<PAGE>
- --------------------------------------------------------------------------------
MORGAN STANLEY
DEAN WITTER
EASTERN EUROPE
FUND, INC.
- --------------------------------------------------------------------------------
SEMI-ANNUAL REPORT
JUNE 30, 1999
MORGAN STANLEY DEAN WITTER
INVESTMENT MANAGEMENT INC.
INVESTMENT ADVISER
MORGAN STANLEY DEAN WITTER
EASTERN EUROPE FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Barton M. Biggs
CHAIRMAN OF THE BOARD
OF DIRECTORS
Michael F. Klein
PRESIDENT AND DIRECTOR
Peter J. Chase
DIRECTOR
John W. Croghan
DIRECTOR
David B. Gill
DIRECTOR
Graham E. Jones
DIRECTOR
John A. Levin
DIRECTOR
William G. Morton, Jr.
DIRECTOR
Stefanie V. Chang
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Mary E. Mullin
SECRETARY
Belinda A. Brady
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
Chaseside
Bournemouth BH7 7DB
United Kingdom
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 or visit our website at
www.msdw.com/institutional/investmentmanagement.
<PAGE>
LETTER TO SHAREHOLDERS
- ------------
For the six months ended June 30, 1999, the Morgan Stanley Dean Witter Eastern
Europe Fund, Inc. (the "Fund") had a total return, based on net asset value per
share, of 30.99% compared to 36.18% for the Fund's benchmark (described below).
For the period since the Fund's commencement of operations on September 30, 1996
through June 30, 1999, the Fund had a total return, based on net asset value per
share, of -0.15% compared with -7.02% for its benchmark. For the period from
September 30, 1996 to December 31, 1997, the Fund's performance had been
compared with the Russia (Moscow Times 50) and New Europe Blended Composite.
This composite was comprised of 50% of the Moscow Times 50 Index and 50% of the
market capitalization weighted Morgan Stanley Capital International (MSCI) local
indices for the Czech Republic, Hungary and Poland, including dividends. Since
December 31, 1997, the Fund's performance has been compared with the Russia and
New Europe Composite. This composite is comprised of the market capitalization
weighted MSCI local indices for Russia, Poland, the Czech Republic and Hungary.
On June 30, 1999, the closing price of the Fund's shares on the New York Stock
Exchange was $15 1/8, representing an 8.7% discount to the Fund's net asset
value per share.
Russian politics took center stage during the first half of 1999 when President
Boris Yeltsin dismissed Prime Minister Yevgeny Primakov, who had been appointed
late last year, and replaced him with loyalist Sergei Stepashin. Until that
point, the Russian market had been rallying, up over 50% through the end of May,
led mainly by the oil stocks. But the political shuffle stunned the country's
stock market, which fell 15% in the aftermath and roiled security prices in
neighboring countries. Primakov's rule had produced relatively positive
results. In the aftermath of last year's financial crisis, which culminated
with the forced devaluation of the ruble, many observers had expected the
Russian economy to collapse due to hyperinflation and political division.
Instead, the subsequent economic contraction and political situation proved much
milder than expected. After falling for several months, industrial production
has rebounded, rising 6% in May year-on-year. Inflation began the year at
nearly 10% month-on-month but has since fallen to below 2%. In addition,
Primakov was not associated with previous reform efforts and escaped blame for
the financial collapse. He was able to bring stability to the Russian political
scene, replacing the conflict between the Yeltsin administration and Parliament
with compromise. It is unclear why Yeltsin removed Primakov just as stability
was returning to Russia. Perhaps the Prime Minister was encroaching on the
President's perogatives. Although his popularity reached new lows in the
aftermath, Yeltsin sent a signal that he was not a lame duck president.
Yeltsin's choice of new Prime Minister also surprised Kremlin observers. Sergei
Stepashin, who became Russia's fourth Prime Minister in little more than a year,
was not widely known throughout the country. His approval for the Prime Minister
post by Parliament was uncertain. If they refused to confirm him, Parliament
would have been dismissed and new elections held. Once Stepashin was approved,
the market quickly resumed its rally. By the end of the first half of 1999, the
market was up 133%, as measured by the MSCI Russia Index.
During the first quarter, the Russian market was driven by the oil companies
LUKoil and Surgutneftegaz, which benefited from the devaluation and the 50%
recovery in the price of oil. LUKoil, the largest of the Russian oil stocks with
over 15 million barrels of reserves, was up 144% through the end of June.
Profitability per barrel of production should more than double this year versus
last year as the devaluation reduced fixed ruble costs. Market leadership,
however, shifted during the second quarter from export oriented companies to
domestic stocks, namely utilities and telecommunication companies. Unified
Energy Systems, Russia's giant, rallied 86% during the second quarter and
finished the first half of the year up 187% despite the fact that demand for
electricity remains sluggish and there have been no tariff increases despite the
high rates of inflation. Rostelecom, Russia's domestic and long-distance
operator, also performed strongly, up 116% during the first half of 1999.
Domestic stock performance has been driven by a combination of higher levels of
liquidity in the market and the better than expected performance of the economy.
Russia's economic recovery has been driven by the surprise benefits of the
devaluation of the ruble, which has fallen by 75% since August of last year,
coupled with a relatively stable inflation environment. The devaluation has
rendered imports too expensive, forcing consumers to switch to domestic
products. Meanwhile, ruble costs have not risen significantly--wage increases
continue to lag inflation. Domestic production has expanded to fill the gap,
driving up overall production. Contrary to expectations, domestic production in
the first half of the year was 3% higher than last year. The country's current
account has also benefited. Imports have collapsed while commodities--Russia's
primary export--have rallied. The country's trade surplus grew from $0.2 billion
in the first quarter of 1998 to $6.2 billion in the first quarter of 1999. After
the ruble's dramatic fall, it has now stabilized at around 25 rubles per dollar.
Renewed confidence in the economy has led investors to buy companies that
benefit from higher levels of economic activity.
During the next year, focus will remain on politics. Elections for the Duma
(Russia's lower house of Parliament) are scheduled to be held in December 1999
and Presidential elections in July 2000. At this point, it appears unlikely
that the elections will produce a major shift in Russian policies. Most of the
serious presidential candidates appear centrist. Until the elections are over,
however, political uncertainty will rise.
Following Russia, the Czech market was the best performing country in the region
during the second quarter, up 28.4%, despite indications that the recession is
lasting
2
<PAGE>
longer than anticipated. First quarter GDP contracted 4.5% year-on-year, after
falling 2.3% for the whole of 1998. While domestic consumption is showing signs
of growth, the volume of investment in the economy fell 7%. In response, the
Czech Central Bank has cut interest rates ten times during the last year; a
total of 7%. While the interest rate cuts appear dramatic, real interest rates
have not fallen as significantly as inflation, which has dropped from 8.8% at
the end of last year to 2.4% by May.
The ongoing restructuring taking place in the Czech economy should reap
long-term benefits, but the process will take time. The stock market, however,
has begun to discount the Czech turn-around story, particularly in the banking
sector. During the last quarter, the government successfully privatized one of
the country's largest banks, CSOB. A foreign strategic investor paid over $1
billion for a controlling stake in the bank, inspiring confidence that the two
remaining large bank privatizations will be completed soon. The two bank stocks
have rallied strongly--Ceska Sporitelna is up 56% for the year and Komercni Bank
is up 79%. The economic impact of privatization in the banking sector is being
felt as banks put pressure on enterprises in which they hold stakes to
accelerate restructuring and this pressure will intensify as the privatization
process accelerates.
A clear indication of increased confidence in the Czech Republic is a large
pick-up in long-term capital flows into the country. The Czech Republic has
traditionally been perceived as a laggard in its ability to attract foreign
investment. But the government's commitment to press ahead with necessary
privatizations, although at a slow pace, is beginning to produce results. New
government incentives, such as tax holidays, help as well. Foreign direct
investment tripled during the first quarter, reaching $600 million, continuing a
trend that began last year. The government has also announced a revitalization
program, aimed at addressing some of the weaknesses in Czech industry. Under
the program, the government would purchase some of the banks' bad debts, convert
them into equity and sell to strategic investors.
The other economies of central Europe continue to be caught in an economic
slowdown - the result of the current sluggishness in core European economies and
last year's Russia crisis. In Poland, GDP growth in the first quarter slowed to
1.5%, from 2.9% in the last quarter of 1998. Export weakness also
continued--exports to Russia, for example, declined 76% quarter-on-quarter. The
economic slowdown has led to growing current account and budget deficits. During
the first five months of the year, the budget deficit reached 10 billion Polish
zloty, well ahead of schedule. The budget overshoot is due to lower than
anticipated revenue collection by the government and higher expenditures on
pension reform. Meanwhile, the current account deficit exceeded $3 billion in
the first four months of the year, up over 30% from last year.
Despite the recent negative developments, the Polish market was up almost 30%
during the second quarter. The economic situation appears to be turning.
Industrial production, which was negative earlier in the year, turned positive
in May, rising 2.3%. In addition, economic recovery in Germany appears to be
gradually recovering, which benefits Polish exports. Regarding the budget
deficit, the government is taking steps to increase revenue collection,
including an increase in excise taxes. The growing current account situation
should improve with rising Western European demand, and large scale
privatization during the second half of the year should cover the deficit.
Meanwhile, a softer economy has helped keep inflation under control with the CPI
falling to 6.4% in May. Evidence of a recovery combined with a jump in merger
activity in the Polish banking sector pushed the market up. Merger and
strategic-takeover rumors pushed up several Polish banks, particularly those
without a strong strategic partner. BRE Bank, for example, has rallied 46%
during the first half due to a large capital gains transaction and the
possibility of merging with another listed bank.
Hungary continues to be the region's laggard, rising only 7.5% during the second
quarter after a fall of 15% in the first quarter. The economy faces many of the
same dynamics as in Poland, namely growing budget and current account deficits.
However, unlike Poland, the government has yet to adopt measures to deal with
the fiscal overshoot, choosing a 'wait-and-see' approach instead. The current
account is also a problem. Export performance has been poor while the
relatively strong economy continues to absorb imports. In addition, the Kosovo
crisis pushed down tourist revenue. The current account will likely reach $2.7
billion for the year or almost 6% of GDP. While the situation appears
manageable, the equity market is likely to remain in the doldrums until the
government takes stronger fiscal action or the situation dramatically approves
on its own.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
July 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.
- --------------------------------------------------------------------------------
DAILY NET ASSET AND MARKET VALUES, AS WELL AS MONTHLY PORTFOLIO INFORMATION FOR
THE FUND, ARE AVAILABLE ON OUR WEBSITE AT
www.msdw.com/institutional/investmentmanagement.
3
<PAGE>
Morgan Stanley Dean Witter Eastern Europe Fund, Inc.
Investment Summary as of June 30, 1999 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL TOTAL RETURN (%)
INFORMATION -------------------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (3)
------------------------ ------------------------ -------------------------
ANNUAL ANNUAL ANNUAL
CUMULATIVE AVERAGE CUMULATIVE AVERAGE CUMULATIVE AVERAGE
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Fiscal Year to Date 54.14% -- 30.99% -- 36.18% --
One Year -0.41 -0.41% -7.07 -7.07% -7.14 -7.14%
Since Inception* -8.86 -3.32 -0.15 -0.05 -7.02 -2.61
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
[GRAPH]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
PERIOD FROM ENDED
SEPTEMBER 30, 1996* JUNE 30,
TO DECEMBER 31, 1996 1997 1998 1999
-------------------- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value Per Share..... $ 20.77 $ 26.59 $ 12.65 $ 16.57
Market Value Per Share ....... $ 18.00 $ 23.88 $ 9.81 $ 15.13
Premium/(Discount)............ -13.3% -10.2% -22.4% -8.7%
Income Dividends.............. $ 0.07 -- -- --
Capital Gains Distributions... -- $ 3.68 $ 0.67 --
Fund Total Return (2)......... 4.18% 48.19% -50.62% 30.99%
Index Total Return (3)........ 9.25% 48.23% -57.84% 36.18%
</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) For the period from the commencement of operations through December 31,
1997, the Fund's performance had been compared with the Russia (Moscow
Times 50) and New Europe Blended Composite. This composite was comprised of
50% of the market capitalization weighted Morgan Stanley Capital
International (MSCI) local indices for the Czech Republic, Hungary and
Poland, and 50% of the Moscow Times 50 Index, including dividends.
Beginning December 31, 1997, the Fund's performance has been compared with
the Russia and New Europe Composite. This composite is comprised of the
market capitalization weighted MSCI local indices for Russia, Poland, the
Czech Republic and Hungary.
* The Fund commenced operations on September 30, 1996.
4
<PAGE>
Morgan Stanley Dean Witter Eastern Europe Fund, Inc.
Portfolio Summary as of June 30, 1999 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[PIE CHART]
<TABLE>
<S> <C>
Equity Securities (98.1%)
Debt Instruments (1.0%)
Short-Term Investments (0.9%)
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
[PIE CHART]
<TABLE>
<S> <C>
Banking (16.6%)
Data Processing & Reproduction (3.4%)
Energy Sources (28.5%)
Leisure & Tourism (2.2%)
Misc. Materials & Commodities (1.2%)
Telecommunications (6.7%)
Telecommunications--Integrated (21.2%)
Transportation--Road & Rail (1.8%)
Utilities -- Electrical & Gas (9.9%)
Wholesale & International Trade (4.8%)
Other (3.7%)
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[PIE CHART]
<TABLE>
<S> <C>
Russia (36.9%)
Poland (27.3%)
Hungary (18.6%)
Czech Republic (12.1%)
Croatia (4.3%)
Other (0.8%)
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. LUKoil Holdings (Russia) 16.4%
2. Surgutneftegaz (Russia) 9.9
3. Telekomunikacja Polska (Poland) 9.7
4. Matav Rt. (Hungary) 8.9
5. SPT Telecom (Czech Republic) 6.7
6. Unified Energy Systems (Russia) 5.6%
7. Elektrim (Poland) 4.9
8. Zagrebacka Banka (Croatia) 4.3
9. Wielkopolski Bank Kredytowy (Poland) 3.5
10. Czech Power Co. (Czech Republic) 2.8
----
72.7%
----
----
</TABLE>
* Excludes short-term investments.
5
<PAGE>
FINANCIAL STATEMENTS
- ------
STATEMENT OF NET ASSETS (UNAUDITED)
- ------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (98.2%)
(Unless otherwise noted)
- --------------------------------------------------------------------------------
CROATIA (4.3%)
BANKING
(a)Zagrebacka Banka GDR 310,500 U.S.$ 3,175
-------------
- --------------------------------------------------------------------------------
CZECH REPUBLIC (12.1%)
BANKING
Ceska Sporitelna 75,000 320
(a)Komercni Banka 34,800 651
-------------
971
-------------
BEVERAGES & TOBACCO
Tabak 1,695 403
-------------
Chemicals
(a)Unipetrol 318,000 602
-------------
TELECOMMUNICATIONS
SPT Telecom 307,600 4,964
-------------
UTILITIES -- ELECTRICAL & GAS
(a)Czech Power Co. 1,003,800 2,053
-------------
8,993
-------------
- --------------------------------------------------------------------------------
HUNGARY (18.6%)
BANKING
OTP Bank Rt. 44,700 1,866
-------------
DATA PROCESSING & REPRODUCTION
(a,b)Synergon Information Systems GDR 62,000 722
-------------
ENERGY SOURCES
MOL Magyar Olaj-es Gazipari Rt. GDR 67,618 1,620
-------------
LEISURE & TOURISM
Danubius Hotel and Spa Rt. 89,020 1,617
-------------
TELECOMMUNICATIONS -- INTEGRATED
Matav Rt. 400,234 2,167
Matav Rt. ADR 60,400 1,661
(a)Matav Rt. ADR 101,040 2,779
-------------
6,607
-------------
TRANSPORTATION -- ROAD & RAIL
North American Bus Industries Rt. 84,081 1,311
-------------
13,743
-------------
- --------------------------------------------------------------------------------
POLAND (27.3%)
BANKING
(a)Bank Handlowy W Warszawie 28,098 U.S.$ 390
(a)Bank Handlowy W Warszawie GDR 60,246 837
BRE 45,043 1,416
Powszechny Bank Kredytowy 844 20
(a,c)Powszechny Bank Kredytowy `C' 60,723 1,066
Wielkopolski Bank Kredytowy 443,969 2,598
-------------
6,327
-------------
BEVERAGES & TOBACCO
Zwyiec 3,667 423
-------------
DATA PROCESSING & REPRODUCTION
Prokom 4,223 140
Prokom GDR 77,860 1,277
Softbank 10,340 358
-------------
1,775
-------------
MISC. MATERIALS & COMMODITIES
(a) KGHM Polska Miedz 5,898 37
(a) KGHM Polska Miedz GDR 66,000 831
-------------
868
-------------
TELECOMMUNICATIONS -- INTEGRATED
(a)Telekomunikacja Polska GDR 1,020,000 7,191
-------------
WHOLESALE & INTERNATIONAL TRADE
Elektrim 254,102 3,588
-------------
20,172
-------------
- --------------------------------------------------------------------------------
RUSSIA (35.9%)
BROADCASTING & PUBLISHING
(a,c)Storyfirst Communications `A' (Preferred) 1,920 725
-------------
ENERGY SOURCES
LUKoil Holding-Sponsored ADR 190,920 7,804
LUKoil Holdings 197,000 1,950
LUKoil Holdings ADR 58,818 2,404
(a)Surgutneftegaz ADR 866,842 7,314
-------------
19,472
-------------
TELECOMMUNICATIONS -- INTEGRATED
(a,c)Mustcom 5,356,352 1,117
-------------
UTILITIES -- ELECTRICAL & GAS
(a)Gazprom ADR 98,800 1,114
Unified Energy Systems 40,000,000 3,500
Unified Energy Systems GDR 68,800 667
-------------
5,281
-------------
26,595
-------------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost U.S.$69,542) 72,678
-------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------------------------
DEBT INSTRUMENTS (1.0%)
- -------------------------------------------------------------------------------------
<S> <C> <C>
RUSSIA (1.0%)
TELECOMMUNICATIONS -- INTEGRATED (1.0%)
(c)Svyazinvest (Cost U.S.$3,146) U.S.$ 3,146 U.S.$ 773
---------------
- -------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (0.4%)
- -------------------------------------------------------------------------------------
UNITED STATES (0.4%)
REPURCHASE AGREEMENT
Chase Securities, Inc. 4.55%,
dated 6/30/99, due 7/1/99,
to be repurchased at U.S.$301,
collateralized by U.S.$280
United States Treasury Bonds,
7.25%, due 5/15/16, valued at U.S.$311
(Cost U.S.$301) 301 301
---------------
- -------------------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN (0.5%)
HUNGARIAN FORINT
(Cost U.S.$337) HUF 81,355 337
---------------
- -------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.1%)
(Cost $73,326) 74,089
---------------
- -------------------------------------------------------------------------------------
OTHER ASSETS (1.7%)
Receivable for Investments Sold U.S.$ 588
Interest Receivable 454
Dividends Receivable 200
Other Assets 12 1,254
--------------- ---------------
- -------------------------------------------------------------------------------------
LIABILITIES (-1.8%)
Payable For:
Investments Purchased (969)
Custodian Fees (100)
Investment Advisory Fees (95)
Professional Fees (47)
Shareholder Reporting Expenses (51)
Administrative Fees (12)
Directors' Fees and Expenses (23)
Bank Overdraft (13)
Other Liabilities (14) (1,324)
--------------- ---------------
- -------------------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 4,466,648, issued and
outstanding U.S.$0.01 par value shares
(500,000,000 shares authorized) 74,019
---------------
---------------
- -------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 16.57
---------------
---------------
- -------------------------------------------------------------------------------------
<CAPTION>
AMOUNT
(000)
- -------------------------------------------------------------------------------------
<S> <C>
AT JUNE 30, 1999, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------
Common Stock U.S.$ 45
Capital Surplus 93,697
Accumulated Net Investment Loss (359)
Accumulated Net Realized Loss (20,123)
Unrealized Appreciation on Investments and
Foreign Currency Translations 759
- -------------------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$ 74,019
---------------
---------------
- -------------------------------------------------------------------------------------
</TABLE>
(a) -- Non-income producing
(b) -- 144A - certain conditions for public sale may exist.
(c) -- Security valued at fair value -- see note A-1 to financial statements.
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
SUMMARY OF TOTAL INVESTMENTS BY INDUSTRY
CLASSIFICATION -- JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
- ------------------------------------------------------------------
<S> <C> <C>
Banking U.S.$12,339 16.6%
Beverages & Tobacco 826 1.1
Broadcasting & Publishing 725 1.0
Chemicals 602 0.8
Data Processing & Reproduction 2,497 3.4
Energy Sources 21,092 28.5
Leisure & Tourism 1,617 2.2
Misc. Materials & Commodities 868 1.2
Telecommunications 4,964 6.7
Telecommunications -- Integrated 15,688 21.2
Transportation -- Road & Rail 1,311 1.8
Utilities -- Electrical & Gas 7,334 9.9
Wholesale & International Trade 3,588 4.8
Other 638 0.9
----------- -----
U.S.$74,089 100.1%
----------- -----
----------- -----
- -----------------------------------------------------------------
</TABLE>
SUMMARY OF TOTAL INVESTMENTS BY COUNTRY --
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
COUNTRY (000) ASSETS
- -----------------------------------------------------------------
<S> <C> <C>
Croatia U.S.$ 3,175 4.3%
Czech Republic 8,993 12.1
Hungary 13,743 18.6
Poland 20,172 27.3
Russia 27,368 36.9
United States (short-term investments) 301 0.4
Other 337 0.5
----------- -----
U.S.$74,089 100.1%
----------- -----
----------- -----
- -----------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1999
(UNAUDITED)
STATEMENT OF OPERATIONS (000)
- -------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 304
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243
Less: Foreign Taxes Withheld . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (42)
- -------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 505
- -------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 511
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Administrative Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Professional Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Shareholder Reporting Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Amortization of Organization Costs . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
- -------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 865
- -------------------------------------------------------------------------------------------------------------
Net Investment Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (360)
- -------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,734
Foreign Currency Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (137)
- -------------------------------------------------------------------------------------------------------------
Net Realized Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,597
- -------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Appreciation on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,786
Appreciation on Foreign Currency Translations . . . . . . . . . . . . . . . . . . . . . 19
- -------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation . . . . . . . . . . . . . . . . . . . 11,805
- -------------------------------------------------------------------------------------------------------------
Total Net Realized Gain and Change in Unrealized
Appreciation/Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,402
- -------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . . . . . . . . . . . . U.S.$ 17,042
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1999 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1998
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Loss . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ (360) U.S.$ (823)
Net Realized Gain (Loss). . . . . . . . . . . . . . . . . . . . . . . 5,597 (25,872)
Change in Unrealized Appreciation/Depreciation. . . . . . . . . . . . 11,805 (40,832)
- -------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations . . . 17,042 (67,527)
- -------------------------------------------------------------------------------------------------------------
Distributions:
In Excess of Net Realized Gains . . . . . . . . . . . . . . . . . . . -- (3,351)
- -------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Reinvestment of Distributions (32,748 shares) . . . . . . . . . . . . -- 579
Repurchase of Shares (300,600 and 270,500 shares, respectively) . . . (3,332) (2,463)
- -------------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting from Capital
Share Transactions . . . . . . . . . . . . . . . . . . . . . . . . (3,332) (1,884)
- -------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . . . . . . . . . . . . 13,710 (72,762)
Net Assets:
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . . 60,309 133,071
- -------------------------------------------------------------------------------------------------------------
End of Period (including accumulated net investment
loss / undistributed net investment income of
U.S.$(359) and U.S.$1, respectively) . . . . . . . . . . . . . . . U.S.$ 74,019 U.S.$ 60,309
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31, PERIOD FROM
1999 ---------------------------------------- SEPTEMBER 30, 1996* TO
SELECTED PER SHARE DATA AND RATIOS: (UNAUDITED) 1998 1997 DECEMBER 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . U.S.$ 12.65 U.S.$ 26.59 U.S.$ 20.77 U.S.$ 20.00
- ----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) . . . . . . . . . . (0.08) (0.17) (0.38) 0.06
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . 3.84 (13.21) 9.88 0.78
- ----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations . . . . . 3.76 (13.38) 9.50 0.84
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income . . . . . . . . . . . . -- -- -- (0.07)
Net Realized Gain . . . . . . . . . . . . . . -- -- (3.68) --
In Excess of Net Realized Gain . . . . . . . . -- (0.67) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . -- (0.67) (3.68) (0.07)
- ----------------------------------------------------------------------------------------------------------------------------------
Anti-Dilutive Effect of Shares Repurchased . . . 0.16 0.11 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . U.S.$ 16.57 U.S.$ 12.65 U.S.$ 26.59 U.S.$ 20.77
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD . . . . . U.S.$ 15.13 U.S.$ 9.81 U.S.$ 23.88 U.S.$ 18.00
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value . . . . . . . . . . . . . . . . . 54.14% (57.34)% 53.53% (9.72)%
Net Asset Value (1) . . . . . . . . . . . . . 30.99% (50.62)% 48.19% 4.18%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS) . . . . . U.S.$74,019 U.S.$60,309 U.S.$133,071 U.S.$103,945
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets . . . . 2.72%** 2.51% 2.50% 3.30%**
Ratio of Net Investment Income (Loss)
to Average Net Assets . . . . . . . . . . . . (1.13)%** (0.89)% (1.27)% 1.15%**
Portfolio Turnover Rate . . . . . . . . . . . . 100% 96% 71% 2%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of Operations.
* * Annualized.
(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.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 (UNAUDITED)
- ------------
The Morgan Stanley Dean Witter Eastern Europe Fund, Inc. (formerly Morgan
Stanley Russia & New Europe Fund, Inc.) (the "Fund") was incorporated in
Maryland on February 3, 1994 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, which are in conformity with
generally accepted accounting principles for investment companies, 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. All non-equity securities as
to which market quotations are readily available are valued at their market
values. 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. At June 30, 1999, securities valued at
$3,681,000 representing 5.0% of net assets have been fair valued. The
amounts realized upon disposition may differ from the assigned valuations
and such differences could be material.
2. TAXES: It is the Fund's intention to continue to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly,
no provision for U.S. Federal income taxes is required in the financial
statements.
The Fund may be subject to taxes imposed by countries in which it invests.
Such taxes are generally based on income and/or capital gains earned or
repatriated. Taxes are accrued and applied to net investment income, net
realized gains and net unrealized appreciation as such income and/or gains
are earned.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the
underlying securities, with a market value at least equal to the amount of
the repurchase transaction, including principal and accrued interest. To
the extent that any repurchase transaction exceeds one business day, the
value of the collateral is marked-to-market on a daily basis to determine
the adequacy of the collateral. In the event of default on the obligation
to repurchase, the Fund has the right to liquidate the collateral and apply
the proceeds in satisfaction of the obligation. In the event of default or
bankruptcy by the counterparty to the agreement, realization and/or
retention of the collateral or proceeds may be subject to legal
proceedings.
4. FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into
U.S. dollars at the mean of the bid and asked prices of such currencies
against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates
of exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the period, the Fund does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from
changes in the market prices of the securities held at period end.
Similarly, the Fund does not isolate the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market
prices of securities sold during the period. Accordingly, realized and
unrealized foreign currency gains (losses) are included in the reported net
realized and unrealized gains (losses) on investment transactions and
balances.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of foreign
currency exchange contracts, disposition of foreign currencies, currency
gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid. Net
unrealized currency gains (losses) from valuing foreign currency denom-
11
<PAGE>
inated assets and liabilities at period end exchange rates are reflected as
a component of unrealized appreciation (depreciation) on investments and
foreign currency translations in the Statement of Net Assets. The change in
net unrealized currency gains (losses) for the period is reflected in the
Statement of Operations.
The Fund may use derivatives to achieve its investment objective. The Fund may
engage in transactions in futures contracts on foreign currencies, stock
indices, as well as in options, swaps and structured notes. Consistent with the
Fund's investment objectives and policies, the Fund may use derivatives for
non-hedging as well as hedging purposes.
Following is a description of derivative instruments that the Fund may utilize
and their associated risks:
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 a foreign currency relative to the
U.S. dollar.
6. LOAN AGREEMENTS: The Fund may invest in fixed and floating rate loans
("Loans") arranged through private negotiations between an issuer of
sovereign debt obligations and one or more financial institutions
("Lenders") deemed to be creditworthy by the investment adviser. The Fund's
investments in Loans may be in the form of participations in Loans
("Participations") or assignments of all or a portion of Loans
("Assignments") from third parties. The Fund's investment in Participations
typically results in the Fund having a contractual relationship with only
the Lender and not with the borrower. The Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the Lender selling the Participation and only upon receipt by the
Lender of the payments from the borrower. The Fund generally has no right
to enforce compliance by the borrower with the terms of the loan agreement.
As a result, the Fund may be subject to the credit risk of both the
borrower and the Lender that is selling the Participation. When the Fund
purchases Assignments from Lenders it acquires direct rights against the
borrower on the Loan. Because Assignments are arranged through private
negotiations between potential assignees and potential assignors, the
rights and obligations acquired by the Fund as the purchaser of an
Assignment may differ from, and be more limited than, those held by the
assigning Lender.
7. 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.
8. 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 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
ex-
12
<PAGE>
tent 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.
9. 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.
10. 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.
11. 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 dividends) net of applicable
withholding taxes where recovery of such taxes is not reasonably assured.
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, gains on certain securities of corporations designated as
"passive foreign investment companies", net operating losses and the timing
of the recognition of gains or losses on securities.
Permanent book and tax basis differences relating to shareholder
distributions may result in reclassifications to undistributed net
investment income (loss), accumulated net realized gain (loss) and capital
surplus.
Adjustments for permanent book-tax differences, if any, are not reflected
in ending undistributed net investment income (loss) for the purpose of
calculating net investment income (loss) per share in the financial
highlights.
B. Morgan Stanley Dean Witter Investment Management Inc. (the "Adviser")
provides investment advisory services to the Fund under the terms of an
Investment Advisory Agreement (the "Agreement"). Under the Agreement, the
Adviser is paid a fee computed weekly and payable monthly at an annual rate of
1.60% 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 0.09% of the Fund's average weekly net assets, plus $65,000
per annum. In addition, the Fund is charged certain out-of-pocket expenses by
the Administrator.
D. The Chase Manhattan Bank serves as custodian for the Fund. Custody fees are
payable monthly based on assets held in custody, investment purchase and sales
activity and account maintenance fees, plus reimbursement for certain
out-of-pocket expenses.
13
<PAGE>
E. For the six months ended June 30, 1999, the Fund made purchases and sales
totaling $63,185,000 and $65,196,000, respectively, of investment securities
other than long-term U.S. Government securities and short-term investments.
There were no purchases or sales of long-term U.S. Government securities. During
the six months ended June 30, 1999, the Fund incurred $33,000 as brokerage
commissions to Morgan Stanley & Co. Incorporated, an affiliated broker/dealer.
At June 30, 1999, the U.S. Federal income tax cost basis of securities was
$72,989,000 and, accordingly, net unrealized appreciation for U.S. Federal
income tax purposes was $763,000, of which $11,444,000 related to appreciated
securities and $10,681,000 related to depreciated securities. At December 31,
1998, the Fund had a capital loss carryforward for U.S. Federal income tax
purposes of approximately $23,890,000 available to offset future capital gains
which will expire on December 31, 2006. To the extent that capital gains are
offset, such gains will not be distributed to the shareholders.
F. A significant portion of the Fund's assets consist of securities of issuers
located in emerging markets, which are denominated in foreign currencies.
Changes in currency exchange rates will affect the value of and investment
income from such securities. Securities in emerging markets involve certain
considerations and risks not typically associated with investments in the United
States. In addition to smaller size, lesser liquidity and greater volatility,
certain securities' markets in which the Fund may invest are less developed than
the U.S. securities market and there is often substantially less publicly
available information about these issuers. Further, emerging market issues may
be subject to substantial governmental involvement in the economy and greater
social, economic and political uncertainty. Accordingly, the price which the
Fund may realize upon sale of securities in such markets may not be equal to its
value as presented in the financial statements.
Settlement and registration of securities transactions may be subject to
significant risks not normally associated with investments in the United States.
In certain markets, including Russia, ownership of shares is defined according
to entries in the issuer's share register. In Russia, there currently exists no
central registration system and the share registrars may not be subject to
effective state supervision. It is possible the Fund could lose its share
registration through fraud, negligence or even mere oversight. In addition,
shares being delivered for sales and cash being paid for purchases may be
delivered before the exchange is complete. This may subject the Fund to further
risk of loss in the event of a failure to complete the transaction by the
counterparty.
G. In connection with its organization the Fund incurred $80,000 of
organization costs. The organization costs have been amortized on a
straight-line basis over a five year period beginning September 30, 1996, the
date the Fund commenced operations. Due to a change in accounting guidance, the
balance of unamortized organization costs at December 31, 1998 will be charged
to expense in 1999.
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,
1999 totaled $20,000 and are included in Payable for Directors' Fees and
Expenses on the Statement of Net Assets.
I. 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. For the six months ended June
30, 1999, the Fund repurchased 300,600 shares of its Common Stock at an average
price per share of $11.03 and an average discount of 17.92% 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.
14
<PAGE>
J. Supplemental Proxy Information
The Annual Meeting of the Stockholders of the Morgan Stanley Russia and New
Europe Fund, Inc. was held on April 29, 1999. The following is a summary of
each proposal presented and the total number of shares voted:
<TABLE>
<CAPTION>
VOTES IN VOTES AUTHORITY VOTES
FAVOR OF AGAINST WITHHELD ABSTAINED
--------- ------- --------- ---------
<S> <C> <C> <C> <C>
1. To elect the following Directors: Peter J. Chase . . 2,532,457 -- 27,063 --
David B. Gill. . . 2,532,457 -- 27,063 --
Michael F. Klein.. 2,532,457 -- 27,063 --
2. To ratify the selection of PricewaterhouseCoopers
LLP as independent accountants of the Fund. . . . . . 2,539,968 10,697 -- 8,855
3. To approve an amendment to the Fund's Articles of
Incorporation to change the name of the Fund to
Morgan Stanley Dean Witter Eastern Europe Fund, Inc.. 2,522,614 27,089 -- 9,817
4. To approve an amendment to the Fund's investment
restrictions to allow the Fund to invest more than
25% of the Fund's total assets in securities of
companies involved in the telecommunications
industry if the Board of Directors of the Fund
determines that certain criteria are met. . . . . . . 1,783,720 25,957 -- 7,381
</TABLE>
15
<PAGE>
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.
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 or distributions.
In the case of shareholders, such as banks, brokers or nominees, which hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
shareholder as representing the total amount registered in the shareholder's
name and held for the account of beneficial owners who are participating in the
Plan.
Participants who wish to withdraw from the Plan should notify the Plan
Agent in writing. There is no penalty for non-participation or withdrawal from
the Plan, and shareholders who have previously withdrawn from the Plan may
rejoin at any time. Requests for additional information or any correspondence
concerning the Plan should be directed to the Plan Agent at:
Morgan Stanley Dean Witter Eastern Europe 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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