<PAGE>
Managed
HIGH INCOME
Portfolio Inc.
[GRAPHIC OMITTED]
Semi-Annual
Report
August 31, 1998
<PAGE>
Managed
HIGH INCOME
PORTFOLIO INC.
LETTER TO
SHAREHOLDERS
August 31, 1998
Dear Shareholder:
We are pleased to provide the semi-annual report for the Managed High
Income Portfolio Inc. ("Fund") for the period ended August 31, 1998. During the
past six months, the Fund paid income dividends totaling $0.52 per share. The
table below details the annualized distribution rate and the six-month total
return for the Fund based on its August 31, 1998 net asset value ("NAV") and the
New York Stock Exchange ("NYSE") closing price.
Annualized Six-Month
Price Per Share Distribution Rate Total Return
--------------- ----------------- ------------
$10.99 (NAV) 9.39% (3.13)%
$9.75 (NYSE) 10.58% (13.18)%
For the three and six months ended August 31, 1998, the Fund returned
- -4.87% and -3.13%, respectively. While we are clearly disappointed by the Fund's
poor results during these time periods, we did better than the three-month and
six-month average total returns of -7.69% and -6.17%, respectively for
closed-end, high-yield bond funds as reported by Lipper Analytical Services,
Inc. (Lipper is an independent mutual fund performance tracking organization.)
We believe that we were able to mitigate the Fund's recent declines through
conservative and prudent issue selection with a heavy focus on identifying
companies with improving fundamentals.
Market and Economic Overview
For the six months ended August 31, 1998, the high-yield bond market
generated relatively weak results and underperformed versus all other domestic
bond market sectors. Total returns ranged between a negative 5.75% for high
yield bonds to a positive 7.50% for 30-year U.S. Treasuries.
1
<PAGE>
The 30-year U.S. Treasury bond generated the strongest results of all bond
sectors during the review period. As more investors became convinced that the
Asian crisis would contribute to an economic slowdown in the U.S. starting in
the second half of 1998, they began to aggressively invest in U.S. Treasury
bonds that would provide better protection in any meaningful economic slowdown.
Among high-yield bonds, the higher-quality issues generated the strongest
results given their better performance in a potentially slowing economy. The
lowest-quality, high-yield bond issues generated the worst returns in the
domestic bond market, which was not surprising given their greater vulnerability
when the economy performs poorly. By the end of August, the high-yield market
had reached relative valuation levels last seen in the recession of 1990-91. We
believe that the recent high-yield bond market sell-off has been more a function
of extremely poor short-term demand rather than any major deterioration in U.S.
economic growth.
The year-to-date total of newly issued high-yield bonds was roughly $120
billion, more than twice last year's figure of $60 billion. Year-to-date inflows
into open-end, high-yield bond funds were roughly $17 billion. While these fund
inflows were above last year's total of $8 billion, it was clearly insufficient
to counterbalance the extremely heavy new-issue calendar. We think this
short-term imbalance in the high-yield bond market will correct itself as the
amount of new issuance decreases and demand eventually picks up.
While the U.S. economy remains generally supportive of a broad range of
U.S. companies and inflation continues to be modest, there is some concern that
the Asian economic crisis will cause U.S. economic growth to slow down,
particularly in those industries that export to Asia. However, since only a
small percentage of U.S. manufacturing and services companies export to Asia,
the U.S. economy's exposure to this region remains minimal. We think it is still
an open question whether Asia's problems will have any meaningful negative
impact on future U.S. economic growth. Nevertheless, the Federal Reserve Board
("Fed") remains vigilant about the possibility of a marked deterioration in U.S.
economic growth and has recently indicated it may lower short-term interest
rates to stimulate the economy.*
Portfolio Strategy and Market Outlook
The Fund remains cautiously positioned with a heavy emphasis in
better-quality, intermediate-maturity "B" and "BB" rated high-yield bonds. As of
August 1998, the Fund's average maturity on a call-adjusted basis was
approximately 6.5 years. (Average maturity on a call-adjusted basis calculates
the Fund's maturity based on the call dates, rather than the maturity dates, of
the bonds
- -----------
* The Fed lowered the federal-funds rate 25 basis points on Tuesday,
September 29, 1998 and on Thursday, October 15, 1998, after this letter
was written.
2
<PAGE>
held.) In addition, the Fund continued to emphasize telecommunications issues as
well as cable and media issues.
As high-yield bond spreads continued to widen during the past three
months, we began to take advantage of what we believed were attractively priced
"B" rated issues. Given the continued problems in Asia, we plan to remain
underweighted in basic commodity industries such as steel, forest products and
petrochemicals; industries that have been negatively affected by disinflationary
trends over the past six months. (Disinflation is the slowing down of the rate
at which prices increase. Disinflation should not be confused with deflation,
which is when prices actually fall.) We have recently started to lower our
exposure to the energy industry given the continued weakness in energy prices
and the expectation that as long as Asia remains mired in difficulties, energy
prices should remain depressed.
Although the high-yield bond market may still be vulnerable to further
disappointments, we believe that the Fund is appropriately positioned for
current economic conditions. And while we still expect economic growth to slow
and corporate profit margins to deteriorate for the rest of 1998, we do not
anticipate any meaningful slowdown in U.S. economic growth for the balance of
the year. As a result, we have become more opportunistically invested in select
"B" and "BB" rated new issues that we believe have good investment potential.
Moreover, we will continue to maintain the Fund's relatively sound
credit-quality orientation given the higher volatility in the financial markets.
In closing, thank you for investing in the Managed High Income Portfolio.
We look forward to continuing to help you achieve your investment goals. If you
have any questions about the Fund, please call the First Data Investor Services
Group Inc. at (800) 331-1710.
Sincerely,
/s/ Heath B. McLendon /s/ John C. Bianchi
Heath B. McLendon John C. Bianchi, C.F.A.
Chairman Vice President and
Investment Officer
September 23, 1998
3
<PAGE>
Take Advantage of the Fund's Dividend Reinvestment Plan!
Did you know that fund investors who reinvest their dividends are taking
advantage of one of the most effective wealth-building tools available today?
Systematic investments put time to work for you through the strength of
compounding.
As an investor in the Portfolio, you can participate in its Dividend
Reinvestment Plan ("Plan"), a convenient, simple and efficient way to reinvest
your dividends and capital gains, if any, in additional shares of the Portfolio.
A description of the Fund's Plan begins on page 31. Below is a short summary of
how the Dividend Reinvestment Plan works.
Plan Summary
If you are a Plan participant who has not elected to receive your dividends in
the form of a cash payment, then your dividend and capital gain distributions
will be reinvested automatically in additional shares of the Portfolio.
The number of common stock shares in the Fund you will receive in lieu of a cash
dividend is determined in the following manner. If the market price of the
common stock is equal to or exceeds the net asset value ("NAV") per share on the
date of valuation, you will be issued shares for the equivalent of the most
recently determined NAV per share or 95% of the market price, whichever is
greater.
If the NAV per share at the time of valuation is greater than the market price
of the common stock, or if the Portfolio declares a dividend or capital gains
distribution payable only in cash, the Purchasing Agent will buy common stock
for your account in the open market or on the New York Stock Exchange.
If the Purchasing Agent begins to purchase additional shares in the open market
and the market price of the shares subsequently rises above the NAV before the
purchases are completed, the Purchasing Agent will attempt to cancel any
remaining orders and the Portfolio will issue the remaining dividend or
distribution in shares at the greater of Fund's NAV per share or 95% of the then
current market price. In that case, the number of Fund shares you receive will
be based on the weighted average of prices paid for shares purchased in the open
market and the price at which the Fund issues the remaining shares.
To find out more detailed information about the Dividend Reinvestment Plan and
about how you can participate, please call First Data Investors Services Group
Inc. at (800) 331-1710.
4
<PAGE>
SCHEDULE OF INVESTMENTS
August 31, 1998 (unaudited)
<TABLE>
<CAPTION>
Face
Amount Rating Security Value
- -------------------------------------------------------------------------------------
CORPORATE BONDS AND NOTES - 93.7%
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aerospace/Defense -- 2.2%
$9,375,000 Ba2* Airplanes-Pass Through Trust, Corporate
Collateralized Mortgage Obligation,
10.875% due 3/15/19 .......................... $10,350,844
- -------------------------------------------------------------------------------------
Banks, Savings & Loans -- 2.3%
First Nationwide Parent Holdings Ltd.:
9,025,000 B Sr. Notes, 12.500% due 4/15/03 ............... 10,130,563
600,000 Ba3* Sr. Sub. Notes, 10.625% due 10/1/03 .......... 669,750
- -------------------------------------------------------------------------------------
10,800,313
- -------------------------------------------------------------------------------------
Broadcasting - TV, Cable and Radio -- 11.3%
Century Communications Corp.:
1,150,000 Ba3* Sr. Discount Notes, zero coupon bond to yield
8.170% due 3/15/03 ......................... 747,500
3,050,000 BB- Sr. Notes, 8.750% due 10/1/07 ................ 3,175,813
3,925,000 B2* Comcast UK Cable, Debentures, step bond to
yield 11.175% due 11/15/07 ................... 3,257,750
CSC Holdings Inc., Sr. Sub. Debentures:
9,220,000 BB- 9.875% due 2/15/13 ........................... 10,049,800
3,250,000 BB- 10.500% due 5/15/16 .......................... 3,705,000
3,175,000 BB- 9.875% due 4/1/23 ............................ 3,452,813
Rogers Cablesystems, Inc.:
2,275,000 BB+ Sr. Notes, Series B, 10.000% due 3/15/05 ..... 2,411,500
2,575,000 BB+ Sr. Sub. Debentures, 10.000% due 12/1/07 ..... 2,729,500
7,175,000 BB- Sr. Sub. Debentures, 11.000% due 12/1/15 ..... 8,036,000
1,250,000 BB- Rogers Communications, Sr. Notes,
9.125% due 1/15/06 ........................... 1,237,500
1,950,000 CCC+ Telemundo Holdings Inc., Sr. Discount Notes,
step bond to yield 11.120% due 8/15/08 ....... 1,087,125
TV Azteca SA, Guaranteed Sr. Notes:
2,300,000 B+ Series A, 10.125% due 2/15/04 ................ 1,874,500
3,000,000 B+ Series B, 10.500% due 2/15/07 ................ 2,355,000
</TABLE>
See Notes to Financial Statements 5
<PAGE>
SCHEDULE OF INVESTMENTS
August 31, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Rating Security Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Broadcasting - TV, Cable and Radio -- 11.3% (continued)
$21,450,000 B United International Holdings Inc., Sr. Discount
Notes, step bond to yield
11.023% due 2/15/08+ .......................... $10,081,500
- -------------------------------------------------------------------------------------
54,201,301
- -------------------------------------------------------------------------------------
Cellular and Other Wireless -- 11.8%
11,200,000 B3* Clearnet Communications Inc., Sr. Discount Notes,
step bond to yield 12.840% due 12/15/05 ....... 8,960,000
Dolphin Telecom PLC, Sr. Discount Notes:
5,100,000 B- Step bond to yield 11.410% due 6/1/08+ ........ 2,741,250
4,525,000 B- Step bond to yield 11.200% due 6/1/08+ ........ 2,478,454
7,850,000 B- Iridium LLC Capital Corp., Guaranteed Notes,
14.000% due 7/15/05 ........................... 7,379,000
7,875,000 B3* Millicom International Cellular SA,
Sr. Discount Notes, step bond to yield
13.322% due 6/1/06 ............................ 5,286,094
10,250,000 B2* Nextel Communications Inc., Sr. Discount Notes,
step bond to yield 10.585% due 8/15/04 ........ 9,955,313
2,900,000 B3* Omnipoint Corp, Sr. Notes, 11.625% due 8/15/06 .. 2,827,500
4,525,000 Ba3* Orange PLC, Sr. Notes, 8.000% due 8/1/08 ........ 4,185,625
2,800,000 B3* Pagemart Nationwide, Sr. Discount Notes,
step bond to yield 13.297% due 2/1/05 ......... 2,464,000
6,550,000 Caa* Pagemart Wireless Inc., Sr. Discount Notes,
step bond to yield 11.250% due 2/1/08 ......... 3,283,188
Telesystems International Wireless Inc.,
Sr. Discount Notes:
9,575,000 CCC+ Step bond to yield 12.395% due 6/30/07 ...... 5,745,000
2,500,000 CCC+ Step bond to yield 11.152% due 11/1/07 ...... 1,375,000
- -------------------------------------------------------------------------------------
56,680,424
- -------------------------------------------------------------------------------------
Consumer Durables -- 1.0%
4,650,000 B Outboard Marine Corp., Sr. Notes,
10.750% due 6/1/08 ............................ 4,580,250
- -------------------------------------------------------------------------------------
</TABLE>
6 See Notes to Financial Statements
<PAGE>
SCHEDULE OF INVESTMENTS
August 31, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Rating Security Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Diversified Conglomerate/Manufacturing -- 2.3%
$1,750,000 B- Alvey Systems Inc., Sr. Sub. Notes,
11.375% due 1/31/03 .......................... $ 1,800,313
2,225,000 BB- Clisa SA, Guaranteed Sr. Notes,
11.625% due 6/1/04+ .......................... 1,907,938
2,600,000 B- Eagle-Picher Industries Inc., Sr. Sub. Notes,
9.375% due 3/1/08 ............................ 2,580,500
2,265,000 B3* Interlake Corp., Sr. Sub. Debentures,
12.125% due 3/1/02 ........................... 2,276,325
2,650,000 B+ Park-Ohio Industries, Sr. Sub. Notes,
9.250% due 12/1/07 ........................... 2,593,689
- -------------------------------------------------------------------------------------
11,158,765
- -------------------------------------------------------------------------------------
Diversified Conglomerate/Services -- 1.7%
1,800,000 B- Axiohm Transaction Solutions Inc.,
Sr. Sub. Notes, 9.750% due 10/1/07 ........... 1,719,000
2,900,000 B2* Intertek Finance PLC., Sr. Sub. Notes,
Series B, 10.250% due 11/1/06 ................ 2,921,750
3,250,000 B- Outsourcing Solutions Inc., Sr. Sub. Notes,
11.000% due 11/1/06 .......................... 3,457,189
- -------------------------------------------------------------------------------------
8,097,939
- -------------------------------------------------------------------------------------
Electric Utilities -- 3.4%
AES Corp., Sr. Sub. Notes:
6,660,000 Ba1* 8.500% due 11/1/07 ........................... 6,618,375
1,640,000 Ba1* 10.250% due 7/15/06 .......................... 1,746,600
Calpine Corp., Sr. Notes:
3,650,000 Ba2* 10.500% due 5/15/06 .......................... 3,905,500
2,400,000 Ba2* 8.750% due 7/15/07 ........................... 2,421,000
1,065,586 BB Midland Cogeneration Venture Limited
Partnership, Midland Funding, Sr. Secured
Lease Obligation Bond, Series C,
10.330% due 7/23/02 .......................... 1,137,514
850,000 BB- Niagara Mohawk Power Corp.,
step bond to yield 8.419% due 7/1/10 ......... 580,125
- -------------------------------------------------------------------------------------
16,409,114
- -------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements 7
<PAGE>
SCHEDULE OF INVESTMENTS
August 31, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Rating Security Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Electronics - Computers -- 7.0%
$1,495,000 B Celestica International Inc., Sr. Sub. Notes,
10.500% due 12/31/06 .......................... $ 1,603,388
5,275,000 B Fairchild Semiconductor Inc., Sr. Sub. Notes,
10.125% due 3/15/07 ........................... 4,813,438
2,675,000 B- Graphic Controls Corp., Sr. Sub. Notes,
12.000% due 9/15/05 ........................... 2,975,938
Unisys Corp., Sr. Notes:
6,200,000 Ba3* 12.000% due 4/15/03 ........................... 6,936,250
9,175,000 Ba3* 11.750% due 10/15/04 .......................... 10,516,845
5,650,000 B- Viasystems Inc., Sr. Sub. Notes,
9.750% due 6/1/07 ............................. 4,915,500
2,900,000 NR WAM!Net Inc., step bond to yield
13.299% due 3/1/05 ............................ 1,638,500
- -------------------------------------------------------------------------------------
33,399,859
- -------------------------------------------------------------------------------------
Finance -- 2.5%
Amresco Inc., Sr. Sub. Notes, Series A:
3,250,000 B 10.000% due 3/15/04 ........................... 3,258,125
750,000 B 9.875% due 3/15/05 ............................ 738,750
2,250,000 NR Ocwen Asset Investment, Sr. Notes,
11.500% due 7/1/05+ ........................... 2,185,314
3,200,000 B2* Ocwen Capital Trust, Guaranteed Notes,
10.875% due 8/1/27 ............................ 3,304,000
2,100,000 BB- Ocwen Financial Corp., Notes,
11.875% due 10/1/03 ........................... 2,302,125
- -------------------------------------------------------------------------------------
11,788,314
- -------------------------------------------------------------------------------------
Food & Beverages -- 1.5%
2,675,000 B- B&G Foods Inc., Sr. Sub. Notes,
9.625% due 8/1/07 ............................. 2,487,750
4,625,000 B Imperial Holly Corp., Sr. Sub. Notes,
9.750% due 12/15/07 ........................... 4,515,156
- -------------------------------------------------------------------------------------
7,002,906
- -------------------------------------------------------------------------------------
</TABLE>
8 See Notes to Financial Statements
<PAGE>
SCHEDULE OF INVESTMENTS
August 31, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Rating Security Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Healthcare/Drugs/Hospital Supplies -- 8.0%
$ 1,700,000 B- Alaris Medical Inc., Sr. Discount Notes,
step bond to yield 11.125% due 8/1/08+ ........ $ 975,375
ICN Pharmaceuticals Inc., Sr. Notes:
6,600,000 BB 9.250% due 8/15/05 ............................ 6,303,000
900,000 BB 8.750% due 11/15/08 ........................... 864,000
Integrated Health Services Inc., Sr. Sub. Notes:
2,575,000 B2* 9.500% due 9/15/07 ............................ 2,375,438
4,925,000 B2* 9.250% due 1/15/08 ............................ 4,580,250
12,500,000 B- Magellan Health Services Inc., Sr. Sub. Notes,
9.000% due 2/15/08+ ........................... 10,125,000
4,500,000 B- Mariner Post-Acute Network, Sr. Sub. Notes,
9.500% due 11/1/07 ............................ 4,365,000
Sun Healthcare Group Inc., Sr. Sub. Notes:
4,250,000 B2* 9.500% due 7/1/07 ............................. 4,042,813
4,775,000 B2* 9.375% due 5/1/08+ ............................ 4,542,219
- -------------------------------------------------------------------------------------
38,173,095
- -------------------------------------------------------------------------------------
Hotel, Casinos and Gaming -- 1.9%
1,300,000 B Aztar Corp., Sr. Sub. Notes,
13.750% due 10/1/04 ........................... 1,477,125
3,250,000 B- Courtyard By Marriott, Sr. Secured Notes,
10.750% due 2/1/08 ............................ 3,530,313
3,025,000 BB+ Mohegan Tribal Gaming Authority,
Sr. Secured Notes, 13.500% due 11/15/02 ....... 3,906,031
- -------------------------------------------------------------------------------------
8,913,469
- -------------------------------------------------------------------------------------
Insurance -- 1.2%
3,225,000 BB+ SIG Capital Trust, Guaranteed Notes,
9.500% due 8/15/27 ............................ 3,172,594
2,500,000 BB- Veritas Capital Trust, Guaranteed Notes,
10.000% due 1/1/28+ ........................... 2,537,500
- -------------------------------------------------------------------------------------
5,710,094
- -------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements 9
<PAGE>
SCHEDULE OF INVESTMENTS
August 31, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Rating Security Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Leisure -- 0.5%
$2,500,000 B3* SFX Entertainment Inc., Sr. Sub. Notes,
9.125% due 2/1/08 ............................. $2,387,500
- -------------------------------------------------------------------------------------
Metals/Mining -- 1.0%
2,425,000 B- Haynes International Inc., Sr. Notes,
11.625% due 9/1/04 ............................ 2,670,531
2,300,000 B WHX Corp., Sr. Notes,
10.500% due 4/15/05 ........................... 2,052,750
- -------------------------------------------------------------------------------------
4,723,281
- -------------------------------------------------------------------------------------
Oil and Natural Gas -- 5.1%
2,125,000 B Canadian Forest Oil Ltd., Sr. Sub. Notes,
8.750% due 9/15/07 ............................ 1,912,500
4,350,000 B+ Clark USA Inc., Sr. Notes, 10.875% due 12/1/05 .. 4,670,813
2,650,000 BB- Gulf Canada Resources Ltd., Sub. Debentures,
9.625% due 7/1/05 ............................. 2,722,875
Ocean Energy Inc.:
1,200,000 BB- Company Guaranteed, 8.875% due 7/15/07 ........ 1,095,000
2,625,000 BB- Sr. Sub. Notes, 10.375% due 10/15/05 .......... 2,759,531
2,750,000 BB- Sr. Sub. Notes, 9.750% due 10/1/06 ............ 2,860,000
2,625,000 B+ Parker Drilling Co., Sr. Notes,
9.750% due 11/15/06 ........................... 2,467,500
3,550,000 BB- Santa Fe Energy Resources Inc., Sr. Sub.
Debentures, 11.000% due 5/15/04 ............... 3,785,188
2,150,000 B2* Stone Energy Corp., Sr. Sub. Notes,
8.750% due 9/15/07 ............................ 2,047,875
- -------------------------------------------------------------------------------------
24,321,282
- -------------------------------------------------------------------------------------
Oil Services -- 1.8%
2,315,000 B- Deeptech International Inc., Sr. Notes,
12.000% due 12/15/00 .......................... 2,555,181
2,150,000 B+ ICO Inc., Sr. Notes, 10.375% due 6/1/07 ......... 2,160,750
1,350,000 BB- J. Ray McDermott SA, Sr. Sub. Notes,
9.375% due 7/15/06 ............................ 1,434,375
2,600,000 BB Pride Petroleum Services Inc., Sr. Notes,
9.375% due 5/1/07 ............................. 2,590,250
- -------------------------------------------------------------------------------------
8,740,556
- -------------------------------------------------------------------------------------
</TABLE>
10 See Notes to Financial Statements
<PAGE>
SCHEDULE OF INVESTMENTS
August 31, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Rating Security Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Packaging/Containers -- 0.7%
$1,850,000 B Huntsman Packaging Corp., Sr. Notes,
9.125% due 10/1/07 ............................ $1,838,438
3,000,000 B Impress Metal Packaging Holdings,
Sr. Sub. Notes, 9.875% due 5/29/07 ............ 1,726,679
- -------------------------------------------------------------------------------------
3,565,117
- -------------------------------------------------------------------------------------
Paper/Forest Products and Printing -- 1.7%
7,525,000 B+ S.D. Warren Co., Sr. Sub. Notes,
12.000% due 12/15/04 .......................... 8,305,719
- -------------------------------------------------------------------------------------
Personal Care Products/Cosmetics -- 0.0%
500,000 B3* Revlon Worldwide, Sr. Discount Notes,
zero coupon bond to yield
12.110% due 3/15/01 ........................... 362,500
- -------------------------------------------------------------------------------------
Pollution Control/Waste Removal -- 0.5%
2,025,000 B+ Allied Waste North America Inc., Sr. Sub. Notes,
10.250% due 12/1/06 ........................... 2,181,938
- -------------------------------------------------------------------------------------
Publishing -- 0.7%
2,250,000 NR Middleweb PLC, Sr. Notes,
10.500% due 5/30/08 ........................... 3,447,395
- -------------------------------------------------------------------------------------
Real Estate Developement/REITS -- 0.3%
275,000 B- BF Saul REIT, Sr. Notes, 9.750% due 4/1/08 ...... 258,500
1,250,000 BB+ Trizec Finance Ltd., Sr. Notes,
10.875% due 10/15/05 .......................... 1,378,125
- -------------------------------------------------------------------------------------
1,636,625
- -------------------------------------------------------------------------------------
Retail -- 1.3%
1,500,000 B- Advance Holding Corp., Sr. Discount Notes,
step bond to yield 12.875% due 4/15/09 ........ 840,000
3,100,000 B- Advance Stores Co., Sr. Sub. Notes,
10.250% due 4/15/08+ .......................... 3,007,000
2,700,000 B- US Office Products Co., Sr. Sub. Notes,
9.750% due 6/15/08+ ........................... 2,288,250
- -------------------------------------------------------------------------------------
6,135,250
- -------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements 11
<PAGE>
SCHEDULE OF INVESTMENTS
August 31, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Rating Security Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Telecommunications -- 19.7%
$ 1,200,000 NR Allegiance Telecom Inc., Sr. Notes,
12.875% due 5/15/08 ........................... $1,149,000
2,000,000 BB- Call-Net Enterprises Inc., Sr. Discount Notes,
step bond to yield 8.801% due 8/15/08 ......... 1,130,000
Colt Telecom Group PLC:
5,300,000 B Bonds, 7.625% due 7/31/08 ..................... 2,644,740
800,000 B Sr. Notes, 10.125% due 11/30/07 ............... 1,353,003
4,400,000 B Step bond to yield 11.598% due 12/15/06 ....... 3,454,000
8,250,000 NR E. Spire Communications, Sr. Discount Notes,
step bond to yield 11.032% due 7/1/08+ ........ 3,960,000
Esprit Telecom Group PLC, Sr. Notes:
2,300,000 B- 11.500% due 12/15/07 .......................... 2,334,500
2,000,000++ B- 11.500% due 12/15/07 .......................... 1,088,743
1,300,000 B- 10.875% due 6/15/08 ........................... 1,291,875
3,875,000 NR Facilicom International Inc., Sr. Notes,
10.500% due 1/15/08 ........................... 3,729,689
3,450,000 NR FirstWorld Communications, step bond
to yield 12.999% due 4/15/08 .................. 1,466,250
3,900,000 B Hermes Europe Railtel Inc.,
Sr. Notes, 11.500% due 8/15/07 ................ 4,051,125
Impsat Corp:
950,000 BB- Company Guaranteed, 12.125% due 7/15/03 ....... 858,564
1,200,000 B+ Sr. Notes, 12.375% due 6/15/08 ................ 1,143,000
Intermedia Communications Co.:
5,975,000 B Sr. Discount Notes, step bond to yield
11.945% due 5/15/06 ......................... 4,615,688
1,500,000 B Sr. Notes, 8.600% due 6/1/08 .................. 1,421,250
5,200,000 B3* Level 3 Communications Inc., Sr. Notes,
9.125% due 5/1/08 ............................. 4,654,000
5,525,000 B+ McLeod USA Inc., Sr. Discount Notes,
step bond to yield 10.591% due 3/1/07 ......... 3,846,782
6,050,000 B Metronet Communications, Sr. Notes,
12.000% due 8/15/07 ........................... 6,851,625
11,650,000 B Metronet Communication, Sr. Discount Notes,
step bond to yield 9.866% due 6/15/08+ ........ 6,247,314
</TABLE>
12 See Notes to Financial Statements
<PAGE>
SCHEDULE OF INVESTMENTS
August 31, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Rating Security Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Telecommunications -- 19.7% (continued)
$6,775,000 B Nextlink Communications, Sr. Notes,
12.500% due 4/15/06 ........................... $ 7,537,188
5,025,000 B Primus Telecom Group, Sr. Notes,
11.750% due 8/1/04 ............................ 5,112,938
4,725,000 B- Psinet Inc., Sr. Notes, 10.000% due 2/15/05 ..... 4,453,314
Qwest Communications International Inc.:
6,375,000 B+ Sr. Discount Notes, step bond to yield
9.378% due 10/15/07 ......................... 4,653,750
2,125,000 B+ Sr. Notes, 10.875% due 4/1/07 ................. 2,390,625
RCN Corp.:
4,600,000 B3* Sr. Discount Notes, step bond to yield
11.143% due 10/15/07 ........................ 2,737,000
2,350,000 B3* Sr. Notes, 10.000% due 10/15/08 ............... 2,164,939
2,288,000 B- RSL Communications Ltd., Sr. Notes,
12.250% due 11/15/06 .......................... 2,436,720
3,300,000 NR Splitrock Services Inc., 11.750% due 7/15/08# ... 3,135,000
2,600,000 NR Versatel Telecommunications,
13.250% due 5/15/08# .......................... 2,609,750
- -------------------------------------------------------------------------------------
94,522,372
- -------------------------------------------------------------------------------------
Textiles/Apparel -- 0.4%
4,400,000 B Texon International, Sr. Notes,
10.000% due 2/1/08+ ........................... 1,946,129
- -------------------------------------------------------------------------------------
Transportation/Trucking -- 1.9%
1,000,000 B+ American Reefer Co. Ltd., First Mortgage,
10.250% due 3/1/08+ ........................... 950,000
1,050,000 BB Enterprises Shipholding Inc., Sr. Notes,
8.875% due 5/1/08+ ............................ 903,000
1,000,000 BB Guangzhou Shenzhen Superhighway, Sr. Notes,
10.250% due 8/15/07 ........................... 520,000
3,130,000 BB- Sea Containers Ltd., Sr. Sub. Debentures,
12.500% due 12/1/04 ........................... 3,513,425
</TABLE>
See Notes to Financial Statements 13
<PAGE>
SCHEDULE OF INVESTMENTS
August 31, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Rating Security Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Transportation/Trucking -- 1.9% (continued)
$2,300,000 B+ Stena Line AB, Sr. Notes, 10.625% due 6/1/08 .... $ 2,279,875
1,425,000 B+ TBS Shipping International Ltd., First Mortgage,
10.000% due 5/1/05 ............................ 1,182,750
- -------------------------------------------------------------------------------------
9,349,050
- -------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost-- $465,799,672) ........................... 448,891,401
=====================================================================================
<CAPTION>
Shares Security Value
=====================================================================================
- -------------------------------------------------------------------------------------
COMMON STOCK - 0.0%
- -------------------------------------------------------------------------------------
<S> <C> <C>
Cellular & Other Wireless -- 0.0%
12,250 Pagemart Nationwide Inc. (Cost-- $0) ............ 91,875
=====================================================================================
- -------------------------------------------------------------------------------------
PREFERRED STOCK - 0.9%
- -------------------------------------------------------------------------------------
Banking -- 0.4%
63,850 California Federal Preferred Capital Corp.,
Series A, Exchangeable 9.125% ................. 1,739,912
- -------------------------------------------------------------------------------------
Broadcasting -- 0.4%
16,604 Capstar Broadcasting, Series E,
Exchangeable 12.625% Payment-in-kind .......... 1,946,819
- -------------------------------------------------------------------------------------
Electronics - Computers -- 0.1%
40,800 Viasystems Inc., Series B, Payment-in-kind ...... 652,800
- -------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost-- $4,356,257) ............................. 4,339,531
=====================================================================================
- -------------------------------------------------------------------------------------
WARRANTS - 0.6%
- -------------------------------------------------------------------------------------
Broadcasting -- 0.0%
5,425 Australis Holdings Ltd., Expire 10/30/01* ....... 1
8,625 UIH Australia Inc., Expire 5/15/06* ............. 43,125
3,375 Wireless One Inc., Expire 10/19/00* ............. 842
- -------------------------------------------------------------------------------------
43,968
- -------------------------------------------------------------------------------------
</TABLE>
14 See Notes to Financial Statements
<PAGE>
SCHEDULE OF INVESTMENTS
August 31, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Shares Security Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
Cellular & Other Wireless -- 0.3%
32,175 Clearnet Communications Inc.,
Expire 9/15/05+* .............................. $ 193,050
4,725 Globalstart Telecommunications,
Expire 2/15/04* ............................... 637,875
4,125 Iriduim World Communications Ltd.,
Expire 7/15/05* ............................... 577,500
3,900 Nextel Communications Warrants,
Expire 1/10/01* ............................... 624
24,840 Pagemart Inc., Expire 12/31/03+* ................ 149,040
- -------------------------------------------------------------------------------------
1,558,089
- -------------------------------------------------------------------------------------
Electronics - Computers -- 0.0%
8,700 WAM!Net Inc., Expire 3/1/05* .................... 69,600
- -------------------------------------------------------------------------------------
Paper/Forest Products and Printing -- 0.0%
4,800 SD Warren Co., Expire 12/15/06* ................. 84,480
- -------------------------------------------------------------------------------------
Telecommunications -- 0.3%
3,650 Allegiance Telecom Inc., Expire 2/3/08* ......... 43,800
5,000 Colt Telecom, Expire 12/31/06* .................. 972,500
60,500 Metronet Communications, Expire 8/15/07* ........ 242,000
4,475 Primus Telecommunications Group,
Expire 8/1/04* ................................ 156,625
4,125 RSL Communications Ltd., Expire 11/15/06* ....... 165,000
2,600 Versatel Telecommunications, Expire 5/15/08* .... 26,520
- -------------------------------------------------------------------------------------
1,606,445
- -------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost-- $1,640,415) ............................. 3,362,582
=====================================================================================
</TABLE>
See Notes to Financial Statements 15
<PAGE>
SCHEDULE OF INVESTMENTS
August 31, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
- -------------------------------------------------------------------------------------
REPURCHASE AGREEMENT - 4.8%
- -------------------------------------------------------------------------------------
$22,972,000 Chase Securities Inc., 5.650% due 9/1/98;
Proceeds at maturity -- $22,975,601; (Fully
collateralized by U.S. Treasury Notes, 5.250%
due 8/15/03; Market value -- $23,431,604)
(Cost -- $22,972,000) ......................... $ 22,972,000
=====================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $494,768,344** ) ..................... $479,657,389
=====================================================================================
</TABLE>
+ 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.
++ Represents local currency.
# Security is issued with attached warrants.
* Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 18 for definition of ratings.
16 See Notes to Financial Statements
<PAGE>
SUMMARY OF BONDS BY COMBINED RATINGS
August 31, 1998 (unaudited)
% of
Total Corporate
Moody's and/or Standard & Poor's Bonds and Notes
- --------------------------------------------------------------------------------
Ba BB 29.2%
B B 63.1
Caa CCC 1.8
Ca CC 0.7
NR NR 5.2
-----
100.0%
=====
17
<PAGE>
BOND RATINGS (UNAUDITED)
All ratings are by Standard & Poor's Ratings Service ("Standard & Poor's"),
except that those identified by an asterisk(*) are rated by Moody's Investors
Service Inc. ("Moody's"). The definitions of the applicable rating symbols are
set forth below:
Standard & Poor's -- Ratings from "BBB" to "C" may be modified by the addition
of a plus (+) or minus (-) sign to show relative standings within the major
rating categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated
categories.
BB, B, CCC, -- Bonds rated "BB", "B", "CCC" and "CC" are regarded, on
CC and C balance, as predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with the
terms of the obligation. "BB" represents the lowest degree of
speculation and "C" the highest degree of speculation. While
such bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or
major risk exposures to adverse conditions.
Moody's -- Numerical modifiers 1, 2 and 3 may be applied to each generic rating
from "Baa" to "Ca," where 1 is the highest and 3 the lowest ranking within its
generic category.
Baa -- Bonds rated "Baa" are considered to be medium grade
obligations; that is, they are neither highly protected nor
poorly secured. Interest payment and principal security appear
adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any
great length of time. These bonds lack outstanding investment
characteristics and may have speculative characteristics as
well.
Ba -- Bonds rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds rated "B" generally lack characteristics of desirable
investments. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long
period of time may be small.
Caa -- Bonds rated "Caa" are of poor standing. These issues may be in
default, or present elements of danger may exist with respect
to principal or interest.
Ca -- Bonds rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have
other marked shortcomings.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
18
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1998 (unaudited)
ASSETS:
Investments, at value (Cost -- $494,768,344) ................ $479,657,389
Cash ........................................................ 533
Receivable for securities sold .............................. 4,398,176
Interest receivable ......................................... 8,863,364
- -------------------------------------------------------------------------------
Total Assets ................................................ 492,919,462
- -------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased ............................ 7,118,809
Dividends payable ........................................... 1,169,189
Investment advisory fees payable ............................ 383,508
Administration fees payable ................................. 91,057
Payable for open forward foreign currency
contracts (Note 5) ........................................ 174,369
Accrued expenses ............................................ 242,400
- -------------------------------------------------------------------------------
Total Liabilities ........................................... 9,179,332
- -------------------------------------------------------------------------------
Total Net Assets ............................................... $483,740,130
===============================================================================
NET ASSETS:
Par value of capital shares ................................. $ 44,015
Capital paid in excess of par value ......................... 524,531,845
Undistributed net investment income ......................... 347,687
Accumulated net realized loss from
security transactions ..................................... (25,900,771)
Net unrealized appreciation on investments
and foreign currencies .................................... (15,282,646)
- -------------------------------------------------------------------------------
Total Net Assets
(Equivalent to $10.99 per share on 44,014,989
shares of $0.001 par value outstanding;
500,000 shares authorized) .................................. $483,740,130
===============================================================================
See Notes to Financial Statements. 19
<PAGE>
STATEMENT OF OPERATIONS
For the Six Months Ended August 31, 1998 (unaudited)
INVESTMENT INCOME:
Interest ..................................................... $ 25,083,719
Dividends .................................................... 1,153,450
- -------------------------------------------------------------------------------
Total Investment Income ...................................... 26,237,169
- -------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) ............................ 2,367,337
Administration fees (Note 2) ................................. 526,075
Shareholder communications ................................... 88,191
Audit and legal .............................................. 27,980
Directors' fees .............................................. 20,386
Shareholder and system servicing fees ........................ 10,947
Custody ...................................................... 10,643
Other ........................................................ 27,897
- -------------------------------------------------------------------------------
Total Expenses ............................................... 3,079,456
- -------------------------------------------------------------------------------
Net Investment Income ........................................... 23,157,713
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTES 3 AND5):
Realized Gain From:
Security transactions (excluding short-term securities) .... 2,847,451
Foreign currency transactions .............................. 59,399
- -------------------------------------------------------------------------------
Net Realized Gain ............................................ 2,906,850
- -------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation)
of Investments and Foreign Currencies:
Beginning of period ........................................ 26,890,410
End of period .............................................. (15,282,646)
- -------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation ...................... (42,173,056)
- -------------------------------------------------------------------------------
Net Loss on Investments and Foreign Currencies .................. (39,266,206)
- -------------------------------------------------------------------------------
Decrease in Net Assets from Operations .......................... $(16,108,493)
===============================================================================
20 See Notes to Financial Statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
For the Six Months Ended August 31, 1998 (unaudited)
and the Year Ended February 28, 1998
<TABLE>
<CAPTION>
August 31 February 28
==================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income ............................. $ 23,157,713 $ 46,590,619
Net realized gain ................................. 2,906,850 7,736,886
Increase (decrease) in net unrealized appreciation (42,173,056) 5,091,961
- ----------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations . (16,108,493) 59,419,466
- ----------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income ............................. (22,711,734) (47,244,754)
- ----------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders ................... (22,711,734) (47,244,754)
- ----------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 10):
Net asset value of shares issued for
reinvestment of dividends ....................... -- 16,479,649
- ----------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions ......................... -- 16,479,649
- ----------------------------------------------------------------------------------
Increase (Decrease) in Net Assets .................... (38,820,227) 28,654,361
NET ASSETS:
Beginning of period ............................... 522,560,357 493,905,996
- ----------------------------------------------------------------------------------
End of period* .................................... $483,740,130 $522,560,357
- ----------------------------------------------------------------------------------
* Includes undistributed (overdistributed)
net investment income of: ......................... $ 347,687 $ (157,691)
- ----------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. 21
<PAGE>
NOTES TO FINANCIAL STATEMENTS
August 31, 1998 (unaudited)
1. Significant Accounting Policies
Managed High Income Portfolio Inc. ("Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company.
The following are significant accounting policies consistently followed by
the Fund: (a) security transactions are accounted for on trade date; (b)
securities are valued at the mean between the quoted bid and ask prices provided
by an independent pricing service that are based on transactions in corporate
obligations, quotations from corporate bond dealers, market transactions in
comparable securities and various relationships between securities; (c)
securities maturing within 60 days are valued at cost plus accreted discount or
minus amortized premium, which approximates value; (d) gains or losses on the
sale of securities are calculated by using the specific identification method;
(e) interest income, adjusted for accretion of original issue discount, is
recorded on an accrual basis; (f) dividend income is recorded by the Fund on the
ex-dividend date; foreign dividends are recorded on the ex-dividend date or as
soon as practical after the Fund determines the existence of a dividend
declaration after exercising reasonable due diligence; (g) the accounting
records of the Fund are maintained in U.S. dollars. All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars on the date
of valuation. Purchases and sales of securities and income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income or expense amounts
recorded and collected or paid are adjusted when reported by the custodian; (h)
the Fund intends to comply with the applicable provisions of the Internal
Revenue Code of 1986, as amended, pertaining to regulated investment companies
and to make distributions of taxable income sufficient to relieve it from
substantially all Federal income and excise taxes; (i) the character of income
and gains to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles. At
February 28, 1998, reclassifications were made to the Fund's capital accounts to
reflect permanent book/tax differences and income and gains available for
distributions under income tax regulations. Accordingly, overdistributed net
investment income amounting to $372,685 was reclassified to paid-in capital. Net
investment income, net realized gains and net assets were not affected by this
adjustment; and (j) estimates and assumptions are required to be made regarding
assets,
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS
August 31, 1998 (unaudited) (continued)
liabilities and changes in net assets resulting from operations when financial
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ.
In addition, the Fund may enter into forward exchange contracts in order
to hedge against foreign currency risk. These contracts are marked to market
daily by recognizing the difference between the contract exchange rate and the
current market rate as an unrealized gain or loss. Realized gains or losses are
recognized when contracts are settled.
2. Investment Advisory Agreement, Administration Agreement and Other
Transactions
Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith Barney
Holdings Inc. ("SSBH"), acts as investment adviser to the Fund. The Fund pays
MMC an advisory fee calculated at an annual rate of 0.90% of the average daily
net assets. This fee is calculated daily and paid monthly.
MMC also acts as the Fund's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the average daily net assets. This fee
is calculated daily and paid monthly.
All officers and one Director of the Fund are employees of Smith Barney
Inc., another subsidiary of SSBH.
3. Investments
For the six months ended August 31, 1998, the aggregate cost of purchases
and proceeds from sales of investments (including maturities but excluding
short-term securities) were:
================================================================================
Purchases $230,391,482
- --------------------------------------------------------------------------------
Sales 246,720,993
================================================================================
At August 31, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $ 7,456,791
Gross unrealized depreciation (22,567,746)
- --------------------------------------------------------------------------------
Net unrealized depreciation $(15,110,955)
================================================================================
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS
August 31, 1998 (unaudited) (continued)
4. Repurchase Agreements
The Fund purchases, and its custodian takes possession of, U.S. government
securities from banks subject to agreements to resell the securities to the
sellers at a future date (generally, the next business day) at an agreed-upon
higher repurchase price. The Fund requires continual maintenance of the market
value of the collateral in amounts at least equal to the repurchase price.
5. Forward Foreign Currency Contracts
At August 31, 1998, the Fund had open forward foreign currency contracts
as described below. The Fund bears the market risk that arises from changes in
foreign currency exchange rates. The unrealized loss on the contracts reflected
in the accompanying financial statements were as follows:
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Loss
================================================================================
To Sell:
British Pound 898,900 $1,496,296 2/25/99 $ (40,078)
European Currency Units 2,720,528 3,061,176 11/30/98 (24,442)
German Mark 10,052,482 5,700,935 9/2/98 (41,078)
German Mark 672,917 385,802 12/23/98 (8,306)
German Mark 6,312,883 3,626,010 1/28/99 (60,465)
- --------------------------------------------------------------------------------
Total Unrealized Loss on Open
Forward Foreign Currency Contracts $(174,369)
================================================================================
6. Futures Contracts
Initial margin deposits made upon entering into futures contracts are
recognized as assets. Securities equal to the initial margin amount are
segregated by the custodian in the name of the broker. Additional securities are
also segregated up to the current market value of the futures contract. During
the period the futures contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by marking to market on a daily
basis to reflect the market value of the contract at the end of each day's
trading. Variation margin payments are received or made and recognized as assets
due from or liabilities due to broker, depending upon whether unrealized gains
or losses are incurred. When the contract is closed, the Fund records a realized
gain or loss equal to the difference between the proceeds from (or cost of) the
closing transactions and the Fund's basis in the contract.
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS
August 31, 1998 (unaudited) (continued)
The Fund enters into such contracts to hedge a portion of its portfolio.
The Fund bears the market risk that arises from changes in the value of the
financial instruments and securities indices (futures contracts).
At August 31, 1998, the Fund had no open futures contracts.
7. Options Contracts
Premiums paid when put or call options are purchased by the Fund,
represent investments, which are marked-to-market daily. When a purchased option
expires, the Fund will realize a loss in the amount of the premium paid. When
the Fund enters into closing sales transaction, the Fund will realize a gain or
loss depending on whether the sales proceeds from the closing sales transaction
are greater or less than the premium paid for the option. When the Fund
exercises a put option, it will realize a gain or loss from the sale of the
underlying security and the proceeds from such sale will be decreased by the
premium originally paid. When the Fund exercises a call option, the cost of the
security which the Fund purchases upon exercise will be increased by the premium
originally paid.
At August 31, 1998, the Fund had no open purchased call or put option
contracts.
When the Fund writes a covered call or put option, an amount equal to the
premium received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a gain
equal to the amount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain or loss depending upon whether
the cost of the closing transaction is greater or less than the premium
originally received, without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is eliminated.
When a written call option is exercised, the proceeds of the security sold will
be increased by the premium originally received. When a written put option is
exercised, the amount of the premium received will reduce the cost of the
security which the Fund purchased upon exercise. When written index options are
exercised, settlement is made in cash.
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS
August 31, 1998 (unaudited) (continued)
The risk associated with purchasing options is limited to the premium
originally paid. The Fund enters into options for hedging purposes. The risk in
writing a call option is that the Fund gives up the opportunity to participate
in any increase in the price of the underlying security beyond the exercise
price. The risk in writing a put option is that the Fund is exposed to the risk
of loss if the market price of the underlying security declines.
During the six months ended August 31, 1998, the Fund did not write any
covered call or put options.
8. Payment-in-Kind Securities
The Fund may invest in payment-in-kind ("PIK") securities. PIK securities
pay interest through the issuance of additional securities. PIK securities carry
a risk in that, unlike bonds which pay interest throughout the period to
maturity, the Fund will realize no cash until the cash payment dates unless a
portion of such securities are sold. If the issuer of a PIK security defaults,
the Fund may obtain no return at all on its investment.
9. Capital Loss Carryforward
At February 28, 1998, the Fund had, for Federal income tax purposes,
$27,703,000 of loss carryforwards available to offset future capital gains. To
the extent that these carryforward losses are used to offset capital gains, it
is probable that the gains so offset will not be distributed. The amount and
expiration of the carryforwards are indicated below. Expiration occurs on the
last day in February of the year indicated:
2003 2004 2005
================================================================================
Carryforward Amounts $9,349,000 $18,115,000 $239,0000
================================================================================
10. Capital Shares
During the six months ended August 31, 1998 and the year ended February
28, 1998, capital stock transactions were as follows:
Six Months Ended Year Ended
August 31, 1998 February 28, 1998
------------------- ------------------
Shares Amount Shares Amount
================================================================================
Shares issued on reinvestment -- -- 1,412,894 $16,479,649
================================================================================
26
<PAGE>
FINANCIAL HIGHLIGHTS
For a share of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
1998(1) 1998 1997 1996 1995 1994(2)
=================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of Period ........... $ 11.87 $ 11.59 $ 11.36 $ 10.88 $ 12.39 $ 12.00
- -------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income ......... 0.53 1.09 1.12 1.13 1.12 0.98
Net realized and
unrealized gain (loss) ...... (0.89) 0.28 0.21 0.65 (1.48) 0.51
- -------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations ............... (0.36) 1.37 1.33 1.78 (0.36) 1.49
- -------------------------------------------------------------------------------------------------
Offering costs credited (charged)
to Paid-In Capital ............ -- -- -- -- 0.00* (0.02)
- -------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income ......... (0.52) (1.09) (1.08) (1.27) (1.00) (0.96)
Net realized gains ............ -- -- -- -- (0.15) (0.12)
Capital ....................... -- -- (0.02) (0.03) -- --
- -------------------------------------------------------------------------------------------------
Total Distributions ............. (0.52) (1.09) (1.10) (1.30) (1.15) (1.08)
- -------------------------------------------------------------------------------------------------
Net asset value,
end of Period ................. $ 10.99 $ 11.87 $ 11.59 $ 11.36 $ 10.88 $ 12.39
- -------------------------------------------------------------------------------------------------
Total Return,
Based on Market Value (3) ..... (13.18)%++ 10.96% 15.37% 18.83% 0.14% 6.85%++
- -------------------------------------------------------------------------------------------------
Total Return,
Based on Net Asset Value (3) .. (3.13)%++ 12.43% 12.65% 17.80% (2.18)% 12.67%++
- -------------------------------------------------------------------------------------------------
Net assets,
end of Period (millions) ...... $ 484 $ 523 $ 494 $ 477 $ 457 $ 520
- -------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses ...................... 1.18%+ 1.18% 1.20% 1.24% 1.24% 1.19%+
Net investment income ......... 8.86+ 9.19 9.89 9.74 9.96 8.74+
- -------------------------------------------------------------------------------------------------
Portfolio turnover rate ......... 47% 94% 61% 73% 62% 108%
- -------------------------------------------------------------------------------------------------
Market value, End of Period ..... $ 9.750 $11.750 $11.625 $11.125 $10.500 $11.750
=================================================================================================
</TABLE>
(1) For the six months ended August 31, 1998 (unaudited).
(2) For the period from March 26, 1993 (commencement of operations) to
February 28, 1994.
(3) The total return calculation assumes that dividends are reinvested in
accordance with the Fund's dividend reinvestment plan.
* Amount represents less than $0.01.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
27
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Net Realized Net Increase
and Unrealized in Net Assets
Investment Net Investment Gain (Loss) From
Income Income on Investments Operations
-----------------------------------------------------------------------------------
Quarter Per Per Per Per
Ended Total Share Total Share Total Share Total Share
=================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
May 31,
1996 $13,001,508 $0.31 $11,542,616 $0.27 $(7,102,523) $(0.17) $4,440,093 $0.10
August 31,
1996 13,247,484 0.31 11,804,210 0.29 (7,860,018) (0.19) 3,944,192 0.10
November 30,
1996 13,267,331 0.31 11,856,227 0.28 15,505,326 0.37 27,361,553 0.65
February 28,
1997 13,188,573 0.31 11,798,385 0.28 8,827,165 0.20 20,625,550 0.48
May 31,
1997 13,200,189 0.31 11,741,167 0.27 (5,289,541) (0.12) 6,451,626 0.15
August 31,
1997 13,358,455 0.31 11,846,555 0.28 12,682,793 0.29 24,529,348 0.57
November 30,
1997 12,745,541 0.29 11,250,534 0.26 1,354,794 0.03 12,605,328 0.29
February 28,
1998 13,288,741 0.30 11,752,363 0.27 4,080,801 0.09 15,833,164 0.36
May 31,
1998 12,823,273 0.29 11,293,219 0.26 (2,829,443) (0.06) 8,463,776 0.19
August 31,
1998 13,493,791 0.31 11,864,494 0.27 (36,436,763) (0.83) (24,572,269) (0.56)
=================================================================================================
</TABLE>
28
<PAGE>
FINANCIAL DATA (UNAUDITED)
For a share of capital stock outstanding throughout each period:
Dividend
NYSE Net Asset Dividend Reinvestment
Closing Price Value Paid Price
================================================================================
March 31, 1996 $10.875 $11.18 $0.093 $10.79
April 30, 1996 10.750 11.20 0.093 10.74
May 31, 1996 10.625 11.18 0.093 10.56
June 30, 1996 10.625 11.07 0.091 10.71
July 31, 1996 10.875 10.98 0.091 10.97
August 31, 1996 11.000 11.01 0.091 11.01
September 30, 1996 11.125 11.27 0.091 11.13
October 31, 1996 11.125 11.21 0.091 11.19
November 30, 1996 11.250 11.38 0.091 11.16
December 31, 1996 11.250 11.46 0.091 11.27
January 31, 1997 11.625 11.50 0.091 11.48
February 28, 1997 11.625 11.59 0.091 11.62
March 31, 1997 11.375 11.29 0.091 11.35
April 30, 1997 11.500 11.26 0.091 11.22
May 31, 1997 11.625 11.47 0.091 11.45
June 30, 1997 11.750 11.62 0.091 11.65
July 31, 1997 12.000 11.84 0.091 11.69
August 31, 1997 11.875 11.77 0.091 11.76
September 30, 1997 12.000 11.94 0.091 11.90
October 31, 1997 11.750 11.82 0.091 11.78
November 30, 1997 12.125 11.78 0.091 11.76
December 31, 1997 12.313 11.82 0.091 11.80
January 31, 1998 12.500 11.89 0.091 11.82
February 28, 1998 11.750 11.87 0.091 11.87
March 31, 1998 11.563 11.90 0.086 11.87
April 30, 1998 11.375 11.84 0.086 11.88
May 31, 1998 11.438 11.81 0.086 11.81
June 30, 1998 11.625 11.74 0.086 11.73
July 31, 1998 11.438 11.76 0.086 11.76
August 31, 1998 9.750 10.99 0.086 10.99
================================================================================
29
<PAGE>
ADDITIONAL SHAREHOLDER INFORMATION (UNAUDITED)
On June 11, 1998, the Annual Meeting of shareholders of the Fund was held
for the purpose of voting on the following matters:
1. The election of Alessandro C. di Montezemolo and Heath B.
Mclendon as Directors of the Fund for a three-year period; and
2. Ratification of the selection of KPMG Peat Marwick LLP as the
independent auditors of the Fund for the current fiscal year.
The results of the vote on Proposal 1 were as follows:
<TABLE>
<CAPTION>
Percentage Percentage
Shares Voted of Shares Shares Voted of Shares
Name of Director* For Voted Against Voted
==================================================================================
<S> <C> <C> <C> <C>
Alessandro C. di Montezemolo 41,495,592.552 98.60% 582,513.591 1.40%
Heath B. Mclendon 41,590,679.317 98.80% 487,426.826 1.20%
==================================================================================
</TABLE>
* The following Directors, representing the balance of the Board of
Directors, continue to serve as Directors: Paolo M. Cucchi, Andrea Farace,
Paul R. Hardin, and George M. Pavia.
The results of the vote on Proposal 2 were as follows:
Percentage Percentage Percentage
Shares Voted of Shares Shares Voted of Shares Shares of Shares
For Voted Against Voted Abstaining Voted
================================================================================
41,574,862.088 98.80% 167,491.100 0.40% 335,752.955 0.80%
================================================================================
30
<PAGE>
DIVIDEND REINVESTMENT PLAN (UNAUDITED)
Under the Fund's Dividend Reinvestment Plan ("Plan"), a shareholder whose
shares of Common Stock are registered in his own name will have all
distributions from the Fund reinvested automatically by First Data Investor
Services Group, Inc. ("First Data") as agent under the Plan, unless the
shareholder elects to receive cash. Distributions with respect to shares
registered in the name of a broker-dealer or other nominee (that is, in "street
name") will be reinvested by the broker or nominee in additional shares under
the Plan, unless the service is not provided by the broker or nominee or the
shareholder elects to receive distributions in cash. Investors who own Common
Stock registered in street name should consult their broker-dealers for details
regarding reinvestment. All distributions to Fund shareholders who do not
participate in the Plan will be paid by check mailed directly to the record
holder by or under the direction of First Data as dividend-paying agent.
If the Fund declares a dividend or capital gains distribution payable
either in shares of Common Stock or in cash, shareholders who are not Plan
participants will receive cash, and Plan participants will receive the
equivalent amount in shares of Common Stock. When the market price of the Common
Stock is equal to or exceeds the net asset value per share of the Common Stock
on the Valuation Date (as defined below), Plan participants will be issued
shares of Common Stock valued at the net asset value most recently determined
or, if net asset value is less than 95% of the then current market price of the
Common Stock, then at 95% of the market value. The Valuation Date is the
dividend or capital gains distribution payment date or, if that date is not a
New York Stock Exchange ("NYSE") trading day, the immediately preceding trading
day.
If the market price of the Common Stock is less than the net asset value
of the Common Stock, or if the Fund declares a dividend or capital gains
distribution payable only in cash, a broker-dealer not affiliated with Smith
Barney, as purchasing agent for Plan participants ("Purchasing Agent"), will buy
Common Stock in the open market, on the NYSE or elsewhere, for the participants'
accounts (effective June 1, 1996, the Plan's Valuation Date changed from the
payable date to the record date). If, following the commencement of the
purchases and before the Purchasing Agent has completed its purchases, the
market price exceeds the net asset value of the Common Stock, the average per
share purchase price paid by the Purchasing Agent may exceed the net asset value
of the Common Stock, resulting in the acquisition of fewer shares than if the
dividend or capital gains distribution had been paid in Common Stock issued by
the Fund at net asset value. Additionally, if the market price exceeds the net
asset value of shares before the Purchasing Agent has completed its purchases,
the Purchasing Agent is permitted to cease purchasing shares and the Fund may
issue the remaining shares at a price equal to the greater of (a) net asset
value or (b) 95% of the then current market price. In a case where the
Purchasing Agent
31
<PAGE>
DIVIDEND REINVESTMENT PLAN (UNAUDITED) (CONTINUED)
has terminated open market purchases and the Fund has issued the remaining
shares, the number of shares received by the participant in respect of the cash
dividend or distribution will be based on the weighted average of prices paid
for shares purchased in the open market and the price at which the Fund issues
the remaining shares. First Data will apply all cash received as a dividend or
capital gains distribution to purchase Common Stock on the open market as soon
as practicable after the payable date of the dividend or capital gains
distribution, but in no event later than 30 days after that date, except when
necessary to comply with applicable provisions of the federal securities laws.
First Data will maintain all shareholder accounts in the Plan and will
furnish written confirmations of all transactions in each account, including
information needed by a shareholder for personal and tax records. The automatic
reinvestment of dividends and capital gains distributions will not relieve Plan
participants of any income tax that may be payable on the dividends or capital
gains distributions. Common Stock in the account of each Plan participant will
be held by First Data on behalf of the Plan participant, and each shareholder's
proxy will include those shares purchased pursuant to the Plan.
Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions. First Data's fees for handling the reinvestment of
dividends and capital gains distributions will be paid by the Fund. No brokerage
charges apply with respect to shares of Common Stock issued directly by the Fund
as a result of dividends or capital gains distributions payable either in Common
Stock or in cash. Each Plan participant will, however, bear a proportionate
share of brokerage commissions incurred with respect to open market purchases
made in connection with the reinvestment of dividends or capital gains
distributions.
Experience under the Plan may indicate that changes to it are desirable.
The Fund reserves the right to amend or terminate the Plan as applied to any
dividend or capital gains distribution paid subsequent to written notice of the
change sent to participants at least 30 days before the record date for the
dividend or capital gains distribution. The Plan also may be amended or
terminated by First Data, with the Fund's prior written consent, on at least 30
days' written notice to Plan participants. All correspondence concerning the
Plan should be directed by mail to First Data Investor Services Group, Inc.,
P.O. Box 8030, Boston, Massachusetts 02266 or by telephone at (800) 331-1710.
-------------------------
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
shares of its common stock in the open market.
32
<PAGE>
Managed
HIGH INCOME
PORTFOLIO INC.
Directors
Paolo M. Cucchi
Andrea Farace
Paul R. Hardin
Heath B. McLendon, Chairman
Alessandro C. di Montezemolo
George M. Pavia
James J. Crisona, Emeritus
Officers
Heath B. McLendon
President and Chief Executive Officer
Lewis E. Daidone
Senior Vice President and Treasurer
John C. Bianchi
Vice President and Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Adviser and Administrator
Mutual Management Corp.
388 Greenwich Street
New York, New York 10013
Transfer Agent
First Data Investor Services Group, Inc.
P.O. Box 8030
Boston, Massachusetts 02266
Custodian
PNC Bank, N.A.
17th and Chestnut Streets
Philadelphia, Pennsylvania 19103
<PAGE>
This report is intended only for the shareholders of Managed High Income
Portfolio Inc. It is not a prospectus, circular or representation intended for
use in the purchase or sale of shares of the Fund or of any securities mentioned
in the report.
FD0777 10/98
