<PAGE>
MANAGED HIGH YIELD FUND INC. ANNUAL REPORT
September 25, 1998
Dear Shareholder,
We are pleased to present you with the annual report for the Managed High Yield
Fund Inc. (the "Fund") for the fiscal year ended July 31, 1998.
- -------------------------------------------------------------------------------
Managed High Yield
Fund Inc.
FUND PROFILE
Goal:
High current income
Portfolio Managers:
Tom Libassi,
Mitchell Hutchins
Asset Management Inc.
Total Net Assets:
$85.5 million as of
July 31, 1998
Dividend Payments:
Monthly
MANAGED HIGH
YIELD FUND INC.
Quality breakdown,
July 31, 1998(1)
[PIE CHART]
BB & higher 20.5%
B 61.1%
CCC & lower 4.8%
Nonrated 9.4%
Cash 1.3%
Equity/preferred 2.9%
- -------------------------------------------------------------------------------
GENERAL MARKET OVERVIEW
When Thailand's currency plummeted a year ago, few saw it as the start of a
regional crisis that would affect the entire globe. As the Asian economies
began to implode, investors poured money into the U.S. Treasury market buying
up bonds and driving down yields.
High-yield bonds posted strong gains in the first few months of 1998, and then
opportunistic issuers began to flood the market with new supply. The result was
a glut of new bonds that dragged down prices. The yield premium of high-yield
bonds (the "spread") compared to Treasurys widened from 3.54% at the beginning
of 1998 to 3.93% at the end of the period, its highest point in a long time.
Soon after the Fund's fiscal year-end, the high yield market entered a period
of sharp correction that has lasted through late September (when this letter
was in preparation). Prices tumbled and spreads to Treasurys widened
dramatically. By September 23, the spread to Treasurys of the First Boston High
Yield Index had widened to 6.76%. The Index risk premium--the spread divided by
the yield of the underlying Treasury--rose to 144%, its highest point ever.
(Investors demand a higher risk premium when they perceive greater risk in the
market.)
Spreads and risk premiums have not reached such levels since the recession of
1990-1991. Investors seem to be discounting the possibility of a recession and
a 6-8% default rate. The current default rate is still less than 1%. Based on
our review of anticipated third-quarter earnings, we do not believe the default
rate will increase dramatically, nor do we see a recession coming. The market
seems undervalued to us at this time.
PORTFOLIO REVIEW
PERFORMANCE
For the fiscal year ended July 31, 1998, the Managed High Yield Fund Inc.
(symbol: PHT) returned 8.23% based on the change in the Fund's net asset value
and 5.45% based on the change in its share price on the New York Stock
Exchange. During the period, the Fund's Lipper peer group, the High Current
Yield median, gained 8.62% on a
(1) Unless otherwise noted, all portfolio weightings represent percentages
of net assets as of July 31, 1998; all holdings are subject to change.
1
<PAGE>
ANNUAL REPORT
net-asset-value basis.
At July 31, 1998 the Fund's net asset value per share was $14.18, while its
share price on the New York Stock Exchange was $13.44. During the fiscal year
ended July 31, 1998, the Fund paid dividends from net investment income
totaling $1.26 per share, or about 10 1/2 cents per share per month. Based on
the dividend paid in July and the Fund's market price on July 31, 1998, the
Fund's market yield was 9.38% annualized.
Note: The performance reported in this letter does not reflect the impact of
market events after July 31, 1998; they will be reflected in the next
semiannual report, which will cover the six months ending January 31, 1999.
- -------------------------------------------------------------------------------
MANAGED HIGH
YIELD FUND INC.
Top five sectors,
July 31, 1998(1)
Communications 13.3%
Cable 8.6%
General Industrial 7.6%
Retail 7.1%
Energy 6.8%
- -------------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS
The Fund's investment strategy focuses on fundamental value within companies
and industries based on analyses of interest coverage; debt-to-cash flow
ratios; and potential for total return, yield, or premium to
comparable-maturity Treasury securities.
Our largest sector weighting remains communications. We think European
long-distance and local telephone companies stand to benefit from deregulation
this year. We continue to favor--and look for--the debt of industry
consolidators, in the belief that as these companies expand and cut costs their
securities will gain value. The Fund's holdings now include Packaged Ice (2.0%
of net assets on July 31, 19981), the biggest distributor of manufactured ice
in the United States, and Verio (0.9%), an Internet service provider that is
reducing expenses by putting acquired providers on a common Internet backbone.
These companies went public near the end of the fiscal year, benefiting the
Fund.
During the period, we reduced the Fund's exposure to the retail sector and
increased exposure to the cable industry. As oil prices declined, bond prices
fell in the energy sector and better-quality names with good fundamentals
became more affordable. We took advantage of the bargains to increase energy to
the Fund's fifth-largest sector weighting (6.8%).
OUTLOOK
The high-yield market is cheap by historical standards; despite the recent
downturn we think its fundamentals are sound. The default rate remains low at
less than 1%. Supply is down dramatically. Issuance of high-yield bonds dropped
to $2 billion in August, down sharply from $10 billion in July. There has been
scarcely any new issuance in September. Demand has begun to pick
(1) Unless otherwise noted, all portfolio weightings represent percentages of
net assets as of July 31, 1998; all holdings are subject to change.
2
<PAGE>
MANAGED HIGH YIELD FUND INC. ANNUAL REPORT
up. Institutional investors and market-timers are coming back into the market,
and issuers are taking advantage of low prices to buy back their debt.
We believe our focus on fundamental value has positioned the Fund to benefit
from a market recovery. We do not foresee any significant strategic changes
over the next six months, though we may take advantage of opportunities to
enhance yield by increasing the Fund's holdings of B-rated securities.
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.
For a quarterly Fund Profile on Managed High Yield Fund Inc. or a fund in the
PaineWebber Family of Funds,(2) please contact your investment executive.
Sincerely,
/s/ Margo Alexander /s/ Thomas J. Libassi
MARGO ALEXANDER THOMAS J. LIBASSI
President Portfolio Manager
Mitchell Hutchins Asset Management Inc. Managed High Yield Fund Inc.
(2) Mutual funds are sold by prospectus only. The prospectuses for the funds
contain more complete information regarding risks, charges and expenses, and
should be read carefully before investing.
This letter is intended to assist shareholders in understanding how the
Fund performed during the fiscal year ended July 31, 1998, and reflects our
views at the time of 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, 1998
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- --------- -------- -------- -----
<S> <C> <C> <C>
Corporate Bonds--89.38%
Aerospace--1.16%
$ 1,000 SabreLiner Corporation** ............................. 06/15/08 11.000% $ 992,500
----------
Airlines--1.93%
1,500 Airplane Pass Through Trust .......................... 03/15/19 10.875 1,653,750
----------
Cable--8.53%
2,000 Knology Holdings Incorporated ........................ 10/15/07 11.875+ 1,175,000
3,000 NTL Incorporated** ................................... 04/01/08 9.750+ 2,017,500
1,500# Park N View Incorporated** ........................... 05/15/08 13.000 1,455,000
1,250 RCN Corporation ...................................... 10/15/07 11.125+ 809,375
1,000 21st Century Telecommunications Group ................ 02/15/08 12.250+ 550,000
2,000 UIH Australia Pacific Incorporated ................... 05/15/06 14.000+ 1,290,000
----------
7,296,875
----------
Communications--12.01%
1,000 Barak I.T.C. International Telecom .................. 11/15/07 12.500+ 600,000
1,500 Colt Telecom Group PLC ............................... 12/15/06 12.000+ 1,222,500
1,000 E. Spire Communications Incorporated ................. 11/01/05 13.000+ 847,500
500 Facilicom International Incorporated ................. 01/15/08 10.500 505,000
1,000 GST Equipment Funding Incorporated ................... 05/01/07 13.250 1,160,000
1,250 Hyperion Telecommunications Incorporated ............. 04/15/03 13.000+ 962,500
150 Mastec Incorporated .................................. 02/01/08 7.750 146,625
2,500 Nextel Communications Incorporated** ................. 02/15/08 9.950+ 1,643,750
1,500 Nextel International Incorporated** .................. 04/15/08 12.125+ 885,000
400 PSI Net Incorporated ................................. 02/15/05 10.000 420,000
500 Verio Incorporated** ................................. 06/15/04 13.500 580,000
2,000# Wam! Net Incorporated** .............................. 03/01/05 13.250+ 1,300,000
----------
10,272,875
----------
Consumer Manufacturing--6.16%
1,000 Apparel Ventures Incorporated ........................ 12/31/00 12.250 965,000
1,250 Commemorative Brands Incorporated .................... 01/15/07 11.000 1,250,000
1,000 Decora Industries Incorporated** ..................... 05/01/05 11.000 985,000
750 EKCO Group Incorporated .............................. 04/01/06 9.250 782,813
750 IHF Holdings Incorporated ............................ 11/15/04 15.000+ 525,000
750 Phillips Van-Heusen Corporation** .................... 05/01/08 9.500 757,500
----------
5,265,313
----------
Energy--6.83%
500 American Eco Corporation** ........................... 05/15/08 9.625 482,500
1,000 Grant Geophysical Incorporated ....................... 02/15/08 9.750 990,000
250 Gulfmark Offshore** .................................. 06/01/08 8.750 245,625
200 HVIDE Marine Incorporated ............................ 02/15/08 8.375 190,000
1,000 Northern Offshore ASA** .............................. 05/15/05 10.000 940,000
1,000 Petroleos Mexicanos .................................. 09/15/27 9.500 952,500
1,000 Transamerican Energy Corporation ..................... 06/15/02 13.000+ 780,000
1,000# Transamerican Refining Corporation** ................. 06/30/03 16.000 1,020,000
250 Trico Marine Services Incorporated ................... 08/01/05 8.500 244,375
----------
5,845,000
----------
</TABLE>
4
<PAGE>
MANAGED HIGH YIELD FUND INC.
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- --------- -------- -------- -----
<S> <C> <C> <C>
Corporate Bonds (continued)
Entertainment--3.88%
$ 500 Clearview Cinema Group Incorporated** ................ 06/01/08 10.875% $ 512,500
750 Discovery Zone Incorporated++ ........................ 08/01/02 13.500 667,500
176# Discovery Zone Incorporated** ........................ 05/01/02 13.500 176,000
750 Silver Cinemas Incorporated** ........................ 04/15/05 10.500 757,500
1,194 United Artists Theatre Circuit ....................... 07/01/15 9.300 1,205,450
----------
3,318,950
Finance--1.73%
350 Emergent Group Incorporated** ........................ 09/15/04 10.750 262,500
500 Metris Companies Incorporated ........................ 11/01/04 10.000 525,000
750 Olympic Financial Limited ............................ 03/15/07 11.500 693,750
----------
1,481,250
----------
Food & Beverage--4.88%
1,000 Cuddy International Corporation** .................... 12/01/07 10.750 995,000
1,625 Iowa Select Farms L. P.** ............................ 12/01/05 10.750 1,637,188
1,500 Packaged Ice Incorporated** .......................... 02/01/05 9.750 1,545,000
----------
4,177,188
----------
General Industrial--4.42%
500 Goss Graphic Systems Incorporated .................... 10/15/06 12.000 482,500
1,500 Jordan Telecommunication Products .................... 08/01/07 9.875 1,537,500
1,000 Poindexter J.B. Incorporated ......................... 05/15/04 12.500 990,000
750 Prestolite Electric Incorporated** ................... 02/01/08 9.625 766,875
----------
3,776,875
----------
Healthcare--0.59%
500 MEDIQ/PRN Life Support Services, Incorporated** ...... 06/01/08 11.000 502,500
----------
Hotels & Lodging--0.84%
750 Silverleaf Resorts Incorporated ...................... 04/01/08 10.500 720,000
----------
Media--5.52%
1,500 Fox Family Worldwide Incorporated .................... 11/01/07 9.250 1,481,250
1,000 Globo Communicacoes Participation** .................. 12/05/08 10.625 915,000
500 Impac Group Incorporated** ........................... 03/15/08 10.125 502,500
1,000 Source Media Incorporated ............................ 11/01/04 12.000 1,035,000
750 Sullivan Graphics Incorporated ....................... 08/01/05 12.750 787,500
----------
4,721,250
----------
Metals & Mining--4.16%
375 AEI Holding Incorporated** ........................... 11/15/07 10.000 375,000
1,250 Metal Management Incorporated** ...................... 05/15/08 10.000 1,237,500
1,250 Murrin Murrin Holdings Party Limited ................. 08/31/07 9.375 1,181,250
750 WCI Steel Incorporated .............................. 12/01/04 10.000 761,250
----------
3,555,000
----------
</TABLE>
5
<PAGE>
MANAGED HIGH YIELD FUND INC.
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- --------- -------- -------- -----
<S> <C> <C> <C>
Corporate Bonds (concluded)
Packaging--3.66%
$ 750 Bear Island Paper Company LLC ........................ 12/01/07 10.000% $ 770,625
1,000 Four M Corporation ................................... 06/01/06 12.000 1,060,000
750 Portola Packaging Incorporated ....................... 10/01/05 10.750 789,375
500 Vicap, S.A. de C.V.** ................................ 05/15/07 11.375 510,000
----------
3,130,000
----------
Real Estate and Buildings--2.69%
1,000 American Architectural Products ...................... 12/01/07 11.750 1,010,000
500 D.R. Horton Incorporated ............................. 06/15/04 8.375 510,000
750 U.S. Home Corporation ................................ 08/15/07 8.880 777,187
----------
2,297,187
----------
Restaurants--0.88%
750 American Restaurant Group Incorporated** ............. 02/15/03 11.500 750,000
----------
Retail--7.12%
1,550 Advance Holding Corporation** ........................ 04/15/09 12.875+ 937,750
750 Advance Stores Company Incorporated** ................ 04/15/08 10.250 776,250
500 Barry's Jewelers Incorporated ........................ 12/22/00 11.000(a) 300,000
750 Big 5 Corporation .................................... 11/15/07 10.875 776,250
1,200 Great American Cookie Incorporated ................... 01/15/01 10.875 1,248,000
1,000 Mrs Fields Original Cookies Incorporated ............. 12/01/04 10.125 990,000
1,000 Tuesday Morning Corporation .......................... 12/15/07 11.000 1,065,000
----------
6,093,250
----------
Technology--3.35%
500 Ampex Corporationa ................................... 03/15/03 12.000 510,000
800 Electronic Retailing Systems International ........... 02/01/04 13.250+ 352,000
1,500 InterAct Systems Incorporated ........................ 08/01/03 14.000+ 600,000
1,500 Samsung Electronics America Incorporated** ........... 05/01/03 9.750 1,398,750
----------
2,860,750
----------
Transportation Non-Air--6.56%
500 Atlantic Express Transportation Corporation .......... 02/01/04 10.750 532,500
1,500 Equimar Shipholdings Limited ......................... 07/01/07 9.875 1,395,000
1,000 Greater Beijing First Expressways** .................. 06/15/04 9.250 640,000
750 Guangzhou Shen Superhighway .......................... 08/15/07 10.250 510,000
1,250# Navigator Gas Transport PLC** ........................ 06/30/07 12.000 1,400,000
500 Stena AB ............................................. 06/15/07 8.750 502,500
1,000 TFM S.A. de C.V. ..................................... 06/15/09 11.750+ 630,000
----------
5,610,000
----------
Utilities--2.48%
1,000 Calpine Corporation .................................. 02/01/04 9.250 1,032,500
998 Panda Funding Corporation ............................ 08/20/12 11.625 1,087,770
----------
2,120,270
----------
Total Corporate Bonds (cost--$77,446,966) ...................... 76,440,783
----------
</TABLE>
6
<PAGE>
MANAGED HIGH YIELD FUND INC.
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- --------- -------- -------- -----
<S> <C> <C> <C>
Convertible Bonds--3.48%
Communications--0.32%
$ 215 GST Telecommunciations Incorporated .................. 12/15/05 13.875%+ $ 275,200
----------
General Industrial--3.16%
1,500 Corporate Express Incorporated ....................... 07/01/00 4.500 1,387,500
1,250 Waste Systems International Incorporated** ........... 05/13/05 7.000 1,312,500
----------
2,700,000
----------
Total Convertible Bonds (cost--$2,793,158) ..................... 2,975,200
----------
<CAPTION>
Number
of Shares
- ---------
<S> <C>
Common Stock(a)--1.63%
Communications--0.14%
4,260 Nextel Communications Incorporated ................................................. 114,087
----------
Gaming--0.96%
59,668 Casino America Incorporated ........................................................ 208,838
105,643 Colorado Gaming & Entertainment Company ............................................ 594,242
10,000 Hollywood Casino Corporation ....................................................... 16,250
----------
819,330
----------
Media--0.29%
2,000 Affiliated Newspaper Investments ................................................... 250,000
----------
Technology--0.24%
122,676 Ampex Corporation++ ................................................................ 207,016
----------
Total Common Stock (cost--$1,154,604) ........................................................ 1,390,433
----------
Preferred Stock--2.38%
Finance--0.63%
500 Superior National Insurance Group .................................................. 537,500
----------
Healthcare--1.14%
1,000 Fresenius Medical Care Capital Trust ............................................... 980,000
----------
Restaurants--0.61%
500 American Restaurant Group Incorporated**(a) ........................................ 520,000
----------
Total Preferred Stock (cost--$2,033,819) ..................................................... 2,037,500
----------
<CAPTION>
Number
of Warrants
- -----------
<S> <C>
Warrants(a)--1.29%
Cable--0.02%
2,000 Knology Holdings Incorporated ...................................................... 5,000
2,000 UIH Australia Pacific Incorporated ................................................. 10,000
----------
15,000
----------
</TABLE>
7
<PAGE>
MANAGED HIGH YIELD FUND INC.
<TABLE>
<CAPTION>
Number
of Warrants Value
- ----------- -----
<S> <C>
Warrants(a) (concluded)
Communications--0.79%
1,500 Colt Telecom Group PLC ............................................................. $ 495,000
1,750 McCaw International Limited ........................................................ 6,563
4,000 Verio Incorporated ................................................................. 174,000
-----------
675,563
-----------
Consumer Manufacturing--0.26%
2,000 AVI Holdings Incorporated .......................................................... 10,000
3,000 IFA Capital Incorporated ........................................................... 210,000
-----------
220,000
-----------
Entertainment--0.01%
750 Discovery Zone Incorporated++ ...................................................... 7,500
-----------
Finance--0.01%
750 Olympic Financial Limited .......................................................... 7,500
-----------
Food & Beverage--0.16%
1,250 Packaged Ice Incorporated .......................................................... 137,500
-----------
Gaming--0.01%
10,563 Casino America Incorporated ........................................................ 10,563
-----------
Retail--0.00%
270 Cookies USA Incorporated ........................................................... 0
-----------
Technology--0.03%
17,000 Ampex Corporation++ ................................................................ 19,125
800 Electronic Retailing Systems International ......................................... 8,000
1,500 InterAct Systems Incorporated ...................................................... 3,750
-----------
30,875
-----------
Total Warrants (cost--$263,351) .............................................................. 1,104,501
-----------
Total Investments (cost--$83,691,898)--98.16% ................................................ 83,948,417
Other assets in excess of liabilities--1.84% ................................................. 1,576,656
-----------
Net Assets--100.00% .......................................................................... $85,525,073
===========
</TABLE>
- ------------------
# Security represents a unit which is composed of the stated bond with
attached warrants or common stock.
++ Illiquid securities representing 1.6% of net assets. These 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.
(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, 1998
Assets:
Investments in securities, at value (cost--$83,691,898) ........ $83,948,417
Receivable for investments sold ................................ 972,417
Interest receivable ............................................ 1,584,941
Deferred organizational expenses ............................... 9,249
Other assets ................................................... 5,074
-----------
Total assets ................................................... 86,520,098
-----------
Liabilities:
Payable for investments purchased .............................. 799,491
Payable to investment adviser and administrator ................ 65,598
Accrued expenses and other liabilities ......................... 129,936
-----------
Total liabilities .............................................. 995,025
-----------
Net Assets:
Capital Stock - $0.001 par value; 100,000,000 shares authorized;
6,031,667 shares issued and outstanding ........................ 90,455,326
Undistributed net investment income ............................ 196,124
Accumulated net realized loss from investment transactions ..... (5,382,896)
Net unrealized appreciation of investments ..................... 256,519
-----------
Net assets applicable to shares outstanding .................... $85,525,073
===========
Net asset value per share ...................................... $ 14.18
===========
See accompanying notes to financial statements
9
<PAGE>
MANAGED HIGH YIELD FUND INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the
Year Ended
July 31, 1998
--------------
<S> <C>
Investment income:
Interest and dividends ........................................... $ 8,555,397
-----------
Expenses:
Investment advisory and adminstration ............................ 780,730
Legal and audit .................................................. 57,110
Reports and notices to shareholders .............................. 50,116
Custody and accounting ........................................... 46,835
Amortization of organizational expenses .......................... 30,620
Directors' fees .................................................. 10,500
Transfer agency and service fees ................................. 8,399
Other expenses ................................................... 15,849
-----------
1,000,159
-----------
Net investment income ............................................ 7,555,238
-----------
Realized and unrealized gains (losses) from investment activities:
Net realized gain from investment transactions ................... 1,813,855
Net change in unrealized appreciation/depreciation of investments (2,476,436)
-----------
Net realized and unrealized loss from investment activities ...... (662,581)
-----------
Net increase in net assets resulting from operations ............. $ 6,892,657
===========
</TABLE>
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,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
From operations:
Net investment income........................................................... $ 7,555,238 $ 7,755,248
Net realized gains from investment transactions................................ 1,813,855 897,493
Net change in unrealized appreciation/depreciation of investments............... (2,476,436) 5,275,401
------------ -------------
Net increase in net assets resulting from operations............................ 6,892,657 13,928,142
------------ -------------
Dividends to shareholders from:
Net investment income........................................................... (7,599,901) (7,599,901)
------------ ------------
Net increase (decrease) in net assets........................................... (707,244) 6,328,241
Net assets:
Beginning of year............................................................... 86,232,317 79,904,076
------------ ------------
End of year (including undistributed net investment income of $196,124
and $170,004, respectively).................................................... $85,525,073 $86,232,317
============ ============
</TABLE>
11
See accompanying notes to financial statements
<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"), an asset management 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.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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.
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,
1998 was substantially the same as the cost of securities for financial
statement purposes.
At July 31, 1998, the components of net unrealized appreciation of
investments were as follows:
<TABLE>
<S> <C>
Gross appreciation (investments having an excess of value over cost)............ $ 3,454,615
Gross depreciation (investments having an excess of cost over value)........... (3,198,096)
-----------
Net unrealized appreciation of investments..................................... $ 256,519
===========
</TABLE>
For the year ended July 31, 1998, aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $132,353,812 and
$134,679,846, respectively.
CAPITAL STOCK
Of the 6,031,667 shares of common stock outstanding, 8,667 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, 1998, the Fund had a net capital loss carryforward of
$5,244,902. 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.
In accordance with U.S. Treasury Regulations, the Fund has elected to
defer realized capital losses in the amount of $137,994 arising after October
31, 1997. Such losses are treated for tax purposes as arising on August 1,
1998.
13
<PAGE>
MANAGED HIGH YIELD FUND INC.
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each period
is presented below:
<TABLE>
<CAPTION>
For the Period
December 7,
1993+
For the Years Ended July 31, through July 31,
------------------------------------------ ----------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ............... $ 14.30 $ 13.25 $ 13.44 $ 13.76 $ 15.00
-------- -------- -------- --------- --------
Net investment income .............................. 1.25 1.29 1.29 1.40 0.77
Net realized and unrealized gains (losses) from
investments and foreign currency transactions .... (0.11) 1.02 (0.16) (0.34) (1.25)
-------- -------- -------- --------- --------
Net increase (decrease) from investment operations . 1.14 2.31 1.13 1.06 (0.48)
-------- -------- -------- --------- --------
Dividends from net investment income ............... (1.26) (1.26) (1.32) (1.38) (0.76)
-------- -------- -------- --------- --------
Net asset value, end of period ..................... $ 14.18 $ 14.30 $ 13.25 $ 13.44 $ 13.76
======== ======== ======== ========= =========
Market value, end of period ........................ $ 13.44 $ 13.94 $ 12.50 $ 12.38 $ 12.38
======== ======== ======== ========= =========
Total investment return (1) ........................ 5.45% 22.59% 12.16% 11.87% (12.76)%
======== ======== ======== ========= =========
Ratios/Supplemental Data:
Net assets, end of period (000's omitted) .......... $ 85,525 $ 86,232 $ 79,904 $ 81,081 $ 82,995
Ratio of expenses to average net assets ............ 1.15% 1.34% 1.25% 1.21% 1.17%*
Ratio of net investment income to average net assets 8.71% 9.39% 9.87% 10.68% 8.27%*
Portfolio turnover rate ............................ 156% 122% 135% 103% 85%
</TABLE>
- ----------
+ Commencement of operations
* Annualized
(1) Total investment return is calculated assuming a purchase of common 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 Fund's Dividend Reinvestment Plan. Total investment
return 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
To the Board of Directors and Stockholders of
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, 1998, 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, 1998, by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Managed High Yield Fund Inc. at July 31, 1998, 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 14, 1998
15
<PAGE>
MANAGED HIGH YIELD FUND INC.
TAX INFORMATION (unaudited)
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,
1998) 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 1998. 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 1999. 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 (unaudited)
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 seek high
current income. The Fund's investment adviser and administrator is Mitchell
Hutchins Asset Management Inc., an asset management subsidiary of PaineWebber
Incorporated ("PaineWebber"), which has over $51 billion in assets under
management as of August 31, 1998.
SHAREHOLDER INFORMATION
The NYSE ticker symbol for the Managed High Yield Fund Inc. 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.
YEAR 2000 RISKS
Like other funds and financial and business organizations around the
world, the Fund could be adversely affected if the computer systems used by
its investment adviser, other service providers and entities with computer
systems that are linked to Fund records do not properly process and calculate
date-related information and data from and after January 1, 2000. This is
commonly known as the "Year 2000 Issue."
Mitchell Hutchins is taking steps that it believes are reasonably
designed to address the Year 2000 Issue with respect to the computer systems
that it uses, and to obtain satisfactory assurances that each of the Fund's
other major service providers is taking comparable steps. However, there can
be no assurance that these steps will be sufficient to avoid any adverse
impact on the Fund.
DISTRIBUTION POLICY
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
common 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. The ability of such stockholders to participate in the Plan may change
if their shares are transferred into the name of another broker or nominee.
A stockholder may elect not to participate in the Plan or may terminate
participation in the Plan at any time without penalty, and stockholders who
have previously terminated participation in the Plan may rejoin it at any
time. Changes in elections must be made in writing to the Fund's transfer
agent and should include the stockholder's name and address as they appear on
that share certificate or in the transfer agent's records. An election to
terminate participation in the Plan, until such election is changed, will be
deemed an election by a stockholder to take all subsequent distributions in
cash. An election will be effective only for distributions declared and having
a record date at least ten days after the date on which the election is
received.
17
<PAGE>
MANAGED HIGH YIELD FUND INC.
GENERAL INFORMATION (unaudited) (concluded)
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 number of shares of common stock purchased with each
dividend will be equal to the result obtained by dividing the amount of the
dividend payable to a particular stockholder by the average price per share
(including applicable brokerage commissions) that the transfer agent was able
to obtain in the open market. The Fund will not issue any new shares of common
stock in connection with the Plan. There is no charge to participants for
reinvesting dividends or other distributions. The transfer agent's fees for
handling the reinvestment of distributions will be paid by the Fund. However,
each participant pays a pro rata share of brokerage commissions incurred with
respect to the transfer agent's open market purchases of common stock in
connection with the reinvestment of distributions. The automatic reinvestment
of dividends and other distributions in shares of common stock does not
relieve participants of any income tax that may be payable on such
distributions. See "Tax Information".
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Trust reserves the right to amend or terminate the Plan with
respect to any dividend or other distribution if notice of the change is sent
to Plan participants at least 30 days before the record date for such
distribution. The Plan also may be amended or terminated by the transfer agent
by at least 30 days' written notice to all Plan participants. Additional
information regarding the Plan may be obtained from, and all correspondence
concerning the Plan should be directed to, the transfer agent at PNC Bank,
National Association, c/o PFPC Inc., P.O. Box 8950, Wilmington, Delaware
19899.
18
<PAGE>
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>
ANNUAL REPORT
====================
MANAGED HIGH
YIELD FUND INC.
JULY 31, 1998
PAINEWEBBER
(Copyright)1998 PaineWebber Incorporated
Member SIPC
