SENIOR HIGH
INCOME
PORTFOLIO, INC.
FUND LOGO
Annual Report
February 28, 1995
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.
<PAGE>
Senior High Income
Portfolio, Inc.
Box 9011
Princeton, NJ
08543-9011
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>
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 agencies or are unrated, as is commonly the case with
bank loans.
For the year ended February 28, 1995, the Portfolio's total
investment return was +0.37%, based on a change in per share net
asset value from $9.82 to $8.94, and assuming reinvestment of $0.913
per share income dividends. During the same period, the net
annualized yield of the Portfolio's Common Stock was 10.27%. Since
inception (April 30, 1993) through February 28, 1995, the total
investment return on the Portfolio's Common Stock was +10.69%, based
on a change in per share net asset value from $9.50 to $8.94, and
assuming reinvestment of $1.540 per share income dividends. At the
end of the February period, the Portfolio was 26.8% leveraged,
having borrowed $82 million of its $120 million line of credit
available at an average borrowing cost of 6.1%. (For a complete
explanation of the benefits and risks of leveraging, see page 1 of
this report to shareholders.)
As of February 28, 1995 the Portfolio paid out a regular monthly
dividend at an annualized rate of 8.65% in order to permit the
Portfolio to maintain a more stable level of distributions. 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 annually.
The regular monthly dividend has increased from an annualized rate
of 8.0% since inception of the Portfolio.
The Environment
The year ended February 28, 1995 was characterized by an interest
rate environment that proved to be a mixed blessing for the
Portfolio's investments. The steady rise in interest rates
throughout 1994 had a positive effect on the floating rate portion
of the Portfolio while eroding the values in the fixed-rate high-
yield bond portion of the Portfolio. The high-yield bond market was
particularly impacted in the September through December period as
outflows from high-yield mutual funds significantly increased the
price declines already occurring in sympathy with the fall in
intermediate-term and long-term US Treasury securities.
<PAGE>
On February 1, 1995, the Federal Reserve Board raised short-term
interest rates for the seventh time since the beginning of 1994 by
increasing the discount rate it charges on loans to its member banks
by 50 basis points (0.50%) to 5.25% and by pushing the Federal Funds
target rate to 6.0% from 5.5%. The economy ended 1994 with its
strongest growth in a decade as indicated by a gross domestic
product growth of 4%. At the same time inflation remained at low
levels. However, the Federal Reserve Board continues to be
preemptive in its efforts to head off inflation amid signs that the
economy is still strong.
Portfolio Strategy
Although the high-yield market is much firmer since the end of 1994,
we continue to focus on weighting the Portfolio toward senior
secured floating rate bank loans in order to take advantage of the
rise in short-term interest rates. As we feel more comfortable that
rates have stabilized and are likely to move downward, we will give
greater weighting to fixed-rate high-yield bonds when investing the
Portfolio.
Currently, more than 98% of the Portfolio's investments in corporate
loans are currently accruing interest at a yield spread above LIBOR
(London Interbank Offered Rate), the rate that major international
banks charge each other for US dollar-denominated deposits outside
of the United States. LIBOR has historically tracked very closely
with other short-term rates in the United States, particularly the
Federal Funds rate. Since the first tightening of monetary policy by
the Federal Reserve Board in February 1994, three-month LIBOR has
risen from 3.25% to 6.25%, an increase of 300 basis points. Since
the average reset on the Portfolio's floating rate investments is
currently 48 days, the potential impact of a LIBOR increase on the
yield of the Portfolio's floating rate investments will not be fully
realized for at least a comparable time period following any rate
increase. At February 28, 1995, floating rate securities made up 56%
of the market value of the Portfolio's investments, with an
additional 43% invested in fixed-rate high-yield bonds.
The leveraged loan market continued to be strong, particularly
during the last half of the year. Demand for bank loans was robust,
as banks and other institutional investors competed for the fees and
high spreads available in this sector. This demand created more
liquidity and more of a run up in prices for par names than seen in
over eighteen months. The volume of leveraged loans (those at a
spread of at least 1.50% over LIBOR) increased 187% last year, to
$81 billion. This is far and away the highest total of the 1990s,
but still far below the levels of the 1980s. The leveraged bank loan
market continues to be an attractive alternative for corporate
borrowers relative to the high coupons and call protection demanded
in the high-yield bond market.
<PAGE>
The high-yield bond market, driven by reduced mutual fund liquidity
and the uncertainty of the US Treasury market, drifted downward for
most of the second half of 1994, but seems to have found a floor at
year end. Since the beginning of 1995, investors began to return to
high-yield mutual funds, adding to cash balances. Heartened by signs
that the Federal Reserve Board's soft landing might become a
reality, the government market rallied, pushing the 30-year yield
down over 30 basis points between January 1, 1995 and February 28,
1995. High-yield bonds followed suit, fueled by fund managers eager
to invest cash and insurance companies attracted by relatively high
yields compared to investment-grade corporate bonds and governments.
The market rallied, and remained firm through the end of the
Portfolio's fiscal year as mutual funds continued to benefit from
solid inflows and new issue remained light. Demand for BB-rated
credits driven by crossover investment-grade buyers and quality
conscious mutual funds caused spreads to narrow by as much as 50
basis points. Most industry sectors fared well during this rally,
with health care and paper products showing particular strength.
Carrying over a common theme from 1994, investors treated issuers
reporting disappointing earnings harshly.
Overall fundamentals for both the bank loan and high-yield bond
markets remain positive as favorable quarterly earnings reports
occurred over the last nine months. Defaults, although expected to
increase this year, continue to be at historically low levels. Our
focus will continue to invest in those companies that we believe are
undervalued by the market or are generating improved earnings
trends. The industry focus is on companies that have leading market
shares, strong management and improving cash flows. The best
performing industry sectors included paper, building products,
airlines, broadcast/media, and chemicals. This strategy is reflected
in our holdings of such cyclicals as Jefferson Smurfit/Container
Corp. of America, Stone Container Corp., UCAR International Inc.,
S.D. Warren Co., and AK Steel Holding Corp. Underperforming sectors
included homebuilding and the grocery segment. Both segments were
hurt by both disappointing earnings reports and the announcement of
debt restructuring for specific companies in the respective
industries. The Portfolio reduced its holdings in each of these
sectors during the last six months.
At February 28, 1995, cash equivalents totaled 1.8% of net assets.
The Portfolio's average stated maturity was 6.1 years but had a much
shorter real average life 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 with 29
borrowers across 20 industries and in the fixed-rate portion with 52
borrowers across 30 industries. The largest industry concentrations
are in paper (19.5% of net assets), grocery (10.9%), metals (8.8%),
retail-specialty (8.8%), and food and beverage (6.3%).
<PAGE>
Our near-term outlook envisions firm high-yield bonds and leveraged
bank loan markets. Stronger companies are taking advantage of
attractive public debt and equity markets to improve their balance
sheets and reduce debt. With the Federal Reserve Board adopting a
neutral position for the short term, fixed-income investors are
positive on the bond and loan markets. Flows into the high-yield
bond and loan markets should remain steady. Although we expect the
new-issue calendar to develop over the next few months to satisfy
this demand, the intervening months will probably be a seller's
market. Looking forward, we expect to continue to emphasize senior
secured floating rate bank loans in order to take advantage of high
short-term rates and the possibility of another tightening by the
Federal Reserve Board. We will continue to be opportunistic in our
high-yield bond purchases, selling overvalued bonds and sectors, and
buying undervalued ones. We believe the Portfolio is well-positioned
to provide shareholders with the benefit of another increase in
rates or a stable rate environment.
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
April 12, 1995
<PAGE>
<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-- B B2 $ 5,000,000 Lamar Advertising Co., Senior Secured Notes,
2.1% 11% due 5/15/2003 $ 5,056,250 $ 4,850,000
Aerospace--6.1% Aviall, Inc., Term Loan, Tranche B, due
11/30/2000**:
NR* NR* 882,353 8.57% to 3/07/1995 882,353 882,353
NR* NR* 411,765 9.38% to 3/07/1995 411,765 411,765
NR* NR* 3,705,882 10% to 6/07/1995 3,705,882 3,705,882
NR* NR* 4,500,000 Gulfstream Delaware Corp., Term Loan, due
3/31/1998, 9.88% to 6/08/1995** 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 1,810,000
BB- B1 3,000,000 UNC, Inc., Senior Notes, 9.125% due 7/15/2003 3,000,000 2,565,000
------------ ------------
14,530,000 13,875,000
Agricultural BB- B1 2,000,000 Fresh Del Monte Produce N.V., Series A,
Products--0.6% Senior Notes, 10% due 5/01/2003 2,025,000 1,400,000
Airlines--2.0% NR* NR* 4,487,409 Northwest Airlines, Term Loan, due
6/15/1997, 8.562% to 4/20/1995** 4,487,409 4,487,409
Automotive B B2 1,500,000 Harvard Industries, Inc., Senior Notes, 12%
Products-- due 7/15/2004 1,500,000 1,541,250
0.7%
Broadcast/ BB Ba2 2,500,000 Continental Cablevision, Inc., Senior Notes,
Media--5.0% 8.625% due 8/15/2003 2,500,000 2,375,000
Enquirer/Star, Term Loan B, due 9/30/2002**:
NR* NR* 4,950,000 8.75% to 5/22/1995 4,950,000 4,950,000
NR* NR* 50,000 10.50% to 5/22/1995 50,000 50,000
U.S. Radio Inc., Term Loan A, due 12/31/2001**:
NR* NR* 865,477 8.69% to 3/30/1995 865,477 865,477
NR* NR* 865,477 9.313% to 4/28/1995 865,477 865,477
U.S. Radio Inc., Term Loan B, due 9/21/2003**:
NR* NR* 1,130,109 9.69% to 3/30/1995 1,130,109 1,130,109
NR* NR* 1,138,937 10.312% to 4/28/1995 1,138,937 1,138,937
------------ ------------
11,500,000 11,375,000
<PAGE>
Building & B- B2 2,500,000 Baldwin Co., Senior Notes, 10.375% due 8/01/2003 2,500,000 1,550,000
Construction B+ Ba3 2,250,000 U.S. Home Corp., Senior Notes, 9.75% due
- --1.6% 6/15/2003 2,250,000 2,047,500
------------ ------------
4,750,000 3,597,500
Building BB- Ba3 1,000,000 Schuller International, 10.875% due 12/15/2004 1,000,000 1,056,250
Products--0.4%
Carbon & NR* NR* 2,442,708 UCAR International Inc., Term Loan B,
Graphite due 1/31/2003**, 9.313% to 5/08/1995 2,442,708 2,442,708
Products--2.2% NR* NR* 1,278,646 UCAR International Inc., Term Loan C,
due 7/31/2003**, 9.8125% to 5/08/1995 1,278,646 1,278,646
NR* NR* 1,278,646 UCAR International Inc., Term Loan D,
due 1/31/2004**, 10.0625% to 5/08/1995 1,278,646 1,278,646
------------ ------------
5,000,000 5,000,000
Chemicals--4.0% BB- B1 1,000,000 Huntsman Chemical Corp., Senior Notes,
11% due 4/15/2004 1,015,000 1,065,000
NR* NR* 5,000,000 Indspec Chemical Corp., Term Loan B,
due 12/02/2000, 9.125% to 3/31/1995** 5,000,000 5,000,000
B+ B1 3,000,000 Uniroyal Chemical Company, Inc., 9%
due 9/01/2000 3,000,000 2,865,000
------------ ------------
9,015,000 8,930,000
Computers--1.0% BB- B1 2,100,000 Dell Computer Corp., Senior Notes, 11%
due 8/15/2000 2,118,375 2,231,250
Consumer NR* NR* 5,000,000 CHF/Ebel USA Inc., Term Loan B, due
Products-- 9/30/2001, 9.25% to 4/28/1995** 5,000,000 5,000,000
2.7% B+ B2 1,000,000 Drypers Corp., Series B, Senior Notes,
12.50% due 11/01/2002 1,050,000 1,005,000
6,050,000 6,005,000
Containers--3.9% Silgan Corp., Term Loan B, due 9/15/1996**:
NR* NR* 2,461,967 9.688% to 3/07/1995 2,461,967 2,461,967
NR* NR* 2,500,000 10% to 6/09/1995 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 3,870,000
------------ ------------
8,961,967 8,831,967
<PAGE>
Diversified B+ B1 3,000,000 Essex Group Inc., 10% due 5/01/2003 3,041,250 2,910,000
Manufacturing Thermadyne Industries, Term Loan B, due
- --3.4% 2/01/2001**:
NR* NR* 750 10.75% to 3/31/1995 (1) 750 750
NR* NR* 4,225,000 8.3125% to 3/02/1995 4,225,000 4,225,000
NR* NR* 600,000 9.312% to 5/03/1995 600,000 600,000
------------ ------------
7,867,000 7,735,750
Drug Stores-- Duane Reade Co., Term Loan A, due 9/30/1997**:
5.5% NR* NR* 436,980 9.0625% to 3/31/1995 436,980 436,980
NR* NR* 5,626,957 9.25% to 5/30/1995 5,626,957 5,626,957
NR* NR* 1,500,000 Duane Reade Co., Term Loan B, due 9/30/1999,
9.50% to 5/30/1995** 1,500,000 1,500,000
Thrifty Payless Inc., Term Loan B, due
9/30/2001**:
NR* NR* 4,974,874 9.375% to 5/24/1995 4,974,874 4,974,874
NR* NR* 12,563 11% to 5/24/1995 (1) 12,563 12,563
------------ ------------
12,551,374 12,551,374
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 4,675,000
Electrical Berg Electronics, Inc., Term Loan B, due
Instruments 6/30/2001**:
- --0.9% NR* NR* 8,333 9.07% to 3/30/1995 8,333 8,333
NR* NR* 1,983,333 9.375% to 5/25/1995 1,983,333 1,983,333
------------ ------------
1,991,666 1,991,666
</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--1.6% BB- B1 $ 2,500,000 Ferrellgas L.P., Series B, Floating Rate
Senior Notes, 9.4375% due 8/01/2001 (2) $ 2,488,332 $ 2,487,500
B- B3 1,500,000 Presidio Oil Company, Senior Secured Notes,
11.50% due 9/15/2000 1,540,000 1,245,000
------------ ------------
4,028,332 3,732,500
<PAGE>
Fertilizer--2.0% BB- B1 3,750,000 Sherritt Gordon Ltd., Senior Notes, 9.75%
due 4/01/2003 3,762,500 3,600,000
BB- B1 1,000,000 Sherritt, Inc., USD Debentures, 10.50% due
3/31/2014 1,000,000 986,250
------------ ------------
4,762,500 4,586,250
Food & B+ B1 5,000,000 Royal Crown Corp., Senior Secured Notes,
Beverage 9.75% due 8/01/2000 5,000,000 4,662,500
- --6.3% Specialty Foods Corp., Term Loan B, due
8/31/1999**:
NR* NR* 89,395 10% (1) 89,395 89,395
NR* NR* 4,557,369 9.13% to 4/18/1995 4,557,369 4,557,369
NR* NR* 4,960,000 10% to 7/18/1995 4,960,000 4,960,000
------------ ------------
14,606,764 14,269,264
Forest BB- Ba3 1,000,000 Malette Inc., Senior Secured Notes, 12.25%
Products due 7/15/2004 1,000,000 1,020,000
- --1.4% BB- Ba3 2,000,000 Rainy River Forest Products, 10.75% due
10/15/2001 1,995,321 2,045,000
------------ ------------
2,995,321 3,065,000
Grocery--10.9% NR* NR* 4,966,667 CK Aquisitions Corp., Term Loan B, due
7/31/2001, 8.125% to 3/28/1995** 4,966,667 4,966,667
B+ NR* 2,500,000 Homeland Stores Inc., Series D, Floating Rate
Senior Secured Notes, 9.063% due 2/28/1997 (3) 2,462,968 2,512,707
D Caa 4,950,000 Pathmark Stores, Inc., Term Loan B, due
10/31/1999, 9.25% to 3/31/1995** 4,950,000 4,950,000
BB- Ba3 1,000,000 The Penn Traffic Company, Senior Notes, 8.625%
due 12/15/2003 1,000,000 917,500
B- B2 2,000,000 Pueblo Xtra International, Inc., Senior Notes,
9.50% due 8/01/2003 2,000,000 1,690,000
Ralph's Grocery Co., Primary Term Loan, due
6/30/1998**:
NR* NR* 272,211 9% to 3/06/1995 272,211 272,211
NR* NR* 158,263 8.938% to 3/30/1995 158,263 158,263
NR* NR* 158,263 8.8125% to 3/31/1995 158,263 158,263
NR* NR* 158,263 8.9375% to 3/31/1995 158,263 158,263
NR* NR* 158,263 8.938% to 3/31/1995 158,263 158,263
NR* NR* 6,849,603 8.938% to 4/10/1995 6,849,603 6,849,603
B+ B3 2,000,000 Stater Brothers Holdings, Inc., Senior Notes,
11% due 3/01/2001 2,000,000 1,885,000
------------ ------------
25,134,501 24,676,740
<PAGE>
Health B B2 2,500,000 Charter Medical Corp., Senior Subordinated
Services Notes, 11.25% due 4/15/2004 2,500,000 2,600,000
- --3.7% B- B2 1,000,000 Integrated Health Services, Inc., Senior
Subordinated Notes, 10.75% due 7/15/2004 1,000,000 1,030,000
B+ B1 5,200,000 MEDIQ/PRN Life Support Services, Inc., Senior
Secured Notes, 11.125% due 7/01/1999 5,409,000 4,784,000
------------ ------------
8,909,000 8,414,000
Hotels & BB- B1 2,000,000 ++Four Seasons Hotels Inc., Notes, 9.125%
Casinos--2.5% due 7/01/2000 1,928,749 1,910,000
B+ B2 4,500,000 GB Property Funding Corp., First Mortgage
Notes, 10.875% due 1/15/2004 4,500,000 3,870,000
------------ ------------
6,428,749 5,780,000
Leasing & B- B2 2,000,000 Cort Furniture Rental Corp., Senior Notes,
Rental 12% due 9/01/2000 1,999,355 1,840,000
Services--3.8% Prime Acquisition, Term Loan, due
12/31/2000**:
NR* NR* 1,600,000 9.25% to 3/06/1995 1,600,000 1,600,000
NR* NR* 1,800,000 9.50% to 4/06/1995 1,800,000 1,800,000
NR* NR* 1,600,000 9.375% to 5/08/1995 1,600,000 1,600,000
BB- B1 2,000,000 The Scotsman Group, Inc., Senior Secured
Notes, 9.50% due 12/15/2000 2,000,000 1,910,000
------------ ------------
8,999,355 8,750,000
Manufacturing B+ B1 3,623,000 Foamex L.P., Senior Secured Notes, 9.50%
- --1.5% due 6/01/2000 3,643,000 3,423,735
Metals--8.8% B B2 1,000,000 AK Steel Holding Corp., Senior Notes,
10.75% due 4/1/2004 l,000,000 1,022,500
B B2 3,000,000 Bayou Steel Corp., First Mortgage Notes,
10.25% due 3/01/2001 3,000,000 2,730,000
B- B3 5,000,000 Federal Industries Ltd., 10.25% due 6/15/2000 5,011,250 4,700,000
B+ B1 3,000,000 Geneva Steel, Senior Notes, 9.50% due 1/15/2004 2,891,238 2,835,000
B B2 2,000,000 Republic Engineered Steel, Inc., First
Mortgage Notes, 9.875% due 12/15/2001 2,000,000 1,850,000
B+ B1 3,000,000 WCI Steel, Inc., Senior Notes, 10.50% due
3/01/2002 3,000,000 2,910,000
Weirton Steel Corp., Senior Notes:
B B2 2,000,000 11.50% due 3/01/1998 2,100,000 2,005,000
B B2 2,000,000 10.875% due 10/15/1999 2,070,000 1,962,500
------------ ------------
21,072,488 20,015,000
<PAGE>
Office B+ B1 5,000,000 Bell & Howell Co., 9.25% due 7/15/2000 5,025,000 4,650,000
Machines--3.4% NR* NR* 3,133,532 Lexmark Holdings, US, Term Loan, due
3/27/1998, 8.58594% to 3/31/1995** 3,133,532 3,133,532
------------ ------------
8,158,532 7,783,532
Paper--19.5% NR* NR* 14,125,000 Fort Howard Corp., Primary Term Loan, due
5/01/1997, 10.75% to 3/31/1995** 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 5,225,000
Jefferson Smurfit/Container Corp. of America,
Term Loan B, due 12/31/1997**:
NR* NR* 666,667 9.1875% to 3/24/1995 666,667 666,667
NR* NR* 9,333,333 9.3125% to 4/24/1995 9,333,333 9,333,333
NR* NR* 7,500,000 S.D. Warren Co., Term Loan B, due 12/19/2002,
9.50% to 8/23/1995** 7,500,000 7,500,000
Stone Container Corp., Term Loan B, due
4/01/2000**:
NR* NR* 3,750,000 9.25% to 3/17/1995 3,750,000 3,750,000
NR* NR* 3,750,000 9.3125% to 4/14/1995 3,750,000 3,750,000
------------ ------------
44,125,000 44,350,000
</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>
Publishing-- NR* NR* $ 2,573,529 Ziff Davis Acquisition Corp., Term Loan B,
2.2% due 12/31/2001, 9.38% to 3/28/1995** $ 2,573,529 $ 2,573,529
NR* NR* 2,426,471 Ziff Davis Acquisition Corp., Term Loan C,
due 12/31/2002, 9.88% to 3/28/1995** 2,426,471 2,426,471
------------ ------------
5,000,000 5,000,000
Railroad Westinghouse Air Brake Company, Term Loan B,
Equipment--2.2% due 2/15/2003**:
NR* NR* 300,000 9.125% to 3/31/1995** 300,000 300,000
NR* NR* 4,700,000 9.25% to 5/22/1995 4,700,000 4,700,000
------------ ------------
5,000,000 5,000,000
<PAGE>
Retail-- B B2 4,000,000 Color Tile, Inc., Senior Notes, 10.75% due
Specialty-- 12/15/2001 4,000,000 3,240,000
8.8% Music Aquisition Corp., Term Loan B, due
8/31/2001**:
NR* NR* 3,125,000 8.875% to 4/19/1995 3,125,000 3,125,000
NR* NR* 1,812,500 9.5625% to 8/17/1995 1,812,500 1,812,500
NR* NR* 9,912,700 Saks & Co., Term Loan, Tranche B, due
6/30/2000, 9.13% to 5/09/1995** 9,912,700 9,912,700
B+ B1 2,000,000 Specialty Retailers, Inc., Series A, Senior
Notes, 10% due 8/15/2000 2,000,000 1,800,000
------------ ------------
20,850,200 19,890,200
Security NR* NR* 4,740,711 Alert Centre Inc., Term Loan, due 8/01/2001,
Systems--2.1% 8.375% to 8/05/1995** 4,740,711 4,740,711
Shipping--1.4% BB Ba2 1,000,000 Eletson Holdings, 9.25% due 11/15/2003 912,820 937,500
B B2 2,500,000 OMI Corp., Senior Notes, 10.25% due 11/01/2003 2,500,000 2,150,000
------------ ------------
3,412,820 3,087,500
Textiles--1.4% BB Ba3 3,500,000 Dominion Textile (USA) Inc., Senior Notes,
8.875% due 11/01/2003 3,484,278 3,220,000
Utilities--2.7% B Ba3 2,000,000 First PV Funding Corp., 10.30% due 1/15/2014 2,020,000 1,990,000
B B1 4,000,000 Texas-New Mexico Power Company, Secured
Debentures, 10.75% due 9/15/2003 4,000,000 4,056,640
------------ ------------
6,020,000 6,046,640
Warehousing & B+ B2 2,000,000 Americold Corp., First Mortgage Bonds, Series
Storage--2.8% B, 11.50% due 3/01/2005 2,045,000 1,840,000
Pierce Leahy Corp., Term Loan, Tranche B,
due 6/30/2001**:
NR* NR* 1,665,909 9.9375% to 4/28/1995 1,665,909 1,665,909
NR* NR* 2,915,341 9.5625% to 4/28/1995 2,915,341 2,915,341
------------ ------------
6,626,250 6,421,250
Total Investments in Corporate Debt
Obligations--133.2% 311,401,842 302,386,738
<PAGE>
Shares
Held Warrants
Leasing & Rental NR* NR* 66,000 Cort Furniture Rental Corp. (a) (b) 760 66,000
Services--0.0%
Total Investments in Warrants--0.0% 760 66,000
Face
Amount Short-Term Securities
Commercial $ 4,084,000 General Electric Capital Corp., 6% due 3/01/1995 4,084,000 4,084,000
Paper***--1.8%
Total Investments in Short-Term Securities--1.8% 4,084,000 4,084,000
Total Investments--135.0% $315,486,602 306,536,738
============
Liabilities in Excess of Other Assets--(35.0%) (79,529,704)
------------
Net Assets--100.0% $227,007,034
============
<FN>
*Not Rated.
**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
February 28, 1995.
***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.
(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 investment in
restricted securities was approximately $1,910,000, representing
0.84% of net assets.
<PAGE>
Acquisition Value
Issue Date Cost (Note 1b)
Four Seasons Hotels Inc.,
Notes, 9.125% due 7/01/2000 1/25/1994 $1,918,200 $1,910,000
---------- ----------
Total $1,918,200 $1,910,000
========== ==========
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of February 28, 1995
<S> <S> <C>
Assets: Investments, at value (identified cost--$315,486,602) (Note 1b) $306,536,738
Cash 423,882
Interest receivable 5,336,831
Deferred facility expense (Note 1e) 41,315
Deferred organization expense (Note 1f) 69,749
Prepaid expenses and other assets 2,614
------------
Total assets 312,411,129
------------
Liabilities: Payables:
Loans (Note 5) $ 82,000,000
Dividends to shareholders (Note 1g) 707,508
Interest on loans (Note 5) 435,122
Investment adviser (Note 2) 119,455
Commitment fees 10,000 83,272,085
------------
Deferred income (Note 1e) 1,983,089
Accrued expenses and other liabilities 148,921
------------
Total liabilities 85,404,095
------------
Net Assets: Net assets $227,007,034
============
<PAGE>
Capital: Common Stock, par value $.10 per share; 200,000,000
shares authorized (25,388,292 shares issued and outstanding) $ 2,538,829
Paid-in capital in excess of par 238,288,358
Undistributed investment income--net 3,923,535
Accumulated realized capital losses on investments--net (Note 6) (8,793,824)
Unrealized depreciation on investments--net (8,949,864)
------------
Total Capital--Equivalent to $8.94 net asset value per share
of Common Stock (market price--$8.625) $227,007,034
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended February 28, 1995
<S> <S> <C>
Investment Income Interest and discount earned $ 29,920,761
(Note 1e): Facility and other fees 960,351
------------
Total income 30,881,112
------------
Expenses: Loan interest expense (Note 5) 5,370,797
Investment advisory fees (Note 2) 1,614,921
Facility fee amortization (Note 5) 527,168
Professional fees 131,609
Accounting services (Note 2) 98,293
Printing and shareholder reports 68,105
Transfer agent fees (Note 2) 51,535
Amortization of organization expenses (Note 1f) 28,402
Custodian fees 26,885
Directors' fees and expenses 24,355
Pricing services 14,336
Listing fees 250
Other 19,947
------------
Total expenses 7,976,603
------------
Investment income--net 22,904,509
------------
Realized & Realized loss on investments--net (8,793,344)
Unrealized Gain Change in unrealized appreciation/depreciation on investments--net (13,013,937)
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 1,097,228
(Notes 1c, 1e & 3): ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the For the Period
Year Ended April 30, 1993++
Feb. 28, to Feb. 28,
Increase (Decrease) in Net Assets: 1995 1994
<S> <S> <C> <C>
Operations: Investment income--net $ 22,904,509 $ 17,533,097
Realized gain (loss) on investments--net (8,793,344) 2,392,226
Change in unrealized appreciation/depreciation on
investments--net (13,013,937) 4,064,073
------------ ------------
Net increase in net assets resulting from operations 1,097,228 23,989,396
------------ ------------
Dividends & Investment income--net (21,343,397) (15,325,391)
Distributions to Realized gain on investments--net (1,784,188) (453,536)
Shareholders ------------ ------------
(Note 1g): Net decrease in net assets resulting from dividends and
distributions to shareholders (23,127,585) (15,778,927)
------------ ------------
Capital Share Offering costs resulting from the issuance of Common Stock (85,747) (223,215)
Transactions Value of shares issued to Common Stock shareholders in
(Note 4): reinvestment of dividends and distributions 781,304 240,254,573
------------ ------------
Net increase in net assets resulting from capital share
transactions 695,557 240,031,358
------------ ------------
Net Assets: Total increase (decrease) in net assets (21,334,800) 248,241,827
Beginning of period 248,341,834 100,007
------------ ------------
End of period* $227,007,034 $248,341,834
============ ============
<PAGE>
<FN>
*Undistributed investment income--net (Note 1h) $ 3,923,535 $ 2,207,706
============ ============
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Year Ended February 28, 1995
<S> <C> <C>
Cash Provided by Net increase in net assets resulting from operations $ 1,097,228
Operating Adjustments to reconcile net increase in net assets
Activities: resulting from operations to net cash provided by
operating activities:
Increase in receivables (581,519)
Decrease in other assets 306,460
Increase in other liabilities 295,449
Realized and unrealized loss on investments--net 21,807,281
Amortization of discount (178,818)
------------
Net cash provided by operating activities 22,746,081
------------
Cash Provided by Proceeds from sales of long-term investments 157,940,628
Investing Purchases of long-term investments (152,194,149)
Activities: Purchases of short-term investments (585,347,129)
Proceeds from sales and maturities of short-term
investments 581,616,000
------------
Net cash provided by investing activities 2,015,350
------------
Cash Used for Offering costs from capital shares sold (85,747)
Financing Proceeds from short-term borrowings 22,000,000
Activities: Payments for short-term borrowings (24,000,000)
Dividends paid to shareholders (22,424,154)
------------
Net cash used for financing activities (24,509,901)
------------
<PAGE>
Cash: Net increase in cash 251,530
Cash at beginning of period 172,352
------------
Cash at end of period $ 423,882
============
Cash Flow Cash paid for interest $ 5,171,083
Information: ============
Non-Cash Capital shares issued in reinvestment
Financing of dividends paid to shareholders $ 781,304
Activities: ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived For the For the Period
from information provided in the financial statements. Year Ended April 30, 1993++
Feb. 28, to Feb. 28,
Increase (Decrease) in Net Asset Value: 1995++++ 1994
<S> <S> <C> <C>
Per Share Net asset value, beginning of period $ 9.82 $ 9.50
Operating ------------ ------------
Performance: Investment income--net .90 .70
Realized and unrealized gain (loss) on
` investments--net (.87) .25
------------ ------------
Total from investment operations .03 .95
------------ ------------
Less dividends and distributions from:
Investment income--net (.84) (.61)
Realized gain on investments--net (.07) (.02)
------------ ------------
Total dividends and distributions (.91) (.63)
============ ============
Net asset value, end of period $ 8.94 $ 9.82
============ ============
Market price per share, end of period $ 8.625 $ 9.375
============ ============
<PAGE>
Total Investment Based on net asset value per share 0.37% 10.28%+++
Return:** ============ ============
Based on market price per share 1.87% 0.02%+++
============ ============
Ratios to Average Expenses, net of reimbursement and
Net Assets: excluding interest expense .80% .67%*
============ ============
Expenses, net of reimbursement 2.46% 1.61%*
============ ============
Expenses 2.46% 1.75%*
============ ============
Investment income--net 7.07% 7.33%*
============ ============
Supplemental Net assets, end of period (in thousands) $ 227,007 $ 248,342
Data: ============ ============
Portfolio turnover 44.81% 52.73%
============ ============
<FN>
++Commencement of Operations.
++++Based on average shares outstanding during the period.
+++Aggregate total investment return.
*Annualized.
**Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may 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 and publicly offered corporate bonds and notes.
Because agents and intermediaries are primarily commercial banks,
the Fund's investment in corporate loans could be considered
concentrated in financial institutions.
<PAGE>
(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. The
value of interest rate swaps, caps, and floors is determined in
accordance with a formula and then confirmed periodically by
obtaining a bank quotation. 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.
(c) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return or to hedge its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities or to enhance its
income. Futures contracts are contracts for delayed delivery of
securities at a specific future date and at a specific price or
yield. Upon entering into a contract, the Fund deposits and
maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
<PAGE>
* Options--The Fund is authorized to write and purchase call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing
investments.
* Interest rate transactions--The Fund is authorized to enter into
interest rate swaps and purchase or sell interest rate caps and
floors. In an interest rate swap, the Fund exchanges with another
party their respective commitments to pay or receive interest on a
specified notional principal amount. The purchase of an interest
rate cap (or floor) entitles the purchaser, to the extent that a
specified index exceeds (or falls below) a predetermined interest
rate, to receive payments of interest equal to the difference
between the index and the predetermined rate on a notional principal
amount from the party selling such interest rate cap (or floor).
NOTES TO FINANCIAL STATEMENTS (concluded)
(d) 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.
(e) 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. For income tax
purposes, as of March 1, 1994 the corporate loans are treated as
discount obligations.
<PAGE>
(f) Deferred organization expenses--Deferred organization expenses
are amortized on a straight-line basis over a five-year period.
(g) Dividends and distributions--Dividends from net investment
income are declared 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.
(h) Reclassifications--Generally accepted accounting principles
require that certain differences between accumulated net realized
capital losses for financial reporting and tax purposes, if
permanent, be reclassified to undistributed net investment income.
Accordingly, current year's permanent book/tax differences of
approximately $155,000 have been reclassified from accumulated net
realized losses to undistributed net investment income. These
reclassifications have no effect on net assets or net asset values
per share.
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. ("PSI"), an
indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML &
Co."), which is the limited partner.
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.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
During the period May 25, 1994 to February 28, 1995, the Fund paid
Merrill Lynch Security Pricing Service, an affiliate of Merrill
Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"), $1,103 for security
price quotations to compute the net asset value of the Fund.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, FDS, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended February 28, 1995 were $142,218,519 and
$157,940,628, respectively.
<PAGE>
Net realized and unrealized losses as of February 28, 1995 were as
follows:
Realized Unrealized
Losses Losses
Long-term investments $(8,793,344) $(8,949,864)
----------- -----------
Total $(8,793,344) $(8,949,864)
=========== ===========
As of February 28, 1995, net unrealized depreciation for financial
reporting and Federal income tax purposes aggregated $8,949,864, of
which $903,853 related to appreciated securities and $9,853,717
related to depreciated securities. The aggregate cost of investments
at February 28, 1995 for Federal income tax purposes was
$315,486,602.
4. Capital Share Transaction:
The Fund is authorized to issue 200,000,000 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 holders of Common Stock.
For the year ended February 28, 1995, shares issued and outstanding
increased by 87,810 to 25,388,292 as a result of dividend
reinvestment. At February 28, 1995, total paid-in capital amounted
to $240,827,187.
5. Short-Term Borrowings:
On June 16, 1993, the Fund entered into a one-year revolving credit
facility in the amount of $55 million, which was increased to $95
million on February 4, 1994, bearing interest at alternate base rate
plus 0.25% and/or LIBOR plus 1.25%, and a two-year term loan
facility in the amount of $25 million bearing interest at alternate
base rate plus 0.50% and/or LIBOR plus 1.375%. On June 10, 1994, the
Fund's existing credit agreement with The Bank of New York was
refinanced with a one-year revolving credit facility with a
syndicate of banks led by The Bank of New York in the amount of $120
million bearing interest at Federal Funds Rate plus 1.125% and/or
alternate base rate plus 0.125% and/or LIBOR plus 1.125%.
From March 1, 1994 to February 28, 1995, the maximum amount borrowed
was $106 million, the average amount borrowed was approximately $92
million, and the daily weighted average interest rate was 6.1243%.
<PAGE>
6. Capital Loss Carryforward:
At February 28, 1995, the Fund had a net capital loss carryforward
of approximately $5,318,000, all of which expires 2003. This amount
will be available to offset like amounts of any future taxable
gains.
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Senior High Income Portfolio, Inc.:
We have audited the accompanying statement of assets, liabilities
and capital, including the schedule of investments, of Senior High
Income Portfolio, Inc. as of February 28, 1995, the related
statements of operations for the year then ended and changes in net
assets, and cash flows and the financial highlights for the year
then ended and 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
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and the 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 at February
28, 1995 by correspondence with the custodian and financial
intermediaries. 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, such financial statements and the financial
highlights present fairly, in all material respects, the financial
position of Senior High Income Portfolio, Inc. as of February 28,
1995, the results of its operations for the year then ended and the
changes in its net assets, its cash flows, and the financial
highlights for the year then ended and for the period April 30, 1993
to February 28, 1994 in conformity with generally accepted
accounting principles.
<PAGE>
As discussed in Notes 1a and 1b, the financial statements include
corporate loans valued at $169,044,066 (74% of total net assets and
55% 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 judgment, 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.
Deloitte & Touche LLP
Princeton, New Jersey
April 12, 1995
</AUDIT-REPORT>
PER SHARE INFORMATION (unaudited)
<TABLE>
Per Share
Selected Quarterly
Financial Data*
<CAPTION>
Dividends/Distributions
Net Realized Unrealized
Investment Gains Gains Net Investment Capital
For the Period Income (Losses) (Losses) Income 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 (.03) (.49) .20 --
June 1, 1994 to August 31, 1994 .23 (.14) (.05) .21 --
September 1, 1994 to November 30, 1994 .22 (.09) (.17) .21 --
December 1, 1994 to February 28, 1995 .23 (.09) .19 .22 .07
<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 9.71 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 9.28 9.625 8.75 2,557
June 1, 1994 to August 31, 1994 9.40 9.13 9.29 8.25 3,034
September 1, 1994 to November 30, 1994 9.17 8.90 9.125 7.75 3,252
December 1, 1994 to February 28, 1995 8.94 8.74 8.875 8.375 2,284
<PAGE>
<FN>
*Calculations are based upon Common Shares outstanding at the end of
each period.
**As reported in the consolidated transaction reporting system.
***In thousands.
++Commencement of Operations.
</TABLE>
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
John W. Fraser, 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
