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[LOGO]
THE FOREIGN & COLONIAL
EMERGING MIDDLE EAST FUND, INC.
SEMI-ANNUAL REPORT
APRIL 30, 1999
[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 are 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.
NEW DIRECTOR
Effective April 21, 1999, Mr. Vipul Bhagat was elected by the Fund's Board of
Directors to serve as a director of the Fund.
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YEAR 2000 PROCESSING ISSUE
Many computer programs employed throughout the world use two digits rather than
four to identify the year. These programs, if not adapted, may not correctly
handle the change from "99" to "00" on January 1, 2000, and may not be able to
perform necessary functions. The Year 2000 issue affects virtually all companies
and organizations.
The Investment Adviser has advised the Fund that it is implementing steps
intended to ensure that its computer systems are capable of Year 2000
processing. In addition, the Fund is inquiring with third parties to assess the
adequacy of their Year 2000 compliance efforts. The Fund has developed
contingency plans intended to assure that third-party noncompliance will not
materially affect the Fund's operations. Based upon reports provided by its
service providers, the Fund does not currently anticipate that the Year 2000
issue will have an adverse effect on its ability to continue its operations.
Companies in which the Fund invests could be adversely affected by the Year 2000
issue, but the Fund cannot predict the consequential effect on its investment
return. To the extent the impact on a portfolio holding is negative, the Fund's
investment return could be adversely affected.
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 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.
2
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ANNUAL SHAREHOLDERS' MEETING
The Fund's annual meeting of shareholders was held on January 21, 1999.
Shareholders voted to: (1) elect Abdulwahab Al-Mulla and re-elect Bassam
Aburdene and Fred Arthur Rank Packard as Class III Directors; and (2) ratify the
appointment of PricewaterhouseCoopers LLP as the Fund's independent accountant
for the fiscal year ending October 31, 1999.
The resulting vote count for each proposal is indicated below:
<TABLE>
<S> <C> <C> <C>
1. Election of Directors:
CLASS III TO SERVE UNTIL YEAR 2002 ANNUAL MEETING
Bassam Aburdene For: 2,063,536
Withheld Authority: 464,608
Abdulwahab Al-Mulla For: 2,063,318
Withheld Authority: 464,826
Fred Arthur Rank Packard For: 2,066,136
Withheld Authority: 462,008
2. Ratification of appointment of PricewaterhouseCoopers
LLP as the Fund's independent accountant:
For: 2,468,863
Against: 481
Abstain: 58,800
</TABLE>
3
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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,
1999. At April 30, 1999, the Fund's net asset value per share was $17.22. The
net asset value total return for the six month period was 8.7%. We are pleased
to announce that the Board of Directors have approved the adoption of a
benchmark index for the Fund. Commencing July 1, 1999, the Fund will use the
ING-Barings Greater Middle-East Index, which will include all the countries in
which the Fund invests and will be calculated daily.
EGYPT
The Egyptian Stock Exchange recently inaugurated an online trading system, with
all trading and settlement activities connected through a central database. This
electronic link is a critical building block towards the stock exchange's
ultimate objective of ensuring more efficient trading and reduced settlement
periods. With respect to performance, the Hermes Financial index produced a
return of 10.4% in US$ terms during the past six months. Investor attention
remains concentrated on blue chips and despite a solid start to 1999, the market
remains at a single-digit price/earnings ("P/E") ratio with an attractive
dividend yield in excess of 8%. In terms of security, since the massacre at
Luxor in 1997, the threat of violence has eased considerably with fewer arrests
related to Islamic activities. This decline in terrorist activity can be partly
attributed to the government's efforts to alleviate poverty in rural areas,
which traditionally have been breeding grounds for Islamic militant groups.
Following recent corporate activity in the cement sector, most notably the
purchase of Beni Suef by Lafarge of France and Titan Cement of Greece, Egypt's
privatization credentials received a further boost in March when the mandate was
issued to an international consortium to privatize the seven regional electric
companies. The sell-off of this long-term government monopoly provides further
credence to the government's privatization program and is likely to focus
investor attention on Egypt for future privatization of other sectors. In
addition, the flotation of an estimated 20% of the electric companies will bring
significant new equity to the Egyptian stock market, further boosting liquidity.
On the external front, Egypt's current account deficit widened during the fourth
quarter of 1998 in comparison to the previous quarter. However, at $451 million,
the deficit is significantly lower than the deficit recorded during the first
half of the year. For calendar year 1998, the current
4
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account deficit ended at 3% of Gross Domestic Product ("GDP"). This improvement
is largely a result of the recovery in tourism as tourist arrivals in December
1998 exceeded 300,000, compared to 178,000 in December 1997. Local reports also
suggest that Egypt is considering a $250 million-$300 million Eurobond issue in
the near future. The issue's maturity is likely to be less than five years with
the purpose primarily to establish an interest rate benchmark that will enable
Egyptian corporates to access international capital markets. Egypt abandoned
plans for such an issue last year due to the turmoil in international markets.
ISRAEL
Israel has had a strong six months as the Mishtanim Index increased 36.7% in US$
terms. This performance has been driven by a resumption of the benign
inflation/interest rate story, as well as, increasing optimism on the political
front. In the medium-term, there is a risk that the post-election Knesset will
once again be so fractious that the newly elected Prime Minister will have a
difficult time implementing policy without pandering to expensive special
interest groups. The election campaign was focused primarily on personalities
and peace/security issues, with little discussion of economic policies. The new
Prime Minister Barak has co-opted a moderate religious party and a centrist
party, and re-cast itself as "One Israel." Israeli-Palestinian and international
issues have receded from the spotlight due to the recent elections. Arafat had
previously pledged to unilaterally declare a Palestinian state on May 4th, the
five-year anniversary of the Oslo Accords. This did not happen, however, as the
furor it would have created among Israelis would have almost ensured hard-liner
success in the Israeli elections two weeks later. GDP growth reached
approximately 2.0% in 1998 after the government changed its accounting
standards, raising the figure from 1.6%. We project GDP of 2.25% for 1999
compared to the government's forecast of 2.50%. The solid fiscal performance of
1998 is unlikely to be repeated due to the elections, as the government has
already allocated budget reserves to curry favor with special interest groups.
In addition, tax collections are well behind budget. We expect a deficit of
2.8%, well above the target of 2.0% and slightly worse than the 2.4% recorded in
1998. Inflation is back under control due to tight monetary policy and
appreciation of the shekel from its very weak levels in the fall.
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JORDAN
During the past six months, the market rose 7.3% in US$ terms. Progress on the
privatization front, through strategic sales or public offerings, could become a
positive trigger for the market. The emergence of King Abdullah as the new
Monarch, following the death of King Hussein, caught many by surprise. Abdullah
is popular with the army and enjoys a great deal of public goodwill, however, he
is politically inexperienced and his authority in the country and in the region
is likely to be challenged often. It is important for King Abdullah to ensure
the support of Hassan, Hussein's brother, in order to avoid painful splits
within the royal family. Abdullah supports the "King's Peace", the long standing
attempt for reconciliation with Israel. The emergence of a more moderate
Barak-led government will allow for increased trade and economic relations
between Israel, Jordan and the Palestinians. Improving relations with Syria and
Iraq is another challenge for the new King, especially given Jordan's large
Iraqi migrant population. Last, but not least, financial support from the Gulf
is critical given the poor shape of the economy. Official figures reflect that
in 1998, GDP grew by a relatively healthy 2.2%. However, unofficial estimates of
growth are considerably lower. Given the poor corporate earnings growth numbers
and the extent of the unemployment problem (ranging between 15-25% of the labor
force) one can conclude that the economy is in a recession. The lack of oil
reserves and other natural resources have caused the Jordanian economy to be
very dependent on outside aid. An improved outlook for oil prices would allow
the Gulf States to become more generous in this direction. The new Prime
Minister, Abdul Raouf Al Rawabdeh, a veteran politician with a reputation as a
tough administrator, has already initiated intensive discussions with western
creditors aimed at debt rescheduling or, possibly, forgiveness. President
Clinton promised to work for the approval of a $300 million aid package in
recognition of the Jordanian contribution in the October 1998 Wye River
memorandum between Israel and the PLO. Foreign debt of $8 billion and a budget
deficit of 9.7% of GDP point to the urgent need for external aid. However, it is
unlikely that any aid package will manage to transform the country's economic
circumstances. This will be dependent on the successful implementation of an
economic liberalization and privatization program. Given the extent of the
unemployment problem, it is likely that there will be strong public reaction to
the introduction of any economic reforms.
6
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LEBANON
The Lebanese market has been a poor performer, losing 27.2% of its value in US$
terms during the six months ended April 30, 1999. The recently formed government
of Prime Minister Salim Hoss has not yet been able to convince investors of its
ability to proceed quickly with administrative reform and economic
stabilization. The attempt to sideline the key people associated with the
previous Hariri administration has not proven to be successful. Hoss has
admitted to some hasty appointments that have turned out to be inappropriate. On
economic reform, the cabinet has been divided even on the general direction of
policies with the Minister of Finance, George Corm, pushing for a new focus on
the productive sectors. More importantly, the cabinet has been divided over the
intensity of the applied remedies, with a number of Ministers arguing against
the implementation of a strict budget in the current phase of the business
cycle. As a result, the cabinet approved the final draft of the 1999 budget only
in early April. It now has to be presented and discussed in the parliament. The
most important economic problem that Lebanon faces today is the size of its
budget deficit. In 1998, it reached an unsustainable 14% of GDP. Such a large
deficit requires high interest rates for its financing. These high rates attract
significant capital flows, which create an overvaluation of the currency. At
present, it is estimated that the Lebanese pound is overvalued by more than 40%.
On a less alarming note, the extensive dollarization of the economy will tend to
constrain the adverse implications of a potential devaluation. Indicatively, the
dollarization of bank deposits reached 66% in 1998. In this frame of economic
affairs, it is therefore critical, if fiscal, monetary and exchange rate
stability is to be achieved, that the budget deficit be drastically lowered. The
1999 budget is a step in the right direction when it proposes a range of taxes,
most importantly a 5% rise in corporate tax rates from 10% to 15%. In indirect
taxes, the most important change is the proposed increased tax on petroleum. The
General Workers Confederation has already rejected this proposal and may hold
demonstrations.
MOROCCO
The great bull run of the Casablanca bourse is showing signs of fatigue. The
market declined 17.2% in US$ terms during the six months ended April 30, 1999.
Valuations continue to look rather stretched although mutual fund growth remains
strong: assets under management have exceeded US$3.5 billion, 30% of which are
in equities with the remainder in bonds and liquid
7
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assets (from 13 week to 15 year paper). The interest for new equity issuance is
solid, but the secondary market is not a compelling value. The political scene
in Morocco remains quiet for the moment. Now a year old, the maiden opposition
'ALTERNANCE', administration of Abderrhmane Youssoufi has won praise abroad for
improving its behavior in regards to human rights and for strengthening trade
links with both France and China. However, at home, the birthday celebrations
are more muted. The view that the overstaffed cabinet has been ineffective in
implementing reforms and shaping policy is backed up by delays in implementing a
range of policies, in social sectors as well as privatization. Improved
performance across a range of ministries will be necessary if, in the event of
King Hassan's death, Morocco is to avoid playing into the hands of those who
offer a different kind of 'ALTERNANCE', Islamist radicals. The macroeconomic
outlook has brightened due to heavy rains in the new year, bolstering 1999 GDP
forecasts of approximately 4% after growth of 6.3% in 1998. This is expected to
be achieved against a background of continued low inflation. Indeed, the year
started with a 0.22% month on month DEFLATION in spite of the fact that Ramadan
is traditionally a period when retail prices inflate. Recent oil-price strength
(Morocco is a net importer) and the weakness of the euro (two-thirds of the
dirham basket) should offset each other. Reform of the Office Cherifien des
Phosphates has produced higher yields and a competitive financial position,
thereby bolstering exports during the Asian slump. This bodes well for a future
recovery in those economies. Foreign reserves continue to rise slowly, up 5.6%
at the end 1998 to US$4.6 billion, five months' imports cover. Efforts to
control external debt (1999 estimate--US$21 billion) will feed into a further
increase in domestic debt. It will also require new offshore financing; official
lenders--the World Bank and other multilaterals--will continue to supply most of
this, hence, Morocco's historical low correlation with external events. However,
when the risk appetite among international investors increases, JP Morgan and
Merrill Lynch will revive Morocco's US$300 million Eurobond issue. Morocco's
rating is one notch below investment grade.
TUNISIA
After a lengthy (three year) bear phase, the stock market has staged something
of a recovery increasing 11.1% in US$ terms during the past 6 months. The
triggers were a 1% reduction in interest rates and a more robust attitude
towards state-owned bank restructuring. The market continues to appear to have
good value despite the rise, given a 1999
8
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earnings multiple of under 10 times, a healthy 4% yield and a banking sector
price/book ratio of 1.0. However, volumes are low and Tunisia remains a
difficult market for foreign investors to access. President Zinc al-Abedine Ben
Ali, should win a third consecutive term as President. The opposition should win
more seats in parliament, however, the ruling party, Rassemblement
Constitutionnel Democratique will remain dominant. The Association Agreement
with the EU, which came into effect in March 1998, has a socio-political
dimension. The President announced that the constitution would be amended to
allow leaders of the six registered parties to stand in the forthcoming
presidential elections. Under the present constitution, it is impossible for a
candidate not sponsored by the ruling party to run for the presidency since each
needs to be sponsored by at least 30 mayors or members of the parliament. As a
buffer state between Algeria and Libya, the west is keen that Tunisia be kept
happy and that EU grants are generous. As for Tunisia, its leisure industry and
small geographical size result in a foreign policy geared towards being friends
with everybody. We expect strong agricultural contribution in 1999. Oil
production has continued to decline, however, tourism receipts remain robust. We
anticipate economic growth of between 4.5%-5.0% in 1999 and 5.5% for 2000.
Inflation is set to remain subdued and even slightly overstated.
TURKEY
The two main features of the general elections in April were the strong
performance of the nationalist MHP party and the weakness of the two
center-right parties, ANAP and the DYP. The election outcome indicates that a
three party coalition will be required to have a parliamentary majority. The
largest party in parliament will be the DSP, led by acting Prime Minister Bulent
Ecevit. He swept to power on a wave of popular support following the arrest of
Abdullah Ocalan, leader of the Kurdistan Workers Party (PKK) and public enemy
number one in Turkey. Following a relatively quiet January, the ISE index
exploded into life in February and continued the rally in the run-up to the
election, providing an impressive return of 83.4% in US$ terms over the past six
months. The rally began slowly following a successful February Treasury auction
and the upward trend continued amid International Monetary Fund ("IMF") Turkish
desk director Martin Hardy's statement regarding the Turkish economy and a
possible loan package after the elections. This helped bring treasury bill
yields down and drive the equity market further forward. However, the main
movement in the bourse was after the capture of Ocalan, as the market reassessed
the potential
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political and economic benefits of the PKK leader's arrest. Despite the
substantial rally in the market year-to-date, in terms of valuation, the local
index is currently still only trading at a PE of 8.5 times 1999 earnings.
Meanwhile, average turnover increased to between $300 million-$400 million,
compared to $200 million or less during the second half of 1998. The main
economic issue over the past few months has been the sharp decrease in annual
treasury-bill yields, which have fallen from over 140% at the end of January to
the current level of 98%. When the coalition is finally confirmed, we expect
yields to fall even further. According to the State Institute of Statistics, the
February 1999 Wholesale Price Index ("WPI") and Consumer Price Index ("CPI")
decelerated 3.4% and 3.2%, respectively, confirming the strong deflationary
trends in the economy. The WPI is now at an eight year annual low at 48.3%,
compared to 89.6% last February while the CPI reached a six-year low falling to
63.9%, compared to 99.3% in February 1998. The IMF is looking for a WPI of 45%
by June 1999 and while this is not out of the question, significant acceleration
in oil prices will place some pressure on the inflation target. On the fiscal
side, a strict policy has been in place since 1998 which has resulted in a
higher than expected $1.6 billion primary surplus (4.7% of GDP) at the end of
1998. The government is targeting a primary deficit of $388 million for the
first quarter, as in the early months of the year, treasury revenues are driven
by indirect taxes, which have slumped due to the recession. The first
installment of personal income tax is due at the end of March, alleviating
revenue weakness.
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 / David McIlroy
Co-Portfolio Managers
THE FOREIGN & COLONIAL
EMERGING MIDDLE EAST FUND INC.
MAY 21, 1999
10
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PORTFOLIO OF INVESTMENTS (UNAUDITED)
APRIL 30, 1999
- --------------------------------------------------------
EQUITIES--97.00%
- -------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- -----------
<C> <S> <C>
EGYPT--32.07%
APPAREL & TEXTILES--1.28%
29,850 Oriental Weavers.................................. $ 617,724
-----------
BANKING--4.26%
60,400 MI Bank........................................... 1,382,752
38,900 National Societe Generale Bank.................... 678,108
-----------
2,060,860
-----------
CONSTRUCTION--8.71%
132,000 Arab International Construction (a)............... 1,020,340
73,900 Industrial and Engineering Enterprises............ 837,211
28,000 Madinet Nasr City................................. 841,830
49,230 Suez Cement....................................... 840,878
40,000 Suez Cement - GDR (b)............................. 670,000
-----------
4,210,259
-----------
FINANCIAL SERVICES--1.93%
6,666 Commercial International Bank (CIB)............... 65,682
82,400 EFG Hermes Holdings S.A.E - GDR (b)............... 869,320
-----------
935,002
-----------
FOOD & BEVERAGE--2.36%
35,710 Al Ahram Beverage - GDR (a)(b).................... 1,142,720
25 North Cairo Flour Mills........................... 318
-----------
1,143,038
-----------
GAS UTILITY--1.33%
10,500 Egypt Gas......................................... 640,523
-----------
HOTELS--0.00%
20 Misr for Hotels (Hilton).......................... 631
-----------
MANUFACTURING--0.63%
76,300 Olympic Group Financial Investment................ 305,422
-----------
PHARMACEUTICALS--2.62%
25,200 Egyptian International Pharmaceuticals (EIPICO)... 1,268,235
-----------
PROPERTY--0.56%
9,000 Alexandria Real Estate Investment................. 269,281
-----------
TELECOMMUNICATIONS--5.57%
201,500 Egypt Mobile Phone Network (a).................... 2,690,179
-----------
TOBACCO--2.82%
53,300 Eastern Tobacco................................... 1,362,498
-----------
15,503,652
-----------
</TABLE>
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<TABLE>
<CAPTION>
SHARES VALUE
- ----------- -----------
<C> <S> <C>
ISRAEL--14.36%
BANKING--2.17%
439,044 Bank Hapoalim Ltd................................. $ 1,047,780
-----------
CONGLOMERATES--3.44%
26,565 Discount Investment Corporation................... 961,496
6,505 Koor Industries................................... 703,514
-----------
1,665,010
-----------
ELECTRONICS--2.83%
35,000 Elbit Systems..................................... 492,922
30,000 Elron Electronic Industry......................... 596,250
10,991 Formula Systems (1985) (a)........................ 277,093
-----------
1,366,265
-----------
FINANCIAL SERVICES--1.59%
449,751 Bank Leumi Le Israel.............................. 769,600
-----------
PHARMACEUTICALS--0.74%
7,877 Teva Pharmaceuticals - ADR........................ 360,373
-----------
TELECOMMUNICATIONS--3.59%
314,923 Bezeq The Israeli Telecom (a)..................... 1,222,334
13,902 ECI Telecom - ADR................................. 512,636
-----------
1,734,970
-----------
6,943,998
-----------
JORDAN--7.34%
BANKING--4.57%
7,500 Arab Bank (a)..................................... 2,208,363
-----------
CHEMICALS--1.29%
105,000 Arab Potash Company (a)........................... 622,769
-----------
CONSTRUCTION--0.70%
151,000 Zara for Investments (a).......................... 339,564
-----------
HOTELS--0.78%
69,187 Arab International Hotels (a)..................... 375,350
-----------
3,546,046
-----------
LEBANON--0.48%
INVESTMENT COMPANIES--0.48%
40,000 Lebanon Holdings (a).............................. 230,000
-----------
</TABLE>
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<TABLE>
<CAPTION>
SHARES VALUE
- ----------- -----------
<C> <S> <C>
MOROCCO--15.95%
BANKING--4.96%
6,484 Banque Commerciale du Maroc (BCM)................. $ 653,778
15,000 Banque Marocaine Du Commerce Exterieur (BMCE) -
GDR............................................. 330,750
20,066 Credit Immobilier et Hotelier (CIH)............... 325,346
11,000 Wafabank.......................................... 1,086,830
-----------
2,396,704
-----------
CONGLOMERATES--4.30%
10,400 Omnium Nord Africain.............................. 1,038,087
10,000 Societe Nationale d'Investissement (SNI).......... 1,040,722
-----------
2,078,809
-----------
CONSTRUCTION--1.07%
5,000 Cimenterie de l'Oriental (CIOR)................... 516,814
-----------
FOOD & BEVERAGE--5.62%
8,500 Branoma........................................... 1,421,239
5,450 Brasseries du Maroc (BDM) (a)..................... 1,297,862
-----------
2,719,101
-----------
7,711,428
-----------
OMAN--2.07%
INVESTMENT COMPANIES--2.07%
77,000 Oryx Fund (a)..................................... 1,001,000
-----------
TUNISIA--4.94%
BANKING--4.07%
10,000 Banque Internationale De Tunisie - GDR (a)........ 103,500
180,000 Banque Internationale De Tunisie - GDR (a)(b)..... 1,863,000
-----------
1,966,500
-----------
LEASE FINANCING--0.87%
12,000 Tunisie Leasing................................... 423,422
-----------
2,389,922
-----------
TURKEY--19.79%
BANKING--9.28%
54,169,000 Akbank............................................ 1,727,945
115,073,400 Yapi Kredi Bankasi................................ 2,760,399
-----------
4,488,344
-----------
CONGLOMERATES--2.67%
184,800 Haci Omer Sabanci Holdings SAE (b)................ 1,288,980
-----------
</TABLE>
13
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<TABLE>
<CAPTION>
SHARES VALUE
- ----------- -----------
<C> <S> <C>
TURKEY--(concluded)
FINANCIAL SERVICES--3.79%
37,283,800 Turkiye Is Bankasi (C Shares)..................... $ 1,831,555
-----------
PETROCHEMICALS--1.27%
7,917,000 Tupras Turkiye Petrol Rafinerileri................ 616,211
-----------
RETAIL--2.78%
974,700 Migros Turkey..................................... 1,343,179
-----------
9,568,269
-----------
TOTAL EQUITIES (cost $36,423,667)--97.00%...................... 46,894,315
Other assets less liabilities--3.00%........................... 1,451,370
-----------
NET ASSETS (applicable to 2,807,169 shares; equivalent to
$17.22 per share)--100.00%................................... $48,345,685
-----------
-----------
</TABLE>
- ------------
(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 $5,834,020 or 12.07% of net assets.
ADR American Depositary Receipt.
GDR Global Depositary Receipt.
See accompanying notes to financial statements
14
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STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
<TABLE>
<CAPTION>
APRIL 30, 1999
--------------
<S> <C>
ASSETS
Investments in securities, at value (cost $36,423,667).................... $ 46,894,315
Cash (including foreign currency of $1,099,108 with a cost of
$1,194,706).............................................................. 635,721
Receivable for investments sold........................................... 1,785,598
Dividends receivable...................................................... 230,320
Deferred organizational expenses.......................................... 38,702
Prepaid expenses.......................................................... 23,131
--------------
Total assets........................................................ 49,607,787
--------------
LIABILITIES
Payable for investments purchased......................................... 1,000,105
Investment advisory fee payable........................................... 49,975
Administration fee payable................................................ 10,274
Accrued expenses and other liabilities.................................... 201,748
--------------
Total liabilities................................................... 1,262,102
--------------
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................................................ 37,080,728
Accumulated net investment loss........................................... (796,265)
Accumulated net realized gain............................................. 1,669,358
Net unrealized appreciation of investments and other assets and
liabilities denominated in foreign currency.............................. 10,389,057
--------------
Net assets applicable to shares outstanding......................... $ 48,345,685
--------------
--------------
NET ASSET VALUE PER SHARE................................................. $17.22
--------------
--------------
</TABLE>
See accompanying notes to financial statements
15
<PAGE>
STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
ENDED
APRIL 30, 1999
--------------
<S> <C>
INVESTMENT INCOME
Dividends (net of foreign withholding taxes of $17,005)................... $ 626,394
Interest.................................................................. 12,391
--------------
638,785
--------------
EXPENSES
Investment advisory fees.................................................. 289,957
Custody and accounting fees............................................... 126,896
Legal and audit fees...................................................... 111,190
Directors' fees and expenses.............................................. 76,760
Administration fees....................................................... 61,986
Amortization of organizational expenses................................... 36,676
Shareholder reports expense............................................... 23,716
Insurance expense......................................................... 21,753
Transfer agent fees and expenses.......................................... 6,944
Other expenses............................................................ 10,672
--------------
Total expenses............................................................ 766,550
--------------
Net investment loss....................................................... (127,765)
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS
Net realized gain (loss) on:
Investments............................................................. 2,056,071
Foreign currency transactions........................................... (67,963)
Net change in unrealized appreciation/depreciation of:
Investments............................................................. 1,756,520
Other assets and liabilities denominated in foreign currency............ (70,756)
--------------
Net realized and unrealized gain on investments and
foreign currency transactions............................................ 3,673,872
--------------
NET INCREASE IN NET ASSETS FROM INVESTMENT OPERATIONS..................... $ 3,546,107
--------------
--------------
</TABLE>
See accompanying notes to financial statements
16
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
ENDED FOR THE YEAR
APRIL 30, 1999 ENDED
(UNAUDITED) OCTOBER 31, 1998
-------------- ----------------
<S> <C> <C>
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss)........................... $ (127,765) $ 161,037
Net realized gain on investments and foreign currency
transactions.......................................... 1,988,108 1,178,932
Net change in unrealized appreciation/depreciation of
investments and other assets and liabilities
denominated in foreign currency....................... 1,685,764 (11,802,490)
-------------- ----------------
Total from investment operations....................... 3,546,107 (10,462,521)
-------------- ----------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
In excess of net investment income..................... -- (635,842)
From net realized gain on investments.................. (1,538,329) (2,930,105)
-------------- ----------------
Total dividends and distributions...................... (1,538,329) (3,565,947)
-------------- ----------------
Net increase (decrease) in net assets.................. 2,007,778 (14,028,468)
-------------- ----------------
NET ASSETS
Beginning of period.................................... 46,337,907 60,366,375
-------------- ----------------
End of period.......................................... $ 48,345,685 $ 46,337,907
-------------- ----------------
-------------- ----------------
</TABLE>
See accompanying notes to financial statements
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
APRIL 30, 1999
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
18
<PAGE>
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 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
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.
19
<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 21, 1998, the Fund's Board of Directors declared a long-term capital
gain dividend of $0.5480 per share. The dividend was paid on January 14, 1999 to
shareholders of record on December 31, 1998.
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.
20
<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,
1999 was substantially the same as the cost of securities for financial
statement purposes. Accordingly, net unrealized appreciation of investments of
$10,470,648 was comprised of gross appreciation of $12,372,786 for those
investments having an excess of value over cost and gross depreciation of
$1,902,138 for those investments having an excess of cost over value.
For the six months ended April 30, 1999, aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $17,411,741 and
$17,676,050, 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,
1999 or for the year ended October 31, 1998.
At April 30, 1999, 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 are deemed to be affiliates of the Investment
Adviser under U.S. securities laws, owned 84,215, 6,403 and 2,886 shares,
respectively, of the Fund.
21
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of common stock outstanding throughout each period is
presented below.
<TABLE>
<CAPTION>
FOR THE FOR THE PERIOD
SIX MONTHS NOVEMBER 4, 1994*
ENDED FOR THE YEAR FOR THE YEAR FOR THE YEAR THROUGH
APRIL 30, 1999 ENDED ENDED ENDED OCTOBER 31,
(UNAUDITED) OCTOBER 31, 1998 OCTOBER 31, 1997 OCTOBER 31, 1996 1995
-------------- ---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 16.51 $ 21.50 $ 15.37 $ 13.45 $ 14.04**
-------------- -------- -------- -------- --------
INCOME (LOSS) FROM INVESTMENT
OPERATIONS
Net investment income
(loss)...................... (0.05) 0.06 0.01 (0.03) 0.02
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions................ 1.31 (3.78) 6.33 1.95 (0.06)
-------------- -------- -------- -------- --------
Total from investment
operations.............. 1.26 (3.72) 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................. (0.55) (1.04) (0.21) -- --
-------------- -------- -------- -------- --------
Total dividends and
distributions........... (0.55) (1.27) (0.21) -- --
-------------- -------- -------- -------- --------
CAPITAL SHARE TRANSACTIONS
Offering costs charged to
additional paid-in
capital..................... -- -- -- -- (0.55)
-------------- -------- -------- -------- --------
Net asset value, end of
period...................... $ 17.22 $ 16.51 $ 21.50 $ 15.37 $ 13.45
-------------- -------- -------- -------- --------
-------------- -------- -------- -------- --------
Market value, end of period... $ 14.25 $13.375 $ 17.75 $12.375 $ 11.00
-------------- -------- -------- -------- --------
-------------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN
(a)(b)...................... 11.02% (19.01)% 45.46% 12.50% (21.65)%
-------------- -------- -------- -------- --------
-------------- -------- -------- -------- --------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(in thousands).............. $48,346 $46,338 $60,366 $43,157 $37,756
Ratio of expenses to average
net assets.................. 3.30%(d) 2.91% 2.89%(c) 3.16%(c) 2.99%(d)(e)
Ratio of net investment income
(loss) to average net
assets...................... (0.55)%(d) 0.29% 0.06%(c) (0.23)%(c) 0.13%(d)(e)
Portfolio turnover............ 39% 45% 57% 30% 19%
</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 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 waived a portion of their
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%.
22
<PAGE>
CORPORATE INFORMATION
DIRECTORS
Fred Arthur Rank Packard, Chairman
Bassam Aburdene
Abdulwahab Al-Mulla
Vipul Bhagat
Karen J. Clarke
Albert Francke
Walter M. Noel, Jr.
David C. Patterson
OFFICERS
Karen J. Clarke President, Treasurer & Secretary
Arnab Banerji Executive Vice President
Jeffrey Chowdhry Executive Vice President
James Graham-Maw Vice President
David McIlroy Vice President
INVESTMENT ADVISER
Foreign & Colonial Emerging Markets Limited
Exchange House, 8th Floor
Primrose Street
London, England EC2A 2NY
ADMINISTRATOR
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
PricewaterhouseCoopers 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.
FC99S
<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
