The Emerging Markets
Income Fund II Inc
June 27, 2001
Dear Shareholder:
We are pleased to provide this annual report for The Emerging Markets Income
Fund II Inc (the "Fund") as of May 31, 2001. Included in this report are market
commentary, a listing of the Fund's investments as of May 31, 2001 and financial
statements for the 12 months ended May 31, 2001. We hope you find this report to
be useful and informative.
The net asset value of the Fund ("NAV")1 increased from $10.84 per share as of
May 31, 2000 to $11.53 per share as of May 31, 2001. In addition, dividends of
$1.65 per share from net investment income were paid during the period. Assuming
reinvestment of these dividends in additional shares of the Fund, the total
return based on net asset value for the 12 months ended May 31, 2001 was 22.72%.
In comparison, the J.P. Morgan Emerging Bond Markets Index Plus (the "EMBI+")2
posted a return of 16.84% for the same period.
MARKET OVERVIEW
10 out of the 16 countries that comprise the EMBI+ outperformed the Index's
16.84% return, as measured by the EMBI+. The upgrade of Mexico's sovereign debt
to investment grade status and its deep liquidity attracted a broader group of
investors to emerging market debt. This trend continued through January but
slowed along with the overall level of economic activity during the rest of the
period. Technicals remained strong, which helped the emerging market debt asset
class outperform many other asset classes during the period, especially U.S. and
European high yield, and U.S. and global equity markets.
At the commencement of the period, the concerns of the U.S. Federal Reserve
Board (the "Fed") over inflation drove the discount rate 3 to 6.50%. The market
received a boost when the Fed changed its focus from inflation to a slowdown and
commenced easing rates in early 2001. The Fed cut rates 100 basis points in
January, and 150 basis points over March, April, and May, bringing overnight
rates to 4.00% by the end of the period. The Fed's changing bias was caused by
evidence that U.S. economic growth has slowed considerably in recent months. We
feel the reduction in U.S. rates may provide a boost to Latin American debt, as
many investors may turn to international issuers to obtain higher yields.
Nevertheless, this potential positive development could be stalled if the U.S.
economy continues to slow.
-----------------
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 markets. An investor cannot invest directly in an index.
3 The discount rate is the interest rate the Federal Reserve Bank charges banks
on short-term loans (usually overnight or on weekends.)
PAGE 1
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
Oil prices, an important driver of value in the emerging debt markets, continued
to remain at high levels. Monetary reserves improved substantially as high oil
prices contributed to overall credit quality of oil producing countries, namely,
Russia, Venezuela, Algeria, Colombia and Mexico. Oil prices fluctuated during
the period, ranging from a low of $24.06 to a high of $30.34 per barrel and
prices closed the period at about $28.57 per barrel. In our opinion, stable or
slightly weaker oil prices will be a modest benefit for oil importers, and will
not significantly undermine the very strong external and fiscal performance of
the major oil exporters.
Volatility for emerging markets debt remained substantially below historical
levels. 12-month volatility ending May 31, 2001 was 9.19%, well below the 19%
historical levels. However, the combination of the Turkish and Argentine
financial and political turbulence in early 2001 registered an upward movement
in volatility levels. We believe this will normalize as the year progresses.
Individual country performance was generally good as 10 of 16 index countries
outperformed the EMBI+ return of 16.84%, as measured by the EMBI+. The following
is a brief description of each segment's highlights during the period.
LATIN AMERICA
Latin American fixed-income securities had a combined return of 13.21% for the
period, as measured by the EMBI+. The key developments in Latin America during
the period included: Mexico's PAN candidate, Vicente Fox, was elected as
President; Brazil completed a successful $5 billion, 40-year debt exchange; and
Venezuelan debt generally improved in credit quality. Argentina's recession and
its continuing political and economic woes contributed to the region's
underperformance.
o Ecuador. Ecuadorian fixed-income securities returned 83.44% for the period, as
measured by the EMBI+. Ecuador dominated individual country performance within
the EMBI+. It completed its debt restructuring of defaulted Brady bonds,
exchanging them for two issues of global bonds during the year. The market was
pleasantly surprised by the relatively fast resolution of this Brady bond
default. In addition, the Paris Club 4 granted Ecuador a standard rescheduling
of $880 million of bilateral debt. Both of these events contributed to overall
strong returns during the period. President Noboa has developed a good working
relationship with the IMF 5, an important factor that has been missing in
recent years, which we feel will help Ecuador receive future funding. We
believe Ecuador's budget forecasts seem realistic and are not based solely on
sustained high oil prices. Nevertheless, we also believe the country still
needs comprehensive tax reforms to improve its overall fiscal health.
o Venezuela. Venezuelan fixed-income securities returned 21.61% for the period,
as measured by the EMBI+. Oil price strength continued to drive the Venezuelan
economy. Venezuela's level of international reserves provides a clear measure
of the positive impact that rising oil prices have had on the country's credit
quality. The approximately $23 billion of international reserves exceed the
stock of external debt. Inflation in 2000 was 13.4%, the lowest figure in 14
years, down from 20% in 1999. We maintained our overweight position, relative
to the EMBI+, in Venezuelan fixed-income securities.
-----------------
4 The Paris Club is an informal group of sovereign lenders who have extended
credit to sovereign governments.
5 The IMF (International Monetary Fund) is an international organization of 183
member countries established to promote international monetary cooperation,
exchange stability, and orderly exchange arrangements.
PAGE 2
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 Mexico. Mexican fixed-income securities returned 20.85% during the period, as
measured by the EMBI+. The election of Vicente Fox, the first non-PRI party
president in 70 years, and appointment of Francisco Gil Diaz in February as
minister of finance were well received by the market. The Mexican economy
benefited from rising oil prices which were reflected in its overall levels of
growth and fiscal strength.
o Brazil. Brazilian fixed-income securities returned 10.99% for the period, as
measured by the EMBI+, slightly underperforming the EMBI+. A severe drought
resulted in a sharp reduction in hydroelectric power generation. The
government instituted a series of conservation measures to help reduce the
impact of the crisis. Nonetheless, we believe the energy shortfall may reduce
2001 GDP 6 growth by 1.0% to 1.5%. The spike in volatility in international
financial markets, combined with concerns regarding a weakening Brazilian
real, impacted the economy and led the Brazilian Central Bank to raise the
Selic, the overnight lending rate, by 100 basis points in March and April to
16.25%. On a spread duration 7 basis, we maintained our neutral stance
relative to the EMBI+ in Brazil.
OTHER EMERGING MARKETS
The debt of other emerging markets generally outperformed Latin American
fixed-income securities during the period, returning a combined 26.88%, as
measured by the EMBI+. Algeria increased returns in Africa while Russia, Poland
and Bulgaria contributed to strong returns in Eastern Europe. Turkey, the worst
performer in the EMBI+, as measured by the EMBI+, devalued its currency in the
wake of a domestic banking crisis.
o Africa. Algerian fixed-income securities, returning 22.33% for the period, as
measured by the EMBI+, continued to benefit from rising oil and gas prices as
well as political stability. Moroccan debt returned 14.22% for the period as
measured by the EMBI+, trailing the EMBI+. Morocco's economy is highly
dependent on the performance of its agricultural sector and a recent shortage
of rainfall reduced the country's growth expectations from 8% to 10% down to
4% to 5%. The privatization of Maroc Telecom occurred in late December 2000.
The government will receive $2.2 billion from Vivendi Universal, which should
help finance its budget deficit.
o Russia. Russian fixed-income securities returned 38.77% for the period as
measured by the EMBI+, supported primarily by sustained oil prices. We believe
Russia made excellent progress during the period toward improving its credit
quality. Russia's hard currency reserves doubled from 1999 levels and stood in
excess of $30 billion at the end of the period. We believe the 2001 budget
that the Russian Federation Council approved at the end of 2000 is
conservative and that the London Club 8 financing received in August 2000 will
make Russia's 2001 debt service obligations very manageable. Russia's
attractiveness to investors further improved when the government decided to
pay its Paris Club debts in January and February and assured it would meet all
of its remaining 2001 Paris Club obligations on time. The period ended
positively as the government and the IMF made progress on structural reform
objectives for 2001, which include: tax reform; the
---------------
6 GDP (Gross Domestic Product) is the total market value of all final goods and
services produced within a country in one year.
7 Spread duration is the sensitivity of a bond's price to movements in dollar
credit spreads. The spread duration of a bond is the percentage change in
price for a 100 basis point change in the bond, all else remaining constant.
8 The London Club is an informal group of sovereign lenders who have extended
credit to sovereign governments.
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
introduction of a customs regime acceptable to the WTO 9; the reduction and
streamlining of regulatory procedures; and an improvement in accounting
standards. We remained overweight Russia relative to the EMBI+ throughout the
period.
o Turkey. Turkish fixed-income securities generally were the worst performers in
the EMBI+ for the period as measured by the EMBI+, returning a negative 2.97%.
The November banking crisis became a full-scale balance of payments crisis,
which ultimately led to the devaluation of its currency, the lira. The IMF
granted the Turkish Treasury over $20 billion in financial aid during the
course of the period in an attempt to restore confidence in the domestic
banking sector. Recently, Stanley Fischer of the IMF provided the most
unequivocal statement of support for Turkey since the devaluation, arguing
that it deserves the support of the international community and that it will
receive that support. We believe that although the potential for negative
political surprises has somewhat diminished, the political situation still
remains unpredictable. We will continue to closely monitor developments in
Turkey.
OUTLOOK
Emerging debt markets have come under pressure prompted by the developed world's
economic slowdown, the poor performance of the equity markets, and the financial
woes of Turkey and Argentina. While we have attempted to reduce the Fund's
exposure to market risk over the past few months, we believe the long-term
outlook for the asset class remains attractive. We plan to continue to remain
invested in a diversified portfolio of emerging market debt securities.
In a continuing effort to provide timely information about the Fund,
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 account, please call American Stock
Transfer & Trust Company at 1-800-937-5449, or 1-718-921-8200 if you are calling
from within New York City.
Thank you for your investment in the Fund. 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
----------------
9 The WTO (World Trade Organization) is a group of 141 countries that deal with
the global rules of trade among nations, seeking to ensure that trade flows as
smoothly, predictably and freely as possible.
PAGE 4
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Statement of Investments
May 31, 2001
PRINCIPAL
AMOUNT (a) BONDS+ -- 93.2% VALUE
-----------------------------------------------------------------------------------------------------
ARGENTINA -- 12.6%
Republic of Argentina:
Peso 6,600,000 8.750% due 7/10/02 .............................................. $ 6,056,045
1,000,000 14.250% due 11/30/02* ........................................... 980,000
28,250,000 13.969% due 4/10/05*(b) ......................................... 25,213,125
500,000 11.750% due 2/12/07# ............................................ 405,000
710,000 11.750% due 4/7/09 .............................................. 573,325
Peso 2,482,491 BOCON, Pro 1, 2.905% due 4/1/07* ................................ 1,748,012
-----------
34,975,507
-----------
BRAZIL -- 22.8%
Federal Republic of Brazil:
5,450,000 9.625% due 7/15/05 .............................................. 5,020,812
631,000 12.750% due 1/15/20 ............................................. 561,117
32,068,000 12.250% due 3/6/30 .............................................. 26,937,120
18,276,000 11.000% due 8/17/40 ............................................. 13,515,102
21,552,941 NMB, Series L, 5.500% due 4/15/09* .............................. 17,404,000
-----------
63,438,151
-----------
BULGARIA -- 6.3%
22,250,000 Republic of Bulgaria, FLIRB, Series A, 3.000% due 7/28/12* ........ 17,494,091
-----------
COLUMBIA -- 4.7%
Republic of Columbia:
1,600,000 8.700% due 2/15/16 .............................................. 1,190,880
12,910,000 11.750% due 2/25/20 ............................................. 11,941,750
-----------
13,132,630
-----------
COSTA RICA -- 1.2%
Republic of Costa Rica:
800,000 9.995% due 8/1/20# .............................................. 890,000
2,500,000 Principal Bond, Series B, 6.250% due 5/21/15 .................... 2,325,000
-----------
3,215,000
-----------
ECUADOR -- 3.2%
Republic of Ecuador:
6,220,000 4.000% due 8/15/30*, # .......................................... 2,539,315
15,525,000 4.000% due 8/15/30* ............................................. 6,338,081
-----------
8,877,396
-----------
See accompanying notes to financial statements.
PAGE 5
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Statement of Investments (continued)
May 31, 2001
PRINCIPAL
AMOUNT (a) BONDS+ -- 93.2% (continued) VALUE
-----------------------------------------------------------------------------------------------------
INDONESIA -- 0.5%
2,000,000 APP China Group Ltd, 14.000% due 3/15/10#(c)(d) ................... $ 115,000
5,804,260 Pt Polytama Propindo, 11.250% due 6/15/07(c)(d) ................... 304,724
Tjiwi Kimia International Finance Company B.V.:
1,000,000 13.250% due 8/1/01(e) ........................................... 165,000
5,000,000 10.000% due 8/1/04(e) ........................................... 825,000
-----------
1,409,724
-----------
IVORY COAST -- 0.9%
16,225,000 Republic of Ivory Coast, 2.000% due 3/31/18* ...................... 2,433,750
-----------
JAMAICA -- 0.2%
500,000 Government of Jamaica, 12.750% due 9/1/07# ........................ 550,000
-----------
MEXICO -- 6.3%
2,000,000 Hylsa S.A. de C.V., 9.250% due 9/15/07 ............................ 1,260,000
United Mexican States:
270,000 9.875% due 2/1/10 ............................................... 293,827
17,125,000 8.125% due 12/30/19 ............................................. 16,046,125
-----------
17,599,952
-----------
PANAMA -- 1.5%
5,092,065 Republic of Panama, PDI, 6.4375% due 7/17/16*(f) .................. 4,200,954
-----------
PERU -- 0.4%
Republic of Peru:
1,285,000 FLIRB, 4.000% due 3/7/17* ....................................... 717,191
440,000 PDI Bond, 4.500% due 3/7/17* .................................... 273,900
-----------
991,091
-----------
PHILIPPINES -- 3.8%
12,325,000 Republic of the Philippines, 9.875% due 1/15/19 ................... 10,630,313
-----------
RUSSIA -- 5.6%
Russian Government:
17,500,000 10.00% due 6/26/07 .............................................. 14,766,500
600,000 8.250% due 3/31/10 .............................................. 437,460
247,611 8.250% due 3/31/10# ............................................. 180,533
547,550 5.000% due 3/31/30*,# ........................................... 239,991
-----------
15,624,484
-----------
URUGUAY -- 1.0%
Republic of Uruguay:
1,105,262 DCB, Series B, 7.125% due 2/19/07* .............................. 1,077,630
1,764,705 NMB, 7.250% due 2/19/06* ........................................ 1,729,411
-----------
2,807,041
-----------
See accompanying notes to financial statements.
PAGE 6
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Statement of Investments (continued)
May 31, 2001
PRINCIPAL
AMOUNT (a) BONDS+ -- 93.2% (continued) VALUE
-----------------------------------------------------------------------------------------------------
VENEZUELA -- 22.2%
Republic of Venezuela:
10,104,000 13.625% due 8/15/18 ............................................. $ 9,851,400
34,265,000 9.250% due 9/15/27 .............................................. 23,617,151
750,000 DISC, Series W-A, 5.125% due 3/31/20* ........................... 583,125
7,000,000 DISC, Series W-B, 4.875% due 3/31/20* ........................... 5,442,500
15,000,149 FLIRB, Series A, 5.6875% due 3/31/07* ........................... 12,647,000
428,572 FLIRB, Series B, 5.6875% due 3/31/07* ........................... 361,339
10,924,773 NMB, 7.500% due 12/18/05* ....................................... 9,286,057
-----------
61,788,572
-----------
TOTAL BONDS (cost -- $265,088,270) ................................ 259,168,656
-----------
LOAN PARTICIPATIONS+,++-- 6.0%
------------------------------------------------------------------------------------------------------
The People's Democratic Republic of Algeria:
33,648 Tranche 1, 5.8125% due 9/4/06* (Chase Manhattan Bank) ........... 29,989
11,935,526 Tranche 3, 5.8125% due 3/4/10* (Chase Manhattan Bank) ........... 10,025,842
2,750,000 Government of Jamaica, Tranche B, 7.5625% due 11/15/04*
(Chase Manhattan Bank, Morgan Guaranty Trust Company)............ 2,523,125
Kingdom of Morocco:
2,325,000 Tranche A, 5.09375% due 1/1/09* (Chase Manhattan Bank) 2,130,281
529,406 Tranche B, 5.09375% due 1/1/04*(Morgan Stanley Emerging
Markets, Inc.)................................................... 481,098
3,000,000 Russian Government, Foreign Trade Obligation(e) (Bank of America) 1,410,000
-----------
TOTAL LOAN PARTICIPATIONS (cost -- $16,711,741).................... 16,600,335
-----------
NUMBER OF
CONTRACTS PURCHASED CALL OPTIONS (d) -- 0.3%
------------------------------------------------------------------------------------------------------
Russian Government:
160 10.000% due 6/26/07, Call @ 84.25, Expire 7/2/01*** ............. 144,000
630 8.250% due 3/31/10, Call @ 72.75, Expire 6/7/01##,*** ........... 409,500
330 2.500% due 3/31/30, Call @ 43.625, Expire 7/2/01*** ............. 330,000
-----------
TOTAL PURCHASED OPTIONS (cost-- $883,500).......................... 883,500
-----------
SHARES RIGHTS (d) -- 0.3%
------------------------------------------------------------------------------------------------------
70,000,000 United Mexican States Rights, expire 6/3/03 (Cost -- $1,030,000) .. 945,000
-----------
See accompanying notes to financial statements.
PAGE 7
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Statement of Investments (concluded)
May 31, 2001
WARRANTS WARRANTS (e) -- 0.0% VALUE
------------------------------------------------------------------------------------------------------
2,000+ Asia Pulp and Papers Warrants, expire 3/15/05# (Cost -- $0) $ 200
------------
PRINCIPAL
AMOUNT (a) REPURCHASE AGREEMENT## -- 0.2%
------------------------------------------------------------------------------------------------------
$ 645,000 UBS Warburg LLC, 4.000%, $645,072 due 6/1/01
(collateralized by $532,000 U.S. Treasury Bond, 7.875%
due 2/15/21, valued at $658,350) (Cost-- $645,000)............... 645,000
------------
TOTAL INVESTMENTS-- 100.0% (Cost-- $284,358,511**)................. $278,242,691
============
---------------
(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) Security is currently in default.
(d) Non-income producing security.
(e) Security is in default subsequent to year end.
(f) Payment-in-kind security for which all or part of the interest earned is
capitalized as additional principal.
* Rate shown reflects rate in effect at May 31, 2001 on instrument with
variable rates or step coupon rates.
** Aggregate cost for federal income tax purposes is substantially the same.
*** Security valued at fair value.
+ All or portion of the security is segregated as collateral pursuant to a
loan agreement. See Note 4.
++ Participation interests were acquired through the financial institutions
indicated parenthetically. See Note 5.
# Pursuant to Rule 144A of the Securities Act of 1933, this security can
only be sold to qualified institu tional investors.
## The following securities were segregated at May 31, 2001 to cover
outstanding written put options:
PRINCIPAL AMOUNT/
NUMBER OF MARKET VALUE NUMBER OF
CONTRACTS SECURITIES SEGREGATED OF SECURITIES WRITTEN PUT OPTIONS CONTRACTS
---------------- --------------------- ------------- ------------------- ---------
$645,000 Repurchase Agreement, Russian Government, 10.000% due
UBS Warburg LLC, 4.000% 6/26/07 @ 84.25, Expire 7/2/01 160
due 6/1/01 $645,000 Russian Government, 8.250% due
630 Russian Government, 8.250% due 3/31/10 @ 72.75, Expire 6/7/01 630
3/31/10, Purchased Call Option Russian Government, 2.500% due
@ 72.75, Expire 6/7/01 409,500 3/31/30 @ 43.63, Expire 7/2/01 330
Abbreviations used in this statement:
BOCON - Bonos De Consolidacion.
DCB - Debt Conversion Bond.
DISC - Discount Bond.
FLIRB - Front Loaded Interest Reduction Bond.
NMB - New Money Bond.
PDI - Past Due Interest.
Peso - Argentina Peso.
See accompanying notes to financial statements.
PAGE 8
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Statement of Assets and Liabilities
May 31, 2001
ASSETS
Investments, at value (cost -- $ 284,358,511)...................................... $278,242,691
Receivable for securities sold..................................................... 89,269,535
Interest receivable................................................................ 7,037,705
Prepaid expenses................................................................... 18,656
------------
Total Assets....................................................................... 374,568,587
------------
LIABILITIES
Payable to bank.................................................................... 132
Loan payable (Note 4).............................................................. 100,000,000
Written options, at fair value (Premium received-- $985,200)....................... 985,200
Payable for securities purchased................................................... 883,500
Interest payable on loan........................................................... 274,363
Management fee payable (Note 2).................................................... 274,192
Accrued expenses................................................................... 253,560
------------
Total Liabilities.................................................................. 102,670,947
------------
Net Assets......................................................................... $271,897,640
============
NET ASSETS
Common Stock ($0.001 par value, authorized
100,000,000; 23,587,395 shares outstanding)...................................... $ 23,587
Additional paid-in capital......................................................... 325,527,228
Undistributed net investment income................................................ 4,072,736
Accumulated net realized loss on investments....................................... (51,617,110)
Net unrealized depreciation on investments and foreign currencies.................. (6,108,801)
------------
Net Assets......................................................................... $271,897,640
============
NET ASSET VALUE PER SHARE ($271,897,640 / 23,587,395 shares)......................... $11.53
======
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 Year Ended May 31, 2001
INCOME
Interest (includes discount accretion of $12,851,322).............................. $ 53,542,720
EXPENSES
Interest on loan..................................................... $8,550,358
Management fee....................................................... 3,215,737
Custodian............................................................ 121,225
Printing............................................................. 75,050
Audit and tax services............................................... 56,845
Legal................................................................ 54,600
Listing fees......................................................... 33,959
Transfer agent expenses.............................................. 33,865
Directors' fees and expenses......................................... 33,215
Other ............................................................... 39,793 12,214,647
---------- ------------
Net Investment Income................................................................ 41,328,073
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, WRITTEN OPTIONS
AND FOREIGN CURRENCY TRANSACTIONS
Net Realized Gain on:
Investments...................................................................... 25,760,579
Written options.................................................................. (36,143)
Foreign currency transactions.................................................... 1,075,950
------------
Net Realized Gain.................................................................. 26,800,386
------------
Net Change in Unrealized Depreciation on:
Investments...................................................................... (13,080,997)
Foreign currency contracts and other assets and liabilities
denominated in foreign currencies.............................................. (210,515)
------------
Increase in Net Unrealized Depreciation.......................................... (13,291,512)
------------
Net Gain on Investments and Foreign Currency Transactions ........................... 13,508,874
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS .......................................... $ 54,836,947
============
See accompanying notes to financial statements.
PAGE 10
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 Year Ended May 31, 2001
and May 31, 2000
2001 2000
-------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income............................................. $ 41,328,073 $ 33,328,711
Net realized gain................................................. 26,800,386 10,223,710
(Increase) decrease in net unrealized depreciation................ (13,291,512) 21,148,019
------------ ------------
Increase in Net Assets From Operations............................ 54,836,947 64,700,440
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................. (38,751,801) (38,496,993)
Net realized gains................................................ -- --
------------ ------------
Decrease in Net Assets From
Dividends and Distributions to Shareholders..................... (38,751,801) (38,496,993)
------------ ------------
FUND SHARE TRANSACTIONS
Proceeds from shares issued in reinvestment of dividends
(153,712 and 268,061 shares issued)............................. 1,752,961 2,849,104
------------ ------------
Total Increase in Net Assets........................................ 17,838,107 29,052,551
------------ ------------
NET ASSETS
Beginning of year................................................. 254,059,533 225,006,982
------------ ------------
End of year (includes undistributed net investment income of
$4,072,736 and $420,512, respectively).......................... $271,897,640 $254,059,533
============ ============
Statement of Cash Flows
For the Year Ended May 31, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Purchases of securities............................................................ $(761,376,510)
Net sales of short-term investments................................................ 18,167,773
Proceeds from sales of securities and principal paydowns........................... 751,057,024
-------------
7,848,287
Net investment income.............................................................. 41,328,073
Adjustments to reconcile net investment income to net cash
provided by operating activities:
Accretion of discount on investments............................................. (12,851,322)
Net change in receivables/payables related to operations......................... 673,152
-------------
Net Cash Provided by Operating Activities........................................ 36,998,190
-------------
CASH FLOWS USED BY FINANCING ACTIVITIES:
Proceeds from shares issued in reinvestment of dividends........................... 1,752,961
Dividends and distributions paid................................................... (38,751,801)
-------------
Net Cash Used by Financing Activities.............................................. (36,998,840)
-------------
Net Decrease in Cash................................................................. (650)
Cash at Beginning of Year............................................................ 518
-------------
Payable to Bank at End of Year....................................................... $ (132)
=============
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
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. As a secondary objective, the Fund seeks capital appreciation. In
pursuit of these objectives, the Fund invests primarily in U.S. dollar
denominated debt securities of government and government related issuers located
in emerging market countries, and of entities organized to restructure the
outstanding debt of these issuers.
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 of America ("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.
In November 2000, a revised AICPA Audit and Accounting Guide, Audits of
Investment Companies, was issued and is effective for fiscal years
beginning after December 15, 2000. The revised Guide will require the Fund
to amortize premium on all fixed income securities. Adopting this acounting
principle will not affect the Fund's net asset value, but will change the
classification of certain amounts between interest income and realized and
unrealized gain/loss in the Statement of Operations. The Fund expects that
the impact of the adoption of this accounting principle will not be
material to the financial statements.
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 (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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 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 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.
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 (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)
(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.
(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, the value of which is marked-to-market to
reflect the current market value of the option. When the option expires,
the Fund realizes a gain or loss equal to the amount of the premium
received or paid. When the Fund enters into a closing transaction by
purchasing or selling an offsetting option, it realizes a gain or loss
without regard to any unrealized gain or loss on the underlying security.
When a written call option is exercised, the Fund realizes a gain or loss
from the sale of the underlying security and the proceeds from such sale
are increased by the premium originally received on the option. If a
written put option is exercised, the amount of the premium received reduces
the cost of the security that the Fund purchased upon exercise of the
option.
(i) Cash flow information. The Fund invests in securities and distributes
dividends from net investment income and net realized gains from investment
transactions which are paid in cash. These activities are reported in the
Statement of Changes in Net Assets. Additional information on cash receipts
and cash payments is presented in the Statement of Cash Flows. For the year
ended May 31, 2001, the Fund paid interest expense of $8,685,472.
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 May 31, 2001 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 (continued)
3. PORTFOLIO ACTIVITY AND TAX INFORMATION
Cost of purchases and proceeds from sales of securities, excluding
short-term investments for the year ended May 31, 2001 aggregated $762,260,010
and $827,305,206, respectively. The federal income tax cost basis of the Fund's
investments at May 31, 2001 was substantially the same as the cost basis for
financial reporting. Gross unrealized appreciation and depreciation amounted to
$16,135,395 and $22,251,215, respectively, resulting in a net unrealized
depreciation on investments of $6,115,820.
The following written put option transactions occurred during the year
ended May 31, 2001.
Number of
Contracts Premium
--------- ----------
Options written, outstanding at May 31, 2000 -- $ --
Options written during the year ended May 31, 2001 2,222 2,013,532
Options canceled in closing purchase transactions (1,102) (1,028,332)
Options expired -- --
------ ----------
Options written, outstanding at May 31, 2001 1,120 $ 985,200
====== ==========
The following represents the written put options open at May 31, 2001:
Number of Strike
Contracts Expiraton Price Value
--------- --------- ------ ---------
160 Russian Government, 10.000% due 6/26/07 7/2/01 84.25 $(211,200)
630 Russian Government, 8.250% due 3/31/10 6/7/01 72.75 (378,000)
330 Russian Government, 2.500% due 3/31/30 7/2/01 43.63 (396,000)
---------
Total Written Put Options
(Premium received-- $985,200) $(985,200)
=========
In the year ended May 31, 2001, 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 5.81% and the maturity date is November 15, 2001. The collateral for
the loan was valued at $363,055,747 on May 31, 2001 and is being held in a
segregated account by the Fund's custodian. In accordance with the terms of the
loan agreement, the Fund must maintain a level of collateral to debt of not less
than 300%.
5. LOAN PARTICIPATIONS/ASSIGNMENTS
The Fund invests in fixed and floating rate loans arranged through private
negotiations between a foreign sovereign entity and one or more financial
institutions ("lenders"). The Fund's investment in any such loan may be in the
form of a participation in or an assignment of the loan. The market value of the
Fund's loan participations at May 31, 2001 was $16,600,335.
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
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 (continued)
5. LOAN PARTICIPATIONS/ASSIGNMENTS (CONCLUDED)
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.
7. CREDIT AND MARKET RISK
The yields of emerging market debt obligations reflect, among other things,
perceived credit risk. The Fund's investment in securities rated below
investment grade typically involves risks not associated with higher rated
securities including, among others, overall greater risk of timely and ultimate
payment of interest and principal, greater market price volatility and less
liquid secondary market trading. The consequences of political, social, economic
or diplomatic changes may have disruptive effects on the market prices of
investments held by the Fund. The Fund's investment in non-dollar-denominated
securities may also result in foreign currency losses caused by devaluations and
exchange rate fluctuations. At May 31, 2001, 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 May 31, 2001, the Fund has no
outstanding forward contracts.
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
Notes to Financial Statements (concluded)
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONCLUDED)
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. The risk in writing a put option is that the Fund may incur a loss if
the market price of the underlying security decreases and the option is
exercised.
9. DIVIDEND SUBSEQUENT TO MAY 31, 2001
On April 20, 2001, the Board of Directors of the Fund declared a common
stock dividend of $0.4125 per share from net investment income. The dividend was
payable on June 29, 2001 to shareholders of record June 12, 2001.
10. CAPITAL LOSS CARRYFORWARD
At May 31, 2001, the Fund had, for Federal income tax purposes, a capital
loss carryforward of approximately $45,948,000, 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
----------- -----------
$34,136,600 $11,811,400
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
Financial Highlights
Selected data for a share of common stock outstanding throughout the period:
YEAR ENDED
--------------------------------------------------
MAY 31, MAY 31, MAY 28, MAY 29, MAY 31,
2001 2000 1999 1998 1997
----------------------------------------------------------------------------------------------------
Net asset value, beginning of period.......... $10.84 $ 9.71 $15.03 $17.19 $13.54
------ ------ ------ ------ ------
Net investment income......................... 1.80 1.36 1.78 1.68 1.74
Net realized gain (loss) and change in
unrealized appreciation (depreciation)
on securities and foreign currency
translations............................... 0.54 1.41 (4.45) (0.86) 3.56
------ ------ ------ ------ ------
Total from investment operations.............. 2.34 2.77 (2.67) 0.82 5.30
------ ------ ------ ------ ------
Dividends to shareholders from net
investment income.......................... (1.65) (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.............. (1.65) (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.... 0.69 1.13 (5.32) (2.16) 3.65
------ ------ ------ ------ ------
Net asset value, end of period................ $11.53 $10.84 $ 9.71 $15.03 $17.19
====== ====== ====== ====== ======
Per share market value, end of period......... $12.65 $10.8125 $11.875 $15.4375 $15.75
====== ======== ======= ======== ======
Total investment return based on market
price per share (a)........................ 35.06% 5.83% -0.43% 17.51% 26.84%
Ratios to Average Net Assets:
Total expenses, including interest
expense.................................. 4.55% 4.45% 4.00% 3.14% 3.34%
Total expenses, excluding interest
expense (operating expenses)............. 1.37% 1.39% 1.35% 1.35% 1.37%
Net investment income...................... 15.41% 13.52% 17.52% 10.16% 11.29%
Supplemental Data:
Net assets, end of period (000)............ $271,898 $254,060 $225,007 $335,080 $377,252
Portfolio turnover rate.................... 225% 93% 148% 136% 172%
Bank loan outstanding, end of period (000). $100,000 $100,000 $100,000 $100,000 $100,000
Asset coverage (000)....................... $371,898 $354,010 $325,507 $435,080 $477,252
Interest rate on bank loan, end of period.. 5.81% 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............. 8.55% 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.
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
Report of Independent Accountants
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
THE EMERGING MARKETS INCOME FUND II INC
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations, of
changes in net assets and of cash flows and the financial highlights present
fairly, in all material respects, the financial position of The Emerging Markets
Income Fund II Inc (the "Fund") at May 31, 2001, the results of its operations
and cash flows for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at May 31, 2001 by correspondence with the custodian and brokers,
provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
July 27, 2001
PAGE 19
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
Pursuant to certain rules of the Securities and Exchange Commission, the
following additional disclosure is provided.
Form of Terms and Conditions of Amended and Restated Dividend Reinvestment and
Cash Purchase Plan (unaudited)
1. Each shareholder holding shares of common stock ("Shares") of The Emerging
Markets Income Fund II Inc (the "Fund") will be deemed to have elected to be a
participant in the Amended and Restated Dividend Reinvestment and Cash Purchase
Plan (the "Plan"), unless the shareholder specifically elects in writing
(addressed to the Agent at the address below or to any nominee who holds Shares
for the shareholder in its name) to receive all income dividends and
distributions of capital gains in cash, paid by check, mailed directly to the
record holder by or under the direction of American Stock Transfer & Trust
Company as the Fund's dividend-paying agent (the "Agent"). A shareholder whose
Shares are held in the name of a broker or nominee who does not provide an
automatic reinvestment service may be required to take such Shares out of
"street name" and register such Shares in the shareholder's name in order to
participate, otherwise dividends and distributions will be paid in cash to such
shareholder by the broker or nominee. Each participant in the Plan is referred
to herein as a "Participant." The Agent will act as Agent for each Participant,
and will open accounts for each Participant under the Plan in the same name as
their Shares are registered.
2. Unless the Fund declares a dividend or distribution payable only in the form
of cash, the Agent will apply all dividends and distributions in the manner set
forth below.
3. If, on the determination date, the market price per Share equals or exceeds
the net asset value per Share on that date (such condition, a "market premium"),
the Agent will receive the dividend or distribution in newly issued Shares of
the Fund on behalf of Participants. If, on the determination date, the net asset
value per Share exceeds the market price per Share (such condition, a "market
discount"), the Agent will purchase Shares in the open-market. The determination
date will be the fourth New York Stock Exchange trading day (a New York Stock
Exchange trading day being referred to herein as a "Trading Day") preceding the
payment date for the dividend or distribution. For purposes herein, "market
price" will mean the average of the highest and lowest prices at which the
Shares sell on the New York Stock Exchange on the particular date, or if there
is no sale on that date, the average of the closing bid and asked quotations.
4. Purchases made by the Agent will be made as soon as practicable commencing on
the Trading Day following the determination date and terminating no later than
30 days after the dividend or distribution payment date except where temporary
curtailment or suspension of purchase is necessary to comply with applicable
provisions of federal securities law; provided, however, that such purchases
will, in any event, terminate on the earlier of (i) 60 days after the dividend
or distribution payment date and (ii) the Trading Day prior to the "ex-dividend"
date next succeeding the dividend or distribution payment date.
PAGE 20
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
5. If (i) the Agent has not invested the full dividend amount in open-market
purchases by the date specified in paragraph 4 above as the date on which such
purchases must terminate or (ii) a market discount shifts to a market premium
during the purchase period, then the Agent will cease making open-market
purchases and will receive the uninvested portion of the dividend amount in
newly issued Shares (x) in the case of (i) above, at the close of business on
the date the Agent is required to terminate making open-market purchases as
specified in paragraph 4 above or (y) in the case of (ii) above, at the close of
business on the date such shift occurs; but in no event prior to the payment
date for the dividend or distribution.
6. In the event that all or part of a dividend or distribution amount is to be
paid in newly issued Shares, such Shares will be issued to Participants in
accordance with the following formula: (i) if, on the valuation date, the net
asset value per Share is less than or equal to the market price per Share, then
the newly issued Shares will be valued at net asset value per Share on the
valuation date; provided, however, that if the net asset value is less than 95%
of the market price on the valuation date, then such Shares will be issued at
95% of the market price and (ii) if, on the valuation date, the net asset value
per Share is greater than the market price per Share, then the newly issued
Shares will be issued at the market price on the valuation date. The valuation
date will be the dividend or distribution payment date, except that with respect
to Shares issued pursuant to paragraph 5 above, the valuation date will be the
date such Shares are issued. If a date that would otherwise be a valuation date
is not a Trading Day, the valuation date will be the next preceding Trading Day.
7. Participants have the option of making additional cash payments to the Agent,
monthly, in a minimum amount of $250, for investment in Shares. The Agent will
use all such funds received from Participants to purchase Shares in the open
market on or about the first business day of each month. To avoid unnecessary
cash accumulations, and also to allow ample time for receipt and processing by
the Agent, Participants should send in voluntary cash payments to be received by
the Agent approximately 10 days before an applicable purchase date specified
above. A Participant may withdraw a voluntary cash payment by written notice, if
the notice is received by the Agent not less than 48 hours before such payment
is to be invested.
8. Purchases by the Agent pursuant to paragraphs 4 and 7 above may be made on
any securities exchange on which the Shares are traded, in the over-the-counter
market or in negotiated transactions, and may be on such terms as to price,
delivery and otherwise as the Agent shall determine. Funds held by the Agent
uninvested will not bear interest, and it is understood that, in any event, the
Agent shall have no liability in connection with any inability to purchase
Shares within the time periods herein provided, or with the timing of any
purchases effected. The Agent shall have no responsibility as to the value of
the Shares acquired for the Participant's account. The Agent may commingle
amounts of all Participants to be used for open-market purchases of Shares and
the price per Share allocable to each Participant in connection with such
purchases shall be the average price (including brokerage commissions) of all
Shares purchased by the Agent.
PAGE 21
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
9. The Agent will maintain all Participants' accounts in the Plan and will
furnish written confirmations of all transactions in each account, including
information needed by Participants for personal and tax records. The Agent will
hold Shares acquired pursuant to the Plan in noncertificated form in the
Participant's name or that of its nominee, and each Participant's proxy will
include those Shares purchased pursuant to the Plan. The Agent will forward to
Participants any proxy solicitation material and will vote any Shares so held
for Participants only in accordance with the proxy returned by Participants to
the Fund. Upon written request, the Agent will deliver to Participants, without
charge, a certificate or certificates for the full Shares.
10. The Agent will confirm to Participants each acquisition made for their
respective accounts as soon as practicable but not later than 60 days after the
date thereof. Although Participants may from time to time have an undivided
fractional interest (computed to three decimal places) in a Share of the Fund,
no certificates for fractional shares will be issued. Dividends and
distributions on fractional shares will be credited to each Participant's
account. In the event of termination of a Participant's account under the Plan,
the Agent will adjust for any such undivided fractional interest in cash at the
market value of the Fund's Shares at the time of termination less the pro rata
expense of any sale required to make such an adjustment.
11. Any share dividends or split shares distributed by the Fund on Shares held
by the Agent for Participants will be credited to their respective accounts. In
the event that the Fund makes available to Participants rights to purchase
additional Shares or other securities, the Shares held for Participants under
the Plan will be added to other Shares held by the Participants in calculating
the number of rights to be issued to Participants.
12. The Agent's service fee for handling capital gains distributions or income
dividends will be paid by the Fund. Participants will be charged a pro rata
share of brokerage commissions on all open-market purchases.
13. Participants may terminate their accounts under the Plan by notifying the
Agent in writing. Such termination will be effective immediately if notice is
received by the Agent not less than 10 days prior to any dividend or
distribution record date; otherwise such termination will be effective on the
first Trading Day after the payment date for such dividend or distribution with
respect to any subsequent dividend or distribution. The Plan may be amended or
terminated by the Fund as applied to any voluntary cash payments made and any
income dividend or capital gains distribution paid subsequent to written notice
of the change or termination sent to Participants at least 30 days prior to the
record date for the income dividend or capital gains distribution. The Plan may
be amended or terminated by the Agent, with the Fund's prior written consent, on
at least 30 days' written notice to Participants. Notwithstanding the preceding
two sentences, the Agent or the Fund may amend or supplement the Plan at any
time or times when necessary or appropriate to comply with applicable law or
rules or policies of the Securities and Exchange Commission or any other
regulatory authority. Upon any termination, the Agent will cause a certificate
or certificates for the
PAGE 22
T H E E M E R G I N G M A R K E T S I N C O M E F U N D I I I N C
full Shares held by each Participant under the Plan and cash adjustment for any
fraction to be delivered to each Participant without charge.
14. Any amendment or supplement shall be deemed to be accepted by each
Participant unless, prior to the effective date thereof, the Agent receives
written notice of the termination of the Participant's account under the Plan.
Any such amendment may include an appointment by the Agent in its place and
stead of a successor Agent under these terms and conditions, with full power and
authority to perform all or any of the acts to be performed by the Agent under
these terms and conditions. Upon any such appointment of an Agent for the
purpose of receiving dividends and distributions, the Fund will be authorized to
pay to such successor Agent, for each Participant's account, all dividends and
distributions payable on Shares of the Fund held in each Participant's name or
under the Plan for retention or application by such successor Agent as provided
in these terms and conditions.
15. In the case of Participants, such as banks, broker-dealers or other
nominees, which hold Shares for others who are beneficial owners ("Nominee
Holders"), the Agent will administer the Plan on the basis of the number of
Shares certified from time to time by each Nominee Holder as representing the
total amount registered in the Nominee Holder's name and held for the account of
beneficial owners who are to participate in the Plan.
16. The Agent shall at all times act in good faith and use its best efforts
within reasonable limits to insure the accuracy of all services performed under
this Agreement and to comply with applicable law, but assumes no responsibility
and shall not be liable for loss or damage due to errors unless such error is
caused by its negligence, bad faith, or willful misconduct or that of its
employees.
17. All correspondence concerning the Plan should be directed to the Agent at 40
Wall Street, 46th Floor, New York, New York 10005.
The report is transmitted to the shareholders of the Fund for their information.
This is not a prospectus, circular or representation intended for use in the
purchase of shares of the Fund or any securities mentioned in this report.
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that the Fund may purchase at market prices from time to
time shares of its common stock in the open market.
PAGE 23
PT 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, emeritus Director
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 and Director, Smith Barney Fund Salomon Brothers Asset Management Inc
Management LLC and Travelers Investment 7 World Trade Center
Advisers, Inc. New York, New York 10048
RIORDAN ROETT
Professor and Director, CUSTODIAN
Latin American Studies Program, Brown Brothers Harriman & Co.
Paul H. Nitze School of Advanced 40 Water Street
International Studies, Boston, Massachusetts 02109
Johns Hopkins University
DIVIDEND DISBURSING AND TRANSFER AGENT
JESWALD W. SALACUSE American Stock Transfer &Trust Company
Henry J. Braker Professor of 40 Wall Street
Commercial Law, and formerly Dean, New York, New York 10005
The Fletcher School of Law & Diplomacy
Tufts University INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
STEPHEN J. TREADWAY 1177 Avenue of the Americas
Co-Chairman of the Board; New York, New York 10036
Executive Vice President,
PIMCO Advisors LP LEGAL COUNSEL
Chairman and President, Simpson Thacher & Bartlett
PIMCO Funds Distributors LLC 425 Lexington Avenue
New York, New York 10017
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
ANTHONY PACE
Controller
CHRISTINA T. SYDOR
Secretary
(THIS PAGE INTENTIONALLY LEFT BLANK)
(THIS PAGE INTENTIONALLY LEFT BLANK)
(THIS PAGE INTENTIONALLY LEFT BLANK)
The Emerging Markets
Income Fund II Inc
Annual Report
May 31, 2001
--------------------------------------------------------
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
EDFANN 5/01