<PAGE>
MORGAN STANLEY
EMERGING MARKETS DEBT FUND, INC.
- ---------------------------------------------
OFFICERS AND DIRECTORS
<TABLE>
<S> <C>
Barton M. Biggs Frederick B. Whittemore
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS James W. Grisham
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND DIRECTOR Harold J. Schaaff, Jr.
Peter J. Chase VICE PRESIDENT
DIRECTOR Joseph P. Stadler
John W. Croghan VICE PRESIDENT
DIRECTOR Valerie Y. Lewis
David B. Gill SECRETARY
DIRECTOR James R. Rooney
Graham E. Jones TREASURER
DIRECTOR Joanna M. Haigney
John A. Levin ASSISTANT TREASURER
DIRECTOR
William G. Morton, Jr.
DIRECTOR
</TABLE>
- ---------------------------------------------
INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------------------
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
The First National Bank of Boston
Investor Relations Department
P.O. Box 644, Mail Stop 46-02-09
Boston, Massachusetts 02102-0644
(617) 575-2900
- ---------------------------------------------------------
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.
------------------------
MORGAN STANLEY
EMERGING MARKETS
DEBT FUND, INC.
---------------------
ANNUAL REPORT
DECEMBER 31, 1995
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------
For the three months ended December 31, 1995, the Morgan Stanley Emerging
Markets Debt Fund, Inc. (the "Fund") had a total return, based on net asset
value per share, of 7.49% compared to 10.20% for the J.P. Morgan Emerging
Markets Bond Index (the "Index"). For the year ended December 31, 1995, the
Fund's total return, based on net asset value per share, was 26.85% compared to
27.54% for the Index. We believe that the markets' two-quarter strength is
extendable into the next several quarters -- albeit not at the same pace as the
last six months -- by virtue of still broadly attractive valuations which exist
in the benchmark assets for the 14 countries in which the Fund is invested.
Following a bout of profit taking early in the fourth quarter, the market
resumed its upward climb. Profit taking was triggered by broker/dealers who were
reducing positions due to fiscal year-end considerations. An improvement in the
markets sentiment toward Argentina prompted all market participants to increase
capital committed to this asset class. Hopes of a balanced budget agreement in
the U.S. provided a favorable backdrop to the currency and fixed income markets
in general over this period.
The fourth quarter was characterized by a high degree of dispersion in the
individual country performances, as investors re-positioned their portfolios.
Panama, Argentina and Venezuela were the outperformers and Poland, Philippines,
South Africa, Mexico and Russia were the underperformers for the quarter.
The markets perception of Argentina's credit risk changed dramatically as the
political infighting between rival contenders for power came to an end, as
President Menem seized the political initiative. Aggressive moves to tackle the
federal budget, remedial measures to tackle the fiscal problems in the provinces
and the privatization of the remaining state assets pulled Argentina out of the
vicious circle of declining confidence and poor economic performance following
the tequila crisis of the first quarter. Price movements were exaggerated by the
fact that most investors, foreign and local, were underweight in Argentina. The
return of liquidity and improving sentiment should result in the resumption of
economic growth in 1996. Entering the quarter with a relative underweight in
Argentina, we started increasing our positions during the first half of November
and ended the year close to our target levels. We intend to retain a relative
overweight allocation until such time when the market prices in all the good
economic news that we can expect in the first half of 1996.
Part of the increase in Argentina was financed by a modest reduction in our
exposure to Brazil. Brazil underperformed in the fourth quarter as the market
was disappointed with the progress of the reform agenda. Further, a plethora of
bad news such as an increase in the fiscal deficit, interventions in private
banks and politicians jockeying for influence adversely affected market
perceptions. Issues such as the lack of fiscal controls at the federal, state
and local levels and the burgeoning in the levels of internal debt questioned
the long term sustainability of the Real plan. Brazilian assets recovered quite
strongly during the last weeks of the quarter as President Cardoso
re-established the political momentum for the reform program. The fiscal
condition of the federal government will continue to be strained as the current
constitution does not provide the government with sufficient degrees of freedom.
Any long term corrective measures will have to wait until such time when reforms
(including the administrative, tax and social security reform measures currently
being discussed) are passed and implemented in the future. We remain optimistic
that the political process will deliver reforms eventually. Meanwhile the
competent economic managers of the country will work hard to maintain the Real
plan. Declining inflation and real interest rates, a manageable external account
situation and reasonable economic growth should make their work that much
easier.
We entered the quarter with an overweight position in Venezuela. Its high
yields, we thought, compensated us for the deterioration in the country's
economic fundamentals. High inflation, negative real interest rates and
spiraling fiscal deficits were counteracted by its oil revenues and reasonable
level of foreign exchange reserves. The political leadership was making half-
hearted measures to gradually move away from its non-orthodox economic policies.
The resignation of the last remaining committed reformer prompted us to reduce
the allocation to Venezuela. With hindsight, such a move proved to be pre-mature
as we underestimated the President's commitment to reform and his willingness to
engage the IMF and the World Bank in discussions to obtain external finance and
expertise in managing the transition to a more free market oriented economic
policy stance. The impact of stabilization measures on the real non-oil economy
will be severe and managing the political fallout of the IMF program will be one
of the key challenges for the government.
2
<PAGE>
There seems to have developed a political consensus in favor of a stabilization
program and this should reduce the probability of civil unrest following the
adoption of policies which will result in higher inflation, fiscal contraction
and positive real interest rates. We will increase our allocation to Venezuela
as the opportunity presents itself during the early part of 1996. We continue to
believe that implementing the IMF program will require an upgrade in the
technical skills of the administrative machinery.
Mexico once again proved to be a difficult credit to understand. Concerns over
the state of the banking system and the lack of a pick-up in domestic growth
caused nervousness in the foreign exchange markets in the fourth quarter. The
markets believed that the government lacked the political will and economic
policy alternatives to meet year-end demand for dollars. Fears about another
peso crisis and the lack of a clear and timely strategic response on the part of
the policy makers to combat the speculative demand for dollars produced the
second peso crisis within the space of less than twelve months. Our holdings in
peso denominated local treasury bills were affected as interest rates eventually
increased and the peso weakened dramatically. We continued to hold our positions
as we believed that this time around the pressures on the currency were seasonal
and temporary and a drastic tightening of monetary policy would reverse the
slide in the currency. Our outlook for 1996 is one of cautious optimism. The
return of growth is imperative from a social and political standpoint. Growth in
private consumption is unlikely to surprise on the upside as the system needs to
de-leverage and pay-off the debts accumulated in the last four years. The
economy remains vulnerable to any internal and external shocks that would delay
economic recovery. Local treasury bills continue to offer the best way to play
the Mexican debt markets as Mexican Brady bonds trade unjustifiably tight to
other credits in the region.
Russia, one of our relatively large bets against the Index, finally reached an
agreement with its external creditors. Prices of the loans did appreciate in
value soon after, but profit taking and a reduction in positions in front of the
Duma elections caused prices to come down from their highs. The Duma elections
did result in the Communists winning the largest share of the seats, however,
the opposition still lacks a two thirds majority to reverse the stance of
economic policy. The political aspirations of the incumbent President will,
however, result in changes in the tone of public pronouncements of the
administration and the President will take policy actions to increase his
approval ratings within the ranks of the center and right of the political
spectrum. There could be a slow-down and some dilution of the economic reform
program as economic policy takes a back seat to Presidential politics. The
potential for a policy vacuum or a near-term reversal in course will limit the
enthusiasm for Russian assets in the market. The non-performing loans, based on
the parameters of the announced restructuring, trade at spreads close to 2,000
bps above U.S. Treasuries, 700 bps wider than the assets of Ecuador, Bulgaria
and Venezuela. We believe that given the current state of the economy (declining
inflation, trade surpluses, a low external debt burden and a resumption in
growth) and the willingness of any future administration to service their
external debts, the market is mis-pricing Russian risk. The prices of the asset
should increase on the announcement of an IMF Extended Fund Facility and
continued compliance by the government under the terms of the restructuring
agreement. We do not envisage any changes in our exposure to Russia at this
point.
Morocco has been maintained at a steady 7% level for most of the quarter. At
current prices Morocco is attractive. The drought of 1995 is over and the
resumption of rainfall during this season will make all the difference to the
fortunes of this country. A better harvest will lead to higher growth, lower
inflation, improvement in the external payments position and give the policy
makers an opportunity to initiate long delayed structural reforms. The country
has outlined the course of economic policy to be followed in the next fiscal
year. Financial de-regulation, privatization, increasing exports and reforming
government expenditures are in the cards. Implementation of the proposed
strategy should result in a substantial tightening of Moroccan spreads in 1996.
In the high yield sector we remain sanguine about the prospects of Ecuador and
Bulgaria. We reduced our exposure to Nigeria following the delay in the
transition to civilian rule and the execution of leaders campaigning for civil
rights. The prospects for further political uncertainty and strife make Nigerian
assets risky.
Panama, a pre-Brady country turned in a strong performance for the quarter.
Investors sought to increase their allocations in the when-as and if issued
markets. The commitment of the new government to
3
<PAGE>
reform encouraged investors. The enactment of labor reform and the possible
privatization of state assets, including the properties along the Panama canal
should improve the economic fortunes of the country in the future. We retain our
relative overweight exposure to Panama.
Our outlook for emerging markets debt remains positive. A slowdown in growth in
the U.S. and Europe and in signs of inflation should result in a decline in
market rates. Credit stories unfolding in Latin America and Eastern Europe show
dramatic improvements over 1995. Policy makers commitment to reform has only
been strengthened in the post tequila days. The perfect line up of interest
rates, spreads and fund flows should result in price appreciation. We will
remain vigilant, however, for the first signs of a turnaround in market
sentiment or fundamentals.
Sincerely,
[SIGNATURE]
Barton M. Biggs
CHAIRMAN
[SIGNATURE]
Paul Ghaffari
PORTFOLIO MANAGER
February 2, 1996
4
<PAGE>
Morgan Stanley Emerging Markets Debt 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 37.48%+++ 37.48%+++ 26.85%+++ 26.85%+++ 27.54% 27.54%
SINCE INCEPTION* 28.74+++ 10.90+++ 27.71+++ 10.54+++ 23.08 8.88
</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:
1993* 1994 1995
<S> <C> <C> <C>
Net Asset Value Per Share $ 18.96 $ 12.23 $ 12.40
Market Value Per Share $ 18.13 $ 11.38 $ 12.50
Premium/(Discount) (4.4%) (7.0%) 0.8%
Income Dividends $0.16 $1.49 $1.72
Capital Gains Distributions - $0.41 -
Fund Total Return (2) 35.96% (25.95%) 26.85%+++
Index Total Return (1)(3)
** 18.67% (18.68%) 27.54%
</TABLE>
<TABLE>
<C> <S>
(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. This return does not include the effect of dilution in
connection with the Rights Offering. 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) JP Morgan Emerging Markets Bond Index
* The Fund commenced operations on July 23, 1993.
** Unaudited.
+++ Adjusted for Rights Offering.
</TABLE>
5
<PAGE>
Morgan Stanley Emerging Markets Debt Fund, Inc.
Portfolio Summary as of December 31, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Debt Instruments 89.8%
Short-Term Investments 10.0%
Other 0.2%
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 24.1%
Brazil 14.8%
Mexico 14.4%
Russia 13.4%
Morocco 7.7%
Ecuador 4.4%
Panama 4.3%
Algeria 3.8%
Venezuela 2.7%
Poland 1.9%
Bulgaria 1.6%
Nigeria 1.4%
Jordan 1.2%
India 1.0%
Peru 0.5%
Other 2.8%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
---------------
<C> <S> <C>
1. Republic of Argentina 'L'
Bond 6.8125%, 3/31/05 11.3%
2. Kingdom of Morocco
Restructuring and
Consolidation Agreement 'A'
1990 6.59375%, 1/1/09 7.7
3. Bank for Foreign Economic
Affairs (DEM) 7.5
4. Federative Republic of Brazil
'C' Bond PIK 8.00%, 4/15/14 5.3
5. Bank for Foreign Economic
Affairs (USD) 4.8
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
---------------
<C> <S> <C>
6. Republic of Panama
Unrestructured Loans 4.3%
7. Federative Republic of Brazil
'C' Bond PIK 8.00%, 4/15/14
(144A) 3.7
8. Mexican Cetes, 1/18/96 3.3
9. Republic of Argentina
Discount Bond 6.5625%,
3/31/23 3.3
10. Federative Republic of Brazil
Par Bond 'Z-L' 4.25%, 4/15/24 3.2
---
54.4%
---
---
</TABLE>
6
<PAGE>
FINANCIAL STATEMENTS
- ---------
PORTFOLIO OF INVESTMENTS
(Showing Percentage of Total Value of Investments)
- ----------
DECEMBER 31, 1995
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------
- -------------
DEBT INSTRUMENTS (89.8%)
- -----------------------------------------------------------------
- -------------
ALGERIA (3.8%)
LOAN AGREEMENTS (3.8%)
p###Algeria Loan Agreement 1989 FRF 27,830 U.S.$ 2,103
p###Algeria Reprofiled Loan
Agreement 'A' U.S.$ 10,220 5,314
~p###Algeria Reprofiled Loan
Agreement 'A' (Participation:
Salomon Brothers) 6,696 3,482
-------------
10,899
-------------
- -----------------------------------------------------------------
- -------------
ARGENTINA (24.1%)
BONDS (22.0%)
Argentine Cellular
Communications (Convertible)
7.00%, 3/7/96 1,000 1,249
Banco de Galicia 9.00%, 11/1/03 1,000 876
Banco de Galicia 10.875%,
12/1/97 2,000 2,015
Banco Rio de la Plata 8.75%,
12/15/03 4,000 3,533
Metrogas 'A' 12.00%, 8/15/00 1,000 1,018
+++Republic of Argentina Bocon,
Pre 1, 3.19%, 4/1/01 5,000 4,338
+++Republic of Argentina 'L'
Bond 6.8125%, 3/31/05 45,500 32,419
+++Republic of Argentina
Discount Bond 6.5625%, 3/31/23 14,400 9,450
/ / Republic of Argentina Par
Bond 5.00%, 3/31/23 14,400 8,226
-------------
63,124
-------------
NOTES (2.1%)
**Nortel Inversora 'A' 6.00%,
3/31/07 11,541 6,088
-------------
69,212
-------------
- -----------------------------------------------------------------
- -------------
BRAZIL (14.6%)
BONDS (14.6%)
/\Federative Republic of Brazil
'C' Bond PIK 8.00%, 4/15/14 26,318 15,100
#/\Federative Republic of Brazil
'C' Bond PIK 8.00%, 4/15/14 18,704 10,731
+++Federative Republic of Brazil
Discount Bond 'Z-L' 6.8125%,
4/15/24 2,500 1,544
/ / Federative Republic of
Brazil Par Bond 'Z-L' 4.25%,
4/15/24 17,250 9,186
Minas Gerais 'B' 8.25%, 2/10/00 5,500 4,565
Minas Gerais 7.875%, 2/10/99 1,000 845
-------------
41,971
-------------
- -----------------------------------------------------------------
- -------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------
- -------------
BULGARIA (1.6%)
BONDS (1.6%)
#+++The Republic of Bulgaria
Discount Bond 'A' 6.75%,
7/28/24 U.S.$ 49 U.S.$ 26
#+++The Republic of Bulgaria
Discount Bond 'B' 7.25%,
7/28/24 880 470
+++The Republic of Bulgaria
Interest Arrears Bond 6.75%,
7/28/11 5,648 2,627
#+++The Republic of Bulgaria
Interest Arrears Bond 6.75%,
7/28/11 3,024 1,406
-------------
4,529
-------------
- -----------------------------------------------------------------
- -------------
ECUADOR (4.4%)
BONDS (4.4%)
#+++Republic of Ecuador Discount
Bond 6.8125%, 2/28/25 792 401
+++Republic of Ecuador Discount
Bond 6.8125%, 2/28/25 7,115 3,606
#+++Republic of Ecuador Interest
Equalization Bond 6.50%,
12/21/04 671 409
+++Republic of Ecuador Interest
Equalization Bond 6.50%,
12/21/04 7,230 4,411
#/ / Republic of Ecuador Par
Bond 3.00%, 3/1/25 65 24
#+++Republic of Ecuador Past Due
Interest Bond 6.8125%, 3/1/15 11,277 3,778
-------------
12,629
-------------
- -----------------------------------------------------------------
- -------------
INDIA (1.0%)
BONDS (1.0%)
Saurashtra Cement Co. 17.00%,
9/7/97 INR 94,000 3,007
-------------
- -----------------------------------------------------------------
- -------------
JORDAN (1.2%)
BONDS (1.2%)
/ / Republic of Jordan Par Bond
4.00%, 12/23/23 U.S.$ 7,000 3,395
-------------
- -----------------------------------------------------------------
- -------------
MEXICO (7.2%)
BONDS (7.2%)
Banamex Pagare Discount Bond,
4/3/97 MXP 28,045 2,303
Banamex Pagare Discount Bond,
10/9/97 29,671 2,117
BNCE International Finance
7.25%, 2/2/04 U.S.$ 1,000 784
Grupo Industrial Durango 12.00%,
7/15/01 5,500 4,888
#Petroleos Mexicanos 8.625%,
12/1/23 10,500 7,875
+++United Mexican States
Discount Bond 'A' 6.7656%,
12/31/19 4,000 2,890
-------------
20,857
-------------
- -----------------------------------------------------------------
- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------
- -------------
MOROCCO (7.7%)
LOAN AGREEMENTS (7.7%)
~+++Kingdom of Morocco
Restructuring and Consolidation
Agreement `A' 1990
(Participation: Goldman Sachs,
Lehman Brothers, Salomon
Brothers) 6.59375%, 1/1/09 U.S.$ 32,500 U.S.$ 22,059
-------------
- -----------------------------------------------------------------
- -------------
NIGERIA (1.4%)
NOTES (1.4%)
Central Bank of Nigeria
Promissory Note 8.00%, 1/5/10 11,000 4,152
-------------
- -----------------------------------------------------------------
- -------------
PANAMA (4.3%)
LOAN AGREEMENTS (4.3%)
p###Republic of Panama Loans
16,483 12,362
-------------
- -----------------------------------------------------------------
- -------------
PERU (0.5%)
LOAN AGREEMENTS (0.5%)
++Republic of Peru - Petroperu
Working Capital Loan
2,000 1,360
-------------
- -----------------------------------------------------------------
- -------------
POLAND (1.9%)
NOTES (1.9%)
##Republic of Poland Note Zero
Coupon, 2/28/96
5,202 5,351
-------------
- -----------------------------------------------------------------
- -------------
RUSSIA (13.4%)
LOAN AGREEMENTS (13.4%)
++Bank for Foreign Economic
Affairs CHF 11,000 3,218
++Bank for Foreign Economic
Affairs DEM 81,000 21,466
++Bank for Foreign Economic
Affairs U.S.$ 40,150 13,701
-------------
38,385
-------------
- -----------------------------------------------------------------
- -------------
VENEZUELA (2.7%)
BONDS (2.7%)
+++Republic of Venezuela Debt
Conversion Bond 'DL' 6.5625%,
12/18/07 14,000 7,717
-------------
- -----------------------------------------------------------------
- -------------
TOTAL DEBT INSTRUMENTS
(Cost U.S.$243,021) 257,885
-------------
- -----------------------------------------------------------------
- -------------
NO. OF RIGHTS
- -----------------------------------------------------------------
- -------------
RIGHTS (0.0%)
- -----------------------------------------------------------------
- -------------
MEXICO (0.0%)
*+Mexico Recovery Rights,
expiring 6/30/03 (Cost $0) 6,154 --
-------------
- -----------------------------------------------------------------
- -------------
Value
CONTRACTS (000)
- -----------------------------------------------------------------
- -------------
PURCHASED OPTIONS (0.2%)
- -----------------------------------------------------------------
- -------------
BRAZIL (0.2%)
+Brazil Par Bond Call, expiring
1/8/96, strike price
U.S.$50.4375 (Cost U.S.$209) 220,000 U.S.$ 633
-------------
- -----------------------------------------------------------------
- -------------
<CAPTION>
FACE
AMOUNT
(000)
<S> <C> <C>
- -----------------------------------------------------------------
- -------------
SHORT TERM INVESTMENTS (10.0%)
- -----------------------------------------------------------------
- -------------
MEXICO (7.2%)
Mexican Cetes Zero Coupon,
1/11/96 MXP 30,719 3,928
Mexican Cetes Zero Coupon,
1/18/96 75,884 9,618
Mexican Cetes Zero Coupon,
2/8/96 20,000 2,471
Mexican Cetes Zero Coupon,
2/22/96 12,093 1,469
Mexican Cetes Zero Coupon,
7/25/96 15,839 1,636
Mexican Cetes Zero Coupon,
9/26/96 15,000 1,459
-------------
20,581
-------------
- -----------------------------------------------------------------
- -------------
UNITED STATES (2.8%)
REPURCHASE AGREEMENT (2.8%)
Chase Manhattan Bank, N.A.,
5.35%, dated 12/29/95, due
1/2/96, to be repurchased at
U.S.$8,219, collateralized by
U.S.$6,135, United States
Treasury Bond 8.875%, due
8/15/17, valued at U.S.$8,382 U.S.$ 8,214 8,214
-------------
- -----------------------------------------------------------------
- -------------
TOTAL SHORT TERM INVESTMENTS
(Cost U.S.$34,197) 28,795
-------------
- -----------------------------------------------------------------
- -------------
TOTAL INVESTMENTS (100.0%)
(Cost U.S.$277,427) U.S.$ 287,313
-------------
- -----------------------------------------------------------------
- -------------
</TABLE>
<TABLE>
<C> <C> <S>
+ -- Non-income producing.
++ -- Non-income producing -- in default.
+++ -- Variable/floating rate security -- rate disclosed is as of
December 31, 1995.
# -- 144A Security -- certain conditions for public sale may
exist.
## -- Security's redemption value is linked to the Republic of
Poland Treasury Bill maturing 2/28/96 and to the value of
the Polish Zloty and Deutsche Mark at maturity.
### -- Under restructuring at December 31, 1995 -- see note A-7 to
financial statements.
~ -- Participation interests were acquired through the financial
institutions indicated parenthetically.
/ / -- Step Bond -- coupon rate increases in increments to
maturity. Rate disclosed is as of December 31, 1995.
Maturity date disclosed is the ultimate maturity.
/\ -- 4.00% of 8.00% represents amount paid in cash. The remainder
is payment-in-kind. Cash payment rate increases in
increments to maturity.
* -- Security is valued at cost -- see note A-1 to financial
statements.
** -- Security valued at fair value -- see note A-1 to financial
statements.
p -- Issuer is making partial interest payments.
PIK -- Payment-in-Kind. Income may be paid in additional securities
or cash at the discretion of the issuer.
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
- -----------------------------------------------------------------
- -------------
<TABLE>
<S> <C> <C>
DECEMBER 31, 1995 EXCHANGE RATES:
- -----------------------------------------------------------------
- -------------
DEM Deutsche Mark 1.434 = U.S.$1.00
FRF French Franc 4.897 = U.S.$1.00
INR Indian Rupee 35.165 = U.S.$1.00
MXP Mexican Peso 7.695 = U.S.$1.00
CHF Swiss Franc 1.154 = U.S.$1.00
- -----------------------------------------------------------------
- -------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------
- -------------
SECURITIES SOLD SHORT
- -----------------------------------------------------------------
- -------------
MEXICO
BONDS
United Mexican States Aztec
Bonds 7.61%, 3/31/08 (Proceeds
U.S.$ 12,750) U.S.$ 15,000 U.S.$ 13,500
-------------
PANAMA
BONDS
***Republic of Panama Interest
Reduction Bond (Proceeds U.S.$
820) 2,000 905
-------------
(Total Proceeds U.S. $13,570) 14,405
-------------
- -----------------------------------------------------------------
- -------------
</TABLE>
***Security is expected to be received in connection with the restructuring of
the Panama loan owned by the Fund.
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
1995
STATEMENT OF ASSETS AND LIABILITIES (000)
- ------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at Value (Cost U.S.$277,427)..... U.S.$ 287,313
Cash.......................................... 6,674
Receivable for Investments Sold............... 20,216
Collateral on Deposit with Broker............. 12,919
Interest Receivable........................... 5,665
Deferred Organization Costs................... 38
Other Assets.................................. 34
- ------------------------------------------------------------------
Total Assets................................ 332,859
- ------------------------------------------------------------------
LIABILITIES:
Securities Sold Short, at Value (Proceeds
$13,570)..................................... (14,405)
Payable For:
Investments Purchased..................... (41,096)
Dividends Declared........................ (10,221)
Interest.................................. (424)
Investment Advisory Fees.................. (218)
Professional Fees......................... (66)
Custodian Fees............................ (47)
Shareholder Reporting Expenses............ (46)
Administrative Fees....................... (22)
Directors' Fees and Expenses.............. (11)
Other Liabilities............................. (8)
- ------------------------------------------------------------------
Total Liabilities........................... (66,564)
- ------------------------------------------------------------------
NET ASSETS........................................ U.S.$ 266,295
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock.................................. U.S.$ 215
Capital Surplus............................... 273,697
Distributions in Excess of Net Investment
Income....................................... (1,825)
Accumulated Net Realized Loss................. (14,623)
Unrealized Appreciation on Investments,
Foreign Currency Translations and Short
Sales........................................ 8,831
- ------------------------------------------------------------------
NET ASSETS........................................
Applicable to 21,481,113 issued and
outstanding U.S. $0.01 par value (100,000,000
shares authorized)........................... U.S.$ 266,295
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NET ASSET VALUE PER SHARE......................... U.S.$ 12.40
- ------------------------------------------------------------------
- ------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
STATEMENT OF OPERATIONS (000)
- -----------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Interest...................................... U.S.$ 37,034
Less: Foreign Taxes Withheld.................. (69)
- -----------------------------------------------------------------
Total Income................................ 36,965
- -----------------------------------------------------------------
EXPENSES
Investment Advisory Fees...................... 2,156
Interest Expense.............................. 850
Custodian Fees................................ 372
Administrative Fees........................... 238
Professional Fees............................. 124
Directors' Fees and Expenses.................. 114
Shareholder Reporting Expenses................ 95
Transfer Agent Fees........................... 25
Other Expenses................................ 121
- -----------------------------------------------------------------
Total Expenses.............................. 4,095
- -----------------------------------------------------------------
Net Investment Income..................... 32,870
- -----------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold.................... (3,263)
Investment Securities Sold Short.............. (247)
Written Option Contracts...................... 827
Swaps......................................... (875)
Foreign Currency Transactions................. (1,443)
- -----------------------------------------------------------------
Net Realized Loss........................... (5,001)
- -----------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investments and Short Sales................... 26,430
Foreign Currency Translations................. (3)
- -----------------------------------------------------------------
Change in Unrealized Appreciation
(Depreciation).............................. 26,427
- -----------------------------------------------------------------
Total Net Realized Loss and Change in Unrealized
Appreciation (Depreciation)...................... 21,426
- -----------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... U.S.$ 54,296
- -----------------------------------------------------------------
- -----------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- ------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income......................... U.S.$ 24,184 U.S.$ 32,870
Net Realized Loss............................. (16,403) (5,001)
Change in Unrealized Appreciation
(Depreciation)............................... (85,163) 26,427
- ------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations.................... (77,382) 54,296
- ------------------------------------------------------------------------------------
Distributions:
Net Investment Income......................... (23,740) (31,947)
In Excess of Net Investment Income............ -- (473)
Net Realized Gain............................. (6,618) --
- ------------------------------------------------------------------------------------
Total Distributions........................... (30,358) (32,420)
- ------------------------------------------------------------------------------------
Capital Share Transactions:
Common Stock Issued through Rights Offering
(5,400,000 shares)........................... -- 48,360
Offering Costs................................ -- (500)
Reinvestment of Distributions (74,127 and
25,493 shares, respectively)................. 1,071 277
- ------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Capital Share Transactions................... 1,071 48,137
- ------------------------------------------------------------------------------------
Total Increase (Decrease)..................... (106,669) 70,013
Net Assets:
Beginning of Year............................. 302,951 196,282
- ------------------------------------------------------------------------------------
End of Year (including distributions in excess
of net investment income of U.S.$923 and
U.S.$1,825, respectively).................... U.S.$ 196,282 U.S.$ 266,295
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 23,
1993* TO YEARS ENDED DECEMBER 31,
DECEMBER 31, ----------------------------
SELECTED PER SHARE DATA AND RATIOS: 1993 1994 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... U.S.$ 14.10 U.S. $18.96 U.S.$ 12.23
- -------------------------------------------------------------------------------------------
OFFERING COSTS............................... (0.04) -- (0.02)
- -------------------------------------------------------------------------------------------
Net Investment Income........................ 0.50 1.51 1.76
Net Realized and Unrealized Gain (Loss) on
Investments................................. 4.56 (6.34) 1.16
- -------------------------------------------------------------------------------------------
Total from Investment Operations....... 5.06 (4.83) 2.92
- -------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income.................... (0.16) (1.49) (1.69)
In Excess of Net Investment Income....... -- -- (0.03)
Net Realized Gain........................ -- (0.41) --
- -------------------------------------------------------------------------------------------
Total Distributions.................... (0.16) (1.90) (1.72)
- -------------------------------------------------------------------------------------------
Decrease in Net Asset Value due to Rights
Offering.................................... -- -- (1.01)
- -------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............... U.S.$ 18.96 U.S.$ 12.23 U.S.$ 12.40
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD........ U.S.$ 18.13 U.S.$ 11.38 U.S.$ 12.50
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value............................. 29.97% (27.97)% 37.48%+++
Net Asset Value (1)...................... 35.96% (25.95)% 26.85%+++
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS)........ U.S.$302,951 U.S.$196,282 U.S.$266,295
- -------------------------------------------------------------------------------------------
Ratio of Expenses Before Interest Expense to
Average Net Assets.......................... 1.73%** 1.59% 1.50%
Ratio of Expenses After Interest Expense to
Average Net Assets.......................... 2.79%** 2.30% 1.89%
Ratio of Net Investment Income to Average Net
Assets...................................... 7.20%** 10.79% 15.21%
Portfolio Turnover Rate...................... 72% 256% 348%
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C><S>
* Commencement of operations
** Annualized
+++ Adjusted for Rights Offering.
(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. This return does not
include the effect of dilution in connection with the Rights Offering. 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 per share.
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
- ------------
The Morgan Stanley Emerging Markets Debt Fund, Inc. (the "Fund"), was
incorporated in Maryland on May 6, 1993, and is registered as a non-diversified,
closed-end management investment company under the Investment Company Act of
1940, as amended. The Fund's primary investment objective is to produce high
current income and as a secondary objective, to seek capital appreciation,
through investments primarily in debt securities.
A. The following significant accounting policies, which are in conformity with
generally accepted accounting principles for investment companies, are
consistently followed by the Fund in the preparation of its financial
statements. Generally accepted accounting principles may require management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results may differ from those estimates.
1. SECURITY VALUATION: In valuing the Fund's assets, all
listed securities for which market quotations are readily available are
valued at the last sale price on the valuation date, or if there was no sale
on such date, at the mean between the current bid and asked prices or the
bid price if only bid quotations are available. Securities which are traded
over-the-counter are valued at the average of the mean of the current bid
and asked prices obtained from reputable brokers. Securities may be valued
by independent pricing services which use prices provided by market-makers
or estimates of market values obtained from yield data relating to
investments or securities with similar characteristics. 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. INCOME TAXES: It is the Fund's intention to continue
to qualify as a regulated investment company and distribute all of its
taxable income. Accordingly, no provision for U.S. Federal income taxes is
required in the financial statements.
The Fund may be subject to taxes imposed by countries in which it invests.
Such taxes are generally based on either income earned or repatriated. The
Fund accrues such taxes when the related income is earned.
Capital surplus, distributions in excess of net investment income 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.
3. REPURCHASE AGREEMENTS: In connection with
transactions in repurchase agreements, a bank as custo-
dian 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. REVERSE REPURCHASE AGREEMENTS: In order to
leverage the Fund, the Fund may enter into reverse repurchase agreements with
institutions that the Fund's investment adviser has determined are
creditworthy. Under a reverse repurchase agreement, the Fund sells
securities and agrees to repurchase them at a mutually agreed upon date and
price. Reverse repurchase agreements involve the risk that the market value
of the securities purchased with the proceeds from the sale of securities
received by the Fund may decline below the price of the securities the Fund
is obligated to repurchase. Securities subject to repurchase under reverse
repurchase agreements, if any, are designated as such in the Statement of
Assets and Liabilities. There were no reverse repurchase agreements
outstanding at December 31, 1995.
The average weekly balance of reverse repurchase agreements outstanding
during the year ended December 31, 1995 was approximately $5,908,000, at a
weighted average interest rate of 6.15%.
5. FOREIGN CURRENCY TRANSLATION: The books and
records of the Fund are maintained in U.S. dollars. Foreign currency amounts
are translated into U.S. dollars at the mean of the bid and asked prices of
such currencies against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
12
<PAGE>
- investment transactions and investment income at the prevailing rates of
exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the period, the Fund does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from
changes in the market prices of the securities held at period end.
Similarly, the Fund does not isolate the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market
prices of securities sold during the period. Accordingly, realized and
unrealized foreign currency gains (losses) are included in the reported net
realized and unrealized gains (losses) on investment transactions and
balances.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of forward foreign
currency contracts, disposition of foreign currencies, currency gains or
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income and
foreign withholding taxes recorded on the Fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net unrealized currency gains
(losses) from valuing foreign currency denominated assets and liabilities at
period end exchange rates are reflected as a component of unrealized
appreciation (depreciation) in the Statement of Assets and Liabilities. The
change in net unrealized currency gains (losses) for the period is reflected
in the Statement of Operations.
6. 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 gain on the
contracts, if any, at the date of default. Risks may also arise from
unanticipated movements in the value of a foreign currency relative to the
U.S. dollar.
7. LOAN AGREEMENTS: The Fund may invest in fixed
and floating rate loans ("Loans") arranged through private negotiations
between an issuer of sovereign debt obligations and one or more financial
institutions ("Lenders") deemed to be creditworthy by the investment
adviser. The Fund's investments in Loans may be in the form of
participations in Loans ("Participations") or assignments of all or a
portion of Loans ("Assignments") from third parties. The Fund's investment
in Participations typically results in the Fund having a contractual
relationship with only the Lender and not with the borrower. The Fund has
the right to receive payments of principal, interest and any fees to which
it is entitled only from the Lender selling the Participation and only upon
receipt by the Lender of the payments from the borrower. The Fund generally
has no right to enforce compliance by the borrower with the terms of the
loan agreement. As a result, the Fund may be subject to the credit risk of
both the borrower and the Lender that is selling the Participation. When the
Fund purchases Assignments from Lenders it acquires direct rights against
the borrower on the Loan. Because Assignments are arranged through private
negotiations between potential assignees and potential assignors, the rights
and obligations acquired by the Fund as the purchaser of an Assignment may
differ from, and be more limited than, those held by the assigning Lender.
8. WHEN-ISSUED/DELAYED DELIVERY SECURITIES: 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 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. Purchasing securities on a
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.
9. SECURITIES SOLD SHORT: The Fund may sell securities
short. A short sale is a transaction in which the Fund sells securities it
does not own, but has borrowed, in anticipation of a decline in the market
price of the securities. The Fund is obligated to replace the borrowed
securities at their market price at the time of replacement. The Fund's
obligation to replace the securities borrowed in connection with a short
sale will generally be secured by collateral deposited with the broker that
consists of cash, U.S. government securities or other liquid, high grade
debt obligations. In
13
<PAGE>
addition, the Fund will place in a segregated account with its custodian an
amount of cash, U.S. government securities or other liquid high grade debt
obligations equal to the difference, if any, between (1) the market value of
the securities sold at the time they were sold short and (2) any cash, U.S.
government securities or other liquid high grade debt obligations deposited
as collateral with the broker in connection with the short sale (not
including the proceeds of the short sale). Short sales by the Fund involve
certain risks and special considerations. Possible losses from short sales
differ from losses that could be incurred from a purchase of a security
because losses from short sales may be unlimited, whereas losses from
purchases can not exceed the total amount invested.
10. WRITTEN OPTIONS: The Fund may write covered call
options in an attempt to increase the Fund's total return. The Fund will
receive premiums that are recorded as liabilities and subsequently adjusted
to the current value of the options written. Premiums received from writing
options which expire are treated as realized gains. Premiums received from
writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the net realized
gain or loss. The Fund, as writer of a covered call option, limits its
opportunity to profit from an increase in the market value of the underlying
security above the exercise price of the option as long as the option
remains open.
11. SWAPS: A swap is an agreement to exchange the
return generated by one instrument for the return generated by another
instrument. The following summarizes the types of swaps 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. The Fund
utilizes interest rate swaps in an attempt to increase income while limiting
the Fund's exposure to market fluctuations in interest rates. 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 an unrealized gain or loss 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 and
provide the Fund with the full benefit on an investment in a security
without an initial cash outlay. To the extent the total return of the
security or index underlying the transaction exceeds or falls short of the
offsetting interest rate 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 an unrealized gain or loss in the Statement
of Operations. Payments received or made at the end of each measurement
period are recorded as realized gain or loss in the Statement of Operations.
12. 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 and discounts
and premiums on investments purchased are accreted or amortized in
accordance with the effective yield method over their respective lives,
except where collection is in doubt. 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 the permanent differences described in note A-2.
B. Morgan Stanley Asset Management Inc. (the "Adviser") provides investment
advisory services to the Fund under the terms of an Investment Advisory and
Management Agreement (the "Agreement"). Under the Agreement, the 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. 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.
D. Morgan Stanley Trust Company (the "International Custodian"), an affiliate
of the Adviser, acts as custodian for the Fund's assets held outside the United
States in accordance with a Custody Agreement. Custodian fees
14
<PAGE>
are payable monthly based on assets under custody, investment purchase and sale
activity, an account maintenance fee, plus reimbursement for certain
out-of-pocket expenses. Investment transaction fees vary by country and security
type. For the year ended December 31, 1995, the Fund incurred international
custodian fees of $299,000 of which $46,000 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 $54,000 and incurred interest
expense of $45,000, on balances with the International Custodian.
E. During the year ended December 31, 1995, the Fund made purchases and sales
totaling $736,934,000 and $703,219,000, respectively, of investment securities
other than long-term U.S. Government securities, purchased options and
short-term investments. There were no purchases and sales of long-term U.S.
Government securities. At December 31, 1995, the U.S. Federal income tax cost
basis of securities was $279,628,000 and accordingly, net unrealized
appreciation for U.S. Federal income tax purposes was $7,685,000, of which
$19,672,000 related to appreciated securities and $11,987,000 related to
depreciated securities. At December 31, 1995, the Fund had a capital loss
carryforward for U.S. Federal income tax purposes totaling approximately
$10,865,000 available to offset future capital gains of which $4,462,000 and
$6,403,000 will expire on December 31, 2002 and 2003, respectively. To the
extent that capital gains are so offset, such gains will not be distributed to
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 $1,611,000 and post-October currency losses of $1,056,000.
F. In connection with its organization, the Fund incurred $75,000 of
organization costs. The organization costs are being amortized on a
straight-line basis over a five year period beginning July 23, 1993, the date
the Fund commenced operations.
G. The Fund issued to its shareholders of record as of the close of business on
July 18, 1995 transferable Rights to subscribe for up to an aggregate of
5,400,000 shares of Common Stock of the Fund at a rate of one share of Common
Stock for three Rights held at the subscription price of $9.25 per share. During
August 1995, the Fund issued a total of 5,400,000 shares of Common Stock on
exercise of such Rights. Rights' offering costs of $500,000 were charged
directly against the proceeds of the Offering. The Fund was advised that Morgan
Stanley & Co. Incorporated, an affiliate of the Adviser, received commissions of
$1,590,000 and reimbursement of its expenses of $125,000 in connection with its
participation in the Rights Offering.
H. At December 31, 1995, a portion of the Fund's net assets consist of
securities located in emerging markets which are denominated in foreign
currencies. Changes in currency exchange rates will affect the value of and
investment income from such securities. Emerging market securities are often
subject to greater price volatility, limited capitalization and liquidity, and
higher rates of inflation than U.S. securities. In addition, emerging market
securities may be subject to substantial governmental involvement in the economy
and greater social, economic and political uncertainty.
I. 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
$6,000 and are included in Payable for Directors' Fees and Expenses on the
Statement of Assets and Liabilities.
J. During the year ended December 31, 1995, the Fund participated in writing
covered call options. The Fund had option activity as follows:
<TABLE>
<CAPTION>
FACE AMOUNT PREMIUM
(000) (000)
------------- -----------
<S> <C> <C>
Options outstanding at December
31, 1994...................... $ 20,000 $ 140
Options written during the
period........................ 84,400 1,606
Options cancelled in closing
transactions during the
period........................ (27,000) (610)
Options expired during the
period........................ (48,900) (564)
Options exercised during the
period........................ (28,500) (572)
------------- -----------
Options outstanding at December
31, 1995...................... $ -- $ --
------------- -----------
------------- -----------
</TABLE>
K. During December 1995, the Board declared a distribution of $0.48 per share,
derived from net investment income, payable on January 9, 1996, to shareholders
of record on December 29, 1995.
15
<PAGE>
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
U.S. AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
MARCH 31, 1995 JUNE 30, 1995 SEPTEMBER 30, 1995 DECEMBER 31, 1995
------------------- ------------------- ------------------- -------------------
PER PER PER PER
TOTAL SHARE TOTAL SHARE TOTAL SHARE TOTAL SHARE
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income.................. $ 9,121 $ 0.57 $ 8,875 $ 0.55 $ 9,972 $ 0.43 $ 8,997 $ 0.42
Net Investment Income.............. $ 8,163 $ 0.51 $ 8,084 $ 0.50 $ 8,889 $ 0.38 $ 7,734 $ 0.37
Net Realized Gain (Loss) and Change
in Unrealized Appreciation
(Depreciation).................... $(37,898) $ (2.37) $ 39,958 $ 2.49 $ 7,824 $ 0.50 $ 11,542 $ 0.54
Net Increase (Decrease) in Net
Assets Resulting from
Operations........................ $(29,735) $ (1.86) $ 48,042 $ 2.99 $ 16,713 $ 0.88 $ 19,276 $ 0.91
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
MARCH 31, 1994 JUNE 30, 1994 SEPTEMBER 30, 1994 DECEMBER 31, 1994
------------------- ------------------- ------------------- -------------------
PER PER PER PER
TOTAL SHARE TOTAL SHARE TOTAL SHARE TOTAL SHARE
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income.................. $ 7,568 $ 0.47 $ 5,288 $ 0.33 $ 9,164 $ 0.57 $ 7,310 $ 0.46
Net Investment Income.............. $ 5,756 $ 0.36 $ 3,947 $ 0.25 $ 7,707 $ 0.48 $ 6,774 $ 0.42
Net Realized Loss and Change in
Unrealized Appreciation
(Depreciation).................... $(86,118) $ (5.39) $ (5,972) $ (0.38) $ 13,501 $ 0.85 $(22,977) $ (1.42)
Net Increase (Decrease) in Net
Assets Resulting from
Operations........................ $(80,362) $ (5.03) $ (2,025) $ (0.13) $ 21,208 $ 1.33 $(16,203) $ (1.00)
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
</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.
- --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED):
For the year ended December 31, 1995, the Fund expects to pass through to its
shareholders foreign tax credits of approximately $69,000.
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------
To the Shareholders and Board of Directors of
Morgan Stanley Emerging Markets Debt Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Morgan Stanley Emerging Markets
Debt 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
in the period then ended and for the period July 23, 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
17
<PAGE>
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
shareholders may elect, by instructing The First National Bank of Boston (the
"Plan Agent") in writing, to have all distributions automatically reinvested in
Fund shares. Participants in the Plan have the option of making additional
voluntary cash payments to the Plan Agent, quarterly, in any amount from $100 to
$3,000, for investment in Fund shares. Shareholders who do not participate in
the Plan will receive distributions in cash.
Dividend and capital gain distributions will be reinvested on the
reinvestment date in full and fractional shares. If the market price per share
equals or exceeds net asset value per share on the reinvestment date, the Fund
will issue shares to participants at net asset value. If net asset value is less
than 95% of the market price on the reinvestment date, shares will be issued at
95% of the market price. If net asset value exceeds the market price on the
reinvestment date, participants will receive shares valued at market price. The
Fund may purchase shares of its Common Stock in the open market in connection
with dividend reinvestment requirements at the discretion of the Board of
Directors. Should the Fund declare a dividend or capital gain distribution
payable only in cash, 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.
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:
Morgan Stanley Emerging Markets Debt Fund, Inc.
The First National Bank of Boston
Dividend Reinvestment Unit
Mail Stop 45-01-06
P.O. Box 1681
Boston, MA 02105-1681
1-800-442-2001
18
