MANAGED HIGH YIELD FUND INC. ANNUAL REPORT
September 15, 1997
Dear Shareholder,
We are pleased to present you with the annual report for Managed High Yield Fund
Inc. (the "Fund") for the year ended July 31, 1997.
GENERAL MARKET OVERVIEW
- --------------------------------------------------------------------------------
Early in the period, uncertainty over the direction of interest rates
unsettled what was already a jittery market. By mid-summer 1996, a moderating
economy helped bolster the market for a short period of time, a situation that
was, however, only fleeting as renewed fears of an overheating economy quickly
re-emerged. This pattern would repeat itself throughout fall and into the new
year.
The Federal Reserve's ("the Fed") decision to raise short-term interest rates
to 5.5% in March resulted in virtually every bond sector posting a negative
return during the first three months of the period. The high yield sector was
the exception, as gains in the first two months of the period more than offset
the softness following the Fed move. Then, on April 28th, the report of the
Employment Cost Index (ECI)--considered to be the most comprehensive
wage-inflation indicator, and critical to Federal Reserve policy--indicated a
very positive inflation picture. This information, plus positive news on an
agreed upon framework by President Clinton and the Republicans to balance the
budget by 2002, and an atypical paydown in federal debt, turned market sentiment
extremely bullish. Bonds entered a prolonged rally that sent the yield on the
long bond from 7.1% on March 31, 1997 to 6.8% by June 30, 1997.
July continued to be a harbinger of good news for fixed income investors as
additional favorable inflation data prompted the yield on the long bond to drop
even further,to 6.5%--the lowest level of the year.All bond sectors experienced
positive returns; again, however, the high yield sector outperformed others as
investors' willingness to accept higher credit risk produced higher returns.
PORTFOLIO REVIEW
- --------------------------------------------------------------------------------
PERFORMANCE
Total return for Managed High Yield Fund Inc. (Symbol: PHT) for the year
ended July 31, 1997 was 18.26% based on the Fund's net asset value and 22.59%
based on the Fund's share price on the New York Stock Exchange. As of July 31,
1997, the Fund's net asset value per share was $14.30, while its share price on
the New York Stock Exchange was $13.94. During the year ended July 31, 1997, the
Fund paid dividends from net investment income totalling $1.26 per share. We
hope to maintain the Fund's current dividend for the remainder of 1997. Based on
the dividend paid in July and the Fund's market price on July 31, 1997, the
Fund's market yield was 9.04% annualized. Over the fiscal year, the Fund
generated performance comparable to that of the 18.61% return of its Lipper peer
group (High Current Yield).
MANAGED HIGH
YIELD FUND INC.
Top Five Industries (as a % of net
assets as of July 31, 1997)
Communications ........ 14.12%
Media ................. 12.74%
Cable ................. 12.05%
Packaging ............. 8.08%
General Industrial .... 7.72%
1
<PAGE>
Managed High Yield
Fund Inc.
FUND PROFILE
Goal:
High current income
Portfolio Manager:
Thomas J. Libassi, MH
Asset Management Inc.
Total Net Assets:
$86.2 million as of
July 31, 1997
Dividend Payments:
Monthly
PORTFOLIO HIGHLIGHTS
Of the industries in which the Fund invests, media companies held one of the
largest positions, constituting 12.74% of net assets as of July 31, 1997. We
particularly favored print media companies, many of which have seen their cash
flows increase due to their advertising revenues; at the same time, their raw
materials costs are falling. Two examples of print companies we currently like
are Hollinger International Publishing (0.60%), a publisher of daily newspapers,
and Petersen Publishing LLC (0.65%), a publisher of specialty magazines.
Another sector to which we devoted substantial assets was communications
(14.12% of fund net assets as of July 31, 1997). Within this sector, we
specifically targeted companies that either have a well-developed niche
business, such as Nextel Communications Incorporated (2.62%), or strong growth
prospects. Additionally, as of July 31, 1997, approximately 4.7% of our
allocation to this sector is in European telecommunications providers such as
Colt Telecom Group PLC (1.54%)--companies that we believe should benefit from
industry deregulation scheduled to take place in Europe in January 1998.
The Fund's third largest weighting was allocated to cable providers (12.05%
of net assets as of July 31, 1997). Within this sector, we favored companies
located in tightly clustered markets with dense populations and strong
demographics, such as New York City's Cablevision Systems Corporation (0.71%)
and Philadelphia's Comcast Corporation (1.23%).
One sector of the high yield market that performed particularly well during
the period was U.S. dollar-denominated emerging market corporate debt (14.28% of
net assets as of July 31, 1997). Our strategy is to invest in generally
better-quality companies like Grupo Televisa S.A. de C.V. (1.65%), Mexico's
leading broadcast company. Going forward, we plan to focus more on these types
of companies, as we believe these securities currently offer greater investment
potential than similarly-rated companies located in the U.S.
OUTLOOK
- --------------------------------------------------------------------------------
The high yield market has turned in above-average performance for several
years in a row, driven mainly by the combination of moderate economic growth,
low interest rates and a booming stock market. Presently, we see little reason
for the bull market to end any time soon. In addition to these factors, we
expect that new demand from institutional buyers and pension funds will further
support high yield prices in the future. Finally, the company consolidations we
are seeing across industries are likely to help high yield companies as more and
more of them are acquired by stronger companies.
We will continue to focus on non-cyclical industries such as cable and
communications, placing particular emphasis on media. We expect this industry
will benefit from what is an increasing need for worldwide programming. Most
significantly, we will focus more on companies domiciled outside of the United
States. We believe these securities, which are denominated in U.S. dollars,
currently offer greater investment potential than similarly situated companies
located in the U.S.
2
<PAGE>
Our ultimate objective in managing your investments is to help you
successfully meet your financial goals. We thank you for your continued support,
and welcome any comments or questions you may have.
Sincerely,
/s/ Margo N. Alexander /s/ Dennis L. McCauley
- ----------------------------- ---------------------------
MARGO N. ALEXANDER DENNIS L. MCCAULEY
President, Managing Director and Chief Investment
Mitchell Hutchins Asset Management Inc. Officer - Fixed Income
Mitchell Hutchins Asset Management Inc.
This letter is intended to assist shareholders in understanding how the Fund
performed during the fiscal year ended July 31, 1997 and reflects our views at
the time we are writing this report. Of course, these views may change in
response to changing circumstances. We encourage you to consult your investment
executive regarding your personal investment program.
3
<PAGE>
MANAGED HIGH YIELD FUND INC.
PORTFOLIO OF INVESTMENTS JULY 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Corporate Bonds--92.63%
Airlines--1.01%
$ 750 Airplane Pass Through Trust .............. 03/15/19 10.875% $ 873,750
---------
Cable--11.34%
1,000 Comcast Corporation ...................... 05/15/05 9.375 1,063,750
2,500 International CableTel Incorporated ...... 04/15/05 to 02/01/06 11.500+ to 12.375+ 1,820,000
1,250 Multi Canal S.A. de C.V. ** .............. 02/01/07 10.500 1,346,875
625 Pratama Datakom Asia B.V.** .............. 07/15/05 12.750 623,438
2,400 TCI Satellite Entertainment Incorporated** 02/15/07 12.250+ 1,452,000
750 Telewest PLC ............................. 10/01/06 9.625 791,250
1,250 Tevecap S.A. de C.V. ..................... 11/26/04 12.625 1,320,312
2,000 UIH Australia Pacific Incorporated ....... 05/15/06 14.000+ 1,360,000
-----------
9,777,625
-----------
Chemicals--0.88%
750 Polytama International Finance B.V. ...... 06/15/07 11.250 755,625
-----------
Communications--13.59%
2,000 Colt Telecom Group PLC ................... 12/15/06 12.000+ 1,330,000
625 Comcast Cellular Holdings Incorporated** . 05/01/07 9.500 651,563
1,000 Globalstar L.P. .......................... 02/15/04 11.375 960,000
1,000 GST USA Incorporated ..................... 12/15/05 13.875+ 670,000
500 ITC Deltacom Incorporated** .............. 06/01/07 11.000 522,500
1,750 McCaw International Limited** ............ 04/15/07 13.000+ 962,500
500 Metronet Communications Corporation** .... 08/15/07 12.000 532,500
2,750 Nextel Communications Incorporated ....... 08/15/04 9.750+ 2,255,000
550 People's Telecommunications Company ...... 07/15/02 12.250 572,000
2,000 RSL Communications Limited ............... 11/15/06 12.250 2,060,000
500 Verio Incorporated** ..................... 06/15/04 13.500 522,500
1,000 Viatel Incorporated ...................... 01/15/05 15.000+ 680,000
-----------
11,718,563
-----------
Consumer Manufacturing--4.68%
1,800 Apparel Ventures Incorporated ............ 12/31/00 12.250 1,584,000
1,000 Chattem Incorporated ..................... 06/15/04 12.750 1,120,000
500 EKCO Group Incorporated .................. 04/01/06 9.250 517,500
1,500 Icon Health & Fitness Corporation ........ 11/15/06 14.000+ 813,750
-----------
4,035,250
-----------
Energy--2.67%
730 Crown Central Petroleum Corporation ...... 02/01/05 10.875 770,150
800 Petroleos Mexicanos ...................... 12/01/23 8.625 752,000
1,000 Transamerican Energy Corporation** ....... 06/15/02 13.000+ 780,000
-----------
2,302,150
-----------
Entertainment--2.46%
125 Cobb Theatres ............................ 03/01/03 10.625 138,125
750 Discovery Zone Incorporated** ............ 08/01/02 13.500 772,500
1,218 United Artists Theatre Circuit ........... 07/01/15 9.300 1,211,571
-----------
2,122,196
-----------
</TABLE>
4
<PAGE>
Managed High Yield Fund Inc.
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Corporate Bonds--(continued)
Finance--3.02%
$ 500 Cityscape Financial Corporation** ........ 06/01/04 12.750% $ 475,000
500 Delta Financial Corporation .............. 08/01/04 9.500 501,250
875 Imperial Credit Industries Incorporated .. 01/15/07 9.875 868,438
750 Olympic Financial Limited ................ 03/15/07 11.500 759,375
-----------
2,604,063
-----------
Food & Beverage--5.24%
1,000 American Rice Incorporated ............... 07/31/02 13.000 1,045,000
3,741 Iowa Select Farms ........................ 02/15/04 17.250+ 2,691,275
750 Packaged Ice Incorporated** .............. 04/15/04 12.000 780,000
-----------
4,516,275
-----------
Gaming--1.23%
1,000 Casino America Incorporated .............. 08/01/03 12.500 1,060,000
1,659# Grand Palais Casino Incorporated++ ....... 11/01/97 18.250(a) 0
-----------
1,060,000
-----------
General Industrial--6.93%
1,000 Communications & Power Industries Incorporated 08/01/05 12.000 1,117,500
625 Continental Global Group Incorporated** 04/01/07 11.000 662,500
500 Dominion Textile USA ..................... 04/01/06 9.250 523,750
500 Goss Graphic Systems Incorporated ........ 10/15/06 12.000 552,500
250 Jordan Industries Incorporated** ......... 08/01/07 10.375 250,000
750 Jordan Telecommunication Products** ...... 08/01/07 9.875 750,000
1,000 Poindexter J.B. Incorporated ............. 05/15/04 12.500 1,047,500
1,000 Polysindo International Finance
Company B.V. .......................... 06/15/06 to 07/30/07 9.375 to 11.375 1,073,125
-----------
5,976,875
-----------
Healthcare--0.31%
250 Integrated Health Services Incorporated** 09/15/07 9.500 265,000
-----------
Homebuilding--1.84%
750 K Hovnanian Enterprises Incorporated ..... 04/15/02 11.250 780,000
750 Ryland Group Incorporated ................ 07/01/06 10.500 810,000
-----------
1,590,000
-----------
Media--12.48%
1,500 Affiliated Newspaper Investments ......... 07/01/06 13.250+ 1,346,250
1,000 All American Communications Incorporated 10/15/01 10.875 1,071,250
1,500 Grupo Televisa S.A. de C.V. .............. 05/15/08 13.250+ 1,080,000
300 Grupo Televisa S.A. de C.V. .............. 05/15/06 11.875 339,750
500 Hollinger International Publishing ....... 02/01/06 9.250 521,250
1,250 Newsquest Capital PLC .................... 05/01/06 11.000 1,368,750
1,000 Pegasus Communications Corporation ....... 07/01/05 12.500 1,110,000
500 Petersen Publishing Company LLC .......... 11/15/06 11.125 562,500
750 Sullivan Graphics Incorporated ........... 08/01/05 12.750 774,375
1,000 Sun Media Corporation** .................. 05/15/07 9.500 1,035,000
1,000 T.V. Azteca S.A. de C.V.** ............... 02/15/07 10.500 1,060,000
500 Viacom Incorporated ...................... 07/07/06 8.000 490,000
-----------
10,759,125
-----------
</TABLE>
5
<PAGE>
Managed High Yield Fund Inc.
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Corporate Bonds--(continued)
Metals & Mining--2.16%
$ 500 Altos Hornos de Mexico S.A. de C.V.** .... 04/30/04 11.875% $ 545,000
500 Easco Corporation ........................ 03/15/01 10.000 513,750
750 WCI Steel Incorporated .................. 12/01/04 10.000 802,500
-----------
1,861,250
-----------
Packaging--8.08%
1,250 Doman Industries Limited ................. 03/15/04 8.750 1,243,750
1,000 Four M Corporation ....................... 06/01/06 12.000 1,065,000
500 FSW International Finance Company B.V. .. 11/01/06 12.500 510,000
500 Grupo Industrial Durango S.A. de C.V. .... 08/01/03 12.625 572,500
750 Portola Packaging Incorporated ........... 10/01/05 10.750 778,125
500 Printpack Incorporated ................... 08/15/06 10.625 538,750
750 Tjiwi Kimia Finance Maurities Limited** .. 08/01/04 10.000 753,750
1,000 Uniforet Incorporated .................... 10/15/06 11.125 965,000
500 Vicap, S.A. de C.V.** .................... 05/15/07 11.375 543,750
-----------
6,970,625
-----------
Real Estate--0.58%
500 D.R. Horton Incorporated ................. 06/15/04 8.375 503,750
-----------
Retail--4.01%
500 Barry's Jewelers, Incorporated ........... 12/22/00 11.000(a) 277,500
1,125 Chief Auto Parts Incorporated ............ 05/15/05 10.500 1,130,625
500 CSK Auto Incorporated .................... 11/01/06 11.000 533,750
1,500 Great American Cookie Incorporated ....... 01/15/01 10.875 1,515,000
-----------
3,456,875
-----------
Supermarkets & Drugstores--2.41%
500 Di Giorgio Corporation** ................. 06/15/07 10.000 495,000
922 Farm Fresh Holdings Corporation .......... 10/01/02 14.250 64,540
1,000 Pantry Incorporated ...................... 11/15/00 12.000 1,030,000
500 Pueblo Xtra International Incorporated ... 08/01/03 9.500 493,750
-----------
2,083,290
-----------
Technology--1.38%
800 Electronic Retailing Systems International 02/01/04 13.250+ 512,000
1,500 InterAct Systems Incorporated ............ 08/01/03 14.000+ 675,000
-----------
1,187,000
-----------
Transportation Non-Air--3.92%
500 Equimar Shipholdings Limited** ........... 07/01/07 9.875 490,000
1,000 Greater Bejing First Expressways** ....... 06/15/07 9.500 1,010,000
750 Navigator Gas** .......................... 06/30/07 12.000 761,250
500 Stena Shipping ........................... 12/15/05 10.500 547,500
500 TFM S.A. de C.V.** ....................... 06/15/09 11.750+ 310,000
250 TFM S.A. de C.V.** ....................... 06/15/07 10.250 258,125
-----------
3,376,875
-----------
</TABLE>
6
<PAGE>
Managed High Yield Fund Inc.
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Corporate Bonds--(concluded)
Utilities--2.41%
$ 1,000 Calpine Corporation ...................... 02/01/04 9.250% $ 1,030,000
998 Panda Funding Corporation ................ 08/20/12 11.625 1,047,852
-----------
2,077,852
-----------
Total Corporate Bonds (cost--$78,255,028) ............ 79,874,014
-----------
Convertible Bonds--0.97%
Communications--0.18%
215 GST Telecommunciations Incorporated ...... 12/15/05 13.875+ 159,100
-----------
General Industrial--0.79%
750 Corporate Express Incorporated ........... 07/01/00 4.500 676,875
-----------
Total Convertible Bonds (cost--$802,466) ............. 835,975
-----------
Number of
Shares
--------
Common Stock(a)--1.77%
Communications--0.08%
7,000 PageMart Nationwide Incorporated .................................................. 65,625
-----------
Gaming--0.92%
59,668 Casino America Incorporated ....................................................... 134,253
105,643 Colorado Gaming & Entertainment Company ........................................... 633,858
10,000 Hollywood Casino Corporation ...................................................... 29,375
-----------
797,486
-----------
Media--0.03%
2,256 Pegasus Communications Corporation ................................................ 29,892
-----------
Technology--0.74%
122,676 Ampex Corporation ................................................................. 636,382
-----------
Total Common Stock (cost--$1,075,998) ......................................................... 1,529,385
-----------
Preferred Stock--1.92%
Cable--0.71%
5,816 Cablevision Systems Corporation(a) ................................................ 612,175
-----------
Healthcare--1.21%
1,000 Fresenius Medical Care Capital Trust .............................................. 1,045,000
-----------
Total Preferred Stock (cost--$1,514,746) ...................................................... 1,657,175
-----------
</TABLE>
7
<PAGE>
Managed High Yield Fund Inc.
<TABLE>
<CAPTION>
Number of
Warrants Value
-------- --------
<S> <C> <C>
Warrants(a)--1.29%
Communications--0.27%
2,475 Clearnet Communications Incorporated .............................................. $ 18,563
1,000 Globalstar Telecommunications ..................................................... 60,000
6,900 Pagemart Wireless Incorporated .................................................... 69,000
2,000 RSL Communications Limited ........................................................ 85,000
-----------
232,563
-----------
Consumer Manufacturing--0.58%
2,000 AVI Holdings Incorporated ......................................................... 10,000
2,000 Chattem Incorporated .............................................................. 116,000
3,000 Icon Health & Fitness Corporation ................................................. 375,000
-----------
501,000
-----------
Food & Beverage--0.15%
50,000 Iowa Select Farms ................................................................. 125,000
-----------
Gaming--0.02%
10,563 Casino America Incorporated ....................................................... 19,013
-----------
Media--0.23%
2,000 Affiliated Newspaper Investments .................................................. 200,000
-----------
Retail--0.00%
270 Cookies USA Incorporated .......................................................... 2,700
-----------
Technology--0.04%
800 Electronic Retailing Systems International ........................................ 32,000
1,500 InterAct Systems Incorporated ..................................................... 3,750
-----------
35,750
-----------
Total Warrants (cost--$631,382) ............................................................... 1,116,026
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Date Rate
-------- ------- -------
<S> <C> <C> <C> <C>
Repurchase Agreement--0.59%
$ 505 Repurchase Agreement dated 07/31/97 with
State Street Bank and Trust Company,
collateralized by $494,775 U.S. Treasury Notes,
7.250% due 02/15/98; proceeds $505,070
(cost--$505,000) ......................... 08/01/97 5.000% 505,000
-----------
Total Investments (cost--$82,784,620)--99.17% .......... 85,517,575
Other assets in excess of liabilities--0.83% ........... 714,742
-----------
Net Assets--100.00% .................................... $86,232,317
===========
</TABLE>
- ---------------
# Security represents a unit which is composed of the stated bond with
attached warrants or common stock. ++ Illiquid security representing 0.00%
of total investments.
(a) Non-income producing securities.
+ Denotes a step-up bond or zero coupon bond that converts to the noted fixed
rate at a designated future date.
** Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
See accompanying notes to financial statements
8
<PAGE>
MANAGED HIGH YIELD FUND INC.
STATEMENT OF ASSETS AND LIABILITIES JULY 31, 1997
Assets:
Investments in securities, at value (cost--$82,784,620) ........ $ 85,517,575
Receivable for investments sold ................................ 859,479
Interest receivable ............................................ 1,510,941
Deferred organizational expenses ............................... 39,869
Other assets ................................................... 6,247
------------
Total assets ................................................... 87,934,111
------------
Liabilities:
Payable for investments purchased .............................. 1,495,913
Payable to investment adviser and administrator ................ 65,192
Accrued expenses and other liabilities ......................... 140,689
------------
Total liabilities .............................................. 1,701,794
------------
Net Assets:
Capital Stock--$0.001 par value; 100,000,000 shares authorized;
6,031,667 shares issued and outstanding ...................... 90,459,520
Undistributed net investment income ............................ 170,004
Accumulated net realized losses from investment transactions ... (7,130,162)
Net unrealized appreciation of investments ..................... 2,732,955
------------
Net assets applicable to shares outstanding .................... $ 86,232,317
============
Net asset value per share ...................................... $ 14.30
============
See accompanying notes to financial statements
9
<PAGE>
MANAGED HIGH YIELD FUND INC.
STATEMENT OF OPERATIONS JULY 31, 1997
For the Year
Ended
July 31, 1997
-------------
Investment income:
Interest and dividends ........................................... $ 8,860,739
-----------
Expenses:
Investment advisory and administration ........................... 742,432
Reports and notices to shareholders .............................. 103,891
Legal and audit .................................................. 101,275
Custody and accounting ........................................... 48,329
Amortization of organizational expenses .......................... 30,620
Transfer agency and service fees ................................. 28,942
Directors' fees .................................................. 12,250
Other expenses ................................................... 37,752
-----------
1,105,491
-----------
Net investment income ............................................ 7,755,248
-----------
Realized and unrealized gains from investment activities:
Net realized gains from investment transactions .................. 897,493
Net change in unrealized appreciation/depreciation of investments 5,275,401
-----------
Net realized and unrealized gains from investment activities ..... 6,172,894
-----------
Net increase in net assets resulting from operations ............. $13,928,142
===========
See accompanying notes to financial statements
10
<PAGE>
MANAGED HIGH YIELD FUND INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Years Ended
July 31,
--------------------------
1997 1996
---------- ----------
<S> <C> <C>
From operations:
Net investment income ........................................... $ 7,755,248 $ 7,769,124
Net realized gains from investment transactions ................. 897,493 1,035,278
Net change in unrealized appreciation/depreciation of investments 5,275,401 (2,049,902)
------------ ------------
Net increase in net assets resulting from operations ............ 13,928,142 6,754,500
------------ ------------
Dividends to shareholders from:
Net investment income ........................................... (7,599,901) (7,931,642)
------------ ------------
Net increase (decrease) in net assets ........................... 6,328,241 (1,177,142)
Net assets:
BEGINNING OF YEAR ............................................... 79,904,076 81,081,218
------------ ------------
End of year (including undistributed net investment income
of $170,004 at July 31, 1997) ................................. $ 86,232,317 $ 79,904,076
============ ============
</TABLE>
See accompanying notes to financial statements
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Managed High Yield Fund Inc. (the "Fund") was incorporated in Maryland on
June 11, 1993 and is registered with the Securities and Exchange Commission as a
closed-end, diversified management investment company. Organizational costs have
been deferred and are being amortized on the straight line method over a period
not to exceed 60 months from the date the Fund commenced operations.
The preparation of financial statements in accordance with generally accepted
accounting principles requires Fund management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates. The following is a summary of
significant accounting policies:
VALUATION OF INVESTMENTS--Where market quotations are readily available,
portfolio securities are valued thereon, provided such quotations adequately
reflect the fair value of the securities, in the judgment of Mitchell Hutchins
Asset Management Inc. ("Mitchell Hutchins"), a wholly-owned subsidiary of
PaineWebber Incorporated ("PaineWebber") and investment adviser and
administrator of the Fund. When market quotations are not readily available,
securities are valued based upon appraisals derived from information concerning
those securities or similar securities received from recognized dealers in those
securities. All other securities are valued at fair value as determined in good
faith by a management committee under the direction of the Fund's board of
directors. The amortized cost method of valuation, which approximates market
value, generally is used to value short-term debt instruments with sixty days or
less remaining to maturity, unless the Fund's board of directors determines that
this does not represent fair value.
REPURCHASE AGREEMENTS--The Fund's custodian takes possession of the
collateral pledged for investments in repurchase agreements. The underlying
collateral is valued daily on a mark-to-market basis to ensure that the value,
including accrued interest, is at least equal to the repurchase price. In the
event of default of the obligation to repurchase, the Fund has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings. The Fund occasionally
participates in joint repurchase agreement transactions with other funds managed
by Mitchell Hutchins.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions are calculated using the identified cost method. Interest income is
recorded on an accrual basis. Discounts are accreted and premiums are amortized
as adjustments to interest income and the identified cost of investments.
DIVIDENDS AND DISTRIBUTIONS--Dividends and distributions to stockholders are
recorded on the ex-dividend date. Dividends from net investment income and
distributions from the net realized capital gains are determined in accordance
with federal income tax regulations which may differ from generally accepted
accounting principles. These "book/tax" differences are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax-basis treatment; temporary differences do not require
reclassification.
CONCENTRATION OF RISK
The ability of the issuers of the debt securities held by the Fund to meet
their obligations may be affected by economic developments, including those
particular to a specific industry, country or region.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
INVESTMENT ADVISER AND ADMINISTRATOR
The Fund's board of directors has approved an Investment Advisory and
Administration Contract ("Advisory Contract") with Mitchell Hutchins, under
which Mitchell Hutchins serves as investment adviser and administrator of the
Fund. In accordance with the Advisory Contract, Mitchell Hutchins receives
compensation from the Fund, computed weekly and paid monthly, at the annual rate
of 0.90% of the Fund's average weekly net assets.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at July 31,
1997 was substantially the same as the cost of securities for financial
statement purposes.
At July 31, 1997, the components of net unrealized appreciation of
investments were as follows:
Gross appreciation (investments having an excess of value
over cost) ..................................................... $6,599,178
Gross depreciation (investments having an excess of cost
over value) .................................................... (3,866,223)
----------
Net unrealized appreciation of investments ....................... $2,732,955
==========
For the year ended July 31, 1997, aggregate purchases and sales of portfolio
securities, excluding short-term securities, were $98,645,735 and $100,703,020,
respectively.
CAPITAL STOCK
There are 100,000,000 shares of $0.001 par value common stock authorized. Of
the 6,031,667 shares of common stock outstanding, 7,926 shares are owned by
Mitchell Hutchins.
FEDERAL TAX STATUS
The Fund intends to distribute all of its taxable income and to comply with
the other requirements of the Internal Revenue Code applicable to regulated
investment companies. Accordingly, no provision for federal income taxes is
required. In addition, by distributing during each calendar year substantially
all of its net investment income, capital gains and certain other amounts, if
any, the Fund intends not to be subject to a federal excise tax.
At July 31, 1997, the Fund had a net capital loss carryforward of $7,130,162.
The loss carryforward is available as a reduction, to the extent provided in the
regulations, of future net realized capital gains, and will expire between July
31, 2003 and by July 31, 2005. To the extent such losses are used to offset
future capital gains, it is probable that the gains so offset will not be
distributed.
13
<PAGE>
MANAGED HIGH YIELD FUND INC.
FINANCIAL HIGHLIGHTS
Selected data for a share of common stock outstanding throughout each period is
presented below:
<TABLE>
<CAPTION>
For the Years Ended July 31, For the Period
---------------------------------- December 7, 1993+
1997 1996 1995 through July 31, 1994
---- ---- ---- ---------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ................... $13.25 $13.44 $13.76 $15.00
------ ------ ------ ------
Net investment income .................................. 1.29 1.29 1.40 0.77
Net realized and unrealized gains (losses) from
investments and foreign currency transactions ........ 1.02 (0.16) (0.34) (1.25)
------ ------ ------ ------
Net increase (decrease) from investment operations ..... 2.31 1.13 1.06 (0.48)
------ ------ ------ ------
Dividends from net investment income ................... (1.26) (1.32) (1.38) (0.76)
------ ------ ------ ------
Net asset value, end of period ......................... $14.30 $13.25 $13.44 $13.76
====== ====== ====== ======
Per share market value, end of period .................. $13.94 $12.50 $12.38 $12.38
====== ====== ====== ======
Total investment return:
On net asset value(1) .................................. 18.26% 8.83% 9.27% (3.00)%
====== ====== ====== ======
On market value(2) ..................................... 22.59% 12.16% 11.87% (12.76)%
====== ====== ====== ======
Ratios/Supplemental Data:
Net assets, end of period (000's omitted) .............. $86,232 $79,904 $81,081 $82,995
Expenses to average net assets ......................... 1.34% 1.25% 1.21% 1.17%*
Net investment income to average net assets ............ 9.39% 9.87% 10.68% 8.27%*
Portfolio turnover rate ................................ 122% 135% 103% 85%
</TABLE>
- ----------------
+ Commencement of operations
* Annualized
(1) Total investment return on net asset value is calculated assuming a
purchase of stock at net asset value on the first day of each period
reported and a sale at net asset value on the last day of each period
reported and assuming reinvestment of dividends at prices obtained under
the Fund's Dividend Reinvestment Plan (the "Plan"). Total investment return
on net asset value has not been annualized for periods of less than one
year. Total investment return does not reflect brokerage commissions.
(2) Total investment return on market value is calculated assuming a purchase
of stock at market value on the first day of each period reported and a
sale at market value on the last day of each period reported and assuming
reinvestment of dividends at prices obtained under the Plan. Total
investment return on market value has not been annualized for period of
less than one year. Total investment return does not reflect brokerage
commissions.
14
<PAGE>
MANAGED HIGH YIELD FUND INC.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Managed High Yield Fund Inc.
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Managed High Yield Fund Inc. (the
"Fund") as of July 31, 1997, and the related statement of operations for the
year then ended, the statement of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
periods indicated therein. 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 and financial highlights. Our procedures included confirmation of
investments owned as of July 31, 1997 by correspondence with the custodian. 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 aspects, the financial position of Managed
High Yield Fund Inc. at July 31, 1997, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the indicated
periods in conformity with generally accepted accounting principles.
/S/ Ernst & Young LLP
New York, New York
September 19, 1997
15
<PAGE>
MANAGED HIGH YIELD FUND INC.
TAX INFORMATION
We are required by subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of the Fund's fiscal year end (July 31,
1997) as to the federal tax status of distributions received by stockholders
during such fiscal year. Accordingly, we are advising you that the distributions
paid during the fiscal year were derived from net investment income and are
taxable as ordinary income.
Dividends received by tax-exempt recipients (e.g., IRAs and Keoghs) need not
be reported as taxable income. Some retirement trusts (e.g., corporate, Keogh
and 403(b)(7) plans) may need this information for their annual information
reporting.
Because the Fund's fiscal year is not the calendar year, another notification
will be sent in respect to calendar year 1997. The second notification, which
will reflect the amount to be used by calendar year taxpayers on their federal
income tax returns, will be made in conjunction with Form 1099 DIV and will be
mailed in January 1998. Stockholders are advised to consult their own tax
advisers with respect to the tax consequences of their investment in the Fund.
16
<PAGE>
MANAGED HIGH YIELD FUND INC.
GENERAL INFORMATION
THE FUND
Managed High Yield Fund Inc. (the "Fund") is a diversified, closed-end
management investment company whose shares trade on the New York Stock Exchange,
Inc. ("NYSE"). The investment objective of the Fund is to achieve a high level
of current income consistent with the preservation of capital. The Fund's
investment adviser and administrator is Mitchell Hutchins Asset Management Inc.,
a wholly owned subsidiary of PaineWebber Incorporated ("PaineWebber"), which has
over $46 billion in assets under management as of August 31, 1997.
STOCKHOLDER INFORMATION
The NYSE ticker symbol for the Managed High Yield Fund is "PHT." Weekly
comparative net asset value and market price information about the Fund is
published each Monday in THE WALL STREET JOURNAL, each Sunday in THE NEW YORK
TIMES and each week in BARRON'S, as well as in numerous other newspapers.
DISTRIBUTION POLICY
The Fund's board of directors has established a Dividend Reinvestment Plan
(the "Plan") under which all common stockholders whose shares are registered in
their own names, or in the name of PaineWebber or its nominee, will have all
dividends and other distributions on their shares of common stock automatically
reinvested in additional shares of common stock, unless such stockholders elect
to receive cash. Common stockholders who elect to hold their shares in the name
of another broker or nominee should contact such broker or nominee to determine
whether, or how, they may participate in the Plan. Additional shares of common
stock acquired under the Plan will be purchased in the open market, on the NYSE,
at prices that may be higher or lower than the net asset value per share of the
common stock at the time of the purchase. The Fund will not issue any new shares
of common stock in connection with the Plan.
17
<PAGE>
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<PAGE>
MANAGED HIGH YIELD FUND INC.
DIRECTORS
E. Garrett Bewkes, Jr. Mary C. Farrell
CHAIRMAN Meyer Feldberg
Margo N. Alexander George W. Gowen
Richard Q. Armstrong Frederic V. Malek
Richard R. Burt Carl W. Schafer
PRINCIPAL OFFICERS
Margo N. Alexander Paul H. Schubert
PRESIDENT VICE PRESIDENT AND TREASURER
Victoria E. Schonfeld Thomas J. Libassi
VICE PRESIDENT VICE PRESIDENT
Dianne E. O'Donnell Dennis L. McCauley
VICE PRESIDENT AND SECRETARY VICE PRESIDENT
INVESTMENT ADVISER
AND ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
NOTICE IS HEREBY GIVEN IN ACCORDANCE WITH SECTION 23(C) OF THE INVESTMENT
COMPANY ACT OF 1940 THAT FROM TIME TO TIME THE FUND MAY PURCHASE SHARES OF ITS
COMMON STOCK IN THE OPEN MARKET AT MARKET PRICES. THIS REPORT IS SENT TO THE
SHAREHOLDERS OF THE FUND FOR THEIR INFORMATION. IT IS NOT A PROSPECTUS, CIRCULAR
OR REPRESENTATION INTENDED FOR THE USE IN THE PURCHASE OR SALE OF SHARES OF THE
FUND OR OF ANY SECURITIES MENTIONED IN THIS REPORT.
<PAGE>
PaineWebber
(c)1997 PaineWebber Incorporated
Member SIPC
July 31, 1997
- -----------------------------------------
MANAGED HIGH
YIELD FUND INC.
ANNUAL REPORT
