<PAGE>
MORGAN STANLEY
EMERGING MARKETS DEBT FUND, INC.
- ---------------------------------------------
OFFICERS AND DIRECTORS
<TABLE>
<S> <C>
Barton M. Biggs John A. Levin
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS William G. Morton, Jr.
Frederick B. Whittemore DIRECTOR
VICE-CHAIRMAN OF THE BOARD James W. Grisham
OF DIRECTORS VICE PRESIDENT
Warren J. Olsen Michael F. Klein
PRESIDENT AND DIRECTOR VICE PRESIDENT
Peter J. Chase Harold J. Schaaff, Jr.
DIRECTOR VICE PRESIDENT
John W. Croghan Joseph P. Stadler
DIRECTOR VICE PRESIDENT
David B. Gill Valerie Y. Lewis
DIRECTOR SECRETARY
Graham E. Jones James R. Rooney
DIRECTOR TREASURER
Belinda A. Brady
ASSISTANT TREASURER
</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
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank
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.
---------------------
ANNUAL REPORT
DECEMBER 31, 1996
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------
For the year ended December 31, 1996, the Morgan Stanley Emerging Markets Debt
Fund, Inc. had a total return, based on net asset value per share, of 50.98%
compared to 34.16% for the J.P. Morgan Emerging Markets Bond Index. For the
period since the Fund's commencement of operations on July 23, 1993 through
December 31, 1996, the Fund's total return, based on net asset value per share,
was 92.80% compared with 65.13% for the Index. On December 31, 1996, the closing
price of the Fund's shares on the New York Stock Exchange was $15 1/8,
representing a 12.6% discount to the Fund's net asset value per share.
1996 was a stellar year for emerging markets debt. The market experienced a
dramatic re-pricing of credit risk despite a volatile year for U.S. bonds. The
underlying improvement in credit fundamentals finally were recognized by
investors. The inflow of liquidity into this market resulted in a credit spread
tightening of about 400 basis points on average. The average masks a wide
dispersion in performance of various individual countries. Argentina, Mexico and
Brazil lagged the market during the first half of the year and made up some
relative performance during the second. The high-yielding, oil exporting
countries such as Algeria, Venezuela, Ecuador and Nigeria steadily outperformed
for most of the year and the smaller Brady countries like Peru and Panama
benefited from lower liquidity as their economic performance improved during
1996.
Greater institutional participation in the market gradually led to a decline in
volatility as long-term investors replaced the trading oriented accounts as the
dominant players in the market. Volatility in the options markets declined
steadily throughout the year to end the year at roughly 50% of the levels seen
at the beginning of the period.
The market also became more efficient in terms of relative pricing of securities
both within one country as well as across countries. Arbitrage activity made
sure that relative spreads were more closely aligned to levels dictated by bond
fundamentals.
As we look into 1997, we expect the market to benefit from some of the positive
undercurrents that we have experienced in 1996. Emerging markets debt has
finally been accepted as a part of the mainstream global fixed income markets.
Equity-type returns earned in the first few years of its development will
obviously be a thing of the past. Lower and more stable expected returns will be
the norm for the years to come. Lower volatility and falling correlations with
other major asset classes will provide the fundamental underpinnings of
increased allocations to this sector. Continued spread tightening to "fair
value" will result in outperformance relative to other fixed income markets in
the world.
By our estimates "fair value" on average is another 100 basis points away in
terms of credit spreads. The improvement in individual economic environments
justifies further tightening in credit spreads. Emerging countries are not
vulnerable, to the same extent as in 1994, to a financial shock. We do not
currently see the usual warning signs such as overvalued currencies, excessive
concentration of funding in the short end of the market, vulnerable banking
systems and excessive speculative activity. Potential areas of concern remain
those linked to domestic politics, as some countries face important elections
during second half of 1997. The political landscape at the beginning of the year
does not signal any major reverses to the climate of a continued commitment to
economic reform. Voter displeasure over the severity of the 1995 recessions and
only slight relief from the recovery so far for the beleaguered consumer should
not result in any reversal in the nature of orthodox economic policies.
To summarize, we believe the emerging debt markets can look forward to a year of
12-18% total return, an outcome fixed income investors should be extremely
comfortable with. Any major corrections, not driven by changes in credit risk
perceptions, should be viewed as opportunities to increase commitments to the
asset class.
The major risk to the story remains a possible tightening of monetary policy by
the Federal Reserve Bank, which could temporarily derail the trend for continued
spread tightening. In that environment, we believe there will be few places to
hide barring cash and emerging markets fixed income could end up in the
outperforming camp even in a down year. Currently we do not have sufficient data
to be able to offer reasonable estimates of the probability of such an event,
but it does not seem likely of being more than 20%.
During 1996 we were successful in terms of picking up the major currents in the
markets and employed investment strategies that helped us outperform. We were,
for the most part of the year overweight the oil rich, high-yielding sector of
Venezuela, Algeria, Ecuador and Nigeria as we expected these countries to
endeavor to make some progress in stabilization and structural reform as well as
benefit from strong revenues from their oil exporting sectors. Exposures to Peru
2
<PAGE>
and Panama remained at a steady 3-4% of the Fund as we believed that their
improving economic prospects, closure of their Brady restructuring and low
floating stock should buoy asset prices. Argentina and Mexico were underweighted
during the first half as the market remained skeptical about the strength of the
economic recoveries and overweighted during the second half as evidence of their
strong rebounds surfaced.
Brazil, remains a solid economic story but was buffeted by political headwinds
as the reform process lost momentum during the year. The long-term viability of
the Real plan in the absence of fiscal reform remains in doubt and questions
emerged within the investment community of the similarities of Brazil's position
with that of Mexico in 1994/1995. An appreciating currency, emerging trade
deficits, a loose fiscal and tight monetary policy were not healthy signs. In
our opinion, the political process is key to long-term sustainable growth and
progress on reducing the fiscal deficit is vital during 1997. Any delays in
tackling this key issue is bound to result in instability in the foreign
exchange, interest rates and other financial markets of Brazil later during the
year.
Russia was one of our success stories in 1996. Cheap assets because of a murky
political situation during the pre-election period prompted us to build a
substantial overweight in the non-performing loans of the sovereign. Our
analysis indicated that whatever the complexion of the new government the
economic situation and future policies could not justify credit spreads in
excess of 2000 basis points. The elections subsequently turned out in favor of
the reformers and market oriented parties, and continued official and IMF
assistance resulted in a dramatic rally in the prices of Russian assets for most
of the year.
Our non-hard currency exposure was limited for the most part to those situations
where we were receiving high real interest rates and buying undervalued
currencies. Mexico and Turkey's local markets were two profitable investments. A
foray into the South African Rand market did not prove to be profitable as we
misjudged the lack of political will to defend the currency from speculative
attack.
During the first few weeks of 1997, allocations are relatively unchanged other
than an increase in Bulgaria. A lack of alternatives to a currency board and
continued IMF assistance seems to make these assets cheap. Political turbulence
and civil unrest should only strengthen the case of the reformers as the
incumbent Socialist party has allowed the situation to drift to the point of
economic collapse. Fresh elections could improve the caliber of the governing
elites. Delays in the adoption of the IMF program will bring up the issue of a
potential default if no changes to economic policies are made. We believe that
it is in nobody's interest in Bulgaria and outside to precipitate the first
Brady default.
Sincerely,
[SIGNATURE]
Warren J. Olsen
PRESIDENT AND DIRECTOR
[SIGNATURE]
Paul Ghaffari
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
MORGAN STANLEY GROUP, INC., THE DIRECT PARENT COMPANY OF THE FUND'S INVESTMENT
ADVISER, MORGAN STANLEY ASSET MANAGEMENT INC., RECENTLY ANNOUNCED ITS INTENTION
TO MERGE WITH DEAN WITTER, DISCOVER & CO. TO FORM MORGAN STANLEY, DEAN WITTER,
DISCOVER & CO. IT CURRENTLY IS ANTICIPATED THAT THE TRANSACTION WILL CLOSE IN
MID-1997. THEREAFTER, MORGAN STANLEY ASSET MANAGEMENT INC. WILL BE A SUBSIDIARY
OF MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
3
<PAGE>
Morgan Stanley Emerging Markets Debt Fund, Inc.
Investment Summary as of December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 30.86% 30.86% 50.98% 50.98% 34.16% 34.16%
SINCE INCEPTION* 68.47+ 16.35+ 92.80+ 21.00+ 65.13 15.68
</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>
YEAR ENDED DECEMBER 31:
1993* 1994 1995 1996
<S> <C> <C> <C> <C>
Net Asset Value Per Share $ 18.96 $ 12.23 $ 12.40 $ 17.31
Market Value Per Share $ 18.13 $ 11.38 $ 12.50 $ 15.13
Premium/(Discount) -4.4% -7.0% 0.8% -12.6%
Income Dividends $0.16 $1.49 $1.72 $1.08
Capital Gains Distributions - $0.41 - -
Fund Total Return (2) 35.96% -25.95% 26.85%+ 50.98%
Index Total Return (1)(3) 18.67% -18.68% 27.54% 34.16%
</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. 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.
+ This return does not include the effect of dilution in connection with the
Rights Offering.
</TABLE>
4
<PAGE>
Morgan Stanley Emerging Markets Debt Fund, Inc.
Portfolio Summary as of December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Debt Instruments 99.9%
Purchased Options 0.1%
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Brazil 18.0%
Mexico 16.5%
Argentina 14.2%
Russia 10.8%
Bulgaria 7.7%
Venezuela 7.0%
Ecuador 6.1%
Jamaica 4.3%
Peru 3.2%
Morocco 3.2%
Other 9.0%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
---------------
<C> <S> <C>
1. Republic of Brazil Debt 10.2%
2. United Mexican States Debt 8.8
3. Republic of Argentina Debt 12.2
4. Republic of Russia Debt 10.8
5. Republic of Bulgaria Debt 7.6
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
---------------
<C> <S> <C>
6. Republic of Venezuela Debt 7.0%
7. Republic of Equador Debt 6.1
8. Government of Jamaica Debt 4.3
9. Kingdom of Morocco Debt 3.2
10. Republic of Peru Debt 3.2
---
73.4%
---
---
</TABLE>
5
<PAGE>
FINANCIAL STATEMENTS
- ---------
PORTFOLIO OF INVESTMENTS
(Showing Percentage of Total Value of Investments)
- ---------
DECEMBER 31, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------
- -------------
DEBT INSTRUMENTS (99.9%)
- --------------------------------------------------
- ----------
ALGERIA (2.1%)
LOAN AGREEMENT
Algeria Refinanced Loan Tranche 'A' U.S.$ 11,873 U.S.$ 9,172
--------------
- -----------------------------------------------------------------
- -------------
ARGENTINA (14.2%)
BONDS (13.4%)
Industrias Pescarmona S.A. 11.75%,
3/27/98 1,000 1,032
Metrogas S.A. 'B' 10.875%, 5/15/01 4,000 4,280
+++Republic of Argentina Bocon Pre 4
5.375%, 9/1/02 10,900 11,670
+++Republic of Argentina Discount Bond
6.375%, 3/31/23 10,600 8,175
**+++Republic of Argentina 'L' Bond
'Euro' 6.625%, 3/31/05 39,249 34,110
--------------
59,267
--------------
NOTE (0.8%)
Nortel Inversora 'A' 6.00%, 3/31/07 6,723 3,580
--------------
62,847
--------------
- -----------------------------------------------------------------
- -------------
BRAZIL (18.0%)
BONDS
+++Brazil-Multi Year Deposit Trust
Certificate 6.688%, 9/15/07 28,800 24,696
#Comtel Brasiliera Ltd. 'A' 10.75%,
9/26/04 4,500 4,644
**/*Federative Republic of Brazil 'C'
Bond PIK 'Euro' 8.00%, 4/15/14 36,015 26,550
#Federative Republic of Brazil 'C'
Bond PIK 'Euro' 8.00%, 4/15/14 11,702 8,627
*Federative Republic of Brazil Par
Bond 5.00%, 4/15/24 6,275 3,941
**+++Federative Republic of Brazil
Debt Conversion 'L' Bond 6.563%,
4/15/12 7,500 5,691
Tevecap 12.625%, 11/26/04 5,000 5,112
--------------
79,261
--------------
- -----------------------------------------------------------------
- -------------
BULGARIA (7.6%)
BONDS
**+++Republic of Bulgaria Discount
Bond 'A' 6.688%, 7/28/24 20,700 11,760
*Republic of Bulgaria Front-Loaded
Interest Reduction Bond 'A' 'Euro'
2.25%, 7/28/12 34,950 13,434
+++Republic of Bulgaria Past Due
Interest Bond 6.688%, 7/28/11 16,250 8,369
--------------
33,563
--------------
- -----------------------------------------------------------------
- -------------
CROATIA (0.5%)
BOND
+++National Government of Croatia
Series 'B' 6.688%, 7/31/06 2,500 2,428
--------------
- -----------------------------------------------------------------
- -------------
ECUADOR (6.1%)
BOND
**+++Republic of Ecuador Past Due
Interest Bond PIK 6.50%, 2/27/15 43,665 26,840
- -----------------------------------------------------------------
- -------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
INDIA (0.6%)
BOND
Saurashtra Cement Co. 17.00%, 9/7/97 INR 94,000 U.S.$ 2,438
--------------
- -----------------------------------------------------------------
- -------------
IVORY COAST (0.5%)
BONDS
++Republic of Ivory Coast Syndicated
Loan, Zero Coupon, 12/31/00 U.S.$ 2,000 658
++Republic of Ivory Coast Syndicated
Loan, Zero Coupon, 12/31/00 FRF 20,000 1,359
--------------
2,017
--------------
- -----------------------------------------------------------------
- -------------
JAMAICA (4.3%)
BOND
Government of Jamaica 12.00%, 7/19/99 U.S.$ 19,100 19,100
--------------
- -----------------------------------------------------------------
- -------------
MEXICO (16.5%)
BONDS
Banamex Pagare Discount Bond, Zero
Coupon 4/3/97 MXP 28,045 3,313
Banamex Pagare Discount Bond, Zero
Coupon 10/9/97 29,671 3,089
+++Chase Mexican Discount Structured
Note 6.75%, 4/28/97 U.S.$ 7,500 4,841
#Empresas ICA Sociedad Controladora
11.875%, 5/30/01 8,500 9,063
#Empresas La Moderna 11.375%, 1/25/99 6,500 6,825
Grupo Industrial Durango 12.625%,
8/1/03 4,000 4,350
Nacional Financiera 17.00%, 2/26/99 ZAR 12,000 2,469
United Mexican States Global Bond
11.375%, 9/15/16 U.S.$ 29,100 30,519
+++United Mexican States Global
Discount Bond Series C, 6.375%,
12/31/19 (Rights attached) 9,700 8,342
--------------
72,811
--------------
- -----------------------------------------------------------------
- -------------
MOROCCO (3.2%)
LOAN AGREEMENT
+++~Kingdom of Morocco Restructuring
and Consolidation Agreement 'A' 1990
(Participation: Chase Securities,
Inc., J.P. Morgan) 6.375%, 1/1/09 17,000 14,035
--------------
- -----------------------------------------------------------------
- -------------
NIGERIA (1.3%)
NOTE
Central Bank of Nigeria Promissory
Note 3.91%, 1/5/10 11,000 5,940
--------------
- -----------------------------------------------------------------
- -------------
PANAMA (2.7%)
BOND
*Republic of Panama Interest Reduction
Bond 3.50%, 7/17/14 16,783 11,685
- -----------------------------------------------------------------
- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------
- -------------
<S> <C> <C>
PERU (3.2%)
BONDS (0.9%)
+*#Republic of Peru Past Due Interest
Bond, 12/29/49 U.S.$ 500 U.S.$ 296
+*#Republic of Peru Past Due Interest
Bond, 12/29/49 6,000 3,547
--------------
3,843
--------------
LOAN AGREEMENT (0.4%)
##++Republic of Peru - Petroperu
Working Capital Loan 2,000 1,570
--------------
NOTE (1.9%)
++/+++Republic of Peru Working Capital
Loan 9,699 8,535
--------------
13,948
--------------
- -----------------------------------------------------------------
- -------------
PHILIPPINES (1.3%)
BOND
Philippine Long Distance Telephone
9.25%, 6/30/06 5,500 5,954
--------------
- -----------------------------------------------------------------
- -------------
RUSSIA (10.8%)
BONDS (4.8%)
#Ministry of Finance Tranche IV,
3.00%, 5/14/03 24,015 14,694
#Ministry of Finance Tranche IV,
3.00%, 5/14/03 (Letter of
Entitlement) 128 78
+#Russia Past Due Interest Bond, Zero
Coupon, 12/31/99 8,900 6,180
--------------
20,952
--------------
LOAN AGREEMENTS (4.4%)
##++Bank for Foreign Economic Affairs DEM 8,200 4,503
##++Bank for Foreign Economic Affairs U.S.$ 18,950 15,125
--------------
19,628
--------------
NOTE (1.6%)
+#Russia Principal Notes, Zero Coupon,
12/31/99 12,300 7,234
--------------
47,814
--------------
- -----------------------------------------------------------------
- -------------
VENEZUELA (7.0%)
BONDS
+++Republic of Venezuela Discount
Bonds 'A' 6.438%, 3/31/20 5,000 4,150
+++Republic of Venezuela Front Loaded
Interest Rate Reduction Bond 'A'
6.625%, 3/31/07 22,750 20,333
+++Republic of Venezuela Front Loaded
Interest Rate Reduction Bond 'B'
6.438%, 3/31/07 7,000 6,256
--------------
30,739
--------------
- -----------------------------------------------------------------
- -------------
TOTAL DEBT INSTRUMENTS
(Cost $417,613) 440,592
- -----------------------------------------------------------------
- -------------
VALUE
NO. OF WARRANTS (000)
- ---------------------------------------------------------
- ------------
WARRANTS (0.0%)
- -----------------------------------------------------------------
- -------------
VENEZUELA (0.0%)
Republic of Venezuela Oil, expiring
4/15/20 (Cost $0) 35,700 U.S.$ --
--------------
- -----------------------------------------------------------------
- -------------
CONTRACTS
- ---------------------------------------------------------
- ------------
PURCHASED OPTIONS (0.1%)
- ---------------------------------------------------------
- ------------
BULGARIA
Republic of Bulgaria Front-Loaded
Interest Reduction Bond Call
expiring 3/24/97, Strike price
U.S.$40.5625 150,000 337
Republic of Bulgaria Past Due Interest
Bond Call expiring 1/6/97, Strike
price U.S.$51.50 150,000 64
- -----------------------------------------------------------------
- -------------
TOTAL PURCHASED OPTIONS
(Cost $797) 401
--------------
- -----------------------------------------------------------------
- -------------
FACE
AMOUNT
(000)
- ---------------------------------------------------------
- ------------
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (0.0%)
German Mark
(Cost $17) DEM 26 17
--------------
- -----------------------------------------------------------------
- -------------
TOTAL INVESTMENTS (100.0%)
(Cost $418,427) U.S.$ 441,010
--------------
- -----------------------------------------------------------------
- -------------
</TABLE>
++ -- Non-income producing -- in default.
+++ -- Variable/floating rate security -- rate disclosed is as of December 31,
1996.
+ -- When-issued security -- see Note A-8 to Financial Statements.
# -- 144A security -- certain conditions for public sale may exist.
## -- Under restructuring at December 31, 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 disclosed is as of December 31, 1996. Maturity date disclosed is
ultimate maturity.
** -- Denotes all or a portion of securities subject to repurchase under
Reverse Repurchase Agreements as of December 31, 1996 -- See Note A-4 to
financial statements.
PIK -- Payment-in-Kind. Income may be paid in additional securities or cash at
the discretion of the issuer.
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<S> <C> <C>
- ----------------------------------------------------
- -------------
DECEMBER 31, 1996 EXCHANGE RATES:
- ----------------------------------------------------
DEM German Mark 1.539 = U.S.$1.00
FRF French Franc 5.187 = U.S.$1.00
INR Indian Rupee 35.850 = U.S.$1.00
MXP Mexican Peso 7.885 = U.S.$1.00
South African
Rand 4.679 = U.S.$1.00
ZAR
- ----------------------------------------------------
- -------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT
INFORMATION:
Under the terms of the forward foreign currency
exchange contract open at December 31, 1996, the
Fund is obligated to deliver U.S. dollars in
exchange for foreign currency as indicated
below:
</TABLE>
<TABLE>
<CAPTION>
CURRENCY IN NET
TO EXCHANGE UNREALIZED
DELIVER SETTLEMENT FOR VALUE GAIN
(000) DATE (000) (000) (000)
- ------------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S.$ 1,277 1/2/97 FRF 6,700 U.S.$1,292 U.S.$15
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------
- -------------
SECURITIES SOLD SHORT
ECUADOR BOND
Republic of Ecuador Past Due Interest
Bond PIK 6.50%, 2/27/15 U.S.$ 10,573 U.S.$ 6,500
--------------
- -----------------------------------------------------------------
- -------------
MEXICO BOND
United Mexican States Global Bond
11.50%, 5/15/26 17,800 18,823
--------------
(Total Proceeds U.S.$24,467) 25,323
--------------
--------------
- -----------------------------------------------------------------
- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
1996
STATEMENT OF ASSETS AND LIABILITIES (000)
<S> <C>
- --------------------------------------------------------------------------------------
ASSETS:
Investments, at Value (Cost U.S.$418,427)......................... U.S.$ 441,010
Cash.............................................................. 156
Receivable for Investments Sold................................... 33,351
Receivable due from Broker........................................ 18,690
Interest Receivable............................................... 11,810
Deferred Organization Costs....................................... 23
Unrealized Gain on Forward Foreign Currency Exchange Contracts.... 15
Other Assets...................................................... 18
- --------------------------------------------------------------------------------------
Total Assets.................................................... 505,073
- --------------------------------------------------------------------------------------
LIABILITIES:
Securities Sold Short, at Value (Proceeds U.S.$24,467)............ (25,323)
Payable For:
Reverse Repurchase Agreement.................................. (66,648)
Investments Purchased......................................... (39,188)
Interest on Securities Sold Short............................. (452)
Investment Advisory Fees...................................... (301)
Interest...................................................... (240)
Shareholder Reporting Expenses................................ (79)
Custodian Fees................................................ (77)
Professional Fees............................................. (63)
Directors' Fees and Expenses.................................. (29)
Administrative Fees........................................... (27)
Other Liabilities................................................. (2)
- --------------------------------------------------------------------------------------
Total Liabilities............................................... (132,429)
- --------------------------------------------------------------------------------------
NET ASSETS............................................................ U.S.$ 372,644
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock...................................................... U.S.$ 215
Capital Surplus................................................... 274,350
Undistributed Net Investment Income............................... 4,012
Accumulated Net Realized Gain..................................... 72,558
Unrealized Appreciation on Investments, Foreign Currency
Translations and Securities Sold Short........................... 21,509
- --------------------------------------------------------------------------------------
NET ASSETS
Applicable to 21,531,260 issued and outstanding U.S.$0.01 par
value shares (100,000,000 shares authorized)..................... U.S.$ 372,644
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE............................................. U.S.$ 17.31
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
STATEMENT OF OPERATIONS (000)
- -------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Interest.......................................................... U.S.$ 45,911
Less: Foreign Taxes Withheld...................................... (91)
- -------------------------------------------------------------------------------------
Total Income.................................................... 45,820
- -------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees.......................................... 3,125
Interest Expense on Borrowings.................................... 3,179
Interest Expense on Securities Sold Short......................... 585
Custodian Fees.................................................... 431
Administrative Fees............................................... 295
Shareholder Reporting Expenses.................................... 116
Professional Fees................................................. 115
Directors' Fees and Expenses...................................... 69
Other Expenses.................................................... 138
- -------------------------------------------------------------------------------------
Total Expenses.................................................. 8,053
- -------------------------------------------------------------------------------------
Net Investment Income......................................... 37,767
- -------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold........................................ 92,915
Investment Securities Sold Short.................................. (8,312)
Written Option Contracts.......................................... 433
Foreign Currency Transactions..................................... (6,533)
- -------------------------------------------------------------------------------------
Net Realized Gain............................................... 78,503
- -------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Appreciation on Investments and Securities Sold Short............. 12,687
Depreciation on Foreign Currency Translations..................... (8)
- -------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation.................. 12,679
- -------------------------------------------------------------------------------------
Net Realized Gain and Change in Unrealized
Appreciation/Depreciation............................................ 91,182
- -------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............. U.S.$128,949
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income............................................... U.S.$ 37,767 U.S.$ 32,870
Net Realized Gain (Loss)............................................ 78,503 (5,001)
Change in Unrealized Appreciation/Depreciation...................... 12,679 26,427
- ---------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations................ 128,949 54,296
- ---------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income............................................... (23,254) (31,947)
In Excess of Net Investment Income.................................. -- (473)
- ---------------------------------------------------------------------------------------------------------------
Total Distributions................................................. (23,254) (32,420)
- ---------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Common Stock Issues 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...................................................... 106,349 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.$4,012 and U.S.$(1,825)
respectively)...................................................... U.S.$372,644 U.S.$266,295
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
STATEMENT OF CASH FLOWS (000)
<S> <C>
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING AND OPERATING ACTIVITIES:
Proceeds from Sales of Investments...................................................... U.S.$ 1,250,261
Purchases of Investments................................................................ (1,333,308)
Net Decrease in Short Term Investments.................................................. 34,174
Net Cash from Foreign Currency Transactions............................................. (6,550)
Investment Income....................................................................... 22,672
Interest Expense Paid................................................................... (2,643)
Operating Expenses Paid................................................................. (4,522)
- ---------------------------------------------------------------------------------------------------------------
Net Cash Used for Investing and Operating Activities.................................... (39,916)
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Received from Reverse Repurchase Agreements........................................ 66,219
Cash Distributions Paid (net of reinvestment of U.S.$654)............................... (32,821)
- ---------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities............................................... 33,398
- ---------------------------------------------------------------------------------------------------------------
Net Decrease in Cash.................................................................... (6,518)
CASH AT BEGINNING OF PERIOD................................................................. 6,674
- ---------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD....................................................................... U.S.$ 156
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INVESTMENT INCOME TO NET CASH USED FOR INVESTING AND OPERATING
ACTIVITIES
- ---------------------------------------------------------------------------------------------------------------
Net Investment Income................................................................... U.S.$ 37,767
Proceeds from sale of Investments....................................................... 1,284,435
Purchases of Investments................................................................ (1,333,308)
Net Cash from Foreign Currency Transactions............................................. (6,550)
Net Increase in Receivables Related to Operations....................................... (6,114)
Net Increase in Payables Related to Operations.......................................... 428
Amortization of Organization Costs...................................................... 15
Accretion/Amortization of Discounts and Premiums........................................ (16,589)
- ---------------------------------------------------------------------------------------------------------------
Net Cash Used for Investing and Operating Activities.................................... U.S.$ (39,916)
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 23, 1993*
YEARS ENDED DECEMBER 31, TO
-------------------------------------------- DECEMBER 31,
SELECTED PER SHARE DATA AND RATIOS: 1996 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....................................... 1.75 1.76 1.51 0.50
Net Realized and Unrealized Gain (Loss) on Investments...... 4.24 1.16 (6.34) 4.56
- -------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations........................ 5.99 2.92 (4.83) 5.06
- -------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income................................... (1.08) (1.69) (1.49) (0.16)
In Excess of Net Investment Income...................... -- (0.03) -- --
Net Realized Gain....................................... -- -- (0.41) --
- -------------------------------------------------------------------------------------------------------------------------------
Total Distributions..................................... (1.08) (1.72) (1.90) (0.16)
- -------------------------------------------------------------------------------------------------------------------------------
Decrease in Net Asset Value due to Rights Offering.......... -- (1.01) -- --
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. U.S.$ 17.31 U.S.$ 12.40 U.S.$ 12.23 U.S.$ 18.96
- -------------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD....................... U.S.$ 15.13 U.S.$ 12.50 U.S.$ 11.38 U.S.$ 18.13
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value............................................ 30.86% 37.48%+++ (27.97)% 29.97%
Net Asset Value (1)..................................... 50.98% 26.85%+++ (25.95% 35.96%
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS)....................... U.S.$372,644 U.S.$266,295 U.S.$196,282 U.S.$302,951
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses Before Interest Expense to Average Net
Assets.................................................... 1.38% 1.50% 1.59% 1.73%**
Ratio of Expenses After Interest Expense to Average Net
Assets.................................................... 2.59% 1.89% 2.30% 2.79%**
Ratio of Net Investment Income to Average Net Assets........ 12.14% 15.21% 10.79% 7.20%**
Portfolio Turnover Rate..................................... 373% 348% 256% 72%
- -------------------------------------------------------------------------------------------------------------------------------
*Commencement of operations.
**Annualized.
+++This return does not include the effect of dilution in connection with the Rights Offering.
(1)Total investment return based on net asset value per share reflects the effects of changes in net asset value on the
performance of the Fund during each period, and assumes dividends and distributions, if any, were reinvested. 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
DECEMBER 31, 1996
- ------------
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 receives cash
from the sale of securities and agrees to repurchase the securities at a
mutually agreed upon date and price. Reverse repurchase agreements involve
market risk that the 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. The Fund is also
subject to credit risk equal to the amount by which the value of securities
subject to repurchase exceeds the Fund's Liability under the reverse
repurchase agreement. Securities subject to repurchase under reverse
repurchase agreements, if any, are designated as such in the Portfolio of
Investments.
At December 31, 1996, the Fund had reverse repurchase agreements outstanding
as follows:
<TABLE>
<CAPTION>
MATURITY IN
30 TO 90 DAYS
-------------
<S> <C>
Value of Securities Subject to
Repurchase........................... $73,560,000
Liability under Reverse Repurchase
Agreement............................ $66,648,000
Weighted Average Interest Rate........ 5.75%
</TABLE>
The average weekly balance of reverse repurchase agreements outstanding
during the year ended December 31, 1996 was approximately $45,439,000 at a
weighted average interest rate of 5.82%.
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. 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.
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.
15
<PAGE>
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 year
ended December 31, 1996, the Fund incurred international custodian fees of
$265,000 of which $76,000 was payable to the International Custodian at December
31, 1996. In addition, for the year ended December 31, 1996, the Fund has earned
interest income of $40,000 and incurred interest expense of $451,000, on
balances with the International Custodian.
E. During the year ended December 31, 1996, the Fund made purchases and sales
totaling approximately $1,332,000,000 and $1,267,000,000 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, 1996, the U.S. Federal
income tax cost basis of securities was approximately $419,955,000 and
accordingly, net unrealized appreciation for U.S. Federal income tax purposes
was $21,038,000, of which $23,878,000 related to appreciated securities and
$2,840,000 related to depreciated securities.
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 December 31, 1996 totaled
$17,000 and are included in Payable for Directors' Fees and Expenses on the
Statement of Assets and Liabilities.
J. During the year ended December 31, 1996, the Fund's written covered call
option activity was as follows:
<TABLE>
<CAPTION>
PREMIUM FACE RECEIVED
AMOUNT (000) (000)
------------ --------
<S> <C> <C>
Options outstanding at December 31, 1995.......... $ -- $ --
Options written during the year................... 103,500 2,200
Options expired during the year................... (36,000) (433)
Options exercised during the year................. (67,500) (1,767)
------------ --------
Options outstanding at December 31, 1996.......... $ -- $ --
------------ --------
------------ --------
</TABLE>
K. During December 1996, the Board declared distributions of $0.19 and $3.24
per share, derived from net investment income and net realized gains,
respectively, payable on January 9, 1997, to shareholders of record on December
31, 1996.
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION (UNAUDITED):
For the year ended December 31, 1996, the Fund designates $286,000 as
long-term capital gain.
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, of cash
flows 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, 1996, the results of its
operations and its cash flows 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 three 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, 1996 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 10, 1997
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 the 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, non-participants in the Plan will receive
cash and 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
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