<PAGE>
---------------------------------------------------------------------------
MORGAN STANLEY
AFRICA INVESTMENT
FUND, INC.
---------------------------------------------------------------------------
ANNUAL REPORT
DECEMBER 31, 1998
MORGAN STANLEY DEAN WITTER INVESTMENT
MANAGEMENT INC.
INVESTMENT ADVISER
MORGAN STANLEY
AFRICA INVESTMENT FUND, INC.
---------------------------------------------------------------------------
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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 Dean Witter Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
- --------------------------------------------------------------------------------
CUSTODIAN
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT
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 year ended December 31, 1998, the Morgan Stanley Africa Investment Fund,
Inc. (the "Fund") had a total return, based on net asset value per share, of
- -11.82% compared to -17.46% for the Fleming Africa Index including South Africa
(the "Index"). For the period since the Fund's commencement of operations on
February 14, 1994 through December 31, 1998, the Fund's total return, based on
net asset value per share, was 33.22% compared to 16.77% for the Index. On
December 31, 1998, the closing price of the Fund's shares on the New York Stock
Exchange was $8 3/8, representing a 28.3% discount to the Fund's net asset value
per share.
SOUTH AFRICA
The South African market turned in a disappointing performance for the year
ended December 31, 1998, falling by 28.2%, despite a 5.7% bounce in the fourth
quarter of the year. The market fell victim to weak commodity prices, a
critical component of exports and economic activity, and loss of confidence in
emerging markets, which resulted in the volatile devaluation of the currency and
a sharp spike in local interest rates.
The Rand exchange rate ended the year 18% weaker against the dollar, reflecting
the weaker trade and current account balances which resulted from commodity
price behavior, the outflow of portfolio funds and speculative pressure. We
expect the Rand to weaken in real terms in 1999 due to the country's lack of
foreign reserves. Interest rates are now in a gradual decline, whose pace will
be dictated by global sentiment on emerging markets and the policy of the
Reserve Bank, which has tended to favor fighting inflation versus growth. The
economy is likely to record no GDP growth in 1998 as the third quarter number
came in at a disheartening -2.8%. We expect the economy to contract by about 1%
in 1999, though the pace of interest rate cuts and the behavior of commodity
prices will be key in determining the actual outcome. The real economy, while
weakened by the effect of high interest rates and low confidence, remains quite
sound as a result of prudent fiscal management and a strong, well-managed
banking system.
Presidential elections will be held in May, which Deputy President Thabo Mbeki,
Nelson Mandela's pragmatic right-hand man, is expected to win. On the
corporate front, the massive restructuring of conglomerates continues, and some
of the premier companies are slowly becoming multinationals. The quality of
South African corporate management and their understanding of shareholding
culture is among the best in the emerging market universe.
We are cautiously optimistic on the market for 1999 (our relative underweight
simply means we like other markets even more), as we see a benign effect from
interest rate reduction and corporate restructuring. We continue to be heavily
underweight in the commodity stocks but should be on the lookout for any signs
of a bottom in metal prices. Our bias is in the banking sector, which should
benefit the most from the fall in rates and on the media sector where our
largest South African holding, Primedia, combines a strong franchise, good
earnings performance and a very attractive valuation.
EGYPT
Egypt fell prey to the emerging market sell-off, as the EFG Index depreciated by
25.4% for the year ended December 31, 1998. The current account deteriorated to
- -2.6% of GDP, a direct result of the fall in tourism following the Luxor
terrorist incident and the decline in the oil price, which constitutes 50% of
exports. The economy, however, powered ahead at a rate above 5% and earnings
reports were generally good. Privatization achieved no meaningful progress,
but action is promised in the electric, telecommunications and cement sectors in
1999. The Egyptian market should revive in the coming year, as it receives
important inflows from pension and insurance funds and the current account heals
with tourism already in a recovery.
The Fund has a slight overweight in Egypt focused on consumer and infrastructure
stocks, as we see the market offering great value, solid earnings growth and a
stable and attractive macroeconomic backdrop. Our enthusiasm is only tempered
by our inability to find more than a handful of exciting stocks, as the
influence of the state in the partially privatized companies still hampers the
dynamism of Egyptian corporate management.
MAURITIUS
Mauritius once again put in a solid performance for the year as orthodox
economic management and the diversification of the economy paid off. The Semdex
Index recorded a gain of 6% for the year ended December 31, 1998, propelled by
gains in the tourism, banking and conglomerate sectors. GDP growth for 1998 is
expected at 5.5% and the fiscal deficit is expected to fall to 3.7% from 4.6% a
year earlier. Inflation, which should be approximately 8%, was negatively
impacted by the move in the currency, which experienced a 12% devaluation. The
economy remains well positioned to grow, benefiting from a well-promoted tourism
sector, a competitive
2
<PAGE>
manufacturing sector and healthy agriculture sector. We therefore retain our
overweight in the market, with an emphasis on State Bank of Mauritius, our
single largest holding, which we believe offers an attractive secular growth
story, attractive valuations, and holds a valuable 19% strategic stake in
Mauritius Telecom, which is due to be privatized in 1999.
GHANA
The Ghanaian market was the star of Africa in 1998, with the Databank Index
rising 62.9% (it was up 125% at its peak) for the year ended December 31, 1998.
The country's most significant achievement was the cut in inflation from 29% in
1997 to 19% in 1998, which allowed for the precipitous decline in interest rates
from 48% to 28%. The Cedi, the local currency, was remarkably strong, losing
only 3% of its value during the year, helping price stability, but creating a
concern for 1999. We expect the economy to continue to improve under the
watchful eye of the IMF and thus retain our overweight with an emphasis on
financial institutions that will benefit from falling rates and positive growth.
Further, we feel strongly that the valuations in Ghana, with the market 1999
price-earnings multiple at 3.5 times and real earnings growth at around the 15%
level, are extremely compelling even after the recent appreciation.
REST OF AFRICA
The Fund holds about 16% of its investments in Botswana, Zimbabwe, Kenya and
Morocco. Botswana recorded a 14.9% gain in 1998, following another year of
remarkable 6.5% GDP growth and progress on the inflation front. The poor global
market for diamonds drove the budget into deficit for the first time in 16
years, but the current account remained firmly in the black. The country's low
tax rates, its extremely strong foreign reserves and transparent government and
business environment bodes well for the economic and market prospects, and we
are thus maintaining an overweight.
Zimbabwe had another disastrous year in 1998, with the Mining and Industrial
Index falling 60.8%, reflecting the deteriorating condition of the economy
arising out of misguided government policy and a sharp currency depreciation.
Inflation soared to around 47%, and the currency fell from a high of 16 to the
dollar in March to a low of 39 in October, propelled by lack of confidence, and
weak prices for the country's main exports, tobacco and metals. The involvement
of the Zimbabwe military in the conflict in the Congo has created discontent in
society, marked by public and labor union activism, and worsened the fiscal
situation. In a desperate act to appease its constituency, the government has
embarked upon a land redistribution initiative that has alienated the IMF and
temporarily blocked badly needed disbursements. The Fund has a small overweight
in the country, with the view that the severity of the current crisis will
elicit a constructive response by the government or a change in the current
regime.
Morocco had a banner year, rising 30.4%, as growing local liquidity forced its
way into the stock market and pushed stocks up. Despite a 9.3% correction
during the fourth quarter, valuations remain stretched at a 1999 price-earnings
of around 20 times with earnings growth at 15%. The poor value afforded by
Morocco combined with our outlook for a higher number of stock issues by
corporates as the economy gets closer to opening to the EU, argues for an
underweight in this market.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
January 1999
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO
PURCHASE OR SELL THE SECURITIES MENTIONED.
- --------------------------------------------------------------------------------
Effective January 1999, Michael Schwabe has joined Jaideep Khanna in the
day-to-day management of the Fund's assets. Michael Schwabe joined Morgan
Stanley Dean Witter ("MSDW") Investment Management in 1995. He is a portfolio
manager specializing in the African region. Previously, he was a Latin America
analyst for MSDW Investment Management. Prior to joining MSDW Investment
Management, he spent two years in Morgan Stanley Dean Witter & Co.'s Latin
American investment banking group working in corporate finance. He is a native
of Mexico and graduated from the University of Notre Dame with a B.B.A. in
Finance
3
<PAGE>
Morgan Stanley Africa Investment Fund, Inc.
Investment Summary as of December 31, 1998 (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 -20.62% -20.62% -11.82% -11.82% -17.46% -17.46%
Since Inception* -4.56 -0.95 33.22 6.05 16.77 3.23
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION (2)
[GRAPH]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994* 1995 1996 1997 1998
-------- ---------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value Per Share. . . . . $ 14.43 $ 17.05 $ 16.86 $ 14.45 $ 11.69
Market Value Per Share . . . . . . $ 11.38 $ 12.88 $ 13.63 $ 11.50 $ 8.38
Premium/(Discount) . . . . . . . . -21.1% -24.5% -19.2% -20.4% -28.3%
Income Dividends . . . . . . . . . $ 0.54 $ 0.96 $ 0.14 $ 0.30 $ 0.86
Capital Gains Distributions. . . . $ 0.01 $ 1.23 $ 2.25 $ 0.00#
Fund Total Return (2). . . . . . . 7.34% 26.14% 8.64% 2.69% -11.82%
Index Total Return (3) . . . . . . 44.69% 14.81% -10.72% -4.61% -17.46%
</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 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 December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<S> <C>
Equity Securities (92.0)%
Short-Term Investments (8.0)%
- --------------------------------------------------------------------------------
SECTORS
[CHART]
Banking (27.8%)
Beverage & Tobacco (15.2%)
Broadcasting & Publishing (3.2%)
Chemicals (2.9%)
Financial Services (7.1%)
Food & Household Products (2.1%)
Machinery & Engineering (2.3%)
Merchandising (4.9%)
Multi-Industry (12.5%)
Services (3.9%)
Other (18.1%)
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[CHART]
South Africa (32.6%)
Egypt (18.8%)
Ghana (14.8%)
Mauritius (14.2%)
Zimbabwe (5.7%)
Botswana (5.6%)
Kenya (2.8%)
Morocco (1.6%)
Ivory Coast (0.8%)
Zambia (0.6%)
Other (2.5%)
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C> <C>
1. State Bank of Mauritius Ltd. (Mauritius) 8.7%
2. Standard Chartered Bank (Ghana) 5.6
3. Sechaba Breweries Ltd. (Botswana) 5.1
4. Bidvest Group Ltd. (South Africa) 3.7
5. Social Security Bank Ltd. (Ghana) 3.7
6. Al-Ahram Beverages Co. (Egypt) 3.6%
7. Primedia Ltd. (South Africa) 3.2
8. Eastern Tobacco (Egypt) 3.1
9. B.O.E. Corp., Ltd. (South Africa) 3.0
10. Mauritius Commercial Bank (Mauritius) 2.7
-----
42.4%
-----
-----
</TABLE>
* Excludes short-term investments.
5
<PAGE>
FINANCIAL STATEMENT
- ----------
STATEMENT OF NET ASSETS
- ----------
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (98.4%)
(Unless otherwise noted)
- --------------------------------------------------------------------------------
BOTSWANA (5.6%) BANKING
Standard Chartered Bank of Botswana 150,000 U.S.$ 790
---------------
BEVERAGES & TOBACCO
Sechaba Breweries Ltd. 7,449,450 8,613
---------------
9,403
---------------
- --------------------------------------------------------------------------------
EGYPT (18.8%) BANKING
Al Watany Bank of Egypt 22,014 252
Commercial International Bank 90 1
---------------
253
---------------
BEVERAGES & TOBACCO
(a)Al-Ahram Beverages Co. GDR 211,000 5,987
Eastern Tobacco 223,706 5,149
---------------
11,136
---------------
BUILDING MATERIALS & COMPONENTS
Suez Cement Co. 6,600 99
Suez Cement Co. GDR 194,760 2,688
---------------
2,787
---------------
CHEMICALS
Egyptian Finance & Industrial Co. 57,265 947
Paints & Chemical Industries 19,510 400
Paints & Chemical Industries GDR 243,300 1,460
---------------
2,807
---------------
CONSTRUCTION & HOUSING
Heliopolis Housing & Development Co. 11,500 904
---------------
ELECTRICAL & ELECTRONICS
Egyptian Electro Cables 1,848 24
---------------
FINANCIAL SERVICES
(a,b)EFG-Hermes Holding GDR 100,000 975
National Societe Generale Bank 118,232 2,157
---------------
3,132
---------------
FOOD & HOUSEHOLD PRODUCTS
Central Flour Mills 110 -@
North Cairo Flour Mills 605 7
---------------
7
---------------
MACHINERY & ENGINEERING
Industrial & Engineering Enterprises Co. 254,416 3,600
---------------
MERCHANDISING
MISR Free Shops Co. 78,320 712
---------------
OIL & GAS
Egypt Gas Co. 45,000 3,339
---------------
REAL ESTATE
(a) Alexandria Real Estate Investment Co. 14,155 528
Madinet Nasr Housing & Development 75,240 2,271
---------------
2,799
---------------
31,500
---------------
- --------------------------------------------------------------------------------
GHANA (14.8%) BANKING
Ghana Commercial Bank 5,394,580 2,532
Social Security Bank Ltd. 6,390,000 6,144
Standard Chartered Bank 913,400 9,368
---------------
18,044
---------------
BEVERAGES & TOBACCO
(a) Ghana Breweries Ltd. 504,000 442
Guinness Ghana Ltd. 3,800,979 1,299
Pioneer Tobacco Co., Ltd. 6,749,660 1,154
---------------
2,895
---------------
FINANCIAL SERVICES
Home Finance Co. 2,814,840 902
---------------
FOOD & HOUSEHOLD PRODUCTS
Unilever Ghana Ltd. 2,494,900 1,706
---------------
METALS - NON-FERROUS
Aluworks Ghana Ltd. 1,070,000 1,143
Ghana Pioneer Aluminum Factory 1,043,400 178
---------------
1,321
---------------
24,868
---------------
- --------------------------------------------------------------------------------
IVORY COAST (0.8%) DIVERSIFIED OPERATIONS
(a) SOC Ivoirienne de Coco Rappe 24,000 429
---------------
FINANCIAL SERVICES
(a) Filature Tissages Sacs 25,000 984
---------------
1,413
---------------
- --------------------------------------------------------------------------------
KENYA (2.8%) BANKING
Kenya Commercial Bank Ltd. 991,326 987
National Industrial Credit Bank 311,551 189
1,176
---------------
INDUSTRIAL COMPONENTS
Firestone East Africa Ltd. 4,756,950 1,240
---------------
MERCHANDISING
Uchumi Supermarket Ltd. 2,501,107 1,781
---------------
MINING
Athi River Mining Ltd. 3,262,500 349
---------------
UTILITIES - ELECTRICAL & GAS
Kenya Power & Lighting Co., Ltd. 100,000 202
---------------
4,748
---------------
- --------------------------------------------------------------------------------
MALAWI (0.5%) FOOD & HOUSEHOLD PRODUCTS
Sugar Corp. of Malawi 7,160,000 778
---------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
MAURITIUS (14.2%)BANKING
Mauritius Commercial Bank 1,022,345 U.S.$ 4,465
State Bank of Mauritius Ltd. 20,111,364 14,557
---------------
19,022
---------------
LEISURE & TOURISM
New Mauritus Hotels 975,388 2,090
---------------
MULTI-INDUSTRY
Rogers and Co., Ltd. 389,231 2,692
---------------
23,804
---------------
- --------------------------------------------------------------------------------
MOROCCO (1.6%)SERVICES
Credor 25,000 2,696
---------------
- --------------------------------------------------------------------------------
MOZAMBIQUE (0.3%)MINING
(a)Kenmare Resources plc 2,975,000 432
---------------
- --------------------------------------------------------------------------------
NIGERIA (0.1%)UTILITIES - ELECTRICAL & GAS
Tuskar Resources plc 17,829,000 223
---------------
- --------------------------------------------------------------------------------
SOUTH AFRICA (32.6%)
APPLIANCES & HOUSEHOLD DURABLES
Ellerine Holdings Ltd. 570,400 1,230
---------------
BANKING
ABSA Group Ltd. 735,780 3,485
Nedcor Ltd. 182,141 3,099
---------------
6,584
---------------
BEVERAGES & TOBACCO
Amalgamated Beverage Industries LTD. 430,205 2,775
Suncrush Ltd. 151,300 23
---------------
2,798
---------------
BROADCASTING & PUBLISHING
Primedia Ltd. "N" 2,425,000 5,352
---------------
CHEMICALS
SASOL Ltd. 204,802 774
SASOL Ltd. 8.50% (Convertible Preferred) 294,400 1,024
---------------
1,798
---------------
COMMERCIAL SERVICES
(a)First South Africa Corp. 278,404 261
---------------
COMPUTERS
Software Connection, Ltd. 1,664,000 508
---------------
CONSTRUCTION & HOUSING
Concor Ltd. 294,522 388
---------------
- --------------------------------------------------------------------------------
DIVERSIFIED OPERATIONS
Johnnies Industrial Corp. Ltd. 401,400U.S.$ 1,894
---------------
ELECTRICAL & ELECTRONICS
DataTec Ltd. 10,500 135
Comparex Holdings Ltd. 323,100 2,622
---------------
2,757
---------------
FINANCIAL SERVICES
B.O.E. Corp. Ltd. 'N' 8,760,468 4,983
(a)Theta Group Ltd. 554,900 1,884
---------------
6,867
---------------
INSURANCE
FirstRand Ltd. 1,225,700 1,336
Liberty Life Association of Africa Ltd. 158,100 2,174
---------------
3,510
---------------
MACHINERY & ENGINEERING
Howden Africa Holdings Ltd. 2,010,172 282
---------------
MERCHANDISING
New Clicks Holdings Ltd. 2,061,015 2,012
---------------
MULTI-INDUSTRY
Bidvest Group Ltd. 857,560 6,217
(a)New Africa Investments Ltd. (Preferred) 'N' 6,520,200 3,985
Rembrandt Group Ltd. 699,990 4,278
---------------
14,480
---------------
SERVICES
Educor 3,399,080 3,924
---------------
54,645
---------------
- --------------------------------------------------------------------------------
ZAMBIA (0.6%)FOOD & HOUSEHOLD PRODUCTS
Zambia Sugar Co., Ltd. 151,371,609 874
MINING
(a)Zambia Consolidated Copper Mines 600,000 105
---------------
979
---------------
- --------------------------------------------------------------------------------
ZIMBABWE (5.7%)BANKING
NMBZ Holdings Ltd. 1,954,000 722
---------------
BUILDING MATERIALS & COMPONENTS
PG Industries Ltd. 1,713,446 41
Portland Holdings Ltd. 400,000 88
Portland Holdings Ltd.
(Convertible Shares 13%) 25,000 6
---------------
135
---------------
CHEMICALS
Interfresh Ltd. 15,000,000 282
---------------
ENERGY SOURCES
Wankie Colliery Co. Ltd. 7,871,900 360
---------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
ZIMBABWE (CONTINUED)
FOOD & HOUSEHOLD Products
Eastern Highland Plantation 3,375,659 U.S.$ 172
---------------
LEISURE & TOURISM
Zimbabwe Sun Ltd. 6,617,338 373
---------------
MERCHANDISING
Meikles Africa Ltd. 6,544,880 3,665
---------------
METALS - NON-FERROUS
Bindura Nickel Corp., Ltd. 658,750 18
---------------
MULTI-INDUSTRY
CFI Holdings 694,953 18
Delta Corp., Ltd. 13,497,630 2,938
(a)TA Holdings Ltd. 11,432,100 200
Trans Zambezi Industries Ltd. 6,012,410 275
Trans Zambezi Industries Ltd. - New 360,000 16
(a,b)Trans Zambezi Industries Ltd. ADR 2,200,000 101
TSL Ltd. 3,477,000 247
---------------
3,795
---------------
9,522
---------------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost U.S.$196,074) 165,011
---------------
- --------------------------------------------------------------------------------
NO. OF
RIGHTS
- --------------------------------------------------------------------------------
Rights (0.0%)
- --------------------------------------------------------------------------------
SOUTH AFRICA (0.0%)
(a)Primedia Ltd.
(Cost U.S.$-) 2,270,600 4
---------------
- --------------------------------------------------------------------------------
NO. OF
WARRANTS
- --------------------------------------------------------------------------------
WARRANTS (0.0%)
- --------------------------------------------------------------------------------
SOUTH AFRICA (0.0%)
(a,c)First South Africa Corp. - Warrant B,
expiring 1/24/01
(Cost U.S.$-) 5 -@
---------------
- --------------------------------------------------------------------------------
Face
Amount Value
(000) (000)
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (8.0%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT (8.0%)
Chase Securities, Inc. 4.45%,
dated 12/31/98, due 1/4/99, to be repurchased
at U.S.$13,409, collateralized by U.S.$8,060
United States Treasury Bonds, 11.25%, due
2/15/15, valued at U.S.$13,672
(Cost U.S.$13,402) U.S.$ 13,402 U.S.$ 13,402
---------------
- --------------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (0.5%)
Egyptian Pound EGP 2,507 735
Ghana Cedi GHC 47,301 20
Kenyan Shilling KES 1 -@
Mauritius Rupee MUR 2,660 108
Moroccan Dirham MAD 202 22
---------------
(Cost U.S.$883) 885
---------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (106.9%)
(Cost U.S.$210,359) 179,302
---------------
- --------------------------------------------------------------------------------
OTHER ASSETS (0.6%)
Net Unrealized Gain on Foreign
Currency Exchange Contracts U.S.$ 368
Receivable for Investments
Sold 316
Dividends Receivable 277
Interest Receivable 2
Other Assets 17 980
---------------------------
- --------------------------------------------------------------------------------
LIABILITIES (-7.5%)
Payable For:
Dividends Declared (11,760)
Bank Overdraft (347)
Investment Advisory Fees (178)
Custodian Fees (108)
Professional Fees (65)
Shareholder Reporting Expenses (45)
Directors' Fees and Expenses (35)
Administrative Fees (18)
Other Liabilities (3) (12,559)
---------------------------
- --------------------------------------------------------------------------------
</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 14,346,421, issued and
outstanding U.S.$0.01 par value shares
(100,000,000 shares authorized) U.S.$167,723
----------------------------
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 11.69
----------------------------
- --------------------------------------------------------------------------------
AT DECEMBER 31,1998, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Common Stock U.S.$ 144
Capital Surplus 204,946
Undistributed Net Investment Income 14
Accumulated Net Realized Loss (6,675)
Unrealized Depreciation on Investments
and Foreign Currency Translations (30,706)
- ---------------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$167,723
----------------------------
- --------------------------------------------------------------------------------
</TABLE>
(a)- Non-income producing
(b)- 144A Security - certain conditions for
public sale may exist.
(c)- Security valued at fair value - See note
A-1 to financial statements.
@ - Value is less than U.S.$500.
ADR - American Depositary Receipt
GDR - Global Depositary Receipt
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange
contracts open at December 31, 1998, the
Fund is obligated to deliver or is to
receive foreign currency in exchange for
U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY UNREALIZED
TO IN GAIN
DELIVER VALUE SETTLEMENT EXCHANGE VALUE (LOSS)
(000) (000) DATE FOR (000) (000) (000)
- ----------------- --------------- ------------- ------------------ ----------------- -------------
<S> <C> <C> <C> <C> <C> <C>
EGP 7,100 U.S.$ 2,082 03/03/99 U.S.$ 2,000 U.S.$ 2,000 U.S.$ (82)
ZAR 27,135 4,372 06/23/99 U.S.$ 4,500 4,500 128
U.S.$ 4,050 4,050 06/23/99 ZAR 27,135 4,372 322
------------- ------------- ----------
U.S.$ 10,504 U.S.$ 10,872 U.S.$ 368
------------- ------------- ----------
------------- ------------- ----------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------
DECEMBER 31, 1998 EXCHANGE RATES:
- --------------------------------------------------------------
<S> <C> <C>
EGP Egyptian Pound 3.410 = U.S. $1.00
GHC Ghana Cedi 2340.000 = U.S. $1.00
KES Kenyan Shilling 61.775 = U.S. $1.00
MUR Mauritius Rupee 24.730 = U.S. $1.00
MAD Moroccan Dirham 9.272 = U.S. $1.00
ZAR South African Rand 5.890 = U.S. $1.00
- --------------------------------------------------------------
</TABLE>
SUMMARY OF TOTAL INVESTMENTS BY INDUSTRY
CLASSIFICATION - DECEMBER 31, 1998
<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
- -------------------------------------------------------------------------
<S> <C> <C>
Appliances & Household Durables U.S.$ 1,230 0.7%
Banking 46,591 27.8
Beverages & Tobacco 25,442 15.2
Broadcasting & Publishing 5,356 3.2
Building Materials & Components 2,922 1.7
Chemicals 4,887 2.9
Commercial Services 261 0.2
Computers 508 0.3
Construction & Housing 1,292 0.8
Diversified Operations 2,323 1.4
Electrical & Electronics 2,781 1.7
Energy Sources 360 0.2
Financial Services 11,885 7.1
Food & Household Products 3,537 2.1
Industrial Components 1,240 0.7
Insurance 3,510 2.1
Leisure & Tourism 2,463 1.5
Machinery & Engineering 3,882 2.3
Merchandising 8,170 4.9
Metals - Non-Ferrous 1,339 0.8
Mining 886 0.5
Multi-Industry 20,967 12.5
Oil & Gas 3,339 2.0
Real Estate 2,799 1.7
Services 6,620 3.9
Utilities - Electrical & Gas 425 0.2
Other 14,287 8.5
------------ -----
U.S.$179,302 106.9%
------------ -----
------------ -----
- -------------------------------------------------------------------------
</TABLE>
SUMMARY OF TOTAL INVESTMENTS BY COUNTRY -
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
COUNTRY (000) ASSETS
- ----------------------------------- ---------------------------------
<S> <C> <C>
Botswana U.S.$ 9,403 5.6%
Egypt 31,500 18.8
Ghana 24,868 14.8
Ivory Coast 1,413 0.8
Kenya 4,748 2.8
Malawi 778 0.5
Mauritius 23,804 14.2
Morocco 2,696 1.6
Mozambique 432 0.3
Nigeria 223 0.1
South Africa 54,649 32.6
United States (short-term investments) 13,402 8.0
Zambia 979 0.6
Zimbabwe 9,522 5.7
Other 885 0.5
------------ -----
U.S.$179,302 106.9%
------------ -----
------------ -----
- -------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
Year Ended
December 31, 1998
STATEMENT OF OPERATIONS (000)
- ---------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . U.S.$ 9,953
Interest. . . . . . . . . . . . . . . . . . . . . . 318
Less: Foreign Taxes Withheld. . . . . . . . . . . . (384)
- ---------------------------------------------------------------------------------------------------
Total Income. . . . . . . . . . . . . . . . . . . 9,887
- ---------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees. . . . . . . . . . . . . . 2,734
Custodian Fees. . . . . . . . . . . . . . . . . . . 742
Administrative Fees . . . . . . . . . . . . . . . . 245
Professional Fees . . . . . . . . . . . . . . . . . 112
Shareholder Reporting Expenses. . . . . . . . . . . 80
Directors' Fees and Expenses. . . . . . . . . . . . 38
Transfer Agent Fees . . . . . . . . . . . . . . . . 15
Amortization of Organization Costs. . . . . . . . . 12
Other Expenses. . . . . . . . . . . . . . . . . . . 83
- ---------------------------------------------------------------------------------------------------
Total Expenses. . . . . . . . . . . . . . . . . . 4,061
- ---------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . 5,826
- ---------------------------------------------------------------------------------------------------
Net Realized Gain (Loss)
Investment Securities Sold. . . . . . . . . . . . . (2,409)
Foreign Currency Transactions . . . . . . . . . . . 5,362
- ---------------------------------------------------------------------------------------------------
Net Realized Gain . . . . . . . . . . . . . . . . 2,953
- ---------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation
Depreciation on Investments . . . . . . . . . . . . (40,290)
Appreciation on Foreign Currency Translations . . . 513
- ---------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation. . (39,777)
- ---------------------------------------------------------------------------------------------------
Total Net Realized Gains and Change in Unrealized
Appreciation/Depreciation . . . . . . . . . . . . . (36,824)
- ---------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS U.S.$(30,998)
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income. . . . . . . . . . . . . . . . . U.S.$ 5,826 U.S.$ 5,273
Net Realized Gain. . . . . . . . . . . . . . . . . . . 2,953 24,986
Change in Unrealized Appreciation/Depreciation . . . . (39,777) (28,174)
- ---------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations. . . . . . . . . . . . . . . . . . . . (30,998) 2,085
- ---------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income. . . . . . . . . . . . . . . . . (12,452) (4,710)
Net Realized Gains . . . . . . . . . . . . . . . . . . -- (31,278)
In Excess of Net Realized Gains. . . . . . . . . . . . (37) (3,416)
- ---------------------------------------------------------------------------------------------------
Total Distributions. . . . . . . . . . . . . . . . . . (12,489) (39,404)
- ---------------------------------------------------------------------------------------------------
Capital Share Transactions:
Repurchase of Shares (1,102,056 shares and 0 shares,
respectively). . . . . . . . . . . . . . . . . . . . . (11,993) --
- ---------------------------------------------------------------------------------------------------
Total Decrease . . . . . . . . . . . . . . . . . . . . (55,480) (37,319)
Net Assets:
Beginning of Period. . . . . . . . . . . . . . . . . . 223,203 260,522
- ---------------------------------------------------------------------------------------------------
End of Period including undistributed net investment
income of U.S.$14 and U.S.$465, respectively) . . . U.S.$167,723 U.S.$223,203
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, Period from
SELECTED PER SHARE DATA ------------------------------------------------------------- FEBRUARY 14, 1994* TO
AND RATIOS: 1998 1997 1996 1995 DECEMBER 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . U.S.$ 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. . . . . . . . . . . . 0.40 0.34 0.35 0.64 0.54
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . (2.58) (0.20) 0.83 2.95 0.38
- ------------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations . . . . . (2.18) 0.14 1.18 3.59 0.92
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income. . . . . . . . . . . (0.86) (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. . . . . . (0.00)# (0.21) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions. . . . . . . . . . . (0.86) (2.55) (1.37) (0.97) (0.54)
- ------------------------------------------------------------------------------------------------------------------------------------
Anti-Dilutive Effect of Shares Repurchased . 0.28 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . U.S.$ 11.69 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.$ 8.38 U.S.$ 11.50 U.S.$ 13.63 U.S.$ 12.88 U.S.$ 11.38
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value . . . . . . . . . . . . . . . (20.62)% 1.13% 16.26% 20.84% (15.37)%
Net Asset Value (1). . . . . . . . . . . . (11.82)% 2.69% 8.64% 26.14% 7.34%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS). . . . U.S.$167,723 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 . . . . . . . . . . . . . . . . 2.56% 1.72% 2.11% 4.18% 4.47%**
Portfolio Turnover Rate. . . . . . . . . . . 53% 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
DECEMBER 31, 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 may use derivatives to achieve its investment objectives. The Fund may
engage in transactions in futures contracts on foreign currencies, stock
indices, as well as in options, swaps and structured notes. Consistent with the
Fund's investment objectives and policies, the Fund may use derivatives for
non-hedging as well as hedging purposes.
Following is a description of derivative instruments and their associated risks
that the Fund may 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 net of applicable withholding taxes where recovery of
such taxes is not reasonably assured. Distributions to shareholders are
recorded on the ex-dividend 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 Dean Witter Investment Management Inc. (formerly 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.
D. The Chase Manhattan Bank and its affiliates serve as custodian for the
Fund. The Fund's assets held outside the United States have been held by Morgan
Stanley Trust Company ("MSTC"), which was an affiliate of the Adviser prior to
October 1, 1998. On October 1, 1998, MSTC was acquired by the Chase Manhattan
Bank. Custody fees are payable monthly based on assets held in custody,
investment purchase and sales activity and account maintenance fees, plus
reimbursement for certain out-of-pocket expenses. Through September 30,1998,
the Fund paid MSTC fees of approximately $565,000.
E. For the year ended December 31, 1998, the Fund made purchases and sales
totaling approximately $117,734,000 and $131,586,000 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. At December 31, 1998, the U.S. Federal income tax cost basis of
securities was $209,622,000 and, accordingly, net unrealized depreciation for
U.S. Federal income tax purposes was $31,205,000 of which $28,679,000 related to
appreciated securities and $59,884,000 related to depreciated securities. At
December 31, 1998, the Fund had a capital loss carryforward for U.S. Federal
income tax purposes of approximately $3,546,000 available to offset future
capital gains which will expire on December 31, 2006. For the year ended
December 31, 1998, the Fund elects to defer to January 1, 1999 for U.S. Federal
income tax purposes, post-October capital losses of $2,982,000.
F. For the year ended December 31, 1998, the Fund placed a portion of its
portfolio transactions with affiliated broker/dealers. Accordingly, the Fund
incurred brokerage commissions of $9,000 with Morgan Stanley & Co. Incorporated,
an affiliate of the Adviser, for the year ended December 31, 1998.
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, 1998 totaled $35,000 and are included in Payable for Directors' Fees and
Expenses on the Statement of Net Assets.
I. During December 1998, the Board declared a dividend distribution of $0.8197
per share, derived from net investment income, payable on January 8, 1999, to
shareholders of record on December 31, 1998.
J. On September 15, 1998, the Fund commenced a share repurchase program for
purposes of enhancing shareholder value and reducing the discount at which the
Fund's shares traded from their net asset value. From that date through December
31, 1998, the Fund repurchased 1,102,056 shares or 7.13% of its Common Stock at
an average price per share of $10.83 and an average discount of 25.62% from net
asset value per share. The Fund expects to continue to repurchase its
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.
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FEDERAL INCOME TAX INFORMATION (UNAUDITED):
For the year ended December 31, 1998, the Fund designates $36,000 as
long-term capital gain distribution at the 20% tax bracket. The Fund also
expects to pass through to shareholders foreign tax credits of approximately
$383,000. In addition, for the year ended December 31, 1998, gross income
derived from sources within foreign countries amounted to $10,090,000.
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<PAGE>
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, 1998,
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 four 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, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 8, 1999
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YEAR 2000 DISCLOSURE (UNAUDITED):
The investment advisory services provided to the Fund by the Adviser depend on
the smooth operation of its computer systems. Many computer and software systems
in use today cannot recognize the year 2000, but revert to 1900 or some other
date, due to the manner in which dates were encoded and calculated. That failure
could have a negative impact on the handling of securities trades, pricing and
account services. The Adviser has been actively working on necessary changes to
its own computer systems to deal with the year 2000 problem and expects that its
systems will be adapted before that date. There can be no assurance, however,
that the Adviser will be successful. In addition, other unaffiliated service
providers may be faced with similar problems. The Adviser is monitoring their
remedial efforts, but, there can be no assurance that they and the services they
provide will not be adversely affected.
In addition, it is possible that the markets for securities in which the Fund
invests may be detrimentally affected by computer failures throughout the
financial services industry beginning January 1, 2000. Improperly functioning
trading systems may result in settlement problems and liquidity issues. In
addition, corporate and governmental data processing errors may result in
production problems for individual companies and overall economic uncertainties.
Earnings of individual issuers will be affected by remediation costs, which may
be substantial and may be reported inconsistently in U.S. and foreign financial
statements. Accordingly, the Fund's investments may be adversely affected.
17
<PAGE>
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
each shareholder will be deemed to have elected, unless 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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