SENIOR HIGH
INCOME
PORTFOLIO, INC.
FUND LOGO
Annual Report
February 29, 1996
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. Statements and other information herein are as dated
and are subject to change.
<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.
<PAGE>
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
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
<PAGE>
NYSE Symbol
ARK
DEAR SHAREHOLDER
For the year ended February 29, 1996, Senior High Income Portfolio,
Inc.'s total investment return was +14.14%, based on a change in per
share net asset value from $8.94 to $9.21, and assuming reinvestment
of $0.920 per share income dividends. During the same period, the
net annualized yield of the Portfolio's Common Stock was 10.07%.
Since inception (April 30, 1993) through February 29, 1996, the
total investment return on the Portfolio's Common Stock was +26.91%,
based on a change in per share net asset value from $9.50 to $9.21,
and assuming reinvestment of $2.461 per share income dividends. At
the end of the February period, the Portfolio was 16.4% leveraged,
having borrowed $47 million of its $120 million line of credit
available at an average borrowing cost of 6.78%. (For a further
explanation of the benefits and risks of leveraging, see page 1 of
this report to shareholders.)
As of February 29, 1996, the Portfolio paid out a regular monthly
dividend at an annualized rate of 9.25% so that the Portfolio could
maintain a more stable level of distributions. Monthly dividends are
limited to the lesser of the targeted monthly dividend rate in
effect and the amount of previously undistributed net investment
income held by the Portfolio. 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 targeted monthly dividend
rate has increased from an annualized rate of 8.0% since September
1993.
The Environment
On January 31, 1996, the Federal Reserve Board lowered short-term
interest rates for the third time since mid-1995, decreasing the
discount rate it charges on loans to its member banks by 25 basis
points (0.25%) to 5.25% and by pushing the Federal Funds target rate
to 5.25% from 5.50%. The economy ended 1995 with moderate growth
while inflation remained at low levels. However, the Federal Reserve
Board continues to be pre-emptive in its efforts to head off any
sustained economic slowdown.
<PAGE>
Portfolio Strategy
At February 29, 1996, more than 93% of the Portfolio's investments
in corporate loans was accruing interest at a yield spread above the
London Interbank Offered Rate (LIBOR). LIBOR is the rate that major
international banks charge each other for US dollar-denominated
deposits outside the United States. LIBOR has historically tracked
very closely with other US short-term interest rates, particularly
the Federal Funds rate. Since the first easing of monetary policy by
the Federal Reserve Board in July 1995, the three-month LIBOR has
fallen from 5.84% to 5.25%, a decrease of approximately 59 basis
points. Since the average reset on the Portfolio's floating rate
investments is 46 days, the yield on the bank loan portion of the
Portfolio should move up (or down) within a one-month--two-month
period after any interest rate increase (or decrease). At the end of
the February period, floating rate securities made up 46.4% of the
market value of the Portfolio's investments, with an additional
54.6% invested in fixed-rate high-yield bonds. Approximately $47
million remains available under the leverage facility. The leveraged
loan market continued to be strong, particularly during the last
half of 1995. 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 than we have seen in over 18 months. The
leveraged bank loan market continues to be an attractive alternative
for corporate borrowers relative to the coupons and call protection
demanded in the high-yield bond market.
Both the high-yield loan and bond markets experienced strong rallies
after the first of the year. The high-yield market continued to
benefit from healthy inflows, interest rate declines and a rallying
equity market. Very strong market technical factors helped to absorb
new issues and still drive up prices in the secondary market. The
market has offered increasingly attractive spreads compared to the
Treasury market and other fixed-income assets, resulting in
substantial cross-over interest that has exacerbated an already
acute supply/demand imbalance.
Since January 1, 1996, the spread between a ten-year A-rated
corporate bond and the Merrill Lynch High Yield Master Index has
widened by over 110 basis points. With such a strong secondary
market, new issues are not only priced aggressively, but the size of
issues is often increased. Transactions such as the El Paso Electric
Co. bond financing that totaled over $1 billion were very well
received by both the high-yield and investment grade cross-over
markets. New issues during the latter half of the February period
were typically priced at spreads tighter than the secondary market.
The spread between the Merrill Lynch High Yield Master Index and ten-
year Treasury securities narrowed from 400 basis points in the prior
period to as little as 362 basis points by the end of January, as
price gains were seen in all industry groups and particularly the
lower-rated tiers. Growth sectors, such as the communications
industry, continued to benefit from the positive reaction to the
passage of the telecommunications reform bill.
<PAGE>
The high-yield bank loan market remained extremely strong throughout
the six-month period ended February 29, 1996, with demand continuing
to outstrip supply. The fourth quarter of 1995 capped a year of
explosive growth for the secondary loan market. The $9.7 billion in
volume brought the year's total to $33.8 billion, an increase of
more than 60% from 1994. Several factors contributed to this growth
including a 25% rise in leveraged loan issuance to $101 billion. At
the same time, demand from institutional investors continues to
grow. Banks are also increasing their trading activity, using the
secondary market to adjust exposure to sectors and specific credits.
However, contrary to expectations, there was not much overhang in
early 1996 on the origination side, although new-issue demand
remains strong, as banks continue to compete for the fees and high
spreads on agenting and investing in leveraged credits. Loan funds
continued to see substantial inflows, enhancing already solid demand
for funded term loans.
The credit fundamentals for both the high-yield market and the loan
market remain generally favorable. However, with a 2.1% gross
national product growth rate in 1995, down from 3.5% in 1994, and an
anemic 0.9% rate for the fourth quarter, we remain cautious in both
markets. If a slowing economy pushes the default rate above 5%, the
present market trading levels may not be sustained, as investors
demand higher yield premiums to compensate them for the risk of
default. In general, earnings continue to improve and issues
continue to focus on improving balance sheets. In some cyclical
industries, such as paper, prices appear to have peaked, at least
for the near term. Most of these borrowers used the cash flow
generated by record prices to upgrade plants and pay down debt,
thereby better positioning themselves for the next downturn. These
borrowers appear in much better shape than at the end of their
respective previous downturns, and are capable of generating oper-
ating cash flows at or below previous trough prices. In light of
generating positive prospects for most high-yield issuers, our
primary strategy for the Portfolio was and will continue to be
focusing investments in the new-issue sector where issues come at
market clearing prices and the prices hold up relatively well.
We are also selectively selling lower-coupon issues and weaker
single B- rated credits as prices rally and upside potential
diminishes. This will free up assets for floating rate paper, which
provides cushion against interest rate and credit surprises, and for
select secondary high-yield issues which may see "event" upside in
the form of an upgrade, refinancing, or stock offering. Rather than
stretch for yield in either market, we will consider lower-coupon
issues that we expect to become investment grade relatively quickly
and prove liquid in the interim. When neither attractive bank loan
nor high-yield bond opportunities were available, excess cash was
and will continue to be used to reduce outstanding debt under the
Fund's leverage facilities.
<PAGE>
At February 29, 1996, cash equivalents totaled less than 1% of net
assets. The Portfolio is diversified in the floating rate portion
with 23 borrowers across 16 industries and in the fixed-rate portion
with 75 borrowers across 33 industries. The largest industry concen-
trations are: broadcast/media (11.40% of total assets); paper
(10.54%); retail specialty (7.58%); metals (7.12%); and aerospace
(3.32%).
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 3, 1996
Shareholders of Senior High Income Portfolio, Inc., Senior
High Income Portfolio II, Inc. and Senior Strategic Income
Fund, Inc. recently approved an Agreement and Plan of Merger.
Effective April 15, 1996, Senior High Income Portfolio, Inc. will
acquire substantially all of the assets and liabilities of Senior
High Income Portfolio II, Inc. and Senior Strategic Income Fund,
Inc.
<PAGE>
Proxy Results
During the six-month period ended February 29, 1996, Senior High
Income Portfolio, Inc. shareholders voted on the following
proposals. The proposals were approved at a special shareholders'
meeting on March 14, 1996. The description of each proposal and
number of shares voted are as follows:
<TABLE>
<CAPTION>
Shares Voted Shares Voted Shares Voted Broker
For Against Abstain No-Vote
<S> <C> <C> <C> <C>
1. To consider and act upon a proposal to approve the Agreement
and Plan of Merger among the Portfolio, Senior High Income
Portfolio II, Inc. and Senior Strategic Income Fund, Inc. 13,635,638 304,034 667,673 10,763,339
<CAPTION>
Shares Voted Shares Voted
For Without Authority
<S> <S> <C> <C>
2. To elect the Portfolio's Board of Directors: Ronald W. Forbes 24,771,984 598,700
Cynthia A. Montgomery 24,788,569 582,115
Charles C. Reilly 24,812,409 558,275
Kevin A. Ryan 24,794,167 576,517
Richard R. West 24,803,711 566,973
Arthur Zeikel 24,789,309 581,375
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C>
3. To select Deloitte & Touche LLP as the Portfolio's independent auditors. 24,523,399 124,431 722,854
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Debt Obligations+++ Cost (Note 1b)
<S> <C> <C> <C> <S> <C> <C>
Advertising--2.2% B+ B1 $5,000,000 Lamar Advertising Co., 11% due
5/15/2003 $ 5,056,250 $ 5,300,000
<PAGE>
Aerospace--4.0% NR* NR* 4,500,000 Gulfstream Delaware Corp., Term
Loan B, due 3/31/1998, 8.82% to
3/08/1996** 4,500,000 4,500,000
B B2 2,000,000 Talley Manufacturing & Technology,
Inc., 10.75% due 10/15/2003 2,030,000 2,040,000
BB- B1 3,000,000 UNC, Inc., 9.125% due 7/15/2003 3,000,000 2,970,000
------------ ------------
9,530,000 9,510,000
Agricultural CCC+ Caa 2,000,000 Fresh Del Monte Produce N.V., 10%
Products--0.8% due 5/01/2003 2,025,000 1,920,000
Automotive & Collins & Aikman Corp., Term Loan B,
Equipment--2.1% due 12/31/2002:**
NR* NR* 2,538,071 7.875% to 3/04/1996 2,538,071 2,538,071
NR* NR* 2,461,929 7.875% to 4/01/1996 2,461,929 2,461,929
------------ ------------
5,000,000 5,000,000
Automotive Harvard Industries, Inc., Senior
Products--2.0% Notes:
B B3 1,500,000 12% due 7/15/2004 1,500,000 1,612,500
B+ B3 1,000,000 11.125% due 8/01/2005 1,000,000 1,045,000
B+ Ba3 2,000,000 Walbro Corp., 9.875% due 7/15/2005 1,996,627 2,070,000
------------ ------------
4,496,627 4,727,500
Broadcast/ American Media, Term Loan B, due
Media--13.8% 9/30/2002:**
NR* Ba2 1,950,000 7.82% to 3/25/1996 1,950,000 1,950,000
NR* Ba2 3,000,000 7.69% to 8/22/1996 3,000,000 3,000,000
B- B2 1,000,000 American Radio Systems Corp., Senior
Sub Notes, 9% due 2/01/2006 991,921 985,000
NR* B2 1,500,000 Benedek Broadcasting, 11.875% due
3/01/2005 1,500,000 1,605,000
BB- B3 2,000,000 CAI Wireless Systems, Inc., Senior
Notes, 12.25% due 9/15/2002 2,000,000 2,170,000
Continental Cablevision, Inc.:
BB+ Ba2 2,500,000 8.625% due 8/15/2003 2,500,000 2,725,000
BB+ NR* 2,000,000 ++8.30% due 5/15/2006 1,993,664 2,130,000
B- B2 1,000,000 EZ Communications, Inc., Senior
Sub Notes, 9.75% due 12/01/2005 992,220 990,000
B- B3 2,000,000 Granite Broadcasting Corp., Senior
Sub Notes, 10.375% due 5/15/2005 2,000,000 2,070,000
BB+ Ba3 1,000,000 Lenfest Communications Inc., Senior
Notes, 8.375% due 11/01/2005 997,117 993,750
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Debt Obligations+++ Cost (Note 1b)
<S> <C> <C> <C> <S> <C> <C>
Broadcast/ Marcus Cable Co., Term Loan B,
Media due 4/30/2004:**
(concluded) NR* NR* $ 333,333 8.13% to 3/05/1996 $ 333,333 $ 333,333
NR* NR* 2,500,000 8.57% to 3/06/1996 2,500,000 2,500,000
NR* NR* 2,166,667 8.13% to 5/02/1996 2,166,667 2,166,667
B- B3 1,000,000 ++Rifkin Acquisition Partners,
Senior Sub Notes, 11.125% due 1/15/2006 1,000,000 1,030,000
BB B1 2,000,000 Telewest Communications PLC, Senior
Notes, 9.625% due 10/01/2006 2,000,000 2,030,000
U.S. Radio Inc., Term Loan A, due
12/31/2002:**
NR* NR* 846,931 9% to 3/29/1996 846,931 846,931
NR* NR* 822,203 8.875% to 4/30/1996 822,203 822,203
U.S. Radio Inc., Term Loan B, due
9/23/2003:**
NR* NR* 1,121,280 10% to 3/29/1996 1,121,280 1,121,280
NR* NR* 1,138,937 9.875% to 4/30/1996 1,138,937 1,138,937
B B2 2,000,000 Young Broadcasting Corp., Senior
Sub Notes, 10.125% due 2/15/2005 2,000,000 2,080,000
------------ ------------
31,854,273 32,688,101
Building National Gypsum Co., Term Loan B,
Products--4.4% due 9/20/2003:**
NR* NR* 127,273 8.31% to 3/27/1996 127,273 127,273
NR* NR* 13,636 10% to 3/31/1996 13,636 13,636
NR* NR* 4,545,455 8.50% to 4/26/1996 4,545,455 4,545,455
NR* NR* 309,091 8.25% to 5/28/1996 309,091 309,091
BB- Ba3 1,000,000 Schuller International Group, Senior
Notes, 10.875% due 12/15/2004 1,000,000 1,116,250
NR* Ba3 4,285,714 UCAR International Inc., Term Loan B,
due 12/31/2002 7.3215% to 3/29/1996** 4,285,714 4,285,714
------------ ------------
10,281,169 10,397,419
Casinos--1.8% B+ B2 4,500,000 GB Property Funding Corp., First
Mortgage Notes, 10.875% due 1/15/2004 4,500,000 4,140,000
<PAGE>
Chemicals--2.5% BB- B1 1,000,000 ++Acetex Corporation, Senior Notes,
9.75% due 10/01/2003 995,782 1,030,000
BB+ Ba2 1,000,000 Borden Chemicals and Plastics L.P.,
9.50% due 5/01/2005 1,000,000 1,035,000
NR* NR* 3,806,063 Inspec Chemical Corp., Term Loan B, due
12/02/2000, 7.9375% to 3/29/1996** 3,806,063 3,806,063
------------ ------------
5,801,845 5,871,063
Computers--1.0% BB Ba3 2,100,000 Dell Computer Corp., Senior Notes,
11% due 8/15/2000 2,118,375 2,289,000
Consumer NR* NR* 5,000,000 CHF/Ebel USA Inc., Term Loan B,
Products--3.0% due 9/28/2001, 9.125% to 4/30/1996** 5,000,000 5,000,000
B+ Ba3 2,000,000 Coty, Inc., Senior Sub Notes,
10.25% due 5/01/2005 2,000,000 2,130,000
------------ ------------
7,000,000 7,130,000
Containers--1.8% B+ Ba3 4,000,000 Sweetheart Cup Co., 9.625% due
9/01/2000 4,000,000 4,120,000
Diversified B+ B1 3,000,000 Essex Group Inc., 10% due 5/01/2003 3,041,250 3,090,000
Manufacturing--3.6% B+ B2 1,000,000 J.B. Poindexter & Co., Inc.,
Senior Notes, 12.50% due 5/15/2004 974,807 805,000
NR* B2 4,733,666 Thermadyne Co., Term Loan B, due
2/01/2001, 8.375% to 3/12/1996** 4,733,666 4,733,666
------------ ------------
8,749,723 8,628,666
Drug NR* NR* 4,047,107 Duane Reade Co., Term Loan A, due
Stores--4.4% 9/30/1997, 10.25% to 5/31/1996** 4,047,107 4,047,107
NR* NR* 1,500,000 Duane Reade Co., Term Loan B, due
9/30/1999, 10.25% to 5/31/1996** 1,500,000 1,500,000
NR* Ba3 4,937,186 Thrifty Payless Inc., Term Loan B,
due 9/30/2001, 8.8125% to 3/22/1996** 4,937,186 4,937,186
------------ ------------
10,484,293 10,484,293
Educational B B3 5,000,000 La Petite Holdings Corp., 9.625%
Services--1.9% due 8/01/2001 5,000,000 4,500,000
<PAGE>
Electrical NR* Ba3 1,958,333 Berg Electronics, Inc., Term Loan B,
Instruments--0.8% due 6/30/2001, 10% to 5/31/1996** 1,958,333 1,958,333
Energy--2.0% BB- B1 2,500,000 Ferrellgas Partners, L.P., Series B,
Floating Rate Senior Notes, 8.55%
due 8/01/2001** 2,489,781 2,475,000
B- B1 2,000,000 ++KCS Energy, Inc., 11% due 1/15/2003 2,000,000 2,070,000
------------ ------------
4,489,781 4,545,000
Fertilizer--2.1% BB- B1 3,750,000 Sherritt Gordon Ltd., 9.75% due
4/01/2003 3,762,500 3,937,500
NR* NR* 1,000,000 Sherritt, Inc., Debentures, 10.50%
due 3/31/2014 1,000,000 1,125,000
------------ ------------
4,762,500 5,062,500
Food & SC International Services, Inc.,
Beverage--4.2% Term Loan B, due 9/15/2001:**
NR* B2 20,211 8.3125% to 3/15/1996 20,211 20,211
NR* B2 725,528 8.5625% to 3/19/1996 725,528 725,528
NR* B2 857,002 8.8125% to 3/19/1996 857,002 857,002
NR* B2 379,077 8.5625% to 4/19/1996 379,077 379,077
SC International Services, Inc.,
Term Loan B, due 9/15/2002:**
NR* B2 24,579 8.3125% to 3/15/1996 24,579 24,579
NR* B2 904,172 8.5625% to 3/19/1996 904,172 904,172
NR* B2 1,318,788 8.8125% to 3/19/1996 1,318,788 1,318,788
NR* B2 222,256 8.5625% to 4/19/1996 222,256 222,256
SC International Services, Inc.,
Term Loan C, due 9/15/2003:**
NR* B2 5,921 8.5625% to 3/15/1996 5,921 5,921
NR* B2 199,450 8.8125% to 3/19/1996 199,450 199,450
NR* B2 290,909 9.0625% to 3/19/1996 290,909 290,909
NR* B2 48,528 8.8125% to 4/19/1996 48,528 48,528
Specialty Foods Corp., Term Loan B,
due 4/30/2001:**
NR* B2 3,333,334 7.8125% to 4/22/1996 3,333,334 3,333,334
NR* B2 1,659,524 7.75% to 4/26/1996 1,659,524 1,659,524
------------ ------------
9,989,279 9,989,279
Forest BB- Ba3 1,000,000 Malette Inc., 12.25% due 7/15/2004 1,000,000 1,115,000
Products--1.3% BB B1 2,000,000 Tembec Finance Corp., Senior Notes,
9.875% due 9/30/2005 2,000,000 1,900,000
------------ ------------
3,000,000 3,015,000
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Debt Obligations+++ Cost (Note 1b)
<S> <C> <C> <C> <S> <C> <C>
Grocery--3.0% B- B3 $1,500,000 Bruno's Supermarkets, Senior Sub
Notes, 10.50% due 8/01/2005 $ 1,500,000 $ 1,455,000
BB- Ba3 1,000,000 The Penn Traffic Company, 8.625%
due 12/15/2003 1,000,000 910,000
B- B2 2,000,000 Pueblo Xtra International, Inc.,
9.50% due 8/01/2003 2,000,000 1,800,000
Ralph's Grocery Co., Term Loan B,
due 6/15/2002:**
NR* Ba3 2,479 8.5625% to 3/15/1996 2,479 2,479
NR* Ba3 984,187 8.5625% to 4/22/1996 984,187 984,187
Ralph's Grocery Co., Term Loan C,
due 6/15/2003:**
NR* Ba3 2,479 9.0625% to 3/15/1996 2,479 2,479
NR* Ba3 984,188 9.0625% to 4/22/1996 984,188 984,188
Ralph's Grocery Co., Term Loan D,
due 2/15/2004:**
NR* Ba3 2,479 9.3125% to 3/15/1996 2,479 2,479
NR* Ba3 984,188 9.3125% to 4/22/1996 984,188 984,188
------------ ------------
7,460,000 7,125,000
Health B+ B2 1,000,000 Dynacare Inc., 10.75% due 1/15/2006 1,000,000 1,030,000
Services--4.8% B B2 1,000,000 Grancare Inc., Senior Sub Notes,
9.375% due 9/15/2005 1,000,000 1,010,000
B- B2 1,000,000 Integrated Health Services, Inc.,
Senior Subordinated Notes, 10.75%
due 7/15/2004 1,000,000 1,060,000
B B1 5,200,000 MEDIQ/PRN Life Support Services, Inc.,
12.125% due 7/01/1999 5,409,000 5,434,000
B B2 2,500,000 Magellan Health Services, Inc., Senior
Sub Notes, 11.25% due 4/15/2004 2,500,000 2,800,000
------------ ------------
10,909,000 11,334,000
Hotels--1.3% NR* NR* 2,000,000 ++Four Seasons Hotels Inc., 9.125%
due 7/01/2000 1,939,449 2,020,000
B+ Ba3 1,000,000 Prime Hospitality Corp., Senior
Notes, 9.25% due 1/15/2006 996,760 1,000,000
------------ ------------
2,936,209 3,020,000
<PAGE>
Leasing & Rental B B2 1,200,000 Cort Furniture Rental Corp., 12%
Services--3.5% due 9/01/2000 1,199,666 1,248,000
Prime Acquisition, Term Loan,
due 12/31/2000:**
NR* NR* 1,580,000 8.875% to 3/04/1996 1,580,000 1,580,000
NR* NR* 1,780,000 8.625% to 4/01/1996 1,780,000 1,780,000
NR* NR* 1,600,000 8.3125% to 5/06/1996 1,600,000 1,600,000
BB- B1 2,000,000 The Scotsman Group, Inc., 9.50% due
12/15/2000 2,000,000 2,060,000
------------ ------------
8,159,666 8,268,000
Leisure/ B- B3 1,500,000 Alliance Entertainment Corp.,
Entertainment-- Senior Sub Notes, 11.25% due 7/15/2005 1,500,000 1,507,500
1.3% BB- B2 1,500,000 ++Cobb Theatres LLC, 10.625% due
3/01/2003 1,500,000 1,500,000
------------ ------------
3,000,000 3,007,500
Manufacturing NR* B3 1,000,000 ++Crain Industries Inc., Senior
- --1.9% Sub Notes, 13.50% due 8/15/2005 1,000,000 1,040,000
B+ B1 3,623,000 Foamex L.P., 9.50% due 6/01/2000 3,643,000 3,459,965
------------ ------------
4,643,000 4,499,965
Marking B+ B2 1,000,000 Monarch Acquisition Corp., Senior
Devices--0.5% Notes, 12.50% due 7/01/2003 1,000,000 1,080,000
Materials NR* NR* 1,000,000 ++Alvey Systems, Inc., Senior Sub
Handling & Notes, 11.375% due 1/31/2003 1,000,000 1,022,500
Storage--3.2% B+ B2 2,000,000 Americold Corp., First Mortgage,
11.50% due 3/01/2005 2,045,000 2,080,000
NR* NR* 2,838,462 Pierce Leahy Corp., Term Loan B,
due 10/25/2002, 8.75% to 3/29/1996** 2,838,462 2,838,462
NR* NR* 1,661,538 Pierce Leahy Corp., Term Loan C,
due 10/25/2003, 9% to 3/29/1996** 1,661,538 1,661,538
------------ ------------
7,545,000 7,602,500
<PAGE>
Metals--8.7% B B1 1,000,000 Algoma Steel Inc., First Mortgage
Notes, 12.375% due 7/15/2005 904,557 966,250
B B2 3,000,000 Bayou Steel Corp., First Mortgage
Notes, 10.25% due 3/01/2001 3,000,000 2,670,000
B B2 1,000,000 GS Technologies, 12.25% due 10/01/2005 1,000,000 1,007,500
B B1 1,000,000 Gulf States Steel Corp., Senior Notes,
13.50% due 4/15/2003 989,703 915,000
B+ B3 2,000,000 Renco Metals, Inc., 12% due 7/15/2000 1,974,159 2,180,000
B+ B2 2,000,000 Republic Engineered Steel, Inc., First
Mortgage Notes, 9.875% due 12/15/2001 2,000,000 1,880,000
B- B3 5,000,000 Russell Metals, 10.25% due 6/15/2000 5,011,250 4,850,000
B+ B1 3,000,000 WCI Steel, Inc., 10.50% due 3/01/2002 3,000,000 3,045,000
B B2 3,000,000 Weirton Steel Corp., Senior Notes,
10.75% due 6/01/2005 2,956,878 2,902,500
------------ ------------
20,836,547 20,416,250
Musical B- B1 1,000,000 Selmer Co. Inc., Senior Sub Notes,
Instruments--0.5% 11% due 5/15/2005 1,000,000 1,060,000
Paper--12.8% Fort Howard Corp., Term Loan B,
due 12/31/2002:**
NR* NR* 2,500,000 8.82% to 3/19/1996 2,500,000 2,500,000
NR* NR* 2,500,000 8.66% to 6/19/1996 2,500,000 2,500,000
B B3 1,000,000 Gaylord Container Corp., 11.50%
due 5/15/2001 1,000,000 1,040,000
Jefferson Smurfit/Container Corp.
of America, Term Loan B, due
4/30/2002:**
NR* Ba3 1,633,333 8.3125% to 3/20/1996 1,633,333 1,633,333
NR* Ba3 5,800,000 8.3125% to 3/22/1996 5,800,000 5,800,000
Repap New Brunswick Inc., Senior
Notes:
BB- Ba3 2,000,000 8.859% due 7/15/2000** 2,027,500 2,000,000
BB- Ba3 1,000,000 9.875% due 7/15/2000 1,000,000 1,010,000
NR* Ba2 6,615,089 S.D. Warren Co., Term Loan B, due
12/19/2002, 8.32% to 3/27/1996** 6,615,089 6,615,089
Stone Container Corp., Term Loan B,
due 4/01/2000:**
NR* Ba3 3,712,500 8.75% to 3/18/1996 3,712,500 3,712,500
NR* Ba3 3,412,500 8.4375% to 4/22/1996 3,412,500 3,412,500
------------ ------------
30,200,922 30,223,422
Restaurant--1.7% BB- B1 4,000,000 Host Marriott Corp., 9.50% due
5/15/2005 3,898,850 4,000,000
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Debt Obligations+++ Cost (Note 1b)
<S> <C> <C> <C> <S> <C> <C>
Retail-- Federated Department Stores, Inc.,
Specialty--9.2% Term Loan, due 3/31/2000:**
NR* Ba1 $3,125,000 6.25% to 4/29/1996 $ 3,125,000 $ 3,125,000
NR* Ba1 1,875,000 6.4375% to 5/29/1996 1,875,000 1,875,000
Music Acquisition Corp., Term Loan B,
due 8/31/2001:**
NR* NR* 1,812,500 8.8125% to 3/20/1996 1,788,029 1,776,250
NR* NR* 3,062,500 9.75% to 5/31/1996 3,021,282 3,001,250
NR* NR* 9,912,700 Saks & Co., Term Loan, Tranche B,
due 6/30/2000, 8.75% to 5/09/1996** 9,912,700 9,912,700
B+ B1 2,000,000 Specialty Retailers, Inc., Series A,
10% due 8/15/2000 2,000,000 1,960,000
------------ ------------
21,722,011 21,650,200
Shipping--2.1% BB- Ba2 1,000,000 Eletson Holdings, Inc., Senior Notes,
9.25% due 11/15/2003 919,270 1,000,000
B- B3 1,500,000 OMI Corp., 10.25% due 11/01/2003 1,500,000 1,402,500
BB- Ba2 1,000,000 Stena Line AB, 10.50% due 12/15/2005 1,000,000 1,025,000
BB Ba2 1,500,000 Teekay Shipping Inc., 8.32% due
2/01/2008 1,500,000 1,494,375
------------ ------------
4,919,270 4,921,875
Transportation-- NR* B3 2,000,000 Ameritruck Distribution Corp., 12.25%
0.8% due 11/15/2005 1,978,725 1,960,000
Utilities--3.4% B+ B1 1,860,000 Beaver Valley Funding, 8.625% due
6/01/2007 1,585,519 1,738,504
BB Ba2 2,000,000 Cleveland Electric Illuminating Co.,
First Mortgage Notes, 9.50% due
5/15/2005 1,996,350 2,080,000
El Paso Electric Co.:
BB- Ba3 1,000,000 Series D, 8.90% due 2/01/2006 1,000,000 1,022,500
BB- Ba3 1,000,000 Series E, 9.40% due 5/01/2011 1,000,000 1,030,000
B+ B1 2,000,000 First PV Funding Corp., 10.30% due
1/15/2014 2,020,000 2,100,000
------------ ------------
7,601,869 7,971,004
<PAGE>
Waste BB- B3 1,000,000 ++Norcal Waste Systems, Inc., 12.50%
Management--0.4% due 11/15/2005 975,795 1,045,000
Total Corporate Debt
Obligations--118.8% 278,884,312 280,460,870
Shares
Held Warrants
Leasing & Rental NR* NR* 66,000 Cort Furniture Rental Corp. (a) 760 280,500
Services--0.1%
Steel--0.0% NR* NR* 1,000 ++Gulf States Steel Corp. (a) 11,000 250
Total Warrants--0.1% 11,760 280,750
Face
Amount Short-Term Securities
Commercial $ 849,000 General Electric Capital Corp.,
Paper***--0.4% 5.42% due 3/01/1996 849,000 849,000
Total Short-Term Securities--0.4% 849,000 849,000
Total Investments--119.3% $279,745,072 281,590,620
============
Liabilities in Excess of Other
Assets--(19.3%) (45,454,924)
------------
Net Assets--100.0% $236,135,696
============
<FN>
*Not Rated.
**Floating or Variable Rate Corporate Debt--The interest rates on
floating or variable rate corporate debt 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 29, 1996.
***Commercial Paper is traded on a discount basis; the interest rate
shown is the discount rate paid at the time of purchase by the
Portfolio.
(a)Warrants entitle the Portfolio 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.
+++Corporate loans represent 53.8% of the Portfolio's net assets.
++Restricted securities as to resale. The value of the Portfolio's
investment in restricted securities was approximately $12,888,000,
representing 5.5% of net assets.
<PAGE>
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1b)
<S> <C> <C> <C>
Acetex Corporation, Senior
Notes, 9.75% due 10/01/2003 9/22/1995 $ 995,782 $ 1,030,000
Alvey Systems, Inc., Senior Sub
Notes, 11.375% due 1/31/2003 1/19/1996 1,000,000 1,022,500
Cobb Theatres LLC, 10.625%
due 3/01/2003 2/29/1996 1,500,000 1,500,000
Continental Cablevision, Inc.,
Senior Notes, 8.30% due
5/15/2006 12/08/1995 1,993,664 2,130,000
Crain Industries Inc., 13.50%
due 8/15/2005 8/29/1995 1,000,000 1,040,000
Four Seasons Hotels Inc.,
9.125% due 7/01/2000 1/25/1994 1,939,449 2,020,000
Gulf States Steel Corp.
(Warrants) 4/12/1995 11,000 250
KCS Energy Inc., 11%
due 1/15/2003 1/19/1996 2,000,000 2,070,000
Norcal Waste Systems,
Inc., 12.50% due 11/15/2005 11/15/1995 975,795 1,045,000
Rifkin Acquisition Partners,
Senior Sub Notes, 11.125%
due 1/15/2006 1/26/1996 1,000,000 1,030,000
Total $12,415,690 $12,887,750
=========== ===========
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of February 29, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$279,745,072) (Note 1b) $281,590,620
Cash 558
Interest receivable 4,949,615
Deferred facility fees (Note 5) 14,837
Deferred organization expenses (Note 1f) 41,347
Prepaid expenses and other assets 127,786
------------
Total assets 286,724,763
------------
Liabilities: Payables:
Loans (Note 5) $ 47,000,000
Securities purchased 1,500,000
Dividends to shareholders (Note 1g) 621,433
Investment adviser (Note 2) 117,732
Commitment fees 17,811
Interest on loans (Note 5) 6,914 49,263,890
------------
Deferred income (Note 1e) 1,214,955
Accrued expenses and other liabilities 110,222
------------
Total liabilities 50,589,067
------------
Net Assets: Net assets $236,135,696
============
Capital: Common Stock, par value $.10 per share; 200,000,000 shares
authorized (25,639,592 shares issued and outstanding) $ 2,563,959
Paid-in capital in excess of par 240,548,925
Undistributed investment income--net 4,016,428
Accumulated realized capital losses on investments--net (Note 6) (12,839,164)
Unrealized appreciation on investments--net 1,845,548
------------
Total Capital--Equivalent to $9.21 net asset value per share of
Common Stock (market price--$9.25) $236,135,696
============
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended February 29, 1996
<S> <S> <C> <C>
Investment Income Interest and discount earned $ 29,694,310
(Note 1e): Facility and other fees 607,462
------------
Total income 30,301,772
============
<PAGE>
Expenses: Loan interest expense (Note 5) $ 4,639,838
Investment advisory fees (Note 2) 1,500,647
Borrowing costs (Note 5) 174,106
Accounting services (Note 2) 109,264
Professional fees 92,058
Printing and shareholder reports 66,327
Transfer agent fees (Note 2) 62,574
Custodian fees 32,082
Amortization of organization expenses (Note 1f) 28,402
Directors' fees and expenses 24,492
Pricing services 6,270
Listing fees 250
Other 41,074
------------
Total expenses 6,777,384
------------
Investment income--net 23,524,388
------------
Realized & Realized loss on investments--net (4,045,820)
Unrealized Gain Change in unrealized appreciation/depreciation on investments--net 10,795,412
(Loss) on ------------
Investments Net Increase in Net Assets Resulting from Operations $ 30,273,980
- --Net (Notes 1c, ============
1e & 3):
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the For the
Year Ended Year Ended
February 29, February 28,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 23,524,388 $ 22,904,509
Realized loss on investments--net (4,045,820) (8,793,344)
Change in unrealized appreciation/depreciation on investments--net 10,795,412 (13,013,937)
------------ ------------
Net increase in net assets resulting from operations 30,273,980 1,097,228
------------ ------------
Dividends & Investment income--net (23,431,545) (21,343,397)
Distributions to Realized gain on investments--net -- (1,784,188)
Shareholders ------------ ------------
(Note 1g): Net decrease in net assets resulting from dividends and
distributions to shareholders (23,431,545) (23,127,585)
------------ ------------
<PAGE>
Capital Share Offering costs resulting from the issuance of Common Stock -- (85,747)
Transactions Value of shares issued to Common Stock shareholders in
(Note 4): reinvestment of dividends and distributions 2,286,227 781,304
------------ ------------
Net increase in net assets resulting from capital share
transactions 2,286,227 695,557
------------ ------------
Net Assets: Total increase (decrease) in net assets 9,128,662 (21,334,800)
Beginning of year 227,007,034 248,341,834
------------ ------------
End of year* $236,135,696 $227,007,034
============ ============
<FN>
*Undistributed investment income--net (Note 1h) $ 4,016,428 $ 3,923,535
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Year Ended February 29, 1996
<S> <S> <C>
Cash Provided by Net increase in net assets resulting from operations $ 30,273,980
Operating Adjustments to reconcile net increase in net assets
Activities: resulting from operations to net cash provided by
operating activities:
Decrease in receivables 387,216
Increase in other assets (70,292)
Decrease in other liabilities (460,819)
Realized and unrealized gain on investments--net (6,749,592)
Amortization of premium and discount--net (600,008)
------------
Net cash provided by operating activities 22,780,485
------------
Cash Provided by Proceeds from sales of long-term investments 178,360,304
Investing Purchases of long-term investments (148,614,668)
Activities: Purchases of short-term investments (206,712,053)
Proceeds from sales and maturities of short-term investments 209,994,000
------------
Net cash provided by investing activities 33,027,583
------------
<PAGE>
Cash Used for Cash receipts from borrowings 111,000,000
Financing Cash payments on borrowings (146,000,000)
Activities: Dividends paid to shareholders (21,231,392)
------------
Net cash used for financing activities (56,231,392)
------------
Cash: Net decrease in cash (423,324)
Cash at beginning of year 423,882
------------
Cash at end of year $ 558
============
Cash Flow Cash paid for interest $ 5,068,046
Information: ============
Noncash Capital shares issued in reinvestment of dividends paid to shareholders $ 2,286,227
Financing ============
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 For the Period
from information provided in the financial statements. Year Ended Year Ended April 30, 1993++
Feb. 29, Feb. 28, to Feb. 28,
Increase (Decrease) in Net Asset Value: 1996++++ 1995++++ 1994
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 8.94 $ 9.82 $ 9.50
Operating ------------ ------------ ------------
Performance: Investment income--net .92 .90 .70
Realized and unrealized gain (loss) on investments
--net .27 (.87) .25
------------ ------------ ------------
Total from investment operations 1.19 .03 .95
------------ ------------ ------------
Less dividends and distributions:
Investment income--net (.92) (.84) (.61)
Realized gain on investments--net -- (.07) (.02)
------------ ------------ ------------
Total dividends and distributions (.92) (.91) (.63)
------------ ------------ ------------
Net asset value, end of period $ 9.21 $ 8.94 $ 9.82
============ ============ ============
Market price per share, end of period $ 9.25 $ 8.625 $ 9.375
============ ============ ============
<PAGE>
Total Investment Based on net asset value per share 14.14% .82% 10.28%+++
Return:** ============ ============ ============
Based on market price per share 18.82% 1.87% .02%+++
============ ============ ============
Ratios to Expenses, net of reimbursement and excluding
Average Net interest expense .92% .80% .67%*
Assets: ============ ============ ============
Expenses, net of reimbursement 2.92% 2.46% 1.61%*
============ ============ ============
Expenses 2.92% 2.46% 1.75%*
============ ============ ============
Investment income--net 10.14% 7.07% 7.33%*
============ ============ ============
Supplemental Net assets, end of period (in thousands) $ 236,136 $ 227,007 $ 248,342
Data: ============ ============ ============
Portfolio turnover 50.76% 44.81% 52.73%
============ ============ ============
Leverage: Amount of borrowings (in thousands) $ 47,000 $ 82,000 $ 84,000
============ ============ ============
Asset coverage per $1,000 $ 6,024 $ 3,768 $ 3,956
============ ============ ============
<FN>
*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.
++Commencement of Operations.
++++Based on average shares outstanding during the year.
+++Aggregate total investment return.
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. These unaudited financial statements
reflect all adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim period
represented. All such adjustments are of a normal recurring nature.
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.
(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. Obligations with remaining maturities of sixty days or less
are valued at amortized cost unless this method no longer produces
fair valuations. 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. 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.
(c) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging 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.
<PAGE>
* 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. 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.
* 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 is less than or exceeds the premiums 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).
(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.
<PAGE>
(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.
(f) Deferred organization expenses--Deferred organization expen-ses
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) Reclassification--Generally accepted accounting principles
require that certain components of net assets be reclassified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax differences
of $480 and $50 have been reclassified to accumulated net realized
capital losses and undistributed net investment income,
respectively, from paid-in capital in excess of par. These
reclassifications have no effect on net assets or net asset value
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 plus the proceeds of any
outstanding borrowings used for leverage.
Accounting services are provided to the Fund by FAM at cost.
During the year ended February 29, 1996, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S"), $4,772 for security price quota-
tions 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, MLPF&S, and/or ML & Co.
<PAGE>
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended February 29, 1996 were $150,114,668 and
$178,360,304, respectively.
Net realized and unrealized gains (losses) as of February 29, 1996
were as follows:
Realized Unrealized
Losses Gains
Long-term investments $(4,045,820) $1,845,548
----------- ----------
Total $(4,045,820) $1,845,548
=========== ==========
As of February 29, 1996, net unrealized appreciation for financial
reporting and Federal income tax purposes aggregated $1,845,548, of
which $4,627,921 related to appreciated securities and $2,782,373
related to depreciated securities. The aggregate cost of investments
at February 29, 1996 for Federal income tax purposes was $279,810,761.
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 29, 1996, shares issued and outstanding
increased by 251,300 to 25,639,592 as a result of dividend
reinvestment. At February 29, 1996, total paid-in capital amounted
to $243,112,884.
5. Short-Term Borrowings:
On June 16, 1993, the Fund entered into a credit facility with a
syndicate of banks led by The Bank of New York consisting of a one-
year $55,000,000 revolving credit facility bearing interest on
outstanding balances at an alternate base rate plus 0.25% and/or
LIBOR plus 1.25%, and of a two-year $25,000,000 term loan facility
bearing interest on outstanding balances at an alternate base rate
plus 0.50% and/or LIBOR plus 1.375%. On June 10, 1994, this credit
facility and all outstanding balances thereunder were refinanced by
a one-year $120,000,000 revolving credit facility extended by a
syndicate of banks led by The Bank of New York and bearing interest
on outstanding balances at the Federal Funds rate plus 1.125% and/or
an alternate base rate plus 0.125% and/or LIBOR plus 1.125%. On
June 9, 1995, the existing credit facility was extended for an
additional year and amended to reduce applicable interest rates on
outstanding balances to Federal Funds rate plus 0.75% and/or
alternate base rate plus 0% and/or LIBOR plus 0.75%. For the year
ended February 29, 1996, the maximum amount borrowed was
$86,000,000, the average amount borrowed was approximately
$68,473,000, and the daily weighted average interest rate was 6.78%.
For the year ended February 29, 1996, facility and commitment fees
aggregated approximately $174,106.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
6. Capital Loss Carryforward:
At February 29, 1996, the Fund had a net capital loss carryforward
of approximately $12,363,000, of which $5,318,000 expires in 2003
and $7,045,000 expires in 2004. This amount will be available to
offset like amounts of any future taxable gains.
7. Subsequent Events:
On March 8, 1996, the Board of Directors of the Fund declared an
ordinary income dividend in the amount of $0.073493 per share,
payable on March 29, 1996 to shareholders of record as of March 19,
1996. Additionally, on April 8, 1996, the Board of Directors of the
Fund declared an ordinary income dividend in the amount of $0.114041
per share, payable on April 19, 1996 to shareholders of record as
of April 12, 1996.
8. Reorganization Plan:
On April 15, 1996, pursuant to an agreement and plan of reorganization
approved by shareholders, the Fund acquired substantially all of the
assets and liabilities of Senior High Income Portfolio II, Inc. and
Senior Strategic Income Fund, Inc., both of which are registered, non-
diversified, closed-end management investment companies. All three
entities have a similar investment objective and are managed by FAM.
On April 15, 1996, the total net assets of the merged Fund was
$449,986,715.
<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 29, 1996, the related
statements of operations and cash flows for the year then ended and
the statements of changes in net assets for each of the years in
the two-year period then ended, and the financial highlights for
each of the years in the two-year period then ended and 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.
<PAGE>
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
29, 1996 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 29,
1996, the results of its operations and its cash flows for the year
then ended, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
April 15, 1996
</AUDIT-REPORT>
PER SHARE INFORMATION
<PAGE>
<TABLE>
Per Share
Selected Quarterly
Financial Data*
<CAPTION>
Net Realized Unrealized Dividends/Distributions
Investment Gains Gains Net Investment Income Capital
For the Quarter Income (Losses) (Losses) Common Gains
<S> <C> <C> <C> <C> <C>
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
March 1, 1995 to May 31, 1995 .24 (.01) .20 .22 --
June 1, 1995 to August 31, 1995 .24 (.03) (.06) .24 --
September 1, 1995 to November 30, 1995 .23 (.13) .14 .23 --
December 1, 1995 to February 29, 1996 .21 .02 .14 .23 --
<CAPTION>
Net Asset Value Market Price**
For the Quarter High Low High Low Volume***
<S> <C> <C> <C> <C> <C>
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
March 1, 1995 to May 31, 1995 9.16 8.95 8.875 8.125 3,147
June 1, 1995 to August 31, 1995 9.17 9.04 9.125 8.50 3,279
September 1, 1995 to November 30, 1995 9.15 9.04 9.375 8.875 2,032
December 1, 1995 to February 29, 1996 9.28 9.04 9.625 8.75 2,036
<FN>
*Calculations are based upon shares of Common Stock outstanding at
the end of each quarter.
**As reported in the consolidated transaction reporting system.
***In thousands.
</TABLE>
