S A L O M O N B R O T H E R S H I G H I N C O M E F U N D I N C
February 28, 1997
Dear Shareholders:
The year 1996 proved to be a highly rewarding year for the Salomon Brothers High
Income Fund Inc (the "Fund"). Assuming reinvestment of dividends in additional
shares of the Fund, the Fund returned 21.46%, based on net asset value per
share, during the twelve months ended December 31, 1996. This compares with an
increase of 11.28% for the Salomon Brothers High-Yield Market Index.
The net asset value of the Fund increased from $14.56 per share on September 30,
1996 to $14.72 per share on December 31, 1996. Dividends of $0.40 per share were
declared during the quarter. Assuming reinvestment of these dividends in
additional shares of the Fund, the net asset value return for the quarter ended
December 31, 1996 was 3.91%. In comparison, the Salomon Brothers High-Yield
Market Index returned 3.90% during the same period.
U.S. high-yield investments accounted for approximately 82% of total investments
at December 31, 1996. The balance of the portfolio was principally invested in
emerging markets debt.
MARKET REVIEW
The market's performance was driven by better than expected U.S. economic growth
during the year, which resulted in strong corporate performance and improved
credit quality among corporate bond issuers. The risk premium above U.S.
Treasuries, which the high-yield market paid, on average, declined from 4.35% to
3.55% over the course of the year, as measured by the Salomon Brothers High-
Yield Market Index.
Strong performing industries during the year included aerospace, electronics,
casino gaming and leisure and retail stores, all of which benefited from
cyclical strength in their underlying fundamentals. Lagging industries for the
year included cable television and other media, where companies are suffering
from intense competition. Machinery continues to suffer from cyclical pressures,
as well as restaurant companies, which are also facing a difficult competitive
environment.
Globally, the best performing fixed-income market was the emerging markets debt
market, which returned 34.60% for 1996, as measured by the Salomon Brothers
Brady Bond Index. This market generally represents government or sovereign
credit risk of lower-rated countries. The risk premium on these bonds has moved
from 9.42% at the beginning of 1996 to 4.87% at the end of 1996 due to global
economic growth, structural economic reforms, widening access to capital and
improved credit quality among many of the emerging nations.
The Salomon Brothers High Income Fund's out-performance can be attributed to
astute industry weighting, strong individual company selection and an allocation
outside the United States to emerging markets debt, which approximated 18% of
the Fund's total investments during the year.
<PAGE>
S A L O M O N B R O T H E R S H I G H I N C O M E F U N D I N C
Within the U.S. portion of the Fund, the portfolio was heavily overweighted in
the consumer-driven industries, such as consumer products companies, food
companies and retail stores, all of which outperformed the market during the
year. Consumer-oriented investments ranged from 31-38% of the U.S. portfolio
during the year, versus approximately 23% for the market in general. Also within
the U.S. portion, the Fund's average investment in the media sector ranged from
19-28% versus approximately 31% for the market. This underweighted sector
underperformed the market by about 3.5% in 1996.
In emerging markets, we continued to favor the Brady Bond market, with key
positions in Argentina, Brazil, Venezuela and Ecuador. In addition, we also
favored investments in Morocco (not a Brady Bond). This sector performed very
strongly in 1996, especially the Latin American countries.
OUTLOOK
Our macroeconomic outlook is for continued moderate growth in the U.S., combined
with a pickup in growth in Europe and the emerging markets in general. As a
result, we feel corporate credit quality in the U.S. and sovereign quality in
emerging markets should continue to be strong and we currently see no imminent
change in strategy.
FOR CURRENT INFORMATION
To obtain current commentary and Fund information, including portfolio holdings
and allocations, shareholders may call 1-800-SALOMON, Monday through Friday from
8:30 am to 6:00 pm EST for a recorded periodic update. Although the Fund will
continue to issue a semi-annual and annual report to shareholders, a press
release containing financial highlights and other Fund information will be
issued in lieu of a first and third quarter interim report - thus resulting in
some cost savings for the Fund.
For information concerning your Salomon Brothers High Income Fund stock account,
please call American Stock Transfer & Trust company at 1-800-937-5449
(1-718-921-8200 if you are calling from within New York City).
Also note that the annual meeting of shareholders of the Fund will be held on
Thursday, April 17, 1997 at 10:00 am at Salomon Brothers, 7 World Trade Center
in New York City. We hope those of you who are able to will attend.
All of us at Salomon Brothers Asset Management appreciate the confidence you
have demonstrated in the past and hope to continue to serve you in the future.
Cordially,
MICHAEL S. HYLAND
Chairman and President
<PAGE>
S A L O M O N B R O T H E R S H I G H I N C O M E F U N D I N C
Statement of Investments
December 31, 1996
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Corporate Bonds-- 80.7% (Note 2)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
BASIC INDUSTRIES -- 11.6%
$ 750 AES Corp., 10.25%, 7/15/06 .......................................... $ 808,125
1,000 Algoma Steel Inc., 12.375%, 7/15/05 ................................. 1,080,000
1,000 Americold Corp., 12.875%, 5/01/08 ................................... 1,035,000
1,000 Berry Plastics, 12.25%, 4/15/04 ..................................... 1,095,000
500 Crown Paper Company, 11.00%, 9/01/05 ................................ 470,000
NL Industries, Zero Coupon until 10/15/98
1,250 (13.00% thereafter), 10/15/05 ................................... 1,075,000
600 Radnor Holdings, 10.00%, 12/01/03# .................................. 609,000
1,000 Repap Wisconsin, 9.875%, 5/01/06 .................................... 1,020,000
1,000 Valcor Inc., 9.625%, 11/01/03. ...................................... 945,000
-----------
8,137,125
-----------
CONSUMER CYCLICALS -- 6.6%
500 Units AmeriKing, Inc., 13.00%, 12/01/08(A) ................................ 517,500
1,000 Finlay Fine Jewelry, 10.625%, 5/01/03 ............................... 1,045,000
1,000 Guitar Center Management, 11.00%, 7/01/06 ........................... 1,055,000
500 Hills Stores, 12.50%, 7/01/03 ....................................... 440,000
500 HMH Properties, 9.50%, 5/15/05 ...................................... 520,000
1,000 Specialty Retailer, 11.00%, 8/15/03 ................................. 1,030,000
-----------
4,607,500
-----------
CONSUMER NON-CYCLICALS -- 27.6%
1,000 Big V Supermarkets, 11.00%, 2/15/04 ................................. 930,000
1,000 Borg-Warner Security Corp., 9.125%, 5/01/03 ......................... 980,000
1,000 Carr-Gottstein Foods, 12.00%, 11/15/05 .............................. 1,067,500
750 Dade International Inc., 11.125%, 5/01/06 ........................... 813,750
500 Ekco Group Inc., 9.25%, 4/01/06 ..................................... 490,000
500 Fresenius Medical Care Capital Trust, 9.00%, 12/01/06 ............... 508,750
1,000 Hines Horticulture, 11.75%, 10/15/05 ................................ 1,070,000
500 Hollywood Casino, 12.75%, 11/01/03 .................................. 480,000
500 Imed Corp., 9.75%, 12/01/06# ........................................ 508,750
500 Iron Mountain Inc., 10.125%, 10/01/06 ............................... 528,750
750 Mettler Toledo Inc., 9.75%, 10/01/06 781,875
325 Muzak Limited Partnership, 10.00%, 10/01/03 ......................... 332,313
1,000 Norcal Waste Systems, 13.00%, 11/15/05* ............................. 1,105,000
500 Penn Traffic Co., 9.625%, 4/15/05 ................................... 280,000
500 Pierce Leahy Corp., 11.125%, 7/15/06 ................................ 546,250
1,000 Rayovac Corp., 10.25%, 11/01/06# .................................... 1,025,000
- ----------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 1
</TABLE>
<PAGE>
S A L O M O N B R O T H E R S H I G H I N C O M E F U N D I N C
Statement of Investments (continued)
December 31, 1996
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Corporate Bonds (continued) (Note 2)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
$1,000 Remington Product Co. LLC, 11.00%, 5/15/06 .......................... $ 855,000
1,000 Revlon Worldwide, Zero Coupon, 3/15/98 .............................. 860,000
1,000 Selmer Co. Inc., 11.00%, 5/15/05 .................................... 1,080,000
500 Smiths Food & Drug, 11.25%, 5/15/07 ................................. 552,500
1,000 Specialty Foods, 11.125%, 10/01/02 .................................. 950,000
500 Stroh Brewery, 11.10%, 7/01/06 ...................................... 521,875
1,000 Telex Communications, Inc., 12.00%, 7/15/04 ......................... 1,106,250
500 Trump Atlantic City Associates, 11.25%, 5/01/06 ..................... 495,000
500 Twin Laboratories Inc., 10.25%, 5/15/06 ............................. 515,000
1,000 Waterford Gaming LLC, 12.75%, 11/15/03# ............................. 1,047,500
-----------
19,431,063
-----------
ENERGY -- 4.2%
750 Benton Oil & Gas, 11.625%, 5/01/03 .................................. 830,625
500 Cliffs Drilling, 10.25%, 5/15/03 .................................... 531,875
500 Flores & Rucks, 9.75%, 10/01/06 ..................................... 530,000
1,000 National Energy Group, 10.75%, 11/01/06# ............................ 1,050,000
-----------
2,942,500
-----------
FINANCIAL -- 2.9%
500 Airplanes Pass Through Trust, 10.875%, 3/15/19 ...................... 555,625
1,000 Central Transport Rental, 9.50%, 4/30/03 ............................ 950,000
500 First Nationwide Bank, 10.625%, 10/01/03# ........................... 542,500
-----------
2,048,125
-----------
INDUSTRIAL/MANUFACTURING -- 10.7%
1,000 Alvey Systems, 11.375%, 1/31/03 ..................................... 1,042,500
1,000 Clark-Schwebel Inc., 10.50%, 4/15/06 ................................ 1,060,000
1,000 Exide Electronics Group, 11.50%, 3/15/06 ............................ 1,065,000
1,150 Foamex, 11.875%, 10/01/04 ........................................... 1,227,625
1,000 Jordan Industries, 10.375%, 8/01/03 ................................. 985,000
1,000 Terex Corporation, 13.25%, 5/15/02 .................................. 1,077,500
1,171 Venture Holdings Trust, 9.75%, 4/01/04 .............................. 1,077,320
-----------
7,534,945
-----------
MEDIA/TELECOMMUNICATIONS -- 14.9%
750 Adelphia Communications, 12.50%, 5/15/02 ............................ 768,750
1,000 Cablevision Systems Corp., 10.50%, 5/15/16 .......................... 1,032,500
- ----------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
Page 2
<PAGE>
S A L O M O N B R O T H E R S H I G H I N C O M E F U N D I N C
Statement of Investments (continued)
December 31, 1996
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Corporate Bonds (concluded) (Note 2)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Diamond Cable Co., Zero Coupon until 12/15/00
$2,000 (11.75% thereafter), 12/15/05 ........................................................... $ 1,440,000
3,000 Hollinger Inc., Zero Coupon Convertible Bond, 10/05/13 ...................................... 1,065,000
ICG Holdings, Zero Coupon until 9/15/00
1,500 (13.50% thereafter), 9/15/05 ............................................................ 1,057,500
International Cabletel Inc., Zero Coupon until 2/01/01
1,300 (11.50% thereafter), 2/01/06 ............................................................ 884,000
Marcus Cable Co., Zero Coupon until 6/15/00
1,250 (14.25% thereafter), 12/15/05 ........................................................... 882,812
People's Choice TV Corp., Zero Coupon until 6/01/00
250 Units (13.125% thereafter), 6/01/04(B) ........................................................ 107,500
1,000 SFX Broadcasting, 10.75%, 5/15/06 ........................................................... 1,055,000
1,500 United International Holdings, Zero Coupon, 11/15/99 ........................................ 1,065,000
500 Western Wireless Corp., 10.50%, 6/01/03 ..................................................... 523,750
Winstar Communications, Zero Coupon until 10/15/00
500 (14.00% thereafter), 10/15/05 ........................................................... 310,000
Winstar Communications, Convertible Bond, Zero Coupon until 10/15/00
500 (14.00% thereafter), 10/15/05# .......................................................... 315,000
-----------
10,506,812
-----------
TRANSPORTATION -- 2.2%
1,000 Petro PSC Properties, 12.50%, 6/01/02 ....................................................... 1,020,000
500 Ryder TRS Inc., 10.00%, 12/01/06# ........................................................... 518,750
-----------
1,538,750
-----------
Total Corporate Bonds (cost $54,358,846) .................................................... 56,746,820
-----------
Sovereign Bonds -- 14.6%
- --------------------------------------------------------------------------------------------------------------------------
1,470 Republic of Argentina, FRB, 6.625%, 3/31/05* ................................................ 1,281,656
832 Federal Republic of Brazil, C Bond, 8.00%, 4/15/14** ........................................ 614,744
1,250 Federal Republic of Brazil, NMB, Series L, 6.5625%, 4/15/09* ................................ 1,006,250
500 Republic of Bulgaria, Discount Bond, Tranche A, 6.6875%, 7/28/24* ........................... 284,063
1,000 Republic of Bulgaria, FLIRB, Series A, 2.25%, 7/28/12* ...................................... 384,375
1,300 Costa Rica, Principal Bond, Series A, 6.25%, 5/21/10 ........................................ 1,053,000
2,676 Republic of Ecuador, PDI Bond, 6.50%, 2/27/15*, ** .......................................... 1,645,683
1,750 United Mexican States, Par Bond, Series A, 6.25%, 12/31/19 (including 1,750,000 rights) ..... 1,284,062
2,000 Republic of Panama, IRB, 3.50%, 7/17/14* .................................................... 1,385,000
1,500 Republic of Venezuela, FLIRB, Series B, 6.4375%, 3/31/07* ................................... 1,335,000
-----------
Total Sovereign Bonds (cost $8,411,871) 10,273,833
-----------
- --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 3
</TABLE>
<PAGE>
S A L O M O N B R O T H E R S H I G H I N C O M E F U N D I N C
Statement of Investments (concluded)
December 31, 1996
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Loan Participation-- 2.7% (Note 2)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Kingdom of Morocco, Tranche A, 6.375%, 1/01/09*
$2,250 (Morgan Guaranty Trust Company of New York)+ (cost $1,423,124) .................. $ 1,856,250
-----------
Warrants & Rights++ -- .2%
- ------------------------------------------------------------------------------------------------------------------------
Exide Electronics Group (Exercise price of $13.475 per share expiring on 3/15/06.
1,000 Warrants Each warrant exercisable for 5.15 shares of common stock.) .......................... 30,000
In Flight Phone (Exercise price of $.01 per share expiring on 8/31/02. Each warrant
2,500 Warrants exercisable for one share of common stock.) .......................................... 0
Petro PSC Properties (Exercise price of $0 expiring on 7/01/97. Warrants are exchangeable
1,000 Warrants for $55,380 principal amount of Notes or an equivalent number of shares.) ............ 50,000
4,000 Rights Terex Corporation Stock Appreciation Rights ............................................. 9,000
United International Holdings (Exercise price of $15 per share expiring on 11/15/99.
2,875 Warrants Each warrant exercisable for 4.535 shares of common stock.) .......................... 57,500
-----------
Total Warrants & Rights (cost $108,830) ................................................. 146,500
-----------
Repurchase Agreement -- 1.0%
- ------------------------------------------------------------------------------------------------------------------------
Union Bank of Switzerland, 6.75%, cost $700,000, dated 12/31/96, $700,263 due
1/02/97, (collateralized by $608,000 U.S. Treasury Bonds, 8.125%, due 5/15/21,
$700 valued at $714,400) .................................................................. 700,000
-----------
Total Investments-- 99.2% (cost $65,002,671) ........................................... 69,723,403
-----------
Cash and Other Assets in Excess of Liabilities-- .8% .................................... 584,906
-----------
Net Assets -- 100.0%
(equivalent to $14.72 per share on 4,776,275 common shares outstanding) ................. $70,308,309
===========
<FN>
- --------------------------------------------------------------------------------------------------------------------------------
* Rate shown reflects rate in effect on December 31, 1996 on instrument with variable rate or step coupon rates.
** Payment-in-kind security for which part of the income earned is capitalized as additional principal.
# Pursuant to Rule 144A under the Securities Act of 1933, this security can only be sold to qualified institutional investors.
(A) Each unit is comprised of 40 shares of $25 par Senior Exchangeable Preferred Stock and one share of common stock.
(B) Each unit is comprised of a $1,000 par Senior Discount Note due 6/01/04 and a warrant to purchase 1.427 shares of
common stock.
+ Participation interest was acquired through the financial institution indicated parenthetically.
++ Non-income producing security.
FLIRB -- Front-Loaded Interest Reduction Bond.
FRB -- Floating Rate Bond.
IRB -- Interest Reduction Bond.
NMB -- New Money Bond.
PDI -- Past Due Interest.
</FN>
- --------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
Page 4
<PAGE>
S A L O M O N B R O T H E R S H I G H I N C O M E F U N D I N C
Statement of Assets and Liabilities
December 31, 1996
<TABLE>
<S> <C>
Assets
Investments, at value (cost-- $65,002,671) ................................................ $69,723,403
Cash ...................................................................................... 50,231
Interest receivable ....................................................................... 1,322,490
Unamortized organization expenses ......................................................... 26,100
-----------
Total assets .................................................................. 71,122,224
-----------
Liabilities
Payable for investments purchased ......................................................... 627,812
Accrued professional fees ................................................................. 101,324
Management fee payable to SBAM (Note 3) ................................................... 41,459
Accrued printing expense .................................................................. 21,061
Other accrued expenses .................................................................... 22,259
-----------
Total liabilities ............................................................. 813,915
-----------
Net Assets
Common Stock ($.001 par value,authorized 100,000,000 shares;4,776,275 shares outstanding).. 4,776
Additional paid-in capital ................................................................ 66,204,135
Undistributed net investment income ....................................................... 252
Accumulated net realized loss on investments .............................................. (621,586)
Net unrealized appreciation on investments ................................................ 4,720,732
-----------
Net assets .................................................................... $70,308,309
-----------
Net Asset Value Per Share ($70,308,309 d/b 4,776,275 shares) .............................. $14.72
-----------
- ---------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 5
</TABLE>
<PAGE>
S A L O M O N B R O T H E R S H I G H I N C O M E F U N D I N C
Statement of Operations
For the Year Ended December 31, 1996
Income
<TABLE>
<S> <C> <C>
Interest (includes discount accretion of $2,027,289) ................................... $ 8,030,292
Expenses
Management fee ............................................................... $470,729
Legal ........................................................................ 54,000
Audit and tax return preparation services .................................... 53,217
Directors' fees and expenses ................................................. 48,413
Printing ..................................................................... 43,718
Transfer Agent ............................................................... 43,351
Amortization of deferred organization costs................................... 24,372
Custodian..................................................................... 18,294
Other ........................................................................ 24,203 780,297
-------- -----------
Net investment income......................................................... 7,249,995
-----------
Net Realized and Unrealized Gain
Net Realized Gain on Investments........................................................ 1,605,972
Change in Net Unrealized Appreciation on Investments.................................... 4,163,849
-----------
Net realized gain and change in net unrealized appreciation ............................ 5,769,821
-----------
Net Increase in Net Assets from Operations.............................................. $13,019,816
-----------
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
Page 6
<PAGE>
S A L O M O N B R O T H E R S H I G H I N C O M E F U N D I N C
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations
Net investment income ....................................................... $ 7,249,995 $ 7,169,795
Net realized gain (loss) on investments...................................... 1,605,972 (2,227,558)
Change in net unrealized appreciation........................................ 4,163,849 5,513,516
----------- -----------
Net increase in net assets from operations .................................. 13,019,816 10,455,753
----------- -----------
Dividends
From net investment income .................................................. (7,249,743) (7,202,554)
From net realized gain....................................................... -- (317,263)
----------- -----------
Net decrease in net assets from dividends.................................... (7,249,743) (7,519,817)
----------- -----------
Capital Share Transactions
Proceeds from shares issued in reinvestment of dividends
(42,303 and 49,559 shares issued) ........................................ 607,460 650,559
----------- -----------
Total increase in net assets................................................. 6,377,533 3,586,495
Net Assets
Beginning of period.......................................................... 63,930,776 60,344,281
----------- -----------
End of period (includes undistributed net investment income of $252 and $0,
respectively) ............................................................ $70,308,309 $63,930,776
----------- -----------
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 7
</TABLE>
<PAGE>
S A L O M O N B R O T H E R S H I G H I N C O M E F U N D I N C
Notes to Financial Statements
Note 1. Organization
Salomon Brothers High Income Fund Inc (the "Fund") was incorporated in Maryland
on September 14, 1992 and is registered as a diversified, closed-end, management
investment company under the Investment Company Act of 1940, as amended. The
Fund commenced operations on January 29, 1993. The Salomon Brothers High Income
Fund Inc seeks to maintain a high level of current income by investing primarily
in a diversified portfolio of high-yield U.S. corporate debt securities and
high-yield foreign sovereign debt securities. As a secondary objective, the Fund
seeks capital appreciation.
Note 2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles
("GAAP"). The preparation of financial statements in accordance with GAAP
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual 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.
Page 8
<PAGE>
S A L O M O N B R O T H E R S H I G H I N C O M E F U N D I N C
Notes to Financial Statements (continued)
(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 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. During 1996, the
Fund utilized capital loss carryovers of $2,055,639 and incurred a post-October
net capital loss of $736,218 which is deemed to occur on January 1, 1997 for
federal income tax purposes.
(e) UNAMORTIZED ORGANIZATION EXPENSES. Organization expenses amounting to
$125,000 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.
(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 at all times during the term of the repurchase agreement to ensure that it
always 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 3. Management Fee and Other Transactions
The Fund has retained SBAM, an indirect wholly owned subsidiary of Salomon Inc,
to act as investment manager and administrator of the Fund subject to
supervision by the Board of Directors of the Fund. The management fee for these
services is payable monthly at an annual rate of 0.70% of the Fund's average
weekly net assets.
Certain officers and/or directors of the Fund are also officers and/or directors
of the investment manager and administrator.
The Fund pays each Director not affiliated with SBAM a fee of $5,000 per year,
plus a fee of $700 and reimbursement for travel and out-of-pocket expenses for
each board and committee meeting attended.
Page 9
<PAGE>
S A L O M O N B R O T H E R S H I G H I N C O M E F U N D I N C
Notes to Financial Statements (concluded)
Note 4. Portfolio Activity
Purchases and sales of investment securities, other than short-term investments,
for the year ended December 31, 1996, aggregated $72,409,048 and $72,394,817,
respectively. The federal income tax cost basis of the Fund's investments at
December 31, 1996 was substantially the same as the cost basis for financial
reporting. Gross unrealized appreciation and depreciation amounted to $5,357,208
and $636,476, respectively, resulting in net unrealized appreciation for federal
income tax purposes of $4,720,732.
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.
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 December 31, 1996
The Board of Directors of the Fund declared a common stock dividend from net
investment income of $0.125 per share payable on January 31, 1997 to
shareholders of record on January 14, 1997.
The Board of Directors of the Fund declared a common stock dividend from net
investment income of $0.125 per share payable on February 28, 1997 to
shareholders of record on February 19, 1997.
Page 10
<PAGE>
S A L O M O N B R O T H E R S H I G H I N C O M E F U N D I N C
Financial Highlights
Data for a share of capital stock outstanding throughout the period:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
1996 1995 1994 1993*
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.......... $13.50 $12.88 $15.59 $13.95
------ ------ ------ ------
Net investment income......................... 1.52 1.52 1.38 1.18
Net gain/(loss) on securities (both realized
and unrealized)............................ 1.22 .70 (2.32) 1.94
------ ------ ------ ------
Total from investment operations.............. 2.74 2.22 (0.94) 3.12
------ ------ ------ ------
Less distributions
Dividends from net investment income....... (1.52) (1.53) (1.39) (1.16)
Dividends from net realized gains.......... -- (.07) (0.38) (0.23)
------ ------ ------ ------
Total distributions. ......................... (1.52) (1.60) (1.77) (1.39)
------ ------ ------ ------
Offering costs on issuance of common stock.... -- -- -- (0.09)
------ ------ ------ ------
Net asset value, end of period................ $14.72 $13.50 $12.88 $15.59
------ ------ ------ ------
Per share market value, end of period......... $15.375 $14.125 $12.875 $15.875
------- ------- ------- -------
Total investment return based on market
price per share**.......................... 20.98% 23.83% (8.04%) 25.10%#
Ratios/supplemental data:
Net assets, end of period (000)............ $70,301 $63,931 $60,344 $72,495
Ratio of expenses to average net assets.... 1.16% 1.22% 1.13% 1.09%(a)
Ratio of net investment income to average
net assets............................... 10.76% 11.68% 9.91% 8.64%(a)
Portfolio turnover rate.................... 110.4% 128.2% 76.6% 49.6%
<FN>
- ----------------------------------------------------------------------------------------------------------------------
* For the period January 29, 1993 (commencement of investment operations) through December 31, 1993.
** 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.
# Return calculated based on beginning of period price of $13.95 (initial offering price of $15.00 less sales load of
$1.05) and end of period market value of $15.875 per share. The calculated return has not been annualized.
(a) Annualized.
</FN>
See accompanying notes to financial statements.
Page 11
</TABLE>
<PAGE>
S A L O M O N B R O T H E R S H I G H I N C O M E F U N D I N C
Report of Independent Accountants
To the Board of Directors and Shareholders of
Salomon Brothers High Income Fund Inc
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Salomon Brothers High Income
Fund Inc (the "Fund") at December 31, 1996, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended and the financial highlights for the periods indicated, 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 audits. We
conducted our audits 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
audits, which included confirmation of securities at December 31, 1996 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
February 14, 1997
Page 12
<PAGE>
S A L O M O N B R O T H E R S H I G H I N C O M E F U N D I N C
Selected Quarterly Financial Information
Summary of quarterly results of operations:
Net Realized Gain
(Loss) & Change
in Net Unrealized
Net Investment Appreciation
Income (Depreciation)
------------------ -----------------
Quarters Ended(a) Total Per Share Total Per Share
- --------------------------------------------------------------------------------
March 31, 1994 ..................... $1,589 $ .34 $(5,201) $ (1.12)
June 30, 1994. ..................... 1,578 .33 (1,684) (.35)
September 30, 1994 ................. 1,620 .35 (302) (.07)
December 31, 1994 .................. 1,702 .36 (3,666) (.78)
March 31, 1995 ..................... 1,829 .39 (1,529) (.33)
June 30, 1995 ...................... 1,789 .38 2,747 .59
September 30, 1995 ................. 1,746 .37 877 .19
December 31, 1995 .................. 1,806 .38 1,191 .25
March 31, 1996 ..................... 1,854 .39 1,617 .34
June 30, 1996....................... 1,838 .39 903 .19
September 30, 1996.................. 1,803 .38 2,315 .48
December 31, 1996................... 1,755 .36 935 .21
- --------------------------------------------------------------------------------
(a) Totals expressed in thousands of dollars except per share amounts.
See accompanying notes to financial statements.
Page 13
<PAGE>
S A L O M O N B R O T H E R S H I G H I N C O M E F U N D I N C
Other Information
Pursuant to certain rules of the Securities and Exchange Commission the
following additional disclosure is provided.
Pursuant to the Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan")
shareholders whose shares of Common Stock are registered in their own names will
be deemed to have elected to have all distributions automatically reinvested by
American Stock Transfer & Trust Company (the "Plan Agent") in Fund shares
pursuant to the Plan, unless such shareholders elect to receive distributions in
cash. Shareholders who elect to receive distributions in cash will receive all
distributions in cash paid by check in dollars mailed directly to the
shareholder by American Stock Transfer & Trust Company, as dividend paying
agent. In the case of shareholders, such as banks, brokers or nominees, that
hold shares for others who are beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
shareholders as representing the total amount registered in such shareholders'
names and held for the account of beneficial owners that have not elected to
receive distributions in cash. Investors that own shares registered in the name
of a bank, broker or other nominee should consult with such nominee as to
participation in the Plan through such nominee, and may be required to have
their shares registered in their own names in order to participate in the Plan.
The Plan Agent serves as agent for the shareholders in administering the Plan.
If the directors of the Fund declare an income dividend or a capital gains
distribution payable either in the Fund's Common Stock or in cash,
nonparticipants in the Plan will receive cash and participants in the Plan will
receive Common Stock, to be issued by the Fund or purchased by the Plan Agent in
the open market, as provided below. If the market price per share on the
valuation date equals or exceeds net asset value per share on that date, the
Fund will issue new shares to participants at net asset value; provided,
however, 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. The
valuation date will be the dividend or distribution payment date or, if that
date is not a New York Stock Exchange trading day, the next preceding trading
day. If net asset value exceeds the market price of Fund shares at such time, or
if the Fund should declare an income dividend or capital gains distribution
payable only in cash, the Plan Agent will, as agent for the participants, buy
Fund shares in the open market, on the New York Stock Exchange or elsewhere, for
the participants' accounts on, or shortly after, the payment date. If, before
the Plan Agent has completed its purchases, the market price exceeds the net
asset value of a Fund share, the average per share purchase price paid by the
Plan Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisition of fewer shares than if the distribution had been paid in shares
issued by the Fund on the dividend payment date. Because of the foregoing
difficulty with respect to open-market purchases, the Plan provides that if the
Plan Agent is unable to invest the full dividend amount in open-market purchases
during the purchase period or if the market discount shifts to a market premium
during the purchase period, the Plan Agent will cease making open-market
purchases and will
Page 14
<PAGE>
S A L O M O N B R O T H E R S H I G H I N C O M E F U N D I N C
Other Information (continued)
receive the uninvested portion of the dividend amount in newly issued shares at
the close of business on the last purchase date.
Participants have the option of making additional cash payments to the Plan
Agent, monthly, in a minimum amount of $250, for investment in the Fund's Common
Stock. The Plan Agent will use all such funds received from participants to
purchase Fund shares in the open market on or about the first business day of
each month. Any voluntary cash payments received more than 30 days prior to
these dates will be returned by the Plan Agent, and interest will not be paid on
any uninvested cash payments. To avoid unnecessary cash accumulations, and also
to allow ample time for receipt and processing by the Plan Agent, it is
suggested that participants send in voluntary cash payments to be received by
the Plan Agent approximately ten days before an applicable purchase date
specified above. A participant may withdraw a voluntary cash payment by written
notice, if the notice is received by the Plan Agent not less than 48 hours
before such payment is to be invested.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in an account, including information
needed by shareholders for personal and tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in the name of the
participant, and each shareholder's proxy will include those shares purchased
pursuant to the Plan.
There is no charge to participants for reinvesting dividends or capital gains
distributions or voluntary cash payments. The Plan Agent's fees for the
reinvestment of dividends and capital gains distributions and voluntary cash
payments will be paid by the Fund. There will be no brokerage charges with
respect to shares issued directly by the Fund as a result of dividends or
capital gains distributions payable either in stock or in cash. However, each
participant will pay a pro rata share of brokerage commissions incurred with
respect to the Plan Agent's open market purchases in connection with the
reinvestment of dividends and capital gains distributions and voluntary cash
payments made by the participant or any dividends or capital gains distributions
payable only in cash. Brokerage charges for purchasing small amounts of stock
for individual accounts through the Plan are expected to be less than the usual
brokerage charges for such transactions, because the Plan Agent will be
purchasing stock for all participants in blocks and prorating the lower
commission thus attainable.
The receipt of dividends and distributions under the Plan will not relieve
participants of any income tax which may be payable on such dividends or
distributions.
Participants may terminate their accounts under the Plan by notifying the Plan
Agent in writing. Such termination will be effective immediately if notice is
received by the Plan Agent not less than ten days prior to any dividend or
distribution record date. Upon termination, the Plan Agent will send the
participant a certificate for the full shares held in the account and a cash
adjustment for any fractional shares to be delivered to each shareholder without
charge.
Page 15
<PAGE>
S A L O M O N B R O T H E R S H I G H I N C O M E F U N D I N C
Other Information (concluded)
Experience under the Plan may indicate that changes in the Plan are desirable.
Accordingly, the Fund and the Plan Agent reserve the right to terminate the Plan
as applied to any voluntary cash payments made and any dividend or distribution
paid subsequent to notice of the termination sent to members of the Plan at
least 30 days before the record date for such dividend or distribution. The Plan
also may be amended by the Fund or the Plan Agent, but (except when necessary or
appropriate to comply with applicable law, rules or policies of a regulatory
authority) only by at least 30 days' written notice to participants in the Plan.
All correspondence concerning the Plan should be directed to the Plan Agent at
40 Wall Street, 46th floor, New York, New York 10005.
Page 16
<PAGE>
S A L O M O N B R O T H E R S H I G H I N C O M E F U N D I N C
(left column)
Directors
CHARLES F. BARBER
Consultant; formerly Chairman,
ASARCO Incorporated
THOMAS W. BROCK
Chairman and Chief
Executive Officer, Salomon
Brothers Asset Management Inc
DANIEL P. CRONIN
VICE President -- General Counsel,
Pfizer International Inc
ALLAN C. HAMILTON
Consultant, formerly
Vice President and
Treasurer, Exxon Corp.
MICHAEL S. HYLAND
Chairman and President;
Managing Director, Salomon Brothers Inc
President, Salomon Brothers
Asset Management 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
MICHAEL S. HYLAND
Chairman and President
PETER J. WILBY
Executive Vice President
LAWRENCE H. KAPLAN
Executive Vice President
and General Counsel
ALAN M. MANDEL
Treasurer
LAURIE A. PITTI
Assistant Treasurer
JENNIFER G. MUZZEY
Secretary
NOEL B. DAUGHERTY
Assistant Secretary
(right column)
Salomon Brothers High Income Fund Inc
7 World Trade Center
New York, New York 10048
TELEPHONE
1-800-725-6666
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
CUSTODIAN
The Chase Manhattan Bank, N.A.
Four Metrotech Center
Brooklyn, New York 11245
DIVIDEND DISBURSING AND TRANSFER AGENT
American Stock Transfer &Trust Company
40 Wall Street
New York, New York 10005
INDEPENDENT ACCOUNTANTS
Price Waterhouse 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
HIF
<PAGE>
(left column)
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
---------------------
BULK RATE
U.S. POSTAGE
PAID
STATEN ISLAND, NY
PERMIT No. 169
---------------------
(right column)
Salomon Brothers
High Income Fund Inc
Annual Report
DECEMBER 31, 1996
- ------------------------------------------------
Salomon Brothers Asset Management
---------------------------------------------
