<PAGE>
- -------------------------------------------------------------------------------
MORGAN STANLEY
AFRICA INVESTMENT
FUND, INC.
- -------------------------------------------------------------------------------
SEMI-ANNUAL REPORT
JUNE 30, 1998
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
MORGAN STANLEY
AFRICA INVESTMENT FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Barton M. Biggs
CHAIRMAN OF THE BOARD
OF DIRECTORS
Michael F. Klein
PRESIDENT AND DIRECTOR
Peter J. Chase
DIRECTOR
John W. Croghan
DIRECTOR
David B. Gill
DIRECTOR
Graham E. Jones
DIRECTOR
John A. Levin
DIRECTOR
William G. Morton, Jr.
DIRECTOR
Stefanie V. Chang
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Valerie Y. Lewis
SECRETARY
Joanna M. Haigney
TREASURER
Belinda A. Brady
ASSISTANT TREASURER
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- -------------------------------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
- -------------------------------------------------------------------------------
CUSTODIANS
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
- -------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT
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
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
For additional Fund information, including the Fund's net asset value per share
and information regarding the investments comprising the Fund's portfolio,
please call 1-800-221-6726.
<PAGE>
LETTER TO SHAREHOLDERS
- ------------
For the six months ended June 30, 1998, the Morgan Stanley Africa Investment
Fund, Inc. (the "Fund") had a total return, based on net asset value per share,
of 8.84% compared to -5.64% for the Fleming Africa Index including South Africa
(the "Index"). For the one year ended June 30, 1998, and for the period since
the Fund's commencement of operations on February 14, 1994 through June 30,
1998, the Fund's total return, based on net asset value per share, was -11.07%
and 64.45%, respectively, compared to -22.67% and 27.71%, respectively, for the
Index. On June 30, 1998, the closing price of the Fund's shares on the New York
Stock Exchange was $11 7/8, representing a 24.2% discount to the Fund's net
asset value per share.
SOUTH AFRICA
The South African rand came under extreme pressure during the months of May and
June, reacting to movements in the Japanese yen and South East Asian currencies.
The rand slipped from 5.03 per U.S. dollar to 5.87 per U.S. dollar, or 17%,
during the second quarter. The South African Reserve Bank used approximately
$10 billion defending the currency, resulting in a further deterioration of the
net reserve account, while interest rates rose by approximately 6%. The
Johannesburg Stock Exchange All-Share Index fell by 10% in local currency terms
during the second quarter, bringing the market losses to 23% in dollar terms.
The weakness in the currency and the reversal of interest rate trends have
dramatically altered the short-term investment thesis for the country. The
expectation of interest rate cuts and acceleration of economic growth had driven
the market to a 29% gain in the first few months of the year, but downward
revisions of the country's growth prospects and the fall in the currency
resulted in poor market performance, now down 10% for the first six months of
1998. We have reduced our expectation for gross domestic product growth for 1998
and 1999 from 1.5% and 3.5% to 0.5% and 1.5%, respectively. Consequently, we
have increased our exposure to businesses with revenues in hard currency and
costs in rand, which include the commodity exporters, as they should outperform
in the short term.
During the period of currency depreciation, the Fund had hedged a significant
portion of its South African rand and Botswanan pula exposure (the Botswanan
currency is pegged to the rand), and thus did not sustain the full loss implied
by the weaker exchange rate.
EGYPT
The Egyptian market continued its disappointing performance during the second
quarter as the EFG Index fell 14.1%. The issue of taxation of interest income
from Treasury Bills was finally resolved at the end of June in a more lenient
manner than previously anticipated. Bank shares reacted positively, but the
news failed to ignite a market-wide rally. The pace of privatization has been
slow in 1998, but should gather momentum after progress in discussions on the
sale of government-owned banks leads to transactions in the coming six months.
Misr Telecom, the state-owned wireline telecommunications provider, is also
slated to be partially auctioned within the next six to twelve months. The
construction sector continues its leadership of economic expansion, with cement
sales and upper-income residential building increasing sharply. Capacity in
both of these segments is increasing and should meet or exceed demand within
three years.
We continue to favor the consumer goods and infrastructure segments, taking
advantage of positive sector trends. We are particularly keen on Al-Ahram
Beverages, the alcoholic and non-alcoholic beer monopoly, which trades at a
price-earnings ratio of 12 times and should register 25% earnings per share
growth for the next three years.
ZIMBABWE
The situation in Zimbabwe deteriorated over the course of the second quarter as
the convergence of falling tobacco prices, the country's main crop and one of
the principal sources of hard currency, and a major fraud in the financial
system broke confidence and put further emphasis on the weak state of government
finances. Tobacco prices recuperated somewhat towards the middle of the
quarter, though the average realized price is expected to be 20% lower than in
1997. In the financial sector, the issuance of fraudulent government agency
bonds approximately equivalent to $50 million sent shockwaves through the system
and still remains unresolved.
Inflation remains high and the social impact of rising prices is beginning to be
felt, with government trying to control prices of essential goods. The exchange
rate slipped 12% from March to June, as a result of feeble inflows from tobacco
sales and a worsening global environment for commodities. The International
Monetary Fund agreed to disburse $52 million out of a $172 million program,
breathing some life into the country's economic prospects and restoring
sentiment. The market fell 27.6% during the quarter, as measured by the Fleming
Zimbabwe Index.
2
<PAGE>
GHANA
The market in Ghana moderated its first quarter pace, with the Databank Ghana
Index gaining 12.7% in the three months ended June 30, 1998 and recording a
healthy 81% rise since the beginning of the year. Concerns over nationwide
power shortages waned with the return of rainfall to fuel the hydroelectric
plants. Local interest rates were cut several times, declining by 6% in
aggregate over the three months ended June 30, 1998 as a response to the falling
inflation which currently stands around the 20% level. The Fund maintains its
significant overweight position in Ghana as valuations remain cheap with the
market trading at a price-earnings ratio of 5.7 times 1998 forecast earnings
while the domestic macroeconomic environment continues to improve.
MAURITIUS
The market in Mauritius rose 5.6% during the second quarter, as foreign
investors returned to the market lured by attractive valuations. The economy
continued to perform well, with projected growth and inflation at 5.5% and 7%,
respectively. The banking and tourism sectors, where the Fund is concentrated,
continue to outperform.
On July 1, 1998, the Fund announced that its Board of Directors had authorized a
share repurchase program for the Fund for purposes of enhancing shareholder
value and reducing the discount at which the Fund's shares traded from their net
asset value. The Fund commenced the repurchase program on July 2nd and will
continue to repurchase the Fund's outstanding shares at such time and in such
amounts as it believes will further the accomplishment of the foregoing
objectives, subject to review by the Board of Directors. We will update you on
the progress of the repurchase program in future shareholder reports.
Beginning with this report, we are discontinuing our practice of designating and
individual portfolio manager to sign our reports to shareholders in order to
better reflect the "Team" investment approach of the Fund's investment adviser,
Morgan Stanley Asset Management ("MSAM"). The global emerging markets team at
MSAM has general oversight of the investment management of the Fund. Jaideep
Khanna continues to have primary responsibility for the day-to-day management of
the Fund's assets.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
July 1998
3
<PAGE>
Morgan Stanley Africa Investment Fund, Inc.
Investment Summary as of June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION TOTAL RETURN (%)
---------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (3)
--------------------- ---------------------- ------------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
---------- --------- ----------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fiscal Year to Date 3.64% -- 8.84% -- -5.64% --
One Year -20.11 -20.11% -11.07 -11.07% -22.67 -22.67%
Since Inception* 24.62 5.16 64.45 12.04 27.71 5.70
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION (2)
[GRAPH]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
ENDED
JUNE 30,
1994* 1995 1996 1997 1998
------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value Per Share........... $14.43 $17.05 $16.86 $14.45 $15.67
Market Value Per Share.............. $11.38 $12.88 $13.63 $11.50 $11.88
Premium/(Discount).................. -21.1% -24.5% -19.2% -20.4% -24.2%
Income Dividends.................... $0.54 $ 0.96 $0.14 $0.30 $0.05
Capital Gains Distributions......... -- $ 0.01 $1.23 $2.25 $0.00#
Fund Total Return (2)............... 7.34% 26.14% 8.64% 2.69% 8.84%
Index Total Return (3).............. 38.41% 14.81% -10.72% -4.61% -5.64%
</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 Fleming Africa Index including South Africa 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.
# Amount is less than U.S.$0.01 per share.
4
<PAGE>
Morgan Stanley Africa Investment Fund, Inc.
Portfolio Summary as of June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<CAPTION>
<S> <C>
Equity Securities (94.8%)
Short-Term Investments (4.5%)
Debt Instruments (0.7%)
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
[CHART]
<TABLE>
<CAPTION>
<S> <C>
Banking (19.6%)
Beverages & Tobacco (11.4%)
Building Materials & Components (2.5%)
Business & Public Services (3.7%)
Chemicals (5.2%)
Financial Services (2.9%)
Food & Household Products (2.6%)
Merchandising (7.5%)
Multi-Industry (16.8%)
Real Estate (3.3%)
Other (24.5%)
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[CHART]
<TABLE>
<CAPTION>
<S> <C>
South Africa (26.8%)
Egypt (19.8%)
Ghana (11.6%)
Mauritius (11.5%)
Zimbabwe (11.4%)
Botswana (5.1%)
Kenya (2.1%)
Morocco (2.1%)
Zambia (0.9%)
Ivory Coast (0.7%)
Other (8.0%)
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. State Bank of Mauritius Ltd. (Mauritius) 5.8%
2. Meikles Africa Ltd. (Zimbabwe) 4.3
3. Sechaba Breweries Ltd. (Botswana) 4.2
4. New Africa Investments Ltd. (South Africa) 3.9
5. Delta Corp., Ltd. (Zimbabwe) 3.7
6. Standard Chartered Bank (Ghana) 3.3
7. Social Security Bank Ltd. (Ghana) 3.0
8. Primedia Ltd. (South Africa) 2.3
9. Mauritius Commercial Bank (Mauritius) 2.3
10. The Education Investment Corp., Ltd.
(South Africa) 2.2
-----
35.0%
-----
-----
</TABLE>
* Excludes short-term investments.
5
<PAGE>
FINANCIAL STATEMENTS
- -------
STATEMENT OF NET ASSETS (Unaudited)
- -------
JUNE 30, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (92.4%)
(Unless otherwise noted)
- --------------------------------------------------------------------------------
BOTSWANA (5.1%)
BANKING
Barclays Bank of Botswana 170,000 U.S.$ 784
First National Bank of Botswana 140,000 500
Standard Chart Bank of Botswana 210,000 1,089
--------------
2,373
--------------
BEVERAGES & TOBACCO
Sechaba Breweries Ltd. 7,571,450 10,035
--------------
12,408
--------------
- --------------------------------------------------------------------------------
EGYPT (19.8%)
BANKING
(a) Al Watany Bank of Egypt 22,014 265
Commercial International Bank 5,681 63
National Societe Generale Bank 82,423 1,522
--------------
1,850
--------------
BEVERAGES & TOBACCO
Al-Ahram Beverages Co. 28,650 1,831
Al-Ahram Beverages Co. GDR 104,500 3,286
Eastern Tobacco 256,150 4,594
--------------
9,711
--------------
BUILDING MATERIALS & COMPONENTS
Ameriyah Cement Co. 435 7
Helwan Portland Cement Co. 11,650 176
Suez Cement Co. 149,100 2,706
Suez Cement Co. GDR 6,600 122
Torah Portland Cement Co. 150,770 2,597
--------------
5,608
--------------
CHEMICALS
Egyptian Finance & Industrial Co. 224,900 4,813
Paints & Chemical Industries 19,510 561
Paints & Chemical Industries GDR 325,900 2,884
--------------
8,258
--------------
CONSTRUCTION & HOUSING
(a) Arabian International Construction 46,000 1,942
--------------
ELECTRICAL & ELECTRONICS
Egyptian Electro Cables 21,780 383
--------------
FOOD & HOUSEHOLD PRODUCTS
Central Flour Mills 110 1
North Cairo Flour Mills 5,855 99
--------------
100
--------------
MERCHANDISING
MSIR Free Shops Co. 103,420 1,213
--------------
MULTI-INDUSTRY
Industrial Engineering Enterprises Co. 228,138 3,712
--------------
REAL ESTATE
(a) Alexandria Real Estate Investment Co. 28,000 U.S.$1,309
Helioplis Housing 15,000 1,499
Madinet Nasr Housing & Development 105,790 5,063
--------------
7,871
--------------
TEXTILES & APPAREL
KABO-El Nasr Clothing & Textile Co. 110,850 2,437
--------------
UTILITIES - ELECTRICAL & GAS
Egypt Gas Co. 50,000 4,791
--------------
47,876
--------------
- --------------------------------------------------------------------------------
GHANA (11.6%)
AUTOMOBILES
(a)Mechanical Lloyd Co., Ltd. 2,000,000 153
--------------
BANKING
Ghana Commercial Bank 5,394,580 3,823
Social Security Bank Ltd. 6,560,000 7,353
Standard Chartered Bank 940,500 8,078
--------------
19,254
--------------
BEVERAGES & TOBACCO
(a) Guinness Ghana Ltd. 3,800,979 1,959
(a) Kumasi Brewery Ltd. 336,000 433
Pioneer Tobacco Co., Ltd. 5,906,600 1,649
--------------
4,041
--------------
FINANCIAL SERVICES
(a) Home Finance Co. 2,345,700 755
--------------
FOOD & HOUSEHOLD PRODUCTS
(a) Unilever Ghana Ltd. 2,494,900 2,250
--------------
MANUFACTURING
Aluworks Ghana Ltd. 1,200,000 1,546
--------------
METALS -- NON-FERROUS
(a) Ghana Pioneer Aluminum Factory 1,043,400 202
--------------
28,201
--------------
- --------------------------------------------------------------------------------
IRELAND (0.6%)
MINING
(a) Kenmare Resources plc 3,565,000 597
--------------
OIL & GAS
(a) Tuskar Resources plc 17,829,000 745
--------------
1,342
--------------
- --------------------------------------------------------------------------------
IVORY COAST (0.7%)
MISCELLANEOUS MATERIALS & COMMODITIES
(a) SOC Ivoirienne de Coco Rappe 24,000 795
--------------
MULTI-INDUSTRY
(a) Filature Tissages Sacs 20,000 1,008
--------------
1,803
--------------
- ------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
KENYA (2.1%)
BANKING
Kenya Commercial Bank Ltd. 991,326 U.S.$ 1,166
National Industrial Credit Bank 311,551 215
--------------
1,381
--------------
CONSTRUCTION & HOUSING
Athi River Mining Ltd. 3,262,500 494
--------------
INDUSTRIAL COMPONENTS
Firestone East Africa Ltd. 3,171,300 906
--------------
MERCHANDISING
Uchumi Supermarket Ltd. 2,501,107 1,933
--------------
UTILITIES -- ELECTRICAL & GAS
Kenya Power & Lighting Co., Ltd. 100,000 319
--------------
5,033
--------------
- --------------------------------------------------------------------------------
MALAWI (0.5%)
FOOD & HOUSEHOLD PRODUCTS
(a) Sugar Corp. of Malawi 7,160,000 1,085
--------------
- --------------------------------------------------------------------------------
MAURITIUS (11.5%)
BANKING
Mauritius Commercial Bank 1,202,145 5,602
State Bank of Mauritius Ltd. 20,842,469 13,923
--------------
19,525
--------------
FOOD & HOUSEHOLD PRODUCTS
Happy World Foods Ltd. 1,457,634 938
--------------
LEISURE & TOURISM
New Mauritus Hotels 1,616,112 3,499
--------------
MULTI-INDUSTRY
Rogers and Co., Ltd. 602,081 3,848
--------------
27,810
--------------
- --------------------------------------------------------------------------------
MOROCCO (2.1%)
MULTI-INDUSTRY
Credor 30,000 3,113
SNI Maroc 20,852 2,001
--------------
5,114
--------------
- --------------------------------------------------------------------------------
SOUTH AFRICA (26.1%)
BANKING
NBS Boland Group Ltd. 1,001,260 1,303
--------------
BEVERAGES & TOBACCO
Amalgamated Beverage Industries Ltd. 409,700 3,565
Suncrush Ltd. 151,300 319
--------------
3,884
--------------
BROADCASTING & PUBLISHING
Primedia Ltd. 856,000 5,626
--------------
BUSINESS & PUBLIC SERVICES
Persetel Holdings Ltd. 400,000 3,581
The Education Investment Corp., Ltd. 2,913,850 5,292
--------------
8,873
--------------
CHEMICALS
Polfin Ltd. 1,000,000 U.S.$ 895
SASOL Ltd. 330,242 1,917
(a) SASOL Ltd. 8.50% (Convertible Preferred) 294,400 1,641
--------------
4,453
--------------
CONSTRUCTION & HOUSING
Concor Ltd. 294,522 761
--------------
ELECTRICAL & ELECTRONICS
DataTec Ltd. 179,000 3,327
--------------
ENERGY SOURCES
(a) Energy Africa Ltd. 144,700 483
Engen Ltd. 133,300 369
--------------
852
--------------
FINANCIAL SERVICES
ABSA Group Ltd. 253,770 1,586
Coronation Holdings Ltd. 131,400 2,042
Orion Selections Ltd. 823,000 1,022
Orion Selections Holdings Ltd. 488,000 825
(a) Real Africa Durolink Holdings Ltd. 1,000,000 676
--------------
6,151
--------------
LEISURE & TOURISM
Spur Holdings Ltd. 646,700 568
Sun International Ltd. 2,518,371 851
--------------
1,419
--------------
MACHINERY & ENGINEERING
Howden Africa Holdings Ltd. 2,010,172 628
--------------
MERCHANDISING
(a) New Clicks Holdings Ltd. 3,831,500 4,822
--------------
METALS -- STEEL
Iscor Ltd. 12,638,700 2,391
--------------
MULTI-INDUSTRY
Bidvest Group Ltd. 403,430 3,084
(a) First South Africa Corp. 278,404 1,166
(a) First South Africa Corp.
(Warrants), expiring 1/24/01 5 --
(a) New Africa Investments Ltd. (Preferred) "N" 8,849,700 9,494
--------------
13,744
--------------
RETAIL -- MAJOR DEPARTMENT STORES
Edgars Stores Ltd. 120,000 1,064
Ellerine Holdings Ltd. 300,000 1,647
Protea Furnishers Ltd. 2,066,582 1,467
Woolworths Holdings Ltd. 1,190,000 884
--------------
5,062
--------------
63,296
--------------
- --------------------------------------------------------------------------------
ZAMBIA (0.9%)
FOOD & HOUSEHOLD PRODUCTS
Zambia Sugar Co., Ltd. 151,371,609 1,456
--------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
ZAMBIA (CONTINUED)
MINING
(a) Zambia Consolidated Copper Mines 600,000 U.S.$ 795
--------------
2,251
--------------
- --------------------------------------------------------------------------------
ZIMBABWE (11.4%)
BANKING
NMBZ Holdings Ltd. 2,284,000 1,798
--------------
BUILDING MATERIALS & COMPONENTS
PG Industries Ltd. 1,713,446 123
Portland Holdings Ltd. 400,000 289
(a) Portland Holdings Ltd.
13.00% (Convertible Preferred) 25,000 18
--------------
430
--------------
ENERGY SOURCES
Wankie Colliery Co. Ltd. 7,871,900 1,311
--------------
FOOD & HOUSEHOLD PRODUCTS
Eastern Highland Plantation 3,375,659 440
--------------
LEISURE & TOURISM
Zimbabwe Sun Ltd. 6,617,338 1,029
--------------
MERCHANDISING
Meikles Africa Ltd. 8,419,880 10,314
--------------
METALS -- NON-FERROUS
Bindura Nickel Corp., Ltd. 658,750 62
--------------
MULTI-INDUSTRY
CFI Holdings 1,054,300 44
Delta Corp., Ltd. 13,497,630 8,844
TA Holdings Ltd. 11,432,100 666
Trans Zambezi Industries Ltd. 6,012,410 751
(a) Trans Zambezi Industries Ltd.
ADR 144A 5,000,000 625
Trans Zambezi Industries Ltd. - New 360,000 45
TSL Ltd. 3,477,000 579
--------------
11,554
--------------
TEXTILES & APPAREL
Spinweave 4,448,000 124
--------------
WHOLESALE & INTERNATIONAL TRADE
Interfresh Ltd. 15,000,000 583
--------------
27,645
--------------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost U.S.$210,910) 223,864
--------------
- --------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
DEBT INSTRUMENT (0.7%)
- --------------------------------------------------------------------------------
SOUTH AFRICA (0.7%)
MULTI-INDUSTRY
(b) First South Africa Corp. 9.00%, 6/15/04
(Cost U.S.$2,252) U.S.$ 2,500 U.S.$ 1,588
--------------
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (3.1%)
- --------------------------------------------------------------------------------
UNITED STATES (3.1%)
REPURCHASE AGREEMENT
Chase Securities, Inc. 5.40%,
dated 6/30/98, due 7/1/98, to be
repurchased at U.S.$7,501, collateralized
by U.S.$6,655, United States Treasury
Bonds, 6.625%, due 2/15/27, valued at
U.S.$7,678
(Cost U.S.$7,500) 7,500 7,500
--------------
- --------------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (1.3%)
Egyptian Pound EGP 1,315 386
Ghana Cedi GHC 1,074,611 462
South African Rand ZAR 13,225 2,234
Zimbabwe Dollar ZWD 1,109 61
--------------
(Cost U.S.$3,283) 3,143
--------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (97.5%)
(Cost U.S.$223,945) U.S.$ 236,095
--------------
- --------------------------------------------------------------------------------
OTHER ASSETS (5.5%)
Cash U.S.$ 373
Net Unrealized Gain on Foreign Currency
Exchange Contracts 9,067
Receivable for Investments Sold 1,822
Dividends Receivable 1,810
Interest Receivable 227
Deferred Organization Costs 7
Other Assets 29 13,335
----------- -------------
- --------------------------------------------------------------------------------
LIABILITIES (-3.0%)
Payable for:
Investments Purchased (5,730)
Distributions Declared (730)
Custodian Fees (410)
Investment Advisory Fees (247)
Directors' Fees and Expenses (49)
Professional Fees (43)
Shareholder Reporting Expenses (42)
Administrative Fees (22)
Other Liabilities (20) (7,293)
----------- -------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
AMOUNT
(000)
- ------------------------------------------------------------------------------
<S> <C>
NET ASSETS (100%)
Applicable to 15,448,477, issued
and outstanding U.S.$0.01 par value
shares (100,000,000 shares authorized) U.S.$ 242,137
-------------
-------------
- ------------------------------------------------------------------------------
NET ASSETS VALUE PER SHARE U.S.$ 15.67
-------------
-------------
- ------------------------------------------------------------------------------
AT JUNE 30, 1998, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------
Common Stock U.S.$ 154
Capital Surplus 216,929
Undistributed Net Investment Income 3,308
Accumulated Net Realized Gain 347
Unrealized Appreciation on Investments and
Foreign Currency Translations 21,399
- ------------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$ 242,137
-------------
-------------
- ------------------------------------------------------------------------------
</TABLE>
(a) -- Non-income producing
(b) -- Security valued at fair value -- see note A-1 to
financial statements.
@ -- Amount is less than U.S.$500.
144A -- Certain conditions for public sale may exist.
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
- ------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30,
1998, the Fund is obligated to deliver or is to receive foreign currency
in exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN UNREALIZED
TO EXCHANGE GAIN
DELIVER VALUE SETTLEMENT FOR VALUE (LOSS)
(000) (000) DATE (000) (000) (000)
- ------------ ----------- ---------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
U.S.$ 822 U.S.$ 822 07/03/98 GHC 1,907,059 U.S. $ 819 U.S. $ (3)
ZAR 182,612 29,936 09/08/98 U.S.$ 34,766 34,766 4,830
39,915 6,538 09/10/98 7,500 7,500 962
55,210 9,016 09/17/98 10,000 10,000 984
40,088 6,544 09/18/98 7,245 7,245 701
40,088 6,544 09/18/98 7,257 7,257 713
40,633 6,459 12/23/98 7,000 7,000 541
27,135 4,161 06/23/99 4,500 4,500 339
----------- ----------- ----------
U.S.$70,020 U.S.$79,087 U.S.$9,067
----------- ----------- ----------
----------- ----------- ----------
- ------------------------------------------------------------------------------
<CAPTION>
JUNE 30, 1998 EXCHANGE RATES:
- ------------------------------------------------------------------------------
<S> <C> <C>
EGP Egyptian Pound 3.411 = U.S. $1.00
GHC Ghana Cedi 2,328.500 = U.S. $1.00
ZAR South African Rand 5.919 = U.S. $1.00
ZWD Zimbabwe Dollar 18.010 = U.S. $1.00
</TABLE>
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUMMARY OF TOTAL INVESTMENTS BY INDUSTRY
CLASSIFICATION -- JUNE 30, 1998
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
- ------------------------------------------------------------------------------
<S> <C> <C>
Automobiles U.S.$ 153 0.1%
Banking 47,484 19.6
Beverages & Tobacco 27,671 11.4
Broadcasting & Publishing 5,626 2.3
Building Materials & Components 6,038 2.5
Business & Public Services 8,873 3.7
Chemicals 12,711 5.2
Construction & Housing 3,197 1.3
Electrical & Electronics 3,710 1.5
Energy Sources 2,163 0.9
Financial Services 6,906 2.9
Food & Household Products 6,269 2.6
Industrial Components 906 0.4
Leisure & Tourism 5,947 2.5
Machinery & Engineering 628 0.3
Manufacturing 1,546 0.6
Merchandising 18,282 7.5
Metals -- Non-Ferrous 264 0.1
Metals -- Steel 2,391 1.0
Mining 1,392 0.6
Miscellaneous Materials & Commodities 795 0.3
Multi-Industry 40,568 16.8
Oil & Gas 744 0.3
Real Estate 7,871 3.3
Retail -- Major Department Stores 5,062 2.1
Textiles & Apparel 2,561 1.1
Utilities -- Electrical & Gas 5,111 2.1
Wholesale & International Trade 583 0.2
Other 10.643 4.3
------------ ----
U.S.$236,095 97.5%
------------ ----
------------ ----
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF TOTAL INVESTMENTS BY COUNTRY --
JUNE 30, 1998
PERCENT
VALUE OF NET
COUNTRY (000) ASSETS
- ------------------------------------------------------------------------------
<S> <C> <C>
Botswana U.S.$12,408 5.1%
Egypt 47,876 19.8
Ghana 28,201 11.6
Ireland 1,342 0.6
Ivory Coast 1,803 0.7
Kenya 5,033 2.1
Malawi 1,085 0.5
Mauritius 27,810 11.5
Morocco 5,114 2.1
South Africa 64,884 26.8
United States (short-term investment) 7,500 3.1
Zambia 2,251 0.9
Zimbabwe 27,645 11.4
Other 3,143 1.3
------------ ----
U.S.$236,095 97.5%
------------ ----
------------ ----
</TABLE>
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1998
(UNAUDITED)
STATEMENT OF OPERATIONS (000)
- ------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends. . . . . . . . . . . . . . . . . . . . . . . U.S.$ 5,699
Interest . . . . . . . . . . . . . . . . . . . . . . . . 286
Less: Foreign Taxes Withheld . . . . . . . . . . . . . . (226)
- ------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . 5,759
- ------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees . . . . . . . . . . . . . . . . 1,507
Custodian Fees . . . . . . . . . . . . . . . . . . . . . 383
Administrative Fees. . . . . . . . . . . . . . . . . . . 130
Professional Fees . . . . . . . . . . . . . . . . . . . 57
Shareholder Reporting Expenses . . . . . . . . . . . . . 34
Directors' Fees and Expenses . . . . . . . . . . . . . . 29
Transfer Agent Fees . . . . . . . . . . . . . . . . . . 7
Other Expenses . . . . . . . . . . . . . . . . . . . . . 76
- ------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . 2,223
- ------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . 3,536
- ------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . . . . 4,311
Foreign Currency Transactions . . . . . . . . . . . . . (511)
- ------------------------------------------------------------------------------
Net Realized Gain. . . . . . . . . . . . . . . . . . . 3,800
- ------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Appreciation on Investments . . . . . . . . . . . . . . 3,058
Appreciation on Foreign Currency Translations . . . . . 9,270
- ------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation . . . . 12,328
- ------------------------------------------------------------------------------
Total Net Realized Gain and Change in Unrealized
Appreciation/Depreciation . . . . . . . . . . . . . . . 16,128
- ------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS . . U.S.$ 19,664
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- ------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income. . . . . . . . . . . U.S.$ 3,536 U.S.$ 5,273
Net Realized Gain. . . . . . . . . . . . . 3,800 24,986
Change in Unrealized
Appreciation/Depreciation. . . . . . . . 12,328 (28,174)
- ------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations . . . . . . . . . . . . . . . 19,664 2,085
- ------------------------------------------------------------------------------
Distributions:
Net Investment Income. . . . . . . . . . . (693) (4,710)
Net Realized Gains . . . . . . . . . . . . (37) (31,278)
In Excess of Net Realized Gains. . . . . . -- (3,416)
- ------------------------------------------------------------------------------
Total Distributions. . . . . . . . . . . . (730) (39,404)
- ------------------------------------------------------------------------------
Total Increase (Decrease). . . . . . . . . 18,934 (37,319)
Net Assets:
Beginning of Period. . . . . . . . . . . . 223,203 260,522
- ------------------------------------------------------------------------------
End of Period (including undistributed net
investment income of U.S.$3,308 and
U.S.$465, respectively). . . . . . . . . . U.S.$ 242,137 U.S.$ 223,203
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31, PERIOD FROM
SELECTED PER SHARE JUNE 30, 1998 ------------------------------------------- FEBRUARY 14, 1994* TO
DATA AND RATIOS: (UNAUDITED) 1997 1996 1995 DECEMBER 31, 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . U.S.$ 14.45 U.S.$ 16.86 U.S.$ 17.05 U.S.$ 14.43 U.S.$ 14.10
- --------------------------------------------------------------------------------------------------------------------------------
Offering Costs . . . . . . . . . . . . . . . -- -- -- -- (0.05)
- --------------------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . 0.23 0.34 0.35 0.64 0.54
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . 1.04 (0.20) 0.83 2.95 0.38
- --------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations . . . . 1.27 0.14 1.18 3.59 0.92
- --------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income . . . . . . . . . . (0.05) (0.30) (0.14) (0.96) (0.54)
In Excess of Net Investment Income . . . . -- -- -- (0.00)# (0.00)#
Net Realized Gains . . . . . . . . . . . . (0.00)# (2.04) (1.23) (0.01) --
In Excess of Net Realized Gains . . . . . -- (0.21) -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . (0.05) (2.55) (1.37) (0.97) (0.54)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . U.S.$ 15.67 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.$ 11.88 U.S.$ 11.50 U.S.$ 13.63 U.S.$ 12.88 U.S.$ 11.38
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value . . . . . . . . . . . . . . . 3.64% 1.13% 16.26% 20.84% (15.37%)
Net Asset Value (1) . . . . . . . . . . . 8.84% 2.69% 8.64% 26.14% 7.34%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS) . . . U.S.$242,137 U.S.$223,203 U.S.$260,522 U.S.$236,428 U.S.$222,929
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets . . 1.79%** 1.77% 1.79% 1.77% 1.87%**
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . 2.84%** 1.72% 2.11% 4.18% 4.47%**
Portfolio Turnover Rate. . . . . . . . . . . 22% 40% 68% 66% 32%
- --------------------------------------------------------------------------------------------------------------------------------
</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.
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
- --------------------
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. 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 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 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.
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 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
14
<PAGE>
$100,000 per annum. In addition, the Fund is charged certain out-of-pocket
expenses by the Administrator. The Chase Manhattan Bank acts as custodian
for the Fund's assets held in the United States.
D. Morgan Stanley Trust Company (the "International Custodian"), an
affiliate of the Adviser, acts as custodian for the Fund's assets held
outside the United States in accordance with a Custody Agreement.
International Custodian fees are payable monthly based on Fund assets under
custody plus an amount for each transaction effected. For the six months
ended June 30, 1998, international custodian fees totaled $379,000, of
which $379,000 was payable to the International Custodian at June 30, 1998.
In addition, for the six months ended June 30, 1998, the Fund has earned
interest income of $7,000 and incurred interest expense of $34,000 on
balances with the International Custodian.
E. For the six months ended June 30, 1998, the Fund made purchases and
sales totaling approximately $55,039,000 and $58,246,000 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. For the six months ended June 30, 1998, the Fund
placed a portion of its portfolio transactions with affiliated
broker/dealers. Accordingly, the Fund incurred brokerage commissions of
$2,000 with Morgan Stanley & Co. Incorporated, an affiliate of the Adviser,
for the six months ended June 30, 1998. At June 30, 1998, the U.S.
Federal income tax cost basis of securities was 220,662,000 and,
accordingly, net unrealized appreciation for U.S. Federal income tax
purposes was $12,290,000 of which $50,663,000 related to appreciated
securities and $38,373,000 related to depreciated securities.
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 June 30, 1998 totaled $38,000 and are included
in Payable for Directors' Fees and Expenses on the Statement of Net Assets.
I. During June 1998, the Board declared distributions of $0.0449 and
$0.0024 per share, derived from net investment income and net realized
gains, respectively, payable on July 15, 1998, to shareholders of record
on June 30, 1998. Also in June, the Board of Directors amended your Fund's
by-laws to require advance notice of any proposals to be made at
stockholders' meetings. For annual meetings the notice must be given to
the Fund's secretary at least 60 days before the anniversary date of the
previous year's annual meeting. This year's annual meeting of stockholders
was held on June 24. This provision was adopted to permit the Fund's
stockholders and Directors to consider every stockholder proposal on an
informed basis and in an organized fashion, taking into account the
interests of all affected constituencies.
15
<PAGE>
J. Supplemental Proxy Information
The Annual Meeting of the Stockholders of the Morgan Stanley Africa Investment
Fund, Inc. was held on June 24, 1998. The following is a summary of each
proposal presented and the total number of shares voted:
<TABLE>
<CAPTION>
VOTES IN VOTES AUTHORITY VOTES
PROPOSAL: FAVOR OF AGAINST WITHHELD ABSTAINED
- -------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
1. To elect the following Directors: Michael F. Klein . . . . 7,967,337 -- 3,821,608 --
Barton M. Biggs. . . . . 7,972,885 -- 3,816,044 --
John A Levin . . . . . . 7,972,885 -- 3,816,044 --
William G. Morton, Jr. . 7,972,885 -- 3,816,044 --
2. To ratify the selection of PricewaterhouseCoopers LLP as
independent accountants of the Fund. . . . . . . . . . . . . 11,707,105 41,640 -- 40,185
</TABLE>
16
<PAGE>
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
each shareholder will be deemed to have elected, unless 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
17
