<PAGE>
[LOGO]
THE FOREIGN & COLONIAL
EMERGING MIDDLE EAST FUND, INC.
SEMI-ANNUAL REPORT
APRIL 30, 1998
[LOGO]
FOREIGN & COLONIAL EMERGING MARKETS LIMITED
<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. 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.
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 Fund's 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, 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
1
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Street Bank and Trust Company, as dividend paying agent, on or about the date
declared by the Board of Directors as the payment date for each such
distribution. Shareholders who do not wish to have distributions automatically
reinvested should notify the Fund c/o State Street Bank and Trust Company at
P.O. Box 8200, Boston, MA 02266-8200.
ANNUAL SHAREHOLDERS' MEETING
The Fund's annual meeting of shareholders was held on January 21, 1998.
Shareholders voted to elect Karen J. Clarke and re-elect David C. Patterson as
Class II Directors and ratified the appointment of Price Waterhouse LLP as the
Fund's independent accountant for the fiscal year ending October 31, 1998.
The resulting vote count for each proposal is indicated below:
<TABLE>
<S> <C> <C> <C>
1. Election of Directors:
CLASS II TO SERVE UNTIL THE YEAR 2001 ANNUAL MEETING
Karen J. Clarke For: 1,767,552
Withheld Authority: 6,128
David C. Patterson For: 1,767,552
Withheld Authority: 6,128
2. Ratification of appointment of Price Waterhouse LLP as
the Fund's independent accountant:
For: 1,648,900
Against: 3,720
Abstain: 121,060
</TABLE>
2
<PAGE>
REPORT OF INVESTMENT ADVISER
Dear Shareholders:
We are pleased to present the semi-annual report of The Foreign & Colonial
Emerging Middle East Fund, Inc. (the "Fund") for the six months ended April 30,
1998. At April 30, 1998, the Fund's net asset value per share was $21.07. The
net asset value total return for the six month period was 5.33%.
EGYPT
The Hermes Financial Index fell 11.1% in US$ terms during the review period. The
tragic events in Luxor, in November 1997, when 61 tourists were killed by
extremists, cast a shadow over the stock market during the past six months. The
security clampdown imposed in the aftermath of the carnage at Luxor is being
hailed a success, but the possibility of further acts of violence can not be
ruled out. There is no popular constituency in the country for political terror,
whether aimed at outsiders or not, and support for the government and its reform
program remains intact. In spite of the negative impact of the Luxor attack on
tourism and related sectors, the outlook for the Egyptian economy is positive.
Egypt's resilience is predicated on a sound economic base and a virtuous
commitment to economic reform. Recent statistics confirm this. Year-on-year
inflation is below 4% from 5% at the end of 1997. The budget deficit is on
course to meet the government target of 0.9% of gross domestic product ("GDP")
and the current account deficit is less than 1% of GDP. Recent evidence suggests
that, barring a repetition of the events in Luxor, hotel occupancy rates are
recovering strongly. We do not anticipate any significant pressure on the
Egyptian pound, given that foreign reserves, rising strongly since the beginning
of the year, have stabilized at approximately US$19bn. Sentiment in the stock
market has been partly affected by government initiatives to close a popular
loophole concerning the tax treatment of Treasury bill purchases. This sparked
certain downgrades among bank stocks early in 1998. In addition, the market has
recovered in recent weeks as investors have responded positively to government
actions to permit share buybacks and plans to liberalize the insurance industry.
3
<PAGE>
ISRAEL
The Mishtanim Index gained 4.9% in US$ terms during the past six months. The
political environment has been shaped by the tension arising from a
deterioration in US-Iraq relations in early 1998. With the potential for armed
conflict, Netanyahu's popularity has temporarily increased, particularly with
many Israelis who had previously disliked him. With the Iraqi crisis apparently
over for now, however, the same old thorny issue returns: the Palestinians are
becoming increasingly frustrated with the lack of progress on land for peace.
The European Union and the United Nations have recently expressed their
dissatisfaction with Israel's stance. Netanyahu remains in a precarious
position--unable to ignore world opinion but at the same time also unable to
ignore the opinion of right wing/ ultra-orthodox parties in his coalition. On
the economic front, 1998 started much like 1997 ended: GDP growth at recent
historical lows and unemployment near the top of recent historical levels. Tight
government spending policies and a very tight monetary policy combined with
slowing exports to Asia indicates that a sluggish growth target of 2% for 1998
appears optimistic. The good news is that the Bank of Israel ("BOI") has been
making unparalleled progress in its war against inflation, setting the stage for
all-important interest rate reductions. 1997 ended with inflation of 7%, a
28-year low. The bond market anticipates inflation will drop to approximately
4.5-5% for 1998. This has provided the BOI with the flexibility to begin to
reduce interest rates more aggressively, which historically has driven the
equity market. The shekel continues to look strong, and with reserves at
all-time highs, the BOI will not let a devaluation jeopardize inflation
accomplishments.
JORDAN
The stock market has remained largely unchanged in US$ terms during the last six
months. In contrast to the general elections of 1989 and 1993, Jordan's election
on November 4 witnessed the cause of political participation take a step
backwards. The election boycott by nine political parties, including the popular
Islamic Action Front, together with a similar stance by a large number of
respected political figures, ensured that the election was merely an exercise in
regime politics with only tribal candidates contesting the election. The
official turnout of 44% demonstrated how little the election caught the
imagination of the people.
4
<PAGE>
The Jordanian economy has grown in real terms by a solid 5-6% each year since
1993, following significant volatility during the early 1990s. The Senate
Finance Committee in its recent report suggested that growth may reach 6.5% in
1998. Our estimate for growth is closer to 5% due to somewhat disappointing
performance from the industrial sector. After rising to 26% in 1989, inflation
has been steadily reduced and is expected to average 3-4% this year. With few
natural resources and a relatively modest industrial base, Jordan runs a
persistent and large trade deficit. Crucially, worker remittances from abroad,
tourism revenues and government to government transfers from abroad help to
mitigate the size of Jordan's current account deficit. This year the deficit is
estimated to reach US$360mm, or 4.5% of GDP. Currency stability is an integral
part of the recovery program. A stable currency should serve to enhance business
confidence and foreign investment. Following its peg to the US dollar, the dinar
has been stable since 1995, fluctuating minimally from JD1/US$0.709.
LEBANON
After experiencing a post-war reconstruction boom, the Lebanese economy slowed
significantly during the past two years. Real GDP growth, which reached 7% in
1995, dropped to 4% in 1997 and is estimated to fall to 3.5% for 1998. The lack
of investment in areas other than property and construction partly accounts for
this continuing trend. GDP growth has also been slowed as a result of the
government's financing requirements for the consistently high budget deficit
that Lebanon has run since the end of the civil war. In addition to a budget
deficit, Lebanon runs high trade and current account deficits. In 1997, the
trade deficit stood at US$6.5bn with a current account deficit that exceeded 40%
of GDP. Lebanon's capital inflows are fairly steady, approximating US$6-7bn per
year. Lebanon is in a unique situation as its non-resident population is three
times the size of its resident population with an estimated US$50bn of capital
held abroad. The Hariri government is committed to maintaining currency
stability as an integral factor of the country's economic recovery. Since 1993,
the exchange rate, managed by the central bank, has strengthened in both nominal
and real terms. The stability of the currency has also been positively affected
by a recent US$600mn soft loan from Saudi Arabia to the central bank. Such a
loan only offers a short-term solution to the problem of maintaining reserve
levels as the country needs to experience improvement both in its budget and
current account deficits if the currency is to attain real stability.
5
<PAGE>
MOROCCO
The Moroccan stock market rose 24.2% in US$ terms during the last six months.
The market, driven by domestic investors (in particular, the rapidly growing
local mutual fund industry), exhibited strong resilience to the turmoil in other
emerging markets in late 1997. Morocco recently became a constituent of the
International Finance Corporation Index (0.7% weighting) which we expect will
lead to increased attention from international investors. Meanwhile, elections
to the lower house of the legislature were held in mid-November and indirect
elections to a new upper house took place in early December. The results of
Morocco's first major experiment with democracy were undramatic: the vote was
evenly split between left, right and center. Morocco's macroeconomic performance
continues to be volatile as a result of alternating years of meagre and heavy
rainfall. GDP contracted 2.5% in 1997 due to a large decrease in agricultural
output, causing a slight widening in both budget and current account deficits
(from 2.0% and 2.7% of GDP in fiscal 1996 and 1997, respectively). Given a
rebound in the primary sector in 1998 and 1999 and a continuation of the 5%
growth rate in the non-agricultural sector, we expect GDP increases of 5% and
6%, respectively. Inflation has fallen to 3.0%, which is strong performance
considering rising food imports caused by the drought. Interest rates should
stabilize at the current level of 8.0%. Imports cover is stable at five months
and we expect the slight overall balance of payments surplus to be maintained
over the next two years as the country enjoys a steady inflow of foreign
capital.
OMAN
Over the review period, the Muscat Securities Market fell 13.1% in US$ terms.
Elections were held in the fourth quarter of 1997 for Oman's Consultative
Council, known as the Majlis al-Shura. An estimated 51,000 Omanis participated
in the voting, with each voter representing approximately 35 Omanis. While he
retains tight control over the Majlis selection process, Sultan Qaboos affirmed
that the governmental system of Oman is evolving and in the long-run, the Majlis
will be elected. As one of the Gulf Corporation Council countries, Oman's main
source of income is oil. The production and export of crude oil accounts for
approximately 40% of Oman's GDP at current prices. Oil revenues account for
approximately 75% of government revenues, and thus, the weakness in oil prices
in early 1998 will put pressure on the budget deficit, which fell to 4.3% of GDP
in
6
<PAGE>
1997. Oman has enjoyed a trade surplus for many years due to increasing oil
revenues. As a result of the large outflows of remittances by foreign workers,
the country has consistently registered a current account deficit. Foreign
labor, which accounts for approximately two-thirds of the workforce in Oman, is
in large demand because of its low cost. However, over the past few years, the
government has focused on "Omanizing" the labor force.
TUNISIA
The stock market depreciated 6.3% in US$ terms during the last six months.
Tunisia's economic performance in 1997 was sound. GDP is estimated to have grown
5.0% while inflation remained low and stable, averaging 3.6% for the year.
Inflation should tick up only moderately from this level in 1998 and on the back
of a recovering primary sector, we expect a similar level of growth next year.
The widening trade deficit (currently US$2bn) will be partially offset by a
surplus on the invisibles account. The official target is for the budget deficit
to average 2.6% between 1998-2001, although foreign investment is likely to
remain modest, pending more concerted action on large scale privatization.
Political reform in Tunisia is proceeding very slowly. The last round of reforms
(first announced by the president in December 1996) has now been approved by the
Chamber and written into the constitution. Presidential and parliamentary
elections are not due until March 1999, however, if current conditions do not
change, a challenge to the status quo is unlikely.
TURKEY
During the last six months, the Istanbul Stock Exchange rose 7.1% in US$ terms.
Speculation regarding the possibility of an early election continues to dominate
the Turkish political scene. Following the Constitutional Court's decision to
close the Islamic Welfare party, the perception of local investors on the
likelihood of early elections increased strongly, causing the equity markets to
suffer in early 1998. Thus far, Prime Minister Yilmaz has resisted the
temptation to go to the country early and we believe this will continue to be
the case for the remainder of the year. Interest rates remain one of the key
determinants of the stock market. After peaking at 126% in February, interest
rates have continued to decline. As the government's borrowing schedule is
expected to ease after the first quarter, there is room for rates to decline
further. On the inflation front, although the government's year-end target of
50% appears extremely optimistic, 70%
7
<PAGE>
should be achievable, a significant improvement compared with last year's ending
Consumer Price Index level of 99%. The economy is finally showing signs of
heading in the right direction as inflation and interest rates are on the
decline and appear likely to decline further. The stock market has yet to react
to the improvement in the economy as local investors remain preoccupied by
politics.
We continue to believe that investing in the Middle Eastern equity markets 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,
Jeffrey Chowdhry James Graham-Maw
Portfolio Manager Portfolio Manager
THE FOREIGN & COLONIAL
EMERGING MIDDLE EAST FUND, INC.
MAY 22, 1998
8
<PAGE>
PORTFOLIO OF INVESTMENTS (UNAUDITED)
APRIL 30, 1998
- --------------------------------------------------------
EQUITIES--99.73%
- -------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- -----------
<C> <S> <C>
EGYPT--29.57%
APPAREL & TEXTILES--0.64%
103 El Nasr Clothing & Textile (KABO).................. $ 2,522
18,000 Oriental Weavers (a)............................... 374,780
-----------
377,302
-----------
CHEMICALS--1.67%
30,000 Paints & Chemical Ind. (PACIN)..................... 987,537
-----------
CONSTRUCTION--9.08%
21,500 Helwan Portland Cement (a)......................... 460,390
28,000 Madinet Nasr City.................................. 1,716,047
49,230 Suez Cement........................................ 1,025,023
40,000 Suez Cement - GDR (b).............................. 814,000
63,975 Torrah Portland Cement............................. 1,353,606
-----------
5,369,066
-----------
CONSUMER NON-DURABLES--0.38%
10,800 Misr Refrigeration & Air Conditioning Manufacturing
(MIRACO) (a)..................................... 226,008
-----------
FINANCIAL SERVICES--4.76%
68,340 Commercial International Bank (CIB)................ 1,172,402
35,105 Commercial International Bank (CIB) - GDR.......... 595,030
83,570 Misr International Bank SAE (b).................... 1,050,893
-----------
2,818,325
-----------
FOOD & BEVERAGE--3.57%
35,710 Al Ahram Beverage - GDR (b)........................ 1,133,793
38,590 North Cairo Flour Mills............................ 891,305
8,800 South Cairo Flour Mills............................ 84,645
-----------
2,109,743
-----------
GAS UTILITY--1.35%
8,000 Egypt Gas.......................................... 797,654
-----------
HOTELS--1.34%
19,989 Misr for Hotels (Hilton)........................... 791,353
-----------
HOUSING--2.30%
10,550 Misr Elgadida for Housing.......................... 1,361,290
-----------
PETROLEUM--0.40%
21,200 Misr Gulf Oil Proc. (MIGOP) (a)(c)................. 238,049
-----------
PHARMACEUTICALS--3.04%
25,200 Egyptian International Pharmaceuticals (EIPICO).... 1,795,777
-----------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- -----------
<C> <S> <C>
EGYPT--(concluded)
STEEL--1.04%
14,000 Alexandria National Iron & Steel (ANSDK)........... $ 614,604
-----------
17,486,708
-----------
ISRAEL--10.79%
BANKING--2.12%
466,815 Bank Hapoalim...................................... 1,251,207
-----------
CHEMICALS--2.57%
352,044 Israel Chemicals................................... 423,806
129,250 Makhteshim Chemical Works (a)...................... 1,095,457
-----------
1,519,263
-----------
CONGLOMERATES--1.50%
7,000 Koor Industries.................................... 884,258
-----------
ELECTRONICS--1.55%
23,743 Formula Systems (1985) (a)......................... 915,805
-----------
ENGINEERING--1.22%
28,552 Tecnomatix Technologies (a)........................ 724,507
-----------
RETAIL TRADE--0.77%
144,978 Super Sol.......................................... 456,285
-----------
TELECOMMUNICATIONS--1.06%
20,591 ECI Telecom - ADR.................................. 628,026
-----------
6,379,351
-----------
JORDAN--2.75%
APPAREL & TEXTILES--0.13%
40,400 El Zay Ready Wear (a).............................. 77,223
-----------
BANKING--1.66%
2,000 Arab Bank.......................................... 983,837
-----------
CHEMICALS--0.21%
125,000 Jordan Industrial Resources (a).................... 121,223
-----------
CONSTRUCTION--0.75%
60,000 Jordan Cement Factories (a)........................ 210,822
151,000 Zara for Investments (a)........................... 233,450
-----------
444,272
-----------
1,626,555
-----------
LEBANON--0.59%
INVESTMENT COMPANIES--0.59%
40,000 Lebanon Holdings (a)............................... 350,000
-----------
</TABLE>
10
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<TABLE>
<CAPTION>
SHARES VALUE
- ---------- -----------
<C> <S> <C>
MOROCCO--32.51%
BANKING--6.13%
6,484 Banque Commerciale du Maroc (BCM).................. $ 644,935
30,000 Banque Marocaine Du Commerce Exterieur (BMCE) -
GDR.............................................. 715,500
20,125 Credit Immobilier et Hotelier (CIH)................ 641,718
14,273 Wafabank........................................... 1,625,210
-----------
3,627,363
-----------
CONGLOMERATES--10.23%
26,200 Omnium Nord Africain............................... 2,775,780
36,331 Societe Nationale d'Investissement (SNI)........... 3,277,355
-----------
6,053,135
-----------
CONSTRUCTION-- 4.32%
23,534 Cimenterie de l'Oriental (CIOR).................... 2,553,847
-----------
FINANCIAL SERVICES--2.22%
9,000 Credit Eqdom....................................... 1,315,477
-----------
FOOD & BEVERAGE--8.03%
8,500 Branoma............................................ 1,285,236
11,000 Brasseries du Maroc (BDM).......................... 3,462,268
-----------
4,747,504
-----------
MINING--1.58%
11,855 Sonasid CS......................................... 932,845
-----------
19,230,171
-----------
OMAN--2.57%
INVESTMENT COMPANIES--2.57%
87,000 Oryx Fund (a)...................................... 1,522,500
-----------
TUNISIA--1.30%
BANKING--1.30%
10,000 Banque Internationale De Tunisie (a)............... 110,000
60,000 Banque Internationale De Tunisie (a)(b)............ 660,000
-----------
770,000
-----------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- -----------
<C> <S> <C>
TURKEY--19.65%
BANKING--8.88%
14,500,000 Akbank (a)......................................... $ 1,232,747
81,990,790 Yapi Kredi Bankasi................................. 4,018,353
-----------
5,251,100
-----------
CONGLOMERATES--4.29%
140,000 Haci Omer Sabanci Holdings SAE (a)(b).............. 2,537,500
-----------
CONSTRUCTION--1.50%
17,716,660 Trakya Cam......................................... 886,010
-----------
CONSUMER DURABLES--1.03%
6,250,000 Ardem.............................................. 606,371
-----------
ELECTRONICS--3.40%
15,000,000 Vestel Electronic.................................. 2,010,402
-----------
STEEL--0.55%
1,975,600 Eregli Demir Celik................................. 328,015
-----------
11,619,398
-----------
TOTAL EQUITIES (cost $38,156,283)--99.73%...................... 58,984,683
Other assets less liabilities--0.27%........................... 161,223
-----------
NET ASSETS (applicable to 2,807,169 shares; equivalent to
$21.07 per share) -- 100.00%................................. $59,145,906
-----------
-----------
</TABLE>
- ------------
<TABLE>
<C> <S>
(a) Non-income producing security.
(b) 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 $6,196,186 or 10.48% of net assets.
(c) Fair valued security, totalling $238,049 or 0.40% of net assets.
ADR American Depositary Receipt.
GDR Global Depositary Receipt.
</TABLE>
See accompanying notes to financial statements
12
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
<TABLE>
<CAPTION>
APRIL 30, 1998
--------------
<S> <C>
ASSETS
Investments in securities, at value (cost $38,156,283).................... $ 58,984,683
Cash (including foreign currency of $10,199 with a cost
of $10,221).............................................................. 10,930
Dividends receivable...................................................... 178,274
Deferred organizational expenses.......................................... 112,256
Prepaid expenses.......................................................... 25,820
--------------
Total assets........................................................ 59,311,963
--------------
LIABILITIES
Investment advisory fee payable........................................... 58,149
Administration fee payable................................................ 10,274
Accrued expenses and other liabilities.................................... 97,634
--------------
Total liabilities................................................... 166,057
--------------
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 (including dividends in excess of
net investment income of $635,842)....................................... (1,084,699)
Accumulated net realized gain............................................. 2,195,479
Net unrealized appreciation of investments and other assets and
liabilities denominated in foreign currency.............................. 20,825,770
--------------
Net assets applicable to shares outstanding......................... $ 59,145,906
--------------
--------------
NET ASSET VALUE PER SHARE................................................. $21.07
--------------
--------------
</TABLE>
See accompanying notes to financial statements
13
<PAGE>
STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
ENDED
APRIL 30, 1998
--------------
<S> <C>
INVESTMENT INCOME
Dividends (net of foreign withholding taxes of $5,051).................... $ 574,308
Interest.................................................................. 23,153
--------------
597,461
--------------
EXPENSES
Investment advisory fees.................................................. 343,585
Custody and accounting fees............................................... 127,400
Legal and audit fees...................................................... 101,706
Administration fees....................................................... 61,986
Amortization of organizational expenses................................... 36,879
Directors' fees and expenses.............................................. 34,927
Insurance expense......................................................... 20,539
Shareholder reports expense............................................... 18,394
Transfer agent fees and expenses.......................................... 7,098
Other expenses............................................................ 14,935
--------------
Total expenses............................................................ 767,449
--------------
Net investment loss....................................................... (169,988)
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS
Net realized gain (loss) on:
Investments............................................................. 2,240,180
Foreign currency transactions........................................... (44,701)
Net change in unrealized appreciation/depreciation of:
Investments............................................................. 321,892
Other assets and liabilities denominated in foreign currency............ (1,905)
--------------
Net realized and unrealized gain on investments
and foreign currency transactions........................................ 2,515,466
--------------
NET INCREASE IN NET ASSETS FROM INVESTMENT OPERATIONS..................... $ 2,345,478
--------------
--------------
</TABLE>
See accompanying notes to financial statements
14
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
ENDED FOR THE YEAR
APRIL 30, 1998 ENDED
(UNAUDITED) OCTOBER 31, 1997
-------------- ----------------
<S> <C> <C>
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss)........................... $ (169,988) $ 32,959
Net realized gain on investments and foreign currency
transactions......................................... 2,195,479 2,619,799
Net change in unrealized appreciation/depreciation of
investments and other assets and liabilities
denominated in foreign currency...................... 319,987 15,152,942
-------------- ----------------
Total from investment operations....................... 2,345,478 17,805,700
-------------- ----------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
In excess of net investment income..................... (635,842) --
From net realized gain on investments.................. (2,930,105) (596,240)
-------------- ----------------
Total dividends and distributions...................... (3,565,947) (596,240)
-------------- ----------------
Net increase (decrease) in net assets.................. (1,220,469) 17,209,460
NET ASSETS
Beginning of period.................................... 60,366,375 43,156,915
-------------- ----------------
End of period.......................................... $ 59,145,906 $ 60,366,375
-------------- ----------------
-------------- ----------------
</TABLE>
See accompanying notes to financial statements
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
APRIL 30, 1998
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
16
<PAGE>
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.
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 (loss) for income tax reporting purposes.
17
<PAGE>
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.
On December 19, 1997, the Fund's Board of Directors declared an ordinary income
and capital gain dividend aggregating $1.2703 per share. The dividend was paid
on January 15, 1998, to shareholders of record on December 31, 1997.
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 calandar 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.
18
<PAGE>
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.
NOTE 3 INVESTMENTS IN SECURITIES
For U.S. federal income tax purposes, the cost of securities owned at April 30,
1998 was substantially the same as the cost of securities for financial
statement purposes. Accordingly, net unrealized appreciation of investments of
$20,828,400 was comprised of gross appreciation of $22,439,964 for those
investments having an excess of value over cost and gross depreciation of
$1,611,564 for those investments having an excess of cost over value.
For the six months ended April 30, 1998, aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $8,139,936 and
$11,427,312, 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,
similar 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 six months ended April 30,
1998 or for the year ended October 31, 1997.
At April 30, 1998, The Foreign & Colonial Emerging Markets Investment Trust, The
Global Emerging Markets Ex-Pacific Asia Fund and The Global Emerging Markets
Investment Co., each of whom may be deemed to be affiliates of the Investment
Adviser under U.S. securities laws, owned 95,284, 6,403 and 2,886 shares,
respectively, of the Fund.
19
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of common stock outstanding throughout each period is
presented below.
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS FOR THE PERIOD
ENDED FOR THE YEAR FOR THE YEAR NOVEMBER 4, 1994*
APRIL 30, 1998 ENDED OCTOBER ENDED OCTOBER THROUGH
(UNAUDITED) 31, 1997 31, 1996 OCTOBER 31, 1995
-------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period.......................... $ 21.50 $ 15.37 $ 13.45 $ 14.04**
-------------- -------- -------- --------
INCOME (LOSS) FROM INVESTMENT
OPERATIONS
Net investment income (loss)...... (0.06) 0.01 (0.03) 0.02
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions... 0.90 6.33 1.95 (0.06)
-------------- -------- -------- --------
Total from investment
operations.................. 0.84 6.34 1.92 (0.04)
-------------- -------- -------- --------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS
In excess of net investment
income.......................... (0.23) -- -- --
From net realized gain on
investments..................... (1.04) (0.21) -- --
-------------- -------- -------- --------
Total dividends and
distributions............... (1.27) (0.21) -- --
-------------- -------- -------- --------
CAPITAL SHARE TRANSACTIONS
Offering costs charged to
additional paid-in capital...... -- -- -- (0.55)
-------------- -------- -------- --------
Net asset value, end of period.... $ 21.07 $ 21.50 $ 15.37 $ 13.45
-------------- -------- -------- --------
-------------- -------- -------- --------
Market value, end of period....... $17.125 $ 17.75 $12.375 $ 11.00
-------------- -------- -------- --------
-------------- -------- -------- --------
TOTAL INVESTMENT RETURN (a)(b).... 3.70% 45.46% 12.50% (21.65)%
-------------- -------- -------- --------
-------------- -------- -------- --------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in
thousands)...................... $59,146 $60,366 $43,157 $37,756
Ratio of expenses to average net
assets.......................... 2.79%(c) 2.89%(d) 3.16%(d) 2.99%(c)(e)
Ratio of net investment income
(loss) to average net assets.... (0.62)%(c) 0.06%(d) (0.23)%(d) 0.13%(c)(e)
Portfolio turnover................ 15% 57% 30% 19%
Average commission rate paid per
share of common stock
investments purchased/sold
(f)............................. $0.0031 $0.0008 $0.0027 --
</TABLE>
NOTES:
<TABLE>
<S> <C>
* 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) Annualized.
(d) The Administrator waived a portion of its fees during the years ended October 31, 1997 and 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.
(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.
</TABLE>
20
<PAGE>
CORPORATE INFORMATION
DIRECTORS
Fred Arthur Rank Packard, Chairman
Bassam Aburdene
Karen J. Clarke
Albert Francke
Walter M. Noel, Jr.
David C. Patterson
OFFICERS
Karen J. 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
[LOGO]
THE FINANCIAL INFORMATION INCLUDED HEREIN IS TAKEN FROM THE RECORDS OF THE FUND
WITHOUT EXAMINATION BY INDEPENDENT ACCOUNTANTS, WHO DO NOT EXPRESS AN OPINION
THEREON.
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.
FC98S
<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]
FOREIGN & COLONIAL EMERGING MARKETS LIMITED
