The Emerging Markets
Income Fund II Inc
January 24, 1997
Dear Shareholders:
WE ARE PLEASED to provide you with this semi-annual report for The Emerging
Markets Income Fund II Inc (the "Fund") as of November 30, 1996. Included are
market commentary, a statement of the Fund's investments as of November 30,
1996, and financial statements for the six months ended November 30, 1996.
We are pleased to report that the Fund returned 26.41% based on net asset value
for the six months ended November 30, 1996, compared to 23.02% for the average
closed-end Emerging Market Debt Fund as per Lipper Analytical Services. For the
twelve months ended November 30, 1996, the Fund returned 59.59% compared to
48.42% for the same Lipper average.
The net asset value of the fund increased from $13.54 per share on May 31, 1996
to $16.13 per share on November 30, 1996. Dividends of $0.825 per share were
declared during the period.
Throughout the last six 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 November 30, 1996, the Fund,
as a percentage of total investments, was approximately 92% 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 short-term investments.
Emerging Markets Review
THE EMERGING DEBT market continued on its very positive trend during the six
months ended November 30, 1996. Both strong economic and political developments
in many of the larger issuing countries combined with a broader investor base in
the market to lower risk premiums for investing in the asset class. As a result,
yields declined in general and various emerging market debt instruments
appreciated in value.
Continued global expansion, particularly in North America, boosted exports from
many emerging countries, and the substantial rise in world oil prices benefited
oil-exporting emerging nations. The increased revenues strengthened these
countries' financial and budgetary outlooks, and financial management has
generally improved. As a consequence, several emerging market issuers were
upgraded and gained increased access to the capital markets, reducing interest
costs in many nations as well.
Latin America Mexico grew strongly in the last six months in economic terms
propelling positive growth for all of 1996. Mexico also reentered the global
bond markets, eliminating its outstanding debt to the U.S. Government ahead of
schedule.
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Brazil was dominated by relative inertia as key structural budget reforms, as
well as a larger scale privatization, have been deterred by President Cardoso's
drive to amend the constitution to allow him to run for a second term as
President. On the positive side in Brazil, the country continues to build
reserves and to keep inflation under control, as the inflation rate declined
from 23.1% in 1995 to 10.1% in 1996.
Argentina was dominated by the transition from Finance Minister Domingo Cavallo
to Rogue Fernandez, and the reception that change would receive in global
markets. Argentina continues to require heavy financing on world markets and the
transition to Fernandez as the finance chief has gone very smoothly. Meanwhile,
on the economic front, Argentina has pushed ahead with various labor market
reforms that should augment GDP growth at a more accelerated rate in 1997.
Venezuela continued to benefit from much higher oil prices as well as strong
reform minded moves in government led by Teodoro Petoff. So far, Venezuela
appears to be not allowing higher oil prices to deter reform and is using excess
oil revenues to pay down debt. Venezuela has shown the most improvement in
credit quality of the major Latin American countries in the last half of 1996.
Eastern Europe Events in Russia dominated the Eastern European debt markets.
Yeltsin's re-election buoyed the market early in the period and although bypass
surgery caused concern, later it failed to dampen the economy overall and
markets ended the period up strongly. During this rather chaotic period, Russia
issued its first Eurobond of $1 billion and received a BB- credit rating from
S&P and Ba from Moodys. This financing was very well received and is the first
of many Russian issues expected in addition to the finalization of the debt
restructuring of the Soviet Union, which should be completed in spring of 1997.
Bulgaria has suffered six months of economic turmoil, as weakness in the
currency and declining economic activity have led to a leadership crisis. The
International Monetary Fund is advising the government. Nevertheless, they will
not fund Bulgaria without certain economic reforms.
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). 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.
As we continue to pursue the Fund's investment objective of high current income
through investments in selected debt securities of emerging markets countries
and capital appreciation as a secondary objective, we appreciate your ongoing
interest in the Fund. In an effort to provide more
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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.
Sincerely,
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
<TABLE>
<CAPTION>
Statement of Investments November 30, 1996 (unaudited)
BONDS -- 101.1%
- --------------------------------------------------------------------------------------------------------
Principal
Amount Value
000's(a) (Note 2a)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
ARGENTINA - 25.5%
Peso 11,264+ Republic of Argentina, BOCON, Pre 1, 3.5148%, 4/01/01*(b) ........... $ 9,511,095
Peso 10,705+ Republic of Argentina, BOCON, Pre 3, 3.5148%, 9/01/02*(b) ........... 7,937,278
24,411 Republic of Argentina, BOCON, Pre 2, 5.375%, 4/01/01*(b) ............ 22,648,120
58,531+ Republic of Argentina, FRB, Series L, 6.625%, 3/31/05*(d) ........... 50,336,230
------------
TOTAL ARGENTINA...................................................... 90,432,723
------------
BRAZIL - 21.4%
51,438+ Federal Republic of Brazil, Capitalization (C) Bond, 8%, 4/15/14(b) . 37,549,569
33,500+ Federal Republic of Brazil, Investment (Exit) Bond, 6%, 9/15/13 ..... 23,994,375
18,000+ Federal Republic of Brazil, NMB, Series L, 6.5625%, 4/15/09* ........ 14,220,000
------------
TOTAL BRAZIL......................................................... 75,763,944
------------
BULGARIA - 2.7%
282 Republic of Bulgaria, Discount Bond, Tranche A, 6.6875%, 7/28/24*.... 153,710
2,500+ Republic of Bulgaria, FLIRB, Series A, 2.25%, 7/28/12* .............. 920,312
17,250+ Republic of Bulgaria, IAB, 6.6875%, 7/28/11* ........................ 8,430,938
------------
TOTAL BULGARIA....................................................... 9,504,960
------------
COSTA RICA - 5.5%
629+ Costa Rica, Interest Bond, Series B, 6.32812%, 5/21/05*.............. 566,414
8,400 Costa Rica, Principal Bond, Series A, 6.25%, 5/21/10 ................ 6,384,000
16,000+ Costa Rica, Principal Bond, Series B, 6.25%, 5/21/15 ................ 12,640,000
------------
TOTAL COSTA RICA..................................................... 19,590,414
------------
ECUADOR - 6.7%
39,325+ Republic of Ecuador, PDI Bond, 6.5%, 2/27/15*(b) .................... 23,545,955
------------
HUNGARY - 1.6%
5,250+ National Bank of Hungary, 8.875%, 11/01/13 .......................... 5,748,750
------------
INDONESIA - 0.7%
1,250 Polysindo International Finance Company B.V., 11.375%, 6/15/06 ...... 1,353,125
1,000+ Tjiwi Kimia International Finance Co., 13.25%, 8/01/01 .............. 1,130,000
------------
TOTAL INDONESIA...................................................... 2,483,125
------------
See accompanying notes to financial statements.
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<TABLE>
<CAPTION>
Statement of Investments November 30, 1996 (continued) (unaudited)
BONDS (concluded)
- --------------------------------------------------------------------------------------------------------
Principal
Amount Value
000's(a) (Note 2a)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
MEXICO - 7.7%
3,000+ Grupo Industrial Durango, 12%, 7/15/01 .............................. $ 3,195,000
20,500+ United Mexico States, Par Bond, Series A, 6.25%, 12/31/19(d)
(including 20,500,000 rights expiring 6/30/03)................... 15,118,750
12,000+ United Mexico States, Par Bond, Series B, 6.25%, 12/31/19
(including 12,000,000 rights expiring 6/30/03)................... 8,850,000
------------
TOTAL MEXICO......................................................... 27,163,750
------------
PANAMA - 5.8%
846+ Republic of Panama, FRN, 6.54688%, 5/10/02* ......................... 814,429
29,000 Republic of Panama, IRB, 3.5%, 7/17/14*(d) .......................... 19,792,500
------------
TOTAL PANAMA......................................................... 20,606,929
------------
PERU - 4.8%
30,000 Republic of Peru, FLIRB, 12/31/25(c) ................................ 16,950,000
------------
POLAND - 5.6%
20,880+ Republic of Poland, PDI Bond, 4%, 10/27/14* 18,035,100
3,000+ Republic of Poland, RSTA Bond, 3.25%, 10/27/24* 1,912,500
------------
TOTAL POLAND......................................................... 19,947,600
------------
RUSSIA - 4.8%
24,500 Russia, IAN, 12/31/15(c) ............................................ 16,935,625
------------
SOUTH AFRICA - 0.5%
ZAL 9,000 Republic of South Africa Notes, 12%, 2/28/05 ........................ 1,622,070
------------
URUGUAY - 1.3%
1,750 Uruguay, DCB, Series B, 6.6875%, 2/18/07* ........................... 1,671,250
3,000 Uruguay, NMB, 6.8125%, 2/18/06* ..................................... 2,775,000
------------
TOTAL URUGUAY........................................................ 4,446,250
------------
VENEZUELA - 6.5%
6,500+ Republic of Venezuela, DCB, Series DL, 6.625%, 12/18/07* ............ 5,602,187
19,750+ Republic of Venezuela, FLIRB, Series B, 6.4375%, 3/31/07* ........... 17,281,250
------------
TOTAL VENEZUELA...................................................... 22,883,437
------------
TOTAL BONDS (cost $321,137,395)...................................... 357,625,532
------------
See accompanying notes to financial statements.
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<TABLE>
<CAPTION>
Statement of Investments November 30, 1996 (concluded) (unaudited)
- --------------------------------------------------------------------------------------------------------
Principal
Amount Value
000's(a) (Note 2a)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
LOAN PARTICIPATIONS++ -- 16.9%
- --------------------------------------------------------------------------------------------------------
Republic of Jamaica,
556 Tranche A, 6.34375%, 10/15/00* (Chase Manhattan, New York)......... $ 544,419
4,000 Tranche B, 6.3125%, 11/15/04* (Morgan Guaranty Trust Company of
New York, Chase Manhattan, New York)............................. 3,440,000
Kingdom of Morocco,
16,000+ Tranche A, 6.375%, 1/01/09* (Chase Manhattan, New York, Morgan
Guaranty Trust Company of New York, ING Bank N.V.)............... 12,960,000
38,824 Tranche B, 6.375%, 1/01/04* (Chase Manhattan, New York, Morgan
Stanley Emerging Markets, Inc.).................................. 35,717,648
Russia,
9,250 Bank for Foreign Economic Affairs, Vnesheconombank#
(Chase Manhattan, New York, Merrill Lynch)....................... 7,261,250
------------
TOTAL LOAN PARTICIPATIONS (cost $53,870,440)......................... 59,923,317
------------
TOTAL INVESTMENTS-- 118.0% (cost $375,007,835)...................... 417,548,849
------------
REPURCHASE AGREEMENTS -- 10.8%
- --------------------------------------------------------------------------------------------------------
15,000 Morgan (J.P.) Securities Inc., 5.6%, cost $15,000,000, dated 11/29/96,
$15,007,000 due 12/02/96, (collateralized by $16,586,000 U.S.
Treasury Strip, due 5/15/98, valued at $15,300,585).............. 15,000,000
23,344 Union Bank of Switzerland, 5.58%, cost $23,344,000, dated 11/29/96,
$23,354,855 due 12/02/96, (collateralized by $23,006,000 U.S. Treasury
Note, 6%, due 5/31/97, valued at $23,811,210).................... 23,344,000
------------
TOTAL REPURCHASE AGREEMENTS (cost $38,344,000)....................... 38,344,000
------------
LIABILITIES IN EXCESS OF OTHER ASSETS - (28.8)%...................... (101,804,971)
------------
NET ASSETS - 100.0% (equivalent to $16.13 per share on
21,946,825 common shares outstanding).............................. $354,087,878
============
<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 a 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 November 30, 1996.
(d)Securities valued at $38,824,750 as of November 30, 1996 were segregated to be available for the
purchase of delayed delivery securities with a cost of $36,588,125.
#Non-income producing. Security is currently in default
*Rate shown reflects current rate on instrument with variable rates or step coupon rates.
+All or a portion of the security is segregated as collateral pursuant to a loan agreement. See Note 5.
++Participation interests were acquired through the financial institutions indicated parenthetically. See Note 6.
Abbreviations used in this statement:
BOCON - Bonos de Consolidacion. IAN - Interest Arrears Note.
DCB - Debt Conversion Bond. IRB - Interest Reduction Bond.
FLIRB - Front Loaded Interest Reduction Bond. NMB - New Money Bond.
FRB - Floating Rate Bond. PDI - Past Due Interest.
FRN - Floating Rate Note. RSTA - Revolving Short Term Agreement.
IAB - Interest Arrears Bond. ZAL - South African Rand.
See accompanying notes to financial statements.
</FN>
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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 Assets and Liabilities November 30, 1996 (unaudited)
<S> <C>
Assets
Investments, at value (cost-- $375,007,835).......................................... $417,548,849
Repurchase Agreements................................................................ 38,344,000
Cash ................................................................................ 824
Receivable for securities sold....................................................... 30,481,232
Interest receivable ................................................................. 5,258,156
Unamortized organization expenses .................................................. 38,047
Prepaid expenses .................................................................... 5,073
------------
Total assets ........................................................... 491,676,181
------------
Liabilities
Loan payable (Note 5) .............................................................. 100,000,000
Payable for securities purchased ................................................... 36,588,125
Accrued interest expense on loan .................................................... 434,723
Accrued management fee (Note 3) ..................................................... 338,764
Other accrued expenses .............................................................. 226,691
------------
Total liabilities ...................................................... 137,588,303
------------
Net Assets
Common Stock ($.001 par value, authorized 100,000,000 shares;
21,946,825 shares outstanding) .................................................... 21,947
Additional paid-in capital ......................................................... 306,927,999
Undistributed net investment income ................................................. 2,478,603
Accumulated net realized gain on investments ....................................... 2,118,743
Net unrealized appreciation on investments and foreign currency translations ........ 42,540,586
------------
Net assets............................................................... $354,087,878
============
Net Asset Value Per Share ($354,087,878 / 21,946,825 shares) ........................ $16.13
======
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 Operations For the Six Months Ended November 30, 1996 (unaudited)
<TABLE>
<S> <C> <C>
Net Investment Income
Income
Interest (includes discount accretion of $8,463,916) ................................ $25,866,093
Expenses
Interest on loan....................................................... $3,353,081
Management fee ........................................................ 1,899,642
Custodian ............................................................. 54,900
Printing .............................................................. 50,142
Transfer agent ........................................................ 36,783
Audit and tax services ................................................ 36,417
Legal ................................................................. 31,659
Directors' fees and expenses .......................................... 17,019
Listing fees .......................................................... 16,170
Amortization of organization expenses ................................. 13,529
Other ................................................................. 63,142 5,572,484
---------- -----------
Net investment income................................................................ 20,293,609
-----------
Realized and Unrealized Gain (Loss) On Investments
and Foreign Currency Transactions
Net Realized Gain (Loss) on:
Investments........................................................................ 1,380,544
Foreign currency transactions...................................................... (58,858)
-----------
1,321,686
-----------
Change in Net Unrealized Appreciation (Depreciation) on:
Investments and written options.................................................... 53,240,528
Translation of foreign currency contracts and other assets and liabilities
denominated in foreign currencies................................................ (2,129)
-----------
53,238,399
-----------
Net realized gain and change in net unrealized appreciation (depreciation)........... 54,560,085
-----------
Net Increase in Net Assets from Operations........................................... $74,853,694
===========
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 Changes in Net Assets
<TABLE>
<CAPTION>
For the
Six Months Ended For the Year
November 30, 1996 Ended
(unaudited) May 31, 1996
- -------------------------------------------------------------------------------------------------------
Operations
<S> <C> <C>
Net investment income ............................................ $ 20,293,609 $ 42,016,993
Net realized gain on investments and foreign currency transactions 1,321,686 12,942,278
Change in net unrealized appreciation (depreciation) ............. 53,238,399 41,682,100
------------ ------------
Net increase in net assets from operations ....................... 74,853,694 96,641,371
------------ ------------
Dividends and Distributions to Shareholders from
Net investment income ............................................ (18,032,138) (28,135,808)
Net realized gains ............................................... -- (7,928,468)
------------ ------------
Total dividends and distributions to shareholders................. (18,032,138) (36,064,276)
------------ ------------
Capital Share Transactions
Value of shares issued in reinvestment of dividends
(89,691 shares issued)....................................... 1,317,325 --
------------ ------------
Total increase in net assets...................................... 58,138,881 60,577,095
Net Assets
Beginning of period............................................... 295,948,997 235,371,902
------------ ------------
End of period (included undistributed net investment income
of $2,478,603 and $217,132, respectively).................... 354,087,878 $295,948,997
============ ============
Statement of Cash Flows For the Six Months Ended November 30, 1996 (unaudited)
Cash Flows from Operating Activities:
Purchases of securities and options ................................................ $(313,887,675)
Net sales of short-term investments ................................................. 28,156,000
Proceeds from sales of securities, options and principal paydowns ................... 297,007,963
-------------
11,276,288
Net investment income .............................................................. 20,293,609
Accretion of discount on investments ................................................ (8,463,916)
Interest on payment-in-kind bonds ................................................... (3,425,728)
Amortization of organization expenses ............................................... 13,529
Net change in receivables/payables related to operations ............................ (3,105,260)
-------------
Net cash provided by operating activities............................................ 16,588,522
-------------
Cash Flows from Financing Activities:
Dividends paid ...................................................................... (18,032,138)
Value of shares issued in reinvestment of dividends ................................. 1,317,325
-------------
Net cash used by financing activities .............................................. (16,714,813)
-------------
Net decrease in cash ............................................................... (126,291)
Cash at beginning of period ........................................................ 127,115
-------------
Cash at end of period .............................................................. $ 824
=============
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. 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
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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.
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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. For the six
months ended November 30, 1996, the Fund paid interest expense of
$3,374,131.
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 November 30, 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
Cost of purchases and proceeds from sales of securities, excluding
short-term investments and written options, for the six months ended November
30, 1996 aggregated $347,737,301 and $309,432,157, respectively. The federal
income tax cost basis of the Fund's investments and repurchase agreements at
November 30, 1996 was $414,096,427. Gross unrealized appreciation and
depreciation amounted to $43,436,897 and $1,640,475, respectively, resulting in
a net unrealized appreciation on investments of $41,796,422.
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)
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, 1997. The collateral for the loan was valued at $234,565,442 on
November 30, 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 November 30, 1996 was $59,923,317.
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 November 30, 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 counterparties
to meet the terms of their contracts. As of November 30, 1996, the Fund did not
have any outstanding forward contracts.
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 (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. As of November 30, 1996,
the Fund did not have any outstanding option transactions.
9. Dividend Subsequent to November 30, 1996
On December 12, 1996, the Board of Directors of the Fund declared a common
stock dividend of $0.2665 per share from net investment income, $0.0635 per
share from realized net short-term capital gains and $0.0825 per share from
realized net long-term capital gains. The dividend was payable on December 31,
1996 to shareholders of record December 24, 1996.
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
Financial Highlights
Data for a share of common stock outstanding throughout the period:
<TABLE>
<CAPTION>
Six Months
Ended Year Year
November 30, Ended Ended Period Ended
1996 May 31, May 31, May 31,
(unaudited) 1996 1995 1994(a)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income..................... $ 0.93 $ 1.92 $ 1.69 $ 1.22
Net realized gain (loss) and change in
unrealized appreciation (depreciation)
on securities and foreign currency
translations........................... 2.49 2.50 (2.24) (1.03)
------- ------- ------- -------
Total from investment operations.......... 3.42 4.42 (0.55) 0.19
------- ------- ------- -------
Dividends to shareholders from net
investment income...................... (0.83) (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.......... (0.83) (1.65) (1.65) (1.20)
------- ------- ------- -------
Offering costs on issuance of common stock -- -- -- (0.04)
------- ------- ------- -------
Net increase (decrease) in net asset value 2.59 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............ $16.13 $13.54 $10.77 $12.97
====== ====== ====== ======
Per share market value, end of period..... $15.38 $13.88 $11.88 $14.00
Total investment return based on market
price per share (c).................... 17.34% 32.72% -2.18% 8.29%(b)
Ratios/Supplemental data:
Net assets, end of period.............. $354,087,878 $295,948,997 $235,371,902 $283,481,270
Ratio of operating expenses to
average net assets................. 1.39%(d) 1.43% 1.45% 1.38%(d)
Ratio of interest expense to
average net assets................. 2.10%(d) 2.78% 2.96% 1.02%(d)
Ratio of total expenses to
average net assets................. 3.49%(d) 4.21% 4.41% 2.40%(d)
Ratio of net investment income to
average net assets................. 12.72%(d) 16.20% 15.42% 8.98%(d)
Portfolio turnover rate................ 79.65% 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 6.5625% 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......... 6.71%(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>
See accompanying notes to financial statements.
Page 15
</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
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
November 30, 1996........................... 9,927 .46 39,475 1.80
<FN>
- -------------
*Totals expressed in thousands of dollars except per share amounts.
**For the period June 25, 1993 (commencement of operations) through August 31, 1993.
See accompanying notes to financial statements.
Page 16
</FN>
</TABLE>
<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I 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>
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<PAGE>
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<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
Semi-Annual Report
NOVEMBER 30, 1996
---------------------------------------------
The Emerging Markets Income Fund II Inc
---------------------------------------------
