April 19, 1996
The Emerging Markets
Income Fund II Inc
Dear Shareholder,
DURING THE QUARTER ENDED February 29, 1996, the net asset value of each of your
shares of The Emerging Markets Income Fund II Inc (the "Fund") increased from
$11.50 per share at November 30, 1995 to $12.69 per share at February 29, 1996.
Assuming that dividends of $0.4125 per share paid during the quarter were
reinvested in additional shares of the Fund, the net asset value return was
14.27% for the quarter. For the same period, the Salomon Brothers Brady Bond
Index, which we use as a measure of performance of the overall market for
emerging market debt, gained 9.64%. The Fund's primary investment objective is
to seek high current income through investments in selected debt securities of
emerging markets countries. As a secondary objective, the Fund seeks capital
appreciation.
Market Overview
THE RALLY IN THE emerging debt markets continued into January 1996 was driven by
the continued improvement of fundamentals in the major Latin American countries
and the effect of additional funds flowing into the market. However, by February
1996, the instability in the U.S. bond market caused by stronger than expected
U.S. economic growth, contributed to a sell-off in the emerging debt markets, as
measured by a 6.18% decline in the Salomon Brothers Brady Bond Index for the
month. Despite the global impact of fluctuations in the U.S. fixed-income
markets, we believe the fundamental outlook for the Fund's core country holdings
in the emerging debt markets continues to be positive.
Portfolio Review
BRAZILIAN BRADY BONDS gained 10.18% for the quarter ended February 29, 1996. By
the end of February, legislative delays and a potential congressional
investigation of an accounting scandal surrounding Brazil's seventh-largest
financial institution, Banco Nacional, overshadowed prospects for a significant
economic recovery into the second quarter and a stabilizing political situation.
We continue to view the momentum of developments in Brazil as positive and
sustainable for the foreseeable future. At quarter end, Brazil represented
19.61% of total investments.
Ecuadorian Brady bonds gained 16.02% during the quarter ended February 29, 1996,
reflecting that country's continued economic development. The Ecuadorian
congress recently approved the sale of 39% of the shares of the newly formed
electricity companies that will be reshaped from assets of the state-owned
electric company. Ecuadorian bonds represented 9.88% of total investments as of
February 29, 1996.
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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 I I N C
For the quarter ended February 29, 1996, Argentine Brady bonds gained 8.16%. In
February, market gains followed partial congressional approval of Argentine
President Menem's "super powers" legislation, which would grant the government
special powers to cut and alter taxes without prior congressional approval.
These gains were erased by the wide Brady bond market sell-off. Current market
prices for Argentine Brady bonds reflect the view that the law is likely to be
ratified in the Senate in its original format. Argentine bonds represented 4.84%
of total investments as of February 29, 1996.
Polish Brady bonds gained 15.85% during the quarter ended February 29, 1996,
reflecting the Moody's Investors Service's upgrade of Polish Brady bonds to the
investment grade rating of Baa. In February, the Cabinet of Prime Minister
Wlodzimierz Cimoszewicz was overwhelmingly approved by the government's powerful
lower chamber, the Sejm. The installation of Mr. Cimoszewicz as Prime Minister
is a very positive step for Poland as he is widely respected across the
political spectrum. Polish Brady bonds represented 4.60% of total investments at
quarter-end.
The Mexican economy is beginning to show significant signs of recovery as
confirmed by the strong economic performance in the third and fourth quarters of
1995. Mexican Brady bonds reflected that progress and gained 4.94% during the
quarter ended February 29, 1996. It is likely that local interest rates in
Mexico will remain volatile in the short-term as market participants remain
unsure of the near-term inflation trend. We remained underweighted in Mexico at
3.84% of total investments as of February 29, 1996.
During the quarter we added to positions in Bulgaria and Ecuador based on our
favorable outlook for these countries. We reduced our positions in Poland based
on the rapid price appreciation following the upgrade of Polish debt to
investment grade status.
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 market debt securities is available by calling (800)
421-4777. The update also includes specific information about the Fund, its
portfolio, country allocations and recent performance.
Cordially,
Alan H. Rappaport Michael S. Hyland
Chairman of the Board President
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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 I I N C
Statement of Investments February 29, 1996 (unaudited)
<TABLE>
<CAPTION>
BONDS -- 99.1%
- -----------------------------------------------------------------------------------------------------
Principal
Amount
000's(a) Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ARGENTINA - 6.5%
5,800 Republic of Argentina, FRB, Series L, 6.8125%, 3/31/05*.............. $ 4,154,250
Peso 15,074 Republic of Argentina, BOCON, Pre 3, 3.9072%, 9/01/02*,**(b)......... 8,441,371
Peso 7,985 Republic of Argentina, BOCON, Pre 1, 3.8876%, 4/01/01*,**(b)......... 5,543,766
------------
TOTAL ARGENTINA...................................................... 18,139,387
------------
BRAZIL - 26.5%
43,090 Federal Republic of Brazil, Capitalization Bond, 8%, 4/15/14**(b).... 26,123,217
29,500 Federal Republic of Brazil, Investment (Exit) Bond, 6%, 9/15/13**.... 17,386,563
25,000 Federal Republic of Brazil, EI Bond, Series L, 6.8125%, 4/15/06*..... 17,843,750
18,000 Federal Republic of Brazil, NMB, Series L, 6.875%, 4/15/09*,**....... 12,127,500
------------
TOTAL BRAZIL......................................................... 73,481,030
------------
BULGARIA - 13.8%
8,750 Republic of Bulgaria, IAB, 6.25%, 7/28/11*,**........................ 4,090,625
282 Republic of Bulgaria, Discount Bond, Tranche A, 6.25%, 7/28/24*...... 145,249
103,000 Republic of Bulgaria, FLIRB, Series A, 2%, 7/28/12*,**............... 34,118,750
------------
TOTAL BULGARIA....................................................... 38,354,624
------------
COSTA RICA - 5.4%
823 Costa Rica, Interest Bond, Series B, 6.09375%, 5/21/05*,**........... 708,067
8,400 Costa Rica, Principal Bond, Series A, 6.25%, 5/21/10**............... 5,040,000
16,000 Costa Rica, Principal Bond, Series B, 6.25%, 5/21/15**............... 9,280,000
------------
TOTAL COSTA RICA..................................................... 15,028,067
------------
ECUADOR - 13.4%
92,546 Republic of Ecuador, PDI Bond, 6.0625%, 2/28/15*,**(b)............... 37,018,216
------------
HUNGARY - 2.8%
8,250 National Bank of Hungary, 8.875%, 11/01/13**......................... 7,734,375
------------
</TABLE>
See accompanying notes to financial statements.
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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 I I N C
Statement of Investments February 29, 1996 (continued) (unaudited)
<TABLE>
<CAPTION>
BONDS (continued)
- -----------------------------------------------------------------------------------------------------
Principal
Amount
000's(a) Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INDONESIA - 3.0%
2,000 APP International Finance Company B.V., 11.75%, 10/01/05**........... $ 1,965,000
3,000 Indah Kiat Finance, 12.5%, 6/15/06**................................. 3,007,500
3,000 Tjiwi Kimia International Finance Co., 13.25%, 8/01/01** ............ 3,330,000
------------
TOTAL INDONESIA...................................................... 8,302,500
------------
MEXICO - 5.2%
3,000 Grupo Industrial Durango, 12.0%, 7/15/01**........................... 2,820,000
18,650 United Mexico States, Par Bond, Series B, 6.25%, 12/31/19
(including 18,650,000 rights expiring 6/30/03)................... 11,551,344
------------
TOTAL MEXICO......................................................... 14,371,344
------------
PANAMA - 4.7%
15,000 Republic of Panama, Floating Rate Note, 6.75%, 5/10/02*,**........... 13,050,000
------------
POLAND - 6.2%
3,000 Republic of Poland, RSTA Bond, 2.75%, 10/27/24*...................... 1,612,500
20,880 Republic of Poland, PDI Bond, 3.75%, 10/27/14*,**.................... 15,607,800
------------
TOTAL POLAND......................................................... 17,220,300
------------
SOUTH AFRICA - 0.7%
ZAL 9,000 Republic of South Africa Notes, 12%, 2/28/05......................... 2,014,977
------------
TRINIDAD AND TOBAGO - 2.9%
2,750 Trinidad and Tobago Notes, 11.5%, 11/20/97**......................... 2,901,250
5,000 Trinidad and Tobago Notes, 9.75%, 11/03/00**......................... 5,175,000
------------
TOTAL TRINIDAD AND TOBAGO............................................ 8,076,250
------------
</TABLE>
See accompanying notes to financial statements.
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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 I I N C
Statement of Investments February 29, 1996 (continued) (unaudited)
<TABLE>
<CAPTION>
BONDS (continued)
- -----------------------------------------------------------------------------------------------------
Principal
Amount
000's(a) Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
URUGUAY - 1.8%
3,750 Uruguay DCB, Series B, 6.4375%, 2/18/07*,**.......................... $ 2,737,500
3,000 Uruguay New Money Note, 6.5625%, 2/18/06*............................ 2,160,000
------------
TOTAL URUGUAY........................................................ 4,897,500
------------
VENEZUELA - 6.2%
18,250 Republic of Venezuela, FLIRB, Series A, 6.8125%, 3/31/07*,**......... 10,288,437
12,000 Republic of Venezuela, FLIRB, Series B, 6.625%, 3/31/07*,**.......... 6,765,000
------------
TOTAL VENEZUELA...................................................... 17,053,437
------------
TOTAL BONDS (cost $292,566,269)...................................... 274,742,007
------------
LOAN PARTICIPATIONS -- 15.8%
- -------------------------------------------------------------------------------------------------------
722 Government of Jamaica, Tranche A, 6.40625%, 10/15/00*
(Participation: Chase Manhattan Bank, New York)+................. 660,822
16,000 Kingdom of Morocco, Tranche A, 6.59375%, 1/01/09*,**
(Participation: Chase Manhattan Bank, Morgan Guaranty
Trust Company of New York)+...................................... 10,680,000
41,412 Kingdom of Morocco, Tranche B, 6.75%, 1/01/04*
(Participation: Chase Manhattan Bank,
Morgan Stanley Emerging Markets, Inc.)+.......................... 32,352,942
------------
TOTAL LOAN PARTICIPATIONS
(cost $45,769,319)................................................. 43,693,764
------------
PURCHASED OPTIONS -- 0.4%
- -------------------------------------------------------------------------------------------------------
75,000 Republic of Argentina, FRB due 3/31/05, Call
(expiring 3/28/96, exercise price $72.875)
(premium paid $1,462,500)........................................ 1,284,750
------------
U.S. GOVERNMENT SECURITY -- 19.8%
- -------------------------------------------------------------------------------------------------------
55,100 U.S. Treasury Bill, 5.075%, 3/14/96 (cost $54,999,022)............... 54,999,022
------------
TOTAL INVESTMENTS-- 135.1% (cost $394,797,110)....................... 374,719,543
------------
LIABILITIES IN EXCESS OF OTHER ASSETS - (35.1%)...................... (97,431,841)
------------
NET ASSETS - 100.0% (equivalent to $12.69 per share on
21,857,134 common shares outstanding)............................ $277,287,702
============
</TABLE>
See accompanying notes to financial statements.
Page 5
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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 I I N C
Statement of Investments February 29, 1996 (continued) (unaudited)
- -----------
(a)Principal denominated in U.S. dollars unless otherwise indicated.
(b)Payment-in-kind security for which all or part of the interest earned is
capitalized as additional principal.
*Rate shown reflects current rate on instrument with variable rates or
step coupon rates.
**All or a portion of the security is segregated as collateral pursuant to a
loan agreement. See Note 5.
+Participation interests were acquired through the financial institutions
indicated parenthetically. See Note 6.
Abbreviations used in this statement:
BOCON - Bonos de Consolidacion.
DCB - Debt Conversion Bond.
EI - Eligible Interest.
FLIRB - Front Loaded Interest Reduction Bond.
FRB - Floating Rate Bond.
IAB - Interest Arrears Bond.
NMB - New Money Bond.
PDI - Past Due Interest.
Peso - Argentina Peso.
RSTA - Revolving Short Term Agreement.
ZAL - South African Rand.
See accompanying notes to financial statements.
Page 6
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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 I I N C
Statement of Assets and Liabilities February 29, 1996 (unaudited)
<TABLE>
<S> <C>
Assets
Investments, at value (cost-- $394,797,110).......................................... $374,719,543
Receivable for securities sold....................................................... 56,841,927
Interest receivable 7,451,982
Unamortized organization expenses .................................................. 58,378
Prepaid expenses .................................................................... 29,777
------------
Total assets ........................................................... 439,101,607
------------
Liabilities
Loan payable (Note 5) .............................................................. 100,000,000
Due to custodian ................................................................... 1,461,763
Payable for securities purchased ................................................... 54,999,022
Payable for compensated foreign currency contracts ................................. 2,682,528
Accrued interest expense on loan .................................................... 2,153,993
Accrued management fee (Note 3) ..................................................... 286,475
Other accrued expenses .............................................................. 230,124
------------
Total liabilities ...................................................... 161,813,905
------------
Net Assets
Common Stock ($.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 ......................................... (2,159,260)
Accumulated net realized loss on investments ....................................... (6,100,170)
Net unrealized depreciation on investments and foreign currency translations ........ (20,085,489)
------------
Net assets............................................................... $277,287,702
------------
Net Asset Value Per Share ($277,287,702 / 21,857,134 shares) ........................ $12.69
======
</TABLE>
See accompanying notes to financial statements.
Page 7
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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 I I N C
Statement of Operations For the Nine Months Ended February 29, 1996 (unaudited)
Net Investment Income
<TABLE>
<S> <C> <C>
Income
Interest (includes discount accretion of $9,707,884) ................................ $38,792,727
Expenses
Interest on loan....................................................... $5,494,096
Management fee ........................................................ 2,260,658
Custodian ............................................................. 82,200
Printing .............................................................. 75,076
Legal ................................................................. 47,506
Audit and tax services ................................................ 54,526
Listing fees .......................................................... 24,189
Transfer agent ........................................................ 59,972
Directors' fees and expenses .......................................... 20,480
Shareholder annual meeting ............................................ 29,459
Amortization of organization expenses ................................. 20,257
Other ................................................................. 69,453 8,237,872
---------- -----------
Net investment income................................................................ 30,554,855
-----------
Realized and Unrealized Gain (Loss) On Investments
and Foreign Currency Transactions
Net Realized Gain (Loss) on:
Investments...................................................................... 7,482,753
Foreign currency transactions.................................................... (1,368,025)
-----------
..................................................................................... 6,114,728
-----------
Change in Net Unrealized Appreciation (Depreciation) on:
Investments...................................................................... 32,034,083
Translation of foreign currency contracts and other assets and liabilities
denominated in foreign currencies............................................ 260,341
-----------
32,294,424
-----------
Net realized gain and change in net unrealized appreciation (depreciation)........... 38,409,152
-----------
Net Increase in Net Assets from Operations........................................... $68,964,007
===========
</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 I I N C
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Nine Months
Ended Twelve Months
February 29, 1996 Ended
(unaudited) May 31, 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations
Net investment income ............................................ $ 30,554,855 $ 37,024,845
Net realized gain (loss) on investments and foreign currency
transactions ................................................... 6,114,728 (25,497,473)
Change in net unrealized appreciation (depreciation) ............. 32,294,424 (23,559,467)
------------ -------------
Net increase (decrease) in net assets from operations ............ 68,964,007 (12,032,095)
------------ -------------
Dividends and Distributions to Shareholders from
Net investment income ............................................ (27,048,207) (29,701,991)
Net realized gains ............................................... -- (6,362,282)
------------ -------------
Total dividends to shareholders................................... (27,048,207) (36,064,273)
------------ -------------
Capital Share Transactions
Offering expenses charged to paid-in capital...................... -- (13,000)
------------ -------------
Total increase (decrease) in net assets........................... 41,915,800 (48,109,368)
Net Assets
Beginning of period............................................... 235,371,902 283,481,270
------------ -------------
End of period..................................................... $277,287,702 $235,371,902
============ ============
</TABLE>
<TABLE>
Statement of Cash Flows For the Nine Months Ended February 29, 1996 (unaudited)
<S> <C>
Cash Flows from Operating Activities:
Purchases of securities .................................................................... $(252,290,757)
Net sales of short-term investments ......................................................... 4,396,000
Proceeds from sales of securities and principal paydowns .................................... 250,135,359
------------
2,240,602
Net investment income ....................................................................... 30,554,855
Accretion of discount on investments ........................................................ (9,707,884)
Interest on payment-in-kind bonds ........................................................... (3,957,934)
Amortization of organization expenses ....................................................... 20,257
Net change in receivables/payables related to operations .................................... 108,106
------------
Net cash provided by operating activities ................................................... 19,258,002
------------
Cash Flows from Financing Activities:
Dividends paid .............................................................................. (27,048,207)
------------
Net cash used by financing activities ....................................................... (27,048,207)
------------
Net decrease in cash ........................................................................ (7,790,205)
Cash at beginning of period ................................................................. 6,328,442
------------
Cash (due to custodian) at end of period .................................................... $ (1,461,763)
============
</TABLE>
See accompanying notes to financial statements.
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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 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. 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 effect the reported
amounts and disclosures in the financial statements. Actual amounts could 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 net investment 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
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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 I I N C
Notes to Financial Statements (unaudited) (continued)
2. Significant Accounting Policies (continued)
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.
(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) 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 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.
(h) 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.
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 I I N C
Notes to Financial Statements (unaudited) (continued)
2. Significant Accounting Policies (continued)
(i) Option contracts. When a 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
daily to reflect the current market value of the option. When the option
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.
When a written put option is exercised, the amount of the premium received
reduces the cost of the security that the Fund purchased upon exercise of
the option.
(j) 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
period ended February 29, 1996, the Fund paid interest expense of
$3,886,285.
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 February 29, 1996, Oppenheimer and the Investment Adviser each own 3,697
and 4,849 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 nine months ended February 29, 1996 aggregated $236,529,746
and $299,429,825, respectively. The federal income tax cost basis of the Fund's
investments at February 29, 1996 was $394,797,110.
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 I I N C
Notes to Financial Statements (unaudited) (continued)
4. Portfolio Activity and Federal Income Tax Status (continued)
Gross unrealized appreciation and depreciation amounted to $5,559,111 and
$25,636,678, respectively, resulting in a net unrealized depreciation on
investments of $20,077,567.
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 from the year ended May 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% and the maturity
date is May 6, 1996. The collateral for the loan was valued at $212,122,435 on
February 29, 1996 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%.
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 February 29, 1996 was $43,693,764.
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 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.
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 I I N C
Notes to Financial Statements (unaudited) (continued)
8. Dividend Subsequent to February 29, 1996
On March 1, 1996, the Board of Directors of the Fund declared a common
stock dividend of $0.4125 per share from net investment income, payable March
29, 1996 to shareholders of record March 12, 1996.
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 counter-
parties to meet the terms of their contracts. As of February 29, 1996, all
forward contracts which the Fund has entered into have been compensated by the
Fund with offsetting closing transactions.
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 I I N C
<TABLE>
<CAPTION>
Financial Highlights
Data for a share of common stock outstanding throughout the period:
Nine Months Twelve Months
Ended Ended Period Ended
February 29, 1996 May 31, May 31,
(unaudited) 1995 1994(a)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income.......................... $ 1.40 $ 1.69 $ 1.22
Net realized gain (loss) and change in
unrealized appreciation (depreciation) on
securities and foreign currency translations 1.76 (2.24) (1.03)
------ ------ ------
Total from investment operations............... 3.16 (0.55) 0.19
------ ------ ------
Dividends to shareholders from net
investment income........................... (1.24) (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..... 1.92 (2.20) (1.05)
Net asset value, beginning of period........... 10.77 12.97 14.02
------ ------ ------
Net asset value, end of period................. $12.69 $10.77 $12.97
====== ====== ======
Per share market value, end of period.......... $13.38 $11.88 $14.00
Total investment return based on market
price per share (c)......................... 24.31% -2.18% 8.29%(b)
Ratios/Supplemental data:
Net assets, end of period................... $277,287,702 $235,371,902 $283,481,270
Ratio of operating expenses to
average net assets...................... 1.46%(d) 1.45% 1.38%(d)
Ratio of interest expense to
average net assets...................... 2.91%(d) 2.96% 1.02%(d)
Ratio of total expenses to
average net assets...................... 4.37%(d) 4.41% 2.40%(d)
Ratio of net investment income to
average net assets...................... 16.21%(d) 15.42% 8.98%(d)
Portfolio turnover rate..................... 69.36% 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... 6.75% 7.5625% 6.375%
Weighted average bank loan.................. $100,000,000 $100,000,000 $ 66,348,974
Weighted average interest rate.............. 7.33%(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.
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 I I N C
Selected Quarterly Financial Information
<TABLE>
<CAPTION>
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
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
November 30, 1995........................... 9,897 .45 10,421 .48
February 29, 1996........................... 10,271 .47 24,630 1.13
<FN>
- --------
*Totals expressed in thousands of dollars except per share amounts.
**For the period June 25, 1993 (commencement of operations) through August 31, 1993.
</FN>
</TABLE>
See accompanying notes to financial statements.
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 I I N C
Left Col.
Directors
CHARLES F. BARBER
Consultant; formerly Chairman,
ASARCO Incorporated
LESLIE H. GELB
President, The Council
on Foreign Relations
MICHAEL S. HYLAND
President;
Managing Director, Salomon Brothers Inc
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 Col.
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
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
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.
- --------------------------------------------------------------------------------
Page 17
<PAGE>
Left Col.
Salomon Brothers Asset Management
Seven World Trade Center
New York, New York 10048
- ---------------------
BULK RATE
U.S. POSTAGE
PAID
STATEN ISLAND, NY
PERMIT No. 169
- ---------------------
Right Col.
The Emerging Markets
Income Fund II Inc
Interim Report
FEBRUARY 29, 1996
-----------------------------------------------
The Emerging Markets Income Fund II Inc
----------------------------------------------
