UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-7396
Managed High Income Portfolio Inc.
(Exact name of registrant as specified in charter)
125 Broad Street, New York, NY 10004
(Address of principal executive offices) (Zip code)
Robert I. Frenkel, Esq.
Smith Barney Fund Management LLC
300 First Stamford Place
Stamford, CT 06902
(Name and address of agent for service)
Registrant's telephone number, including area code: (800) 451-2010
Date of fiscal year end: February 29
Date of reporting period: February 29, 2004
ITEM 1. REPORT TO STOCKHOLDERS.
The Annual Report to Stockholders is filed herewith.
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Managed
HIGH INCOME
PORTFOLIO INC.
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Annual
Report
February 29, 2004
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Managed
HIGH INCOME
PORTFOLIO INC.
WHAT'S INSIDE
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Letter from the Chairman .................................................. 1
Manager Overview .......................................................... 3
Schedule of Investments ................................................... 8
Statement of Assets and Liabilities ....................................... 29
Statement of Operations ................................................... 30
Statements of Changes in Net Assets ....................................... 31
Notes to Financial Statements ............................................. 32
Financial Highlights ...................................................... 37
Independent Auditors' Report .............................................. 38
Financial Data ............................................................ 39
Additional Information .................................................... 40
Dividend Reinvestment Plan ................................................ 43
Tax Information ........................................................... 45
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LETTER FROM
THE CHAIRMAN
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R. JAY GERKEN, CFA
Chairman, President and
Chief Executive Officer
Dear Shareholder,
The high-yield bond market rallied over the 12 months ending February 29, 2004,
spurred by an improving economy, which benefited from a mid-year cut in interest
rates. Although the high-yield market(i) stumbled in July due to a sell-off in
the U.S. Treasury bond market amid interest rate concerns, the high-yield rally
resumed later in the summer as prices of U.S. Treasury bonds stabilized.
Record inflows into high-yield bond funds throughout much of the period drove
demand for higher-yielding securities, propelling the market higher.
Better-than-expected quarterly earnings and lower default rates also contributed
to this strong demand, while increased capital market transactions fortified the
balance sheets of corporate bond issuers. Please note that high-yield bonds are
subject to additional risks, such as the increased risk of default and greater
volatility because of the lower credit quality of these issues.
Please read on for a more detailed look at prevailing economic and market
conditions during the fund's fiscal year and to learn how those conditions and
changes made to the portfolio during this time may have affected fund
performance.
Information About Your Fund
In recent months several issues in the mutual fund industry have come under the
scrutiny of federal and state regulators. The fund's Adviser and some of its
affiliates have received requests for information from various government
regulators regarding market timing, late trading, fees and other mutual fund
issues in connection with various investigations. The fund has been informed
that the Adviser and its affiliates are responding to those information
requests, but are not in a position to predict the outcome of these requests and
investigations.
1
As always, thank you for your confidence in our stewardship of your assets. We
look forward to helping you continue to meet your financial goals.
Sincerely,
/s/ R. Jay Gerken
R. Jay Gerken, CFA
Chairman, President and Chief Executive Officer
March 17, 2004
2
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MANAGER
OVERVIEW
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Performance Review
The Managed High Income Portfolio Inc. returned 11.78% based on its New York
Stock Exchange ("NYSE") market price and 23.98% based on its net asset value
("NAV")(ii) per share during the 12 months ended February 29, 2004. In
comparison, the unmanaged Citigroup High Yield Market Index ("High Yield
Index")(iii) returned 25.72%, and the fund's Lipper high current yield
closed-end funds category average was 26.95% over the same time frame.(iv)
Please note that Lipper performance returns are based on each fund's NAV.
During the fiscal year, the fund made distributions to shareholders totaling
$0.64 per share. The performance table shows the fund's 30-day SEC yield and its
12-month total return based on its NAV and market price as of February 29, 2004.
Past performance is not a guarantee of future results. The fund's yields will
vary.
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FUND PERFORMANCE AS OF FEBRUARY 29, 2004
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30-Day 12 Month
Price Per Share SEC Yield Total Return
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$7.12 (NAV) 6.67% 23.98%
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$6.98 (NYSE) 6.81% 11.78%
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All figures represent past performance and are not a guarantee of future
results. The fund's yields will vary.
Total returns are based on changes in NAV or market price, respectively. Total
returns assume the reinvestment of all dividends and/or capital gains
distributions, if any, in additional shares. The "SEC yield" is a return figure
often quoted by bond and other fixed income mutual funds. This quotation is
based on the most recent 30-day (or one month) period covered by the fund's
filings with the SEC. The yield figure reflects the dividends and interest
earned during the period after deduction of the fund's expenses for the period.
These yields are as of February 29, 2004 and are subject to change.
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Factors Driving the High-Yield Market Rally
Earlier last year, the high-yield market(v) benefited from strong investor
demand for these securities, as evidenced by large inflows of capital into
high-yield mutual funds. Declining default rates and relatively favorable yields
available through high-yield bonds in the low interest rate environment
contributed to this demand.
3
The end of major hostilities in Iraq, reports that many companies had generated
first-quarter earnings in line with estimates, and expectations in May that the
Fed would likely cut its short-term interest rate targets, all helped buoy
high-yield securities through mid-June. In order to help stimulate the U.S.
economy, the Fed cut its target for short-term interest rates in June to its
lowest level since the Eisenhower Administration. During the early summer, the
high-yield market declined considerably due to the sharp sell-off in U.S.
Treasury bonds, which resulted in the high-yield market's first monthly decline
in eight consecutive months.
High-Yield Rally Resumes
The high-yield market regained momentum in the fall amid record inflows into
high-yield funds as the U.S. Treasury bond market stabilized. The fact that
quarterly earnings exceeded expectations, economic growth improved and default
rates remained low relative to 2002 also contributed to the strong demand.
Additionally, increased capital market transactions fortified the balance sheets
of corporate bond issuers in the healthier economic environment. Annual growth
in gross domestic product ("GDP")(vi) over the third quarter of 2003 registered
at 8.2%(vii), although some of this growth was attributable to one-time factors,
such as the tax cuts and the end of major combat operations in Iraq.
The U.S. economy grew at a moderate pace throughout the remainder of 2003,
spurred by the mid-year cut in interest rates, the healthy demand from the
consumer and increasing capital/business investments from corporations.
Fourth-quarter GDP growth registered at 4.1%, which was below third-quarter
results but above those earlier in 2003. Investors' concerns about interest
rates remained subdued due to lackluster employment results and comments from
the Fed, which stated late in January following a Federal Open Market Committee
("FOMC") meeting that it "believes that it can be patient in removing its policy
accommodation."(viii) However, the fact that the Fed did not include the clause
"considerable period" in this statement, as it had referenced in prior FOMC
statements during recent months, added some ambiguity to the Fed's intentions,
according to market analysts.
How Credit Categories Stacked Up
Toward the end of January, tight spreads(ix) combined with a number of
releveraging deals that proposed to pay dividends to equity sponsors weighed on
the market. Over the fiscal year, CCC-rated issues significantly outperformed
B-rated issues, which, in turn, outperformed BB-rated issues as investors sought
higher-yielding securities.(x) CCC-rated bonds gave up some of their gains in
February due, in part, to profit-taking, as reflected in a short-lived outflow
of
4
capital from the high-yield market as investors focused more on fundamentals.
However, capital inflows into the broader high-yield market resumed in March
(after the end of the reporting period). Investor appetite for lower-quality
bonds over much of the fiscal year spurred a spate of new issuance and
refinancings,(xi) as companies rushed to issue CCC-rated debt in the favorable
environment, and B- and BB-rated companies sought to refinance existing debt at
lower rates.
The airlines, cable, utilities, towers and telecommunications sectors were among
the better performers over the fiscal year. The textiles sector was the only
sector to decline during the period. The healthcare sector significantly
underperformed as well but finished in slightly positive territory on a total
return basis.(xii) The fund benefited over the period from its overweighting in
CCC-rated bonds and the towers and cable sectors, but its underweighting in the
utilities sector negatively affected fund performance.
Competitive Relative Yields
Following a strong run over the past year, the high-yield bond market has not
rallied as significantly this year as it did in 2002 due to recent valuations.
However, recent data suggest the U.S. economy is in a recovery mode, which has
proved favorable for the corporate earnings and credit environment and
contributed to the high-yield market's performance. In addition, the market has
remained healthy from a fundamental perspective. In comparison to higher-rated
bonds, high-yield issues are subject to additional risks, such as the increased
possibility of default because of their lower credit quality. Yields and prices
will fluctuate. However, based on the 7.73% yield of the High Yield Index as of
February 29, 2004, high-yield bonds continued to offer competitive yields
relative to U.S. Treasury notes.
Looking for Additional Information?
The fund is traded under the symbol "MHY" and its closing market price is
available in most newspapers under the NYSE listings. The daily NAV is available
online under symbol XMHYX. Barron's and The Wall Street Journal's Monday
editions carry closed-end fund tables that will provide additional information.
In addition, the fund issues a quarterly press release that can be found on most
major financial web sites as well as www.citigroupassetmanagement.com.
In a continuing effort to provide information concerning the fund, shareholders
may call 1-888-735-6507, Monday through Friday from 8:00 a.m. to 6:00 p.m.
Eastern Time, for the fund's current net asset value, market price and other
information.
5
Thank you for your investment in the Managed High Income Portfolio Inc. We
appreciate that you have entrusted us to manage your money and value our
relationship with you.
Sincerely,
/s/ Beth A. Semmel /s/ Peter J. Wilby
Beth A. Semmel, CFA Peter J. Wilby, CFA
Vice President and Vice President and
Investment Officer Investment Officer
March 17, 2004
The information provided is not intended to be a forecast of future events, a
guarantee of future results or investment advice. Views expressed may differ
from those of the firm as a whole.
Portfolio holdings and breakdowns are as of February 29, 2004, and are subject
to change and may not be representative of the portfolio manager's current or
future investments. Please refer to pages 8 through 26 for a list and percentage
breakdown of the fund's holdings.
All index performance reflects no deduction for fees, expenses or taxes. Please
note that an investor cannot invest directly in an index.
RISKS: The fund invests in high yield bonds, which are subject to additional
risks such as the increased risk of default and greater volatility because of
the lower credit quality of the issues. The fund may use derivatives, such as
options and futures, which can be illiquid, may disproportionately increase
losses, and have a potentially large impact on fund performance. In addition,
the fund may invest in foreign securities, which are subject to certain risks of
overseas investing including currency fluctuations and changes in political and
economic conditions, which could result in significant market fluctuations.
(i) As measured by the performance of the Citigroup High Yield Market Index,
which is a broad-based unmanaged index of high yield securities.
(ii) NAV is a price that reflects the value of the fund's underlying portfolio
plus other assets, less the fund's liabilities. However, the price at
which an investor may buy or sell shares of the fund is at the fund's
market price as determined by supply of and demand for the fund's shares.
(iii) The Citigroup High Yield Market Index is a broad-based unmanaged index of
high yield securities.
(iv) Lipper, Inc. is a major independent mutual-fund tracking organization.
Returns are based on the 12-month period ended February 29, 2004,
calculated among the 5 funds in the fund's Lipper category including the
reinvestment of dividends and capital gains, if any.
(v) As measured by the performance of the Citigroup High Yield Market Index.
(vi) Gross domestic product is a market value of goods and services produced
by labor and property in a given country.
(vii) Source: U.S. Department of Commerce Bureau of Economic Analysis (February
27, 2004).
(viii) Source: Federal Reserve (January 28, 2004).
(ix) Credit spread is the difference between the yield of a particular
corporate security and a benchmark security that has the same maturity as
that particular corporate security.
(x) Source: Citigroup Global Markets index data.
(xi) Source: Goldman Sachs.
(xii) Source: Citigroup Global Markets index data.
6
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Take Advantage of the Fund's Dividend Reinvestment Plan!
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 43. 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 shares of common stock of the Fund that 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, 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 the Fund's NAV per share or 95% of the
then current market price. In that case, the number of Fund shares you receive
will be based on the weighted average of prices paid for shares purchased in the
open market and the price at which the Fund issues the remaining shares.
To find out more detailed information about the Plan and about how you can
participate, please call PFPC Inc. at 1 (800) 331-1710.
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7
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SCHEDULE OF INVESTMENTS
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February 29, 2004
Face
Amount++ Rating(a) Security Value
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CORPORATE BONDS AND NOTES -- 95.9%
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Aerospace/Defense -- 0.5%
975,000 B3* Dunlop Standard Aerospace Holdings PLC,
Sr. Notes, 11.875% due 5/15/09 ...................... $ 1,048,125
400,000 BB- Sequa Corp., Sr. Notes, 9.000% due 8/1/09 ............. 447,000
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1,495,125
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Airlines -- 1.2%
6,296,587 D Airplanes Pass-Through Trust, Corporate
Asset-Backed Securities, Series 1, Class D,
10.875% due 3/15/19 (b) ............................. 0
Continental Airlines, Inc., Pass-Through Trust
Certificates:
940,000 BB- Series 1999-2, Class C-2,
7.434% due 9/15/04............................... 934,636
344,763 BB Series 2000-2, Class C, 8.312% due 4/2/11.......... 319,069
1,435,000 B Series 2001-2, Class D, 7.568% due 12/1/06......... 1,282,343
United Air Lines, Inc., Pass-Through Certificates:
581,503 CCC Series 2000-1, Class B, 8.030% due 7/1/11............ 157,843
1,443,359 CCC+ Series 2000-2, Class B, 7.811% due 10/1/09........... 582,547
Series 2001-1:
275,000 B+ Class B, 6.932% due 9/1/11......................... 127,429
630,000 CCC+ Class C, 6.831% due 9/1/08......................... 104,152
281,421 BBB+ US Airways, Inc., Pass-Through Trust
Certificates, Series 99-1, Class A,
8.360% due 1/20/19 .................................. 284,168
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3,792,187
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Automotive -- 2.4%
Dana Corp., Notes:
1,160,000 BB 6.500% due 3/1/09 ................................... 1,229,600
525,000 BB 10.125% due 3/15/10 ................................. 614,250
1,300,000 B- EaglePicher Inc., Sr. Sub. Notes,
9.750% due 9/1/13 ................................... 1,436,500
450,000 Baa1* Ford Motor Co., Notes, 7.450% due 7/16/31 ............. 453,358
775,000 A3* General Motors Acceptance Corp., Notes,
6.875% due 8/28/12 .................................. 833,676
General Motors Corp.:
250,000 Baa1* Sr. Debentures, 8.375% due 7/15/33 .................. 284,133
1,325,000 Baa1* Sr. Notes, 7.125% due 7/15/13 ....................... 1,448,877
8 See Notes to Financial Statements.
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SCHEDULE OF INVESTMENTS
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February 29, 2004 (continued)
Face
Amount++ Rating(a) Security Value
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Automotive -- 2.4% (continued)
375,000 B- Rexnord Corp., Sr. Sub. Notes,
10.125% due 12/15/12 ................................ $ 420,000
600,000 B2* Tenneco Automotive Inc., Sr. Secured, 2nd
Priority Lien Notes, Series B,
10.250% due 7/15/13 ................................. 702,000
250,000 BB- TRW Automotive, Inc., Sr. Sub. Notes,
11.000% due 2/15/13 ................................. 295,000
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7,717,394
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Broadcasting -- 1.8%
2,182,000 B- Emmis Communications Corp., Sr. Discount
Notes, step bond to yield
12.517% due 3/15/11 ................................. 2,072,900
800,000 B3* Granite Broadcasting Corp., Sr. Secured Notes,
9.750% due 12/1/10 (c) .............................. 790,000
225,000 B- NextMedia Operating, Inc., Sr. Sub. Notes,
10.750% due 7/1/11 .................................. 253,688
Paxson Communications Corp.:
825,000 Caa1* Sr. Sub. Discount Notes, step bond to yield
12.309% due 1/15/09................................ 705,375
355,000 Caa1* Sr. Sub. Notes, 10.750% due 7/15/08 ................. 369,200
895,000 B2* Radio One, Inc., Sr. Sub. Notes, Series B,
8.875% due 7/1/11 ................................... 993,450
515,000 Caa1* Spanish Broadcasting System Inc., Sub. Notes,
9.625% due 11/1/09 .................................. 547,188
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5,731,801
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Building/Construction -- 3.9%
Associated Materials Inc.:
2,300,000 B- Sr. Discount Notes, step bond to yield
11.244% due 3/1/14 (c) ............................ 1,331,861
265,000 B- Sr. Sub. Notes, 9.750% due 4/15/12 .................. 292,825
1,050,000 B- Atrium Cos., Inc., Sr. Sub. Notes, Series B,
10.500% due 5/1/09 .................................. 1,119,562
950,000 B- Brand Services, Inc., Sr. Notes,
12.000% due 10/15/12 ................................ 1,116,250
D.R. Horton, Inc.:
685,000 BB+ Sr. Notes, 8.000% due 2/1/09 ........................ 780,900
545,000 Ba2* Sr. Sub. Notes, 9.375% due 3/15/11 .................. 622,663
815,000 Ba2* KB HOME, Sr. Sub. Notes, 9.500% due 2/15/11............ 920,950
See Notes to Financial Statements. 9
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SCHEDULE OF INVESTMENTS
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February 29, 2004 (continued)
Face
Amount++ Rating(a) Security Value
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Building/Construction -- 3.9% (continued)
895,000 BBB- Lennar Corp., Sr. Notes, Series B,
9.950% due 5/1/10.................................... $ 1,022,314
Nortek Inc., Series B:
575,000 B+ Sr. Notes, 9.125% due 9/1/07......................... 595,367
1,315,000 B- Sr. Sub. Notes, 9.875% due 6/15/11................... 1,472,800
405,000 Ca* Oglebay Norton Co., Sr. Sub. Notes,
10.000% due 2/1/09 (b)............................... 143,775
490,000 BBB- The Ryland Group, Inc., Sr. Notes,
9.750% due 9/1/10.................................... 558,600
1,035,000 Ba2* Schuler Homes, Inc., Sr. Sub. Notes,
10.500% due 7/15/11.................................. 1,212,244
Standard Pacific Corp.:
685,000 BB Sr. Notes, 8.500% due 4/1/09......................... 718,394
525,000 Ba3* Sr. Sub. Notes, 9.250% due 4/15/12................... 622,125
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12,530,630
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Business Services -- 1.3%
995,000 B- Advanstar Communications Inc., 2nd Priority
Sr. Secured Notes, 8.620% due 8/15/08 (d)............ 1,059,675
1,805,000 BBB- Avis Group Holdings Inc., Sr. Sub. Notes,
11.000% due 5/1/09................................... 1,929,574
600,000 B- Muzak LLC/Muzak Finance Corp., Sr. Notes,
10.000% due 2/15/09.................................. 634,500
2,005,000 D Outsourcing Solutions Inc., Sr. Sub. Notes,
Series B, 11.000% due 11/1/06 (b).................... 15,038
375,000 B2* Vertis, Inc., Sr. Secured Second Lien Notes,
Series B, 9.750% due 4/1/09.......................... 401,250
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4,040,037
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Cable -- 10.4%
Charter Communications Holdings, LLC:
Sr. Discount Notes:
6,255,000 Ca* Step bond to yield 13.999% due 1/15/10............. 5,129,100
1,650,000 Ca* Step bond to yield 13.334% due 1/15/11............. 1,196,250
2,250,000 Ca* Step bond to yield 17.089% due 5/15/11............. 1,485,000
1,450,000 Ca* Sr. Notes, 10.750% due 10/1/09....................... 1,283,250
CSC Holdings, Inc.:
1,475,000 BB- Sr. Debentures, 7.625% due 7/15/18................... 1,629,875
10 See Notes to Financial Statements.
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SCHEDULE OF INVESTMENTS
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February 29, 2004 (continued)
Face
Amount++ Rating(a) Security Value
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Cable -- 10.4% (continued)
Sr. Notes:
625,000 BB- 7.875% due 12/15/07................................ $ 676,563
Series B:
725,000 BB- 8.125% due 7/15/09............................... 793,875
420,000 BB- 7.625% due 4/1/11................................ 455,700
Sr. Sub. Debentures:
2,345,000 B+ 10.500% due 5/15/16................................ 2,702,612
575,000 B+ 9.875% due 4/1/23.................................. 601,594
1,450,000 BB- DIRECTV Holdings LLC/DIRECTV Financing
Co., Inc., Sr. Notes, 8.375% due 3/15/13............. 1,656,625
EchoStar DBS Corp., Sr. Notes:
2,105,000 BB- 10.375% due 10/1/07.................................. 2,312,869
1,193,000 BB- 9.125% due 1/15/09................................... 1,357,037
1,550,000 BBB+ Historic TW Inc., Sr. Debentures,
6.625% due 5/15/29................................... 1,615,828
1,585,000 B- Insight Communications Co., Inc., Sr.
Discount Notes, step bond to yield
14.599% due 2/15/11.................................. 1,371,025
400,000 B+ Insight Midwest, L.P./Insight Capital, Inc.,
Sr. Notes, 10.500% due 11/1/10....................... 434,000
1,500,000 B+ Mediacom Broadband LLC, Sr. Notes,
11.000% due 7/15/13.................................. 1,635,000
600,000 B+ Mediacom LLC/Mediacom Capital Corp.,
Sr. Notes, 9.500% due 1/15/13........................ 612,000
Pegasus Communications Corp., Sr. Notes,
Series B:
105,000 Ca* 9.625% due 10/15/05................................ 98,700
425,000 Ca* 9.750% due 12/1/06................................. 388,875
525,000 CCC- Pegasus Satellite Communications, Inc.,
Sr. Discount Notes, step bond to yield
17.856% due 3/1/07................................... 435,750
2,710,000 BB- Rogers Cablesystems Ltd., Sr. Sub. Notes,
11.000% due 12/1/15.................................. 3,163,925
865,000(GBP) Ca* Telewest Communications PLC,
Sr. Notes, 5.250% due 2/19/07 (b)(c)(e).............. 900,524
1,300,000 BBB+ Time Warner Inc., Sr. Notes,
7.625% due 4/15/31................................... 1,517,493
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33,453,470
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See Notes to Financial Statements. 11
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SCHEDULE OF INVESTMENTS
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February 29, 2004 (continued)
Face
Amount++ Rating(a) Security Value
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Chemicals -- 5.3%
615,000 Ba2* Airgas, Inc., Sr. Sub. Notes, 9.125% due 10/1/11....... $ 701,100
435,000 CCC Avecia Group PLC, Sr. Notes,
11.000% due 7/1/09................................... 374,100
1,450,000 B+ Equistar Chemicals L.P./Equistar Funding Corp.,
Sr. Notes, 10.625% due 5/1/11........................ 1,580,500
425,000 BB+ FMC Corp., Medium-Term Notes, Series A,
6.750% due 5/5/05.................................... 437,750
Huntsman ICI Holdings LLC:
9,540,000 Caa2* Sr. Discount Notes, zero coupon bond to yield
13.188% due 12/31/09............................... 4,531,500
525,000 B- Sr. Notes, 9.875% due 3/1/09......................... 580,125
1,055,000 B+ IMC Global Inc., Sr. Notes, Series B,
11.250% due 6/1/11................................... 1,255,450
1,035,000 B+ International Specialty Holdings Inc., Sr. Secured
Notes, Series B, 10.625% due 12/15/09................ 1,148,850
1,055,000 BB- ISP Chemco Inc., Sr. Sub. Notes, Series B,
10.250% due 7/1/11................................... 1,197,425
1,425,000 B+ Lyondell Chemical Co., Sr. Secured Notes,
11.125% due 7/15/12.................................. 1,560,375
420,000 BBB- Methanex Corp., Sr. Notes, 8.750% due 8/15/12.......... 478,800
390,000 B- OM Group, Inc., Sr. Sub. Notes,
9.250% due 12/15/11.................................. 412,425
Rhodia SA:
25,000 B3* Sr. Notes, 7.625% due 6/1/10 (c)..................... 23,750
1,750,000 Caa1* Sr. Sub. Notes, 8.875% due 6/1/11 (c)................ 1,575,000
105,000 B+ Terra Capital Inc., Sr. Secured Notes,
12.875% due 10/15/08................................. 125,475
875,000 Ba3* Westlake Chemical Corp., Sr. Notes,
8.750% due 7/15/11................................... 958,125
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16,940,750
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Consumer Products & Services -- 4.5%
American Greetings Corp.:
740,000 BBB- Notes, 6.100% due 8/1/28............................. 758,500
475,000 BB+ Sr. Sub. Notes, 11.750% due 7/15/08.................. 545,063
Doane Pet Care Co.:
450,000 B2* Sr. Notes, 10.750% due 3/1/10........................ 469,125
105,000 Caa1* Sr. Sub. Notes, 9.750% due 5/15/07................... 96,075
1,525,000 Caa1* Home Interiors & Gifts, Inc., Sr. Sub. Notes,
10.125% due 6/1/08................................... 1,551,687
12 See Notes to Financial Statements.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 29, 2004 (continued)
Face
Amount++ Rating(a) Security Value
- -----------------------------------------------------------------------------------------------------
Consumer Products & Services -- 4.5% (continued)
1,325,000 B- Icon Health & Fitness, Inc., Sr. Sub. Notes,
11.250% due 4/1/12................................... $ 1,530,375
1,200,000 B- Interface, Inc., Sr. Notes, 10.375% due 2/1/10......... 1,350,000
1,300,000 B Playtex Products, Inc., Sr. Secured Notes,
8.000% due 3/1/11 (c)................................ 1,358,500
Sealy Mattress Co.:
1,805,000 B- Sr. Sub. Discount Notes, Series B,
10.875% due 12/15/07............................... 1,881,712
250,000 B- Sr. Sub. Notes, Series B, 9.875% due 12/15/07........ 259,688
Service Corp. International:
740,000 BB- Debentures, 7.875% due 2/1/13........................ 760,350
Notes:
820,000 BB- 6.875% due 10/1/07................................. 861,000
1,030,000 BB- 6.500% due 3/15/08................................. 1,060,900
840,000 B1* Sola International Inc., Notes,
6.875% due 3/15/08................................... 853,650
1,135,000 B+ Stewart Enterprises, Inc., Sr. Sub. Notes,
10.750% due 7/1/08................................... 1,282,550
- -----------------------------------------------------------------------------------------------------
14,619,175
- -----------------------------------------------------------------------------------------------------
Energy -- 8.3%
4,800,000 B- Dynegy Holdings Inc., 2nd Priority Sr. Secured
Notes, 7.670% due 7/15/08 (c)(d)..................... 5,148,000
4,175,000 Caa1* El Paso Corp., Global Medium-Term Notes,
7.750% due 1/15/32................................... 3,371,312
1,275,000 BB- Forest Oil Corp., Sr. Notes,
8.000% due 12/15/11.................................. 1,396,125
566,000 BB- GulfTerra Energy Partners L.P., Sr. Sub. Notes,
Series B, 8.500% due 6/1/11.......................... 633,920
1,025,000 BB- Leviathan Gas Pipeline Partners L.P., Sr. Sub.
Notes, Series B, 10.375% due 6/1/09.................. 1,083,937
820,000 BB Luscar Coal Ltd., Sr. Notes,
9.750% due 10/15/11.................................. 934,800
1,050,000 B+ Magnum Hunter Resources, Inc., Sr. Notes,
9.600% due 3/15/12................................... 1,176,000
235,000 Caa1* Parker Drilling Co., Sub. Notes,
5.500% due 8/1/04 (e)................................ 237,056
543,000 Aa2* Pennzoil-Quaker State Co., Sr. Notes,
10.000% due 11/1/08.................................. 637,903
See Notes to Financial Statements. 13
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 29, 2004 (continued)
Face
Amount++ Rating(a) Security Value
- -----------------------------------------------------------------------------------------------------
Energy -- 8.3% (continued)
Plains Exploration & Production Co.,
Sr. Sub. Notes:
800,000 B 8.750% due 7/1/12.................................. $ 898,000
525,000 B Series B, 8.750% due 7/1/12........................ 589,313
Pogo Producing Co., Sr. Sub. Notes, Series B:
205,000 BB 10.375% due 2/15/09.................................. 217,300
310,000 BB 8.250% due 4/15/11................................... 347,200
1,140,000 BB Pride International, Inc., Sr. Notes,
10.000% due 6/1/09................................... 1,221,225
520,000 BB- SESI, L.L.C., Sr. Notes, 8.875% due 5/15/11............ 569,400
1,420,000 B Swift Energy Co., Sr. Sub. Notes,
9.375% due 5/1/12.................................... 1,590,400
Vintage Petroleum, Inc.:
725,000 BB- Sr. Notes, 8.250% due 5/1/12......................... 804,750
200,000 B1* Sr. Sub. Notes, 7.875% due 5/15/11................... 214,000
500,000 Ba3* Westport Resources Corp., Sr. Sub. Notes,
8.250% due 11/1/11................................... 555,000
The Williams Cos., Inc.:
Notes:
1,025,000 B+ 7.625% due 7/15/19................................. 1,045,500
1,825,000 B+ 7.875% due 9/1/21.................................. 1,870,625
450,000 B+ 8.750% due 3/15/32................................. 486,000
1,500,000 B+ Sr. Notes, 8.625% due 6/1/10.......................... 1,646,250
- -----------------------------------------------------------------------------------------------------
26,674,016
- -----------------------------------------------------------------------------------------------------
Entertainment -- 1.8%
AMC Entertainment Inc., Sr. Sub. Notes:
1,605,000 CCC+ 9.500% due 3/15/09................................... 1,655,156
715,000 CCC+ 9.500% due 2/1/11.................................... 752,537
Vivendi Universal SA, Sr. Notes:
2,250,000 Ba3* 6.250% due 7/15/08................................... 2,424,375
725,000 BB 9.250% due 4/15/10................................... 857,312
- -----------------------------------------------------------------------------------------------------
5,689,380
- -----------------------------------------------------------------------------------------------------
Environmental Services -- 1.6%
Allied Waste North America, Inc.:
Sr. Notes, Series B:
1,555,000 BB- 8.500% due 12/1/08................................. 1,741,600
48,000 BB- 7.875% due 1/1/09.................................. 50,126
1,425,000 B+ Sr. Sub. Notes, Series B, 10.000% due 8/1/09......... 1,537,219
14 See Notes to Financial Statements.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 29, 2004 (continued)
Face
Amount++ Rating(a) Security Value
- -----------------------------------------------------------------------------------------------------
Environmental Services -- 1.6% (continued)
1,600,000 B- IMCO Recycling Inc., Sr. Secured Notes,
10.375% due 10/15/10 (c)............................. $ 1,680,000
- -----------------------------------------------------------------------------------------------------
5,008,945
- -----------------------------------------------------------------------------------------------------
Financial Services -- 1.4%
775,000 A3* Ford Motor Credit Co., Notes,
7.250% due 10/25/11.................................. 840,846
500,000 B JSG Funding PLC, Sr. Notes,
9.625% due 10/1/12................................... 565,000
3,200,000 B3* Ocwen Capital Trust I, Capital Securities,
10.875% due 8/1/27................................... 3,232,000
- -----------------------------------------------------------------------------------------------------
4,637,846
- -----------------------------------------------------------------------------------------------------
Food & Beverage -- 0.9%
530,000 B+ Cott Beverages Inc., Sr. Sub. Notes,
8.000% due 12/15/11.................................. 581,675
600,000 Ba2* Dean Foods Co., Sr. Notes,
6.900% due 10/15/17.................................. 625,500
675,000 B Del Monte Corp., Sr. Sub. Notes, Series B,
8.625% due 12/15/12.................................. 749,250
950,000 B Land O' Lakes, Inc., Sr. Secured Notes,
9.000% due 2/15/10 (c)............................... 945,250
200,000 Caa1* Mrs. Fields' Original Cookies, Inc., Sr. Sub.
Notes, Series B, 10.125% due 12/1/04................. 171,000
- -----------------------------------------------------------------------------------------------------
3,072,675
- -----------------------------------------------------------------------------------------------------
Healthcare -- 3.4%
300,000 B- aaiPharma Inc., Sr. Sub. Notes,
11.000% due 4/1/10................................... 327,000
AmeriPath, Inc., Sr. Sub. Notes:
1,000,000 B- 10.500% due 4/1/13................................... 1,045,000
450,000 B- 10.500% due 4/1/13 (c)............................... 470,250
1,775,000 B- Athena Neurosciences Finance LLC,
Sr. Notes, 7.250% due 2/21/08........................ 1,748,375
1,300,510 B+ Dade Behring Inc., Sr. Sub. Notes,
11.910% due 10/3/10.................................. 1,508,592
465,000 B Extendicare Health Services, Inc., Sr. Sub.
Notes, 9.500% due 7/1/10............................. 518,475
1,350,000 B- InSight Health Services Corp., Sr. Sub. Notes,
Series B, 9.875% due 11/1/11......................... 1,387,125
See Notes to Financial Statements. 15
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 29, 2004 (continued)
Face
Amount++ Rating(a) Security Value
- -----------------------------------------------------------------------------------------------------
Healthcare -- 3.4% (continued)
Tenet Healthcare Corp.:
1,500,000 B+ Notes, 7.375% due 2/1/13............................. $ 1,395,000
Sr. Notes:
350,000 B+ 5.375% due 11/15/06................................ 334,250
825,000 B+ 6.500% due 6/1/12.................................. 732,188
1,475,000 B3* Vanguard Health Systems, Inc., Sr. Sub. Notes,
9.750% due 8/1/11.................................... 1,618,812
- -----------------------------------------------------------------------------------------------------
11,085,067
- -----------------------------------------------------------------------------------------------------
Hotels/Casinos/Gaming -- 6.9%
1,270,000 B+ AKI, Inc., Sr. Notes, 10.500% due 7/1/08............... 1,327,150
1,325,000 B Ameristar Casinos, Inc., Sr. Sub. Notes,
10.750% due 2/15/09.................................. 1,530,375
Caesars Entertainment, Inc., Sr. Sub. Notes:
800,000 Ba2* 9.375% due 2/15/07................................... 902,000
800,000 Ba2* 8.875% due 9/15/08................................... 908,000
1,530,000 Ba2* 8.125% due 5/15/11................................... 1,736,550
935,000 B2* Courtyard by Marriott II L.P., Sr. Notes,
Series B, 10.750% due 2/1/08......................... 940,844
1,550,000 B1* Felcor Lodging, L.P., Sr. Notes,
10.000% due 9/15/08.................................. 1,650,750
Hilton Hotels Corp.:
425,000 BBB- Notes, 7.625% due 12/1/12............................ 483,438
890,000 BBB- Sr. Notes, 7.950% due 4/15/07........................ 994,575
375,000 B+ Horseshoe Gaming Holding Corp., Sr. Sub.
Notes, Series B, 8.625% due 5/15/09.................. 395,156
1,760,000 Ba3* Host Marriott, L.P., Notes, Series 1,
9.500% due 1/15/07................................... 1,958,000
Mandalay Resort Group:
415,000 BB- Sr. Sub. Debentures, 7.625% due 7/15/13.............. 447,163
1,040,000 BB- Sr. Sub. Notes, Series B, 10.250% due 8/1/07......... 1,219,400
MeriStar Hospitality Operating Partnership,
L.P./MeriStar Hospitality Finance Corp.,
Sr. Notes:
150,000 B2* 9.000% due 1/15/08................................. 155,625
1,250,000 B2* 10.500% due 6/15/09................................ 1,325,000
MGM MIRAGE, Sr. Sub. Notes:
525,000 Ba2* 9.750% due 6/1/07.................................... 606,375
1,285,000 Ba2* 8.375% due 2/1/11.................................... 1,487,387
16 See Notes to Financial Statements.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 29, 2004 (continued)
Face
Amount++ Rating(a) Security Value
- -----------------------------------------------------------------------------------------------------
Hotels/Casinos/Gaming -- 6.9% (continued)
750,000 BB+ Starwood Hotels & Resorts Worldwide, Inc.,
Notes, 7.875% due 5/1/12............................. $ 840,000
450,000 B+ Station Casinos, Inc., Sr. Sub. Notes,
6.875% due 3/1/16 (c)................................ 456,750
1,100,000 B+ Turning Stone Casino Resort Enterprise,
Sr. Notes, 9.125% due 12/15/10 (c)................... 1,196,250
1,580,000 B- Venetian Casino Resort LLC/Las Vegas
Sands, Inc., Mortgage Secured Notes,
11.000% due 6/15/10.................................. 1,824,900
- -----------------------------------------------------------------------------------------------------
22,385,688
- -----------------------------------------------------------------------------------------------------
Insurance -- 0.5%
1,015,000 Ba1* Markel Capital Trust I, Capital Securities,
Series B, 8.710% due 1/1/46.......................... 1,085,142
630,000 BB+ PXRE Capital Trust I, Capital Trust Pass-Through
Securities, 8.850% due 2/1/27........................ 642,600
- -----------------------------------------------------------------------------------------------------
1,727,742
- -----------------------------------------------------------------------------------------------------
Machinery -- 0.8%
265,000 BB- Case Credit Corp., Notes, 6.750% due 10/21/07.......... 275,600
225,000 BB- Case New Holland Inc., Sr. Notes,
9.250% due 8/1/11 (c)................................ 254,250
850,000 B- Columbus McKinnon Corp., Sr. Secured Notes,
10.000% due 8/1/10................................... 939,250
415,000 B+ NMHG Holding Co., Notes,
10.000% due 5/15/09.................................. 458,575
700,000 B Terex Corp., Sr. Sub. Notes, Series B,
10.375% due 4/1/11................................... 794,500
- -----------------------------------------------------------------------------------------------------
2,722,175
- -----------------------------------------------------------------------------------------------------
Manufacturing -- 2.7%
745,000 NR Aqua-Chem, Inc., Sr. Sub. Notes,
11.250% due 7/1/08................................... 614,625
415,000 B+ Arvin Capital Trust I, Capital Securities,
9.500% due 2/1/27.................................... 446,125
1,185,000 B Flowserve Corp., Sr. Sub. Notes,
12.250% due 8/15/10.................................. 1,374,600
725,000 B- Invensys PLC, Sr. Notes,
9.875% due 3/15/11 (c)............................... 711,566
1,990,000 Ba2* Louisiana-Pacific Corp., Sr. Sub. Notes,
10.875% due 11/15/08................................. 2,343,225
See Notes to Financial Statements. 17
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 29, 2004 (continued)
Face
Amount++ Rating(a) Security Value
- -----------------------------------------------------------------------------------------------------
Manufacturing -- 2.7% (continued)
1,365,000 Caa1* Park-Ohio Industries, Inc., Sr. Sub. Notes,
9.250% due 12/1/07................................... $ 1,392,300
1,675,000 Caa2* Resolution Performance Products LLC/RPP
Capital Corp., Sr. Sub. Notes,
13.500% due 11/15/10................................. 1,365,125
325,000 B+ Wolverine Tube, Inc., Sr. Notes,
10.500% due 4/1/09................................... 346,125
- -----------------------------------------------------------------------------------------------------
8,593,691
- -----------------------------------------------------------------------------------------------------
Metals/Mining -- 0.8%
1,350,000 B+ AK Steel Corp., Sr. Notes, 7.875% due 2/15/09.......... 1,201,500
1,030,000 BBB- Phelps Dodge Corp., Sr. Notes,
8.750% due 6/1/11.................................... 1,286,438
- -----------------------------------------------------------------------------------------------------
2,487,938
- -----------------------------------------------------------------------------------------------------
Packaging/Containers -- 3.7%
1,350,000 B+ Anchor Glass Container Corp., Sr. Secured
Notes, 11.000% due 2/15/13........................... 1,572,750
2,060,000 BB- Owens-Brockway Glass Container Inc.,
Sr. Secured Notes, 8.875% due 2/15/09................ 2,250,550
375,000 B Owens-Illinois, Inc., Sr. Notes,
7.150% due 5/15/05................................... 388,125
990,000 B+ Plastipak Holdings, Inc., Sr. Notes,
10.750% due 9/1/11................................... 1,103,850
Pliant Corp.:
650,000 B- Sr. Secured 2nd Priority Lien Notes,
11.125% due 9/1/09................................. 680,875
150,000 B- Sr. Sub. Notes, 13.000% due 6/1/10................... 128,250
425,000 B Radnor Holdings Corp., Sr. Notes,
11.000% due 3/15/10.................................. 386,750
935,000 BBB Sealed Air Corp., Notes,
6.950% due 5/15/09 (c)............................... 1,071,277
2,790,000 B Stone Container Finance Co. of Canada,
Sr. Notes, 11.500% due 8/15/06 (c)................... 2,912,062
Tekni-Plex, Inc.:
650,000 B2* Sr. Secured Notes, 8.750% due 11/15/13 (c)........... 680,875
835,000 B- Sr. Sub. Notes, Series B,
12.750% due 6/15/10................................ 905,975
- -----------------------------------------------------------------------------------------------------
12,081,339
- -----------------------------------------------------------------------------------------------------
18 See Notes to Financial Statements.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 29, 2004 (continued)
Face
Amount++ Rating(a) Security Value
- -----------------------------------------------------------------------------------------------------
Paper/Forestry Products -- 2.3%
1,400,000 BB+ Abitibi-Consolidated Inc., Debentures,
8.850% due 8/1/30.................................... $ 1,485,513
1,400,000 B+ Appleton Papers Inc., Sr. Sub. Notes, Series B,
12.500% due 12/15/08................................. 1,599,500
650,000 B2* Blue Ridge Paper Products Inc., Sr. Secured
Notes, 9.500% due 12/15/08 (c)....................... 667,875
Buckeye Technologies Inc., Sr. Sub. Notes:
525,000 B 9.250% due 9/15/08................................... 532,875
1,745,000 B 8.000% due 10/15/10.................................. 1,740,637
1,500,000 BB- Tembec Industries Inc., Sr. Notes,
8.625% due 6/30/09................................... 1,485,000
- -----------------------------------------------------------------------------------------------------
7,511,400
- -----------------------------------------------------------------------------------------------------
Printing/Publishing -- 2.5%
650,000 B Dex Media East LLC/Dex Media East Finance Co.,
Notes, 12.125% due 11/15/12.......................... 771,875
Dex Media, Inc., Discount Notes:
1,100,000 B Step bond to yield 8.372% due 11/15/13 (c)........... 739,750
800,000 B Step bond to yield 8.910% due 11/15/13 (c)........... 538,000
875,000 B Dex Media West LLC/Dex Media West Finance
Co., Sr. Sub. Notes, 9.875% due 8/15/13 (c).......... 986,562
1,810,777 B- Hollinger Participation Trust, Sr. Notes,
12.125% due 11/15/10 (c)............................. 2,095,975
1,425,000 B Houghton Mifflin Co., Sr. Discount Notes,
step bond to yield 11.627% due 10/15/13 (c).......... 869,250
730,000 BB- Mail-Well I Corp., Sr. Notes,
9.625% due 3/15/12................................... 810,300
525,000 B PEI Holdings, Inc., Sr. Notes,
11.000% due 3/15/10.................................. 607,687
300,000 B+ RH Donnelley Financial Corp., Sr. Sub. Notes,
10.875% due 12/15/12 (c)............................. 358,500
358,000 BB- Yell Finance BV, Sr. Discount Notes,
step bond to yield 12.263% due 8/1/11................ 334,730
- -----------------------------------------------------------------------------------------------------
8,112,629
- -----------------------------------------------------------------------------------------------------
Retail -- 4.6%
250,000 BB- Ahold Finance USA Inc., Notes,
8.250% due 7/15/10.................................... 275,000
1,891,459 BB Ahold Lease, USA, Inc., Pass-Through Certificates,
Series 2001-A-1, 7.820% due 1/2/20.................... 1,963,571
See Notes to Financial Statements. 19
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 29, 2004 (continued)
Face
Amount++ Rating(a) Security Value
- -----------------------------------------------------------------------------------------------------
Retail -- 4.6% (continued)
315,000 Caa2* American Restaurant Group, Inc., Sr. Secured
Notes, Series D, 11.500% due 11/1/06................. $ 174,825
740,000 B3* CKE Restaurants, Inc., Sr. Sub. Notes,
9.125% due 5/1/09.................................... 773,300
250,000 B Cole National Group, Inc., Sr. Sub. Notes,
8.625% due 8/15/07................................... 258,750
525,000 Ca* Denny's Corp., Sr. Notes, 11.250% due 1/15/08.......... 454,125
300,000 NR Fleming Cos., Inc., Sr. Notes,
10.125% due 4/1/08 (b)............................... 51,000
265,000 B2* Friendly Ice Cream Corp., Sr. Notes,
10.500% due 12/1/07.................................. 276,925
The Gap, Inc., Notes:
315,000 BB+ 9.900% due 12/15/05.................................. 353,588
150,000 BB+ 6.900% due 9/15/07................................... 166,500
1,100,000 BB+ 10.550% due 12/15/08................................. 1,364,000
J.C. Penney Corp., Inc., Notes:
1,400,000 BB+ 8.000% due 3/1/10.................................... 1,624,000
1,323,000 BB+ 9.000% due 8/1/12.................................... 1,617,367
608,000 B2* Jo-Ann Stores, Inc., Sr. Sub. Notes,
10.375% due 5/1/07................................... 634,874
530,000 BB- The Pep Boys -- Manny, Moe & Jack,
Medium-Term Notes, Series A,
6.710% due 11/3/04................................... 536,625
Rite Aid Corp.:
1,105,000 B- Notes, 7.125% due 1/15/07............................ 1,116,050
Sr. Notes:
1,555,000 B- 7.625% due 4/15/05................................. 1,586,100
125,000 B- 11.250% due 7/1/08................................. 137,813
1,172,000 BB Saks Inc., Notes, 9.875% due 10/1/11................... 1,412,260
- -----------------------------------------------------------------------------------------------------
14,776,673
- -----------------------------------------------------------------------------------------------------
Technology -- 1.3%
1,160,000 B3* Amkor Technology, Inc., Sub. Notes,
5.000% due 3/15/07 (e)............................... 1,128,100
2,025,000 B- Lucent Technologies Inc., Debentures,
6.450% due 3/15/29................................... 1,665,562
2,400,000 B1* Sanmina -- SCI Corp., Sub. Debentures,
zero coupon bond to yield
10.702% due 9/12/20 (e).............................. 1,248,000
- -----------------------------------------------------------------------------------------------------
4,041,662
- -----------------------------------------------------------------------------------------------------
20 See Notes to Financial Statements.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 29, 2004 (continued)
Face
Amount++ Rating(a) Security Value
- -----------------------------------------------------------------------------------------------------
Telecommunications -- 11.9%
701,329 NR AirGate PCS, Inc., Sr. Sub. Secured Notes,
9.375% due 9/1/09.................................... $ 683,796
Alamosa (Delaware), Inc.:
584,035 CCC Sr. Discount Notes, step bond to yield
11.437% due 7/31/09................................ 534,392
975,000 CCC Sr. Notes, 11.000% due 7/31/10....................... 1,048,125
150,000 B- American Cellular Corp., Sr. Notes, Series B,
10.000% due 8/1/11................................... 151,500
2,375,000 Caa1* American Tower Corp., Sr. Notes,
9.375% due 2/1/09.................................... 2,529,375
600,000 B3* American Tower Escrow Corp., Discount
Notes, zero coupon bond to yield
14.314% due 8/1/08................................... 423,000
AT&T Corp., Sr. Notes:
1,350,000 BBB 8.050% due 11/15/11.................................. 1,575,191
1,075,000 BBB 8.750% due 11/15/31.................................. 1,271,253
AT&T Wireless Services, Inc.:
2,350,000 BBB Notes, 8.125% due 5/1/12............................. 2,827,504
2,700,000 BBB Sr. Notes, 7.875% due 3/1/11......................... 3,182,387
605,000 B+ Avaya, Inc., Sr. Secured Notes,
11.125% due 4/1/09................................... 715,412
1,790,000(EUR) B- COLT Telecom Group PLC, Sr. Notes,
2.000% due 4/3/07 (c)(e)............................. 2,549,946
Crown Castle International Corp., Sr. Notes:
1,430,000 B3* 10.750% due 8/1/11................................... 1,608,750
750,000 B3* 7.500% due 12/1/13 (c)............................... 755,625
300,000 Caa1* Dobson Communications Corp.,
Sr. Notes, 8.875% due 10/1/13........................ 259,500
940,000 NR GT Group Telecom Inc., Sr. Discount Notes,
step bond to yield 16.470% due 2/1/10 (b)............ 94
535,000 D Horizon PCS, Inc., Sr. Discount Notes,
step bond to yield 14.867% due 10/1/10 (b)........... 147,125
875,000 B+ Nextel Communications, Inc., Sr. Notes,
9.375% due 11/15/09.................................. 954,844
602,000 Caa1* Nextel Partners, Inc., Sr. Notes,
12.500% due 11/15/09................................. 704,340
1,225,000 B Nortel Networks Corp., Notes,
6.875% due 9/1/23.................................... 1,218,875
See Notes to Financial Statements. 21
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 29, 2004 (continued)
Face
Amount++ Rating(a) Security Value
- -----------------------------------------------------------------------------------------------------
Telecommunications -- 11.9% (continued)
525,000 B Northern Telecom Capital Corp., Notes,
7.875% due 6/15/26................................... $ 561,750
Qwest Corp.:
1,250,000 Ba3* Debentures, 6.875% due 9/15/33....................... 1,112,500
2,425,000 Ba3* Notes, 9.125% due 3/15/12 (c)........................ 2,776,625
Qwest Services Corp.:
953,000 Caa1* Notes, 14.000% due 12/15/14 (c)...................... 1,157,895
850,000 Caa1* Sr. Secured Sub. Debentures,
13.500% due 12/15/10 (c)........................... 1,000,875
SBA Communications Corp.:
332,000 Caa2* Sr. Discount Notes, 12.000% due 3/1/08............... 358,560
650,000 Caa2* Sr. Notes, 10.250% due 2/1/09........................ 654,875
1,250,000 B3* SpectraSite, Inc., Sr. Notes, 8.250% due 5/15/10....... 1,321,875
Sprint Capital Corp., Notes:
1,975,000 BBB- 6.875% due 11/15/28.................................. 2,034,120
3,400,000 BBB- 8.750% due 3/15/32................................... 4,232,327
- -----------------------------------------------------------------------------------------------------
38,352,436
- -----------------------------------------------------------------------------------------------------
Textiles/Apparel -- 0.8%
Levi Strauss & Co.:
690,000 CCC Notes, 7.000% due 11/1/06............................ 479,550
Sr. Notes:
1,350,000 CCC 11.625% due 1/15/08................................ 938,250
600,000 CCC 12.250% due 12/15/12............................... 417,000
225,000 Caa1* Tropical Sportswear International Corp.,
Sr. Sub. Notes, Series A, 11.000% due 6/15/08........ 99,000
468,000 B William Carter Co., Sr. Sub. Notes,
Series B, 10.875% due 8/15/11........................ 545,220
- -----------------------------------------------------------------------------------------------------
2,479,020
- -----------------------------------------------------------------------------------------------------
Tobacco -- 0.2%
647,000 BB+ Standard Commercial Tobacco Corp., Inc.,
Sr. Notes, 8.875% due 8/1/05......................... 659,940
- -----------------------------------------------------------------------------------------------------
Transportation -- 0.8%
625,000 B+ General Maritime Corp., Sr. Notes,
10.000% due 3/15/13.................................. 706,250
1,100,000 B Iron Mountain, Inc., Sr. Sub. Notes,
8.625% due 4/1/13.................................... 1,201,750
22 See Notes to Financial Statements.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 29, 2004 (continued)
Face
Amount++ Rating(a) Security Value
- -----------------------------------------------------------------------------------------------------
Transportation -- 0.8% (continued)
580,000 Baa2* Windsor Petroleum Transport Corp., Notes,
7.840% due 1/15/21 (c)............................... $ 575,650
- -----------------------------------------------------------------------------------------------------
2,483,650
- -----------------------------------------------------------------------------------------------------
Utilities -- 7.4%
The AES Corp.:
2,080,000 B- Sr. Notes, 9.500% due 6/1/09......................... 2,277,600
Sr. Sub. Exchange Notes:
75,000 B- 8.375% due 8/15/07................................. 76,500
250,000 B- 8.500% due 11/1/07................................. 256,875
1,550,000 B Allegheny Energy Supply Co. LLC, Secured Notes,
Series A, 10.250% due 11/15/07 (c)................... 1,674,000
330,000 BB+ Avista Corp., Sr. Notes, 9.750% due 6/1/08............. 397,650
5,045,000 Caa1* Calpine Canada Energy Finance PLC,
Sr. Notes, 8.500% due 5/1/08......................... 3,922,487
Calpine Corp.:
200,000 B 2nd Priority Sr. Secured Notes,
8.500% due 7/15/10 (c)............................. 185,000
1,075,000 Caa1* Sr. Notes, 8.625% due 8/15/10........................ 825,062
525,000 B+ CMS Energy Corp., Sr. Notes,
7.625% due 11/15/04.................................. 541,406
Edison Mission Energy, Sr. Notes:
1,055,000 B 10.000% due 8/15/08.................................. 1,113,025
475,000 B 7.730% due 6/15/09................................... 458,375
1,775,000 B 9.875% due 4/15/11................................... 1,872,625
625,000 D Mirant Americas Generation, Inc., Sr. Notes,
9.125% due 5/1/31 (b)................................ 503,125
2,350,000 B+ NRG Energy, Inc., Sr. Secured Notes,
8.000% due 12/15/13 (c).............................. 2,438,125
1,895,000 B2* Orion Power Holdings, Inc., Sr. Notes,
12.000% due 5/1/10................................... 2,321,375
Reliant Resources, Inc., Sr. Secured Notes:
1,725,000 B1* 9.250% due 7/15/10................................... 1,863,000
1,675,000 B1* 9.500% due 7/15/13................................... 1,825,750
1,240,000 BBB- Thomas & Betts Corp., Medium-Term Notes,
6.625% due 5/7/08.................................... 1,308,200
- -----------------------------------------------------------------------------------------------------
23,860,180
- -----------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost -- $287,191,831)................................. 308,764,661
- -----------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 23
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 29, 2004 (continued)
Shares Security Value
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
COMMON STOCK (f) -- 0.3%
- -----------------------------------------------------------------------------------------------------
Food & Beverage -- 0.0%
38,785 Aurora Foods Inc....................................... $ 194
- -----------------------------------------------------------------------------------------------------
Telecommunications -- 0.3%
28,966 AirGate PCS, Inc....................................... 579,038
19,336 Crown Castle International Corp........................ 232,995
2,169 McLeodUSA, Inc., Class A Shares........................ 3,666
12,250 Weblink Wireless Inc., Class A Shares.................. 123
- -----------------------------------------------------------------------------------------------------
815,822
- -----------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost -- $782,292)..................................... 816,016
=====================================================================================================
- -----------------------------------------------------------------------------------------------------
PREFERRED STOCK -- 0.6%
- -----------------------------------------------------------------------------------------------------
Aerospace/Defense -- 0.0%
1,050 Northrop Grumman Corp., 7.250% Equity
Security Units (g)................................... 110,554
- -----------------------------------------------------------------------------------------------------
Telecommunications -- 0.6%
2,235 Alamosa Holdings, Inc., 7.500% Cumulative,
Series B (h)......................................... 1,014,080
12,000 Crown Castle International Corp.,
6.250% Cumulative (h)................................ 550,500
823 Dobson Communications Corp.,
13.000% Sr. Exchangeable,
Payment-in-Kind...................................... 69,371
2,600 Motorola, Inc., 7.000% Equity Security Units (g)....... 132,054
- -----------------------------------------------------------------------------------------------------
1,766,005
- -----------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost -- $1,265,662)................................... 1,876,559
=====================================================================================================
24 See Notes to Financial Statements.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 29, 2004 (continued)
Warrants Security Value
- -----------------------------------------------------------------------------------------------------
WARRANTS (f) -- 0.0%
- -----------------------------------------------------------------------------------------------------
Internet Software/Services -- 0.0%
3,630 WAM!NET Inc., Expire 3/1/05............................ $ 36
- -----------------------------------------------------------------------------------------------------
Packaging/Containers -- 0.0%
150 Pliant Corp., Expire 6/1/10 (c)........................ 2
- -----------------------------------------------------------------------------------------------------
Technology -- 0.0%
2,430 Viasystems Group, Inc., Expire 1/31/10................. 0
- -----------------------------------------------------------------------------------------------------
Telecommunications -- 0.0%
600 American Tower Corp., Expire 8/1/08 (c)................ 81,900
940 GT Group Telecom Inc., Expire 2/1/10 (c)............... 705
695 Horizon PCS Inc., Expire 10/1/10 (c)................... 0
4,125 Iridium World Communications Inc.,
Expire 7/15/05 (c)................................... 41
720 IWO Holdings Inc., Expire 1/15/11 (c).................. 7
4,125 RSL Communications, Ltd., Class A Shares,
Expire 11/15/06...................................... 0
- -----------------------------------------------------------------------------------------------------
82,653
- -----------------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost -- $768,092)..................................... 82,691
=====================================================================================================
See Notes to Financial Statements. 25
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
February 29, 2004 (continued)
Face
Amount++ Security Value
- -----------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 3.2%
- -----------------------------------------------------------------------------------------------------
$ 10,389,000 UBS Warburg LLC dated 2/27/04, 1.000%
due 3/1/04; Proceeds at maturity --
$10,389,866; (Fully collateralized by
U.S. Treasury Notes, 1.500% to 4.375%
due 7/31/05 to 2/15/09; Market value --
$10,596,811) (Cost -- $10,389,000)................... $ 10,389,000
=====================================================================================================
TOTAL INVESTMENTS -- 100.0%
(Cost -- $300,396,877**)............................... $321,928,927
=====================================================================================================
++ Face amount denominated in U.S. dollars unless otherwise indicated.
(a) All ratings are by Standard & Poor's Ratings Service, except for those
identified by an asterisk(*), are rated by Moody's Investors Service.
(b) Security is currently in default.
(c) 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. These securities
have been deemed liquid pursuant to guidelines approved by the Board of
Directors.
(d) Variable rate security.
(e) Convertible bonds exchangeable for shares of common stock.
(f) Non-income producing security.
(g) Each equity security unit consists of a contract to purchase common stock
and senior notes at a specified price.
(h) Preferred stock convertible into shares of common stock.
** Aggregate cost for Federal income tax purposes is $300,871,629.
Currency abbreviations used in this schedule:
EUR -- Euro
GBP -- British Pound
See pages 27 and 28 for definitions of ratings.
26 See Notes to Financial Statements.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BOND RATINGS (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Ratings Service ("Standard &Poor's") -- Ratings from "AA" to
"CCC" may be modified by the addition of a plus (+) or minus (-) sign to show
relative standings within the major rating categories.
AAA -- Bonds rated "AAA" have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA -- Bonds rated "AA" have a very strong capacity to pay interest and repay
principal and differ from the highest rated issue only in a small
degree.
A -- Bonds rated "A" have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds
in higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for bonds
in higher rated categories.
BB, B, -- Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded, on balance,
CCC, as predominantly speculative with respect to capacity to pay interest
CC, and repay principal in accordance with the terms of the obligation.
and C "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.
D -- Bonds rated "D" are in default, and payment of interest and/or
repayment of principal is in arrears.
Moody's Investors Service ("Moody's") -- Numerical modifiers 1, 2 and 3 may be
applied to each generic rating from "Aa" to "Caa," where 1 is the highest and 3
the lowest ranking within its generic category.
Aa -- Bonds rated "Aa" are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or
fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in "Aaa" securities.
A -- Bonds rated "A" possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
some time in the future.
27
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BOND RATINGS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Baa -- Bonds rated "Baa" are considered as 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 therefore 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 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.
C -- Bonds rated "C" are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NR -- Indicates that the bond is not rated by Standard & Poor's or Moody's.
28
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
February 29, 2004
- ------------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $300,396,877) .................... $ 321,928,927
Cash ............................................................ 21,847
Interest and dividends receivable ............................... 6,154,567
Receivable for securities sold .................................. 267,072
Prepaid expenses ................................................ 862
Other receivables ............................................... 106,553
- ------------------------------------------------------------------------------------
Total Assets .................................................... 328,479,828
- ------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased ................................ 2,517,186
Dividends payable ............................................... 431,536
Investment advisory fee payable ................................. 232,898
Administration fee payable ...................................... 51,755
Accrued expenses ................................................ 122,789
- ------------------------------------------------------------------------------------
Total Liabilities ............................................... 3,356,164
- ------------------------------------------------------------------------------------
Total Net Assets ................................................... $ 325,123,664
====================================================================================
NET ASSETS:
Par value of capital shares ..................................... $ 45,638
Capital paid in excess of par value ............................. 503,468,668
Overdistributed net investment income ........................... (869,245)
Accumulated net realized loss from investment transactions
and foreign currencies ....................................... (199,055,806)
Net unrealized appreciation of investments and foreign currencies 21,534,409
- ------------------------------------------------------------------------------------
Total Net Assets
(Equivalent to $7.12 per share on 45,637,929 shares of $0.001
par value outstanding; 500,000,000 shares authorized) ........... $ 325,123,664
====================================================================================
See Notes to Financial Statements. 29
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the Year Ended February 29, 2004
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest ................................................. $ 30,161,924
Dividends ................................................ 76,021
- --------------------------------------------------------------------------------
Total Investment Income .................................. 30,237,945
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee (Note 2) ......................... 2,808,280
Administration fee (Note 2) .............................. 624,062
Shareholder communications ............................... 119,724
Transfer agency services ................................. 81,514
Audit and legal .......................................... 70,648
Custody .................................................. 60,768
Directors' fees .......................................... 53,335
Stock exchange listing fees .............................. 38,183
Other .................................................... 16,739
- --------------------------------------------------------------------------------
Total Expenses ........................................... 3,873,253
- --------------------------------------------------------------------------------
Net Investment Income ....................................... 26,364,692
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTE 3):
Realized Gain (Loss) From:
Investment transactions ............................... (1,803,200)
Foreign currency transactions ......................... 2,592
- --------------------------------------------------------------------------------
Net Realized Loss ........................................ (1,800,608)
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation From:
Investments ........................................... 41,844,867
Foreign currencies .................................... (594)
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation .................. 41,844,273
- --------------------------------------------------------------------------------
Net Gain on Investments and Foreign Currencies .............. 40,043,665
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations ...................... $ 66,408,357
================================================================================
30 See Notes to Financial Statements.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
For the Year Ended February 29, 2004
and the Year Ended February 28, 2003
- -------------------------------------------------------------------------------------------
2004 2003
---- ----
OPERATIONS:
Net investment income ................................ $ 26,364,692 $ 29,211,130
Net realized loss .................................... (1,800,608) (22,241,682)
Increase (decrease) in net unrealized appreciation ... 41,844,273 (845,636)
- -------------------------------------------------------------------------------------------
Increase in Net Assets From Operations ............... 66,408,357 6,123,812
- -------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ................................ (27,038,516) (29,020,043)
Capital .............................................. (1,870,208) (1,402,237)
- -------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders ...................... (28,908,724) (30,422,280)
- -------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net asset value of shares issued for
reinvestment of dividends .......................... 3,567,971 3,662,659
- -------------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions ............................ 3,567,971 3,662,659
- -------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets ....................... 41,067,604 (20,635,809)
NET ASSETS:
Beginning of year .................................... 284,056,060 304,691,869
- -------------------------------------------------------------------------------------------
End of year* ......................................... $ 325,123,664 $ 284,056,060
===========================================================================================
* Includes overdistributed net investment income of: ... $ (869,245) $ (333,719)
===========================================================================================
See Notes to Financial Statements. 31
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Managed High Income Portfolio Inc. ("Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company.
The following are significant accounting policies consistently followed by
the Fund and are in conformity with generally accepted accounting principles
("GAAP"): (a) security transactions are accounted for on trade date; (b)
securities are valued at the mean between the quoted bid and asked 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 for which market quotations are not available will be
valued in good faith at fair value by or under the direction of the Board of
Directors; (d) securities maturing within 60 days are valued at cost plus
accreted discount or minus amortized premium, which approximates value; (e)
gains or losses on the sale of securities are calculated by using the specific
identification method; (f) interest income, adjusted for amortization of premium
and accretion of discount, is recorded on an accrual basis; (g) 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;
(h) dividends and distributions to shareholders are recorded on the ex-dividend
date; the Fund distributes dividends monthly and capital gains, if any, at least
annually; (i) 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; (j) the character of income and gains to be distributed is
determined in accordance with income tax regulations which may differ from
accounting principles generally accepted in the United States of America. At
February 29, 2004, 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, expired capital loss
carryforwards from accumulated net realized loss amounting to $18,114,682 were
reclassified to paid-in capital. Net investment income, net realized gains and
net assets were not affected by this change; (k) 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; and (l) estimates and assumptions are required to be made
regarding assets, liabilities and changes in
32
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 invests in high-yield instruments that are subject
to certain credit and market risks. The yields of high-yield debt obligations
reflect, among other things, perceived credit risk. The Fund's investment in
securities rated below investment-grade typically involves risks not associated
with higher rated securities including, among others, greater risk of timely and
ultimate payment of interest and principal, greater market price volatility and
less liquid secondary market trading.
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 or offset by entering into another forward
exchange contract.
2. Investment Advisory Agreement, Administration Agreement and Other
Transactions
Smith Barney Fund Management LLC("SBFM"), an indirect wholly-owned
subsidiary of Citigroup Inc. ("Citigroup"), acts as investment adviser to the
Fund. The Fund pays SBFM an advisory fee calculated at an annual rate of 0.90%
of the Fund's average daily net assets. This fee is calculated daily and paid
monthly.
SBFM also acts as the Fund's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the Fund's average daily net assets.
This fee is calculated daily and paid monthly.
All officers and one Director of the Fund are employees of Citigroup or
its affiliates.
3. Investments
During the year ended February 29, 2004, the aggregate cost of purchases
and proceeds from sales of investments (including maturities of long-term
investments, but excluding short-term investments) were:
================================================================================
Purchases $92,372,966
- --------------------------------------------------------------------------------
Sales 94,570,354
================================================================================
At February 29, 2004, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were as follows:
================================================================================
Gross unrealized appreciation $ 37,417,096
Gross unrealized depreciation (16,359,798)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 21,057,298
================================================================================
33
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4. Repurchase Agreements
When entering into repurchase agreements, it is the Fund's policy that a
custodian takes possession of the underlying collateral securities, the value of
which at least equals the principal amount of the repurchase transaction,
including accrued interest. To the extent that any repurchase transaction
exceeds one business day, the value of the collateral is marked-to-market to
ensure the adequacy of the collateral. If the seller defaults and the value of
the collateral declines or if bankruptcy proceedings are commenced with respect
to the seller of the security, realization of the collateral by the Fund may be
delayed or limited.
5. Capital Shares
Capital stock transactions were as follows:
Year Ended Year Ended
February 29, 2004 February 28, 2003
--------------------- ---------------------
Shares Amount Shares Amount
================================================================================
Shares issued on reinvestment 528,592 $3,567,971 561,101 $3,662,659
================================================================================
On November 16, 1999, the Fund commenced a share repurchase plan. Since
the inception of the repurchase plan, the Fund repurchased (and retired)
1,213,500 shares with a total cost of $10,210,959. For the year ended February
29, 2004, the Fund did not repurchase shares.
6. Capital Loss Carryforward
At February 29, 2004, the Fund had, for Federal income tax purposes,
approximately $199,019,000 of unused capital 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 year of expiration for each carryforward loss is indicated
below. Expiration occurs on the last day in February of the year indicated:
2005 2007 2008 2009 2010 2011 2012
=======================================================================================================================
Carryforward
Amounts $239,000 $2,616,000 $27,185,000 $37,823,000 $87,540,000 $38,635,000 $4,981,000
=======================================================================================================================
7. Income Tax Information and Distributions to Shareholders
At February 29, 2004, the tax basis components of distributable earnings
were:
================================================================================
Accumulated capital losses $(199,018,763)
- --------------------------------------------------------------------------------
Unrealized appreciation 21,059,657
================================================================================
34
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At February 29, 2004, the difference between book basis and tax basis
unrealized appreciation and depreciation was attributable primarily to wash sale
loss deferrals and the treatment of amortization of premiums and accretion of
discounts.
The tax character of distributions paid during the years ended February
29, 2004 and February 28, 2003 was:
2004 2003
================================================================================
Ordinary income $27,038,516 $29,020,043
Capital 1,870,208 1,402,237
- --------------------------------------------------------------------------------
Total $28,908,724 $30,422,280
================================================================================
8. Additional Information
The Fund has received the following information from Citigroup Asset
Management ("CAM"), the Citigroup business unit which includes the Fund's
Investment Manager and other investment advisory companies, all of which are
indirect, wholly-owned subsidiaries of Citigroup. CAM is reviewing its entry,
through an affiliate, into the transfer agent business in the period 1997-1999.
As CAM currently understands the facts, at the time CAM decided to enter the
transfer agent business, CAM sub-contracted for a period of five years certain
of the transfer agency services to a third party and also concluded a revenue
guarantee agreement with this sub-contractor providing that the sub-contractor
would guarantee certain benefits to CAM or its affiliates (the "Revenue
Guarantee Agreement"). In connection with the subsequent purchase of the
sub-contractor's business by an affiliate of the current sub-transfer agent
(PFPC Inc.) used by CAM on many of the funds it manages, this Revenue Guarantee
Agreement was amended eliminating those benefits in exchange for arrangements
that included a one-time payment from the sub-contractor.
The Boards of CAM-managed funds (the "Boards") were not informed of the
Revenue Guarantee Agreement with the sub-contractor at the time the Boards
considered and approved the transfer agent arrangements. Nor were the Boards
informed of the subsequent amendment to the Revenue Guarantee Agreement when
that occurred.
CAM has begun to take corrective actions. CAM will pay to the applicable
funds approximately $17 million (plus interest) that CAM and its affiliates
received from the Revenue Guarantee Agreement and its amendment. CAM also plans
an independent review to verify that the transfer agency fees charged by CAM
were fairly priced as compared to competitive alternatives. CAM is instituting
new procedures and making changes designed to ensure no similar arrangements are
entered into in the future.
35
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CAM has briefed the SEC, the New York State Attorney General and other
regulators with respect to this matter, as well as the U.S. Attorney who is
investigating the matter. CAM is cooperating with governmental authorities on
this matter, the ultimate outcome of which is not yet determinable.
The Fund's transfer agent is PFPC Inc., which is not affiliated with CAM.
36
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each year ended February 28,
unless otherwise noted:
- --------------------------------------------------------------------------------
2004(1)(2) 2003(2) 2002(2) 2001 2000(3)
====================================================================================================================
Net Asset Value, Beginning of Year $ 6.30 $ 6.84 $ 8.84 $ 10.02 $ 10.73
- --------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(4)(5) 0.58 0.65 0.82 0.97 1.00
Net realized and unrealized
gain (loss)(4) 0.88 (0.51) (1.96) (1.18) (0.76)
- --------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.46 0.14 (1.14) (0.21) 0.24
- --------------------------------------------------------------------------------------------------------------------
Gain From Repurchase of
Treasury Stock -- -- -- 0.01 0.03
- --------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.60) (0.65) (0.82) (0.98) (0.98)
Capital (0.04) (0.03) (0.04) -- --
- --------------------------------------------------------------------------------------------------------------------
Total Distributions (0.64) (0.68) (0.86) (0.98) (0.98)
- --------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 7.12 $ 6.30 $ 6.84 $ 8.84 $ 10.02
- --------------------------------------------------------------------------------------------------------------------
Total Return, Based on Market Price(6) 11.78% 7.86% (11.87)% 24.22% (13.40)%
- --------------------------------------------------------------------------------------------------------------------
Total Return, Based on
Net Asset Value(6) 23.98% 2.68% (13.32)% (1.06)% 3.89%
- --------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $ 325 $ 284 $ 305 $ 383 $ 435
- --------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(5) 1.24% 1.26% 1.24% 1.20% 1.15%
Net investment income(4) 8.45 10.27 10.86 10.59 9.62
- --------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 31% 71% 81% 65% 80%
- --------------------------------------------------------------------------------------------------------------------
Market Price, End of Year $ 6.98 $ 6.85 $ 7.080 $ 9.000 $ 8.125
====================================================================================================================
(1) For the year ended February 29, 2004.
(2) Per share amounts have been calculated using the monthly average shares
method.
(3) For the year ended February 29, 2000.
(4) Effective March 1, 2001, the Fund adopted a change in accounting method
that requires the Fund to amortize premiums and accrete all discounts.
Without the adoption of this change, for the year ended February 28, 2002,
net investment income, net realized and unrealized loss and the ratio of
net investment income to average net assets would have been $0.83, $1.97
and 10.96%, respectively. Per share information, ratios and supplemental
data for the periods prior to March 1, 2001 have not been restated to
reflect this change in presentation.
(5) The investment adviser has waived a portion of its fees for the year ended
February 29, 2000. If such fees had not been waived, the per share
decrease to net investment income and actual expense ratio would have been
less than $0.01 and 1.18%, respectively.
(6) The total return calculation assumes that dividends are reinvested in
accordance with the Fund's dividend reinvestment plan. Performance figures
may reflect fee waivers and/or expense reimbursements. Past performance is
no guarantee of future results. In the absence of fee waivers and/or
expense reimbursements, the total return would be reduced.
37
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each year ended February 28,
unless otherwise noted:
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of the
Managed High Income Portfolio Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Managed High Income Portfolio Inc.
("Fund") as of February 29, 2004, and the related statement of operations for
the year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended and the financial highlights for each of
the years in the five-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of February 29, 2004, by correspondence with the custodian.
As to securities purchased or sold but not yet received or delivered, we
performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Fund as of February 29, 2004, and the results of its operations for the year
then ended, the changes in its net assets for each of the years in the two-year
period then ended and financial highlights for each of the years in the
five-year period then ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
New York, New York
April 9, 2004
38
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each period:
- --------------------------------------------------------------------------------
NYSE Dividend
Record Payable Closing Net Asset Dividend Reinvestment
Date Date Price+ Value+ Paid Price
================================================================================
3/19/02 3/22/02 $7.35 $6.93 $0.063 $6.98
4/23/02 4/26/02 7.09 6.93 0.056 6.93
5/28/02 5/31/02 6.97 6.82 0.056 6.82
6/25/02 6/28/02 6.19 6.52 0.056 6.08
7/23/02 7/26/02 5.51 6.14 0.056 5.69
8/27/02 8/30/02 6.01 6.08 0.056 6.04
9/24/02 9/27/02 5.73 5.95 0.056 5.88
10/22/02 10/25/02 5.51 5.71 0.056 5.63
11/25/02 11/29/02 6.12 6.10 0.056 6.10
12/23/02 12/27/02 6.01 6.13 0.056 6.09
1/28/03 1/31/03 6.50 6.24 0.056 6.24
2/25/03 2/28/03 6.75 6.24 0.056 6.41
3/25/03 3/28/03 6.78 6.34 0.056 6.44
4/22/03 4/25/03 6.92 6.56 0.056 6.57
5/27/03 5/30/03 7.27 6.71 0.056 6.91
6/24/03 6/27/03 7.23 6.89 0.056 6.89
7/22/03 7/25/03 6.87 6.86 0.056 6.86
8/26/03 8/29/03 6.83 6.72 0.056 6.72
9/23/03 9/26/03 6.80 6.87 0.050 6.85
10/28/03 10/31/03 6.94 6.94 0.050 6.94
11/24/03 11/28/03 6.90 6.98 0.050 6.97
12/22/03 12/26/03 6.94 7.11 0.050 7.00
1/27/04 1/30/04 7.07 7.24 0.050 7.10
2/24/04 2/27/04 6.90 7.10 0.050 7.00
================================================================================
+ As of record date.
39
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Information about Directors and Officers
The business and affairs of Managed High Income Portfolio Inc. ("Fund")
are managed under the direction of the Fund's Board of Directors. Information
pertaining to the Directors and Officers of the Fund is set forth below.
Number of
Term of Portfolios Other
Office* Principal in Fund Board
Position(s) and Length Occupation(s) Complex Memberships
Held with of Time During Past Overseen Held by
Name, Address and Age Fund Served Five Years by Director Director
===============================================================================================================================
Non-Interested Directors:
Allan J. Bloostein Director Since President of Allan J. Bloostein 34 Taubman
27 West 67th Street 1993 Associates, a consulting firm; Realty Corp.
New York, NY 10023 former Director of CVS Corp.
Age 74
Dwight B. Crane Director Since Professor, Harvard Business 49 None
Harvard Business School 1993 School
Soldiers Field Road
Morgan Hall #375
Boston, MA 02163
Age 66
Paolo M. Cucchi Director Since Vice President and Dean of 7 None
Drew University 1993 College of Liberal Arts at
108 Brothers College Drew University
Madison, NJ 07940
Age 62
Robert A. Frankel Director Since Managing Partner of 24 None
1961 Deergrass Way 2000 Robert A. Frankel
Carlsbad, CA 92009 Management Consultants
Age 76
Paul Hardin Director Since Chancellor Emeritus and 34 None
12083 Morehead 1993 Professor of Law at the
Chapel Hill, NC 27514 University of North Carolina at
Age 72 Chapel Hill
William R. Hutchinson Director Since President of WR Hutchinson 42 Associated
535 N. Michigan 1993 & Associates, Inc.; Formerly Banc-Corp.
Chicago, IL 60611 Group Vice President, Mergers
Age 61 & Acquisitions BP p.l.c.
George M. Pavia Director Since Senior Partner of Pavia & 7 None
600 Madison Avenue 1993 Harcourt Attorneys
New York, NY 10022
Age 76
40
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Number of
Term of Portfolios Other
Office* Principal in Fund Board
Position(s) and Length Occupation(s) Complex Memberships
Held with of Time During Past Overseen Held by
Name, Address and Age Fund Served Five Years by Director Director
===============================================================================================================================
Interested Director:
R. Jay Gerken, CFA** Chairman, Since Managing Director of Citigroup 221 None
Citigroup Asset President 2002 Global Markets Inc. ("CGM");
Management ("CAM") and Chief Chairman, President and Chief
399 Park Avenue Executive Executive Officer of Smith
4th Floor Officer Barney Fund Management LLC
New York, NY 10022 ("SBFM"), Travelers Investment
Age 52 Adviser, Inc. ("TIA") and Citi
Fund Management Inc. ("CFM");
President and Chief Executive
Officer of certain mutual funds
associated with Citigroup Inc.
("Citigroup"); Formerly,
Portfolio Manager of Smith
Barney Allocation Series Inc.
(from 1996 to 2001) and Smith
Barney Growth and Income
Fund (from 1996 to 2000)
Officers:
Andrew B. Shoup Senior Vice Since Director of CAM; Senior N/A N/A
CAM President 2003 Vice President and Chief
125 Broad Street and Chief Administrative Officer of mutual
11th Floor Administrative funds associated with Citigroup;
New York, NY 10004 Officer Treasurer of certain mutual
Age 47 funds associated with Citigroup;
Head of International Funds
Administration of CAM (from
2001 to 2003); Director of
Global Funds Administration of
CAM (from 2000 to 2001);
Head of U.S. Citibank Funds
Administration of CAM (from
1998 to 2000)
Richard L. Peteka Chief Since Director of CGM; Chief N/A N/A
CAM Financial 2002 Financial Officer and Treasurer
125 Broad Street Officer and of certain mutual funds
11th Floor Treasurer associated with Citigroup;
New York, NY 10004 Director and Head of Internal
Age 42 Control for CAM U.S. Mutual
Fund Administration (from
1999 to 2002); Vice President,
Head of Mutual Fund
Administration and Treasurer at
Oppenheimer Capital (from
1996 to 1999)
41
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Number of
Term of Portfolios Other
Office* Principal in Fund Board
Position(s) and Length Occupation(s) Complex Memberships
Held with of Time During Past Overseen Held by
Name, Address and Age Fund Served Five Years by Director Director
===============================================================================================================================
Beth A. Semmel, CFA Vice Since Managing Director of Salomon N/A N/A
CAM President 2002 Brothers Asset Management
399 Park Avenue and Inc ("SBAM")
4th Floor Investment
New York, NY 10022 Officer
Age 43
Peter J. Wilby, CFA Vice Since Managing Director of SBAM N/A N/A
CAM President 2002
399 Park Avenue and
4th Floor Investment
New York, NY 10022 Officer
Age 45
Kaprel Ozsolak Controller Since Vice President of CGM; N/A N/A
CAM 2002 Controller of certain mutual
125 Broad Street funds associated with
11th Floor Citigroup
New York, NY 10004
Age 38
Robert I. Frenkel Secretary Since Managing Director and General N/A N/A
CAM and 2003 Counsel of Global Mutual Funds
300 First Stamford Place Chief Legal for CAM and its predecessor
4th Floor Officer (since 1994); Secretary of CFM;
Stamford, CT 06902 Secretary and Chief Legal
Age 48 Officer of mutual funds
associated with Citigroup
- ----------
* Directors are elected for a term of three years.
** Mr. Gerken is an "interested person" of the Fund as defined in the
Investment Company Act of 1940, as amended, because Mr. Gerken is an
officer of SBFM and certain of its affiliates.
42
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Under the Fund's Dividend Reinvestment Plan ("Plan"), a shareholder whose
shares of Common Stock are registered in his own name will have all
distributions from the Fund reinvested automatically by PFPC Inc. ("PFPC"), as
agent under the Plan, unless the shareholder elects to receive cash.
Distributions with respect to shares registered in the name of a broker-dealer
or other nominee (that is, in "street name") will be reinvested by the broker or
nominee in additional shares under the Plan, unless the service is not provided
by the broker or nominee or the shareholder elects to receive distributions in
cash. Investors who own Common Stock registered in street name should consult
their broker-dealers for details regarding reinvestment. All distributions to
Fund shareholders who do not participate in the Plan will be paid by check
mailed directly to the record holder by or under the direction of PFPC as
dividend-paying agent.
If the Fund declares a dividend or capital gains distribution payable
either in shares of Common Stock or in cash, shareholders who are not Plan
participants will receive cash, and Plan participants will receive the
equivalent amount in shares of Common Stock. When the market price of the Common
Stock is equal to or exceeds the net asset value per share of the Common Stock
on the Valuation Date (as defined below), Plan participants will be issued
shares of Common Stock valued at the net asset value most recently determined
or, if net asset value is less than 95% of the then current market price of the
Common Stock, then at 95% of the market value. The Valuation Date is the
dividend or capital gains distribution payment date or, if that date is not a
New York Stock Exchange ("NYSE") trading day, the immediately preceding trading
day.
If the market price of the Common Stock is less than the net asset value
of the Common Stock, a broker-dealer not affiliated with Citigroup Global
Markets Inc., 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 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
43
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
based on the weighted average of prices paid for shares purchased in the open
market and the price at which the Fund issues the remaining shares. PFPC will
apply all cash received as a dividend or capital gains distribution to purchase
Common Stock on the open market as soon as practicable after the payable date of
the dividend or capital gains distribution, but in no event later than 30 days
after that date, except when necessary to comply with applicable provisions of
the federal securities laws.
PFPC will maintain all shareholder accounts in the Plan and will furnish
written confirmations of all transactions in each account, including information
needed by a shareholder for personal and tax records. The automatic reinvestment
of dividends and capital gains distributions will not relieve Plan participants
of any income tax that may be payable on the dividends or capital gains
distributions. Common Stock in the account of each Plan participant will be held
by PFPC on behalf of the Plan participant, and each shareholder's proxy will
include those shares purchased pursuant to the Plan.
Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions. PFPC's fees for handling the reinvestment of
dividends and capital gains distributions will be paid by the Fund. No brokerage
charges apply with respect to shares of Common Stock issued directly by the Fund
as a result of dividends or capital gains distributions payable either in Common
Stock or in cash. Each Plan participant will, however, bear a proportionate
share of brokerage commissions incurred with respect to open market purchases
made in connection with the reinvestment of dividends or capital gains
distributions.
Experience under the Plan may indicate that changes to it are desirable.
The Fund reserves the right to amend or terminate the Plan as applied to any
dividend or capital gains distribution paid subsequent to written notice of the
change sent to participants at least 30 days before the record date for the
dividend or capital gains distribution. The Plan also may be amended or
terminated by PFPC, with the Fund's prior written consent, on at least 30 days'
written notice to Plan participants. All correspondence concerning the Plan
should be directed by mail to PFPC Inc., P.O. Box 43027, Providence, Rhode
Island 02940-3027 or by telephone at 1 (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.
44
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
For Federal tax purposes, the Fund hereby designates for the fiscal year
ended February 29, 2004:
o For corporate shareholders, the percentage of ordinary dividends
that qualify for the dividends received deduction is 0.29%.
o For taxable non-corporate shareholders, the maximum amount allowable
of qualifying dividends for the reduced tax rate under The Jobs and
Growth Tax Relief Reconciliation Act of 2003. The amount of
qualified dividend income distributed by the Fund is provided to
shareholders on their Form 1099-Div annually.
45
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Managed
HIGH INCOME
PORTFOLIO INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Directors
Allan J. Bloostein
Dwight B. Crane
Paolo M. Cucchi
Robert A. Frankel
R. Jay Gerken, CFA
Chairman
Paul Hardin
William R. Hutchinson
George M. Pavia
Officers
R. Jay Gerken, CFA
President and
Chief Executive Officer
Andrew B. Shoup
Senior Vice President and
Chief Administrative Officer
Richard L. Peteka
Chief Financial Officer
and Treasurer
Beth A. Semmel, CFA
Vice President and
Investment Officer
Peter J. Wilby, CFA
Vice President and
Investment Officer
Kaprel Ozsolak
Controller
Robert I. Frenkel
Secretary and
Chief Legal Officer
Investment Adviser and Administrator
Smith Barney Fund Management LLC
399 Park Avenue
New York, New York 10022
Transfer Agent
PFPC Inc.
P.O. Box 43027
Providence, Rhode Island 02940-3027
Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
46
- --------------------------------------------------------------------------------
(This page intentionally left blank.)
(This page intentionally left blank.)
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.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available without charge,
upon request, by telephoning the Fund (toll-free) at 1-800-451-2010 and by
visiting the SEC's web site at www.sec.gov
FD0882 4/04 04-6449
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Directors of the registrant has determined that William R.
Hutchinson, a member of the Board's Audit Committee, possesses the
technical attributes identified in Instruction 2(b) of Item 3 to Form
N-CSR to qualify as an "audit committee financial expert," and has
designated Mr. Hutchinson as the Audit Committee's financial expert.
Mr. Hutchinson is an "independent" Director pursuant to paragraph
(a)(2) of Item 3 to Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees for Managed High Income Portfolio Inc. were $33,000
and $34,500 for the years ended 2/29/04 and 2/28/03.
(b) Audit-Related Fees for Managed High Income Portfolio Inc. were
$0 and $0 for the years ended 2/29/04 and 2/28/03.
(c) Tax Fees for Managed High Income Portfolio Inc. were $2,700 and
$2,200 for the years ended 2/29/04 and 2/28/03. These amounts
represent aggregate fees paid for tax compliance, tax advice and
tax planning services, which include (the filing and amendment of
federal, state and local income tax returns, timely RIC
qualification review and tax distribution and analysis planning)
rendered by the Accountant to Managed High Income Portfolio Inc.
(d) There were no all other fees for Managed High Income Portfolio
Inc. for the years ended 2/29/04 and 2/28/03.
(e) (1) Audit Committee's pre-approval policies and procedures
described in paragraph (c) (7) of Rule 2-01 of Regulation S-X.
The Charter for the Audit Committee (the "Committee") of the
Board of each registered investment company (the "Fund") advised
by Smith Barney Fund Management LLC or Salomon Brothers Asset
Management Inc or one of their affiliates (each, an "Adviser")
requires that the Committee shall approve (a) all audit and
permissible non-audit services to be provided to the Fund and
(b) all permissible non-audit services to be provided by the
Fund's independent auditors to the Adviser and any Covered
Service Providers if the engagement relates directly to the
operations and financial reporting of the Fund. The Committee may
implement policies and procedures by which such services are
approved other than by the full Committee.
The Committee shall not approve non-audit services that the
Committee believes may impair the independence of the auditors.
As of the date of the approval of this Audit Committee Charter,
permissible non-audit services include any professional services
(including tax services), that are not prohibited services as
described below, provided to the Fund by the independent
auditors, other than those provided to the Fund in connection
with an audit or a review of the financial statements of the
Fund. Permissible non-audit services may not include:
(i) bookkeeping or other services related to the accounting
records or financial statements of the Fund; (ii) financial
information systems design and implementation; (iii) appraisal
or valuation services, fairness opinions or contribution-in-kind
reports; (iv) actuarial services; (v) internal audit outsourcing
services; (vi) management functions or human resources;
(vii) broker or dealer, investment adviser or investment banking
services; (viii) legal services and expert services unrelated to
the audit; and (ix) any other service the Public Company
Accounting Oversight Board determines, by regulation, is
impermissible.
Pre-approval by the Committee of any permissible non-audit
services is not required so long as: (i) the aggregate amount of
all such permissible non-audit services provided to the Fund, the
Adviser and any service providers controlling, controlled by or
under common control with the Adviser that provide ongoing
services to the Fund ("Covered Service Providers") constitutes
not more than 5% of the total amount of revenues paid to the
independent auditors during the fiscal year in which the
permissible non-audit services are provided to (a) the Fund,
(b) the Adviser and (c) any entity controlling, controlled by or
under common control with the Adviser that provides ongoing
services to the Fund during the fiscal year in which the services
are provided that would have to be approved by the Committee;
(ii) the permissible non-audit services were not recognized by
the Fund at the time of the engagement to be non-audit services;
and (iii) such services are promptly brought to the attention of
the Committee and approved by the Committee (or its delegate(s))
prior to the completion of the audit.
(f) N/A
(g) Non-audit fees billed - $100,000 and $1.2 million for the years
ended 12/31/2003 and 12/31/2002.
(h) Yes. The Managed High Income Portfolio Inc.'s Audit Committee has
considered whether the provision of non-audit services that were
rendered to Service Affiliates which were not pre-approved (not
requiring pre-approval) is compatible with maintaining the
Accountant's independence. All services provided by the
Accountant to the Managed High Income Portfolio Inc. or to
Service Affiliates which were required to be pre-approved were
pre-approved as required.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Board of Directors of the Fund has delegated the authority to
develop policies and procedures relating to proxy voting to the
Manager. The Manager is part of Citigroup Asset Management ("CAM"), a
group of investment adviser affiliates of Citigroup, Inc.
("Citigroup"). Along with the other investment advisers that comprise
CAM, the Manager has adopted a set of proxy voting policies and
procedures (the "Policies") to ensure that the Manager votes proxies
relating to equity securities in the best interest of clients.
In voting proxies, the Manager is guided by general fiduciary
principles and seeks to act prudently and solely in the best interest
of clients. The Manager attempts to consider all factors that could
affect the value of the investment and will vote proxies in the manner
that it believes will be consistent with efforts to maximize
shareholder values. The Manager may utilize an external service
provider to provide it with information and/or a recommendation with
regard to proxy votes. However, such recommendations do not relieve the
Manager of its responsibility for the proxy vote.
In the case of a proxy issue for which there is a stated position in
the Policies, CAM generally votes in accordance with such stated
position. In the case of a proxy issue for which there is a list of
factors set forth in the Policies that CAM considers in voting on such
issue, CAM votes on a case-by-case basis in accordance with the general
principles set forth above and considering such enumerated factors. In
the case of a proxy issue for which there is no stated
position or list of factors that CAM considers in voting on such issue,
CAM votes on a case-by-case basis in accordance with the general
principles set forth above. Issues for which there is a stated position
set forth in the Policies or for which there is a list of factors set
forth in the Policies that CAM considers in voting on such issues fall
into a variety of categories, including election of directors,
ratification of auditors, proxy and tender offer defenses, capital
structure issues, executive and director compensation, mergers and
corporate restructurings, and social and environmental issues. The
stated position on an issue set forth in the Policies can always be
superseded, subject to the duty to act solely in the best interest of
the beneficial owners of accounts, by the investment management
professionals responsible for the account whose shares are being voted.
Issues applicable to a particular industry may cause CAM to abandon a
policy that would have otherwise applied to issuers generally. As a
result of the independent investment advisory services provided by
distinct CAM business units, there may be occasions when different
business units or different portfolio managers within the same business
unit vote differently on the same issue.
In furtherance of the Manager's goal to vote proxies in the best
interest of clients, the Manager follows procedures designed to
identify and address material conflicts that may arise between the
Manager's interests and those of its clients before voting proxies on
behalf of such clients. To seek to identify conflicts of interest, CAM
periodically notifies CAM employees (including employees of the
Manager) in writing that they are under an obligation (i) to be aware
of the potential for conflicts of interest with respect to voting
proxies on behalf of client accounts both as a result of their personal
relationships and due to special circumstances that may arise during
the conduct of CAM's and the Manager's business, and (ii) to bring
conflicts of interest of which they become aware to the attention of
compliance personnel. The Manager also maintains and considers a list
of significant relationships that could present a conflict of interest
for the Manager in voting proxies. The Manager is also sensitive to the
fact that a significant, publicized relationship between an issuer and
a non-CAM affiliate might appear to the public to influence the manner
in which the Manager decides to vote a proxy with respect to such
issuer. Absent special circumstances or a significant, publicized
non-CAM affiliate relationship that CAM or the Manager for prudential
reasons treats as a potential conflict of interest because such
relationship might appear to the public to influence the manner in
which the Manager decides to vote a proxy, the Manager generally takes
the position that non-CAM relationships between Citigroup and an issuer
(e.g. investment banking or banking) do not present a conflict of
interest for the Manager in voting proxies with respect to such issuer.
Such position is based on the fact that the Manager is operated as an
independent business unit from other Citigroup business units as well
as on the existence of information barriers between the Manager and
certain other Citigroup business units.
CAM maintains a Proxy Voting Committee, of which the Manager personnel
are members, to review and address conflicts of interest brought to its
attention by compliance personnel. A proxy issue
that will be voted in accordance with a stated position on an issue or
in accordance with the recommendation of an independent third party is
not brought to the attention of the Proxy Voting Committee for a
conflict of interest review because the Manager's position is that to
the extent a conflict of interest issue exists, it is resolved by
voting in accordance with a pre-determined policy or in accordance with
the recommendation of an independent third party. With respect to a
conflict of interest brought to its attention, the Proxy Voting
Committee first determines whether such conflict of interest is
material. A conflict of interest is considered material to the extent
that it is determined that such conflict is likely to influence, or
appear to influence, the Manager's decision-making in voting proxies.
If it is determined by the Proxy Voting Committee that a conflict of
interest is not material, the Manager may vote proxies notwithstanding
the existence of the conflict.
If it is determined by the Proxy Voting Committee that a conflict of
interest is material, the Proxy Voting Committee is responsible for
determining an appropriate method to resolve such conflict of interest
before the proxy affected by the conflict of interest is voted. Such
determination is based on the particular facts and circumstances,
including the importance of the proxy issue and the nature of the
conflict of interest. Methods of resolving a material conflict of
interest may include, but are not limited to, disclosing the conflict
to clients and obtaining their consent before voting, or suggesting to
clients that they engage another party to vote the proxy on their
behalf.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal
financial officer have concluded that the registrant's disclosure
controls and procedures (as defined in Rule 30a- 3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act")) are
effective as of a date within 90 days of the filing date of this
report that includes the disclosure required by this paragraph,
based on their evaluation of the disclosure controls and
procedures required by Rule 30a-3(b) under the 1940 Act and
15d-15(b) under the Securities Exchange Act of 1934.
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940
Act) that occurred during the registrant's last fiscal half-year
(the registrant's second fiscal half-year in the case of an
annual report) that have materially affected, or are likely to
materially affect the registrant's internal control over
financial reporting.
ITEM 10. EXHIBITS.
(a) Code of Ethics attached hereto.
Exhibit 99.CODE ETH
(b) Attached hereto.
Exhibit 99.CERT Certifications pursuant to section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 99.906CERT Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this Report
to be signed on its behalf by the undersigned, there unto duly authorized.
Managed High Income Portfolio Inc.
By: /s/ R. Jay Gerken
R. Jay Gerken
Chief Executive Officer of
Managed High Income Portfolio Inc.
Date: May 7, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ R. Jay Gerken
(R. Jay Gerken)
Chief Executive Officer of
Managed High Income Portfolio Inc.
Date: May 7, 2004
By: /s/ Richard L. Peteka
(Richard L. Peteka)
Chief Financial Officer of
Managed High Income Portfolio Inc.
Date: May 7, 2004