October 27, 1995
The Emerging Markets
Income Fund II Inc
To Our Shareholders:
The net asset value of the Emerging Markets Income Fund II Inc rose to $10.99
per share as of August 31, 1995. Dividends of $0.4125 per share were paid during
the quarter. The total investment return, based on net asset value per share for
the quarter, assuming reinvestment of dividends in additional shares of the
Fund, was 6.2% compared with an increase of 4.4% in the Salomon Brothers Brady
Bond Index. The Fund's primary investment objective is to seek high current
income through investments in selected debt securities of emerging market
countries.
Emerging Markets
Emerging Markets regained stability in the three-month period ended in August
following the extreme volatility of the first five months of the year. For the
three months ended in August, the Salomon Brothers Brady Bond Index appreciated
4.4% as investors focused on the fundamentals in individual countries and looked
beyond the short-term effects of Mexico's peso devaluation at the end of 1994.
The important developments for the market during the Fund's most recent quarter
included successful financings by Argentina and a continuation of the recession
in Mexico. Investors continue to move back into the market based on the
encouraging level of stability over the past three months.
Country Analysis
The largest holdings of foreign government debt securities in the Fund, as a
percentage of total assets on August 31, were in Argentina (15.5%), Brazil
(13.2%), Morocco (10.3%) and Poland (10.1%).
Argentina: The country successfully returned to the capital markets with major
debt underwritings denominated in deutschmarks and yen during the Fund's most
recent quarter. These financings will be used, in part, to finance repurchases
of Argentine public debt.
Brazil: President Cardoso continued to successfully guide his package of
constitutional reforms through the Brazilian Congress. In July, Standard
& Poor's raised its foreign currency rating on Brazil to single B-plus from
single B, reflecting the success of the Cardoso administration in its
anti-inflation efforts.
Morocco: The Moroccan economy continued to struggle with the effects of a severe
drought. The World Bank approved a $100 million emergency agricultural loan to
aid this stricken sector of the economy. Moroccan GDP is expected to contract in
1995 due to the effects of the drought. Current estimates from the Ministry of
Finance call for a contraction of approximately 5% in the Moroccan economy in
1995.
1
<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 I I N C
Poland: The market continues to upgrade its assessment of Poland's prospects in
light of its investment grade credit rating. Inflation continued to fall during
the recent quarter reflecting the decline in food prices and the strength of the
zloty.
Annual Shareholders Meeting
The Fund held its annual shareholders meeting on September 18, 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
------------------------------------------------
Riordan Roett 20,509,498 409,751
Leslie H. Gelb 20,508,878 410,371
2. Ratification of Price Waterhouse LLP as the Independent Accountants of the
Fund
Votes For Votes Against Votes Abstained Unvoted
------------------------------------------------------------
20,540,174 150,059 229,014 5
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.
Cordially,
Alan H. Rappaport Michael S. Hyland
Chairman of the Board President
2
<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 I I N C
Statement of Investments August 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
BONDS -- 119.9%
- ------------------------------------------------------------------------------------------------------
Principal
Amount
000's(a) Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. CORPORATE BOND -- 1.9%
10,000 General Electric Capital Corp., Global Medium-Term Note,
38.2%, 10/29/96**,***(b)............................................. $ 4,625,000
------------
ARGENTINA - 24.3%
5,000 Bridas Corp., 12.5%, 11/15/99***....................................... 4,850,000
69,800 Republic of Argentina, Floating Rate Bond, Series L,
7.3125%, 3/31/05**,***............................................... 42,708,875
Peso 10,246 Republic of Argentina, Bocon, Pre III, Floating Rate Note,
3.8955%, 9/01/02**,***............................................... 4,017,886
Peso 7,841 Republic of Argentina, Bocon, Pre I, Floating Rate Note,
3.9016%, 4/01/01**,***............................................... 3,756,603
6,500 Republic of Argentina, Par Bond, 5%, 3/31/23**,***..................... 3,067,188
------------
TOTAL ARGENTINA........................................................ 58,400,552
------------
BRAZIL - 21.4%
6,000 Aracruz Celulose S.A., 10.375%, 1/31/02***............................. 5,670,000
30,796 Federal Republic of Brazil, Capitalization Bond, 8%, 4/15/14**,***(c).. 15,301,575
28,000 Federal Republic of Brazil, Investment Bond, 6%, 9/15/13***............ 13,816,180
10,000 Federal Republic of Brazil, Par Bond, Series YL3, 4.25%, 4/15/24**,***. 4,543,750
5,000 Federal Republic of Brazil, Par Bond, Series YL4, 4.25%, 4/15/24**,***. 2,271,875
18,000 Federal Republic of Brazil, "New" New Money Bond, Series L,
7.3125%, 4/15/09**,***............................................... 9,832,500
------------
TOTAL BRAZIL........................................................... 51,435,880
------------
BULGARIA - 4.6%
7,000 Republic of Bulgaria, Interest Arrears Bond, 6.75%, 7/28/11**,***...... 3,080,000
5,782 Republic of Bulgaria, Discount Bond, Tranche A, 6.75%, 7/28/24**,***... 2,905,474
19,500 Republic of Bulgaria, Front Loaded Interest Reduction Bond,
Series A, 2%, 7/28/12**.............................................. 5,070,000
------------
TOTAL BULGARIA......................................................... 11,055,474
------------
COSTA RICA - 5.1%
1,053 Costa Rica, Interest Bond, Series B, 6.7656%, 5/21/05**,***............ 747,739
8,400 Costa Rica, Principal Bond, Series A, 6.25%, 5/21/10***................ 4,368,000
16,000 Costa Rica, Principal Bond, Series B, 6.25%, 5/21/15***................ 7,200,000
------------
TOTAL COSTA RICA....................................................... 12,315,739
------------
ECUADOR - 5.1%
2,072 Republic of Ecuador, Interest Equalization Bond, 6.75%, 12/21/04**,***. 1,206,867
11,598 Republic of Ecuador, Past Due Interest Bond, 6.8125%, 2/28/15**(c)..... 3,783,832
21,000 Republic of Ecuador, Par Bond, 3%, 2/28/25**,***....................... 6,851,250
1,000 Republic of Ecuador, Discount Bond, 6.8125%, 2/28/25**................. 495,000
------------
TOTAL ECUADOR.......................................................... 12,336,949
------------
</TABLE>
See accompanying notes to financial statements.
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 I I N C
Statement of Investments August 31, 1995 (Continued) (Unaudited)
<TABLE>
<CAPTION>
BONDS (continued)
- ------------------------------------------------------------------------------------------------------
Principal
Amount
000's(a) Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
HUNGARY - 4.6%
13,250 National Bank of Hungary, 8.875%, 11/01/13***.......................... $ 10,997,500
------------
INDONESIA - 2.6%
3,000 Indah Kiat Finance, 12.5%, 6/15/06***.................................. 3,060,000
3,000 Tjiwi Kimia International Finance Co., 13.25%, 8/01/01***.............. 3,195,000
------------
TOTAL INDONESIA........................................................ 6,255,000
------------
MEXICO - 7.9%
3,000 Grupo Industrial Durango, 12.0%, 7/15/01***............................ 2,685,000
5,000 Hylsa S.A., 11%, 2/23/98***............................................ 4,875,000
18,650 United Mexico States, Par Bond, Series B, 6.25%, 12/31/19***
(including 18,650,000 rights expiring 6/30/03)....................... 11,318,219
------------
TOTAL MEXICO........................................................... 18,878,219
------------
PANAMA - 5.0%
15,000 Republic of Panama, Floating Rate Note, 7.25%, 5/10/02**,***........... 11,896,875
------------
PHILIPPINES - 6.5%
20,000 Republic of the Philippines, Front-Loaded Interest Reduction Bond,
Series B, 5%, 6/01/08**,***.......................................... 15,575,000
------------
POLAND - 14.6%
2,857 Republic of Poland, Discount Bond, 7.125%, 10/27/24**,***.............. 2,174,891
53,530 Republic of Poland, Past Due Interest Bond, 3.25%,
10/27/14**,***....................................................... 32,753,669
------------
TOTAL POLAND........................................................... 34,928,560
------------
SOUTH AFRICA - 0.8%
ZAL 9,000 Republic of South Africa Notes, 12%, 2/28/05........................... 2,015,877
------------
TRINIDAD AND TOBAGO - 4.6%
5,750 Trinidad and Tobago Notes, 11.5%, 11/20/97***.......................... 6,037,500
5,000 Trinidad and Tobago Notes, 9.75%, 11/03/00***.......................... 4,900,000
------------
TOTAL TRINIDAD AND TOBAGO.............................................. 10,937,500
------------
</TABLE>
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 I I N C
Statement of Investments August 31, 1995 (Continued) (Unaudited)
<TABLE>
<CAPTION>
BONDS (continued)
- ------------------------------------------------------------------------------------------------------
Principal
Amount
000's(a) Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
URUGUAY - 1.9%
3,750 Uruguay Debt Conversion Note, Series B, 6.75%, 2/18/07**,***........... $ 2,662,500
3,000 Uruguay New Money Note, 6.875%, 2/18/06**.............................. 1,893,750
------------
TOTAL URUGUAY.......................................................... 4,556,250
------------
VENEZUELA - 9.0%
10,000 Bariven, 10.625%, 3/17/02***........................................... 9,375,000
7,250 Republic of Venezuela, Front-Loaded Interest Reduction Bond,
Series A, 7.3125%, 3/31/07**,***..................................... 3,665,781
12,000 Republic of Venezuela, Front-Loaded Interest Reduction Bond,
Series B, 7%, 3/31/07**,***.......................................... 6,067,500
5,000 Republic of Venezuela, Par Bond, Series A, 6.75%, 3/31/20***
(including 25,000 warrants expiring 3/31/20)......................... 2,528,125
------------
TOTAL VENEZUELA........................................................ 21,636,406
------------
TOTAL BONDS (cost $319,154,770)........................................ 287,846,781
------------
LOAN PARTICIPATIONS -- 17.9%
- ------------------------------------------------------------------------------------------------------
20,000 Bank for Foreign Economics, Vnesheconombank*
(Participation: Morgan Stanley, Chase Manhattan Bank, New York)+..... 6,350,000
833 Government of Jamaica, Tranche A, 6.6875%, 10/15/00**
(Participation: Chase Manhattan Bank, New York)+..................... 745,830
8,000 Kingdom of Morocco, Floating Rate, 6.6875%, 1/01/09**,***
(Participation: Chase Manhattan Bank, Morgan Guaranty
Trust Company of New York)+.......................................... 4,890,000
44,000 Kingdom of Morocco, Tranche B, Floating Rate, 6.6875%,
1/01/04** (Participation: Chase Manhattan Bank,
Morgan Stanley Emerging Markets, Inc.)+.............................. 30,855,000
------------
TOTAL LOAN PARTICIPATIONS
(cost $49,466,116)................................................... 42,840,830
------------
TOTAL INVESTMENTS (cost $368,620,886).................................. 330,687,611
------------
</TABLE>
See accompanying notes to financial statements.
5
<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 I I N C
Statement of Investments August 31, 1995 (Continued) (Unaudited)
<TABLE>
<CAPTION>
REPURCHASE AGREEMENT -- 1.5%
- ------------------------------------------------------------------------------------------------------
Principal
Amount
000's(a) Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
3,662 State Street Bank and Trust Company, 5.55%, cost $3,662,000,
dated 8/31/95, $3,662,565 due 9/01/95, (collateralized by
$3,510,000 U.S. Treasury Note, 7.125%, due 9/30/99,
valued at $3,738,150)................................................ $ 3,662,000
------------
LIABILITIES IN EXCESS OF OTHER ASSETS - (39.3%)........................ (94,248,972)
------------
NET ASSETS - 100.0% (equivalent to $10.99 per share on
21,857,134 common shares outstanding)................................ $240,100,639
============
<FN>
(a) Principal denominated in U.S. dollars unless otherwise indicated.
(b) The Fund's proceeds at maturity for General Electric Capital Corp. will be
increased or decreased by the percentage change in the Mexican Spot Tesobono
rate versus the U.S. dollars between the date of maturity and the date of
issuance of the Note.
The Note's interest rate resets quarterly based on the 91 day Mexican Cetes
Rate.
(c) Payment-in-kind security for which part of the interest earned is
capitalized as additional principal.
* Non-income producing. Security is currently in default.
** 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.
+ Participation interests were acquired through the financial institutions
indicated parenthetically. See Note 6.
ZAL -South African Rand.
</FN>
</TABLE>
See accompanying notes to financial statements.
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 I I N C
Statement of Assets and Liabilities August 31, 1995 (Unaudited)
Assets
Investments, at value (cost -- $368,620,886)..................... $330,687,611
Cash............................................................. 989
Repurchase agreement............................................. 3,662,000
Interest receivable.............................................. 11,243,299
Unamortized organization expenses................................ 71,833
Prepaid expenses................................................. 15,276
------------
Total assets............................................... 345,681,008
------------
Liabilities
Loan payable (Note 5)............................................ 100,000,000
Payable for compensated foreign currency contracts............... 2,682,528
Accrued interest expense on loan................................. 2,478,819
Accrued management fee (Note 3).................................. 242,560
Other accrued expenses........................................... 176,462
------------
Total liabilities.......................................... 105,580,369
------------
Net Assets
Common Stock ($.001 par value, authorized 100,000,000 shares;
21,857,134 shares outstanding)................................. 21,857
Additional paid-in capital...................................... 305,610,764
Distribution in excess of investment income...................... (4,294,998)
Accumulated net realized loss on investments..................... (23,131,624)
Net unrealized depreciation on investments and foreign
currency translations.......................................... (38,105,360)
------------
Net assets................................................. $240,100,639
============
Net Asset Value Per Share ($240,100,639 / 21,857,134 shares)..... $10.99
======
See accompanying notes to financial statements.
7
<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 I I N C
Statement of Operations for the Three Months ended August 31, 1995 (Unaudited)
Net Investment Income
<TABLE>
<S> <C>
Income
Interest (includes discount accretion of $2,893,667) ........................ $13,184,886
Expenses
Interest on loan................................................ $1,932,639
Management fee.................................................. 702,872
Custodian....................................................... 27,600
Printing........................................................ 25,208
Legal........................................................... 28,060
Audit and tax services.......................................... 18,308
Listing fees.................................................... 8,069
Transfer agent.................................................. 10,120
Directors' fees and expenses.................................... 4,784
Amortization of organization expenses........................... 6,802
Other........................................................... 33,444 2,797,906
---------- -----------
Net investment income........................................... 10,386,980
-----------
Realized and Unrealized Gain (Loss)
Net Realized Loss on:
Investments............................................................... (10,065,694)
Foreign currency transactions............................................. (851,033)
-----------
(10,916,727)
-----------
Change in Net Unrealized Appreciation (Depreciation) on:
Investments............................................................... 14,178,376
Translation of foreign currency contracts and other assets and liabilities
denominated in foreign currencies....................................... 96,177
-----------
14,274,553
-----------
Net realized loss and change in net unrealized appreciation (depreciation)... 3,357,826
-----------
Net Increase in Net Assets from Operations................................... $13,744,806
===========
</TABLE>
See accompanying notes to financial statements.
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 I I N C
Statement of Changes in Net Assets August 31, 1995
<TABLE>
<CAPTION>
Three Months
Ended Twelve Months
August 31, 1995 Ended
(Unaudited) May 31, 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations
Net investment income.................................................... $ 10,386,980 $ 37,024,845
Net realized loss on investments and foreign currency transactions....... (10,916,727) (25,497,473)
Change in net unrealized appreciation (depreciation)..................... 14,274,553 (23,559,467)
------------ ------------
Net increase (decrease) in net assets from operations.................... 13,744,806 (12,032,095)
------------ ------------
Dividends and Distributions to Shareholders from
Net investment income.................................................... (9,016,069) (29,701,991)
Net realized gains....................................................... -- (6,362,282)
------------ ------------
Total dividends to shareholders.......................................... (9,016,069) (36,064,273)
------------ ------------
Capital Share Transactions
Offering expenses charged to paid-in capital............................. -- (13,000)
------------ ------------
Total increase (decrease) in net assets.................................. 4,728,737 (48,109,368)
Net Assets
Beginning of period...................................................... 235,371,902 283,481,270
------------ ------------
End of period............................................................ $240,100,639 $235,371,902
============ ============
</TABLE>
<TABLE>
Statement of Cash Flows For the Three Months Ended August 31, 1995 (Unaudited)
<S> <C>
Cash Flows from Operating Activities:
Purchases of securities................................................................. $(51,377,713)
Net sales of short-term investments..................................................... 734,000
Proceeds from sales of securities and principal paydowns................................ 49,711,206
------------
(932,507)
Net investment income................................................................... 10,386,980
Accretion of discount on investments.................................................... (2,893,667)
Interest on payment-in-kind bond........................................................ (790,359)
Amortization of organization expenses................................................... 6,802
Net change in receivables/payables related to operations................................ (3,088,633)
------------
Net cash provided by operating activities............................................... 2,688,616
------------
Cash Flows from Financing Activities:
Dividends paid.......................................................................... (9,016,069)
------------
Net cash used by financing activities................................................... (9,016,069)
------------
Net decrease in cash.................................................................... (6,327,453)
Cash at beginning of period............................................................. 6,328,442
------------
Cash at end of period................................................................... $ 989
============
</TABLE>
See accompanying notes to financial statements.
9
<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 I I N C
Notes to Financial Statements (Unaudited)
1. Organization
The Emerging Markets Income Fund II Inc (the "Fund") was incorporated in
Maryland on April 27, 1993 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>
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 I I N C
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 $135,000 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.
(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.
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 I I N C
Notes to Financial Statements (Unaudited) (Continued)
3. Management and Advisory Fees and Other Transactions
The Fund entered into a management agreement with Advantage Advisers, Inc.
(the "Investment Manager"), a subsidiary of Oppenheimer, pursuant to which the
Investment Manager, among other things, supervises the Fund's investment program
and monitors the performance of the Fund's service providers.
The Investment Manager and the Fund entered into an investment advisory and
administration agreement with Salomon Brothers Asset Management Inc (the
"Investment Adviser"), an affiliate of Salomon Brothers Inc, pursuant to which
the Investment Adviser provides investment advisory and administrative services
to the Fund. The Investment Adviser is responsible on a day-to-day basis for the
management of the Fund's portfolio in accordance with the Fund's investment
objectives and policies and for making decisions to buy, sell, or hold
particular securities and is responsible for day-to-day administration of the
Fund.
The Fund pays the Investment Manager a monthly fee at an annual rate of
1.20% of the Fund's average weekly net assets for its services, out of which the
Investment Manager pays the Investment Adviser a monthly fee at an annual rate
of .70% of the Fund's average weekly net assets for its services.
At August 31, 1995, Oppenheimer and the Investment Adviser each own 3,697
and 4,549 shares of the Fund, respectively. Certain officers and/or directors of
the Fund are officers and/or directors of the Investment Manager or the
Investment Adviser.
The Fund pays each Director not affiliated with the Investment Manager or
the Investment 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 year ended August 31, 1995 aggregated $37,079,202 and
$42,163,744, respectively. The federal income tax cost basis of the Fund's
investments at August 31, 1995 was $372,833,606. Gross unrealized appreciation
and depreciation amounted to $11,639,447 and $50,123,442, respectively,
resulting in a net unrealized depreciation on investments of $38,483,995.
For the year ended May 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 $4,235,371 and $11,172,399, respectively during fiscal 1995. In addition, the
Fund has a capital loss carryforward as of August 31, 1995 of $7,428,806 which
expires in 2003. To the extent future capital gains are offset by such capital
losses, the Fund does not anticipate distributing such gains to the
shareholders.
5. Bank Loan
The Fund has borrowed $100,000,000 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 1-3/8% and the maturity date
is November 6, 1995. The collateral for the loan was valued at $243,219,960 on
August 31, 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 not less than 190%.
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 I I N C
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 August 31, 1995 was $42,840,830.
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 August 31, 1995
On September 1, 1995, the Board of Directors of the Fund declared a common
stock dividend of $0.4125 per share from net investment income, payable
September 29, 1995 to shareholders of record September 11, 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 August 31, 1995, all forward
contracts which the Fund has entered into have been compensated by the Fund with
offsetting closing transactions.
Consistent with its objective to seek high current income, the Fund invests
in instruments whose values and interest rates may be linked to foreign
currencies, interest rates, indices or some other financial indicator. The value
at maturity or interest rates for these instruments will increase or decrease
according to the change in the indicator to which it is indexed. These
securities are generally more volatile in nature and the risk of loss of
principal or interest is greater.
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 I I N C
Financial Highlights
Data for a share of common stock outstanding throughout the period:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended Ended Period Ended
August 31, 1995 May 31, May 31,
(Unaudited) 1995 1994(a)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income.................................... $ 0.48 $ 1.69 $ 1.22
Net realized gain (loss) and change in
unrealized appreciation (depreciation) on
securities and foreign currency translations........... 0.15 (2.24) (1.03)
------ ------ ------
Total from investment operations......................... 0.63 (0.55) 0.19
------ ------ ------
Dividends to shareholders from net
investment income...................................... (0.41) (1.36) (1.06)
Dividends to shareholders from net
realized capital gains................................. -- (0.29) (0.14)
Offering costs on issuance of common stock............... -- -- (0.04)
------ ------ ------
Net increase (decrease) in net asset value............... 0.22 (2.20) (1.05)
Net asset value, beginning of period..................... 10.77 12.97 14.02
------ ------ ------
Net asset value, end of period........................... $10.99 $10.77 $12.97
====== ====== ======
Per share market value, end of period.................... $11.88 $11.88 $14.00
Total investment return based on market
price per share (c).................................... 3.55% -2.18% 8.29%(b)
Ratios/Supplemental data:
Net assets, end of period..............................$240,100,639 $235,371,902 $283,481,270
Ratio of operating expenses to
average net assets................................... 1.47%(d) 1.45% 1.38%(d)
Ratio of interest expense to
average net assets................................... 3.27%(d) 2.96% 1.02%(d)
Ratio of total expenses to
average net assets................................... 4.74%(d) 4.41% 2.40%(d)
Ratio of net investment income to
average net assets................................... 17.59%(d) 15.42% 8.98%(d)
Portfolio turnover rate................................ 11.36% 58.16% 23.15%
Bank loan outstanding, end of period...................$100,000,000 $100,000,000 $100,000,000
Interest rate on bank loan, end of period.............. 7.5625% 7.5625% 6.375%
Weighted average bank loan.............................$100,000,000 $100,000,000 $ 66,348,974
Weighted average interest rate......................... 7.73%(d) 7.12% 4.87%(d)
<FN>
- ------------
(a) For the period June 25, 1993 (commencement of operations) through May 31,
1994.
(b) 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 $14.00 per share. This calculation is not annualized.
(c) Dividends are assumed, for purposes of this calculation, to be reinvested at
prices obtained under the Fund's dividend reinvestment plan.
(d) Annualized.
</FN>
</TABLE>
See accompanying notes to financial statements.
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 I I N C
Selected Quarterly Financial Information
Summary of quarterly results of operations (Unaudited):
Net Realized Gain
(Loss) & Change in
Net Investment Net Unrealized
Income Appreciation (Depreciation)
Per Per
Quarters Ended* Total Share Total Share
- --------------------------------------------------------------------------------
August 31, 1993**......... $ 3,644 $.17 $14,086 $ .64
November 30, 1993......... 7,869 .36 17,599 .81
February 28, 1994......... 6,585 .30 (12,663) (.58)
May 31, 1994.............. 8,511 .39 (41,458) (1.90)
August 31, 1994........... 8,536 .39 (5,787) (.27)
November 30, 1994......... 9,293 .42 (21,503) (.98)
February 28, 1995......... 9,157 .42 (53,616) (2.45)
May 31, 1995.............. 10,039 .46 31,849 1.46
August 31, 1995........... 10,387 .48 3,358 .15
- ---------
**Totals expressed in thousands of dollars except per share amounts.
**For the period June 25, 1993 (commencement of operations) through August 31,
1993.
See accompanying notes to financial statements.
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 I I N C
(Left Column)
Directors
CHARLES F. BARBER
Consultant; formerly Chairman,
ASARCO Incorporated
LESLIE H. GELB
President, The Council
on Foreign Relations
MICHAEL S. HYLAND
President;
President, Salomon Brothers
Asset Management Inc
ALAN H. RAPPAPORT
Chairman of the Board;
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
ALAN H. RAPPAPORT
Chairman of the Board
MICHAEL S. HYLAND
President
PETER J. WILBY
Executive Vice President
THOMAS FLANAGAN
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 Column)
The Emerging Markets
Income Fund II Inc
7 World Trade Center
New York, New York 10048
1-800-SALOMON (1-800-725-6666)
INVESTMENT MANAGER
Advantage Advisers, Inc.
Oppenheimer Tower
World Financial Center
New York, New York 10281
INVESTMENT ADVISER
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
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
EDF
- --------------------------------------------------------------------------------
This report is submitted for the general information of the shareholders of The
Emerging Markets Income Fund II 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>
(Right Column)
The Emerging Markets
Income Fund II Inc
Interim Report
AUGUST 31, 1995
- -------------------------------------------
The Emerging Markets Income Fund II Inc
-------------------------------------------
(Left Column)
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
