Managed
HIGH INCOME
PORTFOLIO INC.
[GRAPHIC OMITTED]
Quarterly
Report
November 30, 1997
<PAGE>
Managed
HIGH INCOME
PORTFOLIO INC.
LETTER TO
SHAREHOLDERS
May 31, 1998
Dear Shareholder:
We are pleased to provide the first quarter report for the Managed High
Income Portfolio Inc. ("Fund") for the three months ended May 31, 1998. During
the past three months, the Fund paid income dividends totaling $0.26 per share.
The table below details the annualized distribution rate and the three-month
total return for the Fund based on its May 31, 1998 net asset value ("NAV") per
share and the New York Stock Exchange ("NYSE") closing price.
Annualized Three-Month
Price Per Share Distribution Rate Total Return
------------- ----------------- ------------
$11.81 (NAV) 8.74% 1.73%
$11.438 (NYSE) 9.02% (0.47)%
The Fund generated a total return based on NAV of 1.73% for the past three
months. The Fund's performance compares favorably with the three-month average
total return of 1.44% 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 relatively weak results in May 1998 and
underperformed most other bond market sectors. Total returns for the U.S. bond
markets were in the 0.25% to 2.47% range, with the high yield bond market at the
lower end of that range.
The 30-year U.S. Treasury bond generated the strongest results of all the
sectors, as many investors became more convinced that the Asian crisis would
contribute to an economic slowdown in the U.S. beginning in the second quarter
of 1998. Moreover, an extremely heavy amount of new high yield bond issues
caused the high yield bond market to underperform other sectors of the U.S.
bond market. The higher-rated issues generated the strongest results among high
1
<PAGE>
yield bonds given their greater sensitivity to interest rates. The lowest-rated
high yield bond issues generated negative returns, which was not surprising
given their greater sensitivity to the stock market's performance. In fact, the
stock market generated its weakest results since the mini-correction of October
1998 at the close of the reporting period.
The year-to-date total of newly issued high yield bonds was roughly $75
billion and is more than twice last year's figure of $35 billion. The
year-to-date $15 billion of cash inflows into high yield bond mutual funds,
while above last year's total of $8 billion, was clearly insufficient to
counterbalance the extremely heavy new issue calendar. Fortunately, continued
strong demand for high yield bonds from pension funds and insurance companies
somewhat limited the underperformance of the high yield bond market versus other
bond sectors in May 1998.
Yet the current U.S. economy remains generally supportive of high yield bonds
and inflation continues to be modest. In fact, recent retail sales growth in
U.S., housing sales and employment growth remains quite strong. We believe that
it's still an open question whether Asia's problems will have any meaningful
negative impact on future U.S. economic growth. While the Federal Reserve Board
("Fed") remains concerned about the strength of the U.S. economy and the
potential for higher inflation in the future, there has been little evidence of
inflationary pressures so far.
Fund Strategy and Market Outlook
The Fund is cautiously positioned with a heavy emphasis in better quality,
intermediate maturity "B" and "BB" rated high yield bonds. As of May 31, 1998,
the Fund's average maturity was approximately 61 1/42 years on a call adjusted
basis. (Call adjusted basis means the bonds are callable earlier than their
maturity.) In addition, the Fund continued to emphasize telecommunications
issues as well as cable and media issues.
As high yield bond spreads continued to widen during May and into June 1998,
we began to take advantage of what we believed were attractively priced "B" rate
issues. Given the continued problems in Asia, we plan to remain underweighted in
basic commodity industries such as steel, forest products and petrochemicals,
industries that have been negatively affected by disinflationary trends over the
past six months. (Disinflation is the slowing down of the rate at which prices
increase. Disinflation should not be confused with deflation, which is when
prices actually fall.) We have recently started to lower our exposure to the
energy industry given the continued weakness in energy prices and the
expectation that as long as Asia remains mired in difficulties, energy prices
should remain depressed.
Many other high-yield bond funds continue to be aggressively invested in
lower-quality high yield bonds in an effort to maintain their dividend yields
and
2
<PAGE>
to generate competitive performance. As a result of the recent correction in the
world's stock markets, these more speculative high yield bond issues started to
perform poorly during the past six weeks. Given their more speculative features,
lower-quality high yield bonds tend to correlate more closely to the performance
of broad stock markets than other kinds of bonds. In addition, many high yield
bond funds have continued to invest in emerging market government bonds, common
stocks, convertible securities and derivatives, all of which have suffered
varying degrees of corrections. On the other hand, the Fund remains an
essentially style pure investment and we have stayed committed to owning better
quality high yield bonds that should be much less vulnerable to higher stock
market volatility.
We believe that the Fund is appropriately positioned for the current economic
environment, which we think is vulnerable to any disappointments. While we still
expect economic growth to slow and corporate profit margins may deteriorate for
the rest of 1998, we do not anticipate any meaningful U.S. economic slowdown for
the balance of the year. As a result, we have become more opportunistically
invested in select better-priced "B-" and "BB-" rated new issues. Moreover, we
will continue to maintain the Fund's relatively sound credit quality orientation
given the higher volatility in the financial markets lately.
In closing, thank you for investing in the Managed High Income Portfolio. We
look forward to continuing to help you achieve your investment goals. Should you
have any questions about your investment in the Fund, 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
June 15, 1998
3
<PAGE>
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Take Advantage of the Fund's Dividend Reinvestment Plan!
Did you know that fund investors who reinvest their dividends are taking
advantage of one of the most effective wealth-building tools available today?
Systematic investments put time to work for you through the strength of
compounding.
As an investor in the Fund, you can participate in its Dividend Reinvestment
Plan ("Plan"), a convenient, simple and efficient way to reinvest your dividends
and capital gains, if any, in additional shares of the Fund. A description of
the Fund's Plan begins on page 30. Below is a short summary of how the Dividend
Reinvestment Plan works.
Plan Summary
If you are a Plan participant who has not elected to receive your dividends in
the form of a cash payment, then your dividend and capital gain distributions
will be reinvested automatically in additional shares of the Fund.
The number of common stock shares in the Fund you will receive in lieu of a cash
dividend is determined in the following manner. If the market price of the
common stock is equal to or exceeds the net asset value ("NAV") per share on the
date of valuation, you will be issued shares for the equivalent of the most
recently determined NAV per share or 95% of the market price, whichever is
greater.
If the NAV per share at the time of valuation is greater than the market price
of the common stock, or if the Fund declares a dividend or capital gains
distribution payable only in cash, the Purchasing Agent will buy common stock
for your account in the open market or on the New York Stock Exchange.
If the Purchasing Agent begins to purchase additional shares in the open market
and the market price of the shares subsequently rises above the NAV before the
purchases are completed, the Purchasing Agent will attempt to cancel any
remaining orders and the Fund will issue the remaining dividend or distribution
in shares at the greater of Fund's NAV per share or 95% of the then current
market price. In that case, the number of Fund shares you receive will be based
on the weighted average of prices paid for shares purchased in the open market
and the price at which the Fund issues the remaining shares.
To find out more detailed information about the Dividend Reinvestment Plan and
about how you can participate, please call First Data Investors Services Group
at (800) 331-1710.
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4
<PAGE>
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SCHEDULE OF INVESTMENTS
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May 31, 1998 (unaudited)
<TABLE>
<CAPTION>
Face
Amount Ratings Security Value
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
CORPORATE BONDS AND NOTES - 90.8%
- -------------------------------------------------------------------------------------------------
Automotive Suppliers -- 0.5%
$2,600,000 B- Eagle-Picher Industrial Inc., Sr. Sub. Notes,
9.375% due 3/1/08............................. $ 2,655,250
- -------------------------------------------------------------------------------------------------
Cable Television -- 9.8%
3,050,000 BB- Century Communications Inc., Sr. Notes,
8.750% due 10/1/07............................ 3,164,375
4,675,000 B2* Comcast UK Cable, Debentures,
step bond to yield 11.500% due 11/15/07....... 3,856,875
CSC Holding Inc., Sr. Sub Notes:
9,220,000 BB- 9.875% due 2/15/13............................ 10,326,400
3,250,000 BB- 10.500% due 5/15/16........................... 3,802,500
3,175,000 BB- 9.875% due 4/1/23............................. 3,532,188
1,515,000 BBB- Le Groupe Videotron, Sr. Notes,
10.625% due 2/15/05........................... 1,698,694
1,525,000 B3* Marcus Cable Capital Corp., Sr. Discount Notes,
step bond to yield 12.661% due 12/15/05....... 1,401,094
Rogers Cablesystems Inc.:
2,275,000 BB+ Sr. Notes, 10.000% due 3/15/05................ 2,519,563
2,575,000 BB+ Sr. Secured Debentures,
10.000% due 12/1/07......................... 2,851,813
7,175,000 BB- Sr. Sub. Debentures, 11.000% due 12/1/15...... 8,430,625
2,900,000 BB- Rogers Communications, Sr. Notes,
8.875% due 7/15/07............................ 2,929,000
10,250,000 B United International Holdings Inc., Sr. Discount
Notes, step bond to yield 10.653%
due 2/15/08................................... 6,483,125
- -------------------------------------------------------------------------------------------------
50,996,252
- -------------------------------------------------------------------------------------------------
Capital Goods -- 1.9%
1,750,000 B- Alvey Systems Inc., Sr. Sub. Notes,
step bond to yield 11.375% due 1/31/03........ 1,830,938
2,265,000 B3* Interlake Corp., Sr. Sub. Debentures,
12.125% due 3/1/02............................ 2,338,613
2,900,000 B2* Intertek Finance PLC, Sr. Sub. Notes,
10.250% due 11/1/06........................... 3,084,875
</TABLE>
See Notes to Financial Statements. 5
<PAGE>
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SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
May 31, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Ratings Security Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital Goods -- 1.9% (continued)
$2,650,000 B+ Park-Ohio Industries, Sr. Sub. Notes,
9.250% due 12/1/07 (a)........................ $ 2,736,125
- -------------------------------------------------------------------------------------------------
9,990,551
- -------------------------------------------------------------------------------------------------
Cellular -- 3.2%
6,650,000 B3* Clearnet Communications Inc.,
step bond to yield 13.586% due 12/15/05....... 5,552,750
5,025,000 B- Millicom International Cellular SA,
Sr. Discount Notes, step bond to yield
13.500% due 6/1/07............................ 3,888,094
Telesystem International Wireless Inc.,
Sr. Discount Notes:
1,200,000 CCC+ 10.500% due 11/1/07 (a)..................... 732,000
9,575,000 B Step bond to yield 12.395% due 6/30/07...... 6,511,000
- -------------------------------------------------------------------------------------------------
16,683,844
- -------------------------------------------------------------------------------------------------
Chemicals -- 1.2%
3,000,000 B1* NL Industries Inc., Sr. Notes,
11.750% due 10/15/03.......................... 3,307,500
2,600,000 B Unifrax Investment Corp., Sr. Notes,
10.500% due 11/1/03........................... 2,736,500
- -------------------------------------------------------------------------------------------------
6,044,000
- -------------------------------------------------------------------------------------------------
Computers/Components/Distributors -- 5.8%
2,300,000 B Celestica International Inc., Sr. Sub. Notes,
10.500% due 12/31/06.......................... 2,541,500
5,275,000 B Fairchild Semiconductor Corp.,
Sr. Sub. Notes, 10.125% due 3/15/07........... 5,472,813
Unisys Corp., Sr. Notes:
6,200,000 B+ 12.000% due 4/15/03........................... 7,037,000
7,775,000 B+ 11.750% due 10/15/04.......................... 8,999,563
Viasystems Inc., Sr. Sub. Notes:
5,050,000 B- 9.750% due 6/1/07............................. 5,201,500
600,000 B- 9.750% due 6/1/07 (a)......................... 618,000
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29,870,376
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</TABLE>
6 See Notes to Financial Statements.
<PAGE>
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SCHEDULE OF INVESTMENTS
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May 31, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Ratings Security Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Drug Retailers/Wholesalers -- 0.6%
$2,600,000 B- Pharmaceutical Fine Chemicals Inc.,
Sr. Sub. Notes, 9.750% due 11/15/07 (a)....... $ 2,951,000
- -------------------------------------------------------------------------------------------------
Electronics -- 0.4%
1,800,000 B- Axiohm Transaction Solutions Inc.,
Sr. Sub Notes, 9.750% due 10/1/07 (a)......... 1,840,500
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Energy -- 0.3%
1,350,000 BB- J. Ray McDermott SA, Sr. Sub. Notes,
9.375% due 7/15/06............................ 1,461,375
- -------------------------------------------------------------------------------------------------
Environmental Services -- 0.5%
2,325,000 B+ Allied Waste North America Inc.,
Company Guaranty, 10.250% due 12/1/06......... 2,569,125
- -------------------------------------------------------------------------------------------------
Food Wholesalers -- 0.3%
1,325,000 B+ Ameriserve Food Distribution Inc.,
Company Guaranty, 8.750% due 10/15/06......... 1,366,406
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Forest Products -- 1.4%
6,525,000 B+ SD Warren Co., Sr. Sub. Notes,
12.000% due 12/15/04.......................... 7,259,063
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Gaming -- 1.8%
1,300,000 B Aztar Corp., Sr. Sub. Notes,
13.750% due 10/1/04........................... 1,495,000
3,025,000 Ba1* Mohegan Tribal Gaming, Sr. Notes,
13.500% due 11/15/02.......................... 3,906,031
3,275,000 B Showboat Inc., Sr. Sub. Notes,
13.000% due 8/1/09............................ 4,015,969
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9,417,000
- -------------------------------------------------------------------------------------------------
Industrials -- 0.4%
2,000,000 Caa* Thermadyne Holdings, step bond to yield
12.500% due 6/1/08............................ 1,105,000
1,050,000 B3* Thermadyne Manufacturing LLC, Sr. Sub. Notes,
9.875% due 6/1/08............................. 1,055,250
- -------------------------------------------------------------------------------------------------
2,160,250
- -------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. 7
<PAGE>
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SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
May 31, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Ratings Security Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Infrastructure -- 0.1%
$1,000,000 BB GS Superhighway Holdings Inc., Sr. Notes,
10.250% due 8/15/07........................... $ 758,750
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Leisure Time -- 1.3%
4,650,000 B3* Outboard Marine Corp., Sr. Notes,
10.750% due 6/1/08 (a)........................ 4,702,313
2,000,000 B- Premier Parks Inc., Sr. Notes,
9.250% due 4/1/06............................. 2,037,500
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6,739,813
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Lodging -- 1.7%
3,250,000 B- Courtyard by Marriott, Sr. Notes,
10.750% due 2/1/08............................ 3,591,250
HMH Properties Inc., Company Guaranty:
2,000,000 BB- 9.500% due 5/15/05............................ 2,165,000
2,550,000 BB- 8.875% due 7/15/07............................ 2,840,063
- -------------------------------------------------------------------------------------------------
8,596,313
- -------------------------------------------------------------------------------------------------
Medical Products -- 0.7%
750,000 B- Fisher Scientific International Inc.,
Sr. Sub. Notes, 9.000% due 2/1/08 (a)......... 751,875
2,675,000 B- Graphic Controls Corp., Sr. Sub. Notes,
12.000% due 9/15/05........................... 3,002,688
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3,754,563
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Metals/Mining -- 3.2%
5,725,000 B- Haynes International Inc., Sr. Notes,
11.625% due 9/1/04............................ 6,426,313
6,150,000 B2* Kaiser Aluminum & Chemical Corp.,
Sr. Sub. Notes, 12.750% due 2/1/03............ 6,549,750
1,325,000 B2* Koppers Industry Inc., Sr. Sub. Notes,
9.875% due 12/1/07 (a)........................ 1,394,563
2,000,000 B WHX Corp., Sr. Sub. Notes,
10.500% due 4/15/05 (a)....................... 2,070,000
- -------------------------------------------------------------------------------------------------
16,440,626
- -------------------------------------------------------------------------------------------------
</TABLE>
8 See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
May 31, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Ratings Security Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nursing Homes/Alternative Sites -- 4.3%
Integrated Health Services, Sr. Sub. Notes:
$ 900,000 B2* 9.500% due 9/15/07............................ $ 933,750
4,925,000 B2* 9.250% due 1/15/08 (a)........................ 5,048,125
7,750,000 B- Magellan Health Services, Sr. Sub. Notes,
9.000% due 2/15/08 (a)........................ 7,691,875
4,500,000 B- Paragon Health Networks, Inc., Sr. Sub. Notes,
9.500% due 11/1/07 (a)........................ 4,556,250
Sun Healthcare Group Inc., Sr. Sub. Notes:
1,000,000 B2* 9.500% due 7/1/07 (a)......................... 1,020,000
3,025,000 B2* 9.375% due 5/1/08............................. 3,032,563
- -------------------------------------------------------------------------------------------------
22,282,563
- -------------------------------------------------------------------------------------------------
Oil & Gas/Oil Services -- 9.2%
2,575,000 B Canadian Forest Oil Ltd., Sr. Sub. Notes,
8.750% due 9/15/07 (a)........................ 2,587,875
4,350,000 B+ Clark USA Inc., Sr. Notes,
10.875% due 12/1/05........................... 4,752,375
1,550,000 B2* Coho Energy Inc., Sr. Sub. Notes,
8.875% due 10/15/07........................... 1,484,125
4,965,000 B+ Dawson Product Services Inc., Sr. Notes,
9.375% due 2/1/07............................. 5,027,063
2,315,000 CCC+ Deeptech International Inc., Sr. Notes,
12.000% due 12/15/00.......................... 2,569,650
4,150,000 Ba2* Gulf Canada Resources Ltd., Sub. Debentures,
9.625% due 7/1/05............................. 4,502,750
2,150,000 B+ ICO, Inc., Sr. Notes, 10.375% due 6/1/07......... 2,241,375
Ocean Energy Inc.:
2,750,000 B1* Company Guaranteed, 9.750% due 10/1/06........ 3,025,000
1,250,000 B1* Company Guaranteed, 8.875% due 7/15/07........ 1,315,625
2,625,000 B Sr. Sub. Notes, 10.375% due 10/15/05.......... 2,920,313
Parker Drilling Co., Sr. Notes:
2,500,000 B+ 9.750% due 11/15/06........................... 2,612,500
5,625,000 B+ 9.750% due 11/15/06 (a)....................... 5,878,125
</TABLE>
See Notes to Financial Statements. 9
<PAGE>
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SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
May 31, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Ratings Security Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Oil & Gas/Oil Services -- 9.2% (continued)
$2,600,000 BB Pride Petroleum Services Inc., Sr. Notes,
9.375% due 5/1/07............................. $ 2,782,000
3,550,000 BB- Santa Fe Energy Resources, Sr. Sub. Debentures,
11.000% due 5/15/04........................... 3,860,625
2,150,000 B2* Stone Energy Corp., Company Guaranteed,
8.750% due 9/15/07............................ 2,182,250
- -------------------------------------------------------------------------------------------------
47,741,651
- -------------------------------------------------------------------------------------------------
Packaged & Branded Food -- 1.7%
2,675,000 B- B&G Foods Inc., Company Guaranteed,
9.625% due 8/1/07 (a)......................... 2,755,250
4,625,000 B Imperial Holly Corp., Sr. Sub. Notes,
9.750% due 12/15/07 (a)....................... 4,671,250
1,365,000 B2* Van de Kamp Inc., Sr. Sub. Notes,
12.000% due 9/15/05........................... 1,528,800
- -------------------------------------------------------------------------------------------------
8,955,300
- -------------------------------------------------------------------------------------------------
Packaging -- 1.4%
2,500,000 B Huntsman Packaging Corp., Sr. Sub. Notes,
9.125% due 10/1/07 (a)........................ 2,553,125
3,000,000+ B Impress Metal Holding, Sr. Sub. Notes,
9.875% due 5/29/07............................ 1,800,538
2,750,000 B- Tekni-Plex Inc., Sr. Sub. Notes,
9.250% due 3/1/08 (a)......................... 2,763,750
- -------------------------------------------------------------------------------------------------
7,117,413
- -------------------------------------------------------------------------------------------------
Pharmaceuticals/Biotechnology -- 1.0%
5,100,000 BB ICN Pharmaceuticals Inc., Sr. Notes,
9.250% due 8/15/05............................ 5,425,125
- -------------------------------------------------------------------------------------------------
Pollution Control -- 0.4%
2,225,000 NR CIA Latino Americana, Company Guaranty,
11.625% due 6/1/04 (a)........................ 2,261,156
- -------------------------------------------------------------------------------------------------
Printing -- 0.6%
3,000,000 B Goss Graphic System Inc., Sr. Sub. Notes,
12.000% due 10/15/06.......................... 3,367,500
</TABLE>
10 See Notes to Financial Statements.
<PAGE>
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SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
May 31, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Ratings Security Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Property/Casualty Insurance -- 1.1%
$3,225,000 BB+ SIG Capital Trust, Company Guaranteed,
9.500% due 8/15/27............................ $ 3,325,781
2,500,000 BB- Veritas Capital, Company Guaranteed,
10.000% due 1/2/28 (a)........................ 2,631,250
- -------------------------------------------------------------------------------------------------
5,957,031
- -------------------------------------------------------------------------------------------------
Radio & Television Broadcasting -- 1.4%
2,500,000 B3* SFX Entertainment Inc., Sr. Sub. Notes,
9.125% due 2/1/08............................. 2,450,000
TV Azteca SA, Sr. Notes:
2,300,000 Ba3* 10.125% due 2/15/04........................... 2,357,500
2,500,000 Ba3* 10.500% due 2/15/07........................... 2,575,000
- -------------------------------------------------------------------------------------------------
7,382,500
- -------------------------------------------------------------------------------------------------
Real Estate - Commercial -- 0.3%
1,250,000 BB+ Trizec Finance, Sr. Notes,
10.875% due 10/15/05.......................... 1,417,188
- -------------------------------------------------------------------------------------------------
Specialty Finance -- 2.6%
Amresco Inc., Sr Sub. Notes:
3,250,000 B 10.000% due 3/15/04........................... 3,380,000
750,000 B 9.875% due 3/15/05............................ 770,625
3,200,000 B2* Ocwen Capital Trust, Company Guaranteed,
10.875% due 8/1/27............................ 3,496,000
2,100,000 BB- Ocwen Financial Corp., Notes,
11.875% due 10/1/03........................... 2,378,250
3,250,000 B- Outsourcing Solutions Inc., Sr. Sub. Notes,
11.000% due 11/1/06........................... 3,542,500
- -------------------------------------------------------------------------------------------------
13,567,375
- -------------------------------------------------------------------------------------------------
Specialty Retailers -- 0.6%
1,500,000 B- Advance Holding Corp., Sr. Discount Notes,
step bond to yield 12.875% due 4/15/09........ 870,000
2,100,000 B- Advance Stores Co., Sr. Sub. Notes,
10.250% due 4/15/08 (a)....................... 2,173,500
- -------------------------------------------------------------------------------------------------
3,043,500
- -------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. 11
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
May 31, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Ratings Security Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Telecommunications -- 21.0%
$3,650,000 NR Allegiance Telecom Inc., Units,
step bond to yield 11.897% due 2/15/08........ $2,016,625
1,500,000 NR American Mobile Satellite, Units,
12.250% due 4/1/08 (a)........................ 1,500,000
Colt Telecom Group PLC:
800,000+ B Sr. Notes, 10.125% due 11/30/07............... 1,408,933
5,000,000 NR Step bond to yield 11.647% due 12/15/06....... 3,975,000
Dolphin Telecom PLC:
4,050,000 Caa1* Step bond to yield 11.348% due 6/1/08......... 2,349,000
3,525,000 Caa1* Step bond to yield 11.625% due 6/1/08......... 2,225,446
Espirit Telecom Group PLC, Sr. Notes:
2,000,000+ B- 11.500% due 12/15/07.......................... 1,189,141
2,300,000 B- 11.500% due 12/15/07.......................... 2,478,250
2,375,000 NR Facilicom International Inc., Sr. Notes,
10.500% due 1/15/08........................... 2,375,000
4,200,000 NR FirstWorld Communications, Units,
step bond to yield 13.000% due 4/15/08 (a).... 2,100,000
3,825,000 B2* Fonorola Inc., Sr. Notes, 12.500% due
8/15/02....................................... 4,274,438
3,900,000 B Hermes Europe Railtel BV., Sr. Notes,
11.500% due 8/15/07........................... 4,416,750
5,975,000 B Intermedia Communications of Florida, step
bond to yield 11.946% due 5/15/06............. 4,921,906
8,450,000 B- Iridum LLC Capital Corp., Company Guaranty,
14.000% due 7/15/05........................... 9,485,125
5,525,000 B+ McLeod USA Inc., Sr. Discount Notes, step bond
to yield 10.591% due 3/1/07................... 4,123,031
6,050,000 NR Metronet Communications, Sr. Notes,
12.000% due 8/15/07 (a)....................... 6,972,625
1,825,000 B Netia Holdings B.V., Company Guaranty,
10.250% due 11/1/07........................... 1,879,750
8,725,000 B2* Nextel Communications, Sr. Discount Notes,
step bond to yield 11.186% due 8/15/04........ 8,430,531
6,775,000 B Nextlink Communications, Sr. Notes,
12.500% due 4/15/06........................... 7,867,469
</TABLE>
12 See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
May 31, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Ratings Security Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Telecommunications -- 21.0% (continued)
$ 2,800,000 B3* Pagemart Nationwide, Inc., Sr. Discount Notes,
step bond to yield 13.297% due 2/1/05......... $ 2,492,000
6,550,000 Caa2* Pagemart Wireless Inc., Sr. Discount Notes,
step bond to yield 11.250% due 2/1/08 (a)..... 4,110,125
5,025,000 B- Primus Telecom Group, Sr. Notes,
11.750% due 8/1/04............................ 5,414,438
2,725,000 B- PSINET Inc., Sr. Notes, 10.000% due 2/15/05...... 2,772,688
Qwest Communications International Inc.:
2,125,000 B+ Sr. Notes, 10.875% due 4/1/07................. 2,449,063
6,375,000 B+ Step bond to yield 9.378% due 10/15/07........ 4,717,500
RCN Corp.:
4,600,000 B3* Sr. Discount Notes, step bond to yield
11.171% due 10/15/07........................ 3,047,500
2,350,000 B3* Sr. Notes, 10.000% due 10/15/07............... 2,479,250
2,288,000 B- RSL Communications Ltd., Company
Guaranteed, 12.250% due 11/15/06.............. 2,605,460
1,050,000 NR Startec Global Communications Inc., Private
Placement, Units, 12.000% due 5/15/08......... 1,052,625
2,050,000 NR Versatel Telecom, Sr. Notes,
13.250% due 5/15/08........................... 2,111,500
2,150,000 NR WAM!Net Inc., Units, step bond to yield
13.130% due 3/1/05............................ 1,370,625
- -------------------------------------------------------------------------------------------------
108,611,794
- -------------------------------------------------------------------------------------------------
Textiles -- 0.4%
3,650,000+ B Texon International PLC Corp., Sr. Notes,
10.000% due 2/1/08............................ 2,072,933
- -------------------------------------------------------------------------------------------------
Thrifts -- 2.7%
2,525,000 B- BF Saul Reit Inc., Sr. Notes,
9.750% due 4/1/08............................. 2,525,000
10,025,000 B First Nationwide Parent Holdings Ltd.,
Sr. Notes, 12.500% due 4/15/03................ 11,378,375
- -------------------------------------------------------------------------------------------------
13,903,375
- -------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. 13
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
May 31, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Ratings Security Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Transportation -- 2.0%
$1,750,000 B+ American Reefer Co. Ltd., First Mortgage,
10.250% due 3/1/08 (a)........................ $ 1,758,750
1,050,000 Ba3* Enterprises Shipholding Inc., Sr. Notes,
8.875% due 5/1/08 (a)......................... 1,047,375
Sea Containers Ltd., Sr. Notes:
600,000 BB- 7.875% due 2/15/08 (a)........................ 593,250
3,130,000 BB- Sr. Sub. Debentures, 12.500% due 12/1/04...... 3,536,900
1,900,000 B1* Stena Line AB, Sr. Notes, 10.625% due 6/1/08..... 1,928,500
1,425,000 B3* TBS Shipping International Ltd., First Mortgage,
10.000% due 5/1/05 (a)........................ 1,332,375
- -------------------------------------------------------------------------------------------------
10,197,150
- -------------------------------------------------------------------------------------------------
Transportation Equipment Lessors -- 1.8%
5,875,000 BB Airplanes Pass-Through Trust, Corporate
Collateralized Mortgage Obligation, Series D,
10.875% due 3/15/19........................... 6,629,879
2,700,000 BB Morgan Stanley Aircraft Finance,
8.700% due 3/15/23............................ 2,713,500
- -------------------------------------------------------------------------------------------------
9,343,379
- -------------------------------------------------------------------------------------------------
Utilities -- 3.2%
AES Corp., Sr. Sub. Notes:
1,200,000 Ba1* 10.250% due 7/15/06........................... 1,320,000
1,325,000 Ba1* 8.375% due 8/15/07............................ 1,338,250
5,950,000 Ba1* 8.500% due 11/1/07............................ 6,083,875
Calpine Corp., Sr. Notes:
3,650,000 Ba2* 10.500% due 5/15/06........................... 4,005,875
2,400,000 Ba2* 8.750% due 7/15/07............................ 2,478,000
1,195,269 BB Midland Cogeneration Venture, Sr. Secured Lease
Obligation Bond, 10.330% due 7/23/02.......... 1,286,409
- -------------------------------------------------------------------------------------------------
16,512,409
- -------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost -- $450,591,489)........................... 470,714,399
=================================================================================================
</TABLE>
14 See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
May 31, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Shares Security Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
STOCKS - 4.9%
- -------------------------------------------------------------------------------------------------
Broadcasting-TV, Cable & Radio -- 4.3%
19,603 Time Warner Inc., Series M, Preferred,
Exchange 10.250%.............................. $22,249,405
- -------------------------------------------------------------------------------------------------
Communications - Equipment & Software -- 0.0%
12,250 Pagemart Wireless Equipment...................... 104,125
- -------------------------------------------------------------------------------------------------
Electronics / Computers-- 0.2%
40,800 Viasystems Inc., Series B, Preferred
Payment-in-Kind............................... 851,700
- -------------------------------------------------------------------------------------------------
Telecommunications -- 0.1%
4,125 Iridium LLC Corp................................. 577,500
- -------------------------------------------------------------------------------------------------
Thrifts -- 0.3%
63,850 California Federal Perferred Capital Corp........ 1,739,913
- -------------------------------------------------------------------------------------------------
TOTAL STOCKS
(Cost -- $23,760,447)............................ 25,522,643
=================================================================================================
- -------------------------------------------------------------------------------------------------
WARRANTS -- 0.5%
- -------------------------------------------------------------------------------------------------
Cable Television -- 0.0%
5,425 Australis Holdings Ltd., Expire 10/30/01 (b)..... 1
3,375 Wireless One Inc., Expire 10/19/00 (b)........... 843
- -------------------------------------------------------------------------------------------------
844
- -------------------------------------------------------------------------------------------------
Cellular -- 0.0%
32,175 Clearnet Communications Inc.,
Expire 9/15/05 (a)(b)......................... 193,050
- -------------------------------------------------------------------------------------------------
Paper Forest Products/Printing -- 0.0%
4,800 SD Warren Co., Expire 12/15/06 (b)............... 84,480
- -------------------------------------------------------------------------------------------------
Radio & Television Broadcasting -- 0.0%
8,625 UIH Australia, Expire 5/15/06 (b)................ 103,500
- -------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. 15
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
May 31, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Shares Security Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Telecommunications -- 0.5%
5,000 Colt Telecom, Expire 12/31/06.................... $ 975,000
4,725 Globalstar LP, Expire 2/15/04 (a)(b)............. 637,875
6,050 Metronet Communications, Class B Shares,
Expire 8/15/07 (a)(b)......................... 242,000
3,900 Nextel Communications Inc.,
Expire 4/25/99 (b)............................ 5,031
24,840 Pagemart Inc., Expire 12/31/03 (b)............... 186,300
4,475 Primus Telecommunications, Expire 8/1/04 (b)..... 170,050
4,125 RSL Communications Ltd., Expire 11/15/06 (a)(b).. 165,000
- -------------------------------------------------------------------------------------------------
2,381,256
- -------------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost-- $1,059,224).............................. 2,763,130
=================================================================================================
<CAPTION>
Face
Amount Security Value
=================================================================================================
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT - 3.8%
- -------------------------------------------------------------------------------------------------
$19,317,000 Chase Securities Inc., 5.500% due 6/1/98;
Proceeds at maturity-- $19,325,851;
(Fully collateralized by U.S. Treasury Notes,
5.500% due 1/31/03; Market value--
$19,703,369) (Cost-- $19,317,000)................ 19,317,000
=================================================================================================
TOTAL INVESTMENTS-- 100%
(Cost-- $494,728,160**).......................... $518,317,172
=================================================================================================
</TABLE>
(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 18 for definition of ratings.
16 See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF BONDS BY COMBINED RATINGS
- --------------------------------------------------------------------------------
May 31, 1998 (unaudited)
% of
Total Corporate
Moody's and/or Standard & Poor's Bonds and Notes
- --------------------------------------------------------------------------------
Baa BBB 0.3%
Ba BB 23.6
B B 67.8
Caa CCC 2.8
NR NR 5.5
-----
100.0%
=====
17
<PAGE>
- --------------------------------------------------------------------------------
BOND RATINGS (UNAUDITED)
- --------------------------------------------------------------------------------
All ratings are by Standard & Poor's Ratings Service ("Standard & Poor's"),
except that those identified by an asterisk(*) are rated by Moody's Investors
Service Inc. ("Moody's"). The definitions of the applicable rating symbols are
set forth below:
Standard &Poor's -- Ratings from "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
CC and C balance, as predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with the terms
of the obligation. "BB" represents the lowest degree of
speculation and "C" the highest degree of speculation. While
such bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or
major risk exposures to adverse conditions.
Moody's -- Numerical modifiers 1, 2 and 3 may be applied to each generic rating
from "A" to "Ca," where 1 is the highest and 3 the lowest ranking within its
generic category.
A -- Bonds 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 that 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 rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes
bonds in this class.
B -- Bonds rated "B" generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period
of time may be small.
Caa -- Bonds rated "Caa" are of poor standing. These issues may be
in default, or present elements of danger may exist with respect
to principal or interest.
Ca -- Bonds rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
NR -- Indicates that the bond is not rated by Standard & Poor's or Moody's.
18
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
May 31, 1998 (unaudited)
ASSETS:
Investments, at value (Cost-- $494,728,160) ............. $ 518,317,172
Cash .................................................... 491
Receivable for securities sold .......................... 1,852,450
Receivable for open forward foreign
currency contracts (Note 5) ........................... 10,852
Interest receivable ..................................... 9,412,996
- -------------------------------------------------------------------------------
Total Assets ............................................ 529,593,961
- -------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased ........................ 7,916,698
Dividends payable ....................................... 1,295,491
Investment advisory fees payable ........................ 367,739
Administration fees payable ............................. 87,553
Payable for open forward foreign currency
contracts (Note 5) .................................... 78,139
Accrued expenses ........................................ 180,075
- -------------------------------------------------------------------------------
Total Liabilities ....................................... 9,925,695
- -------------------------------------------------------------------------------
Total Net Assets ........................................... $ 519,668,266
===============================================================================
NET ASSETS:
Par value of capital shares ............................. $ 44,015
Capital paid in excess of par value ..................... 524,531,845
Overdistributed net investment income ................... (60,523)
Accumulated net realized loss from
security transactions ................................. (28,377,344)
Net unrealized appreciation on investments
and foreign currencies ................................ 23,530,273
- -------------------------------------------------------------------------------
Total Net Assets
(Equivalent to $11.81 per share on 44,014,989
shares of $0.001 par value outstanding;
500,000,000 shares authorized) ......................... $ 519,668,266
===============================================================================
See Notes to Financial Statements. 19
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the Three Months Ended May 31, 1998 (unaudited)
INVESTMENT INCOME:
Interest ................................................... $ 12,208,565
Dividends .................................................. 614,708
- -------------------------------------------------------------------------------
Total Investment Income .................................... 12,823,273
- -------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) .......................... 1,172,887
Administration fees (Note 2) ............................... 260,642
Shareholder communications ................................. 46,986
Audit and legal ............................................ 14,460
Directors' fees ............................................ 10,471
Registration fees .......................................... 9,225
Shareholder and system servicing fees ...................... 5,385
Custody .................................................... 5,235
Other expenses ............................................. 4,763
- -------------------------------------------------------------------------------
Total Expenses ............................................. 1,530,054
- -------------------------------------------------------------------------------
Net Investment Income ......................................... 11,293,219
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTES 3 AND 5):
Realized Gain From:
Security transactions (excluding short-term securities) .. 370,878
Foreign currency transactions ............................ 159,816
- -------------------------------------------------------------------------------
Net Realized Gain .......................................... 530,694
- -------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments
and Foreign Currencies:
Beginning of period ...................................... 26,890,410
End of period ............................................ 23,530,273
- -------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation .................... (3,360,137)
- -------------------------------------------------------------------------------
Net Loss on Investments and Foreign Currencies ................ (2,829,443)
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations ........................ $ 8,463,776
===============================================================================
20 See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
For the Three Months Ended May 31, 1998 (unaudited)
and the Year Ended February 28, 1998
<TABLE>
<CAPTION>
May 31 February 28
========================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income .............................. $ 11,293,219 $ 46,590,619
Net realized gain .................................. 530,694 7,736,886
Increase (decrease) in net unrealized appreciation . (3,360,137) 5,091,961
- --------------------------------------------------------------------------------------
Increase in Net Assets From Operations ............. 8,463,776 59,419,466
- --------------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income .............................. (11,355,867) (47,244,754)
- --------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders .................... (11,355,867) (47,244,754)
- --------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 10):
Net value of shares issued for
reinvestment of dividends ........................ -- 16,479,649
- --------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions .......................... -- 16,479,649
- --------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets ..................... (2,892,091) 28,654,361
NET ASSETS:
Beginning of period ................................ 522,560,357 493,905,996
- --------------------------------------------------------------------------------------
End of period* ..................................... $ 519,668,266 $ 522,560,357
======================================================================================
*Includes overdistributed net investment income of: ... $ (60,523) $ (157,691)
======================================================================================
</TABLE>
See Notes to Financial Statements. 21
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
May 31, 1998 (unaudited)
1. Significant Accounting Policies
Managed High Income Portfolio Inc. ("Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company.
The following are significant accounting policies consistently followed by
the Fund: (a) security transactions are accounted for on trade date; (b)
securities are valued at the mean between the quoted bid and ask prices provided
by an independent pricing service that are based on transactions in corporate
obligations, quotations from corporate bond dealers, market transactions in
comparable securities and various relationships between securities; (c)
securities maturing within 60 days are valued at cost plus accreted discount or
minus amortized premium, which approximates value; (d) gains or losses on the
sale of securities are calculated by using the specific identification method;
(e) interest income, adjusted for accretion of original issue discount, is
recorded on an accrual basis; (f) dividend income is recorded by the Fund on the
ex-dividend date; foreign dividends are recorded on the ex-dividend date or as
soon as practical after the Fund determines the existence of a dividend
declaration after exercising reasonable due diligence; (g) the accounting
records of the Fund are maintained in U.S. dollars. All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars on the date
of valuation. Purchases and sales of securities and income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income or expense amounts
recorded and collected or paid are adjusted when reported by the custodian; (h)
the Fund intends to comply with the applicable provisions of the Internal
Revenue Code of 1986, as amended, pertaining to regulated investment companies
and to make distributions of taxable income sufficient to relieve it from
substantially all Federal income and excise taxes; (i) the character of income
and gains to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles. At
February 28, 1998, reclassifications were made to the Fund's capital accounts to
reflect permanent book/tax differences and income and gains available for
distributions under income tax regulations. Accordingly, overdistributed net
investment income amounting to $372,685 was reclassified to paid-in capital. Net
investment income, net realized gains and net assets were not affected by this
adjustment; and (j) estimates and assumptions are required to be made regarding
assets,
22
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
May 31, 1998 (unaudited) (continued)
liabilities and changes in net assets resulting from operations when financial
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ.
In addition, the Fund may enter into forward exchange contracts in order to
hedge against foreign currency risk. These contracts are marked to market daily
by recognizing the difference between the contract exchange rate and the current
market rate as an unrealized gain or loss. Realized gains or losses are
recognized when contracts are settled.
2. Investment Advisory Agreement, Administration Agreement and Other
Transactions
Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith Barney
Holdings Inc. ("SSBH"), acts as investment adviser to the Fund. The Fund pays
MMC an advisory fee calculated at an annual rate of 0.90% of the average daily
net assets. This fee is calculated daily and paid monthly.
MMC also acts as the Fund's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the average daily net assets. This fee
is calculated daily and paid monthly.
All officers and one Director of the Fund are employees of Smith Barney Inc.,
another subsidiary of SSBH.
3. Investments
For the three months ended May 31, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities but excluding
short-term securities) were:
================================================================================
Purchases $ 91,247,172
- --------------------------------------------------------------------------------
Sales 100,372,550
================================================================================
At May 31, 1998, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $24,932,250
Gross unrealized depreciation (1,343,238)
- --------------------------------------------------------------------------------
Net unrealized appreciation $23,589,012
================================================================================
23
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
May 31, 1998 (unaudited) (continued)
4. Repurchase Agreements
The Fund purchases, and its custodian takes possession of, U.S. government
securities from banks subject to agreements to resell the securities to the
sellers at a future date (generally, the next business day) at an agreed-upon
higher repurchase price. The Fund requires continual maintenance of the market
value of the collateral in amounts at least equal to the repurchase price.
5. Forward Foreign Currency Contracts
At May 31, 1998, the Fund had open forward foreign currency contracts as
described below. The Fund bears the market risk that arises from changes in
foreign currency exchange rates. The unrealized loss on the contracts reflected
in the accompanying financial statements were as follows:
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain (Loss)
================================================================================
To Sell:
British Pound 898,900 $1,459,683 8/24/98 $ (139)
European Currency Units 2,119,313 2,355,106 11/30/98 10,852
German Mark 9,080,017 5,094,320 6/2/98 (78,000)
- --------------------------------------------------------------------------------
Total Unrealized Loss on Open
Forward Foreign Currency Contracts $(67,287)
================================================================================
6. Futures Contracts
Initial margin deposits made upon entering into futures contracts are
recognized as assets. Securities equal to the initial margin amount are
segregated by the custodian in the name of the broker. Additional securities are
also segregated up to the current market value of the futures contract. During
the period the futures contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by marking to market on a daily
basis to reflect the market value of the contract at the end of each day's
trading. Variation margin payments are received or made and recognized as assets
due from or liabilities due to broker, depending upon whether unrealized gains
or losses are incurred. When the contract is closed, the Fund records a realized
gain or loss equal to the difference between the proceeds from (or cost of) the
closing transactions and the Fund's basis in the contract.
24
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
May 31, 1998 (unaudited) (continued)
The Fund enters into such contracts to hedge a portion of its portfolio. The
Fund bears the market risk that arises from changes in the value of the
financial instruments and securities indices (futures contracts).
At May 31, 1998, the Fund had no open futures contracts.
7. Options Contracts
Premiums paid when put or call options are purchased by the Fund, represent
investments, which are marked-to-market daily. When a purchased option expires,
the Fund will realize a loss in the amount of the premium paid. When the Fund
enters into closing sales transaction, the Fund will realize a gain or loss
depending on whether the sales proceeds from the closing sales transaction are
greater or less than the premium paid for the option. When the Fund exercises a
put option, it will realize a gain or loss from the sale of the underlying
security and the proceeds from such sale will be decreased by the premium
originally paid. When the Fund exercises a call option, the cost of the security
which the Fund purchases upon exercise will be increased by the premium
originally paid.
At May 31, 1998, the Fund had no open purchased call or put option contracts.
When the Fund writes a covered call or put option, an amount equal to the
premium received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a gain
equal to the amount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain or loss depending upon whether
the cost of the closing transaction is greater or less than the premium
originally received, without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is eliminated.
When a written call option is exercised, the proceeds of the security sold will
be increased by the premium originally received. When a written put option is
exercised, the amount of the premium received will reduce the cost of the
security which the Fund purchased upon exercise. When written index options are
exercised, settlement is made in cash.
25
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
May 31, 1998 (unaudited) (continued)
The risk associated with purchasing options is limited to the premium
originally paid. The Fund enters into options for hedging purposes. The risk in
writing a call option is that the Fund gives up the opportunity to participate
in any increase in the price of the underlying security beyond the exercise
price. The risk in writing a put option is that the Fund is exposed to the risk
of loss if the market price of the underlying security declines.
During the year ended May 31, 1998, the Fund did not write any covered call
or put options.
8. Payment-in-Kind Securities
The Fund may invest in payment-in-kind ("PIK") securities. PIK securities pay
interest through the issuance of additional securities. PIK securities carry a
risk in that, unlike bonds which pay interest throughout the period to maturity,
the Fund will realize no cash until the cash payment dates unless a portion of
such securities are sold. If the issuer of a PIK security defaults, the Fund may
obtain no return at all on its investment.
9. Capital Loss Carryforward
At February 28, 1998, the Fund had, for Federal income tax purposes,
$27,703,000 of loss carryforwards available to offset future capital gains. To
the extent that these carryforward losses are used to offset capital gains, it
is probable that the gains so offset will not be distributed. The amount and
expiration of the carryforwards are indicated below. Expiration occurs on the
last day in February of the year indicated:
2003 2004 2005
================================================================================
Carryforward Amounts $9,349,000 $18,115,000 $239,000
================================================================================
10. Capital Shares
During the year ended February 28, 1998, capital stock transactions were as
follows:
1998
------------------
Shares Amount
================================================================================
Shares issued on reinvestment 1,412,894 $16,479,649
================================================================================
26
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
1998(1) 1998 1997 1996 1995 1994(2)
===================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ........... $11.87 $11.59 $11.36 $10.88 $12.39 $12.00
- ---------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income ......... 0.26 1.09 1.12 1.13 1.12 0.98
Net realized and
unrealized gain (loss) ...... (0.06) 0.28 0.21 0.65 (1.48) 0.51
- ---------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations ............... 0.20 1.37 1.33 1.78 (0.36) 1.49
- ---------------------------------------------------------------------------------------------------
Offering Costs Credited (Charged)
to Paid-In Capital ............ -- -- -- -- 0.00* (0.02)
- ---------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income ......... (0.26) (1.09) (1.08) (1.27) (1.00) (0.96)
Net realized gains ............ -- -- -- -- (0.15) (0.12)
Capital ....................... -- -- (0.02) (0.03) -- --
- ---------------------------------------------------------------------------------------------------
Total Distributions ............. (0.26) (1.09) (1.10) (1.30) (1.15) (1.08)
- ---------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period ................. $11.81 $11.87 $11.59 $11.36 $10.88 $12.39
- ---------------------------------------------------------------------------------------------------
Total Return,
Based on Market Value ......... (0.47)%++ 10.96% 15.37% 18.83% 0.14% 6.85%++
- ---------------------------------------------------------------------------------------------------
Total Return,
Based on Net Asset Value** .... 1.73%++ 12.43% 12.65% 17.80% (2.18)% 12.67%++
- ---------------------------------------------------------------------------------------------------
Net Assets,
End of Period (millions) ...... $520 $523 $494 $477 $457 $520
- ---------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses ...................... 1.16%+ 1.18% 1.20% 1.24% 1.24% 1.19%+
Net investment income ......... 8.57+ 9.19 9.89 9.74 9.96 8.74+
- ---------------------------------------------------------------------------------------------------
Portfolio Turnover Rate ......... 18% 94% 61% 73% 62% 108%
- ---------------------------------------------------------------------------------------------------
Market Value, End of Period ..... $11.438 $11.750 $11.625 $11.125 $10.500 $11.750
===================================================================================================
</TABLE>
(1) For the three months ended May 31, 1998 (unaudited).
(2) 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.
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,
1996 $13,001,508 $0.31 $11,542,616 $0.27 $(7,102,523) $(0.17) $4,440,093 $0.10
August 31,
1996 13,247,484 0.31 11,804,210 0.29 (7,860,018) (0.19) 3,944,192 0.10
November 30,
1996 13,267,331 0.31 11,856,227 0.28 15,505,326 0.37 27,361,553 0.65
February 28,
1997 13,188,573 0.31 11,798,385 0.28 8,827,165 0.20 20,625,550 0.48
May 31,
1997 13,200,189 0.31 11,741,167 0.27 (5,289,541) (0.12) 6,451,626 0.15
August 31,
1997 13,358,455 0.31 11,846,555 0.28 12,682,793 0.29 24,529,348 0.57
November 30,
1997 12,745,541 0.29 11,250,534 0.26 1,354,794 0.03 12,605,328 0.29
February 28,
1998 13,288,741 0.30 11,752,363 0.27 4,080,801 0.09 15,833,164 0.36
May 31,
1998 12,823,273 0.29 11,293,219 0.26 (2,829,443) (0.06) 8,463,776 0.19
=====================================================================================================
</TABLE>
28
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each period:
Dividend
NYSE Net Asset Dividend Reinvestment
Closing Price Value Paid Price
===============================================================================
March 31, 1996 $10.875 $11.18 $0.093 $10.79
April 30, 1996 10.750 11.20 0.093 10.74
May 31, 1996 10.625 11.18 0.093 10.56
June 30, 1996 10.625 11.07 0.091 10.71
July 31, 1996 10.875 10.98 0.091 10.97
August 31, 1996 11.000 11.01 0.091 11.01
September 30, 1996 11.125 11.27 0.091 11.13
October 31, 1996 11.125 11.21 0.091 11.19
November 30, 1996 11.250 11.38 0.091 11.16
December 31, 1996 11.250 11.46 0.091 11.27
January 31, 1997 11.625 11.50 0.091 11.48
February 28, 1997 11.625 11.59 0.091 11.62
March 31, 1997 11.375 11.29 0.091 11.35
April 30, 1997 11.500 11.26 0.091 11.22
May 31, 1997 11.625 11.47 0.091 11.45
June 30, 1997 11.750 11.62 0.091 11.65
July 31, 1997 12.000 11.84 0.091 11.69
August 31, 1997 11.875 11.77 0.091 11.76
September 30, 1997 12.000 11.94 0.091 11.90
October 31, 1997 11.750 11.82 0.091 11.78
November 30, 1997 12.125 11.78 0.091 11.76
December 31, 1997 12.3125 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
March 31, 1998 11.5625 11.90 0.086 11.87
April 30, 1998 11.375 11.84 0.086 11.88
May 31, 1998 11.4375 11.81 0.086 11.81
================================================================================
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>
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
32
<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.
FD0839 7/98
