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 23, 1998
Dear Shareholders:
For the year ended December 31, 1997, the Salomon Brothers High Income Fund Inc
(the "Fund") returned 15.34% based on net asset value per share. This return
assumes the reinvestment of dividends in additional shares of the Fund and
compares with an increase of 13.19% for the Salomon Brothers High-Yield Market
Index.
The net asset value of the Fund decreased from $15.08 on June 30, 1997 to
$14.92 per share onDecember 31, 1997. Dividends of $1.19 per share were declared
during this period. Assuming reinvestment of these dividends in additional
shares of the Fund, the net asset value return for the six months ended December
31, 1997 was 7.03%. In comparison, the Salomon Brothers High-Yield Market Index
returned 8.14% during the same period.
U.S. high-yield investments accounted for approximately 81% of total long-term
investments at December 31, 1997. The balance of the portfolio was principally
invested in emerging markets debt.
Market Review
The traditional U.S. corporate high-yield market benefited from the
near-perfect economic conditions that prevailed in the United States in 1997:
the combination of solid economic growth with virtually no inflation.
The U.S. corporate high-yield market posted a strong performance, buoyed by both
fundamental and technical factors. The combination of solid economic growth, low
inflation and continued accessibility of the equity markets in the United States
served to improve credit quality among a broad spectrum of issuers. These
factors contributed to a default loss experience well below historical norms in
the market. The strong high-yield market conditions caused new issue financing
to exceed previous record levels by a substantial amount. Nevertheless, the
heavy flow of new issues was easily absorbed. Mutual fund cash inflows continued
at a healthy pace. Traditional institutional investor demand for the market grew
and increased its share of investment through additional asset allocation. The
securitization of the market through collateralized bond obligations also
augmented demand. And, despite some widening of yield spreads in March, April
and October, spreads generally contracted for the year.
Within the traditional U.S. high-yield market, the strong performance in 1997
was recorded by the media sector, which represents over 30% of the market. It
includes cable television and other broadcasters, telecommunications companies
and print media. The media sector of the Salomon Brothers High-Yield Market
Index was up approximately 15%. The outperformance in this sector came as a
result of strong fundamentals in the industry as well as a burst of
consolidation in traditional media outlets following new industry legislation
passed in 1996.
The weakest performance during the year was recorded by the broad manufacturing
sector, which returned 11% for the year. Broad manufacturing was dragged down by
the automotive supply group, which returned 5.9%. The bankruptcy of Harvard
Industries, a significant issuer in that sector, which was not owned by the
Fund, contributed to these poor results.
Throughout most of 1997, emerging debt markets benefited from favorable market
conditions, attractive yields and positive economic and political settings in
many key countries. In the fourth quarter, however, the markets fell prey to the
dramatic global market sell-off that was sparked by the
<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
turmoil in Asia. The instability of financial markets around the world --
notably the U.S. and Hong Kong -- contributed to the significant pickup in
volatility among emerging markets. Indeed, yield spreads over U.S. Treasuries
widened to as much as 825 basis points at the market's low point in October. At
year end, the yield spread settled at around 500 basis points above U.S.
Treasuries.
Highlights
Salomon Brothers High Income Fund's performance was in line with the U.S.
high-yield market for 1997. The Fund's return was derived with an exposure to
emerging markets debt that ranged from 13-21% of the portfolio for the year.
Within the U.S. high-yield portion of the Fund, our largest weightings during
1997 were in consumer non-cyclicals (ranging from 27-31%), media (ranging from
16-25%) and manufacturing industries (ranging from 11-17%). Another key industry
weighting was in the energy sector which increased from 5% at the beginning of
the year to 9% as of year end. U.S. credit quality was maintained in the
single-B range to take advantage of the strong U.S. economic environment. In
emerging markets, we focused on U.S. dollar-denominated debt, principally
sovereign debt of Latin American and Eastern European issuers. Our focus was on
searching for individual credit quality improvements while emphasizing the
double-B credit quality sector.
Outlook
Our outlook for the domestic U.S. high-yield market is positive for 1998. Even
though there is the possibility of a slowing of economic growth in the U.S. if
the spillover effect from Asian economic turmoil is strong, we believe that
overall credit quality will remain stable. We are likely to continue our current
process of moving our portfolio away from industries and companies which will be
subject to increased competition from Asian exports. As a result of the Asian
turmoil, we expect to see the continuation of heightened currency volatility,
and further corporate bankruptcies are expected to develop in several nations.
These factors will likely keep the entire emerging markets debt market tenuous
for the time being. We do believe that non-Asian emerging debt represents a
strong long-term value at current levels and will maintain an exposure to it.
Special Shareholders Meeting
The Fund held a special shareholders meeting on January 15, 1998. At the
meeting, shareholders approved a new investment management agreement between
Salomon Brothers Asset Management Inc ("SBAM") and the Fund. Approval of the
agreement was necessary due to the merger of Salomon Inc, which had been the
ultimate parent company of SBAM, with and into Smith Barney Holdings Inc., a
subsidiary of Travelers Group Inc., which occurred on November 28, 1997.
Travelers is now the ultimate parent company of SBAM. The following table
provides information concerning the matter voted on at the meeting:
1. Approval of a new investment management agreement between SBAM and the Fund.
Votes For Votes Against Votes Abstained
--------- ------------ --------------
4,271,909 56,093 56,398
* * *
<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
In response to recent amendments to Maryland corporate law, the Board of
Directors recently reviewed various corporate governance provisions in the
Fund's By-Laws and approved amendments to the Fund's By-Laws to (1) increase the
percentage of stockholder voting power that is required to call a special
meeting of its stockholders to a majority of the votes entitled to be cast at
the meeting and (2) reduce the minimum permissible board committee size to one
director.
In a continuing effort to provide timely information concerning the Fund,
shareholders may call 1-888-777-0102 (a toll free number), Monday through
Friday from 8:00 am to 6:00 pm EST for the Fund's net asset value, market price
and other information regarding the Fund's portfolio holdings and allocations.
For information concerning your Salomon Brothers High Income Fund stock account
or for information regarding the Fund's Dividend Reinvestment Plan, 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).
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 future years.
Cordially,
/s/ Michael S. Hyland
MICHAEL S. HYLAND
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, 1997
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Corporate Bonds-- 78.6% (Note 2)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
BASIC INDUSTRIES -- 8.4%
$ 500 AEI Holding Company, 10.00%, 11/15/07#................................... $ 515,000
500 Algoma Steel Inc., 12.375%, 7/15/05...................................... 580,000
1,000 Berry Plastics, 12.25%, 4/15/04 1,107,500
500 Doman Industries Limited, 9.25%, 11/15/07# 485,000
500 Envirosource Inc., 9.75%, 6/15/03# 502,500
1,000 Glencore Nickel, 9.00%, 12/01/14# 997,500
750 Radnor Holdings, 10.00%, 12/01/03 781,875
500,000 Units Stone Container Corp., 12.25%, 4/01/02(A) 506,250
500 Tekni-Plex Inc., 11.25%, 4/01/07 540,000
-----------
6,015,625
-----------
CONSUMER CYCLICALS -- 2.5%
1,000 Pillowtex Corp., 9.00%, 12/15/07#........................................ 1,025,000
750 HMH Properties Inc., 8.875%, 7/15/07..................................... 787,500
-----------
1,812,500
-----------
CONSUMER NON-CYCLICALS -- 22.4%
500 Alaris Medical Systems, Inc., 9.75%, 12/01/06............................ 526,250
1,000 Ameriserve Food Company, 10.125%, 7/15/07................................ 1,040,000
1,000 B&G Foods Inc., 9.625%, 8/01/07#......................................... 1,007,500
1,000 Carr-Gottstein Foods Co., 12.00%, 11/15/05............................... 1,110,000
1,500 CLN Holdings, Inc., Zero Coupon, 5/15/01................................. 907,500
750 Dade International Inc., 11.125%, 5/01/06................................ 834,375
500 Fresenius Medical Care Capital Trust, 9.00%, 12/01/06.................... 525,000
1,000 Hines Horticulture, 11.75%, 10/15/05..................................... 1,095,000
1,000 Imagyn Medical Technologies, 12.50%, 4/01/04............................. 952,500
1,000 Integrated Health Services, 9.25%, 1/15/08#.............................. 1,020,000
1,000 North Atlantic Trading, 11.00%, 6/15/04.................................. 1,050,000
1,000 Pueblo XTRA International, 9.50%, 8/01/03................................ 955,000
649 Rayovac Corp., 10.25%, 11/01/06.......................................... 710,655
1,500 Revlon Worldwide, Zero Coupon, 3/15/01................................... 1,046,250
750 Riddell Sports Inc., 10.50%, 7/15/07..................................... 774,375
500 Selmer Co. Inc., 11.00%, 5/15/05......................................... 547,500
500 Stroh Brewery, 11.10%, 7/01/06........................................... 452,500
500 Sun International Hotels, 9.00%, 3/15/07................................. 516,250
946 Waterford Gaming LLC, 12.75%, 11/15/03................................... 1,045,330
-----------
16,115,985
-----------
- ---------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 4
</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, 1997
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Corporate Bonds (continued) (Note 2)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY -- 7.0%
$ 500 Benton Oil & Gas, 11.625%, 5/01/03....................................... $ 551,250
500 Cliffs Drilling, 10.25%, 5/15/03......................................... 540,000
500 Dailey International Inc., 9.75%, 8/15/07#............................... 527,500
400 Dawson Product Services, 9.375%, 2/01/07................................. 423,500
1,000 National Energy Group, 10.75%, 11/01/06.................................. 1,037,500
500 Snyder Oil Corp., 8.75%, 6/15/07......................................... 503,125
TransAmerican Energy, Zero Coupon until 6/15/99
500 (13.00% thereafter), 6/15/02#.......................................... 403,750
1,000 United Refining, 10.75%, 6/15/07#........................................ 1,030,000
-----------
5,016,625
----------
FINANCIAL -- 0.8%
500 Airplanes Pass Through Trust, 10.875%, 3/15/19........................... 561,250
-----------
INDUSTRIAL/MANUFACTURING -- 13.1%
500 Alvey Systems, 11.375%, 1/31/03.......................................... 545,000
750 Axiohm Transaction Solution, 9.75%, 10/01/07#............................ 761,250
500 Burke Industries Inc., 10.00%, 8/15/07#.................................. 516,250
1,000 Clark-Schwebel Inc., 10.50%, 4/15/06..................................... 1,095,000
1,000 Foamex L.P., 9.875%, 6/15/07............................................. 1,025,000
500 HCC Industries, 10.75%, 5/15/07.......................................... 521,250
1,000 International Knife & Saw Inc., 11.375%, 11/15/06........................ 1,085,000
1,000 Motors & Gears, Inc., 10.75%, 11/15/06#.................................. 1,075,000
1,000 Talley Mfg. & Technology, 10.75%, 10/15/03............................... 1,065,000
667 Terex Corporation, 13.25%, 5/15/02....................................... 753,710
750 Venture Holdings Trust, 9.75%, 4/01/04................................... 746,250
250 Venture Holdings Trust, 9.50%, 7/01/05................................... 252,500
-----------
9,441,210
-----------
MEDIA/TELECOMMUNICATIONS -- 18.9%
550 Adelphia Communications, 9.875%, 3/01/07................................. 578,875
450 Adelphia Communications, 9.25%, 10/01/02................................. 459,000
1,000 Cablevision Systems Corp., 10.50%, 5/15/16............................... 1,165,000
1,000 Cinemark USA Inc., 9.625%, 8/01/08....................................... 1,042,500
Diamond Cable Co., Zero Coupon until 12/15/00
1,000 (11.75% thereafter), 12/15/05.......................................... 777,500
- ---------------------------------------------------------------------------------------------------------
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 Investments (continued)
December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Corporate Bonds (concluded) (Note 2)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
$3,000 Hollinger Inc., Convertible Bond, Zero Coupon, 10/05/13.................. $ 1,166,250
ICG Holdings, Zero Coupon until 9/15/00
1,500 (13.50% thereafter), 9/15/05........................................... 1,231,875
Intermedia Communication of Florida, Zero Coupon until 7/15/02
1,500 (11.25% thereafter), 7/15/07........................................... 1,091,250
Marcus Cable Co., Zero Coupon until 6/15/00
1,250 (14.25% thereafter), 12/15/05 ......................................... 1,081,250
Nextel Communications, Zero Coupon until 2/15/99
750 (9.75% thereafter), 8/15/04............................................ 667,500
NTL Inc., Zero Coupon until 2/01/01
1,300 (11.50% thereafter), 2/01/06........................................... 1,020,500
500 Perry Judd, 10.625%, 12/15/07#........................................... 515,000
1,000 SFX Broadcasting, 10.75%, 5/15/06........................................ 1,097,500
500 Transwestern Publishing, 9.625%, 11/15/07#............................... 521,250
1,500 United International Holdings, Zero Coupon, 11/15/99..................... 1,230,000
-----------
13,645,250
-----------
SERVICES/OTHER -- 2.6%
Allied Waste Industries, Zero Coupon until 6/01/02
1,500 (11.30% thereafter), 6/01/07........................................... 1,042,500
250 Loomis Fargo & Co., 10.00%, 1/15/04...................................... 257,500
500 Norcal Waste Systems, 13.50%, 11/15/05*.................................. 580,000
-----------
1,880,000
-----------
TECHNOLOGY/ELECTRONICS -- 0.6%
400 Amphenol Corp., 9.875%, 5/15/07.......................................... 422,000
-----------
TRANSPORTATION -- 1.2%
850 Ryder TRS Inc., 10.00%, 12/01/06 ........................................ 854,250
-----------
UTILITIES -- 1.1%
750 AESCorp., 10.25%, 7/15/06 ............................................... 819,375
-----------
Total Corporate Bonds (cost $53,864,106)................................ 56,584,070
-----------
- ---------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 6
</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, 1997
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Sovereign Bonds-- 13.6% (Note 2)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
$1,440 Republic of Argentina, FRB, Series L, 6.6875%, 3/31/05*................. $ 1,287,000
1,953 Federal Republic of Brazil, C Bond, 8.00%, 4/15/14**.................... 1,537,802
785 Federal Republic of Brazil, IDU Bond, Series A, 6.8125%, 1/01/01*....... 748,694
2,000 Republic of Bulgaria, FLIRB, Series A, 2.25%, 7/28/12*.................. 1,220,000
500 Republic of Bulgaria, Discount Bond, Tranche A, 6.6875%, 7/28/24*....... 385,000
1,300 Costa Rica, Principal Bond, Series A, 6.25%, 5/21/10.................... 1,131,000
2,767 Republic of Ecuador, PDI Bond, 6.6875%, 2/27/15*,**..................... 1,815,729
500 Republic of Panama, IRB, 3.75%, 7/17/14*................................ 382,500
1,000 Republic of Peru, PDI Bond, 4.00%, 3/07/17*............................. 657,500
6 Russia, IAN, 6.71875%, 12/15/15*........................................ 4,213
679 Republic of Venezuela, FLIRB, Series B, 6.75%, 3/31/07*................. 609,018
-----------
Total Sovereign Bonds (cost $8,278,752)................................. 9,778,456
-----------
Loan Participations -- 5.3%
- ---------------------------------------------------------------------------------------------------------
The People's Democratic Republic of Algeria,
1,000 Tranche A, 7.00%, 9/04/06* (Chase Manhattan)+......................... 818,750
Kingdom of Morocco, Tranche A, 6.65625%, 1/01/09*.......................
2,000 (Morgan Guaranty Trust Company of New York)+.......................... 1,735,625
2,000 Russia, Principal Loan, 6.71875%, 12/15/20* (JP Morgan)+, (B).......... 1,230,923
-----------
Total Loan Participations (cost $3,564,877)............................. 3,785,298
-----------
Common Stock -- 0.0%
- ---------------------------------------------------------------------------------------------------------
500 Shares AmeriKing, Inc. (cost $22,000).............................................. 25,000
-----------
Warrants & Rights++ -- 0.1%
- ---------------------------------------------------------------------------------------------------------
In Flight Phone (Exercise price of $.01 per share expiring on 8/31/02.
2,500 Warrants Each warrant exercisable for one share of common stock.).............. 0
4,000 Rights Terex Corporation Stock Appreciation Rights ............................ 52,000
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.)........... 34,500
1,000 Warrants Urohealth Systems (Exercise price of $9.50 per common share expiring
on 4/01/04.).......................................................... 2,500
-----------
Total Warrants & Rights (cost $78,595) ................................. 89,000
-----------
- ---------------------------------------------------------------------------------------------------------
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
Statement of Investments (concluded)
December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Repurchase Agreement-- 2.6% (Note 2)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Merrill Lynch, 6.60%, cost $1,839,000, dated 12/31/97, $1,839,674
due 1/02/98, (collateralized by $1,795,000 U.S. Treasury
Notes, 6.50%, due 8/31/01,
$1,839 valued at $1,878,018)............................................... $ 1,839,000
------------
Total Investments-- 100.2% (cost $67,647,330).......................... 72,100,824
------------
Liabilities in Excess of Cash and Other Assets--(0.2%).................. (149,931)
------------
Net Assets -- 100.0%
(equivalent to $14.92 per share on 4,823,805 common shares outstanding) $ 71,950,893
============
<FN>
- ---------------------------------------------------------------------------------------------------------
* Rate shown reflects rate in effect on December 31, 1997 on instrument with
variable rate or step coupon rates.
** Payment-in-kind security for which all or 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 a $1 par 10.75% Senior Debenture Note due 4/01/02 and
a 1.50% Supplemental Interest Certificate.
(B) Portion of income earned is capitalized as Russia Interest in Arrears
Notes.
+ Participation interest was acquired through the financial institution
indicated parenthetically.
++ Non-income producing security.
FLIRB -- Front-Loaded Interest Reduction Bond.
FRB -- Floating Rate Bond.
IAN -- Interest in Arrears Notes.
IDU -- Interest Due and Unpaid.
IRB -- Interest Reduction Bond.
PDI -- Past Due Interest.
</FN>
- ---------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 8
</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 Assets and Liabilities
December 31, 1997
<TABLE>
<S> <C>
Assets
Investments, at value (cost -- $67,647,330) .............................................. $72,100,824
Cash...................................................................................... 50,508
Interest receivable ...................................................................... 1,144,228
Unamortized organization expenses (Note 2)................................................ 1,795
Prepaid expenses.......................................................................... 417
----------
Total assets........................................................................ 73,297,772
----------
Liabilities
Payable for investments purchased......................................................... 1,197,500
Accrued professional fees ................................................................ 78,821
Management fee payable to the Investment Manager (Note 3)................................. 43,276
Accrued printing expense.................................................................. 15,120
Other accrued expenses.................................................................... 12,162
-----------
Total liabilities................................................................... 1,346,879
-----------
Net Assets
Common Stock ($.001 par value, authorized 100,000,000 shares; 4,823,805 shares outstanding) 4,824
Additional paid-in capital................................................................ 66,946,521
Undistributed net investment income....................................................... 6,598
Accumulated net realized gain on investments.............................................. 539,456
Net Unrealized appreciation on investments................................................ 4,453,494
-----------
Net assets.......................................................................... $71,950,893
-----------
Net Asset Value Per Share ($71,950,893 / 4,823,805 shares)................................ $14.92
-----------
- ---------------------------------------------------------------------------------------------------------
Page 9
See accompanying notes to financial statements.
</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, 1997
<TABLE>
<S> <C> <C>
Income
Interest (includes discount accretion of $1,706,514) ................................... $ 7,653,923
Expenses
Management fee ............................................................... $504,358
Audit and tax return preparation services .................................... 60,999
Legal ........................................................................ 50,000
Directors' fees and expenses ................................................. 43,001
Transfer Agent ............................................................... 34,001
Printing ..................................................................... 25,000
Amortization of deferred organization costs (Note 2).......................... 24,305
Custodian..................................................................... 20,002
Other ........................................................................ 30,192 791,858
-------- -----------
Net investment income......................................................... 6,862,065
-----------
Net Realized and Unrealized Gain on Investments
Net realized gain on investments........................................................ 3,611,923
Change in net unrealized appreciation on investments.................................... (267,238)
-----------
Net realized gain and change in net unrealized appreciation ............................ 3,344,685
-----------
Net Increase in Net Assets from Operations.............................................. $10,206,750
-----------
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 10
</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 Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations
Net investment income ............................................... $ 6,862,065 $ 7,249,995
Net realized gain on investments.................................... 3,611,923 1,605,972
Change in net unrealized appreciation................................ (267,238) 4,163,849
----------- -----------
Net increase in net assets from operations .......................... 10,206,750 13,019,816
----------- -----------
Dividends and Distributions
From net investment income .......................................... (6,853,996) (7,249,743)
From net realized gain............................................... (2,452,604) --
----------- -----------
(9,306,600) (7,249,743)
----------- -----------
Capital Share Transactions
Proceeds from shares issued in reinvestment of dividends
(47,530 and 42,303 shares issued) ............................ 742,434 607,460
----------- -----------
Total increase in net assets......................................... 1,642,584 6,377,533
Net Assets
Beginning of period.................................................. 70,308,309 63,930,776
----------- -----------
End of period (includes undistributed net investment income of $6,598 and
$252, respectively).......................................... $71,950,893 $70,308,309
----------- -----------
- -----------------------------------------------------------------------------------------------------------------
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
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 Fund 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 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
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.
(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 during the term of the repurchase agreement to ensure that it equals or
exceeds the repurchase price. In the event of default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
Note 3. Management Fee and Other Transactions
The Fund has entered into an investment management and administration agreement
with Salomon Brothers Asset Management Inc (the "Investment Manager"), an
indirect wholly-owned subsidiary of Travelers Group Inc. ("Travelers"), pursuant
to which the Investment Manager provides investment advisory and administrative
services 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 and is responsible for day-to-day administration 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. The agreement with the
Investment Manager was most recently approved by shareholders at a special
meeting held on January 15, 1998. Approval of the agreement was necessary due to
the merger of Salomon Inc, which had been the ultimate parent company of the
Investment Manager, with and into Smith Barney Holdings Inc., a subsidiary of
Travelers, which occurred on November 28, 1997. Travelers is now the ultimate
parent company of the Investment Manager.
Certain officers and/or directors of the Fund are also officers and/or directors
of the investment manager.
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
Notes to Financial Statements (concluded)
The Fund pays each Director not affiliated with the Investment Manager 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.
Note 4. Portfolio Activity
Purchases and sales of investment securities, other than short-term investments,
for the year ended December 31, 1997, aggregated $78,214,035 and $82,082,142,
respectively. The federal income tax cost basis of the Fund's investments at
December 31, 1997 was substantially the same as the cost basis for financial
reporting. Gross unrealized appreciation and depreciation amounted to $4,811,525
and $358,031, respectively, resulting in net unrealized appreciation for federal
income tax purposes of $4,453,494.
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, 1997
The Board of Directors of the Fund declared a common stock dividend from net
investment income of $0.125 per share payable on January 30, 1998 to
shareholders of record on January 13, 1998.
The Board of Directors of the Fund declared a common stock dividend from net
investment income of $0.125 per share payable on February 27, 1998 to
shareholders of record on February 18, 1998.
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
Financial Highlights
Data for a share of capital stock outstanding throughout the period:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31,
1997 1996 1995 1994 1993*
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 14.72 $ 13.50 $ 12.88 $ 15.59 $ 13.95
------- ------- ------- ------- -------
Net investment income............... 1.43 1.52 1.52 1.38 1.18
Net gain/(loss) on securities (both
realized and unrealized)......... .71 1.22 .70 (2.32) 1.94
------- ------- ------- ------- -------
Total from investment operations.... 2.14 2.74 2.22 (0.94) 3.12
------- ------- ------- ------- -------
Less distributions
Dividends from net investment
income......................... (1.43) (1.52) (1.53) (1.39) (1.16)
Dividends from net realized gains (.51) -- (.07) (0.38) (0.23)
------- ------- ------- ------- -------
Total distributions................. (1.94) (1.52) (1.60) (1.77) (1.39)
------- ------- ------- ------- -------
Offering costs on issuance of common
stock.......................... -- -- -- -- (0.09)
------- ------- ------- ------- -------
Net asset value, end of period...... $ 14.92 $ 14.72 $ 13.50 $ 12.88 $ 15.59
------- ------- ------- ------- -------
Per share market value, end of period $16.438 $15.375 $14.125 $12.875 $15.875
------- ------- ------- ------- -------
Total investment return based on
market price per share**......... 20.93% 20.98% 23.83% (8.04%) 25.10%#
Ratios/supplemental data:
Net assets, end of period (000).. $71,951 $70,301 $63,931 $60,344 $72,495
Ratio of expenses to average
net assets..................... 1.10% 1.16% 1.22% 1.13% 1.09%(a)
Ratio of net investment income to
average net assets............. 9.53% 10.76% 11.68% 9.91% 8.64%(a)
Portfolio turnover rate.......... 112.2% 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 15
</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, 1997, 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, 1997 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
February 23, 1998
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
Selected Quarterly Financial Information (unaudited)
Summary of quarterly results of operations:
<TABLE>
<CAPTION>
Net Realized Gain
(Loss) & Change
in Net Unrealized
Net Investment Appreciation
Income (Depreciation)
------------------ ---------------------
Quarters Ended(a) Total Per Share Total Per Share
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
March 31, 1997............................................... 1,708 .35 (565) (.11)
June 30, 1997................................................ 1,724 .36 2,447 .51
September 30, 1997........................................... 1,713 .36 1,569 .33
December 31, 1997............................................ 1,717 .36 (106) (.02)
<FN>
- ---------------------------------------------------------------------------------------------------------------
(a) Totals expressed in thousands of dollars except per share amounts.
</FN>
See accompanying notes to financial statements.
Page 17
</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
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 18
<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 19
<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.
1997 Federal Tax Notice (unaudited)
For the year ended December 31, 1997, the Fund distributed long-term capital
gains totaling $1,658,944 consisting of $1,539,219 20% long-term capital gain
distribution and $119,725 of 28% long-term capital gain distribution.
Page 20
<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
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
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
President
PETER J. WILBY
Executive Vice President
BETH A. SEMMEL
Executive Vice President
THOMAS K. FLANAGAN
Executive Vice President
JAMES E. CRAIGE
Executive Vice President
MAUREEN O'CALLAGHAN
Executive Vice President
ALAN M. MANDEL
Treasurer
LAURIE A. PITTI
Assistant Treasurer
NOEL B. DAUGHERTY
Secretary
JENNIFER G. MUZZEY
Assistant Secretary
Salomon Brothers High Income Fund 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
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>
Salomon Brothers
High Income Fund Inc
Annual Report
DECEMBER 31, 1997
- --------------------------------------------
Salomon Brothers Asset Management
--------------------------------------------------
<PAGE>
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
BULK RATE
U.S. POSTAGE
PAID
STATENISLAND, NY
PERMIT No. 169
