<PAGE>
MORGAN STANLEY AFRICA INVESTMENT FUND, INC.
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS
Michael F. Klein Stefanie V. Chang
PRESIDENT AND DIRECTOR VICE PRESIDENT
Peter J. Chase Harold J. Schaaff, Jr.
DIRECTOR VICE PRESIDENT
John W. Croghan Joseph P. Stadler
DIRECTOR VICE PRESIDENT
David B. Gill Valerie Y. Lewis
DIRECTOR SECRETARY
Graham E. Jones Joanna M. Haigney
DIRECTOR TREASURER
John A. Levin Belinda A. Brady
DIRECTOR 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
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 278-4353
- --------------------------------------------------------------------------------
LEGAL COUNSEL
Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
- --------------------------------------------------------------------------------
For additional Fund information, including the Fund's net asset value per share
and information regarding the investments comprising the Fund's portfolio,
please call 1-800-221-6726.
- --------------------------------------------------------------------------------
MORGAN STANLEY
AFRICA INVESTMENT
FUND, INC.
- --------------------------------------------------------------------------------
ANNUAL REPORT
DECEMBER 31, 1997
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
For the year ended December 31, 1997 the Morgan Stanley Africa Investment Fund,
Inc. (the "Fund") had a total return, based on net asset value per share, of
2.69% compared to -2.57% for the Fleming Africa Index including South Africa
(the "Index"). For the period since the Fund's inception on February 14, 1994,
through December 31, 1997, the Fund's total return, based on net asset value per
share, was 51.07% compared with 37.69% for the Index. For the three months ended
December 31, 1997, the Fund had a total return of -17.11% based on net asset
value per share, compared to -15.03% for the Index. On December 31, 1997, the
closing price of the Fund's shares on the New York Stock Exchange was $11.50,
representing a 20.4% discount to the Fund's net asset value per share.
The Fund's outperformance versus the Index for the year was driven by two
factors: good overall asset allocation across the continent and good stock
selection in markets where the Fund was invested. The best performing markets
within the Index included Botswana (91.1%), Morocco (39.3%), Ghana (17%) and
Egypt (8.5%), while the worst performing included Zimbabwe (-57.2%), Tunisia
(-28.2%), Kenya (-12.6%) and South Africa (-10.5%). The Fund had over 70% of its
exposure to the larger markets on the continent which include South Africa,
Egypt and Zimbabwe. As of December 31, 1997, these markets represented 94.3% of
the Index with South Africa comprising the majority.
SOUTH AFRICA
Contagion from the Asian currency crisis had a significant impact on the South
African market during the fourth quarter. The JSE Overall index declined by
18.7% and 10.5%, for the quarter and year ended December 31, 1997, respectively.
Rand depreciation represented 4.6% of the decline in the market during the
quarter.
We expect 1997 GDP growth to be marginally lower than 2% due to the strong
currency, weaker commodity prices experienced in the fourth quarter, and
prevailing high real interest rates. Exports represent about 26% of GDP of which
almost 60% are commodity related. Approximately 25% of South African merchandise
exports go to Asia of which 10% are bound for the countries affected by the
recent currency crisis. Slower global growth in 1998 is also expected to put
further pressure on commodity prices and volumes. As a result, we do not expect
GDP growth to exceed 2% in 1998.
As expected, the Reserve Bank cut rates by 1% in October and the bank rate now
stands at 16%. We expect a further 2% cut in rates during the course or 1998,
with the first 1% cut expected around the time of the budget in March, followed
by another 1% cut during the second half of 1998. The aggressiveness of the cuts
will be determined to a large extent by the level of the rand as well as the
rate of growth in monetary aggregates. Reduction in rates is primarily being
driven by declining inflation, which reached 6.8% in November. For 1998, lower
import tariffs and relative currency stability should lead to average inflation
of 6%.
In December, president Nelson Mandela stepped down as leader of the African
National Congress and was replaced by deputy president Thabo Mbeki. Mr. Mbeki
who has been running the government on a day-to-day basis for sometime is now
firmly positioned to succeed Nelson Mandela as the next president of South
Africa in 1999. This expected change in leadership should continue to provide
political stability in the country.
EGYPT
The EFG index declined by 11.5% and appreciated by 8.5% for the quarter and year
ended December 31, 1997, respectively.
State pension funds have begun to invest in the stock market providing support
to the market. Egypt has also been able to meet IMF targets of privatizing at
least 10 companies per quarter in 1997. The country will continue to
aggressively pursue privatization in 1998 and is expected to either partially or
fully sell off three companies per month on average. The delayed partial sale of
Misr Aluminum is expected to be the first major privatization in the new year.
The Luxor terrorist incident in November has had a major negative impact on the
tourism industry. Hotels in the Luxor region are currently operating with
occupancy rates averaging 2%. Tourism receipts across the country are expected
to fall by $500-750 million in the current year and would lead to a reduction in
GDP growth for fiscal 1998 from 5.0% to 4.5%. The overall macro economic
environment in Egypt remains positive with real interest rates approximating 5%,
inflation at 4.5% with fiscal and current account deficits to remain well below
2% of GDP.
ZIMBABWE
Zimbabwe had a extremely weak fourth quarter with the Flemings Zimbabwe All
Share index declining by 55.4% and 57.2% for the quarter and year ended December
31, 1997, respectively. Most of the reduction was due to currency depreciation
of 46% and 68.8% for the quarter and year ended December 31, 1997, respectively.
2
<PAGE>
The market and currency were driven down due to increasing concerns over the
deteriorating macro economic conditions coupled with the government proposal of
pursuing an ill conceived land redistribution policy. The land redistribution
policy details proposed acquisition of over 1,500 white owned farms with
compensation to be paid only for improvements made on the farms and not for the
value of the land.
The Reserve Bank of Zimbabwe increased the bank rate from 25.5% to 31.5% in
order to support the currency and to limit the impact on inflation in 1998 from
the major currency depreciation experienced during the course of 1997.
Zimbabwe's trade balance was also negatively affected by weaker commodity and
metal prices - tobacco and gold in particular. In order to try and stabilize the
weaker macro economic environment the government announced a reduction in
current and capital expenditure and stated that it would accelerate
privatizations. After a successful meeting with the finance minister in
December, the World Bank reinstated $60 million in balance of payment support
facility.
The government is expected to scale back its land redistribution policy due to
lack of funds available to finance the acquisitions and in order to try and calm
the overall macro environment. We expect the market to remain volatile during
the first quarter until the land issue is satisfactorily resolved, the effects
of El Nino are better understood and the IMF Enhanced Structural Adjustment
Facility is reinstated.
REST OF AFRICA
The Fund has approximately 20% of its investments in Mauritius, Ghana and
Botswana. Mauritius has a good economic environment with GDP growth forecast to
exceed 5%, inflation averaging 6.5% and the fiscal deficit to come in close to
4% of GDP. The deficit for next year is expected to be lower as proceeds from
the privatization of Mauritius Telecom are utilized to fund infrastructure
projects and pay down existing government debt. The market is attractively
valued with a forward price-earnings ratio of 9 times, a dividend yield of 4.5%
with forecast earnings growth of 15%.
The Ghanaian government is beginning to aggressively focus on existing,
macroeconomic issues of high fiscal deficits and inflation. Ghana has been able
to bring down inflation from 50% in 1996 to 29% in 1997 by maintaining 20% real
interest rates and reducing government expenditure. Government revenues are
expected to be enhanced by the introduction of value-added tax in the latter
half of 1998 and should lead to the fiscal deficit approximating 4% of GDP in
1998. The Ghanaian stock market remains one of the most attractively valued
across the continent. The market trades at a forward price-earnings of 3 times,
and is supported by a 15% dividend yield with real earnings growth expected to
be 15%.
Botswana was the best performing market in Africa in 1997. Its economy continues
to post GDP growth rates in excess of 5% with this trend expected to continue at
least until the end of the decade. The government has been able to post budget
and current account surpluses for each of the past 15 years. Tax rates both for
individual and listed companies remain one of the lowest on the continent and
are expected to drive consumption expenditure by the relatively young population
well into the future.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
/s/ Jaideep Khanna
Jaideep Khanna
PORTFOLIO MANAGER
January 1998
3
<PAGE>
Morgan Stanley Africa Investment Fund, Inc.
Investment Summary as of December 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
HISTORICAL TOTAL RETURN (%)
INFORMATION ------------------------------------------------------------------------
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 1.13% 1.13%% 2.69% 2.69% -2.57% -2.57%
SINCE INCEPTION* 20.24 4.87 51.07 11.22 37.69 8.60
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION (2)
[CHART]
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31:
1994* 1995 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Asset Value Per Share. . . . . $14.43 $17.05 $16.86 $14.45
Market Value Per Share . . . . . . $11.38 $12.88 $13.63 $11.50
Premium/(Discount) . . . . . . . . -21.1% -24.5% -19.2% -20.4%
Income Dividends . . . . . . . . . $0.54 $0.96 $0.14 $0.30
Capital Gains Distributions. . . . -- $0.01 $1.23 $2.25
Fund Total Return (2). . . . . . . 7.34% 26.14% 8.64% 2.69%
Index Total Return (3) . . . . . . 38.41% 16.37% -12.26% -2.57%
</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) Beginning in 1997, the Fund is using the Fleming Africa Index including
South Africa for performance comparison purposes. This Index is a market
capitalization weighted index based on the indices of eleven countries
including Botswana, Egypt, Ghana, Kenya, Malawi, Mauritius, Morocco,
Namibia, South Africa, Tunisia, and Zimbabwe. The local indices include
dividends except for Botswana, Ghana, Kenya and Namibia. The historical
return of the Index for the comparable periods are presented above.
* The Fund commenced operations on February 14, 1994.
4
<PAGE>
Morgan Stanley Africa Investment Fund, Inc.
Portfolio Summary as of December 31, 1997
- --------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Debt Instruments 0.9%
Equity Securities 85.9%
Short-Term Investments 13.2%
</TABLE>
- --------------------------------------------------------------------------------
SECTORS (UNAUDITED)
[CHART]
<TABLE>
<S> <C>
Banking 16.5%
Beverages & Tobacco 8.1%
Building Materials & Components 6.6%
Chemicals 9.0%
Financial Services 3.0%
Food & Household 4.4%
Leisure & Tourism 3.3%
Merchandising 4.5%
Multi-Industry 19.6%
Other 21.0%
Real Estate 4.0%
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[CHART]
<TABLE>
<S> <C>
Botswana 3.8%
Egypt 28.3%
Ghana 6.5%
Ireland 0.9%
Kenya 2.2%
Mauritius 10.1%
Morocco 2.1%
Other 1.4%
South Africa 30.3%
Zambia 1.9%
Zimbabwe 12.5%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. New Africa Investments Ltd. (South Africa) 5.6%
2. State Bank of Mauritius (Mauritius) 4.6
3. Delta Corp. (Zimbabwe) 4.1
4. SASOL Ltd. (South Africa) 3.4
5. Meikles Africa Ltd. (Zimbabwe) 3.4
6. Madinet Nasr Housing & Development (Egypt) 3.1
7. Egyptian Finance & Industrial (Egypt) 3.0
8. Sechaba Breweries Ltd. (Botswana) 3.0
9. Mauritius Commercial Bank (Mauritius) 2.5
10. Eastern Tobacco (Egypt) 2.5
-----
35.2%
-----
-----
</TABLE>
* Excludes short-term investments
5
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (98.1%)
(Unless otherwise noted)
- --------------------------------------------------------------------------------
BOTSWANA (3.8%)
BANKING
<S> <C> <C>
Barclays Bank of Botswana 170,000 U.S.$ 681
First National Bank of Botswana 140,000 368
Standard Chart Bank of Botswana 210,000 799
-------------
1,848
-------------
BEVERAGES & TOBACCO
Sechaba Breweries Ltd. 6,250,000 6,646
-------------
8,494
-------------
- --------------------------------------------------------------------------------
EGYPT (28.3%)
AGRICULTURE
(a)General Silo Storage 48,600 1,168
BANKING
Commercial International Bank 194,490 3,925
(a)El Watany Bank of Egypt 14,000 204
(a,c)Watany Bank 22,014 88
-------------
4,217
-------------
BEVERAGES & TOBACCO
Al-Ahram Beverages Co. 10,000 570
Al-Ahram Beverages Co. GDR 26,400 733
Eastern Tobacco 236,150 5,484
-------------
6,787
-------------
BUILDING MATERIALS & COMPONENTS
Ameriyah Cement Co. 189,993 4,439
(a)Helwan Portland Cement 209,800 4,224
Suez Cement Co. 100,000 2,042
Torah Portland Cement Co. 150,770 3,456
-------------
14,161
-------------
CHEMICALS
Egyptian Finance & Industrial 112,450 6,774
Paints & Chemical Industries 19,510 625
Paints & Chemical Industries GDR 232,400 2,324
-------------
9,723
-------------
CONSTRUCTION & HOUSING
(a)Arabian International 46,000 1,298
-------------
ELECTRICAL & ELECTRONICS
Egyptian Electro Cables 51,131 1,698
-------------
ENERGY EQUIPMENT & SERVICES
(a,c)Miraco International 440 262
-------------
FOOD & HOUSEHOLD PRODUCTS
(a)Alexandria Flour Mills 31,330 715
Central Flour Mill 59,660 496
North Cairo Flour Mills 110,805 3,159
South Cairo & Giza Mills Bakeries 14,670 203
-------------
4,573
-------------
MERCHANDISING
(a)MSIR Free Shops Co. 90,000 913
-------------
MULTI-INDUSTRY
(a)Industrial & Engineering 151,338 2,535
-------------
REAL ESTATE
Helioplis Housing 15,000 1,995
(a)Madinet Nasr Housing & Development 105,790 6,840
-------------
8,835
-------------
TEXTILES & APPAREL
(a)KABO-El Nasr Clothing & Textile Co. 144,050 4,316
-------------
UTILITIES - ELECTRICAL & GAS
(c)Egypt Gas Private Placement 500 2,572
-------------
63,058
-------------
- --------------------------------------------------------------------------------
GHANA (6.5%)
AUTOMOBILES
(a)Mechanical Lloyd Co. Ltd. 2,000,000 165
-------------
BANKING
(a)Ghana Commercial Bank 5,394,580 1,874
(a)Social Security Bank Ltd. 6,560,000 4,934
(a)Standard Chartered Bank 920,500 3,299
-------------
10,107
-------------
BEVERAGES & TOBACCO
Guinness Ghana 3,800,979 1,093
Kumasi Brewery Ltd. 336,000 144
Pioneer Tobacco Co. Ltd. 3,606,600 581
-------------
1,818
-------------
FINANCIAL SERVICES
Home Finance Co. 2,345,700 244
-------------
FOOD & HOUSEHOLD PRODUCTS
Unilever 1,595,800 777
-------------
METALS - NON-FERROUS
Ghana Pioneer Aluminum Factory 1,043,400 83
-------------
METALS - STEEL
(a)Aluworks Ghana Ltd. 1,200,000 1,327
-------------
14,521
-------------
- --------------------------------------------------------------------------------
IRELAND (0.9%)
MINING
(a)Kenmare Resources 3,815,000 760
-------------
OIL & GAS
(a)Tuskar Resources plc 17,829,000 1,245
-------------
2,005
-------------
- --------------------------------------------------------------------------------
IVORY COAST (0.6%)
MISCELLANEOUS MATERIALS & COMMODITIES
(a)SOC Ivoirienne de Coco Rappe 24,000 846
-------------
MULTI-INDUSTRY
(a)Filature Tissages Sacs 5,000 554
-------------
1,400
-------------
- --------------------------------------------------------------------------------
KENYA (2.2%)
BANKING
Kenya Commercial Bank Ltd. 991,326 1,242
(a)National Industrial Credit Bank 311,551 252
-------------
1,494
-------------
CONSTRUCTION & HOUSING
(a)Athi River Mining Ltd. 3,262,500 499
-------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
KENYA (CONTINUED)
INDUSTRIAL COMPONENTS
Firestone East Africa Ltd. 3,171,300 U.S.$ 1,182
-------------
MERCHANDISING
Uchumi Supermarket Ltd. 2,501,107 1,507
-------------
UTILITIES - ELECTRICAL & GAS
Kenya Power & Lighting Co. Ltd. 100,000 286
-------------
4,968
-------------
- --------------------------------------------------------------------------------
MAURITIUS (10.1%)
BANKING
Mauritius Commercial Bank 1,272,145 5,500
State Bank of Mauritius 17,792,469 10,176
-------------
15,676
-------------
FOOD & HOUSEHOLD PRODUCTS
Happy World Foods Ltd. 1,502,013 1,055
-------------
LEISURE & TOURISM
New Mauritus Hotels 2,023,116 2,870
-------------
MULTI-INDUSTRY
Rogers and Co. Ltd. 602,081 2,983
-------------
22,584
-------------
- --------------------------------------------------------------------------------
MOROCCO (2.1%)
MULTI-INDUSTRY
SNI Maroc 56,011 4,798
-------------
- --------------------------------------------------------------------------------
SOUTH AFRICA (29.2%)
BANKING
NBS Boland Group Ltd. 1,001,260 2,479
-------------
BEVERAGES & TOBACCO
Amalgamated Beverage Industries Ltd. 409,700 2,862
-------------
BROADCASTING & PUBLISHING
Perskor Beleggings Beperk 2,877,000 1,685
-------------
CHEMICALS
Polfin Ltd. 1,500,000 2,158
SASOL Ltd. 453,242 4,740
SASOL Ltd. 8.50% (Convertible Preferred) 294,400 2,949
-------------
9,847
-------------
CONSTRUCTION & HOUSING
Concor Ltd. 344,522 1,699
-------------
ELECTRICAL & ELECTRONICS
Persetel Holdings Ltd. 602,356 3,305
Spescom Electronics Ltd. 765,100 1,006
Voltex Holdings Ltd. 196,500 101
-------------
4,412
-------------
ENERGY SOURCES
(a)Energy Africa Ltd. 400,000 2,117
Trans Natal Coal Corp. Ltd. 145,000 526
-------------
2,643
-------------
FINANCIAL SERVICES
Coronation Holdings Ltd. 300,000 4,531
Orion Selections Holdings Ltd. 300,000 771
Orion Selections Ltd. 546,000 1,178
-------------
6,480
-------------
FOOD & HOUSEHOLD PRODUCTS
Illovo Sugar Ltd. 500,000 853
-------------
FOREST PRODUCTS & PAPER
Malbak Ltd. 150,000 147
-------------
LEISURE & TOURISM
Kersaf Investments Ltd. 117,000 613
Spur Holdings Ltd. 672,200 836
Sun International Ltd. 4,923,571 2,023
-------------
3,472
-------------
MACHINERY & ENGINEERING
(a)First South Africa Corp. 128,404 811
Howden Africa Holdings Ltd. 2,010,172 1,652
-------------
2,463
-------------
METALS - NON-FERROUS
Anglo American Platinum Corp. 230,828 3,083
-------------
MULTI-INDUSTRY
Barlow Ltd. 195,700 1,661
Bidvest Group Ltd. 488,545 4,041
(a)New Africa Investments Ltd.
(Preferred) 'N' 13,000,000 12,421
-------------
18,123
-------------
RETAIL - MAJOR DEPARTMENT STORES
Ellerine Holdings Ltd. 200,000 1,290
New Clicks Holdings Ltd. 1,481,457 1,811
Protea Furnishers Ltd. 3,500,000 1,741
-------------
4,842
-------------
65,090
-------------
- --------------------------------------------------------------------------------
ZAMBIA (1.9%)
FOOD & HOUSEHOLD PRODUCTS
(a)Zambia Sugar Co. Ltd. 120,213,609 2,333
-------------
MINING
(a)Zambia Consolidated Copper Mines 600,000 1,830
-------------
4,163
-------------
- --------------------------------------------------------------------------------
ZIMBABWE (12.5%)
BANKING
NMBZ Holdings Ltd. 2,266,000 1,106
-------------
BUILDING MATERIALS & COMPONENTS
PG Industries 1,647,545 197
Portland Holdings Ltd. 425,000 332
-------------
529
-------------
CHEMICALS
(a)Interfresh Ltd. 15,000,000 612
-------------
ENERGY SOURCES
Wankie Colliery Co. Ltd. 7,221,900 1,572
Wankie Colliery Co. Ltd. (UK) 650,000 171
-------------
1,743
-------------
FOOD & HOUSEHOLD PRODUCTS
Colcom Holdings 500,000 33
Eastern Highlands 3,375,659 312
-------------
345
-------------
LEISURE & TOURISM
Zimbabwe Sun 6,617,338 1,045
-------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
ZIMBABWE (CONTINUED)
MERCHANDISING
Meikles Africa Ltd. 8,419,880 U.S.$ 7,578
-------------
METALS - NON-FERROUS
Bindura Nickel Corp. Ltd. 658,750 109
-------------
MULTI-INDUSTRY
CFI Holdings 1,054,300 46
Delta Corp. 13,401,903 9,117
TA Holdings Ltd. 11,250,100 1,408
Trans Zambezi Industries Ltd. 6,012,410 1,914
Trans Zambezi Industries Ltd.
ADR 144A 5,000,000 1,592
Trans Zambezi Industries Ltd. -
New 360,000 115
TSL Ltd. 3,477,000 473
-------------
14,665
-------------
TEXTILES & APPAREL
(a)Spinweave 4,448,000 133
-------------
27,865
-------------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost U.S.$209,802) 218,946
-------------
- --------------------------------------------------------------------------------
Face
Amount
(000)
- --------------------------------------------------------------------------------
DEBT INSTRUMENTS (1.1%)
- --------------------------------------------------------------------------------
SOUTH AFRICA (1.1%)
(b) First South Africa Corp.
9.00%, 06/15/04
(Cost U.S.$2,306) U.S.$ 250 2,393
-------------
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (14.2%)
- --------------------------------------------------------------------------------
UNITED STATES (14.2%)
REPURCHASE AGREEMENT
Chase Securities, Inc., 5.95%,
dated 12/31/97, due 1/2/98,
to be repurchased at
U.S.$31,741, collateralized
by U.S.$32,085, United States
Treasury Notes, 5.25%, due
1/31/01, valued at U.S.$32,399
(Cost U.S.$31,731) 31,731 31,731
-------------
- --------------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (0.8%)
Egyptian Pound EGP 3,689 1,084
Ghana Cedi GHC 298,000 132
Mauritius Rupee MUR 389 18
South African Rand ZAR 2,671 549
-------------
(Cost U.S.$1,784) 1,783
-------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (114.2%)
(Cost U.S.$245,623) U.S.$ 254,853
-------------
- --------------------------------------------------------------------------------
OTHER ASSETS (1.4%)
Receivable for Investments Sold U.S.$ 1,518
Dividends Receivable 1,500
Interest Receivable 81
Deferred Organization Costs 13
Other Assets 16 3,128
----------------------------------------
- --------------------------------------------------------------------------------
LIABILITIES (-15.6%)
Payable For:
Dividends Declared (33,205)
Investments Purchased (887)
Investment Advisory Fees (253)
Custodian Fees (162)
Professional Fees (50)
Shareholder Reporting Expenses (46)
Director's Fees and Expenses (32)
Administrative Fees (22)
Bank Overdraft (115)
Net Unrealized Loss on Foreign
Currency Exchange Contracts (1)
Other Liabilities (5) (34,778)
-----------------------------------------
- ---------------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 15,448,477, issued
and outstanding U.S.$0.01 par
value shares (100,000,000 shares
authorized) U.S.$ 223,203
-------------
-------------
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 14.45
-------------
-------------
- --------------------------------------------------------------------------------
AT DECEMBER 31, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Common Stock U.S.$ 154
Capital Surplus 216,929
Undistributed Net Investment Income 465
Accumulated Net Realized Loss (3,416)
Unrealized Appreciation on Investments
and Foreign Currency Translations 9,071
- --------------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$ 223,203
-------------
-------------
- --------------------------------------------------------------------------------
</TABLE>
(a) - Non-income producing
(b) - Security valued at fair value - See note A-1 to financial statements.
(c) - Security fair valued at cost - See note A-1 to financial statements.
144A - Certain conditions for public sale may exist.
ADR - American Depositary Receipt
GDR - Global Depositary Receipt
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1997, the Fund is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN UNREALIZED
TO EXCHANGE GAIN
DELIVER VALUE SETTLEMENT FOR VALUE (LOSS)
(000) (000) DATE (000) (000) (000)
- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
EGP 1,201 U.S.$ 353 01/02/98 U.S.$ 352 U.S.$ 352 U.S.$ (1)
MUR 389 18 01/02/98 18 18 -
---------- ---------- ---------
U.S.$ 371 U.S.$ 370 U.S.$ (1)
---------- ---------- ---------
---------- ---------- ---------
- --------------------------------------------------------------------------------
DECEMBER 31, 1997 EXCHANGE RATES:
- --------------------------------------------------------------------------------
EGP Egyptian Pound 3.403 = U.S. $1.00
GHC Ghana Cedi 2260.000 = U.S. $1.00
MUR Mauritius Rupee 22.205 = U.S. $1.00
ZAR South African Rand 4.867 = U.S. $1.00
- --------------------------------------------------------------------------------
SUMMARY OF TOTAL INVESTMENTS BY INDUSTRY
CLASSIFICATION - DECEMBER 31, 1997 (Unaudited)
<CAPTION>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
- --------------------------------------------------------------------------------
<S> <C> <C>
Agriculture U.S.$ 1,168 0.5%
Automobiles 166 0.1
Banking 36,928 16.5
Beverages & Tobacco 18,112 8.1
Broadcasting & Publishing 1,685 0.7
Building Materials & Components 14,691 6.6
Chemicals 20,183 9.0
Construction & Housing 3,496 1.6
Electrical & Electronics 6,110 2.7
Energy Equipment & Services 262 0.1
Energy Sources 4,385 2.0
Financial Services 6,724 3.0
Food & Household Products 9,936 4.4
Forest Products & Paper 146 0.1
Industrial Components 1,182 0.5
Leisure & Tourism 7,387 3.3
Machinery & Engineering 4,856 2.2
Merchandising 9,998 4.5
Metals - Non-Ferrous 3,275 1.5
Metals - Steel 1,327 0.6
Mining 2,590 1.2
Miscellaneous Materials & Commodities 846 0.4
Multi-Industry 43,658 19.6
Oil & Gas 1,245 0.5
Real Estate 8,835 4.0
Retail - Major Department Stores 4,842 2.2
Textiles & Apparel 4,449 2.0
Utilities - Electrical & Gas 2,857 1.3
Other 33,514 15.0
------------ -----
U.S.$254,853 114.2%
------------ -----
------------ -----
- --------------------------------------------------------------------------------
<CAPTION>
SUMMARY OF TOTAL INVESTMENTS BY COUNTRY - DECEMBER 31, 1997 (Unaudited)
COUNTRY
- --------------------------------------------------------------------------------
Botswana U.S.$ 8,494 3.8%
Egypt 63,058 28.3
Ghana 14,521 6.5
Ireland 2,005 0.9
Ivory Coast 1,400 0.6
Kenya 4,968 2.2
Mauritius 22,584 10.1
Morocco 4,798 2.1
South Africa 67,483 30.3
United States (short-term investments) 31,731 14.2
Zambia 4,163 1.9
Zimbabwe 27,865 12.5
Other 1,783 0.8
------------ -----
U.S.$254,853 114.2%
------------ -----
------------ -----
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
STATEMENT OF OPERATIONS (000)
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends. . . . . . . . . . . . . . . . . . . . . . U.S.$ 10,891
Interest . . . . . . . . . . . . . . . . . . . . . . 106
Less: Foreign Taxes Withheld . . . . . . . . . . . . (303)
- --------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . 10,694
- --------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees . . . . . . . . . . . . . . 3,672
Custodian Fees . . . . . . . . . . . . . . . . . . . 1,137
Administrative Fees. . . . . . . . . . . . . . . . . 292
Shareholder Reporting Expenses . . . . . . . . . . . 106
Professional Fees. . . . . . . . . . . . . . . . . . 87
Directors' Fees and Expenses . . . . . . . . . . . . 32
Transfer Agent Fees. . . . . . . . . . . . . . . . . 18
Other Expenses . . . . . . . . . . . . . . . . . . . 77
- --------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . 5,421
- --------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . 5,273
- --------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . . 25,806
Foreign Currency Transactions. . . . . . . . . . . . (820)
- --------------------------------------------------------------------------------
Net Realized Gain. . . . . . . . . . . . . . . . . 24,986
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Depreciation on Investments. . . . . . . . . . . . . (28,115)
Depreciation on Foreign Currency Translations. . . . (59)
- --------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation . . (28,174)
- --------------------------------------------------------------------------------
Total Net Realized Gain and Change in Unrealized
Appreciation/Depreciation . . . . . . . . . . . . (3,188)
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS U.S.$ 2,085
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income . . . . . . . . . . . . . . . U.S.$ 5,273 U.S.$ 5,450
Net Realized Gain . . . . . . . . . . . . . . . . . 24,986 22,699
Change in Unrealized Appreciation/Depreciation. . . (28,174) (9,842)
- -------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 2,085 18,307
- -------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income . . . . . . . . . . . . . . . (4,710) (2,153)
Net Realized Gains. . . . . . . . . . . . . . . . . (31,278) (19,060)
In Excess of Net Realized Gains . . . . . . . . . . (3,416) -
- -------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . (39,404) (21,213)
- -------------------------------------------------------------------------------------------------
Total Decrease. . . . . . . . . . . . . . . . . . . (37,319) (2,906)
Net Assets:
Beginning of Period . . . . . . . . . . . . . . . . 260,522 263,428
- -------------------------------------------------------------------------------------------------
End of Period (including undistributed net investment
income of U.S.$465 and U.S.$0, respectively.) . . . U.S.$223,203 U.S.$260,522
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
PERIOD FROM
FEBRUARY 14, 1994* TO
SELECTED PER SHARE DATA AND RATIOS: 1997 1996 1995 DECEMBER 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . U.S.$ 16.86 U.S.$ 17.05 U.S.$ 14.43 U.S.$ 14.10
- ------------------------------------------------------------------------------------------------------------------------------------
Offering Costs . . . . . . . . . . . . . . . . . . . . . - - - (0.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Investment Income. . . . . . . . . . . . . . . . . . 0.34 0.35 0.64 0.54
Net Realized and Unrealized Gain (Loss) on Investments . (0.20) 0.83 2.95 0.38
- ------------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations. . . . . . . . . . 0.14 1.18 3.59 0.92
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income . . . . . . . . . . . . . . . . (0.30) (0.14) (0.96) (0.54)
In Excess of Net Investment Income. . . . . . . . . . - - (0.00)# (0.00)#
Net Realized Gains. . . . . . . . . . . . . . . . . . (2.04) (1.23) (0.01) -
In Excess of Net Realized Gains . . . . . . . . . . . (0.21) - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . (2.55) (1.37) (0.97) (0.54)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . U.S.$ 14.45 U.S.$ 16.86 U.S.$ 17.05 U.S.$ 14.43
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD. . . . . . . . . . U.S.$ 11.50 U.S.$ 13.63 U.S.$ 12.88 U.S.$ 11.38
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value. . . . . . . . . . . . . . . . . . . . . 1.13% 16.26% 20.84% (15.37)%
Net Asset Value (1) . . . . . . . . . . . . . . . . . 2.69% 8.64% 26.14% 7.34%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS). . . . . . . . . . U.S.$223,203 U.S.$260,522 U.S.$236,428 U.S.$222,929
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets. . . . . . . . . 1.77% 1.79% 1.77% 1.87%**
Ratio of Net Investment Income to Average Net Assets . . 1.72% 2.11% 4.18% 4.47%**
Portfolio Turnover Rate. . . . . . . . . . . . . . . . . 40% 68% 66% 32%
Average Commission Rate (2):
Per Share. . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 0.0053 U.S.$ 0.0134 N/A N/A
As a Percentage of Trade Amount. . . . . . . . . . . . . 0.50% 0.46% N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
# Amount is less than U.S.$0.01 per share
(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.
(2) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share it paid for
portfolio trades on which commissions were charged during the period.
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
The Morgan Stanley Africa Investment Fund, Inc. (the "Fund") was
incorporated in Maryland on December 14, 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 investment objective is long-term
capital appreciation through investments primarily in equity 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 sales price on the valuation date, or if there was
no sale on such date, at the mean between the current bid and asked
prices. Securities which are traded over-the-counter are valued at the
average of the mean of current bid and asked prices obtained from
reputable brokers. 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. Due
to certain African securities markets' small size, degree of liquidity
and volatility, the price which the Fund may realize upon sale of
securities may not be equal to its value as presented in the financial
statements.
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. The Fund accrues such taxes when the related income is
earned.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the
underlying securities, with a market value at least equal to the
amount of the repurchase transaction, including principal and accrued
interest. To the extent that any repurchase transaction exceeds one
business day, the value of the collateral is marked-to-market on a
daily basis to determine the adequacy of the collateral. In the event
of default on the obligation to repurchase, the Fund has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counter-party
to the agreement, realization and/or retention of the collateral or
proceeds may be subject to legal proceedings.
4. 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 rate
of exchange on 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 effects of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of securities sold during
the period. Accordingly, realized and unrealized foreign currency
gains (losses) are included in the reported net realized and
unrealized gains (losses) on investment transactions and balances.
Net realized gains (losses) on foreign currency transactions represent
net foreign exchange gains (losses) from sales and maturities of
forward foreign currency exchange contracts, disposition of foreign
currency, 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, if any, 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.
12
<PAGE>
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:
5. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into
forward 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 forward foreign currency
exchange contract is an agreement between two parties to buy or sell
currency at a set price on a future date. The market value of the
contract will fluctuate with changes in currency exchange rates. The
contract is marked-to-market daily and the change in market value is
recorded by the Fund as unrealized gain or loss. The Fund records
realized gains or losses when the contract is closed equal to the
difference between the value of the contract at the time it was opened
and the value at the time it was closed. Risk may arise upon entering
into these contracts from the potential inability of counterparties to
meet the terms of their contracts and is generally limited to the
amount of unrealized gain on the contracts, if any, at the date of
default. Risks may also arise from unanticipated movements in the
value of foreign currency relative to the U.S. dollar.
6. DEBT INSTRUMENTS: The Fund may invest in debt instruments including
those in the form of 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 ("Assignments") of all or a portion
of Loans 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.
7. WRITTEN OPTIONS: The Fund may write covered call options in an attempt
to increase the Fund's total return. The Fund will receive premiums
that are recorded as liabilities and subsequently adjusted to the
current value of the options written. Premiums received from writing
options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset
against the proceeds or amount paid on the transaction to determine
the net realized gain or loss. By writing a covered call option, the
Fund foregoes in exchange for the premium the opportunity for capital
appreciation above the exercise price should the market price of the
underlying security increase.
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 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. SWAP AGREEMENTS: The Fund may enter into swap agreements to exchange
the return generated by one security, instrument or basket of
instruments for the return generated by another security, instrument
or basket of instruments. The following summarizes swaps which may be
entered into by the Fund:
INTEREST RATE SWAPS: Interest rate swaps involve the exchange of
commitments to pay and receive interest based on a notional principal
amount. Net periodic interest payments to be received or paid are
accrued daily and are recorded in the Statement of Operations
13
<PAGE>
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 unrealized appreciation or
depreciation 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. To the extent the total return of the security, instrument or
basket of instruments underlying the transaction exceeds or falls
short of the offsetting interest 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 unrealized
gains or losses in the Statement of Operations. Periodic payments
received or made at the end of each measurement period, but prior to
termination, are recorded as realized gains or losses 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.
10. STRUCTURED SECURITIES: The Fund may invest in interests in entities
organized and operated solely for the purpose of restructuring the
investment characteristics of sovereign debt obligations. This type of
restructuring involves the deposit with or purchase by an entity of
specified instruments and the issuance by that entity of one or more
classes of securities ("Structured Securities") backed by, or
representing interests in, the underlying instruments. Structured
Securities, invested in by the Fund, generally will have credit risk
equivalent to that of the underlying instruments. Structured
Securities are typically sold in private placement transactions with
no active trading market. Investments in structured securities may be
more volatile than their underlying instruments, however, any loss is
limited to the amount of the original investment.
11. 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.
12. 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. Dividend income is recorded on the ex-dividend date (except
certain dividends which may be recorded as soon as the Fund is
informed of such dividend) net of applicable withholding taxes where
recovery of such taxes is not reasonably assured. 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 gains on certain
securities of corporations designated as "passive foreign investment
companies".
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 1.20% of the
Fund's average weekly net assets.
C. The Chase Manhattan Bank, through its affiliate Chase Global Funds Services
Company (the "Administrator"), provides administrative services to the Fund
under an Administration Agreement. Under the Administration Agreement, the
Administrator is paid a fee computed weekly and payable monthly at an annual
rate of 0.06% of the Fund's average weekly net assets, plus $100,000 per
14
<PAGE>
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. International Custodian fees are
payable monthly based on Fund assets under custody plus an amount for each
transaction effected. For the year ended December 31, 1997, international
custodian fees totaled $981,000, of which $161,000 was payable to the
International Custodian at December 31, 1997. In addition, for the year ended
December 31, 1997, the Fund has earned interest income of $1,000 and incurred
interest expense of $104,000 on balances with the International Custodian.
E. During the year ended December 31, 1997, the Fund made purchases and sales
totaling approximately $117,350,000 and $152,007,000 respectively, of investment
securities other than long-term U.S. Government securities and short-term
investments. There were no purchases and sales of long-term U.S. Government
securities. During the year ended December 31, 1997, the Fund placed a portion
of its portfolio transactions with affiliated broker/dealers. Accordingly, the
Fund incurred brokerage commissions of $56,000 with Morgan Stanley & Co.
Incorporated, an affiliate of the Adviser, for the year ended December 31, 1997.
At December 31, 1997, the U.S. Federal income tax cost basis of securities was
$243,843,000 and, accordingly, net unrealized appreciation for U.S. Federal
income tax purposes was $9,227,000 of which $40,203,000 related to appreciated
securities and $30,976,000 related to depreciated securities. For the year ended
December 31, 1997, the Fund expects to defer to January 1, 1998 for U.S. Federal
income tax purposes, post-October currency losses of $99,000 and post-October
capital losses of $3,448,000.
F. In connection with its organization and initial public offering of shares,
the Fund incurred $60,000 and $719,000 of organization and offering costs,
respectively. The organization costs are being amortized on a straight-line
basis over a five-year period beginning February 14, 1994, the date the Fund
commenced operations. The offering costs were charged to capital.
G. A significant portion of the Fund's net assets consists of securities of
issuers located in Africa. These securities are denominated in foreign
currencies and involve certain considerations and risks not typically associated
with investments in the United States. Securities of these issuers are often
subject to greater price volatility, limited capitalization and liquidity, and
higher rates of inflation than securities of companies based in the United
States. In addition, the securities markets in these countries are less
developed than the U.S. securities market and there is often substantially less
publicly available information about African issuers than there is about U.S.
issuers. Settlement mechanisms are also less developed and consist primarily of
physical delivery, which may cause the Fund to experience delays or other
difficulties in effecting transactions in certain African nations.
These securities may also be subject to substantial governmental involvement in
the economy and greater social, economic, and political uncertainty which could
adversely affect the liquidity or value, or both, of the Fund's investment. In
addition, the Fund's ability to hedge its currency risk is limited, possibly
exposing the Fund to currency devaluation and other exchange rate fluctuations.
Accordingly, the price which the Fund may realize upon sale of such securities
may not be equal to its value as presented in the financial statements.
H. Each Director of the Fund who is not an officer of the Fund or an
affiliated person as defined under the Investment Company Act of 1940, as
amended, may elect to participate in the Directors' Deferred Compensation Plan
(the "Plan"). Under the Plan, such Directors may elect to defer payment of a
percentage of their total fees earned as a Director of the Fund. These deferred
portions are treated, based on an election by the Director, as if they were
either invested in the Fund's shares or invested in U.S. Treasury Bills, as
defined under the Plan. The deferred fees payable, under the Plan, at December
31, 1997 totaled $24,000 and are included in Payable for Directors' Fees and
Expenses on the Statement of Net Assets.
I. During December 1997, the Board declared a distribution of $0.30 per share,
derived from net investment income and $1.84 per share, derived from net
realized gains, payable on January 9, 1998, to shareholders of record on
December 31, 1997.
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FEDERAL INCOME TAX INFORMATION (UNAUDITED):
For the year ended December 31, 1997, the Fund designates $12,739,000 as
long-term capital gain at the 28% tax bracket and $15,717,000 at the 20% tax
bracket. The Fund also expects to pass through to shareholders foreign tax
credits of approximately $303,000. In addition, for the year ended December 31,
1997, gross income derived from sources within foreign countries amounted to
$10,933,000.
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REPORT OF INDEPENDENT ACCOUNTANTS
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To the Shareholders and Board of Directors of
Morgan Stanley Africa Investment Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Morgan Stanley Africa Investment Fund, Inc. (the "Fund") at December 31, 1997,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended and the financial
highlights for each of the three years in the period then ended and for the
period February 14, 1994 (commencement of operations) through December 31, 1994,
in conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1997 by
correspondence with the custodians and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 18, 1998
16
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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 American Stock Transfer
& Trust Company (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 and 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. The provisions of the
Plan have been modified to conform to the above description regarding the option
of Participants to make additional voluntary cash payments to the Plan on an
annual, rather than monthly, basis. Requests for additional information or any
correspondence concerning the Plan should be directed to the Plan Agent at:
Morgan Stanley Africa Investment Fund, Inc.
American Stock Transfer & Trust Company
Dividend Reinvestment and Cash Purchase Plan
40 Wall Street
New York, NY 10005
1-800-278-4353
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