SENIOR HIGH
INCOME
PORTFOLIO II, INC.
FUND LOGO
Semi-Annual Report
February 28, 1995
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
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.
<PAGE>
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
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.
<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 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.
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
John W. Fraser, 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
<PAGE>
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 agencies or are unrated, as is commonly the case with
bank loans.
For the six-month period ended February 28, 1995, the Portfolio's
total investment return was +4.26%, based on a change in per share
net asset value from $9.25 to $9.18, and assuming reinvestment of
$0.432 per share income dividends. During the same period, the net
annualized yield of the Portfolio's Common Stock was 9.38%. Since
inception (September 24, 1993) through February 28, 1995, the total
investment return on the Portfolio's Common Stock was +9.56%, based
on a change in per share net asset value from $9.50 to $9.18, and
assuming reinvestment of $1.139 per share income dividends. At the
end of the February period, the Portfolio was 27% leveraged, having
borrowed $57 million of its $80 million line of credit available at
an average borrowing cost of 6.48%. (For a complete explanation of
the benefits and risks of leveraging, see page 1 of this report to
shareholders.)
As of February 28, 1995, the Portfolio paid out a regular monthly
dividend at an annualized rate of 8.65% in order to permit the
Portfolio to maintain a more stable level of distributions. For
Federal income tax purposes, the Portfolio is 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.
The regular monthly dividend has increased from an annualized rate
of 8% since inception of the Portfolio.
The Environment
The six-month period ended February 28, 1995 was characterized by an
interest rate environment that proved to be a mixed blessing for the
Portfolio's investments. The steady rise in interest rates
throughout 1994 had a positive effect on the floating rate portion
of the Portfolio while eroding the values in the fixed-rate high-
yield bond portion of the Portfolio. The high-yield bond market was
particularly impacted in the September through December period as
outflows from high-yield mutual funds significantly increased the
price declines already occurring in sympathy with the fall in
intermediate-term and long-term US Treasury securities.
<PAGE>
On February 1, 1995, the Federal Reserve Board raised short-term
interest rates for the seventh time since the beginning of 1994 by
increasing the discount rate it charges on loans to its member banks
by 50 basis points (0.50%) to 5.25% and by pushing the Federal Funds
target rate to 6.0% from 5.5%. The economy ended 1994 with its
strongest growth in a decade as indicated by a gross domestic
product growth of 4%. At the same time inflation remained at low
levels. However, the Federal Reserve Board continues to be
preemptive in its efforts to head off inflation amid signs that the
economy is still strong.
Portfolio Strategy
Although the high-yield market is much firmer since the end of 1994,
we continue to focus on weighting the Portfolio toward senior
secured floating rate bank loans in order to take advantage of the
rise in short-term interest rates. As we feel more comfortable that
interest rates have stabilized and are likely to move downward, we
will give greater weighting to fixed-rate high-yield bonds in
investing the Portfolio.
Currently, more than 98% of the Portfolio's investments in corporate
loans are accruing interest at a yield spread above LIBOR (London
Interbank Offered Rate), 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 1994, three-month
LIBOR has risen from 3.25% to 6.25%, an increase of 300 basis
points. Since the average reset on the Portfolio's floating rate
investments is currently 54 days, the potential impact of a LIBOR
increase on the yield of the Portfolio's floating rate investments
will not be fully realized for at least a comparable time period
following any rate increase.
At February 28, 1995, floating rate securities made up 56% of the
market value of the Portfolio's investments, with an additional 43%
invested in fixed-rate high-yield bonds.
The leveraged loan market continued to be strong, particularly
during the last half of the year. Demand for bank loans was robust,
as banks and other institutional investors competed for the fees and
high spreads available in this sector. This demand created more
liquidity and more of a run up in prices for par names than seen in
over eighteen months. The volume of leveraged loans (those at a
spread of at least 1.50% over LIBOR) increased 187% last year, to
$81 billion. This is far and away the highest total of the 1990s,
but still far below the levels of the 1980s. The leveraged bank loan
market continues to be an attractive alternative for corporate
borrowers relative to the high coupons and call protection demanded
in the high-yield bond market.
<PAGE>
The high-yield bond market, driven by reduced mutual fund liquidity
and the uncertainty of the US Treasury market, drifted downward for
most of the second half of 1994, but seems to have found a floor at
year end. Since the beginning of 1995, investors began to return to
high-yield mutual funds, adding to cash balances. Heartened by signs
that the Federal Reserve Board's soft landing might become a
reality, the government market rallied, pushing the 30-year yield
down over 30 basis points between January 1, 1995 and February 28,
1995. High-yield bonds followed suit, fueled by fund managers eager
to invest cash and insurance companies attracted by relatively high
yields compared to investment-grade corporate bonds and governments.
The market rallied and remained firm through the end of the
Portfolio's fiscal year as mutual funds continued to benefit from
solid inflows and new issue remained light. Demand for BB-rated
credits driven by crossover investment-grade buyers and quality
conscious mutual funds caused spreads to narrow by as much as 50
basis points. Most industry sectors fared well during this rally,
with health care and paper products showing particular strength.
Carrying over a common theme from 1994, investors treated issuers
reporting disappointing earnings harshly.
Overall, fundamentals for both the bank loan and high-yield bond
markets remain positive as favorable quarterly earnings reports
occurred over the last nine months. Defaults, although expected to
increase this year, continue to be at historically low levels. We
will continue to invest in those companies that we believe are
undervalued by the market or are generating improved earnings
trends. The industry focus is on companies that have leading market
shares, strong management and improving cash flows. The best
performing industry sectors included paper, building products,
airlines, broadcast/media, and chemicals. This strategy is reflected
in our holdings of such cyclicals as Jefferson Smurfit/Container
Corp. of America, Stone Container Corp., UCAR International, Inc.,
S.D. Warren Company, and AK Steel Holding Corp. Underperforming
sectors included homebuilding and the grocery segment. Both segments
were hurt by disappointing earnings reports and the announcements of
debt restructuring for specific companies in the respective
industries. The Portfolio reduced its holdings in each of these
sectors during the last six months.
At February 28, 1995, cash equivalents totaled 0.20% of assets. The
Portfolio's average stated maturity was 5.9 years but had a much
shorter real average life 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 with 23
borrowers across 13 industries and in the fixed-rate portion with 41
borrowers across 25 industries. The largest industry concentrations
are in paper (10.6% of total assets), grocery (10.5%), food and
beverage (8.4%), specialty retail (11.1%), and aerospace (7.1%).
<PAGE>
Our near-term outlook envisions firm high-yield bond and leveraged
bank loan markets. Stronger companies are taking advantage of
attractive public debt and equity markets to improve their balance
sheets and reduce debt. With the Federal Reserve Board adopting a
neutral position for the short term, fixed-income investors are
positive on the bond and loan markets. Flows into the high-yield
bond and loan markets should remain steady. Although we expect the
new-issue calendar to develop over the next few months to satisfy
this demand, the intervening months will probably be a seller's
market. Looking forward, we expect to continue to emphasize senior
secured floating rate bank loans in order to take advantage of high
short-term interest rates and the possibility of another tightening
by the Federal Reserve Board. We will continue to be opportunistic
in our high-yield bond purchases, selling overvalued bonds and
sectors and buying undervalued ones. We believe the Portfolio is
well-positioned to provide shareholders with the benefit of another
increase in interest rates or a stable interest rate environment.
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
April 11, 1995
<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--9.7% Aviall, Inc., Term Loan, Tranche B, due
11/30/2000:**
NR* NR* $ 882,353 8.57% to 3/07/1995 $ 882,353 $ 882,353
NR* NR* 411,765 9.38% to 3/07/1995 411,765 411,765
NR* NR* 3,705,882 10.00% to 6/07/1995 3,705,882 3,705,882
BB- Ba3 3,000,000 BE Aerospace, Senior Notes, 9.75% due 3/01/2003 3,060,000 2,910,000
Gulfstream Delaware Corp., Term Loan A, due
3/31/1998:**
NR* NR* 148,257 9.75% to 3/31/1995 148,257 148,257
NR* NR* 2,606,383 9.13% to 7/13/1995 2,606,383 2,606,383
NR* NR* 2,240,000 Gulfstream Delaware Corp., Term Loan B, due
3/31/1998, 9.88% to 6/08/1995** 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 1,810,000
------------ ------------
15,054,640 14,714,640
Automotive B B3 1,000,000 Doehler Jarvis, Inc., Senior Notes, 11.875%
Products-- due 6/01/2002 995,259 1,025,000
1.3% B B2 1,000,000 JPS Automotive Products Corp., Senior Notes,
11.125% due 6/15/2001 1,000,000 987,500
------------ ------------
1,995,259 2,012,500
Broadcast BB Ba2 1,000,000 Continental Cablevision, Inc., Senior
/Media-- Notes, 8.50% due 9/15/2001 1,052,500 955,000
1.9% B Caa 2,000,000 Marcus Cable, Senior Notes, 11.875% due
10/01/2005 2,000,000 1,970,000
------------ ------------
3,052,500 2,925,000
Building & B B2 2,000,000 NVR, Inc., Senior Notes, 11.00% due 4/15/2003 2,082,500 1,790,000
Construction B- B2 1,000,000 The Presley Companies, Senior
- --1.7% Notes, 12.50% due 7/01/2001 1,000,000 860,000
------------ ------------
3,082,500 2,650,000
<PAGE>
Building BB- Ba3 1,000,000 Schuller International Group, 10.875%
Products--0.7% due 12/15/2004 1,000,000 1,056,250
Chemicals--4.7% BB- B1 2,000,000 Huntsman Chemical, 11.00% due 4/15/2004 2,030,000 2,130,000
NR* NR* 5,000,000 Inspec Chemical Corp., Term Loan B, due
12/02/2000, 9.125% to 3/31/1995** 5,000,000 5,000,000
------------ ------------
7,030,000 7,130,000
Computers--3.1% BB- B1 4,500,000 Dell Computer Corp., Senior Notes, 11.00%
due 8/15/2000 4,515,322 4,781,250
Consumer B+ B2 565,000 Drypers Corp., Senior Notes, 12.50% due
Products-- 11/01/2002 572,063 567,825
0.4%
Containers-- B B1 3,000,000 Calmar Inc., Senior Notes, 12.00% due
5.2% 12/15/1997 3,015,000 3,030,000
Silgan Corp., Term Loan B, due 9/15/1996:**
NR* NR* 2,461,967 9.688% to 3/07/1995 2,461,967 2,461,967
NR* NR* 2,500,000 10.00% to 6/09/1995 2,500,000 2,500,000
------------ ------------
7,976,967 7,991,967
Diversified NR* NR* 5,500,000 Desa International, Term Loan B, due
Manufacturing 11/30/2000, 10.062% to 6/27/1995** 5,500,000 5,500,000
- --8.6% Thermadyne Industries, Term Loan B, due
2/01/2001:**
NR* NR* 750 10.75% (1) 750 750
NR* NR* 4,225,000 8.3125% to 3/02/1995 4,225,000 4,225,000
NR* NR* 600,000 9.3125% to 5/03/1995 600,000 600,000
B B1 3,000,000 Valcor Inc., Senior Notes, 9.625% due 11/01/2003 3,000,000 2,760,000
------------ ------------
13,325,750 13,085,750
<PAGE>
Drug Stores-- Duane Reed Co., Term Loan A, due 9/30/1997:**
6.3% NR* NR* 333,557 9.0625% to 3/31/1995 333,557 333,557
NR* NR* 4,295,186 9.25% to 3/31/1995 4,295,186 4,295,186
Thrifty Payless, Term Loan B, due 9/30/2001:**
NR* NR* 4,974,874 9.375% to 5/24/1995 4,974,874 4,974,874
NR* NR* 12,563 11.00% (1) 12,563 12,563
------------ ------------
9,616,180 9,616,180
</TABLE>
<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>
Energy--1.7% BB- B1 $1,000,000 Maxus Energy Corp., Senior Notes, 9.50% due
2/15/2003 $ 919,914 $ 860,000
BB- B1 2,000,000 Maxus Energy Corp., Senior Notes, 9.375% due
11/01/2003 1,914,606 1,717,500
------------ ------------
2,834,520 2,577,500
Fertilizers BB- B1 3,750,000 Sherritt Gordon Ltd., Senior Notes, 9.75%
- --2.4% due 4/01/2003 3,762,500 3,600,000
Food & American Italian Pasta, Term Loan B, due
Beverage-- 3/31/1999:**
11.5% NR* NR* 1,300,000 9.625% to 3/28/1995 1,300,000 1,300,000
NR* NR* 1,300,000 9.5625% to 4/28/1995 1,300,000 1,300,000
NR* NR* 4,974,403 President Baking Company, Inc., Term Loan B,
due 9/30/2000, 8.9375% to 3/31/1995** 4,974,403 4,974,403
B+ B1 3,000,000 Royal Crown Corp., Senior Secured Notes,
9.75% due 8/01/2000 3,079,625 2,797,500
Specialty Foods Corp., Term Loan B, due
8/31/1999:**
NR* NR* 67,046 10.00% (1) 67,046 67,046
NR* NR* 3,418,027 9.13% to 4/18/1995 3,418,027 3,418,027
NR* NR* 3,720,000 10.00% to 7/18/1995 3,720,000 3,720,000
------------ ------------
17,859,101 17,576,976
<PAGE>
Forest BB- Ba3 2,000,000 Rainy River Forest Products, 10.75% due
Products-- 10/15/2001 1,995,321 2,045,000
1.3%
Fuel Petrolane Gas, Term Loan, due 12/31/1999:**
Distribution-- NR* NR* 6,801,824 8.3125% to 3/30/1995 6,801,824 6,801,824
4.6% NR* NR* 260,066 8.3125% to 4/03/1995 260,066 260,066
------------ ------------
7,061,890 7,061,890
Grocery--14.2% 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, 6.25% to
9/01/1994 (2) 4,992,253 5,025,415
NR* NR* 4,950,000 Pathmark Corp., Term Loan B, due 10/31/1999,
9.25% to 5/30/1995** 4,950,000 4,950,000
BB- Ba3 4,000,000 The Penn Traffic Company, Senior Notes, 8.625%
due 12/15/2003 3,992,414 3,670,000
Ralph Grocery Co., Primary Term Loan, due
6/30/1998:**
NR* NR* 201,332 9.00% to 3/06/1995 201,332 201,332
NR* NR* 117,054 8.9375% to 3/30/1995 117,054 117,054
NR* NR* 117,054 8.8125% to 3/31/1995 117,054 117,054
NR* NR* 234,108 8.9375% to 3/31/1995 234,108 234,108
NR* NR* 5,066,086 8.9375% to 4/10/1995 5,066,086 5,066,086
------------ ------------
22,295,301 21,706,049
Health B B2 1,000,000 Charter Medical Corp., 11.25% due 4/15/2004 1,000,000 1,040,000
Services--3.2% B- B2 1,000,000 Integrated Health Services, 10.75% due
7/15/2004 1,000,000 1,030,000
B+ B1 3,000,000 MEDIQ/PRN Life Support Services Inc., Senior
Secured Notes, 11.125% due 7/01/1999 3,138,750 2,760,000
------------ ------------
5,138,750 4,830,000
Information B B1 1,600,000 ++Anacomp, Inc., Senior Notes, 12.25% due
Services-- 10/26/1997 1,702,000 1,627,888
3.0% BB Ba2 3,000,000 Primark Corp., Senior Notes, 8.75% due
10/15/2000 2,973,897 2,955,000
------------ ------------
4,675,897 4,582,888
Leasing BB- B1 2,000,000 Scotsman Group, Inc., Senior Secured Notes,
& Rental 9.50% due 12/15/2000 2,000,000 1,910,000
Services--1.2%
<PAGE>
Metals--6.1% B B2 1,000,000 AK Steel Holding Corp., Senior Notes, 10.75%
due 4/01/2004 1,000,000 1,022,500
B+ Bl 2,000,000 Geneva Steel, Senior Notes, 11.125% due
3/15/2001 2,010,000 1,890,000
B B2 2,000,000 Jorgensen (Earle M.) Co., New Senior Notes,
10.75% due 3/01/2000 2,065,000 1,960,000
B+ B1 2,000,000 WCI Steel Inc., Senior Notes, 10.50% due
3/01/2002 2,000,000 1,940,000
B B2 2,500,000 Weirton Steel Corp., Senior Notes, 10.875%
due 10/15/1999 2,486,184 2,453,125
------------ ------------
9,561,184 9,265,625
Nautical Sperry Marine, Inc., Term Loan, due
Systems-- 8/31/1999:**
1.9% NR* NR* 1,215,041 9.562% to 3/23/1995 1,215,041 1,215,041
NR* NR* 85,366 9.5625% to 3/23/1995 85,366 85,366
NR* NR* 1,648,984 10.0625% to 6/23/1995 1,648,984 1,648,984
------------ ------------
2,949,391 2,949,391
Paper--14.8% NR* NR* 2,000,000 ++Fort Howard Corp., Term Loan A, due
9/11/1997, 7.75% to 3/11/1995** 2,000,000 2,000,000
B B3 3,000,000 Gaylord Container Corp., Senior Notes, 11.50%
due 5/15/2001 2,954,127 3,135,000
Jefferson Smurfit/Container Corp. of America,
Term Loan B, due 4/30/2002:**
NR* NR* 333,333 9.1875% to 3/24/1995 333,333 333,333
NR* NR* 4,666,667 9.3125% to 4/24/1995 4,666,667 4,666,667
NR* NR* 5,000,000 S.D. Warren Company, Term Loan B, due
12/19/2002, 9.50% to 8/23/1995** 5,000,000 5,000,000
Stone Container Corp., Term Loan B, due
4/01/2000:**
NR* NR* 3,750,000 9.25% to 3/17/1995 3,750,000 3,750,000
NR* NR* 3,750,000 9.3125% to 4/14/1995 3,750,000 3,750,000
------------ ------------
22,454,127 22,635,000
Publishing-- NR* NR* 2,573,529 Ziff Davis, Term Loan B, due 12/31/2001,
3.3% 9.38% to 3/28/1995** 2,573,529 2,573,529
NR* NR* 2,426,471 Ziff Davis, Term Loan C, due 12/31/2002,
9.88% to 3/28/1995** 2,426,471 2,426,471
------------ ------------
5,000,000 5,000,000
<PAGE>
Retail-- Camelot Music, Inc., Term Loan B, due
Specialty-- 8/31/2001:**
11.1% NR* NR* 3,125,000 8.875% to 4/19/1995 3,125,000 3,125,000
NR* NR* 1,812,500 9.5625% to 8/17/1995 1,812,500 1,812,500
B B2 3,000,000 Color Tile, Inc., Senior Notes, 10.75% due
12/15/2001 3,000,000 2,430,000
NR* NR* 7,682,342 Saks & Co., Term Loan Tranche B, due
6/30/2000**, 9.13% to 5/09/1995 7,682,343 7,682,343
B+ B1 2,000,000 Specialty Retailers, Inc., Series A, Senior
Notes, 10.00% due 8/15/2000 2,007,500 1,800,000
------------ ------------
17,627,343 16,849,843
</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>
Security NR* NR* 3,552,940 Alert Center, Term Loan, due 8/01/2001, 8.375%
Systems-- to 8/05/1995** 3,552,940 3,552,940
2.3%
Shipping--4.7% BB Ba2 $2,500,000 Eletson Holdings, Inc., First Preferred
Shipping Mortgage Notes, 9.25% due 11/15/2003 $ 2,525,000 $ 2,343,750
B B2 3,500,000 OMI Corp., Senior Notes, 10.25% due 11/01/2003 3,500,000 3,010,000
B+ Ba3 2,000,000 Viking Star Shipping, Inc., First Preferred
Shipping Mortgage Notes, 9.625% due 7/15/2003 2,012,500 1,860,000
------------ ------------
8,037,500 7,213,750
Textiles--2.1% BB Ba3 3,500,000 Dominion Textile (USA) Inc., Senior Notes,
8.875% due 11/01/2003 3,484,278 3,220,000
Utilities--0.7% B Ba3 1,000,000 First P.V. Funding Corp., 10.30% due 1/15/2014 948,096 995,000
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 2,760,000
Total Corporate Debt Obligations--135.5% 211,526,820 206,863,214
<PAGE>
SHORT-TERM
SECURITIES Issue
<S> <C> <S> <C> <C>
Commercial 410,000 General Electric Capital Corp., 6.00%
Paper***-- due 3/01/1995 410,000 410,000
0.3%
Total Short-Term Securities--0.3% 410,000 410,000
Total Investments--135.8% $211,936,820 207,273,214
============
Liabilities in Excess of Other Assets--(35.8%) (54,728,097)
------------
Net Assets--100.0% $152,545,117
============
<FN>
*Not Rated.
**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, 1995.
***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.
(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 $3,600,000,
representing 2.38% of net assets.
Acquisition Value
Issue Date Cost (Note 1b)
Anacomp, Inc., Senior Notes,
12.25% due 10/26/1997 10/28/1993 $1,914,750 $1,627,888
Fort Howard Corp., Term
Loan A, due 9/11/1997, 7.75%
to 3/11/1995 5/07/1993 2,000,000 2,000,000
Total $3,914,750 $3,627,888
========== ==========
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of February 28, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$211,936,820)(Note 1b) $207,273,214
Cash 326,246
Interest receivable 4,115,829
Deferred facility expense (Note 5) 83,081
Deferred organization expenses (Note 1f) 118,930
Prepaid expenses and other assets 27,328
------------
Total assets 211,944,628
------------
Liabilities: Payables:
Loans (Note 5) $ 57,000,000
Dividends to shareholders (Note 1g) 444,529
Interest on loans (Note 5) 311,896
Investment adviser (Note 2) 82,669
Commitment fees 3,851 57,842,945
------------
Deferred income (Note 1e) 1,380,139
Accrued expenses and other liabilities 176,427
------------
Total liabilities 59,399,511
------------
Net Assets: Net assets $152,545,117
============
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 income--net 1,834,469
Accumulated realized capital losses--net (2,214,055)
Unrealized depreciation on investments--net (4,663,606)
------------
Total Capital--Equivalent to $9.18 net asset value per share of
Common Stock (market price--$8.75) $152,545,117
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended February 28, 1995
<S> <S> <C>
Investment Income Interest and discount earned $ 10,451,926
(Note 1e): Facility and other fees 80,810
------------
Total income 10,532,736
------------
Expenses: Loan interest expense (Note 5) 2,121,933
Investment advisory fees (Note 2) 541,882
Facility fee amortization (Note 5) 108,406
Professional fees 50,238
Accounting services (Note 2) 37,740
Printing and shareholder reports 30,489
Custodian fees 12,522
Directors' fees and expenses 12,299
Transfer agent fees (Note 2) 12,151
Amortization of organization expenses (Note 1f) 7,894
Pricing services 1,312
Listing fees 124
Other 20,114
------------
Total expenses 2,957,104
------------
Investment income--net 7,575,632
------------
Realized & Realized loss on investments--net (944,780)
Unrealized Gain Change in unrealized depreciation on investments--net (563,640)
(Loss) on ------------
Investments Net Increase in Net Assets Resulting from Operations $ 6,067,212
- --Net (Notes ------------
1c, 1e & 3):
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the Period
Months Ended Sept. 24, 1993++
February 28, to August 31,
Increase (Decrease) in Net Assets: 1995 1994
<S> <S> <C> <C>
Operations: Investment income--net $ 7,575,632 $ 13,177,415
Realized loss on investments--net (944,780) (1,269,275)
Change in unrealized depreciation on investments--net (563,640) (4,099,966)
------------ ------------
Net increase in net assets resulting from operations 6,067,212 7,808,174
------------ ------------
Dividends to Investment income--net (7,173,638) (11,744,940)
Shareholders ------------ ------------
(Note 1g):
Net decrease in net assets resulting from dividends to
shareholders (7,173,638) (11,744,940)
------------ ------------
Capital Share Value of shares sold to Common Stock shareholders in re-
Transactions investment of dividends and distributions -- 157,700,000
(Note 4): Offering and underwriting costs resulting from the issuance
of Common Stock -- (211,698)
------------ ------------
Net increase in net assets resulting from capital share
transactions -- 157,488,302
------------ ------------
Net Assets: Total increase (decrease) in net assets (1,106,426) 153,551,536
Beginning of period 153,651,543 100,007
------------ ------------
End of period* $152,545,117 $153,651,543
============ ============
<FN>
*Undistributed investment income--net $ 1,834,469 $ 1,432,475
============ ============
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Six Months Ended February 28, 1995
<S> <S> <C>
Cash Provided by Net increase in net assets resulting from operations $ 6,067,212
Operating Adjustments to reconcile net increase in net assets resulting
Activities: from operations to net cash provided by operating activities:
Decrease in receivables 7,045
Increase in other liabilities 408,490
Realized and unrealized loss on investments--net 1,508,420
Amortization of discount (599,518)
------------
Net cash provided by operating activities 7,391,649
------------
Cash Provided by Proceeds from sales of long-term investments 40,829,697
Investing Purchases of long-term investments (39,122,888)
Activities: Purchases of short-term investments (189,646,238)
Proceeds from sales and maturities of short-term investments--net 191,078,338
------------
Net provided by investing activities 3,138,909
------------
Cash Used for Short-term borrowings (3,000,000)
Financing Dividends paid to shareholders (7,204,312)
Activities:
Net cash used for financing activities (10,204,312)
------------
Cash: Net increase in cash 326,246
Cash at beginning of period --
------------
Cash at end of period $ 326,246
============
Cash Flow Cash paid for interest $ 2,167,746
Information: ============
</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 Six For the Period
Months Ended Sept. 24, 1993++
Increase (Decrease) in Net Asset Value: Feb. 28, 1995 to Aug. 31, 1994
<S> <S> <C> <C>
Per Share Net asset value, beginning of period $ 9.25 $ 9.50
Operating ------------ ------------
Performance: Investment income--net .45 .79
Realized and unrealized loss on investments--net (.09) (.32)
------------ ------------
Total from investment operations .36 .47
------------ ------------
Less dividends from investment income--net (.43) (.71)
------------ ------------
Capital charge resulting from the issuance of Common Stock -- (.01)
------------ ------------
Net asset value, end of period $ 9.18 $ 9.25
============ ============
Market price per share, end of period $ 8.75 $ 8.875
============ ============
Total Investment Based on net asset value per share 4.26%+++ 5.08%+++
Return:** ============ ============
Based on market price per share 3.58%+++ (4.22%)+++
============ ============
Ratios to Expenses, net of reimbursement and excluding interest expense .77%* 1.51%*
Average Net ============ ============
Assets: Expenses, net of reimbursement 2.73%* 2.17%*
============ ============
Expenses 2.73%* 2.34%*
============ ============
Investment income--net 6.98%* 7.14%*
============ ============
Supplemental Net assets, end of period (in thousands) $ 152,545 $ 153,652
Data: ============ ============
Portfolio turnover 18.68% 52.37%
============ ============
<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>
<PAGE>
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. These unaudited financial
statements reflect all adjustments which are, in the opinion of
management, necessary to a fair statement of the results for the
interim period presented. All such adjustments are of a normal
recurring nature. The Fund determines and makes available for
publication the net asset value of its Common Stock on a weekly
basis. The Fund's Common Stock is listed on the New York Stock
Exchange under the symbol 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.
(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 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 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.
<PAGE>
(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.
NOTES TO FINANCIAL STATEMENTS (concluded)
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts for the purpose of hedging the
market risk on existing securities or the intended purchase of
securities. Futures contracts are contracts for delayed delivery of
securities at a specific future date and at a specific price or
yield. Upon entering into a contract, the Fund deposits and
maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
* Options--The Fund is authorized to write and purchase call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
<PAGE>
* 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. For income tax
purposes, as of September 1, 1994 the corporate loans are treated as
discount obligations.
(f) Deferred organization expenses--Deferred organization expenses
are amortized on a straight-line basis over a five-year period.
(g) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates. The Fund may at times pay out
less than the entire amount of net investment income earned in any
particular period and may at times pay out such accumulated
undistributed income in other periods to permit the Fund to maintain
a more stable level of distributions.
2. Investment Advisory Agreement 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.
<PAGE>
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 six months
ended February 28, 1995, FAM earned fees of $541,882.
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 six months ended February 28, 1995, the Fund paid Merrill
Lynch Security Pricing Service, an affiliate of Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), $231.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, FDS, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended February 28, 1995 were $39,479,959 and
$40,829,697, respectively.
Net realized and unrealized losses as of February 28, 1995 were as
follows:
Realized Unrealized
Losses Losses
Long-term investments $(943,817) $(4,663,606)
Short-term investments (963) --
--------- -----------
Total $(944,780) $(4,663,606)
========= ===========
As of February 28, 1995, net unrealized depreciation for financial
reporting and Federal income tax purposes aggregated $4,663,606, of
which $870,036 related to appreciated securities and $5,533,642
related to depreciated securities. The aggregate cost of investments
at February 28, 1995 for Federal income tax purposes was $211,936,820.
4. Capital Share Transaction:
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.
<PAGE>
For the six months ended February 28, 1995, shares issued and
outstanding remained constant at 16,610,527. At February 28, 1995,
total paid-in capital amounted to $157,588,309.
5. Short-Term Borrowings
On October 26, 1993, 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% and/or at 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% and/or at LIBOR plus
1.25%. Effective October 20, 1994, a new one-year credit agreement
was refinanced by an $80,000,000 revolving credit facility extended
by a syndicate of banks led by The Bank of New York bearing interest
at the Federal Funds rate plus 1.00%, and/or at an alternate base
rate plus 0.0%, and/or at LIBOR plus 1.00%. From September 1, 1994
to February 28, 1995, the maximum amount borrowed was $77,000,000,
the average amount borrowed was approximately $33,000,000 and the
daily weighted average interest rate was 6.481%. For the six-month
period ended February 28, 1995, facility and commitment fees
aggregated approximately $108,406.
PER SHARE INFORMATION
<TABLE>
Per Share
Selected Quarterly
Financial Data*
<CAPTION>
Net Dividends
Investment Realized Unrealized Net Investment Income
For the Period Income Gains (Losses) Gains (Losses) Common
<S> <C> <C> <C> <C>
September 24, 1993++ to November 30, 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
September 1, 1994 to November 30, 1994 .22 --+++ (.19) .21
December 1, 1994 to February 28, 1995 .23 (.06) .16 .22
<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 30, 1993 $9.65 $9.50 $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 9.27 9.75 8.625 1,422
June 1, 1994 to August 31, 1994 9.39 9.22 9.375 8.375 1,751
September 1, 1994 to November 30, 1994 9.27 9.06 9.00 7.875 2,205
December 1, 1994 to February 28, 1995 9.18 8.97 9.00 8.25 1,616
<PAGE>
<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.
+++Amount is less than $.01 per share.
</TABLE>
