The Emerging Markets
Income Fund Inc
April 17, 2001
Dear Shareholders:
We are pleased to provide this semi-annual report for The Emerging Markets
Income Fund Inc ("Fund") for the period ended February 28, 2001. Included in
this report is an analysis of the Fund's performance versus the benchmark, a
commentary on emerging markets debt, a statement of the Fund's investments as of
February 28, 2001 and unaudited financial statements for the six months ended
February 28, 2001.
We are proud to report that our director, Charles Barber was named Fund Trustee
of the Year in March 2001 by Fund Directions, a publication of Institutional
Investor, Inc. According to the article, Mr. Barber received this honor for his
"tireless efforts as a vigilant representative of shareholder interests."
During the six months ended February 28, 2001, the net asset value ("NAV")1 of
the Fund decreased from $14.01 per share at August 31, 2000 to $13.33 per share
as of February 28, 2001. Dividends of $0.825 per share from net investment
income were paid during this period. Assuming reinvestment of these dividends in
additional shares of the Fund, the total rate of return based on NAV for the six
months ended February 28, 2001 was 1.34%. In comparison, the J.P. Morgan
Emerging Markets Bond Index Plus ("EMBI+")2, a standard measure of return for
the emerging markets debt returned 3.78%.
As of February 28, 2001, the Fund, as a percentage of total investments, was
approximately 98% invested in securities of emerging market issuers, including
obligations of sovereign governments and companies. The balance of the Fund's
assets was invested in short-term investments.
Emerging Markets Debt Securities
Emerging markets debt returned 3.78% for the period ended February 28, 2001, as
measured by the EMBI+. Performance of emerging markets debt was mixed throughout
the period even though nine countries out of a total of seventeen in the EMBI+
managed to perform better than the EMBI+. This is significant by historical
standards, but the positive tone created in earlier periods was dampened due to
Turkey's banking crisis. Turkey returned negative 15.42% for the period.
Technical factors did, however, remain strong, and this helped the asset class
decouple from other risk oriented markets as it outperformed most financial
assets, especially U.S. and European high-yield bonds and global equities for
the period.
The inflationary bias of the U.S. Federal Reserve Board ("Fed") in effect
through November 2000 had driven interest rates to 6.50%. More recently, the
market received a boost as the Fed changed its
------------
1 The NAV is calculated by subtracting total liabilities from the closing value
of all securities held by the Fund (plus all other assets) and dividing the
result (total net assets) by the total number of shares outstanding. The NAV
fluctuates with the changes in the market price of the securities in which the
Fund has invested. However, the price at which an investor buys or sells
shares of the Fund is its market (NYSE) price as determined by supply and
demand.
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. Please note an investor cannot invest directly in an
index.
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 N C
focus on the U.S. economy from inflation to weakness and commenced easing
interest rates in January. The Fed cut interest rates twice, January 3, and
January 31, 2001, for a total of 100 basis points3, bringing interest rates to
5.50%. On March 20, 2001, the Fed cut interest rates by an additional 50 basis
points, in addition to the January interest rate cuts. In our view, the Fed's
changing bias was caused by evidence that U.S. economic growth has slowed
considerably in recent months.
Oil prices, an important driver of value in the emerging markets debt, continue
to remain at high levels. Fiscal balances and monetary reserves improved
substantially as rising oil prices contributed to overall credit quality in
Russia, Venezuela, Algeria, Colombia and Mexico, all oil producers. Prices
fluctuated during the period, ranging from a low of $24.72 per barrel to a high
of $32.97. Oil prices closed the period at $27.50. We think stable or slightly
weaker oil prices will be a modest benefit for the oil importers, without
significantly undermining the very strong external and fiscal performance of the
major oil exporters.
Return volatility4 for emerging markets debt remained substantially below
historical levels. However, the combination of the Turkish and Argentinean
financial and political crises in January and February registered an upward
spike in volatility. We believe that this will normalize as the year progresses.
(Of course, no guarantees can be given that our expectations will be met.)
The following is a brief description of developments in key countries over the
past months.
Ecuador
Ecuador, the top performer in the EMBI+ index, returned 19.83% for the period.
Eight additional countries outperformed the EMBI+ during the period. Ecuador
completed its debt restructuring of defaulted Brady bonds5, exchanging them for
two issues of global bonds during the period. The relatively fast resolution of
this Brady bond default surprised the market and drove Ecuador's returns. In
addition, the Paris Club6 granted Ecuador a standard rescheduling of US$880
million of bilateral debt. We believe that Ecuador continues to face a number of
economic and political challenges. President Noboa has developed a good working
relationship with the International Monetary Fund ("IMF")7, an important factor
that has been missing in recent years. In our opinion, Ecuador's budget
forecasts seem realistic, and are not based on sustained high oil prices. Yet,
we believe the country still needs comprehensive tax reforms to improve its
overall fiscal health.
Venezuela
Venezuela returned 6.01% for the period, as measured by the EMBI+. Oil price
strength also continues to drive the Venezuelan economy as fiscal and external
accounts have shown marked improvement on year earlier levels. A clear measure
of the positive impact that rising oil prices have had on Venezuelan credit
quality is the level of international reserves. The stock of international
reserves, approximately $23 billion, exceeds the stock of external debt. One
further promising figure for 2000 was the lowest reported inflation figure in
fourteen years, 13.4%, down from 20% in 1999. We believe the country continues
to be an attractive credit at current spread levels, trading at approximately
130 basis points over the EMBI+.
-------------
3 A basis point is 0.01%, or one one-hundredth of a percent.
4 Return volatility is the standard deviation of monthly returns over the period
being measured.
5 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.
6 The Paris Club is the official group of sovereign lenders who have extended
credit to sovereign governments.
7 The IMF is an international organization of 183 member countries, estabished
to promote international monetary cooperation, exchange stability, and orderly
exchange arrangements.
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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 N C
Mexico
Mexico returned 4.63% for the period as measured by the EMBI+. Mexico continues
to reap the rewards of foreign fund flows since it was upgraded to
investment-grade8 by Moody's Investors Service, Inc. in March 2000. The period
was dominated by political events as Vincente Fox was sworn in as president and
completed the formation of his cabinet. In our opinion, the appointment of Gil
Diaz as minister of finance was especially well received by the market. We also
believe that the Mexican economy benefited from rising oil prices as reflected
in its overall levels of growth and fiscal strength. Mexico's progress and its
sound fundamentals have been widely recognized by the market. Mexican debt, with
spreads9 at 415 basis points currently trades approximately 350 basis points
tight to the EMBI+.
Brazil
Brazil returned 4.07% for the period as measured by the EMBI+. In our view,
Brazilian government officials have made substantial progress in dealing with
the country's debt problems and this continues to be at the core of Brazil's
solid success. We believe Brazil remains a likely Standard and Poor's Investor
Service upgrade candidate in 2001. In our opinion, low inflation, continued
growth and moderating oil prices should enable Brazil to continue to improve its
credit quality.
Russia
Russia returned a disappointing 0.82% for the period, as measured by the EMBI+.
Russian performance was hurt in the fourth quarter of 2000 as many investors
sought higher quality credits amidst growing concerns about the pace of
worldwide economic growth. Investment grade credits in countries such as Poland
and South Korea, which returned 10.04% and 7.98%, respectively, for the period,
outperformed the EMBI+. As mentioned earlier, sustained high oil prices drove
Russia's economy earlier in the year and every $1 increase in the price of oil
reportedly increases Russia's annual export revenues by approximately $1
billion. Russia's hard currency reserves doubled from 1999 levels to end the
year in excess of $26 billion. We believe that this reserve position
substantially strengthens Russia's credit quality. The Russian Federation
Council approved the 2001 Budget in the fourth quarter of 2001. The Budget is
considered conservative and we believe the London Club10 financing received in
August makes Russia's 2001 debt service obligations very manageable. In
addition, as reported, Russia recently agreed to service their Paris Club debt
with scheduled payments due to commence in April 2001.
Turkey
Turkey was the worst performer in the index for the period, returning a negative
15.42% as measured by the EMBI+. The November banking crisis became a full-scale
balance of payments crisis for Turkey. This February, the IMF granted the
Turkish treasury a US$1.4 billion injection to restore confidence in the banking
sector. Political disagreements between the Turkish president and the prime
minister have contributed to the severity of the crisis. We believe that the
potential for negative political surprises has not disappeared and the political
situation remains unpredictable. We will continue to monitor developments in
Turkey. As of February 28, 2001, we had no exposure to Turkish debt in the Fund.
-------------
8 Investment-grade bonds are those rated Aaa, Aa, A and Baa by
Moody's Investors Service, Inc. or AAA, AA, A and BBB by Standard & Poor's
Rating Service, or that have an equivalent rating by any nationally
recognized statistical rating organization, or are determined by the
portfolio manager to be of equivalent quality.
9 Spread is the difference between yields on securities of the same quality but
different maturities or the difference between yields on securities of the
same maturity but different quality.
10 The London Club is the official group of creditors lending to emerging
market 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 N C
Outlook
The market for emerging markets debt closed the reporting period with spreads at
748 basis points over U.S. Treasuries, 110 basis points wider from September
levels. Emerging markets debt has come under pressure with the industrial
economic slowdown, the poor performance of the equity markets and the spike in
volatility in Turkey and Argentina.
Annual Shareholders Meeting
The Fund held its annual shareholders meeting on December 19, 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
--------- --------- --------------
Jeswald W. Salacuse 3,391,673 2,233
Riordan Roett 3,391,673 2,233
2. Ratification of PricewaterhouseCoopers LLP as the Independent Accountants of
the Fund
Votes For Votes Against Votes Abstained
--------- ------------ ---------------
3,393,425 -- 481
In a continuing effort to provide timely information concerning The Emerging
Markets Income Fund Inc, shareholders may 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 concerning your Emerging Markets
Income Fund 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).
We appreciate the confidence you have demonstrated in the past and hope to
continue to serve you in the future years.
Sincerely,
/s/ Stephen J. Treadway /s/ William D. Cvengros
Stephen J. Treadway William D. Cvengros
Co-Chairman of the Board Co-Chairman of the Board
/s/ Peter J. Wilby /s/ James E. Craige
Peter J. Wilby James E. Craige
Executive Vice President Executive Vice President
Page 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 N C
Statement of Investments (unaudited)
February 28, 2001
Face
Amount (a) Bonds -- 92.3% Value
---------------------------------------------------------------------------------------------------
Argentina -- 15.0%
Republic of Argentina:
Peso 250,000+ 8.750% due 7/10/02.............................................. $ 235,657
500,000+ 14.100% due 11/30/02*........................................... 506,750
4,150,000+ 11.912% due 4/10/05*(b)......................................... 3,978,812
Peso 1,500,000+ 11.750% due 2/12/07............................................. 1,323,929
1,200,000+ 12.375% due 2/21/12 ............................................ 1,138,500
Peso 3,208,002+ BOCON, Pro 1, 2.3772% due 4/1/07*............................... 1,944,395
----------
9,128,043
----------
Brazil -- 21.1%
Federal Republic of Brazil:
3,927,000+ 12.250% due 3/6/30 ............................................. 3,636,402
11,296,000 11.000% due 8/17/40## .......................................... 9,178,000
----------
12,814,402
----------
Bulgaria -- 5.9%
Republic of Bulgaria:
29,000+ DISC, Series A, 6.3125% due 7/28/24* ........................... 21,822
4,750,000+ FLIRB, Series A, 3.000% due 7/28/12* ........................... 3,544,688
6,000+ IAB, 6.1325% due 7/28/11* ...................................... 4,500
----------
3,571,010
----------
Colombia -- 4.7%
Republic of Colombia:
100,000+ 9.750% due 4/23/09 ............................................. 90,625
3,000,000+ 11.750% due 2/25/20 ............................................ 2,790,000
----------
2,880,625
----------
Costa Rica -- 0.6%
350,000+ Costa Rica, 9.995% due 8/1/20# ................................... 366,625
----------
Ecuador -- 5.9%
Republic of Ecuador:
1,363,000+ 4.000% due 8/15/30*,# .......................................... 599,039
6,850,000+ 4.000% due 8/15/30* ............................................ 3,010,575
----------
3,609,614
----------
Indonesia -- 1.3%
500,000+ APP China Group Ltd, 14.000% due 3/15/10(c) ...................... 132,500
1,000,000+ APP International Finance Company B.V., 11.750% due 10/1/05 ...... 277,500
1,500,000+ Tjiwi Kimia International Finance Company B.V., 10.000% due 8/1/04 390,000
----------
800,000
----------
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 N C
Statement of Investments (unaudited) (continued)
February 28, 2001
Face
Amount (a) Bonds -- 92.3% (concluded) Value
---------------------------------------------------------------------------------------------------
Ivory Coast -- 0.7%
Republic of Ivory Coast:
909,150+ due 3/29/18(d)(e) .............................................. $ 115,917
2,107,000+ FLIRB, due 3/29/18#(d)(e) ...................................... 242,305
375,000+ PDI Bond, due 3/29/18#(d)(e) ................................... 43,125
----------
401,347
----------
Jamaica -- 1.2%
Government of Jamaica:
350,000+ 10.875% due 6/10/05 ............................................ 347,375
350,000+ 12.750% due 9/1/07# ............................................ 364,875
----------
712,250
----------
Mexico -- 1.2%
1,000,000+ Hylsa S.A. de C.V., 9.250% due 9/15/07 ........................... 700,018
----------
Panama -- 1.4%
1,050,000+ Republic of Panama, IRB, 4.500% due 7/17/14* ..................... 867,562
----------
Peru -- 3.1%
2,750,000+ Republic of Peru, PDI Bond, 4.500% due 3/7/17* ................... 1,876,875
----------
Philippines -- 2.6%
1,925,000+ Republic of the Philippines, 9.875% due 1/15/19 .................. 1,580,906
----------
Russia -- 5.3%
Russian Government:
4,000,000+ 10.000% due 6/26/07 ............................................ 3,159,640
17,360+ 8.250% due 3/31/10 ............................................. 11,745
69,500+ 2.500% due 3/31/30* ............................................ 28,256
----------
3,199,641
----------
Uruguay -- 1.0%
631,579+ Uruguay, DCB, Series B, 7.125% due 2/18/07* ...................... 609,473
----------
Venezuela -- 21.3%
Republic of Venezuela:
3,900,000+ 13.625% due 8/15/18## .......................................... 3,763,500
5,250,000+ 9.250% due 9/15/27 ............................................. 3,657,938
4,023,790+ FLIRB, Series A, 7.625% due 3/31/07* ........................... 3,412,677
2,476,164+ FLIRB, Series B, 7.625% due 3/31/07* ........................... 2,100,096
----------
12,934,211
----------
Total Bonds (cost -- $56,726,024)................................. 56,052,602
----------
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 N C
Statement of Investments (unaudited) (continued)
February 28, 2001
Face
Amount (a) Loan Participations, ++ -- 5.8% Value
----------------------------------------------------------------------------------------------------
The People's Democratic Republic of Algeria:
256,992+ Tranche 1, 7.6875% due 9/4/06* (Chase Manhattan Bank) ........... $ 224,868
3,942,500+ Tranche 3, 7.6875% due 3/4/10* (Chase Manhattan Bank) ........... 3,242,706
33,333+ Kingdom of Morocco, Tranche A, 7.5625% due 1/1/09* (J.P. Morgan) .. 29,625
----------
Total Loan Participations (cost -- $3,140,213)..................... 3,497,199
----------
Number of
Contracts Purchase Call Options (e) -- 0.4%
----------------------------------------------------------------------------------------------------
Russian Government:
28 8.250% due 3/31/10, Call @ 68.50, Expire 3/14/01................. 25,200
210 2.500% due 3/31/30, Call @ 41.00, Expire 3/14/01 ................ 201,600
----------
Total Options (cost -- $233,100)................................... 226,800
----------
Warrants Warrants (e) -- 0.0%
----------------------------------------------------------------------------------------------------
500+ Asia Pulp and Papers Warrants, expire 3/15/05# (Cost -- $0) ....... 50
----------
Principal
Amount Repurchase Agreement -- 1.5%
----------------------------------------------------------------------------------------------------
893,000+ UBS Warburg LLC, 5.370% due 3/1/01;
Proceeds at maturity -- $893,133; Fully collateralized
by U.S. Treasury Bond, 10.750% due 8/15/05;
Market value -- $911,720) (Cost -- $893,000).................... 893,000
-----------
Total Investments -- 100.0% (Cost -- $60,992,337**)................ $60,669,651
===========
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 N C
Statement of Investments (unaudited) (concluded)
February 28, 2001
-----------
(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) Security is currently in default.
(e) Non-income producing security.
* Rate shown reflects rate in effect at February 28, 2001 on instrument with
variable rates or step coupon rates.
** Aggregate cost for federal income tax purposes is substantially the same.
+ All or a portion of the security was 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 under the Securities Act of 1933, this security can
only be sold to qualified institutional investors.
## The following securities were segregated at February 28, 2001 to cover
outstanding written put options:
Face Market Value Number of
Amount Securities Segregated of Securities Written Put Options Contracts
-------- --------------------- ------------- ------------------- ---------
Federal Republic of Brazil, Russian Governments, 8.250% due
11,296,000 11.000% due 8/17/40 9,178,000 3/31/10 @ 68.50, Expire 3/14/01 28
Republic of Venezuela, Russian Governments, 2.500% due
150,000 13.625% due 8/15/18 1,447,500 3/31/30 @ 41.00, Expire 3/14/01 210
Abbreviations used in this statement:
BOCON - Bonos De Consolidacion.
DCB - Debt Conversion Bond.
DISC - Discount Bond.
FLIRB - Front Loaded Interest Reduction Bond.
IAB - Interest Arrears Bond.
IRB - Interest Reduction 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 N C
Statement of Assets and Liabilities
February 28, 2001 (unaudited)
Assets
Investments, at value (cost -- $60,992,337).................................. $60,669,651
Receivable for securities sold............................................... 12,289,190
Interest receivable.......................................................... 1,501,020
Prepaid expenses............................................................. 87
-----------
Total Assets................................................................. 74,459,948
-----------
Liabilities
Payable to bank.............................................................. 15,314
Loan payable (Note 4)........................................................ 20,000,000
Payable for securities purchased............................................. 233,100
Written options, at value (Premium received -- $223,440)..................... 205,940
Accrued interest expense on loan............................................. 33,380
Management fee payable (Note 2).............................................. 29,179
Advisory fee payable (Note 2)................................................ 20,842
Accrued expenses............................................................. 215,523
-----------
Total Liabilities............................................................ 20,753,278
-----------
Net Assets................................................................... $53,706,670
===========
Net Assets
Common Stock ($0.001 par value, authorized
100,000,000; 4,028,994 shares outstanding)................................ $ 4,029
Additional paid-in capital................................................... 55,795,823
Undistributed net investment income.......................................... 190,370
Accumulated net realized loss on investments................................. (1,978,366)
Net unrealized depreciation on investments and foreign currency.............. (305,186)
-----------
Net Assets................................................................... $53,706,670
===========
Net Asset Value Per Share ($53,706,670 / 4,028,994 shares)...................... $13.33
======
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 N C
Statement of Operations
For the Six Months Ended February 28, 2001 (unaudited)
Income
Interest (includes discount accretion of $861,845)................................. $4,532,454
Expenses
Interest on loan..................................................... $877,540
Management fee....................................................... 179,892
Advisory fee......................................................... 128,494
Custodian............................................................ 32,218
Audit and tax services............................................... 26,245
Legal................................................................ 20,272
Directors' fees and expenses......................................... 15,371
Printing............................................................. 12,489
Transfer agent expenses.............................................. 5,973
Listing fees......................................................... 5,788
Other............................................................... 8,145 1,312,427
--------- ----------
Net Investment Income................................................................. 3,220,027
----------
Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions
Net Realized Gain on:
Investments...................................................................... 1,718,934
Foreign currency transactions.................................................... 44,746
----------
1,763,680
----------
Change in Net Unrealized Depreciation on:
Investments...................................................................... (4,367,314)
Foreign currency contracts and other assets and liabilities
denominated in foreign currencies............................................. (9,096)
----------
Increase in Net Unrealized Depreciation.......................................... (4,376,410)
----------
Net Loss on Investments and Foreign Currency Transactions ............................. (2,612,730)
----------
Net Increase in Net Assets From Operations ............................................ $ 607,297
==========
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 N C
Statement of Changes in Net Assets
For the Six Months Ended February 28, 2001 (unaudited)
and the Year Ended August 31, 2000
2001 2000
-----------------------------------------------------------------------------------------------------
Operations
Net investment income............................................. $ 3,220,027 $ 6,744,090
Net realized gain................................................. 1,763,680 2,962,700
(Increase) decrease in net unrealized depreciation................ (4,376,410) 8,313,501
----------- -----------
Increase in Net Assets From Operations............................ 607,297 18,020,291
----------- -----------
Dividends and Distributions to Shareholders From:
Net investment income............................................. (3,320,524) (6,605,849)
Capital........................................................... -- --
----------- -----------
Decrease in Net Assets From
Dividends and Distributions to Shareholders.................... (3,320,524) (6,605,849)
----------- -----------
Capital Share Transactions
Proceeds from shares issued in reinvestment of dividends
(8,234 and 44,240 shares issued)............................... 107,121 521,742
----------- -----------
Total Increase (Decrease) in Net Assets.............................. (2,606,106) 11,936,184
----------- -----------
Net Assets
Beginning of period............................................... 56,312,776 44,376,592
----------- -----------
End of period (includes undistributed net investment income of
$190,370 and $290,867, respectively)........................... $53,706,670 $56,312,776
=========== ===========
Statement of Cash Flows
For the Six Months Ended February 28, 2001 (unaudited)
Cash Flows Provided by Operating Activities:
Purchases of securities........................................................ $(61,210,771)
Net purchases of short-term investments........................................ (893,000)
Proceeds from sales of securities and principal paydowns....................... 62,076,449
------------
(27,322)
Net investment income.......................................................... 3,220,027
Adjustments to reconcile net investment income to net cash provided by
operating activities:
Accretion of discount on investments........................................... (861,845)
Net change in receivables/payables related to operations....................... 564,524
------------
Net Cash Provided by Operating Activities...................................... 2,895,384
------------
Cash Flows Used by Financing Activities:
Proceeds from shares issued in reinvestment of dividends....................... 107,121
Dividends and distributions paid............................................... (3,320,524)
------------
Net Cash Used by Financing Activities.......................................... (3,213,403)
------------
Net Decrease in Cash.............................................................. (318,019)
Cash at Beginning of Period....................................................... 302,705
------------
Payable to Bank at End of Period.................................................. $ (15,314)
============
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 N C
Notes to Financial Statements (unaudited)
1. Organization and Significant Accounting Policies
The Emerging Markets Income Fund Inc (the "Fund") was incorporated in
Maryland on July 30, 1992 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 market
countries. As a secondary objective, the Fund seeks capital appreciation.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles
("GAAP"). The preparation of financial statements in accordance with GAAP
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results may differ
from those estimates.
(a) Securities valuation. In valuing the Fund's assets, all securities for
which market quotations are readily available are valued (i) at the last
sale price prior to the time of determination if there was a sale on the
date of determination, (ii) at the mean between the last current bid and
asked prices if there was no sales price on such date and bid and asked
quotations are available, and (iii) at the bid price if there was no sales
price on such date and only bid quotations are available. Publicly traded
foreign government debt securities are typically traded internationally in
the over-the-counter market, and are valued at the mean between the last
current bid and asked price as of the close of business of that market.
However, where the spread between bid and asked price exceeds five percent
of the par value of the security, the security is valued at the bid price.
Securities may also be valued by independent pricing services which use
prices provided by market-makers or estimates of market values obtained
from yield data relating to instruments or securities with similar
characteristics. Short-term investments having a maturity of 60 days or
less are valued at amortized cost, unless the Board of Directors determines
that such valuation does not constitute fair value. Securities for which
reliable quotations are not readily available and all other securities and
assets are valued at fair value as determined in good faith by, or under
procedures established by, the Board of Directors.
(b) Securities transactions and investment income. Securities transactions
are recorded on the trade date. Interest income is accrued on a daily
basis. Discount on securities purchased is accreted on an effective yield
basis over the life of the security. The Fund uses the specific
identification method for determining realized gain or loss on investments
sold.
(c) Foreign currency translation. The books and records of the Fund are
maintained in U.S. dollars. Portfolio securities and other assets and
liabilities denominated in foreign currencies are translated into U.S.
dollar amounts at the date of valuation using the 12:00 noon rate of
exchange reported by Reuters. Purchases and sales of portfolio securities
and income and expense items denominated in foreign currencies are
translated into U.S. dollars at rates of exchange prevailing on the
respective dates of such transactions. Net realized gains and losses on
foreign currency transactions represent net gains and losses from sales and
maturities of forward currency contracts, disposition of foreign
currencies, currency gains and losses realized between the trade and
settlement dates on securities transactions and the difference between the
amount of 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.
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 N C
Notes to Financial Statements (unaudited) (continued)
1. Organization and Significant Accounting Policies (continued)
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 dividend
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.
(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
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 N C
Notes to Financial Statements (unaudited) (continued)
1. Organization and Significant Accounting Policies (concluded)
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 six
months ended February 28, 2001, the Fund paid interest expense of $895,020.
2. Management and Advisory Fees and Other Transactions
The Fund has entered into a management agreement with Salomon Brothers
Asset Management Inc (the "Investment Manager"), a wholly owned subsidiary of
Salomon Smith Barney Holdings Inc. ("SSBH"). The Investment Manager is
responsible for the day-to-day management of the Fund's investment portfolio as
well as providing certain clerical services relating to the Fund's operations,
maintenance of the Fund's records, preparation of reports and supervision of the
Fund's arrangements with its custodian and transfer and dividend paying agent.
The management fee for these services is payable monthly at an annual rate of
0.70% of the Fund's average weekly net assets.
The Fund has also entered into an investment advisory agreement with PIMCO
Advisors L.P. (the "Investment Adviser") to provide financial, economic and
political advice concerning emerging market countries and also, as appropriate,
to be involved in aiding the process of emerging market country selection. The
advisory fee for these services is payable monthly at an annual rate of 0.50% of
the Fund's average weekly net assets.
At February 28, 2001, the Investment Manager owned 5,562 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.
3. Portfolio Activity and Tax Information
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the six months ended February 28, 2001 aggregated
$60,866,655 and $64,990,871 respectively. The federal income tax cost basis of
the Fund's investments at February 28, 2001 was substantially the same as the
cost basis for financial reporting. Gross unrealized appreciation and
depreciation amounted to $4,043,495 and $4,366,181, respectively, resulting in a
net unrealized depreciation on investments of $322,686.
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 N C
Notes to Financial Statements (unaudited) (continued)
3. Portfolio Activity and Tax Information (continued)
The following written put option transactions occurred during the six
months ended February 28, 2001:
Number of
Contracts Premium
------- --------
Options written, outstanding at August 31, 2000 -- $ 0
Options written during the six months ended February 28, 2001 238 223,440
------- --------
Options written, outstanding at February 28, 2001 238 $223,440
======= ========
The following represents the written put options open at February 28, 2001:
Number of Strike
Contracts Expiration Price Value
--------- ---------- ----- ------
28 Russian Government, 8.250% due 3/31/10 3/14/01 68.50 $ (27,440)
210 Russian Government, 2.500% due 3/31/30 3/14/01 41.00 (178,500)
----------
Total Written Put Options
(Premium received -- $223,440) $(205,940)
==========
4. Bank Loan
The Fund has borrowed $20,000,000 pursuant to a secured loan agreement (the
"Loan Agreement") with ING Baring (U.S.) Capital LLC. The interest rate on the
loan is 8.45% and the maturity date is May 21, 2001. The collateral for the loan
was valued at $61,508,114 on February 28, 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 February 28, 2001 was $3,497,199.
In connection with purchasing 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 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.
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
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 N C
Notes to Financial Statements (unaudited) (concluded)
6. "When and If " Issued Bonds (continued)
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 February 28, 2001, the Fund has a concentration
risk in sovereign debt of emerging market countries.
The net asset value of the Fund could be negatively affected if the Fund
were required to liquidate assets in other than an orderly manner and/or in
adverse market conditions to repay any bank loans outstanding.
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 February 28, 2001, the Fund has no
outstanding forward contracts.
A risk in writing a covered call option is that the Fund may forego the
opportunity of profit if the market price of the underlying security increases
and the option is exercised. A 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. 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 February 28, 2001
On March 1, 2001, the Board of Directors of the Fund declared a dividend of
$0.4125 per share, from net investment income, payable on March 30, 2001 to
shareholders of record March 13, 2001.
10. Capital Loss Carryforward
At August 31, 2000, the Fund had, for Federal income tax purposes, a
capital loss carryforward of approximately $3,667,000, available to offset
future capital gains through August 31, 2007. To the extent that these
carryforward losses are used to offset capital gains, it is probable that any
gains so offset will not be distributed.
Page 16
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 N C
Financial Highlights
Selected data per share of common stock outstanding throughout each year:
Period Ended
February 28, Year Ended August 31,
2001 -------------------------------------------------
(unaudited) 2000 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ..... $14.01 $11.16 $ 7.83 $21.89 $18.04
------ ------ ------ ------ ------
Net investment income .................... 0.80 1.72 1.88 2.02 2.10
Net realized gain (loss) and change in
unrealized appreciation
(depreciation) on securities and
foreign currency translations ......... (0.65) 2.78 3.83 (10.84) 5.00
------ ------ ------ ------ ------
Total from investment operations ......... 0.15 4.50 5.71 (8.82) 7.10
------ ------ ------ ------ ------
Dividends and distributions to
shareholders from:
Net investment income ................. (0.83) (1.65) (2.41) (2.03) (2.19)
Net realized capital gains ............ -- -- -- (2.98) (1.06)
Capital ............................... -- -- (0.02) -- --
Distributions in excess of net realized
capital gains ......................... -- -- -- (0.23) --
------ ------ ------ ------ ------
Total dividends and distributions to
shareholders .......................... (0.83) (1.65) (2.43) (5.24) (3.25)
------ ------ ------ ------ ------
Increase in net asset value due to shares
issued on reinvestment of dividends ... -- -- 0.05 -- --
------ ------ ------ ------ ------
Net increase (decrease) in net asset value (0.68) 2.85 3.33 (14.06) 3.85
------ ------ ------ ------ ------
Net asset value, end of period ........... $13.33 $14.01 $11.16 $ 7.83 $21.89
====== ====== ====== ====== ======
Per share market value, end of period .... $13.39 $13.9375 $12.50 $ 9.50 $19.4375
====== ======== ====== ====== ========
Total investment return based on market
price per share (a) ................... 2.62% 27.51% 62.97% -35.00% 39.18%
Ratios to Average Net Assets:
Total expenses, including
interest expense ................... 5.04%(b) 5.00% 5.03% 3.79% 3.58%
Total expenses, excluding
interest expense (operating
expenses) .......................... 1.67%(b) 1.73% 1.85% 1.73% 1.70%
Net investment income ................. 12.37%(b) 13.33% 18.13% 11.56% 10.44%
Supplemental Data:
Net assets, end of period ............. $53,706,670 $56,312,776 $44,376,592 $29,522,593 $76,873,572
Portfolio turnover rate ............... 91% 136% 87% 141% 112%
Bank loan outstanding, end of period... $20,000,000 $20,000,000 $20,000,000 $20,000,000 $20,000,000
Interest rate on bank loan, end
of period .......................... 8.45% 9.06125% 7.17875% 6.28125% 6.50%
Weighted average bank loan ............ $20,000,000 $20,000,000 $20,000,000 $20,000,000 $20,000,000
Weighted average interest rate ........ 8.78%(b) 8.26% 6.48% 6.44% 6.64%
------------
(a) Dividends are assumed, for purposes of this calculation, to be reinvested at
prices obtained under the Fund's dividend reinvestment plan.
(b) Annualized.
Page17
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 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
--------------------------------------------------------------------------------------------------------
November 30, 1996........................... $1,978 $0.56 $8,841 $2.52
February 28, 1997........................... 1,840 0.53 3,833 1.09
May 31, 1997................................ 1,803 0.51 951 0.27
August 31, 1997............................. 1,744 0.50 3,923 1.12
November 30, 1997........................... 1,668 0.47 (5,181) (1.47)
February 27, 1998........................... 1,827 0.51 491 0.14
May 29, 1998................................ 1,996 0.53 (3,192) (0.85)
August 31, 1998............................. 1,721 0.51 (32,372) (8.66)
November 30, 1998........................... 2,052 0.54 13,631 3.61
February 26, 1999........................... 1,938 0.51 (4,077) (1.08)
May 28, 1999................................ 1,775 0.45 5,209 1.32
August 31, 1999............................. 1,615 0.38 (219) (0.02)
November 30, 1999........................... 1,650 0.41 4,745 1.19
February 29, 2000........................... 1,445 0.37 4,634 1.15
May 31, 2000................................ 1,569 0.39 (4,488) (1.12)
August 31, 2000............................. 2,080 0.55 6,385 1.56
November 30, 2000........................... 1,517 0.35 (6,700) (1.64)
February 28, 2001........................... 1,703 0.45 4,087 0.99
*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 N C
Directors The Emerging Markets Income Fund Inc
CHARLES F. BARBER 7 World Trade Center
Consultant; formerly Chairman, New York, New York 10048
ASARCO Inc. For information call (toll free)
LESLIE H. GELB 1-888-777-0102
President, The Council
on Foreign Relations INVESTMENT MANAGER
HEATH B. MCLENDON Salomon Brothers Asset Management Inc
Co-Chairman of the Board; 7 World Trade Center
Managing Director, Salomon New York, New York 10048
Smith Barney Inc.
President and Director, SSB Citi Fund INVESTMENT ADVISER
Management LLC and Travelers PIMCO Advisors L.P.
Investment Advisers, Inc. 800 Newport Center Drive
RIORDAN ROETT Suite 100
Professor and Director, Newport Beach, California 92660
Latin American Studies Program,
Paul H. Nitze School of Advanced CUSTODIAN
International Studies, Brown Brothers Harriman & Co.
Johns Hopkins University 40 Water Street
JESWALD W. SALACUSE Boston, Massachusetts 02109
Henry J. Braker Professor of
Commercial Law, and formerly Dean, DIVIDEND DISBURSING AND TRANSFER AGENT
The Fletcher School of Law & Diplomacy American Stock Transfer & Trust Company
Tufts University 40 Wall Street
STEPHEN J. TREADWAY New York, New York 10005
Co-Chairman of the Board;
Executive Vice President, INDEPENDENT ACCOUNTANTS
PIMCO Advisors LP PricewaterhouseCoopers LLP
Chairman and President, 1177 Avenue of the Americas
PIMCO Funds Distributors LLC New York, New York 10036
Officers LEGAL COUNSEL
Simpson Thacher & Bartlett
HEATH B. MCLENDON 425 Lexington Avenue
Co-Chairman of the Board New York, New York 10017
STEPHEN J. TREADWAY
Co-Chairman of the Board NEW YORK STOCK EXCHANGE SYMBOL
LEWIS E. DAIDONE EMD
Executive Vice President and Treasurer
JAMES E. CRAIGE
Executive Vice President
THOMAS K. FLANAGAN
Executive Vice President
NEWTON SCHOTT
Executive Vice President
PETER J. WILBY
Executive Vice President
ANTHONY PACE
Controller
CHRISTINA T. SYDOR
Secretary
The Emerging Markets
Income Fund Inc
Semi-Annual Report
FEBRUARY 28, 2001
-----------------------------------------------------------
The Emerging Markets Income Fund 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
EMDSEMI 2/01