiwan has developed into a PC-component manufacturing
powerhouse, and as the trend toward lower cost PC's continues so does the global
outsourcing trend, which directly benefits that sector. As a result, the
"electronics" sector in Taiwan posted solid absolute returns in 1998 while the
broader Taiwanese market ended the year in negative territory. A similar
phenomenon has taken place in India, yet in this case it is in the software
services sector. As programming talent in the U.S. gets more expensive, Indian
companies are increasingly capturing a larger piece of the global software
services expenditure pie due to their cost advantages and abundant supply of
high quality programming talent.
THE FUND IN 1998
The Fund outperformed both the MSCI Index and the IFC Index for the year ended
December 31, 1998. On the positive side, our South Korea (+141.1%) and
Thailand (+11.6%) overweights throughout the year contributed solidly to our
performance. Also contributing favorably were our Venezuelan (-49.2%) and
Chilean (-28.5%) underweights, and our strong stock selection in Turkey.
Notable detractors were our underweight in Greece (+78.1%) and our overweight in
Pakistan (-56.6%), as well as poor stock selection in Brazil.
For the three months ended December 31, 1998, the Fund underperformed the MSCI
Index and the IFC Index. Underperformance relative to the indices was largely
driven by our overweight positions in Pakistan (-12.5%), Egypt (-5.6%) and
Brazil (+0.6%). Also negative were our overweight stances in India (-1.6%),
Mexico (+10.5%), Poland (+10.1%), and Turkey (+5.3%), our underweight exposure
to Greece (+28.2%) and disappointing stock returns in Asia.
On a positive note, our decision to overweight South Korea (+114.4%) and
Thailand (+54.4%) positively impacted portfolio return. Also favorable were our
underweights in Argentina (+7.3%), Chile (+13.3%), and Peru (-1.1%). Strong
stock selection in Brazil, Mexico and Taiwan also contributed significantly to
total return.
OUTLOOK FOR 1999
Given all that has happened to the world and to our asset class in the past few
years, any predictions need to be put forth with a large degree of
circumspection. Let us begin with a broad review of what we think are some of
the important lessons and themes for 1999 coming out of the experience of 1998:
1) Liquidity will be abundant in Europe and the U.S. owing to the generous
monetary easings mentioned earlier and the modest global growth we foresee
for 1999.
3
<PAGE>
2) This developed market liquidity will have great difficulty finding its way
back to the "vulnerable" emerging markets; that is, the reduction in global
financial risk appetites witnessed last year will, in our view, persist for
some time to come.
3) Commodity prices may stop falling, but it will take a marked recovery in
global aggregate demand to lead to a sustained and meaningful recovery in
broad commodity prices; we think this is, at best, a medium to long-term
event.
4) As a result of #2 above, fiscally profligate emerging market governments
will be met with grave skepticism and not likely given the "benefit of the
doubt" by financial markets.
5) The Asian financial market recovery should continue into 1999, and we will
begin to see the beginning of an economic stabilization if not full-scale
recovery.
6) In short, the separation between the "haves" and the "have nots" witnessed
in 1998 will persist, and perhaps even widen in 1999; this process in the
emerging markets universe is not unlike what has taken place in the US
stock market between the mega-cap nifty fifty stocks (the haves) and the
small cap or industrial commodity stocks (the have nots).
As a result of the above views, we have chosen to tilt our portfolio toward high
quality markets and sectors with solid fundamental underpinnings, especially
those with endogenously generated underpinnings less vulnerable to exogenous
shocks. The broader regional strategy, therefore, is to overweight peripheral
Europe and Asia, and to underweight Latin America and South Africa. The
overweight in peripheral Europe owes to a continuation of the forces at work
cited above. We are confident Greece will be accepted into EMU, and therefore
that interest rates will converge with those in western Europe. Eastern Europe
we like simply for the strong fiscal discipline they have evidenced, and are
looking for a related fall in interest rates throughout the year. The one
concern we are monitoring is the widening current account deficits in both
Poland and Hungary. Israel is a market that we like not because of the macro
picture but because of a group of Israeli technology companies that offer unique
bottom-up secular earnings growth unmatched in most of our emerging market
universe.
Asia is a region that is tough to get one's arms around; valuations are hard to
ferret out, and earnings outlooks hard to predict. Nevertheless, we are quite
optimistic that the Korean market represents enormous opportunity both for
continued interest rate declines and for enormous earnings growth owing to the
highly leveraged nature of that country's corporate sector. We do not have
dramatic country bets anywhere else in Asia but have a dramatic overweight in
the Taiwanese electronics sector, for reasons mentioned above. India is a
market whose macro outlook is dubious at best but whose market offers up a wide
range of attractive bottom-up stories, especially in the aforementioned software
services sector.
On the underweight side, Latin America is our biggest bet. We are very
concerned about the macro picture in Brazil. After a visit to the country in
November we fleetingly held a more constructive stance, but events since then
have transpired to make us more negative on the market. While not explicitly
calling for a market collapse, we think odds are high that something breaks in
that country's policy mix this year, most likely in the first half. The
combination of an overvalued exchange rate, gargantuan fiscal deficit, and
stubbornly high current account deficit is an unruly mix that will not likely be
tolerated by financial markets. We would be more underweight the market were it
not for our extremely constructive stance on the secular earnings growth outlook
for the telecommunications sector; within our underweight in Brazil we have a
dramatic overweight in that sector. Elsewhere in the region, we are
dramatically underweight Chile (vulnerable to weak copper price, anemic
corporate earnings growth, and large current account deficit) and solidly
underweight Argentina (solid macro but equities are not cheap and the market is
vulnerable to Brazil collapse). Further, we are underweight in Venezuela
(overvalued currency, terrible macro owing to low oil price) and Peru (commodity
price-based economy) and market weight Mexico. As a final note, we are
underweight South Africa in large part due to that country's currency
vulnerability to exogenous shocks (e.g. Brazil), and to the fact that corporate
earnings growth, on a secular basis, should be lackluster.
General risks to our bets would be 1) a return to risk-loving behavior by global
financial markets which would lead to the "vulnerable" emerging markets gaining
access to capital more easily than we expect, and 2) a meaningful near-term
increase in the price of commodities owing to a successful reflation effort by
the developed markets' central banks, which would dramatically improve the
current account positions and economic activities of both Latin America and
South Africa. We think either of these scenarios are low-probability ones, but
nevertheless are on vigilant watch for early warning signals of either scenario
proving us wrong. The tenuous Brazil outlook--and with it the prospect for a
weaker than expected U.S. economy-- as well as the prospect for Japanese
economic activity surprising on the downside (owing to the strong currency and
backup in interest rates) give us some comfort that global aggregate demand will
not be buoyant enough to sharply reverse the trend in commodity prices.
4
<PAGE>
CONCLUSION
Undoubtedly, emerging markets investors have had a difficult few years. Having
said that, we are glimpsing signs that this multi-year bear market may finally
be working its way through. Now that the Brazil shoe has dropped (see below), we
think this may likely be the bottom for our asset class--barring a meltdown in
the US equity market of course. We believe that most of the risks in the asset
class have either dissipated or have been fully discounted. Further, we believe
that our Fund is positioned to take advantage of opportunities arising from
changes in these markets. Not only are our stocks cheap, they are terrific
companies. We are strong believers that sometime in the medium-term, if not the
near term, this asset class, and our Fund with it, will be well on its way to
steadily posting the superior returns for which it earned its "emerging" label.
BRAZIL UPDATE
After a long struggle, the Brazilian government finally bowed to market
pressures and altered its exchange rate regime in mid-January. While details
about specific policy strategy are sketchy, the facts we know are as follows:
1) The currency, the real, was initially allowed to move to the weak side of
its wide trading band, causing an immediate effective devaluation of
roughly 10%
2) Central bank president Gustavo Franco, widely associated with a staunch
defense of the real, has resigned; he will be succeeded by his deputy
Francisco Lopes
3) The currency has subsequently been allowed to float and has traded between
1.60 - 2.05 real/U.S. dollar. As of January 31, 1999, the real closed at
2.05.
Our thoughts about the implications of this move for Brazil are necessarily
tentative at this stage. The currency move per se is not a bad thing; to the
extent it removes rigidities and price distortions from the economy it can be
argued that, longer-term, it will have been helpful. Further, given that high
interest rates have prevailed in Brazil for some time, leverage in the economy
and financial system is actually quite low. Therefore, the follow-on
reverberations witnessed after the Asian devaluations owing to excessive
leverage should not be repeated in Brazil. Having said that, it is too early to
tell what inflationary impact the devaluation may have; there is a possibility,
though we think it low, that inflation spirals out of control. Further, fiscal
imbalances are not solved by the devaluation, and these remain as a major item
to be tackled by the Cardoso administration. On the flip side, a spike in
inflation may temporarily ease some of these fiscal pressures. Overall, we will
have to wait and see how subsequent policy strategy and implementation is
handled, and this will greatly determine whether Brazil is better or worse off
post-devaluation.
Taking a step back, though, asset values in the equity market had already
factored in a good portion of the macro vulnerabilities. Our favorite sector,
the telecommunications sector, trades at unfathomably cheap levels. In fact it
is the attractiveness of this sector which has prevented us from being more
underweight. Given that these assets can be bought approximately 20% cheaper
than prior to the devaluation, we have added to our positions and maintain a
modest underweight.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
January 1999
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO
PURCHASE OR SELL THE SECURITIES MENTIONED.
5
<PAGE>
Morgan Stanley Emerging Markets Fund, Inc.
Investment Summary as of December 31, 1998 (Unaudited)
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<TABLE>
<CAPTION>
HISTORICAL TOTAL RETURN (%)
INFORMATION --------------------------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) IFC INDEX (3) MSCI INDEX (4)
--------------------- --------------------- ------------------- ---------------------
AVERAGE AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
--------------------- --------------------- ------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One Year -24.88% -24.88% -19.61% -19.61% -21.09% -21.09% -25.34% -25.34%
Five Year -49.63+ -12.82+ -28.18+ -6.41+ -36.55+ -8.70+ -38.51+ -9.27+
Since Inception* 31.44+ 3.89+ 67.10+ 7.42+ 12.28+ 1.63+ 31.25+ 3.87+
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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RETURNS AND PER SHARE INFORMATION
[GRAPH]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1991* 1992 1993 1994 1995 1996 1997 1998
------- ------ ------ ------ ------- ------- ------- -------
<S> <C> <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 $ 10.33
Market Value Per Share . . . . . $14.25 $18.13 $31.63 $21.50 $ 15.50 $ 13.88 $ 13.06 $ 8.13
Premium/(Discount) . . . . . . . -3.1% 8.3% 12.2% 5.9% 5.5% -11.5% -15.9% -21.3%
Income Dividends . . . . . . . . $ 0.04 $ 0.01 -- -- -- $ 0.05 $ 0.01 $ 0.11
Capital Gains Distributions. . . -- $ 0.01 $ 1.49 $ 6.50 $ 1.29 $ 0.98 $ 0.01 $ 2.18
Fund Total Return (2). . . . . . 4.61% 13.94% 95.22%+ -5.33% -16.30%+ 13.84% -0.97% -19.61%
IFC Index Total Return (3) . . . 5.29% 0.33% 67.50% -0.53% -12.32% 7.88% -14.54% -21.09%
MSCI Index Total Return (4). . . 9.58% 11.40% 74.84% -7.32% - 5.21% 6.03% -11.59% -25.34%
</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 (the "IFC 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.
(4) The Morgan Stanley Capital International Emerging Markets Free Index (the
"MSCI Index") is a market capitalization weighted index composed of
companies that are representative of the market structure of developing
countries in Latin America, Asia, Eastern Europe, the Middle East and
Africa.
* 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.
6
<PAGE>
Morgan Stanley Emerging Markets Fund, Inc.
Portfolio Summary as of December 31, 1998
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DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Equity Securities (93.1%)
Short-Term Investments (6.7%)
Debt Instruments (0.2%)
</TABLE>
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SECTORS
[CHART]
<TABLE>
<S> <C>
Appliances & Household Durables (5.2%)
Banking (6.2%)
Beverages & Tobacco (9.1%)
Electrical & Electronics (7.9%)
Electronic Components, Instruments (5.2%)
Energy Sources (4.2%)
Multi-Industry (3.7%)
Other (30.2%)
Utilities -- Electrical & Gas (6.6%)
Telecom -- Wireless (3.7%)
Telecom -- Integrated (18.0%)
</TABLE>
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COUNTRY WEIGHTINGS
[CHART]
<TABLE>
<S> <C>
Korea (12.1%)
Mexico (10.7%)
India (8.4%)
Greece (8.1%)
Brazil (7.2%)
Taiwan (7.0%)
Other (26.8%)
Hungary (3.9%)
Poland (4.4%)
South Africa (5.6%)
Israel (5.8%)
</TABLE>
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TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. Hellenic Telecommunications Organization (Greece) 5.1%
2. Samsung Electronics Co. (Korea) 4.7
3. Pohang Iron & Steel Co., Ltd. (Korea) 3.3
4. Telmex (Mexico) 2.6
5. FEMSA (Mexico) 2.5
6. Korea Electric Power Corp. (Korea) 2.2
7. MOL Magyar Olaj-es Gazipari (Hungary) 2.1
8. Televisa (Mexico) 2.1
9. Taiwan Semiconductor Co. (Taiwan) 1.9
10. Hon Hai Precision Industry (Taiwan) 1.7
-----
28.2%
-----
-----
</TABLE>
7
<PAGE>
FINANCIAL STATEMENTS
- ---------
STATEMENT OF NET ASSETS
- ---------
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (94.1%)
(Unless otherwise noted)
- ---------------------------------------------------------------------------------------
ARGENTINA (1.8%)
AUTOMOBILES
CIADEA 1 U.S.$ @
----------------
ENERGY SOURCES
YPF ADR 24,243 677
----------------
TELECOMMUNICATIONS -- INTEGRATED
Telecom Argentina ADR 97,819 2,690
Telefonica Argentina ADR 21,372 597
----------------
3,287
----------------
3,964
----------------
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BRAZIL (7.2%)
BANKING
(a,c) Banco Nacional (Preferred) 61,598,720 2
Unibanco (Preferred) GDR 78,319 1,131
----------------
1,133
----------------
BEVERAGES & TOBACCO
Brahma (Preferred) 2,234,108 976
Brahma (Preferred) ADR 2,034 19
----------------
995
----------------
ENERGY SOURCES
Petrobras (Preferred) 14,461 2
(b) Petrobras (Preferred) ADR 22,595 257
----------------
259
----------------
FOOD & HOUSEHOLD PRODUCTS
Pao de Acucar (Preferred) 6,460,000 104
(a,b) Pao de Acucar (Preferred) ADR 10,145 164
----------------
268
----------------
MERCHANDISING
(a) Lojas Arapua (Preferred) 30,412,000 8
(a,b) Lojas Arapua (Preferred) ADR 31,540 -- @
(a) Renner (Preferred) 14,237,000 10
----------------
18
----------------
METALS -- STEEL
Usiminas (Preferred) 79,200 175
Usiminas (Preferred) ADR 13,735 31
----------------
206
----------------
METALS -- NON-FERROUS
CVRD (Preferred) 32,886 422
CVRD (Preferred) ADR 44,219 569
----------------
991
----------------
TELECOMMUNICATIONS -- INTEGRATED
CRT (Preferred) 'A' 9,676,276 3,484
(a) Embratel (Preferred) 28,703,945 392
(a) Tele Centro-Sul (Preferred) 71,566,945 621
(a) Tele Centro-Sul ADR 3,231 135
(a) Tele Norte-Leste (Preferred) 28,703,945 359
Telebras (Preferred) 28,703,945 3
(a) Telebras Holders 16,298 1,185
(a) Telesp (Preferred) 12,742,945 290
----------------
6,469
----------------
- ---------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- WIRELESS
(a) Tele Celular Sul (Preferred) 86,171,945 U.S.$ 145
(a) Tele Celular Sul ADR 2,825 49
(a) Tele Nordeste Celular (Preferred) 67,659,945 62
(a) Tele Nordeste Celular ADR 2,340 43
(a) Tele Norte Celular (Preferred) 28,703,945 13
(a) Tele Sudeste Celular (Preferred) 85,948,945 363
(a) Tele Sudeste Celular ADR 868 18
(a) Teleleste Celular (Preferred) 112,154,945 65
(a) Telemig Celular (Preferred) 119,640,945 133
(a) Telemig Celular ADR 2,910 62
(a) Telerj Celular (Preferred) 'B' 3,756,000 89
(a) Telesp Celular (Preferred) 49,988,945 368
(a) Telesp Celular (Preferred) 'B' 24,064,313 1,057
(a) Telesp Celular ADR 396 7
----------------
2,474
----------------
TEXTILES & APPAREL
(c) Coteminas 2,200,500 237
(b) Coteminas ADR 23,460 111
----------------
348
----------------
UTILITIES -- ELECTRICAL & GAS
Cemig (Preferred) 92,303,169 1,757
Cemig (Preferred) ADR 44,067 839
(b) Cemig (Preferred) ADR 9,208 175
----------------
2,771
----------------
15,932
----------------
- ---------------------------------------------------------------------------------------
CHILE (1.1%)
BEVERAGES & TOBACCO
CCU ADR 28,420 547
----------------
MERCHANDISING
Santa Isabel ADR 13,022 86
----------------
UTILITIES -- ELECTRICAL & GAS
Endesa ADR 40,519 461
Enersis ADR 54,335 1,403
----------------
1,864
----------------
2,497
----------------
- ---------------------------------------------------------------------------------------
CHINA (1.1%)
ENERGY SOURCES
Yanzhou Coal Mining Co., Ltd.
ADR 74,130 561
Zhenhai Refining & Chemical Co.,
Ltd. 'H' 4,704,000 722
----------------
1,283
----------------
FOOD & HOUSEHOLD PRODUCTS
Want Want Holdings Ltd. 344,000 413
----------------
UTILITIES -- ELECTRICAL & GAS
(a) Huaneng Power International,
Inc. ADR 49,965 724
----------------
2,420
----------------
- ---------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------------
<S> <C> <C>
COLOMBIA (0.0%)
BANKING
Bancolombia (Preferred) 6,249 U.S.$ 8
----------------
- -------------------------------------------------------------------------------------
CZECH REPUBLIC (0.4%)
TELECOMMUNICATIONS -- INTEGRATED
(a) SPT Telecom 34,497 527
(a) SPT Telecom GDR 22,990 342
----------------
869
----------------
- -------------------------------------------------------------------------------------
EGYPT (1.3%)
BEVERAGES & TOBACCO
(a) Al-Ahram Beverages Co. GDR 15,392 445
(a) Al-Ahram Beverages Co. GDR 10,100 287
Eastern Tobacco 27,138 624
----------------
1,356
----------------
BUILDING MATERIALS & COMPONENTS
Ameriyah Cement Co. 100 2
Industrial & Engineering
Enterprises Co. 11,690 165
Suez Cement Co. GDR 19,420 268
----------------
435
----------------
CHEMICALS
Egyptian Finance & Industrial Co. 8,551 141
Paints & Chemical Industries GDR 60,120 361
----------------
502
----------------
REAL ESTATE
Madinet Nasr Housing &
Development 7,295 220
----------------
UTILITIES -- ELECTRICAL & GAS
Egypt Gas Co. 6,100 453
----------------
2,966
----------------
- -------------------------------------------------------------------------------------
GREECE (8.1%)
BANKING
Alpha Credit Bank 5,420 566
(a) Ionian Bank 9,480 503
National Bank of Greece 15,180 3,417
----------------
4,486
----------------
BEVERAGES & TOBACCO
Hellenic Bottling Co. 20,570 635
----------------
BUILDING MATERIALS & COMPONENTS
Heracles General Cement 3,960 108
Titan Cement Co. 3,880 298
----------------
406
----------------
TELECOMMUNICATIONS -- INTEGRATED
Hellenic Telecommunication
Organization 267,341 7,116
(a) Hellenic Telecommunication
Organization ADR 314,140 4,162
----------------
11,278
----------------
- ---------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- WIRELESS
(a) Panafon Hellenic Telecom GDR 13,320 347
(a) STET Hellas
Telecommunications ADR 16,000 518
----------------
865
TRANSPORTATION -- SHIPPING
Attica Enterprises 30,740 276
----------------
17,946
----------------
- -------------------------------------------------------------------------------------
HONG KONG (0.8%)
TELECOMMUNICATIONS -- WIRELESS
China Telecom Ltd. 566,000 979
----------------
UTILITIES -- ELECTRICAL & GAS
Zhejiang Expressway Co., Ltd. 'H' 3,390,000 687
----------------
1,666
----------------
- -------------------------------------------------------------------------------------
HUNGARY (3.9%)
BANKING
OTP Bank Rt. 23,250 1,161
----------------
ENERGY SOURCES
MOL Magyar Olaj-es Gazipari 28,330 774
(a) MOL Magyar Olaj-es Gazipari
GDR 52,500 1,450
MOL Magyar Olaj-es Gazipari Rt.
GDR 88,890 2,456
----------------
4,680
----------------
TELECOMMUNICATIONS -- INTEGRATED
Matav Rt. 197,858 1,127
Matav Rt. ADR 34,390 1,025
----------------
2,152
----------------
TELECOMMUNICATIONS
(a) Matav Rt. ADR 24,765 738
----------------
8,731
----------------
- -------------------------------------------------------------------------------------
INDIA (8.2%)
AUTOMOBILES
Bajaj Auto Ltd. 1,000 12
Hero Honda Ltd. 162,063 2,075
Tata Engineering & Locomotive
Co. Ltd. 91,729 352
----------------
2,439
----------------
BANKING
State Bank of India Ltd. 3,750 14
----------------
BEVERAGES & TOBACCO
ITC Ltd. 142,002 2,508
----------------
BROADCASTING & PUBLISHING
Zee Telefilms Ltd. 40,000 603
----------------
BUILDING MATERIALS & COMPONENTS
Gujarat Ambuja Cements Ltd. 14,000 86
----------------
- -------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
INDIA (Continued)
CHEMICALS
Reliance Industries Ltd. 1,349 U.S.$ 4
----------------
DATA PROCESSING & REPRODUCTION
Infosys Technology Ltd. 34,500 2,403
Satyam Computer Services Ltd. 60,000 1,028
----------------
3,431
----------------
ELECTRICAL & ELECTRONICS
Bharat Heavy Electricals Ltd. 538,100 3,327
FINANCIAL SERVICES
Housing Development Finance
Corp., Ltd. 15,911 816
----------------
FOOD & HOUSEHOLD PRODUCTS
(a) Hindustan Lever Ltd. 9,500 373
Hindustan Lever Ltd. 40,500 1,586
----------------
1,959
----------------
INDUSTRIAL COMPONENTS
Apollo Tyres Ltd. 8,450 13
ITW Signode India Ltd. 71,000 161
MRF Ltd. 10,000 336
----------------
510
----------------
MACHINERY & ENGINEERING
Larsen & Toubro Ltd. 1,800 7
----------------
MULTI-INDUSTRY
(a,e) Morgan Stanley Growth Fund 6,881,800 972
----------------
TELECOMMUNICATIONS -- INTEGRATED
Mahanagar Telephone Nigam Ltd. 70,000 302
----------------
TRANSPORTATION -- ROAD & RAIL
(c) Container Corp. of India Ltd. 221,500 1,247
----------------
18,225
----------------
- -------------------------------------------------------------------------------------
INDONESIA (1.7%)
BEVERAGES & TOBACCO
Gudang Garam 1,210,160 1,762
----------------
FOREST PRODUCTS & PAPER
Indah Kait Pulp & Paper 2,902,405 789
----------------
TELECOMMUNICATIONS -- INTEGRATED
Telekomunikasi Indonesia 3,103,000 1,048
Telekomunikasi Indonesia ADR 34,170 222
----------------
1,270
----------------
3,821
----------------
- -------------------------------------------------------------------------------------
ISRAEL (5.8%)
BANKING
Bank Hapoalim Ltd. 468,001 848
First International Bank of Israel '5' 56,899 282
----------------
1,130
----------------
ELECTRICAL & ELECTRONICS
(a) Comverse Technology, Inc. 30,880 2,193
ECI Telecommunications Ltd. 57,762 2,058
Elbit Systems Ltd. 1 -- @
Elron Electronic Industries Ltd. 12,956 207
(a) Gilat Satellite Networks Ltd. 3,990 220
(a) Nice Systems Ltd. 4,294 93
----------------
- -------------------------------------------------------------------------------------
ELECTRICAL & ELECTRONICS (Continued)
(a) Nice Systems Ltd. ADR 27,430 593
(a) Orckit Communications Ltd. 7,480 121
Tadiran Telecommunications Ltd. 24,710 472
----------------
5,957
----------------
ELECTRONIC COMPONENTS, INSTRUMENTS
(a) Orbotech Ltd. 35,874 1,700
----------------
ENERGY SOURCES
(a) Dor Energy 1988 Ltd. GDR 42,500 122
----------------
HEALTH & PERSONAL CARE
Teva Pharmaceutical Industries
Ltd. ADR 17,260 702
----------------
MERCHANDISING
Super Sol Ltd. 65,189 162
----------------
MULTI-INDUSTRY
Koor Industries Ltd. 29,084 2,540
----------------
TELECOMMUNICATIONS -- INTEGRATED
(a) Bezeq Isreali Telecommunication
Corp., Ltd. 174,030 544
----------------
12,857
----------------
- -------------------------------------------------------------------------------------
KOREA (12.1%)
APPLIANCES & HOUSEHOLD DURABLES
Samsung Electronics Co. 153,950 10,327
Samsung Electronics Co. GDR
New 3,366 124
----------------
10,451
----------------
ELECTRONIC COMPONENTS, INSTRUMENTS
S1 Corp. 9,140 1,710
----------------
METALS -- STEEL
(c) Pohang Iron & Steel Co., Ltd. 114,000 7,197
----------------
MISC. MATERIALS & COMMODITIES
Hankuk Glass Industry Co., Ltd. 43,000 897
----------------
TELECOMMUNICATIONS -- WIRELESS
(c) SK Telecom Co., Ltd. 2,160 1,631
----------------
UTILITIES -- ELECTRICAL & GAS
Korea Electric Power Corp. 199,890 4,952
----------------
26,838
----------------
- -------------------------------------------------------------------------------------
MALAYSIA (2.1%)
BEVERAGES & TOBACCO
(c) Rothmans of Pall Mall Bhd 138,200 570
----------------
FOOD & HOUSEHOLD PRODUCTS
(c) Nestle Bhd 109,000 305
----------------
LEISURE & TOURISM
(c) Genting Bhd 197,400 300
----------------
MISC. MATERIALS & COMMODITIES
(c) Kuala Lumpur Kepong Bhd 316,000 378
----------------
TELECOMMUNICATIONS -- INTEGRATED
(c) Telekom Malaysia Bhd 856,000 1,577
----------------
TELECOMMUNICATIONS -- WIRELESS
(c) Technology Resources Industries
Bhd 86,000 31
----------------
- -------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
MALAYSIA (CONTINUED)
UTILITIES -- ELECTRICAL & GAS
(c) Petronas Gas Bhd 348,000 U.S.$ 551
(c) Tenaga Nasional Bhd 585,000 841
----------------
1,392
----------------
4,553
----------------
- -------------------------------------------------------------------------------------
MEXICO (10.7%)
BANKING
(a) Banacci 'B' 572,802 751
(a) Banacci 'L' 45,447 52
Bancomer 'B' 276,800 59
(b) Bancomer 'B' ADR 64,825 276
----------------
1,138
----------------
BEVERAGES & TOBACCO
FEMSA 1,294,161 3,510
FEMSA ADR 78,635 2,094
----------------
5,604
----------------
BROADCASTING & PUBLISHING
(a) Televisa CPO GDR 185,542 4,580
TV Azteca ADR 35,401 237
----------------
4,817
----------------
BUILDING MATERIALS & COMPONENTS
Cemex 'B' 58,560 145
Cemex 'B' ADR 117,149 571
Cemex CPO 207,510 448
Cemex CPO ADR 171,119 727
----------------
1,891
----------------
ENERGY EQUIPMENT & SERVICES
Tamsa ADR 21,405 138
----------------
HEALTH & PERSONAL CARE
Kimberly 'A' 661,873 2,103
----------------
MERCHANDISING
(a) Cifra 'C' 274,489 335
Cifra 'V' 209,910 254
----------------
589
----------------
MULTI-INDUSTRY
ALFA 'A' 155,136 437
Cifra 'V' ADR 35,100 426
Desc ADR 11,800 227
Grupo Carso 'A1' 186,195 632
----------------
1,722
----------------
TELECOMMUNICATIONS -- INTEGRATED
Telmex 'L' ADR 118,833 5,786
----------------
23,788
----------------
- -------------------------------------------------------------------------------------
PAKISTAN (1.8%)
CHEMICALS
(c) Fauji Fertilizer Co., Ltd. 1,218,800 1,015
----------------
ENERGY SOURCES
(c) Pakistan State Oil Co., Ltd. 166,918 238
----------------
- -------------------------------------------------------------------------------------
ELECOMMUNICATIONS -- INTEGRATED
(c) Pakistan Telecommunications
Corp. 4,076,600 1,409
(a,c) Pakistan Telecommunications
Corp. GDR 27,056 934
----------------
2,343
----------------
UTILITIES -- ELECTRICAL & GAS
(c) Hub Power Co. 1,180,000 274
(a,c) Sui Northern Gas Co. 886,995 145
----------------
419
----------------
4,015
----------------
- -------------------------------------------------------------------------------------
PHILIPPINES (1.7%)
BEVERAGES & TOBACCO
San Miguel Corp. 'B' 601,760 1,160
----------------
REAL ESTATE
SM Prime Holdings, Inc. 'B' 3,862,580 735
----------------
TELECOMMUNICATIONS -- INTEGRATED
Philippine Long Distance
Telephone Co. 33,415 859
Philippine Long Distance
Telephone Co. ADR 1,800 47
----------------
906
----------------
UTILITIES -- ELECTRICAL & GAS
Manila Electric Co. 'B' 322,720 1,037
----------------
3,838
----------------
- -------------------------------------------------------------------------------------
POLAND (4.4%)
BANKING
Bank Bandlowy W Warszawie
GDR 18,690 231
Bank Handlowy W Warszawie 15,195 187
Bank Rozwoju Eksportu 15,767 364
Bank Slaski 7,644 396
BIG Bank Gdanski 191,100 171
BIG Bank Gdanski GDR 50,750 688
Powszechny Bank Kredytowy 5,460 117
Wielkopolski Bank Kredytowy 21,769 137
----------------
2,291
----------------
CHEMICALS
(a,d) Eastbridge 33,600 2,259
Polifarb Cieszyn - Wroclaw 80 -- @
----------------
2,259
----------------
CONSTRUCTION & HOUSING
(a) Exbud 10,554 91
(a) Exbud GDR 35,110 303
----------------
394
----------------
DATA PROCESSING & REPRODUCTION
Prokom GDR 44,580 841
----------------
FOOD & HOUSEHOLD PRODUCTS
(a) Agros Holdings 'C' 1,182 4
----------------
INDUSTRIAL COMPONENTS
Debica 2,150 32
----------------
- -------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------------
<S> <C> <C>
POLAND (CONTINUED)
TELECOMMUNICATIONS -- INTEGRATED
(a) Telekomunikacja Polska GDR 448,360 U.S.$ 2,287
----------------
WHOLESALE & INTERNATIONAL TRADE
Elektrim 154,920 1,677
----------------
9,785
----------------
- -------------------------------------------------------------------------------------
RUSSIA (1.2%)
BROADCASTING & PUBLISHING
(a,c) Storyfirst Communications, Inc. 'C'
(Preferred) 270 48
(a,c) Storyfirst Communications, Inc. 'D'
(Preferred) 720 128
(a,c) Storyfirst Communications, Inc. 'E'
(Preferred) 780 138
(a,c) StoryFirst Communications, Inc. 'F'
(Preferred) 139 49
----------------
363
----------------
ENERGY SOURCES
Lukoil Holdings ADR 24,990 400
Surgutneftegaz ADR 84,250 284
----------------
684
----------------
FOREST PRODUCTS & PAPER
(a,c) Alliance Cellulose Ltd. 'B' 156,075 176
----------------
HEALTH & PERSONAL CARE
(b) Pliva d.d. GDR 24,150 401
----------------
TELECOMMUNICATIONS -- LONG DISTANCE
Rostelecom ADR 26,700 112
----------------
TELECOMMUNICATIONS -- WIRELESS
(a,c) Russian Telecom Development
Corp. 176,000 316
(a) Vimpel-Communications ADR 21,790 282
----------------
598
----------------
UTILITIES -- ELECTRICAL & GAS
Unified Energy Systems ADR 11,000 36
(a) Unified Energy Systems GDR 71,530 232
----------------
268
----------------
2,602
----------------
- -------------------------------------------------------------------------------------
SOUTH AFRICA (5.6%)
BANKING
Nedcor Ltd. 32,180 548
----------------
BEVERAGES & TOBACCO
Rembrandt Group Ltd. 169,915 1,039
South African Breweries Ltd. 50,640 852
----------------
1,891
----------------
BROADCASTING & PUBLISHING
Primedia Ltd. 94,690 209
----------------
BUSINESS & PUBLIC SERVICES
Educor 377,134 435
----------------
CHEMICALS
SASOL Ltd. 188,030 710
----------------
- -------------------------------------------------------------------------------------
CHEMICALS (Continued)
SASOL Ltd. 8.50%
(Convertible Preferred) 3,200 11
----------------
721
----------------
ELECTRICAL & ELECTRONICS
Comparex Holdings Ltd. 78,600 638
----------------
FINANCIAL SERVICES
ABSA Group Ltd. 239,310 1,134
B.O.E. Corp. Ltd. 'N' 2,228,085 1,267
BOE Ltd. 444,178 287
----------------
2,688
----------------
INSURANCE
FirstRand Ltd. 587,600 640
Liberty Life Association of
Africa Ltd. 44,878 617
(a) New Africa Investments Ltd.
(Preferred) 'N' 1,225,000 749
----------------
2,006
----------------
MERCHANDISING
Ellerine Holdings Ltd. 239,880 518
Woolworths Holdings Ltd. 587,400 289
----------------
807
----------------
MULTI-INDUSTRY
Bldvest Group Ltd. 243,676 1,766
(e) Morgan Stanley Africa Investment
Fund, Inc. 74,015 620
----------------
2,386
----------------
12,329
----------------
- -------------------------------------------------------------------------------------
TAIWAN (7.0%)
ELECTRICAL & ELECTRONICS
(a) Siliconware Precision Industries
Co. 950,800 1,682
(a) Taiwan Semiconductor Co. 1,209,000 2,664
(a) Taiwan Semiconductor
Manufacturing Co., Ltd. ADR 109,540 1,554
----------------
5,900
----------------
ELECTRONIC COMPONENTS, INSTRUMENTS
(a) Arima Computer Corp. 89,000 464
(a) Asustek Computer, Inc. 173,978 1,625
(a) Compal Electronics, Inc. 390,465 1,273
(a) Compeq Manufacturing Co., Ltd. 166,000 1,087
(a) Hon Hai Precision Industry 664,800 3,673
----------------
8,122
----------------
MERCHANDISING
President Chain Store Corp. 338,608 1,067
----------------
TEXTILES & APPAREL
Far East Textile Ltd. 516,000 421
----------------
15,510
----------------
- -------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------------
<S> <C> <C>
THAILAND (2.6%)
BROADCASTING & PUBLISHING
(c) BEC World Public Co., Ltd.
(Foreign) 178,400 U.S.$ 982
----------------
BUILDING MATERIALS & COMPONENTS
(a) Siam City Cement Public Co., Ltd.
(Foreign) 210,500 463
----------------
ELECTRICAL & ELECTRONICS
Delta Electronics Public Co., Ltd.
(Foreign) 165,800 876
(a) Shinawatra Computer Public Co.,
Ltd. (Foreign) 223,900 770
----------------
1,646
----------------
ENERGY SOURCES
(a) PTT Exploration & Production
Public Co., Ltd. (Foreign) 147,100 1,036
----------------
TELECOMMUNICATIONS -- WIRELESS
Advanced Information Services
Co., Ltd. (Foreign) 287,300 1,707
----------------
5,834
----------------
- -------------------------------------------------------------------------------------
TURKEY (2.8%)
APPLIANCES & HOUSEHOLD DURABLES
(a) Vestel Elektronik Sanayi Ve
Ticaret AS 12,522,292 1,032
----------------
BANKING
(b) Akbank TAS 23,340 95
Yapi Ve Kredi Bankasi 141,041,355 1,632
----------------
1,727
----------------
BEVERAGES & TOBACCO
(a) Efes Sinai Yatirim 211,652,609 2,046
Ege Biracilik Ve Malt Sanayii 8,817,000 685
Erciyas Biracilik 1,131,000 75
----------------
2,806
----------------
ENERGY SOURCES
Petrol Ofisi AS 2,041,846 275
----------------
MERCHANDISING
Migros Turk TAS 322,000 322
----------------
6,162
----------------
- -------------------------------------------------------------------------------------
VENEZUELA (0.4%)
TELECOMMUNICATIONS -- INTEGRATED
CANTV ADR 47,140 840
----------------
- -------------------------------------------------------------------------------------
ZIMBABWE (0.3%)
BEVERAGES & TOBACCO
Delta Corp., Ltd. 1,297,991 282
----------------
MERCHANDISING
Meikles Africa Ltd. 342,000 192
----------------
MULTI-INDUSTRY
(b) Trans Zambezi Industries Ltd.
ADR 4,000,000 183
----------------
657
----------------
- -------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost U.S.$252,213) U.S.$ 208,653
----------------
- -------------------------------------------------------------------------------------
<CAPTION>
NO. OF
RIGHTS
- -------------------------------------------------------------------------------------
<S> <C> <C>
RIGHTS (0.0%)
- -------------------------------------------------------------------------------------
SOUTH AFRICA (0.0%)
(a) Primedia Ltd. 98,500 -- @
----------------
- -------------------------------------------------------------------------------------
TAIWAN (0.0%)
(a,c) Compal Electronics, Inc. 958 -- @
----------------
- -------------------------------------------------------------------------------------
TOTAL RIGHTS
(Cost U.S.$--) -- @
----------------
- -------------------------------------------------------------------------------------
<CAPTION>
NO. OF
WARRANTS
- -------------------------------------------------------------------------------------
<S> <C> <C>
WARRANTS (0.0%)
- -------------------------------------------------------------------------------------
THAILAND (0.0%)
(a) Siam Commercial Bank Co. Ltd.
(Foreign), expiring 12/31/02
(Cost U.S.$ .) 280,333 -- @
----------------
- -------------------------------------------------------------------------------------
<CAPTION>
NO. OF
UNITS
- -------------------------------------------------------------------------------------
UNITS (0.1%)
- -------------------------------------------------------------------------------------
<S> <C> <C>
RUSSIA (0.1%)
(a,c) Storyfirst Communications, Inc.,
First Section, Tranche I
(Convertible) 604 107
(a,c) Storyfirst Communications, Inc.,
First Section, Tranche II
(Convertible) 35 6
(a,c) Storyfirst Communications, Inc.,
Second Section, Tranche II
(Convertible) 152 27
(a,c) Storyfirst Communications, Inc.,
Tranche IV
(Convertible) 207 36
----------------
176
----------------
- -------------------------------------------------------------------------------------
TOTAL UNITS
(Cost U.S.$1,192) 176
----------------
- -------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------------------------
<S> <C> <C>
DEBT INSTRUMENTS (0.2%)
- -------------------------------------------------------------------------------------
INDIA (0.2%)
METALS -- STEEL
(c) Shri Ishar Alloy Steels Ltd.
15.00%, 4/21/01 INR 581 U.S.$ 98
----------------
MULTI-INDUSTRY
(c,f) DCM Shriram Industries Ltd.
16.50%, 2/21/02 335 170
(c) DCM Shriram Industries Ltd.
(Convertible) 15.00%,
2/21/02 330 126
----------------
296
----------------
- -------------------------------------------------------------------------------------
TOTAL DEBT INSTRUMENTS
(Cost U.S.$1,496) 394
----------------
- -------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (4.4%)
- -------------------------------------------------------------------------------------
UNITED STATES (4.4%)
REPURCHASE AGREEMENT
Chase Securities, Inc. 4.45%,
dated 12/31/98, due
1/4/99, to be repurchased
at U.S.$9,725, collateralized
by U.S.$7,925 United States
Treasury Bonds, 7.50%, due
11/15/16, valued at
U.S.$9,917
(Cost U.S.$9,720) U.S.$ 9,720 9,720
----------------
- -------------------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN (2.4%)
Brazil Real BRL 1,276 1,056
Czech Koruna CZK 1,330 44
Egyptian Pound EGP 169 50
Greek Drachma GRD 120,327 430
Hungarian Forint HUF 72 -- @
Indian Rupee INR 20,970 494
Israeli Shekel ISS 2,852 686
(c) Malaysian Ringgit MYR 2,355 434
Mexican Peso MXP 100 10
(c) Pakistani Rupee PKR 46,436 845
Philippine Peso PHP 1,687 43
Polish Zloty PLZ 354 101
South African Rand ZAR 1,701 289
South Korean Won KRW 238,765 199
Taiwan Dollar TWD 19,347 600
----------------
(Cost U.S.$5,498) 5,281
----------------
- -------------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.2%)
(Cost U.S.$270,119) 224,224
----------------
- -------------------------------------------------------------------------------------
<CAPTION>
AMOUNT AMOUNT
(000) (000)
- -------------------------------------------------------------------------------------
<S> <C> <C>
OTHER ASSETS (1.2%)
Cash U.S.$ 327
Receivable for Investments
Sold 1,651
Dividends Receivable 432
Foreign Withholding Tax Reclaim
Receivable 272
Interest Receivable 19
Other Assets 26 U.S.$ 2,727
----------------
- -------------------------------------------------------------------------------------
LIABILITIES (-2.4%)
Deferred Country Taxes (145)
Payable For:
Investments Purchased (3,700)
Net Unrealized Loss on Foreign
Currency Exchange Contracts (849)
Investment Advisory Fees (231)
Custodian Fees (108)
Professional Fees (96)
Shareholder Reporting Expenses (75)
Directors' Fees and Expenses (47)
Administrative Fees (30)
Other Liabilities (61) (5,197)
----------------
- ------------------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 21,455,344, issued and
outstanding U.S.$0.01 par value shares
(100,000,000 shares authorized) U.S.$ 221,609
----------------
----------------
- ------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 10.33
----------------
----------------
- ------------------------------------------------------------------------------------
AT DECEMBER 31, 1998, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------
Common Stock U.S.$ 215
Capital Surplus 330,138
Distribution in Excess of Net Investment Income (284)
Accumulated Net Realized Loss (61,793)
Unrealized Depreciation on Investments and
Foreign Currency Translations (46,667)
- ------------------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$ 221,609
----------------
----------------
- ------------------------------------------------------------------------------------
</TABLE>
(a) -- Non-income producing
(b) -- 144A Security - certain conditions for public sale may
exist.
(c) -- Security valued at fair value -- See note A-1 to financial
statements.
(d) -- Security fair valued at cost -- See note A-1 to financial
statements.
(e) -- The Fund is advised by an affiliate.
(f) -- Variable/floating rate security -- rate disclosed is as of
December 31, 1998.
@ -- Amount is less than U.S.$500.
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
NOTE: Prior governmental approval for foreign investments may be required
under certain circumstances in some emerging markets, and foreign
ownership limitations may also be imposed by the charters of individual
companies in emerging markets. As a result, an additional class of
shares designated as "foreign" may be created, and offered for
investment. The "local" and "foreign" shares' market values may vary.
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open
at December 31, 1998, the Fund is obligated to deliver or is to receive
foreign currency in exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN UNREALIZED
TO EXCHANGE GAIN
DELIVER VALUE SETTLEMENT FOR VALUE (LOSS)
(000) (000) DATE (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
KRW 2,164 U.S.$ 1,799 01/04/99 U.S.$ 1,402 U.S.$ 1,402 U.S.$ (397)
U.S.$ 287 287 01/04/99 KRW 381,710 317 30
333 333 01/04/99 442,890 368 35
1,109 1,109 01/04/99 1,339,387 1,114 5
KRW 2,301,280 1,913 01/05/99 U.S.$ 1,514 1,514 (399)
U.S.$ 135 135 01/05/99 CZK 4,055 135 --
193 193 01/05/99 GRD 54,615 195 2
KRW 427,000 355 01/06/99 U.S.$ 280 280 (75)
1,960,800 1,629 01/07/99 1,290 1,290 (339)
MYR 2,507 462 02/11/99 556 556 94
9,142 1,683 02/11/99 2,025 2,025 342
U.S.$ 2,581 2,581 02/11/99 MYR 11,649 2,145 (436)
ZAR 6,455 1,040 06/21/99 U.S.$ 1,099 1,099 59
12,926 2,084 06/21/99 2,199 2,199 115
U.S.$ 110 110 06/21/99 ZAR 715 115 5
485 485 06/21/99 3,119 503 18
378 378 06/21/99 2,424 391 13
2,037 2,037 06/21/99 13,123 2,116 79
------------- --------------- ------------
U.S.$ 18,613 U.S.$ 17,764 U.S.$ (849)
------------- --------------- ------------
</TABLE>
<TABLE>
- --------------------------------------------------------------------------------
DECEMBER 31, 1998 EXCHANGE RATES:
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
BRL Brazil Real 1.208 = U.S. $1.00
CZK Czech Koruna 30.023 = U.S. $1.00
EGP Egyptian Pound 3.410 = U.S. $1.00
GRD Greek Drachma 279.880 = U.S. $1.00
HUF Hungarian Forint 216.120 = U.S. $1.00
INR Indian Rupee 42.470 = U.S. $1.00
ISS Israeli Shekel 4.156 = U.S. $1.00
MYR Malaysian Ringgit 5.430 = U.S. $1.00
MXP Mexican Peso 9.898 = U.S. $1.00
PKR Pakistani Rupee 54.958 = U.S. $1.00
PHP Philippine Peso 38.900 = U.S. $1.00
PLZ Polish Zloty 3.510 = U.S. $1.00
ZAR South African Rand 5.890 = U.S. $1.00
KRW South Korean Won 1,203.000 = U.S. $1.00
TWD Taiwan Dollar 32.220 = U.S. $1.00
- --------------------------------------------------------------------------------
</TABLE>
SUMMARY OF TOTAL INVESTMENTS BY INDUSTRY
CLASSIFICATION - DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
- --------------------------------------------------------------------------------
<S> <C> <C>
Appliances & Household Durables U.S.$ 11,483 5.2%
Automobiles 2,439 1.1
Banking 13,636 6.2
Beverages & Tobacco 20,116 9.1
Broadcasting & Publishing 7,150 3.2
Building Materials & Components 3,281 1.5
Business & Public Services 435 0.2
Chemicals 4,501 2.0
Construction & Housing 394 0.2
Data Processing and Reproduction 4,272 1.9
Electrical & Electronics 17,468 7.9
Electronic Components, Instruments 11,532 5.2
Energy Equipment & Services 138 0.1
Energy Sources 9,254 4.2
Financial Services 3,504 1.6
Food & Household Products 2,949 1.3
Forest Products & Paper 965 0.4
Health & Personal Care 3,206 1.4
Industrial Components 542 0.2
Insurance 2,006 0.9
Leisure & Tourism 300 0.1
Machinery & Engineering 7 0.0
Merchandising 3,243 1.5
Metals -- Non-Ferrous 991 0.4
Metals -- Steel 7,501 3.4
Misc. Materials & Commodities 1,275 0.6
Multi-Industry 8,099 3.7
Real Estate 955 0.4
Telecommunications 738 0.3
Telecommunications -- Integrated 39,910 18.0
Telecommunications -- Long Distance 112 0.1
Telecommunications -- Wireless 8,285 3.7
Textiles & Apparel 769 0.3
Transportation -- Road & Rail 1,247 0.6
Transportation -- Shipping 276 0.1
Utilities -- Electrical & Gas 14,567 6.6
Wholesale & International Trade 1,677 0.8
Other 15,001 6.8
------------- ------
U.S.$ 224,224 101.2%
------------- ------
------------- ------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
SUMMARY OF TOTAL INVESTMENTS BY COUNTRY
DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
COUNTRY (000) ASSETS
- ---------------------------------------------------------------------------
<S> <C> <C>
Argentina U.S.$ 3,964 1.8%
Brazil 15,932 7.2
Chile 2,497 1.1
China 2,420 1.1
Colombia 8 0.0
Czech Republic 869 0.4
Egypt 2,966 1.3
Greece 17,946 8.1
Hong Kong 1,666 0.8
Hungary 8,731 3.9
India 18,619 8.4
Indonesia 3,821 1.7
Israel 12,857 5.8
Korea 26,838 12.1
Malaysia 4,553 2.1
Mexico 23,788 10.7
Pakistan 4,015 1.8
Philippines 3,838 1.7
Poland 9,785 4.4
Russia 2,778 1.3
South Africa 12,329 5.6
Taiwan 15,510 7.0
Thailand 5,834 2.6
Turkey 6,162 2.8
United States
(short-term investment) 9,720 4.4
Venezuela 840 0.4
Zimbabwe 657 0.3
Other 5,281 2.4
------------- ------
U.S. $224,224 101.2%
------------- ------
------------- ------
- ---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
STATEMENT OF OPERATIONS (000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 5,816
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 688
Less: Foreign Taxes Withheld. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (318)
- -----------------------------------------------------------------------------------------------------------------------------
Total Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,186
- -----------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,321
Custodian Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 953
Administrative Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339
Professional Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
Shareholder Reporting Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
Country Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
Directors' Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Transfer Agent Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Other Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
Total Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,216
- -----------------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 970
- -----------------------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (47,266)
Foreign Currency Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (906)
- -----------------------------------------------------------------------------------------------------------------------------
Net Realized Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (48,172)
- -----------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Depreciation on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,637)
Depreciation on Foreign Currency Translations . . . . . . . . . . . . . . . . . . . . . . . . . . (365)
- -----------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation. . . . . . . . . . . . . . . . . . . . . . . . (22,002)
- -----------------------------------------------------------------------------------------------------------------------------
Total Net Realized Loss and Change in Unrealized Appreciation/Depreciation. . . . . . . . . . . . . (70,174)
- -----------------------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . U.S.$ (69,204)
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income. . . . . . . . . . . . . . . . . . . . . U.S.$ 970 U.S.$ 621
Net Realized Gain (Loss) . . . . . . . . . . . . . . . . . . . (48,172) 41,204
Change in Unrealized Appreciation/Depreciation . . . . . . . . (22,002) (45,450)
- -----------------------------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting from Operations . . . . . (69,204) (3,625)
- -----------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income. . . . . . . . . . . . . . . . . . . . . (2,318) (220)
In Excess of Net Investment Income . . . . . . . . . . . . . . (284) --
Net Realized Gain. . . . . . . . . . . . . . . . . . . . . . . (49,737) (244)
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions. . . . . . . . . . . . . . . . . . . . . . (52,339) (464)
- -----------------------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Reinvestment of Distributions (0 and 29,974
shares, respectively) . . . . . . . . . . . . . . . . . . . . -- 475
Repurchase of Shares (1,369,000 and 0 shares, respectively). . (10,985) --
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Capital Share Transactions . . . . . . . . . . . . . . . (10,985) 475
- -----------------------------------------------------------------------------------------------------------------------------
Total Decrease . . . . . . . . . . . . . . . . . . . . . . . . (132,528) (3,614)
Net Assets:
Beginning of Period. . . . . . . . . . . . . . . . . . . . . . 354,137 357,751
- -----------------------------------------------------------------------------------------------------------------------------
End of Period (including (distribution in excess of net
investment income)/ undistributed net investment income
of U.S.$(284) and U.S.$576, respectively) . . . . . . . . . U.S.$ 221,609 U.S.$ 354,137
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SELECTED PER SHARE DATA ----------------------------------------------------------------------------------
AND RATIOS: 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD. . . . . . U.S.$ 15.52 U.S.$ 15.69 U.S.$ 14.69 U.S.$ 20.30 U.S.$ 28.20
- ----------------------------------------------------------------------------------------------------------------------------------
Offering Costs (0.03) (0.02)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss). . . . . . . . . . 0.04 0.03 0.10 0.06 (0.12)
Net Realized and Unrealized Gain (Loss)
on Investments. . . . . . . . . . . . . . . . (3.05) (0.18) 1.92 (3.14) (1.30)
- ----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations . . . . . . (3.01) (0.15) 2.02 (3.08) (1.42)
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income. . . . . . . . . . . . (0.10) (0.01) --
In Excess of Net Investment Income (0.01) (0.05) --
Net Realized Gain. . . . . . . . . . . . . . -- (0.01) (0.84) (1.29) (6.50)
In Excess of Net Realized Gain . . . . . . . (2.18) -- (0.14) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions. . . . . . . . . . . . (2.29) (0.02) (1.03) (1.29) (6.50)
- ----------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Asset Value from
Capital Share Transaction . . . . . . . . . . -- -- 0.01* (1.21)++ 0.04+
Anti-Dilutive Effect of Shares Repurchased. . . 0.11 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD. . . . . . . . . U.S.$ 10.33 U.S.$ 15.52 U.S.$ 15.69 U.S.$ 14.69 U.S.$ 20.30
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD . . . . . U.S.$ 8.13 U.S.$ 13.06 U.S.$ 13.88 U.S.$ 15.50 U.S.$ 21.50
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value. . . . . . . . . . . . . . . . (24.88)% (5.75)% (4.59)% (16.61)%+++ (10.61)%
Net Asset Value (1) . . . . . . . . . . . . (19.61)% (0.97)% 13.84% (16.30)%+++ (5.33)%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS). . . . . U.S.$221,609 U.S.$354,137 U.S.$357,751 U.S.$332,879 U.S.$321,729
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets. . . . 1.96% 1.84% 1.87% 1.86% 1.75%
Ratio of Net Investment Income (Loss)
to Average Net Assets . . . . . . . . . . . 0.36% 0.15% 0.58% 0.30% (0.48)%
Portfolio Turnover Rate. . . . . . . . . . . . 101% 90% 67% 61% 52%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Increase (decrease) per share due to reinvestment of distributions.
+ 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.
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- ------------
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, 1998, securities valued at $24,827,000 representing
11.2% 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
19
<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 may use derivatives to achieve its investment objectives. The Fund may
engage in transactions in futures contracts on foreign currencies, stock
indices, as well as in options, swaps and structured notes. Consistent with the
Fund's investment objectives and policies, the Fund may use derivatives for
non-hedging as well as hedging purposes.
Following is a description of derivative instruments and their associated risks
that the Fund may utilize:
5. FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into foreign
currency exchange contracts generally to attempt to protect securities and
related receivables and payables against changes in future foreign exchange
rates and, in certain situations, to gain exposure to a foreign currency. A
foreign currency exchange contract is an agreement between two parties to
buy or sell currency at a set price on a future date. The market value of
the contract will fluctuate with changes in currency exchange rates. The
contract is marked-to-market daily and the change in market value is
recorded by the Fund as unrealized gain or loss. The Fund records realized
gains or losses when the contract is closed equal to the difference between
the value of the contract at the time it was opened and the value at the
time it was closed. Risk may arise upon entering into these contracts from
the potential inability of 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
20
<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 generally will expose the Fund to credit risks of the underlying
instruments as well as of the issuer of the Structured Security. Structured
Securities are typically sold in private placement transactions with no
active trading market. Investments in Structured Securities may be more
volatile than their underlying instruments, however, any loss is limited to
the amount of the original investment.
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 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", net operating losses 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 Dean Witter Investment 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 corporate 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 0.08% 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. The Chase Manhattan Bank and its affiliates serve as custodian for the
Fund. The Fund's assets held outside the United States have been held by Morgan
Stanley Trust Company ("MSTC"), which was an affiliate of the Adviser prior to
October 1, 1998. On October 1, 1998, MSTC was acquired by the Chase Manhattan
Bank. Custody fees are payable monthly based on assets held in custody,
investment purchase and sales activity and account maintenance fees, plus
reimbursement for certain out-of-pocket expenses. Through September 30, 1998,
the Fund paid MSTC fees of approximately $589,000
E. During the year ended December 31, 1998, the Fund made purchases and sales
totaling approximately $259,848,000 and $312,440,000, 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, 1998, the Fund incurred
$80,000 as brokerage commissions to Morgan Stanley & Co. Incorporated, an
affiliate of the Adviser. At December 31, 1998, the U.S. Federal income tax cost
basis of securities was $276,417,000 and, accordingly, net unrealized
depreciation for U.S. Federal income tax purposes was $57,474,000 of which
$20,574,000 related to appreciated securities and $78,048,000 related to
depreciated securities. At December 31, 1998, the Fund had a capital loss
carryforward for U.S. Federal income tax purposes of approximately $40,551,000
available to offset future capital gains all of which will expire on December
31, 2006. To the extent that capital gains are offset, such gains will not be
distributed to the shareholders. For the year ended December 31, 1998, the Fund
intends to elect to defer to January 1, 1999 post-october capital losses of
$7,958,000.
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<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, 1998 totaled $47,000 and are included in Payable for Directors' Fees and
Expenses on the Statement of Net Assets.
H. In June, the Board of Directors amended your Fund's by-laws to require
advance notice of any proposals to be made at stockholders' meetings. For annual
meetings the notice must be given to the Fund's secretary at least 60 days
before the anniversary date of the previous year's annual meeting. This year's
annual meeting of stockholders was held on June 24. This provision was adopted
to permit the Fund's stockholders and Directors to consider every stockholder
proposal on an informed basis and in an organized fashion, taking into account
the interests of all affected constituencies.
I. On September 15, 1998, the Fund commenced a share repurchase program for
purposes of enhancing shareholder value and reducing the discount at which the
Fund's shares traded from their net asset value. From that date through December
31, 1998, the Fund repurchased 1,369,000 shares or 6.00% of its Common Stock at
an average price per share of $8.00 and an average discount of 18.54% from net
asset value per share. The Fund expects to continue to repurchase its
outstanding shares at such time and in such amounts as it believes will further
the accomplishment of the foregoing objectives, subject to review by the Board
of Directors.
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<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
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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,
1998, 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, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 8, 1999
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<PAGE>
YEAR 2000 DISCLOSURE (UNAUDITED):
The investment advisory services provided to the Fund by the Adviser depend
on the smooth operation of its computer systems. Many computer and software
systems in use today cannot recognize the year 2000, but revert to 1900 or
some other date, due to the manner in which dates were encoded and
calculated. That failure could have a negative impact on the handling of
securities trades, pricing and account services. The Adviser has been
actively working on necessary changes to its own computer systems to deal
with the year 2000 problem and expects that its systems will be adapted
before that date. There can be no assurance, however, that the Adviser will
be successful. In addition, other unaffiliated service providers may be faced
with similar problems. The Adviser is monitoring their remedial efforts, but,
there can be no assurance that they and the services they provide will not be
adversely affected.
In addition, it is possible that the markets for securities in which the Fund
invests may be detrimentally affected by computer failures throughout the
financial services industry beginning January 1, 2000. Improperly functioning
trading systems may result in settlement problems and liquidity issues. In
addition, corporate and governmental data processing errors may result in
production problems for individual companies and overall economic
uncertainties. Earnings of individual issuers will be affected by remediation
costs, which may be substantial and may be reported inconsistently in U.S.
and foreign financial statements. Accordingly, the Fund's investments may be
adversely affected.
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<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
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