<PAGE>
The Emerging Markets
Income Fund Inc
Semi-Annual Report
February 26, 1999
- ----------------------------------------------------------
The Emerging Markets Income Fund Inc
---------------------------------------------------------
<PAGE>
April 15, 1999
The Emerging Markets
Income Fund Inc
Dear Shareholders:
We are pleased to provide this semi-annual report for The Emerging Markets
Income Fund Inc. (the "Fund") as of February 26, 1999. Included within this
report is an analysis of the Fund's performance versus the benchmark and its
peer group, a commentary on the emerging debt markets, a statement of the Fund's
investments as of February 26, 1999, and financial statements for the six months
ended February 26, 1999.
During the six months ended February 26, 1999, the net asset value of the Fund
increased from $7.83 per share at August 31, 1998 to $9.83 per share at February
26, 1999. Dividends of $1.61 per share from net investment income were paid
during this period. Assuming reinvestment of these dividends in additional
shares of the Fund, the total rate of return based on net asset value for the
six months ended February 26, 1999 was 49.70%. During the same period, the JP
Morgan Emerging Markets Bond Index Plus ("EMBI+"), a standard measure of return
for the emerging markets debt market, returned 17.86%. The Fund's
outperformance, which was the result of several factors highlighted below,
places the Fund #1 among the Lipper universe of open end and closed end emerging
markets income funds for the six months ended February 26, 1999.
At February 26, 1999, the Fund, as a percentage of total investments, was
approximately 99% invested in securities of emerging market issuers, including
obligations of sovereign governments and companies. The balance of the Fund's
assets was invested in short-term investments.
Emerging Markets Debt Securities
During the six months ended February 26, 1999, the emerging markets debt market
posted one of the more spectacular six-month performance advances we have seen
in years. Coming after an abysmal August 1998 when Russian defaults and hedge
fund liquidations caused the market to suffer its worst monthly decline since
its inception, the emerging debt market rebounded sharply to post returns in
excess of 5% for 3 out of the 6 months of the period.
The initial rebound was caused by a decision by the Federal Reserve Board to
increase liquidity in the financial markets with a Federal Funds rate cut of 25
basis points in September, October and November. This liquidity boost caused the
general bond market to firm and caused skittish investors to begin migrating
back into high yielding assets that held some risk. This marginal appetite for
yield caused incremental demand for the debt of most emerging market countries,
which began the period yielding above 20%. This demand, when combined with a
lack of sell pressure from the recently liquidated hedge fund community,
sustained the rally and caused the market to appreciate more than 23% over this
three month time frame.
While we were not completely convinced, at the end of August, that the emerging
markets debt market was headed straight up over the next three months, we were
confident in our conviction that the worst of the selling pressure was over and
we were very near the bottom. Our conviction, for the most part, was based on
experience we had gained during similar events in past years. These included the
high yield market decline during 1990, the decline due to the 1994 global bond
market implosion, and the decline suffered during the first quarter of 1995 as a
result of the devaluation of
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T H E E M E R G I N G M A R K E T S I N C O M E F U N D I N C
the Mexican Peso. While each event is unique unto itself, many similarities
exist. One of the similarities is that markets generally overshoot on the
downside and if you are vigilant in your analysis, value can be found. Another
similarity is that history teaches us that you can never pick the exact market
bottom but if you panic and remain in cash when you believe the market offers
compelling value, you miss the initial upside and, in turn, a significant
portion of the return.
Accordingly, at the beginning of September, after concluding that the selling
pressure was nearing an end and the market was offering significant value under
a host of scenarios, we reinvested the Fund's cash into the market and were able
to capitalize on the upside.
As the market headed into December, our worries about a mounting domestic debt
problem in Brazil caused us to scale back our market exposure to Brazil and
neighbouring Argentina. Concern lay in our belief that the escalation of debt,
caused by the combination of lofty real interest rates and very high domestic
debt, would be unsustainable and the government would be forced to act.
Notwithstanding the November announcement of a new IMF aide package for Brazil
meant to avert a currency crisis, we believed the country was experiencing a
capital flight and domestic debt trap that would end in devaluation. We felt
that repositioning the assets into the debt of higher quality countries that did
not have a financing need for the foreseeable future and had not fully recovered
from the August decline, was prudent. These countries included Panama, Peru, and
Morocco. In addition, we repositioned some of the assets into Venezuelan
securities that we believed were oversold due to concerns that Presidential
frontrunner Hugo Chavez would announce market unfriendly reforms shortly after
his early December victory. Our analysis of the political environment at the
time led us to believe that Chavez's rhetoric would be more political in nature
and that his desire to radically change the economic climate was minimal.
This repositioning aided the Fund during the month of December as further
pressure on Brazil caused a 2.5% decline in the market while Venezuela rallied
11.81% as President elect Chavez proposed more pro-market reforms.
During January and February, Brazil's devaluation contributed to a 2.32% decline
in the market and reinforced our earlier decision to remain underweight the
credit. Also, during this period, Ecuador, an underweight, suffered an 11.31%
decline as the government was forced to devalue its currency amid mounting
political troubles and capital flight.
While we were happy with our asset allocation and market timing decisions during
the period, the performance of the Fund continued to be buffeted by our decision
to marginally overweight US dollar denominated Eurobonds from Russia. As we
mentioned in our last review, our original decision to invest in Russia was
predicated on our belief that the country's debt burden was very manageable and
its history of timely debt service during prior economic troubles would remain
unscathed. While we have not experienced default in our Eurobonds, and the yield
on these instruments is substantial, the lack of any meaningful demand for the
bonds caused the debt to trade down during the quarter. Subsequent to the end of
the period, we revisited the government in Moscow to further evaluate the
situation. While we left the country reasonably certain that Eurobonds would be
serviced, we are of the opinion that other securities, primarily debt inherited
from the former Soviet Union, will be restructured and ensuingly cause continued
volatility in our position.
Outlook
We remain optimistic with the prospects for continued strength in the emerging
debt market. Asia looks as if economic growth will turn positive this year. This
should help global demand for emerging market exports. We are also encouraged by
Brazil's ability to capture the positive effects of
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T H E E M E R G I N G M A R K E T S I N C O M E F U N D I N C
the devaluation, mainly export competitiveness and lower interest rates, without
capturing too many of the negatives. In addition, commodity price gains appear
to be sticking. This should significantly improve government revenues for most
countries, as they are net commodity exporters. This combination of events
should help drive yields considerably below their current level which is above
14%.
Annual Shareholders Meeting
The Fund held its annual shareholders meeting on December 10, 1998. At the
meeting, shareholders elected each of the nominees proposed for election to the
Fund's Board of Directors and ratified the selection of PricewaterhouseCoopers
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
--------- --------- -------------
Heath B. McLendon 3,277,317 35,796
William D. Cvengros 3,275,677 37,434
Charles F. Barber 3,276,884 36,228
2. Ratification of PricewaterhouseCoopers LLP as the Independent Accountants of
the Fund
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
3,282,345 6,087 24,680
* * *
In a continuing effort to provide timely information concerning the Emerging
Markets Income Fund Inc, shareholders may call 1-888-777-0102 (toll free),
Monday through Friday from 8:00 am to 6:00 pm EST for the Fund's current net
asset value, market price and other information regarding the Fund's portfolio
holdings and allocations. For information concerning your Emerging Markets
Income Fund stock account, please call American Stock Transfer & Trust Company
at 1-800-937-5449 (1-718-921-8200 if you are calling from within New York City).
We appreciate the confidence you have demonstrated in the past and hope to
continue to serve you in the future years.
Sincerely,
/s/ Heath B. McLendon /s/ William D. Cvengros
Heath B. McLendon William D. Cvengros
Co-Chairman of the Board Co-Chairman of the Board
/s/ Peter J. Wilby
Peter J. Wilby
Executive Vice President
Page 3
<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I N C
Statement of Investments (unaudited)
February 26, 1999
<TABLE>
<CAPTION>
Principal
Amount (a) Bonds -- 89.9% Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Argentina -- 12.5%
Republic of Argentina:
Peso 2,258,011+ BOCON, Pro 1, 2.6868% due 4/1/07*................................. $ 1,425,605
500,000 Global Bond, 11.000% due 12/4/05.................................. 2,906,531
500,000 Structured Note, 9.164% due 12/4/05*(b)........................... 445,000
Peso 250,000+ 8.750% due 7/10/02................................................ 205,389
1,000,000 14.250% due 11/30/02*............................................. 955,000
Peso 1,500,000+ 11.750% due 2/12/07............................................... 1,232,331
-----------
7,169,856
-----------
Brazil -- 9.2%
1,000,000+ Companhia Energetica De Sao Paulo, 9.125% due 6/26/07*.............. 665,000
Federal Republic of Brazil:
2,202,529 Capitalization (C) Bond, 8.000% due 4/15/14(c).................... 1,249,935
1,500,000+ DCB Bond, Series L, 6.1875% due 4/15/12*.......................... 727,500
1,250,000+ Discount Bond, Series ZL, 6.125% due 4/15/24*..................... 695,313
600,000 EI Bond, Series L, 6.125% due 4/15/06*............................ 377,250
3,000,000+ NMB, Series L, 6.1875% due 4/15/09*............................... 1,581,562
-----------
5,296,560
-----------
Bulgaria -- 3.7%
Republic of Bulgaria:
3,000,000+ FLIRB, Series A, 2.500% due 7/28/12*.............................. 1,807,500
450,000 IAB, 5.875% due 7/28/11*.......................................... 308,250
-----------
2,115,750
-----------
Colombia -- 4.6%
2,900,000 Republic of Colombia, 10.986% due 8/13/05*.......................... 2,631,750
-----------
Costa Rica -- 4.5%
3,000,000+ Costa Rica, Principal Bond, Series A, 6.250% due 5/21/10............ 2,587,500
-----------
Croatia -- 3.7%
1,500,000+ Republic of Croatia, FRN, Series A, 5.8125% due 7/31/10*............ 2,100,000
-----------
Ecuador -- 2.3%
4,567,045+ Republic of Ecuador, PDI Bond, 6.000% due 2/27/15*(c)............... 1,293,045
-----------
Indonesia -- 2.5%
1,000,000+ APP International Finance Company B.V., 11.750% due 10/1/05......... 650,000
1,500,000+ Tjiwi Kimia International Finance Company B.V., 10.000% due 8/1/04.. 780,000
-----------
1,430,000
-----------
</TABLE>
See accompanying notes to financial statements.
Page 4
<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I N C
Statement of Investments (unaudited) (continued)
February 26, 1999
<TABLE>
<CAPTION>
Principal
Amount (a) Bonds -- 89.9% (continued) Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Ivory Coast -- 1.7%
Republic of Ivory Coast:
2,107,000+ FLIRB, 2.000% due 3/29/18*,#...................................... $ 568,890
375,000 FLIRB, 2.000% due 3/29/18......................................... 101,250
945,038+ PDI Bond, 2.000% due 3/29/18*,#................................... 311,862
-----------
982,002
-----------
Mexico -- 10.4%
1,000,000+ Grupo Industrial Durango, 12.000% due 7/15/01....................... 915,000
1,000,000+ Hylsa S.A. de C.V., 9.250% due 9/15/07.............................. 750,000
United Mexican States:
1,300,000 Global Bond, 10.375% due 2/17/09.................................. 3,052,500
3,000,000+ Global Bond, 11.375% due 9/15/16.................................. 1,256,125
-----------
5,973,625
-----------
Panama -- 2.6%
2,000,000+ Republic of Panama, IRB, 4.000% due 7/17/14*........................ 1,501,250
-----------
Peru -- 4.3%
5,250,000+ Republic of Peru, PDI Bond, 4.000% due 3/7/17*...................... 2,496,875
-----------
Philippines -- 3.9%
Republic of the Philippines:
1,735,000+ 8.750% due 10/7/16#............................................... 1,578,850
650,000 9.875% due 1/15/19................................................ 645,938
-----------
2,224,788
-----------
Poland -- 1.6%
1,000,000+ Republic of Poland, PDI Bond, 5.000% due 10/27/14*.................. 909,375
-----------
Russia -- 6.3%
Russian Government:
4,000,000 Global Bond, 11.000% due 7/24/18.................................. 955,000
9,675,000+ Global Bond, 12.750% due 6/24/28.................................. 2,634,019
460,554 IAN, 5.96875% due 12/15/15*,#..................................... 47,782
-----------
3,636,801
-----------
South Korea -- 2.5%
Export-Import Bank of Korea, Global Bond:
250,000+ 7.250% due 6/25/01................................................ 244,963
250,000+ 6.500% due 2/10/02................................................ 238,688
Korea Development Bank, Global Bond:
750,000+ 7.900% due 2/1/02................................................. 743,437
250,000+ 6.625%, due 11/21/03.............................................. 234,438
-----------
1,461,526
<FN>
-----------
See accompanying notes to financial statements.
Page 5
</FN>
</TABLE>
<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I N C
Statement of Investments (unaudited) (continued)
February 26, 1999
<TABLE>
<CAPTION>
Principal
Amount (a) Bonds -- 89.9% (concluded) Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Uruguay -- 1.2%
842,105+ Uruguay, DCB, Series B, 6.000% due 2/18/07*......................... $ 715,789
-----------
Venezuela -- 12.4%
Republic of Venezuela:
5,261,889+ FLIRB, Series A, 6.125% due 3/31/07*.............................. 3,236,062
5,000,000+ Global Bond, 13.625% due 8/15/18.................................. 3,900,000
-----------
7,136,062
-----------
Total Bonds (cost-- $59,334,445).................................... 51,662,554
-----------
</TABLE>
<TABLE>
<CAPTION>
Loan Participations++ -- 9.0%
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
The People's Democratic Republic of Algeria:
545,454 Tranche A, 7.1875% due 3/4/00* (Chase Manhattan Bank)............. 458,181
1,090,908 Tranche 1, 6.625% due 9/4/06* (Chase Manhattan Bank).............. 474,545
2,000,000 Tranche 3, 6.375% due 3/4/10* (Chase Manhattan Bank).............. 840,000
194,415 Government of Jamaica, Tranche A,
5.750% due 10/15/00* (Chase Manhattan Bank)....................... 182,750
Kingdom of Morocco:
2,583,333+ Tranche A, 6.0625% due 1/1/09* (Morgan Guaranty Trust Company
of New York).................................................... 2,024,687
Yen 132,078,499 Tranche A, 3.0175% due 1/1/09* (Goldman Sachs) 818,289
4,950,000+ Russian Government, Principal Loan, 5.96875%, due 12/15/20
(Chase Manhattan Bank, Goldman Sachs, Morgan Guaranty
Trust Company of New York, ING Bank).............................. 355,781
-----------
Total Loan Participations (cost-- $8,442,267)....................... 5,154,233
-----------
</TABLE>
<TABLE>
<CAPTION>
Warrants Warrants -- 0.5%
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
2,950 Republic of Argentina Warrants, expiring 12/3/99##.................. 85,550
6,000 United Mexican States Warrants, expiring 2/18/00##.................. 180,000
-----------
Total Warrants (Cost-- $183,611).................................... 265,550
-----------
Sub-Total Investments (cost-- $67,960,323).......................... 57,082,337
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount (a) Repurchase Agreement -- 0.6%
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
358,000 State Street Bank, 4.73%, dated 2/26/98, $358,141 due 3/1/99
(collateralized by $280,000 U.S. Treasury Bond, 8.500%
due 2/15/20, valued at $368,760) (Cost-- $358,000)................ 358,000
-----------
Total Investments-- 100% (Cost-- $68,318,323**)..................... $57,440,337
===========
</TABLE>
See accompanying notes to financial statements.
Page 6
<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I N C
Statement of Investments (unaudited) (concluded)
February 26, 1999
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT FEBRUARY 26, 1999:
<TABLE>
<CAPTION>
Contracts In Exchange Contracts at Delivery Unrealized
to Deliver For Value Date Appreciation
-------------- ------------ -------------- -------- ------------
<S> <C> <C> <C> <C> <C>
Sale...... Yen 115,500,000 US $1,006,711 US $977,149 3/29/99 $29,562
<FN>
- ---------------
(a) Principal denominated in U.S. dollars unless otherwise indicated.
(b) Coupon rate linked to yield to maturity of the Republic of Argentina
11.000% Bonds due October 9, 2006, The Republic of Argentina 9.750% Global
Bonds due September 19, 2027 and 30-year U.S. Treasury Bonds.
(c) 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.
** Aggregate cost for federal income tax purposes is substantially the same.
+ All or a portion of the security is segregated as collateral pursuant to a
loan agreement. See Note 4.
++ Participation interests were acquired through the financial institutions
indicated parenthetically. See Note 5.
# Pursuant to Rule 144A of the Securities Act of 1933, this security can
only be sold to qualified institutional investors.
## Non-income producing security.
Abbreviations used in this statement:
BOCON - Bonos De Consolidacion.
DCB - Debt Conversion Bond.
EI - Eligible Interest.
FLIRB - Front Loaded Interest Reduction Bond.
FRN - Floating Rate Note.
IAB - Interest Arrears Bond.
IAN - Interest Arrears Note.
IRB - Interest Reduction Bond.
NMB - New Money Bond.
PDI - Past Due Interest.
Peso - Argentina Peso.
Yen - Japanese Yen.
See accompanying notes to financial statements.
Page 7
</FN>
</TABLE>
<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I N C
Statement of Assets and Liabilities
February 26, 1999 (unaudited)
<TABLE>
<S> <C>
Assets
Investments, at value (cost-- $67,960,323)......................................... $57,082,337
Repurchase agreement............................................................... 358,000
Cash............................................................................... 145
Receivable for securities sold..................................................... 592,500
Interest receivable................................................................ 1,537,518
Net unrealized appreciation on forward foreign currency contracts.................. 29,562
Prepaid expenses................................................................... 473
-----------
Total Assets....................................................................... 59,600,535
-----------
Liabilities
Loan payable (Note 4).............................................................. 20,000,000
Payable for securities purchased................................................... 653,233
Accrued interest expense on loan................................................... 350,602
Accrued management fee (Note 2).................................................... 19,363
Accrued advisory fee (Note 2)...................................................... 13,831
Other accrued expenses............................................................. 175,356
-----------
Total Liabilities.................................................................. 21,212,385
-----------
Net Assets......................................................................... $38,388,150
===========
Net Assets
Common Stock ($0.001 par value, authorized
100,000,000; 3,903,745 shares outstanding)..................................... $ 3,904
Additional paid-in capital......................................................... 54,416,942
Overdistributed net investment income.............................................. (78,689)
Accumulated net realized loss on investments....................................... (5,105,401)
Net unrealized depreciation on investments and foreign currency.................... (10,848,606)
-----------
Net Assets......................................................................... $38,388,150
===========
Net Asset Value Per Share ($38,388,150 / 3,903,745 shares)........................... $9.83
======
</TABLE>
See accompanying notes to financial statements.
Page 8
<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I N C
Statement of Operations
For the Six Months Ended February 26, 1999 (unaudited)
<TABLE>
<S> <C> <C>
Income
Interest (includes discount accretion of $1,110,230)............................... $ 4,913,296
Expenses
Interest on loan..................................................... $ 580,915
Management fee....................................................... 127,369
Advisory fee......................................................... 90,978
Custodian............................................................ 39,862
Audit and tax services............................................... 17,294
Directors' fees and expenses......................................... 17,184
Printing............................................................. 17,178
Transfer agent expenses.............................................. 12,277
Legal................................................................ 10,418
Listing fees......................................................... 5,405
Other............................................................... 3,934 922,814
---------- -----------
Net Investment Income................................................................ 3,990,482
-----------
Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions
Net Realized Gain (Loss) on:
Investments...................................................................... (4,123,700)
Foreign currency transactions.................................................... (161,921)
-----------
(4,285,621)
-----------
Net Change in Unrealized Appreciation (Depreciation) on:
Investments.................................................................... 13,804,243
Foreign currency contracts and other assets and liabilities
denominated in foreign currencies.......................................... 35,353
-----------
13,839,596
-----------
Net Gain on Investments and Foreign Currency Transactions 9,553,975
-----------
Net Increase in Net Assets From Operations $13,544,457
===========
<FN>
See accompanying notes to financial statements.
Page 9
</FN>
</TABLE>
<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I N C
Statement of Changes in Net Assets
For the Six Months Ended February 26, 1999 (unaudited)
and the Year Ended August 31, 1998
<TABLE>
<CAPTION>
February 26, August 31,
1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations
Net investment income............................................. $ 3,990,482 $ 7,212,295
Net realized loss on investments and foreign currency transactions (4,285,621) (223,513)
Net change in unrealized appreciation (depreciation).............. 13,839,596 (40,030,717)
----------- -----------
Net Increase (Decrease) in Net Assets From Operations............. 13,544,457 (33,041,935)
----------- -----------
Dividends and Distributions to Shareholders
From net investment income........................................ (6,105,700) (7,315,909)
From net realized capital gains................................... -- (10,439,304)
In excess of net realized capital gains........................... -- (819,780)
----------- -----------
Net Decrease in Net Assets From
Dividends and Distributions to Shareholders..................... (6,105,700) (18,574,993)
----------- -----------
Capital Share Transactions
Proceeds from shares issued in reinvestment of dividends
(135,317 and 256,294 shares issued)............................. 1,426,800 4,265,949
----------- -----------
Total Increase (Decrease) in Net Assets............................. 8,865,557 (47,350,979)
----------- -----------
Net Assets
Beginning of year................................................. 29,522,593 76,873,572
----------- -----------
End of year (includes (overdistributed)/undistributed net
investment income of $(78,689) and $2,036,529, respectively).... $38,388,150 $29,522,593
=========== ===========
</TABLE>
Statement of Cash Flows
For the Six Months Ended February 26, 1999 (unaudited)
<TABLE>
<S> <C>
Cash Flows From Operating Activities:
Purchases of securities........................................................ $(31,171,866)
Net sales of short-term investments............................................ 4,221,000
Proceeds from sales of securities and principal paydowns....................... 28,917,056
------------
1,966,190
Net investment income.......................................................... 3,990,482
Accretion of discount on investments........................................... (1,308,745)
Interest on payment-in-kind bonds.............................................. (114,021)
Net change in receivables/payables related to operations....................... (36,481)
------------
Net Cash Provided by Operating Activities...................................... 4,497,425
------------
Cash Flows From Financing Activities:
Proceeds from shares issued in reinvestment of dividends....................... 1,426,800
Dividends and distributions paid............................................... (6,105,700)
------------
Net Cash Used by Financing Activities.......................................... (4,678,900)
------------
Net Decrease in Cash............................................................. (181,475)
Cash at Beginning of Year........................................................ 181,620
------------
Cash at End of Year.............................................................. $ 145
============
</TABLE>
See accompanying notes to financial statements.
Page 10
<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I N C
Notes to Financial Statements (unaudited)
1. Organization and Significant Accounting Policies
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. The Fund's primary investment objective is to seek high current
income through investments in selected debt securities of emerging market
countries. As a secondary objective, the Fund seeks capital appreciation.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles
("GAAP"). The preparation of financial statements in accordance with GAAP
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results may differ
from those estimates.
(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 of 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) Securities transactions and investment income. Securities transactions
are recorded on the trade date. Interest income is accrued on a daily
basis. 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. Net realized gains and losses on
foreign currency transactions represent net gains and losses from sales and
maturities of forward currency contracts, disposition of foreign
currencies, currency gains and losses realized between the trade and
settlement dates on securities transactions and the difference between the
amount of income accrued and the U.S. dollar equivalent amount actually
received. 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.
Page 11
<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I N C
Notes to Financial Statements (unaudited) (continued)
1. Organization and Significant Accounting Policies (continued)
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.
(d) Federal income taxes. It is the Fund's intention to continue to meet
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
federal income tax or excise tax provision is required.
(e) 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 during the term of the repurchase agreement to ensure
that it 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.
(f) Distribution of income and gains. The Fund declares and pays dividends
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 GAAP due primarily to
differences in the treatment of foreign currency gains/losses and deferral
of wash sales and post-October losses incurred by the Fund. 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
income 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 distributions 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.
(g) Forward foreign currency contracts. A forward foreign currency contract
is a commitment to purchase or sell a foreign currency at a future date at
a negotiated forward rate. The contract is marked-to-market to reflect the
change in the currency exchange rate. The change in market value is
recorded by the Fund as an unrealized gain or loss. The Fund records a
realized gain or loss 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.
(h) Option contracts. When the Fund writes or purchases a call or a put
option, an amount equal to the premium received or paid by the Fund is
recorded as a liability or asset, the value of which is marked-to-market to
reflect the current market value of the option. When the option
Page 12
<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I N C
Notes to Financial Statements (unaudited) (continued)
1. Organization and Significant Accounting Policies (concluded)
expires, the Fund realizes a gain or loss equal to the amount of the
premium received or paid. When the Fund exercises an option or enters into
a closing transaction by purchasing or selling an offsetting option, it
realizes a gain or loss without regard to any unrealized gain or loss on
the underlying security. When a written call option is exercised, the Fund
realizes a gain or loss from the sale of the underlying security and the
proceeds from such sale are increased by the premium originally received on
the option.
(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 six
months ended February 26, 1999, the Fund paid interest expense of $642,084.
2. Management and Advisory Fees and Other Transactions
The Fund has entered into a management agreement with Salomon Brothers
Asset Management Inc (the "Investment Manager"), a wholly owned subsidiary of
Salomon Smith Barney Holdings Inc. ("SSBH"). The Investment 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 entered into an investment advisory agreement with Value
Advisors LLC (the "Investment Adviser") 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 February 26, 1999, the Investment Manager owned 5,562 shares of the
Fund. Certain officers and/or directors of the Fund are officers and/or
directors of the Investment Manager or the Investment Adviser.
All officers and two directors of the Fund are employees of the Investment
Manager and/or the Investment Adviser.
3. Portfolio Activity and Tax Information
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the six months ended February 26, 1999 aggregated
$31,502,300 and $29,325,681 respectively. The federal income tax cost basis of
the Fund's investments at February 26, 1999 was substantially the same as the
cost basis for financial reporting. Gross unrealized appreciation and
depreciation amounted to $2,511,703 and $13,389,689, respectively, resulting in
a net unrealized depreciation on investments of $10,877,986.
Page 13
<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I N C
Notes to Financial Statements (unaudited) (continued)
4. 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 0.5% and the maturity date is
May 6, 1999. The collateral for the loan was valued at $41,418,820 on February
26, 1999 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%.
5. 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 February 26, 1999 was $5,154,233.
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 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.
6. "When and If" Issued Bonds
"When and if" issued bonds are recorded as investments in the Fund's
portfolio and marked-to-market to reflect the current value of the bonds. When
the Fund sells a "when and if" issued bond, an unrealized gain or loss is
recorded equal to the difference between the selling price and purchase cost of
the bond. Settlement of trades (i.e., receipt and delivery) of the "when and if"
issued bond is contingent upon the successful issuance of such bond. In the
event its sponsor is unable to successfully issue the security, all trades in
"when and if" issued bonds become null and void, and, accordingly, the Fund
will reverse any gain or loss recorded on such transactions.
7. Credit and Market 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
exchange rate fluctuations. At February 26, 1999, the Fund has a concentration
risk in sovereign debt of emerging market countries.
Page 14
<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I N C
Notes to Financial Statements (unaudited) (concluded)
7. Credit and Market Risk (continued)
The net asset value of the Fund could be negatively affected if the Fund
were required to liquidate assets in other than an orderly manner and/or in
adverse market conditions to repay any bank loans outstanding.
8. 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 February 26, 1999, the Fund has an
outstanding contract to sell 115,500,000 Japanese Yen for U.S. $1,006,711 for a
scheduled settlement on March 29, 1999.
9. Dividend Subsequent to February 26, 1999
On March 1, 1999, the Board of Directors of the Fund declared a dividend of
$.4125 per share, from net investment income, payable on March 26, 1999 to
shareholders of record March 16, 1999.
Page 15
<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I N C
Financial Highlights
Selected data per share of common stock outstanding throughout each year:
<TABLE>
<CAPTION>
Period Ended
February 26, Year Ended August 31,
1999 --------------------------------------------------
(unaudited) 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.............. $ 7.83 $21.89 $18.04 $13.38 $16.23
------ ------ ------ ------ ------
Net investment income........................... 1.05 2.02 2.10 2.24 1.95
Net realized gain (loss) and change in
unrealized appreciation (depreciation) on
securities and foreign currency translations. 2.56 (10.84) 5.00 4.10 (2.22)
------ ------ ------ ------ ------
Total from investment operations................ 3.61 (8.82) 7.10 6.34 (0.27)
------ ------ ------ ------ ------
Dividends to shareholders from net
investment income............................ (1.61) (2.03) (2.19) (1.65) (1.37)
Dividends to shareholders from net
realized capital gains....................... -- (2.98) (1.06) (0.03) (0.49)
Distributions in excess of net realized
capital gains................................ -- (0.23) -- -- (0.72)
------ ------ ------ ------ ------
Total dividends and distributions to
shareholders................................. (1.61) (5.24) (3.25) (1.68) (2.58)
------ ------ ------ ------ ------
Net increase (decrease) in net asset value...... 2.00 (14.06) 3.85 4.66 (2.85)
------ ------ ------ ------ ------
Net asset value, end of year.................... $ 9.83 $ 7.83 $21.89 $18.04 $13.38
====== ====== ======== ======= ======
Per share market value, end of period........... $11.25 $ 9.50 $19.4375 $16.625 $13.00
====== ====== ======== ======= ======
Total investment return based on market
price per share (a).......................... 37.03% -35.00% 39.18% 42.46% -1.76%
Ratios to Average Net Assets:
Total expenses, including
interest expense......................... 5.04%(b) 3.79% 3.58% 4.41% 5.15%
Total expenses, excluding
interest expense (operating expenses).... 1.87%(b) 1.73% 1.70% 1.87% 2.00%
Net investment income........................ 21.77%(b) 11.56% 10.44% 14.34% 14.45%
Supplemental Data:
Net assets, end of period.................... $38,388,150 $29,408,506 $76,873,572 $63,349,266 $46,993,103
Portfolio turnover rate...................... 54% 141% 112% 98% 80%
Bank loan outstanding, end of period......... $20,000,000 $20,000,000 $20,000,000 $20,000,000 $20,000,000
Interest rate on bank loan, end of period.... 5.79094% 6.28125% 6.50% 6.60156% 7.5625%
Weighted average bank loan................... $20,000,000 $20,000,000 $20,000,000 $20,000,000 $20,000,000
Weighted average interest rate............... 5.81%(b) 6.44% 6.64% 6.96% 7.50%
<FN>
- ------------
(a) Dividends are assumed, for purposes of this calculation, to be reinvested at prices obtained under the Fund's
dividend reinvestment plan.
(b) Annualized.
</FN>
</TABLE>
Page 16
<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I N C
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, 1994........................... $1,595 $0.46 $ (3,082) $ (0.88)
February 28, 1995........................... 1,599 0.45 (9,960) (2.83)
May 31, 1995................................ 1,744 0.49 5,054 1.44
August 31, 1995............................. 1,894 0.55 205 0.05
November 30, 1995........................... 1,859 0.53 1,412 0.40
February 29, 1996........................... 1,989 0.57 5,477 1.56
May 31, 1996................................ 2,070 0.58 4,137 1.18
August 31, 1996............................. 1,933 0.56 3,379 0.96
November 30, 1996........................... 1,978 0.56 8,841 2.52
February 28, 1997........................... 1,840 0.53 3,833 1.09
May 31, 1997................................ 1,803 0.51 951 0.27
August 31, 1997............................. 1,744 0.50 3,923 1.12
November 30, 1997........................... 1,668 0.47 (5,181) (1.47)
February 27, 1998........................... 1,827 0.51 491 0.14
May 29, 1998................................ 1,996 0.53 (3,192) (0.85)
August 31, 1998............................. 1,721 0.51 (32,372) (8.66)
November 30, 1998........................... 2,052 0.54 13,631 3.61
February 26, 1999........................... 1,938 0.51 (4,077) (1.05)
<FN>
*Totals expressed in thousands of dollars except per share amounts.
Page 17
</FN>
</TABLE>
<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I N C
Other Information (unaudited)
Year 2000. The investment management services provided to the Fund by the
Investment Manager depend in large part on the smooth functioning of its
computer systems. Many computer software systems in use today cannot recognize
the year 2000, but revert to 1900 or some other date, due to the manner in which
the dates were encoded or calculated. The capability of these systems to
recognize the year 2000 could have a negative impact on the Investment Manager's
provision of investement management services, including handling of securities
trades, pricing and account services. The Investment Manager has advised the
Fund that it has been reviewing all of their computer systems and actively
working on necessary changes to its systems to prepare for the year 2000 and
expects that given the extensive testing which it is undertaking its systems
will be year 2000 compliant before such date. In addition, the Investment
Manager has been advised by certain of the Fund's service providers that they
are also in the process of modifying their systems with the same goal. There
can, however, be no assurance that the Investment Manager or any other service
provider will be successful in achieving year 2000 compliance, or that
interaction with other non-complying computer systems will not impair services
to the Fund at that time.
Page 18
<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I N C
Directors
CHARLES F. BARBER
Consultant; formerly Chairman,
ASARCO Incorporated
WILLIAM D. CVENGROS
Co-Chairman of the Board;
Chief Executive Officer,
President and Member of the
Board of Value Advisors LLC and
Chief Executive Officer and
President of PIMCO Advisors L.P.
LESLIE H. GELB
President, The Council
on Foreign Relations
HEATH B. MCLENDON
Co-Chairman of the Board;
Managing Director, Salomon
Smith Barney Inc.
President, Smith Barney Mutual Fund
Management Inc.
Chairman, Smith Barney Strategy Advisors Inc.
RIORDAN ROETT
Professor and Director,
Latin American Studies Program,
Paul H. Nitze School of Advanced
International Studies,
Johns Hopkins University
JESWALD W. SALACUSE
Henry J. Braker Professor of
Commercial Law, and formerly Dean,
The Fletcher School of Law & Diplomacy
Tufts University
Officers
WILLIAM D. CVENGROS
Co-Chairman of the Board
HEATH B. MCLENDON
Co-Chairman of the Board
STEPHEN J. TREADWAY
President
LEWIS E. DAIDONE
Executive Vice President & Treasurer
THOMAS K. FLANAGAN
Executive Vice President
NEWTON SCHOTT
Executive Vice President
PETER J. WILBY
Executive Vice President
CHRISTINA T. SYDOR
Secretary
ANTHONY PACE
Assistant Controller
The Emerging Markets Income Fund Inc
7 World Trade Center
New York, New York 10048
For information call (toll free)
1-888-777-0102
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
INVESTMENT ADVISER
Value Advisors LLC
800 Newport Center Drive
Suite 100
Newport Beach, California 92660
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
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
NEW YORK STOCK EXCHANGE SYMBOL
EMD
<PAGE>
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
-------------------------
BULK RATE
U.S. POSTAGE
PAID
STATEN ISLAND, NY
PERMIT No. 169
-------------------------
EMDSEMI 2/99
