The Emerging Markets
Income Fund II Inc
July 6, 1999
Dear Shareholders:
We are pleased to provide this annual report for The Emerging Markets Income
Fund II Inc (the "Fund") as of May 28, 1999. 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 28, 1999.
During the year ended May 28, 1999, the net asset value of the Fund decreased
from $15.03 per share at May 29, 1998 to $9.71 per share at May 28, 1999.
Dividends totalling $2.68 per share were paid during the year. This total
represents $1.80, $0.41 and $0.47 per share from net investment income, realized
net short-term capital gains and realized net long-term capital gains,
respectively. Assuming the reinvestment of these dividends in additional shares
of the Fund, the total return based on net asset value for the year ended May
28, 1999 was a negative 13.25%. During the same period, the JP Morgan Emerging
Markets Bond Index Plus (the "EMBI+"), which we use as a measure of the return
of the overall market for emerging markets debt, returned a negative 11.01%.
Investments in securities of emerging markets issuers, including both
obligations of sovereign governments and corporate issuers, totalled
approximately 99% of total investments as of May 28, 1999. The remainder of the
Fund's portfolio assets were invested in short-term investments.
EMERGING MARKETS DEBT SECURITIES
The primary events impacting emerging market debt during the fiscal year
included the severe recession in Asia, the Russian domestic debt default and the
currency crisis in Brazil. Each of these events had a sharply negative impact on
the countries directly involved, as well as a broader spillover impact on the
entire market.
The recession in Asia, a product of the rolling currency crisis that impacted
Thailand, Korea, Malaysia and Indonesia and threatened the currency peg in Hong
Kong, had a direct negative impact on the debt values of each of these
countries. In addition, the currency turmoil in Asia increased the risk premium
in all emerging markets debt. This increase in the risk premium represented
investor perception that there was a likelihood of currency devaluation in all
emerging markets. While this perception was unfair to many emerging markets
countries, it was a lingering concern for investors at the beginning of the
Fund's fiscal year.
Russia's ability to finance its budget deficit was another important factor for
the emerging debt market. Russia's currency was under pressure at the beginning
of the Fund's fiscal year as investors questioned the country's ability to
maintain currency stability without meaningful fiscal reform. The country made
some progress on fiscal reform and successfully accessed external debt markets
during June and July, which helped to relieve some of the short-term pressure on
its finances. The pro reform government continued to promote its reform agenda
but was hampered by its inability to increase tax collections. The progress
Russia made through early August, as well as its constructive relationship with
the IMF, was severely damaged when it chose to devalue the ruble, default 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
domestic debt and dismiss its government, in the middle of August. Russia was
pushed to this unlikely combination of measures by its inability to roll over
obligations in the Treasury bill market. Russia's debt securities declined by
nearly 80% in value during August with the decline concentrated in a three-day
period following these events.
The turmoil in Russia impacted all emerging markets debt as investors fled the
asset class for the safety of the U.S. Treasury market. This flight to quality
was compounded by the forced unwinding of the substantial leverage that financed
many investments in emerging markets. The magnitude of spread widening in
emerging market debt was similar to the Mexican peso crisis in early 1995,
although the 1998 spread widening, occurred more quickly. In addition, spreads
in all other non-Treasury fixed-income investments, including investment-grade
corporate debt and investment- grade asset-backed securities expanded to
historically wide levels.
Emerging market debt began to recover in September as investors recognized that
at 1,500 basis points over Treasuries, the market was dramatically oversold. The
recovery was further supported by interest rate cuts by the U.S. Federal Reserve
Board which totalled 75 basis points. Most emerging markets decoupled from
Russia in the recovery as investors recognized value in many oversold countries.
Russia's economic outlook was as uncertain as its political situation. Russia
began to recover in early 1999 as it reopened discussions with the IMF, and
successfully made coupon payments on its Eurobond debt. Russia's recent progress
toward a new IMF agreement has made it the strongest-performing emerging markets
credit during calendar 1999.
The next major development in emerging markets during the Fund's fiscal year was
the devaluation of Brazilian currency in January. After a few false starts,
Brazil has made major strides toward restoring market confidence in its monetary
and fiscal policy. This restoration of confidence has been led by Arminio Fraga,
the new central bank president, and complemented by the government's ability to
obtain a timely congressional package of some key fiscal reforms. Brazil still
has a very heavy domestic debt burden, but its improvement in monetary policy
and its fiscal reforms have created an opportunity for the country to
restructure its debt.
As Brazil stabilized its currency and began to progress with fiscal reform in
February, the emerging debt markets began a sustained rally. Spreads on the
EMBI+ tightened from approximately 1300 basis points over Treasuries in late
February to approximately 1,000 basis points over in early May. The market
spread did widen approximately 150 basis points during May as investors focused
on the likelihood of an interest rate increase by the U.S. Federal Reserve
Board. Spreads on EMBI+ ended the Fund's fiscal year at 1,157 over Treasuries.
Over the course of this highly eventful fiscal year for the Fund, we have
remained invested in emerging markets debt. While the market has been highly
volatile, our extensive experience in the asset class has convinced us that in
order to enjoy the long-term returns offered by the market, we must ride through
the volatility. The primary rationale for remaining invested in a downturn is
that emerging market declines are usually accompanied by reduced liquidity. When
the market recovers, an equally sharp rebound also occurs with below-normal
levels of liquidity, and it is impossible to create a diversified portfolio at
the market bottom. We remain committed to our strategy of maximizing current
income in a highly diversified portfolio of attractive emerging markets credits.
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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 a continuing effort to provide timely information about The Emerging Markets
Income Fund II Inc, shareholders can call 1-888-777-0102 (toll free), Monday
through Friday from 8:00 a.m. to 6:00 p.m. (EST), for the Fund's current net
asset value, market price and other information regarding the Fund's portfolio
holdings and allocations. For information regarding your Emerging Markets Income
Fund II Inc 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).
Thank you for your investment in The Emerging Markets Income Fund II Inc. We
look forward to helping you pursue your investment goals in the years to come.
Sincerely,
/s/ William D. Cvengros
William D. Cvengros
Co-Chairman of the Board
/s/ Heath B. McLendon
Heath B. McLendon
Co-Chairman of the Board
/s/ Peter J. Wilby
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 28, 1999
<TABLE>
<CAPTION>
Principal
Amount (a) Bonds -- 83.4% Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Argentina -- 12.4%
Republic of Argentina:
Peso 1,750,000+ 8.750% due 7/10/02.............................................. $ 1,464,595
Peso 2,000,000+ 11.750% due 2/12/07............................................. 1,653,806
Peso 500,000+ 11.750% due 2/12/07#............................................ 413,452
1,000,000+ 14.250% due 11/30/02*........................................... 970,000
5,000,000+ 11.750% due 2/12/07............................................. 4,131,250
8,550,000+ Global Bond, 11.000% due 12/4/05................................ 7,727,062
19,300,000+ Global Bond, 11.750% due 4/7/09................................. 17,514,750
6,000,000+ Structured Note, 11.447% due 4/10/05*(b)........................ 5,370,000
------------
39,244,915
------------
Brazil -- 12.3%
4,000,000+ Companhia Energetica De Sao Paulo, 9.125% due 6/26/07*............. 3,320,000
Federal Republic of Brazil:
17,844,992+ Capitalization (C)Bond, 8.000% due 4/15/14(c).................... 11,141,967
22,500,000+ DCB, Series L, 5.9375% due 4/15/12*.............................. 12,881,250
8,000,000+ FLIRB, Series L, 5.000% due 4/15/09*............................. 4,560,000
11,000,000+ NMB, Series L, 5.9375% due 4/15/09*.............................. 7,112,188
------------
39,015,405
------------
Bulgaria -- 2.6%
14,000,000+ Republic of Bulgaria, FLIRB, Series A, 2.500% due 7/28/12*......... 8,102,524
------------
Colombia -- 4.5%
Republic of Colombia:
750,000+ 7.250% due 2/15/03............................................... 645,000
3,275,000+ 7.270% due 6/15/03............................................... 2,751,000
900,000+ 10.986% due 8/13/05*............................................. 801,000
6,500,000+ Global 10.875% due 3/9/04........................................ 6,305,000
3,000,000+ Global 7.625% due 2/15/07........................................ 2,265,000
1,675,000+ Global 9.750% due 4/23/09........................................ 1,394,437
------------
14,161,437
------------
Costa Rica -- 4.4%
Costa Rica:
23,642+ Interest Bond, Series B, 6.56836% due 5/21/05*................... 22,815
2,200,000+ Principal Bond, Series A, 6.250% due 5/21/10..................... 1,914,000
14,500,000+ Principal Bond, Series B, 6.250% due 5/21/15..................... 11,890,000
------------
13,826,815
------------
</TABLE>
See accompanying notes to financial statements.
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T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Statement of Investments (continued)
May 28, 1999
<TABLE>
<CAPTION>
Principal
Amount (a) Bonds -- 83.4% (continued) Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Croatia -- 2.7%
Republic of Croatia, FRN:
442,557+ 5.8125% due 7/31/06*............................................ $ 358,471
10,500,000+ 5.8125% due 7/31/10*............................................ 8,268,750
------------
8,627,221
------------
Ecuador -- 2.6%
Republic of Ecuador:
1,500,000+ Discount Bond, 6.000% due 2/28/25*.............................. 721,875
18,929,849+ PDIBond, 6.000% due 2/27/15*(c)................................. 7,193,342
480,000+ Series IE, 6.000% due 12/21/04*................................. 300,000
------------
8,215,217
------------
Indonesia -- 1.5%
5,191,275+ Pt Polytama Propindo, 11.250% due 6/15/07....................... 908,473
Tjiwi Kimia International Finance Company B.V.:
1,000,000+ 13.250% due 8/1/01.............................................. 750,000
5,000,000+ 10.000% due 8/1/04.............................................. 3,150,000
------------
4,808,473
------------
IvoryCoast -- 1.3%
16,225,000+ Republic of Ivory Coast, 2.000% due 3/31/18*....................... 4,299,625
------------
Mexico -- 8.0%
3,000,000+ Grupo Industrial Durango, 12.000% due 7/15/01...................... 2,932,500
2,000,000+ Hylsa S.A. de C.V., 9.250% due 9/15/07............................. 1,520,000
United Mexican States:
6,675,000+ Global Bond, 10.375% due 2/17/09................................ 6,691,687
6,000,000+ Par Bond, Series A, 6.250% due 12/31/19 (including rights)...... 4,473,750
13,000,000+ Par Bond, Series B, 6.250% due 12/31/19 (including rights)...... 9,693,125
------------
25,311,062
------------
Panama -- 2.3%
9,875,000+ Republic of Panama, IRB, 4.000% due 7/17/14*....................... 7,171,719
------------
Peru -- 4.7%
24,450,000+ Republic of Peru, PDI Bond, 4.000% due 3/7/17*..................... 14,838,094
------------
</TABLE>
See accompanying notes to financial statements.
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T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Statement of Investments (continued)
May 28, 1999
<TABLE>
<CAPTION>
Principal
Amount (a) Bonds -- 83.4% (concluded) Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Philippines -- 3.9%
Republic of the Philippines, Global Bond:
2,300,000+ 8.750% due 10/7/16#............................................. $ 2,116,000
10,500,000+ 9.875% due 1/15/19.............................................. 10,211,250
------------
12,327,250
------------
Poland -- 1.7%
Republic of Poland:
1,750,000+ Par Bond, 3.000% due 10/27/14*.................................. 1,082,812
2,760,000+ PDI Bond, 5.000% due 10/27/14*.................................. 2,473,650
3,000,000+ RSTABond, 4.000% due 10/27/24*.................................. 2,002,500
------------
5,558,962
------------
Russia -- 4.1%
Russian Government:
5,700,000+ Global Bond, 11.750% due 6/10/03................................ 2,821,500
2,325,000+ Global Bond, 11.750% due 6/10/03#............................... 1,150,875
19,275,000+ Global Bond, 12.750% due 6/24/28................................ 9,107,438
------------
13,079,813
------------
South Korea -- 1.9%
Export-Import Bank of Korea, Global Bond:
1,100,000+ 7.250% due 6/25/01.............................................. 1,094,665
1,560,000+ 6.500% due 2/10/02.............................................. 1,511,094
3,460,000+ Korea Development Bank, Global Bond, 6.625% due 11/21/03........... 3,313,988
------------
5,919,747
------------
Uruguay -- 1.1%
Uruguay:
1,473,683+ DCB, Series B, 6.000% due 2/18/07*.............................. 1,252,630
2,470,587+ NMB, 6.125% due 2/19/06*........................................ 2,174,117
------------
3,426,747
------------
Venezuela -- 11.4%
Republic of Venezuela:
5,785,824+ DCB, Series DL, 5.9375% due 12/18/07*........................... 4,285,126
37,523,658+ FLIRB, Series A, 6.000% due 3/31/07*............................ 26,970,129
571,429+ FLIRB, Series B, 6.000% due 3/31/07*............................ 410,715
5,000,000+ Global Bond, 13.625% due 8/15/18................................ 4,462,500
------------
36,128,470
------------
Total Bonds (Cost -- $268,491,170) 264,063,496
------------
</TABLE>
See accompanying notes to financial statements.
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T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Statement of Investments (continued)
May 28, 1999
<TABLE>
<CAPTION>
Principal
Amount (a) Loan Participations++ -- 15.1% Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
The People's Democratic Republic of Algeria:
1,909,088+ Tranche A, 6.750% due 3/4/00* (Chase Manhattan Bank)............ $ 1,780,224
5,727,267+ Tranche 1, 6.000% due 9/4/06* (Chase Manhattan Bank)............ 3,364,769
16,000,000+ Tranche 3, 6.000% due 3/4/10* (Chase Manhattan Bank)............ 8,480,000
Government of Jamaica:
166,637+ Tranche A, 5.8125% due 10/15/00* (Chase Manhattan Bank)......... 156,639
4,468,750+ Tranche B, 6.500% due 11/15/04* (Chase Manhattan Bank,
Morgan Guaranty Trust Company of New York).................... 3,664,375
Russian Government:
3,000,000+ Foreign Trade Obligation##(d) (Bank of America).................. 157,500
60,000,000+ Principal Loan, due 12/15/20##(d)
(Morgan Guaranty Trust Company of New York).................... 4,462,500
Kingdom of Morocco:
Yen 674,295,891+ Tranche A, 2.2325% due 1/1/09* (Goldman Sachs).................. 4,166,991
25,882,355+ Tranche B, 5.90625% due 1/1/04* (Chase Manhattan Bank,
Morgan Stanley Emerging Markets, Inc.)........................ 21,611,767
------------
Total Loan Participations (Cost -- $58,723,828).................... 47,844,765
------------
Warrants Warrants -- 1.0%
- -----------------------------------------------------------------------------------------------------
18,800+ Republic of Argentina Warrants, expiring 12/3/99##................. 202,100
48,154+ United Mexican States Warrants, expiring 2/18/00##................. 3,130,010
------------
Total Warrants (cost-- $2,150,466)................................. 3,332,110
------------
Sub-Total Investments (Cost -- $329,365,464)....................... 315,240,371
------------
Repurchase Agreement -- 0.5%
- -----------------------------------------------------------------------------------------------------
1,454,000 State Street Bank, 4.78%, dated 5/28/99, $1,454,772 due 6/1/99
(collateralized by $1,300,000 U.S. Treasury Bond
due 11/15/16, value at $1,485,848) (Cost -- $1,454,000).......... 1,454,000
------------
Total Investments-- 100.0% (Cost -- $330,819,464**)................ $316,694,371
============
</TABLE>
See accompanying notes to financial statements.
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T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Statement of Investments (concluded)
May 28, 1999
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT MAY 28, 1999:
<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 $5,047,778 US $4,888,123 6/29/99 $159,655
<FN>
- ------------
(a) Principal denominated in U.S. dollars unless otherwise indicated.
(b) Coupon rate is derived from a formula based on the yields of other
Argentina Global bonds.
(c) Payment-in-kind security for which all or part of the interest earned is
capitalized as additional principal.
(d) Security is currently in default.
* Rate shown reflects current rate on instrument with variable rates or
step coupon rates.
** Aggregate cost for federal income tax purposes is substantially the same.
+ 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.
# Pursuant to Rule 144A of the Securities Act of 1933, this security can
only be sold to qualified institu tional investors.
## Non-income producing.
</FN>
</TABLE>
Abbreviations used in this statement:
DCB - Debt Conversion Bond.
FLIRB - Front Loaded Interest Reduction Bond.
FRN - Floating Rate Note.
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.
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<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Statement of Assets and Liabilities
May 28, 1999
<TABLE>
<S> <C>
Assets
Investments, at value (cost-- $329,365,464)........................................ $315,240,371
Repurchase agreement............................................................... 1,454,000
Cash............................................................................... 869
Receivable for securities sold..................................................... 1,560,836
Interest receivable................................................................ 7,301,669
Net unrealized appreciation on forward foreign currency contracts.................. 159,655
Prepaid expenses................................................................... 28,374
------------
Total Assets....................................................................... 325,745,774
------------
Liabilities
Loan payable (Note 4).............................................................. 100,000,000
Accrued interest expense on loan................................................... 284,583
Accrued management fee (Note 2).................................................... 220,510
Other accrued expenses............................................................. 233,699
------------
Total Liabilities.................................................................. 100,738,792
------------
Net Assets......................................................................... $225,006,982
============
Net Assets
Common Stock ($0.001 par value, authorized
100,000,000; 23,165,622 shares outstanding)...................................... $ 23,166
Additional paid-in capital......................................................... 320,925,584
Undistributed net investment income................................................ 7,101,419
Accumulated net realized loss on investments....................................... (89,077,879)
Net unrealized depreciation on investments and foreign currencies.................. (13,965,308)
------------
Net Assets......................................................................... $225,006,982
============
Net Asset Value Per Share ($225,006,982 / 23,165,622 shares)......................... $9.71
=====
</TABLE>
See accompanying notes to financial statements.
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T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Statement of Operations
For the Year Ended May 28, 1999
<TABLE>
<S> <C> <C>
Income
Interest (includes discount accretion of $13,385,759).............................. $ 49,674,849
Expenses
Interest on loan..................................................... $6,111,354
Management fee....................................................... 2,752,455
Custodian............................................................ 87,440
Printing............................................................. 62,780
Audit and tax services............................................... 51,708
Legal................................................................ 35,884
Transfer agent expenses.............................................. 37,764
Directors' fees and expenses......................................... 33,624
Listing fees......................................................... 33,054
Other............................................................... 22,769 9,228,832
---------- ------------
Net Investment Income................................................................ 40,446,017
------------
Realized and Unrealized Loss on Investments
and Foreign Currency Transactions
Net Realized Loss on:
Investments...................................................................... (87,000,811)
Foreign currency transactions.................................................... (155,897)
------------
(87,156,708)
------------
Net Change in Unrealized Depreciation on:
Investments...................................................................... (11,286,688)
Foreign currency contracts and other assets and liabilities
denominated in foreign currencies.............................................. (212,410)
------------
(11,499,098)
------------
Net Loss on Investments and Foreign Currency Transactions (98,655,806)
------------
Net Decrease in Net Assets From Operations $(58,209,789)
============
</TABLE>
See accompanying notes to financial statements.
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<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 28, 1999 May 29, 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations
Net investment income............................................. $ 40,446,017 $ 36,700,452
Net realized gain (loss) on investments and foreign currency
transactions.................................................... (87,156,708) 28,265,318
Net change in unrealized appreciation (depreciation).............. (11,499,098) (47,077,819)
------------ ------------
Net Increase (Decrease) in Net Assets From Operations............. (58,209,789) 17,887,951
------------ ------------
Dividends and Distributions to Shareholders
From net investment income........................................ (40,669,385) (35,068,422)
From net realized capital gains................................... (19,722,397) (30,462,193)
------------ ------------
Net Decrease in Net Assets From
Dividends and Distributions to Shareholders..................... (60,391,782) (65,530,615)
------------ ------------
Capital Share Transactions
Proceeds from shares issued in reinvestment of dividends
(865,753 and 353,044 shares issued)............................. 8,528,861 5,469,943
------------ ------------
Total Decrease in Net Assets........................................ (110,072,710) (42,172,721)
------------ ------------
Net Assets
Beginning of year................................................. 335,079,692 377,252,413
------------ ------------
End of year (includes undistributed net investment income of
$7,101,419 and $7,480,264, respectively)........................ $225,006,982 $335,079,692
============ ============
</TABLE>
Statement of Cash Flows
For the Year Ended May 28, 1999
<TABLE>
<S> <C>
Cash Flows From Operating Activities:
Purchases of securities............................................................ $(484,282,113)
Net sales of short-term investments................................................ 764,000
Proceeds from sales of securities and principal paydowns........................... 509,237,321
-------------
25,719,208
Net investment income.............................................................. 40,446,017
Adjustments to reconcile net investment income to net cash
provided by operating activities:
Accretion of discount on investments............................................. (13,385,759)
Interest on payment-in-kind bonds................................................ (311,016)
Net change in receivables/payables related to operations......................... (605,317)
-------------
Net Cash Provided by Operating Activities........................................ 51,863,133
-------------
Cash Flows From Financing Activities:
Proceeds from shares issued in reinvestment of dividends........................... 8,528,861
Dividends and distributions paid................................................... (60,391,782)
-------------
Net Cash Used by Financing Activities.............................................. (51,862,921)
-------------
Net Increase in Cash................................................................. 212
Cash at Beginning of Year............................................................ 657
-------------
Cash at End of Year.................................................................. $ 869
=============
</TABLE>
See accompanying notes to financial statements.
Page 11
<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Notes to Financial Statements
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 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)
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) 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.
(f) 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.
(g) 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)
1. Organization and Significant Accounting Policies (concluded)
(h) 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, and marked-to-market on each valuation
date to reflect the current market value of the option. When a written
option expires, the Fund realizes a gain equal to the amount of the premium
received. For options closed through an offsetting purchase or sale, the
difference between the premium received or paid in the initial transaction
and the amount paid or received in effecting the closing transaction is
treated as a realized gain or loss. 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. If a written put option is exercised,
the premium reduces the cost basis of the security purchased by the Fund.
(i) 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 28, 1999, the Fund paid interest expense of $6,225,124.
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 PIMCOAdvisors 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 Investment Manager and the Fund have entered into an investment
advisory and administration agreement with Salomon Brothers Asset
Management Inc (the "Investment Adviser"), a wholly-owned subsidiary of
Salomon Smith Barney Holdings Inc.("SSBH"), pursuant to which the
Investment Adviser provides investment advisory and administrative services
to the Fund. The Investment Adviser is responsible on a day-to-day basis
for the management of the Fund's portfolio in accordance with the Fund's
investment objectives and policies and for making decisions to buy, sell,
or hold particular securities and is responsible for day-to-day
administration of the Fund.
The Fund pays the Investment Manager a monthly fee at an annual rate of
1.20% of the Fund's average weekly net assets for its services, out of
which the Investment Manager pays the Investment Adviser a monthly fee at
an annual rate of .70% of the Fund's average weekly net assets for its
services.
At May 28, 1999 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.
All Officers and two Directors of the Fund are employees of the
Investment Manager and/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)
3. Portfolio Activity and Tax Information
Cost of purchases and proceeds from sales of securities, excluding
short-term investments for the year ended May 28, 1999 aggregated $474,763,606
and $493,036,829, respectively. The federal income tax cost basis of the Fund's
investments at May 28, 1999 was substantially the same as the cost basis for
financial reporting. Gross unrealized appreciation and depreciation amounted to
$17,440,013 and $31,565,106, respectively, resulting in a net unrealized
depreciation on investments of $14,125,093.
In the current year ended May 28, 1999, permanent book/tax differences of
$(155,477) was reclassified from accumulated net realized loss 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 ING Baring (U.S.) Capital LLC. The interest rate on
the loan is 6.83% and the maturity date is August 16, 1999. The collateral for
the loan was valued at $315,159,467 on May 28, 1999 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 300%.
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 28, 1999 was $47,844,765.
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 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)
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 28, 1999, the Fund has a concentration risk
in sovereign debt of emerging market countries.
8. Financial Instruments with Off-Balance Sheet Risk
The Fund enters into forward foreign currency contracts ("forward
contracts") to facilitate settlement of foreign currency denominated portfolio
transactions or to manage foreign currency exposure associated with foreign
currency denominated securities. Forward contracts involve elements of market
risk in excess of the amount reflected in the Statement of Assets and
Liabilities. The Fund bears the risk of an unfavorable change in the foreign
exchange rate underlying the forward contract. Risks may also arise upon
entering into these contracts from the potential inability of the counterparties
to meet the terms of their contracts. As of May 28, 1999, the Fund has an
outstanding contract to sell 589,000,000 Japanese Yen for US $5,047,778 for a
scheduled settlement of June 29, 1999.
The Fund enters into option transactions as part of its investment strategy
or to hedge against possible changes in the market value of certain securities
held. The risk in writing a 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 28, 1999, the Fund did not have any outstanding option
transactions.
9. Dividend Subsequent to May 28, 1999
On June 1, 1999, the Board of Directors of the Fund declared a common stock
dividend of $0.4125 per share from net investment income. The dividend was
payable on June 25, 1999 to shareholders of record June 15, 1999.
10. Capital Loss Carryforward
At May 28, 1999, the Fund had, for Federal income tax purposes, a capital
loss carryforward of approximately $64,935,000, available to offset future
capital gains through May 31, 2007. To the extent that these carryforward losses
are used to offset capital gains, it is probable that any gains so offset will
not be distributed.
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
Selected data for a share of common stock outstanding throughout the period:
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------------
May 28, May 29, May 31, May 31, May 31,
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year........ $15.03 $17.19 $13.54 $10.77 $12.97
------ ------ ------ ------ ------
Net investment income..................... 1.78 1.68 1.74 1.92 1.69
Net realized gain (loss) and change in
unrealized appreciation (depreciation)
on securities and foreign currency
translations........................... (4.45) (0.86) 3.56 2.50 (2.24)
------ ------ ------ ------ ------
Total from investment operations.......... (2.67) 0.82 5.30 4.42 (0.55)
------ ------ ------ ------ ------
Dividends to shareholders from net
investment income...................... (1.80) (1.59) (1.50) (1.29) (1.36)
Dividends to shareholders from net
realized capital gains................. (0.88) (1.39) (0.15) (0.36) (0.29)
------ ------ ------ ------ ------
Total dividends and
distributions to shareholders.......... (2.68) (2.98) (1.65) (1.65) (1.65)
------ ------ ------ ------ ------
Increase in net asset value due to shares
issued on reinvestment of dividends.... 0.03 -- -- -- --
------ ------ ------ ------ ------
Net increase (decrease) in net asset value (5.32) (2.16) 3.65 2.77 (2.20)
------ ------ ------ ------ ------
Net asset value, end of year.............. $ 9.71 $15.03 $17.19 $13.54 $10.77
====== ====== ====== ====== ======
Per share market value, end of year....... $11.875 $15.4375 $15.75 $13.88 $11.88
======= ======== ====== ====== ======
Total investment return based on market
price per share (a).................... -0.43% 17.51% 26.84% 32.72% -2.18%
Ratios to Average Net Assets:
Total expenses, including interest
expense............................ 4.00% 3.14% 3.34% 4.21% 4.41%
Total expenses, excluding interest
expense (operating expenses)....... 1.35% 1.35% 1.37% 1.43% 1.45%
Net investment income.................. 17.52% 10.16% 11.29% 16.20% 15.42%
Supplemental Data:
Net assets, end of period (000)........ $225,007 $335,080 $377,252 $295,949 $235,372
Portfolio turnover rate................ 148% 136% 172% 94% 58%
Bank loan outstanding, end of year (000) $100,000 $100,000 $100,000 $100,000 $100,000
Interest rate on bank loan, end of year 6.83% 6.28125% 6.50% 6.60156% 7.5625%
Weighted average bank loan (000)....... $100,000 $100,000 $100,000 $100,000 $100,000
Weighted average interest rate......... 6.11% 6.46% 6.67% 7.21% 7.12%
<FN>
- -----------
(a) Dividends are assumed, for purposes of this calculation, to be reinvested at
prices obtained under the Fund's dividend reinvestment plan.
</FN>
</TABLE>
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
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 28, 1999, the results of its operations
and cash flows for the year then ended, 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 five years in the period then ended, 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 28, 1999 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 21, 1999
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
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, 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)
August 31, 1998............................. 9,371 .42 (170,243) (7.62)
November 30, 1998........................... 11,344 .50 65,572 2.94
February 26, 1999........................... 9,629 .42 (19,300) (.85)
May 28, 1999................................ 10,102 .44 25,315 1.08
<FN>
- ------------
*Totals expressed in thousands of dollars except per share amounts.
</FN>
</TABLE>
Page 19
<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
Other Information (unaudited)
Year 2000. The investment management services provided to the Fund by the
Investment Adviser depend in large part on the smooth functioning of its
computer systems. Many computer software systems in use today cannot recognize
the year 2000, but revert to 1900 or some other date, due to the manner in which
the dates were encoded or calculated. The capability of these systems to
recognize the year 2000 could have a negative impact on the Investment Adviser's
provision of investment management services, including handling of securities
trades, pricing and account services. The Investment Adviser has advised the
Fund that it has been reviewing all of their computer systems and actively
working on necessary changes to its systems to prepare for the year 2000 and
expects that given the extensive testing which it is undertaking its systems
will be year 2000 compliant before such date. In addition, the Investment
Adviser has been advised by certain of the Fund's service providers that they
are also in the process of modifying their systems with the same goal. There
can, however, be no assurance that the Investment Adviser or any other service
provider will be successful in achieving year 2000 compliance, or that
interaction with other non-complying computer systems will not impair services
to the Fund at that time.
Tax Information (unaudited)
For Federal tax purposes the Fund hereby designates for the fiscal year
ended May 28, 1999:
* Total long-term capital gain distributions paid of $10,563,967.
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
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 (unaudited)
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 21
<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 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
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 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
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 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
Directors
CHARLES F. BARBER
Consultant; formerly Chairman,
ASARCOIncorporated
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, Salomon
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
LEWIS E. DAIDONE
Executive Vice President & Treasurer
THOMAS K. FLANAGAN
Executive Vice President
NEWTON B. SCHOTT, JR.
Executive Vice President
PETER J. WILBY
Executive Vice President
CHRISTINA T. SYDOR
Secretary
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
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>
The Emerging Markets
Income Fund II Inc
Annual Report
May 28, 1999
- --------------------------------------------------------
The Emerging Markets Income Fund II Inc
-------------------------------------------------------
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
---------------------
EDFANN 5/99
