UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-8709
Salomon Brothers High Income Fund II Inc.
(Exact name of registrant as specified in charter)
125 Broad Street, New York, NY 10004
(Address of principal executive offices) (Zip code)
Robert I. Frenkel, Esq.
Salomon Brothers Asset Management Inc
300 First Stamford Place
Stamford, CT 06902
(Name and address of agent for service)
Registrant's telephone number, including area code: (800) 725-6666
Date of fiscal year end: April 30
Date of reporting period: October 31, 2003
ITEM 1. REPORT TO STOCKHOLDERS.
The Semi-Annual Report to Stockholders is filed herewith.
[GRAPHIC]
SALOMON BROTHERS
HIGH INCOME FUND II INC.
SEMI-ANNUAL REPORT
October 31, 2003
[LOGO] SALOMON BROTHERS
Asset Management
PFPC Inc.
P.O. Box 8030
Boston, MA 02266-8030
HIXSEMI 10/03
03-5815
SALOMON BROTHERS HIGH INCOME FUND II INC.
LETTER FROM THE CHAIRMAN
[PHOTO]
R. Jay Gerken
R. Jay Gerken, CFA
Chairman
Dear Shareholder,
I am gratified to report that the Salomon Brothers High Income Fund II Inc.
performed well during the six months ended October 31, 2003, based on both its
market price return of 13.16% and its net asset value ("NAV")/i/ return of
12.81%, the fund outperformed the unmanaged Citigroup High-Yield Market
Index,/ii/ which returned 8.84% for the same period. In comparison, the fund's
Lipper peer group of high current yield (leveraged) closed-end funds generated
an average return of 13.16% over the six months./iii/ Please note that Lipper
peer group performance is based on each fund's NAV.
During the six months, the fund distributed dividends to shareholders totaling
$0.69 per share. The table below shows the six-month total return based on the
fund's October 31, 2003 NAV per share and its New York Stock Exchange ("NYSE")
closing price. Past performance is not indicative of future results.
FUND PERFORMANCE AS OF OCTOBER 31, 2003
Six-Month
Total
Price Per Share Return
---------------- ---------
$11.02 (NAV) 12.81%
---------------- ---------
$12.40 (NYSE) 13.16%
Total returns are based on changes in NAV or the market price, respectively.
Total return assumes the reinvestment of all dividends and/or capital gains
distributions in additional shares.
The market rally in U.S. high-yield and emerging market debt securities early
in the period came to a halt over the summer, as the sharp rise in U.S.
Treasury bond yields exerted pressure on bond markets. However, declining
default rates and an improved corporate earnings environment led the market to
advance again through the end of October. The U.S. high-yield corporate bond
market is typically more closely linked to the strength of corporate balance
sheets than to interest rates. Performance was also driven, in part, by an
improvement in fundamentals within specific emerging market countries -
particularly the strong returns in Latin America - as well as by an increase in
investors' appetite for higher-yielding international investment alternatives.
SALOMON BROTHERS HIGH INCOME FUND II INC.
Factors Influencing Fund Performance
During the six months, in terms of its U.S. bond holdings, the fund benefited
from its overweighting in the aerospace, cable/media, and communications towers
sectors and by its underweighting in the leisure, metals/mining, paper/forest
products, and restaurant sectors. The fund was adversely affected by its
underweighting in bonds rated CCC and in the airlines sector and by its
overweighting in the chemicals sector. The fund increased its exposure to
issues with CCC credit ratings and added to its positions in the cable/media,
communications towers, and energy sectors, while reducing its holdings in the
metals/mining, paper/forest products, and technology sectors during the period.
Within the fund's emerging markets debt component, the fund's performance was
positively impacted by its overweighted exposure to Brazilian and Ecuadorian
debt. The fund's performance was also positively impacted by the use of
leverage./iv/ The fund's underweighted position in Venezuelan and Turkish debt
detracted from its relative performance during the period.
Especially in this environment of four-decade-low money market yields,
higher-yielding bonds in U.S. and emerging markets may seem appealing.
Remember, however, that higher-yield bonds carry more credit risk than
investment-grade issues, and international issues are subject to economic,
political and currency risks. These additional risks are reasons why it is
critical to perform a thorough analysis before carefully choosing these bonds.
In our opinion, this is all the more reason why investing in high-yield bonds
with a professional fund manager is a more prudent strategy than buying these
bonds directly. Fund managers can provide the diversification and thorough
credit analysis that is an important part of managing risk.
Looking for Additional Information?
The fund is traded under the symbol "HIX" and its closing market price is
available in most newspapers under the New York Stock Exchange listings. The
daily NAV is available online under symbol XHIXX. Barron's and The Wall Street
Journal's Monday editions carry closed-end fund tables that will provide
additional information. In addition, the fund issues a quarterly allocation
press release that can be found on most major financial web sites.
In a continuing effort to provide information concerning the fund, shareholders
may call 1-888-777-0102 or 1-800-SALOMON (toll free), Monday through Friday
from 8:00 a.m. to 6:00 p.m. Eastern Time (ET), for the fund's current NAV,
market price and other information regarding the fund's portfolio holdings and
allocations.
SALOMON BROTHERS HIGH INCOME FUND II INC.
As always, thank you for entrusting your assets to us. We look forward to
helping you continue to seek to meet your financial goals.
Sincerely,
/s/ R. Jay Gerken
R. Jay Gerken, CFA
Chairman
November 19, 2003
The information provided is not intended to be a forecast of future events, a
guarantee of future results or investment advice. Views expressed may differ
from those of the firm as a whole.
Portfolio holdings and breakdowns are as of October 31, 2003 and are subject to
change. Please refer to pages 4 through 16 for a list and percentage breakdown
of the fund's holdings.
/i/ NAV is a price that reflects the value of the fund's underlying portfolio
plus other assets, less the fund's liabilities. However, the price at which
an investor may buy or sell shares of the fund is at the fund's market
price as determined by supply of and demand for the fund's shares.
/ii/ The Citigroup High-Yield Market Index is a broad-based unmanaged index of
high-yield securities. Please note that an investor cannot invest directly
in an index.
/iii/Lipper Inc. is a major independent mutual-fund tracking organization.
Average returns are based on the six-month period ended October 31, 2003,
calculated among 26 funds in the fund's Lipper peer group including the
reinvestment of dividends and capital gains.
/iv/ Leverage will magnify gains and disproportionately increase losses in the
fund's portfolio.
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (unaudited)
October 31, 2003
Face
Amount Security* Value
------------------------------------------------------------------------------------------------
CORPORATE BONDS -- 74.9%
Basic Industries -- 9.0%
$ 3,700,000 Abitibi-Consolidated Inc., Debentures, 8.850% due 8/1/30.......... $ 3,829,056
7,230,000 Acetex Corp., Sr. Notes, 10.875% due 8/1/09....................... 8,133,750
2,500,000 Airgas, Inc., 9.125% due 10/1/11.................................. 2,806,250
Anchor Glass Container Corp., Secured Notes:
3,000,000 11.000% due 2/15/13............................................. 3,435,000
875,000 11.000% due 2/15/13 (a)......................................... 1,001,875
5,400,000 Applied Extrusion Technologies, Inc., Series B, 10.750% due 7/1/11 4,185,000
2,750,000 Berry Plastics Corp., 10.750% due 7/15/12......................... 3,107,500
2,800,000 Borden Chemicals & Plastics L.P., Notes, 9.500% due 5/1/05 (b).... 42,000
Buckeye Technologies Inc., Sr. Sub. Notes:
1,750,000 9.250% due 9/15/08 (c).......................................... 1,785,000
1,000,000 8.000% due 10/15/10............................................. 950,000
8,500,000 FMC Corp., Debentures, 7.750% due 7/1/11.......................... 8,755,000
6,950,000 ISP Chemco Inc., Series B, 10.250% due 7/1/11..................... 7,801,375
2,000,000 Luscar Coal Ltd., Sr. Notes, 9.750% due 10/15/11.................. 2,265,000
Lyondell Chemical Co.:
2,575,000 9.500% due 12/15/08............................................. 2,587,875
550,000 Secured Notes, Series B, 9.875% due 5/1/07 (c).................. 561,000
2,000,000 MDP Acquisitions PLC, Sr. Notes, 9.625% due 10/1/12............... 2,230,000
3,400,000 Methanex Corp., Sr. Notes, 8.750% due 8/15/12..................... 3,723,000
3,190,000 Millennium America Inc., 9.250% due 6/15/08 (c)................... 3,389,375
2,500,000 Noveon, Inc., Series B, 11.000% due 2/28/11....................... 2,887,500
1,325,000 OM Group, Inc., 9.250% due 12/15/11............................... 1,344,875
7,000,000 Plastipak Holdings Inc., 10.750% due 9/1/11....................... 7,770,000
2,000,000 Pliant Corp., Secured Notes, 11.125% due 9/1/09................... 2,150,000
2,700,000 Radnor Holdings Corp., Sr. Notes, 11.000% due 3/15/10 (a)(c)...... 2,322,000
5,000,000 Republic Technologies International, LLC, 13.750% due 7/15/09 (b). 75,000
4,900,000 Rhodia S.A., Sr. Sub. Notes, 8.875% due 6/1/11 (a)................ 4,385,500
3,800,000 Smurfit-Stone Container Corp., 8.250% due 10/1/12................. 4,009,000
4,950,000 Stone Container Corp., Sr. Notes, 8.375% due 7/1/12............... 5,247,000
950,000 Tekni-Plex, Inc., Series B, 12.750% due 6/15/10................... 978,500
Tembec Industries, Inc.:
3,400,000 8.625% due 6/30/09.............................................. 3,332,000
1,325,000 8.500% due 2/1/11............................................... 1,285,250
2,550,000 Westlake Chemical Corp., 8.750% due 7/15/11 (a)................... 2,703,000
---------------
99,077,681
---------------
See Notes to Financial Statements.
Page 4
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (unaudited) (continued)
October 31, 2003
Face
Amount Security* Value
-------------------------------------------------------------------------------------------------------
Consumer Cyclicals -- 6.0%
Cole National Group, Inc., Sr. Sub. Notes:
$ 2,850,000 8.625% due 8/15/07..................................................... $ 2,928,375
3,375,000 8.875% due 5/15/12..................................................... 3,602,812
3,300,000 CSK Auto Inc., 12.000% due 6/15/06 (c)................................... 3,729,000
1,000,000 Eye Care Centers of America, Inc., 9.125% due 5/1/08..................... 985,000
4,350,000 Felcor Lodging L.P., 10.000% due 9/15/08................................. 4,698,000
4,125,000 Finlay Enterprises Inc., 9.000% due 5/1/08............................... 4,161,094
4,000,000 Finlay Fine Jewelry Corp., Sr. Notes, 8.375% due 5/1/08.................. 4,140,000
The Gap, Inc., Notes:
115,000 9.900% due 12/15/05.................................................... 129,088
3,775,000 10.550% due 12/15/08 (c)............................................... 4,614,937
HMH Properties, Inc.:
500,000 Series A, 7.875% due 8/1/05 (c)........................................ 517,000
3,500,000 Sr. Notes, Series C, 8.450% due 12/1/08................................ 3,657,500
Host Marriott, L.P.:
350,000 Series E, 8.375% due 2/15/06........................................... 373,625
1,625,000 Series I, 9.500% due 1/15/07........................................... 1,807,813
1,625,000 Interface, Inc., Sr. Sub. Notes, Series B, 9.500% due 11/15/05 (c)....... 1,576,250
3,000,000 John Q. Hammons Hotels L.P., 1st Mortgage, Series B, 8.875% due 5/15/12.. 3,285,000
2,000,000 Leslie's Poolmart, Sr. Notes, Series B, 10.375% due 7/15/08.............. 2,010,000
Levi Strauss & Co.:
1,750,000 Notes, 7.000% due 11/1/06 (c).......................................... 1,373,750
Sr. Notes:
4,350,000 11.625% due 1/15/08 (c).............................................. 3,762,750
1,835,000 12.250% due 12/15/12................................................. 1,532,225
3,525,000 MeriStar Hospitality Corp., 9.125% due 1/15/11........................... 3,745,312
825,000 MeriStar Hospitality Operating Partnership, L.P., 10.500% due 6/15/09 (c) 899,250
450,000 Phillips-Van Heusen Corp., Sr. Notes, 8.125% due 5/1/13 (a).............. 477,000
Saks Inc.:
1,975,000 8.250% due 11/15/08.................................................... 2,241,625
1,595,000 9.875% due 10/1/11 (c)................................................. 1,898,050
4,550,000 Starwood Hotels & Resorts Worldwide, Inc., 7.875% due 5/1/12............. 5,050,500
3,275,000 Tommy Hilfiger U.S.A., Inc., 6.850% due 6/1/08........................... 3,324,125
---------------
66,520,081
---------------
Consumer Non-Cyclicals -- 16.2%
4,275,000 aaiPharma Inc., 11.000% due 4/1/10....................................... 4,766,625
1,100,000 Ahold Finance USA, Inc., 6.875% due 5/1/29 (c)........................... 979,000
8,500,000 AKI, Inc., Sr. Notes, 10.500% due 7/1/08................................. 8,967,500
5,250,000 American Safety Razor Co., Sr. Notes, Series B, 9.875% due 8/1/05........ 5,223,750
See Notes to Financial Statements.
Page 5
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (unaudited) (continued)
October 31, 2003
Face
Amount Security* Value
---------------------------------------------------------------------------------------------------
Consumer Non-Cyclicals -- 16.2% (continued)
$ 1,275,000 Ameristar Casinos, Inc., 10.750% due 2/15/09...................... $ 1,475,813
1,586,000 Applica Inc., Sr. Sub. Notes, 10.000% due 7/31/08................. 1,649,440
4,275,000 Argosy Gaming Co., 10.750% due 6/1/09............................. 4,702,500
4,875,000 Athena Neurosciences Finance LLC, 7.250% due 2/21/08.............. 4,363,125
7,125,000 Coast Hotels and Casinos, Inc., 9.500% due 4/1/09................. 7,623,750
3,400,000 Dade Behring Holdings Inc., 11.910% due 10/3/10................... 3,893,000
2,175,000 Doane Pet Care Co., Sr. Sub. Notes, 9.750% due 5/15/07 (c)........ 1,968,375
5,120,000 Extendicare Health Services, Inc., 9.500% due 7/1/10.............. 5,657,600
1,625,000 Fleming Cos., Inc., 10.125% due 4/1/08 (b)(c)..................... 260,000
2,375,000 Herbst Gaming, Inc., Secured Notes, Series B, 10.750% due 9/1/08.. 2,668,906
Holmes Group Inc.:
125,000 Series B, 9.875% due 11/15/07................................... 124,375
1,000,000 Sr. Sub. Notes, Series D, 9.875% due 11/15/07................... 995,000
6,500,000 Home Interiors & Gifts, Inc., 10.125% due 6/1/08.................. 6,695,000
7,250,000 Horseshoe Gaming Holding Corp., Series B, 8.625% due 5/15/09...... 7,748,437
7,500,000 IASIS Healthcare Corp., 13.000% due 10/15/09...................... 8,456,250
3,925,000 Icon Health & Fitness, Inc., 11.250% due 4/1/12................... 4,297,875
4,150,000 InSight Health Services Corp., Series B, 9.875% due 11/1/11 (c)... 4,482,000
5,908,625 Iowa Select Farms, L.P., Secured Notes, 10.750% due 12/1/06 (a)(d) 3,545,175
1,000,000 Jafra Cosmetics International Inc., 10.750% due 5/15/11........... 1,105,000
2,400,000 Kerzner International Ltd., 8.875% due 8/15/11.................... 2,631,000
6,375,000 MGM MIRAGE, 9.750% due 6/1/07..................................... 7,259,531
6,250,000 North Atlantic Trading Co. Inc., Series B, 11.000% due 6/15/04.... 5,906,250
1,117,366 Nutritional Sourcing Corp., Notes, 10.125% due 8/1/09............. 765,396
Park Place Entertainment Corp., Sr. Sub. Notes:
700,000 9.375% due 2/15/07.............................................. 789,250
4,500,000 8.875% due 9/15/08 (c).......................................... 5,011,875
3,000,000 8.125% due 5/15/11 (c).......................................... 3,292,500
3,250,000 Playtex Products, Inc., 9.375% due 6/1/11 (c)..................... 3,225,625
5,025,000 Premier International Foods PLC, Sr. Notes, 12.000% due 9/1/09.... 5,565,188
Rite Aid Corp.:
Notes:
1,000,000 6.000% due 12/15/05 (a)........................................ 1,002,500
325,000 7.125% due 1/15/07 (c)......................................... 329,875
6,575,000 Sr. Notes, 7.625% due 4/15/05................................... 6,690,062
Sealy Mattress Co., Series B:
4,475,000 10.875% due 12/15/07............................................ 4,698,750
185,000 Sr. Sub. Notes, 9.875% due 12/15/07 (c)......................... 191,938
3,875,000 Station Casinos, Inc., Sr. Sub. Notes, 9.875% due 7/1/10 (c)...... 4,325,469
See Notes to Financial Statements.
Page 6
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (unaudited) (continued)
October 31, 2003
Face
Amount Security* Value
--------------------------------------------------------------------------------------------------
Consumer Non-Cyclicals -- 16.2% (continued)
$ 2,500,000 Sybron Dental Specialties, Inc., 8.125% due 6/15/12................. $ 2,693,750
3,300,000 Tempur-Pedic Inc. and Tempur Production U.S.A. Inc., Sr. Sub. Notes,
10.250% due 8/15/10 (a)............................................ 3,679,500
2,525,000 Tenet Healthcare Corp., Sr. Notes, 6.875% due 11/15/31.............. 2,234,625
5,000,000 Triad Hospitals, Inc., Series B, 8.750% due 5/1/09.................. 5,437,500
8,175,000 United Industries Corp., Series D, 9.875% due 4/1/09................ 8,542,875
4,750,000 Vanguard Health Systems, Inc., 9.750% due 8/1/11.................... 5,106,250
3,525,000 Venetian Casino Resort, LLC, 11.000% due 6/15/10.................... 4,084,594
3,500,000 Winsloew Furniture, Inc., Series B, 12.750% due 8/15/07............. 2,642,500
---------------
177,755,299
---------------
Energy -- 7.1%
3,000,000 BRL Universal Equipment Corp., Secured Notes, 8.875% due 2/15/08.... 3,255,000
Dynegy Holdings Inc.:
Debentures:
2,550,000 7.125% due 5/15/18 (c)........................................... 2,059,125
8,350,000 7.625% due 10/15/26 (c).......................................... 6,680,000
4,500,000 Secured Notes, 9.875% due 7/15/10 (a)............................. 4,860,000
El Paso Corp., Sr. Notes:
5,425,000 7.800% due 8/1/31................................................. 4,136,562
6,325,000 7.750% due 1/15/32 (c)............................................ 4,822,813
Grey Wolf, Inc.:
2,373,000 8.875% due 7/1/07 (c)............................................. 2,450,123
340,000 Series C, 8.875% due 7/1/07....................................... 351,050
3,416,000 Key Energy Services, Inc., Series B, 14.000% due 1/15/09............ 3,706,360
6,625,000 Magnum Hunter Resources, Inc., 9.600% due 3/15/12 (c)............... 7,420,000
1,775,000 Pioneer Natural Resources Co., 9.625% due 4/1/10.................... 2,163,404
Pogo Producing Co., Sr. Sub. Notes, Series B:
1,500,000 10.375% due 2/15/09............................................... 1,620,000
2,000,000 8.250% due 4/15/11................................................ 2,220,000
2,000,000 Pride International, Inc., Sr. Notes, 10.000% due 6/1/09............ 2,165,000
5,125,000 Vintage Petroleum, Inc., Sr. Sub. Notes, 9.750% due 6/30/09 (c)..... 5,470,937
5,025,000 Western Gas Resources, Inc., 10.000% due 6/15/09.................... 5,389,313
4,675,000 Westport Resources Corp., 8.250% due 11/1/11........................ 5,177,562
The Williams Cos., Inc.:
Notes:
3,700,000 7.625% due 7/15/19............................................... 3,644,500
3,650,000 7.875% due 9/1/21................................................ 3,631,750
2,150,000 8.750% due 3/15/32............................................... 2,257,500
4,000,000 Sr. Notes, 8.625% due 6/1/10...................................... 4,400,000
---------------
77,880,999
---------------
See Notes to Financial Statements.
Page 7
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (unaudited) (continued)
October 31, 2003
Face
Amount Security* Value
-----------------------------------------------------------------------------------------------------------------
Financial -- 0.0%
$ 1,975,400 Airplanes Pass-Through Trust, Series D, 10.875% due 3/15/19........................ $ 59,262
---------------
Housing Related -- 0.4%
4,000,000 Nortek Holdings, Inc., Sr. Notes, Series B, 8.875% due 8/1/08...................... 4,190,000
---------------
Manufacturing -- 4.7%
3,325,000 Alliant Techsystems Inc., 8.500% due 5/15/11....................................... 3,690,750
1,900,000 Blount Inc., 13.000% due 8/1/09.................................................... 1,824,000
8,800,000 BREED Technologies, Inc., 9.250% due 4/15/08 (b)(e)................................ 0
1,250,000 Case Corp., Notes, 7.250% due 1/15/16.............................................. 1,187,500
450,000 Case New Holland Inc., Sr. Notes, 9.250% due 8/1/11 (a)............................ 501,750
Fedders North America, Inc.:
1,300,000 9.375% due 8/15/07 (c)........................................................... 1,261,000
1,500,000 Series B, 9.375% due 8/15/07..................................................... 1,455,000
3,825,000 Flowserve Corp., 12.250% due 8/15/10 (c)........................................... 4,456,125
1,325,000 Ford Motor Co., Notes, 7.450% due 7/16/31.......................................... 1,193,498
2,850,000 Ford Motor Credit Co., Notes, 7.250% due 10/25/11.................................. 2,899,046
1,750,000 General Binding Corp., 9.375% due 6/1/08 (c)....................................... 1,758,750
2,400,000 General Motors Acceptance Corp., Notes, 6.875% due 8/28/12......................... 2,464,217
General Motors Corp.:
725,000 Debentures, 8.375% due 7/15/33................................................... 767,085
3,275,000 Sr. Notes, 7.125% due 7/15/13 (c)................................................ 3,414,004
8,000,000 Key Plastics, Inc., Series B, 10.250% due 3/15/07 (b)(e)........................... 0
1,750,000 Kinetek, Inc., Sr. Notes, Series D, 10.750% due 11/15/06........................... 1,443,750
5,500,000 L-3 Communications Corp., 7.625% due 6/15/12....................................... 6,022,500
1,400,000 LDM Technologies, Inc., Series B, 10.750% due 1/15/07.............................. 1,407,000
2,750,000 Moll Industries, Inc., Sr. Sub. Notes, 10.500% due 7/1/08 (b)(e)................... 41,250
1,850,000 NMHG Holdings Co., 10.000% due 5/15/09............................................. 2,044,250
4,000,000 Sequa Corp., Sr. Notes, 9.000% due 8/1/09.......................................... 4,420,000
1,700,000 Tenneco Automotive Inc., Secured Notes, Series B, 10.250% due 7/15/13.............. 1,887,000
4,000,000 Terex Corp., Series B, 10.375% due 4/1/11 (c)...................................... 4,530,000
2,700,000 TRW Automotive Inc., Sr. Notes, 9.375% due 2/15/13 (a)............................. 3,078,000
---------------
51,746,475
---------------
Media and Cable -- 12.0%
7,500,000 Avalon Cable Holding Finance, Inc., Sr. Discount Notes, (zero coupon until 12/1/03,
11.875% thereafter), due 12/1/08.................................................. 7,781,250
Charter Communications Holdings, LLC:
Sr. Discount Notes:
5,250,000 Zero coupon until 1/15/05, (11.750% thereafter), due 1/15/10 (c)................ 3,898,125
See Notes to Financial Statements.
Page 8
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (unaudited) (continued)
October 31, 2003
Face
Amount Security* Value
-------------------------------------------------------------------------------------------------------------------
Media and Cable -- 12.0% (continued)
$ 10,000,000 Zero coupon until 5/15/06, (11.750% thereafter), due 5/15/11...................... $ 5,925,000
10,000,000 Zero coupon until 1/15/07, (12.125% thereafter), due 1/15/12...................... 5,475,000
Sr. Notes:
350,000 8.625% due 4/1/09 (c)............................................................. 282,625
2,475,000 10.750% due 10/1/09............................................................... 2,103,750
CSC Holdings, Inc., Sr. Sub. Debentures:
10,500,000 10.500% due 5/15/16................................................................ 11,602,500
1,500,000 9.875% due 4/1/23.................................................................. 1,563,750
Dex Media East LLC/Dex Media East Finance Co.:
1,750,000 9.875% due 11/15/09................................................................ 1,990,625
1,250,000 12.125% due 11/15/12............................................................... 1,514,062
2,400,000 Dex Media West LLC/Dex Media West Finance Co., Sr. Sub. Notes, 9.875% due 8/15/13 (a) 2,742,000
4,650,000 DirecTV Holdings LLC, Sr. Notes, 8.375% due 3/15/13.................................. 5,254,500
EchoStar DBS Corp., Sr. Notes:
4,375,000 10.375% due 10/1/07................................................................ 4,850,781
7,183,000 9.125% due 1/15/09................................................................. 8,116,790
4,612,900 Hollinger Participation Trust, Sr. Notes, 12.125% due 11/15/10 (a)(d)................ 5,233,050
2,500,000 Houghton Mifflin Co., Sr. Discount Notes, (zero coupon until 10/15/08,
11.500% thereafter), due 10/15/13 (a)............................................... 1,575,000
4,150,000 Insight Midwest, L.P., Sr. Notes, 10.500% due 11/1/10 (c)............................ 4,357,500
2,100,000 Interep National Radio Sales, Inc., Series B, 10.000% due 7/1/08..................... 1,866,375
5,375,000 Mediacom LLC, Sr. Notes, 9.500% due 1/15/13 (c)...................................... 5,133,125
6,275,000 NextMedia Operating, Inc., 10.750% due 7/1/11........................................ 7,122,125
12,562,880 NTL Inc., Secured Notes, 19.000% due 1/1/10 (d)...................................... 11,496,082
900,000 R.H. Donnelley Finance Corp. I, 10.875% due 12/15/12 (a)............................. 1,077,750
3,475,000 Radio One, Inc., Series B, 8.875% due 7/1/11......................................... 3,839,875
Telewest Communications PLC:
500,000 Debentures, 9.625% due 10/1/06 (b)(c).............................................. 267,500
Sr. Discount Notes:
3,125,000 Zero coupon until 4/15/04, (9.250% thereafter), due 4/15/09....................... 1,390,625
7,950,000 Zero coupon until 2/1/05, (11.375% thereafter), due 2/1/10 (c).................... 3,299,250
6,400,000 Time Warner Inc., 7.625% due 4/15/31................................................. 7,177,734
Vivendi Universal SA, Sr. Notes:
5,600,000 6.250% due 7/15/08 (a)............................................................. 5,880,000
2,000,000 9.250% due 4/15/10 (a)............................................................. 2,335,000
Yell Finance B.V.:
6,776,000 Sr. Discount Notes, (zero coupon until 8/1/06, 13.500% thereafter), due 8/1/11 (c). 6,200,040
606,000 Sr. Notes, 10.750% due 8/1/11 (c).................................................. 712,050
---------------
132,063,839
---------------
See Notes to Financial Statements.
Page 9
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (unaudited) (continued)
October 31, 2003
Face
Amount Security* Value
------------------------------------------------------------------------------------------------------------------
Services and Other -- 2.9%
Allied Waste North America, Inc., Series B:
$ 250,000 8.875% due 4/1/08................................................................. $ 277,500
2,850,000 7.875% due 1/1/09 (c)............................................................. 2,992,500
6,550,000 10.000% due 8/1/09 (c)............................................................ 7,155,875
400,000 9.250% due 9/1/12 (c)............................................................. 452,000
3,200,000 Brand Services, Inc., 12.000% due 10/15/12.......................................... 3,584,000
3,250,000 COMFORCE Operating Inc., Sr. Notes, Series B, 12.000% due 12/1/07................... 2,453,750
4,000,000 The Holt Group, Inc., 9.750% due 1/15/06 (b)........................................ 140,000
825,000 Iron Mountain Inc., 8.625% due 4/1/13............................................... 905,437
3,150,000 Mail-Well, Inc., Series B, 8.750% due 12/15/08 (c).................................. 3,189,375
1,000,000 Mail-Well I Corp., 9.625% due 3/15/12 (c)........................................... 1,127,500
2,325,000 Muzak LLC, Sr. Notes, 10.000% due 2/15/09........................................... 2,458,688
3,180,000 Pierce Leahy Command Co., 8.125% due 5/15/08........................................ 3,331,050
6,500,000 Safety-Kleen Corp., 9.250% due 5/15/09 (b).......................................... 325,000
4,000,000 SITEL Corp., 9.250% due 3/15/06..................................................... 3,790,000
---------------
32,182,675
---------------
Technology -- 1.8%
2,880,000 infoUSA Inc., Sr. Sub. Notes, 9.500% due 6/15/08 (c)................................ 2,980,800
3,000,000 Seagate Technology HDD Holdings, 8.000% due 5/15/09................................. 3,285,000
5,550,000 Unisys Corp., Sr. Notes, 8.125% due 6/1/06.......................................... 6,105,000
7,640,000 Xerox Capital (Europe) PLC, 5.875% due 5/15/04 (c).................................. 7,754,600
---------------
20,125,400
---------------
Telecommunications -- 9.9%
475,000 ACC Escrow Corp., Sr. Notes, 10.000% due 8/1/11 (a)................................. 520,125
3,000,000 Alamosa (Delaware) Inc., 13.625% due 8/15/11........................................ 2,895,000
4,500,000 Alamosa Holdings, Inc., (zero coupon until 2/15/05, 12.875% thereafter), due 2/15/10 3,532,500
8,625,000 American Tower Corp., Sr. Notes, 9.375% due 2/1/09 (c).............................. 9,099,375
1,800,000 American Tower Escrow Corp., Discount Notes, zero coupon due 8/1/08................. 1,242,000
6,875,000 AT&T Corp., Sr. Notes, 8.500% due 11/15/31.......................................... 7,822,444
AT&T Wireless Services Inc.:
4,625,000 Notes, 8.125% due 5/1/12.......................................................... 5,374,551
Sr. Notes:
3,800,000 7.875% due 3/1/11................................................................ 4,349,586
1,850,000 8.750% due 3/1/31................................................................ 2,232,480
Crown Castle International Corp., Sr. Notes:
2,300,000 9.375% due 8/1/11 (c)............................................................. 2,530,000
5,140,000 10.750% due 8/1/11 (c)............................................................ 5,795,350
See Notes to Financial Statements.
Page 10
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (unaudited) (continued)
October 31, 2003
Face
Amount Security* Value
-------------------------------------------------------------------------------------------------------------------
Telecommunications -- 9.9% (continued)
$ 3,250,000 Dobson Communications Corp., Sr. Notes, 8.875% due 10/1/13 (a)....................... $ 3,315,000
Nextel Communications, Inc.:
3,147,000 Sr. Discount Notes, 9.950% due 2/15/08............................................. 3,320,085
Sr. Notes:
75,000 9.375% due 11/15/09 (c)........................................................... 82,125
11,300,000 7.375% due 8/1/15................................................................. 11,808,500
5,750,000 Qwest Communications International Inc., Sr. Notes, Series B, 7.500% due 11/1/08 (c). 5,606,250
Qwest Corp.:
325,000 Debentures, 8.875% due 6/1/31...................................................... 342,875
7,325,000 Notes, 8.875% due 3/15/12 (a)...................................................... 8,313,875
Qwest Services Corp., Notes:
550,000 13.000% due 12/15/07 (a)........................................................... 627,000
325,000 13.500% due 12/15/10 (a)........................................................... 381,062
2,071,000 14.000% due 12/15/14 (a)........................................................... 2,536,975
SBA Communications Corp.:
3,100,000 Sr. Discount Notes, 12.000% due 3/1/08............................................. 3,301,500
2,275,000 Sr. Notes, 10.250% due 2/1/09...................................................... 2,047,500
850,000 SpectraSite, Inc., Sr. Notes, 8.250% due 5/15/10 (a)................................. 905,250
Sprint Capital Corp.:
6,525,000 6.875% due 11/15/28................................................................ 6,161,708
5,325,000 8.750% due 3/15/32................................................................. 6,077,396
3,235,000 TeleCorp PCS, Inc., 10.625% due 7/15/10.............................................. 3,816,996
3,750,000 UbiquiTel Operating Co., (zero coupon until 4/15/05, 14.000% thereafter), due 4/15/10 2,418,750
2,500,000 Western Wireless Corp., Sr. Notes, 9.250% due 7/15/13 (a)............................ 2,625,000
---------------
109,081,258
---------------
Transportation -- 0.4%
1,888,121 Continental Airlines, Inc., Pass Thru Certificates, Series 981C, 6.541% due 9/15/08.. 1,749,090
2,000,000 General Maritime Corp., Sr. Notes, 10.000% due 3/15/13............................... 2,245,000
---------------
3,994,090
---------------
Utilities -- 4.5%
AES Corp., Sr. Sub. Notes:
4,000,000 8.375% due 8/15/07 (c)............................................................. 3,990,000
1,725,000 8.500% due 11/1/07 (c)............................................................. 1,720,687
Avon Energy Partners Holdings:
5,500,000 Notes, 6.460% due 3/4/08 (a)......................................................... 4,675,000
2,550,000 Sr. Notes, 7.050% due 12/11/07 (a)................................................... 2,167,500
10,050,000 Calpine Canada Energy Finance ULC, 8.500% due 5/1/08 (c)............................. 7,437,000
See Notes to Financial Statements.
Page 11
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (unaudited) (continued)
October 31, 2003
Face
Amount Security* Value
-------------------------------------------------------------------------------------------
Utilities -- 4.5% (continued)
Calpine Corp.:
$ 3,500,000 Secured Notes, 8.500% due 7/15/10 (a).................... $ 3,220,000
Sr. Notes:
500,000 7.875% due 4/1/08....................................... 355,000
2,425,000 7.750% due 4/15/09 (c).................................. 1,697,500
425,000 8.625% due 8/15/10 (c).................................. 304,938
1,100,000 8.500% due 2/15/11 (c).................................. 792,000
Edison Mission Energy, Sr. Notes:
4,575,000 7.730% due 6/15/09....................................... 3,934,500
6,575,000 9.875% due 4/15/11....................................... 6,081,875
Mirant Americas Generation, LLC, Sr. Notes:
2,075,000 7.625% due 5/1/06 (b).................................... 1,732,625
2,925,000 9.125% due 5/1/31 (b).................................... 2,435,062
Reliant Resources, Inc., Secured Notes:
5,325,000 9.250% due 7/15/10 (a)................................... 4,792,500
3,975,000 9.500% due 7/15/13 (a)................................... 3,557,625
---------------
48,893,812
---------------
TOTAL CORPORATE BONDS (Cost -- $782,701,011)............... 823,570,871
---------------
CONVERTIBLE BONDS -- 0.5%
Technology -- 0.3%
1,100,000 Avaya Inc., Sr. Notes, zero coupon due 10/31/21............ 666,875
4,450,000 Sanmina-SCI Corp., Sub. Debentures, zero coupon due 9/12/20 2,258,375
---------------
2,925,250
---------------
Telecommunications -- 0.2%
2,675,000 American Tower Corp., Notes, 5.000% due 2/15/10............ 2,534,562
---------------
TOTAL CONVERTIBLE BONDS (Cost -- $3,699,049)............... 5,459,812
---------------
Face
Amount+
-------------
SOVEREIGN BONDS -- 19.1%
Argentina -- 0.0%
4/ARS/ Republic of Argentina, 10.000% due 9/19/08................. 0
---------------
Brazil -- 6.4%
Federal Republic of Brazil:
1,475,000 11.500% due 3/12/08...................................... 1,644,625
See Notes to Financial Statements.
Page 12
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (unaudited) (continued)
October 31, 2003
Face
Amount+ Security* Value
-----------------------------------------------------------------------
Brazil -- 6.4% (continued)
$ 4,225,000 12.000% due 4/15/10.................... $ 4,782,700
2,150,000 9.250% due 10/22/10.................... 2,163,438
7,127,000 12.750% due 1/15/20.................... 8,089,145
875,000 8.875% due 4/15/24..................... 747,031
7,075,000 10.125% due 5/15/27.................... 6,668,187
4,050,000 11.000% due 8/17/40.................... 3,960,900
29,005,863 C Bonds, 8.000% due 4/15/14............ 27,165,876
13,125,000 DCB, Series L, 2.0625% due 4/15/12 (f). 11,107,031
FLIRB, Series L:
2,284,615 2.000% due 4/15/09 (f)................ 2,067,577
803,846 2.000% due 4/15/09 (f)................ 727,481
1,747,116 NMB, Series L, 2.0625% due 4/15/09 (f). 1,605,163
---------------
70,729,154
---------------
Bulgaria -- 0.5%
4,950,000 Republic of Bulgaria, 8.250% due 1/15/15. 5,655,375
---------------
Colombia -- 1.2%
Republic of Colombia:
4,425,000 10.000% due 1/23/12.................... 4,661,737
1,825,000 10.750% due 1/15/13.................... 1,999,744
1,875,000 11.750% due 2/25/20.................... 2,148,750
4,225,000 10.375% due 1/28/33.................... 4,261,969
---------------
13,072,200
---------------
Ecuador -- 1.3%
15,320,000 Republic of Ecuador, 12.000% due 11/15/12 13,711,400
---------------
Mexico -- 3.6%
PEMEX Project Funding Master Trust:
3,100,000 6.125% due 8/15/08..................... 3,273,600
250,000 7.375% due 12/15/14.................... 263,750
United Mexican States:
4,625,000 6.625% due 3/3/15...................... 4,761,437
22,100,000 11.375% due 9/15/16.................... 31,216,250
500,000 8.300% due 8/15/31..................... 557,000
---------------
40,072,037
---------------
Panama -- 1.0%
Republic of Panama:
3,325,000 9.625% due 2/8/11...................... 3,848,688
See Notes to Financial Statements.
Page 13
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (unaudited) (continued)
October 31, 2003
Face
Amount+ Security* Value
--------------------------------------------------------------------------------------------------------------
Panama -- 1.0% (continued)
$ 3,500,000 9.375% due 1/16/23............................................................ $ 3,815,000
1,500,000 8.875% due 9/30/27............................................................ 1,573,125
1,689,509 PDI, 1.9375% due 7/17/16 (f).................................................. 1,478,320
---------------
10,715,133
---------------
Peru -- 0.4%
Republic of Peru:
2,150,000 9.875% due 2/6/15............................................................. 2,520,875
FLIRB:
1,400,000 4.500% due 3/7/17 (f)........................................................ 1,253,000
175,000 4.500% due 3/7/17 (a)(f)..................................................... 156,625
---------------
3,930,500
---------------
Philippines -- 0.8%
Republic of the Philippines:
1,900,000 9.375% due 1/18/17............................................................ 2,022,265
5,000,000 9.875% due 1/15/19............................................................ 5,206,250
1,375,000 10.625% due 3/16/25........................................................... 1,493,594
---------------
8,722,109
---------------
Russia -- 3.2%
Russian Federation:
10,900,000 10.000% due 6/26/07........................................................... 12,875,625
3,050,000 8.250% due 3/31/10............................................................ 3,420,727
20,350,000 5.000% due 3/31/30 (f)........................................................ 19,033,660
---------------
35,330,012
---------------
Turkey -- 0.7%
Republic of Turkey:
5,350,000 11.500% due 1/23/12........................................................... 6,433,375
625,000 11.000% due 1/14/13........................................................... 733,984
---------------
7,167,359
---------------
Venezuela -- 0.0%
425,000 Republic of Venezuela, Series A, 6.750% due 3/31/20............................. 368,688
---------------
TOTAL SOVEREIGN BONDS (Cost -- $186,388,938).................................... 209,473,967
---------------
LOAN PARTICIPATIONS (F )(G) -- 0.5%
Morocco -- 0.5%
5,843,750 Kingdom of Morocco, Tranche A, 2.03125% due 1/2/09 (UBS Financial Services Inc.)
(Cost -- $5,480,831)........................................................... 5,668,438
---------------
See Notes to Financial Statements.
Page 14
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (unaudited) (continued)
October 31, 2003
Shares Security* Value
--------------------------------------------------------------------------------------------------------------------------
COMMON STOCK (H) -- 2.5%
29,156 Mattress Discounters Corp. (e)............................................................... $ 262,404
10,029 NCI Holdings, Inc............................................................................ 3,761
152,459 NTL Inc. (c)................................................................................. 9,411,294
282,980 SpectraSite, Inc............................................................................. 10,965,475
98,997 UGC Europe, Inc.............................................................................. 6,632,799
28,175 UnitedGlobalCom Inc., Class A Shares (c)..................................................... 199,479
---------------
TOTAL COMMON STOCK (Cost -- $39,482,014)..................................................... 27,475,212
---------------
ESCROW SHARES (E)(H) -- 0.0%
5,500,000 Imperial Sugar Co............................................................................ 6
2,025,000 Pillowtex Corp............................................................................... 2
2,648,056 Vlasic Foods International Inc............................................................... 296,582
---------------
TOTAL ESCROW SHARES (Cost -- $0)............................................................. 296,590
---------------
PREFERRED STOCK -- 0.8%
CSC Holdings Inc.:
24,750 Series H, 11.750% due 10/1/07.............................................................. 2,592,563
61,417 Series M, 11.125% due 4/1/08............................................................... 6,448,785
236 NTL Europe, Inc., Series A (h)............................................................... 1,133
TCR Holding Corp.:
17,552 Class B (e)(h)............................................................................. 18
9,654 Class C (e)(h)............................................................................. 10
25,451 Class D (e)(h)............................................................................. 25
52,657 Class E (e)(h)............................................................................. 53
---------------
TOTAL PREFERRED STOCK (Cost -- $8,020,564)................................................... 9,042,587
---------------
Warrants/
Rights
------------
WARRANTS AND RIGHTS (H) -- 0.1%
1,800 American Tower Escrow Corp. (Exercise price of $0.01 per share expiring on 8/1/08. Each
warrant exercisable for 14.10 shares of common stock)....................................... 252,900
5,000 Asia Pulp & Paper (Exercise price of $7.8375 per share expiring on 3/15/05. Each warrant
exercisable for 12.914 shares of common stock) (e).......................................... 0
30,928,049 ContiFinancial Corp. Liquidating Trust, Units of Interest (Represents interests in a trust in
the liquidation of ContiFinancial Corp. and its affiliates)................................. 463,921
2,750 Leap Wireless International Inc. (Exercise price of $96.80 per share expiring on 4/15/10.
Each warrant exercisable for 5.146 shares of common stock) (a)(e)........................... 0
See Notes to Financial Statements.
Page 15
SALOMON BROTHERS HIGH INCOME FUND II INC.
SCHEDULE OF INVESTMENTS (unaudited) (continued)
October 31, 2003
Warrants/
Rights Security* Value
----------------------------------------------------------------------------------------------------------------------
WARRANTS AND RIGHTS (H) -- 0.1% (CONTINUED)
3,500 Mattress Discounters Corp. (Exercise price of $0.01 per share expiring on 7/15/07. Each
warrant exercisable for 4.85 shares of Class A common stock and 0.539 shares of Class L
common stock).......................................................................... $ 2,625
13,614 Pillowtex Corp. (Exercise price of $28.99 per share expiring on 11/24/09. Each warrant
exercisable for 1 share of common stock) (e)........................................... 14
5,000 Republic Technologies International Inc. (Exercise price of $0.01 per share expiring on
7/15/09. Each warrant exercisable for 1 share of Class D common stock)................. 50
5,000 Ubiquitel Operating Co. (Exercise price of $22.74 per share expiring on 4/15/10. Each
warrant exercisable for 5.965 shares of common stock) (a).............................. 50
57,120 Venezuela Discount Rights (e)........................................................... 0
3,500 Winsloew Furniture, Inc. (Exercise price of $0.01 per share expiring on 8/15/07. Each
warrant exercisable for 0.2298 shares of common stock)................................. 1,750
---------------
TOTAL WARRANTS AND RIGHTS (Cost -- $1,454,594).......................................... 721,310
---------------
Face
Amount
-------------
REPURCHASE AGREEMENT -- 1.6%
$ 17,065,000 Morgan Stanley, 0.970% due 11/3/03; Proceeds at maturity -- $17,066,379; (Fully
collateralized by U.S. Treasury Strips, 7.625% to 9.875% due 11/15/05 to 11/15/22;
Market value -- $17,406,300) (Cost -- $17,065,000)..................................... 17,065,000
---------------
TOTAL INVESTMENTS -- 100.0% (Cost -- $1,044,292,001**).................................. $ 1,098,773,787
===============
--------
* All securities except for those that are on loan are segregated as collateral
pursuant to a revolving credit facility.
+ Face amount denominated in U.S. dollars unless otherwise indicated.
(a)Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
(b)Security is currently in default.
(c)All or a portion of this security is on loan (See Note 4).
(d)Payment-in-kind security for which all or part of the interest earned may be
paid in additional bonds.
(e)Security is valued in accordance with fair valuation procedures.
(f)Rate shown reflects current rate on instrument with variable rates or step
coupon rates.
(g)Participation interest was acquired through the financial institution
indicated parenthetically.
(h)Non-income producing security.
**Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviations used in this schedule:
ARS -- Argentine Peso
C Bond -- Capitalization Bond
DCB -- Debt Conversion Bond
FLIRB -- Front Loaded Interest Reduction Bond
NMB -- New Money Bond
PDI -- Past Due Interest
See Notes to Financial Statements.
Page 16
SALOMON BROTHERS HIGH INCOME FUND II INC.
LOANED SECURITIES COLLATERAL (unaudited)
October 31, 2003
Face
Amount Security Value
----------------------------------------------------------------------------------------------------------------
$143,998,957 State Street Navigator Securities Lending Trust Prime Portfolio (Cost -- $143,998,957) $143,998,957
============
See Notes to Financial Statements.
Page 17
SALOMON BROTHERS HIGH INCOME FUND II INC.
STATEMENT OF ASSETS AND LIABILITIES (unaudited)
October 31, 2003
ASSETS:
Investments, at value (Cost -- $1,044,292,001)................................................. $1,098,773,787
Loaned securities collateral, at value (Cost -- $143,998,957) (Note 4)......................... 143,998,957
Cash........................................................................................... 715
Interest and dividends receivable.............................................................. 24,348,868
Receivable for securities sold................................................................. 6,127,754
Prepaid expenses............................................................................... 12,376
--------------
Total Assets................................................................................... 1,273,262,457
--------------
LIABILITIES:
Loan payable (Note 7).......................................................................... 300,000,000
Payable for loaned securities collateral (Note 4).............................................. 143,998,957
Dividends payable.............................................................................. 1,997,755
Management fee payable......................................................................... 945,544
Loan interest payable (Note 7)................................................................. 405,555
Administration fee payable..................................................................... 94,554
Accrued expenses............................................................................... 211,916
--------------
Total Liabilities.............................................................................. 447,654,281
--------------
Total Net Assets.................................................................................. $ 825,608,176
==============
NET ASSETS:
Common stock ($0.001 par value, 100,000,000 shares authorized; 74,935,252 shares outstanding).. $ 74,935
Capital paid in excess of par value............................................................ 1,044,980,777
Overdistributed net investment income.......................................................... (8,695,620)
Accumulated net realized loss from investment transactions..................................... (265,233,702)
Net unrealized appreciation of investments and foreign currencies.............................. 54,481,786
--------------
Total Net Assets.................................................................................. $ 825,608,176
==============
Net Asset Value, per share ($825,608,176 / 74,935,252 shares outstanding)......................... $11.02
======
See Notes to Financial Statements.
Page 18
SALOMON BROTHERS HIGH INCOME FUND II INC.
STATEMENT OF OPERATIONS (unaudited)
For the Six Months Ended October 31, 2003
INVESTMENT INCOME:
Interest................................................... $51,595,875
-----------
EXPENSES:
Management fee (Note 2).................................... 5,490,290
Interest expense (Note 7).................................. 2,515,152
Administration fee (Note 2)................................ 549,029
Custody.................................................... 71,832
Shareholder communications................................. 43,653
Registration fees.......................................... 37,328
Audit and legal............................................ 36,112
Directors' fees............................................ 31,458
Other...................................................... 68,881
-----------
Total Expenses............................................. 8,843,735
-----------
Net Investment Income......................................... 42,752,140
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCIES (NOTE 3):
Realized Gain (Loss) From:
Investment transactions................................... 14,215,288
Foreign currency transactions............................. (19,618)
-----------
Net Realized Gain.......................................... 14,195,670
-----------
Change in Net Unrealized Appreciation From:
Investments............................................... 38,434,279
Foreign currencies........................................ 19,865
-----------
Increase in Net Unrealized Appreciation.................... 38,454,144
-----------
Net Gain on Investments and Foreign Currencies................ 52,649,814
-----------
Increase in Net Assets From Operations........................ $95,401,954
===========
See Notes to Financial Statements.
Page 19
SALOMON BROTHERS HIGH INCOME FUND II INC.
STATEMENTS OF CHANGES IN NET ASSETS
For the Six Months Ended October 31, 2003 (unaudited)
and the Year Ended April 30, 2003
October 31 April 30
-------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income...................................... $ 42,752,140 $ 85,756,547
Net realized gain (loss)................................... 14,195,670 (55,505,695)
Increase in net unrealized appreciation.................... 38,454,144 67,269,678
------------ -------------
Increase in Net Assets From Operations..................... 95,401,954 97,520,530
------------ -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income...................................... (51,395,199) (84,516,112)
Capital.................................................... -- (15,830,265)
------------ -------------
Decrease in Net Assets From Distributions to Shareholders.. (51,395,199) (100,346,377)
------------ -------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares issued on reinvestment of dividends
(902,627 and 2,448,921 shares issued, respectively)....... 10,035,279 24,058,046
------------ -------------
Increase in Net Assets From Capital Share Transactions..... 10,035,279 24,058,046
------------ -------------
Increase in Net Assets........................................ 54,042,034 21,232,199
NET ASSETS:
Beginning of period........................................ 771,566,142 750,333,943
------------ -------------
End of period*............................................. $825,608,176 $ 771,566,142
============ =============
* Includes overdistributed net investment income of:.......... $(8,695,620) $(32,943)
============ =============
See Notes to Financial Statements.
Page 20
SALOMON BROTHERS HIGH INCOME FUND II INC.
STATEMENT OF CASH FLOWS (unaudited)
For the Six Months Ended October 31, 2003
CASH FLOWS PROVIDED (USED) BY OPERATING AND INVESTING ACTIVITIES:
Dividends payable...................................................... $ 1,997,755
Interest and dividends received........................................ 45,901,340
Operating expenses paid................................................ (6,270,330)
Net purchases of short-term investments................................ (9,722,000)
Realized loss on foreign currency transactions......................... (19,618)
Net change in unrealized depreciation on foreign currencies............ 19,865
Purchases of long-term investments..................................... (211,013,546)
Proceeds from disposition of long-term investments..................... 223,007,416
Interest paid on bank loans............................................ (2,551,488)
-------------
Net Cash Provided By Operating and Investing Activities................ 41,349,394
-------------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
Cash distributions paid on Common Stock................................ (51,395,199)
Proceeds from reinvestment of dividends................................ 10,035,279
-------------
Net Cash Used By Financing Activities.................................. (41,359,920)
-------------
Net Decrease in Cash...................................................... (10,526)
Cash, Beginning of period................................................. 11,241
-------------
Cash, End of period....................................................... $ 715
=============
RECONCILIATION OF INCREASE IN NET ASSETS FROM OPERATIONS TO NET CASH FLOWS
PROVIDED (USED) BY OPERATING AND INVESTING ACTIVITIES:
Increase in Net Assets From Operations................................. $ 95,401,954
-------------
Accretion of discount on investments................................... (7,104,593)
Amortization of premium on investments................................. 864,169
Capitalized income on payment-in-kind securities....................... (956,518)
Increase in investments, at value...................................... (32,283,423)
Decrease in interest and dividends receivable.......................... 536,405
Increase in receivable for investments sold............................ (4,276,843)
Decrease in prepaid expenses........................................... 37,328
Decrease in payable of investments purchased........................... (12,851,429)
Increase in dividends payable.......................................... 1,997,755
Decrease in interest payable on loan................................... (36,336)
Increase in accrued expenses........................................... 20,925
-------------
Total Adjustments...................................................... (54,052,560)
-------------
Net Cash Flows Provided By Operating and Investing Activities............. $ 41,349,394
=============
See Notes to Financial Statements.
Page 21
SALOMON BROTHERS HIGH INCOME FUND II INC.
NOTES TO FINANCIAL STATEMENTS (unaudited)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Salomon Brothers High Income Fund II Inc. ("Fund") was incorporated in Maryland
and is registered as a diversified, closed-end, management investment company
under the Investment Company Act of 1940, as amended. The Fund seeks to
maximize current income by investing at least 80% of its net assets plus any
borrowings for investment purposes in high yield debt securities (as defined in
the Fund's prospectus). As a secondary objective, the Fund seeks capital
appreciation to the extent consistent with its objective of seeking to maximize
current income.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America ("GAAP") requires management
to make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual amounts could differ from those
estimates.
(a) SECURITIES VALUATION. In valuing the Fund's assets, all securities for
which market quotations are readily available are valued (i) at the last sale
price prior to the time of determination if there were a sale on the date of
determination, (ii) at the mean between the last current bid and asked prices
if there were no sales on such date and bid and asked quotations are available,
and (iii) at the bid price if there were no sales price on such date and only
bid quotations are available. Publicly traded foreign government debt
securities are typically traded internationally in the over-the-counter market,
and are valued at the mean between the last current bid and asked price as of
the close of business of that market. However, when the spread between bid and
asked price exceeds five percent of the par value of the security, the security
is valued at the bid price. Securities may also be valued by independent
pricing services which use prices provided by market-makers or estimates of
market values obtained from yield data relating to instruments or securities
with similar characteristics. Short-term investments having a maturity of 60
days or less are valued at amortized cost which approximates market value.
Securities for which reliable quotations are not readily available and all
other securities and assets are valued at fair value as determined in good
faith by, or under procedures established by, the Board of Directors.
(b) INVESTMENT TRANSACTIONS. Investment transactions are recorded on the trade
date. Interest income is accrued on a daily basis. Market discount or premium
on securities purchased is accreted or amortized, respectively, on an effective
yield basis over the life of the security. The Fund uses the specific
identification method for determining realized gain or loss on investments.
Dividend income is recorded on ex-dividend date.
(c) FEDERAL INCOME TAXES. The Fund has complied and intends to continue to
comply with the requirements of the Internal Revenue Code of 1986, as amended,
applicable to regulated
Page 22
SALOMON BROTHERS HIGH INCOME FUND II INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
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 at least annually.
Dividends and distributions to shareholders are recorded on the ex-dividend
date. The amount of dividends and distributions from net investment income and
net realized gains are determined in accordance with federal income tax
regulations, which may differ from GAAP. To the extent these differences are
permanent in nature, such amounts are reclassified within the components of net
assets.
(e) REPURCHASE AGREEMENTS. When entering into repurchase agreements, it is the
Fund's policy to take possession, through the 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.
(f) CASH FLOW INFORMATION. The Fund invests in securities and distributes
dividends from net investment income and net realized gains which are paid in
cash and may be reinvested at the discretion of shareholders. These activities
are reported in the statement of changes in net assets and additional
information on cash receipts and cash payments is presented in the statement of
cash flows.
(g) YEAR END TAX RECLASSIFICATIONS. The character of income and gains to be
distributed is determined in accordance with income tax regulations which may
differ from GAAP.
NOTE 2. MANAGEMENT FEE AND OTHER TRANSACTIONS
Salomon Brothers Asset Management Inc ("Investment Manager"), an indirect
wholly-owned subsidiary of Citigroup Inc. ("Citigroup"), acts as investment
manager to the Fund. The Investment Manager is responsible on a day-to-day
basis for the management of the Fund's portfolio in accordance with the Fund's
investment objectives and policies and for making decisions to buy, sell or
hold particular securities of the Fund. The management fee for these services
is payable monthly at an annual rate of 1.00% of the Fund's average weekly net
assets plus the proceeds of any outstanding borrowings used for leverage.
Smith Barney Fund Management LLC ("Administrator"), another indirect
wholly-owned subsidiary of Citigroup, acts as the Fund's administrator for
which the Fund pays a monthly fee
Page 23
SALOMON BROTHERS HIGH INCOME FUND II INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
at an annual rate of 0.10% of the value of the Fund's average weekly net assets
plus the proceeds of any outstanding borrowings used for leverage. The
administrator performs certain administrative services necessary for the
operation of the Fund.
During periods in which the Fund is utilizing financial leverage, the fees
which are payable to the Investment Manager and Administrator as a percentage
of the Fund's assets will be higher than if the Fund did not utilize leverage
because the fees are calculated as a percentage of the Fund's assets, including
those investments purchased with leverage.
At October 31, 2003, Citigroup Global Markets Inc. ("CGM"), another indirect
wholly-owned subsidiary of Citigroup, held 11.766 shares of the Fund.
Certain officers and/or directors of the Fund are also officers and/or
directors of the Investment Manager.
NOTE 3. PORTFOLIO ACTIVITY
During the six months ended October 31, 2003, the aggregate cost of purchases
and proceeds from sales of investments (including maturities of long-term
investments, but excluding short-term investments) were as follows:
Purchases.................................... $198,162,117
============
Sales........................................ $227,284,259
============
At October 31, 2003, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
Gross unrealized appreciation................ $114,072,009
Gross unrealized depreciation................ (59,590,223)
------------
Net unrealized appreciation.................. $ 54,481,786
============
NOTE 4. LENDING OF PORTFOLIO SECURITIES
The Fund has an agreement with its custodian whereby the custodian may lend
securities owned by the Fund to brokers, dealers and other financial
organizations. Fees earned by the Fund on securities lending are recorded in
interest income. Loans of securities by the Fund are collateralized by cash,
U.S. government securities or high quality money market instruments that are
maintained at all times in an amount at least equal to the current market value
of the securities loaned, plus a margin which may vary depending on the type of
securities loaned. The Fund maintains exposure for the risk of any losses in
the investment of amounts received as collateral.
Page 24
SALOMON BROTHERS HIGH INCOME FUND II INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
At October 31, 2003, the Fund loaned securities having a market value of
$141,644,174. The Fund received cash collateral amounting to $143,998,957 which
was invested into the State Street Navigator Securities Lending Trust Prime
Portfolio.
Income earned by the Fund from securities lending for the six months ended
October 31, 2003 was $121,443.
NOTE 5. LOAN PARTICIPATIONS
The Fund invests in fixed and floating rate loans arranged through private
negotiations between a foreign sovereign entity and one or more financial
institutions. The Fund's investment in any such loan may be in the form of a
participation in or an assignment of the loan.
In connection with purchasing participations, the Fund generally will have no
right to enforce compliance by the borrower with the terms of the loan
agreement relating to the loan, nor any rights of set-off against the borrower,
and the Fund may not benefit directly from any collateral supporting the loan
in which it has purchased the participation. As a result, the Fund will assume
the credit risk of both the borrower and the lender that is selling the
participation. In the event of the insolvency of the lender selling the
participation, the Fund may be treated as a general creditor of the lender and
may not benefit from any set-off between the lender and the borrower.
At October 31, 2003, the Fund held loan participations with a total cost of
$5,480,831.
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 involves risks
not associated with higher rated securities including, among others, overall
greater risk of timely and ultimate payment of interest and principal, greater
market price volatility and less liquid secondary market trading. The
consequences of political, social, economic or diplomatic changes may have
disruptive effects on the market prices of investments held by the Fund.
NOTE 7. LOAN
At October 31, 2003, the Fund had outstanding a $300,000,000 loan pursuant to a
revolving credit and security agreement with CXC Inc., an affiliate of
Citigroup, a commercial paper conduit issuer for which Citicorp North America
Inc., an affiliate of the Investment Manager, acts as administrative agent. The
loans generally bear interest at a variable rate based on the weighted average
interest rates of the underlying commercial paper or LIBOR, plus any applicable
margin. Securities held by the Fund are subject to a lien, granted to the
lenders, to the extent of the borrowing outstanding and any additional
expenses. For the six months ended October 31, 2003, the Fund paid interest
expense of $2,551,488.
Page 25
SALOMON BROTHERS HIGH INCOME FUND II INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
NOTE 8. DIVIDENDS SUBSEQUENT TO OCTOBER 31, 2003
On July 18, 2003, the Board of Directors of the Fund declared dividends in the
amount of $0.115 per share, payable on November 28, 2003 to shareholders of
record on November 18, 2003.
On October 22, 2003, the Board of Directors of the Fund declared three
dividends, each in the amount of $0.115 per share, payable on December 26,
2003, January 30, 2004, and February 27, 2004 to shareholders of record on
December 16, 2003, January 13, 2004 and February 18, 2004, respectively.
NOTE 9. SUBSEQUENT EVENT
The Fund has received the following information from Citigroup Asset Management
("CAM"), the Citigroup business unit which includes the Fund's Investment
Manager and other investment advisory companies, all of which are indirect,
wholly-owned subsidiaries of Citigroup. CAM is reviewing its entry, through an
affiliate, into the transfer agent business in the period 1997-1999. As CAM
currently understands the facts, at the time CAM decided to enter the transfer
agent business, CAM sub-contracted for a period of five years certain of the
transfer agency services to a third party and also concluded a revenue
guarantee agreement with this sub-contractor providing that the sub-contractor
would guarantee certain benefits to CAM or its affiliates (the "Revenue
Guarantee Agreement"). In connection with the subsequent purchase of the
sub-contractor's business by an affiliate of the current sub-transfer agent
(PFPC Inc.) used by CAM on many of the funds it manages, this Revenue Guarantee
Agreement was amended eliminating those benefits in exchange for arrangements
that included a one-time payment from the sub-contractor.
The Boards of CAM-managed funds (the "Boards") were not informed of the Revenue
Guarantee Agreement with the sub-contractor at the time the Boards considered
and approved the transfer agent arrangements. Nor were the Boards informed of
the subsequent amendment to the Revenue Guarantee Agreement when that occurred.
CAM has begun to take corrective actions. CAM will pay to the applicable funds
$16 million (plus interest) that CAM and its affiliates received from the
Revenue Guarantee Agreement and its amendment. CAM also plans an independent
review to verify that the transfer agency fees charged by CAM were fairly
priced as compared to competitive alternatives. CAM is instituting new
procedures and making changes designed to ensure no similar arrangements are
entered into in the future.
CAM has briefed the SEC, the New York State Attorney General and other
regulators with respect to this matter, as well as the U.S. Attorney who is
investigating the matter. CAM is cooperating with governmental authorities on
this matter, the ultimate outcome of which is not yet determinable.
The Fund's transfer agent is PFPC Inc., which is not affiliated with CAM.
Page 26
SALOMON BROTHERS HIGH INCOME FUND II INC.
FINANCIAL HIGHLIGHTS
Data for a share of capital stock outstanding throughout each year ended April
30, unless otherwise noted:
2003/(1)/ 2003 2002 2001 2000 1999/(2)/
--------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period........ $10.42 $10.48 $11.08 $11.85 $ 13.54 $ 15.00
------ ------ ------ ------ ------ ------
Income (Loss) From Operations:
Net investment income.................... 0.57 1.18 1.27 1.37 1.45 1.23
Net realized and unrealized gain (loss).. 0.72 0.12 (0.50) (0.58) (1.70) (1.45)
-- -- ----- ----- ----- -----
Total Income (Loss) From Operations......... 1.29 1.30 0.77 0.79 (0.25) (0.22)
-- -- -- -- ----- -----
Offering Costs on Issuance of
Common Stock............................... -- -- -- -- -- (0.02)
- - - - - -----
Less Distributions From:
Net investment income.................... (0.69) (1.16) (1.18) (1.40) (1.44) (1.22)
Capital.................................. -- (0.22) (0.20) (0.16) -- --
- ----- ----- ----- - -
Total Distributions......................... (0.69) (1.38) (1.38) (1.56) (1.44) (1.22)
----- ----- ----- ----- ----- -----
Increase in Net Asset Value Due to Shares
Issued on Reinvestment of Dividends........ -- 0.02 0.01 -- -- --
- -- -- - - -
Net Asset Value, End of Period.............. $11.02 $10.42 $10.48 $11.08 $ 11.85 $ 13.54
====== ====== ====== ====== ====== ======
Market Price, End of Period................. $12.40 $11.65 $11.65 $10.96 $11.750 $12.625
====== ====== ====== ====== ======= =======
Total Return, Based on Market Price/(3)/.... 13.16%++ 15.00% 20.83% 6.85% 5.45% (7.57)%++
Ratios to Average Net Assets:
Total expenses, including interest
expense................................. 2.22%+ 2.49% 2.80% 3.09% 2.09% 1.54%+
Total expenses, excluding interest
expense (operating expenses)............ 1.59%+ 1.63% 1.57% 1.43% 1.29% 1.24%+
Net investment income.................... 10.73%+ 12.64% 12.08% 11.87% 11.48% 9.84%+
Net Assets, End of Period (000s)............ $825,608 $771,566 $750,334 $764,344 $790,743 $903,792
Portfolio Turnover Rate..................... 19% 87% 118% 118% 68% 66%
Loans Outstanding, End of Period (000s)..... $300,000 $300,000 $260,000 $260,000 $105,000 $105,000
Weighted Average Interest Rate on Loans..... 1.67%+ 2.15% 3.44% 6.69% 6.18% 5.72%
--------------------------------------------------------------------------------
(1)For the six months ended October 31, 2003 (unaudited).
(2)For the period May 28, 1998 (commencement of operations) to April 30, 1999.
(3)For purposes of this calculation, dividends are assumed to be reinvested at
prices obtained under the Fund's dividend reinvestment plan and the broker
commission paid to purchase or sell a share is excluded.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
Page 27
SALOMON BROTHERS HIGH INCOME FUND II INC.
ADDITIONAL INFORMATION (unaudited)
Results of Annual Meeting of Stockholders
The Fund held its Annual Meeting of Stockholders on August 7, 2003, for the
purpose of voting upon the election of Riordan Roett and Leslie H. Gelb as
Class II Directors of the Fund, to serve until the 2006 Annual Meeting of
Stockholders, and R. Jay Gerken as a Class III Director of the Fund, to serve
until the 2004 Annual Meeting of Stockholders. The following table provides
information concerning the matter voted upon at the Meeting.
1. Election of Directors
Nominees Votes For Votes Withheld
-------- ---------- --------------
Class II -- to serve until the year 2006
Riordan Roett............................ 69,695,990 851,912
Leslie H. Gelb........................... 69,706,637 841,265
Class III -- to serve until the year 2004
R. Jay Gerken............................ 69,743,108 804,794
In addition, on August 1, 2003, the Board of Directors ("Board") of the Fund
elected William R. Hutchinson a Class III Director of the Fund. The Board also
appointed Mr. Hutchinson a member of the Fund's Nominating Committee and chair
of the Fund's Audit Committee.
At October 31, 2003, in addition to Leslie H. Gelb, R. Jay Gerken, William R.
Hutchinson, and Riordan Roett, the other Directors of the Fund were as follows:
Carol L. Colman
Daniel P. Cronin
Jeswald W. Salacuse
ADDITIONAL INFORMATION ABOUT YOUR FUND (unaudited)
The Fund's Adviser and some of its affiliates have received requests for
information from various government regulators regarding market timing, late
trading, fees and other mutual fund issues in connection with various
investigations. The Fund has been informed that the Adviser and its affiliates
are responding to those information requests, but are not in a position to
predict the outcome of these requests and investigations.
Page 28
SALOMON BROTHERS HIGH INCOME FUND II INC.
DIVIDEND REINVESTMENT PLAN (unaudited)
Pursuant to certain rules of the Securities and Exchange Commission the
following additional disclosure is provided.
Each shareholder purchasing shares of common stock ("Shares") of Salomon
Brothers High Income Fund II Inc. ("Fund") will be deemed to have elected to be
a participant in the Dividend Reinvestment Plan ("Plan"), unless the
shareholder specifically elects in writing (addressed to the Agent at the
address below or to any nominee who holds Shares for the shareholder in its
name) to receive all income dividends and distributions of capital gains in
cash, paid by check, mailed directly to the record holder by or under the
direction of PFPC Inc. as the Fund's dividend-paying agent ("Agent"). A
shareholder whose Shares are held in the name of a broker or nominee who does
not provide an automatic reinvestment service may be required to take such
Shares out of "street name" and register such Shares in the shareholder's name
in order to participate, otherwise dividends and distributions will be paid in
cash to such shareholder by the broker or nominee. Each participant in the Plan
is referred to herein as a "Participant." The Agent will act as Agent for each
Participant, and will open accounts for each Participant under the Plan in the
same name as their Shares are registered.
Unless the Fund declares a dividend or distribution payable only in the form of
cash, the Agent will apply all dividends and distributions in the manner set
forth below.
If, on the determination date (as defined below), the market price per Share
equals or exceeds the net asset value per Share on that date (such condition, a
"market premium"), the Agent will receive the dividend or distribution in newly
issued Shares of the Fund on behalf of Participants. If, on the determination
date, the net asset value per Share exceeds the market price per Share (such
condition, a "market discount"), the Agent will purchase Shares in the open
market. The determination date will be the fourth New York Stock Exchange
trading day (a New York Stock Exchange trading day being referred to herein as
a "Trading Day") preceding the payment date for the dividend or distribution.
For purposes herein, "market price" will mean the average of the highest and
lowest prices at which the Shares sell on the New York Stock Exchange on the
particular date, or if there is no sale on that date, the average of the
closing bid and asked quotations.
Purchases made by the Agent will be made as soon as practicable commencing on
the Trading Day following the determination date and terminating no later than
30 days after the dividend or distribution payment date except where temporary
curtailment or suspension of purchase is necessary to comply with applicable
provisions of federal securities law; provided, however, that such purchases
will, in any event, terminate on the Trading Day prior to the "ex-dividend"
date next succeeding the dividend or distribution payment date.
If (i) the Agent has not invested the full dividend amount in open market
purchases by the date specified at the bottom of the prior page as the date on
which such purchases must terminate or (ii) a market discount shifts to a
market premium during the purchase period, then the
Page 29
SALOMON BROTHERS HIGH INCOME FUND II INC.
DIVIDEND REINVESTMENT PLAN (unaudited) (continued)
Agent will cease making open market purchases and will receive the uninvested
portion of the dividend amount in newly issued Shares (x) in the case of (i)
above, at the close of business on the date the Agent is required to terminate
making open market purchases as specified at the bottom of the prior page or
(y) in the case of (ii) above, at the close of business on the date such shift
occurs; but in no event prior to the payment date for the dividend or
distribution.
In the event that all or part of a dividend or distribution amount is to be
paid in newly issued Shares, such Shares will be issued to Participants in
accordance with the following formula: (i) if, on the valuation date, the net
asset value per share is less than or equal to the market price per Share, then
the newly issued Shares will be valued at net asset value per Share on the
valuation date provided, however, that if the net asset value is less than 95%
of the market price on the valuation date, then such Shares will be issued at
95% of the market price and (ii) if, on the valuation date, the net asset value
per share is greater than the market price per Share, then the newly issued
Shares will be issued at the market price on the valuation date. The valuation
date will be the dividend or distribution payment date, except that with
respect to Shares issued pursuant to the paragraph above, the valuation date
will be the date such Shares are issued. If a date that would otherwise be a
valuation date is not a Trading Day, the valuation date will be the next
preceding Trading Day.
The open market purchases provided for above may be made on any securities
exchange on which the Shares of the Fund are traded, in the over-the-counter
market or in negotiated transactions, and may be on such terms as to price,
delivery and otherwise as the Agent shall determine. Funds held by the Agent
uninvested will not bear interest, and it is understood that, in any event, the
Agent shall have no liability in connection with any inability to purchase
Shares within the time periods herein provided, or with the timing of any
purchases effected. The Agent shall have no responsibility as to the value of
the Shares acquired for the Participant's account. The Agent may commingle
amounts of all Participants to be used for open market purchases of Shares and
the price per Share allocable to each Participant in connection with such
purchases shall be the average price (including brokerage commissions) of all
Shares purchased by the Agent.
The Agent will maintain all Participant accounts in the Plan and will furnish
written confirmations of all transactions in each account, including
information needed by Participants for personal and tax records. The Agent will
hold Shares acquired pursuant to the Plan in noncertificated form in the
Participant's name or that of its nominee, and each Participant's proxy will
include those Shares purchased pursuant to the Plan. The Agent will forward to
Participants any proxy solicitation material and will vote any Shares so held
for Participants only in accordance with the proxy returned by Participants to
the Fund. Upon written request, the Agent will deliver to Participants, without
charge, a certificate or certificates for the full Shares.
Page 30
SALOMON BROTHERS HIGH INCOME FUND II INC.
DIVIDEND REINVESTMENT PLAN (unaudited) (continued)
The Agent will confirm to Participants each acquisition made for their
respective accounts as soon as practicable but not later than 60 days after the
date thereof. Although Participants may from time to time have an undivided
fractional interest (computed to three decimal places) in a Share of the Fund,
no certificates for fractional shares will be issued. Dividends and
distributions on fractional shares will be credited to each Participant's
account. In the event of termination of a Participant's account under the Plan,
the Agent will adjust for any such undivided fractional interest in cash at the
market value of the Fund's Shares at the time of termination less the pro rata
expense of any sale required to make such an adjustment.
Any share dividends or split shares distributed by the Fund on Shares held by
the Agent for Participants will be credited to their respective accounts. In
the event that the Fund makes available to Participants rights to purchase
additional Shares or other securities, the Shares held for Participants under
the Plan will be added to other Shares held by the Participants in calculating
the number of rights to be issued to Participants.
The Agent's service fee for handling capital gains distributions or income
dividends will be paid by the Fund. Participants will be charged a pro rata
share of brokerage commissions on all open market purchases.
Participants may terminate their accounts under the Plan by notifying the Agent
in writing or by calling 1-800-331-1710. Such termination will be effective
immediately if notice is received by the Agent not less than ten days prior to
any dividend or distribution record date; otherwise such termination will be
effective on the first Trading Day after the payment due for such dividend or
distribution with respect to any subsequent dividend or distribution. The Plan
may be amended or terminated by the Fund as applied to any dividend or capital
gains distribution paid subsequent to written notice of the change or
termination sent to Participants at least 30 days prior to the record date for
the dividend or capital gains distribution. The Plan may be amended or
terminated by the Agent, with the Fund's prior written consent, on at least 30
days' written notice to Plan Participants. Notwithstanding the preceding two
sentences, the Agent or the Fund may amend or supplement the Plan at any time
or times when necessary or appropriate to comply with applicable law or rules
or policies of the Securities and Exchange Commission or any other regulatory
authority. Upon any termination, the Agent will cause a certificate or
certificates for the full Shares held by each Participant under the Plan and
cash adjustment for any fraction to be delivered to each Participant without
charge. If the Participant elects by notice to the Agent in writing in advance
of such termination to have the Agent sell part or all of a Participant's
Shares and remit the proceeds to Participant, the Agent is authorized to deduct
a $2.50 fee plus brokerage commission for this transaction from the proceeds.
Any amendment or supplement shall be deemed to be accepted by each Participant
unless, prior to the effective date thereof, the Agent receives written notice
of the termination of the Participant's account under the Plan. Any such
amendment may include an appointment by the
Page 31
SALOMON BROTHERS HIGH INCOME FUND II INC.
DIVIDEND REINVESTMENT PLAN (unaudited) (continued)
Agent in its place and stead of a successor Agent under these terms and
conditions, with full power and authority to perform all or any of the acts to
be performed by the Agent under these terms and conditions. Upon any such
appointment of an Agent for the purpose of receiving dividends and
distributions, the Fund will be authorized to pay to such successor Agent, for
each Participant's account, all dividends and distributions payable on Shares
of the Fund held in each Participant's name or under the Plan for retention or
application by such successor Agent as provided in these terms and conditions.
In the case of Participants, such as banks, broker-dealers or other nominees,
which hold Shares for others who are beneficial owners ("Nominee Holders"), the
Agent will administer the Plan on the basis of the number of Shares certified
from time to time by each Nominee Holder as representing the total amount
registered in the Nominee Holder's name and held for the account of beneficial
owners who are to participate in the Plan.
The Agent shall at all times act in good faith and use its best efforts within
reasonable limits to insure the accuracy of all services performed under this
Agreement and to comply with applicable law, but assumes no responsibility and
shall not be liable for loss or damage due to errors unless such error is
caused by its negligence, bad faith, or willful misconduct or that of its
employees.
All correspondence concerning the Plan should be directed to the Agent at P.O.
Box 8030, Boston, Massachusetts 02266-8030.
ADDITIONAL SHAREHOLDER INFORMATION (unaudited)
This report is transmitted to the shareholders of Salomon Brothers High Income
Fund II Inc. for their information. This is not a prospectus, circular or
representation intended for use in the purchase of shares of the Fund or any
securities mentioned in this report.
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940, as amended, that from time to time the Fund may purchase,
at market prices, shares of its common stock in the open market.
A description of the policies and procedures that the Fund uses to determine
how to vote proxies relating to portfolio securities is available without
charge, upon request, by telephoning the Fund (toll-free) at 1-800-446-1013 and
by visiting the SEC's web site at www.sec.gov.
Page 32
SALOMON BROTHERS HIGH INCOME FUND II INC.
DIRECTORS
CAROL L. COLMAN
DANIEL P. CRONIN
LESLIE H. GELB
R. JAY GERKEN, CFA
WILLIAM R. HUTCHINSON
RIORDAN ROETT
JESWALD W. SALACUSE
OFFICERS
R. JAY GERKEN, CFA
Chairman
PETER J. WILBY, CFA
President
ANDREW B. SHOUP*
Senior Vice President and
Chief Administrative Officer
MAUREEN O'CALLAGHAN
Executive Vice President
JAMES E. CRAIGE, CFA
Executive Vice President
THOMAS K. FLANAGAN, CFA
Executive Vice President
BETH A. SEMMEL, CFA
Executive Vice President
FRANCES M. GUGGINO
Controller
ROBERT I. FRENKEL
Secretary* and Chief Legal Officer
* As of November 25, 2003.
SALOMON BROTHERS HIGH INCOME FUND II INC.
125 Broad Street
10th Floor, MF-2
New York, New York 10004
Telephone 1-888-777-0102
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc
399 Park Avenue
New York, New York 10022
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DIVIDEND DISBURSING AND TRANSFER AGENT
PFPC Inc.
P.O. Box 8030
Boston, Massachusetts 02266-8030
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
LEGAL COUNSEL
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, New York 10017
NEW YORK STOCK EXCHANGE SYMBOL
HIX
Page 33
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ITEM 2. CODE OF ETHICS.
Not Applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not Applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Board of Directors of the Fund has delegated the authority to
develop policies and procedures relating to proxy voting to the
Manager. The Manager is part of Citigroup Asset Management ("CAM"), a
group of investment adviser affiliates of Citigroup, Inc.
("Citigroup"). Along with the other investment advisers that comprise
CAM, the Manager has adopted a set of proxy voting policies and
procedures (the "Policies") to ensure that the Manager votes proxies
relating to equity securities in the best interest of clients.
In voting proxies, the Manager is guided by general fiduciary
principles and seeks to act prudently and solely in the best interest
of clients. The Manager attempts to consider all factors that could
affect the value of the investment and will vote proxies in the manner
that it believes will be consistent with efforts to maximize
shareholder values. The Manager may utilize an external service
provider to provide it with information and/or a recommendation with
regard to proxy votes. However, such recommendations do not relieve the
Manager of its responsibility for the proxy vote.
In the case of a proxy issue for which there is a stated position in
the Policies, CAM generally votes in accordance with such stated
position. In the case of a proxy issue for which there is a list of
factors set forth in the Policies that CAM considers in voting on such
issue, CAM votes on a case-by-case basis in accordance with the general
principles set forth above and considering such enumerated factors. In
the case of a proxy issue for which there is no stated position or list
of factors that CAM considers in voting on such issue, CAM votes on a
case-by-case basis in accordance with the general principles set forth
above. Issues for which there is a stated position set forth in the
Policies or for which there is a list of factors set forth in the
Policies that CAM considers in voting on such issues fall into a
variety of categories, including election of directors, ratification of
auditors, proxy and tender offer defenses, capital structure issues,
executive and director
compensation, mergers and corporate restructurings, and social and
environmental issues. The stated position on an issue set forth in the
Policies can always be superseded, subject to the duty to act solely in
the best interest of the beneficial owners of accounts, by the
investment management professionals responsible for the account whose
shares are being voted. Issues applicable to a particular industry may
cause CAM to abandon a policy that would have otherwise applied to
issuers generally. As a result of the independent investment advisory
services provided by distinct CAM business units, there may be
occasions when different business units or different portfolio managers
within the same business unit vote differently on the same issue.
In furtherance of the Manager's goal to vote proxies in the best
interest of clients, the Manager follows procedures designed to
identify and address material conflicts that may arise between the
Manager's interests and those of its clients before voting proxies on
behalf of such clients. To seek to identify conflicts of interest, CAM
periodically notifies CAM employees (including employees of the
Manager) in writing that they are under an obligation (i) to be aware
of the potential for conflicts of interest with respect to voting
proxies on behalf of client accounts both as a result of their personal
relationships and due to special circumstances that may arise during
the conduct of CAM's and the Manager's business, and (ii) to bring
conflicts of interest of which they become aware to the attention of
compliance personnel. The Manager also maintains and considers a list
of significant relationships that could present a conflict of interest
for the Manager in voting proxies. The Manager is also sensitive to the
fact that a significant, publicized relationship between an issuer and
a non-CAM affiliate might appear to the public to influence the manner
in which the Manager decides to vote a proxy with respect to such
issuer. Absent special circumstances or a significant, publicized
non-CAM affiliate relationship that CAM or the Manager for prudential
reasons treats as a potential conflict of interest because such
relationship might appear to the public to influence the manner in
which the Manager decides to vote a proxy, the Manager generally takes
the position that non-CAM relationships between Citigroup and an issuer
(e.g. investment banking or banking) do not present a conflict of
interest for the Manager in voting proxies with respect to such issuer.
Such position is based on the fact that the Manager is operated as an
independent business unit from other Citigroup business units as well
as on the existence of information barriers between the Manager and
certain other Citigroup business units.
CAM maintains a Proxy Voting Committee, of which the Manager personnel
are members, to review and address conflicts of interest brought to its
attention by compliance personnel. A proxy issue that will be voted in
accordance with a stated position on an issue or in accordance with the
recommendation of an independent third party is not brought to the
attention of the Proxy Voting Committee for a conflict of interest
review because the Manager's position is that to the extent a conflict
of interest issue exists, it is resolved by voting in accordance with a
pre-determined policy or in accordance with the recommendation of an
independent third party. With respect to a conflict of interest brought
to its attention, the
Proxy Voting Committee first determines whether such conflict of
interest is material. A conflict of interest is considered material to
the extent that it is determined that such conflict is likely to
influence, or appear to influence, the Manager's decision-making in
voting proxies. If it is determined by the Proxy Voting Committee that
a conflict of interest is not material, the Manager may vote proxies
notwithstanding the existence of the conflict.
If it is determined by the Proxy Voting Committee that a conflict of
interest is material, the Proxy Voting Committee is responsible for
determining an appropriate method to resolve such conflict of interest
before the proxy affected by the conflict of interest is voted. Such
determination is based on the particular facts and circumstances,
including the importance of the proxy issue and the nature of the
conflict of interest. Methods of resolving a material conflict of
interest may include, but are not limited to, disclosing the conflict
to clients and obtaining their consent before voting, or suggesting to
clients that they engage another party to vote the proxy on their
behalf.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal
financial officer have concluded that the registrant's disclosure
controls and procedures (as defined in Rule 30a- 3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act")) are
effective as of a date within 90 days of the filing date of this
report that includes the disclosure required by this paragraph,
based on their evaluation of the disclosure controls and procedures
required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under
the Securities Exchange Act of 1934.
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940
Act) that occurred during the registrant's last fiscal half-year
(the registrant's second fiscal half-year in the case of an annual
report) that have materially affected, or are likely to materially
affect the registrant's internal control over financial reporting.
ITEM 10. EXHIBITS.
(a) Not applicable.
(b) Attached hereto.
Exhibit 99.CERT Certifications pursuant to section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 99.906CERT Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this Report
to be signed on its behalf by the undersigned, there unto duly authorized.
Salomon Brothers High Income Fund II Inc.
By: /s/ R. Jay Gerken
R. Jay Gerken
Chief Executive Officer of
Salomon Brothers High Income Fund II Inc.
Date: January 5, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ R. Jay Gerken
(R. Jay Gerken)
Chief Executive Officer of
Salomon Brothers High Income Fund II Inc.
Date: January 5, 2004
By: /s/ Andrew B. Shoup
(Andrew B. Shoup)
Chief Administrative Officer of
Salomon Brothers High Income Fund II Inc.
Date: January 5, 2004