<PAGE>
The Emerging Markets
Income Fund II Inc
Semi-Annual Report
NOVEMBER 30, 1997
- -------------------------------------------------------
The Emerging Markets Income Fund II Inc
------------------------------------------------------
<PAGE>
The Emerging Markets January 22, 1998
Income Fund II Inc
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, 1997. Included are
market commentary, a statement of the Fund's investments as of November 30,
1997, and financial statements for the six months ended November 30, 1997.
The net asset value of the Fund decreased from $17.19 per share on May 31, 1997
to $16.73 per share on November 30, 1997. Dividends of $0.825 per share from net
investment income were declared during the period. Assuming reinvestment of
these dividends in additional shares of the Fund, the net asset value return for
the six months ended November 30, 1997 was 1.95%. During the same period, the
Salomon Brothers Brady Bond Index returned 3.77%.
The Fund continued to provide investors with stable current income through its
broad exposure to government sponsored debt instruments issued by emerging
market economies. Investments in securities of emerging market issuers,
including obligations of sovereign governments and companies, totaled
approximately 98% of the Fund's total investments at November 30, 1997. The
remainder of the Fund's assets was invested primarily in short-term investments.
EMERGING MARKETS
The emerging debt markets enjoyed a strong performance during most of the six
months ended November 30, 1997, but fell prey to the dramatic global market
sell-off that was sparked by the turmoil in Asia. The volatility of financial
markets around the world contributed to the significant pickup in volatility
among emerging markets. Indeed, yield spreads widened to as much as 825 basis
points over Treasuries at the market's low point in October. These volatile
conditions thus led to a liquidity squeeze, as broker/dealers grew more
cautious. We continue to believe, however, that the fundamentals of most
countries remain strong and the market is attractive for long-term investors. We
continue to focus on countries that do not rely heavily on the international
capital markets.
Throughout most of the six-month period, emerging debt markets benefited from
favorable market conditions, attractive yields, and positive economic and
political settings in many key countries. Moreover, the near-perfect combination
of solid economic growth and no signs of inflation in the United States buoyed
the market.
Latin America Prospects for economic growth in Latin America remain favorable.
In Mexico, the recent election results signal a decisive step toward greater
democracy and policymakers have reaffirmed their commitment to fiscal discipline
and monetary consistency. Indeed, second-quarter GDP growth of 8.8% was the
highest quarterly growth rate in 15 years.
PAGE 1
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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
In Brazil, monetary authorities raised interest rates in an effort to stem
short-term fears of a currency devaluation. The Asian devaluations were
perceived to make it more difficult for countries like Brazil to remain
competitive, and thus the Government was forced to act promptly to keep
investors in local currency instruments and to encourage domestic firms to
continue raising funds in the international capital markets.
In Argentina, the ruling Peronist party was defeated in October for the first
time since 1987, but fortunately the victorious opposition indicated its support
for the one-to-one fixed exchange rate between the peso and the U.S. dollar.
Venezuela recently issued US$4 billion of new 30-year global bonds, marking its
first foray into the international capital markets in five years. Its
privatization efforts and restructurings have continued, and the Government is
planning a longer-term debt management strategy that would reduce the amount
budgeted for debt service from 40% of the budget to 25% by the year 2000.
Although political instability earlier this year caused a great deal of
volatility in Ecuador, current interim government officials appeared committed
to correcting the fiscal imbalances. Moody's assigned Ecuador's long-term
foreign currency debt a B1 rating, reflecting its competitive export sector and
basically sound economic policies. However, thus far, the country seems unable
to institute the promised reform measures.
Eastern Europe Following a period of declining economic activity and a weak
currency, Bulgaria embarked on an impressive turnaround. In exchange for
International Monetary Fund ("IMF") support, Bulgaria agreed to launch a
currency board and to implement tight fiscal and monetary policies. With the
victory of the pro-reform UDF party earlier this year, there is both the
incentive and the political majority to deliver swift economic reform. The
momentum of stabilization and reform efforts continues to be strong in our view,
but in October, Bulgaria lost ground as investors locked in sizable profits.
In Russia, the debt restructuring process has been completed, with more than 90%
of an estimated US$24.3 billion in eligible debt having been reconciled. The IMF
recently lauded the Government's success in controlling inflation, but warned
that budget reforms must yield tangible results. Yet, the government's
reluctance to allow interest rates to rise appears to be at odds with its
commitment to defend the ruble.
PAGE 2
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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 AND SPECIAL MEETINGS
The Fund held its annual shareholders meeting on October 14, 1997 and a special
meeting on January 15, 1998. At the meeting on October 14, 1997, shareholders
approved a new investment management agreement between Value Advisors LLC
("Value Advisors") and the Fund and a new investment advisory and administration
agreement among Value Advisors, Salomon Brothers Asset Management Inc ("SBAM")
and the Fund, 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 new agreement took effect upon the
closing of the sale of Value Advisors by Oppenheimer Group Inc. to PIMCO
Advisors L.P., which occurred on November 4, 1997. At the special meeting on
January 15, 1998, shareholders elected William D. Cvengros to the Fund's Board
of Directors and approved a new investment advisory and administration agreement
among SBAM, Value Advisors and the Fund. Approval of the agreement was necessary
due to the merger of Salomon Inc, which had been the ultimate parent company of
SBAM, with and into Smith Barney Holdings Inc., a subsidiary of Travelers Group
Inc., which occurred on November 28, 1997. Travelers is now the ultimate parent
company of SBAM. The following table provides information concerning the matters
voted on at the meetings:
OCTOBER 14, 1997
1. Approval of a new investment management agreement between Value Advisors
and the Fund.
VOTES FOR VOTES AGAINST VOTES ABSTAINED UNVOTED
--------- ------------- --------------- ---------
16,424,703 423,334 478,307 2,509,862
2. Approval of a new investment advisory and administration agreement among
Value Advisors, SBAM and the Fund.
VOTES FOR VOTES AGAINST VOTES ABSTAINED UNVOTED
--------- ------------- --------------- ---------
18,963,424 419,136 453,636 10
3. Election of directors.
NOMINEES VOTES FOR VOTES WITHHELD
---------- ------------ --------------
Alan H. Rappaport* 19,369,443 466,758
Charles F. Barber 19,391,791 444,415
*Mr. Rappaport subsequently resigned from the Board of Directors on
November 4, 1997.
4. Ratification of Price Waterhouse LLP as the Independent Accountants of the
Fund.
VOTES FOR VOTES AGAINST VOTES ABSTAINED UNVOTED
--------- ------------- --------------- ---------
19,248,699 318,355 269,147 5
JANUARY 15, 1998
1. Election of a director.
NOMINEE VOTES FOR VOTES WITHHELD
--------- ------------ --------------
William D. Cvengros 20,392,034 330,880
2. Approval of a new investment advisory and administration agreement among
SBAM, Value Advisors and the Fund.
VOTES FOR VOTES AGAINST VOTES ABSTAINED UNVOTED
--------- ------------- --------------- ---------
19,507,126 295,524 324,056 596,211
PAGE 3
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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
We thank you for your ongoing interest and confidence in the Fund. In a
continuing effort to provide timely information concerning the Fund,
shareholders may call 1-888-777-0102 (a toll-free number), Monday through Friday
from 8:00 am to 6:00 pm EST for the Fund's net asset value, market price and
other information regarding the Fund's portfolio holdings and allocations. For
information concerning your Emerging Markets Income Fund II stock account, or
for information regarding the Fund's Dividend Reinvestment Plan, please call
American Stock Transfer & Trust Company at 1-800-937-5449. If you are calling
from within New York City, please call 1-718-921-8200.
Sincerely,
William D. Cvengros Michael S. Hyland
Co-Chairman of the Board Co-Chairman of the Board
PAGE 4
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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 November 30, 1997 (unaudited)
<TABLE>
<CAPTION>
BONDS -- 89.8%
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
000'S(a) (NOTE 2a)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ARGENTINA - 16.5%
10,176 Republic of Argentina, FRB, Series L, 6.6875%, 3/31/05*.............. $ 9,026,112
Peso 5,000+ Republic of Argentina, Global Bond, 11.75%, 2/12/07##................ 4,701,716
1,350 Republic of Argentina, Global Bond, 11%, 10/09/06.................... 1,431,000
6,000 Republic of Argentina, Global Bond, 9.75%, 9/19/27................... 5,565,000
55,750+ Republic of Argentina, Par Bond, Series L, 5.5%, 3/31/23*............ 39,791,563
------------
TOTAL ARGENTINA...................................................... 60,515,391
------------
BRAZIL - 17.3%
4,000 Companhia Energetica De Sao Paul, 9.125%, 6/26/07*,##................ 3,640,000
26,343+ Federal Republic of Brazil, Capitalization (C) Bond, 8%, 4/15/14(b).. 19,856,239
2,500+ Federal Republic of Brazil, Investment (Exit) Bond, 6%, 9/15/13...... 2,025,000
48,000+ Federal Republic of Brazil, NMB, Series L, 6.75%, 4/15/09*........... 37,920,000
------------
TOTAL BRAZIL......................................................... 63,441,239
------------
BULGARIA - 2.8%
282 Republic of Bulgaria, Discount Bond, Tranche A, 6.6875%, 7/28/24*.... 212,409
11,500+ Republic of Bulgaria, FLIRB, Series A, 2.25%, 7/28/12*............... 6,770,625
4,500+ Republic of Bulgaria, IAB, 6.6875%, 7/28/11*......................... 3,234,375
------------
TOTAL BULGARIA....................................................... 10,217,409
------------
COSTA RICA - 5.4%
394+ Costa Rica, Interest Bond, Series B, 6.77344%, 5/21/05*.............. 374,514
8,400+ Costa Rica, Principal Bond, Series A, 6.25%, 5/21/10................. 7,140,000
16,000+ Costa Rica, Principal Bond, Series B, 6.25%, 5/21/15................. 12,160,000
------------
TOTAL COSTA RICA..................................................... 19,674,514
------------
ECUADOR - 4.6%
27,426+ Republic of Ecuador, PDI Bond, 6.6875%, 2/27/15*(b).................. 17,055,474
------------
INDONESIA - 3.3%
6,000 Pt Polytama Propindo, 11.25%, 6/15/07................................ 5,340,000
1,250 Polysindo International Finance Company B.V., 11.375%, 6/15/06....... 1,259,375
1,000+ Tjiwi Kimia International Finance Company, B.V., 13.25%, 8/01/01..... 1,040,000
5,000 Tjiwi Kimia International Finance Company, B.V., 10%, 8/01/04##...... 4,525,000
------------
TOTAL INDONESIA...................................................... 12,164,375
------------
<FN>
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 November 30, 1997 (continued) (unaudited)
<TABLE>
<CAPTION>
BONDS (concluded)
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
000'S(a) (NOTE 2a)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
MEXICO - 7.4%
3,000+ Grupo Industrial Durango, 12%, 7/15/01............................... $ 3,247,500
2,000 Hylsa S.A. de C.V., 9.25%, 9/15/07................................... 2,017,500
8,000+ United Mexican States, Global Bond, 11.5%, 5/15/26................... 9,280,000
4,000 United Mexican States, Par Bond, Series A, 6.25%, 12/31/19
(including 4,000,000 rights expiring 6/30/03).................... 3,253,760
11,500+ United Mexican States, Par Bond, Series B, 6.25%, 12/31/19
(including 11,500,000 rights, expiring 6/30/03).................. 9,354,560
------------
TOTAL MEXICO......................................................... 27,153,320
------------
PANAMA - 3.7%
9,875+ Republic of Panama, IRB, 3.75%, 7/17/14*............................. 7,529,687
7,627 Republic of Panama, PDI Bond, 6.6875%, 7/17/16*(b)................... 6,201,393
------------
TOTAL PANAMA......................................................... 13,731,080
------------
PERU - 6.0%
2,750 Republic of Peru, FLIRB, 3.25%, 3/07/17*,##.......................... 1,569,219
33,000+ Republic of Peru, PDI Bond, 4%, 3/07/17*............................. 20,542,500
------------
TOTAL PERU........................................................... 22,111,719
------------
POLAND - 5.4%
20,880+ Republic of Poland, PDI Bond, 4%, 10/27/14*.......................... 17,721,900
3,000+ Republic of Poland, RSTA Bond, 3.75%, 10/27/24*...................... 1,995,000
------------
TOTAL POLAND......................................................... 19,716,900
------------
URUGUAY - 1.2%
1,750+ Uruguay, DCB, Series B, 6.8125%, 2/18/07*............................ 1,610,000
3,000 Uruguay, NMB, 6.9375%, 2/18/06*...................................... 2,760,000
------------
TOTAL URUGUAY........................................................ 4,370,000
------------
VENEZUELA - 16.2%
63,000+ Republic of Venezuela, DCB, Series DL, 6.75%, 12/18/07*.............. 56,050,155
3,167+ Republic of Venezuela, FLIRB, Series A, 6.75%, 3/31/07*.............. 2,786,663
679+ Republic of Venezuela, FLIRB, Series B, 6.75%, 3/31/07*.............. 597,142
------------
TOTAL VENEZUELA...................................................... 59,433,960
------------
TOTAL BONDS (cost $312,437,713)...................................... 329,585,381
------------
<FN>
See accompanying notes to financial statements.
PAGE 6
</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 November 30, 1997 (continued) (unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
000'S(a) (NOTE 2a)
- ------------------------------------------------------------------------------------------------------
LOAN PARTICIPATIONS++ -- 22.9%
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
The People's Democratic Republic of Algeria,
10,500 Tranche A, 7%, 9/04/06* (Chase Manhattan).......................... $ 8,610,000
16,000 Tranche 3, 6.65625%, 3/04/10* (Chase Manhattan).................... 11,640,000
Republic of Jamaica,
333 Tranche A, 6.5625%, 10/15/00* (Chase Manhattan).................... 313,293
5,500 Tranche B, 6.6875%, 11/15/04* (Chase Manhattan, Morgan Guaranty
Trust Company of New York)....................................... 4,675,000
Kingdom of Morocco,
Yen 708,011 Tranche A, 3.175%, 1/01/09* (Goldman Sachs)........................ 4,521,283
3,250 Tranche A, 5.84375%, 1/01/09* (Chase Manhattan).................... 2,778,750
33,647 Tranche B, 6.59375%, 1/01/04* (Chase Manhattan, Morgan
Stanley Emerging Markets, Inc.).................................. 29,777,648
Russia,
21,250 Bank for Foreign Economic Affairs, Vnesheconombank#(c)
(Chase Manhattan, Merrill Lynch)................................. 19,523,438
3,000 Foreign Trade Obligation, 6/26/07# (Bank of America)............... 2,220,000
------------
TOTAL LOAN PARTICIPATIONS (cost $80,569,185)......................... 84,059,412
------------
TOTAL INVESTMENTS-- 112.7% (cost $393,006,898)...................... 413,644,793
------------
REPURCHASE AGREEMENT -- 2.9%
- ------------------------------------------------------------------------------------------------------
10,784 J.P. Morgan, 5.66%, cost $10,784,000, dated 11/28/97, $10,789,086
due 12/01/97, (collateralized by $11,458,000 U.S. Treasury
Strips due 8/15/98, valued at $10,999,680)......................... 10,784,000
------------
LIABILITIES IN EXCESS OF OTHER ASSETS - (15.6)%...................... (57,278,819)
------------
NET ASSETS - 100.0% (EQUIVALENT TO $16.73 PER SHARE ON
21,946,825 COMMON SHARES OUTSTANDING).............................. $367,149,974
------------
------------
<FN>
See accompanying notes to financial statements.
PAGE 7
</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 November 30, 1997 (concluded) (unaudited)
<TABLE>
<CAPTION>
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT NOVEMBER 30, 1997:
CONTRACTS IN EXCHANGE CONTRACTS AT DELIVERY UNREALIZED
TO DELIVER FOR VALUE DATE APPRECIATION
---------- ----------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C>
Sale..... Yen 560,000,000 US $4,476,061 US $4,397,495 12/15/97 $78,566
<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) Pursuant to Russia's 1996 Financing Plan, defaulted Vnesheconombank Loans have been
scheduled for restructuring. The restructuring was completed and finalized on
December 5, 1997 and the related bonds issued.
* Rate shown reflects current rate on instrument with variable rates or step coupon rates.
# Non-income producing. Security is currently in default.
## Pursuant to Rule 144A under the Securities Act of 1933, this security can only be sold
to qualified institutional investors.
+ 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.
</TABLE>
DCB - Debt Conversion Bond.
FLIRB - Front Loaded Interest Reduction Bond.
FRB - Floating Rate Bond.
IAB - Interest Arrears Bond.
IRB - Interest Reduction Bond.
NMB - New Money Bond.
PDI - Past Due Interest.
Peso - Argentina Peso.
RSTA - Revolving Short Term Agreement.
Yen - Japanese Yen.
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 Assets and Liabilities November 30, 1997 (unaudited)
<TABLE>
<S> <C>
Assets
Investments, at value (cost--$393,006,898)........................................... $413,644,793
Repurchase agreement................................................................. 10,784,000
Receivable for securities sold....................................................... 52,164,792
Interest receivable.................................................................. 7,580,473
Net unrealized appreciation of forward foreign currency contracts.................... 78,566
Unamortized organization expenses .................................................. 11,063
Prepaid expenses .................................................................... 7,214
------------
Total assets ........................................................... 484,270,901
------------
Liabilities
Loan payable (Note 5) .............................................................. 100,000,000
Due to custodian..................................................................... 51,058
Payable for securities purchased ................................................... 15,966,250
Accrued interest expense on loan .................................................... 419,967
Accrued management fee (Note 3) ..................................................... 345,796
Other accrued expenses .............................................................. 337,856
------------
Total liabilities ...................................................... 117,120,927
------------
Net Assets
Common Stock ($.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 ................................................. 4,591,361
Accumulated net realized gain on investments ....................................... 31,374,080
Net unrealized appreciation on investments and foreign currency translations ........ 24,234,587
------------
Net assets............................................................... $367,149,974
------------
------------
Net Asset Value Per Share ($367,149,974 / 21,946,825 shares) ........................ $16.73
------
------
<FN>
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 Operations For the Six Months Ended November 30, 1997 (unaudited)
NET INVESTMENT INCOME
<TABLE>
<S> <C> <C>
INCOME
Interest (includes discount accretion of $5,597,111) ................................ $ 23,126,421
EXPENSES
Interest on loan....................................................... $3,293,751
Management fee ........................................................ 2,316,683
Custodian ............................................................. 102,480
Audit and tax services ................................................ 38,430
Legal ................................................................. 32,574
Printing .............................................................. 26,535
Transfer agent ........................................................ 22,509
Directors' fees and expenses .......................................... 16,653
Listing fees .......................................................... 16,371
Amortization of organization expenses ................................. 13,529
Other ................................................................. 37,398 5,916,913
---------- ------------
Net investment income................................................................ 17,209,508
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net Realized Gain on:
Investments...................................................................... 10,731,806
Foreign currency transactions.................................................... 439,400
------------
11,171,206
------------
Net Change in Unrealized Appreciation/Depreciation on:
Investments...................................................................... (20,455,839)
Translation of foreign currency contracts and other assets and liabilities
denominated in foreign currencies............................................ 78,817
------------
(20,377,022)
------------
Net loss on investments and foreign currency transactions............................ (9,205,816)
------------
Net Increase in Net Assets from Operations........................................... $ 8,003,692
------------
------------
<FN>
See accompanying notes to financial statements.
PAGE 10
</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 SIX
MONTHS ENDED FOR THE YEAR
NOVEMBER 30, 1997 ENDED
(UNAUDITED) MAY 31, 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income ............................................ $ 17,209,508 $ 38,245,380
Net realized gain on investments and foreign currency transactions 11,171,206 22,569,558
Net change in unrealized appreciation/depreciation................ (20,377,022) 55,309,422
------------ ------------
Net increase in net assets from operations ....................... 8,003,692 116,124,360
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income ............................................ (18,106,131) (32,934,033)
Net realized gains ............................................... -- (3,204,236)
------------ ------------
Total dividends and distributions to shareholders................. (18,106,131) (36,138,269)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Value of shares issued in reinvestment of dividends
(89,691 shares issued in year ended May 31, 1997)............ -- 1,317,325
------------ ------------
Total increase (decrease) in net assets........................... (10,102,439) 81,303,416
NET ASSETS
Beginning of period............................................... 377,252,413 295,948,997
------------ ------------
End of period (includes undistributed net investment income
of $4,591,361 and $5,487,984, respectively).................. $367,149,974 $377,252,413
============ ============
</TABLE>
<TABLE>
<CAPTION>
Statement of Cash Flows For the Six Months Ended November 30, 1997 (unaudited)
<S> <C>
Cash Flows from Operating Activities:
Purchases of securities.............................................................. $(314,541,294)
Net purchases of short-term investments ............................................. (165,000)
Proceeds from sales of securities and principal paydowns ............................ 322,569,166
-------------
7,862,872
Net investment income .............................................................. 17,209,508
Accretion of discount on investments ................................................ (5,597,111)
Interest on payment-in-kind bonds ................................................... (973,114)
Amortization of organization expenses ............................................... 13,529
Net change in receivables/payables related to operations ............................ (461,458)
-------------
Net cash provided by operating activities............................................ 18,054,226
-------------
Cash Flows from Financing Activities:
Dividends paid ...................................................................... (18,106,131)
-------------
Net cash used by financing activities .............................................. (18,106,131)
-------------
Net decrease in cash ............................................................... (51,905)
Cash at beginning of period ........................................................ 847
-------------
Due to custodian at end of period .................................................. $ (51,058)
=============
<FN>
See accompanying notes to financial statements.
PAGE 11
</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
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 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)
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 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)
2. SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)
(i) Option contracts. When the Fund writes or purchases a call or a put
option, an amount equal to the premium received or paid by the Fund is
recorded as a liability or asset, the value of which is marked-to-market
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, 1997, the Fund paid interest expense of
$3,322,223.
3. MANAGEMENT AND ADVISORY FEES AND OTHER TRANSACTIONS
The Fund has entered into a management agreement with Value Advisors LLC
(the "Investment Manager"), a subsidiary of PIMCO Advisors L.P., 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 agreement with the Investment Manager was approved by shareholders at a
special meeting held on October 14, 1997, and has been in effect since the
closing of the sale of the Investment Manager by Oppenheimer Group Inc. to PIMCO
Advisors L.P., which occurred on November 4, 1997. The Investment Manager was
the transferee of the investment management responsibilities for the Fund which
were previously provided by Advantage Advisers, Inc.
The Investment Manager and the Fund have entered into an investment
advisory and administration agreement with Salomon Brothers Asset Management
Inc (the "Investment Adviser"), an indirect wholly-owned subsidiary of Salomon
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 agreement with the Investment Adviser was most
recently approved by shareholders at a special meeting held on January 15,
1998. Approval of the agreement was necessary due to the merger of Salomon
Inc., which had been the ultimate parent company of the Investment Adviser,
with and into Smith Barney Holdings Inc., a subsidiary of Travelers Group Inc.,
which occurred on November 28, 1997. Travelers is now the ultimate parent
company of the Investment Adviser.
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, 1997 the Investment Adviser owned 4,849 shares of the Fund.
Certain officers and/or directors of the Fund are officers and/or directors of
the Investment Manager or the Investment Adviser.
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 (continued) (unaudited)
3. MANAGEMENT AND ADVISORY FEES AND OTHER TRANSACTIONS (CONCLUDED)
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 TAX INFORMATION
Cost of purchases and proceeds from sales of securities, excluding
short-term investments for the six months ended November 30, 1997 aggregated
$312,130,669 and $317,475,617, respectively. The federal income tax cost basis
of the Fund's investments and repurchase agreement at November 30, 1997 was
$405,525,147. Gross unrealized appreciation and depreciation amounted to
$23,989,059 and $5,085,413, respectively, resulting in a net unrealized
appreciation on investments of $18,903,646.
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 0.5% and the maturity
date is May 6, 1998. The collateral for the loan was valued at $194,506,400 on
November 30, 1997 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, 1997 was $84,059,412.
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.
The Fund may have difficulty disposing of participations/assignments
because the market for certain instruments may not be highly liquid.
7. "WHEN AND IF" ISSUED BONDS
"When and if" issued bonds are recorded as investments in the Fund's
portfolio and marked-to-market to reflect the current value of the bonds. When
the Fund sells a "when and if" issued bond, an unrealized gain or loss is
recorded equal to the difference between the selling price and purchase cost of
the bond. Settlement of trades (i.e., receipt and delivery) of the "when and if"
issued bond is contingent upon the successful issuance of such bond. In the
event its sponsor is unable to successfully issue the security, all trades in
"when and if" issued bonds become null and void, and, accordingly, the Fund
will reverse any gain or loss recorded on such transactions.
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
Notes to Financial Statements (concluded) (unaudited)
7. "WHEN AND IF" ISSUED BONDS (CONCLUDED)
For the year ended May 31, 1997, the Fund sold approximately $28.5 million
of "when and if" issued Russian IAN bonds and recorded an unrealized gain of
$3,518,125. Settlement of the transaction and recognition of the realized gain
occurred on December 5, 1997, upon the successful closing of Russia's 1996
Financing Plan.
8. 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, 1997, the Fund has a concentration
risk in sovereign debt of emerging market countries.
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Fund enters into forward foreign currency contracts ("forward
contracts") to facilitate settlement of foreign currency denominated portfolio
transactions or to manage foreign currency exposure associated with foreign
currency denominated securities. Forward contracts involve elements of market
risk in excess of the amount reflected in the Statement of Assets and
Liabilities. The Fund bears the risk of an unfavorable change in the foreign
exchange rate underlying the forward contract. Risks may also arise upon
entering into these contracts from the potential inability of the counter
parties to meet the terms of their contracts. As of November 30, 1997, the Fund
has an outstanding contract to sell 560,000,000 Japanese Yen for US $4,476,061
for a scheduled settlement of December 15, 1997.
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 into a
closing transaction because of an illiquid secondary market. As of November 30,
1997, the Fund did not have any outstanding option transactions.
10. DIVIDEND SUBSEQUENT TO NOVEMBER 30, 1997
On December 9, 1997, the Board of Directors of the Fund declared a common
stock dividend of $0.355 per share from net investment income, and distributions
of $0.832 per share from realized net short-term capital gains and $0.556 per
share from realized net long-term capital gains. The dividend and distributions
were payable on December 31, 1997 to shareholders of record December 23, 1997.
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
Financial Highlights
Data for a share of common stock outstanding throughout the period:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR YEAR YEAR
NOVEMBER 30, ENDED ENDED ENDED PERIOD ENDED
1997 MAY 31, MAY 31, MAY 31, MAY 31,
(UNAUDITED) 1997 1996 1995 1994(a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period...... $17.19 $13.54 $10.77 $12.97 $14.02
------ ------ ------ ------ ------
Net investment income..................... 0.78 1.74 1.92 1.69 1.22
Net realized gain (loss) and change in
unrealized appreciation (depreciation)
on securities and foreign currency
translations........................... (0.41) 3.56 2.50 (2.24) (1.03)
------ ------ ------ ------ ------
Total from investment operations.......... 0.37 5.30 4.42 (0.55) 0.19
------ ------ ------ ------ ------
Dividends to shareholders from net
investment income...................... (0.83) (1.50) (1.29) (1.36) (1.06)
Dividends to shareholders from net
realized capital gains................. -- (0.15) (0.36) (0.29) (0.14)
------ ------ ------ ------ ------
Total dividends and
distributions to shareholders.......... (0.83) (1.65) (1.65) (1.65) (1.20)
------ ------ ------ ------ ------
Offering costs on issuance of common stock -- -- -- -- (0.04)
------ ------ ------ ------ ------
Net increase (decrease) in net asset value (0.46) 3.65 2.77 (2.20) (1.05)
------ ------ ------ ------ ------
Net asset value, end of period............ $16.73 $17.19 $13.54 $10.77 $12.97
====== ====== ====== ====== ======
Per share market value, end of period $15.5625 $15.75 $13.88 $11.88 $14.00
Total investment return based on market
price per share (c).................... 3.70% 26.84% 32.72% -2.18% 8.29%(b)
Ratios/Supplemental data:
Net assets, end of period (000)........ $367,150 $377,252 $295,949 $235,372 $283,481
Ratio of operating expenses to
average net assets................. 1.38%(d) 1.37% 1.43% 1.45% 1.38%(d)
Ratio of interest expense to
average net assets................. 1.73%(d) 1.97% 2.78% 2.96% 1.02%(d)
Ratio of total expenses to
average net assets................. 3.11%(d) 3.34% 4.21% 4.41% 2.40%(d)
Ratio of net investment income to
average net assets................. 9.04%(d) 11.29% 16.20% 15.42% 8.98%(d)
Portfolio turnover rate................ 69.68% 172.20% 93.50% 58.16% 23.15%
Bank loan outstanding, end of period
(000).............................. $100,000 $100,000 $100,000 $100,000 $100,000
Interest rate on bank loan, end of
period............................. 6.34375% 6.50% 6.60156% 7.5625% 6.375%
Weighted average bank loan (000)....... $100,000 $100,000 $100,000 $100,000 $66,349
Weighted average interest rate......... 6.59%(d) 6.67% 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.
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
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
February 28, 1997........................... 8,948 .40 19,218 .88
May 31, 1997................................ 9,003 .41 4,101 .19
August 31, 1997............................. 8,485 .39 17,668 .80
November 30, 1997........................... 8,725 .39 (26,874) (1.21)
<FN>
- ---------------
*Totals expressed in thousands of dollars except per share amounts.
**For the period June 25, 1993 (commencement of operations) through August 31,
1993.
PAGE 18
</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
Directors
CHARLES F. BARBER
Consultant; formerly Chairman,
ASARCO Incorporated
LESLIE H. GELB
President, The Council
on Foreign Relations
MICHAEL S. HYLAND
Co-Chairman of the Board
Managing Director, Salomon Brothers Inc
President, Salomon Brothers
Asset Management Inc
WILLIAM D. CVENGROS
Co-Chairman of the Board;
Chief Executive Officer,
President and Member of the
Board of Value Advisors LLC and
Chief Executive Officer and
President of PIMCO Advisors L.P.
RIORDAN ROETT
Professor and Director,
Latin American Studies Program,
Paul H. Nitze School of Advanced
International Studies,
Johns Hopkins University
JESWALD W. SALACUSE
Henry J. Braker Professor of
Commercial Law, and formerly Dean,
The Fletcher School of Law & Diplomacy
Tufts University
Officers
WILLIAM D. CVENGROS
Co-Chairman of the Board
MICHAEL S. HYLAND
Co-Chairman of the Board
STEPHEN TREADWAY
President
PETER J. WILBY
Executive Vice President
THOMAS K. FLANAGAN
Executive Vice President
ALAN M. MANDEL
Treasurer
NOEL B. DAUGHERTY
Secretary
JENNIFER G. MUZZEY
Assistant Secretary
AMY W. YEUNG
Assistant Treasurer
LAURIE A. PITTI
Assistant Treasurer
The Emerging Markets
Income Fund II Inc
7 World Trade Center
New York, New York 10048
For information call (toll free)
1-888-777-0102
INVESTMENT MANAGER
Value Advisors LLC
800 Newport Center Drive
Suite 100
Newport Beach, California 92660
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
- --------------------------------------------------------------------------
PAGE 19
<PAGE>
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
-------------------
BULK RATE
U.S. POSTAGE
PAID
STATEN ISLAND, NY
PERMIT No. 169
-------------------
