SENIOR HIGH
INCOME
PORTFOLIO, INC.
FUND LOGO
Annual Report
February 28, 1997
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
Printed on post-consumer recycled paper
Senior High Income Portfolio, Inc.
DEAR SHAREHOLDER
For the year ended February 28, 1997, the Portfolio's total
investment return was +10.80%, based on a change in per share net
asset value from $9.21 to $9.22, and assuming reinvestment of $0.923
per share income dividends. During the same 12-month period, the net
annualized yield of the Portfolio's Common Stock was 9.94%. Since
inception (April 30, 1993) through February 28, 1997, the total
investment return on the Portfolio's Common Stock was +40.62%, based
on a change in per share net asset value from $9.50 to $9.22 and
assuming reinvestment of $3.384 per share income dividends. At the
end of the February period, the Portfolio was 14.32% leveraged,
having borrowed $81 million of its $225 million line of credit at an
average rate of 5.91%. (For a complete explanation of the benefits
and risks of leverage, see page 4 of this report to shareholders.)
<PAGE>
The investment objective of the Portfolio is to seek to provide
shareholders with high current income by investing primarily in
senior debt obligations of companies, including portions of floating
rate corporate loans made by banks and other financial institutions
and both publicly offered and privately placed corporate bonds and
notes. The securities by and large are rated in the lower rating
categories of the established agencies or are unrated.
Until mid-January 1997, the Portfolio paid out a regular monthly
dividend at an annualized rate of 9.25% in order to maintain a more
stable level of distributions. In January, the Portfolio paid out
the last of its previously undistributed net investment income.
Going forward, the Portfolio will distribute net investment income
as it is earned on a monthly basis. All net realized short-term and
long-term capital gains, if any, will continue to be distributed to
shareholders annually.
The Environment
The Federal Reserve Board held short-term interest rates steady
throughout the Portfolio's fiscal year. Strong economic growth
failed to ignite inflation, allowing the Federal Reserve Board to
maintain stable monetary policy. However, the Treasury bond market
experienced significant volatility during the year ended February
28, 1997. Treasury bonds responded negatively to economic strength
and inflationary fears during the second calendar quarter of 1996,
pushing the 10-year Treasury bond above 7% by July. The Treasury
market rallied on confidence in the economy's ability to grow
without sparking inflation and expectations that the president's re-
election would prompt bi-partisan efforts to balance the Federal
budget. The 10-year Treasury bond fell below 6.50% by year-end, only
to once again lose ground in the new year as the market increasingly
focused on potential tightening by the Federal Reserve Board. Stocks
had a strong year, despite a mid-summer correction, fueled by the
economy in general and momentum in technology and large-
capitalization issues in particular. The Dow Jones Industrial
Average and the Standard & Poor's 500 Index both traded to record
levels by January 1997.
High-yield markets benefited from a strong economy and generally
solid capital markets during the reporting period. Growth enhanced
credit quality, leading to improving credit statistics and low
default rates. Leveraged loan and high-yield bond mutual funds
experienced record inflows and other institutional investors
increased allocations to these sectors, attracted by high yields and
perceived low credit risk. Demand for bank loans again outpaced
supply, even though 1996 leveraged loan new-issue volume of $135
billion surpassed 1995's volume by 34%. Insufficient new-issue
supply caused many loan buyers to turn to the secondary market,
contributing to strong loan liquidity and bids well-above par for
performing term loans.
<PAGE>
Demand for high-yield bonds continued the market rally that began
early in the fiscal year. As in the loan market, demand exceeded
supply, despite 1996's record $74 billion in new issuance, and drove
spreads down. The yield spread between the Merrill Lynch High Yield
Master Index II and the ten-year Treasury bond narrowed from 379
basis points (3.79%) in March 1996 to 303 basis points by late
February 1997. With few investors willing to sell existing positions
into the secondary market for fear of not being able to replace
them, investors focused on new issues, often resulting in
significant oversubscription, small allocations and premium trading
levels shortly after issuance.
Most industry groups shared in the strength exhibited by the high-
yield loan and bond markets in general. Bonds of issuers in all
sectors reported positive 1996 returns, with most well into double
digits. Cyclicals, including chemicals, steel, housing, automotive,
aerospace and manufacturing, reported solid cash flow growth,
resulting in bond returns for these industries above the unmanaged
Merrill Lynch High Yield Master Index II return of +11.27%. Consumer
products, food and drug, and gaming and leisure issues also
performed well. The healthcare sector underperformed the market,
primarily because of already tight spreads early in the year. Media
and communications issuers initially extended the rally that began
with the 1996 Telecom Act. However, abundant supply driven by huge
capital needs for network development negatively impacted returns
late in the year. Cable television issues suffered as a result of
the growth of satellite TV and wireless TV, although the latter lost
ground amidst questions regarding technological viability.
Portfolio Strategy
At February 28, 1997, floating rate investments totaled 39.1% of the
Portfolio's total assets. Fixed-rate investments totaled 57.8% of
total assets. Approximately $104 million was available for
additional borrowing under the Portfolio's leverage facility, based
on its February 28, 1997 borrowing base. We reduced leverage from
both August 31, 1996 and February 29, 1996 because of the limited
supply of new floating rate investments and the declining supply of
attractively priced fixed-rate investments.
Throughout the fiscal year, we continued to focus on increasing the
Portfolio's floating rate exposure. As discussed in our last report
to shareholders, several market factors limited our success in
achieving a greater floating rate weighting. Investor demand for new
issues allowed underwriters to use aggressive pricing to compete for
new business and resulted in smaller allocations on attractively
priced transactions. Refinancings of existing Portfolio investments
continued at lower spreads and often resulted in allocations smaller
than the Portfolio's existing investment.
<PAGE>
As in the first half of the fiscal year, tight loan market
conditions and a favorable outlook for high-yield bonds caused us to
turn to the bond market. We invested in 32 new issues of companies
with attractive fundamental outlooks at prices generally inexpensive
to the secondary market. As with the floating rate market, demand
for new issues resulted in small allocations, with add-on buying
fueling price appreciation. Examples of new-issue purchases include
Newport News Shipbuilding, Inc., the only US aircraft carrier
shipyard; Tenet Healthcare Inc., a large national hospital operator;
and First Nationwide Escrow, a California thrift. We also pursued
secondary market purchases of companies with solid business
franchises that may have experienced short-term financial
disappointments. These investments were pursued only if the borrower
exhibited signs of overcoming short-term financial setbacks and if
the bonds were priced at a discount to the market. The Portfolio
sold bond issues that had achieved significant price appreciation
and spread compression and represented little additional upside, as
well as those of companies with potential credit problems.
At February 28, 1997, the Portfolio's floating rate investments were
diversified across 39 borrowers in 20 industries. Fixed-rate
investments were diversified across 122 borrowers in 41 industries.
The largest industry concentrations were: paper (9.9% of total
assets); health services (6.9%); food and kindred products (6.8%);
metals and mining (6.7%); and automotive equipment (5.0%). The
largest individual credit exposures were: Stone Container Corp.
($13.9 million/2.5% of total assets); Jefferson Smurfit
Company/Container Corp. of America ($12.9 million/2.3%); Marcus
Cable Operating Co. ($12.1 million/2.1%); SC International Corp.,
Inc. ($11.9 million/2.1%); and Collins & Aikman Corp. ($11.7
million/2.1%).
In Conclusion
We appreciate your ongoing investment in Senior High Income
Portfolio, Inc. We look forward to reviewing the Portfolio's market
environment and performance in our upcoming semi-annual report to
shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
<PAGE>
(John W. Fraser)
John W. Fraser
Vice President and Portfolio Manager
(R. Douglas Henderson)
R. Douglas Henderson
Vice President and Portfolio Manager
April 9, 1997
As of December 31, 1996, N. John Hewitt retired as Senior Vice
President of the Portfolio. His colleagues at Merrill Lynch Asset
Management, L.P. join the Portfolio's Board of Directors in wishing
Mr. Hewitt well in his retirement.
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.
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
Face Loan S&P Moody's Stated Value
Industries Amount Corporate Debt Obligations+++ Type Rating Rating Maturity** (Note 1b)
<S> <C> <S> <S> <S> <S> <S> <C>
Advertising-- $ 2,000 Adams Outdoor Advertising LP -- B B2 3/15/06 $ 2,155
1.1% 2,500 Outdoor Systems, Inc. Term A NR* Ba2 12/30/02 2,503
167 Outdoor Systems, Inc. Term B NR* Ba2 12/31/03 167
667 Outdoor Systems, Inc. Canadian
Term B NR* Ba2 12/31/03 669
Total Advertising (Cost--$5,263) 5,494
Agricultural 3,000 Chiquita Brands International Inc. -- B+ B1 11/01/06 3,210
Products--1.1% 2,000 Fresh Del Monte Produce N.V. -- CCC+ Caa 5/01/03 1,990
Total Agricultural Products (Cost--$5,008) 5,200
Aircraft & 2,000 Airplanes Pass Through Trust -- BB Ba2 3/15/19 2,208
Parts--3.9% 5,000 BE Aerospace, Inc. -- BB- Ba3 3/01/03 5,225
1,500 Derlan Manufacturing (b) -- NR* NR* 1/15/07 1,534
1,000 K & F Industries Inc., Senior Sub Notes -- B- B2 9/01/04 1,068
4,000 Talley Manufacturing & Technology, Inc. -- B B2 10/15/03 4,180
3,000 UNC Inc. -- BB- Ba3 7/15/03 3,068
1,000 UNC Inc. -- B Ba3 6/01/06 1,099
Total Aircraft & Parts (Cost--$17,536) 18,382
<PAGE>
Amusement & 4,563 AMF Group, Inc. Term NR* Ba3 3/31/01 4,601
Recreational 1,500 Cobb Theatres LLC -- BB- B2 3/01/03 1,590
Services--2.3% 4,000 Coleman Holdings, Inc. -- B B3 5/27/98 3,560
1,000 Plitt Theatres, Inc. -- B B3 6/15/04 1,015
Total Amusement & Recreational Services (Cost--$10,593) 10,766
Apparel--0.3% 1,500 Gear for Sports (b) -- B- B3 3/01/07 1,522
Total Apparel (Cost--$1,500) 1,522
Automotive 1,500 Aetna Industries Inc. -- B- B3 10/01/06 1,628
Equipment--5.9% 11,695 Collins & Aikman Corp. Term B B+ B1 12/31/02 11,717
1,000 Delco Remy International Inc. (b) -- B- B2 8/01/06 1,069
2,000 Harvard Industries, Inc. -- B B2 7/15/04 1,240
1,000 Harvard Industries, Inc. -- B+ B3 8/01/05 620
4,500 J.B. Poindexter & Co., Inc. -- B+ B2 5/15/04 4,590
1,500 LDM Technologies Inc. (b) -- BB- B3 1/15/07 1,568
1,500 Motors and Gears Inc. (b) -- B B3 11/15/06 1,560
4,000 Walbro Corp. -- B+ Ba3 7/15/05 4,080
Total Automotive Equipment (Cost--$28,573) 28,072
Broadcast-- 3,000 Albritton Communications Co. -- B- B3 11/30/07 2,985
Radio & TV--5.3% 1,000 American Radio Systems Corp.,
Senior Sub Notes -- B- B2 2/01/06 1,030
4,000 Granite Broadcasting Corp., Senior Sub Notes -- B- B3 5/15/05 4,140
3,000 Lenfest Communications Inc. -- BB+ Ba3 11/01/05 2,910
2,978 Sinclair Broadcasting Group, Inc. Term B NR* Ba3 11/30/03 2,985
5,000 Telewest Communications PLC -- BB B1 10/01/06 5,063
1,250 TV Azteca, S.A. de C.V. (b) -- BBB+ Ba3 2/15/04 1,269
750 TV Azteca, S.A. de C.V. (b) -- BBB+ Ba3 2/15/07 761
2,000 Young Broadcasting Corp., Senior Sub Notes -- B B2 2/15/05 2,080
2,000 Young Broadcasting Corp., Senior Sub Notes -- B B2 1/15/06 1,990
Total Broadcast--Radio & TV (Cost--$24,810) 25,213
Building 9,975 National Gypsum Term B NR* Ba3 9/20/03 10,006
Materials--2.8% 3,000 Schuller International Group -- BB- Ba3 12/15/04 3,330
Total Building Materials (Cost--$12,957) 13,336
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
Face Loan S&P Moody's Stated Value
Industries Amount Corporate Debt Obligations+++ Type Rating Rating Maturity** (Note 1b)
<S> <C> <S> <S> <S> <S> <S> <C>
Building & $ 3,000 Presley Companies -- CCC B3 7/01/01 $ 2,918
Construction--
0.6%
<PAGE>
Total Building & Construction (Cost--$3,000) 2,918
Cable Television 1,500 Diamond Cable Communications Co. (b) -- B- NR* 2/15/07 898
Services--3.4% 3,000 International CableTel Inc. (b) -- B B3 2/15/07 3,030
12,000 Marcus Cable Co. Term B NR* NR* 4/30/04 12,068
Total Cable Television Services (Cost--$15,815) 15,996
Casinos--1.2% 634 GB Property Funding Corp. -- B B3 1/15/04 514
1,500 Harvey Casinos Resorts, Senior Sub Notes -- B B2 6/01/06 1,624
1,000 Players International, Inc. -- BB Ba3 4/15/05 1,050
2,500 Trump Atlantic City Association/Funding Inc. -- BB- B1 5/01/06 2,413
Total Casinos (Cost--$5,634) 5,601
Chemicals--1.7% 3,000 Acetex Corp. -- BB- B1 10/01/03 3,030
1,000 Astor Corporation -- B- B3 10/15/06 1,063
1,500 Borden Chemicals and Plastics LP -- BB+ Ba2 5/01/05 1,605
2,500 ISP Holdings Inc. (b) -- B+ Ba3 10/15/03 2,575
Total Chemicals (Cost--$7,977) 8,273
Consumer 3,000 Coty, Inc., Senior Sub Notes -- B+ Ba3 5/01/05 3,300
Products--1.4% 3,000 Remington Arms Company, Inc.,
Senior Sub Notes (b) -- B- B3 12/01/03 2,280
1,000 Shop Vac Corporation (b) -- B Ba3 10/01/03 1,057
Total Consumer Products (Cost--$6,763) 6,637
Diversified--1.8% 3,000 Essex Group Inc. -- B+ B1 5/01/03 3,195
1,423 IMAcquisition Term B NR* NR* 6/30/03 1,427
1,107 IMAcquisition Term C NR* NR* 6/30/04 1,110
3,000 Valcor Inc. -- B B1 11/01/03 2,940
Total Diversified (Cost--$8,572) 8,672
Drug/Proprietary 4,617 Duane Reade Co. Term A NR* NR* 9/30/98 4,603
Stores--1.3% 1,500 Duane Reade Co. Term B NR* NR* 9/30/99 1,497
Total Drug/Proprietary Stores (Cost--$6,113) 6,100
Educational 3,000 Kinder-Care Learning Centers Inc. (b) -- NR* Ba3 2/15/09 3,022
Services--1.7% 5,000 La Petite Holdings Corp. -- B B3 8/01/01 4,950
Total Educational Services (Cost--$8,000) 7,972
Electronics/ 2,000 Advanced Micro Devices Inc. -- BB- Ba1 8/01/03 2,230
Electrical 3,000 Exide Electronics Corp., Senior Sub Notes -- B B3 3/15/06 3,195
Components--3.3% 3,982 International Wire Group, Inc. Term B NR* NR* 9/30/02 3,998
1,855 Tracor Inc. Term B NR* Ba3 10/31/00 1,859
2,845 Tracor Inc. Term C NR* Ba3 4/30/01 2,854
1,500 Tracor Inc. (b) -- NR* Ba3 3/01/07 1,494
<PAGE>
Total Electronics/Electrical Components (Cost--$15,094) 15,630
Energy--2.5% 2,000 Kelley Oil & Gas Corp. -- B- B3 10/15/06 2,125
2,000 Maxus Energy Corp. -- BB- B1 11/01/03 2,105
4,000 Mesa Operating Co., Senior Sub Notes -- B B2 7/01/06 4,425
1,000 Plains Resources Inc., Senior Sub Notes -- B- B2 3/15/06 1,088
2,000 Vintage Petroleum Inc. -- B+ B1 2/01/09 2,040
Total Energy (Cost--$10,900) 11,783
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
Face Loan S&P Moody's Stated Value
Industries Amount Corporate Debt Obligations+++ Type Rating Rating Maturity** (Note 1b)
<S> <C> <S> <S> <S> <S> <S> <C>
Financial $ 4,000 First Nationwide Escrow (b) -- B Ba3 10/01/03 $ 4,430
Services--1.1% 1,000 Imperial Credit Industries Inc. (b) -- B+ B1 1/15/07 1,030
Total Financial Services (Cost--$5,000) 5,460
Food & Kindred 2,985 American Italian Pasta Company Term C NR* NR* 2/26/04 2,948
Products--7.9% 500 CFP Holdings Inc. (b) -- B+ B3 1/15/04 529
1,000 Delta Beverage Group (b) -- NR* NR* 12/15/03 1,039
1,081 International HomeFoods Term B BB- Ba3 9/30/04 1,091
919 International HomeFoods Term C BB- Ba3 9/30/05 928
4,882 President Baking Co. Term B NR* NR* 9/30/00 4,878
4,691 SC International Services, Inc. Caterair B NR* B2 9/15/01 4,711
5,851 SC International Services, Inc. SCIB NR* B2 9/15/02 5,877
1,286 SC International Services, Inc. SCIC NR* B2 9/15/03 1,292
9,957 Specialty Foods Inc. Term B NR* B2 4/30/01 9,920
2,967 Van de Kamps Inc. Term B NR* Ba3 4/30/03 2,981
1,856 Van de Kamps Inc. Term C NR* Ba3 9/30/03 1,866
Total Food & Kindred Products (Cost--$37,773) 38,060
Forest 1,000 Malette Inc. -- BB- Ba3 7/15/04 1,115
Products--1.9% 4,000 Tembec Finance Corp. -- BB B1 9/30/05 4,030
4,000 Uniforet Inc. (b) -- B+ B2 10/15/06 3,720
Total Forest Products (Cost--$9,000) 8,865
General 6,447 Federated Department Stores, Inc. Term NR* Ba1 3/31/00 6,434
Merchandise 4,000 Specialty Retailers Group, Inc., Series A -- B+ B1 8/15/00 4,240
Stores--2.2%
Total General Merchandise Stores (Cost--$10,410) 10,674
<PAGE>
Grocery Stores-- 3,000 Eagle Food Centers Inc., -- B+ B1 4/15/00 2,918
2.4% 2,000 Pueblo Xtra International, Inc. -- B- B2 8/01/03 1,920
900 Ralph's Grocery Co. Term B NR* Ba3 6/15/02 906
900 Ralph's Grocery Co. Term C NR* Ba3 6/15/03 908
900 Ralph's Grocery Co. Term D NR* Ba3 2/15/04 908
1,299 Smith's Food & Drug Centers, Inc. Term B NR* Ba3 11/30/03 1,301
1,299 Smith's Food & Drug Centers, Inc. Term C NR* Ba3 11/30/04 1,301
1,299 Smith's Food & Drug Centers, Inc. Term D NR* Ba3 8/31/05 1,301
Total Grocery Stores (Cost--$11,313) 11,463
Health 1,801 Community Health Care Inc. Term B NR* NR* 12/31/03 1,807
Services--8.1% 1,801 Community Health Care Inc. Term C NR* NR* 12/31/04 1,807
1,356 Community Health Care Inc. Term D NR* NR* 12/31/05 1,360
1,636 Dade International Inc. Term B NR* B1 12/31/02 1,649
1,636 Dade International Inc. Term C NR* B1 12/31/03 1,651
1,727 Dade International Inc. Term D NR* B1 12/31/04 1,745
1,500 Dynacare, Inc. -- B+ B2 1/15/06 1,564
1,357 Imed Corp. Term B BB- B1 11/01/03 1,370
1,357 Imed Corp. Term C BB- B1 11/01/04 1,370
1,277 Imed Corp. Term D BB- B1 5/01/05 1,290
3,000 Integrated Health Services, Inc.,
Senior Sub Notes -- B B2 7/15/04 3,285
5,500 Magellan Health Services Inc.,
Senior Sub Notes -- B B2 4/15/04 6,105
5,000 Merit Behavioral Care Corp. Term A NR* B2 6/01/03 4,995
5,000 Paracelsus Healthcare Inc., Senior Sub Notes -- B B1 8/15/06 4,900
1,000 Regency Health Services Inc.,
Senior Sub Notes -- B- B2 10/15/02 1,030
2,500 Tenet Healthcare Inc. -- BB Ba3 1/15/07 2,587
Total Health Services (Cost--$37,283) 38,515
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
Face Loan S&P Moody's Stated Value
Industries Amount Corporate Debt Obligations+++ Type Rating Rating Maturity** (Note 1b)
<S> <C> <S> <S> <S> <S> <S> <C>
Hotels & $ 2,000 Four Seasons Hotels Inc. (b) -- BB- B1 7/01/00 $ 2,062
Motels--1.5% 3,000 Prime Hospitality Corp. -- B+ Ba3 1/15/06 3,098
2,000 Wyndham Hotels Corp., Senior Sub Notes -- B B2 5/15/06 2,150
Total Hotels & Motels (Cost--$6,942) 7,310
Leasing & Rental 1,200 Cort Furniture Rental Corp. -- B- B2 9/01/00 1,320
Services--1.1% 4,000 The Scotsman Group, Inc. -- BB- B1 12/15/00 4,120
<PAGE>
Total Leasing & Rental Services (Cost--$5,200) 5,440
Manufacturing-- 3,000 Crain Industries Inc., Senior Sub Notes -- B- B3 8/15/05 3,420
1.8% 3,623 Foamex LP -- B+ B1 6/01/00 3,677
1,500 Tokheim Corp., Senior Sub Notes -- NR* NR* 8/01/06 1,639
Total Manufacturing (Cost--$8,143) 8,736
Marking Devices-- 3,000 Monarch Acquisition Corp. -- B+ B2 7/01/03 3,502
0.7%
Total Marking Devices (Cost--$3,000) 3,502
Materials Handling 1,500 Alvey Systems Inc., Senior Sub Notes -- NR* NR* 1/31/03 1,586
& Storage--1.7% 5,000 Americold Corp. -- D Caa 3/01/05 5,250
1,000 Iron Mountain Inc. -- B+ B3 10/01/06 1,080
Total Materials Handling & Storage (Cost--$7,612) 7,916
Measuring, 4,651 CHF/Ebel USA Inc. Term B NR* NR* 9/28/01 4,651
Analyzing &
Controlling
Instruments--1.0%
Total Measuring, Analyzing & Controlling Instruments (Cost--$4,651) 4,651
Metals & 3,000 Bayou Steel Corp. -- B B2 3/01/01 2,925
Mining--7.9% 1,000 GS Technologies Operating Co. -- B B2 9/01/04 1,059
1,000 GS Technologies Operating Co. -- B B2 10/01/05 1,073
3,000 Gulf States Steel Corp. -- B B1 4/15/03 2,880
3,500 Ivaco Inc. -- B+ B1 9/15/05 3,719
2,000 Jorgensen (Earle M.) Co. -- B B3 3/01/00 2,000
3,000 Renco Metals, Inc. -- B+ B3 7/01/03 3,157
2,000 Republic Engineered Steel, Inc. -- B+ B2 12/15/01 1,820
2,000 Royal Oak Mines Inc. -- NR* NR* 8/15/06 2,060
5,000 Russel Metals Inc. -- B- B3 6/15/00 5,137
3,429 UCAR International, Inc. Term B NR* NR* 12/31/02 3,433
2,000 Weirton Steel Corp. -- B B2 7/01/04 2,080
3,190 Weirton Steel Corp. -- B B2 6/01/05 3,254
3,000 Wheeling-Pittsburg Steel Corp. -- BB- B1 11/15/03 3,000
Total Metals & Mining (Cost--$37,084) 37,597
Music--0.7% 3,000 Selmer Co., Inc., Senior Sub Notes -- NR* B1 5/15/05 3,277
Total Music (Cost--$3,000) 3,277
Packaging--2.5% 1,000 Fonda Group Inc., Senior Sub Notes (b) -- B- B3 3/01/07 1,000
2,000 Packaging Resources Group -- B+ B2 5/01/03 2,112
2,000 Printpack Inc. -- BB- B2 8/15/04 2,100
2,000 Spinnaker Industries Inc. (b) -- B B3 10/15/06 2,100
4,500 Sweetheart Cup Co. -- B+ Ba3 9/01/00 4,624
<PAGE>
Total Packaging (Cost--$11,514) 11,936
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
Face Loan S&P Moody's Stated Value
Industries Amount Corporate Debt Obligations+++ Type Rating Rating Maturity** (Note 1b)
<S> <C> <S> <S> <S> <S> <S> <C>
Paper--11.7% $ 2,885 Fort Howard Corp. Term B BB+ Ba3 12/31/02 $ 2,917
1,500 Four M Corp. -- B B2 6/01/06 1,605
3,000 Gaylord Container Corp. -- B B3 5/15/01 3,173
12,745 Jefferson Smurfit Company/
Container Corp. of America Term B BB Ba3 4/30/02 12,864
2,000 Repap New Brunswick, Inc. -- BB- Ba3 7/15/00 1,960
3,000 Repap New Brunswick, Inc. -- BB- Ba3 7/15/00 3,030
8,571 Riverwood International, Inc. Term B B+ B1 2/28/04 8,376
3,429 Riverwood International, Inc. Term C B+ B1 8/28/04 3,350
4,658 S.D. Warren Co. Term B NR* Ba2 6/30/02 4,675
13,800 Stone Container Corp. Term B NR* Ba3 4/01/00 13,873
Total Paper (Cost--$55,057) 55,823
Printing & 4,885 American Media Term B BB- Ba2 9/30/02 4,873
Publishing--3.4% 1,750 National Fiberstock Corp. -- B+ B3 6/15/02 1,855
2,333 Newsquest Capital PLC Term 2 NR* NR* 12/31/04 2,322
3,000 Peterson Publishing Term B NR* B1 9/30/04 3,008
1,000 Sun Media Corp. (b) -- B- B3 2/15/07 1,017
2,970 Treasure Chest Advertising Co. Term NR* Ba3 12/31/02 2,981
Total Printing & Publishing (Cost--$15,902) 16,056
Restaurants--1.5% 7,000 Host Marriott Corp. -- BB- B1 5/15/05 7,367
Total Restaurants (Cost--$6,827) 7,367
Shipbuilding & 4,000 Newport News Shipbuilding, Inc. (b) -- B+ B1 12/01/06 4,190
Repairing--0.9%
Total Shipbuilding & Repairing (Cost--$4,000) 4,190
Shipping--2.5% 4,500 Eletson Holdings Inc. -- BB- Ba2 11/15/03 4,590
3,000 Stena Line AB -- BB- Ba2 12/15/05 3,322
2,000 Teekay Shipping Inc. -- BB Ba2 2/01/08 2,010
2,000 Viking Star Shipping Inc. -- BB- Ba2 7/15/03 2,105
Total Shipping (Cost--$11,395) 12,027
<PAGE>
Telephone 5,000 CAI Wireless Systems, Inc. -- CCC+ Caa 9/15/02 2,350
Communications-- 3,000 CCPR Services Inc. (b) -- NR* NR* 2/01/07 3,000
4.4% 2,500 Mcleod Inc. (b) -- B3 B 3/01/02 1,500
5,000 MobileMedia Communications Inc. Term B NR* C 6/30/03 4,159
5,000 Nextel Communications, Inc. Term D NR* B1 6/30/03 5,014
4,893 Shared Technology Inc. Term B NR* B1 3/31/03 4,868
Total Telephone Communications (Cost--$24,343) 20,891
Textile--1.2% 3,000 Avondale Mills Inc., Senior Sub Notes -- B+ B2 5/01/06 3,150
2,500 Dominion Textile USA, Inc. -- BB Ba2 4/01/06 2,625
Total Textile (Cost--$5,456) 5,775
Transportation 4,000 Ameritruck Distribution Corp. -- B- B3 11/15/05 4,080
Services--2.2% 4,584 Continental Micronesia, Inc. Axel NR* NR* 7/31/03 4,580
2,100 Trism Inc., Senior Sub Notes -- B B2 12/15/00 2,000
Total Transportation Services (Cost--$10,559) 10,660
Utilities--2.1% 1,605 Beaver Valley Funding Corp. -- B+ B1 6/01/07 1,547
4,000 Cleveland Electric Illuminating Co. -- BB Ba2 5/15/05 4,294
1,000 El Paso Electric Co., Series D -- BB- Ba3 2/01/06 1,051
1,000 El Paso Electric Co., Series E -- BB- Ba3 5/01/11 1,085
2,125 Public Service of New Mexico -- B+ B1 1/15/14 2,268
Total Utilities (Cost--$9,568) 10,245
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
Face Loan S&P Moody's Stated Value
Industries Amount Corporate Debt Obligations+++ Type Rating Rating Maturity** (Note 1b)
<S> <C> <S> <S> <S> <S> <S> <C>
Waste $ 500 Allied Waste Industries, Inc. Axel A BB+ Ba3 6/30/03 $ 504
Management-- 1,000 Allied Waste Industries, Inc. Axel B BB+ Ba3 6/30/04 1,009
1.2% 1,000 Allied Waste Industries, Inc. Axel C BB+ Ba3 6/30/05 1,009
3,000 Norcal Waste Systems, Inc. -- BB- B3 11/15/05 3,382
Total Waste Management (Cost--$5,411) 5,904
Total Corporate Debt Obligations (Cost--$540,551)--115.2% 549,907
Shares
Held Warrants (a)
Electronics/Electrical 3 Exide Electronics Corp. (b) 126
Components--0.0%
<PAGE>
Leasing & Rental 66 Cort Furniture Rental Corp. 222
Services--0.1%
Metals & Mining-- 3 Gulf States Steel Corp. (b) 1
0.0%
Total Warrants (Cost--$119)--0.1% 349
Short-Term Investments
Commercial General Motors Acceptance Corp. ($729 par, maturing 3/03/1997, yielding 5.43%) 729
Paper***--0.2%
Total Short-Term Investments (Cost--$729)--0.2% 729
Total Investments (Cost--$541,399)--115.5% 550,985
Liabilities in Excess of Other Assets--(15.5%) (73,815)
---------
Net Assets--100.0% $ 477,170
=========
<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.
***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.
(b)The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933.
+++Corporate loans represent 45.9% of the Portfolio's net assets.
Ratings of issues shown have not been audited by Deloitte & Touche
LLP.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION
<PAGE>
<TABLE>
Statement of Assets, Liabilities and Capital as of February 28, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$541,399,013) (Note 1b) $ 550,985,242
Cash 21,194
Interest receivable 10,966,507
Deferred facility fees 10,982
Deferred organization expenses (Note 1f) 28,402
Prepaid expenses and other assets 19,413
---------------
Total assets 562,031,740
---------------
Liabilities: Payables:
Loans (Note 5) $ 81,000,000
Securities purchased 2,981,530
Interest on loans (Note 5) 363,079
Investment adviser (Note 2) 213,237
Commitment fees 26,250 84,584,096
---------------
Deferred income (Note 1e) 67,260
Accrued expenses and other liabilities 210,438
---------------
Total liabilities 84,861,794
---------------
Net Assets: Net assets $ 477,169,946
===============
Capital: Common Stock, par value $.10 per share; 200,000,000 shares
authorized (51,754,836 shares issued and outstanding) $ 5,175,485
Paid-in capital in excess of par 482,244,548
Undistributed investment income--net 3,750,733
Accumulated realized capital losses on investments--net (Note 6) (23,587,049)
Unrealized appreciation on investments--net 9,586,229
---------------
Total Capital--Equivalent to $9.22 net asset value per share of
Common Stock (market price--$9.50) $ 477,169,946
===============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<PAGE>
<TABLE>
Statement of Operations
<CAPTION>
For the Year Ended
February 28, 1997
<S> <S> <C> <C>
Investment Income Interest and discount earned $ 49,481,928
(Note 1e): Facility and other fees 899,594
---------------
Total income 50,381,522
---------------
Expenses: Loan interest expense (Note 5) $ 4,870,047
Investment advisory fees (Note 2) 2,604,703
Borrowing costs (Note 5) 226,191
Professional fees 139,070
Accounting services (Note 2) 91,873
Printing and shareholder reports 68,663
Transfer agent fees (Note 2) 56,562
Custodian fees 51,712
Directors' fees and expenses 22,591
Amortization of organization expenses (Note 1f) 12,945
Pricing services 7,500
Listing fees 500
Other 55,439
---------------
Total expenses 8,207,796
---------------
Investment income--net 42,173,726
---------------
Realized & Realized loss on investments--net (1,541,894)
Unrealized Gain Change in unrealized appreciation on investments--net 10,730,017
(Loss) on ---------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 51,361,849
(Notes 1c, 1e & 3): ===============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<PAGE>
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the For the
Year Ended Year Ended
Increase (Decrease) in Net Assets: February 28, 1997 February 29, 1996
<S> <S> <C> <C>
Operations: Investment income--net $ 42,173,726 $ 23,524,388
Realized loss on investments--net (1,541,894) (4,045,820)
Change in unrealized appreciation/depreciation on
investments--net 10,730,017 10,795,412
--------------- ---------------
Net increase in net assets resulting from operations 51,361,849 30,273,980
--------------- ---------------
Dividends to Investment income--net (42,444,377) (23,431,545)
Shareholders --------------- ---------------
(Note 1g): Net decrease in net assets resulting from dividends
to shareholders (42,444,377) (23,431,545)
--------------- ---------------
Capital Share Net proceeds from issuance of Common Stock resulting
Transactions from reorganization 220,470,337 --
(Note 4): Value of shares issued to Common Stock shareholders in
reinvestment of dividends 11,646,441 2,286,227
--------------- ---------------
Net increase in net assets resulting from capital share
transactions 232,116,778 2,286,227
--------------- ---------------
Net Assets: Total increase in net assets 241,034,250 9,128,662
Beginning of year 236,135,696 227,007,034
--------------- ---------------
End of year* $ 477,169,946 $ 236,135,696
=============== ===============
<FN>
*Undistributed investment income--net (Note 1h) $ 3,750,733 $ 4,016,428
=============== ===============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<PAGE>
<TABLE>
Statement of Cash Flows
<CAPTION>
For the Year Ended
February 28, 1997
<S> <S> <C>
Cash Provided by Net increase in net assets resulting from operations $ 51,361,849
Operating Adjustments to reconcile net increase (decrease)in net assets resulting from
Activities: operations to net cash provided by operating activities:
Increase in receivables (4,562,972)
Decrease in other assets 125,173
Increase in other liabilities 627,586
Realized and unrealized gain on investments--net (9,188,123)
Amortization of discount--net (540,849)
---------------
Net cash provided by operating activities 37,822,664
---------------
Cash Provided by Proceeds from sales of long-term investments 501,122,092
Investing Purchases of long-term investments (495,308,682)
Activities: Purchases of short-term investments (208,273,487)
Proceeds from sales and maturities of short-term investments 209,584,000
---------------
Net cash provided by investing activities 7,123,923
---------------
Cash Used for Cash payments for reorganization expenses (258,177)
Financing Cash receipts from borrowings 234,000,000
Activities: Cash payments on borrowings (248,000,000)
Dividends paid to shareholders (30,667,774)
---------------
Net cash used for financing activities (44,925,951)
---------------
Cash: Net increase in cash 20,636
Cash at beginning of year 558
---------------
Cash at end of year $ 21,194
===============
Cash Flow Cash paid for interest $ 4,513,882
Information: ===============
Noncash Value of capital shares issued in reinvestment of dividends paid to
Financing shareholders $ 11,646,441
Activities: ===============
Value of capital shares issued resulting from reorganization $ 220,470,337
===============
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights
<CAPTION>
For the
For the For the For the Period
The following per share data and ratios have been derived Year Year Year April 30,
from information provided in the financial statements. Ended Ended Ended 1993++ to
Feb. 28, Feb. 29, Feb. 28, Feb. 28,
Increase (Decrease) in Net Asset Value: 1997++++ 1996++++ 1995++++ 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.21 $ 8.94 $ 9.82 $ 9.50
Operating -------- -------- -------- --------
Performance: Investment income--net .89 .92 .90 .70
Realized and unrealized gain (loss) on
investments--net .04 .27 (.87) .25
-------- -------- -------- --------
Total from investment operations .93 1.19 .03 .95
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.92) (.92) (.84) (.61)
Realized gain on investments--net -- -- (.07) (.02)
-------- -------- -------- --------
Total dividends and distributions (.92) (.92) (.91) (.63)
-------- -------- -------- --------
Net asset value, end of period $ 9.22 $ 9.21 $ 8.94 $ 9.82
======== ======== ======== ========
Market price per share, end of period $ 9.50 $ 9.25 $ 8.625 $ 9.375
======== ======== ======== ========
Total Investment Based on net asset value per share 10.80% 14.14% .82% 10.28%+++
Return:** ======== ======== ======== ========
Based on market price per share 13.67% 18.82% 1.87% .02%+++
======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement and excluding
Net Assets: interest expense .75% .92% .80% .67%*
======== ======== ======== ========
Expenses, net of reimbursement 1.84% 2.92% 2.46% 1.61%*
======== ======== ======== ========
Expenses 1.84% 2.92% 2.46% 1.75%*
======== ======== ======== ========
Investment income--net 9.45% 10.14% 7.07% 7.33%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $477,170 $236,136 $227,007 $248,342
Data: ======== ======== ======== ========
Portfolio turnover 98.51% 50.76% 44.81% 52.73%
======== ======== ======== ========
<PAGE>
Leverage: Amount of borrowings (in thousands) $ 81,000 $ 47,000 $ 82,000 $ 84,000
======== ======== ======== ========
Asset coverage per $1,000 $ 6,891 $ 6,024 $ 3,768 $ 3,956
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns based on market price, 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.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
+++Aggregrate total investment return.
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.
(b) Valuation of investments--Until June 17, 1996, corporate loans
were valued at fair value as determined in good faith by or under
the direction of the Board of Directors of the Fund. As of June 17,
1996, the Board of Directors enhanced their policy for valuing
corporate loans whereby the corporate loans would be valued at the
average of the mean between the bid and asked quotes received from
one or more brokers, if available.
<PAGE>
Other portfolio securities may be valued on the basis of prices
furnished by one or more pricing services which determine prices for
normal, institutional-size trading units of such securities using
market information, transactions for comparable securities and
various relationships between securities which are generally
recognized by institutional traders. 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 sale price on the market where any such
option is principally traded. Short-term securities with remaining
maturities of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market
quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of
Directors of the Fund.
(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.
* 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).
<PAGE>
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.
(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 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) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of $4,956
have been reclassified between paid-in capital in excess of par and
undistributed net investment income. 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 Fund
Asset Management, L.P. ("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.
<PAGE>
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 28, 1997, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S"), $4,820 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, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended February 28, 1997 were $496,714,864 and
$501,122,092, respectively.
Net realized and unrealized gains (losses) as of February 28, 1997
were as follows:
Realized Unrealized
Losses Gains
Long-term investments $(1,541,894) $9,586,229
----------- ----------
Total $(1,541,894) $9,586,229
=========== ==========
As of February 28, 1997, net unrealized appreciation for financial
reporting and Federal income tax purposes aggregated $9,586,229, of
which $16,331,300 related to appreciated securities and $6,745,071
related to depreciated securities. The aggregate cost of investments
at February 28, 1997 for Federal income tax purposes was
$541,399,013.
NOTES TO FINANCIAL STATEMENTS (concluded)
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.
<PAGE>
For the year ended February 28, 1997, shares issued and outstanding
increased by 26,115,244, of which 24,833,536 resulted from a
reorganization and 1,281,705 resulted from reinvestment of
dividends, to 51,754,836. At February 28, 1997, total paid-in
capital amounted to $487,420,033.
5. Short-Term Borrowings:
On April 14, 1997, the Fund extended its credit agreement with a
syndicate of banks led by The Bank of New York. The agreement is a
$225,000,000 credit facility bearing interest at the Federal Funds
rate plus 0.25% and/or the LIBOR plus 0.25%. For the year ended
February 28, 1997, the maximum amount borrowed was $119,000,000, the
average amount borrowed was approximately $82,384,000, and the daily
weighted average interest rate was 5.91%. For the year ended
February 28, 1997, facility and commitment fees aggregated
approximately $226,191.
6. Capital Loss Carryforward:
At February 28, 1997, the Fund had a net capital loss carryforward
of approximately $22,144,000, of which $9,353,000 expires in
2003, $12,057,000 expires in 2004 and $734,000 expires in 2005.
This amount will be available to offset like amounts of any
future taxable gains.
7. Subsequent Event:
On March 10, 1997, the Board of Directors of the Fund declared an
ordinary income dividend in the amount of $.067162 per share,
payable on March 31, 1997 to shareholders of record as of March 20,
1997.
8. Acquisition of Senior High Income Portfolio II,
Inc. and Senior Strategic Income Fund, Inc.:
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. The
acquisition was accomplished by a tax-free exchange of 24,833,536
Common Stock shares of the Fund for 16,771,595 and 7,841,703 Common
Stock shares for Senior High Income Portfolio II, Inc. and Senior
Strategic Income Fund, Inc., respectively. As of that date, Senior
High Income Portfolio II, Inc.'s net assets of $149,467,377,
including $3,140,213 of unrealized depreciation and $6,443,907 of
accumulated net realized capital losses and Senior Strategic Income
Fund, Inc.'s net assets of $71,666,666, including $150,877
unrealized appreciation and $2,762,085 accumulated net realized
capital losses, were combined with those of the Fund. The aggregate
net assets of the Fund immediately after the acquisition amounted to
$449,986,715.
<PAGE>
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, 1997, the related
statements of operations and cash flows for the year then ended and
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 three-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.
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, 1997 by correspondence with the custodian, brokers 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 financial highlights
present fairly, in all material respects, the financial position of
Senior High Income Portfolio, Inc. as of February 28, 1997, 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 14, 1997
<PAGE>
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Richard R. West, Director
Terry K. Glenn, Executive Vice President
Joseph T. Monagle Jr., 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
