<PAGE>
MORGAN STANLEY
EMERGING MARKETS DEBT FUND, INC.
- ---------------------------------------------
OFFICERS AND DIRECTORS
<TABLE>
<S> <C>
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS James W. Grisham
Frederick B. Whittemore VICE PRESIDENT
VICE-CHAIRMAN OF THE BOARD Michael F. Klein
OF DIRECTORS VICE PRESIDENT
Warren J. Olsen Harold J. Schaaff, Jr.
PRESIDENT AND DIRECTOR VICE PRESIDENT
Peter J. Chase Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John W. Croghan Valerie Y. Lewis
DIRECTOR SECRETARY
David B. Gill James R. Rooney
DIRECTOR TREASURER
Graham E. Jones Belinda A. Brady
DIRECTOR ASSISTANT TREASURER
John A. Levin
DIRECTOR
</TABLE>
- ---------------------------------------------
INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
- ---------------------------------------------------------
CUSTODIANS
Morgan Stanley Trust Company (International)
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank (Domestic)
770 Broadway
New York, New York 10003
- ---------------------------------------------------------
SHAREHOLDER SERVICING AGENT
Boston Equiserve
Investor Relations Department
P.O. Box 644
Boston, Massachusetts 02102-0644
(617) 575-3120
- ---------------------------------------------------------
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.
---------------------
SEMI-ANNUAL REPORT
JUNE 30, 1996
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------
For the six months ended June 30, 1996, the Morgan Stanley Emerging Markets Debt
Fund, Inc. had a total return, based on net asset value per share, of 19.42%
compared to 13.38% for the J.P. Morgan Emerging Markets Bond Index. For the
period since the Fund's commencement of operations on July 23, 1993 through June
30, 1996, the Fund's total return, based on net asset value per share, was
52.51% compared with 39.55% for the Index. On June 28, 1996, the closing price
of the Fund's shares on the New York Stock Exchange was $13.25 representing a
5.6% discount to the Fund's net asset value per share.
Emerging markets debt de-coupled from the U.S. bond market during the second
quarter of 1996. Improving credit stories in emerging market countries
successively counteracted the negative influence of rising interest rates. The
U.S. bond market was repeatedly buffeted by signs of strength in the U.S.
economy during the last three months. The long end of the market tested the lows
on each occasion that the non-farm payroll data was released during the quarter.
Yields of 7.20% and above were attractive to aggressive fixed income investors.
High real rates and the prospect that the economy would fail to retain the
momentum of faster growth prompted rates to rally from their highs. We believe
that the global economy is likely to witness a synchronized global pick up in
aggregate demand within the next twelve months and any sign that the Federal
Reserve is behind the curve in terms of managing inflation could result in a
severe reaction in the bond market. Emerging market debt should continue to
outperform other fixed income markets as long as credit fundamentals remain on
an improving trend, with floating rate non-collateralized bonds continuing to be
the preferred sector in the market.
The Fund outperformed over the quarter due to its overweight positions in
Russia, Venezuela and Panama and underweight position for the major Latin
American countries: Argentina, Brazil and Mexico. During the quarter, Russia,
Panama, Venezuela, Peru, Philippines and Ecuador outperformed the market and
Argentina, Brazil and Mexico underperformed the overall market.
Russian loans were the outperformers of the quarter as incumbent President
Yeltsin won the second round election by a wide margin. We reduced our positions
in Russian loans gradually during the last month of the quarter. The sharp
post-election rally surprised even the believers. We believe the loans will
trade in a tight range for some time as post-election reality sets in. Economic
problems such as a wide fiscal deficit, banking sector restructurings, tight
domestic liquidity conditions, a gradual uptick in inflation and Kremlin
politics will keep a lid on prices. Valuations of the loans, based on the terms
of the restructuring, suggest that they continue to be the cheapest assets in
the emerging fixed income markets.
Mexican external debt trailed the market after the run-up in prices on the back
of its exchange offer to substitute collateralized Brady debt with a non-
collateralized, current coupon bond with a bullet maturity of 30 years.
Lingering concerns over the fragile economic recovery in the domestic non-
tradeable sector and the need for an adjustment in the nominal value of the
exchange rate made investors shy away from Mexican bonds. The local currency
denominated treasury bills continued to be the best performing sector. We
increased our allocation to Mexico towards the end of the quarter as we believed
investor skepticism to have peaked. The domestic political situation continues
to warrant a close watch as the investigation of various financial scandals
could unearth all kinds of skeletons in the cupboards of the ruling elites.
Argentina continued to underperform the market, despite signs that an economic
recovery was underway. Tax receipts continued to stagnate and the fiscal targets
agreed to with the IMF continue to look ambitious. High unemployment and low
consumer confidence continue to prove to be a drag on the recovery. Despite
abundant liquidity in the banking system, a consumption and trade led economic
recovery is taking a long time to take hold. Unless a durable and sustained
recovery becomes a reality in the second half, Argentina faces a difficult
economic future in the months ahead. Rising U.S. interest rates and a firm
dollar will prove to be a considerable headwind for the Convertibility
2
<PAGE>
Plan to weather. We do not anticipate making any changes to our allocation to
Argentina in the immediate future.
Brazil came under closer scrutiny as a leading academic questioned the
sustainability of the Real plan. Questions related to its burgeoning internal
debt and overvalued exchange rates led some to draw parallels with Mexico's
situation in 1994. We do not believe that Brazil and Mexico should be put in the
same basket. Brazil's performance is far less dependent on external capital, (in
fact it could be argued that a withdrawal of short term capital will probably be
of benefit) and the overvaluation of its currency less significant, for any
comparisons to Mexico to setoff any alarm bells at this juncture. There is no
doubt that the long run sustainability of the Real plan requires a fiscal
adjustment. Political wrangling should not be allowed to derail the process of
stabilization. Progress towards implementing a fiscal adjustment remains one of
the elements that we would be watching for to justify maintaining our allocation
to Brazil. We increased our allocations towards the end of the second quarter as
the administration sought to counteract market pressure related to the
stagnation of its various reform proposals in the legislature by becoming more
ambitious in the fields of privatization and de-regulation of the economy.
Venezuela continued to make slow and steady progress towards implementing an
orthodox stabilization program. We reduced our allocation to the country as its
bonds moved up in price, discounting the positive news of an IMF stabilization
plan.
Other high yielding markets of Ecuador and Bulgaria witnessed volatility as
Ecuador braced for the second round of its Presidential elections and Bulgaria
coped with economic distress after swallowing the bitter pill of an IMF program.
Despite a negative U.S. rate environment in the first half of 1996, emerging
debt has performed well. Improvement in economic fortunes of most of the
countries included in the universe has delivered handsome returns. What is
underway is the dramatic re-rating of this asset class, a process that was
interrupted by the Mexican crisis of 1994. Barring changes in the economic
outlook of the various countries, this process has not yet been finished. If the
headwind of rising interest rates becomes stronger in the second half, there may
be some retracement in prices, as liquidity alone cannot sustain the run-up in
prices.
Sincerely
[SIGNATURE]
Warren J. Olsen
PRESIDENT AND DIRECTOR
[SIGNATURE]
Paul Ghaffari
PORTFOLIO MANAGER
August 8, 1996
3
<PAGE>
Morgan Stanley Emerging Markets Debt Fund, Inc.
Investment Summary as of June 30, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION (UNAUDITED)
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>
FISCAL YEAR TO DATE 11.88% -- 19.42% -- 13.38% --
ONE YEAR 37.30+ 37.30%+ 37.56+ 37.56%+ 32.40 32.40%
SINCE INCEPTION* 44.03+ 13.21+ 52.51+ 15.44+ 39.55 12.00
</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 SIX MONTHS ENDED 6/30/96 (UNAUDITED)
<S> <C> <C> <C> <C>
Net Asset Value Per Share $ 18.96 $ 12.23 $ 12.40 $ 14.03
Market Value Per Share $ 18.13 $ 11.38 $ 12.50 $ 13.25
Premium/(Discount) -4.4% -7.0% 0.8% -5.6%
Income Dividends $0.16 $1.49 $1.72 $0.72
Capital Gains Distributions - $0.41 - -
Morgan Stanley Emerging Markets Debt Fund, Inc. (2) 35.96% -25.95% 26.85%+ 19.42%
J. P. Morgan Emerging Markets Bond Index (1)(3)** 18.67% -18.68% 27.54% 13.38%
</TABLE>
<TABLE>
<C> <S>
(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. 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) The J.P. Morgan Emerging Markets Bond Index is a market weighted index
composed of all Brady bonds outstanding and includes Argentina, Brazil,
Bulgaria, Mexico, Nigeria, the Philippines, Poland and Venezuela.
* The Fund commenced operations on July 23, 1993.
** Unaudited.
+ Adjusted for Rights Offering.
</TABLE>
4
<PAGE>
Morgan Stanley Emerging Markets Debt Fund, Inc.
Portfolio Summary as of June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Debt Instruments 87.7%
Structured Security 6.2%
Short-Term Investments 4.6%
Purchased Options 1.5%
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Brazil 17.6%
Russia 17.5%
Argentina 13.7%
Mexico 12.4%
Venezuela 9.5%
United States 6.2%
Panama 3.6%
Turkey 3.5%
Nigeria 3.2%
South Africa 3.0%
Ecuador 2.9%
Peru 2.1%
Algeria 1.9%
Morocco 1.4%
Poland 0.8%
India 0.7%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
---------------
<C> <S> <C>
1. Republic of Russia Debt 17.5%
2. Republic of Brazil Debt 14.6
3. Republic of Argentina Debt 10.6
4. Republic of Venezuela Debt 9.5
5. Salomon Short-Term Structured Note 6.2
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
---------------
<C> <S> <C>
6. Republic of Panama Debt 3.6%
7. Lojas Americanas S.A. Bond 3.1
8. Republic of South Africa Debt 3.0
9. Republic of Ecuador Debt 2.9
10. Empresas ICA Sociedad Controladora
S.A. 2.4
---
73.4%
---
---
</TABLE>
5
<PAGE>
FINANCIAL STATEMENTS
- ---------
PORTFOLIO OF INVESTMENTS (UNAUDITED)
(Showing Percentage of Total Value of Investments)
- ------------
JUNE 30, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------------------
- ------------
DEBT INSTRUMENTS (87.7%)
- -----------------------------------------------------------------------------------
- ----------
ALGERIA (1.9%)
LOAN AGREEMENT
###pAlgeria Reprofiled Loan Agreement 'A' U.S.$ 4,918 U.S.$ 2,877
###~pAlgeria Reprofiled Loan Agreement 'A'
(Participation: Salomon Brothers) 6,696 3,917
-------------
6,794
-------------
- -----------------------------------------------------------------------------------
- -------------
ARGENTINA (13.7%)
BONDS (12.7.%)
Banco de Galicia 10.875%, 12/1/97 2,000 2,083
Industrias Pescarmona S.A. 11.75%, 3/27/98 1,000 1,010
Metrogas S.A. 'B' 10.875%, 5/15/01 4,000 4,070
+++^Republic of Argentina 'L' Bond 'Euro' 6.31%,
3/31/05 42,620 33,296
+++Republic of Argentina Discount Bond 6.44%,
3/31/23 6,400 4,480
-------------
44,939
-------------
NOTE (1.0%)
Nortel Inversora 'A' 6.00%, 3/31/07 6,723 3,563
-------------
48,502
-------------
- -----------------------------------------------------------------------------------
- -------------
BRAZIL (17.6%)
BONDS
+++Federative Republic of Brazil Debt Conversion
'L' Bond 6.56%, 4/15/12 12,500 8,562
Federative Republic of Brazil 'C' Bond PIK
'Euro' 8.00%, 4/15/14 39,292 24,312
#Federative Republic of Brazil 'C' Bond PIK
8.00%, 4/15/14 11,501 7,116
+++Federative Republic of Brazil Discount Bond
'Z-L' 6.50%, 4/15/24 16,500 11,725
Lojas Americanas S.A. 11.00%, 6/4/04 11,000 10,835
-------------
62,550
-------------
- -----------------------------------------------------------------------------------
- -------------
ECUADOR (2.9%)
BONDS
#*Republic of Ecuador Par Bond 3.00%, 3/1/25 65 23
Republic of Ecuador Past Due Interest Bond PIK
6.06%, 2/27/15 22,434 10,222
-------------
10,245
-------------
- -----------------------------------------------------------------------------------
- -------------
INDIA (0.7%)
BOND
Saurashtra Cement Co. 17.00%, 9/7/97 INR 94,000 2,520
-------------
- -----------------------------------------------------------------------------------
- -------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------------------
- ------------
MEXICO (11.3%)
BONDS
Banamex Pagare Discount Bond, 4/3/97 MXP 28,045 U.S.$ 2,918
Banamex Pagare Discount Bond, 10/9/97 29,671 2,702
Empresas La Moderna 11.38%, 1/25/99 U.S.$ 6,500 6,736
Grupo Elektra S.A. de C.V. 12.75%, 5/15/01 7,000 7,061
Grupo Industrial Durango 12.00%, 7/15/01 4,500 4,528
Grupo Mexicano de DeSarrollo 8.25%, 2/17/01 1,000 520
#Empresas ICA Sociedad Controladora S.A.
11.875%, 5/30/01 8,500 8,508
Nacional Financiera 17.00%, 2/26/99 ZAR 12,000 2,700
United Mexican States 11.50%, 5/15/26 U.S.$ 5,000 4,575
-------------
40,248
-------------
- -----------------------------------------------------------------------------------
- -------------
MOROCCO (1.4%)
LOAN AGREEMENT
+++###~Kingdom of Morocco Restructuring and
Consolidation Agreement 'A' 1990
(Participation: J.P. Morgan) 6.4375%, 1/1/09 7,000 5,049
-------------
- -----------------------------------------------------------------------------------
- -------------
NIGERIA (3.2%)
BOND (1.8%)
Central Bank of Nigeria Par Bond 6.25%, 11/15/20
(Warrants Attached) 12,000 6,390
-------------
NOTE (1.4%)
Central Bank of Nigeria Promissory Note 8.00%,
1/5/10 11,000 4,868
-------------
11,258
-------------
- -----------------------------------------------------------------------------------
- -------------
PANAMA (3.6%)
LOAN AGREEMENT
**###pRepublic of Panama Loans 13,183 12,986
-------------
- -----------------------------------------------------------------------------------
- -------------
PERU (2.1%)
LOAN AGREEMENT (0.4%)
++###pRepublic of Peru - Petroperu Working
Capital Loan 2,000 1,240
-------------
NOTE (1.7%)
++Peru Working Capital Lines 9,699 6,183
-------------
7,423
-------------
- -----------------------------------------------------------------------------------
- -------------
POLAND (0.8%)
NOTE
##Republic of Poland, Zero Coupon, 1/8/97 3,166 2,851
-------------
- -----------------------------------------------------------------------------------
- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------------------
<S> <C> <C>
- ------------
RUSSIA (16.0%)
LOAN AGREEMENT (9.3%)
++###Bank for Foreign Economic Affairs DEM 93,300 U.S.$ 32,954
-------------
BONDS (6.7%)
Ministry of Finance Tranche III 3.00%, 5/14/99 U.S.$ 4,500 3,229
Ministry of Finance Tranche IV, 3.00%, 5/14/03 48,215 20,612
-------------
23,841
-------------
56,795
-------------
- -----------------------------------------------------------------------------------
- -------------
SOUTH AFRICA (3.0%)
BONDS
Republic of South Africa
Series 147, 11.50%, 5/30/00 ZAR 5,250 1,116
Series 150, 12.00%, 2/28/25 14,490 2,907
Series 153, 13.00%, 8/31/10 13,020 2,653
Series 162, 12.50%, 1/15/02 12,180 2,599
Series 175, 9.00%, 10/15/02 4,200 738
Series 177, 9.50%, 5/15/07 3,150 512
-------------
10,525
-------------
- -----------------------------------------------------------------------------------
- -------------
VENEZUELA (9.5%)
BONDS
+++Republic of Venezuela Debt Conversion Bond
'DL' 6.63%, 12/18/07 U.S.$ 14,000 9,905
+++Republic of Venezuela Front Loaded Interest
Rate Reduction Bond 'A' 6.38%, 3/31/07 32,750 23,703
-------------
33,608
-------------
- -----------------------------------------------------------------------------------
- -------------
TOTAL DEBT INSTRUMENTS
(Cost U.S.$293,117) 311,354
-------------
- -----------------------------------------------------------------------------------
- -------------
CONTRACTS
- -----------------------------------------------------------------------------------
- -------------
PURCHASED OPTIONS (1.5%)
- -----------------------------------------------------------------------------------
- ------------
POLAND (0.0%)
+Poland Discount Bond Put, expiring 7/29/96,
strike price U.S.$90.50 10,000 4
-------------
- -----------------------------------------------------------------------------------
- -------------
RUSSIA (1.5%)
+Russian Vneshkonombank Bond Call, expiring
7/22/96, strike price
DEM 45.125 16,500 972
+Russian Vneshkonombank Bond Call, expiring
7/22/96, strike price U.S.$41.31 50,000 4,371
-------------
5,343
-------------
- -----------------------------------------------------------------------------------
- -------------
TOTAL PURCHASED OPTIONS
(Cost U.S.$2,179) 5,347
-------------
- -----------------------------------------------------------------------------------
- -------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------------------
- -------------
STRUCTURED SECURITY (6.2%)
- -----------------------------------------------------------------------------------
- ------------
UNITED STATES (6.2%)
NOTE
^Salomon Short-Term Structured Note 10.13%,
4/2/97 (Principal is composed of National
Treasury Notes, issued by the National
Treasury of Brazil, valued at U.S.$22,000)
(Cost U.S.$22,000) U.S.$ 22,000 U.S.$ 22,055
- -----------------------------------------------------------------------------------
- -------------
SHORT-TERM INVESTMENTS (3.0%)
- -----------------------------------------------------------------------------------
- ------------
MEXICO (1.1%)
BILLS
Mexican Cetes
Zero Coupon, 7/25/96 MXP 15,839 2,042
Zero Coupon, 9/26/96 15,000 1,832
-------------
3,874
-------------
- -----------------------------------------------------------------------------------
- -------------
TURKEY (1.9%)
BILLS
Turkish T-Bill
Zero Coupon, 7/10/96 TRL 312,000,000 3,692
Zero Coupon, 8/7/96 278,000,000 3,132
-------------
6,824
-------------
- -----------------------------------------------------------------------------------
- -------------
TOTAL SHORT-TERM INVESTMENTS
(Cost U.S.$12,768) 10,698
-------------
- -----------------------------------------------------------------------------------
- -------------
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (1.6%)
French Franc FRF 49 9
Indian Rupee INR 5 --
Turkish Lira TRL 464,675,000 5,660
-------------
(Cost U.S.$5,690) 5,669
-------------
- -----------------------------------------------------------------------------------
- -------------
TOTAL INVESTMENTS (100.0%)
(Cost U.S.$335,754) U.S.$355,123
-------------
-------------
- -----------------------------------------------------------------
- -------------
</TABLE>
<TABLE>
<C> <S>
+ -- Non-income producing.
++ -- Non-income producing -- in default.
+++ -- Variable/floating rate security -- rate disclosed is as of
June 30, 1996.
^ -- Denotes all or a portion of securities subject to
repurchase under Reverse Repurchase Agreements as of June
30, 1996 -- see note A-4 to financial statements.
# -- 144A security -- certain conditions for public sale may
exist.
## -- Security's redemption value is linked to the Republic of
Poland Treasury Bill maturing 1/1/97 and to the value of
the Polish Zloty and the Deutsche Mark at maturity.
### -- Under restructuring at June 30, 1996 -- 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 dislcosed is as of June 30, 1996. Maturity
date disclosed is the ultimate maturity.
** -- 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.
7
<PAGE>
<TABLE>
<S> <C> <C>
- --------------------------------------------------------
- ----
JUNE 30, 1996 EXCHANGE RATES:
- --------------------------------------------------------
DEM German Mark 1.520 = U.S. $1.00
FRF French Franc 5.139 = U.S. $1.00
INR Indian Rupee 35.230 = U.S. $1.00
MXP Mexican Peso 7.583 = U.S. $1.00
TRL Turkish Lira 82,100.000 = U.S. $1.00
ZAR South African Rand 4.333 = U.S. $1.00
- --------------------------------------------------------
- ----
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of a forward foreign currency exchange
contract open at June 30, 1996, the Fund is
obligated to deliver foreign currency in exchange
for U.S. dollars as indicated below:
</TABLE>
<TABLE>
<CAPTION>
IN NET
CURRENCY EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR LOSS
(000) (000) DATE (000) (000)
- ---------------- --------- ---------- --------- -------------
<S> <C> <C> <C> <C>
TRL 464,675,000 U.S.$5,660 7/1/96 U.S.$5,652 U.S.$ (8)
--------- --------- -------------
--------- --------- -------------
- -----------------------------------------------------------------
- -------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------------------
- -------------
SECURITIES SOLD SHORT
- -----------------------------------------------------------------------------------
- ------------
PANAMA
BONDS
++-DIAMOND-Republic of Panama Interest Reduction
Bond, (Proceeds U.S.$4,730) U.S.$ 10,000 U.S.$ 5,575
++-DIAMOND-Republic of Panama Past Due Interest
Bond (Proceeds U.S.$7,240) 12,000 7,357
-------------
12,932
-------------
- -----------------------------------------------------------------------------------
- -------------
RUSSIA
LOAN AGREEMENTS
++###Bank for Foreign Economic Affairs (Proceeds
U.S.$3,619) 7,500 3,647
-------------
NOTES
++-DIAMOND-Interest Arrears Note
(Proceeds U.S.$6,150) 11,200 5,992
++-DIAMOND-Principal Notes
(Proceeds U.S.$2,268) 6,400 2,296
-------------
8,288
-------------
11,935
-------------
- -----------------------------------------------------------------------------------
- -------------
TOTAL SECURITIES SOLD SHORT
(Proceeds U.S.$24,007) U.S.$ 24,867
-------------
- -----------------------------------------------------------------------------------
- -------------
</TABLE>
- -DIAMOND- -- Securities are expected to be received in connection with the
restructuring of the issuing country's Loan Agreements owned by the
Fund.
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1996
(UNAUDITED)
STATEMENT OF ASSETS AND LIABILITIES (000)
<S> <C>
- ---------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at Value (Cost U.S.$335,754)............................................... U.S.$ 355,123
Receivable for Investments Sold......................................................... 37,093
Interest Receivable..................................................................... 7,299
Deferred Organization Costs............................................................. 31
Other Assets............................................................................ 30
- ---------------------------------------------------------------------------------------------------------------
Total Assets........................................................................ 399,576
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES:
Securities Sold Short, at Value (Proceeds U.S.$24,007).................................. (24,867)
Payable For:
Reverse Repurchase Agreements......................................................... (51,577)
Investments Purchased................................................................. (10,837)
Dividends Declared.................................................................... (7,751)
Bank Overdraft........................................................................ (1,436)
Interest.............................................................................. (602)
Investment Advisory Fees.............................................................. (240)
Custodian Fees........................................................................ (74)
Shareholder Reporting Expenses........................................................ (67)
Professional Fees..................................................................... (53)
Administrative Fees................................................................... (23)
Directors' Fees and Expenses.......................................................... (22)
Unrealized Loss on Forward Foreign Currency Contracts................................... (8)
Other Liabilities....................................................................... (41)
- ---------------------------------------------------------------------------------------------------------------
Total Liabilities................................................................... (97,598)
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS.................................................................................. U.S.$ 301,978
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock............................................................................ U.S.$ 215
Capital Surplus......................................................................... 274,351
Undistributed Net Investment Income..................................................... 2,296
Accumulated Net Realized Gain........................................................... 6,741
Unrealized Appreciation on Investments, Foreign Currency Translations and Short Sales... 18,375
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS
Applicable to 21,531,260 issued and outstanding U.S.$0.01 par value shares (100,000,000
shares authorized)..................................................................... U.S.$ 301,978
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE................................................................... U.S.$ 14.03
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1996
(UNAUDITED)
STATEMENT OF OPERATIONS (000)
<S> <C>
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest................................................................................ U.S.$ 22,856
Less: Foreign Taxes Withheld............................................................ (45)
- ---------------------------------------------------------------------------------------------------------------
Total Income.......................................................................... 22,811
- ---------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees................................................................ 1,423
Interest Expense........................................................................ 1,115
Custodian Fees.......................................................................... 254
Administrative Fees..................................................................... 139
Professional Fees....................................................................... 60
Directors' Fees and Expenses............................................................ 55
Shareholder Reporting Expenses.......................................................... 48
Transfer Agent Fees..................................................................... 10
Other Expenses.......................................................................... 84
- ---------------------------------------------------------------------------------------------------------------
Total Expenses........................................................................ 3,188
- ---------------------------------------------------------------------------------------------------------------
Net Investment Income............................................................... 19,623
- ---------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold.............................................................. 26,831
Investment Securities Sold Short........................................................ (1,000)
Written Option Contracts................................................................ 433
Foreign Currency Transactions........................................................... (4,900)
- ---------------------------------------------------------------------------------------------------------------
Net Realized Gain................................................................... 21,364
- ---------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Appreciation on Investments and Short Sales............................................. 9,565
Depreciation on Foreign Currency Translations........................................... (21)
- ---------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation...................................... 9,544
- ---------------------------------------------------------------------------------------------------------------
Net Realized Gain and Change in Unrealized Appreciation/Depreciation........................ 30,908
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................... U.S.$ 50,531
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1996 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1995
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income............................................... U.S.$ 19,623 U.S.$ 32,870
Net Realized Gain (Loss)............................................ 21,364 (5,001)
Change in Unrealized Appreciation/Depreciation...................... 9,544 26,427
- ---------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations................ 50,531 54,296
- ---------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income............................................... (15,502) (31,947)
In Excess of Net Investment Income.................................. -- (473)
- ---------------------------------------------------------------------------------------------------------------
Total Distributions................................................. (15,502) (32,420)
- ---------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Common Stock Issued Through Rights Offering (5,400,000 shares)...... -- 48,360
Offering Costs...................................................... -- (500)
Reinvestment of Distributions (50,147 and 25,493 shares,
respectively)...................................................... 654 277
- ---------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Capital Share
Transactions....................................................... 654 48,137
- ---------------------------------------------------------------------------------------------------------------
Total Increase...................................................... 35,683 70,013
Net Assets:
Beginning of Period................................................. 266,295 196,282
- ---------------------------------------------------------------------------------------------------------------
End of Period (including undistributed (distributions in excess of)
net investment income of U.S.$2,296 and U.S.$(1,825),
respectively)...................................................... U.S.$301,978 U.S.$266,295
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1996
(UNAUDITED)
STATEMENT OF CASH FLOWS (000)
<S> <C>
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING AND OPERATING ACTIVITIES:
Proceeds from Sales of Investments...................................................... U.S.$ 583,079
Purchases of Investments................................................................ (623,052)
Net Decrease in Written Options......................................................... 433
Net Increase in Short-Term Investments.................................................. (166)
Net Cash Used for Foreign Currency Transactions......................................... (4,900)
Investment Income....................................................................... 10,824
Interest Expense Paid................................................................... (743)
Operating Expenses Paid................................................................. (1,782)
- ---------------------------------------------------------------------------------------------------------------
Net Cash Used for Investing and Operating Activities.................................... (36,307)
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Received from Reverse Repurchase Agreements........................................ 51,205
Cash Distributions Paid (net of Reinvestments of U.S. $654)............................. (17,318)
- ---------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities............................................... 33,887
- ---------------------------------------------------------------------------------------------------------------
Net Decrease in Cash.................................................................... (2,420)
CASH AT BEGINNING OF PERIOD................................................................. 6,674
- ---------------------------------------------------------------------------------------------------------------
CASH AND FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN AT END OF PERIOD........................ U.S.$ 4,254
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS TO NET CASH USED FOR
INVESTING AND OPERATING ACTIVITIES:
- ---------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations.................................... U.S.$ 50,531
Increase in Investments................................................................. (20,604)
Net Realized Gain on Investments........................................................ (21,364)
Change in Unrealized Appreciation/Depreciation.......................................... (9,544)
Net Increase in Receivables Pertaining to Investing and Operating Activities............ (5,515)
Net Decrease in Payables Pertaining to Investing and Operating Activities............... (18,649)
Interest Expense........................................................................ (743)
Amortization of Deferred Organization Costs............................................. 7
(Accretion)/Amortization................................................................ (10,426)
- ---------------------------------------------------------------------------------------------------------------
Net Cash Used for Investing and Operating Activities.................................... U.S.$ (36,307)
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS JULY 23,
ENDED JUNE YEARS ENDED DECEMBER 31, 1993* TO
30, 1996 ------------------------------ DECEMBER 31,
SELECTED PER SHARE DATA AND RATIOS: (UNAUDITED) 1995 1994 1993
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD.... U.S.$ 12.40 U.S.$ 12.23 U.S.$ 18.96 U.S.$ 14.10
- --------------------------------------------------------------------------------------------------------------
Offering Costs.......................... -- (0.02) -- (0.04)
- --------------------------------------------------------------------------------------------------------------
Net Investment Income................... 0.92 1.76 1.51 0.50
Net Realized and Unrealized Gain (Loss)
on Investments......................... 1.43 1.16 (6.34) 4.56
- --------------------------------------------------------------------------------------------------------------
Total from Investment Operations.... 2.35 2.92 (4.83) 5.06
- --------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income............... (0.72) (1.69) (1.49) (0.16)
In Excess of Net Investment
Income............................ -- (0.03) -- --
Net Realized Gain................... -- -- (0.41) --
- --------------------------------------------------------------------------------------------------------------
Total Distributions................. (0.72) (1.72) (1.90) (0.16)
- --------------------------------------------------------------------------------------------------------------
Decrease in Net Asset Value due to
Capital Share Transactions............. -- (1.01) -- --
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.......... U.S.$ 14.03 U.S.$ 12.40 U.S.$ 12.23 U.S.$ 18.96
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD... U.S.$ 13.25 U.S.$ 12.50 U.S.$ 11.38 U.S.$ 18.13
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value........................ 11.88% 37.48%+++ (27.97)% 29.97%
Net Asset Value (1)................. 19.42% 26.85%+++ (25.95)% 35.96%
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS)... U.S.$301,978 U.S.$266,295 U.S.$196,282 U.S.$302,951
- --------------------------------------------------------------------------------------------------------------
Ratio of Expenses Before Interest
Expense to Average Net Assets.......... 1.46%** 1.50% 1.59% 1.73%**
Ratio of Expenses After Interest Expense
to Average Net Assets.................. 2.25%** 1.89% 2.30% 2.79%**
Ratio of Net Investment Income to
Average Net Assets..................... 13.84%** 15.21% 10.79% 7.20%**
Portfolio Turnover Rate................. 201% 348% 256% 72%
- --------------------------------------------------------------------------------------------------------------
*Commencement of operations
**Annualized
+++Adjusted for Rights Offering
(1)Total investment return based on net asset value per share reflects the effects of changes in net asset
value on the performance of the Fund during each period, and assumes dividends and distributions, if any,
were reinvested. This 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.
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 (UNAUDITED)
- ------------
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. 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.
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 counter-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 Portfolio of Investments.
At June 30, 1996, the Fund had reverse repurchase agreements outstanding as
follows:
<TABLE>
<CAPTION>
MATURITY IN
30 TO 90
DAYS
------------
<S> <C>
Maturity Amount........................ $51,577,000
------------
Market Value of Assets Sold Under
Agreements............................ $55,351,000
------------
Weighted Average Interest Rate......... 5.88%
</TABLE>
The average weekly balance of reverse repurchase agreements outstanding
during the six months ended June 30, 1996 was approximately $28,365,000 at a
weighted average interest rate of 6.08%.
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;
- investment transactions and investment income at the prevailing rates of
exchange on the dates of such transactions.
13
<PAGE>
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 exchange contracts, disposition of foreign currencies, currency
gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amount of investment
income and foreign withholding taxes recorded on the Fund's books and the
U.S. dollar equivalent amounts actually received or paid. Net unrealized
currency gains (losses) from valuing foreign currency denominated assets and
liabilities at period end exchange rates are reflected as a component of
unrealized appreciation (depreciation) 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 EXCHANGE CONTRACTS: The Fund may enter into forward
foreign currency exchange contracts to attempt to protect securities and
related receivables and payables against changes in future foreign exchange
rates. A forward foreign currency exchange contract is an agreement between
two parties to buy or sell currency at a set price on a future date. The
market value of the contract will fluctuate with changes in currency
exchange rates. The contract is marked-to-market daily and the change in
market value is recorded by the Fund as unrealized gain or loss. The Fund
records realized gains or losses when the contract is closed equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed. Risk may arise upon entering into these
contracts from the potential inability of counterparties to meet the terms
of their contracts and is generally limited to the amount of unrealized gain
on the contracts, if any, at the date of default. Risks may also arise from
unanticipated movements in the value of a foreign currency relative to the
U.S. dollar.
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 may or may 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 may have to pay a
premium to borrow the securities as well as pay any dividends or interest
payable on the securities until they are replaced. The Fund's obligation to
replace the securities borrowed in connection with a short sale will
generally be secured by collateral deposited
14
<PAGE>
with the broker that consists of cash, U.S. government securities or other
liquid, high grade debt obligations. In 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 cannot 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. By writing a
covered call option, the Fund foregoes in exchange for the premium the
opportunity for capital appreciation above the exercise price should the
market price of the underlying security increase.
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 that the Fund may enter into:
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. 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 ("Structured Securities") backed by, or representing interests
in, the underlying instruments. Structured Securities, invested in by the
Fund, generally will have credit risk equivalent to that of the underlying
instruments. Structured Securities are typically sold in private placement
transactions with no active trading market. Investments in structured
securities may be more volatile than their underlying instruments, however,
any loss is limited to the amount of the original investment.
13. 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.
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 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.
15
<PAGE>
Adjustments for permanent book-tax differences, if any, are not reflected in
ending undistributed net investment income (loss) for the purpose of
calculating net investment income (loss) per share in the financial
highlights.
B. Morgan Stanley Asset Management Inc. (the "Adviser") provides investment
advisory services to the Fund under the terms of an Investment Advisory 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. The Chase Manhattan Bank, through its affiliate Chase Global Funds Services
Company (the "Administrator"), provides administrative services to the Fund
under an Administration Agreement. Under the Administration Agreement, the
Administrator is paid a fee computed weekly and payable monthly at an annual
rate of .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. The Chase Manhattan Bank acts as custodian for the Fund's assets
held in the United States.
D. Morgan Stanley Trust Company (the "International Custodian"), an affiliate
of the Adviser, acts as custodian for the Fund's assets held outside the United
States in accordance with a Custody Agreement. Custodian fees are payable
monthly based on assets under custody, investment purchase and sale activity, an
account maintenance fee, plus reimbursement for certain out-of-pocket expenses.
Investment transaction fees vary by country and security type. For the six
months ended June 30, 1996, the Fund incurred international custodian fees of
$146,000 of which $72,000 was payable to the International Custodian at June 30,
1996. In addition, for the six months ended June 30, 1996, the Fund has earned
interest income of $15,000 and incurred interest expense of $135,000, on
balances with the International Custodian.
E. During the six months ended June 30, 1996, the Fund made purchases and sales
totaling $592,793,000 and $576,707,000, 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 June 30, 1996, the U.S. Federal income tax cost basis
of securities was $330,064,000 and accordingly, net unrealized appreciation for
U.S. Federal income tax purposes was $19,390,000, of which $27,215,000 related
to appreciated securities and $7,825,000 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. 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 June 30, 1996 totaled
$10,000 and are included in Payable for Directors' Fees and Expenses on the
Statement of Assets and Liabilities.
16
<PAGE>
J. During the six months ended June 30, 1996, the Fund's written covered call
option activity was as follows:
<TABLE>
<CAPTION>
PREMIUM
FACE AMOUNT RECEIVED
(000) (000)
------------- -----------
<S> <C> <C>
Options outstanding at December
31, 1995...................... $ -- $ --
Options written during the
period........................ 63,500 1,068
Options expired during the
period........................ (36,000) (433)
Options exercised during the
period........................ (27,500) (635)
------------- -----------
Options outstanding at June 30,
1996.......................... $ -- $ --
------------- -----------
------------- -----------
</TABLE>
K. During June 1996, the Board declared a quarterly distribution of $0.36 per
share, derived from net investment income, payable on July 15, 1996, to
shareholders of record on June 28, 1996.
L. Supplemental Proxy Information
The Annual Meeting of the Stockholders of the Morgan Stanley Emerging Markets
Debt Fund, Inc. was held on June 5, 1996. The following is a summary of each
proposal presented and the total number of shares voted:
<TABLE>
<CAPTION>
VOTES IN VOTES VOTES VOTES
PROPOSAL FAVOR OF AGAINST WITHHELD ABSTAINED
- -------------------------------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1. To elect the following
Directors Peter J. Chase 17,939,851 -- 126,214 --
David B. Gill 17,924,399 -- 141,666 --
Warren J. Olsen 17,925,618 -- 140,447 --
2.To ratify the selection of Price Waterhouse LLP
as independent public accountants of the Fund 17,982,650 25,362 -- 58,053
</TABLE>
- --------------------------------------------------------------------------------
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS* (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET REALIZED GAIN
(LOSS) AND CHANGE NET INCREASE
IN UNREALIZED (DECREASE) IN NET
NET INVESTMENT APPRECIATION/ ASSETS RESULTING
INVESTMENT INCOME INCOME DEPRECIATION FROM OPERATIONS
------------------- ----------------------- ----------------------- -------------------------
PER PER PER PER
QUARTER ENDED AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE
- -------------------- -------- -------- ---------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1996....... $11,988 $ 0.56 $ 10,443 $ 0.49 $ 25,423 $ 1.18 $ 35,866 $ 1.67
March 31, 1996...... 10,823 0.50 9,180 0.43 5,485 0.25 14,665 0.68
-------- -------- ---------- ----- ---------- ---------- ----------- -----------
Total........... $22,811 $ 1.06 $ 19,623 $ 0.92 $ 30,908 $ 1.43 $ 50,531 $ 2.35
-------- -------- ---------- ----- ---------- ---------- ----------- -----------
-------- -------- ---------- ----- ---------- ---------- ----------- -----------
December 31, 1995... $ 8,997 $ 0.42 $ 7,734 $ 0.37 $ 11,542 $ 0.54 $ 19,276 $ 0.91
September 30,
1995............... 9,972 0.43 8,889 0.38 7,824 0.50 16,713 0.88
June 30, 1995....... 8,875 0.55 8,084 0.50 39,958 2.49 48,042 2.99
March 31, 1995...... 9,121 0.57 8,163 0.51 (37,898) (2.37) (29,735) (1.86)
-------- -------- ---------- ----- ---------- ---------- ----------- -----------
Total........... $36,965 $ 1.97 $ 32,870 $ 1.76 $ 21,426 $ 1.16 $ 54,296 $ 2.92
-------- -------- ---------- ----- ---------- ---------- ----------- -----------
-------- -------- ---------- ----- ---------- ---------- ----------- -----------
December 31, 1994... $ 7,310 $ 0.46 $ 6,774 $ 0.42 $ (22,977) $ (1.42) $ (16,203) $ (1.00)
September 30,
1994............... 9,164 0.57 7,707 0.48 13,501 0.85 21,208 1.33
June 30, 1994....... 5,288 0.33 3,947 0.25 (5,972) (0.38) (2,025) (0.13)
March 31, 1994...... 7,568 0.47 5,756 0.36 (86,118) (5.39) (80,362) (5.03)
-------- -------- ---------- ----- ---------- ---------- ----------- -----------
Total........... $29,330 $ 1.83 $ 24,184 $ 1.51 $ (101,566) $ (6.34) $ (77,382) $ (4.83)
-------- -------- ---------- ----- ---------- ---------- ----------- -----------
-------- -------- ---------- ----- ---------- ---------- ----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
*Expressed in thousands of U.S. dollars except per share amounts.
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.
17
<PAGE>
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
shareholders may elect, by instructing Boston Equiserve (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.
Boston Equiserve
Dividend Reinvestment Unit
P.O. Box 1681
Boston, MA 02105-1681
1-800-442-2001
18
