[ANNOTATED FORM N-CSR FOR ANNUAL REPORTS]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file
number: 811-07694
-------------------------------------------------
Morgan Stanley Emerging Markets Debt Fund, Inc.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
1221 Avenue of the America's 22nd Floor New York, NY 10020
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, 33rd Floor New York, New York 10020
--------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area
code: 1-800-221-6726
-----------------------------------
Date of fiscal year
end: 12/31
--------------------------------------------------------------
Date of reporting
period: 12/31
--------------------------------------------------------------
ITEM 1. REPORTS TO STOCKHOLDERS.
The Fund's as annual report transmitted to shareholders pursuant to Rule 30e-1
under the Investment Company Act of 1940 is as follows: [Provide annual report.]
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
DIRECTORS
Charles A. Fiumefreddo
Michael Bozic
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael Nugent
Philip J. Purcell
Fergus Reid
OFFICERS
Charles A. Fiumefreddo
CHAIRMAN OF THE BOARD
Mitchell M. Merin
PRESIDENT
Ronald E. Robison
EXECUTIVE VICE PRESIDENT
AND PRINCIPAL EXECUTIVE
OFFICER
Joseph J. McAlinden
VICE PRESIDENT
Barry Fink
VICE PRESIDENT
Stefanie V. Chang
VICE PRESIDENT
James W. Garrett
TREASURER AND CHIEF
FINANCIAL OFFICER
Michael J. Leary
ASSISTANT TREASURER
Mary E. Mullin
SECRETARY
INVESTMENT ADVISER
Morgan Stanley Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
ADMINISTRATOR
JPMorgan Investor Services Company
73 Tremont Street
Boston, Massachusetts 02108
CUSTODIAN
JPMorgan Chase Bank
270 Park Avenue
New York, New York 10017
STOCKHOLDER SERVICING AGENT
American Stock Transfer & Trust Company
59 Maiden Lane
New York, New York 10030
1-(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) 2004 Morgan Stanley
ANNUAL REPORT
DECEMBER 31, 2003
[MORGAN STANLEY LOGO]
MORGAN STANLEY
EMERGING MARKETS DEBT FUND,
INC.
MORGAN STANLEY
INVESTMENT MANAGEMENT INC.
INVESTMENT ADVISER
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Overview
LETTER TO STOCKHOLDERS
PERFORMANCE
For the year ended December 31, 2003, the Morgan Stanley Emerging Markets Debt
Fund, Inc. (the "Fund") had a total return, based on net asset value per share
of 31.44%, compared to 25.66% for the J.P. Morgan Emerging Markets Bond Index
Global (the "Index"). On December 31, 2003, the closing price of the Fund's
shares on the New York Stock Exchange was $9.76, representing a 4.7% discount to
the Fund's net asset value per share.
FACTORS AFFECTING PERFORMANCE
- By almost any measure, 2003 was a remarkable year for emerging markets
debt (EMD) investors. With the exception of a brief summer respite, the
market rallied from start to finish with yield spreads on the J.P. Morgan
Emerging Markets Bond Index Index plummeting by more than 300 basis points
versus U.S. Treasuries. Thanks to this significant yield-spread
compression and attractive coupon income, the asset class generated total
returns in excess of 25 percent -- one of its best years on record.
- Supportive external conditions -- including strong global economic growth,
rising commodity prices and ample global liquidity -- in conjunction with
significant improvements in emerging markets fundamentals led to a
dramatic reduction of sovereign risk and improved credit quality over the
course of the year. Most remarkably, Moody's upgrade of Russia's
credit-quality rating to Baa3 shifted over half of the Index's market
value to investment-grade status; clearly, this represented a dramatic
change from the 1998 environment when Russia's default led many to
speculate about the "death" of the asset class.
- Investors' EMD perceptions shifted remarkably during 2003, leading to
significant new inflows into the asset class. This was perhaps the first
year in which the notion that EMD could provide a diversified source of
income to most fixed-income strategies gained widespread support.
Improving fundamentals and a ten-year history of high returns and
declining volatility attracted strategic investors in search of additional
yield to meet liabilities or funding requirements.
MANAGEMENT STRATEGIES
- Key factors contributing to the Fund's favorable relative performance last
year included overweights in Brazil, Peru and Russia, as well as an
underweight to the Asian region. In addition, effective interest-rate risk
management during the second half of the year aided performance. An
underweight allocation to Ecuador, part of the year, detracted from
relative returns.
- From a country-specific standpoint, both Brazil and Ecuador generated some
of the asset class' best returns last year. In both cases, the newly
elected presidents pleasantly surprised deeply skeptical investors with
their ability to implement reasonable policies. In Brazil, President Lula
adhered to cautious fiscal and monetary policies and negotiated approval
of crucial structural reforms with the Brazilian congress. In Ecuador,
President Gutierrez's adherence to International Monetary Fund commitments
-- albeit with hiccups -- allowed his nation to benefit from higher oil
production and prices. Better-than-expected economic performance and
favorable external conditions led the value of Brazilian and Ecuadorian
assets to increase by almost 70 percent and 100 percent, respectively,
during 2003.
Sincerely,
/s/ Ronald E. Robison
Ronald E. Robison
Executive Vice President and Principal Executive Officer
January 2004
2
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
STATEMENT OF NET ASSETS
December 31, 2003
STATEMENT OF NET ASSETS
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
FACE
AMOUNT VALUE
(000) (000)
--------------------------------------------------------------------------------
DEBT INSTRUMENTS (100.0%)
ARGENTINA (1.1%)
SOVEREIGN (1.1%)
Republic of Argentina
2.063%, 3/31/23 $ 1,790 (d) $ 895
76.953%, 4/10/05 4,290 (d) 1,437
Republic of Argentina Par Bond
6.00%, 3/31/23 644 (d) 319
--------------------------------------------------------------------------------
2,651
================================================================================
BRAZIL (24.8%)
SOVEREIGN (24.8%)
Federative Republic of Brazil
8.875%, 4/15/24 13,980 (a) 13,648
11.00%, 8/17/40 14,370 15,879
11.25%, 7/26/07 5,340 6,274
12.25%, 3/6/30 4,200 5,250
14.50%, 10/15/09 7,500 9,844
Federative Republic of Brazil, PIK
8.00%, 4/15/14 7,438 (a) 7,354
--------------------------------------------------------------------------------
58,249
================================================================================
BULGARIA (1.6%)
SOVEREIGN (1.6%)
Republic of Bulgaria
8.25%, 1/15/15 3,189 3,765
================================================================================
CHILE (2.0%)
CORPORATE (2.0%)
Empresa Nacional de Petroleo
6.75%, 11/15/12 4,170 (b) 4,599
================================================================================
COLOMBIA (1.5%)
SOVEREIGN (1.5%)
Republic of Colombia
9.75%, 4/9/11 3,133 3,572
================================================================================
DOMINICAN REPUBLIC (0.7%)
SOVEREIGN (0.7%)
Dominican Republic
9.04%, 1/23/13 2,140 1,594
================================================================================
ECUADOR (4.6%)
SOVEREIGN (4.6%)
Republic of Ecuador
7.00%, 8/15/30 13,980 (c) 10,835
================================================================================
INDIA (0.0%)
CORPORATE (0.0%)
Surashtra Cement and Chemical Ltd.
19.00% INR 30,000 (d)(f) --@
================================================================================
INDONESIA (2.0%)
CORPORATE (2.0%)
Pindo Deli Finance (Mauritius)
10.75%, 10/1/07 $ 11,610 (b)(d) $ 2,438
Tjiwi Kimia Finance Mauritius Ltd.
10.00%, 8/1/04 1,630 (d) 530
Tjiwi Kimia International Global Bond
13.25%, 8/1/49 4,990 (d) 1,622
--------------------------------------------------------------------------------
4,590
================================================================================
IVORY COAST (0.1%)
SOVEREIGN (0.1%)
Republic of Ivory Coast
2.00%, 3/29/18 2,045 327
================================================================================
MALAYSIA (1.5%)
SOVEREIGN (1.5%)
Government of Malaysia
7.50%, 7/15/11 3,060 3,628
================================================================================
MEXICO (20.7%)
CORPORATE (6.2%)
Pemex Project Funding Master Trust
2.95%, 10/15/09 2,410 (b)(g) 2,464
9.125%, 10/13/10 4,040 4,818
Petroleos Mexicanos
9.50%, 9/15/27 2,700 3,227
Petroleos Mexicanos (Registered)
8.625%, 12/1/23 1,740 1,918
Satelites Mexicanos SA de CV, 'B'
10.125%, 11/1/04 4,433 (d) 2,017
--------------------------------------------------------------------------------
14,444
--------------------------------------------------------------------------------
SOVEREIGN (14.5%)
United Mexican States
8.375%, 1/14/11 7,080 8,425
10.375%, 2/17/09 1,510 1,918
11.375%, 9/15/16 16,680 23,685
--------------------------------------------------------------------------------
34,028
--------------------------------------------------------------------------------
48,472
================================================================================
NIGERIA (1.1%)
SOVEREIGN (1.1%)
Central Bank of Nigeria Par Bond
6.25%, 11/15/20 3,000 (c) 2,670
================================================================================
PANAMA (1.6%)
SOVEREIGN (1.6%)
Republic of Panama
9.375%, 4/1/29 1,890 2,136
9.625%, 2/8/11 1,370 1,589
--------------------------------------------------------------------------------
3,725
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
3
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
STATEMENT OF NET ASSETS
December 31, 2003
STATEMENT OF NET ASSETS (CONT'D)
FACE
AMOUNT VALUE
(000) (000)
--------------------------------------------------------------------------------
PERU (3.2%)
SOVEREIGN (3.2%)
Republic of Peru
8.75%, 11/21/33 $ 2,360 $ 2,372
9.875%, 2/6/15 4,320 5,033
--------------------------------------------------------------------------------
7,405
================================================================================
PHILIPPINES (1.7%)
SOVEREIGN (1.7%)
Republic of Philippines
9.375%, 1/18/17 3,686 3,990
================================================================================
QATAR (0.8%)
SOVEREIGN (0.8%)
State of Qatar
9.75%, 6/15/30 1,260 1,783
================================================================================
RUSSIA (20.6%)
SOVEREIGN (20.6%)
Russian Federation
5.00%, 3/31/30 25,885 (c) 25,044
5.00%, 3/31/30 4,684 (b)(c) 4,532
8.25%, 3/31/10 3,760 4,202
11.00%, 7/24/18 7,051 9,501
12.75%, 6/24/28 3,120 4,968
--------------------------------------------------------------------------------
48,247
================================================================================
SOUTH AFRICA (1.9%)
SOVEREIGN (1.9%)
Republic of South Africa
8.50%, 6/23/17 3,630 4,347
================================================================================
SOUTH KOREA (0.6%)
SOVEREIGN (0.6%)
Republic of Korea
4.25%, 6/1/13 1,525 1,476
================================================================================
TUNISIA (0.4%)
CORPORATE (0.4%)
Banque Centrale de Tunisie
7.375%, 4/25/12 750 846
================================================================================
TURKEY (2.9%)
SOVEREIGN (2.9%)
Republic of Turkey
11.50%, 1/23/12 2,890 3,692
11.75%, 6/15/10 1,110 1,410
12.375%, 6/15/09 1,380 1,773
--------------------------------------------------------------------------------
6,875
================================================================================
UKRAINE (1.0%)
SOVEREIGN (1.0%)
Ukraine Government
11.00%, 3/15/07 2,202 2,460
================================================================================
VENEZUELA (3.6%)
SOVEREIGN (3.6%)
Republic of Venezuela
9.25%, 9/15/27 $ 2,820 $ 2,580
10.75%, 9/19/13 5,420 (b) 5,813
--------------------------------------------------------------------------------
8,393
================================================================================
TOTAL DEBT INSTRUMENTS
(Cost $218,659) 234,499
================================================================================
NO. OF
WARRANTS
--------------------------------------------------------------------------------
WARRANTS (0.0%)
COLOMBIA (0.0%)
Occidente y Caribe Celular,
expiring 3/15/04 69,200 (e)(f) --@
================================================================================
NIGERIA (0.0%)
Central Bank of Nigeria,
expiring 11/15/20 8,750 (e)(f) --@
================================================================================
VENEZUELA (0.0%)
Republic of Venezuela Oil-
Linked Payment Obligation
0.00%, 4/15/20 11,350 (e)(g) --@
--------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost $44) --@
================================================================================
FACE
AMOUNT
(000)
--------------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN (0.0%)
Euro EUR 46 58
Indian Rupee INR --@ --@
--------------------------------------------------------------------------------
TOTAL FOREIGN CURRENCIES
(Cost $54) 58
================================================================================
TOTAL INVESTMENTS (100.0%)
(Cost $218,757) 234,557
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
STATEMENT OF NET ASSETS
December 31, 2003
STATEMENT OF NET ASSETS (CONT'D)
AMOUNT AMOUNT
(000) (000)
--------------------------------------------------------------------------------
OTHER ASSETS
Cash $ 5
Interest Receivable 5,212
Due from Broker 1,783
Other 8 $ 7,008
================================================================================
LIABILITIES
Payable For:
Dividends Declared (5,984)
Reverse Repurchase Agreements (9,440)
Investment Advisory Fees (193)
Directors' Fees and Expenses (83)
Custodian Fees (10)
Administrative Fees (11)
Other Liabilities (60) (15,781)
================================================================================
NET ASSETS
Applicable to 22,046,681, issued and
outstanding $ 0.01 par value shares
(100,000,000 shares authorized) $ 225,784
================================================================================
NET ASSET VALUE PER SHARE $ 10.24
================================================================================
AT DECEMBER 31, 2003, NET ASSETS
CONSISTED OF:
Common Stock $ 220
Paid-in Capital 279,066
Undistributed (Distributions in Excess
of) Net Investment Income (523)
Accumulated Net Realized Gain (Loss) (67,880)
Unrealized Appreciation (Depreciation)
on Investments, Futures and Foreign
Currency Translations 14,901
================================================================================
TOTAL NET ASSETS $ 225,784
================================================================================
(a) -- Denotes all or a portion of securities subject to repurchase under the
Reverse Repurchase Agreements as of December 31, 2003. See note A-3 to
financial statements
(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, 2003. Maturity date disclosed is ultimate
maturity.
(d) -- Security is in default.
(e) -- Non-income producing.
(f) -- Securities valued at fair value - see note A-1 to financial statements.
At December 31, 2003, the Fund held less than $500 of fair-valued
securities representing less than 0.05% of net assets.
(g) -- Variable/floating rate security - rate disclosed is as of December 31,
2003.
@ -- Face Amount/Value is less than $500.
PIK -- Payment-in-Kind. Income may be paid in additional securities or cash at
the discretion of the issuer.
FUTURES CONTRACTS:
The Fund had the following futures contract(s) open at period end:
NET
UNREALIZED
NUMBER APPRECIATION
OF VALUE EXPIRATION (DEPRECIATION)
CONTRACTS (000) DATE (000)
--------------------------------------------------------------------------------
SHORT:
5 Year U.S. Treasury Note 869 $ 97,002 March-04 $ (720)
10 Year U.S. Treasury Note 215 $ 24,137 March-04 (184)
--------------------------------------------------------------------------------
$ (904)
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
5
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Financial Statements
STATEMENT OF OPERATIONS
YEAR ENDED
DECEMBER 31, 2003
(000)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Interest $ 19,588
================================================================================
EXPENSES
Investment Advisory Fees 2,113
Professional Fees 107
Interest Expense on Reverse Repurchase Agreements 96
Administrative Fees 76
Custodian Fees 56
Country Tax Expense 42
Directors' Fees and Expenses 25
Stockholder Reporting Expenses 23
Stockholder Servicing Agent 17
Other Expenses 78
================================================================================
TOTAL EXPENSES 2,633
================================================================================
NET INVESTMENT INCOME 16,955
================================================================================
NET REALIZED GAIN (LOSS) ON:
Investments 26,492
Foreign Currency Transactions (64)
Futures (1,537)
================================================================================
NET REALIZED GAIN (LOSS) 24,891
================================================================================
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON:
Investments 14,734
Foreign Currency Translations (1)
Futures (537)
================================================================================
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 14,196
================================================================================
NET REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION) 39,087
================================================================================
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ 56,042
================================================================================
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
(000) (000)
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income $ 16,955 $ 14,837
Net Realized Gain (Loss) 24,891 4,226
Change in Unrealized Appreciation
(Depreciation) 14,196 (117)
================================================================================
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 56,042 18,946
================================================================================
Distributions from and/or in excess of:
Net Investment Income (16,566) (14,551)
================================================================================
TOTAL INCREASE (DECREASE) 39,476 4,395
================================================================================
Net Assets:
Beginning of Period 186,308 181,913
================================================================================
END OF PERIOD (INCLUDING UNDISTRIBUTED
(DISTRIBUTIONS IN EXCESS OF) NET
INVESTMENT INCOME OF $(523) AND
$(892), RESPECTIVELY) $ 225,784 $ 186,308
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
6
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Financial Statements
STATEMENT OF CASH FLOWS
YEAR ENDED
DECEMBER 31, 2003
(000)
--------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Proceeds from Sales and Maturities of Long-Term Investments $ 405,478
Purchases of Long-Term Investments (407,551)
Net (Increase) Decrease in Short-Term Investments 1,803
Net (Increase) Decrease in Foreign Currency Holdings (58)
Net Realized Gain (Loss) on Foreign Currency Translations (64)
Net Realized Gain (Loss) on Futures Contracts (1,537)
Net Investment Income 16,955
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net (Increase) Decrease in Receivables Related to Operations (1,237)
Net Increase (Decrease) in Payables Related to Operations (23)
Accretion/Amortization of Discounts and Premiums (2,186)
--------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 11,580
--------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Received for Reverse Repurchase Agreements 478,146
Cash Paid for Reverse Repurchase Agreements (476,109)
Cash Distributions Paid (13,889)
--------------------------------------------------------------------------------
Net Cash Used for Financing Activities (11,852)
--------------------------------------------------------------------------------
Net Increase (Decrease) in Cash (272)
CASH AT BEGINNING OF PERIOD 277
--------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 5
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
7
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Financial Highlights
SELECTED PER SHARE DATA AND RATIOS
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2003 2002 2001 2000 1999
------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.45 $ 8.25 $ 8.22 $ 8.36 $ 7.01
------------------------------------------------------------------------------------------------------------------------
Net Investment Income 0.77+ 0.67+ 0.80 1.23 1.09
Net Realized and Unrealized Gain (Loss) on Investments 1.77 0.19 0.08 (0.29) 1.27
------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 2.54 0.86 0.88 0.94 2.36
------------------------------------------------------------------------------------------------------------------------
Distributions from and/or in excess of:
Net Investment Income (0.75) (0.66) (0.85) (1.08) (1.01)
------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.24 $ 8.45 $ 8.25 $ 8.22 $ 8.36
========================================================================================================================
PER SHARE MARKET VALUE, END OF PERIOD $ 9.76 $ 7.55 $ 7.40 $ 6.88 $ 6.81
========================================================================================================================
TOTAL INVESTMENT RETURN:
Market Value 40.21% 11.11% 20.65% 16.49% 8.55%
Net Asset Value (1) 31.44% 11.54% 12.50% 13.50% 36.58%
========================================================================================================================
RATIOS, SUPPLEMENTAL DATA:
NET ASSETS, END OF PERIOD (THOUSANDS) $ 225,784 $ 186,308 $ 181,913 $ 181,134 $ 184,269
------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 1.25% 1.34% 1.61% 2.32% 2.28%
Ratio of Expenses Excluding Interest Expense to Average
Net Assets 1.20% 1.29% 1.41% 1.34% 1.35%
Ratio of Net Investment Income to Average Net Assets 8.04% 8.11% 9.73% 14.31% 14.53%
Portfolio Turnover Rate 187% 149% 233% 272% 178%
------------------------------------------------------------------------------------------------------------------------
(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 are based on average shares outstanding.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
8
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
December 31, 2003
NOTES TO FINANCIAL STATEMENTS
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.
Such policies are consistently followed by the Fund in the preparation of its
financial statements. Accounting principles generally accepted in the United
States 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: Equity securities listed on a U.S. exchange are valued
at the latest quoted sales price on the valuation date. Equity securities
listed or traded on NASDAQ, for which market quotations are available, are
valued at the NASDAQ Official Closing Price. Securities listed on a foreign
exchange are valued at their closing price. Unlisted securities and listed
securities not traded on the valuation date for which market quotations are
readily available are valued at the mean between the current bid and asked
prices obtained from reputable brokers. Bonds and other fixed income
securities may be valued according to the broadest and most representative
market. In addition, bonds and other fixed income securities may be valued
on the basis of prices provided by a pricing service. 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. Debt
securities purchased with remaining maturities of 60 days or less are
valued at amortized cost, if it approximates value.
All other securities and investments for which market values are not
readily available, including restricted securities, and those securities
for which it is inappropriate to determine prices in accordance with the
aforementioned procedures, are valued at fair value as determined in good
faith under procedures adopted by the Board of Directors, although the
actual calculations may be done by others. Factors considered in making
this determination may include, but are not limited to, information
obtained by contacting the issuer, analysts, or the appropriate stock
exchange (for exchange-traded securities), analysis of the issuer's
financial statements or other available documents and, if necessary,
available information concerning other securities in similar circumstances.
Most foreign markets close before the New York Stock Exchange (NYSE).
Occasionally, developments that could affect the closing prices of
securities and other assets may occur between the times at which valuations
of such securities are determined (that is, close of the foreign market on
which the securities trade) and the close of business on the NYSE. If these
developments are expected to materially affect the value of the securities,
the valuations may be adjusted to reflect the estimated fair value as of
the close of the NYSE, as determined in good faith under procedures
established by the Board of Directors.
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
9
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
December 31, 2003
NOTES TO FINANCIAL STATEMENTS (CONT'D)
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, 2003, the Fund had reverse repurchase agreements
outstanding with Lehman Brothers as follows:
MATURITY IN
LESS THAN
365 DAYS
---------------------------------------------------------------------------
Value of Securities Subject to Repurchase $ 9,435,000
Liability Under Reverse Repurchase Agreement $ 9,440,000
Weighted Average Days to Maturity 6
The weighted average weekly balance of reverse repurchase agreements
outstanding during the year ended December 31, 2003, was approximately
$8,027,000 at a weekly weighted average interest rate of 1.14%.
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
10
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
December 31, 2003
NOTES TO FINANCIAL STATEMENTS (CONT'D)
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 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. 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. An employee of the administrator is an Officer of the fund.
D. CUSTODIAN: JPMorgan Chase Bank and its affiliates serve as custodian for
the Fund. Custody fees are payable monthly
11
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
December 31, 2003
NOTES TO FINANCIAL STATEMENTS (CONT'D)
based on assets held in custody, investment purchases and sales activity and
account maintenance fees, plus reimbursement for certain out-of-pocket expenses.
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 2003 and 2002 were as follows:
2003 DISTRIBUTIONS 2002 DISTRIBUTIONS
PAID FROM: PAID FROM:
(000) (000)
--------------------------------------- ---------------------------------------
LONG-TERM LONG-TERM
ORDINARY CAPITAL ORDINARY CAPITAL
INCOME GAIN INCOME GAIN
--------------------------------------- ---------------------------------------
$ 16,566 $ -- $ 14,551 $ --
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.
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 book and tax basis differences may result in reclassifications among
undistributed (distributions in excess of) net investment income (or accumulated
net investment loss), accumulated net realized gain (loss) and paid-in capital.
At December 31, 2003, the components of distributable earnings on a tax basis
were as follows:
UNDISTRIBUTED UNDISTRIBUTED
ORDINARY INCOME LONG-TERM CAPITAL GAIN
(000) (000)
--------------------------------------------------------------------------------
$ 176 $ --
--------------------------------------------------------------------------------
At December 31, 2003, the U.S. Federal income tax cost basis of securities was
approximately $218,760,000 and, accordingly, net unrealized appreciation for
U.S. Federal income tax purposes was $15,739,000 of which $20,509,000 related to
appreciated securities and $4,770,000 related to depreciated securities.
At December 31, 2003, the Fund had a capital loss carryforward for U.S. Federal
income tax purposes of approximately $69,415,000 available to offset future
capital gains, of which $52,822,000 will expire on December 31, 2006,
$13,135,000 will expire on December 31, 2007 and $3,458,000 will expire on
December 31, 2009.
During the year ended December 31, 2003, the Fund utilized capital loss
carryforwards for U.S. Federal income tax purposes of $23,417,000.
To the extent that capital loss carryforwards are used to offset any future
capital gains realized during the carryover period as provided by U.S. Federal
income tax regulations, no capital gains tax liability will be incurred by the
Fund for gains realized and not distributed. To the extent that capital gains
are offset, such gains will not be distributed to the stockholders.
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, 2003, the Fund did not defer any
post-October losses to January 1, 2004, for U.S. Federal income tax purposes.
F. OTHER: During the year ended December 31, 2003, the Fund made purchases and
sales totaling approximately $399,894,000 and $402,030,000 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.
On December 15, 2003, the Board of Directors declared a distribution of $0.2714
per share, derive from net investment income, payable on January 9, 2004, to
stockholders of record on December 24, 2003.
12
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
December 31, 2003
INDEPENDENT AUDITORS' REPORT
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, 2003, 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 four 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 the year 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. 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, 2003 by correspondence with the custodian. 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, 2003, the results of
its operations and its cash flows for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the four years in the period then ended, in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 11, 2004
13
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Overview
DIRECTOR AND OFFICER INFORMATION (UNAUDITED)
INDEPENDENT DIRECTORS:
NUMBER OF
PORTFOLIOS IN
TERM OF FUND
OFFICE AND COMPLEX
POSITION(S) LENGTH OF OVERSEEN
NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) DURING BY OTHER DIRECTORSHIPS
DIRECTOR REGISTRANT SERVED* PAST 5 YEARS DIRECTOR** HELD BY DIRECTOR
--------------------------- ----------- ---------- ---------------------------------------- ------------- ---------------------
Michael Bozic (62) Director Director Retired; Director or Trustee of the 208 Director of Weirton
c/o Kramer Levin Naftalis & since 2003 Retail Funds and the Institutional Steel Corporation.
Frankel LLP Funds; formerly Vice Chairman of Kmart
Counsel to the Independent Corporation, Chairman and Chief
Directors Executive Officer of Levitz Furniture
919 Third Avenue Corporation and President and Chief
New York, NY 10022 Executive Officer of Hills Department
Stores; formerly variously Chairman,
Chief Executive Officer, President and
Chief Operating Officer of the Sears
Merchandise Group of Sears, Roebuck &
Co.
Edwin J. Garn (71) Director Director Director or Trustee of the Retail Funds 208 Director of Franklin
Summit Ventures LLC since 2003 and the Institutional Funds; member of Covey (time
One Utah Center the Utah Regional Advisory Board of management systems),
201 South Main Street Pacific Corp.; formerly United States BMW Bank of North
Salt Lake City, UT 84111 Senator (R-Utah) and Chairman, Senate America, Inc.
Banking Committee, Mayor of Salt Lake (industrial loan
City, Utah, Astronaut, Space Shuttle corporation), United
Discovery and Vice Chairman, Huntsman Space Alliance
Corporation (chemical company). (joint venture
between Lockheed
Martin and The
Boeing Company) and
Nuskin Asia Pacific
(multilevel
marketing); member
of the board of
various civic and
charitable
organizations.
Wayne E. Hedien (69) Director Director Retired; Director or Trustee of the 208 Director of the PMI
WEH Associates since 2003 Retail Funds and the Institutional Group Inc. (private
5750 Old Orchard Road Funds; formerly associated with the mortgage
Suite 530 Allstate Companies, most recently as insurance); Trustee
Skokie, IL 60077 Chairman of The Allstate Corporation and and Vice Chairman of
Chairman and Chief Executive Officer of the Field Museum of
its wholly-owned subsidiary, Allstate Natural History;
Insurance Company. director of various
other business and
charitable
organizations.
Dr. Manuel H. Johnson (54) Director Director Chairman of the Audit Committee and 208 Director of NVR,
Johnson Smick since 2003 Director or Trustee of the Retail Funds Inc. (home
International, Inc. and the Institutional Funds; Senior construction);
2099 Pennsylvania Avenue, Partner, Johnson Smick International, Chairman and Trustee
NW Suite 950 Inc. (consulting firm); Co-Chairman and a of the Financial
Washington, D.C. 20006 founder of the Group of Seven Council Accounting
(G7C), an international economic Foundation
commission; formerly Vice Chairman of (oversight
the Board of Governors of the Federal organization of the
Reserve System and Assistant Secretary Financial Accounting
of the U.S. Treasury. Standards Board);
Director of RBS
Greenwich Capital
Holdings (financial
holdings company).
Joseph J. Kearns (61) Director Director Deputy Chairman of the Audit Committee 209 Director of Electro
Kearns & Associates LLC since 1994 and Director or Trustee of the Retail Rent Corporation
PMB754 Funds and the Institutional Funds; (equipment leasing),
23852 Pacific Coast Hwy. previously Chairman of the Audit The Ford Family
Malibu, CA 90265 Committee of the Institutional Funds; Foundation and the
President, Kearns & Associates LLC UCLA Foundation.
(investment consulting); formerly CFO of
The J. Paul Getty Trust.
Michael Nugent (67) Director Director Chairman of the Insurance Committee and 209 Director of various
Triumph Capital, L.P. since 2001 Director or Trustee of the Retail Funds business
445 Park Avenue, 10th Floor and the Institutional Funds; General organizations.
New York, NY 10022 Partner of Triumph Capital, L.P.,
(private investment partnership);
formerly Vice President, Bankers Trust
Company and BT Capital Corporation.
Fergus Reid (71) Director Director Chairman of the Governance Committee and 209 Trustee and Director
Lumelite Plastics since 2001 Director or Trustee of the Retail Funds of certain investment
85 Charles Coleman Blvd. and the Institutional Funds; Chairman of companies in the
Pawling, NY 12564 Lumelite Plastics Corporation. JPMorgan Funds
complex managed by JP
Morgan Investment
Management Inc.
14
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Overview
DIRECTOR AND OFFICER INFORMATION (CONT'D)
INTERESTED DIRECTORS:
TERM OF NUMBER OF
OFFICE AND PORTFOLIOS IN
POSITION(S) LENGTH OF FUND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) DURING OVERSEEN BY OTHER DIRECTORSHIPS
DIRECTOR REGISTRANT SERVED* PAST 5 YEARS DIRECTOR** HELD BY DIRECTOR
--------------------------- ----------- ---------- ---------------------------------------- ------------- ---------------------
Charles A. Fiumefreddo (70) Chairman and Chairman Chairman and Director or Trustee of the 208 None
Morgan Stanley Funds Director and Retail Funds and the Institutional
Harborside Financial Center Director Funds; formerly Chief Executive Officer
Plaza Two 3rd Floor since 2003 of the Retail Funds.
Jersey City, NJ 07311
James F. Higgins (55) Director Director Director or Trustee of the Retail Funds 208 Director of AXA
Morgan Stanley since 2003 and the Institutional Funds; Senior Financial, Inc. and
Harborside Financial Center Advisor of Morgan Stanley; Director of The Equitable Life
Plaza Two 2nd Floor Morgan Stanley Distributors Inc. and Assurance Society of
Jersey City, NJ 07311 Dean Witter Realty Inc.; previously the United States
President and Chief Operating Officer of (financial services).
the Private Client Group of Morgan
Stanley and President and Chief
Operating Officer of Individual
Securities of Morgan Stanley.
Philip J. Purcell (60) Director Director Director or Trustee of the Retail Funds 208 Director of American
Morgan Stanley since 2003 and the Institutional Funds; Chairman of Airlines, Inc. and
1585 Broadway 39th Floor the Board of Directors and Chief its parent company,
New York, NY 10036 Executive Officer of Morgan Stanley and AMR Corporation.
Morgan Stanley DW Inc.; Director of
Morgan Stanley Distributors Inc.;
Chairman of the Board of Directors and
Chief Executive Officer of Novus Credit
Services Inc.; Director and/or officer
of various Morgan Stanley subsidiaries.
* 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 adviser that is an
affiliated entity of Morgan Stanley Investment Management Inc. (including,
but not limited to, Morgan Stanley Investment Advisors Inc. and Van Kampen
Asset Management Inc.).
*** Additionally, a description of the Fund's proxy voting policies and
procedures is available without charge at our website at
www.morganstanley.com/im/legal, at the SEC's website at www.sec.gov or by
calling 1(800) 281-2715.
15
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
Overview
DIRECTOR AND OFFICER INFORMATION (CONT'D)
OFFICERS:
TERM OF OFFICE AND
POSITION(S) HELD LENGTH OF TIME
NAME, AGE AND ADDRESS OF EXECUTIVE OFFICER WITH REGISTRANT SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
------------------------------------------ ---------------- ------------------ ----------------------------------------------
Mitchell M. Merin (50) President President since President and Chief Operating Officer of
Morgan Stanley Investment Management Inc. 2003 Morgan Stanley Investment Management Inc.;
1221 Avenue of the Americas 33rd Floor President, Director and Chief Executive
New York, NY 10020 Officer of Morgan Stanley Investment Advisors
Inc. and Morgan Stanley Services Company
Inc.; Chairman, Chief Executive Officer and
Director of Morgan Stanley Distributors Inc.;
Chairman and Director of Morgan Stanley
Trust; Director of various Morgan Stanley
subsidiaries; President of the Institutional
Funds and the Retail Funds; Trustee and
President of the Van Kampen Open-End and
Closed-End funds.
Ronald E. Robison (64) Executive Vice Executive Vice Chief Global Operations Officer and Managing
Morgan Stanley Investment Management Inc. President and President and Director of Morgan Stanley Investment
1221 Avenue of the Americas 33rd Floor Principal Principal Management Inc.; Managing Director of Morgan
New York, NY 10020 Executive Executive Officer Stanley & Co. Incorporated; Managing Director
Officer since 2003 of Morgan Stanley; Managing Director, Chief
Administrative Officer and Director of Morgan
Stanley Investment Advisors Inc. and Morgan
Stanley Services Company Inc.; Chief
Executive Officer and Director of Morgan
Stanley Trust; Executive Vice President and
Principal Executive Officer of the
Institutional Funds and the Retail Funds;
previously President and Director of the
Institutional Funds.
Barry Fink (48) Vice President Vice President General Counsel and Managing Director of
Morgan Stanley Investment Management Inc. since 2003 Morgan Stanley Investment Management;
1221 Avenue of the Americas 22nd Floor Managing Director, Secretary and Director of
New York, NY 10020 Morgan Stanley Investment Advisors Inc. and
Morgan Stanley Services Company Inc.;
Assistant Secretary of Morgan Stanley DW
Inc.; Vice President and General Counsel of
the Retail Funds; Vice President of the
Institutional Funds; Vice President and
Secretary of Morgan Stanley Distributors
Inc.; previously Secretary of the Retail
Funds; previously Vice President and
Assistant General Counsel of Morgan Stanley
Investment Advisors Inc. and Morgan Stanley
Services Company Inc.
Joseph J. McAlinden (60) Vice President Vice President Managing Director and Chief Investment Officer
Morgan Stanley Investment Management Inc. since 2003 of Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas 33rdFloor and Morgan Stanley Investment Management
New York, NY 10020 Inc.; Director of Morgan Stanley Trust, Chief
Investment Officer of the Van Kampen Funds;
Vice President of the Institutional Funds and
the Retail Funds.
Stefanie V. Chang (36) Vice President Vice President Executive Director of Morgan Stanley & Co.
Morgan Stanley Investment Management Inc. since 2001 Incorporated and Morgan Stanley Investment
1221 Avenue of the Americas 22nd Floor Management Inc.; Vice President of the
New York, NY 10020 Institutional Funds and the Retail Funds;
formerly practiced law with the New York law
firm of Rogers & Wells (now Clifford Chance US
LLP).
James W. Garrett (34) Treasurer and Treasurer since Executive Director of Morgan Stanley & Co.
Morgan Stanley Investment Management Inc. Chief Financial 2002 Incorporated and Morgan Stanley Investment
1221 Avenue of the Americas 34th Floor Officer CFO since 2003 Management Inc.; Treasurer and Chief
New York, NY 10020 Financial Officer of the Institutional Funds;
previously with Price Waterhouse LLP (now
PricewaterhouseCoopers LLP).
Michael J. Leary (37) Assistant Assistant Assistant Director and Vice President of Fund
J.P. Morgan Investor Services Co. Treasurer Treasurer since Administration, J.P. Morgan Investor Services
73 Tremont Street 2003 Co. (formerly Chase Global Funds Company);
Boston, MA 02108 formerly Audit Manager at Ernst & Young LLP.
Mary E. Mullin (36) Secretary Secretary since Executive Director of Morgan Stanley & Co.
Morgan Stanley Investment Management Inc. 2001 Incorporated and Morgan Stanley Investment
1221 Avenue of the Americas 22nd Floor Management Inc.; Secretary of the
New York, NY 10020 Institutional Funds and the Retail Funds;
formerly practiced law with the New York law
firms of McDermott, Will & Emery and Skadden,
Arps, Slate, Meagher & Flom LLP.
-----
* Each Officer serves an indefinite term, until his or her successor is elected.
16
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
17
ITEM 2. CODE OF ETHICS.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies
to its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the Fund or a third
party.
(b) No information need be disclosed pursuant to this paragraph.
(c) The Fund has not amended its Code of Ethics during the period covered by
the shareholder report presented in Item 1 hereto.
(d) The Fund has not granted a waiver or an implicit waiver from a provision of
its Code of Ethics.
(e) Not applicable.
(f)
(1) The Fund Code of Ethics is attached hereto as Exhibit A.
(2) Not applicable.
(3) Not applicable.
For Retail and Institutional Funds
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Fund's Board of Directors has determined that it has two "audit committee
financial experts" serving on its audit committee, each of whom are
"independent" Directors: Dr. Manuel H. Johnson and Joseph J. Kearns. Under
applicable securities laws, a person who is determined to be an audit committee
financial expert will not be deemed an "expert" for any purpose, including
without limitation for the purposes of Section 11 of the Securities Act of 1933,
as a result of being designated or identified as an audit committee financial
expert. The designation or identification of a person as an audit committee
financial expert does not impose on such person any duties, obligations, or
liabilities that are greater than the duties, obligations, and liabilities
imposed on such person as a
1
member of the audit committee and Board of Directors in the absence of such
designation or identification.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2003
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 69,525 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 0 $ 93,000(2)
TAX FEES $ 2,575(3) $ 163,414(4)
ALL OTHER FEES $ 0 $ 341,775(5)
TOTAL NON-AUDIT FEES $ 2,575 $ 598,189
TOTAL $ 72,100 $ 598,189
2002
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 67,500 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 0 $ 179,000(2)
TAX FEES $ 2,500(3) $ 0
ALL OTHER FEES $ 0 $ 595,150(6)
TOTAL NON-AUDIT FEES $ 2,500 $ 774,150
TOTAL $ 70,000 $ 774,150
N/A- Not applicable, as not required by Item 4.
(1) Covered Entities include the Adviser (excluding sub-advisors) and
any entity controlling, controlled by or under common control
with the Adviser that provides ongoing services to the
Registrant.
(2) Audit-Related Fees represent assurance and related services
provided that are reasonably related to the performance of the
audit of the financial statements of the Covered Entities' and
funds advised by the Adviser or its affiliates, specifically
attestation services provided in connection with a SAS 70 Report.
(3) Tax Fees represent tax advice and compliance services provided in
connection with the review of the Registrant's tax return.
(4) Tax Fees represent tax advice services provided to Covered
Entities, including research and identification of Passive
Foreign Investment Company entities.
(5) All Other Fees represent attestation services provided in
connection with performance presentation standards.
(6) All Other Fees represent attestation services provided in
connection with performance presentation standards, general
industry education seminars provided, and a regulatory review
project performed.
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED JULY 31, 2003(1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.
The SEC has issued rules specifying the types of services that an
independent auditor may not provide to its audit client, as well as the audit
committee's administration of the engagement of the independent auditor. The
SEC's rules establish two different approaches to pre-approving services, which
the SEC considers to be equally valid. Proposed services either: may be
pre-approved without consideration of specific case-by-case services by the
Audit Committee ("GENERAL PRE-APPROVAL"); or require the specific pre-approval
of the Audit Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit
Committee believes that the combination of these two approaches in this Policy
will result in an effective and efficient procedure to pre-approve services
performed by the Independent Auditors. As set forth in this Policy, unless a
type of service has received general pre-approval, it will require specific
pre-approval by the Audit Committee (or by any member of the Audit Committee to
which pre-approval authority has been delegated) if it is to be provided by the
Independent Auditors. Any proposed services exceeding pre-approved cost levels
or budgeted amounts will also require specific pre-approval by the Audit
Committee.
----------
(1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and
Procedures (the "POLICY"), adopted as of the date above, supercedes and
replaces all prior versions that may have been adopted from time to time.
2
For both types of pre-approval, the Audit Committee will consider whether
such services are consistent with the SEC's rules on auditor independence. The
Audit Committee will also consider whether the Independent Auditors are best
positioned to provide the most effective and efficient services, for reasons
such as its familiarity with the Fund's business, people, culture, accounting
systems, risk profile and other factors, and whether the service might enhance
the Fund's ability to manage or control risk or improve audit quality. All such
factors will be considered as a whole, and no one factor should necessarily be
determinative.
The Audit Committee is also mindful of the relationship between fees for
audit and non-audit services in deciding whether to pre-approve any such
services and may determine for each fiscal year, the appropriate ratio between
the total amount of fees for Audit, Audit-related and Tax services for the Fund
(including any Audit-related or Tax service fees for Covered Entities that were
subject to pre-approval), and the total amount of fees for certain permissible
non-audit services classified as All Other services for the Fund (including any
such services for Covered Entities subject to pre-approval).
The appendices to this Policy describe the Audit, Audit-related, Tax and
All Other services that have the general pre-approval of the Audit Committee.
The term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers and provides a different period and states
otherwise. The Audit Committee will annually review and pre-approve the services
that may be provided by the Independent Auditors without obtaining specific
pre-approval from the Audit Committee. The Audit Committee will add to or
subtract from the list of general pre-approved services from time to time, based
on subsequent determinations.
The purpose of this Policy is to set forth the policy and procedures by
which the Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committee's responsibilities to pre-approve services
performed by the Independent Auditors to management.
The Fund's Independent Auditors have reviewed this Policy and believes that
implementation of the Policy will not adversely affect the Independent Auditors'
independence.
2. DELEGATION
As provided in the Act and the SEC's rules, the Audit Committee may
delegate either type of pre-approval authority to one or more of its members.
The member to whom such authority is delegated must report, for informational
purposes only, any pre-approval decisions to the Audit Committee at its next
scheduled meeting.
3. AUDIT SERVICES
3
The annual Audit services engagement terms and fees are subject to the
specific pre-approval of the Audit Committee. Audit services include the annual
financial statement audit and other procedures required to be performed by the
Independent Auditors to be able to form an opinion on the Fund's financial
statements. These other procedures include information systems and procedural
reviews and testing performed in order to understand and place reliance on the
systems of internal control, and consultations relating to the audit. The Audit
Committee will monitor the Audit services engagement as necessary, but no less
than on a quarterly basis, and will also approve, if necessary, any changes in
terms, conditions and fees resulting from changes in audit scope, Fund structure
or other items.
In addition to the annual Audit services engagement approved by the Audit
Committee, the Audit Committee may grant general pre-approval to other Audit
services, which are those services that only the Independent Auditors reasonably
can provide. Other Audit services may include statutory audits and services
associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4,
etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings.
The Audit Committee has pre-approved the following Audit services. All
other Audit services not listed below must be specifically pre-approved by the
Audit Committee (or by any member of the Audit Committee to which pre-approval
has been delegated):
- Statutory audits or financial audits for the Fund
- Services associated with SEC registration statements (including new funds),
periodic reports and other documents filed with the SEC or other documents
issued in connection with securities offerings (e.g., comfort letters for
closed-end fund offerings, consents), and assistance in responding to SEC
comment letters
- Consultations by the Fund's management as to the accounting or disclosure
treatment of transactions or events and/or the actual or potential impact
of final or proposed rules, standards or interpretations by the SEC, FASB,
or other regulatory or standard setting bodies (Note: Under SEC rules, some
consultations may be "audit related" services rather than "audit" services)
4. AUDIT-RELATED SERVICES
Audit-related services are assurance and related services that are
reasonably related to the performance of the audit or review of the Fund's
financial statements and, to the extent they are Covered Services, the Covered
Entities or that are traditionally performed by the Independent Auditors.
Because the Audit Committee believes that the provision of Audit-related
services does not impair the independence of the auditor and is consistent with
the SEC's rules on auditor independence, the Audit Committee may grant general
pre-approval to Audit-related services. Audit-related services include, among
others, accounting consultations related to accounting, financial reporting or
disclosure matters not classified as "Audit services"; assistance with
understanding and
4
implementing new accounting and financial reporting guidance from rulemaking
authorities; agreed-upon or expanded audit procedures related to accounting
and/or billing records required to respond to or comply with financial,
accounting or regulatory reporting matters; and assistance with internal control
reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the following Audit-related services.
All other Audit-related services not listed below must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated):
- Attest procedures not required by statute or regulation (including agreed
upon procedures related to the Closed-End Fund asset coverage tests
required by the rating agencies and/or lenders and agreed upon procedures
related to fund profitability analysis in connection with 15c management
contract renewal process
- Services associated with registration statement with Japanese regulatory
authorities, including issuance of consent and opinion for Morgan Stanley
Asia-Pacific Fund
- Due diligence services pertaining to potential fund mergers
- Issuance of SAS-70 reports on internal controls of a service provider
- Consultations by the Fund's management as to the accounting or disclosure
treatment of transactions or events and/or the actual or potential impact
of final or proposed rules, standards or interpretations by the SEC, FASB,
or other regulatory or standard-setting bodies (Note: Under SEC rules, some
consultations may be "audit" services rather than "audit-related" services)
- Information systems reviews not performed in connection with the audit
(e.g., application data center and technical reviews)
- General assistance with implementation of the requirements of SEC rules or
listing standards promulgated pursuant to the Sarbanes-Oxley Act
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide Tax
services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing
the auditor's independence, and the SEC has stated that the Independent Auditors
may provide such services. Hence, the Audit Committee believes it may grant
general pre-approval to those Tax services that have historically been provided
by the Independent Auditors, that the Audit Committee has reviewed and believes
would not impair the independence of the Independent Auditors, and that are
consistent with the SEC's rules on auditor independence. The Audit Committee
will not permit the retention of the Independent Auditors in connection with a
transaction initially recommended by the Independent Auditors, the sole business
purpose of which may be tax avoidance and the tax treatment
5
of which may not be supported in the Internal Revenue Code and related
regulations. The Audit Committee will consult with Director of Tax or outside
counsel to determine that the tax planning and reporting positions are
consistent with this policy.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved
the following Tax Services. All Tax services involving large and complex
transactions not listed below must be specifically pre-approved by the Audit
Committee (or by any member of the Audit Committee to which pre-approval has
been delegated), including tax services proposed to be provided by the
Independent Auditors to any executive officer or trustee/director/managing
general partner of the Fund, in his or her individual capacity, where such
services are paid for by the Fund (generally applicable only to internally
managed investment companies):
- U.S. federal, state and local tax planning and advice
- U.S. federal, state and local tax compliance
- International tax planning and advice
- International tax compliance
- Review/preparation of federal, state, local and international income,
franchise, and other tax returns
- Identification of Passive Foreign Investment Companies
- Preparation of local Indian Tax Returns
- Domestic and foreign tax planning, compliance, and advice
- Assistance with tax audits and appeals before the IRS and similar state,
local and foreign agencies
- Tax advice and assistance regarding statutory, regulatory or administrative
developments (e.g., excise tax reviews, evaluation of Fund's tax compliance
function)
- Review the calculations of taxable income from corporate actions including
reorganizations related to bankruptcy filings and provide guidance related
to the foregoing
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
The Audit Committee has pre-approved the following All Other services.
Permissible All Other services not listed below must be specifically
pre-approved by the
6
Audit Committee (or by any member of the Audit Committee to which pre-approval
has been delegated):
- Risk management advisory services, e.g., assessment and testing of security
infrastructure controls
The following is a list of the SEC's prohibited non-audit services. The
SEC's rules and relevant guidance should be consulted to determine the precise
definitions of these services and the applicability of exceptions to certain of
the prohibitions:
- Bookkeeping or other services related to the accounting records or
financial statements of the audit client
- Financial information systems design and implementation
- Appraisal or valuation services, fairness opinions or contribution-in-kind
reports
- Actuarial services
- Internal audit outsourcing services
- Management functions
- Human resources
- Broker-dealer, investment adviser or investment banking services
- Legal services
- Expert services unrelated to the audit
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be provided
by the Independent Auditors will be established annually by the Audit Committee.
Any proposed services exceeding these levels or amounts will require specific
pre-approval by the Audit Committee. The Audit Committee is mindful of the
overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services. For each fiscal year, the Audit
Committee may determine the appropriate ratio between the total amount of fees
for Audit, Audit-related, and Tax services for the Fund (including any
Audit-related or Tax services fees for Covered Entities subject to
pre-approval), and the total amount of fees for certain permissible non-audit
services classified as All Other services for the Fund (including any such
services for Covered Entities subject to pre-approval).
8. PROCEDURES
All requests or applications for services to be provided by the Independent
Auditors that do not require specific approval by the Audit Committee will be
submitted to the Fund's Chief Financial Officer and must include a detailed
description of the services to be rendered. The Fund's Chief Financial Officer
will determine whether such services are included within the list of services
that have received the general pre-approval of the Audit Committee. The Audit
Committee will be informed on a timely basis of any such services rendered by
the Independent Auditors. Requests or applications to provide services that
require specific approval by the Audit Committee will be submitted to the Audit
Committee by both the Independent Auditors and the
7
Fund's Chief Financial Officer, and must include a joint statement as to
whether, in their view, the request or application is consistent with the SEC's
rules on auditor independence.
The Audit Committee has designated the Fund's Chief Financial Officer to
monitor the performance of all services provided by the Independent Auditors and
to determine whether such services are in compliance with this Policy. The
Fund's Chief Financial Officer will report to the Audit Committee on a periodic
basis on the results of its monitoring. Both the Fund's Chief Financial Officer
and management will immediately report to the chairman of the Audit Committee
any breach of this Policy that comes to the attention of the Fund's Chief
Financial Officer or any member of management.
The Audit Committee will also review the internal auditor's annual internal
audit plan to determine that the plan provides for the monitoring of the
Independent Auditors' services.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an annual
basis to meet its responsibility to oversee the work of the Independent Auditors
and to assure the auditor's independence from the Fund, such as reviewing a
formal written statement from the Independent Auditors delineating all
relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No. 1, and discussing with the Independent Auditors
its methods and procedures for ensuring independence.
10. COVERED ENTITIES
Covered Entities include the Fund's investment adviser(s) and any entity
controlling, controlled by or under common control with the Fund's investment
adviser(s) that provides ongoing services to the Fund(s). Beginning with
non-audit service contracts entered into on or after May 6, 2003, the Fund's
audit committee must pre-approve non-audit services provided not only to the
Fund but also to the Covered Entities if the engagements relate directly to the
operations and financial reporting of the Fund. This list of Covered Entities
would include:
MORGAN STANLEY RETAIL FUNDS
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management
Morgan Stanley Investments LP
Van Kampen Asset Management Inc.
Morgan Stanley Services Company, Inc.
8
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
MORGAN STANLEY INSTITUTIONAL FUNDS
Morgan Stanley Investment Management Inc.
Morgan Stanley Investments LP
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after May
6, 2003, the audit committee also is required to pre-approve services to Covered
Entities to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Registrant. 100% of such
services were pre-approved by the audit committee pursuant to the Audit
Committee's pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Trustees has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and Covered Entities is compatible with maintaining the auditors'
independence in performing audit services.
9
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. [RESERVED.]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Fund and its investment advisor's Proxy Voting Policies and Procedures are
as follows:
I. POLICY STATEMENT
INTRODUCTION - Morgan Stanley Investment Management's ("MSIM") policies and
procedures for voting proxies with respect to securities held in the accounts of
clients applies to those MSIM entities that provide discretionary Investment
Management services and for which a MSIM entity has the authority to vote their
proxies. The policies and procedures and general guidelines in this section will
be reviewed and, as necessary, updated periodically to address new or revised
proxy voting issues. The MSIM entities covered by these policies and procedures
currently include the following: Morgan Stanley Investment Advisors Inc., Morgan
Stanley Alternative Investment Partners, L.P., Morgan Stanley AIP GP LP, Morgan
Stanley Investment Management Inc., Morgan Stanley Investment Group Inc., Morgan
Stanley Investment Management Limited, Morgan Stanley Investment Management
Company, Morgan Stanley Asset & Investment Trust Management Co., Limited, Morgan
Stanley Investment Management Private Limited, Morgan Stanley Investments LP,
Morgan Stanley Hedge Fund Partners GP LP, Morgan Stanley Hedge Fund Partners LP,
Van Kampen Investment Advisory Corp., Van Kampen Asset Management Inc., and Van
Kampen Advisors Inc. (each a "MSIM Affiliate" and collectively referred to as
the "MSIM Affiliates").
10
Each MSIM Affiliate will vote proxies as part of its authority to manage,
acquire and dispose of account assets. With respect to the MSIM registered
management investment companies (Van Kampen, Institutional and Advisor
Funds)(collectively referred to as the "MSIM Funds"), each MSIM Fund will vote
proxies pursuant to authority granted under its applicable investment advisory
agreement or, in the absence of such authority, as authorized by its Board of
Directors or Trustees. A MSIM Affiliate will not vote proxies if the "named
fiduciary" for an ERISA account has reserved the authority for itself, or in the
case of an account not governed by ERISA, the Investment Management Agreement
does not authorize the MSIM Affiliate to vote proxies. MSIM Affiliates will, in
a prudent and diligent manner, vote proxies in the best interests of clients,
including beneficiaries of and participants in a client's benefit plan(s) for
which we manage assets, consistent with the objective of maximizing long-term
investment returns ("Client Proxy Standard"). In certain situations, a client or
its fiduciary may provide a MSIM Affiliate with a statement of proxy voting
policy. In these situations, the MSIM Affiliate will comply with the client's
policy unless to do so would be inconsistent with applicable laws or regulations
or the MSIM Affiliate's fiduciary responsibility.
PROXY RESEARCH SERVICES - To assist the MSIM Affiliates in their responsibility
for voting proxies and the overall global proxy voting process, Institutional
Shareholder Services ("ISS") and the Investor Responsibility Research Center
("IRRC") have been retained as experts in the proxy voting and corporate
governance area. ISS and IRRC are independent advisers that specialize in
providing a variety of fiduciary-level proxy-related services to institutional
investment managers, plan sponsors, custodians, consultants, and other
institutional investors. The services provided to MSIM Affiliates include
in-depth research, global issuer analysis, and voting recommendations. In
addition to research, ISS provides vote execution, reporting, and recordkeeping.
MSIM's Proxy Review Committee (see Section IV.A. below) will carefully monitor
and supervise the services provided by the proxy research services.
VOTING PROXIES FOR CERTAIN NON-US COMPANIES - While the proxy voting process is
well established in the United States and other developed markets with a number
of tools and services available to assist an investment manager, voting proxies
of non-US companies located in certain jurisdictions, particularly emerging
markets, may involve a number of problems that may restrict or prevent a MSIM
Affiliate's ability to vote such proxies. These problems include, but are not
limited to: (i) proxy statements and ballots being written in a language other
than English; (ii) untimely and/or inadequate notice of shareholder meetings;
(iii) restrictions on the ability of holders outside the issuer's jurisdiction
of organization to exercise votes; (iv) requirements to vote proxies in person,
(v) the imposition of restrictions on the sale of the securities for a period of
time in proximity to the shareholder meeting; and (vi) requirements to provide
local agents with power of attorney to facilitate the MSIM Affiliate's voting
instructions. As a result, clients' non-U.S. proxies will be voted on a best
efforts basis only, consistent with the Client Proxy Standard. ISS has been
retained to provide assistance to the MSIM Affiliates in connection with voting
their clients' non-US proxies.
II. GENERAL PROXY VOTING GUIDELINES
11
To ensure consistency in voting proxies on behalf of its clients, MSIM
Affiliates will follow (subject to any exception set forth herein) these Proxy
Voting Policies and Procedures, including the guidelines set forth below. These
guidelines address a broad range of issues, including board size and
composition, executive compensation, anti-takeover proposals, capital structure
proposals and social responsibility issues and are meant to be general voting
parameters on issues that arise most frequently. The MSIM Affiliates, however,
may vote in a manner that is contrary to the following general guidelines,
pursuant to the procedures set forth in Section IV. below, provided the vote is
consistent with the Client Proxy Standard.
III. GUIDELINES
A. MANAGEMENT PROPOSALS
1. When voting on routine ballot items the following proposals are
generally voted in support of management, subject to the review and
approval of the Proxy Review Committee, as appropriate.
- Selection or ratification of auditors.
- Approval of financial statements, director and auditor reports.
- Election of Directors.
- Limiting Directors' liability and broadening indemnification of
Directors.
- Requirement that a certain percentage (up to 66 2/3%) of its
Board's members be comprised of independent and unaffiliated
Directors.
- Requirement that members of the company's compensation,
nominating and audit committees be comprised of independent or
unaffiliated Directors.
- Recommendations to set retirement ages or require specific levels
of stock ownership by Directors.
- General updating/corrective amendments to the charter.
- Elimination of cumulative voting.
- Elimination of preemptive rights.
- Provisions for confidential voting and independent tabulation of
voting results.
12
- Proposals related to the conduct of the annual meeting except
those proposals that relate to the "transaction of such other
business which may come before the meeting."
2. The following non-routine proposals, which potentially may have a
substantive financial or best interest impact on a shareholder, are
generally voted in support of management, subject to the review and
approval of the Proxy Review Committee, as appropriate.
CAPITALIZATION CHANGES
- Capitalization changes that eliminate other classes of stock and
voting rights.
- Proposals to increase the authorization of existing classes of
common stock (or securities convertible into common stock) if:
(i) a clear and legitimate business purpose is stated; (ii) the
number of shares requested is reasonable in relation to the
purpose for which authorization is requested; and (iii) the
authorization does not exceed 100% of shares currently authorized
and at least 30% of the new authorization will be outstanding.
- Proposals to create a new class of preferred stock or for
issuances of preferred stock up to 50% of issued capital.
- Proposals for share repurchase plans.
- Proposals to reduce the number of authorized shares of common or
preferred stock, or to eliminate classes of preferred stock.
- Proposals to effect stock splits.
- Proposals to effect reverse stock splits if management
proportionately reduces the authorized share amount set forth in
the corporate charter. Reverse stock splits that do not adjust
proportionately to the authorized share amount will generally be
approved if the resulting increase in authorized shares coincides
with the proxy guidelines set forth above for common stock
increases.
COMPENSATION
- Director fees, provided the amounts are not excessive relative to
other companies in the country or industry.
13
- Employee stock purchase plans that permit discounts up to 15%,
but only for grants that are part of a broad based employee plan,
including all non-executive employees.
- Establishment of Employee Stock Option Plans and other employee
ownership plans.
ANTI-TAKEOVER MATTERS
- Modify or rescind existing supermajority vote requirements to
amend the charters or bylaws.
- Adoption of anti-greenmail provisions provided that the proposal:
(i) defines greenmail; (ii) prohibits buyback offers to large
block holders not made to all shareholders or not approved by
disinterested shareholders; and (iii) contains no anti-takeover
measures or other provisions restricting the rights of
shareholders.
3. The following non-routine proposals, which potentially may have a
substantive financial or best interest impact on the shareholder, are
generally voted AGAINST (notwithstanding management support), subject
to the review and approval of the Proxy Review Committee, as
appropriate.
- Capitalization changes that add classes of stock which
substantially dilute the voting interests of existing
shareholders.
- Proposals to increase the authorized number of shares of existing
classes of stock that carry preemptive rights or supervoting
rights.
- Creation of "blank check" preferred stock.
- Changes in capitalization by 100% or more.
- Compensation proposals that allow for discounted stock options
that have not been offered to employees in general.
- Amendments to bylaws that would require a supermajority
shareholder vote to pass or repeal certain provisions.
- Proposals to indemnify auditors.
4. The following types of non-routine proposals, which potentially may
have a potential financial or best interest impact on an issuer, are
voted as determined by the Proxy Review Committee.
14
CORPORATE TRANSACTIONS
- Mergers, acquisitions and other special corporate transactions
(i.e., takeovers, spin-offs, sales of assets, reorganizations,
restructurings and recapitalizations) will be examined on a
case-by-case basis. In all cases, ISS and IRRC research and
analysis will be used along with MSIM Affiliates' research and
analysis, based on, among other things, MSIM internal
company-specific knowledge.
- Change-in-control provisions in non-salary compensation plans,
employment contracts, and severance agreements that benefit
management and would be costly to shareholders if triggered.
- Shareholders rights plans that allow appropriate offers to
shareholders to be blocked by the board or trigger provisions
that prevent legitimate offers from proceeding.
- Executive/Director stock option plans. Generally, stock option
plans should meet the following criteria:
(i) Whether the stock option plan is incentive based;
(ii) For mature companies, should be no more than 5% of the
issued capital at the time of approval;
(iii) For growth companies, should be no more than 10% of the
issued capital at the time of approval.
ANTI-TAKEOVER PROVISIONS
- Proposals requiring shareholder ratification of poison pills.
- Anti-takeover and related provisions that serve to prevent the
majority of shareholders from exercising their rights or
effectively deter the appropriate tender offers and other offers.
B. SHAREHOLDER PROPOSALS
1. The following shareholder proposals are generally supported, subject
to the review and approval of the Proxy Review Committee, as
appropriate:
- Requiring auditors to attend the annual meeting of shareholders.
- Requirement that members of the company's compensation,
nominating and audit committees be comprised of independent or
unaffiliated Directors.
15
- Requirement that a certain percentage of its Board's members be
comprised of independent and unaffiliated Directors.
- Confidential voting.
- Reduction or elimination of supermajority vote requirements.
2. The following shareholder proposals will be voted as determined by the
Proxy Review Committee.
- Proposals that limit tenure of directors.
- Proposals to limit golden parachutes.
- Proposals requiring directors to own large amounts of stock to be
eligible for election.
- Restoring cumulative voting in the election of directors.
- Proposals that request or require disclosure of executive
compensation in addition to the disclosure required by the
Securities and Exchange Commission ("SEC") regulations.
- Proposals that limit retirement benefits or executive
compensation.
- Requiring shareholder approval for bylaw or charter amendments.
- Requiring shareholder approval for shareholder rights plan or
poison pill.
- Requiring shareholder approval of golden parachutes.
- Elimination of certain anti-takeover related provisions.
- Prohibit payment of greenmail.
3. The following shareholder proposals are generally not supported,
subject to the review and approval of the Committee, as appropriate.
- Requirements that the issuer prepare reports that are costly to
provide or that would require duplicative efforts or expenditures
that are of a non-business nature or would provide no pertinent
information from the perspective of institutional shareholders.
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- Restrictions related to social, political or special interest
issues that impact the ability of the company to do business or
be competitive and that have a significant financial or best
interest impact to the shareholders.
- Proposals that require inappropriate endorsements or corporate
actions.
IV. ADMINISTRATION OF PROXY POLICIES AND PROCEDURES
A. PROXY REVIEW COMMITTEE
1. The MSIM Proxy Review Committee ("Committee") is responsible for
creating and implementing MSIM's Proxy Voting Policy and Procedures
and, in this regard, has expressly adopted them. Following are some of
the functions and responsibilities of the Committee.
(a) The Committee, which will consist of members designated by MSIM's
Chief Investment Officer, is responsible for establishing MSIM's
proxy voting policies and guidelines and determining how MSIM
will vote proxies on an ongoing basis.
(b) The Committee will periodically review and have the authority to
amend as necessary MSIM's proxy voting policies and guidelines
(as expressed in these Proxy Voting Policy and Procedures) and
establish and direct voting positions consistent with the Client
Proxy Standard.
(c) The Committee will meet at least monthly to (among other
matters): (1) address any outstanding issues relating to MSIM's
Proxy Voting Policy and Procedures; and (2) generally review
proposals at upcoming shareholder meetings of MSIM portfolio
companies in accordance with this Policy and Procedures
including, as appropriate, the voting results of prior
shareholder meetings of the same issuer where a similar proposal
was presented to shareholders. The Committee, or its designee,
will timely communicate to ISS MSIM's Proxy Voting Policy and
Procedures (and any amendments to them and/or any additional
guidelines or procedures it may adopt).
(d) The Committee will meet on an ad hoc basis to (among other
matters): (1) authorize "split voting" (i.e., allowing certain
shares of the same issuer that are the subject of the same proxy
solicitation and held by one or more MSIM portfolios to be voted
differently than other shares) and/or "override voting" (i.e.,
voting all MSIM portfolio shares in a manner contrary to the
Procedures); (2) review and approve upcoming votes, as
appropriate, for matters
17
for which specific direction has been provided in Sections I, II,
and III above; and (3) determine how to vote matters for which
specific direction has not been provided in Sections I, II and
III above. Split votes will generally not be approved within a
single Global Investor Group team. The Committee may take into
account ISS recommendations and the research provided by IRRC as
well as any other relevant information they may request or
receive.
(e) In addition to the procedures discussed above, if the Committee
determines that an issue raises a potential material conflict of
interest, or gives rise to the appearance of a potential material
conflict of interest, the Committee will designate a special
committee to review, and recommend a course of action with
respect to, the conflict(s) in question ("Special Committee").
The Special Committee may request the assistance of the Law and
Compliance Departments and will have sole discretion to cast a
vote. In addition to the research provided by ISS and IRRC, the
Special Committee may request analysis from MSIM Affiliate
investment professionals and outside sources to the extent it
deems appropriate.
(f) The Committee and the Special Committee, or their designee(s),
will document in writing all of their decisions and actions,
which documentation will be maintained by the Committee and the
Special Committee, or their designee(s) for a period of at least
6 years. To the extent these decisions relate to a security held
by a MSIM U.S. registered investment company, the Committee and
Special Committee, or their designee(s), will report their
decisions to each applicable Board of Trustees/Directors of those
investment companies at each Board's next regularly Scheduled
Board meeting. The report will contain information concerning
decisions made by the Committee and Special Committee during the
most recently ended calendar quarter immediately preceding the
Board meeting.
The Committee and Special Committee, or their designee(s), will timely
communicate to applicable PMs, the Compliance Departments and, as necessary to
ISS, decisions of the Committee and Special Committee so that, among other
things, ISS will vote proxies consistent with their decisions.
ITEM 8. [RESERVED.]
ITEM 9. CONTROLS AND PROCEDURES.
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(a) The Fund's chief executive officer and chief financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient
to ensure that information required to be disclosed by the Fund in this
Form N-CSR was recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and
forms, based upon such officers' evaluation of these controls and procedures
as of a date within 90 days of the filing date of the report.
(b) There were no changes in the Fund's internal control over financial
reporting that occurred during the registrant's most recent second fiscal
half-year that has materially affected, or is reasonably likely to materially
affect, the Fund's internal control over financial reporting.
ITEM 10. EXHIBITS.
(a) [Attach the Code of Ethics]
(b)(1) [Attach the 302 Certification of Chief Executive Officer]
(b)(2) [Attach the 302 Certification of Chief Financial Officer]
[Note: the 906 Certifications are not exhibits to the Form but are filed with
the Form.]
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Morgan Stanley Emerging Markets Debt Fund, Inc.
--------------------------------------------------------------------
By: /s/ Ronald E. Robison
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Name: Ronald E. Robison
Title: Principal Executive Officer
Date: 2/18/2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
By: /s/ Ronald E. Robison
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Name: Ronald E. Robison
Title: Principal Executive Officer
Date: 2/18/2004
By: /s/ James W. Garrett
-----------------------------------------------------------------------------
Name: James W. Garrett
Title: Chief Financial Officer
Date: 2/18/2004