SENIOR HIGH
INCOME
PORTFOLIO, INC.
FUND LOGO
Annual Report
February 29, 2000
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
Printed on post-consumer recycled paper
Senior High Income Portfolio, Inc.
DEAR SHAREHOLDER
For the year ended February 29, 2000, Senior High Income Portfolio,
Inc.'s total investment return was +1.11%, based on a change in per
share net asset value from $8.40 to $7.54, and assuming reinvestment
of $0.877 per share income dividends. During the same 12-month
period, the net annualized yield of the Portfolio's Common Stock was
11.72%. For the six-month period ended February 29, 2000, the total
investment return on the Portfolio's Common Stock was +0.22%, based
on a change in per share net asset value from $8.03 to $7.54, and
assuming reinvestment of $0.447 per share income dividends. During
the same period, the net annualized yield of the Portfolio's Common
Stock was 11.86%. At the end of the period, the Portfolio was 23.7%
leveraged as a percent of total assets, having borrowed $127.0
million of its $235.0 million credit facility at an average rate of
5.70%. (For a complete explanation of the benefits and risks of
leverage, see page 5 of this report to shareholders.)
Investment Approach
Senior High Income Portfolio, Inc. consists largely of high-yield
bonds and participations in leveraged bank loans. The high-yield
bond and bank loan markets are comprised of similar industry sectors
and often contain overlapping issuers. As a result, general economic
events and trends tend to move the two markets in the same
direction, although the bonds typically move to a greater degree
than the bank loans. This is driven usually by two factors. First,
bank loans are typically senior secured obligations, thus generally
offering investors greater principal protection than unsecured
bonds. Second, bank loans are floating rate instruments whose
principal value generally does not move conversely with interest
rate fluctuations, as is the case with fixed-income bonds.
Market Review
Market conditions were difficult for high-yield securities during
1999. While benefiting from a strong economy, the high-yield market
suffered from a rise in Treasury interest rates resulting from
inflationary fears and an increase in default rates. The yield on
the ten-year Treasury note rose from 4.65% at the beginning of 1999
to 6.44% at year-end, producing a return of -8.25% for the year. To
keep the economy from overheating and igniting inflation, the
Federal Reserve Board raised the Federal Funds rate (the rate US
banks charge each other for overnight loans) 100 basis points
(1.00%) to 5.75% during the Portfolio's fiscal year. This sharp
spike in interest rates resulted in the high-yield market posting
its second consecutive year of declining prices. The average price
of a bond in the high-yield market fell to 86% of par from 91% at
the beginning of the year. The risk premium, measured by the spread
between the yield on the average high-yield bond and the comparable
Treasury bond, narrowed to 5.73% at year-end as compared to 6.57% at
the beginning of the year. The reduction in the credit risk premium
reflects the high-yield market's recovery from its overreaction to
the global financial crisis in the third quarter of 1998.
In 1999, there was approximately $91 billion of new high-yield debt
issued compared to $123 billion in 1998 and $137 billion in 1997.
The new-issue market was not as active as prior years in response to
investors' concerns about higher interest rates and the crowding out
effect of the equity market, whose sky-high returns attracted
capital from the high-yield market. In addition, capital deployed by
investment banks and dealers to support secondary market trading in
high-yield bonds dissipated throughout the year because of
uncertainty about how liquid the market would be at year-end over
concerns surrounding Year 2000 readiness.
Senior High Income Portfolio, Inc.
February 29, 2000
Another major factor affecting the high-yield market in 1999 was the
higher default rate. High-yield bond defaults rose during the year
to a 5.5% annual rate, the highest level in almost a decade, as 86
domestic issuers defaulted in 1999, representing $22 billion in par
amount, compared to 46 issuers and $7.9 billion in 1998. Ironically,
the high level of defaults occurred during a period of strong
economic growth. This was the result of several factors. First,
lower commodity prices, especially in energy and chemicals, from
global overcapacity derived from the 1998 Asian financial crisis
drove smaller companies to lose access to capital at a time when
business prospects were pressured. Second, in response to huge
demand, heavy issuance of high-yield debt from 1996 to 1998 strained
underwriting standards and lower-quality transactions entered the
marketplace. In addition, pricing power vanished in the global
competitive arena, unfavorably positioning producers of low value-
added products. Finally, the healthcare industry was specifically
damaged by governmental change in reimbursement rates. Going forward
into 2000 and 2001, these trends have already shifted direction. In
general, the global markets have turned around and demand for
commodities should improve, raising prices. In addition, new
issuance has been subdued and healthcare issuance has been almost
non-existent. Therefore, we believe there will be a reduction in the
default rate over the near term.
The loan market also experienced more volatility in 1999 than its
historical norm because of the higher default rate. Loan investors,
seeking to prevent the anticipated problems associated with
financial restructurings, sold loans that reported weaker-than-
expected financial results faster to avoid potential problems. This
increased trading activity heightened volatility, as dealers became
less optimistic about providing liquidity for borrowers that were
not meeting projected budgets. In addition, loan investors
dynamically shifted their portfolios, increasing exposure to less
volatile sectors or adding exposure to sectors with greater
potential for credit improvement. In essence, the loan market
appears to be assuming portfolio management practices similar to
other markets, substantiating our view that loans do have prices,
actively trade, and should be valued on the basis of available
market quotations, rather than being marked at face value for the
life of the loan.
The technical and fundamental problems of the high-yield market have
resulted in high-yield market outflows rather consistently for the
past ten months. Because of fund redemptions and higher interest
rates, the high-yield bond sector (as measured by the unmanaged
Donaldson, Lufkin and Jenrette High Yield Index) generated a poor
total return of +1.60% for the six-month period ended February 29,
2000. Bank loans (as measured by the unmanaged Donaldson, Lufkin and
Jenrette Leveraged Loan Index) fared better, given the floating rate
nature of the asset class, and generated a total return of +2.27%
for the same period. Senior High Income Portfolio, Inc.
underperformed the Indexes as a result of defaults in the portfolio,
limited exposure to emerging markets that performed strongly in 1999
and its leverage, which amplifies losses in a declining market.
Investment Activities
At February 29, 2000, 63% of the Portfolio's assets were allocated
to bonds and 37% to bank loans. More than 97% of the Portfolio's
bank loan holdings were accruing interest at a yield spread above
the London Interbank Offered Rate (LIBOR), the rate that major banks
charge each other for US dollar-denominated deposits outside of the
United States. LIBOR tracks very closely with other short-term
interest rates, such as the Federal Funds rate. Since the average
interest rate reset across the bank loan portion of the Portfolio is
about 45 days, the yield on that portion of the Portfolio will move
within a two-month period of any change in the Federal Funds rate.
The Portfolio's stated average maturity was approximately 6.8 years
at February 29, 2000, but based on our experience, the Portfolio's
holdings can be expected to have an actual average life of about 3
years - 4 years in response to the freely prepayable nature of the
bank loans. By period-end, the Portfolio was approximately 24%
leveraged and spread across 215 issuers in 50 industries. (See the
"Portfolio Profile" on page 23 of this report to shareholders, which
provides listings of the Portfolio's ten largest holdings and five
largest industries as of February 29, 2000.)
Investment Strategy
Throughout the six months ended February 29, 2000, the Portfolio's
investment philosophy remained unchanged: to invest in leveraged
transactions in which borrowers have strong market shares,
experienced managements, consistent cash flows and appropriate
risk/reward characteristics. In addition, we look for companies with
significant underlying asset and franchise value, strong capital
structures and equity sponsors that support their investments.
Senior High Income Portfolio, Inc.
February 29, 2000
During the six-month period, we focused on the better-priced new-
issue market. New-issue transactions were also much more
conservatively structured, with lower leverage and higher interest
coverage as investors became more demanding.
Looking ahead, we expect to emphasize growth sectors, such as
wireless telecommunications, that are exhibiting improving credit
trends and have access to equity capital. Substantial merger and
acquisition activity and better-than-expected subscriber growth have
attracted equity capital to the wireless telecommunications sector.
The Portfolio's largest holding in this sector is Nextel
Communications, Inc. In 1999, Nextel Communications entered the
Standard & Poor's 500 Index, a tribute to its success in meeting
investors' high expectations for growth and profitability. While a
potential acquisition by MCI WorldCom Inc. fell through in 1999, it
highlighted the strategic value of the company and since that time
the stock has tripled. Nextel Communications remains a core holding
of the Portfolio, and we expect its credit profile to continue to
improve.
While we expect that the Federal Reserve Board may increase short-
term interest rates by another 0.50% before year-end, and we
acknowledge that this may put pressure on high-yield bond prices
over the next few months, we are optimistic about the prospects for
the Portfolio in 2000. This is based on our expectations for a
continuation of the strong economy in the United States with a
relatively stable interest rate environment, a gradual improvement
in the Asian economies and a gradual decline in credit spreads to a
more normal range.
In Conclusion
As difficult as the past six months were for the high-yield bond and
leveraged loan markets and the Portfolio, their performances
illustrate the bank loan market's ability to weather market
fluctuations with less volatility than the high-yield bond market.
This is what differentiates the Portfolio from a pure high-yield
bond fund. This attribute continues to draw many new institutional
buyers to the bank loan market. We believe that both the technical
and fundamental aspects are improving in both the high-yield bond
and bank loan sectors. We also believe we have positively positioned
the Portfolio to follow further expected improvements in the
marketplace in an effort to seek to enhance total return potential
in the coming months.
We thank you for your investment in Senior High Income Portfolio,
Inc., and we look forward to reviewing our outlook and strategy with
you again in our next report to shareholders.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Richard C. Kilbride)
Richard C. Kilbride
Vice President and Co-Portfolio Manager
(Gilles Marchand)
Gilles Marchand
Vice President and Co-Portfolio Manager
(Paul Travers)
Paul Travers
Vice President and Co-Portfolio Manager
April 11, 2000
Senior High Income Portfolio, Inc.
February 29, 2000
RISK/REWARD OF VARIOUS ASSETS
The graph below plots the annualized return and volatility
experienced by several asset classes averaged over the last eight
years. The annualized returns represent the annualization of the
monthly series of returns for each asset class over the time period
indicated. The annualized volatility represents the annualization of
the monthly series of standard deviation for each asset class over
the time period indicated. Asset classes resting on the capital
markets line, linking the risk/return data points for money market
securities and the broad equity market, experienced a proportionate
amount of return for the corresponding amount of risk. Asset classes
falling below the line endured a disproportionate amount of risk
relative to the return they achieved. Finally, asset classes lying
above the line achieved higher returns than justified by the risk
they experienced. Leveraged bank loans fall above the line, which
illustrates that, compared to other asset classes, the bank loan
market provided superior risk/reward characteristics over the
period.
Scatter Chart Referenced Above Appears Here.
Source: Calculated by Merrill Lynch using information and data
presented in Ibbotson Investment Analysis Software, c2000 Ibbotson
Associates, Inc. All rights reserved. Used with permission.
The assets used in the above analysis are represented by the
following indexes: US 30-day Treasury Bill Index (Money Market
Securities); Merrill Lynch Mortgage Index (Mortgage Securities);
Ibbotson's U.S. IT (Intermediate Treasuries); Ibbotson's U.S. LT
Index (Long-Term Treasuries); Merrill Lynch Corporate Index
(Investment-Grade Bonds); Donaldson, Lufkin & Jenrette HY Index
(High Yield Bonds); Donaldson Lufkin & Jenrette Leveraged Loan Index
(Leveraged Loans); EMBI Fixed Rate Index (Emerging Market Bonds);
and Standard & Poor's 500 Index (Broad Equity Market).
Money market securities are managed to maintain stable net asset
values and are highly liquid. US long-term Treasury bonds and US
intermediate Treasury bonds are guaranteed by the US government,
and, if held at maturity, offer both a fixed investment return and a
fixed principal value. Investment-grade bonds, although not
guaranteed by the US government, also offer both fixed principal
value and investment return if held at maturity. High-yield bonds,
emerging market bonds and leveraged loans entail greater risk than
investment-grade bonds or loans. Certain leveraged bank loans may be
considered illiquid.
Past performance is not a guarantee of future results. The
Portfolio's performance is not represented in the above chart.
Senior High Income Portfolio, Inc.
February 29, 2000
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.
Senior High Income Portfolio, Inc.
February 29, 2000
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P Moody's Face
Industries Rating Rating Amount Corporate Debt Obligations Value
<S> <S> <S> <C> <S> <C>
Advertising-- B B1 $ 1,000,000 Outdoor Systems Inc., 8.875% due 6/15/2007 $ 1,020,000
1.1% NR* NR* 3,683,333 Petry Media, Term, due 3/31/2002+++ 3,609,667
--------------
4,629,667
Agricultural B B2 2,000,000 Sun World International, Inc., 11.25% due 4/15/2004 2,025,000
Products--0.5%
Aircraft & BB Ba2 1,980,400 Airplanes Pass Through Trust, 10.875% due 3/15/2012 (d) 1,699,302
Parts--0.4%
Amusement & AMC Entertainment Inc.:
Recreational B- B3 1,275,000 9.50% due 3/15/2009 (b) 975,375
Services--3.2% B- B3 700,000 9.50% due 2/01/2011 528,500
B B2 800,000 Carmike Cinemas Inc., 9.375% due 2/01/2009 600,000
B+ B1 2,000,000 Hollywood Entertainment, 10.625% due 8/15/2004 (b) 1,810,000
BBB- Baa3 4,000,000 Metro Goldwyn Mayer Co. (MGM), Term A, due 12/15/2005+++ 3,926,668
B B2 2,500,000 Riddell Sports, Inc., 10.50% due 7/15/2007 2,100,000
B+ B1 3,000,000 SFX Entertainment, Term B, due 6/30/2006+++ 3,002,625
--------------
12,943,168
Apparel--1.0% Arena Brands, Inc.+++:
NR* NR* 753,541 Revolving Credit, due 6/01/2002 697,026
NR* NR* 829,163 Term A, due 6/01/2002 768,012
NR* NR* 1,976,776 Term B, due 6/01/2002 1,833,460
B- Ba3 1,500,000 GFSI Inc., 9.625% due 3/01/2007 900,000
--------------
4,198,498
Automotive CC Caa1 4,000,000 Cambridge Industries Inc., 10.25% due 7/15/2007 720,000
Equipment-- BB- Ba3 3,737,500 Collins & Aikman, Term A, due 12/31/2003+++ 3,683,773
4.2% B+ B2 1,000,000 Delco Remy International Inc., 10.625% due 8/01/2006 985,000
BB- Ba3 800,000 Hayes Lemmerz International Inc., 8.25% due 12/15/2008 698,000
CCC+ Caa2 3,635,000 Key Plastics, Inc., 10.25% due 3/15/2007 1,163,200
CCC+ Caa1 1,500,000 Newcor Inc., 9.875% due 3/01/2008 885,000
Safelite Glass Corp.+++:
B+ B1 2,051,122 Term B, due 12/23/2004 1,119,912
B+ B1 2,051,122 Term C, due 12/23/2005 1,119,912
B- B3 1,600,000 Special Devices Inc., 11.375% due 12/15/2008 1,088,000
BB B2 1,875,000 Tenneco Inc., 11.625% due 10/15/2009 (b) 1,905,469
Venture Holdings Trust:
B B2 3,325,000 9.50% due 7/01/2005 3,025,750
B- B3 700,000 12% due 6/01/2009 595,000
--------------
16,989,016
Broadcast B B2 2,875,000 Ackerley Group Inc., 9% due 1/15/2009 2,713,281
Radio & TV-- B- B3 1,000,000 ++Acme Television/Finance, 10.875% due 9/30/2004 881,250
5.0% B- B3 3,000,000 Albritton Communications, 9.75% due 11/30/2007 2,910,000
NR* NR* 3,200,000 Gocom Communications, Term B, due 12/31/2007+++ 3,192,000
NR* Caa1 5,000,000 ++Radio Unica Corp., 11.75% due 8/01/2006 3,200,000
B- B3 3,775,000 Spanish Broadcasting System, 9.625% due 11/01/2009 3,708,938
Young Broadcasting Corporation:
B B2 2,000,000 10.125% due 2/15/2005 1,960,000
B B2 2,000,000 9% due 1/15/2006 1,825,000
--------------
20,390,469
</TABLE>
Senior High Income Portfolio, Inc.
February 29, 2000
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face
Industries Rating Rating Amount Corporate Debt Obligations Value
<S> <S> <S> <C> <S> <C>
Building & B- B2 $ 1,525,000 Webb (Del E.) Corp., 10.25% due 2/15/2010 $ 1,330,563
Construction--
0.3%
Building Dal Tile International, Inc.+++:
Materials--1.4% NR* NR* 1,069,519 Revolving Credit, due 12/31/2002 1,037,433
NR* NR* 1,764,706 Term, due 12/31/2002 1,720,588
Paint Sundry+++:
NR* NR* 886,076 Term, due 8/11/2008 841,772
NR* NR* 604,494 Term B, due 8/11/2005 595,426
NR* NR* 503,228 Term C, due 8/11/2006 495,679
B B2 1,000,000 Republic Group Inc., 9.50% due 7/15/2008 900,000
--------------
5,590,898
Cable CSC Holdings Inc.:
Television BB+ Ba2 800,000 7.25% due 7/15/2008 746,840
Services--9.8% BB+ Ba2 1,000,000 7.625% due 7/15/2018 920,855
Charter Communications Holdings LLC:
B+ B2 2,500,000 8.625% due 4/01/2009 2,275,000
B+ B2 5,000,000 10% due 4/01/2009 4,968,750
Classic Cable Inc.:
B- B3 800,000 9.375% due 8/01/2009 750,000
B- B3 2,250,000 10.50% due 3/01/2010 (b) 2,252,813
BB B1 2,605,263 Term C, due 1/31/2008+++ 2,608,520
CCC+ B3 3,000,000 Coaxial Communications/Phoenix, 10% due 8/15/2006 2,868,750
BB+ Baa2 3,000,000 Lenfest Communications, Inc., 8.375% due 11/01/2005 3,072,570
NR* B1 1,500,000 Multicanal SA, 10.50% due 4/15/2018 1,211,250
CCC+ B3 500,000 Park N View Inc., 13% due 5/15/2008 350,000
B- B3 1,000,000 RCN Corporation, 10.125% due 1/15/2010 930,000
D Caa3 1,575,000 Supercanal Holdings SA, 11.50% due 5/15/2005 (b)(e) 929,250
Telewest Communications PLC:
B+ B1 5,000,000 9.625% due 10/01/2006 5,025,000
B+ B1 2,900,000 9.875% due 2/01/2010 (b) 2,903,625
United Pan-European Communications NV (b):
B- B2 3,000,000 ++10.875% due 8/01/2009 2,970,000
B+ B2 5,000,000 11.25% due 2/01/2010 5,037,500
--------------
39,820,723
Chemicals-- BB- B3 3,000,000 Acetex Corp., 9.75% due 10/01/2003 2,835,000
8.1% NR* NR* 4,945,652 Epsilon Products, Term B, due 12/31/2005+++ 4,911,873
BBB- Baa3 2,000,000 Equistar Chemicals LP, 8.75% due 2/15/2009 1,949,520
Huntsman Corp.:
B+ B2 6,000,000 9.38% due 7/01/2007 (b) 5,460,000
NR* NR* 3,477,209 Term, due 12/31/2002+++ 3,456,927
Lyondell Petrochemical Co.+++:
NR* Ba3 8,105,809 Term B, due 6/30/2005 8,201,465
NR* Ba3 1,985,000 Term E, due 5/17/2006 2,037,982
NR* NR* 4,029,810 Vinings Industries, Term B, due 3/31/2005+++ 4,005,885
--------------
32,858,652
Computer- NR* NR* 4,225,983 Bridge Information, Term B, due 5/29/2005+++ 4,072,204
Related B- B3 2,000,000 Federal Data Corp., 10.125% due 8/01/2005 1,300,000
Products--1.3% --------------
5,372,204
Consumer B+ B2 1,000,000 Evenflo Company Inc., 11.75% due 8/15/2006 970,000
Products--0.5% BB B1 1,050,000 Home Products International Inc., 9.625% due 5/15/2008 945,000
--------------
1,915,000
</TABLE>
Senior High Income Portfolio, Inc.
February 29, 2000
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face
Industries Rating Rating Amount Corporate Debt Obligations Value
<S> <S> <S> <C> <S> <C>
Diversified B+ Ba1 $ 2,992,500 Blount Inc., Term B, due 6/30/2006+++ $ 3,011,203
- --0.7%
Drilling--2.5% BB- B1 4,000,000 Cliffs Drilling, 10.25% due 5/15/2003 3,980,000
BBB- NR* 2,000,000 Falcon Drilling Co. Inc., 9.75% due 1/15/2001 2,000,000
B+ B1 2,475,000 Parker Drilling Co., 9.75% due 11/15/2006 2,357,438
NR* NR* 1,727,718 Rigco North America, Term, due 9/30/2000+++ 1,684,525
--------------
10,021,963
Educational B- B3 1,050,000 La Petite Academy/LPA Holdings, 10% due 5/15/2008 693,000
Services--0.2%
Electronics/ B B2 3,232,000 Advanced Glassfiber Yarn, 9.875% due 1/15/2009 2,973,440
Electrical BB- Ba3 3,000,000 Amkor Technologies Inc., 9.25% due 5/01/2006 2,910,000
Components-- B B2 1,613,000 BGF Industries Inc., 10.25% due 1/15/2009 1,475,895
2.0% B+ B3 1,000,000 High Voltage Engineering, 10.50% due 8/15/2004 817,500
--------------
8,176,835
Energy--5.7% B Ba2 2,000,000 Belco Oil & Gas Corp., 8.875% due 9/15/2007 1,860,000
B- B3 2,500,000 Bellwether Exploration, 10.875% due 4/01/2007 2,262,500
BBB B3 2,000,000 Chesapeake Energy Corp., 9.625% due 5/01/2005 1,890,000
CCC Caa1 1,000,000 Continental Resources, 10.25% due 8/01/2008 950,000
BBB+ Ba3 1,000,000 Cross Timbers Oil Company, 8.75% due 11/01/2009 917,500
B- Caa1 1,500,000 Energy Corp. of America, 9.50% due 5/15/2007 1,065,000
NR* Ba2 5,000,000 Ferrell Companies, Inc., Term C, due 6/17/2006+++ 4,943,750
B B2 2,000,000 Forest Oil Corporation, 10.50% due 1/15/2006 2,020,000
CCC+ B3 1,850,000 Gothic Production Corp., 11.125% due 5/01/2005 1,540,125
BB- Ba2 2,000,000 Gulf Canada Resources Ltd., 9.25% due 1/15/2004 2,008,360
CC Ca 2,000,000 Kelly Oil & Gas Corp., 10.375% due 10/15/2006 945,000
B+ B1 3,000,000 Nuevo Energy Company, 9.50% due 6/01/2008 2,925,000
--------------
23,327,235
Environmental-- B+ B3 3,200,000 IT Group Inc., 11.25% due 4/01/2009 3,044,000
0.8%
Financial NR* NR* 2,422,081 Blackstone Capital, Term, due 11/30/2000+++ 2,403,915
Services--3.8% NR* Ba3 4,000,000 Highland Legacy Limited Co., 12.29875% due 6/01/2011 (b) 3,960,000
NR* NR* 500,000 Investcorp SA, Term, due 10/21/2008+++ 496,915
NR* Ba3 1,000,000 Pennant CBO Limited, 13.43% due 9/14/2011 (b) 990,000
SKM-Libertyview CBO Limited (b):
NR* Baa2 1,500,000 8.71% due 4/10/2011 1,314,585
NR* Ba3 1,000,000 11.91% due 4/10/2011 877,031
BB+ Ba3 3,000,000 Sovereign Bank, Term, due 11/17/2003+++ 3,013,125
NR* NR* 2,378,830 Wasserstein, Term, due 11/30/2000+++ 2,360,988
--------------
15,416,559
Food & Kindred B B2 3,000,000 SC International Services, Inc., 9.25% due 9/01/2007 2,760,000
Products--0.7%
Forest B B2 4,500,000 Ainsworth Lumber Company, 12.50% due 7/15/2007 (c) 4,848,750
Products--3.3% B+ B3 550,000 Millar Western Forest, 9.875% due 5/15/2008 543,125
BB+ Ba2 6,000,000 Tembec Finance Corporation, 9.875% due 9/30/2005 6,060,000
CCC+ Caa1 4,000,000 Uniforet Inc., 11.125% due 10/15/2006 1,800,000
--------------
13,251,875
</TABLE>
Senior High Income Portfolio, Inc.
February 29, 2000
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face
Industries Rating Rating Amount Corporate Debt Obligations Value
<S> <S> <S> <C> <S> <C>
Furniture & B+ Ba3 $ 3,150,000 Formica Corporation, 10.875% due 3/01/2009 $ 2,787,750
Fixtures--0.7%
Gaming--6.7% B- B1 1,375,000 Argosy Gaming Company, 10.75% due 6/01/2009 1,412,813
B- Ba3 1,350,000 Coast Hotels & Casino, 9.50% due 4/01/2009 1,265,625
B B2 1,500,000 Harvey Casino Resorts, 10.625% due 6/01/2006 1,541,250
Hollywood Park Inc.:
BB- Ba2 5,275,000 9.25% due 2/15/2007 5,103,563
B B2 2,000,000 9.50% due 8/01/2007 1,940,000
BB+ Ba2 1,150,000 Horseshoe Gaming Holdings, 8.625% due 5/15/2009 1,060,875
BB Ba2 2,360,000 Isle of Capri Casinos, 8.75% due 4/15/2009 2,091,550
NR* NR* 735,488 Jazz Casino Co. LLC, 8% due 5/15/2010 (c) 69,871
B B2 5,000,000 Majestic Star LLC, 10.875% due 7/01/2006 4,800,000
BB- Ba3 3,000,000 Mohegan Tribal Gaming, 8.75% due 1/01/2009 2,872,500
B B2 3,850,000 Peninsula Gaming LLC, 12.25% due 7/01/2006 (b)(g) 4,004,000
B B2 1,700,000 Trump Atlantic City Associates/Funding Inc., 11.25% due
5/01/2006 1,156,000
--------------
27,318,047
Grocery B B2 5,000,000 Grand Union Co., Term, due 8/17/2003+++ 4,975,000
Stores--1.2%
Healthcare B+ NR* 4,825,000 Iasis Health, Term B, due 9/30/2006+++ 4,728,500
Providers--1.8% D Caa2 3,000,000 Integrated Health Services, Inc., 9.50% due 9/15/2007 60,000
BB- Ba3 2,500,000 Tenet Healthcare Corp., 8.625% due 1/15/2007 2,375,000
--------------
7,163,500
Hotels & B- Ba3 6,000,000 Extended Stay America, 9.15% due 3/15/2008 5,355,000
Motels--4.9% HMH Properties, Inc.:
BB Ba2 1,600,000 8.45% due 12/01/2008 1,436,000
BB Ba2 1,075,000 Series B, 7.875% due 8/01/2008 932,563
B B3 4,520,000 Lodgian Financing Corporation, 12.25% due 7/15/2009 4,248,800
BB Ba2 3,000,000 Prime Hospitality Corporation, 9.25% due 1/15/2006 2,910,000
Wyndam International, Term+++:
B+ B3 2,000,000 due 6/30/2006 1,974,062
B+ B3 3,000,000 due 6/30/2006 2,921,667
--------------
19,778,092
Industrial BB- Ba3 1,750,000 American Plumbing & Mechanic, 11.625% due 10/15/2008 1,592,500
Consumer B B2 3,450,000 Building One Services, 10.50% due 5/01/2009 (b) 3,174,000
Services--1.2% --------------
4,766,500
Insurance--0.5% B+ Ba3 2,475,000 Willis Corroon Corporation, 9% due 2/01/2009 1,980,000
Leasing Avis Rent A Car+++:
& Rental BB+ Ba3 2,500,000 Term B, due 6/30/2006 2,516,537
Services--3.3% BB+ Ba3 2,500,000 Term C, due 6/30/2007 2,518,125
CCC B1 4,975,000 MEDIQ Life Support Services, Inc., Term, due 6/30/2006+++ 3,258,625
National Equipment Services:
B B3 1,000,000 10% due 11/30/2004 965,000
B B3 500,000 10% due 11/30/2004 482,500
B B3 500,000 Neff Corp., 10.25% due 6/01/2008 450,000
BB+ Ba2 2,500,000 United Rental, Term C, due 8/12/2006+++ 2,497,265
B B3 1,000,000 Universal Hospital Services, 10.25% due 3/01/2008 680,000
--------------
13,368,052
</TABLE>
Senior High Income Portfolio, Inc.
February 29, 2000
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face
Industries Rating Rating Amount Corporate Debt Obligations Value
<S> <S> <S> <C> <S> <C>
Manufacturing B+ B1 $ 1,500,000 Citation Corporation, Term B, due 12/01/2007+++ $ 1,485,469
- --4.3% B- B2 1,932,000 Fairfield Manufacturing Company Inc., 9.625% due
10/15/2008 1,758,120
CCC- Ca 1,500,000 Morris Materials Handling, 9.50% due 4/01/2008 285,000
B- B3 1,250,000 Russell-Stanley Holding Inc, 10.875% due 2/15/2009 1,087,500
NR* B1 4,924,623 Terex Corp., Term B, due 3/06/2005+++ 4,931,660
BB- Ba3 3,500,000 TransTechnology, Term, due 8/31/2009+++ 3,447,500
B B2 5,000,000 Woods Equipment Company, 12% due 7/15/2009 4,550,000
--------------
17,545,249
Medical Alaris Medical Systems, Inc.+++:
Equipment--0.9% B+ B1 1,246,400 Term B, due 11/01/2003 1,241,726
B+ B1 1,246,400 Term C, due 11/01/2004 1,241,726
B+ B1 1,173,141 Term D, due 5/01/2005 1,168,742
--------------
3,652,194
Metals & CC Ca 3,000,000 Anker Coal Group, Inc., 9.75% due 10/01/2007 2,100,000
Mining--6.4% BB NR* 596,695 Asarco Incorporated, Term B, due 5/18/2001+++ 595,576
B B1 850,000 Bayou Steel Corp., 9.50% due 5/15/2008 784,125
BB- B2 2,000,000 CSN Iron SA, 9.125% due 6/01/2007 (b) 1,680,000
GS Technologies Operating Co.:
B Caa1 1,000,000 12% due 9/01/2004 560,000
B Caa1 1,000,000 12.25% due 10/01/2005 560,000
D C 1,000,000 Geneva Steel, 9.50% due 1/15/2004 (e) 190,000
Ispat International N.V.+++:
BB Ba3 1,822,250 Term B, due 7/15/2005 1,812,126
BB Ba3 1,822,250 Term C, due 7/15/2006 1,812,126
B+ Aaa 3,500,000 Ivaco, Inc., 11.50% due 9/15/2005 3,753,750
CCC+ Caa2 1,600,000 Metal Management Inc., 10% due 5/15/2008 1,200,000
B+ B2 875,000 Pen Holdings Inc., 9.875% due 6/15/2008 796,250
B B3 3,000,000 Renco Metals Inc., 11.50% due 7/01/2003 2,557,500
B+ B1 2,000,000 Russel Metals Inc., 10% due 6/01/2009 2,040,000
B+ B2 6,000,000 Wheeling-Pittsburg Steel Corp., Term, due 11/15/2006+++ 5,730,000
--------------
26,171,453
Online B- B3 1,150,000 PSINet Inc., 11% due 8/01/2009 1,152,875
Services--0.5% B- B3 750,000 Verio Inc., 11.25% due 12/01/2008 768,750
--------------
1,921,625
Packaging--1.9% B B2 4,000,000 Anchor Glass, 11.25% due 4/01/2005 3,200,000
B- Caa1 675,000 Consumers Packaging Inc., 9.75% due 2/01/2007 384,750
B- B3 1,000,000 Fonda Group Inc., 9.50% due 3/01/2007 835,000
B B3 4,000,000 Spinnaker Industries Inc., 10.75% due 10/15/2006 3,200,000
--------------
7,619,750
Paper--5.6% B B3 1,150,000 American Tissue Inc., 12.50% due 7/15/2006 (b) 1,178,750
BB Ba2 4,975,000 Pacifica, Term B, due 12/31/2006+++ 4,999,875
B+ B2 5,000,000 Repap New Brunswick, Inc., Term B, due 6/01/2004+++ 4,896,875
Riverwood International, Inc.+++:
B+ B1 8,359,962 Term B, due 2/28/2004 8,394,364
B+ B1 3,343,002 Term C, due 8/28/2004 3,357,628
--------------
22,827,492
</TABLE>
Senior High Income Portfolio, Inc.
February 29, 2000
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face
Industries Rating Rating Amount Corporate Debt Obligations Value
<S> <S> <S> <C> <S> <C>
Petroleum BB Ba3 $ 5,000,000 Clark Refining & Marketing, Term, due 11/15/2004+++ $ 3,125,000
Refineries BB- B1 2,000,000 Tesoro Petroleum Corp., 9% due 7/01/2008 1,845,000
- --1.5% B- B3 2,000,000 United Refining Co., 10.75% due 6/15/2007 1,200,000
--------------
6,170,000
Printing & B- Caa3 800,000 Premier Graphics Inc., 11.50% due 12/01/2005 360,000
Publishing B- B3 900,000 Regional Independent Media, 10.50% due 7/01/2008 900,000
- --0.8% B- B3 1,500,000 T/SF Communications Corp., 10.375% due 11/01/2007 1,428,750
BBB- Baa3 750,000 World Color Press Inc., 8.375% due 11/15/2008 733,325
--------------
3,422,075
Property NR* Ba3 3,000,000 NRT Incorporated, Term, due 7/31/2004+++ 2,987,814
Management-- B- B1 600,000 Prison Realty Trust Inc., 12% due 6/01/2006 576,000
0.9% --------------
3,563,814
Restaurants-- Domino & Bluefence+++:
1.2% B+ B1 904,914 Term B, due 12/21/2006 909,721
B+ B1 905,857 Term C, due 12/21/2007 910,872
NR* B1 2,957,627 Shoney's Inc., Term B, due 4/30/2002+++ 2,834,392
--------------
4,654,985
Retail NR* NR* 3,960,000 Asbury Automotive, Senior Note, due 3/31/2005+++ 3,910,500
Specialty--1.8% B B3 1,575,000 TM Group Holdings, 11% due 5/15/2008 1,559,250
B- Caa1 2,000,000 United Auto Group, Inc., 11% due 7/15/2007 1,900,000
--------------
7,369,750
Satellite Echostar DBS Corporation:
Telecom- B B2 700,000 9.25% due 2/01/2006 682,500
munications B B2 3,275,000 9.375% due 2/01/2009 3,201,313
Distribution Pegasus Communications:
Systems--2.1% CCC+ B3 350,000 9.75% due 12/01/2006 337,750
NR* NR* 2,000,000 Term, due 4/30/2005+++ 2,005,834
B+ B1 2,425,000 Satelites Mexicanos SA, 9.75% due 6/30/2004 (b) 2,303,750
--------------
8,531,147
Shipbuilding BB Ba1 4,000,000 Newport News Shipbuilding, Inc., 9.25% due 12/01/2006 3,920,000
& Repairing
- --1.0%
Shipping--1.8% BB- Ba3 4,500,000 Eletson Holdings, Inc., 9.25% due 11/15/2003 3,757,500
CCC+ B2 1,525,000 Enterprises Shipholding, 8.875% due 5/01/2008 930,250
BB Ba2 3,000,000 Stena AB, 10.50% due 12/15/2005 2,760,000
--------------
7,447,750
Textile Mill B Caa3 3,000,000 Galey & Lord, Inc., 9.125% due 3/01/2008 930,000
Products--0.8% B- Caa1 900,000 Globe Manufacturing Corp., 10% due 8/01/2008 378,000
BB Ba3 2,050,000 Westpoint Stevens Inc., 7.875% due 6/15/2008 (f) 1,722,000
--------------
3,030,000
Tower BB- B1 4,000,000 American Tower, Term B, due 12/31/2007+++ 4,030,832
Construction Crown Castle International Corporation:
& Leasing--1.8% B+ B1 500,000 9% due 5/15/2011 472,500
B B1 3,000,000 9.50% due 8/01/2011 2,917,500
--------------
7,420,832
Transportation D Ca 4,000,000 AmeriTruck Distribution Corp., 12.25% due 11/15/2005 (e) 85,000
Services--0.5% BB- NR* 2,000,000 Autopistas del Sol SA, 10.25% due 8/01/2009 (b) 1,650,000
NR* NR* 556,651 Trism, 12% due 2/09/2005 (e) 333,991
--------------
2,068,991
</TABLE>
Senior High Income Portfolio, Inc.
February 29, 2000
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face
Industries Rating Rating Amount Corporate Debt Obligations Value
<S> <S> <S> <C> <S> <C>
Utilities--1.0% BB Ba1 $ 4,500,000 AES Corporation, 8.50% due 11/01/2007 $ 4,106,250
Waste Allied Waste+++:
Management-- BB Ba3 2,272,727 Term B, due 6/30/2006 2,194,095
3.5% BB Ba3 2,727,273 Term C, due 6/30/2007 2,634,496
B+ B2 3,000,000 Allied Waste North America, 10% due 8/01/2009 2,475,000
BB- B3 5,000,000 ++Norcal Waste Systems, 13.50% due 11/15/2005 5,262,500
B+ Ca 1,350,000 Safety-Kleen Corporation, 9.25% due 5/15/2009 1,161,000
B B3 575,000 Stericycle Inc., 12.375% due 11/15/2009 587,938
--------------
14,315,029
Wired B B3 3,375,000 Caprock Communications Corporation, 11.50% due 5/01/2009 3,425,625
Telecommun- NR* NR* 3,350,000 ++E.Spire Communications, 10.521% due 7/01/2008 1,641,500
ications--7.7% B B3 500,000 Hermes Europe RailTel BV, 10.375% due 1/15/2009 468,750
B B3 2,850,000 Level 3 Communications Inc., 9.125% due 5/01/2008 2,579,250
B+ B2 750,000 Metromedia Fiber Network, 10% due 11/15/2008 736,875
BBB Baa3 1,675,000 ++Metronet Communications, 9.95% due 6/15/2008 1,317,384
Nextlink Communications Inc.:
B B2 2,500,000 9% due 3/15/2008 2,325,000
B B2 3,000,000 ++12.25% due 6/01/2009 1,815,000
NR* NR* 2,500,000 Pacific Cross, Term B, due 7/28/2006+++ 2,443,750
Primus Telecommunications Group:
B- B3 800,000 11.75% due 8/01/2004 792,000
B- B3 1,475,000 11.25% due 1/15/2009 1,401,250
RSL Communications PLC:
B- B2 3,000,000 9.125% due 3/01/2008 2,445,000
B- B2 3,000,000 ++11.965% due 3/01/2008 1,627,500
B- B3 3,333,333 Teligent Inc., Term, due 7/01/2002+++ 3,272,917
NR* NR* 500,000 Versatel Telecom BV, 11.875% due 7/15/2009 (b) 510,000
Williams Communication Group Inc.:
BB- B2 1,250,000 10.70% due 10/01/2007 1,284,375
BB- B2 1,250,000 10.875% due 10/01/2009 1,275,000
Worldwide Fiber Inc.:
B+ B3 1,500,000 12.50% due 12/15/2005 1,571,250
B+ B3 500,000 12% due 8/01/2009 520,000
--------------
31,452,426
Wireless B- Caa1 3,000,000 ++McCaw International Ltd., 13.355% due 4/15/2007 2,175,000
Telecommun- B- B3 1,650,000 ++Microcell Telecommunications, 12% due 6/01/2009 1,076,625
ications--5.8% Nextel Communications, Inc.+++:
BB- Ba2 2,500,000 Term B, due 6/30/2008 2,527,232
BB- Ba2 2,500,000 Term C, due 12/31/2008 2,527,232
NR* NR* 1,000,000 ++PTC International Finance BV, 10.269% due 7/01/2007 680,000
B+ B2 750,000 PTC International Finance II SA, 11.25% due 12/01/2009 (b) 757,500
NR* B2 5,000,000 Telecorp PCS, Inc., Term B, due 1/15/2008+++ 4,989,585
CCC+ Caa1 2,000,000 ++Telesystem International Wireless Inc., 16.147% due
6/30/2007 1,280,000
VoiceStream Wireless Corporation/VoiceStream Wireless
Holding Company:
B- B2 575,000 10.375% due 11/15/2009 (b) 594,406
B+ B1 7,000,000 Term B, due 1/15/2009+++ 7,041,013
--------------
23,648,593
Total Investments in Corporate Debt Obligations
(Cost--$576,093,123)--128.6% 522,462,176
</TABLE>
Senior High Income Portfolio, Inc.
February 29, 2000
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares
Industries Held Equity Investments Value
<S> <C> <S> <C>
Cable Television 500 Park N View Inc. (Warrants) (a) $ 500
Services--0.0% 615,733 Supercanal Holdings SA (Warrants) (a) 6
--------------
506
Energy--0.2% 55,766 Forcenergy Inc. (e) 780,724
Financial Services--0.0% 1,500 Olympic Financial Limited (Warrants) (a) 1,500
Metals & Mining--0.0% 3,000 Gulf States Steel (Warrants) (a)(b) 30
Telephone 1,000 Unifi Communications (Warrants) (a)(b) 10
Communications--0.0%
Transportation Services--0.0% 35,255 Trism (e) 17,628
Wired Telecommunications--0.1% 2,000 Metronet Communications (Warrants) (a)(b) 411,000
Wireless Telecommunications--0.0% 3,000 McCaw International Ltd. (Warrants) (a)(b) 6,750
Total Equity Investments (Cost--$1,277,731)--0.3% 1,218,148
Face
Amount Short-Term Investments
Commercial Paper**--0.1% $ 312,000 General Motors Acceptance Corp., 5.94% due 3/01/20003 12,000
Total Short-Term Investments (Cost--$312,000)--0.1% 312,000
Total Investments (Cost--$577,682,854)--129.0% 523,992,324
Liabilities in Excess of Other Assets--(29.0%) (117,947,810)
--------------
Net Assets--100.0% $ 406,044,514
==============
*Not Rated.
**Commercial Paper is traded on a discount basis; the interest rate
shown reflects the discount rate paid at the time of purchase by the
Fund.
++Represents a zero coupon or step bond; the interest rate shown
reflects the effective yield at the time of purchase by the Fund.
+++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. Corporate loans represent 47.7% of the Fund's net
assets.
(a)Warrants entitle the Fund to purchase a predetermined number of
shares of common stock and are non-income producing. The purchase
price and number of shares are subject to adjustment 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)Pass-through security is subject to principal paydowns.
(e)Non-income producing security.
(f)Restricted securities as to resale. The value of the Fund's
investment in restricted securities was approximately $1,722,000,
representing 0.4% of net assets.
Acquisition
Issue Date Cost Value
Westpoint Stevens Inc.,
7.875% due 6/15/2008 6/03/1998 $2,026,121 $1,722,000
Total $2,026,121 $1,722,000
========== ==========
(g)Each $1,000 face amount contains 7.042 convertible preferred
membership interests of Peninsula Gaming LLC.
Ratings of issues shown have not been audited by Deloitte & Touche
LLP.
See Notes to Financial Statements.
</TABLE>
Senior High Income Portfolio, Inc.
February 29, 2000
FINANCIAL INFORMATION
<TABLE>
Statement of Assets, Liabilities and Capital as of February 29, 2000
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$577,682,854) $ 523,992,324
Cash 718,445
Interest receivable 11,647,304
Deferred facility fees 2,476
Prepaid expenses and other assets 39,148
-------------
Total assets 536,399,697
-------------
Liabilities: Loans 127,000,000
Payables:
Interest on loans $ 1,952,227
Dividends to shareholders 662,596
Investment adviser 174,072
Commitment fees 17,675
Securities purchased 8,487 2,815,057
-------------
Deferred income 158,286
Accrued expenses and other liabilities 381,840
-------------
Total liabilities 130,355,183
-------------
Net Assets: Net assets $ 406,044,514
=============
Capital: Common Stock, par value $.10 per share; 200,000,000 shares
authorized (53,870,134 shares issued and outstanding) $ 5,387,013
Paid-in capital in excess of par 501,426,423
Undistributed investment income--net 3,918,292
Accumulated realized capital losses on investments--net (50,839,209)
Unrealized depreciation on investments--net (53,848,005)
-------------
Total Capital--Equivalent to $7.54 net asset value per share of
Common Stock (market price--$6.5625) $ 406,044,514
=============
See Notes to Financial Statements.
</TABLE>
Senior High Income Portfolio, Inc.
February 29, 2000
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations
<CAPTION>
For the Year Ended
February 29, 2000
<S> <S> <C> <C>
Investment Interest and discount earned $ 61,134,966
Income: Facility and other fees 485,404
-------------
Total income 61,620,370
-------------
Expenses: Loan interest expense $ 10,022,004
Investment advisory fees 3,054,718
Borrowing costs 343,935
Professional fees 125,793
Accounting services 122,200
Transfer agent fees 101,655
Custodian fees 58,794
Printing and shareholder reports 50,499
Listing fees 44,108
Directors' fees and expenses 27,058
Pricing services 15,606
Other 36,247
-------------
Total expenses 14,002,617
-------------
Investment income--net 47,617,753
-------------
Realized & Realized loss on investments--net (21,692,813)
Unrealized Change in unrealized depreciation on investments--net (25,209,528)
Loss on -------------
Investments Net Increase in Net Assets Resulting from Operations $ 715,412
- --Net: =============
See Notes to Financial Statements.
</TABLE>
Senior High Income Portfolio, Inc.
February 29, 2000
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the For the
Year Ended Year Ended
February 29, February 28,
Increase (Decrease) in Net Assets: 2000 1999
<S> <S> <C> <C>
Operations: Investment income--net $ 47,617,753 $ 46,706,030
Realized loss on investments--net (21,692,813) (9,257,432)
Change in unrealized appreciation/depreciation on
investments--net (25,209,528) (42,080,592)
------------- -------------
Net increase (decrease) in net assets resulting from
operations 715,412 (4,631,994)
------------- -------------
Dividends to Dividends to shareholders from investment income--net (47,229,886) (47,373,187)
Shareholders: ------------- -------------
Capital Share Value of shares issued to Common Stock shareholders in
Transactions: reinvestment of dividends -- 8,087,161
------------- -------------
Net increase in net assets resulting from capital share
transactions -- 8,087,161
------------- -------------
Net Assets: Total decreasein net assets (46,514,474) (43,918,020)
Beginning of year 452,558,988 496,477,008
------------- -------------
End of year* $ 406,044,514 $ 452,558,988
============= =============
*Undistributed investment income--net $ 3,918,292 $ 3,530,425
============= =============
See Notes to Financial Statements.
</TABLE>
Senior High Income Portfolio, Inc.
February 29, 2000
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Cash Flows
<CAPTION>
For the Year Ended
February 29, 2000
<S> <S> <C>
Cash Provided Net increase in net assets resulting from operations $ 715,412
by Operating Adjustments to reconcile net increase in net assets resulting from
Activities: operations to net cash provided by operating activities:
Increase in receivables (1,170,612)
Decrease in other assets 29,929
Increase in other liabilities 179,645
Realized and unrealized loss on investments--net 46,902,341
Amortization of discount--net (3,277,399)
-------------
Net cash provided by operating activities 43,379,316
-------------
Cash Provided Proceeds from sales of long-term investments 355,870,725
by Investing Purchases of long-term investments (280,086,126)
Activities: Purchases of short-term investments (125,263,688)
Proceeds from sales and maturities of short-term investments 125,874,000
-------------
Net cash provided by investing activities 76,394,911
-------------
Cash Used for Cash receipts of borrowings 229,000,000
Financing Cash payments on borrowings (301,000,000)
Activities: Dividends paid to shareholders (47,357,937)
-------------
Net cash used for financing activities (119,357,937)
-------------
Cash: Net increase in cash 416,290
Cash at beginning of year 302,155
-------------
Cash at end of year $ 718,445
=============
Cash Flow Cash paid for interest $ 9,924,542
Information: =============
See Notes to Financial Statements.
</TABLE>
Senior High Income Portfolio, Inc.
February 29, 2000
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights
<CAPTION>
For the For the
The following per share data and ratios have been derived Year Year
from information provided in the financial statements. Ended For the Year Ended Ended
Feb. 29, February 28, Feb. 29,
Increase (Decrease) in Net Asset Value: 2000++ 1999++ 1998++ 1997++ 1996++
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 8.40 $ 9.37 $ 9.22 $ 9.21 $ 8.94
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .88 .87 .92 .89 .92
Realized and unrealized gain (loss) on
investments--net (.86) (.95) .14 .04 .27
-------- -------- -------- -------- --------
Total from investment operations .02 (.08) 1.06 .93 1.19
-------- -------- -------- -------- --------
Less dividends from investment income--net (.88) (.89) (.91) (.92) (.92)
-------- -------- -------- -------- --------
Net asset value, end of year $ 7.54 $ 8.40 $ 9.37 $ 9.22 $ 9.21
======== ======== ======== ======== ========
Market price per share, end of year $ 6.5625 $ 8.125 $ 10.125 $ 9.50 $ 9.25
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 1.11% (.87%) 11.95% 10.80% 14.14%
Return:* ======== ======== ======== ======== ========
Based on market price per share (9.02%) (11.26%) 17.41% 13.67% 18.82%
======== ======== ======== ======== ========
Ratios to Average Expenses, excluding interest expense .98% .90% .83% .75% .92%
Net Assets: ======== ======== ======== ======== ========
Expenses 3.45% 2.99% 2.66% 1.84% 2.92%
======== ======== ======== ======== ========
Investment income--net 11.73% 9.87% 9.98% 9.45% 10.14%
======== ======== ======== ======== ========
Leverage: Amount of borrowings (in thousands) $127,000 $199,000 $181,200 $ 81,000 $ 47,000
======== ======== ======== ======== ========
Average amount of borrowings outstanding
during the year (in thousands) $175,899 $174,240 $149,166 $ 82,384 $ 68,473
======== ======== ======== ======== ========
Average amount of borrowings outstanding
per share during the year $ 3.26 $ 3.26 $ 2.85 $ 2.13 $ 2.68
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $406,045 $452,559 $496,477 $477,170 $236,136
Data: ======== ======== ======== ======== ========
Portfolio turnover 46.11% 68.52% 58.60% 98.51% 50.76%
======== ======== ======== ======== ========
*Total investment returns based on market price, which can be
significantly greater or less than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales charges.
++Based on average shares outstanding.
See Notes to Financial Statements.
</TABLE>
Senior High Income Portfolio, Inc.
February 29, 2000
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's financial statements are
prepared in accordance with generally accepted accounting
principles, which may require the use of management accruals and
estimates. 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 are valued in
accordance with guidelines established by the Fund's Board of
Directors. Until July 9, 1999, Corporate Loans for which an active
secondary market exists and for which the Investment Adviser can
obtain at least two quotations from banks or dealers in Corporate
Loans were valued by calculating the mean of the last available bid
and asked prices in the markets for such Corporate Loans, and then
using the mean of those two means. If only one quote for a
particular Corporate Loan was available, such Corporate Loan was
valued on the basis of the mean of the last available bid and asked
prices in the market. As of July 12, 1999, pursuant to the approval
of the Board of Directors, the Corporate Loans are valued at the
mean between the last available bid and asked prices from one or
more brokers or dealers as obtained from Loan Pricing Corporation.
For Corporate Loans for which an active secondary market does not
exist to a reliable degree in the opinion of the Investment Adviser,
such Corporate Loans will be valued by the Investment Adviser at
fair value, which is intended to approximate market value.
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 that 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.
Senior High Income Portfolio, Inc.
February 29, 2000
NOTES TO FINANCIAL STATEMENTS (concluded)
* Options--The Fund is authorized to write and purchase call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written. When a security is purchased or sold through an exercise of
an option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction is less than or exceeds the premiums paid or
received).
Written and purchased options are non-income producing investments.
* Interest rate transactions--The Fund is authorized to enter into
interest rate swaps and purchase or sell interest rate caps and
floors. In an interest rate swap, the Fund exchanges with another
party their respective commitments to pay or receive interest on a
specified notional principal amount. The purchase of an interest
rate cap (or floor) entitles the purchaser, to the extent that a
specified index exceeds (or falls below) a predetermined interest
rate, to receive payments of interest equal to the difference
between the index and the predetermined rate on a notional principal
amount from the party selling such interest rate cap (or floor).
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(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) 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.
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 .50% of
the Fund's average weekly net assets plus the proceeds of any
outstanding borrowings used for leverage.
Accounting services are provided to the Fund by FAM at cost.
During the year ended February 29, 2000, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, $2,448 for security price quotations to
compute the net asset value of the Fund.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended February 29, 2000 were $276,594,613 and
$354,993,582, respectively.
Senior High Income Portfolio, Inc.
February 29, 2000
Net realized losses for the year ended February 29, 2000 and net
unrealized losses as of February 29, 2000 were as follows:
Realized Unrealized
Losses Losses
Long-term investments $(21,692,813) $(53,690,530)
Unfunded corporate loans -- (157,475)
------------ ------------
Total $(21,692,813) $(53,848,005)
============ ============
As of February 29, 2000, net unrealized depreciation for Federal
income tax purposes aggregated $53,734,594, of which $3,274,688
related to appreciated securities and $57,009,282 related to
depreciated securities. The aggregate cost of investments at
February 29, 2000 for Federal income tax purposes was $577,726,918.
4. Capital Share Transaction:
The Fund is authorized to issue 200,000,000 shares of capital stock
par value $.10, all of which are initially classified as Common
Stock. The Board of Directors is authorized, however, to classify
and reclassify any unissued shares of capital stock without approval
of the holders of Common Stock.
Shares issued and outstanding during the year ended February 29,
2000 remained constant and for the year ended February 28, 1999
increased by 909,410 as a result of dividend reinvestment.
5. Unfunded Corporate Loans:
As of February 29, 2000, the Fund had unfunded loan commitments of
$3,586,848, which would be extended at the option of the borrower,
pursuant to the following loan agreements:
Unfunded
Commitment
Borrower (in thousands)
Arena Brands, Inc. $ 983
Dal Tile International, Inc. 1,604
Metro Goldwyn Mayer Co. 1,000
6. Short-Term Borrowings:
On April 29, 1999, the Fund extended its one-year credit agreement
with a syndicate of banks led by The Bank of New York. The agreement
is a $235,000,000 credit facility bearing interest at the Prime
rate, the Federal Funds rate plus .55%, and/or the Eurodollar rate
plus .55%. For the year ended February 29, 2000 the average amount
borrowed was approximately $175,899,000 and the daily weighted
average interest rate was 5.70%. For the year ended February 29,
2000, facility and commitment fees aggregated $343,935.
7. Capital Loss Carryforward:
At February 29, 2000, the Fund had a net capital loss carryforward
of approximately $36,927,000, of which $7,098,000 expires in 2003,
$12,057,000 expires in 2004, $734,000 expires in 2005, $4,283,000
expires in 2007 and $12,755,000 expires in 2008. This amount will be
available to offset like amounts of any future taxable gains.
8. Subsequent Event:
On March 7, 2000, the Board of Directors of the Fund declared an
ordinary income dividend in the amount of $.072735 per share,
payable on March 31, 2000 to shareholders of record as of March 17,
2000.
Senior High Income Portfolio, Inc.
February 29, 2000
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Senior High Income Portfolio, Inc.:
We have audited the accompanying statement of assets, liabilities
and capital, including the schedule of investments, of Senior High
Income Portfolio, Inc. as of February 29, 2000, 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 five-year period then ended. 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
29, 2000 by correspondence with the custodian and financial
intermediaries; where replies were not received from financial
intermediaries, we performed other auditing 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 29, 2000, 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.
Deloitte & Touche LLP
Princeton, New Jersey
April 17, 2000
</AUDIT-REPORT>
Senior High Income Portfolio, Inc.
February 29, 2000
PORTFOLIO PROFILE (unaudited)
AS OF FEBRUARY 29, 2000
Percent of
Ten Largest Holdings Total Assets
Riverwood International, Inc. 2.2%
Lyondell Petrochemical Co. 1.9
United Pan-European Communications NV 1.5
VoiceStream Wireless Corporation/VoiceStream
Wireless Holding Company 1.4
Allied Waste North America, Inc. 1.4
Charter Communications Holdings LLC 1.4
Hollywood Park Inc. 1.3
Tembec Finance Corporation 1.1
Classic Cable Inc. 1.1
WHX Corporation 1.1
Percent of
Five Largest Industries Total Assets
Cable Television Services 8.6%
Chemicals 6.1
Wired Telecommunications 5.8
Gaming 5.1
Metals & Mining 5.0
Percent of
Quality Ratings Long-Term
S&P/Moody's Investments
AAA/Aaa 0.7%
BBB/Baa 3.3
BB/Ba 31.0
B/B 51.8
CCC/Caa 2.4
CC/Ca 0.6
NR (Not Rated) 10.2
Percent of
Breakdown of Investments Long-Term
by Country Investments
United States 85.5%
Canada 5.5
United Kingdom 2.8
Netherlands 2.3
Greece 0.9
Argentina 0.7
Cayman Islands 0.6
Sweden 0.5
Mexico 0.4
Panama 0.3
Luxembourg 0.3
Belgium 0.1
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Richard R. West, Director
Arthur Zeikel, Director
Joseph T. Monagle Jr., Senior Vice President
Richard C. Kilbride, Vice President
Gilles Marchand, Vice President
Paul Travers, Vice President
Donald C. Burke, Vice President and Treasurer
Bradley J. Lucido, Secretary
Custodian and Transfer Agent
The Bank of New York
110 Washington Street
New York, NY 10286
NYSE Symbol
ARK
