SENIOR HIGH
INCOME
PORTFOLIO, INC.
FUND LOGO
Semi-Annual Report
August 31, 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.
Senior High Income
Portfolio, Inc.
Box 9011
Princeton, NJ
08543-9011
<PAGE>
Printed on post-consumer recycled paper
Senior High Income Portfolio, Inc.
DEAR SHAREHOLDER
For the six months ended August 31, 1997, the Portfolio's total
investment return was +5.99%, based on a change in per share net
asset value from $9.22 to $9.32, and assuming reinvestment of $0.440
per share income dividends. During the same period, the net
annualized yield of the Portfolio's Common Stock was 9.57%. Since
inception (April 30, 1993) through August 31, 1997, the total
investment return on the Portfolio's Common Stock was +49.03%, based
on a change in per share net asset value from $9.50 to $9.32, and
assuming reinvestment of $3.824 per share income dividends. At the
end of the August period, the Portfolio was 22.8% leveraged, having
borrowed $145.8 million of its $225 million credit facility at an
average rate of 5.88%. (For a complete explanation of the benefits
and risks of leverage, see page 4 of this report to shareholders.)
The Environment
After raising the target Federal Funds rate by 25 basis points
(0.25%) in March, the Federal Reserve Board (FRB) held short-term
interest rates steady throughout the remainder of the six-month
period. Strong economic growth failed to ignite inflation, allowing
the FRB to maintain stable monetary policy. However, the Treasury
bond market experienced significant volatility during the period
ended August 31, 1997. Treasury bonds responded negatively to
economic strength and inflationary fears in the early part of the
period, pushing the 10-year Treasury bond above 6.39% by mid-July.
However, with increasing investor confidence in the economy's
ability to grow without sparking inflation and bi-partisan efforts
to balance the Federal budget, the 10-year Treasury bond rallied
again to 6.10% by the end of September. Increasing evidence of
noninflationary economic growth, together with continued strong
corporate earnings, helped produce a significant rally in the US
stock market. The Dow Jones Industrial Average and the Standard &
Poor's 500 Index both traded to record levels by late summer.
Current consensus expectations are for the US economy's growth rate
to continue at a pace below the first quarter gross domestic product
(GDP) growth of 5.9%. However, the 3.3% rate generated in the second
quarter still reflects a strong economy. Currently, inflationary
pressures remain contained, supported by the recent labor and
unemployment reports showing moderate growth in wages along with a
slight increase in unemployment. It remains to be seen whether
economic activity moderates enough to rule out future FRB monetary
policy tightenings.
<PAGE>
Any threat to the current positive outlook for global liquidity
originated outside the United States. The US dollar continued to be
strong relative to other currencies. In Europe, amid investor
uncertainty regarding the viability of economic and monetary union,
underlying economic conditions do not warrant a more restrictive
monetary policy in countries such as Germany to support their
currencies. The currency crisis in Southeast Asia reminds investors
that, although current account deficits are to be expected in
developing countries, it is important to consider a country's
ability to obtain the necessary amount of foreign currency to repay
its obligations. Concerns about Brazil's capacity to sustain its
current foreign exchange policy may shift investor preferences
toward those economies that retain or adjust their relative prices.
In summary, general nervousness with some international markets has
investors viewing the US economy most favorably for its growth and
limited inflationary pressures.
High-yield markets benefited from a strong economy and generally
solid capital markets during the six months ended August 31, 1997.
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 institutional investors, attracted
by high yields and perceived low credit risk, increased their
allocations to both asset classes. Demand for bank loans again
outpaced supply, even though 1997 year-to-date leveraged loan new-
issue volume of $65.5 billion surpassed 1996's volume by 6%.
Insufficient new-issue supply caused many loan buyers to turn to the
secondary market, contributing to strong loan liquidity and bids
above par for performing term loans. Both London Interbank Offered
Rate spreads and upfront fees came down as a result. However, the
actual credit structures of the transactions brought to market
continued to be strong realtive to transactions generated in the
late 1980s, when compared on the basis of equity invested and
coverage ratios.
Demand for high-yield bonds continued the market rally that began
early in the August period with the only real correction coming in
April with a back up in both the equity and bond markets. As in the
loan market, continued steady inflows caused demand to exceed
supply, despite record new issuances of $79.6 billion in the first
eight months of 1997. The spread between the Merrill Lynch High
Yield Master Index II and the ten-year Treasury bond narrowed from
379 basis points in March 1996 to 303 basis points at the beginning
of March 1997 and 286 basis points by August 31, 1997. With few
investors willing to sell existing positions into the secondary
market for fear of not being able to replace them, the focus was on
new issues, often resulting in significant oversubscriptions, small
allocations and premium trading levels shortly after issuance.
<PAGE>
Most industry groups shared in the strength exhibited by the high-
yield loan and bond markets. Bonds of issuers in all sectors
reported positive year-to-date 1997 returns. 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
total return of +8.20%. Consumer products, food and drug, gaming and
leisure issues also performed well. The healthcare, chemical and
energy sectors 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
Telecommunications Act. However, abundant supply driven by huge
capital needs for network development negatively impacted returns
late in the year. The domestic cable sector, previously under
some pressure, benefited from a $1 billion investment by
Microsoft Corp. in Comcast Corp.
Most high-yield bonds appear fully valued as reflected by the
historically tight spreads between Treasury issues and high-yield
bonds. However, continued low default rates and strong technicals
should keep spreads tight through the remainder of the year. In
addition to record mutual fund inflows, the high-yield market
continued to benefit from pension fund money and more importantly,
demand from the numerous collateralized bond obligations raised
since the beginning of the year.
Portfolio Strategy
At August 31, 1997, floating rate investments totaled 41.3% of the
Portfolio's total assets, and fixed-rate investments totaled 58.7%
of total assets. Approximately $79.2 million was available for
additional borrowing under the Portfolio's leverage facility, based
on its August 31, 1997 borrowing base. We increased leverage from
the beginning of the August period as we took advantage of the
strong new-issue calendar in both the loan and high-yield bond
markets in the face of a benign monetary policy by the FRB.
Throughout the six-month period, we continued to focus on increasing
the Portfolio's floating rate exposure. As discussed in our February
28, 1997 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 investments.
Secondary offerings proved elusive and, when available, were often
uneconomically priced, given the refinancing activity described
above and the lack of call protection.
<PAGE>
Tight loan market conditions and a favorable outlook for high-yield
bonds caused us to turn to the bond market. We invested in new
issues of companies with attractive fundamental outlooks at prices
generally inexpensive relative 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.
We also sought 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.
We 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 August 31, 1997, the Portfolio's floating rate investments were
spread across 48 borrowers in 20 industries. Fixed-rate investments
were spread across 149 borrowers in 42 industries. The largest
industry concentrations were: paper (8.8% of total assets); metals
and mining (7.4%); telephone communications (6.4%); health services
(6.5%); and automotive equipment (5.4%).
In Conclusion
We appreciate your ongoing investment in Senior High Income
Portfolio, Inc., and we look forward to reviewing the Portfolio's
market environment and performance in our upcoming annual report to
shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(R. Douglas Henderson)
R. Douglas Henderson
Vice President and Portfolio Manager
<PAGE>
October 15, 1997
THE BENEFITS AND RISKS OF LEVERAGING
Senior High Income Portfolio, Inc. has the ability to utilize
leverage through borrowings or issuance of short-term debt
securities or shares of Preferred Stock. The concept of leveraging
is based on the premise that the cost of assets to be obtained from
leverage will be based on short-term interest rates, which normally
will be lower than the return earned by the fund on its longer-term
portfolio investments. Since the total assets of the fund (including
the assets obtained from leverage) are invested in higher-yielding
portfolio investments, the fund's Common Stock shareholders are the
beneficiaries of the incremental yield. Should the differential
between the underlying interest rates narrow, the incremental yield
"pick up" will be reduced. Furthermore, if long-term interest rates
rise, the Common Stock's net asset value will reflect the full
decline in the entire portfolio holdings resulting therefrom since
the assets obtained from leverage do not fluctuate.
Leverage creates risks for holders of Common Stock including the
likelihood of greater net asset value and market price volatility.
In addition, there is the risk that fluctuations in interest rates
on borrowings (or in the dividend rates on any Preferred Stock, if
the fund were to issue the preferred stock) may reduce the Common
Stock's yield and negatively impact its market price. If the income
derived from securities purchased with assets received from leverage
exceeds the cost of leverage, the fund's net income will be greater
than if leverage had not been used. Conversely, if the income from
the securities purchased is not sufficient to cover the cost of
leverage, the fund's net income will be less than if leverage had
not been used, and therefore the amount available for distribution
to Common Stock shareholders will be reduced. In this case, the fund
may nevertheless decide to maintain its leveraged position in order
to avoid capital losses on securities purchased with leverage.
However, the fund will not generally utilize leverage if it
anticipates that its leveraged capital structure would result in a
lower rate of return for its Common Stock than would be obtained if
the Common Stock were unleveraged for any significant amount of
time.
<PAGE>
<TABLE>
PROXY RESULTS
During the six-month period ended August 31, 1997, Senior High
Income Portfolio, Inc. shareholders voted on the following
proposals. The proposals were approved at a shareholders' meeting on
July 12, 1997. The description of each proposal and number of shares
voted are as follows:
<CAPTION>
Shares Voted Shares Voted
For Without Authority
<S> <S> <C> <C>
1. To elect the Portfolio's Board of Directors: Ronald W. Forbes 50,268,347 736,025
Cynthia A. Montgomery 50,177,390 826,982
Charles C. Reilly 50,268,328 736,044
Kevin A. Ryan 50,280,393 723,979
Richard R. West 50,284,995 719,377
Arthur Zeikel 50,167,428 836,944
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C>
2. To select Deloitte & Touche LLP as the
Portfolio's independent auditors. 49,663,035 286,021 1,055,316
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
Face Loan S&P Moody's Stated Value
Industries Amount Corporate Debt Obligations+++ Type Rating Rating Maturity** Cost (Note 1b)
<S> <C> <S> <C> <C> <C> <C> <C> <C>
Advertising-- $ 2,000 Adams Outdoor Advertising LP -- B B2 3/15/06 $ 2,000 $ 2,160
0.7% 1,000 Outdoor Systems, Inc. (b) -- B B1 6/15/07 992 1,018
Total Advertising 2,992 3,178
Aerospace--1.5% 4,253 Whittaker Corp. Revolver NR* NR* 4/09/01 4,253 4,258
3,148 Whittaker Corp. Term NR* NR* 4/09/01 3,144 3,152
Total Aerospace 7,397 7,410
Agricultural 3,000 Chiquita Brands
Products--1.5% International Inc. -- B+ B1 11/01/06 2,983 3,262
2,000 Fresh Del Monte Produce N.V. -- B+ B2 5/01/03 2,025 2,110
2,000 Sun World International (b) -- NR* NR* 4/15/04 2,000 2,145
Total Agricultural Products 7,008 7,517
<PAGE>
Aircraft & 2,000 Airplanes Pass Through Trust -- BB Ba2 3/15/19 2,000 2,286
Parts--3.1% 5,000 BE Aerospace, Inc. -- BB- Ba3 3/01/03 5,009 5,225
2,500 Derlan Manufacturing (b) -- B+ B3 1/15/07 2,476 2,563
1,000 K & F Industries Inc.,
Senior Sub Notes -- B B2 9/01/04 1,000 1,070
4,000 Talley Manufacturing &
Technology, Inc. -- B B2 10/15/03 4,030 4,200
Total Aircraft & Parts 14,515 15,344
Amusement & 500 AMC Entertainment Inc. (b) -- B B2 3/15/09 497 500
Recreational 4,200 AMF Group, Inc. Term NR* Ba3 3/31/01 4,242 4,239
Services--1.9% 1,500 Cobb Theatres LLC -- BB+ B2 3/01/03 1,500 1,687
2,000 Hollywood Entertainment
Corp. (b) -- B- B2 8/15/04 2,000 2,040
1,000 Hollywood Theater, Inc. (b) -- B- B3 8/01/07 1,000 1,033
Total Amusement &
Recreational Services 9,239 9,499
Apparel--0.7% 2,000 Brazos Sportware Inc. (b) B+ B2 7/01/07 1,985 1,980
1,500 Gear for Sports (b) -- B- B3 3/01/07 1,500 1,537
Total Apparel 3,485 3,517
Automotive 330 AM General Corp. -- NR* NR* 5/01/02 301 348
Equipment-- 2,000 APS Inc. -- B B3 1/15/06 1,943 1,760
7.1% 5,000 Advanced Accessory Term B NR* NR* 10/30/04 4,990 5,003
1,500 Aetna Industries Inc. -- B- B3 10/01/06 1,500 1,646
11,391 Collins & Aikman Corp. Term B B+ B1 12/31/02 11,345 11,420
1,000 Delco Remy International
Inc. (b) -- B- B2 8/01/06 1,000 1,065
4,500 J.B. Poindexter & Co., Inc. -- B- B2 5/15/04 4,441 4,680
1,250 Key Plastics, Inc. -- B- B3 3/15/07 1,250 1,303
1,500 LDM Technologies Inc. -- B- B3 1/15/07 1,500 1,601
1,500 Motors and Gears Inc. -- B B3 11/15/06 1,500 1,586
4,000 Walbro Corp. -- B+ B1 7/15/05 3,991 4,150
Total Automotive Equipment 33,761 34,562
<PAGE>
Broadcast-- 3,000 Albritton Communications Co. -- B- B3 11/30/07 2,921 2,940
Radio & TV-- 4,000 Granite Broadcasting Corp.,
7.0% Senior Sub Notes -- B- B3 5/15/05 4,000 4,110
3,000 Lenfest Communications Inc. -- BB+ Ba3 11/01/05 2,992 2,955
5,000 Petry Media Term NR* NR* 3/31/02 4,976 4,988
2,500 STC Broadcasting Inc. (b) -- B- B3 3/15/07 2,500 2,656
5,000 Sinclair Broadcasting
Group, Inc. Term NR* Ba2 12/31/04 4,993 5,000
1,250 TV Azteca, S.A. de C.V. (b) -- B+ Ba3 2/15/04 1,249 1,292
750 TV Azteca, S.A. de C.V. -- B+ Ba3 2/15/07 750 789
5,000 Telewest Communications PLC -- B+ B1 10/01/06 5,000 5,225
2,000 Young Broadcasting Corp.,
Senior Sub Notes -- B B2 2/15/05 2,000 2,090
2,000 Young Broadcasting Corp.,
Senior Sub Notes -- B B2 1/15/06 1,943 1,970
Total Broadcast--Radio & TV 33,324 34,015
</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** Cost (Note 1b)
<S> <C> <S> <C> <C> <C> <C> <C> <C>
Building & $ 3,000 Presley Companies -- CCC B3 7/01/01 $ 3,000 $ 2,790
Construction--
0.6%
Total Building & Construction 3,000 2,790
Building 7,000 Johns Manville International
Materials--3.7% Group -- BB- Ba3 12/15/04 7,448 7,831
9,958 National Gypsum Term B NR* Ba3 9/20/03 9,941 9,996
Total Building Materials 17,389 17,827
Cable Television 1,500 Diamond Cable
Services--2.3% Communications Co.++ -- B- B3 2/15/07 941 926
5,000 Marcus Cable Co. Term B2 NR* NR* 4/30/04 4,985 5,028
1,000 Marcus Cable Co. Term B2 NR* NR* 4/30/04 997 1,006
1,250 Marcus Cable Co. Term B1 NR* NR* 4/30/04 1,238 1,257
3,000 NTL Inc. -- B B3 2/15/07 3,002 3,105
Total Cable Television
Services 11,163 11,322
Casinos--1.4% 1,650 Grand Casinos, Inc. -- BB Ba3 12/01/03 1,766 1,757
1,500 Harveys Casinos Resorts,
Senior Sub Notes -- B B2 6/01/06 1,500 1,620
1,000 Players International, Inc. -- BB- Ba3 4/15/05 1,000 1,048
2,500 Trump Atlantic City
Association/Funding Inc. -- BB- B1 5/01/06 2,500 2,437
Total Casinos 6,766 6,862
<PAGE>
Chemicals--4.6% 3,000 Acetex Corp. -- BB- B1 10/01/03 2,989 3,067
1,500 Borden Chemicals and
Plastics LP -- BB+ Ba2 5/01/05 1,500 1,590
2,974 HSC Holdings Term NR* NR* 3/31/00 2,961 2,967
5,000 Huntsman Corp. Term NR* NR* 3/15/07 5,106 5,112
6,000 Huntsman Corp. -- B+ B2 7/01/07 6,000 6,195
2,500 ISP Holdings Inc. -- BB- Ba3 10/15/03 2,494 2,594
1,000 Pride Petroleum
Services, Inc. -- BB- Ba3 5/01/07 1,000 1,050
Total Chemicals 22,050 22,575
Consumer 3,000 Coleman Escrow Corp. (b)++ -- B B3 5/15/01 2,009 1,965
Products--1.3% 3,000 Coty, Inc., Senior Sub Notes -- B+ Ba3 5/01/05 3,000 3,218
1,000 Shop Vac Corporation -- B Ba3 9/01/03 1,000 1,072
Total Consumer Products 6,009 6,255
Diversified--1.6% 3,000 Ameriserv Food Co. (b) -- B- B3 7/15/07 3,000 3,075
3,000 Essex Group Inc. -- BB- B1 5/01/03 3,041 3,169
1,500 Insilco Corp. (b) -- B+ B3 8/15/07 1,500 1,517
Total Diversified 7,541 7,761
Drilling--2.1% 2,000 Falcon Drilling
Company, Inc. -- B+ Ba3 1/15/01 2,115 2,095
1,985 IRI International Term A NR* NR* 3/31/02 1,978 1,996
4,000 Key Energy Group Term NR* NR* 6/30/04 3,992 4,030
2,266 Rigco North America Term NR* NR* 9/30/98 2,265 2,277
Total Drilling 10,350 10,398
Drug/Proprietary 2,484 Duane Reade Co. Term A NR* NR* 9/30/98 2,484 2,481
Stores--1.2% 1,896 Duane Reade Co. Term A NR* NR* 9/30/98 1,896 1,894
1,500 Duane Reade Co. Term B NR* NR* 9/30/99 1,500 1,498
Total Drug/Proprietary
Stores 5,880 5,873
Educational 2,000 Kinder-Care Learning
Services--1.4% Centers Inc. -- B- B3 2/15/09 2,000 1,935
5,000 La Petite Holdings Corp. -- B B3 8/01/01 5,000 5,106
Total Educational Services 7,000 7,041
</TABLE>
<PAGE>
<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** Cost (Note 1b)
<S> <C> <S> <C> <C> <C> <C> <C> <C>
Electronics/ $ 2,000 Advanced Micro Devices Inc. -- BB- Ba1 8/01/03 $ 2,000 $ 2,235
Electrical 2,500 Amphenol Corp. Term B NR* Ba3 3/31/02 2,494 2,530
Components-- 2,375 Amphenol Corp. Term C NR* Ba3 3/31/03 2,369 2,405
3.4% 3,000 EV International, Inc. (b) -- B- B3 3/15/07 3,000 3,165
2,000 Federal Data Corp. (b) -- B- B3 8/01/05 2,000 2,020
1,000 High Voltage Engineering
Corp. (b) -- B+ B3 8/15/04 1,000 1,008
2,000 Telesystems International
Wireless (b) -- B- Caa1 6/30/02 1,077 1,175
500 Therma-Wave Inc. (b) -- B B2 5/15/04 500 538
1,500 Tracor Inc. (b) -- B+ B1 3/01/07 1,494 1,504
Total Electronics/Electrical
Components 15,934 16,580
Energy--3.9% 2,500 Bellwether Exploration Co. -- B- B3 4/01/07 2,500 2,688
1,500 Energy Corp. of America (b) -- B B2 5/15/07 1,500 1,485
2,000 Kelly Oil & Gas Corp. -- B- B3 10/15/06 1,995 2,075
2,000 Maxus Energy Corp. -- BBB- B1 11/01/03 1,932 2,145
4,000 Mesa Operating Co.,
Senior Sub Notes -- BB+ Ba2 7/01/06 4,000 4,565
1,000 Plains Resources Inc.,
Senior Sub Notes -- B- B2 3/15/06 994 1,065
1,000 Snyder Oil Corp. -- B+ B2 6/15/07 1,003 1,005
2,000 United Refining Co. (b) -- B- B2 6/15/07 2,000 2,010
2,000 Vintage Petroleum Inc. -- B+ B1 2/01/09 1,984 2,005
Total Energy 17,908 19,043
Financial 1,000 Citiscape Financial Corp. (b) -- B B2 6/01/04 1,000 825
Services--1.6% 4,000 First Nationwide Escrow -- NR* Ba3 10/01/03 4,000 4,380
1,000 Imperial Credit Industries Inc. -- B+ B2 1/15/07 1,000 990
1,500 Olympic Financial Ltd. -- NR* NR* 3/15/07 1,500 1,508
Total Financial Services 7,500 7,703
Food & Kindred 2,948 American Italian Pasta
Products--5.6% Company Term C NR* NR* 2/28/04 2,921 2,951
500 CFP Holdings Inc. (b) -- B+ B3 1/15/04 500 505
1,003 International HomeFoods Term B BB- Ba3 9/30/04 1,001 1,008
1,080 International HomeFoods Term B BB- Ba3 9/30/04 1,076 1,085
918 International HomeFoods Term C BB- Ba3 9/30/04 914 924
4,609 President Baking Co. Term B NR* NR* 9/30/00 4,590 4,617
1,000 SC International
Services, Inc. (b) -- B B2 9/01/07 999 1,001
9,943 Specialty Foods Inc. Term B NR* B3 4/30/01 9,900 9,921
2,948 Van de Kamps Inc. Term B NR* Ba3 4/30/03 2,935 2,962
1,847 Van de Kamps Inc. Term C NR* Ba3 9/30/03 1,839 1,856
500 Windy Hill Pet Food Co. (b) -- B- B3 5/15/07 500 510
Total Food & Kindred
Products 27,175 27,340
<PAGE>
Forest 2,000 Ainsworth Lumber (b) -- B B3 7/15/07 1,945 1,943
Products--2.3% 1,000 Malette Inc. -- BB Ba3 7/15/04 1,000 1,130
4,000 Tembec Finance Corp. -- BB B1 9/30/05 4,000 4,190
4,000 Uniforet Inc. -- NR* NR* 10/15/06 4,000 3,800
Total Forest Products 10,945 11,063
Furniture & 1,000 Omeaga Cabinets (b) -- B- B3 6/15/07 1,000 1,011
Fixtures--0.2%
Total Furniture & Fixtures 1,000 1,011
</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** Cost (Note 1b)
<S> <C> <S> <C> <C> <C> <C> <C> <C>
Grocery $ 3,000 Eagle Food Centers Inc. -- B+ B1 4/15/00 $ 2,777 $ 2,955
Stores--3.0% 2,000 Pueblo Xtra International, Inc. -- B- B3 8/01/03 2,000 1,955
5,985 Ralph's Grocery Co. Term B NR* Ba3 2/15/04 5,978 6,038
3,500 Star Markets Co., Inc. Term C NR* Ba3 12/31/02 3,493 3,502
Total Grocery Stores 14,248 14,450
Health 1,350 Alaris Medical Term B BB- B1 11/30/03 1,350 1,364
Services--8.5% 1,350 Alaris Medical Term C BB- B1 11/30/04 1,350 1,364
1,270 Alaris Medical Term D BB- B1 11/30/05 1,270 1,284
1,801 Community Health Care Inc. Term B NR* NR* 12/31/03 1,793 1,807
1,801 Community Health Care Inc. Term C NR* NR* 12/31/04 1,793 1,807
1,356 Community Health Care Inc. Term D NR* NR* 12/31/05 1,350 1,362
1,626 Dade International Inc. Term B NR* B1 12/31/02 1,630 1,628
1,626 Dade International Inc. Term C NR* B1 12/31/03 1,630 1,628
1,716 Dade International Inc. Term D NR* B1 12/31/04 1,721 1,725
1,500 Dynacare, Inc. -- B+ B2 1/15/06 1,499 1,571
3,000 FPA Medical Management,
Inc. Term NR* NR* 9/30/01 2,996 3,000
3,000 Integrated Health Services,
Inc., Senior Sub Notes (b) -- B B2 9/15/07 3,000 3,060
3,500 Magellan Health Services
Inc., Senior Sub Notes -- B B2 4/15/04 3,628 3,907
5,000 Medco Behavior Term A NR* B2 6/01/03 4,989 4,995
1,000 Paracelsus Healthcare Inc.,
Senior Sub Notes -- B- B3 8/15/06 948 1,018
5,000 Sterling Diagnostics Term B NR* NR* 9/30/05 4,988 4,988
2,500 Tenet Healthcare Inc. -- B+ Ba3 1/15/07 2,498 2,575
2,500 Vencor Inc. (b) -- B B1 7/15/07 2,529 2,494
Total Health Services 40,962 41,577
<PAGE>
Hotels & 3,000 Prime Hospitality Corp. -- B+ Ba3 1/15/06 2,991 3,135
Motels--1.1% 2,000 Wyndham Hotels Corp.,
Senior Sub Notes -- B B2 5/15/06 2,000 2,260
Total Hotels & Motels 4,991 5,395
Leasing & Rental 1,200 Cort Furniture Rental Corp. -- BB- B1 9/01/00 1,200 1,332
Services--0.4% 750 Williams Scotsman Inc. (b) -- B- B3 6/01/07 750 750
Total Leasing & Rental Services 1,950 2,082
Manufacturing-- 3,000 Crain Industries Inc.,
1.0% Senior Sub Notes -- B- B3 8/15/05 3,000 3,413
1,500 Tokheim Corp., Senior
Sub Notes -- B B3 8/01/06 1,500 1,691
Total Manufacturing 4,500 5,104
Materials Handling 1,500 Alvey Systems Inc.,
& Storage--1.6% Senior Sub Notes -- B- B3 1/31/03 1,500 1,556
5,000 Americold Corp. -- B+ B1 3/01/05 5,113 5,363
1,000 Iron Mountain Inc. -- B- B3 10/01/06 1,000 1,080
Total Materials
Handling & Storage 7,613 7,999
Measuring, 4,651 CHF/Ebel USA Inc. Term B NR* NR* 9/30/01 4,650 4,651
Analyzing &
Controlling
Instruments--1.0%
Total Measuring, Analyzing
& Controlling Instruments 4,650 4,651
Metals & 2,952 Adience Inc. Term B NR* NR* 4/15/05 2,942 2,967
Mining--9.6% 3,245 Anker Coal Group Inc. Term B NR* NR* 6/30/04 3,237 3,237
3,000 Bayou Steel Corp. -- A A3 3/01/01 3,000 3,090
2,000 CSN Iron Panama (b) -- NR* B1 6/01/07 1,991 1,935
2,000 Carbide/Graphite Group -- BB B1 9/01/03 2,195 2,180
</TABLE>
<PAGE>
<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** Cost (Note 1b)
<S> <C> <S> <C> <C> <C> <C> <C> <C>
Metals & Mining $ 2,000 Continental Global Group (b) -- NR* NR* 4/01/07 $ 2,000 $ 2,100
(concluded) 1,000 GS Technologies Operating Co. -- B B2 9/01/04 994 1,103
1,000 GS Technologies Operating Co. -- B B2 10/01/05 1,000 1,105
3,000 Gulf States Steel Corp. -- B B1 4/15/03 2,973 3,079
3,500 Ivaco Inc. -- B+ B1 9/15/05 3,433 3,868
2,000 Murrin, Murrin Holdings
Party (b) -- BB- Ba3 8/31/07 2,000 1,991
3,000 Renco Metals, Inc. -- B B2 7/01/03 3,008 3,165
2,000 Republic Engineered
Steel, Inc. -- B B3 12/15/01 2,000 1,900
3,429 UCAR International, Inc. Term B NR* Ba2 12/31/02 3,425 3,431
2,000 Weirton Steel Corp. -- B B2 7/01/04 2,058 2,160
3,190 Weirton Steel Corp. -- B B2 6/01/05 3,149 3,381
3,000 Westmin Resources Ltd. -- B B3 3/15/07 3,000 3,210
3,000 Wheeling-Pittsburg
Steel Corp. -- BB- B2 11/15/03 3,001 3,045
Total Metals & Mining 45,406 46,947
Music--0.7% 3,000 Selmer Co., Inc.,
Senior Sub Notes -- B- B2 5/15/05 3,000 3,270
Total Music 3,000 3,270
Packaging--4.3% 4,000 Anchor Glass Container
Corp. (b) -- NR* NR* 4/01/05 4,000 4,360
1,000 Fonda Group Inc.,
Senior Sub Notes -- B- B3 3/01/07 1,000 960
2,000 Packaging Resources Group -- B+ B2 5/01/03 2,000 2,063
2,000 Printpack Inc. -- BB- B2 8/15/04 2,000 2,100
5,000 Silgan Corp. Term B NR* Ba2 6/30/05 4,995 5,012
2,000 Spinnaker Industries Inc. -- B B3 10/15/06 2,000 2,030
4,500 Sweetheart Cup Co. -- B+ B1 9/01/00 4,514 4,500
Total Packaging 20,509 21,025
Paper--11.5% 1,500 Four M Corp. -- B B3 6/01/06 1,500 1,616
3,000 Gaylord Container Corp. (b) -- B B3 6/15/07 3,000 3,045
12,745 Jefferson Smurfit Company/
Container Corp. of America Term B BB Ba3 4/30/02 12,596 12,856
2,000 Indah Kiat (b) -- BB- Ba3 7/01/07 1,987 1,908
3,500 Repap New Brunswick, Inc. -- CCC B2 7/15/00 3,517 3,439
3,000 Repap New Brunswick, Inc. -- CCC B2 7/15/00 3,000 3,037
8,550 Riverwood International, Inc. Term B B+ B1 2/28/04 8,439 8,620
3,420 Riverwood International, Inc. Term C B+ B1 8/28/04 3,375 3,448
3,221 S.D. Warren Co. Term B NR* Ba2 6/30/02 3,215 3,234
1,454 St. Laurent Paperboard, Inc. Term B NR* NR* 5/31/03 1,449 1,472
1,546 St. Laurent Paperboard, Inc. Term C NR* NR* 5/31/04 1,542 1,566
8,727 Stone Container Corp. Term B NR* Ba3 4/01/00 8,628 8,797
3,000 Tjiwi Kimia (b) -- BB Ba3 8/01/04 2,984 2,906
Total Paper 55,232 55,944
<PAGE>
Printing & 4,860 American Media Term B BB- Ba2 9/30/02 4,856 4,854
Publishing--4.7% 1,000 Big Flower Press Holdings,
Inc. (b) -- NR* NR* 7/01/07 992 980
4,714 Foamex LP Term B NR* NR* 6/30/05 4,709 4,747
4,286 Foamex LP Term C NR* NR* 6/30/06 4,280 4,319
1,750 National Fiberstock Corp. -- B+ B3 6/15/02 1,750 1,838
2,333 Newsquest Capital PLC Term NR* NR* 12/31/04 2,322 2,336
2,663 Peterson Publishing Term B B+ B1 9/30/04 2,653 2,669
1,000 Sun Media Corp. -- B- B3 2/15/07 1,000 1,030
Total Printing & Publishing 22,562 22,773
</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** Cost (Note 1b)
<S> <C> <S> <C> <C> <C> <C> <C> <C>
Restaurants-- $ 7,000 Host Marriott Corp. -- BB- Ba3 5/15/05 $ 6,834 $ 7,341
1.5%
Total Restaurants 6,834 7,341
Retail 2,000 United Auto Group Inc. (b) -- B- B3 7/15/07 1,971 2,020
Specialty--0.4%
Total Retail Specialty 1,971 2,020
Shipbuilding & 4,000 Newport News Shipbuilding,
Repairing--0.9% Inc. -- BB Ba2 12/01/06 4,000 4,180
Total Shipbuilding & Repairing 4,000 4,180
Shipping--2.4% 4,500 Eletson Holdings Inc. -- BB- Ba2 11/15/03 4,389 4,556
2,000 Global Ocean Carriers (b) -- B+ B2 7/15/07 1,970 1,993
3,000 Stena Line AB -- BB- Ba2 12/15/05 3,000 3,262
2,000 Teekay Shipping Inc. -- BB Ba2 2/01/08 2,000 2,030
Total Shipping 11,359 11,841
<PAGE>
Telephone 4,500 CAI Wireless Systems, Inc. -- CCC+ Caa 9/15/02 4,548 1,350
Communications-- 3,000 CCPR Services Inc. -- NR* NR* 2/01/07 3,000 2,996
8.4% 8,500 McCaw International Ltd.++ -- CCC+ Caa 4/15/07 4,618 4,548
2,500 Mcleod Inc. (b)++ -- B B3 3/01/07 1,577 1,650
2,000 Metronet Communications (c) -- NR* NR* 8/15/07 2,000 2,140
5,000 MobileMedia Communications Inc. Term B NR* Caa 6/30/03 5,025 4,456
5,000 Nextel Communications, Inc. Term D NR* B1 6/30/03 4,910 5,048
2,500 Quest Communications (b) -- B+ B2 4/01/07 2,500 2,781
4,821 Shared Technology Inc. Term B NR* B1 3/31/03 4,796 4,828
10,000 Sprint Spectrum L.P. Term NR* NR* 5/29/04 9,939 10,050
1,000 Unifi Communications, Inc. -- NR* NR* 3/01/04 915 965
Total Telephone Communications 43,828 40,812
Textile--1.2% 3,000 Avondale Mills Inc.,
Senior Sub Notes -- B+ B2 5/01/06 2,958 3,195
2,500 Dominion Textile USA, Inc. -- BB Ba2 4/01/06 2,500 2,613
Total Textile 5,458 5,808
Transportation 4,000 Ameritruck Distribution Corp. -- B- B3 11/15/05 3,961 4,180
Services--3.9% 5,000 Atlas Freight Term NR* NR* 5/29/04 4,988 5,016
1,000 Autopistas Del Sol S.A. (b) -- BB- NR* 8/01/04 1,000 1,003
3,000 Autopistas Del Sol S.A. (b) -- BB- NR* 8/01/09 3,000 3,067
2,000 Coach USA Inc. (b) -- B+ B1 7/01/07 2,000 2,000
3,600 Trism Inc., Senior Sub Notes -- B B3 12/15/00 3,333 3,609
Total Transportation Services 18,282 18,875
Utilities--0.5% 2,059 First PV Funding Corp. -- BB- NR* 1/15/14 2,040 2,176
Total Utilities 2,040 2,176
Waste 3,000 Norcal Waste Systems, Inc. -- BB- B3 11/15/05 2,925 3,390
Management--
0.7%
Total Waste Management 2,925 3,390
Total Corporate Debt
Obligations--128.0% 611,651 624,146
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
Shares Value
Industries Held Warrants (a) Cost (Note 1b)
<S> <C> <S> <C> <C>
Electronics/ 15 Exide Electronics Corp. $ 293 $ 363
Electrical
Components--0.1%
Total Electronics/Electrical Components 293 363
Leasing & Rental 66 Cort Furniture Rental Corp. 1 223
Services--0.0%
Total Leasing & Rental Services 1 223
<PAGE>
Metals & Mining-- 3 Gulf States Steel Corp. (b) 33 1
0.0%
Total Metals & Mining 33 1
Telephone 9 McCaw International Ltd. (b) 132 2
Communications-- 1 Unifi Communications Inc. (b) 57 20
0.0%
Total Telephone Communications 189 22
Total Warrants--0.1% 516 609
Short-Term Investments
US Government Federal Home Loan Mortgage Corp. ($54 par, maturing 9/02/97,
Agency Obliga- yielding 5.50%) 54 54
tions***--0.0%
Total Short-Term Investments--0.0% 54 54
Total Investments--128.1% $612,221 624,809
========
Liabilities in Excess of Other Assets--(28.1%) (136,934)
--------
Net Assets--100.0% $487,875
========
<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.
***Certain US Government Agency Obligations are traded on a discount
basis; the interest rate shown is the discount rate paid at the time
of purchase by the Fund.
++Represents a zero coupon or step bond.
(a)Warrants entitle the Fund to purchase a predetermined number of
shares of common stock/face amount of bonds. The purchase price and
number of shares/face amount are subject to adjustments under
certain conditions until the expiration date.
(b)The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933.
(c)Restricted security as to resale. The value of the Fund's
investments in restricted securities was approximately $2,140,000,
representing 0.4% of net assets.
<PAGE>
Acquisition Value
Issue Date Cost (Note 1b)
Metronet Communications 7/19/97 $2,000,000 $2,140,000
---------- ----------
Total $2,000,000 $2,140,000
========== ==========
+++Corporate loans represent 51.6% of the Fund's net assets.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets, Liabilities and Capital as of August 31, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$612,221,150) (Note 1b) $ 624,808,683
Cash 257,617
Receivables:
Interest $ 12,304,518
Securities sold 22,999 12,327,517
-------------
Deferred facility fees 6,114
Deferred organization expenses (Note 1f) 28,402
Prepaid expenses and other assets 21,835
-------------
Total assets 637,450,168
-------------
Liabilities: Payables:
Loans (Note 6) 145,800,000
Securities purchased 2,000,000
Interest on loans (Note 6) 1,407,689
Investment adviser (Note 2) 276,231
Commitment fees 5,979 149,489,899
-------------
Deferred income (Note 1e) 61,260
Accrued expenses and other liabilities 24,055
-------------
Total liabilities 149,575,214
-------------
Net Assets: Net assets $ 487,874,954
=============
<PAGE>
Capital: Common Stock, par value $.10 per share; 200,000,000 shares
authorized (52,361,575 shares issued and outstanding) $ 5,236,158
Paid-in capital in excess of par 487,790,951
Undistributed investment income--net 4,159,817
Accumulated realized capital losses on investments--net (Note 7) (21,899,505)
Unrealized appreciation on investments--net 12,587,533
-------------
Total Capital--Equivalent to $9.32 net asset value per share of
Common Stock (market price--$9.875) $ 487,874,954
=============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations
<CAPTION>
For the Six Months Ended
August 31, 1997
<S> <S> <C> <C>
Investment Income Interest and discount earned $ 28,050,233
(Note 1e): Facility and other fees 356,965
-------------
Total income 28,407,198
-------------
Expenses: Loan interest expense (Note 6) $ 3,232,069
Investment advisory fees (Note 2) 1,474,328
Borrowing costs (Note 6) 107,234
Professional fees 89,851
Accounting services (Note 2) 55,707
Printing and shareholder reports 30,381
Transfer agent fees (Note 2) 28,355
Custodian fees 25,565
Amortization of organization expenses (Note 1f) 14,467
Directors' fees and expenses 12,410
Pricing services 3,935
Listing fees 64
Other 35,347
-------------
Total expenses 5,109,713
-------------
Investment income--net 23,297,485
-------------
<PAGE>
Realized & Realized gain on investments--net 1,687,544
Unrealized Change in unrealized appreciation on investments--net 3,001,304
Gain on -------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 27,986,333
(Notes 1c, 1e & 3): =============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Six For the
Months Ended Year Ended
August 31, February 28,
Increase (Decrease) in Net Assets: 1997 1997
<S> <S> <C> <C>
Operations: Investment income--net $ 23,297,485 $ 42,173,726
Realized gain (loss) on investments--net 1,687,544 (1,541,894)
Change in unrealized appreciation/depreciation
on investments--net 3,001,304 10,730,017
------------- -------------
Net increase in net assets resulting from operations 27,986,333 51,361,849
------------- -------------
Dividends to Investment income--net (22,888,401) (42,444,377)
Shareholders ------------- -------------
(Note 1g): Net decrease in net assets resulting from dividends
to shareholders (22,888,401) (42,444,377)
------------- -------------
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 5,615,898 11,646,441
Offering costs from issuance of Common Stock resulting
from reorganization (8,822) --
------------- -------------
Net increase in net assets resulting from capital
share transactions 5,607,076 232,116,778
------------- -------------
<PAGE>
Net Assets: Total increase in net assets 10,705,008 241,034,250
Beginning of period 477,169,946 236,135,696
------------- -------------
End of period* $ 487,874,954 $ 477,169,946
============= =============
<FN>
*Undistributed investment income--net $ 4,159,817 $ 3,750,733
============= =============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Cash Flows
<CAPTION>
For the Six Months Ended
August 31, 1997
<S> <S> <C>
Cash Provided by Net increase in net assets resulting from operations $ 27,986,333
Operating Adjustments to reconcile net increase in net assets resulting from
Activities: operations to net cash used for operating activities:
Increase in receivables (1,338,011)
Decrease in other assets 2,446
Increase in other liabilities 894,950
Realized and unrealized gain on investments--net (4,688,848)
Amortization of discount--net (850,511)
-------------
Net cash provided by operating activities 22,006,359
Cash Used for Proceeds from sales of long-term investments 176,145,288
Investing Purchases of long-term investments (246,127,305)
Activities: Purchases of short-term investments (64,957,593)
Proceeds from sales and maturities of short-term investments 65,651,000
-------------
Net cash used for investing activities (69,288,610)
Cash Provided by Cash payments for reorganization expenses (8,822)
Financing Cash receipts of borrowings 189,900,000
Activities: Cash payments on borrowings (125,100,000)
Dividends paid to shareholders (17,272,504)
-------------
Net cash provided by financing activities 47,518,674
-------------
Cash: Net increase in cash 236,423
Cash at beginning of period 21,194
-------------
Cash at end of period $ 257,617
=============
<PAGE>
Cash Flow Cash paid for interest $ 3,232,069
Information: =============
Noncash Value of capital shares issued in reinvestment of dividends
Financing paid to shareholders $ 5,615,898
Activities: =============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights
For the For the
Six For the For the For the Period
The following per share data and ratios have been derived Months Year Year Year April 30,
from information provided in the financial statements. Ended Ended Ended Ended 1993++ to
Aug. 31, Feb. 28, Feb. 29, Feb. 28, Feb. 28,
Increase (Decrease) in Net Asset Value: 1997++++ 1997++++ 1996++++ 1995++++ 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.22 $ 9.21 $ 8.94 $ 9.82 $ 9.50
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .45 .89 .92 .90 .70
Realized and unrealized gain (loss) on
investments--net .09 .04 .27 (.87) .25
-------- -------- -------- -------- --------
Total from investment operations .54 .93 1.19 .03 .95
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.44) (.92) (.92) (.84) (.61)
Realized gain on investments--net -- -- -- (.07) (.02)
-------- -------- -------- -------- --------
Total dividends and distributions (.44) (.92) (.92) (.91) (.63)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.32 $ 9.22 $ 9.21 $ 8.94 $ 9.82
======== ======== ======== ======== ========
Market price per share, end of period $ 9.875 $ 9.50 $ 9.25 $ 8.625 $ 9.375
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 5.99%+++ 10.80% 14.14% .82% 10.28%+++
Return:** ======== ======== ======== ======== ========
Based on market price per share 8.99%+++ 13.67% 18.82% 1.87% .02%+++
======== ======== ======== ======== ========
<PAGE>
Ratios to Average Expenses, net of reimbursement and excluding
Net Assets: interest expense .78%* .75% .92% .80% .67%*
======== ======== ======== ======== ========
Expenses, net of reimbursement 2.13%* 1.84% 2.92% 2.46% 1.61%*
======== ======== ======== ======== ========
Expenses 2.13%* 1.84% 2.92% 2.46% 1.75%*
======== ======== ======== ======== ========
Investment income--net 9.72%* 9.45% 10.14% 7.07% 7.33%*
======== ======== ======== ======== ========
Leverage: Amount of borrowings (in thousands) $145,800 $ 81,000 $ 47,000 $ 82,000 $ 84,000
======== ======== ======== ======== ========
Average amount of borrowings outstanding
during the period (in thousands) $109,604 $ 82,384 $ 68,473 $ 92,000 $ 67,000
======== ======== ======== ======== ========
Average amount of borrowings outstanding
per share during the period $ 2.11 $ 2.13 $ 2.68 $ 3.67 $ 2.67
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $487,875 $477,170 $236,136 $227,007 $248,342
Data: ======== ======== ======== ======== ========
Portfolio turnover 30.37% 98.51% 50.76% 44.81% 52.73%
======== ======== ======== ======== ========
<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>
<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
presented. 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--Corporate loans will be valued in
accordance with guidelines established by the Fund's Board of
Directors. Under the Fund's current guidelines, corporate loans will
be valued at the average of the mean between the bid and asked
quotes received from one or more brokers, if available.
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.
<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).
NOTES TO FINANCIAL STATEMENTS (concluded)
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 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.
2. Investment Advisory Agreement
and Transactions 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.
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 six months ended August 31, 1997, the Fund paid Merrill
Lynch Security Pricing Service, an affiliate of Merrill Lynch,
Pierce, Fenner & Smith Inc., $3,221 for security price quotations to
compute the net asset value of the Fund.
The Fund's leverage facility is currently provided by Merrill Lynch
International Bank Limited, an affiliate of FAM (as further
described in Note 6).
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
<PAGE>
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for six months ended August 31, 1997 were $245,124,029 and
$176,089,861, respectively.
Net realized and unrealized gains as of August 31, 1997 were as
follows:
Realized Unrealized
Gains Gains
Long-term investments $ 1,687,544 $12,587,533
----------- -----------
Total $ 1,687,544 $12,587,533
=========== ===========
As of August 31, 1997, net unrealized appreciation for Federal
income tax purposes aggregated $12,587,533, of which $18,255,982
related to appreciated securities and $5,668,449 related to depre-
ciated securities. The aggregate cost of investments at August 31,
1997 for Federal income tax purposes was $612,221,150.
4. Capital Share Transactions:
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.
Shares issued and outstanding during the six months ended August 31,
1997 increased by 606,739 as a result of dividend reinvestment and
during the year ended February 28, 1997 increased by 26,115,244, of
which 24,833,536 resulted from a reorganization and 1,281,708
resulted from dividend reinvestment.
5. Unfunded Loan Interests:
As of August 31, 1997, the Fund had unfunded loan commitments of
$3,299,425, which would be extended at the option of the borrower,
pursuant to the following loan agreements:
Unfunded
Commitment
Borrower (in thousands)
American Italian Pasta Company $2,700
Whittaker Corp. 599
<PAGE>
6. Short-Term Borrowings:
On April 21, 1997, the Fund extended its credit agreement through
April 30, 1998 with a syndicate of banks led by Merrill Lynch
International Bank Limited. 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 six months ended August 31,
1997, the maximum amount borrowed was $152,600,000, the average
amount borrowed was approximately $109,604,000, and the daily
weighted average interest rate was 5.88%. For the six months ended
August 31, 1997, facility and commitment fees aggregated
approximately $107,234.
7. 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.
8. Subsequent Event:
On September 8, 1997, the Board of Directors of the Fund declared an
ordinary income dividend in the amount of $.076966 per share,
payable on September 30, 1997 to shareholders of record as of
September 18, 1997.
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
R. Douglas Henderson, Vice President
Gerald M. Richard, Treasurer
Patrick D. Sweeney, Secretary
<PAGE>
Custodian and Transfer Agent
The Bank of New York
110 Washington Street
New York, NY 10286
NYSE Symbol
ARK
