SENIOR
HIGH
INCOME
PORTFOLIO,
INC.
Semi-Annual Report August 31,1994
This report, including the financial information herein, is
transmitted to the shareholders of Senior High Income Portfolio,
Inc. for their information. It is not a prospectus, circular or
representation intended for use in the purchase of shares of the
Fund or any securities mentioned in the report. Past performance
results shown in this report should not be considered a repre-
sentation of future performance. The Fund has leveraged its Common
Stock to provide Common Stock shareholders with a potentially higher
rate of return. Leverage creates risk for Common Stock shareholders,
including the likelihood of greater volatility of net asset value
and market price of Common Stock shares, and the risk that
fluctuations in short-term interest rates may reduce the Common
Stock's yield.
Senior High Income
Portfolio, Inc.
Box 9011
Princeton, NJ
08543-9011
<PAGE>
SENIOR HIGH INCOME PORTFOLIO, INC.
The Benefits and
Risks of
Leveraging
Senior High Income Portfolio, Inc. has the ability to utilize
leverage through borrowings or issuance of short-term debt
securities or shares of Preferred Stock. The concept of leveraging
is based on the premise that the cost of assets to be obtained from
leverage will be based on short-term interest rates, which normally
will be lower than the return earned by the fund on its longer-term
portfolio investments. Since the total assets of the fund (including
the assets obtained from leverage) are invested in higher-yielding
portfolio investments, the fund's Common Stock shareholders are the
beneficiaries of the incremental yield. Should the differential
between the underlying interest rates narrow, the incremental yield
"pick up" will be reduced. Furthermore, if long-term interest rates
rise, the Common Stock's net asset value will reflect the full
decline in the entire portfolio holdings resulting therefrom since
the assets obtained from leverage do not fluctuate.
Leverage creates risks for holders of Common Stock including the
likelihood of greater net asset value and market price volatility.
In addition, there is the risk that fluctuations in interest rates
on borrowings (or in the dividend rates on any Preferred Stock, if
the fund were to issue the preferred stock) may reduce the Common
Stock's yield and negatively impact its market price. If the income
derived from securities purchased with assets received from leverage
exceeds the cost of leverage, the fund's net income will be greater
than if leverage had not been used. Conversely, if the income from
the securities purchased is not sufficient to cover the cost of
leverage, the fund's net income will be less than if leverage had
not been used, and therefore the amount available for distribution
to Common Stock shareholders will be reduced. In this case, the fund
may nevertheless decide to maintain its leveraged position in order
to avoid capital losses on securities purchased with leverage.
However, the fund will not generally utilize leverage if it
anticipates that its leveraged capital structure would result in a
lower rate of return for its Common Stock than would be obtained if
the Common Stock were unleveraged for any significant amount of
time.
<PAGE>
Officers and Directors
Arthur Zeikel, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Richard R. West, Director
Terry K. Glenn, Executive Vice President
N. John Hewitt, Senior Vice President
Donald C. Burke, Vice President
R. Douglas Henderson, Vice President
Gerald M. Richard, Treasurer
Patrick D. Sweeney, Secretary
Custodian and Transfer Agent
The Bank of New York
110 Washington Street
New York, New York 10286
NYSE Symbol
ARK
DEAR SHAREHOLDER
Senior High Income Portfolio, Inc. seeks to provide shareholders
with high current income by investing primarily in senior debt
obligations of companies, including portions of corporate loans made
by banks and other financial institutions and both privately placed
and publicly offered corporate bonds and notes. These securities by
and large are rated in the lower rating categories of the
established rating agencies or are unrated, as is commonly the case
with bank loans.
For the six-month period ended August 31, 1994, the Portfolio's
total investment return was -2.53%, based on a change in per share
net asset value from $9.82 to $9.15, and assuming reinvestment of
$0.409 per share income dividends. During the same period, the net
annualized yield of the Portfolio's Common Stock was 9.11%. Since
inception (April 30, 1993) through August 31, 1994, the total
investment return on the Portfolio's Common Stock was 7.50%, based
on a change in per share net asset value from $9.50 to $9.15, and
assuming reinvestment of $1.037 per share income dividends. At the
end of the August period, the Portfolio was 25.7% leveraged, having
borrowed $80 million of its $120 million line of credit available at
an average borrowing cost of 5.28%. (For a complete explanation of
the benefits and risks of leveraging, see page 1 of this report to
shareholders.)
<PAGE>
As of August 31, 1994, the Portfolio paid out a fixed dividend of
8.50% in order to permit the Portfolio to maintain a more stable
level of distributions. For Federal income tax purposes, the Portfolio
will be required to distribute substantially all of its net investment
income for each calendar year. All net realized long-term and short-
term capital gains, if any, will be distributed to the Portfolio's
shareholders annually. If the increase in short-term interest rates
- --including the London Interbank Offered Rate (LIBOR)--is
sustained, we would expect the fixed dividend to be increased over
time. The dividend has increased from 8% since inception of the
Portfolio.
The Environment
The six months ended August 31, 1994 were characterized by an
interest rate environment that proved a mixed blessing for the
Portfolio's investments. The steady rise in interest rates that
began in February, and has been the overriding factor in the
volatility in the US financial markets and the poor performance of
the fixed-income sector in general, has had a positive effect on the
floating rate portion of the Portfolio, while eroding the high-yield
market further in sympathy with intermediate-term and long-term US
Treasury securities. On August 16, 1994, the Federal Reserve Board
raised short-term interest rates for the fifth time this year by
increasing the discount rate it charges on loans to its member banks
by 50 basis points (0.50%) to 4% and by pushing the Federal Funds
target rate to 4.75% from 4.25% in its effort to remove some
uncertainty in the financial markets and keep inflation at bay.
However, selected higher-than-expected economic indicators
subsequent to the end of the period have reflected continued strong
growth in the economy and the likelihood of further increases in
short-term interest rates.
Portfolio Strategy
In light of the current market environment, our focus over the last
six months has been weighting the Portfolio more toward senior
secured floating rate bank loans in order to take advantage of the
rise in short-term interest rates. More than 99% of the Portfolio's
investments in corporate loans are currently accruing interest at
a yield spread above LIBOR, the rate that major international
banks charge each other for US dollar-denominated deposits out-
side of the United States. LIBOR has historically tracked very
closely with other short-term interest rates in the United States,
particularly the Federal Funds rate. Since the first tightening
of monetary policy by the Federal Reserve Board in February,
three-month LIBOR has risen from 3.25% to 5.25%, an increase
of 200 basis points. Since the average reset on the Portfolio's
floating rate investments is 49 days, their yields are likely to
continue to benefit from the latest interest rate increase as
they move through their resets during the next quarter. At the
end of the period under review, floating rate securities made up 54%
of the Portfolio's investments, with an additional 46% invested
in fixed-rate high-yield bonds. Approximately $40 million in
availability remains under the leverage facility.
<PAGE>
In the senior secured bank loan market, secondary issues continue
to be well bid as banks, insurance companies and non-bank funds
aggressively look to book floating rate assets in the current
environment. At the same time, there has been a substantial increase
in leveraged primary bank loan transactions as corporate borrowers
have tapped the bank loan market rather than pay the higher yields
demanded in the high-yield bond market. At a yield spread over LIBOR
and no call protection, bank loans are a more attractive alternative
than they were during the "hot" public markets of one year ago.
The high-yield bond market, on the other hand, continued to suffer
from the overhang from the battered US Treasury market, even though
overall credit quality in many sectors is improving with the
strengthening economy. This environment of soft bond prices created
buying opportunities for the Portfolio. During the later part of the
August period, we focused on selectively trading out of lower-
yielding coupons into higher-yielding new issues or secondary names
trading at attractive relative spreads. New-issue placement overall
was down for the first eight months of 1994 compared to 1993 for two
reasons. First, there was a perceived reluctance on the part of
issuers to tap the market in advance of expected Federal Reserve
Board interest rate action, and second, there was a significant
slowdown of cash inflows into high-yield mutual funds. We expect
this environment to continue for the remainder of the year with some
week-to-week volatility based on supply pressures from the new-issue
calendar. However, overall fundamentals remain positive for this
asset class as favorable quarterly earnings comparisons occur with
increasing regularity.
We continue to focus on buying higher-yielding, improving-quality
cyclical credits. This is reflected in the Portfolio's large
holdings of names, such as Jefferson Smurfit/Container Corp. of
America and Stone Container Corp. in the recovering linerboard
industry, while the steel and homebuilding industries also reflect
higher cyclical concentrations.
<PAGE>
At August 31, 1994, cash equivalents totaled 1.1% of net assets. The
Portfolio's average stated maturity was 6.1 years but had a real
average life of approximately 2 years--3 years as a result of the
shorter average life of bank loans which are freely prepayable
without call protection. The Portfolio is diversified in the
floating rate portion in 22 investments across 13 industries, and in
the fixed-rate portion in 59 investments across 31 industries.
Stronger companies are taking advantage of attractive public debt
and equity markets to improve their balance sheets and reduce debt.
These trends have translated into lower default rates in both the
bank loan and high-yield bond markets. We believe that low default
rates will continue through the remainder of 1994.
Looking forward, we expect to continue to emphasize senior secured
floating rate bank loans in order to take advantage of the rising
interest rate environment while being opportunistic in our high-
yield bond purchases. We believe the Portfolio is well positioned to
provide shareholders with the benefit of an increase in short-term
interest rates.
In Conclusion
We appreciate your ongoing investment in Senior High Income
Portfolio, Inc., and we look forward to reviewing our strategy with
you again in our next report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(R. Douglas Henderson)
R. Douglas Henderson
Vice President and Portfolio Manager
October 10, 1994
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Debt Obligations Cost (Note 1b)
<S> <S> <S> <C> <S> <C> <C>
Advertising--2.1% B B2 $ 5,000,000 Lamar Advertising Co., Senior Secured
Notes, 11% due 5/15/2003 $ 5,056,250 $ 4,900,000
<PAGE>
Aerospace--6.5% Aviall Inc., Term Loan, Tranche B, due
11/30/2000*:
NR NR 882,353 7.75% to 9/07/1994 882,353 882,353
NR NR 1,176,471 7.69% to 10/07/1994 1,176,471 1,176,471
NR NR 2,941,176 8.19% to 12/07/1994 2,941,176 2,941,176
BB- Ba3 1,000,000 BE Aerospace Inc., Senior Notes, 9.75% due
3/01/2003 940,000 965,000
NR NR 4,500,000 Gulfstream Delaware Corp., Term Loan, due
3/31/1998, 7.57% to 9/08/1994* 4,500,000 4,500,000
B B2 2,000,000 Talley Manufacturing & Technology, Inc.,
Senior Discount Debentures, 10.75% due
10/15/2003 2,030,000 1,850,000
BB B1 3,000,000 UNC, Inc., Senior Notes, 9.125% due 7/15/2003 3,000,000 2,715,000
------------ ------------
15,470,000 15,030,000
Agricultural BB- B1 2,000,000 Chiquita Brands International, Inc.,
Products--2.0% Senior Notes, 9.125% due 3/01/2004 2,000,000 1,870,000
BB- B1 3,000,000 Fresh Del Monte Produce N.V., Series
A, Senior Notes, 10% due 5/01/2003 3,037,500 2,730,000
------------ ------------
5,037,500 4,600,000
Automotive B B2 1,500,000 Harvard Industries, Inc., Senior Notes,
Products--0.6% 12% due 7/15/2004 1,500,000 1,511,250
Broadcast/Media-- BB- Ba2 2,500,000 Continental Cablevision, Inc., Senior
1.0% Notes, 8.625% due 8/15/2003 2,500,000 2,262,500
Building & B- B2 2,500,000 Baldwin Co., Senior Notes, 10.375% due
Construction--4.7% 8/01/2003 2,500,000 2,050,000
B+ B1 4,000,000 Beazer Homes USA, Inc., Senior Notes,
9% due 3/01/2004 4,000,000 3,440,000
B- B2 2,000,000 Del Webb Corp., Senior Notes, 9% due
2/15/2006 2,000,000 1,680,000
B Ba3 4,250,000 U.S. Home Corp., Senior Notes, 9.75% due
6/15/2003 4,250,000 3,835,625
------------ ------------
12,750,000 11,005,625
Building BB- B1 6,000,000 USG Corp., Senior Secured Notes, 10.25%
Products--2.6% due 12/15/2002 6,015,000 6,127,500
<PAGE>
Carbon & Graphite B+ B3 2,000,000 Carbide/Graphite Group, Senior Notes,
Products--0.9% 11.50% due 9/01/2003 2,000,000 2,035,000
Chemicals--5.2% BB- B1 1,000,000 Huntsman Chemical Corp., Senior Notes, 11%
due 4/15/2004 1,015,000 1,042,500
NR NR 5,000,000 Indspec Chemical Corp., Term Loan B, due
12/02/2000, 7.4375% to 9/30/1994* 5,000,000 5,000,000
OSI Specialties, Inc., Term Loan B, due
6/30/2000*:
NR NR 1,590,909 7.34% to 9/15/1994 1,590,909 1,590,909
NR NR 1,504,132 7.57% to 9/22/1994 1,504,132 1,504,132
B+ B1 3,000,000 Uniroyal Chemical Company, Inc., 9% due
9/01/2000 3,000,000 2,865,000
------------ ------------
12,110,041 12,002,541
Computers--0.9% BB- B1 2,100,000 Dell Computer Corp., Senior Notes, 11% due
8/15/2000 2,118,375 2,205,000
Consumer Food B+ B1 5,000,000 Royal Crown Corp., Senior Secured Notes,
Products--6.3% 9.75% due 8/01/2000 5,000,000 4,700,000
Specialty Foods Corp., Term Loan B, due
8/31/1999*:
NR NR 59,200 9.75% (1) 59,200 59,200
NR NR 4,960,000 7.69% to 10/18/1994 4,960,000 4,960,000
NR NR 4,827,733 8.19% to 10/18/1994 4,827,733 4,827,733
------------ ------------
14,846,933 14,546,933
Consumer B+ B2 2,000,000 Drypers Corp., Series B, Senior Notes,
Products--0.9% 12.50% due 11/01/2002 2,105,000 2,110,000
Containers--3.8% Silgan Corp., Term Loan B, due 9/15/1996*:
NR NR 2,500,000 8.188% to 12/07/1994 2,500,000 2,500,000
NR NR 2,500,000 8.125% to 12/09/1994 2,500,000 2,500,000
B+ Ba3 4,000,000 Sweetheart Cup Co., Senior Secured Notes,
9.625% due 9/01/2000 4,000,000 3,820,000
------------ ------------
9,000,000 8,820,000
<PAGE>
Diversified American Standard, Inc., Term Loan, Tranche
Manufacturing-- A, due 6/01/2000*:
9.8% NR NR 8,888,889 8% to 12/02/1994 8,888,889 8,888,889
NR NR 988,815 8.0625% to 12/02/1994 988,815 988,815
B+ B1 3,000,000 Essex Group Inc., 10% due 5/01/2003 3,041,250 2,917,500
Joy Technologies, Inc., Term Loan, Tranche
B, due 12/31/1997*:
NR NR 3,855,255 7.8125% to 9/29/1994 3,855,255 3,855,255
NR NR 1,144,745 8% to 11/28/1994 1,144,745 1,144,745
TDII Company, Term Loan B, due 2/01/2001*:
NR NR 12,875 9.50% (1) 12,875 12,875
NR NR 4,225,000 6.9375% to 9/02/1994 4,225,000 4,225,000
NR NR 600,000 7.8125% to 11/03/1994 600,000 600,000
------------ ------------
22,756,829 22,633,079
Drug Stores--3.5% Duane Reade Co., Term Loan A, due 9/30/1997*:
NR NR 268,911 7.8125% to 9/30/1994 268,911 268,911
NR NR 6,332,848 8% to 11/30/1994 6,332,848 6,332,848
NR NR 1,500,000 Duane Reade Co., Term Loan B, due 9/30/1999,
8.50% to 11/30/1994* 1,500,000 1,500,000
------------ ------------
8,101,759 8,101,759
Educational B B3 5,000,000 La Petite Holdings Corp., Senior Secured
Services--2.1% Notes, 9.625% due 8/01/2001 5,000,000 4,850,000
Electrical Berg Electronics, Inc., Term Loan B, due
Instruments--0.9% 6/30/2001*:
NR NR 8,333 9.50% (1) 8,333 8,333
NR NR 1,991,667 7.875% to 11/25/1994 1,991,667 1,991,667
------------ ------------
2,000,000 2,000,000
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Debt Obligations Cost (Note 1b)
<S> <S> <S> <C> <S> <C> <C>
Energy--2.9% BB- B1 $ 2,500,000 Ferrellgas L.P., Series B, Floating Rate
Senior Notes, 7.875% due 8/01/2001 (2) $ 2,487,500 $ 2,475,000
B- B3 4,500,000 Presidio Oil Company, Senior Secured Notes,
11.50% due 9/15/2000 4,540,000 4,275,000
------------ ------------
7,027,500 6,750,000
<PAGE>
Fertilizer--3.8% B B3 4,000,000 IMC Fertilizer Group, Inc., Senior Notes,
10.75% due 6/15/2003 4,000,000 4,140,000
BB- B1 3,750,000 Sherritt Gordon Ltd., Senior Notes, 9.75%
due 4/01/2003 3,762,500 3,637,500
BB- B1 1,000,000 Sherritt, Inc., USD Debentures, 10.50% due
3/31/2014 1,000,000 990,000
------------ ------------
8,762,500 8,767,500
Forest BB- Ba3 1,000,000 Malette Inc., Senior Secured Notes, 12.25%
Products--0.4% due 7/15/2004 1,000,000 1,010,000
Grocery--14.9% NR NR 5,000,000 CK Aquisitions Corp., Term Loan B, due
7/31/2001, 6.8125% to 9/29/1994* 5,000,000 5,000,000
Grand Union Co., Term Loan B, due
6/30/1998*:
NR NR 24,062 9.75% (1) 24,062 24,062
NR NR 3,166,667 8.125% to 9/06/1994 3,166,667 3,166,667
NR NR 3,333,333 7.625% to 9/09/1994 3,333,333 3,333,333
B+ NR 2,500,000 Homeland Stores Inc., Series D, Floating
Rate Senior Secured Notes, 7.625% due
2/28/1997 (3) 2,450,000 2,512,707
BB1 Ba1 2,000,000 Kroger Co., Senior Secured Notes, 9.25%
due 1/01/2005 2,085,000 1,990,000
D Caa 1,500,000 Mega Warehouse Foods, Inc., Senior Notes,
10.25% due 10/15/2000 (a) 1,515,000 375,000
NR NR 5,000,000 Pathmark Stores, Inc., Term Loan B, due
10/31/1999, 7.8125% to 9/26/1994* 5,000,000 5,000,000
BB- Ba3 1,000,000 The Penn Traffic Company, Senior Notes,
8.625% due 12/15/2003 1,000,000 910,000
B- B2 2,000,000 Pueblo Xtra International, Inc., Senior
Notes, 9.50% due 8/01/2003 2,000,000 1,640,000
Ralph's Grocery Co., Primary Term Loan,
due 6/30/1998*:
NR NR 4,051,521 7.375% to 9/07/1994 4,051,521 4,051,521
NR NR 158,263 7.625% to 9/14/1994 158,263 158,263
NR NR 158,263 7.50% to 9/19/1994 158,263 158,263
NR NR 1,028,707 7.5625% to 9/29/1994 1,028,707 1,028,707
NR NR 272,211 7.4375% to 10/04/1994 272,211 272,211
NR NR 158,263 7.625% to 10/24/1994 158,263 158,263
NR NR 2,798,082 7.5625% to 11/09/1994 2,798,082 2,798,082
B+ B3 2,000,000 Stater Brothers Holdings, Inc., Senior
Notes, 11% due 3/01/2001 2,000,000 1,960,000
------------ ------------
36,199,372 34,537,079
<PAGE>
Health B B2 2,500,000 ++Charter Medical Corp., Senior Subordin-
Services--3.8% ated Notes, 11.25% due 4/15/2004 2,500,000 2,575,000
B- B2 1,000,000 Integrated Health Services, Inc., Senior
Subordinated Notes, 10.75% due 7/15/2004 1,000,000 1,000,000
B+ B1 5,200,000 MEDIQ/PRN Life Support Services, Inc.,
Senior Secured Notes, 11.125% due 7/01/1999 5,409,000 5,200,000
------------ ------------
8,909,000 8,775,000
Hotels & BB- B1 2,000,000 ++Four Seasons Hotels Inc., Notes, 9.125%
Motels--2.3% due 7/01/2000 1,918,200 1,820,000
B+ B2 4,500,000 GB Property Funding Corp., First Mortgage
Notes, 10.875% due l/15/2004 4,500,000 3,420,000
------------ ------------
6,418,200 5,240,000
Leasing & Rental B- B2 2,000,000 Cort Furniture Rental Corp., Senior Notes,
Services--1.6% 12% due 9/01/2000 2,000,000 1,940,000
BB- B1 2,000,000 The Scotsman Group, Inc., Senior Secured
Notes, 9.50% due 12/15/2000 2,000,000 1,870,000
------------ ------------
4,000,000 3,810,000
Manufacturing-- B+ B1 3,623,000 Foamex L.P., Senior Secured Notes, 9.50%
1.5% due 6/01/2000 3,643,000 3,432,793
Office B+ B1 5,000,000 Bell & Howell Co., 9.25% due 7/15/2000 5,025,000 4,600,000
Machines--4.1% Lexmark Holdings, US, Term Loan, due
3/27/1998*:
NR NR 2,611,276 7.2813% to 9/30/1994 2,611,276 2,611,276
NR NR 2,178,287 7.3125% to 10/31/1994 2,178,287 2,178,287
------------ ------------
9,8l4,563 9,389,563
<PAGE>
Paper--15.2% NR NR 14,125,000 Fort Howard Corp., Primary Term Loan,
due 5/01/1997, 7.63% to 10/21/1994* 14,125,000 14,125,000
B B3 5,000,000 Gaylord Container Corp., Senior Notes,
11.50% due 5/15/2001 5,000,000 5,112,500
NR NR 10,000,000 Jefferson Smurfit/Container Corp. of
America, Term Loan, due 4/30/2002, 7.875%
to 10/24/1994* 10,000,000 10,000,000
Stone Container Corp., Canadian Tender
Loan, due 3/01/1997*:
NR NR 424,009 7.5625% to 9/12/1994 424,009 424,009
NR NR 2,157,944 7.75% to 9/19/1994 2,157,944 2,157,944
NR NR 365,219 7.8125% to 9/29/1994 365,219 365,219
NR NR 287,197 Stone Container Corp., Canadian Term Loan,
due 3/01/1997, 7.8125% to 9/29/1994* 287,197 287,197
Stone Container Corp., US Term Loan, due
3/01/1997*:
NR NR 2,382,162 7.75% to 9/19/1994 2,382,162 2,382,162
NR NR 342,100 7.8125% to 9/29/1994 342,100 342,100
------------ ------------
35,083,631 35,196,131
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Debt Obligations Cost (Note 1b)
<S> <S> <S> <C> <S> <C> <C>
Retail-- B B2 $ 4,000,000 Color Tile, Inc., Senior Notes, 10.75%
Specialty--8.9% due 12/15/2001 $ 4,000,000 $ 3,760,000
Music Acquisition Corp., Term Loan B,
due 8/31/2001*:
NR NR 3,125,000 7.6875% to 9/16/1994 3,125,000 3,125,000
NR NR 1,843,750 8.375% to 2/17/1995 1,843,750 1,843,750
NR NR 9,961,400 Saks & Co., Term Loan, Tranche B, due
6/30/2000, 7.88% to 11/09/1994* 9,961,400 9,961,400
B+ B1 2,000,000 Specialty Retailers, Inc., Series A,
Senior Notes, 10% due 8/15/2000 2,000,000 1,920,000
------------ ------------
20,930,150 20,610,150
<PAGE>
Steel--8.8% B B2 1,000,000 A.K. Steel Corp., Senior Notes, 10.75%
due 4/1/2004 1,000,000 1,020,000
B B2 3,000,000 Bayou Steel Corp., First Mortgage Notes,
10.25% due 3/01/2001 3,000,000 2,857,500
B- B3 5,000,000 Federal Industries Ltd., 10.25% due
6/15/2000 5,011,250 4,687,500
B+ B1 3,000,000 Geneva Steel, Senior Notes, 9.50% due
1/15/2004 3,000,000 2,730,000
B B2 2,000,000 Republic Engineered Steel, Inc., First
Mortgage Notes, 9.875% due 12/15/2001 2,000,000 1,890,000
B+ B1 3,000,000 WCI Steel, Inc., Senior Notes, 10.50%
due 3/01/2002 3,000,000 3,000,000
Weirton Steel Corp., Senior Notes:
B B2 2,000,000 11.50% due 3/01/1998 2,100,000 2,070,000
B B2 2,000,000 10.875% due 10/15/1999 2,070,000 2,020,000
------------ ------------
21,181,250 20,275,000
Textiles--1.4% BB Ba3 3,500,000 Dominion Textile (USA) Inc., Senior Notes,
8.875% due 11/01/2003 3,482,780 3,255,000
Transportation-- B B2 2,500,000 OMI Corp., Senior Notes, 10.25% due
3.1% 11/01/2003 2,500,000 2,275,000
B+ Ba3 5,000,000 Southern Pacific Rail Corp., Senior
Notes, 9.375% due 8/15/2005 5,000,000 4,875,000
------------ ------------
7,500,000 7,150,000
Utilities--2.6% B Ba3 2,000,000 First PV Funding Corp., 10.30% due 1/15/2014 2,020,000 1,940,000
B1 B1 4,000,000 Texas-New Mexico Power Company, Secured
Debentures, 10.75% due 9/15/2003 4,000,000 4,000,000
------------ ------------
6,020,000 5,940,000
<PAGE>
Warehousing & B+ B2 2,000,000 Americold Corp., First Mortgage Bonds,
Storage--2.8% Series B, 11.50% due 3/01/2005 2,045,000 1,830,000
NR NR 4,581,250 Pierce Leahy Corp., Term Loan, Tranche B,
due 6/30/2001, 7.75% to 9/01/1994* 4,581,250 4,581,250
------------ ------------
6,626,250 6,411,250
Total Investments in Corporate Debt
Obligations--131.9% 314,965,883 305,290,653
<CAPTION>
Shares Held Warrants
<S> <S> <S> <C> <S> <C> <C>
Leasing & Rental NR NR 66,000 Cort Furniture Rental Corp. (b) (c) 0 66,000
Services--0.0%
Total Investments in Warrants--0.0% 0 66,000
<CAPTION>
Face
Amount Short-Term Securities
<S> <C> <S> <C> <C>
Commercial $ 2,519,000 General Electric Capital Corp., 4.75%
Paper**--1.1% due 9/01/1994 2,519,000 2,519,000
Total Investments in Short-Term
Securities--1.1% 2,519,000 2,519,000
Total Investments--133.0% $317,484,883 307,875,653
============
Liabilities in Excess of Other Assets--(33.0%) (76,380,588)
------------
Net Assets--100.0% $231,495,065
============
<PAGE>
<FN>
*Floating or Variable Rate Corporate Loans--The interest rates on
floating or variable rate corporate loans are subject to change
periodically, based on the change in the prime rate of a US Bank,
LIBOR (London Interbank Offered Rate), or, in some cases, another
base lending rate. The interest rates shown are those in effect at
August 31, 1994.
**Commercial Paper is traded on a discount basis; the interest rate
shown is the discount rate paid at the time of purchase by the fund.
(a) Security has filed Chapter 11 for reorganization under
bankruptcy protection. Interest is in default.
(b) Warrants entitle the fund to purchase a predetermined number of
shares of common stock/face amount of bonds. The purchase price and
number of shares/face amount are subject to adjustments under
certain conditions until the expiration date.
(c) Non-income producing security.
(1) Interest rate is based on the prime rate of a US bank, which is
subject to change daily.
(2) Interest rate resets quarterly and is based on the three-month
LIBOR (London Interbank Offered Rate), plus an interest rate spread
of three hundred twelve and one half basis points.
(3) Interest rate resets quarterly and is based on the three-month
LIBOR (London Interbank Offered Rate), plus an interest rate spread
of three hundred basis points.
++Restricted securities. The value of the fund's investments in
restricted securities was approximately $4,395,000, representing
1.9% of net assets.
Value
Issue Acquisition Date Cost (Note 1b)
Charter Medical Corp., Senior
Subordinated Notes, 11.25%
due 4/15/2004 4/22/1994 $2,500,000 $2,575,000
Four Seasons Hotels, Inc.,
Notes, 9.125% due 7/01/2000 1/25/1994 1,918,200 1,820,000
---------- ----------
Total $4,418,200 $4,395,000
========== ==========
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of August 31, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$317,484,883) (Note 1b) $307,875,653
Cash 99,007
Receivables:
Interest $ 4,630,505
Commitment fees 1,199,720 5,830,225
------------
Deferred facility expenses (Note 1d) 142,158
Deferred organization expense (Note 1e) 98,151
Prepaid expenses and other assets 1,881
------------
Total assets 314,047,075
------------
Liabilities: Payables:
Loans (Note 5) 80,000,000
Dividends to shareholders (Note 1f) 746,942
Interest on loans (Note 5) 12,879
Investment adviser (Note 2) 136,682 80,896,503
------------
Deferred income (Note 1d) 1,546,128
Accrued expenses and other liabilities 109,379
------------
Total liabilities 82,552,010
------------
Net Assets: Net assets $231,495,065
============
Capital: Common stock, par value $.10 per share; 200,000,000 shares
authorized (25,300,482 shares issued and outstanding) $ 2,530,048
Paid-in capital in excess of par 237,601,317
Undistributed investment income--net 3,176,838
Accumulated realized capital losses--net (2,203,908)
Unrealized depreciation on investments--net (Note 3) (9,609,230)
------------
Total Capital--Equivalent to $9.15 net asset value per share
of Common Stock (market price--$8.875) $231,495,065
============
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended August 31, 1994
<S> <S> <C> <C>
Investment Income Interest and discount earned $ 14,516,856
(Note 1d): Facility and other fees 750,608
------------
Total income 15,267,464
Expenses: Loan interest expense and commitment fees (Note 5) $ 2,548,219
Investment advisory fees (Note 2) 833,816
Facility fee amortization (Note 5) 320,259
Professional fees 88,002
Accounting services (Note 2) 43,028
Printing and shareholder reports 26,273
Amortization of organization expenses (Note 1e) 14,201
Custodian fees 13,532
Listing fees 12,924
Pricing services 12,224
Registration fees (Note 1e) 10,521
Transfer agent fees (Note 2) 9,731
Directors' fees and expenses 6,203
Other 3,558
------------
Total expenses 3,942,491
------------
Investment income--net 11,324,973
------------
Realized & Realized loss on investments--net (4,142,598)
Unrealized Change in unrealized appreciation/depreciation on investments--net (13,673,303)
Gain (Loss) on ------------
Investments--Net Net Decrease in Net Assets Resulting from Operations $ (6,490,928)
(Notes 1d & 3): ============
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the Period
Months Ended April 30,1993++
Increase (Decrease) in Net Assets: August 31, 1994 to Feb. 28, 1994
<S> <S> <C> <C>
Operations: Investment income--net $ 11,324,973 $ 17,533,097
Realized gain (loss) on investments--net (4,142,598) 2,392,226
Change in unrealized appreciation/depreciation on
investments--net (13,673,303) 4,064,073
------------ ------------
Net increase (decrease) in net assets resulting from operations (6,490,928) 23,989,396
------------ ------------
Dividends & Investment income--net (10,355,841) (15,325,391)
Distributions to Realized gain on investments--net -- (453,536)
Shareholders ------------ ------------
(Note 1f):
Net decrease in net assets resulting from dividends and
distributions to shareholders (10,355,841) (15,778,927)
------------ ------------
Capital Share Value of shares issued to Common Stock shareholders in
Transctions reinvestment of dividends -- 240,254,573
(Note 4): Offering costs resulting from the issuance of Common Stock -- (223,215)
------------ ------------
Net increase in net assets resulting from capital share
transactions -- 240,031,358
------------ ------------
Net Assets: Total increase (decrease) in net assets (16,846,769) 248,241,827
Beginning of period 248,341,834 100,007
------------ ------------
End of period* $231,495,065 $248,341,834
============ ============
<FN>
*Undistributed investment income--net $ 3,176,838 $ 2,207,706
============ ============
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Six Months Ended
August 31, 1994
<S> <S> <C>
Cash Provided Net decrease in net assets resulting from operations $ (6,490,928)
by Operating Adjustments to reconcile net increase (decrease) in net assets
Activities: resulting from operations to net cash provided by operating
activities:
Increase in receivables (1,074,913)
Decrease in other assets 177,948
Decrease in other liabilities (596,070)
Realized and unrealized gain (loss) on investments--net 17,815,901
Amortization of discount (63,327)
------------
Net cash provided by operating activities 9,768,611
------------
Cash Provided by Proceeds from sales of long-term investments 70,731,972
Investing Activities: Purchases of long-term investments (63,971,879)
Purchases of short-term investments--net (2,207,769)
------------
Net cash provided by investing activities 4,552,324
------------
Cash Used for Dividends paid to shareholders (10,394,280)
Financing Activities: Short-term borrowings (4,000,000)
------------
Net cash used for financing activities (14,394,280)
------------
Cash: Net decrease in cash (73,345)
Cash at beginning of period 172,352
------------
Cash at end of period $ 99,007
============
Cash Flow Cash paid for interest $ 2,770,748
Information: ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Six For the Period
Months Ended April 30, 1993++
Increase (Decrease) in Net Asset Value: August 31, 1994 to Feb. 28, 1994
<S> <S> <C> <C>
Per Share Net asset value, beginning of period $ 9.82 $ 9.50
Operating ------------ ------------
Performance: Investment income (loss)--net .45 .70
Realized and unrealized gain (loss) on investments--net (.71) .26
------------ ------------
Total from investment operations (.26) .96
------------ ------------
Less dividends and distributions:
Investment income--net (.41) (.61)
Realized gain on investments--net -- (.02)
------------ ------------
Total dividends and distributions (.41) (.63)
------------ ------------
Capital charge resulting from the issuance of Common Stock -- (.01)
------------ ------------
Net asset value, end of period $ 9.15 $ 9.82
============ ============
Market price per share, end of period $ 8.875 $ 9.375
============ ============
Total Investment Based on net asset value per share (2.53%)+++ 10.28%+++
Return:** ============ ============
Based on market price per share (0.97%)+++ 0.02%+++
============ ============
Ratios to Average Expenses, net of reimbursement 2.47%* 1.61%*
Net Assets: ============ ============
Expenses 2.47%* 1.75%*
============ ============
Investment income--net 7.11%* 7.33%*
============ ============
Supplemental Net assets, end of period (in thousands) $ 231,495 $ 248,342
Data: ============ ============
Portfolio turnover 16.66% 52.73%
============ ============
<PAGE>
<FN>
++Commencement of Operations.
+++Aggregate total investment return.
*Annualized.
**Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, result
in substantially different returns. Total investment returns
exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Senior High Income Portfolio, Inc. ("the Fund") is registered under
the Investment Company Act of 1940 as a non-diversified, closed-end
management investment company. The Fund determines and makes
available for publication the net asset value of its Common Stock on
a weekly basis. The Fund's Common Stock is listed on the New York
Stock Exchange under the symbol ARK.
(a) Corporate debt obligations--The Fund invests principally in
senior debt obligations ("Senior Debt") of companies, including
corporate loans made by banks and other financial institutions and
both privately placed and publicly offered corporate bonds and
notes.
(b) Valuation of investments--Portfolio securities are valued on the
basis of prices furnished by one or more pricing services, which
determines prices for normal, institutional-size trading units. In
certain circumstances, portfolio securities are valued at the last
sale price on the exchange that is the primary market for such
securities, or the last quoted bid price for those securities for
which the over-the-counter market is the primary market or for
listed securities in which there were no sales during the day.
Positions in options are valued at the last sale price on the market
where any such option is principally traded. Securities for which
there exist no price quotations or valuations and all other assets
are valued at fair value as determined in good faith by or on behalf
of the Board of Directors of the Fund. Since corporate loans are
purchased and sold primarily at par value, the Fund values the loans
at par, unless Fund Asset Management, L.P. ("FAM") determines par
does not represent fair value. In the event such a determination is
made, fair value will be determined in accordance with guidelines
approved by the Fund's Board of Directors. Obligations with
remaining maturities of sixty days or less are valued at amortized
cost unless this method no longer produces fair valuations.
<PAGE>
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Realized gains and losses on security transactions are
determined on the identified cost basis. Facility fees are accreted
to income over the term of the related loan.
(e) Deferred organization expenses--Deferred organization expenses
are amortized on a straight-line basis over a five-year period.
(f) Dividends and distributions--Dividends from net investment
income are declared daily and paid monthly. Distributions of capital
gains are recorded on the ex-dividend dates. The Fund may at times
pay out less than the entire amount of net investment income earned
in any particular period and may at times pay out such accumulated
undistributed income in other periods to permit the Fund to maintain
a more stable level of distributions.
2. Investment Advisory Agreement with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM.
The general partner of FAM is Princeton Services, Inc., an indirect
wholly-owned subsidiary of Merrill Lynch & Co. ("ML & Co."). The
limited partners are ML & Co. and Merrill Lynch Investment
Management, Inc. ("MLIM"), which is also an indirect wholly-owned
subsidiary of ML & Co.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund.
For such services, the Fund pays a monthly fee at an annual rate of
0.50% of the Fund's average weekly net assets.
During the period May 25, 1994 to August 31, 1994, Merrill Lynch
Security Pricing Service, an affiliate of Merrill Lynch, Pierce,
Fenner & Smith, Inc. ("MLPF&S"), provided security price quotations
to compute the net asset value of the Fund.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, MLIM, MLPF&S, and/or ML & Co.
<PAGE>
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period ended August 31, 1994 were $53,971,879 and
$70,731,972.
Net realized and unrealized gain (losses) as of August 31, 1994 were
as follows:
Realized Unrealized
Losses Losses
Long-term investments $(4,142,598) $ (9,609,230)
----------- ------------
Total $(4,142,598) $ (9,609,230)
=========== ============
As of August 31, 1994, net unrealized depreciation for financial
reporting and Federal income tax purposes aggregated $9,609,230, of
which $789,082 related to appreciated securities and $10,398,312
related to depreciated securities. The aggregate cost of investments
at August 31, 1994 for Federal income tax purposes was $317,484,883.
4. Capital Share Transaction:
The Fund is authorized to issue 200,000 shares of capital stock par
value $.10, all of which are initially classified as Common Stock.
The Board of Directors is authorized, however, to classify and
reclassify any unissued shares of capital stock without approval of
the holder of Common Stock.
For the six months ended August 31, 1994, shares issued and
outstanding remained the same. At August 31, 1994, total paid-in
capital amounted to $240,131,365.
5. Short-Term Borrowings:
On June 16, 1993, the Fund entered into a one-year revolving credit
facility in the amount of $55 million and a two-year term loan
facility in the amount of $25 million bearing interest at the
Federal Funds rate plus 1%--3% on the outstanding balance. Effective
June 10, 1994, the credit agreement with the Bank of New York was
amended to eliminate the revolving credit facility and to reflect an
increase in the term loan commitment to $120 million from $80
million, the maximum amount borrowed was $106 million, the average
amount borrowed was approximately $93.5 million, and the daily
weighted average interest rate was 5.28%. For the period to August
31, 1994, facility and commitment fees aggregated approximately
$2,697,970.
<PAGE>
PER SHARE INFORMATION
<TABLE>
Per Share
Selected
Quarterly
Financial Data*
<CAPTION>
Net Dividends/Distributions
Investment Realized Unrealized Net Investment Income Capital
For the Period Income Gains Gains Common Gains
<S> <C> <C> <C> <C> <C>
April 30, 1993++ to May 31, 1993 $.04 -- $ .01 -- --
June 1, 1993 to August 31, 1993 .20 $ .02 .02 $.17 --
September 1, 1993 to November 30, 1993 .22 .04 .06 .20 --
December 1, 1993 to February 28, 1994 .24 .04 .06 .24 $.02
March 1, 1994 to May 31, 1994 .22 (.04) (.49) .20 --
June 1, 1994 to August 31, 1994 .23 (.13) (.05) .21 --
<CAPTION>
Net Asset Value Market Price**
For the Period High Low High Low Volume***
<S> <C> <C> <C> <C> <C>
April 30, 1993++ to May 31, 1993 $9.54 $9.48 $10.125 $10.00 179
June 1, 1993 to August 31, 1993 9.70 9.56 10.125 9.50 1,347
September 1, 1993 to November 30, 1993 9.77 9.54 10.125 9.375 1,881
December 1, 1993 to February 28, 1994 9.89 9.70 9.875 9.125 1,990
March 1, 1994 to May 31, 1994 9.80 9.29 9.625 8.75 2,557
June 1, 1994 to August 31, 1994 9.89 9.13 9.29 8.25 3,034
<FN>
*Calculations are based upon Common Stock outstanding at the end of
each period.
**As reported in the consolidated transaction reporting system.
***In thousands.
++Commencement of Operations.
</TABLE>
