<PAGE>
----------------------------------------------------------------
MORGAN STANLEY DEAN WITTER
EMERGING MARKETS DEBT FUND, INC.
----------------------------------------------------------------
ANNUAL REPORT
DECEMBER 31, 1999
MORGAN STANLEY DEAN WITTER INVESTMENT
MANAGEMENT INC.
INVESTMENT ADVISER
MORGAN STANLEY DEAN WITTER
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
Mary E. Mullin
SECRETARY
Belinda A. Brady
TREASURER
Robin L. Conkey
ASSISTANT TREASURER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Morgan Stanley Dean Witter Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
- --------------------------------------------------------------------------------
CUSTODIAN
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 or visit our website at
www.msdw.com/institutional/investmentmanagement.
<PAGE>
LETTER TO SHAREHOLDERS
- ---------
For the year ended December 31, 1999, the Morgan Stanley Dean Witter Emerging
Markets Debt Fund, Inc. (the "Fund") had a total return, based on net asset
value per share, of 36.58% compared to 25.97% for the J.P. Morgan Emerging
Markets Bond Plus Index (the "Index"). For the period from the Fund's
commencement of operations on July 23, 1993 through December 31, 1999, the
Fund's total return, based on net asset value per share, was 114.75% compared
to 107.18% for the Index. On December 31, 1999, the closing price of the
Fund's shares on the New York Stock Exchange was $6 13/16, representing an
18.5% discount to the Fund's net asset value per share.
Emerging market debt was easily the best performing fixed income asset class
in 1999, returning 25.97% as measured by the Index. In addition, emerging
market debt was the best performing fixed income asset class for the
five-year period through 1999--a remarkable feat given the multiple shocks
witnessed during the period (Mexico, Asia, Russia, Brazil and two distinct
periods of U.S. monetary tightening).
In the fourth quarter of 1999, the Fund had a total return, based on net
asset value, of 17.71%, bringing the 1999 performance up to 36.58% compared
with 12.58% in the fourth quarter and the aforementioned 25.97% for the
entirety of 1999 for the Index. During the fourth quarter, overweights in
Brazil and Peru, and underweights in Argentina, South Korea and Poland and
security selection decisions in Russia positively impacted results relative
to the Index. Conversely, an overweight position in the Philippines and
Indonesia detracted from relative performance.
FACTORS INFLUENCING 1999 OUTCOME
Investors contended with several concerns during the year, including Brazil's
devaluation, a panic over the fate of the Argentine peso, rising global
interest rates, acute uncertainty in Russia, increased violence in Colombia
and Indonesia, a default in Ecuador, and a severe earthquake in Turkey, to
name a few. Nonetheless, the asset class posted exceptionally strong absolute
returns during 1999--a fact mainly reflecting its relative cheapness at the
start of last year. With yield spreads of approximately 1200 basis points
above U.S. Treasuries at the beginning of 1999, emerging markets debt clearly
provided a healthy amount of interest income, which, in turn, provided an
excellent cushion for investors.
For much of the year, relative valuations for emerging markets debt remained
near historically wide levels. Fueled by a variety of fundamental factors,
emerging market debt then enjoyed a powerful rally in the final months of
1999 with yield spreads tightening to approximately 830 basis points over
U.S. Treasuries. Investors were comforted by signs of a bottoming out of
economic activity in most Latin American economies, while growth in Emerging
Asia surprised on the upside throughout the year. Overall, external balances
improved during the latter part of the year, reflecting higher oil prices and
import compression. At the structural level, systemically important countries
(e.g., Brazil and Mexico) were pushing through reform agendas while the
absence of reform setbacks in other countries (e.g., Argentina and Russia)
provided investors with a modicum of comfort. Finally, the political
environment in emerging countries remained benign with key elections
proceeding relatively smoothly.
OUTLOOK FOR 2000
Looking into the new year, the outlook for emerging markets debt remains
favorable and encouraging. The asset class is attractive both in terms of
income (the Index now yields some 850 basis points over U.S. treasury rates)
and prospects for price appreciation. This prognosis reflects two
self-reinforcing factors.
Short-term uncertainties notwithstanding, the global environment continues to
be supportive. Emerging markets are facing a world in which economic growth
looks set to be both higher and better synchronized across regions. Moreover,
the developing world is benefiting from evidence of improved risk appetite
that should be manifested in higher capital inflows. Finally, commodity
prices remain on an upward trend that should help the most systemically
important--but precariously positioned--emerging countries.
The second factor relates to the ongoing process of adjustment and reform in
emerging economies. In the day-to-day flurry of headlines, it is easy to lose
sight of the fact that emerging countries are presently in a significantly
better position than only a decade ago. That Asia has recovered so
impressively and Latin America has avoided the old cycle of
shocks-cum-hyperinflation is a testament to the important economic advances
that these regions have achieved over the past decade. Encouragingly, we
enter 2000 with no signs that "reform fatigue" has set in.
However, the path of "convergence" will not be linear. There will always be
bumps along the way. The short-term outlook is an important case in point. We
have recently entered into a period of uncertainty over the short-term
behavior of U.S. financial markets. Indeed, if the Federal
2
<PAGE>
Reserve commences a period of monetary tightening over the next few months,
highly leveraged emerging economies will be adversely affected. Moreover,
should the tightening cause a slowdown in U.S. growth rates, emerging
economies will lose an important export-growth market. As such, and following
the very strong November/December rally in emerging markets debt prices, we
have adopted a less aggressive stance by switching into shorter duration
assets of countries that are less correlated with overall market movements.
Over a medium term horizon, however, we remain on the look out for resumed
stability in global financial markets. In any event, we feel there should be
significant scope for emerging market assets to resume their upward price
path.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
January 2000
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO
PURCHASE OR SELL THE SECURITIES MENTIONED.
- --------------------------------------------------------------------------------
DAILY NET ASSET AND MARKET VALUES, AS WELL AS MONTHLY PORTFOLIO INFORMATION
FOR THE FUND, ARE AVAILABLE ON OUR WEBSITE AT
www.msdw.com/institutional/investmentmanagement.
3
<PAGE>
Morgan Stanley Dean Witter Emerging Markets Debt Fund, Inc.
Investment Summary as of December 31, 1999 (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>
ONE YEAR 8.55% 8.55% 36.58% 36.58% 25.97% 25.97%
FIVE YEAR 86.89 13.32 113.31 16.36 115.35 16.58
SINCE INCEPTION* 75.00 9.07 114.75 12.59 107.18 11.97
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
[GRAPH]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1993* 1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share.......... $18.96 $12.23 $12.40 $17.31 $15.21 $ 7.01 $ 8.36
Market Value Per Share............. $18.13 $11.38 $12.50 $15.13 $15.38 $ 7.19 $ 6.81
Premium/(Discount)................. -4.4% -7.0% 0.8% -12.6% 1.1% 2.6% -18.5%
Income Dividends................... $ 0.16 $ 1.49 $ 1.72 $ 1.08 $ 1.27 $ 1.41 $ 1.01
Capital Gains Distributions........ -- $ 0.41 -- -- $ 3.44 $ 2.94 --
Fund Total Return (2).............. 35.96% -25.95% 26.85%+ 50.98% 21.71% -33.00% 36.58%
Index Total Return (3)............. 18.67% -18.93% 26.77% 39.31% 13.02% -14.35% 25.97%
</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 market weighted
index composed of all Brady bonds, outstanding loans and Eurobonds, as
well as U.S. Dollar local market instruments of Argentina, Brazil,
Bulgaria, Colombia, Ecuador, Mexico, Morocco, Nigeria, Panama, Peru, the
Philippines, Poland, Russia, South Korea and Venezuela. 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
used 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 Dean Witter Emerging Markets Debt Fund, Inc.
Investment Summary as of December 31, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Debt Securities (93.3%)
Short-Term Investments (6.7%)
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[CHART]
<TABLE>
<S> <C>
Brazil (24.8%)
Argentina (21.1%)
Mexico (14.6%)
Russia (8.2%)
Venezuela (5.6%)
Turkey (3.8%)
Bulgaria (3.4%)
Peru (2.7%)
Morocco (2.3%)
Colombia (1.9%)
Other (11.6%)
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
------------------
<S> <C>
1. Federative Republic of Brazil Bond PIK 'C'
8.00%, 4/15/14 (Brazil) 10.6%
2. United Mexican States Discount Bonds
12/31/19 (Mexico) 5.5
3. Republic of Argentina Global Bond
11.375%, 1/30/17 (Argentina) 5.0
4. Republic of Argentina
11.75%, 4/7/09 (Argentina) 5.0
5. United Mexican States Global Bond
11.375%, 9/15/16 (Mexico) 4.8
6. Federative Republic of Brazil Global
Bond 14.50%, 10/15/09 (Brazil) 4.3%
7. Russian Federation 11.00%, 7/24/18
(Russia) 4.3
8. Republic of Argentina 'L' 6.813%,
3/31/05 (Argentina) 4.0
9. Federative Republic of Brazil Debt
Conversion Bond 'L' 7.00%, 4/15/12
(Brazil) 3.9
10. Republic of Argentina Global Units
(Euro) 12.125%, 2/15/19 (Argentina) 3.7
----
51.1%
----
----
</TABLE>
* Excludes short-term investments.
5
<PAGE>
FINANCIAL STATEMENTS
- ---------
STATEMENT OF NET ASSETS
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- ---------
DECEMBER 31, 1999
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
DEBT INSTRUMENTS(93.3%)
- ----------------------------------------------------------------------------------------------
ALGERIA (0.7%)
SOVEREIGN (0.7%)
Republic of Algeria Loan
Agreements
6.813%, 3/31/00 U.S.$ 600 U.S.$ 464
6.813%, 3/31/00 1,500 1,076
-------------
1,540
-------------
- ----------------------------------------------------------------------------------------------
ARGENTINA (21.1%)
CORPORATE (3.0%)
(b)Cablevision S.A.
13.75%, 5/1/09 500 489
(b)CIA International Telecom
10.375%, 8/1/04 ARP 2,570 2,133
10.375%, 8/1/04 250 208
Nortel Inversora 'A'
6.00%, 3/31/07 U.S.$ 6,486 3,899
-------------
6,729
-------------
SOVEREIGN (18.1%)
Republic of Argentina
(c)2.868%, 4/1/07 1,418 982
(e)11.75%, 4/7/09 11,060 11,038
(c)Republic of Argentina 'L'
6.813%, 3/31/05 9,724 8,902
(e)Republic of Argentina Global
Bond
11.375%, 1/30/17 11,150 11,114
(e)Republic of Argentina Global
Units (Euro)
12.125%, 2/15/19 7,714 8,157
-------------
40,193
-------------
46,922
-------------
- ----------------------------------------------------------------------------------------------
BRAZIL (24.8%)
SOVEREIGN (24.8%)
(e)Brazil Global Bond
10.125%, 5/15/27 8,050 7,004
(e)Federative Republic of Brazil
Bond PIK 'C'
8.00%, 4/15/14 31,405 23,632
(c)Federative Republic of
Brazil Debt Conversion
Bond 'L'
7.00%, 4/15/12 5,860 4,351
(c)Federative Republic of
Brazil Debt Conversion
Bond 'L' (Registered)
7.00%, 4/15/12 5,890 4,373
Federative Republic of
Brazil Global Bond
14.50%, 10/15/09 U.S.$ 8,667 U.S.$ 9,625
(c)Federative Republic of
Brazil New Money
Bond 'L'
7.00%, 4/15/09 7,700 6,206
-------------
55,191
-------------
- ----------------------------------------------------------------------------------------------
BULGARIA (3.4%)
SOVEREIGN (3.4%)
(c)Republic of Bulgaria
Discount Bond 'A' Euro
6.50%, 7/28/24 4,400 3,534
(d)Republic of Bulgaria
Front Loaded Interest
Reduction Bond 'A'
2.75%, 7/28/12 2,150 1,553
(c)Republic of Bulgaria Past
Due Interest Bond
6.50%, 7/28/11 3,250 2,574
-------------
7,661
-------------
- ----------------------------------------------------------------------------------------------
COLOMBIA (1.9%)
CORPORATE (0.3%)
(b,d)Occidente y Caribe 'B'
0.00%, 3/15/04 1,050 577
-------------
SOVEREIGN (1.6%)
Republic of Colombia
8.375%, 2/15/27 1,150 888
(e)9.75%, 4/23/09 2,900 2,712
-------------
3,600
-------------
4,177
-------------
- ----------------------------------------------------------------------------------------------
ECUADOR (0.7%)
SOVEREIGN (0.7%)
(c,f)Republic of Ecuador
Discount Bond
6.75%, 2/28/25 4,020 1,560
-------------
- ----------------------------------------------------------------------------------------------
INDIA (0.3%)
CORPORATE (0.3%)
(g)Surashtra Cement and
Chemical Ltd.
19.00%, 6/26/00 INR 30,000 644
-------------
- ----------------------------------------------------------------------------------------------
INDONESIA (1.2%)
CORPORATE (1.2%)
Indah Kiat International
Finance 'B'
11.875%, 6/15/02 U.S.$ 900 801
- ----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
INDONESIA (CONTINUED)
CORPORATE (CONTINUED)
Tjiwi Kimia International
Global Bond
13.25%, 8/1/01 U.S.$ 2,100 U.S.$ 1,869
-------------
2,670
-------------
- ----------------------------------------------------------------------------------------------
JORDAN (0.8%)
SOVEREIGN (0.8%)
Jordan Discount Bond
(c)7.00%, 12/23/23 1,484 1,065
(b,c)7.00%, 12/23/23 1,061 761
-------------
1,826
-------------
- ----------------------------------------------------------------------------------------------
MEXICO (14.6%)
CORPORATE (2.3%)
(b)Nuevo Grupo Iusacell S.A.
14.25%, 12/1/06 1,300 1,355
(b)Sanluis Corp. S.A.
8.875%, 3/18/08 2,400 2,154
(b)TV Azteca S.A. 'B'
10.50%, 2/15/07 1,900 1,658
-------------
5,167
-------------
SOVEREIGN (12.3%)
(c)United Mexican States
Discount Bond 'B'
6.943%, 12/31/19 12,400 11,602
(c)United Mexican States
Discount Bond 'D'
6.903%, 12/31/19 600 561
(e)United Mexican States Euro Bond
10.375%, 2/17/09 4,250 4,548
(e)United Mexican States Global
Bond
11.375%, 9/15/16 9,426 10,694
-------------
27,405
-------------
32,572
-------------
- ----------------------------------------------------------------------------------------------
MOROCCO (2.3%)
SOVEREIGN (2.3%)
(c)Morocco R&C 'A'
6.844%, 1/1/09 5,693 5,194
-------------
- ----------------------------------------------------------------------------------------------
PANAMA (0.6%)
SOVEREIGN (0.6%)
Republic of Panama
Global Bond
8.875%, 9/30/27 850 717
(c)Republic of Panama Past
Due Interest Bond PIK
6.50%, 7/17/16 U.S.$ 918 U.S.$ 726
-------------
1,443
-------------
- ----------------------------------------------------------------------------------------------
PERU (2.7%)
SOVEREIGN (2.7%)
(d)Peru Past Due Interest Bond
4.50%, 3/7/17 4,520 3,154
(d)Republic of Peru Front
Loaded Interest
Reduction Bond
3.75%, 3/7/17 498 309
Republic of Peru Front
Loaded Interest Reduction
Global Bond
3.75%, 3/7/17 3,950 2,454
-------------
5,917
-------------
- ----------------------------------------------------------------------------------------------
PHILIPPINES (1.8%)
CORPORATE (1.0%)
(b)Bayan Telecommunications, Inc.
13.50%, 7/15/06 2,400 2,112
-------------
SOVEREIGN (0.8%)
Republic of Philippines
9.875%, 1/15/19 1,900 1,884
-------------
3,996
-------------
- ----------------------------------------------------------------------------------------------
POLAND (1.1%)
CORPORATE (1.1%)
(b)Netia Holdings II B.V.
13.125%, 6/15/09 1,500 1,507
(b)PTC International Finance II S.A.
11.25%, 12/1/09 1,000 979
-------------
2,486
-------------
- ----------------------------------------------------------------------------------------------
RUSSIA (8.2%)
SOVEREIGN (8.2%)
(c)Russia Interest Arrears Notes
6.906%, 12/15/15 1,950 359
(c)Russia Principal Note, PIK
6.906%, 12/15/20 37,746 6,110
(b)Russian Federation
8.75%, 7/24/05 1,640 1,025
11.00%, 7/24/18 15,860 9,595
Russian Federation (Registered)
10.00%, 6/26/07 1,900 1,159
-------------
18,248
-------------
- ----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
SOUTH KOREA (0.5%)
SOVEREIGN (0.5%)
Republic of Korea Global Bond
8.875%, 4/15/08 U.S.$ 1,000 U.S.$ 1,055
-------------
- ----------------------------------------------------------------------------------------------
TURKEY (1.0%)
CORPORATE (1.0%)
(b)Cellco Finance NV
15.00%, 8/1/05 1,910 2,072
15.00%, 8/1/05 100 109
-------------
2,181
-------------
- ----------------------------------------------------------------------------------------------
VENEZUELA (5.6%)
SOVEREIGN (5.6%)
(c,e)Republic of Venezuela Debt
Conversion Bond 'DL'
7.00%, 12/18/07 5,524 4,364
Republic of Venezuela
Global Bond
9.25%, 9/15/27 11,950 8,006
-------------
12,370
-------------
- ----------------------------------------------------------------------------------------------
TOTAL DEBT INSTRUMENTS
(Cost U.S.$186,827) 207,653
-------------
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
RIGHTS (0.0%)
MEXICO
(a)United Mexican States
Value Recovery Rights, 20,029,000 --@
expiring 06/30/03 (Cost U.S.$-@)
-------------
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
WARRANTS(0.0%)
- ----------------------------------------------------------------------------------------------
ARGENTINA (0.0%)
(a)Republic of Argentina,
expiring 2/25/00 10,500 22
-------------
- ----------------------------------------------------------------------------------------------
COLOMBIA (0.0%)
(a,b)Occidente y Caribe,
expiring 3/15/04 41,200 62
-------------
- ----------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost U.S.$27) 84
-------------
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS(6.7%)
- ----------------------------------------------------------------------------------------------
TURKEY (2.8%)
BILLS
Turkish Treasury Bills
0.00%, 02/09/00 TRL 2,417,032,000 U.S.$ 4,101
0.00%, 03/15/00 1,255,997,000 2,036
-------------
6,137
-------------
- ----------------------------------------------------------------------------------------------
UNITED STATES (3.9%)
REPURCHASE AGREEMENT
Chase Securities, Inc. 2.60%,
dated 12/31/99, due 1/3/00, to
be repurchased at U.S.$8,794,
collateralized by U.S.$8,995
United States Treasury Notes,
6.125%, due 12/31/01, valued at
U.S.$8,977 U.S.$ 8,792 8,792
-------------
- ----------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost U.S.$16,339) 14,929
-------------
- ----------------------------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN(0.0%)
Argentine Peso ARP 15 15
Indian Rupee INR 1,211 28
-------------
(Cost U.S.$43) 43
-------------
- ----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS(100.0%)
(Cost U.S.$203,236) 222,709
-------------
- ----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AMOUNT
(000) (000)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
OTHER ASSETS
Cash U.S.$ 939
Interest Receivable 6,252
Receivable for Investments Sold 195
Other Assets 12 U.S.$ 7,398
--------------- ---------------------
- ----------------------------------------------------------------------------------------------
LIABILITIES
Deferred Country Taxes (242)
Payable For:
Reverse Repurchase
Agreements (38,859)
Dividends Declared (6,314)
Investment Advisory Fees (154)
Professional Fees (80)
Directors' Fees and Expenses (69)
Shareholder Reporting Expenses (61)
Administrative Fees (20)
Custodian Fees (14)
Other Liabilities (25) (45,838)
--------------- ---------------------
- ----------------------------------------------------------------------------------------------
NET ASSETS
Applicable to 22,046,681, issued and
outstanding U.S.$0.01 par value
shares (100,000,000 shares authorized) U.S.$ 184,269
-------------------
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 8.36
-------------------
- ----------------------------------------------------------------------------------------------
AT DECEMBER 31, 1999, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------------------
Common Stock U.S.$ 220
Capital Surplus 279,105
Distributions in Excess of Net
Investment Income (269)
Accumulated Net Realized Loss (113,981)
Unrealized Appreciation on Investments
and Foreign Currency Translations
(net of accrued foreign taxes of U.S.$242
on unrealized appreciation) 19,194
- ----------------------------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$ 184,269
-------------------
- ----------------------------------------------------------------------------------------------
(a) - Non-income producing.
(b) - 144A Security - certain conditions for public sale may exist.
(c) - Variable/floating rate security - rate disclosed is as of December 31, 1999.
(d) - Step Bond - coupon rate increases in increments to maturity. Rate disclosed is as of
December 31, 1999. Maturity date disclosed is ultimate maturity.
(e) - Denotes all or a portion of securities subject to repurchase under Reverse Repurchase
Agreements as of December 31,1999. See note A-4 to financial statements.
(f) - Security is in default.
(g) - Security valued at fair value - see note A-1 to financial statements.
@ - Amount is less than U.S.$500.
PIK - Payment-in-Kind. Income may be paid in additional securities or cash at
the discretion of the issuer.
- ----------------------------------------------------------------------------------------------
DECEMBER 31, 1999 EXCHANGE RATES:
- ----------------------------------------------------------------------------------------------
ARP Argentine Peso 1.000 = U.S.$ 1.00
INR Indian Rupee 43.500 = U.S.$ 1.00
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
STATEMENT OF OPERATIONS (000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Interest ......................................................................................... U.S.$ 27,421
Dividends ........................................................................................ 347
Less: Foreign Taxes Withheld ..................................................................... (25)
- -----------------------------------------------------------------------------------------------------------------------------
Total Income 27,743
- -----------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees.......................................................................... 1,649
Interest Expense on Borrowings.................................................................... 1,532
Administrative Fees............................................................................... 214
Professional Fees................................................................................. 108
Shareholder Reporting Expenses.................................................................... 93
Custodian Fees.................................................................................... 64
Directors' Fees and Expenses...................................................................... 49
Transfer Agent Fees............................................................................... 29
Other Expenses.................................................................................... 27
- -----------------------------------------------------------------------------------------------------------------------------
Total Expenses.................................................................................. 3,765
- -----------------------------------------------------------------------------------------------------------------------------
Net Investment Income......................................................................... 23,978
- -----------------------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold........................................................................ 772
Foreign Currency Transactions..................................................................... (1,702)
- -----------------------------------------------------------------------------------------------------------------------------
Net Realized Loss............................................................................... (930)
- -----------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Appreciation on Investments....................................................................... 28,870
Depreciation on Foreign Currency Translations..................................................... (52)
- -----------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation.................................................. 28,818
- -----------------------------------------------------------------------------------------------------------------------------
Net Realized Loss and Change in Unrealized Appreciation/Depreciation.................................. 27,888
- -----------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................................. U.S.$ 51,866
- -----------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income..................................................... U.S.$ 23,978 U.S.$ 27,779
Net Realized Loss......................................................... (930) (113,390)
Change in Unrealized Appreciation/Depreciation............................ 28,818 1,761
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations........... 51,866 (83,850)
- ---------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income..................................................... (21,876) (30,153)
In Excess of Net Investment Income........................................ (269) (560)
In Excess of Net Realized Gain............................................ -- (63,390)
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions....................................................... (22,145) (94,103)
- ---------------------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Reinvestment of Distributions (195,910 and 319,511 shares, respectively).. 1,464 3,481
- ---------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease)................................................. 31,185 (174,472)
Net Assets:
Beginning of Period....................................................... 153,084 327,556
- ---------------------------------------------------------------------------------------------------------------------------
End of Period (including distributions in excess of net investment income
of U.S.$(269) and U.S.$(560), respectively)............................ U.S.$ 184,269 U.S.$ 153,084
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
STATEMENT OF CASH FLOWS (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM INVESTING AND OPERATING ACTIVITIES:
Proceeds from Sales of Investments.................................................................. U.S.$ 332,086
Purchases of Investments............................................................................ (346,286)
Purchases of Foreign Currency....................................................................... (43)
Net Increase in Short-Term Investments.............................................................. (12,549)
Net Realized Loss from Foreign Currency Transactions................................................ (1,702)
Investment Income................................................................................... 17,677
Interest Expense Paid............................................................................... (1,463)
Operating Expenses Paid............................................................................. (2,303)
- --------------------------------------------------------------------------------------------------------------------------------
Net Cash Used for Investing and Operating Activities................................................ (14,583)
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Received for Reverse Repurchase Agreements..................................................... 32,432
Cash Distributions Paid (net of reinvestments of $1,464)............................................ (21,407)
- --------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided for Financing Activities.......................................................... 11,025
- --------------------------------------------------------------------------------------------------------------------------------
Net Decrease in Cash................................................................................ (3,558)
CASH AT BEGINNING OF PERIOD............................................................................. 4,497
- --------------------------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD................................................................................... U.S.$ 939
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INVESTMENT INCOME TO NET CASH PROVIDED BY INVESTING AND OPERATING ACTIVITIES......
- --------------------------------------------------------------------------------------------------------------------------------
Net Investment Income............................................................................... U.S.$ 23,978
Proceeds from Sales of Investments.................................................................. 332,086
Purchases of Investments............................................................................ (346,286)
Purchases of Foreign Currency....................................................................... (43)
Net Increase in Short-Term Investments.............................................................. (12,549)
Net Realized Loss for Foreign Currency Transactions................................................. (1,702)
Net Increase in Receivables Related to Operations................................................... (1,587)
Net Decrease in Payables Related to Operations...................................................... (4)
Accretion/Amortization of Discounts and Premiums.................................................... (8,476)
- --------------------------------------------------------------------------------------------------------------------------------
Net Cash Used for Investing and Operating Activities................................................ U.S.$ (14,583)
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
SELECTED PER SHARE DATA 1999 1998 1997 1996 1995
AND RATIOS:
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........ U.S.$ 7.01 U.S.$ 15.21 U.S.$ 17.31 U.S.$ 12.40 U.S.$ 12.23
- ---------------------------------------------------------------------------------------------------------------------------------
Offering Costs.............................. -- -- -- -- (0.02)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Investment Income....................... 1.09 1.27 1.34 1.75 1.76
Net Realized and Unrealized Gain (Loss) on
Investments............................... 1.27 (5.12) 1.27 4.24 1.16
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations........ 2.36 (3.85) 2.61 5.99 2.92
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income..................... (1.00) (1.39) (1.27) (1.08) (1.69)
In Excess of Net Investment Income........ (0.01) (0.02) -- -- (0.03)
Net Realized Gain......................... -- -- (3.44) -- --
In Excess of Net Realized Gain............ -- (2.94) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions..................... (1.01) (4.35) (4.71) (1.08) (1.72)
- ---------------------------------------------------------------------------------------------------------------------------------
Decrease in Net Asset Value due to Rights
Offering.................................. -- -- -- -- (1.01)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............. U.S.$ 8.36 U.S.$ 7.01 U.S.$ 15.21 U.S.$ 17.31 U.S.$ 12.40
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD....... U.S.$ 6.81 U.S.$ 7.19 U.S.$ 15.38 U.S.$ 15.13 U.S.$ 12.50
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value.............................. 8.55% (32.04)% 40.81% 30.86% 37.48%+
Net Asset Value (1)....................... 36.58% (33.00)% 21.71% 50.98% 26.85%+
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS)....... U.S.$ 184,269 U.S.$ 153,084 U.S.$ 327,556 U.S.$ 372,644 U.S.$ 266,295
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets..... 2.28% 2.75% 2.27% 2.59% 1.89%
Ratio of Expenses Excluding Interest
Expense to Average Net Assets............. 1.35% 1.47% 1.51% 1.38% 1.50%
Ratio of Net Investment Income to Average
Net Assets................................ 14.53% 12.50% 8.80% 12.14% 15.21%
Portfolio Turnover Rate..................... 178% 308% 361% 373% 348%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ 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
DECEMBER 31, 1999
- ----------
Morgan Stanley Dean Witter Emerging Markets Debt Fund, Inc. (formerly
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. The prices provided by a pricing
service take into account broker dealer market price quotations for
institutional size trading in similar groups of securities, security
quality, maturity, coupon and other security characteristics as well as
any developments related to the specific securities. 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 under
procedures approved by the Board of Directors, 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: The Fund may enter into repurchase agreements under
which the Fund lends excess cash and takes possession of securities with
and agreement that the counterparty will repurchase such securities. In
connection with transactions in repurchase agreements, a bank as
custodian for the Fund takes possession of the underlying securities
(collateral), 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: 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. Reverse repurchase
agreements also involve credit risk with the counter party to the extent
that the value of securities subject to repurchase exceed the Fund's
liability under the reverse repurchase agreement. Securities subject to
repurchase under reverse repurchase agreements, if any, are designated as
such in the Statement of Net Assets.
At December 31, 1999, the Fund had reverse repurchase agreements
outstanding with Lehman Brothers and J.P. Morgan as follows:
<TABLE>
<CAPTION>
MATURITY IN
LESS THAN
365 DAYS
-------------
<S> <C>
Value of Securities Subject to
Repurchase............................... $ 49,789,000
Liability Under Reverse
Repurchase Agreement..................... $ 38,859,000
Interest Rate............................... 6.14%
</TABLE>
The average weekly balance of reverse repurchase agreements outstanding
during the year ended December 31, 1999 was approximately $32,336,000 at a
weighted average interest rate of 4.75%.
13
<PAGE>
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 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) due to securities transactions
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) on foreign
currency translations for the period is reflected in the Statement of
Operations.
Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of U.S. dollar
denominated transactions as a result of, among other factors, the
possibility of lower levels of governmental supervision and regulation of
foreign securities markets and the possibility of political or economic
instability.
The Fund may use derivatives to achieve its investment objectives. The Fund may
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 may use derivatives for
non-hedging as well as hedging purposes.
Following is a description of derivative instruments that the Fund may utilize
and their associated risks:
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 and any intermediaries between the Lender and the Fund.
When the Fund purchases Assignments from Lenders it acquires direct
rights against the borrower on the Loan. Because Assign-
14
<PAGE>
ments 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 assets
as segregated on the Fund's records. Purchasing securities on a forward
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 denote 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. SWAP AGREEMENTS: 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
may utilize 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 or-
15
<PAGE>
ganized 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.
Risks also arise from potential losses from adverse market movements, and
such losses could exceed the related amounts shown in the Statement of Net
Assets.
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 underlying instruments,
however, any loss is limited to the amount of the original investment.
13. OVER-THE-COUNTER TRADING: Securit ies and other 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.
The Fund did not sell securities short or write options, nor did the Fund invest
in Swap Agreements or Structured Securities during the year ended December 31,
1999.
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-dividend date.
The amount and character of income and capital gain distributions to be
paid by the Fund are determined in accordance with Federal income tax
regulations, which may differ from generally accepted accounting
principles. The book/tax differences are either considered temporary or
permanent in nature.
Temporary differences are attributable to differing book and tax
treatments for the timing of the recognition of gains and losses on
certain investment transactions and the timing of the deductibility of
certain expenses.
Permanent book and tax basis differences may result in reclassifications
among undistributed net investment income (loss), accumulated net
realized gain (loss) and paid in capital.
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 Dean Witter Investment 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.
D. The Chase Manhattan Bank serves as custodian for the Fund. Custody fees are
payable monthly based on assets held in custody, investment purchase and sales
activity and account maintenance fees, plus reimbursement for certain
out-of-pocket expenses.
E. During the year ended December 31, 1999, the Fund made purchases and
sales totaling approximately $343,134,000 and $328,070,000 respectively, of
investment securities other than long-term U.S. Government securities,
purchased options and short-term investments. There were no purchases or
sales of long-term U.S. Government
16
<PAGE>
securities. At December 31, 1999, the U.S. Federal income tax cost basis of
securities was approximately $206,198,000 and, accordingly, net unrealized
appreciation for U.S. Federal income tax purposes was $16,468,000, of which
$20,580,000 related to appreciated securities and $4,112,000 related to
depreciated securities. At December 31, 1999, the Fund had a capital loss
carryforward for U.S. Federal income tax purposes of approximately
$106,955,000 available to offset future capital gains, of which $93,820,000
will expire on December 31, 2006 and $13,135,000 will expire on December 31,
2007. To the extent that capital gains are offset, such gains will not be
distributed to the shareholders. For the year ended December 31, 1999, the
Fund intends to elect to defer to January 1, 2000, for U.S. Federal income
tax purposes, post-October currency losses of $5,000 and post-October capital
losses of $4,021,000.
As of December 31, 1999, the permanent differences are primarily due to
differing book and tax treatments related to net foreign currency losses as well
as differing book/tax treatments as to the recognition of certain items of
income and expense. To reflect reclassification arising from permanent
differences, undistributed net investment income was charged $1,542,000,
accumulated net realized loss was credited $1,406,000 and paid in capital was
credited $136,000.
F. A significant portion of the Fund's net assets consist of securities of
issuers located in emerging markets or which are denominated in foreign
currencies. Such investments may be concentrated in a limited number of
countries and regions and may vary throughout the year. Changes in currency
exchange rates will affect the value of and investment income from foreign
currency denominated 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.
These investments may be traded by one market maker who may also be utilized
by the Fund to provide pricing information used to value such securities. The
amounts which will be realized upon disposition of the securities may differ
from the value reflected on the statement of net assets and the differences
could be material.
G. 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. At December 31, 1999, the deferred fees payable, under the Plan totaled
$69,000 and are included in Payable for Directors' Fees and Expenses on the
Statement of Net Assets.
H. During December 1999, the Board of Directors declared a distribution of
$0.29 per share, derived from net investment income, payable on January 14,
2000, to shareholders of record on December 21, 1999.
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REPORT OF INDEPENDENT ACCOUNTANTS
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To the Shareholders and Board of Directors of
Morgan Stanley Dean Witter Emerging Markets Debt Fund, Inc.
(formerly, Morgan Stanley Emerging Markets Debt Fund, Inc.)
In our opinion, the accompanying statement of net assets and the related
statements of operations, of changes in net assets and of cash flows and the
financial highlights present fairly, in all material respects, the financial
position of Morgan Stanley Dean Witter Emerging Markets Debt Fund, Inc. (the
"Fund") at December 31, 1999, the results of its operations and its cash flows
for the year then ended, the changes in its net assets for each of the two years
in the period then ended and the financial highlights for each of the five years
in the period then ended, in conformity with accounting principles generally
accepted in the United States. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at December
31, 1999 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 18, 2000
18
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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. 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 Dean Witter Emerging Markets Debt Fund, Inc.
Boston Equiserve
Dividend Reinvestment Unit
P.O. Box 1681
Boston, MA 02105-1681
1-800-730-6001
19
