Managed
HIGH INCOME
Portfolio Inc.
[photo]
Annual
Report
February 28, 1997
<PAGE>
This report is sent to the shareholders of Managed High Income Portfolio Inc.
for their information. 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.
FD0882 4/97
<PAGE>
- --------------------------------------------------------------------------------
Managed
HIGH INCOME
PORTFOLIO INC.
LETTER TO
SHAREHOLDERS
February 28, 1997
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to provide you with the annual report for the Managed High
Income Portfolio Inc. ("Fund") for the year ended February 28, 1997. Over the
past twelve months the Fund paid income dividends totaling $1.08 per share. The
table below shows the annualized distribution rates and twelve-month total
returns for the Fund based on its February 28, 1997 net asset value (NAV) per
share and New York Stock Exchange (NYSE) closing price.
Annualized Twelve-Month
Price Per Share Distribution Rate Total Return
------------- ---------------- -------------
$11.59 (NAV) 9.42% 12.65%
$11.625 (NYSE) 9.39% 15.37%
In comparison, the average total return on NAV was 14.20% for closed-end
high yield bond funds during the same time period, according to Lipper
Analytical Services, an independent fund tracking organization. Because a
significant number of closed-end high yield funds are leveraged, they tend to
generate somewhat stronger performance returns than the unleveraged Managed High
Income Fund in a strong market for high yield securities. As a result the
overall average performance returns for closed end high yield funds tend to be
exaggerated in market rallies. However, in market declines such as what occurred
in 1994, the leveraged funds suffer much greater principal losses than the
unleveraged Managed High Income Fund.
Despite its relatively more conservative positions, the Fund, over the past
twelve months, materially outperformed all domestic bond markets with a total
return in excess of 12.6% far exceeding the 3.0% to 6.0% average total returns
on intermediate and long maturity U.S. Treasuries, government agency securities
and investment grade corporate bonds, respectively.
Market and Economic Overview
The fixed income markets began to rally in the fourth quarter of 1996, with
strong performance gains by investment grade and U.S. Treasury bonds. An
anticipated slowdown in U.S. economic growth, combined with favorable inflation
data, helped to bolster the domestic fixed income markets. The bond market rally
was also fueled by the Federal Reserve Board's ("Fed") decision to remain on the
sidelines, and not raise interest rates. However, since early December, several
factors prevented interest rates from declining further, with a
1
<PAGE>
modest upturn in rates occurring in January and February. For example, Fed
Chairman Alan Greenspan's comments about "irrational exuberance" in the
financial markets caused a widespread but temporary sell-off in both the equity
and bond markets. Additionally, the first quarter of 1997 is experiencing
stronger economic growth with stronger retail sales and solid growth in the
manufacturing and construction sectors. This has caused interest rate levels to
move higher with increased price volatility in all of the financial markets. It
now appears that the Fed is seriously considering raising short-term interest
rates to slow down economic growth and prevent any potential increase in
inflation rates over the upcoming months. Despite the Fed's concerns over
inflation, the official inflation statistics continue to be moderate, with
little signs of any upturn.
The high yield market has generally outperformed the more interest-rate
sensitive, longer maturity Treasury and investment grade markets throughout the
past six months. However, lower quality issues (i.e., rated CCC/Caa and CC/Ca by
Standard & Poor's or Moody's Investors Services, two major bond rating agencies)
turned in disappointing performance due to an increasing number of bond defaults
in the latter half of 1996. The most visible defaults or failures in 1996
included Marvel Entertainment, Moblemedia, Anchor Glass, CAI Wireless and
MidAmerican West. A number of these issues experienced price declines of between
60% to 80%. Because of our relatively conservative investment philosophy, we
avoided these high risk issues.
In contrast to the performance of the lower-rated high yield issues, the
current upwardly biased growth rate of the U.S. economy has been slightly more
negative for the better-quality "BB/Ba"-rated and "B/B"-rated issues that are
more sensitive to rising interest rates. This has modestly put the Fund at a
relative disadvantage versus its more aggressive counterparts.
However, the absolute total returns of the Fund over the past twelve months
have still been far superior to all other sectors of the domestic bond market.
We continue to see more investors, who have become dissatisfied with the modest
returns and extreme price swings in the U.S. Treasury market, investing
increasing amounts of money into the high yield market. In fact, during the
course of 1996 alone, approximately $15 billion flowed into open-end, high yield
mutual funds. At the same time, a large number of institutional investors such
as insurance companies and municipal and corporate pension fund managers have
allocated a larger portion of their assets to the high yield market,
particularly the better-quality issues. In our view, this trend is likely to
continue well into 1997 as investors search for higher yielding investment
alternatives.
Given the relatively strong performance of the high yield market compared
to U.S. Treasuries over this time frame, high yield bond spreads are now roughly
2
<PAGE>
100 basis points (one percentage point) tighter than they were at the beginning
of 1996. We consider the high yield market as being fully valued at this point
in time. Fortunately, the economic and financial market environment has been
relatively benign with moderate economic growth and modest inflation. It remains
to be seen whether this positive environment will continue over the remainder of
1997, especially in light of the Fed's recently indicated bias towards raising
interest rates. However, even if the Fed were to increase short term interest
rates, we still expect the overall environment to remain benign over the
foreseeable future with little serious threat of either an economic recession or
an inflationary acceleration. Nevertheless, security selectivity has become
increasingly more important when picking investment ideas given the high yield
market's fully valued levels and the likelihood of increased market volatility
given investors' confusion over Fed monetary policy.
Portfolio Strategy
Despite the increasing market volatility our outlook for the high yield
bond market in 1997 is still positive for a large number of companies that are
successfully competing in their markets. These companies tend to be in
industries that continue to benefit from new technology. We have found many
growth opportunities in the telecommunications, media, cable TV and oil and
natural gas industries, and the Fund is overweighted in these areas. Some of the
issues that we continue to favor include Time Warner, Brooks Fiber, Teleport,
and Revlon to name but a few. All of these companies continue to generate
improving results through either increased market share and/or improved internal
cost controls.
In addition, we still firmly believe that over a full economic cycle the
better-quality high yield issues should offer superior risk adjusted returns and
lower default risk relative to lower-quality issues. Considering the trend
toward greater industry competition and little pricing power in most sectors of
the domestic economy, we believe our prudent approach to high yield investing
should generate consistent positive returns in 1997. We therefore will continue
to avoid the sectors of the economy that are experiencing weak growth as well as
intense industry competition. In addition, we will continue to place a greater
emphasis on higher-quality issues and avoid the weaker, lower-tier issues.
We became fully invested during the first quarter of 1997 as we took
advantage of a relatively heavy new issue calendar. Because of our concerns over
increased market volatility, we have kept the Fund's average maturity below 8
years. This should limit the Fund's net asset value volatility should interest
rates move higher.
3
<PAGE>
Outlook
In our opinion, the U.S. economy will remain in a solid growth environment
at least through the first half of 1997. Given the competitive industry
conditions we would expect disappointing results from some of the weaker, less
viable high yield companies. As a result, we believe there will be a continued
increase in default rates among certain high yield issuers, especially the
weaker, more vulnerable companies that are having trouble competing. However, as
we noted before, we do remain optimistic on the high yield market's prospects
for 1997, particularly among the higher quality issues, and the Fund has been
positioned accordingly.
Given our expectations for continued economic growth with greater interest
rate volatility, we are somewhat more cautious on the bond market as a whole. We
expect intermediate- and long-term interest rates to continue to gyrate up and
down over the first half of 1997 as investors attempt to sort out the confusion
over economic growth, inflation and Federal Reserve monetary policy.
In closing, thank you for investing in the Managed High Income Portfolio.
We look forward to continuing to help you achieve your investment goals.
Sincerely,
/s/Heath B. McLendon /s/John C. Bianchi
Heath B. McLendon John C. Bianchi, CFA
Chairman and Vice President
Chief Executive Officer Investment Officer
March 26, 1997
4
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1997
Face
Amount Rating Security Value
- --------------------------------------------------------------------------------
CORPORATE BONDS AND NOTES -- 91.7%
Aerospace/Defense -- 2.3%
$3,925,000 88 Airplanes Pass Through Trust, Corporate
Collateralized Mortgage Obligation,
10.875% due 3/15/19......................... $ 4,395,333
2,760,000 B Howmet Corp., Sr. Sub. Notes,
10.000% due 12/1/03+........................ 2,998,050
2,175,000 B+ Tracor Inc., Sr. Sub. Notes,
10.875% due 8/15/01......................... 2,324,531
1,350,000 B UNC Inc., Sr. Sub. Notes,
11.000% due 6/1/06+......................... 1,486,688
- --------------------------------------------------------------------------------
11,204,602
- --------------------------------------------------------------------------------
Banking -- 1.8%
7,775,000 B First Nationwide Parent Holdings Ltd.,
Sr. Exchange Notes, 12.500% due 4/15/03..... 8,824,625
- --------------------------------------------------------------------------------
Broadcasting/Cable -- 24.1%
1,000,000 B- All American Communications Inc.,
Sr. Sub. Notes, 10.875% due 10/15/01+....... 1,023,750
2,625,000 B- Allbritton Communications Co., Sr. Sub.
Debentures, 11.500% due 08/15/04............ 2,802,188
5,150,000 B Australis Holdings Property Ltd., Sr. Secured
Disc. Notes, step bond to yield
15.000% due 11/1/02+........................ 3,038,500
9,745,000 NR Australis Media Ltd., Sr. Discount Notes, step
bond to yield 15.826% due 5/15/03++......... 5,652,100
Bell Cablemedia, Sr. Discount Notes:
9,725,000 BB- Step bond to yield 12.110% due 7/15/04.... 8,558,000
3,575,000 BB- Step bond to yield 11.523% due 9/15/05+... 2,913,625
Cablevision Systems Corp., Sr. Sub. Debentures:
6,250,000 B 10.750% due 4/1/04........................ 6,484,375
7,520,000 B 9.875% due 2/15/13........................ 7,529,400
2,900,000 B 10.500% due 5/15/16....................... 3,066,750
6,000,000 B Comcast UK Cable, Sr. Discount Debentures,
step bond to yield 11.424% due 11/15/07..... 4,305,000
See Notes to Financial Statements. 5
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1997 (continued)
Face
Amount Rating Security Value
- --------------------------------------------------------------------------------
Broadcasting/Cable -- 24.1% (continued)
Globo Communicacoes, Co., Guaranteed Notes:
$ 2,000,000 B+ Series A, 9.875% due 12/20/04+.............. $ 2,012,500
2,000,000 B+ Series B, 10.500% due 12/20/06+............. 2,055,000
1,000,000 B Jacor Communications Co., Guaranteed Sr. Sub.
Notes, 9.750% due 12/15/06.................. 1,065,000
12,500,000 B Marcus Cable Capital Corp., Sr. Discount Notes,
step bond to yield 11.831% due 8/1/04....... 10,500,000
Rogers Cablesystems Ltd.:
Sr. Secured Debentures:
2,575,000 BB+ 10.000% due 12/1/07....................... 2,745,594
3,150,000 BB- 11.000% due 12/1/15....................... 3,433,500
3,200,000 BB+ Sr. Secured Second Priority Debentures,
9.650% due 1/15/14........................ 2,317,285
6,135,000 BB- Rogers Communications Inc., Sr. Debentures,
10.875% due 4/15/04......................... 6,472,425
1,750,000 BB- SCI Television Inc., Sr. Notes,
11.000% due 6/30/05......................... 1,868,125
3,675,000 B- SFX Broadcasting Inc., Sr. Sub. Notes,
10.750% due 5/15/06+........................ 3,978,188
1,600,000 NR TCI Satellite Entertainment Inc.,
Sr. Sub. Notes, 10.875% due 2/15/07+........ 1,620,000
10,225,000 BB Telewest Communications PLC,
Sr. Discount Debentures, step bond to yield
11.073% due 10/1/07......................... 7,157,500
2,050,000 BB- TLC Beatrice International Holdings,
Sr. Secured Notes, 11.500% due 10/1/05...... 2,211,438
2,325,000 B TV Azteca SA, Guaranteed Sr. Notes, Series B
10.500% due 2/15/07+........................ 2,383,125
6,725,000 B- UIH Australia Inc., Sr. Disc. Notes, step bond
to yield 14.000% due 5/15/06+............... 3,589,469
United International Holdings Inc.,
Sr. Discount Notes:
5,925,000 B- Zero coupon bond to yield
13.21% due 11/15/99.................... 4,414,125
3,975,000 B- Zero coupon bond to yield
13.520% due 11/15/99................... 2,961,375
6 See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1997 (continued)
Face
Amount Rating Security Value
- --------------------------------------------------------------------------------
Broadcasting/Cable -- 24.1% (continued)
$ 1,515,000 BB+ Videotron Group Ltd., Sr. Notes,
10.625% due 2/15/05........................ $ 1,702,481
3,325,000 B+ Videotron Holdings PLC, Sr. Discount Notes
step bond to yield 11.312% due 8/15/05...... 2,676,625
2,475,000 BB+ Videotron Ltd., Sr. Sub. Notes,
10.250% due 10/15/02........................ 2,657,531
2,625,000 B- Wireless One Inc., Sr. Discount Notes,
13.000% due 10/15/03........................ 2,513,438
1,550,000 B Young Broadcasting Corp., Guaranteed Secured
Notes, 11.750% due 11/15/04................. 1,714,688
- --------------------------------------------------------------------------------
117,423,100
- --------------------------------------------------------------------------------
Building/Construction -- 0.3%
1,575,000 BB- American Standard Inc., Sr. Sub. Debentures,
11.375% due 5/15/04......................... 1,685,250
- --------------------------------------------------------------------------------
Chemicals -- 3.4%
NL Industries, Sr. Secured Notes:
3,000,000 B 11.750% due 10/15/03........................ 3,255,000
2,550,000 B Step bond to yield 12.525% due 10/15/05..... 2,326,875
3,462,000 BB Pt. Polysindo Eka Perkasa, Sr. Notes,
13.000% due 6/15/01......................... 3,929,370
4,350,000 B+ Terra Industries, Inc., Sr. Notes,
10.500% due 6/15/05......................... 4,768,688
2,250,000 B Texas Petrochemical Corp., Sr. Sub. Notes,
11.125% due 7/1/06+......................... 2,421,563
- --------------------------------------------------------------------------------
16,701,496
- --------------------------------------------------------------------------------
Consumer Durables -- 1.5%
8,650,000 B+ International Semi-Tech., Sr. Discount
Secured Notes, step bond to yield
11.395% due 8/15/03......................... 4,973,750
1,934,000 B+ TAG-Heuer International Inc., Sr. Sub. Notes,
12.000% due 12/15/05........................ 2,228,935
- --------------------------------------------------------------------------------
7,202,685
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1997 (continued)
Face
Amount Rating Security Value
- --------------------------------------------------------------------------------
Diversified/Conglomerate Manufacturing -- 1.0%
$2,565,000 B Interlake Corp., Sr. Sub. Debentures,
12.125% due 3/1/02.......................... $ 2,693,250
2,175,000 B Unifrax Investment Corp., Sr. Notes,
10.500% due 11/1/03......................... 2,267,438
- --------------------------------------------------------------------------------
4,960,688
- --------------------------------------------------------------------------------
Electric Equipment -- 0.6%
2,450,000 B Celestica International Inc., Guaranteed Sr. Sub.
Notes, 10.500% due 12/31/06+................ 2,682,750
- --------------------------------------------------------------------------------
Electric Utilities -- 1.3%
4,250,000 B+ Calpine Corp., Sr. Notes
10.500% due 5/15/06+........................ 4,632,500
1,435,333 BB- Midland Cogeneration Venture Limited
Partnership, Midland Funding, Sr. Secured
Lease Obligation Bond, Series C,
10.330% due 7/23/02......................... 1,542,983
- --------------------------------------------------------------------------------
6,175,483
- --------------------------------------------------------------------------------
Electronics/Computers -- 2.7%
2,675,000 B- Graphic Controls Corp., Sr. Sub. Notes,
12.000% due 9/15/05+........................ 2,996,000
Unisys Corp., Sr. Notes:
4,600,000 B+ 12.000% due 4/15/03+........................ 5,048,500
4,700,000 B+ 11.750% due 10/15/04........................ 5,152,375
- --------------------------------------------------------------------------------
13,196,875
- --------------------------------------------------------------------------------
Finance -- 0.5%
2,300,000 B+ Imperial Credit Industries Inc., Sr. Notes,
9.875% due 1/15/07+......................... 2,380,500
- --------------------------------------------------------------------------------
Foods -- 0.7%
1,950,000 B- International Home Foods, Sr. Sub. Notes,
10.375% due 11/1/06+........................ 2,057,250
1,365,000 B- Van De Kamp Inc., Sr. Sub. Notes,
12.000% due 9/15/05+........................ 1,528,800
- --------------------------------------------------------------------------------
3,586,050
- --------------------------------------------------------------------------------
8 See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1997 (continued)
Face
Amount Rating Security Value
- --------------------------------------------------------------------------------
Grocery/Convenience Stores -- 1.0%
$4,450,000 B- Pathmark Stores Inc., Sub. Debentures,
12.625% due 6/15/02......................... $ 4,639,125
- --------------------------------------------------------------------------------
Healthcare -- 2.2%
3,900,000 B Magellan Health Services Inc., Sr. Sub. Notes,
11.250% due 4/15/04......................... 4,353,375
700,000 B- Packard Bioscience Industry Inc., Sr. Sub. Notes,
9.375% due 3/1/07+.......................... 712,250
Tenet Healthcare Corp.:
2,400,000 BB Sr. Notes, 8.000% due 1/15/05............... 2,427,000
3,000,000 B+ Sr. Sub. Notes, 8.625% due 1/15/07.......... 3,078,750
- --------------------------------------------------------------------------------
10,571,375
- --------------------------------------------------------------------------------
Hotel, Casinos and Gaming -- 3.1%
1,500,000 B Aztar Corp., Sr. Sub. Notes,
13.750% due 10/1/04......................... 1,710,000
3,250,000 B- Courtyard by Marriott Ltd., Sr. Secured Notes,
10.750% due 2/1/08+......................... 3,473,438
2,150,000 BB Grand Casinos Inc., Guaranteed 1st Mortgage,
10.125% due 12/1/03......................... 2,214,500
3,025,000 BB+ Mohegan Tribal Gaming Authority,
Sr. Secondary Notes,
13.500% due 11/15/02+....................... 4,023,250
3,275,000 B Showboat Inc., Sr. Sub. Notes,
13.000% due 8/1/09.......................... 3,758,063
- --------------------------------------------------------------------------------
15,179,251
- --------------------------------------------------------------------------------
Leisure -- 0.4%
1,682,390 NR Gillett Holdings Inc., Sr. Sub. Notes,
12.250% due 6/30/02......................... 1,749,686
- --------------------------------------------------------------------------------
Machinery -- 2.0%
1,750,000 B- Alvey Systems Inc., Sr. Sub. Notes,
11.375% due 1/31/03+ ....................... 1,855,000
1,200,000 B+ Hawk Corp., Sr. Notes,
10.250% due 12/1/03+........................ 1,248,000
See Notes to Financial Statements. 9
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1997 (continued)
Face
Amount Rating Security Value
- --------------------------------------------------------------------------------
Machinery -- 2.0% (continued)
$6,175,000 B- Terex Corp., Sr. Secured Notes,
13.250% due 5/15/02......................... $ 6,869,688
- --------------------------------------------------------------------------------
9,972,688
- --------------------------------------------------------------------------------
Metals/Mining -- 4.4%
268,000 B Algoma Steel Inc., 1st Mortgage Notes,
12.375% due 7/15/05......................... 302,840
2,225,000 B- Commonwealth Aluminum Co., Sr. Sub. Notes,
10.750% due 10/1/06+........................ 2,350,156
1,150,000 B Envirosource Inc., Sr. Notes,
9.750% due 6/15/03.......................... 1,129,875
4,025,000 B- Haynes International Inc., Sr. Notes,
11.625% due 9/1/04.......................... 4,417,438
2,650,000 B Intertek Finance PLC., Sr. Sub. Notes,
10.250% due 11/1/06+........................ 2,799,063
4,525,000 B- Kaiser Aluminum Corp., Sr. Sub. Notes,
12.750% due 2/1/03.......................... 4,988,813
1,850,000 B- Russel Metals Inc., Sr. Notes,
10.250% due 6/15/00+........................ 1,896,250
3,205,000 B+ UCAR Global Enterprises Inc.,
Sr. Sub Notes, 12.000% due 1/15/05.......... 3,693,763
- --------------------------------------------------------------------------------
21,578,198
- --------------------------------------------------------------------------------
Miscellaneous Services -- 0.5%
2,300,000 B- Outsourcing Solutions Inc., Sr. Sub. Notes,
11.000% due 11/1/06+........................ 2,489,750
- --------------------------------------------------------------------------------
Oil/Natural Gas -- 6.7%
3,925,000 B+ Clark USA Inc., Sr. Notes,
10.875% due 12/1/05......................... 4,052,563
4,150,000 B+ Dawson Productions Services Inc., Sr. Notes,
9.375% due 2/1/07........................... 4,274,500
1,740,000 CCC+ Deeptech International Inc., Sr. Secured Notes,
12.000% due 12/15/00........................ 1,877,025
1,050,000 B Forcenergy Inc., Sr. Sub. Notes,
8.500% due 2/15/07+......................... 1,047,375
10 See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1997 (continued)
Face
Amount Rating Security Value
- --------------------------------------------------------------------------------
Oil/Natural Gas -- 6.7% (continued)
$3,860,000 B+ Global Marine Inc., Sr. Secured Notes,
12.750% due 12/15/99........................ $ 4,130,200
2,175,000 B- Kelley Oil & Gas Corp., Sr. Notes,
10.375% due 10/15/06........................ 2,321,813
4,575,000 B+ Parker Drilling Co., Sr. Notes,
9.750% due 11/15/06+........................ 4,895,250
4,300,000 B+ RM Clark Holdings Inc., Sr. Notes, zero coupon
bond to yield 11.040% due 2/15/00........... 3,165,875
3,550,000 BB- Santa Fe Energy Resources Inc., Sr. Sub.
Debentures, 11.000% due 5/15/04............. 3,913,875
2,625,000 B United Meridian Corp., Sr. Sub. Notes,
10.375% due 10/15/05........................ 2,923,594
- --------------------------------------------------------------------------------
32,602,070
- --------------------------------------------------------------------------------
Packaging/Containers -- 0.8%
525,000 B- Gaylord Container Corp., Sr. Sub. Debentures,
12.750% due 5/15/05......................... 582,750
4,000,000 B- Ivex Holdings Corp., Sr. Sub. Debentures,
step bond to yield 12.910% due 3/15/05...... 3,195,000
- --------------------------------------------------------------------------------
3,777,750
- --------------------------------------------------------------------------------
Paper/Printing -- 6.8%
2,616,000 B- American Pad & Paper Co., Sr. Sub. Notes,
13.000% due 11/15/05........................ 3,070,530
5,350,000 B+ Asia Pulp & Paper Ltd., Guaranteed Preferred
Notes, Series A, 12.000% due 12/29/49+...... 5,383,438
3,000,000 B Goss Graphic Systems Inc., Sr. Sub. Notes,
12.000% due 10/15/06........................ 3,210,000
8,725,000 BB Indah Kiat International Finance Co.,
Sr. Secured Notes, 11.875% due 6/15/02...... 9,859,250
6,050,000 B+ SD Warren Co., Sr. Sub. Notes,
12.000% due 12/15/04........................ 6,715,500
3,725,000 BB Tjiwi Kimia International, Sr. Notes,
13.250% due 8/1/01.......................... 4,302,375
- --------------------------------------------------------------------------------
32,541,093
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 11
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1997 (continued)
Face
Amount Rating Security Value
- --------------------------------------------------------------------------------
Personal Care -- 2.9%
$ 2,000,000 B- Revlon Consumer Products Corp.,
Sr. Sub. Notes, 10.500% due 2/15/03......... $ 2,130,000
12,825,000 B- Revlon Worldwide Corp., Sr. Secured
Notes, zero coupon bond to yield
24.440% due 3/15/98......................... 12,071,531
- --------------------------------------------------------------------------------
14,201,531
- --------------------------------------------------------------------------------
Pollution Control -- 0.5%
2,325,000 B+ Allied Waste North America Inc., Sr. Sub. Notes,
10.250% due 12/1/06+........................ 2,511,000
- --------------------------------------------------------------------------------
Real Estate -- 1.0%
4,300,000 BB- Trizec Finance, Sr. Notes,
10.875% due 10/15/05........................ 4,789,125
- --------------------------------------------------------------------------------
Retail -- 1.0%
4,325,000 B+ Barnes and Noble, Sr. Sub. Notes,
11.875% due 1/15/03......................... 4,752,094
- --------------------------------------------------------------------------------
Telecommunications -- 16.8%
Brooks Fiber Properties Inc., Sr. Discount Notes:
8,475,000 NR Step bond to yield 11.559% due 3/1/06....... 5,794,781
10,700,000 NR Step bond to yield 11.701% due 11/1/06...... 6,995,125
9,750,000 B Clearnet Communications Inc., Sr. Discount
Notes, step bond to yield
13.948% due 12/15/05........................ 6,703,125
3,900,000 NR Colt Telecommunications Group PLC. Sr.
Discount Notes, step bond to yield
11.561% due 12/15/06........................ 2,515,500
2,000,000 NR Dobson Communications Corp., Sr. Notes,
11.750% due 4/18/07+........................ 2,025,000
2,425,000 B+ Fonorola Inc., Sr. Sub. Notes,
12.500% due 8/15/02......................... 2,716,000
2,600,000 B Globolstar L.P. Corp., Sr. Notes,
11.375% due 2/15/04+........................ 2,704,000
8,750,000 NR Intelcom Group USA Inc., Sr. Discount Notes,
step bond to yield 12.500% due 5/1/06+...... 5,928,125
12 See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1997 (continued)
Face
Amount Rating Security Value
- --------------------------------------------------------------------------------
Telecommunications -- 16.8% (continued)
$8,375,000 B- Intermedia Communications, Sr. Discount Notes,.
step bond to yield 12.332% due 5/15/06...... $ 5,736,875
5,750,000 B Mcleod Inc., Sr. Discount Notes,
step bond to yield 10.443% due 3/1/07+...... 3,464,375
7,975,000 B- Millicom International Cellular SA, Sr. Sub.
Discount Notes, step bond to yield
13.500% due 6/1/06+......................... 5,423,000
2,025,000 BB Multicanal SA, Notes,
10.500% due 2/1/07+......................... 2,103,469
7,475,000 B Nextel Communications Inc., Sr. Discount Notes,
step bond to yield 12.410% due 8/15/04 ..... 5,494,125
4,575,000 NR Nextlink Communications, Sr. Discount Notes,
12.500% due 4/15/06+........................ 4,975,313
1,000,000 CCC+ Omnipoint Corp., Sr. Notes,
11.625% due 8/15/06+........................ 1,010,000
Pagemart Nationwide, Inc., Sr. Discount Notes:
5,400,000 NR Step bond to yield 11.950% due 11/1/03...... 4,387,500
2,800,000 NR Step bond to yield 13.297% due 2/1/05 ...... 2,016,000
1,225,000 B- Phonetel Technologies Inc., Sr. Notes,
12.000% due 12/15/06........................ 1,304,625
1,900,000 B Pricellular Wireless Corp., Sr. Notes,
10.750% due 11/1/04+........................ 2,006,875
4,125,000 NR RSL Communications Ltd., Sr. Notes,
12.250% due 11/15/06+....................... 4,372,500
5,650,000 B Teleport Communications Inc.,
Sr. Discount Notes, step bond to yield
11.442% due 7/1/07 ......................... 4,011,500
- --------------------------------------------------------------------------------
81,687,813
- --------------------------------------------------------------------------------
Tobacco -- 0.6%
3,000,000 B Consolidated Cigar Corp., Sr. Sub. Notes,
10.500% due 3/1/03.......................... 3,150,000
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 13
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1997 (continued)
Face
Amount Rating Security Value
- --------------------------------------------------------------------------------
Transportation -- 0.8%
$3,630,000 BB- Sea Containers Ltd., Sub. Debentures,
Series A, 12.500% due 12/1/04............... $ 4,047,450
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost-- $422,942,228).......................... 446,264,103
================================================================================
Shares Security Value
- --------------------------------------------------------------------------------
COMMON STOCKS -- 0.1%
- --------------------------------------------------------------------------------
Communications -- 0.0%
32,175 Clearnet Communications Inc.................... 185,006
- --------------------------------------------------------------------------------
Metals/Mining -- 0.1%
73,037 Algoma Steel Inc............................... 382,042
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost-- $548,574).............................. 567,048
================================================================================
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS -- 7.4%
- --------------------------------------------------------------------------------
Automobiles/Trucking -- 1.0%
87,625 Navistar International Series G,
Convertible $6.00........................... 5,082,250
- --------------------------------------------------------------------------------
Broadcasting -- 4.0%
17,718 Time Warner Inc., Series K,
Exchange 0.000%+............................ 19,711,275
- --------------------------------------------------------------------------------
Healthcare and Pharmaceuticals -- 0.2%
156,014 Avatex Corp., Series A,
Payment-in-kind, Exchange $4.200............ 916,582
- --------------------------------------------------------------------------------
Publishing -- 0.0%
K-III Communications Corp.
939 Series B, Exchange 11.625%+++............... 95,780
- --------------------------------------------------------------------------------
Telecommunications -- 2.2%
8,699 PanAmSat Corp., Series A,
Exchange $31.875............................ 10,613,941
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost-- $38,233,086)........................... 36,419,828
================================================================================
14 See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1997 (continued)
Shares Security Value
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PREFERRED STOCKS -- 0.7%
- --------------------------------------------------------------------------------
Banking -- 0.3%
63,850 California Federal Preferred Capital Corp...... $ 1,644,138
- --------------------------------------------------------------------------------
Healthcare -- 0.4%
1,700 Fresensius Medical Care Capital Trust ......... 1,746,750
- --------------------------------------------------------------------------------
TOTAL PREFFERED STOCKS
(Cost-- $3,296,250)............................ 3,390,888
================================================================================
- --------------------------------------------------------------------------------
WARRANTS -- 0.1%
- --------------------------------------------------------------------------------
18,000 Degeorge Financial Corp., Expire 4/1/97+++..... 180
3,900 Nextel Communications Inc., Expire 4/25/99..... 39
12,250 Pagemart Inc., Expire 12/31/04+................ 79,625
24,840 Pagemart Nationwide, Expire 12/31/03+.......... 111,780
4,800 SD Warren Co., Expire 12/15/06+................ 62,400
3,375 Wireless One Inc., Expire 10/15/03............ 6,740
- --------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost-- $84,044)............................... 260,764
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost -- $465,104,182)......................... $486,902,631
================================================================================
+ 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.
++ Security issued with attached warrants.
++ Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 16 for definitions of ratings.
================================================================================
Summary of Bonds by Combined Ratings
% of Total Corporate
Moody's and/or Standard & Poor's Bonds and Notes
- --------------------------------------------------------------------------------
Ba BB 20.5%
B B 68.2
Caa CCC 0.6
NR NR 10.7
-----
100.0%
=====
================================================================================
See Notes to Financial Statements. 15
<PAGE>
- --------------------------------------------------------------------------------
BOND RATINGS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 and CCC -- Bonds rated "BB" and "B" are regarded, on balance, as
predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of
the obligation. "BB" represents a lower degree of
speculation than "B," and "CCC" the highest degree of
speculation. While such bonds will likely have some quality
and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse
conditions.
C -- The rating "C" is reserved for income bonds on which no
interest is being paid.
Moody's -- Numerical modifiers 1, 2 and 3 may be applied to each generic rating
from "Baa" to "C," 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 that are 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 that are 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 that are 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 that are rated "Ca" represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C -- Bonds that are rated "C" are the lowest rated class of
bonds, and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real
investment standing.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
16
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
February 28, 1997
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost-- $465,104,182) ........... $486,902,631
Receivable for securities sold ........................ 10,746,555
Interest receivable ................................... 7,914,460
- --------------------------------------------------------------------------------
Total Assets .......................................... 505,563,646
- --------------------------------------------------------------------------------
LIABILITIES:
Payable to bank ....................................... 6,255,701
Payable for securities purchased ...................... 4,847,000
Investment advisory fees payable ...................... 334,076
Administration fees payable ........................... 80,072
Accrued expenses ...................................... 140,801
- --------------------------------------------------------------------------------
Total Liabilities ..................................... 11,657,650
- --------------------------------------------------------------------------------
Total Net Assets ......................................... $493,905,996
================================================================================
NET ASSETS:
Par value of capital shares ........................... $ 42,602
Capital paid in excess of par value ................... 508,426,294
Accumulated net realized loss from
security transactions, futures contracts and options ... (36,361,349)
Net unrealized appreciation on investments ............ 21,798,449
- --------------------------------------------------------------------------------
Total Net Assets
(Equivalent to $11.59 a share on 42,602,095
shares of $0.001 par value outstanding;
500,000,000 shares authorized) ........................... $493,905,996
================================================================================
See Notes to Financial Statements. 17
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the Year Ended February 28, 1997
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest .............................................. $ 49,630,040
Dividends ............................................. 3,074,785
- --------------------------------------------------------------------------------
Total Investment Income ............................... 52,704,825
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) ..................... 4,255,116
Administration fees (Note 2) .......................... 945,581
Shareholder communications ............................ 241,255
Shareholder and system servicing fees ................. 20,469
Audit and legal ....................................... 76,650
Custody ............................................... 66,642
Directors' fees ....................................... 43,800
Registration fees ..................................... 32,480
Other ................................................. 21,465
- --------------------------------------------------------------------------------
Total Expenses ........................................ 5,703,458
- --------------------------------------------------------------------------------
Net Investment Income .................................... 46,998,367
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS, FUTURES CONTRACTS
AND OPTIONS (NOTES 3 AND 6):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) (749,281)
Futures contracts ................................... 905,151
Options purchased ................................... (391,917)
- --------------------------------------------------------------------------------
Net Realized Loss ..................................... (236,047)
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year ................................... 12,189,381
End of year ......................................... 21,798,449
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation ............... 9,609,068
- --------------------------------------------------------------------------------
Net Gain on Investments, Futures Contracts
and Options ........................................... 9,373,021
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations ................... $ 56,371,388
================================================================================
18 See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
For the Years Ended February 28, 1997
and February 29, 1996
- --------------------------------------------------------------------------------
1997 1996
================================================================================
OPERATIONS:
Net investment income ..................... $46,998,367 $45,933,323
Net realized loss ......................... (236,047) (9,713,821)
Increase in net unrealized appreciation ... 9,609,068 38,580,381
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations .... 56,371,388 74,799,883
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ..................... (45,618,552) (53,548,915)
Capital ................................... (671,702) (1,215,693)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders ........... (46,290,254) (54,764,608)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net asset value of shares issued for
reinvestment of dividends ............... 7,000,597 --
- --------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions ................. 7,000,597 --
- --------------------------------------------------------------------------------
Increase in Net Assets ....................... 17,081,731 20,035,275
NET ASSETS:
Beginning of year ......................... 476,824,265 456,788,990
- --------------------------------------------------------------------------------
End of year* .............................. $493,905,996 $476,824,265
================================================================================
*Includes overdistributed net investment
income of: ................................ -- $(1,379,815)
================================================================================
See Notes to Financial Statements. 19
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
February 28, 1997
- --------------------------------------------------------------------------------
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 the 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 and 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, 1997, 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 $668,631 was reclassified to paid-in capital. Net
investment income, net realized gains and net assets were not affected by this
change; and (j) estimates and assumptions are required to be made regarding
assets, liabilities and changes in net assets resulting from operations when
financial statements are prepared. Changes in the economic
20
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
February 28, 1997 (continued)
- --------------------------------------------------------------------------------
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ.
2. Investment Advisory Agreement, Administration Agreement and Other
Transactions
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings ("SBH"), through its Greenwich Street Advisors division, acts as
investment adviser to the Fund. The Fund pays SBMFM 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.
SBMFM 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.
3. Investments
For the year ended February 28, 1997, the aggregate cost of purchases and
proceeds from sales of investments (including maturities but excluding
short-term securities) were:
================================================================================
Purchases $349,377,861
- --------------------------------------------------------------------------------
Sales 357,453,516
================================================================================
At February 28, 1997, the aggregate gross unrealized appreciation and
depreciation of investments were as follows:
================================================================================
Gross unrealized appreciation $34,308,983)*
Gross unrealized depreciation (12,510,534)*
- --------------------------------------------------------------------------------
Net unrealized appreciation $21,798,449)*
================================================================================
* Substantially the same for Federal income tax purposes.
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. Futures Contracts
Initial margin deposits made upon entering into futures contracts are
21
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
February 28, 1997 (continued)
- --------------------------------------------------------------------------------
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 made or received 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. 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)and the credit risk should a counterparty
fail to perform under such contracts.
At February 28, 1997, the Fund had no open futures contracts.
6. 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.
As of February 28, 1997, the Fund had no open purchased call or put option
contracts.
When a 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 if the cost of the
closing purchase transaction exceeds the premium received when the option was
written) 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
22
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
February 28, 1997 (continued)
- --------------------------------------------------------------------------------
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. The risk associated with purchasing options is
limited to the premium originally paid. The Fund enters into options for the
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 year ended February 28, 1997, the Fund had not written any call
or put options.
7. 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 bonds 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 bond defaults, the Fund may
obtain no return at all on its investment.
8. Capital Loss Carryforward
At February 28, 1997, the Fund had, for Federal income tax purposes,
$36,358,000 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 $18,004,000 $18,115,000 $239,000
================================================================================
9. Capital Shares
During the year ended February 28, 1997, capital stock transactions were as
follows:
Shares Amount
================================================================================
Shares issued on reinvestment 620,506 $7,000,597
================================================================================
23
<PAGE>
FINANCIAL HIGHLIGHTS
For a share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
1997 1996 1995 1994(1)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ...... $11.36 $10.88 $12.39 $12.00
- ------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income ................. 1.12 1.13 1.12 0.98
Net realized and unrealized gain (loss) 0.21 0.65 (1.48) 0.51
- ------------------------------------------------------------------------------------------
Total Income (Loss) From Operations ..... 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 ................. (1.08) (1.27) (1.00) (0.96)
Net realized gains .................... -- -- (0.15) (0.12)
Capital ............................... (0.02) (0.03) -- --
- ------------------------------------------------------------------------------------------
Total Distributions ..................... (1.10) (1.30) (1.15) (1.08)
- ------------------------------------------------------------------------------------------
Net Asset Value, End of Year ............ $11.59 $11.36 $10.88 $12.39
- ------------------------------------------------------------------------------------------
Total Return, Based on Market Value** ... 15.37% 18.82% (0.43)% 6.85%++
- ------------------------------------------------------------------------------------------
Total Return, Based on Net Asset Value** 12.65% 17.80% (2.18)% 12.67%++
- ------------------------------------------------------------------------------------------
Net Assets, End of Year (000s)........... $493,906 $476,824 $456,789 $520,091
- ------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses............................... 1.20% 1.24% 1.24% 1.19%+
Net investment income.................. 9.89 9.74 9.96 8.74+
- ------------------------------------------------------------------------------------------
Portfolio Turnover Rate.................. 61% 73% 62% 108%
- ------------------------------------------------------------------------------------------
Market Value, End of Year................ $11.625 $11.125 $10.500 $11.750
- ------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from March 26, 1993 (commencement of operations) to February
28, 1994. * Amount represents less than $0.01.
** The total return assumes the purchase and redemption of shares using the
Fund's net asset value rather than the market value. Dividends are
reinvested in accordance with the Fund's dividend reinvestment plan.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
24
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
UNAUDITED FINANCIAL DATA
The Shareholders and Board of Directors of the
Managed High Income Portfolio Inc.:
- --------------------------------------------------------------------------------
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Managed High Income Portfolio Inc.
as of February 28, 1997, the related statement of operations, statements of
changes in net assets and financial highlights for each of the years in the
two-year period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibilty is to express
an opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the year ended February 28, 1995 and the
financial highlights for the period from March 26, 1993 (commencement of
operations) to February 28, 1994 were audited by other auditors whose report
thereon, dated April 10, 1995, expressed an unqualified opinion on those
financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
February 28, 1997, by correspondence with the custodian. As to securities
purchased or sold but not received or delivered, we performed other appropriate
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Managed High Income Portfolio Inc. as of February 28, 1997, the results of its
operations and changes in its net assets and financial highlights for each of
the years in the two-year period then ended, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat MOnarch LLP
New York, New York
April 17, 1997
25
<PAGE>
- --------------------------------------------------------------------------------
QUARTERLY RESULTS OF OPERATIONS (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase
Net Realized (Decrease) in
and Unrealized 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,
1994 $13,770,124 $0.33 $12,213,050 $0.29 $(29,239,421) $(0.70) $(17,026,371) $(0.41)
August 31,
1994 13,186,368 0.31 11,777,589 0.28 (25,175,803) (0.60) (13,398,214) (0.32)
November 30,
1994 12,944,849 0.31 11,569,422 0.28 (17,816,469) (0.42) (6,247,047) (0.14)
February 28,
1995 12,720,474 0.30 11,250,507 0.27 10,275,042 0.24 21,525,549 0.51
May 31,
1995 12,525,032 0.30 11,084,402 0.27 14,597,234 0.35 25,681,636 0.61
August 31,
1995 13,294,948 0.32 11,827,361 0.28 1,313,938 0.03 13,141,299 0.31
November 30,
1995 13,166,852 0.31 11,710,524 0.28 1,796,990 0.04 13,507,514 0.32
February 29,
1996 12,770,322 0.30 11,311,036 0.27 11,158,398 0.26 22,469,434 0.53
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
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<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
- --------------------------------------------------------------------------------
September 30, 1994 $10.375 $11.00 $0.093 $10.40
October 31, 1994 10.000 10.91 0.093 9.93
November 30, 1994 10.125 10.68 0.093 9.97
December 31, 1994 9.500 10.62 0.131 9.99
January 31, 1995 10.125 10.59 0.093 10.44
February 28, 1995 10.500 10.88 0.093 10.54
March 31, 1995 10.625 10.90 0.093 10.23
April 30, 1995 10.125 11.04 0.093 10.81
May 31, 1995 10.750 11.21 0.093 10.87
June 30, 1995 10.500 11.15 0.093 10.67
July 31, 1995 10.625 11.31 0.093 10.65
August 31, 1995 10.625 11.25 0.093 10.68
September 30, 1995 10.375 11.26 0.093 10.67
October 31, 1995 10.500 11.31 0.093 10.68
November 30, 1995 10.750 11.29 0.093 10.71
December 31, 1995 10.500 11.20 0.093 10.76
December 31, 1995* 10.500 11.20 0.188 10.76
January 31, 1996 11.188 11.35 0.093 11.19
February 29, 1996 11.125 11.36 0.093 11.09
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
- --------------------------------------------------------------------------------
*Capital gain distribution.
27
<PAGE>
- --------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN (unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Under the Portfolio's Dividend Reinvestment Plan (the "Plan"), a
shareholder whose shares of Common Stock are registered in his own name will
have all distributions from the Portfolio 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, Inc. ("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 (the "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 will
change 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
28
<PAGE>
- --------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN (unaudited)(continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
greater of (a) net asset value or (b) 95% of the then current market price. In a
case where the Purchasing Agent 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 1376, Boston, Massachusetts 02104 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.
29
<PAGE>
- --------------------------------------------------------------------------------
Managed
HIGH INCOME
PORTFOLIO INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Directors
Paolo M. Cucchi
Alessandro C. di Montezemolo
Andrea Farace
Paul R. Hardin
George M. Pavia
Heath B. McLendon, Chairman
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
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
Smith Barney Mutual Funds Management Inc.
388 Greenwich Street
New York, New York 10013
Transfer Agent
First Data Investor Services Group, Inc.
P.O. Box 1376
Boston, Massachusetts 02104
Custodian
PNC Bank, N.A.
17th and Chestnut Streets
Philadelphia, Pennsylvania 19103
