Managed
HIGH INCOME
PORTFOLIO INC.
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[GRAPHIC OMITTED]
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Quarterly
Report
November 30, 1998
<PAGE>
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Managed
HIGH INCOME
PORTFOLIO INC.
LETTER TO
SHAREHOLDERS
November 30, 1998
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Dear Shareholder:
We are pleased to provide the third quarter report for the Managed High
Income Portfolio Inc. ("Fund") for the nine months ended November 30, 1998.
During the past nine months, the Fund paid income dividends totaling $0.77 per
share. The table below details the annualized distribution rate and the
nine-month total return for the Fund based on its November 30, 1998 net asset
value ("NAV") per share and the New York Stock Exchange ("NYSE") closing price.
Price Annualized Nine-Month
Per Share Distribution Rate Total Return
------------- ----------------- ------------
$10.97 (NAV) 9.41% (0.94)%
$10.75 (NYSE) 9.60% (1.93)%
As we have noted in recent market commentaries, we have decided to follow
a more conservative investment strategy that involves focusing on higher quality
high-yield bonds that, in our opinion, can provide greater price stability but
generate less income. This was due to increased market volatility and
uncertainty over future corporate profits. Our more conservative strategy caused
a slight decline in the Fund's earnings power. However, we remain confident that
when market and economic conditions warrant, we can quickly become more
aggressive by focusing on lower quality but riskier issues and increase the
Fund's earnings power.
Market and Economic Overview
The high-yield bond market generated relatively weak results during
September and October 1998, and did not perform as well as the other U.S. bond
market sectors. By the end of September, the Federal Reserve Board
1
<PAGE>
("Fed") began taking aggressive actions to restore investor confidence in the
financial markets. Many companies were finding it increasingly more difficult to
borrow money through the bond markets. As the financial markets were beginning
to freeze up and overall liquidity began to disappear, the Fed acted quickly to
cut short-term rates.
Investors had become increasingly reluctant to invest in new bond issues,
especially from companies that issue high-yield bonds. Many investors feared
that an economic recession in the U.S. was becoming more likely given the higher
turmoil in emerging economies such as Korea, Russia and Indonesia. Another major
investor concern was that a worldwide credit crunch in the financial markets
could throw the U.S. economy into a meaningful and protracted recession. By
acting swiftly and lowering short-term interest rates three times in the past
three months, the Fed was able to stabilize the U.S. financial markets and
restore investor confidence. As a result, the performance of the U.S. bond
market, especially the high-yield bond market, began to improve in the latter
half of October and November.
Portfolio Strategy and Market Outlook
The Fund remains cautiously positioned with a heavy emphasis in better
quality, intermediate maturity "B-" and "BB-" rated high-yield bonds. As of
November, 1998, the Fund's average maturity on a call-adjusted basis was
approximately 6.5 years. (Average maturity on a call-adjusted basis means that
the bonds callable earlier than their maturity are deemed to mature on the call
date.) In addition, the Fund continued to emphasize telecommunications issues as
well as cable and media issues as it has in recent years. However, given Asia's
continued problems, we remained underweighted in basic commodity industries such
as steel, forest products, energy and petrochemicals, industries that continue
to be negatively affected by worldwide deflationary trends during the period
under review. (Deflation is when prices actually fall. Deflation should not be
confused with disinflation, which is the slowing down of the rate at which
prices increase).
We believe that the Fund is appropriately positioned for current economic
conditions, an environment that has been characterized by slower economic growth
and somewhat weaker corporate profits. However, in 1999, we do not anticipate a
U.S. recession. Moreover, we will continue to maintain the Portfolio's
relatively sound credit quality orientation given higher volatility in the
financial markets.
2
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In closing, thank you for investing in the Managed High Income Portfolio.
We look forward to continuing to help you achieve your investment goals. Should
you have any questions about your investment in the Fund, please call the First
Data Investor Services Group Inc. at (800) 331-1710.
Sincerely,
/s/ Heath B. McLendon /s/ John C. Bianchi, C.F.A.
Heath B. McLendon John C. Bianchi, C.F.A.
Chairman Vice President and
Investment Officer
December 23, 1998
3
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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 31. 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 First Data Investors Services Group Inc. at (800)
331-1710.
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4
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SCHEDULE OF INVESTMENTS
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November 30, 1998 (unaudited)
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
=====================================================================================
CORPORATE BONDS AND NOTES - 98.4%
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<S> <C> <C> <C>
Aerospace/Defense -- 0.3%
$ 1,500,000 B BE Aerospace Inc., Sr. Sub. Notes,
9.500% due 11/1/08+.......................... $ 1,586,250
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Airlines -- 2.1%
9,375,000 BB Airplanes-Pass Through Trust, Corporate
Collateralized Mortgage Obligation,
10.875% due 3/15/19.......................... 9,954,000
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Automobile/Auto Parts/Truck Manufacturing -- 0.4%
340,000 B+ Breed Technologies Inc., Sr. Sub. Notes,
9.250% due 4/15/08........................... 283,900
1,580,000 B1* Exide Corp., Sr. Notes, 10.000% due 4/15/05.... 1,572,100
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1,856,000
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Banks/Savings and Loans -- 0.1%
275,000 B- BF Saul REIT, Sr. Notes, 9.750% due 4/1/08..... 251,625
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Broadcasting - TV, Cable and Radio -- 17.8%
525,000 B- Capstar Broadcasting Corp., Sr. Discount Notes,
step bond to yield 11.002% due 2/1/09........ 431,813
3,350,000 BB- Century Communications Corp., Sr. Notes,
8.750% due 10/1/07........................... 3,634,750
6,775,000 Ba3* Chancellor Media Corp., Sr. Sub. Notes,
9.000% due 10/1/08+.......................... 7,164,562
Citadel Broadcasting Co., Sr. Sub. Notes:
790,000 B- 10.250% due 7/1/07........................... 861,100
1,265,000 B- 9.250% due 11/15/08+......................... 1,315,600
3,925,000 B- Comcast UK Cable, Debentures, step bond to
yield 11.574% due 11/15/07................... 3,385,312
CSC Holdings Inc., Sr. Sub. Debentures:
9,220,000 BB- 9.875% due 2/15/13........................... 10,257,250
3,250,000 BB- 10.500% due 5/15/16.......................... 3,810,625
1,000,000 BB+ 7.625% due 7/15/18........................... 1,005,000
3,175,000 BB- 9.875% due 4/1/23............................ 3,532,187
NTL Inc., Sr. Notes:
1,000,000 B- Sr. Notes, 9.500% due 4/1/08................. 1,518,552
</TABLE>
See Notes To Financial Statements. 5
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SCHEDULE OF INVESTMENTS
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November 30, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
=====================================================================================
<S> <C> <C> <C>
Broadcasting - TV, Cable and Radio -- 17.8% (continued)
$ 2,025,000 B- Sr. Notes, 11.500% due 10/1/08............... $ 2,252,813
3,795,000 B- Step bond to yield 12.040% due 10/1/03....... 2,457,263
2,130,000 B- Step bond to yield 11.893% due 4/15/05....... 1,906,350
RCN Corp.:
4,600,000 B3* Sr. Discount Notes, step bond to yield
11.143% due 10/15/07....................... 2,691,000
2,350,000 B3* Sr. Notes, 10.000% due 10/15/08.............. 2,250,125
Rogers Cablesystems, Inc.:
2,275,000 BB+ Sr. Notes, Series B, 10.000% due 3/15/05..... 2,559,375
2,575,000 BB+ Sr. Sub. Debentures, 10.000% due 12/1/07..... 2,896,875
7,175,000 BB- Sr. Sub. Debentures, 11.000% due 12/1/15..... 8,412,687
1,250,000 BB- Rogers Communications, Sr. Notes,
9.125% due 1/15/06........................... 1,278,125
1,950,000 CCC+ Telemundo Holdings Inc., Sr. Discount Notes,
step bond to yield 11.110% due 8/15/08....... 1,074,937
2,350,000 B+ Telewest Communications PLC, Sr. Notes,
11.250% due 11/1/08.......................... 2,679,000
TV Azteca SA, Guaranteed Sr. Notes:
2,300,000 Ba3* Series A, 10.125% due 2/15/04................ 2,098,750
3,000,000 Ba3* Series B, 10.500% due 2/15/07................ 2,730,000
21,450,000 B United International Holdings Inc.,
Sr. Discount Notes, step bond to yield
11.023% due 2/15/08.......................... 12,548,250
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84,752,301
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Building/Construction -- 1.3%
Building Materials Corp., Sr. Notes:
500,000 BB Step bond to yield 10.015% due 7/1/04........ 508,750
500,000 BB 7.750% due 7/15/05........................... 501,250
1,570,000 BB 8.000% due 12/1/08+.......................... 1,585,700
1,490,000 B Columbus McKinnon Corp., Sr. Sub. Notes,
8.500% due 4/1/08............................ 1,449,025
Nortek Inc., Sr. Notes:
500,000 B+ 9.250% due 3/15/07........................... 526,250
1,750,000 B+ 9.125% due 9/1/07............................ 1,820,000
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6,390,975
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</TABLE>
6 See Notes To Financial Statements.
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<PAGE>
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SCHEDULE OF INVESTMENTS
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November 30, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
=====================================================================================
<S> <C> <C> <C>
Cellular and Other Wireless -- 8.5%
$ 9,885,000 B3* Clearnet Communications Inc.,
Sr. Discount Notes, step bond to yield
12.615% due 12/15/05......................... $ 8,599,950
Dolphin Telecom PLC, Sr. Discount Notes:
5,100,000 B- Step bond to yield 11.410% due 6/1/08+....... 1,925,250
4,525,000 B- Step bond to yield 11.570% due 6/1/08+....... 1,812,164
7,325,000 B- Iridium LLC Capital Corp., Guaranteed Notes,
14.000% due 7/15/05.......................... 6,885,500
8,375,000 B Millicom International Cellular SA, Sr. Discount
Notes, step bond to yield 13.486% due 6/1/06. 5,862,500
4,525,000 Ba3* Orange PLC, Sr. Notes, 8.000% due 8/1/08....... 4,615,500
2,800,000 B3* Pagemart Nationwide, Sr. Discount Notes,
step bond to yield 13.297% due 2/1/05........ 2,418,136
6,550,000 NR Pagemart Wireless Inc., Sr. Discount Notes,
step bond to yield 11.250% due 2/1/08........ 2,955,687
Telesystems International Wireless Inc.,
Sr. Discount Notes:
9,575,000 CCC+ Step bond to yield 12.395% due 6/30/07..... 4,308,750
2,500,000 CCC+ Step bond to yield 11.152% due 11/1/07..... 1,000,000
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40,383,437
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Chemicals -- 0.1%
680,000 NR Huntsman Corp., Sr. Sub. Notes,
9.500% due 7/1/07+........................... 674,900
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Diversified Conglomerate/Manufacturing -- 2.9%
600,000 B- Eagle-Picher Industries Inc., Sr. Sub. Notes,
9.375% due 3/1/08............................ 577,500
Fisher Scientific International Inc., Sr. Sub. Notes:
1,525,000 B- 9.000% due 2/1/08............................ 1,536,438
2,240,000 B- 9.000% due 2/1/08+........................... 2,256,800
2,265,000 B3* Interlake Corp., Sr. Sub. Debentures,
12.125% due 3/1/02........................... 2,287,650
4,650,000 B Outboard Marine Corp., Sr. Notes,
10.750% due 6/1/08........................... 4,603,500
</TABLE>
See Notes To Financial Statements. 7
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<PAGE>
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SCHEDULE OF INVESTMENTS
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November 30, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
=====================================================================================
<S> <C> <C> <C>
Diversified Conglomerate/Manufacturing -- 2.9% (continued)
$ 2,650,000 B+ Park-Ohio Industries, Sr. Sub. Notes,
9.250% due 12/1/07........................... $ 2,689,750
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13,951,638
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Diversified Conglomerate/Services -- 1.0%
2,225,000 BB- Clisa SA, Guaranteed Sr. Notes,
11.625% due 6/1/04+.......................... 1,540,812
3,250,000 B- Outsourcing Solutions Inc., Sr. Sub. Notes,
11.000% due 11/1/06.......................... 3,075,312
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4,616,124
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Electric Utilities -- 3.5%
AES Corp., Sr. Sub. Notes:
1,840,000 Ba1* 10.250% due 7/15/06.......................... 1,973,400
6,660,000 Ba1* 8.500% due 11/1/07........................... 6,660,000
Calpine Corp., Sr. Notes:
3,650,000 BB- 10.500% due 5/15/06.......................... 3,942,000
2,900,000 BB- 8.750% due 7/15/07........................... 3,037,750
519,134 BB Midland Cogeneration Venture Limited
Partnership, Midland Funding, Sr. Secured
Lease Obligation Bond, Series C,
10.330% due 7/23/02.......................... 551,581
850,000 BB- Niagara Mohawk Power Corp., step bond to yield
8.419% due 7/1/10............................ 637,500
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16,802,231
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Electronics - Computers -- 6.8%
1,800,000 B- Axiohm Transaction Solutions Inc.,
Sr. Sub. Notes, 9.750% due 10/1/07........... 1,701,000
1,995,000 B Celestica International Inc., Sr. Sub. Notes,
10.500% due 12/31/06......................... 2,184,525
5,275,000 B Fairchild Semiconductor Inc., Sr. Sub. Notes,
10.125% due 3/15/07.......................... 5,248,625
Unisys Corp., Sr. Notes:
6,200,000 Ba3* 12.000% due 4/15/03.......................... 6,975,000
9,175,000 Ba3* 11.750% due 10/15/04......................... 10,505,375
</TABLE>
8 See Notes To Financial Statements.
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<PAGE>
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SCHEDULE OF INVESTMENTS
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November 30, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
=====================================================================================
<S> <C> <C> <C>
Electronics - Computers -- 6.8% (continued)
$ 5,650,000 B- Viasystems Inc., Sr. Sub. Notes,
9.750% due 6/1/07............................ $ 5,664,125
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32,278,650
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Finance -- 1.7%
Amresco Inc., Sr. Sub. Notes, Series A:
1,500,000 CCC+ 10.000% due 3/15/04.......................... 1,110,000
1,275,000 CCC+ 9.875% due 3/15/05........................... 946,688
2,250,000 NR Ocwen Asset Investment, Sr. Notes,
11.500% due 7/1/05+.......................... 1,687,500
3,200,000 B- Ocwen Capital Trust, Guaranteed Notes,
10.875% due 8/1/27........................... 2,592,000
2,100,000 BB- Ocwen Financial Corp., Notes,
11.875% due 10/1/03.......................... 1,869,000
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8,205,188
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Food & Beverages -- 3.3%
2,675,000 B- B&G Foods Inc., Sr. Sub. Notes,
9.625% due 8/1/07............................ 2,654,938
Carrols Corp., Sr. Sub. Notes:
2,000,000 B+ 11.500% due 8/15/03.......................... 2,120,000
3,900,000 B- 9.500% due 12/1/08........................... 3,968,250
4,625,000 B Imperial Holly Corp., Sr. Sub. Notes,
9.750% due 12/15/07.......................... 4,578,750
2,600,000 B SC International Services Inc., Sr. Sub. Notes,
9.250% due 9/1/07............................ 2,652,000
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15,973,938
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Health Care/Drugs/Hospital Supplies -- 8.1%
Columbia/HCA Healthcare Corp., Notes:
2,500,000 BBB 7.000% due 7/1/07............................ 2,371,875
500,000 BBB 7.250% due 5/20/08........................... 480,000
750,000 BBB 8.700% due 2/10/10........................... 788,438
1,000,000 BBB 6.630% due 7/15/45........................... 977,500
500,000 Ba3* Fresenius Medical Cap Trust, Notes,
7.875% due 2/1/08............................ 500,000
2,675,000 Ba2* Graphic Controls Corp., Sr. Sub. Notes,
12.000% due 9/15/05.......................... 3,076,250
</TABLE>
See Notes To Financial Statements. 9
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<PAGE>
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SCHEDULE OF INVESTMENTS
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November 30, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
=====================================================================================
<S> <C> <C> <C>
Health Care/Drugs/Hospital Supplies -- 8.1% (continued)
$ 6,600,000 BB ICN Pharmaceuticals Inc., Sr. Notes,
9.250% due 8/15/05........................... $ 6,509,250
Integrated Health Services Inc., Sr. Sub. Notes:
2,575,000 B- 9.500% due 9/15/07........................... 2,523,500
1,215,000 B- 9.250% due 1/15/08........................... 1,187,663
12,000,000 B- Magellan Health Services Inc., Sr. Sub. Notes,
9.000% due 2/15/08+.......................... 11,190,000
4,500,000 B- Mariner Post-Acute Network, Sr. Sub. Notes,
9.500% due 11/1/07........................... 3,825,000
Sun Healthcare Group Inc., Sr. Sub. Notes:
3,250,000 B2* 9.500% due 7/1/07............................ 2,892,500
2,775,000 B2* 9.375% due 5/1/08............................ 2,414,250
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38,736,226
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Hotel, Casinos and Gaming -- 3.4%
1,300,000 B Aztar Corp., Sr. Sub. Notes,
13.750% due 10/1/04.......................... 1,443,000
210,000 BB+ Circus Circus Enterprise, Sr. Sub. Notes,
9.250% due 12/1/05........................... 217,088
3,250,000 B- Courtyard By Marriott, Sr. Secured Notes,
10.750% due 2/1/08........................... 3,396,250
3,250,000 BB Grand Casinos Inc., First Mortgage,
10.125% due 12/1/03.......................... 3,562,813
HMH Properties:
930,000 BB Company Guaranteed, 7.875% due 8/1/05........ 931,163
2,420,000 BB Sr. Notes, 7.875% due 8/1/08................. 2,423,025
3,025,000 BB+ Mohegan Tribal Gaming Authority,
Sr. Secured Notes, 13.500% due 11/15/02...... 3,660,250
400,000 B+ Station Casinos, Sr. Sub. Notes,
8.875% due 12/1/08+.......................... 406,000
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16,039,589
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Insurance -- 1.0%
3,225,000 BB+ SIG Capital Trust, Guaranteed Notes,
9.500% due 8/15/27........................... 2,628,375
</TABLE>
10 See Notes To Financial Statements.
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<PAGE>
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SCHEDULE OF INVESTMENTS
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November 30, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
=====================================================================================
<S> <C> <C> <C>
Insurance -- 1.0% (continued)
$ 2,500,000 BB- Veritas Capital Trust, Guaranteed Notes,
10.000% due 1/1/28+.......................... $ 2,306,250
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4,934,625
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Leisure -- 1.6%
3,590,000 B Regal Cinemas Inc., Sr. Sub. Notes,
9.500% due 6/1/08+........................... 3,778,475
4,000,000 B3* SFX Entertainment Inc., Sr. Sub. Notes,
9.125% due 2/1/08............................ 4,020,000
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7,798,475
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Machinery--0.3%
1,217,000 B Alvey Systems Inc., Sr. Sub. Notes,
11.375% due 1/31/03.......................... 1,217,000
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Metals/Mining -- 0.5%
2,425,000 B- Haynes International Inc., Sr. Notes,
11.625% due 9/1/04........................... 2,321,938
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Miscellaneous -- 0.6%
2,900,000 B Intertek Finance PLC., Sr. Sub. Notes, Series B,
10.250% due 11/1/06.......................... 2,907,250
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Oil and Natural Gas -- 3.0%
2,125,000 B Canadian Forest Oil Ltd., Sr. Sub. Notes,
8.750% due 9/15/07........................... 2,093,125
4,350,000 B+ Clark USA Inc., Sr. Notes, 10.875% due 12/1/05. 4,165,125
Ocean Energy Inc.:
2,750,000 BB- Sr. Sub. Debentures, 9.750% due 10/1/06...... 2,935,625
2,625,000 BB- Sr. Sub. Notes, 10.375% due 10/15/05......... 2,795,625
2,150,000 B- Stone Energy Corp., Sr. Sub. Notes,
8.750% due 9/15/07........................... 2,171,500
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14,161,000
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Oil Services -- 1.5%
1,305,000 B+ Cliffs Drilling Co., Sr. Notes,
10.250% due 5/15/03.......................... 1,383,300
2,150,000 B+ ICO Inc., Sr. Notes, 10.375% due 6/1/07........ 2,010,250
1,350,000 BB+ J. Ray McDermott SA, Sr. Sub. Notes,
9.375% due 7/15/06........................... 1,419,188
</TABLE>
See Notes To Financial Statements. 11
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<PAGE>
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SCHEDULE OF INVESTMENTS
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November 30, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
=====================================================================================
<S> <C> <C> <C>
Oil Services -- 1.5% (continued)
$ 2,600,000 BB Pride Petroleum Services Inc., Sr. Notes,
9.375% due 5/1/07............................ $ 2,548,000
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7,360,738
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Packaging/Containers -- 1.0%
1,850,000 B Huntsman Packaging Corp., Sr. Notes,
9.125% due 10/1/07+.......................... 1,850,000
3,000,000 B Impress Metal Packaging Holdings,
Sr. Sub. Notes, 9.875% due 5/29/07........... 1,942,867
1,050,000 B- Tekni-Plex Inc., Company Guaranteed,
9.250% due 3/1/08............................ 1,092,000
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4,884,867
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Paper/Forest Products and Printing -- 2.6%
2,500,000 BB Malette Inc., Sr. Secured Notes,
12.250% due 7/15/04.......................... 2,700,000
Riverwood International, Company Guaranteed:
580,000 B- 10.625% due 8/1/07........................... 597,400
625,000 CCC+ 10.875% due 4/1/08........................... 593,750
7,525,000 B+ S.D. Warren Co., Sr. Sub. Notes,
12.000% due 12/15/04......................... 8,239,875
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12,131,025
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Personal Care Products/Cosmetics -- 1.4%
3,500,000 B- Revlon Consumer Products, Sr. Sub. Notes,
8.625% due 2/1/08............................ 3,465,000
4,300,000 B- Revlon Worldwide, Sr. Discount Notes, zero
coupon bond to yield 12.030% due 3/15/01..... 3,010,000
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6,475,000
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Pollution Control/Waste Removal -- 0.5%
2,025,000 BB- Allied Waste North America Inc., Sr. Sub. Notes,
10.250% due 12/1/06.......................... 2,376,844
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Publishing -- 1.1%
3,250,000 B Middleweb PLC, Sr. Notes,
10.500% due 5/30/08.......................... 5,042,585
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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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November 30, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
=====================================================================================
<S> <C> <C> <C>
Real Estate Development/REITS -- 0.3%
$ 1,250,000 BB+ Trizec Finance Ltd., Sr. Notes,
10.875% due 10/15/05......................... $ 1,381,250
- -------------------------------------------------------------------------------------
Retail -- 1.3%
2,400,000 B- Advance Holding Corp., Sr. Discount Notes,
step bond to yield 12.769% due 4/15/09+...... 1,416,000
3,100,000 B- Advance Stores Co., Inc., Sr. Sub. Notes,
10.250% due 4/15/08+......................... 3,193,000
1,725,000 BB DR Structured Finance, Pass Through
Certificates, 8.375% due 8/15/15............. 1,772,558
- -------------------------------------------------------------------------------------
6,381,558
- -------------------------------------------------------------------------------------
Telecommunications -- 18.4%
Colt Telecommunications Group PLC:
800,000 B Sr. Notes, 10.125% due 11/30/07.............. 1,307,275
660,000 B Sr. Notes, 8.875% due 11/30/07............... 402,058
6,085,000 B Sr. Notes, 7.625% due 7/31/08................ 3,580,893
4,400,000 B Step bond to yield 11.598% due 12/15/06...... 3,707,000
8,250,000 NR E. Spire Communications, Sr. Discount Notes,
step bond to yield 11.032% due 7/1/08........ 4,207,500
Esprit Telecom Group PLC, Sr. Notes:
2,300,000 B- 11.500% due 12/15/07......................... 2,351,750
2,000,000++ B- 11.500% due 12/15/07 ........................ 1,171,043
1,300,000 B- 10.875% due 6/15/08.......................... 1,300,000
4,615,000 NR Facilicom International Inc., Sr. Notes,
10.500% due 1/15/08.......................... 3,830,450
3,900,000 B Hermes Europe Railtel Inc., Sr. Notes,
11.500% due 8/15/07.......................... 4,270,500
Impsat Corp:
950,000 BB- Company Guaranteed, 12.125% due 7/15/03...... 830,063
1,200,000 B+ Sr. Notes, 12.375% due 6/15/08............... 1,032,000
5,975,000 B Intermedia Communications Co.,
Sr. Discount Notes, step bond to yield
11.945% due 5/15/06.......................... 4,780,000
2,665,000 B Level 3 Communications Inc., Sr. Notes,
9.125% due 5/1/08............................ 2,668,331
</TABLE>
See Notes To Financial Statements. 13
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
November 30, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
=====================================================================================
<S> <C> <C> <C>
Telecommunications -- 18.4% (continued)
$ 4,305,000 B Metromedia Fiber Network, Sr. Notes,
10.000% due 11/15/08+........................ $ 4,466,438
Metronet Communications Inc.:
11,400,000 B Sr. Discount Notes, step bond to yield
10.036% due 6/15/08+....................... 7,182,000
6,050,000 B Sr. Notes, 12.000% due 8/15/07............... 6,685,250
1,785,000 B Sr. Notes, 10.625% due 11/1/08+.............. 1,918,875
6,775,000 B Nextlink Communications, Sr. Notes,
12.500% due 4/15/06.......................... 7,486,375
5,025,000 B Primus Telecommunications Group, Sr. Notes,
11.750% due 8/1/04........................... 5,226,000
PSINet Inc., Sr. Notes:
4,225,000 B- 10.000% due 2/15/05.......................... 4,267,250
2,500,000 B- 11.500% due 11/1/08+......................... 2,675,000
990,000 BB+ Qwest Communications International Inc.,
Sr. Discount Notes, step bond to yield
9.274% due 10/15/07.......................... 762,300
2,288,000 B- RSL Communications Ltd., Sr. Notes,
12.250% due 11/15/06......................... 2,436,720
4,050,000 NR Splitrock Services Inc., 11.750% due 7/15/08... 3,665,250
1,195,000 B- Verio Inc., Sr. Notes, 11.250% due 12/1/08+.... 1,242,800
2,600,000 NR Versatel Telecommunications,
13.250% due 5/15/08+......................... 2,619,500
2,900,000 NR WAM!Net Inc., step bond to yield
13.299% due 3/1/05........................... 1,566,000
- -------------------------------------------------------------------------------------
87,638,621
- -------------------------------------------------------------------------------------
Textiles/Apparel -- 0.5%
4,400,000 B Texon International, Sr. Notes,
10.000% due 2/1/08........................... 2,251,005
- -------------------------------------------------------------------------------------
Transportation/Trucking -- 1.5%
1,000,000 B+ American Reefer Co. Ltd., First Mortgage,
10.250% due 3/1/08........................... 760,000
3,130,000 BB- Sea Containers Ltd., Sr. Sub. Debentures,
12.500% due 12/1/04.......................... 3,443,000
2,300,000 B+ Stena Line AB, Sr. Notes, 10.625% due 6/1/08... 2,093,000
</TABLE>
14 See Notes To Financial Statements.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
November 30, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
=====================================================================================
<S> <C> <C> <C>
Transportation/Trucking -- 1.5% (continued)
$ 1,425,000 B+ TBS Shipping International Ltd., First Mortgage,
10.000% due 5/1/05+.......................... $ 798,000
- -------------------------------------------------------------------------------------
7,094,000
- -------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost--$479,691,203)........................... 468,810,853
=====================================================================================
<CAPTION>
Shares Security Value
=====================================================================================
<S> <C> <C>
- -------------------------------------------------------------------------------------
COMMON STOCK -- 0.0%
- -------------------------------------------------------------------------------------
Cellular & Other Wireless -- 0.0%
12,250 Pagemart Nationwide Inc. (Cost--$0)............ 82,688
=====================================================================================
- -------------------------------------------------------------------------------------
PREFERRED STOCK -- 1.0%
- -------------------------------------------------------------------------------------
Banking -- 0.4%
63,850 California Federal Preferred Capital Corp.,
Series A, Exchangeable 9.125%................ 1,656,110
- -------------------------------------------------------------------------------------
Broadcasting -- 0.4%
16,604 Capstar Broadcasting, Series E,
Exchangeable 12.625%, Payment-in-kind........ 2,025,688
- -------------------------------------------------------------------------------------
Electronics - Computers -- 0.2%
42,481 Viasystems Inc., Series B, Payment-in-kind..... 764,663
- -------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost--$4,383,158)............................. 4,446,461
=====================================================================================
- -------------------------------------------------------------------------------------
WARRANTS# - 0.6.0%
- -------------------------------------------------------------------------------------
Broadcasting -- 0.0%
8,625 UIH Australia Inc., Expire 5/15/06............. 43,125
3,375 Wireless One Inc., Expire 10/19/00............. 844
- -------------------------------------------------------------------------------------
43,969
- -------------------------------------------------------------------------------------
Cellular & Other Wireless -- 0.3%
32,175 Clearnet Communications Inc.,
Expire 9/15/05+.............................. 160,875
</TABLE>
See Notes To Financial Statements. 15
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
November 30, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
=====================================================================================
<S> <C> <C>
Cellular & Other Wireless -- 0.3% (continued)
4,725 Globalstart Telecommunications,
Expire 2/15/04............................... $ 420,525
4,125 Iridium World Communications Ltd.,
Expire 7/15/05............................... 573,292
3,900 Nextel Communications, Expire 5/23/99.......... 39
24,840 Pagemart Inc., Expire 12/31/03+................ 124,200
- -------------------------------------------------------------------------------------
1,278,931
- -------------------------------------------------------------------------------------
Paper/Forest Products and Printing -- 0.0%
4,800 SD Warren Co., Expire 12/15/06................. 84,480
- -------------------------------------------------------------------------------------
Telecommunications -- 0.3%
3,650 Allegiance Telecom Inc., Expire 2/3/08......... 43,800
5,000 Colt Telecom, Expire 12/31/06.................. 1,000,000
60,500 Metronet Communications, Expire 8/15/07........ 212,234
4,475 Primus Telecommunications Group,
Expire 8/1/04................................ 22,375
4,125 RSL Communications Ltd., Expire 11/15/06....... 165,000
2,600 Versatel Telecommunications, Expire 5/15/08.... 32,500
8,700 WAM!Net Inc., Expire 3/1/05.................... 69,600
- -------------------------------------------------------------------------------------
1,545,509
- -------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost--$1,640,415)............................. 2,952,889
=====================================================================================
TOTAL INVESTMENTS -- 100%
(Cost--$485,714,776** )........................ $476,292,891
=====================================================================================
</TABLE>
(a) All ratings are by Standard & Poor's Ratings Service, except that those
identified by an asterisk(*) are rated by Moody's Investors Service Inc.
# Non-income producing security.
+ Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
++ Represents local currency of German Mark.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 18 for definition of ratings.
16 See Notes To Financial Statements.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF BONDS BY COMBINED RATINGS
- --------------------------------------------------------------------------------
November 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
% of
Total Corporate
Moody's and/or Standard & Poor's Bonds and Notes
----------------------------------------------------------------------------
Baa BBB 1.0%
Ba BB 32.6
B B 60.0
Caa CCC 1.9
NR NR 4.5
-----
100.0%
=====
17
- --------------------------------------------------------------------------------
<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" and "CC" are regarded, on balance,
CC and C as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the
obligation. "BB" represents the lowest degree of speculation and
"C" the highest degree of speculation. While such bonds will
likely have some quality and protective characteristics, they are
outweighed by large uncertainties or major risk exposures to
adverse conditions.
Moody's 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.
18
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
November 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost--$485,714,776) .............. $ 476,292,891
Receivable for securities sold .......................... 3,822,056
Interest receivable ..................................... 10,570,698
- --------------------------------------------------------------------------------
Total Assets ............................................ 490,685,645
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased ........................ 2,629,719
Payable to bank ......................................... 601,379
Dividends payable ....................................... 1,164,562
Payable for open forward foreign currency
contracts (Note 5) .................................... 388,869
Investment advisory fees payable ........................ 356,818
Administration fees payable ............................. 85,126
Accrued expenses ........................................ 260,179
- --------------------------------------------------------------------------------
Total Liabilities ....................................... 5,486,652
- --------------------------------------------------------------------------------
Total Net Assets ........................................... $ 485,198,993
================================================================================
NET ASSETS:
Par value of capital shares ............................. $ 44,236
Capital paid in excess of par value ..................... 526,857,718
Overdistributed net investment income ................... (370,439)
Accumulated net realized loss from
security transactions ................................. (31,522,015)
Net unrealized depreciation on investments
and foreign currencies ................................ (9,810,507)
- --------------------------------------------------------------------------------
Total Net Assets
(Equivalent to $10.97 per share on 44,236,103
shares of $0.001 par value outstanding;
500,000,000 shares authorized) .......................... $ 485,198,993
================================================================================
See Notes to Financial Statements. 19
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the Nine Months Ended November 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest .................................................... $ 37,247,257
Dividends ................................................... 1,216,765
- --------------------------------------------------------------------------------
Total Investment Income ..................................... 38,464,022
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) ........................... 3,424,787
Administration fees (Note 2) ................................ 761,064
Shareholder communications .................................. 125,589
Audit and legal ............................................. 39,698
Directors' fees ............................................. 29,112
Registration fees ........................................... 27,978
Shareholder and system servicing fees ....................... 16,331
Custody ..................................................... 15,878
Other ....................................................... 13,383
- --------------------------------------------------------------------------------
Total Expenses .............................................. 4,453,820
- --------------------------------------------------------------------------------
Net Investment Income .......................................... 34,010,202
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTES 3 AND 5):
Realized Loss From:
Security transactions (excluding short-term securities) ... (2,773,793)
Foreign currency transactions ............................. (127,990)
- --------------------------------------------------------------------------------
Net Realized Loss ........................................... (2,901,783)
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation)
of Investments and Foreign Currencies:
Beginning of period ....................................... 26,890,410
End of period ............................................. (9,810,507)
- --------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation ..................... (36,700,917)
- --------------------------------------------------------------------------------
Net Loss on Investments and Foreign Currencies ................. (39,602,700)
- --------------------------------------------------------------------------------
Decrease in Net Assets From Operations ......................... $ (5,592,498)
================================================================================
20 See Notes to Financial Statements.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
For the Nine Months Ended November 30, 1998 (unaudited)
and the Year Ended February 28, 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
November 30 February 28
========================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income ............................... $ 34,010,202 $ 46,590,619
Net realized gain (loss) ............................ (2,901,783) 7,736,886
(Increase) decrease in net unrealized depreciation .. (36,700,917) 5,091,961
- ----------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations.... (5,592,498) 59,419,466
- ----------------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income ............................... (34,094,960) (47,244,754)
- ----------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders ..................... (34,094,960) (47,244,754)
- ----------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 10):
Net asset value of shares issued for
reinvestment of dividends ......................... 2,326,094 16,479,649
- ----------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions ........................... 2,326,094 16,479,649
- ----------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets ...................... (37,361,364) 28,654,361
NET ASSETS:
Beginning of period ................................. 522,560,357 493,905,996
- ----------------------------------------------------------------------------------------
End of period* ...................................... $ 485,198,993 $ 522,560,357
========================================================================================
*Includes overdistributed net investment income of: .... $ (370,439) $ (157,691)
========================================================================================
</TABLE>
See Notes to Financial Statements. 21
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Managed High Income Portfolio Inc. ("Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company.
The following are significant accounting policies consistently followed by
the Fund: (a) security transactions are accounted for on trade date; (b)
securities are valued at the mean between the quoted bid and ask prices provided
by an independent pricing service that are based on transactions in corporate
obligations, quotations from corporate bond dealers, market transactions in
comparable securities and various relationships between securities; (c)
securities maturing within 60 days are valued at cost plus accreted discount or
minus amortized premium, which approximates value; (d) gains or losses on the
sale of securities are calculated by using the specific identification method;
(e) interest income, adjusted for accretion of original issue discount, is
recorded on an accrual basis; (f) dividend income is recorded by the Fund on the
ex-dividend date; foreign dividends are recorded on the ex-dividend date or as
soon as practical after the Fund determines the existence of a dividend
declaration after exercising reasonable due diligence; (g) the accounting
records of the Fund are maintained in U.S. dollars. All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars on the date
of valuation. Purchases and sales of securities and income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income or expense amounts
recorded and collected or paid are adjusted when reported by the custodian; (h)
the Fund intends to comply with the applicable provisions of the Internal
Revenue Code of 1986, as amended, pertaining to regulated investment companies
and to make distributions of taxable income sufficient to relieve it from
substantially all Federal income and excise taxes; (i) the character of income
and gains to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles. At
February 28, 1998, reclassifications were made to the Fund's capital accounts to
reflect permanent book/tax differences and income and gains available for
distributions under income tax regulations. Accordingly, overdistributed net
investment income amounting to $372,685 was reclassified to paid-in capital. Net
investment income, net realized gains and net assets were not affected by this
adjustment; and (j) estimates and assumptions are required to be made regarding
assets,
22
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
liabilities and changes in net assets resulting from operations when financial
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ.
In addition, the Fund may enter into forward exchange contracts in order
to hedge against foreign currency risk. These contracts are marked to market
daily by recognizing the difference between the contract exchange rate and the
current market rate as an unrealized gain or loss. Realized gains or losses are
recognized when contracts are settled.
2. Investment Advisory Agreement, Administration Agreement and Other
Transactions
Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith Barney
Holdings Inc. ("SSBH"), acts as investment adviser to the Fund. The Fund pays
MMC an advisory fee calculated at an annual rate of 0.90% of the average daily
net assets. This fee is calculated daily and paid monthly.
MMC also acts as the Fund's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the average daily net assets. This fee
is calculated daily and paid monthly.
All officers and one Director of the Fund are employees of Salomon Smith
Barney Inc., another subsidiary of SSBH.
3. Investments
For the nine months ended November 30, 1998, the aggregate cost of
purchases and proceeds from sales of investments (including maturities but
excluding short-term securities) were:
================================================================================
Purchases $330,033,330
- --------------------------------------------------------------------------------
Sales 329,193,913
================================================================================
At November 30, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $ 10,198,600
Gross unrealized depreciation (19,620,485)
- --------------------------------------------------------------------------------
Net unrealized depreciation $ (9,421,885)
================================================================================
23
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4. Repurchase Agreements
The Fund purchases, and its custodian takes possession of, U.S. government
securities from banks subject to agreements to resell the securities to the
sellers at a future date (generally, the next business day) at an agreed-upon
higher repurchase price. The Fund requires continual maintenance of the market
value of the collateral in amounts at least equal to the repurchase price.
5. Forward Foreign Currency Contracts
At November 30, 1998, the Fund had open forward foreign currency contracts
as described below. The Fund bears the market risk that arises from changes in
foreign currency exchange rates. The unrealized loss on the contracts reflected
in the accompanying financial statements were as follows:
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Loss
================================================================================
To Sell:
British Pound 898,900 $1,478,609 2/25/99 $ (22,391)
European Currency Units 1,784,660 2,077,046 3/1/99 (7,911)
German Mark 9,182,781 5,431,961 12/3/98 (158,501)
German Mark 672,917 398,512 12/23/98 (21,015)
German Mark 6,312,883 3,744,596 1/28/99 (179,051)
- --------------------------------------------------------------------------------
Total Unrealized Loss on Open
Forward Foreign Currency Contracts $(388,869)
================================================================================
6. Futures Contracts
Initial margin deposits made upon entering into futures contracts are
recognized as assets. Securities equal to the initial margin amount are
segregated by the custodian in the name of the broker. Additional securities are
also segregated up to the current market value of the futures contract. During
the period the futures contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by marking to market on a daily
basis to reflect the market value of the contract at the end of each day's
trading. Variation margin payments are received or made and recognized as assets
due from or liabilities due to broker, depending upon whether unrealized gains
or losses are incurred. When the contract is closed, the Fund records a realized
gain or loss equal to the difference between the proceeds from (or cost of) the
closing transactions and the Fund's basis in the contract.
24
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Fund enters into such contracts to hedge a portion of its portfolio.
The Fund bears the market risk that arises from changes in the value of the
financial instruments and securities indices (futures contracts).
At November 30, 1998, the Fund had no open futures contracts.
7. Options Contracts
Premiums paid when put or call options are purchased by the Fund,
represent investments, which are marked-to-market daily. When a purchased option
expires, the Fund will realize a loss in the amount of the premium paid. When
the Fund enters into closing sales transaction, the Fund will realize a gain or
loss depending on whether the sales proceeds from the closing sales transaction
are greater or less than the premium paid for the option. When the Fund
exercises a put option, it will realize a gain or loss from the sale of the
underlying security and the proceeds from such sale will be decreased by the
premium originally paid. When the Fund exercises a call option, the cost of the
security which the Fund purchases upon exercise will be increased by the premium
originally paid.
At November 30, 1998, the Fund had no open purchased call or put option
contracts.
When the Fund writes a covered call or put option, an amount equal to the
premium received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a gain
equal to the amount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain or loss depending upon whether
the cost of the closing transaction is greater or less than the premium
originally received, without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is eliminated.
When a written call option is exercised, the proceeds of the security sold will
be increased by the premium originally received. When a written put option is
exercised, the amount of the premium received will reduce the cost of the
security which the Fund purchased upon exercise. When written index options are
exercised, settlement is made in cash.
25
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The risk associated with purchasing options is limited to the premium
originally paid. The Fund enters into options for hedging purposes. The risk in
writing a call option is that the Fund gives up the opportunity to participate
in any increase in the price of the underlying security beyond the exercise
price. The risk in writing a put option is that the Fund is exposed to the risk
of loss if the market price of the underlying security declines.
During the nine months ended November 30, 1998, the Fund did not write any
covered call or put options.
8. Payment-in-Kind Securities
The Fund may invest in payment-in-kind ("PIK") securities. PIK securities
pay interest through the issuance of additional securities. PIK securities carry
a risk in that, unlike bonds which pay interest throughout the period to
maturity, the Fund will realize no cash until the cash payment dates unless a
portion of such securities are sold. If the issuer of a PIK security defaults,
the Fund may obtain no return at all on its investment.
9. Capital Loss Carryforward
At February 28, 1998, the Fund had, for Federal income tax purposes,
$27,703,000 of loss carryforwards available to offset future capital gains. To
the extent that these carryforward losses are used to offset capital gains, it
is probable that the gains so offset will not be distributed. The amount and
expiration of the carryforwards are indicated below. Expiration occurs on the
last day in February of the year indicated:
2003 2004 2005
================================================================================
Carryforward Amounts $9,349,000 $18,115,000 $239,000
================================================================================
10. Capital Shares
Capital stock transactions were as follows:
Nine Months Ended Year Ended
November 30, 1998 February 28, 1998
----------------- -----------------
Shares Amount Shares Amount
================================================================================
Shares issued on reinvestment 221,114 $2,326,094 1,412,894 $16,479,649
================================================================================
26
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each year ended February 28,
except where noted:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1998(1) 1998 1997 1996(2) 1995 1994(3)
================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ........... $ 11.87 $ 11.59 $ 11.36 $ 10.88 $ 12.39 $ 12.00
- ----------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income ......... 0.77 1.09 1.12 1.13 1.12 0.98
Net realized and
unrealized gain (loss) ...... (0.90) 0.28 0.21 0.65 (1.48) 0.51
- ----------------------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations ............... (0.13) 1.37 1.33 1.78 (0.36) 1.49
- ----------------------------------------------------------------------------------------------------------------
Offering Costs Credited (Charged)
to Paid-In Capital ............ -- -- -- -- 0.00* (0.02)
- ----------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income ......... (0.77) (1.09) (1.08) (1.27) (1.00) (0.96)
Net realized gains ............ -- -- -- -- (0.15) (0.12)
Capital ....................... -- -- (0.02) (0.03) -- --
- ----------------------------------------------------------------------------------------------------------------
Total Distributions ............. (0.77) (1.09) (1.10) (1.30) (1.15) (1.08)
- ----------------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period ................. $ 10.97 $ 11.87 $ 11.59 $ 11.36 $ 10.88 $ 12.39
- ----------------------------------------------------------------------------------------------------------------
Total Return,
Based on Market Value(4) ..... (1.93)%++ 10.96% 15.37% 18.83% 0.14% 6.85%++
- ----------------------------------------------------------------------------------------------------------------
Total Return,
Based on Net Asset Value(4) .. (0.94)%++ 12.43% 12.65% 17.80% (2.18)% 12.67%++
- ----------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (millions) ...... $ 485 $ 523 $ 494 $ 477 $ 457 $ 520
- ----------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses ...................... 1.18%+ 1.18% 1.20% 1.24% 1.24% 1.19%+
Net investment income ......... 8.97+ 9.19 9.89 9.74 9.96 8.74+
- ----------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate ......... 67% 94% 61% 73% 62% 108%
- ----------------------------------------------------------------------------------------------------------------
Market Value, End of Period ..... $ 10.750 $ 11.750 $ 11.625 $ 11.125 $ 10.500 $ 11.750
================================================================================================================
</TABLE>
(1) For the nine months ended November 30, 1998 (unaudited).
(2) For the year ended February 29, 1996.
(3) For the period from March 26, 1993 (commencement of operations) to
February 28, 1994.
(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.
27
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Net Realized Net Increase
and Unrealized in Net Assets
Investment Net Investment Gain (Loss) From
Income Income on Investments Operations
-------------------------------------------------------------------------------------------------
Quarter Per Per Per Per
Ended Total Share Total Share Total Share Total Share
=================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
May 31,
1996 $ 13,001,508 $ 0.31 $ 11,542,616 $ 0.27 $ (7,102,523) $ (0.17) $ 4,440,093 $ 0.10
August 31,
1996 13,247,484 0.31 11,804,210 0.29 (7,860,018) (0.19) 3,944,192 0.10
November 30,
1996 13,267,331 0.31 11,856,227 0.28 15,505,326 0.37 27,361,553 0.65
February 28,
1997 13,188,573 0.31 11,798,385 0.28 8,827,165 0.20 20,625,550 0.48
May 31,
1997 13,200,189 0.31 11,741,167 0.27 (5,289,541) (0.12) 6,451,626 0.15
August 31,
1997 13,358,455 0.31 11,846,555 0.28 12,682,793 0.29 24,529,348 0.57
November 30,
1997 12,745,541 0.29 11,250,534 0.26 1,354,794 0.03 12,605,328 0.29
February 28,
1998 13,288,741 0.30 11,752,363 0.27 4,080,801 0.09 15,833,164 0.36
May 31,
1998 12,823,273 0.29 11,293,219 0.26 (2,829,443) (0.06) 8,463,776 0.20
August 31,
1998 13,493,791 0.31 11,864,494 0.27 (36,436,763) (0.83) (24,572,269) (0.56)
November 30,
1998 12,146,958 0.27 10,852,489 0.24 (336,494) (0.01) 10,515,995 0.23
=================================================================================================================
</TABLE>
28
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each period:
- --------------------------------------------------------------------------------
Dividend
NYSE Net Asset Dividend Reinvestment
Closing Price Value Paid Price
================================================================================
March 31, 1996 $10.875 $11.18 $0.093 $10.79
April 30, 1996 10.750 11.20 0.093 10.74
May 31, 1996 10.625 11.18 0.093 10.56
June 30, 1996 10.625 11.07 0.091 10.71
July 31, 1996 10.875 10.98 0.091 10.97
August 31, 1996 11.000 11.01 0.091 11.01
September 30, 1996 11.125 11.27 0.091 11.13
October 31, 1996 11.125 11.21 0.091 11.19
November 30, 1996 11.250 11.38 0.091 11.16
December 31, 1996 11.250 11.46 0.091 11.27
January 31, 1997 11.625 11.50 0.091 11.48
February 28, 1997 11.625 11.59 0.091 11.62
March 31, 1997 11.375 11.29 0.091 11.35
April 30, 1997 11.500 11.26 0.091 11.22
May 31, 1997 11.625 11.47 0.091 11.45
June 30, 1997 11.750 11.62 0.091 11.65
July 31, 1997 12.000 11.84 0.091 11.69
August 31, 1997 11.875 11.77 0.091 11.76
September 30, 1997 12.000 11.94 0.091 11.90
October 31, 1997 11.750 11.82 0.091 11.78
November 30, 1997 12.125 11.78 0.091 11.76
December 31, 1997 12.313 11.82 0.091 11.80
January 31, 1998 12.500 11.89 0.091 11.82
February 28, 1998 11.750 11.87 0.091 11.87
March 31, 1998 11.563 11.90 0.086 11.87
April 30, 1998 11.375 11.84 0.086 11.88
May 31, 1998 11.438 11.81 0.086 11.81
June 30, 1998 11.625 11.74 0.086 11.73
July 31, 1998 11.438 11.76 0.086 11.76
August 31, 1998 9.750 10.99 0.086 10.58
September 30, 1998 11.000 10.83 0.086 10.73
October 31, 1998 10.690 10.42 0.086 10.34
November 30, 1998 10.750 10.97 0.086 10.79
================================================================================
29
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
ADDITIONAL SHAREHOLDER INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
On June 11, 1998, the Annual Meeting of shareholders of the Fund was held
for the purpose of voting on the following matters:
1. The election of Alessandro C. di Montezemolo and Heath B. McLendon as
Directors of the Fund for a three-year period; and
2. Ratification of the selection of KPMG Peat Marwick LLP as the
independent auditors of the Fund for the current fiscal year.
The results of the vote on Proposal 1 were as follows:
<TABLE>
<CAPTION>
Percentage Percentage
Shares Voted of Shares Shares Voted of Shares
Name of Director* For Voted Against Voted
===========================================================================================
<S> <C> <C> <C> <C>
Alessandro C. di Montezemolo 41,495,592.552 98.60% 582,513.591 1.40%
Heath B. McLendon 41,590,679.317 98.80% 487,426.826 1.20%
===========================================================================================
</TABLE>
* The following Directors, representing the balance of the Board of
Directors, continue to serve as Directors: Paolo M. Cucchi, Andrea Farace,
Paul R. Hardin, and George M. Pavia.
The results of the vote on Proposal 2 were as follows:
Percentage Percentage Percentage
Shares Voted of Shares Shares Voted of Shares Shares of Shares
For Voted Against Voted Abstaining Voted
================================================================================
41,574,862.088 98.80% 167,491.100 0.40% 335,752.955 0.80%
================================================================================
30
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Under the Fund's Dividend Reinvestment Plan ("Plan"), a shareholder whose
shares of Common Stock are registered in his own name will have all
distributions from the Fund reinvested automatically by First Data Investor
Services Group, Inc. ("First Data") as agent under the Plan, unless the
shareholder elects to receive cash. Distributions with respect to shares
registered in the name of a broker-dealer or other nominee (that is, in "street
name") will be reinvested by the broker or nominee in additional shares under
the Plan, unless the service is not provided by the broker or nominee or the
shareholder elects to receive distributions in cash. Investors who own Common
Stock registered in street name should consult their broker-dealers for details
regarding reinvestment. All distributions to Fund shareholders who do not
participate in the Plan will be paid by check mailed directly to the record
holder by or under the direction of First Data as dividend-paying agent.
If the Fund declares a dividend or capital gains distribution payable
either in shares of Common Stock or in cash, shareholders who are not Plan
participants will receive cash, and Plan participants will receive the
equivalent amount in shares of Common Stock. When the market price of the Common
Stock is equal to or exceeds the net asset value per share of the Common Stock
on the Valuation Date (as defined below), Plan participants will be issued
shares of Common Stock valued at the net asset value most recently determined
or, if net asset value is less than 95% of the then current market price of the
Common Stock, then at 95% of the market value. The Valuation Date is the
dividend or capital gains distribution payment date or, if that date is not a
New York Stock Exchange ("NYSE") trading day, the immediately preceding trading
day.
If the market price of the Common Stock is less than the net asset value
of the Common Stock, or if the Fund declares a dividend or capital gains
distribution payable only in cash, a broker-dealer not affiliated with Smith
Barney, as purchasing agent for Plan participants ("Purchasing Agent"), will buy
Common Stock in the open market, on the NYSE or elsewhere, for the participants'
accounts (effective June 1, 1996, the Plan's Valuation Date changed from the
payable date to the record date). If, following the commencement of the
purchases and before the Purchasing Agent has completed its purchases, the
market price exceeds the net asset value of the Common Stock, the average per
share purchase price paid by the Purchasing Agent may exceed the net asset value
of the Common Stock, resulting in the acquisition of fewer shares than if the
dividend or capital gains distribution had been paid in Common Stock issued by
the Fund at net asset value. Additionally, if the market price exceeds the net
asset value of shares before the Purchasing Agent has completed its purchases,
the Purchasing Agent is permitted to cease purchasing shares and the Fund may
issue the remaining shares at a price equal to the greater of (a) net asset
value or (b) 95% of the then current market price. In a case where the
Purchasing Agent
31
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
has terminated open market purchases and the Fund has issued the remaining
shares, the number of shares received by the participant in respect of the cash
dividend or distribution will be based on the weighted average of prices paid
for shares purchased in the open market and the price at which the Fund issues
the remaining shares. First Data will apply all cash received as a dividend or
capital gains distribution to purchase Common Stock on the open market as soon
as practicable after the payable date of the dividend or capital gains
distribution, but in no event later than 30 days after that date, except when
necessary to comply with applicable provisions of the federal securities laws.
First Data will maintain all shareholder accounts in the Plan and will
furnish written confirmations of all transactions in each account, including
information needed by a shareholder for personal and tax records. The automatic
reinvestment of dividends and capital gains distributions will not relieve Plan
participants of any income tax that may be payable on the dividends or capital
gains distributions. Common Stock in the account of each Plan participant will
be held by First Data on behalf of the Plan participant, and each shareholder's
proxy will include those shares purchased pursuant to the Plan.
Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions. First Data's fees for handling the reinvestment of
dividends and capital gains distributions will be paid by the Fund. No brokerage
charges apply with respect to shares of Common Stock issued directly by the Fund
as a result of dividends or capital gains distributions payable either in Common
Stock or in cash. Each Plan participant will, however, bear a proportionate
share of brokerage commissions incurred with respect to open market purchases
made in connection with the reinvestment of dividends or capital gains
distributions.
Experience under the Plan may indicate that changes to it are desirable.
The Fund reserves the right to amend or terminate the Plan as applied to any
dividend or capital gains distribution paid subsequent to written notice of the
change sent to participants at least 30 days before the record date for the
dividend or capital gains distribution. The Plan also may be amended or
terminated by First Data, with the Fund's prior written consent, on at least 30
days' written notice to Plan participants. All correspondence concerning the
Plan should be directed by mail to First Data Investor Services Group, Inc.,
P.O. Box 8030, Boston, Massachusetts 02266 or by telephone at (800) 331-1710.
----------------
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940, as amended, that from time to time the Fund may purchase
shares of its common stock in the open market.
32
- --------------------------------------------------------------------------------
<PAGE>
Managed
HIGH INCOME
PORTFOLIO INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Directors
Paolo M. Cucchi
Andrea Farace
Paul R. Hardin
Heath B. McLendon, Chairman
Alessandro C. di Montezemolo
George M. Pavia
James J. Crisona, Emeritus
Officers
Heath B. McLendon
President and
Chief Executive Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
John C. Bianchi
Vice President and
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Adviser and Administrator
Mutual Management Corp.
388 Greenwich Street
New York, New York 10013
Transfer Agent
First Data Investor Services Group, Inc.
P.O. Box 8030
Boston, Massachusetts 02266
Custodian
PNC Bank, N.A.
17th and Chestnut Streets
Philadelphia, Pennsylvania 19103
- --------------------------------------------------------------------------------
<PAGE>
This report is intended only for the shareholders of Managed High Income
Portfolio Inc. It is not a prospectus, circular or representation intended for
use in the purchase or sale of shares of the Fund or of any securities mentioned
in the report.
FD0839 1/99
