SENIOR
HIGH
INCOME
PORTFOLIO II,
INC.
Semi-Annual Report February 28, 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 pro-
spectus, circular or representation intended for use in
the purchase of shares of the Fund or any securities men-
tioned 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.
Senior High Income
Portfolio II, Inc.
Box 9011
Princeton, NJ
08543-9011
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 sec-
urities 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 be-
tween 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.
<PAGE>
Leverage creates risks for holders of Common Stock including the
likelihood of greater net asset value and market price volatility.
In addition, there is the risk that fluctuations in interest rates
on borrowings (or in the dividend rates on any Preferred Stock, if
the fund were to issue 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 sec-
urities 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 never-
theless 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.
DEAR SHAREHOLDER
We are pleased to provide you with this first semi-annual report to
shareholders for Senior High Income Portfolio II, Inc. In this and
future shareholder reports, we will highlight the fund's performance,
describe recent investment activities, and examine some of the im-
portant market developments that helped shape our investment strategy
for the period under review.
Senior High Income Portfolio II, Inc. seeks to provide shareholders
with high current income by investing principally in senior debt ob-
ligations 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. The securities in which
the fund invests generally are rated in the lower rating categories
of the established rating agencies or are unrated, as is commonly the
case with bank loans.
Since inception (September 24, 1993) through February 28, 1994, the
Portfolio's total investment return was +5.51%, based on a change in
per share net asset value from $9.50 to $9.72, and assuming reinvest-
ment of $0.297 per share income dividends. During the same period,
the net annualized yield of the Portfolio's Common Stock was 8.56%,
reflecting the initial investment process as the Portfolio began opera-
tions. Now that the Fund is fully invested and utilizing leverage, the
monthly net annualized yield as of February 28, 1994 was 8.49%.
As of February 28, 1994, the Portfolio was 31% leveraged, having
borrowed $75 million of its $80 million line of credit available at
an average borrowing cost of 5.27%. (For a complete explanation of
the benefits and risks of leveraging, see page 1 of this report to
shareholders.)
<PAGE>
Commencing with the dividend paid on March 31, 1994, the Portfolio
changed its dividend policy, which will permit it at times to pay
out less than the entire amount of net investment income earned in
any particular period and to pay out such accumulated undistributed
income in addition to net investment income earned in other periods
in order to permit the Portfolio to maintain a more stable level of
distributions. As a result, the distribution paid by the Portfolio
for any particular period may be more or less than the amount of in-
vestment income earned by the Portfolio during such period. For Fed-
eral 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 at least annually.
The Environment
The five-month period since the fund's inception provided an excellent
opportunity for investment. A strong flow of leveraged bank trans-
actions in the fall of 1993 coupled with a continued ample supply of
senior bond issues in the high-yield market allowed us to balance
attractive yields with credit quality.
Economic indicators continue to point to a healthy economic recovery
in the United States. However, in a fairly short time investor senti-
ment in the United States and in most of the world's financial markets
has turned more bearish. This change began when the Federal Reserve
Board raised short-term interest rates on February 4, 1994, the first
time in five years. This prompted a nervous sell-off in financial
markets throughout the world. Reassurances by Federal Reserve Board
Chairman Alan Greenspan and the widespread belief that a sell-off was
overdue helped stabilize the US bond market and enabled it to gain some
composure and actually gain some ground in the last week of the quar-
ter. However, bond investors continue to be concerned about further
Federal Reserve Board tightening in an effort to head off inflation.
We expect to see some price improvement in the longer-term end of the
maturity spectrum as investors come to realize that the economy is not
overheating and that inflation remains subdued. Looking further ahead,
it is possible that the yield curve will flatten gradually during 1994
as the Federal Reserve Board takes further modest steps to push up the
Federal Funds rate.
Portfolio Strategy
In light of the current investment environment, we continue to weight
the Portfolio more heavily in senior secured floating rate bank loans.
At the end of the period under review, these securities made up 53% of
the Portfolio's investments with an additional 43% invested in fixed-
rate high-yield bonds. Since these bank loans have an average reset of
65 days, any increase in short-term interest rates should benefit the
Portfolio's return within one to two months. The majority of the Port-
folio's floating rate investments are at a spread over the London Inter-
bank Offered Rate (LIBOR). Historically, that rate has tracked the
Federal Funds rate closely. Since the tightening by the Federal Reserve
Board which moved the Federal Funds rate from 3.00% to 3.25%, three-
month LIBOR has risen from 3.1875% to 3.75% at period-end.
<PAGE>
In the loan market, both new and secondary issues continue to be
well bid, providing strong liquidity at attractive prices. With the
recent retreat in stock prices and the amount of equity sponsor
assets presently being raised or sitting on the sidelines, it is
likely that more buyout activity will be seen in the remainder of
1994 than was the case over the last 12 months when refinancings
dominated the market.
On the other hand, the high-yield bond market has begun to reprice
itself. While the high-yield market historically has not had a strong
correlation to interest rate movements, the possibility of climbing
interest rates has put selling pressure on prices in the high-yield
sector, since many large high-yield funds have built cash in antici-
pation of redemptions. We were opportunistic in this environment,
selling certain lower-coupon issues and replacing them with higher-
coupon new issues or floating rate bank notes. New issues coming to
market in February were either put on hold until the interest rate
environment improved or priced at 50 basis points--70 basis points
(0.50%--0.70%) above the original projected prices. We believe this
repricing was long overdue and will ultimately provide attractive
opportunities in the heavy new issue calendar expected in the latter
half of March.
We continue to focus on buying higher yielding, improving quality
cyclical credits. Fundamental price support for these bonds is
likely to continue to improve as the economy strengthens. Over the
long run, rising and fluctuating interest rates tend to have a
limited effect on the value of these securities since they have
traded at relatively wide spreads to the US Treasury curve. Our
investments in building companies such as USG Corp. and NVR, Inc.
reflect this view, as does our emphasis on the retail, shipping,
steel, chemicals and paper industries. We continue to focus on those
issues with a maturity of ten years or less that generally have
five-year call protection.
Both the bond and loan markets continue to be characterized by
improving credit quality as the economy expands, supported by im-
proving corporate profits. 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 high-yield bond markets. With an improving
economy, we believe that low default rates will continue throughout
1994.
Looking ahead, 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.
In Conclusion
We appreciate your ongoing investment in Senior High Income Port-
folio II, Inc., and we look forward to reviewing our strategy with
you again in our next report to shareholders.
<PAGE>
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(R. Douglas Henderson)
R. Douglas Henderson
Vice President and Portfolio Manager
March 31, 1994
<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--10.9% Aviall, Inc., Term Loan, Tranche B,
due 11/30/2000*:
NR NR $ 1,176,471 6.57% to 4/07/1994 $ 1,176,471 $ 1,176,471
NR NR 2,941,177 6.76% to 6/07/1994 2,941,177 2,941,177
NR NR 882,353 6.80% to 8/08/1994 882,353 882,353
BB- Ba3 3,000,000 BE Aerospace, Senior Notes, 9.75%
due 3/01/2003 3,060,000 3,060,000
NR NR 2,754,640 Gulfstream Delaware Corp., Term Loan A,
due 3/31/1998, 5.50% to 4/13/1994* 2,754,640 2,754,640
NR NR 2,240,000 Gulfstream Delaware Corp., Term Loan 2,
due 3/31/1998, 6.50% to 3/08/1994* 2,240,000 2,240,000
BB B1 2,500,000 Sequa Corp., Senior Secured Notes, 8.75%
due 12/15/2001 2,500,000 2,525,000
B B2 2,000,000 Talley Manufacturing & Technology, Inc.,
Senior Notes, 10.75% due 10/15/2003 2,000,000 2,080,000
------------ ------------
17,554,641 17,659,641
Broadcast/ BB- Ba2 1,000,000 Continental Cablevision, Inc.,
Media--1.9% Senior Notes, 8.50% due 9/15/2001 1,052,500 1,030,000
B B3 2,000,000 Marcus Cable, Senior Notes, 11.875%
due 10/01/2005 2,000,000 2,080,000
------------ ------------
3,052,500 3,110,000
Building & B B2 2,000,000 NVR, Inc., Senior Notes, 11% due 4/15/2003 2,082,500 2,145,000
Construction--1.3%
<PAGE>
Building NR NR 15,000,000 American Standard, Inc., Term Loan, Tranche A,
Products--10.6% due 6/01/2000, 6.50% to 6/02/1994* 15,000,000 15,000,000
B+ B2 2,000,000 USG Corp., Senior Secured Notes, 10.25%
due 12/15/2002 2,025,000 2,050,000
------------ ------------
17,025,000 17,050,000
Carbon & Graphite B+ B3 2,000,000 Carbide/Graphite Group, Senior Notes, 11.50%
Products--1.3% due 9/01/2003 2,150,000 2,140,000
Chemicals--6.2% NR NR 819,444 Hilton Davis Chemical Co., Term Loan A,
due 9/09/1998, 6.125% to 3/15/1994* 819,444 819,444
NR NR 4,166,667 Hilton Davis Chemical Co., Term Loan B,
due 9/09/2000, 6.625% to 3/15/1994* 4,166,667 4,166,667
NR NR 5,000,000 Inspec Chemical Corp., Term Loan B,
due 12/02/2000, 5.75% to 3/01/1994* 5,000,000 5,000,000
------------ ------------
9,986,111 9,986,111
Computers--2.0% NR NR 3,000,000 Dell Computer Corp., Senior Notes, 11%
due 8/15/2000 2,985,000 3,165,000
Consumer Food NR NR 5,000,000 President Company, Inc., Term Loan B,
Products--9.6% due 9/30/2000, 6.0625% to 3/29/1994* 5,000,000 5,000,000
B+ B1 3,000,000 Royal Crown Corp., Senior Secured Notes, 9.75%
due 8/01/2000 3,079,625 3,060,000
NR NR 7,440,000 Specialty Foods Corp., Term Loan B,
due 8/31/1999, 6.63% to 4/18/1994* 7,440,000 7,440,000
------------ ------------
15,519,625 15,500,000
Consumer B+ B2 3,000,000 Drypers Corp., Senior Notes, 12.50%
Products--2.0% due 11/01/2002 3,037,500 3,240,000
Containers--4.9% B B1 3,000,000 Calmar Inc., Senior Notes, 12% due 12/15/1997 3,015,000 3,067,500
Silgan Corp., Term Loan B, due 9/15/1996*:
NR NR 2,500,000 6.56% to 3/07/1994 2,500,000 2,500,000
NR NR 2,500,000 6.63% to 5/09/1994 2,500,000 2,500,000
------------ ------------
8,015,000 8,067,500
<PAGE>
Diversified NR NR 13,286,246 Joy Technologies, Inc., Term Loan B,
Manufacturing-- due 12/31/1997, 6.5625% to 5/27/1994* 13,286,246 13,286,246
12.8% NR NR 4,325,000 Thermadyne Industries, Term Loan B,
due 2/01/2001, 7.75% to 3/31/1994* 4,325,000 4,325,000
B B1 3,000,000 Valcor, Inc., Senior Notes, 9.625%
due 11/01/2003 3,000,000 3,075,000
------------ ------------
20,611,246 20,686,246
Drug Stores--6.9% Jack Eckerd Corp., Term Loan A, due 7/30/1999*:
NR NR 169,323 6.375% to 4/28/1994 169,323 169,323
NR NR 2,571,468 6.3125% to 5/18/1994 2,571,468 2,571,468
NR NR 899,210 6.50% to 5/31/1994 899,210 899,210
NR NR 7,500,000 Jack Eckerd Corp., Term Loan B,
due 6/14/2000, 6.50% to 2/28/1994* 7,500,000 7,500,000
------------ ------------
11,140,001 11,140,001
Energy--6.5% BB B1 3,000,000 Maxus Energy Corp., Senior Notes, 9.375%
due 11/01/2003 3,000,000 2,977,500
Petrolane Gas, Term Loan, due 3/20/1996*:
NR NR 373,316 5.4375% to 3/28/1994 373,316 373,316
305,341 5.875% to 5/31/1994 305,341 305,341
NR NR 6,801,824 5.50% to 7/28/1994 6,801,824 6,801,824
------------ ------------
10,480,481 10,457,981
Fertilizers--4.3% B B3 3,000,000 IMC Fertilizer Group, Inc., Senior Notes, 9.25%
due 10/01/2000 3,000,000 3,060,000
BB- Ba3 3,750,000 Sherritt Gordon Ltd., Senior Notes, 9.75%
due 4/01/2003 3,762,500 3,900,000
------------ ------------
6,762,500 6,960,000
Food & B+ B2 2,500,000 ++++Del Monte Corp., Series A, Senior Notes, 12.25%
Beverage--16.6% due 10/01/2000 2,625,000 2,668,750
B+ NR 5,000,000 Homeland Stores, Inc. (Floating Rate), Senior
Notes, due 2/28/1997, 6.50% to 3/01/1994 4,987,500 5,122,525
B B2 3,000,000 MegaWarehouse Foods, Senior Notes, 10.25% due
10/15/2000 2,959,550 2,988,750
NR NR 5,000,000 Pathmark Corp., Term Loan B, due 10/31/1999,
6.25% to 4/26/1994* 5,000,000 5,000,000
AAA Aaa 4,000,000 The Penn Traffic Company, Senior Notes, 8.625%
due 12/15/2003 3,991,760 3,960,000
Ralph's Grocery Co., Primary Term Loan,
due 6/30/1998*:
NR NR 201,332 5.9372% to 3/04/1994 201,332 201,332
NR NR 2,996,576 6.25% to 3/07/1994 2,996,576 2,996,576
NR NR 234,108 6.125% to 3/14/1994 234,108 234,108
NR NR 1,404,645 6.1875% to 3/23/1994 1,404,645 1,404,645
NR NR 117,054 6.25% to 4/22/1994 117,054 117,054
NR NR 2,069,510 6.1875% to 5/09/1994 2,069,510 2,069,510
------------ ------------
26,587,035 26,763,250
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Debt Obligations Cost (Note 1b)
<S> <S> <S> <C> <S> <C> <C>
Health B+ B1 $3,000,000 MEDIQ/PRN Life Support Services Inc.,
Services--1.9% Senior Secured Notes, 11.125% due 7/01/1999 $ 3,138,750 $ 3,157,500
Information NR B1 2,000,000 ++++Anacomp, Inc., Senior Notes, 12.25%
Services--3.2% due 10/26/1997 2,127,500 2,120,000
BB Ba2 3,000,000 Primark Corp., Senior Notes, 8.75%
due 10/15/2000 2,969,250 3,037,500
------------ ------------
5,096,750 5,157,500
Leasing & Rental BB- B1 2,000,000 Scotsman Group, Inc., Senior Secured Notes,
Services--1.3% 9.50% due 12/15/2000 2,000,000 2,025,000
Paper--5.3% B B3 3,000,000 Gaylord Container Corp., Senior Notes, 11.50%
due 5/15/2001 2,947,500 3,210,000
NR NR 5,335,822 Jefferson Smurfit/Container Corp. of America,
Term Loan, due 12/31/1997, 6.50% to 3/28/1994* 5,335,822 5,335,822
------------ ------------
8,283,322 8,545,822
Restaurants--2.8% NR NR 4,532,993 TW Services, Inc., Term Loan,
due 11/17/1998, 6.1875% to 3/28/1994* 4,532,993 4,532,993
Retail-- Camelot Music, Inc., Term Loan B, due 8/31/2001*:
Specialty--12.4% NR NR 1,875,000 6.50% to 5/17/1994 1,875,000 1,875,000
NR NR 3,125,000 6.75% to 8/17/1994 3,125,000 3,125,000
B B2 4,000,000 Color Tile, Inc., Senior Notes, 10.75%
due 12/15/2001 4,000,000 4,160,000
NR NR 7,750,000 Saks & Co., Term Loan, Tranche B,
due 6/30/2000, 6.69% to 8/09/1994* 7,750,000 7,750,000
B+ B1 3,000,000 Specialty Retailers, Inc., Series A, Senior
Notes, 10% due 8/15/2000 3,011,250 3,060,000
------------ ------------
19,761,250 19,970,000
Search & Navigation NR NR 3,500,000 Sperry Marine, Inc., Term Loan, due
Equipment--2.2% 11/15/2000, 6.5625% to 3/23/1994* 3,500,000 3,500,000
<PAGE>
Shipping--7.1% BB Ba2 5,500,000 Eletson Holdings, Inc., First Preferred
Shipping Mortgage Notes, 9.25% due 11/15/2003 5,525,000 5,692,500
B B1 3,500,000 OMI Corp., Senior Notes, 10.25% due 11/01/2003 3,500,000 3,570,000
B+ Ba3 2,000,000 Viking Star Shipping, Inc., First Preferred
Shipping Mortgage Notes, 9.625% due 7/15/2003 2,012,500 2,170,000
------------ ------------
11,037,500 11,432,500
Steel--5.6% B B2 2,000,000 Jorgensen (Earle M.) Co., New Senior Notes,
10.75% due 3/01/2000 2,065,000 2,140,000
B B2 2,000,000 Republic Engineered Steel, Inc., First
Mortgage Notes, 9.875% due 12/15/2001 2,000,000 2,070,000
B+ B1 2,000,000 ++++WCI Steel, Inc., Senior Notes, 10.50%
due 3/01/2002 2,000,000 2,185,000
B B2 2,500,000 Weirton Steel Corp., Senior Notes, 10.875%
due 10/15/1999 2,483,125 2,662,500
------------ ------------
8,548,125 9,057,500
Textiles--3.4% BB- B1 3,500,000 Dominion Textile (USA) Inc., Senior Notes,
8.875% due 11/01/2003 3,482,780 3,465,000
BB- Ba3 2,000,000 Westpoint Stevens, Inc., Senior Notes, 8.75%
due 12/15/2001 2,006,250 2,000,000
------------ ------------
5,489,030 5,465,000
Warehousing & B+ B1 3,000,000 Americold Corp., First Mortgage Bonds,
Storage--1.9% Series B, 11.50% due 3/01/2005 3,067,500 3,067,500
Total Investments in
Corporate Debt Obligations--144.9% 231,444,360 233,982,045
<CAPTION>
SHORT-TERM
SECURITIES Issue
<S> <C> <S> <C> <C>
Commercial 1,556,000 General Electric Capital Corp., 3.40%
Paper**--1.0% due 3/01/1994 1,556,000 1,556,000
Total Investments in
Short-Term Securities--1.0% 1,556,000 1,556,000
Total Investments--145.9% $233,000,360 235,538,045
============
Liabilities in Excess of Other Assets--(45.9%) (74,089,388)
------------
Net Assets--100.0% $161,448,657
============
<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
February 28,1994.
**Commercial Paper is traded on a discount basis; the interest rate
shown is the discount rate paid at the time of purchase by the Fund.
++Restricted securities as to resale. The value of the fund's investment
in restricted securities was approximately $2,120,000, representing
1.3% of net assets.
Acquisition Value
Issue Date Cost (Note 1b)
Anacomp, Inc., Senior Notes,
12.25% due 10/26/1997 10/28/1993 $ 2,127,500 $ 2,120,000
Total $ 2,127,500 $ 2,120,000
============ ===========
++++Restricted securities pursuant to Rule 144A.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of February 28, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$233,000,360) (Note 1b) $235,538,045
Cash 437,140
Receivables:
Interest $ 3,718,635
Commitment fees 225 3,718,860
------------
Deferred facility expense (Note 1d) 235,575
Deferred organization expenses (Note 1e) 118,000
------------
Total assets 240,047,620
------------
<PAGE>
Liabilities: Payables:
Loans (Note 6) 76,000,000
Dividends to shareholders (Note 1f) 556,493
Interest on loans (Note 6) 450,587
Investment adviser (Note 2) 91,258 77,098,338
------------
Deferred income (Note 1d) 1,330,053
Accrued expenses and other liabilities 170,572
------------
Total liabilities 78,598,963
------------
Net Assets: Net assets $161,448,657
============
Net Assets Common Stock, par value $.10 per share; 200,000,000 shares authorized $ 1,661,053
Consist of: Paid-in capital in excess of par 155,895,954
Undistributed investment income--net 1,053,500
Undistributed realized capital gains--net 300,465
Unrealized appreciation on investments--net 2,537,685
------------
Net Assets--Equivalent to $9.72 per share based on 16,610,527 shares of
capital stock outstanding (market price--$9.50) $161,448,657
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Period
September 24, 1993++
to February 28, 1994
<S> <S> <C> <C>
Investment Income Interest and discount earned $ 6,705,935
(Note 1d): Facility and other fees 548,934
------------
Total income 7,254,869
------------
<PAGE>
Expenses: Loan interest expense (Note 6) $ 925,864
Investment advisory fees (Note 2) 439,197
Facility fee amortization (Note 6) 104,425
Accounting services (Note 2) 23,618
Borrowing costs (Note 6) 20,354
Professional fees 18,456
Custodian fees 13,979
Amortization of organization expenses (Note 1e) 13,063
Directors' fees and expenses 8,659
Printing and shareholder reports 5,710
Transfer agent fees (Note 2) 2,886
Pricing services 2,328
Registration fees (Note 1e) 105
Other 16,539
------------
Total expenses before reimbursement 1,595,183
Reimbursement of expenses (Note 2) (322,093)
------------
Total expenses after reimbursement 1,273,090
------------
Investment income--net 5,981,779
------------
Realized & Realized gain on investments--net 300,465
Unrealized Unrealized appreciation on investments--net 2,537,685
Gain (Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 8,819,929
(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 February 28, 1994
<S> <S> <C>
Operations: Investment income--net $ 5,981,779
Realized gain on investments--net 300,465
Unrealized appreciation on investments--net 2,537,685
------------
Net increase in net assets resulting from operations 8,819,929
------------
<PAGE>
Dividends to Investment income--net (4,928,279)
Shareholders ------------
(Note 1f): Net decrease in net assets resulting from dividends to shareholders (4,928,279)
------------
Capital Share Net increase in net assets resulting from capital share transactions 157,457,000
Transactions ------------
(Note 4):
Net Assets: Total increase in net assets 161,348,650
Beginning of period 100,007
------------
End of period* $161,448,657
============
<FN>
*Undistributed investment income--net $ 1,053,500
============
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Period
September 24, 1993++
to February 28, 1994
<S> <S> <C>
Cash Provided by Net increase in net assets resulting from operations $ 8,819,929
Operating Adjustments to reconcile net increase in net assets resulting
Activities: from operations to net cash provided by operating activities:
Increase in receivables (3,718,635)
Increase in other assets (353,800)
Increase in other liabilities 2,042,470
Realized and unrealized gain on investments--net (2,838,150)
Amortization of discounts (272,248)
------------
Net cash provided by operating activities 3,679,566
------------
Cash Used for Proceeds from sales of long-term investments 42,278,040
Investing Purchases of long-term investments (273,419,946)
Activities: Purchases of short-term investments (561,941,116)
Proceeds from sales and maturities of short-term investments--net 560,655,375
------------
Net cash used for investing activities (232,427,647)
------------
<PAGE>
Cash Provided by Cash receipts on capital shares sold 157,457,000
Financing Dividends paid to shareholders (4,371,786)
Activities: Short-term borrowings 76,000,000
------------
Net cash provided by financing activities 229,085,214
------------
Cash: Net increase in cash 337,133
Cash at beginning of period 100,007
------------
Cash at end of period $ 437,140
============
Cash Flow Cash paid for interest $ 946,218
Information: ============
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<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 February 28, 1994
<S> <S> <C>
Per Share Net asset value, beginning of period $ 9.50
Operating ------------
Performance: Investment income--net .36
Realized and unrealized gain on investments--net .16
------------
Total from investment operations .52
------------
Less dividends:
Investment income--net (.30)
------------
Net asset value, end of period $ 9.72
============
Market price per share, end of period $ 9.50
============
Total Investment Based on net asset value per share 5.51%+++
Return:** ============
Based on market price per share (2.03%)+++
============
<PAGE>
Ratios to Expenses, net of reimbursement 1.47%*
Average Net Assets: ============
Expenses 1.84%*
============
Investment income--net 6.89%*
============
Supplemental Net assets, end of period (in thousands) $ 161,449
Data: ============
Portfolio turnover 26.61%
============
<FN>
*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.
++Commencement of Operations.
+++Aggregate total investment return.
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 of companies ("Senior Debt"), including
corporate loans made by banks and other financial institutions and
both privately and publicly offered corporate bonds and notes.
<PAGE>
(b) Valuation of investments--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.
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. 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. 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 trans-
actions 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 de-
termined on the identified cost basis. Facility fees are accreted
to income over the term of the related loan.
(e) Deferred organization expenses--Deferred organization expenses
are amortized on a straight-line basis over a five-year period.
(f) Dividends and distributions--Dividends from net investment in-
come are declared daily and paid monthly. Distributions of capital
gains are recorded on the ex-dividend dates. The Fund may at times
pay out less than the entire amount of net investment income earned
in any particular period and may at times pay out such accumulated
undistributed income in other periods to permit the Fund to maintain
a more stable level of distributions.
2. Investment Advisory Agreement 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., an indirect wholly-owned
subsidiary of ML & Co. The limited partners are ML & Co. and Merrill
Lynch Investment Management, Inc. ("MLIM"), which is also an
indirect wholly-owned subsidiary of ML & Co.
<PAGE>
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operation 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
February 28, 1994, FAM earned fees of $439,197, of which $276,716
was voluntarily waived. In addition, FAM reimbursed the Fund $45,378
for additional expenses.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, MLIM, or Merrill Lynch, Pierce, Fenner & Smith,
Inc. ("MLPF & S"), and/or ML & Co.
NOTES TO FINANCIAL STATEMENTS (concluded)
3. Investments:
Purchases and sales of investments, excluding short-term
securities, for the period ended February 28, 1994 were $273,419,946
and $42,278,040, respectively.
Net realized and unrealized gains (losses) as of February 28, 1994
were as follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $ 300,649 $ 2,537,685
Short-term investments (184) --
------------ ------------
Total $ 300,465 $ 2,537,685
============ ============
As of February 28, 1994, net unrealized appreciation for financial
reporting and Federal income tax purposes aggregated $2,537,685, of
which $2,675,600 related to appreciated securities and $137,915
related to depreciated securities. The aggregate cost of investments
at February 28, 1994 for Federal income tax purposes was $233,000,360.
4. Capital Share Transactions:
Transactions in capital shares were as follows:
<PAGE>
For the Period September 24, 1993++ Dollar
to February 28, 1994 Shares Amount
Shares sold 16,600,000 $157,457,000
Shares issued to shareholders in
reinvestment of dividends -- --
------------ ------------
Net increase 16,600,000 $157,457,000
============ ============
[FN]
++Prior to September 24, 1993 (commencement of operations),
the Fund issued 10,527 shares to FAM for $100,007.
5. Unfunded Loan Interests:
As of February 28, 1994, the Fund had unfunded loan commitments of
$960,317, which would be extended at the option of the borrower,
pursuant to the following loan agreements:
Unfunded
Commitment
Borrower (in thousands)
Petrolane Gas $ 285
Thermadyne Industries 675
------------
$ 960
============
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 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 at an alternate
base rate plus 0.45% or at LIBOR plus 1.25%. From October 26, 1993 to
February 28, 1994, the maximum amount borrowed was $76,000,000, the aver-
age amount borrowed was approximately $56,000,000, and the daily weighted
average interest rate was 5.06%. For the period ended February 28, 1994,
facility and commitment fees aggregated approximately $1,050,643.
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
<PAGE>
Custodian and Transfer Agent
The Bank of New York
110 Washington Street
New York, New York 10286
NYSE Symbol
SAL
