<PAGE>
------------------------------------------------------------
MORGAN STANLEY
DEAN WITTER
EASTERN EUROPE
FUND, INC.
------------------------------------------------------------
SEMI-ANNUAL REPORT
JUNE 30, 2000
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
Harold J. Schaaff, Jr.
PRESIDENT AND DIRECTOR
John D. Barrett II
DIRECTOR
Gerard E. Jones
DIRECTOR
Graham E. Jones
DIRECTOR
John A. Levin
DIRECTOR
Andrew McNally IV
DIRECTOR
William G. Morton, Jr.
DIRECTOR
Samuel T. Reeves
DIRECTOR
Fergus Reid
DIRECTOR
Frederick O. Robertshaw
DIRECTOR
Stefanie V. Chang
VICE PRESIDENT
Arthur J. Lev
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Mary E. Mullin
SECRETARY
Belinda A. Brady
TREASURER
Robin L. Conkey
ASSISTANT TREASURER
================================================================================
INVESTMENT ADVISER
Morgan Stanley Dean Witter Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
--------------------------------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
--------------------------------------------------------------------------------
CUSTODIAN
The Chase Manhattan Bank
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
Clifford Chance Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
--------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Ernst & Young LLP
787 Seventh Avenue
New York, New York 10019
================================================================================
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/im.
<PAGE>
LETTER TO SHAREHOLDERS
---------
For the six months ended June 30, 2000, the Morgan Stanley Dean Witter Eastern
Europe Fund, Inc. (the "Fund") had a total return, based on net asset value per
share, of -4.17% compared to -3.70% for the Fund's benchmark (described below).
For the period from the Fund's commencement of operations on September 30, 1996
through June 30, 2000, the Fund had a total return, based on net asset value per
share, of 17.68% compared with 10.00% for its benchmark. Since January 1, 1998,
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. For the
period from September 30, 1996 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 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. On June 30,
2000, the closing price of the Fund's shares on the New York Stock Exchange was
$16 15/16, representing a 13.3% discount to the Fund's net asset value per
share.
RUSSIA
Russian equities declined 5.6% during the first half of 2000, despite strong oil
prices and continued signs of economic strength, as sentiment has been tempered
by the hostilities in Chechnya and the need for substantive economic reform.
Vladamir Putin's election as president on March 26, 2000 should provide
political stability in Russia and further bolster Russia's economic recovery,
which has benefited from oil price strength, debt restructuring and forgiveness,
current account surpluses and improving international reserves. President Putin
has been seeking to consolidate power and increase centralization among the
Russian Confederation. Putin has also been endeavoring to increase the
transparency between the government and corporations and to improve minority
shareholder rights. Signs of the first real reforms emerged during early June
2000, when the Duma passed a tax bill. The tax law would significantly lower the
income tax with the intention of ending tax evasion and widening the tax base.
Although much of Russia's good fortune these past six months may be attributed
to the higher price of oil and optimism surrounding Putin's election, healthier
fiscal and current accounts have also buoyed the market. Fiscal accounts have
benefited from higher government revenues due to higher oil taxes and better tax
collection (e.g. from utility companies). Tax measures and changes in the fiscal
regime include hikes in tobacco and alcohol excise taxes, the reduction of goods
eligible for preferential VAT treatment, and the introduction of a new local
sales tax. The significant turnaround in Russia's external trade performance has
resulted from the stronger price of oil as well as from the impact of the
collapsed Ruble on pushing up import prices. In addition, dramatic improvements
in inflation have resulted from a combination of a restrictive monetary policy
and willingness by suppliers to cut prices in order to protect market share.
The recovery in public finances has fostered sustainable structural changes,
which we believe shall further facilitate a healthier economy going forward. The
increased demand and receipt of cash payments for the public budgets has
lessened the use of barter and payments in arrears trade.
We are encouraged by Russia's buoyant export sector and industrial production
growth, and we anticipate growth for 2000 to reach 5.5%. During the third and
fourth quarters of 2000 we anticipate Russia shall reach agreement with the IMF
and Paris Club. Russia still needs to concentrate on economic reform and
tackling corruption and creating greater transparency in government-controlled
companies. The absence of an end to the bitter dispute in Chechnya is also a
restraining factor holding back economic growth. We believe Russian equities
will perform well in the near-term as we anticipate positive macro fundamentals
to remain intact.
CZECH REPUBLIC
Equities in the Czech Republic led the region during the first half of 2000,
advancing 6.2%. Gains at the beginning of the year were fueled by strong
performance in the telecommunications and banking industries. Modest inflation
and declining interest rates have also started to boost consumption. Improving
export performance due to a pick-up in Western European demand and a competitive
Czech exchange rate have further enhanced prospects for better economic growth
this year. During the second quarter of 2000 there was a run on the troubled IPB
bank by depositors following an auditor's statement that the bank had lost its
capital base and could no longer operate on its own. Subsequently, the
government has guaranteed all deposits in IBP, yet we do not anticipate this
should raise solvency risk given the government's low debt to GDP level. As the
Czech Republic continues to emerge from its recession, export growth to Western
Europe remains the main economic driver. The Czech Republic's open economy is
particularly geared to the economic pickup in Western Europe, as the ratio of
imports and exports to GDP is 120%. We anticipate GDP growth for 2000 to reach
2.5%. Further privatization in the telecom sector should take place dur-
2
<PAGE>
ing the second half of 2000 and in the banking sector during the first half of
2001. We anticipate Czech equities will perform well over the near-term, buoyed
by privatization and economic growth.
HUNGARY
During the first half of 2000 equities in Hungary declined 7.8%, weighed down
towards the end of the second quarter of 2000 by the government's unfavorable
price increase for index-heavyweight oil and gas producer MOL and concerns over
Hungary's current and fiscal account deficits. Recently, however, Hungary's
economy has been exceeding expectations, with a better-than-expected current
account and GDP growth reflecting increased domestic production. Exports,
primarily to the European Union and Germany, have been strong, and GDP growth is
anticipated to reach 5.5% this year. Hungarian exports have a greater value
added component than most Czech and Polish exports, and Hungary's established
position as a manufacturer and assembler for many large Western European
companies has particularly supported the country's trade position. Economic
growth should be boosted by a combination of exports (benefiting from the
economic recovery of Hungary's main trading partners), private consumption
(fueled by real wage growth) and capital formation (including new funds from
domestic pension funds). Despite aggressively cutting interest rates earlier
this year, the government remains concerned about inflation. However, we
anticipate equities should perform well amidst the backdrop of an improving
economy and support from strong growth in Western Europe.
POLAND
The Polish equities market advanced 1.5%, notwithstanding heightened political
tensions during the first half of 2000. Since the Freedom Union (UW) and its
cabinet representatives left the two-party coalition in early June 2000, Poland
is now governed by a minority government. It is unlikely that the AWS, the
amalgamation of various right-wing solidarity parties, will receive sufficient
support from opposition parties to pass any significant legislation, and fiscal
policy may be the main casualty. On a positive note, fiscal numbers during the
second quarter of 2000 showed improvement compared to the same time last year,
supported by higher tax revenues and smoother performance of the state social
security fund. In mid-April, the National Bank of Poland removed the Zloty's
trading bands and decided to let the market determine the exchange rate. The
Zloty weathered the recent political turmoil rather well and substantial capital
inflows that are anticipated for this year should minimize the risk of a sharp
Zloty sell-off. Polish equities may be fueled by a convergence in valuations of
companies in the information technology/Internet/telecoms sectors with their
competitive global peers. In addition, Polish companies are forming alliances
among major players in the technology, telecommunications and media arenas.
A large current account deficit (forecast to exceed 7.0% of GDP for 2000) and
high inflation remain our chief economic concerns, dampening our enthusiasm for
Polish equities. Although foreign direct investment should plug most of the
current account deficit this year, we anticipate fewer strategic sales of
government stakes next year and are cautious given the political instability and
disappointing macroeconomic environment.
Sincerely,
/s/ Harold J. Schaaff, Jr,
Harold J. Schaaff, Jr.
PRESIDENT AND DIRECTOR
July 2000
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO
PURCHASE OR SELL THE SECURITIES MENTIONED.
FOREIGN INVESTING INVOLVES CERTAIN RISKS, INCLUDING CURRENCY FLUCTUATIONS AND
CONTROLS, RESTRICTIONS ON FOREIGN INVESTMENTS, LESS GOVERNMENTAL SUPERVISION AND
REGULATION, LESS LIQUIDITY AND THE POTENTIAL FOR MARKET VOLATILITY AND POLITICAL
INSTABILITY.
--------------------------------------------------------------------------------
DAILY NET ASSET AND MARKET VALUES, AS WELL AS MONTHLY PORTFOLIO INFORMATION FOR
THE FUND, ARE AVAILABLE ON OUR WEBSITE AT www.msdw.com/im.
3
<PAGE>
Morgan Stanley Dean Witter Eastern Europe Fund, Inc.
Investment Summary as of June 30, 2000 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION TOTAL RETURN (%)
-------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (3)
---------------------- --------------------------------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
------------ -------- ----------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
YEAR TO DATE 0.37% -- -4.17% -- -3.70% --
ONE YEAR 11.98 11.98% 17.86 17.86% 18.31 18.31%
SINCE INCEPTION* 2.06 0.55 17.68 4.44 10.00 2.58
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
--------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
[CHART]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
ENDED
JUNE 30,
1996* 1997 1998 1999 2000
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value Per Share .......................... $ 20.77 $ 26.59 $ 12.65 $ 20.38 $ 19.53
Market Value Per Share ............................. $ 18.00 $ 23.88 $ 9.81 $ 16.88 $ 16.94
Premium/(Discount) ................................. -13.3% -10.2% -22.4% -17.2% -13.3%
Income Dividends ................................... $ 0.07 -- -- -- --
Capital Gains Distributions ........................ -- $ 3.68 $ 0.67 -- --
Fund Total Return (2) .............................. 4.18% 48.19% -50.62% 61.11% -4.17%
Index Total Return (3) ............................. 9.25% 48.23% -57.84% 67.30% -3.70%
</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) Since January 1, 1998, 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. 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.
* The Fund commenced operations on September 30, 1996.
4
<PAGE>
Morgan Stanley Dean Witter Eastern Europe Fund, Inc.
Portfolio Summary as of June 30, 2000 (Unaudited)
===============================================================================
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Equity Securities (99.4%)
Short-Term Investments (0.6%)
</TABLE>
-------------------------------------------------------------------------------
INDUSTRIES
[CHART]
<TABLE>
<S> <C>
Banks (5.3%)
Diversified Telecommunications Services (28.4%)
Electric Utilities (12.2%)
Integrated Oil & Gas (16.2%)
Media (2.6%)
Metals & Mining (4.5%)
Oil & Gas Exploration & Production (18.0%)
Software (2.2%)
Telecommunication Services (1.7%)
Trading Companies & Distributors (2.2%)
Other (6.7%)
</TABLE>
-------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[CHART]
<TABLE>
<S> <C>
Czech Republic (13.2%)
Hungary (16.8%)
Poland (17.0%)
Russia (52.5%)
Other (0.5%)
</TABLE>
-------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
------------
<S> <C>
1. Surgutneftgaz (Russia) 18.0%
2. LUKoil Holdings (Russia) 14.5
3. Matav Rt. (Hungary) 11.1
4. Unified Energy System (Russia) 8.0
5. SPT Telecom (Czech Republic) 6.8
6. Telekomunikacja Polska (Poland) 5.9
7. CEZ (Czech Republic) 3.5
8. KGHM Polska Miedz (Poland) 2.4
9. Mustcom (Russia) 2.4
10. Elektrim (Poland) 2.2
-----
74.8%
=====
</TABLE>
* Excludes short-term investments.
5
<PAGE>
FINANCIAL STATEMENTS
---------
STATEMENT OF NET ASSETS (UNAUDITED)
---------
JUNE 30, 2000
<TABLE>
<CAPTION>
SHARES VALUE
(000)
--------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (99.5%)
(Unless otherwise noted)
--------------------------------------------------------------------------------------------------
CZECH REPUBLIC (13.2%)
BANKS
(a)Ceska Sporitelna 126,430 U.S.$ 683
(a)Ceska Sporitelna GDR 16,225 88
(a)Komercni Banka 82,860 1,677
-----------
2,448
-----------
DIVERSIFIED TELECOMMUNICATION SERVICES
(a)SPT Telecom 337,477 5,666
-----------
ELETRIC UTILITIES
(a)CEZ 1,108,020 2,923
-----------
11,037
-----------
--------------------------------------------------------------------------------------------------
HUNGARY (16.8%)
AUTO COMPONENTS
(a)North American Bus Industries Rt. 40,431 861
-----------
BANKS
OTP Bank Rt. 27,970 1,457
-----------
CHEMICALS
Tiszai Vegyi Kombinat Rt. 30,200 416
-----------
DIVERSIFIED TELECOMMUNICATION SERVICES
Matav Rt. 586,542 4,077
Matav Rt. ADR 152,429 5,249
-----------
9,326
-----------
HOTELS RESTAURANTS & LEISURE
Danubius Hotel and Spa Rt. 24,320 469
-----------
IT CONSULTING & SERVICES
(a)Synergon Information Systems 61,500 564
-----------
PHARMACEUTICALS
EGIS Rt. 13,670 572
Richter Gedeon Rt. 7,750 417
-----------
989
-----------
14,082
-----------
--------------------------------------------------------------------------------------------------
POLAND (17.0%)
BANKS
BRE Bank SA 17,659 547
-----------
COMPUTERS & PERIPHERALS
Optimus SA 10,444 485
-----------
DIVERSIFIED FINANCIALS
(a)Europejski Fundusz Leasingowy SA GDR 82,000 1,321
-----------
DIVERSIFIED TELECOMMUNICATION SERVICES
Telekomunikacja Polska GDR 712,770 4,922
-----------
MEDIA
(a)Agora SA 50,202 1,326
-----------
METALS & MINING
KGHM Polska Miedz 272,661 2,041
-----------
SOFTWARE
Prokom GDR 50,660 1,282
Softbank 10,100 524
-----------
1,806
-----------
--------------------------------------------------------------------------------------------------
TRADING COMPANIES & DISTRIBUTORS
(a)Elektrim 158,235 U.S.$1,817
-----------
14,265
-----------
--------------------------------------------------------------------------------------------------
RUSSIA (52.5%)
DIVERSIFIED TELECOMMUNICATION SERVICES
(a,b)Mustcom 9,526,809 1,986
Kubanelectrosvyaz 50,000 420
Rostelecom (Preferred) 2,110,000 1,511
-----------
3,917
-----------
ELECTRIC UTILITIES
Irkutskenergo ADR 182,700 635
Unified Energy Systems 18,839,846 2,167
Unified Energy Systems ADR 31,000 356
(a)Unified Energy Systems GDR 362,700 4,171
-----------
7,329
-----------
INTEGRATED OIL & GAS
AO Tatneft ADR 141,800 1,391
LUKoil Holdings 147,000 1,879
LUKoil Holdings ADR 140,498 7,182
LUKoil Holdings ADR (Preferred) 154,500 3,109
-----------
13,561
-----------
MEDIA
(a)Storyfirst Communications 'A' (Preferred) 1,920 818
-----------
METALS & MINING
Norilsk Nickel 238,000 1,743
-----------
OIL & GAS EXPLORATION & PRODUCTION
Surgutneftgaz ADR 872,472 11,626
Surgutneftgaz ADR (Preferred) 30,310,000 3,455
-----------
15,081
-----------
TELECOMMUNICATION SERVICES
(a)Nizhegordsvyazinform 500,000 500
Nizhegordsvyazinform ADR 250,000 668
St. Petersburg Telephone Network 500,000 301
-----------
1,469
-----------
43,918
-----------
--------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost U.S.$86,499) 83,302
-----------
--------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
--------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (0.6%)
UNITED STATES
REPURCHASE AGREEMENT
Chase Securities, Inc., 6.15%,
dated 6/30/00, due
7/03/00, to be repurchased
at U.S.$504, collateralized
by U.S.$565 United States
Treasury Note, 4.75%, due
11/15/08, valued at
U.S.$517
(Cost U.S.$504) U.S.$504 U.S.$ 504
-----------
--------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.1%)
(Cost U.S.$87,003) 83,806
-----------
--------------------------------------------------------------------------------------------------
<CAPTION>
AMOUNT
(000)
--------------------------------------------------------------------------------------------------
<S> <C> <C>
OTHER ASSETS (2.7%)
Cash 1,964
Dividends Receivable 204
Receivable for Investments Sold 117
Other 9 2,294
----------- -----------
--------------------------------------------------------------------------------------------------
LIABILITIES (-2.8%)
Payable For:
Investments Purchased (1,801)
Custodian Fees (256)
Investment Advisory Fees (119)
Professional Fees (51)
Shareholder Reporting Expenses (45)
Directors' Fees and Expenses (32)
Administrative Fees (29)
Other Liabilities (19) (2,352)
----------- -----------
--------------------------------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 4,287,648, issued and
outstanding U.S.$ 0.01 par value
shares (500,000,000 shares
authorized) U.S.$83,748
===========
--------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 19.53
============
--------------------------------------------------------------------------------------------------
AT JUNE 30, 2000, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------------------------
Common Stock U.S.$ 43
Capital Surplus 88,724
Accumulated Net Investment Loss (785)
Accumulated Net Realized Loss (1,011)
Unrealized Depreciation on Investments and
Foreign Currency Translations (3,223)
--------------------------------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$83,748
============
--------------------------------------------------------------------------------------------------
(a) -- Non-income producing.
(b) -- Security is valued at fair value -- see note A1 to financial
statements.
ADR - American Depositary Receipt.
GDR - Global Depositary Receipt.
--------------------------------------------------------------------------------------------------
SUMMARY OF TOTAL INVESTMENTS BY INDUSTRY
CLASSIFICATION -- JUNE 30, 2000
<CAPTION>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Auto Components U.S. $861 1.0%
Banks 4,452 5.3
Chemicals 416 0.5
Computers & Peripherals 485 0.6
Diversified Financials 1,321 1.6
Diversified Telecommunication Services 23,831 28.4
Electric Utilities 10,252 12.2
Hotels Restaurants & Leisure 469 0.6
Integrated Oil & Gas 13,561 16.2
IT Consulting and Services 564 0.7
Media 2,144 2.6
Metals & Mining 3,784 4.5
Oil & Gas Exploration & Production 15,081 18.0
Pharmaceuticals 989 1.2
Software 1,806 2.2
Telecommunication Services 1,469 1.7
Trading Companies & Distributors 1,817 2.2
Other 504 0.6
----------- ---------
U.S.$83,806 100.1%
=========== =========
--------------------------------------------------------------------------------------------------
SUMMARY OF TOTAL INVESTMENTS BY COUNTRY --
JUNE 30, 2000
<CAPTION>
PERCENT
VALUE OF NET
COUNTRY (000) ASSETS
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Czech Republic 11,037 13.2%
Hungary 14,082 16.8
Poland 14,265 17.0
Russia 43,918 52.5
United States (short-term investments) 504 0.6
----------- ---------
U.S.$83,806 100.1%
=========== =========
--------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 2000
(UNAUDITED)
STATEMENT OF OPERATIONS (000)
---------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends ................................................................................. U.S.$ 310
Interest .................................................................................. 50
Less: Foreign Taxes Withheld .............................................................. (15)
---------------------------------------------------------------------------------------------------------------------
Total Income .............................................................................. 345
---------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees .................................................................. 778
Custodian Fees ............................................................................ 91
Administrative Fees ....................................................................... 83
Professional Fees ......................................................................... 59
Shareholder Reporting Expenses ............................................................ 33
Directors' Fees and Expenses .............................................................. 15
---------------------------------------------------------------------------------------------------------------------
Total Expenses ............................................................................ 1,059
---------------------------------------------------------------------------------------------------------------------
Net Investment Loss ....................................................................... (714)
---------------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold ................................................................ 17,400
Foreign Currency Transactions ............................................................. (202)
---------------------------------------------------------------------------------------------------------------------
Net Realized Gain ......................................................................... 17,198
---------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Depreciation on Investments ............................................................... (20,477)
Depreciation on Foreign Currency Translations ............................................. (13)
---------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation ............................................ (20,490)
---------------------------------------------------------------------------------------------------------------------
Total Net Realized Gain and Change in Unrealized Appreciation/Depreciation ................ (3,292)
---------------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ...................................... U.S.$ (4,006)
=====================================================================================================================
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 2000 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1999
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Loss ........................................................ U.S.$ (714) U.S.$ (1,518)
Net Realized Gain .......................................................... 17,198 7,213
Change in Unrealized Appreciation/Depreciation ............................. (20,490) 28,313
---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations ............ (4,006) 34,008
---------------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Repurchase of Shares (172,100 and 307,500 shares, respectively) ............ (3,125) (3,438)
---------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) .................................................. (7,131) 30,570
Net Assets:
Beginning of Period ........................................................ 90,879 60,309
---------------------------------------------------------------------------------------------------------------------
End of Period (including accumulated net investment loss of
U.S.$(785) and U.S.$(71), respectively) .................................... U.S.$ 83,748 U.S.$ 90,879
=====================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
SIX MONTHS ENDED PERIOD FROM
JUNE 30, 2000 SEPTEMBER 30, 1996*
SELECTED PER SHARE DATA AND RATIOS: (UNAUDITED) 1999 1998 1997 TO DECEMBER 31, 1996
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .............. U.S.$ 20.38 U.S.$ 12.65 U.S.$ 26.59 U.S.$ 20.77 U.S.$ 20.00
------------------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) ...................... (0.17) (0.34) (0.17) (0.38) 0.06
Net Realized and Unrealized Gain (Loss) on
Investments ....................................... (0.84) 7.91 (13.21) 9.88 0.78
------------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .................. (1.01) 7.57 (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 0.16 0.11 -- --
------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD .................... U.S.$ 19.53 U.S.$ 20.38 U.S.$ 12.65 U.S.$ 26.59 U.S.$ 20.77
====================================================================================================================================
PER SHARE MARKET VALUE, END OF PERIOD ............. U.S.$ 16.94 U.S.$ 16.88 U.S.$ 9.81 U.S.$ 23.88 U.S.$ 18.00
====================================================================================================================================
TOTAL INVESTMENT RETURN:
Market Value ...................................... 0.37% 71.98% (57.34)% 53.53% (9.72)%
Net Asset Value (1) ............................... (4.17)% 61.11% (50.62)% 48.19% 4.18%
====================================================================================================================================
RATIOS, SUPPLEMENTAL DATA:
------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS) ............. U.S.$ 83,748 U.S.$90,879 U.S.$60,309 U.S.$133,071 U.S.$103,945
------------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets ........... 2.17%** 2.51% 2.51% 2.50% 3.30%**
Ratio of Net Investment Income (Loss) to Average
Net Assets ........................................ (1.48)%** (2.25)% (0.89)% (1.27)% 1.15%**
Portfolio Turnover Rate ........................... 69% 161% 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.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 (UNAUDITED)
---------
Morgan Stanley Dean Witter Eastern 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 under procedures approved by the Board of Directors, although
the actual calculations may be done by others.
2. TAXES: It is the Fund's intention to continue to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly,
no provision for U.S. Federal income taxes is required in the financial
statements.
The Fund may be subject to taxes imposed by countries in which it invests.
Such taxes are generally based on 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: The Fund may enter into repurchase agreements under
which the Fund lends excess cash and takes possession of securities with an
agreement that the counterparty will repurchase such securities. In
connection with transactions in repurchase agreements, a bank as custodian
for the Fund takes possession of the underlying securities (collateral),
with a market value at least equal to the amount of the repurchase
transaction, including principal and accrued interest. To the extent that
any repurchase transaction exceeds one business day, the value of the
collateral is marked-to-market on a daily basis to determine the adequacy
of the collateral. In the event of default on the obligation to repurchase,
the Fund has the right to liquidate the collateral and apply the proceeds
in satisfaction of the obligation. In the event of default or bankruptcy by
the counterparty to the agreement, realization and/or retention of the
collateral or proceeds may be subject to legal proceedings.
4. FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into
U.S. dollars at the mean of the bid and asked prices of such currencies
against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities - at the prevailing
rates of exchange on the valuation date;
- investment transactions and investment income - at the prevailing
rates of exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the period, the Fund does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from
changes in the market prices of the securities held at period end.
Similarly, the Fund does not isolate the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market
prices of securities sold during the period. Accordingly, realized and
unrealized foreign currency gains (losses) due to securities transactions
are included in the reported net realized and unrealized gains (losses) on
investment transactions and balances.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of foreign
currency exchange contracts, disposition of foreign currencies, currency
gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid. Net
unrealized currency gains (losses) from valuing foreign currency
denominated assets and liabilities at period end exchange rates are
reflected as a component of unrealized ap-
10
<PAGE>
preciation (depreciation) on investments and foreign currency translations
in the Statement of Net Assets. The change in net unrealized currency gains
(losses) on foreign currency translations for the period is reflected in
the Statement of Operations.
Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of U.S. dollar
denominated transactions as a result of, among other factors, the
possibility of lower levels of governmental supervision and regulation of
foreign securities markets and the possibility of political or economic
instability.
The Fund may use derivatives to achieve its investment 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 and any
intermediaries between the Lender and the Fund. When the Fund purchases
Assignments from Lenders it acquires direct rights against the borrower on
the Loan. Because 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 assets as
segregated on the Fund's records. Purchasing securities on a forward
commitment or when-issued or delayed-delivery basis may involve a risk that
the market price at the time of delivery may be lower than the agreed upon
purchase price, in which case there could be an unrealized loss at the time
of delivery.
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
quo-
11
<PAGE>
tations 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.
Risks also arise from potential losses from adverse market movements, and
such losses could exceed the related amounts shown in the Statement of Net
Assets.
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: Securities and other derivative instruments that
may be purchased or sold by the Fund may 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.
During the six month period ended June 30, 2000, the Fund's investments in the
derivative instruments described above only included foreign currency exchange
contracts.
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 by the Fund are determined in accordance with Federal income tax
regulations, which may differ from generally accepted accounting
principles. The book/tax differences are either considered temporary or
permanent in nature.
Temporary differences are attributable to differing book and tax treatments
for the timing of the recognition of gains and losses on certain investment
transactions and the timing of the deductibility of certain expenses.
Permanent book and tax basis differences may result in reclassifications
among undistributed net investment income (loss), accumulated net realized
gain (loss) and paid in capital.
Adjustments for permanent book-tax differences, if any, are not reflected
in ending undistributed net investment income (loss) for the purpose of
calculating net investment income (loss) per share in the financial
highlights.
12
<PAGE>
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.
E. For the six month period ended June 30, 2000, the Fund made purchases and
sales totaling $64,197,000 and $68,774,000, 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. At June 30, 2000, the U.S. Federal income tax cost basis of
securities was $87,003,000 and, accordingly, net unrealized depreciation for
U.S. Federal income tax purposes was $3,197,000, of which $13,160,000 related to
appreciated securities and $16,357,000 related to depreciated securities. At
December 31, 1999, the Fund had a capital loss carryforward for U.S. Federal
income tax purposes of approximately $17,030,000 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. For the six month period ended June 30, 2000, the Fund incurred $3,000 of
brokerage commissions with Morgan Stanley & Co. Incorporated, an affiliate of
the Adviser.
G. A significant portion of the Fund's assets consist of securities of issuers
located in emerging markets or 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.
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. At June 30, 2000, the deferred fees payable, under the
Plan, totaled $32,000 and are included in Payable for Directors' Fees and
Expenses on the Statement of Net Assets.
13
<PAGE>
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 month period ended
June 30, 2000, the Fund repurchased 172,100 or 3.86% shares of its Common Stock
at an average price per share of $18.11, excluding $9,000 in commissions, and an
average discount of 18.51% from net asset value per share. For the year ended
December 31, 1999, the Fund repurchased 307,500 shares or 6.45% of its Common
Stock at an average price per share of $11.13, excluding $15,000 in Commissions,
and an average discount of 17.78% from net asset value per share. Since the
inception of the program, the Fund has repurchased 750,100 shares or 14.89% of
its Common Stock at an average price per share of $11.98, excluding $39,000 in
commissions paid, and an average discount of 17.95% 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 of Directors.
J. Supplemental Proxy Information
The Annual Meeting of the Stockholders of the Fund was held on June 15, 2000.
The following is a summary of the proposal presented and the total number of
shares voted:
<TABLE>
<CAPTION>
VOTES IN VOTES VOTES
PROPOSAL: FAVOR OF AGAINST ABSTAINED
--------- ---------- --------- -----------
<S> <C> <C> <C>
1. To elect the following Directors: Andrew McNally IV ....................... 4,062,731 84,320 --
Frederick O. Robertshaw ................. 4,062,731 84,320 --
Harold J. Schaaff, Jr ................... 4,062,731 84,320 --
Fergus Reid ............................. 4,062,731 84,320 --
Graham E. Jones ......................... 4,062,731 84,320 --
John D. Barrett II ...................... 4,062,731 84,320 --
Samuel T. Reeves. ....................... 4,062,731 84,320 --
Gerard E. Jones ......................... 4,062,731 84,320 --
</TABLE>
The Annual Meeting of the Stockholders of the Fund was reconvened on August 1,
2000. The following is a summary of the proposal presented and the total number
of shares voted:
<TABLE>
<CAPTION>
VOTES IN VOTES VOTES
PROPOSAL: FAVOR OF AGAINST ABSTAINED
--------- ---------- --------- -----------
<S> <C> <C> <C>
2. To ratify the selection of Ernst & Young LLP
as independent accountants of the Fund ...................................... 3,746,002 127,546 4,774
</TABLE>
--------------------------------------------------------------------------------
CHANGE IN INDEPENDENT ACCOUNTANTS:
ON JULY 5, 2000, PRICEWATERHOUSECOOPERS LLP RESIGNED AS INDEPENDENT ACCOUNTANTS
OF THE FUND. THE REPORTS OF PRICEWATERHOUSECOOPERS LLP ON THE FINANCIAL
STATEMENTS OF THE FUND FOR THE PAST TWO FISCAL YEARS CONTAINED NO ADVERSE
OPINION OR DISCLAIMER OF OPINION AND WERE NOT QUALIFIED OR MODIFIED AS TO
UNCERTAINTY, AUDIT SCOPE OR ACCOUNTING PRINCIPLE. IN CONNECTION WITH ITS AUDITS
FOR THE TWO MOST RECENT FISCAL YEARS AND THROUGH JULY 5, 2000, THERE HAVE BEEN
NO DISAGREEMENTS WITH PRICEWATERHOUSECOOPERS LLP ON ANY MATTER OF ACCOUNTING
PRINCIPLES OR PRACTICES, FINANCIAL STATEMENT DISCLOSURE, OR AUDITING SCOPE OR
PROCEDURE, WHICH DISAGREEMENTS, IF NOT RESOLVED TO THE SATISFACTION OF
PRICEWATERHOUSECOOPERS LLP, WOULD HAVE CAUSED THEM TO MAKE REFERENCE THERETO IN
THEIR REPORT ON THE FINANCIAL STATEMENTS FOR SUCH YEARS. THE FUND, WITH THE
APPROVAL OF ITS BOARD OF DIRECTORS, AUDIT COMMITTEE AND SHAREHOLDERS, ENGAGED
ERNST & YOUNG LLP AS INDEPENDENT ACCOUNTANTS AS OF AUGUST 1, 2000.
14
<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. 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
15
