The Emerging Markets
Income Fund II Inc
December 27, 2000
Dear Shareholder:
We are pleased to provide this semi-annual report for The Emerging Markets
Income Fund II Inc. (the "Fund") as of November 30, 2000. Included are market
commentary on the results in the emerging market debt sector, a statement of the
Fund's investments and unaudited financial statements for the six-month period
ended November 30, 2000.
The net asset value ("NAV")1 of the Fund increased from $10.84 per share on May
31, 2000 to $10.96 per share on November 30, 2000. Dividends of $0.825 per share
from net investment income were declared during the period. Assuming
reinvestment of these dividends in additional shares of the Fund, the total
return based on NAV for the six months ended November 30, 2000 was 8.52%. In
comparison, the J.P. Morgan Emerging Bond Markets Index Plus ("EMBI+")2 posted a
return of 7.50% for the same period.
As of November 30, 2000, the Fund, as a percentage of total investments, was
100% invested in securities of emerging markets issuers, including obligations
of sovereign governments and companies.
EMERGING MARKETS DEBT
Emerging markets debt returned 7.50% for the six months ended November 30, 2000,
as measured by the EMBI+. Performance was mixed throughout the reporting period
as a handful of individual country returns drove performance. Volatility in the
equity markets, heightened tension in the Middle East and a U.S. presidential
election like no other in history impacted performance for the period.
Individual country performance was balanced with eight countries outperforming
and eight countries underperforming the EMBI+ return. Notable outperformers were
Russia, Venezuela, Mexico and Nigeria, which posted double-digit returns.
Throughout the reporting period, the Federal Reserve Board ("Fed") continued its
policy of slowing the pace of growth within the U.S. economy. The inflationary
bias, now in effect for the past seven Federal Open Market Committee ("FOMC")3
meetings was maintained at the November 15th meeting. The FOMC hiked rates 50
basis points to 6.50% at its May 16th meeting. This was the only
------------------
1 The NAV is calculated by substracting total liabilities from the closing value
of all securities held by the Fund (plus all other assets) and dividing the
results (total net assets) by the total number of shares outstanding. The NAV
fluctuates with changes in the value of the securities in which the Fund has
invested. However, the price at which the investor may buy or sell shares of
the Fund is at their market (NYSE) price.
2 The EMBI+ is a total return index that tracks the traded market for U.S.
dollar-denominated Brady and other similar sovereign restructured bonds traded
in the emerging market. Please note that an investor cannot invest directly in
an index.
3 The FOMC is a policy-making body of the Federal Reserve System, the U.S.
central bank, that is responsible for the formulation of policy designed to
promote economic growth, full employment, stable prices and a sustainable
pattern of international trade and payments.
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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
federal funds rate ("fed funds rate")4 change during the six-month period ended
November 30, 2000.
Oil price strength over the past six months continued to drive many emerging
market economies. Oil prices ended the period at $32.88 per barrel up over 27%
in six months. In our view, Russia, Venezuela, Mexico and Colombia, the primary
emerging market oil producers, continue to benefit from rising oil prices.
Return volatility5 for emerging markets debt remained substantially low relative
to year-earlier levels. We believe the decline in volatility is a function of
reduced leverage in the market coupled with expanded investor interest in the
asset class. During the twelve-month period ended November 30, 2000, return
volatility for the EMBI+ totaled 8.53%, down substantially from the 1999 levels
of 15.99%.
Ecuador's securities were the best performing securities in the EMBI+ returning
58.67% for the period. Ecuador completed its debt restructuring of defaulted
Brady bonds6, exchanging them for two issues of international bonds, one
maturing in 2012 and one maturing in 2030. The relatively fast resolution of the
Brady bond default surprised the market and drove Ecuador's September returns
well above the EMBI+ in a difficult month for emerging markets. In addition, the
Paris Club granted Ecuador a standard rescheduling of US$880 million of
bilateral debt7. This Paris Club rescheduling represents all arrears plus all
payments falling due through April 2001, when Ecuador's current stand-by
agreement with the International Monetary Fund ("IMF") expires. While Ecuador
continues to face a number of economic and political challenges, we believe the
debt restructuring gives the country time to deal with these challenges.
Securities issued by Venezuela returned 12.40% for the period, third highest in
the EMBI+. Oil price strength continues to drive the Venezuelan economy. We
believe that Venezuela's fiscal and external accounts are benefiting from high
oil prices. Venezuela's large volume of oil production and its relatively low
debt load make it one of the most leveraged oil and gas producers in the
emerging markets. Politics has been the other key influence on returns in
Venezuela this year. President Chavez was re-elected to a six-year term in July.
International cash reserves now exceed total public sector external debt, which
stands at $21 billion. In our view, the country continues to be an attractive
credit at current spread levels, trading at approximately 100 basis points8 over
the EMBI+.
Securities issued by Russia were the fourth best-performing securities in the
EMBI+ over the past six months, returning 12.07%. It is also the best performer
year-to-date. The country continues to work with the IMF on an expanded
financing package. Most notable during the period were:
o The Duma approved the terms of Russia's debt restructuring with the London
Club of creditors. The Russian government signed the agreements and the debt
restructuring closed in August;
----------------
4 The fed funds rate is the interest rate that banks with excess reserves at a
Federal Reserve district bank charge other banks that need overnight loans.
The fed funds rate often points to the direction of U.S. interest rates.
5 Return volatility is the standard deviation of monthly returns over the
period being measured.
6 Brady bonds are public issues. U.S. dollar denominated bonds of developing
countries, mainly Latin America, that were exchanged, in a restructuring, for
commercial bank loans in default.
7 The Paris Club is the official group of sovereign lenders who have extended
credit to sovereign governments.
8 A basis point is 0.01% or one one-hundredth of a percent.
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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
o Tax collections continued to run ahead of budgeted levels, leading to a
stronger than anticipated fiscal balance; and
o Rising oil prices helped expand Russia's hard currency reserve position.
Russian reserves have doubled over the previous year and now exceed $26
billion. This reserve position substantially strengthens Russia's credit
quality.
This broad range of events encouraged investors to reassess the outlook for
Russia. Russian debt prices reflected this improved outlook. We have remained
overweighted in Russia during the past six months.
Mexico's securities returned 11.92% for the period. Mexico has been viewed by
investors as a safe-haven in emerging markets since Moody's Investor Service
upgraded its foreign currency debt rating to investment grade (Baa3). Sound
fiscal policies, increased political stability and a reduced debt burden
continue to be viewed positively by outside investors. That perception was
enhanced when Vincente Fox, the PAN candidate, was elected president on July 2nd
2000. The election marked the first defeat for the PRI party in over 70 years of
presidential politics. We believe that this evolutionary opening of the Mexican
political system further establishes Mexico as a leading issuer in emerging
markets from a credit perspective.
Argentina's securities lagged the returns of the EMBI+ for the period returning
1.49%. Our underweight position in Argentina continues to contribute to our
overall performance. We believe that the Argentine economy must grow at a more
accelerated pace in order to reduce the fiscal pressure of its debt amortization
schedule. The Argentine federal government secured an attractive IMF package to
alleviate its debt burden in 2001. The market reacted positively and sparked a
late rally in Argentine bonds. We continue to remain underweight but are
monitoring its progress carefully.
Finally, Peru's debt performance significantly trailed the EMBI+ return for the
period, returning a negative 0.74%. Political uncertainty has risen in Peru
following the resignation of President Fujimori, precipitated by heightened
allegations of election fraud. New elections are scheduled for April 2001. While
the situation is likely to remain volatile, it is our view that Peru remains
totally committed to servicing its debt.
OUTLOOK
The emerging market closed the month of November with spreads at 805 basis
points over Treasuries. We believe the forces that led to strong emerging
markets performance over the last two years remain intact. We believe that
reduced volatility levels and improving country fundamentals will continue to
drive valuations in the emerging market debt sector. In addition, we believe
that six emerging market countries are on alert for credit upgrade by the rating
agencies.
Page 3
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 7, 2000. 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 accountants of the Fund. The following table provides
information concerning the matters voted on at the meeting.
1. ELECTION OF DIRECTORS
NOMINEES VOTES FOR VOTES WITHHELD
--------- --------- --------------
Charles Barker 20,500,535 222,343
William Cvengros* 20,505,528 217,350
* Mr. Cvengros subsequently resigned from the Board of Directors on November 21,
2000.
2. RATIFICATION OF PRICEWATERHOUSECOOPERS LLP AS THE INDEPENDENT ACCOUNTANTS OF
THE FUND
VOTES FOR VOTES AGAINST VOTES ABSTAINED
--------- ------------ ---------------
20,464,818 94,969 163,091
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/ Stephen J. Treadway /s/ Heath B. McLendon
Stephen J. Treadway 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
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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, 2000
Principal
Amount (a) BONDS+ -- 92.2% Value
--------------------------------------------------------------------------------------------------------------
ARGENTINA -- 9.7%
Republic of Argentina:
Peso 4,700,000 8.750% due 7/10/02 .................................................. $ 4,136,786
1,000,000 14.100% due 11/30/02* ............................................... 962,500
10,250,000 11.725% due 4/10/05*(b) ............................................. 9,532,500
Peso 7,000,000 11.750% due 2/12/07 ................................................. 5,627,319
500,000 11.750% due 2/12/07# ................................................ 401,875
10,010,000 11.750% due 4/7/09 .................................................. 8,658,650
Peso 2,913,101 BOCON, Pro 1, 2.598% due 4/1/07* .................................... 1,925,103
------------
31,244,733
------------
BRAZIL -- 10.5%
Federal Republic of Brazil:
13,868,000 12.250% due 3/6/30 .................................................. 11,562,445
25,826,000 11.000% due 8/17/40 ................................................. 19,117,697
3,669,375 MYDFA Trust Certificates, 7.625% due 9/15/07* ....................... 3,128,142
------------
33,808,284
------------
BULGARIA -- 5.2%
24,450,000 Republic of Bulgaria, FLIRB, Series A, 3.000% due 7/28/12* ............ 16,809,402
------------
COLUMBIA -- 3.5%
Republic of Columbia:
925,000 7.270% due 6/15/03 .................................................. 851,000
12,910,000 11.750% due 2/25/20 ................................................. 10,311,863
------------
11,162,863
------------
COSTA RICA -- 1.0%
Costa Rica:
800,000 9.995% due 8/1/20# ................................................. 810,000
2,500,000 Principal Bond, Series B, 6.250% due 5/21/15 ....................... 2,250,000
------------
3,060,000
------------
CROATIA -- 0.2%
827,273 Republic of Croatia, FRN, 7.750% due 7/31/10* ........................ 765,228
------------
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 (unaudited) (continued)
November 30, 2000
Principal
Amount (a) BONDS+ -- 92.2% (continued) Value
--------------------------------------------------------------------------------------------------------------
ECUADOR -- 5.0%
Republic of Ecuador:
7,000,000 12.000% due 11/15/12# .............................................. $ 4,585,000
24,700,000 4.000% due 8/15/30* ................................................ 9,030,937
6,220,000 4.000% due 8/15/30*,# .............................................. 2,274,188
------------
15,890,125
------------
INDONESIA -- 1.3%
2,000,000 APP China Group Ltd, 14.000% due 3/15/10(c) .......................... 625,220
5,804,260 Pt Polytama Propindo, 11.250% due 6/15/07(d) ......................... 594,937
Tjiwi Kimia International Finance Company B.V.:
1,000,000 13.250% due 8/1/01 ................................................. 775,000
5,000,000 10.000% due 8/1/04 ................................................. 2,075,000
------------
4,070,157
------------
IVORY COAST -- 0.7%
16,225,000 Republic of Ivory Coast, 2.000% due 3/31/18* ......................... 2,271,500
------------
JAMAICA -- 0.2%
500,000 Government of Jamaica, 12.750% due 9/1/07# ........................... 495,000
------------
MEXICO -- 6.6%
3,000,000 Grupo Industrial Durango, 12.000% due 7/15/01 ........................ 3,037,500
2,000,000 Hylsa S.A. de C.V., 9.250% due 9/15/07 ............................... 1,430,000
Petroleos Mexicanos:
2,800,000 9.250% due 3/30/18 ................................................. 2,712,500
4,000,000 9.500% due 9/15/27 ................................................. 3,930,000
3,000,000 Series P, 9.500% due 9/15/27 ....................................... 3,060,000
6,000,000 Project Funding Master Trust, 9.125% due 10/13/10# ................. 5,895,000
United Mexican States:
270,000 9.875% due 2/1/10 .................................................. 281,340
680,000 11.375% due 9/15/16 ................................................ 778,430
------------
21,124,770
------------
PANAMA -- 4.5%
Republic of Panama:
1,150,000 8.875% due 9/30/27 ................................................. 958,813
15,625,000 IRB, 4.500% due 7/17/14* ........................................... 12,363,281
1,608,385 PDI, 7.750% due 7/17/16*(e) ........................................ 1,230,414
------------
14,552,508
------------
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 (unaudited) (continued)
November 30, 2000
Principal
Amount (A) BONDS+ -- 92.2% (continued) Value
--------------------------------------------------------------------------------------------------------------
PERU -- 4.7%
Republic of Peru:
1,435,000 FLIRB, 3.750% due 3/7/17* .......................................... $ 774,900
23,440,000 PDI Bond, 4.500% due 3/7/17* ....................................... 14,342,350
------------
15,117,250
------------
PHILIPPINES -- 3.0%
Republic of the Philippines:
5,625,000 9.875% due 1/15/19 ................................................. 4,275,000
6,700,000 10.625% due 3/16/25 ................................................ 5,238,563
------------
9,513,563
------------
POLAND -- 0.7%
Republic of Poland:
750,000 Par Bond, 3.750% due 10/27/24* ..................................... 483,750
1,760,000 PDI Bond, 6.000% due 10/27/14* ..................................... 1,639,000
------------
2,122,750
------------
RUSSIA -- 20.5%
Russian Government:
4,050,000 8.250% due 3/31/10 ................................................. 2,500,875
247,611 8.250% due 3/31/10# ................................................ 152,900
73,262,000 2.500% due 3/31/30* ................................................ 26,374,320
101,510,550 2.500% due 3/31/30*,# .............................................. 36,543,798
------------
65,571,893
------------
URUGUAY -- 0.9%
Uruguay:
1,197,367 DCB, Series B, 7.9375% due 2/18/07* ................................ 1,161,446
1,941,176 NMB, 7.1875% due 2/19/06* .......................................... 1,878,087
------------
3,039,533
------------
VENEZUELA -- 14.0%
Republic of Venezuela:
12,438,000 13.625% due 8/15/18 ................................................ 11,567,340
490,000 9.250% due 9/15/27 ................................................. 324,380
12,000,000 DISC, 7.5625% due 3/31/20* ......................................... 9,180,000
16,250,149 FLIRB, Series A, 7.625% due 3/31/07* ............................... 13,365,747
464,286 FLIRB, Series B, 7.625% due 3/31/07* ............................... 381,875
12,014,390 NMB, 8.000% due 12/18/05* .......................................... 10,032,016
------------
44,851,358
------------
TOTAL BONDS (cost -- $314,338,685) ................................... 295,470,917
------------
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 (unaudited) (concluded)
November 30, 2000
Principal
Amount (a) LOAN PARTICIPATIONS+,++ -- 7.8% Value
--------------------------------------------------------------------------------------------------------------
The People's Democratic Republic of Algeria:
36,708 Tranche 1, 7.1875% due 9/4/06* (Chase Manhattan Bank) .............. $ 30,926
987,500 Tranche 3, 7.1875% due 3/4/10* (Chase Manhattan Bank) .............. 785,062
Yen530,000,000 Tranche 3, 7.1875% due 3/4/10* (Chase Manhattan Bank) .............. 3,297,863
3,437,500 Government of Jamaica, Tranche B, 7.5625% due 11/15/04*
(Chase Manhattan Bank, Morgan Guaranty Trust Company) .............. 3,153,906
3,000,000 Russia Government, Foreign Trade Obligation## (Bank of America) ...... 1,035,000
18,117,641 Kingdom of Morocco, Tranche B, 7.750% due 1/1/04*
(Chase Manhattan Bank, Morgan Stanley Emerging Markets, Inc.) ...... 16,849,406
------------
TOTAL LOAN PARTICIPATIONS (Cost -- $25,978,456) ...................... 25,152,163
------------
TOTAL INVESTMENTS -- 100.0% (Cost -- $340,317,141**) ................. $320,623,080
============
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT NOVEMBER 30, 2000:
CONTRACTS IN EXCHANGE CONTRACTS AT DELIVERY UNREALIZED
TO DELIVER FOR VALUE DATE APPRECIATION
-------------- ------------ -------------- -------- ------------
Sale...... Yen 352,000,000 US $3,759,176 US $3,230,765 9/11/00 $528,411
------------
(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) The bond is denominated in units. Each unit is equal to $1,000 and one
warrant to buy 12.914 shares of Asia Pulp & Paper at $7.8375 per share.
The warrant will expire on March 15, 2005.
(d) Payment-in-kind security. Interest earned is capitalized as additional
principal when received by the Fund.
(e) Payment-in-kind security for which all or part of the interest earned is
capitalized as additional principal.
* Rate shown reflects current rate in effect at November 30, 2000 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.
Abbreviations used in this statement:
BOCON - Bonos De Consolidacion.
DCB - Debt Conversion Bond.
DISC - Discount Bond.
FLIRB - Front Loaded Interest Reduction Bond.
FRN - Floating Rate Note.
IRB - Interest Reduction Bond.
MYDFA - Multi Year Depository Facility Agreement.
NMB - New Money Bond.
PDI - Past Due Interest.
Peso - Argentina Peso.
Yen - Japanese Yen.
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 Assets and Liabilities
November 30, 2000 (unaudited)
ASSETS
Investments, at value (cost -- $340,317,141)....................................... $320,623,080
Receivable for securities sold..................................................... 38,186,515
Interest receivable................................................................ 8,459,559
Foreign currency contracts receivable.............................................. 528,411
Prepaid expenses................................................................... 2,990
------------
Total Assets....................................................................... 367,800,555
------------
LIABILITIES
Payable to bank.................................................................... 331,070
Loan payable (Note 4).............................................................. 100,000,000
Payable for securities purchased................................................... 8,792,755
Interest expense payable on loan................................................... 376,002
Management fee payable (Note 2).................................................... 257,119
Accrued expenses................................................................... 176,217
------------
Total Liabilities.................................................................. 109,933,163
------------
Net Assets......................................................................... $257,867,392
============
NET ASSETS
Common Stock ($0.001 par value, authorized
100,000,000; 23,525,237 shares outstanding)...................................... $ 23,525
Additional paid-in capital......................................................... 324,815,901
Undistributed net investment income................................................ 1,864,373
Accumulated net realized loss on investments....................................... (49,663,482)
Net unrealized depreciation on investments and foreign currencies.................. (19,172,925)
------------
Net Assets......................................................................... $257,867,392
============
NET ASSET VALUE PER SHARE ($257,867,392 / 23,525,237 shares)......................... $10.96
======
See accompanying notes to financial statements.
Page 9
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, 2000 (unaudited)
INCOME
Interest (includes discount accretion of $4,620,606)............................... $ 27,024,207
EXPENSES
Interest on loan..................................................... $4,398,497
Management fee....................................................... 1,615,492
Custodian............................................................ 66,795
Printing............................................................. 31,110
Audit and tax services............................................... 27,999
Legal................................................................ 25,620
Transfer agent expenses.............................................. 18,483
Listing fees......................................................... 17,782
Directors' fees and expenses......................................... 16,653
Other............................................................... 18,435 6,236,866
---------- ------------
Net Investment Income................................................................ 20,787,341
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net Realized Gain on:
Investments...................................................................... 27,333,324
Foreign currency transactions.................................................... 344,738
------------
27,678,062
------------
Net Change in Unrealized Appreciation (Depreciation) on:
Investments...................................................................... (26,659,238)
Foreign currency contracts and other assets and liabilities
denominated in foreign currencies.............................................. 303,602
------------
(26,355,636)
------------
Net Gain on Investments and Foreign Currency Transactions............................ 1,322,426
------------
Net Increase in Net Assets From Operations .......................................... $ 22,109,767
============
See accompanying notes to financial statements.
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T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Statement of Changes in Net Assets
For the Six Months Ended November 30, 2000 (unaudited)
and the Year Ended May 31, 2000
NOVEMBER 30, MAY 31,
2000 2000
------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income............................................. $ 20,787,341 $ 33,328,711
Net realized gain on investments and foreign currency transactions 27,678,062 10,223,710
Net change in unrealized appreciation (depreciation).............. (26,355,636) 21,148,019
------------ ------------
Net Increase in Net Assets From Operations........................ 22,109,767 64,700,440
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income........................................ (19,343,480) (38,496,993)
From net realized capital gains................................... -- --
------------ ------------
Net Decrease in Net Assets From
Dividends and Distributions to Shareholders..................... (19,343,480) (38,496,993)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares issued in reinvestment of dividends
(91,554 and 268,061 shares issued).............................. 1,041,572 2,849,104
------------ ------------
Total Increase in Net Assets........................................ 3,807,859 29,052,551
------------ ------------
NET ASSETS
Beginning of period............................................... 254,059,533 225,006,982
------------ ------------
End of period (includes undistributed net investment income of
$1,864,373 and $420,512, respectively).......................... $257,867,392 $254,059,533
============ ============
Statement of Cash Flows
For the Six Months Ended November 30, 2000 (unaudited)
Cash Flows From Operating Activities:
Purchases of securities............................................................ $(300,539,303)
Net sales of short-term investments................................................ 18,812,425
Proceeds from sales of securities and principal paydowns........................... 285,049,713
-------------
3,322,835
Net investment income.............................................................. 20,787,341
Adjustments to reconcile net investment income to net cash
provided by operating activities:
Accretion of discount on investments............................................. (4,620,606)
Interest on payment-in-kind bonds................................................ (35,623)
Net change in receivables/payables related to operations......................... (1,483,627)
-------------
Net Cash Provided by Operating Activities........................................ 17,970,320
-------------
Cash Flows Used by Financing Activities:
Proceeds from shares issued in reinvestment of dividends........................... 1,041,572
Dividends and distributions paid................................................... (19,343,480)
-------------
Net Cash Used by Financing Activities.............................................. (18,301,908)
-------------
Net Decrease in Cash................................................................. (331,588)
Cash at Beginning of Period.......................................................... 518
-------------
Payable to Bank at End of Period..................................................... $ (331,070)
=============
See accompanying notes to financial statements.
Page 11
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 accounting principles generally accepted in the
United States ("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 price 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
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 GAAP
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
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, 2000, the Fund paid interest expense of
$4,431,972.
2. MANAGEMENT AND ADVISORY FEES AND OTHER TRANSACTIONS
The Fund has entered into a management agreement with PIMCO Advisors LP
(the "Investment Manager"), 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, 2000 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
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, 2000 aggregated
$309,264,558 and $310,129,922, respectively. The federal income tax cost basis
of the Fund's investments at November 30, 2000 was substantially the same as the
cost basis for financial reporting. Gross unrealized appreciation and
depreciation amounted to $8,780,417 and $28,474,478, respectively, resulting in
a net unrealized appreciation on investments of $19,694,061.
In the year ended May 31, 2000, permanent book/tax differences were
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 Barings (U.S.) Capital LLC. The interest rate on
the loan is 8.46% and the maturity date is May 15, 2001. The collateral for the
loan was valued at $320,623,080 on November 30, 2000 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, 2000 was $25,152,163.
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
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, 2000, the Fund has a concentration
of 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, 2000, the Fund has
outstanding contracts to sell 352,000,000 Japanese Yen for US $3,759,176 for a
scheduled settlement of March 12, 2001.
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.
9. DIVIDEND SUBSEQUENT TO NOVEMBER 30, 2000
On December 1, 2000, 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 29, 2000 to shareholders of record December 12, 2000.
10. CAPITAL LOSS CARRYFORWARD
At May 31, 2000, the Fund had, for Federal income tax purposes, a capital
loss carryforward of approximately $76,746,400, available to offset future
capital gains through May 31, 2008. 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. The amount and date of expiration of the carryforward losses
is indicated below:
May 2007 May 2008
--------- ---------
$64,935,000 $11,811,400
Page 16
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:
PERIOD ENDED YEAR ENDED
NOVEMBER 30, ----------------------------------------
2000 MAY 31, MAY 28, MAY 29, MAY 31,
(UNAUDITED) 2000 1999 1998 1997
----------------------------------------------------------------------------------------------------
Net asset value, beginning of period...... $10.84 $ 9.71 $15.03 $17.19 $13.54
------ ------ ------ ------ ------
Net investment income..................... 0.89 1.36 1.78 1.68 1.74
Net realized gain (loss) and change in
unrealized appreciation (depreciation)
on securities and foreign currency
translations........................... 0.06 1.41 (4.45) (0.86) 3.56
------ ------ ------ ------ ------
Total from investment operations.......... 0.95 2.77 (2.67) 0.82 5.30
------ ------ ------ ------ ------
Dividends to shareholders from net
investment income...................... (0.83) (1.65) (1.80) (1.59) (1.50)
Dividends to shareholders from net
realized capital gains................. -- -- (0.88) (1.39) (0.15)
------ ------ ------ ------ ------
Total dividends and
distributions to shareholders.......... (0.83) (1.65) (2.68) (2.98) (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 0.12 1.13 (5.32) (2.16) 3.65
------ ------ ------ ------ ------
Net asset value, end of period............ $10.96 $10.84 $ 9.71 $15.03 $17.19
====== ====== ====== ====== ======
Per share market value, end of period..... $11.125 $10.8125 $11.875 $15.4375 $15.75
======= ======== ======= ======== ======
Total investment return based on market
price per share (a).................... 10.55% 5.83% -0.43% 17.51% 26.84%
Ratios to Average Net Assets:
Total expenses, including interest
expense.............................. 4.64%(b) 4.45% 4.00% 3.14% 3.34%
Total expenses, excluding interest
expense (operating expenses)......... 1.37%(b) 1.39% 1.35% 1.35% 1.37%
Net investment income.................. 15.48%(b) 13.52% 17.52% 10.16% 11.29%
Supplemental Data:
Net assets, end of period (000)........ $257,867 $254,060 $225,007 $335,080 $377,252
Portfolio turnover rate................ 90% 93% 148% 136% 172%
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 .............................. 8.46% 8.67125% 6.83% 6.28125% 6.50%
Weighted average bank loan (000)....... $100,000 $100,000 $100,000 $100,000 $100,000
Weighted average interest rate......... 8.80%(b) 7.55% 6.11% 6.46% 6.67%
----------------
(a) Dividends are assumed, for purposes of this calculation, to be reinvested at
prices obtained under the Fund's dividend reinvestment plan.
(b) Annualized.
Page 17
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)*
NET REALIZED GAIN
(LOSS) & CHANGE IN
NET INVESTMENT NET UNREALIZED
INCOME APPRECIATION (DEPRECIATION)
------------------- --------------------------
PER PER
QUARTERS ENDED TOTAL SHARE TOTAL SHARE
-------------------------------------------------------------------------------------------------------
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
February 29, 2000........................... 7,396 .32 26,617 1.13
May 31, 2000................................ 8,161 .28 (20,536) (.81)
August 31, 2000............................. 12,146 .52 33,641 1.43
November 30, 2000........................... 8,641 .37 (32,319) (1.37)
--------------
*Totals expressed in thousands of dollars except per share amounts.
Page 18
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 The Emerging Markets
Income Fund II Inc
CHARLES F. BARBER
Consultant; formerly Chairman, 7 World Trade Center
ASARCO Incorporated New York, New York 10048
For information call (toll free)
LESLIE H. GELB 1-888-777-0102
President, The Council
on Foreign Relations INVESTMENT MANAGER
PIMCO Advisors LP
HEATH B. MCLENDON 800 Newport Center Drive
Co-Chairman of the Board; Newport Beach, California 92660
Managing Director, Salomon
Smith Barney Inc. INVESTMENT ADVISER
President, Smith Barney Mutual Fund Salomon Brothers Asset Management Inc
Management Inc. 7 World Trade Center
Chairman, Smith Barney New York, New York 10048
Strategy Advisors Inc.
CUSTODIAN
RIORDAN ROETT Brown Brothers Harriman & Co.
Professor and Director, 40 Water Street
Latin American Studies Program, Boston, Massachusetts 02109
Paul H. Nitze School of Advanced
International Studies, DIVIDEND DISBURSING AND TRANSFER AGENT
Johns Hopkins University American Stock Transfer & Trust Company
40 Wall Street
JESWALD W. SALACUSE New York, New York 10005
Henry J. Braker Professor of
Commercial Law, and formerly Dean, INDEPENDENT ACCOUNTANTS
The Fletcher School of Law & Diplomacy PricewaterhouseCoopers LLP
Tufts University 1177 Avenue of the Americas
New York, New York 10036
STEPHEN J. TREADWAY
Co-Chairman of the Board; LEGAL COUNSEL
Executive Vice President, Simpson Thacher & Bartlett
PIMCO Advisors LP 425 Lexington Avenue
Chairman and President, New York, New York 10017
PIMCO Funds Distributors LLC
NEW YORK STOCK EXCHANGE SYMBOL
EDF
Officers
HEATH B. MCLENDON
Co-Chairman of the Board
STEPHEN J. TREADWAY
Co-Chairman of the Board
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
Semi-Annual Report
November 30, 2000
---------------------------------------------
The Emerging Markets Income Fund II Inc
---------------------------------------------
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
EDFSEMI 11/00
PRSRT-STD
U.S. POSTAGE
PAID
PERMIT No. 169
STATEN ISLAND, NY