ANNUAL REPORT
December 31, 2002
[MORGAN STANLEY LOGO]
Morgan Stanley
Emerging Markets Debt Fund,
Inc.
Morgan Stanley
Investment Management Inc.
Investment Adviser
Morgan Stanley Emerging Markets Debt Fund, Inc.
DIRECTORS AND OFFICERS
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE DIRECTOR
BOARD OF DIRECTORS
Michael Nugent
Ronald E. Robison DIRECTOR
PRESIDENT AND DIRECTOR
Fergus Reid
John D. Barrett II DIRECTOR
DIRECTOR
Stefanie V. Chang
Thomas P. Gerrity VICE PRESIDENT
DIRECTOR
Lorraine Truten
Gerard E. Jones VICE PRESIDENT
DIRECTOR
James W. Garrett
Joseph J. Kearns TREASURER
DIRECTOR
Mary E. Mullin
Vincent R. McLean SECRETARY
DIRECTOR
Belinda A. Brady
C. Oscar Morong, Jr. ASSISTANT TREASURER
DIRECTOR
INVESTMENT ADVISER
Morgan Stanley Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
ADMINISTRATOR
JPMorgan Chase Bank
73 Tremont Street
Boston, Massachusetts 02108
CUSTODIAN
JPMorgan Chase Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
STOCKHOLDER SERVICING AGENT
American Stock Transfer & Trust Company
59 Maiden Lane
New York, New York 10030
(800) 278-4353
LEGAL COUNSEL
Clifford Chance US LLP
200 Park Avenue
New York, New York 10166
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116
For additional Fund information, including the Fund's net asset value per share
and information regarding the investments comprising the Fund's portfolio,
please call 1-800-221-6726 or visit our website at www.morganstanley.com/im.
(C) 2003 Morgan Stanley
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Letter to Stockholders
Overview
For the year ended December 31, 2002, the Morgan Stanley Emerging Markets Debt
Fund, Inc. (the "Fund") had a total return, based on net asset value per share
of 11.54% compared to 13.11% for the J.P. Morgan Emerging Markets Bond Global
Index (the "Index"). On December 31, 2002, the closing price of the Fund's
shares on the New York Stock Exchange was $7.55, representing a 10.5% discount
to the Fund's net asset value per share.
MARKET REVIEW
The emerging markets debt (EMD) asset class has spent the better part of the
last decade trying to shake its reputation for high risk and volatile return
pattern. With another year of muted volatility and solid returns under its belt
in 2002, it seems likely that EMD could receive some overdue attention by
investors seeking higher yields in 2003.
EMD performed quite well in 2002 due to the substantial decline in U.S. Treasury
yields and contracting yield spreads for most EMD issues. More importantly, a
number of positive trends gained momentum over the course of the year, including
a continued improvement in overall credit quality, a steady decline in
inter-country correlations and continued new allocations to the EMD asset class.
Relative returns were aided by security selection decisions in Russia, security
selection in Indonesian corporates undergoing restructuring and consistent
underweights in both Ecuador and Uruguay. Defensive positioning in Brazil,
during the fourth quarter, detracted from relative returns, as did an overweight
in Venezuelan assets.
The EMD asset class got off to a very strong start in 2002 as spreads tightened
by over 130 basis points during the first five months of the year. The rebound
in the global economy and significant inflows into EMD were major factors
driving this strong absolute performance. Motivated by evidence of a turn in the
global economic cycle and low nominal interest rates in the developed world,
many investors increased their EMD allocations. In addition, oil exporters such
as Ecuador, Mexico, Nigeria, Russia and Venezuela performed particularly well in
this environment as a result of higher than expected oil prices.
The strong start for EMD gave way to a period of heightened volatility during
the late spring and summer months. A left-leaning presidential candidate in
Brazil unsettled the markets, as did a pause in global economic activity and
revelations of corporate accounting scandals. These events rattled investor
confidence in all financial markets and caused EMD to give back all of the gains
earned during the first few months of the year. During the third quarter, the
intensification of market volatility and the acknowledgement that new capital
flows would not be forthcoming to Latin America caused EMD bond prices to fall
further; yield spreads widened more than 300 basis points between May and the
end of September. Fortunately, the asset class reversed course and rallied
strongly during the final quarter of the year, allowing the yield spread on the
overall Index to end the year 15 basis points below its starting level. The year
end EMD rally was largely a response to the improvement in other non-Treasury
bond markets, the sharp turnaround in equity prices in the final few months of
the year and the U.S. Federal Reserve's early November 50 basis point cut in the
Federal funds target rate.
There was tremendous dispersion in the performance of EMD countries during 2002
as a number of countries posted total returns above 20% including Russia, South
Africa, Turkey and Pakistan; while other countries such as Argentina, Brazil and
Uruguay experienced negative returns.
MARKET OUTLOOK
As is usually the case, the high current income provided by EMD bonds may
provide some protection against the potential for rising interest rates within
the developed markets. Moreover, the combination of favorable liquidity
conditions, a rebounding U.S. economy and the continuation of EMD inflows from
new investors may provide a strong foundation supporting the EMD asset class in
2003.
OTHER DEVELOPMENTS
In our ongoing efforts to reduce Fund expenses, the Fund will discontinue the
distribution of first and third quarter stockholder reports. The Fund will
continue to produce and distribute semi-annual and annual stockholder reports.
Additionally, the Fund's portfolio holdings information that was contained in
the first and third quarter reports will be available on our web site, which is
www.morganstanley.com/im, beginning in May of 2003. If you have difficulty
accessing or navigating the site, or if you would like us to send you a copy of
the portfolio holdings, please call us at 1-800-221-6726 and we will be happy to
assist you.
On February 13, 2003, Barton M. Biggs resigned as Director and Chairman of the
Board of Directors of the Fund. On that same day, Mitch Merin, President and
Chief Operating Officer of the Adviser, was elected by the Fund's Board of
Directors to serve as a Director and Chairman of the Board of Directors of the
Fund.
Sincerely,
/s/ Ronald E. Robison
Ronald E. Robison
President and Director
January 2003
2
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Investment Summary (Unaudited)
December 31, 2002
Historical Information
TOTAL RETURN (%)
-----------------------------------------------------------------------------------------
MARKET VALUE(1) NET ASSET VALUE(2) INDEX(3)
-----------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
---------------------------------------------------------------------------------------------------------------------------------
One Year 11.11% 11.11% 11.54% 11.54% 13.11% 13.11%
Five Year 15.20 2.87 30.33 5.44 44.08 7.58
Since Inception* 173.29 11.24 205.87 12.56 167.10 10.97
Past performance is not predictive of future performance.
[CHART]
Returns and Per Share Information
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1993* 1994 1995 1996 1997 1998 1999 2000 2001 2002
------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value Per Share $ 18.96 $ 12.23 $ 12.40 $ 17.31 $ 15.21 $ 7.01 $ 8.36 $ 8.22 $ 8.25 $ 8.45
------------------------------------------------------------------------------------------------------------------------------------
Market Value Per Share $ 18.13 $ 11.38 $ 12.50 $ 15.13 $ 15.38 $ 7.19 $ 6.81 $ 6.88 $ 7.40 $ 7.55
------------------------------------------------------------------------------------------------------------------------------------
Premium/(Discount) (4.4)% (7.0)% 0.8% (12.6)% 1.1% 2.6% (18.5)% (16.3)% (10.3)% (10.5)%
------------------------------------------------------------------------------------------------------------------------------------
Income Dividends $ 0.16 $ 1.49 $ 1.72 $ 1.08 $ 1.27 $ 1.41 $ 1.01 $ 1.08 $ 0.85 $ 0.66
------------------------------------------------------------------------------------------------------------------------------------
Capital Gains Distributions -- $ 0.41 -- -- $ 3.44 $ 2.94 -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Fund Total Return(2) 35.96% (25.95)% 26.85%+ 50.98% 21.71% (33.00)% 36.58% 13.50% 12.50% 11.54%
------------------------------------------------------------------------------------------------------------------------------------
Index Total Return(3) 18.67% (18.35)% 26.38% 35.23% 11.95% (11.54)% 24.18% 14.41% 1.36% 13.11%
------------------------------------------------------------------------------------------------------------------------------------
(1) Assumes dividends and distributions, if any, were reinvested.
(2) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. Total returns do not reflect the deduction of taxes that a
stockholder would pay on Fund distributions or the redemption of fund
shares. These percentages are not an indication of the performance of a
stockholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value
per share of the Fund.
(3) The J.P. Morgan Emerging Markets Bond Global Index (the "Index") tracks
total returns for U.S. dollar-denominated debt instruments issued by
emerging markets sovereign and quasi-sovereign entities: Brady bonds, loans,
Eurobonds and local market instruments. The Index includes coverage of 27
emerging market countries. Since the Index was not available prior to
January 1, 1994, the performance of the J.P. Morgan Emerging Markets Bond
Index is shown for the period July 23, 1993 to December 31, 1993, and used
for purposes of computing cumulative performance of the benchmark index for
that period.
* The Fund commenced operations on July 23, 1993.
+ This return does not include the effect of the rights issued in connection
with the rights offering.
FOREIGN INVESTING INVOLVES CERTAIN RISKS, INCLUDING CURRENCY FLUCTUATIONS
AND CONTROLS, RESTRICTIONS ON FOREIGN INVESTMENTS, LESS GOVERNMENTAL
SUPERVISION AND REGULATION, LESS LIQUIDITY AND THE POTENTIAL FOR MARKET
VOLATILITY AND POLITICAL INSTABILITY. IN ADDITION, INVESTING IN EMERGING
MARKETS MAY INVOLVE A RELATIVELY HIGHER DEGREE OF VOLATILITY.
3
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Portfolio Summary (Unaudited)
December 31, 2002
[CHART]
Allocation of Total Investments*
Debt Securities 99.0%
Short-Term Investments 0.9%
Equity Securities 0.1%
[CHART]
Country Weightings*
Mexico 20.2%
Brazil 16.5%
Russia 16.5%
Venezuela 6.7%
Colombia 5.6%
Other 34.5%
Ten Largest Holdings**
PERCENT OF
TOTAL
INVESTMENTS
---------------------------------------------------------------------
1. Russian Federation
5.00%, 3/31/30 (Russia) 6.2%
2. Russian Federation
12.75%, 6/24/28 (Russia) 6.1
3. United Mexican States, Discount Bond, 'A'
9.875%, 2/1/10 (Mexico) 5.9
4. United Mexican States
8.30%, 8/15/31 (Mexico) 4.8
5. United Mexican States
11.375%, 9/15/16 (Mexico) 4.7
6. Federative Republic of Brazil Bond, 'C' PIK
8.00%, 4/15/14 (Brazil) 3.9%
7. Republic of Colombia
9.75%, 4/9/11 (Colombia) 3.7
8. Government of Malaysia
7.50%, 7/15/11 (Malaysia) 3.4
9. Federative Republic of Brazil Global Bond
8.875%, 4/15/24 (Brazil) 3.3
10. Federative Republic of Brazil Debt Conversion Bond, 'L'
2.625%, 4/15/12 (Brazil) 3.3
----
45.3%
====
* Percent of Total Investments
** Excludes Short-Term Investments
4
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Statement of Net Assets
(SHOWING PERCENTAGE OF TOTAL STATEMENT OF NET ASSETS
VALUE OF INVESTMENTS) December 31, 2002
FACE
AMOUNT VALUE
(000) (000)
--------------------------------------------------------------------------------------------------
DEBT INSTRUMENTS (99.0%)
==================================================================================================
ALGERIA (0.7%)
SOVEREIGN (0.7%)
Algerian Loan Agreement Tranche 1
7.188%, 3/31/10 $ 1,449 $ 1,348
==================================================================================================
ARGENTINA (3.1%)
SOVEREIGN (3.1%)
Republic of Argentina
11.375%, 3/15/10 4,260(d,f) 937
11.75%, 4/7/09 7,090(d,f) 1,595
11.75%, 6/15/15 2,010(d,f) 460
Republic of Argentina Par Bond, 'L-GP'
6.00%, 3/31/23 6,490(d,f) 2,986
--------------------------------------------------------------------------------------------------
5,978
==================================================================================================
BRAZIL (16.5%)
SOVEREIGN (16.5%)
Federative Republic of Brazil
12.00%, 4/15/10 2,610 1,892
12.75%, 1/15/20 1,740 1,218
Federative Republic of Brazil Bond, 'C' PIK
8.00%, 4/15/14 11,569(e) 7,579
Federative Republic of Brazil Bond, 'L'
2.625%, 4/15/09 4,259(a) 2,821
Federative Republic of Brazil Bond, 'Z-L'
2.563%, 4/15/24 6,390(a) 3,850
Federative Republic of Brazil Debt
Conversion Bond, 'L'
2.625%, 4/15/12 11,800(a) 6,371
Federative Republic of Brazil Debt
Conversion Bond, 'RG'
2.625%, 4/15/12 2,570(a) 1,401
Federative Republic of Brazil Global Bond
8.875%, 4/15/24 11,930 6,443
12.25%, 3/6/30 860 598
--------------------------------------------------------------------------------------------------
32,173
==================================================================================================
BULGARIA (2.2%)
SOVEREIGN (2.2%)
Republic of Bulgaria
8.25%, 1/15/15 1,370 1,495
8.25%, 1/15/15 1,699(b) 1,856
Republic of Bulgaria Front-Loaded
Interest Reduction Bond, 'A'
2.688%, 7/28/12 971(a) 916
--------------------------------------------------------------------------------------------------
4,267
==================================================================================================
CHILE (0.9%)
CORPORATE (0.9%)
Empresa Nacional De Petroleo
6.75%, 11/15/12 1,680(b) 1,771
==================================================================================================
COLOMBIA (5.6%)
SOVEREIGN (5.6%)
Republic of Colombia
9.75%, 4/23/09 $ 870 $ 896
9.75%, 4/9/11 6,903 7,127
10.50%, 7/9/10 2,820 2,961
--------------------------------------------------------------------------------------------------
10,984
==================================================================================================
CROATIA (0.7%)
SOVEREIGN (0.7%)
Croatia Government International Bond, 'A'
2.688%, 7/31/10 1,309(a) 1,298
==================================================================================================
DOMINICAN REPUBLIC (0.6%)
SOVEREIGN (0.6%)
Dominican Republic Bond
9.50%, 9/27/06 1,050(b) 1,125
==================================================================================================
EL SALVADOR (0.9%)
SOVEREIGN (0.9%)
Republic of El Salvador
7.75%, 1/24/23 1,690(b) 1,681
==================================================================================================
INDIA (0.0%)
CORPORATE (0.0%)
Surashtra Cement and Chemical Ltd.
19.00% INR 30,000(f,g) --@
==================================================================================================
INDONESIA (1.3%)
CORPORATE (1.3%)
Pindo Deli Finance (Mauritius)
10.75%, 10/1/07 $ 4,500(b,d,f) 1,035
Tjiwi Kimia Finance Mauritius Ltd.
10.00%, 8/1/04 1,280(d,f) 314
Tjiwi Kimia International Global Bond
13.25%, 8/1/49 4,990(d,f) 1,222
--------------------------------------------------------------------------------------------------
2,571
==================================================================================================
IVORY COAST (0.5%)
SOVEREIGN (0.5%)
Republic of Ivory Coast Bond
2.00%, 3/29/18 4,525(c,d,f) 566
Republic of Ivory Coast Front-Loaded
Interest Reduction Bond
2.00%, 3/29/18 3,677(c,d,f) 478
--------------------------------------------------------------------------------------------------
1,044
==================================================================================================
MALAYSIA (3.4%)
SOVEREIGN (3.4%)
Government of Malaysia
7.50%, 7/15/11 5,755 6,616
==================================================================================================
The accompanying notes are an integral part of the financial statements.
5
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Statement of Net Assets (cont'd) STATEMENT OF NET ASSETS
December 31, 2002
FACE
AMOUNT VALUE
(000) (000)
--------------------------------------------------------------------------------------------------
MEXICO (20.1%)
CORPORATE (4.7%)
Pemex Master Trust
8.625%, 2/1/22 $ 1,720(b) $ 1,815
Pemex Project Funding Master Trust
9.125%, 10/13/10 3,800 4,331
Petroleos Mexicanos
9.50%, 9/15/27 2,700 3,024
--------------------------------------------------------------------------------------------------
9,170
--------------------------------------------------------------------------------------------------
SOVEREIGN (15.4%)
United Mexican States (MTN)
8.30%, 8/15/31 8,840 9,352
11.375%, 9/15/16 6,790 9,099
United Mexican States, Discount Bond, 'A'
9.875%, 2/1/10 9,380(e) 11,515
--------------------------------------------------------------------------------------------------
29,966
--------------------------------------------------------------------------------------------------
39,136
==================================================================================================
MOROCCO (2.3%)
SOVEREIGN (2.3%)
Kingdom of Morocco, 'A'
2.56%, 1/5/09 4,883(a) 4,455
==================================================================================================
NIGERIA (1.0%)
SOVEREIGN (1.0%)
Central Bank of Nigeria Par Bond
6.25%, 11/15/20 3,000 2,038
==================================================================================================
PANAMA (2.8%)
SOVEREIGN (2.8%)
Republic of Panama
9.375%, 4/1/29 3,030 3,250
9.625%, 2/8/11 1,250 1,366
Republic of Panama, PDI PIK
2.75%, 7/17/16 1,031 821
--------------------------------------------------------------------------------------------------
5,437
==================================================================================================
PERU (4.8%)
SOVEREIGN (4.8%)
Republic of Peru
9.125%, 2/21/12 3,840 3,763
Republic of Peru Front-
Loaded Interest
Reduction Bond
4.00%, 3/7/17 4,040(a,c) 2,868
Republic of Peru, PDI Bond
4.25%, 3/7/17 3,420(a) 2,668
--------------------------------------------------------------------------------------------------
9,299
==================================================================================================
PHILIPPINES (1.6%)
SOVEREIGN (1.6%)
Republic of Philippines
9.375%, 1/18/17 2,980 3,062
==================================================================================================
POLAND (0.9%)
SOVEREIGN (0.9%)
Republic of Poland
3.75%, 10/27/24 $ 1,980 $ 1,663
==================================================================================================
QATAR (0.8%)
SOVEREIGN (0.8%)
State of Qatar
9.75%, 6/15/30 1,260 1,603
==================================================================================================
RUSSIA (16.5%)
SOVEREIGN (16.5%)
Russian Federation
5.00%, 3/31/30 15,115(c) 11,979
5.00%, 3/31/30 4,684(b,c) 3,712
8.25%, 3/31/10 1,318 1,393
8.75%, 7/24/05 2,900 3,143
12.75%, 6/24/28 9,000 11,925
--------------------------------------------------------------------------------------------------
32,152
==================================================================================================
SOUTH AFRICA (1.7%)
SOVEREIGN (1.7%)
Republic of South Africa
7.375%, 4/25/12 3,140 3,399
==================================================================================================
SOUTH KOREA (1.7%)
CORPORATE (1.1%)
Korea Electric Power Corp.
7.75%, 4/1/13 1,850 2,227
--------------------------------------------------------------------------------------------------
SOVEREIGN (0.6%)
Republic of South Korea
8.875%, 4/15/08 950 1,179
--------------------------------------------------------------------------------------------------
3,406
==================================================================================================
TUNISIA (0.4%)
CORPORATE (0.4%)
Banque Centrale de Tunisie
7.375%, 4/25/12 750 787
==================================================================================================
TURKEY (0.9%)
SOVEREIGN (0.9%)
Republic of Turkey
12.375%, 6/15/09 1,580 1,717
==================================================================================================
UKRAINE (0.4%)
SOVEREIGN (0.4%)
Ukraine Government
11.00%, 3/15/07 680 701
==================================================================================================
VENEZUELA (6.7%)
SOVEREIGN (6.7%)
Republic of Venezuela
9.25%, 9/15/27 8,460 5,721
Republic of Venezuela Debt Conversion Bond, 'DL'
2.31%, 12/18/07 7,262(a) 5,574
The accompanying notes are an integral part of the financial statements.
6
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Statement of Net Assets (cont'd) STATEMENT OF NET ASSETS
December 31, 2002
FACE
AMOUNT VALUE
(000) (000)
--------------------------------------------------------------------------------------------------
VENEZUELA (CONT'D)
SOVEREIGN (CONT'D)
Republic of Venezuela Par Bond
6.75%, 3/31/20 $ 2,270 $ 1,827
--------------------------------------------------------------------------------------------------
13,122
==================================================================================================
TOTAL DEBT INSTRUMENTS
(Cost $191,848) 192,833
==================================================================================================
NO. OF
RIGHTS
--------------------------------------------------------------------------------------------------
RIGHTS (0.1%)
--------------------------------------------------------------------------------------------------
MEXICO
United Mexican States Value
Recovery Rights, 6/30/03
(Cost $--@) 41,421,000(f) 124
==================================================================================================
NO. OF
WARRANTS
--------------------------------------------------------------------------------------------------
WARRANTS (0.0%)
==================================================================================================
COLOMBIA (0.0%)
Occidente y Caribe Celular,
expiring 3/15/04 69,200(b,f) 1
==================================================================================================
NIGERIA (0.0%)
Central Bank of Nigeria,
expiring 11/15/20 6,500(a,f) --@
==================================================================================================
VENEZUELA (0.0%)
Republic of Venezuela,
expiring 4/15/20 11,350(f) --@
==================================================================================================
TOTAL WARRANTS
(Cost $44) 1
==================================================================================================
FACE
AMOUNT
(000)
--------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (0.9%)
==================================================================================================
UNITED STATES (0.9%)
REPURCHASE AGREEMENT (0.9%)
J.P. Morgan Securities Inc.,
1.05%, dated 12/31/02,
due 1/02/03 (Cost $1,803) $ 1,803(h) 1,803
==================================================================================================
VALUE
(000)
--------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100%)
(Cost $193,695) $ 194,761
==================================================================================================
AMOUNT
(000)
--------------------------------------------------------------------------------------------------
OTHER ASSETS
Cash $ 277
Receivable for
Investments Sold 5,805
Interest Receivable 3,971
Due from Broker 229
Other 12 10,294
==================================================================================================
LIABILITIES
Payable For:
Investments Purchased (7,657)
Dividends Declared (3,307)
Reverse Repurchase
Agreements (7,399)
Investment Advisory Fees (158)
Directors' Fees and
Expenses (82)
Stockholder Reporting
Expenses (76)
Professional Fees (35)
Administrative Fees (23)
Custodian Fees (10) (18,747)
==================================================================================================
NET ASSETS
Applicable to 22,046,681 issued and
outstanding $ 0.01 par value shares
(100,000,000 shares authorized) $ 186,308
==================================================================================================
NET ASSET VALUE PER SHARE $ 8.45
==================================================================================================
AT DECEMBER 31, 2002, NET ASSETS CONSISTED OF:
Common Stock $ 220
Paid-in Capital 279,080
Undistributed (Distributions in Excess of) Net
Investment Income (892)
Accumulated Net Realized Gain (Loss) (92,805)
Unrealized Appreciation (Depreciation) on
Investments, Futures and Foreign Currency
Translations 705
==================================================================================================
TOTAL NET ASSETS $ 186,308
==================================================================================================
The accompanying notes are an integral part of the financial statements.
7
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Statement of Net Assets (cont'd) STATEMENT OF NET ASSETS
December 31, 2002
(a) -- Variable/floating rate security - rate disclosed is as of December 31,
2002.
(b) -- 144A Security - Certain conditions for public sale may exist.
(c) -- Step Bond - coupon rate increases in increments to maturity. Rate
disclosed is as of December 31, 2002. Maturity date disclosed is ultimate
maturity.
(d) -- Security is in default.
(e) -- Denotes all or a portion of securities subject to repurchase under the
Reverse Repurchase Agreements as of December 31, 2002. See note A-4 to
financial statements
(f) -- Non-income producing.
(g) -- Security valued at fair value - see note A-1 to financial statements. At
December 31, 2002, the Fund held a fair-valued security with a market
value of $0, representing 0.0% of net assets.
(h) -- The repurchase agreement is fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of this
statement of net assets. The investment in the repurchase agreement is
through participation in a joint account with affiliated funds.
@ -- Value is less than $500.
MTN -- Medium Term Note
PDI -- Past Due Interest.
PIK -- Payment-in-kind. Income may be paid in additional securities or cash at
the discretion of the issuer.
INR -- Indian Rupee
===================================================================
FUTURES CONTRACTS:
The Fund had the following futures contracts open at period end:
NUMBER NOTIONAL UNREALIZED
OF VALUE EXPIRATION GAIN (LOSS)
CONTRACTS (000) DATE (000)
--------------------------------------------------------------------
Short:
5 Year U.S.
Treasury Note 200 $ 22,650 March-03 $ (367)
===================================================================
The accompanying notes are an integral part of the financial statements.
8
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Financial Statements
Statement of Operations
YEAR ENDED
DECEMBER 31, 2002
(000)
------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest (net of $75 of foreign taxes withheld) $ 17,283
==========================================================================================
EXPENSES
Investment Advisory Fees 1,830
Administrative Fees 203
Stockholder Reporting Expenses 131
Professional Fees 101
Interest Expense on Reverse Repos 76
Custodian Fees 39
Stockholder Servicing Fees 31
Bank Overdraft Expense 14
Directors' Fees and Expenses 13
Other Expenses 8
==========================================================================================
TOTAL EXPENSES 2,446
==========================================================================================
NET INVESTMENT INCOME 14,837
==========================================================================================
NET REALIZED GAIN (LOSS) ON:
Investments 5,350
Futures (1,124)
==========================================================================================
NET REALIZED GAIN (LOSS) 4,226
==========================================================================================
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON:
Investments 239
Foreign Currency Translations 11
Futures (367)
==========================================================================================
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (117)
==========================================================================================
NET REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 4,109
==========================================================================================
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 18,946
==========================================================================================
Statement of Changes in Net Assets
YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
(000) (000)
-------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income $ 14,837 $ 17,659
Net Realized Gain (Loss) 4,226 (2,457)
Change in Unrealized Appreciation (Depreciation) (117) 4,317
===============================================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 18,946 19,519
===============================================================================================================================
Distributions from and/or in excess of:
Net Investment Income (14,551) (18,740)
===============================================================================================================================
TOTAL INCREASE (DECREASE) 4,395 779
===============================================================================================================================
Net Assets:
Beginning of Period 181,913 181,134
===============================================================================================================================
END OF PERIOD (INCLUDING UNDISTRIBUTED (DISTRIBUTIONS IN EXCESS OF) NET INVESTMENT
INCOME OF $(892) AND $(1,132), RESPECTIVELY) $ 186,308 $ 181,913
===============================================================================================================================
The accompanying notes are an integral part of the financial statements.
9
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Financial Statements
Statement of Cash Flows
YEAR ENDED
DECEMBER 31, 2002
(000)
-------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Proceeds from Sales and Maturities of Long-Term Investments $ 286,267
Purchases of Long-Term Investments (277,277)
Net Increase (Decrease) in Short-Term Investments (1,803)
Net Realized Gain (Loss) on Futures Contracts (1,124)
Net Investment Income 14,837
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net (Increase) Decrease in Receivables Related to Operations 399
Net Increase (Decrease) in Payables Related to Operations (47)
Accretion/Amortization of Discounts and Premiums (1,993)
-------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 19,259
-------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Received (Paid) for Reverse Repurchase Agreements (2,594)
Cash Distributions Paid (16,094)
-------------------------------------------------------------------------------------------------------------------------
Net Cash Used for Financing Activities (18,688)
-------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash 571
CASH AT BEGINNING OF PERIOD (294)
-------------------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 277
=========================================================================================================================
The accompanying notes are an integral part of the financial statements.
10
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Selected Per Share Data and Ratios
Financial Highlights
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2002+ 2001 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 8 .25 $ 8.22 $ 8.36 $ 7.01 $ 15.21
------------------------------------------------------------------------------------------------------------------------------
Net Investment Income 0.67 0.80 1.23 1.09 1.27
Net Realized and Unrealized Gain (Loss) on
Investments 0.19 0.08 (0.29) 1.27 (5.12)
------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.86 0.88 0.94 2.36 (3.85)
------------------------------------------------------------------------------------------------------------------------------
Distributions from and/or in excess of:
Net Investment Income (0.66) (0.85) (1.08) (1.01) (1.41)
Net Realized Gain -- -- -- -- (2.94)
------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.66) (0.85) (1.08) (1.01) (4.35)
------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 8.45 $ 8.25 $ 8.22 $ 8.36 $ 7.01
==============================================================================================================================
PER SHARE MARKET VALUE, END OF PERIOD $ 7.55 $ 7.40 $ 6.88 $ 6.81 $ 7.19
==============================================================================================================================
TOTAL INVESTMENT RETURN:
Market Value 11.11% 20.65% 16.49% 8.55% (32.04)%
Net Asset Value(1) 11.54% 12.50% 13.50% 36.58% (33.00)%
==============================================================================================================================
RATIOS, SUPPLEMENTAL DATA:
------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS) $ 186,308 $ 181,913 $ 181,134 $ 184,269 $ 153,084
------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 1.34% 1.61% 2.32% 2.28% 2.75%
Ratio of Expenses Excluding Interest Expense to
Average Net Assets 1.29% 1.41% 1.34% 1.35% 1.47%
Ratio of Net Investment Income to Average Net
Assets 8.11% 9.73% 14.31% 14.53% 12.50%
Portfolio Turnover Rate 149% 233% 272% 178% 308%
------------------------------------------------------------------------------------------------------------------------------
(1) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. This percentage is not an indication of the performance of a
stockholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value
per share of the Fund.
+ Per share amounts for the year ended December 31, 2002 are based on average
shares outstanding.
The accompanying notes are an integral part of the financial statements.
11
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Notes to Financial Statements
December 31, 2002
Morgan Stanley Emerging Markets Debt Fund, Inc. (the "Fund") was
incorporated in Maryland on May 6, 1993, and is registered as a non-diversified,
closed-end management investment company under the Investment Company Act of
1940, as amended. The Fund's primary investment objective is to produce high
current income and as a secondary objective, to seek capital appreciation,
through investments primarily in debt securities.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with accounting principles generally accepted in the United States of
America. Such policies are consistently followed by the Fund in the preparation
of its financial statements. Accounting principles generally accepted in the
United States of America may require management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results may differ from those estimates.
1. SECURITY VALUATION: In valuing the Fund's assets, all listed securities for
which market quotations are readily available are valued at the last sale
price on the valuation date, or if there was no sale on such date, at the
mean between the current bid and asked prices or the bid price if only bid
quotations are available. Securities which are traded over-the-counter are
valued at the mean of the current bid and asked prices obtained from
reputable brokers. Securities may be valued by independent pricing
services. The prices provided by a pricing service take into account broker
dealer market price quotations for institutional size trading in similar
groups of securities, security quality, maturity, coupon and other security
characteristics as well as any developments related to the specific
securities. Short-term securities which mature in 60 days or less are
valued at amortized cost. For all other securities and investments for
which market values are not readily available, including restricted
securities, and where prices determined in accordance with the
aforementioned procedures are not reflective of fair market value, values
are determined in good faith, under fair valuation procedures adopted by
the Board of Directors, although actual calculations may be done by others.
2. REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements under
which the Fund lends excess cash and takes possession of securities with an
agreement that the counterparty will repurchase such securities. In
connection with transactions in repurchase agreements, a bank as custodian
for the Fund takes possession of the underlying securities (collateral),
with a market value at least equal to the amount of the repurchase
transaction, including principal and accrued interest. To the extent that
any repurchase transaction exceeds one business day, the value of the
collateral is marked-to-market on a daily basis to determine the adequacy
of the collateral. In the event of default on the obligation to repurchase,
the Fund has the right to liquidate the collateral and apply the proceeds
in satisfaction of the obligation. In the event of default or bankruptcy by
the counterparty to the agreement, realization and/or retention of the
collateral or proceeds may be subject to legal proceedings.
The Fund, along with other affiliated investment companies, may utilize a
joint trading account for the purpose of entering into one or more
repurchase agreements.
3. REVERSE REPURCHASE AGREEMENTS: The Fund may enter into reverse repurchase
agreements with institutions that the Fund's investment adviser has
determined are creditworthy. Under a reverse repurchase agreement, the Fund
sells securities and agrees to repurchase them at a mutually agreed upon
date and price. Reverse repurchase agreements involve the risk that the
market value of the securities purchased with the proceeds from the sale of
securities received by the Fund may decline below the price of the
securities the Fund is obligated to repurchase. Reverse repurchase
agreements also involve credit risk with the counterparty to the extent
that the value of securities subject to repurchase exceed the Fund's
liability under the reverse repurchase agreement. Securities subject to
repurchase under reverse repurchase agreements, if any, are designated as
such in the Statement of Net Assets.
At December 31, 2002, the Fund had reverse repurchase agreements
outstanding with Lehman Brothers as follows:
MATURITY IN
LESS THAN
365 DAYS
-----------------------------------------------------------
Value of Securities Subject to Repurchase $ 7,398,000
Liability Under Reverse Repurchase Agreement $ 7,399,000
Weighted Average Days to Maturity 10.2
The weighted average daily balance of reverse repurchase agreements
outstanding during the year ended December 31, 2002, was approximately
$6,518,000 at a weighted average interest rate of 1.77%.
12
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Notes to Financial
Statements (cont'd) December 31, 2002
4. FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into
U.S. dollars at the mean of the bid and asked prices of such currencies
against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates of
exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the period, the Fund does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from
changes in the market prices of the securities held at period end.
Similarly, the Fund does not isolate the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market
prices of securities sold during the period. Accordingly, realized and
unrealized foreign currency gains (losses) due to securities transactions
are included in the reported net realized and unrealized gains (losses) on
investment transactions and balances.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of foreign
currency exchange contracts, disposition of foreign currencies, currency
gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid. Net
unrealized currency gains (losses) from valuing foreign currency
denominated assets and liabilities at period end exchange rates are
reflected as a component of unrealized appreciation (depreciation) on
investments and foreign currency translations in the Statement of Net
Assets. The change in net unrealized currency gains (losses) on foreign
currency translations for the period is reflected in the Statement of
Operations.
A significant portion of the Fund's net assets consist of securities of
issuers located in emerging markets or which are denominated in foreign
currencies. Such investments may be concentrated in a limited number of
countries and regions and may vary throughout the year. Changes in currency
exchange rates will affect the value of and investment income from foreign
currency denominated securities. Emerging market securities are often
subject to greater price volatility, limited capitalization and liquidity,
and higher rates of inflation than U.S. securities. In addition, emerging
market securities may be subject to substantial governmental involvement in
the economy and greater social, economic and political uncertainty.
The Fund may use derivatives to achieve its investment objectives. The Fund may
engage in transactions in futures contracts on foreign currencies, stock
indices, as well as in options, swaps and structured notes. Consistent with the
Fund's investment objectives and policies, the Fund may use derivatives for
non-hedging as well as hedging purposes.
Following is a description of derivative instruments that the Fund has utilized
and their associated risks:
5. FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into foreign
currency exchange contracts generally to attempt to protect securities and
related receivables and payables against changes in future foreign exchange
rates and, in certain situations, to gain exposure to a foreign currency. A
foreign currency exchange contract is an agreement between two parties to
buy or sell currency at a set price on a future date. The market value of
the contract will fluctuate with changes in currency exchange rates. The
contract is marked-to-market daily and the change in market value is
recorded by the Fund as unrealized gain or loss. The Fund records realized
gains or losses when the contract is closed equal to the difference between
the value of the contract at the time it was opened and the value at the
time it was closed. Risk may arise upon entering into these contracts from
the potential inability of counterparties to meet the terms of their
contracts and is generally limited to the amount of unrealized gain on the
contracts, if any, at the date of default. Risks may also arise from
unanticipated movements in the value of a foreign currency relative to the
U.S. dollar.
6. STRUCTURED SECURITIES: The Fund may invest in interests in entities
organized and operated solely for the purpose of restructuring the
investment characteristics of sovereign debt obligations. This type of
restructuring involves the deposit with or purchase by an entity of
specified instruments and the issuance by that entity of one or more
classes of securities ("Structured Securities") backed by, or
13
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Notes to Financial
Statements (cont'd) December 31, 2002
representing interests in, the underlying instruments. Structured
Securities generally will expose the Fund to credit risks of the underlying
instruments as well as of the issuer of the Structured Security. Structured
Securities are typically sold in private placement transactions with no
active trading market. Investments in Structured Securities may be more
volatile than their underlying instruments, however, any loss is limited to
the amount of the original investment.
7. FUTURES: The Fund may purchase and sell futures contracts. Futures
contracts provide for the sale by one party and purchase by another party
of a specified amount of a specified security, index, instrument or basket
of instruments. Futures contracts (secured by cash, government or other
liquid securities deposited with brokers or custodians as "initial margin")
are valued based upon their quoted daily settlement prices; changes in
initial settlement value (represented by cash paid to or received from
brokers as "variation margin") are accounted for as unrealized appreciation
(depreciation). When futures contracts are closed, the difference between
the opening value at the date of purchase and the value at closing is
recorded as realized gains or losses in the Statement of Operations.
The Fund may use futures contracts in order to manage its exposure to the
stock and bond markets, to hedge against unfavorable changes in the value
of securities or to remain fully invested and to reduce transaction costs.
Futures contracts involve market risk in excess of the amounts recognized
in the Statement of Net Assets. Risks arise from the possible movements in
security values underlying these instruments. The change in value of
futures contracts primarily corresponds with the value of their underlying
instruments, which may not correlate with the change in value of the hedged
investments. In addition, there is the risk that the Fund may not be able
to enter into a closing transaction because of an illiquid secondary
market.
8. OVER-THE-COUNTER TRADING: Securities and other derivative instruments that
may be purchased or sold by the Fund may consist of instruments not traded
on an exchange. The risk of nonperformance by the obligor on such an
instrument may be greater, and the ease with which the Fund can dispose of
or enter into closing transactions with respect to such an instrument may
be less, than in the case of an exchange-traded instrument. In addition,
significant disparities may exist between bid and asked prices for
derivative instruments that are not traded on an exchange. Derivative
instruments not traded on exchanges are also not subject to the same type
of government regulation as exchange traded instruments, and many of the
protections afforded to participants in a regulated environment may not be
available in connection with such transactions.
9. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Interest
income is recognized on the accrual basis and discounts and premiums on
investments purchased are accreted or amortized in accordance with the
effective yield method over their respective lives, except where collection
is in doubt. Distributions to stockholders are recorded on the ex-dividend
date.
B. ADVISER: Morgan Stanley Investment Management Inc. (the "Adviser") provides
investment advisory services to the Fund under the terms of an Investment
Advisory and Management Agreement (the "Agreement"). Under the Agreement, the
Adviser is paid a fee computed weekly and payable monthly at an annual rate of
1.00% of the Fund's average weekly net assets.
C. ADMINISTRATOR: JPMorgan Chase Bank, through its corporate affiliate
J.P. Morgan Investor Services Co. (the "Administrator"), provides administrative
services to the Fund under an Administration Agreement. Under the old
Administration Agreement, effective through September 30, 2002, the
Administrator was paid a fee computed weekly and payable monthly at an annual
rate of 0.06% of the Fund's average weekly net assets, plus $100,000 per annum.
Effective October 1, 2002, under the new Administration Agreement, the
Administrator is paid a fee computed weekly and payable monthly at an annual
rate of 0.02435% of the Fund's average weekly net assets, plus $24,000 per
annum. In addition, the Fund is charged for certain out-of-pocket expenses
incurred by the Administrator on its behalf.
D. CUSTODIAN: JPMorgan Chase Bank and its affiliates serve as custodian for
the Fund. Custody fees are payable monthly based on assets held in custody,
investment purchase and sales activity and account maintenance fees, plus
reimbursement for certain out-of-pocket expenses.
14
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Notes to Financial
Statements (cont'd) December 31, 2002
E. FEDERAL INCOME TAXES: It is the Fund's intention to continue to qualify as
a regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the financial
statements. Dividend income and distributions to stockholders are recorded on
the ex-dividend date.
The Fund may be subject to taxes imposed by countries in which it invests. Such
taxes are generally based on income and/or capital gains earned or repatriated.
Taxes are accrued and applied to net investment income, net realized gains and
net unrealized appreciation as such income and/or gains are earned.
The tax character of distributions paid may differ from the character of
distributions shown on the Statement of Changes in Net Assets due to short-term
capital gains being treated as ordinary income for tax purposes. The tax
character of distributions paid during 2002 and 2001 was as follows:
2002 DISTRIBUTIONS 2001 DISTRIBUTIONS
PAID FROM: PAID FROM:
(000) (000)
--------------------------- -------------------------
LONG-TERM LONG-TERM
ORDINARY CAPITAL ORDINARY CAPITAL
INCOME GAIN INCOME GAIN
--------------------------------------------------------
$ 14,551 $ -- $ 18,740 $ --
The amount and character of income and capital gain distributions to be paid by
the Fund are determined in accordance with Federal income tax regulations, which
may differ from accounting principles generally accepted in the United States of
America. The book/tax differences are considered either temporary or permanent
in nature.
Temporary differences are attributable to differing book and tax treatments for
the timing of the recognition of gains and losses on certain investment
transactions and the timing of the deductibility of certain expenses.
Permanent differences may result in reclassifications among undistributed net
investment income (loss), accumulated net realized gain (loss) and paid-in
capital. Adjustments for permanent book-tax differences, if any, are not
reflected in ending undistributed net investment income (loss) for the purpose
of calculating net investment income (loss) per share in the financial
highlights.
At December 31, 2002, the components of distributable earnings on a tax basis
were are follows:
UNDISTRIBUTED UNDISTRIBUTED
ORDINARY INCOME LONG-TERM CAPITAL GAIN
(000) (000)
----------------------------------------------------
$ 1,145 $ --
----------------------------------------------------
At December 31, 2002, the U.S. Federal income tax cost basis of securities was
approximately $194,723,000 and, accordingly, net unrealized appreciation for
U.S. Federal income tax purposes was $38,000, of which $13,363,000 related to
appreciated securities and $13,325,000 related to depreciated securities.
At December 31, 2002, the Fund had a capital loss carryforward for U.S. Federal
income tax purposes of approximately $92,832,000 available to offset future
capital gains, of which $75,550,000 will expire on December 31, 2006,
$13,135,000 will expire on December 31, 2007 and $4,147,000 will expire on
December 31, 2009. To the extent that capital gains are offset, such gains will
not be distributed to the stockholders. During the year ended December 31, 2002,
the Fund utilized capital loss carryforwards for U.S. Federal income tax
purposes of $1,887,000.
Net capital and currency losses incurred after October 31, and within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. For the year ended December 31, 2002, the Fund did not defer any
post-October losses to January 1, 2003, for U.S. Federal income tax purposes.
F. OTHER: During the year ended December 31, 2002, the Fund made purchases and
sales totaling approximately $278,726,000 and $286,625,000 respectively, of
investment securities other than long-term U.S. Government securities, purchased
options and short-term investments. There were no purchases or sales of
long-term U.S. Government securities.
These investments may be traded by one market maker who may also be utilized by
the Fund to provide pricing information used to value such securities. The
amounts which will be realized upon disposition of the securities may differ
from the value reflected on the Statement of Net Assets and the differences
could be material.
Each Director of the Fund who is not an officer of the Fund or an affiliated
person as defined under the Investment Company Act of 1940, as amended, may
elect to participate in the Directors' Deferred Compensation Plan (the "Plan").
Under the Plan, such Directors may elect to defer payment of a percentage
15
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Notes to Financial
Statements (cont'd) December 31, 2002
of their total fees earned as a Director of the Fund. These deferred portions
are treated, based on an election by the Director, as if they were either
invested in the Fund's shares or invested in U.S. Treasury Bills, as defined
under the Plan. At December 31, 2002, the deferred fees payable under the Plan
totaled $81,000 and are included in Payable for Directors' Fees and Expenses on
the Statement of Net Assets. The deferred portion of Directors' Fees and
Expenses shown on the Statement of Operations is impacted by fluctuations in the
market value of the investments selected by each Director. For the fiscal year
ended December 31, 2002, Directors' Fees and Expenses were increased by $9,399
due to these fluctuations.
On December 13, 2002, the Officers of the Fund, pursuant to authority granted by
the Board of Directors declared a distribution of $0.15 per share, derived from
net investment income, payable on January 10, 2003, to stockholders of record on
December 24, 2002.
16
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Independent Auditors' Report
December 31, 2002
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
We have audited the accompanying statement of net assets of Morgan Stanley
Emerging Markets Debt Fund, Inc. (the "Fund") as of December 31, 2002, and the
related statements of operations and cash flows for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the three years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for each of the two years in the period ended
December 31, 1999 were audited by other auditors whose report, dated February
18, 2000, expressed an unqualified opinion on those financial highlights.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 2002 by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley Emerging Markets Debt Fund, Inc. at December 31, 2002, the results of
its operations and its cash flows for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the three years in the period then ended, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 7, 2003
17
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Director and Officer Information
(Unaudited) Overview
Independent Directors:
NUMBER OF
TERM OF PORTFOLIOS IN
OFFICE AND FUND
POSITION(S) LENGTH OF PRINCIPAL COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH TIME OCCUPATION(S) DURING OVERSEEN BY OTHER DIRECTORSHIPS HELD
DIRECTOR REGISTRANT SERVED* PAST 5 YEARS DIRECTOR** BY DIRECTOR
------------------------ ---------- ----------- -------------------- -------------- ------------------------
John D. Barrett II (67) Director Director Chairman and 71 Director of the Ashforth
565 Fifth Avenue since Director of Barrett Company (real estate).
New York, NY 10017 1996 Associates, Inc.
(investment
counseling).
Thomas P. Gerrity (61) Director Director Professor of 71 Director, ICG Commerce,
219 Grays Lane since Management, formerly Inc.; Sunoco; Fannie Mae;
Haverford, PA 19041 2001 Dean, Wharton School Reliance Group Holdings,
of Business, Inc., CVS Corporation and
University of Knight-Ridder, Inc.
Pennsylvania;
formerly Director,
IKON Office
Solutions, Inc.,
Fiserv, Digital
Equipment
Corporation,
Investor Force
Holdings, Inc. and
Union Carbide
Corporation.
Gerard E. Jones (65) Director Director Of Counsel, Shipman 72 Director of Tractor
Shipman & Goodwin, LLP since & Goodwin, LLP (law Supply Company, Tiffany
43 Arch Street 1996 firm). Foundation, and
Greenwich, CT 06830 and Fairfield County
Foundation. Director of
the India Magnum Fund Ltd.
Joseph J. Kearns (60) Director Director Investment 71 Director, Electro Rent
Kearns & Associates LLC since consultant; formerly Corporation and The Ford
PMB 754 2001 CFO of The J. Paul Family Foundation.
23852 Pacific Coast Hwy. Getty Trust.
Malibu, CA 90265
Vincent R. McLean (71) Director Director Formerly, Executive 71 Director, Banner Life
702 Shackamaxon Drive since Vice President, Insurance Co.; William
Westfield, NJ 07090 2001 Chief Financial Penn Life Insurance
Officer, Director Company of New York.
and Member of the
Executive Committee
of Sperry
Corporation (now
part of
Unisys Corporation).
C. Oscar Morong, Jr. Director Director Managing Director, 71 Trustee of the mutual
(67) since Morong Capital funds in the Smith
1385 Outlook Drive West 2001 Management; Barney/CitiFunds fund
Mountainside, NJ 07092 formerly, Senior complex.
Vice President and
Investment Manager
for CREF, TIAA-CREF
Investment
Management, Inc.
(investment
management);
formerly, Director,
The Indonesia Fund
(mutual fund).
William G. Morton, Jr. Director Director Chairman Emeritus 71 Director of Radio Shack
(65) since and former Chief Corporation (electronics).
304 Newbury Street, #560 2000 Executive Officer of
Boston, MA 02115 Boston Stock
Exchange.
Michael Nugent (66) Director Director General Partner, 194 Director of various
c/o Triumph Capital, L.P. since Triumph Capital, business organizations;
237 Park Avenue 2001 L.P. (private Chairman of the Insurance
New York, NY 10017 investment Committee and Director or
partnership); Trustee of the retail
formerly, Vice families of funds advised
President, Bankers by Morgan Stanley
Trust Company and BT Investment Advisors Inc.
Capital Corporation.
Fergus Reid (70) Director Director Chairman and Chief 72 Trustee and Director of
85 Charles Colman Blvd. since Executive Officer of approximately 30
Pawling, NY 12564 1996 Lumelite Plastics investment companies in
Corporation. the JPMorgan Funds
complex managed by
JPMorgan Investment
Management Inc. Director
of the India Magnum Fund
Ltd.
18
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Director and Officer
Information (cont'd) Overview
Interested Directors:
NUMBER OF
TERM OF PORTFOLIOS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DIRECTOR REGISTRANT SERVED* DURING PAST 5 YEARS DIRECTOR** HELD BY DIRECTOR
------------------------ -------------- ----------- ----------------------------- -------------- -------------------
Barton M. Biggs (70) Chairman Chairman Chairman, Director and 72 Member of the Yale
1221 Avenue of the and Director and Director Managing Director of Morgan Development Board
Americas since Stanley Investment Management
New York, NY 10020 1996 Inc. and Chairman and
Director of Morgan Stanley
Investment Management
Limited; Managing Director of
Morgan Stanley & Co.
Incorporated; Director and
Chairman of the Board of
various U.S. registered
companies managed by Morgan
Stanley Investment Management
Inc.
Ronald E. Robison (63) President President President and Trustee; Chief 72
1221 Avenue of the and Director and Director Global Operations Officer and
Americas since Managing Director of Morgan
New York, NY 10020 2001 Stanley Investment
Management, Inc.; Managing
Director of Morgan Stanley &
Co. Incorporated; formerly,
Managing Director and Chief
Operating Officer of TCW
Investment Management
Company; Director and
President of various funds in
the Fund Complex.
----------
* Each Director serves an indefinite term, until his or her successor is
elected.
** The Fund Complex includes all funds advised by Morgan Stanley Investment
Management Inc. and any funds that have an investment advisor that is an
affiliated entity of Morgan Stanley Investment Management Inc. (including,
but not limited to, Morgan Stanley Investments LP, Morgan Stanley Investment
Advisors Inc. and Van Kampen Asset Management Inc.).
19
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Director and Officer
Information (cont'd) Overview
Officers:
POSITION(S) TERM OF OFFICE
HELD WITH AND LENGTH OF
NAME, AGE AND ADDRESS OF EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
------------------------------------------ -------------- ------------------ ---------------------------------------------
Ronald E. Robison (63) President President and Chief Global Operations Officer and Managing
Morgan Stanley Investment Management Inc. and Director Director since Director of Morgan Stanley Investment
1221 Avenue of the Americas 2001 Management Inc.; Director and President of
New York, NY 10020 various U.S. registered investment companies
managed by Morgan Stanley Investment
Management Inc.; previously, Managing
Director and Chief Operating Officer of
TCW Investment Management Company.
Stefanie V. Chang (36) Vice Vice President Executive Director of Morgan Stanley & Co.
Morgan Stanley Investment Management Inc. President since 1997 Incorporated and Morgan Stanley Investment
1221 Avenue of the Americas Management Inc.; formerly, practiced law
New York, NY 10020 with New York law firm of Rogers & Wells
(now Clifford Chance US LLP); Vice President
of certain funds in the Fund Complex.
Lorraine Truten (41) Vice Vice President Executive Director of Morgan Stanley
Morgan Stanley Investment Management Inc. President since 2001 Investment Management Inc.; Head of Global
1221 Avenue of the Americas Client Services, Morgan Stanley Investment
New York, NY 10020 Management Inc.; President, Morgan Stanley
Fund Distribution, Inc. formerly, President
of Morgan Stanley Institutional Fund Trust;
Vice President of certain funds in the Fund
Complex.
Mary E. Mullin (35) Secretary Secretary since Vice President of Morgan Stanley & Co.,
Morgan Stanley Investment Management Inc. 1999 Incorporated and Morgan Stanley Investment
1221 Avenue of the Americas Management, Inc.; formerly, practiced law
New York, NY 10020 with the New York law firms of McDermott,
Will & Emery and Skadden, Arps, Slate,
Meagher & Flom LLP; Secretary of certain
funds in the Fund Complex.
James W. Garrett (34) Treasurer Treasurer since Executive Director of Morgan Stanley & Co.
Morgan Stanley Investment Management Inc. 2002 Incorporated and Morgan Stanley Investment
1221 Avenue of the Americas Management Inc. and Treasurer of various
New York, NY 10020 U.S. registered investment companies managed
by Morgan Stanley Investment Management
Inc.; formerly, with Price Waterhouse LLP
(now PricewaterhouseCoopers LLP).
Belinda A. Brady (34) Assistant Assistant Fund Administration Senior Manager, J.P.
J.P. Morgan Investor Services Co. Treasurer Treasurer since Morgan Investor Services Co. (formerly Chase
73 Tremont Street 2001 Global Funds Services Company); formerly,
Boston, MA 02108-3913 Senior Auditor at Price Waterhouse LLP (now
PricewaterhouseCoopers LLP). Assistant
Treasurer of certain funds in the Fund
Complex.
----------
* Each Officer serves an indefinite term, until his or her successor is
elected.
20
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Dividend Reinvestment and Cash Purchase Plan
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
each stockholder will be deemed to have elected, unless American Stock Transfer
& Trust Company (the "Plan Agent") is otherwise instructed by the stockholder in
writing, to have all distributions automatically reinvested in Fund shares.
Participants in the Plan have the option of making additional voluntary cash
payments to the Plan Agent, annually, in any amount from $100 to $3,000, for
investment in Fund shares.
Dividend and capital gain distributions will be reinvested on the
reinvestment date in full and fractional shares. If the market price per share
equals or exceeds net asset value per share on the reinvestment date, the Fund
will issue shares to participants at net asset value. If net asset value is less
than 95% of the market price on the reinvestment date, shares will be issued at
95% of the market price. If net asset value exceeds the market price on the
reinvestment date, participants will receive shares valued at market price. The
Fund may purchase shares of its Common Stock in the open market in connection
with dividend reinvestment requirements at the discretion of the Board of
Directors. Should the Fund declare a dividend or capital gain distribution
payable only in cash, the Plan Agent will purchase Fund shares for participants
in the open market as agent for the participants.
The Plan Agent's fees for the reinvestment of dividends and distributions
will be paid by the Fund. However, each participant's account will be charged a
pro rata share of brokerage commissions incurred on any open market purchases
effected on such participant's behalf. A participant will also pay brokerage
commissions incurred on purchases made by voluntary cash payments. Although
stockholders in the Plan may receive no cash distributions, participation in the
Plan will not relieve participants of any income tax which may be payable on
such dividends or distributions.
In the case of stockholders, such as banks, brokers or nominees, that hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
stockholder as representing the total amount registered in the stockholder's
name and held for the account of beneficial owners who are participating in the
Plan.
Stockholders who do not wish to have distributions automatically reinvested
should notify the Plan Agent in writing. There is no penalty for
non-participation or withdrawal from the Plan, and stockholders who have
previously withdrawn from the Plan may rejoin at any time. Requests for
additional information or any correspondence concerning the Plan should be
directed to the Plan Agent at:
Morgan Stanley Emerging Markets Debt Fund, Inc.
American Stock Transfer & Trust Company
Dividend Reinvestment and Cash Purchase Plan
59 Maiden Lane
New York, New York 10030
1-800-278-4353
21