<PAGE>
- -------------------------------------------------------------------------------
THE PAKISTAN
INVESTMENT
FUND, INC.
- --------------------------------------------------------------------------------
ANNUAL REPORT
DECEMBER 31, 1998
MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT INC.
INVESTMENT ADVISER
THE PAKISTAN INVESTMENT FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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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- --------------------------------------------------------------------------------
U.S. INVESTMENT ADVISER
Morgan Stanley Dean Witter Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------------------------------------
PAKISTAN INVESTMENT ADVISER
International Asset Management Company Limited
Nacon House
Maulana Din Mohammed Wafar Road
Karachi, Pakistan
- --------------------------------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
- --------------------------------------------------------------------------------
CUSTODIAN
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 278-4353
- --------------------------------------------------------------------------------
LEGAL COUNSEL
Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
- --------------------------------------------------------------------------------
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 Pakistan Investment Fund, Inc. (the
"Fund") had a total return, based on net asset value per share, of -57.25%
compared to -55.88% for the IFC Global Pakistan Total Return Index (the
"Index"). For the period from the Fund's commencement of operations on December
27, 1993 through December 31, 1998, the Fund had a total return, based on net
asset value per share, of -81.66% compared to -71.79% for the Index. On
December 31, 1998, the closing price of the Fund's shares on the New York Stock
Exchange was $1 7/8, representing a 20.7% discount to the Fund's net asset value
per share.
The Pakistan stock market witnessed continual erosion of value in 1998. The
initial trigger point was government action against Hub Power Company where
allegations were made regarding over invoicing and tariff agreement anomalies.
This seriously dented foreign investor confidence and caused significant
outflows of funds from the Pakistan market. Next came the nuclear tests on May
28 and the imposition of sanctions by G-7 countries. The market collapsed by
33% between April 30 and May 31. In order to stop the capital flight out of
Pakistan the government imposed draconian foreign exchange controls including
freezing of all accounts, restricting repatriation of foreign currency funds and
introducing a multiple exchange rate regime. These actions, perversely, led to
complete loss of investor confidence with the Karachi Stock Exchange Index
(KSE-100) falling to a record low of 765 on July 14, 1998.
The third quarter of 1998 exposed the vulnerability of government's external
financial position as forex reserves continued to fall despite a sharp
compression of imports. At the same time, negotiations with the International
Monetary Fund (IMF) regarding resumption of the stalled ESAF program took a new
twist with Pakistan requesting debt restructuring. This, along with a stiffer
stance from the IMF regarding implementation of certain conditions led to a
delay in approval of ESAF funding. The government missed a scheduled coupon
payment on its sovereign debt but managed to pay within the grace period
allowed. However, this episode led to a ratings downgrade by Standard & Poor's
to CC- from an already low CCC- status. The stock market, which had staged a
sharp rally with the KSE-100 rising nearly 45% in nominal terms by September 30,
1998, in expectations of early IMF agreement once again, slipped into a bearish
mode.
POLITICS
The domestic and regional political situation remained volatile through most of
1998 and showed a marked deterioration in the second half of the year.
Internally, the law and order situation in Karachi and the interior of Punjab,
the largest province, was characterized by sectarian violence and political
disturbances. Governor's rule was imposed in Sindh in the fourth quarter of
1998 when the ruling party, PML (N), broke up its provincial coalition with MQM
(A) after a high profile assassination of a leading and respected
educationalist, Hakim Saeed. The government, citing inefficiency of local law
enforcement agencies and stepped up terrorist activities, then set up military
courts in Sindh to try suspected criminals / terrorists.
Externally, relations with India depicted a sharp deterioration after the
nuclear tests, with the propaganda machinery in both countries stepping up their
rhetoric, which highlighted extremely polar positions on the key issue of
Kashmir. The U.S. stepped in to diffuse tension by pressuring both sides to
begin initial dialogues, encouraging the World Bank to act as an honest broker
in exploring the possibility of selling electricity from Pakistan to India,
easing some sanctions on both countries as well as giving the green signal to
the IMF to proceed with Pakistan's debt restructuring and renewal of the ESAF
program.
ECONOMIC DEVELOPMENTS
The impact of the above events on economic activity and corporate earnings has
been extremely negative. On the macro front, gross domestic product (GDP)
growth for the fiscal year ending in June 1999 is likely to be no more than 3.5%
compared to 5.4%, in 1998. Slowing economic activity has caused tax revenues to
fall well below the target of 340 billion rupee and these are not expected to
exceed 290-295 billion rupee. With external funding inflows at a standstill,
the government has had to resort to both bank and non-bank borrowing which is
likely to put upward pressure on the budget deficit. Reasonably good
agricultural output has, however, allowed food prices, a major component of CPI,
and thus inflation, to be kept in check, at around 8%. The other saving grace
for the government has been continued weakness in oil and commodity prices.
With domestic petroleum prices pegged at June 1997 levels, the government is
expected to earn a differential of up to 65 billion rupee on this account. One
major positive development has been a significant narrowing of trade and current
account deficits, due to import suppression. This has occurred because the
central bank has removed official exchange rate subsidies on
2
<PAGE>
almost all imports except petroleum and wheat and also imposed a 30% cash margin
requirement for opening import letters of credit. As a result, the current
account deficit is expected to shrink to 2% of GDP in fiscal year 1998-1999,
which is substantially lower than the historical average of 4-5% of GDP.
Going forward, there is a high probability of the IMF ESAF/EEF agreement being
reinstated in February 1999, followed by a restructuring of bilateral,
multilateral and commercial debt to the tune of $5.5 billion by the second
quarter of 1999. At the same time, under IMF/World Bank pressure, the
government has finally been forced to restart implementing long dormant
structural adjustment policies. Three major developments in this respect are as
follows:
First, the crisis ridden electricity and water utility, WAPDA, has been handed
over to army administration with the intention of recovering defaulted and
overdue payments and improving revenue collection by 50% over the next six
months. This is a major test case for the army and with its reputation at stake
the probability of success is certainly higher than previous half hearted
attempts at reforming WAPDA.
Second, again under IMF pressure, the government has withdrawn termination
notices given to independent power producers, and with the exception of Hubco
and Kapco (where the National Power of UK is the operator), new tariff
agreements have been signed with almost all IPPs. This is a major development
in that it opens the door to potential foreign direct investment at a future
date when country risk ratings improve.
Third, the Securities & Exchange Commission (SEC), in order to regulate capital
markets, has finally been formed and the old Corporate Law Authority (CLA)
abolished. The new SEC has wide ranging powers of censure and stiff penalties
against corporate misconduct and operates under the umbrella of constitutional
legal statute. It is expected to be fully functional by June 1999. This is
another example of the new hands-on approach by international development
agencies to push through structural reforms as the Asian Development Bank has
held up $250 million funding pending implementation of capital market reforms.
If the IMF funding and associated debt restructuring comes through as expected,
foreign exchange reserves, which had fallen below $500 million in early December
1998, are expected to climb back over $1.0 billion by June 1999. The government
has agreed with the IMF to unify its multiple exchange rates into a single rate
by July 1999. The rupee has already been devalued effectively by about 13% in
the fourth quarter of 1998. Unification of the exchange rate would likely imply
another 6-7% depreciation implying an annualized devaluation of about 20%. This
should help the process of narrowing trade and current accounts to continue as
imports become expensive and exports more competitive.
STOCK MARKET OUTLOOK
As far as foreign exchange controls and capital repatriation restrictions are
concerned, there is little likelihood of these being eased before the third
quarter of 1999. Until this happens and reserves show sustainability above the
$1.0 billion mark, there is limited possibility of any upward re-rating for
Pakistan by international credit agencies. This means foreign portfolio
investors are likely to remain conspicuous by their absence in the first half of
1999 and the Pakistan stock market would remain driven mainly by local
institutional investors and speculators.
The three main drivers of market performance are corporate earnings outlook,
alternative returns (interest rates) and liquidity. The post sanctions earnings
outlook is in general weak for 1999 with a few notable exceptions such as PTCL
and Engro Chemical. Key sectors such as textiles, cement and chemicals are
facing the twin pressures of over capacity and static or slowing demand. Thus
even though inflation is under check, most firms do not enjoy pricing power and
the ability to grow sales significantly. With margins not increasing, overall
earnings growth outlook is sluggish in 1999 with only a gradual recovery
expected in 2000.
The banking sector remains unattractive over the next 6 to 8 months as it faces
several pressures. With both trade and industrial activity having slumped by an
estimated 25% over last year, potential of rising non-performing loans has
increased. As a result, banks are reluctant to lend while increased overall
demand for loans is running below the historical trend. The central bank has
reduced rates on government paper to the 12% level from 16% a few months ago.
With excess liquidity usually put to work in "treasuries", this development has
caused a drop in bank yields. After the freezing of foreign currency accounts,
competition for rupee deposits has also heated up. This competition is not just
between banks but also with the government owned National Savings Schemes which
are offering 17% annualized returns on an after tax basis. Consequently, with
asset growth hemmed in, spreads under pressure and the possibility of higher
loan write-offs, 1999 earnings in the banking sector are expected to be flat at
best. From the domestic investor perspective, the
3
<PAGE>
benchmark interest rate is the 17% return on National Savings Schemes. Only
when this is reduced, as has been done recently in India, will equity
investments acquire attraction at the retail level. Consensus expectations are
that the NSS rates could be reduced in the June 99 budget.
Liquidity in the domestic stock market remains tight. There are several reasons
for this. First, the bearish trend in the market has discouraged banks from
actively lending for stock market operations. Second, a significant amount of
short-term support to the market used to come from excess liquidity with
exporters and importers. With reduced trade volumes and 30% cash margin
requirements for opening letters of credit, this source of liquidity has dried
up. Third, domestic investment banks have traditionally been the major
institutional investors. Difficulty in raising funds after the freezing of
foreign currency accounts has meant that their liquidity position has been very
tight. Finally, foreign portfolio investors have typically remained on the sell
side for the past six months. A positive feature however, is that total foreign
holdings are estimated to have been reduced from just under $1.0 billion at the
beginning of 1998 to nearly $200 million at present. As a result, the downside
potential through sudden foreign selling has been greatly reduced.
INVESTMENT STRATEGY
In view of the above developments we expect the Pakistan market to move in a
narrow range of 800-1000 in the first quarter of 1999. Any sustainable
improvement is only likely if, as part of the IMF program, the structural reform
process begins to yield results. Key milestones here would include a
sustainable reduction in WAPDA's losses, increase in tax revenue collection in
the second half of 1999 and reduction in government borrowing; improvement in
export performance and inward remittances by expatriate Pakistanis leading to a
sustainable rise in foreign exchange reserves; elimination of foreign exchange
controls and unification of the exchange rate; resolution of tariff
disagreements with IPPs; the end of government/national power confrontation
vis-a-vis Hubco and Kapco; and finally, some definitive move towards
privatization. We believe that in the best case scenario, positive developments
on any of these fronts are unlikely before the third quarter of 1999. Until
then, we believe the stock market will remain lack luster providing only limited
trading opportunities.
As a result, the Fund's investment strategy will focus on a narrow group of
quality blue chips and look to lock in returns at higher levels with re-entry
during market weakness. At the same time, depending on the changing macro and
earnings outlook, we will be looking to reposition the Fund to fully participate
in any upward move in the second half of 1999.
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.
4
<PAGE>
The Pakistan Investment Fund, Inc.
Investment Summary as of December 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL TOTAL RETURN (%)
INFORMATION -----------------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (3)
------------------------ ------------------------ ------------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
---------- -------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
ONE YEAR -58.30% -58.30% -57.25% -57.25% -55.88% -55.88%
FIVE YEAR -86.80 -33.30 -81.57 -28.70 -71.79 -22.36
SINCE INCEPTION* -85.49 -31.96 -81.66 -28.70 -71.79 -22.32
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
[GRAPH]
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1993* 1994 1995 1996 1997 1998
-------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share . . . $ 14.03 $ 11.42 $ 6.57 $ 4.77 $ 6.01 $ 2.37
Market Value Per Share . . . . $ 15.50 $ 9.00 $ 5.25 $ 5.13 $ 4.88 $ 1.88
Premium/(Discount). . . . . . . 10.5% -21.2% -20.1% 7.5% -18.8% -20.7%
Income Dividends. . . . . . . . -- $ 0.03 $ 0.00# -- $ 0.01 $ 0.16
Capital Gains Distributions . . -- -- $ 0.00# -- -- --
Fund Total Return (2) . . . . . -0.50% -18.36% -42.43% -27.40% 26.32% -57.25%
Index Total Return (3). . . . . N/A -8.51% -31.14% -19.46% 26.13% -55.88%
</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 Pakistan Total Return Index is an unmanaged index of common
stocks, including dividends.
* The Fund commenced operations on December 27, 1993.
# Amount is less than $0.01 per share.
5
<PAGE>
The Pakistan Investment Fund, Inc.
Portfolio Summary as of December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Short-Term Investments (9.1%)
Equity Securities (90.9%)
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
[CHART]
<TABLE>
<S> <C>
Other (6.5%)
Utilities - Electrical & Gas (15.7%)
Textiles & Apparel (8.4%)
Telecommunications (16.6%)
Insurance (2.2%)
Automobiles (2.7%)
Banking (5.2%)
Chemicals (20.2%)
Energy Sources (10.9%)
Forest Products & Paper (1.4%)
Health & Personal Care (10.2%)
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. Pakistan Telecommunications Corp. 'A' 16.6%
2. Hub Power Co. 12.1
3. Fauji Fertilizer Co., Ltd. 11.8
4. Lever Brothers Pakistan Ltd. 10.2
5. Nishat Mills Ltd. 5.1
6. Engro Chemicals Ltd. 4.6
7. Pakistan State Oil Co., Ltd. 4.6
8. Shell Pakistan Ltd. 4.5
9. ICI Pakistan Ltd. 3.8
10. Pak Suzuki Motor Co., Ltd. 2.7
----
76.0%
----
----
</TABLE>
* Excludes short-term investments.
6
<PAGE>
FINANCIAL STATEMENTS
- ---------
STATEMENT OF NET ASSETS
- ---------
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------
<S> <C> <C>
PAKISTANI COMMON STOCKS (93.5%)
(Unless otherwise noted)
- ----------------------------------------------------------------------
AUTOMOBILES (2.7%)
Pak Suzuki Motor Co., Ltd. 1,579,000 U.S.$ 747
-------------
- ----------------------------------------------------------------------
BANKING (5.2%)
Askari Bank 1,688,592 364
Faysal Bank Ltd. 1,861,150 372
Muslim Commercial Bank Ltd. 2,222,770 690
-------------
1,426
-------------
- ----------------------------------------------------------------------
CHEMICALS (20.2%)
Engro Chemicals Ltd. 777,759 1,273
Fauji Fertilizer Co., Ltd. 3,875,200 3,229
(a)ICI Pakistan Ltd 4,778,300 1,052
-------------
5,554
-------------
- ----------------------------------------------------------------------
ENERGY SOURCES (10.9%)
Pakistan Oilfields Ltd. 471,462 498
Pakistan State Oil Co., Ltd. 882,400 1,258
Shell Pakistan Ltd. 427,800 1,226
-------------
2,982
-------------
- ----------------------------------------------------------------------
FINANCIAL SERVICES (0.0%)
(a)Trust Modaraba Ltd. 100 -- @
-------------
- ----------------------------------------------------------------------
FOREST PRODUCTS & PAPER (1.4%)
Packages Ltd. 648,671 384
-------------
- ----------------------------------------------------------------------
HEALTH & PERSONAL CARE (10.2%)
Lever Brothers Pakistan Ltd. 225,160 2,806
-------------
- ----------------------------------------------------------------------
INSURANCE (2.2%)
Adamjee Insurance Co., Ltd. 975,456 599
-------------
- ----------------------------------------------------------------------
TELECOMMUNICATIONS (16.6%)
Pakistan Telecommunications Corp. 'A'
13,218,300 4,570
-------------
- ----------------------------------------------------------------------
TEXTILES & APPAREL (8.4%)
Artistic Denim Mills Ltd. 1,250,000 159
Crescent Textile Mills Ltd. 1,325,192 193
Gadoon Textile Mills Ltd. 670,000 219
Ibrahim Fibre Ltd. 3,390,000 312
Nishat Mills Ltd. 7,987,428 1,410
Saif Textiles Mills Ltd. 110 -- @
-------------
2,293
-------------
- ----------------------------------------------------------------------
UTILITIES -- ELECTRICAL & GAS (15.7%)
Hub Power Co. 14,299,200 3,317
(a)Sui Northern Gas Co. 2,397,270 393
(a)Sui Southern Gas Co. 4,116,192 U.S.$ 603
-------------
4,313
-------------
- ----------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost U.S.$57,822) 25,674
-------------
- ----------------------------------------------------------------------
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------
SHORT-TERM INVESTMENTS (6.9%)
- ----------------------------------------------------------------------
REPURCHASE AGREEMENT (6.9%)
Chase Securities, Inc., 4.45%,
dated 12/31/98, due 1/4/99,
to be repurchased at
U.S.$1,902, United States
Treasury Bonds, 9.875%,
due 11/15/15, valued
at U.S.$1,941
(Cost U.S.$1,901) U.S.$ 1,901 1,901
-------------
- ----------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN (2.4%)
Pakistani Rupee
(Cost U.S.$665) PKR 36,599 666
-------------
- ----------------------------------------------------------------------
TOTAL INVESTMENTS (102.8%)
(Cost U.S.$60,388) 28,241
-------------
- ----------------------------------------------------------------------
OTHER ASSETS (4.9%)
Dividends Receivable U.S.$ 1,194
Receivable for Investments
Sold 110
Other Assets 33 1,337
------------- -------------
- ----------------------------------------------------------------------
LIABILITIES (-7.7%)
Payables For:
Dividends Declared (1,753)
Investment Advisory Fees (126)
Custodian Fees (71)
Professional Fees (57)
Administrative Fees (54)
Shareholder Reporting Expenses (22)
Directors' Fees and Expenses (15)
Pakistani Investment
Advisory Fees (9)
Other Liabilities (13) (2,120)
------------- -------------
- ----------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 11,604,792, issued
and outstanding U.S.$0.01 par
value shares (100,000,000
shares authorized) U.S.$ 27,458
-------------
-------------
- ----------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 2.37
-------------
-------------
- ----------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
AMOUNT
SHARES (000)
- ----------------------------------------------------------------------
<S> <C> <C>
AT DECEMBER 31, 1998, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------
Common Stock U.S.$ 116
Capital Surplus 162,958
Distribution in Excess of Net Investment Income (25)
Accumulated Net Realized Loss (103,371)
Unrealized Depreciation on Investments and
Foreign Currency Translations (32,220)
- ----------------------------------------------------------------------
TOTAL NET ASSETS U.S.$ 27,458
------------
------------
- ----------------------------------------------------------------------
</TABLE>
(a)-- Non-income producing
@ -- Value is less than U.S.$500.
- ----------------------------------------------------------------------
DECEMBER 31, 1998 EXCHANGE RATE:
- ----------------------------------------------------------------------
(PKR) Pakistan Rupee 54.953 = U.S.$1.00
- ----------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
STATEMENT OF OPERATIONS (000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 4,284
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Less: Foreign Taxes Withheld. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (523)
- -----------------------------------------------------------------------------------------------------------------------------
Total Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,825
- -----------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 445
Custodian Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
Administrative Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
Pakistani Investment Advisory Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Professional Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Country Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Shareholder Reporting Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Amortization of Organizational Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Transfer Agent Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Directors' Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Other Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
- -----------------------------------------------------------------------------------------------------------------------------
Total Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
- -----------------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,625
- -----------------------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (Loss)
Investment Securities Sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,575)
Foreign Currency Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (904)
- -----------------------------------------------------------------------------------------------------------------------------
Net Realized Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,479)
- -----------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Depreciation on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,506)
Depreciation on Foreign Currency Translations . . . . . . . . . . . . . . . . . . . . . . . . . . . (71)
- -----------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . (18,577)
- -----------------------------------------------------------------------------------------------------------------------------
Net Realized Loss and Change in Unrealized Appreciation/Depreciation . . . . . . . . . . . . . . . . . . (43,056)
- -----------------------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . U.S.$ (40,431)
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1998
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
<S> <C> <C>
Operations:
Net Investment Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 2,625 U.S.$ 430
Net Realized Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,479) (11,412)
Change in Unrealized Appreciation/Depreciation . . . . . . . . . . . . . . . . (18,577) 25,484
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations. . . . . . . . (40,431) 14,502
- -----------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,857) (130)
In Excess of Net Investment Income . . . . . . . . . . . . . . . . . . . . . . (25) --
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,882) (130)
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease). . . . . . . . . . . . . . . . . . . . . . . . . . . (42,313) 14,372
Net Assets:
Beginning of Period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,771 55,399
- -----------------------------------------------------------------------------------------------------------------------------
End of Period (including (distribution in excess of net investment
income) / undistributed net investment income of U.S.$(25) and
U.S.$76, respectively). . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 27,458 U.S.$ 69,771
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<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.$ 6.01 U.S.$ 4.77 U.S.$ 6.57 U.S.$ 11.42 U.S.$ 14.03
- ------------------------------------------------------------------------------------------------------------------------------------
Offering Costs -- -- -- -- (0.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.22 0.04 (0.04) (0.02) 0.02
Net Realized and Unrealized Gain (Loss) on Investments (3.70) 1.21 (1.76) (4.83) (2.78)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations (3.48) 1.25 (1.80) (4.85) (2.76)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income (0.16) (0.01) -- (0.00)# (0.02)
In Excess of Net Investment Income (0.00)# -- -- (0.00)# (0.01)
Net Realized Gain -- -- -- (0.00)# --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.16) (0.01) -- (0.00)# (0.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Increase in Net Asset Value due to Shares Issued through
Rights Offering -- -- -- -- 0.19
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD U.S.$ 2.37 U.S.$ 6.01 U.S.$ 4.77 U.S.$ 6.57 U.S.$ 11.42
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD U.S.$ 1.88 U.S.$ 4.88 U.S.$ 5.13 U.S.$ 5.25 U.S.$ 9.00
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value (58.30)% (4.63)% (2.38)% (41.63)% (41.76)%
Net Asset Value (1) (57.25)% 26.32% (27.40)% (42.43)% (18.36)%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS) U.S.$27,458 U.S.$69,771 U.S.$55,399 U.S.$76,219 U.S.$132,483
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 2.69% 2.25% 2.30% 2.20% 1.93%
Ratio of Net Investment Income (Loss) to Average
Net Assets 5.88% 0.61% (0.63)% (0.36)% 0.15%
Portfolio Turnover Rate 55% 31% 28% 15% 2%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
# Amount is less than U.S.$0.01 per share.
(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.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- -----------------
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 securities
for which market quotations are readily available are valued at the last
sales price on the valuation date, or if there was no sale on such date, at
the mean between the current bid and asked prices. Securities which are
traded over-the-counter are valued at the average of the mean of current
bid and asked prices obtained from reputable brokers. Short-term securities
which mature in 60 days or less are valued at amortized cost. All other
securities and assets for which market values are not readily available
(including investments which are subject to limitations as to their sale)
are valued at fair value as determined in good faith by the Board of
Directors (the "Board"), although the actual calculations may be done by
others.
2. TAXES: It is the Fund's intention to continue to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly,
no provision for U.S. Federal income taxes is required in the financial
statements. The Fund is subject to withholding taxes on dividends earned.
Such tax is accrued at the time the applicable dividend income is recorded.
Pakistan currently has exempted from capital gains tax, most capital gains
realized on sales of equity securities quoted on any Pakistani exchange.
This exemption is applicable through 1998.
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. Amounts denominated in Pakistani rupees are
generally 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.
As described in Note A-1, at December 31, 1998, the Pakistani securities
and currency have been fair valued under procedures approved by the Board
due to the imposition of capital controls in Pakistan. The impact to the
Fund of such fair valuation procedures was significant.
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 foreign
currency exchange 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 are reflected as a
component of unrealized appreciation (depreciation) on investments and
foreign currency translations in the Statement of Net Assets. The change in
11
<PAGE>
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 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. 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 by an entity of
specified instruments and the issuance by that entity of one or more
classes of securities
12
<PAGE>
("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 net of applicable withholding taxes where recovery of
such taxes is not reasonably assured. Distributions to shareholders are
recorded on the ex-dividend date.
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, net operating losses and the timing of the recognition of
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 "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 Dean Witter Investment 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 0.30% of the Fund's average weekly net assets.
D. 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 0.06% 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.
E. 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 U.S. 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 purchases 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 $115,000.
F. During the year ended December 31, 1998, the Fund made purchases and sales
totaling $24,763,000 and $22,648,000, 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, 1998, the U.S. Federal income tax cost basis of securities was
$67,148,000 and, accordingly, net unrealized depreciation for U.S. Federal
income tax purposes was $39,573,000, all of which related to depreciated
securities. At December 31, 1998, the Fund had a capital loss carryforward for
U.S. Federal income tax purposes of approximately $91,260,000 available to
offset future capital gains of which $11,036,000 will expire on December 31,
2003, $57,209,000 will expire on December 31, 2004, $10,411,000 will expire on
December 31, 2005 and $12,604,000 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 for U.S. Federal
13
<PAGE>
income tax purposes, post-October currency losses of $173,000 and post-October
capital losses of $4,685,000.
G. 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 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.
H. Each Director of the Fund who is not an officer of the Fund or an
affiliated person as defined under the Investment Company Act of 1940, as
amended, may elect to participate in the Directors' Deferred Compensation Plan
(the "Plan"). Under the Plan, such Directors may elect to defer payment of a
percentage of their total fees earned as a Director of the Fund. These deferred
portions are treated, based on an election by the Director, as if they were
either invested in the Fund's shares or invested in U.S. Treasury Bills, as
defined under the Plan. The deferred fees payable, under the Plan, at December
31, 1998 totaled $14,000 and are included in Payable for Directors' Fees and
Expenses on the Statement of Net Assets.
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION (UNAUDITED):
For the year ended December 31, 1998, the Fund expects to pass through to
shareholders foreign tax credits of approximately $523,000. In addition, for
the year ended December 31, 1998, gross income derived from sources within
foreign countries amounted to $4,283,000.
14
<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, 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.
As discussed in Note A-1 to the financial statements, at December 31, 1998,
Pakistani securities and currency comprised 95.9% of the Fund's net assets.
These securities and currency have been fair valued under procedures approved by
the Board of Directors. The impact to the Fund of such fair valuation procedures
was significant. The fair values assigned may differ from the actual U.S. dollar
amounts realized upon disposition of the investments and the differences could
be material.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 8, 1999
15
<PAGE>
YEAR 2000 DISCLOSURE (UNAUDITED):
The investment advisory services provided to the Fund by the Advisers depend on
the smooth operation of their 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 Advisers have been actively working on
necessary changes to their own computer systems to deal with the year 2000
problem and expect that their systems will be adapted before that date. There
can be no assurance, however, that they will be successful. In addition, other
unaffiliated service providers may be faced with similar problems. The Advisers
are 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.
16
<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 or distributions.
In the case of shareholders, such as banks, brokers or nominees, which
hold shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time
to time by the shareholder as representing the total amount registered in the
shareholder's name and held for the account of beneficial owners who are
participating in the Plan.
Shareholders who do not wish to have distributions automatically
reinvested should notify the Plan Agent in writing. There is no penalty for
non-participation or withdrawal from the Plan, and shareholders who have
previously withdrawn from the Plan may rejoin at any time. Requests for
additional information or any correspondence concerning the Plan should be
directed to the Plan Agent at:
The 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
17
