<PAGE>
The Emerging Markets
Income Fund II Inc
July 15, 1998
Dear Shareholders:
We are pleased to provide this annual report for The Emerging Markets Income
Fund II Inc (the "Fund") as of May 29, 1998. Included are a market commentary,
audited financial statements, the related report of the independent accountants
and other information about the Fund for the year ended May 29, 1998.
During the year ended May 29, 1998, the net asset value of the Fund decreased
from $17.19 per share at May 31, 1997 to $15.03 per share at May 29, 1998.
Dividends totaling $2.9805 per share were paid during the year. This total
represents $1.5925, $0.832 and $0.556 per share from net investment income,
realized net short-term capital gains and realized net long-term capital gains,
respectively. Assuming the reinvesment of these dividends in additional shares
of the Fund, the total return based on net asset value for the year ended May
29, 1998, was 5.26%. During the same period, the JP Morgan Emerging Markets Bond
Index Plus (the "Emerging Markets Bond Index"), which we use as a measure of the
return of the overall market for emerging markets debt, returned 6.82%.
Investments in securities of emerging markets issuers, including both
obligations of sovereign governments and corporate issuers, totaled 99.5% of
total investments at May 29, 1998. The remainder of the Fund's portfolio assets
was invested in short-term investments.
EMERGING MARKETS DEBT SECURITIES
The emerging debt markets rebounded to post a respectable return for the twelve
months ended May 31, 1998, despite the volatility surrounding the Asian stock,
bond and currency crisis in October. The asset class posted a return of 6.82% as
measured by the Emerging Markets Bond Index during that time period. By
comparison, the Salomon Brothers Broad Investment Grade index, which is a proxy
for investment grade fixed income securities, posted a return of 10.99%.
The stripped spread on the Emerging Markets Bond Index, which is the premium
emerging market bond investors demand over U.S. Treasuries, shrunk to as low as
334 basis points (3.34%) just prior to the sell-off on October 22nd, and ended
the month with a spread of 606 basis points. While this spread widening and bond
market decline was meaningful, it fails to capture the volatility experienced in
the market over the final nine days of October when the spread on the Emerging
Markets Bond Index fluctuated between the mid 400 basis point range and the low
800 basis point range.
When the crisis started to take shape during mid-October, we reduced the Fund's
exposure to the emerging markets in anticipation of increased volatility. At the
time, we were worried that the Asian crisis would cause significant volatility
in non-Asian debt from emerging market countries as
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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
investors curtailed their appetite for risk. During the end of October and into
November, most of the Asian countries began to take steps to combat the weakness
in their currencies: Korea exchanged over $20 billion in maturing short-term
debt for longer-term bonds and subscribed to an International Monetary Fund
(IMF) reform package; Thailand and Malaysia began to implement many IMF reforms;
and China reaffirmed commitment to maintaining Hong Kong's U.S. dollar currency
peg. While we did not believe the market risk in Asia had disappeared, these
events increased our confidence in global emerging market bond prospects and,
consequently, we began to increase the Fund's exposure to emerging market bonds.
Our increased exposure was concentrated in those countries that had sold off in
sympathy with Asia but had solid fundamentals and were not excessively reliant
on the international capital markets. Mexico and Venezuela were two such
countries. We increased the Fund's exposure to Mexico which had previously been
underweight and we also increased the Fund's exposure to Venezuela to a
meaningful overweight. Additionally, we continued to focus our investing in the
U.S. dollar debt sector of the market, as opposed to the local currency markets.
In this volatile environment, a better risk/reward profile was afforded via
external dollar denominated debt relative to local currency debt.
At May 29, 1998 our top country allocations (as a percentage of total
investments) were as follows:
* Brazil 17.08%
* Venezuela 12.13%
* Russia 10.82%
* Morocco 7.74%
* South Korea 5.87%
* Peru 5.27%
* Argentina 4.95%
* Costa Rica 4.76%
* Algeria 4.73%
LATIN AMERICA
Brady bond exchanges in three Latin American countries dominated the Latin
sector's focus. More than USD 8 billion of outstanding Bradys were retired in
exchange for nearly USD 7 billion in global bonds. Investors tendered
collateralized Brady bonds to the countries and received uncollateralized global
bonds in return. These transactions benefited the investor who received a higher
yielding instrument and benefited the issuer who was then able to sell the
collateral backing the bonds and use the proceeds to retire more debt. In
addition to the benefits mentioned, these deals contribute to the long-run
process of eliminating the Brady market. The Brady market, which provided a
resolution to the 1980s debt crisis in Latin America and several non-Latin
countries, has become less necessary in today's marketplace as the countries
affected have greatly improved their creditworthiness.
Argentina In Argentina, the ruling Peronist party was defeated for the first
time since 1987 in mid-term congressional elections that took place on October
26. Half of the seats of the lower house of congress were at stake, and the
alliance formed by the opposition parties Frepaso and Alianza won 46% of the
total vote, versus 36% for the Peronists. As a result, out of a total of 257
seats, the Peronists have 120 seats and the main opposition has 105. While the
Peronist defeat was
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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
unfortunate, the leaders of the victorious opposition indicated their strong
support for the government's basic economic policy, including the one-to-one
fixed exchange rate between the peso and the U.S. dollar. As a result of such
declarations, the political instability that would have been predicted by an
opposition victory was largely negated. Separately during the period, the
Argentine government expanded its long maturity global bond due 2017 by USD 750
million. With the expansion, Argentina has met USD 1.35 billion of its USD 2
billion financing requirement for the second quarter. This is important because
it gives Argentina additional flexibility in managing its liabilities.
Separately, the IMF issued mixed comments on Argentina, praising the country for
having successfully withstood the Asian storm, but expressing concerns on the
deteriorating external position. The IMF urged Argentina to further diversify
its export base instead of relying on its import tariffs. We remain confident
that Argentina will implement the necessary reforms, but are slightly
underweight awaiting the reforms.
Brazil In June, 1997, Brazil exchanged collateralized Brady bonds for a new
30-year global bond, totaling USD 3 billion in exact size. This is the largest
amount ever issued by an emerging market borrower. The debt exchange will help
Brazil build a more complete yield curve and strengthens foreign reserves by
about $1.5 billion. During the period, Brazilian policy makers' Asian crisis
management capabilities were impressive as Brazil took several steps to defend
its currency, the real, from attack. First, they doubled interest rates,
draining liquidity from the system and increasing demand for the real. Second,
President Cardoso proposed, and then passed, a series of fiscal measures
designed to lend credibility to its monetary policy and improve the current
account deficit. All this was implemented over a very short timeframe despite
significant political consequences. Finally, Brazil made significant advances on
its structural reform agenda, including pushing forward with its privatization
plan. In addition, after nearly three years of delays, the Brazilian senate
approved the administrative reform bill by a wide margin. A prompt approval was
also reached in the upper house of congress. This approval will allow a general
reduction in public expenditure at both the federal and state levels by ending
job guarantees, setting limits on salaries and providing review evaluations for
employees. While it may seem like a simple step to improve the economic and
political system, this type of progress was previously unheard of in Brazil. The
reform will enable state and municipal governments that spend more than 60% of
receipts on payrolls to dismiss workers whose jobs are currently protected by
the constitution. While the crisis in Asia leaves prospects for another year of
significant economic growth in doubt, the government has allayed concerns
surrounding their political commitment to stabilization and reform. Brazil's
success and expediency in making these reforms have encouraged us to take a
slightly overweight position.
Ecuador Despite Ecuador's relative outperformance, the country's ability to
institute reform measures continues to be disappointing. Specifically
disappointing was the government's continuous delays in the auction of a 35%
stake in state-owned telephone company EMETEL. In addition, following the
failure by congress to pass an increase in the value added tax, the sucre
devalued 7.5%. We have established a marginally overweight position because we
believe we are being adequately compensated for the risk we are taking, but
further reforms would need to take place for us to increase our exposure.
Mexico In historic elections on July 6, Mexicans elected Cuauhtemoc Cardenas,
the leader of the leftist PRD party, as mayor of Mexico City and took away the
ruling party's majority in the lower house of congress. These landmark results
should have minimal impact upon the economic
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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
reform process but signal a decisive step toward greater democracy.
Additionally, with none of the parties questioning the results, this was the
cleanest election yet undertaken in the country. It is also the first time in
more than 68 years that the Mexico City mayor has been popularly elected, and
the first time the PRI has failed to win a majority in congress. Separately,
Mexico's executive branch submitted a 1998 budget proposal to congress calling
for no tax cuts and a fiscal deficit equivalent to 1.25% of GDP. Subsequently,
opposition legislators stated that they will push for tax cuts and increases in
public spending, while at the same time maintaining the fiscal deficit at or
below 1.5% of GDP. Banco de Mexico signaled on March 12 that it is temporarily
tightening its monetary stance by draining liquidity. The move is intended to
help limit the deterioration in inflationary expectations resulting from the
recent peso weakness associated with the Asian crisis. The Central Bank
explicitly linked this move with its desire to prevent an excessive short-term
deterioration in the exchange rate. We remain confident in Mexico's potential
and increased exposure during the period.
Panama During September, Panama retired USD 600 million of outstanding Brady
debt and simultaneously issued a 30-year global bond. The exchange allowed
Panama to improve its debt structure and lower its cost of funding. We remain
overweight in Panama.
Peru In the beginning of the period, having recently closed its Brady debt
restructuring and overcome an unexpected hostage crisis, Peru began to
concentrate on fiscal reforms and economic accountability. In March, Moody's
raised Peru's sovereign debt ceiling to Ba3 from B2, citing prudent fiscal and
monetary policies and an outlook for strong growth. Moody's stated that the move
was based on the country's progress, which included macroeconomic stabilization
and high average rates of growth over the past several years. Also noted was the
completion of both Paris and London Club debt restructurings, which have reduced
external debt from USD 33.5 billion to USD 28.2 billion and have significantly
lessened the near-term debt service by improving the amortization profile. The
rating increase complements Standard & Poor's previously assigned BB rating. We
maintained our overweight position during the period.
Venezuela In June, 1997, Standard & Poor's upgraded Venezuela's long-term
foreign currency debt to B+ from B and revised the outlook to stable from
positive. S&P cited higher world oil prices, fiscal restraint and increased oil
production as factors increasing Venezuela's external flexibility. In addition,
progress on privatization and restructuring the public sector contributed to the
upgrade. Venezuela is less reliant upon the international capital markets than
the majority of Latin American countries due in large part to its enormous oil
reserves and its prudent use of above budget oil revenues to pay down debt. As a
result, it is our contention that Venezuela will be somewhat insulated from the
market volatility that is expected to exist going forward. In addition, the
government gave a positive sign to investors with congress' approval of a
privatization plan of the aluminum sector which the government hopes will bring
in USD 2 billion. In the face of the recent slump in oil prices, privatization
proceeds will be the saving grace for the government's finances for 1998. We
remain overweight Venezuela and used the Asia-related sell off to increase
exposure.
EASTERN EUROPE
Bulgaria At the end of the period, Bulgaria remained the top 1998 performer
in the Emerging Markets Bond Index, up 7.66% year-to-date. Moody's upgraded
Bulgaria's foreign currency rating to B2 from B3, citing improved credit risk
with the election of a reform-oriented government and establishment of a
currency board. In comparison, the upgrade puts Bulgaria on
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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
par with Peru and one notch below Brazil and Ecuador. Additionally, the IMF
approved the fourth tranche of a $510 million standby loan. Bulgaria's strides
in decreasing inflation and promoting growth during the past year have been
significant: inflation in March was negative 0.1% (largely due to falling fuel
prices), and was near 1.5% in February down from levels above 100% a year ago.
Hungary Moody's announced an upgrade for Hungary's long-term currency rating
from Baa3 to Baa2 with a "positive" outlook. The upgrade was supported by the
results of the austerity program launched in mid-1995 that improved Hungary's
external and fiscal balances.
Russia Following the Asian crisis, Russia was one of the most scrutinized and
most volatile credits in the emerging debt markets. Its currency, the ruble, is
pegged to the US dollar and investors feared it would have to be devalued, much
like Asia, due to capital flight and dwindling reserves brought on by the Asia
crisis. In addition, the deterioration of Russia's fiscal accounts as a result
of the capital flight and a fall in oil prices, one of its major exports, caused
S&P to lower its outlook for Russia's long-term foreign debt rating to negative
from stable. On a positive note, negotiations between the Russian government and
the IMF are continuing with regard to the release of the next tranche of its
Extended Fund Facility Loan which was introduced in 1996 to help Russia face
problems surrounding its implementation of reforms. President Yeltsin, due to
his frustrations with the government's failure to make substantial progress on
reform, dismissed his entire Parliamentary cabinet and replaced Prime Minister
Viktor Chernomyrdin with former Energy Minister, Sergey Kiriyenko. Although this
development was cause for initial concern, Kiriyenko was approved by the Duma,
and a new cabinet was introduced, comprised of players with strong reformist
views. Separately, in a move that improved market sentiment, the 1998 budget was
passed overwhelmingly by the Duma and signed into law.
Russia will continue to remain volatile throughout 1998. Capital flight will
come and go, oil prices will remain volatile, and politics will continue to make
headlines. Fortunately, Russia has the ability and willingness to service its
obligations. For example, Russia's debt service is 12% of exports and places it
in the top 10% of emerging market countries. We continue to believe the risk
premium offered for this debt more than adequately compensates investors for the
risk.
MIDDLE EAST AND AFRICA
Morocco Positive news came from Morocco, as the U.S. rating agencies
assigned sovereign ratings: Moody's rated Morocco Ba1, while Standard and
Poor's assigned a rating of BB. The grades can be attributed to three main
factors: 1) the ability of Morocco to stabilize its macroeconomic performance,
namely its current account deficit, 2) the ability of Morocco to substantially
attract foreign investors and gain their confidence, and 3) the government's
high commitment to the privatization process and to liberalization.
Algeria Although the recent elections are not expected to end the violence
in Algeria, they were a positive event, as the newly elected national assembly
represents an opportunity to improve the security situation going forward.
Specifically, the National Liberation Front (FLN) is bargaining with the
National Democratic Rally (RND) to form a coalition government. An RND/FLN
government would include many individuals from the outgoing cabinet, insuring
policy continuity.
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T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
The Board of Directors of the Fund recently reviewed and approved various
amendments to the Fund's bylaws. For example, the bylaws provisions relating to
timely notice for proposals to be brought before an annual meeting of
stockholders (other than a proposal under Rule 14a-8 of the Securities Exchange
Act of 1934 to be included in the Fund's proxy statement) have been amended. As
amended, a stockholder's notice must be delivered to the Fund not less than 60
days nor more than 90 days prior to the first anniversary of the preceding
year's annual meeting. An exception applies in the event the date of the annual
meeting is substantially advanced or delayed from the anniversary date. The
Board believes that the amended timely notice provisions will provide greater
certainty to stockholders because previously, timely notice keyed off the date
of the current year's meeting or the date public disclosure of the current
year's meeting is made. In addition, the provisions provide that any business to
be brought before a special meeting of stockholders must be specified in the
notice of meeting or otherwise properly brought before the meeting by or at the
direction of the Board of Directors. Finally, upon recommendation of the Fund's
Maryland counsel, other changes to certain bylaw provisions were made to conform
to the bylaw provisions of more recently organized Maryland companies.
In a continuing effort to provide timely information concerning the Fund,
shareholders may call 1-888-777-0102 (toll free), Monday through Friday from
8:00 am to 6:00 pm EST for the Fund's current 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,
please call American Stock Transfer & Trust Company at 1-800-937-5449
(1-718-921-8200 if you are calling from within New York City).
Sincerely,
William D. Cvengros Heath B. McLendon
Co-Chairman of the Board Co-Chairman of the Board
Peter J. Wilby
Executive Vice President
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T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Statement of Investments May 29, 1998
BONDS -- 93.8%
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
000'S(a) VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ARGENTINA - 6.2%
Peso 5,000+ Republic of Argentina, Global Bond, 8.75%, 7/10/02............................. $ 4,402,091
Peso 2,250+ Republic of Argentina, Global Bond, 11.75%, 2/12/07##.......................... 2,194,793
Peso 2,750 Republic of Argentina, Global Bond, 11.75%, 2/12/07............................ 2,682,524
8,000+ Republic of Argentina, Global Bond, 11.375%, 1/30/17........................... 8,544,000
3,100+ Republic of Argentina, Global Bond, 9.75%, 9/19/27............................. 2,885,325
------------
TOTAL ARGENTINA................................................................ 20,708,733
------------
BRAZIL - 21.3%
4,000 Companhia Energetica De Sao Paul, 9.125%, 6/26/07*............................. 3,740,000
59,481+ Federal Republic of Brazil, Capitalization (C) Bond, 8.00%, 4/15/14(b)......... 46,060,943
27,000+ Federal Republic of Brazil, NMB, Series L, 6.6875%, 4/15/09*................... 21,600,000
------------
TOTAL BRAZIL................................................................... 71,400,943
------------
BULGARIA - 4.2%
21,500+ Republic of Bulgaria, FLIRB, Series A, 2.25%, 7/28/12*......................... 14,230,342
------------
COLUMBIA - 1.4%
5,000 Republic of Columbia, 7.625%, 2/15/07.......................................... 4,587,500
------------
COSTA RICA - 5.9%
295+ Costa Rica, Interest Bond, Series B, 6.54687%, 5/21/05*........................ 287,535
7,200+ Costa Rica, Principal Bond, Series A, 6.25%, 5/21/10........................... 6,336,000
16,000+ Costa Rica, Principal Bond, Series B, 6.25%, 5/21/15........................... 13,280,000
------------
TOTAL COSTA RICA............................................................... 19,903,535
------------
CROATIA- 2.5%
9,500+ Republic of Croatia, FRN, 6.50%, 7/30/10*...................................... 8,288,750
------------
ECUADOR - 4.6%
25,087+ Republic of Ecuador, PDI Bond, 6.625%, 2/27/15*(b)............................ 15,428,387
------------
INDONESIA - 2.0%
6,000 Pt Polytama Propindo, 11.25%, 6/15/07**....................................... 2,400,000
1,000+ Tjiwi Kimia International Finance Company, B.V., 13.25%, 8/01/01.............. 820,000
5,000 Tjiwi Kimia International Finance Company, B.V., 10.00%, 8/01/04.............. 3,550,000
------------
TOTAL INDONESIA............................................................... 6,770,000
------------
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 May 29, 1998 (continued)
BONDS (continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
000'S(a) VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MEXICO - 3.0%
3,000+ Grupo Industrial Durango, 12.00%, 7/15/01..................................... $ 3,225,000
2,000 Hylsa S.A. de C.V., 9.25%, 9/15/07............................................ 1,940,000
4,050+ United Mexican States, Global Bond, 11.50%, 5/15/26........................... 4,723,313
------------
TOTAL MEXICO.................................................................. 9,888,313
------------
PANAMA - 4.1%
9,875+ Republic of Panama, IRB, 3.75%, 7/17/14*...................................... 7,622,265
7,727+ Republic of Panama, PDI Bond, 6.5625%, 7/17/16*(b)............................ 6,196,245
------------
TOTAL PANAMA.................................................................. 13,818,510
------------
PERU - 6.6%
33,000+ Republic of Peru, PDI Bond, 4.00%, 3/07/17*................................... 22,027,500
------------
PHILIPPINES - 5.2%
5,000 Republic of Philippines, Global Bond, 8.75%, 10/07/16......................... 4,718,750
13,000 Republic of Philippines, Treasury Bond, 8.875%, 4/15/08....................... 12,561,250
------------
TOTAL PHILIPPINES............................................................. 17,280,000
------------
POLAND - 2.9%
8,130+ Republic of Poland, PDI Bond, 4.00%, 10/27/14*................................ 7,367,812
3,000+ Republic of Poland, RSTA Bond, 3.75%, 10/27/24*............................... 2,188,125
------------
TOTAL POLAND.................................................................. 9,555,937
------------
RUSSIA - 0.2%
1,315 Russia, IAN, 6.71875%, 12/15/15*,##........................................... 856,530
------------
SOUTH KOREA - 7.3%
1,250 Export-Import Bank of Korea, Global Bond, 7.25%, 6/25/01...................... 1,132,375
1,560 Export-Import Bank of Korea, Global Bond, 6.50%, 2/10/02...................... 1,352,520
2,750 Korea Development Bank, Global Bond, 7.90%, 2/01/02........................... 2,496,725
5,800 Korea Development Bank, Global Bond, 6.625%, 11/21/03......................... 4,789,060
3,735 Korea Development Bank, Global Bond, 7.375%, 9/17/04.......................... 3,138,520
12,450 Republic of Korea, Global Bond, 8.875%, 4/15/08............................... 11,625,188
------------
TOTAL SOUTH KOREA............................................................. 24,534,388
------------
See accompanying notes to financial statements.
PAGE 8
</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 May 29, 1998 (continued)
BONDS (concluded)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
000'S(a) VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
URUGUAY - 1.3%
1,658+ Uruguay, DCB, Series B, 6.50%, 2/19/07*....................................... $ 1,641,315
2,824 Uruguay, NMB, 6.625%, 2/19/06*................................................ 2,880,000
------------
TOTAL URUGUAY................................................................. 4,521,315
------------
VENEZUELA - 15.1%
54,524+ Republic of Venezuela, DCB, Series DL, 6.8125%, 12/18/07*..................... 47,537,952
3,000+ Republic of Venezuela, FLIRB, Series A, 6.625%, 3/31/07*...................... 2,611,872
643+ Republic of Venezuela, FLIRB, Series B, 6.625%, 3/31/07*...................... 559,687
------------
TOTAL VENEZUELA............................................................... 50,709,511
------------
TOTAL BONDS (cost $312,458,684)............................................... 314,510,194
------------
LOAN PARTICIPATIONS++ -- 30.3%
- ----------------------------------------------------------------------------------------------------------------------------
The People's Democratic Republic of Algeria,
3,818 Tranche A, 7.3125%, 3/06/00* (Chase Manhattan)............................. 3,560,451
5,727 Tranche 1, 6.625%, 9/04/06* (Chase Manhattan).............................. 4,352,723
16,000 Tranche 3, 6.53125%, 3/04/10* (Chase Manhattan)............................ 11,880,000
Republic of Jamaica,
278 Tranche A, 6.50%, 10/15/00* (Chase Manhattan).............................. 274,963
5,156 Tranche B, 6.4375%, 11/15/04* (Chase Manhattan, Morgan Guaranty
Trust Company of New York).............................................. 4,589,062
Kingdom of Morocco,
Yen 708,011 Tranche A, 2.5175%, 1/01/09* (Goldman Sachs)............................... 4,300,462
31,059 Tranche B, 6.4375%, 1/01/04* (Chase Manhattan, Morgan
Stanley Emerging Markets, Inc.)......................................... 28,069,413
Russia,
75,000 Principal Loan, 6.71875%, 12/15/20*(c) (Chase Manhattan,
Goldman Sachs, ING Bank, J.P. Morgan, Merrill Lynch).................... 42,093,750
3,000 Foreign Trade Obligation, 6/26/07# (Bank of America)....................... 2,280,000
------------
TOTAL LOAN PARTICIPATIONS (cost $106,290,739)................................ 101,400,824
------------
TOTAL INVESTMENTS-- 124.1% (cost $418,749,423)................................ 415,911,018
------------
REPURCHASE AGREEMENT -- 0.7%
- ----------------------------------------------------------------------------------------------------------------------------
2,218 Merrill Lynch, 5.47%, cost $2,218,000, dated 5/29/98, $2,219,011
due 6/01/98, (collateralized by $2,225,000 U.S. Treasury Notes,
5.875%, due 8/31/99, valued at $2,263,938)................................. 2,218,000
------------
LIABILITIES IN EXCESS OF OTHER ASSETS - (24.8)%............................... (83,049,326)
------------
NET ASSETS - 100.0% (EQUIVALENT TO $15.03 PER SHARE ON
22,299,869 COMMON SHARES OUTSTANDING)...................................... $335,079,692
------------
------------
See accompanying notes to financial statements.
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T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Statement of Investments May 29, 1998 (concluded)
FORWARD FOREIGN CURRENCYCONTRACTSOPENATMAY 29, 1998:
<TABLE>
<CAPTION>
CONTRACTS IN EXCHANGE CONTRACTS AT DELIVERY UNREALIZED
TO DELIVER FOR VALUE DATE APPRECIATION
-------------- ------------ -------------- -------- ------------
<S> <C> <C> <C> <C> <C>
Sale.... Yen 589,000,000 US $4,638,526 US $4,261,772 6/17/98 $376,754
<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)Portion of income earned is capitalized as Russian Government Interest Arrears Note.
*Rate shown reflects current rate on instrument with variable rates or step coupon rates.
**Default on interest payment subsequent to May 29, 1998.
#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 4.
++Participation interests were acquired through the financial institutions indicated parenthetically. See Note 5.
</FN>
</TABLE>
<TABLE>
<S> <C> <C> <C>
DCB - Debt Conversion Bond. NMB - New Money Bond.
FLIRB - Front Loaded Interest Reduction Bond. PDI - Past Due Interest.
FRN - Floating Rate Note. Peso - Argentina Peso.
IAN - Interest Arrears Note. RSTA - Revolving Short Term Agreement.
IRB - Interest Reduction Bond. Yen - Japanese Yen.
See accompanying notes to financial statements.
</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 Assets and Liabilities May 29, 1998
<TABLE>
<S> <C>
Assets
Investments, at value (cost -- $418,749,423)......................................... $415,911,018
Repurchase agreement................................................................. 2,218,000
Cash................................................................................. 657
Receivable for securities sold....................................................... 17,458,828
Interest receivable ................................................................. 7,449,286
Net unrealized appreciation of forward foreign currency contracts.................... 376,754
Prepaid expenses .................................................................... 25,495
------------
Total assets ........................................................... 443,440,038
------------
Liabilities
Loan payable (Note 4) .............................................................. 100,000,000
Payable for securities purchased ................................................... 7,317,007
Accrued interest expense on loan .................................................... 398,353
Accrued management fee (Note 2) ..................................................... 331,435
Other accrued expenses .............................................................. 313,551
------------
Total liabilities ...................................................... 108,360,346
------------
Net Assets
Common Stock ($.001 par value, authorized 100,000,000 shares;
22,299,869 shares outstanding) .................................................. 22,300
Additional paid-in capital ......................................................... 312,397,589
Undistributed net investment income ................................................. 7,480,264
Accumulated net realized gain on investments ....................................... 17,645,749
Net unrealized depreciation on investments and foreign currency translations ........ (2,466,210)
------------
Net assets............................................................... $335,079,692
------------
------------
Net Asset Value Per Share ($335,079,692 / 22,299,869 shares) ........................ $15.03
------
------
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
Statement of Operations For the Year Ended May 29, 1998
<TABLE>
<CAPTION>
NET INVESTMENT INCOME
INCOME
<S> <C> <C>
Interest (includes discount accretion of $11,491,363) ............................... $ 48,036,539
EXPENSES
Interest on loan....................................................... $6,461,633
Management fee ........................................................ 4,361,717
Custodian ............................................................. 160,560
Audit and tax services ................................................ 73,230
Legal ................................................................. 64,614
Printing .............................................................. 45,496
Transfer agent ........................................................ 38,973
Directors' fees and expenses .......................................... 33,033
Listing fees .......................................................... 32,436
Amortization of organization expenses ................................. 24,591
Other ................................................................. 39,804 11,336,087
---------- ------------
Net investment income................................................................ 36,700,452
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net Realized Gain on:
Investments...................................................................... 27,657,422
Foreign currency transactions.................................................... 607,896
------------
28,265,318
------------
Net Change in Unrealized Appreciation (Depreciation) on:
Investments...................................................................... (47,450,263)
Translation of foreign currency contracts and other assets and liabilities
denominated in foreign currencies............................................ 372,444
------------
(47,077,819)
------------
Net loss on investments and foreign currency transactions............................ (18,812,501)
------------
Net Increase in Net Assets from Operations........................................... $ 17,887,951
------------
------------
See accompanying notes to financial statements.
PAGE 12
</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 YEAR FOR THE YEAR
ENDED ENDED
MAY 29, 1998 MAY 31, 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income ............................................ $ 36,700,452 $ 38,245,380
Net realized gain on investments and foreign currency transactions 28,265,318 22,569,558
Net change in unrealized appreciation (depreciation).............. (47,077,819) 55,309,422
------------ ------------
Net increase in net assets from operations ....................... 17,887,951 116,124,360
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ....................................... (35,068,422) (32,934,033)
From net realized gains .......................................... (30,462,193) (3,204,236)
------------ ------------
Total dividends and distributions to shareholders................. (65,530,615) (36,138,269)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares issued in reinvestment of dividends
(353,044 and 89,691 shares issued, respectively)............. 5,469,943 1,317,325
------------ ------------
Total increase (decrease) in net assets........................... (42,172,721) 81,303,416
NET ASSETS
Beginning of period............................................... 377,252,413 295,948,997
------------ ------------
End of period (includes undistributed net investment income
of $7,480,264 and $5,487,984, respectively).................. $335,079,692 $377,252,413
------------ ------------
------------ ------------
Statement of Cash Flows For the Year Ended May 29, 1998
Cash Flows from Operating Activities:
Purchases of securities.............................................................. $(605,865,826)
Net sales of short-term investments ................................................. 8,401,000
Proceeds from sales of securities and principal paydowns ............................ 635,923,335
-------------
38,458,509
Net investment income .............................................................. 36,700,452
Accretion of discount on investments ................................................ (11,491,363)
Interest on payment-in-kind bonds ................................................... (3,386,809)
Amortization of organization expenses ............................................... 24,591
Net change in receivables/payables related to operations ............................ (244,898)
-------------
Net cash provided by operating activities............................................ 60,060,482
-------------
Cash Flows from Financing Activities:
Value of shares issued in reinvestment of dividends ................................ 5,469,943
Dividends paid ...................................................................... (65,530,615)
-------------
Net cash used by financing activities .............................................. (60,060,672)
-------------
Net decrease in cash ............................................................... (190)
Cash at beginning of period ........................................................ 847
-------------
Cash at end of period .............................................................. $ 657
-------------
-------------
See accompanying notes to financial statements.
PAGE 13
</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
1. Organization and SIGNIFICANT ACCOUNTING POLICIES
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.
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 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)
1. ORGANIZATION AND 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 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 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 (continued)
1. ORGANIZATION AND 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 year
ended May 29, 1998, the Fund paid interest expense of $6,511,719.
2. 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 the
annual shareholders 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
Travelers Group Inc. ("Travelers"), 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, 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 May 29, 1998 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 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
Notes to Financial Statements (continued)
2. 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.
3. PORTFOLIO ACTIVITY AND TAX INFORMATION
Cost of purchases and proceeds from sales of securities, excluding
short-term investments for the year ended May 29, 1998 aggregated $594,805,958
and $594,221,726, respectively. The federal income tax cost basis of the Fund's
investments and repurchase agreement at May 29, 1998 was $423,044,073. Gross
unrealized appreciation and depreciation amounted to $13,091,924 and
$18,006,979, respectively, resulting in a net unrealized depreciation on
investments of $4,915,055.
As a result of differing book and tax treatment for foreign currency gains
for the year ended May 29, 1998, $360,250 has been reclassified from
Accumulated Net Realized Gain on Investments to Undistributed Net Investment
Income.
4. 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 November 6, 1998. The collateral for the loan was valued at $199,712,253
on May 29, 1998 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%.
5. 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 May 29, 1998 was $101,400,824.
In connection with purchasing loan 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.
6. "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
PAGE 17
<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)
6. "WHEN AND IF" ISSUED BONDS (CONCLUDED)
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.
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 May 29, 1998, the Fund has a concentration risk
in sovereign debt of emerging market countries.
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Fund enters into forward foreign currency contracts ("forward
contracts") to facilitate settlement of foreign currency denominated portfolio
transactions or to manage foreign currency exposure associated with foreign
currency denominated securities. Forward contracts involve elements of market
risk in excess of the amount reflected in the Statement of Assets and
Liabilities. The Fund bears the risk of an unfavorable change in the foreign
exchange rate underlying the forward contract. Risks may also arise upon
entering into these contracts from the potential inability of the counter
parties to meet the terms of their contracts. As of May 29, 1998, the Fund has
an outstanding contract to sell 589,000,000 Japanese Yen for US $4,638,526 for
a scheduled settlement of June 17, 1998.
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 May 29, 1998,
the Fund did not have any outstanding option transactions.
9. DIVIDEND SUBSEQUENT TO MAY 29, 1998
On June 1, 1998, the Board of Directors of the Fund declared a common stock
dividend of $0.4125 per share from net investment income, payable on June 30,
1998 to shareholders of record June 16, 1998.
PAGE 18
<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
<TABLE>
<CAPTION>
Data for a share of common stock outstanding throughout the period:
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED PERIOD ENDED
MAY 29, MAY 31, MAY 31, MAY 31, MAY 31,
1998 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..................... 1.68 1.74 1.92 1.69 1.22
Net realized gain (loss) and change in
unrealized appreciation (depreciation)
on securities and foreign currency
translations........................... (0.86) 3.56 2.50 (2.24) (1.03)
------ ------ ------ ------ ------
Total from investment operations.......... 0.82 5.30 4.42 (0.55) 0.19
------ ------ ------ ------ ------
Dividends to shareholders from net
investment income...................... (1.59) (1.50) (1.29) (1.36) (1.06)
Dividends to shareholders from net
realized capital gains................. (1.39) (0.15) (0.36) (0.29) (0.14)
------ ------ ------ ------ ------
Total dividends and
distributions to shareholders.......... (2.98) (1.65) (1.65) (1.65) (1.20)
------ ------ ------ ------ ------
Offering costs on issuance of common stock -- -- -- -- (0.04)
------ ------ ------ ------ ------
Net increase (decrease) in net asset value (2.16) 3.65 2.77 (2.20) (1.05)
------ ------ ------ ------ ------
Net asset value, end of period............ $15.03 $17.19 $13.54 $10.77 $12.97
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Per share market value, end of period $15.4375 $15.75 $13.88 $11.88 $14.00
Total investment return based on market
price per share (c).................... 17.51% 26.84% 32.72% -2.18% 8.29%(b)
Ratios to Average Net Assets:
Total expenses, including interest
expense............................ 3.14% 3.34% 4.21% 4.41% 2.40%(d)
Total expenses, excluding interest
expense (operating expenses)....... 1.35% 1.37% 1.43% 1.45% 1.38%(d)
Net investment income.................. 10.16% 11.29% 16.20% 15.42% 8.98%(d)
Supplemental Data:
Net assets, end of period (000)........ $335,080 $377,252 $295,949 $235,372 $283,481
Portfolio turnover rate................ 135.85% 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 6.28125% 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......... 6.46% 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.
</FN>
See accompanying notes to financial statements.
PAGE 19
</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
Report of Independent Accountants
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
THE EMERGING MARKETS INCOME FUND II INC
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations, of
changes in net assets and of cash flows and the financial highlights present
fairly, in all material respects, the financial position of The Emerging Markets
Income Fund II Inc (the "Fund") at May 29, 1998, the results of its operations
and cash flows for the year then ended, and the changes in its net assets for
each of the two years in the period then ended and the financial highlights for
each of the four years in the period then ended and for the period June 25, 1993
(commencement of operations) through May 31, 1994, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at May 29, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
July 13, 1998
PAGE 20
<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)
February 27, 1998........................... 9,829 .45 5,778 .25
May 29, 1998................................ 9,661 .45 (15,385) (.70)
<FN>
- ----------
*Totals expressed in thousands of dollars except per share amounts.
**For the period June 25, 1993 (commencement of operations) through August 31, 1993.
</FN>
PAGE 21
</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
Pursuant to certain rules of the Securities and Exchange Commission, the
following additional disclosure is provided.
Form of Terms and Conditions of Amended and Restated Dividend Reinvestment
and Cash Purchase Plan
1. Each shareholder holding shares of common stock ("Shares") of The Emerging
Markets Income Fund II Inc (the "Fund") will be deemed to have elected to be a
participant in the Amended and Restated Dividend Reinvestment and Cash Purchase
Plan (the "Plan"), unless the shareholder specifically elects in writing
(addressed to the Agent at the address below or to any nominee who holds Shares
for the shareholder in its name) to receive all income dividends and
distributions of capital gains in cash, paid by check, mailed directly to the
record holder by or under the direction of American Stock Transfer & Trust
Company as the Fund's dividend-paying agent (the "Agent"). A shareholder whose
Shares are held in the name of a broker or nominee who does not provide an
automatic reinvestment service may be required to take such Shares out of
"street name" and register such Shares in the shareholder's name in order to
participate, otherwise dividends and distributions will be paid in cash to such
shareholder by the broker or nominee. Each participant in the Plan is referred
to herein as a "Participant." The Agent will act as Agent for each Participant,
and will open accounts for each Participant under the Plan in the same name as
their Shares are registered.
2. Unless the Fund declares a dividend or distribution payable only in the form
of cash, the Agent will apply all dividends and distributions in the manner set
forth below.
3. If, on the determination date, the market price per Share equals or exceeds
the net asset value per Share on that date (such condition, a "market premium"),
the Agent will receive the dividend or distribution in newly issued Shares of
the Fund on behalf of Participants. If, on the determination date, the net asset
value per Share exceeds the market price per Share (such condition, a "market
discount"), the Agent will purchase Shares in the open-market. The determination
date will be the fourth New York Stock Exchange trading day (a New York Stock
Exchange trading day being referred to herein as a "Trading Day") preceding the
payment date for the dividend or distribution. For purposes herein, "market
price" will mean the average of the highest and lowest prices at which the
Shares sell on the New York Stock Exchange on the particular date, or if there
is no sale on that date, the average of the closing bid and asked quotations.
4. Purchases made by the Agent will be made as soon as practicable commencing on
the Trading Day following the determination date and terminating no later than
30 days after the dividend or distribution payment date except where temporary
curtailment or suspension of purchase is necessary to comply with applicable
provisions of federal securities law; provided, however, that such purchases
will, in any event, terminate on the earlier of (i) 60 days after the dividend
or distribution payment date and (ii) the Trading Day prior to the "ex-dividend"
date next succeeding the dividend or distribution payment date.
PAGE 22
<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
5. If (i) the Agent has not invested the full dividend amount in open-market
purchases by the date specified in paragraph 4 above as the date on which such
purchases must terminate or (ii) a market discount shifts to a market premium
during the purchase period, then the Agent will cease making open-market
purchases and will receive the uninvested portion of the dividend amount in
newly issued Shares (x) in the case of (i) above, at the close of business on
the date the Agent is required to terminate making open-market purchases as
specified in paragraph 4 above or (y) in the case of (ii) above, at the close of
business on the date such shift occurs; but in no event prior to the payment
date for the dividend or distribution.
6. In the event that all or part of a dividend or distribution amount is to be
paid in newly issued Shares, such Shares will be issued to Participants in
accordance with the following formula: (i) if, on the valuation date, the net
asset value per Share is less than or equal to the market price per Share, then
the newly issued Shares will be valued at net asset value per Share on the
valuation date; provided, however, that if the net asset value is less than 95%
of the market price on the valuation date, then such Shares will be issued at
95% of the market price and (ii) if, on the valuation date, the net asset value
per Share is greater than the market price per Share, then the newly issued
Shares will be issued at the market price on the valuation date. The valuation
date will be the dividend or distribution payment date, except that with respect
to Shares issued pursuant to paragraph 5 above, the valuation date will be the
date such Shares are issued. If a date that would otherwise be a valuation date
is not a Trading Day, the valuation date will be the next preceding Trading Day.
7. Participants have the option of making additional cash payments to the
Agent, monthly, in a minimum amount of $250, for investment in Shares. The
Agent will use all such funds received from Participants to purchase Shares in
the open market on or about the first business day of each month. To avoid
unnecessary cash accumulations, and also to allow ample time for receipt and
processing by the Agent, Participants should send in voluntary cash payments to
be received by the Agent approximately 10 days before an applicable purchase
date specified above. A Participant may withdraw a voluntary cash payment by
written notice, if the notice is received by the Agent not less than 48 hours
before such payment is to be invested.
8. Purchases by the Agent pursuant to paragraphs 4 and 7 above may be made on
any securities exchange on which the Shares are traded, in the over-the-counter
market or in negotiated transactions, and may be on such terms as to price,
delivery and otherwise as the Agent shall determine. Funds held by the Agent
uninvested will not bear interest, and it is understood that, in any event, the
Agent shall have no liability in connection with any inability to purchase
Shares within the time periods herein provided, or with the timing of any
purchases effected. The Agent shall have no responsibility as to the value of
the Shares acquired for the Participant's account. The Agent may commingle
amounts of all Participants to be used for open-market purchases of Shares and
the price per Share allocable to each Participant in connection with such
purchases shall be the average price (including brokerage commissions) of all
Shares purchased by the Agent.
PAGE 23
<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
9. The Agent will maintain all Participants' accounts in the Plan and will
furnish written confirmations of all transactions in each account, including
information needed by Participants for personal and tax records. The Agent will
hold Shares acquired pursuant to the Plan in noncertificated form in the
Participant's name or that of its nominee, and each Participant's proxy will
include those Shares purchased pursuant to the Plan. The Agent will forward to
Participants any proxy solicitation material and will vote any Shares so held
for Participants only in accordance with the proxy returned by Participants to
the Fund. Upon written request, the Agent will deliver to Participants, without
charge, a certificate or certificates for the full Shares.
10. The Agent will confirm to Participants each acquisition made for their
respective accounts as soon as practicable but not later than 60 days after the
date thereof. Although Participants may from time to time have an undivided
fractional interest (computed to three decimal places) in a Share of the Fund,
no certificates for fractional shares will be issued. Dividends and
distributions on fractional shares will be credited to each Participant's
account. In the event of termination of a Participant's account under the Plan,
the Agent will adjust for any such undivided fractional interest in cash at the
market value of the Fund's Shares at the time of termination less the pro rata
expense of any sale required to make such an adjustment.
11. Any share dividends or split shares distributed by the Fund on Shares held
by the Agent for Participants will be credited to their respective accounts. In
the event that the Fund makes available to Participants rights to purchase
additional Shares or other securities, the Shares held for Participants under
the Plan will be added to other Shares held by the Participants in calculating
the number of rights to be issued to Participants.
12. The Agent's service fee for handling capital gains distributions or income
dividends will be paid by the Fund. Participants will be charged a pro rata
share of brokerage commissions on all open-market purchases.
13. Participants may terminate their accounts under the Plan by notifying the
Agent in writing. Such termination will be effective immediately if notice is
received by the Agent not less than 10 days prior to any dividend or
distribution record date; otherwise such termination will be effective on the
first Trading Day after the payment date for such dividend or distribution with
respect to any subsequent dividend or distribution. The Plan may be amended or
terminated by the Fund as applied to any voluntary cash payments made and any
income dividend or capital gains distribution paid subsequent to written notice
of the change or termination sent to Participants at least 30 days prior to the
record date for the income dividend or capital gains distribution. The Plan may
be amended or terminated by the Agent, with the Fund's prior written consent, on
at least 30 days' written notice to Participants. Notwithstanding the preceding
two sentences, the Agent or the Fund may amend or supplement the Plan at any
time or times when necessary or appropriate to comply with applicable law or
rules or policies of the Securities and Exchange Commission or any other
regulatory authority. Upon any termination, the Agent will cause a certificate
or certificates for the
PAGE 24
<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
full Shares held by each Participant under the Plan and cash adjustment for any
fraction to be delivered to each Participant without charge.
14. Any amendment or supplement shall be deemed to be accepted by each
Participant unless, prior to the effective date thereof, the Agent receives
written notice of the termination of the Participant's account under the Plan.
Any such amendment may include an appointment by the Agent in its place and
stead of a successor Agent under these terms and conditions, with full power and
authority to perform all or any of the acts to be performed by the Agent under
these terms and conditions. Upon any such appointment of an Agent for the
purpose of receiving dividends and distributions, the Fund will be authorized to
pay to such successor Agent, for each Participant's account, all dividends and
distributions payable on Shares of the Fund held in each Participant's name or
under the Plan for retention or application by such successor Agent as provided
in these terms and conditions.
15. In the case of Participants, such as banks, broker-dealers or other
nominees, which hold Shares for others who are beneficial owners ("Nominee
Holders"), the Agent will administer the Plan on the basis of the number of
Shares certified from time to time by each Nominee Holder as representing the
total amount registered in the Nominee Holder's name and held for the account of
beneficial owners who are to participate in the Plan.
16. The Agent shall at all times act in good faith and use its best efforts
within reasonable limits to insure the accuracy of all services performed under
this Agreement and to comply with applicable law, but assumes no responsibility
and shall not be liable for loss or damage due to errors unless such error is
caused by its negligence, bad faith, or willful misconduct or that of its
employees.
17. All correspondence concerning the Plan should be directed to the Agent at 40
Wall Street, 46th Floor, New York, New York 10005.
PAGE 25
<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
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.
LESLIE H. GELB
President, The Council
on Foreign Relations
HEATH B. MCLENDON
Co-Chairman of the Board
Managing Director, Smith Barney Inc.
President, Smith Barney
Mutual Fund Management Inc.
Chairman, Smith Barney
Strategy Advisors Inc.
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
HEATH B. MCLENDON
Co-Chairman of the Board
STEPHEN J. TREADWAY
President
NEWTON B. SCHOTT
Executive Vice President
PETER J. WILBY
Executive Vice President
THOMAS K. FLANAGAN
Executive Vice President
LEWIS E. DAIDONE
Executive Vice President & Treasurer
NOEL B. DAUGHERTY
Secretary
ALAN M. MANDEL
Controller
ANTHONY PACE
Assistant Controller
- ----------------------
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
PricewaterhouseCoopers 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 26
<PAGE>
The Emerging Markets
Income Fund II Inc
Annual Report
MAY 29, 1998
- -------------------------------------------------------
The Emerging Markets Income Fund IIInc
------------------------------------------------------------
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
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