SENIOR HIGH
INCOME
PORTFOLIO, INC.
FUND LOGO
Annual Report
February 28, 1998
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 year ended February 28, 1998, the Portfolio's total
investment return was +11.95%, based on a change in per share net
asset value from $9.22 to $9.37 and assuming reinvestment of $0.913
per share income dividends. During the same 12-month period, the net
annualized yield of the Portfolio's Common Stock was 9.82%. Since
inception (April 30, 1993) through February 28, 1998, the total
investment return on the Portfolio's Common Stock was +57.42%, based
on a change in per share net asset value from $9.50 to $9.37, and
assuming reinvestment of $4.296 per share income dividends. At the
end of the February period, the Portfolio was 26.1% leveraged,
having borrowed $181.2 million of its $245.0 million line of credit
at an average borrowing rate of 5.94%. (For a complete explanation
of the benefits and risks of leverage, see page 4 of this report to
shareholders.)
Portfolio Strategy
Although the high-yield market has been very strong since the
beginning of 1998, we have continued to increase the weighting of
bank loans in the Portfolio, since floating rate bank loans are more
attractive than high-yield bonds from a risk/reward standpoint. As
long-term US interest rates moved lower, those leveraged senior
secured floating rate bank loans that are set at a spread above the
London Interbank Offered Rate (LIBOR) are getting priced in the new-
issue market at yields that are often equivalent to the unsecured
subordinated bonds of the same issuer. In the absence of a
significant change in the current interest rate environment, we
intend at the present time to maintain a minimum 40% weighting in
floating rate loans.
<PAGE>
As of February 28, 1998, more than 98% of the Portfolio's
investments in corporate loans were accruing interest at a yield
spread above LIBOR, the rate that major international banks charge
each other for US dollar-denominated deposits outside of the United
States. LIBOR has tracked very closely with other short-term rates
in the United States, particularly the Federal Funds rate. Since the
average reset on the Portfolio's floating rate investments is 42
days, the yield on the bank loan portion of the Portfolio is likely
to move up within a one-month--two-month period after any rate
increase. At February 28, 1998, floating rate securities made up 48%
of the market value of the Portfolio's investments, with an
additional 52% invested in fixed-rate high-yield bonds.
Approximately $63.8 million remained available under the leverage
facility. The leveraged loan market continued to be strong,
particularly during the last half of the fiscal year. Demand for
bank loans was robust, as banks and other institutional investors
competed for the fees and high spreads available in this sector.
This demand continued the trend in growing liquidity and the run up
in prices for leveraged bank loans that we have seen since the
beginning of 1998. Leveraged loan new-issue volume increased 44%
last year to $194.0 billion. (Leveraged loans are those at a spread
of at least 1.5% over LIBOR.) This is the highest total of the
1990s. At the same time, secondary trading volume of leveraged loans
reached $62.0 billion in 1997, the highest level on record.
With almost uninterrupted inflows of investor assets, yield spreads
in the high-yield bond market remained at historically narrow levels
throughout most of 1997. The high-yield bond market benefited from
strong demand, a good economy, a record-breaking US stock market and
low default rates. High-yield bonds generated a third consecutive
year of positive double-digit returns. With a total return of
+12.83% for 1997, the unmanaged Merrill Lynch High Yield Master
Index was up from +11.06% in 1996. This improvement reflected the
boost from declining interest rates as the ten-year Treasury fell
from 6.42% to 5.75% during the year. This was partially offset by
the slight widening of the Index's spread over Treasury securities
from 296 basis points to 312 basis points during the year.
Senior High Income Portfolio, Inc.
February 28, 1998
New high-yield bond issuance broke all previous records in 1997. The
dollar volume of $118.7 billion was up 64%, breaking the previous
record of $72.3 billion set in 1993. From an industry standpoint,
telecommunications grew to over 12% of the market in 1997. Companies
such as Sprint PCS and Iridium were issuers in the high-yield market
to fund their huge capital needs for the build out of their systems
for the next generation of wireless telephony. By year-end, cable
television and telecommunications accounted for over 25% of the
outstanding bonds in the high-yield universe. This is reflected in
the fact that these two sectors now make up a sizable portion of the
Portfolio.
<PAGE>
Overall, fundamentals for both the bank loan and high-yield bond
market remain positive as favorable quarterly earnings and more
rating upgrades than downgrades continued into the first calendar
quarter of this year. Defaults, although expected to increase this
year, are at historically low levels. Our focus will continue to be
to invest in those companies that are generating improved earnings
trends or whose securities we believe are undervalued. The industry
focus has been on those companies that have leading market shares,
strong managements and improving cash flows. The best-performing
industry sectors included cable television, publishing, and radio
and television broadcasting. These industries not only had more
stable cash flows than many of their cyclical counterparts, but also
benefited from the substantial mergers and acquisition activity in
these sectors. A number of cyclical sectors underperformed the
market at large. Paper and metals and mining were such industry
groups. Concerns over the longer-term effects of the Asian currency
crisis on these industries had an adverse effect on performance. In
certain cyclical names, we have been more willing to trade out of
the unsecured bond and into the senior secured bank debt in order to
limit the Portfolio's downside volatility. Other underperforming
sectors included diversified financial services and the grocery
segment. Both segments were hurt by both disappointing earnings
reports and the announcements of debt restructuring for specific
companies in the respective industries. The Portfolio reduced its
holdings in each of these sectors during the last six months.
At February 28, 1998, the Portfolio was virtually fully invested.
The Portfolio's average stated maturity was 6.9 years but, based
upon past experience, the Portfolio can be expected to have a real
average life of approximately 2 years--3 years as a result of the
shorter average life of bank loans which are freely prepayable
without call protection. At February 28, 1998, the Portfolio's
floating rate investments were spread across 56 borrowers in 26
industries. Fixed-rate investments were spread across 149 borrowers
in 43 industries. The largest industry concentrations were:
telephone communications (10.5% of total assets); health services
(8.4%); metals and mining (7.9%); paper (7.1%); and automotive
equipment (5.3%).
Stronger companies are taking advantage of attractive public debt
and equity markets to improve their balance sheets and reduce debt.
With a low ten-year Treasury and strong investor demand in the bank
loan and high-yield bond markets, the first quarter of 1998 appears
to be on the same rapid pace of new issuance as non-investment grade
investors rush to market to refinance with lower-cost debt and
refinance existing facilities.
Over the coming months, we expect high-yield bond and leveraged bank
loan pricing to be firm. With the Federal Reserve Board adopting a
neutral position for the near term, fixed-income investors are
positive on the bond and loan markets. Flows into the high-yield
bond and loan markets are and should remain steady. Although we
expect the forward calendar to continue to be strong, we remain
cautious in light of the full valuations seen today. We will
continue to be opportunistic in our high-yield bond purchases,
selling overvalued bonds and sectors and buying undervalued ones. In
the meantime, we will maintain a defensive position in secured
floating rate bank debt, buying new issues in the high-yield market
and buying into the secondary market when undervalued investments
are available.
<PAGE>
Senior High Income Portfolio, Inc.
February 28, 1998
In Conclusion
We appreciate your ongoing investment in Senior High Income
Portfolio, Inc., and we look forward to reviewing our strategy with
you again in our next report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(R. Douglas Henderson)
R. Douglas Henderson
Senior Vice President and Portfolio Manager
April 8, 1998
Senior High Income Portfolio, Inc.
February 28, 1998
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.
PORTFOLIO INFORMATION
AS OF FEBRUARY 28, 1998
Quality Ratings Percent of
S&P/Moody's Market Value
BB/Ba 33%
B/B 45
CCC/Caa 1
Not Rated 21
Percent of
Five Largest Industries Total Assets
Telephone Communications 10.5%
Health Services 8.4
Metals & Mining 7.9
Paper 7.1
Automotive Equipment 5.3
<PAGE>
Senior High Income Portfolio, Inc.
February 28, 1998
PORTFOLIO INFORMATION (concluded)
<TABLE>
Percent of
Ten Largest Holdings as of February 28, 1998 Total Assets*
<S> <S> <C>
Federal Mogul Federal Mogul is a world leader in the design, manufacturing, marketing and distribution 2.2%
Corp. of a broad line of gaskets for the auto industry's original equipment manufacturers.
Additionally, Federal Mogul is a leading supplier of heavy-duty diesel engine parts, high
performance drive-line components, and specialty lubricants, sealants, adhesives and other
products.
Jefferson Smurfit Jefferson Smurfit Company/Container Corp. of America is one of the nation's largest 1.8
Company/Container producers of paperboard and packaging products and is the largest producer of recycled
Corp. of America packaging products.
Riverwood Riverwood International is a leading provider of paperboard and paperboard packaging 1.7
International, solutions, either directly or through independent converters, to multinational beverage
Inc. and consumer products companies. The company also manufactures and sells linerboard,
corrugating medium and kraft paper through its containerboard business segment.
Omnipoint Omnipoint is a leader in commercializing personal communications services (PCS). The 1.7
Communications company intends to provide wireless communications services in areas covering
Corp. approximately 40.3 million people, of which 97.1% are located in a contiguous area in the
Northwest region of the United States. Omnipoint will be the fifth-largest PCS licensee in
the United States.
Collins & Aikman Collins & Aikman is a major supplier of textile and plastic interior trim products and 1.6
Corp. convertible top systems to the North American automotive industry, with leading positions
in five of its seven major automotive products lines. The company is also a leading
manufacturer of decorative fabrics, consisting of upholstery fabrics such as flat-woven
jacquards.
Sprint Spectrum/ Sprint Spectrum is a development stage enterprise formed for the purpose of establishing 1.5
Lucent Technologies a nationwide personal communications service wireless telecommunications network.
National National Gypsum is a fully integrated manufacturer and supplier of gypsum wallboard and 1.4
Gypsum related products for the building and construction industry. The company also serves the
residential, commercial, repair/remodeling and manufactured housing sectors of the
building and construction industries.
Specialty Foods Specialty Foods is a leading producer, marketer, and distributor of retail bread, cookies 1.4
Inc. and other baked goods in the Midwestern and Western United States. In addition, the
company's H&M Foods Systems Company, Inc. subsidiary manufactures and distributes specialty
meats and meat-based prepared foods nationally to restaurants and food manufacturers.
<PAGE>
Stone Container Stone Container is a major international pulp and paper company engaged principally in 1.3
Corp. the productions and sale of paper, packaging, and market pulp.
Foamex L.P. Foamex is the largest manufacturer and marketer of flexible polyurethane and advanced 1.0
polymer foam products in North America. The company is the largest North American
producer of foam used for carpet cushion, automotive applications and specialty and
technical products and is a leading North American producer of cushioning foams.
<FN>
*Holdings may represent an unfunded loan commitment.
</TABLE>
Senior High Income Portfolio, Inc.
February 28, 1998
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Corporate Debt Obligations+++ Cost (Note 1A)
<S> <S> <S> <C> <S> <C> <C>
Advertising-- B B2 $ 2,000,000 Adams Outdoor Advertising L.P.,
0.7% 10.75% due 3/15/2006 $ 2,000,000 $ 2,220,000
B Ba2 1,000,000 Outdoor Systems, Inc., 8.875%
due 6/15/2007 992,202 1,048,750
-------------- --------------
2,992,202 3,268,750
Aerospace-- NR* Ba3 2,940,000 K & F Industries, Term B, due 10/15/2005 2,958,375 2,962,050
1.4% NR* NR* 4,168,507 Whittaker Corp., Revolving Credit, due
4/09/2001 4,168,507 4,152,875
-------------- --------------
7,126,882 7,114,925
Agricultural B+ B1 3,000,000 Chiquita Brands International Inc.,
Products--1.3% 10.25% due 11/01/2006 2,983,923 3,285,000
BB- Ba3 1,137,000 Fresh Del Monte Produce N.V., 10%
due 5/01/2003 1,151,213 1,188,165
B B2 2,000,000 Sun World International, 11.25%
due 4/15/2004 2,000,000 2,185,000
-------------- --------------
6,135,136 6,658,165
Aircraft & BB Ba2 2,000,000 Airplanes Pass Through Trust,
Parts--1.3% 10.875% due 3/15/2019 (d) 2,000,000 2,236,620
B- B3 1,500,000 Argo-Tech Corp., 8.625% due 10/01/2007 1,500,000 1,533,750
B+ B3 2,500,000 Derlan Manufacturing, 10% due 1/15/2007 2,476,425 2,587,500
-------------- --------------
5,976,425 6,357,870
<PAGE>
Amusement & B B2 500,000 AMC Entertainment Inc., 9.50% due
Recreational 3/15/2009 497,464 522,500
Services--2.1% AMF Group, Inc.:
NR* Ba3 879,335 Revolving Credit, due 3/31/2002 879,335 878,785
NR* Ba3 2,450,000 Term Loan C, due 3/31/2002 2,444,250 2,448,469
B- B3 2,000,000 Hollywood Entertainment Corp.,
10.625% due 8/15/2004 2,000,000 2,035,000
B- B3 1,000,000 Hollywood Theater, Inc., 10.625%
due 8/01/2007 (b) 1,000,000 1,080,000
Metro Goldwyn Mayer Co.:
NR* NR* 1,305,000 Revolving Credit, due 9/30/2003 1,305,000 1,287,056
NR* NR* 2,000,000 Term A, due 12/31/2005 1,990,333 1,972,500
-------------- --------------
10,116,382 10,224,310
Apparel--0.3% B- B3 1,500,000 Gear For Sports, 9.625% due 3/01/2007 1,500,000 1,582,500
Automotive B- B3 330,000 AM General Corp., 12.875% due 5/01/2002 303,845 353,925
Equipment--7.4% NR* B1 1,443,924 Advanced Accessory, Term, due 10/30/2004 1,441,193 1,444,827
B- B3 1,500,000 Aetna Industries Inc., 11.875% due
10/01/2006 1,500,000 1,425,000
NR* NR* 7,000,000 American Axel, Term B, due 3/31/2007 6,993,176 7,035,000
B+ B1 11,241,574 Collins & Aikman Corp., Term B,
due 12/31/2002 11,199,517 11,269,678
B- B2 1,000,000 Delco Remy International Inc.,
10.625% due 8/01/2006 1,000,000 1,097,500
B- B2 4,500,000 J.B. Poindexter & Co., Inc., 12.50%
due 5/15/2004 4,443,635 4,320,000
B- B3 1,250,000 Key Plastics, Inc., 10.25% due 3/15/2007 1,250,000 1,337,500
B- B3 1,500,000 LDM Technologies Inc., 10.75% due
1/15/2007 1,500,000 1,638,750
B B3 1,500,000 Motors and Gears Inc., 10.75% due
11/15/2006 1,500,000 1,642,500
B- B2 1,000,000 Trident Automotive, 10% due
12/15/2005 (b) 1,000,000 1,030,000
B+ B1 4,000,000 Walbro Corp., 9.875% due 7/15/2005 3,991,342 4,060,000
-------------- --------------
36,122,708 36,654,680
</TABLE>
Senior High Income Portfolio, Inc.
February 28, 1998
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Corporate Debt Obligations+++ Cost (Note 1A)
<S> <S> <S> <C> <S> <C> <C>
Broadcast-- B- B3 $ 1,000,000 ++Acme Television/Finance, 10.875% due
Radio & TV-- 9/30/2004 (b) $ 760,923 $ 800,000
6.5% B- B3 3,000,000 Allbritton Communications Co.,
9.75% due 11/30/2007 2,923,681 3,157,500
B- B3 4,000,000 Granite Broadcasting Corp., Senior
Sub Notes, 10.375% due 5/15/2005 4,000,000 4,310,000
NR* NR* 5,000,000 Petry Media, Term, due 3/31/2002 4,977,999 4,925,000
B- B3 2,500,000 STC Broadcasting Inc., 11% due 3/15/2007 2,500,000 2,756,250
NR* Ba3 4,725,000 Sinclair Broadcasting Group, Inc., Term,
due 12/31/2004 4,725,000 4,713,424
TV Azteca, S.A. de C.V.:
B Ba3 1,250,000 10.125% due 2/15/2004 1,248,555 1,334,375
B+ Ba3 750,000 10.50% due 2/15/2007 750,000 806,250
B+ B1 5,000,000 Telewest Communications PLC, 9.625%
due 10/01/2006 5,000,000 5,325,000
Young Broadcasting Corp., Senior
Sub Notes:
B B2 2,000,000 10.125% due 2/15/2005 2,000,000 2,145,000
B B2 2,000,000 9% due 1/15/2006 1,945,339 2,070,000
-------------- --------------
30,831,497 32,342,799
Building & BB Ba2 1,000,000 Kaufman & Broad Home Corp., 7.75%
Construction-- due 10/15/2004 992,369 1,000,000
0.2%
Building BB- Ba3 7,000,000 Johns Manville International Group,
Materials--3.6% 10.875% due 12/15/2004 7,447,500 7,752,500
NR* Ba3 9,941,569 National Gypsum, Term B, due 9/20/2003 9,925,497 9,957,103
-------------- --------------
17,372,997 17,709,603
Cable B- B3 2,000,000 ++Diamond Cable Communications Co.,
Television 10.647% due 2/15/2007 1,331,103 1,330,000
Services--4.0% BB+ Ba3 3,000,000 Lenfest Communications Inc., 8.375%
due 11/01/2005 2,992,623 3,112,500
NR* NR* 7,159,375 Marcus Cable Co., Term B, 7.63%
due 4/30/2004 7,131,259 7,166,087
B- B3 3,000,000 NTL Inc., 10% due 2/15/2007 3,001,875 3,210,000
NR* NR* 5,000,000 Supercanal Holdings S.A., due 11/14/2007 4,888,907 4,906,250
-------------- --------------
19,345,767 19,724,837
<PAGE>
Casinos--0.9% BB Ba3 1,650,000 Grand Casinos, Inc., 10.125% due
12/01/2003 1,765,500 1,786,125
B B2 1,500,000 Harveys Casinos Resorts, Senior Sub
Notes, 10.625% due 6/01/2006 1,500,000 1,687,500
BB- Ba3 1,000,000 Players International, Inc., 10.875%
due 4/15/2005 1,000,000 1,087,500
-------------- --------------
4,265,500 4,561,125
Chemicals--6.9% BB- B1 3,000,000 Acetex Corp., 9.75% due 10/01/2003 2,989,848 3,075,000
BB+ Ba2 1,500,000 Borden Chemicals and Plastics
L.P., 9.50% due 5/01/2005 1,500,000 1,567,500
NR* NR* 5,000,000 Epsilon Products, Term B, due
12/31/2005 5,000,000 5,000,000
Foamex L.P.:
NR* NR* 3,580,862 Term B, due 6/30/2005 3,576,680 3,601,004
NR* NR* 3,255,329 Term C, due 6/30/2006 3,251,484 3,273,640
NR* NR* 2,922,234 HSC Holdings, Term, due 3/31/2000 2,911,361 2,914,927
Huntsman Corp.:
B- B2 6,000,000 9.093% due 7/01/2007 (b) 6,000,000 6,225,000
NR* Ba2 5,000,000 Term, due 3/15/2007 5,106,250 5,100,000
BB- Ba3 2,500,000 ISP Holdings Inc., 9% due 10/15/2003 2,494,073 2,618,750
BB- Ba3 1,000,000 Pride Petroleum Services, Inc., 9.375%
due 5/01/2007 1,000,000 1,075,000
-------------- --------------
33,829,696 34,450,821
</TABLE>
Senior High Income Portfolio, Inc.
February 28, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Corporate Debt Obligations+++ Cost (Note 1A)
<S> <S> <S> <C> <S> <C> <C>
Consumer B B3 $ 3,000,000 ++CLN Holdings Inc., 11.125% due
Products--1.5% 5/15/2001 $ 2,119,974 $ 2,186,250
B+ Ba3 3,000,000 Coty, Inc., Senior Sub Notes, 10.25%
due 5/01/2005 3,000,000 3,202,500
B Ba3 2,000,000 Shop Vac Corporation, 10.625%
due 9/01/2003 2,090,000 2,180,000
-------------- --------------
7,209,974 7,568,750
<PAGE>
Diversified--1.6% B- B3 3,000,000 Ameriserv Food Co., 10.125% due
7/15/2007 3,000,000 3,247,500
B+ B1 3,000,000 Essex Group Inc., 10% due 5/01/2003 3,041,250 3,135,000
B+ B3 1,500,000 Insilco Corp., 10.25% due 8/15/2007 1,500,000 1,605,000
-------------- --------------
7,541,250 7,987,500
Drilling--1.3% B B1 2,000,000 Cliffs Drilling Co., 10.25%
due 5/15/2003 2,155,000 2,180,000
B+ Ba3 2,000,000 Falcon Drilling Company, Inc.,
9.75% due 1/15/2001 2,115,000 2,075,000
NR* NR* 1,934,011 Rigco North America, Term,
due 9/30/1998 1,934,011 1,938,846
-------------- --------------
6,204,011 6,193,846
Drug/Proprietary NR* NR* 2,500,000 Duane Reade Co., Term B, due 2/15/2005 2,492,222 2,518,750
Stores--0.5%
Educational B- B3 2,000,000 Kinder-Care Learning Centers Inc.,
Services--1.4% 9.50% due 2/15/2009 2,000,000 2,050,000
B B3 5,000,000 La Petite Holdings Corp., 9.625%
due 8/01/2001 5,000,000 5,125,000
-------------- --------------
7,000,000 7,175,000
Electronics/ BB- Ba1 2,000,000 Advanced Micro Devices Inc., 11%
Electrical due 8/01/2003 2,000,000 2,150,000
Components-- NR* Ba3 4,687,500 Amphenol Corp., Term B, due 5/19/2005 4,677,299 4,727,051
2.7% B- B3 2,000,000 Federal Data Corp., 10.125% due
8/01/2005 2,000,000 2,070,000
NR* B3 1,000,000 High Voltage Engineering Corp., 10.50%
due 8/15/2004 1,000,000 1,050,000
NR* B1 19 International Wire, Term B, due 9/30/2002 19 19
B- Caa1 2,000,000 ++Telesystems International Wireless,
13.246% due 6/30/2007 (b) 1,147,178 1,350,000
B B2 500,000 Therma-Wave Inc., 10.625% due 5/15/2004 500,000 530,000
B+ B2 1,500,000 Tracor Inc., 8.50% due 3/01/2007 1,494,415 1,541,250
-------------- --------------
12,818,911 13,418,320
<PAGE>
Energy--4.4% B B1 2,000,000 Belco Oil & Gas Corp., 8.875%
due 9/15/2007 2,000,000 2,037,500
B- B3 2,500,000 Bellwether Exploration Co., 10.875%
due 4/01/2007 2,500,000 2,675,000
NR* Ba2 5,000,000 Clark Refining, Term, due 11/15/2004 5,000,000 5,037,500
B B2 1,000,000 Cross Timbers Oil Co., 8.75% due
11/01/2009 1,000,000 1,022,500
B B2 1,500,000 Energy Corp. of America, 9.50% due
5/15/2007 1,500,000 1,496,250
B B2 1,000,000 Forcenergy Inc., 8.50% due 2/15/2007 986,582 1,012,500
B- B3 2,000,000 Kelly Oil & Gas Corp., 10.375% due
10/15/2006 1,995,416 2,095,000
B B2 1,000,000 Plains Resources Inc., Senior Sub Notes,
10.25% due 3/15/2006 994,619 1,077,500
B+ B2 1,000,000 Snyder Oil Corp., 8.75% due 6/15/2007 1,002,500 1,010,000
B- B2 2,000,000 United Refining Co., 10.75% due
6/15/2007 2,000,000 2,120,000
B+ B1 2,000,000 Vintage Petroleum Inc., 8.625% due
2/01/2009 1,984,059 2,080,000
-------------- --------------
20,963,176 21,663,750
Financial B- B3 2,000,000 Emergent Group, Inc., 10.75%
Services--1.8% due 9/15/2004 2,000,000 1,840,000
B Ba3 4,000,000 First Nationwide Escrow, 10.625%
due 10/01/2003 4,000,000 4,470,000
B+ B1 1,000,000 Imperial Credit Industries Inc.,
9.875% due 1/15/2007 1,000,000 980,000
BB- B2 1,500,000 Olympic Financial Ltd., 11.50% due
3/15/2007 1,500,000 1,485,000
-------------- --------------
8,500,000 8,775,000
</TABLE>
Senior High Income Portfolio, Inc.
February 28, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Corporate Debt Obligations+++ Cost (Note 1A)
<S> <S> <S> <C> <S> <C> <C>
Food & Kindred B+ B3 $ 500,000 CFP Holdings Inc., 11.625% due
Products--3.7% 1/15/2004 $ 500,000 $ 493,750
B B2 3,000,000 SC International Services, Inc.,
9.25% due 9/01/2007 3,053,722 3,165,000
NR* B3 9,928,571 Specialty Foods Inc., Term B,
due 4/30/2001 9,890,896 9,906,852
Van de Kamps Inc.:
NR* Ba3 2,929,036 Term B, due 4/30/2003 2,917,157 2,943,681
NR* Ba3 1,837,751 Term C, due 9/30/2003 1,830,151 1,846,939
-------------- --------------
18,191,926 18,356,222
<PAGE>
Forest B B3 4,500,000 Ainsworth Lumber, 12.50% due
Products--3.2% 7/15/2007 (c) 4,484,087 4,529,772
B B3 1,000,000 Malette Inc., 12.25% due 7/15/2004 1,000,000 1,120,000
BB B1 6,000,000 Tembec Finance Corp., 9.875% due
9/30/2005 6,110,000 6,285,000
B+ B2 4,000,000 Uniforet Inc., 11.125% due 10/15/2006 4,000,000 3,930,000
-------------- --------------
15,594,087 15,864,772
Furniture & NR* NR* 5,000,000 Lifestyles Furnishings International
Fixtures--1.2% Ltd., Term, due 6/27/2007 5,018,750 5,009,375
B- B3 1,000,000 Omeaga Cabinets, 10.50% due 6/15/2007 1,000,000 1,055,000
-------------- --------------
6,018,750 6,064,375
Grocery B+ B1 3,000,000 Eagle Food Centers Inc., 8.625%
Stores--2.5% due 4/15/2000 2,813,980 2,835,000
NR* Ba3 5,955,000 Ralph's Grocery Co., Term B, due
2/15/2004 5,948,299 5,960,955
B Ba3 3,488,636 Star Markets Co., Inc., Term C,
due 12/31/2002 3,482,466 3,488,636
-------------- --------------
12,244,745 12,284,591
Health B- B3 1,500,000 Alliance Imaging, Inc., 5% due
Services--11.6% 12/15/2005 1,500,000 1,552,500
Arenabrands:
NR* NR* 653,909 Revolving Credit, due 6/01/2002 655,392 656,361
NR* NR* 1,123,461 Term Loan A, due 6/01/2002 1,124,865 1,127,673
NR* NR* 2,045,385 Term Loan B, due 6/01/2002 2,047,941 2,053,054
Community Health Care Inc.:
NR* NR* 1,794,521 Term B, due 12/31/2003 1,787,017 1,800,128
NR* NR* 1,794,521 Term C, due 12/31/2004 1,786,756 1,800,128
NR* NR* 1,349,315 Term D, due 12/31/2005 1,343,329 1,355,218
Dade International Inc.:
NR* B1 1,489,985 Term B, due 12/31/2002 1,493,710 1,491,848
NR* B1 1,489,985 Term C, due 12/31/2003 1,493,710 1,491,848
NR* B1 1,572,457 Term D, due 12/31/2004 1,576,388 1,578,845
B+ B2 1,500,000 Dynacare, Inc., 10.75% due 1/15/2006 1,498,886 1,590,000
NR* Ba3 2,992,500 FPA Medical Management, Inc., Term,
due 9/30/2001 2,988,577 2,985,019
B- B3 550,000 Graham-Field Health Products Inc.,
9.75% due 8/15/2007 578,750 587,125
BB- Ba3 3,000,000 HEALTHSOUTH Corp., 9.50% due 4/01/2001 3,155,000 3,135,000
Imed Corp. (Alaris):
BB- B1 1,343,000 Term B, due 11/01/2003 1,343,000 1,351,394
BB- B1 1,343,000 Term C, due 11/01/2004 1,343,000 1,351,394
BB- B1 1,264,000 Term D, due 5/01/2005 1,264,000 1,271,900
Integrated Health Services, Inc.:
NR* B3 3,000,000 Senior Sub Notes, 9.50% due 9/15/2007 3,000,000 3,150,000
NR* Ba3 5,000,000 Term, due 9/15/2003 4,988,262 4,971,875
B B1 2,000,000 Physician Sales & Services Inc., 8.50%
due 10/01/2007 1,993,474 2,102,500
NR* NR* 5,000,000 Sterling Diagnostics, Term B, due
9/30/2005 4,988,071 4,987,500
</TABLE>
<PAGE>
Senior High Income Portfolio, Inc.
February 28, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Corporate Debt Obligations+++ Cost (Note 1A)
<S> <S> <S> <C> <S> <C> <C>
Health Services Sun Healthcare Group Inc.:
(concluded) NR* Ba3 $ 2,500,000 Term B, due 11/12/2004 $ 2,496,444 $ 2,510,937
NR* Ba3 2,500,000 Term C, due 11/12/2005 2,496,444 2,510,937
B+ Ba3 2,500,000 Tenet Healthcare Inc., 8.625%
due 1/15/2007 2,497,542 2,600,000
NR* NR* 5,000,000 Total Renal Care Holdings, Term,
due 9/30/2007 4,995,162 5,000,000
B B1 2,500,000 Vencor Inc., 8.625% due 7/15/2007 2,529,375 2,768,750
-------------- --------------
56,965,095 57,781,934
Hotels & BB Ba2 3,000,000 Prime Hospitality Corp., 9.25% due
Motels--0.6% 1/15/2006 2,991,614 3,195,000
Industrials-- BB- Ba2 2,000,000 Gulf Canada Resources Ltd., 9.25%
0.4% due 1/15/2004 2,105,000 2,105,080
Leasing & Rental BB- B1 1,200,000 Cort Furniture Rental Corp., 12%
Services--1.6% due 9/01/2000 1,199,793 1,314,000
NR* NR* 1,000,000 National Equipment Services, 10% due
11/30/2004 (b) 987,996 1,062,500
NR* NR* 5,000,000 Rental Services Corp., Term Prime, due
12/02/2004 4,993,916 5,000,000
NR* NR* 750,000 Williams Scotsman Inc., 9.875%
due 6/01/2007 750,000 783,750
-------------- --------------
7,931,705 8,160,250
Manufacturing-- NR* NR* 5,000,000 Favourite Brands International,
2.3% 10.25% due 8/20/2007 4,969,615 4,984,375
Goodman Mann:
NR* NR* 2,389,087 Term B, due 9/30/2004 2,389,087 2,395,060
NR* NR* 2,389,087 Term C, due 9/30/2005 2,389,087 2,395,060
B B3 1,500,000 Tokheim Corp., Senior Sub Notes, 11.50%
due 8/01/2006 1,500,000 1,672,500
-------------- --------------
11,247,789 11,446,995
Materials B- B3 1,500,000 Alvey Systems Inc., Senior Sub Notes,
Handling & 11.375% due 1/31/2003 1,500,000 1,608,750
Storage--0.6% B- B3 1,000,000 Iron Mountain Inc., 10.125% due
10/01/2006 1,000,000 1,110,000
-------------- --------------
2,500,000 2,718,750
<PAGE>
Measuring, NR* NR* 4,650,566 CHF/Ebel USA Inc., Term B, due 9/30/2001 4,650,566 4,650,566
Analyzing &
Controlling
Instruments--0.9%
Metals & NR* NR* 2,952,381 Adience, Inc., Term B, due 4/15/2005 2,942,020 2,959,762
Mining--11.0% B B1 3,000,000 Anker Coal Group Inc., 9.75% due
10/01/2007 (b) 3,015,000 3,045,000
B B2 3,000,000 Bayou Steel Corp., 10.25% due 3/01/2001 3,000,000 3,045,000
NR* B1 2,000,000 CSN Iron Panama, 9.125% due
6/01/2007 (b) 1,991,393 1,742,500
B B2 2,000,000 Continental Global Group, 11% due
4/01/2007 2,000,000 2,150,000
NR* NR* 4,927,885 Doe Run Reso, Term, due 10/23/2003 4,909,913 4,915,565
GS Technologies Operating Co.:
B B2 1,000,000 12% due 9/01/2004 993,831 1,110,000
B B2 1,000,000 12.25% due 10/01/2005 1,000,000 1,135,000
BB Ba2 2,000,000 Grupo Imsa S.A., 8.93% due 9/30/2004 1,999,407 2,030,000
B+ B1 3,500,000 Ivaco Inc., 11.50% due 9/15/2005 3,435,920 3,850,000
NR* NR* 5,000,000 Kopper Industries Inc., Term B,
due 11/30/2004 4,993,882 4,993,750
BB- Ba3 2,000,000 Murrin, Murrin Holdings Party, 9.375%
due 8/31/2007 (b) 2,000,000 1,960,000
B B2 3,000,000 Renco Metals, Inc., 11.50% due 7/01/2003 3,007,500 3,210,000
NR* Ba2 3,425,714 UCAR International, Inc., Term B,
due 12/31/2002 3,422,760 3,429,996
Weirton Steel Corp.:
B B2 2,000,000 11.375% due 7/01/2004 2,057,500 2,160,000
B B2 3,190,000 10.75% due 6/01/2005 3,150,617 3,397,350
</TABLE>
Senior High Income Portfolio, Inc.
February 28, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Corporate Debt Obligations+++ Cost (Note 1A)
<S> <S> <S> <C> <S> <C> <C>
Metals & B B3 $ 3,000,000 Westmin Resources Ltd., 11% due
Mining 3/15/2007 $ 3,000,000 $ 3,480,000
(concluded) Wheeling-Pittsburg Steel Corp.:
BB- B1 3,000,000 9.375% due 11/15/2003 3,001,406 3,300,000
NR* Ba3 2,500,000 Term Prime, due 11/15/2006 2,487,690 2,487,500
-------------- --------------
52,408,839 54,401,423
<PAGE>
Music--0.7% B B2 3,000,000 Selmer Co., Inc., Senior Sub Notes,
11% due 5/15/2005 3,000,000 3,270,000
Packaging--4.2% NR* B2 4,000,000 Anchor Glass Container Corp., 11.25%
due 4/01/2005 (b) 4,000,000 4,400,000
B- B3 1,000,000 Fonda Group Inc., Senior Sub Notes,
9.50% due 3/01/2007 1,000,000 947,500
B+ B2 2,000,000 Packaging Resources Group, 11.625%
due 5/01/2003 2,000,000 1,940,000
BB- B2 2,000,000 Printpack Inc., 9.875% due 8/15/2004 2,000,000 2,160,000
NR* Ba2 4,975,000 Silgan Corp., Term B, due 6/30/2005 4,970,307 4,981,219
B B3 2,000,000 Spinnaker Industries Inc., 10.75%
due 10/15/2006 2,000,000 2,060,000
B+ B1 4,500,000 Sweethart Cup Co., 9.625% due 9/01/2000 4,513,750 4,477,500
-------------- --------------
20,484,057 20,966,219
Paper--9.9% B B2 1,500,000 Four M Corp., 12% due 6/01/2006 1,500,000 1,599,375
B NR* 3,000,000 Gaylord Container Corp., 9.75%
due 6/15/2007 3,000,000 3,015,000
BB Ba3 12,744,761 Jefferson Smurfit Company/Container Corp.
of America, Term B, due 4/30/2002 12,609,383 12,757,506
BB- Ba3 1,000,000 Pindo Deli Finance Mauritius, 10.75% due
10/01/2007 (b) 997,052 790,000
Repap New Brunswick, Inc.:
CCC B2 3,500,000 8.937% due 7/15/2000 3,519,095 3,447,500
CCC B2 3,000,000 9.875% due 7/15/2000 3,000,000 3,060,000
Riverwood International, Inc.:
B+ B1 8,529,135 Term B, due 2/28/2004 8,424,670 8,601,100
B+ B1 3,411,571 Term C, due 8/28/2004 3,368,913 3,440,356
NR* Ba2 2,330,762 S.D. Warren Co., Term B, due 6/30/2002 2,326,387 2,339,502
NR* Ba3 8,679,930 Stone Container Corp., Term B,
due 4/01/2000 8,598,731 8,696,747
BB Ba3 2,000,000 Tjiwi Kimia, 10% due 8/01/2004 (b) 1,989,742 1,580,000
-------------- --------------
49,333,973 49,327,086
Printing & BB- Ba2 4,835,268 American Media, Term B, due 9/30/2002 4,831,208 4,829,224
Publishing--1.6% NR* B2 1,000,000 Big Flower Press Holdings, Inc., 8.875%
due 7/01/2007 992,154 1,017,500
B- B3 569,000 Sun Media Corp., 9.50% due 2/15/2007 569,000 617,365
B- B3 1,500,000 T/SF Communications Corp., 10.375%
due 11/01/2007 (b) 1,477,827 1,515,000
-------------- --------------
7,870,189 7,979,089
Real Estate-- NR* NR* 3,000,000 ++Rockefeller Center Properties
0.4% (Convertible), 11.441% due
12/31/2000 2,212,111 2,231,250
<PAGE>
Restaurants-- BB- Ba3 7,000,000 Host Marriott Corp., 9.50% due
2.5% 5/15/2005 6,840,904 7,437,500
NR* Ba3 4,937,500 Shoney's Inc., Term B, due 4/30/2002 4,908,075 4,912,812
-------------- --------------
11,748,979 12,350,312
Retail NR* B3 2,000,000 United Auto Group Inc., 11% due
Specialty--0.4% 7/15/2007 1,971,593 1,880,000
Shipbuilding & B+ B1 4,000,000 Newport News Shipbuilding, Inc.,
Repairing--0.9% 9.25% due 12/01/2006 4,000,000 4,290,000
</TABLE>
Senior High Income Portfolio, Inc.
February 28, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Corporate Debt Obligations+++ Cost (Note 1A)
<S> <S> <S> <C> <S> <C> <C>
Shipping--2.4% BB- Ba2 $ 4,500,000 Eletson Holdings Inc., 9.25% due
11/15/2003 $ 4,397,522 $ 4,649,625
B+ B2 2,000,000 Global Ocean Carriers, 10.25% due
7/15/2007 1,970,727 1,820,000
BB- Ba2 3,000,000 Stena Line AB, 10.50% due 12/15/2005 3,000,000 3,307,500
BB Ba2 2,000,000 Teekay Shipping Inc., 8.32% due 2/01/2008 2,000,000 2,070,000
-------------- --------------
11,368,249 11,847,125
Telephone CCC+ Caa 4,000,000 CAI Wireless Systems, Inc., 12.25%
Communications-- due 9/15/2002 4,047,500 1,240,000
14.6% B B2 3,000,000 CCPR Services Inc., 10% due 2/01/2007 3,000,000 2,895,000
Cellular Inc.:
NR* B1 586,527 Term B, due 9/30/2006 584,487 585,060
NR* B1 1,161,440 Term C, due 3/31/2007 1,157,399 1,158,536
NR* B1 3,252,033 Term D, due 9/30/2007 3,240,715 3,243,903
CCC NR* 3,000,000 ++McCaw International Ltd., 13.355%
due 4/15/2007 1,737,269 1,965,000
B B3 2,500,000 ++Mcleod Inc., 8.686% due 3/01/2007 1,660,241 1,862,500
NR* NR* 2,000,000 Metronet Communications, 12% due
8/15/2007 1,980,156 2,310,000
B- B3 1,500,000 Newcor Inc., 9.875% due 3/01/2008 (b) 1,500,000 1,500,000
NR* B1 5,000,000 Nextel Communications, Inc., Term D,
due 6/30/2003 4,916,368 5,000,000
B B3 2,500,000 Nextlink Communications Inc., 9% due
<PAGE> 3/15/2008 (b) 2,494,950 2,494,950
Omnipoint Communications Corp.:
NR* NR* 6,807,203 Term A, due 2/17/2006 6,800,407 6,820,818
NR* NR* 1,942,797 Term B, due 2/17/2006 1,940,857 1,937,939
B+ NR* 1,000,000 ++PTC International Finance, 10.269%
due 7/01/2007 659,639 685,000
Paragon Health Network:
NR* NR* 2,500,000 Term B, due 3/31/2005 2,497,581 2,512,500
NR* NR* 2,500,000 Term C, due 3/31/2006 2,497,567 2,515,625
NR* NR* 4,987,500 Price Communications Corp., Term B,
due 9/30/2006 4,977,830 5,018,672
B+ B2 2,500,000 Quest Communications, 10.875% due
4/01/2007 2,500,000 2,850,000
NR* NR* 2,000,000 RCN Corp., 10% due 10/15/2007 2,000,000 2,107,500
B- B3 3,000,000 RSL Communications, 9.125% due
3/01/2008 (b) 3,000,000 2,985,000
NR* NR* 5,000,000 Satellite Mexicanos, 9.43% due
6/30/2004 (b) 4,987,500 4,987,500
NR* B1 4,750,000 Shared Technology Inc., Term B, due
3/31/2003 4,727,045 4,755,937
NR* B1 10,000,000 Sprint Spectrum/Lucent Technologies,
Term, due 6/29/2001 9,942,141 10,006,250
NR* NR* 1,000,000 Unifi Communications, Inc. (Units),
14% due 3/01/2004 919,454 890,000
-------------- --------------
73,769,106 72,327,690
Transportation BB- B1 3,000,000 Allied Holdings, Inc., 8.625% due
Services--4.8% 10/01/2007 3,037,500 3,097,500
B- B3 4,000,000 Ameritruck Distribution Corp.,
12.25% due 11/15/2005 3,962,666 3,990,000
NR* NR* 4,931,757 Atlas Freight, Term, due 5/29/2004 4,920,448 4,944,086
BB- NR* 4,000,000 Autopistas Del Sol S.A., 10.25% due
8/01/2009 (b) 4,035,000 3,890,000
B+ B1 2,000,000 Coach USA Inc., 9.375% due 7/01/2007 2,000,000 2,080,000
MRS Logistica S.A. (b):
B NR* 2,000,000 9% due 8/15/2005 1,992,788 1,965,000
B NR* 500,000 10.625% due 8/15/2005 494,576 476,250
B- B3 1,600,000 Trism Inc., Senior Sub Notes, 10.75%
due 12/15/2000 1,428,507 1,408,000
BB Ba2 2,000,000 Viking Star Shipping Co., 9.625%
due 7/15/2003 2,091,250 2,020,000
-------------- --------------
23,962,735 23,870,836
</TABLE>
Senior High Income Portfolio, Inc.
February 28, 1998
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
S&P Moody's Face Value
Industries Rating Rating Amount Corporate Debt Obligations+++ Cost (Note 1A)
<S> <S> <S> <C> <S> <C> <C>
Utilities--1.4% B+ Ba1 $ 4,500,000 AES Corp., 8.50% due 11/01/2007 (b) $ 4,465,274 $ 4,635,000
BB- NR* 1,989,000 First PV Funding Corp., 10.30%
due 1/15/2014 1,969,752 2,105,515
-------------- --------------
6,435,026 6,740,515
Waste BB- B3 3,000,000 ++Norcal Waste Systems, Inc., 13.25% 2,927,778 3,495,000
Management--0.7% due 11/15/2005
Total Corporate Debt Obligations--135.9% 661,271,017 674,556,381
Shares
Held Warrants (a)
Cable Television 615,733 Supercanal Holdings S.A. 0 0
Services--0.0%
Leasing & Rental 66,000 Cort Furniture Rental Corp. 760 222,750
Services--0.1%
Metals & Mining--0.0% 3,000 Gulf States Steel Corp. (b) 33,000 900
Telephone 3,000 McCaw International Ltd. (b) 46,799 750
Communications--0.0% 2,000 Metronet Communications (b) 20,500 70,000
1,000 Unifi Communications Inc. (b) 56,590 20,000
-------------- --------------
123,889 90,750
Total Warrants--0.1% 157,649 314,400
Face
Amount Short-Term Investments
Commercial $ 90,000 General Motors Acceptance Corp.,
Paper**--0.0% 5.69% due 3/02/1998 90,000 90,000
Total Short-Term Investments--0.0% 90,000 90,000
Total Investments--136.0% $ 661,518,666 674,960,781
==============
Liabilities in Excess of Other Assets--(36.0%) (178,483,773)
--------------
Net Assets--100.0% $ 496,477,008
==============
<PAGE>
<FN>
*Not Rated.
**Commercial Paper is traded on a discount basis; the interest rate
shown is the discount rate paid at the time of purchase by the Fund.
++Represents a zero coupon or step bond; the interest rate shown is
the effective yield at the time of purchase.
+++Floating or Variable Rate Corporate Debt--The interest rates
onfloating 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. Corporate loans represent 60.6% of the Fund's
net assets.
See Notes to Financial Statements.
(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)Represents a pay-in-kind security which may pay
interest/dividends in additional face/shares.
(d)Subject to principal paydowns.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</TABLE>
Senior High Income Portfolio, Inc.
February 28, 1998
FINANCIAL INFORMATION
<TABLE>
Statement of Assets, Liabilities and Capital as of February 28, 1998
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$661,518,666) (Note 1b) $ 674,960,781
Receivables:
Interest $ 11,423,772
Securities sold 5,281,878 16,705,650
-------------
Deferred facility fees 16,710
Prepaid expenses and other assets 35,109
-------------
Total assets 691,718,250
-------------
<PAGE>
Liabilities: Payables:
Loans (Note 6) 181,200,000
Securities purchased 11,099,367
Interest on loans (Note 6) 1,954,253
Investment adviser (Note 2) 262,591
Commitment fees 59,422 194,575,633
-------------
Deferred income (Note 1e) 70,913
Accrued expenses and other liabilities 594,696
-------------
Total liabilities 195,241,242
-------------
Net Assets: Net assets $ 496,477,008
=============
Capital: Common Stock, par value $.10 per share; 200,000,000 shares
authorized (52,960,724 shares issued and outstanding) $ 5,296,072
Paid-in capital in excess of par 493,430,202
Undistributed investment income--net 4,197,582
Accumulated realized capital losses on investments--net (Note 7) (19,888,963)
Unrealized appreciation on investments--net 13,442,115
-------------
Total Capital--Equivalent to $9.37 net asset value per share of
Common Stock (market price--$10.125) $ 496,477,008
=============
See Notes to Financial Statements.
</TABLE>
Senior High Income Portfolio, Inc.
February 28, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations
<CAPTION>
For the Year Ended
February 28, 1998
<S> <S> <C> <C>
Investment Income Interest and discount earned $ 60,327,939
(Note 1e): Facility and other fees 716,463
-------------
Total income 61,044,402
-------------
<PAGE>
Expenses: Loan interest expense (Note 6) $ 8,841,001
Investment advisory fees (Note 2) 3,168,067
Borrowing costs (Note 6) 195,315
Professional fees 178,770
Accounting services (Note 2) 157,271
Transfer agent fees (Note 2) 71,993
Custodian fees 52,398
Printing and shareholder reports 44,772
Amortization of organization expenses (Note 1f) 28,402
Directors' fees and expenses 24,568
Pricing services 12,040
Listing fees 125
Other 68,562
-------------
Total expenses 12,843,284
-------------
Investment income--net 48,201,118
-------------
Realized & Realized gain on investments--net 3,698,086
Unrealized Change in unrealized appreciation on investments--net 3,855,886
Gain on -------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 55,755,090
(Notes 1c, 1e & 3): =============
See Notes to Financial Statements.
</TABLE>
Senior High Income Portfolio, Inc.
February 28, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended February 28,
Increase (Decrease) in Net Assets: 1998 1997
<S> <S> <C> <C>
Operations: Investment income--net $ 48,201,118 $ 42,173,726
Realized gain (loss) on investments--net 3,698,086 (1,541,894)
Change in unrealized appreciation/depreciation on investments--net 3,855,886 10,730,017
------------- -------------
Net increase in net assets resulting from operations 55,755,090 51,361,849
------------- -------------
<PAGE>
Dividends to Investment income--net (47,759,736) (42,444,377)
Shareholders ------------- -------------
(Note 1g): Net decrease in net assets resulting from dividends to shareholders (47,759,736) (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 11,321,619 11,646,441
Offering costs from issuance of Common Stock resulting
from reorganization (9,911) --
------------- -------------
Net increase in net assets resulting from capital
share transactions 11,311,708 232,116,778
------------- -------------
Net Assets: Total increase in net assets 19,307,062 241,034,250
Beginning of year 477,169,946 236,135,696
------------- -------------
End of year* $ 496,477,008 $ 477,169,946
============= =============
<FN>
*Undistributed investment income--net (Note 1h) $ 4,197,582 $ 3,750,733
============= =============
See Notes to Financial Statements.
</TABLE>
Senior High Income Portfolio, Inc.
February 28, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Cash Flows
<CAPTION>
For the Year Ended
February 28, 1998
<S> <S> <C>
Cash Provided by Net increase in net assets resulting from operations $ 55,755,090
Operating Adjustments to reconcile net increase (decrease) in net assets resulting
Activities: from operations to net cash provided by operating activities:
Increase in receivables (457,265)
Decrease in other assets 6,978
Increase in other liabilities 2,061,611
Realized and unrealized gain on investments--net (7,553,972)
Amortization of discount--net (1,790,024)
-------------
Net cash provided by operating activities 48,022,418
-------------
<PAGE>
Cash Used for Proceeds from sales of long-term investments 362,310,939
Investing Purchases of long-term investments (474,778,430)
Activities: Purchases of short-term investments (134,626,613)
Proceeds from sales and maturities of short-term investments 135,298,520
-------------
Net cash used for investing activities (111,795,584)
-------------
Cash Provided by Cash payments for reorganization expenses (9,911)
Financing Cash receipts of borrowings 385,400,000
Activities: Cash payments on borrowings (285,200,000)
Dividends paid to shareholders (36,438,117)
-------------
Net cash provided by financing activities 63,751,972
-------------
Cash: Net decrease in cash (21,194)
Cash at beginning of year 21,194
-------------
Cash at end of year $ 0
=============
Cash Flow Cash paid for interest $ 7,249,827
Information: =============
Noncash Value of capital shares issued in reinvestment of dividends paid to shareholders $ 11,321,619
Financing =============
Activities:
See Notes to Financial Statements.
</TABLE>
Senior High Income Portfolio, Inc.
February 28, 1998
FINANCIAL INFORMATION (concluded)
<PAGE>
<TABLE>
Financial Information
<CAPTION>
For the
For the For the Period
The following per share data and ratios have been derived For the Year Year Year April 30,
from information provided in the financial statements. Ended Ended Ended 1993++ to
February 28, Feb. 29, Feb. 28, Feb. 28,
Increase (Decrease) in Net Asset Value: 1998++++ 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 .92 .89 .92 .90 .70
Realized and unrealized gain (loss)
on investments--net .14 .04 .27 (.87) .25
-------- -------- -------- -------- --------
Total from investment operations 1.06 .93 1.19 .03 .95
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.91) (.92) (.92) (.84) (.61)
Realized gain on investments--net -- -- -- (.07) (.02)
-------- -------- -------- -------- --------
Total dividends and distributions (.91) (.92) (.92) (.91) (.63)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.37 $ 9.22 $ 9.21 $ 8.94 $ 9.82
======== ======== ======== ======== ========
Market price per share, end of period $ 10.125 $ 9.50 $ 9.25 $ 8.625 $ 9.375
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 11.95% 10.80% 14.14% .82% 10.28%+++
Return:** ======== ======== ======== ======== ========
Based on market price per share 17.41% 13.67% 18.82% 1.88% .02%+++
======== ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement and
Net Assets: excluding interest expense .83% .75% .92% .80% .67%*
======== ======== ======== ======== ========
Expenses, net of reimbursement 2.66% 1.84% 2.92% 2.46% 1.61%*
======== ======== ======== ======== ========
Expenses 2.66% 1.84% 2.92% 2.46% 1.75%*
======== ======== ======== ======== ========
Investment income--net 9.98% 9.45% 10.14% 7.07% 7.33%*
======== ======== ======== ======== ========
Leverage: Amount of borrowings (in thousands) $181,200 $ 81,000 $ 47,000 $ 82,000 $ 84,000
======== ======== ======== ======== ========
Average amount of borrowings outstanding
during the period (in thousands) $149,166 $ 82,384 $ 68,473 $ 92,000 $ 67,000
======== ======== ======== ======== ========
Average amount of borrowings outstanding
per share during the period $ 2.85 $ 2.13 $ 2.68 $ 3.67 $ 2.67
======== ======== ======== ======== ========
<PAGE>
Supplemental Net assets, end of period (in thousands) $496,477 $477,170 $236,136 $227,007 $248,342
Data: ======== ======== ======== ======== ========
Portfolio turnover 58.60% 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.
+++Aggregrate total investment return.
See Notes to Financial Statements.
</TABLE>
Senior High Income Portfolio, Inc.
February 28, 1998
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--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.
<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
financial 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).
Senior High Income Portfolio, Inc.
February 28, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Realized gains and losses on security transactions are
determined on the identified cost basis. Facility fees are accreted
to income over the term of the related loan.
(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 dividends.
(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 $5,467
have been reclassified between paid-in capital and undistributed net
investment income. These reclassifications have no effect on net
assets or net asset value per share.
<PAGE>
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.
<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, 1998, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of Merrill Lynch, Pierce,
Fenner & Smith Inc., $7,039 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.
Senior High Income Portfolio, Inc.
February 28, 1998
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended February 28, 1998 were $482,790,535 and
$366,992,680, respectively.
Net realized gains for the year ended February 28, 1998 and net
unrealized gains as of February 28, 1998:
Realized Unrealized
Gains Gains
Long-term investments $ 3,698,086 $13,442,115
----------- -----------
Total $ 3,698,086 $13,442,115
=========== ===========
<PAGE>
As of February 28, 1998, net unrealized appreciation for Federal
income tax purposes aggregated $13,413,756, of which $18,833,031
related to appreciated securities and $5,419,275 related to
depreciated securities. The aggregate cost of investments at
February 28, 1998 for Federal income tax purposes was $661,547,025.
<PAGE>
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 year ended February 28,
1998 increased by 1,205,888 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 February 28, 1998, the Fund had unfunded loan commitments of
$22,206,849, which would be extended at the option of the borrower,
pursuant to the following loan agreements:
Unfunded
Commitment
Borrower (in thousands)
AMF Group, Inc. $ 621
Arenabrands 1,082
Federal Mogul Corp., Bridge 5,000
Federal Mogul Corp., Interim 4,000
Federal Mogul Corp., Term Loan B 6,000
Metro Goldwyn Mayer Co. 1,695
Omnipoint Communications Corp. 3,125
Whittaker Foods 684
6. Short-Term Borrowings:
On April 14, 1997, the Fund extended its credit agreement with
Merrill Lynch International Bank Limited, an affiliate of FAM,
through April 30, 1998. The agreement is a $245,000,000 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, 1998,
the maximum amount borrowed was $223,600,000, the average amount
borrowed was approximately $149,165,934, and the daily weighted
average interest rate was 5.94%. For the year ended February 28,
1998, facility and commitment fees aggregated approximately
$195,315.
7. Capital Loss Carryforward:
At February 28, 1998, the Fund had a net capital loss carryforward
of approximately $19,889,000, of which $7,098,000 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.
<PAGE>
8. Subsequent Event:
On March 10, 1998, the Board of Directors of the Fund declared an
ordinary income dividend in the amount of $.075007 per share,
payable on March 31, 1998 to shareholders of record as of March 23,
1998.
Senior High Income Portfolio, Inc.
February 28, 1998
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Senior High Income Portfolio, Inc.:
We have audited the accompanying statement of assets, liabilities
and capital, including the schedule of investments, of Senior High
Income Portfolio, Inc. as of February 28, 1998, the related
statements of operations and cash flows for the year then ended, the
statements of changes in net assets for each of the years in the two-
year period then ended, and the financial highlights for each of the
years in the four-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, 1998 by correspondence with the custodian, brokers and financial
intermediaries or other alternative procedures. 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, 1998, the
results of its operations, its cash flows, the changes in its net
assets, and the financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
<PAGE>
Deloitte & Touche LLP
Princeton, New Jersey
April 14, 1998
</AUDIT-REPORT>
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
R. Douglas Henderson, Senior Vice President
Joseph T. Monagle Jr., Senior Vice President
Donald C. Burke, Vice President
Gerald M. Richard, Treasurer
Patrick D. Sweeney, Secretary
Custodian and Transfer Agent
The Bank of New York
110 Washington Street
New York, NY 10286
NYSE Symbol
ARK
