<PAGE>
------------------------------------------------------------
MORGAN STANLEY
DEAN WITTER
EASTERN EUROPE
FUND, INC.
------------------------------------------------------------
ANNUAL REPORT
DECEMBER 31, 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
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
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 year ended December 31, 1999, the Morgan Stanley Dean Witter Eastern
Europe Fund, Inc. (the "Fund") had a total return, based on net asset value
per share, of 61.11% compared to 67.30% for the Fund's benchmark (described
below). For the period from the Fund's commencement of operations on
September 30, 1996 through December 31, 1999, the Fund had a total return,
based on net asset value per share, of 22.81% compared with 14.23% for its
benchmark. 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, including dividends. 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. On December 31,
1999, the closing price of the Fund's shares on the New York Stock Exchange
was $16 7/8, representing a 17.2% discount to the Fund's net asset value per
share.
Once again, the surprising twists and turns of Russian politics dominated
investor focus in the region during the end of 1999. Two major political
developments during December, namely Parliamentary elections and the
resignation of President Boris Yeltsin, will continue to impact the stock
market and the country's economic development well into the year 2000.
Elections in the Russian Parliament (the Duma) in mid-December resulted in a
dilution of left-wing representation and a surprise victory for
pro-government forces. The recently formed Unity Party (supported by the
Yeltsin administration), the right wing Union of Right Forces and other
pro-reformers all won more seats than anyone had expected. For the first time
in the country's short history of democracy, Parliament was not dominated by
Communist forces. The biggest political surprise of the year, however, was
the resignation of President Boris Yeltsin. Expressing his desire to usher in
the new millenium with "young blood" at the country's helm, Yeltsin chose the
last day of the year to step down and allow Prime Minister Vladimir Putin to
become acting president of Russia. Yeltsin's premature departure reduces by
approximately three months the lengthy period of pre-election instability.
As prime minister, Putin has become enormously popular, in part due to the
general public's view that he will rule with a strong hand and can strengthen
the Russian state. Putin has aggressively pursued the war in Chechnya and
often speaks of reinvigorating Russia's deteriorating military.
Presidential elections are scheduled for March and Putin, boosted by his
status as acting head of state, is the outstanding favorite to win. Although
Putin's political and economic agenda is not yet known, if he wins, political
stability will improve dramatically. Up to and following the election, the
market will focus on the people with whom Putin surrounds himself. The
president's cabinet will ultimately be the key to reform. Before Russia can
return to steady and sustainable economic growth, the government must
implement a number of structural reforms, including a solution to the
non-payments problem, reform of the tax system, rational regulatory
structures and improved legal environment. To achieve success, close
cooperation between the Duma and the president, an unprecedented event, is
required. Russia could be beginning a new stage of its political and economic
development.
Starting from relatively depressed levels of 1998 and fueled by a significant
reduction in perceived political risk of investing in Russia, the stock
market performed phenomenally for the year. The Fund benefited strongly from
large positions in Russian oil stocks, Lukoil and Surgutneftegaz, which
rallied 155% and 396%, respectively. In particular, Surgutneftegaz's profits
rose phenomenally due to the benefits of the devaluation and markedly higher
oil prices, combined with the companies ability to significantly increase its
output. The Fund also maintained a large position in Unified Energy Systems
(UES), the electricity monopoly, which rose 293% for the year. UES and other
utilities will be significant beneficiaries of a resumption of the reform
process.
On the economic front, Russia is in much better shape than in the past,
especially when compared with 1996 when Yeltsin started his presidency. The
budget is stronger and the federal deficit is estimated to have fallen below
2% of GDP. In comparison, the federal deficit was an alarming 9% of GDP four
years ago. In addition, since the devaluation in August 1998, a competitive
currency has strongly supported Russia's export sector. Russia also expects
to reach an agreement on a comprehensive write-off of Soviet-era debt in the
next year, which relieves the country of a huge financial burden. Commodity
prices are also on the rise, benefiting Russia's export sector. Economic
growth will likely be flat for the year as a whole, which is much better than
anyone had anticipated at the beginning of 1999.
One major political risk continues to overhang the Russian market--the war in
Chechnya. In retaliation for what Moscow insists was Chechen involvement in a
series of terrorists incidents, Russia launched a major offensive to regain
control of the Chechen republic, which has resulted in numerous civilian and
military casualties. The war's most vocal proponent remains acting-President
Putin, whose pursuit of the war has increased his popularity among the
Russian populace. The general support for the
2
<PAGE>
war could deteriorate if the war continues through next year. The most
significant fallout from the war is likely to be strained Russian-Western
relations and continued problems with the IMF (International Monetary Fund),
which has yet to disburse the latest $640 million tranche that was expected
in September. In the past, the Fund has gone to extraordinary lengths to lend
to Russia, but disquiet among Western nations appears to have persuaded the
IMF to back away. In addition, the war could put pressure on the country's
difficult financial resources.
Towards the end of 1999, Russia was considered to be woefully unprepared for
the new millennium. As concerns over Y2K preparedness in the emerging markets
escalated, investors focused on Russia's near total lack of investment in
upgrading technology, both at the governmental and private level, and the
risk to the rest of the world of the country's nuclear arsenal. As with the
Y2K event around the world, it was a non-event in Russia and Central Europe.
The equity markets of Central Europe displayed lackluster performance during
1999. After a volatile year, the Polish market managed a 31.5% return. Political
tension among members of the ruling coalition continues to plague the market. At
one point, the market-friendly Minister of Finance threatened to resign over the
government's inability to approve a tax reduction plan, roiling the market.
After long debates among coalition partners, the Finance Minister kept his post
and a crisis was averted. But the coalition remains strained at best and may not
survive its term in office. Equity investments also suffered from currency
weakness. Delays in privatization and a widening current account put downward
pressure on the currency during the middle of the year. By year's end, however,
the zloty rebounded and, although delayed, next year's privatization receipts
are expected to reach over $7 billion.
On the economic front, the slowdown in the European Union, coupled with the
loss of export markets in the East in the wake of the 1998 Russia crisis,
continued to hurt Poland's exporters, leading to a growing trade and current
account deficit. For 1999, the current account deficit is likely to reach $10
billion or more than 7% of GDP. On the interest rate front, the year started
with a boost when the National Bank of Poland (NBP) surprised the market and
cut interest rates by 250 basis points. But the NBP adopted a hawkish stance
later in the year as rising global energy prices fed into the Polish economy,
pushing up inflation and forcing the NBP to start raising interest rates. In
November the NBP hiked interest rates by over 2.5%, reversing all the cuts
made earlier in the year. Inflation rose to 8.7% in October and will likely
increase to over 10% during early 2000, until energy prices, particularly
oil, begin to reverse. Economic growth will likely finish the year at around
3.5%, disappointing by Polish growth standards. The economy will likely
recover in 2000 growing over 4.5%, the fastest recovering major economy in
the region.
The Hungarian stock market had a disappointing year in 1999. The economy
remains highly dependent on the European Union business cycle, especially the
German economy that absorbs almost 40% of Hungarian exports. Sluggish growth
in core Europe during the first half of 1999 led to concerns over Hungary's
growing twin deficit problem--high current account and budget deficits.
Slower economic growth in Hungary's export markets caused the trade balance
to deteriorate and coincident lower domestic GDP growth produced
disappointing government revenue collection and a higher budget deficit.
Fears of unsustainable external and internal imbalances partly explain the
market's significant underperformance compared to other emerging markets
during the year. MSCI Hungary rose 11.7% during the year which,
comparatively, was one of the worst performing emerging markets. During the
end of 1999, however, Western Europe had shown strong signs of economic
recovery, greatly improving the prospects for the Hungarian economy in 2000.
The current account deficit will likely improve from around 4% of GDP in 1999
to closer to 3% in the year 2000 while GDP growth should improve from 3.8% to
4.5%.
Hungary was hit by higher than expected inflation during the year, a product
of the economy's openness and dependency on imported energy. In order for the
government to meet its aggressive 6-7% inflation target for next year, it was
announced that regulated tariffs would be capped. Lower than expected
regulated tariff increases will impact both the telecommunication and
utilities sector. In particular, Hungary's largest oil and gas company, MOL,
could be negatively impacted by disappointing increases in the regulated
price of natural gas. The government and MOL have long negotiated the
implementation of a gas-pricing formula that would automatically adjust the
company's selling price based on the imported cost price, allowing the
company to pass on increases in raw material costs. The government, however,
again postponed the price formula adjustment, disappointing the market and
leading to the stock's poor performance.
Although the privatization process in the Czech Republic has historically
lagged the developments in other countries, progress was made during the
second half of 1999 and is set to accelerate in 2000. The government has
formulated a concrete plan to privatize both state-owned banks, Ceska
Sportitelna and Komercni Banka. Bank privatization has long been anticipated
by the market. Czech banks are heavily burdened by a large portfolio of bad
loans and credit growth is currently non-existent. A change in ownership from
the state to private hands will significantly benefit the allocation of
credit in the country. In addition, the government is planning its largest
priva-
3
<PAGE>
tization in its history, a sale of a 51% stake in the country's key
telecommunications concern, the re-named Cesky Telecom. In addition to
privatization, the government is also tackling problematic voucher funds that
have historically dominated Czech financial markets. Legislation drafted in
1998 mandated that the funds open-end by the year 2002. But most of the
largest and well-known investment companies that run the funds are carrying
out the transformation early which will have an impact on the market's
liquidity. Although the equity market returned only 5.3% for 1999, continued
progress on privatization, coupled with an economic recovery, should help the
market perform next year.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
January 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.
- -------------------------------------------------------------------------------
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.
4
<PAGE>
Morgan Stanley Dean Witter Eastern Europe Fund, Inc.
Investment Summary as of December 31, 1999 (Unaudited)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL TOTAL RETURN (%)
INFORMATION --------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (3)
--------------------- -------------------- ---------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
ONE YEAR 71.98% 71.98% 61.11% 61.11% 67.30% 67.30%
SINCE INCEPTION* 1.69 0.52 22.81 6.52 14.23 4.18
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- -------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
[GRAPH]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996* 1997 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Asset Value Per Share........ $20.77 $26.59 $12.65 $20.38
Market Value Per Share........... $18.00 $23.88 $9.81 $16.88
Premium/(Discount)............... -13.3% -10.2% -22.4% -17.2%
Income Dividends................. $ 0.07 -- -- --
Capital Gains Distributions...... -- $3.68 $0.67 --
Fund Total Return (2)............ 4.18% 48.19% -50.62% 61.11%
Index Total Return (3)........... 9.25% 48.23% -57.84% 67.30%
</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 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.
* The Fund commenced operations on September 30, 1996.
5
<PAGE>
Morgan Stanley Dean Witter Eastern Europe Fund, Inc.
Portfolio Summary as of December 31, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[GRAPH]
Equity Securities (98.7%)
Short-Term Investments (1.3%)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INDUSTRIES
[GRAPH]
Other (3.7%)
Wholesale & International Trade (2.9%)
Utilities -- Electrical & Gas (13.3%)
Telecommunications -- Integrated (29.1%)
Telecommunications -- Long Distance (1.3%)
Misc. Materials & Commodities (3.0%)
Banking (10.4%)
Chemicals (1.8%)
Data Processing & Reproduction (1.3%)
Energy Sources (32.2%)
Health & Personal Care (1.0%)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[GRAPH]
Other (-0.1%)
Czech Republic (10.6%)
Poland (19.9%)
Hungary (22.0%)
Russia (47.6%)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. LUKoil Holdings (Russia) 16.4%
2. Surgutneftgaz (Russia) 15.8
3. Matav Rt. (Hungary) 14.1
4. Unified Energy System (Russia) 11.1
5. Telekomunikacja Polska (Poland) 7.1
6. SPT Telecom (Czech Republic) 5.8
7. OTP Bank Rt. (Hungary) 3.4
8. KGHM Polska Miedz (Poland) 3.0
9. Elektrim (Poland) 2.9
10. Mustcom (Russia) 2.1
81.7%
----
----
</TABLE>
* Excludes short-term investments.
6
<PAGE>
FINANCIAL STATEMENTS
- -------
STATEMENTS OF NET ASSETS
- -------
DECEMBER 31, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (100.1%)
(Unless otherwise noted)
- --------------------------------------------------------------------------------
CZECH REPUBLIC (10.6%)
BANKING
Ceska Sporitelna 304,730 U.S.$ 1,412
(a)Ceska Sporitelna GDR 16,225 75
(a)Komercni Banka 79,200 1,285
--------------
2,772
--------------
TELECOMMUNICATIONS -- INTEGRATED
SPT Telecom 329,850 5,311
--------------
UTILITIES -- ELECTRICAL & GAS
(a)Ceske Energeticke Zovady AS 630,800 1,561
--------------
9,644
--------------
- --------------------------------------------------------------------------------
HUNGARY (22.0%)
BANKING
OTP Bank Rt. GDR 24,300 1,415
OTP Bank Rt. 28,971 1,697
--------------
3,112
--------------
CHEMICALS
BorsodChem Rt. GDR 14,700 584
Tiszai Vegyi Kombinat Rt. 57,600 1,100
--------------
1,684
--------------
HEALTH & PERSONAL CARE
Gedeon Richter Rt. 14,000 920
--------------
LEISURE & TOURISM
Danubius Hotel and Spa Rt. 32,920 600
--------------
TELECOMMUNICATIONS -- INTEGRATED
Matav Rt. 742,591 5,206
Matav Rt. ADR 212,429 7,647
--------------
12,853
--------------
TRANSPORTATION -- ROAD & RAIL
North American Bus Industries Rt. 20,031 420
--------------
UTILITIES -- ELECTRICAL & GAS
Demasz Rt. GDR 26,250 394
--------------
19,983
--------------
- --------------------------------------------------------------------------------
POLAND (19.9%)
BANKING
BRE 32,959 1,044
Powszechny Bank Kredytowy 30,893 706
Wielkopolski Bank Kredytowy 265,369 1,797
--------------
3,547
--------------
DATA PROCESSING & REPRODUCTION
Prokom 4,223 131
Prokom GDR 67,860 1,058
--------------
1,189
--------------
MISC. MATERIALS & COMMODITIES
KGHM Polska Miedz 356,961 2,245
KGHM Polska Miedz GDR 41,000 515
--------------
2,760
--------------
- --------------------------------------------------------------------------------
TELECOMMUNICATIONS -- INTEGRATED
Telekomunikacja Polska GDR 985,270 U.S.$ 6,404
--------------
TEXTILES & APPAREL
(a)Polski Koncern Naftowy 103,355 630
(a)Polski Koncern Naftowy GDR 75,000 938
--------------
1,568
--------------
WHOLESALE & INTERNATIONAL TRADE
(a)Elektrim 265,348 2,631
--------------
18,099
--------------
- --------------------------------------------------------------------------------
RUSSIA (47.6%)
BROADCASTING & PUBLISHING
(a,b)Storyfirst Communications 'A' (Preferred) 1,920 818
--------------
ENERGY SOURCES
LUKoil Holdings-Sponsored ADR 244,798 12,362
(a)LUKoil Holdings 197,000 2,561
Surgutneftegaz ADR 825,772 14,348
--------------
29,271
--------------
TELECOMMUNICATIONS -- INTEGRATED
(a,b)Mustcom 9,526,809 1,880
--------------
TELECOMMUNICATIONS -- LONG DISTANCE
(a)Rostelecom ADR 68,700 1,159
--------------
UTILITIES -- ELECTRICAL & GAS
Unified Energy Systems 20,739,846 2,489
Unified Energy Systems GDR 574,500 7,612
--------------
10,101
--------------
43,229
--------------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost U.S.$73,675) 90,955
--------------
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (1.3%)
- --------------------------------------------------------------------------------
UNITED STATES (1.3%)
Chase Securities, Inc., 2.60%,
dated 12/31/99, due 1/3/00, to be
repurchased at U.S.$1,206,
collateralized by U.S.$1,235
United States Treasury Note,
6.125%, due 12/31/01, valued at
U.S.$1,232
(Cost U.S.$1,206) U.S.$1,206 1,206
--------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AMOUNT
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
TOTAL INVESTMENTS (101.4%)
(Cost U.S.$74,881) U.S.$ 92,161
--------------
- --------------------------------------------------------------------------------
OTHER ASSETS (0.0%)
Dividends Receivable U.S.$ 8
Other Assets 1 9
---- -----------
- --------------------------------------------------------------------------------
LIABILITIES (-1.4%)
Payable For:
Bank Overdraft (845)
Custodian Fees (172)
Investment Advisory Fees (101)
Professional Fees (73)
Shareholder Reporting Expenses (47)
Directors' Fees and Expenses (25)
Administrative Fees (12)
Investments Purchased (10)
Other Liabilities (6) (1,291)
---- -----------
- --------------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 4,459,748, issued and
outstanding U.S.$0.01 par value
shares (500,000,000 shares authorized) U.S.$ 90,879
---------------
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 20.38
---------------
- --------------------------------------------------------------------------------
AT DECEMBER 31, 1999, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Common Stock U.S.$ 45
Capital Surplus 91,847
Accumulated Net Investment Loss (71)
Accumulated Net Realized Loss (18,209)
Unrealized Appreciation on Investments and
Foreign Currency Translations 17,267
- --------------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$ 90,879
---------------
- --------------------------------------------------------------------------------
(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 -- DECEMBER 31, 1999
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
- --------------------------------------------------------------------------------
Banking U.S.$ 9,431 10.4%
Broadcasting & Publishing 818 0.9
Chemicals 1,684 1.8
Data Processing & Reproduction 1,189 1.3
Energy Sources 29,271 32.2
Health & Personal Care 920 1.0
Leisure & Tourism 600 0.8
Misc. Materials & Commodities 2,760 3.0
Telecommunications -- Integrated 26,448 29.1
Telecommunications -- Long Distance 1,159 1.3
Textiles & Apparel 1,568 1.7
Transportation -- Road & Rail 420 0.4
Utilities -- Electrical & Gas 12,056 13.3
Wholesale & International Trade 2,631 2.9
Other 1,206 1.3
-------------- ---------
U.S.$ 92,161 101.4%
-------------- ---------
-------------- ---------
- --------------------------------------------------------------------------------
SUMMARY OF TOTAL INVESTMENTS BY COUNTRY -- DECEMBER 31, 1999
PERCENT
VALUE OF NET
COUNTRY (000) ASSETS
- --------------------------------------------------------------------------------
Czech Republic 9,644 10.6%
Hungary 19,983 22.0
Poland 18,099 19.9
Russia 43,229 47.6
United States (short-term investments) 1,206 1.3
-------------- ---------
U.S.$ 92,161 101.4%
-------------- ---------
-------------- ---------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
STATEMENT OF OPERATIONS (000)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends......................................................................................... U.S.$ 221
Less: Foreign Taxes Withheld...................................................................... (49)
- ---------------------------------------------------------------------------------------------------------------------------
Total Income.................................................................................... 172
- ---------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees ......................................................................... 1,075
Custodian Fees.................................................................................... 164
Administrative Fees............................................................................... 133
Shareholder Reporting Expenses.................................................................... 114
Professional Fees................................................................................. 100
Directors' Fees and Expenses...................................................................... 36
Amortization of Organization Costs................................................................ 44
Other Expenses.................................................................................... 24
- ---------------------------------------------------------------------------------------------------------------------------
Total Expenses.................................................................................. 1,690
- ---------------------------------------------------------------------------------------------------------------------------
Net Investment Loss........................................................................... (1,518)
- ---------------------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold........................................................................ 7,512
Foreign Currency Transactions..................................................................... (299)
- ---------------------------------------------------------------------------------------------------------------------------
Net Realized Gain............................................................................... 7,213
- ---------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Appreciation on Investments....................................................................... 28,304
Appreciation on Foreign Currency Translations..................................................... 9
- ---------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation.................................................. 28,313
- ---------------------------------------------------------------------------------------------------------------------------
Total Net Realized Gain and Change in Unrealized Appreciation/Depreciation............................ 35,526
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..............................................U.S.$ 34,008
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 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.$ (1,518) U.S.$ (823)
Net Realized Gain (Loss)................................................... 7,213 (25,872)
Change in Unrealized Appreciation/Depreciation............................. 28,313 (40,832)
- ------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations............ 34,008 (67,527)
- ------------------------------------------------------------------------------------------------------------------------
Distributions:
In Excess of Net Realized Gains............................................ -- (3,351)
- ------------------------------------------------------------------------------------------------------------------------
Total Distributions........................................................ -- (3,351)
- ------------------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Reinvestment of Distributions (0 and 32,748 shares, respectively).......... -- 579
Repurchase of Shares (307,500 and 270,500 shares, respectively)............ (3,438) (2,463)
- ------------------------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting from Capital Share Transactions....... (3,438) (1,884)
- ------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease).................................................. 30,570 (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.$(71) and U.S.$1, respectively)................. U.S.$ 90,879 U.S.$ 60,309
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
------------------------------------------ SEPTEMBER 30, 1996* TO
SELECTED PER SHARE DATA AND RATIOS: 1999 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).......................... (0.34) (0.17) (0.38) 0.06
Net Realized and Unrealized Gain (Loss) on Investments 7.91 (13.21) 9.88 0.78
- ------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations.................. 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 0.11 -- --
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD........................ 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.$ 16.88 U.S.$ 9.81 U.S.$ 23.88 U.S.$ 18.00
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value........................................ 71.98% (57.34)% 53.53% (9.72)%
Net Asset Value (1)................................. 61.11% (50.62)% 48.19% 4.18%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS)................. U.S.$90,879 U.S.$60,309 U.S.$133,071 U.S.$103,945
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets............... 2.51% 2.51% 2.50% 3.30%**
Ratio of Net Investment Income (loss) to Average Net
Assets.............................................. (2.25)% (0.89)% (1.27)% 1.15%**
Portfolio Turnover Rate............................... 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.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
- -----
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 under
procedures approved by the Board of Directors, although the actual
calculations may be done by others. At December 31, 1999, securities
valued at $2,698,000 representing 3.0% of net assets have been fair
valued. The amounts realized upon disposition of such fair valued
securities 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: 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
11
<PAGE>
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 appreciation (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 segragated 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:
12
<PAGE>
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 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 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.
The Fund did not invest in Loan Agreements, Forward Commitments and When
Issued/Delayed Delivery Securities, Swap Agreements, Structured Securities,
or participate in Over-the-Counter Trading during the year ended December
31, 1999.
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
13
<PAGE>
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.
E. For the year ended December 31, 1999, the Fund made purchases and sales
totaling $107,331,000 and $110,133,000, 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 year ended December 31, 1999, the Fund incurred
$68,000 of brokerage commissions to Morgan Stanley & Co. Incorporated, an
affiliated broker/dealer. At December 31, 1999, the U.S. Federal income tax
cost basis of securities was $76,058,000 and, accordingly, net unrealized
appreciation for U.S. Federal income tax purposes was $16,103,000, of which
$25,453,000 related to appreciated securities and $9,350,000 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. During the year ended December 31, 1999, the Fund utilized
capital loss carryforwards, for U.S. Federal income tax purposes, of
approximately $6,860,000. To the extent that capital gains are offset, such
gains will not be distributed to the shareholders. For the year ended
December 31, 1999 the Fund intends to elect to defer to January 1, 2000, for
U.S. Federal income tax purposes, post-October currency losses of $50,000.
As of December 31, 1999, the permanent differences are primarily due to net
operating losses that are not available to be carried forward for income tax
purposes and differing book and tax treatments related to net foreign
currency losses. To reflect reclassifications arising from the permanent
differences, accumulated net investment loss was credited $1,446,000,
accumulated net realized losses was credited $299,000 and paid in capital was
charged $1,745,000.
F. 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.
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 principles,
the balance of unamortized organization costs at December 31, 1998 was
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. At December 31, 1999, the deferred fees
payable, under the Plan, totaled $25,000 and are included in Payable for
Directors' Fees and Expenses on the Statement of Net Assets.
14
<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 year ended
December 31, 1999, the Fund repurchased 307,500 or 6.45% shares of its Common
Stock at an average price per share of $11.13, plus $15,000 in commissions,
and an average discount of 17.78% from net asset value per share. For the
year ended December 31, 1998, the Fund repurchased 270,500 shares or 5.37% of
its Common Stock at an average price per share of $9.05, plus $15,000 in
Commissions, and an average discount of 17.78% 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.
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- -----------
To the Shareholders and Board of Directors of
Morgan Stanley Dean Witter Eastern Europe Fund, Inc.
(formerly Morgan Stanley Russia & New Europe Fund, Inc.)
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position
of Morgan Stanley Dean Witter Eastern Europe Fund, Inc. (the "Fund") at
December 31, 1999, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended
and the financial highlights for each of the three years in the period then
ended and for the period September 30, 1996 (Commencement of Operations)
through December 31, 1996, in conformity with accounting principles generally
accepted in the United States. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1999 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 18, 2000
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. 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
17
