SENIOR
HIGH
INCOME
PORTFOLIO,
INC.
Annual Report February 28, 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
representation 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
SENIOR HIGH INCOME PORTFOLIO, INC.
The Benefits and
Risks of Leveraging
<PAGE>
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.
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
<PAGE>
DEAR SHAREHOLDER
For the quarter ended February 28, 1994, the Senior High Income
Portfolio Inc.'s total investment return was +3.60%, based on a
change in per share net asset value from $9.73 to $9.82, and
assuming reinvestment of $0.253 per share income dividends. During
the same period, the Portfolio's net annualized yield was 10.27%.
Since inception (April 30, 1993) through February 28, 1994, the
Portfolio's total investment return was +10.28%, based on a change
in per share net asset value from $9.50 to $9.82, and assuming
reinvestment of $0.627 per share income dividends. The Portfolio is
25% leveraged, having borrowed $84.0 million of its $120.0 million
line of credit available at an average borrowing cost of 5.15%. (For
a complete explanation of leveraging, see page 1 of this report to
shareholders.)
As of September 1, 1993, the Portfolio's Board of Directors elected
to pay out a fixed monthly dividend of 8.0% in order to permit the
Portfolio to maintain a more stable level of distribution. For
Federal income tax purposes, the Portfolio is 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 at least
annually. If the current trend toward higher short-term interest
rates--including the London Interbank Offered Rate (LIBOR)--is
sustained, the fixed dividend rate is likely to increase over time.
The Environment
Since the fund's inception we have experienced an excellent
opportunity for investment. A strong flow of leveraged bank
transactions in the fall of 1993 coupled with a continued ample
supply of senior bond issues in the high-yield market allowed us to
balance attractive yields with credit quality.
Economic indicators continue to point to a healthy economic recovery
in the United States. However, in a fairly short time investor
sentiment in the United States and in most of the world's financial
markets has turned more bearish. This change began when the Federal
Reserve Board raised short-term interest rates on February 4, 1994,
the first time in five years. This prompted a nervous sell-off in
financial markets throughout the world. Reassurances by Federal
Reserve Board Chairman Alan Greenspan and the widespread belief that
a sell-off was overdue helped stabilize the US bond market and
enabled it to gain some composure and actually gain some ground in
the last week of the quarter. However, bond investors continue to be
concerned about further Federal Reserve Board tightening in an
effort to head off inflation. We expect to see some price
improvement in the longer-term end of the maturity spectrum
as investors come to realize that the economy is not overheating
and that inflation remains subdued. Looking further ahead, it is
possible that the yield curve will flatten gradually during 1994
as the Federal Reserve Board takes further modest steps to push
up the Federal Funds rate.
<PAGE>
Portfolio Strategy
In light of the current investment environment, we continue to
weight the Portfolio more heavily in senior secured floating rate
bank loans. At the end of the period under review, these securities
made up 51% of the Portfolio's investments with an additional 47%
invested in fixed-rate high-yield bonds. Since these bank loans have
an average reset of 61 days, any increase in short-term interest
rates should benefit the Portfolio's return within one to two
months. The majority of the Portfolio's floating rate investments
are at a spread over the LIBOR. Historically, that rate has tracked
the Federal Funds rate closely. Since the tightening by the Federal
Reserve Board which moved the Federal Funds rate from 3.00% to
3.25%, three-month LIBOR has risen from 3.1875% to 3.75% at period-
end.
In the loan market, both new and secondary issues continue to be
well bid, providing strong liquidity at attractive prices. With the
recent retreat in stock prices and the amount of equity sponsor
funds presently being raised or sitting on the sidelines, it is
likely that more buyout activity will be seen in the remainder of
1994 than was the case over the last 12 months when refinancings
dominated the market.
On the other hand, the high-yield bond market has begun to reprice
itself. While the high-yield market historically has not had a
strong correlation to interest rate movements, the possibility of
climbing interest rates has put selling pressure on prices in the
high-yield sector, since many large high-yield funds have built cash
in anticipation of redemptions. We were opportunistic in this
environment, selling certain lower-coupon issues and replacing them
with higher-coupon new issues or floating rate bank notes. New
issues coming to market in February were either put on hold until
the interest rate environment improved or priced at 50 basis points--
70 basis points (0.50%--0.70%) above the original price talk. We
believe this repricing was long overdue and will ultimately provide
attractive opportunities in the heavy new issue calendar expected in
the latter half of March. We believe supply should ease going into
the second quarter of 1994, permitting the prices of outstanding
bonds to rise.
We continue to focus on buying higher-yielding, improving quality
cyclical credits. Fundamental price support for these bonds is
likely to continue to improve as the economy strengthens. Over the
long run, rising and fluctuating interest rates tend to have a
limited effect on the value of these securities since they have
traded at relatively wide spreads to the US Treasury curve. Our
investments in building products companies such as USG Corp. and
American Standard, Inc. reflect this view, as does our emphasis on
the retail, shipping, steel, chemicals and paper industries. We
continue to focus on those issues with a maturity of ten years or
less that generally have five-year call protection.
<PAGE>
At February 28, 1994, cash equivalents totaled 0.1% of net assets.
The Portfolio's average stated maturity was 6.3 years but had an
average life of approximately 4.7 years as a result of the shorter
average life of bank loans which are freely payable without call
protection. The Portfolio is diversified in the floating rate sector
with 23 investments across 14 industries and in the fixed-rate
sector with 52 investments across 28 industries.
Both the bond and loan markets continue to be characterized by
improving credit quality as the economy expands, supported by
improving corporate profits. Stronger companies are taking advantage
of attractive public debt and equity markets to improve their
balance sheets. These trends have translated into lower default
rates in both the bank loan and high-yield bond markets. With an
improving economy, we believe that low default rates will continue
throughout 1994.
Looking ahead, 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
March 31, 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 $ 5,300,000
<PAGE>
Aerospace--6.9% Aviall, Inc., Term Loan, Tranche B,
due 11/30/2000:*
NR NR 1,176,471 6.57% to 4/07/1994 1,176,471 1,176,471
NR NR 2,941,176 6.76% to 6/07/1994 2,941,176 2,941,176
NR NR 882,353 6.80% to 8/08/1994 882,353 882,353
NR NR 4,500,000 Gulfstream Delaware Corp., Term Loan 2,
due 3/31/1998, 6.50% to 3/08/1994* 4,500,000 4,500,000
BB B1 2,500,000 Sequa Corp., Senior Secured Notes, 8.75%
due 12/15/2001 2,500,000 2,525,000
B B2 2,000,000 Talley Manufacturing & Technology, Inc.,
Senior Discount Debentures, 10.75%
due 10/15/2003 2,030,000 2,080,000
BB B1 3,000,000 UNC, Inc., Senior Notes, 9.125% due 7/15/2003 3,000,000 3,090,000
------------- -------------
17,030,000 17,195,000
Agricultural BB- B1 2,000,000 Chiquita Brands International, Inc.,
Products--2.7% Senior Notes, 9.125% due 3/01/2004 2,000,000 1,970,000
BB- Ba3 5,000,000 ++Del Monte Corp., Series A, Senior Notes, 10%
due 5/01/2003 5,062,500 4,850,000
------------- -------------
7,062,500 6,820,000
Broadcast/ BB- Ba2 2,500,000 Continental Cablevision, Inc.,
Media--1.0% Senior Notes, 8.625% due 8/15/2003 2,500,000 2,562,500
Building & B- B2 2,500,000 Baldwin Co., Senior Notes, 10.375% due 8/01/2003 2,500,000 2,525,000
Construction--5.2% B+ B1 4,000,000 Beazer Homes USA, Inc., Senior Notes, 9%
due 3/01/2004 4,000,000 3,920,000
NR B2 2,000,000 Del Webb Corp., Senior Notes, 9% due 2/15/2006 2,000,000 1,962,500
B B1 4,250,000 U.S. Home Corp., Senior Notes, 9.75%
due 6/15/2003 4,250,000 4,398,750
------------- -------------
12,750,000 12,806,250
Building NR NR 10,000,000 American Standard, Inc., Term Loan, Tranche A,
Products--6.5% due 6/01/2000, 6.50% to 6/02/1994* 10,000,000 10,000,000
B+ B2 6,000,000 USG Corp., Senior Secured Notes, 10.25%
due 12/15/2002 6,015,000 6,150,000
------------- -------------
16,015,000 16,150,000
Carbon & Graphite B+ B3 2,000,000 Carbide/Graphite Group, Senior Notes,
Products--0.9% 11.50% due 9/01/2003 2,000,000 2,140,000
<PAGE>
Chemicals--4.5% NR NR 5,000,000 Indspec Chemical Corp., Term Loan B,
due 12/02/2000, 5.75% to 3/01/1994* 5,000,000 5,000,000
OSI Specialties, Inc., Term Loan B,
due 6/30/2000:*
NR NR 1,590,909 6.19% to 3/22/1994 1,590,909 1,590,909
NR NR 1,590,909 6.32% to 5/23/1994 1,590,909 1,590,909
B+ B1 3,000,000 Uniroyal Chemical Company, Inc., 9%
due 9/01/2000 3,000,000 3,075,000
------------- -------------
11,181,818 11,256,818
Computers--0.9% NR NR 2,100,000 ++Dell Computer Corp., Senior Notes, 11%
due 8/15/2000 2,118,375 2,215,500
Consumer Food B+ B1 5,000,000 Royal Crown Corp., Senior Secured Notes,
Products--6.1% 9.75% due 8/01/2000 5,000,000 5,100,000
NR NR 9,920,000 Specialty Foods Corp., Term Loan B,
due 8/31/1999, 6.63% to 4/18/1994* 9,920,000 9,920,000
------------- -------------
14,920,000 15,020,000
Consumer NR NR 3,530,663 Harvard Industries, Inc., Term Loan,
Products--2.2% due 9/26/1994, 8.25% (1)* 3,530,663 3,530,663
Revlon Consumer Products Corp., Senior Notes:
B B2 1,000,000 9.50% due 6/01/1999 979,918 990,000
B B2 1,000,000 9.375% due 4/01/2001 968,839 968,750
------------- -------------
5,479,420 5,489,413
Containers--3.7% Silgan Corp., Term Loan B, due 9/15/1996:*
NR NR 2,500,000 6.56% to 3/07/1994 2,500,000 2,500,000
NR NR 2,500,000 6.63% to 5/09/1994 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 4,160,000
------------- -------------
9,000,000 9,160,000
Drug Duane Reade, Term Loan A, due 9/30/1997:*
Stores--3.8% NR NR 262,123 6.50% to 3/28/1994 262,123 262,123
NR NR 4,377,457 6.75% to 5/31/1994 4,377,457 4,377,457
NR NR 4,724,704 Jack Eckerd Corp., Term Loan B,
due 6/14/2000, 6.75% to 5/31/1994* 4,724,704 4,724,704
------------- -------------
9,364,284 9,364,284
Educational B B3 5,000,000 ++La Petite Holdings Corp., Senior Secured
Services--2.0% Notes, 9.625% due 8/01/2001 5,000,000 5,000,000
<PAGE>
Energy--1.9% NR NR 4,500,000 Presidio Oil Company, Senior Secured Notes,
11.50% due 9/15/2000 4,540,000 4,680,000
Fertilizer--3.3% B B3 4,000,000 ++IMC Fertilizer Group, Inc., Senior Notes,
10.75% due 6/15/2003 4,000,000 4,340,000
BB- Ba3 3,750,000 Sherritt Gordon Ltd., Senior Notes, 9.75%
due 4/01/2003 3,762,500 3,900,000
------------- -------------
7,762,500 8,240,000
Grocery--17.7% NR NR 2,424,242 CK Aquisitions Corp., Term Loan A,
due 4/30/1998, 6% to 3/28/1994* 2,424,242 2,424,242
CK Aquisitions Corp., Term Loan B,
due 4/30/2000:*
NR NR 1,777,778 6.50% to 3/28/1994 1,777,778 1,777,778
NR NR 4,888,889 6.4375% to 4/27/1994 4,888,889 4,888,889
Grand Union Co., Term Loan B, due 6/30/1998:*
NR NR 24,062 8% (1) 24,062 24,062
NR NR 3,333,333 6.9375% to 3/09/1994 3,333,333 3,333,333
NR NR 3,166,667 7% to 5/16/1994 3,166,667 3,166,667
BB- Ba2 4,000,000 Kroger Co., Senior Secured Notes, 9.25%
due 1/01/2005 4,170,000 4,290,000
B B2 6,500,000 Mega Warehouse Foods, Inc., Senior Notes, 10.25%
due 10/15/2000 6,487,370 6,475,625
NR NR 5,000,000 Pathmark Stores, Inc., Term Loan B, due
10/31/1999, 6.25% to 4/26/1994* 5,000,000 5,000,000
BB- Ba3 1,000,000 The Penn Traffic Company, Senior Notes,
8.625% due 12/15/2003 1,000,000 990,000
B- B2 2,000,000 Pueblo Xtra International, Inc., Senior
Notes, 9.50% due 8/01/2003 2,000,000 1,980,000
</TABLE>
<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>
Grocery Ralph's Grocery Co., Primary Term Loan,
(concluded) due 6/30/1998:*
NR NR $ 272,212 5.9375% to 3/04/1994 $ 272,212 $ 272,212
NR NR 4,051,521 6.25% to 3/07/1994 4,051,521 4,051,521
NR NR 316,525 6.125% to 3/14/1994 316,525 316,525
NR NR 1,899,151 6.1875% to 3/23/1994 1,899,151 1,899,151
NR NR 158,262 6.25% to 4/22/1994 158,262 158,262
NR NR 2,798,082 6.1875% to 5/09/1994 2,798,082 2,798,082
------------- -------------
43,768,094 43,846,349
Hotels & BB- B1 2,000,000 ++Four Seasons Hotels, Inc., Notes, 9.125%
Casinos--2.6% due 7/01/2000 1,918,200 1,940,000
B+ B2 4,500,000 GB Property Funding Corp., First Mortgage
Notes, 10.875% due 1/15/2004 4,500,000 4,455,000
------------- -------------
6,418,200 6,395,000
Industrial B+ B1 3,000,000 Essex Group, Inc., 10% due 5/01/2003 3,041,250 3,045,000
Services--5.0% NR NR 5,000,000 Joy Technologies, Inc., Term Loan, Tranche B,
due 12/31/1997, 6.5625% to 5/27/1994* 5,000,000 5,000,000
NR NR 4,325,000 TD II Company, Term Loan B, due 2/01/2001,
7.75%(1)* 4,325,000 4,325,000
------------- -------------
12,366,250 12,370,000
Leasing & Rental B- B2 2,000,000 Cort Furniture Rental Corp., Senior Notes,
Services--3.9% 12% due 9/01/2000 2,000,000 2,080,000
B+ B1 5,200,000 MEDIQ/PRN Life Support Services, Inc.,
Senior Secured Notes, 11.125% due 7/01/1999 5,409,000 5,473,000
BB- B1 2,000,000 The Scotsman Group, Inc., Senior Secured
Notes, 9.50% due 12/15/2000 2,000,000 2,025,000
------------- -------------
9,409,000 9,578,000
Manufacturing--1.5% BB B1 3,623,000 Foamex L.P., Senior Secured Notes, 9.50%
due 6/01/2000 3,643,000 3,731,690
Office B+ B1 5,000,000 Bell & Howell Co., 9.25% due 7/15/2000 5,025,000 5,200,000
Machines--4.7% Lexmark Holdings, US, Term Loan, due 3/27/1998:*
NR NR 3,655,787 5.875% to 3/31/1994 3,655,787 3,655,787
NR NR 2,909,445 5.875% to 7/29/1994 2,909,445 2,909,445
------------- -------------
11,590,232 11,765,232
Paper--18.2% BB- Ba3 2,000,000 Doman Industries Ltd., Senior Notes,
8.75% due 3/15/2004 2,000,000 1,985,000
NR NR 14,125,000 Fort Howard Corp., Primary Term Loan,
due 5/01/1997, 6.44% to 4/21/1994* 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 5,350,000
Jefferson Smurfit/Container Corp. of America,
Term Loan, due 12/31/1997:*
NR NR 6,768,848 5.69% to 3/18/1994 6,768,848 6,768,848
NR NR 3,994 5.69% to 3/25/1994 3,994 3,994
NR NR 15,000,000 6.50% to 3/28/1994 15,000,000 15,000,000
B+ B1 2,000,000 Repap Wisconsin, Inc., Senior Secured Notes,
9.25% due 2/01/2002 2,000,000 2,005,000
------------- -------------
44,897,842 45,237,842
<PAGE>
Restaurants--1.2% NR NR 3,027,183 TW Services, Inc., Term Loan, due
11/17/1999, 6.1875% to 3/28/1994* 3,027,183 3,027,183
Retail-- Camelot Music, Inc., Term Loan B,
Speciality--9.4% due 8/31/2001:*
NR NR 1,875,000 6.50% to 5/17/1994 1,875,000 1,875,000
NR NR 3,125,000 6.75% to 8/17/1994 3,125,000 3,125,000
B B2 4,000,000 Color Tile, Inc., Senior Notes, 10.75%
due 12/15/2001 4,000,000 4,160,000
NR NR 10,000,000 Saks & Co., Term Loan, Tranche B,
due 6/30/2000, 6.69% to 8/09/1994* 10,000,000 10,000,000
B+ B1 4,000,000 ++Specialty Retailers, Inc., Series A,
Senior Notes, 10% due 8/15/2000 4,000,000 4,080,000
------------- -------------
23,000,000 23,240,000
Steel--8.8% B B2 4,000,000 Bayou Steel Corp., First Mortgage Notes,
10.25% due 3/01/2001 4,000,000 4,015,000
B- B3 5,000,000 Federal Industries Ltd., 10.25% due 6/15/2000 5,011,250 5,187,500
B+ B1 3,000,000 Geneva Steel, Senior Notes, 9.50% due 1/15/2004 3,000,000 3,052,500
B B2 2,000,000 Republic Engineered Steel, Inc.,
First Mortgage Notes, 9.875% due 12/15/2001 2,000,000 2,070,000
B+ B1 3,000,000 ++WCI Steel, Inc., Senior Notes, 10.50%
due 3/01/2002 3,000,000 3,277,500
Weirton Steel Corp., Senior Notes:
B B2 2,000,000 11.50% due 3/01/1998 2,100,000 2,145,000
B B2 2,000,000 10.875% due 10/15/1999 2,070,000 2,130,000
------------- -------------
21,181,250 21,877,500
Textiles--1.8% BB Ba3 3,500,000 Dominion Textile (USA) Inc.,
Senior Notes, 8.875% due 11/01/2003 3,482,780 3,465,000
B+ B3 1,000,000 Westpoint Stevens, Inc., Senior Notes,
8.75% due 12/15/2001 1,000,000 1,000,000
------------- -------------
4,482,780 4,465,000
Transportation-- B B1 2,500,000 OMI Corp., Senior Notes, 10.25%
3.1% due 11/01/2003 2,500,000 2,550,000
B+ Ba3 5,000,000 Southern Pacific Rail Corp., Senior Notes,
9.375% due 8/15/2005 5,000,000 5,212,500
------------- -------------
7,500,000 7,762,500
<PAGE>
Utilities--2.6% B Ba3 2,000,000 First PV Funding Corp., 10.30% due 1/15/2014 2,020,000 2,052,590
B+ B1 4,000,000 Texas-New Mexico Power Company, Secured
Debentures, 10.75% due 9/15/2003 4,000,000 4,340,000
------------- -------------
6,020,000 6,392,590
Warehousing & B+ B1 2,000,000 Americold Corp., First Mortgage Bonds, Series
Storage--2.7% B, 11.50% due 3/01/2005 2,045,000 2,045,000
Pierce Leahy Corp., Term Loan, Tranche A,
due 1/31/2000:*
NR NR 156,250 6.625% to 4/29/1994 156,250 156,250
NR NR 4,581,250 6.50% to 6/07/1994 4,581,250 4,581,250
------------- -------------
6,782,500 6,782,500
Total Investments in
Corporate Debt Obligations--136.9% 335,866,478 339,871,151
<CAPTION>
Shares Warrants
<S> <S> <S> <C> <S> <C> <C>
Leasing & Rental NR NR 66,000 Cort Furniture Rental Corp. (a) (b) 0 59,400
Services--0.0%
Total Investments in Warrants--0.0% 0 59,400
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
SHORT-TERM Face Value
SECURITIES Amount Issue Cost (Note 1b)
<S> <C> <S> <C> <C>
Commercial $250,000 General Electric Capital Corp., 3.40%
Paper** -- 0.1% due 3/01/1994 $ 250,000 $ 250,000
Total Investments in
Short-Term Securities--0.1% 250,000 250,000
Total Investments--137.0% $ 336,116,478 340,180,551
=============
Liabilities in
Excess of Other Assets--(37.0%) (91,838,717)
-------------
Net Assets--100.0% $ 248,341,834
=============
<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, LIB0R (London Interbank Offered Rate), or, in some cases, another base lending
rate. The interest rates shown are those in effect at February 28, 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)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.
(b)Non-income producing security.
(1)Interest rate is based on the prime rate of a US bank, which is subject to
change daily.
++Restricted securities pursuant to Rule 144A.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of February 28, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$336,116,478) (Note 1b) $ 340,180,551
Cash 172,352
Receivables:
Interest $ 4,754,730
Commitment fees 582 4,755,312
-------------
Deferred facility fee (Note 1e) 320,106
Prepaid expenses and other assets (Note 1e) 100,032
-------------
Total assets 345,528,353
-------------
Liabilities: Payables:
Loans (Note 6) 84,000,000
Securities purchased 10,000,000
Dividends to shareholders (Note 1f) 785,381
Interest on loans (Note 6) 235,408
Investment adviser (Note 2) 101,034 95,121,823
-------------
Deferred income (Note 1d) 1,963,401
Accrued expenses and other liabilities 101,295
-------------
Total liabilities 97,186,519
-------------
Net Assets: Net assets $ 248,341,834
=============
<PAGE>
Net Assets Common stock, par value $.10 per share; 200,000,000 shares authorized $ 2,530,048
Consist of: Paid-in capital in excess of par 237,601,317
Undistributed investment income--net 2,207,706
Undistributed realized capital gains--net 1,938,690
Unrealized appreciation on investments--net (Note 3) 4,064,073
-------------
Net Assets--Equivalent to $9.82 per share based on 25,300,482
shares of capital stock outstanding (market price--$9.375) $ 248,341,834
=============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Period April 30, 1993++
to February 28,1994
<S> <S> <C> <C>
Investment Income Interest and discount earned $ 19,189,851
(Note 1d): Facility and other fees 2,191,363
-------------
Total income 21,381,214
Expenses: Loan interest expense and commitment fees (Note 6) $ 2,268,076
Investment advisory fees (Note 2) 1,220,882
Facility fee amortization (Note 6) 429,894
Professional fees 56,307
Accounting services (Note 2) 54,902
Amortization of organization expenses (Note 1e) 43,859
Custodian fees 31,411
Directors' fees and expenses 21,851
Transfer agent fees (Note 2) 17,238
Printing and shareholder reports 13,443
Pricing services 4,417
Registration fees (Note 1e) 250
Other 19,495
-------------
Total expenses before reimbursement 4,182,025
Reimbursement of expenses (Note 2) (333,908)
-------------
Total expenses after reimbursement 3,848,117
-------------
Investment income--net 17,533,097
-------------
Realized & Realized gain on investments--net 2,392,226
Unrealized Gain on Unrealized appreciation on investments--net 4,064,073
Investments--Net: -------------
Net Increase in Net Assets Resulting from Operations $ 23,989,396
=============
<PAGE>
<FN>
++ Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
For the Period
April 30, 1993++
Increase (Decrease) in Net Assets: to February 28,1994
<S> <S> <C>
Operations: Investment income--net $ 17,533,097
Realized gain on investments--net 2,392,226
Unrealized appreciation on investments--net 4,064,073
-------------
Net increase in net assets resulting from operations 23,989,396
-------------
Dividends & Investment income--net (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 (15,778,927)
-------------
Capital Share Net increase in net assets resulting from capital share transactions 240,031,358
Transactions -------------
(Note 4):
Net Assets: Total increase in net assets 248,241,827
Beginning of period 100,007
-------------
End of period* $ 248,341,834
=============
<FN>
* Undistributed investment income--net $ 2,207,706
=============
++ Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Period
April 30, 1993++
to February 28, 1994
<S> <S> <C>
Cash Provided by Net increase in net assets resulting from operations $ 23,989,396
Operating Activities: Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by operating activities:
Increase in receivables (4,755,312)
Increase in other assets (420,138)
Increase in other liabilities 2,401,138
Realized and unrealized gain on investments--net (6,456,299)
Amortization of discount (499,745)
--------------
Net cash provided by operating activities 14,259,040
--------------
Cash Used for Proceeds from sales of long-term investments 130,547,990
Investing Activities: Purchases of long-term investments (454,013,130)
Purchases of short-term investments (1,195,041,637)
Proceeds from sales and maturities of short-term investments --net 1,195,282,270
--------------
Net cash used for investing activities (323,224,507)
--------------
Cash Provided by Cash receipts on capital shares sold 235,784,458
Financing Activities: Dividends paid to shareholders (10,746,646)
Short-term borrowings 84,000,000
--------------
Net cash provided by financing activities 309,037,812
--------------
Cash: Net increase in cash 72,345
Cash at beginning of period 100,007
--------------
Cash at end of period $ 172,352
==============
Cash Flow Cash paid for interest $ 2,268,076
Information: ==============
Non-Cash Financing Capital shares issued in reinvestment of dividends paid to shareholders $ 4,246,900
Activities: ==============
<PAGE>
<FN>
++ Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period
April 30, 1993++
Increase (Decrease) in Net Asset Value: to February 28, 1994
<S> <S> <C>
Per Share Net asset value, beginning of period $ 9.50
Operating -------------
Performance: Investment income--net .70
Realized and unrealized gain on investments--net .25
-------------
Total from investment operations .95
-------------
Less dividends and distributions:
Investment income--net (.61)
Realized gain on investments--net (.02)
-------------
Total dividends and distributions (.63)
-------------
Net asset value, end of period $ 9.82
=============
Market price per share, end of period $ 9.375
=============
Total Investment Based on net asset value per share 10.28%+++
Return:** =============
Based on market price per share (0.65%)+++
=============
Ratios to Average Expenses, net of reimbursement 1.61%*
Net Assets: =============
Expenses 1.75%*
=============
Investment income--net 7.33%*
=============
Supplemental Net assets, end of period (in thousands) $ 248,342
Data: =============
Portfolio turnover 52.73%
=============
<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>
<PAGE>
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. Prior to commencement of operations
on April 30, 1993, the Fund had no operations other than those
relating to organizational matters and the issue of 10,527 capital
shares of the Fund to Fund Asset Management, L.P. ("FAM") for
$100,007. 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 of companies ("Senior Debt"), 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.
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 loan
interests at par, unless 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.
(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 trans-
actions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accru-
al 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.
<PAGE>
(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.
Effective January 1, 1994, the investment advisory business of FAM
was reorganized from a corporation to a limited partnership. Both
prior to and after the reorganization, ultimate control of FAM was
vested with Merrill Lynch and Co., Inc. ("ML & Co."). The general
partner of FAM is Princeton Services, Inc., an indirect wholly-owned
subsidiary of 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 plus the proceeds of
any outstanding borrowings used for leverage. For the period April
30, 1993 to February 28, 1994, FAM earned fees of $1,220,882, of
which $305,108 was voluntarily waived. FAM also reimbursed the Fund
$28,800 for additional expenses.
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, Merrill Lynch, Pierce, Fenner & Smith, Inc.
("MLPF&S"), and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period April 30, 1993 to February 28, 1994 were $464,013,130
and $130,547,990, respectively.
Net realized and unrealized gains (losses) as of February 28, 1994
were as follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $ 2,394,262 $ 4,064,073
Short-term investments (2,036) --
----------- ------------
Total $ 2,392,226 $ 4,064,073
=========== ============
NOTES TO FINANCIAL STATEMENTS (concluded)
<PAGE>
As of February 28, 1994 net unrealized appreciation for financial
reporting and Federal income tax purposes aggregated $4,064,073, of
which $4,543,687 related to appreciated securities and $479,614
related to depreciated securities. The aggregate cost of investments
at February 28, 1994 for Federal income tax purposes was
$336,116,478.
4. Capital Share Transactions:
Transactions in capital shares were as follows:
For the Period April 30, 1993++ Dollar
to February 28, 1994 Shares Amount
Shares sold 24,850,000 $235,784,458
Shares issued to shareholders
in reinvestment of dividends
and distributions 439,955 4,246,900
----------- ------------
Net increase 25,289,955 $240,031,358
=========== ============
[FN]
++ Prior to April 30, 1993 (commencement of operations), the
Fund issued 10,527 shares to FAM for $100,007.
5. Unfunded Loan Interests:
As of February 28, 1994, the Fund had unfunded loan commitments of
$2,277,000, which would be extended at the option of the borrower,
pursuant to the following loan agreements:
Unfunded
Commitment
Borrower (in thousands)
Harvard Industries, Inc. $ 1,602
TD II Company 675
------------
$ 2,277
============
6. Short-Term Borrowings:
On June 10, 1993, the Fund entered into a one-year revolving credit
facility commitment in the amount of $55,000,000 and a two-year term
loan facility in the amount of $25,000,000 bearing interest at the
Federal Funds rate plus 1%--3% on the outstanding balance. Effective
February 10, 1994, the credit agreement with The Bank of New York was
amended to reflect an increase in the revolving credit commitment to
$95,000,000 from $55,000,000. From June 17, 1993 to February 28, 1994,
the maximum amount borrowed was $84,000,000, the average amount borrow-
ed was approximately $67,000,000, and the daily weighted average inter-
est rate was 5.15%. For the period April 30, 1993 to February 28, 1994,
facility, commitment fees (which is 1/4 of 1% of the unused credit
facility), and interest expense aggregated approximately $2,698,000.
<PAGE>
<AUDIT-REPORT>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders,
Senior High Income Portfolio, Inc.:
We have audited the accompanying statement of assets and
liabilities, including the schedule of investments, of Senior High
Income Portfolio, Inc. as of February 28, 1994, the related state-
ments of operations, changes in net assets, and cash flows and the
financial highlights for the period April 30, 1993 (commencement
of operations) to February 28, 1994. These financial statements and
the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our
audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material mis-
statement. 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 at February
28, 1994 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and sig-
nificant estimated made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Senior High Income Portfolio, Inc. as of February 28, 1994, the
results of its operations, the changes in its net assets, its cash
flows, and the financial highlights for the period April 30, 1993 to
February 28, 1994 in conformity with generally accepted accounting
principles.
As discussed in Notes 1a and 1b, the financial statements include
corporate loans valued at $160,160,245 (65% of total net assets and
47.1% of total investments of the Fund), whose values are fair
values as determined by or under the direction of the Board of
Directors in the absence of actual market values. Determination of
fair value involves subjective judgement, as the actual market value
of particular corporate loans can be established only by negotiation
between the parties in a sales transaction. We have reviewed the
procedures established by the Board of Directors and used by the
Fund's investment adviser in determining the fair values of such
corporate loans and have inspected underlying documentation, and
under the circumstances, we believe that the procedures are
reasonable and the documentation appropriate.
Deliotte & Touche
Princeton, New Jersey
March 31, 1994
</AUDIT-REPORT>
<PAGE>
PER SHARE INFORMATION
<TABLE>
Per Share Selected Quarterly Financial Data*
<CAPTION>
Net Dividends/Distributions
Investment Realized Unrealized Net Investment Income Capital
For the Quarter 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
<CAPTION>
Net Asset Value Market Price**
For the Quarter 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
<FN>
* Calculations are based upon Common Shares outstanding at the end of each quarter.
** As reported in the consolidated transaction reporting system.
*** In thousands.
++ Commencement of Operations.
</TABLE>
