<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
June 2, 1999
Dear Shareholders:
We are pleased to provide this first annual report for the Salomon Brothers High
Income Fund II Inc ("Fund") as of April 30, 1999. We hope you find this report
to be useful and informative. Included are market commentary, a schedule of the
Fund's investments as of April 30, 1999 and financial statements for the period
ended April 30, 1999. The Fund distributed income dividends totaling $1.22 per
share during this period. The table below shows the annualized distribution rate
and the total return for the period covered by this report based on the Fund's
April 30, 1999 net asset value ("NAV") per share and its New York Stock Exchange
("NYSE") closing price:
Price Annualized
Per Share Distribution Rate* Total Return
--------- ----------------- ------------
$13.54 (NAV) 10.19% (0.98)%
$12.625 (NYSE) 10.93% (7.57)%
In comparison, the Salomon Smith Barney High Yield Market Index showed a return
of 2.33% and the J.P. Morgan Emerging Markets Bond Index Plus ("EMBI+") showed a
decline of 5.63% during the same period.
On April 30, 1999, 69.9% of the Fund's long-term investments were in high-yield
corporate bonds. The remaining 30.1% was invested in emerging market issuers,
including obligations of sovereign governments.
When the Fund was organized in May 1998, the High Yield and Emerging Debt
Markets were trading at 355 basis points over Treasuries and 550 basis points
over Treasuries, respectively. In the ensuing twelve months, both markets
experienced periods of extreme volatility which we describe below. The Fund has
come through this period invested in a broadly diversified portfolio of high
yield and emerging markets credits. The Fund is modestly leveraged (i.e.,
approximately 10% of total assets) and remains committed to maximizing current
income through prudent investments in high yield and emerging markets debt.
U.S. HIGH YIELD MARKET
The year ended April 30, 1999 was marked by periods of extreme volatility in all
financial markets caused by fundamental problems in Asia, Russia and Brazil. The
performance of the U.S. high-yield bond market was influenced by these
fundamental developments as well as from technical market factors. The market
returned 2.61% for the 12-month period ended April 30, 1999 as measured by the
Salomon Smith Barney High Yield Market Index.
High yield market performance was relatively stable during the first few months
of the Fund's fiscal year, reflecting the trend in behavior of U.S. equity
markets and reduced volatility in Asian markets. Volatility increased
substantially during August and September as investors reduced their exposure to
credit risk and sought the safety and liquidity of the U.S. Treasury market.
This flight to quality was triggered by the Russian currency crisis. In August,
the market suffered an outflow of over $2 billion from high-yield bond mutual
funds, while new issue activity ground to a halt. The spread over cap treasuries
of the Salomon
- ----------
* The distribution rate assumes a current monthly income dividend rate of $0.115
per share for twelve months and excludes any special dividends.
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Smith Barney High Yield Index widened from 374 basis points at the end of July
to 664 basis points in late October. This yearly spread of 300 basis points
reflected a dramatic change in investor sentiment toward risk rather than any
specific fundamental change in credit quality in the high-yield market.
The market's recovery was triggered by the Federal Reserve Board ("Fed")'s
easing of the federal funds rate and has continued with further strong U.S.
economic growth. The Fed rate cuts convinced investors that the impact of
international events on the U.S. high-yield market would be limited and that the
market represented attractive value. With the exception of a brief contraction
in February following Brazil's currency devaluation, the U.S. high-yield bond
market moved higher over the course of the Fund's fiscal year. The market's
recovery has been fueled by a number of fundamental and technical factors
including:
o a strong U.S. economy,
o a high level of merger and acquisition activity,
o historic highs in equity indices,
o strong demand for high-yield paper from both retail and
institutional investors,
o a lighter-than-anticipated new issue calendar,
o a rebound in energy prices, and
o more stability in global markets.
As reported by the Salomon Smith Barney High Yield Market Index, the high-yield
market returned 2.33% during the reporting period. The average market yield at
April 30, 1999 was 9.99%, up from 9.09% at May 31, 1998. In addition, the spread
over U.S. Treasuries finished the period at 471 basis points, widening from 355
basis points at May 31, 1998.
For the year ended April 30, 1999, the top-performing industries in the
high-yield bond market included Cable & Media, Utilities, Gaming and most other
industry groups with relatively stable and predictable cash flows. Housing &
Related and Retail also outperformed. The worst performing industry group during
the Fund's fiscal year was Energy. The performance of the energy sector has
improved since OPEC reached an agreement to cut oil production, triggering a
sharp increase in oil prices. In addition, Healthcare underperformed due to
difficulties presented by the newly imposed PPS Medicare reimbursement system.
Other underperforming industry groups included Consumer Products, Metals &
Mining and Textile/Apparel.
Our outlook for the high-yield market remains positive given current valuations.
We continue to focus on good quality and liquid credits in our highly
diversified portfolio.
EMERGING MARKET DEBT
Emerging Market Debt returned a negative 8.85% for the fiscal year ended April
30, 1999 as measured by the JP Morgan Emerging Markets Bond Index Plus. The
primary events impacting emerging market debt during the fiscal year included
the severe recession in Asia, the Russian domestic debt default and the currency
crisis in Brazil. Each of these events had a sharply negative impact on the
countries directly involved, as well as a broader spillover impact on the entire
market.
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
The recession in Asia, a product of the rolling currency crisis which impacted
Thailand, Korea, Malaysia and Indonesia and threatened the currency peg in Hong
Kong, had a direct negative impact on the debt values of each of these
countries. In addition, the currency turmoil in Asia increased the risk premium
in all emerging markets debt. This increase in the risk premium represented
investor perception that there was a likelihood of currency devaluation in all
emerging markets. While these perceptions were unfair to many emerging markets
countries, it was a lingering concern for investors at the beginning of the
Fund's fiscal year.
Russia's ability to finance its budget deficit was another important factor for
the emerging debt market. Russia's currency was under pressure at the beginning
of the Fund's fiscal year as investors questioned the country's ability to
maintain currency stability without meaningful fiscal reform. The country made
some progress on fiscal reform and successfully accessed external debt markets
during June and July, which helped to relieve some of the short-term pressure on
its finances. The pro reform government continued to promote its reform agenda
but was hampered by its inability to increase tax collections. The progress
Russia made through early August, as well as its constructive relationship with
the International Monetary Fund ("IMF"), was severely damaged when it chose to
devalue the ruble, default on domestic debt and dismiss its government, in the
middle of August. Russia was pushed to this unlikely combination of measures by
its inability to roll over obligations in the Treasury bill market. Russia's
debt securities declined by nearly 80% during August with the decline
concentrated in a three-day period following these events.
The turmoil in Russia impacted all emerging markets debt as investors fled the
asset class for the safety of the U.S. Treasury market. This flight to quality
was compounded by the forced unwinding of substantial leverage which financed
many investments in emerging markets. The magnitude of spread widening in
emerging market debt was similar to the Mexican peso crisis in early 1995,
although the 1998 spread widening occurred more quickly. In addition, spreads in
all other non-Treasury fixed-income investments -- including investment grade
corporate debt and investment grade asset-backed securities -- expanded to
historically wide levels.
Emerging market debt began to recover in September as investors recognized that
at 1,500 basis points over Treasuries the market was dramatically oversold. The
recovery was further supported by interest-rate cuts by the Fed that totaled 75
basis points. Most emerging markets decoupled from Russia in the recovery as
investors recognized value in many oversold countries. Russia's economic outlook
was as uncertain as its political situation. Russia began to recover in early
1999 as it reopened discussions with the IMF, and successfully made coupon
payments on its Eurobond debt.
The final major development in emerging markets during the Fund's fiscal year
was the devaluation of the Brazilian currency in January. After a few false
starts, Brazil has made major strides toward restoring market confidence in its
monetary and fiscal policy. This restoration of confidence has been led by
Arminio Fraga, the new central bank president, and complemented by the
government's ability to obtain a timely Congressional package of some key fiscal
reforms. Brazil still has a very heavy domestic debt burden, but its improvement
in monetary policy and its fiscal reforms have created an opportunity for the
country to restructure its debt.
Over the course of the Fund's highly eventful first fiscal year, we have
remained invested in emerging markets debt. While the market has been highly
volatile, our extensive experience in the asset class has convinced us that in
order to enjoy the long-term returns offered by the market we must ride out the
volatility. The primary rationale for remaining invested in a downturn is that
emerging market declines are
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
usually accompanied by reduced liquidity. When the market recovers, an equally
sharp rebound also occurs with below-normal levels of liquidity, and it is
impossible to create a diversified portfolio at the market bottom. We did
increase our allocation to emerging market debt over the course of the fiscal
year during periods when the market was oversold. We remain committed to our
strategy of combining emerging market debt with high-yield debt in order to
maximize current income in a highly diversified portfolio.
In a continuing effort to provide timely information about the Salomon Brothers
High Income Fund II Inc, shareholders can call 1-888-777-0102 (toll free),
Monday through Friday from 8:00 a.m. to 6:00 p.m. (EST), for the Fund's current
net asset value, market price and other information regarding the Fund's
portfolio holdings and allocations. For information regarding your Fund stock
account, please call First Data Investor Services Group Inc. at 1-800-331-1710.
Thank you for your investment in the Salomon Brothers High Income Fund II Inc.
We look forward to helping you pursue your investment goals in the years to
come.
Sincerely,
/s/ Heath B. McLendon /s/ Peter J. Wilby
Heath B. McLendon Peter J. Wilby
Chairman Executive Vice President
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Schedule of Investments
April 30, 1999
<TABLE>
<CAPTION>
Face
Amount Security Value
- -----------------------------------------------------------------------------------------
Corporate Bonds -- 69.1%
Basic Industries -- 7.9%
<S> <C> <C>
$10,000,000 AEI Holdings Co. Inc., 10.500% due 12/15/05 ............. $ 10,200,000
10,000,000 Glencore Nickel, 9.000% due 12/1/14 ..................... 8,662,500
5,000,000 Huntsman Corp., 9.500% due 7/1/07(a) .................... 4,950,000
7,500,000 Huntsman Packaging Corp., 9.125% due 10/1/07 ............ 7,593,750
10,000,000 Key Plastics Holdings, Inc., 10.250% due 3/15/07 ........ 10,150,000
4,250,000 P&L Coal Holding Corp., 9.625% due 5/15/08 .............. 4,430,625
8,000,000 PCI Chemicals Canada Inc., 9.250% due 10/15/07 .......... 6,740,000
9,500,000 Philipp Brothers Chemicals, Inc., 9.875% due 6/1/08 ..... 9,310,000
7,000,000 Radnor Holdings Corp., 10.000% due 12/1/03 .............. 7,297,500
Tekni-Plex, Inc.:
3,000,000 11.250% due 4/1/07 .................................... 3,270,000
5,500,000 9.250% due 3/1/08 ..................................... 5,651,250
-------------
78,255,625
-------------
Consumer Cyclicals -- 3.6%
Archibald Candy Corp.:
3,500,000 10.250% due 7/1/04(a) ................................. 3,605,000
5,550,000 10.250% due 7/1/04 .................................... 5,716,500
4,000,000 Cole National Group, 8.625% due 8/15/07 ................. 3,960,000
10,000,000 HMH Properties, 7.875% due 8/1/08 ....................... 9,700,000
5,000,000 Synthetic Industries, Inc., 9.250% due 2/15/07 .......... 5,200,000
7,750,000 Thermadyne Manufacturing, 9.875% due 6/1/08 ............. 7,285,000
-------------
35,466,500
-------------
Consumer Non-Cyclicals -- 16.8%
12,000,000 AKI, Inc., 10.500% due 7/1/08 ........................... 11,430,000
5,000,000 ALARIS Medical, Inc., 9.750% due 12/1/06 ................ 5,125,000
2,250,000 American Safety Razor Co., 9.875% due 8/1/05 ............ 2,275,312
10,000,000 Ameriserve Food Distribution Inc., 10.125% due 7/15/07 .. 8,300,000
5,500,000 Anchor Advanced Products, Inc., 11.750% due 4/1/04 ...... 5,671,875
7,000,000 Aztar Corp., 8.875% due 5/15/07(a) ...................... 7,035,000
8,750,000 The Derby Cycle Corp., 10.000% due 5/15/08 .............. 8,531,250
2,000,000 Empress Entertainment, Inc., 8.125% due 7/1/06 .......... 2,015,000
8,500,000 French Fragrances, Inc., 10.375% due 5/15/07 ............ 8,670,000
10,000,000 Home Interiors & Gifts, Inc., 10.125% due 6/1/08 ........ 10,150,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
Page 5
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Schedule of Investments (continued)
April 30, 1999
<TABLE>
<CAPTION>
Face
Amount Security Value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Consumer Non-Cyclicals -- 16.8% (continued)
$ 7,750,000 Horseshoe Gaming LLC, 9.375% due 6/15/07 .................. $ 8,040,625
6,000,000 Imperial Holly Corp., 9.750% due 12/15/07 ................. 6,105,000
10,000,000 Iowa Select Farms, 10.750% due 12/1/05(a) ................. 8,025,000
1,750,000 Isle of Capri Casinos, Inc., 8.750% due 4/15/09(a) ........ 1,745,625
4,500,000 Moll Industries, Inc., 10.500% due 7/1/08 ................. 3,915,000
7,500,000 Polaroid Corp., 11.500% due 2/15/06 ....................... 7,893,750
Pueblo Xtra International, Inc.:
10,750,000 9.500% due 8/1/03 ....................................... 10,588,750
1,750,000 Series C, 9.500% due 8/1/03 ............................. 1,741,250
2,880,000 Purina Mills, Inc., 9.000% due 3/15/10 .................... 2,534,400
11,500,000 Revlon Worldwide Corp., zero coupon bond due 3/15/01 ...... 7,762,500
10,000,000 SC International Services, 9.250% due 9/1/07 .............. 10,750,000
Sun International Hotels:
4,500,000 8.625% due 12/15/07 ..................................... 4,680,000
2,165,000 9.000% due 3/15/07 ...................................... 2,278,662
37,500,000 Sunbeam Corp., zero coupon bond due 3/25/18 ............... 4,687,500
10,000,000 Triarc Consumers, 10.250% due 2/15/09(a) .................. 10,100,000
7,000,000 Windmere-Durable Holdings Inc., 10.000% due 7/31/08 ....... 6,562,500
------------
166,613,999
------------
Energy -- 2.6%
10,000,000 Canadian Forest Oil Ltd., 8.750% due 9/15/07 .............. 9,850,000
10,000,000 Continental Resources, 10.250% due 8/1/08 ................. 7,700,000
7,900,000 Dailey International Inc., 9.500% due 2/15/08(e)(f) ....... 2,607,000
4,000,000 Pennzoil Co., 10.250% due 11/1/05 ......................... 4,270,000
10,000,000 Transamerican Energy Corp., 11.500% due 6/15/02(e)(f) ..... 1,700,000
------------
26,127,000
------------
Financial -- 2.9%
2,000,000 Airplanes Pass-Through Trust, Series D, 10.875% due 3/15/19 2,026,420
Contifinancial Corp.:
5,000,000 7.500% due 3/15/02 ...................................... 3,800,000
5,000,000 8.375% due 8/15/03 ...................................... 3,850,000
8,000,000 Morgan Stanley Aircraft Finance, Series 1A,
Class D1, 8.700% due 3/15/23(a) ......................... 7,360,000
7,500,000 Nationwide Credit, 10.250% due 1/15/08 .................... 4,012,500
7,500,000 Williams Scotsman Inc., 9.875% due 6/1/07 ................. 7,837,500
------------
28,886,420
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
Page 6
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Schedule of Investments (continued)
April 30, 1999
<TABLE>
<CAPTION>
Face
Amount Security Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Industrial/Manufacturing -- 7.6%
$ 8,800,000 Breed Technologies, 9.250% due 4/15/08 ....................... $ 2,640,000
8,500,000 Communication Instruments, 10.000% due 9/15/04 ............... 8,245,000
7,000,000 Foamex L.P., 9.875% due 6/15/07 .............................. 6,317,500
3,000,000 Hexcel Corp., 9.750% due 1/15/09 ............................. 3,060,000
5,000,000 International Utility, 10.750% due 2/1/08 .................... 5,125,000
14,475,000 Jordan Industries Inc., zero coupon until 4/1/02
(11.750% thereafter), due 4/1/09 ........................... 8,829,750
8,000,000 Motors & Gears, 10.750% due 11/15/06 ......................... 8,260,000
7,250,000 Neenah Corp., 11.125% due 5/1/07 ............................. 7,376,875
5,000,000 Oxford Automotive Inc., 10.125% due 6/15/07(a) ............... 5,187,500
Polymer Group:
6,500,000 9.000% due 7/1/07 .......................................... 6,678,750
1,000,000 8.750% due 3/1/08 .......................................... 1,017,500
7,500,000 Transdigm Inc., 10.375% due 12/1/08 .......................... 7,593,750
5,000,000 Venture Holdings Trust, 9.500% due 7/1/05 .................... 5,062,500
-----------
75,394,125
-----------
Media/Telecommunications -- 21.5%
2,136,263 Adelphia Communications, Series B, 9.500% due 2/15/04(c) ..... 2,253,757
10,000,000 Advanstar Communications, 9.250% due 5/1/08 .................. 10,400,000
10,000,000 Amphenol Corp., 9.875% due 5/15/07 ........................... 10,375,000
10,500,000 Avalon Cable Holdings, zero coupon until 12/1/03
(11.875% thereafter), due 12/1/08(a) ....................... 7,035,000
2,000,000 Call Net Enterprises Inc., zero coupon until
8/15/03 (8.940% thereafter), due 8/15/08 ................... 1,300,000
2,000,000 Centennial Cellular, 10.750% due 12/15/08(a) ................. 2,175,000
4,750,000 Century Communications, zero coupon bond due 1/15/08 ......... 2,280,000
12,500,000 Charter Communications Holdings LLC., zero coupon until 4/1/04
(9.920% thereafter), due 4/1/11(a) ......................... 8,250,000
2,250,000 Citadel Broadcasting, 9.250% due 11/15/08 .................... 2,424,375
Frontiervision Holdings:
8,500,000 Zero coupon until 9/15/01 (11.875% thereafter), due 9/15/07 7,522,500
4,000,000 Zero coupon until 9/15/01 (11.875% thereafter), due 9/15/07 3,540,000
8,000,000 Granite Broadcasting Corp., 8.875% due 5/15/08 ............... 8,020,000
11,500,000 GST Telecom, zero coupon until 5/1/03
(10.500% thereafter), due 5/1/08(a) ........................ 6,957,500
10,000,000 Hollinger International Publishing, 9.250% due 2/1/06 ........ 10,475,000
5,000,000 Intermedia Communications, 8.600% due 6/1/08 ................. 5,012,500
14,000,000 Lin Holdings Corp., zero coupon until 3/1/03
(10.000% thereafter), due 3/1/08 ........................... 9,835,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
Page 7
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Schedule of Investments (continued)
April 30, 1999
<TABLE>
<CAPTION>
Face
Amount Security Value
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Media/Telecommunications -- 21.5% (continued)
$ 5,000,000 Loews Cineplex Entertainment, 8.875% due 8/1/08 ............... $ 5,050,000
15,000,000 Metronet Communications, zero coupon until 6/15/03
(9.950% thereafter), due 6/15/08 ............................ 11,737,500
10,000,000 Musicland Group, 9.875% due 3/15/08 ........................... 10,175,000
Nextel Communications:
9,750,000 9.750% due 8/15/04 .......................................... 10,188,750
3,000,000 Zero coupon until 2/15/03 (9.950% thereafter), due 2/15/08 .. 2,287,500
NTL Inc.:
5,000,000 Zero coupon until 2/1/01 (11.500% thereafter), due 2/1/06 ... 4,406,250
10,000,000 Zero coupon until 10/1/03 (12.375% thereafter), due 10/1/08 . 7,025,000
8,250,000 Price Communications Wireless, 9.125% due 12/15/06 ............ 8,724,375
10,000,000 R.H. Donnelley Inc., 9.125% due 6/1/08 ........................ 10,637,500
10,000,000 Rogers Communications, 8.875% due 7/15/07 ..................... 10,500,000
10,000,000 Sun Media Corp., 9.500% due 2/15/07 ........................... 11,000,000
Telewest Communications:
2,500,000 9.625% due 10/1/06 .......................................... 2,675,000
3,750,000 Zero coupon until 10/1/00 (11.000% thereafter), due 10/1/07 . 3,337,500
1,250,000 Zero coupon until 4/15/04 (9.250% thereafter), due 4/15/09(a) 843,750
5,000,000 Transwestern Publishing, 9.625% due 11/15/07 .................. 5,237,500
16,500,000 United International Holdings, zero coupon until 2/15/03
(10.750% thereafter), due 2/15/08 ........................... 11,096,250
------------
212,777,507
------------
Services/Other -- 4.5%
7,000,000 American Business Information, 9.500% due 6/15/08 ............. 6,160,000
2,500,000 Aqua Chemical Inc., 11.250% due 7/1/08 ........................ 2,100,000
10,000,000 Kindercare Learning, 9.500% due 2/15/09 ....................... 10,087,500
9,000,000 Marsulex Inc., 9.625% due 7/1/08 .............................. 9,315,000
10,000,000 Millar Western, 9.875% due 5/15/08 ............................ 9,300,000
Pierce Leahy Corp.:
2,250,000 11.125% due 7/15/06 ......................................... 2,514,375
2,000,000 8.125% due 5/15/08 .......................................... 1,985,000
3,500,000 Protection One Inc., 8.125% due 1/15/09(a) .................... 3,482,500
------------
44,944,375
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
Page 8
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Schedule of Investments (continued)
April 30, 1999
<TABLE>
<CAPTION>
Face
Amount Security Value
- -----------------------------------------------------------------------------------
<S> <C> <C>
Transportation -- 1.7%
$ 5,000,000 Enterprises Shipholding, 8.875% due 5/1/08 ......... $ 3,500,000
10,000,000 Stena Line, 10.625% due 6/1/08 ..................... 7,800,000
9,244,471 Viacao Aerea Riograndens (Varig), 9.600% due 2/10/05 5,592,904
------------
16,892,904
------------
Total Corporate Bonds (Cost -- $730,120,574) ....... 685,358,455
------------
Sovereign Bonds -- 27.0%
Argentina -- 4.5%
Republic of Argentina, Global Bonds:
6,500,000 11.447% due 4/10/05(b) ........................... 6,272,500
20,150,000 11.000% due 12/4/05 .............................. 20,099,625
14,300,000 11.750% due 4/7/09 ............................... 14,750,450
3,750,000 11.375% due 1/30/17 .............................. 3,778,125
------------
44,900,700
------------
Brazil -- 4.4%
Federal Republic of Brazil:
46,259,244 C Bond, 8.000% due 4/15/14(c) .................... 32,092,351
13,500,000 FLIRB, Series L, 5.000% due 4/15/09(b) ........... 8,488,125
5,000,000 NMB, Series L, 5.9375% due 4/15/09(b) ............ 3,617,190
------------
44,197,666
------------
Bulgaria -- 1.9%
Republic of Bulgaria:
28,000,000 FLIRB, Series A, 2.500% due 7/28/12(b) ........... 17,062,500
3,250,000 IAB, 5.875% due 7/28/11(b) ....................... 2,203,906
------------
19,266,406
------------
Colombia -- 1.3%
Republic of Colombia:
2,080,000 7.250% due 2/15/03 ............................... 1,918,800
3,500,000 7.270% due 6/15/03(a) ............................ 3,185,000
8,500,000 10.986% due 8/13/05(b) ........................... 8,138,750
------------
13,242,550
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
Page 9
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Schedule of Investments (continued)
April 30, 1999
<TABLE>
<CAPTION>
Face
Amount Security Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
Croatia -- 1.5%
Croatia Government:
$11,500,000 Series A, 5.812% due 7/31/10(b) ...................... $ 8,998,750
6,638,324 Series B, 5.812% due 7/31/06(b) ...................... 5,393,638
-----------
14,392,388
-----------
Ecuador -- 1.1%
Republic of Ecuador:
7,200,000 Bearer, EI Bond, 6.000% due 12/21/04(b) .............. 4,356,000
16,000,000 Par Bond, 4.000% due 2/28/25(b) ...................... 6,860,000
-----------
11,216,000
-----------
Ivory Coast -- 0.2%
4,875,000 Republic of Ivory Coast, PDI Bond, 2.000% due 3/29/18(b) 1,596,562
-----------
Korea -- 0.2%
2,000,000 Korea Development Bank, Global Bond, 7.900% due 2/1/02 . 2,030,000
-----------
Mexico -- 3.1%
United Mexican States:
14,750,000 10.375% due 2/17/09 .................................. 15,830,437
13,200,000 Global Bond, 11.375% due 9/15/16 ..................... 15,089,250
-----------
30,919,687
-----------
Panama -- 1.1%
13,250,000 Republic of Panama, IRB, 4.000% due 7/17/14(b) ......... 10,450,937
-----------
Peru -- 1.6%
Republic of Peru:
6,175,000 FLIRB, 3.750% due 3/7/17(b) .......................... 3,838,151
17,000,000 PDI, 4.500% due 3/7/17(b) ............................ 11,560,000
-----------
15,398,151
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
Page 10
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Schedule of Investments (continued)
April 30, 1999
Face
Amount Security Value
- --------------------------------------------------------------------------------
Philippines -- 1.0%
Republic of Philippines:
$5,720,000 DCB, 6.000% due 12/1/09 ....................... $ 5,233,800
5,000,000 Series B, 6.500% due 12/1/17 .................. 4,450,000
------------
9,683,800
------------
Poland -- 0.2%
2,500,000 Republic of Poland, 4.000% due 10/27/24 ......... 1,731,262
------------
Russia -- 1.4%
Russia:
Ministry of Finance, Global Bond:
1,275,000 11.750% due 6/10/03(a) ...................... 556,218
18,000,000 12.750% due 6/24/28 ......................... 7,717,500
7,000,000 12.750% due 6/24/28(a) ...................... 3,001,250
5,275,000 11.000% due 7/24/18 ......................... 2,142,968
3,280,362 IAN, 5.96875% due 12/15/15(b) ................. 276,780
------------
13,694,716
------------
Venezuela -- 3.5%
Republic of Venezuela:
642,880 DCB, Series DL, 5.938 due 12/18/07(b) ......... 517,518
30,666,475 FLIRB, Series A, 6.000% due 3/31/07(b) ........ 24,207,348
3,809,500 FLIRB, Series B, 6.000% due 3/31/07(b) ........ 3,007,124
7,525,000 Global Bond, 13.625% due 8/15/18 .............. 7,111,125
------------
34,843,115
------------
Total Sovereign Bonds (Cost -- $259,905,046) .... 267,563,940
------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
Page 11
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Schedule of Investments (continued)
April 30, 1999
Face
Amount Security Value
- --------------------------------------------------------------------------------
Loan Participations(d) -- 2.3%
$13,719,048 Kingdom of Morocco, Tranche A, 6.0625% due 1/1/09
(J.P. Morgan Securities, Chase Manhattan Bank,
Bank of Boston)(b) ............................... $11,266,768
12,400,000 Russia, Principal Loan, 5.96875% due 12/15/20
(Chase Manhattan Bank, Merrill Lynch)(b)(e)(f) ... 918,381
14,497,873 The People's Democratic Republic of Algeria,
Tranche 1, 6.000% due 9/4/06
(Chase Manhattan Bank)(b) ........................ 7,828,851
3,000,000 The People's Democratic Republic of Algeria,
Tranche 3, 6.000% due 3/4/10
(Chase Manhattan Bank)(b) ........................ 1,515,000
1,600,000 The People's Democratic Republic of Algeria,
Tranche A, 6.750% due 3/4/00
(Chase Manhattan Bank)(b) ........................ 1,440,000
-----------
Total Loan Participations (Cost -- $33,144,952) .... 22,969,000
-----------
Shares Security Value
- --------------------------------------------------------------------------------
Preferred Stock(f) -- 0.0%
TCR Holding:
17,552 Class B ........................................... 1,053
9,654 Class C ........................................... 540
25,451 Class D ........................................... 1,348
52,657 Class E ........................................... 3,317
---------
Total Preferred Stock (Cost -- $6,260) .............. 6,258
---------
Warrants(f) -- 0.4%
28,550 Republic of Argentina Warrants, expire on 12/3/99 ... 856,500
59,400 United Mexican States Warrants, expire on 2/18/00 ... 3,088,800
---------
Total Warrants (Cost -- $3,122,931) ................. 3,945,300
---------
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
Page 12
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Schedule of Investments (continued)
April 30, 1999
<TABLE>
<CAPTION>
Face
Amount Security Value
- --------------------------------------------------------------------------------------------------------------------
Repurchase Agreement -- 1.2%
<S> <C> <C>
$12,118,000 State Street Bank & Trust, 4.850% due 5/3/99; Proceeds at maturity -- $12,122,898;
(Fully collateralized by U.S. Treasury Bonds, 8.750% due 5/15/17;
Market value -- $12,364,688) (Cost -- $12,118,000) ..................... $ 12,118,000
------------
Total Investments -- 100% (Cost -- $1,038,417,763*) ...................... $991,960,953
============
</TABLE>
- ----------
(a) Pursuant to Rule 144A under the Securities Act of 1933, this
security can only be sold to qualified institutional buyers.
(b) Rate shown reflects the current rate on variable rate or step coupon
rate instruments.
(c) Payment-in-kind security for which part of the income earned may be
paid in the form of additional principal.
(d) Participation interests were acquired through the financial
institutions indicated parenthetically.
(e) Currently in default.
(f) Non-income producing securities.
* Aggregate cost for Federal income tax purposes is substantially the
same.
Abbreviations used in schedule:
-------------------------------
DCB -- Debt Conversion Bond
EI -- Eligible Interest
FLIRB -- Front Loaded Interest Reduction Bond
IAB -- Interest in Arrears Bond
IAN -- Interest in Arrears Note
IRB -- Interest Reduction Bond
NMB -- New Money Bond
PDI -- Past Due Interest
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
Page 13
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Statement of Assets and Liabilities
April 30, 1999
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $1,038,417,763) ............... $ 991,960,953
Interest receivable .......................................... 23,669,199
Receivable for investments sold .............................. 7,570,198
Deferred organization costs .................................. 69,305
Cash ......................................................... 154
Prepaid expenses ............................................. 175,134
---------------
Total Assets ................................................. 1,023,444,943
---------------
LIABILITIES:
Loan payable ................................................. 105,000,000
Payable for investments purchased ............................ 11,320,000
Dividends payable ............................................ 1,406,282
Management fees payable ...................................... 819,595
Loan interest payable ........................................ 631,313
Administration fees payable .................................. 81,959
Accrued organizational expenses .............................. 29,700
Accrued expenses ............................................. 363,639
---------------
Total Liabilities ............................................ 119,652,488
---------------
Total Net Assets ............................................. $ 903,792,455
===============
NET ASSETS:
Common stock ($0.001 par value, 100,000,000 shares authorized;
66,741,739 shares outstanding) ........................... $ 66,742
Additional paid-in capital ................................... 997,889,143
Undistributed net investment income .......................... 695,011
Accumulated net realized loss on investments ................. (48,401,631)
Net unrealized depreciation on investments ................... (46,456,810)
---------------
Total Net Assets ............................................. $ 903,792,455
===============
Net Asset Value, Per Share ($903,792,455 / 66,741,739 shares) ..... $ 13.54
===============
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
Page 14
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Statement of Operations
For the Period Ended April 30, 1999(a)
<TABLE>
<S> <C>
INCOME:
Interest .................................................................. $ 94,281,666
-------------
EXPENSES:
Management fees (Note 2) .................................................. 8,691,753
Interest expense (Note 8) ................................................. 2,471,939
Administration fees ....................................................... 869,175
Shareholder reporting expense ............................................. 277,000
Legal fees ................................................................ 115,491
Audit fees ................................................................ 56,000
Trustees' fees ............................................................ 37,537
Amortization of deferred organization costs ............................... 15,695
Other ..................................................................... 200,143
-------------
Total Expenses ............................................................ 12,734,733
-------------
Net Investment Income .......................................................... 81,546,933
-------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTE 3):
Realized Loss From Security Transactions (excluding short-term securities):
Proceeds from sales ..................................................... 547,601,726
Cost of securities sold ................................................. 596,003,357
-------------
Net Realized Loss on Investments .......................................... (48,401,631)
-------------
Change in Net Unrealized Depreciation on Investments:
Beginning of period ..................................................... --
End of period ........................................................... (46,456,810)
-------------
Increase in Net Unrealized Depreciation ................................... (46,456,810)
-------------
Net Loss on Investments ........................................................ (94,858,441)
-------------
Decrease in Net Assets From Operations ......................................... $ (13,311,508)
=============
</TABLE>
- ----------
(a) For the period from May 28, 1998 (commencement of operations) to April 30,
1999.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
Page 15
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Statement of Changes in Net Assets
For the Period Ended April 30, 1999(a)
<TABLE>
<S> <C>
OPERATIONS:
Net investment income .......................................... $ 81,546,933
Net realized loss .............................................. (48,401,631)
Increase in net unrealized depreciation ........................ (46,456,810)
-------------
Decrease in Net Assets From Operations ......................... (13,311,508)
-------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income .......................................... (80,851,922)
-------------
Decrease in Net Assets From Distributions to Shareholders ...... (80,851,922)
-------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from initial offering (65,670,000 shares issued, net of
$1,545,000 offering costs) .................................. 983,505,000
Proceeds from shares issued on reinvestment of dividends
(1,065,072 shares issued) ................................... 14,350,880
-------------
Increase in Net Assets From Capital Share Transactions ......... 997,855,880
-------------
Increase in Net Assets .............................................. 903,692,450
NET ASSETS:
Beginning of period ............................................ 100,005
-------------
End of period* ................................................. $ 903,792,455
=============
*Includes undistributed net investment income of: ................... $ 695,011
=============
</TABLE>
- ----------
(a) For the period from May 28, 1998 (commencement of operations) to April 30,
1999.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
Page 16
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Statement of Cash Flows
For the Period Ended April 30, 1999(a)
CASH FLOWS USED BY OPERATING ACTIVITIES:
Purchases of long-term portfolio investments ........... $ (1,601,469,549)
Proceeds from disposition of long-term portfolio
investments and principal paydowns ................... 549,489,167
Net purchase of short-term portfolio investments ....... (12,118,000)
---------------
(1,064,098,382)
Net investment income .................................. 81,546,933
Capitalized income on payment-in-kind securities ....... (1,118,421)
Amortization of net premium/discount on investments .... (17,852,789)
Net change in receivables/payables related to operations (20,581,150)
---------------
Net Cash Flows Used by Operating Activities ............ (1,022,103,809)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from bank loan ................................ 105,000,000
Net proceeds from issuance of 65,670,000 shares (Note 1) 983,505,000
Proceeds from shares issued on reinvestment of dividends 14,350,880
Cash dividend paid ..................................... (80,851,922)
---------------
Net Cash Provided by Financing Activities .............. 1,022,003,958
---------------
Net Decrease in Cash ........................................ (99,851)
Cash, Beginning of Period ................................... 100,005
---------------
Cash, End of Period ......................................... $ 154
===============
- ----------
(a) For the period from May 28, 1998 (commencement of operations) to April 30,
1999.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
Page 17
<PAGE>
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 following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with Generally Accepted
Accounting Principles ("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 at 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 investment companies, and to distribute all of its
income to its shareholders. Therefore, no federal income tax or excise tax
provision is required.
(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 annually. Dividends and
distributions to shareholders are recorded on the ex-dividend date. The amount
of dividends and distributions from net investment income
Page 18
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Notes to Financial Statements (continued)
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) DEFERRED ORGANIZATION COSTS. Organization costs amounting to $85,000 were
incurred in connection with the organization of the Fund. These costs have been
deferred and are being amortized ratably over a five-year period from
commencement of operations in May 1998. However, in accordance with the AICPA
Statement of Position No. 98-5, "Reporting on the Costs of Start-up Activities",
the Fund will expense the unamortized amount of this asset on the first day of
its second fiscal year.
(f) REPURCHASE AGREEMENTS. When entering into repurchase agreements, it is the
Fund's policy to take possession, through its custodian, of the underlying
collateral and to monitor its value at the time the arrangement is entered into
and during the term of the repurchase agreement to ensure that it equals or
exceeds the repurchase price. In the event of default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
Note 2. Management Fee and Other Transactions
Salomon Brothers Asset Management Inc, a wholly-owned subsidiary of Salomon
Smith Barney Holdings ("SSBH"), acts as investment manager ("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 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.
SSBC Fund Management Inc. ("SSBC"), formerly known as Mutual Management Corp.,
another subsidiary of SSBH, acts as the Fund's administrator ("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, 1999, the Investment Manager and Salomon Smith Barney Inc. owned
6,667 and 6,519 shares, respectively of the Fund.
Certain officers and/or directors of the Fund are also officers and/or directors
of the investment manager.
Page 19
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Notes to Financial Statements (continued)
Note 3. Portfolio Activity
During the period ended April 30, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
Purchases ............................... $1,612,789,549
==============
Sales ................................... $ 547,601,726
==============
At April 30, 1999, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
Gross unrealized appreciation ............. $ 28,592,346
Gross unrealized depreciation ............. (75,049,156)
------------
Net unrealized depreciation ............... $(46,456,810)
============
Note 4. 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, 1999, the Fund held loan participations with a total cost of
$33,144,952.
Note 5. Credit 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 involve 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.
Page 20
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Notes to Financial Statements (continued)
Note 6. Dividends Subsequent to April 30, 1999
The Board of Directors of the Fund declared a common stock dividend from net
investment income of $0.115 per share for the months of May and June 1999,
payable on May 28 and June 25, 1999 to shareholders of record on May 18 and June
15, 1999, respectively.
Note 7. Capital Loss Carryforward
At April 30, 1999, the Fund had, for Federal income tax purposes, a capital loss
carryforward of approximately $32,298,000, available to offset future capital
gains through April 30, 2007. To the extent that these carryforward losses are
used to offset capital gains, it is probable that any gains so offset will not
be distributed.
Note 8. Bank Loan
The Fund has outstanding a $105,000,000 loan pursuant to a credit agreement with
Chase Manhattan Bank. The current interest rate on the loan is 5.55% and the
maturity date is June 23, 1999.
Page 21
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Financial Highlights
Data for a share of capital stock outstanding throughout the period ended April
30:
<TABLE>
<CAPTION>
1999(1)
- ---------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period ............................. $ 15.00
------------
Income (Loss) From Operations:
Net investment income ......................................... 1.23
Net realized and unrealized loss .............................. (1.45)
------------
Total Loss From Operations ....................................... (0.22)
------------
Offering Costs on Issuance of Common Stock ....................... (0.02)
------------
Less Distributions From:
Net investment income ......................................... (1.22)
------------
Net Asset Value, End of Period ................................... $ 13.54
============
Per Share Market Value, End of Period ............................ $ 12.625
============
Total Return, Based on Market Price Per Share(2)++ ............... (7.57)%
Ratios to Average Net Assets+:
Total expenses, including interest expense .................... 1.54%
Total expenses, excluding interest expense (operating expenses) 1.24%
Net investment income ......................................... 9.84%
Bank Loans Outstanding, End of Period (000s) ..................... 105,000
Weighted Average Interest Rate on Bank Loans ..................... 5.72%
Net Assets, End of Period (000s) ................................. $ 903,792
Portfolio Turnover Rate .......................................... 66%
- ---------------------------------------------------------------------------------
</TABLE>
(1) For the period May 28, 1998 (commencement of operations) through April 30,
1999.
(2) 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.
++ Total return is not annualized, as it may not be representative of the
total return of the year.
+ Annualized.
Page 22
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Report of Independent Accountants
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 (the "Fund") at April 30, 1999, and the results of its
operations, the changes in its net assets, its cash flows and the financial
highlights for the period May 28, 1998 (commencement of operations) through
April 30, 1999, in conformity with generally accepted accounting principles.
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 audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at April
30, 1999 by correspondence with the custodian and brokers, provides a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
June 15, 1999
Page 23
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Selected Quarterly Financial Information (unaudited)
Summary of quarterly results of operations:
Net Realized &
Net Investment Unrealized
Income Gain (Loss)
------------------------ -------------------------
Quarters Ended(1) Total Per Share Total Per Share
- -------------------------------------------------------------------------
July 31, 1998(2) .. $ 11,896 $ 0.18 $ (9,730) $ (0.15)
October 31, 1998 .. 22,489 0.34 (138,586) (2.10)
January 31, 1999 .. 23,108 0.35 32,169 0.48
April 30, 1999 .... 24,054 0.36 21,289 0.32
- ----------
(1) Totals expressed in thousands of dollars except per share amounts.
(2) For the period May 28, 1998 (commencement of investment operations)
through July 31, 1998.
Other Information (unaudited)
Year 2000. The investment management services provided to the Fund by the
Investment Manager depend in large part on the smooth functioning of its
computer systems. Many computer software systems in use today cannot recognize
the year 2000, but revert to 1900 or some other date, due to the manner in which
the dates were encoded or calculated. The capability of these systems to
recognize the year 2000 could have a negative impact on the Investment Manager's
provision of investment management services, including handling of securities
trades, pricing and account services. The Investment Manager has advised the
Fund that it has been reviewing all of their computer systems and actively
working on necessary changes to its systems to prepare for the year 2000 and
expects that given the extensive testing which it is undertaking its systems
will be year 2000 compliant before such date. In addition, the Investment
Manager has been advised by certain of the Fund's service providers that they
are also in the process of modifying their systems with the same goal. There
can, however, be no assurance that the Investment Manager or any other service
provider will be successful in achieving year 2000 compliance, or that
interaction with other non-complying computer systems will not impair services
to the Fund at that time.
Page 24
<PAGE>
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 First Data
Investor Services Group, 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.
Page 25
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Dividend Reinvestment Plan (unaudited) (continued)
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 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
Page 26
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Dividend Reinvestment Plan (unaudited) (continued)
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.
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
Page 27
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Dividend Reinvestment Plan (unaudited) (continued)
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 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 8030, Boston, Massachusetts 02266-8030.
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.
Page 28
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Directors
CHARLES F. BARBER
Consultant; formerly Chairman,
ASARCO Inc.
DANIEL P. CRONIN
Vice President -- General Counsel,
Pfizer International Inc
HEATH B. MCLENDON
Managing Director, Salomon Smith Barney Inc.;
President and Director, SSBC Fund
Management Inc. and Travelers Investment
Advisors, Inc., Chairman, Smith Barney
Strategy Advisors Inc.
RIORDAN ROETT
Professor and Director,
Latin American Studies Program,
Paul H. Nitze School of Advanced
International Studies,
Johns Hopkins University
JESWALD W. SALACUSE
Henry J. Braker Professor of
Commercial Law, and formerly Dean,
The Fletcher School of Law & Diplomacy
Tufts University
Officers
HEATH B. MCLENDON
Chairman and President
LEWIS E. DAIDONE
Executive Vice President and Treasurer
MAUREEN O'CALLAGHAN
Executive Vice President
JAMES E. CRAIGE
Executive Vice President
THOMAS K. FLANAGAN
Executive Vice President
BETH A. SEMMEL
Executive Vice President
PETER J. WILBY
Executive Vice President
ANTHONY PACE
Assistant Controller
CHRISTINA T. SYDOR
Secretary
Salomon Brothers High Income Fund II Inc
7 World Trade Center
New York, New York 10048
Telephone 1-888-777-0102
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
CUSTODIAN
PNC Bank, N.A.
17th and Chestnut Streets
Philadelphia, PA 19103
DIVIDEND DISBURSING AND TRANSFER AGENT
First Data Investor Services Group, Inc.
P.O. Box 8030
Boston, MA 02266-8030
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
NEW YORK STOCK EXCHANGE SYMBOL
HIX
<PAGE>
(This page intentionally left blank)
<PAGE>
Salomon Brothers
High Income Fund II Inc
Annual Report
April 30, 1999
[GRAPHIC]
- ---------------------------------------------------------
Salomon Brothers Asset Management
--------------------------------------------------------
First Data Investor Services Group, Inc.
P.O. Box 8030
Boston, MA 02266-8030
-----------------
BULK RATE
U.S. POSTAGE
PAID
STATEN ISLAND, NY
PERMIT No. 169
-----------------
HIXANN 4/99
