Managed
HIGH INCOME
PORTFOLIO INC.
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[GRAPHIC OMITTED]
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Annual
Report
February 29, 2000
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Managed
HIGH INCOME
PORTFOLIO INC.
LETTER TO
SHAREHOLDERS
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Dear Shareholder:
We are pleased to provide the annual report for the Managed High Income
Portfolio Inc. ("Fund") for the year ended February 29, 2000. During the past
year, the Fund paid income dividends totaling $0.98 per share. The table below
details the annualized distribution rate and the twelve-month total return for
the Fund based on its February 29, 2000 net asset value ("NAV") and the New York
Stock Exchange ("NYSE") closing price.(1)
Price Annualized Twelve-Month
Per Share Distribution Rate(2) Total Return(2)
--------- -------------------- ---------------
$10.02 (NAV) 9.70% 3.89%
$8.125 (NYSE) 11.96% (13.40)%
Special Shareholder Notice
We are pleased to report that we have continued our effort of
reducing the Funds's shares' discount to NAV. This program, which commenced on
November 16, 1999, is believed to be an opportunity to take advantage of market
price fluctuations with the objective of offering long term value to the Fund's
shareholders. The Fund intends to purchase shares of its stock in the open
market at such times, prices and amounts deemed advisable and subsequently
retire them.
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(1) The NAV is calculated by subtracting total liabilities from the closing
value of all securities held by the Fund, plus all other assets. This
result (net assets) is divided by the total number of shares outstanding.
The Nav fluctuates with changes in the market price of the securities in
which the Fund has invested. However, the price at which the investor buys
or sells shares of the Fund is its market (NYSE) price as determined by
supply and demand.
(2) Total returns are based on changes in NAV and the market value,
respectively. Total returns assume the reinvestment of all dividends
and/or capital gains distributions in additional shares. The annualized
distribution rate is the Fund's current monthly income dividend rate,
annualized, and then divided by the NAV or the market value noted in the
report. This annualized distribution rate assumes a current monthly income
dividend rate of $0.081 for twelve months. This rate is as of March 31,
2000 and is subject to change. The important difference between a total
return and an annualized distribution rate is that the total return takes
into consideration a number of factors including the fluctuation of the
NAV or the market value during the period reported. The NAV fluctuation
includes the effects of unrealized appreciation or depreciation in the
Fund. Accordingly, since an annualized distribution rate only reflects the
current monthly income dividend rate annualized, it should not be used as
the sole indicator to judge the return you receive from your Fund
investment. Past performance is not indicative of future results.
1
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This repurchase program has added liquidity to the market for the benefit
of investors who wish to sell their shares, while also seeking to benefit
current shareholders by increasing the Fund's shares' NAV. Since the inception
of the program, the Fund has repurchased and retired 804,000 shares at an
average buyback price of $8.52 per share and at an average discount of $1.58 per
share. As of February 29, 2000, this repurchase program has increased the Fund's
shares' NAV by $0.03 and increased the Fund's shares' total return by 0.30% when
measured by NAV.
The Board of Directors ("Board") believes that this share repurchase
program is an opportunity to take advantage of market price fluctuations with
the objective of increasing the Fund's per share NAV. However, there can be no
assurance that the Board will continue this program.
Market and Economic Overview
For the year ended February 29, 2000, the overall high-yield bond market
generated total returns in the 0.50% to 1.50% range while 10-Year U.S.
Treasuries generated total returns in the negative 4.50% to negative 5.00%
range. 1999 turned out to be one of the worst years in bond market history in
terms of performance. The high-yield bond market generated the best performance
returns in the domestic bond market primarily due to the strength of the U.S.
economy. However, because of the dramatic increase in overall interest rates,
the high-yield market was only able to generate modestly positive total returns
as high current yields offset price declines.
During the period, the U.S. bond market continued to decline in response
to investor fears over strong economic growth, potentially higher inflation and
more restrictive Federal Reserve Board ("Fed") monetary policy. The Fed raised
short-term interest rates four times during the reporting period for a total of
100 basis points in an effort to control economic growth and inflation. (A basis
point is 0.01% or one one-hundredth of a percent.) Given the strength in the
domestic and world economies, we would not be surprised if the Fed raises
short-term interest rates again this year.(3) However, we think that the bond
market's recent decline may be over and we anticipate better bond market
performance in 2000.
Performance Update & Fund Strategy
The Fund generated a total return of 3.89% for the past 12 months. In
comparison, the Lipper, Inc. peer group of high current yield funds returned
1.49%. (Lipper is a major fund-tracking organization.) The market price of the
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(3) Please note that on March 21, 2000, the Fed raised interest rates 0.25% to
6.00% after this letter was written.
2
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shares decreased during the reporting period largely due to concerns regarding
the direction of interest rates and heavy tax loss swapping.
We were encouraged by our results over the past year because our
relatively more conservative credit stance contributed to the Fund's
outperformance in a difficult market for bonds. (Of course, past performance is
not indicative of future results.) We think our general cautiousness was
warranted because of the higher volatility in the financial markets over the
past year. We also believe that the high yield market is competitively valued at
current levels. While no guarantees can be made, we feel we are in a good
position to take advantage of any economic or market conditions that may occur
over the near term.
During this period of rising interest rates and declining bond prices, the
Fund benefited from having an eight-year average maturity that was less
sensitive to increases in overall interest rates. (Maturity refers to the date
on which the principal is required to be repaid on a bond.)
Portfolio Strategy
During the last six months, we continued to add to our basic industry
positions on the assumption that stronger U.S. economic growth would benefit a
number of cyclical industries. We also maintained healthy weightings in the
fast-growing telecommunications, cable and media sectors. The strongest
performing industry sectors in the high-yield market in the past six months were
in basic materials (i.e., forest products, metals, mining, etc.), chemicals,
cable and media, and telecommunications.
The worst-performing sectors included restaurants, health care and
textile/apparel. Some of our better-performing investments included Tembec, a
paper and forest products company, Nextel, a fast-growing wireless
communications company, Nextlink, a fast-growing telecommunications company, and
PSINet, a major Internet telecommunications company.(4)
Our portfolio changes over the first half of the Fund's fiscal year
benefited the Fund's performance in the second half. Our continued emphasis on
better-quality issues and our increased focus on basic industry issues
contributed to our relative outperformance versus our peer group during the
reporting period. During the first half of 1999, the higher-quality issues
actually underperformed the lower-quality issues by a meaningful margin because
of their higher sensitivity to rising U.S. Treasury rates.
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(4) Portfolio holdings are as of February 29, 2000 and are subject to change.
3
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During the second half of 1999, we saw a sharp reversal of earlier trends.
Lower-quality issues dramatically underperformed in the second half of last year
because of rising default rates. Yet, we do not think rising defaults in the
high yield market are due to a deteriorating U.S. economy. Instead, we believe
that rising defaults are a natural fallout from the massive amount of new
issuance in the past three years when a lot of merger and acquisition activity
took place. A number of defaults are occurring among the less viable companies
that are simply not competitive in today's more challenging economic
environment. Given our quality orientation, we did not have any defaults in the
Fund in 1999. In our view, this is no time to get reckless with respect to
credit risk.
We have continued to eliminate underperforming companies and selectively
raised our exposure to improving credits during the period. We will continue to
selectively add attractively priced credits in an effort to add more balance to
the Fund. In terms of quality, we have been increasing our exposure during the
period to the middle B-rated segment of the market where we have continued to
find attractive yields. And while no guarantees can be made, we believe as rates
rise, a yield-oriented strategy may be prudent. (Past performance is not
indicative of future results.)
In closing, we are encouraged by our continued improved results and remain
confident we can pick up additional ground in the upcoming months as we continue
to deploy our strategy in the new millennium. We will continue to focus on what
we believe are the better-quality names in each sector and look to pick up
additional yield for the portfolios. We have a positive outlook on the total
return prospects of the high-yield bond market at current valuation levels,
especially given the continued health of the economy.
Conclusion
As we enter the new millennium, we would expect a continuation of solid
economic growth with only a modest upward bias to inflation. We anticipate both
the stock market and the high-yield bond market to do better than U.S.
Treasuries. In this environment, we believe the middle-quality high yield issues
should outperform as they offer the most attractive yields with more limited
4
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default risk than lower-quality issues. In addition, they tend to be less
sensitive to rising interest rates than higher-quality issues. We will also
continue to focus closely on some of the stronger companies in select commodity
sectors such as paper, energy and steel where conditions appear to be improving.
Longer term, we remain positive on the high-yield market and seek to generate
relatively strong total return performance over the near term.
Thank you for your continued confidence in our investment approach.
Sincerely,
/s/ Heath B. McLendon /s/ John C. Bianchi, C.F.A.
Heath B. McLendon John C. Bianchi, C.F.A.
Chairman and Vice President and
Chief Executive Officer Investment Officer
March 16, 2000
5
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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 38. Below is a short summary of
how the 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 Plan and about how you can
participate, please call PFPC Global Fund Services at (800) 331-1710.
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6
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SCHEDULE OF INVESTMENTS
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February 29, 2000
<TABLE>
<CAPTION>
Face
Amount++ Rating(a) Security Value
========================================================================================
CORPORATE BONDS AND NOTES - 93.7%
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<S> <C> <C> <C>
Aerospace -- 0.4%
745,000 B BE Aerospace, Inc., Sr. Sub. Notes,
8.000% due 3/1/08 ............................... $ 633,250
1,185,000 B- Dunlop Standard Aerospace, Sr. Notes,
11.875% due 5/15/09 ............................. 1,210,181
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1,843,431
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Airlines -- 1.3%
6,312,525 BB Airplanes Pass Through Trust, Corporate
Collateralized Mortgage Obligation,
Series D, 10.875% due 3/15/19 ................... 5,744,587
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Aluminum -- 1.5%
Kaiser Aluminum & Chemical:
500,000 B1* Series B, Sr. Notes, 10.875% due 10/15/06 ....... 495,000
445,000 B1* Series D, Sr. Notes, 10.875% due 10/15/06 ....... 440,550
5,395,000 B3* Sr. Sub. Notes, 12.750% due 2/1/03 .............. 5,341,050
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6,276,600
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Apparel -- 0.1%
550,000 B- Tropical Sportswear International Corp., Sr. Sub. .
Notes, 11.000% due 6/15/08 ...................... 528,000
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Auto Parts: O.E.M. -- 2.1%
3,225,000 B Collins & Aikman Products, Sr. Sub. Notes,
11.500% due 4/15/06 ............................. 3,168,563
1,485,000 B Dura Operating Corp., Sr. Sub. Notes,
9.000% due 5/1/09 ............................... 1,377,338
Hayes Lemmerz International Inc.,
Sr. Sub. Notes:
685,000 B 11.000% due 7/15/06 ........................... 698,700
705,000 B 8.250% due 12/15/08 ........................... 618,638
3,185,000 B+ Tenneco Inc., Sr. Sub. Notes,
11.625% due 10/15/09 (b) ........................ 3,244,719
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9,107,958
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Automotive Aftermarket -- 0.6%
2,605,000 B+ Exide Corp., Sr. Notes, 10.000% due 4/15/05 ....... 2,526,850
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</TABLE>
See Notes to Financial Statements. 7
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SCHEDULE OF INVESTMENTS
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February 29, 2000 (continued)
<TABLE>
<CAPTION>
Face
Amount++ Rating(a) Security Value
========================================================================================
<S> <C> <C> <C>
Broadcasting -- 0.6%
1,876,600 NR AMFM Operating Inc., Debenture,
Payment-in-Kind, 12.625% due 10/31/06 .......... $ 2,158,090
525,000 B Capstar Broadcasting, Sr. Discount Notes,
step bond to yield 12.750% due 2/1/09 .......... 472,500
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2,630,590
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Building Products -- 0.8%
1,150,000 B Amatek Industries Property, Sr. Sub. Notes,
12.000% due 2/15/08 (b) ........................ 1,089,625
1,190,000 B Atrium Cos., Sr. Sub. Notes,
10.500% due 5/1/09 ............................. 1,148,350
Nortek Inc., Sr. Notes:
275,000 B+ 9.250% due 3/15/07 ............................. 261,938
965,000 B+ 9.125% due 9/1/07 .............................. 911,925
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3,411,838
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Cable Television -- 12.4%
Adelphia Communications Corp., Sr. Notes:
5,770,000 B+ 9.875% due 3/1/07 .............................. 5,712,300
1,055,000 BB- 8.375% due 11/15/17 ............................ 896,750
Century Communications Corp.:
5,535,000 BB- Sr. Discount Notes, zero coupon due 1/15/08 .... 2,338,538
410,000 BB- Sr. Notes, 9.750% due 2/15/02 .................. 412,050
Charter Communications Holdings LLC:
5,085,000 B+ Sr. Discount Notes, step bond to yield
11.750% due 1/15/10 .......................... 2,936,588
2,825,000 B+ Sr. Notes, 10.000% due 4/1/09 .................. 2,810,875
2,105,000 BB- CSC Holdings Inc., Sr. Sub. Notes,
10.500% due 5/15/16 ............................ 2,326,025
1,125,000GBP B- Diamond Holdings PLC, Sr. Notes,
10.000% due 2/1/08 ............................. 1,744,964
2,100,000 B EchoStar DBS Corp., Sr. Notes,
9.375% due 2/1/09 .............................. 2,068,500
4,225,000 B- NTL Inc., Sr. Notes,
11.500% due 10/1/08 ............................ 4,478,500
1,480,000 B- RCN Corp., Sr. Discount Notes, step bond
to yield 11.125% due 10/15/07 .................. 984,200
4,465,000 BB- Rogers Cablesystems Ltd., Sr. Sub. Notes,
11.000% due 12/1/15 ............................ 4,956,150
</TABLE>
8 See Notes to Financial Statements.
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<PAGE>
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SCHEDULE OF INVESTMENTS
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February 29, 2000 (continued)
<TABLE>
<CAPTION>
Face
Amount++ Rating(a) Security Value
========================================================================================
<S> <C> <C> <C>
Cable Television -- 12.4% (continued)
2,350,000 B+ Telewest Communications PLC, Sr. Notes,
11.250% due 11/1/08 ............................. $ 2,491,000
16,250,000 B- United International Holdings Inc., Sr. Discount
Notes, step bond to yield
10.750% due 2/15/08 ............................. 11,496,875
13,600,000 B United Pan-Europe Communications N.V.,
Sr. Discount Notes, step bond to yield
12.500% due 8/1/09 (b) .......................... 7,412,000
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53,065,315
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Casinos/Gambling -- 2.1%
415,000 BB+ Circus Circus Enterprises, Sr. Sub. Notes,
7.625% due 7/15/13 .............................. 348,600
2,200,000 B Harvey Casinos Resort, Sr. Sub. Notes,
10.625% due 6/1/06 .............................. 2,260,500
Hollywood Casinos, 1st Mortgage Notes:
500,000 B 13.000% due 8/1/06 (b) .......................... 537,500
2,340,000 B 11.250% due 5/1/07 .............................. 2,401,425
855,000 NR Jazz Casino Co., Payment-in-Kind, Sr. Sub.
Notes, 5.867% due 11/15/09 ...................... 367,650
Sun International Hotels Ltd., Sr. Sub. Notes:
875,000 Ba3* 9.000% due 3/15/07 .............................. 813,750
1,185,000 Ba3* 8.625% due 12/15/07 ............................. 1,110,938
1,155,000 B- Venetian Casino Resort LLC, Secured Notes,
12.250% due 11/15/04 ............................ 1,065,488
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8,905,851
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Chemicals - Major -- 1.5%
Huntsman Corp.:
10,525,000 B+ Sr. Discount Notes, zero coupon
due 12/31/09 (b) .............................. 3,341,688
2,005,000 B+ Sr. Sub. Notes, 10.125% due 7/1/09 (b) .......... 2,015,025
1,355,000 B+ Terra Industries Inc., Sr. Notes,
10.500% due 6/15/05 ............................. 1,111,100
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6,467,813
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Chemicals - Specialty -- 0.3%
1,135,000 B Zeneca Specialty Chemical PLC, Sr. Secured
Notes, 11.000% due 7/1/09 (b) ................... 1,169,050
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</TABLE>
See Notes to Financial Statements. 9
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<PAGE>
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SCHEDULE OF INVESTMENTS
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February 29, 2000 (continued)
<TABLE>
<CAPTION>
Face
Amount++ Rating(a) Security Value
=========================================================================================
<S> <C> <C> <C>
Coal Mining -- 0.3%
2,780,000 Caa* AEI Resources Inc., Sr. Sub. Notes,
10.500% due 12/15/05 (b) ....................... $ 1,112,000
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Construction/Agricultural Equipment/Trucks-- 0.3%
1,490,000 B Columbus McKinnon Corp., Sr. Sub. Notes,
8.500% due 4/1/08 .............................. 1,311,200
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Containers/Packaging -- 3.1%
3,475,000EUR B1* BSN Financing Co., S.A., Sr. Sub. Notes,
10.250% due 8/1/09 (b) ......................... 3,462,822
705,000 B BWAY Corp., Sr. Sub. Notes,
10.250% due 4/15/07 ............................ 636,263
1,850,000 B Huntsman Packaging Corp., Sr. Sub. Notes,
9.125% due 10/1/07 ............................. 1,785,250
3,565,000 B Stone Container Corp., Sr. Notes,
11.500% due 8/15/06 (b) ........................ 3,778,900
1,900,000 B- Sweetheart Cup Co., Inc., Sr. Sub. Notes,
10.500% due 9/1/03 ............................. 1,843,000
Tekni-Plex Inc., Sr. Sub. Notes:
1,005,000 B- 11.250% due 4/1/07 ............................. 1,045,200
620,000 B- 9.250% due 3/1/08 .............................. 595,200
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13,146,635
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Contract Drilling -- 2.3%
Parker Drilling Co., Sr. Notes:
350,000 B- 5.500% due 8/1/04 .............................. 257,688
1,800,000 B+ 9.750% due 11/15/06 ............................ 1,737,000
3,205,000 BB Pride International Inc., Sr. Notes,
10.000% due 6/1/09 ............................. 3,180,963
RBF Finance Corp.:
2,545,000 Ba3* Sr. Notes, 12.250% due 3/15/06 ................. 2,735,875
1,840,000 BB- Sr. Secured Notes, 11.375% due 3/15/09 ......... 1,959,600
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9,871,126
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Discount Stores -- 1.2%
3,760,000 B+ Ames Department Stores, Inc., Sr. Notes,
10.000% due 4/15/06 ............................ 3,308,800
1,710,000 BB+ Kmart Corp., Sr. Notes, 12.500% due 3/1/05 ....... 1,915,200
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5,224,000
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</TABLE>
10 See Notes to Financial Statements.
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<PAGE>
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SCHEDULE OF INVESTMENTS
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February 29, 2000 (continued)
<TABLE>
<CAPTION>
Face
Amount++ Rating(a) Security Value
=========================================================================================
<S> <C> <C> <C>
Diversified Commercial Services -- 1.3%
2,900,000 B2* Intertek Finance, Sr. Sub. Notes,
10.250% due 11/1/06 ............................ $2,552,000
3,250,000 B- Outsourcing Solutions Inc., Sr. Sub. Notes,
11.000% due 11/1/06 ............................ 3,055,000
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5,607,000
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Diversified Financial Services -- 0.5%
Amresco Inc., Sr. Sub. Notes:
1,500,000 Caa* 10.000% due 3/15/04 ............................ 1,132,500
1,275,000 Caa* 9.875% due 3/15/05 ............................. 962,625
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2,095,125
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Diversified Manufacturers -- 0.8%
1,210,000 B- Blount Inc., Sr. Sub. Notes,
13.000% due 8/1/09 (b) ......................... 1,282,600
2,650,000 B+ Park Ohio Holdings Corp., Sr. Sub. Notes,
9.250% due 12/1/07 ............................. 2,371,750
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3,654,350
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Drugs - Generic -- 1.2%
5,450,000 BB ICN Pharmaceuticals Inc., Sr. Notes,
9.250% due 8/15/05 ............................. 5,313,750
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Electronic Components -- 0.5%
1,995,000 B+ Celestica International Inc., Sr. Sub. Notes,
10.500% due 12/31/06 ........................... 2,099,738
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Engineering & Construction -- 0.7%
760,000 B- American Plumbing & Mechanic, Sr. Sub. Notes,
11.625% due 10/15/08 ........................... 708,700
1,005,000 BB- Integrated Electrical Services Inc., Sr. Sub. Notes,
9.375% due 2/1/09 .............................. 864,300
1,295,000 B- Orius Capital Corp., Sr. Sub. Notes,
12.750% due 2/1/10 ............................. 1,307,950
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2,880,950
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</TABLE>
See Notes to Financial Statements. 11
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<PAGE>
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SCHEDULE OF INVESTMENTS
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February 29, 2000 (continued)
<TABLE>
<CAPTION>
Face
Amount++ Rating(a) Security Value
=========================================================================================
<S> <C> <C> <C>
Environmental Services -- 2.6%
Allied Waste Industries, Inc.:
700,000 BB Sr. Notes, 7.875% due 1/1/09 ................... $ 591,500
7,350,000 B- Sr. Sub. Notes, 10.000% due 8/1/09 ............. 6,155,625
985,000 B+ IT Group Inc., Sr. Sub. Notes,
11.250% due 4/1/09 (b) ......................... 950,525
1,375,000 CCC+ Metal Management Inc., 10.000% due 5/15/08 ....... 1,045,000
2,285,000 B+ URS Corp., Sr. Sub. Notes,
12.250% due 5/1/09 ............................. 2,382,113
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11,124,763
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Food Distributors -- 1.9%
385,000 B- Agrilink Foods Inc., Sr. Notes,
11.875% due 11/1/08 (b) ........................ 380,188
3,900,000 B2* Carrols Corp., Sr. Sub. Notes,
9.500% due 12/1/08 ............................. 3,402,750
1,845,000 B- Premier International Foods PLC, Sr. Notes,
12.000% due 9/1/09 (b) ......................... 1,798,875
2,660,000 B SC International Services Inc., Sr. Sub. Notes,
9.250% due 9/1/07 .............................. 2,487,100
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8,068,913
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Foods - Specialty/Candy -- 0.9%
2,675,000 B- B&G Foods Inc., Sr. Sub. Notes,
9.625% due 8/1/07 .............................. 2,273,750
3,285,000 B2* Imperial Holly Corp., Sr. Sub. Notes,
9.750% due 12/15/07 ............................ 1,511,100
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3,784,850
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Forest Products -- 1.0%
2,940,000 B Ainsworth Lumber Co. Ltd., Sr. Notes,
12.500% due 7/15/07 ............................ 3,211,950
1,210,000 B+ Millar Western Forest Products, Sr. Notes,
9.875% due 5/15/08 ............................. 1,203,950
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4,415,900
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Home Furnishings -- 0.3%
1,260,000 B Falcon Products Inc., Sr. Sub. Notes,
11.375% due 6/15/09 ............................ 1,184,400
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</TABLE>
12 See Notes to Financial Statements.
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<PAGE>
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SCHEDULE OF INVESTMENTS
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February 29, 2000 (continued)
<TABLE>
<CAPTION>
Face
Amount++ Rating(a) Security Value
=========================================================================================
<S> <C> <C> <C>
Hospital/Nursing Management -- 1.5%
1,440,000 Ba3* Fresenius Medical Care Capital Trust,
9.000% due 12/1/06 ............................. $ 1,368,000
6,410,000 B- Magellan Health Services Inc., Sr. Sub. Notes,
9.000% due 2/15/08 ............................. 5,224,150
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6,592,150
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Hotels/Resorts -- 1.7%
1,355,000 B- Courtyard by Marriott, Sr. Secured Notes,
10.750% due 2/1/08 ............................. 1,314,350
2,185,000 BB HMH Properties Inc., Sr. Notes,
8.450% due 12/1/08 ............................. 1,966,500
Intrawest Corp., Sr. Notes:
1,850,000 B+ 9.750% due 8/15/08 ............................ 1,776,000
2,085,000 B+ 10.500% due 2/1/10 ............................. 2,074,575
- -----------------------------------------------------------------------------------------
7,131,425
- -----------------------------------------------------------------------------------------
Insurance - Multi-Line -- 0.4%
2,500,000 B Veritas Capital Trust, Sr. Notes,
10.000% due 1/1/28 ............................. 1,625,000
- -----------------------------------------------------------------------------------------
Internet Services -- 5.2%
1,005,000 Caa* Cybernet Internet Services International,
Sr. Notes, 14.000% due 7/1/09 .................. 839,175
2,435,000 B- Exodus Communications, Inc., Sr. Notes,
10.750% due 12/15/09 ........................... 2,459,350
1,870,000 NR Globix Corp., Sr. Notes, 12.500% due 2/1/10 ...... 1,867,663
PSINet, Sr. Notes:
1,575,000 B- 10.500% due 12/1/06 ............................ 1,543,500
2,605,000 B- 11.500% due 11/1/08 ............................ 2,644,075
2,655,000 B- 11.000% due 8/1/09 ............................. 2,661,68
775,000EUR B- 11.000% due 8/1/09 ............................. 736,841
1,360,000 B3* Rhythms NetConnections, Sr. Notes,
14.000% due 2/15/10 (b) ........................ 1,358,300
3,300,000 NR Splitrock Services Inc., Sr. Sub. Notes,
11.750% due 7/15/08 ............................ 3,502,125
Verio Inc., Sr. Notes:
1,685,000 B- 11.250% due 12/1/08 ............................ 1,743,975
2,085,000 B- 10.625% due 11/15/09 ........................... 2,085,000
1,690,000 CCC+ WAM!Net Inc., Sr. Discount Notes,
step bond to yield 13.250% due 3/1/05 .......... 997,100
- -----------------------------------------------------------------------------------------
22,438,742
- -----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. 13
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 29, 2000 (continued)
<TABLE>
<CAPTION>
Face
Amount++ Rating(a) Security Value
=========================================================================================
<S> <C> <C> <C>
Leisure/Movies/Entertainment -- 1.4%
990,000 B- AMC Entertainment Inc., Sr. Sub. Notes,
9.500% due 2/1/11 ............................. $ 764,775
2,130,000 B- Premier Parks, Sr. Discount Notes,
step bond to yield 10.000% due 4/1/08 (b) ..... 1,384,500
4,000,000 B- SFX Entertainment Inc., Sr. Sub. Notes,
9.125% due 2/1/08 ............................. 4,050,000
- -----------------------------------------------------------------------------------------
6,199,275
- -----------------------------------------------------------------------------------------
Medical Specialties -- 0.4%
2,050,000 B- Hanger Orthopedic Group Inc., Sr. Notes,
11.250% due 6/15/09 (b) ....................... 1,670,750
- -----------------------------------------------------------------------------------------
Multi-Sector Companies -- 0.4%
2,045,000 B- Triarc Consumer Beverage, Sr. Sub. Notes,
10.250% due 2/15/09 (b) ....................... 1,952,975
- -----------------------------------------------------------------------------------------
Newspapers -- 0.1%
580,000 B+ Garden State Newspapers Inc., Sr. Sub. Notes,
8.625% due 7/1/11 ............................. 524,900
- -----------------------------------------------------------------------------------------
Oil & Gas Production -- 2.7%
Belco Oil and Gas Corp., Sr. Sub. Notes:
700,000 B1* 10.500% due 4/1/06 ............................ 712,250
1,330,000 B1* 8.875% due 9/15/07 ............................ 1,250,200
2,125,000 B Canadian Forest Oil Ltd., Sr. Sub. Notes,
8.750% due 9/15/07 ............................ 1,955,000
450,000 B Chesapeake Energy Corp., Sr. Notes,
9.625% due 5/1/05 ............................. 427,500
4,350,000 B Clark USA Inc., Sr. Notes,
10.875% due 12/1/05 ........................... 1,979,250
1,595,000 B Forest Oil Corp., Sr. Sub. Notes,
10.500% due 1/15/06 ........................... 1,618,925
1,725,000 B+ Nuevo Energy Co., Sr. Sub. Notes,
9.500% due 6/1/08 ............................. 1,673,250
1,765,000 B Stone Energy Corp., Sr. Sub. Notes,
8.750% due 9/15/07 ............................ 1,650,275
320,000 B+ Vintage Petroleum, Inc., Sr. Sub. Notes,
9.750% due 6/30/09 ............................ 324,800
- -----------------------------------------------------------------------------------------
11,591,450
- -----------------------------------------------------------------------------------------
</TABLE>
14 See Notes to Financial Statements.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 29, 2000 (continued)
<TABLE>
<CAPTION>
Face
Amount++ Rating(a) Security Value
=============================================================================================
<S> <C> <C> <C>
Oil/Gas Transmission -- 0.2%
750,000 BB- Leviathan Gas Pipeline Partners L.P.,
Sr. Sub. Notes, 10.375% due 6/1/09 .............. $ 776,250
- ---------------------------------------------------------------------------------------------
Paper -- 3.5%
Doman Industries Ltd., Sr. Notes:
4,965,000 B 8.750% due 3/15/04 .............................. 4,319,550
625,000 B 9.250% due 11/15/07 ............................. 517,188
2,515,000EUR B Kapa Beheer BV, Sr. Sub. Notes,
10.625% due 7/15/09 (b) ......................... 2,566,722
700,000 CCC+ Repap New Brunswick, Sr. Secured Notes,
10.625% due 4/15/05 ............................. 651,000
Riverwood International Corp.:
1,005,000 B- Sr. Notes, 10.625% due 8/1/07 ................... 1,020,075
4,820,000 CCC+ Sr. Sub. Notes, 10.875% due 4/1/08 .............. 4,627,200
1,140,000 BB+ Tembec Industries Inc., Sr. Notes,
9.875% due 9/30/05 .............................. 1,157,100
- ---------------------------------------------------------------------------------------------
14,858,835
- ---------------------------------------------------------------------------------------------
Pharmaceuticals - Other -- 0.4%
1,605,000 B King Pharmaceutical Inc., Sr. Sub. Notes,
10.750% due 2/15/09 ............................. 1,673,213
- ---------------------------------------------------------------------------------------------
Photographic Products -- 0.5%
2,255,000 BB- Polaroid Corp., Sr. Notes, 11.500% due 2/15/06 .... 2,322,650
- ---------------------------------------------------------------------------------------------
Printing/Forms -- 1.1%
1,040,000 B Merrill Corp., Sr. Sub. Notes,
12.000% due 5/1/09 (b) .......................... 1,014,000
2,400,000GBP B Polestar Corp., PLC, Sr. Notes,
10.500% due 5/30/08 ............................. 3,637,340
- ---------------------------------------------------------------------------------------------
4,651,340
- ---------------------------------------------------------------------------------------------
Real Estate Investment Trusts -- 0.4%
2,250,000 NR Ocwen Asset Investment, Sr. Notes,
11.500% due 7/1/05 1,890,000
- ---------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. 15
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 29, 2000 (continued)
<TABLE>
<CAPTION>
Face
Amount++ Rating(a) Security Value
========================================================================================
<S> <C> <C> <C>
Recreational Products/Toys -- 0.2%
1,000,000EUR B2* Head Holding, Sr. Notes,
10.750% due 7/15/06 (b) .................... $ 1,010,937
- ----------------------------------------------------------------------------------------
Rental/Leasing Companies -- 0.8%
2,130,000 BB- Avis Rent A Car, Inc., Sr. Sub. Notes,
11.000% due 5/1/09 ......................... 2,161,950
195,000 B NationsRent Inc., Sr. Sub. Notes,
10.375% due 12/15/08 ....................... 185,738
United Rentals, Sr. Sub. Notes:
550,000 BB- 9.250% due 1/15/09 ......................... 510,125
525,000 BB- 9.000% due 4/1/09 .......................... 485,625
- ----------------------------------------------------------------------------------------
3,343,438
- ----------------------------------------------------------------------------------------
Retail - Food Chains -- 0.2%
805,000 B+ Stater Brothers Holdings Inc., Sr. Notes,
10.750% due 8/15/06 ........................ 815,063
- ----------------------------------------------------------------------------------------
Retail - Other Specialty Stores -- 0.3%
1,575,000 B- Advance Stores Co., Sr. Sub. Notes,
10.250% due 4/15/08 ........................ 1,338,750
- ----------------------------------------------------------------------------------------
Savings & Loan Associations -- 0.8%
Ocwen Capital Trust:
3,200,000 B2* Jr. Sub. Notes, 10.875% due 8/1/27 ......... 2,080,000
1,630,000 B+ Sr. Notes, 11.875% due 10/1/03 ............. 1,483,300
- ----------------------------------------------------------------------------------------
3,563,300
- ----------------------------------------------------------------------------------------
Semiconductors -- 1.0%
4,260,000 B Fairchild Semiconductor Inc., Sr. Sub. Notes,
10.125% due 3/15/07 ........................ 4,196,100
- ----------------------------------------------------------------------------------------
Steel/Iron Ore -- 1.6%
400,000 B1* Algoma Steel Inc., 1st Mortgage Notes,
12.375% due 7/15/05 ........................ 397,000
1,110,000 BB- LTV Corp., Sr. Notes,
11.750% due 11/15/09 (b) ................... 1,129,425
</TABLE>
16 See Notes to Financial Statements.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 29, 2000 (continued)
<TABLE>
<CAPTION>
Face
Amount++ Rating(a) Security Value
===========================================================================================
<S> <C> <C> <C>
Steel/Iron Ore -- 1.6% (continued)
2,060,000 B+ Russel Metals Inc., Sr. Notes,
10.000% due 6/1/09 ............................ $ 2,049,700
1,350,000 B+ WCI Steel Inc., Sr. Notes, 10.000% due 12/1/04 .. 1,343,250
1,940,000 B- WHX Corp., Sr. Notes, 10.500% due 4/15/05 ....... 1,843,000
- -------------------------------------------------------------------------------------------
6,762,375
- -------------------------------------------------------------------------------------------
Telecommunications -- 12.7%
Call-Net Enterprises, Inc.:
520,000 B+ Sr. Discount Notes, step bond to yield
8.940% due 8/15/08 (b) ...................... 260,000
940,000 B+ Sr. Notes, 9.375% due 5/15/09 ................. 761,400
600,000EUR B+ Esat Telecom Group PLC, Sr. Notes,
11.875% due 11/1/09 ........................... 724,871
Esprit Telecom Group PLC, Sr. Notes:
3,900,000 B 11.500% due 8/15/07 ........................... 3,802,500
2,300,000 B- 11.500% due 12/15/07 .......................... 2,248,250
1,300,000 B 10.875% due 6/15/08 ........................... 1,270,750
Focal Communications Corp.:
1,040,000 B Sr. Discount Notes, step bond to yield
12.125% due 2/15/08 ......................... 702,000
835,000 B Sr. Notes, 11.875% due 1/15/10 ................ 864,225
1,500,000 CCC+ GT Group Telecom Inc., Sr. Discount Notes,
step bond to yield 13.250% due 2/1/10 ......... 890,625
Hermes Europe Railtel, Sr. Notes:
2,000,000DEM B- 11.500% due 12/15/07 .......................... 950,037
705,000 B 10.375% due 1/15/09 ........................... 659,175
ICG Holdings Inc., Sr. Discount Notes:
715,000 B- Step bond to yield 13.500% due 9/15/05 ........ 657,800
945,000 B- Step bond to yield 12.500% due 5/1/06 ......... 774,900
1,225,000EUR CCC+ Jazztel PLC, Sr. Notes, 13.250% due 12/15/09 .... 1,241,347
KMC Telecom Holdings Inc.:
2,440,000 B- Sr. Discount Notes, step bond to yield
12.500% due 2/15/08 ......................... 1,415,200
1,200,000 B- Sr. Notes, 13.500% due 5/15/09 (b) ............ 1,212,000
</TABLE>
See Notes to Financial Statements. 17
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 29, 2000 (continued)
<TABLE>
<CAPTION>
Face
Amount++ Rating(a) Security Value
===========================================================================================
<S> <C> <C> <C>
Telecommunications -- 12.7% (continued)
Level 3 Communications:
7,270,000 B Sr. Discount Notes, step bond to yield
12.875% due 3/15/10 $ 3,899,174
4,125,000EUR B Sr. Notes, 11.250% due 3/15/10 3,991,397
300,000 B+ Metromedia Fiber Network, Sr. Notes,
10.000% due 11/15/08 297,750
NEXTLINK Communications, Inc.:
4,125,000 B Sr. Discount Notes, step bond to yield
12.250% due 6/1/09 2,495,625
Sr. Notes:
3,260,000 B 12.500% due 4/15/06 3,471,900
2,580,000 B 10.750% due 6/1/09 (b) 2,592,900
2,845,000 B Step bond to yield 12.125% due 12/1/09 1,607,425
3,515,000 B- Primus Telecom Group, Sr. Notes,
11.750% due 8/1/04 3,435,913
Tele1 Europe B.V., Sr. Notes:
1,570,000 B- 13.000% due 5/15/09 1,648,500
1,000,000EUR B- 13.000% due 5/15/09 (b) 1,049,449
2,600,000 Caa* Versatel Telecom International NV, Sr. Notes,
13.250% due 5/15/08 2,775,500
2,135,000 B- Viatel Inc., Sr. Notes, 11.250% due 4/15/08 1,974,875
2,575,000 BB- Williams Communications Group Inc., Sr. Notes,
10.875% due 10/1/09 2,626,500
4,615,000 NR World Access Inc., Sr. Notes,
13.250% due 1/15/08 4,130,425
- -------------------------------------------------------------------------------------------
54,432,413
- -------------------------------------------------------------------------------------------
Telephone - Cellular -- 10.3%
Airgate PCS Inc., Sr. Sub. Discount Notes:
660,000 CCC Step bond to yield 13.500% due 10/1/09 384,450
2,060,000 NR Step bond to yield 13.500% due 10/1/09 (c) 1,493,500
2,460,000 CCC+ Alamosa PCS Holdings, Sr. Discount Notes,
step bond to yield 12.875% due 2/15/10 1,303,800
1,470,000 B- Centennial Cellular, Sr. Sub. Notes,
10.750% due 12/15/08 1,503,075
Clearnet Communications Inc.:
2,500,000CAD B Sr. Discount Notes, zero coupon due 5/15/08 1,085,458
2,000,000 NR Sr. Secured Notes, 10.125% due 7/7/07 2,000,000
</TABLE>
18 See Notes to Financial Statements.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 29, 2000 (continued)
<TABLE>
<CAPTION>
Face
Amount++ Rating(a) Security Value
==========================================================================================
<S> <C> <C> <C>
Telephone - Cellular -- 10.0% (continued)
2,285,000 B Crown Castle International Corp.,
Sr. Discount Notes, step bond to yield
10.375% due 5/15/11 .............................. $ 1,399,563
1,090,000 NR Dobson/Sygnet Communications, Sr. Notes,
12.250% due 12/15/08 ............................. 1,177,200
Dolphin Telecom PLC:
2,235,000 CCC+ Step bond to yield 11.500% due 6/1/08 ............ 983,400
2,025,000 Caa* Zero coupon due 6/1/08 ........................... 828,608
1,380,000 BB Global Crossing Holdings Ltd., Sr. Notes,
9.500% due 11/15/09 .............................. 1,338,600
Microcell Telecommunications Inc.,
Sr. Discount Notes:
950,000 B3* Step bond to yield 14.000% due 6/1/06 .......... 855,000
3,575,000 B- Step bond to yield 12.000% due 6/1/09 .......... 2,314,813
4,015,000 B- Millicom International Cellular S.A.,
Sr. Discount Notes, step bond to yield
13.500% due 6/1/06 ............................... 3,493,050
Nextel Communications Inc., Sr. Discount Notes:
3,530,000 B1* Step bond to yield 10.650% due 9/15/07 ........... 2,696,038
7,875,000 B1* Step bond to yield 9.950% due 2/15/08 ............ 5,591,250
Omnipoint Corp., Sr. Notes:
555,000 B2* 11.500% due 9/15/09 (b) .......................... 604,950
1,040,000 B2* Series A, 11.625% due 8/15/06 .................... 1,112,800
2,455,000 NR Spectrasite Holdings, Sr. Discount Notes,
step bond to yield 11.250% due 4/15/09 ........... 1,414,694
Telesystem International Wireless Inc.,
Sr. Discount Notes:
6,380,000 CCC+ Step bond to yield 13.250% due 6/30/07 ......... 4,099,150
3,020,000 CCC+ Step bond to yield 10.500% due 11/1/07 ......... 1,691,200
3,475,000 B3* Triton PCS Inc., Sr. Discount Notes,
step bond to yield 11.000% due 5/1/08 ............ 2,510,688
VoiceStream Wireless Corp.:
1,485,000 B2* Sr. Discount Notes, step bond to yield
11.875% due 11/15/09 (b) ....................... 935,550
3,200,000 B2* Sr. Notes, 10.375% due 11/15/09 (b) .............. 3,320,000
- ------------------------------------------------------------------------------------------
44,136,837
- ------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. 19
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 29, 2000 (continued)
<TABLE>
<CAPTION>
Face
Amount++ Rating(a) Security Value
=======================================================================================
<S> <C> <C> <C>
Textiles -- 0.2%
1,900,000DEM B3* Texon International PLC, Sr. Notes,
10.000% due 2/1/08 ......................... $ 841,743
- ---------------------------------------------------------------------------------------
Transportation - Marine -- 0.3%
1,255,000 B- Oglebay Norton Co., Sr. Sub. Notes,
10.000% due 2/1/09 ......................... 1,179,700
107,000 BB- Sea Containers Ltd., Series A, Sr. Sub.
Debentures, 12.500% due 12/1/04 ............ 109,140
- ---------------------------------------------------------------------------------------
1,288,840
- ---------------------------------------------------------------------------------------
Unregulated Power Generation -- 2.6%
AES Corp.:
4,955,000 Ba1* Sr. Notes, 9.500% due 6/1/09 ............... 4,893,063
2,350,000 Ba3* Sr. Sub. Notes, 10.250% due 7/15/06 ........ 2,367,625
3,550,000 BB+ Calpine Corp., Sr. Notes, 10.500% due 5/15/06 3,745,250
- ---------------------------------------------------------------------------------------
11,005,938
- ---------------------------------------------------------------------------------------
Wholesale Distributors -- 0.2%
1,045,000 B Buhrman US Inc., Sr. Sub. Notes,
12.250% due 11/1/09 (b) .................... 1,089,413
- ---------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost -- $423,533,719) ....................... 402,296,685
=======================================================================================
Shares Security Value
- ---------------------------------------------------------------------------------------
COMMON STOCK - 0.1%
- ---------------------------------------------------------------------------------------
Telecommunications -- 0.1%
12,250 Pagemart Nationwide Inc. (b) ................. 232,750
14,500 World Access Inc. ............................ 275,500
- ---------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost -- $261,807) ........................... 508,250
=======================================================================================
</TABLE>
20 See Notes to Financial Statements.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 29, 2000 (continued)
<TABLE>
<CAPTION>
Shares Security Value
=====================================================================================
<S> <C> <C>
PREFERRED STOCK - 0.4%
- -------------------------------------------------------------------------------------
Savings & Loan Association -- 0.4%
63,850 California Federal Preferred Capital Corp.,
Series A, 9.125% ............................. $1,404,700
48 Dobson Communications,
Payment-in-Kind, 13.000% ..................... 4,608
1,717 Viasystems, Inc., Series B, Payment-in-Kind .... 15,457
- -------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost -- $1,624,902) ........................... 1,424,765
=====================================================================================
WARRANTS (d) - 1.1%
- -------------------------------------------------------------------------------------
Broadcasting -- 0.1%
5,425 Australis Media, Expire 10/30/01 ............... 0
8,625 UIH Australia, Expire 5/15/06 .................. 258,750
- -------------------------------------------------------------------------------------
258,750
- -------------------------------------------------------------------------------------
Cable Television -- 0.0%
3,375 Wireless One Inc., Expire 10/19/00 ............. 844
- -------------------------------------------------------------------------------------
Internet Services -- 0.3%
1,005 Cybernet Internet Services International,
Sr. Notes, Expire 7/1/09 (b) ................. 175,875
4,050 Splitrock Services, Expire 7/15/08 ............. 931,500
8,700 WAM!Net Inc., Expire 3/1/05 (b) ................ 101,122
- -------------------------------------------------------------------------------------
1,208,497
- -------------------------------------------------------------------------------------
Paper -- 0.0%
4,800 SD Warren Co., Expire 12/15/06 ................. 84,480
- -------------------------------------------------------------------------------------
Telecommunications -- 0.7%
24,840 Pagemart Nationwide Inc., Expire 12/31/03 (b) .. 372,600
4,125 RSL Communications Ltd., Expire 11/15/06 (b) ... 165,000
1,000EUR Tele1 Europe B.V., Expire 5/15/09 .............. 312,909
1,005 Tele1 Europe B.V., Expire 5/15/09 (b) .......... 326,625
2,600 Versatel, Expire 5/15/08 (b) ................... 2,021,500
- -------------------------------------------------------------------------------------
3,198,634
- -------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. 21
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 29, 2000 (continued)
<TABLE>
<CAPTION>
Shares Security Value
=====================================================================================
<S> <C> <C>
Telephone Cellular -- 0.0%
4,125 Iridium World Communications Ltd.,
Expire 7/15/05 .............................. $ 41
- -------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost -- $595,263) ............................ 4,751,246
=====================================================================================
Face
Amount Security Value
- -------------------------------------------------------------------------------------
repurchase agreement -- 4.7%
- -------------------------------------------------------------------------------------
$ 20,306,000 J.P. Morgan Securities, 5.650% due 3/1/00;
Proceeds at maturity -- $20,309,143;
(Fully collateralized by U.S. Treasury Bills,
Notes & Bonds, 4.750% to 12.750%
due 5/25/00 to 8/15/28;
Market value -- $20,712,169)
(Cost -- $20,306,000) ....................... 20,306,000
=====================================================================================
TOTAL INVESTMENTS-- 100%
(Cost -- $446,321,691** ) ..................... $429,286,946
=====================================================================================
</TABLE>
++ Face amount denominated in U.S. dollars unless otherwise indicated.
(a) All ratings are by Standard & Poor's Ratings Service, except those
identified by an asterisk(*), which are rated by Moody's Investors
Service, Inc.
(b) 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.
(c) Security is issued with attached warrants.
(d) Non-income producing securities.
** Aggregate cost for Federal income tax purposes is substantially the same.
Currency abbreviations used in this schedule:
CAD -- Canadian Dollar
DEM -- German Mark
EUR -- Euro
GBP -- British Pound
See page 24 for definition of ratings.
22 See Notes to Financial Statements.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF BONDS BY COMBINED RATINGS
- --------------------------------------------------------------------------------
February 29, 2000
% of
Total Corporate
Moody's and/or Standard & Poor's Bonds and Notes
- --------------------------------------------------------------------------------
Ba BB 15.5%
B B 73.1
Caa CCC 6.4
NR NR 5.0
-----
100.0%
=====
See Notes to Financial Statements. 23
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BOND RATINGS (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Ratings Service ("Standard & Poor's") -- Ratings from "BBB" to
"C" may be modified by the addition of a plus (+) or minus (-) sign to show
relative standings within the major rating categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for bonds in this
category than for bonds in higher rated categories.
BB, B, CCC, -- Bonds rated "BB", "B", "CCC","CC" and "C" are regarded, on
CC and C balance, as pre-dominantly 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 Investors Service, Inc. ("Moody's") -- Numerical modifiers 1, 2 and 3
may be applied to each generic rating from "Baa" to "Ca," where 1 is the highest
and 3 the lowest ranking within its generic category.
Baa -- Bonds rated "Baa" are considered to be medium grade obligations;
that is, they are neither highly protected nor poorly secured.
Interest payment and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time.
These bonds lack outstanding investment characteristics and may
have speculative characteristics as well.
Ba -- Bonds rated "Ba" are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection
of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this
class.
B -- Bonds rated "B" generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period
of time may be small.
Caa -- Bonds rated "Caa" are of poor standing. These issues may be in
default, or present elements of danger may exist with respect to
principal or interest.
Ca -- Bonds rated "Ca" represent obligations which are speculative in a
high degree. Such issues are often in default or have other
marked shortcomings.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
24
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
February 29, 2000
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $446,321,691) .......... $ 429,286,946
Cash .................................................. 872
Interest and dividends receivable ..................... 8,914,025
Receivable for open forward foreign currency
contracts (Note 5) .................................. 1,323,543
- --------------------------------------------------------------------------------
Total Assets .......................................... 439,525,386
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased ...................... 2,811,371
Dividends payable ..................................... 881,717
Investment advisory fees payable ...................... 329,097
Payable for open forward foreign currency
contracts (Note 5) .................................. 246,314
Administration fees payable ........................... 69,483
Accrued expenses ...................................... 166,045
- --------------------------------------------------------------------------------
Total Liabilities ..................................... 4,504,027
- --------------------------------------------------------------------------------
Total Net Assets ......................................... $ 435,021,359
================================================================================
NET ASSETS:
Par value of capital shares ........................... $ 43,432
Capital paid in excess of par value ................... 526,858,523
Treasury stock, at cost (Note 10) ..................... (6,846,551)
Undistributed net investment income ................... 229,710
Accumulated net realized loss on investments .......... (69,293,985)
Net unrealized depreciation of investments and
foreign currencies .................................. (15,969,770)
- --------------------------------------------------------------------------------
Total Net Assets
(Equivalent to $10.02 per share on 43,432,103
shares of $0.001 par value outstanding;
500,000,000 shares authorized) ........................ $ 435,021,359
================================================================================
See Notes to Financial Statements. 25
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the Year Ended February 29, 2000
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest .................................................. $ 48,680,670
Dividends ................................................. 476,063
- --------------------------------------------------------------------------------
Total Investment Income ................................... 49,156,733
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) ......................... 4,145,340
Administration fees (Note 2) .............................. 921,187
Shareholder communications ................................ 90,300
Audit and legal ........................................... 56,100
Shareholder and system servicing fees ..................... 48,100
Registration fees ......................................... 41,011
Directors' fees ........................................... 40,200
Custody ................................................... 28,600
Other ..................................................... 29,001
- --------------------------------------------------------------------------------
Total Expenses ............................................ 5,399,839
Less: Investment advisory fee waiver (Note 2) ............ (167,472)
- --------------------------------------------------------------------------------
Net Expenses .............................................. 5,232,367
- --------------------------------------------------------------------------------
Net Investment Income ........................................ 43,924,366
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTES 3 AND 5):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) . (39,699,691)
Foreign currency transactions ........................... 1,727,584
- --------------------------------------------------------------------------------
Net Realized Loss ......................................... (37,972,107)
- --------------------------------------------------------------------------------
Change in Net Unrealized Depreciation of
Investments and Foreign Currencies:
Beginning of year ....................................... (20,663,994)
End of year ............................................. (15,969,770)
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Depreciation ................... 4,694,224
- --------------------------------------------------------------------------------
Net Loss on Investments and Foreign Currencies ............... (33,277,883)
- --------------------------------------------------------------------------------
Increase in Net Assets from Operations ....................... $ 10,646,483
================================================================================
26 See Notes to Financial Statements.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
For the Years Ended February 29, 2000 and February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income ............................ $ 43,924,366 $ 44,952,453
Net realized loss ................................ (37,972,107) (645,006)
(Increase) decrease in net unrealized depreciation 4,694,224 (49,320,029)
- -------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations 10,646,483 (5,012,582)
- -------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................ (43,409,984) (45,242,459)
- -------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders .................. (43,409,984) (45,242,459)
- -------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 10):
Net asset value of shares issued for
reinvestment of dividends ...................... -- 2,326,095
Treasury stock acquired .......................... (6,846,551) --
- -------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions ........................ (6,846,551) 2,326,095
- -------------------------------------------------------------------------------------------
Decrease in Net Assets .............................. (39,610,052) (47,928,946)
NET ASSETS:
Beginning of year ................................ 474,631,411 522,560,357
- -------------------------------------------------------------------------------------------
End of year* ..................................... $ 435,021,359 $ 474,631,411
===========================================================================================
*Includes undistributed (overdistributed) net
investment income of: ............................. $ 229,710 $ (755,015)
===========================================================================================
</TABLE>
See Notes to Financial Statements. 27
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 29, 2000, 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. Net investment income, net realized
gains and net assets were not affected by this adjustment; (j) estimates and
assumptions are required to be made regarding assets, liabilities and changes in
net assets resulting from operations when financial statements are prepared.
Changes in the economic
28
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ; and (k) certain prior year
numbers have been restated to reflect current year's presentation. Current net
investment income, net realized gains, and net assets were not affected by this
change.
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
SSB Citi Fund Management LLC ("SSBC"), formerly known as SSBC Fund
Management Inc., a subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"),
which, in turn, is a subsidiary of Citigroup Inc., acts as investment adviser to
the Fund. The Fund pays SSBC 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. For the year ended February 29, 2000, SSBC waived investment advisory
fees of $167,472.
SSBC 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 Salomon Smith
Barney Inc., another subsidiary of SSBH.
3. Investments
For the year ended February 29, 2000, the aggregate cost of purchases and
proceeds from sales of investments (including maturities but excluding
short-term securities) were:
================================================================================
Purchases $352,512,513
- --------------------------------------------------------------------------------
Sales 376,407,138
================================================================================
At February 29, 2000, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $ 9,823,373
Gross unrealized depreciation (26,858,118)
- --------------------------------------------------------------------------------
Net unrealized depreciation $(17,034,745)
================================================================================
29
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (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 29, 2000, 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 (Loss)
================================================================================
To Sell:
British Pound 3,441,750 $ 5,433,258 6/22/00 $ 117,666
Canadian Dollar 1,575,000 1,088,066 6/8/00 (15,543)
Euro 1,719,990 1,668,453 6/15/00 130,786
Euro 775,000 751,778 6/15/00 34,793
Euro 1,225,000 1,188,294 6/15/00 79,458
Euro 16,834,163 16,329,747 6/15/00 842,782
Euro 4,130,250 4,006,492 6/15/00 118,058
- --------------------------------------------------------------------------------
1,308,000
- --------------------------------------------------------------------------------
To Buy:
Euro 1,135,750 1,101,719 6/15/00 (56,974)
Euro 475,875 461,616 6/15/00 (25,038)
Euro 1,262,500 1,224,671 6/15/00 (66,741)
Euro 573,330 556,151 6/15/00 (28,760)
Euro 1,146,660 1,112,302 6/15/00 (18,878)
Euro 775,000 751,778 6/15/00 (9,194)
Euro 1,131,250 1,097,353 6/15/00 (25,186)
- --------------------------------------------------------------------------------
(230,771)
- --------------------------------------------------------------------------------
Total Unrealized Gain on Open
Forward Foreign Currency Contracts $ 1,077,229
================================================================================
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
30
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
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 29, 2000, 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 29, 2000, 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.
31
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (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 February 29, 2000, 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 29, 2000, the Fund had, for Federal income tax purposes,
approximately $57,559,000 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:
<TABLE>
<CAPTION>
2003 2004 2005 2007 2008
====================================================================================================
<S> <C> <C> <C> <C> <C>
Carryforward Amounts $ 9,404,000 $18,115,000 $ 239,000 $ 2,616,000 $27,185,000
====================================================================================================
</TABLE>
10. Capital Shares
Capital stock transactions were as follows:
Year Ended Year Ended
February 29, 2000 February 28, 1999
----------------- -----------------
Shares Amount Shares Amount
================================================================================
Shares issued on reinvestment -- -- 221,114 $2,326,095
================================================================================
On November 16, 1999, the Fund commenced a share repurchase plan. As of
February 29, 2000, repurchased shares totaled 804,000.
32
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each year ended February 28,
except where noted:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000(1) 1999 1998 1997 1996(2)
=======================================================================================================
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of Year $ 10.73 $ 11.87 $ 11.59 $ 11.36 $ 10.88
- -------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(3) 1.00 1.01 1.09 1.12 1.13
Net realized and
unrealized gain (loss) (0.76) (1.12) 0.28 0.21 0.65
- -------------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 0.24 (0.11) 1.37 1.33 1.78
- -------------------------------------------------------------------------------------------------------
Gain From Repurchase
of Treasury Stock 0.03 -- -- -- --
- -------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.98) (1.03) (1.09) (1.08) (1.27)
Net realized gains -- -- -- -- --
Capital -- -- -- (0.02) (0.03)
- -------------------------------------------------------------------------------------------------------
Total Distributions (0.98) (1.03) (1.09) (1.10) (1.30)
- -------------------------------------------------------------------------------------------------------
Net asset value,
end of Year $ 10.02 $ 10.73 $ 11.87 $ 11.59 $ 11.36
- -------------------------------------------------------------------------------------------------------
Total Return,
Based on Market Value(4) (13.40)% (2.44)% 10.96% 15.37% 18.83%
- -------------------------------------------------------------------------------------------------------
Total Return,
Based on Net Asset Value(4) 3.89% (0.72)% 12.43% 12.65% 17.80%
- -------------------------------------------------------------------------------------------------------
Net assets,
end of Year (millions) $ 435 $ 475 $ 523 $ 494 $ 477
- -------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses(3) 1.15% 1.17% 1.18% 1.20% 1.24%
Net investment income 9.62 9.03 9.19 9.89 9.74
- -------------------------------------------------------------------------------------------------------
Portfolio turnover rate 80% 84% 94% 61% 73%
- -------------------------------------------------------------------------------------------------------
Market value, End of Year $ 8.125 $ 10.438 $ 11.750 $ 11.625 $ 11.125
=======================================================================================================
</TABLE>
(1) For the year ended February 29, 2000.
(2) For the year ended February 29, 1996.
(3) The Investment Adviser has waived a portion of its fees for the year ended
February 29, 2000. If such fees were not waived, the per share decrease in
net investment income and actual expense ratio would have been $0.00* and
1.18%, respectively.
(4) The total return calculation assumes that dividends are reinvested in
accordance with the Fund's dividend reinvestment plan.
* Amount represents less than $0.01.
++ Total return is not annualized, as it may not be representative of the
total return for the year. + Annualized.
33
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of the Managed High Income Portfolio:
- --------------------------------------------------------------------------------
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 29, 2000, 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 the financial highlights for each of the years in
the five-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.
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 29, 2000, by correspondence with the custodian. As to securities
purchased or sold but not yet received or delivered, we performed other
appropriate auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Managed High Income Portfolio Inc. as of February 29, 2000, 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 five-year period then ended, in conformity with generally
accepted accounting principles.
KPMG LLP
New York, New York
April 13, 2000
34
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Increase
Net Realized (Decrease)
and Unrealized in Net Assets
Investment Net Investment 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,
1998 $12,823,273 $0.29 $11,293,219 $0.26 $(2,829,443) $(0.06) $8,463,776 $0.19
August 31,
1998 13,413,896 0.30 11,864,494 0.27 (36,436,763) (0.83) (24,572,269) (0.56)
November 30,
1998 12,226,853 0.28 10,852,489 0.25 (336,494) (0.01) 10,515,995 0.24
February 28,
1999 12,298,897 0.28 10,942,251 0.25 (10,362,335) (0.23) 579,916 0.01
May 31,
1999 12,214,442 0.28 10,822,682 0.25 (6,708,610) (0.15) 4,114,072 0.09
August 31,
1999 12,394,209 0.28 11,158,749 0.25 (16,122,251) (0.36) (4,963,502) (0.11)
November 30,
1999 12,460,713 0.28 11,152,594 0.25 (4,771,670) (0.11) 6,380,924 0.14
February 29,
2000 12,087,369 0.28 10,790,341 0.25 (5,675,352) (0.13) 5,114,989 0.12
=========================================================================================================================
</TABLE>
35
- --------------------------------------------------------------------------------
<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, 1998 $11.563 $11.90 $0.086 $11.62
April 30, 1998 11.375 11.84 0.086 11.51
May 31, 1998 11.438 11.81 0.086 11.53
June 30, 1998 11.625 11.74 0.086 11.55
July 31, 1998 11.438 11.76 0.086 11.50
August 31, 1998 9.750 10.99 0.086 10.58
September 30, 1998 11.000 10.83 0.086 10.73
October 31, 1998 10.688 10.42 0.086 10.34
November 30, 1998 10.750 10.97 0.086 10.79
December 31, 1998 10.250 10.85 0.084 10.34
January 29, 1999 10.250 10.94 0.084 10.26
February 28, 1999 10.438 10.73 0.084 10.40
March 31, 1999 10.438 10.77 0.084 10.34
April 30, 1999 10.313 10.88 0.084 10.35
May 31, 1999 10.188 10.57 0.084 10.35
June 30, 1999 10.188 10.41 0.084 10.23
July 31, 1999 9.813 10.36 0.081 9.66
August 31, 1999 9.250 10.21 0.081 9.28
September 30, 1999 8.875 10.10 0.081 8.77
October 31, 1999 8.688 10.01 0.081 8.87
November 30, 1999 8.313 10.12 0.081 8.31
December 31, 1999 8.125 10.13 0.081 8.11
January 31, 2000 8.625 10.05 0.081 8.61
February 29, 2000 8.125 10.02 0.081 8.18
================================================================================
36
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
ADDITIONAL SHAREHOLDER INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
On June 15, 1999, the annual meeting of the shareholders of the Fund was
held for the purpose of voting on the following matters:
1. To approve or disapprove for the Fund the election of Paul R. Hardin
and George M. Pavia as Directors for a three-year period; and
2. Ratification of the selection of KPMG LLP as the independent
auditors of the Fund for the current fiscal year.
The results of the vote on Proposal 1 were as follows:
% of Votes % of
Directors Votes For Shares Voted Against Shares Voted
================================================================================
Paul R. Hardin 41,714,321.538 98.83% 495,020.651 1.17%
George M. Pavia 41,705,900.031 98.81 503,442.158 1.19
================================================================================
The results of the vote on Proposal 2 were as follows:
% of Votes % of Votes % of
Votes For Shares Voted Against Shares Voted Abstained Shares Voted
================================================================================
41,717,710.000 98.84% 190,168.089 0.45% 301,464.100 0.71%
================================================================================
The following Directors, representing the balance of the Board of Directors,
continue to serve as Directors: Paolo M. Cucchi and Heath B. McLendon.
37
- --------------------------------------------------------------------------------
<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 PFPC Global Fund
Services ("PFPC"), formerly known as First Data Investor Services Group Inc., 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 PFPC 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
38
- --------------------------------------------------------------------------------
<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. PFPC 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.
PFPC 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. PFPC'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 PFPC, 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 PFPC Global Fund Services, P.O. Box 8030, Boston
Massachusetts 02266-8030 or by telephone at (800) 331-1710.
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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.
39
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<PAGE>
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TAX INFORMATION (UNAUDITED)
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For Federal tax purposes the Fund hereby designates for the fiscal year
ended February 29, 2000:
o A corporate dividends received deduction of 1.07%.
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40
<PAGE>
Managed
HIGH INCOME
PORTFOLIO INC.
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Directors
Paolo M. Cucchi
Paul R. Hardin
Heath B. McLendon, Chairman
George M. Pavia
James J. Crisona, Emeritus
Alessandro C. di Montezemolo, 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
Irving P. David
Controller
Christina T. Sydor
Secretary
Investment Adviser and Administrator
SSB Citi Fund Management LLC
388 Greenwich Street
New York, New York 10013
Transfer Agent
PFPC Global Fund Services
P.O. Box 8030
Boston, Massachusetts 02266-8030
Custodian
PNC Bank, N.A.
17th and Chestnut Streets
Philadelphia, Pennsylvania 19103
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<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 4/00
