<PAGE>
MORGAN STANLEY
GLOBAL OPPORTUNITY BOND FUND, INC.
- ---------------------------------------------
OFFICERS AND DIRECTORS
<TABLE>
<S> <C>
Barton M. Biggs John A. Levin
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS William G. Morton, Jr.
Frederick B. Whittemore DIRECTOR
VICE CHAIRMAN OF THE BOARD James W. Grisham
OF DIRECTORS VICE PRESIDENT
Warren J. Olsen Michael F. Klein
PRESIDENT AND DIRECTOR VICE PRESIDENT
Peter J. Chase Harold J. Schaaff, Jr.
DIRECTOR VICE PRESIDENT
John W. Croghan Joseph P. Stadler
DIRECTOR VICE PRESIDENT
David B. Gill Valerie Y. Lewis
DIRECTOR SECRETARY
Graham E. Jones James R. Rooney
DIRECTOR TREASURER
Belinda A. Brady
ASSISTANT TREASURER
</TABLE>
- ---------------------------------------------
INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
- ---------------------------------------------------------
CUSTODIANS
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank
770 Broadway
New York, New York 10003
- ---------------------------------------------------------
SHAREHOLDER SERVICING AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 278-4353
- ---------------------------------------------------------
LEGAL COUNSEL
Rogers & Wells
200 Park Avenue
New York, New York 10166
- ---------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse 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.
------------------------
MORGAN STANLEY
GLOBAL OPPORTUNITY
BOND FUND, INC.
---------------------
ANNUAL REPORT
DECEMBER 31, 1996
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------
For the year ended December 31, 1996, the Morgan Stanley Global Opportunity Bond
Fund, Inc. (the "Fund") had a total return, based on net asset value per share,
of 31.45% compared to 34.16% for the J.P. Morgan Emerging Markets Bond Index.
For the period since the Fund's commencement of operations on May 27, 1994
through December 31, 1996, the Fund's total return, based on net asset value per
share, is 48.04% compared with 60.07% for the Index. On December 31, 1996, the
closing price of the Fund's shares on the New York Stock Exchange was $14 5/8,
representing a 1.5% discount to the Fund's net asset value per share.
1996 was a stellar year for emerging markets debt. The market experienced a
dramatic re-pricing of credit risk despite a volatile year for U.S. bonds. The
underlying improvement in credit fundamentals finally were recognized by
investors. The inflow of liquidity into this market resulted in a credit spread
tightening of about 400 basis points on average. The average masks a wide
dispersion in performance of various individual countries. Argentina, Mexico and
Brazil lagged the market during the first half of the year and made up some
relative performance during the second half. The high-yielding, oil exporting
countries such as Algeria, Venezuela, Ecuador and Nigeria steadily outperformed
for most of the year and the smaller Brady countries like Peru and Panama
benefited from lower liquidity as their economic performance improved during
1996.
Greater institutional participation in the market gradually led to a decline in
volatility as long-term investors replaced the trading oriented accounts as the
dominant players in the market. Volatility in the options markets declined
steadily throughout the year to end the year at roughly 50% of the levels seen
at the beginning of the period.
The market also became more efficient in terms of relative pricing of securities
both within one country as well as across countries. Arbitrage activity made
sure that relative spreads were more closely aligned to levels dictated by bond
fundamentals.
As we look into 1997, we expect the market to benefit from some of the positive
undercurrents that we have experienced in 1996. Emerging markets debt has
finally been accepted as a part of the mainstream global fixed income markets.
Equity-type returns earned in the first few years of its development will
obviously be a thing of the past. Lower and more stable expected returns will be
the norm for the years to come. Lower volatility and low correlations with other
major asset classes will provide the fundamental underpinnings of increased
allocations to this sector. Continued spread tightening to "fair value" will
result in outperformance relative to other fixed income markets in the world.
By our estimates "fair value" on average is another 100 basis points away in
terms of credit spreads. The improvement in individual economic environments
justifies further tightening in credit spreads. Emerging countries are not
vulnerable, to the same extent as in 1994, to a financial shock. We do not
currently see the usual warning signs such as overvalued currencies, excessive
concentration of funding in the short end of the market, vulnerable banking
systems and excessive speculative activity. Potential areas of concern remain
those linked to domestic politics, as some countries face important elections
during second half of 1997. The political landscape at the beginning of the year
does not signal any major reverses to the climate of a continued commitment to
economic reform. Voter displeasure over the severity of the 1995 recessions and
only slight relief from the recovery so far for the beleaguered consumer should
not result in any reversal in the nature of orthodox economic policies.
To summarize, we believe the emerging debt markets can look forward to a year of
12-18% total return, an outcome fixed income investors should be extremely
comfortable with. Any major corrections, not driven by changes in credit risk
perceptions, should be viewed as opportunities to increase commitments to the
asset class.
The major risk to the story remains a possible tightening of monetary policy by
the Federal Reserve Bank, which could temporarily derail the trend for continued
spread tightening. In that environment, we believe there will be few places to
hide barring cash. Emerging markets fixed income could end up in the
outperforming camp even in a down year. Currently we do not have sufficient data
to be able to offer reasonable estimates of the probability of such an event,
but it does not seem likely of being more than 20%.
2
<PAGE>
During 1996 we were successful in terms of picking up the major currents in the
markets and employed investment strategies that helped us outperform. We were,
for the most part of the year overweight the oil rich, high-yielding sector of
Venezuela, Algeria, Ecuador and Nigeria as we expected these countries to
endeavor to make some progress in stabilization and structural reform as well as
benefit from strong revenues from their oil exporting sectors. Exposures to Peru
and Panama remained at a steady 3-4% of the Fund as we believed that their
improving economic prospects, closure of their Brady restructuring and low
floating stock should buoy asset prices. Argentina and Mexico were underweighted
during the first half as the market remained skeptical about the strength of the
economic recoveries and overweighted during the second half as evidence of their
strong rebounds surfaced.
Brazil, remains a solid economic story but was buffeted by political headwinds
as the reform process lost momentum during the year. The long-term viability of
the Real plan in the absence of fiscal reform remains in doubt and questions
emerged within the investment community of the similarities of Brazil's position
with that of Mexico in 1994/1995. An appreciating currency, emerging trade
deficits, a loose fiscal and tight monetary policy were not healthy signs. In
our opinion, the political process is key to long-term sustainable growth and
progress on reducing the fiscal deficit is vital during 1997. Any delays in
tackling this key issue is bound to result in instability in the foreign
exchange, interest rates and other financial markets of Brazil later during the
year.
Russia was one of our success stories in 1996. Cheap assets because of a murky
political situation during the pre-election period prompted us to build a
substantial overweight in the non-performing loans of the sovereign. Our
analysis indicated that whatever the complexion of the new government the
economic situation and future policies could not justify credit spreads in
excess of 2000 basis points. The elections subsequently turned out in favor of
the reformers and market oriented parties, and continued official and IMF
assistance resulted in a dramatic rally in the prices of Russian assets for most
of the year.
Our non-hard currency exposure was limited for the most part to those situations
where we were receiving high real interest rates and buying undervalued
currencies. Mexico and Turkey's local markets were two profitable investments. A
foray into the South African Rand market did not prove to be profitable as we
misjudged the lack of political will to defend the currency from speculative
attack.
During the first few weeks of 1997, allocations are relatively unchanged other
than an increase in Bulgaria. A lack of alternatives to a currency board and
continued IMF assistance seems to make these assets cheap. Political turbulence
and civil unrest should only strengthen the case of the reformers as the
incumbent Socialist party has allowed the situation to drift to the point of
economic collapse. Fresh elections could improve the caliber of the governing
elites. Delays in the adoption of the IMF program will bring up the issue of a
potential default if no changes to economic policies are made. We believe that
it is in nobody's interest in Bulgaria and outside to precipitate the first
Brady default.
The High Yield market performed well in 1996 far outpacing high quality bonds
for the year. This performance occurred in the face of ten-year Treasury yields
rising nearly eighty-five basis points over the course of the year. This infers
that the spread to Treasuries narrowed about one hundred basis points. The
strong performance in the high yield market can be traced to the sound economy
as was reflected in the outstanding performance of the stock market in 1996.
Several factors helped the Fund's performance for the year. The communications
sector performed very well for the Fund. The entire sector responded favorably
when MFS Communications and Worldcom announced they would merge. We were
favorably positioned when this announcement was made and continued to add to our
positions subsequent to the announcement. This sector also performed well
because the securities in it tend to have bullish characteristics. Many of the
securities in the sector are zero coupon or deferred pay bonds. Thus, in a
rallying high yield market, they tend to outperform.
The cable television sector had a mixed year, performing poorly in the first
half of the year and well in the second half. We added to our positions at wide
spreads and reaped the benefits as spreads narrowed in the second half. Our
exposure to emerging markets debt also continued to add to performance.
3
<PAGE>
As spreads narrowed over the year, we continually upgraded the quality of the
Fund's portfolio. We believe this will protect the Fund if either the economy
weakens or spreads widen generally. We still believe this is the prudent
position to take in the current market environment.
Sincerely,
[SIGNATURE]
Warren J. Olsen
PRESIDENT AND DIRECTOR
[SIGNATURE]
Robert E. Angevine
PORTFOLIO MANAGER
[SIGNATURE]
Paul Ghaffari
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
MORGAN STANLEY GROUP INC., THE DIRECT PARENT COMPANY OF THE FUND'S INVESTMENT
ADVISER, MORGAN STANLEY ASSET MANAGEMENT INC., RECENTLY ANNOUNCED ITS INTENTION
TO MERGE WITH DEAN WITTER, DISCOVER & CO. TO FORM MORGAN STANLEY, DEAN WITTER,
DISCOVER & CO. IT CURRENTLY IS ANTICIPATED THAT THE TRANSACTION WILL CLOSE IN
MID-1997. THEREAFTER, MORGAN STANLEY ASSET MANAGEMENT INC. WILL BE A SUBSIDIARY
OF MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
4
<PAGE>
Morgan Stanley Global Opportunity Bond Fund, Inc.
Investment Summary as of December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION
TOTAL RETURN (%)
----------------------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (1)(3)
---------------------------- ---------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
<S> <C> <C> <C> <C> <C> <C>
---------------------------- ---------------------------- ----------------------------
ONE YEAR 34.44% 34.44% 31.45% 31.45% 34.16% 34.16%
SINCE INCEPTION* 45.70 15.57 48.04 16.29 60.07 19.83
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
A BAR CHART REFLECTING THE DATA BELOW IS REFLECTED HERE.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31:
1994* 1995 1996
NET ASSET VALUE PER SHARE $12.25 $12.99 $14.86
<S> <C> <C> <C>
Market Value Per Share $12.50 $12.50 $14.63
Premium/(Discount) 2.0% -3.8% -1.5%
Income Dividends $0.91 $1.59 $1.49
Capital Gains Distributions _ _ $0.50
Fund Total Return (2) -6.42% 20.34% 31.45%
Index Total Return (1) (3) -6.45% 27.54% 34.16%
</TABLE>
(1) Assumes dividends and distributions, if any, were reinvested.
(2) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. These percentages are not an indication of the performance of a
shareholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value
per share of the Fund.
(3) The J.P. Morgan Emerging Markets Bond Index is a market weighted index
composed of all Brady bonds outstanding and includes Argentina, Brazil,
Bulgaria, Mexico, Nigeria, the Philippines, Poland and Venezuela.
* The Fund commenced operations on May 27, 1994.
5
<PAGE>
Morgan Stanley Global Opportunity Bond Fund, Inc.
Portfolio Summary as of December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Debt Securities 94.6%
Short-Term Investments 3.8%
Equity Securities 1.6%
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
United States 32.0%
Brazil 13.0%
Argentina 12.1%
Russia 10.3%
Mexico 9.0%
Bulgaria 8.0%
Venezuela 6.1%
Ecuador 4.6%
Morocco 3.1%
Panama 2.5%
Other -0.7%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
------------
<C> <S> <C>
1. Republic of Russia Debt 10.3%
2. Republic of Argentina Debt 8.3
3. The Republic of Bulgaria Debt 8.0
4. Federative Republic of Brazil Debt 7.5
5. Republic of Venezuela Debt 6.1
<CAPTION>
PERCENT OF
NET ASSETS
------------
<C> <S> <C>
6. Republic of Ecuador Debt 4.7%
7. United Mexican States Debt 4.2
8. Kingdom of Morocco Debt 3.1
9. Iochpe Maxion Bond 2.8
10. Republic of Panama Debt 2.5
-----
57.5%
-----
-----
</TABLE>
6
<PAGE>
FINANCIAL STATEMENTS
- ---------
STATEMENT OF NET ASSETS
- ---------
DECEMBER 31, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
DEBT INSTRUMENTS (102.7%)
- --------------------------------------------------
- ----------
ALGERIA (1.8%)
LOAN AGREEMENT (1.8%)
Algeria Reprofiled Loan Agreement 'A' U.S.$ 1,450 U.S.$ 1,120
-------------
- ---------------------------------------------------------
- ------------
ARGENTINA (12.1%)
BONDS (12.1%)
Industrias Pescarmona S.A. 11.75%, 3/27/98 1,250 1,291
Metrogas S.A. 'B' 10.875%, 5/15/01 1,000 1,070
+++Republic of Argentina 'L' Bond 6.625%,
3/31/05 4,998 4,344
+++Republic of Argentina Pre 4 Bocon 0.00%,
9/1/02 700 749
-------------
7,454
-------------
- ---------------------------------------------------------
- ------------
BRAZIL (13.0%)
BONDS (13.0%)
#Comtel Brasiliera Ltd. 'A' 10.75%, 9/26/04 1,000 1,032
Federative Republic of Brazil 'C' Bond PIK
8.00%, 4/15/14 6,269 4,621
Iochpe Maxion 12.375%, 11/8/02 1,750 1,733
TV Filme, Inc., Senior Notes 12.875%, 12/15/04 600 603
-------------
7,989
-------------
- ---------------------------------------------------------
- ------------
BULGARIA (8.0%)
BONDS (8.0%)
+++The Republic of Bulgaria Discount Bond 'A'
Euro 6.6875%, 7/28/24 1,700 966
*The Republic of Bulgaria Front Loaded Interest
Rate Reduction Bond 2.25%, 7/28/12 4,950 1,903
Bulgaria Interest Arrears Bond 6.6875%, 7/28/11 4,000 2,060
-------------
4,929
-------------
- ---------------------------------------------------------
- ------------
CANADA (0.3%)
BONDS (0.3%)
Ivaco, Inc. 11.50%, 9/15/05 80 80
Rogers Communications, Inc. 9.125%, 1/15/06 90 89
-------------
169
-------------
- ---------------------------------------------------------
- ------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
COLOMBIA (0.5%)
BOND (0.5%)
*Occidente Y Caribe 0.00%, 3/15/04 U.S.$ 525 U.S.$ 308
-------------
- ---------------------------------------------------------
- ------------
ECUADOR (4.6%)
BONDS (4.6%)
Republic of Ecuador Past Due Interest Bond PIK
0.00%, 2/27/15 56 35
+++Republic of Ecuador Past Due Interest Bond
PIK 6.50%, 2/27/15 4,600 2,827
-------------
2,862
-------------
- ---------------------------------------------------------
- ------------
JAMAICA (1.6%)
BOND (1.6%)
#Mechala Group Jamaica, Ltd. 12.75%, 12/30/99 1,000 1,003
-------------
- ---------------------------------------------------------
- ------------
MEXICO (9.0%)
BONDS (9.0%)
#Empresas ICA Sociedad Controladora S.A.
11.875%, 5/30/01 2,000 2,132
Nacional Financiera 17.00%, 2/26/99 ZAR 4,000 823
United Mexican States Global Bond 11.375%,
9/15/16 U.S.$ 800 839
United Mexican States Discount Bond 'C', 6.375%,
12/31/19 2,050 1,763
-------------
5,557
-------------
- ---------------------------------------------------------
- ------------
MOROCCO (3.1%)
LOAN AGREEMENT (3.1%)
~+++Kingdom of Morocco Restructuring and
Consolidation Agreement 'A' 1990
(Participation: J.P. Morgan, Salomon) 6.375%,
1/1/09 2,300 1,899
-------------
- ---------------------------------------------------------
- ------------
PANAMA (2.5%)
BONDS (2.5%)
#*Republic of Panama Interest Reduction Bond
3.50%, 7/17/14 1,300 905
Republic of Panama Past Due Interest Bond PIK
4.00%, 7/17/16 810 634
-------------
1,539
-------------
- ---------------------------------------------------------
- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
PERU (1.8%)
BONDS (1.8%)
++Republic of Peru Front Loaded Interest Rate
Reduction Bond 3.25%, 12/29/49 U.S.$ 1,000 U.S.$ 550
++#*Republic of Peru Past Due Interest Bond
4.00%, 12/29/49 900 532
-------------
1,082
-------------
- ---------------------------------------------------------
- ------------
PHILIPPINES (1.1%)
BOND (1.1%)
Philippine Long Distance Telephone Co. 9.25%,
6/30/06 655 709
-------------
- ---------------------------------------------------------
- ------------
RUSSIA (10.3%)
BOND (2.5%)
#Ministry of Finance Tranche IV, 3.00%, 5/14/03 2,550 1,560
-------------
LOAN AGREEMENTS (7.8%)
##**Bank for Foreign Economic Affairs 3,400 2,714
++#Russia Past Due Interest Bond 1,550 1,076
++#Russia Principal Notes 1,700 1,000
-------------
4,790
-------------
6,350
-------------
- ---------------------------------------------------------
- ------------
UNITED KINGDOM (0.7%)
BOND (0.7%)
*Telewest plc 0.00%, 10/1/07 585 406
-------------
- ---------------------------------------------------------
- ------------
UNITED STATES (26.2%)
ASSET-BACKED SECURITIES (1.6%)
#Aircraft Lease Portfolio Securitization Ltd.,
1996-1 P1, 'D' 12.75%, 6/15/06 375 389
DR Securitized Lease Trust 1993-K1 A-1 6.66%,
8/15/10 168 139
DR Securitized Lease Trust 1994-K1 A-1 7.60%,
8/15/07 502 462
-------------
990
-------------
BONDS (24.3%)
Advanced Micro Devices Inc. 11.00%, 8/1/03 260 281
Boyd Gaming Corp. 9.25%, 10/1/03 260 254
Brooks Fiber Properties
*0.00%, 3/1/06 700 466
*0.00%, 11/1/06 160 102
Cablevision Systems Corp.
9.25%, 11/1/05 165 162
9.875%, 5/15/06 405 415
#Cole National Group Senior Subordinated Notes
9.875%, 12/31/06 235 241
Comcast Cellular Corp.
'A' Zero Coupon, 3/5/00 100 72
'B' Zero Coupon, 3/5/00 465 335
Comcast Corp.
9.375%, 5/15/05 390 405
9.125%, 10/15/06 80 82
- ---------------------------------------------------------
- ------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
UNITED STATES (CONTINUED)
Courtyard By Marriott 'B' 10.75%, 2/1/08 U.S.$ 400 U.S.$ 423
Digital Equipment 8.625%, 11/1/12 125 121
*Echostar Satellite Broadcast 0.00%, 3/15/04 815 614
First Nationwide
9.125%, 1/15/03 115 117
#10.625%, 10/1/03 95 102
Flores & Rucks 9.75%, 10/1/06 185 195
Gaylord Container Corp.
11.50%, 5/15/01 500 533
12.75%, 5/15/05 80 88
Grand Casinos 10.125%, 12/1/03 400 401
HMC Acquisition Properties 9.00%, 12/15/07 350 350
Home Holdings, Inc. 8.625%, 12/15/03 350 77
Homeside, Inc. 11.25%, 5/15/03 80 89
Host Marriott Travel 9.50%, 5/15/05 450 469
#International Home Foods 10.375%, 11/1/06 110 114
#ISP Holdings, Inc. 9.00%, 10/15/03 265 268
IXC Communications, Inc. 12.50%, 10/1/05 165 182
#Jet Equipment Trust 'C1' 11.79%, 6/15/13 175 208
Lenfest Communications 8.375%, 11/1/05 370 354
*Marcus Cable Co. 0.00%, 12/15/05 700 500
**Marvel Holdings, Inc., Zero Coupon, 4/15/98 250 35
#Maxxam Group, Inc. Holdings Sr. Notes 12.00%,
8/1/03 165 168
*MFS Communications Zero Coupon, 1/15/06 845 617
Midland Cogeneration Ventures
'C-91' 10.33%, 7/23/02 93 99
'C-94' 10.33%, 7/23/02 25 27
Midland Funding II 'A' 11.75%, 7/23/05 80 88
*Nextel Communications 0.00%, 8/15/04 1,175 799
*Norcal Waste Systems, Inc. 12.5%, 11/15/05 500 555
Nuevo Energy Co. 9.50%, 4/15/06 240 253
Owen-Illinois, Inc. 11.00%, 12/1/03 485 540
Paging Network Inc.
10.125%, 8/1/07 80 81
#10.00%, 10/15/08 215 217
#Parker Drilling Corp. 9.75%, 11/15/06 130 135
Quest Diagnostics, Inc. 10.75%, 12/15/06 80 84
Revlon Worldwide Corp., Zero Coupon, 3/15/98 475 410
Rogers Cablesystems 'B' 10.00%, 3/15/05 425 453
- ---------------------------------------------------------
- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
UNITED STATES (CONTINUED)
SD Warren Co. 'B' 12.00%, 12/15/04 U.S.$ 215 U.S.$ 231
Southland Corp. 5.00%, 12/15/03 490 404
Station Casinos, Inc. 9.625%, 6/1/03 110 109
#Stone Container Corp. 11.50%, 8/15/06 125 129
TCI Communications, Inc. 7.875%, 2/15/26 300 269
*Teleport Communications 0.00%, 7/1/07 305 210
TLC Beatrice International Holdings 11.50%,
10/1/05 255 270
#US Can Corp. 10.125%, 10/15/06 80 84
Viacom, Inc. 8.00%, 7/7/06 675 651
-------------
14,938
-------------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.3%)
First Home Mortgage Acceptance Corp., Series
1996-B, Class C, 7.9289%, 11/1/18 250 212
-------------
16,140
-------------
- ---------------------------------------------------------
- ------------
VENEZUELA (6.1%)
BONDS (6.1%)
+++Republic of Venezuela Front Loaded Interest
Rate Reduction Bond 'A' 6.625%, 3/31/07 2,500 2,234
+++Republic of Venezuela Front Loaded Interest
Rate Reduction Bond 'B' 6.4375%, 3/31/07 1,000 894
+++Republic of Venezuela Discount Bonds 'A'
6.4375%, 3/31/20 750 622
-------------
3,750
-------------
- ---------------------------------------------------------
- ------------
TOTAL DEBT INSTRUMENTS
(Cost $60,053) 63,266
-------------
- ---------------------------------------------------------
- ------------
<CAPTION>
NO. OF
CONTRACTS
<S> <C> <C>
- ---------------------------------------------------------
- ------------
PURCHASED OPTIONS (0.1%)
- ---------------------------------------------------------
- ------------
BULGARIA (0.1%)
+Bulgaria Front Loaded Interest Rate Reduction
Bond Call Option, Strike price 40.5625,
expiring 3/24/97 20,000 45
+Bulgaria Past Due Interest Bond Call Option,
Strike price 51.5, expiring 1/6/97 20,000 8
-------------
- ---------------------------------------------------------
- ------------
TOTAL PURCHASED OPTIONS (Cost $106) 53
-------------
- ---------------------------------------------------------
- ------------
<CAPTION>
NO. OF
RIGHTS
<S> <C> <C>
- ---------------------------------------------------------
- ------------
RIGHTS (0.0%)
- ---------------------------------------------------------
- ------------
MEXICO (0.0%)
+Mexican 'A', Expiring 6/30/03 (Cost $0) 3,154,000 --
-------------
- ---------------------------------------------------------
- ------------
<CAPTION>
NO. OF VALUE
WARRANTS (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
WARRANTS (0.0%)
- ---------------------------------------------------------
- ------------
VENEZUELA (0.0%)
+Republic of Venezuela Oil U.S.$ 5,355 U.S.$ --
- ---------------------------------------------------------
- ------------
COLOMBIA (0.0%)
+Occidente Y Caribe, expiring 3/15/04 2,100 --
-------------
- ---------------------------------------------------------
- ------------
TOTAL WARRANTS (Cost $0) --
-------------
- ---------------------------------------------------------
- ------------
<CAPTION>
SHARES
<S> <C> <C>
- ---------------------------------------------------------
- ------------
PREFERRED STOCKS (1.7%)
- ---------------------------------------------------------
- ------------
UNITED STATES (1.7%)
Fresenius Medical Care 145 148
TCI Communications, Inc. 2 225
Time Warner, Inc., Series M 616 668
-------------
- ---------------------------------------------------------
- ------------
TOTAL PREFERRED STOCKS (Cost $982) 1,041
-------------
- ---------------------------------------------------------
- ------------
<CAPTION>
FACE
AMOUNT
(000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
SHORT-TERM INVESTMENTS (4.1%)
- ---------------------------------------------------------
- ------------
UNITED STATES (4.1%)
REPURCHASE AGREEMENT
Chase Securities, Inc. 5.95%, dated 12/31/96,
due 1/2/97, to be repurchased at U.S. $1,429,
collateralized by U.S.$1,225 United States
Treasury Bond, 8.125%, due 8/15/21, valued at
U.S. $1,429 U.S. $ 1,429 1,429
TREASURY BILL
Zero Coupon, 1/9/97 1,100 1,099
-------------
- ---------------------------------------------------------
- ------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $2,528) 2,528
-------------
- ---------------------------------------------------------
- ------------
TOTAL INVESTMENTS (108.6%)
(Cost $63,669) 66,888
-------------
- ---------------------------------------------------------
- ------------
OTHER ASSETS (5.5%)
Receivable for Investments Sold 2,195
Interest Receivable 1,140
Dividend Receivable 16
Deferred Organization Costs 14
Other Assets 4 3,369
------------- -------------
- ---------------------------------------------------------
- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
VALUE
(000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
LIABILITIES (-14.1%)
Payable for:
Investments Purchased (5,203)
Dividends Declared (3,262)
Investment Advisory Fees (53)
Shareholder Reporting Expenses (46)
Professional Fees (43)
Directors' Fees and Expenses (19)
Custodian Fees (18)
Administration Fees (14)
Other Liabilities (8) (8,666)
------------- -------------
- ---------------------------------------------------------
- ------------
NET ASSETS (100%)
Applicable to 4,145,999 issued and outstanding
U.S. $0.01 par value shares (100,000,000
shares authorized) U.S.$ 61,591
-------------
-------------
- ---------------------------------------------------------
- ------------
NET ASSET VALUE PER SHARE U.S.$ 14.86
-------------
-------------
- ---------------------------------------------------------
- ------------
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
AT DECEMBER 31, 1996, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------
Common Stock U.S.$ 41
Capital Surplus 57,662
Undistributed Net Investment Income 12
Accumulated Net Realized Gain 665
Unrealized Appreciation on Investments and
Foreign Currency Translations 3,211
- ---------------------------------------------------------
- ------------
TOTAL NET ASSETS U.S.$ 61,591
-------------
-------------
- ---------------------------------------------------------
- ------------
</TABLE>
+ -- Non-income producing.
++ -- Non-income producing - in default.
+++ -- Variable/floating rate security - rate disclosed is as of December 31,
1996.
# -- 144A security - certain conditions for public sale may exist.
## -- Under restructuring at December 31, 1996 -- See note A-8 to financial
statements.
** -- When-issued Security -- see note A-9 to financial statements.
~ -- Participation interests were acquired through the financial institutions
indicated parenthetically.
* -- Step Bond - coupon rate increases in increments to maturity. Rate
disclosed is as of December 31, 1996. Maturity date disclosed is the
ultimate maturity.
PIK -- Payment-in-Kind. Income may be paid in additional securities or cash at
the discretion of the issuer.
<TABLE>
<S> <C> <C>
- ----------------------------------------------------
- ------------
DECEMBER 31, 1996 EXCHANGE RATES
- ----------------------------------------------------
South African
ZAR Rand 4.679 = U.S. $1.00
- ----------------------------------------------------
- ------------
</TABLE>
SUMMARY OF TOTAL INVESTMENTS BY INDUSTRY
CLASSIFICATION -- DECEMBER 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
- ------------
Aerospace & Defense U.S.$ 596 1.0%
Banking 219 0.4
Broadcast -- Radio & Television 82 0.1
Coal, Gas & Oil 1,070 1.7
Collateralized Mortgage Obligation 212 0.3
Computers 403 0.7
Diversified 668 1.1
Energy 253 0.4
Entertainment & Leisure 144 0.2
Finance 129 0.2
Financial Services 691 1.1
Food 270 0.4
Foreign Government & Agency Obligations 30,938 50.2
Gaming & Lodging 1,294 2.1
Health Care Supplies & Services 231 0.4
Insurance 77 0.1
Loan Agreements 5,733 9.3
Materials 466 0.8
Multi-Industry 9,170 14.9
Packaging & Container 624 1.0
Personal Care Products 410 0.7
Purchased Options 53 0.1
Real Estate 350 0.6
Repurchase Agreement 1,429 2.3
Retail -- General 404 0.7
Services 1,206 2.0
Telecommunications 8,453 13.7
U.S. Treasury Bills 1,099 1.8
Utilities 214 0.3
------------ -------
U.S.$ 66,888 108.6%
------------ -------
------------ -------
- ---------------------------------------------------------
- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
STATEMENT OF OPERATIONS (000)
<S> <C>
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest................................................................................ U.S.$ 8,220
Dividend................................................................................ 46
- ---------------------------------------------------------------------------------------------------------------
Total Income.......................................................................... 8,266
- ---------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees................................................................ 585
Administrative Fees..................................................................... 158
Interest Expense........................................................................ 112
Professional Fees....................................................................... 82
Shareholder Reporting Expenses.......................................................... 70
Custodian Fees.......................................................................... 49
Directors' Fees and Expenses............................................................ 27
Transfer Agent Fees..................................................................... 16
Other Expenses.......................................................................... 69
- ---------------------------------------------------------------------------------------------------------------
Total Expenses........................................................................ 1,168
- ---------------------------------------------------------------------------------------------------------------
Net Investment Income............................................................. 7,098
- ---------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold.............................................................. 8,279
Foreign Currency Transactions........................................................... (1,069)
Investment Securities Sold Short........................................................ (345)
- ---------------------------------------------------------------------------------------------------------------
Net Realized Gain................................................................. 6,865
- ---------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Appreciation on Investments............................................................. 2,029
Depreciation on Foreign Currency Translations........................................... (11)
- ---------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation.................................... 2,018
- ---------------------------------------------------------------------------------------------------------------
Total Net Realized Gain and Change in Unrealized Appreciation/Depreciation.................. 8,883
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................... U.S.$15,981
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income............................................... U.S.$ 7,098 U.S.$ 6,657
Net Realized Gain (Loss)............................................ 6,865 (3,777)
Change in Unrealized Appreciation/Depreciation...................... 2,018 6,731
- ---------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations................ 15,981 9,611
- ---------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income............................................... (6,178) (6,562)
Net Realized Gain................................................... (2,059) --
- ---------------------------------------------------------------------------------------------------------------
Total Distributions................................................. (8,237) (6,562)
- ---------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Reinvestment of Distributions (-- and 15,950 shares,
respectively)...................................................... -- 191
- ---------------------------------------------------------------------------------------------------------------
Total Increase...................................................... 7,744 3,240
Net Assets:
Beginning of Year................................................... 53,847 50,607
- ---------------------------------------------------------------------------------------------------------------
End of Year (including undistributed net investment income of U.S.
$12 and U.S. $159, respectively)................................... U.S.$ 61,591 U.S.$ 53,847
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED YEAR ENDED MAY 27, 1994*
DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
SELECTED PER SHARE DATA AND RATIOS: 1996 1995 1994
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD.............. U.S.$ 12.99 U.S.$ 12.25 U.S.$ 14.10
- ---------------------------------------------------------------------------------------------------
Offering Costs.................................... -- -- (0.17)
- ---------------------------------------------------------------------------------------------------
Net Investment Income............................. 1.71 1.61 0.95
Net Realized and Unrealized Gain (Loss) on
Investments...................................... 2.15 0.72 (1.72)
- ---------------------------------------------------------------------------------------------------
Total from Investment Operations.............. 3.86 2.33 (0.77)
- ---------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income......................... (1.49) (1.59) (0.91)
Net Realized Gain............................. (0.50) -- --
- ---------------------------------------------------------------------------------------------------
Total Distributions........................... (1.99) (1.59) (0.91)
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.................... U.S.$ 14.86 U.S.$ 12.99 U.S.$ 12.25
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD............. U.S.$ 14.63 U.S.$ 12.50 U.S.$ 12.50
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value.................................. 34.44% 13.49% (4.51)%
Net Asset Value (1)........................... 31.45% 20.34% (6.42)%
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS)............. U.S.$61,591 U.S.$53,847 U.S.$50,607
- ---------------------------------------------------------------------------------------------------
Ratio of Expenses Before Interest Expense to
Average Net Assets............................... 1.81% 1.95% 1.75%**
Ratio of Expenses After Interest Expense to
Average Net Assets............................... 2.00% 2.06% 2.97%**
Ratio of Net Investment Income to Average Net
Assets........................................... 12.17% 13.07% 11.90%**
Portfolio Turnover Rate........................... 280% 160% 86%
- ---------------------------------------------------------------------------------------------------
* 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 of the Fund.
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- ------------
The Morgan Stanley Global Opportunity Bond Fund, Inc. (the "Fund"), was
incorporated in Maryland on March 31, 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 primary objective is to produce high
current income and as a secondary objective to seek capital appreciation through
investments primarily in high yield bonds.
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 sale price on the valuation date, or if there was no sale
on such date, at the mean between the current bid and asked prices or the
bid price if only bid quotations are available. Securities which are traded
over-the-counter are valued at the average of the mean of the current bid
and asked prices obtained from reputable brokers. Securities may be valued
by independent pricing services which use prices provided by market-makers
or estimates of market values obtained from yield data relating to
investments or securities with similar characteristics. Certain securities
may be valued on the basis of bid prices provided by one principal market
maker. Short-term securities which mature in 60 days or less are valued at
amortized cost. All other securities and assets for which market values are
not readily available (including investments which are subject to
limitations as to their sale) are valued at fair value as determined in good
faith by the Board of Directors (the "Board") although the actual
calculations may be done by others.
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 either income or gains earned or
repatriated. Taxes are accrued and applied to net investment income, net
realized gains and net unrealized appreciation as such income and/or gains
are earned.
3. REPURCHASE AGREEMENTS: In connection with
transactions in repurchase agreements, a bank as custodian for the Fund takes
possession of the underlying securities, with a market value at least equal
to the amount of the repurchase transaction, including principal and accrued
interest. To the extent that any repurchase transaction exceeds one business
day, the value of the collateral is marked-to-market on a daily basis to
determine the adequacy of the collateral. In the event of default on the
obligation to repurchase, the Fund has the right to liquidate the collateral
and apply the proceeds in satisfaction of the obligation. In the event of
default or bankruptcy by the counter-party to the agreement, realization
and/or retention of the collateral or proceeds may be subject to legal
proceedings.
4. REVERSE REPURCHASE AGREEMENTS: In order to
leverage the Fund, the Fund may enter into reverse repurchase agreements with
institutions that the Fund's investment adviser has determined are
creditworthy. Under a reverse repurchase agreement, the Fund sells
securities and agrees to repurchase them at a mutually agreed upon date and
price. Reverse repurchase agreements involve the risk that the market value
of the securities purchased with the proceeds from the sale of securities
received by the Fund may decline below the price of the securities the Fund
is obligated to repurchase. Securities subject to repurchase under reverse
repurchase agreements, if any, are designated as such in the Statement of
Net Assets. There were no reverse repurchase agreements outstanding at
December 31, 1996.
The average weekly balance of reverse repurchase agreements outstanding
during the year ended December 31, 1996 was approximately $384,000 at a
weighted average interest rate of 6.02%.
5. 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
13
<PAGE>
fluctuations arising from changes in the market prices of the securities
held at period end. Similarly, the Fund does not isolate the effect of
changes in foreign exchange rates from the fluctuations arising from changes
in the market prices of securities sold during the period. Accordingly,
realized and unrealized foreign currency gains (losses) are included in the
reported net realized and unrealized gains (losses) on investment
transactions and balances.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of forward 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 appreciation (depreciation) in the Statement of Net Assets. The
change in net unrealized currency gains (losses) 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.
6. PURCHASED OPTIONS: The Fund may purchase call
and put options on listed securities or securities traded over the counter.
The Fund may purchase call options on securities to protect against an
increase in the price of the underlying security. The Fund may purchase put
options on securities to protect against a decline in the value of the
underlying security. Risks may arise from an imperfect correlation between
the change in market value of the securities held by the Portfolio and the
prices of options relating to the securities purchased or sold by the
Portfolio and from the possible lack of a liquid secondary market for an
option. Possible losses from purchased options cannot exceed the total
amount invested. Realized gains or losses on purchased options are included
with net gain (loss) on securities sold in the financial statements.
7. FORWARD FOREIGN CURRENCY EXCHANGE
CONTRACTS: The Fund may enter into forward foreign currency exchange contracts
to attempt to protect securities and related receivables and payables
against changes in future foreign exchange rates. A forward 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.
8. LOAN AGREEMENTS: The Fund may invest in fixed
and floating rate loans ("Loans") arranged through private negotiations
between an issuer of sovereign debt obligations and one or more financial
institutions ("Lenders") deemed to be creditworthy by the investment
adviser. The Fund's investments in Loans may be in the form of
participations in Loans ("Participations") or assignments of all or a
portion of Loans ("Assignments") from third parties. The Fund's investment
in Participations typically results in the Fund having a contractual
relationship with only the Lender and not with the borrower. The Fund has
the right to receive payments of principal, interest and any fees to which
it is entitled only from the Lender selling the Participation and only upon
receipt by the Lender of the payments from the borrower. The Fund generally
has no right to enforce compliance by the borrower with the terms of the
loan agreement. As a result, the Fund may be subject to the credit risk of
both the borrower and the Lender that is selling the Participation. When the
Fund purchases Assignments from Lenders it acquires direct rights against
the borrower on the Loan. Because Assignments are arranged through private
negotiations between potential assignees and potential assignors, the rights
and obligations acquired by the Fund as the purchaser of an Assignment may
differ from, and be more limited than, those held by the assigning Lender.
9. WHEN-ISSUED/DELAYED DELIVERY SECURITIES: 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
14
<PAGE>
Fund on such securities prior to delivery. When the Fund enters into a
purchase transaction on a when-issued or delayed delivery basis, it
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. Purchasing securities on a 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.
10. SECURITIES SOLD SHORT: The Fund may sell securities
short. A short sale is a transaction in which the Fund sells securities it
may or may not own, but has borrowed, in anticipation of a decline in the
market price of the securities. The Fund is obligated to replace the
borrowed securities at their market price at the time of replacement. The
Fund may have to pay a premium to borrow the securities as well as pay any
dividends or interest payable on the securities until they are replaced. The
Fund's obligation to replace the securities borrowed in connection with a
short sale will generally be secured by collateral deposited with the broker
that consists of cash, U.S. government securities or other liquid, high
grade debt obligations. In addition, the Fund will place in a segregated
account with its custodian an amount of cash, U.S. government securities or
other liquid high grade debt obligations equal to the difference, if any,
between (1) the market value of the securities sold at the time they were
sold short and (2) any cash, U.S. government securities or other liquid high
grade debt obligations deposited as collateral with the broker in connection
with the short sale (not including the proceeds of the short sale). Short
sales by the Fund involve certain risks and special considerations. Possible
losses from short sales differ from losses that could be incurred from a
purchase of a security because losses from short sales may be unlimited,
whereas losses from purchases cannot exceed the total amount invested.
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 and discounts
and premiums on investments purchased are accreted or amortized in
accordance with the effective yield method over their respective lives,
except where collection is in doubt. Distributions to shareholders are
recorded on the ex-date.
The amount and character of income and capital gain distributions to be paid
are determined in accordance with Federal income tax regulations which may
differ from generally accepted accounting principles. These differences are
primarily due to differing book and tax treatments for foreign currency
transactions, non-deductible expenses and the timing of the recognition of
losses on securities.
Permanent book and tax basis differences relating to shareholder
distributions may result in reclassifications to undistributed net
investment income (loss), accumulated net realized gain (loss) and capital
surplus.
Adjustments for permanent book-tax differences, if any, are not reflected in
ending undistributed net investment income (loss) for the purpose of
calculating net investment income (loss) per share in the financial
highlights.
B. Morgan Stanley Asset Management Inc. (the "Adviser"), provides investment
advisory services to the Fund under the terms of an Investment Advisory and
Management Agreement (the "Agreement"). Under the Agreement, the Adviser is paid
a fee computed weekly and payable monthly at an annual rate of 1.00% of the
Fund's average weekly net assets.
C. The Chase Manhattan Bank, through its 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 .08% of the Fund's average weekly net assets, plus $100,000 per annum.
In addition, the Fund is charged certain out-of-pocket expenses by the
Administrator. The Chase Manhattan Bank acts as custodian for the Fund's assets
held in the United States.
D. Morgan Stanley Trust Company (the "International Custodian"), an affiliate
of the Adviser, acts as custodian for the Fund's assets held outside the United
States in accordance with a Custody Agreement. Custodian fees are payable
monthly based on assets under custody, investment purchase and sale activity, an
account maintenance fee, plus reimbursement for certain out-of-pocket expenses.
Investment transaction fees vary by country and security type. For the year
ended December 31, 1996, the Fund incurred International Custodian fees of
$39,000, of which $16,000 was payable to the International Custodian at December
31, 1996. In addition, for the year ended December 31, 1996, the Fund has earned
interest income of $8,000 and incurred interest expense of $60,000 on balances
with the International Custodian.
E. For the year ended December 31, 1996, the Fund made purchases and sales
totaling $160,054,000 and $161,930,000, respectively, of investments other than
long-term U.S. Government securities and short-term investments. There were no
purchases and sales of long-term
15
<PAGE>
U.S. Government securities. At December 31, 1996, the U.S. Federal income tax
cost basis of securities was $63,736,000 and accordingly, net unrealized
appreciation for U.S. Federal income tax purposes was $3,152,000 of which
$3,960,000 related to appreciated securities and $808,000 related to depreciated
securities. During the year ended December 31, 1996, the Fund utilized capital
loss carryforwards for U.S. Federal income tax purposes of approximately
$4,559,000.
F. In connection with its organization and initial public offering of shares,
the Fund incurred $30,000 and $714,000 of organization and offering costs,
respectively. The organization costs are being amortized on a straight-line
basis over a five-year period beginning May 27, 1994, the date the Fund
commenced operations. The offering costs were charged to capital.
G. At December 31, 1996, approximately 42% of the Fund's total investments
consist of high yield securities rated below investment grade. Investments in
high yield securities are accompanied by a greater degree of credit risk and the
risk tends to be more sensitive to economic conditions than higher-rated
securities.
H. Each Director of the Fund who is not an officer of the Fund or an affiliated
person as defined under the Investment Company Act of 1940, as amended, may
elect to participate in the Directors' Deferred Compensation Plan (the "Plan").
Under the Plan, such Directors may elect to defer payment of a percentage of
their total fees earned as a Director of the Fund. These deferred portions are
treated, based on an election by the Director, as if they were either invested
in the Fund's shares or invested in U.S. Treasury Bills, as defined under the
Plan. The deferred fees payable, under the Plan, at December 31, 1996 totaled
$9,000 and are included in Payable for Directors' Fees and Expenses on the
Statement of Net Assets.
I. During December 1996, the Board declared a distribution of $0.29 per share,
derived from net investment income and $0.50 per share, derived from net
realized gains, payable on January 9, 1997, to shareholders of record on
December 31, 1996.
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------
To the Shareholders and Board of Directors of
Morgan Stanley Global Opportunity Bond 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 Global Opportunity Bond Fund, Inc. (the "Fund") at December 31,
1996, 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 two years in the period then ended and for the period
May 27, 1994 (commencement of operations) through December 31, 1994, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1996 by
correspondence with the custodians and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 10, 1997
17
<PAGE>
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
each shareholder may elect by providing written instructions to American Stock
Transfer & Trust Company (the "Plan Agent") 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,
quarterly, in any amount from $100 to $3,000, for investment in Fund shares.
Dividend and capital gain distributions will be reinvested on the
reinvestment date in full and fractional shares. If the market price per share
equals or exceeds net asset value per share on the reinvestment date, the Fund
will issue shares to participants at net asset value. If net asset value is less
than 95% of the market price on the reinvestment date, shares will be issued at
95% of the market price. If net asset value exceeds the market price on the
reinvestment date, participants will receive shares valued at market price. The
Fund may purchase shares of its Common Stock in the open market in connection
with dividend reinvestment requirements at the discretion of the Board of
Directors. Should the Fund declare a dividend or capital gain distribution
payable only in cash, the Plan Agent will purchase Fund shares for participants
in the open market as agent for the participants.
The Plan Agent's fees for the reinvestment of dividends and distributions
will be paid by the Fund. However, each participant's account will be charged a
pro rata share of brokerage commissions incurred on any open market purchases
effected on such participant's behalf. A participant will also pay brokerage
commissions incurred on purchases made by voluntary cash payments. Although
shareholders in the Plan may receive no cash distributions, participation in the
Plan will not relieve participants of any income tax which may be payable on
such dividends or distributions.
In the case of shareholders, such as banks, brokers or nominees, which hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
shareholder as representing the total amount registered in the shareholder's
name and held for the account of beneficial owners who are participating in the
Plan.
Participants who wish to withdraw from the Plan should notify the Plan Agent
in writing. There is no penalty for non-participation or withdrawal from the
Plan, and shareholders who have previously withdrawn from the Plan may rejoin at
any time. Requests for additional information or any correspondence concerning
the Plan should be directed to the Plan Agent at:
Morgan Stanley Global Opportunity Bond Fund, Inc.
American Stock Transfer & Trust Company
Dividend Reinvestment and Cash Purchase Plan
40 Wall Street
New York, NY 10005
1-800-278-4353
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