<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC.
May 22, 2000
Dear Shareholders:
We are pleased to provide this annual report for the Salomon Brothers High
Income Fund II Inc ("Fund") as of April 30, 2000. 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, 2000 and financial statements for the year
ended April 30, 2000. The Fund distributed income dividends totaling $1.44 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, 2000 net asset value ("NAV")(1) per share and its New York Stock
Exchange ("NYSE") closing price:
Price Annualized Twelve-Month
Per Share Distribution Rate(2) Total Return
------------- -------------------- -------------
$11.85 (NAV) 13.16% (1.94)%
$11.75 (NYSE) 13.28% 5.45%
In comparison, the Salomon Smith Barney High Yield Market Index(3) returned a
negative 3.99% and the J.P. Morgan Emerging Markets Bond Index Plus
("EMBI+")(4) returned 18.49% for the same period.
The Fund is invested in a broadly diversified portfolio of high-yield and
emerging market bonds. On April 30, 2000, 60.5% of the Fund's long-term
investments were in high-yield corporate bonds and 26.2% of the Fund's holdings
were invested in emerging market issuers, including obligations of sovereign
governments and corporate issuers. The Fund is modestly leveraged and remains
committed to maximizing current income through investments in high-yield and
emerging markets debt.
------------------
1 The NAV is calculated by subtracting total liabilities from the closing
value of all securities held by the Fund, plus all other assets. The result
(total net assets) is divided by the total number of shares outstanding.
The NAV fluctuates with the changes in the market price of the securities
in which the Fund has invested. However, the price at which the investor
buys or sells shares of the Fund is its market (NYSE) price as determined
by supply and demand.
2 Total returns are based on changes in NAV and the market value,
respectively. Total returns assume the reinvestment of all dividends and/or
capital gains distributions in additional shares. The annualized
distribution rate is the Fund's current monthly income dividend rate,
annualized, and then divided by the NAV or the market value noted in the
above chart. This annualized distribution rate assumes a current monthly
income dividend rate of $0.13 for twelve months. This rate is as of May 31,
2000 and is subject to change. The important difference between a total
return and an annualized distribution rate is that the total return takes
into consideration a number of factors including the fluctuation of the NAV
or the market value during the period reported. The NAV fluctuation
includes the effects of unrealized appreciation or depreciation in the
Fund. Accordingly, since an annualized distribution rate only reflects the
current monthly income dividend rate annualized, it should not be used as
the sole indicator to judge the return you receive from your Fund
investment. Past performance is not indicative of future results.
3 The Salomon Smith Barney High Yield Market Index covers a significant
portion of the below investment-grade U.S. corporate bond market.
4 EMBI+ is a total return index that tracks the traded market for U.S.
dollar-denominated Brady and other similar sovereign restructured bonds
traded in the emerging market.
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC.
U.S. HIGH-YIELD MARKET
The fiscal year ended April 30, 2000 was a period of investor uncertainty
regarding interest rates, inflation and the sustainability of the North American
economic expansion. These concerns, as well as investors' appetite for the
surging NASDAQ market translated into significant high-yield mutual fund
outflows. In addition, limited liquidity for the U.S. high-yield market,
resulted in technical weakness for the market throughout the fiscal year. The
market declined 3.99% for the year ended April 30, 2000 as measured by the
Salomon Smith Barney High Yield Market Index.
Early in the fiscal year, the U.S. economy displayed surprising strength in the
aftermath of the Russian and Asian financial crises of the autumn of calendar
1998. In the ensuing months, the continued growth of the U.S. economy led to
heightened concerns about rising inflation, which resulted in a string of
interest rate hikes by the U.S. Federal Reserve Board ("Fed"). From June 1999 to
April 2000, the Fed lifted its target rate for overnight bank lending five
times, or 1.25%, to 6.00%. Most recently on May 16, 2000, the Fed raised
interest rates 50 basis points to 6.50% and it indicated that further rate
increases may follow later this year. The Fed's rate increases and the seeming
immunity of the strength of the economic expansion to these hikes caused
significant concern and uncertainty in the fixed income and equity markets as to
the ultimate end of the rate increases. The resulting rise in long-term interest
rates and volatility in the U.S. equity markets put pressure on the high-yield
market, both in terms of asset pricing and liquidity. These pressures were
compounded by relatively high default rates in the high-yield market, primarily
due to (i) the lingering effects of the Asian crisis on commodity industries,
(ii) weak underwriting standards in 1997 and 1998 and (iii) a tightening of
banks' and the market's credit standards, which limited companies' access to new
funds. As a result, liquidity in the market was limited on the investor side, as
mutual fund outflows totaled $11.4 billion during the period, and by broker
dealers, who held back from committing significant funds to support the market.
The high-yield market did enjoy some relief from the aforementioned conditions
during the fiscal year, however, as inflows of funds from the issuance of
collateralized bond obligations throughout the year and a slowing in the pace of
new issuance late in the period eased a portion of the market's liquidity
concerns.
As reported by the Salomon Smith Barney High Yield Market Index, the high-yield
market declined 3.99% during the reporting period. The average market yield at
April 30, 2000 was 12.48%, up from 9.99% at April 30, 1999. In addition, the
spread over U.S. Treasuries finished the period at 611 basis points, widening
from 471 basis points at April 30, 1999.
For the year ended April 30, 2000, the top-performing industries in the
high-yield bond market included cable & other media and gaming, due to their
relatively stable and predictable cash flows. Telecommunications outperformed
due to explosive growth in that sector, mergers and acquisitions and equity
investment activity. Telecommunications also benefited with technology from
those sectors' popularity in the equity markets. Energy and paper & forest
products were also among the top performers due to the strength in the
underlying commodity prices in those sectors.
The worst performing industry group during the Fund's fiscal year was
leisure/lodging due to difficulties arising from overcapacity in the theater
operator sector. In addition, supermarkets/drugstores underperformed due to
individual credit difficulties at Rite Aid and Pathmark Stores. Other
underperforming industry groups included capital goods, textiles and
services/other. In terms of credit
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC.
quality, BB issues outperformed B issues, which in turn outperformed CCC issues
as investors favored the greater liquidity and higher credit quality offered by
BB issues. BB, B and CCC issues returned (1.18)%, (4.83)% and (13.09)%,
respectively, for the fiscal year, according to the Salomon Smith Barney High
Yield Market Index.
The Fund's performance benefited from overweightings in gaming and technology
and underweightings in leisure/lodging and textiles during the fiscal year. The
Fund's performance was adversely affected by an overweighting in capital goods
and by underweightings in telecommunications, energy and paper & forest
products. Over the course of the fiscal year, the Fund responded to market
conditions by increasing its positions in telecommunications, gaming, energy and
paper & forest products and by reducing its positions in textiles, capital goods
and supermarkets/drugstores.
OUTLOOK
Although high-yield valuations are attractive relative to historical levels, we
expect to experience continued volatility over the course of the year primarily
as a result of several factors, including: (i) continued inflation and interest
rate concerns, (ii) further reduced secondary market liquidity, (iii) continued
credit problems and (iv) growing cyclical concerns later in the year. In light
of these conditions, we are continuing to pursue a conservative investment
strategy geared to purchasing BB credits and pursuing selective opportunities in
undervalued B and CCC credits at significant discounts to par.
EMERGING MARKETS DEBT
Emerging markets debt performed very well during the Fund's fiscal year. For the
year ended April 30, 2000, emerging markets debt returned 18.49% as measured by
the EMBI+. Returns for the year were dominated by Russia which appreciated over
148%. Bulgaria and Morocco also outperformed the index return.
At the beginning of the Fund's fiscal year, investors were preoccupied with the
outlook for interest rate increases from the Fed. The Fed's adoption of a
tightening bias in May 1999 lead to weakness in global bond and equity markets.
Spreads opened the fiscal year at 1,010 basis points over U.S. Treasuries and
remained in a range of 1,000 to 1,200 basis points over Treasuries from May
through October. Emerging markets monthly performance during this period was
driven by a number of factors including volatile equity markets, rising
commodity prices, a strengthening yen and the ongoing presence of the Fed.
The market began a strong rally in October as a number of Brady bond exchanges
encouraged the participation of crossover buyers. The Fed moved to a neutral
bias toward future interest rate adjustments in November. This change in Fed
policy combined with continued strength in commodity prices helped spreads
tighten 300 basis points between October 1999 and April 2000.
An additional note: J.P. Morgan & Co. adjusted the spread level of the EMBI+
over Treasuries in mid-April 2000 to reflect the restructuring of certain
Russian securities. This adjustment tightened EMBI+ spreads approximately 120
basis points over Treasuries, making the apparent tightening from October 1999
to April 2000 approximately 400 basis points.
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC.
Returns in emerging markets debt were skewed with only three of 16 Index
countries outperforming. Russia, Bulgaria and Morocco provided the best returns
in the Index during the Fund's fiscal year.
The following is a brief description of developments in key countries over the
past 12 months:
Russia. Russia was the best performing country in the EMBI+ over the past 12
months, returning 148.71%. During the year, Russia successfully restructured its
defaulted Soviet-era debt on terms which are very favorable for Russia.
Relations with the International Monetary Fund ("IMF") continued to improve and
the country exceeded some of its targets for extended financing. Oil price
strength and increased corporate tax collections also contributed to the
improved economic picture. Acting President Putin was elected in the first
democratic transition of presidential administrations in Russian history.
Bulgaria. Bulgaria returned 20.82% during the Fund's fiscal year. The country
continues to recover from the effects of the war in Kosovo. The currency board
is imposing fiscal discipline on the economy as trade with Europe recovers in
the aftermath of the war. We continue to believe that Bulgaria is an undervalued
holding in the portfolio.
Morocco. King Hassan II died after 38 years on the throne and was replaced by
his eldest son, King Mohammed VI. We expect the policies that have made Morocco
a steadily improving credit will be continued by the new king. In another
important development in Morocco, a cellular telephone license has been awarded
to Telefonica S.A. for a price of $1.1 billion and a commitment to spend an
additional $700 million developing the network. The proceeds from this sale will
be used to fund a variety of government initiatives in Morocco. Morocco returned
19.06% during the fiscal year.
Brazil, Mexico and Argentina all registered double-digit returns for the fiscal
year, although they trailed the return of the index. Brazil made further
progress on fiscal reform during the past 12 months. The Argentine economy
showed signs of a rebound in the latter months of the Fund's fiscal year.
Mexico's foreign currency credit rating was upgraded by Moody's to Baa3 --
investment grade status. This upgrade makes Mexico an eligible investment for
investment grade-only portfolios, broadening the potential investor base for
emerging markets debt.
OUTLOOK
Our outlook for emerging markets debt is positive based upon the current spread
level of approximately 800 basis points over U.S. Treasuries. The economic
recovery in Latin America underscores an improving fundamental outlook for
emerging countries. We believe continued stability will attract additional
investors into the market.
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 Salomon
Brothers High Income Fund II Inc stock account, please call PFPC Global Fund
Services at 1-800-331-1710.
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC.
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
/S/ Beth A. Semmel /S/ James E. Craige
Beth A. Semmel James E. Craige
Executive Vice President Executive Vice President
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC.
Schedule of Investments
April 30, 2000
<TABLE>
<CAPTION>
Face
Amount Security Value
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Corporate Bonds -- 60.5%
Basic Industries -- 6.7%
$10,000,000 AEI Resources Inc., 10.500% due 12/15/05 (a)......................... $ 1,550,000
5,000,000 APP China Group Ltd., 14.000% due 3/15/10 (a) ....................... 4,012,500
4,000,000 Borden Chemical and Plastics Ltd., 9.500% due 5/1/05 ................ 3,760,000
10,000,000 Glencore Nickel Property Ltd., 9.000% due 12/1/14 ................... 8,350,000
7,000,000 Huntsman Packaging Corp., 9.125% due 10/1/07 ........................ 7,315,000
2,500,000 LTV Corp., 11.750% due 11/15/09 (a) ................................. 2,475,000
Lyondell Chemicals Inc.:
2,500,000 9.875% due 5/1/07 ................................................. 2,471,875
2,500,000 10.875% due 5/1/09 ................................................. 2,481,250
4,250,000 P&L Coal Holding Corp., 9.625% due 5/15/08 .......................... 3,835,625
4,675,000 PCI Chemicals Canada Inc., 9.250% due 10/15/07 ...................... 3,769,219
7,250,000 Philipp Brothers Chemicals Inc., 9.875% due 6/1/08 .................. 5,836,250
6,000,000 Radnor Holdings Inc., 10.000% due 12/1/03 ........................... 5,310,000
5,000,000 Recap New Brunswick Inc., 10.625% due 4/15/05 ....................... 4,737,500
5,000,000 Republic Technologies International Corp., 13.750% due 7/15/09 (a) .. 1,175,000
5,000,000 ZSC Speciality Chemicals PLC, 11.000% due 7/1/09 .................... 5,100,000
------------
62,179,219
------------
Consumer Cyclicals -- 2.8%
5,200,000 Archibald Candy Corp., 10.250% due 7/1/04 ........................... 4,446,000
4,000,000 Cole National Corp., 8.625% due 8/15/07 ............................. 2,820,000
5,000,000 Guitar Center Management, 11.000% due 7/1/06 ........................ 4,875,000
5,000,000 HMH Properties Inc., 7.875% due 8/1/08 .............................. 4,350,000
3,500,000 Mattress Discount Co., 12.625% due 7/15/07 (a) ...................... 3,198,125
5,750,000 Metris Cos. Inc., 10.125% due 7/15/06 ............................... 5,548,750
2,025,000 Pillowtex Corp., 9.000% due 12/15/07 ................................ 820,125
------------
26,058,000
------------
Consumer Non-Cyclicals -- 12.4%
11,000,000 AKI Inc., 10.500% due 7/1/08 (a) .................................... 9,405,000
3,500,000 ALARIS Medical Systems, Inc., 9.750% due 12/1/06 .................... 2,821,875
2,250,000 American Safety Razor Co., 9.875% due 8/1/05 ........................ 2,176,875
4,500,000 Anchor Advanced Products Inc., 11.750% due 4/1/04 ................... 3,172,500
7,000,000 Aztar Corp., 8.875% due 5/15/07 ..................................... 6,562,500
1,500,000 Circus Circus Enterprise Inc., 9.250% due 12/1/05 ................... 1,458,750
7,250,000 Derby Cycle Corp., 10.000% due 5/15/08 .............................. 4,567,500
8,500,000 French Fragrance Inc., 10.375% due 5/15/07 .......................... 8,202,500
1,000,000 Harrahs Operating Co. Inc., 7.875% due 12/15/05 ..................... 935,000
6,500,000 Home Interiors & Gifts Inc., 10.125% due 6/1/08 ..................... 5,167,500
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements.
Page 6
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC.
Schedule of Investments (continued)
April 30, 2000
<TABLE>
<CAPTION>
Face
Amount Security Value
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Consumer Non-Cyclicals -- 12.4% (continued)
$ 7,750,000 Horseshoe Gaming LLC., 9.375% due 6/15/07 ......................... $ 7,575,625
5,500,000 Imperial Holly Corp., 9.750% due 12/15/07 ......................... 1,127,500
10,000,000 Iowa Select Farms L.P., 10.750% due 12/1/05 (a) ................... 1,850,000
5,500,000 Majestic Star Casino Inc., 10.875% due 7/1/06 ..................... 5,142,500
1,500,000 Mohegan Tribal Gaming, 8.750% due 1/1/09 .......................... 1,425,000
4,500,000 Moll Industries, Inc., 10.500% due 7/1/08 ......................... 1,462,500
Park Place Entertainment Inc.:
5,000,000 7.875% due 12/15/05 ............................................. 4,662,500
4,000,000 9.375% due 2/15/07 (a) .......................................... 3,970,000
7,500,000 Polaroid Corp., 11.500% due 2/15/06 ............................... 7,612,500
4,000,000 Premier International Foods, 12.000% due 9/1/09 (a) ............... 3,800,000
10,000,000 Pueblo Xtra International, Inc., 9.500% due 8/1/03 ................ 4,950,000
1,000,000 Revlon Consumer Products Inc., 8.625% due 2/1/08 .................. 500,000
Sun International Hotels Ltd.:
3,000,000 9.000% due 3/15/07 .............................................. 2,707,500
4,500,000 8.625% due 12/15/07 ............................................. 4,027,500
1,750,000 Tenet Healthcare Corp., 8.000% due 1/15/05 ........................ 1,684,375
10,000,000 Triarc Consumers Products Group, 10.250% due 2/15/09 .............. 9,450,000
2,500,000 Vlasic Foods International Inc., 10.250% due 7/1/09 ............... 1,637,500
5,000,000 Windmere-Durable Holdings Inc., 10.000% due 7/31/08 ............... 4,850,000
3,500,000 Winsloew Furniture, Inc., 12.750% due 8/15/07 ..................... 3,237,500
------------
116,142,500
------------
Energy -- 3.5%
3,500,000 Belco Oil & Gas Co., 8.875% due 9/15/07 ........................... 3,237,500
5,500,000 Canadian Forest Oil Ltd., 8.750% due 9/15/07 ...................... 5,156,250
10,000,000 Continental Resources Inc., 10.250% due 8/1/08 .................... 8,962,500
500,000 Key Energy Services Inc., 14.000% due 1/15/09 ..................... 548,750
2,000,000 Lomak Petroleum Inc., 8.750% due 1/15/07 .......................... 1,710,000
4,000,000 Ocean Energy Inc., 8.875% due 7/15/07 ............................. 3,970,000
2,000,000 Pennzoil Co., 10.250% due 11/1/05 ................................. 2,160,000
2,500,000 Pioneer Natural Resources Co., 9.625% due 4/1/10 .................. 2,493,750
3,500,000 Plains Resources Inc., 10.250% due 3/15/06 (a) .................... 3,447,500
1,000,000 R&B Falcon Corp., 9.500% due 12/15/08 ............................. 990,000
------------
32,676,250
------------
Financial -- 2.9%
1,975,400 Airplanes Pass-Through Trust, Series D, 10.875% due 3/15/19 ....... 1,658,071
5,000,000 Avis Rent A Car Inc., 11.000% due 5/1/09 .......................... 5,237,500
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements.
Page 7
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC.
Schedule of Investments (continued)
April 30, 2000
<TABLE>
<CAPTION>
Face
Amount Security Value
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial -- 2.9% (continued)
ContiFinancial Corp.:
$11,600,000 Due 3/15/02 (b)(c) ............................................... $ 1,305,000
9,620,000 Due 8/15/03 (b)(c) ............................................... 1,082,250
12,445,000 Due 4/1/08 (b)(c) ................................................ 1,400,063
8,000,000 Morgan Stanley Aircraft Finance, Series 1A, Class D1,
8.700% due 3/15/23 ............................................... 800,000
7,500,000 Nationwide Credit Inc., 10.250% due 1/15/08 ........................ 5,512,500
4,250,000 Williams Scotsman Inc., 9.875% due 6/1/07 .......................... 3,888,750
------------
26,884,134
------------
Housing Related -- 0.5%
1,100,000 American Standard Inc., 7.375% due 4/15/05 ......................... 1,025,750
4,025,000 Nortek Inc., 9.875% due 3/1/04 ..................................... 3,823,750
------------
4,849,500
------------
Industrial - Manufacturing -- 7.1%
3,500,000 Aqua Chemical Inc., 11.250% due 7/1/08 ............................. 1,977,500
3,000,000 Blount Inc., 13.000% due 8/1/09 .................................... 2,955,000
8,800,000 Breed Technologies Inc., due 4/15/08 (b)(c) ........................ 121,000
8,500,000 Communication Instruments, 10.000% due 9/15/04 ..................... 6,460,000
Doman Industries Inc.:
2,000,000 8.750% due 3/15/04 ............................................... 1,770,000
2,500,000 12.000% due 7/1/04 ................................................ 2,618,750
7,500,000 Federal Mogal Inc., 7.500% due 1/15/09 ............................. 5,775,000
7,000,000 Foamex International Inc., 9.875% due 6/15/07 ...................... 5,425,000
3,750,000 Hexcel Corp., 9.750% due 1/15/09 ................................... 3,168,750
2,500,000 International Utility Structures Inc., 10.750% due 2/1/08 .......... 2,087,500
14,475,000 Jordan Industries Inc., zero coupon until 4/1/02
(11.750% thereafter), due 4/1/09 ................................. 9,625,875
8,000,000 Key Plastics Inc., due 3/15/07 (b)(c) .............................. 280,000
1,000,000 Lear Corp., 8.110% due 5/15/09 ..................................... 891,250
5,000,000 Motors & Gears Inc., 10.750% due 11/15/06 .......................... 4,775,000
6,000,000 Neenah Corp., 11.125% due 5/1/07 ................................... 4,710,000
4,000,000 Oxford Automotive Inc., 10.125% due 6/15/07 ........................ 3,740,000
6,500,000 Safety-Kleen Corp., 9.250% due 5/15/09 (b)(c)....................... 227,500
5,000,000 Tenneco Automotive Inc., 11.625% due 10/15/09 ...................... 5,025,000
5,500,000 Transdigm Inc., 10.375% due 12/1/08 ................................ 4,372,500
------------
66,005,625
------------
Media - Telecommunications -- 19.5%
2,136,263 Adelphia Communications Corp., 9.500% due 2/15/04 (d) .............. 2,104,219
10,000,000 Advanstar Communications Inc., 9.250% due 5/1/08 ................... 9,150,000
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements.
Page 8
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC.
Schedule of Investments (continued)
April 30, 2000
<TABLE>
<CAPTION>
Face
Amount Security Value
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Media - Telecommunications -- 19.5% (continued)
$10,500,000 Avalon Cable Holdings LLC., zero coupon until 12/1/03 (11.875% thereafter), due 12/1/08 ...... $ 6,877,500
2,000,000 Call Net Enterprises Inc., zero coupon until 8/15/03 (8.940% thereafter), due 8/15/08 ........ 790,000
2,000,000 Centennial Cellular Corp., 10.750% due 12/15/08 .............................................. 2,000,000
8,250,000 Century Communications Corp., zero coupon due 1/15/08 ........................................ 3,485,625
12,000,000 Charter Communications Holdings LLC., zero coupon until 4/1/04 (9.920% thereafter),
due 4/1/11 ................................................................................. 6,630,000
2,250,000 Citadel Broadcasting Co., 9.250% due 11/15/08 ................................................ 2,162,813
5,000,000 Covad Communications Group Inc., 12.000% due 2/15/10 (a) ..................................... 4,725,000
3,250,000 CSC Holding Inc., 9.875% due 2/15/13 ......................................................... 3,315,000
Frontiervision Holdings:
8,500,000 Series B, zero coupon until 9/15/01 (11.875% thereafter), due 9/15/07 ...................... 7,437,500
4,000,000 Zero coupon until 9/15/01 (11.875% thereafter), due 9/15/07 ................................ 3,500,000
2,500,000 Global Crossing Holding Ltd., 9.500% due 11/15/09 (a) ........................................ 2,450,000
5,500,000 Granite Broadcasting Corp., 8.875% due 5/15/08 ............................................... 4,730,000
10,000,000 GST Telecommunications Inc., zero coupon until 5/1/03 (10.500% thereafter), due 5/1/08 ....... 3,950,000
7,500,000 Hollinger International Publishing Inc., 9.250% due 2/1/06 ................................... 7,275,000
5,000,000 ICG Holding Inc., zero coupon until 5/1/01 (12.500% thereafter), due 5/1/06 .................. 4,025,000
5,000,000 Intermedia Communication Inc., 8.600% due 6/1/08 ............................................. 4,575,000
2,800,000 Leap Wireless International, Inc., 12.500% due 4/15/10 (a) ................................... 2,814,000
14,000,000 Lin Holding Corp., zero coupon until 3/1/03 (10.000% thereafter), due 3/1/08 ................. 8,400,000
Nextel Communications Inc.:
10,000,000 Zero coupon until 10/31/02 (9.750% thereafter), due 10/31/07 ............................... 7,225,000
8,000,000 Zero coupon until 2/15/03 (9.950% thereafter), due 2/15/08 ................................. 5,670,000
NTL Inc.:
5,000,000 Zero coupon until 2/1/01 (11.500% thereafter), due 2/1/06 ................................. 4,625,000
10,000,000 Zero coupon until 10/1/03 (12.375% thereafter), due 10/1/08 ............................... 6,575,000
5,000,000 Orange PLC, 9.000% due 6/1/09 ................................................................ 5,150,000
8,250,000 Price Communications Wireless Inc., 9.125% due 12/15/06 ...................................... 8,188,125
PSINet Inc.:
1,500,000 11.500% due 11/1/08 ........................................................................ 1,342,500
2,500,000 11.000% due 8/1/09 ......................................................................... 2,212,500
10,000,000 R.H. Donnelley, 9.125% due 6/1/08 ............................................................ 9,450,000
6,500,000 Rogers Communications Inc., 8.875% due 7/15/07 ............................................... 6,402,500
10,000,000 Sun Media Corp., 9.500% due 2/15/07 .......................................................... 9,550,000
Telewest Communications PLC:
2,500,000 9.625% due 10/1/06 ......................................................................... 2,412,500
3,250,000 Zero coupon until 10/1/00 (11.000% thereafter), due 10/1/07 ................................ 3,071,250
3,125,000 Zero coupon until 4/15/04 (9.250% thereafter), due 4/15/09 (a) ............................. 1,789,063
5,000,000 Transwestern Publishing Co., 9.625% due 11/15/07 ............................................. 4,775,000
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements.
Page 9
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC.
Schedule of Investments
April 30, 2000
<TABLE>
<CAPTION>
Face
Amount Security Value
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Media - Telecommunications -- 19.5% (continued)
$ 5,000,000 Ubiquitel Operating Co., zero coupon until 4/15/05
(14.000% thereafter), due 4/15/10 ................................. $ 2,900,000
16,500,000 United International Holdings, zero coupon until 2/15/03
(10.750% thereafter), due 2/15/08 ................................. 10,807,500
------------
182,542,595
------------
Services - Other -- 2.0%
2,250,000 Allied Waste North America Inc., 10.000% due 8/1/09 ............... 1,535,625
7,000,000 American Business Information, 9.500% due 6/15/08 ................. 6,195,000
750,000 Iron Mountain Inc., 8.750% due 9/30/09 ............................ 673,125
5,000,000 Marsulex Inc., 9.625% due 7/1/08 .................................. 4,587,500
Pierce Leahy Corp.:
2,250,000 11.125% due 7/15/06 ............................................. 2,306,250
2,000,000 8.125% due 5/15/08 .............................................. 1,735,000
1,825,000 Primark Corp., 9.250% due 12/15/08 ................................ 1,697,250
------------
18,729,750
------------
Technology - Electronics -- 0.3%
3,000,000 Amphenol Corp., 9.875% due 5/15/07 ................................ 3,045,000
------------
Transportation -- 2.8%
4,000,000 Continental Airlines Inc., 9.500% due 12/15/01 .................... 4,080,000
5,000,000 Enterprises Shipholding Inc., 8.875% due 5/1/08 ................... 3,025,000
4,000,000 Holt Group Inc., 9.750% due 1/15/06 ............................... 1,820,000
3,000,000 Laidlaw Inc., 6.650% due 10/1/04 .................................. 1,140,000
5,500,000 Northwest Airlines Corp., 7.625% due 3/15/05 ...................... 4,805,625
7,000,000 Stena Line, 10.625% due 6/1/08 .................................... 4,550,000
7,703,943 Viacao Aerea Riograndens, 9.600% due 2/10/05 ...................... 6,702,430
------------
26,123,055
------------
Total Corporate Bonds (Cost -- $690,554,495) ...................... 565,235,628
------------
Convertible Corporate Bonds -- 1.4%
1,250,000 Affmetrix Inc., 4.750% due 2/15/07 ................................ 881,250
7,500,000 Quantum Corp., 7.000% due 8/1/04 .................................. 5,962,500
37,500,000 Sunbeam Corp., zero coupon due 3/25/18 (a) ........................ 6,468,750
------------
Total Convertible Corporate Bonds (Cost -- $17,130,434) ........... 13,312,500
------------
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements.
Page 10
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC.
Schedule of Investments
April 30, 2000
<TABLE>
<CAPTION>
Face
Amount+ Security Value
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Sovereign Bonds -- 26.2%
Argentina -- 5.1%
Republic of Argentina:
19,892,373(ARS) Bocon Pro 1, 2.951% due 4/1/07 (e) .............................. $ 14,348,030
Global Bond:
5,000,000(ARS) 8.750% due 7/10/02 ............................................ 4,595,000
500,000 14.250% due 11/30/02 .......................................... 495,000
6,500,000 11.786% due 4/10/05 ........................................... 6,110,000
3,380,000(ARS) 11.750% due 2/12/07 ........................................... 3,341,974
9,520,000 11.750% due 4/7/09 ............................................ 9,362,920
9,500,000 12.000% due 2/1/20 ............................................ 9,393,125
------------
47,646,049
------------
Brazil -- 6.6%
Federal Republic of Brazil:
82,558 C Bond, 8.000% due 4/15/14 ...................................... 59,261
38,900,000 DCB, Series L, 7.4375% due 4/15/12 (e) .......................... 28,080,938
6,075,023 Exit, 6.000% due 9/15/13 ........................................ 4,191,766
30,500,000 FLIRB, 7.375% due 4/15/09 (e) ................................... 22,684,374
8,420,981 MYDFA, 7.1875% due 9/15/07 (e) .................................. 7,147,308
------------
62,163,647
------------
Bulgaria -- 1.7%
22,440,000 Republic of Bulgaria, FLIRB, Series A, 2.750% due 7/28/12 (e)........ 15,651,900
------------
Colombia -- 1.6%
Republic of Colombia:
3,100,000 11.218% due 8/13/05 (e) ....................................... 3,022,500
2,500,000 9.750% due 4/23/09 ............................................ 1,975,000
12,160,000 11.750% due 2/25/20 ........................................... 10,351,200
------------
15,348,700
------------
Croatia -- 0.1%
Croatia Government:
444,816 Series A, 7.0625% due 7/31/10 (e) ............................. 396,998
195,374 Series B, 7.0625% due 7/31/06 (e) ............................. 180,233
------------
577,231
------------
Ecuador -- 0.6%
16,000,000 Republic of Ecuador, Par Bond, due 2/28/25 (b)(c) ................... 5,600,000
------------
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements.
Page 11
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC.
Schedule of Investments
April 30, 2000
<TABLE>
<CAPTION>
Face
Amount+ Security Value
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Ivory Coast -- 0.5%
Republic of Ivory Coast:
7,000,000 FLIRB, due 3/29/18 (b) .................................................... $ 1,190,000
17,099,998 PDI, due 3/29/18 (b) ...................................................... 3,249,000
------------
4,439,000
------------
Peru -- 0.3%
4,175,000 Republic of Peru, FLIRB, 3.750% due 3/7/17 (e) .............................. 2,536,313
------------
Russia -- 4.5%
Russia:
15,430,000 11.750% due 6/10/03 ....................................................... 13,655,550
14,400,000 10.000% due 6/26/07 ....................................................... 10,368,000
22,600,000 Ministry of Finance, 12.750% due 6/24/28 .................................. 18,447,250
------------
42,470,800
------------
Venezuela -- 5.2%
Republic of Venezuela:
15,025,000 13.625% due 8/15/18 ....................................................... 13,823,000
5,350,000 9.250% due 9/15/27 ........................................................ 3,421,325
250,000 Discount Bond, Series W-A, 7.375% due 3/31/20 ............................. 192,500
29,499,706 FLIRB, Series A, 7.4375% due 3/31/07 (e) .................................. 22,917,583
5,666,610 FLIRB, Series B, 7.4375% due 3/31/07 (e) .................................. 4,402,248
4,764,825 NMB, 7.125% due 12/18/05 (e) .............................................. 3,788,036
------------
48,544,692
------------
Total Sovereign Bonds (Cost -- $240,110,623) ................................ 244,978,332
------------
Loan Participations (f) -- 3.1%
4,600,143 Kingdom of Morocco, Tranche A, 6.84375% due 1/1/09
(Chase Manhattan Bank) (e) ................................................ 4,128,629
18,997,873 The People's Democratic Republic of Algeria, Tranche 1, 7.1875%
due 9/4/06 (Chase Manhattan Bank)(e) ...................................... 15,388,277
5,000,000 The People's Democratic Republic of Algeria, Tranche 3, 7.1875%
due 3/4/10 (Chase Manhattan Bank, CS First Boston)(e) ..................... 3,800,000
19,000,000 Russia, Principal Loan, due 12/15/20 (Chase Manhattan Bank) (b)(c) ......... 5,225,000
------------
Total Loan Participations (Cost -- $28,270,006) ............................ 28,541,906
------------
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements.
Page 12
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC.
Schedule of Investments (continued)
April 30, 2000
Shares Security Value
--------------------------------------------------------------------------------
Preferred Stock -- 0.3%
25,000 Rural Cellural Corp, 12.250% due 2/15/05 ........... $ 2,425,000
TCR Holding:
17,552 Class B (c) ...................................... 175
9,654 Class C (c) ...................................... 97
25,451 Class D (c) ...................................... 254
52,657 Class E (c) ...................................... 527
------------
Total Preferred Stock (Cost -- $2,506,260) ......... 2,426,053
------------
Warrants (c) -- 0.0%
5,000 Republic Technologies Corp., expire7/15/09 ......... 500
3,500 Winsloew Furniture Corp., expire 1/1/01 ............ 87,500
------------
Total Warrants (Cost -- $249,020) .................. 88,000
------------
Face
Amount
-------------
Repurchase Agreement -- 8.5%
$78,926,000 Warburg Dillon Read, 5.700% due 5/1/00; Proceeds
at maturity -- $78,963,490; (Fully collateralized
by U.S. Treasury Bonds, 7.500% due 11/15/16;
Market value -- $80,505,810) (Cost -- $78,926,000).. 78,926,000
------------
Total Investments -- 100% (Cost -- $1,057,746,838*).. $933,508,419
============
--------------------
+ Face amount denominated in U.S. dollars unless otherwise indicated.
(a) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactionsthat are exempt from
registration, normally to qualified institutional buyers.
(b) Security is in default as of, or subsequent to April 30, 2000.
(c) Non-income producing security.
(d) Payment-in-kind security for which part of the income earned is capitalized
as additional principal.
(e) Rate shown reflects the current rate on variable rate or step coupon rate
instruments.
(f) Participation interests were acquired through the financial institutions
indicated parenthetically.
* Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviations used in this schedule:
------------------------------------
ARS -- Argentine Peso.
C Bond -- Capitalization Bond.
DCB -- Debt Conversion Bond.
FLIRB -- Front Loaded 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, 2000
ASSETS:
Investments, at value (Cost -- $1,057,746,838) ........... $ 933,508,419
Cash ..................................................... 203
Interest receivable ...................................... 23,394,842
Receivable for securities sold ........................... 37,462
Prepaid expenses ......................................... 4,977
------------
Total Assets ............................................. 956,945,903
------------
LIABILITIES:
Bank loan (Note 9) ....................................... 105,000,000
Payable for securities purchased ......................... 57,519,855
Dividends payable ........................................ 2,554,552
Management fee payable ................................... 691,132
Loan interest payable .................................... 80,442
Administration fee payable ............................... 69,113
Accrued expenses ......................................... 288,068
------------
Total Liabilities ........................................ 166,203,162
------------
Total Net Assets ......................................... $ 790,742,741
============
NET ASSETS:
Common Stock ($0.001 par value, 100,000,000 shares
authorized; 66,741,739 shares outstanding) ............. $ 66,742
Additional paid-in capital ............................... 997,914,118
Overdistributed net investment income .................... (21,494)
Accumulated net realized loss from security
transactions ........................................... (82,978,206)
Net unrealized depreciation on investments ............... (124,238,419)
------------
Total Net Assets ............................................. $ 790,742,741
============
Net Asset Value, per share ($790,742,741 / 66,741,739 shares) $11.85
======
--------------------------------------------------------------------------------
See Notes to Financial Statements.
Page 14
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Statement of Operations
For the Year Ended April 30, 2000
INCOME:
Interest ................................................. $ 114,195,185
------------
EXPENSES:
Management fees (Note 2) ................................. 9,451,280
Interest expense (Note 9) ................................ 6,556,882
Administration fees ...................................... 945,128
Shareholder communications ............................... 176,240
Deferred organization costs .............................. 69,305
Audit and legal .......................................... 48,018
Directors' fees .......................................... 35,901
Other .................................................... 335,771
------------
Total Expenses ........................................... 17,618,525
-------------
Net Investment Income ........................................ 96,576,660
-------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
AND OPTIONS (NOTES 3 AND 4):
Net Realized Loss From:
Security transactions (excluding short-term securities). (34,793,195)
Options purchased ...................................... (1,101,925)
-------------
Net Realized Loss ........................................ (35,895,120)
-------------
Change in Net Unrealized Depreciation of Investments:
Beginning of year ...................................... (46,456,810)
End of year ............................................ (124,238,419)
-------------
Increase in Net Unrealized Depreciation .................. (77,781,609)
-------------
Net Loss on Investments and Options .......................... (113,676,729)
-------------
Decrease in Net Assets From Operations ....................... $ (17,100,069)
=============
--------------------------------------------------------------------------------
See Notes to Financial Statements.
Page 15
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC
Statement of Changes in Net Assets
For the Year Ended April 30, 2000 and
the Period Ended April 30, 1999(a)
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income ......................................... $ 96,576,660 $ 81,546,933
Net realized loss ............................................. (35,895,120) (48,401,631)
Increase in net unrealized depreciation ....................... (77,781,609) (46,456,810)
------------- -------------
Decrease in Net Assets From Operations ........................ (17,100,069) (13,311,508)
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ......................................... (95,974,620) (80,851,922)
------------- -------------
Decrease in Net Assets From Distributions to Shareholders ..... (95,974,620) (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
Offering expenses credited to paid-in capital ................. 24,975 --
------------- -------------
Increase in Net Assets From Capital Share Transactions ........ 24,975 997,855,880
------------- -------------
Increase (Decrease) in Net Assets ................................. (113,049,714) 903,692,450
NET ASSETS:
Beginning of year ............................................. 903,792,455 100,005
------------- -------------
End of year* .................................................. $ 790,742,741 $ 903,792,455
============= =============
*Includes undistributed (overdistributed) net investment income of: $(21,494) $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 Year Ended April 30, 2000
<TABLE>
<S> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Purchases of long-term portfolio investments .................................. $(578,598,028)
Proceeds from disposition of long-term portfolio investments and principal
paydowns .................................................................... 669,931,666
Net purchase of short-term portfolio investments .............................. (66,808,000)
-------------
24,525,638
Net investment income ......................................................... 96,576,660
Capitalized income on payment-in-kind securities .............................. (701,586)
Amortization of net premium/discount on investments ........................... (25,315,656)
Net change to receivables/payables related to operations ...................... (258,657)
-------------
Net Cash Flows Provided by Operating Activities ............................... 94,826,399
CASH FLOWS USED BY FINANCING ACTIVITIES:
Cash dividends paid ........................................................... (94,826,350)
-------------
Net Increase in Cash .............................................................. 49
Cash, Beginning of Year ........................................................... 154
-------------
Cash, End of Year ................................................................. $ 203
=============
</TABLE>
--------------------------------------------------------------------------------
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 accounting principles
generally accepted in the United States ("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 were 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 has expensed the unamortized amount of this asset on the first day of
the current fiscal year. As of April 30, 2000, all deferred organization costs
have been expensed.
(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.
(g) YEAR END TAX RECLASSIFICATIONS. The character of income and gains to be
distributed are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. At April 30, 2000,
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. Net investment income, net realized loss and net
assets were not affected by this change.
Note 2. Management Fee and Other Transactions
Salomon Brothers Asset Management Inc, a wholly-owned subsidiary of Salomon
Smith Barney Holdings ("SSBH"), which, in turn, is a subsidiary of Citigroup
Inc., 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.
SSB Citi Fund Management LLC ("SSBC"), formerly known as SSBC Fund Management
Inc., 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.
Page 19
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC.
Notes to Financial Statements (continued)
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, 2000, the Investment Manager and Salomon Smith Barney Inc., an
affiliate of the Investment Manager, owned 6,667 and 7 shares, respectively 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, 2000, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding short-
term securities) were as follows:
Purchases..................................................... $ 623,695,958
-------------
Sales......................................................... $ 648,133,064
=============
At April 30, 2000, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
Gross unrealized appreciation................................. $ 20,286,784
Gross unrealized depreciation................................. (144,525,203)
-------------
Net unrealized depreciation................................... $(124,238,419)
=============
Note 4. Options Contracts
The Fund may from time to time enter into options contracts. Premiums paid when
put or call options are purchased by the Fund, represent investments, which are
marked-to-market daily. When a purchased option expires, the Fund will realize a
loss in the amount of the premium paid. When the Fund enters into a closing
sales transaction, the Fund will realize a gain or loss depending on whether the
proceeds from the closing sales transaction are greater or less than the premium
paid for the option. When the Fund exercises a put option, it will realize a
gain or loss from the sale of the underlying security and the proceeds from such
sale will be decreased by the premium originally paid. When the Fund exercises a
call option, the cost of the security which the Fund purchases upon exercise
will be increased by the premium originally paid.
At April 30, 2000, the Fund held no purchased call or put options.
When the Fund writes a call or put option, an amount equal to the premium
received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a gain
equal to the amount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain or loss depending upon whether
the cost of the closing transaction is greater or less than the premium
originally received, without regard to any unrealized gain or loss on the
underlying security, and the liability related to
Page 20
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC.
Notes to Financial Statements (continued)
such option is eliminated. When a written call option is exercised the proceeds
of the security sold will be increased by the premium originally received. When
a written put option is exercised, the amount of the premium originally received
will reduce the cost of the security which the Fund purchased upon exercise.
When written index options are exercised, settlement is made in cash.
The Fund enters into options for hedging purposes. The risk associated with
purchasing options is limited to the premium originally paid. The risk in
writing a covered call option is that the Fund gives up the opportunity to
participate in any increase in the price of the underlying security beyond the
exercise price. The risk in writing a put option is that the Fund is exposed to
the risk of loss if the market price of the underlying security declines.
During the year ended April 30, 2000, the Fund did not write any call or put
options.
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, 2000, the Fund held loan participations with a total cost of
$28,270,006.
Note 6. 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.
Note 7. Dividends Subsequent to April 30, 2000
The Board of Directors of the Fund declared a common stock dividend from net
investment income of $0.13 per share for the months of May and June 2000,
payable on May 26 and June 30, 2000 to shareholders of record on May 16 and June
13, 2000, respectively.
Page 21
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC.
Notes to Financial Statements (continued)
Note 8. Capital Loss Carryforward
At April 30, 2000, the Fund had, for Federal income tax purposes, a capital loss
carryforward of approximately $72,343,500, available to offset future capital
gains. To the extent that these carryforward losses are used to offset capital
gains, it is probable that any gains so offset will not be distributed.
The amount and expiration of the carryforwards are indicated below. Expiration
occurs on April30 of the year indicated:
2007 2008 Total
------------- ------------- -------------
Carryforward Amount............... $32,298,000 $40,142,000 $72,440,000
Note 9. Bank Loan
As of April 30, 2000, the Fund has outstanding a $105,000,000 loan pursuant to a
credit agreement with Chase Manhattan Bank. The interest rate on the loan as of
April 30, 2000 is 6.8950% and the maturity date was May 25, 2000.
Note 10. Subsequent Events
Effective May 2, 2000, the investment policies of the Fund were amended to
permit the Fund to invest primarily (at least 65% of its total assets during
normal market condition) in high-yield securities issued by U.S. and foreign
corporations and foreign governments. The Fund's investment policy continues to
allow in the Fund to invest up to 35% of its assets in emerging market
securities.
On May 25, 2000, the Fund borrowed $155,000,000 pursuant to a revolving credit
and security agreement with CXC Inc., a commercial paper conduit issuer for
which Citicorp North America Inc. acts as administrative agent. The loan with
Chase Manhattan Bank was not renewed on May 25, 2000.
Page 22
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC.
Financial Highlights
Data for a share of capital stock outstanding throughout the year ended April
30:
<TABLE>
<CAPTION>
2000 1999(1)
--------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Year ............................ $ 13.54 $ 15.00
--------- ---------
Income (Loss) From Operations:
Net investment income ...................................... 1.45 1.23
Net realized and unrealized loss ........................... (1.70) (1.45)
--------- ---------
Total Loss From Operations .................................... (0.25) (0.22)
--------- ---------
Offering Costs on Issuance of Common Stock .................... -- (0.02)
--------- ---------
Less Distributions From:
Net investment income ...................................... (1.44) (1.22)
--------- ---------
Net Asset Value, End of Year .................................. $ 11.85 $ 13.54
========= =========
Per Share Market Value, End of Year ........................... $ 11.750 $ 12.625
========= =========
Total Return, Based on Market Price Per Share(2) .............. 5.45% (7.57)%++
Ratios to Average Net Assets:
Total expenses, including interest expense ................. 2.09% 1.54%+
Total expenses, excluding interest expense
(operating expenses) ...................................... 1.29% 1.24%+
Net investment income ...................................... 11.48% 9.84%+
Bank Loans Outstanding, End of Year (000s) .................... $ 105,000 $ 105,000
Weighted Average Interest Rate on Bank Loans .................. 6.18% 5.72%
Net Assets, End of Year (000s) ................................ $ 790,743 $ 903,792
Portfolio Turnover Rate ....................................... 68% 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 for the year.
+ Annualized.
Page 23
<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, 2000, the results of its
operations and its cash flows for the year then ended, and the changes in its
net assets and the financial highlights for the year then ended and for the
period May 28, 1998 (commencement of operations) through April 30, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at April 30, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
June 5, 2000
Page 24
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC.
Selected Quarterly Financial Information (unaudited)
Summary of quarterly results of operations:
<TABLE>
<CAPTION>
Net Realized &
Net Investment Unrealized
Income Gain (Loss)
-------------------------------------------------
Quarters Ended(1) Total Per Share Total Per Share
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
July 31, 1999 ........................... 22,833 0.34 (44,121) (0.66)
October 31, 1999 ........................ 24,606 0.37 (28,350) (0.42)
January 31, 2000 ........................ 25,079 0.38 (6,790) (0.10)
April 30, 2000 .......................... 24,059 0.36 (34,416) (0.52)
</TABLE>
----------
(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 Issue. As the year 2000 began, there were few problems caused by the
inability of certain computer systems to tell the difference between the year
2000 and the year 1900 (commonly known as the "Year 2000" issue). It is still
possible that some computer systems could malfunction in the future because of
the year 2000 issue or as a result of actions taken to address the Year 2000
issue. The Investment Adviser does not anticipate that its services or those of
the Fund's other service providers will be adversley affected, but the
Investment Adviser will continue to monitor the situation. If malfunctions
related to the Year 2000 issue do arise, the Fund and its investments could be
negatively affected.
Page 25
<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 PFPC Global
Fund Services, formerly known as 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 26
<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 27
<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 28
<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 29
<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, SSB Citi Fund
Management LLC and Travelers Investment
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
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
PFPC Trust Company
17th and Chestnut Streets
Philadelphia, Pennsylvania 19103
DIVIDEND DISBURSING AND TRANSFER AGENT
PFPC Global Fund Services
P.O. Box 8030
Boston, Massachusetts 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 30
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC.
Annual Report
April 30, 2000
[GRAPHIC]
---------------------------------
Salomon Brothers Asset Management
---------------------------------
PFPC Global Fund Services -----------------
P.O. Box 8030 BULK RATE
Boston, MA 02266-8030 U.S. POSTAGE
PAID
STATEN ISLAND, NY
PERMIT No. 169
-----------------
HIXANN 4/00
