October 18, 1996
The Emerging Markets
Income Fund II Inc
Dear Shareholders:
We are pleased to provide you with this interim report for The Emerging Markets
Income Fund II Inc (the "Fund") as of August 31, 1996. Included are market
commentary, a statement of the Fund's investments as of August 31, 1996, and
financial statements for the three months ended August 31, 1996.
We are pleased to report that the Fund returned 49.45% based on net asset value
per share, for the twelve months ended August 31, 1996, significantly
outperforming the 38.78% return of the Lipper Emerging Market Debt Fund Average.
In fact, the Fund ranked #2 of 13 funds in this investment category tracked by
Lipper Analytical Services, Inc., placing it in the first quartile.*
The net asset value of the Fund increased from $13.54 per share on May 31, 1996,
to $14.29 per share on August 31, 1996. Dividends of $0.4125 per share were
declared during the quarter. Assuming reinvestment of these dividends in
additional shares of the Fund, the net asset value return for the quarter ended
August 31,1996, was 8.93%. In comparison, the Salomon Brothers Brady Bond Index
returned 6.85% during the same period.
Throughout the last twelve months, the Fund continued to provide investors with
stable current income through its broad exposure to government sponsored debt
instruments issued in emerging market economies. On August 31, 1996, the Fund,
as a percentage of total investments, was approximately 95% invested in
securities of emerging market issuers, including obligations of sovereign
governments and companies. The remainder of the Fund's assets was invested
primarily in options and short-term investments.
Emerging Markets Review
There was a decidedly positive tone to the emerging debt markets by the end of
August 1996, as political and fundamental economic developments continued to
promote growth throughout most of the emerging market nations.
Latin America The Mexican Finance Ministry confirmed late in July that it would
repay $7 billion of its remaining $10.5 billion in emergency borrowings from the
U.S. Treasury as well as $1 billion in debt owed to the International Monetary
Fund (the "IMF"). The repayments, financed in part with a $6 billion
floating-rate note issue, are nearly double what Mexico had initially planned.
Since these bonds will be repaid from oil-export revenues of government-owned
Petroleos Mexicanos, flowing directly to the Federal Reserve Bank of New York,
the issue was rated Baa-3 by Moody's Investors Service and BBB- by Standard and
Poor's, both higher ratings than garnered by Mexico itself.
In other positive news, Mexico reported a surge in second-quarter economic
growth, breaking a five-quarter string of declines. A strong export sector is
credited with reviving demand for goods and services in the local economy.
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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
The Venezuelan government approved the creation of a Debt Rescue Fund that will
set aside certain oil revenues to pay down foreign debt. Also, the IMF approved
a $1.4 billion standby credit, signifying Venezuela's first formal credit
arrangement since 1989. As a further positive sign, Venezuela's economy is
estimated to rebound to a 4% annual growth rate in 1997 from a negative 1.1%
inflation-adjusted growth rate this year, according to the IMF. The IMF's visit
to Caracas in August highlighted the government's progress towards many of its
economic reform targets.
Eastern Europe Russia was the emerging debt market's top performer in August,
despite continued speculation over the health of President Boris Yeltsin.
Yeltsin soundly beat his Communist rival in a runoff presidential election in
July but immediately departed Moscow to receive care for his ailing condition.
Separately, the Russian Central Bank moved to draw more foreign investors into
its treasury bill market in a bid to lower the country's rising interest
payments. Foreign investors will now be allowed greater flexibility in investing
in ruble-denominated treasury bills, including easier repatriation of profits.
Poland enjoyed another successful issue with its July 9 release of a five-year,
250 million deutschemark Eurobond, priced very competitively over comparable
German government bonds. This pricing, along with recent acceptance of Poland
into the Organization for Economic Cooperation and Development and its strong
trade relations with Germany, are believed to be among the primary reasons
German investors accounted for one-third of the bond issue's placement.
In Bulgaria, the IMF approved a fourth standby loan for the country in July.
This loan is hoped to pave the way for additional external financial support
from the World Bank and bilateral lenders. Of course, the success of Bulgaria's
IMF and World Bank loan programs is dependent on the nation's ongoing progress
towards recapitalization and reform of its banking system. Interest payments
totaling US$125 million on Brady bonds were paid in July as scheduled.
Dividend Reinvestment Plan
For those shareholders not currently participating in the Fund's Dividend
Reinvestment Plan (the "Plan"), we encourage you to do so. The Plan offers a
prompt, simple and inexpensive way to put your dividends and distributions to
work through reinvestment in additional shares of capital stock of the Fund.
Shareholders who are not currently participating in the Plan may enroll in the
Plan by completing an Authorization Card attached to the Terms and Conditions of
the Plan, which can be obtained by contacting American Stock Transfer & Trust
Company at 1-800-937-5449 (1-718-921-8200 if you are calling from within New
York City). Shareholders who initially purchased shares of the Fund on or after
September 6, 1996, are automatically enrolled in the Plan. If your shares are
held in the name of a broker or nominee, you should contact your broker or
nominee for more information about your ability to participate in the Plan.
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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
Annual Shareholders Meeting
The Fund held its annual shareholders meeting on September 16, 1996. 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
-------- --------- -------------
Jeswald W. Salacuse 20,612,701 217,462
Michael S. Hyland 20,619,839 210,324
2. Ratification of Price Waterhouse LLP as the Independent Accountants of the
Fund
<TABLE>
<CAPTION>
Votes For Votes Against Votes Abstained Unvoted
--------- ------------- --------------- -------
<S> <C> <C> <C> <C>
20,566,158 100,382 163,622 4
</TABLE>
* * *
As we continue to pursue the Fund's investment objective of high current income
through investments in selected debt securities of emerging markets countries,
we appreciate your ongoing interest in the Fund. In an effort to provide more
timely information concerning the Fund, shareholders may call 1-800-421-4777 for
a recorded periodic update of the developments affecting the markets in which
the Fund invests, as well as its current net asset value, portfolio manager
comments and other information regarding the Fund's portfolio holdings and
allocations. Although the Fund will continue to issue a semi-annual and annual
report to shareholders, a press release containing financial highlights and
other Fund information will be issued in lieu of a first and third quarter
interim report. This will result in some cost savings for the Fund while still
providing shareholders with current information about the Fund.
Sincerely,
Alan H. Rappaport Michael S. Hyland
Chairman of the Board President
*Lipper rankings change monthly. Lipper performance results represent changes in
net asset value, adjusted to reflect reinvestment of dividends and capital gains
distributions.
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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
<TABLE>
<CAPTION>
Statement of Investments August 31, 1996 (unaudited)
Bonds - 98.8%
- ------------------------------------------------------------------------------------------------------
Principal
Amount Value
000's(a) (Note 2a)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ARGENTINA - 21.1%
32,150 Republic of Argentina, FRB, Series L, 6.3125%, 3/31/05*,**(d)........ $ 24,956,631
31,447 Republic of Argentina, BOCON, Pre 2, 5.46094%, 4/01/01*(b)........... 28,028,360
Peso 8,122 Republic of Argentina, BOCON, Pre 1, 3.474%, 4/01/01*,**(b).......... 6,234,484
Peso 10,613 Republic of Argentina, BOCON, Pre 3, 3.474%, 9/01/02*,**(b).......... 6,654,836
------------
TOTAL ARGENTINA...................................................... 65,874,311
------------
BRAZIL - 23.4%
61,965 Federal Republic of Brazil, Capitalization (C) Bond, 8%, 4/15/14**(b) 40,006,437
29,500 Federal Republic of Brazil, Investment (Exit) Bond, 6%, 9/15/13**.... 19,138,125
18,000 Federal Republic of Brazil, NMB, Series L, 6.5625%, 4/15/09*,**...... 13,927,500
------------
TOTAL BRAZIL......................................................... 73,072,062
------------
BULGARIA - 11.2%
8,750 Republic of Bulgaria, IAB, 6.875%, 7/28/11*,**....................... 3,932,031
282 Republic of Bulgaria, Discount Bond, Tranche A, 6.6875%, 7/28/24*.... 141,195
99,750 Republic of Bulgaria, FLIRB, Series A, 2.25%, 7/28/12*,**............ 30,797,813
------------
TOTAL BULGARIA....................................................... 34,871,039
------------
COSTA RICA - 5.8%
716 Costa Rica, Interest Bond, Series B, 6.34375%, 5/21/05*,**........... 658,960
8,400 Costa Rica, Principal Bond, Series A, 6.25%, 5/21/10................. 6,132,000
16,000 Costa Rica, Principal Bond, Series B, 6.25%, 5/21/15**............... 11,360,000
------------
TOTAL COSTA RICA..................................................... 18,150,960
------------
ECUADOR - 6.9%
46,389 Republic of Ecuador, PDI Bond, 6.5%, 2/27/15*,**(b).................. 21,512,813
------------
HUNGARY - 1.7%
5,250 National Bank of Hungary, 8.875%, 11/01/13**......................... 5,269,688
------------
INDONESIA - 0.8%
1,250 Polysindo International Finance Company B.U., 11.375%, 6/15/06....... 1,259,375
1,000 Tjiwi Kimia International Finance Co., 13.25%, 8/01/01** ............ 1,120,000
------------
TOTAL INDONESIA...................................................... 2,379,375
------------
MEXICO - 7.9%
3,000 Grupo Industrial Durango, 12%, 7/15/01**............................. 3,135,000
22,552 United Mexico States, Global Bond, 11.5%, 5/15/26**.................. 21,692,205
------------
TOTAL MEXICO......................................................... 24,827,205
------------
</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 August 31, 1996 (continued) (unaudited)
Bonds (concluded)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Principal
Amount Value
000's(a) (Note 2a)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
PANAMA - 1.2%
923 Republic of Panama, FRN, 6.62891%, 5/10/02*,** ...................... $ 883,849
5,000 Republic of Panama, IRB, 3.5%, 7/17/14* ............................. 3,012,500
------------
TOTAL PANAMA......................................................... 3,896,349
------------
POLAND - 5.8%
20,880 Republic of Poland, PDI Bond, 3.75%, 10/27/14*,**.................... 16,482,150
3,000 Republic of Poland, RSTA Bond, 2.75%, 10/27/24*,**................... 1,730,625
------------
TOTAL POLAND......................................................... 18,212,775
------------
RUSSIA - 4.7%
24,500 Russia, IAN, 12/31/15*(c)............................................ 14,562,800
------------
SOUTH AFRICA - 0.5%
ZAL 9,000 Republic of South Africa Notes, 12%, 2/28/05......................... 1,701,342
------------
URUGUAY - 1.4%
1,750 Uruguay DCB, Series B, 6.6875%, 2/18/07*,**.......................... 1,631,875
3,000 Uruguay New Money Note, 6.8125%, 2/18/06*............................ 2,730,000
------------
TOTAL URUGUAY........................................................ 4,361,875
------------
VENEZUELA - 6.4%
16,500 Republic of Venezuela, DCB, Series DL, 6.625%, 12/18/07*(d).......... 12,447,187
9,750 Republic of Venezuela, FLIRB, Series B, 6.5%, 3/31/07*,**............ 7,531,875
------------
TOTAL VENEZUELA...................................................... 19,979,062
------------
TOTAL BONDS (cost $308,161,669)...................................... 308,671,656
------------
Loan Participations - 15.8%
- ------------------------------------------------------------------------------------------------------
611 Government of Jamaica, Tranche A, 6.5%, 10/15/00*
(Chase Manhattan, New York)+..................................... 595,813
4,000 Government of Jamaica, Tranche B, 6.3125%, 11/15/04*
(Morgan Guaranty Trust Company of New York,
Chase Manhattan, New York)+...................................... 3,120,000
16,000 Kingdom of Morocco, Tranche A, 6.4375%, 1/01/09*,**
(Chase Manhattan, New York, Morgan Guaranty
Trust Company of New York, ING Bank N.V.)+....................... 11,960,000
38,824 Kingdom of Morocco, Tranche B, 6.4375%, 1/01/04*
(Chase Manhattan, New York, Morgan Stanley
Emerging Markets, Inc.)+......................................... 33,776,471
------------
TOTAL LOAN PARTICIPATIONS (cost $47,238,208)......................... 49,452,284
------------
See accompanying notes to financial statements.
Page 5
</TABLE>
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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 August 31, 1996 (continued) (unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Principal
Amount Value
000's(a) (Note 2a)
- ------------------------------------------------------------------------------------------------------
Purchased Put Options - 0.2%
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
10,000 Republic of Bulgaria, FLIRB due 7/28/12
(expiring 9/23/96, exercise price 30)............................ $ 15,000
5,000 Republic of Bulgaria, FLIRB due 7/28/12
(expiring 9/23/96, exercise price 30.25)......................... 9,500
15,000 Republic of Bulgaria, FLIRB due 7/28/12
(expiring 9/29/96, exercise price 30.3125)....................... 42,000
5,000 Republic of Bulgaria, FLIRB due 7/28/12
(expiring 10/01/96, exercise price 30.625)....................... 41,500
10,000 Republic of Bulgaria, FLIRB due 7/28/12
(expiring 11/06/96, exercise price 30)........................... 117,500
25,000 Republic of Bulgaria, FLIRB due 7/28/12
(expiring 11/12/96, exercise price 31)........................... 262,500
------------
TOTAL PURCHASED PUT OPTIONS (premium paid $2,242,000)................ 488,000
------------
TOTAL INVESTMENTS - 114.8% (cost $357,641,877)...................... 358,611,940
------------
Written Call Options - (0.6)%
- ------------------------------------------------------------------------------------------------------
(10,000) Republic of Bulgaria, FLIRB due 7/28/12
(expiring 9/23/96, exercise price 30)........................... (230,000)
(5,000) Republic of Bulgaria, FLIRB due 7/28/12
(expiring 9/23/96, exercise price 30.25)........................ (104,500)
(15,000) Republic of Bulgaria, FLIRB due 7/28/12
(expiring 9/29/96, exercise price 30.3125)...................... (316,500)
(5,000) Republic of Bulgaria, FLIRB due 7/28/12
(expiring 10/01/96, exercise price 30.625)....................... (154,500)
(10,000) Republic of Bulgaria, FLIRB due 7/28/12
(expiring 11/06/96, exercise price 30)........................... (417,000)
(25,000) Republic of Bulgaria, FLIRB due 7/28/12
(expiring 11/12/96, exercise price 31)........................... (542,500)
------------
TOTAL WRITTEN CALL OPTIONS (premium received $1,853,500)............. (1,765,000)
------------
</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 August 31, 1996 (concluded) (unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Principal
Amount Value
000's(a) (Note 2a)
- ------------------------------------------------------------------------------------------------------
Repurchase Agreements - 6.3%
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
15,000 State Street Bank and Trust Company, 5.2%, cost $15,000,000, dated
8/30/96, $15,008,667 due 9/03/96, (collateralized by $15,060,000 U.S.
Treasury Note, 6.125%, due 5/15/98, valued at $15,304,725)....... $ 15,000,000
4,573 Union Bank of Switzerland, 5.21%, cost $4,573,000, dated 8/30/96,
$4,575,647 due 9/03/96, (collateralized by $4,459,000 U.S. Treasury
Bond, 7.5%, due 11/15/16, valued at $4,665,229).................. 4,573,000
------------
TOTAL REPURCHASE AGREEMENTS (cost $19,573,000)....................... 19,573,000
------------
LIABILITIES IN EXCESS OF OTHER ASSETS - (20.5)%...................... (64,034,747)
------------
NET ASSETS - 100.0% (equivalent to $14.29 per share on
21,857,134 common shares outstanding)............................ $312,385,193
============
<FN>
- -----------
(a)Principal denominated in U.S. dollars unless otherwise indicated.
(b)Payment-in-kind security for which all or part of the interest earned is capitalized as additional principal.
(c)"When and if issued" security issued pursuant to Russia's Brady Plan debt restructuring. The Investment
Adviser believes that this restructuring will be completed and finalized and that the related Brady Bonds
will be issued. Accordingly, the Fund has marked-to-market its investment in this security at August 31,
1996.
(d)Securities valued at $14,141,875 as of August 31, 1996 were segregated to be available for the purchase of
delayed delivery securities with a cost of $13,251,250.
*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.
FLIRB - Front Loaded Interest Reduction Bond.
FRN - Floating Rate Note.
FRB - Floating Rate Bond.
IAB - Interest Arrears Bond.
IAN - Interest Arrears Note.
IRB - Interest Reduction Bond.
NMB - New Money Bond.
PDI - Past Due Interest.
Peso - Argentina Peso.
RSTA - Revolving Short Term Agreement.
ZAL - South African Rand.
</FN>
See accompanying notes to financial statements.
Page 7
</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 I I N C
Statement of Assets and Liabilities August 31, 1996 (unaudited)
<TABLE>
<S> <C>
Assets
Investments, at value (cost - $357,641,877).......................................... $358,611,940
Repurchase Agreements................................................................ 19,573,000
Cash ................................................................................ 423
Receivable for securities sold....................................................... 47,643,402
Interest receivable ................................................................. 7,223,197
Unamortized organization expenses .................................................. 44,775
Prepaid expenses .................................................................... 12,436
------------
Total assets ........................................................... 433,109,173
------------
Liabilities
Loan payable (Note 5) .............................................................. 100,000,000
Payable for securities purchased ................................................... 14,781,250
Written options at value (premium received - $1,853,500) ........................... 1,765,000
Payable for compensated foreign currency contracts (Note 2) ......................... 1,383,698
Accrued interest expense on loan .................................................... 2,142,838
Accrued management fee (Note 3) ..................................................... 315,875
Other accrued expenses .............................................................. 335,319
------------
Total liabilities ...................................................... 120,723,980
------------
Net Assets
Common Stock ($.001 par value, authorized 100,000,000 shares;
21,857,134 shares outstanding) .................................................... 21,857
Additional paid-in capital ......................................................... 305,610,764
Undistributed net investment income ................................................. 1,567,998
Accumulated net realized gain on investments ....................................... 4,131,704
Net unrealized appreciation on investments and foreign currency translations ........ 1,052,870
------------
Net assets............................................................... $312,385,193
============
Net Asset Value Per Share ($312,385,193 (d/b) 21,857,134 shares) .................... $14.29
======
</TABLE>
See accompanying notes to financial statements.
Page 8
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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 Three Months Ended August 31, 1996 (unaudited)
Net Investment Income
<TABLE>
<S> <C> <C>
Income
Interest (includes discount accretion of $4,270,239) ................................ $13,119,599
Expenses
Interest on loan....................................................... $1,687,066
Management fee ........................................................ 904,935
Custodian ............................................................. 27,600
Printing .............................................................. 25,208
Transfer agent ........................................................ 18,492
Audit and tax services ................................................ 18,308
Legal ................................................................. 15,916
Directors' fees and expenses .......................................... 8,556
Listing fees .......................................................... 8,129
Amortization of organization expenses ................................. 6,802
Other ................................................................. 31,652 2,752,664
---------- -----------
Net investment income................................................................ 10,366,935
-----------
Realized and Unrealized Gain (Loss) On Investments
and Foreign Currency Transactions
Net Realized Gain (Loss) on:
Investments...................................................................... 3,387,719
Foreign currency transactions.................................................... (53,072)
-----------
3,334,647
-----------
Change in Net Unrealized Appreciation (Depreciation) on:
Investments and written options.................................................. 11,758,076
Translation of foreign currency contracts and other assets and liabilities
denominated in foreign currencies............................................ (7,393)
-----------
11,750,683
-----------
Net realized gain and change in net unrealized appreciation (depreciation)........... 15,085,330
-----------
Net Increase in Net Assets from Operations........................................... $25,452,265
===========
See accompanying notes to financial statements.
Page 9
</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 I I N C
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the
Three Months For the Year
August 31, 1996 Ended
(unaudited) May 31, 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations
Net investment income ............................................ $ 10,366,935 $ 42,016,993
Net realized gain on investments and foreign currency transactions 3,334,647 12,942,278
Change in net unrealized appreciation (depreciation) ............. 11,750,683 41,682,100
------------ ------------
Net increase in net assets from operations ....................... 25,452,265 96,641,371
------------ ------------
Dividends and Distributions to Shareholders from
Net investment income ............................................ (9,016,069) (28,135,808)
Net realized gains ............................................... - (7,928,468)
------------ ------------
Total dividends and distributions to shareholders................. (9,016,069) (36,064,276)
------------ ------------
Total increase in net assets...................................... 16,436,196 60,577,095
Net Assets
Beginning of period............................................... 295,948,997 235,371,902
------------ ------------
End of period (included undistributed net investment income
of $1,567,998 and $217,132, respectively).................... $312,385,193 $295,948,997
============ ============
Statement of Cash Flows For the Three Months Ended August 31, 1996 (unaudited)
Cash Flows from Operating Activities:
Purchases of securities and options ................................................ $(179,770,852)
Net sales of short-term investments ................................................. 46,927,000
Proceeds from sales of securities, options and principal paydowns ................... 139,468,221
-------------
6,624,369
Net investment income .............................................................. 10,366,935
Accretion of discount on investments ................................................ (4,270,239)
Interest on payment-in-kind bonds ................................................... (1,938,898)
Amortization of organization expenses ............................................... 6,802
Net change in receivables/payables related to operations ............................ (1,899,592)
-------------
Net cash provided by operating activities............................................ 8,889,377
-------------
Cash Flows from Financing Activities:
Dividends paid ...................................................................... (9,016,069)
-------------
Net cash used by financing activities .............................................. (9,016,069)
-------------
Net decrease in cash ............................................................... (126,692)
Cash at beginning of period ........................................................ 127,115
-------------
Cash at end of period .............................................................. $ 423
=============
</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 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. 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.
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 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 and
options 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
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 (continued) (unaudited)
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 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 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 (continued) (unaudited)
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 on
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.
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, 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
Cost of purchases and proceeds from sales of securities, excluding
short-term investments and written options, for the three months ended August
31, 1996 aggregated $192,027,102 and $167,889,585, respectively. The federal
income tax cost basis of the Fund's investments and repurchase agreements at
August 31, 1996 was $377,984,934. Gross unrealized appreciation and depreciation
amounted to $14,665,729 and $14,465,723, respectively, resulting in a net
unrealized depreciation on investments of $200,006.
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 (continued) (unaudited)
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 November 6, 1996. The collateral for the loan was valued at $226,442,614
on August 31, 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 August 31, 1996 was $49,452,284.
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. At August 31, 1996, the Fund has a concentration
risk in sovereign debt of emerging market countries.
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 counter
parties to meet the terms of their contracts. As of August 31, 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
Notes to Financial Statements (concluded) (unaudited)
8. Financial Instruments with Off-Balance Sheet Risk (continued)
The Fund enters into option transactions to hedge against possible changes
in the market value of certain securities held. The risk in writing a covered
call option is that the Fund may forego the opportunity of profit if the market
price of the underlying security increases and the option is exercised. In
addition, there is the risk that the Fund may not be able to enter a closing
transaction because of an illiquid secondary market.
9. Dividend Subsequent to August 31, 1996
On September 3, 1996, the Board of Directors of the Fund declared a common
stock dividend of $0.4125 per share from net investment income, payable on
September 30, 1996 to shareholders of record September 17, 1996.
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
Financial Highlights
Data for a share of common stock outstanding throughout the period:
<TABLE>
<CAPTION>
Three Months
Ended Year Year
August 31, Ended Ended Period Ended
1996 May 31, May 31, May 31,
(unaudited) 1996 1995 1994(a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income..................... $ 0.47 $ 1.92 $ 1.69 $ 1.22
Net realized gain (loss) and change in
unrealized appreciation (depreciation)
on securities and foreign currency
translations........................... 0.69 2.50 (2.24) (1.03)
------- ------- ------- -------
Total from investment operations.......... 1.16 4.42 (0.55) 0.19
------- ------- ------- -------
Dividends to shareholders from net
investment income...................... (0.41) (1.29) (1.36) (1.06)
Dividends to shareholders from net
realized capital gains................. - (0.36) (0.29) (0.14)
Total dividends and
distributions to shareholders.......... (0.41) (1.65) (1.65) (1.20)
------- ------- ------- -------
Offering costs on issuance of common stock - - - (0.04)
------- ------- ------- -------
Net increase (decrease) in net asset value 0.75 2.77 (2.20) (1.05)
Net asset value, beginning of period...... 13.54 10.77 12.97 14.02
------- ------- ------- -------
Net asset value, end of period............ $14.29 $13.54 $10.77 $12.97
======= ======= ======= =======
Per share market value, end of period..... $14.38 $13.88 $11.88 $14.00
Total investment return based on market
price per share (c).................... 6.71% 32.72% -2.18% 8.29%(b)
Ratios/Supplemental data:
Net assets, end of period.............. $312,385,193 $295,948,997 $235,371,902 $283,481,270
Ratio of operating expenses to
average net assets................. 1.40%(d) 1.43% 1.45% 1.38%(d)
Ratio of interest expense to
average net assets................. 2.22%(d) 2.78% 2.96% 1.02%(d)
Ratio of total expenses to
average net assets................. 3.62%(d) 4.21% 4.41% 2.40%(d)
Ratio of net investment income to
average net assets................. 13.63%(d) 16.20% 15.42% 8.98%(d)
Portfolio turnover rate................ 46.16% 93.50% 58.16% 23.15%
Bank loan outstanding, end of period... $100,000,000 $100,000,000 $100,000,000 $100,000,000
Interest rate on bank loan, end of period 6.60156% 6.60156% 7.5625% 6.375%
Weighted average bank loan............. $100,000,000 $100,000,000 $100,000,000 $ 66,348,974
Weighted average interest rate......... 6.748%(d) 7.21% 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 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
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>
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
May 31, 1996................................ 11,462 .52 16,215 .74
August 31, 1996............................. 10,367 .47 15,085 .69
<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>
See accompanying notes to financial statements.
Page 17
</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 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;
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 K. Flanagan
Executive Vice President
Lawrence H. Kaplan
Executive Vice President and General Counsel
Alan M. Mandel
Treasurer
Tana E. Tselepis
Secretary
Jennifer G. Muzzey
Assistant 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
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>
(left column)
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
(right column)
The Emerging Markets
Income Fund II Inc
Interim Report
AUGUST 31, 1996
- -------------------------------------------
The Emerging Markets Income Fund II Inc
-------------------------------------------
