SENIOR
HIGH
INCOME
PORTFOLIO II,
INC.
Annual Report August 31, 1994
This report, including the financial information herein,is
transmitted to the shareholders of Senior High Income Portfolio II,
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 represen-
tation 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.
Senior High Income
Portfolio II, Inc.
Box 9011
Princeton, NJ
08543-9011
<PAGE>
SENIOR HIGH INCOME PORTFOLIO II, INC.
The Benefits and
Risks of
Leveraging
Senior High Income Portfolio II, 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 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 Preferred Stock) may reduce the Common
Stock's yield and negatively impact its market price. If the income
derived from securities purchased with assets received from leverage
exceeds the cost of leverage, the fund's net income will be greater
than if leverage had not been used. Conversely, if the income from
the securities purchased is not sufficient to cover the cost of
leverage, the fund's net income will be less than if leverage had
not been used, and therefore the amount available for distribution
to Common Stock shareholders will be reduced. In this case, the fund
may nevertheless decide to maintain its leveraged position in order
to avoid capital losses on securities purchased with leverage.
However, the fund will not generally utilize leverage if it
anticipates that its leveraged capital structure would result in a
lower rate of return for its Common Stock than would be obtained if
the Common Stock were unleveraged for any significant amount of
time.
<PAGE>
Officers and
Directors
Arthur Zeikel, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Richard R. West, Director
Terry K. Glenn, Executive Vice President
N. John Hewitt, Senior Vice President
Donald C. Burke, Vice President
R. Douglas Henderson, Vice President
Gerald M. Richard, Treasurer
Patrick D. Sweeney, Secretary
Custodian and Transfer Agent
The Bank of New York
110 Washington Street
New York, New York 10286
NYSE Symbol
SAL
DEAR SHAREHOLDER
Senior High Income Portfolio II, Inc. seeks to provide shareholders
with high current income by investing primarily in senior debt
obligations of companies, including portions of corporate loans made
by banks and other financial institutions and both privately placed
and publicly offered corporate bonds and notes. These securities by
and large are rated in the lower rating categories of the
established rating agencies or are unrated, as is commonly the case
with bank loans.
<PAGE>
For the six months ended August 31, 1994, the Portfolio's total
investment return was -0.41%, based on a change in per share net
asset value from $9.72 to $9.25, and assuming reinvestment of $0.410
per share income dividends. During the same period, the net
annualized yield of the Portfolio's Common Stock was 8.97%. Since
inception (September 24, 1993) through August 31, 1994, the total
investment return on the Portfolio's Common Stock was +5.08%, based
on a change in per share net asset value from $9.50 to $9.25, and
assuming reinvestment of $0.707 per share income dividends. At the
end of the August period, the Portfolio was 28% leveraged, having
borrowed $60 million of its $80 million line of credit available at
an average borrowing cost of 5.09%. (For a complete explanation of
the benefits and risks of leveraging, see page 1 of this report to
shareholders.)
As of August 31, 1994, the Portfolio paid out a fixed dividend of
8.40% in order to permit the Portfolio to maintain a more stable
level of distributions. For Federal income tax purposes, the
Portfolio will be required to distribute substantially all of its
net investment income for each calendar year. All net realized long-
term and short-term capital gains, if any, will be distributed to
the Portfolio's shareholders, annually. If the increase in short-
term interest rates--including the London Interbank Offered Rate
(LIBOR)--is sustained, we would expect the fixed dividend to be
increased over time. The dividend has increased from 8.25% since
inception of the Portfolio.
The Environment
The fiscal year ended August 31, 1994 were characterized by an
interest rate environment that proved a mixed blessing for the
Portfolio's investments. The steady rise in interest rates that
began in February and has been the overriding factor in the
volatility in the US financial markets and the poor performance of
the fixed-income sector in general has had a positive effect on the
floating rate portion of the Portfolio, while eroding the high-yield
market further in sympathy with intermediate-term and long-term US
Treasury securities. On August 16, 1994, the Federal Reserve Board
raised short-term interest rates for the fifth time this year by
increasing the discount rate it charges on loans to its member banks
by 50 basis points (0.50%) to 4% and by pushing the Federal Funds
target rate to 4.75% from 4.25% in its effort to remove some
uncertainty in the financial markets and keep inflation at bay.
However, selected higher-than-expected economic indicators
subsequent to the end of the period have reflected continued strong
growth in the economy and the likelihood of further increases in
short-term interest rates.
<PAGE>
Portfolio Strategy
In light of the current market environment, our focus over the last
six months has been on weighting the Portfolio more toward senior
secured floating rate bank loans in order to take advantage of the
rise in short-term interest rates. More than 98% of the Portfolio's
investments in corporate loans are currently 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 historically tracked very closely with
other short-term interest rates in the United States, particularly
the Federal Funds rate. Since the first tightening of monetary
policy by the Federal Reserve Board in February, three-month LIBOR
has risen from 3.25% to 5.25%, an increase of 200 basis points.
Since the average reset on the Portfolio's floating rate investments
is 53 days, their yields are likely to continue to benefit from the
latest interest rate increase as they move through their resets
during the next quarter. At the end of the period under review,
floating rate securities made up 52% of the Portfolio's investments,
with an additional 45% invested in fixed-rate high-yield bonds.
Approximately $20 million in availability remains under the leverage
facility.
In the senior secured bank loan market, secondary issues continue to
be well bid as banks, insurance companies and non-bank funds
aggressively look to book floating rate assets. At the same time,
there has been a substantial increase in leveraged primary
transactions as corporate borrowers tap the bank loan market rather
than pay the higher yields demanded in the high-yield bond market.
At a yield spread over LIBOR and no call protection, bank loans are
a much more attractive alternative than they were during the "hot"
public markets of one year ago.
The high-yield bond market, on the other hand, continued to suffer
from the overhang from the battered US Treasury market, even though
overall credit quality in many sectors is improving with the
strengthening economy. This environment of soft bond prices created
buying opportunities for the Portfolio. During the later part of the
August period, we focused on selectively trading out of lower-
yielding coupons into higher-yielding new issues or secondary names
trading at attractive relative spreads. New-issue placement overall
was down for the first eight months of 1994 compared to 1993 for two
reasons. First, there was a perceived reluctance on the part of
issuers to tap the market in advance of expected Federal Reserve
Board interest rate action, and second, there was a significant
slowdown of cash inflows into high-yield mutual funds. We expect
this environment to continue for the remainder of the year with some
week-to-week volatility based on supply pressures from the new-issue
calendar. However, overall fundamentals remain positive for this
asset class as favorable quarterly earnings comparisons occur with
increasing regularity.
<PAGE>
We continue to focus on buying higher-yielding, improving-quality
cyclical credits. This is reflected in the Portfolio's large
holdings of names, such as Jefferson Smurfit/Container Corp. of
America and Stone Container Corp. in the recovering linerboard
industry, while the steel and homebuilding industries also reflect
higher cyclical concentrations.
At August 31, 1994, cash equivalents totaled 1.2% of net assets. The
Portfolio's average stated maturity was 5.9 years but had an 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. The Portfolio is diversified in the floating rate
portion in investments across 13 industries, and in the fixed-rate
portion in 42 investments across 25 industries.
Stronger companies are taking advantage of attractive public debt
and equity markets to improve their balance sheets. These trends
have translated into lower default rates in both the bank loan and
bond markets. We believe that low default rates will continue
through the remainder of 1994.
Looking forward, we expect to continue to emphasize senior secured
floating rate bank loans in order to take advantage of the rising
interest rate environment while being opportunistic in our high-
yield bond purchases. We believe the Portfolio is well positioned to
provide shareholders with the benefit of an increase in short-term
interest rates.
In Conclusion
We appreciate your ongoing investment in Senior High Income
Portfolio II, Inc., and we look forward to reviewing our strategy
with you again in our next report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(R. Douglas Henderson)
R. Douglas Henderson
Vice President and Portfolio Manager
October 10, 1994
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Debt Obligations Cost (Note 1b)
<S> <S> <S> <C> <S> <C> <C>
Aerospace--9.6% Aviall, Inc., Term Loan, Tranche B,
due 11/30/2000:*
NR NR $1,176,471 7.69% to 10/07/1994 $ 1,176,471 $ 1,176,471
NR NR 2,941,177 8.19% to 12/07/1994 2,941,177 2,941,177
NR NR 882,353 7.75% to 9/07/1994 882,353 882,353
BB- Ba3 3,000,000 BE Aerospace, Senior Notes, 9.75% due
3/01/2003 3,060,000 2,895,000
NR NR 2,754,640 Gulfstream Delaware Corp., Term Loan A,
due 3/31/1998, 7.63% to 1/13/1995* 2,754,640 2,754,640
NR NR 2,240,000 Gulfstream Delaware Corp., Term Loan B,
due 3/31/1998, 7.57% to 9/08/1994* 2,240,000 2,240,000
B B2 2,000,000 Talley Manufacturing & Technology,
Inc., Senior Notes, 10.75% due 10/15/2003 2,000,000 1,850,000
------------ ------------
15,054,641 14,739,641
Automotive B B3 1,000,000 Doehler Jarvis, Inc., Senior Notes,
Products--1.3% 11.875% due 6/01/2002 995,000 995,000
B B2 1,000,000 JPS Automotive Products Corp., Senior
Notes, 11.125% due 6/15/2001 1,000,000 1,000,000
------------ ------------
1,995,000 1,995,000
Broadcast/ BB Ba2 1,000,000 Continental Cablevision, Inc., Senior
Media--1.8% Notes, 8.50% due 9/15/2001 1,052,500 920,000
B Caa 2,000,000 Marcus Cable, Senior Notes, 11.875% due
10/01/2005 2,000,000 1,870,000
------------ ------------
3,052,500 2,790,000
Building & B B2 2,000,000 NVR, Inc., Senior Notes, 11.00% due
Construction--1.8% 4/15/2003 2,082,500 1,840,000
B- B2 1,000,000 The Presley Companies, Senior Notes, 12.50%
due 7/01/2001 1,000,000 975,000
------------ ------------
3,082,500 2,815,000
Building BB- B1 2,000,000 USG Corp., Senior Secured Notes, 10.25%
Products--1.3% due 12/15/2002 2,025,000 2,040,000
<PAGE>
Carbon & Graphite B+ B3 2,000,000 Carbide/Graphite Group, Senior Notes,
Products--1.3% 11.50% due 9/01/2003 2,150,000 2,035,000
Chemicals--4.6% BB- B1 2,000,000 Huntsman Corp., Mortgage Corp., 11.00% due
4/15/2004 2,030,000 2,085,000
NR NR 5,000,000 Inspec Chemical Corp., Term Loan B, due
12/02/2000, 7.437% to 9/30/1994* 5,000,000 5,000,000
------------ ------------
7,030,000 7,085,000
Computers--3.1% BB- B1 4,500,000 Dell Computer Corp., Senior Notes, 11.00%
due 8/15/2000 4,513,125 4,725,000
Consumer Food NR NR 4,988,623 President Baking Company, Inc., Term Loan
Products--9.9% B, due 9/30/2000, 7.562% to 9/23/1994* 4,988,623 4,988,623
B+ B1 3,000,000 Royal Crown Corp., Senior Secured Notes,
9.75% due 8/01/2000 3,079,625 2,820,000
Specialty Foods Corp., Term Loan B, due
8/31/1999:*
NR NR 44,400 9.75% (1) 44,400 44,400
NR NR 3,720,000 7.69% to 10/18/1994 3,720,000 3,720,000
NR NR 3,620,800 8.19% to 10/18/1994 3,620,800 3,620,800
------------ ------------
15,453,448 15,193,823
Consumer B+ B2 1,565,000 Drypers Corp., Senior Notes, 12.50% due
Products--1.1% 11/01/2002 1,584,563 1,651,075
Containers--5.2% B B1 3,000,000 Calmar Inc., Senior Notes, 12.00% due
12/15/1997 3,015,000 3,037,500
Silgan Corp., Term Loan B, due 9/15/1996*:
NR NR 2,500,000 8.188% to 12/07/1994 2,500,000 2,500,000
NR NR 2,500,000 8.125% to 12/09/1994 2,500,000 2,500,000
------------ ------------
8,015,000 8,037,500
<PAGE>
Diversified American Standard, Inc., Term Loan,
Manufacturing-- Tranche A, due 6/01/2000*:
23.6% NR NR 8,888,889 8% to 12/02/1994 8,888,889 8,888,889
NR NR 988,815 8.062% to 12/02/1994 988,815 988,815
NR NR 5,500,000 Desa International, Term Loan B,
due 11/30/2000, 7.875% to 9/27/1994* 5,500,000 5,500,000
Joy Technologies, Inc., Term Loan B,
due 12/31/1997*:
NR NR 10,244,372 7.812% to 9/29/1994 10,244,372 10,244,372
NR NR 3,041,873 8.00% to 11/28/1994 3,041,873 3,041,873
TDII Company, Term Loan B, due
2/01/2001*:
NR NR 12,875 9.50% (1) 12,875 12,875
NR NR 4,225,000 6.9375% to 9/02/1994 4,225,000 4,225,000
NR NR 600,000 7.8125% to 11/03/1994 600,000 600,000
B B1 3,000,000 Valcor Inc., Senior Notes, 9.625%
due 11/01/2003 3,000,000 2,790,000
------------ ------------
36,501,824 36,291,824
Drug Stores--3.3% Duane Reade Co., Term Loan A, due
9/30/1997*:
NR NR 205,266 7.8125% to 9/30/1994 205,266 205,266
NR NR 4,834,009 8.00% to 11/30/1994 4,834,009 4,834,009
------------ ------------
5,039,275 5,039,275
Energy--6.6% Maxus Energy Corp., Senior Notes:
BB Bl 2,000,000 9.375% due 11/01/2003 1,910,000 1,875,000
BB Bl 1,000,000 9.50% due 2/15/2003 915,000 946,250
Petrolane Gas, Term Loan, due
12/31/1999*:
NR NR 93,329 6.8125% to 9/28/1994 93,329 93,329
NR NR 365,206 6.9375% to 9/30/1994 365,206 365,206
NR NR 373,316 6.9375% to 10/28/1994 373,316 373,316
NR NR 4,834,447 6.9375% to 10/28/1994 4,834,447 4,834,447
NR NR 1,594,061 6.9375% to 10/28/1994 1,594,061 1,594,061
------------ ------------
10,085,359 10,081,609
Fertilizers--2.4% BB- B1 3,750,000 Sherritt Gordon Ltd., Senior Notes,
9.75% due 4/01/2003 3,762,500 3,637,500
Food & Beverage-- NR NR 2,600,000 American Italian Pasta, Term Loan B,
1.7% due 3/31/1999, 8.0625% to 9/26/1994* 2,600,000 2,600,000
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Debt Obligations Cost (Note 1b)
<S> <S> <S> <C> <S> <C> <C>
Grocery--14.7% B+ B2 $2,500,000 Farm Fresh Inc., Senior Notes, Series
A, 12.25% due 10/01/2000 $ 2,625,000 $ 2,325,000
B+ NR 5,000,000 Homeland Stores, Inc., Floating Rate
Senior Secured Notes, due 2/28/1997,
7.625% to 9/01/1994 (2) 4,987,500 5,025,415
D Caa 1,000,000 MegaWarehouse Foods, Senior Notes,
10.25% due 10/15/2000 (a) 983,910 250,000
NR NR 5,000,000 Pathmark Corp., Term Loan B, due
10/31/1999, 7.8125% to 9/26/1994 5,000,000 5,000,000
BB- Ba3 4,000,000 The Penn Traffic Company, Senior Notes,
8.625% due 12/15/2003 3,991,760 3,640,000
Ralph's Grocery Co., Primary Term Loan,
due 6/30/1998:*
NR NR 2,996,576 7.375% to 9/07/1994 2,996,576 2,996,576
NR NR 117,054 7.625% to 9/14/1994 117,054 117,054
NR NR 117,054 7.50% to 9/19/1994 117,054 117,054
NR NR 760,849 7.5625% to 9/29/1994 760,849 760,849
NR NR 201,332 7.4375% to 10/04/1994 201,332 201,332
NR NR 117,054 7.625% to 10/24/1994 117,054 117,054
NR NR 2,069,510 7.5625% to 11/09/1994 2,069,510 2,069,510
------------ ------------
23,967,599 22,619,844
Health Services-- B B2 2,500,000 ++Charter Medical Corp., 11.25% due
4.3% 4/15/2004 2,500,000 2,575,000
B- B2 1,000,000 Integrated Health Services, Senior
Subordinated Notes, 10.75% due
7/15/2004 1,000,000 1,000,000
B+ Bl 3,000,000 MEDIQ/PRN Life Support Services Inc.,
Senior Secured Notes, 11.125% due
7/01/1999 3,138,750 3,000,000
------------ ------------
6,638,750 6,575,000
Information B Bl 1,800,000 ++Anacomp, Inc., Senior Notes, 12.25%
Services--3.1% due 10/26/1997 1,914,750 1,836,432
BB Ba2 3,000,000 Primark Corp., Senior Notes, 8.75% due
10/15/2000 2,969,250 2,932,500
------------ ------------
4,884,000 4,768,932
<PAGE>
Leasing & Rental BB- B1 2,000,000 Scotsman Group, Inc., Senior Secured
Services--1.2% Notes, 9.50% due 12/15/2000 2,000,000 1,870,000
Nautical Systems-- Sperry Marine, Inc., Term Loan, due
2.2% 11/15/2000*:
NR NR 1,792,683 7.4375% to 9/23/1994 1,792,683 1,792,683
NR NR 1,648,984 8.25% to 12/23/1994 1,648,984 1,648,984
------------ ------------
3,441,667 3,441,667
Paper--5.3% B B3 3,000,000 Gaylord Container Corp., Senior Notes,
11.50% due 5/15/2001 2,947,500 3,067,500
NR NR 5,000,000 Jefferson Smurfit/Container Corp. of
America, Term Loan, due 4/30/2002, 7.875%
to 10/24/1994* 5,000,000 5,000,000
------------ ------------
7,947,500 8,067,500
Retail-- B B2 3,000,000 Color Tile, Inc., Senior Notes, 10.75%
Specialty--11.3% due 12/15/2001 3,000,000 2,820,000
Music Acquisition Corp., Term Loan B,
due 8/31/2001*:
NR NR 3,125,000 7.6875% to 9/16/1994 3,125,000 3,125,000
NR NR 1,843,750 8.375% to 2/17/1995 1,843,750 1,843,750
NR NR 7,720,085 Saks & Co., Term Loan, Tranche B, due
6/30/2000, 7.88 to 11/09/1994* 7,720,085 7,720,085
B+ B1 2,000,000 Specialty Retailers, Inc., Series A,
Senior Notes, 10.00% due 8/15/2000 2,007,500 l,920,000
------------ ------------
17,696,335 17,428,835
Shipping--4.9% BB Ba2 2,500,000 Eletson Holdings, Inc., First Preferred
Shipping Mortgage Notes, 9.25% due
11/15/2003 2,525,000 2,325,000
B B2 3,500,000 OMI Corp., Senior Notes, 10.25% due
11/01/2003 3,500,000 3,185,000
B+ Ba3 2,000,000 Viking Star Shipping, Inc., First
Preferred Shipping Mortgage Notes,
9.625% due 7/15/2003 2,012,500 1,940,000
------------ ------------
8,037,500 7,450,000
<PAGE>
Steel--6.2% B B2 l,000,000 AK Steel Holdings Corp., Senior Notes,
10.75% due 4/01/2004 1,000,000 1,020,000
B+ B1 2,000,000 Geneva Steel, Senior Notes, 11.125%
due 3/15/2001 2,010,000 2,030,000
B B2 2,000,000 Jorgensen (Earle M.) Co., New Senior
Notes, 10.75% due 3/01/2000 2,065,000 1,990,000
B+ B1 2,000,000 WCI Steel Inc., Senior Notes, 10.50%
due 3/01/2002 2,000,000 2,000,000
B B2 2,500,000 Weirton Steel Corp., Senior Notes,
10.875% due 10/15/1999 2,483,125 2,525,000
------------ ------------
9,558,125 9,565,000
Textiles--2.1% BB Bl 3,500,000 Dominion Textile (USA) Inc., Senior
Notes, 8.875% due 11/01/2003 3,482,780 3,255,000
Utilities--0.6% B Ba3 1,000,000 First PV Funding Inc., 10.30% due 1/15/2014 947,500 970,000
Warehousing & B+ B2 3,000,000 Americold Corp., First Mortgage Bonds,
Storage--1.8% Series B, 11.50% due 3/01/2005 3,067,500 2,745,000
Total Corporate Debt Obligations--136.3% 213,613,991 209,514,025
<CAPTION>
Short-Term Securities
<S> <C> <S> <C> <C>
Commercial 1,807,000 General Electric Capital Corp., 4.75%
Paper**--1.2% due 9/01/1994 1,807,000 1,807,000
Total Investments in Short-Term
Securities--1.2% 1,807,000 1,807,000
Total Investments--137.5% $215,420,991 211,321,025
============
Liabilities in Excess of Other Assets--
(37.5%) (57,669,482)
------------
Net Assets--100.0% $153,651,543
============
<PAGE>
<FN>
*Floating or Variable Rate Corporate Loans--The interest rates on
floating or variable rate corporate loans are subject to change
periodically based on the change in the prime rate of a US Bank,
LIBOR (London Interbank Offered Rate), or, in some cases, another
base lending rate. The interest rates shown are those in effect at
August 31, 1994.
**Commercial Paper is traded on a discount basis; the interest rates
shown are the discount rates paid at the time of purchase by the
fund.
(a)Security has filed Chapter 11 for reorganization under bankruptcy
protection. Interest is in default.
(1)Interest rate is based on the prime rate of a US bank, which is
subject to change daily.
(2)Interest rate resets quarterly and is based on the three-month
LIBOR (London Interbank Offered Rate), plus an interest rate spread
of three hundred basis points.
++Restricted securities as to resale. The value of the fund's
investment in restricted securities was approximately $4,411,000,
representing 2.87% of net assets.
Value
Issue Acquisition Date Cost (Note 1b)
Anacomp, Inc., Senior Notes,
12.25% due 10/26/1997 10/28/1993 $1,914,750 $1,836,432
Charter Medical Corp.,
11.25% due 4/15/2004 4/22/1994 2,500,000 2,575,000
Total $4,414,750 $4,411,432
========== ==========
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of August 31, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$215,420,991)(Note 1b) $ 211,321,025
Interest receivable 4,122,874
Deferred facility expense (Note 6) 83,081
Deferred organization expenses (Note 1e) 118,930
Prepaid expenses and other assets (Note 1e) 27,328
------------
Total assets 215,673,238
------------
<PAGE>
Liabilities: Payables:
Loans (Note 6) $ 60,000,000
Dividends to shareholders (Note 1f) 475,203
Interest on loans (Note 6) 110,411
Investment adviser (Note 2) 92,701 60,678,315
------------
Deferred income (Note 1d) 1,023,068
Accrued expenses and other liabilities 320,312
------------
Total liabilities 62,021,695
------------
Net Assets: Net assets $153,651,543
============
Capital: Common Stock, par value $.10 per share; 200,000,000 shares
authorized (16,610,527 shares issued and outstanding) $ 1,661,053
Paid-in capital in excess of par 155,927,256
Undistributed investment gain--net 1,432,475
Accumulated realized capital losses--net (1,269,275)
Unrealized depreciation on investments--net (4,099,966)
------------
Total Capital--Equivalent to $9.25 net asset value per share
of Common Stock (market price--$8.875) $153,651,543
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Period
September 24, 1993++
to August 30, 1994
<S> <S> <C> <C>
Investment Income Interest and discount earned $ 16,299,790
(Note 1d): Facility and other fees 876,877
------------
Total income 17,176,667
------------
<PAGE>
Expenses: Loan interest expense and commitment fees (Note 6) $ 2,815,700
Investment advisory fees (Note 2) 1,005,763
Facility fee amortization (Note 6) 256,918
Accounting services (Note 2) 52,912
Professional fees 47,589
Directors' fees and expenses 27,489
Amortization of organization expenses (Note 1e) 26,699
Listing fees 24,647
Custodian fees 23,658
Transfer agent fees (Note 2) 15,198
Printing and shareholder reports 14,586
Pricing services 3,807
Registration fees (Note 1e) 438
Other 5,942
------------
Total expenses before reimbursement 4,321,346
Reimbursement of expenses (Note 2) (322,094)
------------
Total expenses after reimbursement 3,999,252
------------
Investment income--net 13,177,415
------------
Realized & Realized loss on investments--net (1,269,275)
Unrealized Unrealized depreciation on investments--net (4,099,966)
Loss on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 7,808,174
(Notes 1d & 3): ============
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
For the Period
September 24, 1993++
Increase (Decrease) in Net Assets: to August 31, 1994
<S> <S> <C>
Operations: Investment income--net $ 13,177,415
Realized loss on investments--net (1,269,275)
Unrealized depreciation on investments--net (4,099,966)
------------
Net increase in net assets resulting from operations 7,808,174
------------
<PAGE>
Dividends to Investment income--net (11,744,940)
Shareholders ------------
(Note 1f): Net decrease in net assets resulting from dividends to shareholders (11,744,940)
------------
Capital Share Value of shares sold to Common Stock shareholders 157,700,000
Transactions Offering costs resulting from the issuance of Common Stock (211,698)
(Note 4): ------------
Net increase in net assets resulting from capital share transactions 157,488,302
------------
Net Assets: Total increase in net assets 153,551,536
Beginning of period 100,007
------------
End of period* $153,651,543
============
<FN>
*Undistributed investment income--net $ 1,432,475
============
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Period
September 24, 1993++
to August 31, 1994
<S> <S> <C>
Cash Provided Net increase in net assets resulting from operations $ 7,808,174
by Operating Adjustments to reconcile net increase (decrease) in net
Activities: assets resulting from operations to net cash provided by
operating activities:
Increase in receivables (4,122,874)
Increase in other assets (229,339)
Decrease in other liabilities 1,546,492
Realized and unrealized gain on investments--net 5,369,241
Amortization of discounts (327,065)
------------
Net cash provided by operating activities 10,044,629
------------
<PAGE>
Cash Used for Proceeds from sales of long-term investments 97,758,888
Investing Purchases of long-term investments (312,640,111)
Activities: Purchases of short-term investments (908,011,353)
Proceeds from sales and maturities of short-term
investments--net 906,529,375
------------
Net cash used for investing activities (216,363,201)
------------
Cash Provided by Cash receipts on capital shares sold 157,488,302
Financing Dividends paid to shareholders (11,269,737)
Activities: Short-term borrowings 60,000,000
------------
Net cash provided by financing activities 206,218,565
------------
Cash: Net decrease in cash (100,007)
Cash at beginning of period 100,007
------------
Cash at end of period $ 0
============
Cash Flow Cash paid for interest $ 2,705,289
Information: ============
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period
September 24, 1993++
Increase (Decrease) in Net Asset Value: to August 31, 1994
<S> <S> <C>
Per Share Net asset value, beginning of period $ 9.50
Operating ------------
Performance: Investment income--net .79
Realized and unrealized loss on investments--net (.32)
------------
Total from investment operations .47
------------
Less dividends:
Investment income--net (.71)
------------
Capital charge resulting from the issuance of Common Stock (.01)
------------
Net asset value, end of period $ 9.25
============
Market price per share, end of period $ 8.875
============
Total Investment Based on net asset value per share 5.08%+++
Return:** ============
Based on market price per share (4.22%)+++
============
Ratios to Expenses, net of reimbursement 2.17%*
Average Net ============
Assets: Expenses 2.34%*
============
Investment income--net 7.14%*
============
Supplemental Net assets, end of period (in thousands) $ 153,652
Data: ============
Portfolio turnover 52.37%
============
<PAGE>
<FN>
++Commencement of Operations.
+++Aggregate total investment return.
*Annualized.
**Total investment returns based on market price, which can
be significantly greater or lesser than the net asset value,
result in substantially different returns. Total investment
returns exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Senior High Income Portfolio II, Inc. ("the Fund") is registered
under the Investment Company Act of 1940 as a non-diversified,
closed-end management investment company. Prior to commencement of
operations on September 24, 1993, the Fund had no operations other
than those relating to organizational matters and the issue of
10,527 capital shares of the Fund to Fund Asset Management, L.P.
("FAM") for $100,007. 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 SAL.
(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.
<PAGE>
(b) Valuation of investments--Since corporate loans are purchased
and sold primarily at par value, the Fund values the loans at par,
unless FAM determines par does not represent fair value. In the
event such a determination is made, fair value will be determined in
accordance with guidelines approved by the Fund's Board of
Directors. Portfolio securities are valued on the basis of prices
furnished by one or more pricing services, which determines prices
for normal, institutional-size trading units. In certain
circumstances, portfolio securities are valued at the last sale
price on the exchange that is the primary market for such
securities, or the last quoted bid price for those securities for
which the over-the-counter market is the primary market or for
listed securities in which there were no sales during the day.
Positions in options are valued at the last sale price on the market
where any such option is principally traded. Securities for which
there exist no price quotations or valuations and all other assets
are valued at fair value as determined in good faith by or on behalf
of the Board of Directors of the Fund. Obligations with remaining
maturities of sixty days or less are valued at amortized cost unless
this method no longer produces fair valuations.
(c) 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.
(d) 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.
(e) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are amortized on a straight-line
basis over a five-year period. Prepaid registration fees are charged
to expense as the related shares are issued.
(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 undis-
tributed income in other periods to permit the Fund to maintain a
more stable level of distributions.
<PAGE>
2. Investment Advisory Agreement with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM.
Effective January 1, 1994, the investment advisory business of FAM
was reorganized from a corporation to a limited partnership. Both
prior to and after the reorganization, ultimate control of FAM was
vested with Merrill Lynch & Co., Inc. ("ML & Co."). The general
partner of FAM is Princeton Services, Inc. ("PSI"), an indirect
wholly-owned subsidiary of ML & Co. The limited partners are ML &
Co. and Fund Asset Management, Inc. ("FAMI"), which is also an
indirect wholly-owned subsidiary of ML & Co.
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. For the period ended
August 31, 1994, FAM earned fees of $1,005,763, of which $322,094
was voluntarily waived.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
During the period May 25, 1994 to August 31, 1994, Merrill Lynch
Security Pricing Service, an affiliate of Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S"), provided security quotations to
compute the net asset value for the Fund.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, FDS, MLIM, PSI, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period ended August 31, 1994 were $312,640,111 and
$97,758,888.
Realized Unrealized
Losses Losses
Long-term investments $(1,269,091) $(4,099,966)
Short-term investments (184) --
----------- -----------
Total $(1,269,275) $(4,099,966)
=========== ===========
As of August 31, 1994, net unrealized depreciation for financial
reporting and Federal income tax purposes aggregated $4,099,966, of
which $739,428 related to appreciated securities and $4,839,394
related to depreciated securities. The aggregate cost of investments
at August 31, 1994 for Federal income tax purposes was $215,420,991.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
4. Capital Share Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock
par value, $0.10, all of which are initially classified as Common
Stock. The Board of Directors is authorized, however, to reclassify
any unissued shares of capital stock without approval of the holders
of Common Stock. For the period September 24, 1993 to August 31,
1994, 16,600,000 shares were sold. At August 31, 1994, total paid-in
capital amounted to $157,588,309.
5. Unfunded Loan Interests:
As of August 31, 1994, the Fund had unfunded loan commitments of
$285,000, which would be extended at the option of the borrower,
pursuant to the following loan agreements:
Unfunded
Commitment
Borrower (in thousands)
Petrolane Gas $285
6. Short-Term Borrowings:
On February 28, 1994, the Fund entered into a one-year revolving
credit facility in the amount of $60,000,000 bearing interest at an
alternate base rate (Federal Funds rate plus .50% on the Bank of New
York commercial lending rate) plus 0.20% or at a LIBOR plus 1.20%
and a two-year term loan facility in the amount of $20,000,000,
bearing interest on the outstanding balance at the alternate base
rate plus 0.45% or at LIBOR plus 1.25%. From October 26, 1993 to
August 31, 1994, the maximum amount borrowed was $76,000,000, the
average amount borrowed was approximately $64,000,000, and the daily
weighted average interest rate was 5.10%. For the period ended
August 31, 1994, interest and facility and commitment (.25% of the
unused facility) fees aggregated approximately $3,072,618.
<PAGE>
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Senior High Income Portfolio II, Inc.:
We have audited the accompanying statement of assets, liabilities
and capital, including the schedule of investments, of Senior High
Income Portfolio II, Inc. as of August 31, 1994, the related
statements of operations, changes in net assets, and cash flows, and
the financial highlights for the period September 24, 1993
(commencement of operations) to August 31, 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 audit.
We conducted our audit 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 August
31, 1994 by correspondence with the custodian and financial
intermediaries. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audit provides 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 ll, Inc. as of August 31, 1994, the
results of its operations, the changes in its net assets, its cash
flows, and the financial highlights for the period September 24,
1993 to August 31, 1994 in conformity with generally accepted
accounting principles.
<PAGE>
As discussed in Notes 1a and 1b, the financial statements include
corporate loans valued at $113,334,653 (74% of total net assets and
54% of total investments of the Fund), whose values are fair values
as determined by or under the direction of the Board of Directors in
the absence of actual market values. Determination of fair value
involves subjective judgment, as the actual market value of
particular corporate loans can be established only by negotiation
between the parties in a sales transaction. We have reviewed the
procedures established by the Board of Directors and used by the
Fund's investment adviser in determining the fair values of such
corporate loans and have inspected underlying documentation, and
under the circumstances, we believe that the procedures are
reasonable and the documentation appropriate.
Deloitte & Touche LLP
Princeton, New Jersey
September 30, 1994
</AUDIT-REPORT>
PER SHARE INFORMATION
<TABLE>
Per Share
Selected
Quarterly
Financial Data*
<CAPTION>
Net Dividends/Distributions
Investment Realized Unrealized Net Investment Income Capital
For the Period Income Gains Gains Common Gains
<S> <C> <C> <C> <C> <C>
September 24, 1993++ to November 31, 1993 $.13 -- $ .03 -- --
December 1, 1993 to February 28, 1994 .23 $ .02 .12 $.30 --
March 1, 1994 to May 31, 1994 .21 (.03) (.37) .20 --
June 1, 1994 to August 31, 1994 .23 (.07) (.04) .21 --
<CAPTION>
Net Asset Value Market Price**
For the Period High Low High Low Volume***
<S> <C> <C> <C> <C> <C>
September 24, 1993++ to November 31, 1993 -- -- $10.00 $9.00 652
December 1, 1993 to February 28, 1994 $9.80 $9.58 9.75 9.00 1,253
March 1, 1994 to May 31, 1994 9.71 9.29 9.75 8.625 1,422
June 1, 1994 to August 31, 1994 9.39 9.22 9.375 8.375 1,751
<FN>
*Calculations are based upon Common Stock outstanding at the end
of each period.
**As reported in the consolidated transaction reporting system.
***In thousands.
++Commencement of Operations.
</TABLE>
<PAGE>
