<PAGE>
- --------------------------------------------------------------------------------
MORGAN STANLEY
GLOBAL OPPORTUNITY
BOND FUND, INC.
- --------------------------------------------------------------------------------
ANNUAL REPORT
DECEMBER 31, 1998
MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT INC.
INVESTMENT ADVISER
MORGAN STANLEY
GLOBAL OPPORTUNITY BOND 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
Valerie Y. Lewis
SECRETARY
Joanna M. Haigney
TREASURER
Belinda A. Brady
ASSISTANT TREASURER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Morgan Stanley Dean Witter Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
- --------------------------------------------------------------------------------
CUSTODIAN
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 278-4353
- --------------------------------------------------------------------------------
LEGAL COUNSEL
Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
For additional Fund information, including the Fund's net asset value per share
and information regarding the investments comprising the Fund's portfolio,
please call 1-800-221-6726.
<PAGE>
LETTER TO SHAREHOLDERS
- ---------
For the year ended December 31, 1998, the Morgan Stanley Global Opportunity Bond
Fund, Inc. (the "Fund") had a total return, based on net asset value per share,
of -21.57% compared to -3.19% for the Fund's benchmark (described below). For
the period since the Fund's commencement of operations on May 27, 1994 through
December 31, 1998, the Fund's total return, based on net asset value per share,
was 36.04% compared to 57.32% for the benchmark. Beginning January 1, 1998,
the Fund uses as its benchmark, for purpose of comparing its performance, a
composite comprised of 25% of the J.P. Morgan Latin Eurobond Index, 25% of the
J.P. Morgan Emerging Markets Bond Plus Index and 50% of the CS First Boston High
Yield Index. Prior to 1998, the Fund used a composite comprised of 50% of the
J.P. Morgan Emerging Markets Bond Plus Index and 50% of the CS First Boston High
Yield Index. However, the Fund's weightings in these asset classes is not
restricted and will, under normal circumstances, fluctuate depending on market
conditions. At December 31, 1998, the Fund's investments in debt instruments
were comprised of 62% emerging markets debt securities and 38% U.S. high yield
securities.
On December 31, 1998, the closing price of the Fund's shares on the New York
Stock Exchange was $8 5/16, representing a 13.8% discount to the Fund's net
asset value per share.
Throughout the first two quarters of 1998, the Asian region remained in the
spotlight and often dictated the tone for emerging markets. During the first
quarter, emerging market debt recovered a large portion of the losses realized
in October of 1997, however the market remained volatile during this period of
spread compression, with general market spreads oscillating within a 100 basis
point range. In January, a market sell-off was caused by a worsening of
certain countries fiscal accounts due to historically low commodity prices as
well as policy inaction in Indonesia. The successful rescheduling of Korea's
short-term bank debt obligations late in the month reversed this. In February,
dramatic swings in the current account positions of Thailand and Korea combined
with proactive responses on the part of policy makers in Brazil, Mexico and
Russia to the worsening external environment helped bolster investor confidence.
By the early spring, the apparent economic and political stabilization in the
Asian region buoyed investor sentiment, causing spreads to rally to the mid
400's. However, this period of calm proved to be temporary. Spreads widened
out to above 600 basis points, as the "Asian Contagion" hit emerging markets
debt yet again during the second quarter of 1998 bringing returns for the first
half of the year close to zero.
During the second quarter, the medium term effects of 1997's Asian crisis were
manifesting themselves in the form of lower global demand for commodities and a
reduced demand for exports from other regions of the world especially Japan.
The yen declined versus the U.S. dollar which put pressure on all the currencies
in the Asian region. The ill health of the Japanese economy and of major
Japanese banks caused investors to adjust risk premiums higher and caused
liquidity for most emerging countries to evaporate. Investors feared that
Japan's inability to fix its economy would continue to weaken the yen and might
eventually cause a devaluation in China. This would increase the risk of
another round of currency devaluation in Asia and might further depress
commodity prices, a large source of earnings for many emerging countries.
Furthermore, President Suharto of Indonesia was forced out of office by a series
of national protests and riots, leaving a fragile political environment in his
absence. As investor sentiment soured in general, Russia's fiscal management
came under increased scrutiny causing a significant sell off in both the local
and external Russian debt markets. Lack of progress in tax collection, poor
corporate governance policies and a failed privatization led to a significant
rise in domestic interest rates and in difficulties rolling over domestic debt.
The J.P. Morgan Emerging Markets Bond Plus Index was down -21.23% during the
third quarter, which highlights the fact that the vast majority of the negative
price action had occurred during this time period. During July, the Russian
government successfully completed negotiations on an assistance package from the
International Monetary Fund but this proved to be too little assistance too
late. In August, investor sensitivity to deteriorating credit fundamentals and
a worsened global environment for emerging countries reached a breakpoint and
precipitated the largest and broadest sell-off in emerging market debt history.
The sell-off transitioned from a focus on fundamentals to a technically driven
liquidation when Russia devalued its currency and defaulted on its domestic debt
(ruble denominated treasury bills) on August 17th. The Russian restructuring
forced many market participants to sell non-Russian assets to meet margin calls,
thereby contaminating the debt of all emerging countries. Spreads on the broad
emerging market debt benchmark widened by 861 basis points during that month.
2
<PAGE>
The market effectively decoupled from events in Russia during September, as
every country within the J.P. Morgan Emerging Markets Bond Plus Index posted
positive results except Russia, which was down an additional 23.81%. Emerging
market debt continued to rebound during the last quarter of the year, with the
J.P. Morgan Emerging Markets Bond Plus Index advancing by 9.92%. The market was
buoyed by interest rate cuts in the U.S., the completion of an International
Monetary Fund assistance program for Brazil, and finally by the hope that
emerging markets had already passed through the point of maximum pessimism.
The negatives facing emerging market countries in 1999 are daunting. Emerging
countries will have to confront slowing global gross domestic development growth
and continued weak commodity prices, while caught in the grip of global excess
capacity and deflationary forces. Additionally, 1999 will likely require
precise navigation through a myriad of potential land mines ranging from equity
market corrections, to Japanese bank defaults, to Brazilian economic
instability. But rather than dwelling on what has been priced into the markets,
we prefer to focus on what might cause emerging market debt to rally or fall
further from current levels. For starters, we have seen a good dose of monetary
reflation during the final quarter of 1998. G- 7 central banks have cut
interest rates aggressively and we may see emerging markets rise as newfound
liquidity works its way into the markets. With domestic interest rates below 5%
in all major developed countries, yields in the low teens may prove too tempting
to ignore. Also, the International Monetary Fund has been substantially
re-capitalized and may be both more willing and better positioned to prevent a
future liquidity driven crisis. Finally, it is true that in many cases crisis
breeds reform and that in effect, the markets have forced an acceleration of
structural adjustment agendas in most emerging countries. This last factor may
lead to improvement in the longer-term credit prospects for certain sovereign
issuers. Unfortunately, we do not believe that the momentum provided by the
easing of monetary conditions will be powerful enough to reverse the negative
fundamental forces for the most vulnerable emerging market credits and we may
experience an up-tick in default levels during 1999. As shown in the chart
below, the market did differentiate between stronger and weaker credits in 1998
and we expect this differentiation to continue. Despite what is generally
perceived to have been a catastrophic year for emerging market debt, only four
countries posted significantly negative returns.
<TABLE>
<CAPTION>
U.S. DOLLAR TOTAL RETURN %
COUNTRY 1998 PERFORMANCE
- ------- ----------------
<S> <C>
Argentina 3.57%
Brazil -15.39%
Bulgaria -0.01%
Ecuador -25.46%
Mexico 0.03%
Morocco -1.36%
Nigeria 2.33%
Panama 3.84%
Peru 2.40%
Philippines 11.28%
Poland 11.79%
Russia -82.57%
Venezuela -18.43%
</TABLE>
During the first few months of 1999, the market will likely experience liquidity
driven broad-based rallies. However, the trend toward credit polarization
should take precedence and it is for this reason we remain cautious on countries
such as Brazil, Ecuador and Venezuela. While each suffers from its own unique
set of problems, fiscal imbalances remain high and currencies vulnerable in each
of these countries. At the same time we feel that countries with sound
fundamentals and fewer imbalances such as Mexico, the Philippines and Bulgaria
will benefit most from the return of funds into emerging markets. We also see
value in countries such as Colombia and Turkey and Korea where credible reforms
initiated in 1998 look set to continue in 1999 and the large imbalances in these
countries should prove manageable.
The U.S. high yield market underperformed high quality bonds in 1998 by over 500
basis points. Global financial turmoil highlighted by the default of Russia and
the subsequent flight to quality caused spreads to widen dramatically in the
third quarter. For the year, the weakness in the third quarter outweighed strong
returns for the asset class in the first and fourth quarters.
Technical factors and fear were primarily responsible for the spread widening
that occurred in the third quarter. However, for the year, default rates also
rose meaningfully, which put pressure on specific industries. Leveraged
investors including many hedge funds were forced to sell to satisfy margin
calls. At the same time, dealers were under pressure to keep inventories low
and net cash flows into mutual funds turned negative.
3
<PAGE>
Consistent with the other non-Treasury sectors of the bond market, high yield
bonds rebounded strongly in the fourth quarter. An accommodative Fed reduced
fears of a credit crunch allowing liquidity to return to this market as well.
Technical conditions improved dramatically: mutual fund cash flows were strong,
demand for the large number of new issues has been overwhelming, and the
deleveraging so prevalent in the previous quarter appears to be over. A strong
equity market and improving conditions in the emerging markets also enhanced the
confidence of high yield investors in late December and early January.
Even after the recent rebound, yield spreads on high yield bonds now exceed 500
basis points over Treasuries - levels not seen since the early 1990's. During
that historical period, default rates were very high (reaching 10% in 1990 and
1991), interest coverage ratios were less than 2.0 times, and there was serious
concern over the health of the banking system. Today, default rates are less
than 3%, coverage ratios average 2.5 times, and the U.S. financial system is
better capitalized. Also, the rating agency upgrade to downgrade ratio is
better today than in it was in the late 80's, and the percentage of equity in
the capital structures of high yield issuers is significantly higher. Finally,
cash flow continues to improve for many of the issuers we follow. In summary,
prices in the high yield market continue to discount worst case outcomes/default
rates that are historically very high at a time when the fundamental credit
quality of most high yield issuers is quite strong and the financial system is
very healthy. Consequently, we believe that high yield bonds offer compelling
value, and we continue to find attractive bottom up investment opportunities
using our valuation criteria.
Sincerely,
/S/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
January 1999
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO
PURCHASE OR SELL THE SECURITIES MENTIONED.
4
<PAGE>
Morgan Stanley Global Opportunity Bond Fund, Inc.
Investment Summary as of December 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION TOTAL RETURN (%)
------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (3)
-------------------- -------------------- --------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
ONE YEAR -29.20% -29.20% -21.57% -21.57% -3.19% -3.19%
SINCE INCEPTION* 17.53 3.57 36.04 6.96 57.32 10.36
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION:
[GRAPH]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994* 1995 1996 1997 1998
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value Per Share. . . . . . . . $12.25 $12.99 $14.86 $13.74 $9.64
Market Value Per Share . . . . . . . . . $12.50 $12.50 $14.63 $13.13 $8.31
Premium/(Discount) . . . . . . . . . . . 2.0% -3.8% -1.5% -4.4% -13.8%
Income Dividends . . . . . . . . . . . . $0.91 $1.59 $1.49 $1.30 $1.18
Capital Gains Distributions. . . . . . . -- -- $0.50 $2.30 $0.06
Fund Total Return (2). . . . . . . . . . -6.42% 20.34% 31.45% 17.38% -21.57%
Index Total Return (3) . . . . . . . . . -0.46% 22.37% 25.36% 12.56% -3.19%
</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) Beginning january 1, 1998, the Fund uses as its benchmark, for purpose
of comparing its performance, a composite comprised of 25% of the J.P.
Morgan Latin Eurobond Index, 25% of the J.P. Morgan Emerging Markets Bond
Plus Index, and 50% of the CS First Boston High Yield Index. Prior to
1998, the Fund used a composite comprised of 50% of the J.P. Morgan
Emerging Markets Bond Plus Index and 50% of the CS First Boston High Yield
Index. However, the Fund's weighting in these asset classes is not
restricted and will, under normal circumstances, fluctuate depending on
market conditions. As of december 31, 1998, the Fund's investment in debt
instruments was comprised of 62% emerging markets debt securities and 38%
U.S. high yield securities.
* The Fund commenced operations on May 27, 1994.
5
<PAGE>
Morgan Stanley Global Opportunity Bond Fund, Inc.
Investment Summary as of December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Debt Instruments (95.9%)
Short-Term Investments (4.1%)
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[CHART]
<TABLE>
<S> <C>
United States (39.7%)
Mexico (13.1%)
Argentina (11.9%)
Brazil (7.6%)
Bulgaria (3.1%)
Korea (2.6%)
United Kingdom (2.4%)
Colombia (2.1%)
Philippines (2.1%)
Russia (1.9%)
Other (13.5%)
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
-----------
<S> <C>
1. United Mexican States Par Bond 'W-B'
6.25%, 12/31/19 (Mexico) 6.4%
2. Republic of Argentina
6.188%, 3/31/05 (Argentina) 5.3
3. United Mexican States Discount Bond 'D'
6.098%, 12/31/19 (Mexico) 3.3
4. Federative Republic of Brazil 'EI-L' Bond
6.125%, 4/15/06 (Brazil) 2.9
5. Federative Republic of Brazil 'C' Bond
5.00%, 4/15/14 (Brazil) 2.8
6. Republic of Argentina Par Bond 'L-GP'
5.75%, 3/31/23 (Argentina) 2.8
7. Republic of Bulgaria Discount Bond 'A' Euro
6.688%, 7/28/24 (Bulgaria) 1.8
8. Republic of Argentina Global Bond
11.375%, 1/30/17 (Argentina) 1.8
9. Nacional Financiera
17.00%, 2/26/99 (South Africa) 1.6
10. Federative Republic of Brazil Debt
Conversion 'L' Bond 6.188%, 4/15/12
(Brazil) 1.6
----
30.3%
----
----
</TABLE>
* Excludes short-term investments.
6
<PAGE>
FINANCIAL STATEMENTS
- ---------
STATEMENTS OF NET ASSETS
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- ---------
DECEMBER 31, 1998
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------
<S> <C> <C>
DEBT INSTRUMENTS(95.9%)
- -------------------------------------------------------------------
ARGENTINA (11.9%)
CORPORATE (1.6%)
CIA International Telecom
10.375%, 8/1/04 ARP 100 U.S.$ 71
(b)10.375%, 8/1/04 600 423
(b)Supercanal Holdings S.A.
11.50%, 5/15/05 U.S.$ 300 174
------------
668
------------
SOVEREIGN (10.3%)
Republic of Argentina
(d)6.188%, 3/31/05 2,500 2,138
11.00%, 10/9/06 160 158
Republic of Argentina
Global Bond
11.375%, 1/30/17 740 742
(d)Republic of Argentina Par
Bond 'L-GP'
5.75%, 3/31/23 1,580 1,142
------------
4,180
------------
4,848
------------
- -------------------------------------------------------------------
AUSTRALIA (0.6%)
CORPORATE (0.6%)
Glencore Nickel Property Ltd.
9.00%, 12/1/14 155 124
Murrin Murrin Holdings Property Ltd.
9.375%, 8/31/07 135 120
------------
244
------------
- -------------------------------------------------------------------
BERMUDA (0.2%)
CORPORATE (0.2%)
Flag Ltd.
8.25%, 1/30/08 100 99
------------
- -------------------------------------------------------------------
BRAZIL (7.6%)
CORPORATE (0.3%)
(b,d)Compania Energetica Sao Paulo
9.125%, 6/26/07 100 81
(b)Globopar
10.50%, 12/20/06 80 52
------------
133
------------
SOVEREIGN (7.3%)
(d)Federative Republic of Brazil
'C' Bond PIK
5.00%, 4/15/14 1,903 1,146
(d,e)Federative Republic of Brazil
'EI-L' Bond
6.125%, 4/15/06 1,843 1,196
- -------------------------------------------------------------------
(d)Federative Republic of Brazil
Debt Conversion 'L' Bond
6.188%, 4/15/12 U.S.$ 1,230 U.S.$ 632
------------
2,974
------------
3,107
------------
- -------------------------------------------------------------------
BULGARIA (3.1%)
SOVEREIGN (3.1%)
(d)Republic of Bulgaria Discount
Bond 'A' Euro
6.688%, 7/28/24 1,040 742
(d)Republic of Bulgaria Front Loaded
Interest Reduction Bond
2.50%, 7/28/12 450 259
(c)Republic of Bulgaria Past Due
Interest Bond
6.688%, 7/28/11 380 257
------------
1,258
------------
- -------------------------------------------------------------------
CHILE (0.7%)
CORPORATE (0.7%)
Endesa
7.75%, 7/15/08 315 302
------------
- -------------------------------------------------------------------
COLOMBIA (2.1%)
CORPORATE (0.4%)
(c)Transtel Structured Note
0.016%, 8/13/08 950 149
------------
SOVEREIGN (1.7%)
Republic of Colombia
7.625%, 2/15/07 280 233
(c)Republic of Columbia
12.243%, 8/13/05 500 463
------------
696
------------
845
------------
- -------------------------------------------------------------------
ECUADOR (1.3%)
CORPORATE (0.2%)
(b)Consorcio Ecuatorian Notes
14.00%, 5/1/02 190 97
------------
SOVEREIGN (1.1%)
(c)Republic of Ecuador Discount Bond
6.625%, 2/28/25 760 389
(d)Republic of Ecuador Past Due
Interest Bond
3.25%, 2/27/15 124 51
------------
440
------------
537
------------
- -------------------------------------------------------------------
GERMANY (0.7%)
CORPORATE (0.7%)
(d)RSL Communications plc
0.00%, 3/15/08 DEM 500 166
- -------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------
<S> <C> <C>
GERMANY (CONTINUED)
CORPORATE (CONTINUED)
(b)Sirona Dental Systems
9.125%, 7/15/08 DEM 175 U.S.$ 104
------------
270
------------
- -------------------------------------------------------------------
HONG KONG (0.8%)
CORPORATE (0.8%)
(b)Hutchinson Whampoa Financial 'B'
7.45%, 8/1/17 U.S.$ 380 332
------------
- -------------------------------------------------------------------
INDIA (0.6%)
CORPORATE (0.6%)
(b)Reliance Industries Ltd.
10.375%, 6/24/16 290 231
------------
- -------------------------------------------------------------------
INDONESIA (0.5%)
CORPORATE (0.5%)
Hermes Europe Railtel B.V.
11.50%, 8/15/07 190 200
------------
- -------------------------------------------------------------------
JAMAICA (0.9%)
CORPORATE (0.9%)
Mechala Group Jamaica, Ltd. 'B'
12.75%, 12/30/99 500 352
------------
- -------------------------------------------------------------------
JORDAN (0.5%)
SOVEREIGN (0.5%)
Jordan Discount Bond
(b,c)6.00%, 12/23/23 155 95
(c)6.00%, 12/23/23 168 104
------------
199
------------
- -------------------------------------------------------------------
KOREA (2.6%)
CORPORATE (0.2%)
(b)Samsung Electronics, Co.
7.45%, 10/1/02 100 88
------------
QUASI-SOVEREIGN (2.4%)
Export-Import Bank of Korea
6.50%, 2/10/02 300 275
Korea Development Bank
7.125%, 9/17/01 300 283
Korea Electric Power Corp.
7.00%, 10/1/02 450 407
------------
965
------------
1,053
------------
- -------------------------------------------------------------------
MEXICO (13.1%)
CORPORATE (1.2%)
(b)Innova
12.875%, 4/1/07 370 255
(c)Petro Mexicanos
9.574%, 7/15/05 240 223
------------
478
------------
- -------------------------------------------------------------------
SOVEREIGN (11.9%)
United Mexican States
11.50%, 5/15/26 U.S.$ 210 U.S.$ 224
(c)United Mexican States
Discount Bond 'A'
6.116%, 12/31/19 10 8
(c)United Mexican States
Discount Bond 'D'
6.098%, 12/31/19 1,650 1,347
United Mexican States Global
Bond
9.875%, 1/15/07 160 158
11.375%, 9/15/16 270 281
United Mexican States Par
Bond 'W-A'
6.25%, 12/31/19 270 211
United Mexican States Par
Bond 'W-B'
6.25%, 12/31/19 3,350 2,615
------------
4,844
------------
5,322
------------
- -------------------------------------------------------------------
PANAMA (1.1%)
SOVEREIGN (1.1%)
Republic of Panama
8.875%, 9/30/27 360 340
(d)Republic of Panama Interest
Reduction Bond Euro
3.75%, 7/17/14 170 129
------------
469
------------
- -------------------------------------------------------------------
PERU (1.3%)
SOVEREIGN (1.3%)
Peru Past Due Interest Bond
(d)4.00%, 3/7/17 370 234
Republic of Peru Front Loaded
Interest Reduction Bond
(d)3.25%, 3/7/17 50 28
(b,d)3.25%, 3/7/17 450 257
------------
519
------------
- -------------------------------------------------------------------
PHILIPPINES (2.1%)
CORPORATE (0.6%)
Philippine Long Distance Telephone
7.85%, 3/6/07 250 225
------------
SOVEREIGN (1.5%)
(d)Republic of Philippines 'B'
5.962%, 6/1/08 750 626
------------
851
------------
- -------------------------------------------------------------------
RUSSIA (1.9%)
CORPORATE (0.5%)
(d)PTC International Finance B.V.
0.00%, 7/1/07 300 209
------------
- -------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------
<S> <C> <C>
RUSSIA (CONTINUED)
SOVEREIGN (1.4%)
(c)Russia Interest Arrears Notes
5.969%, 12/15/15 U.S.$ 38 U.S. 4
(c,f)Russia Principal Note
3.313%, 12/15/20 2,035 132
Russian Federation
(b)8.75%, 7/24/05 700 165
(b)11.00%, 7/24/18 1,030 252
------------
553
------------
762
------------
- -------------------------------------------------------------------
SOUTH AFRICA (1.6%)
SOVEREIGN (1.6%)
Nacional Financiera
17.00%, 2/26/99 ZAR 4,000 642
------------
- -------------------------------------------------------------------
TURKEY (1.1%)
CORPORATE (1.1%)
(b)Cellco Finance NV
15.00%, 8/1/05 U.S.$ 320 277
Pera Financial Services
9.375%, 10/15/02 200 156
------------
433
------------
- -------------------------------------------------------------------
UNITED KINGDOM (2.4%)
CORPORATE (2.4%)
Colt Telecommunications Group plc
7.625%, 7/31/08 DEM 225 133
(d)Dolphin Telecommunications plc
0.00%, 6/1/08 ECU 190 73
(b)Esprit Telecommunications
Group plc
11.00%, 6/15/08 DEM 655 396
(b)HMV Media Group plc
10.875%, 5/15/08 GBP 200 309
(b)RSL Communications plc
12.00%, 11/1/08 U.S.$ 50 52
------------
963
------------
- -------------------------------------------------------------------
UNITED STATES (36.2%)
ASSET BACKED SECURITIES (3.1%)
Aircraft Lease Portfolio
Securitization Ltd.
1996-1 P1D 12.75%, 6/15/06 337 337
(g)CFS 1997-5 'A1'
7.72%, 6/15/05 250 163
DR Securitized Lease Trust
1993-K1 A1 6.66%, 8/15/10 152 144
1994-K1 A1 7.60%, 8/15/07 438 436
(b)First Home Mortgage Acceptance
Corp., 1996-B, Class C
7.929%, 11/1/18 243 185
------------
1,265
------------
- -------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATION (0.4%)
Long Beach Auto 1997-1, 'B'
14.22%, 10/26/03 U.S.$ 153 U.S.$ 152
------------
CORPORATE (32.7%)
Adelphia Communications 'B'
8.375%, 2/1/08 100 104
9.875%, 3/1/07 25 28
AES Corp.
8.50%, 11/1/07 215 218
Algoma Steel, Inc.
12.375%, 7/15/05 50 37
(b)Allied Waste
7.875%, 1/1/09 75 76
(b)American Cellular Corp.
10.50%, 5/15/08 160 157
American Standard Cos., Inc.
7.375%, 2/1/08 180 181
AMSC Acquisition Co., Inc. 'B'
12.25%, 4/1/08 180 112
(b)CA FM Lease Trust
8.50%, 7/15/17 237 263
CB Richard Ellis Services
8.875%, 6/1/06 55 53
(b)Centennial Cellular
10.75%, 12/15/08 90 90
Chancellor Media Corp. 'B'
8.125%, 12/15/07 315 314
Columbia/HCA Healthcare
6.91%, 6/15/05 300 294
7.00%, 7/1/07 90 87
7.69%, 6/15/25 350 323
Comcast Cellular Holdings 'B'
9.50%, 5/1/07 30 32
CSC Holdings, Inc.
7.875%, 12/15/07 175 186
9.875%, 5/15/06 220 242
Dobson Communications Corp.
11.75%, 4/15/07 100 102
(b)EES Coke Battery Co., Inc.
9.382%, 4/15/07 100 98
(b)Fresenius Medical Care AG
7.875%, 2/1/08 130 129
Global Crossing Holdings Ltd.
9.625%, 5/15/08 225 236
Globalstar LP
11.375%, 2/15/04 110 83
Grand Casinos
10.125%, 12/1/03 400 436
Harrahs Operating Co., Inc.
7.875%, 12/5/05 80 80
(b)Hayes Lemmerz International, Inc.
8.25%, 12/15/08 100 100
Hilton Hotels
7.95%, 4/15/07 230 238
HMH Properties 'A'
7.875%, 8/1/05 275 271
- -------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------
<S> <C> <C>
UNITED STATES (CONTINUED)
CORPORATE (CONTINUED)
(d)Intermedia Communications,
Inc. 'B'
0.00%, 7/15/07 U.S.$ 565 U.S.$ 390
(b)Iridium LLC/Capital Corp.
13.00%, 7/15/05 55 50
Iridium LLC/Capital Corp. 'A'
13.00%, 7/15/05 90 82
ISP Holdings, Inc. 'B'
9.00%, 10/15/03 195 206
IXC Communications, Inc.
9.00%, 4/15/08 305 303
Jet Equipment Trust 'C1'
11.79%, 6/15/13 175 230
K Mart Funding Corp. 'F'
8.80%, 7/1/10 100 105
Lenfest Communications, Inc.
8.375%, 11/1/05 185 200
Level 3 Communications, Inc.
9.125%, 5/1/08 20 20
(b)9.125%, 5/1/08 125 123
Musicland Group, Inc.
9.00%, 6/15/03 100 96
Musicland Group, Inc. 'B'
9.875%, 3/15/08 175 171
Nextel Communications, Inc.
(d)0.00%, 8/15/04 385 373
(d)0.00%, 9/15/07 360 230
(d)0.00%, 2/15/08 150 90
(d)NEXTLINK Communications, Inc.
0.00%, 4/15/08 375 216
Niagara Mohawk Power 'G'
7.75%, 10/1/08 48 52
(d)Niagara Mohawk Power 'H'
0.00%, 7/1/10 86 66
(d)Norcal Waste Systems, Inc.
13.50%, 11/15/05 250 270
(b)Nortek, Inc.
8.875%, 8/1/08 140 142
(b)NSM Steel, Inc.
12.25%, 2/1/08 100 14
(b,d)NTL Inc.
0.00%, 4/1/08 GBP 330 309
(b)Onepoint Communications Corp.
14.50%, 6/1/08 U.S.$ 145 78
Outdoor Systems, Inc.
8.875%, 6/15/07 410 437
Primus Telecommunications Group 'B'
9.875%, 5/15/08 145 138
PSINet, Inc. 'B'
10.00%, 2/15/05 110 108
- -------------------------------------------------------------------
Qwest Communications
International
(d)0.00%, 10/15/07 U.S.$ 485 U.S.$ 378
10.875%, 4/1/07 87 100
(b)RAS Laffan Liquid Natural Gas
8.294%, 3/15/14 100 84
(d)RCN Corp.
0.00%, 10/15/07 725 410
(d)Rhythms Netconnections 'B'
0.00%, 5/15/08 400 193
Rogers Cablesystems 'B'
10.00%, 3/15/05 225 252
Rogers Communications, Inc.
9.125%, 1/15/06 90 94
RSL Communications plc
9.125%, 3/1/08 315 287
(b)Samsung Electronics America
9.75%, 5/1/03 300 284
(b)SB Treasury Co. LLC
9.40%, 12/29/49 100 95
SD Warren Co. 'B'
12.00%, 12/15/04 215 234
Smithfield Foods, Inc.
(b)7.625%, 2/15/08 95 95
7.625%, 2/15/08 50 50
Snyder Oil Corp.
8.75%, 6/15/07 315 306
Southland Corp.
5.00%, 12/15/03 180 158
Station Casinos, Inc.
9.625%, 6/1/03 175 181
10.125%, 3/15/06 160 169
Tenet Healthcare Corp.
8.625%, 1/15/07 405 425
Vencor, Inc.
9.875%, 5/1/05 250 216
(d)Viatel, Inc.
0.00%, 4/15/08 105 60
(d)WAM! Net Inc. 'B'
0.00%, 3/1/05 200 110
Western Financial Bank
8.875%, 8/1/07 120 86
------------
13,336
------------
14,753
------------
- -------------------------------------------------------------------
VENEZUELA (1.0%)
SOVEREIGN (1.0%)
(d)Republic of Venezuela Debt
Conversion Bond 'DL'
5.938%, 12/18/07 679 432
------------
- -------------------------------------------------------------------
TOTAL DEBT INSTRUMENTS
(Cost U.S.$40,757) 39,023
------------
- -------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
- -------------------------------------------------------------------
<S> <C> <C>
RIGHTS(0.0%)
- -------------------------------------------------------------------
MEXICO (0.0%)
(a)United Mexican States, Value
Recovery Rights, expiring
6/30/03 (Cost U.S.$__) 2,554,000 U.S.$ --
------------
- -------------------------------------------------------------------
NO. OF
WARRANTS
- -------------------------------------------------------------------
WARRANTS(0.0%)
- -------------------------------------------------------------------
NIGERIA (0.0%)
(a)Central Bank of Nigeria,
expiring 11/15/20 250 --
------------
- -------------------------------------------------------------------
UNITED STATES (0.0%)
(a,b)American Mobile Satellite
Corp., expiring 4/1/08 180 --@
(a,b)NSM Steel, Inc., expiring 2/1/08 63,309 --@
(a,b)Onepoint Communications
Corp., expiring 6/1/08 145 --@
(a,b)Rhythms Netcommunications,
expiring 5/15/08 1,600 1
(a,b)WAM! Net., Inc., expiring 3/1/05 600 1
------------
2
------------
- -------------------------------------------------------------------
TOTAL WARRANTS
(Cost U.S.$--) 2
------------
- -------------------------------------------------------------------
SHARES
- -------------------------------------------------------------------
PREFERRED STOCK(0.0%)
- -------------------------------------------------------------------
UNITED STATES
(a)IXC Communications, Inc. 'B' 5 5
(a,g)Viatel, Inc., Series 'A' 10.00% 54 --@
------------
- -------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost U.S.$--) 5
------------
- -------------------------------------------------------------------
FACE
AMOUNT
(000)
- -------------------------------------------------------------------
SHORT-TERM INVESTMENTS(4.1%)
- -------------------------------------------------------------------
TURKEY (0.6%)
BILLS
Bankers Trust International plc,
U.S. Dollar Note linked to
Turkish Interest and Turkish
Lira Exchange Rate,
0.00%, 12/31/99 U.S.$ 250 250
------------
- -------------------------------------------------------------------
UNITED STATES (3.5%)
REPURCHASE AGREEMENT
Chase Securities, Inc., 4.45%,
dated 12/31/98, due 1/4/99,
to be repurchased at
U.S.$1,423, collateralized
by United States Treasury
Bonds, 11.25%, due 2/15/15,
valued at U.S.$1,459 U.S.$ 1,422 U.S.$ 1,422
------------
- -------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost U.S.$1,672) 1,672
------------
- -------------------------------------------------------------------
TOTAL INVESTMENTS(100.0%)
(Cost U.S.$42,429) 40,702
------------
- -------------------------------------------------------------------
ASSETS
Cash 400
Receivable for Investments Sold 1,026
Interest Receivable 907
Receivable for Daily
Variation on Futures
Contracts 5
Other Assets 7 2,345
------------ ------------
- -------------------------------------------------------------------
LIABILITIES
Payable For:
Dividends Declared (1,156)
Reverse Repurchase Agreements (963)
Investments Purchased (399)
Foreign Tax Expense (53)
Professional Fees (48)
Shareholder Reporting Expenses (37)
Investment Advisory Fees (35)
Directors' Fees and Expenses (29)
Administrative Fees (12)
Net Unrealized Loss on Foreign
Currency Exchange Contracts (7)
Custodian Fees (6)
Other Liabilities (8) (2,753)
----------- ------------
- -------------------------------------------------------------------
NET ASSETS
Applicable to 4,178,082, issued and
outstanding U.S.$0.01 par value
shares (100,000,000 shares authorized) U.S.$ 40,294
------------
- -------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 9.64
------------
- -------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<TABLE>
<CAPTION>
AMOUNT
(000)
- -------------------------------------------------------------------
AT DECEMBER 31, 1998, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------
<S> <C>
Common Stock U.S.$ 42
Capital Surplus 58,070
Undistributed Net Investment Income 55
Accumulated Net Realized Loss (16,115)
Unrealized Depreciation on Investments,
Foreign Currency Translations and
Futures Contracts (1,758)
- -------------------------------------------------------------------
TOTAL NET ASSETS U.S.$ 40,294
------------
- -------------------------------------------------------------------
</TABLE>
(a) -- Non-income producing
(b) -- 144A Security - certain conditions for public sale may exist.
(c) -- Variable/floating rate security - rate disclosed is as of
December 31, 1998.
(d) -- Step Bond - coupon rate increases in increments to maturity. Rate
disclosed is as of December 31, 1998. Maturity date disclosed is
the ultimate maturity.
(e) -- Denotes all or a portion of securities subject to repurchase under
Reverse Repurchase Agreements as of December 31, 1998 - see note
A-4 to financial statements.
(f) -- Security is in default.
(g) Security valued at fair value - See note A-1 to financial
statements.
@ -- Value is less than U.S.$500.
PIK -- Payment-in-Kind. Income may be paid in additional securities or
cash.
- -------------------------------------------------------------------
DECEMBER 31, 1998 EXCHANGE RATES:
- -------------------------------------------------------------------
ARP Argentine Peso 0.999 = U.S. $1.00
ECU European Currency Unit 0.852 = U.S. $1.00
DEM German Mark 1.666 = U.S. $1.00
GBP Great British Pound 0.602 = U.S. $1.00
ZAR South African Rand 5.890 = U.S. $1.00
- -------------------------------------------------------------------
FUTURES CONTRACTS:
At December 31, 1998, the following futures contracts were open:
<TABLE>
<CAPTION>
NET
NUMBER AGGREGATE UNREALIZED
OF FACE VALUE EXPIRATION LOSS
CONTRACTS (000) DATE (000)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
LONG:
Long Gilt 3 U.S.$ 593 Mar-99 U.S.$ (16)
--- ----------
--- ----------
- ------------------------------------------------------------------------------
</TABLE>
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts
open at December 31, 1998, the Fund is obligated to
deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN UNREALIZED
TO EXCHANGE GAIN
DELIVER VALUE SETTLEMENT FOR VALUE (LOSS)
(000) (000) DATE (000) (000) (000)
- --------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
DEM 145 U.S.$ 87 12/07/98 U.S.$ 89 U.S.$ 89 U.S.$ 2
U.S.$ 87 87 12/07/98 DEM 145 87 --
ECU 55 65 01/25/99 U.S.$ 64 64 (1)
DEM 200 120 01/25/99 117 117 (3)
25 15 01/27/99 15 15 --
830 498 01/27/99 500 500 2
150 90 01/27/99 89 89 (1)
145 87 02/08/99 87 87 --
135 81 02/22/99 81 81 --
GBP 335 557 03/03/99 551 551 (6)
----------- ----------- ----------
U.S.$ 1,687 U.S.$ 1,680 $(7)
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
SUMMARY OF TOTAL INVESTMENTS BY COUNTRY --
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PERCENT
VALUE OF TOTAL
COUNTRY (000) INVESTMENTS
- -----------------------------------------------------------------
<S> <C> <C>
Argentina U.S.$ 4,848 11.9%
Australia 244 0.6
Bermuda 99 0.2
Brazil 3,107 7.6
Bulgaria 1,258 3.1
Chile 302 0.7
Colombia 845 2.1
Ecuador 537 1.3
Germany 270 0.7
Hong Kong 332 0.8
India 231 0.6
Indonesia 200 0.5
Jamaica 352 0.9
Jordan 199 0.5
Korea 1,053 2.6
Mexico 5,322 13.1
Panama 469 1.1
Peru 519 1.3
Philippines 851 2.1
Russia 762 1.9
South Africa 642 1.6
Turkey 683 1.7
United Kingdom 963 2.4
United States 16,182 39.7
Venezuela 432 1.0
------------ -----
U.S.$ 40,702 100.0%
------------ -----
------------ -----
- -----------------------------------------------------------------
</TABLE>
SUMMARY OF TOTAL INVESTMENTS BY INDUSTRY
CLASSIFICATION -- DECEMBER 31, 1998
<TABLE>
<CAPTION>
PERCENT
VALUE OF TOTAL
INDUSTRY (000) INVESTMENTS
- -----------------------------------------------------------------
<S> <C> <C>
Aerospace & Defense U.S.$ 230 0.6%
Asset-Backed Securities 1,265 3.1
Automobiles 198 0.5
Banking 181 0.4
Broadcast -- Radio & Television 879 2.2
Building Materials & Components 186 0.5
Chemicals 436 1.1
Coal, Gas & Oil 84 0.2
Collateralized Mortgage
Obligations 152 0.4
Construction & Mining 120 0.3
Consumer Staples 105 0.3
Electronics 373 0.9
Energy 605 1.5
Entertainment & Leisure 267 0.6
Finance 1,179 2.9
Food 146 0.4
Foreign Government & Agency
Obligations 19,352 47.5
Gaming & Lodging 1,024 2.5
Health Care Supplies & Services 1,259 3.1
Metals -- Steel 51 0.1
Multi-Industry 3,067 7.5
Real Estate 324 0.8
Repurchase Agreements 1,422 3.5
Retail -- General 158 0.4
Services 811 2.0
Technology 181 0.4
Telecommunications 5,922 14.5
Transportation 200 0.5
Utilities 525 1.3
------------ -----
U.S.$ 40,702 100.0%
------------ -----
------------ -----
- -----------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
STATEMENT OF OPERATIONS (000)
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 12
Interest . . . . . . . . . . . . . . . . . . . . . . . . 6,468
- --------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . 6,480
- --------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees . . . . . . . . . . . . . . . . 508
Interest Expense on Borrowings . . . . . . . . . . . . . 285
Administrative Fees . . . . . . . . . . . . . . . . . . . 150
Foreign Tax Expense . . . . . . . . . . . . . . . . . . . 80
Professional Fees . . . . . . . . . . . . . . . . . . . . 80
Custodian Fees . . . . . . . . . . . . . . . . . . . . . 73
Shareholder Reporting Expenses . . . . . . . . . . . . . 71
Transfer Agent Fees . . . . . . . . . . . . . . . . . . . 18
Directors' Fees and Expenses . . . . . . . . . . . . . . 16
Amortization of Organization Costs . . . . . . . . . . . 6
Other Expenses . . . . . . . . . . . . . . . . . . . . . 34
- --------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . 1,321
- --------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . 5,159
- --------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . . . . (15,639)
Investment Securities Sold Short . . . . . . . . . . . . 3
Written Option Contracts . . . . . . . . . . . . . . . . 11
Foreign Currency Transactions . . . . . . . . . . . . . . (239)
Futures Contracts . . . . . . . . . . . . . . . . . . . . 5
- -------------------------------------------------------------------------------
Net Realized Loss . . . . . . . . . . . . . . . . . . . . (15,859)
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Depreciation on Investments . . . . . . . . . . . . . . . (1,206)
Depreciation on Foreign Currency Translations . . . . . . (24)
- --------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation . . . (1,230)
- --------------------------------------------------------------------------------
Net Realized Loss and Change in Unrealized
Appreciation/Depreciation . . . . . . . . . . . . . . . . . . (17,089)
- --------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS. . . U.S.$ (11,930)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income . . . . . . . . . . . . . . . . . . U.S.$ 5,159 U.S.$ 5,362
Net Realized Gain (Loss). . . . . . . . . . . . . . . . . (15,859) 8,685
Change in Unrealized Appreciation/Depreciation. . . . . . (1,230) (3,739)
- ------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations . . . . . . . . . . . . . . . . . . . . (11,930) 10,308
- ------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income . . . . . . . . . . . . . . . . . . (4,917) (5,362)
In Excess of Net Investment Income. . . . . . . . . . . . -- (19)
Net Realized Gain . . . . . . . . . . . . . . . . . . . . -- (9,362)
In Excess of Net Realized Gains . . . . . . . . . . . . . (261) (205)
- ------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . (5,178) (14,948)
- ------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Reinvestment of Distributions (24,590 and 7,493 shares,
respectively) . . . . . . . . . . . . . . . . . . . . . 333 118
- ------------------------------------------------------------------------------------------------------------
Total Decrease. . . . . . . . . . . . . . . . . . . . . . (16,775) (4,522)
Net Assets:
Beginning of Period . . . . . . . . . . . . . . . . . . . 57,069 61,591
- ------------------------------------------------------------------------------------------------------------
End of Period (including undistributed net investment
income/ (distributions in excess of net investment
income) of U.S.$55 and U.S.$(19), respectively). . . . . U.S.$ 40,294 U.S.$ 57,069
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The accompnaying notes are an integral part of the financial statements.
14
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
STATEMENT OF CASH FLOWS (000)
- --------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM INVESTING AND OPERATING ACTIVITIES:
Proceeds from Sales of Investments. . . . . . . . . . . . U.S. $ 150,525
Purchases of Investments. . . . . . . . . . . . . . . . . (139,964)
Net Decrease in Short-Term Investments. . . . . . . . . . 4,261
Investment Income . . . . . . . . . . . . . . . . . . . . 5,450
Interest Expense Paid . . . . . . . . . . . . . . . . . . (309)
Net Operating Expenses Paid . . . . . . . . . . . . . . . (1,000)
- --------------------------------------------------------------------------------
Net Cash Provided by Investing and Operating Activities . 18,963
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Received for Reverse Repurchase Agreements . . . . . (5,046)
Cash Distributions Paid (net of reinvestments of $333). . (13,659)
- --------------------------------------------------------------------------------
Net Cash Used for Financing Activities. . . . . . . . . . (18,705)
- --------------------------------------------------------------------------------
Net Increase in Cash. . . . . . . . . . . . . . . . . . . 258
CASH AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . 142
- --------------------------------------------------------------------------------
CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . . . U.S. $ 400
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RECONCILIATION OF NET INVESTMENT INCOME TO NET CASH PROVIDED BY
INVESTING AND OPERATING ACTIVITIES . . . . . . . . . . . . .
- --------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . U.S. $ 5,159
Proceeds from Sales of Investments. . . . . . . . . . . . 150,525
Purchases of Investments. . . . . . . . . . . . . . . . . (139,964)
Net Decrease in Short-Term Investments. . . . . . . . . . 4,261
Net Decrease in Receivables Related to Operations . . . . 538
Net Increase in Payables Related to Operations. . . . . . 9
Accretion/Amortization of Discounts and Premiums. . . . . (1,565)
- --------------------------------------------------------------------------------
Net Cash Provided by Investing and Operating
Activities. . . . . . . . . . . . . . . . . . . . . . . U.S. $ 18,963
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompnaying notes are an integral part of the financial statements.
15
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
SELECTED PER SHARE DATA --------------------------------------------------------------- MAY 27, 1994* TO
AND RATIOS: 1998 1997 1996 1995 DECEMBER 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . U.S.$ 13.74 U.S.$ 14.86 U.S.$ 12.99 U.S.$ 12.25 U.S.$ 14.10
- ----------------------------------------------------------------------------------------------------------------------------------
Offering Costs . . . . . . . . . . . . . . -- -- -- -- (0.17)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . 1.23 1.29 1.71 1.61 0.95
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . (4.09) 1.19 2.15 0.72 (1.72)
- ----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations . . . (2.86) 2.48 3.86 2.33 (0.77)
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income. . . . . . . . . . (1.18) (1.29) (1.49) (1.59) (0.91)
In Excess of Net Investment Income . . . -- (0.01) -- -- --
Net Realized Gain. . . . . . . . . . . . -- (2.25) (0.50) -- --
In Excess of Net Realized Gains. . . . . (0.06) (0.05) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions. . . . . . . . . . (1.24) (3.60) (1.99) (1.59) (0.91)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . U.S.$ 9.64 U.S.$ 13.74 U.S.$ 14.86 U.S.$ 12.99 U.S.$ 12.25
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD. . . U.S.$ 8.31 U.S.$ 13.13 U.S.$ 14.63 U.S.$ 12.50 U.S.$ 12.50
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value . . . . . . . . . . . . . . (29.20)% 13.93% 34.44% 13.49% (4.51)%
Net Asset Value (1). . . . . . . . . . . (21.57)% 17.38% 31.45% 20.34% (6.42)%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS) U.S.$ 40,294 U.S.$ 57,069 U.S.$ 61,591 U.S.$ 53,847 U.S.$ 50,607
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses Excluding Interest
Expense to Average Net Assets. . . . . . 2.03% 1.75% 1.81% 1.95% 1.75%**
Ratio of Expenses Including Interest
Expense to Average Net Assets. . . . . . 2.59% 1.86% 2.00% 2.06% 2.97%**
Ratio of Net Investment Income to Average
Net Assets . . . . . . . . . . . . . . . 10.13% 8.15% 12.17% 13.07% 11.90%**
Portfolio Turnover Rate. . . . . . . . . . 266% 333% 280% 160% 86%
- ----------------------------------------------------------------------------------------------------------------------------------
</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.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- ------------------
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: 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. Reverse repurchase
agreements also involve credit risk with the counter party to the extent
that the value of securities subject to repurchase exceed the Fund's
liability under the reverse repurchase agreement. Securities subject to
repurchase under reverse repurchase agreements, if any, are designated as
such in the Statement of Net Assets.
At December 31, 1998, the Fund had reverse repurchase agreements
outstanding as follows:
<TABLE>
<CAPTION>
MATURITY IN
LESS THAN
365 DAYS
-----------
<S> <C>
Value of Securities Subject to
Repurchase............................................. $ 1,038,000
Liability Under Reverse
Repurchase Agreement................................... $ 963,000
Weighted Average Interest Rate.......................... 5.13%
</TABLE>
The average weekly balance of reverse repurchase agreements outstanding
during the year ended December 31, 1998 was approximately $5,531,000 at a
weighted average interest rate of 4.70%.
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:
17
<PAGE>
- investments, other assets and liabilities at the prevailing rates
of exchange on the valuation date;
- investment transactions and investment income at the prevailing
rates of exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the period, the Fund does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from
changes in the market prices of the securities held at period end.
Similarly, the Fund does not isolate the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market
prices of securities sold during the period. Accordingly, realized and
unrealized foreign currency gains (losses) are included in the reported net
realized and unrealized gains (losses) on investment transactions and
balances.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of foreign
currency exchange contracts, disposition of foreign currencies, currency
gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid. Net
unrealized currency gains (losses) from valuing foreign currency
denominated assets and liabilities at period end exchange rates are
reflected as a component of unrealized appreciation (depreciation) on
investments and foreign currency translations in the Statement of Net
Assets. The change in net unrealized currency gains (losses) for the period
is reflected in the Statement of Operations.
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 objectives. The Fund may
engage in transactions in futures contracts on foreign currencies, stock
indices, as well as in options, swaps and structured notes. Consistent with the
Fund's investment objectives and policies, the Fund may use derivatives for non-
hedging as well as hedging purposes.
Following is a description of derivative instruments and their associated risks
that the Fund may utilize:
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
investment securities sold in the financial statements.
7. 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.
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
18
<PAGE>
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. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: The Fund
may make forward commitments to purchase or sell securities. Payment and
delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not to exceed 120 days)
after the date of the transaction. Additionally, the Fund may purchase
securities on a when-issued or delayed delivery basis. Securities purchased
on a when-issued or delayed delivery basis are purchased for delivery
beyond the normal settlement date at a stated price and yield, and no
income accrues to the Fund on such securities prior to delivery. When the
Fund enters into a purchase transaction on a when-issued or delayed
delivery basis, it either establishes a segregated account in which it
maintains liquid assets in an amount at least equal in value to the Fund's
commitments to purchase such securities or denotes such securities on the
custody statement for its regular custody account. Purchasing securities on
a forward commitment or when-issued or delayed-delivery basis may involve a
risk that the market price at the time of delivery may be lower than the
agreed upon purchase price, in which case there could be an unrealized loss
at the time of delivery.
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 either place in a segregated
account with its custodian or denote on its custody records 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. WRITTEN OPTIONS: The Fund may write covered call options in an attempt to
increase the Fund's total return. The Fund will receive premiums that are
recorded as liabilities and subsequently adjusted to the current value of
the options written. Premiums received from writing options which expire
are treated as realized gains. Premiums received from writing options which
are exercised or are closed are added to or offset against the proceeds or
amount paid on the transaction to determine the net realized gain or loss.
By writing a covered call option, the Fund forgoes in exchange for the
premium the opportunity for capital appreciation above the exercise price
should the market price of the underlying security increase.
12. SWAP AGREEMENTS: The Fund may enter into swap agreements to exchange the
return generated by one security, instrument or basket of instruments for
the return generated by another security, instrument or basket of
instruments. The following summarizes swaps which may be entered into by
the Fund:
INTEREST RATE SWAPS: Interest rate swaps involve the exchange of
commitments to pay and receive interest based on a notional principal
amount. Net periodic interest payments to be received or paid are accrued
daily and are recorded in the Statement of Operations as an adjustment to
interest income. Interest rate swaps are marked-to-market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized appreciation or depreciation in the Statement of Operations.
TOTAL RETURN SWAPS: Total return swaps involve commitments to pay interest
in exchange for a market- linked return based on a notional amount. To the
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.
19
<PAGE>
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.
13. 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.
14. OVER-THE-COUNTER TRADING: Derivative instruments that may be purchased or
sold by the Fund are expected to regularly consist of instruments not
traded on an exchange. The risk of nonperformance by the obligor on such an
instrument may be greater, and the ease with which the Fund can dispose of
or enter into closing transactions with respect to such an instrument may
be less, than in the case of an exchange- traded instrument. In addition,
significant disparities may exist between bid and asked prices for
derivative instruments that are not traded on an exchange. Derivative
instruments not traded on exchanges are also not subject to the same type
of government regulation as exchange traded instruments, and many of the
protections afforded to participants in a regulated environment may not be
available in connection with such transactions.
15. 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-dividend
date. The amount and character of income and capital gain distributions to
be paid are determined in accordance with Federal income tax regulations
which may differ from generally accepted accounting principles. These
differences are primarily due to differing book and tax treatments for
foreign currency transactions and 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 Dean Witter Investment 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 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 0.08% 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.
D. The Chase Manhattan Bank and its affiliates serve as custodian for the
Fund. The Fund's assets held outside the United States have been held by Morgan
Stanley Trust Company ("MSTC"), which was an affiliate of the Adviser prior to
October 1, 1998. On October 1, 1998, MSTC was acquired by the Chase Manhattan
Bank. Custody fees are payable monthly based on assets held in custody,
investment purchase and sales activity and account maintenance fees, plus
reimbursement for certain out-of-pocket expenses. Through September 30,1998,
the Fund paid MSTC fees of approximately $43,000.
E. For the year ended December 31, 1998, the Fund made purchases and sales
totaling $140,053,000 and $150,847,000, respectively, of investments other than
long- term U.S. Government securities and short-term investments. There were no
purchases and sales of long-term U.S. Government securities. At December 31,
1998, the U.S. Federal income tax cost basis of securities was $44,113,000 and,
accordingly, net unrealized depreciation for U.S. Federal income tax purposes
was $3,402,000 of
20
<PAGE>
which $1,242,000 related to appreciated securities and $4,644,000 related to
depreciated securities. At December 31, 1998, the Fund had a capital loss
carryforward for U.S. Federal income tax purposes of approximately $13,340,000
to offset against future capital gains which will expire on December 31, 2006.
To the extent that capital gains are offset, such gains will not be distributed
to shareholders. For the year ended December 31, 1998, the Fund intends to
elect to defer to January 1, 1999 for U.S. Federal income tax purposes,
post-October capital losses of $1,102,000.
F. During the year ended December 31, 1998, the Fund's written covered call
option activity was as follows:
<TABLE>
<CAPTION>
FACE PREMIUM
AMOUNT (000) (000)
------------ ---------
<S> <C> <C>
Options outstanding at
January 1, 1998................. $ -- $ --
Options written during the
year............................ 1,700 14
Options closed during the
year............................ (1,700) (14)
Options outstanding at
December 31, 1998............... $ -- $ --
</TABLE>
G. At December 31, 1998, approximately 38% of the Fund's total investments
consist of U.S. 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. These investments are often traded by one market maker who may also
be utilized by the Fund to provide pricing information used to value such
securities. The amounts which will be realized upon disposition of the
securities may differ from the value reflected on the statement of net assets
and the differences could be material.
H. Each Director of the Fund who is not an officer of the Fund or an
affiliated person as defined under the Investment Company Act of 1940, as
amended, may elect to participate in the Directors' Deferred Compensation Plan
(the "Plan"). Under the Plan, such Directors may elect to defer payment of a
percentage of their total fees earned as a Director of the Fund. These deferred
portions are treated, based on an election by the Director, as if they were
either invested in the Fund's shares or invested in U.S. Treasury Bills, as
defined under the Plan. The deferred fees payable, under the Plan, at December
31, 1998 totaled $29,000 and are included in Payable for Directors' Fees and
Expenses on the Statement of Net Assets.
I. During December 1998, the Board declared a dividend distribution of $0.28
per share, derived from net investment income, payable on January 8, 1999, to
shareholders of record on December 31, 1998.
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION (UNAUDITED):
For the year ended December 31, 1998, the Fund designates $261,000 as long-
term capital gain at the 20% tax bracket.
21
<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, of changes in net assets and of cash flows 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, 1998, the results of its operations and its cash flows for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the four years in the
period then ended and for the period 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, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 8, 1999
22
<PAGE>
YEAR 2000 DISCLOSURE (UNAUDITED):
The investment advisory services provided to the Fund by the Adviser depend on
the smooth operation of its computer systems. Many computer and software systems
in use today cannot recognize the year 2000, but revert to 1900 or some other
date, due to the manner in which dates were encoded and calculated. That failure
could have a negative impact on the handling of securities trades, pricing and
account services. The Adviser has been actively working on necessary changes to
its own computer systems to deal with the year 2000 problem and expects that its
systems will be adapted before that date. There can be no assurance, however,
that the Adviser will be successful. In addition, other unaffiliated service
providers may be faced with similar problems. The Adviser is monitoring their
remedial efforts, but, there can be no assurance that they and the services they
provide will not be adversely affected.
In addition, it is possible that the markets for securities in which the Fund
invests may be detrimentally affected by computer failures throughout the
financial services industry beginning January 1, 2000. Improperly functioning
trading systems may result in settlement problems and liquidity issues. In
addition, corporate and governmental data processing errors may result in
production problems for individual companies and overall economic uncertainties.
Earnings of individual issuers will be affected by remediation costs, which may
be substantial and may be reported inconsistently in U.S. and foreign financial
statements. Accordingly, the Fund's investments may be adversely affected.
23
<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, annually,
in any amount from $100 to $3,000, for investment in Fund shares.
Dividend and capital gain distributions will be reinvested on the
reinvestment date in full and fractional shares. If the market price per share
equals or exceeds net asset value per share on the reinvestment date, the Fund
will issue shares to participants at net asset value. If net asset value is less
than 95% of the market price on the reinvestment date, shares will be issued at
95% of the market price. If net asset value exceeds the market price on the
reinvestment date, participants will receive shares valued at market price. The
Fund may purchase shares of its Common Stock in the open market in connection
with dividend reinvestment requirements at the discretion of the Board of
Directors. Should the Fund declare a dividend or capital gain distribution
payable only in cash, the Plan Agent will purchase Fund shares for participants
in the open market as agent for the participants.
The Plan Agent's fees for the reinvestment of dividends and distributions
will be paid by the Fund. However, each participant's account will be charged a
pro rata share of brokerage commissions incurred on any open market purchases
effected on such participant's behalf. A participant will also pay brokerage
commissions incurred on purchases made by voluntary cash payments. Although
shareholders in the Plan may receive no cash distributions, participation in the
Plan will not relieve participants of any income tax which may be payable on
such dividends or distributions.
In the case of shareholders, such as banks, brokers or nominees, which hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
shareholder as representing the total amount registered in the shareholder's
name and held for the account of beneficial owners who are participating in the
Plan.
Shareholders who do not wish to have distributions automatically reinvested
should notify the Plan Agent in writing. There is no penalty for
non-participation or withdrawal from the Plan, and shareholders who have
previously withdrawn from the Plan may rejoin at any time. 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
24
