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[LOGO]
THE FOREIGN & COLONIAL
EMERGING MIDDLE EAST FUND, INC.
ANNUAL REPORT
OCTOBER 31, 1997
[LOGO]
<PAGE>
GENERAL INFORMATION
THE FUND
The Foreign & Colonial Emerging Middle East Fund, Inc. (the "Fund") is a
non-diversified, closed-end management investment company whose shares trade on
the New York Stock Exchange ("NYSE"). Its investment objective is long-term
capital appreciation through investment primarily in equity securities of Middle
East issuers. Under normal market conditions, the Fund invests at least 65% of
its total assets in equity securities of emerging Middle East issuers, with an
anticipated emphasis on Egypt, Jordan, Morocco, Oman and Tunisia. The balance of
the Fund's assets is invested in equity and corporate debt securities of other
Middle East issuers and sovereign debt obligations of Middle East countries.
THE INVESTMENT ADVISER
Foreign & Colonial Emerging Markets Limited ("FCEM" or the "Investment
Adviser"), an indirect wholly-owned subsidiary of Foreign & Colonial Management
Ltd., is the Fund's investment adviser.
Effective September 1997, Jeffrey Chowdhry, a Director of FCEM, and James
Graham-Maw, an Assistant Director of FCEM assumed joint responsibility for the
day-to-day management of the Fund. Mr. Chowdhry is head of the Middle East
portfolio management team and has been actively involved in the management of
the Fund's portfolio since early 1996. Prior to joining FCEM in 1994, Mr.
Chowdhry was a Director of the emerging markets division of BZW Investment
Management for seven years. Mr. Graham-Maw joined FCEM in 1996 and is a Senior
Portfolio Manager covering the Middle East and Africa. Before joining FCEM, he
worked for six years at Daiichi Life International as a Senior Manager
responsible for investments in the United Kingdom and Europe.
SHAREHOLDER INFORMATION
Daily market prices for the Fund's shares are published in the NYSE Composite
Transactions section of major newspapers under the designation "ForClE" or
"ForegnColon". The Fund's NYSE trading symbol is "EME".
Net asset value and market price information regarding the Fund's shares is
published each Monday in THE WALL STREET JOURNAL, each Sunday in THE NEW YORK
TIMES and each Saturday in BARRON'S, as well as in other newspapers. All
inquiries regarding registered shareholder accounts may be directed to the
Fund's transfer agent, dividend paying agent and registrar, State Street Bank
and Trust Company, at 800-426-5523.
DIVIDEND REINVESTMENT PLAN
Pursuant to the Dividend Reinvestment Plan (the "Plan"), shareholders whose
shares are registered in their own names are deemed to have elected to have all
distributions (net of any applicable U.S. withholding tax) reinvested
automatically in additional shares of the Fund by State Street Bank and Trust
Company (the "Plan Agent") as agent under the Plan, unless such shareholders
elect to receive distributions in cash. Shareholders who elect to receive
distributions in cash will receive all distributions in cash paid by check in
U.S. dollars mailed directly to the shareholder by State Street Bank and Trust
Company, as dividend paying agent. In the case of shareholders, such as banks,
brokers or nominees, which hold shares for others who are the beneficial owners,
the Plan Agent administers the Plan on the basis of the number of shares
certified from time to time by the record shareholders as representing the total
amount registered in the record shareholder's name and held for the account of
beneficial owners that have not elected to receive distributions in cash.
Investors that own shares registered in the name of a bank, broker or other
nominee should consult with such nominee as to participation in the Plan through
such nominee, and may be required to have their shares registered in their own
names in order to participate in the Plan.
The Plan Agent serves as agent for the shareholders in administering the Plan.
If the Board of Directors of the Fund declares a dividend or capital gain
distribution payable either in the Fund's shares or in cash, as shareholders may
have elected, participants in the Plan will receive shares of the Fund, as
outlined below. Whenever the market price per share is equal to or exceeds the
net asset value per share as of the valuation date, participants will be issued
new shares at a price per share equal to the greater of (a) the net asset value
per share on that date or (b) 95% of the market price per share on that date.
The valuation date will be the dividend or distribution payment date or, if that
date is not a trading day on the NYSE, the immediately preceding trading day.
The Fund will not
1
<PAGE>
issue shares under the Plan at a price below net asset value. If net asset value
exceeds the market price of the Fund's shares on the valuation date, or if the
Fund should declare a dividend or capital gain distribution payable only in
cash, the Plan Agent will, as agent for the participants, purchase shares in the
open market, on the NYSE or elsewhere, for the participants' accounts on or
shortly after the payment date. If, prior to the Plan Agent completing its
purchases, the market price per share exceeds net asset value per share, the
average per share purchase price paid by the Plan Agent may exceed the net asset
value per share of the Fund, resulting in the acquisition of fewer shares than
if the dividend or capital gain distribution had been paid in shares issued by
the Fund. Because of the foregoing difficulty with respect to open-market
purchases, the Plan provides that if the Plan Agent is unable to invest the
entire dividend amount in open-market purchases during the purchase period or if
the market discount shifts to a market premium during the purchase period, the
Plan Agent will cease making open-market purchases and will receive the
uninvested portion of the dividend amount in newly issued shares at the close of
business on the last purchase date.
A shareholder may elect to withdraw from the Plan at any time upon written
notice to the Plan Agent. When a participant withdraws from the Plan, or upon
termination of the Plan as provided below, certificates for whole shares
credited to his or her account under the Plan will be issued and a cash payment
will be made for any fractional shares credited to such account. An election to
withdraw from the Plan will, until such election is changed, be deemed to be an
election by a shareholder to take all subsequent dividends and distributions in
cash. Elections will be effective immediately if notice is received by the Plan
Agent not less than ten days prior to any dividend or distribution record date;
otherwise such termination will be effective after the investment of the then
current dividend or distribution. If a withdrawing shareholder requests that the
Plan Agent sell the shareholder's shares upon withdrawal from participation in
the Plan, the withdrawing shareholder will be required to pay a $2.50 fee plus
brokerage commission.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmation of all transactions in the accounts, including information
required by shareholders for personal and tax records. Shares in the account of
each Plan participant are held by the Plan Agent in noncertificated form in the
name of the participant, and each shareholder's proxy will include those shares
purchased pursuant to the Plan.
There is no charge to participants for reinvesting dividends or capital gain
distributions. The Plan Agent's fee for the handling of reinvestment of
dividends and distributions is borne by the Fund. There will be no brokerage
charges with respect to shares issued directly by the Fund as a result of
dividends or capital gain distributions payable either in shares or in cash.
However, each participant will pay a pro rata share of brokerage commissions
incurred with respect to the Plan Agent's open market purchases in connection
with the reinvestment of dividends or capital gain distributions.
The automatic reinvestment of dividends and capital gain distributions will not
relieve participants of any U.S. federal income tax that may be payable on such
dividends or distributions. To the extent dividends and distributions are
reinvested in additional shares issued by the Fund, participants should be
treated for U.S. federal income tax purposes as receiving a distribution in an
amount equal to the fair market value, determined as of the valuation date, of
the shares received (regardless of the net asset value of the shares on the
valuation date), and should have a cost basis in such shares equal to such fair
market value. Shareholders receiving a distribution in the form of shares
purchased by the Plan Agent in the open market will be treated for U.S. federal
income tax purposes as receiving a distribution of the cash distribution that
such shareholder would have received had it not elected to have such
distribution reinvested.
Experience under the Plan may indicate that changes thereto may be desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any dividend or distribution paid (i) subsequent to notice of the
change sent to all shareholders of the Fund at least 90 days prior to the record
date for such dividend or distribution or (ii) otherwise in accordance with the
terms of the Plan. The Plan also may be amended or terminated by the Plan Agent
by at least 90 days' prior written notice to all shareholders of the Fund. All
correspondence concerning the Plan should be directed to the Plan Agent at P.O.
Box 8209, Boston, Massachusetts 02266-8209.
2
<PAGE>
TAX INFORMATION
The Fund is required by subchapter M of the Internal Revenue Code of 1986, as
amended, to advise its shareholders within 60 days of the Fund's fiscal year end
(October 31, 1997) as to the U.S. federal tax status of long-term capital gain
distributions received by the Fund's shareholders in respect of such fiscal
year. Accordingly, during the fiscal year ended October 31, 1997, the Fund paid
to shareholders $0.21 per share from net long-term capital gains. There were no
dividends which would qualify for the dividend received deduction available to
corporate shareholders.
Because the Fund's fiscal year is not the calendar year, another notification
will be sent in respect of calendar year 1997. The second notification, which
will reflect the amount to be used by calendar year taxpayers on their federal
income tax returns, will be made in conjunction with Form 1099 DIV and will be
mailed in January 1998. Shareholders are advised to consult their tax advisers
with respect to the tax consequences of their investment in the Fund.
Foreign shareholders will generally be subject to U.S. withholding tax on the
amount of their dividends.
Dividends received by tax-exempt recipients (e.g., IRAs and Keoghs) need not be
reported as taxable income for U.S. federal income tax purposes. However, some
retirement trusts (e.g., corporate, Keogh and 403(b)(7) plans) may need this
information for their annual information reporting.
OTHER INFORMATION
The Investment Adviser is a wholly-owned subsidiary of Foreign & Colonial
Management Ltd. ("FCM"), an indirect wholly-owned subsidiary of Hypo Foreign &
Colonial Management (Holdings) Ltd. ("Hypo-FCM"). Thirty-five percent of
Hypo-FCM is owned by four public investment trusts and 65% is owned by Hypo
(U.K.) Holdings Ltd., a wholly-owned subsidiary of Bayerische Hypotheken-und
Wechsel Bank AG, a publicly traded German bank ("Hypo-Bank"). On July 21, 1997,
Hypo-Bank announced that it would merge with Bayerische Vereinsbank AG
("Vereinsbank"), another publicly traded German bank (the "Merger"). It is
expected that the Merger will be completed in the latter half of 1998 and that
Vereinsbank will be the legal entity surviving the completion of the Merger. The
Merger is not expected to affect FCEM's operations or the personnel or services
provided by FCEM to the Fund.
In response to recent amendments to Maryland corporate law, the Board of
Directors reviewed various corporate governance provisions in the Fund's By-Laws
and, on May 14, 1997, approved amendments to the Fund's By-Laws to (i) increase
the percentage of shareholder voting power required to call a special meeting of
its shareholders to a majority of the votes entitled to be cast at the meeting
and (ii) reduce the permissible board committee size to one director.
Since October 31, 1996, there have been no (i) material changes in the Fund's
investment objectives or policies, or (ii) material changes in the principal
risk factors associated with investment in the Fund.
3
<PAGE>
REPORT OF INVESTMENT ADVISER
Dear Shareholder:
We are pleased to present the annual report of The Foreign & Colonial Emerging
Middle East Fund, Inc. (the "Fund") for the fiscal year ended October 31, 1997
(the "Fiscal Year"). During the Fiscal Year, the Fund's net asset value total
return was 41.9% reflecting the increasing strength of the Middle East equity
markets.
EGYPT
The political situation in Egypt remains calm with the next presidential and
parliamentary elections scheduled for the fourth quarter of 1999. Prime Minister
Ganzouri, who has been a staunch proponent of economic reform since his
appointment in January 1996, sent a clear signal that the reform program must
move forward by appointing Dr. Youssef Boutros-Ghali as Minister of the Economy
in July. The Massachusetts Institute of Technology trained economist is regarded
by most observers as the primary architect and mastermind of the greater
transparency and efficiency in the stock exchange. His long term objective is to
make Cairo the financial capital of the Middle East. He is also striving to
increase gross domestic product ("GDP") growth to the 6-8% range by encouraging
exports which can best utilize Egypt's abundant labor force.
The Egyptian economy is expected to have grown by approximately 5.2% in 1997.
More importantly, it is not exhibiting any of the imbalances which have driven
the South East Asian economies off track during the past year. Inflation has
recently fallen below 5.1%, the fiscal deficit has been reduced to 0.8% of GDP,
foreign reserves stand at an all time high of more than $20 billion (equivalent
to one year imports), and the current account deficit is expected to reach a
small surplus this year.
The stock market has risen 55.6% in US$ terms over the Fiscal Year despite a
modest correction during the middle of 1997.
MOROCCO
Seventy-five percent of Moroccans voted in the June 13, 1997 local elections
which were purported to have been the most democratic elections in Moroccan
history. Although the pro-government parties have gained by far the largest
share of the vote, the opposition Koutlah bloc improved significantly upon its
1992 performance. The Koutlah also participated in the November parliamentary
election, in which they gained a large share of seats in the lower house.
Having grown 11.8% in 1996, the Moroccan economy continues its roller coaster
ride and is forecast to complete 1997 without any growth. While agricultural GDP
declined 9.7% during the first quarter of 1997, non-agricultural GDP rose 5.2%.
There has been a decline in consumer prices so far this year following a
reduction in demand due to the dwindling purchasing power of rural households
and the sluggish job market. Inflation should close the year at less than 3%.
The market has risen 40.6% in US$ terms during the Fiscal Year. Investors are
anxiously awaiting earnings announcements for the first and second quarters of
1997, which are expected to be published shortly. We expect 15% earnings growth
for both 1997 and 1998. The driving force of the Moroccan market remains the
local mutual fund industry which has total funds under management of US$750
million, 40% of which are invested in equities.
TURKEY
On July 12, 1997, the Meclis (national assembly) voted into power the new
coalition government led by Mesut Yilmaz of the Motherland Party (the "ANAP").
In addition to the ANAP, the coalition is comprised of the Democratic Left Party
and the Democratic Turkey Party. The fall of the previous pro-Islamist Refahyol
coalition led by Necmettin Erbakan exemplifies the limited tolerance of the
military for any deviations from secular principles. Initial expectations for
the ANAP-led coalition were that it would be relatively short-lived, however
recent comments from the respective party leaders do not indicate any likelihood
that early elections will be necessary; it may be the second half of 1998 before
the next elections are held.
4
<PAGE>
Economic growth continues to be strong. According to State Institute of
Statistics data, gross national product ("GNP") grew 6.4% in the second quarter
of 1997, buoyed by domestic demand, bringing growth during the first half of the
year to 6.0%.
At the end of July 1997, the Treasury and the Central Bank signed a seven-point
protocol which restricts the Treasury's ability to borrow from the Central Bank.
Under the protocol, which becomes effective in 1998, the Central Bank will be
given overall responsibility for monetary policy. As a result of these new
arrangements, the Treasury will introduce weekly treasury bill auctions at the
beginning of next year, including auctions of treasury bills with three, six,
nine and twelve month maturities.
Despite the competing attraction of treasury bills, the stock market increased
83.6% in US$ terms during the Fiscal Year. Investors have recently been
encouraged by market-friendly announcements from the Economic Ministry,
particularly with regard to future privatizations. The government expects
proceeds from privatizations to exceed $4 billion by the end of 1997.
ISRAEL
A spate of bombings in Jerusalem and Prime Minister Netanyahu's withholding of
Palestinian tax proceeds have caused lengthy delays in the peace process. U.S.
Secretary of State Albright used her September visit to criticize both Netanyahu
and Palestinian Liberation Organization leader Yassar Arafat, and there are now
early indications of renewed Israeli and Palestinian willingness to cooperate.
Domestically, Netanyahu is feeling increasingly isolated, having failed to keep
his election promise to bring security and peace to the nation. His 1998 budget
was sharply criticized by his coalition members. Barak, the leader of the
opposition, waits in the wings, having recently become one of the most popular
politicians in the country during the past months.
Economic growth continues to slow due to a decline in both tourism and
immigration, though this was partly offset by solid exports. Forecast GDP growth
for the full year now stands at 2.5%, well below the rate most believe to be
sustainable, 4-5%. The Bank of Israel (the "Bank") continues to cling doggedly
to its 1997 annual inflation target of 7-10%. After inflation spiked in
mid-summer in reaction to a drop in interest rates and a planned depreciation in
the shekel, the Bank increased rates for the first time in fourteen months.
Netanyahu and his new finance minister have put forth a strict 1998 budget,
aimed at reducing the deficit to 2.4% of GDP, down from a 1997 target of 2.8%.
The market rose 38.1% in US$ terms over the Fiscal Year. We anticipate earnings
growth of 12% for the remainder of 1997. Export-oriented technology and selected
chemical stocks have been among the top performers in the stock market, should
benefit from a depreciated shekel and be somewhat insulated from the economic
slowdown.
LEBANON
In Lebanon, elections for local authorities have been delayed to ensure an
orderly election process, however, the government's decision to delay has been
criticized as heavy-handed. The long-term view regarding Lebanon may be the most
positive long-term view regarding any Middle East country, as it is starting
from a much lower base. Risk factors should not be brushed aside, as a failure
of the peace process and resumption of the regional unrest would significantly
impact Lebanon.
Meanwhile, the economy is gearing up and rebuilding, increasingly displaying its
traditional bias towards long term growth in the services sector, which accounts
for more than 53% of GDP. The government is expected to continue with a high
interest rate policy in order to attract capital into Lebanon and in order to
control local liquidity.
OMAN
The Omani economy remains dependent on sales of crude oil. In 1996, GDP rose an
estimated 5.6%, the fastest pace in the Gulf Cooperation Council, and is
expected to rise 4.2% in 1997 and 5.1% in 1998.
The market increased 136.4% in US$ terms during the Fiscal Year. Despite
government legislation earlier this year to permit foreign investment in Omani
companies, some companies are still reluctant to change their articles of
association and allow foreign investors to become shareholders.
5
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JORDAN
In Jordan, parliamentary elections were held in November. Unfortunately, the
overall turnout was only 44%, due to a boycott by the main Islamic parties.
While the domestic situation remains calm after last year's food riots, the
external picture remains poor due to the deterioration of the peace process.
The country is expected to experience another year of strong growth in 1997,
although the official forecast of 6.5% appears overly optimistic. We believe
growth of between 5.2%-5.4% is more likely, given that the government has
continued to pursue a tight monetary policy. After a one time rise last year,
inflation is expected to end the year at close to 3.5%, while the current
account deficit is at a very manageable 3% of GDP.
As part of its continuing attempt to encourage direct and portfolio investment
by foreigners, Jordanian authorities have removed the ceiling on equity
ownership by non-Jordanians in most sectors. During the Fiscal Year, the stock
market rose a modest 15.9% in US$ terms.
TUNISIA
In Tunisia the economy is expected to grow approximately 5.0% in 1997, compared
with 6.6% in 1996 and 2.5% (following a drought) in 1995. Indications from the
authorities that agricultural output in 1997 is likely to be affected by drought
is unlikely to necessitate revisions of growth forecasts for the year. The
parameters of the government's five-year economic development plan covering the
period 1997-2001 seem achievable, however, there is some doubt as to whether the
targeted investment amounts will be raised, given the government's intention to
accelerate privatization.
The stock market has fallen 31.1% during the Fiscal Year. Daily trading volume
remains very low and is dominated by banks which trade at a premium to the
market. Attractive investment opportunities among industrial companies are
limited.
OUTLOOK
The outlook for the region remains encouraging due to continuing liberalization
and privatization within economies, attractive valuations and limited
participation by foreign investors. Currently, our favored markets continue to
be Egypt and Morocco. Turkey, as always, remains an uncertainty due to political
and economic factors.
We continue to believe that investing in the Middle Eastern equity markets,
including markets of smaller nations, will provide attractive long-term growth.
We appreciate your interest in the Fund and would be pleased to respond to your
questions or comments.
Respectfully,
<TABLE>
<S> <C>
Jeff Chowdhry James Graham-Maw
Portfolio Manager Portfolio Manager
</TABLE>
THE FOREIGN & COLONIAL
EMERGING MIDDLE EAST FUND, INC.
DECEMBER 5, 1997
6
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PORTFOLIO OF INVESTMENTS
October 31, 1997
- --------------------------------------------------------------------------------
EQUITIES--98.70%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- -----------
EGYPT--32.82%
<C> <S> <C>
APPAREL & TEXTILES--0.00%
103 El Nasr Clothing & Textile Co. (KABO)................................. $ 2,705
-----------
CHEMICALS--1.67%
30,000 Paints & Chemicals Ind. (PACIN)....................................... 1,005,231
-----------
CONSTRUCTION--11.90%
21,500 Helwan Portland Ct.................................................... 453,380
41,500 Madinet Nasr City..................................................... 2,866,153
49,230 Suez Cement........................................................... 1,077,924
50,000 Suez Cement--GDR...................................................... 1,037,500
63,975 Torah Cement.......................................................... 1,748,619
-----------
7,183,576
-----------
FINANCIAL SERVICES--4.90%
68,340 Commercial International Bank (CIB)................................... 1,579,703
42,105 Commercial International Bank (CIB)--GDR.............................. 910,521
28,570 Misr International Bank SAE (a)....................................... 464,262
-----------
2,954,486
-----------
FOOD & BEVERAGE--4.65%
30,000 Al Ahram Beverage Co.--ADR (b)........................................ 825,000
38,590 North Cairo Flour Mills............................................... 1,678,566
16,825 South Cairo Flour Mills............................................... 302,133
-----------
2,805,699
-----------
HOTELS--2.79%
34,989 Misr for Hotels (Hilton).............................................. 1,684,305
-----------
HOUSING--2.39%
10,550 Misr Elgadida for Housing............................................. 1,442,118
-----------
PETROLEUM--0.48%
21,200 Misr Gulf Oil Proc. Co. (MIGOP) (b)(c)................................ 292,843
-----------
PHARMACEUTICALS--3.02%
25,200 Egyptian International Pharmaceuticals (EIPICO)....................... 1,821,954
-----------
STEEL--1.02%
14,000 Alexandria National Iron & Steel (ANSDK).............................. 617,193
-----------
19,810,110
-----------
ISRAEL--9.49%
CHEMICALS--3.09%
854,000 Israel Chemicals...................................................... 1,068,496
129,250 Makhteshim Chemical Works (b)......................................... 799,761
-----------
1,868,257
-----------
ELECTRONICS--1.93%
38,000 Formula Systems (b)................................................... 1,164,438
-----------
PHARMACEUTICALS--0.87%
11,200 Teva Pharmaceuticals--ADR............................................. 523,600
-----------
RETAIL TRADE--1.33%
280,000 Super Sol............................................................. 804,184
-----------
TELECOMMUNICATIONS--2.27%
27,500 ECI Telecom Ltd.--ADR................................................. 759,687
27,000 Tadiran Telecommunications (b)........................................ 610,875
-----------
1,370,562
-----------
5,731,041
-----------
JORDAN--2.61%
APPAREL & TEXTILES--0.14%
40,400 El Zay Ready Wear (b)................................................. 82,449
-----------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- -----------
<C> <S> <C>
CHEMICALS--1.61%
94,900 Arab Potash Co........................................................ $ 821,443
125,000 Jordan Industrial Resources........................................... 149,543
-----------
970,986
-----------
CONSTRUCTION--0.86%
60,000 Jordan Cement Factories............................................... 263,476
151,000 Zara for Investments (b).............................................. 259,282
-----------
522,758
-----------
1,576,193
-----------
LEBANON--6.29%
BANKING--2.52%
64,000 Banque Libanaise Pour Le Commerce (BLC)--GDR (b)...................... 1,520,000
-----------
ENGINEERING & CONSTRUCTION--3.08%
120,000 Solidere--GDR......................................................... 1,860,000
-----------
INVESTMENT COMPANIES--0.69%
40,000 Lebanon Holdings (b).................................................. 420,000
-----------
3,800,000
-----------
MOROCCO--28.44%
AUTOMOTIVE & TRUCKS--1.03%
2,700 Auto Hall (c)......................................................... 618,735
-----------
BANKING--5.92%
11,484 Banque Commerciale du Maroc (BCM)..................................... 1,079,417
30,000 Banque Marocaine Du Commerce Exterieur (BMCE)--GDR.................... 565,500
20,125 Credit Immobilier et Hotelier (CIH)................................... 598,584
14,273 Wafabank.............................................................. 1,332,499
-----------
3,576,000
-----------
CONGLOMERATES--8.78%
26,200 Omnium Nord Africain.................................................. 2,382,196
33,029 Societe Nationale d'Investissement (SNI).............................. 2,919,208
-----------
5,301,404
-----------
CONSTRUCTION--3.05%
23,534 Cimenterie de l'Oriental (CIOR)....................................... 1,843,362
-----------
FINANCIAL SERVICES--1.80%
9,000 Credit Eqdom.......................................................... 1,088,383
-----------
FOOD & BEVERAGE--6.71%
8,500 Branoma............................................................... 1,147,129
13,000 Brasseries du Maroc (BDM)............................................. 2,903,414
-----------
4,050,543
-----------
MINING--1.15%
11,855 Sonasid CS............................................................ 691,411
-----------
17,169,838
-----------
OMAN--2.81%
INVESTMENT COMPANIES--2.81%
87,000 Oryx Fund (b)......................................................... 1,696,500
-----------
TURKEY--16.24%
AUTOMOTIVE & TRUCKS--2.13%
1,476,000 Otosan................................................................ 1,286,415
-----------
BANKING--4.14%
81,990,790 Yapi Kredi Bankasi.................................................... 2,501,081
-----------
CONGLOMERATES--3.07%
140,000 Haci Omer Sabanci Holdings SAE (a).................................... 1,855,000
-----------
CONSTRUCTION--1.56%
13,000,000 Trakya Cam............................................................ 938,283
-----------
CONSUMER DURABLES--1.20%
6,250,000 Ardem................................................................. 723,458
-----------
ELECTRONICS--1.93%
15,000,000 Vestel Electronic..................................................... 1,164,343
-----------
STEEL--2.21%
8,150,000 Eregli Demir Celik.................................................... 1,331,844
-----------
9,800,424
-----------
TOTAL EQUITIES (cost $39,077,598)................................................. 59,584,106
-----------
</TABLE>
8
<PAGE>
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT--0.46%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
- ---------- -----------
<C> <S> <C>
US$276 Agreement with State Street Bank and Trust Co. 2.00% dated 10/31/97 to
be repurchased 11/03/97 in the amount of $276,046 collateralized by
$270,000 U.S. Treasury Note, 6.625% due 7/31/01 (cost $276,000)....... $ 276,000
-----------
TOTAL INVESTMENTS (cost $39,353,598)--99.16%...................................... 59,860,106
Other assets less liabilities--0.84%.............................................. 506,269
-----------
NET ASSETS (applicable to 2,807,169 shares; equivalent to $21.50 per
share)--100.00%................................................................... $60,366,375
-----------
-----------
</TABLE>
- -------------
(a) Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, typically to qualified institutional buyers. These
securities total $2,319,262 or 3.84% of net assets.
(b) Non-income producing security.
(c) Fair valued security totalling $911,578 or 1.51% of net assets.
ADR - American Depositary Receipt.
GDR - Global Depositary Receipt.
See accompanying notes to financial statements
9
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
OCTOBER 31, 1997
----------------
<S> <C>
ASSETS
Investments in securities, at value (cost $39,353,598).......................................... $ 59,860,106
Cash............................................................................................ 306
Receivable for investments sold................................................................. 583,878
Dividends and interest receivable............................................................... 52,957
Deferred organizational expenses................................................................ 149,135
Prepaid expenses................................................................................ 36,173
----------------
Total assets................................................................................ 60,682,555
----------------
LIABILITIES
Investment advisory fee payable................................................................. 66,910
Administration fee payable...................................................................... 10,616
Accrued expenses and other liabilities.......................................................... 238,654
----------------
Total liabilities........................................................................... 316,180
----------------
NET ASSETS
Common stock, $0.001 par value; 2,807,169 shares issued and outstanding
(100,000,000 shares authorized)............................................................... 2,807
Additional paid-in capital...................................................................... 37,206,549
Accumulated net investment loss................................................................. (278,869)
Accumulated net realized gain................................................................... 2,930,105
Net unrealized appreciation of investments and other assets and liabilities
denominated in foreign currency............................................................... 20,505,783
----------------
Net assets applicable to shares outstanding................................................. $ 60,366,375
----------------
----------------
NET ASSET VALUE PER SHARE....................................................................... $21.50
----------------
----------------
</TABLE>
See accompanying notes to financial statements
10
<PAGE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED OCTOBER
31, 1997
----------------
<S> <C>
INVESTMENT INCOME
Dividends (net of foreign withholding taxes of $55,392)......................................... $ 1,561,655
Interest........................................................................................ 28,600
----------------
1,590,255
----------------
EXPENSES
Investment advisory fees........................................................................ 674,702
Custody and accounting fees..................................................................... 252,938
Legal and audit fees............................................................................ 185,153
Directors' fees and expenses.................................................................... 139,221
Administration fees............................................................................. 125,000
Amortization of organizational expenses......................................................... 73,960
Shareholder reports expense..................................................................... 50,874
Insurance expense............................................................................... 41,491
Transfer agent fees and expenses................................................................ 15,291
New York Stock Exchange listing fee............................................................. 12,916
Other expenses.................................................................................. 6,079
----------------
Total expenses.................................................................................. 1,577,625
Less: Fee waiver (Note 2)....................................................................... (20,329)
----------------
Net expenses.................................................................................... 1,557,296
----------------
Net investment income........................................................................... 32,959
----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net realized gain (loss) on:
Investments................................................................................... 2,931,627
Foreign currency transactions................................................................. (311,828)
Net change in unrealized appreciation of:
Investments................................................................................... 15,170,493
Other assets and liabilities denominated in foreign currency.................................. (17,551)
----------------
Net realized and unrealized gain on investments and foreign currency transactions............... 17,772,741
----------------
NET INCREASE IN NET ASSETS FROM INVESTMENT OPERATIONS........................................... $ 17,805,700
----------------
----------------
</TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 1997 OCTOBER 31, 1996
---------------- -----------------
<S> <C> <C>
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss)..................................... $ 32,959 $ (90,466)
Net realized gain on investments and foreign currency
transactions................................................... 2,619,799 681,798
Net change in unrealized appreciation/depreciation of investments
and other assets and liabilities denominated in foreign
currency....................................................... 15,152,942 4,809,689
---------------- -----------------
Total from investment operations................................. 17,805,700 5,401,021
---------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS
From net realized gain on investments............................ (596,240) --
---------------- -----------------
Net increase in net assets....................................... 17,209,460 5,401,021
NET ASSETS
Beginning of period.............................................. 43,156,915 37,755,894
---------------- -----------------
End of period.................................................... $60,366,375 $43,156,915
---------------- -----------------
---------------- -----------------
</TABLE>
See accompanying notes to financial statements
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
October 31, 1997
NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Foreign & Colonial Emerging Middle East Fund, Inc. (the "Fund") was
incorporated in the State of Maryland on July 29, 1994, as a non-diversified,
closed-end management investment company. Prior to commencing operations on
November 4, 1994, the Fund had no operations other than the sale to Foreign &
Colonial Emerging Markets Limited (the "Investment Adviser") of 7,169 shares of
common stock for $100,008 on October 25, 1994. Organizational costs of $370,000
have been deferred and are being amortized on a straight-line basis over a
60-month period from the date the Fund commenced operations.
The preparation of financial statements in accordance with generally accepted
accounting principles requires Fund management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
The following is a summary of significant accounting policies followed by the
Fund.
VALUATION OF INVESTMENTS--Portfolio securities for which market quotations are
readily available are valued at the last sale price prior to the time of
determination if there was a sale on the date of determination or, if there was
no sale on such day, at the mean between the last current bid and asked prices,
or if there was no asked price, the bid price. Securities for which reliable
market quotations or pricing services are not readily available are valued at
fair value using methods determined in good faith by, or under procedures
established by the Fund's Board of Directors. Investments in short-term debt
securities having a maturity of 60 days or less are valued at amortized cost,
which approximates market value, or by amortizing their value on the 61st day
prior to maturity if their term to maturity from the date of purchase is greater
than 60 days.
REPURCHASE AGREEMENTS--The Fund's custodian takes possession of the collateral
pledged for investments in repurchase agreements. The underlying collateral is
valued daily on a mark-to-market basis to assure that the value, including
accrued interest, is at least equal to the repurchase price. In the event of
default of the obligation to repurchase, the Fund has the right to liquidate the
collateral and apply the proceeds in satisfaction of the obligation. If the
seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are
recorded on the trade date (the date on which the order to buy or sell is
executed). Realized gains and losses from investments and foreign currency
transactions are determined on the identified cost basis. Interest income is
recorded on an accrual basis. Dividend income and other distributions are
recorded on the ex-dividend date, except for certain dividends which are
recorded as soon after the ex-dividend date as the Fund, using reasonable
diligence, becomes aware of such dividends.
FOREIGN CURRENCY TRANSLATION--The books and records of the Fund are maintained
in U.S. dollars as follows: (1) the foreign currency market value of investments
and other assets and liabilities denominated in a foreign currency are
translated at the prevailing rates of exchange on the valuation date; (2)
purchases and sales of investments, income and expenses are translated at the
rate of exchange prevailing on the respective dates of such transactions. The
resulting net foreign currency gain or loss is included in the Statement of
Operations.
The Fund does not generally isolate that portion of the results of operations
arising as a result of changes in the foreign currency exchange rates from the
fluctuations arising from changes in the market prices of securities.
Accordingly, such foreign currency gain (loss) is included in net realized and
unrealized gain (loss) on investments. However, the Fund does isolate the effect
of fluctuations in foreign currency exchange rates when determining the gain or
loss upon the sale or maturity of foreign currency denominated debt obligations
pursuant to U.S. federal income tax regulations; such amount is categorized as
foreign currency gain or loss for both financial reporting and income tax
reporting purposes.
12
<PAGE>
Net foreign currency gain (loss) from valuing foreign currency denominated
assets and liabilities at period end exchange rates is reflected as a component
of net unrealized appreciation of investments and other assets and liabilities
denominated in foreign currency. Net realized foreign currency gain (loss) is
treated as ordinary income for tax reporting purposes.
Net realized loss on foreign currency transactions of $311,828 represents
foreign currency gains and losses from the holding of foreign currencies, sales
and maturities of foreign debt securities, transactions in foreign currencies,
currency gains and losses realized between the trade and settlement dates on
investment transactions, and the difference between the amounts of interest and
dividends recorded on the Fund's books and the U.S. dollar equivalent of the
amounts actually received or paid.
DIVIDENDS AND DISTRIBUTIONS--Dividends and distributions to shareholders are
recorded on the ex-dividend date. Dividends and distributions from net
investment income and net realized capital gains are determined in accordance
with federal income tax regulations, which may differ from generally accepted
accounting principles. These "book/tax" differences are considered either
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax-basis treatment; temporary differences do not require
reclassification. Dividends and distributions which exceed net investment income
or net realized capital gain for financial reporting purposes, but not for tax
purposes, are reported as dividends in excess of net investment income or
distributions in excess of net realized gain on investments. To the extent they
exceed net investment income or net realized capital gain for tax purposes, they
are reported as distributions of additional paid-in capital.
U.S. FEDERAL INCOME TAXES--The Fund intends to distribute all of its taxable
income and to comply with the other requirements of the Internal Revenue Code of
1986, as amended, applicable to regulated investment companies. Accordingly, no
provision for U.S. federal income taxes is required. In addition, by
distributing substantially all of its net investment income, capital gains and
certain other amounts, if any, during each calendar year, the Fund intends not
to be subject to U.S. federal excise tax. Withholding taxes on foreign dividends
and interest have been provided for in accordance with the applicable tax
requirements.
FOREIGN TAXES--The Fund may be subject to certain taxes on dividends, capital
gains and other income imposed by the foreign countries in which it invests.
NOTE 2 INVESTMENT ADVISER AND ADMINISTRATOR
The Investment Adviser provides investment advisory services to the Fund under
the terms of an Investment Advisory Agreement. As compensation for its services,
the Investment Adviser is paid a monthly fee at the annual rate of 1.25% of the
value of the Fund's average weekly net assets.
Mitchell Hutchins Asset Management Inc. (the "Administrator") provides
administrative services to the Fund under an Administration Agreement. As
compensation for its services, the Administrator is paid a monthly fee at the
annual rate of 0.15% of the value of the Fund's average weekly net assets,
subject to a minimum annual fee of $125,000. For the year ended October 31,
1997, the Administrator voluntarily waived $20,329 of its fees.
13
<PAGE>
NOTE 3 INVESTMENTS IN SECURITIES
For U.S. federal income tax purposes, the cost of securities owned at October
31, 1997 was $40,107,098. Accordingly, net unrealized appreciation of
investments of $19,753,008 was comprised of gross appreciation of $21,207,210
for those investments having an excess of value over cost and gross depreciation
of $1,454,202 for those investments having an excess of cost over value.
For the year ended October 31, 1997, aggregate purchases and sales of portfolio
securities, excluding short-term securities, were $29,610,764 and $30,148,271,
respectively.
NOTE 4 CONCENTRATION OF RISK
Investment in Middle East issuers involves certain risks and special
considerations which are not typically associated with investing in securities
issued by U.S. or Western European companies or governments, as a result of,
among other things, future political and economic developments and the level of
governmental supervision and regulation of the securities markets. In
particular, securities markets and currencies of many Middle East countries,
similarly to those of other emerging market countries, have been subject to
substantial price volatility and sudden market declines. The ability of the
issuers of the debt securities held by the Fund to meet their obligations may be
affected by economic and political developments in a specific industry or
region.
NOTE 5 CAPITAL STOCK
There were no transactions in common stock for the years ended October 31, 1997
and October 31, 1996.
At October 31, 1997, The Foreign & Colonial Emerging Markets Investment Trust,
The Global Emerging Markets Exempt Fund and The Global Emerging Markets
Investment Co., affiliates of the Investment Adviser, owned 63,354, 6,403 and
2,886 shares, respectively, of the Fund.
14
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of common stock outstanding throughout each period is
presented below.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE NOVEMBER 4,
FOR THE YEAR YEAR 1994*
ENDED ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31,
1997 1996 1995
-------------- ----------- --------------
<S> <C> <C> <C>
Net asset value, beginning of period............................. $ 15.37 $ 13.45 $ 14.04**
------- ----------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss)..................................... 0.01 (0.03) 0.02
Net realized and unrealized gain (loss) on investments and
foreign currency transactions................................... 6.33 1.95 (0.06)
------- ----------- -------
Total from investment operations............................... 6.34 1.92 (0.04)
------- ----------- -------
DISTRIBUTIONS TO SHAREHOLDERS
From net realized gain on investments............................ (0.21) -- --
------- ----------- -------
CAPITAL SHARE TRANSACTIONS
Offering costs charged to additional
paid-in capital................................................. -- -- (0.55)
------- ----------- -------
Net asset value, end of period................................... $ 21.50 $ 15.37 $ 13.45
------- ----------- -------
------- ----------- -------
Market value, end of period...................................... $ 17.75 $ 12.375 $ 11.00
------- ----------- -------
------- ----------- -------
TOTAL INVESTMENT RETURN (a)(b)................................... 45.46% 12.50% (21.65)%
------- ----------- -------
------- ----------- -------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands)......................... $ 60,366 $43,157 $ 37,756
Ratio of expenses to average net assets.......................... 2.89%(c) 3.16%(c) 2.99%(d)(e)
Ratio of net investment income (loss) to average net assets...... 0.06%(c) (0.23)%(c) 0.13%(d)(e)
Portfolio turnover............................................... 57% 30% 19%
Average commission rate paid per share of common stock
investments purchased/sold (f).................................. $ 0.0008 $0.0027 --
</TABLE>
- -------------------
NOTES:
* Commencement of operations.
** Initial public offering price of $15.00 per share less an average
underwriting discount of $0.96 per share.
(a) Total investment return is calculated assuming a purchase of common stock at
the current market price on the first day, and a sale at the current market
price on the last day of each period reported. Dividends and distributions,
if any, are assumed, for purposes of this calculation, to be reinvested at
prices obtained under the Fund's dividend reinvestment plan. Total
investment return does not reflect sales charges or brokerage commissions.
(b) Total investment return for a period of less than one year is not
annualized.
(c) The Administrator waived a portion of its fees during the years ended
October 31, 1997 and October 31, 1996. If such waivers had not been made,
the ratio of expenses to average net assets would have been 2.92% and 3.25%,
respectively, and the ratio of net investment income (loss) to average net
assets would have been 0.03% and (0.32)%, respectively.
(d) Annualized.
(e) The Investment Adviser and Administrator each waived a portion of its fees
during the period. If such waivers had not been made, the ratio of expenses
to average net assets would have been 3.11% and the ratio of net investment
income to average net assets would have been 0.01%.
(f) Disclosure effective for fiscal years beginning on or after September 1,
1995.
15
<PAGE>
REPORT OF THE INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
The Foreign & Colonial Emerging Middle East Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, 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 The Foreign & Colonial Emerging
Middle East Fund, Inc. (the "Fund") at October 31, 1997, 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 November 4, 1994
(commencement of operations) through October 31, 1995, 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 October 31, 1997 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
December 8, 1997
16
<PAGE>
CORPORATE INFORMATION
DIRECTORS
Fred Arthur Rank Packard, Chairman
Bassam Aburdene
Karen Clarke
Albert Francke
Walter M. Noel, Jr.
David C. Patterson
OFFICERS
Karen Clarke President
Arnab Banerji Executive Vice President
Jeffrey Chowdhry Executive Vice President
James Graham-Maw Vice President
Michael Gabriel Treasurer & Secretary
INVESTMENT ADVISER
Foreign & Colonial Emerging Markets Limited
Exchange House, 8th Floor
Primrose Street
London, England EC2A 2NY
ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, NY 10019
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
THIS REPORT IS SENT TO THE SHAREHOLDERS OF THE FUND FOR THEIR INFORMATION. IT IS
NOT A PROSPECTUS, CIRCULAR OR REPRESENTATION INTENDED FOR USE IN THE PURCHASE OR
SALE OF SHARES OF THE FUND OR OF ANY SECURITIES MENTIONED IN THIS REPORT.
NOTICE IS HEREBY GIVEN IN ACCORDANCE WITH SECTION 23(C) OF THE INVESTMENT
COMPANY ACT OF 1940, AS AMENDED, THAT FROM TIME TO TIME THE FUND MAY PURCHASE
SHARES OF ITS COMMON STOCK IN THE OPEN MARKET.
FC97A
[LOGO]
<PAGE>
The Foreign & Colonial Emerging Middle East Fund, Inc.
1285 Avenue of the Americas
New York, NY 10019
Telephone: 212-713-2848
Fax: 212-713-4058
Foreign & Colonial Emerging Markets Limited
Exchange House, 8th Floor
Primrose Street
London, England EC2A 2NY
Telephone: 44-171-628-1234
Fax: 44-171-628-2281
[LOGO]
