<PAGE>
------------------------------------------------------------
MORGAN STANLEY
EMERGING MARKETS
DEBT FUND, INC.
------------------------------------------------------------
SEMI-ANNUAL REPORT
JUNE 30, 1998
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
MORGAN STANLEY
EMERGING MARKETS DEBT FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Barton M. Biggs
CHAIRMAN OF THE BOARD
OF DIRECTORS
Michael F. Klein
PRESIDENT AND DIRECTOR
Peter J. Chase
DIRECTOR
John W. Croghan
DIRECTOR
David B. Gill
DIRECTOR
Graham E. Jones
DIRECTOR
John A. Levin
DIRECTOR
William G. Morton, Jr.
DIRECTOR
Stefanie V. Chang
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Valerie Y. Lewis
SECRETARY
Joanna M. Haigney
TREASURER
Belinda A. Brady
ASSISTANT TREASURER
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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
3 Chase MetroTech Center
Brooklyn, New York 11245
- -------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT
Boston Equiserve
Investor Relations Department
P.O. Box 644
Boston, Massachusetts 02102-0644
(800) 730-6001
- -------------------------------------------------------------------------------
LEGAL COUNSEL
Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
- -------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
For additional Fund information, including the Fund's net asset value per share
and information regarding the investments comprising the Fund's portfolio,
please call 1-800-221-6726.
<PAGE>
LETTER TO SHAREHOLDERS
- ----------
For the six months ended June 30, 1998, the Morgan Stanley Emerging Markets Debt
Fund, Inc. had a total return, based on net asset value per share, of -2.54%
compared to -1.08% for the J.P. Morgan Emerging Markets Bond Plus Index (the
"Index"). For the one year ended June 30, 1998, and for the period since the
Fund's commencement of operations on July 23, 1993 through June 30, 1998, the
Fund's total return, based on net asset value per share, was -0.56% and 128.73%,
respectively, compared to 1.39% and 89.95%, respectively, for the Index. On
June 30, 1998, the closing price of the Fund's shares on the New York Stock
Exchange was $11.00, representing a 1.2% discount to the Fund's net asset value
per share.
The underperformance can be attributed to an overweight in Russia and Indonesian
corporates. Throughout the last two quarters the Asian region remained in the
spotlight and often dictated the tone of the market. In the first quarter
emerging market debt recovered a large portion of the losses realized in October
of 1997, however the market remained volatile during this period of spread
compression, with general market spreads oscillating within a 100 basis point
range. In December a rally spurred by Russia's improving external debt profile
and Boris Yeltsin's improving health was cut short by Asian currency volatility
and the declining economic condition of Korea and Indonesia. In January, a
market sell-off caused by Russian fiscal imbalances, historically low commodity
prices and policy inaction in Indonesia was reversed by the successful
rescheduling of Korea's short term bank debt obligations. In February, dramatic
swings in the current account positions of Thailand and Korea combined with new
evidence of Russia's commitment to prudent fiscal policy helped bolster investor
confidence, despite continued uncertainty in Indonesia. Apparent economic and
political stabilization in the region buoyed investor sentiment, causing spreads
to rally to the mid 400's. When this period of calm proved to be temporary,
spreads widened out to above 600 basis points, as the "Asian Contagion" hit
emerging markets debt yet again.
The second quarter started off uneventfully as financial markets globally
drifted sideways throughout the month of April. Relative stability in Asia and
Indonesia in particular allowed emerging market debt to rally despite political
uncertainty in Russia, Ecuador and Venezuela. This period of relative calm was
short lived as continued weakness in Asia and the forced resignation of former
President Suharto in Indonesia caused investors to reassess the risk premiums
required for all emerging market assets. Russia in particular came under
pressure. We decreased the Fund's exposure to Indonesia as the post-Suharto
political environment remained fragile with no "quick fix" in sight. Believing
that the market had overly penalized Russian debt, we shifted to an overweight
position in late May after Russian assets experienced a significant sell-off,
returning -9.90% for the month.
The months of May and June saw the return of the kind of nervousness, investor
skepticism, and volatility in the emerging markets that we experienced during
the large sell off in 1994 and more recently in the Asian induced sell off
during the fourth quarter of 1997. The reasons for this round of volatility are
less obvious than past episodes, as there have not been the classic signs of a
decrease in global liquidity nor has this sell off been precipitated by
political/social instability in any major country. Interest rates continue to
stay low globally, there have not been large flows out of emerging market debt
mutual funds, global inflation remains quite well contained, and broadly
speaking, most emerging countries continue to pursue virtuous economic
policies. However, the ill health of the Japanese economy and of major
Japanese banks has caused investors to adjust risk premiums higher and has
caused liquidity for most emerging countries to evaporate. Investors fear that
Japan's inability to fix its economy will continue to weaken the yen and might
eventually cause a devaluation in China. This would increase the risk of
another round of currency devaluation in Asia and might further depress
commodity prices, a large source of earnings for many emerging countries. The
good news is that markets have considerably discounted such a negative scenario.
While Asia continues to cast a dark shadow over the emerging markets, any
evidence of a turn around or stabilization in Asia should allow prices on
emerging market debt to recover substantially.
In June, Russian debt underperformed the other emerging market bonds by a wide
margin again, with the Russian subcomponent of the J.P. Morgan Emerging Markets
Bond Plus Index returning -13.85% for the month. The dramatic sell off in
Russian assets reflects investors' concerns about short term liquidity rather
than longer term solvency issues. Russia relies heavily on foreign debt and
foreign investors in its local markets to fund its budget deficit which has been
aggravated this year by poor tax collection resulting from low oil prices. As
global liquidity has become scarce,
2
<PAGE>
Russia has come under particular scrutiny as it relies on the markets for
constant funding. We believe that the new administration in Moscow has
developed a credible program and will survive its current predicament. The
Russians are working closely with the International Monetary Fund and should
come to terms, in the next two months, for additional aid and an expanded
program to bolster international reserves. The current government is the most
reform-minded since the collapse of communism and it is in western government's
interest to see them succeed. Russia's deteriorating fiscal position is
providing the impetus for the government to conclude its negotiations with the
IMF for additional aid. All of the Funds' holdings in Russia are in U.S. dollar
denominated securities and as such would not be directly impacted by a
devaluation of the ruble.
We will continue to overweight Mexico as we remain confident about the soundness
of Mexico's macroeconomic fundamentals. The Mexican economy should register
growth of 5% this year and unlike 1995, growth is more balanced now as it is
being driven by both the export sectors and the non-tradables sectors. We
continue to underweight Venezuela due to the country's declining fiscal and
political condition.
Beginning with this report, we are discontinuing our practice of designating an
individual portfolio manager to sign our reports to shareholders in order to
better reflect the "Team" investment approach of the Fund's investment adviser,
Morgan Stanley Asset Management Inc. ("MSAM"). The global emerging markets team
at MSAM has general oversight of the investment management of the Fund. Paul
Ghaffari continues to have primary responsibility of the day-to-day management
of the Fund's assets.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
July 1998
3
<PAGE>
Morgan Stanley Emerging Markets Debt Fund. Inc.
Investment Summary as of June 30, 1998 (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 -4.71% -- -2.54% -- -1.08% --
One Year 2.92 2.92% -0.56 -0.56% 1.39 1.39%
Since Inception* 126.06+ 17.95+ 128.73+ 18.23+ 89.95 13.88
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
[GRAPH]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
ENDED
JUNE 30,
1993(*) 1994 1995 1996 1997 1998
------- ------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share. . . . . . . . $18.96 $12.23 $12.40 $17.31 $15.21 $11.13
Market Value Per Share . . . . . . . . . $18.13 $11.38 $12.50 $15.13 $15.38 $11.00
Premium/(Discount) . . . . . . . . . . . -4.4% -7.0% 0.8% -12.6% 1.1% -1.2%
Income Dividends . . . . . . . . . . . . $ 0.16 $ 1.49 $ 1.72 $ 1.08 $ 1.27 $ 0.79
Capital Gains Distributions. . . . . . . -- $ 0.41 -- -- $ 3.44 $ 2.94
Fund Total Return (2). . . . . . . . . . 35.96% -25.95% 26.85%+ 50.98% 21.71% -2.54%
Index Total Return (3) . . . . . . . . . 18.67% -18.93% 26.77% 39.31% 13.02% -1.08%
</TABLE>
(1) Assumes dividends and distributions, if any, were reinvested.
(2) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. These percentages are not an indication of the performance of a
shareholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value
per share of the Fund.
(3) The J.P. Morgan Emerging Markets Bond Plus Index is a total return index
tracking the traded U.S. Dollar currency denominated instruments in the
emerging markets. The index in composed of Brady Bonds, benchmark
Eurobonds, loans, and Argentina domestic debt. 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 Fund commenced operations on July 23, 1993.
(+) This return does not include the effect of the rights issued in connection
with the Rights Offering.
4
<PAGE>
Morgan Stanley Emerging Markets Debt Fund. Inc.
Portfolio Summary as of June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
Debt Instruments (96.1%)
Short-Term Investments (3.9%)
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[CHART]
Russia (22.9%)
Brazil (22.5%)
Mexico (16.5%)
Argentina (14.2%)
Jamaica (5.2%)
Turkey (4.9%)
Korea (4.0%)
Venezuala (1.4%)
Thailand (1.3%)
Indonesia (1.1%)
Other (6.0%)
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
-----------
<S> <C>
1. Ministry of Finance
11.75%, 6/10/03 (Russia) 8.4%
2. United Mexican States
11.50%, 5/15/26 (Mexico) 7.0
3. Federative Republic of Brazil 'C' Bond PIK
8.00%, 4/15/14 (Brazil) 6.7
4. Russia Principal Note, PIK
3.313%, 12/15/20 (Russia) 5.6
5. Federative Republic of Brazil 'EI-L' Bond
6.625%, 4/15/06 (Brazil) 5.6
6. Government of Jamaica
12.00%, 7/19/99 (Jamaica) 5.2%
7. Salomon Brothers Federative Republic of
Brazil Credit Linked Enhanced Note
9.00%, 1/15/99 (Brazil) 4.8
8. Federative Republic of Brazil
9.375%, 4/7/08 (Brazil) 4.6
9. Republic of Argentina
6.625%, 3/31/05 (Argentina) 4.5
10. United Mexican States Global Bond
9.875%, 9/15/16 (Mexico) 4.0
----
56.4%
----
----
</TABLE>
5
<PAGE>
FINANCIAL STATEMENTS
- ----------
STATEMENT OF NET ASSETS (UNAUDITED)
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- ----------
JUNE 30, 1998
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
DEBT INSTRUMENTS (91.3%)
- --------------------------------------------------------------------------------
ARGENTINA (14.2%)
CORPORATE (5.8%)
(c)Acindar Industries 144A
11.555%, 11/12/98 U.S.$ 1,500 U.S.$ 1,514
CIA International
Telecom 144A
10.375%, 8/1/04 ARP 8,400 6,931
Nortel Inversora 'A' U.S.$
6.00%, 3/31/07 7,434 6,690
Supercanal Holdings S.A. 144A
11.50%, 5/15/05 3,200 3,080
-----------------
18,215
-----------------
SOVEREIGN (8.4%)
Argentina Global Bond
9.75%, 9/19/27 1,090 1,010
(c,e)Republic of Argentina
6.625%, 3/31/05 15,723 13,907
Republic of Argentina
Global Bond
11.375%, 1/30/17 10,500 11,188
-----------------
26,105
-----------------
44,320
-----------------
- --------------------------------------------------------------------------------
BRAZIL (17.7%)
CORPORATE (0.8%)
Globopar 144A
10.625%, 12/5/08 2,850 2,539
-----------------
SOVEREIGN (16.9%)
(e,f)Federative Republic of Brazil
'C' Bond PIK
8.00%, 4/15/14 28,158 20,749
(c,e,f)Federative Republic of Brazil
'EI-L' Bond
6.625%, 4/15/06 21,049 17,333
(e)Federative Republic of Brazil
9.375%, 4/7/08 16,000 14,384
-----------------
52,466
-----------------
55,005
-----------------
- --------------------------------------------------------------------------------
BULGARIA (1.1%)
SOVEREIGN (1.1%)
(d,f)Republic of Bulgaria
Front Loaded Interest
Reduction Bond
2.25%, 7/28/12 550 341
(c,e,f)Republic of Bulgaria
Past Due Interest Bond
6.563%, 7/28/11 4,100 2,938
-----------------
3,279
-----------------
- --------------------------------------------------------------------------------
COLOMBIA (0.8%)
SOVEREIGN (0.8%)
Republic of Colombia
7.625%, 2/15/07 U.S.$ 2,740 U.S.$ 2,475
-----------------
- --------------------------------------------------------------------------------
ECUADOR (1.0%)
CORPORATE (1.0%)
Conecel
14.00%, 5/1/02 3,000 3,000
14.00%, 5/1/02 144A 150 150
-----------------
3,150
-----------------
- --------------------------------------------------------------------------------
INDIA (0.5%)
CORPORATE (0.5%)
(b)Saurashtra Cement Co.
19.00%, 9/27/98 INR 65,000 1,510
-----------------
- --------------------------------------------------------------------------------
INDONESIA (1.1%)
CORPORATE (1.1%)
Tjiwi Kimia International
Global Bond
13.25%, 8/1/01 U.S.$ 4,310 3,427
-----------------
- --------------------------------------------------------------------------------
IVORY COAST (0.3%)
SOVEREIGN (0.3%)
(f)Republic of Ivory Coast
Front Loaded Interest
Reduction Bond
2.00%, 3/29/18 FRF 16,685 831
-----------------
- --------------------------------------------------------------------------------
JAMAICA (5.2%)
SOVEREIGN (5.2%)
Government of Jamaica
12.00%, 7/19/99 U.S.$ 15,700 16,171
-----------------
- --------------------------------------------------------------------------------
KOREA (4.0%)
SOVEREIGN (4.0%)
Export-Import Bank of Korea
6.50%, 10/6/99 8,700 8,212
Korea Development Bank
7.125%, 9/17/01 4,700 4,157
-----------------
12,369
-----------------
- --------------------------------------------------------------------------------
MEXICO (16.5%)
CORPORATE (3.0%)
Empresas ICA Sociedad
Controladora (Registered)
11.875%, 5/30/01 1,000 1,065
Empresas ICA Sociedad
Controladora 144A
11.875%, 5/30/01 5,000 5,325
Innova 144A
12.875%, 4/1/07 3,100 3,177
-----------------
9,567
-----------------
- --------------------------------------------------------------------------------
</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)
SOVEREIGN (13.5%)
(c,f)United Mexican States
Discount Bond 'A'
6.594%, 12/31/19 U.S.$ 1,550 U.S.$ 1,393
(c,f)United Mexican States
Discount Bond 'B'
6.594%, 12/31/19 250 225
(c,f)United Mexican States
Discount Bond 'C'
6.617%, 12/31/19 2,050 1,843
National Financiera
17.00%, 2/26/99 ZAR 12,000 1,987
(e)United Mexican States
11.50%, 5/15/26 U.S.$ 19,150 21,769
(e)United Mexican States
Global Bond
9.875%, 1/15/07 12,000 12,489
11.375%, 9/15/16 2,000 2,230
-----------------
41,936
-----------------
51,503
-----------------
- --------------------------------------------------------------------------------
NIGERIA (1.0%)
SOVEREIGN (1.0%)
(d)Central Bank of Nigeria
Promissory Note
3.586%, 1/5/10 6,250 3,070
-----------------
- --------------------------------------------------------------------------------
PERU (0.8%)
SOVEREIGN (0.8%)
(d,f)Republic of Peru Front
Loaded Interest Reduction
Bond
(e)3.25%, 3/7/17 3,900 2,179
3.25%, 3/7/17 144A 698 390
-----------------
2,569
-----------------
- --------------------------------------------------------------------------------
RUSSIA (22.9%)
CORPORATE (1.6%)
Unexim International Finance
9.875%, 8/1/00 144A 1,500 1,142
9.875%, 8/1/00 4,950 3,768
-----------------
4,910
-----------------
SOVEREIGN (21.3%)
(c,f)Russia Principal
Note, PIK
3.313%, 12/15/20 36,860 17,508
Ministry of Finance
11.75%, 6/10/03 144A 29,350 25,975
10.00%, 6/26/07 6,640 5,021
12.75%, 6/24/28 144A 9,290 8,303
14.00%, 5/19/99 8,100 6,855
Ministry of Finance,
Series IV 144A
3.00%, 5/14/03 2,850 1,642
- --------------------------------------------------------------------------------
SOVEREIGN (CONTINUED)
(c)Russia Interest
Arrears Notes
6.625%, 12/15/15 U.S.$ 1,974 U.S.$ 1,098
-----------------
66,402
-----------------
71,312
-----------------
- --------------------------------------------------------------------------------
THAILAND (1.3%)
SOVEREIGN (1.3%)
Kingdom of Thailand
8.70%, 8/1/99 4,100 4,113
-----------------
- --------------------------------------------------------------------------------
TURKEY (1.5%)
SOVEREIGN (1.5%)
Pera Financial
Services 144A
9.375%, 10/15/02 5,200 4,641
-----------------
- --------------------------------------------------------------------------------
VENEZUELA (1.4%)
SOVEREIGN (1.4%)
(c,e,f)Republic of Venezuela
Debt Conversion Bond 'DL'
6.625%, 12/18/07 5,202 4,260
-----------------
- --------------------------------------------------------------------------------
TOTAL DEBT INSTRUMENTS
(Cost U.S.$305,005) 284,005
-----------------
- --------------------------------------------------------------------------------
STRUCTURED INVESTMENT (4.8%)
- --------------------------------------------------------------------------------
BRAZIL (4.8%)
SOVEREIGN (4.8%)
Salomon Brothers Federative
Republic of Brazil Credit
Linked Enhanced Note
9.00%, 1/15/99
(Cost U.S. $15,000) 15,000 14,805
-----------------
- --------------------------------------------------------------------------------
No. of
Rights
- --------------------------------------------------------------------------------
RIGHTS (0.0%)
- --------------------------------------------------------------------------------
MEXICO (0.0%)
(a)United Mexican States
Value Recovery Rights,
expiring 6/30/03
(Cost U.S.$0) 5,154,000 -- @
-----------------
- --------------------------------------------------------------------------------
No. of
Warrants
- --------------------------------------------------------------------------------
WARRANTS (0.0%)
- --------------------------------------------------------------------------------
NIGERIA (0.0%)
(a)Central Bank of Nigeria,
expiring 11/15/20
(Cost U.S.$0) 2,000 -- @
-----------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (3.4%)
- --------------------------------------------------------------------------------
TURKEY (3.4%)
BILLS
Turkey Treasury
Bill, Zero Coupon,
8/19/98 TRL 1,700,800,000 U.S.$ 5,811
Zero Coupon, 9/2/98 1,408,300,000 4,706
-----------------
(Cost U.S.$9,985) 10,517
-----------------
- --------------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN (0.5%)
French Franc FRF 10,445 1,727
German Mark DEM 1 1
-----------------
(Cost U.S. $1,720) 1,728
-----------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(Cost U.S.$331,710) 311,055
-----------------
- --------------------------------------------------------------------------------
AMOUNT
(000)
- --------------------------------------------------------------------------------
OTHER ASSETS
Cash U.S.$ 9,104
Receivable for
Investments Sold 9,210
Interest Receivable 8,051
Unrealized Gain on
Foreign Currency
Exchange Contracts 323
Foreign Withholding
Tax Reclaim Receivable 71
Dividends Receivable 5
Deferred Organization Costs 1
Other Assets 30 26,795
----------------- -----------------
- --------------------------------------------------------------------------------
LIABILITIES
Payable For:
Reverse Repurchase
Agreements (75,430)
Investments Purchased (13,125)
Dividends and
Distributions Declared (6,531)
Investment Advisory Fees (212)
Custodian Fees (69)
Directors' Fees and Expenses (60)
Professional Fees (60)
Shareholder Reporting Expenses (60)
Administration Fees (22)
Other Liabilities (31) (95,600)
----------------- -----------------
- --------------------------------------------------------------------------------
VALUE
(000)
- --------------------------------------------------------------------------------
NET ASSETS
Applicable to 21,768,320,
issued and outstanding
U.S.$0.01 par value shares
(100,000,000 shares authorized) U.S.$ 242,250
-----------------
-----------------
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 11.13
-----------------
-----------------
- --------------------------------------------------------------------------------
AT JUNE 30, 1998, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Common Stock U.S.$ 218
Capital Surplus 277,151
Undistributed Net Investment Income 1,292
Accumulated Net Realized Loss (16,145)
Unrealized Depreciation on Investments and Foreign Currency
Translations (net of accrued foreign tax of U.S.$101 on
unrealized appreciation) (20,266)
- --------------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$ 242,250
-----------------
-----------------
- --------------------------------------------------------------------------------
</TABLE>
(a) -- Non-income producing
(b) -- Security valued at fair value - see note A-1 to financial
statements.
(c) -- Variable/floating rate security - rate disclosed is as of June 30,
1998.
(d) -- Step Bond - coupon rate increases in increments to maturity. Rate
disclosed is as of June 30, 1998. Maturity date disclosed is
ultimate maturity.
(e) -- Denotes all or a portion of securities subject to repurchase under
Reverse Repurchase Agreements as of June 30, 1998. See note A-4 to
financial statements.
(f) -- Security is a Brady Bond, created through the debt restructuring
exchange of commercial bank loans to foreign entities for new fixed
income obligations. These bonds may be collateralized and are
actively traded in the over-the-counter secondary market.
@ -- Amount is less than U.S.$500.
144A -- Certain conditions for public sale may exist.
PIK -- Payment-in-Kind. Income may be paid in additional securities or
cash.
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30,1998,
the Fund is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN NET
TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN
(000) (000) DATE (000) (000) (000)
- ----------- ---------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
ZAR 12,340 U.S.$2,077 07/07/98 U.S.$2,400 U.S.$2,400 U.S.$323
---------- ---------- ------------
---------- ---------- ------------
<CAPTION>
- --------------------------------------------------------------------------------
JUNE 30, 1998 EXCHANGE RATES:
- --------------------------------------------------------------------------------
<S> <C> <C>
ARP Argentine Peso 1.000 = U.S. $1.00
DEM German Mark 1.804 = U.S. $1.00
FRF French Franc 6.048 = U.S. $1.00
INR Indian Rupee 42.400 = U.S. $1.00
TRL Turkey Lira 266,600.000 = U.S. $1.00
ZAR South African Rand 5.919 = U.S. $1.00
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1998
(UNAUDITED)
STATEMENT OF OPERATIONS (000)
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 18,329
Less: Foreign Taxes Withheld . . . . . . . . . . . . . . (23)
- --------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . 18,306
- --------------------------------------------------------------------------------
EXPENSES
Interest Expense . . . . . . . . . . . . . . . . . . . . 2,243
Investment Advisory Fees . . . . . . . . . . . . . . . . 1,308
Administrative Fees . . . . . . . . . . . . . . . . . . . 134
Custodian Fees . . . . . . . . . . . . . . . . . . . . . 63
Professional Fees . . . . . . . . . . . . . . . . . . . . 57
Shareholder Reporting Expenses . . . . . . . . . . . . . 52
Directors' Fees and Expenses . . . . . . . . . . . . . . 21
Other Expenses . . . . . . . . . . . . . . . . . . . . . 74
- --------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . 3,952
- --------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . 14,354
- --------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . . . . (12,950)
Investment Securities Sold Short . . . . . . . . . . . . 21
Written Option Contracts . . . . . . . . . . . . . . . . 73
Foreign Currency Transactions . . . . . . . . . . . . . . (204)
- --------------------------------------------------------------------------------
Net Realized Loss . . . . . . . . . . . . . . . . . . . (13,060)
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Depreciation on Investments . . . . . . . . . . . . . . . (9,269)
Appreciation on Foreign Currency Translations . . . . . . 388
- --------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation . . . . (8,881)
- --------------------------------------------------------------------------------
Net Realized Loss and Change in Unrealized
Appreciation/Depreciation . . . . . . . . . . . . . . . . (21,941)
- --------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS . . . . . . . . . . . . . . . . . . U.S.$ (7,587)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Inome . . . . . . . . . . . . . . . . . . . . . U.S.$ 14,354 U.S.$ 28,827
Net Realized Gain (Loss) . . . . . . . . . . . . . . . . . . . (13,060) 60,350
Change in Unrealized Appreciation/Depreciation . . . . . . . . (8,881) (32,894)
- -----------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations . . . . . . . . . . . . . . . . . . . . . . (7,587) 56,283
- -----------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income. . . . . . . . . . . . . . . . . . . . . (17,133) (27,267)
Net Realized Gain. . . . . . . . . . . . . . . . . . . . . . . (63,390) (74,104)
Total Distributions. . . . . . . . . . . . . . . . . . . . . . (80,523) (101,371)
- -----------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Reinvestment of Distributions (237,060 shares) . . . . . . . . 2,804 --
- -----------------------------------------------------------------------------------------------------------
Total Decrease . . . . . . . . . . . . . . . . . . . . . . . . (85,306) (45,088)
Net Assets:
Beginning of Period. . . . . . . . . . . . . . . . . . . . . . 327,556 372,644
- -----------------------------------------------------------------------------------------------------------
End of Period (including undistributed net investment
income of U.S.$1,292 and U.S.$4,071, respectively) . . . . . . U.S.$242,250 U.S.$327,556
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1998
(UNAUDITED)
STATEMENT OF CASH FLOWS (000)
- --------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM INVESTING AND OPERATING ACTIVITIES:
Proceeds from Sales of Investments . . . . . . . . . U.S. $ 646,707
Purchases of Investments . . . . . . . . . . . . . . (596,567)
Net Decrease in Short-Term Investments . . . . . . . 915
Net Cash from Foreign Currency Transactions. . . . . (1,924)
Investment Income. . . . . . . . . . . . . . . . . . 16,787
Interest Expense Paid. . . . . . . . . . . . . . . . (2,457)
Operating Expenses Paid. . . . . . . . . . . . . . . (1,727)
- --------------------------------------------------------------------------------
Net Cash Provided by Investing and Operating
Activities. . . . . . . . . . . . . . . . . . . . 61,734
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Received for Reverse Repurchase Agreements. . . 15,916
Cash Distributions Paid
(net of reinvestments of $2,804). . . . . . . . . (71,188)
- --------------------------------------------------------------------------------
Net Cash Used for Financing Activities . . . . . . . (55,272)
- --------------------------------------------------------------------------------
Net Increase in Cash . . . . . . . . . . . . . . . . 6,462
CASH AT BEGINNING OF PERIOD. . . . . . . . . . . . . . 2,642
- --------------------------------------------------------------------------------
CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . U.S. $ 9,104
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RECONCILIATION OF NET INVESTMENT INCOME TO NET CASH
PROVIDED BY INVESTING AND OPERATING ACTIVITIES . . .
- --------------------------------------------------------------------------------
Net Investment Income. . . . . . . . . . . . . . . . U.S. $ 14,354
Proceeds from Sales of Investments . . . . . . . . . 646,707
Purchases of Investments . . . . . . . . . . . . . . (596,567)
Net Decrease in Short-Term Investments . . . . . . . 915
Net Cash used for Foreign Currency Transactions. . . (1,924)
Net Decrease in Receivables Related to Operations. . 1,535
Net Decrease in Payables Related to Operations . . . (2,470)
Amortization of Organization Costs . . . . . . . . . 7
Accretion/Amortization of Discounts and Premiums . . (823)
- --------------------------------------------------------------------------------
Net Cash Provided by Investing and Operating
Activities . . . . . . . . . . . . . . . . . . . U.S. $ 61,734
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31, PERIOD FROM
SELECTED PER SHARE DATA AND RATIOS: JUNE 30, 1998 ---------------------------------------------------------- JULY 23, 1993* TO
(UNAUDITED) 1997 1996 1995 1994 DECEMBER 31, 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD . . . . . . U.S.$ 15.21 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 . . . . . . 0.66 1.34 1.75 1.76 1.51 0.50
Net Realized and Unrealized
Gain (Loss) on Investments. . . (1.01) 1.27 4.24 1.16 (6.34) 4.56
- ----------------------------------------------------------------------------------------------------------------------------------
Total from Investment
Operations . . . . . . . (0.35) 2.61 5.99 2.92 (4.83) 5.06
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income . . . . . (0.79) (1.27) (1.08) (1.69) (1.49) (0.16)
In Excess of Net
Investment Income . . . . . . -- -- -- (0.03) -- --
Net Realized Gain . . . . . . . (2.94) (3.44) -- -- (0.41) --
In Excess of Net Realized Gain -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . (3.73) (4.71) (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.$ 11.13 U.S.$ 15.21 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.$ 11.00 U.S.$ 15.38 U.S.$ 15.13 U.S.$ 12.50 U.S.$ 11.38 U.S.$ 18.13
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value . . . . . . . . . (4.71)% 40.81% 30.86% 37.48%+++ (27.97)% 29.97%
Net Asset Value (1) . . . . . . (2.54)% 21.71% 50.98% 26.85%+++ (25.95)% 35.96%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD
(THOUSANDS) . . . . . . . . . . U.S.$242,250 U.S.$327,556 U.S.$372,644 U.S.$266,295 U.S.$196,282 U.S.$302,951
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses Excluding
Interest Expense to Average
Net Assets . . . . . . . . . . 1.28%** 1.51% 1.38% 1.50% 1.59% 1.73%**
Ratio of Total Expenses to
Average Net Assets . . . . . . 2.96%** 2.27% 2.59% 1.89% 2.30% 2.79%**
Ratio of Net Investment Income
to Average Net Assets . . . . . 10.76%** 8.80% 12.14% 15.21% 10.79% 7.20%**
Portfolio Turnover Rate . . . . . 184% 361% 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. This percentage is not an indication of the
performance of a shareholder's investment in the Fund based on market
value due to differences between the market price of the stock and the
net asset value per share of the Fund.
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
- -------------
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 are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of its
financial statements. Generally accepted accounting principles may require
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results may differ from
those estimates.
1. SECURITY VALUATION: In valuing the Fund's assets, all listed securities for
which market quotations are readily available are valued at the last 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 counterparty 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, 1998, the Fund had reverse repurchase agreements outstanding as
follows:
<TABLE>
<CAPTION>
MATURITY IN
LESS THAN
65 DAYS
------------
<S> <C>
Value of Securities Subject to
Repurchase. . . . . . . . . . . . . . . . . . . . . . . $ 81,265,000
Liability Under Reverse
Repurchase Agreement. . . . . . . . . . . . . . . . . . $ 75,430,000
Weighted Average Interest Rate. . . . . . . . . . . . . . 4.40%
</TABLE>
The average weekly balance of reverse repurchase agreements outstanding
during the six months ended June 30, 1998 was approximately $86,080,000 at
a weighted average interest rate of 5.02%.
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 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.
The Fund intends to use derivatives more actively than it has in the past. The
Fund intends to engage in transactions in futures contracts on foreign
currencies, stock indices, as well as in options, swaps and structured notes.
Consistent with the Fund's investment objectives and policies, the Fund intends
to use derivatives for non-hedging as well as hedging purposes.
Following is a description of derivative instruments and their associated risks
that the Fund intends to utilize:
6. FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into foreign
currency exchange contracts generally to attempt to protect securities and
related receivables and payables against changes in future foreign exchange
rates and, in certain situations, to gain exposure to a foreign currency. A
foreign currency exchange contract is an agreement between two parties to
buy or sell currency at a set price on a future date. The market value of
the contract will fluctuate with changes in currency exchange rates. The
contract is marked-to-market daily and the change in market value is
recorded by the Fund as unrealized gain or loss. The Fund records realized
gains or losses when the contract is closed equal to the difference between
the value of the contract at the time it was opened and the value at the
time it was closed. Risk may arise upon entering into these contracts from
the potential inability of counterparties to meet the terms of their
contracts and is generally limited to the amount of unrealized 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. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: The Fund
may make forward commitments to purchase or sell securities. Payment and
delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not to exceed 120 days)
after the date of the transaction. Additionally, the Fund may purchase
securities on a when-issued or delayed delivery basis. Securities purchased
on a when-issued or delayed delivery basis are purchased for delivery
beyond the normal settlement date at a stated price and yield, and no
income accrues to the Fund on such securities prior to delivery. When the
Fund enters into a purchase transaction on a when-issued or delayed
delivery basis, it either establishes a segregated account in which it
maintains liquid assets in an amount at least equal in value to the Fund's
commitments to purchase such securities or denotes such securities on the
custody statement for its regular custody account. Purchasing securities on
a forward
14
<PAGE>
commitment or when-issued or delayed-delivery basis may involve a risk that
the market price at the time of delivery may be lower than the agreed upon
purchase price, in which case there could be an unrealized loss at the time
of delivery.
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 either place in a segregated
account with its custodian or denotes as pledged on the custody records 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 added to or 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.
Realized gains or losses on maturity or termination of interest rate and
total return swaps are presented in the Statement of Operations. Because
there is no organized market for these swap agreements, the value reported
in the Statement of Net Assets may differ from that which would be realized
in the event the Fund terminated its position in the agreement. Risks may
arise upon entering into these agreements from the potential inability of
the counterparties to meet the terms of the agreements and are generally
limited to the amount of net interest payments to be received and/or
favorable movements in the value of the underlying security, instrument or
basket of instruments, if any, at the date of default.
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 generally
will expose the Fund to credit risks of the underlying instruments as well
as of the issuer of the structured security. Structured Securities are
typically sold in private placement transactions with no active trading
market. Investments in structured securities may be more volatile than
their un-
15
<PAGE>
derlying instruments, however, any loss is limited to the amount of the
original investment.
13. OVER-THE-COUNTER TRADING: Derivative instruments that may be purchased or
sold by the Fund are expected to regularly consist of instruments not
traded on an exchange. The risk of nonperformance by the obligor on such an
instrument may be greater, and the ease with which the Fund can dispose of
or enter into closing transactions with respect to such an instrument may
be less, than in the case of an exchange-traded instrument. In addition,
significant disparities may exist between bid and asked prices for
derivative instruments that are not traded on an exchange. Derivative
instruments not traded on exchanges are also not subject to the same type
of government regulation as exchange traded instruments, and many of the
protections afforded to participants in a regulated environment may not be
available in connection with such transactions.
14. 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 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 corporate affiliate Chase Global
Funds Services Company (the "Administrator"), provides administrative services
to the Fund under an Administration Agreement. Under the Administration
Agreement, the Administrator is paid a fee computed weekly and payable monthly
at an annual rate of 0.06% of the Fund's average weekly net assets, plus
$100,000 per annum. In addition, the Fund is charged certain out-of-pocket
expenses by the Administrator. 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, 1998, the Fund incurred international custodian fees of
$59,000 of which $59,000 was payable to the International Custodian at June 30,
1998. In addition, for the six months ended June 30, 1998, the Fund has earned
interest income of $15,000 and incurred interest expense of $37,000 on balances
with the International Custodian.
E. During the six months ended June 30, 1998, the Fund made purchases and
sales totaling approximately $608,416,000 and $656,058,000 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, 1998, the U.S. Federal income
tax cost basis of securities was approximately $329,990,000 and, accordingly,
net unrealized depreciation for U.S. Federal income tax purposes was
$20,663,000, of which $2,972,000 related to appreciated securities and
$23,635,000 related to depreciated securities.
F. During the six months ended June 30, 1998, the Fund's written covered call
option activity was as follows:
<TABLE>
<CAPTION>
FACE PREMIUM
AMOUNT (000) (000)
----------- --------
<S> <C> <C>
Options outstanding at
January 1, 1998. . . . . . . . . . . . . . . . . $ -- $ --
Options written during the
year . . . . . . . . . . . . . . . . . . . . . . 6,200 95
Options closed during the
year . . . . . . . . . . . . . . . . . . . . . . (6,200) (95)
-------- -------
Options outstanding at
June 30, 1998. . . . . . . . . . . . . . . . . . $ -- $ --
-------- -------
-------- -------
</TABLE>
G. 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.
16
<PAGE>
H. 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.
I. A portion of the Fund's net assets consist of securities of issuers 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.
J. 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,
1998 totaled $52,000 and are included in Payable for Directors' Fees and
Expenses on the Statement of Net Assets.
K. During June 1998, the Board declared a distribution of $0.30 per share,
derived from net investment income, payable on July 15, 1998, to shareholders of
record on June 30, 1998. Also in June, the Board of Directors amended your
Fund's by-laws to require advance notice of any proposals to be made at
stockholders' meetings. For annual meetings the notice must be given to the
Fund's secretary at least 60 days before the anniversary date of the previous
year's annual meeting. This year's annual meeting of stockholders was held on
June 24. This provision was adopted to permit the Fund's stockholders and
Directors to consider every stockholder proposal on an informed basis and in an
organized fashion, taking into account the interests of all affected
constituencies.
L. Supplemental Proxy Information
The Annual Meeting of the Stockholders of the Morgan Stanley Emerging Markets
Debt Fund, Inc. was held on June 24, 1998. The following is a summary of each
proposal presented and the total number of shares voted:
<TABLE>
<CAPTION>
VOTES IN VOTES AUTHORITY VOTES
PROPOSAL: FAVOR OF AGAINST WITHHELD ABSTAINED
- --------- -------- ------- --------- ---------
<S> <C> <C> <C> <C>
1. To elect the following Directors: Michael F. Klein . . . . . . . . 18,623,510 -- 173,900 --
Barton M. Biggs. . . . . . . . . 18,671,113 -- 126,297 --
John A. Levin. . . . . . . . . . 18,678,400 -- 119,010 --
William G. Morton, Jr. . . . . . 18,678,140 -- 119,270 --
2. To ratify the selection of PricewaterhouseCoopers LLP as independent
accountants of the Fund. . . . . . . . . . . . . . . . . . . . . . 18,698,607 29,947 -- 65,856
</TABLE>
17
<PAGE>
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the
"Plan"), each shareholder will be deemed to have elected, unless Boston
Equiserve (the "Plan Agent") is otherwise instructed by the shareholder in
writing, to have all distributions automatically reinvested in Fund shares.
Participants in the Plan have the option of making additional voluntary cash
payments to the Plan Agent, annually, in any amount from $100 to $3,000, for
investment in Fund shares.
Dividend and capital gain distributions will be reinvested on the
reinvestment date in full and fractional shares. If the market price per
share equals or exceeds net asset value per share on the reinvestment date,
the Fund will issue shares to participants at net asset value. If net asset
value is less than 95% of the market price on the reinvestment date, shares
will be issued at 95% of the market price. If net asset value exceeds the
market price on the reinvestment date, participants will receive shares
valued at market price. The Fund may purchase shares of its Common Stock in
the open market in connection with dividend reinvestment requirements at the
discretion of the Board of Directors. Should the Fund declare a dividend or
capital gain distribution payable only in cash, the Plan Agent will purchase
Fund shares for participants in the open market as agent for the
participants.
The Plan Agent's fees for the reinvestment of dividends and
distributions will be paid by the Fund. However, each participant's account
will be charged a pro rata share of brokerage commissions incurred on any
open market purchases effected on such participant's behalf. A participant
will also pay brokerage commissions incurred on purchases made by voluntary
cash payments. Although shareholders in the Plan may receive no cash
distributions, participation in the Plan will not relieve participants of any
income tax which may be payable on such dividends or distributions.
In the case of shareholders, such as banks, brokers or nominees, which
hold shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time
to time by the shareholder as representing the total amount registered in the
shareholder's name and held for the account of beneficial owners who are
participating in the Plan.
Shareholders who do not wish to have distributions automatically
reinvested should notify the Plan Agent in writing. There is no penalty for
non-participation or withdrawal from the Plan, and shareholders who have
previously withdrawn from the Plan may rejoin at any time. Requests for
additional information or any correspondence concerning the Plan should be
directed to the Plan Agent at:
Morgan Stanley Emerging Markets Debt Fund, Inc.
Boston Equiserve
Dividend Reinvestment Unit
P.O. Box 1681
Boston, MA 02105-1681
1-800-730-6001
18
