<PAGE>
THE PAKISTAN INVESTMENT FUND, INC.
---------------------------------------------
OFFICERS AND DIRECTORS
<TABLE>
<S> <C>
Barton M. Biggs J. Antonio Quila
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS Altaf M. Saleem
Warren J. Olsen DIRECTOR
PRESIDENT AND DIRECTOR Frederick B. Whittemore
Peter J. Chase DIRECTOR
DIRECTOR James W. Grisham
John W. Croghan VICE PRESIDENT
DIRECTOR Harold J. Schaaff, Jr.
David B. Gill VICE PRESIDENT
DIRECTOR Joseph P. Stadler
Graham E. Jones VICE PRESIDENT
DIRECTOR Valerie Y. Lewis
John A. Levin SECRETARY
DIRECTOR James R. Rooney
William G. Morton, Jr. TREASURER
DIRECTOR Joanna M. Haigney
ASSISTANT TREASURER
</TABLE>
---------------------------------------------
U.S. INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
----------------------------------------------------------------
PAKISTANI INVESTMENT ADVISER
International Asset Management Company Limited
Sidco Avenue Centre
6th Floor
Strachen Road
Karachi, Pakistan
----------------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank, N.A.
73 Tremont Street
Boston, Massachusetts 02108
----------------------------------------------------------------
CUSTODIANS
Morgan Stanley Trust Company (International)
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank, N.A. (Domestic)
770 Broadway
New York, New York 10003
----------------------------------------------------------------
SHAREHOLDER SERVICING AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 278-4353
----------------------------------------------------------------
LEGAL COUNSEL
Rogers & Wells
200 Park Avenue
New York, New York 10166
----------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
----------------------------------------------------------------
For additional Fund information, including the Fund's net asset value per share
and information regarding the investments comprising the Fund's portfolio,
please call 1-800-221-6726.
----------------------------------
THE
PAKISTAN
INVESTMENT
FUND, INC.
---------------------
ANNUAL REPORT
DECEMBER 31, 1995
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------
For the year ended December 31, 1995, the Fund's total return, based on net
asset value per share, was -42.43%, as compared with -31.14% for the IFC Index
for Pakistan. With perhaps a slight sigh of relief, we mark the end of 1995--a
disappointing year for emerging markets and an even worse year for Pakistan.
After a year of market turmoil in Mexico, civil war in Sri Lanka and Enron
follies in India, Pakistan held the dubious distinction of being the worst
performing of all the emerging markets according to the MSCI emerging markets
index: down 38.27% for the year. Not surprisingly, the NAV of the Pakistan
Investment Fund suffered as well: down 18.89% for the fourth quarter as compared
with a decline in the IFC Index of 16.73%.
The Fund's performance is disappointing even in light of Pakistan's recent
problems. While it is true that we had to invest the bulk of the Fund's assets
at a time when the Karachi market was at its historic high, it also should be
said that our significant exposure to the cement and polyester synthetic fiber
sectors was a significant drag on performance. Our underweighting in Hubco, the
utility greenfield project which was the top performing stock in the market last
year, didn't help either. And finally, our overweight positions in the small cap
sector also contributed to our underperformance as many of these small issues
led the market's decline.
Looking back at 1995, one can cite innumerable factors which contributed to the
market's downfall. To name just a few: ongoing violence in Karachi, the
lingering macro and microeconomic effects of the country's third consecutive
poor cotton crop and some uncertainty over the government's commitment to the
IMF reform program. Instead of rehashing why the violence and poor economic
growth depressed the market last year, we thought it more useful to focus on
what changes have been made going forward--both organizationally and
strategically.
On the organizational front, we have restructured the role and responsibility of
our local advisor in Karachi-- International Asset Management Company. This
Morgan Stanley Asset Management affiliate has a new country manager, Farooqh
Lakhani, and is now fully set up in the technological and personnel sense to
provide us with the increased objective, detailed and prescient information that
one needs in a market such as Pakistan. Strategically, we have done a
considerable amount of portfolio restructuring over the past six months. On the
sell side, we have significantly decreased our weightings in the cement,
polyester synthetic fiber and small cap sectors. Cement prices remain under
pressure due to oversupply and import competition from India while fiber prices
have plunged worldwide due to the Chinese government's decision to pull back
from the market. And, while we still retain selective exposure to the small cap
sector in Pakistan, we have been of late focusing more on the larger blue chip
companies whose lower betas keep them stable in choppy markets.
On the buy side, we have increased our exposure to the rapidly growing fuel and
energy sector by increasing our holdings in Hubco and Sui Northern, the gas
distributor for northern Pakistan. Consistent with our view that a strong cotton
crop will spur a recovery in the textile sector, we have also added two textile
spinners--Gadoon and Crescent Textile--to the portfolio. The other main
beneficiary from an improved cotton crop will be the fertilizer sector.
Accordingly, our overweight positions in Engro Chemical and Fauji
Fertilizer--the two leading fertilizer manufacturers in Pakistan--should enhance
performance in 1996.
It is also worth examining the extent to which last year's negative events might
affect the market this year. First and foremost is the always volatile Karachi
situation. Without a doubt, the security situation in Karachi deteriorated
significantly last year. And, while there have been some initial attempts by the
government and the MQM opposition to reach some common ground, the differences
between the two sides remain substantial. Realistically, we do not expect an
immediate resolution to a problem which has plagued Pakistan since its
inception; what we do expect, however, is that the market will not react as
sharply to such dislocations in the year ahead. For one, the Karachi situation
has been effectively discounted in stock prices and locals are now more inured
than ever to street turmoil in the city; and secondly, it seems that both the
MQM and the government have staked out their positions with a bias towards the
extreme, making it more likely for compromise in the months ahead than further
disagreement.
On the subject of the cotton crop and economic reform, the news is better.
Estimates are for a crop of close to 11 million bales for the fiscal year ending
June 1996--a level approaching the record output of 12 million bales in 1992.
The improved crop will boost GDP
2
<PAGE>
growth above the government's previous estimate of 6% while also improving tax
collection, the budget deficit and exports. Indeed the bumper crop could not
have come at a more propitious time as the IMF has been keeping a close eye on
the government's handling of the reform process. As Pakistan well knows, it is
always easier to take the sensitive reform measures-- such as tax reform--at a
time when the economy is growing. Having just qualified for the second tranche
of the stand-by loan granted in December 1995, relations with the IMF have
improved considerably over the past year and as budget targets are likely to be
met this year, IMF support should continue.
The government's privatization program is also likely to make some gains in
1996. Having officially corporatized PTC, the telecom monopoly at the beginning
of the year, the government is looking to cement a 25% sale to a strategic
investor by the end of March. This will not only bolster market confidence but
be a boon to the economy as foreign reserves will increase substantially.
As an early stage emerging market, Pakistan will tend to be more volatile than
its peer group--as was evidenced last year. While 1995 was painful for all
concerned, it can at least be said that all the bad news is now effectively in
the market. At 8x 1996 expected earnings, the market is trading at the lower end
of its historic PE range and with so much bad news already in prices, small
pieces of good news can have a substantial effect on the market. It is also true
that the Pakistan market is very sensitive to foreign capital flows, the absence
of which significantly squeezed liquidity last year. If indeed there is to be a
flow of funds out of the U.S. to Asian markets, Pakistan, as the worst
performing market in 1995 is bound to receive some attention.
Sincerely,
[SIGNATURE]
Marianne L. Hay
SENIOR PORTFOLIO MANAGER
[SIGNATURE]
Landon Thomas
PORTFOLIO MANAGER
February 9, 1996
3
<PAGE>
The Pakistan Investment Fund, Inc.
Investment Summary as of December 31, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION
TOTAL RETURN (%)
----------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (1)(3)**
------------------------ ------------------------ ------------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
ONE YEAR -41.63% -41.63% -42.43% -42.43% -31.14% -31.14%
SINCE INCEPTION* -62.63 -38.70 -53.23 -31.47 -37.00 -20.63
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
A BAR CHART REFLECTING THE DATA BELOW IS REFLECTED HERE.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31:
<S> <C> <C> <C>
1993* 1994 1995
Net Asset Value Per Share $ 14.03 $ 11.42 $ 6.57
Market Value Per Share $15.50 $9.00 $5.25
Premium/(Discount) 10.5% -21.2% -20.1%
Income Dividends - $0.03 $0.00#
Cap Gains Distributions - - $0.00#
Fund Total Return (2) -0.50% -18.36% -42.43%
Index Total Return (1)(3)** N/A -8.51% -31.14%
</TABLE>
(1) Assumes dividends and distributions, if any, were reinvested.
(2) Total investment return based on per share net asset value 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) IFC Index for Pakistan
* The Fund commenced operations on December 27, 1993.
** Unaudited
# Amount is less than $0.01 per share.
4
<PAGE>
The Pakistan Investment Fund, Inc.
Portfolio Summary as of December 31, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Equity Securities 91.7%
Debt Securities 1.7%
Short-Term Investments 6.6%
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Chemicals 19.5%
Utilities - Electrical & Gas 14.0%
Textiles & Apparel 11.1%
Building Materials & Components 10.2%
Energy Sources 10.1%
Telecommunications 8.4%
Banking 6.5%
Financial Services 6.2%
Forest Products & Paper 4.1%
Appliances & Household Durables 2.6%
Other 7.3%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
-------------
<C> <S> <C>
1. Fauji Fertilizer Co. Ltd. 9.1%
2. Pakistan State Oil Co. Ltd. 9.0
3. Pakistan Telecommunications GDR 5.1
4. Hub Power Co. Ltd. GDR 4.8
5. D.G. Khan Cement Ltd. 4.7
<CAPTION>
PERCENT OF
NET ASSETS
-------------
<C> <S> <C>
6. Sui Northern Gas Co. 4.6%
7. Engro Chemicals Ltd. 3.8
8. Pakistan Telecommunications 3.1
9. Fauji Jordan Fertilizer Co. Ltd. 2.9
10. Pel Appliances Ltd. 2.6
-----
49.7%
-----
-----
</TABLE>
5
<PAGE>
FINANCIAL STATEMENTS
- ---------
STATEMENT OF NET ASSETS
- ---------
DECEMBER 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C> <C>
- ---------------------------------------------------------
- ------------
PAKISTANI COMMON STOCKS (94.3%)
(Unless otherwise noted)
- -----------------------------------------------------------------
- -------------
APPLIANCES & HOUSEHOLD DURABLES (2.6%)
+ Pel Appliances Ltd. 814,010 U.S.$ 1,951
-------------
- -----------------------------------------------------------------
- -------------
AUTOMOBILES (0.0%)
+ Indus Motor Co. 5,000 2
-------------
- -----------------------------------------------------------------
- -------------
BANKING (6.5%)
+ Bank of Punjab 755,000 563
+ Bankers Equity Ltd. 949,520 631
+ Faysal Bank Ltd. 2,000,000 1,619
+ First International Investment Bank Ltd. 220,000 129
+ Muslim Commercial Bank Ltd. 1,539,475 1,653
+ Union Bank Ltd. 510,500 322
-------------
4,917
-------------
- -----------------------------------------------------------------
- -------------
BUILDING MATERIALS & COMPONENTS (10.2%)
+ Cherat Cement Ltd. 799,200 1,028
Dadabhoy Cement 1,351,400 537
+ Dadabhoy Cement (Rights) 686,450 273
+ Dandot Cement Co. 356,250 190
+ Dandot Cement Co. (Rights) 339,062 181
D.G. Khan Cement Ltd. 4,109,050 3,603
***+ D.G. Khan Cement Ltd. (Rights) 1,232,715 432
+ Pakland Cement 1,009,800 1,505
-------------
7,749
-------------
- -----------------------------------------------------------------
- -------------
CHEMICALS (19.5%)
Engro Chemicals Ltd. 702,000 2,903
Fauji Fertilizer Co. Ltd. 4,619,000 6,919
*+ Fauji Jordan Fertilizer Co. Ltd. 7,500,000 2,192
ICI Pakistan Ltd 225,000 407
+ ICI Pakistan Ltd. (Rights) 495,000 895
Searle Pakistan 280,709 377
Sitara Chemicals Industries 689,610 1,169
+ Sitara Chemicals Industries (Rights) 25 --
-------------
14,862
-------------
- -----------------------------------------------------------------
- -------------
ELECTRICAL & ELECTRONICS (1.3%)
+ Pak Electronics 937,497 986
-------------
- -----------------------------------------------------------------
- -------------
ENERGY SOURCES (10.1%)
Pakistan Oilfields Ltd. 377,170 882
Pakistan State Oil Co. Ltd. 882,518 6,835
-------------
7,717
-------------
- -----------------------------------------------------------------
- -------------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C> <C>
- ---------------------------------------------------------
- ------------
FINANCIAL SERVICES (6.2%)
Atlas BOT Lease 605,000 U.S.$ 769
***+ Atlas BOT Lease (Rights) 302,500 296
+ First Punjab Modaraba 12,480 2
+ LTV Capital Modaraba 1,400,000 178
+ LTV Capital Modaraba (Rights) 499,975 64
National Development Leasing Corp. 2,325,063 1,138
+ National Development Leasing Corp. (Rights) 170,005 83
Orix Leasing Pakistan Ltd. 520,590 936
+ P.I.C.I.C. 953,425 369
PIL Corporation Ltd. 1,180,200 828
+ Trust Modaraba 147,500 29
-------------
4,692
-------------
- -----------------------------------------------------------------
- -------------
FOOD & HOUSEHOLD PRODUCTS (1.3%)
+ Haseeb Waqas Sugar 3,240,000 639
+ Lever Brothers 20,000 395
-------------
1,034
-------------
- -----------------------------------------------------------------
- -------------
FOREST PRODUCTS & PAPER (4.1%)
Century Paper & Board 1,883,150 1,858
Packages Ltd. 441,200 1,302
-------------
3,160
-------------
- -----------------------------------------------------------------
- -------------
INDUSTRIAL COMPONENTS (0.3%)
+ General Tyres & Rubber Co. 195,000 155
+ General Tyres & Rubber Co. (Rights) 97,500 78
-------------
233
-------------
- -----------------------------------------------------------------
- -------------
INSURANCE (0.5%)
Adamjee Insurance Co. Ltd. 124,250 376
-------------
- -----------------------------------------------------------------
- -------------
TELECOMMUNICATIONS (8.4%)
+ Pakistan Telecommunications 26,542 2,385
+ Pakistan Telecommunications GDR 44,950 3,911
**+ T.F. Payphones Ltd. 350,000 129
-------------
6,425
-------------
- -----------------------------------------------------------------
- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C> <C>
- ---------------------------------------------------------
- ------------
TEXTILES & APPAREL (9.3%)
**+ Artistic Denim Mills 1,250,000 U.S.$ 621
+ Crescent Textile Mills Ltd. 27,000 17
+ Dewan Salman Fibre 720,625 1,738
***+ Dewan Salman Fibre (Rights) 107,812 --
+ Gadoon Textile Mills 670,000 783
+ Kohinoor Industries 904,601 278
+ Mohib Exports 492,900 58
+ Mohib Textile 406,500 119
+ Nishat Mills Ltd 2,093,002 1,789
+ Nishat Mills Ltd. (Rights) 313,950 268
+ Pakistan Synthetic 480,000 365
+ Saif Textiles 640,656 534
+ Zahur Textile Mills 2,130,000 171
+ Zahur Textile Mills (Rights) 4,400,000 354
-------------
7,095
-------------
- -----------------------------------------------------------------
- -------------
UTILITIES--ELECTRICAL & GAS (14.0%)
+ Hub Power Co. Ltd. GDR 5,415,500 3,664
+ Ibrahim Energy 490,000 336
+ Karachi Electric Supply Corp. 1,050,000 813
+ Kohinoor Power Co. Ltd. 275,700 201
+ Nishat Tek Ltd. 457,486 284
+ Nishat Tek Ltd. (Rights) 17 --
+ Sui Northern Gas Co. 3,999,796 3,478
+ Sui Southern Gas Co. 2,200,937 1,898
-------------
10,674
-------------
- -----------------------------------------------------------------
- -------------
TOTAL PAKISTANI COMMON STOCKS
(Cost U.S. $137,238) 71,873
-------------
- ---------------------------------------------------------
- ------------
FACE
AMOUNT
(000)
- ---------------------------------------------------------
- ------------
FIXED INCOME SECURITY (1.8%)
- ---------------------------------------------------------
- ------------
TEXTILES & APPAREL (1.8%)
Dewan Salman Fibre 5.00%, 5/5/01 (Cost U.S.
$2,000) U.S.$ 2,000 1,350
-------------
- -----------------------------------------------------------------
- -------------
SHORT-TERM INVESTMENT (6.7%)
- ---------------------------------------------------------
- ------------
REPURCHASE AGREEMENT (6.7%)
Chase Manhattan Bank, N.A., 5.35%, dated
12/29/95, due 1/2/96, to be repurchased at
U.S. $5,127 collateralized by U.S. $3,565
United States Treasury Bonds 12.00%, due
5/15/05, valued at U.S. $5,232
(Cost U.S. $5,124) 5,124
-------------
- -----------------------------------------------------------------
- -------------
TOTAL INVESTMENTS (102.8%)
(Cost U.S. $144,362) 78,347
-------------
- -----------------------------------------------------------------
- -------------
OTHER ASSETS (1.3%)
Cash 1
Dividends Receivable 724
Receivable for Investments Sold 181
Deferred Organization Costs 52
Interest Receivable 18
Other Assets 10 986
------------- -------------
- -----------------------------------------------------------------
- -------------
<CAPTION>
AMOUNT AMOUNT
(000) (000)
<C> <S> <C> <C>
- ---------------------------------------------------------
- ------------
LIABILITIES (-4.1%)
Payable for:
Investments Purchased U.S.$ (2,486)
Bank Overdraft (366)
U.S. Investment Advisory
Fees (59)
Professional Fees (53)
Custodian Fees (51)
Shareholder Reporting
Expenses (33)
Pakistani Investment Advisory
Fees (23)
Offering Costs (18)
Administrative Fees (13)
Directors' Fees and Expenses (11)
Other Liabilities (1) U.S.$ (3,114)
------------- -------------
- -----------------------------------------------------------------
- -------------
NET ASSETS (100%)
Applicable to 11,604,793 issued and outstanding U.S. $0.01
par value shares
(100,000,000 shares authorized) U.S.$ 76,219
------------
- -----------------------------------------------------------------
- -------------
NET ASSET VALUE PER SHARE U.S.$ 6.57
------------
- -----------------------------------------------------------------
- -------------
AT DECEMBER 31,1995, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Common Stock U.S.$ 116
Capital Surplus 164,095
Accumulated (Distributions in Excess of) Net Investment
Income (Loss) (27)
Accumulated Net Realized Loss (21,921)
Unrealized Depreciation on Investments
and Foreign Currency Translations (66,044)
- --------------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$ 76,219
------------
- -----------------------------------------------------------------
- -------------
+-- Non-income producing security.
*-- Security valued at cost-see note A-1 to financial statements.
**-- Security valued at fair value-see note A-1 to financial statements.
***-- Security valued at fair value as determined based on the market value of
the underlying security less subscription costs.
GDR-- Global Depositary Receipt.
</TABLE>
December 31, 1995 exchange rate--Pakistani Rupee (PKR) 34.21580=U.S.$ 1.00
FORWARD FOREIGN CURRENCY CONTRACT INFORMATION:
Under the terms of forward foreign currency contracts open at December 31,
1995, the Fund is obligated to receive foreign currency in exchange for U.S.
dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO RECEIVE VALUE SETTLEMENT FOR GAIN
(000) (000) DATE (000) (000)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------
PKR 71,109 U.S.$2,078 1/2/96 U.S.$2,078 U.S.$ --
PKR 13,563 396 1/2/96 396 --
--------- ------------ -----------
U.S.$2,474 U.S.$2,474 U.S.$ --
--------- ------------ -----------
--------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
STATEMENT OF OPERATIONS (000)
<S> <C>
- -------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends................................................. U.S.$ 1,930
Interest.................................................. 159
Less: Foreign Taxes Withheld.............................. (299)
- -------------------------------------------------------------------------------
Total Income............................................ 1,790
- -------------------------------------------------------------------------------
EXPENSES
U.S. Investment Advisory Fees............................. 978
Custodian Fees............................................ 323
Pakistani Investment Advisory Fees........................ 298
Administrative Fees....................................... 166
Professional Fees......................................... 82
Shareholder Reporting Expenses............................ 71
Directors' Fees and Expenses.............................. 60
Transfer Agent Fees....................................... 14
Other Expenses............................................ 154
- -------------------------------------------------------------------------------
Total Expenses.......................................... 2,146
- -------------------------------------------------------------------------------
Net Investment Loss................................... (356)
- -------------------------------------------------------------------------------
NET REALIZED LOSS
Investment Securities Sold................................ (21,921)
Foreign Currency Transactions............................. (258)
- -------------------------------------------------------------------------------
Net Realized Loss..................................... (22,179)
- -------------------------------------------------------------------------------
CHANGE IN UNREALIZED DEPRECIATION
Investments............................................... (33,641)
Foreign Currency Translations............................. (32)
- -------------------------------------------------------------------------------
Change in Unrealized Depreciation..................... (33,673)
- -------------------------------------------------------------------------------
Total Net Realized Loss and Change in Unrealized
Depreciation............................................... (55,852)
- -------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS....... U.S.$ (56,208)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
<S> <C> <C>
- -------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income (Loss).......... U.S.$ 236 U.S.$ (356)
Net Realized Gain (Loss).............. 107 (22,179)
Change in Unrealized Depreciation..... (32,275) (33,673)
- -------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting
from Operations...................... (31,932) (56,208)
- -------------------------------------------------------------------------------
Distributions:
Net Investment Income................. (246) (22)
In Excess of Net Investment Income.... (58) (6)
Net Realized Gain..................... -- (28)
- -------------------------------------------------------------------------------
Total Distributions................... (304) (56)
- -------------------------------------------------------------------------------
Capital Share Transactions:
Offering Costs........................ (89) --
Repurchase of Shares (1,043,500
shares).............................. (12,602) --
- -------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting
from Capital Share Transactions...... (12,691) --
- -------------------------------------------------------------------------------
Total Decrease........................ (44,927) (56,264)
Net Assets:
Beginning of Period................... 177,410 132,483
- -------------------------------------------------------------------------------
End of Period (including accumulated
undistributed (distributions in
excess of) net investment income
(loss) of U.S. $22 and U.S. $(27),
respectively)........................ U.S.$132,483 U.S.$ 76,219
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER 31,
SELECTED PER SHARE DATA AND DECEMBER 27, 1993* TO -------------------------------------
RATIOS: DECEMBER 31, 1993 1994 1995
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD....................... U.S.$ 14.10 U.S.$ 14.03 U.S.$ 11.42
- ---------------------------------------------------------------------------------------------
Offering Costs................ (0.07) (0.01) --
- ---------------------------------------------------------------------------------------------
Net Investment Income
(Loss)....................... -- 0.02 (0.02)
Net Realized and Unrealized
Loss on Investments.......... -- (2.78) (4.83)
- ---------------------------------------------------------------------------------------------
Total From Investment
Operations................. -- (2.76) (4.85)
- ---------------------------------------------------------------------------------------------
Distributions:
Net Investment Income....... -- (0.02) (0.00)#
In Excess of Net Investment
Income..................... -- (0.01) (0.00)#
Net Realized Gain........... -- -- (0.00)#
- ---------------------------------------------------------------------------------------------
Total Distributions......... (0.03) (0.00)#
- ---------------------------------------------------------------------------------------------
Increase in Net Asset Value
due to Repurchase of
Shares....................... -- 0.19 --
- ---------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD....................... U.S.$ 14.03 U.S.$ 11.42 U.S.$ 6.57
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF
PERIOD....................... U.S.$ 15.50 U.S.$ 9.00 U.S.$ 5.25
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value................ 9.93% (41.76)% (41.63)%
Net Asset Value (1)......... (0.50)% (18.36)% (42.43)%
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD
(THOUSANDS).................. U.S.$177,410 U.S.$132,483 U.S.$ 76,219
- ---------------------------------------------------------------------------------------------
Ratio of Expenses to Average
Net Assets................... 2.51%** 1.93% 2.20%
Ratio of Net Investment Income
(Loss) to Average Net
Assets....................... 0.41%** 0.15% (0.36)%
Portfolio Turnover Rate....... 0% 2% 15%
- ---------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
#Amount is less than U.S.$0.01 per share
(1) Total investment return based on per share net asset value reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. These percentages are not an indication of the performance of a
shareholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value of
the Fund.
Note: Current period permanent book-tax differences, if any, are not included
in the calculation of net investment income (loss) per share.
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
- ----------
The Pakistan Investment Fund, Inc. (the "Fund") was incorporated in Maryland
on January 14, 1992, 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 are in conformity with
generally accepted accounting principles for investment companies. Such policies
are consistently followed by the Fund in the preparation of its financial
statements. Generally accepted accounting principles may require management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results may differ from those estimates.
1. SECURITY VALUATION: In valuing the Fund's assets, all listed equity
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. All non-equity
securities for which market quotations are readily available are valued at
their market values. Short-term securities which mature in 60 days or less
are valued at amortized cost. All other securities and assets for which
market values are not readily available (including investments which are
subject to limitations as to their sale) are valued at fair value as
determined in good faith by the Board of Directors (the "Board"), although
the actual calculations may be done by others.
2. TAXES: It is the Fund's intention to continue to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly, no
provision for U.S. Federal income taxes is required in the financial
statements.
The Fund has been granted an exemption from taxation on capital gains
realized on sales of equity securities quoted on any Pakistani exchange.
While this exemption is applicable for an indefinite period, there is no
assurance that it will not be revoked in the future.
Capital surplus, accumulated (distributions in excess of) net investment
income (loss) and accumulated net realized loss have been adjusted for
current and prior period permanent book-tax differences. Current period
adjustments arose principally from differing book-tax treatments for foreign
currency transactions and net operating losses.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the
underlying securities, the value of which equals or exceeds the principal
amount of the repurchase transaction, including 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. To the extent that proceeds from
the sale of the underlying securities are less than the repurchase price
under the agreement, the Fund may incur a loss. In the event of default or
bankruptcy by the other party to the agreement, realization and/or retention
of the collateral or proceeds may be subject to legal proceedings.
4. FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are
maintained in U.S. dollars. Amounts denominated in Pakistani rupees are
translated into U.S. dollars at the mean of the bid and asked prices of such
currency against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the
prevailing rate of exchange on the valuation date;
- investment transactions and investment income at
the prevailing rate of exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rate 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 rate 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 the foreign exchange rate from the
fluctuations arising from changes in the market prices of securities sold
during the period. Accordingly, realized and unrealized foreign currency
gains (losses) are included in the reported net realized and unrealized
gains (losses) on investment transactions and balances.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of forward foreign
currency contracts, disposition of foreign currency, 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
10
<PAGE>
(depreciation) in the Statement of Net Assets. The change in net unrealized
currency gains (losses) for the period is reflected in the Statement of
Operations.
5. FORWARD FOREIGN CURRENCY CONTRACTS: The Fund may enter into forward foreign
currency contracts to protect securities and related receivables and
payables against changes in future foreign exchange rates. A forward foreign
currency 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 gains 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. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Interest
income is recognized on the accrual basis. Dividend income is recorded on
the ex-date (except certain dividends which may be recorded as soon as the
Fund is informed of such dividend) net of applicable withholding taxes where
recovery of such taxes is not reasonably assured. Distributions to
shareholders are recorded on the ex-date. Income distributions and capital
gain distributions are determined in accordance with U.S. Federal income tax
regulations which may differ from generally accepted accounting principles.
These differences are principally due to the timing of the recognition of
losses on securities and due to permanent differences described in note A-2.
B. Morgan Stanley Asset Management Inc. (the "U.S. Adviser") provides
investment advisory services to the Fund under the terms of an Investment
Advisory and Management Agreement (the "Agreement"). Under the Agreement, the
U.S. Adviser is paid a fee computed weekly and payable monthly at an annual rate
of 1.00% of the Fund's average weekly net assets.
C. International Asset Management Company Limited (the "Pakistani Adviser")
provides investment advice, research and assistance on behalf of the Fund to
Morgan Stanley Asset Management Inc. under terms of a contract. Under the
contract, the Pakistani Adviser is paid a fee computed weekly and paid monthly
at an annual rate of .30% of the Fund's average weekly net assets.
D. Effective September 1, 1995, The Chase Manhattan Bank, N.A., through its
affiliate Chase Global Funds Services Company (the "Administrator"), (formerly
Mutual Funds Service Company, a wholly owned subsidiary of the United States
Trust Company of New York), 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 .06% of the Fund's average weekly net assets, plus $100,000 per annum.
In addition, the Fund is charged certain out of pocket expenses by the
Administrator. Effective September 1, 1995, The Chase Manhattan Bank, N.A. acts
as custodian for the Fund's assets held in the United States. Prior to September
1, 1995, Mutual Funds Service Company and United States Trust Company of New
York provided administrative and custodian services, respectively, to the Fund
under the same terms, conditions and fees as stated above.
E. Morgan Stanley Trust Company (the "International Custodian"), an affiliate
of the Adviser, acts as custodian for the Fund's assets held outside the United
States in accordance with a Custody Agreement. International Custodian fees are
payable monthly based on Fund assets under custody plus an amount for each
transaction effected. For the year ended December 31, 1995, international
custodian fees totaled $317,000, of which $50,000 was payable to the
International Custodian at December 31, 1995. In addition, for the year ended
December 31, 1995, the Fund has earned interest income of $2,000 and incurred
interest expense of $12,000 on balances with the International Custodian.
F. During the year ended December 31, 1995, the Fund made purchases and sales
totaling $14,617,000 and $18,192,000, respectively, of investment securities
other than long-term U.S. Government securities and short term investments.
There were no purchases or sales of long-term U.S. Government securities. At
December 31, 1995, the U.S. Federal income tax cost basis of securities was
$144,397,000 and accordingly, net unrealized depreciation for U.S. Federal
income tax purposes was $66,050,000, of which $827,000 related to appreciated
securities and $66,877,000 related to depreciated securities. At December 31,
1995, the Fund had a capital loss carryforward for U.S. Federal Income tax
purposes of approximately $11,037,000 available to offset future capital gains
which will expire on December 31, 2003. To the extent that capital gains are
offset, such gains will not be distributed to the shareholders. For the year
ended December 31, 1995, the Fund expects to defer to January 1, 1996 for U.S.
Federal income tax purposes, post-October capital losses of $10,879,000.
G. In connection with its organization and initial public offering of shares,
the Fund incurred $89,000 of organization costs. The organization costs are
being amortized on a straight line basis over a five year period beginning
December 27, 1993, the date the Fund commenced operations.
H. At December 31, 1995, a significant portion of the Fund's net assets consist
of equity securities and currency denominated in Pakistani rupees. Changes in
currency exchange rates will affect the value of and investment income from such
investments. Pakistani securities are
11
<PAGE>
subject to greater price volatility, limited capitalization and liquidity, and
higher rates of inflation than securities of companies based in the United
States. In addition, Pakistani securities may be subject to substantial
governmental involvement in the economy and greater social, economic and
political uncertainty.
I. During the year ended December 31, 1994, the Board authorized the Fund to
repurchase up to 1,250,000 shares of its Common Stock in the open market. During
the year, the Fund repurchased 1,043,500 shares of its Common Stock at an
average price per share of $12.08 and a weighted average discount of 14.95% per
share. Such shares are included as authorized but unissued shares of the Fund.
J. 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, 1995 totaled
$4,000 and are included in Payable for Directors' Fees and Expenses on the
Statement of Net Assets.
- --------------------------------------------------------------------------------
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
U.S. AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS
--------------------------------------------------------------------------------------
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
MARCH 31, 1995 JUNE 30, 1995 SEPTEMBER 30, 1995 DECEMBER 31, 1995
------------------- ------------------ --------------------- -------------------
TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE
-------- --------- ------- --------- ------ --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income...................... $ 275 $ 0.02 $ 541 $ 0.05 $ 332 $ 0.03 $ 642 $ 0.06
Net Investment Income (Loss)........... $ (367) $(0.03) $ (55) $(0.00)# $ (229) $(0.02) $ 295 $ 0.03
Net Realized Gain (Loss) and Change in
Unrealized Depreciation............... $(30,224) $(2.61) $(8,688) $(0.75) $1,160 $ 0.09 $(18,100) $(1.56)
Net Increase (Decrease) in Net Assets
Resulting from Operations............. $(30,591) $(2.64) $(8,743) $(0.75) $ 931 $ 0.07 $(17,805) $(1.53)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1994 JUNE 30, 1994 SEPTEMBER 30, 1994 DECEMBER 31, 1994
----------------- ------------------ -------------------- -------------------
TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE
------ --------- ------- --------- ----- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income............................ $1,204 $0.10 $ 1,065 $ 0.10 $ 698 $ 0.06 $ 384 $ 0.03
Net Investment Income (Loss)................. $ 438 $0.04 $ 488 $ 0.04 $(205) $(0.02) $ (485) $(0.04)
Net Realized Gain and Change in Unrealized
Appreciation (Depreciation)................. $ 701 $0.04 $(5,051) $(0.43) $ 592 $ 0.05 $(28,410) $(2.44)
Net Increase (Decrease) in Net Assets Result-
ing from Operations......................... $1,139 $0.08 $(4,563) $(0.39) $ 387 $ 0.03 $(28,895) $(2.48)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Fund may purchase shares of its Common Stock in the open market at such
prices and in such amounts as the Board of Directors may deem advisable.
# Amount is less than $0.01 per share.
- --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED):
For the year ended December 31, 1995, the Fund expects to pass through to
shareholders foreign tax credits of approximately $299,000.
12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------
To the Shareholders and Board of Directors of
The Pakistan Investment Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
The Pakistan Investment Fund, Inc. (the "Fund") at December 31, 1995, 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 two years then ended and for the period December 27, 1993
(commencement of operations) through December 31, 1993, 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, 1995 by
correspondence with the custodians and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 9, 1996
13
<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 American Stock Transfer
& Trust Company (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 and distributions.
In the case of shareholders, such as banks, brokers or nominees, which hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
shareholder as representing the total amount registered in the shareholder's
name and held for the account of beneficial owners who are participating in the
Plan.
Participants who wish to withdraw from the Plan should notify the Plan Agent
in writing. There is no penalty for non-participation or withdrawal from the
Plan, and shareholders who have previously withdrawn from the Plan may rejoin at
any time. Requests for additional information or any correspondence concerning
the Plan should be directed to the Plan Agent at:
The Pakistan Investment Fund, Inc.
American Stock Transfer & Trust Company
Dividend Reinvestment and Cash Purchase Plan
40 Wall Street
New York, NY 10005
1-800-278-4353
14
