<PAGE>
MORGAN STANLEY
EMERGING MARKETS DEBT FUND, INC.
- ---------------------------------------------
DIRECTORS AND OFFICERS
<TABLE>
<S> <C>
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS James W. Grisham
Michael F. Klein VICE PRESIDENT
PRESIDENT AND DIRECTOR Harold J. Schaaff, Jr.
Peter J. Chase VICE PRESIDENT
DIRECTOR Joseph P. Stadler
John W. Croghan VICE PRESIDENT
DIRECTOR Valerie Y. Lewis
David B. Gill SECRETARY
DIRECTOR Joanna M. Haigney
Graham E. Jones TREASURER
DIRECTOR Belinda A. Brady
John A. Levin ASSISTANT TREASURER
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
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.
---------------------
SEMI-ANNUAL REPORT
JUNE 30, 1997
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------
For the six months ended June 30, 1997, the Morgan Stanley Emerging Markets Debt
Fund, Inc. (the "Fund") had a total return, based on net asset value per share,
of 19.29% compared to 10.27% for the J.P. Morgan Emerging Markets Bond Plus
Index (the "Index"). For the one year ended June 30, 1997, the Fund had a total
return, based on net asset value per share, of 50.82% compared to 33.04% for the
Index. Prior to January 1, 1997, the Fund used the J.P. Morgan Emerging Markets
Bond Index as its benchmark. For the period since the Fund's commencement of
operations on July 23, 1993 through June 30, 1997, the Fund's total return,
based on net asset value per share, was 103.81% compared with 67.36% for the
Index. On June 30, 1997, the closing price of the Fund's shares on the New York
Stock Exchange was $14 9/16, representing a 4.5% discount to the Fund's net
asset value per share.
For the first few weeks of the year the trend of an across the board tightening
of credit spreads continued unabated. Attractive relative valuations, the
stretch for incremental yield and easy global monetary conditions prompted
increases in allocations to emerging market assets. Federal Reserve Governor
Greenspan's comments on the state of credit markets, extended valuations and
mispricing of risk stopped the music suddenly. A correction in fixed income
markets started in late February and lasted for much of March.
The emerging markets didn't surprise by behaving differently during this market
correction. An increase in risk premiums affected all countries and all bonds. A
correction, precipitated by possible Fed action and deepened by redemptions and
a reduction in committed capital tends to affect the broad market. The weight of
money heading for the exits drowns the fundamentals for a while.
During the second quarter of 1997, the emerging debt markets recovered from
their late first quarter correction buoyed by falling U.S. interest rates and a
renewed investor appetite for yield. U.S. interest rates fell by 35 to 40 basis
points across the yield curve. This decline in rates was prompted by signs of
moderating economic growth and the lack of evidence of any inflationary
pressures in the system. These factors reassured investors that the Federal
Reserve would not increase interest rates anytime soon. In addition to the
positive interest rate environment, a confluence of events both fundamental and
technical in nature bolstered the performance of emerging markets debt. On the
fundamental front, improving macro-economic outlooks and rating upgrades by
major U.S. ratings agencies in Argentina, Brazil, the Philippines, Uruguay, and
Venezuela provided support. While on the technical front, a continuation of the
trend of Brady bond retirement and debt buybacks as well as a strong inflow of
funds from non-dedicated or "crossover" investors caused spreads on emerging
markets debt to tighten back to levels not seen since 1993.
During the first half of the year, Bulgaria, Morocco, and Peru outperformed the
universe of emerging market debt, while the Philippines, Poland, and Nigeria
were the performance laggards. The Fund's overweight positions in Bulgaria and
Morocco as well as underweights in Nigeria, the Philippines and Poland allowed
the Fund to outperform the broad market benchmark.
Bulgarian bonds were the best performing in the emerging country universe during
the second quarter of 1997. The election of a reformist democratic government in
April assured investors that prudent macro-economic policy measures would be
enacted. The new government secured technical and financial help from the IMF
and the World Bank and adopted a policy framework to facilitate the July 1
introduction of a currency board monetary system. As prices of Bulgarian Brady
bonds rose, we reduced our exposure to the credit but remained overweight. We
expect continued outperformance next quarter from our Bulgarian positions albeit
at a more gradual pace.
Morocco benefited from an economic recovery following 1995's drought. The
prospect of favorable ratings also buoyed priced. We used the rally to reduce
our allocation to Morocco in the spring and will consider increasing them again
once valuations reach attractive levels and are consistent with our expectations
for a BB rating. The other out-performing credit, Peru, reacted to the release
of above consensus GDP growth numbers of over 7% for the first 6 months of the
year.
Our value-oriented investment style steered us away from the debt of the
Philippines and Poland, which both trade at fully valued levels. Both countries
suffered from their proximity to the turbulence of neighboring currency markets
and both were forced to keep local interest rates high in a defensive move
against possible speculative attacks on their own currencies. We will monitor
both situations closely and may increase our exposure should valuations become
more attractive.
Deteriorating political dynamics caused us to avoid Nigerian debt which suffered
from its failed involvement in the unrest in neighboring Sierra Leone. The
Nigerian's inability to install the former civilian government has undermined
political stability in Nigeria. Also, lack of progress on economic reforms has
reduced the prospect of a new IMF agreement and consequently, debt forgiveness.
Our outlook remains cautiously positive. The benign U.S. rate environment,
improving economic fundamentals in the emerging countries and growing investor
2
<PAGE>
interest in the emerging debt asset class should cause risk premiums on emerging
markets debt to come down and prices to rise over the medium term. Over the
short term, however, we will be watching for signs of fatigue as spreads are
near historic lows and we expect some profit taking. Additionally, some emerging
countries in Asia and eastern Europe are experiencing considerable local
currency volatility and we will be monitoring the potential contagion effects on
emerging debt.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
/s/ Paul Ghaffari
Paul Ghaffari
PORTFOLIO MANAGER
July 1997
3
<PAGE>
Morgan Stanley Emerging Markets Debt Fund, Inc.
Investment Summary as of June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION
TOTAL RETURN (%)
---------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (3)
----------------------- ----------------------- -----------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
FISCAL YEAR TO DATE 30.37% -- 19.29% -- 10.27% --
ONE YEAR 52.50 52.50% 50.82 50.82% 33.04 33.04%
SINCE INCEPTION* 119.65+ 22.63+ 103.02+ 23.54+ 87.36 17.28
</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:
SIX MONTHS ENDED
1993* 1994 1995 1996 JUNE 30, 1997
<S> <C> <C> <C> <C> <C>
Net Asset Value Per Share $ 18.96 $ 12.23 $ 12.40 $ 17.31 $15.25
Market Value Per Share $ 18.13 $ 11.38 $ 12.50 $ 15.13 $14.56
Premium/(Discount) -4.4% -7.0% 0.8% -12.6% -4.5%
Income Dividends $0.16 $1.49 $1.72 $1.08 $0.91
Capital Gains Distributions - $0.41 - - $3.44
Fund Total Return (2) 35.96% -25.95% 26.85%+ 50.98% 19.29%
Index Total Return (3) 18.67% -18.93% 26.77% 39.31% 10.27%
</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) Prior to fiscal year 1997, the Fund used the J.P. Morgan Emerging Markets
Bond Index as its benchmark for performance purposes. Beginning in 1997,
the Fund is now using the J.P. Morgan Emerging Markets Bond Plus Index for
the purpose of performance comparisons. This index includes a broader
range of debt instruments and more closely represents the investment
strategy of the Fund. Because the J.P. Morgan Emerging Markets Bond Plus
Index was not available prior to January 1, 1994 the performance of the
J.P. Morgan Emerging Markets Bond Index is shown for the period July 23,
1993 to December 31, 1993 and for purposes of computing cumulative
performance of the benchmark index, for that period. The J.P. Morgan
Emerging Markets Bond Plus Index is a market weighted index composed of
Brady bonds, loans and Eurobonds, as well as U.S. Dollar local market
instruments of Argentina, Brazil, Bulgaria, Mexico, Morocco, Nigeria, the
Philippines, Poland, Russia, Venezuela and South Africa.
* The Fund commenced operations on July 23, 1993.
+ This return does not include the effect of the rights issued in connection
with the Rights Offering.
</TABLE>
4
<PAGE>
Morgan Stanley Emerging Markets Debt Fund, Inc.
Portfolio Summary as of June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Debt Instruments 94.6%
Short-Term Investments 5.4%
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Mexico 17.9%
Russia 15.7%
Brazil 12.8%
Argentina 12.8%
Venezuela 10.1%
Bulgaria 5.3%
Jamaica 4.7%
Morocco 2.9%
Ivory Coast 2.7%
Peru 2.1%
Other 13.0%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
-----------
<C> <S> <C>
1. Ministry of Finance Tranche IV 144A
3.00%, 5/14/03 6.8%
2. Republic of Argentina 'L' Bond 6.75%,
3/31/05 6.4
3. Republic of Venezuela Debt Conversion
Bond 'DL' 6.75%, 12/18/07 5.3
4. Government of Jamaica 12.00%, 7/19/99 4.7
5. Federative Republic of Brazil Debt
Conversion 'L' Bond 6.94%, 4/15/12 4.3
6. Salomon Brothers Federative Republic of
Brazil Credit Linked Enhanced Note
9.00%, 1/15/99 3.6
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
-----------
<C> <S> <C>
7. Russia Principal Note Zero Coupon,
12/31/99 3.5%
8. Chase Manhattan Bank United Mexican
States Stripped Discount Bond 6.375%,
9/9/97 2.9
9. Kingdom of Morocco Restructuring and
Consolidation Agreement 'A'
(Participation: J.P. Morgan, Lehman
Bros.) 6.81%, 1/1/09 2.9
10. Chase Manhattan Bank Republic of
Bulgaria Stripped Discount Note 6.56%,
8/20/97 2.8
-----
43.2%
-----
-----
</TABLE>
* Excludes short-term investments.
5
<PAGE>
FINANCIAL STATEMENTS
- ---------
STATEMENT OF NET ASSETS (UNAUDITED)
(Showing Percentage of Total Value of Investments)
- ---------
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------
- -------------
DEBT INSTRUMENTS (85.3%)
- --------------------------------------------------
- ----------
ALGERIA (0.2%)
LOAN AGREEMENT
(e,i)Algeria Refinanced Loan Tranche
'A' U.S.$ 1,000 U.S.$ 877
--------------
- -----------------------------------------------------------------
- -------------
ARGENTINA (12.8%)
BONDS (11.9%)
(e)Acindar Industries 144A 11.75%,
11/12/98 1,500 1,564
City of Buenos Aires 144A 11.25%,
4/11/07 2,000 2,175
Industrias Pescarmona S.A. 11.75%,
3/27/98 1,000 1,039
Metrogas S.A. 'B' 10.875%, 5/15/01 4,000 4,400
Republic of Argentina 11.00%, 10/9/06 5,800 6,452
Republic of Argentina 144A 11.75%,
2/12/07 ARP 3,200 3,569
(e,j)Republic of Argentina 'L' Bond
6.75%, 3/31/05 U.S.$ 27,791 26,140
Republic of Argentina Par Bond 5.50%,
3/31/23 5,000 3,469
--------------
48,808
--------------
NOTE (0.9%)
Nortel Inversora 'A' 6.00%, 3/31/07 6,723 3,580
--------------
52,388
--------------
- -----------------------------------------------------------------
- -------------
BRAZIL (9.2%)
BONDS
Federative Republic of Brazil Global
Bond 10.13%, 5/15/27 8,862 8,543
(h)Federative Republic of Brazil 'C'
Bond PIK Euro 8.00%, 4/15/14 7,228 5,812
(e,j)Federative Republic of Brazil
Debt Conversion 'L' Bond 6.94%,
4/15/12 21,500 17,791
Tevecap 12.625%, 11/26/04 5,000 5,406
--------------
37,552
--------------
- -----------------------------------------------------------------
- -------------
BULGARIA (2.5%)
BONDS
(h)Republic of Bulgaria Front Loaded
Interest Reduction Bond 'A' Euro
2.25%, 7/28/12 15,600 8,912
(e)Republic of Bulgaria Past Due
Interest Bond 6.56%, 7/28/11 2,050 1,482
--------------
10,394
--------------
- -----------------------------------------------------------------
- -------------
DOMINICAN REPUBLIC (0.4%)
BOND
(e)Dominican Republic Past Due
Interest Bond 6.44%, 8/30/09 1,750 1,518
--------------
- -----------------------------------------------------------------
- -------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
ECUADOR (1.9%)
BONDS
Conecel 144A 14.00%, 5/1/02 U.S.$ 3,000 U.S.$ 3,188
(e)Republic of Ecuador Discount Bond
6.44%, 2/28/25 6,700 4,790
--------------
7,978
--------------
- -----------------------------------------------------------------
- -------------
INDIA (0.6%)
BOND
(d)Saurashtra Cement Co. 17.00%,
9/7/97 INR 94,000 2,614
--------------
- -----------------------------------------------------------------
- -------------
IVORY COAST (2.7%)
BOND (0.2%)
(b,k)Republic of Ivory Coast Front
Loaded Interest Reduction Bond 144A U.S.$ 2,000 668
--------------
LOAN AGREEMENTS (2.5%)
(b)Republic of Ivory Coast Syndicated
Loan, Zero Coupon, 12/31/00 FRF 99,146 7,995
(b)Republic of Ivory Coast Syndicated
Loan, Zero Coupon, 12/31/00 U.S.$ 5,750 2,415
--------------
10,410
--------------
11,078
--------------
- -----------------------------------------------------------------
- -------------
JAMAICA (4.7%)
BOND
(i)Government of Jamaica 12.00%,
7/19/99 19,100 19,100
--------------
- -----------------------------------------------------------------
- -------------
JORDAN (0.1%)
BOND
(e)Government of Jordan Interest
Arrears Bond 6.75%, 12/23/05 358 342
--------------
- -----------------------------------------------------------------
- -------------
MEXICO (15.0%)
BONDS
Bancomext Global Bond 7.25%, 2/2/04 11,900 11,112
Bufete Industrial 144A 11.375%,
7/15/99 7,000 7,311
(j)Empresas ICA Sociedad Controladora
144A, 11.875%, 5/30/01 8,000 8,740
Empresas ICA Sociedad Controladora
(Registered) 11.875%, 5/30/01 1,000 1,092
(j)Empresas La Moderna 144A 11.375%,
1/25/99 6,500 6,849
National Financiera 17.00%, 2/26/99 ZAR 12,000 2,645
(e)United Mexican States Discount Bond
6.84%, 12/31/19 U.S.$ 5,000 4,653
(e)United Mexican States Discount Bond
6.87%, 12/31/19 1,300 1,210
- -----------------------------------------------------------------
- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
MEXICO (CONTINUED)
United Mexican States Global Bond 'A'
6.25%, 12/31/19 U.S.$ 2,400 U.S.$ 1,856
United Mexican States Global Bond 'B'
6.25%, 12/31/19 9,600 7,422
United Mexican States Global Bond Euro
11.50%, 5/15/26 7,400 8,458
--------------
61,348
--------------
- -----------------------------------------------------------------
- -------------
MOROCCO (2.9%)
LOAN AGREEMENT
(e,g)Kingdom of Morocco Restructuring
and Consolidation Agreement 'A'
(Participation: J.P. Morgan, Lehman
Bros.) 6.81%, 1/1/09 12,900 11,827
--------------
- -----------------------------------------------------------------
- -------------
NIGERIA (1.4%)
NOTE
(e)Central Bank of Nigeria Promissory
Note 3.80%, 1/5/10 11,000 5,761
--------------
- -----------------------------------------------------------------
- -------------
PANAMA (1.1%)
BONDS
(h)Republic of Panama Interest
Reduction Bond 144A 3.50%, 7/17/14 3,583 2,768
(h)Republic of Panama Interest
Reduction Bond Euro 3.50%, 7/17/14 300 231
(e)Republic of Panama Past Due
Interest Bond 144A, 6.56%, 7/17/16 1,724 1,516
--------------
4,515
--------------
- -----------------------------------------------------------------
- -------------
PERU (2.1%)
BONDS
(h)Republic of Peru Front Loaded
Interest Reduction Bond 3.25%,
3/7/17 300 179
(h)Republic of Peru Front Loaded
Interest Reduction Bond 3.25%,
3/7/17 14,098 8,424
--------------
8,603
--------------
- -----------------------------------------------------------------
- -------------
RUSSIA (15.7%)
BONDS (8.0%)
Ministry of Finance Tranche IV 144A
3.00%, 5/14/03 41,740 28,008
Ministry of Finance Tranche IV (Letter
of Entitlement) 3.00%, 5/14/03 122 81
Ministry of Finance Tranche VI 144A
3.00%, 5/14/06 8,800 4,778
--------------
32,867
--------------
LOAN AGREEMENTS (3.2%)
(b,f,g)Bank for Foreign Economic
Affairs (Participation: J.P. Morgan) 4,550 4,175
International Bank for Economic
Cooperation Loan Agreement DEM 14,450 5,180
International Bank for Economic
Cooperation Loan Agreement U.S.$ 5,843 3,652
--------------
13,007
--------------
- -----------------------------------------------------------------
- -------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
NOTES (4.5%)
Russia Interest Arrears Note U.S.$ 5,300 U.S.$ 4,050
Russia Principal Note Zero Coupon,
12/31/99 21,300 14,211
--------------
18,261
--------------
64,135
--------------
- -----------------------------------------------------------------
- -------------
SOUTH AFRICA (1.9%)
BOND
Republic of South Africa '150' 12.00%,
2/28/05 ZAR 40,100 7,889
--------------
- -----------------------------------------------------------------
- -------------
VENEZUELA (10.1%)
BONDS
(e)Republic of Venezuela Debt
Conversion Bond 'DL' 6.75%, 12/18/07 U.S.$ 23,500 21,811
(e)Republic of Venezuela Discount
Bonds 'A' 6.81%, 3/31/20 5,500 4,874
(e)Republic of Venezuela Discount
Bonds 'B' 6.81%, 3/31/20 5,600 4,963
(e,j)Republic of Venezuela Front
Loaded Interest Reduction Bond 'A',
6.75%, 3/31/07 10,238 9,525
--------------
41,173
--------------
- -----------------------------------------------------------------
- -------------
TOTAL DEBT INSTRUMENTS
(Cost U.S. $334,777) 349,092
--------------
- -----------------------------------------------------------------
- -------------
STRUCTURED INVESTMENTS (9.3%)
- -----------------------------------------------------------------
- -------------
BRAZIL (3.6%)
Salomon Brothers Federative Republic
of Brazil Credit Linked Enhanced
Note 9.00%, 1/5/99 15,000 14,856
--------------
- -----------------------------------------------------------------
- -------------
BULGARIA (2.8%)
Chase Manhattan Bank Republic of
Bulgaria Stripped Discount Note
6.56%, 8/20/97 20,000 11,496
--------------
- -----------------------------------------------------------------
- -------------
MEXICO (2.9%)
Chase Manhattan Bank United Mexican
States Stripped Discount Bond
6.375%, 9/9/97 16,550 11,991
--------------
- -----------------------------------------------------------------
- -------------
TOTAL STRUCTURED INVESTMENTS
(Cost U.S. $35,322) 38,343
--------------
- -----------------------------------------------------------------
- -------------
<CAPTION>
NO. OF
WARRANTS
<S> <C> <C>
- ---------------------------------------------------------
- ------------
WARRANTS (0.0%)
- --------------------------------------------------
- ----------
VENEZUELA
(a)Republic of Venezuela Oil,
expiring 4/15/20
(Cost U.S. $0) 95 --@
- -----------------------------------------------------------------
- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
RIGHTS (0.0%)
- --------------------------------------------------
- ----------
MEXICO
(a)United Mexican States Value
Recovery Rights, expiring 6/30/03
(Cost U.S. $0) 21,692 U.S.$ --@
--------------
- -----------------------------------------------------------------
- -------------
<CAPTION>
FACE
AMOUNT
(000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
SHORT-TERM INVESTMENTS (4.3%)
- --------------------------------------------------
- ----------
SOUTH AFRICA (0.6%)
COMMERCIAL PAPER
Eskom 15.54%, 8/12/97 ZAR 10,300 2,229
--------------
- -----------------------------------------------------------------
- -------------
UNITED STATES (3.7%)
REPURCHASE AGREEMENT
Chase Securities, Inc., 5.70%, dated
6/30/97, due 7/1/97, to be
repurchased at U.S. $15,196,
collateralized by U.S. Treasury
Bonds, 5.625%, due 2/15/06, valued
at U.S. $15,452 U.S.$ 15,194 15,194
--------------
- -----------------------------------------------------------------
- -------------
TOTAL SHORT-TERM INVESTMENTS
(Cost U.S. $17,463) 17,423
--------------
- -----------------------------------------------------------------
- -------------
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (1.1%)
German Mark DEM 7,903 4,534
Indian Rupee INR 10 --@
--------------
(Cost U.S. $4,572) 4,534
--------------
- -----------------------------------------------------------------
- -------------
TOTAL INVESTMENTS (100.0%)
(Cost U.S. $392,134) 409,392
--------------
- -----------------------------------------------------------------
- -------------
OTHER ASSETS
Receivable for Investments Sold U.S.$ 55,697
Interest Receivable 9,169
Dividend Receivable 16
Deferred Organization Costs 16
Other Assets 39 64,937
--------------- --------------
- -----------------------------------------------------------------
- -------------
LIABILITIES
Payable for:
Investments Purchased (76,135)
Reverse Repurchase Agreement (49,983)
Dividends Declared (7,751)
Bank Overdraft (6,442)
Capital Gains Declared (4,321)
Interest (823)
Investment Advisory Fees (290)
Shareholder Reporting Expenses (54)
Custodian Fees (52)
Professional Fees (49)
Directors' Fees and Expenses (44)
Administration Fees (27)
Other Liabilities (6) (145,977)
--------------- --------------
- -----------------------------------------------------------------
- -------------
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
NET ASSETS
Applicable to 21,531,260 issued and
outstanding U.S.$0.01 par value
shares (100,000,000 shares
authorized) U.S.$ 328,352
--------------
--------------
- -----------------------------------------------------------------
- -------------
NET ASSET VALUE PER SHARE U.S.$ 15.25
--------------
--------------
- -----------------------------------------------------------------
- -------------
AT JUNE 30, 1997, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------
Common Stock U.S.$ 215
Capital Surplus 274,350
Accumulated Net Investment Loss (1,182)
Accumulated Net Realized Gain 37,707
Unrealized Appreciation on Investments and Foreign
Currency Translations 17,262
- -----------------------------------------------------------------
- -------------
TOTAL NET ASSETS U.S.$ 328,352
--------------
--------------
- -----------------------------------------------------------------
- -------------
</TABLE>
(a) -- Non-income producing.
(b) -- Non-income producing -- in default.
(c) -- Security valued at cost -- see note A-1 to financial statements.
(d) -- Security valued at fair value -- see note A-1 to financial statements.
(e) -- Variable/floating rate security -- rate disclosed is as of June 30,
1997.
(f) -- Under restructuring at June 30, 1997 -- see note A-7 to financial
statements.
(g) -- Participation interests were acquired through the financial institutions
indicated parenthetically.
(h) -- Step Bond -- coupon rate increases in increments to maturity.
Rate dislcosed is as of June 30, 1997. Maturity date disclosed is
ultimate maturity.
(i) -- Issuer is making partial payments.
(j) -- Denotes all or a portion of securities subject to repurchase under
Reverse Repurchase Agreements as of June 30, 1997. See note A-4 to
financial statements.
(k) -- Security is subject to delayed delivery -- see note A-8 to financial
statements.
144A -- Certain conditions for public sale may exist.
PIK -- Payment-in-Kind. Income may be paid in additional securities or cash at
the discretion of the issuer.
<TABLE>
<S> <C> <C>
- -----------------------------------------------------
- -------------
JUNE 30, 1997 EXCHANGE RATES:
- -----------------------------------------------------
ARP Argentine Peso 1.000 = U.S.$1.00
DEM German Mark 1.743 = U.S.$1.00
FRF French Franc 5.875 = U.S.$1.00
INR Indian Rupee 35.800 = U.S.$1.00
ZAR South African Rand 4.537 = U.S.$1.00
</TABLE>
- -----------------------------------------------------------------
- -------------
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1997
(UNAUDITED)
STATEMENT OF OPERATIONS (000)
<S> <C>
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends............................................................................... U.S.$ 16
Interest................................................................................ 18,591
Less: Foreign Taxes Withheld............................................................ (45)
- ---------------------------------------------------------------------------------------------------------------
Total Income.......................................................................... 18,562
- ---------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees................................................................ 1,593
Interest Expense on Borrowings.......................................................... 1,697
Interest Expense on Securities Sold Short............................................... 479
Custodian Fees.......................................................................... 134
Administrative Fees..................................................................... 149
Shareholder Reporting Expenses.......................................................... 72
Professional Fees....................................................................... 53
Directors' Fees and Expenses............................................................ 23
Other Expenses.......................................................................... 40
- ---------------------------------------------------------------------------------------------------------------
Total Expenses........................................................................ 4,240
- ---------------------------------------------------------------------------------------------------------------
Net Investment Income............................................................. 14,322
- ---------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold.............................................................. 40,047
Investment Securities Sold Short........................................................ (1,126)
Written Option Contracts................................................................ 300
Foreign Currency Transactions........................................................... 32
- ---------------------------------------------------------------------------------------------------------------
Net Realized Gain..................................................................... 39,253
- ---------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Appreciation on Investments............................................................. (4,230)
Depreciation on Foreign Currency Translations........................................... (17)
- ---------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation........................................ (4,247)
- ---------------------------------------------------------------------------------------------------------------
Net Realized Gain and Change in Unrealized Appreciation/Depreciation........................ 35,006
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................................ U.S.$ 49,328
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1997 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1996
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income............................................... U.S.$ 14,322 U.S.$ 37,767
Net Realized Gain................................................... 39,253 78,503
Change in Unrealized Appreciation/Depreciation...................... (4,247) 12,679
- ---------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations................ 49,328 128,949
- ---------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income............................................... (19,516) (23,254)
Net Realized Gain................................................... (74,104) --
- ---------------------------------------------------------------------------------------------------------------
Total Distributions................................................. (93,620) (23,254)
- ---------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Reinvestment of Distributions (50,147 shares)....................... -- 654
- ---------------------------------------------------------------------------------------------------------------
Total Increase (Decrease)........................................... (44,292) 106,349
- ---------------------------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period................................................. 372,644 266,295
- ---------------------------------------------------------------------------------------------------------------
End of Period (including accumulated undistributed net investment
income (loss) of U.S.$(1,182) and U.S.$4,012, respectively)........ U.S.$328,352 U.S.$372,644
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1997
(UNAUDITED)
STATEMENT OF CASH FLOWS (000)
<S> <C>
- --------------------------------------------------------------------------------------------
CASH FLOW FROM INVESTING AND OPERATING ACTIVITIES:
Proceeds from Sale of Investments................................... U.S.$(714,408)
Purchases of Investments............................................ 829,404
Net Increase in Short-Term Investments.............................. (32,349)
Net Cash used for Foreign Currency Transactions..................... (4,555)
Investment Income................................................... 17,702
Interest Expense Paid............................................... (2,080)
Operating Expenses Paid............................................. (1,791)
- --------------------------------------------------------------------------------------------
Net Cash Provided by Investing and Operating Activities............. 91,923
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Paid for Reverse Repurchase Agreements......................... (16,974)
Cash Distributions Paid............................................. (81,547)
- --------------------------------------------------------------------------------------------
Net Cash Used for Financing Activities.............................. (98,521)
- --------------------------------------------------------------------------------------------
Net Decrease in Cash................................................ (6,598)
CASH AT BEGINNING OF PERIOD............................................. 156
- --------------------------------------------------------------------------------------------
BANK OVERDRAFT AT END OF PERIOD......................................... U.S.$ (6,442)
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
RECONCILITATION OF NET INVESTMENT INCOME TO NET CASH PROVIDED BY
INVESTING AND OPERATING ACTIVITIES:
- --------------------------------------------------------------------------------------------
Net Investment Income............................................... U.S.$ 14,322
Proceeds from Sale of Investments................................... (714,408)
Purchases of Investments............................................ 829,404
Net Decrease in Receivables Related to Operations................... 2,604
Net Increase in Payables Related to Operations...................... 383
Net Cash used for Foreign Currency Transactions..................... (4,555)
Net Increase in Short-Term Investments.............................. (32,349)
Amortization of Organization Costs.................................. 7
Accretion/Amortization of Discounts and Premiums.................... (3,485)
- --------------------------------------------------------------------------------------------
Net Cash Provided by Investing and Operating Activities............. U.S.$ 91,923
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS JULY 23, 1993*
ENDED YEAR ENDED DECEMBER 31, TO
JUNE 30, 1997 --------------------------------------------------- DECEMBER 31,
SELECTED PER SHARE DATA AND RATIOS: (UNAUDITED) 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD.... U.S.$ 17.31 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................... 0.67 1.75 1.76 1.51 0.50
Net Realized and Unrealized Gain (Loss)
on Investments......................... 1.62 4.24 1.16 (6.34) 4.56
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations.... 2.29 5.99 2.92 (4.83) 5.06
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income............... (0.91) (1.08) (1.69) (1.49) (0.16)
In Excess of Net Investment
Income............................ -- -- (0.03) -- --
Net Realized Gain................... (3.44) -- -- (0.41) --
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions................. (4.35) (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.$ 15.25 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.$ 14.56 U.S.$ 15.13 U.S.$ 12.50 U.S.$ 11.38 U.S.$ 18.13
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value........................ 30.37% 30.86% 37.48%+++ (27.97)% 29.97%
Net Asset Value (1)................. 19.29% 50.98% 26.85%+++ (25.95)% 35.96%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS)... U.S.$328,352 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.......... 1.30%** 1.38% 1.50% 1.59% 1.73%**
Ratio of Expenses After Interest Expense
to Average Net Assets.................. 2.67%** 2.59% 1.89% 2.30% 2.79%**
Ratio of Net Investment Income to
Average Net Assets..................... 9.03%** 12.14% 15.21% 10.79% 7.20%**
Portfolio Turnover Rate................. 198% 373% 348% 256% 72%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
+++ This return does not include the effect of the rights issued 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
per share of the Fund.
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997
- ------------
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 Statement of Net Assets.
At June 30, 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............................ $ 58,088,000
Liability Under Reverse
Repurchase Agreement.................. $ 49,983,000
Weighted Average Interest Rate........ 5.625%
</TABLE>
The average weekly balance of reverse repurchase agreements outstanding
during the six months ended June 30, 1997 was approximately $25,262,000 at a
weighted average interest rate of 5.65%.
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.
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
12
<PAGE>
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 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) on investments and foreign currency
translations in the Statement of Net Assets. The change in net unrealized
currency gains (losses) for the period is reflected in the Statement of
Operations.
6. FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into foreign
currency exchange contracts to attempt to protect securities and related
receivables and payables against changes in future foreign exchange rates. A
foreign currency exchange contract is an agreement between two parties to
buy or sell currency at a set price on a future date. The market value of
the contract will fluctuate with changes in currency exchange rates. The
contract is marked-to-market daily and the change in market value is
recorded by the Fund as unrealized gain or loss. The Fund records realized
gains or losses when the contract is closed equal to the difference between
the value of the contract at the time it was opened and the value at the
time it was closed. Risk may arise upon entering into these contracts from
the potential inability of counterparties to meet the terms of their
contracts and is generally limited to the amount of unrealized 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 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
13
<PAGE>
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.
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
14
<PAGE>
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, 1997, the Fund incurred international custodian fees of
$115,000 of which $51,000 was payable to the International Custodian at June 30,
1997. In addition, for the six months ended June 30, 1997, the Fund has earned
interest income of $46,000 and incurred interest expense of $107,000 on balances
with the International Custodian.
E. During the six months ended June 30, 1997, the Fund made purchases and sales
totaling approximately $751,355,000 and $854,761,000 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, 1997, the U.S. Federal income tax cost basis
of securities was approximately $387,562,000 and accordingly, net unrealized
appreciation for U.S. Federal income tax purposes was $17,296,000, of which
$19,083,000 related to appreciated securities and $1,787,000 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 June 30, 1997 totaled
$34,000 and are included in Payable for Directors' Fees and Expenses on the
Statement of Net Assets.
J. During the six months ended June 30, 1997, the Fund's written covered call
option activity was as follows:
<TABLE>
<CAPTION>
FACE PREMIUM
AMOUNT (000) (000)
------------- -------------
<S> <C> <C>
Options outstanding at December
31, 1996...................... $ -- $ --
Options written during the
year.......................... 45,400 592
Options expired during the
year.......................... (31,600) (343)
Options closed during the
year.......................... (13,800) (249)
------------- ---
Options outstanding at June 30,
1997.......................... $ -- $ --
------------- ---
------------- ---
</TABLE>
K. During June 1997, the Board declared quarterly distributions of $0.36 and
$0.20 per share, derived from net investment income and net realized gains,
respectively, payable on July 15, 1997, to shareholders of record on June 30,
1997.
15
<PAGE>
L. Supplemental Proxy Information
The Annual Meeting of the Stockholders of the Morgan Stanley Emerging Markets
Debt Fund, Inc. was held on April 30, 1997. 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>
1. To elect the following Directors: John W. Croghan 19,102,588 -- 158,849 --
Graham E. Jones 19,095,820 -- 165,617 --
2.To ratify the selection of Price Waterhouse LLP as independent public
accountants of the Fund. 19,098,109 57,560 -- 105,768
3.To approve an Investment Advisory and Management Agreement between the Fund
and Morgan Stanley Asset Management Inc. 18,967,208 126,340 -- 167,889
</TABLE>
16
<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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