The Emerging Markets
Income Fund II Inc
December 21, 1999
Dear Shareholders:
We are pleased to provide this semi-annual report for The Emerging Markets
Income Fund II Inc. (the "Fund") as of November 30, 1999. Included are market
commentary, a statement of the Fund's investments and financial statements for
the six months ended November 30, 1999.
The net asset value of the Fund increased from $9.71 per share on May 28, 1999
to $10.74 per share on November 30, 1999. Dividends of $0.825 per share from net
investment income were declared during this period. Assuming reinvestment of
these dividends in additional shares of the Fund, the total return based on net
asset value for the six months ended November 30, 1999 was 20.43%. In
comparison, the JP Morgan Emerging Bond Markets Index Plus ("EMBI+") posted a
return of 12.92% for the same period.
EMERGING MARKETS DEBT OVERVIEW
The market performed well in an environment that included an aggressive interest
rate policy by the U.S. Federal Reserve Board (the "Fed") and the first default
on a Brady bond by Ecuador. Market returns were dominated by Russia, Bulgaria,
Morocco and Brazil over the six-month period.
The Fed raised interest rates by 50 basis points during the past six months in
response to the ongoing strength of the U.S. economy. The process of
anticipating these two 25-basis-point rate increases has influenced bond market
investors worldwide and has impacted emerging markets debt. The Fed has
emphasized its commitment to price stability and its governors have made a
number of public speeches outlining their concerns. This high profile approach
on the part of the Fed has increased the bond market's focus on the U.S. economy
and the outlook for increases in rates.
When viewed in the context of this relatively difficult fixed income
environment, the performance of emerging markets debt has been particularly
strong. Investors have been attracted by the high yields available in the market
and reassured by the improving economic performance of a number of countries.
Some of the most significant events of the past six months are highlighted
below.
Russia was the best performing country in the Index over the past six months,
returning 49.19%. The country continues to work with the International Monetary
Fund ("IMF") on an expanded financing package. Spokesmen for the IMF indicated
pleasant surprise at the status of Russia's macroeconomic reforms. On the
political front, Duma elections in December reduced the influence of the
Communist party and expanded the size of the moderate bloc. President Yeltsin
resigned at year-end and appointed Prime Minister Putin acting president.
Presidential elections will be held March 26, 2000 with President Putin the
early favorite. We have remained overweight in Russia during the past six
months.
PAGE 1
<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
Bulgaria returned 25.57% during the past six months. The local economy continues
to recover from the impact of the Kosovo crisis as regional trade has rebounded.
In addition, the country enjoys the support of multi-lateral agencies and
Western governments because of its disciplined approach to dealing with its
economic problems. We continue to hold an overweight position in Bulgaria.
Brazil's recovery from the effects of its January currency devaluation continues
to be impressive. Brazil has exceeded the fiscal targets outlined in its IMF
agreement for the first six months of 1999. In addition, unemployment and
inflation levels have exceeded projections and underscore the progress Brazil is
making in reforming its economy. Brazil continues to have an ambitious
structural reform agenda, which includes changes to the taxation and social
security schemes. Despite recent political noise, the working relationship
between the administration and Congress remains intact and we expect further
positive developments on these important initiatives in 2000. Brazil returned
17.11% in the six months ended November 30, 1999. We are overweight Brazil on a
spread duration basis. (Spread duration defines the sensitivity of a bond's
price to a 1% move in its credit spread.)
King Hassan II of Morocco died after 38 years on the throne and has been
replaced by his eldest son, King Mohammed VI. We expect the policies that have
made Morocco a steadily improving credit will be continued by the new king. In
another important development in Morocco, a cellular telephone license has been
awarded to Telefonica for a price of $1.1 billion and a commitment to spend an
additional $700 million developing the network. The proceeds from this sale will
be used to fund a variety of government initiatives in Morocco. Morocco has been
a long-term, overweight position in the portfolio. It returned 18.78% over the
past six months.
In a development with potentially negative implications for all emerging
markets, Ecuador defaulted on a $96 million coupon payment on its Brady bonds
due on August 31, 1999. In addition, Ecuador also announced plans to restructure
its $6 billion of outstanding Brady debt. Any restructuring is expected to take
considerable time and involve a number of important parties including the
Ecuadorian government and Congress, the IMF and international investors. It is
too early to make a definite determination of value in Ecuador until a firm
restructuring proposal is presented. Investors have been willing to segregate
Ecuador's problems from the rest of the market.
OUTLOOK
Our outlook for emerging markets debt is positive based upon the current spread
level of 875 basis points over U.S. Treasuries. The economic rebound in Asia and
the apparent bottoming of the recession in many Latin American countries point
to an improving macroeconomic environment for emerging countries. We expect the
market to remain volatile but believe that we are being well compensated for
this price risk at current spread levels.
PAGE 2
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T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
ANNUAL SHAREHOLDERS MEETING
The Fund held its annual shareholders meeting on September 9, 1999. At the
meeting, shareholders elected each of the nominees proposed for election to the
Fund's Board of Directors and ratified the selection of PricewaterhouseCoopers
LLP as the independent acountants of the Fund. The following table provides
information concerning the matters voted on at the meeting.
1. ELECTION OF DIRECTORS
NOMINEES VOTES FOR VOTES AGAINST
-------- --------- -------------
Heath B. McLendon 20,213,398 192,121
Jeswald W. Salacuse 20,213,995 191,524
2. RATIFICATION OF PRICEWATERHOUSECOOPERS LLP AS THE INDEPENDENT ACCOUNTANTS
OF THE FUND
VOTES FOR VOTES AGAINST VOTES ABSTAINED
---------- ------------ ---------------
20,263,091 41,024 101,402
* * *
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 /s/ Heath B. McLendon
William D. Cvengros Heath B. McLendon
Co-Chairman of the Board Co-Chairman of the Board
/s/ Peter J. Wilby /s/ James E. Craige
Peter J. Wilby James E. Craige
Executive Vice President Executive Vice President
PAGE 3
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T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Statement of Investments (unaudited)
November 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (a) BONDS -- 80.8% VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ARGENTINA -- 11.7%
Republic of Argentina:
Peso 1,750,000+ 8.750% due 7/10/02............................................... $ 1,532,355
1,000,000+ 14.250% due 11/30/02*............................................ 980,000
Peso 7,000,000+ 11.750% due 2/12/07.............................................. 6,187,178
Peso 500,000+ 11.750% due 2/12/07#............................................. 441,941
19,740,000+ 11.750% due 4/7/09............................................... 19,147,800
690,000+ 11.375% due 1/30/17.............................................. 648,255
Peso 4,097,164+ BOCON, Pro 1, 2.7864% due 4/1/07*................................ 2,744,285
1,000,000+ Discount Bond, Series L-GL, 6.875% due 3/31/23*.................. 759,375
6,000,000+ Structured Note, 9.164% due 4/10/05*(b).......................... 5,340,000
650,000+ Zero Coupon Bond, Series E due 10/15/03.......................... 429,813
------------
38,211,002
------------
BRAZIL -- 16.3%
4,000,000+ Companhia Energetica De Sao Paulo, 9.125%, 6/26/07*................ 3,730,000
Federal Republic of Brazil:
7,086,000+ 14.500% due 10/15/09............................................. 7,390,698
26,416,151+ Capitalization (C) Bond, 8.000% due 4/15/14(c)................... 18,161,104
17,500,000+ DCB, Series L, 7.000% due 4/15/12*............................... 11,878,125
13,000,000+ FLRB, Series L, 5.000% due 4/15/09*.............................. 8,840,000
4,120,988+ MYDFA Trust Certificates, 6.8125% due 9/15/07*................... 3,168,009
------------
53,167,936
------------
BULGARIA -- 3.0%
14,000,000+ Republic of Bulgaria, FLIRB, Series A, 2.500% due 7/28/12*......... 9,835,029
------------
COLOMBIA -- 5.0%
Republic of Colombia:
750,000+ 7.250% due 2/15/03............................................... 678,750
3,275,000+ 7.270% due 6/15/03............................................... 2,906,562
6,000,000+ 10.875% due 3/9/04............................................... 6,000,000
4,325,000+ 11.442% due 8/13/05*............................................. 4,152,000
3,000,000+ 7.625% due 2/15/07............................................... 2,424,375
------------
16,161,687
------------
COSTA RICA -- 4.3%
Costa Rica:
2,200,000+ Principal Bond, Series A, 6.250% due 5/21/10..................... 1,991,000
14,500,000+ Principal Bond, Series B, 6.250% due 5/21/15..................... 12,035,000
------------
14,026,000
------------
</TABLE>
See accompanying notes to financial statements.
PAGE 4
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T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Statement of Investments (unaudited) (continued)
November 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (a) BONDS -- 80.8% (continued) VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
CROATIA -- 2.9%
Republic of Croatia, FRN:
432,722+ 6.45625% due 7/31/06*............................................ $ 386,204
10,500,000+ 6.45625% due 7/31/10*............................................ 8,977,500
------------
9,363,704
------------
ECUADOR -- 1.3%
10,725,000+ Republic of Ecuador, Discount Bond, 6.000% due 2/28/25*(d)......... 4,149,234
------------
INDONESIA -- 1.8%
5,539,427+ Pt Polytama Propindo, 11.250% due 6/15/07.......................... 1,384,857
Tjiwi Kimia International Finance Company B.V.:
1,000,000+ 13.250% due 8/1/01............................................... 890,000
5,000,000+ 10.000% due 8/1/04............................................... 3,700,000
------------
5,974,857
------------
IVORY COAST -- 1.1%
16,225,000+ Republic of Ivory Coast, 2.000% due 3/31/18*....................... 3,610,062
------------
MEXICO -- 5.1%
3,000,000+ Grupo Industrial Durango, 12.000% due 7/15/01...................... 3,011,250
2,000,000+ Hylsa S.A. de C.V., 9.250% due 9/15/07............................. 1,705,000
2,800,000+ Petroleos Mexicanos, 9.250% due 3/30/18............................ 2,576,000
United Mexican States:
120,000+ 10.375% due 2/17/09.............................................. 124,590
220,000+ 11.375% due 9/15/16.............................................. 242,550
4,700,000+ Par Bond, Series A, 6.250% due 12/31/19.......................... 3,641,031
7,000,000+ Par Bond, Series B, 6.250% due 12/31/19.......................... 5,422,813
------------
16,723,234
------------
PANAMA -- 1.9%
8,125,000+ Republic of Panama, IRB, 4.250% due 7/17/14*....................... 6,063,281
------------
PERU -- 3.6%
17,700,000+ Republic of Peru, PDI Bond, 4.500% due 3/7/17*..................... 11,670,937
------------
See accompanying notes to financial statements.
PAGE 5
</TABLE>
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T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Statement of Investments (unaudited) (continued)
November 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (a) BONDS -- 80.8% (continued) VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
PHILIPPINES -- 3.6%
11,350,000+ Republic of the Philippines, 9.875% due 1/15/19.................... $ 11,577,000
------------
POLAND -- 1.7%
Republic of Poland:
1,750,000+ Par Bond, 3.000% due 10/27/14*................................... 1,093,750
2,760,000+ PDI Bond, 6.000% due 10/27/14*................................... 2,446,050
3,000,000+ RSTA Bond, 4.000% due 10/27/24*.................................. 1,996,875
------------
5,536,675
------------
RUSSIA -- 5.5%
Russia Government:
3,850,000+ 11.750% due 6/10/03.............................................. 2,632,438
2,325,000+ 11.750% due 6/10/03#............................................. 1,589,719
19,275,000+ 12.750% due 6/24/28.............................................. 11,902,312
12,040,000+ IAN due 12/15/15##(d)............................................ 1,873,725
------------
17,998,194
------------
URUGUAY -- 1.1%
Uruguay:
1,381,577+ DCB, Series B, 6.500% due 2/18/07*............................... 1,284,867
2,294,117+ NMB, 6.625% due 2/19/06*......................................... 2,236,764
------------
3,521,631
------------
VENEZUELA -- 10.9%
Republic of Venezuela:
3,500,000+ 13.625% due 8/15/18.............................................. 3,150,000
2,000,000+ 9.250% due 9/15/27............................................... 1,270,000
4,452,360+ DCB, Series DL, 6.3125% due 12/18/07*............................ 3,492,320
35,178,571+ FLIRB, Series A, 6.875% due 3/31/07*............................. 27,087,500
535,714+ FLIRB, Series B, 6.875% due 3/31/07*............................. 412,500
------------
35,412,320
------------
TOTAL BONDS (Cost -- $251,311,197)................................. 263,002,783
------------
</TABLE>
See accompanying notes to financial statements.
PAGE 6
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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 (unaudited) (continued)
November 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (a) LOAN PARTICIPATIONS++ -- 17.7% VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
The People's Democratic Republic of Algeria:
954,542+ Tranche A, 6.8125% due 3/4/00* (Chase Manhattan Bank)............ $ 942,611
5,727,267+ Tranche 1, 6.8125% due 9/4/06* (Chase Manhattan Bank)............ 4,381,359
16,000,000+ Tranche 3, 7.500% due 3/4/10* (Chase Manhattan Bank)............. 11,440,000
Government of Jamaica:
111,082+ Tranche A, 7.000% due 10/15/00* (Chase Manhattan Bank)........... 104,417
4,125,000+ Tranche B, 6.875% due 11/15/04* (Chase Manhattan Bank,
Morgan Guaranty Trust Company)................................. 3,506,250
Russia Government:
3,000,000+ Foreign Trade Obligation## (Bank of America)..................... 281,250
74,700,000+ Principal Loan, due 12/15/20##(d)
(Morgan Guaranty Trust Company of New York).................... 10,271,250
Kingdom of Morocco:
Yen 640,581,097+ Tranche A, 3.0175% due 1/1/09* (Goldman Sachs)................... 4,796,417
23,294,111+ Tranche B, 6.84375% due 1/1/04* (Chase Manhattan Bank,
(Morgan Stanley Emerging Markets, Inc.)........................ 21,896,465
------------
TOTAL LOAN PARTICIPATIONS (Cost -- $57,874,916).................... 57,620,019
------------
CONTRACTS Purchased Options## -- 0.0%
- -----------------------------------------------------------------------------------------------------
108,000,000 Hong Kong Dollar., Put @ HKD 7.8025, Expire 1/20/00................ 86,400
54,000,000 Hong Kong Dollar., Put @ HKD 7.8165, Expire 1/26/00................ 0
------------
TOTAL OPTIONS (Cost-- $ 1,315,802)................................. 86,400
------------
WARRANTS Warrants## -- 1.3%
- -----------------------------------------------------------------------------------------------------
52,289+ United Mexican States Warrants, Expire 2/18/00 (Cost -- $2,399,573) 4,339,987
------------
SUB-TOTAL INVESTMENTS (Cost -- $312,901,488)....................... 325,049,189
------------
Repurchase Agreement -- 0.2%
- -----------------------------------------------------------------------------------------------------
645,000 State Street Bank, 5.630%, dated 11/30/99, 645,101 due 12/1/99
(collateralized by $655,000 U.S. Treasury Notes
due 8/31/00, value at $659,913) (Cost -- $645,000)............... 645,000
------------
TOTAL INVESTMENTS-- 100.0% (Cost -- $313,546,488**)................ $325,694,189
============
See accompanying notes to financial statements.
PAGE 7
</TABLE>
<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Statement of Investments (unaudited) (concluded)
November 30, 1999
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT NOVEMBER 30, 1999:
<TABLE>
<CAPTION>
CONTRACTS IN EXCHANGE CONTRACTS AT DELIVERY UNREALIZED
TO DELIVER FOR VALUE DATE DEPRECIATION
-------------- ------------ -------------- -------- ------------
<S> <C> <C> <C> <C> <C>
Sale...... Yen 589,000,000 US $5,676,014 US $5,787,471 12/6/99 $111,457
<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 in effect at November 30, 1999 on instrument with variable rates or step
coupon rates.
** Aggregate cost for federal income tax purposes is substantially the same.
+ 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
institutional investors.
## Non-income producing security.
</FN>
</TABLE>
Abbreviations used in this statement:
BOCON - Bonos De Consolidacion.
DCB - Debt Conversion Bond.
FLIRB - Front Loaded Interest Reduction Bond.
FLRB - Floating Rate Bond.
FRN - Floating Rate Note.
HKD - Hong Kong Dollar.
IAN - Interest Arrears Note.
IRB - Interest Reduction Bond.
MYDFA - Multi Year Depository Facility Agreement.
NMB - New Money Bond.
PDI - Past Due Interest.
Peso - Argentina Peso.
RSTA - Revolving Short Term Agreement.
Yen - Japanese Yen.
See accompanying notes to financial statements.
PAGE 8
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T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Statement of Assets and Liabilities
November 30, 1999 (unaudited)
<TABLE>
<S> <C>
ASSETS
Investments, at value (Cost -- $312,901,488)....................................... $325,049,189
Repurchase agreement............................................................... 645,000
Receivable for securities sold..................................................... 22,628,696
Interest receivable................................................................ 7,013,725
Prepaid expenses................................................................... 5,555
------------
Total Assets....................................................................... 355,342,165
------------
LIABILITIES
Due to custodian................................................................... 70,582
Loan payable (Note 4).............................................................. 100,000,000
Payable for securities purchased................................................... 2,607,325
Net unrealized depreciation on forward foreign currency contracts.................. 111,457
Accrued interest expense on loan................................................... 333,889
Accrued management fee (Note 2).................................................... 244,056
Other accrued expenses............................................................. 220,280
------------
Total Liabilities.................................................................. 103,587,589
------------
Net Assets......................................................................... $251,754,576
============
NET ASSETS
Common Stock ($0.001 par value, authorized
100,000,000; 23,433,683 shares outstanding)...................................... $ 23,434
Additional paid-in capital......................................................... 323,774,420
Undistributed net investment income................................................ 5,709,306
Accumulated net realized loss on investments....................................... (89,789,890)
Net unrealized depreciation on investments and foreign currencies.................. 12,037,306
------------
Net Assets......................................................................... $251,754,576
============
NET ASSET VALUE PER SHARE ($ 251,754,576 / 23,433,683 shares)........................ $10.74
======
See accompanying notes to financial statements.
PAGE 9
</TABLE>
<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Statement of Operations
For the Six Months Ended November 30, 1999 (unaudited)
<TABLE>
<S> <C> <C>
INCOME
Interest (includes discount accretion of $6,487,254)............................... $ 22,966,202
EXPENSES
Interest on loan..................................................... $3,559,167
Management fee....................................................... 1,405,664
Custodian............................................................ 67,890
Printing............................................................. 31,620
Audit and tax services............................................... 28,458
Legal................................................................ 26,040
Transfer agent expenses.............................................. 18,786
Listing fees......................................................... 17,490
Directors' fees and expenses......................................... 16,926
Other............................................................... 22,069 5,194,110
---------- -----------
Net Investment Income................................................................ 17,772,092
-----------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net Realized Loss on:
Investments...................................................................... (219,163)
Foreign currency transactions.................................................... (492,848)
-----------
(712,011)
-----------
Net Change in Unrealized Appreciation (Depreciation) on:
Investments...................................................................... 26,272,794
Foreign currency contracts and other assets and liabilities
denominated in foreign currencies.............................................. (270,180)
-----------
26,002,614
-----------
Net Gain on Investments and Foreign Currency Transactions............................ 25,290,603
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS........................................... $43,062,695
===========
</TABLE>
See accompanying notes to financial statements.
PAGE 10
<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Statement of Changes in Net Assets
For the Six Months Ended November 30, 1999 (unaudited)
and the Year Ended May 28, 1999
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 28,
1999 1999
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income............................................. $ 17,772,092 $ 40,446,017
Net realized loss on investments and foreign currency transactions (712,011) (87,156,708)
Net change in unrealized appreciation (depreciation).............. 26,002,614 (11,499,098)
------------ ------------
Net Increase (Decrease) in Net Assets From Operations............. 43,062,695 (58,209,789)
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income........................................ (19,164,205) (40,669,385)
From net realized capital gains................................... -- (19,722,397)
------------ ------------
Net Decrease in Net Assets From
Dividends and Distributions to Shareholders..................... (19,164,205) (60,391,782)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares issued in reinvestment of dividends
(268,061 and 865,753 shares issued)............................. 2,849,104 8,528,861
------------ ------------
Total Increase (Decrease) in Net Assets............................. 26,747,594 (110,072,710)
------------ ------------
NET ASSETS
Beginning of year................................................. 225,006,982 335,079,692
------------ ------------
End of year (includes undistributed net investment income of
$5,709,306 and $7,101,419, respectively)........................ $251,754,576 $225,006,982
============ ============
</TABLE>
Statement of Cash Flows
For the Six Months Ended November 30, 1999 (unaudited)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Purchases of securities............................................................ $(101,423,471)
Net sales of short-term investments................................................ 809,000
Proceeds from sales of securities and principal paydowns........................... 106,355,397
-------------
5,740,926
Net investment income.............................................................. 17,772,092
Adjustments to reconcile net investment income to net cash
provided by operating activities:
Accretion of discount on investments............................................. (6,487,254)
Interest on payment-in-kind bonds................................................ (660,393)
Net change in receivables/payables related to operations......................... (121,721)
-------------
Net Cash Provided by Operating Activities........................................ 16,243,650
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shares issued in reinvestment of dividends........................... 2,849,104
Dividends and distributions paid................................................... (19,164,205)
-------------
Net Cash Used by Financing Activities.............................................. (16,315,101)
-------------
Net Decrease in Cash................................................................. (71,451)
Cash at Beginning of Year............................................................ 869
-------------
Due to Custodian at End of Period.................................................... $ (70,582)
=============
See accompanying notes to financial statements.
PAGE 11
</TABLE>
<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Notes to Financial Statements (unaudited)
1. ORGANIZATION 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 (unaudited) (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 (unaudited) (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 six
months ended November 30, 1999, the Fund paid interest expense of
$3,509,861.
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 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 November 30, 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 (unaudited) (continued)
3. PORTFOLIO ACTIVITY AND TAX INFORMATION
Cost of purchases and proceeds from sales of securities, excluding
short-term investments for the six months ended November 30, 1999 aggregated
$101,864,244 and $126,868,227, respectively. The federal income tax cost basis
of the Fund's investments at November 30, 1999 was substantially the same as the
cost basis for financial reporting. Gross unrealized appreciation and
depreciation amounted to $29,204,979 and $17,057,278, respectively, resulting in
a net unrealized appreciation on investments of $12,147,701.
In the 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 7.75125% and the maturity date is May 15, 2000. The collateral for
the loan was valued at $324,980,156 on November 30, 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 November 30, 1999 was $57,620,019.
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 (unaudited) (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 November 30, 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 November 30, 1999, the Fund has an
outstanding contract to sell 589,000,000 Japanese Yen for US $5,676,014 for a
scheduled settlement of December 6, 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 November 30, 1999, the Fund held purchased put options with a
total market value of $86,400.
9. DIVIDEND SUBSEQUENT TO NOVEMBER 30, 1999
On December 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 December 23, 1999 to shareholders of record December 14, 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>
PERIOD ENDED YEAR ENDED
NOVEMBER 30 ----------------------------------------
1999 MAY 28, MAY 29, MAY 31, MAY 31,
(UNAUDITED) 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period...... $ 9.71 $15.03 $17.19 $13.54 $10.77
------ ------ ------ ------ ------
Net investment income..................... 0.76 1.78 1.68 1.74 1.92
Net realized gain (loss) and change in
unrealized appreciation (depreciation)
on securities and foreign currency
translations........................... 1.09 (4.45) (0.86) 3.56 2.50
------ ------ ------ ------ ------
Total from investment operations.......... 1.85 (2.67) 0.82 5.30 4.42
------ ------ ------ ------ ------
Dividends to shareholders from net
investment income...................... (0.83) (1.80) (1.59) (1.50) (1.29)
Dividends to shareholders from net
realized capital gains................. -- (0.88) (1.39) (0.15) (0.36)
------ ------ ------ ------ ------
Total dividends and
distributions to shareholders.......... (0.83) (2.68) (2.98) (1.65) (1.65)
------ ------ ------ ------ ------
Increase in net asset value due to shares
issued on reinvestment of dividends.... 0.01 0.03 -- -- --
------ ------ ------ ------ ------
Net increase (decrease) in net asset value 1.03 (5.32) (2.16) 3.65 2.77
------ ------ ------ ------ ------
Net asset value, end of period............ $10.74 $ 9.71 $15.03 $17.19 $13.54
====== ====== ====== ====== ======
Per share market value, end of period..... $11.125 $11.875 $15.4375 $15.75 $13.88
======= ======= ======== ====== ======
Total investment return based on market
price per share (a).................... 1.10% -0.43% 17.51% 26.84% 32.72%
Ratios to Average Net Assets:
Total expenses, including interest
expense.............................. 4.40%(b) 4.00% 3.14% 3.34% 4.21%
Total expenses, excluding interest
expense (operating expenses)......... 1.39%(b) 1.35% 1.35% 1.37% 1.43%
Net investment income.................. 15.07%(b) 17.52% 10.16% 11.29% 16.20%
Supplemental Data:
Net assets, end of period (000)........ $251,755 $225,007 $335,080 $377,252 $295,949
Portfolio turnover rate................ 32% 148% 136% 172% 94%
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 7.75125% 6.83% 6.28125% 6.50% 6.60156%
Weighted average bank loan (000)....... $100,000 $100,000 $100,000 $100,000 $100,000
Weighted average interest rate......... 7.12%(b) 6.11% 6.46% 6.67% 7.21%
<FN>
- -------------
(a) Dividends are assumed, for purposes of this calculation, to be reinvested at prices obtained under
the Fund's dividend reinvestment plan.
(b) Annualized.
</FN>
PAGE 17
</TABLE>
<PAGE>
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Selected Quarterly Financial Information
Summary of quarterly results of operations (unaudited)*
<TABLE>
<CAPTION>
NET REALIZED GAIN
(LOSS) & CHANGE IN
NET INVESTMENT NET UNREALIZED
INCOME APPRECIATION (DEPRECIATION)
PER PER
QUARTERS ENDED TOTAL SHARE TOTAL SHARE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
August 31, 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
August 31, 1999............................. 9,044 .39 (732) (.03)
November 30, 1999........................... 8,728 .37 26,023 1.12
<FN>
- -------------
*Totals expressed in thousands of dollars except per share amounts.
</FN>
</TABLE>
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
Other Information (unaudited)
YEAR 2000 ISSUE As the year 2000 began, there were few problems caused by the
inability of certain computer systems to tell the difference between the year
2000 and the year 1900 (commonly known as the "Year 2000" issue). It is still
possible that some computer systems could malfunction in the future because of
the Year 2000 issue or as a result of actions taken to address the Year 2000
issue. The Investment Adviser does not anticipate that its services or those of
the Fund's other service providers will be adversely affected, but the
Investment Adviser will continue to monitor the situation. If malfunctions
related to the Year 2000 issue do arise, the Fund and its investments could be
negatively affected.
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
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, 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
JAMES E. CRAIGE
Executive Vice President
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
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>
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<PAGE>
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<PAGE>
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<PAGE>
The Emerging Markets
Income Fund II Inc
Semi-Annual Report
November 30, 1999
- ------------------------------------------------------------
The Emerging Markets Income Fund II Inc
------------------------------------------------
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
PRSRT-STD
U.S. POSTAGE
PAID
PERMIT No. 169
STATEN ISLAND, NY
EDFSEMI 11/99
