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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-CSR
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CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-8709
SALOMON BROTHERS HIGH INCOME FUND II INC.
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(Exact name of registrant as specified in charter)
125 Broad Street, New York, NY 10004
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(Address of principal executive offices) (Zip code)
Robert I. Frenkel, Esq.
Salomon Brothers Asset Management Inc
300 First Stamford Place
Stamford, CT 06902
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(Name and address of agent for service)
Registrant's telephone number, including area code: (800) 725-6666
Date of fiscal year end: APRIL 30
Date of reporting period: APRIL 30, 2004
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ITEM 1. REPORT TO STOCKHOLDERS.
The Annual Report to Stockholders is filed herewith.
[GRAPHIC]
SALOMON BROTHERS
HIGH INCOME FUND II INC.
ANNUAL REPORT
April 30, 2004
[LOGO] SALOMON BROTHERS
Asset Management
PFPC Inc.
P.O. Box 43027
Providence, RI 02940-3027
HIXANN 4/04
04-6758
SALOMON BROTHERS HIGH INCOME FUND II INC.
LETTER FROM THE CHAIRMAN
[PHOTO]
R. Jay Gerken
R. Jay Gerken, CFA
Chairman
Dear Shareholder,
The high-yield bond market generated a stellar return over the 12 months ended
April 30, 2004, spurred by an improving economy, which benefited from a
mid-year cut in interest rates. The rally came to a temporary halt in the
summer of 2003 due to a sharp sell-off in the bond market amid interest rate
concerns, but the market resumed course and advanced in the autumn as prices of
U.S. Treasuries stabilized. Although the market's tone was more tempered in the
first four months of 2004 compared to earlier in the fiscal year, as of the
period's close, corporate fundamentals remained strong and yields on high-yield
issues finished significantly above those on higher-rated bonds.
Strong inflows into high-yield bond funds throughout much of the fund's fiscal
year drove demand for high-yield bonds as fund managers deployed the assets,
propelling the market higher. Better-than-expected quarterly earnings and lower
default rates also contributed to this strong demand, while increased capital
market transactions fortified the balance sheets of corporate bond issuers.
Please note that high-yield bonds are subject to additional risks compared with
investment-grade bonds, such as the increased risk of default and greater
volatility because of the lower credit quality of these issues.
Emerging markets debt, as represented by the J.P. Morgan Emerging Markets Bond
Index Plus ("EMBI+")/i/, returned 9.50% for the 12-month period. The year was
made up of ten very strong months followed by a volatile two-month technical
sell-off in March and April 2004. The positive macro environment over the first
ten months was supportive of improving credit quality across the emerging
markets, which, when combined with continued progress on political and economic
reforms in many Latin American countries, encouraged broader investor
participation in emerging markets debt during this time. In addition, the
improving credit quality of the market may have caused some investors to change
their allocation approach to emerging markets from tactical to strategic,
further strengthening technical support for the market.
Please read on for a more detailed look at prevailing economic and market
conditions during the fund's fiscal year and to learn how those conditions and
changes made to the portfolio during this time may have affected fund
performance.
Information About Your Fund
In recent months several issues in the mutual fund industry have come under the
scrutiny of federal and state regulators. The fund's Adviser and some of its
affiliates have received requests for information from various government
regulators regarding market timing, late trading, fees and other mutual fund
issues in connection with various investigations. The fund has been informed
that the Adviser and its affiliates are responding to those information
requests, but are not in a position to predict the outcome of these requests
and investigations.
SALOMON BROTHERS HIGH INCOME FUND II INC.
As always, thank you for your confidence in our stewardship of your assets. We
look forward to helping you continue to meet your financial goals.
Sincerely,
/s/ R. Jay Gerken
R. Jay Gerken, CFA
Chairman, President and Chief Executive Officer
May 19, 2004
SALOMON BROTHERS HIGH INCOME FUND II INC.
MANAGER OVERVIEW
Performance Review
During the 12 months ended April 30, 2004, the fund returned 13.51%, based on
its New York Stock Exchange ("NYSE") market price and 19.99% based on its net
asset value ("NAV")/ii/ per share. In comparison, its benchmark, the unmanaged
Citigroup High-Yield Market Index,/iii/ returned 14.84% and its Lipper high
current yield (leveraged) closed-end funds category average returned 23.49%
over the same timeframe./iv/ Please note that Lipper performance returns are
based on each fund's NAV.
During the 12-month period, the fund distributed dividends to shareholders
totaling $1.38 per share. The performance table shows the fund's 30-day SEC
yield and its 12-month total return based on its NAV and market price as of
April 30, 2004. Past performance is no guarantee of future results. The fund's
yields will vary.
FUND PERFORMANCE AS OF APRIL 30, 2004
12-Month
30-Day Total
Price Per Share SEC Yield Return
$11.03 (NAV) 8.92% 19.99%
$11.75 (NYSE) 8.37% 13.51%
All figures represent past performance and are not a guarantee of future
results. The fund's yields will vary.
Total returns are based on changes in NAV or market price, respectively.
Total returns assume the reinvestment of all dividends and/or capital gains
distributions, if any, in additional shares. The "SEC yield" is a return
figure often quoted by bond and other fixed income mutual funds. This
quotation is based on the most recent 30-day (or one month) period covered by
the fund's filings with the SEC. The yield figure reflects the dividends and
interest earned during the period after deduction of the fund's expenses for
the period. These yields are as of April 30, 2004 and are subject to change.
Factors Driving the High-Yield Market Rally
Earlier last year, the high-yield market/v/ benefited from strong investor
demand for these securities, as evidenced by large inflows of capital into
high-yield mutual funds. The demand was driven by declining default rates and
more attractive yields on high-yield issues versus their investment-grade
counterparts.
The end of major combat in Iraq last year, reports that many companies had
generated first-quarter earnings in line with estimates and expectations in May
that the Fed would likely cut its short-term interest rate targets, all helped
buoy high-yield securities through mid-June. In order to help stimulate the
U.S. economy, the Fed cut its target for short-term interest rates in June to
its lowest level since the Eisenhower Administration. However, after advancing
for eight consecutive months, the high-yield market declined considerably in
July and early August due to the sharp sell-off in U.S. bond markets sparked by
signs of a strengthening economy, leading bond investors to bet that the Fed's
accommodative stance has come to an end and interest rates would soon be on the
rise.
SALOMON BROTHERS HIGH INCOME FUND II INC.
High-Yield Rally Resumes
During the autumn, the high-yield market regained some of the momentum it lost
over the summer. Through much of the reporting period, the high-yield market
advanced amid record inflows into high-yield funds. Fundamentals also supported
the market as many companies generated better-than-expected earnings and
default rates continued to decline substantially compared to 2002.
Additionally, increased capital market transactions fortified the balance
sheets of corporate bond issuers in the healthier economic environment.
Except for the summer pullback last year, high-yield issues experienced
positive performance during most of 2003. That began to change in early 2004 as
signs of economic recovery increased and statements by the Fed indicated that
the central bank might begin raising interest rates sooner than anticipated.
The high-yield market continued to decline in February with lower-quality
issues leading the way down amid large fund outflows, continued profit taking
and greater scrutiny of company fundamentals. However, economic data released
in April showing an improving labor market and signs of higher inflation,
sparked another sell-off in U.S. Treasury bonds as investors shifted their
expectations of Fed tightening from 2005 to the summer of 2004.
Emerging Markets Debt
Emerging markets debt returned 9.50% for the 12 months as measured by the EMBI+
index. The rally led to a dwindling of the gap, or spread,/vi/ between the
yield of emerging markets debt versus U.S. Treasury bonds. The spread declined
by almost one percentage point, with emerging debt ending the period yielding
4.78% more than Treasuries. The year consisted of ten very strong months
followed by a volatile two-month, technical sell-off in March and April 2004.
The positive macro environment for most of the year has been supportive of
improving credit quality across the emerging markets, which when combined with
continued progress on political and economic reforms in many Latin American
countries, encouraged broader investor participation in emerging markets debt.
In addition, the improving credit quality of the market may have caused some
investors to change their allocation approach to emerging markets from tactical
to strategic, further strengthening technical support for the market.
An increasingly stable U.S. economy also contributed to the emerging market
rally. Concerns about the economic impact of the war in Iraq were somewhat
unfounded as the U.S. economy steadily gained strength. The
quicker-than-anticipated resolution to these concerns, combined with higher
industrial productivity and stabilization in the unemployment rate, boosted
equity returns in the U.S., further contributing to a positive investment
environment in emerging markets. A stable U.S. economy is generally positive
for emerging market economies, many of which are export-oriented and dependent
on the U.S. as the world's growth engine.
The rally in emerging markets was generally supported by positive returns in
the U.S. Treasury bond market in 2003. In July, U.S. Treasury bond prices
plummeted following a report stating that economic growth sharply accelerated,
which prompted investors to question if the Fed's rate-cutting cycle had run
its course. Accordingly, the rally in emerging markets was temporarily halted
in July and resumed at a less torrid pace during the rest of the year.
Investors were encouraged by the relative stability of emerging market spreads
during this volatile Treasury market. During the month of July, when the U.S.
Treasury ten-year note declined 7.17%, spreads on the EMBI+ actually tightened
by 15 basis points./vii/ In other periods of comparable Treasury volatility,
emerging markets have experienced dramatic spread widening.
Low interest rates created a favorable environment for all emerging economies
and had been a key factor to the technical strength in the market, encouraging
investors to assume credit risk by focusing on
SALOMON BROTHERS HIGH INCOME FUND II INC.
higher-yielding securities. These technicals turned around in the month of
March after a very strong U.S. employment number and fears of inflation caused
U.S. interest rates to move sharply higher. While, emerging market debt
fundamentals remained strong, sellers sold the asset class in an attempt to
decrease overall interest rate and credit risk. Another strong job report in
April only exacerbated this trend. The EMBI+ fell 6.1% from its March 19th peak
to the end of the period on April 30 dampening returns for the year.
Factors Influencing Fund Performance
As for the U.S. high-yield sector, the top-performing areas for the year
included aerospace, airlines, automotive, cable, communication towers, and
consumer products. The aerospace sector rallied as demand stabilized and
companies aggressively reduced costs. During the period, airlines recovered as
some companies avoided bankruptcy by renegotiating union contracts and
experiencing better-than-expected traffic volume following the resolution of
the major combat in Iraq. The automotive sector benefited from continued
strength in auto sales and better-than-expected earnings. The cable sector
outperformed many others as Charter Communications LLC, whose bonds had been
under pressure following an accounting investigation at the firm, rebounded
when the communications company reached an agreement with its banks to amend
its credit facilities and issued additional long-term debt to replace
short-term debt and improve liquidity. The communications towers sector
benefited from better-than-expected earnings results, asset sales, new
financing, and increasing free cash flow. Consumer Products outperformed, as
Revlon completed debt-for-equity exchanges to improve its balance sheet.
The most significant underperforming sectors included broadcast/outdoor,
publishing, satellites, and textiles. Despite having generated positive
performance, broadcast/outdoor, publishing, and satellites underperformed many
others due to their lower yields and limited price appreciation potential.
The portfolio benefited from overweighting in the cable, communications towers,
and consumer products sectors and overweighting issues rated CCC. The
portfolio's overweighted exposure to the healthcare sector, and underweightings
in the airlines, automotive, and utilities sectors, detracted from the
portfolio's performance. We added to the fund's positions in issues rated CCC
and in the chemicals, healthcare, metals/mining, and utilities sectors and
reduced the fund's exposure to the gaming and telecommunications sectors.
Within the fund's emerging markets debt component, the fund performed
relatively well in the ten-month period of strong returns. The fund's
performance was positively impacted by its overweighted exposure to Brazilian
and Ecuadorian debt. The fund's underweighted position in Venezuelan and
Turkish debt detracted from its relative performance, as did its holdings in
higher-quality credit issues. Fund performance was also positively impacted by
the use of leverage./viii/ During the first quarter of 2004, we decreased our
allocation to emerging markets debt based on our forecast of increased
volatility in the emerging markets, and we increased the portfolio's defensive
posture. The performance of our remaining exposure to the emerging markets
suffered slightly due to our continuing overweights in Brazil and Ecuador,
which led the asset class' sell-off.
Especially in this environment of four decade-low money market yields,
higher-yielding bonds in U.S. and emerging markets may seem even more
appealing. Remember, however, that higher-yield bonds carry more credit risk
than investment-grade issues, and international issues are subject to economic,
political and currency risks.
SALOMON BROTHERS HIGH INCOME FUND II INC.
Looking for Additional Information?
The fund is traded under the symbol "HIX" and its closing market price is
available in most newspapers under the NYSE listings. The daily NAV is
available online under symbol XHGIX. Barron's and The Wall Street Journal's
Monday editions carry closed-end fund tables that will provide additional
information. In addition, the fund issues a quarterly press release that can be
found on most major financial websites as well as www.sbam.com.
In a continuing effort to provide information concerning the fund, shareholders
may call 1-888-777-0102 or 1-800-SALOMON (toll free), Monday through Friday
from 8:00 a.m. to 6:00 p.m. Eastern Time, for the fund's current NAV, market
price and other information.
Thank you for your investment in the Salomon Brothers High Income Fund II Inc.
We appreciate that you have entrusted us to manage your money and value our
relationship with you.
Sincerely,
/s/ Peter J. Wilby /s/ Beth A. Semmel
Peter J. Wilby, CFA Beth A. Semmel, CFA
President Executive Vice President
/s/ James E. Craige
James E. Craige, CFA
Executive Vice President
May 19, 2004
SALOMON BROTHERS HIGH INCOME FUND II INC.
The information provided is not intended to be a forecast of future events, a
guarantee of future results or investment advice. Views expressed may differ
from those of the firm as a whole.
Portfolio holdings and breakdowns are as of April 30, 2004 and are subject to
change and may not be representative of the portfolio manager's current or
future investments. The fund's top ten holdings as of this date were: Russian
Federation (2.41%), United Mexican States (1.77%), NTL Inc. (1.76%), Federal
Republic of Brazil (1.60%), Nextel Communications, Inc. (1.58%), Federal
Republic of Brazil (1.50%), CSC Holdings, Inc. (1.45%), SpectraSite, Inc.
(1.26%), UnitedGlobalCom Inc. (1.20%), and NRG Energy, Inc. (1.13%). Please
refer to pages 8 through 22 for a list and percentage breakdown of the fund's
holdings.
The mention of sector breakdowns is for informational purposes only and should
not be construed as a recommendation to purchase or sell any securities. The
information provided regarding such sectors is not a sufficient basis upon
which to make an investment decision. Investors seeking financial advice
regarding the appropriateness of investing in any securities or investment
strategies discussed should consult their financial professional. Portfolio
holdings are subject to change at any time and may not be representative of the
portfolio manager's current or future investments. The fund's top five sector
holdings as of April 30, 2004 were: Consumer Non-Cyclicals (23.77%); Basic
Industries (16.25%); Media & Cable (14.19%); Telecommunications (12.79%);
Consumer Cyclicals (8.40%). The fund's portfolio composition is subject to
change at any time.
RISKS:
Like any investment where there is risk loss, you may not be able to sell the
shares for the same amount that you purchased them. Investing in foreign
securities is subject to certain risks not associated with domestic investing,
such as currency fluctuations, and changes in political and economic
conditions. These risks are magnified in emerging or developing markets. High
yield bonds involve greater credit and liquidity risks than investment grade
bonds. The fund may use derivatives, such as options and futures, which can be
illiquid, may disproportionately increase losses, and have a potentially large
impact on fund performance. Leverage may magnify gains and increase losses in
the fund's portfolio.
All index performance reflects no deduction for fees, expenses or taxes. Please
note that an investor cannot invest directly in an index.
/i/The J.P. Morgan Emerging Markets Bond Index Plus 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.
/ii/NAV is a price that reflects the value of the fund's underlying portfolio
plus other assets, less the fund's liabilities. However, the price at which
an investor may buy or sell shares of the fund is at the fund's market price
as determined by supply of and demand for the fund's common shares, which
may be more or less than the fund's NAV.
/iii/The Citigroup High Yield Market Index is a broad-based unmanaged index of
high yield securities.
/iv/Lipper, Inc. is a major independent mutual-fund tracking organization.
Returns are based on the 12-month period ended April 30, 2004, calculated
among the 26 funds in the fund's Lipper category including the reinvestment
of dividends and capital gains, if any.
/v/As measured by the performance of the High Yield Index.
/vi/Credit spread is the difference between the yield of a particular corporate
security and a benchmark security that has the same maturity as that
particular corporate security.
/vii/A basis point is one one-hundredth (1/100 or 0.01) of one percent.
/viii/Leverage may magnify gains and increase losses in the fund's portfolio.
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS
April 30, 2004
Face
Amount Security* Value
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CORPORATE BONDS & NOTES -- 78.7%
Basic Industries -- 12.3%
$ 4,350,000 Abitibi-Consolidated Inc., Debentures, 8.850% due 8/1/30........................... $ 4,435,469
7,230,000 Acetex Corp., Sr. Notes, 10.875% due 8/1/09........................................ 7,989,150
2,500,000 Airgas, Inc., 9.125% due 10/1/11................................................... 2,837,500
5,000,000 Ak Steel Corp., 7.875% due 2/15/09 (a)............................................. 4,625,000
3,875,000 Anchor Glass Container Corp., Secured Notes, 11.000% due 2/15/13................... 4,495,000
5,400,000 Applied Extrusion Technologies, Inc., Series B, 10.750% due 7/1/11 (a)............. 4,185,000
2,750,000 Berry Plastics Corp., 10.750% due 7/15/12.......................................... 3,121,250
2,800,000 Borden Chemicals & Plastics L.P., Notes, 9.500% due 5/1/05 (b)..................... 42,000
Buckeye Technologies Inc., Sr. Sub. Notes:
1,750,000 9.250% due 9/15/08 (a)........................................................... 1,741,250
1,000,000 8.000% due 10/15/10 (a).......................................................... 960,000
3,500,000 Equistar Chemicals L.P., Sr. Notes, 10.625% due 5/1/11............................. 3,937,500
8,500,000 FMC Corp., Debentures, 7.750% due 7/1/11 (a)....................................... 9,180,000
4,275,000 Huntsman ICI Chemicals, 10.125% due 7/1/09 (a)..................................... 4,499,438
2,850,000 IMCO Recycling Inc., Secured Notes, 10.375% due 10/15/10........................... 3,056,625
6,950,000 ISP Chemco Inc., Series B, 10.250% due 7/1/11...................................... 7,888,250
3,650,000 Ispat Inland ULC, Secured Notes, 9.750% due 4/1/14 (c)............................. 3,741,250
3,800,000 Jefferson Smurfit Corp., 8.250% due 10/1/12........................................ 4,085,000
1,805,000 Luscar Coal Ltd., Sr. Notes, 9.750% due 10/15/11................................... 2,057,700
Lyondell Chemical Co.:
2,575,000 9.500% due 12/15/08.............................................................. 2,703,750
Secured Notes:
1,400,000 11.125% due 7/15/12 (a)........................................................ 1,561,000
550,000 Series B, 9.875% due 5/1/07 (a)................................................ 580,250
2,000,000 MDP Acquisitions PLC, Sr. Notes, 9.625% due 10/1/12................................ 2,260,000
3,075,000 Methanex Corp., Sr. Notes, 8.750% due 8/15/12...................................... 3,536,250
3,190,000 Millennium America Inc., 9.250% due 6/15/08 (a).................................... 3,493,050
2,000,000 Mueller Holdings Inc., (zero coupon until 4/15/09, 14.750% thereafter), due 4/15/14 1,120,000
1,000,000 Nalco Co., Sr. Sub. Notes, 8.875% due 11/15/13 (c)................................. 1,060,000
2,500,000 Noveon, Inc., Series B, 11.000% due 2/28/11........................................ 2,925,000
1,325,000 OM Group, Inc., 9.250% due 12/15/11................................................ 1,364,750
7,000,000 Plastipak Holdings Inc., 10.750% due 9/1/11........................................ 7,595,000
2,000,000 Pliant Corp., Secured Notes, 11.125% due 9/1/09.................................... 2,140,000
2,700,000 Radnor Holdings Corp., Sr. Notes, 11.000% due 3/15/10 (a).......................... 2,362,500
5,000,000 Republic Technologies International, LLC, 13.750% due 7/15/09 (b).................. 75,000
5,200,000 Resolution Performance Products Inc., Sr. Sub. Notes, 13.500% due 11/15/10 (a)..... 4,342,000
5,850,000 Rhodia S.A., Sr. Sub. Notes, 8.875% due 6/1/11 (a)(c).............................. 4,855,500
See Notes to Financial Statements.
Page 8
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (continued)
April 30, 2004
Face
Amount Security* Value
-------------------------------------------------------------------------------------------------------
Basic Industries -- 12.3% (continued)
$ 1,000,000 Smurfit Capital Funding PLC, Debentures, 7.500% due 11/20/25............. $ 975,000
4,950,000 Stone Container Corp., Sr. Notes, 8.375% due 7/1/12...................... 5,346,000
2,850,000 Tekni-Plex, Inc., Series B, 12.750% due 6/15/10 (a)...................... 2,892,750
Tembec Industries, Inc.:
7,900,000 8.625% due 6/30/09 (a)................................................. 8,097,500
1,325,000 8.500% due 2/1/11 (a).................................................. 1,358,125
2,550,000 Westlake Chemical Corp., 8.750% due 7/15/11 (a).......................... 2,811,375
---------------
136,332,182
---------------
Consumer Cyclicals -- 6.3%
5,000,000 AMF Bowling Worldwide, Inc., Sr. Sub. Notes, 10.000% due 3/1/10 (c)...... 5,212,500
Cole National Group, Inc., Sr. Sub. Notes:
2,850,000 8.625% due 8/15/07..................................................... 2,914,125
3,000,000 8.875% due 5/15/12..................................................... 3,255,000
1,000,000 Eye Care Centers of America, Inc., 9.125% due 5/1/08..................... 1,005,000
4,350,000 Felcor Lodging L.P., 10.000% due 9/15/08 (a)............................. 4,665,375
4,125,000 Finlay Enterprises, Inc., 9.000% due 5/1/08.............................. 4,253,906
4,000,000 Finlay Fine Jewelry Corp., Sr. Notes, 8.375 % due 5/1/08................. 4,135,000
The Gap, Inc., Notes:
115,000 9.900% due 12/15/05.................................................... 127,938
3,775,000 10.550% due 12/15/08................................................... 4,662,125
Host Marriott L.P.:
350,000 Series E, 8.375% due 2/15/06........................................... 374,938
1,625,000 Series I, 9.500% due 1/15/07........................................... 1,811,875
2,500,000 Sr. Notes, 7.125% due 11/1/13.......................................... 2,550,000
Interface, Inc.:
2,875,000 Sr. Notes, 10.375% due 2/1/10 (a)...................................... 3,230,781
1,500,000 Sr. Sub. Notes, 9.500% due 2/1/14 (c).................................. 1,515,000
3,000,000 John Q. Hammons Hotels L.P., 1st Mortgage, Series B, 8.875% due 5/15/12.. 3,315,000
2,000,000 Leslie's Poolmart, Sr. Notes, Series B, 10.375% due 7/15/08.............. 2,007,500
Levi Strauss & Co.:
1,750,000 Notes, 7.000% due 11/1/06 (a).......................................... 1,531,250
Sr. Notes:
4,350,000 11.625% due 1/15/08 (a).............................................. 3,980,250
935,000 12.250% due 12/15/12................................................. 841,500
3,525,000 MeriStar Hospitality Corp., 9.125% due 1/15/11 (a)....................... 3,683,625
825,000 MeriStar Hospitality Operating Partnership, L.P., 10.500% due 6/15/09 (a) 886,875
450,000 Phillips-Van Heusen Corp., Sr. Notes, 8.125% due 5/1/13 (a).............. 474,750
See Notes to Financial Statements.
Page 9
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (continued)
April 30, 2004
Face
Amount Security* Value
-----------------------------------------------------------------------------------------------------------
Consumer Cyclicals -- 6.3% (continued)
Saks Inc.:
$ 1,543,000 9.875% due 10/1/11 (a)..................................................... $ 1,847,743
1,574,000 7.000% due 12/1/13 (c)..................................................... 1,613,350
2,825,000 Sbarro, Inc., 11.000% due 9/15/09 (a)........................................ 2,429,500
4,300,000 Starwood Hotels & Resorts Worldwide, Inc., 7.875% due 5/1/12................. 4,724,625
3,275,000 Tommy Hilfiger U.S.A., Inc., 6.850% due 6/1/08............................... 3,406,000
---------------
70,455,531
---------------
Consumer Non-Cyclicals -- 17.9%
3,975,000 aaiPharma Inc., 11.000% due 4/1/10 (a)....................................... 3,597,375
1,100,000 Ahold Finance USA, Inc., 6.875% due 5/1/29................................... 994,125
8,500,000 AKI, Inc., Sr. Notes, 10.500% due 7/1/08..................................... 8,882,500
4,425,000 AmeriPath, Inc., 10.500% due 4/1/13 (a)...................................... 4,557,750
3,055,000 Ameristar Casinos, Inc., 10.750% due 2/15/09................................. 3,559,075
5,250,000 American Safety Razor Co., Sr. Notes, Series B, 9.875% due 8/1/05............ 5,223,750
1,036,000 Applica Inc., Sr. Sub. Notes, 10.000% due 7/31/08 (a)........................ 1,072,260
3,550,000 Argosy Gaming Co., Sr. Sub. Notes, 7.000% due 1/15/14 (c).................... 3,652,063
4,875,000 Athena Neurosciences Finance LLC, 7.250% due 2/21/08......................... 4,960,313
Caesars Entertainment Corp., Sr. Sub. Notes:
700,000 9.375% due 2/15/07......................................................... 775,250
4,500,000 8.875% due 9/15/08 (a)..................................................... 5,028,750
3,000,000 8.125% due 5/15/11 (a)..................................................... 3,330,000
7,125,000 Coast Hotels and Casinos, Inc., 9.500% due 4/1/09............................ 7,525,781
4,900,000 Curative Health Services Inc., Sr. Notes, 10.750% due 5/1/11 (c)............. 4,942,875
3,228,098 Dade Behring Holdings Inc., 11.910% due 10/3/10.............................. 3,744,594
5,250,000 Doane Pet Care Co., Sr. Sub. Notes, 9.750% due 5/15/07 (a)................... 4,856,250
5,120,000 Extendicare Health Services, Inc., 9.500% due 7/1/10......................... 5,708,800
2,375,000 Herbst Gaming, Inc., Secured Notes, Series B, 10.750% due 9/1/08............. 2,683,750
Holmes Group Inc.:
125,000 Series B, 9.875% due 11/15/07.............................................. 127,683
1,000,000 Sr. Sub. Notes, Series D, 9.875% due 11/15/07.............................. 1,021,460
6,500,000 Home Interiors & Gifts, Inc., 10.125% due 6/1/08............................. 6,605,625
4,325,000 Horseshoe Gaming Holding Corp., Series B, 8.625% due 5/15/09................. 4,541,250
IASIS Healthcare Corp.:
125,000 8.500% due 10/15/09........................................................ 134,375
7,500,000 13.000% due 10/15/09....................................................... 8,343,750
3,925,000 Icon Health & Fitness Inc., 11.250% due 4/1/12............................... 4,435,250
3,780,000 Inn of the Mountain Gods Resort & Casino, Sr. Notes, 12.000% due 11/15/10 (c) 4,158,000
3,850,000 InSight Health Services, Corp., Series B, 9.875% due 11/1/11 (a)............. 3,907,750
See Notes to Financial Statements.
Page 10
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (continued)
April 30, 2004
Face
Amount Security* Value
--------------------------------------------------------------------------------------------------------------
Consumer Non-Cyclicals -- 17.9% (continued)
$ 6,031,515 Iowa Select Farms, L.P., Secured Notes, Payment-in-Kind, 10.750% due 12/1/06 (c) $ 4,663,559
4,800,000 Isle of Capri Casinos Inc., Sr. Sub. Notes, 7.000% due 3/1/14 (c)............... 4,728,000
3,500,000 Jafra Cosmetics International Inc., 10.750% due 5/15/11......................... 3,981,250
2,450,000 Kerzner International Ltd., 8.875% due 8/15/11.................................. 2,731,750
6,375,000 MGM MIRAGE Inc., 9.750% due 6/1/07.............................................. 7,235,625
1,117,366 Nutritional Sourcing Corp., Notes, 10.125% due 8/1/09........................... 715,114
4,700,000 Pinnacle Entertainment Inc., Sr. Sub. Notes, 8.250% due 3/15/12 (c)............. 4,547,250
4,675,000 Pinnacle Foods Holding Corp., Sr. Sub. Notes, 8.250% due 12/1/13 (c)............ 4,902,906
4,325,000 Playtex Products, Inc., 9.375% due 6/1/11 (a)................................... 4,303,375
5,025,000 Premier International Foods PLC, Sr. Notes, 12.000% due 9/1/09.................. 5,452,125
Rite Aid Corp.:
Notes:
1,000,000 6.000% due 12/15/05 (c)..................................................... 1,001,250
310,000 7.125% due 1/15/07 (a)...................................................... 316,200
6,525,000 Sr. Notes, 7.625% due 4/15/05 (a)............................................. 6,720,750
1,000,000 Sealy Mattress Co., Sr. Sub. Notes, 8.250% due 6/15/14 (c)...................... 980,000
475,000 Station Casinos Inc., Sr. Sub. Notes, 6.875% due 3/1/16 (c)..................... 475,000
2,500,000 Sybron Dental Specialties, Inc., 8.125% due 6/15/12............................. 2,775,000
2,145,000 Tempur-Pedic Inc. and Tempur Production U.S.A. Inc., Sr. Sub. Notes,
10.250% due 8/15/10 (c)........................................................ 2,461,388
Tenet Healthcare Corp.:
6,550,000 Notes, 7.375% due 2/1/13 (a).................................................. 5,960,500
Sr. Notes:
1,800,000 6.500% due 6/1/12........................................................... 1,570,500
1,525,000 6.875% due 11/15/31......................................................... 1,265,750
5,000,000 Triad Hospitals, Inc., Series B, 8.750% due 5/1/09.............................. 5,568,750
7,775,000 United Industries Corp., Series D, 9.875% due 4/1/09............................ 8,197,805
4,750,000 Vanguard Health Systems, Inc., 9.750% due 8/1/11 (a)............................ 5,177,500
3,525,000 Venetian Casino Resort, LLC, 11.000% due 6/15/10................................ 4,141,875
1,450,000 Winsloew Furniture, Inc., Series B, 12.750% due 8/15/07 (a)..................... 1,210,750
---------------
199,454,376
---------------
Energy -- 6.2%
3,000,000 BRL Universal Equipment 2001 A, L.P., Secured Notes, 8.875% due 2/15/08......... 3,240,000
Dynegy Holdings Inc.:
Debentures:
4,550,000 7.125% due 5/15/18 (a)...................................................... 3,640,000
8,350,000 7.625% due 10/15/26......................................................... 6,680,000
2,000,000 Secured Notes, 9.875% due 7/15/10 (c)......................................... 2,180,000
See Notes to Financial Statements.
Page 11
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (continued)
April 30, 2004
Face
Amount Security* Value
-------------------------------------------------------------------------------------------------------
Energy -- 6.2% (continued)
EL Paso Corp.:
$ 5,200,000 Notes, 7.875% due 6/15/12 (a).......................................... $ 4,602,000
Sr. Notes;
5,425,000 7.800% due 8/1/31 (a)................................................ 4,258,625
6,325,000 7.750% due 1/15/32 (a)............................................... 4,965,125
6,625,000 Magnum Hunter Resources, Inc., 9.600% due 3/15/12 (a).................... 7,386,875
1,775,000 Pioneer Natural Resource Co., 9.625% due 4/1/10.......................... 2,201,831
2,000,000 Pogo Producing Co., Sr., Sub. Notes, Series B, 8.250% due 4/15/11........ 2,255,000
2,000,000 Pride International Inc., Sr. Notes, 10.000% due 6/1/09.................. 2,120,000
1,000,000 Swift Energy Co., Sr. Sub. Notes, 9.375% due 5/1/12...................... 1,115,000
5,025,000 Western Gas Resources, Inc., 10.000% due 6/15/09......................... 5,301,375
4,675,000 Westport Resources Corp., 8.250% due 11/1/11............................. 5,271,063
The Williams Cos., Inc.:
Notes:
3,700,000 7.625% due 7/15/19................................................... 3,626,000
3,650,000 7.875% due 9/1/21.................................................... 3,577,000
2,150,000 8.750% due 3/15/32................................................... 2,203,750
4,000,000 Sr. Notes, 8.625% due 6/1/10........................................... 4,420,000
---------------
69,043,644
---------------
Financial -- 0.0%
1,975,400 Airplanes Pass-Through Trust, Series D, 10.875% due 3/15/19 (b)(d)....... 0
---------------
Housing Related -- 1.0%
8,500,000 Associated Materials Inc., Sr. Discount Notes, (zero coupon until 3/1/09,
11.250% thereafter), due 3/1/14 (c)..................................... 5,567,500
5,075,000 Ply Gem Industries, Inc., Sr. Sub. Notes, 9.000% due 2/15/12 (c)......... 5,227,250
---------------
10,794,750
---------------
Manufacturing -- 4.7%
3,325,000 Alliant Techsystems Inc., 8.500% due 5/15/11............................. 3,674,125
5,075,000 Blount Inc., 13.000% due 8/1/09.......................................... 5,506,375
8,800,000 BREED Technologies, Inc., 9.250% due 4/15/08 (b)(d)...................... 0
450,000 Case New Holland Inc., Sr. Notes, 9.250% due 8/1/11 (c).................. 504,000
3,825,000 Flowserve Corp., 12.250% due 8/15/10 (a)................................. 4,417,875
1,325,000 Ford Motor Co., Notes, 7.450% due 7/16/31 (a)............................ 1,295,374
625,000 Ford Motor Credit Co., Notes, 7.250% due 10/25/11........................ 664,153
1,750,000 General Binding Corp., 9.375% due 6/1/08 (a)............................. 1,787,188
2,400,000 General Motors Acceptance Corp., Notes, 6.875% due 8/28/12............... 2,506,334
See Notes to Financial Statements.
Page 12
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (continued)
April 30, 2004
Face
Amount Security* Value
------------------------------------------------------------------------------------------------------------------
Manufacturing -- 4.7% (continued)
General Motors Corp.:
$ 725,000 Debentures, 8.375% due 7/15/33 (a)................................................ $ 786,347
3,275,000 Sr. Notes, 7.125% due 7/15/13 (a)................................................. 3,441,160
2,100,000 Invensys PLC, Sr. Notes, 9.875% due 3/15/11 (c)..................................... 2,226,000
8,000,000 Key Plastics Holdings, Inc., Series B, 10.250% due 3/15/07 (b)(d)................... 10,000
2,100,000 Keystone Automotive Operations Inc., Sr. Sub. Notes, 9.750% due 11/1/13 (c)......... 2,310,000
1,750,000 Kinetek, Inc., Sr. Notes, Series D, 10.750% due 11/15/06............................ 1,557,500
5,500,000 L-3 Communications Corp., 7.625% due 6/15/12........................................ 5,953,750
2,750,000 Moll Industries, Inc., Sr. Sub. Notes, 10.500% due 7/1/08 (b)(d).................... 41,250
1,850,000 NMHG Holdings Co., 10.000% due 5/15/09.............................................. 2,062,750
4,000,000 Sequa Corp., Sr. Notes, 9.000% due 8/1/09 (a)....................................... 4,440,000
1,700,000 Tenneco Automotive Inc., Secured Notes, Series B, 10.250% due 7/15/13 (a)........... 1,967,750
4,000,000 Terex Corp., Series B, 10.375% due 4/1/11 (a)....................................... 4,570,000
2,409,000 TRW Automotive Inc., Sr. Notes, 9.375% due 2/15/13.................................. 2,770,350
---------------
52,492,281
---------------
Media & Cable -- 10.7%
4,726,575 Avalon Cable Holding Finance, Inc., Sr. Discount Notes, 11.875% due 12/1/08......... 5,045,619
Charter Communications Holdings, LLC:
Sr. Discount Notes:
4,530,000 Zero coupon until 1/15/05, (11.750% thereafter), due 1/15/10.................... 3,748,575
13,000,000 Zero coupon until 5/15/06, (11.750% thereafter), due 5/15/11 (a)................ 8,547,500
10,000,000 Zero coupon until 1/15/07, (12.125% thereafter), due 1/15/12.................... 6,025,000
Sr. Notes:
350,000 8.625% due 4/1/09............................................................... 292,250
50,000 10.750% due 10/1/09............................................................. 44,125
CSC Holdings, Inc., Sr. Sub. Debentures:
10,500,000 10.500% due 5/15/16 (a)........................................................... 12,127,500
1,500,000 9.875% due 4/1/23................................................................. 1,571,250
Dex Media East LLC/Dex Media East Finance Co.:
1,750,000 9.875% due 11/15/09 (a)........................................................... 1,970,938
1,250,000 12.125% due 11/15/12.............................................................. 1,456,250
4,500,000 Dex Media Inc., Discount Notes, (zero coupon until 11/15/08, 9.000% thereafter), due
11/15/13 (c)....................................................................... 2,767,500
2,400,000 Dex Media West LLC/Dex Media West Finance Co., Sr. Sub. Notes,
9.875% due 8/15/13 (c)............................................................. 2,640,000
4,650,000 DirecTV Holdings LLC, Sr. Notes, 8.375% due 3/15/13................................. 5,219,625
See Notes to Financial Statements.
Page 13
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (continued)
April 30, 2004
Face
Amount Security* Value
----------------------------------------------------------------------------------------------------------------------
Media & Cable -- 10.7% (continued)
EchoStar DBS Corp., Sr. Notes:
$ 4,355,000 10.375% due 10/1/07................................................................ $ 4,730,619
7,183,000 9.125% due 1/15/09................................................................. 8,080,875
4,894,755 Hollinger Participation Trust, Sr. Notes, Payment-in-Kind, 12.125% due 11/15/10 (c).. 5,574,405
2,500,000 Houghton Mifflin Co., Sr. Discount Notes, (zero coupon until 10/15/08,
11.500% thereafter), due 10/15/13 (a)(c)............................................ 1,237,500
Insight Midwest, L.P., Sr. Notes:
3,350,000 10.500% due 11/1/10 (a)............................................................ 3,668,250
1,000,000 10.500% due 11/1/10 (c)............................................................ 1,095,000
2,100,000 Interep National Radio Sales, Inc., Series B, 10.000% due 7/1/08..................... 1,895,250
4,875,000 Mediacom LLC, Sr. Notes, 9.500% due 1/15/13 (a)...................................... 4,875,000
6,275,000 Nextmedia Operating, Inc., 10.750% due 7/1/11........................................ 7,106,438
900,000 R.H. Donnelley Finance Corp. I, 10.875% due 12/15/12 (c)............................. 1,075,500
3,475,000 Radio One, Inc., Series B, 8.875% due 7/1/11 (a)..................................... 3,865,938
Telewest Communications PLC:
500,000 Debentures, 9.625% due 10/1/06 (a)(b).............................................. 308,750
Sr. Discount Notes:
3,125,000 9.250% due 4/15/09 (b)........................................................... 1,640,625
7,950,000 Zero coupon until 2/1/05, (11.375% thereafter), due 2/1/10 (a)................... 3,776,250
6,400,000 Time Warner Inc., 7.625% due 4/15/31 (a)............................................. 7,025,114
Vivendi Universal S.A., Sr. Notes:
2,050,000 6.250% due 7/15/08................................................................. 2,149,938
2,000,000 9.250% due 4/15/10................................................................. 2,345,000
Yell Finance B.V.:
6,776,000 Sr. Discount Notes, (zero coupon until 8/1/06, 13.500% thereafter), due 8/1/11 (a). 6,403,320
606,000 Sr. Notes, 10.750% due 8/1/11 (a).................................................. 713,565
---------------
119,023,469
---------------
Services & Other -- 1.9%
Allied Waste North America, Inc.:
Series B:
250,000 8.875% due 4/1/08................................................................ 278,750
2,190,000 7.875% due 1/1/09 (a)............................................................ 2,283,075
400,000 9.250% due 9/1/12 (a)............................................................ 456,000
6,000,000 Sr. Notes, 7.375% due 4/15/14 (c).................................................. 5,985,000
3,200,000 Brand Services, Inc., 12.000% due 10/15/12........................................... 3,728,000
4,000,000 The Holt Group, Inc., 9.750% due 1/15/06 (b)(d)...................................... 0
710,000 Iron Mountain Inc., 8.625% due 4/1/13................................................ 763,250
1,000,000 Mail-Well I Corp., 9.625% due 3/15/12................................................ 1,105,000
See Notes to Financial Statements.
Page 14
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (continued)
April 30, 2004
Face
Amount Security* Value
-------------------------------------------------------------------------------------------------
Services & Other -- 1.9% (continued)
$ 2,325,000 Muzak LLC, Sr. Notes, 10.000% due 2/15/09 (a)...................... $ 2,394,750
6,500,000 Safety-Kleen Corp., 9.250% due 5/15/09 (b)......................... 325,000
4,000,000 Sitel Corp., 9.250% due 3/15/06.................................... 4,020,000
---------------
21,338,825
---------------
Technology -- 2.3%
10,975,000 Lucent Technologies Inc., Debentures, 6.450% due 3/15/29 (a)....... 8,752,563
3,000,000 Seagate Technology HDD Holdings, 8.000% due 5/15/09 (a)............ 3,255,000
5,550,000 Unisys Corp., Sr. Notes, 8.125% due 6/1/06......................... 6,049,500
7,640,000 Xerox Capital (Europe) PLC, 5.875% due 5/15/04 (a)................. 7,640,000
---------------
25,697,063
---------------
Telecommunications -- 9.6%
1,125,000 ACC Escrow Corp., Sr. Notes, Series B, 10.000% due 8/1/11.......... 1,091,250
Alamosa (Delaware) Inc.:
1,950,000 11.000% due 7/31/10.............................................. 2,125,500
4,430,995 Zero coupon until 7/31/05, (12.000% thereafter), due 7/31/09..... 4,187,290
American Tower Corp., Sr. Notes:
8,625,000 9.375% due 2/1/09 (a)............................................ 9,293,438
1,825,000 7.500% due 5/1/12 (a)(c)......................................... 1,770,250
1,800,000 American Tower Escrow Corp., Discount Notes, zero coupon due 8/1/08 1,318,500
4,250,000 AT&T Corp., Sr. Notes, 8.750% due 11/15/31......................... 4,509,964
AT&T Wireless Services Inc.:
4,625,000 Notes, 8.125% due 5/1/12 (a)..................................... 5,402,661
Sr. Notes:
3,800,000 7.875% due 3/1/11.............................................. 4,382,802
1,850,000 8.750% due 3/1/31.............................................. 2,263,447
Crown Castle International Corp., Sr. Notes:
2,300,000 9.375% due 8/1/11................................................ 2,530,000
5,140,000 10.750% due 8/1/11 (a)........................................... 5,859,600
600,000 7.500% due 12/1/13............................................... 601,500
950,000 Series B, 7.500% due 12/1/13 (a)................................. 952,375
1,350,000 Dobson Communications Corp., Sr. Notes, 8.875% due 10/1/13......... 1,063,125
Nextel Communications, Inc., Sr. Notes:
75,000 9.375% due 11/15/09 (a).......................................... 81,469
12,725,000 7.375% due 8/1/15................................................ 13,281,719
Qwest Corp.:
325,000 Debentures, 8.875% due 6/1/31 (a)................................ 333,938
7,325,000 Notes, 9.125% due 3/15/12 (c).................................... 7,819,437
See Notes to Financial Statements.
Page 15
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (continued)
April 30, 2004
Face
Amount Security* Value
--------------------------------------------------------------------------------------------------
Telecommunications -- 9.6% (continued)
Qwest Services Corp., Notes:
$ 8,075,000 13.500% due 12/15/10 (c).......................................... $ 9,407,375
2,071,000 14.000% due 12/15/14 (c).......................................... 2,480,023
4,975,000 SBA Communications Corp., Sr. Notes, 10.250% due 2/1/09 (a)......... 4,999,875
850,000 SpectraSite, Inc., Sr. Notes, 8.250% due 5/15/10.................... 896,750
Sprint Capital Corp.:
6,525,000 6.875% due 11/15/28 (a)........................................... 6,424,574
5,325,000 8.750% due 3/15/32 (a)............................................ 6,379,329
UbiquiTel Operating Co.:
3,750,000 Zero coupon until 4/15/05, (14.000% thereafter), due 4/15/10 (a).. 3,693,750
1,575,000 Sr. Notes, 9.875% due 3/1/11 (c).................................. 1,582,875
2,500,000 Western Wireless Corp., Sr. Notes, 9.250% due 7/15/13............... 2,581,250
---------------
107,314,066
---------------
Transportation -- 0.6%
Continental Airlines, Inc., Pass-Through, Certificates:
1,893,846 Series 00-2, 8.312% due 4/2/11.................................... 1,624,095
675,000 Series 98-3, 7.250% due 11/1/05................................... 622,202
2,673,960 Series 981C, 6.541% due 9/15/08................................... 2,453,287
1,775,000 General Maritime Corp., Sr. Notes, 10.000% due 3/15/13.............. 2,005,750
---------------
6,705,334
---------------
Utilities -- 5.2%
The AES Corp.:
Sr. Notes:
1,400,000 9.375% due 9/15/10 (a).......................................... 1,512,000
4,425,000 7.750% due 3/1/14 (a)........................................... 4,413,937
1,300,000 Sr. Sub. Notes, 8.500% due 11/1/07 (a)............................ 1,337,375
3,000,000 Allegheny Energy Supply Statutory Trust 2001, Secured Notes,
10.250% due 11/15/07 (c)........................................... 3,330,000
8,050,000 Calpine Canada Energy Finance ULC, 8.500% due 5/1/08................ 5,715,500
Calpine Corp.:
3,500,000 Secured Notes, 8.500% due 7/15/10 (a)(c).......................... 3,115,000
Sr. Notes:
500,000 7.875% due 4/1/08............................................... 352,500
2,425,000 7.750% due 4/15/09 (a).......................................... 1,691,438
425,000 8.625% due 8/15/10 (a).......................................... 299,625
1,100,000 8.500% due 2/15/11 (a).......................................... 775,500
2,500,000 Calpine Generating Co. LLC, Secured Notes, 10.250% due 4/1/11 (a)(c) 2,268,750
See Notes to Financial Statements.
Page 16
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (continued)
April 30, 2004
Face
Amount Security* Value
----------------------------------------------------------------------------------------------
Utilities -- 5.2% (continued)
Edison Mission Energy, Sr. Notes:
$ 4,575,000 7.730% due 6/15/09....................................... $ 4,346,250
5,175,000 9.875% due 4/15/11....................................... 5,356,125
Mirant Americas Generation, LLC, Sr. Notes:
2,075,000 7.625% due 5/1/06 (b).................................... 1,525,125
2,925,000 9.125% due 5/1/31 (b).................................... 2,135,250
9,350,000 NRG Energy, Inc., Secured Notes, 8.000% due 12/15/13 (c)... 9,466,875
Reliant Resources, Inc., Secured Notes:
5,325,000 9.250% due 7/15/10 (a)................................... 5,724,375
3,975,000 9.500% due 7/15/13....................................... 4,332,750
---------------
57,698,375
---------------
TOTAL CORPORATE BONDS & NOTES (Cost -- $843,364,525)....... 876,349,896
---------------
CONVERTIBLE BONDS -- 0.9%
Consumer Non-Cyclicals -- 0.5%
4,900,000 Elan Pharm Inv., Secured Notes, 7.720% due 3/15/05 (e)..... 4,924,500
---------------
Technology -- 0.2%
4,450,000 Sanmina-SCI Corp., Sub. Debentures, zero coupon due 9/12/20 2,325,125
---------------
Telecommunications -- 0.2%
2,675,000 American Tower Corp., Notes, 5.000% due 2/15/10 (a)........ 2,658,281
---------------
TOTAL CONVERTIBLE BONDS (Cost -- $8,215,906)............... 9,907,906
---------------
Face
Amount+
-------------
SOVEREIGN BONDS -- 14.1%
Argentina -- 0.1%
Republic of Argentina:
4/ARS/ 10.000% due 9/19/08 (b).................................. 0
1,750,000 DISC, Series L, 2.0625% due 3/31/23 (b)(e)............... 916,563
---------------
916,563
---------------
Brazil -- 3.5%
Federal Republic of Brazil:
3,020,000 10.125% due 5/15/27...................................... 2,661,375
12,365,000 12.250% due 3/6/30....................................... 12,612,300
890,000 11.000% due 8/17/40...................................... 831,037
See Notes to Financial Statements.
Page 17
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (continued)
April 30, 2004
Face
Amount+ Security* Value
-----------------------------------------------------------------------
Brazil -- 3.5% (continued)
$ 14,577,535 C Bonds, 8.000% due 4/15/14............ $ 13,420,443
6,917,647 DCB, Series L, 2.125% due 4/15/12 (e).. 5,802,176
FLIRB, Series L:
730,769 Bearer, 2.0625% due 4/15/09 (e)...... 657,692
2,076,923 Registered, 2.0625% due 4/15/09 (e).. 1,869,231
1,588,302 NMB, Series L, 2.125% due 4/15/09 (e).. 1,429,472
---------------
39,283,726
---------------
Bulgaria -- 0.1%
1,350,000 Republic of Bulgaria, 8.250% due 1/15/15. 1,552,500
---------------
Colombia -- 1.0%
Republic of Colombia:
4,425,000 10.000% due 1/23/12.................... 4,756,875
1,825,000 10.750% due 1/15/13.................... 2,012,062
4,225,000 10.375% due 1/28/33.................... 4,267,250
---------------
11,036,187
---------------
Dominican -- 0.1%
1,050,000 Dominican Republic, 9.500% due 9/27/06... 892,500
---------------
Ecuador -- 0.8%
9,295,000 Republic of Ecuador, 12.000% due 11/15/12 8,319,025
---------------
Mexico -- 2.2%
PEMEX Project Funding Master Trust:
3,100,000 6.125% due 8/15/08..................... 3,239,500
250,000 7.375% due 12/15/14.................... 262,500
United Mexican States:
2,820,000 6.375% due 1/16/13..................... 2,862,300
2,694,000 5.875% due 1/15/14..................... 2,619,915
14,620,000 6.625% due 3/3/15...................... 14,813,715
500,000 8.300% due 8/15/31..................... 538,750
---------------
24,336,680
---------------
Panama -- 0.8%
Republic of Panama:
3,325,000 9.625% due 2/8/11...................... 3,773,875
3,500,000 9.375% due 1/16/23..................... 3,675,000
1,689,509 PDI, 2.000% due 7/17/16 (e)............ 1,478,321
---------------
8,927,196
---------------
See Notes to Financial Statements.
Page 18
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (continued)
April 30, 2004
Face
Amount+ Security* Value
--------------------------------------------------------------------------
Peru -- 0.6%
Republic of Peru:
$ 2,150,000 9.875% due 2/6/15......................... $ 2,322,000
3,925,000 8.750% due 11/21/33....................... 3,493,250
FLIRB:
1,400,000 4.500% due 3/7/17 (e)................... 1,183,000
175,000 4.500% due 3/7/17 (c)(e)................ 147,875
---------------
7,146,125
---------------
Philippines -- 0.8%
Republic of Philippines:
1,900,000 9.375% due 1/18/17........................ 1,985,500
5,000,000 9.875% due 1/15/19........................ 5,150,000
1,375,000 10.625% due 3/16/25....................... 1,479,844
---------------
8,615,344
---------------
Russia -- 2.4%
Russian Federation:
4,820,000 11.000% due 7/24/18....................... 6,217,800
22,065,000 5.000% due 3/31/30 (e).................... 20,258,428
---------------
26,476,228
---------------
Turkey -- 0.6%
Republic of Turkey:
5,350,000 11.500% due 1/23/12....................... 6,353,125
625,000 11.000% due 1/14/13....................... 729,688
---------------
7,082,813
---------------
Venezuela -- 1.1%
Republic of Venezuela:
8,250,000 5.375% due 8/7/10......................... 6,455,625
4,600,000 9.250% due 9/15/27........................ 3,783,500
2,075,000 9.375% due 1/13/34........................ 1,696,312
425,000 Series A, 6.750% due 3/31/20.............. 371,875
---------------
12,307,312
---------------
TOTAL SOVEREIGN BONDS (Cost -- $158,359,671) 156,892,199
---------------
See Notes to Financial Statements.
Page 19
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (continued)
April 30, 2004
Face
Amount+ Security* Value
--------------------------------------------------------------------------------------------------------------
LOAN PARTICIPATION (E)(F)--0.4%
Morocco -- 0.4%
$ 5,312,500 Kingdom of Morocco, Tranche A, 2.03125% due 1/2/09 (UBS Financial Services Inc.)
(Cost -- $5,012,196)........................................................... $ 5,232,812
---------------
Shares
-------------
COMMON STOCK (G) -- 3.2%
29,156 Mattress Discounters Corp. (d).................................................. 262,404
259,521 NTL Inc. (a).................................................................... 14,733,007
283,656 SpectraSite, Inc. (a)........................................................... 10,600,225
1,341,240 UnitedGlobalCom Inc., Class A Shares (a)........................................ 10,032,475
---------------
TOTAL COMMON STOCK (Cost -- $45,394,093)........................................ 35,628,111
---------------
ESCROW SHARES (D)(G) -- 0.0%
5,500,000 Imperial Sugar Co............................................................... 0
2,025,000 Pillowtex Corp.................................................................. 0
2,648,056 Vlasic Foods International Inc.................................................. 238,325
---------------
TOTAL ESCROW SHARES (Cost -- $0)................................................ 238,325
---------------
PREFERRED STOCK -- 0.4%
6,845 Alamosa Holdings, Inc., Series B, 7.500% due 7/31/13............................ 3,686,558
CSC Holdings Inc.:
7,350 Series H, 11.750% due 10/1/07................................................. 771,750
67 Series M, 11.125% due 4/1/08.................................................. 7,018
TCR Holding Corp. (d)(g):
17,552 Class B....................................................................... 18
9,654 Class C....................................................................... 10
25,451 Class D....................................................................... 25
52,657 Class E....................................................................... 53
---------------
TOTAL PREFERRED STOCK (Cost -- $2,720,155)...................................... 4,465,432
---------------
See Notes to Financial Statements.
Page 20
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (continued)
April 30, 2004
Warrants/
Rights Security* Value
--------------------------------------------------------------------------------------------------------------------------
WARRANTS & RIGHTS (G) -- 0.1%
1,800 American Tower Escrow Corp. (Exercise price of $0.01 per share expiring 8/1/08. Each
warrant exercisable for 14.10 shares of common stock.)...................................... $ 287,100
5,000 Asia Pulp & Paper (Exercise price of $7.8375 per share expiring on 3/15/05. Each warrant
exercisable for 12.914 shares of common stock.) (c)(d)...................................... 0
30,928,049 ContiFinancial Corp. Liquidating Trust, Units of Interest (Represents interests in a trust in
the liquidation of ContiFinancial Corp. and its affiliates.)................................ 541,241
2,750 Leap Wireless International Inc. (Exercise price of $96.80 per share expiring 4/15/10. Each
warrant exercisable for 5.146 shares of common stock.) (c)(d)............................... 0
3,500 Mattress Discounters Corp. (Exercise price of $0.01 per share expiring on 7/15/07. Each
warrant exercisable for 4.85 shares of Class A common stock and 0.539 shares of Class L
common stock.).............................................................................. 35
13,614 Pillowtex Corp. (Exercise price of $28.99 per share expiring on 11/24/09. Each warrant
exercisable for 1 share of common stock.) (d)............................................... 681
5,000 Republic Technologies International Inc. (Exercise price of $0.01 per share expiring on
7/15/07. Each warrant exercisable for 1 share of Class D common stock.)..................... 50
5,000 Ubiquitel Operating Co. (Exercise price of $22.74 per share expiring on 4/15/10. Each
warrant exercisable for 5.965 shares of common stock.)...................................... 50
57,120 Venezuela Discount Right (d)................................................................. 0
3,500 Winsloew Furniture, Inc. (Exercise price of $0.01 per share expiring 8/15/07. Each warrant
exercisable for 0.2298 shares of common stock.)............................................. 1,750
---------------
TOTAL WARRANTS & RIGHTS (Cost -- $1,207,170)................................................. 830,907
---------------
See Notes to Financial Statements.
Page 21
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (continued)
April 30, 2004
Face
Amount Security* Value
--------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS -- 2.2%
$ 20,000,000 Merrill Lynch, Pierce, Fenner & Smith Inc., dated 4/30/04, 1.020% due 5/3/04; Proceed at
maturity -- $20,001,700; (Fully collateralized by Fannie Mae and Freddie Mac Notes,
0.000% to 2.340% due 9/9/04 to 9/16/05; Market value -- $20,400,000)................... $ 20,000,000
4,198,000 Morgan Stanley Co. Inc., dated 4/30/04, 1.020% due 5/3/04; Proceed at maturity --
$4,198,357; (Fully collateralized by Fannie Mae Notes, 2.590% to 6.375% due 5/5/04 to
6/13/17; Market value -- $4,281,960)................................................... 4,198,000
--------------
TOTAL REPURCHASE AGREEMENTS (Cost -- $24,198,000)....................................... 24,198,000
--------------
TOTAL INVESTMENTS -- 100.0% (Cost -- $1,088,471,716**).................................. $1,113,743,588
==============
LOANED SECURITIES COLLATERAL
205,684,415 State Street Navigator Securities Lending Trust Prime Portfolio (Cost -- $205,684,415).. $ 205,684,415
==============
--------
* All securities except for those that are on loan are segregated as collateral
pursuant to a loan agreement.
+ Face amount denominated in U.S. dollars unless otherwise indicated.
(a)All or portion of this security is on loan (See Note 4).
(b)Security is currently in default.
(c)Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers. This security has
been deemed liquid pursuant to the guidelines approved by the Board of
Directors.
(d)Security is valued in accordance with fair valuation procedures.
(e)Rate shown reflects current rate on instrument with variable rates or step
coupon rates.
(f)Participation interest was acquired through the financial institution
indicated parenthetically.
(g)Non-income producing security.
**Aggregate cost for Federal income tax purposes is $1,089,630,884.
Abbreviations used in this schedule:
ARS -- Argentine Peso
DCB -- Debt Conversion Bond
DISC -- Discount Bond
FLIRB -- Front-Loaded Interest Reduction Bond
NMB -- New Money Bond
PDI -- Past Due Interest
See Notes to Financial Statements.
Page 22
SALOMON BROTHERS HIGH INCOME FUND II INC.
STATEMENT OF ASSETS AND LIABILITIES
April 30, 2004
ASSETS:
Investments, at value (Cost -- $1,088,471,716)................................................. $1,113,743,588
Loaned securities collateral, at value (Cost -- $205,684,415).................................. 205,684,415
Cash........................................................................................... 3,168,740
Interest receivable............................................................................ 23,432,641
Receivable for securities sold................................................................. 805,989
Prepaid expenses............................................................................... 43,127
--------------
Total Assets................................................................................... 1,346,878,500
--------------
LIABILITIES:
Loan payable (Note 7).......................................................................... 300,000,000
Payable for securities on loan (Note 4)........................................................ 205,684,415
Management fee payable......................................................................... 945,204
Payable for securities purchased............................................................... 457,432
Loan interest payable.......................................................................... 390,643
Administration fee payable..................................................................... 94,520
Accrued expenses............................................................................... 284,674
--------------
Total Liabilities.............................................................................. 507,856,888
--------------
Total Net Assets.................................................................................. $ 839,021,612
==============
NET ASSETS:
Common stock ($0.001 par value, 100,000,000 shares authorized; 76,064,933 shares outstanding).. $ 76,065
Capital paid in excess of par value............................................................ 1,038,809,255
Accumulated net realized loss from investment transactions..................................... (225,135,580)
Net unrealized appreciation of investments..................................................... 25,271,872
--------------
Total Net Assets.................................................................................. $ 839,021,612
==============
Net Asset Value, per share ($839,021,612 / 76,064,933 shares outstanding)......................... $11.03
======
See Notes to Financial Statements.
Page 23
SALOMON BROTHERS HIGH INCOME FUND II INC.
STATEMENT OF OPERATIONS
For the Year Ended April 30, 2004
INVESTMENT INCOME:
Interest (Note 4)...................................... $101,655,816
------------
EXPENSES:
Management fee (Note 2)................................ 11,231,503
Interest expense (Note 7).............................. 4,913,117
Administration fee (Note 2)............................ 1,123,150
Custody................................................ 135,452
Transfer agency services............................... 112,991
Audit and legal........................................ 80,118
Registration fees...................................... 73,797
Directors' fees........................................ 73,224
Shareholder communications............................. 62,577
Insurance.............................................. 10,020
Other.................................................. 31,067
------------
Total Expenses......................................... 17,847,016
------------
Net Investment Income..................................... 83,808,800
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCIES (NOTE 3):
Realized Gain (Loss) From:
Investment transactions............................... 54,313,410
Foreign currency transactions......................... (19,618)
------------
Net Realized Gain...................................... 54,293,792
------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year..................................... 16,027,642
End of year........................................... 25,271,872
------------
Increase in Net Unrealized Appreciation................ 9,244,230
------------
Net Gain on Investments and Foreign Currencies............ 63,538,022
------------
Increase in Net Assets From Operations.................... $147,346,822
============
See Notes to Financial Statements.
Page 24
SALOMON BROTHERS HIGH INCOME FUND II INC.
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended April 30,
2004 2003
--------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income.............................................................. $ 83,808,800 $ 85,756,547
Net realized gain (loss)........................................................... 54,293,792 (55,505,695)
Increase in net unrealized appreciation............................................ 9,244,230 67,269,678
------------- -------------
Increase in Net Assets From Operations............................................. 147,346,822 97,520,530
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................................. (103,492,241) (84,516,112)
Net realized gains................................................................. -- (15,830,265)
------------- -------------
Decrease in Net Assets From Distributions to Shareholders.......................... (103,492,241) (100,346,377)
------------- -------------
FUND SHARE TRANSACTIONS:
Proceeds from shares issued in reinvestment of dividends (2,032,308 and 2,448,921
shares issued, respectively)...................................................... 23,600,889 24,058,046
------------- -------------
Increase in Net Assets From Fund Share Transactions................................ 23,600,889 24,058,046
------------- -------------
Increase in Net Assets................................................................ 67,455,470 21,232,199
NET ASSETS:
Beginning of year.................................................................. 771,566,142 750,333,943
------------- -------------
End of year*....................................................................... $839,021,612 $771,566,142
============= =============
* Includes overdistributed net investment income of:.................................. -- $(32,943)
============= =============
See Notes to Financial Statements.
Page 25
SALOMON BROTHERS HIGH INCOME FUND II INC.
STATEMENT OF CASH FLOWS
For the Year Ended April 30, 2004
CASH FLOWS PROVIDED (USED) BY OPERATING AND INVESTING ACTIVITIES:
Interest and dividend received......................................... $ 90,539,966
Operating expenses paid................................................ (12,834,013)
Net purchases of short-term investments................................ (16,855,000)
Realized loss on foreign currency transactions......................... (19,618)
Purchases of long-term investments..................................... (557,563,560)
Proceeds from disposition of long-term investments..................... 584,745,441
Interest paid on bank loans............................................ (4,964,365)
-------------
Net Cash Provided By Operating and Investing Activities................ 83,048,851
-------------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
Cash distributions paid on Common Stock................................ (103,492,241)
Proceeds from reinvestment of dividends................................ 23,600,889
-------------
Net Cash Used by Financing Activities.................................. (79,891,352)
-------------
Net Increase in Cash...................................................... 3,157,499
Cash, Beginning of year................................................... 11,241
-------------
Cash, End of year......................................................... $ 3,168,740
=============
RECONCILIATION OF INCREASE IN NET ASSETS FROM OPERATIONS TO NET CASH FLOWS
PROVIDED (USED) BY OPERATING AND INVESTING ACTIVITIES:
Increase in Net Assets From Operations................................. $ 147,346,822
-------------
Accretion of discount on investments................................... (13,418,729)
Amortization of premium on investments................................. 1,681,796
Capitalized income on payment-in-kind securities....................... (831,549)
Increase in investments, at value...................................... (41,881,684)
Decrease in interest receivable........................................ 1,452,632
Decrease in receivable for investments sold............................ 1,044,922
Decrease in prepaid expenses........................................... 6,577
Decrease in payable of investments purchased........................... (12,393,997)
Decrease in interest payable on loan................................... (51,248)
Increase in accrued expenses........................................... 93,309
-------------
Total Adjustments...................................................... (64,297,971)
-------------
Net Cash Flows Provided By Operating and Investing Activities $ 83,048,851
=============
See Notes to Financial Statements.
Page 26
SALOMON BROTHERS HIGH INCOME FUND II INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Salomon Brothers High Income Fund II Inc. ("Fund") was incorporated in Maryland
and is registered as a diversified, closed-end, management investment company
under the Investment Company Act of 1940, as amended. The Fund seeks to
maximize current income by investing at least 80% of its net assets plus any
borrowings for investment purposes in high yield debt securities (as defined in
the Fund's prospectus). As a secondary objective, the Fund seeks capital
appreciation to the extent consistent with its objective of seeking to maximize
current income.
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
amounts could 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 were a sale on the date of
determination, (ii) at the mean between the last current bid and asked prices
if there were no sales on such date and bid and asked quotations are available,
and (iii) at the bid price if there were 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, when 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 which approximates market 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) INVESTMENT TRANSACTIONS. Investment transactions are recorded on the trade
date. Interest income is accrued on a daily basis. Market discount or premium
on securities purchased is accreted or amortized, respectively, 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.
Dividend income is recorded on ex-dividend date.
(c) FEDERAL INCOME TAXES. The Fund has complied and intends to continue to
comply with the requirements of the Internal Revenue Code of 1986, as amended,
applicable to regulated
Page 27
SALOMON BROTHERS HIGH INCOME FUND II INC.
NOTES TO FINANCIAL STATEMENTS (continued)
investment companies, and to distribute all of its income to its shareholders.
Therefore, no federal income tax or excise tax provision is required. The
character of income and gains to be distributed are determined in accordance
with income tax regulations which may differ from U.S. generally accepted
accounting principles.
(d) DIVIDENDS AND DISTRIBUTIONS. The Fund declares and pays dividends to
shareholders monthly from net investment income. Net realized gains, if any, in
excess of loss carryovers are expected to be distributed at least 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. To the extent these differences are
permanent in nature, such amounts are reclassified within the components of net
assets.
(e) REPURCHASE AGREEMENTS. When entering into repurchase agreements, it is the
Fund's policy that a custodian takes possession of the underlying collateral
securities, the value of which at least equals the principal amount of the
repurchase transaction, including accrued interest. To the extent that any
repurchase transaction exceeds one business day, the value of the collateral is
marked-to-market to ensure the adequacy of the collateral. If the seller
defaults and the value of the collateral declines or if bankruptcy proceedings
are commenced with respect to the seller of the security, realization of the
collateral by the Fund may be delayed or limited.
(f) CASH FLOW INFORMATION. The Fund invests in securities and distributes
dividends from net investment income and net realized gains which are paid in
cash and may be reinvested at the discretion of shareholders. These activities
are reported in the statement of changes in net assets and additional
information on cash receipts and cash payments are presented in the statement
of cash flows.
(g) YEAR END TAX RECLASSIFICATIONS. The character of income and gains to be
distributed is determined in accordance with income tax regulations which may
differ from U.S. generally accepted accounting principles. At April 30, 2004,
reclassifications were made to the capital accounts of the Fund to reflect
permanent book/tax differences and income and gains available for distributions
under income tax regulations. Accordingly, a portion of overdistributed net
investment income amounting to $19,736,002 was reclassified to paid-in-capital.
Net investment income, net realized gains and net assets were not affected by
this change.
NOTE 2. MANAGEMENT FEE AND OTHER TRANSACTIONS
Salomon Brothers Asset Management Inc ("Investment Manager"), an indirect
wholly-owned subsidiary of Citigroup Inc. ("Citigroup"), acts as investment
manager to the Fund. The Investment Manager 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
Page 28
SALOMON BROTHERS HIGH INCOME FUND II INC.
NOTES TO FINANCIAL STATEMENTS (continued)
decisions to buy, sell or hold particular securities of the Fund. The
management fee for these services is payable monthly at an annual rate of 1.00%
of the Fund's average weekly net assets plus the proceeds of any outstanding
borrowings used for leverage.
Smith Barney Fund Management LLC ("Administrator"), another indirect
wholly-owned subsidiary of Citigroup, acts as the Fund's administrator for
which the Fund pays a monthly fee at an annual rate of 0.10% of the value of
the Fund's average weekly net assets plus the proceeds of any outstanding
borrowings used for leverage. The administrator performs certain administrative
services necessary for the operation of the Fund.
During periods in which the Fund is utilizing financial leverage, the fees
which are payable to the Investment Manager and Administrator as a percentage
of the Fund's assets will be higher than if the Fund did not utilize leverage
because the fees are calculated as a percentage of the Fund's assets, including
those investments purchased with leverage.
At April 30, 2004, Citigroup Global Markets Inc. ("CGM"), another indirect
wholly-owned subsidiary of Citigroup, held 12.338 shares of the Fund.
Certain officers and/or Directors of the Fund are also officers and/or
Directors of the Investment Manager.
NOTE 3. PORTFOLIO ACTIVITY
During the year ended April 30, 2004, the aggregate cost of purchases and
proceeds from sales of investments (including maturities of long-term
investments, but excluding short-term investments) were as follows:
Purchases.................................... $545,169,563
============
Sales........................................ $575,102,599
============
At April 30, 2004, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were as follows:
Gross unrealized appreciation................ $ 87,090,528
Gross unrealized depreciation................ (62,977,824)
------------
Net unrealized appreciation.................. $ 24,112,704
============
NOTE 4. LENDING OF PORTFOLIO SECURITIES
The Fund has an agreement with its custodian whereby the custodian may lend
securities owned by the Fund to brokers, dealers and other financial
organizations, and receives a lenders fee. Fees earned by the Fund on
securities lending are recorded in interest income. Loans of securities by the
Fund are collateralized by cash, U.S. government securities or high quality
Page 29
SALOMON BROTHERS HIGH INCOME FUND II INC.
NOTES TO FINANCIAL STATEMENTS (continued)
money market instruments that are maintained at all times in an amount at least
equal to the current market value of the securities loaned, plus a margin which
may vary depending on the type of securities loaned. The Fund maintains
exposure for the risk of any losses in the investment of amounts received as
collateral.
At April 30, 2004, the Fund loaned securities having a market value of
$201,273,072. The Fund received cash collateral amounting to $205,684,415 which
was invested into the State Street Navigator Securities Lending Trust Prime
Portfolio.
Income earned by the Fund from securities lending for the year ended April 30,
2004 was $308,136.
NOTE 5. LOAN PARTICIPATIONS
The Fund invests in fixed and floating rate loans arranged through private
negotiations between a foreign sovereign entity and one or more financial
institutions. The Fund's investment in any such loan may be in the form of a
participation in or an assignment of the loan.
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 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.
At April 30, 2004, the Fund held loan participations with a total cost of
$5,012,196.
NOTE 6. CREDIT AND MARKET RISK
The yields of emerging markets debt obligations and high-yield corporate 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.
NOTE 7. LOAN
At April 30, 2004, the Fund had outstanding a $300,000,000 loan pursuant to a
revolving credit and security agreement with CXC Inc., an affiliate of
Citigroup, a commercial paper conduit issuer for which Citicorp North America
Inc., an affiliate of the Investment Manager, acts as
Page 30
SALOMON BROTHERS HIGH INCOME FUND II INC.
NOTES TO FINANCIAL STATEMENTS (continued)
administrative agent. The average balance outstanding on the loan for the year
ended April 30, 2004 was $300,000,000. The loans generally bear interest at a
variable rate based on the weighted average interest rates of the underlying
commercial paper or LIBOR, plus any applicable margin. Securities held by the
Fund are subject to a lien, granted to the lenders, to the extent of the
borrowing outstanding and any additional expenses. For the year ended April 30,
2004, the weighted average interest rate of the loan was 1.64%. The interest
expense of the Fund was $4,964,365.
NOTE 8. DIVIDENDS SUBSEQUENT TO APRIL 30, 2004
On February 9, 2004, the Board of Directors of the Fund declared dividends in
the amount of $0.115 per share, payable on May 28, 2004 to shareholders of
record on May 18, 2004.
On May 14, 2004, the Board of Directors of the Fund declared three dividends,
each in the amount of $0.115 per share, payable on June 25, 2004, July 30, 2004
and August 27, 2004 to shareholders of record on June 15, 2004, July 13, 2004
and August 17, 2004, respectively.
9. CAPITAL LOSS CARRYFORWARD
At April 30, 2004, the Fund had, for Federal income tax purposes, approximately
$223,976,000 of capital loss carryforwards available to offset future capital
gains. To the extent that these carryforward losses are used to offset capital
gains, it is probable that the gains so offset will not be distributed.
However, if current year distributions exceed the required distribution amount
as defined under the Internal Revenue Code of 1986, as amended, realized gains
that have been offset by the carryforward losses may be taxable to shareholders.
The amount and year of expiration for each carryforward loss is indicated
below. Expiration occurs on April 30 of the year indicated:
2007 2008 2009 2010 2011
--------- ---------- ---------- ---------- ----------
Carryforward Amounts 2,302,000 40,142,000 10,635,000 93,766,000 77,131,000
10. INCOME TAX INFORMATION AND DISTRIBUTIONS TO SHAREHOLDERS
The tax basis components of distributable earnings at April 30, 2004 were:
Accumulated capital losses $(223,976,412)
=============
Unrealized appreciation... $ 24,112,704
=============
The difference between book basis and tax basis unrealized appreciation and
depreciation is attributable primarily to wash sale loss deferrals.
Page 31
SALOMON BROTHERS HIGH INCOME FUND II INC.
NOTES TO FINANCIAL STATEMENTS (continued)
The tax character of distributions paid during the year ended April 30 was:
2004 2003
------------ ------------
Ordinary income $103,492,241 $ 84,516,112
Capital........ -- 15,830,265
------------ ------------
Total.......... $103,492,241 $100,346,377
============ ============
NOTE 11. ADDITIONAL INFORMATION
The Fund has received the following information from Citigroup Asset Management
("CAM"), the Citigroup business unit which includes the Fund's Investment
Manager and other investment advisory companies, all of which are indirect,
wholly-owned subsidiaries of Citigroup. CAM is reviewing its entry, through an
affiliate, into the transfer agent business in the period 1997-1999. As CAM
currently understands the facts, at the time CAM decided to enter the transfer
agent business, CAM sub-contracted for a period of five years certain of the
transfer agency services to a third party and also concluded a revenue
guarantee agreement with this sub-contractor providing that the sub-contractor
would guarantee certain benefits to CAM or its affiliates (the "Revenue
Guarantee Agreement"). In connection with the subsequent purchase of the
sub-contractor's business by an affiliate of the current sub-transfer agent
(PFPC Inc.) used by CAM on many of the funds it manages, this Revenue Guarantee
Agreement was amended eliminating those benefits in exchange for arrangements
that included a one-time payment from the sub-contractor.
The Boards of CAM-managed funds (the "Boards") were not informed of the Revenue
Guarantee Agreement with the sub-contractor at the time the Boards considered
and approved the transfer agent arrangements. Nor were the Boards informed of
the subsequent amendment to the Revenue Guarantee Agreement when that occurred.
CAM has begun to take corrective actions. CAM will pay to the applicable funds
approximately $17 million (plus interest) that CAM and its affiliates received
from the Revenue Guarantee Agreement and its amendment. CAM also plans an
independent review to verify that the transfer agency fees charged by CAM were
fairly priced as compared to competitive alternatives. CAM is instituting new
procedures and making changes designed to ensure no similar arrangements are
entered into in the future.
CAM has briefed the SEC, the New York State Attorney General and other
regulators with respect to this matter, as well as the U.S. Attorney who is
investigating the matter. CAM is cooperating with governmental authorities on
this matter, the ultimate outcome of which is not yet determinable.
The Fund's transfer agent is PFPC Inc., which is not affiliated with CAM.
Page 32
SALOMON BROTHERS HIGH INCOME FUND II INC.
FINANCIAL HIGHLIGHTS
Data for a share of capital stock outstanding throughout each year ended April
30, unless otherwise noted:
2004 2003 2002 2001 2000
--------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year.............. $10.42 $10.48 $11.08 $11.85 $ 13.54
------ ------ ------ ------ ------
Income (Loss) From Operations:
Net investment income........................ 1.12 1.18 1.27 1.37 1.45
Net realized and unrealized gain (loss)...... 0.85 0.12 (0.50) (0.58) (1.70)
-- -- ----- ----- -----
Total Income (Loss) From Operations............. 1.97 1.30 0.77 0.79 (0.25)
-- -- -- -- -----
Less Distributions From:
Net investment income........................ (1.38) (1.16) (1.18) (1.40) (1.44)
Return of capital............................ -- (0.22) (0.20) (0.16) --
- ----- ----- ----- -
Total Distributions............................. (1.38) (1.38) (1.38) (1.56) (1.44)
----- ----- ----- ----- -----
Increase in Net Asset Value Due to Shares Issued
on Reinvestment of Dividends................... 0.02 0.02 0.01 -- --
-- -- -- - -
Net Asset Value, End of Year.................... $11.03 $10.42 $10.48 $11.08 $ 11.85
====== ====== ====== ====== ======
Market Price, End of Year....................... $11.75 $11.65 $11.65 $10.96 $11.750
====== ====== ====== ====== =======
Total Return, Based on Market Price(1).......... 13.51% 15.00% 20.83% 6.85% 5.45%
Ratios to Average Net Assets:
Total expenses, including interest expense... 2.17% 2.49% 2.80% 3.09% 2.09%
Total expenses, excluding interest expense
(operating expenses)........................ 1.57% 1.63% 1.57% 1.43% 1.29%
Net investment income........................ 10.18% 12.64% 12.08% 11.87% 11.48%
Net Assets, End of Year (000s).................. $839,022 $771,566 $750,334 $764,344 $790,743
Portfolio Turnover Rate......................... 50% 87% 118% 118% 68%
Loans Outstanding, End of Year (000s)........... $300,000 $300,000 $260,000 $260,000 $105,000
Weighted Average Interest Rate on Loans......... 1.64% 2.15% 3.44% 6.69% 6.18%
--------------------------------------------------------------------------------
(1)For purposes of this calculation, dividends are assumed to be reinvested at
prices obtained under the Fund's dividend reinvestment plan and the broker
commission paid to purchase or sell a share is excluded.
Page 33
SALOMON BROTHERS HIGH INCOME FUND II INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Salomon Brothers High Income Fund II Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule 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 Salomon Brothers
High Income Fund II Inc. ("Fund") at April 30, 2004, the results of its
operations and its 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 the standards of the Public Company Accounting Oversight Board (United
States). Those standards 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 April 30, 2004 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
New York, NY
June 17, 2004
Page 34
SALOMON BROTHERS HIGH INCOME FUND II INC.
ADDITIONAL INFORMATION (unaudited)
Information about Directors and Officers
The business and affairs of Salomon Brothers High Income Fund II Inc. ("Fund")
are managed under the direction of the Board of Directors. Information
pertaining to the Directors and Officers of the Fund is set forth below. The
Statement of Additional Information includes additional information about Fund
Directors and is available by contacting the transfer agent at 1-800-446-1013.
Number of
Portfolios in
Fund Complex
Term of Principal Overseen by Other
Position(s) Office/(1)/ and Occupation(s) Director Board
Held with Length of During Past (including Memberships
Name, Address and Age Fund/(1)/ Time Served Five Years the Fund) Held by Director
-----------------------------------------------------------------------------------------------------------------
Non-Interested
Directors:
Carol L. Colman Director and Since President, Colman 35 None
Colman Consulting Co. Member of the 2002 Consulting Co.
278 Hawley Road Nominating and
North Salem, NY 10560 Audit
Age 58 Committees,
Class III
Daniel P. Cronin Director and Since Formerly Associate 32 None
Pfizer Inc. Member of the 2002 General Counsel,
235 East 42nd Street Nominating and Pfizer Inc.
New York, NY 10017 Audit
Age 57 Committees,
Class I
Leslie H. Gelb Director and Since President, Emeritus and 32 Director of
150 East 69th Street Member of the 1994 Senior Board Fellow, The two registered
New York, NY 10021 Nominating and Council on Foreign investment
Age 66 Audit Relations; Formerly, companies advised by
Committees, Columnist, Deputy Advantage Advisers,
Class II Editorial Page Editor and Inc. ("Advantage")
Editor, Op-Ed Page, The
New York Times
William R. Hutchinson Director and Since President, W.R. 42 Director, Associated
535 N. Michigan Member of the 2003 Hutchinson & Associates Banc-Corp.
Suite 1012 Nominating and Inc.; Formerly Group Vice
Chicago, IL 60611 Audit President, Mergers and
Age 61 Committees, Acquisitions, BP Amoco
Class III p.l.c.
Page 35
SALOMON BROTHERS HIGH INCOME FUND II INC.
ADDITIONAL INFORMATION (unaudited) (continued)
Number of
Portfolios in
Fund Complex
Term of Principal Overseen by Other
Position(s) Office/(1)/ and Occupation(s) Director Board
Held with Length of During Past (including Memberships
Name, Address and Age Fund/(1)/ Time Served Five Years the Fund) Held by Director
-----------------------------------------------------------------------------------------------------------------------------
Riordan Roett Director and Since Professor and Director, 32 Director, The Latin
The Johns Hopkins University Member of the 1995 Latin America Studies America Equity Fund,
1740 Massachusetts Ave., NW Nominating and Program, Paul H. Nitze Inc.
Washington, DC 20036 Audit School of Advanced
Age 65 Committees, International Studies, The
Class II Johns Hopkins University
Jeswald W. Salacuse Director and Since Henry J. Braker Professor 32 Director of two
Tufts University Member of the 1994 of Commercial Law and registered investment
The Fletcher School of Nominating and formerly Dean, The companies advised by
Law & Diplomacy Audit Fletcher School of Law Advantage
160 Packard Avenue Committees, and Diplomacy,
Medford, MA 02155 Class I Tufts University
Age 66
Interested Directors:
R. Jay Gerken, CFA/(2)/ Director, Since Managing Director of 221 None
Citigroup Asset Chairman and 2002 Citigroup Global Markets
Management ("CAM") Chief Executive Inc. ("CGM"); Chairman,
399 Park Avenue, 4th Floor Officer, President, Chief Executive
New York, NY 10022 Class III Officer and Director of
Age 52 Smith Barney Fund
Management LLC
("SBFM") Travelers
Investment Adviser, Inc.
("TIA") and Citi Fund
Management Inc.
("CFM"); President and
Chief Executive Officer of
certain mutual funds
associated with Citigroup
Inc. ("Citigroup");
Formerly Portfolio
Manager of Smith Barney
Allocation Series Inc. (from
1996 to 2001) and Smith
Barney Growth and
Income Fund (from 1996
to 2000)
Page 36
SALOMON BROTHERS HIGH INCOME FUND II INC.
ADDITIONAL INFORMATION (unaudited) (continued)
Number of
Portfolios in
Fund Complex
Term of Principal Overseen by Other
Position(s) Office/(1)/ and Occupation(s) Director Board
Held with Length of During Past (including Memberships
Name, Address and Age Fund/(1)/ Time Served Five Years the Fund) Held by Director
---------------------------------------------------------------------------------------------------------------------
Officers:
Peter J. Wilby, CFA President Since Managing Director of N/A N/A
CAM Executive 2002 CGM and Salomon
399 Park Avenue, 4th Floor Vice President 1994- Brothers Asset
New York, NY 10022 2002 Management Inc
Age 44 ("SBAM")
Andrew B. Shoup Treasurer Since Director of CAM; Senior N/A N/A
CAM 2004 Vice President and Chief
125 Broad Street, 11th Floor Senior Vice Since Administrative Officer of
New York, NY 10004 President and 2003 mutual funds associated
Age 47 Chief with Citigroup; Treasurer
Administrative of certain mutual funds
Officer associated with Citigroup;
Head of International
Funds Administration of
CAM (from 2001 to 2003);
Director of Global Funds
Administration of CAM
(from 2000 to 2001); Head
of U.S. Citibank Funds
Administration of CAM
(from 1998 to 2000)
James E. Craige, CFA Executive Vice Since Managing Director of N/A N/A
CAM President 1999 CGM and SBAM (since
399 Park Avenue, 4th Floor December 1998); Director
New York, NY 10022 of CGM and SBAM (since
Age 37 January 1998) and Vice
President of CGM and
SBAM (since January
1996)
Thomas K. Flanagan, CFA Executive Vice Since Managing Director of N/A N/A
CAM President 1994 CGM and SBAM (since
399 Park Avenue, 4th Floor December 1998); Prior to
New York, NY 10022 December 1998, Director
Age 50 of CGM and SBAM
Page 37
SALOMON BROTHERS HIGH INCOME FUND II INC.
ADDITIONAL INFORMATION (unaudited) (continued)
Number of
Portfolios in
Fund Complex
Term of Principal Overseen by Other
Position(s) Office/(1)/ and Occupation(s) Director Board
Held with Length of During Past (including Memberships
Name, Address and Age Fund/(1)/ Time Served Five Years the Fund) Held by Director
---------------------------------------------------------------------------------------------------------------------
Maureen O'Callaghan Executive Vice Since Managing Director of N/A N/A
CAM President 1997 SBAM (since January
399 Park Avenue, 4th Floor 2001); Director and Vice
New York, NY 10022 President of SBAM (prior
Age 40 to 2001)
Beth A. Semmel, CFA Executive Vice Since Managing Director of N/A N/A
CAM President 1995 CGM and SBAM (since
399 Park Avenue, 4th Floor December 1998); Director
New York, NY 10022 of CGM and SBAM (since
Age 42 January 1996)
Frances M. Guggino Controller Since Vice President of CGM; N/A N/A
CAM 2002 Controller of certain
125 Broad Street, 10th Floor mutual funds associated
New York, NY 10004 with Citigroup
Age 45
Robert I. Frenkel Secretary and Since Managing Director and N/A N/A
CAM Chief Legal 2003 General Counsel of Global
300 First Stamford Place Officer Mutual Funds for CAM
4th Floor and its predecessor (since
Stamford, CT 06902 1994); Secretary of CFM
Age 48 (from 2001 to 2004);
Secretary and Chief Legal
Officer of mutual funds
associated with Citigroup
--------
(1)The Fund's Board of Directors is divided into three classes: Class I, Class
II and Class III. The terms of office of the Class I, II and III Directors
expire at the Annual Meeting of Stockholders in the year 2005, year 2006 and
year 2004, respectively, or thereafter in each case when their respective
successors are duly elected and qualified. The Fund's executive officers are
chosen each year at the first meeting of the Fund's Board of Directors
following the Annual Meeting of Stockholders, to hold office until the
meeting of the Board following the next Annual Meeting of Stockholders and
until their successors are duly elected and qualified.
(2)Mr. Gerken in an "interested person" of the Fund as defined in the
Investment Company Act of 1940, as amended, because Mr. Gerken is an officer
of SBFM and certain of its affiliates.
Page 38
SALOMON BROTHERS HIGH INCOME FUND II INC.
DIVIDEND REINVESTMENT PLAN (unaudited)
Pursuant to certain rules of the Securities and Exchange Commission the
following additional disclosure is provided.
Each shareholder purchasing shares of common stock ("Shares") of Salomon
Brothers High Income Fund II Inc. ("Fund") will be deemed to have elected to be
a participant in the Dividend Reinvestment Plan ("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 PFPC Inc. as the Fund's dividend-paying agent ("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.
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.
If, on the determination date (as defined below), 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.
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 Trading Day prior to the "ex-dividend"
date next succeeding the dividend or distribution payment date.
If (i) the Agent has not invested the full dividend amount in open market
purchases by the date specified at the bottom of the prior page 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
Page 39
SALOMON BROTHERS HIGH INCOME FUND II INC.
DIVIDEND REINVESTMENT PLAN (unaudited) (continued)
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 at the bottom of the prior page 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.
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 the paragraph 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.
The open market purchases provided for above may be made on any securities
exchange on which the Shares of the Fund 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.
The Agent will maintain all Participant 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.
Page 40
SALOMON BROTHERS HIGH INCOME FUND II INC.
DIVIDEND REINVESTMENT PLAN (unaudited) (continued)
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.
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.
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.
Participants may terminate their accounts under the Plan by notifying the Agent
in writing or by calling 1-800-331-1710. Such termination will be effective
immediately if notice is received by the Agent not less than ten days prior to
any dividend or distribution record date; otherwise such termination will be
effective on the first Trading Day after the payment due 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 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 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 Plan 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 full Shares held by each Participant under the Plan and
cash adjustment for any fraction to be delivered to each Participant without
charge. If the Participant elects by notice to the Agent in writing in advance
of such termination to have the Agent sell part or all of a Participant's
Shares and remit the proceeds to Participant, the Agent is authorized to deduct
a $2.50 fee plus brokerage commission for this transaction from the proceeds.
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
Page 41
SALOMON BROTHERS HIGH INCOME FUND II INC.
DIVIDEND REINVESTMENT PLAN (unaudited) (continued)
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.
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.
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.
All correspondence concerning the Plan should be directed to the Agent at P.O.
Box 43027, Providence, RI 02940-3027.
ADDITIONAL SHAREHOLDER INFORMATION (unaudited)
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940, as amended, that from time to time the Fund may purchase,
at market prices, shares of its common stock in the open market.
A description of the policies and procedures that the Fund uses to determine
how to vote proxies relating to portfolio securities is available without
charge, upon request, by telephoning the Fund (toll-free) at 1-800-446-1013 and
by visiting the SEC's web site at www.sec.gov.
This report is transmitted to the shareholders of Salomon Brothers High Income
Fund II Inc. 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.
Page 42
SALOMON BROTHERS HIGH INCOME FUND II INC.
DIRECTORS
CAROL L. COLMAN
DANIEL P. CRONIN
LESLIE H. GELB
R. JAY GERKEN, CFA
WILLIAM R. HUTCHINSON
RIORDAN ROETT
JESWALD W. SALACUSE
OFFICERS
R. JAY GERKEN, CFA
Chairman
PETER J. WILBY, CFA
President
ANDREW B. SHOUP
Senior Vice President,
Chief Administrative Officer and Treasurer
JAMES E. CRAIGE, CFA
Executive Vice President
THOMAS K. FLANAGAN, CFA
Executive Vice President
MAUREEN O'CALLAGHAN
Executive Vice President
BETH A. SEMMEL, CFA
Executive Vice President
FRANCES M. GUGGINO
Controller
ROBERT I. FRENKEL
Secretary and Chief Legal Officer
SALOMON BROTHERS HIGH INCOME FUND II INC.
125 Broad Street
10/th/ Floor, MF-2
New York, New York 10004
Telephone 1-888-777-0102
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc
399 Park Avenue
New York, New York 10022
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
TRANSFER AGENT
PFPC Inc.
P.O. Box 43027
Providence, RI 02940-3027
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
LEGAL COUNSEL
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, New York 10017-3909
NEW YORK STOCK EXCHANGE SYMBOL
HIX
Page 43
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to the
registrant's principal executive officer, principal financial
officer, principal accounting officer or controller.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Directors of the registrant has determined that
William R. Hutchinson, the Chairman of the Board's Audit
Committee, possesses the technical attributes identified in
Instruction 2(b) of Item 3 to Form N-CSR to qualify as an "audit
committee financial expert," and has designated Mr. Hutchinson
as the Audit Committee's financial expert. Mr. Hutchinson is an
"independent" Director pursuant to paragraph (a)(2) of Item 3 to
Form N-CSR.
TEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees for Salomon Brothers High Income Fund II Inc.
were $33,000 and $33,000 for the years ended 4/30/04 and
4/30/03, respectively.
(b) Audit-Related Fees for Salomon Brothers High Income Fund II
Inc. of $0 and $8,000 for the years ended 4/30/04 and
4/30/03.
In addition, there were no Audit-Related Fees billed in the
years ended 4/30/04 and 4/30/03 for assurance and related
services by the Accountant to the Registrant's investment
adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or
overseen by another investment adviser), and any entity
controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the
Salomon Brothers High Income Fund Inc. ("service
affiliates"), that were reasonably related to the
performance of the annual audit of the service affiliates.
Accordingly, there were no such fees that required
pre-approval by the Audit Committee for the period May 6,
2003 to April 30, 2004 (prior to May 6, 2003 services
provided by the Accountant were not required to be
pre-approved).
(c) Tax Fees for Salomon Brothers High Income Fund II Inc. of
$3,600 and $2,600 for the years ended 4/30/04 and 4/30/03.
These amounts represent aggregate fees paid for tax
compliance, tax advice and tax planning services, which
include (the filing and amendment of federal, state and
local income tax returns, timely RIC qualification review
and tax distribution and analysis planning) rendered by the
Accountant to Salomon Brothers High Income Fund II Inc.
There were no fees billed for tax services by the
Accountants to service affiliates for the period May 6, 2003
through December 31, 2003 that required pre-approval by the
Audit Committee.
(d) There were no All Other Fees for Salomon Brothers High
Income Fund II Inc. for the years ended 4/30/04 and 4/30/03.
All Other Fees. The aggregate fees billed for all other
non-audit services rendered by the Accountant to Salomon
Brothers Asset Management ("SBAM"), and any entity
controlling, controlled by or under common control with SBAM
that provided ongoing services to Salomon Brothers High
Income Fund Inc., requiring pre-approval by the Audit
Committee for the period May 6, 2003 through December 31,
2003, which included the issuance of reports on internal
control under SAS No. 70 relating to various Citigroup Asset
Management ("CAM") entities, were $558,750; all of which
were pre-approved by the Audit Committee.
(e) (1) Audit Committee's pre-approval policies and procedures
described in paragraph (c) (7) of Rule 2-01 of Regulation
S-X. The Charter for the Audit Committee (the "Committee")
of the Board of each registered investment company (the
"Fund") advised by Smith Barney Fund Management LLC or
Salomon Brothers Asset Management Inc. or one of their
affiliates (each, an "Adviser") requires that the Committee
shall approve (a) all audit and permissible non-audit
services to be provided to the Fund and (b) all permissible
non-audit services to be provided by the Fund's independent
auditors to the Adviser and any Covered Service Providers if
the engagement relates directly to the operations and
financial reporting of the Fund. The Committee may implement
policies and procedures by which such services are approved
other than by the full Committee.
The Committee shall not approve non-audit services that the
Committee believes may impair the independence of the
auditors. As of the date of the approval of this Audit
Committee Charter, permissible non-audit services include
any professional services (including tax services), that are
not prohibited services as described below, provided to the
Fund by the independent auditors, other than those provided
to the Fund in connection with an audit or a review of the
financial statements of the Fund. Permissible non-audit
services may not include: (i) bookkeeping or other services
related to the accounting records or financial statements of
the Fund; (ii) financial information systems design and
implementation; (iii) appraisal or valuation services,
fairness opinions or contribution-in-kind reports; (iv)
actuarial services; (v) internal audit outsourcing services;
(vi) management functions or human resources; (vii) broker
or dealer, investment adviser or investment banking
services; (viii) legal services and expert services
unrelated to the audit; and (ix) any other service the
Public Company Accounting Oversight Board determines, by
regulation, is impermissible.
Pre-approval by the Committee of any permissible non-audit
services is not required so long as: (i) the aggregate
amount of all such permissible non-audit services provided
to the Fund, the Adviser and any service providers
controlling, controlled by or under common control with the
Adviser that provide ongoing services to the Fund ("Covered
Service Providers") constitutes not more than 5% of the
total amount of revenues paid to the independent auditors
during the fiscal year in which the permissible non-audit
services are provided to (a) the Fund, (b) the Adviser and
(c) any entity controlling, controlled by or under common
control with the Adviser that provides ongoing services to
the Fund during the fiscal year in which the services are
provided that would have to be approved by the Committee;
(ii) the permissible non-audit services were not recognized
by the Fund at the time of the engagement to be non-audit
services; and (iii) such services are promptly brought to
the attention of the Committee and approved by the Committee
(or its delegate(s)) prior to the completion of the audit.
(f) N/A
(g) Non-audit fees billed by the Accountant for services
rendered to Salomon Brothers High Income Fund II Inc. and
CAM and any entity controlling, controlled by, or under
common control with CAM that provides ongoing services to
Salomon Brothers High Income Fund II Inc. were $18.3 million
and $6.4 million for the years ended 12/31/2003 and
12/31/2002.
(h) Yes. The Salomon Brothers High Income Fund II Inc.'s Audit
Committee has considered whether the provision of non-audit
services that were rendered to Service Affiliates which were
not pre-approved (not requiring pre-approval) is compatible
with maintaining the Auditor's independence. All services
provided by the Accountant to the Salomon Brothers High
Income Fund II Inc. or to Service Affiliates which were
required to be pre-approved were pre-approved as required.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
The Board of Directors of the Fund has delegated the authority
to develop policies and procedures relating to proxy voting to
the Manager. The Manager is part of Citigroup Asset Management
("CAM"), a group of investment adviser affiliates of Citigroup,
Inc. ("Citigroup"). Along with the other investment advisers
that comprise CAM, the Manager has adopted a set of proxy voting
policies and procedures (the "Policies") to ensure that the
Manager votes proxies relating to equity securities in the best
interest of clients.
In voting proxies, the Manager is guided by general fiduciary
principles and seeks to act prudently and solely in the best
interest of clients. The Manager attempts to consider all
factors that could affect the value of the investment and will
vote proxies in the manner that it believes will be consistent
with efforts to maximize shareholder values. The Manager may
utilize an external service provider to provide it with
information and/or a recommendation with regard to proxy votes.
However, such recommendations do not relieve the Manager of its
responsibility for the proxy vote.
In the case of a proxy issue for which there is a stated
position in the Policies, CAM generally votes in accordance with
such stated position. In the case of a proxy issue for which
there is a list of factors set forth in the Policies that CAM
considers in voting on such issue, CAM votes on a case-by-case
basis in accordance with the general principles set forth above
and considering such enumerated factors. In the case of a proxy
issue for which there is no stated
position or list of factors that CAM considers in voting on such
issue, CAM votes on a case-by-case basis in accordance with the
general principles set forth above. Issues for which there is a
stated position set forth in the Policies or for which there is
a list of factors set forth in the Policies that CAM considers
in voting on such issues fall into a variety of categories,
including election of directors, ratification of auditors, proxy
and tender offer defenses, capital structure issues, executive
and director compensation, mergers and corporate restructurings,
and social and environmental issues. The stated position on an
issue set forth in the Policies can always be superseded,
subject to the duty to act solely in the best interest of the
beneficial owners of accounts, by the investment management
professionals responsible for the account whose shares are being
voted. Issues applicable to a particular industry may cause CAM
to abandon a policy that would have otherwise applied to issuers
generally. As a result of the independent investment advisory
services provided by distinct CAM business units, there may be
occasions when different business units or different portfolio
managers within the same business unit vote differently on the
same issue.
In furtherance of the Manager's goal to vote proxies in the best
interest of clients, the Manager follows procedures designed to
identify and address material conflicts that may arise between
the Manager's interests and those of its clients before voting
proxies on behalf of such clients. To seek to identify conflicts
of interest, CAM periodically notifies CAM employees (including
employees of the Manager) in writing that they are under an
obligation (i) to be aware of the potential for conflicts of
interest with respect to voting proxies on behalf of client
accounts both as a result of their personal relationships and
due to special circumstances that may arise during the conduct
of CAM's and the Manager's business, and (ii) to bring conflicts
of interest of which they become aware to the attention of
compliance personnel. The Manager also maintains and considers a
list of significant relationships that could present a conflict
of interest for the Manager in voting proxies. The Manager is
also sensitive to the fact that a significant, publicized
relationship between an issuer and a non-CAM affiliate might
appear to the public to influence the manner in which the
Manager decides to vote a proxy with respect to such issuer.
Absent special circumstances or a significant, publicized
non-CAM affiliate relationship that CAM or the Manager for
prudential reasons treats as a potential conflict of interest
because such relationship might appear to the public to
influence the manner in which the Manager decides to vote a
proxy, the Manager generally takes the position that non-CAM
relationships between Citigroup and an issuer (e.g. investment
banking or banking) do not present a conflict of interest for
the Manager in voting proxies with respect to such issuer. Such
position is based on the fact that the Manager is operated as an
independent business unit from other Citigroup business units as
well as on the existence of information barriers between the
Manager and certain other Citigroup business units.
CAM maintains a Proxy Voting Committee, of which the Manager
personnel are members, to review and address conflicts of
interest brought to its attention by compliance personnel. A
proxy issue
that will be voted in accordance with a stated position on an
issue or in accordance with the recommendation of an independent
third party is not brought to the attention of the Proxy Voting
Committee for a conflict of interest review because the
Manager's position is that to the extent a conflict of interest
issue exists, it is resolved by voting in accordance with a
pre-determined policy or in accordance with the recommendation
of an independent third party. With respect to a conflict of
interest brought to its attention, the Proxy Voting Committee
first determines whether such conflict of interest is material.
A conflict of interest is considered material to the extent that
it is determined that such conflict is likely to influence, or
appear to influence, the Manager's decision-making in voting
proxies. If it is determined by the Proxy Voting Committee that
a conflict of interest is not material, the Manager may vote
proxies notwithstanding the existence of the conflict.
If it is determined by the Proxy Voting Committee that a
conflict of interest is material, the Proxy Voting Committee is
responsible for determining an appropriate method to resolve
such conflict of interest before the proxy affected by the
conflict of interest is voted. Such determination is based on
the particular facts and circumstances, including the importance
of the proxy issue and the nature of the conflict of interest.
Methods of resolving a material conflict of interest may
include, but are not limited to, disclosing the conflict to
clients and obtaining their consent before voting, or suggesting
to clients that they engage another party to vote the proxy on
their behalf.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and
principal financial officer have concluded that the
registrant's disclosure controls and procedures (as
defined in Rule 30a- 3(c) under the Investment Company
Act of 1940, as amended (the "1940 Act")) are effective
as of a date within 90 days of the filing date of this
report that includes the disclosure required by this
paragraph, based on their evaluation of the disclosure
controls and procedures required by Rule 30a-3(b) under
the 1940 Act and 15d-15(b) under the Securities Exchange
Act of 1934.
(b) There were no changes in the registrant's internal
control over financial reporting (as defined in Rule
30a-3(d) under the 1940 Act) that occurred during the
registrant's last fiscal half-year (the registrant's
second fiscal half-year in the case of an annual report)
that have materially affected, or are likely to
materially affect the registrant's internal control over
financial reporting.
ITEM 10. EXHIBITS.
(a) Code of Ethics attached hereto.
Exhibit 99.CODE ETH
(b) Attached hereto.
Exhibit 99.CERT Certifications pursuant to section 302
of the Sarbanes-Oxley Act of 2002
Exhibit 99.906CERT Certifications pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this Report
to be signed on its behalf by the undersigned, there unto duly authorized.
SALOMON BROTHERS HIGH INCOME FUND II INC.
By: /s/ R. Jay Gerken
-----------------------------------------
R. Jay Gerken
Chief Executive Officer of
Salomon Brothers High Income Fund II Inc.
Date: July 6, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ R. Jay Gerken
-----------------------------------------
R. Jay Gerken
Chief Executive Officer of
Salomon Brothers High Income Fund II Inc.
Date: July 6, 2004
By: /s/ Andrew B. Shoup
-----------------------------------------
Andrew B. Shoup
Chief Administrative Officer of
Salomon Brothers High Income Fund II Inc.
Date: July 6, 2004