January 29, 1996
The Emerging Markets
Income Fund Inc
To Our Shareholders:
During the quarter ended November 30, 1995, the net asset value for The Emerging
Markets Income Fund Inc (the "Fund") increased from $13.38 per share at August
31, 1995 to $13.90 per share at November 30, 1995. Dividends of $0.4125 per
share were paid during the quarter. Assuming that these dividends were
reinvested in additional shares of the Fund, the total investment return, based
on net asset value per share, for the quarter ended November 30, 1995 was 7.15%,
compared to a 6.19% return for the Salomon Brothers Brady Bond Index, which we
use as a measure of the return of the overall market for emerging markets debt.
At November 30, 1995, the Fund's stock traded at $13.625 per share, up $0.625
per share from August 31, 1995, this represents an approximate 2% discount to
the underlying net asset value per share of $13.90. The Fund's primary
investment objective is to seek high current income through investments in
selected debt securities of emerging markets countries.
Market Overview
The fiscal quarter ended November 30, 1995 saw continued recovery in emerging
markets debt after the dismal first calendar quarter of 1995. The important
developments for the markets during the Fund's most recent quarter included:
declining U.S. interest rates, successful financings by Argentina and Mexico,
continued Mexican peso volatility, and continued economic and structural reform
progress in Brazil. The market, after its 6.19% return in the quarter ended
November 30, 1995, returned 7.40% in December, as measured by the Salomon
Brothers Brady Bond Index.
Spreads above U.S. Treasuries for the Salomon Brothers Brady Bond Index
narrowed modestly from 1,076 basis points at the beginning of the quarter to
1,065 basis points at November 30, 1995.
Portfolio Review
U.S. dollar-denominated bonds of the Republic of Brazil remain the largest
holding of the portfolio, totaling 20.7% of total investments. During the
quarter, we increased the Fund's allocation to Brazilian Brady Bonds from 15.4%
of total investments to capture any expected spread tightening. Brazilian Brady
Bonds were one of the top performing components of the Salomon Brothers Brady
Bond Index during the quarter, posting a return of 7.9%.
The key to Brazil's economic and credit quality improvement in 1995 has been the
credibility of its new currency, the Real, and the ability of Brazil's monetary
policy to drastically reduce inflation. Inflation is expected to total about 15%
in 1995, down from 1,094% in 1994. After initiating a strong burst of
consumption upon the introduction of the new currency in July 1994, the central
bank has used high interest rates to bring economic growth rates down in the
later part of 1995, reducing inflationary pressures.
1
<PAGE>
Going forward, Brazil's performance is largely dependent upon fiscal policy.
Successful fiscal policy will include substantial reductions in government
expenditures and privatization to pay down government debt. With high real
interest rates, domestic debt levels are increasing substantially, although
external debt remains at reasonable levels. The risk in Brazil is that the
political will to downsize the government, and sell off state owned companies
will diminish. We view the momentum of developments in Brazil as positive and
sustainable, and feel that Brazilian external debt represents an acceptable
level of risk.
Moroccan government loans continue to be a core holding in the portfolio,
accounting for 16.4% of total investments. Moroccan debt has lagged the market
for much of the year but rebounded 6.9% during the quarter. Morocco's economic
output and governmental finances were hurt by a drought in 1995, which caused a
sharp rise in imports as well as a decline in agricultural exports. We view this
as a short-term concern and expect Morocco to remain a core holding in the
portfolio.
The Fund's third largest holding is in bonds of the Republic of Poland, which
represent 11.7% of total investments. During the quarter, Polish Brady Bonds
were up 4.8%. On November 19, 1995, Aleksander Kwasniewski was elected President
of the Republic in the second round of voting. The election of the former
communist was largely anticipated by the market, but caused some market
nervousness and contributed to Poland's underperformance versus the overall
market during the quarter.
Poland has shown remarkable economic advancements during 1995 and we expect
Poland to develop into a major European economic force. Poland was the first
Brady Bond issuing country to receive an investment grade rating, Baa3 by
Moody's Investors Service, Inc. We expect that large investment grade bond
buyers will focus increasingly on Poland which should cause spreads to tighten.
Accordingly, during the quarter, while the percentage allocation to Poland was
increased marginally from 11.2% of total investments, we sold our collateralized
positions and purchased uncollateralized bonds. The uncollateralized bonds
should outperform the collateralized issues due to their pure sovereign risk
characteristics if the risk premium, as measured by spreads to treasuries,
narrows.
Obligations of the Republic of Argentina constitute 11.5% of total investments,
down from 13.5% of total investments at the beginning of the quarter. During the
quarter, Argentine Brady Bonds were the top performing component of the Brady
Bond Index registering a gain of 11.1%. Argentina's outperformance is primarily
due to the success of the government's tax moratorium through which $3.5 billion
in receipts have been pledged as of quarter end. This increase in revenues has
aided both President Menem and Finance Minister Cavallo and has helped solidify
the economic reforms the country has undertaken under their leadership. While we
expect to continue to maintain a large exposure to Argentina we marginally
lowered the Fund's exposure to Argentina to take advantage of other
opportunities in the market.
The Fund's allocation to Mexican corporate bonds and government debt was reduced
from 9.8% of total investments to 6.1% of total investments during the quarter
through the sale of the Fund's Cementos Mexicanos position. We continue to
believe Mexico still has a while before meaningful economic growth is
sustainable. We are encouraged by Mexico's ability to raise capital in the debt
market at attractive levels but feel a more significant investment at this time
is not warranted. During the quarter, the Mexican portion of the Salomon
Brothers Brady Bond Index was up 2.2%.
2
<PAGE>
During the quarter we almost doubled our investment in Indonesian paper company
corporate bonds to 3.0% of total investments from 1.6% of total investments
and lowered our Philippine exposure to 2.2% of total investments from 5.7% of
total investments. These trades marginally lowered our exposure to Asia but
increased our exposure to paper company debt which should be a direct
beneficiary from an increase in economic activity in the region.
The Fund's allocation to debt from Russia was reduced to 0.9% of total
investments from 2.1% of total investments during the quarter. We believe at
some point Russian debt will be a meaningful component of the Fund, as Russia
should have an impressive fiscal profile after their Brady restructuring. At
this point, however, we believe the debt has some downside risk heading into an
election year.
During the quarter, we reinstituted a position in loans from the government of
Peru. Peru is a dynamic country that is emerging from years of an economic
drought brought upon by terrorist activity and economic mismanagement. President
Fujimori has handled the problems admirably and we expect his privatization
program to reinvigorate the economy and attract foreign investors. The country's
recent Brady restructuring should also aid their fiscal profile and improve
their debt service management.
Annual Shareholders Meeting
The Fund held its annual shareholders meeting on December 13, 1995. At the
meeting, shareholders elected each of the nominees proposed for election to the
Fund's Board of Directors and ratified the selection of Price Waterhouse LLP as
the independent accountants of the Fund. The following table provides
information concerning the matters voted on at the meeting:
1. Election of Directors
Nominees Votes For Votes Against
-------- --------- -------------
Charles F. Barber 3,332,858 37,797
Alan H. Rappaport 3,334,602 36,053
Riordan Roett 3,335,602 35,053
2. Ratification of Price Waterhouse LLP as the Independent Accountants of the
Fund
Votes For Votes Against Votes Abstained Unvoted
--------- ------------- --------------- -------
3,331,756 19,008 19,891 1
We encourage you to read the financial statements that follow for further
details about the Fund's investments. A recorded update of developments
affecting emerging markets debt securities is available by calling (800)
421-4777. This number also includes specific information about the Fund, its
portfolio and its recent performance.
Cordially,
Michael S. Hyland Alan H. Rappaport
Chairman of the Board President
3
<PAGE>
Statement of Investments November 30, 1995 (unaudited)
<TABLE>
BONDS -- 106.4%
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
Principal
Amount
000's(a) Value
<S> <C> <C>
ARGENTINA - 15.5%
Peso 1,846 Republic of Argentina, Bocon, Pre I, Floating Rate Note,
3.4502%, 4/01/01*(b) ................................................... $ 1,031,167
10,000 Republic of Argentina, Floating Rate Bond, Series L, 6.8125%, 3/31/05*,** 6,537,500
-----------
TOTAL ARGENTINA .......................................................... 7,568,667
-----------
BRAZIL - 28.1%
238 Federal Republic of Brazil, Interest Due Bond, 6.6875%, 1/01/01*,** ...... 202,469
4,000 Federal Republic of Brazil, "New" New Money Bond, Floating Rate,
Series L, 6.875%, 4/15/09*,** .......................................... 2,350,000
4,000 Federal Republic of Brazil, Par Bond, Series Z-L, 4.25%, 4/15/24*,** ..... 2,002,500
14,133 Federal Republic of Brazil, Capitalization Bond, 8.0%, 4/15/14*,**(b) .... 7,499,259
2,500 Federal Republic of Brazil, Eligible Interest Bond,
Series L, 6.8125%, 4/15/06*,** ......................................... 1,654,687
-----------
TOTAL BRAZIL ............................................................. 13,708,915
-----------
BULGARIA - 6.5%
10,000 Republic of Bulgaria, Front Loaded Interest Reduction Bond,
Series A, 2%, 7/28/12*,** .............................................. 2,775,000
800 Republic of Bulgaria, Discount Bond, Tranche A, 6.75%, 7/28/24*,** ....... 407,500
-----------
TOTAL BULGARIA ........................................................... 3,182,500
-----------
COSTA RICA - 4.0%
3,500 Costa Rica, Principal Bond, Series A, 6.25%, 5/21/10** ................... 1,960,000
-----------
ECUADOR - 7.3%
736 Republic of Ecuador, Interest Equalization Bond, 6.75%, 12/21/04*,** ..... 426,953
9,459 Republic of Ecuador, Past Due Interest Bond, 6.8125%, 2/28/15*,**(b) ..... 3,121,307
-----------
TOTAL ECUADOR 3,548,260
-----------
INDONESIA - 4.1%
1,000 APP International Finance Company B.V., 11.75%, 10/01/05** ............... 985,000
1,000 Indah Kiat Finance, 12.5%, 6/15/06** ..................................... 992,500
-----------
TOTAL INDONESIA .......................................................... 1,977,500
-----------
MEXICO - 8.2%
1,000 Grupo Industrial Durango, 12.0%, 7/15/01** ............................... 852,500
2,000 United Mexican States, Par Bond, Series A, 6.25%, 12/31/19**
(including 2,000,000 rights expiring 6/30/03) .......................... 1,232,500
3,150 United Mexican States, Par Bond, Series B, 6.25%, 12/31/19**
(including 3,150,000 rights expiring 6/30/03) .......................... 1,941,187
-----------
TOTAL MEXICO ............................................................. 4,026,187
-----------
</TABLE>
4
<PAGE>
Statement of Investments November 30, 1995 (continued) (unaudited)
<TABLE>
BONDS (continued)
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
Principal
Amount
000's(a) Value
<S> <C> <C>
PANAMA - 5.1%
3,000 Republic of Panama, Floating Rate Note, 6.75%, 5/10/02*,** ............... $ 2,491,875
-----------
PHILIPPINES - 3.0%
2,000 Republic of the Philippines, Par Bond, Series B, 5.75%, 12/01/17*,** ..... 1,445,000
-----------
POLAND - 15.9%
12,000 Republic of Poland, Past Due Interest Bond, 3.75%, 10/27/14*,** .......... 7,747,500
-----------
SOUTH AFRICA - 1.5%
ZAL 3,000 Republic of South Africa Notes, 12%, 2/28/05** ........................... 715,673
-----------
TRINIDAD AND TOBAGO - 2.1%
1,000 Trinidad and Tobago Notes, 9.75%, 11/03/00** ............................. 1,040,000
-----------
URUGUAY - 1.5%
1,000 Uruguay Debt Conversion Bonds, Series B, Floating Rate Note,
6.75%, 2/18/07*,** ..................................................... 735,000
-----------
VENEZUELA - 3.6%
2,500 Republic of Venezuela, Par Bond, Series A, 6.75%, 3/31/20**
(including 12,500 warrants expiring 3/31/20) ........................... 1,271,875
1,000 Republic of Venezuela, Par Bond, Series B, 6.75%, 3/31/20**
(including 5,000 warrants expiring 3/31/20) ............................ 508,750
-----------
TOTAL VENEZUELA .......................................................... 1,780,625
-----------
TOTAL BONDS (cost $51,207,575) ........................................... 51,927,702
-----------
LOAN PARTICIPATIONS -- 29.0%
- -----------------------------------------------------------------------------------------------------------
DEM 2,500 Bank for Foreign Economic Affairs, Vnesheconombank#
(Participation: Chase Manhattan Bank, New York)T ....................... 601,668
3,000 Government of Ivory Coast, 1/01/01#
(Participation: Morgan Stanley Emerging Markets, Inc.)T ................ 510,000
778 Government of Jamaica, Tranche A, 6.75%, 10/15/00*
(Participation: Chase Manhattan Bank, New York)T ....................... 699,993
17,000 Kingdom of Morocco, Tranche A, 6.59375%, 1/01/09*,**
(Participation: Morgan Guaranty Trust Company of New York)T ............ 10,826,875
2,250 Peru Non-Citi # (Participation: Merrill Lynch)T .......................... 1,535,625
-----------
TOTAL LOAN PARTICIPATIONS
(cost $12,345,053) ..................................................... 14,174,161
-----------
TOTAL INVESTMENTS - 135.4% (cost $63,552,628) ............................ 66,101,863
-----------
</TABLE>
5
<PAGE>
Statement of Investments November 30, 1995 (continued) (unaudited)
REPURCHASE AGREEMENTS -- 6.9%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
000's(a)
<S> <C> <C>
2,342 Merrill Lynch, 5.85%, cost $2,342,000, dated 11/30/95,
$2,342,381 due 12/1/95, (collateralized by $2,390,000 U.S. Treasury
Note, 5.125%, due 3/31/98, valued at $2,392,988) $ 2,342,000
1,000 Chase Manhattan Bank, 5.875%, cost $1,000,000, dated 11/30/95,
$1,000,163 due 12/1/95, (collateralized by $1,020,000 U.S. Treasury
Bond, 11.75%, due 11/15/14, valued at $1,021,275) 1,000,000
-----------
TOTAL REPURCHASE AGREEMENTS (cost $3,342,000) 3,342,000
-----------
LIABILITIES IN EXCESS OF OTHER ASSETS - (42.3%) (20,628,259)
-----------
NET ASSETS - 100.0% (equivalent to $13.90 per share on
3,512,134 common shares outstanding) $48,815,604
===========
<FN>
- -----------
(a) Principal denominated in U.S. dollars unless otherwise indicated.
(b) Payment-in-kind security for which all or part of the interest earned is capitalized as additional principal.
* Rate shown reflects current rate on instrument with variable rates or step coupon rates.
** All or a portion of the security is segregated as collateral pursuant to a loan agreement. See Note 5.
# Non-income producing. Security is currently in default.
T Participation interests were acquired through the financial institutions indicated parenthetically. See Note 6.
Peso - Argentina Peso.
DEM - Deutschemark.
ZAL - South African Rand.
</FN>
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
Statement of Assets and Liabilities November 30, 1995 (unaudited)
<TABLE>
<S> <C>
Assets
Investments, at value (cost-$63,552,628) ...................................... $66,101,863
Repurchase agreements ......................................................... 3,342,000
Cash .......................................................................... 404
Receivable for securities sold ................................................ 2,314,120
Interest receivable ........................................................... 950,119
Unamortized organization expenses ............................................. 57,586
Prepaid expenses .............................................................. 2,215
-----------
Total assets ....................................................... 72,768,307
-----------
Liabilities
Loan payable (Note 5) ......................................................... 20,000,000
Payable for securities purchased .............................................. 3,129,540
Payable for compensated foreign currency contracts ............................ 564,044
Accrued interest expense on loan .............................................. 93,750
Accrued management fee (Note 3) ............................................... 26,934
Accrued advisory fee (Note 3) ................................................. 19,239
Other accrued expenses ........................................................ 119,196
-----------
Total liabilities .................................................. 23,952,703
-----------
Net Assets
Common Stock ($.001 par value, authorized
100,000,000; 3,512,134 shares outstanding) .................................. 3,512
Additional paid-in capital .................................................... 48,716,493
Undistributed net investment income ........................................... 627,371
Accumulated net realized loss on investments .................................. (3,087,155)
Net unrealized appreciation on investments and foreign currency translations .. 2,555,383
-----------
Net assets ......................................................... $48,815,604
===========
.
Net Asset Value Per Share ($48,815,604 - 3,512,134 shares) .................. $13.90
. ======
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
Statement of Operations for the Three Months ended November 30, 1995 (unaudited)
<TABLE>
<S> <C> <C>
Net Investment Income
Income
Interest (includes discount accretion of $713,743) ................................ $ 2,465,924
Expenses
Interest on loan .................................................................. $371,042
Management fee .................................................................... 82,336
Advisory fee ...................................................................... 58,811
Audit and tax services ............................................................ 15,925
Printing .......................................................................... 13,650
Custodian ......................................................................... 14,924
Legal ............................................................................. 12,285
Amortization of organization expenses ............................................. 7,462
Directors' fees and expenses ...................................................... 8,190
Transfer agent expenses ........................................................... 8,190
Listing fees ...................................................................... 4,783
Other ............................................................................. 8,835 606,433
-------- -----------
Net investment income ......................................................................... 1,859,491
-----------
Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions
Net Realized Loss on:
Investments ................................................................................. (549,240)
Foreign currency transactions ............................................................... (339)
-----------
(549,579)
-----------
Change in Net Unrealized Appreciation on:
Investments ................................................................................. 1,954,918
Translation of foreign currency contracts and other assets and liabilities
denominated in foreign currencies .......................................................... 6,426
-----------
1,961,344
-----------
Net realized loss and change in net unrealized appreciation ................................... 1,411,765
-----------
Net Increase in Net Assets from Operations .................................................... $ 3,271,256
===========
</TABLE>
8
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Three Months
Ended Twelve Months
November 30, 1995 Ended
(unaudited) August 31, 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations
Net investment income ................................................... $ 1,859,491 $ 6,832,081
Net realized loss on investments and foreign currency transactions ...... (549,579) (1,970,869)
Change in net unrealized appreciation (depreciation) .................... 1,961,344 (5,811,885)
----------- -----------
Net increase (decrease) in net assets from operations ................... 3,271,256 (950,673)
----------- -----------
Dividends and Distributions to Shareholders
From net investment income .............................................. (1,448,755) (4,794,063)
From net realized capital gains ......................................... -- (1,729,666)
In excess of net realized capital gains ................................. -- (2,537,577)
----------- -----------
Total dividend to shareholders .......................................... (1,448,755) (9,061,306)
----------- -----------
Total increase (decrease) in net assets ................................. 1,822,501 (10,011,979)
Net Assets
Beginning of period ..................................................... 46,993,103 57,005,082
----------- -----------
End of period (includes undistributed net investment income of
$627,371 for the three months ended November 30, 1995 and
$216,636 for the year ended August 31, 1995) .......................... $48,815,604 $46,993,103
=========== ===========
Statement of Cash Flows For the Three Months Ended November 30, 1995 (unaudited)
Cash Flows from Operating Activities:
Purchases of securities .................................................................. $(13,756,314)
Net purchases of short-term investments .................................................. (2,164,000)
Proceeds from sales of securities and principal paydowns ................................. 15,982,114
------------
61,800
Net investment income .................................................................... 1,859,491
Accretion of discount on investments ..................................................... (713,743)
Interest on payment-in-kind bonds ........................................................ (259,525)
Amortization of organization expenses .................................................... 7,462
Net change in receivables/payables related to operations ................................. 466,238
------------
Net cash provided by operating activities ................................................ 1,421,723
------------
Cash Flows from Financing Activities:
Dividends paid ........................................................................... (1,448,755)
------------
Net cash used by financing activities .................................................... (1,448,755)
------------
Net decrease in cash ..................................................................... (27,032)
Cash at beginning of period .............................................................. 27,436
------------
Cash at end of period $ 404
============
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
Notes to Financial Statements (unaudited)
1. Organization
The Emerging Markets Income Fund Inc (the "Fund") was incorporated in
Maryland on July 30, 1992 and is registered as a non-diversified, closed-end,
management investment company under the Investment Company Act of 1940, as
amended. The Board of Directors authorized 100 million shares of $.001 par value
common stock.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
(a) Securities valuation. In valuing the Fund's assets, all securities for
which market quotations are readily available are valued (i) at the last
sale price prior to the time of determination if there was a sale on the
date of determination, (ii) at the mean between the last current bid and
asked prices if there was no sales price on such date and bid and asked
quotations are available, and (iii) at the bid price if there was no sales
price on such date and only bid quotations are available. Publicly traded
foreign government debt securities are typically traded internationally in
the over-the-counter market, and are valued at the mean between the last
current bid and asked price as at the close of business of that market.
However, where the spread between bid and asked price exceeds five percent
of the par value of the security, the security is valued at the bid price.
Securities may also be valued by independent pricing services which use
prices provided by market-makers or estimates of market values obtained from
yield data relating to instruments or securities with similar
characteristics. Short-term investments having a maturity of 60 days or less
are valued at amortized cost, unless the Board of Directors determines that
such valuation does not constitute fair value. Securities for which reliable
quotations are not readily available and all other securities and assets are
valued at fair value as determined in good faith by, or under procedures
established by, the Board of Directors.
(b) Investment transactions. Investment transactions are recorded on the
trade date. Interest income is accrued on a daily basis. Market discount on
securities purchased is accreted on an effective yield basis over the life
of the security. The Fund uses the specific identification method for
determining realized gain or loss on investments sold.
(c) Foreign currency translation. The books and records of the Fund are
maintained in U.S. dollars. Portfolio securities and other assets and
liabilities denominated in foreign currencies are translated into U.S.
dollar amounts at the date of valuation using the 12:00 noon rate of
exchange reported by Reuters. Purchases and sales of portfolio securities
and income and expense items denominated in foreign currencies are
translated into U.S. dollars at rates of exchange prevailing on the
respective dates of such transactions. The Fund does not isolate that
portion of gains and losses on investments which is due to changes in
foreign exchange rates from that which is due to changes in market prices of
the securities. Such fluctuations are included with the net realized and
unrealized gain or loss from investments. However, pursuant to U.S. federal
income tax regulations, certain net foreign exchange gains/losses included
in realized gain/loss are included in or are a reduction of ordinary income
for federal income tax purposes.
10
<PAGE>
Notes to Financial Statements (unaudited) (continued)
2. Significant Accounting Policies (Continued)
(d) Federal income taxes. It is the Fund's intention to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income and
capital gains, if any, to its shareholders. Therefore, no provision has been
made for federal income taxes.
(e) Organization expenses. Organization expenses amounting to $150,000 were
incurred in connection with the organization of the Fund. These costs have
been deferred and are being amortized ratably over a five year period from
commencement of operations.
(f) Repurchase agreements. When entering into repurchase agreements, it is
the Fund's policy to take possession, through its custodian, of the
underlying collateral and to monitor its value at the time the arrangement
is entered into and at all times during the term of the repurchase agreement
to ensure that it always equals or exceeds the repurchase price. In the
event of default of the obligation to repurchase, the Fund has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or
bankruptcy by the other party to the agreement, realization and/or retention
of the collateral may be subject to legal proceedings.
(g) Distribution of income and gains. The Fund declares and pays
distributions to shareholders quarterly from net investment income. Net
realized gains, if any, in excess of loss carryovers are expected to be
distributed annually. Dividends and distributions to shareholders are
recorded on the ex-dividend date. The amount of dividends and distributions
from net investment income and net realized gains are determined in
accordance with federal income tax regulations, which may differ from
generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within
the capital accounts based on their federal tax basis treatment; temporary
differences do not require reclassification. Dividends and distributions
which exceed net investment income and net realized capital gains for
financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of
net realized capital gains. To the extent they exceed net investment income
and net realized capital gains for tax purposes, they are reported as tax
return of capital.
(h) Forward foreign currency exchange contracts. The Fund enters into
forward foreign currency exchange contracts which are marked-to-market to
reflect the changes in the currency exchange rates. The change in market
value is recorded by the Fund as unrealized gain or loss. The Fund records
realized gains or losses on delivery of the currency or at the time the
forward contract is extinguished (compensated) by entering into a closing
transaction prior to delivery. This gain or loss, if any, is included in net
realized gain (loss) on foreign currency transactions.
(i) Cash flow information. The Fund invests in securities and distributes
dividends from net investment income and net realized gains from investment
transactions which are paid in cash. These activities are reported in the
Statement of Changes in Net Assets. Additional information on cash receipts
and cash payments is presented in the Statement of Cash Flows. For the three
months ended November 30, 1995, the Fund paid interest expense of $777,257.
11
<PAGE>
Notes to Financial Statements (unaudited) (continued)
3. Management and Advisory Fees and Other Transactions
The Fund has retained Salomon Brothers Asset Management Inc, an indirect
wholly owned subsidiary of Salomon Inc, to act as investment manager and
administrator (the "Manager") of the Fund subject to supervision by the Board of
Directors of the Fund. The Manager is responsible for the day-to-day management
of the Fund's investment portfolio as well as providing certain clerical
services relating to the Fund's operations, maintenance of the Fund's records,
preparation of reports and supervision of the Fund's arrangements with its
custodian and transfer and dividend paying agent. The management fee for these
services is payable monthly at an annual rate of 0.70% of the Fund's average
weekly net assets.
The Fund has also retained Advantage Advisers, Inc., a subsidiary of
Oppenheimer, to act as investment adviser (the "Adviser") to the Fund and to
provide financial, economic and political advice concerning emerging market
countries and also, as appropriate, to be involved in aiding the process of
emerging market country selection. The advisory fee for these services is
payable monthly at an annual rate of 0.50% of the Fund's average weekly net
assets.
At November 30, 1995, Oppenheimer and the Manager own 3,658 and 5,412 shares
of the Fund, respectively.
Certain officers and/or directors of the Fund are officers and/or directors
of the Manager or the Adviser.
The Fund pays each Director not affiliated with the Manager or the Adviser a
fee of $5,000 per year, plus a fee of $700 and reimbursement for travel and
out-of-pocket expenses for each board meeting attended.
4. Portfolio Activity and Federal Income Tax Status
Purchases and sales of investment securities, other than short-term
investments, for the three months ended November 30, 1995 aggregated $16,885,854
and $18,086,234, respectively. The federal income tax cost basis of the Fund's
investments and repurchase agreements at November 30, 1995 was $66,986,319.
Gross unrealized appreciation and depreciation amounted to $3,811,143 and
$1,353,599, respectively, resulting in a net unrealized appreciation on
investments of $2,457,544.
For the year ended August 31, 1995 for federal income tax purposes, capital
and foreign currency losses incurred after October 31 within the taxable year
are deemed to arise on the first business day of the Fund's next taxable year.
The Fund incurred and elected to defer net capital and foreign currency losses
of $2,589,473 and $1,511,892, respectively, during fiscal 1995.
5. Bank Loan
The Fund has borrowed $20,000,000 pursuant to a secured loan agreement (the
"Loan Agreement") with Morgan Guaranty Trust Company of New York. The interest
rate on the loan is equal to six month LIBOR plus 1% and the maturity date is
May 6, 1996. The collateral for the loan was valued at $51,045,944 on November
30, 1995 and is being held in a segregated account by the Fund's custodian. In
accordance with the terms of the Loan Agreement, the Fund must maintain a level
of collateral to debt of at least 200%.
12
<PAGE>
Notes to Financial Statements (unaudited) (continued)
6. Loan Participations/Assignments
The Fund invests in fixed and floating rate loans arranged through private
negotiations between a foreign sovereign entity and one or more financial
institutions ("lenders"). The Fund's investment in any such loan may be in the
form of a participation in or an assignment of the loan. The market value of the
Fund's loan participations at November 30, 1995 was $14,174,161.
In connection with purchasing participations, the Fund generally will have
no right to enforce compliance by the borrower with the terms of the loan
agreement relating to the loan, nor any rights of set-off against the borrower,
and the Fund may not benefit directly from any collateral supporting the loan in
which it has purchased the participation. As a result, the Fund will assume the
credit risk of both the borrower and the lender that is selling the
participation. In the event of the insolvency of the lender selling the
participation, the Fund may be treated as a general creditor of the lender and
may not benefit from any set-off between the lender and the borrower.
When the Fund purchases assignments from lenders, the Fund will acquire
direct rights against the borrower on the loan, except that under certain
circumstances such rights may be more limited than those held by the assigning
lender.
7. Credit Risk
The yields of emerging market debt obligations reflect, among other things,
perceived credit risk. The Fund's investment in securities rated below
investment grade typically involves risks not associated with higher rated
securities including, among others, overall greater risk of timely and ultimate
payment of interest and principal, greater market price volatility and less
liquid secondary market trading. The consequences of political, social, economic
or diplomatic changes may have disruptive effects on the market prices of
investments held by the Fund. The Fund's investment in non-dollar-denominated
securities may also result in foreign currency losses caused by devaluations and
other currency exchange fluctuations.
8. Dividend Subsequent to November 30, 1995
On December 13, 1995, the Board of Directors of the Fund declared a dividend
of $.4125 per share, from net investment income and $.03 per share from long
term capital gain, payable on December 29, 1995 to shareholders of record
December 26, 1995.
9. Financial Instruments with Off-Balance Sheet Risk
The Fund enters into forward foreign currency contracts ("forward
contracts") to facilitate settlement of foreign currency denominated portfolio
transactions or to manage foreign currency exposure associated with foreign
currency denominated securities. Forward contracts involve elements of market
risk in excess of the amount reflected in the Statement of Assets and
Liabilities. The Fund bears the risk of an unfavorable change in the foreign
exchange rate underlying the forward contract. Risks may also arise upon
entering into these contracts from the potential inability of the counterparties
to meet the terms of their contracts. As of November 30, 1995, all forward
contracts which the Fund has entered into have been compensated by the Fund with
offsetting contracts.
13
<PAGE>
Financial Highlights
Selected data per share of common stock outstanding throughout the period:
<TABLE>
<CAPTION>
Three Months Period
Ended Twelve Months Twelve Months Ended
November 30, 1995 Ended Ended August 31,
(unaudited) August 31, 1995 August 31, 1994 1993(c)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income ............................... $ 0.53 $ 1.95 $ 1.37 $ 1.28
------ ------ ------ ------
Net realized gain (loss) and change in
unrealized appreciation (depreciation) on
securities and foreign currency translations ...... 0.40 (2.22) (0.79) 3.88
------ ------ ------ ------
Total from investment operations .................... 0.93 (0.27) 0.58 5.16
------ ------ ------ ------
Dividends to shareholders from net
investment income ................................. (0.41) (1.37) (1.50) (1.07)
Dividends to shareholders from net
realized capital gains ............................ -- (0.49) (0.81) --
Distributions in excess of net realized capital gains -- (0.72) -- --
Offering costs on issuance of common stock .......... -- -- -- (0.15)
------ ------ ------ ------
Net increase (decrease) in net asset value .......... 0.52 (2.85) (1.73) 3.94
Net asset value, beginning of period ................ 13.38 16.23 17.96 14.02
------ ------ ------ ------
Net asset value, end of period ...................... $13.90 $13.38 $16.23 $17.96
====== ====== ====== ======
Per share market value, end of period ............... $13.63 $13.00 $16.00 $18.50
Total investment return based on market
price per share (b) ............................... 8.07% -1.76% -1.33% 40.7%(d)
Ratios/Supplemental data:
Net assets, end of period ......................... $48,815,604 $46,993,103 $57,005,082 $63,091,629
Ratio of total expenses to
average net assets .............................. 5.14%(a) 5.15% 3.31% 2.81%(a)
Ratio of operating expenses to
average net assets .............................. 2.01%(a) 2.00% 1.78% 2.00%(a)
Ratio of interest expense to
average net assets .............................. 3.13%(a) 3.15% 1.53% 0.81%(a)
Ratio of net investment income to
average net assets .............................. 15.68%(a) 14.45% 7.99% 9.99%(a)
Portfolio turnover rate ........................... 25.58% 79.7% 21.6% 29.9%
Bank loan outstanding, end of period .............. $20,000,000 $20,000,000 $20,000,000 $10,000,000
Interest rate on bank loan, end of period ......... 6.75% 7.5625% 6.3125% 4.9375%
Weighted average bank loan ........................ $20,000,000 $20,000,000 $16,876,712 $18,202,614
Weighted average interest rate .................... 7.4%(a) 7.5% 5.40% 5.2%(a)
- ----------
<FN>
(a) Annualized.
(b) Dividends are assumed, for purposes of this calculation, to be reinvested at
prices obtained under the Fund's dividend reinvestment plan.
(c) For the period October 30, 1992 (commencement of operations) through August
31, 1993.
(d) Return calculated based on beginning period price of $14.02 (initial
offering price of $15.00 less sales load of $0.98) and end of period market
value of $18.50 per share. This calculation is not annualized.
</FN>
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
Selected Quarterly Financial Information
Summary of quarterly results of operations (unaudited)
<TABLE>
<CAPTION>
Net Realized Gain
(Loss) & Change in
Net Investment Net Unrealized
Income Appreciation (Depreciation)
Per Per
Quarters Ended** Total Share Total Share
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
November 30, 1992* ............. $ 243 $.07 $ (148) $ (.04)
February 28, 1993 .............. 1,530 .44 1,000 .28
May 31, 1993 ................... 1,378 .39 5,280 1.50
August 31, 1993 ................ 1,290 .38 7,537 2.14
November 30, 1993 .............. 1,267 .36 4,243 1.21
February 28, 1994 .............. 1,146 .33 (1,723) (.49)
May 31, 1994 ................... 1,197 .34 (6,897) (1.97)
August 31, 1994 ................ 1,189 .34 1,615 .46
November 30, 1994 .............. 1,595 .46 (3,082) (.88)
February 28, 1995 .............. 1,599 .45 (9,960) (2.83)
May 31, 1995 ................... 1,744 .49 5,054 1.44
August 31, 1995 ................ 1,894 .55 205 .05
November 30, 1995 .............. 1,859 .53 1,412 .40
<FN>
*For the period October 30, 1992 (commencement of operations) through November 30, 1992.
**Totals expressed in thousands of dollars except per share amounts.
</FN>
</TABLE>
15
<PAGE>
Left Col.
Directors
CHARLES F. BARBER
Consultant; formerly Chairman,
ASARCO Incorporated
LESLIE H. GELB
President, The Council
on Foreign Relations
MICHAEL S. HYLAND
Chairman of the Board;
President, Salomon Brothers
Asset Management Inc
ALAN H. RAPPAPORT
President;
Executive Vice President,
Oppenheimer & Co., Inc.
RIORDAN ROETT
Professor and Director,
Latin American Studies Program,
Paul H. Nitze School of Advanced
International Studies,
John Hopkins University
JESWALD W. SALACUSE
Henry J. Braker Professor of
Commercial Law, and formerly Dean,
The Fletcher School of Law & Diplomacy
Tufts University
Officers
MICHAEL S. HYLAND
Chairman of the Board
ALAN H. RAPPAPORT
President
PETER J. WILBY
Executive Vice President
LAWRENCE H. KAPLAN
Executive Vice President
ALAN M. MANDEL
Treasurer
TANA E. TSELEPIS
Secretary
AMY W. YEUNG
Assistant Treasurer
LAURIE A. PITTI
Assistant Treasurer
Right Col.
The Emerging Markets Income Fund Inc
7 World Trade Center
New York, New York 10048
1-800-SALOMON (1-800-725-6666)
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
INVESTMENT ADVISER
Advantage Advisers, Inc.
Oppenheimer Tower
World Financial Center
New York, New York 10281
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
DIVIDEND DISBURSING AND TRANSFER AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
New York, New York 10036
LEGAL COUNSEL
Simpson Thacher & Bartlett
New York, New York 10017
NEW YORK STOCK EXCHANGE SYMBOL
EMD
- -------------------------------------------------------------------------------
This report is submitted for the general information of the shareholders of The
Emerging Markets Income Fund Inc. It is not authorized for distribution to
prospective investors unless accompanied or preceded by an effective Prospectus
for the Fund, which contains information concerning the Fund's investment
policies and expenses as well as other pertinent information.
16
<PAGE>
Left Col.
Salomon Brothers Asset Management
Seven World Trade Center
New York, New York 10048
---------------------
BULK RATE
U.S. POSTAGE
PAID
STATEN ISLAND, NY
PERMIT No. 169
---------------------
Right Col.
The Emerging Markets
Income Fund Inc
Interim Report
NOVEMBER 30, 1995
..
- -------------------------------------------
The Emerging Markets Income Fund Inc
---------------------------------------------
