Managed
HIGH INCOME
Portfolio Inc.
Annual
Report
February 28, 1998
<PAGE>
Managed
HIGH INCOME
Portfolio Inc.
LETTER TO
SHAREHOLDERS
February 28, 1998
Dear Shareholder:
We are pleased to provide the annual report for the Managed High Income
Portfolio Inc. ("Portfolio") for the year ended February 28, 1998. During the
past year, the Portfolio distributed income dividends totaling $1.09 per share.
The table below shows the annualized distribution rate and the twelve-month
total return for the Portfolio based on its February 28, 1998 net asset value
("NAV") per share and New York Stock Exchange ("NYSE") closing price.
Annualized Twelve-Month
Price Per Share Distribution Rate Total Return
------------- ----------------- ------------
$11.87 (NAV) 8.69% 12.43%
$11.75 (NYSE) 8.78% 10.96%
The Portfolio generated a total return of 12.43% for the past year. The
Portfolio's performance was roughly in-line with the twelve-month average total
return of 12.89% 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 we have been able to generate consistent
performance returns in the Portfolio through prudent asset selection with a
heavy focus on companies with improving fundamentals.
Market and Economic Overview
The high yield bond market generated competitive performance relative to
that of other bonds of similar maturities during the year as well as in
comparison to the 6% to 9% returns for intermediate-term U.S. Treasurys (i.e.,
maturities of less than 10 years) and investment-grade corporate bonds and the
roughly 12% returns for 10-year U.S. Treasurys and investment-grade corporate
bonds.
1
<PAGE>
After relatively strong performance through the first three quarters of
1997, the high yield bond market began to underperform that of U.S. Treasurys in
the fourth quarter as fears of an economic slowdown and lower corporate profits
caused high yield bond premiums to increase versus U.S. Treasurys. The
lower-quality high yield bonds turned in the greatest underperformance in the
fourth quarter. In periods of increasing economic uncertainty, the lower-quality
segments of the high yield bond market generally underperform versus other types
of bonds because of their greater vulnerability to weaker economic conditions
whereas the more interest-rate sensitive higher quality issues generate the
strongest total returns when general interest rates decline.
By the start of the fourth quarter of 1997, the crisis in Asia had taken
center stage with severe currency and financial market declines in a number of
Asian countries potentially threatening economic stability not only throughout
the Far Eastern region, but the entire world. (Asia represents more than 25% of
world economic output and is a significant global producer and consumer of a
large number of products.) Consequently, there was a dramatic increase in market
volatility in the fourth quarter, especially in the stock markets both
domestically and abroad. In response, many investors began to invest more
aggressively in U.S. Treasurys which are often viewed as the ultimate safe haven
during periods of economic uncertainty.
Despite this increasing uncertainty over future economic growth and levels
of corporate profitability, the U.S. stock markets had another strong year with
total returns in the 25%-to-33% range.
Within the high yield bond market, the lower-quality issues generated the
strongest total returns (i.e., roughly 15% range) in the past year. This was not
surprising given the strong performance of the U.S. stock markets because the
lower-quality segment of the high yield bond market tends to track the
performance of the U.S. stock market. However, the Portfolio's relatively
high-quality orientation caused its performance to lag the high yield bond
market averages to a modest degree during the past year. Yet we remain committed
more than ever to our investment strategy of owning the better quality issues,
especially in light of the increased turbulence in a number of Asian economies.
During the first two months of 1998, the U.S. stock market was more
volatile while most of the major stock indices moved toward record highs. And
despite record new issue supply, the high yield bond market performed extremely
well in January and February of 1998, most likely in reaction to the strength of
the U.S. stock market.
2
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During the reporting period, the U.S. high yield bond market responded
favorably to strength in both the U.S. stock market and U.S. Treasury securities
market. A total of approximately $19 billion of new money flowed into open-end
high yield bond funds in 1997. In addition, there was higher institutional
demand for high yield bonds from insurance companies and pension funds. This
overall higher demand was significant enough to absorb a record total of more
than $120 billion of new high yield bond issues. As of the date of this report,
the high yield bond market is now more than $450 billion in size and that figure
represents a 25% of the entire U.S. corporate bond market.
Portfolio Strategy and Market Outlook
During the past year, we became more conservative and increased our
weighting primarily in high-quality, defensive issues. We think that the U.S.
economy will remain mixed and that many consumer-sensitive industries will
continue to face fierce price competition. In addition, Asia's significant
problems could also put severe pressure on commodity goods prices as troubled
companies in the region try and increase their exports to make up for expected
economic declines. We believe a slowdown in overall global economic growth will
occur as the severe economic decline in Asia sharply reduces demand for many
U.S. and European products. Consequently, the first half of 1998 could see a
slight increase in default rates among select high-yield bond issuers,
especially weaker, more vulnerable companies that are already having difficulty
competing. Given the increased uncertainty over Asia, we would also expect an
increase in stock market volatility in the first and second quarters of 1998,
both domestically and abroad.
We therefore will continue to avoid economic sectors where consumers are
spending less as well as industries facing heavy pricing competition. Our
emphasis in the Portfolio will continue to be industries that are experiencing
strong growth such as telecommunications, media, and cable television. Moreover,
the Portfolio will remain heavily weighted in stronger-rated "B" and "BB" issues
and we plan on avoiding weaker lower-tier issues that are generally rated
"CCC/Caa." Given the higher risks in many of the world's financial markets, we
believe our conservative investment strategy, which involves an emphasis on
high-rated issues, is prudent and in the best long-term interest of our
shareholders.
3
<PAGE>
We look forward to continuing to help you pursue your investment goals. If
you have any questions about the Portfolio, please call the First Data Investor
Services Group, Inc. at (800) 331-1710.
Sincerely,
/s/ Heath B. McLendon /s/ John C. Bianchi, C.F.A.
Heath B. McLendon John C. Bianchi, C.F.A.
Chairman Vice President and
Investment Officer
March 23, 1998
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Take Advantage of the Portfolio'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? The power of automatically reinvesting your dividends is
one of the most successful investment strategies 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, a convenient, simple and efficient way to reinvest your
dividends and capital gains, if any, in additional shares of the
Portfolio. For more detailed information about the Portfolio's Dividend
Reinvestment Plan, please refer to pages 30 and 31.
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4
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SCHEDULE OF INVESTMENTS
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February 28, 1998
Face
Amount Ratings Security Value
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CORPORATE BONDS AND NOTES - 92.1%
- --------------------------------------------------------------------------------
Aerospace & Defense -- 1.8%
$ 5,875,000 BB Airplanes Pass-Through Trust, Corporate
Collateralized Mortgage Obligation,
Series D, 10.875% due 3/15/19 ................ $ 6,625,414
2,700,000 BB Morgan Stanley Aircraft Finance,
8.700% due 3/15/23 ........................... 2,740,500
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9,365,914
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Broadcasting-TV, Cable & Radio -- 13.6%
Cablevision Systems Corp., Sr. Sub. Debentures:
9,220,000 BB- 9.875% due 2/15/13 ........................... 10,234,200
3,250,000 BB- 10.500% due 5/15/16 .......................... 3,835,000
3,175,000 BB- 9.875% due 4/1/23 ............................ 3,508,375
Century Communications Corp., Sr. Notes:
850,000 BB- 8.375% due 12/15/07 .......................... 864,875
2,900,000 BB- 8.750% due 10/1/07 ........................... 3,037,750
4,675,000 B- Comcast UK Cable, Sr. Sub. Debenture,
step bond to yield 11.395% due 11/15/07 ...... 3,845,188
1,515,000 BBB- Le Groupe Videotron, Sr. Notes,
10.625% due 2/15/05 .......................... 1,700,587
Marcus Cable Capital Corp., Sr. Discount Notes:
2,400,000 B Step bond to yield 11.392% due 8/1/04 ........ 2,274,000
1,525,000 B Step bond to yield 12.661% due 12/15/05 ...... 1,362,969
Rogers Cable Systems Inc.:
2,275,000 BB+ Sr. Notes, 10.000% due 3/15/05 ............... 2,559,375
2,575,000 BB+ Sr. Secured Debenture, 10.000% due 12/1/07 ... 2,890,438
7,175,000 BB- Sr. Sub. Debenture, 11.000% due 12/1/15 ...... 8,457,530
2,900,000 BB- Rogers Communications, Sr. Notes,
8.875% due 7/15/07 ........................... 2,929,000
2,500,000 CCC+ SFX Entertainment Inc., Sr. Sub. Notes,
9.125% due 2/1/08 (a) ........................ 2,500,000
TV Azteca SA, Sr. Notes:
2,300,000 B+ 10.125% due 2/15/04 .......................... 2,466,750
4,000,000 B+ 10.500% due 2/15/07 .......................... 4,300,000
7,100,000 B UIH Australia Inc., Sr. Discount Notes,
step bond to yield 14.058% due 5/15/06 ......... 5,058,750
See Notes to Financial Statements. 5
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<PAGE>
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SCHEDULE OF INVESTMENTS
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February 28, 1998 (continued)
Face
Amount Ratings Security Value
- --------------------------------------------------------------------------------
Broadcasting-TV, Cable & Radio-- 13.6% (continued)
$1,525,000 B UIH Australia Pacific, Sr. Discount Notes,
step bond to yield 14.000% due 5/15/06 ....... $ 1,067,500
12,400,000 B United International Holdings Inc.,
Sr. Discount Notes, step bond to yield
10.447% due 2/15/08 .......................... 7,533,000
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70,425,287
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Building/Construction -- 0.3%
1,250,000 BB+ Trizec Finance, Sr. Notes,
10.875% due 10/15/05 ......................... 1,417,187
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Chemicals -- 1.2%
3,000,000 B NL Industries Inc., Sr. Notes,
11.750% due 10/15/03 ......................... 3,352,500
2,600,000 B Unifrax Investment Corp., Sr. Notes,
10.500% due 11/1/03 .......................... 2,717,000
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6,069,500
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Conglomerate Manufacturing -- 1.9%
2,225,000 BB- CIA Latino Americana, Company Guaranteed,
11.625% due 6/1/04 (a) ....................... 2,308,438
2,600,000 B- Eagle-Picher Industrial Inc., Sr. Sub. Notes,
9.375% due 3/1/08 (a) ........................ 2,619,500
2,265,000 CCC+ Interlake Corp., Sr. Sub. Debentures,
12.125% due 3/1/02 ........................... 2,349,937
2,650,000 NR Park-Ohio Industries, Sr. Sub. Notes,
9.250% due 12/1/07 (a) ....................... 2,775,875
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10,053,750
- --------------------------------------------------------------------------------
Consumer Durable -- 0.3%
2,500,000+ B Texon International, Sr. Notes,
10.000% due 2/1/08 (a) ....................... 1,425,777
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Electric Utilities -- 4.7%
AES Corp., Sr. Sub. Notes:
1,200,000 B+ 10.250% due 7/15/06 .......................... 1,329,000
1,325,000 B+ 8.375% due 8/15/07 ........................... 1,361,438
5,950,000 B+ 8.500% due 11/1/07 (a) ....................... 6,143,375
6 See Notes to Financial Statements.
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<PAGE>
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SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1998 (continued)
Face
Amount Ratings Security Value
- --------------------------------------------------------------------------------
Electric Utilities -- 4.7% (continued)
Calpine Corp., Sr. Notes:
$3,650,000 BB- 10.500% due 5/15/06 .......................... $ 4,051,500
1,400,000 BB- 8.750% due 7/15/07 (a) ....................... 1,452,500
2,000,000 BB+ Cleveland Electric Illuminating Corp., Sr. Notes,
7.430% due 11/1/09 (a) ....................... 2,075,000
3,225,000 BB+ El Paso Electric Co., 1st Mortgage Obligation,
8.900% due 2/1/06 ............................ 3,591,844
750,000 BB ESI Tractebel ACQ Corp., Debentures,
7.990% due 12/30/11 (a) ...................... 750,000
1,195,269 BB Midland Cogeneration Venture, Sr. Secured Lease
Obligation Bond, 10.330% due 7/23/02 ......... 1,286,409
1,975,000 BBB- Niagara Mohawk Power, 1st Mortgage
Obligation, 7.750% due 5/15/06 ............... 2,093,500
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24,134,566
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Electronics/Computers -- 5.9%
1,800,000 NR Axiohm Transaction Solution Inc., Sr. Sub.
Notes, 9.750% due 10/1/07 (a) ................ 1,836,000
2,300,000 NR Celestica International Inc., Sr. Sub. Notes,
10.500% due 12/31/06 ......................... 2,489,750
5,275,000 B Fairchild Semiconductor, Sr. Sub. Notes,
10.125% due 3/15/07 .......................... 5,591,500
1,900,000 B Flextronics International Ltd., Sr. Sub. Notes,
8.750% due 10/15/07 (a) ...................... 1,933,250
Unisys Corp., Sr. Notes:
6,200,000 B+ 12.000% due 4/15/03 .......................... 7,099,000
5,775,000 B+ 11.750% due 10/15/04 ......................... 6,727,875
4,700,000 B- ViaSystems Inc., Sr. Sub. Notes,
9.750% due 6/1/07 ............................ 4,935,000
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30,612,375
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Finance Company -- 3.8%
3,250,000 B Amresco Inc., Sr. Sub. Notes,
10.000% due 3/15/04 .......................... 3,388,125
8,775,000 B First Nationwide Parent Holdings Ltd.,
Sr. Notes, 12.500% due 4/15/03 ............... 10,080,280
3,200,000 B- Ocwen Capital Trust, Company Guaranteed,
10.875% due 8/1/27 3,568,000
See Notes to Financial Statements. 7
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<PAGE>
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SCHEDULE OF INVESTMENTS
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February 28, 1998 (continued)
Face
Amount Ratings Security Value
- --------------------------------------------------------------------------------
Finance Company -- 3.8% (continued)
$2,100,000 BB- Ocwen Financial Corp., Notes,
11.875% due 10/1/03 .......................... $ 2,373,000
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19,409,405
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Financial Services -- 1.2%
2,900,000 NR Intertek Finance PLC, Sr. Sub. Notes,
10.250% due 11/1/06 .......................... 3,088,500
2,750,000 B- Outsourcing Solutions Inc., Sr. Sub. Notes,
11.000% due 11/1/06 .......................... 3,031,875
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6,120,375
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Foods -- 1.9%
1,325,000 B+ Ameriserve Food Distribution Inc.,
Company Guaranteed, 8.875% due 10/15/06 ...... 1,371,375
2,675,000 B- B&G Foods Inc., Sr. Sub. Notes,
9.625% due 8/1/07 (a) ........................ 2,748,562
4,125,000 B Imperial Holly Corp., Sr. Sub. Notes,
9.750% due 12/15/07 (a) ...................... 4,253,906
1,365,000 B- Van de Kamp Inc., Sr. Sub. Notes,
12.000% due 9/15/05 .......................... 1,528,800
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9,902,643
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Health Care -- 6.3%
2,050,000 B- Fisher Scientific International Inc., Sr. Sub. Notes,
9.000% due 2/1/08 (a) ........................ 2,091,000
2,350,000 B+ Frensenius Medical Capital Trust II, Company
Guaranteed, 7.875% due 2/1/08 (a) ............ 2,358,813
2,675,000 B- Graphic Controls Corp., Sr. Sub. Notes,
12.000% due 9/15/05 .......................... 3,002,688
5,100,000 BB ICN Pharmaceuticals Inc., Sr. Notes,
9.250% due 8/15/05 ........................... 5,418,750
2,425,000 B- Integrated Health Services Inc., Sr. Sub. Notes,
9.250% due 1/15/08 (a) ....................... 2,540,187
7,750,000 B- Magellan Health Services, Sr. Sub. Notes,
9.000% due 2/15/08 (a) ....................... 7,866,250
4,500,000 NR Paragon Health Network, Sr. Sub. Notes,
9.500% due 11/1/07 (a) ....................... 4,680,000
8 See Notes to Financial Statements.
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<PAGE>
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SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1998 (continued)
Face
Amount Ratings Security Value
- --------------------------------------------------------------------------------
Health Care -- 6.3% (continued)
$2,600,000 NR Pharmaceutical Fine Chemicals Inc., Sr. Sub.
Notes, 9.750% due 11/15/07 (a) ............... $ 2,691,000
2,000,000 BB- Tenet Healthcare, Sr. Sub. Notes,
8.625% due 1/15/07 ........................... 2,087,500
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32,736,188
- --------------------------------------------------------------------------------
Hotel/Gaming -- 6.0%
1,300,000 B Aztar Corp., Sr. Sub. Notes,
13.750% due 10/1/04 .......................... 1,498,250
3,250,000 B- Courtyard by Marriott, Sr. Notes,
10.750% due 2/1/08 ........................... 3,603,438
900,000 Ba3* HMC Acquisition Properties, Sr. Notes,
9.000% due 12/15/07 .......................... 954,000
HMH Properties Inc.:
2,550,000 BB- Company Guaranteed, 8.875% due 7/15/07 ....... 2,712,562
10,625,000 BB- Sr. Notes, 9.500% due 5/15/05 ................ 11,368,750
3,025,000 BB+ Mohegan Tribal Gaming, Sr. Notes,
13.500% due 11/15/02 ......................... 3,909,812
3,275,000 B Showboat Inc., Sr. Sub. Notes,
13.000% due 8/1/09 ........................... 3,987,312
2,950,000 B Signature Resorts Inc., Sr. Sub. Notes,
9.750% due 10/1/07 (a) ....................... 3,031,125
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31,065,249
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Insurance -- 1.2%
3,225,000 BB+ SIG Capital Trust, Company Guaranteed,
9.500% due 8/15/27 ........................... 3,333,844
2,500,000 BB- Veritas Capital Trust, Company Guaranteed,
10.000% due 1/1/28 (a) ....................... 2,618,750
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5,952,594
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Leisure -- 0.5%
3,525,000 B- PX Escrow Corp., Sr. Discount Notes,
9.625% due 2/1/06 (a) ........................ 2,493,938
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Machinery -- 2.1%
1,750,000 B- Alvey Systems Inc., Sr. Sub. Notes,
11.375% due 1/31/03 .......................... 1,830,937
See Notes to Financial Statements. 9
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<PAGE>
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SCHEDULE OF INVESTMENTS
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February 28, 1998 (continued)
Face
Amount Ratings Security Value
- --------------------------------------------------------------------------------
Machinery -- 2.1% (continued)
$3,000,000 B Goss Graphic System Inc., Sr. Sub. Notes,
12.000% due 10/15/06 ......................... $ 3,442,500
4,784,000 NR Terex Corp., Sr. Notes, 13.250% due 5/15/02 .... 5,633,160
- --------------------------------------------------------------------------------
10,906,597
- --------------------------------------------------------------------------------
Metals & Mining -- 2.8%
5,725,000 B- Haynes International Inc., Sr. Notes,
11.625% due 9/1/04 ........................... 6,540,812
6,150,000 CCC+ Kaiser Aluminum & Chemical Corp., Sr. Sub.
Notes, 12.750% due 2/1/03 .................... 6,565,125
1,325,000 B- Koppers Industry Inc., Sr. Sub. Notes,
9.875% due 12/1/07 (a) ....................... 1,397,875
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14,503,812
- --------------------------------------------------------------------------------
Oil/Natural Gas -- 5.5%
2,575,000 B Canadian Forest Oil Ltd. Inc., Sr. Sub. Notes,
8.750% due 9/15/07 (a) ....................... 2,620,062
4,350,000 B+ Clark USA Inc., Sr. Notes,
10.875% due 12/1/05 .......................... 4,774,125
1,550,000 B- Coho Energy Inc., Sr. Sub. Notes,
8.875% due 10/15/07 .......................... 1,538,375
4,150,000 BB- Gulf Canada Resources Ltd., Sub. Debentures,
9.625% due 7/1/05 ............................ 4,533,875
250,000 BB Hvide Marine Inc., Sr. Notes,
8.375% due 2/15/08 (a) ....................... 246,250
1,350,000 BB- J Ray McDermott SA, Sr. Sub. Notes,
9.375% due 7/15/06 ........................... 1,458,000
Ocean Energy Inc., Company Guaranteed:
2,750,000 BB- 9.750% due 10/1/06 ........................... 3,018,125
1,250,000 BB- 8.875% due 7/15/07 ........................... 1,331,250
3,550,000 BB- Santa Fe Energy Resources, Sr. Sub. Debentures,
11.000% due 5/15/04 .......................... 3,860,625
2,150,000 B- Stone Energy Corp., Company Guaranteed,
8.750% due 9/15/07 ........................... 2,219,875
2,625,000 BB- United Meridian Corp., Sr. Sub. Notes,
10.375% due 10/15/05 ......................... 2,913,750
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28,514,312
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10 See Notes to Financial Statements.
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<PAGE>
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SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1998 (continued)
Face
Amount Ratings Security Value
- --------------------------------------------------------------------------------
Oil Services -- 3.7%
$4,965,000 B+ Dawson Product Services, Sr. Notes,
9.375% due 2/1/07 ............................ $ 5,200,838
2,315,000 CCC+ Deeptech International Inc., Sr. Notes,
12.000% due 12/15/00 ......................... 2,468,369
2,150,000 B+ ICO Inc., Sr. Notes, 10.375% due 6/1/07 ........ 2,300,500
5,625,000 B+ Parker Drilling, Sr. Notes,
9.750% due 11/15/06 .......................... 6,103,125
2,600,000 BB Pride International Inc., Sr. Notes,
9.375% due 5/1/07 ............................ 2,808,000
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18,880,832
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Packaging/Containers -- 1.4%
2,500,000 B Huntsman Packaging Corp., Sr. Sub. Notes,
9.125% due 10/1/07 (a) ....................... 2,556,250
3,000,000+ NR Impress Metal Holding, Sr. Sub. Notes,
9.875% due 5/29/07 ........................... 1,743,994
2,750,000 B- Tekni-Plex Inc., Sr. Sub. Notes,
9.250% due 3/1/08 (a) ........................ 2,784,375
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7,084,619
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Pollution Control -- 0.5%
2,325,000 B+ Allied Waste North America Inc., Company
Guaranteed, 10.250% due 12/1/06 .............. 2,598,188
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Printing/Paper/Forest Products -- 1.6%
966,000 B- American Pad & Paper, Inc., Sr. Sub. Notes,
13.000% due 11/15/05 ......................... 1,061,392
1,250,000 B- Indah Kiat International Finance Co., Company
Guaranteed, 11.875% due 6/15/02 .............. 1,062,500
5,525,000 B+ SD Warren Co., Sr. Sub. Notes,
12.000% due 12/15/04 ......................... 6,181,094
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8,304,986
- --------------------------------------------------------------------------------
Telecommunications -- 22.1%
2,550,000 NR Allegiance Telecom Inc., Units, step bond to yield
11.713% due 2/15/08 .......................... 1,389,750
6,650,000 B3* Clearnet Communications Inc., Sr. Discount
Notes, 14.750% due 12/15/05 .................. 5,369,875
See Notes to Financial Statements. 11
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<PAGE>
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SCHEDULE OF INVESTMENTS
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February 28, 1998 (continued)
Face
Amount Ratings Security Value
- --------------------------------------------------------------------------------
Telecommunications -- 22.1% (continued)
Colt Telecom Group PLC:
$ 800,000+ B Sr. Notes, 10.125% due 11/30/07 .............. $ 1,409,400
5,000,000 NR Units, step bond to yield
11.647% due 12/15/06 ....................... 4,400,000
Esprit Telecom Group PLC, Sr. Notes:
4,325,000+ B- 11.500% due 12/15/07 ......................... 2,612,564
2,300,000 B- 11.500% due 12/15/07 ......................... 2,512,750
1,375,000 NR Facilicom International Inc., Sr. Notes,
10.500% due 1/15/08 (a) ...................... 1,405,938
3,825,000 BB- Fonorola Inc., Sr. Notes,
12.500% due 8/15/02 .......................... 4,274,438
2,650,000 B Hermes Europe Railtel BV, Sr. Notes,
11.500% due 8/15/07 (a) ...................... 2,974,625
5,975,000 B Intermedia Communications of Florida,
Sr. Discount Notes, 12.500% due 5/15/06 ...... 4,832,280
7,700,000 B- Iridium LLC Capital Corp., Company
Guaranteed, 14.000% due 7/15/05 .............. 8,758,750
5,525,000 B+ McLeod USA Inc., Sr. Discount Notes, step bond
to yield 10.577% due 3/1/07 .................. 4,171,375
6,050,000 NR Metronet Communications, Sr. Notes,
12.000% due 8/15/07 (a) ...................... 7,018,000
5,025,000 B- Millicom International Cellular SA, Sr. Sub.
Discount Notes, step bond to yield
13.500% due 6/1/06 ........................... 3,881,813
2,575,000 B Netia Holdings B.V., Company Guaranteed,
10.250% due 11/1/07 (a) ...................... 2,610,406
Nextel Communications, Sr. Discount Notes:
775,000 CCC+ Step bond to yield 9.844% due 9/15/07 ........ 501,813
8,725,000 CCC+ Step bond to yield 12.168% due 8/15/04 ....... 8,354,188
5,475,000 B Nextlink Communications, Sr. Notes,
12.500% due 4/15/06 .......................... 6,309,938
1,300,000 NR Orbital Imaging Corp., Units,
11.625% due 3/1/05 ........................... 1,332,500
2,800,000 B3* Pagemart Nationwide, Inc., Sr. Discount Notes,
step bond to yield 13.243% due 2/1/05 ........ 2,457,000
12 See Notes to Financial Statements.
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<PAGE>
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SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1998 (continued)
Face
Amount Ratings Security Value
- --------------------------------------------------------------------------------
Telecommunications -- 22.1% (continued)
$6,550,000 Caa* Pagemart Wireless Inc., Sr. Discount Notes,
11.250% due 2/1/08 (a) ....................... $ 3,962,750
5,025,000 B- Primus Telecomm Group, Sr. Notes,
11.750% due 8/1/04 ........................... 5,590,312
6,375,000 B+ Qwest Communications, Sr. Discount Notes,
9.470% due 10/15/07 (a) ...................... 4,462,500
2,125,000 B+ Qwest Communications International, Sr. Notes,
10.875% due 4/1/07 2,449,063 RCN Corp.:
5,350,000 B3* Sr. Discount Notes, step bond to yield
11.171% due 10/15/07 ....................... 3,497,563
2,350,000 B3* Sr. Notes, 10.000% due 10/15/07 (a) .......... 2,491,000
4,125,000 B- RSL Communications Ltd., Company
Guaranteed, 12.250% due 11/15/06 ............. 4,702,500
1,250,000 B- Satelites Mexicanos SA, Sr. Notes,
10.125% due 11/1/04 (a) ...................... 1,298,438
Telesystem International Wireless, Sr. Discount
Notes:
2,050,000 B- 10.500% due 11/1/07 (a) .................... 1,255,625
9,575,000 NR Step bond to yield 13.066% due 6/30/07 (a) 6,511,000
1,850,000 NR WAM!Net Inc., Units, 13.250% due 3/1/05 ........ 1,128,500
- --------------------------------------------------------------------------------
113,926,654
- --------------------------------------------------------------------------------
Transportation -- 1.8%
1,750,000 B+ American Reefer Co. Ltd.,
10.250% due 3/1/08 (a) ....................... 1,767,500
3,750,000 BB GS Superhighways Holdings, Sr. Notes,
10.250% due 8/15/07 (a) ...................... 2,910,938
Sea Containers Ltd.:
1,200,000 BB- Sr. Notes, 7.875% due 2/15/08 (a) ............ 1,194,000
3,130,000 BB- Sr. Sub. Debenture, 12.500% due 12/1/04 ...... 3,536,900
- --------------------------------------------------------------------------------
9,409,338
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost-- $451,093,073) .......................... 475,314,086
================================================================================
See Notes to Financial Statements. 13
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1998 (continued)
Shares Security Value
- --------------------------------------------------------------------------------
STOCKS - 5.9%
- --------------------------------------------------------------------------------
Automotive -- 0.9%
87,625 Navistar International, Series G,
Preferred Convertible $6.00 .................. $ 4,441,492
- --------------------------------------------------------------------------------
Banks -- 0.3%
63,850 California Federal Preferred Capital Corp. ..... 1,755,875
- --------------------------------------------------------------------------------
Broadcasting-TV, Cable & Radio -- 4.3%
19,603 Time Warner Inc., Series M, Preferred,
Exchange 10.250% ............................. 22,347,420
- --------------------------------------------------------------------------------
Communications-Equipment & Software -- 0.0%
12,250 Pagemart Wireless Equipment .................... 110,250
- --------------------------------------------------------------------------------
Electronics/Computer -- 0.2%
40,800 ViaSystems Inc., Series B, Preferred PIK ....... 851,700
- --------------------------------------------------------------------------------
Publishing -- 0.0%
939 Primedia Inc., Series B, Preferred PIK,
Exchange 11.625% ............................. 100,240
- --------------------------------------------------------------------------------
Telecommunications -- 0.2%
4,125 Iridium LLC Corp. .............................. 577,500
11,580 Nextel Communications Inc. ..................... 342,334
- --------------------------------------------------------------------------------
919,834
- --------------------------------------------------------------------------------
TOTAL STOCKS
(Cost-- $28,956,082) .......................... 30,526,811
================================================================================
- --------------------------------------------------------------------------------
WARRANTS - 0.3%
- --------------------------------------------------------------------------------
Broadcasting-TV, Cable & Radio -- 0.0%
8,625 UIH Australia, Expire 5/15/06 (b) .............. 103,500
3,375 Wireless One Inc., Expire 10/19/00 (b) ......... 844
- --------------------------------------------------------------------------------
104,344
- --------------------------------------------------------------------------------
Printing/Paper/Forest Products -- 0.0%
4,800 SD Warren Co., Expire 12/15/06 (b) ............. 84,480
- --------------------------------------------------------------------------------
Telecommunications -- 0.3%
5,425 Australis Holdings Ltd., Expire 10/30/01 (b) ... 0
- --------------------------------------------------------------------------------
14 See Notes to Financial Statements.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1998 (continued)
Shares Ratings Security Value
- --------------------------------------------------------------------------------
WARRANTS - 0.3%
32,175 Clearnet Communications Inc.,
Expire 9/15/05 (a)(b) ........................ $ 193,050
4,725 Globalstar LP, Expire 2/15/04 (a)(b) ........... 661,500
Telecommunications -- 0.3% (continued)
6,050 Metronet Communications Class B,
Expire 8/15/07 (a)(b) ........................ 121,000
3,900 Nextel Communications Inc., Expire 4/25/99 (b) . 6,318
24,840 Pagemart Inc., Expire 12/31/03 (b) ............. 186,300
4,475 Primus Telecommunications, Expire 8/1/04 (b) ... 143,200
4,125 RSL Communications Ltd.,
Expire 11/15/06 (a)(b) ....................... 165,000
- --------------------------------------------------------------------------------
1,476,368
- --------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost-- $731,738) ............................. 1,665,192
================================================================================
Face
Amount Security Value
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT - 1.7%
- --------------------------------------------------------------------------------
$8,752,000 Goldman Sachs, 5.590% due 3/2/98; Proceeds
at maturity-$8,756,076; (Fully collateralized
by U.S. Treasury Notes, 5.375% due 2/15/01;
Market value - $8,931,363)
(Cost - $8,752,000) .......................... 8,752,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost -- $489,532,893**) ....................... $516,258,089
================================================================================
(a) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
(b) Non-income producing security.
+ Represents local currency.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 17 for definition of ratings.
See Notes to Financial Statements. 15
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 28, 1998 (continued)
================================================================================
SUMMARY OF BONDS BY COMBINED RATINGS
% of
Total Corporate
Moody's and/or Standard & Poor's Bonds and Notes
- --------------------------------------------------------------------------------
Baa BBB 0.8%
Ba BB 27.7
B B 55.8
Caa CCC 5.6
NR NR 10.1
-----
100.0%
=====
16 See Notes to Financial Statements.
- --------------------------------------------------------------------------------
<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 "A" to "CC" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standings within the major rating
categories.
A -- Bonds rated "A" have a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than debt in higher rated 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
balance, as and CC 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 "CC" 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.
Moody's -- Numerical modifiers 1, 2 and 3 may be applied to each generic rating
from "A" to "Ca," where 1 is the highest and 3 the lowest ranking within its
generic category.
A -- Bonds that are rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the
future.
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.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
17
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
February 28, 1998
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost-- $489,532,893) .................. $516,258,089
Cash ......................................................... 468
Receivable for securities sold ............................... 10,295,315
Interest receivable .......................................... 8,671,791
Receivable for open forward foreign
currency contracts (Note 5) ............................... 165,878
- --------------------------------------------------------------------------------
Total Assets ................................................. 535,391,541
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased ............................. 12,187,194
Investment advisory fees payable ............................. 356,437
Administration fees payable .................................. 85,042
Accrued expenses ............................................. 202,511
- --------------------------------------------------------------------------------
Total Liabilities ............................................ 12,831,184
- --------------------------------------------------------------------------------
Total Net Assets ................................................ $522,560,357
================================================================================
NET ASSETS:
Par value of capital shares .................................. $ 44,015
Capital paid in excess of par value .......................... 524,531,845
Overdistributed net investment income ........................ (157,691)
Accumulated net realized loss from
security transactions, futures contracts
and options ............................................... (28,748,222)
Net unrealized appreciation of investments
and foreign currencies .................................... 26,890,410
- --------------------------------------------------------------------------------
Total Net Assets
(Equivalent to $11.87 per share on 44,014,989
shares of $0.001 par value outstanding;
500,000,000 shares authorized) .............................. $522,560,357
================================================================================
18 See Notes to Financial Statements.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the Year Ended February 28, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $48,722,852
Dividends 3,870,074
- --------------------------------------------------------------------------------
Total Investment Income 52,592,926
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 4,548,218
Administration fees (Note 2) 1,010,715
Shareholder communications 239,341
Audit and legal 57,840
Directors' fees 41,885
Registration fees 36,899
Shareholder and system servicing fees 21,538
Custody 20,941
Other 24,930
- --------------------------------------------------------------------------------
Total Expenses 6,002,307
- --------------------------------------------------------------------------------
Net Investment Income 46,590,619
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FOREIGN CURRENCIES, FUTURES CONTRACTS AND OPTIONS
(NOTES 3, 5, 6 and 7):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 8,348,172
Foreign currency transactions 123,759
Futures contracts (326,360)
Options purchased (408,685)
- --------------------------------------------------------------------------------
Net Realized Gain 7,736,886
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments
and Foreign Currencies:
Beginning of year 21,798,449
End of year 26,890,410
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 5,091,961
- --------------------------------------------------------------------------------
Net Gain on Investments, Foreign Currencies,
Futures Contracts and Options 12,828,847
- --------------------------------------------------------------------------------
Increase in Net Assets from Operations $59,419,466
================================================================================
See Notes to Financial Statements. 19
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
For the Years Ended February 28,
- --------------------------------------------------------------------------------
1998 1997
================================================================================
OPERATIONS:
Net investment income .......................... $ 46,590,619 $ 47,001,438
Net realized gain (loss) ....................... 7,736,886 (239,118)
Increase in net unrealized appreciation ........ 5,091,961 9,609,068
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations ......... 59,419,466 56,371,388
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income .......................... (47,244,754) (45,621,623)
Capital ........................................ -- (668,631)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders ................ (47,244,754) (46,290,254)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 10):
Net asset value of shares issued for
reinvestment of dividends .................... 16,479,649 7,000,597
- --------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions ...................... 16,479,649 7,000,597
- --------------------------------------------------------------------------------
Increase in Net Assets ............................ 28,654,361 17,081,731
NET ASSETS:
Beginning of year .............................. 493,905,996 476,824,265
- --------------------------------------------------------------------------------
End of year* ................................... $522,560,357 $493,905,996
================================================================================
*Includes overdistributed net investment income of: $ (157,691) --
================================================================================
20 See Notes to Financial Statements.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
February 28, 1998
- --------------------------------------------------------------------------------
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,
21
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
February 28, 1998 (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"), formerly known as Smith Barney Mutual Funds
Management Inc., 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 year ended February 28, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities but excluding
short-term securities) were:
================================================================================
Purchases $458,697,474
- --------------------------------------------------------------------------------
Sales 462,861,414
================================================================================
At February 28, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $29,027,465
Gross unrealized depreciation (2,302,269)
- --------------------------------------------------------------------------------
Net unrealized appreciation $26,725,196
================================================================================
22
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
February 28, 1998 (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 February 28, 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 gain on the contracts reflected
in the accompanying financial statements were as follows:
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain
================================================================================
To Sell:
British Pound 797,040 $1,306,375 5/26/98 $ 27,209
Deutschemark 3,466,849 1,910,671 3/2/98 53,772
Deutschemark 4,325,000 2,385,960 3/18/98 65,854
Deutschemark 2,500,000 1,379,167 3/18/98 19,043
- --------------------------------------------------------------------------------
Total Unrealized Gain on Forward
Foreign Currency Contracts $165,878
================================================================================
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.
23
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
February 28, 1998 (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 February 28, 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 February 28, 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.
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.
24
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
February 28, 1998 (continued)
- --------------------------------------------------------------------------------
During the year ended February 28, 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 years ended February 28, 1998 and 1997, capital stock transactions
were as follows:
1998 1997
------------------- --------------------
Share Amount Shares Amount
================================================================================
Shares issued on reinvestment 1,412,894 $16,479,649 620,506 $7,000,597
================================================================================
25
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994(1)
==================================================================================================
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of Year $ 11.59 $ 11.36 $ 10.88 $ 12.39 $ 12.00
- --------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income ........... 1.09 1.12 1.13 1.12 0.98
Net realized and
unrealized gain (loss) ........ 0.28 0.21 0.65 (1.48) 0.51
- --------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 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 ........... (1.09) (1.08) (1.27) (1.00) (0.96)
Net realized gains .............. -- -- -- (0.15) (0.12)
Capital ......................... -- (0.02) (0.03) -- --
- --------------------------------------------------------------------------------------------------
Total Distributions ............... (1.09) (1.10) (1.30) (1.15) (1.08)
- --------------------------------------------------------------------------------------------------
Net asset value, end of Year ...... $ 11.87 $ 11.59 $ 11.36 $ 10.88 $ 12.39
- --------------------------------------------------------------------------------------------------
Total Return,
Based on Market Value ........... 10.96% 15.37% 18.83% 0.14% 6.85%++
- --------------------------------------------------------------------------------------------------
Total Return,
Based on Net Asset Value** ...... 12.43% 12.65% 17.80% (2.18)% 12.67%++
- --------------------------------------------------------------------------------------------------
Net assets, end of Year (000s) .... $522,560 $493,906 $476,824 $456,789 $520,091
- --------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses ........................ 1.18% 1.20% 1.24% 1.24% 1.19%+
Net investment income ........... 9.19 9.89 9.74 9.96 8.74+
- --------------------------------------------------------------------------------------------------
Portfolio turnover rate ........... 94% 61% 73% 62% 108%
- --------------------------------------------------------------------------------------------------
Market value, End of Year ......... $ 11.750 $ 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 calculation assumes that 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.
26
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
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, 1998, the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended and financial highlights for each of the years in the
three-year period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
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 of
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, 1998, by correspondence with the custodian. As to securities
purchased or sold but not received or delivered, we performed other appropriate
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
Managed High Income Portfolio Inc. as of February 28, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended and financial highlights for each of
the years in the three-year period then ended, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
April 24, 1998
27
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<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,
1995 $12,525,032 $0.30 $11,084,402 $0.27 $14,597,234 $0.35 $25,681,636 $0.62
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
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
============================================================================================================
</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
================================================================================
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
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 12.3125 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
================================================================================
*Capital gain distribution.
29
- --------------------------------------------------------------------------------
<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
30
- --------------------------------------------------------------------------------
<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.
31
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year ended
February 28, 1998:
o 8.17% of the ordinary dividends paid as qualifying for the corporate
dividends received deduction.
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.
FD0882 4/98
